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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 333-18053
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
(Exact name of Registrant as specified in its charter)
New Jersey 22-2426091
---------- ----------
(State or other (IRS Employer
jurisdiction, incorporation Identification No.)
or organization)
213 Washington Street, Newark, New Jersey 07102
-----------------------------------------------
(Address of principal executive offices) (Zip Code)
(973) 802-6000
----------------------------------------------------
(Registrant's Telephone Number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO ___
State the aggregate market value of the voting stock held by non-affiliates
of the registrant: NONE
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 15, 1999. Common stock, par value of $5 per
share: 400,000 shares outstanding
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
(Registrant)
INDEX
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Item No. Page No.
- -------- --------
Cover Page -
Index 2
PART I
1. Business 3
2. Properties 3
3. Legal Proceedings 3
4. Submission of Matters to a Vote of Security Holders 3
PART II
5. Market for Registrant's Common Equity and Related
Stockholders' Matters 4
6. Selected Financial Data 4
7. Management's Discussion and Analysis of Financial Position
and Results of Operations 4
7a. Quantitative and Qualitative Disclosures About Market Risk 12
8. Financial Statements and Supplementary Data 15
9. Changes in and Disagreements with Independent Accountants on
Accounting and Financial Disclosure 15
PART III
10. Directors and Executive Officers of the Registrant 16
11. Executive Compensation 17
12. Security Ownership of Certain Beneficial Owners and Management 17
13. Certain Relationships and Related Transactions 17
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 18
Exhibit Index 18
Signatures 20
2
PART 1
------
Item 1. Business
- ------------------
Pruco Life Insurance Company of New Jersey (the Company) 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,
variable annuities, and fixed annuities (the Contracts) only in the states of
New Jersey and New York.
The Company is a wholly owned subsidiary of Pruco Life Insurance Company (Pruco
Life), a stock life insurance company organized in 1971 under the laws of the
state of Arizona. Pruco Life, in turn, is a wholly owned subsidiary of The
Prudential Insurance Company of America (Prudential), a mutual insurance company
founded in 1875 under the laws of the state of New Jersey. Pruco Life 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, Pruco Life is under no obligation to make such
contributions and its assets do not back the benefits payable under the
Contracts.
The Company is engaged in a business that is highly competitive because of the
large number of stock and mutual life insurance companies and other entities
engaged in marketing insurance products, and individual annuities. There are
approximately 1,620 stock, mutual and other types of insurers in the life
insurance business in the United States.
Item 2. Properties
- -------------------
Not applicable.
Item 3. Legal Proceedings
- --------------------------
Based on complaints about sales practices engaged in by Prudential, the Company
and agents appointed by Prudential and the Company, several actions have been
brought against the Company on behalf of those persons who purchased life
insurance policies. Prudential has agreed to indemnify the Company for any and
all losses resulting from such litigation.
In the normal course of business, the Company is subject to various claims and
assessments. Management believes the settlement of these matters would not have
a material effect on the financial position or results of operations of the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
At the annual meeting of the stockholders held on June 9, 1998, Pruco Life, the
sole shareholder of the Company, appointed the Board of Directors of the
Company. The following are the appointed Board of Directors:
James J. Avery, Jr.
William M. Bethke
Ira J. Kleinman
Mendel A. Melzer
Esther H. Milnes
I. Edward Price
3
PART II
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Item 5. Market for the Registrant's Common Equity and Related Stockholders'
- --------------------------------------------------------------------------------
Matters
- -------
The Company is a wholly-owned subsidiary of Pruco Life. There is no public
market for the Company's common stock.
Item 6. Selected Financial Data
- --------------------------------
Pruco Life Insurance Company of New Jersey
For the Years Ended December 31,
-------------------------------------------------------------------
(In Thousands)
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
Revenues
Premiums and other revenue $ 63,347 $ 62,773 $ 63,963 $ 64,457 $ 60,091
Realized investment gains, net 8,446 1,707 1,221 3,592 (8,310)
Net investment income 47,032 46,324 43,784 43,530 42,357
-------------------------------------------------------------------
Total revenues 118,825 110,804 108,968 111,579 94,138
Benefits and expenses
Current and future benefits and
claims 47,327 53,371 48,722 47,695 44,939
Other expenses 22,105 27,236 12,848 21,881 23,716
-------------------------------------------------------------------
Total benefits and expenses 69,432 80,607 61,570 69,576 68,655
-------------------------------------------------------------------
Income before income tax provision 49,393 30,197 47,398 42,003 25,483
Income tax provision 17,570 10,974 15,611 15,002 9,483
-------------------------------------------------------------------
Net income $ 31,823 $ 19,223 $ 31,787 $ 27,001 $ 16,000
===================================================================
Total assets at period end $ 2,411,157 $ 2,002,432 $ 1,695,616 $ 1,558,282 $ 1,424,886
===================================================================
Seperate Account liabilities $ 1,450,986 $ 1,108,994 $ 880,065 $ 787,566 $ 639,928
===================================================================
Item 7. Management's Discussion and Analysis of Financial Position and Results
- --------------------------------------------------------------------------------
of Operations.
- --------------
The following analysis should be read in conjunction with the Notes to Financial
Statements.
The Company markets individual life insurance, variable life insurance, variable
annuities, and fixed annuities through Prudential's sales force in New Jersey
and New York.
The Company markets its products in the life insurance and annuity sectors of
the insurance industry. 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 pressures as the legal
barriers which have historically segregated the markets of the financial
services industry are being challenged 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 had $2.4 billion in assets at December 31, 1998 compared to $2.0
billion at December 31, 1997, of which $1.5 billion and $1.1 billion were held
in Separate Accounts in 1998 and 1997, respectively under variable life
insurance policies and variable annuity contracts. The remaining assets
consisted primarily of general account investments in bonds, policy loans, and
short-term investments.
4
1. Results of Operations
Net income for the year ended December 31, 1998 was $31.8 million, an increase
of $12.6 million or 66% from $19.2 million earned in the year ended December 31,
1997. Net income for the year ended December 31, 1996 was $31.8 million.
(a) 1998 versus 1997
Total insurance revenues, consisting of premiums and policy charges and fee
income increased $.1 million for the year ended December 31, 1998 to $57.6
million from $57.5 million for the year ended December 31, 1997. This increase
in insurance revenues is primarily attributable to an increase in sales of
Discovery Select, a variable annuity retirement type product. This has proven to
be a successful product of the Company's portfolio since its introduction in
January 1997. However, these gains were offset by a decline in the number of
traditional life insurance policies in force in 1998 compared to 1997.
The Company's net investment income increased $.7 million for the year ended
December 31, 1998 to $47.0 million from $46.3 million for the year ended
December 31, 1997. Realized investment gains, net, increased $6.7 million for
the year ended December 31, 1998 to $8.4 million from $1.7 million for the year
ended December 31, 1997. Please refer to the section below titled "Investment
Portfolio and Investment Strategies" for a discussion of investment income and
net unrealized investment gains by asset type.
Other income increased $.5 million for the year ended December 31, 1998 to $5.8
million from $5.3 million for the year ended December 31, 1997. The portfolio of
mutual fund investments related to the Company's Separate Account products are
known as The Prudential Series Fund. The Company receives an allocated portion
of investment management fees that Prudential earns from the Prudential Series
Fund and records these fees in "Other income."
Policyholders' benefits decreased $5.7 million for the year ended December 31,
1998 to $28.3 million from $34.0 million for the year ended December 31, 1997.
This decrease is attributable to a favorable change in reserves due to better
than expected mortality experiences.
Interest credited to policyholders' account balances decreased by $.4 million
for the year ended December 31, 1998 to $19.0 million from $19.4 million for the
year ended December 31, 1997. This decrease is primarily attributable to a
decrease in interest crediting rates, partially offset by increased interest
credited to policy loans as well as increased fund values due to new sales of
Separate Account products.
Other operating costs and expenses decreased $5.1 million for the year ended
December 31, 1998 to $22.1 million compared to $27.2 million for the year ended
December 31, 1997. This decrease is primarily attributable to refinements in the
DAC amortization model leading to comparably lower 1998 expenses. Offsetting
this decrease was an increase in sales volume of Discovery Select which resulted
in a corresponding increase in expenses. In addition to the increased sales
volume, the Parent company's expense allocation methodology changed in 1998,
resulting in increased expenses allocated to the Company.
Investment Portfolio and Investment Strategies
The Company's investment portfolio supports its insurance and annuity
liabilities and other obligations to customers for which it assumes investment
related risks. The portfolio was comprised of total investments amounting to
$816.2 million at December 31, 1998, versus $772.1 million at December 31, 1997.
A diversified portfolio of publicly traded bonds, private placement investments
and short term investments is managed under strategies intended to maintain
optimal asset mix consistent with current and anticipated cash flow requirements
of the related obligations.
The asset management strategy for the portfolio is set in accordance with an
investment policy statement developed and coordinated within the Company by the
Portfolio 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 mix strategies are constrained by the need to match asset structure to
product liabilities, considering the underlying income and
5
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 mix
strategies also include maintenance of 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 securities as "available for sale".
Fixed maturities totaled $622.9 million, an increase of $30.6 million compared
to December 31, 1997. The increase is primarily attributable to a higher
beginning of year asset base.
1998 1997
-------------------------------------- ----------------------------------------
Net Net
Amortized Estimated Unrealized Amortized Estimated Unrealized
Cost Fair Value Gains Cost Fair Value Gains
--------- ---------- ---------- --------- ---------- ----------
(In Thousands)
Fixed maturities -
available for sale
Publicly traded $537,339 $541,874 $ 4,535 $575,110 $582,315 $ 7,205
Privately traded 80,419 81,116 697 9,999 10,046 47
-------- -------- -------- -------- -------- --------
Total $617,758 $622,990 $ 5,232 $585,109 $592,361 $ 7,252
======== ======== ======== ======== ======== ========
At December 31, 1998, the net unrealized capital gains on the fixed maturity
portfolio totaled $5.2 million compared to $7.3 million at December 31, 1997.
