PRUCO LIFE INSURANCE OF NEW JERSEY - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 2001

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 Identification No.)
jurisdiction, incorporation or organization)

213 Washington Street, Newark, New Jersey 07102
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(Address of principal executive offices) (Zip Code)

(973) 802-3274
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(Registrant's Telephone Number, including area code)

Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: NONE

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ___

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 27, 2002. Common stock,
par value of $5 per share: 400,000 shares outstanding

Pruco Life Insurance Company of New Jersey meets the conditions set
forth in General Instruction (I) (1) (a) and (b) on Form 10-K and
is therefore filing this Form with the reduced disclosure format.

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
(Registrant)

INDEX

Page No.
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Cover Page -

Index 2

PART I Item 1. Business 3

Item 2. Properties 3

Item 3. Legal Proceedings 3

PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 5

Item 7. Management's Discussion and Analysis of Financial Position and Results of
of Operations 5

Item 8. Financial Statements and Supplementary Data 13

Item 9. Changes in and Disagreements with Independent Accountants on Accounting
and Financial Disclosure 13

PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 14

Exhibit Index 14

Signatures 16

Forward-Looking Statement Disclosure

Certain of the statements included in this Annual Report on Form 10-K, including
but not limited to those in the Management's Discussion and Analysis of
Financial Condition and Results of Operations, constitute forward-looking
statements within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. Words such as "expects," "believes," "anticipates," "includes,"
"plans," "assumes," "estimates," "projects," or variations of such words are
generally part of forward-looking statements. Forward-looking statements are
made based on management's current expectations and beliefs concerning future
developments and their potential effects upon Pruco Life Insurance Company Of
New Jersey ("the Company"). There can be no assurance that future developments
affecting the Company will be those anticipated by management. These
forward-looking statements are not a guarantee of future performance and involve
risks and uncertainties, and there are certain important factors that could
cause actual results to differ, possibly materially, from expectations or
estimates reflected in such forward-looking statements, including without
limitation: general economic, market and political conditions, including the
performance of financial markets, interest rate fluctuations and the continuing
impact of the events of September 11; volatility in the securities markets;
reestimates of our reserves for future policy benefits and claims; our exposure
to contingent liabilities; catastrophe losses; investment losses and defaults;
changes in our claims-paying or credit ratings; competition in our product lines
and for personnel; fluctuations in foreign currency exchange rates and foreign
securities markets; the impact of changing regulation or accounting practices;
adverse litigation results; and changes in tax law. The Company does not intend,
and is under no obligation to, update any particular forward-looking statement
included in this document.

2

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.
The Company is licensed to sell interest-sensitive individual life insurance and
variable life insurance, term life insurance, and individual variable 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"), an insurance company
founded in 1875 under the laws of the state of New Jersey. On December 18, 2001
("the date of demutualization") Prudential converted from a mutual life
insurance company to a stock life insurance company and became an indirect
wholly owned subsidiary of Prudential Financial, Inc. (the "Holding Company").
The demutualization was completed in accordance with Prudential's Plan of
Reorganization, which was approved by the Commissioner of the New Jersey
Department of Banking and Insurance in October 2001.

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.

Item 2. Properties

Office space is provided by Prudential, as is described in the Notes to the
Financial Statements.

Item 3. Legal Proceedings

Prudential and the Company are subject to legal and regulatory actions in the
ordinary course of their businesses, including class actions. Pending legal and
regulatory actions include proceedings relating to aspects of the businesses and
operations that are specific to the Company and Prudential and that are typical
of the businesses in which the Company and Prudential operate. Some of these
proceedings have been brought on behalf of various alleged classes of
complainants. In certain of these matters, the plaintiffs are seeking large
and/or indeterminate amounts, including punitive or exemplary damages.

Beginning in 1995, regulatory authorities and customers brought significant
regulatory actions and civil litigation against the Company and Prudential
involving individual life insurance sales practices. In 1996, Prudential, on
behalf of itself and many of its life insurance subsidiaries including the
Company entered into settlement agreements with relevant insurance regulatory
authorities and plaintiffs in the principal life insurance sales practices class
action lawsuit covering policyholders of individual permanent life insurance
policies issued in the United States from 1982 to 1995. Pursuant to the
settlements, the companies agreed to various changes to their sales and business
practices controls, to a series of fines, and to provide specific forms of
relief to eligible class members. Virtually all claims by class members filed in
connection with the settlements have been resolved and virtually all aspects of
the remediation program have been satisfied. While the approval of the class
action settlement is now final, Prudential and the Company remain subject to
oversight and review by insurance regulators and other regulatory authorities
with respect to its sales practices and the conduct of the remediation program.
The U.S. District Court has also retained jurisdiction as to all matters
relating to the administration, consummation, enforcement and interpretation of
the settlements.

As of February 28, 2002, Prudential and/or the Company remained a party to
approximately 44 individual sales practices actions filed by policyholders who
"opted out" of the class action settlement relating to permanent life insurance
policies issued in the United States between 1982 and 1995. In addition, there
were 20 sales practices actions pending that were filed by policyholders who
were members of the class and who failed to "opt out" of the class action
settlement. Prudential and the Company believe that those actions are governed
by the class settlement release, and expects them to be enjoined and/or
dismissed. Additional suits may be filed by class members who "opted out" of the
class settlements or who failed to "opt out", but nevertheless seek to proceed
against Prudential and/or the Company. A number of the plaintiffs in these cases
seek large and/or indeterminate amounts, including punitive or exemplary
damages. Some of these actions are brought on behalf of multiple plaintiffs. It
is possible that substantial punitive damages might be awarded in any of these
actions and particularly in an action involving multiple plaintiffs.

Prudential has indemnified the Company for any liabilities incurred in
connection with sales practices litigation covering policyholders of individual
permanent life insurance policies issued in the United States from 1982 to 1995.

3

The Company's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted. It is possible that the
results of operations or the cash flow of the Company in a particular quarterly
or annual period could be materially affected by an ultimate unfavorable
resolution of pending litigation and regulatory matters. Management believes,
however, that the ultimate outcome of all pending litigation and regulatory
matters should not have a material adverse effect on the Company's financial
position.

4

PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters

The Company is a wholly owned subsidiary of Pruco Life. There is no public
market for the Company's common stock.

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, term
insurance, variable and fixed annuities through Prudential's sales force in New
Jersey and New York. 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 have been changed through both legislative and judicial
processes. Regulatory changes have opened the insurance industry to competition
from other financial institutions, particularly banks and mutual funds that are
positioned to deliver competing investment products through large, stable
distribution channels.

In accordance with a profit sharing agreement with Prudential that was in effect
through December 31, 2000, the Company received fee income from policyholder
account balances invested in the Prudential Series Funds ("PSF"). PSF are a
portfolio of mutual fund investments related to the Company's Separate Account
products. These revenues were recorded as "Asset management fees" in the
Statements of Operations and Comprehensive Income. The Company was charged an
asset management fee by Prudential Global Asset Management ("PGAM") and Jennison
Associates LLC ("Jennison") for managing the PSF portfolio. These fees were a
component of "general, administrative and other expenses."

On September 29, 2000, the Board of Directors for the Prudential Series Fund,
Inc. ("PSFI") adopted resolutions to terminate the existing management agreement
between PSFI and Prudential, and has appointed another subsidiary of Prudential
as the fund manager for the PSF. The change was approved by the shareholders of
PSFI during early 2001 and was effective as of January 1, 2001. Therefore as of
January 1, 2001, the Company no longer receives fees associated with the PSF or
incurs asset management expenses from PGAM and Jennison associated with the PSF.
This transaction resulted in a decrease in net income from the prior year of $
4.7 million.

On December 28, 2001, the Company paid to its Parent an extraordinary dividend
which was approved by the New Jersey Department of Banking and Insurance. The
dividend was $186 million and was paid with cash of $26.5 million and fixed
maturities of $159.5 million.

In connection with Prudential's demutualization, qualified annuity contract
holders were given increases to their policy values in the form of policy
credits. The policy credits of $10.3 million are reflected as a reduction of
retained earnings.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires the application of accounting policies
that often involve a significant degree of judgment. Management, on an ongoing
basis, reviews critical estimates and assumptions. If management determines, as
a result of its consideration of facts and circumstances, that modifications in
assumptions and estimates are appropriate, results of operations and financial
position as reported in the Financial Statements may change significantly.

The following sections discuss accounting policies applied in preparing our
financial statements that Management believes are most dependent on the
application of estimates and assumptions.

Valuation of investments
The major portion of our investments are recorded at fair value in the statement
of financial position. Fair values are based on quoted market prices or
estimates from independent pricing services, when available. However, when such
information is not available, for example, with respect to private placement
fixed maturity securities, fair value is estimated, typically by using a
discounted cash flow model, which considers current market credit spreads for
publicly traded issues with similar terms by companies of comparable credit
quality. Consequently, changes in estimated future cash flows or in our
assessment of the issuer 's credit quality will result in changes in carrying
value. For fixed maturities and equity securities classified as available for
sale, the impact of such changes is recorded in "Accumulated other comprehensive
income (loss)," a separate component of equity. However, the carrying value of
these securities is written down to estimated fair value when a decline in value
is considered to be other than temporary, and we record the corresponding
impairment loss in "Realized investment losses, net," in the Statements of
Operations and Comprehensive Income. The factors we consider to determine if an
impairment loss is warranted are discussed more fully in Note 2 to the Financial
Statements. The level of impairment losses can be expected to increase when
economic conditions worsen and decrease when economic conditions improve.

5

Policyholder liabilities and deferred policy acquisition costs
The liability for future policy benefits is primarily comprised of the present
value of estimated future payments to holders of life insurance and annuity
products where the timing and amount of payment depends on policyholder
mortality surrender or retirement experience. For life insurance and annuity
products, expected mortality is generally based on the Company 's historical
experience or standard industry tables. Interest rate assumptions are based on
factors such as market conditions and expected investment returns. Although
mortality and interest rate assumptions are "locked-in" upon the issuance of new
insurance or annuity business with fixed and guaranteed terms, significant
changes in experience or assumptions may require us to provide for expected
future losses on a product by establishing premium deficiency reserves.

