STRATEGIC PARTNERS SM
HORIZON ANNUITY
PROSPECTUS: OCTOBER 4, 2002
This prospectus describes a market value
adjusted individual annuity contract offered by Pruco Life
Insurance Company (Pruco Life). Pruco Life is a wholly owned
subsidiary of the Prudential Insurance Company of America. Pruco
Life is located at 213 Washington Street, Newark, NJ
07102-2992, and can be contacted by calling (973) 367-1730.
Pruco Life administers the Strategic Partners Horizon Annuity
contracts at the Prudential Annuity Service Center, P.O.
Box 7960, Philadelphia, PA 19101. You can contact the
Prudential Annuity Service Center by calling, toll-free,
(888) PRU-2888.
Please Read this Prospectus
Please read this prospectus before purchasing a Strategic
Partners Horizon Annuity contract and keep it for future
reference.
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The SEC has not determined that this contract
is a good investment, nor has the SEC determined that this
prospectus is complete or accurate. It is a criminal offense to
state otherwise. Investment in a market value adjusted annuity
contract is subject to risk, including the possible loss of your
money. An investment in Strategic Partners Horizon Annuity is
not a bank deposit and is not insured by the Federal Deposit
Insurance Corporation or any other government agency. |
ORD01124
Contents
Part I Summary
Strategic Partners Horizon Annuity Prospectus
Glossary
We have tried to make this prospectus as easy
to read and understand as possible. By the nature of the
contract, however, certain technical words or terms are
unavoidable. We have identified the following as some of the key
words or terms. Other defined terms are set forth in your
contract.
ACCUMULATION PHASE
The period that begins with the contract date (see below
definition) and ends when you start receiving income payments or
earlier if the contract is terminated through a full withdrawal
or payment of a death benefit.
ADJUSTED CONTRACT VALUE
When you begin receiving income payments, the value of your
contract minus any charge we impose for premium taxes.
ANNUITANT
The person whose life determines the amount of income payments
that will be paid. If, upon the death of the annuitant, there is
no surviving co-annuitant, and the owner is not the annuitant,
then the owner becomes the annuitant.
ANNUITY DATE
The date when income payments are scheduled to begin.
BENEFICIARY
The person(s) or entity you have chosen to receive a death
benefit.
CO-ANNUITANT
The person shown on the contract data pages who becomes the
annuitant upon the death of the annuitant before the annuity
date. No co-annuitant may be designated if the owner is a
non-natural person.
CONTRACT DATE
The date we receive your purchase payment and all necessary
paperwork in good order at the Prudential Annuity Service
Center. Contract anniversaries are measured from the contract
date. A contract year starts on the contract date or on a
contract anniversary.
CONTRACT OWNER, OWNER OR YOU
The person entitled to the ownership rights under the contract.
CONTRACT SURRENDER VALUE
This is the total value of your contract adjusted by any
market-value adjustment, minus any withdrawal charge(s) and
premium taxes.
CONTRACT VALUE
The total value of the amount in a contract allocated to a
guarantee period as of a particular date.
DEATH BENEFIT
If the sole owner or first to die of the joint owners dies, the
designated person(s) or the beneficiary will receive the
contract value as the death benefit. If the contract is owned by
an entity (e.g. a corporation or trust), rather than by an
individual, then we will pay the death benefit upon the death of
the annuitant. See What is the Death Benefit? on
page 15.
GUARANTEE PERIOD
A period of time during which your invested purchase payment
earns interest at the declared rate. We currently make available
guarantee periods equal to any or all of the following:
1 year (currently available only as a renewal option),
3 years, 5 years, 7 years, and 10 years.
INCOME OPTIONS
Options under the contract that define the frequency and
duration of income payments. In your contract, these are
referred to as payout or annuity options.
INVESTED PURCHASE PAYMENT
Your purchase payment (which we define below) less any deduction
we make for any premium or other tax charge. In addition to the
initial invested purchase payment, we allow you to make
additional purchase payments during the 30 days preceding
the end of a guarantee period.
JOINT OWNER
The person named as the joint owner, who shares ownership rights
with the owner as defined in the contract. Joint owners may be
spouses, but are not required to be spouses.
PRUDENTIAL ANNUITY SERVICE CENTER
For general correspondence: P.O. Box 7960, Philadelphia, PA,
19101. For express overnight mail: 2101 Welsh Road, Dresher, PA
19025. The phone number is (888) PRU-2888.
Prudentials Web site is www.prudential.com.
PURCHASE PAYMENT
The amount of money you pay us to purchase the contract, as well
as any additional payment you make.
TAX DEFERRAL
This is a way to increase your assets without currently being
taxed. You do not pay taxes on your contract earnings until you
take money out of your contract.
Summary of Sections 19
For a more complete discussion of the following topics, see
the corresponding section in the prospectus.
SECTION 1
What Is The Strategic Partners Horizon Annuity?
This market value adjusted annuity contract, offered by Pruco
Life, is a contract between you, as the owner, and us. The
contract is intended for retirement savings or other long-term
investment purposes and provides a death benefit and guaranteed
income options.
While your money remains in the contract for the full guarantee
period, your principal amount is guaranteed and the interest
amount that your money will earn is guaranteed by us to always
be at least 3%. Payments allocated to the contract are held as a
separate pool of assets, but the income, gains or losses
experienced by these assets are not directly credited or charged
against the contracts. As a result, the strength of our
guarantees under the contract are based on the overall financial
strength of Pruco Life.
The contract, like all deferred annuity contracts, has two
phases: the accumulation phase and the income phase. During the
accumulation phase, earnings grow on a tax-deferred basis and
are taxed as income when you make a withdrawal. The income phase
starts when you begin receiving regular payments from your
contract. The amount of money you are able to accumulate in your
contract during the accumulation phase will help determine the
amount of the payments you will receive during the income phase.
Other factors will affect the amount of your payments such as
age, gender and the payout option you selected.
Free Look. If you change your mind about owning Strategic
Partners Horizon Annuity, you may cancel your contract within
10 days after receiving it (or whatever time period is
required in the state where the contract was issued).
SECTION 2
What Guarantee Periods Can I Choose?
You can allocate your initial purchase payment to one of the
guarantee periods available under the contract. We have the
right under the contract to offer one or more of the following
guarantee periods: 1 year (currently available only as a
renewal option), 3 years, 5 years, 7 years, or
10 years, and we may offer other guarantee periods in the
future. At any time, we may offer any or all of these guarantee
periods. You may not allocate your purchase payment to more than
one guarantee period.
SECTION 3
What Kind Of Payments Will I Receive During The Income Phase?
(Annuitization)
If you want to receive regular income from your annuity, you can
choose one of several options, including guaranteed payments for
the annuitants lifetime. Once you begin receiving regular
payments, you cannot change your payment plan.
SECTION 4
What Is The Death Benefit?
If the sole owner or the first of the joint owners dies, the
designated person(s) or the beneficiary will receive the
contract value as the death benefit. If the contract is owned by
an entity (e.g., a corporation or trust), rather than by an
individual, then we will pay the death benefit upon the death of
the annuitant.
SECTION 5
How Can I Purchase A Strategic Partners Horizon Annuity
Contract?
You can purchase this contract, under most circumstances, with a
minimum purchase payment of $5,000. We allow you to make
additional purchase payments only during the 30 days
immediately preceding the end of a guarantee period. Your
representative can help you fill out the proper forms.
SECTION 6
What Are The Expenses Associated With The Strategic Partners
Horizon Annuity Contract?
There are a few states/jurisdictions that assess a premium tax
when you begin receiving regular income payments from your
annuity. In those states, we will impose the required premium
tax charge which can range up to 3.5%.
During the accumulation phase, if you withdraw money, you may
have to pay a withdrawal charge on all or part of the
withdrawal. The withdrawal charge that we impose depends on the
guarantee period from which you are withdrawing your money. The
withdrawal charge ranges from 0% to 7%. You also will be subject
to a market value adjustment if you make a withdrawal prior to
the end of a guarantee period.
SECTION 7
How Can I Access My Money?
You may take money out at any time during the accumulation
phase. If you do so, however, you may be subject to income tax
and, if you make a withdrawal prior to age 59 1/2, an
additional tax penalty as well. Each contract year after the
first, you may withdraw without charge an amount equal to the
interest you earned (but did not withdraw) during the contract
year immediately preceding the withdrawal. Withdrawals greater
than that amount will be subject to a withdrawal charge. A
market-value adjustment may also apply.
SECTION 8
What Are The Tax Considerations Associated With The Strategic
Partners Horizon Annuity Contract?
Your earnings are not taxed until withdrawn. If you take money
out during the accumulation phase, earnings are withdrawn first
and are taxed as ordinary income. If you are younger than age
59 1/2 when you take money out, you may be charged a 10%
federal tax penalty on the earnings in addition to ordinary
taxation. A portion of the payments you receive during the
income phase is considered partly a return of your original
investment. As a result, that portion of each payment is not
taxable as income. Generally, all amounts withdrawn from IRA
contracts (excluding Roth IRAs) are fully taxable and subject to
the 10% penalty if withdrawn prior to age 59 1/2.
SECTION 9
Other Information
This contract is issued by Pruco Life, a subsidiary of The
Prudential Insurance Company of America and sold by registered
representatives. Section 9 of the prospectus provides a
detailed discussion of Pruco Lifes operations and assets.
RISK FACTORS
There are various risks associated with the purchase of the
Strategic Partners Horizon Annuity annuity that we summarize
below.
Issuer Risk. Your Strategic Partners Horizon Annuity is
issued by Pruco Life, and thus is backed by the financial
strength of that company. If Pruco Life were to experience
significant financial adversity, it is possible that Pruco
Lifes ability to pay interest and principal under the
Strategic Partners Horizon Annuity could be impaired.
Risks Related to Changing Interest Rates. You do not
participate directly in the investment experience of the bonds
and other instruments that Pruco Life holds to support the
Strategic Partners Horizon Annuity. Nonetheless, the market
value adjustment formula (which is detailed in the appendix to
this prospectus) reflects the effect that prevailing interest
rates have on those bonds and other instruments. If you need to
withdraw your money during a period in which prevailing interest
rates have risen above their level when you made your purchase,
you will experience a negative market value
adjustment. When we impose this market value adjustment, it
could result in the loss of both the interest you have earned
and a portion of your purchase payments. Thus, before you commit
to a particular guarantee period, you should consider carefully
whether you have the ability to remain in the contract
throughout the guarantee period. In addition, we cannot, of
course, assure you that the Strategic Partners Horizon Annuity
will perform better than another investment that you might have
made.
Risks Related to the Withdrawal Charge. We impose withdrawal charges that range as high as 7%. If you
anticipate needing to withdraw your money prior to the end of a
guarantee period, you should be prepared to pay the withdrawal
charge that we will impose.
A more comprehensive discussion of the risks inherent in Pruco
Lifes operations appears in Section 9 under
Quantitative and Qualitative Disclosures About Market
Risk.
Part II Sections 19
Strategic Partners Horizon Annuity Prospectus
What is the Strategic Partners
Horizon
The Strategic Partners Horizon Annuity is a contract between
you, the owner, and us, the insurance company, Pruco Life
Insurance Company (Pruco Life, We or Us).
Under our contract or agreement, in exchange for your payment to
us, we promise to pay you a guaranteed income stream that can
begin any time after the second contract anniversary. This time
period may differ in certain states. Your annuity is in the
accumulation phase until you decide to begin receiving annuity
payments. The date you begin receiving annuity payments is the
annuity date. On the annuity date, your contract switches to the
income phase.
This annuity contract benefits from tax deferral. Tax deferral
means that you are not taxed on earnings or appreciation on the
assets in your contract until you withdraw money from your
contract.
Strategic Partners Horizon Annuity allows you to allocate a
purchase payment to one of several guarantee periods that we
offer at the time. As the owner of the contract, you have all of
the decision-making rights under the contract. You will also be
the annuitant unless you designate someone else. The owner is
the person upon whose death during the accumulation phase, the
death benefit generally is payable. The annuitant is the person
whose life is used to determine the amount of annuity payments
and how long the payments will continue. On and after the
annuity date, the annuitant may not be changed.
The beneficiary is the person(s) or entity designated to receive
any death benefit if the owner (or first to die of joint owners)
dies during the accumulation phase. You may change the
beneficiary any time prior to the annuity date by making a
written request to us. Your request becomes effective when we
approve it.
Short Term Cancellation Right or Free Look
If you change your mind about owning Strategic Partners Horizon
Annuity, you may cancel your contract within 10 days after
receiving it (or whatever period is required by applicable law).
You can request a refund by returning the contract either to the
representative who sold it to you, or to the Prudential Annuity
Service Center at the address shown on the first page of this
prospectus. You will receive, depending on applicable state law:
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Your full purchase payment; or |
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The amount your contract is worth as of the day we receive your
request. |
We impose neither a withdrawal charge nor any market value
adjustment if you cancel your contract under this provision.
What Guarantee Periods
The contract gives you the choice of allocating your purchase
payment to one of the guarantee periods that we are offering at
the time.
GUARANTEE PERIODS
Under each Strategic Partners Horizon Annuity contract, we have
the right to offer one or more of several guarantee periods.
These guarantee periods are 1 year (currently available
only as a renewal option), 3 years, 5 years,
7 years, or 10 years in length. In the future, we may
offer other guarantee periods on substantially the same terms as
described in this prospectus. We are not obligated to offer more
than one guarantee period at any time. We will apply your
purchase payment to the guarantee period you have chosen. You
must allocate all of your initial purchase payment to a single
guarantee period.
We declare the interest rate for each available guarantee period
periodically, but we guarantee that we will declare no less than
3% interest with respect to any guarantee period. You will earn
interest on your invested purchase payment at the rate that we
have declared for the guarantee period you have chosen.
In addition to the basic interest, we also may pay additional
interest with respect to guarantee periods other than the one
year and three year periods. The amount of the additional
interest varies according to the amount of your purchase
payment. Specifically, we will pay additional interest equal to
0.50% annually for a purchase payment of $25,000 to $74,999, and
1.00% annually for a purchase payment of $75,000 or more.
If we grant additional interest to you, you will earn that
interest only during the first year of your contract (and during
the first year of the initial renewal guarantee period, other
than the one and three year periods). We are not obligated to
offer this additional interest continuously, meaning that we
reserve the right to offer additional interest only during
limited time periods of our choosing. We also reserve the right
to change the amount of the additional interest.
We express interest rates as annual rates, although we credit
interest within each guarantee period on a daily basis. The
daily interest that we credit is equal to the pro rated portion
of the interest that would be earned on an annual basis. We
credit interest from the business day on which your purchase
payment is received in good order at the Prudential Annuity
Service Center until the earliest to occur of any of the
following events: (a) full surrender of the Contract,
(b) commencement of annuity payments or settlement,
(c) cessation of the guarantee period, or (d) death of
the first to die of the owner and joint owner (or annuitant, for
entity-owned contracts).
During the 30 day period immediately preceding the end of a
guarantee period, we allow you to do any of the following,
without the imposition of the withdrawal charge or market value
adjustment: (a) surrender the contract, in whole or in
part, (b) allocate the contract value to another guarantee
period available at that time (provided that the new guarantee
period ends prior to the contract anniversary next following the
annuitants 95th birthday and that you reinvest at least
$2,000), or (c) apply the adjusted contract value to the
annuity or settlement option of your choice. If we do not
receive instructions from you concerning the disposition of the
contract value in your maturing guarantee period, we will
reinvest the contract value in a guarantee period having the
same duration as the guarantee period that matured (provided
that the new guarantee period ends prior to the contract
anniversary next following the annuitants 95th birthday
and that you reinvest at least $2,000). If any available new
guarantee period would end on or after the contract anniversary
next following the annuitants 95th birthday, or if the
annuitant is 91 years old at the end of the guarantee
period, then we will make only the one year guarantee period
available as the renewal period. We will not impose a withdrawal
charge on amounts you withdraw from the one year guarantee
period described in the immediately preceding sentence, although
such a withdrawal would be subject to a market value adjustment.
Market Value Adjustment
When you allocate a purchase payment to a guarantee period, we
use that money to buy and sell securities and other instruments
to support our obligation to pay interest. Generally, we buy
bonds for this purpose. The duration of the bonds and other
instruments that we buy with respect to a particular guarantee
period is influenced significantly by the length of the
guarantee period. Thus, for example, we typically would acquire
longer-duration bonds with respect to the 10 year guarantee
period than we do for the 3 year guarantee period. The
value of these bonds is affected by changes in interest rates,
among other factors. The market value adjustment that we assess
against your contract value if you withdraw prior to the end of
a guarantee period involves our attributing to you a portion of
our investment experience on these bonds and other instruments.
For example, if you make a full withdrawal when interest rates
have risen since the time of your investment, the bonds and
other investments in the guarantee period likely would have
decreased in value, meaning that we would impose a
negative market value adjustment on you (i.e., one
that results in a reduction of the withdrawal proceeds that you
receive). For a partial withdrawal, we would deduct a negative
market value adjustment from your remaining contract value.
Conversely, if interest rates have decreased, the market value
adjustment would be positive.
Other things you should know about the market value adjustment
include the following:
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We determine the market value adjustment according to a
mathematical formula, which is set forth at the end of this
prospectus under the heading Market-Value Adjustment
Formula. In that section of the prospectus, we also
provide hypothetical examples of how the formula works. |
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A negative market value adjustment could cause you to lose not
only the interest you have earned but also a portion of your
principal. However, the laws of certain states provide for an
absolute limit or floor on the amount of a negative
market value adjustment. This floor operates regardless of how
much interest rates have risen since you made your purchase
payment. |
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You may withdraw, without the imposition of any market value
adjustment, an amount equal to the interest earned under your
contract during the immediately preceding contract year. |
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In addition to imposing a market value adjustment on
withdrawals, we also will impose a market value adjustment on
the contract value you apply to an annuity or settlement option,
except if you annuitize during the 30 day period preceding the
end of a guarantee period (See Section 3 for details). The
laws of certain states may prohibit us from imposing a market
value adjustment on the annuity date. |
You should realize, however, that apart from the market value
adjustment, the value of the benefits under your contract does
not depend on the investment performance of the bonds and other
instruments that we hold with respect to your guarantee period.
Apart from the effect of any market value adjustment, we do not
pass through to you the gains or losses on the bonds and other
instruments that we hold in connection with a guarantee
period.
What Kind of Payments Will I Receive During
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the Income Phase? (Annuitization) |
PAYMENT PROVISIONS
We can begin making annuity payments any time after the second
contract anniversary. (This time period may differ in certain
states.) Annuity payments must begin no later than the contract
anniversary next following the annuitants 95th birthday.
If you begin annuity payments or commence Option 3 at a
time other than the 30 day period prior to the end of a
guarantee period, then:
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We will impose both a withdrawal charge and a market value
adjustment if you choose an annuity option with a fixed period
of fewer than 10 years or Option 3. (If your adjusted
contract value is allocated to the one year guarantee period, we
will impose only a market value adjustment). |
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We will impose a market value adjustment if you choose a life
annuity or an annuity option with a fixed period of at least
10 years. |
We make the income plans described below available before the
annuity date. These plans are called annuity options. You must
choose an annuity option at least 30 days in advance of the
annuity date. If you do not, we will select Option 2 below
on your behalf unless prohibited by applicable law. During the
income phase, all of the annuity options under this contract are
fixed annuity options. Generally, once the annuity payments
begin, the annuity option cannot be changed and you cannot make
withdrawals.
If the annuitant dies or assigns the contract, and the new
annuitant is older than the original annuitant, then the annuity
date will be based on the new annuitants age. If the
annuitant dies or assigns the contract, and the new annuitant is
younger than the original annuitant, then the annuity date will
remain unchanged. In no event, however, may an original or
revised annuity date be later than the contract anniversary next
following the annuitants 95th birthday.
Option 1
Annuity Payments For A Fixed Period
Under this option, we will make equal payments for the period
chosen, up to 25 years (but no less than 5 years). The
annuity payments may be made monthly, quarterly, semi-annually,
or annually for as long as the annuitant is alive. If the
annuitant dies during the income phase, a lump sum payment
generally will be made to the beneficiary. The amount of the
lump sum payment is determined by calculating the present value
of the unpaid future payments. This is done by using the
interest rate used to compute the actual payments. The interest
rate used will always be at least 3.0% a year.
Option 2
Life Annuity With 120 Payments (10 Years)
Under this option, we will make annuity payments monthly,
quarterly, semi-annually, or annually as long as the annuitant
is alive. If the annuitant dies before we have made
10 years worth of payments, we will pay the beneficiary the
present value of the remaining annuity payments in one lump sum
unless we were specifically instructed that the remaining
annuity payments continue to be paid to the beneficiary. The
present value of the remaining annuity payments is calculated by
using the interest rate used to compute the amount of the
original payments. The interest rate used will always be at
least 3.0% a year.
Option 3
Interest Payment Option
Under this option, we will credit interest on the adjusted
contract value until you request payment of all or part of the
adjusted contract value. We can make interest payments on a
monthly, quarterly, semiannual, or annual basis or allow the
interest to accrue on your contract assets. Under this option,
we will pay you interest at an effective rate of at least 1.50%
a year. This option may not be available in all states, and is
not available if you hold your contract in an IRA.
Option 4
Other Annuity Options
We currently offer a variety of other annuity options not
described above. At the time annuity payments are chosen, we may
make available to you any of the fixed annuity options that are
offered at your annuity date.
Tax Considerations
If your contract is held under a tax-favored plan, as discussed
on page 21, you should consider the minimum distribution
requirements mentioned on page 24 when selecting your
annuity option.
For certain contracts held in connection with
qualified retirement plans (such as a
Section 401(k) plan), please note that if you are married
at the time your payments commence, you may be required by
federal law to choose an income option that provides at least a
50 percent joint and survivor annuity to your spouse, unless
your spouse waives that right. Similarly, if you are married at
the time of your death, federal law may require all or a portion
of the death benefit to be paid to your spouse, even if you
designated someone else as your beneficiary. For more
information, consult the terms of your retirement arrangement.
What is the
The death benefit feature protects the value of the contract
for the beneficiary.
BENEFICIARY
The beneficiary is the person(s) or entity you name to receive
any death benefit. The beneficiary is named at the time the
contract is issued, unless you change it at a later date. Unless
an irrevocable beneficiary has been named, you can change the
beneficiary at any time before the owner or joint owner dies.
CALCULATION OF THE DEATH BENEFIT
If the owner (or first to die of the owner and joint owner) dies
during the accumulation phase, we will, upon receiving
appropriate proof of death and any other needed documentation
(due proof of death), pay a death benefit to the
beneficiary designated by the contract owner. If the contract is
owned by an entity (e.g., a corporation or trust), rather than
by an individual, then we will pay the death benefit upon the
death of the annuitant. We require due proof of death to be
submitted promptly. The beneficiary will receive a death benefit
equal to the contract value as of the date that due proof of
death is received in good order at the Prudential Annuity
Service Center.
Instead of asking us to pay a death benefit, a surviving spouse
may opt to continue the contract, as discussed below. Generally,
we impose no withdrawal charge or market value adjustment when
we pay the death benefit.
JOINT OWNERSHIP RULES
If the contract has an owner and a joint owner and they are
spouses, then upon the first to die of the owner and joint
owner, the surviving spouse has the choice of the following:
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The contract can continue, with the surviving spouse as the sole
owner of the contract; or |
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The surviving spouse can receive the death benefit and the
contract will end. If the surviving spouse wishes to receive the
death benefit, he or she must make that choice within the first
60 days following our receipt of due proof of death. Otherwise,
the contract will continue with the surviving spouse as the sole
owner. |
If the contract has an owner and a joint owner, and they are not
spouses, the contract will not continue. Instead, the
beneficiary will receive the death benefit.
The payout options are:
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Choice 1. |
Lump sum. |
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Choice 2. |
Payment of the entire death benefit within 5 years of the
date of death of the first to die. Under this choice, we will
impose a market value adjustment upon any withdrawal made during
the 5 year period (unless the withdrawal is made during the
30 day period immediately preceding the end of a guarantee
period). |
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Choice 3. |
Payment under an annuity or settlement option over the lifetime
of the beneficiary or over a period not extending beyond the
life expectancy of the beneficiary with distribution beginning
within one year of the date of death of the first to die. |
This contract is subject to special tax rules that govern the
required distributions upon the death of the owner or joint
owner. See What are the Tax Considerations Associated with
the Strategic Partners Horizon Annuity Contract? section
beginning on page 20.
How Can I Purchase a Strategic
Partners
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Horizon Annuity Contract? |
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PURCHASE PAYMENT
A purchase payment is the amount of money you give us to
purchase the contract. The minimum initial purchase payment is
$5,000. You must get our prior approval for any purchase payment
over $5 million. You can allocate subsequent purchase
payments to a guarantee period only during the 30 day
period immediately preceding the end of a guarantee period,
provided that any such purchase payment is at least $1,000.
Generally, your initial purchase payment consists of a single
sum. However, with respect to an exchange or roll-over, your
purchase payment can consist of multiple sums that you identify
at the time of application. With respect to the latter:
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we will aggregate each sum for purposes of computing the amount
of any additional interest that we pay on each sum; and |
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each sum will earn interest only from the business day on which
it is received in good order at the Prudential Annuity Service
Center until the end of the guarantee period. |
We will sell you a contract only if the eldest of the owner, any
joint owner, annuitant, and any co-annuitant is 85 or younger on
the date that the application is signed.
ALLOCATION OF PURCHASE PAYMENT
When you purchase a contract, we will allocate your invested
purchase payment to the guarantee period of your choosing,
provided that we are offering that guarantee period at the time.
You must allocate all of your initial purchase payment to a
single guarantee period. Likewise, any subsequent purchase
payment you make during the 30 day period immediately
preceding the end of a guarantee period will be consolidated
with your existing contract value, and the total will be
allocated to a single guarantee period of your choosing.
What are the Expenses Associated with the
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Strategic Partners Horizon Annuity Contract? |
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There are charges associated with the contract that may
reduce the return on your investment. These charges and expenses
are described below.
WITHDRAWAL CHARGE
The withdrawal charge is for the payment of the expenses
involved in selling and distributing the contracts, including
sales commissions, printing of prospectuses, sales
administration, preparation of sales literature and other
promotional activities.
You may surrender your contract in whole or in part while the
guarantee period remains in effect. If you do so, however, you
will be subject to (a) a possible withdrawal charge,
(b) a market value adjustment (which we discussed in
Section 2 above) and (c) possible tax penalties. After
the first contract year, you may withdraw, without the
imposition of any withdrawal charge or market value adjustment,
an amount equal to the interest earned under your contract
during the immediately preceding contract year. When we
calculate the withdrawal charge and market value adjustment, we
first take into account any available charge-free amount. We
impose a withdrawal charge and market value adjustment only
after that amount has been exhausted. In addition, we do not
impose either a withdrawal charge or a market value adjustment
on amounts you withdraw to satisfy Internal Revenue Service
minimum distribution requirements.
If you make a full withdrawal, we will deduct the withdrawal
charge from the proceeds that we pay to you. If you make a
partial withdrawal, we will deduct the withdrawal charge from
the contract value remaining in the guarantee period. We
calculate the withdrawal charge after we have given effect to
any market value adjustment.
The withdrawal charge that we impose is equal to a specified
percentage of the contract value withdrawn that is in excess of
the charge-free amount described above. With respect to the
initial guarantee period, the withdrawal charge is based on the
number of contract anniversaries that have elapsed since the
contract date. If permitted by state law, the withdrawal charge
schedule set out below is reinstated during your first, renewal
guarantee period, and the contract anniversaries set out in the
table below also refer to contract anniversaries within the
first, renewal guarantee period. No withdrawal charges apply to
any guarantee period that you choose subsequent to your first,
renewal guarantee period. Moreover, we impose no withdrawal
charge on withdrawals from any one year guarantee period. The
withdrawal charge is equal to the following, if the contract is
issued (or the initial renewal guarantee period is selected) by
an owner who is 84 or younger at that time:
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Number of contract anniversaries since |
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contract date (and start of first |
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renewal guarantee period) |
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Withdrawal Charge |
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0 |
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7% |
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1 |
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7% |
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2 |
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7% |
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3 |
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6% |
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4 |
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5% |
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5 |
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5% |
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6 |
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4% |
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7 |
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3% |
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8 |
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2% |
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9 |
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1% |
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10 |
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0% |
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As specified in the contract, we reduce withdrawal charges (from
what is depicted above) if the owner is 85 or older. There is a
separate withdrawal charge schedule applicable to each of ages
85, 86, 87, 88, 89 and 90. With certain exceptions, the
withdrawal charge at any contract anniversary declines by 1%
from one age to the next successive age, at such older ages.
Some or all of the guarantee periods that we offer at any given
time will be shorter than the time periods indicated immediately
above. As such, the length of the guarantee period that you have
selected, in and of itself, may prevent you from taking
advantage of the decreasing withdrawal charges depicted above.
For example, if you choose a three year guarantee period, you
would not be able to take advantage of the lower withdrawal
charges that would have been available in subsequent contract
years. If a withdrawal is effective on the day before a contract anniversary, the withdrawal charge
percentage will be that as of the next following contract
anniversary.
WAIVER OF WITHDRAWAL CHARGE FOR CRITICAL CARE
We will allow you to withdraw money from the contract, and will
waive any withdrawal charge and market value adjustment, if the
owner or joint owner (if applicable) becomes confined to an
eligible nursing home or hospital for a period of at least three
consecutive months after the contract was purchased. You would
need to provide us with proof of the confinement. If a physician
has certified that the owner or joint owner is terminally ill
(has twelve months or less to live) there will be no charge
imposed for withdrawals nor any market value adjustment.
Critical Care Access is not available in all states.
TAXES ATTRIBUTABLE TO PREMIUM
There are federal, state and local premium based taxes
applicable to your purchase payment. We are responsible for the
payment of these taxes and may make a deduction from the value
of the contract to pay some or all of these taxes. Some of these
taxes are due when the contract is issued, others are due when
the annuity payments begin. It is our current practice not to
deduct a charge for state premium taxes until annuity payments
begin. In the states that impose a premium tax, the current
rates range up to 3.5%. It is also our current practice not to
deduct a charge for the federal deferred acquisition costs paid
by us that are based on premium received. However, we reserve
the right to charge the contract owner in the future for any
such deferred acquisition costs and any federal, state or local
income, excise, business or any other type of tax measured by
the amount of premium received by us.
How Can I
________________________________________________________________________________
You can take money out at any time during the accumulation
phase. If you do so, however, you may be subject to income tax
and, if the withdrawal is prior to your attaining age
59 1/2, an additional tax penalty. You will need our
consent to make a partial withdrawal if the requested withdrawal
is less than $250. During the accumulation phase, we generally
have the right to terminate your contract and pay you the
contract value if the current contract value is less than $2,000
and certain other conditions apply.
Income taxes, tax penalties, and certain restrictions may
apply to any withdrawal you make. For a more complete
explanation, see Section 8 of this prospectus.
AUTOMATED WITHDRAWALS
We offer an automated withdrawal feature. This feature enables
you to receive periodic withdrawals in monthly, quarterly,
semiannual, or annual intervals. We will process your withdrawal
at the end of the business day at the intervals you specify. We
will continue at these intervals until you tell us otherwise. We
reserve the right to cease paying automated withdrawals if
paying any such withdrawal would cause the contract value to be
less than $2,000.
The minimum automated withdrawal amount you can make is $100.