The decrease is primarily due to the effect of a higher level of sales activity,
offset in part by the effect of lower interest rates.
At December 31, 1998, the Company's holdings of private placement fixed
maturities totaled $81.1 million and constituted 13% of total fixed maturities
compared to $10.0 million representing 2% in 1997. These investments generally
offer higher yields than comparable quality public market securities, increase
the diversification of the portfolio, and contain tighter covenant protection
than public securities.
Gross investment income was relatively unchanged from year to year, despite the
increase in the average size of the fixed maturity portfolio from 1997 to 1998.
Realized gains increased by $4.7 million from 1997 primarily due to the sale of
fixed maturities during a period of declining interest rates. The table below
presents a summary of investment results from fixed maturity investments.
Year Ended December 31,
1998 1997
------- -------
(In Thousands)
Gross investment income $39,478 $37,563
Yield (1) 6.94% 6.97%
Realized capital gains $ 6,360 $ 1,707
(1) Yields are determined by dividing gross investment income by the average of
quarter-end asset carrying values, excluding unrealized gains and losses, less
one-half of gross investment income.
6
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 Standard & Poor's Corporation, an independent rating
agency :
December 31, 1998 December 31, 1997
----------------------------------------------- -----------------------------------------------
Standard & Amortized Estimated Amortized Estimated
NAIC Poor's Cost % Fair Value % Cost % Fair Value %
- ---- --------------- --------- ---- ---------- ---- --------- ---- ---------- ----
(In Thousands)
1 AAA to AA- $303,209 49.1% $306,693 49.2% $310,409 53.0% $313,746 53.0%
2 BBB+ to BBB- 286,640 46.4 287,888 46.2 254,084 43.4 257,024 43.4
3 BB+ to BB- 27,134 4.4 27,692 4.5 20,616 3.6 21,591 3.6
4 B+ to B- 704 0.1 638 0.1 -- -- -- --
5 CCC or lower 71 -- 79 -- -- -- -- --
6 In or near default -- -- -- -- -- -- -- --
-------- -------- -------- --------
Total $617,758 $622,990 $585,109 $592,361
======== ======== ======== ========
The fixed maturity portfolio consists largely of investment grade assets (rated
"1" or "2" by the NAIC), with such investments accounting for 95% and 96% of the
portfolio at December 31, 1998 and 1997, respectively, based on fair value.
The Company continually reviews fixed maturities and identifies potential
problem assets which require additional monitoring. The Company defines
"problem" fixed maturities as those for which principal and/or interest payments
are in default. The Company defines "potential problem" fixed maturities as
assets which are believed to present default risk associated with future debt
service obligations and therefore require more active management. Management has
identified no fixed maturity investments as problem or potential problem asset
at December 31, 1998 and 1997.
Portfolio Diversity
The fixed maturity portfolio is broadly diversified by type and industry of
issuer. The greatest industry concentrations within the public portfolio were
finance, manufacturing, and utilities. While the greatest concentration within
the private portfolio was asset backed securities. The total portfolio is
summarized below by issuer category:
December 31, 1998 December 31, 1997
------------------------ -------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
(In Thousands)
United States government
securities and obligations $ 51,663 $ 51,605 $ 42,885 $ 43,222
Mortgage backed securities 1,507 1,505 2,039 2,036
Asset backed secrutities (1) 78,396 79,075 5,076 5,070
Manufacturing 95,713 96,369 92,805 94,041
Utilities 101,287 102,487 87,416 88,996
Retail and wholesale 9,992 9,834 0 0
Finance 120,084 121,470 221,624 223,900
Services 78,586 78,727 54,075 54,494
Transportation 49,695 50,331 40,856 41,717
Other 30,835 31,587 38,333 38,885
-------- -------- -------- --------
Total $617,758 $622,990 $585,109 $592,361
======== ======== ======== ========
(1) The asset backed securities are primarily backed by credit card receivables,
home equity loans, trade receivables and auto loans.
7
Short-Term Investments
Short-term investments include highly liquid debt instruments such as commercial
paper and are purchased with an original maturity of twelve months or less.
These securities are carried at amortized cost, which approximates fair value.
As of December 31, 1998, the Company's short-term investments totaled $53.8
million versus $52.5 million at December 31, 1997. While assets and income are
relatively unchanged, the short-term yield decreased 210 basis points primarily
due to lower average interest rates in 1998 compared to 1997. The table below
presents summary data with respect to the Company's short-term investment
positions:
Year Ended December 31,
1998 1997
------- -------
(In Thousands)
Carrying amount at end of period $53,761 $52,464
Net investment income 3,502 3,023
Yield (1) 5.38% 7.48%
(1) Yields are determined by dividing net investment income by the average of
quarter-end asset carrying values, less one-half of net investment income.
(b) 1997 versus 1996
Total insurance revenues, consisting of premiums and policy charges and fee
income, decreased $2.4 million for the year ended December 31, 1997 to $57.5
million from $59.9 million for the year ended December 31, 1996. This decrease
in insurance revenues is primarily attributable to a decrease of $2.2 million in
policy charges and fee income. This is a result of an aging book of business
along with an increased emphasis in the domestic market place on retirement type
products rather than life insurance protection products.
The Company's net investment income increased $2.5 million for the year ended
December 31, 1997 to $46.3 million from $43.8 million for the year ended
December 31, 1996. Increase in cash flows from insurance operations and average
assets as well as the asset mix strategies, produced favorable investment
results in 1997. Fixed maturity income increased in 1997 due to higher
investment returns as a result of a shift to higher yielding securities. Income
from short-term investments increased because of higher fixed maturity assets
available to lend to third parties as part of the Company's securities lending
program.
Other income increased $1.3 million for the year ended December 31, 1997 to $5.3
million from $4.0 million for the year ended December 31, 1996. This increase is
due a higher level of advisory fees attributable to the Discovery Preferred and
Discovery Select Separate Account products.
Policyholders' benefits increased $5.3 million for the year ended December 31,
1997 to $34.0 million from $28.7 million for the year ended December 31, 1996.
This increase is attributable to an increase in mortality costs associated with
the aging book of business.
Other operating costs and expenses increased $14.4 million for the year ended
December 31, 1997 to $27.2 million compared to $12.8 million for the year ended
December 31, 1996. The increase reflects factors including the refinement of
estimated gross profit margins used to amortize deferred policy acquisition
costs (DAC). Favorable mortality experience and reduction in cost of insurance
charges contributed to a change in net amortization. Also, increased operating
costs resulted from higher sales activity of Discovery Select and Discovery
Preferred annuity products, and technological advancements made in annuity
processing, customer service, and product development.
8
2. Liquidity and Capital Resources
The Company's liquidity requirements include the payment of sales commissions
and other underwriting expenses and the funding of its contractual obligations
for the life insurance and annuity contracts it has in-force. The Company has
developed and utilizes a cash flow projection system and regularly performs
asset/liability duration matching in the management of its asset and liability
portfolios. The Company anticipates funding all its cash requirements utilizing
cash from operations, normal investment maturities and anticipated calls and
repayments or through short term lending from its affiliate Prudential Funding
Corporation (see Item 13 Certain Relationships & Related Transactions). As of
December 31, 1998, the Company's assets included $567.5 million of cash,
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
Company's statutory equity with certain adjustments ("Adjusted Capital") to its
required capital, based on the risk characteristics of its insurance liabilities
and investments. Required capital is determined by statutory formulae that
consider risks related to the type and quality of invested assets,
insurance-related risks associated with the Company's products, interest rate
risks, and general business risks. The RBC calculations are intended to assist
regulators in measuring the adequacy of the Company's statutory capitalization.
The Company considers RBC implications in its asset/liability management
strategies. Each year, the Company conducts a thorough review of the adequecy of
statutory insurance reserves and other actuarial liabilities. The review is
performed to ensure that the Company's statutory reserves are computed in
accordance with accepted actuarial standards, reflect all contractual
obligations, meet the requirements of state laws and regulations and include
adequate provisions for any other actuarial liabilities that need to be
established. All significant reserve changes are reviewed by the Board of
Directors and are subject to approval by the New Jersey Department of Banking
and Insurance. The Company believes that its statutory capital is adequate for
its currently anticipated levels of risk as measured by regulatory guidelines.
The National Association of Insurance Commissioners recently approved a series
of codified statutory accounting standards for consideration by the various
state regulators. Certain of the proposed standards, if adopted by insurance
regulatory authorities, could have an impact on the measurement of statutory
capital which, in turn, could affect RBC ratios of insurance companies. If
adopted, implementation could commence with 1999 statutory financial statements.
At the present time, the Company cannot estimate the potential impact of these
proposed standards on its RBC position.
3. Regulatory Environment
The Company is subject to the laws of the State of New Jersey as governing
insurance companies and to the regulations of the New Jersey Department of
Banking & Insurance (the "Insurance Department"). A detailed financial statement
in the prescribed form (the "Annual Statement") is filed with the Insurance
Department each year covering the Company's operations for the preceding year
and its financial position as of the end of that year. Regulation by the
Insurance Department includes periodic examination to verify the accuracy of
contract liabilities and reserves. The Company's books and accounts are subject
to review by the Insurance Department at all times. A full examination of the
Company's operations is conducted periodically by the Insurance Department and
under the auspices of the NAIC.
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.