Our liability for Unpaid claims and claim adjustment expenses includes estimates
of claims that we believe have been incurred, but have not yet been reported
("IBNR"), as of the balance sheet date. These estimates, and estimates of the
amounts of loss we will ultimately incur on reported claims, which are based in
part on our historical experience, are regularly adjusted to reflect actual
claims experience. When actual experience differs from our previous estimate,
the resulting difference will be included in our reported results for the period
of the change in estimate.

For most life insurance and annuity products that we sell, we defer costs that
vary with and are related primarily to the production of new business to the
extent these costs are deemed recoverable from future profits, and we record
these costs as an asset known as deferred policy acquisition costs or "DAC" "in
the statements of financial position. We amortize this DAC asset over the
expected lives of the contracts, based on the level and timing of either
estimated profits or premiums, depending on the type of contract. For products
with amortization based on future premiums, the amortization rate is locked-in
when the product is sold. However, for products with amortization based on
estimated profits, the amortization rate is periodically updated to reflect
current period experience or changes in assumptions that affect future
profitability, such as lapse rates, investment returns, mortality experience,
expense margins and surrender charges. These changes result in adjustments to
DAC balances in the period that we change our assumptions as well as changes in
prospective DAC amortization. For example, adverse market conditions in 2001
resulted in declines in the market values of assets supporting our variable life
insurance and annuity products, which in turn resulted in lower expectations
regarding our estimated future gross profits from fee-based income. As a result,
we recorded a higher level of DAC amortization in 2001 for these products. DAC
is also subject to periodic recoverability testing.

Reserves for contingencies, litigation and restructuring
A contingency is an existing condition that involves a degree of uncertainty
that will ultimately be resolved upon the occurrence of future events. Under
GAAP, reserves for contingencies are required to be established when the future
event is probable and its impact can be reasonably estimated. An example is the
establishment of a reserve for losses in connection with an unresolved legal
matter. The initial reserve reflects management's best estimate of the probable
cost of ultimate resolution of the matter and is revised accordingly as facts
and circumstances change and, ultimately, when the matter is brought to closure.
In situations in which the Company is to be indemnified by Prudential, as with
the sales practices actions, a reserve for contingencies would not need to be
established in the Company's financial statements.

Other significant estimates
In addition to the items discussed above, the application of GAAP requires
management to make other estimates and assumptions. One example is the
recognition of deferred tax assets, which depends on management's assumption
that future earnings will be sufficient to realize the deferred benefit. This is
discussed in Note 8 to the Financial Statements.

6

The Company's Changes in Financial Position and Results of Operations are
described below.

Changes in Financial Position

2001 versus 2000

Total assets of the Company decreased $304 million during 2001, the majority of
which relates to a $174 million decrease in Separate Accounts primarily from
stock market declines, as described below. Fixed maturities decreased by $130
million primarily from an extraordinary dividend of $186 million paid to Pruco
Life of Arizona in December 2001, of which $159.5 million was paid with fixed
maturities. The Company reclassified held-to-maturity fixed maturities,
amounting to $7.5 million at January 1, 2001, to the available-for-sale
category.

Total liabilities of the Company decreased $127 million during the year from
$2.445 billion to $2.318 billion. Corresponding with the asset change, Separate
Account liabilities decreased by $174 million due to net investment losses of
$146 million, expense and other disbursements of $47 million, partially offset
by net contributions (contributions less surrenders and withdrawals) of $19
million. Net Separate Account contributions in 2000 were $95 million. The
current year decline in net contributions reflects activity related to the
Discovery Select exchange program, which was terminated in May 2000. This
decrease was partially offset by an increase of $20 million in PruSelect III
contributions.

Policyholder Account balances increased $23 million mainly from interest
credited as net sales were relatively flat. Future policy benefits increased $11
million as a result of increases to reserves for term and extended term
insurance. Other liabilities increased $11 million due to adjustments to
Separate Account policy values in the form of policy credits, related to the
demutualization.

2000 versus 1999

The Company's assets increased by $76 million from December 31, 1999 to December
31, 2000, mainly from an increase in investments and cash and cash equivalents.
Liabilities increased $43 million from the prior year resulting from increases
in securities lending activity, which also contributed to the asset increase. As
of December 31, 2000 and December 31, 1999, $1.806 billion and $1.827 billion,
respectively, of assets and liabilities were held in Separate accounts to
support variable life insurance policies and variable annuity contracts.

Results of Operations

2001 versus 2000

Net Income
Net income after taxes for the year ended December 31, 2001 was $15.6 million, a
decrease of $8.0 million from the year ended December 31, 2000. Realized
investment losses increased $8.6 million mainly from recognized impairment
writedowns on fixed maturities. In addition, net asset management fee income
declined $4.7 million ($7.8 million in revenues less $3.1 million of expenses)
as the Company ceased receiving fee income or paying asset management fee
expenses related to the Pru Series Fund ("PSF") as of January 1, 2001, as
described in the Notes to Financial Statements. Tax expense for the current year
is lower than the prior year by $6.2 million due to reduced income from
operations before income taxes and a refinement of the estimated benefits from
nontaxable investment income.

Revenues
Revenues decreased by $9.5 million from the prior year comparable period. As
mentioned above, realized investment losses increased by $8.6 million as
writedowns for other than temporary impairments of fixed maturities grew $6.5
million, losses on the sale of Enron fixed maturities were $3.7 million, and
derivative losses were $4.7 million higher than the prior year. Partially
offsetting these losses were higher gains on sales of fixed maturities of $6.7
million as a result of selling in an environment of declining interest rates.
The elimination of PSF asset management fees reduced revenues by $7.8 million.
Policy charges and fee income, primarily consisting of expense, mortality,
loading and other insurance charges assessed on policyholder account balances,
decreased by $5.4 million primarily driven by a decrease in mortality and
expense charges as a result of the decline in Separate Account liabilities due
to unfavorable market returns. Partially offsetting these decreases was an
increase in premiums of $10.6 million. Premiums increased from higher term
insurance sales of the Term Essential and Term Elite products of $6.5 million as
those products were not launched until late 2000, and an increase in premiums
related to extended term policy conversions. As an option in the event of a
lapse, individual variable life insurance policies provide policyholders with
additional extended term or reduced paid-up life insurance based on the amount
that can be purchased with the remaining cash value of the contract (if the
policyholder does not elect to receive the remaining cash value as a cash
distribution). The application of the remaining cash value to purchase such
coverage is recorded as premium revenue in the Statement of Operations. Future
policy benefit reserves are also increased by the amount of these premiums. Net
investment income increased $1.5 million mainly as a result of increased income
from fixed maturities as the average portfolio balance was higher in the current
year, somewhat offset by lower income on short-term investments due to lower
interest rates.

7

Benefits and Expenses
Total benefits and expenses increased by $4.7 million. Policyholder benefits
increased $4.9 million due to increased reserve provisions for term and extended
term premiums and higher surrender benefits for reduced paid up insurance
policies. Interest credited increased by $1.2 million due to higher general
account liabilities. General, administrative and other expenses decreased by
$1.5 million from the prior year. The elimination of asset management expenses
resulted in a decrease of $3.1 million. Commission and distribution expenses,
net of capitalization, decreased $.5 million as a result of a change to market
based pricing as of April 1, 2000 and higher capitalization of commissions due
to increased sales. Offsetting this was an increase in amortization of deferred
acquisition costs ("DAC") of $2.5 million driven by lower projected future gross
profits from continued market declines.

2000 versus 1999

Net Income
Net income for the year ended December 31, 2000 was $23.6 million; an increase
of $10.8 million from $12.8 million earned in the year ended December 31, 1999.
Revenue increased $13.4 million and expenses decreased $3.2 million. The income
tax provision was higher by $5.8 million based on the corresponding increase in
net income.

Revenues
Net investment income increased by $6.9 million, $4.4 million from fixed
maturity income and $2.6 million from short term investment income primarily due
to a corresponding increase in these asset bases during the period, and higher
average investment yields. There were also realized losses of $1.0 million, an
improvement of $4.0 million, as a result of gains on forward currency contracts,
driven by a rise in the value of the US dollar against other currencies compared
to the same period.

Policy charges and fee income increased by $2.5 million and asset management
fees increased by $1.1 million from the prior year. The increases are primarily
related to higher mortality and expense charges and investment advisory fees
resulting from the rise in Separate Account balances primarily as a result of
sales and exchanges of Discovery Select and growth of the markets in 1999. The
Exchange Program had provided the contractholders of older Prudential, Pruco
Life or Pruco Life of New Jersey annuity products an opportunity to convert to
the Discovery Select product. The Exchange Program was discontinued in May 2000.

Benefits and Expenses
Policyholders' benefits increased by $2.0 million, primarily due to increases in
reserves for extended term policies and annuitizations. Interest credited to
policyholder account balances remained relatively flat during the period
compared to the prior year.

General, administrative and other expenses decreased by $5.7 million to $39.4
million at year-end December 31, 2000 from $45.1 million at December 31, 1999.
Salary expenses are down by $2 million due to lower staff counts and consulting
fees are also down by $2 million as the prior year had higher expenses due to
Year 2000 systems projects. Distribution expenses (net of capitalization) are
$2.2 million less due to change in allocation of these expenses to market based
pricing. Amortization of DAC is relatively flat in the two years as annuity DAC
amortization increased by $3.2 million due to gross profit emergence on
Discovery Select. DAC amortization on life products decreased by $3.1 million
due to prior year write-offs of DAC for policies that were rescinded as part of
the sales remediation program, as described in the Notes to the Financial
Statements.