Withdrawal charges, and a market value adjustment, may apply to
any automated withdrawal you make.
Income taxes, tax penalties, and certain restrictions may
apply to automated withdrawals. For a more complete discussion,
see Section 8 of this prospectus.
What are the Tax Considerations Associated
with the Strategic Partners Horizon Annuity
Contract?
________________________________________________________________________________
The tax considerations associated with the Strategic Partners
Horizon Annuity contract vary depending on whether the contract
is (i) owned by an individual and not associated with a
tax-favored retirement plan, or (ii) held under a
tax-favored retirement plan. We discuss the tax considerations
for these categories of contracts below. The discussion is
general in nature and describes only federal income tax law (not
state or other tax laws). It is based on current law and
interpretations, which may change. It is not intended as tax
advice. A tax adviser should be consulted for complete
information and advice.
CONTRACTS OWNED BY INDIVIDUALS (NOT ASSOCIATED WITH TAX
FAVORED RETIREMENT PLANS)
Taxes Payable by You
We believe the contract is an annuity contract for tax purposes.
Accordingly, as a general rule, you should not pay any tax until
you receive money under the contract.
Generally, annuity contracts issued by the same company (and
affiliates) to you during the same calendar year must be treated
as one annuity contract for purposes of determining the amount
subject to tax under the rules described below.
Taxes on Withdrawals and Surrender
If you make a withdrawal from your contract or surrender it
before annuity payments begin, the amount you receive will be
taxed as ordinary income, rather than as return of purchase
payments, until all gain has been withdrawn. You will generally
be taxed on any withdrawal from a contract while you are alive
even if the withdrawal is paid to someone else.
If you assign or pledge all or part of your contract as
collateral for a loan, the part assigned will be treated as a
withdrawal. Also, if you elect the interest payment option, you
will be treated, for tax purposes, as surrendering your contract.
If you transfer your contract for less than full consideration,
such as by gift, you will trigger tax on the gain in the
contract. This rule does not apply if you transfer the contract
to your spouse or under most circumstances if you transfer the
contract incident to divorce.
Taxes on Annuity Payments
A portion of each annuity payment you receive will be treated as
a partial return of your purchase payments and will not be
taxed. The remaining portion will be taxed as ordinary income.
Generally, the nontaxable portion is determined by multiplying
the annuity payment you receive by a fraction, the numerator of
which is your purchase payments (less any amounts previously
received tax-free) and the denominator of which is the total
expected payments under the contract.
After the full amount of your purchase payments have been
recovered tax-free, the full amount of the annuity payments will
be taxable. If annuity payments stop due to the death of the
annuitant before the full amount of your purchase payments have
been recovered, a tax deduction may be allowed for the
unrecovered amount.
Tax Penalty on Withdrawals and Annuity Payments
Any taxable amount you receive under your contract may be
subject to a 10 percent tax penalty. Amounts are not subject to
this tax penalty if:
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the amount is paid on or after you reach age 59 1/2 or die; |
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the amount received is attributable to your becoming disabled; |
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the amount paid or received is in the form of level annuity
payments not less frequently than annually under a lifetime
annuity; and |
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the amount received is paid under an immediate annuity contract
(in which annuity payments begin within one year of purchase). |
If you modify the lifetime annuity payment stream (other than as
a result of death or disability) before you reach age
59 1/2 (or before the end of the five year period beginning
with the first payment and ending after you reach age
59 1/2), your tax for the year of modification will be
increased by the penalty tax that
would have been imposed without the exception, plus interest for
the deferral.
Taxes Payable by Beneficiaries
The death benefit is subject to income tax to the extent the
distribution exceeds the adjusted basis in the contract and the
full value of the death benefit is included in the owners
estate.
Generally, the same tax rules apply to amounts received by your
beneficiary as those set forth above with respect to you. The
election of an annuity payment option instead of a lump sum
death benefit may defer taxes. Certain minimum distribution
requirements apply upon your death, as discussed further below.
Reporting and Withholding on Distributions
Taxable amounts distributed from your annuity contracts are
subject to federal and state income tax reporting and
withholding. In general, we will withhold federal income tax
from the taxable portion of such distribution based on the type
of distribution. In the case of an annuity or similar periodic
payment, we will withhold as if you are a married individual
with 3 exemptions unless you designate a different withholding
status. In the case of all other distributions, we will withhold
at a 10% rate. You may generally elect not to have tax withheld
from your payments. An election out of withholding must be made
on forms that we provide.
State income tax withholding rules vary and we will withhold
based on the rules of your State of residence. Special tax rules
apply to withholding for nonresident aliens, and we generally
withhold income tax for nonresident aliens at a 30% rate. A
different withholding rate may be applicable to a nonresident
alien based on the terms of an existing income tax treaty
between the United States and the nonresident aliens
country.
Regardless of the amount withheld by us, you are liable for
payment of federal and state income tax on the taxable portion
of annuity distributions. You should consult with your tax
advisor regarding the payment of the correct amount of these
income taxes and potential liability if you fail to pay such
taxes.
Annuity Qualification
Required Distributions Upon Your Death Upon
your death (or the death of a joint owner, if earlier), certain
distributions must be made under the contract. The required
distributions depend on whether you die on or before you start
taking annuity payments under the contract or after you start
taking annuity payments under the contract.
If you die on or after the annuity date, the remaining portion
of the interest in the contract must be distributed at least as
rapidly as under the method of distribution being used as of the
date of death.
If you die before the annuity date, the entire interest in the
contract must be distributed within 5 years after the date
of death. However, if an annuity payment option is selected by
your designated beneficiary and if annuity payments begin within
1 year of your death, the value of the contract may be
distributed over the beneficiarys life or a period not
exceeding the beneficiarys life expectancy. Your
designated beneficiary is the person to whom benefit rights
under the contract pass by reason of death, and must be a
natural person in order to elect an annuity payment option based
on life expectancy or a period exceeding five years.
If any portion of the contract is payable to (or for the benefit
of) your surviving spouse, such portion of the contract may be
continued with your spouse as the owner.
Changes in the Contract We reserve the right
to make any changes we deem necessary to assure that the
contract qualifies as an annuity contract for tax purposes. Any
such changes will apply to all contractowners and you will be
given notice to the extent feasible under the circumstances.
Additional Tax Considerations
For additional information about the requirements of federal tax
law applicable to tax favored plans, see the IRA
Disclosure Statement on page 97.
CONTRACTS HELD BY TAX FAVORED PLANS
Currently, the contract may be purchased for use in connection
with individual retirement accounts and
annuities (IRAs) which are subject to
Sections 408(a), 408(b) and 408A of the Internal Revenue
Code of 1986, as amended (Code). At some future time we may
allow the contract to be purchased in connection with other
retirement arrangements which are also entitled to favorable
federal income tax treatment (tax favored plans).
These other tax favored plans include:
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Simplified employee pension plans (SEPs) under
Section 408(k) of the Code; |
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Saving incentive match plans for employees-IRAs
(SIMPLE-IRAs) under Section 408(p) of the Code; and |
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Tax-deferred annuities (TDAs) under
Section 403(b) of the Code. |
This description assumes that (i) we will be offering this
to both IRA and non-IRA tax favored plans, and (ii) you
have satisfied the requirements for eligibility for these
products.
You should be aware that tax favored plans such as IRAs
generally provide tax deferral regardless of whether they invest
in annuity contracts. This means that when a tax favored plan
invests in an annuity contract, it generally does not result in
any additional tax deferral benefits.
Types of Tax Favored Plans
IRAs If you buy a contract for use as an IRA, we will
provide you a copy of the prospectus and the contract. The
IRA Disclosure Statement on page 97 contains
information about eligibility, contribution limits, tax
particulars and other IRA information. In addition to this
information (some of which is summarized below), the IRS
requires that you have a free look after making an
initial contribution to the contract. During this time, you can
cancel the contract by notifying us in writing, and we will
refund all of the purchase payments under the contract (or, if
greater, the amount credited under the contract, calculated as
of the date that we receive this cancellation notice).
Contributions Limits/ Rollovers: Because of the way the contract
is designed, you may only purchase a contract for an IRA in
connection with a rollover of amounts from a
qualified retirement plan or transfer from another IRA. The
minimum payment under the contract ($5,000) is greater than the
maximum amount of the annual contribution currently allowed by
law for an IRA. For 2002 to 2004, the IRA contribution limit is
$3,000; increasing for 2005 to 2007, to $4,000; and for 2008,
$5,000. After 2008 the contribution amount will be indexed for
inflation. The tax law also provides for a catch-up provision
for individuals who are age 50 and above. These taxpayers will
be permitted to contribute an additional $500 in years 2002 to
2005 and an additional $1,000 in 2006 and years thereafter). The
rollover rules under the Code are fairly technical;
however, an individual (or his or her surviving spouse) may
generally roll over certain distributions from tax
favored retirement plans (either directly or within 60 days
from the date of these distributions) if he or she meets the
requirements for distribution. Once you buy the contract, you
can make regular IRA contributions under the contract (to the
extent permitted by law). However, if you make such regular IRA
contributions, you should note that you will not be able to
treat the contract as a conduit IRA, which means
that you will not retain possible favorable tax treatment if you
subsequently roll over the contract funds originally
derived from a qualified retirement plan or TDA into another
Section 401(a) plan or TDA.
Required Provisions: Contracts that are IRAs (or endorsements
that are part of the contract) must contain certain provisions:
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You, as owner of the contract, must be the annuitant
under the contract (except in certain cases involving the
division of property under a decree of divorce); |
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Your rights as owner are non-forfeitable; |
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You cannot sell, assign or pledge the contract, other than to
Pruco Life; |
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The annual premium you pay cannot be greater than the maximum
amount allowed by law, including catch-up contributions if
applicable (which does not include any rollover amounts); |
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The date on which annuity payments must begin cannot be later
than the April 1st of the calendar year after the calendar year
you turn age 70 1/2; and |
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Death and annuity payments must meet minimum distribution
requirements (described below). |
Usually, the full amount of any distribution from an IRA
(including a distribution from this contract) which is not a
rollover is taxable. As taxable income, these distributions are
subject to the general tax withholding rules described earlier.
In addition to this normal tax liability, you may also be liable
for the following, depending on your actions:
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A 10% early distribution penalty (described below); |
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Liability for prohibited transactions if you, for
example, borrow against the value of an IRA; or |
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Failure to take a minimum distribution (also generally described
below). |
SEPs SEPs are a variation on a standard IRA, and
contracts issued to a SEP must satisfy the same general
requirements described under IRAs (above). There are, however,
some differences:
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If you participate in a SEP, you generally do not include in
income any employer contributions made to the SEP on your behalf
up to the lesser of (a) $40,000 in 2002 or (b) 25% of the
employees earned income (not including the employer
contribution amount as earned income for these
purposes). However, for these purposes, compensation in excess
of certain limits established by the IRS will not be considered.
In 2002, this limit is $200,000. |
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SEPs must satisfy certain participation and nondiscrimination
requirements not generally applicable to IRAs; and |
|
Some SEPs for small employers permit salary deferrals up to
$11,000 in 2002 with the employer making these contributions to
the SEP. However, no new salary reduction or
SAR-SEPs can be established after 1996. Individuals
participating in a SARSEP who are age 50 or above by the end of
the year will be permitted to contribute an additional $1,000 in
2002, increasing in $1,000 increments per year until reaching
$5,000 in 2006. Thereafter the amount is indexed for inflation. |
You will also be provided the same information, and have the
same free look period, as you would have if you were
purchasing the contract for a standard IRA.
SIMPLE-IRAs SIMPLE-IRAs are another variation on the
standard IRA, available to small employers (under 100 employees,
on a controlled group basis) that do not offer other
tax favored plans. SIMPLE-IRAs are also subject to the same
basic IRA requirements with the following exceptions:
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Participants in a SIMPLE-IRA may contribute up to $7,000 in
2002, as opposed to the usual IRA contribution limit, and
employer contributions may also be provided as a match (up to 3%
of your compensation); and |
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Beginning in 2002, individuals age 50 or above by the end of the
year will be permitted to contribute an additional $500 in 2002,
increasing in $500 increments per year until reaching $2,500 in
2006. Thereafter the amount is indexed for inflation. |
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SIMPLE-IRAs are not subject to the SEP nondiscrimination rules. |
ROTH IRAs Congress amended the Code in 1997 to add a new
Section 408A, creating the Roth IRA as a new
type of individual retirement plan. Like standard IRAs, income
within a Roth IRA accumulates tax-deferred, and contributions
are subject to specific limits. Roth IRAs have, however, the
following differences:
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Contributions to a Roth IRA cannot be deducted from your gross
income; |
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Qualified distributions (generally, held for 5 tax
years and payable on account of death, disability, attainment of
age 59 1/2, or first time-homebuyer) from Roth IRAs are
excludable from your gross income; and |
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If eligible, you may make contributions to a Roth IRA after
attaining age 70 1/2, and distributions are not required to
begin upon attaining such age or at any time thereafter. |
The annual contribution allowed by law for Roth IRAs increases
in the same manner as the increases for traditional IRAs as
described on page 22). The Code permits persons who meet
certain income limitations
(generally, adjusted gross income under $100,000), and who
receive certain qualifying distributions from such non-Roth
IRAs, to directly rollover or make, within 60 days, a
rollover of all or any part of the amount of such
distribution to a Roth IRA which they establish. This conversion
triggers current taxation (but is not subject to a 10% early
distribution penalty). Once the contract has been purchased,
regular Roth IRA contributions will be accepted to the extent
permitted by law.
TDAs You may own TDAs generally if you are either an
employer or employee of a tax-exempt organization (as defined
under Code Section 501(c)(3)) or a public educational
organization. You may make contributions to a TDA so long as the
employees rights to the annuity are nonforfeitable.
Contributions to a TDA, and any earnings, are not taxable until
distribution. You may also make contributions to a TDA under a
salary reduction agreement, generally up to a maximum of $11,000
in 2002. Individuals participating in a TDA who are age 50 or
above by the end of the year will be permitted to contribute an
additional $1,000 in 2002, increasing in $1,000 increments per
year until reaching $5,000 in 2006. Thereafter the amount is
indexed for inflation. Further, you may roll over TDA amounts to
another TDA or an IRA. Beginning in 2002, TDA amounts may also
be rolled over to a qualified retirement plan, a SEP and a 457
government plan.
A contract may only qualify as a TDA if distributions (other
than grandfathered amounts held as of
December 31, 1988) may be made only on account of:
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Your attainment of age 59 1/2; |
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Your severance of employment; |
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Your death; |
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Your total and permanent disability; OR |
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Hardship (under limited circumstances, and only related to
salary deferrals and any earnings attributable to these amounts). |
In any event, you must begin receiving distributions from your
TDA by April 1st of the calendar year after the calendar year
you turn age 70 1/2 or retire, whichever is later.
These distribution limits do not apply either to transfers or
exchanges of investments under the contract, or to any
direct transfer of your interest in the contract to
another TDA or to a mutual fund custodial account
described under Code Section 403(b)(7).
Employer contributions to TDAs are subject to the same general
contribution, nondiscrimination, and minimum participation rules
applicable to qualified retirement plans.
Minimum Distribution Requirements and Payment Option
If you hold the contract under an IRA (or other tax-favored
plan), IRS minimum distribution requirements must be satisfied.
This means that payments must start by April 1 of the year after
the year you reach age 70 1/2 and must be made for each
year thereafter. The amount of the payment must at least equal
the minimum required under the IRS rules. Several choices are
available for calculating the minimum amount, permitted under
IRS regulations released in April 2002. More information on the
mechanics of this calculation is available on request. Please
contact us a reasonable time before the IRS deadline so that a
timely distribution is made. Please note that there is a 50% IRS
penalty tax on the amount of any minimum distribution not made
in a timely manner.
You can use the Minimum Distribution option to satisfy the IRS
minimum distribution requirements for this contract without
either beginning annuity payments or surrendering the contract.
We will send you a check for this minimum distribution amount,
less any other partial withdrawals that you made during the
year. Please note that the Minimum Distribution option may need
to be modified to satisfy recently announced changes in IRS
rules.
Penalty for Early Withdrawals
You may owe a 10% tax penalty on the taxable part of
distributions received from an IRA, SEP, SIMPLE-IRA (which may
increase to 25%), Roth IRA, TDA or qualified retirement plan
before you attain age 59 1/2.
There are only limited exceptions to this tax, and you should
consult your tax adviser for further details.
Withholding
Unless a distribution is an eligible rollover distribution that
is directly rolled over into another qualified plan,
IRA (including the IRA variations described above) SEP, 457
government plan, or TDA, we will withhold at the rate of 20%.
This 20% withholding does not apply to distributions from IRAs
and Roth IRAs. For all other distributions, unless you elect
otherwise, we will withhold federal income tax from the taxable
portion of such distribution at an appropriate percentage. The
rate of withholding on annuity payments where no mandatory
withholding is required is determined on the basis of the
withholding certificate that you file with us. If you do not
file a certificate, we will automatically withhold federal taxes
on the following basis:
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For any annuity payments not subject to mandatory withholding,
you will have taxes withheld by us as if you are a married
individual, with 3 exemptions; and |
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For all other distributions, we will withhold at a 10% rate. |
We will provide you with forms and instructions concerning the
right to elect that no amount be withheld from payments in the
ordinary course. However, you should know that, in any event,
you are liable for payment of federal income taxes on the
taxable portion of the distributions, and you should consult
with your tax advisor to find out more information on your
potential liability if you fail to pay such taxes.
ERISA Disclosure/ Requirements
ERISA (the Employee Retirement Income Security Act of
1974) and the Code prevents a fiduciary and other
parties in interest with respect to a plan (and, for
these purposes, an IRA would also constitute a plan)
from receiving any benefit from any party dealing with the plan,
as a result of the sale of the contract. Administrative
exemptions under ERISA generally permit the sale of
insurance/annuity products to plans, provided that certain
information is disclosed to the person purchasing the contract.
This information has to do primarily with the fees, charges,
discounts and other costs related to the contract, as well as
any commissions paid to any agent selling the contract.
Information about any applicable fees, charges, discounts,
penalties or adjustments may be found under What Are the
Expenses Associated with the Strategic Partners Horizon Annuity
Contract starting on page 17.
Information about sales representatives and commissions may be
found under Other Information and Sale and
Distribution of the Contract on page 27.
In addition, other relevant information required by the
exemptions is contained in the contract and accompanying
documentation. Please consult your tax advisor if you have any
additional questions.
Spousal Consent Rules for Retirement Plans Qualified
Contracts
If you are married at the time your payments commence, you may
be required by federal law to choose an income option that
provides survivor annuity income to your spouse, unless your
spouse waives that right. Similarly, if you are married at the
time of your death, federal law may require all or a portion of
the death benefit to be paid to your spouse, even if you
designated someone else as your beneficiary. A brief explanation
of the applicable rules follows. For more information, consult
the terms of your retirement arrangement.
Defined Benefit Plans, Money Purchase Pension Plans, and
ERISA 403(b) Annuities. If you are married at the time your
payments commence, federal law requires that benefits be paid to
you in the form of a qualified joint and survivor
annuity (QJSA), unless you and your spouse
waive that right, in writing. Generally, this means that you
will receive a reduced payment during your life and, upon your
death, your spouse will receive at least one-half of what you
were receiving for life. You may elect to receive another income
option if your spouse consents to the election
and waives his or her right to receive the QJSA. If your spouse
consents to the alternative form of payment, your spouse may not
receive any benefits from the plan upon your death. Federal law
also requires that the plan pay a death benefit to your spouse
if you are married and die before you begin receiving your
benefit. This benefit must be available in the form of an
annuity for your spouses lifetime and is called a
qualified pre-retirement survivor annuity
(QPSA). If the plan pays death benefits to other
beneficiaries, you may elect to have a beneficiary other than
your spouse receive the death benefit, but only if your spouse
consents to the election and waives his or her right to receive
the QPSA. If your spouse consents to the alternate beneficiary,
your spouse will receive no benefits from the plan upon your
death. Any QPSA waiver prior to your attaining age 35 will
become null and void on the first day of the calendar year in
which you attain age 35, if still employed.
Defined Contribution Plans (including 401(k) Plans).
Spousal consent to a distribution is generally not required.
Upon your death, your spouse will receive the entire death
benefit, even if you designated someone else as your
beneficiary, unless your spouse consents in writing to waive
this right. Also, if you are married and elect an annuity as a
periodic income option, federal law requires that you receive a
QJSA (as described above), unless you and your spouse consent to
waive this right.
IRAs, non-ERISA 403(b) Annuities, and 457 Plans. Spousal
consent to a distribution is not required. Upon your death, any
death benefit will be paid to your designated beneficiary.
Additional Information
For additional information about the requirements of federal tax
law applicable to tax favored plans, see the IRA
Disclosure Statement on page 97. The following
additional tax considerations also may be of interest.
Entity Owners.
Where a contract is held by a non-natural person (e.g., a
corporation), other than as an agent or nominee for a natural
person (or in other limited circumstances), the contract will
not be taxed as an annuity and increases in the value of the
contract will be subject to tax.
Purchase Payments Made Before August 14, 1982.
If your contract was issued in exchange for a contract
containing purchase payments made before August 14, 1982,
favorable tax rules may apply to certain withdrawals from the
contract. Generally, withdrawals are treated as a recovery of
your investment in the contract first until purchase payments
made before August 14, 1982 are withdrawn. Moreover, any
income allocable to purchase payments made before
August 14, 1982, is not subject to the 10% tax penalty.
Generation-Skipping Transfers.
If you transfer your contract to a person two or more
generations younger than you (such as a grandchild or
grandniece) or to a person that is more than
37 1/2 years younger than you, there may be
generation-skipping transfer tax consequences.
Other Information
________________________________________________________________________________
PRUCO LIFE INSURANCE COMPANY
Pruco Life Insurance Company (Pruco Life) is a stock
life insurance company, organized in 1971 under the laws of the
State of Arizona. It is licensed to sell life insurance and
annuities in the District of Columbia, Guam, and in all states
except New York. Pruco Lifes primary competitors are other
insurers that sell fixed and variable insurance products. Pruco
Life currently has no employees.
Pruco Life is a wholly-owned subsidiary of The Prudential
Insurance Company of America (Prudential), a New
Jersey stock life insurance company that has been doing business
since 1875. Prudential is an indirect wholly-owned subsidiary of
Prudential Financial, Inc. (Prudential Financial), a
New Jersey insurance holding company. As Pruco Lifes
ultimate parent, Prudential Financial exercises significant
influence over the operations and capital structure of Pruco
Life and Prudential. However, neither Prudential Financial,
Prudential, nor any other related company has any legal
responsibility to pay amounts that Pruco Life may owe under the
contract.
Pruco Life publishes annual and quarterly reports that are filed
with the SEC. These reports contain financial information about
Pruco Life that is annually audited by independent accountants.
Prucos Life annual report for the year ended
December 31, 2001, together with subsequent periodic
reports that Pruco Life files with the SEC, are incorporated by
reference into this prospectus. You can obtain copies, at no
cost, of any and all of this information, including the Pruco
Life annual report that is not ordinarily mailed to
contractholders, the more current reports and any subsequently
filed documents at no cost by contacting us at the address or
telephone number listed on the cover. You may read and copy any
filings made by Pruco Life with the SEC at the SECs Public
Reference Room at 450 Fifth Street, Washington, D.C. 20549. You
can obtain information on the operation of the Public Reference
Room by calling 1-800-SEC-0330. The SEC maintains an Internet
site that contains reports, proxy and information statements,
and other information regarding issuers that file electronically
with the SEC at http://www.sec.gov.
SALE AND DISTRIBUTION OF THE CONTRACT
Prudential Investment Management Services LLC
(PIMS), 100 Mulberry Street, Newark, New Jersey
07102-4077, acts as the distributor of the contracts under a
best efforts underwriting agreement with Pruco Life
under which PIMS is reimbursed for its costs and expenses. PIMS
is an indirect wholly-owned subsidiary of Prudential Financial,
Inc. and is a limited liability corporation organized under
Delaware law in 1996. It is a registered broker-dealer under the
Securities Exchange Act of 1934 and a member of the National
Association of Securities Dealers, Inc. We pay the broker-dealer
whose registered representatives sell the contract either:
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a commission of up to 5.0% of your purchase payments; or |
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a combination of a commission on purchase payments and a
trail commission which is a commission
determined as a percentage of your contract value that is paid
periodically over the life of your contract. |
The commission amount quoted above is the maximum amount which
is paid. In most circumstances, the registered representative
who sold the contract will receive significantly less. The
broker-dealer who sells a contract to you will deliver or make
available to you a copy of the prospectus for the Strategic
Partners Horizon Annuity.
From time to time, Prudential or its affiliates may offer and
pay non-cash compensation to registered representatives who sell
the contract. For example, Prudential or an affiliate may pay
for a training and education meeting that is attended by
registered representatives of both Prudential-affiliated
broker-dealers and independent broker-dealers. Prudential and
its affiliates retain discretion as to which broker-dealers to
offer non-cash (and cash) compensation arrangements, and will
comply with NASD rules and other pertinent laws in making such
offers and payments. Our payment of cash or non-cash
compensation in connection with sales of the contract does not
result directly in any additional charge to you.
ASSIGNMENT
You can assign the contract at any time during your lifetime. We
will not be bound by the assignment until we receive written
notice. We will not be liable for any payment or other action we
take in accordance with the contract if that action occurs
before we receive notice of the assignment. An assignment, like
any other change in ownership, may trigger a taxable event.
If the contract is issued under a qualified plan, there may be
limitations on your ability to assign the contract. For further
information please speak to your financial professional.
HOUSEHOLDING
To reduce costs, we now send only a single copy of prospectuses
and shareholder reports to each consenting household, in lieu of
sending a copy to each contractholder that resides in the
household. If you are a member of such a household, you should
be aware that you can revoke your consent to householding at any
time, and begin to receive your own copy of prospectuses and
shareholder reports, by calling 1-877-778-5008.
LITIGATION
We are subject to legal and regulatory actions in the ordinary
course of our businesses, including class actions. Pending legal
and regulatory actions include proceedings specific to our
practices and proceedings generally applicable to business
practices in the industries in which we operate. In certain of
these lawsuits, large and/or indeterminate amounts are sought,
including punitive or exemplary damages.
Beginning in 1995, regulatory authorities and customers brought
significant regulatory actions and civil litigation against
Pruco Life and Prudential involving individual life insurance
sales practices. In 1996, Prudential, on behalf of itself and
many of its life insurance subsidiaries, including Pruco Life,
entered into settlement agreements with relevant insurance
regulatory authorities and plaintiffs in the principal life
insurance sales practices class action lawsuit covering
policyholders of individual permanent life insurance policies
issued in the United States from 1982 to 1995. Pursuant to the
settlements, the companies agreed to various changes to their
sales and business practices controls, to a series of fines, and
to provide specific forms of relief to eligible class members.
Virtually all claims by class members filed in connection with
the settlements have been resolved and virtually all aspects of
the remediation program have been satisfied.
As of June 30, 2002 Prudential and/or Pruco Life remained a
party to approximately 40 individual sales practices
actions filed by policyholders who opted out of the
class action settlement relating to permanent life insurance
policies issued in the United States between 1982 and 1995. In
addition, there were 17 sales practices actions pending
that were filed by policyholders who were members of the class
and who failed to opt out of the class action
settlement. Prudential and Pruco Life believed that those
actions are governed by the class settlement release and expects
them to be enjoined and/or dismissed. Additional suits may be
filed by class members who opted out of the class
settlements or who failed to opt out but
nevertheless seek to proceed against Prudential and/or Pruco
Life. A number of the plaintiffs in these cases seek large
and/or indeterminate amounts, including punitive or exemplary
damages. Some of these actions are brought on behalf of multiple
plaintiffs. It is possible that substantial punitive damages
might be awarded in any of these actions and particularly in an
action involving multiple plaintiffs.
Prudential has indemnified Pruco Life for any liabilities
incurred in connection with sales practices litigation covering
policyholders of individual permanent life insurance policies
issued in the United States from 1982 to 1995.
Pruco Lifes 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 Pruco Life 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
Pruco Lifes financial position.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
POSITION AND RESULTS OF OPERATIONS
The following analysis should be read in conjunction with the
Notes to Consolidated Financial Statements.
Pruco Life (the Company) sells interest-sensitive
individual life insurance and variable life insurance, term life
insurance, individual variable and fixed annuities, and a
non-participating guaranteed interest contract (GIC)
called Prudential Credit Enhanced (PACE) primarily
through Prudentials 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 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.
Generally, policyholders who purchase the Companys
products have the option of investing in the Separate Accounts,
segregated funds for which investment risks are borne by the
customer, or the Companys 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
majority of the fund balances and new sales, except for the GIC
product, are in the Separate Accounts.
In accordance with a profit sharing agreement with Prudential
that was in effect through December 31, 2000, the Company
received fee income from policyholder account balances invested
in the Prudential Series Funds (PSF). PSF are a
portfolio of mutual fund investments related to the
Companys Separate Account products. These revenues were
recorded as Asset management fees in the
Consolidated Statements of Operations and Comprehensive Income.
The Company was charged an asset management fee by Prudential
Global Asset Management (PGAM) and Jennison
Associates LLC (Jennison) for managing the PSF
portfolio. These fees were a component of general,
administrative and other expenses.
On September 29, 2000, the Board of Directors for the
Prudential Series Fund, Inc. (PSFI) adopted
resolutions to terminate the existing management agreement
between PSFI and Prudential, and has appointed another
subsidiary of Prudential (Prudential Investments LLC) as the
fund manager for the PSF. The change was approved by the
shareholders of PSFI during early 2001 and was effective as of
January 1, 2001. Therefore as of January 1, 2001, the
Company ceased receiving such fees associated with the PSF. This
transaction resulted in a decrease in net income from the prior
year of $34.2 million. However, effective February 1,
2002, the Company began receiving fees
from Prudential Investments LLC related to the amount of PSF
assets attributable to Company-issued variable annuities and
variable life policies.
On January 31, 2001, the Company transferred all of its
assets and liabilities associated with the Companys Taiwan
branch including Taiwans insurance book of business to an
affiliated Company, Prudential Life Insurance Company of Taiwan
Inc. (Prudential of Taiwan), a wholly owned
subsidiary of Prudential.
The mechanism used to transfer this block of business in Taiwan
is referred to as a full acquisition and assumption
transaction. Under this mechanism, the Company is jointly liable
with Prudential of Taiwan for two years from the giving of
notice to all obligees for all matured obligations and for two
years after the maturity date of not-yet-matured obligations.
Prudential of Taiwan is also contractually liable, under
indemnification provisions of the transaction, for any
liabilities that may be asserted against the Company. The
transfer of the insurance related assets and liabilities was
accounted for as a long-duration coinsurance transaction under
accounting principles generally accepted in the United States.
Under this accounting treatment, the insurance related
liabilities remain on the books of the Company and an offsetting
reinsurance recoverable is established.
As part of this transaction, the Company made a capital
contribution to Prudential of Taiwan in the amount of the net
equity of the Companys Taiwan branch as of the date of
transfer. In July 2001, the Company dividended its interest in
Prudential of Taiwan totaling $45.8 million to Prudential.
Beginning February 1, 2001 Taiwans net income is not
included in the Companys results of operations. The Taiwan
branch had net income of $1.8 million ($97.8 million in
revenues and $96.0 million in expenses) in 2000.