9
The NAIC has adopted several regulatory initiatives designed to improve the
surveillance and financial analysis regarding the solvency of insurance
companies in general. These initiatives include the development and
implementation of a risk-based capital formula for determining adequate levels
of capital and surplus. Insurance companies are required to calculate their
risk-based capital in accordance with this formula and to include the results in
their Annual Statement. It is anticipated that these standards will have no
significant effect upon the Company.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Certain insurance products of the Company are subject to
various federal securities laws and regulations. In addition, current and
proposed federal measures which may significantly affect the insurance business
include regulation of insurance company solvency, employee benefit regulation,
removal of barriers preventing banks from engaging in the insurance business,
tax law changes affecting the taxation of insurance companies and the tax
treatment of insurance products and its impact on the relative desirability of
various personal investment vehicles.
4. The Year 2000 Issue
Pruco Life of New Jersey utilizes many of the same business applications,
infrastructure and business partners as Prudential. Prudential has addressed the
Year 2000 issue on an enterprise-wide basis. Therefore, it is not possible to
differentiate Pruco Life of New Jersey's Year 2000 issue from that of
Prudential. The accompanying discussion of the Year 2000 issue reflects steps
taken by Prudential to mitigate the Year 2000 risks.
Many computer systems are programmed to recognize only the last two digits in a
date. As a result, any computer system that has date-sensitive programming may
recognize a date using "00" as the year 1900 rather than the year 2000. This
problem can affect non-information technology systems that include embedded
technology, such as microprocessors included in "infrastructure" equipment used
for telecommunications and other services as well as computer systems. If this
anomaly is not corrected, the year "00" could cause systems to perform date
comparisons and calculations incorrectly, which could in turn affect the
accuracy and compromise the integrity of business records. Business operations
could be interrupted when companies are unable to process transactions, send
invoices, or engage in similar normal business activities.
Prudential established a Company-wide Program Office (CPO) to develop and
coordinate an operating framework for the Year 2000 compliance activities.
Prudential's CPO structured the Year 2000 program into three major components:
Business Applications, Infrastructure and Business Partners. The CPO also
established quality assurance procedures including a certification process to
monitor and evaluate enterprise-wide progress of each component of Prudential's
program for conversion and upgrading of systems for Year 2000 compliance.
Business Applications
The scope of the Business Applications component includes a wide range of
computer systems that directly support Prudential's business operations and
accounting systems. The entire application portfolio was analyzed in 1996 to
determine appropriate Year 2000 readiness strategies (i.e., renovate, replace or
retire). Rigorous testing standards have been employed for all applications that
will not be retired, including those that are newly developed or purchased.
Application replacement and renovation projects follow a similar path toward
Year 2000 compliance. The key project phases include Year 2000 analysis and
design, programming activities, testing, and implementation. Replacement
projects are also tracked until the existing applications are removed from
production.
Of Prudential's total application portfolio, approximately 70% of the
applications are being renovated, 13% are being replaced by Year 2000 compliant
systems, and the remaining 17% are being retired from production. At December
31, 1998, the percentage of business applications (based on application count)
at Prudential in the implementation phase for Year 2000 compliance for
renovation, replacement and retirement are 99%, 96% and 99%,respectively. The
overall completion date for Business Applications is June 1999.
10
Infrastructure
The scope of Prudential's Year 2000 Infrastructure initiatives include mainframe
computer system hardware and operating system software, mid-range systems and
servers, telecommunications equipment, buildings and facilities systems,
personal computers, and vendor hardware and software.
Although there are minor differences among these various components, the
approach to Year 2000 readiness for Infrastructure generally involves phases
identified as inventory, assessment, remediation activities (e.g., upgrading
hardware or software), testing and implementation. The overall completion date
for Infrastructure is June 1999.
Business Partners
Prudential's approach to business partner readiness includes classification of
each partner's status as "highly critical" or "less critical" and the
development of contingency plans to address the potential that a business
partner could experience a Year 2000 failure. Approximately 30% of Prudential's
business partners have been identified as highly critical and the remaining 70%
as less critical. Project phases include inventory, risk assessment, and
contingency planning activities. All project phases for highly critical business
partner readiness were achieved in December 1998; Prudentail has an overall
completion date for less critical business partner readiness of June 1999.
The Cost of Year 2000 Readiness
Prudential is funding the Year 2000 program from operating cash flows. Some of
the expenses of Prudential's Year 2000 readiness are allocated across its
various businesses and subsidiaries, including Pruco Life of New Jersey.
Expenses related to the Year 2000 initiatives allocated to Pruco Life of New
Jersey are part of systems overhead costs to date and are included in Pruco Life
of New Jersey's general and administrative expenses. The Year 2000 costs
allocated to Pruco Life of New Jersey to date are not material to its operations
and financial position. Moreover, the forecasted allocated Year 2000 costs are
not expected to have a material impact on Pruco Life of New Jersey's ability to
meet its contractual commitments.
Year 2000 Risks and Contingency Planning
The major portion of the Prudential's transactions are of such volume that they
can only be effectively processed through the use of automated systems.
Therefore, substantially all of Prudential's contingency plans include the
ultimate resolution of any causative technology failures that may be
encountered.
Prudential believes that the Business Application, Infrastructure and Business
Partners components of the Year 2000 project are substantially on schedule.
While management expects a small number of the projects may not meet their
targeted completion date, it is anticipated that these projects will be
completed by September 1999 so that any delays, if experienced, would not have a
significant impact on the timing of the project as a whole. During the course of
the Year 2000 program, some discretionary technology projects have been delayed
in favor of the completion of Year 2000 projects. However, this impact has been
minimized by Prudential's strategic decision to outsource most of the Year 2000
renovation work.
While Prudential and its subsidiaries believe that they are well positioned to
mitigate its Year 2000 issue, this issue, by its nature, contains inherent
uncertainties, including the uncertainty of Year 2000 readiness of third
parties. Consequently, the Company is unable to determine at this time whether
the consequences of Year 2000 failures will have a material adverse effect on
the Company's results of operations, liquidity or financial position. In the
worst case, it is possible that any technology failure, including an internal or
external Year 2000 failure, could have a material impact on the Company's
results of operations, liquidity, or financial position.
Prudential is enhancing existing business contingency plans to mitigate Year
2000 risk. Current contingency plans include planned responses to the failure of
specific business applications or infrastructure components. These responses are
being reviewed and expected to be finalized by June 1999 to ensure that they are
workable under the special conditions of a Year 2000 failure. The plans are also
being updated to reduce the level of uncertainty about the Year 2000 problem
including readiness of Prudential's business partners.
The discussion of the Year 2000 Issue herein, and in particular Prudential's
plans to remediate this issue and the estimated costs thereof, are
forward-looking in nature. See cautionary statement below relating to
forward-looking statements.
11
5. Effective New Accounting Pronouncements
Refer to Note 2, "Summary of Significant Accounting Policies," of the Notes to
Financial Statements.
6. Information Concerning Forward-Looking Statements
Certain of the statements contained in Management's Discussion and Analysis may
be considered forward-looking statements. Words such as "expects," "believes,"
"anticipates," "intends," "plans," or variations of such words are generally
part of forward-looking statements. Forward-looking statements are made based
upon management's current expectations and beliefs concerning future
developments and their potential effects upon the Company. There can be no
assurance that future developments affecting the Company will be those
anticipated by management. There are certain important factors that could cause
actual results to differ materially from estimates or expectations reflected in
such forward-looking statements including without limitation, changes in general
economic conditions, including the performance of financial markets and interest
rates; market acceptance of new products and distribution channels; competitive,
regulatory or tax changes that affect the cost or demand for the Company's
products; and adverse litigation results. While the Company reassesses material
trends and uncertainties affecting its financial position and results of
operations, it does not intend to review or revise any particular
forward-looking statement referenced in this Management's Discussion and
Analysis in light of future events. The information referred to above should be
considered by readers when reviewing any forward-looking statements contained in
this Management's Discussion and Analysis.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
As an indirect 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 maximizing returns.
Prudential considers risk management an integral part of its core businesses.
The risks inherent in the Company's operations include market risk, product
risk, credit risk, concentration risk, liquidity risk, and operating risk. These
risk categories, and the Company's strategies relative to each, are discussed
below.
The Company's risk monitoring processes include preparation and review of risk
reports on a regular basis, with frequency based on the purpose of the report.
For example, reports associated with specific strategies or assets are produced
daily, while portfolio level reports are typically semi-monthly or monthly and
high level reports are produced quarterly.
Market risk is the risk of change in the value of financial instruments as a
result of changes in interest rates, currency exchange rates, equity and
commodity prices. To varying degrees, the investment activities supporting all
of the Company's products and services generate market risks. These products and
services include life insurance and annuities. Market risks incurred and the
strategies for managing these risks vary by product.
Insurance products and annuities, incur market risk primarily in the form of
interest rate risk. This is controlled through asset/liability management
strategies that seek to match the interest rate sensitivity of the assets to
that of the underlying liabilities, with the objective of insulating the
portfolio's underlying capital from market value changes due to interest rate
movements. If perfectly matched, interest rate movements will generate asset
market value changes that offset changes in the value of the liabilities
relating to the underlying insurance products.
For fee-based products, including variable contracts and separate accounts,
investment risk is borne primarily by the contractholders rather than the
Company (subject to any minimum guarantees). The greatest market-related risk to
the Company for these products is the indirect one that, in the event of sub-par
performance, asset based fee revenues could decline and that competitive factors
could impede the Company's ability to maintain or grow assets under management.
However, since this is primarily an operating risk it is not quantified as part
of the Company's analysis of market risk.
The Company's exposure to market risk results from "other than trading"
activities in its insurance businesses. Market risks in the Company's 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 for hedging purposes
in the asset/liability management process.
12
Insurance Asset/Liability Management
Interest rate and equity exposures are maintained within established ranges,
which are subject to adjustment based on market conditions and the design of
related insurance products sold to customers. Risk managers, independent of
portfolio and asset managers, establish investment risk limits on
asset/liability management and oversee ongoing efforts to manage risk within
policy constraints.