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. A diversified portfolio of publicly traded bonds, private
placement investments and short term investments is managed under strategies
intended to maintain a competitive asset mix consistent with current and
anticipated cash flow requirements of the related obligations. The risk
tolerance reflects the Company's aggregate capital position, exposure to
business risk, liquidity and rating agency considerations. The portfolio was
comprised of total investments amounting to $685.1 million at December 31, 2001,
versus $804.8 million at December 31, 2000. The fixed maturity portfolio
decreased primarily due to funding of an extraordinary dividend payment in
December 2001.

8

The asset management strategy for the portfolio is set in accordance with an
investment policy statement developed and coordinated within the Company by the
Asset Liability and Risk Management Group, agreed to by senior management, and
approved by the Board of Directors. In managing the investment portfolio, the
long-term objective is to generate favorable investment results through
asset-liability management, strategic and tactical asset allocation and asset
manager selection. Asset management strategies take into account the need to
match asset structure to product liabilities, considering the underlying income
and return characteristics of investment alternatives and seeking to closely
approximate the interest rate sensitivity of the asset portfolio with the
estimated interest rate sensitivity of the product liabilities. Asset management
strategies also include broad diversification across asset classes, issuers and
sectors; effective utilization of capital while maintaining liquidity believed
to be adequate to satisfy cash flow requirements; and achievement of competitive
performance. The major categories of invested assets, quality across the
portfolio, and recent activities to manage the portfolio are discussed below.

Fixed Maturities

The fixed maturity portfolio is diversified across maturities, sectors and
issuers. The Company has classified all publicly traded securities as available
for sale ("AFS"). As of December 31, 2001 all privately placed securities were
classified as AFS compared to approximately 96% in 2000. The remainder of the
privately placed fixed maturities was classified as "held to maturity."
"Available for sale" securities are carried in the Statement of Financial
Position at fair value, with unrealized gains and losses (after certain related
adjustments) recognized by credits and charges to equity capital. Securities
held to maturity ("HTM") are carried at amortized cost, and unrealized gains or
losses on these securities are not recognized in the financial statements. Fixed
maturities totaled $490.7 million, a decrease of $129.6 million compared to
$620.3 million (AFS fair value of $612.9 million and HTM amortized cost of $7.5
million), as of December 31, 2000. The variance was primarily due to funding of
an extraordinary dividend payment of $186 million, of which $159.5 million was
paid with fixed maturities.

December 31, 2001 December 31, 2000
---------------------------------------------- -----------------------------------------
Net Net
Amortized Estimated Unrealized Amortized Estimated Unrealized
Cost Fair Value Gains Cost Fair Value Losses
-------------- -------------- -------------- -------------- ----------------------------
(In Thousands)

Fixed Maturities
Publicly traded $ 285,536 $ 290,974 $ 5,438 $ 444,423 $ 442,365 $ 2,058
Privately placed 193,460 199,760 6,300 177,905 177,745 160

-------------- -------------- -------------- -------------- ----------------------------
Total $ 478,996 $ 490,734 $ 11,738 $ 622,328 $ 620,110 $ 2,218
============== ============== ============== ============== ============================

At December 31, 2001, the net unrealized capital gains on the "available for
sale" fixed maturity portfolio totaled $11.7 million compared to $2.0 million of
unrealized losses at December 31, 2000. The increase in the net unrealized
capital gain position is primarily due to the effect of lower interest rates in
2001 versus 2000.

Gross investment income increased 6%, as the average asset base was slightly
larger during the year. The Company's holdings of private placement fixed
maturities totaled $193.5 million and constituted 40% of total fixed maturities
portfolio at December 31, 2001 compared to $177.9 million representing 29% in
2000. These investments generally offer higher yields than comparable quality
public market securities and increase the diversification of the portfolio.

Realized losses in 2001 on fixed maturities of $7.8 million were higher than
prior year by $3.5 million primarily due to greater impairments, losses on the
sale of the Enron holdings, offset by higher gains on sale.

9

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 Moody's Corporation, an independent rating agency:

December 31, 2001 December 31, 2000
- ------------------------ ------------------------------------------- ------------------------------------------
Amortized Estimated Amortized Estimated
NAIC Moody's Cost % Fair Value % Cost % Fair Value %
- ------------------------ --------------------- --------------------- ------------------------------------------
(In Thousands)

1 AAA to AAA- $189,192 39.5% $ 195,864 39.9% $ 256,136 41.2% $ 260,857 42.2%
2 BBB+ to BBB- 244,231 51.0% 250,526 51.1% 300,867 48.3% 296,664 47.8%
3 BB+ to BB- 23,044 4.8% 22,525 4.6% 34,941 5.6% 34,367 5.5%
4 B+ to B- 19,261 4.0% 18,380 3.7% 27,312 4.4% 25,434 4.1%
5 CCC or lower 3,176 0.7% 3,342 0.7% 3,045 0.5% 2,761 0.4%
6 In or near 92 0.0% 97 0.0% 27 0.0% 27 0.0%
default
------------- ------------- ------------- --------------
Total $478,996 100.0% $490,734 100.0% $ 622,328 100.0% $ 620,110 100.0%
============= ============= ============= ==============

The fixed maturity portfolio consists largely of investment grade assets (rated
"1" or "2" by the NAIC). Based on fair value, these investments accounted for
91% of the portfolio at December 31, 2001, which was an increase from 90% at
December 31, 2000.

The Company maintains separate monitoring processes for public and private fixed
maturities and create watch lists to highlight securities that require special
scrutiny and management. Our public fixed maturity asset managers formally
review all public fixed maturity holdings on a monthly basis and more frequently
when necessary to identify potential credit deterioration whether due to ratings
downgrades, unexpected price variances, and/or industry specific concerns. We
classify public fixed maturity securities of issuers that have defaulted as
loans not in good standing and all other public watch list assets as closely
monitored.

Our private fixed maturity asset managers conduct specific servicing tests on
each investment on an ongoing basis to determine whether the investment is in
compliance or should be placed on the watch list or assigned an early warning
classification. We assign early warning classification to those issuers that
have failed a servicing test or experienced a minor covenant default, and we
continue to monitor them for improvement or deterioration. We assign closely
monitored status to those investments that have been recently restructured or
for which a restructuring is a possibility due to substantial credit
deterioration or material covenant defaults. We classify as not in good standing
securities of issuers that are in more severe conditions, for example,
bankruptcy or payment default.

December 31, 2001 December 31, 2000
-------------------------------- --------------------------------
Amortized Amortized
Cost % of Total Cost % of Total
-------------- --------------- --------------- ---------------
(In Thousands)

Performing $ 474,731 99.1% $ 616,134 99.0%
Watch List
Closely monitored 4,255 0.9% 6,194 1.0%
Not in good standing 10 0.0% - 0.0%
-------------- --------------- --------------- ---------------
Total $ 478,996 100.0% $ 622,328 100.0%
============== =============== =============== ===============

10

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, utilities, and manufacturing, while the greatest industry concentration
within the private portfolio was asset-backed securities. The total portfolio is
summarized below by issuer category:

December 31, 2001
-----------------------------------------------
Amortized Estimated % of
Cost Fair Value Fair Value
---------------- --------------- -------------
(In Thousands)

United States Government
Securities and Obligations $ 19,136 $ 19,278 3.9%
Mortgage Backed Securities 681 677 0.1%
Asset Backed Securities (1) 99,004 100,423 20.5%
Foreign Government Securities 4,029 4,288 0.9%
Manufacturing 91,674 94,220 19.2%
Utilities 88,338 90,394 18.4%
Retail and Wholesale 35,257 36,610 7.5%
Finance 76,277 80,473 16.4%
Services 45,517 45,843 9.3%
Transportation 19,083 18,528 3.8%
---------------- --------------- -------------
Total $ 478,996 $ 490,734 100.0%
================ =============== =============

December 31, 2000
-----------------------------------------------
Amortized Estimated % of
Cost Fair Value Fair Value
---------------- ---------------- ------------
(In Thousands)

United States Government
Securities and Obligations $ 25,050 $ 25,756 4.2%
Mortgage Backed Securities - - 0.0%
Asset Backed Securities (1) 111,706 110,850 17.9%
Foreign Government Securities 11,181 11,644 1.9%
Manufacturing 126,245 124,648 20.1%
Utilities 120,669 118,484 19.1%
Retail and Wholesale 39,391 39,750 6.4%
Finance 101,945 104,154 16.8%
Services 58,082 57,256 9.2%
Transportation 28,059 27,568 4.4%
---------------- ---------------- ------------
Total $ 622,328 $ 620,110 100.0%
================ ================ ============

(1) The asset backed securities are primarily backed by credit card receivables,
home equity loans, trade receivables and auto loans.

Short-Term Investments

Short-term investments include highly liquid debt instruments that have
maturities between 3-12 months from date of purchase. These securities are
carried at amortized cost, which approximates fair value. As of December 31,
2001, the Company's short-term investments totaled $33.0 million versus $28.8
million at December 31, 2000. Short-term income and yields decreased due to
lower rates in 2001.

Derivatives

The Company uses derivatives primarily to alter mismatches between the duration
of assets in its portfolios and the duration of insurance and annuity
liabilities supported by those assets. These derivative contracts do not qualify
for hedge accounting and, consequently, we recognize the changes in fair value
of such contracts from period to period in current earnings. During 2001, $1.8
million of losses were realized from futures versus gains of $2.9 million in
2000. This was the result of the Company's net short position in futures during
2001, versus a net long position in 2000, as interest rates were generally
declining in both years.

11

Liquidity and Capital Resources

The Company's liquidity requirements include the payment of sales commissions,
other underwriting expenses and the funding of its contractual obligations for
the life insurance and annuity contracts 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 (refer to Footnote 13 in the Notes to Financial Statements). As of
December 31, 2001, the Company's assets included $336 million of cash and cash
equivalents, short-term investments and investment grade publicly traded fixed
maturity securities that could be liquidated if funds were required.