On December 28, 2001, the Company paid to Prudential an
extraordinary dividend which was approved by the Insurance
Department of Arizona. The dividend was $108 million and
was paid with cash of $26 million and fixed maturities of
$82 million.
In connection with Prudentials demutualization, qualified
annuity contract holders were given increases to their policy
values in the form of policy credits. The policy credits of
$128.0 million are reflected as a reduction of retained
earnings.
Critical Accounting Policies
The preparation of financial statements in conformity with
generally accepted accounting principles (GAAP)
requires the application of accounting policies that often
involve a significant degree of judgment. Management, on an
ongoing basis, reviews critical estimates and assumptions. If
management determines, as a result of its consideration of facts
and circumstances, that modifications in assumptions and
estimates are appropriate, results of operations and financial
position as reported in the Consolidated Financial Statements
may change significantly.
The following sections discuss accounting policies applied in
preparing our financial statements that Management believes are
most dependent on the application of estimates and assumptions.
Valuation of Investments
The major portion of our investments are recorded at fair value
in the statement of financial position. Fair values are based on
quoted market prices or estimates from independent pricing
services, when available. However, when such information is not
available, for example, with respect to private placement fixed
maturity securities, fair value is estimated, typically by using
a discounted cash flow model, which considers current market
credit spreads for publicly traded issues with similar terms by
companies of comparable credit quality. Consequently, changes in
estimated future cash flows or in our assessment of the issuer
s credit quality will result in changes in carrying value.
For fixed maturities and equity securities classified as
available for sale, the impact of such changes is recorded in
Accumulated other comprehensive income (loss), a
separate component of equity. However, the carrying value of
these securities is written down to estimated fair value when a
decline in value is considered to be other than temporary, and
we record the corresponding
impairment loss in Realized investment losses, net,
in the Consolidated Statements of Operations and Comprehensive
Income. The factors we consider to determine if an impairment
loss is warranted are discussed more fully in Note 2 to the
Consolidated Financial Statements. The level of impairment
losses can be expected to increase when economic conditions
worsen and decrease when economic conditions improve.
Policyholder Liabilities and Deferred Policy
Acquisition Costs
The liability for future policy benefits is primarily comprised
of the present value of estimated future payments to holders of
life insurance and annuity products where the timing and amount
of payment depends on policyholder mortality surrender or
retirement experience. For life insurance and annuity products,
expected mortality is generally based on the Company s
historical experience or standard industry tables. Interest rate
assumptions are based on factors such as market conditions and
expected investment returns. Although mortality and interest
rate assumptions are locked-in upon the issuance of
new insurance or annuity business with fixed and guaranteed
terms, significant changes in experience or assumptions may
require us to provide for expected future losses on a product by
establishing premium deficiency reserves.
Our liability for Unpaid claims and claim adjustment expenses
includes estimates of claims that we believe have been incurred,
but have not yet been reported (IBNR), as of the
balance sheet date. These estimates, and estimates of the
amounts of loss we will ultimately incur on reported claims,
which are based in part on our historical experience, are
regularly adjusted to reflect actual claims experience. When
actual experience differs from our previous estimate, the
resulting difference will be included in our reported results
for the period of the change in estimate.
For most life insurance and annuity products that we sell, we
defer costs that vary with and are related primarily to the
production of new business to the extent these costs are deemed
recoverable from future profits, and we record these costs as an
asset known as deferred policy acquisition costs or
DAC in the statements of financial position. We
amortize this DAC asset over the expected lives of the
contracts, based on the level and timing of either estimated
profits or premiums, depending on the type of contract. For
products with amortization based on future premiums, the
amortization rate is locked-in when the product is sold.
However, for products with amortization based on estimated
profits, the amortization rate is periodically updated to
reflect current period experience or changes in assumptions that
affect future profitability, such as lapse rates, investment
returns, mortality experience, expense margins and surrender
charges. These changes result in adjustments to DAC balances in
the period that we change our assumptions as well as changes in
prospective DAC amortization. For example, adverse market
conditions in 2001 resulted in declines in the market values of
assets supporting our variable life insurance and annuity
products, which in turn resulted in lower expectations regarding
our estimated future gross profits from fee-based income. As a
result, we recorded a higher level of DAC amortization in 2001
for these products. DAC is also subject to periodic
recoverability testing.
Reserves for Contingencies and Litigation
A contingency is an existing condition that involves a degree of
uncertainty that will ultimately be resolved upon the occurrence
of future events. Under GAAP, reserves for contingencies are
required to be established when the future event is probable and
its impact can be reasonably estimated. An example is the
establishment of a reserve for losses in connection with an
unresolved legal matter. The initial reserve reflects management
s best estimate of the probable cost of ultimate
resolution of the matter and is revised accordingly as facts and
circumstances change and, ultimately, when the matter is brought
to closure. In situations in which the Company is to be
indemnified by Prudential, as with the sales practices actions,
a reserve for contingencies would not need to be established in
the Companys financial statements.
Other Significant Estimates
In addition to the items discussed above, the application of
GAAP requires management to make other estimates and
assumptions. One example is the recognition of deferred tax
assets, which depends on managements assumption that
future earnings will be sufficient to realize the deferred
benefit. This is discussed in Note 8 to the Consolidated
Financial Statements.
The Companys Changes in Financial Position and Results of
Operations are described below.
Changes in Financial Position
2001 versus 2000
From December 31, 2000 to December 31, 2001 there was
a decrease of $966 million in total assets from
$23.059 billion to $22.093 billion, the majority of
which relates to a $1.310 billion decrease in Separate
Accounts primarily from stock market declines, as described
below. The fixed maturity portfolio increased $139 million
resulting from unrealized appreciation from declining interest
rates and from positive cash inflows. The transfer of the
Companys Taiwan branch accounted for using coinsurance
accounting required the establishment of reinsurance recoverable
of $260.6 million, and the inclusion of the Taiwan branch
future policy reserve liabilities on the Companys balance
sheet. The Company also reclassified held-to-maturity
securities, amounting to $324.5 million at January 1,
2001 to the available-for-sale category.
During the year, liabilities decreased by $784 million from
$21.226 billion to $20.442 billion. Separate account
liabilities decreased $1.310 billion as a result of net
investment losses of $1.388 billion, expense disbursements
and other changes of $244 million offset by net sales of
$322 million. Current year net sales of $322 million
($1.540 billion of contributions less $1.218 billion
of surrenders and withdrawals) are $918 million lower than
the same period prior year sales of $1.240 billion
($2.376 billion of contributions less $1.136 billion of
surrenders and withdrawals). The primary reason for the decrease
is declines in Discovery Select annuity product (Discovery
Select) exchange sales resulting from the discontinuation
of the Exchange Program on May 1, 2000. The Exchange
Program had provided the contract holders of older Prudential or
Pruco Life annuity products an opportunity to convert to the
Discovery Select product. Annuity product net sales declined
$1.118 billion while variable life insurance sales grew
$200 million from the prior year.
Policyholder account balances increased by $301 million
from interest credited and positive cash inflows for the PACE
product and the general account life and annuity products.
Future policy benefit liabilities increased by $105 million
resulting from sales of term insurance, additional extended term
insurance, and increases to Taiwan branch reserves. Other
liabilities increased by $108 million as a result of policy
credits granted to Separate Account qualified annuity contract
holders related to the demutualization.
Total equity declined $181 million from $1.832 billion
at December 31, 2000 to $1.651 billion at
December 31, 2001. The largest factor in this decrease is
the payment of two dividends, which are discussed above, to
Prudential totaling $153.8 million. One dividend consisted
of an extraordinary dividend approved by the Insurance
Department of Arizona for $108 million. The other dividend
of $45.8 million represented the Companys net
investment in its Taiwan branch, which was contributed to a
sister company, Prudential Life Insurance Company of Taiwan, and
subsequently dividended to Prudential. Refer to Note 14 for more
information on the Taiwan dividend. Equity was also reduced by
$128.0 million for policy credits to be made to eligible
policyholders. In connection with Prudentials
demutualization, qualified annuity contract holders were given
increases to their policy values in the form of policy credits.
In addition, equity was increased by net income of
$67.6 million, net unrealized investment gains of
$30.0 million and net foreign currency translation
adjustments of $3.2 million.
2000 versus 1999
Total assets increased from $21.768 billion at
December 31, 1999 to $23.059 billion at December 31,
2000, an increase of $1.291 billion,
primarily from increases in investments and cash and cash
equivalents of $945 million, and Separate Accounts of
$198 million. Investments increased due to positive
insurance cash inflows and unrealized appreciation of fixed
maturities. A discussion of Separate Account balances and net
sales follows.
Although there were positive Separate Account net sales of
$1.240 billion (contributions of $2.376 billion less
withdrawals of $1.136 billion), growth in the Separate
Accounts was minimized by expense disbursements and other
changes of $384 million, and in particular, investment
losses from stock value declines of $658 million. This was
in contrast to the prior year which experienced investment gains
of $2.164 billion. However, the average Separate Account
fund value during the current year, which is more indicative of
fee income, was approximately $3 billion higher than the
prior year, due to beginning of the year 2000 balances being
substantially higher than the prior year. The majority of the
net sales were from the Discovery Select annuity product
(Discovery Select), which had net sales of
$1.115 billion. This was significantly lower than net sales
of Discovery Select of $2.646 billion in 1999 due primarily
to the termination of the Exchange program in May 2000.
Surrenders also increased due to the aging of the business and
since exchange assets are not subject to surrender charges.
Total liabilities increased from $20.099 billion at
December 31, 1999 to $21.226 billion at
December 31, 2000, an increase of $1.127 billion. The
increase was primarily due to increases to policyholder account
balances of $522 million, securities lending liabilities of
$181 million, Separate Account liabilities of
$198 million, and an increase to future policy reserves of
$73 million. The increase in policyholders account
balances from $3.125 billion at December 31, 1999 to
$3.647 billion at December 31, 2000 was primarily due
to increases of $315 million from sales of the PACE
product, and an increase of $175 million, mainly due to
exchanges and sales of the Discovery Select product for the
General Account. Future policy benefits increased by
$73 million from $630 million at December 31,
1999 to $703 million at December 31, 2000 primarily
the result of increased sales and in-force business at the
Taiwan branch.
Results of Operations
2001 versus 2000
Net Income
Consolidated net income was $35.9 million lower for the
year ended December 31, 2001 than for the year ended
December 31, 2000. Economic and market downturns resulted
in increased realized investment losses for impairments and
sales of fixed maturities of $39.8 million. In addition,
there was increased amortization of deferred policy acquisition
costs (DAC) of $35.2 million for domestic life
and annuity products, resulting from a decline in expected
future profits. Net asset management fee revenue declined
$34.2 million ($63.3 million in revenues less
$29.1 million of expenses). The Company ceased receiving
fee income or paying asset management fee expenses related to
the Prudential Series Fund (PSF) as of
January 1, 2001, as described in the Notes to Consolidated
Financial Statements. Policyholder benefits were
$8.0 million higher as increases to domestic individual
life product reserves, death benefits, and surrender benefits
offset decreases in the Taiwan branchs policyholder
benefits. Tax expense for the current year is lower than the
prior year by $79.7 million due to reduced income from
operations before income taxes and a refinement of the estimated
benefits from nontaxable investment income.
Revenues
Consolidated revenues decreased by $110.6 million, from
$987.7 million to $877.1 million. As discussed above,
the elimination of PSF asset management fees reduced revenues by
$63.3 million. Premiums decreased by $31.0 million
from the prior year. The ceding of premiums pursuant to the
transfer of the Companys Taiwan branch caused an
$80.6 million decline in premiums. This was partially
offset by higher term insurance sales of the Term Essential and
Term Elite products, as those products were not launched until
late 2000, and an increase in premiums related to extended term
policy conversions. As an option in the event of a lapse, individual variable life insurance policies
provide policyholders with additional extended term or reduced
paid-up life insurance based on the amount that can be purchased
with the remaining cash value of the contract (if the
policyholder does not elect to receive the remaining cash value
as a cash distribution). The application of the remaining cash
value to purchase such coverage is recorded as premium revenue
in the Statement of Operations. Future policy benefit reserves
are also increased by the amount of these premiums.
Realized investment losses increased by $39.8 million from
the prior year as recognized writedowns on fixed maturities with
other than temporary impairments increased by $41.2 million
in 2001. In addition, a realized loss of $29.2 million was
recorded on the sale of Enron fixed maturities in 2001.
Partially offsetting these investment declines were gains on
sales of fixed maturities of $21.8 million in
2001(excluding Enron) compared to losses of $22.3 million
in 2000 as interest rates declined in 2001 increasing the fair
value of the bonds. The sales in 2000 were made in the early
part of the year before rates substantially declined. Derivative
instruments and other investment gains were $13.5 million
less than in 2000. This was mainly the result of the
Companys net short position in futures during 2001, versus
a net long position in 2000, as interest rates were generally
declining in both years.
These decreases were partially offset by increases in policy
charges and fee income and net investment income. Policy charges
and fee income, consisting primarily of mortality and expense
(M&E), loading and other insurance charges
assessed on General and Separate Account policyholder fund
balances, increased by $15.3 million. The increase was a
result of a $29.0 million increase for domestic individual
life products offset by a $13.7 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 higher new sales. The in-force business grew from
$53.214 billion at December 31, 2000 to $58.743
billion at December 31, 2001, an increase of 10.3%. In
contrast, annuity fees are mainly asset based fees which are
dependent on the fund balances which are affected by net sales
as well as asset depreciation or appreciation on the underlying
investment funds in which the customer has the option to invest.
Annuity fund balances have declined as a result of unfavorable
valuation changes in the securities market and lower sales due
to the discontinuation of the Exchange program.
Net investment income increased by $5.7 million from the
prior year as income from fixed maturities rose as a result of a
higher average asset base from reinvestment of proceeds from GIC
sales, and general account annuity life deposits. Partially
offsetting this increase was a decline in short term investments
and cash equivalent income mainly as a result of lower interest
rates.
Other income increased $2.5 million due to an increase in
the modal premium charge for policyholders who pay other than
annual premiums, as a result of the growth of the term insurance
business.
Benefits and Expenses
Policyholder benefits increased by $8.0 million from
increases in domestic individual life product reserves, death
benefits, and surrender benefits; offset by decreases in
Taiwans policyholder benefits. Death benefits increased
$29.0 million due mainly to the increased in force
business, with $11.6 million of the increase specifically
related to the September 11 terrorist attacks. Domestic
individual life reserves increased $32.6 million as a
result of sales of term insurance and extended term premiums.
There were also increased benefits paid on surrenders of reduced
paid up policies of $8.3 million. Offsetting these were
decreases in reserve provisions and benefits for the
Companys Taiwan branch of $61.6 million.
Interest credited to policyholder account balances increased by
$25.0 million as policyholder account balances grew by
$301.0 million from December 2000 mainly as a result of GIC
and general account life and annuity sales, as mentioned above.
General, administrative, and other expenses decreased
$28.0 million from the prior year.
Commission and distribution expenses after capitalization,
excluding the Taiwan branch, are $33.2 million lower
resulting from a change in the allocation of distribution
expenses to a market based pricing arrangement as of
April 1, 2000 and higher capitalization of commissions from
new sales. The elimination of asset management expenses lowered
expenses by $29.1 million. The transfer of the
Companys Taiwan branch resulted in an expense reduction of
$25.2 million.
Partially offsetting these decreases was an increase in DAC
amortization of domestic life and annuity products of
$35.2 million from increases in deferrable expenses as a
result of sales, and increased amortization associated with a
decline in expected future profits from stock market declines.
There was also an additional $24.3 million of expenses,
excluding the Taiwan branch, driven by higher allocations
charged to the Company for salary, consulting, and data
processing costs. The Company is assuming a larger share of
allocated costs as allocations are based on new sales of which
the Company has a higher percentage than in the previous year.
2000 versus 1999
Net Income
Net income for the year ended December 31, 2000 was
$103.5 million; an increase of $47.9 million from
$55.6 million earned in the year ended December 31,
1999. The increase reflects a $168.2 million, or 20.5%
increase in revenues, offset in part by a $95.8 million,
13.1% increase in expenses. Income taxes increased by
$24.5 million corresponding with the income increase.
Revenues
Policy charges and fee income increased by $60.4 million,
to $474.9 million in 2000 from $414.4 million in 1999.
In addition, asset management fees, primarily representing fees
collected from the Pru Series Funds (PSF)
increased by $10.8 million from the prior year. Although
the Separate Account fund balances as of December 31, 2000
are only slightly higher than the prior year end due to stock
market declines, (especially in the fourth quarter) the average
fund balance during the year was $3 billion higher than the
prior year, as is described in the Changes In Financial
Position section. Strong securities market conditions
contributed to significant appreciation in Separate Account
asset values during 1999 which had a carryover effect on 2000
income, as beginning of the year balances were substantially
higher than in the previous year. Policy charges for annuity and
life products were $37.4 million and $23.0 million higher,
respectively, than the prior year. Most of the annuity increase
came from higher M&E charges from Discovery Select, as net
sales of this product were approximately $1.1 billion. The
increase in life policy fees is also due to a higher average
fund balance than in the previous year.
Premiums increased $22.9 million to $121.9 million for
the year ended December 31, 2000. The increase was primarily due
to continued growth at the Companys Taiwan branch, which
sells traditional life insurance products. New sales for the
Taiwan branch grew by 21% and gross insurance in force increased
by 17%. Premiums from annuitizations of Discovery Select
contracts also contributed somewhat to the growth in premiums.
Net investment income increased by $61.1 million to
$337.9 million in 2000. The increase was primarily the
result of higher income from fixed maturities of
$45.8 million, and $10.4 million from short-term and
cash equivalents, as the asset base increased. Investment of
cash inflows from the PACE product was the primary cause of the
increase in the asset base.
Realized investment losses, net were $20.7 million in 2000
compared to realized losses of $32.5 million for the prior
year. This improvement of $11.8 million came primarily from
derivative gains in 2000 of $15.0 million versus losses of
$1.6 million in 1999. Partially offsetting this were
realized losses on fixed maturities that were $5.7 million
higher than in 1999, as most of the sales were made in early
2000, when interest rates were higher and writedowns for
impairments deemed other than temporary were $12.3 million,
an increase of $1.1 million from 1999.
Benefits and Expenses
Policyholders benefits including changes in reserves were
$248.1 million for the year ended December 31, 2000,
an increase of $43.0 million from the prior year. Increases
to reserves were $31.0 million higher than the prior year
of which $14.8 million is related to continued business
expansion in the Companys Taiwan branch. Discovery Select
annuitizations of $7.7 million, and higher life reserves
for extended term insurance and disability reserves of
$8.5 million also contributed to the reserve increases.
Policyholder benefits were $12.0 million higher mainly due to an
increase in death claims of $9.8 million and increased
annuity and Taiwanese policyholder benefits due to the growth in
business.
Interest credited to policyholder account balances for the year
ended December 31, 2000 was $171.0 million, an increase of
$34.2 million from 1999. Interest credited for the PACE
product increased by $25.8 million as the PACE policyholder
account balances increased $315 million. Interest credited
on annuity products increased by $7.5 million as the
General Account fund balances increased and there were higher
new money rates due to higher incentive rates for Discovery
Select.
General, administrative and other expenses, net of
capitalization increased $18.6 million to
$410.7 million in 2000. The largest factor in this increase
is amortization of deferred policy acquisition costs
(DAC) of $129.0 million, which is
$32.6 million higher than the prior year. Annuity DAC
amortization increased $39.3 million to $72.8 million,
due to growth in profitability of Discovery Select, and
accelerated amortization associated with a decline in expected
future gross profits as a result of unfavorable market
conditions in 2000. Amortization of life products declined by
$10.2 million due to prior year write-offs of DAC for
policies that were rescinded as a result of the Companys
policyholder remediation program, as described in the Notes to
the financial statements. The Taiwan branch DAC amortization
increased by $3.5 million due to growth in the business.
Commission and distribution expenses, net of capitalization are
lower by $1.1 million due mainly to two offsetting factors.
Growth in trail commissions on Discovery Select exchanges, which
are nondeferable, increased expenses by $8.0 million. This was
offset by a change in the allocation of distribution expenses to
reflect a market based pricing arrangement. This decreased year
over year expenses (net of capitalization) by $8.9 million.
Other general and administrative expenses were down
$16.1 million from the prior year due to decreases in
consulting fees, salary expenses, and charges to the reserve for
unbeknownst modified endowment contracts (UMEC).
Consulting and external contracted services charges were lower
in 2000 by $7.9 million as the prior year had contracted
external programmers for Year 2000 system preparation and data
integrity projects. Decreases in staffing levels from the prior
year resulted in reductions in salary expense and employee
benefits of $4.1 million. Provisions made to UMEC were
$6.3 million in 2000 which is $3.9 million less than the
prior year. Offsetting these decreases slightly was an increase
of $3.2 million for asset management fees, asset based
charges for managing Separate Account investment portfolios, due
to the increase in the average Separate Account balance.
Investment Portfolio and Investment Strategies
The Companys 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 $5.207 billion
at December 31, 2001, versus $5.048 billion at
December 31, 2000. A diversified portfolio of publicly
traded bonds, private placements, commercial loans on real
estate and equity 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 Companys
aggregate capital position, exposure to business risk, liquidity
and rating agency considerations.
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, quality across the portfolio, and recent activities to
manage the portfolio are discussed below.
Fixed Maturities
The fixed maturity portfolio is diversified across maturities,
sectors and issuers. The Company has classified all publicly
traded securities as available for sale (AFS). As of
December 31, 2001 all privately placed securities were
classified as AFS compared to approximately 78% in 2000. The
remainder of privately placed fixed maturities in 2000 was
classified as held to maturity (HTM). AFS 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. HTM securities are carried at amortized cost, and
unrealized gains or losses on these securities are not
recognized in the financial statements. At December 31,
2001 the fixed maturities portfolio totaled $4.025 billion,
an increase of $143 million, based on fair value, compared
to December 31, 2000. This increase in fixed maturities
reflected growth in the overall portfolio due to positive cash
flow from insurance operations during 2000, appreciation arising
from a lower interest rate environment, as well as reinvestment
of net investment income, offset by dividends paid in the form
of fixed maturities. The following table displays a
public/private breakout of this years net unrealized
appreciation in the fixed income portfolio versus during 2001.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
2000 |
|
|
|
|
|
|
|
|
Amortized |
|
Estimated |
|
Net |
|
Amortized |
|
Estimated |
|
Net |
|
|
|
|
Cost |
|
Fair Value |
|
Unrealized |
|
Cost |
|
Fair Value |
|
Unrealized |
|
|
|
|
|
|
|
|
Gains |
|
|
|
|
|
Gains(Losses) |
|
|
|
|
|
|
Fixed Maturities
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Publicly traded
|
|
$ |
2,638,917 |
|
|
$ |
2,695,135 |
|
|
$ |
56,218 |
|
|
$ |
2,385,108 |
|
|
$ |
2,393,919 |
|
|
|
$8,811 |
|
|
|
|
Privately placed
|
|
|
1,296,555 |
|
|
|
1,329,758 |
|
|
|
33,203 |
|
|
|
1,491,682 |
|
|
|
1,488,236 |
|
|
|
(3,446 |
) |
|
|
|
Total
|
|
$ |
3,935,472 |
|
|
$ |
4,024,893 |
|
|
$ |
89,421 |
|
|
$ |
3,876,790 |
|
|
$ |
3,882,155 |
|
|
|
$5,365 |
|
|
|
At December 31, 2001, the net unrealized capital
gains/(losses) on the available for sale fixed
maturity portfolio totaled $89.4 million compared to
$9.3 million ($5.4 million including HTM) at
December 31, 2000. The increase in the net unrealized
capital gain position is primarily due to the effect of lower
interest rates in 2001 versus 2000.
Gross investment income on fixed maturities increased by
$16.1 million from 2000 to 2001 as a result of a higher
asset base in 2001, offset by reinvestment and new purchases at
lower rates. Realized losses of $60.9 million were $26.3
million greater than December 31, 2000. This variance is
attributed to higher impairments taken in 2001 of
$41.2 million, primarily relating to asset-backed securities, and losses on sale of Enron holdings of
$29.2 million, offset by higher trading gains of
$44.1 million, occurring mainly in the first half of the
year.
The table below summarizes fixed maturity investment results:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
|
|
|
|
|
|
|
|
|
|
2001 |
|
2000 |
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
Gross Investment Income
|
|
$ |
279,477 |
|
|
$ |
263,325 |
|
|
|
Yield(1)
|
|
|
7.32% |
|
|
|
7.53% |
|
|
|
Realized Capital Losses
|
|
|
($60,924 |
) |
|
|
($34,812 |
) |
|
|
|
|
(1) |
Yields are determined by dividing gross investment income by
the average of year-end asset carrying values, excluding
unrealized gains and losses, less one-half of gross investment
income. |
Credit Quality
The following table describes the credit quality of the fixed
maturity portfolio, based on ratings assigned by the National
Association of Insurance Commissioners (NAIC) or
Moodys Corporation, an independent rating agency:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2001 |
|
December 31, 2000 |
|
|
|
|
|
|
|
|
|
|
NAIC |
|
Moodys |
|
Amortized |
|
|
|
Estimated |
|
|
|
Amortized |
|
|
|
Estimated |
|
|
|
|
|
|
|
|
Cost |
|
% |
|
Fair Value |
|
% |
|
Cost |
|
% |
|
Fair Value |
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
1
|
|
|
AAA to AAA- |
|
|
$ |
1,889,567 |
|
|
|
48.0% |
|
|
$ |
1,930,014 |
|
|
|
48.0% |
|
|
$ |
1,811,068 |
|
|
|
46.7% |
|
|
$ |
1,835,642 |
|
|
|
47.3% |
|
|
|
2
|
|
|
BBB+ to BBB- |
|
|
|
1,727,161 |
|
|
|
43.9% |
|
|
|
1,778,254 |
|
|
|
44.2% |
|
|
|
1,794,309 |
|
|
|
46.3% |
|
|
|
1,784,694 |
|
|
|
46.0% |
|
|
|
3
|
|
|
BB+ to BB- |
|
|
|
198,945 |
|
|
|
5.1% |
|
|
|
201,466 |
|
|
|
5.0% |
|
|
|
118,652 |
|
|
|
3.0% |
|
|
|
117,793 |
|
|
|
3.1% |
|
|
|
4
|
|
|
B+ to B- |
|
|
|
81,558 |
|
|
|
2.1% |
|
|
|
77,436 |
|
|
|
1.9% |
|
|
|
113,050 |
|
|
|
2.9% |
|
|
|
106,699 |
|
|
|
2.7% |
|
|
|
5
|
|
|
CCC or lower |
|
|
|
20,782 |
|
|
|
0.5% |
|
|
|
20,786 |
|
|
|
0.5% |
|
|
|
22,093 |
|
|
|
0.6% |
|
|
|
20,067 |
|
|
|
0.5% |
|
|
|
6
|
|
|
In or near default |
|
|
|
17,459 |
|
|
|
0.4% |
|
|
|
16,937 |
|
|
|
0.4% |
|
|
|
17,618 |
|
|
|
0.5% |
|
|
|
17,260 |
|
|
|
0.4% |
|
|
|
|
|
|
|
Total |
|
|
$ |
3,935,472 |
|
|
|
100.0% |
|
|
$ |
4,024,893 |
|
|
|
100.0% |
|
|
$ |
3,876,790 |
|
|
|
100.0% |
|
|
$ |
3,882,155 |
|
|
|
100.0% |
|
|
|
The fixed maturity portfolio consists largely of investment
grade assets (rated 1 or 2 by the NAIC).
Based on fair value, these investments accounted for 92% and 93%
of the portfolio as of December 31, 2001 and 2000,
respectively. As of December 31, 2001 and 2000, less than
1% of the fixed maturities portfolio was rated 6 by
the NAIC, defined as public and private placement securities
which are currently non-performing or believed to be subject to
default in the near-term.
The Company maintains 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 loans not
in good standing and all other public watch list assets as closely
monitored.
Our private fixed maturity asset managers conduct specific
servicing tests on each investment on an ongoing basis to
determine whether the investment is in compliance or should be
placed on the watch list or assigned an early warning
classification. We assign early warning classification 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. We assign closely monitored status
to those investments that have been recently restructured or for
which a 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.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2001 |
|
December 31, 2000 |
|
|
|
|
|
|
(In Thousands) |
|
Book Value |
|
% of Total |
|
Book Value |
|
% of Total |
|
|
|
|
Performing
|
|
|
$3,903,871 |
|
|
|
99.2% |
|
|
|
$3,799,529 |
|
|
|
98.0% |
|
|
|
Watch List
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closely monitored
|
|
|
26,230 |
|
|
|
0.7% |
|
|
|
56,513 |
|
|
|
1.5% |
|
|
|
|
Not in good standing
|
|
|
5,371 |
|
|
|
0.1% |
|
|
|
20,748 |
|
|
|
0.5% |
|
|
|
|
Total
|
|
|
$3,935,472 |
|
|
|
100.0% |
|
|
|
$3,876,790 |
|
|
|
100.0% |
|
|
|
Writedowns for impairments of fixed maturities which were deemed
to be other than temporary were $53.5 million,
$12.3 million and $11.2 million for the years 2001,
2000 and 1999 respectively.
Portfolio Diversity
The fixed maturity portfolio is broadly diversified by type and
industry of issuer. As of December 31, 2001, the greatest
industry concentrations within the public portfolio were
finance, utilities, and manufacturing. The greatest industry concentrations within the private portfolio were
asset-backed securities, manufacturing and service. The fixed
maturities portfolio is summarized below by issuer category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2001 |
|
December 31, 2000 |
|
|
|
|
|
|
|
|
(In Thousands) |
|
Amortized |
|
Estimated |
|
% of Fair |
|
Amortized |
|
Estimated |
|
% of Fair |
|
|
|
|
Cost |
|
Fair Value |
|
Value |
|
Cost |
|
Fair Value |
|
Value |
|
|
|
|
United States Government Securities and
Obligations
|
|
$ |
303,606 |
|
|
$ |
303,453 |
|
|
|
7.5 |
% |
|
$ |
309,609 |
|
|
$ |
317,479 |
|
|
|
8.2 |
% |
|
|
Mortgage Backed Securities
|
|
|
10,148 |
|
|
|
10,247 |
|
|
|
0.3 |
% |
|
|
31,479 |
|
|
|
31,809 |
|
|
|
0.8 |
% |
|
|
Asset Backed Securities(1)
|
|
|
577,528 |
|
|
|
590,245 |
|
|
|
14.7 |
% |
|
|
544,447 |
|
|
|
541,315 |
|
|
|
14.0 |
% |
|
|
Foreign Government Securities
|
|
|
27,331 |
|
|
|
29,454 |
|
|
|
0.7 |
% |
|
|
136,133 |
|
|
|
143,706 |
|
|
|
3.7 |
% |
|
|
Manufacturing
|
|
|
782,944 |
|
|
|
803,155 |
|
|
|
19.9 |
% |
|
|
791,609 |
|
|
|
788,188 |
|
|
|
20.3 |
% |
|
|
Utilities
|
|
|
646,628 |
|
|
|
663,645 |
|
|
|
16.5 |
% |
|
|
634,671 |
|
|
|
628,657 |
|
|
|
16.2 |
% |
|
|
Retail and Wholesale
|
|
|
223,373 |
|
|
|
230,162 |
|
|
|
5.7 |
% |
|
|
230,303 |
|
|
|
229,162 |
|
|
|
5.9 |
% |
|
|
Energy
|
|
|
5,223 |
|
|
|
5,173 |
|
|
|
0.1 |
% |
|
|
1,304 |
|
|
|
1,359 |
|
|
|
0 |
% |
|
|
Finance
|
|
|
688,064 |
|
|
|
711,932 |
|
|
|
17.7 |
% |
|
|
519,690 |
|
|
|
528,020 |
|
|
|
13.6 |
% |
|
|
Services
|
|
|
557,311 |
|
|
|
565,654 |
|
|
|
14.1 |
% |
|
|
548,729 |
|
|
|
544,555 |
|
|
|
14.0 |
% |
|
|
Transportation
|
|
|
106,687 |
|
|
|
104,716 |
|
|
|
2.6 |
% |
|
|
122,655 |
|
|
|
121,565 |
|
|
|
3.1 |
% |
|
|
Other
|
|
|
6,629 |
|
|
|
7,057 |
|
|
|
0.2 |
% |
|
|
6,161 |
|
|
|
6,340 |
|
|
|
0.2 |
% |
|
|
|
Total
|
|
$ |
3,935,472 |
|
|
$ |
4,024,893 |
|
|
|
100.0 |
% |
|
$ |
3,876,790 |
|
|
$ |
3,882,155 |
|
|
|
100.0 |
% |
|
|
|
|
(1) |
Asset backed securities are primarily backed
by credit card receivables, home equity loans, trade receivables
and auto loans. |
Commercial Loans on Real Estate
As of December 31, 2001, the Companys portfolio of
commercial loans on real estate portfolio totaled
$8.2 million, a reduction of $1.1 million from
December 31, 2000, reflecting maturities and prepayments.