The Company uses duration and convexity analyses to measure price sensitivity to
interest rate changes. Duration measures the relative sensitivity of the fair
value of a financial instrument to changes in interest rates. Convexity measures
the rate of change of duration with respect to changes in yield, recognizing
that the price of a bond is usually expected to fall at a slower rate as yield
increases.
While duration and convexity are useful indicators of asset price sensitivity to
interest rate changes, pricing models used in the portfolio management process
also consider the effects of optionality. This entails a variety of option
pricing model applications.
The Company also performs portfolio stress testing as part of its regulatory
cash flow testing in which interest-sensitive assumptions (such as asset calls
and prepayments and insurance product contract persistency) are evaluated under
various severe interest rate environments. Any shortfalls revealed by cash flow
testing are evaluated to determine whether there is a need to increase reserves
or adjust portfolio management strategies.
Interest Rate Related Market Risk on Assets
Assets with interest rate risk include fixed maturities and policy loans which,
in the aggregate, comprise 85% of the Company's invested assets (excluding
assets held in Separate Accounts) as of December 31, 1998.
Interest Rate Related Market Risk on Liabilities
In addition to insurance reserves, which are not measured by the sensitivity
analysis below, the Company has policyholder account balances relating to
interest-sensitive life and annuity contracts through which it is exposed to
interest rate risk.
Interest Rate Sensitivity
Interest rate sensitivity for the indicated classes of financial assets and
financial liabilities is assessed using hypothetical test scenarios which assume
both upward and downward 100 basis point parallel shifts in the yield curve from
prevailing interest rates at December 31, 1998. The following table summarizes
the potential loss in fair value associated with a hypothetical 100 basis point
upward parallel shift in the yield curve from prevailing interest rates at
December 31, 1998. This scenario results in the greatest net exposure to
interest rate risk of the hypothetical scenarios tested. The test scenario is
for illustrative purposes only and is not intended to reflect management's
expectations regarding future interest rates or performance of fixed income
markets.
13
In addition, this presentation includes only assets, liabilities and derivatives
required by the Rules and does not include $90 million of insurance liabilities.
Management includes the interest rate sensitivities implicit in these insurance
liabilities in its internal measurements and believes these insurance
liabilities substantially offset the interest rate risk summarized in the
following table.
December 31, 1998
------------------------------------
Fair Value
After + 100
Basis Point Hypothetical
Fair Yield Curve Change in
Value Shift Fair Value
------ ----------- ------------
(Amounts in Millions)
Financial Assets and Liabilities
with Interest Rate Risk:
Financial Assets:
Fixed maturities:
Available for sale 623 601 (22)
Policy loans 147 138 (9)
Financial Liabilities:
Policyholders' account balances (415) (418) (3)
------
Total estimated potential loss (34)
======
The estimated changes in fair values of financial assets shown above relate to
assets invested in support of the Company's insurance liabilities, and do not
include assets associated with products for which investment risk is borne
primarily by the contractholders rather than the Company.
Product Risk is the risk of adverse results due to deviation of experience from
expected levels reflected in pricing. The Company, in its insurance and annuity
operations, sells traditional and interest sensitive individual insurance
products and annuity products. Products are priced to reflect the expected
levels of risk and to allow 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 Company's 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 to
respond to changes in actuarial experience. The competitive environment is also
an important element in determining pricing elements including premiums,
crediting rates and non-guaranteed charges.
Mortality risks, generally inherent in the Company's products, are incorporated
in pricing based on the Company's 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. 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 Company's
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 mortgages, private placements and
other lending-type products, certain derivative transactions, and various
investment operations functions.
14
Limits of exposure by counterparty, country and industry 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. Additionally, stress tests and
sensitivity analysis are utilized to estimate the exposure to credit losses from
unusual events.
Liquidity Risk is the risk that the Company will be unable to liquidate
positions at a reasonable price in order to meet cash flow requirements under
various scenarios. As indicated above, the Company's asset/liability management
strategies seek to maintain asset positions that are consistent with the
expected cash flow demands associated with its liabilities under various
possible situations. Liquidity policies are formally managed at the enterprise
level, using various comparisons of asset liquidity to potential liability
outflows. The Company believes that the comparison of its general account net
liquidity to individual policy net cash surrender value is key to the periodic
evaluation of its ability to meet policyholder claim requirements, and stress
tests are utilized to measure the expected liquidity situation under
hypothetical unusual events. The Company believes that its liquidity position is
more than adequate to meet the expected cash flow demands associated with its
liabilities under reasonably possible stress situations.
Operating Risk is the risk of potential loss from internal or external events
such as mismanagement, fraud, systems breakdowns, business interruption, or
failure to satisfy legal or fiduciary responsibilities. All financial
institutions, including the Company, are exposed to the risk of unauthorized
activities by employees that are contrary to the internal controls designed to
manage such risks. Legal risk may arise from inadequate control over contract
documentation, marketing processes, or other operations. Internal controls
responsive to regulatory, legal, credit, asset stewardship and other concerns
are established at the business unit level for specific lines of business and at
the enterprise level for company-wide processes. Controls are monitored by
business unit management, internal and external auditors, and by an enterprise
level Management Internal Control unit, and in certain instances, are subject to
regulatory review.
Following recent revelations and negative publicity surrounding the issue of
sales practices, the Company has implemented a strategy to emphasize ethical
conduct in the recruitment and training of agents and in the sales process.
Prudential has also strengthened controls including the establishment of a
client acquisition program, in conjunction with the underwriting process,
intended to ascertain the appropriateness of insurance coverages sold and
mitigate the risk of inappropriate policy replacement activity.
Another aspect of operating risk relates to the Company's ability to conduct
transactions electronically and to gather, process, and disseminate information
and maintain data integrity and uninterrupted operations given the possibility
of unexpected or unusual events. The Company is implementing a business
continuation initiative to address these concerns. Considerations relative to
the potential impact of the Year 2000 on computer operations, infrastructural
support, and other matters are discussed above.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
Information required with respect to this Item 8 regarding Financial Statements
and Supplementary Data is set forth commencing on page F-3 hereof. See Index to
Financial Statements elsewhere in this Annual Report.
Item 9. Changes in and Disagreements with Independent Accountants on Accounting
- --------------------------------------------------------------------------------
and Financial Disclosure
- ------------------------
Not applicable.
15
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Name Position Age
- ---- -------- ---
James J. Avery, Jr. Chairman of the Board and Director 47
I. Edward Price Vice Chairman of the Board and Director 56
Esther H. Milnes President and Director 48
James Drozanowski Senior Vice President 56
Frank Marino Senior Vice President 54
Edward A. Minogue Senior Vice President 56
Hwei-Chung Shao Senior Vice President and Chief Actuary 44
Dennis G. Sullivan Principal Financial Officer and Chief Accounting Officer 43
David A. Nachman Vice President and Comptroller 51
Imants Saksons Vice President 48
William M. Bethke Director 51
Ira J. Kleinman Director 51
Mendel A. Melzer Director 38
James J. Avery, Jr., age 47 was elected Chairman of the Board of Directors of
the Company on June 27, 1997. Mr. Avery joined the Prudential Insurance Company
of America in 1988 and has served as the Senior Vice President, CFO and Chief
Actuary for the Prudential Individual Insurance Group since 1997.
I. Edward Price, age 56, has been Senior Vice President and Actuary of
Prudential Individual Insurance since 1995. From 1994 to 1995, he was Chief
Executive Officer of Prudential International Insurance. From 1993 to 1994 he
was President of Prudential International Insurance. Prior to 1993, he was
Senior Vice President and Company Actuary of Prudential.
Esther H. Milnes, age 48, has been Vice President and Actuary of Prudential
Individual Insurance Group since 1996. From 1993 to 1995, she was Senior Vice
President and Chief Actuary of Prudential Insurance and Financial Services.
Prior to 1993, she was Vice President and Associate Actuary of Prudential.
James C. Drozanowski, age 56, has been Vice President and Operations Executive,
Prudential Individual Insurance Group since 1996. From 1995 to 1996, he was
President and Chief Executive Officer of Chase Manhattan Bank, and from 1993 to
1995, he was Vice President, North America Customer Services, Chase Manhattan
Bank. Prior to 1993, he was Operations Executive, Global Securities Services,
Chase Manhattan Bank.
Frank P. Marino, age 54, has been Vice President, Policyowner Relations
Department, Prudential Individual Insurance Group since 1996. Prior to 1996 he
was Senior Vice President, Prudential Mutual Fund Services.
Edward A. Minogue, age 56, was elected a Senior Vice President of the Company on
September 1, 1997. Mr. Minogue has been a Vice President of the Prudential
Insurance Company of America since July, 1997. Prior to 1997, Mr. Minogue was a
director of Merrill Lynch, Pierce & Smith, Inc.
Hwei-Chung Shao, age 44, has been Vice President and Associate Actuary,
Prudential.
16
Dennis G. Sullivan, age, 43, was elected Principal Financial Officer and Chief
Accounting Officer of the Company in March, 1999. Mr. Sullivan has been Vice
President and Deputy Controller of Prudential since November 1998. Prior
thereto, from January 1998, Mr. Sullivan was Vice President and Controller of
ContiFinancial Corporation. From 1997 to 1998, Mr. Sullivan was Deputy Corporate
Controller of Salomon Brothers Inc.. Prior to 1997, he was a director at Salomon
Brothers, Inc..
David A. Nachman, age 51, was elected Vice President and Comptroller of the
Company in March, 1999. Mr. Nachman joined the Prudential Insurance Company of
America in 1973 and has served as Vice President, Accounting of The Prudential
since 1992.
Imants Saksons, age 48, was elected Vice President, Compliance, Prudential
Individual Financial Services in September, 1998. Prior to 1998, he was Vice
President, Market Conduct, U.S. Operations, Manulife Financial.