In order to continue to market life insurance and annuity products, the Company
must meet or exceed the statutory capital and surplus requirements of the
insurance departments of the states in which it conducts business. Statutory
accounting practices differ from generally accepted accounting principles
("GAAP") in two major respects. First, under statutory accounting practices, the
acquisition costs of new business are charged to expense, while under GAAP they
are initially deferred and amortized over a period of time. Second, under
statutory accounting practices, the required additions to statutory reserves for
new business in some cases may initially exceed the statutory revenues
attributable to such business. These practices result in a reduction of
statutory income and surplus at the time of recording new business.

Insurance companies are subject to Risk-Based Capital ("RBC") guidelines,
monitored by insurance regulatory authorities, that measure the ratio of the
Company's statutory surplus with certain adjustments ("Adjusted Capital") to its
required capital, based on the risk characteristics of its insurance liabilities
and investments. Required capital is determined by statutory formulae that
consider risks related to the type and quality of invested assets,
insurance-related risks associated with the 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 adequacy 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 "Insurance Department"). The Company believes that its
statutory capital is adequate for its currently anticipated levels of risk as
measured by regulatory guidelines.

In March 1998 the NAIC adopted the Codification of Statutory Accounting
Principles Guidance ("Codification"), which replaces the current Accounting
Practices and Procedures manual as the NAIC's primary guidance on statutory
accounting as of January 1, 2001. Codification provides guidance for areas where
statutory accounting has been silent and changes current statutory accounting in
certain areas. Certain of the standards could have an impact on the measurement
of statutory capital, which in turn, could affect RBC ratios of insurance
companies. The Company has adopted the Codification guidance effective January
1, 2001. As a result of these changes, the Company reported an increase to
statutory surplus of $7 million, primarily as a result of the recognition of
deferred tax assets.

Regulatory Environment

The Company is subject to the laws of 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.

12

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 as described in the Liquidity and
Capital Resources disclosure. The implementation of these standards has not had
an 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.

Effective New Accounting Pronouncements

Refer to Footnote 2, "Summary of Significant Accounting Policies," of the Notes
to Financial Statements.

Item 8. Financial Statements and Supplementary Data

Information required with respect to this Item 6 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.

13

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) (1) and (2) Financial Statements of Registrant are listed in the
accompanying "Index to Financial Statements" 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 Insurance Company 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 Insurance Company 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 Vivian L. Banta, Richard J. Carbone, Helen M.
Galt and Jean D. Hamilton are incorporated by reference to
Post-Effective Amendment No. 5 to Form S-6, Registration No. 333-85117,
filed June 28, 2001 on behalf of the Pruco Life of New Jersey Variable
Appreciable Account. Powers of Attorney for David R. Odenath, Jr. and
William J. Eckert, IV are incorporated by reference to Pre-Effective
Amendment No. 1, Registration No. 333-49334, filed February 8, 2001 on
behalf of the Pruco Life of New Jersey Variable Appreciable Account. A
Power of Attorney for James J. Avery, Jr. was incorporated by reference
to Post-Effective Amendment No. 10 to Form S-1, Registration No.
33-20018, filed April 9, 1998 on behalf of the Pruco Life of New Jersey
Variable Contract Real Property Account. A Power of Attorney for Ronald
P. Joelson was incorporated by reference to Post-Effective Amendment
No. 14 to Form S-1, filed April 10, 2001 on behalf of the Pruco Life of
New Jersey Variable Contract Real Property Account.

14

99. The following table presents sales and related expenses of the Flexible
Premium Variable Annuity Account since February 7, 1997, the effective
date of the registration statement (SEC file number 333-18053).

For the account For the accounts of
of the Company the contract holders
--------------------------------------------------------
Aggregate offering
price of amount
registered Amount sold Amount sold
--------------------------------------------------------
(In Thousands)

Flexible Premium Variable Annuity Account * $ 150,000 $ 35,267 $ 6,375

Underwriting discounts and commissions ** (984)
Other expenses *** (1,399)
---------------
Total (2,383)
---------------

Net offering proceeds $ 32,884
===============

* 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.

15

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 27, 2002 By:
-------------- ----------------------------------
Andrew J. Mako
Executive Vice 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 and President March 27, 2002
Vivian L. Banta

*
________________________ Vice Chairman of the Board March 27, 2002
James J. Avery, Jr. and Director

*
________________________ Director March 27, 2002
Helen M. Galt

*
________________________ Director March 27, 2002
Jean D. Hamilton

*
_________________________ Director March 27, 2002
Ronald Paul Joelson

*
________________________ Director March 27, 2002
Richard J. Carbone

*
________________________ Director March 27, 2002
David R. Odenath, Jr.

*
_________________________ Vice President and Chief March 27, 2002
William J. Eckert, IV Accounting Officer

* By:
-----------------------------------
Thomas C. Castano
(Attorney-in-Fact)

16

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K
ANNUAL REPORT

PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
Financial Statements and
Report of Independent Accountants

December 31, 2001 and 2000

17

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, 2001 and 2000 F-3

Statements of Operations and Comprehensive Income
Years Ended December 31, 2001, 2000 and 1999 F-4

Statements of Changes in Stockholder's Equity - Years Ended December 31, 2001, 2000 and 1999 F-5

Statements of Cash Flows - Years Ended December 31, 2001, 2000 and 1999 F-6

Notes to Financial Statements F-7

F-1

Report of Independent Accountants

To the Board of Directors and Stockholder of
Pruco Life Insurance Company of New Jersey

In our opinion, the financial statements listed in the accompanying index
present fairly, in all material aspects, the financial position of Pruco Life
Insurance Company of New Jersey (an indirect, wholly-owned subsidiary of The
Prudential Insurance Company of America) at December 31, 2001 and 2000, and
the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America. These
financial statements are the responsibility of the 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
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
New York, New York
February 21, 2002

F-2

Pruco Life Insurance Company of New Jersey

Statements of Financial Position
December 31, 2001 and 2000 (In Thousands)
- --------------------------------------------------------------------------------

2001 2000
----------- -----------

ASSETS
Fixed Maturities
Available for Sale, at fair value (amortized cost, 2001: $478,996; and
2000: $614,858) $ 490,734 $ 612,851
Held to Maturity, at amortized cost (fair value, 2000: $7,259) -- 7,470
Policy Loans 158,754 152,111
Short-Term Investments 32,983 28,759
Other Long-Term Investments 2,614 3,577
----------- -----------
Total Investments 685,085 804,768
Cash and Cash Equivalents 58,212 65,237
Deferred Policy Acquisition Costs 118,975 116,653
Accrued Investment Income 10,399 13,781
Receivables from Affiliate 17,270 22,265
Other Assets 3,919 292
Separate Account Assets 1,631,113 1,805,584
----------- -----------
TOTAL ASSETS $ 2,524,973 $ 2,828,580
=========== ===========

LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Policyholders' Account Balances $ 457,172 $ 434,442
Future Policy Benefits and Other Policyholder Liabilities 119,400 108,218
Cash Collateral for Loaned Securities 36,092 48,309
Securities Sold under agreements to repurchase 18,514 9,754
Income Taxes Payable 36,012 29,913
Other Liabilities 19,298 8,793
Separate Account Liabilities 1,631,113 1,805,584
----------- -----------
Total Liabilities 2,317,601 2,445,013
----------- -----------
Contingencies - (See Footnote 11)
Stockholder's Equity
Common Stock, $5 par value;
400,000 shares authorized;
Issued and outstanding at
December 31, 2001 and 2000 2,000 2,000
Paid-In-Capital 128,689 128,689
Retained Earnings 72,959 253,641
Accumulated Other Comprehensive Income (Loss) 3,724 (763)
----------- -----------
Total Stockholder's Equity 207,372 383,567
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 2,524,973 $ 2,828,580
=========== ===========

See Notes to Financial Statements

F-3

Pruco Life Insurance Company of New Jersey

Statements of Operations and Comprehensive Income
Years Ended December 31, 2001, 2000 and 1999 (In Thousands)
- --------------------------------------------------------------------------------

2001 2000 1999
--------- --------- ---------

REVENUES

Premiums $ 16,284 $ 5,717 $ 6,742
Policy charges and fee income 49,808 55,231 52,714
Net investment income 55,981 54,524 47,600
Realized investment losses, net (9,630) (1,045) (5,013)
Asset management fees 613 8,467 7,407
Other income 646 331 386
--------- --------- ---------

Total Revenues 113,702 123,225 109,836
--------- --------- ---------

BENEFITS AND EXPENSES

Policyholders' benefits 33,148 28,201 26,237
Interest credited to policyholders' account balances 20,503 19,326 18,846
General, administrative and other expenses 37,954 39,415 45,065
--------- --------- ---------

Total Benefits and Expenses 91,605 86,942 90,148
--------- --------- ---------

Income from operations before income taxes 22,097 36,283 19,688
--------- --------- ---------

Income tax provision 6,504 12,699 6,891
--------- --------- ---------

NET INCOME 15,593 23,584 12,797

Other comprehensive income (loss), net of tax:

Unrealized gains (losses) on securities, net of
reclassification adjustment 4,487 5,325 (7,681)
--------- --------- ---------

TOTAL COMPREHENSIVE INCOME $ 20,080 $ 28,909 $ 5,116
========= ========= =========

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, 2001, 2000 and 1999 (In Thousands)
- --------------------------------------------------------------------------------

Accumulated
Other Total
Common Paid - In - Retained Comprehensive Stockholder's
Stock Capital Earnings Income (Loss) Equity
-------------------------------------------------------------------

Balance, December 31, 1998 $ 2,000 $ 125,000 $ 217,260 $ 1,593 $ 345,853

Net income -- -- 12,797 -- 12,797
Change in net unrealized
investment (losses) gains,
net of reclassification and taxes -- -- -- (7,681) (7,681)

--------- --------- --------- --------- ---------
Balance, December 31, 1999 2,000 125,000 230,057 (6,088) 350,969