The portfolio is comprised of commercial loans on real estate,
with diversification by property type and geographic location.
Refer to Footnote 3 in the Notes to Consolidated Financial
Statements. Mortgage investment income is $0.9 million,
which is $0.1 million lower than the prior year due to a
lower asset base.
The Company evaluates its loans on a quarterly basis for watch
list status based on compliance with various financial ratios
and other covenants set forth in the loan agreements, borrower
credit quality, property condition and other factors. The
Company may place loans on early warning status in cases where
it detects that the physical condition of the property, the
financial situation of the borrower or tenant, or other factors
could lead to a loss of principal or interest. The Company
classifies as closely monitored those loans that have
experienced material covenant defaults or substantial credit or
collateral deterioration. Not in good standing loans are those
for which there is a high probability of loss of principal, such
as when the borrower is in bankruptcy or the loan is in
foreclosure. An experienced staff of workout professionals
actively manages the loans in the closely monitored and not in
good standing categories.
Equity Securities
The Companys equity securities are comprised of common and
non-redeemable preferred stock and are carried at estimated fair
value on the Statement of Financial Position. Based on fair
value, equity securities totaled $0.4 million in 2001 compared
to $10.8 million in 2000. At December 31, 2001, the
unrealized capital gains on the equity portfolio totaled
$0.2 million compared to $2.6 million of losses at
December 31, 2000. The equity securities asset base
declined due to the transfer of stocks in connection with the
transfer of the Taiwan branch.
Short-Term Investments
Short-term investments include liquid debt instruments that have
maturities between 3-12 months from date of purchase. These securities are carried at amortized cost, which
approximates fair value. As of December 31, 2001, the
Companys short-term investments totaled
$215.6 million, an increase of $12.8 million compared to
$202.8 million at December 31, 2000. Short-term yields
decreased due to lower rates in 2001, partially offset by
greater spread income earned on securities lending activity.
Derivatives
The Company uses derivatives primarily to alter mismatches
between the duration of assets in its portfolios and the
duration of insurance and annuity liabilities supported by those
assets. These derivative contracts do not qualify for hedge
accounting and, consequently, we recognize the changes in fair
value of such contracts from period to period in current
earnings. During 2001, $2.9 million of gains were realized
in swaps versus a gain of $5.6 million in 2000. This was due to
favorable 2001 and 2000 trends in exchange rates and spreads.
During 2001, $4.3 million of losses were realized from
futures versus gains of $9.4 million in 2000. This was the
result of the Companys net short position in futures
during 2001, versus a net long position in 2000, as interest
rates were generally declining in both years.
Liquidity and Capital Resources
The Companys liquidity requirements include the payment of
sales commissions, other underwriting expenses and the funding
of its contractual obligations for the life insurance and
annuity contracts in-force. The Company has developed and
utilizes a cash flow projection system and regularly performs
asset/liability duration matching in the management of its asset
and liability portfolios. The Company anticipates funding all
its cash requirements utilizing cash from operations, normal
investment maturities and anticipated calls and repayments or
through short term borrowing from its affiliate Prudential
Funding Corporation (refer to Footnote 14 in the Notes to
Consolidated Financial Statements). As of December 31,
2001, the Companys assets included $3.0 billion of
cash and cash equivalents, short-term investments and investment
grade publicly traded fixed maturity securities that could be
liquidated if funds were required.
In order to continue to market life insurance and annuity
products, the Company must meet or exceed the statutory capital
and surplus requirements of the insurance departments of the
states in which it conducts business. Statutory accounting
practices differ from generally accepted accounting principles
(GAAP) in two major respects. First, under statutory
accounting practices, the acquisition costs of new business are
charged to expense, while under GAAP they are initially deferred
and amortized over a period of time. Second, under statutory
accounting practices, the required additions to statutory
reserves for new business in some cases may initially exceed the
statutory revenues attributable to such business. These
practices result in a reduction of statutory income and surplus
at the time of recording new business.
Insurance companies are subject to Risk-Based Capital
(RBC) guidelines, monitored by insurance regulatory
authorities, that measure the ratio of the Companys
statutory surplus with certain adjustments (Adjusted
Capital) to its required capital, based on the risk
characteristics of its insurance liabilities and investments.
Required capital is determined by statutory formulae that
consider risks related to the type and quality of invested
assets, insurance-related risks associated with the
Companys products, interest rate risks, and general
business risks. The RBC calculations are intended to assist
regulators in measuring the adequacy of the Companys
statutory capitalization.
The Company considers RBC implications in its asset/liability
management strategies. Each year, the Company conducts a
thorough review of the adequacy of statutory insurance reserves
and other actuarial liabilities. The review is performed to
ensure that the Companys statutory reserves are computed
in accordance with accepted actuarial standards, reflect all
contractual obligations, meet the requirements of state laws and
regulations and include adequate provisions for any other
actuarial liabilities that need to be established. All
significant reserve changes are reviewed by the Board of
Directors and are subject to approval by the Arizona Department of Insurance and the New
Jersey Department of Banking and Insurance (the Insurance
Departments). The Company believes that its statutory
capital is adequate for its currently anticipated levels of risk
as measured by regulatory guidelines.
In March 1998, the NAIC adopted the Codification of Statutory
Accounting Principles guidance (Codification), which
replaces the current Accounting Practices and Procedures manual
as the NAICs primary guidance on statutory accounting as
of January 1, 2001. The Codification provides guidance for
areas where statutory accounting has been silent and changes
current statutory accounting in certain areas. Certain of the
standards could have an impact on the measurement of statutory
capital, which, in turn, could affect RBC ratios of insurance
companies. The Company has adopted the Codification guidance
effective January 1, 2001. As a result of these changes,
the Company reported an increase to statutory surplus of
$88 million, primarily as a result of the recognition of
deferred tax assets.
Regulatory Environment
The Company is subject to the laws of the Insurance Departments.
A detailed financial statement in the prescribed form (the
Annual Statement) is filed with the Insurance
Departments each year covering the Companys operations for
the preceding year and its financial position as of the end of
that year. Regulation by the Insurance Departments includes
periodic examinations to verify the accuracy of contract
liabilities and reserves. The Companys books and accounts
are subject to review by the Insurance Departments at all times.
A full examination of the Companys operations is conducted
periodically by the Insurance Departments and under the auspices
of the NAIC.
The Company is subject to regulation under the insurance laws of
all jurisdictions in which it operates. The laws of the various
jurisdictions establish supervisory agencies with broad
administrative powers with respect to various matters, including
licensing to transact business, overseeing trade practices,
licensing agents, approving contract forms, establishing reserve
requirements, fixing maximum interest rates on life insurance
contract loans and minimum rates for accumulation of surrender
values, prescribing the form and content of required financial
statements and regulating the type and amounts of investments
permitted. The Company is required to file the Annual Statement
with supervisory agencies in each of the jurisdictions in which
it does business, and its operations and accounts are subject to
examination by these agencies at regular intervals.
The NAIC has adopted several regulatory initiatives designed to
improve the surveillance and financial analysis regarding the
solvency of insurance companies in general. These initiatives
include the development and implementation of a risk-based
capital formulae as described in the Liquidity and Capital
Resources disclosure. The implementation of these standards has
not had a significant impact on the Company.
Although the federal government generally does not directly
regulate the business of insurance, federal initiatives often
have an impact on the business in a variety of ways. Certain
insurance products of the Company are subject to various federal
securities laws and regulations. In addition, current and
proposed federal measures which may significantly affect the
insurance business include regulation of insurance company
solvency, employee benefit regulation, removal of barriers
preventing banks from engaging in the insurance business, tax
law changes affecting the taxation of insurance companies and
the tax treatment of insurance products and its impact on the
relative desirability of various personal investment vehicles.
Effective New Accounting Pronouncements
Refer to Footnote 2, Summary of Significant Accounting
Policies, of the Notes to Consolidated Financial
Statements.
Analysis of Financial Condition: Period Ending June 30,
2002
From December 31, 2001 to June 30, 2002 there was a
decrease of $569 million in total assets from $22,093 million to
$21,524 million. Separate Account assets declined $1,197 million mainly from market value declines. Fixed
maturities increased by $389 from investing policyholder
deposits. Cash and cash equivalents are $151 million higher than
December 31, 2001 as a result of increased securities
lending activities. Reinsurance recoverable increased by
$81 million primarily as a result of a $37 million increase
in reserves of the transferred business of the Taiwan branch and
an increase of $40 million associated with a new reinsurance
agreement that reinsures the variable life insurance policies.
The transfer of the Companys Taiwan branch accounted for
using coinsurance accounting requires the establishment of
reinsurance recoverable and the inclusion of the Taiwan branch
future policy reserve liabilities on the Companys
statement of financial position.
During this six-month period, liabilities decreased by $584
million from $20,442 million to $19,858 million. Corresponding
with the asset change, Separate Account liabilities decreased by
$1,197 million primarily from market value declines. Other
liabilities decreased by $71 million mainly due to the funding
of policy credits to the Separate Account policyholders, which
had been accrued in other liabilities at December 31, 2001.
This decrease was partially offset by an increase in reinsurance
payables of $35 million primarily related to the new variable
life reinsurance contract. Policyholder account balances
increased by $415 million primarily from positive net sales
(sales less withdrawals) of annuity products with fixed rate
options and the funding of policy credits. A higher level of
securities lending activity increased liabilities by
$218 million. Future policy benefits increased
$43 million mainly due to an increase in reserves of the
transferred Taiwan business.
Results of Operations
For the six months ended June 30, 2002 versus 2001
Net Income
Consolidated net income of $2.2 million for the first six
months of 2002 was $39.3 million lower than for the first
six months of 2001. The decrease in net income was caused
primarily by an increase in the amortization of deferred
acquisition costs (DAC) of $34.5 million
contained in General, Administrative and Other
Expenses. The decline in our Separate Account assets
resulting from unfavorable market conditions contributed to the
increased amortization of DAC reflecting a decrease in expected
future gross profits. Continued deterioration in market
conditions may result in further increases in the amortization
of DAC. In addition, there was a $32.6 million change in
realized investment (losses)/gains resulting from the
realization of losses on fixed maturities and derivatives.
During 2002, there were losses on sales and impairments of fixed
maturities due to credit related issues compared to gains on
sales in the prior year due to the favorable impact of declining
interest rates. These items were partially offset by lower taxes
and higher policy charges and fee income, as described below.
Revenues
Consolidated revenues decreased by $23.1 million, from
$467.4 million to $444.3 million. As discussed above,
realized losses on investments decreased revenues by
$32.6 million. The decrease consists of $20.3 million
of increased credit related losses on fixed maturities from
sales and impairments and $12.3 million in derivative and
other losses. The derivative losses were mainly from Treasury
futures as the Company is in a net short position in a declining
interest rate environment. Net investment income is lower by
$11.0 million due to lower yields available on the
reinvestment of fixed maturities and lower interest rates for
short-term investments. The fixed maturity portfolio yield
declined from 7.22% for the period ended June 30, 2001 to
6.63% for the period ended June 30, 2002. Premiums
decreased by $6.1 million mainly due to the transfer of the
Taiwan branch as of January 31, 2001, and the subsequent
ceding of premiums which caused a $7.5 million decline in
premiums. This was partially offset by an increase in domestic
life insurance premiums of $2.1 million. The increase in
domestic life premiums was a result of higher term insurance
sales and renewals of the Term Essential and Term Elite products of $21.6 million partially offset by lower
extended term premiums. Extended term policies represent term
insurance the Company issued, under policy provisions to
customers who previously had lapsing variable life insurance
with the Company.
These decreases were partially offset by increases in policy
charges and fee income and other income. Policy charges and fee
income, consisting primarily of mortality and expense
(M&E), loading and other insurance charges
assessed on General and Separate Account policyholder fund
balances, increased by $18.4 million. The increase was a
result of a $24.6 million increase for domestic individual
life products offset by a $6.2 million decrease for annuity
products. Mortality and sales based loading charges for life
products increased as a result of growth of the in-force
business. The in-force business (excluding term insurance) grew
to $61.7 billion at June 30, 2002 from $56.1 billion at
June 30, 2001 and $58.7 billion at December 31, 2001.
In contrast, annuity fees are mainly asset based fees which are
dependent on the fund balances which are affected by net sales
as well as asset depreciation or appreciation on the underlying
investment funds in which the customer has the option to invest.
Annuity fund balances have declined as a result of unfavorable
valuation changes in the securities market over the past two
years. Other income increased $6.9 million primarily from
expense allowance recoveries from the new variable life
reinsurance contract.
Benefits and Expenses
Policyholder benefits increased by $1.4 million from
increased death and surrender benefits offset by decreases in
reserve provisions for the Taiwan branch and domestic life
insurance reserves. Death benefits were higher by
$18.2 million due to higher death claims of
$11.8 million consistent with the increase of the life
insurance in-force business and higher guaranteed minimum death
benefits for annuity products of $6.4 million. There were
also increased benefits paid on surrenders of reduced paid up
policies of $3.3 million. Taiwan benefits and reserves were
$5.9 million lower due to the transfer of the branch as of
January 31, 2001. Domestic life reserves decreased
$14.7 million primarily as a result of the lower amount of
extended term insurance. This was partially offset by increases
for term insurance reserves due to sales and renewals of the
Term Essential and Term Elite products.
Interest credited to policyholder account balances decreased by
$1.4 million despite growth in policyholder account
balances as interest crediting rates were decreased in reaction
to the declining investment portfolio yields.
General, administrative, and other expenses increased
$30.5 million from the prior year. The primary reason for
the increase is an increase in DAC amortization of
$34.5 million, as described above.
For the three months ended June 30, 2002 versus 2001
Net Income
Consolidated net income for the three months ended June 30,
2002 is $30.2 million lower than the prior year comparable
three-month period. The largest factor in this decrease is
higher DAC amortization of $45.2 million ($29 million
after tax) attributable to unfavorable market conditions.
Revenues
Consolidated revenues of $220.2 are comparable to the prior year
as decreases in realized gains were offset by increases in
policy charges and other income. Realized losses on investments
increased by $15.5 million as a result of increased
derivative losses of $11.6 million and credit related sales
and impairments of fixed maturities of $3.9 million. The
derivative losses were mainly from Treasury futures as the
Company is in a net short futures position in a declining
interest rate environment. Policy charges and fee income
increased $10.5 million due to an increase from domestic
individual life products of $13.0 million from continued
growth of the in-force business partially offset by a decrease
in individual annuity charges due to declining fund values as a
result of the securities market. Other income increased $6.4 million as a result of expense allowance
recoveries on the new reinsurance contract.
Benefits and Expenses
Policyholder benefits are $0.5 million higher due to higher
death claims of $8.1 million from growth in the life
insurance in-force business and higher minimum death benefit
guarantees for annuity products of $2.1 million. Offsetting
this is a decrease in reserves of $9.7 million from
decreases to extended term premium reserves partially offset by
increases for term insurance reserves.
General, administrative and other expenses increased
$39.7 million. As mentioned above, the largest factor was
the increase in DAC amortization of $45.2 million.
Liquidity and Capital Resources
Principal cash flow sources are investment and fee income,
investment maturities and sales, and premiums and fund deposits.
These cash inflows may be supplemented by financing activities
through other Prudential affiliates.
Cash outflows consist principally of benefits, claims and
amounts paid to policyholders in connection with policy
surrenders, withdrawals and net policy loan activity. Uses of
cash also include commissions, general and administrative
expenses, and purchases of investments. Liquidity requirements
associated with policyholder obligations are monitored regularly
so that the Company can manage cash inflows to match anticipated
cash outflow requirements.
The Company believes that cash flow from operations together
with proceeds from scheduled maturities and sales of fixed
maturity investments, are adequate to satisfy liquidity
requirements based on the Companys current liability
structure.
The Company had $21.5 billion of assets at June 30, 2002
compared to $22.1 billion at December 31, 2001, of which
$13.7 billion and $14.9 billion were held in Separate Accounts
at June 30, 2002 and December 31, 2001, respectively,
under variable life insurance policies and variable annuity
contracts. The remaining assets consisted primarily of
investments and deferred policy acquisition costs.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Risk Management, Market Risk, and Derivative Financial
Instruments
As a wholly-owned subsidiary of Prudential, the Company benefits
from the risk management strategies implemented by its parent.
Risk management includes the identification and measurement of
various forms of risk, establishment of acceptable risk
thresholds, and creation of processes intended to maintain risks
within these thresholds while optimizing returns on the
underlying assets or liabilities. Prudential considers risk
management an integral part of its core businesses.
The risks inherent in the Companys operations include
market risk, product risk, credit risk, and operating risk.
Market risk is the risk of change in the value of
financial instruments as a result of absolute or relative
changes in interest rates, foreign currency exchange rates or
equity or commodity prices. To varying degrees, the investment
activities supporting all of the Companys products and
services generate market risks. Market risks incurred and the
strategies for managing these risks vary by product.
With respect to non-variable life insurance products, fixed rate
annuities and the fixed rate options in our variable life
insurance and annuity products, the Company incurs market risk
primarily in the form of interest rate risk. The Company manages
this risk through asset/liability management strategies that
seek to match the interest rate sensitivity of the assets to
that of the underlying liabilities. The Companys overall
objective in these strategies is to limit the net change in
value of assets and liabilities arising from interest rate
movements. While it is more difficult to measure the interest
sensitivity of the Companys insurance liabilities than
that of the related assets, to the extent the Company can
measure such sensitivities the Company believes that interest
rate movements will generate asset value changes that
substantially offset changes in the value of the liabilities relating to the underlying products.
For variable annuities and variable life insurance products,
excluding the fixed rate options in these products, the
Companys main exposure is the risk that asset management
fees may decrease as a result of declines in assets under
management due to changes in prices of securities. The Company
is also exposed to the risk that asset management fees
calculated by reference to performance could be lower. For
variable annuity and variable life insurance products with
minimum guaranteed death benefits, the Company also faces the
indirect risk that declines in the value of underlying
investments as a result of changes in securities prices may
increase the Companys net exposure to death benefits under
these contracts. The Company does not believe that these
indirect risks add significantly to the Companys overall
risk. The Company manages its exposure to equity price risk
primarily by seeking to match the risk profile of equity
investments against risk-adjusted equity market benchmarks. The
Company measures benchmark risks level in terms of price
volatility in relation to the market in general.
The Companys exposure to market risk results from
other than trading activities in its insurance
businesses. Market risks in the Companys insurance
business are managed through an investment process that
incorporates asset/liability management techniques and other
risk management policies and limits. Derivatives, as discussed
further below, are used to alter interest rate or currency
exposures arising from mismatches between assets and
liabilities. These include sensitivity and Value-at-Risk
measures, positions and other limits based on type of risk, and
various hedging methods.
Insurance Asset/ Liability Management
The Companys asset/liability management strategies seek to
match the interest rate sensitivity of the assets to that of the
underlying liabilities and to construct asset mixes consonant
with product features, such as interest crediting strategies.
The Company also considers risk-based capital implications in
its asset/liability management strategies. The Company seeks to
maintain interest rate and equity exposures within established
ranges, which are periodically adjusted based on market
conditions and the design of related insurance products sold to
customers. The Companys risk managers, who work with
portfolio and asset managers but under separate management,
establish investment risk limits for exposures to any issuer, or
type of security and oversee efforts to manage risk within
policy constraints set by management and approved by the Board
of Directors.
The Company uses duration and convexity analyses to estimate the
price sensitivity of assets and liabilities to interest rate
changes. Duration is an estimate of the sensitivity of the fair
value of a financial instrument relative to changes in interest
rates. Convexity is an estimate of the rate of change of
duration with respect to changes in interest rate, and is
commonly used for managing assets with prepayment risk, such as
mortgage backed securities. The Company seeks to manage its
interest rate exposure by matching the relative sensitivity of
asset and liability values to interest rate changes, or
controlling duration mismatch of assets and
liabilities. The Company has a target duration mismatch level of
plus or minus 0.6 years. As of December 31, 2001, the
difference between the pre-tax duration of assets and the target
duration of liabilities in the Companys duration managed
portfolio was 0.2 years.
The Company also performs portfolio stress testing as part of
its regulatory cash flow testing. In this testing, the Company
evaluates the impact of altering its interest-sensitive
assumptions under various moderately adverse interest rate
environments. These interest-sensitive assumptions relate to the
timing and amounts of redemptions and pre-payments of
fixed-income securities and lapses and surrenders of insurance
products. The Company evaluates any shortfalls that this cash
flow testing reveals to determine if there is a need to increase
statutory reserves or adjust portfolio management strategies.
Market Risk Related to Interest Rates
Assets that subject the Company to interest rate risk include
fixed maturities, commercial loans on real estate, and policy
loans. In the aggregate, the carrying value of these assets
represented 68% of consolidated assets, other than assets that
are held in Separate Accounts, as of December 31, 2001 and
70% as of December 31, 2000. With respect to liabilities,
the Company is exposed to interest rate risk through
policyholder account balances relating to life insurance and
annuity investment type contracts.
The Company assesses interest rate sensitivity for its financial
assets, financial liabilities and derivatives using hypothetical
test scenarios which assume both upward and downward 100 basis
point parallel shifts in the yield curve from prevailing
interest rates. The following tables set forth the potential
loss in fair value from a hypothetical 100 basis point upward
shift at December 31, 2001 and 2000, because this scenario
results in the greatest net exposure to interest rate risk of
the hypothetical scenarios tested at those dates. While the test
scenario is for illustrative purposes only and does not reflect
managements expectations regarding future interest rates
or the performance of fixed income markets, it is a near-term,
reasonably possible hypothetical change that illustrates the
potential impact of such events. These test scenarios do not
measure the changes in value that could result from non-parallel
shifts in the yield curve, which would be expected to produce
different changes in discount rates for different maturities. As
a result, the actual loss in fair value from a 100 basis point
change in interest rates could be different from that indicated
by these calculations.
This presentation does not include $2.753 billion and
$2.587 billion of insurance reserves and deposit
liabilities at December 31, 2001 and 2000, respectively.
The Company believes that the interest rate sensitivities of
these insurance liabilities offset, in large measure, the
interest rate risk of the financial assets set forth in the
following tables.
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December 31, 2001 |
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December 31, 2000 |
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Fair Value |
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Fair Value |
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After + 100 |
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After + 100 |
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Basis Point |
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Hypothetical |
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Basis Point |
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Hypothetical |
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Notional |
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Estimated |
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Parallel |
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Change in |
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Notional |
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Estimated |
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Parallel |
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Change in |
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Value |
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Fair |
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Yield Curve |
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Fair |
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Value |
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Fair |
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Yield Curve |
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Fair |
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(Derivatives) |
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Value |
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Shift |
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Value |
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(Derivatives) |
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Value |
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Shift |
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Value |
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Financial Assets and |
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Liabilities with Interest Rate Risk:
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Financial Assets:
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Fixed Maturities:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale
|
|
|
|
|
|
$ |
4,025 |
|
|
$ |
3,902 |
|
|
$ |
(123 |
) |
|
|
|
|
|
$ |
3,562 |
|
|
$ |
3,468 |
|
|
$ |
(94 |
) |
|
|
|
Held to Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
321 |
|
|
|
313 |
|
|
|
(8 |
) |
|
|
Commercial Loans on Real Estate
|
|
|
|
|
|
|
10 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
10 |
|
|
|
(1 |
) |
|
|
Policy Loans
|
|
|
|
|
|
|
934 |
|
|
|
880 |
|
|
|
(54 |
) |
|
|
|
|
|
|
883 |
|
|
|
838 |
|
|
|
(45 |
) |
|
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures
|
|
|
(128 |
) |
|
|
|
|
|
|
6 |
|
|
|
6 |
|
|
|
202 |
|
|
|
2 |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
Swaps
|
|
|
9 |
|
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
9 |
|
|
|
.3 |
|
|
|
.1 |
|
|
|
(.2 |
) |
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Contracts
|
|
|
|
|
|
|
(2,053 |
) |
|
|
(2,028 |
) |
|
|
25 |
|
|
|
|
|
|
|
(1,785 |
) |
|
|
(1,760 |
) |
|
|
25 |
|
|
|
|
|
Total Estimated Potential Loss |
|
|
|
|
|
|
|
$ |
(146 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(124.2 |
) |
The estimated changes in fair values of the financial assets
shown above relate to assets invested in support of the
Companys insurance liabilities, but do not include assets
associated with products for which investment risk is borne
primarily by the contract holders rather than the Company.
Market Risk Related to Equity Prices
The Company actively manages equity price risk relative to
benchmarks in respective markets. Equity holdings are
benchmarked against a blend of leading market indices, mainly
the Standard & Poors (S&P) 500
and Russell 2000, and targets price sensitivities that
approximate those of the benchmark indices. The Company
estimates its equity price risk from a hypothetical 10% decline
in equity benchmark market levels and measures this risk in
terms of the decline in the fair value of the equity securities
it holds. Using this methodology, the Companys estimated
equity price risk at December 31, 2001 was
$.038 million, representing a hypothetical decline in fair
market value of equity securities held by the Company at that
date from $.375 million to $.338 million. The
Companys estimated equity price risk using this
methodology at December 31, 2000 was $1.1 million,
representing a hypothetical decline in fair market value of
equity securities the Company held at that date from
$10.8 million to $9.7 million. These amounts exclude
equity securities relating to products for which investment risk
is borne primarily by the contract holder rather than by the
Company. While these scenarios are for illustrative purposes
only and do not reflect managements expectations regarding
future performance of equity markets or of the Companys
equity portfolio, they represent near term reasonably possible
hypothetical changes that illustrate the potential impact of
such events.
Market Risk Related to Foreign Currency Exchange Rates
The Company is exposed to foreign currency exchange risk in its
investment portfolio and through its operations in Taiwan. The
Company generally hedges substantially all foreign
currency-denominated fixed-income investments supporting its
U.S. insurance operations into U.S. dollars, using foreign
exchange currency swaps, in order to mitigate the risk that the
fair value of these investments fluctuates as a result of
changes in foreign exchange rates. The Company generally does
not hedge all of the foreign currency risk of its equity
investments in unaffiliated foreign entities.
Foreign currency exchange risk is actively managed within
specified limits at the enterprise (Prudential) level using
Value-at-Risk (VaR) analysis. This statistical
technique estimates, at a specified confidence level, the
potential pretax loss in portfolio market value that could occur
over an assumed time horizon due to adverse market movements.
This calculation utilizes a variance/covariance approach.
The Company calculates VaR estimates of exposure to loss from
volatility in foreign currency exchange for a one month time
period. The Companys estimated VaR at December 31,
2001 for foreign currency assets not hedged to U.S. dollars,
measured at the 95% confidence level and using a one month time
horizon, was $0.8 million, representing a hypothetical
decline in fair market value of these foreign currency assets
from $17.6 million to $16.8 million. The
Companys estimated VaR at December 31, 2000 for
foreign currency assets not hedged to U.S. dollars, measured at
the 95% confidence level and using a one month time horizon, was
$2.3 million, representing a hypothetical decline in fair
market value of these foreign currency assets from
$133.2 million to $130.9 million. These calculations
use historical price volatilities and correlation data at a 95%
confidence level.
The Companys average monthly VaR from foreign currency
exchange rate movements measured at the 95% confidence level
over a one month time horizon was $1.33 million during 2001
and $2.3 million during 2000.
Limitations of VaR Models
Although VaR models represent a recognized tool for risk
management, they have inherent limitations, including reliance
on historical data that may not be indicative of future market
conditions or trading patterns. Accordingly VaR models should not be viewed as a
predictor of future results. The Company may incur losses that
could be materially in excess of the amounts indicated by the
model on a particular trading day or over a period of time. A
VaR model does not estimate the greatest possible loss. The
Company uses these models together with other risk management
tools, including stress testing. The results of these models and
analysis thereof are subject to the judgment of the
Companys risk management personnel.
Derivatives
Derivatives are financial instruments whose values are derived
from interest rates, foreign exchange rates, various financial
indices, or the value of securities or commodities. Derivative
financial instruments can be exchange-traded or contracted in
the over-the-counter market and include swaps, futures, options
and forwards contracts. See Footnote 11 of the Notes to
Consolidated Financial Statements as to the Companys
derivative positions at December 31, 2001 and 2000. Under
insurance statutes the Company may only use derivative
securities in activities intended to offset changes in the
market value of assets held, obligations, and anticipated
transactions. These statutes prohibit the use of derivatives for
speculation. The Company uses derivative financial instruments
to manage market risk from changes in interest rates or foreign
currency exchange rates, and to alter interest rate or currency
exposures arising from mismatches between assets and liabilities.
Product Risk is the risk of adverse results due to
deviation of experience from expected levels reflected in
pricing. Products are priced to reflect the expected levels of
benefits and expense while allowing a margin for adverse
deviation. The level of margin varies with product design and
pricing strategy with respect to the targeted market. The
Company seeks to maintain underwriting standards so that premium
charged is consistent with risk assumed on an overall basis.
Additionally, most of the Companys policies and contracts
allow the Company to adjust credits (via interest crediting
rates) and/or charges (in contracts where elements such as
mortality and expense charges are not guaranteed), allowing the
Company some flexibility to respond to changes in actuarial
experience. The Company also considers the competitive
environment in determining pricing elements including premiums,
crediting rates, and non-guaranteed charges.
Mortality risks, generally inherent in most of the
Companys life insurance and annuity products, are
incorporated in pricing based on the Companys experience
(if available and relevant) and/or industry experience.
Mortality studies are performed periodically to compare the
actual incidence of death claims in relation to business in
force, to levels assumed in pricing and to industry experience.
Expense risk is the risk that actual expenses exceed those
assumed in pricing relates to all products and varies by volume
of business as well as general price level changes. Persistency
risk represents the risk that the pattern of policy surrenders
will deviate from assumed levels so that policies do not remain
in force long enough to allow the Company to recover its
acquisition costs. Certain products are designed, by use of
surrender charges and other features, to discourage early
surrenders and thus mitigate this risk to the Company. Periodic
studies are performed to compare actual surrender experience to
pricing assumptions and industry experience.