William M. Bethke, age 51, has been President, Prudential Capital Markets Group
since 1992.
Ira J. Kleinman, age 51, has been Chief Marketing and Product Development
Officer of Prudential Individual Insurance Group since 1995. From 1993 to 1995,
he was President of Prudential Select. From 1992 to 1993, he was Senior Vice
President of Prudential. Prior to 1992, he was Vice President of Prudential.
Mendel A. Melzer, age 38, has been Chief Investment Officer, Mutual Funds and
Annuities, Prudential Investments since 1996; 1995 to 1996: Chief Financial
Officer of the Money Management Group of Prudential; 1993 to 1995: Senior Vice
President and Chief Financial Officer of Prudential Preferred Financial
Services; Prior to 1993: Managing Director, Prudential Investment Corporation.
Item 11. Executive Compensation
- -------------------------------
The following table shows the 1998 annual compensation, paid by Prudential, to
each named executive for services provided to the Company. The amounts have been
determined based on each individual's time devoted to the duties as an executive
of the Company.
Name and Principal Other Annual
Position Year Salary Bonus Compensation
- ---------------------------- -------- ---------------- ---------------- ----------------
Esther H. Milnes 1998 $6,231 $7,894 $ 0
President 1997 5,598 6,419 0
1996 5,417 3,641 0
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
Not applicable.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
Refer to Note 12 in the Notes to the Financial Statements on page F-21.
17
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) (1) and (2) Financial Statements and Schedules of Registrant are listed
in the accompanying "Index to Financial Statements and Financial Statement
Schedules" on page F-1 hereof and are filed as part of this Report.
(a) (3) Exhibits
--------
Regulation S-K
--------------
2. Not applicable.
3. Documents Incorporated by Reference
(i) The Articles of Incorporation of Pruco Life of New Jersey as
amended March 11, 1983 and the Bylaws of Pruco Life Insurance Company
of New Jersey, as amended February 1, 1991 are incorporated herein by
reference to Post-Effective Amendment No. 26 to Form S-6, Registration
No. 2-89780, filed April 28, 1997 on behalf of the Company; (ii)
Bylaws of Pruco Life of New Jersey as amended May 5, 1997 are
incorporated herein by reference to Form 10-Q, Registration No.
333-18117-01, filed August 15, 1997 on behalf of Pruco Life Insurance
Company of New Jersey.
4. Exhibits
Market-Value Annuity Contract, incorporated by reference to
Registrant's Form S-1 Registration Statement, Registration No.
333-18053, filed December 17, 1996, on behalf of Pruco Life Insurance
Company of New Jersey.
9. None.
10. None.
11. Not applicable.
12. Not applicable.
13. Not applicable.
16. Not applicable.
18. None.
21. None.
22. None.
23. Not applicable.
24. Powers of Attorney for I. Edward Price, Esther H. Milnes, William M.
Bethke, Ira Kleinman and Mendel Melzer are incorporated by reference
to Form N-4, Registration No. 333-18117, filed December 18, 1996 on
behalf of Pruco Life of New Jersey Flexible Premium Variable Annuity
Account. A Power of Attorney for James J. Avery, Jr. is incorporated
by reference to Post Effective Amendment No. 9 to Form S-1,
Registration No. 33-20018, filed June 25, 1997 on behalf of the Pruco
Life of New Jersey Variable Contract Real Property Account.
27. Exhibit 27, Financial Data Schedule appended to this form in
accordance with EDGAR instructions.
99. The following table presents sales and related expenses of the
Flexible Premium Variable Annuity Account since July 19, 1995, the
effective date of the registration statement (SEC file number
333-18053).
18
For the account(s)
For the account of the
of the Company contractholder(s)
------------------------------- -----------------
Aggregate
offering price
of amount
registered Amount sold Amount sold
---------- ----------- -----------
(000's)
Flexible Premium Variable Annuity Account * $ 150,000 $ 18,684 $ 660
Underwriting discounts and commissions ** (654)
Other expenses *** (291)
--------
Total (945)
--------
Net offering proceeds $ 17,739
========
* Securities are not issued or sold in predetermined units.
** Amount represents estimated commissions paid to affiliated parties.
*** Amount represents estimated general administrative expenses paid to the
parent under service and lease agreement.
19
SIGNATURES
----------
Pursuant to the requirements of Section 13, or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
(Registrant)
Date: March 15, 1999 By: /s/ ESTHER H. MILNES
_________________ _____________________________
Esther H. Milnes
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
*
_________________________ Chairman of the Board March 15, 1999
James J. Avery, Jr.
*
_________________________ Vice Chairman of the Board March 15, 1999
I. Edward Price and Director
*
_________________________ President and Director March 15, 1999
Esther H. Milnes
/s/ DENNIS G. SULLIVAN
_________________________ Principal Financial Officer and Chief March 15, 1999
Dennis G. Sullivan Accounting Officer
*
__________________________ Director March 15, 1999
William M. Bethke
*
_________________________ Director March 15, 1999
Ira J. Kleinman
*
_________________________ Director March 15, 1999
Mendel A. Melzer
* By: /s/ THOMAS C. CASTANO
___________________________________
Thomas C. Castano
(Attorney-in-Fact)
20
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
21
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Financial Statements Page No.
- -------------------- --------
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
Report of Independent Accountants F-2
Financial Statements:
Statements of Financial Position - December 31, 1998 and 1997 F-3
Statements of Operations - Years Ended December 31, 1998, 1997, and 1996 F-4
Statements of Changes in Stockholder's Equity - Years Ended
December 31, 1998, 1997, and 1996 F-5
Statements of Cash Flows - Years Ended December 31, 1998, 1997, and 1996 F-6
Notes to Financial Statements - December 31, 1998, 1997, and 1996 F-7
F-1
Report of Independent Accountants
---------------------------------
To the Board of Directors of
Pruco Life Insurance Company of New Jersey
In our opinion, the accompanying statements of finanacial position and the
related statements of operations, of changes in stockholder's equity and of cash
flows present fairly, in all material respects, the financial position of Pruco
Life Insurance Company of New Jersey at December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
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 generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
February 26, 1999
F-2
Pruco Life Insurance Company of New Jersey
Statements of Financial Position
December 31, 1998 and 1997 (In Thousands)
- --------------------------------------------------------------------------------
1998 1997
---------- ----------
ASSETS
Fixed maturities
Available for sale, at fair value (amortized cost, 1998: $617,758; and
1997: $585,109) $ 622,990 $ 592,361
Policy loans 139,443 127,306
Short-term investments 53,761 52,464
---------- ----------
Total investments 816,194 772,131
Cash 45 3
Deferred policy acquisition costs 113,923 101,625
Accrued investment income 12,209 14,075
Other assets 15,379 4,037
Separate Account assets 1,453,407 1,110,561
---------- ----------
TOTAL ASSETS $2,411,157 $2,002,432
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Policyholders' account balances $ 413,848 $ 402,601
Future policy benefits and other policyholder liabilities 90,530 85,220
Cash collateral for loaned securities 34,424 33,663
Securities sold under agreements to repurchase 27,210 --
Income taxes payable 1,610 12,963
Net deferred income tax liability 23,715 22,188
Payable to affiliate 3,492 4,307
Other liabilities 19,489 17,103
Separate Account liabilities 1,450,986 1,108,994
---------- ----------
Total liabilities 2,065,304 1,687,039
Contingencies - (See Note 10) ---------- ----------
Stockholder's Equity
Common stock, $5 par value;
400,000 shares, authorized;
issued and outstanding at
December 31, 1998 and 1997 2,000 2,000
Paid-in-capital 125,000 125,000
Retained earnings 217,260 185,437
Accumulated other comprehensive income 1,593 2,956
---------- ----------
Total stockholder's equity 345,853 315,393
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $2,411,157 $2,002,432
========== ==========
See Notes to Financial Statements
F-3
Pruco Life Insurance Company of New Jersey
Statements of Operations
Years Ended December 31, 1998, 1997, and 1996 (In Thousands)
- --------------------------------------------------------------------------------
1998 1997 1996
--------- --------- ---------
REVENUES
Premiums $ 1,345 $ 1,105 $ 1,345
Policy charges and fee income 56,247 56,382 58,571
Net investment income 47,032 46,324 43,784
Realized investment gains, net 8,446 1,707 1,221
Other income 5,755 5,286 4,047
--------- --------- ---------
Total revenues 118,825 110,804 108,968
--------- --------- ---------
BENEFITS AND EXPENSES
Policyholders' benefits 28,342 33,999 28,653
Interest credited to policyholders' account balances 18,985 19,372 20,069
General, administrative and other expenses 22,105 27,236 12,848
--------- --------- ---------
Total benefits and expenses 69,432 80,607 61,570
--------- --------- ---------
Income from operations before income taxes 49,393 30,197 47,398
--------- --------- ---------
Income taxes
Current 15,309 13,279 12,682
Deferred 2,261 (2,305) 2,929
--------- --------- ---------
Total income taxes 17,570 10,974 15,611
--------- --------- ---------
NET INCOME $ 31,823 $ 19,223 $ 31,787
========= ========= =========
Net unrealized investment gains (losses) on securities,
net of reclassification adjustment (1,363) 924 (4,556)
--------- --------- ---------
TOTAL COMPREHENSIVE INCOME $ 30,460 $ 20,147 $ 27,231
========= ========= =========
See Notes to Financial Statements
F-4
Pruco Life Insurance Company of New Jersey
Statements of Changes in Stockholder's Equity
Years Ended December 31, 1998, 1997, and 1996 (In Thousands)
- --------------------------------------------------------------------------------
Accumulated
other Total
Common Paid-in- Retained comprehensive stockholder's
stock capital earnings income equity
--------- --------- --------- --------- ---------
Balance, January 1, 1996 $ 2,000 $ 125,000 $ 134,427 $ 6,588 $ 268,015
Net income -- -- 31,787 -- 31,787
Change in net unrealized
investment gains, net of
reclassification adjustment -- -- -- (4,556) (4,556)
--------- --------- --------- --------- ---------
Balance, December 31, 1996 2,000 125,000 166,214 2,032 295,246
Net income -- -- 19,223 -- 19,223
Change in net unrealized
investment gains, net of
reclassification adjustment -- -- -- 924 924
--------- --------- --------- --------- ---------
Balance, December 31, 1997 2,000 125,000 185,437 2,956 315,393
Net income -- -- 31,823 -- 31,823
Change in net unrealized
investment gains, net of
reclassification adjustment -- -- -- (1,363) (1,363)
--------- --------- --------- --------- ---------
Balance, December 31, 1998 $ 2,000 $ 125,000 $ 217,260 $ 1,593 $ 345,853
========= ========= ========= ========= =========
See Notes to Financial Statements
F-5
Pruco Life Insurance Company of New Jersey
Statements of Cash Flows
Years Ended December 31, 1998, 1997, and 1996 (In Thousands)
- --------------------------------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,823 $ 19,223 $ 31,787