Contribution -- 3,689 -- -- 3,689
Net income -- -- 23,584 -- 23,584
Change in net unrealized
investment (losses) gains,
net of reclassification and taxes -- -- -- 5,325 5,325

--------- --------- --------- --------- ---------
Balance, December 31, 2000 2,000 128,689 253,641 (763) 383,567

Policy credits issued to
eligible eligible policyholders -- -- (10,275) -- (10,275)
Dividend to Parent -- -- (186,000) -- (186,000)
Net income -- -- 15,593 -- 15,593
Change in net unrealized
investment (losses) gains,
net of reclassification and taxes -- -- -- 4,487 4,487

--------- --------- --------- --------- ---------
Balance, December 31, 2001 $ 2,000 $ 128,689 $ 72,959 $ 3,724 $ 207,372
========= ========= ========= ========= =========

See Notes to Financial Statements

F-5

Pruco Life Insurance Company of New Jersey

Statements of Cash Flows
Years Ended December 31, 2001, 2000 and 1999 (In Thousands)
- --------------------------------------------------------------------------------

2001 2000 1999
--------- --------- ---------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 15,593 $ 23,584 $ 12,797
Adjustments to reconcile net income to net cash from (used in)
operating activities:
Policy charges and fee income (9,906) (9,881) (11,399)
Interest credited to policyholders' account balances 20,503 19,326 18,846
Realized investment losses, net 9,630 1,045 5,013
Amortization and other non-cash items (10,883) (9,254) 18,092
Change in:
Future policy benefits and other policyholders'
liabilities 11,182 3,468 14,918
Accrued investment income 3,382 (1,289) (283)
Policy loans (6,643) (8,296) (4,372)
Receivable from affiliates 4,995 (2,345) (19,723)
Deferred policy acquisition costs (2,322) 12,531 (15,261)
Income taxes payable 6,099 2,084 2,504
Other, net (2,244) 1,869 2,523
--------- --------- ---------
Cash Flows From Operating Activities 39,386 32,842 23,655
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities:
Available for sale 552,931 396,117 702,380
Payments for the purchase of:
Fixed maturities:
Available for sale (577,097) (411,579) (695,198)
Held to maturity -- -- (7,470)
Other long term investments, net 963 (1,058) 99
Cash collateral for loaned securities, net (12,217) 30,409 (16,524)
Securities sold under agreements to repurchase, net 8,760 9,754 (27,210)
Short term investments, net (4,224) (28,756) 11,040
--------- --------- ---------
Cash Flows (Used in) Investing Activities (30,884) (5,113) (32,883)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 87,261 170,978 258,417
Withdrawals (76,288) (161,060) (264,373)
Cash dividend paid to Parent (26,500) -- --
--------- --------- ---------
Cash Flows (Used in) From Financing Activities (15,527) 9,918 (5,956)
--------- --------- ---------
Net (decrease) increase in Cash and cash equivalents (7,025) 37,647 (15,184)
Cash and cash equivalents, beginning of year 65,237 27,590 42,774
--------- --------- ---------
CASH and CASH EQUIVALENTS, END OF YEAR $ 58,212 $ 65,237 $ 27,590
========= ========= =========

SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid $ 2,930 $ 13,421 $ 480
--------- --------- ---------
NON-CASH TRANSACTIONS DURING THE YEAR
Dividend paid with fixed maturities $ 159,500 $ -- $ --
--------- --------- ---------
Policy credits issued to eligible policyholders $ 10,275 $ -- $ --
--------- --------- ---------
Contribution from parent $ -- $ 3,689 $ --
--------- --------- ---------

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. The Company is licensed to sell interest-sensitive individual life
insurance, variable life insurance, term 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"), an
insurance company founded in 1875 under the laws of the state of New Jersey.
On December 18, 2001 ("the date of demutualization") Prudential converted
from a mutual life insurance company to a stock life insurance company and
became an indirect wholly owned subsidiary of Prudential Financial, Inc. (the
"Holding Company"). The demutualization was completed in accordance with
Prudential's Plan of Reorganization, which was approved by the Commissioner
of the New Jersey Department of Banking and Insurance in October 2001.

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.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). The
Company has extensive transactions and relationships with Prudential and
other affiliates, as more fully described in Footnote 13. Due to these
relationships, it is possible that the terms of these transactions are not
the same as those that would result from transactions among wholly unrelated
parties.

Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, in particular deferred policy acquisition costs
("DAC") and future policy benefits, and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the period. Actual results could differ from
those estimates.

Investments
Fixed maturities classified as "available for sale" are carried at estimated
fair value. Fixed maturities that the Company has both the intent and ability
to hold to maturity are stated at amortized cost and classified as "held to
maturity". The amortized cost of fixed maturities is written down to
estimated fair value if a decline in value is considered to be other than
temporary. Unrealized gains and losses on fixed maturities "available for
sale", including the effect on deferred policy acquisition costs and
policyholders' account balances that would result from the realization of
unrealized gains and losses are included in a separate component of equity,
"Accumulated other comprehensive income (loss)", net of income taxes.

Policy loans are carried at unpaid principal balances.

Short-term investments, consisting of highly liquid debt instruments other
than those held in "Cash and cash equivalents" with a maturity of twelve
months or less when purchased, are carried at amortized cost, which
approximates fair value.

Realized investment (losses) gains, net are computed using the specific
identification method. Costs of fixed maturity securities are adjusted for
impairments considered to be other than temporary. Impairment adjustments are
included in "Realized investment gains (losses), net." Factors considered in
evaluating whether a decline in value is other than temporary are: 1) whether
the decline is substantial; 2) the Company's ability and intent to retain the
investment for a period of time sufficient to allow for an anticipated
recovery in value; 3) the duration and extent to which the market value has
been less than cost; and 4) the financial condition and near-term prospects
of the issuer.

Cash and cash equivalents include cash on hand, amounts due from banks, money
market instruments, and other debt issues with a maturity of three months or
less when purchased.

F-7

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
- --------------------------------------------------------------------------------

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Deferred Policy Acquisition Costs
The costs that vary with and that are related primarily to the production of
new insurance and annuity business are deferred to the extent that they are
deemed recoverable from future profits. Such costs include certain
commissions, costs of policy issuance and underwriting, and variable field
office expenses. Deferred policy acquisition costs are subject to recognition
testing at the time of policy issue and recoverability and premium deficiency
testing at the end of each accounting period. Deferred policy acquisition
costs, for certain products, are adjusted for the impact of unrealized gains
or losses on investments as if these gains or losses had been realized, with
corresponding credits or charges included in "Accumulated other comprehensive
(loss) income."

Policy acquisition costs related to interest-sensitive and variable life
products and certain investment-type products are deferred and amortized over
the expected life of the contracts (periods ranging from 25 to 30 years) in
proportion to estimated gross profits arising principally from investment
results, mortality and expense margins, and surrender charges based on
historical and anticipated future experience, which is updated periodically.
The effect of changes to estimated gross profits on unamortized deferred
acquisition costs is reflected in "General and administrative expenses" in
the period such estimated gross profits are revised. Deferred policy
acquisition costs related to non-participating term insurance are amortized
over the expected life of the contracts in proportion to premium income.

Prudential and the Company have offered programs under which policyholders,
for a selected product or group of products, can exchange an existing policy
or contract issued by Prudential or the Company for another form of policy or
contract. These transactions are known as internal replacements. If the new
policies have terms that are substantially similar to those of the earlier
policies, the DAC is retained with respect to the new policies and amortized
over the life of the new policies. If the terms of the new policies are not
substantially similar to those of the former policy, the unamortized DAC on
the surrendered policies is immediately charged to expense.

Securities loaned
Securities loaned are treated as financing arrangements and are recorded at
the amount of cash received as collateral. The Company obtains collateral in
an amount equal to 102% and 105% of the fair value of the domestic and
foreign securities, respectively. The Company monitors the market value of
securities loaned on a daily basis with additional collateral obtained as
necessary.

Non-cash collateral received is not reflected in the statements of financial
position because the debtor typically has the right to redeem the collateral
on short notice. 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. Assets to be repurchased are the same, or
substantially the same, as the assets transferred and the transferor, through
right of substitution, maintains the right and ability to redeem the
collateral on short notice. The market value of securities to be repurchased
is monitored and additional collateral is obtained, where appropriate, to
protect against credit exposure.

Securities lending and securities repurchase agreements are used to generate
net investment income and facilitate trading activity. These instruments are
short-term in nature (usually 30 days or less). Securities loaned are
collateralized principally by U.S. Government and mortgage-backed securities.
Securities sold under repurchase agreements are collateralized principally by
cash. The carrying amounts of these instruments approximate fair value
because of the relatively short period of time between the origination of the
instruments and their expected realization.

Separate Account Assets and Liabilities
Separate Account assets and liabilities are reported at estimated fair value
and represent segregated funds which are invested for certain policyholders
and other customers. The assets consist of common stocks, fixed maturities,
real estate related securities, and short-term investments. The assets of
each account are legally segregated and are not subject to claims that arise
out of any other business of the Company. Investment risks associated with
market value changes are borne by the customers, except to the extent of
minimum guarantees made by the Company with respect to certain accounts. The
investment income and gains or losses for Separate Accounts generally accrue
to the policyholders and are not included in the Statements of Operations and
comprehensive Income. Mortality, policy administration and surrender charges
on the accounts are included in "Policy charges and fee income."

F-8

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
- --------------------------------------------------------------------------------

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Separate Accounts represent funds for which investment income and investment
gains and losses accrue directly to, and investment risk is borne by, the
policyholders, with the exception of the Pruco Life Modified Guaranteed
Annuity Account. The Pruco Life Modified Guaranteed Annuity Account is a
non-unitized Separate Account, which funds the Modified Guaranteed Annuity
Contract and the Market Value Adjustment Annuity Contract. Owners of the
Pruco Life Modified Guaranteed Annuity and the Market Value Adjustment
Annuity Contracts do not participate in the investment gain or loss from
assets relating to such accounts. Such gain or loss is borne, in total, by
the Company.