For fee-based products in which investment risk is borne by the
client, the Company retains the risk that fees charged may not
adequately cover administrative expenses. The ability to earn a
spread between these fees and the associated costs is dependent
upon the competitive environment, product performance, the
ability to attract clients and assets, and the Companys
control of expense levels.
Credit Risk is the risk that counterparties or issuers
may default or fail to fully honor contractual obligations and
is inherent in investment portfolio asset positions including
corporate bonds and commercial loans on real estate, private
placements and other lending-type products, certain derivative
transactions, and various investment operations functions. In
derivative transactions, the Company follows an established
credit approval process which includes risk control limits and
monitoring procedures. The Company is also exposed to credit
risk resulting from reinsurance transactions. Limits of exposure
by counterparty, are in place at the portfolio level, and
counterparty concentration risk is also reviewed at the
enterprise level. Credit concentration risks are limited based
on credit quality, and enterprise-level concentrations are
reviewed on a quarterly basis. Business group credit analysis
units evaluate creditworthiness of counterparties and assign
internal credit ratings based on data from independent rating
agencies and their own fundamental analysis.
Operating Risk is the risk of potential loss from
internal or external events such as mismanagement, fraud,
systems breakdowns, business interruption, or failure to satisfy
legal or fiduciary responsibilities. Like other financial
institutions, the Company is exposed to the risk of misconduct
by employees that are contrary to the internal controls the
Company designed to manage those risks. Legal risk may arise
from inadequate control over contract documentation, marketing
processes, or other operations. The Company is subject to
internal controls established by Prudential to manage
regulatory, legal, credit, asset management and other risks at
the business unit level for specific lines of business and at
the enterprise level for company-wide processes. Business unit
management personnel, internal auditors and an enterprise level
Management Internal Control unit monitor the Companys
controls. The Companys controls are subject to regulatory
review in certain instances.
Another aspect of operating risk relates to the Companys
ability to conduct transactions electronically and to gather,
process, and disseminate information and maintain data integrity
and uninterrupted operations given the possibility of unexpected
or unusual events. The Company has implemented a business
continuation initiative to address these concerns.
DIRECTORS AND OFFICERS
The directors and major officers of Pruco Life, listed with
their principal occupations during the past 5 years, are
shown below.
DIRECTORS OF PRUCO LIFE
James J. Avery, Jr., Vice Chairman and
Director President, Prudential Individual Life
Insurance since 1998; prior to 1998: Senior Vice President,
Chief Actuary and CFO, Prudential Individual Insurance Group.
Vivian L. Banta, President, Chairman, and
Director Executive Vice President, Individual
Financial Services, U.S. Consumer Group since 2000; 1998 to
1999: Consultant, Individual Financial Services; prior to 1998:
Consultant, Morgan Stanley.
Richard J. Carbone, Director Senior
Vice President and Chief Financial Officer since 1997.
Helen M. Galt, Director Company
Actuary, Prudential since 1993.
Ronald P. Joelson, Director Senior
Vice President, Prudential Asset, Liability and Risk Management
since 1999; prior to 1999: President, Guaranteed Products,
Prudential Institutional.
David R. Odenath, Jr., Director
President, Prudential Investments since 1999; prior to 1999:
Senior Vice President and Director of Sales, Investment
Consulting Group, PaineWebber.
OFFICERS WHO ARE NOT DIRECTORS
Shaun M. Byrnes, Senior Vice President
Senior Vice President, Director of Annuities, Prudential
Investments since 2001; 2000 to 2001: Senior Vice President,
Director of Research, Prudential Investments; 1999 to 2000:
Senior Vice President, Director of Mutual Funds, Prudential
Investments; prior to 1999: Vice President, Mutual Funds,
Prudential Investments.
C. Edward Chaplin, Treasurer
Senior Vice President and Treasurer, Prudential since 2000;
prior to 2000, Vice President and Treasurer, Prudential.
Thomas F. Higgins, Senior Vice
President Vice President, Annuity Services,
Prudential Individual Financial Services since 1999; 1998 to
1999: Vice President, Mutual Funds, Prudential Individual
Financial Services; prior to 1998: Principal, Mutual Fund
Operations, The Vanguard Group.
Clifford E. Kirsch, Chief Legal Officer and
Secretary Chief Counsel, Variable Products,
Prudential Law Department since 1995.
Andrew J. Mako, Executive Vice
President Vice President, Finance, U.S. Consumer
Group since 1999; prior to 1999: Vice President, Business
Performance Management Group.
Melody C. McDaid, Senior Vice
President Vice President and Site Executive,
Prudential Financial Services Customer Service Office since 1995.
Esther H. Milnes, Senior Vice
President Vice President and Chief Actuary,
Prudential Individual Life Insurance since 1999; prior to 1999:
Vice President and Actuary, Prudential Individual Insurance
Group.
James M. OConnor, Senior Vice President and
Actuary Vice President, Guaranteed Products
since 2001; 1998 to 2000: Corporate Vice President, Guaranteed
Products; prior to 1998: Corporate Actuary, Prudential
Investments.
Shirley H. Shao, Senior Vice President and Chief
Actuary Vice President and Associate Actuary,
Prudential since 1996.
William J. Eckert, IV, Vice President and Chief
Accounting Officer Vice President and IFS
Controller, Prudential Enterprise Financial Management since
2000; 1999 to 2000: Vice President and Individual Life
Controller, Prudential Enterprise Financial Management; prior to
1999: Vice President, Accounting, Enterprise Financial
Management.
The business address of all directors and officers of Pruco Life
is 213 Washington Street, Newark, New Jersey 07102-2992.
Pruco Life directors and officers are elected annually.
POSITIONS HELD BY CERTAIN PRUCO LIFE DIRECTORS AND OFFICERS
WITH PRUDENTIAL AFFILIATES
Vivian L. Banta, Pruco Life Insurance Companys
president, also serves as director of the following entities,
each of which is under the ultimate control of Prudential
Financial, Inc.: Pruco Life Insurance Company of New Jersey, Prudential Securities Group, Prudential
Select Life Insurance Company of America, Prudential Select
Holdings, Inc. and Prudential P&C Holdings, Inc.
James M. OConnor, Pruco Life Insurance
Companys senior vice president and actuary, also serves as
director of The Prudential Assigned Settlement Services Corp.,
which is under the ultimate control of Prudential Financial, Inc.
C. Edward Chaplin, Pruco Life Insurance Companys
treasurer, also serves as director of the following entities,
each of which is under the ultimate control of Prudential
Financial, Inc.: Bree Investments Limited, Gibraltar Properties,
Inc., Gateway Holdings, Inc., PIM Warehouse, Inc., PRUCO, Inc.,
Prudential Human Resources Management Company, Inc., Prudential
Global Funding, Inc., Prudential Resources Management Asia
Limited, Prudential Funding, LLC and Prudential Holdings, LLC.
Richard J. Carbone and Ronald P. Joelson are an
executive officer of one or more of such Prudential Financial,
Inc. entities.
Officers of Pruco Life Insurance Company receive salary and
other compensation from The Prudential Insurance Company of
America, rather than from Pruco Life. Each such officer provides
services to Pruco Life Insurance Company pursuant to a service
agreement between Prudential and Pruco Life. Prudential
allocates to Pruco Life a portion of its compensation costs for
these Pruco Life officers. No director or officer of Pruco Life,
nor the Pruco Life directors and officers collectively, own more
than 1% of any class of equity security of Prudential Financial,
Inc.
EXECUTIVE COMPENSATION
The following table shows the 2001 annual compensation, paid by
Prudential, and allocated based on time devoted to the duties as
an executive of Pruco Life Insurance Company for services
provided to Pruco Life Insurance Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Annual |
Name and Principal Position |
|
Year |
|
Salary |
|
Bonus |
|
Compensation |
|
|
Vivian L. Banta, President
|
|
|
2001 |
|
|
$ |
35,084 |
|
|
$ |
213,904 |
|
|
$ |
0 |
|
Esther H. Milnes, President
|
|
|
2000 |
|
|
|
21,533 |
|
|
|
3,132 |
|
|
|
0 |
|
Esther H. Milnes, President
|
|
|
1999 |
|
|
|
20,782 |
|
|
|
23,238 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SELECTED FINANCIAL DATA
|
|
|
|
Pruco Life Insurance Company and Subsidiary |
|
|
For the Years Ended December 31, |
|
|
|
|
|
|
(In Thousands) |
|
2001 |
|
2000 |
|
1999 |
|
1998 |
|
1997 |
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums and other revenue
|
|
$ |
593,912 |
|
|
$ |
670,445 |
|
|
$ |
575,190 |
|
|
$ |
473,975 |
|
|
$ |
435,547 |
|
|
Realized investment (losses) gains, net
|
|
|
(60,476 |
) |
|
|
(20,679 |
) |
|
|
(32,545 |
) |
|
|
44,841 |
|
|
|
10,974 |
|
|
Net investment income
|
|
|
343,638 |
|
|
|
337,919 |
|
|
|
276,821 |
|
|
|
261,430 |
|
|
|
259,634 |
|
|
|
|
Total revenues
|
|
|
877,074 |
|
|
|
987,685 |
|
|
|
819,466 |
|
|
|
780,246 |
|
|
|
706,155 |
|
|
|
|
Benefits and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders benefits and interest
credited to policyholders account balances
|
|
|
452,046 |
|
|
|
419,073 |
|
|
|
341,894 |
|
|
|
312,731 |
|
|
|
310,352 |
|
|
Other expenses
|
|
|
382,701 |
|
|
|
410,684 |
|
|
|
392,041 |
|
|
|
231,320 |
|
|
|
227,561 |
|
|
|
|
Total benefits and expenses
|
|
|
834,747 |
|
|
|
829,757 |
|
|
|
733,935 |
|
|
|
544,051 |
|
|
|
537,913 |
|
|
|
|
Income before income tax provision
|
|
|
42,327 |
|
|
|
157,928 |
|
|
|
85,531 |
|
|
|
236,195 |
|
|
|
168,242 |
|
Income tax (benefit) provision
|
|
|
(25,255 |
) |
|
|
54,432 |
|
|
|
29,936 |
|
|
|
84,233 |
|
|
|
61,868 |
|
|
|
|
Net income
|
|
$ |
67,582 |
|
|
$ |
103,496 |
|
|
$ |
55,595 |
|
|
$ |
151,962 |
|
|
$ |
106,374 |
|
|
|
|
Total assets at year end
|
|
$ |
22,093,412 |
|
|
$ |
23,059,009 |
|
|
$ |
21,768,508 |
|
|
$ |
16,812,781 |
|
|
$ |
12,851,467 |
|
|
|
|
Separate Account liabilities at year end
|
|
$ |
14,920,584 |
|
|
$ |
16,230,264 |
|
|
$ |
16,032,449 |
|
|
$ |
11,490,751 |
|
|
$ |
7,948,788 |
|
|
|
|
COMPANY FINANCIAL INFORMATION
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Financial
Position
December 31, 2001 and 2000 (In
Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
2000 |
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
|
|
Available for sale, at fair value (amortized
cost, 2001: $3,935,472; 2000: $3,552,244)
|
|
$ |
4,024,893 |
|
|
$ |
3,561,521 |
|
|
Held to maturity, at amortized cost (fair value,
2000: $320,634)
|
|
|
|
|
|
|
324,546 |
|
Equity securities available for sale,
at fair value (cost, 2001: $173; 2000: $13,446)
|
|
|
375 |
|
|
|
10,804 |
|
Commercial loans on real estate
|
|
|
8,190 |
|
|
|
9,327 |
|
Policy loans
|
|
|
874,065 |
|
|
|
855,374 |
|
Short-term investments
|
|
|
215,610 |
|
|
|
202,815 |
|
Other long-term investments
|
|
|
84,342 |
|
|
|
83,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
5,207,475 |
|
|
|
5,048,125 |
|
Cash and cash equivalents
|
|
|
374,185 |
|
|
|
453,071 |
|
Deferred policy acquisition costs
|
|
|
1,159,830 |
|
|
|
1,132,653 |
|
Accrued investment income
|
|
|
77,433 |
|
|
|
82,297 |
|
Reinsurance recoverable
|
|
|
300,697 |
|
|
|
31,568 |
|
Receivables from affiliates
|
|
|
33,074 |
|
|
|
51,586 |
|
Other assets
|
|
|
20,134 |
|
|
|
29,445 |
|
Separate Account assets
|
|
|
14,920,584 |
|
|
|
16,230,264 |
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$ |
22,093,412 |
|
|
$ |
23,059,009 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Policyholders account balances
|
|
$ |
3,947,690 |
|
|
$ |
3,646,668 |
|
Future policy benefits and other policyholder
liabilities
|
|
|
808,230 |
|
|
|
702,862 |
|
Cash collateral for loaned securities
|
|
|
190,022 |
|
|
|
185,849 |
|
Securities sold under agreements to repurchase
|
|
|
80,715 |
|
|
|
104,098 |
|
Income taxes payable
|
|
|
266,096 |
|
|
|
235,795 |
|
Other liabilities
|
|
|
228,596 |
|
|
|
120,891 |
|
Separate Account liabilities
|
|
|
14,920,584 |
|
|
|
16,230,264 |
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
20,441,933 |
|
|
|
21,226,427 |
|
|
|
|
|
|
|
|
|
|
Contingencies (See Footnote 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Common stock, $10 par value;
|
|
|
|
|
|
|
|
|
|
|
1,000,000 shares, authorized; 250,000 shares,
issued and outstanding
|
|
|
2,500 |
|
|
|
2,500 |
|
Paid-in-capital
|
|
|
466,748 |
|
|
|
466,748 |
|
Retained earnings
|
|
|
1,147,665 |
|
|
|
1,361,924 |
|
|
|
|
|
Accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment gains
|
|
|
34,718 |
|
|
|
4,730 |
|
|
|
Foreign currency translation adjustments
|
|
|
(152 |
) |
|
|
(3,320 |
) |
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
34,566 |
|
|
|
1,410 |
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity
|
|
|
1,651,479 |
|
|
|
1,832,582 |
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY
|
|
$ |
22,093,412 |
|
|
$ |
23,059,009 |
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Operations and
Comprehensive Income
Years Ended December 31, 2001, 2000 and 1999
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$ |
90,868 |
|
|
$ |
121,921 |
|
|
$ |
98,976 |
|
|
|
Policy charges and fee income
|
|
|
490,185 |
|
|
|
474,861 |
|
|
|
414,425 |
|
|
|
Net investment income
|
|
|
343,638 |
|
|
|
337,919 |
|
|
|
276,821 |
|
|
|
Realized investment losses, net
|
|
|
(60,476 |
) |
|
|
(20,679 |
) |
|
|
(32,545 |
) |
|
|
Asset management fees
|
|
|
7,897 |
|
|
|
71,160 |
|
|
|
60,392 |
|
|
|
Other income
|
|
|
4,962 |
|
|
|
2,503 |
|
|
|
1,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
877,074 |
|
|
|
987,685 |
|
|
|
819,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders benefits
|
|
|
256,080 |
|
|
|
248,063 |
|
|
|
205,042 |
|
|
|
Interest credited to policyholders account
balances
|
|
|
195,966 |
|
|
|
171,010 |
|
|
|
136,852 |
|
|
|
General, administrative and other expenses
|
|
|
382,701 |
|
|
|
410,684 |
|
|
|
392,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Benefits and Expenses
|
|
|
834,747 |
|
|
|
829,757 |
|
|
|
733,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes
|
|
|
42,327 |
|
|
|
157,928 |
|
|
|
85,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) provision
|
|
|
(25,255 |
) |
|
|
54,432 |
|
|
|
29,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
|
67,582 |
|
|
|
103,496 |
|
|
|
55,595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on securities, net
of reclassification adjustment
|
|
|
29,988 |
|
|
|
33,094 |
|
|
|
(38,266 |
) |
|
|
|
Foreign currency translation adjustments
|
|
|
3,168 |
|
|
|
(993 |
) |
|
|
(742 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
33,156 |
|
|
|
32,101 |
|
|
|
(39,008 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL COMPREHENSIVE INCOME
|
|
$ |
100,738 |
|
|
$ |
135,597 |
|
|
$ |
16,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Changes in
Stockholders Equity
Years Ended December 31, 2001, 2000 and
1999 (In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
Other |
|
Total |
|
|
Common |
|
Paid-in- |
|
Retained |
|
Comprehensive |
|
Stockholders |
|
|
Stock |
|
Capital |
|
Earnings |
|
Income (Loss) |
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 1999 |
|
|
$2,500 |
|
|
|
$439,582 |
|
|
|
$1,202,833 |
|
|
|
$8,317 |
|
|
|
$1,653,232 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
55,595 |
|
|
|
|
|
|
|
55,595 |
|
Change in foreign currency translation
adjustments, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(742 |
) |
|
|
(742 |
) |
Change in net unrealized investment losses, net
of reclassification adjustment and taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,266 |
) |
|
|
(38,266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 1999
|
|
|
2,500 |
|
|
|
439,582 |
|
|
|
1,258,428 |
|
|
|
(30,691 |
) |
|
|
1,669,819 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
103,496 |
|
|
|
|
|
|
|
103,496 |
|
Contribution from Parent
|
|
|
|
|
|
|
27,166 |
|
|
|
|
|
|
|
|
|
|
|
27,166 |
|
Change in foreign currency translation
adjustments, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(993 |
) |
|
|
(993 |
) |
Change in net unrealized investment losses, net
of reclassification adjustment and taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,094 |
|
|
|
33,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2000
|
|
|
2,500 |
|
|
|
466,748 |
|
|
|
1,361,924 |
|
|
|
1,410 |
|
|
|
1,832,582 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Cash
Flows
Years Ended December 31, 2001, 2000 and
1999 (In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
2000 |
|
1999 |
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
67,582 |
|
|
$ |
103,496 |
|
|
$ |
55,595 |
|
|
|
|
|
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy charges and fee income
|
|
|
(54,970 |
) |
|
|
(72,275 |
) |
|
|
(83,961 |
) |
|
Interest credited to policyholders account
balances
|
|
|
195,966 |
|
|
|
171,010 |
|
|
|
136,852 |
|
|
Realized investment losses, net
|
|
|
60,476 |
|
|
|
20,679 |
|
|
|
32,545 |
|
|
Amortization and other non-cash items
|
|
|
(49,594 |
) |
|
|
(48,141 |
) |
|
|
75,037 |
|
|
|
|
|
|
Change in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future policy benefits and other
policyholders liabilities
|
|
|
105,368 |
|
|
|
73,340 |
|
|
|
100,743 |
|
|
|
Accrued investment income
|
|
|
4,864 |
|
|
|
(13,380 |
) |
|
|
(7,803 |
) |
|
|
Receivable from/ Payable to affiliate
|
|
|
18,512 |
|
|
|
(24,907 |
) |
|
|
(66,081 |
) |
|
|
Policy loans
|
|
|
(40,645 |
) |
|
|
(63,022 |
) |
|
|
(25,435 |
) |
|
|
Deferred policy acquisition costs
|
|
|
(100,281 |
) |
|
|
(69,868 |
) |
|
|
(201,072 |
) |
|
|
Income taxes payable/receivable
|
|
|
38,839 |
|
|
|
90,195 |
|
|
|
(47,758 |
) |
|
|
Other, net
|
|
|
(38,114 |
) |
|
|
51,011 |
|
|
|
18,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from (used in) Operating
Activities
|
|
|
208,003 |
|
|
|
218,138 |
|
|
|
(12,364 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale/maturity of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
2,653,798 |
|
|
|
2,273,789 |
|
|
|
3,076,848 |
|
|
|
|
Held to maturity
|
|
|
|
|
|
|
64,245 |
|
|
|
45,841 |
|
|
|
Equity securities
|
|
|
482 |
|
|
|
1,198 |
|
|
|
5,209 |
|
|
|
Commercial loans on real estate
|
|
|
1,137 |
|
|
|
1,182 |
|
|
|
6,845 |
|
|
|
Other long-term investments
|
|
|
|
|
|
|
15,039 |
|
|
|
385 |
|
|
|
|
|
|
Payments for the purchase of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
(2,961,861 |
) |
|
|
(2,782,541 |
) |
|
|
(3,452,289 |
) |
|
|
|
Held to maturity
|
|
|
|
|
|
|
|
|
|
|
(24,170 |
) |
|
|
Equity securities
|
|
|
(184 |
) |
|
|
(11,134 |
) |
|
|
(5,110 |
) |
|
|
Other long-term investments
|
|
|
(130 |
) |
|
|
(6,917 |
) |
|
|
(39,094 |
) |
|
Cash collateral for loaned securities, net
|
|
|
4,174 |
|
|
|
98,513 |
|
|
|
14,000 |
|
|
Securities sold under agreement to repurchase, net
|
|
|
(23,383 |
) |
|
|
82,947 |
|
|
|
(28,557 |
) |
|
Short-term investments, net
|
|
|
(12,766 |
) |
|
|
(118,418 |
) |
|
|
92,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows used in Investing
Activities
|
|
|
(338,733 |
) |
|
|
(382,097 |
) |
|
|
(307,893 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders account deposits
|
|
|
1,456,668 |
|
|
|
2,409,399 |
|
|
|
3,457,158 |
|
|
Policyholders account withdrawals
|
|
|
(1,313,300 |
) |
|
|
(1,991,363 |
) |
|
|
(3,091,565 |
) |
|
Cash dividend to Parent
|
|
|
(26,048 |
) |
|
|
|
|
|
|
|
|
|
Cash provided to affiliate
|
|
|
(65,476 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows (used in) from Financing
Activities
|
|
|
51,844 |
|
|
|
418,036 |
|
|
|
365,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
(78,886 |
) |
|
|
254,077 |
|
|
|
45,336 |
|
|
Cash and cash equivalents, beginning of year
|
|
|
453,071 |
|
|
|
198,994 |
|
|
|
153,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF
YEAR
|
|
$ |
374,185 |
|
|
$ |
453,071 |
|
|
$ |
198,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes (received) paid
|
|
$ |
(46,021 |
) |
|
$ |
(14,832 |
) |
|
$ |
55,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH TRANSACTIONS DURING THE
YEAR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend paid with fixed maturities
|
|
$ |
81,952 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taiwan branch dividend paid with net
assets/liabilities
|
|
$ |
45,816 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy credits issued to eligible policyholders
|
|
$ |
128,025 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution from Parent
|
|
$ |
|
|
|
$ |
27,166 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial
Statements
1. BUSINESS
Pruco Life Insurance Company (the Company) is a
stock life insurance company, organized in 1971 under the laws
of the state of Arizona. The Company is licensed to sell
individual life insurance, variable life insurance, term life
insurance, variable and fixed annuities, and a non-participating
guaranteed interest contract (GIC) called Prudential
Credit Enhanced GIC (PACE) in the District of
Columbia, Guam and in all states and territories except New
York. The Company also had marketed individual life insurance
through its branch office in Taiwan. The branch office was
transferred to an affiliated Company on January 31, 2001,
as described in Footnote 14.
The Company has one wholly owned subsidiary, Pruco Life
Insurance Company of New Jersey (PLNJ). PLNJ is a
stock life insurance company organized in 1982 under the laws of
the state of New Jersey. It is licensed to sell individual life
insurance, variable life insurance, term life insurance, fixed
and variable annuities only in the states of New Jersey and New
York. Another wholly owned subsidiary, The Prudential Life
Insurance Company of Arizona (PLICA) was dissolved
on September 30, 2000. All assets and liabilities were
transferred to the Company. PLICA had no new business sales in
2000 or 1999.
The Company is a wholly owned subsidiary of The Prudential
Insurance Company of America (Prudential), an
insurance company founded in 1875 under the laws of the state of
New Jersey. On December 18, 2001 (the date of
demutualization) Prudential converted from a mutual life
insurance company to a stock life insurance company and became
an indirect wholly owned subsidiary of Prudential Financial,
Inc. (the Holding Company). The demutualization was
completed in accordance with Prudentials Plan of
Reorganization, which was approved by the Commissioner of the
New Jersey Department of Banking and Insurance in October 2001.
Prudential intends to make additional capital contributions to
the Company, as needed, to enable it to comply with its reserve
requirements and fund expenses in connection with its business.
Generally, Prudential is under no obligation to make such
contributions and its assets do not back the benefits payable
under the Companys policyholder contracts. During 2000, a
capital contribution of $27.2 million resulted from the
forgiveness of an intercompany receivable.
The Company is engaged in a business that is highly competitive
because of the large number of stock and mutual life insurance
companies and other entities engaged in marketing insurance
products, and individual and group annuities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America (GAAP). The Company has
extensive transactions and relationships with Prudential and
other affiliates, as more fully described in Footnote 14.
Due to these relationships, it is possible that the terms of
these transactions are not the same as those that would result
from transactions among wholly unrelated parties.
Use of Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, in
particular deferred policy acquisition costs (DAC)
and future policy benefits, and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
Investments
Fixed maturities classified as available for
sale are carried at estimated fair value. Fixed maturities
that the Company has both the intent and ability to hold to
maturity are stated at amortized cost and classified as
held to maturity. The amortized cost of fixed
maturities is written down to estimated fair value if a decline
in value is considered to be other than temporary. Unrealized
gains and losses on fixed maturities available for
sale, including the effect on deferred policy acquisition
costs and policyholders account balances that would result
from the realization of unrealized gains and losses are included
in a separate component of equity, Accumulated other
comprehensive income (loss), net of income taxes.
Equity securities, available for sale, comprised of
common and non-redeemable preferred stock, are carried at
estimated fair value. The associated unrealized gains and
losses, the effects on deferred policy acquisition costs and on
policyholders account balances that would result from the
realization of unrealized gains and losses, are included in a
separate component of equity, Accumulated other
comprehensive income (loss), net of income taxes.
Commercial loans on real estate are stated primarily at
unpaid principal balances, net of unamortized discounts and an
allowance for losses. The allowance for losses includes a loan
specific reserve for impaired loans and a portfolio reserve for
incurred but not specifically identified losses. Impaired loans
include those loans for which it is probable that all amounts
due according to the contractual terms of the loan agreement
will not be collected. Impaired loans are measured at the
present value of expected future cash flows discounted at the
loans effective interest rate, or at the fair value of the
collateral if the loan is collateral dependent. Interest
received on impaired loans, including loans that were previously
modified in a troubled debt restructuring, is either applied
against the principal or reported as revenue, according to
managements judgment as to the collectibility of
principal. Management discontinues accruing interest on impaired
loans after the loans are 90 days delinquent as to
principal or interest, or earlier when management has serious
doubts about collectibility. When a loan is recognized as
impaired, any accrued but uncollectible interest is reversed
against interest income of the current period. Generally, a loan
is restored to accrual status only after all delinquent interest
and principal are brought current and, in the case of loans
where the payment of interest has been interrupted for a
substantial period, a regular payment performance has been
established. The portfolio reserve for incurred but not
specifically identified losses considers the Companys past
loan loss experience, the current credit composition of the
portfolio, historical credit migration, property type
diversification, default and loss severity statistics and other
relevant factors.
Policy loans are carried at unpaid principal balances.
Short-term investments, consisting of highly liquid debt
instruments other than those held in Cash and cash
equivalents, with a maturity of twelve months or less when
purchased, are carried at amortized cost, which approximates
fair value.
Other long-term investments represent the Companys
investments in joint ventures and partnerships in which the
Company does not exercise control, derivatives held for purposes
other than trading, and investments in the Companys own
Separate Accounts. Joint ventures and partnerships are recorded
using the equity method of accounting, reduced for other than
temporary declines in value. The Companys investment in
the Separate Accounts is carried at estimated fair value. The
Companys net income from investments in joint ventures and
partnerships is generally included in Net investment
income.
Realized investment losses, net are computed using the
specific identification method. Costs of fixed maturity and
equity securities are adjusted for impairments considered to be
other than temporary. Impairment adjustments are included in
Realized investment gains (losses), net. Factors
considered in evaluating whether a decline in value is other
than temporary are: 1) whether the decline is substantial;
2) the Companys ability and intent to retain the
investment for a period of time sufficient to allow for an
anticipated recovery in value; 3) the duration and extent
to which the market value has been less than cost; and
4) the financial condition and near-term prospects of the
issuer.
Cash and cash equivalents include cash on hand, amounts
due from banks, money market instruments, and other debt issues
with a maturity of three months or less when purchased.
Deferred policy acquisition costs
The costs that vary with and that are related primarily to the
production of new insurance and annuity business are deferred to
the extent that they are deemed recoverable from future profits.
Such costs include commissions, costs of policy issuance and
underwriting, and variable field office expenses. Deferred
policy acquisition costs are subject to recognition testing at
the time of policy issue and recoverability and premium
deficiency testing at the end of each accounting period.
Deferred policy acquisition costs, for certain products, are
adjusted for the impact of unrealized gains or losses on
investments as if these gains or losses had been realized, with
corresponding credits or charges included in Accumulated
other comprehensive income (loss).
Policy acquisition costs related to interest-sensitive and
variable life products and certain investment-type products are
deferred and amortized over the expected life of the contracts
(periods ranging from 25 to 30 years) in proportion to
estimated gross profits arising principally from investment
results, mortality and expense margins, and surrender charges
based on historical and anticipated future experience, which is
updated periodically. The effect of changes to estimated gross
profits on unamortized deferred acquisition costs is reflected
in General and administrative expenses in the period
such estimated gross profits are revised.
Deferred policy acquisition costs related to non-participating
term insurance are amortized over the expected life of the
contracts in proportion to premium income. For guaranteed
investment contracts, acquisition costs are expensed as incurred.
Prudential and the Company have offered programs under which
policyholders, for a selected product or group of products, can
exchange an existing policy or contract issued by Prudential or
the Company for another form of policy or contract. These
transactions are known as internal replacements. If the new
policies have terms that are substantially similar to those of
the earlier policies, the DAC is retained with respect to the
new policies and amortized over the life of the new policies. If
the terms of the new policies are not substantially similar to
those of the former policy, the unamortized DAC on the
surrendered policies is immediately charged to expense.
Securities loaned
Securities loaned are treated as financing arrangements and are
recorded at the amount of cash received as collateral. The
Company obtains collateral in an amount equal to 102% and 105%
of the fair value of the domestic and foreign securities,
respectively. The Company monitors the market value of
securities loaned on a daily basis with additional collateral
obtained as necessary. Non-cash collateral received is not
reflected in the consolidated statements of financial position
because the debtor typically has the right to redeem the
collateral on short notice. Substantially all of the
Companys securities loaned are with large brokerage firms.
Securities sold under agreements to repurchase
Securities sold under agreements to repurchase are treated as
financing arrangements and are carried at the amounts at which
the securities will be subsequently reacquired, including
accrued interest, as specified in the respective agreements.
Assets to be repurchased are the same, or substantially the
same, as the assets transferred and the transferor, through
right of substitution, maintains the right and ability to redeem
the collateral on short notice. The market value of securities
to be repurchased is monitored and additional collateral is
obtained, where appropriate, to protect against credit exposure.
Securities lending and securities repurchase agreements are used
to generate net investment income and facilitate trading
activity. These instruments are short-term in nature (usually
30 days or less). Securities loaned are collateralized
principally by U.S. Government and mortgage-backed
securities. Securities sold under repurchase agreements are
collateralized principally by cash. The carrying amounts of
these instruments approximate fair value because of the
relatively short period of time between the origination of the
instruments and their expected realization.