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Policy charges and fee income (10,871) (7,841) (9,963)
Interest credited to policyholders' account balances 18,985 19,372 20,069
Realized investment gains, net (8,446) (1,707) (1,221)
Amortization and other non-cash items 2,491 (1,046) 10,065
Change in:
Future policy benefits and other policyholders' liabilities 5,310 8,981 7,461
Accrued investment income 1,866 (1,167) (1,329)
Policy loans (12,137) (13,388) (15,724)
Separate Accounts (854) 1,629 (1,335)
Payable to affiliates (815) (1,752) 4,300
Deferred policy acquisition costs (12,298) 5,340 (10,934)
Income taxes payable (11,353) 10,993 1,970
Deferred income tax liability 1,527 (1,987) 366
Other, net (8,955) 2,812 4,669
----------- ----------- -----------
Cash Flows (Used in) From Operating Activities (3,727) 39,462 40,181
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities:
Available for sale 1,001,096 645,355 901,775
Payments for the purchase of:
Fixed maturities:
Available for sale (1,029,988) (679,709) (956,483)
Cash collateral for loaned securities, net 761 33,663 --
Securities sold under agreements to repurchase, net 27,210 -- --
Short term investments, net (1,297) (35,461) 28,306
----------- ----------- -----------
Cash Flows Used in Investing Activities (2,218) (36,152) (26,402)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 300,536 134,020 16,754
Withdrawals (294,549) (141,255) (26,605)
----------- ----------- -----------
Cash Flows From (Used in) Financing Activities 5,987 (7,235) (9,851)
----------- ----------- -----------
Net increase (decrease) in Cash 42 (3,925) 3,928
Cash, beginning of year 3 3,928 --
----------- ----------- -----------
CASH, END OF PERIOD $ 45 $ 3 $ 3,928
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid $ 27,083 $ 1,896 $ 11,673
=========== =========== ===========
See Notes to Financial Statements
F-6
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. BUSINESS
Pruco Life Insurance Company of New Jersey (the Company) 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,
variable annuities, and fixed annuities (the Contracts) only in the states of
New Jersey and New York.
The Company is a wholly owned subsidiary of Pruco Life Insurance Company (Pruco
Life), a stock life insurance company organized in 1971 under the laws of the
state of Arizona. Pruco Life, in turn, is a wholly owned subsidiary of The
Prudential Insurance Company of America (Prudential), a mutual insurance company
founded in 1875 under the laws of the state of New Jersey. Pruco Life 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, Pruco Life is under no obligation to make such
contributions and its assets do not back the benefits payable under the
Contracts.
The Company is engaged in a business that is highly competitive because of the
large number of stock and mutual life insurance companies and other entities
engaged in marketing insurance products, and individual annuities. There are
approximately 1,620 stock, mutual and other types of insurers in the life
insurance business in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements include the accounts of the Company, a stock life
insurance company. The financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP").
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the period. Actual results could differ from those estimates.
Investments
Fixed maturities classified as "available for sale" are carried at estimated
fair value. 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 participating annuity
contracts that would result from the realization of unrealized gains and losses,
net of income taxes, are included in a separate component of equity,
"Accumulated other comprehensive income."
Policy loans are carried at unpaid principal balances.
Short-term investments, consists primarily of highly liquid debt instruments
purchased with an original maturity of twelve months or less and are carried at
amortized cost, which approximates fair value.
Realized investment gains, net, are computed using the specific identification
method. Costs of fixed maturity are adjusted for impairments considered to be
other than temporary.
Cash
Cash includes cash on hand, amounts due from banks, and money market
instruments.
Deferred Policy Acquisition Costs
The costs which vary with and that are related primarily to the production of
new insurance business are deferred to the extent that they are deemed
recoverable from future profits. Such costs include certain commissions, costs
of policy issuance and underwriting, and certain variable field office expenses.
Deferred policy acquisition costs are subject to recoverability testing at the
time of policy issue and loss recognition testing at the end of each accounting
period. Deferred policy acquisition costs are adjusted for the impact of
unrealized gains or losses on investments as if these gains or losses had been
realized, with corresponding credits or charges included in equity.
F-7
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Acquisition costs related to interest-sensitive life products and
investment-type contracts are deferred and amortized in proportion to total
estimated gross profits arising principally from investment results, mortality
and expense margins and surrender charges based on historical and anticipated
future experience. Amortization periods range from 15 to 30 years. Deferred
policy acquisition costs are analyzed to determine if they are recoverable from
future income, including investment income. If such costs are determined to be
unrecoverable, they are expensed at the time of determination. The effect of
revisions to estimated gross profits on unamortized deferred acquisition costs
is reflected in earnings in the period such estimated gross profits are revised.
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% of the fair value of the securities. The Company monitors
the market value of securities loaned on a daily basis with additional
collateral obtained as necessary. Non-cash collateral received is not reflected
in the statements of financial position. Substantially all of the Company's
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. The Company's policy is to take possession of securities
purchased under agreements to resell. The market value of securities to be
repurchased is monitored and additional collateral is requested, 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. Separate Account assets include 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 Statement of Operations. Mortality,
policy administration and surrender charges on the accounts are included in
"Policy charges and fee income."
Separate Accounts represent funds for which investment income and investment
gains and losses accrue directly to, and investment risk is borne by, the
policyholders, with the exception of the Pruco Life of New Jersey Modified
Guaranteed Annuity Account. The Pruco Life of New Jersey 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 of New Jersey 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.
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.
F-8
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Amounts received as payment for interest sensitive life, investment contracts
and variable annuities are reported as deposits to "Policyholders' account
balances." Revenues from these contracts are reflected as "Policy charges and
fee income" and consist primarily of fees assessed during the period against the
policyholders' account balances for mortality charges, policy administration
charges, and surrender charges. In addition, interest earned from the investment
of these account balances is reflected in "Net investment income." 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.
Other Income
Other income consists primarily of asset management fees which are received by
the Company from Prudential for services Prudential provides to the Prudential
Series Fund, an underlying investment option of the Separate Accounts.
Derivative Financial Instruments
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 used by the Company
are futures and can be exchange-traded or contracted in the over-the-counter
market. The Company uses derivative financial instruments to hedge market risk
from changes in interest rates and to alter interest rate or currency exposures
arising from mismatches between assets and liabilities. All derivatives used by
the Company are for other than trading purposes.
To qualify as a hedge, derivatives must be designated as hedges for existing
assets, liabilities, firm commitments, or anticipated transactions which are
identified and probable to occur, and effective in reducing the market risk to
which the Company is exposed. The effectiveness of the derivatives must be
evaluated at the inception of the hedge and throughout the hedge period.
When derivatives qualify as hedges, the changes in the fair value or cash flows
of the derivatives and the hedged items are recognized in earnings in the same
period. If the Company's use of other than trading derivatives does not meet the
criteria to apply hedge accounting, the derivatives are recorded at fair value
in "Other liabilities" in the Statements of Financial Position, and changes in
their fair value are recognized in earnings in "Realized investment gains, net"
without considering changes in the hedged assets or liabilities. Cash flows from
other than trading derivative assets and liabilities are reported in the
operating activities section in the Statements of Cash Flows.
Income Taxes
The Company is a member of the consolidated federal income tax return of
Prudential and files separate company state and local tax returns. Pursuant to
the tax allocation arrangement, total federal income tax expense is determined
on a separate company basis. Members with losses record tax benefits to the
extent such losses are recognized in the consolidated federal tax provision.
Deferred income taxes are generally recognized, based on enacted rates, when
assets and liabilities have different values for financial statement and tax
reporting purposes. A valuation allowance is recorded to reduce a deferred tax
asset to that portion that is expected to be realized.
New Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board ("FASB") issued the
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS 125"). The statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
and provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. SFAS 125
became effective January 1, 1997 and was applied prospectively. Subsequent to
June 1996, FASB issued SFAS No. 127 "Deferral of the Effective Date of Certain
Provisions of SFAS 125" ("SFAS 127"). SFAS 127 delays the implementation of SFAS
125 for one year for certain transactions, including repurchase agreements,
dollar rolls, securities lending and similar transactions. Adoption of SFAS 125
did not have a material impact on the Company's results of operations, financial
position and liquidity.
On January 1, 1999, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SOP 97-3").
This statement provides guidance for determining when an insurance company or
other enterprise should recognize a liability for guaranty-fund assessments as
well as guidance for measuring the liability. The adoption of SOP 97-3 is not
expected to have a material effect on the Company's financial position or
results of operations.