Contingencies
Amounts related to contingencies are accrued if it is probable that a
liability has been incurred and an amount is reasonably estimable. Management
evaluates whether there are incremental legal or other costs directly
associated with the ultimate resolution of the matter that are reasonably
estimable and, if so, they are included in the accrual.

Insurance Revenue and Expense Recognition
Premiums from insurance policies are generally recognized when due. Benefits
are recorded as an expense when they are incurred. For traditional life
insurance contracts, a liability for future policy benefits is recorded using
the net level premium method. For individual annuities in payout status, a
liability for future policy benefits is recorded for the present value of
expected future payments based on historical experience.

Amounts received as payment for interest-sensitive life, individual
annuities and guaranteed investment contracts are reported as deposits to
"Policyholders' account balances." Revenues from these contracts reflected as
"Policy charges and fee income" consist primarily of fees assessed during the
period against the policyholders' account balances for mortality charges,
policy administration charges and surrender charges. Benefits and expenses
for these products include claims in excess of related account balances,
expenses of contract administration, interest credited and amortization of
deferred policy acquisition costs.

Premiums, benefits and expenses are stated net of reinsurance ceded to other
companies. Estimated reinsurance recoverables and the cost of reinsurance are
recognized over the life of the reinsured policies using assumptions
consistent with those used to account for the underlying policies.

Asset Management Fees
Through December 31, 2000, the Company received asset management fee income
from policyholder account balances invested in The Prudential Series Funds
("PSF"), which are a portfolio of mutual fund investments related to the
Company's Separate Account products (refer to Note 13). In addition, the
Company receives fees from policyholder account balances invested in funds
managed by companies other than Prudential. Asset management fees are
recognized as income as earned.

Derivative Financial Instruments
Derivatives are financial instruments whose values are derived from interest
rates, foreign exchange rates, financial indices, or the value of securities
or commodities. Derivative financial instruments used by the Company include
swaps, futures, forwards and option contracts and may be exchange-traded or
contracted in the over-the-counter market. See Note 10 for a discussion of
the Company's use of derivative financial instruments and the related
accounting and reporting treatment for such instruments.

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 with Prudential, total federal income tax
expense is determined on a separate company basis. Members with losses record
tax benefits to the extent such losses are recognized in the consolidated
federal tax provision. Deferred income taxes are generally recognized, based
on enacted rates, when assets and liabilities have different values for
financial statement and tax reporting purposes. A valuation allowance is
recorded to reduce a deferred tax asset to that portion that is expected to
be realized.

New Accounting Pronouncements
In September 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities--a replacement of FASB Statement No. 125." The Company has
adopted the provisions of SFAS No. 140 relating to transfers and
extinguishments of liabilities which are effective for periods occurring
after March 31, 2001. The adoption did not have an effect on the results of
operations of the Company.

F-9

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
- --------------------------------------------------------------------------------

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that
the Company account for all business combinations in the scope of the
statement using the purchase method. SFAS No. 142 requires that an intangible
asset acquired either individually or with a group of other assets shall
initially be recognized and measured based on fair value. An intangible asset
with a finite life is amortized over its useful life to the reporting entity;
an intangible asset with an indefinite useful life, including goodwill, is
not amortized. All intangible assets shall be tested for impairment in
accordance with the statement. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001; however, goodwill and intangible assets
acquired after June 30, 2001 are subject immediately to the nonamortization
and amortization provisions of this statement. As of December 31, 2001, The
Company does not have any goodwill or intangible assets.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 eliminated the requirement
that discontinued operations be measured at net realizable value or that
entities include losses that have not yet occurred. SFAS No. 144 eliminated
the exception to consolidation for a subsidiary for which control is likely
to be temporary. SFAS No. 144 requires that long-lived assets that are to be
disposed of by sale be measured at the lower of book value or fair value less
cost to sell. An impairment for assets that are not considered to be disposed
of is recognized only if the carrying amounts of long-lived assets are not
recoverable and exceed their fair values. Additionally, SFAS No. 144 expands
the scope of discontinued operations to include all components of an entity
with operations and cash flows that (1) can be distinguished from the rest of
the entity and (2) will be eliminated from the ongoing operations of the
entity in a disposal transaction. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001 and,
generally, its provisions are to be applied prospectively.

Reclassifications
Certain amounts in the prior years have been reclassified to conform to the
current year presentation.

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:

2001
--------------------------------------------------
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 $ 19,136 $ 241 $ 99 $ 19,278

Foreign Government Bonds 4,029 259 -- 4,288

Corporate Securities 455,150 15,772 4,431 466,491

Mortgage-backed Securities 681 -- 4 677
-------- -------- -------- --------

Total Fixed Maturities Available for Sale $478,996 $ 16,272 $ 4,534 $490,734
======== ======== ======== ========

2000
--------------------------------------------------
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 $ 25,050 $ 708 $ 2 $ 25,756

Foreign Government Bonds 11,181 463 -- 11,644

Corporate Securities 578,627 7,314 10,490 575,451

Mortgage-backed Securities -- -- -- --
-------- -------- -------- --------

Total Fixed Maturities Available for Sale $614,858 $ 8,485 $ 10,492 $612,851
======== ======== ======== ========
Fixed Maturities Held to Maturity
Corporate Securities $ 7,470 $ -- $ 211 $ 7,259
-------- -------- -------- --------

Total Fixed Maturities Held to Maturity $ 7,470 $ -- $ 211 $ 7,259
======== ======== ======== ========

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, by
contractual maturities at December 31, 2001, is shown below:

Available for Sale
-----------------------------------
Amortized Estimated Fair
Cost Value
-----------------------------------
(In Thousands)

Due in one year or less $ 51,735 $ 53,286

Due after one year through five years 225,748 231,715

Due after five years through ten years 163,721 166,996

Due after ten years 37,792 38,737
---------------- ------------------

Total $ 478,996 $ 490,734
================ ==================

Actual maturities may differ from contractual maturities because issuers have
the right to call or prepay obligations.

Proceeds from the sale of fixed maturities available for sale during 2001,
2000, and 1999 were $552.4 million, $354.4 million, and $698.8 million,
respectively. Gross gains of $10.1 million, $2.2 million, and $3.5 million,
and gross losses of $10.1 million, $5.2 million, and $8.0 million, were
realized on those sales during 2001, 2000, and 1999, respectively. Proceeds
from maturities of fixed maturities available for sale during 2001, 2000, and
1999 were $0.5 million, $41.7 million, and $3.6 million, respectively.

Due to the adoption of FAS 133, "Accounting for Derivative Instruments and
Hedging Activities", on January 1, 2001, the entire portfolio of fixed
maturities classified as held to maturity were transferred to the available
for sale category. The aggregate amortized cost of the securities was $7.5
million. Unrealized losses of $0.2 million, net of tax, were recorded in
"Accumulated Other Comprehensive Income (Loss)" at the time of transfer.
During the years ended December 31, 2001, 2000, and 1999, there were no
securities classified as held to maturity that were sold.

Writedowns for impairments that were deemed to be other than temporary for
fixed maturities were $7.8 million and $1.3 million for the years 2001 and
2000, respectively. There were no writedowns for impairments recorded during
1999.

Special Deposits
Fixed maturities of $0.5 million at December 31, 2001 and 2000 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:

2001 2000 1999
-------- -------- --------
(In Thousands)

Fixed Maturities $ 46,813 $ 43,972 $ 39,538
Policy Loans 8,647 8,053 7,641
Short-Term Investments & Cash Equivalents 4,496 5,126 2,516
Other (418) 1,300 60
-------- -------- --------
Gross Investment Income 59,538 58,451 49,755
Less Investment Expenses (3,557) (3,927) (2,155)
-------- -------- --------
Net Investment Income $ 55,981 $ 54,524 $ 47,600
======== ======== ========

F-12

Pruco Life Insurance Company of New Jersey

- --------------------------------------------------------------------------------
Notes to Financial Statements

3. INVESTMENTS (continued)

Realized investment losses, net, including charges for other than temporary
reductions in value, for the years ended December 31, were from the following
sources:
2001 2000 1999
------- ------- -------
(In Thousands)

Fixed Maturities $(7,807) $(4,324) $(4,616)
Derivatives (1,823) 2,924 (412)
Other -- 355 15
------- ------- -------
Realized Investment Losses, Net $(9,630) $(1,045) $(5,013)
======= ======= =======

Securities Pledged to Creditors

The Company pledges investment securities it owns to unaffiliated parties
through certain transactions including securities lending, securities sold
under agreements to repurchase, and futures contracts. At December 31, 2001
and 2000, the carrying value of fixed maturities available for sale pledged
to third parties as reported in the Statements of Financial Position are
$54.8 million and $57.3 million.