Separate Account Assets and Liabilities
Separate Account assets and liabilities are reported at
estimated fair value and represent segregated funds which are
invested for certain policyholders and other customers. The
assets consist of common stocks, fixed maturities, real estate
related securities, and short-term investments. The assets of
each account are legally segregated and are not subject to
claims that arise out of any other business of the Company.
Investment risks associated with market value changes are borne
by the customers, except to the extent of minimum guarantees
made by the Company with respect to certain accounts. The
investment income and gains or losses for Separate Accounts
generally accrue to the policyholders and are not included in
the Consolidated Statements of Operations and Comprehensive
Income. Mortality, policy administration and surrender charges
on the accounts are included in Policy charges and fee
income.
Separate Accounts represent funds for which investment income
and investment gains and losses accrue directly to, and
investment risk is borne by, the policyholders, with the
exception of the Pruco Life Modified Guaranteed Annuity Account.
The Pruco Life Modified Guaranteed Annuity Account is a
non-unitized Separate Account, which funds the Modified
Guaranteed Annuity Contract and the Market Value Adjustment
Annuity Contract. Owners of the Pruco Life Modified Guaranteed
Annuity and the Market Value Adjustment Annuity Contracts do not
participate in the investment gain or loss from assets relating
to such accounts. Such gain or loss is borne, in total, by the
Company.
Contingencies
Amounts related to contingencies are accrued if it is probable
that a liability has been incurred and an amount is reasonably
estimable. Management evaluates whether there are incremental
legal or other costs directly associated with the ultimate
resolution of the matter that are reasonably estimable and, if
so, they are included in the accrual.
Insurance Revenue and Expense Recognition
Premiums from insurance policies are generally recognized when
due. Benefits are recorded as an expense when they are incurred.
For traditional life insurance contracts, a liability for future
policy benefits is recorded using the net level premium method.
For individual annuities in payout status, a liability for
future policy benefits is recorded for the present value of
expected future payments based on historical experience.
Amounts received as payment for interest-sensitive life,
individual annuities and guaranteed investment contracts are
reported as deposits to Policyholders account
balances. Revenues from these contracts reflected as
Policy charges and fee income consist primarily of
fees assessed during the period against the policyholders
account balances for mortality charges, policy administration
charges and surrender charges. Benefits and expenses for these
products include claims in excess of related account balances,
expenses of contract administration, interest credited and
amortization of deferred policy acquisition costs.
Premiums, benefits and expenses are stated net of reinsurance
ceded to other companies. Estimated reinsurance recoverables and
the cost of reinsurance are recognized over the life of the
reinsured policies using assumptions consistent with those used
to account for the underlying policies.
Foreign Currency Translation Adjustments
Assets and liabilities of the Taiwan branch are translated to
U.S. dollars at the exchange rate in effect at the end of the
period. Revenues, benefits and other expenses are translated at
the average rate prevailing during the period. Cumulative
translation adjustments arising from the use of differing
exchange rates from period to period are charged or credited
directly to Other comprehensive income (loss). The
cumulative effect of changes in foreign exchange rates are
included in Accumulated other comprehensive income
(loss).
Asset Management Fees
Through December 31, 2000, the Company received asset
management fee income from policyholder account balances
invested in The Prudential Series Funds (PSF),
which are a portfolio of mutual fund investments related to the Companys Separate Account products (refer to Note
14). In addition, the Company receives fees from policyholder
account balances invested in funds managed by companies other
than Prudential. Asset management fees are recognized as income
as earned.
Derivative Financial Instruments
Derivatives are financial instruments whose values are derived
from interest rates, foreign exchange rates, financial indices,
or the value of securities or commodities. Derivative financial
instruments used by the Company include swaps, futures, forwards
and option contracts and may be exchange-traded or contracted in
the over-the-counter market. See Note 11 for a discussion of the
Companys use of derivative financial instruments and the
related accounting and reporting treatment for such instruments.
Income Taxes
The Company and its subsidiary are members of the consolidated
federal income tax return of Prudential and file separate
company state and local tax returns. Pursuant to the tax
allocation arrangement with Prudential, total federal income tax
expense is determined on a separate company basis. Members with
losses record tax benefits to the extent such losses are
recognized in the consolidated federal tax provision. Deferred
income taxes are generally recognized, based on enacted rates,
when assets and liabilities have different values for financial
statement and tax reporting purposes. A valuation allowance is
recorded to reduce a deferred tax asset to that portion that is
expected to be realized.
New Accounting Pronouncements
In September 2000, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities a replacement of FASB Statement
No. 125. The Company has adopted the provisions of
SFAS No. 140 relating to transfers and extinguishments
of liabilities which are effective for periods occurring after
March 31, 2001. The adoption did not have an effect on the
results of operations of the Company.
In June 2001, the FASB issued SFAS No. 141,
Business Combinations and SFAS No. 142,
Goodwill and Other Intangible Assets.
SFAS No. 141 requires that the Company account for all
business combinations in the scope of the statement using the
purchase method. SFAS No. 142 requires that an intangible
asset acquired either individually or with a group of other
assets shall initially be recognized and measured based on fair
value. An intangible asset with a finite life is amortized over
its useful life to the reporting entity; an intangible asset
with an indefinite useful life, including goodwill, is not
amortized. All intangible assets shall be tested for impairment
in accordance with the statement. SFAS No. 142 is
effective for fiscal years beginning after December 15,
2001; however, goodwill and intangible assets acquired after
June 30, 2001 are subject immediately to the
nonamortization and amortization provisions of this statement.
As of December 31, 2001, The Company does not have any
goodwill or intangible assets.
In August 2001, the FASB issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS No. 144 eliminated the requirement
that discontinued operations be measured at net realizable value or that entities include losses that have not yet occurred.
SFAS No. 144 eliminated the exception to consolidation
for a subsidiary for which control is likely to be temporary.
SFAS No. 144 requires that long-lived assets that are
to be disposed of by sale be measured at the lower of book value
or fair value less cost to sell. An impairment for assets that
are not considered to be disposed of is recognized only if the
carrying amounts of long-lived assets are not recoverable and
exceed their fair values. Additionally, SFAS No. 144
expands the scope of discontinued operations to include all
components of an entity with operations and cash flows that
(1) can be distinguished from the rest of the entity and
(2) will be eliminated from the ongoing operations of the
entity in a disposal transaction. SFAS No. 144 is effective
for financial statements issued for fiscal years beginning after
December 15, 2001 and, generally, its provisions are to be
applied prospectively.
Reclassifications
Certain amounts in the prior years have been reclassified to
conform to the current year presentation.
3. INVESTMENTS
Fixed Maturities and Equity Securities:
The following tables provide additional information relating to
fixed maturities and equity securities as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Estimated |
|
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
Fixed Maturities Available For Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Securities and Obligations of U.S.
Government Corporations and Agencies
|
|
$ |
303,606 |
|
|
$ |
1,496 |
|
|
$ |
1,648 |
|
|
$ |
303,454 |
|
Foreign Government Bonds
|
|
|
27,332 |
|
|
|
2,122 |
|
|
|
|
|
|
|
29,454 |
|
Corporate Securities
|
|
|
3,594,386 |
|
|
|
116,186 |
|
|
|
28,834 |
|
|
|
3,681,738 |
|
Mortgage-backed Securities
|
|
|
10,148 |
|
|
|
160 |
|
|
|
61 |
|
|
|
10,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities Available For Sale
|
|
$ |
3,935,472 |
|
|
$ |
119,964 |
|
|
$ |
30,543 |
|
|
$ |
4,024,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities Held To Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Securities
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities Held To Maturity
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities Available For Sale
|
|
$ |
173 |
|
|
$ |
220 |
|
|
$ |
18 |
|
|
$ |
375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2000 |
|
|
|
|
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Estimated |
|
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
Fixed Maturities Available For Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Securities and Obligations of U.S.
Government Corporations and Agencies
|
|
$ |
309,609 |
|
|
$ |
7,888 |
|
|
$ |
17 |
|
|
$ |
317,480 |
|
Foreign Government Bonds
|
|
|
136,133 |
|
|
|
8,093 |
|
|
|
520 |
|
|
|
143,706 |
|
Corporate Securities
|
|
|
3,075,023 |
|
|
|
43,041 |
|
|
|
49,538 |
|
|
|
3,068,526 |
|
Mortgage-backed Securities
|
|
|
31,479 |
|
|
|
330 |
|
|
|
0 |
|
|
|
31,809 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities Available For Sale
|
|
$ |
3,552,244 |
|
|
$ |
59,352 |
|
|
$ |
50,075 |
|
|
$ |
3,561,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities Held To Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Securities
|
|
$ |
324,546 |
|
|
$ |
1,500 |
|
|
$ |
5,412 |
|
|
$ |
320,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities Held To Maturity
|
|
$ |
324,546 |
|
|
$ |
1,500 |
|
|
$ |
5,412 |
|
|
$ |
320,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities Available For Sale
|
|
$ |
13,446 |
|
|
$ |
197 |
|
|
$ |
2,839 |
|
|
$ |
10,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and estimated fair value of fixed maturities,
by contractual maturities at December 31, 2001 is shown
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available For Sale |
|
|
|
|
|
|
|
|
Amortized |
|
Estimated Fair |
|
|
Cost |
|
Value |
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
Due in one year or less
|
|
$ |
802,235 |
|
|
$ |
821,790 |
|
Due after one year through five years
|
|
|
1,841,097 |
|
|
|
1,885,535 |
|
Due after five years through ten years
|
|
|
1,026,709 |
|
|
|
1,045,693 |
|
Due after ten years
|
|
|
255,283 |
|
|
|
261,628 |
|
Mortgage-backed securities
|
|
|
10,148 |
|
|
|
10,247 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
3,935,472 |
|
|
$ |
4,024,893 |
|
|
|
|
|
|
|
|
|
|
Actual maturities may differ from contractual maturities because
issuers have the right to call or prepay obligations.
Proceeds from the sale of fixed maturities available for sale
during 2001, 2000, and 1999, were $2,380.4 million,
$2,103.6 million, and $2,950.4 million, respectively.
Gross gains of $40.3 million, $15.3 million,
$13.1 million, and gross losses of $47.7 million,
$33.9 million, and $31.1 million, were realized on
those sales during 2001, 2000, and 1999, respectively.
Proceeds from the maturity of fixed maturities available for
sale during 2001, 2000, and 1999, were $273.4 million,
$170.2 million, and $126.5 million, respectively.
Writedowns for impairments which were deemed to be other than
temporary for fixed maturities were $53.5 million,
$12.3 million, and $11.2 million, for the years 2001,
2000 and 1999, respectively.
Due to the adoption of FAS 133, Accounting for
Derivative Instruments and Hedging Activities, on
January 1, 2001, the entire portfolio of fixed maturities
classified as held to maturity were transferred to the available
for sale category. The aggregate amortized cost of the
securities was $324.5 million. Unrealized investment losses
of $2.5 million, net of tax were recorded in
Accumulated Other Comprehensive income (loss) at the
time of transfer.
During 2000, certain securities classified as held to maturity
were transferred to the available for sale portfolio. These
actions were taken as a result of a significant deterioration in
credit worthiness. The aggregate amortized cost of the
securities transferred was $6.6 million. Gross unrealized
investment losses of $0.3 million were recorded in
Accumulated Other Comprehensive income (loss) at the
time of transfer. Prior to transfer, impairments related to
these securities, if any, were included in realized
investment losses, net. During the year ended
December 31, 1999, there were no securities classified as
held to maturity that were transferred. During the years ended
December 31, 2001, 2000, and 1999, there were no securities
classified as held to maturity that were sold.
Commercial Loans on Real Estate
The Companys commercial loans on real estate were
collateralized by the following property types at
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
2000 |
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
Retail Stores
|
|
$4,623
|
|
56.4%
|
|
$5,615
|
|
60.2%
|
Industrial Buildings
|
|
3,567
|
|
43.6%
|
|
3,712
|
|
39.8%
|
|
|
|
|
|
|
|
|
|
|
Net Carrying Value
|
|
$8,190
|
|
100.0%
|
|
$9,327
|
|
100.0%
|
|
|
|
|
|
The concentration of commercial loans are in the states of
Washington (47%), New Jersey (44%), and North Dakota (9%).
Special Deposits and Restricted Assets
Fixed maturities of $2.9 million and $8.0 million at
December 31, 2001 and 2000, respectively, were on deposit
with governmental authorities or trustees as required by certain
insurance laws. Equity securities restricted as to sale were
$.2 million at December 31, 2001 and 2000,
respectively.
Other Long-Term Investments
The Companys Other long-term investments of
$84.3 million and $83.7 million as of
December 31, 2001 and 2000, respectively, are comprised of
joint ventures and limited partnerships, the Companys
investment in the Separate Accounts and certain derivatives for
other than trading. Joint ventures and limited partnerships
totaled $35.8 million and $34.3 million at December 31,
2001 and 2000, respectively. The Companys share of net
income from the joint ventures was $1.6 million,
$.9 million, and $.3 million, for the years ended
December 31, 2001, 2000 and 1999, respectively, and is
reported in Net investment income. The
Companys investment in the Separate Accounts was
$44.0 million and $46.9 million at December 31,
2001 and 2000, respectively.
Investment Income and Investment Gains and Losses
Net investment income arose from the following sources for the
years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
Fixed Maturities Available For Sale
|
|
$ |
279,477 |
|
|
$ |
237,042 |
|
|
$ |
188,236 |
|
Fixed Maturities Held To Maturity
|
|
|
|
|
|
|
26,283 |
|
|
|
29,245 |
|
Equity Securities Available For Sale
|
|
|
71 |
|
|
|
18 |
|
|
|
|
|
Commercial Loans On Real Estate
|
|
|
905 |
|
|
|
1,010 |
|
|
|
2,825 |
|
Policy Loans
|
|
|
48,149 |
|
|
|
45,792 |
|
|
|
42,422 |
|
Short-Term Investments and Cash Equivalents
|
|
|
24,253 |
|
|
|
29,582 |
|
|
|
19,208 |
|
Other
|
|
|
6,021 |
|
|
|
16,539 |
|
|
|
4,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Investment Income
|
|
|
358,876 |
|
|
|
356,266 |
|
|
|
286,368 |
|
|
Less: Investment Expenses
|
|
|
(15,238 |
) |
|
|
(18,347 |
) |
|
|
(9,547 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
$ |
343,638 |
|
|
$ |
337,919 |
|
|
$ |
276,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment losses, net including charges for
other than temporary reductions in value, for the years ended
December 31, were from the following sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
Fixed Maturities Available For Sale
|
|
$ |
(60,924 |
) |
|
$ |
(34,600 |
) |
|
$ |
(29,192 |
) |
Fixed Maturities Held To Maturity
|
|
|
|
|
|
|
(212 |
) |
|
|
102 |
|
Equity Securities Available For Sale
|
|
|
(56 |
) |
|
|
271 |
|
|
|
392 |
|
Derivatives
|
|
|
(1,396 |
) |
|
|
15,039 |
|
|
|
(1,557 |
) |
Other
|
|
|
1,900 |
|
|
|
(1,177 |
) |
|
|
(2,290 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized Investment Losses, Net
|
|
$ |
(60,476 |
) |
|
$ |
(20,679 |
) |
|
$ |
(32,545 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Pledged to Creditors
The Company pledges investment securities it owns to
unaffiliated parties through certain transactions including
securities lending, securities sold under agreements to
repurchase, and futures contracts. At December 31, 2001 and
2000, the carrying value of fixed maturities available for sale
pledged to third parties as reported in the Consolidated
Statements of Financial Position were $265.2 million and
$287.8 million, respectively.
Net Unrealized Investment Gains (Losses)
Net unrealized investment gains (losses) on securities
available for sale are included in the Consolidated Statements
of Financial Position as a component of Accumulated other
comprehensive income (loss). Changes in these amounts
include reclassification adjustments to exclude from Other
Comprehensive income (loss), those items that are included
as part of Net income for a period that also had
been part of Other Comprehensive income (loss) in
earlier periods. The amounts for the years ended
December 31, net of tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive |
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) |
|
|
|
|
|
|
Deferred |
|
|
|
Deferred |
|
Related to Net |
|
|
|
|
Unrealized |
|
Policy |
|
Policyholders |
|
Income Tax |
|
Unrealized |
|
|
|
|
Gains (Losses) |
|
Acquisition |
|
Account |
|
(Liability) |
|
Investment |
|
|
|
|
on Investments |
|
Costs |
|
Balances |
|
Benefit |
|
Gains (Losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
|
|
Balance, January 1, 1999
|
|
$ |
25,169 |
|
|
$ |
(13,115 |
) |
|
$ |
2,680 |
|
|
$ |
(4,832 |
) |
|
$ |
9,902 |
|
|
|
Net investment gains (losses) on investments
arising during the period
|
|
|
(138,268 |
) |
|
|
|
|
|
|
|
|
|
|
47,785 |
|
|
|
(90,483 |
) |
|
|
Reclassification adjustment for
gains (losses) included in net income
|
|
|
28,698 |
|
|
|
|
|
|
|
|
|
|
|
(9,970 |
) |
|
|
18,728 |
|
|
|
Impact of net unrealized investment
gains (losses) on deferred policy acquisition costs
|
|
|
|
|
|
|
53,407 |
|
|
|
|
|
|
|
(16,283 |
) |
|
|
37,124 |
|
|
|
Impact of net unrealized investment
gains (losses) on policyholders account balances
|
|
|
|
|
|
|
|
|
|
|
(5,712 |
) |
|
|
2,077 |
|
|
|
(3,635 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 1999
|
|
|
(84,401 |
) |
|
|
40,292 |
|
|
|
(3,032 |
) |
|
|
18,777 |
|
|
|
(28,364 |
) |
|
|
Net investment gains (losses) on investments
arising during the period
|
|
|
56,707 |
|
|
|
|
|
|
|
|
|
|
|
(21,539 |
) |
|
|
35,168 |
|
|
|
Reclassification adjustment for
gains (losses) included in net income
|
|
|
34,329 |
|
|
|
|
|
|
|
|
|
|
|
(13,039 |
) |
|
|
21,290 |
|
|
|
Impact of net unrealized investment
gains (losses) on deferred policy acquisition costs
|
|
|
|
|
|
|
(39,382 |
) |
|
|
|
|
|
|
14,177 |
|
|
|
(25,205 |
) |
|
|
Impact of net unrealized investment
gains (losses) on policyholders account balances
|
|
|
|
|
|
|
|
|
|
|
2,877 |
|
|
|
(1,036 |
) |
|
|
1,841 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2000
|
|
|
6,635 |
|
|
|
910 |
|
|
|
(155 |
) |
|
|
(2,660 |
) |
|
|
4,730 |
|
|
|
Net investment gains (losses) on investments
arising during the period
|
|
|
22,007 |
|
|
|
|
|
|
|
|
|
|
|
(7,922 |
) |
|
|
14,085 |
|
|
|
Reclassification adjustment for
gains (losses) included in net income
|
|
|
60,980 |
|
|
|
|
|
|
|
|
|
|
|
(21,953 |
) |
|
|
39,027 |
|
|
|
Impact of net unrealized investment
gains (losses) on deferred policy acquisition costs
|
|
|
|
|
|
|
(41,223 |
) |
|
|
|
|
|
|
14,840 |
|
|
|
(26,383 |
) |
|
|
Impact of net unrealized investment
gains (losses) on policyholders account balances
|
|
|
|
|
|
|
|
|
|
|
5,092 |
|
|
|
(1,833 |
) |
|
|
3,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2001
|
|
$ |
89,622 |
|
|
$ |
(40,313 |
) |
|
$ |
4,937 |
|
|
$ |
(19,528 |
) |
|
$ |
34,718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. DEFERRED POLICY ACQUISITION COSTS
The balances of and changes in deferred policy acquisition costs
as of and for the years ended December 31, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
Balance, Beginning of Year
|
|
$ |
1,132,653 |
|
|
$ |
1,062,785 |
|
|
$ |
861,713 |
|
Capitalization of Commissions, Sales and Issue
Expenses
|
|
|
295,823 |
|
|
|
242,322 |
|
|
|
242,373 |
|
Amortization
|
|
|
(156,092 |
) |
|
|
(129,049 |
) |
|
|
(96,451 |
) |
Change In Unrealized Investment (Gains) Losses
|
|
|
(41,223 |
) |
|
|
(39,382 |
) |
|
|
53,407 |
|
Foreign Currency Translation
|
|
|
1,773 |
|
|
|
(4,023 |
) |
|
|
1,743 |
|
Transfer of Taiwan branch balance to an
affiliated company
|
|
|
(73,104 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, End of Year
|
|
$ |
1,159,830 |
|
|
$ |
1,132,653 |
|
|
$ |
1,062,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5. POLICYHOLDERS LIABILITIES
Future policy benefits and other policyholder liabilities at
December 31, are as follows:
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
2000 |
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
Life Insurance Domestic
|
|
|
$500,974 |
|
|
|
$429,825 |
|
Life Insurance Taiwan
|
|
|
260,632 |
|
|
|
226,272 |
|
Individual Annuities
|
|
|
32,423 |
|
|
|
31,817 |
|
Group Annuities
|
|
|
14,201 |
|
|
|
14,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$808,230 |
|
|
|
$702,862 |
|
|
|
|
|
|
|
|
|
|
Life insurance liabilities include reserves for death benefits.
Annuity liabilities include reserves for annuities that are in
payout status.
The following table highlights the key assumptions generally
utilized in calculating these reserves:
|
|
|
|
|
|
|
Product |
|
Mortality |
|
Interest Rate |
|
Estimation Method |
|
|
|
|
|
|
|
Life Insurance Domestic Variable and
Interest-Sensitive
|
|
Generally rates guaranteed in calculating cash
surrender values
|
|
2.5% to 11.25%
|
|
Net level premium based on non-forfeiture
interest rate
|
|
|
|
|
|
|
|
Life Insurance Domestic Term Insurance
|
|
Best estimate plus a provision for adverse
deviation
|
|
6.5% to 6.75%
|
|
Net level premium plus a provision for adverse
deviation
|
|
|
|
|
|
|
|
Life Insurance International
|
|
Generally the Taiwan standard table plus a
provision for adverse deviation
|
|
6.25% to 7.5%
|
|
Net level premium plus a provision for adverse
deviation
|
|
|
|
|
|
|
|
Individual Annuities
|
|
Mortality table varies based on the issue year of
the contract. Current table (for 1998 & later issues) is the
Annuity 2000 Mortality Table with certain modifications
|
|
6.25% to 11.0%
|
|
Present value of expected future payments based
on historical experience
|
|
|
|
|
|
|
|
Group Annuities
|
|
1950 & 1971 Group Annuity Mortality Table
with certain modifications
|
|
14.75%
|
|
Present value of expected future payments based
on historical experience
|
Policyholders account balances at December 31, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
2000 |
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
Interest-Sensitive Life Contracts
|
|
$ |
1,976,710 |
|
|
$ |
1,886,714 |
|
Individual Annuities
|
|
|
976,237 |
|
|
|
859,996 |
|
Guaranteed Investment Contracts
|
|
|
994,743 |
|
|
|
899,958 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,947,690 |
|
|
$ |
3,646,668 |
|
|
|
|
|
|
|
|
|
|
Policyholders account balances for interest-sensitive
life, individual annuities, and guaranteed investment contracts
are equal to policy account values plus unearned premiums. The
policy account values represent an accumulation of gross premium
payments plus credited interest less withdrawals, expenses and
mortality charges.
Certain contract provisions that determine the policyholder
account balances are as follows:
|
|
|
|
|
Product |
|
Interest Rate |
|
Withdrawal/Surrender Charges |
|
|
|
|
|
Interest Sensitive Life Contracts
|
|
3.0% to 6.75%
|
|
Various up to 10 years
|
Individual Annuities
|
|
3.0% to 16.0%
|
|
0% to 7% for up to 9 years
|
Guaranteed Investment Contracts
|
|
4.32% to 8.03%
|
|
Subject to market value withdrawal provisions for
any funds withdrawn other than for benefit responsive and
contractual payments
|
6. REINSURANCE
The Company participates in reinsurance, with Prudential and
other companies, in order to provide greater diversification of
business, provide additional capacity for future growth and
limit the maximum net loss potential arising from large risks.
Reinsurance ceded arrangements do not discharge the Company or
the insurance subsidiary as the primary insurer. Ceded balances
would represent a liability of the Company in the event the
reinsurers were unable to meet their obligations to the Company
under the terms of the reinsurance agreements. The likelihood of
a material reinsurance liability reassumed by the Company is
considered to be remote. The affiliated reinsurance agreements,
including the Companys reinsurance of all its Taiwanese
business, are described further in Note 14.
Reinsurance amounts included in the Consolidated Statements of
Operations and Comprehensive Income for the year ended
December 31, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
Domestic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance premiums ceded affiliated
|
|
$ |
(9,890 |
) |
|
$ |
(7,641 |
) |
|
$ |
(5,630 |
) |
Reinsurance premiums ceded
unaffiliated
|
|
|
(13,399 |
) |
|
|
(2,475 |
) |
|
|
|
|
Policyholders benefits ceded
|
|
|
10,803 |
|
|
|
3,558 |
|
|
|
3,140 |
|
|
|
|
|
Taiwan after the transfer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance premiums ceded affiliated
|
|
|
(82,433 |
) |
|
|
|
|
|
|
|
|
Policyholders benefits ceded
affiliated
|
|
|
12,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Taiwan before the transfer:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance premiums ceded affiliated
|
|
|
(107 |
) |
|
|
(1,573 |
) |
|
|
(1,252 |
) |
Reinsurance premiums ceded
unaffiliated
|
|
|
(167 |
) |
|
|
(2,830 |
) |
|
|
(1,745 |
) |
Policyholders benefits ceded
|
|
|
71 |
|
|
|
1,914 |
|
|
|
1,088 |
|
Reinsurance premiums assumed
|
|
|
162 |
|
|
|
1,671 |
|
|
|
1,778 |
|
Reinsurance recoverables, included in the Companys
Consolidated Statements of Financial Position at
December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
2000 |
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
Domestic Life Insurance affiliated
|
|
$ |
11,014 |
|
|
$ |
8,765 |
|
Domestic Life Insurance unaffiliated
|
|
|
14,850 |
|
|
|
2,037 |
|
Other Reinsurance affiliated
|
|
|
14,201 |
|
|
|
14,948 |
|
Taiwan Life Insurance affiliated
|
|
|
260,632 |
|
|
|
|
|
Taiwan Life Insurance unaffiliated
|
|
|
|
|
|
|
5,818 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
300,697 |
|
|
$ |
31,568 |
|
|
|
|
|
|
|
|
|
|
The gross and net amounts of life insurance in force at
December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
Life Insurance Face Amount In Force
|
|
$ |
84,317,628 |
|
|
$ |
66,327,999 |
|
|
$ |
54,954,680 |
|
Ceded To Other Companies
|
|
|
(25,166,264 |
) |
|
|
(7,544,363 |
) |
|
|
(2,762,319 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Amount of Life Insurance In Force
|
|
$ |
59,151,364 |
|
|
$ |
58,783,636 |
|
|
$ |
52,192,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. EMPLOYEE BENEFIT PLANS
Pension and Other Postretirement Plans
The Company had a non-contributory defined benefit pension plan
that covered substantially all of its Taiwanese employees. The
pension plan was transferred to an affiliate on January 31,
2001 as described in Note 14. This plan was established as
of September 30, 1998 and the projected benefit obligation
and related expenses at December 31, 2000 were not material
to the Consolidated Statements of Financial Position or results
of operations for the years presented. All other employee
benefit costs are allocated to the Company by Prudential in
accordance with the service agreement described in
Footnote 14.
8. INCOME TAXES
The components of income taxes for the years ended
December 31, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
Current Tax Expense (Benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$ |
(100,946 |
) |
|
$ |
8,588 |
|
|
$ |
(14,093 |
) |
|
State and Local
|
|
|
1,866 |
|
|
|
38 |
|
|
|
378 |
|
|
Foreign
|
|
|
124 |
|
|
|
35 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(98,956 |
) |
|
|
8,661 |
|
|
|
(13,700 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Expense (Benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
76,155 |
|
|
|
43,567 |
|
|
|
42,320 |
|
|
State and Local
|
|
|
(2,454 |
) |
|
|
2,204 |
|
|
|
1,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
73,701 |
|
|
|
45,771 |
|
|
|
43,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income Tax Expense
|
|
$ |
(25,255 |
) |
|
$ |
54,432 |
|
|
$ |
29,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax expense for the years ended December 31,
differs from the amount computed by applying the expected
federal income tax rate of 35% to income from operations before
income taxes for the following reasons:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
2000 |
|
1999 |
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
Expected Federal Income Tax Expense
|
|
$ |
14,814 |
|
|
$ |
55,275 |
|
|
$ |
29,936 |
|
|
State and Local Income Taxes
|
|
|
(382 |
) |
|
|
1,457 |
|
|
|
1,101 |
|
|
Non taxable investment income
|
|
|
(38,693 |
) |
|
|
(6,443 |
) |
|
|
(1,010 |
) |
|
Incorporation of Taiwan Branch
|
|
|
(1,774 |
) |
|
|
|
|
|
|
|
|
|
Other
|
|
|
780 |
|
|
|
4,143 |
|
|
|
(91 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income Tax Expense
|
|
$ |
(25,255 |
) |
|
$ |
54,432 |
|
|
$ |
29,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities at December 31,
resulted from the items listed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
2000 |
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
Deferred Tax Assets
|
|
|
|
|
|
|
|
|
|
Insurance Reserves
|
|
$ |
43,317 |
|
|
$ |
100,502 |
|
|
State Net Operating Losses
|
|
|
5,642 |
|
|
|
1,400 |
|
|
Other
|
|
|
9,309 |
|
|
|
8,610 |
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Assets
|
|
|
58,268 |
|
|
|
110,512 |
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
|
|
Deferred Acquisition Costs
|
|
|
324,082 |
|
|
|
324,023 |
|
|
Net Unrealized Gains on Securities
|
|
|
32,264 |
|
|
|
2,389 |
|
|
Investments
|
|
|
20,644 |
|
|
|
19,577 |
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
376,990 |
|
|
|
345,989 |
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Liability
|
|
$ |
318,722 |
|
|
$ |
235,477 |
|
|
|
|
|
|
|
|
|
|
Management believes that based on its historical pattern of
taxable income, the Company and its subsidiary will produce
sufficient income in the future to realize its deferred tax
assets. Adjustments to the valuation allowance will be made if
there is a change in managements assessment of the amount
of the deferred tax asset that is realizable. At
December 31, 2001 and 2000, the Company and its subsidiary
had no federal operating loss carryforwards for tax purposes. At
December 31, 2001 and December 31, 2000, the Company
had state operating loss carryforwards for tax purposes of $369
million and $91 million, which expire by 2021 and 2020,
respectively.
The Internal Revenue Service (the Service) has
completed all examinations of the consolidated federal income
tax returns through 1992. The Service has examined the years
1993 through 1995. Discussions are being held with the Service
with respect to proposed adjustments. Management, however,
believes there are adequate defenses against, or sufficient
reserves to provide for such adjustments. The Service has
completed its examination of 1996 and has begun its examination
of 1997 through 2000.