F-9
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires that companies recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 provides, if certain conditions
are met, that a derivative may be specifically designated as (1) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment (fair value hedge), (2) a hedge of the exposure to
variable cash flows of a forecasted transaction (cash flow hedge), or (3) a
hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security or a
foreign-currency-denominated forecasted transaction (foreign currency hedge).
SFAS No. 133 does not apply to most traditional insurance contracts. However,
certain hybrid contracts that contain features which can affect settlement
amounts similarly to derivatives may require separate accounting for the "host
contract" and the underlying "embedded derivative" provisions. The latter
provisions would be accounted for as derivatives as specified by the statement.
Under SFAS No. 133, the accounting for changes in fair value of a derivative
depends on its intended use and designation. For a fair value hedge, the gain or
loss is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item. For a cash flow hedge, the effective
portion of the derivative's gain or loss is initially reported as a component of
other comprehensive income and subsequently reclassified into earnings when the
forecasted transaction affects earnings. For a foreign currency hedge, the gain
or loss is reported in other comprehensive income as part of the foreign
currency translation adjustment. For all other items not designated as hedging
instruments, the gain or loss is recognized in earnings in the period of change.
The Company is required to adopt this statement by the first quarter of 2000 and
is currently assessing the effect of the new standard.
In October, 1998, the AICPA issued Statement of Position 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk," ("SOP 98-7"). This statement provides guidance on how
to account for insurance and reinsurance contracts that do not transfer
insurance risk. SOP 98-7 is effective for fiscal years beginning after June 15,
1999. The adoption of this statement is not expected to have a material effect
on the Company's financial position or results of operations.
Reclassifications
Certain amounts in the prior years have been reclassified to conform to current
year presentations.
F-10
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS
Fixed Maturities
The following tables provide additional information relating to fixed maturities
as of December 31:
1998
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
(In Thousands)
Fixed maturities available for sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 51,663 $ 260 $ 318 $ 51,605
Foreign government bonds 34,744 887 236 35,395
Corporate Securities 531,351 7,273 2,634 535,990
-------- -------- -------- --------
Total fixed maturities available for sale $617,758 $ 8,420 $ 3,188 $622,990
======== ======== ======== ========
1997
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
(In Thousands)
Fixed maturities available for sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 42,885 $ 340 $ 3 $ 43,222
Foreign government bonds 38,332 551 -- 38,883
Corporate securities 503,892 6,545 181 510,256
-------- -------- -------- --------
Total fixed maturities available for sale $585,109 $ 7,436 $ 184 $592,361
======== ======== ======== ========
F-11
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS (continued)
The amortized cost and estimated fair value of fixed maturities, categorized by
contractual maturities at December 31, 1998, are shown below:
Available for Sale
---------------------------
Amortized Estimated
Cost Fair Value
-------- ----------
(In Thousands)
Due in one year or less $ 13,645 $ 13,767
Due after one year through five years 269,252 271,525
Due after five years through ten years 255,280 257,992
Due after ten years 79,581 79,706
-------- --------
Total $617,758 $622,990
======== ========
Actual maturities will differ from contractual maturities because, in certain
circumstances, issuers have the right to call or prepay obligations.
Proceeds from the sale of fixed maturities available for sale during 1998, 1997,
and 1996 were $990.7 million, $635.4 million and $854.8 million, respectively.
Gross gains of $8.8 million, $2.9 million, and $3.9 million and gross losses of
$1.8 million, $1.2 million, and $3.8 million were realized on those sales during
1998, 1997, and 1996, respectively. Proceeds from maturities of fixed maturities
available for sale during 1998, 1997, and 1996 were $10.4 million, $10.0
million, and $47.0 million, respectively.
Writedowns for impairments of fixed maturities which were deemed to be other
than temporary were $.6 million for 1998. There were no impairments of fixed
maturities for the years 1997 and 1996.
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 Standard & Poor's Corporation, an independent rating
agency as of December 31, 1998:
Available for Sale
-------------------------------
Amortized Estimated
Cost Fair Value
--------- ----------
NAIC Standard & Poor's (In Thousands)
1 AAA to AA- $ 303,209 $ 306,693
2 BBB+ to BBB- 286,640 287,888
3 BB+ to BB- 27,134 27,692
4 B+ to B- 704 638
5 CCC or lower 71 79
6 In or near default -- --
--------- ---------
Total $ 617,758 $ 622,990
========= =========
F-12
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS (continued)
The fixed maturity portfolio consists largely of investment grade assets (rated
"1" or "2" by the NAIC), with such investments accounting for 95% and 96% of the
portfolio at December 31, 1998 and 1997, respectively, based on fair value. As
of both of those dates, no fixed maturities in the portfolio were rated "6" by
the NAIC, defined as public and private placement securities which are currently
non-performing or believed subject to default in the near-term.
The Company continually reviews fixed maturities and identifies potential
problem assets which require additional monitoring. The Company defines
"problem" fixed maturities as those for which principal and/or interest payments
are in default. The Company defines "potential problem" fixed maturities as
assets which are believed to present default risk associated with future debt
service obligations and therefore require more active management. No problem or
potential problem fixed maturities were identified in 1998 or 1997.
Special Deposits
Fixed maturities of $.5 million at both December 31, 1998 and 1997,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws.
Investment Income and Investment Gains and Losses
Net investment income arose from the following sources for the years ended
December 31:
1998 1997 1996
-------- -------- --------
(In Thousands)
Fixed maturities - available for sale $ 39,478 $ 37,563 $ 36,193
Policy loans 7,350 6,596 5,761
Short-term investments 3,502 3,023 2,504
Other (842) 333 28
-------- -------- --------
Gross investment income 49,488 47,515 44,486
Less investment expenses (2,456) (1,191) (702)
-------- -------- --------
Net investment income $ 47,032 $ 46,324 $ 43,784
======== ======== ========
Realized investment gains, net, including charges for other than temporary
reductions in value, for the years ended December 31, were as follows:
1998 1997 1996
-------- -------- --------
(In Thousands)
Realized investment gains $ 17,957 $ 2,898 $ 5,232
Realized investment losses (9,511) (1,191) (4,011)
-------- -------- --------
Realized investment gains, net $ 8,446 $ 1,707 $ 1,221
======== ======== ========
F-13
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS (continued)
Net Unrealized Investment Gains
Net unrealized investment gains on fixed maturities available for sale are
included in the Statements of Financial Position as a component of accumulated
other comprehensive income. Changes in these amounts include adjustments to
avoid double-counting in comprehensive income, items that are included as part
of net income for a period that also have been part of other comprehensive
income in earlier periods. The amounts for the years ended December 31, net of
tax, are as follows:
1998 1997 1996
------- ------- -------
(In Thousands)
Net unrealized investment gains, beginning of year $ 2,956 $ 2,032 $ 6,588
Changes in net unrealized investment gains attributable to:
Investments:
Net unrealized investment gains on investments arising during the period 3,227 3,228 (6,403)
Reclassification adjustment for gains included in net income 4,539 1,109 860
------- ------- -------
Change in net unrealized investment gains , net of adjustments (1,312) 2,119 (7,263)
Impact of net unrealized investment gains on:
Future policy benefits 57 216 (776)
Deferred policy acquisition costs (108) (1,411) 3,483
------- ------- -------
Change in net unrealized investment gains (1,363) 924 (4,556)
------- ------- -------
Net unrealized investment gains, end of year $ 1,593 $ 2,956 $ 2,032
======= ======= =======
Unrealized gains (losses) on investments arising during the periods reported in
the above table are net of income tax expense (benefit) of $1.7 million, $1.7
million and $(3.6) million for the years ended December 31, 1998, 1997, and
1996, respectively.
Reclassification adjustments reported in the above table for the years ended
December 31, 1998, 1997, and 1996 are net of income tax expense of $(2.4)
million, $(.6) million and $(.5) million, respectively.
The future policy benefits reported in the above table are net of income tax
expense (benefit) of $.03 million, $0, and $(.4) million for the years ended
December 31, 1998, 1997 and 1996, respectively.
Deferred policy acquisition costs in the above tables for the years ended
December 31, 1998, 1997 and 1996 are net of income tax expense (benefit) of
$(.06) million, $(.8) million and $2.0 million, respectively.
4. POLICYHOLDERS' LIABILITIES
Future policy benefits and other policyholder liabilities at December 31 are as
follows:
1998 1997
------- -------
(In Thousands)
Life insurance $85,523 $80,464
Annuities 5,007 4,756
------- -------
$90,530 $85,220
======= =======
Life insurance liabilities include reserves for death and endowment policy
benefits. Annuity liabilities include reserves for immediate annuities.
F-14
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
4. POLICYHOLDERS' LIABILITIES (continued)
The following table highlights the key assumptions generally utilized in
calculating these reserves:
Product Mortality Interest Rate Estimation Method
- ---------------------- ----------------------- ---------------------- ---------------------------
Life insurance Generally rates 2.5% to 7.5% Net level premium based
guaranteed in on non-forfeiture
calculating interest rate
cash surrender values
Individual immediate 1983 Individual Annuity 6.25% to 8.75% Present value of
annuities Mortality Table with expected future payment
certain modifications based on historical experience
Policyholders' account balances at December 31, are as follows:
1998 1997
-------- --------
(In Thousands)
Individual annuities $148,327 $145,120
Interest-sensitive life contracts 265,521 257,481
-------- --------
$413,848 $402,601
======== ========
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, mortality charges.
Certain contract provisions that determine the policyholder account balances are
as follows:
Product Interest Rate Withdrawal / Surrender Charges
------- ------------- ------------------------------
Interest sensitive life contracts 4.0% to 5.4% Various up to 10 years
Individual annuities 3.0% to 5.6% 0% to 8% for up to 8 years
F-15
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
5. 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 subsidiaries as the primary insurer, except for cases involving a
novation. Ceded balances would represent a liability to 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.