F-13

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
- --------------------------------------------------------------------------------

3. INVESTMENTS (continued)

Net Unrealized Investment (Losses) Gains

Net unrealized investment (losses) 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 exclude from "Other comprehensive income (loss)" those items
that are included as part of "net income" for a period that also had been
part of "Other comprehensive income (loss)" in earlier periods. The amounts
for the years ended December 31, net of tax, are as follows:

Accumulated Other
Comprehensive
Income (Loss)
Deferred Deferred Related to Net
Unrealized Policy Policyholders' Income Tax Unrealized
Gains (Losses) Acquisition Account (Liability) Investment
on Investments Costs Balances Benefit Gains (Losses)
-------------- ------------- ------------- ----------- ----------------
(In Thousands)

Balance, December 31, 1998 $ 5,233 $ (3,545) $ 987 $ (1,082) $ 1,593

Net investment gains (losses) on investments
arising during the period (28,794) -- -- 10,366 (18,428)

Reclassification adjustment for gains (losses)
included in net income 4,610 -- -- (1,660) 2,950

Impact of net unrealized investment gains
(losses) on deferred policy acquisition costs -- 14,681 -- (5,285) 9,396

Impact of net unrealized investment gains
(losses) on policyholders' account balances -- -- (2,499) 900 (1,599)
-------- -------- -------- -------- --------

Balance, December 31, 1999 (18,951) 11,136 (1,512) 3,239 (6,088)

Net investment gains (losses) on investments
arising during the period 12,620 -- -- (4,454) 8,166

Reclassification adjustment for gains (losses)
included in net income 4,324 -- -- (1,526) 2,798

Impact of net unrealized investment
gains (losses) on deferred policy acquisition -- (10,161) -- 3,658 (6,503)

Impact of net unrealized investment gains
(losses) on policyholders' account balances -- -- 1,350 (486) 864

-------- -------- -------- -------- --------
Balance, December 31, 2000 (2,007) 975 (162) 431 (763)

Net investment gains (losses) on investments
arising during the period 5,938 -- -- (2,138) 3,800

Reclassification adjustment for gains (losses)
included in net income 7,807 -- -- (2,810) 4,997

Impact of net unrealized investment gains
(losses) on deferred policy acquisition costs -- (8,109) -- 2,919 (5,190)

Impact of net unrealized investment gains
(losses) on policyholders' account balances -- -- 1,376 (496) 880
-------- -------- -------- -------- --------
Balance, December 31, 2001 $ 11,738 $ (7,134) $ 1,214 $ (2,094) $ 3,724
======== ======== ======== ======== ========

F-14

Pruco Life Insurance Company of New Jersey

- --------------------------------------------------------------------------------
Notes to Financial Statements

4. DEFERRED POLICY ACQUISITION COSTS

The balance of and changes in deferred policy acquisition costs for the year
ended December 31, are as follows:

2001 2000 1999
--------- --------- ---------
(In Thousands)

Balance, Beginning of Year $ 116,653 $ 129,184 $ 113,923
Capitalization of Commissions, Sales and Issue
Expenses 25,953 10,638 13,439
Amortization (15,522) (13,008) (12,859)
Change in Unrealized Investment (Gains) Losses (8,109) (10,161) 14,681
--------- --------- ---------
Balance, End of Year $ 118,975 $ 116,653 $ 129,184
========= ========= =========

5. POLICYHOLDERS' LIABILITIES

Future policy benefits and other policyholder liabilities at December 31 are
as follows:

2001 2000
-------------- --------------
(In Thousands)

Life Insurance $ 114,698 $ 103,557
Annuities 4,702 4,661
-------------- -------------
$ 119,400 $ 108,218
============== =============

Life insurance liabilities include reserves for death benefits. Annuity
liabilities include reserves for annuities that are in payout status.

The following table highlights the key assumptions generally utilized in
calculating these reserves:

Product Mortality Interest Rate Estimation Method
- ----------------------- ------------------------------------ ----------------------- ------------------------------

Life Insurance Generally rates 2.5% to 11.25% Net level premium based
Variable and guaranteed in calculating on non-forfeiture interest
Interest-Sensitive cash surrender values rate

Life Insurance - Best estimate plus a provision for 6.5% to 6.75% Net level premium plus a
Term Insurance adverse deviation provision for adverse
deviation

Individual Mortality table varies based on 6.25% to 8.75% Present value of expected
Annuities the issue year of the contract. future payment based on
Current table (for 1998 and later historical experience
issues) is the Annuity 2000
Mortality Table

Policyholders' account balances at December 31, are as follows:

2001 2000
------------- -------------
(In Thousands)

Interest-Sensitive Life Contracts $ 345,344 $ 332,761
Individual Annuities 111,828 101,681
------------- -------------
$ 457,172 $ 434,442
============= =============

F-15

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
- --------------------------------------------------------------------------------

5. POLICYHOLDERS' LIABILITIES (continued)

Policyholders' account balances for interest-sensitive life and individual
annuities are equal to policy account values plus unearned premiums. The policy
account values represent an accumulation of gross premium payments plus credited
interest less withdrawals, expenses, and mortality charges.

Certain contract provisions that determine the policyholder account balances are
as follows:

Product Interest Rate Withdrawal / Surrender Charges
- --------------------------------- ---------------------------- ----------------------------------

Interest Sensitive Life Contracts 3.0% to 6.75% Various up to 10 years

Individual Annuities 3.0% to 6.0% 0% to 7% for up to 9 years

6. REINSURANCE

The Company participates in reinsurance with Prudential and other companies, in
order to provide greater diversification of business, provide additional
capacity for future growth and limit the maximum net loss potential arising from
large risks. Reinsurance ceded arrangements do not discharge the Company as the
primary insurer. Ceded balances would represent a liability of the Company in
the event the reinsurers were unable to meet their obligations to the Company
under the terms of the reinsurance agreements. The likelihood of a material
reinsurance liability reassumed by the Company is considered to be remote.

Reinsurance amounts included in the Statement of Operations and Comprehensive
Income for the years ended December 31 are below.

2001 2000 1999
-------- -------- --------
(In Thousands)

Reinsurance Premiums ceded - affiliated $ (257) $ (19) $ (17)
Reinsurance Premiums ceded - unaffiliated $(2,540) $ (445) $ --

Policyholders' Benefits ceded $ 762 $ 110 $ --

Reinsurance recoverables, included in "Other assets" in the Company's
Statements of Financial Position, at December 31 were as follows:

2001 2000
----------- -----------
(In Thousands)

Life Insurance - affiliated $ 2,416 $ 369
=========== ===========

The gross and net amounts of life insurance in force at December 31, were as
follows:

2001 2000 1999
---- ---- ----
(In Thousands)

Life Insurance Face Amount In Force $ 11,071,045 $ 7,874,501 $ 7,523,324

Ceded To Other Companies (3,697,344) (673,474) (1,763)
------------ ------------ ------------
Net Amount of Life Insurance In Force $ 7,373,701 $ 7,201,027 $ 7,521,561
============ ============ ============

F-16

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
- --------------------------------------------------------------------------------

7. INCOME TAXES

The components of income taxes for the years ended December 31, are as follows:

2001 2000 1999
-------- -------- --------
(In Thousands)
Current Tax Expense (Benefit):
U.S $ (3,756) $ 15,365 $ 6,769
State and Local 153 -- 178
-------- -------- --------
Total (3,603) 15,365 6,947
-------- -------- --------

Deferred Tax Expense (Benefit):
U.S 10,019 (3,211) (54)
State and Local 88 545 (2)
-------- -------- --------
Total 10,107 (2,666) (56)
-------- -------- --------

Total Income Tax Expense $ 6,504 $ 12,699 $ 6,891
======== ======== ========

The income tax expense for the years ended December 31, differs from the amount
computed by applying the expected federal income tax rate of 35% to income from
operations before income taxes for the following reasons:

2001 2000 1999
-------- -------- --------
(In Thousands)

Expected Federal Income Tax Expense $ 7,734 $ 12,699 $ 6,891
State and Local Income Taxes 157 354 114
Non taxable investment income (1,558) (843) (878)
Other 171 489 764
-------- -------- --------
Total Income Tax Expense $ 6,504 $ 12,699 $ 6,891
======== ======== ========

Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:

2001 2000
-------- --------
(In Thousands)
Deferred Tax Assets
Insurance Reserves $ 7,331 $ 15,961
Investments 1,061 (914)
-------- --------
Deferred Tax Assets 8,392 15,047
-------- --------

Deferred Tax Liabilities
Deferred Acquisition Costs 35,233 34,249
Net Unrealized (Gains) Losses on Securities 4,226 (723)
Other 1,835 1,791
-------- --------
Deferred Tax Liabilities 41,294 35,317
-------- --------

Net Deferred Tax Liability $ 32,902 $ 20,270
======== ========

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, 2001 and 2000,
respectively, the Company had no federal operating loss carryforwards and $4
million of state operating loss carryforwards for tax purposes, which will
expire in 2021.

F-17

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
- --------------------------------------------------------------------------------

7. INCOME TAXES (continued)

The Internal Revenue Service (the "Service") has completed all examinations of
the consolidated federal income tax returns through 1992. The Service has
examined the years 1993 through 1995. The Service has completed its examination
of 1996 and has begun its examination of 1997 through 2000. 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.

8. STATUTORY NET INCOME AND SURPLUS

The Company is required to prepare statutory financial statements in accordance
with accounting practices prescribed or permitted by the New Jersey Department
of Banking and Insurance. Statutory accounting practices primarily differ from
GAAP by charging policy acquisition costs to expense as incurred, establishing
future policy benefit liabilities using different actuarial assumptions and
valuing investments, deferred taxes, and certain assets on a different basis.

Statutory net income (loss) of the Company amounted to $(12.1) million, $21.3
million, and $20.2 million for the years ended December 31, 2001, 2000, and
1999, respectively. Statutory surplus of the Company amounted to $111.5 million
and $294.3 million at December 31, 2001 and 2000, respectively.

In March 1998, the NAIC adopted the Codification of Statutory Accounting
Principles guidance ("Codification"), which replaces the current Accounting
Practices and Procedures manual as the NAIC's primary guidance on statutory
accounting as of January 1, 2001. Codification provides guidance for areas where
statutory accounting has been silent and changes current statutory accounting in
certain areas. The Company has adopted the Codification guidance effective
January 1, 2001. As a result of these changes, the Company reported an increase
to statutory surplus of $7 million, primarily relating to the recognition of
deferred tax assets.

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values presented below have been determined using available
market information and by applying valuation methodologies. Considerable
judgment is applied in interpreting data to develop the estimates of fair value.
Estimates of fair values may not be realized in a current market exchange. The
use of different market assumptions and/or estimation methodologies could have a
material effect on the estimated fair values. The following methods and
assumptions were used in calculating the estimated fair values (for all other
financial instruments presented in the table, the carrying value approximates
estimated fair value).