9. STATUTORY NET INCOME AND SURPLUS
The Company is required to prepare statutory financial
statements in accordance with accounting practices prescribed or
permitted by the Arizona Department of Insurance and the New
Jersey Department of Banking and Insurance. Statutory accounting
practices primarily differ from GAAP by charging policy
acquisition costs to expense as incurred, establishing future
policy benefit liabilities using different actuarial assumptions
and valuing investments, deferred taxes, and certain assets on a
different basis.
Statutory net income (loss) of the Company amounted to
$71.5 million, $(50.5) million, and $(82.3) million
for the years ended December 31, 2001, 2000, and 1999,
respectively. Statutory surplus of the Company amounted to
$728.7 million and $849.6 million at December 31, 2001
and 2000, respectively.
In March 1998, the NAIC adopted the Codification of
Statutory Accounting Principles guidance
(Codification), which replaces the current
Accounting Practices and Procedures manual as the NAICs
primary guidance on statutory accounting as of January 1,
2001. Codification provides guidance for areas where statutory
accounting has been silent and changes current statutory
accounting in certain areas. The Company has adopted the
Codification guidance effective January 1, 2001. As a
result of these changes, the Company reported an increase to
statutory surplus of $88 million, primarily relating to the
recognition of deferred tax assets.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values presented below have been determined
using available market information and by applying valuation
methodologies. Considerable judgment is applied in interpreting
data to develop the estimates of fair value. Estimated fair
values may not be realized in a current market exchange. The use
of different market assumptions and/or estimation methodologies
could have a material effect on the estimated fair values. The
following methods and assumptions were used in calculating the
estimated fair values (for all other financial instruments
presented in the table, the carrying value approximates
estimated fair value).
Fixed maturities and Equity securities
Estimated fair values for fixed maturities and equity
securities, other than private placement securities, are based
on quoted market prices or estimates from independent pricing
services. Generally, fair values for private placement
securities are estimated using a discounted cash flow model
which considers the current market spreads between the U.S.
Treasury yield curve and corporate bond yield curve, adjusted
for the type of issue, its current credit quality and its
remaining average life. The estimated fair value of certain
non-performing private placement securities is based on amounts
estimated by management.
Commercial loans on real estate
The estimated fair value of the portfolio of commercial loans on
real estate is primarily based upon the present value of the
expected future cash flows discounted at the appropriate U.S.
Treasury rate, adjusted for the current market spread for a
similar quality loan.
Policy loans
The estimated fair value of policy loans is calculated using a
discounted cash flow model based upon current U.S. Treasury
rates and historical loan repayment patterns.
Investment contracts
For guaranteed investment contracts, estimated fair values are
derived using discounted projected cash flows, based on interest
rates being offered for similar contracts with maturities
consistent with those remaining for the contracts being valued.
For individual deferred annuities and other deposit liabilities,
fair value approximates carrying value.
Derivative financial instruments
Refer to Note 11 for the disclosure of fair values on these
instruments.
The following table discloses the carrying amounts and estimated
fair values of the Companys financial instruments at
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
2000 |
|
|
|
|
|
|
|
Carrying |
|
Estimated |
|
Carrying |
|
Estimated |
|
|
Value |
|
Fair Value |
|
Value |
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands) |
|
|
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities: Available For Sale
|
|
$ |
4,024,893 |
|
|
$ |
4,024,893 |
|
|
$ |
3,561,521 |
|
|
$ |
3,561,521 |
|
|
Fixed Maturities: Held To Maturity
|
|
|
|
|
|
|
|
|
|
|
324,546 |
|
|
|
320,634 |
|
|
Equity Securities
|
|
|
375 |
|
|
|
375 |
|
|
|
10,804 |
|
|
|
10,804 |
|
|
Commercial Loans on Real Estate
|
|
|
8,190 |
|
|
|
10,272 |
|
|
|
9,327 |
|
|
|
10,863 |
|
|
Policy Loans
|
|
|
874,065 |
|
|
|
934,203 |
|
|
|
855,374 |
|
|
|
883,460 |
|
|
Short-Term Investments
|
|
|
215,610 |
|
|
|
215,610 |
|
|
|
202,815 |
|
|
|
202,815 |
|
|
Cash and Cash Equivalents
|
|
|
374,185 |
|
|
|
374,185 |
|
|
|
453,071 |
|
|
|
453,071 |
|
|
Separate Account Assets
|
|
|
14,920,584 |
|
|
|
14,920,584 |
|
|
|
16,230,264 |
|
|
|
16,230,264 |
|
|
|
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Contracts
|
|
|
2,003,265 |
|
|
|
2,053,259 |
|
|
|
1,762,794 |
|
|
|
1,784,767 |
|
|
Cash Collateral for Loaned Securities
|
|
|
190,022 |
|
|
|
190,022 |
|
|
|
185,849 |
|
|
|
185,849 |
|
|
Securities Sold Under Repurchase Agreements
|
|
|
80,715 |
|
|
|
80,715 |
|
|
|
104,098 |
|
|
|
104,098 |
|
|
Separate Account Liabilities
|
|
|
14,920,584 |
|
|
|
14,920,584 |
|
|
|
16,230,264 |
|
|
|
16,230,264 |
|
11. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED
INSTRUMENTS
Adoption of Statement of Financial Accounting Standards
No. 133
The Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities as amended,
on January 1, 2001. The adoption of this statement did not
have a material impact on the results of operations of the
Company.
Accounting for Derivatives and Hedging Activities
Derivatives are financial instruments whose values are derived
from interest rates, foreign exchange rates, financial indices,
or the value of securities or commodities. Derivative financial
instruments used by the Company include swaps, futures, forwards
and option contracts and may be exchange-traded or contracted in
the over-the-counter market. Derivatives may be held for trading
purposes or held for purposes other than trading. All of the
Companys derivatives are held for purposes other than
trading.
Derivatives held for purposes other than trading are used to
seek to reduce exposure to interest rates and foreign currency
risks associated with assets held or expected to be purchased or
sold, and liabilities incurred or expected to be incurred. Other than trading derivatives are also used to
manage the characteristics of the Companys asset/liability
mix, and to manage the interest rate and currency
characteristics of invested assets.
Derivatives held for purposes other than trading are recognized
on the Consolidated Statements of Financial Position at their
fair value. On the date the derivative contract is entered into,
the Company designates the derivative as either (1) a hedge
of the fair value of a recognized asset or liability or
unrecognized firm commitment (fair value hedge),
(2) a hedge of a forecasted transaction or the variability
of cash flows to be received or paid related to a recognized
asset or liability (cash flow hedge), (3) a
foreign currency or cash flow hedge (foreign
currency hedge), (4) a hedge of a net investment in a
foreign operation, or (5) a derivative that does not
qualify for hedge accounting. As of December 31, 2001, none
of the Companys derivatives qualify for hedge accounting
treatment.
If a derivative does not qualify for hedge accounting, it is
recorded at fair value in Other long-term
investments or Other liabilities in the
Consolidated Statements of Financial Position, and changes in
fair value are included in earnings without considering changes
in fair value of the hedged assets or liabilities. See
Types of Derivative Instruments for further
discussion of the classification of derivative activity in
current earnings.
Types of Derivative Instruments
Interest Rate Swaps
The Company uses interest rate swaps to reduce market risk from
changes in interest rates and to manage interest rate exposures
arising from mismatches between assets and liabilities. Under
interest rate swaps, the Company agrees with other parties to
exchange, at specified intervals, the difference between
fixed-rate and floating-rate interest amounts calculated by
reference to an agreed notional principal amount. Generally, no
cash is exchanged at the outset of the contract and no principal
payments are made by either party. Cash is paid or received
based on the terms of the swap. These transactions are entered
into pursuant to master agreements that provide for a single net
payment to be made by one counterparty at each due date. The
fair value of swap agreements is estimated based on proprietary
pricing models or market quotes.
If the criteria for hedge accounting are not met, the swap
agreements are accounted for at fair value with changes in fair
value reported in Realized investment losses, net in
the Consolidated Statement of Operations. During the period that
interest rate swaps are outstanding, net receipts or payments
are include in Net investment income in the
Consolidated Statement of Operations.
Futures and Options
The Company uses exchange-traded Treasury futures and options to
reduce market risk from changes in interest rates, and to manage
the duration of assets and the duration of liabilities supported
by those assets. In exchange-traded futures transactions, the
Company agrees to purchase or sell a specified number of
contracts, the value of which are determined by the value of
designated classes of Treasury securities, and to post variation
margin on a daily basis in an amount equal to the difference in
the daily market values of those contracts. The Company enters
into exchange-traded futures and options with regulated futures
commissions merchants who are members of a trading exchange. The
fair value of futures and options is based on market quotes.
Treasury futures move substantially in value as interest rates
change and can be used to either modify or hedge existing
interest rate risk. This strategy protects against the risk that
cash flow requirements may necessitate liquidation of
investments at unfavorable prices resulting from increases in
interest rates. This strategy can be a more cost effective way
of temporarily reducing the Companys exposure to a market
decline than selling fixed income securities and purchasing a
similar portfolio when such a decline is believed to be over.
If futures meet hedge accounting criteria, changes in their fair
value are deferred and recognized as an adjustment to the
carrying value of the hedged item. Deferred gains or losses from
the hedges for interest-bearing financial instruments are
amortized as a yield adjustment over the remaining lives of the
hedged item. Futures that do not qualify as hedges are carried
at fair value with changes in value reported in Realized
investment losses, net.
When the Company anticipates a significant decline in the stock
market which will correspondingly affect its diversified
portfolio, it may purchase put index options where the basket of
securities in the index is appropriate to provide a hedge
against a decrease in the value of the equity portfolio or a
portion thereof. This strategy effects an orderly sale of hedged
securities. When the Company has large cash flows which it has
allocated for investment in equity securities, it may purchase
call index options as a temporary hedge against an increase in
the price of the securities it intends to purchase. This hedge
permits such investment transactions to be executed with the
least possible adverse market impact.
Option premium paid or received is reported as an asset or
liability and amortized into income over the life of the option.
If options meet the criteria for hedge accounting, changes in
their fair value are deferred and recognized as an adjustment to
the hedged item. Deferred gains or losses from the hedges for
interest-bearing financial instruments are recognized as an
adjustment to interest income or expense of the hedged item. If
the options do not meet the criteria for hedge accounting, they
are fair valued, with changes in fair value reported in current
period earnings.
Currency Derivatives
The Company uses currency swaps to reduce market risk from
changes in currency values of investments denominated in foreign
currencies that the Company either holds or intends to acquire
and to manage the currency exposures arising from mismatches
between such foreign currencies and the US Dollar.
Under currency swaps, the Company agrees with other parties to
exchange, at specified intervals, the difference between one
currency and another at a forward exchange rate and calculated
by reference to an agreed principal amount. Generally, the
principal amount of each currency is exchanged at the beginning
and termination of the currency swap by each party. These
transactions are entered into pursuant to master agreements that
provide for a single net payment to be made by one counterparty
for payments made in the same currency at each due date.
If currency swaps are effective as hedges of foreign currency
translation and transaction exposures, gains or losses are
recorded in a manner similar to the hedged item. If currency
swaps do not meet hedge accounting criteria, gains or losses
from those derivatives are recognized in Realized
investment (losses) gains, net.
The table below summarizes the Companys outstanding
positions by derivative instrument types as of December 31,
2001 and 2000. All amounts presented have been classified as
other than trading based on managements intent at the time
of contract and throughout the life of the contract.
Other than Trading Derivatives
December 31, 2001 and 2000
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
2000 |
|
|
|
|
|
|
|
|
|
Estimated |
|
Carrying |
|
|
|
Estimated |
|
Carrying |
|
|
Notional |
|
Fair Value |
|
Value |
|
Notional |
|
Fair Value |
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Hedge Accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swap Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
$ |
9,470 |
|
|
$ |
638 |
|
|
$ |
638 |
|
|
$ |
9,470 |
|
|
$ |
327 |
|
|
$ |
327 |
|
|
Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
24,785 |
|
|
|
3,858 |
|
|
|
3,858 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future Contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Treasury Futures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
76,800 |
|
|
|
394 |
|
|
|
394 |
|
|
|
139,800 |
|
|
|
3,530 |
|
|
|
3,530 |
|
|
Liability
|
|
|
64,500 |
|
|
|
238 |
|
|
|
238 |
|
|
|
61,900 |
|
|
|
1,067 |
|
|
|
1,067 |
|
|
|
|
|
Hedge Accounting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Swap Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,326 |
|
|
|
1,633 |
|
|
|
2,155 |
|
|
Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk
The current credit exposure of the Companys derivative
contracts is limited to the fair value at the reporting date.
Credit risk is managed by entering into transactions with
creditworthy counterparties and obtaining collateral where
appropriate and customary. The Company also attempts to minimize
its exposure to credit risk through the use of various credit
monitoring techniques. All of the net credit exposure for the
Company from derivative contracts are with investment grade
counterparties. As of December 31, 2001, 86% of notional
consisted of interest rate derivatives, and 14% of notional
consisted of foreign currency derivatives.
12. CONTINGENCIES AND LITIGATION
Prudential and the Company are subject to legal and regulatory
actions in the ordinary course of their businesses, including
class actions. Pending legal and regulatory actions include
proceedings relating to aspects of the businesses and operations
that are specific to the Company and Prudential and that are
typical of the businesses in which the Company and Prudential
operate. Some of these proceedings have been brought on behalf
of various alleged classes of complainants. In certain of these
matters, the plaintiffs are seeking large and/or indeterminate
amounts, including punitive or exemplary damages.
Beginning in 1995, regulatory authorities and customers brought
significant regulatory actions and civil litigation against the
Company and Prudential involving individual life insurance sales
practices. In 1996, Prudential, on behalf of itself and many of
its life insurance subsidiaries including the Company entered
into settlement agreements with relevant insurance regulatory
authorities and plaintiffs in the principal life insurance sales
practices class action lawsuit covering policyholders of
individual permanent life insurance policies issued in the
United States from 1982 to 1995. Pursuant to the settlements,
the companies agreed to various changes to their sales and
business practices controls, to a series of fines, and to
provide specific forms of relief to eligible class members.
Virtually all claims by class members filed in connection with
the settlements have been resolved and virtually all aspects of
the remediation program have been satisfied. While the approval
of the class action settlement is now final, Prudential and the
Company remain subject to oversight and review by insurance
regulators and other regulatory authorities with respect to its
sales practices and the conduct of the remediation program. The
U.S. District Court has also retained jurisdiction as to
all matters relating to the administration, consummation,
enforcement and interpretation of the settlements.
As of December 31, 2001, Prudential and/or the Company
remained a party to approximately 44 individual sales
practices actions filed by policyholders who opted
out of the class action settlement relating to permanent
life insurance policies issued in the United States between 1982
and 1995. In addition, there were 19 sales practices actions
pending that were filed by policyholders who were members of the
class and who failed to opt out of the class action
settlement. Prudential and the Company believe that those
actions are governed by the class settlement release and expects
them to be enjoined and/or dismissed. Additional suits may be
filed by class members who opted out of the class
settlements or who failed to opt out but
nevertheless seek to proceed against Prudential and/or the
Company. A number of the plaintiffs in these cases seek large
and/or indeterminate amounts, including punitive or exemplary
damages. Some of these actions are brought on behalf of multiple
plaintiffs. It is possible that substantial punitive damages
might be awarded in any of these actions and particularly in an
action involving multiple plaintiffs.
Prudential has indemnified the Company for any liabilities
incurred in connection with sales practices litigation covering
policyholders of individual permanent life insurance policies
issued in the United States from 1982 to 1995.
The Companys 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
Companys financial position.
13. DIVIDENDS
The Company is subject to Arizona law which limits the amount of
dividends that insurance companies can pay to stockholders. The
maximum dividend which may be paid in any twelve month period
without notification or approval is limited to the lesser of 10%
of statutory surplus as of December 31 of the preceding
year or the net gain from operations of the preceding calendar
year. Cash dividends may only be paid out of surplus derived
from realized net profits. Based on these limitations, the
Company would not be permitted a dividend distribution until
December 29, 2002.
During 2001, the Company received approval from the Arizona
Department of Insurance to pay an extraordinary dividend to
Prudential of $108 million.
14. RELATED PARTY TRANSACTIONS
The Company has extensive transactions and relationships with
Prudential and other affiliates. It is possible that the terms
of these transactions are not the same as those that would
result from transactions among wholly unrelated parties.
Expense Charges and Allocations
All of the Companys expenses are allocations or charges
from Prudential or other affiliates. These expenses can be
grouped into the following categories: general and
administrative expenses, retail distribution expenses and asset
management fees.
The Companys general and administrative expenses are
charged to the Company using allocation methodologies based on
business processes. Management believes that the methodology is
reasonable and reflects costs incurred by Prudential to process
transactions on behalf of the Company. Prudential and the
Company operate under service and lease agreements whereby
services of officers and employees (except for those agents
employed directly by the Company in Taiwan), supplies, use of
equipment and office space are provided by Prudential. The
Company is allocated estimated distribution expenses from
Prudentials retail agency network for both its domestic
life and annuity products. The Company has capitalized the
majority of these distribution expenses as deferred policy
acquisition costs. Beginning April 1, 2000, Prudential and
the Company agreed to revise the estimate of allocated
distribution expenses to reflect a market based pricing
arrangement.
In accordance with a profit sharing agreement with Prudential
that was in effect through December 31, 2000, the Company
received fee income from policyholder account balances invested
in the Prudential Series Funds (PSF). These revenues
were recorded as Asset management fees in the
Consolidated Statements of Operations and Comprehensive Income.
The Company was charged an asset management fee by Prudential
Global Asset Management (PGAM) and Jennison
Associates LLC (Jennison) for managing the PSF
portfolio. These fees are a component of general,
administrative and other expenses.
On September 29, 2000, the Board of Directors for the
Prudential Series Fund, Inc. (PSFI) adopted
resolutions to terminate the existing management agreement
between PSFI and Prudential, and has appointed another
subsidiary of Prudential as the fund manager for the PSF. The
change was approved by the shareholders of PSF during early 2001
and effective January 1, 2001. The Company no longer
receives fees associated with the PSF. In addition, the Company
will no longer incur the asset management expense from PGAM and
Jennison associated with the PSF.
Corporate Owned Life Insurance
The Company has sold three Corporate Owned Life Insurance
(COLI) policies to Prudential. The cash surrender
value included in Separate Accounts was $647.2 million and
$685.9 million at December 31, 2001 and
December 31, 2000, respectively. The fees received related
to the COLI policies were $7.0 million and
$9.6 million for the years ending December 31, 2001
and 2000.
Reinsurance
The Company currently has four reinsurance agreements in place
with Prudential and affiliates. Specifically, the Company has a
reinsurance Group Annuity Contract, whereby the reinsurer, in
consideration for a single premium payment by the Company,
provides reinsurance equal to 100% of all payments due under the
contract. In addition, there are two yearly renewable term
agreements in which the Company may offer and the reinsurer may
accept reinsurance on any life in excess of the Companys
maximum limit of retention. The Company is not relieved of its
primary obligation to the policyholder as a result of these
reinsurance transactions. These agreements had no material
effect on net income for the periods ended December 31,
2001 or 2000. The fourth agreement, which is new for 2001, is
described in the following paragraphs.
On January 31, 2001, the Company transferred all of its
assets and liabilities associated with the Companys Taiwan
branch including Taiwans insurance book of business to an
affiliated Company, Prudential Life Insurance Company of Taiwan
Inc. (Prudential of Taiwan), a wholly owned
subsidiary of the Holding Company.
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 Companys Taiwan branch as of the date of
transfer. In July 2001, the Company dividended its interest in
Prudential of Taiwan to Prudential.
Premiums and benefits ceded for the period ending
December 31, 2001 from the Taiwan coinsurance agreement
were $82.4 million and $12.9 million, respectively.
Debt Agreements
In July 1998, the Company established a revolving line of
credit facility of up to $500 million with Prudential
Funding LLC, a wholly owned subsidiary of Prudential. There is
no outstanding debt relating to this credit facility as of
December 31, 2001 or December 31, 2000.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Pruco Life Insurance Company
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of Pruco Life Insurance Company (a
wholly-owned subsidiary of The Prudential Insurance Company of
America) and its subsidiary at December 31, 2001 and 2000,
and the results of their operations and their cash flows for
each of the three years in the period ended December 31,
2001, in conformity with accounting principles generally
accepted in the United States of America. These financial
statements are the responsibility of the Companys
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 21, 2002
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Financial Position
(Unaudited)
As of June 30, 2002 and December 31,
2001 (In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
|
|
2002 |
|
2001 |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
|
|
Available for sale, at fair value (amortized
cost, 2002: $4,304,687; 2001: $3,935,472)
|
|
$ |
4,414,108 |
|
|
$ |
4,024,893 |
|
Equity securities available for sale,
at fair value (cost, 2002: $5,138; 2001: $173)
|
|
|
5,331 |
|
|
|
375 |
|
Commercial loans on real estate
|
|
|
7,582 |
|
|
|
8,190 |
|
Policy loans
|
|
|
878,540 |
|
|
|
874,065 |
|
Short-term investments
|
|
|
125,059 |
|
|
|
215,610 |
|
Other long-term investments
|
|
|
87,594 |
|
|
|
84,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
5,518,214 |
|
|
|
5,207,475 |
|
Cash and cash equivalents
|
|
|
525,136 |
|
|
|
374,185 |
|
Deferred policy acquisition costs
|
|
|
1,210,029 |
|
|
|
1,159,830 |
|
Accrued investment income
|
|
|
80,960 |
|
|
|
77,433 |
|
Reinsurance recoverable
|
|
|
381,512 |
|
|
|
300,697 |
|
Receivables from affiliates
|
|
|
45,054 |
|
|
|
33,074 |
|
Other assets
|
|
|
39,140 |
|
|
|
20,134 |
|
Separate Account assets
|
|
|
13,723,881 |
|
|
|
14,920,584 |
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$ |
21,523,926 |
|
|
$ |
22,093,412 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Policyholders account balances
|
|
$ |
4,363,024 |
|
|
$ |
3,947,690 |
|
Future policy benefits and other policyholder
liabilities
|
|
|
851,693 |
|
|
|
808,230 |
|
Cash collateral for loaned securities
|
|
|
220,278 |
|
|
|
190,022 |
|
Securities sold under agreement to repurchase
|
|
|
268,055 |
|
|
|
80,715 |
|
Income taxes payable
|
|
|
273,526 |
|
|
|
266,096 |
|
Other liabilities
|
|
|
157,782 |
|
|
|
228,596 |
|
Separate Account liabilities
|
|
|
13,723,881 |
|
|
|
14,920,584 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
19,858,239 |
|
|
|
20,441,933 |
|
|
|
|
|
|
|
|
|
|
Contingencies (See Footnote 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Common stock, $10 par value;
|
|
|
|
|
|
|
|
|
|
|
1,000,000 shares, authorized; 250,000 shares,
issued and outstanding
|
|
|
2,500 |
|
|
|
2,500 |
|
Paid-in-capital
|
|
|
466,748 |
|
|
|
466,748 |
|
Retained earnings
|
|
|
1,149,867 |
|
|
|
1,147,665 |
|
|
|
|
|
Accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
Net unrealized investment gains
|
|
|
46,500 |
|
|
|
34,718 |
|
|
|
Foreign currency translation adjustments
|
|
|
72 |
|
|
|
(152) |
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
46,572 |
|
|
|
34,566 |
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,665,687 |
|
|
|
1,651,479 |
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY
|
|
$ |
21,523,926 |
|
|
$ |
22,093,412 |
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Operations and
Comprehensive Income (Unaudited)
Three and Six Months Ended June 30, 2002
and 2001 (In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
Three months ended |
|
|
June 30, |
|
June 30, |
|
|
|
|
|
|
|
2002 |
|
2001 |
|
2002 |
|
2001 |
|
|
|
|
|
|
|
|
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$ |
41,266 |
|
|
$ |
47,354 |
|
|
$ |
22,968 |
|
|
$ |
23,936 |
|
Policy charges and fee income
|
|
|
258,748 |
|
|
|
240,330 |
|
|
|
131,715 |
|
|
|
121,226 |
|
Net investment income
|
|
|
163,796 |
|
|
|
174,803 |
|
|
|
82,325 |
|
|
|
84,493 |
|
Realized investment (losses) gains, net
|
|
|
(32,306 |
) |
|
|
307 |
|
|
|
(26,080 |
) |
|
|
(10,570 |
) |
Asset management fees
|
|
|
5,132 |
|
|
|
3,869 |
|
|
|
2,880 |
|
|
|
1,716 |
|
Other income
|
|
|
7,633 |
|
|
|
740 |
|
|
|
6,425 |
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
444,269 |
|
|
|
467,403 |
|
|
|
220,233 |
|
|
|
220,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders benefits
|
|
|
116,929 |
|
|
|
115,490 |
|
|
|
59,116 |
|
|
|
58,585 |
|
Interest credited to policyholders account
balances
|
|
|
96,672 |
|
|
|
98,033 |
|
|
|
49,486 |
|
|
|
49,225 |
|
General, administrative and other expenses
|
|
|
231,577 |
|
|
|
201,061 |
|
|
|
137,221 |
|
|
|
97,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
445,178 |
|
|
|
414,584 |
|
|
|
245,823 |
|
|
|
205,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income from operations before income taxes
|
|
|
(909 |
) |
|
|
52,819 |
|
|
|
(25,590 |
) |
|
|
15,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) provision
|
|
|
(3,116 |
) |
|
|
11,286 |
|
|
|
(8,326 |
) |
|
|
2,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
|
2,207 |
|
|
|
41,533 |
|
|
|
(17,264 |
) |
|
|
12,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on securities, net
of reclassification adjustment
|
|
|
11,782 |
|
|
|
9,396 |
|
|
|
30,928 |
|
|
|
(7,215 |
) |
Foreign currency translation adjustments
|
|
|
224 |
|
|
|
3,320 |
|
|
|
219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
12,006 |
|
|
|
12,716 |
|
|
|
31,147 |
|
|
|
(7,215 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL COMPREHENSIVE INCOME
|
|
$ |
14,213 |
|
|
$ |
54,249 |
|
|
$ |
13,883 |
|
|
$ |
5,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Changes in
Stockholders Equity (Unaudited)
Periods Ended June 30, 2002 and
December 31, 2001 and 2000 (In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
Other |
|
Total |
|
|
Common |
|
Paid-in- |
|
Retained |
|
Comprehensive |
|
Stockholders |
|
|
Stock |
|
Capital |
|
Earnings |
|
Income (Loss) |
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2000 |
|
|
$2,500 |
|
|
|
$439,582 |
|
|
|
$1,258,428 |
|
|
|
$(30,691 |
) |
|
|
$1,669,819 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
103,496 |
|
|
|
|
|
|
|
103,496 |
|
Contribution from Parent
|
|
|
|
|
|
|
27,166 |
|
|
|
|
|
|
|
|
|
|
|
27,166 |
|
Change in foreign currency translation
adjustments, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(993 |
) |
|
|
(993 |
) |
Change in net unrealized investment losses, net
of reclassification adjustment and taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,094 |
|
|
|
33,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2000
|
|
|
2,500 |
|
|
|
466,748 |
|
|
|
1,361,924 |
|
|
|
1,410 |
|
|
|
1,832,582 |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
67,582 |
|
|
|
|
|
|
|
67,582 |
|
Dividends to Parent
|
|
|
|
|
|
|
|
|
|
|
(153,816 |
) |
|
|
|
|
|
|
(153,816 |
) |
Policy credits to eligible Policyholders
|
|
|
|
|
|
|
|
|
|
|
(128,025 |
) |
|
|
|
|
|
|
(128,025 |
) |
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
|
|
|
|
|
|
|
|
|
|
|
2,207 |
|
|
|
|
|
|
|
2,207 |
|
Policy credits to eligible Policyholders
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
|
|
|
|
(5 |
) |
Change in foreign currency translation
adjustments, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
224 |
|
|
|
224 |
|
Change in net unrealized investment losses, net
of reclassification adjustment and taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,782 |
|
|
|
11,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2002
|
|
|
$2,500 |
|
|
|
$466,748 |
|
|
|
$1,149,867 |
|
|
|
$46,572 |
|
|
|
$1,665,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
Pruco Life Insurance Company and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30, 2002 and 2001
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 |
|
2001 |
|
|
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES: |
|
|
|
|
|
|
|
|
Net income
|
|
$ |
2,207 |
|
|
$ |
41,533 |
|
|
|
|
|
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Policy charges and fee income
|
|
|
(34,645 |
) |
|
|
(39,033 |
) |
|
Interest credited to policyholders account
balances
|
|
|
96,672 |
|
|
|
98,033 |
|
|
Realized investment (gains) losses, net
|
|
|
32,306 |
|
|
|
(307 |
) |
|
Amortization and other non-cash items
|
|
|
(5,284 |
) |
|
|
(12,227 |
) |
|
|
|
|
|
Change in:
|
|
|
|
|
|
|
|
|
|
|
Future policy benefits and other
policyholders liabilities
|
|
|
43,463 |
|
|
|
33,903 |
|
|
|
Accrued investment income
|
|
|
(3,527 |
) |
|
|
5,434 |
|
|
|
Receivables from affiliates
|
|
|
(11,980 |
) |
|
|
24,651 |
|
|
|
Policy loans
|
|
|
(4,475 |
) |
|
|
(25,851 |
) |
|
|
Deferred policy acquisition costs
|
|
|
(50,199 |
) |
|
|
19,863 |
|
|
|
Income taxes payable/receivable
|
|
|
7,430 |
|
|
|
38,364 |
|
|
|
Other, net
|
|
|
(54,661 |
) |
|
|
(54,544 |
) |
|
|
|
|
|
|
|
|
|
Cash Flows From Operating Activities
|
|
|
17,307 |
|
|
|
129,819 |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS USED IN INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale/maturity of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
932,838 |
|
|
|
1,767,648 |
|
|
|
Equity securities
|
|
|
|
|
|
|
274 |
|
|
|
Commercial loans on real estate
|
|
|
608 |
|
|
|
536 |
|
|
|
|
|
|
Payments for the purchase of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale
|
|
|
(1,332,737 |
) |
|
|
(1,980,148 |
) |
|
|
Equity securities
|
|
|
(4 |
) |
|
|
(176 |
) |
|
Cash collateral for loaned securities, net
|
|
|
30,256 |
|
|
|
44,630 |
|
|
Securities sold under agreement to repurchase, net
|
|
|
187,340 |
|
|
|
(39,988 |
) |
|
Other long-term investments
|
|
|
(11,787 |
) |
|
|
(2,717 |
) |
|
Short-term investments, net
|
|
|
90,536 |
|
|
|
103,855 |
|
|
|
|
|
|
|
|
|
|
Cash Flows Used In Investing
Activities
|
|
|
(102,950 |
) |
|
|
(106,086 |
) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholders account balances:
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
936,679 |
|
|
|
731,505 |
|
|
|
Withdrawals
|
|
|
(584,106 |
) |
|
|
(647,426 |
) |
|
Cash payments to eligible policyholders
|
|
|
(115,979 |
) |
|
|
|
|
|
Cash provided to affiliate
|
|
|
|
|
|
|
(65,636 |
) |
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
236,594 |
|
|
|
18,443 |
|
|
|
|
|
|
|
|
|
|
|
Net increase in Cash and cash equivalents
|
|
|
150,951 |
|
|
|
42,176 |
|
|
Cash and cash equivalents, beginning of year
|
|
|
374,185 |
|
|
|
453,071 |
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF
PERIOD
|
|
$ |
525,136 |
|
|
$ |
495,247 |
|
|
|
|
|
|
|
|
|
|
Notes to Consolidated Financial Statements
Pruco Life Insurance Company and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements have
been prepared pursuant to the rules and regulations for
reporting on Form 10-Q on the basis of accounting
principles generally accepted in the United States. These
interim financial statements are unaudited but reflect all
adjustments which, in the opinion of management, are necessary
to provide a fair presentation of the consolidated results of
operations and financial condition of the Pruco Life Insurance
Company (the Company), for the interim periods
presented. The Company is a wholly owned subsidiary of the
Prudential Life Insurance Company of America
(Prudential), which in turn is a wholly owned
subsidiary of Prudential Financial, Inc. 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 Companys 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
Companys Annual Report on Form 10-K for the year
ended December 31, 2001.