Reinsurance amounts included in the Statement of Operations for the year ended
December 31 are below.
1998 1997 1996
------- ------- -------
(In Thousands)
Direct Premiums $ 1,373 $ 1,117 $ 1,345
Reinsurance ceded-affiliated (28) (12) --
------- ------- -------
Premiums $ 1,345 $ 1,105 $ 1,345
======= ======= =======
Policyholders' benefits ceded $ 15 $ 14 $ 13
======= ======= =======
Reinsurance recoverables, included in "Other assets" in the Company's Statements
of Financial Position, at December 31 include amounts recoverable on unpaid and
paid losses and were as follows:
1998 1997
---- ----
(In Thousands)
Life insurance - affiliated $31 $30
--- ---
$31 $30
=== ===
F-16
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
6. INCOME TAXES
The components of income taxes for the years ended December 31, are as follows:
1998 1997 1996
-------- -------- --------
(In Thousands)
Current tax expense (benefit):
U.S. $ 14,786 $ 12,880 $ 13,589
State and local 523 399 (907)
-------- -------- --------
Total 15,309 13,279 12,682
-------- -------- --------
Deferred tax expense (benefit):
U.S. 2,198 (2,305) 2,848
State and local 63 -- 81
-------- -------- --------
Total 2,261 (2,305) 2,929
-------- -------- --------
Total income tax expense $ 17,570 $ 10,974 $ 15,611
======== ======== ========
The Company's income tax expense for the years ended December 31, differs from
the amount computed by applying the expected federal income tax rate of 35% to
income from operations before income taxes for the following reasons:
1998 1997 1996
-------- -------- --------
(In Thousands)
Expected federal income tax expense $ 17,288 $ 10,569 $ 16,589
State and local income taxes 381 259 (537)
Other (99) 146 (441)
-------- -------- --------
Total income tax expense $ 17,570 $ 10,974 $ 15,611
======== ======== ========
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
1998 1997
------- -------
(In Thousands)
Deferred income tax assets:
Insurance reserves $10,016 $ 6,907
Other -- --
------- -------
Deferred tax assets $10,016 $ 6,907
------- -------
Deferred income tax liabilities:
Deferred acquisition costs 28,509 24,725
Net investment gains 2,847 4,284
Other 2,375 86
------- -------
Deferred tax liabilities 33,731 29,095
------- -------
Net deferred federal tax liability $23,715 $22,188
======= =======
F-17
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
6. INCOME TAXES (continued)
Management believes that based on its historical pattern of taxable income, the
Company will produce sufficient income in the future to realize its deferred tax
assets after valuation allowance. Adjustments to the valuation allowance will be
made if there is a change in management's assessment of the amount of the
deferred tax asset that is realizable. At December 31, 1998 and 1997,
respectively, the Company had no federal or state operating loss carryforwards
for tax purposes.
The Internal Revenue Service (the "Service") has completed examinations of the
consolidated federal income tax returns through 1989. The Service has examined
the years 1990 through 1992. Discussions are being held with the Service with
respect to proposed adjustments. Management, however, believes there are
adequate defenses against, or sufficient reserves to provide for, such
adjustments. The Service has begun their examination of the years 1993 through
1995.
F-18
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
7. EQUITY
Reconciliation of Statutory Surplus and Net Income
Accounting practices used to prepare statutory financial statements for
regulatory purposes differ in certain instances from GAAP. The following table
reconciles the Company's statutory net income and surplus as of and for the
years ended December 31, determined in accordance with accounting practices
prescribed or permitted by the New Jersey Department of Banking and Insurance
with net income and equity determined using GAAP.
1998 1997 1996
-------- -------- --------
(In Thousands)
Statutory net income $ 18,704 $ 18,306 $ 24,774
Adjustments to reconcile to net income on a GAAP basis:
Deferred acquisition costs 12,464 (3,170) 5,656
Deferred premium 534 198 221
Insurance liabilities (808) 2,324 4,784
Deferred taxes (2,261) 2,305 (2,929)
Valuation of investments 3,794 (143) (765)
Other, net (604) (597) 46
-------- -------- --------
GAAP net income $ 31,823 $ 19,223 $ 31,787
======== ======== ========
1998 1997
--------- ---------
(In Thousands)
Statutory surplus $ 252,530 $ 235,958
Adjustments to reconcile to equity on a GAAP basis:
Valuation of investments 20,799 18,540
Deferred acquisition costs 113,923 101,625
Deferred premium (1,473) (2,007)
Insurance liabilities (18,141) (19,120)
Deferred taxes (23,715) (22,188)
Other, net 1,930 2,585
--------- ---------
GAAP stockholder's equity $ 345,853 $ 315,393
========= =========
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values presented below have been determined using available
information and valuation methodologies. Considerable judgment is applied in
interpreting data to develop the estimates of fair value. Accordingly, such
estimates presented may not be realized in a current market exchange. The use of
different market assumptions and/or estimation methodologies could have a
material effect on the estimated fair values. The following methods and
assumptions were used in calculating the fair values (for all other financial
instruments presented in the table, the carrying value approximates estimated
fair value).
Fixed maturities
Estimated fair values for fixed maturities are based on quoted market prices or
estimates from independent pricing services.
Policy loans
Estimated fair value of policy loans is calculated using a discounted cash flow
model based upon current U.S. Treasury rates and historical loan repayments.
F-19
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
8. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Policyholders' account balances
Estimated fair values of policyholders' account balances are derived by 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.
Derivative financial instruments
The fair value of futures is estimated based on market quotes for transactions
with similar terms. The following table discloses the carrying amounts and
estimated fair values of the Company's financial instruments at December 31, :
1998 1997
--------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------- ---------- ---------- ----------
(In Thousands)
Financial Assets:
Fixed maturities available for sale $ 622,990 $ 622,990 $ 592,361 $ 592,361
Policy loans 139,443 146,504 127,306 126,262
Short-term investments 53,761 53,761 52,464 52,464
Cash 45 45 3 3
Separate Accounts assets 1,453,407 1,453,407 1,110,561 1,110,561
Financial Liabilities:
Policyholders'
account balances $ 413,848 $ 414,602 $ 402,601 $ 401,267
Cash collateral for loaned
securities 61,634 61,634 33,663 33,663
Separate Accounts liabilities 1,450,986 1,450,986 1,108,994 1,108,994
Derivatives -- -- 83 83
9. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
Futures
The Company uses exchange-traded Treasury futures to reduce market risks from
changes in interest rates, to alter mismatches between the duration of assets in
a portfolio and the duration of liabilities supported by those assets, and to
hedge against changes in the value of securities it owns or anticipates
acquiring. The Company enters into exchange-traded futures with regulated
futures commissions merchants who are members of a trading exchange. The fair
value of futures is estimated based on market quotes for a transaction with
similar terms.
Under exchange-traded futures, the Company agrees to purchase a specified number
of contracts with other parties and to post variation margin on a daily basis in
an amount equal to the difference in the daily market values of those contracts.
Futures are typically used to hedge duration mismatches between assets and
liabilities by replicating Treasury performance. Treasury futures move
substantially in value as interest rates change and can be used to either
generate new 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
Company's exposure to a market decline than selling fixed income securities and
purchasing a similar portfolio when such a decline is believed to be over.
F-20
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
9. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)
For futures that 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 current period earnings. The fair value of
futures contracts was immaterial at December 31, 1998 and 1997.
Credit Risk
The current credit exposure of the Company's 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 is with
investment-grade counterparties.
10. CONTINGENCIES
Several actions have been brought against the Company on behalf of those persons
who purchased life insurance policies based on complaints about sales practices
engaged in by Prudential, the Company and agents appointed by Prudential and the
Company. Prudential has agreed to indemnify the Company for any and all losses
resulting from such litigation.
In the normal course of business, the Company is subject to various claims and
assessments. Management believes the settlement of these matters would not have
a material effect on the financial position or results of operations of the
Company.
11. DIVIDENDS
The Company is subject to New Jersey law which requires any shareholder dividend
or distribution must be filed with the New Jersey Commissioner of Insurance.
Cash dividends may only be paid out of surplus derived from realized net
profits.
12. RELATED PARTY TRANSACTIONS
Service Agreements
Prudential and Pruco Life of New Jersey operate under service and lease
agreements whereby services of officers and employees, supplies, use of
equipment and office space are provided by Prudential. The net cost of these
services allocated to the Company were $23.5 million, $16.2 million, and $12.2
million for the years ended December 31, 1998, 1997, and 1996, respectively.
These costs are treated in a manner consistent with the Company's policy on
deferred acquisition costs.
Prudential and Pruco Life of New Jersey have an agreement with respect to
administrative services for the Prudential Series Fund. The Company invests in
the various portfolios of the Series Fund through the Separate Accounts. Under
this agreement, Prudential pays compensation to Pruco Life of New Jersey in the
amount equal to a portion of the gross investment advisory fees paid by the
Prudential Series Fund. The Company received from Prudential its allocable
shares of such compensation in the amount of $5.6 million, $5.0 million, and
$3.5 million during 1998, 1997, and 1996 respectively, recorded in "Other
income."
F-21
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
12. RELATED PARTY TRANSACTIONS (continued)
Reinsurance
The Company currently has a reinsurance agreement in place with Prudential (the
reinsurer). The reinsurance agreement is a yearly renewable term agreement in
which the Company may offer and the reinsurer may accept reinsurance on any life
in excess of the Company's maximum limit of retention. The Company is not
relieved of its primary obligation to the policyholder as a result of these
reinsurance transactions. These agreements had no material effect on net income
for the years ended December 31, 1998, 1997, and 1996.
Debt Agreements
In July 1998, the Company established a revolving line of credit facility with
Prudential Funding Corporation, a wholly-owned subsidiary of Prudential. There
is no outstanding debt relating to this credit facility as of December 31, 1998.
F-22