Fixed maturities
Estimated fair values for fixed maturities, other than private placement
securities, are based on quoted market prices or estimates from independent
pricing services. Generally, fair values for private placement securities are
estimated using a discounted cash flow model which considers the current market
spreads between the U.S. Treasury yield curve and corporate bond yield curve,
adjusted for the type of issue, its current credit quality and its remaining
average life. The estimated fair value of certain non-performing private
placement securities is based on amounts estimated by management.

Policy loans
The estimated fair value of policy loans is calculated using a discounted cash
flow model based upon current U.S. Treasury rates and historical loan repayment
patterns.

Investment contracts
For individual deferred annuities and other deposit liabilities, fair value
approximates carrying value.

Derivative financial instruments
See note 10 for disclosure of fair value on these instruments.

F-18

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
- --------------------------------------------------------------------------------

9. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

The following table discloses the carrying amounts and estimated fair values of
the Company's financial instruments at December 31:

2001 2000
-------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------- ---------- ---------- ----------
(In Thousands)

Financial Assets:
Fixed Maturities:
Available for Sale $ 490,734 $ 490,734 $ 612,851 $ 612,851
Held to Maturity -- -- 7,470 7,259
Policy loans 158,754 169,701 152,111 156,786
Short-Term Investments 32,983 32,983 28,759 28,759
Cash and Cash Equivalents 58,212 58,212 65,237 65,237
Separate Accounts Assets 1,631,113 1,631,113 1,805,584 1,805,584

Financial Liabilities:
Investment Contracts $ 117,694 $ 117,694 $ 102,255 $ 102,255
Cash Collateral for Loaned Securities 36,092 36,092 48,309 48,309
Securities Sold Under Agreements
to Repurchase 18,514 18,514 9,754 9,754
Separate Accounts Liabilities 1,631,113 1,631,113 1,805,584 1,805,584

10. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS

Adoption of Statement of Financial Accounting Standards No. 133

The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" as amended, on January 1, 2001. The adoption of this
statement did not have a material impact on the results of operations of the
Company.

Derivative Financial Instruments

A derivative is a financial instrument whose value is derived from interest
rates, foreign exchange rates, financial indices, or the value of securities or
commodities. Derivative financial instruments used by the Company include swaps,
futures, forwards and option contracts and may be exchange-traded or contracted
in the over-the-counter market. The Company uses derivative financial
instruments to seek to reduce market risk from changes in interest rates and to
alter interest rate or currency exposures arising from mismatches between assets
and liabilities. All of the Company's derivatives are classified as other than
trading. As of December 31, 2001, none of the Company's derivatives qualifies
for hedge accounting treatment, therefore they are shown at fair value, with
changes in fair value reported in current earnings.

Futures
The Company uses exchange-traded Treasury futures and options to reduce market
risk from changes in interest rates, and to manage the duration of assets and
the duration of liabilities supported by those assets. In exchange-traded
futures transactions, the Company agrees to purchase or sell a specified number
of contracts, the value of which are determined by the value of designated
classes of Treasury securities, and to post variation margin on a daily basis in
an amount equal to the difference in the daily market values of those contracts.
The Company enters into exchange-traded futures and options with regulated
futures commissions merchants who are members of a trading exchange. The fair
value of futures and options is based on market quotes.

Treasury futures move substantially in value as interest rates change and can be
used to either modify or hedge existing interest rate risk. This strategy
protects against the risk that cash flow requirements may necessitate
liquidation of investments at unfavorable prices resulting from increases in
interest rates. This strategy can be a more cost effective way of temporarily
reducing the 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-19

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
- --------------------------------------------------------------------------------

10. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)

If futures meet hedge accounting criteria, changes in their fair value are
deferred and recognized as an adjustment to the carrying value of the hedged
item. Deferred gains or losses from the hedges for interest-bearing financial
instruments are amortized as a yield adjustment over the remaining lives of the
hedged item. Futures that do not qualify as hedges are carried at fair value
with changes in value reported in current period earnings. The notional and fair
value of futures contracts was $37.0 million and $.03 million at December 31,
2001, respectively. The notional and fair value of futures contracts was $3.6
million and $.1 million at December 31, 2000, respectively.

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. As of December 31, 2000, 100% of the notional
consisted of interest rate derivatives.

11. CONTINGENCIES AND LITIGATION

Prudential and the Company are subject to legal and regulatory actions in the
ordinary course of their businesses, including class actions. Pending legal and
regulatory actions include proceedings relating to aspects of the businesses and
operations that are specific to the Company and Prudential and that are typical
of the businesses in which the Company and Prudential operate. Some of these
proceedings have been brought on behalf of various alleged classes of
complainants. In certain of these matters, the plaintiffs are seeking large
and/or indeterminate amounts, including punitive or exemplary damages.

Beginning in 1995, regulatory authorities and customers brought significant
regulatory actions and civil litigation against the Company and Prudential
involving individual life insurance sales practices. In 1996, Prudential, on
behalf of itself and many of its life insurance subsidiaries including the
Company entered into settlement agreements with relevant insurance regulatory
authorities and plaintiffs in the principal life insurance sales practices class
action lawsuit covering policyholders of individual permanent life insurance
policies issued in the United States from 1982 to 1995. Pursuant to the
settlements, the companies agreed to various changes to their sales and business
practices controls, to a series of fines, and to provide specific forms of
relief to eligible class members. Virtually all claims by class members filed in
connection with the settlements have been resolved and virtually all aspects of
the remediation program have been satisfied. While the approval of the class
action settlement is now final, Prudential and the Company remain subject to
oversight and review by insurance regulators and other regulatory authorities
with respect to its sales practices and the conduct of the remediation program.
The U.S. District Court has also retained jurisdiction as to all matters
relating to the administration, consummation, enforcement and interpretation of
the settlements.

As of December 31, 2001, Prudential and/or the Company remained a party to
approximately 44 individual sales practices actions filed by policyholders who
"opted out" of the class action settlement relating to permanent life insurance
policies issued in the United States between 1982 and 1995. In addition, there
were 19 sales practices actions pending that were filed by policyholders who
were members of the class and who failed to "opt out" of the class action
settlement. Prudential and the Company believe that those actions are governed
by the class settlement release and expects them to be enjoined and/or
dismissed. Additional suits may be filed by class members who "opted out" of the
class settlements or who failed to "opt out" but nevertheless seek to proceed
against Prudential and/or the Company. A number of the plaintiffs in these cases
seek large and/or indeterminate amounts, including punitive or exemplary
damages. Some of these actions are brought on behalf of multiple plaintiffs. It
is possible that substantial punitive damages might be awarded in any of these
actions and particularly in an action involving multiple plaintiffs.

Prudential has indemnified the Company for any liabilities incurred in
connection with sales practices litigation covering policyholders of individual
permanent life insurance policies issued in the United States from 1982 to 1995.

The Company's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted. It is possible that the
results of operations or the cash flow of the Company in a particular quarterly
or annual period could be materially affected by an ultimate unfavorable
resolution of pending litigation and regulatory matters. Management believes,
however, that the ultimate outcome of all pending litigation and regulatory
matters should not have a material adverse effect on the Company's financial
position.

F-20

Pruco Life Insurance Company of New Jersey

Notes to Financial Statements
- --------------------------------------------------------------------------------

12. 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 earned surplus derived from realized net
profits. The Company received approval from the New Jersey Commissioner of
Insurance to pay an extraordinary dividend to its Parent in 2001 of $186
million.

13. RELATED PARTY TRANSACTIONS

The Company has extensive transactions and relationships with Prudential and
other affiliates. It is possible that the terms of these transactions are not
the same as those that would result from transactions among wholly unrelated
parties.

Expense Charges and Allocations
All of the Company's expenses are allocations or charges from Prudential or
other affiliates. These expenses can be grouped into the following categories:
general and administrative expenses, retail distribution expenses and asset
management fees.

The Company's general and administrative expenses are charged to the Company
using allocation methodologies based on business processes. Management believes
that the methodology is reasonable and reflects costs incurred by Prudential to
process transactions on behalf of the Company. Prudential and the Company
operate under service and lease agreements whereby services of officers and
employees, supplies, use of equipment and office space are provided by
Prudential.

The Company is allocated estimated distribution expenses from Prudential's
retail agency network for both its domestic life and annuity products. The
Company has capitalized certain of these distribution expenses as deferred
policy acquisition costs. Beginning April 1, 2000, Prudential and the Company
agreed to revise the estimate of allocated distribution expenses to reflect a
market based pricing arrangement.

In accordance with a profit sharing agreement with Prudential that was in effect
through December 31, 2000, the Company received fee income from policyholder
account balances invested in the Prudential Series Funds ("PSF"). These revenues
were recorded as "Asset management fees" in the Statements of Operations and
Comprehensive Income. The Company was charged an asset management fee by
Prudential Global Asset Management ("PGAM") and Jennison Associates LLC
("Jennison") for managing the PSF portfolio. These expenses are a component of
general, administrative and other expenses.

On September 29, 2000, the Board of Directors for the Prudential Series Fund,
Inc. ("PSFI") adopted resolutions to terminate the existing management agreement
between PSFI and Prudential, and has appointed another subsidiary of Prudential
as the fund manager for PSF. The change was approved by the shareholders of the
PSFI during early 2001 and effective January 1, 2001, the Company will no longer
receives fees associated with the PSF. In addition, the Company will no longer
incur the asset management expense from PGAM and Jennison associated with the
PSF.

Corporate Owned Life Insurance
The Company has sold a Corporate Owned Life Insurance ("COLI") policy to
Prudential. The cash surrender value included in Separate Accounts was $165.7
million and $182.4 million at December 31, 2001 and December 31, 2000,
respectively.

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, 2001, 2000, and 1999.

Debt Agreements
In July 1998, the Company established a revolving line of credit facility with
Prudential Funding LLC, a wholly-owned subsidiary of Prudential. There is no
outstanding debt relating to this credit facility as of December 31, 2001.