2. CONTINGENCIES AND LITIGATION
Contingencies
On an ongoing basis, our internal supervisory and control
functions review the quality of our sales, marketing and other
customer interface procedures and practices and may recommend
modifications or enhancements. In certain cases, if appropriate,
we may offer customers remediation and may incur charges,
including the cost of such remediation, administrative costs and
regulatory fines.
It is possible that the results of operations or the cash flow
of the Company in a particular quarterly or annual period could
be materially affected as a result of payments in connection
with the matters discussed above depending, in part, upon the
results of operations or cash flow for such period. Management
believes, however, that the ultimate payments in connection with
these matters should not have a material adverse effect on the
Companys financial position.
Litigation
Prudential and the Company are subject to legal and regulatory
actions in the ordinary course of their businesses, including
class actions. Pending legal and regulatory actions include
proceedings relating to aspects of the businesses and operations
that are specific to the Company and Prudential and that are
typical of the businesses in which the Company and Prudential
operate. Some of these proceedings have been brought on behalf
of various alleged classes of complaintants. In certain of these
matters, the plaintiffs are seeking large and/or indeterminate
amounts, including punitive or exemplary damages.
Beginning in 1995, regulatory authorities and customers brought
significant regulatory actions and civil litigation against the
Company and Prudential involving individual life insurance sales
practices. In 1996, Prudential, on behalf of itself and many of
its life insurance subsidiaries including the Company entered
into settlement agreements with relevant insurance regulatory
authorities and plaintiffs in the principal life insurance sales
practices class action lawsuit covering policyholders of individual permanent life
insurance policies issued in the United States from 1982 to
1995. Pursuant to the settlements, the companies agreed to
various changes to their sales and business practices controls,
to a series of fines, and to provide specific forms of relief to
eligible class members. Virtually all claims by class members
filed in connection with the settlements have been resolved and
virtually all aspects of the remediation program have been
satisfied. While the approval of the class action settlement is
now final, Prudential and the Company remain subject to
oversight and review by insurance regulators and other
regulatory authorities with respect to its sales practices and
the conduct of the remediation program. The U.S. District Court
has also retained jurisdiction as to all matters relating to the
administration, consummation, enforcement and interpretation of
the settlements.
As of June 30, 2002, Prudential and/or the Company remained
a party to approximately 40 individual sales practices actions
filed by policyholders who opted out of the class
action settlement relating to permanent life insurance policies
issued in the United States between 1982 and 1995. In addition,
there were 17 sales practices actions pending that were filed by
policyholders who were members of the class and who failed to
opt out of the class action settlement. Prudential
and the Company believe that those actions are governed by the
class settlement release and expects them to be enjoined and/or
dismissed. Additional suits may be filed by class members who
opted out of the class settlements or who failed to
opt out but nevertheless seek to proceed against
Prudential and/or the Company. A number of the plaintiffs in
these cases seek large and/or indeterminate amounts, including
punitive or exemplary damages. Some of these actions are brought
on behalf of multiple plaintiffs. It is possible that
substantial punitive damages might be awarded in any of these
actions and particularly in an action involving multiple
plaintiffs.
Prudential has indemnified the Company for any liabilities
incurred in connection with sales practices litigation covering
policyholders of individual permanent life insurance policies
issued in the United States from 1982 to 1995.
The Companys litigation is subject to many uncertainties,
and given the complexity and scope, the outcomes cannot be
predicted. It is possible that the results of operations or the
cash flow of the Company in a particular quarterly or annual
period could be materially effected by an ultimate unfavorable
resolution of pending litigation and regulatory matters.
Management believes, however, that the ultimate outcome of all
pending litigation and regulatory matters should not have a
material adverse effect on the Companys financial position.
3. RELATED PARTY TRANSACTIONS
The Company has extensive transactions and relationships with
Prudential and other affiliates. It is possible that the terms
of these transactions are not the same as those that would
result from transactions among wholly unrelated parties.
Expense Charges and Allocations
All of the Companys expenses are allocations or charges
from Prudential or other affiliates. These expenses can be
grouped into the following categories: general and
administrative expenses, retail distribution expenses and asset
management fees.
The Companys general and administrative expenses are
charged to the Company using allocation methodologies based on
business processes. Management believes that the methodology is
reasonable and reflects costs incurred by Prudential to process
transactions on behalf of the Company. Prudential and the
Company operate under service and lease agreements whereby
services of officers and employees, supplies, use of equipment
and office space are provided by Prudential.
The Company is allocated estimated distribution expenses from
Prudentials retail 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.
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 were recorded as Asset management
fees in the Consolidated Statements of Operations and
Comprehensive Income.
Corporate Owned Life Insurance
The Company has sold three Corporate Owned Life Insurance
(COLI) policies to Prudential. The cash surrender
value included in Separate Accounts was $626.7 million and
$647.2 million at June 30, 2002 and December 31, 2001,
respectively. The fees received related to the COLI policies
were $4.4 million for both the periods ending June 30, 2002
and 2001.
Reinsurance
The Company currently has four reinsurance agreements in place
with Prudential and affiliates. Specifically, the Company has a
reinsurance Group Annuity Contract, whereby the reinsurer, in
consideration for a single premium payment by the Company,
provides reinsurance equal to 100% of all payments due under the
contract. In addition there are two yearly renewable term
agreements in which the Company may offer and the reinsurer may
accept reinsurance on any life in excess of the Companys
maximum limit of retention. The Company is not relieved of its
primary obligation to the policyholder as a result of these
reinsurance transactions. These agreements had no material
effect on net income for the periods ended June 30, 2002 or
2001. The fourth agreement is described below.
On January 31, 2001, the Company transferred all of its
assets and liabilities associated with the Companys Taiwan
branch including Taiwans 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 Companys Taiwan branch as of the date of
transfer. In July 2001, the Company dividended its interest
in Prudential of Taiwan to Prudential.
Premiums ceded for the periods ending June 30, 2002 and
2001 from the Taiwan coinsurance agreement were $37.6 million
and $41.3 million, respectively. Benefits ceded for the periods
ending June 30, 2002 and 2001 from the Taiwan coinsurance
agreement were $7.1 million and $6.0 million, respectively.
Included in the reinsurance recoverable balances were affiliated
reinsurance recoverables of $322.6 million and $285.8 million at
June 30, 2002 and December 31, 2001, respectively. Of these
affiliated amounts, the reinsurance recoverable related to the
Taiwan coinsurance agreement was $297.5 million and $ 260.6
million at June 30, 2002 and December 31, 2001,
respectively.
Debt Agreements
In July 1998, the Company established a revolving line of
credit facility of up to $500 million with Prudential Funding
LLC, a wholly owned subsidiary of Prudential. There was no
outstanding debt relating to this credit facility as of
June 30, 2002 or December 31, 2001.
EXPERTS
The consolidated financial statements of Pruco Life and its
subsidiary as of December 31, 2001 and 2000 and for each of
the three years in the period ended December 31, 2001 have
been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants given on the
authority of said firm as experts in auditing and accounting.
PricewaterhouseCoopers LLPs principal business address is
1177 Avenue of the Americas, New York, New York 10036.
INDEMNIFICATION
Pruco Life, in conjunction with certain affiliates, maintains
insurance on behalf of any person who is or was a trustee,
director, officer, employee, or agent of Pruco Life, or who is
or was serving at the request of Pruco Life as a trustee,
director, officer, employee or agent of such other affiliated
trust or corporation, against any liability asserted against and
incurred by him or her arising out of his or her position with
such trust or corporation.
Arizona, being the state of organization of Pruco Life, permits
entities organized under its jurisdiction to indemnify directors
and officers with certain limitations. The relevant provisions
of Arizona law permitting indemnification can be found in
Section 10-850 et. seq. of the Arizona Statutes Annotated.
The text of Pruco Lifes By-law, Article VIII, which
relates to indemnification of officers and directors, is
incorporated by reference to Exhibit 3(ii) to its
form 10-Q filed August 15, 1997.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of Pruco Life pursuant to the foregoing
provisions or otherwise, Pruco Life has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by Pruco Life of expenses incurred or paid by a director,
officer or controlling person of Pruco Life in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, Pruco Life will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
Market-Value
MARKET-VALUE ADJUSTMENT FORMULA
With respect to residents of states, other than Pennsylvania,
in which Strategic Partners Horizon Annuity is being offered.
The formula under which Pruco Life calculates the market value
adjustment applicable to a full or partial surrender,
annuitization, or settlement under Strategic Partners Horizon
Annuity is set forth below. The market value adjustment is
expressed as a multiplier factor. That is, the Contract Value
after the market value adjustment (MVA), but before
any surrender charge, is as follows: Contract Value (after MVA)
= Contract Value (before MVA) × (1 + MVA). The MVA itself
is calculated as follows:
MVA = [ |
( |
1 + I 1 + J + .0025 |
)N/12 |
] -1 |
|
|
|
|
|
|
|
|
|
|
|
where:
|
|
I
|
|
=
|
|
the guaranteed credited interest rate (annual
effective) for the given contract at the time of withdrawal or
annuitization or settlement.
|
|
|
J
|
|
=
|
|
the current credited interest rate offered on new
money at the time of withdrawal or annuitization or settlement
for a guarantee period of equal length to the number of whole
years remaining in the Contracts current guarantee period
plus one year.
|
|
|
N
|
|
=
|
|
equals the remaining number of months in the
contracts current guarantee period (rounded up) at the
time of withdrawal or annuitization or settlement.
|
We use the same MVA formula with respect to contracts issued in
Pennsylvania, except that J in the formula above
uses an interpolated rate as the current credited interest rate.
Specifically, J is the interpolated current credited
interest rate offered on new money at the time of withdrawal,
annuitization, or settlement. The interpolated value is
calculated using the following formula:
m/365 × (n + 1) year rate + (365 - m)/365 × n year
rate,
where n equals the number of whole years remaining
in the Contracts current guarantee period, and
m equals the number of days remaining in year
n of the current guarantee period.
MARKET VALUE ADJUSTMENT EXAMPLE
(All States Except Pennsylvania)
The following will illustrate the application of the
Market-Value Adjustment. For simplicity, surrender charges are
ignored in these hypothetical examples.
Positive market value adjustment
|
|
|
Suppose a contract owner made an invested purchase payment of
$10,000 on July 1, 2000 and received a guaranteed interest
rate of 6% for 5 years. A request to surrender the contract
is made on May 1, 2002. At the time, the Contract Value has
accumulated to $11,127.11. The number of whole years remaining
in the guarantee period is 3. |
|
On May 1, 2002 the interest rate declared by Pruco Life for
a guarantee period of 4 years (the number of whole years
remaining plus 1) is 5%. |
The following computations would be made:
|
|
1) |
Calculate the Charge Free Amount. The Charge Free Amount is the
interest credited in the contract in the previous contract year.
This amount is $600.00. It is not subject to a Market Value
Adjustment. |
2) |
Subtract the Charge Free Amount from the Contract Value. The
result is the amount subject to a Market Value Adjustment (MVA). |
$11,127.11 − $600.00 = $10,527.11
|
|
3) |
Determine the Market Value Adjustment factor. |
|
|
|
|
|
|
|
N =
|
|
38
|
|
|
I =
|
|
6% (0.06)
|
|
|
J =
|
|
5% (0.05)
|
|
|
|
The MVA factor calculation would be:
[(1.06)/(1.05 + .0025)] to the 38/12 power
−1 = 0.02274 |
|
|
4) |
Multiply the amount subject to a Market Value Adjustment by the
factor calculated in Step 3. |
$10,527.11 × 0.02274 = $239.39
|
|
5) |
Add together the Market Value Adjustment and the amount subject
to the MVA. |
$10,527.11 + $239.39 = $10,766.50
|
|
6) |
Add back the Charge Free Amount to get the total Contract
Surrender Value. |
$10,766.50 + $600.00 = $11,366.50
The MVA may not always be positive. Here is an example where it
is negative.
|
|
|
Suppose a contract owner made an invested purchase payment of
$10,000 on July 1, 2000 and received a guaranteed interest
rate of 6% for 5 years. A request to surrender the contract
is made on May 1, 2002. At the time, the Contract Value has
accumulated to $11,127.11. The number of whole years remaining
in the guarantee period is 3. |
|
On May 1, 2002 the interest rate declared by Pruco Life for
a guarantee period of 4 years (the number of whole years
remaining plus 1) is 7%. |
The following computations would be made:
|
|
1) |
Calculate the Charge Free Amount. The Charge Free Amount is the
interest credited in the contract in the previous contract year.
This amount is $600.00. It is not subject to a Market Value
Adjustment. |
2) |
Subtract the Charge Free Amount from the Contract Value. The
result is the amount subject to a Market Value Adjustment (MVA). |
$11,127.11 − $600.00 = $10,527.11
|
|
3) |
Determine the Market Value Adjustment factor. |
|
|
|
|
|
|
|
N =
|
|
38
|
|
|
I =
|
|
6% (0.06)
|
|
|
J =
|
|
7% (0.07)
|
|
|
|
The MVA factor calculation would be: [(1.06)/(1.07+.0025)] to
the 38/12 power −1 = −0.03644 |
|
|
4) |
Multiply the amount subject to a Market Value Adjustment by the
factor calculated in Step 3. |
$10,527.11 × −0.03644 = -$383.61
|
|
5) |
Add together the Market Value Adjustment and the amount subject
to the MVA. |
$10,527.11 − $383.61 = $10,143.50
|
|
6) |
Add back the Charge Free Amount to get the total Contract
Surrender Value. |
$10,143.50 + $600.00 = $10,743.50
Market Value Adjustment Example
(Pennsylvania)
The following will illustrate the application of the
Market-Value Adjustment. For simplicity, surrender charges are
ignored in these hypothetical examples.
Positive market value adjustment
|
|
|
Suppose a contract owner made an invested purchase payment of
$10,000 on July 1, 2000 and received a guaranteed interest
rate of 6% for 5 years. A request to surrender the contract
is made on May 1, 2002. At the time, the Contract Value has
accumulated to $11,127.11. The number of whole years remaining
in the guarantee period is 3. |
|
On May 1, 2002 the interest rate declared by Pruco Life for
a guarantee period of 3 years (the number of whole years
remaining) is 4%, and for a guarantee period of 4 years
(the number of whole years remaining plus 1) is 5%.
|
The following computations would be made:
|
|
1) |
Calculate the Charge Free Amount. The Charge Free Amount is the
interest credited in the contract in the previous contract year.
This amount is $600.00. It is not subject to a Market Value
Adjustment. |
2) |
Subtract the Charge Free Amount from the Contract Value. The
result is the amount subject to a Market Value Adjustment (MVA). |
$11,127.11 − $600.00 = $10,527.11
|
|
3) |
Determine the Market Value Adjustment factor. |
|
|
|
|
|
|
|
N =
|
|
38
|
|
|
I =
|
|
6% (0.06)
|
|
|
J =
|
|
[(60/365) × 0.05] + [((365-60)/365) × 0.04]
= 0.0416
|
The MVA factor calculation would be:
[(1.06)/(1.0416 + .0025)] to the 38/12 power−1 =
0.04902
|
|
4) |
Multiply the amount subject to a Market Value Adjustment by the
factor calculated in Step 3. |
$10,527.11 × 0.04902 = $516.04
|
|
5) |
Add together the Market Value Adjustment and the amount subject
to the MVA. |
$10,527.11 + $ 516.04 = $11,043.15
|
|
6) |
Add back the Charge Free Amount to get the total Contract
Surrender Value. |
$11,043.15 + $600.00 = $11,643.15
The MVA may not always be positive. Here is an example where it
is negative.
|
|
|
Suppose a contract owner made an invested purchase payment of
$10,000 on July 1, 2000 and received a guaranteed interest
rate of 6% for 5 years. A request to surrender the contract
is made on May 1, 2002. At the time, the Contract Value has
accumulated to $11,127.11. The number of whole years remaining
in the guarantee period is 3. |
|
On May 1, 2002 the interest rate declared by Pruco Life for
a guarantee period of 3 years (the number of whole years
remaining) is 7%, and for a guarantee period of 4 years
(the number of whole years remaining plus 1) is 8%. |
The following computations would be made:
|
|
1) |
Calculate the Charge Free Amount. The Charge Free Amount is the
interest credited in the contract in the previous contract year.
This amount is $600.00. It is not subject to a Market Value
Adjustment. |
2) |
Subtract the Charge Free Amount from the Contract Value. The
result is the amount subject to a Market Value Adjustment (MVA). |
$11,127.11 − $600.00 = $10,527.11
|
|
3) |
Determine the Market Value Adjustment Factor. |
|
|
|
|
|
|
|
N =
|
|
38
|
|
|
I =
|
|
6% (0.06)
|
|
|
J =
|
|
[(60/365) × 0.08] + [((365 - 60)/365) × 0.07]
= 0.0716
|
The MVA Factor calculation would be:
[(1.06)/(1.0716 + .0025)] to the 38/12 power−1 =
-0.04098
|
|
4) |
Multiply the amount subject to a Market Value Adjustment by the
factor calculated in Step 3. |
$10,527.11 × −0.04098 = −$431.40
|
|
5) |
Add together the Market Value Adjustment and the amount subject
to the MVA. |
$10,527.11 − $431.40 = $10,095.71
|
|
6) |
Add back the Charge Free Amount to get the total Contract
Surrender Value. |
$10,095.71 + $600.00 = $10,695.71
IRA Disclosure Statement
________________________________________________________________________________
This statement is designed to help you understand the
requirements of federal tax law which apply to your individual
retirement annuity (IRA), your Roth IRA, your simplified
employee pension IRA (SEP) for employer contributions, your
Savings Incentive Match Plan for Employees (SIMPLE) IRA, or
to one you purchase for your spouse. You can obtain more
information regarding your IRA either from your sales
representative or from any district office of the Internal
Revenue Service. Those are federal tax law rules; state tax laws
may vary.
FREE LOOK PERIOD
The annuity contract offered by this prospectus gives you the
opportunity to return the contract for a full refund within
10 days (or whatever period is required by applicable state
law) after it is delivered. This is a more liberal provision
than is required in connection with IRAs. To exercise this
free-look provision, return the contract to the
representative who sold it to you or to the Prudential Annuity
Service Center at the address shown on the first page of this
prospectus.
ELIGIBILITY REQUIREMENTS
IRAs are intended for all persons with earned compensation
whether or not they are covered under other retirement programs.
Additionally, if you have a non-working spouse (and you file a
joint tax return), you may establish an IRA on behalf of your
non-working spouse. A working spouse may establish his or her
own IRA. A divorced spouse receiving taxable alimony (and no
other income) may also establish an IRA.
CONTRIBUTIONS AND DEDUCTIONS
Contributions to your IRA will be deductible if you are not an
active participant in an employer maintained
qualified retirement plan or you have Adjusted Gross
Income (as defined under Federal tax laws) which does not
exceed the applicable dollar limit. IRA (or SEP)
contributions must be made by no later than the due date for
filing your income tax return for that year, excluding
extensions (generally by April 15th). For a single
taxpayer, the applicable dollar limitation is $34,000 in 2002,
with the amount of IRA contribution which may be deducted
reduced proportionately for Adjusted Gross Income between
$34,000 $44,000. For married couples filing jointly,
the applicable dollar limitation is $54,000, with the amount of
IRA contribution which may be deducted reduced proportionately
for Adjusted Gross Income between $54,000-$64,000. There is no
deduction allowed for IRA contributions when Adjusted Gross
Income reaches $44,000 for individuals and $64,000 for married
couples filing jointly. Income limits are scheduled to increase
until 2006 for single taxpayers and 2007 for married taxpayers.
Contributions made by your employer to your SEP are excludable
from your gross income for tax purposes in the calendar year for
which the amount is contributed. Certain employees who
participate in a SEP will be entitled to elect to have their
employer make contributions to their SEP on their behalf or to
receive the contributions in cash. If the employee elects to
have contributions made on the employees behalf to the
SEP, those funds are not treated as current taxable income to
the employee. Elective deferrals under a SEP are limited to
$11,000 in 2002 with a permitted catch-up contribution of $1,000
for individuals age 50 and above. Contribution and catch-up
contribution limits are scheduled to increase through 2006 and
are indexed for inflation thereafter. Salary-reduction SEPs
(also called SARSEPs) are available only if at least
50% of the employees elect to have amounts contributed to the
SARSEP and if the employer has 25 or fewer employees at all
times during the preceding year. New SARSEPs may not be
established after 1996.
The IRA maximum annual contribution and your tax deduction is
limited to the lesser of: (1) the maximum amount allowed by
law, including catch-up contributions if applicable, or
(2) 100% of your earned compensation. Contributions in
excess of these limits may be subject to penalty. See below.
Under a SEP agreement, the maximum annual contribution which
your employer may make on your behalf to a SEP contract that is
excludable from your income is the lesser of 25% of your salary
or $40,000 in 2002. An employee who is a participant in a SEP agreement may make after-tax contributions to the SEP contract,
subject to the contribution limits applicable to IRAs in
general. Those employee contributions will be deductible subject
to the deductibility rules described above.
The maximum tax deductible annual contribution that a divorced
spouse with no other income may make to an IRA is the lesser of
(1) the maximum amount allowed by law, including catch-up
contributions if applicable or (2) 100% of taxable alimony.
If you or your employer should contribute more than the maximum
contribution amount to your IRA or SEP, the excess amount will
be considered an excess contribution. You are
permitted to withdraw an excess contribution from your IRA or
SEP before your tax filing date without adverse tax
consequences. If, however, you fail to withdraw any such excess
contribution before your tax filing date, a 6% excise tax will
be imposed on the excess for the tax year of contribution.
Once the 6% excise tax has been imposed, an additional 6%
penalty for the following tax year can be avoided if the excess
is (1) withdrawn before the end of the following year, or
(2) treated as a current contribution for the following
year. (See Premature Distributions below for penalties
imposed on withdrawal when the contribution exceeds the
maximum amount allowed by law, including catch-up contributions
if applicable.)
IRA FOR NON-WORKING SPOUSE
If you establish an IRA for yourself, you may also be eligible
to establish an IRA for your non-working spouse. In
order to be eligible to establish such a spousal IRA, you must
file a joint tax return with your spouse and, if your
non-working spouse has compensation, his/her compensation must
be less than your compensation for the year. Contributions of up
to the maximum amount allowed by law, including catch-up
contributions if applicable may be made to your IRA and the
spousal IRA if the combined compensation of you and your spouse
is at least equal to the amount contributed. If requirements for
deductibility (including income levels) are met, you will be
able to deduct an amount equal to the least of (i) the
amount contributed to the IRAs; (ii) twice the maximum
amount allowed by law, including catch-up contributions if
applicable; or (iii) 100% of your combined gross income.
Contributions in excess of the contribution limits may be
subject to penalty. See above under Contributions and
Deductions. If you contribute more than the allowable
amount, the excess portion will be considered an excess
contribution. The rules for correcting it are the same as
discussed above for regular IRAs.
Other than the items mentioned in this section, all of the
requirements generally applicable to IRAs are also applicable to
IRAs established for non-working spouses.
ROLLOVER CONTRIBUTION
Once every year, you are permitted to withdraw any portion of
the value of your IRA or SEP and reinvest it in another IRA or
bond. Withdrawals may also be made from other IRAs and
contributed to this contract. This transfer of funds from one
IRA to another is called a rollover IRA. To qualify
as a rollover contribution, the entire portion of the withdrawal
must be reinvested in another IRA within 60 days after the
date it is received. You will not be allowed a tax-deduction for
the amount of any rollover contribution.
A similar type of rollover to an IRA can be made with the
proceeds of a qualified distribution from a qualified retirement
plan or tax-sheltered annuity. Properly made, such a
distribution will not be taxable until you receive payments from
the IRA created with it. Unless you were a self-employed
participant in the distributing plan, you may later roll over
such a contribution to another qualified retirement plan as long
as you have not mixed it with IRA (or SEP) contributions you
have deducted from your income. (You may roll less than all of a
qualified distribution into an IRA, but any part of it not
rolled over will be currently includable in your income without
any capital gains treatment.) Beginning in 2002, the rollover
options increase. Funds can be rolled over from an IRA or SEP to
another IRA or SEP or to another qualified retirement plan or 457 government plan even if additional contributions have been made
to the account.
DISTRIBUTIONS
(a) Premature Distributions
At no time can your interest in your IRA or SEP be forfeited. To
insure that your contributions will be used for retirement, the
federal tax law does not permit you to use your IRA or SEP as
security for a loan. Furthermore, as a general rule, you may not
sell or assign your interest in your IRA or SEP to anyone. Use
of an IRA (or SEP) as security or assignment of it to another
will invalidate the entire annuity. It then will be includable
in your income in the year it is invalidated and will be subject
to a 10% tax penalty if you are not at least age 59 1/2 or
totally disabled. (You may, however, assign your IRA or SEP
without penalty to your former spouse in accordance with the
terms of a divorce decree.)
You may surrender any portion of the value of your IRA (or SEP).
In the case of a partial surrender which does not qualify as a
rollover, the amount withdrawn will be includable in your income
and subject to the 10% penalty if you are not at least age
59 1/2 or totally disabled unless you comply with special
rules requiring distributions to be made at least annually over
your life expectancy.
The 10% penalty tax does not apply to the withdrawal of an
excess contribution as long as the excess is withdrawn before
the due date of your tax return. Withdrawals of excess
contributions after the due date of your tax return will
generally be subject to the 10% penalty unless the excess
contribution results from erroneous information from a plan
trustee making an excess rollover contribution or unless you are
over age 59 1/2 or are disabled.
(b) Distribution After Age 59 1/2
Once you have attained age 59 1/2 (or have become totally
disabled), you may elect to receive a distribution of your IRA
(or SEP) regardless of when you actually retire. In addition,
you must commence distributions from your IRA by April 1
following the year you attain age 70 1/2. You may elect to
receive the distribution under any one of the periodic payment
options available under the contract. The distributions from
your IRA under any one of the periodic payment options or in one
sum will be treated as ordinary income as you receive them to
the degree that you have made deductible contributions. If you
have made both deductible and nondeductible contributions, the
portion of the distribution attributable to the nondeductible
contribution will be tax-free.
(c) Inadequate Distributions50% Tax
Your IRA or SEP is intended to provide retirement benefits over
your lifetime. Thus, federal tax law requires that you either
(1) receive a lump-sum distribution of your IRA by April 1
of the year following the year in which you attain age
70 1/2 or (2) start to receive periodic payments by
that date. If you elect to receive periodic payments, those
payments must be sufficient to pay out the entire value of your
IRA during your life expectancy (or over the joint life
expectancies of you and your spouse/beneficiary.) The
calculation is revised under the IRS final regulations for
distributions beginning in 2003 and are optional for
distributions in 2002. If the payments are not sufficient to
meet these requirements, an excise tax of 50% will be imposed on
the amount of any underpayment.
(d) Death Benefits
If you, (or your surviving spouse) die before receiving the
entire value of your IRA (or SEP), the remaining interest must
be distributed to your beneficiary (or your surviving
spouses beneficiary) in one lump-sum by December 31st
of the fifth year after your (or your surviving spouses
death, or applied to purchase an immediate annuity for the
beneficiary. This annuity must be payable over the life
expectancy of the beneficiary beginning by December 31 of
the year following the year after your or your spouses
death. If your spouse is the designated beneficiary, he or she
is treated as the owner of the IRA. If minimum required
distributions have begun and no designated beneficiary is
identified by September 30 of the year following the year
of death, the entire amount must be distributed based on the life expectancy of the owner using the owners
age prior to death. A distribution of the balance of your IRA
upon your death will not be considered a gift for federal tax
purposes, but will be included in your gross estate for purposes
of federal estate taxes.
ROTH IRAS
Section 408A of the Code permits eligible individuals to
contribute to a type of IRA known as a Roth IRA.
Contributions may be made to a Roth IRA by taxpayers with
adjusted gross incomes of less than $160,000 for married
individuals filing jointly and less than $110,000 for single
individuals. Married individuals filing separately are not
eligible to contribute to a Roth IRA. The maximum amount of
contributions allowable for any taxable year to all Roth IRAs
maintained by an individual is generally the lesser of the
maximum amount allowed by law and 100% of compensation for that
year (the maximum amount allowed by law is phased out for
incomes between $150,000 and $160,000 for married and between
$95,000 and $110,000 for singles). The contribution limit is
reduced by the amount of any contributions made to a non-Roth
IRA. Contributions to a Roth IRA are not deductible.
For taxpayers with adjusted gross income of $100,000 or less,
all or part of amounts in a non-Roth IRA may be converted,
transferred or rolled over to a Roth IRA. Some or all of the IRA
value will typically be includable in the taxpayers gross
income. If such a rollover, transfer or conversion occurred
before January 1, 1999, the portion of the amount
includable in gross income must be included in income ratably
over the next four years beginning with the year in which the
transaction occurred. Provided a rollover contribution meets the
requirements of IRAs under Section 408(d)(3) of the Code, a
rollover may be made from a Roth IRA to another Roth IRA.
Under some circumstances, it may not be advisable to roll
over, transfer or convert all or part of a non-Roth IRA to a
Roth IRA. Persons considering a rollover, transfer or conversion
should consult their own tax advisor.
Qualified distributions from a Roth IRA are
excludable from gross income. A qualified
distribution is a distribution that satisfies two
requirements: (1) the distribution must be made
(a) after the owner of the IRA attains age 59 1/2;
(b) after the owners death; (c) due to the
owners disability; or (d) for a qualified first time
homebuyer distribution within the meaning of Section 72(t)(2)(F)
of the Code; and (2) the distribution must be made in the
year that is at least five tax years after the first year for
which a contribution was made to any Roth IRA established for
the owner or five years after a rollover, transfer, or
conversion was made from a non-Roth IRA to a Roth IRA.
Distributions from a Roth IRA that are not qualified
distributions will be treated as made first from contributions
and then from earnings, and taxed generally in the same manner
as distributions from a non-Roth IRA.
Distributions from a Roth IRA need not commence at age
70 1/2. However, if the owner dies before the entire
interest in a Roth IRA is distributed, any remaining interest in
the contract must be distributed under the same rules applied to
traditional IRAs where death occurs before the required
beginning date.
REPORTING TO THE IRS
Whenever you are liable for one of the penalty taxes discussed
above (6% for excess contributions, 10% for premature
distributions or 50% for underpayments), you must file
Form 5329 with the Internal Revenue Service. The form is to
be attached to your federal income tax return for the tax year
in which the penalty applies. Normal contributions and
distributions must be shown on your income tax return for the
year to which they relate.
ORD01124