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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- - EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the quarterly period ended September 30, 2002
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 33-18053
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 November 14, 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 (H) (1)
(a) and (b) on Form 10-Q and is therefore filing this
Form with the reduced disclosure format.
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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page No.
--------
Cover Page
Index 2
PART I - Financial Information
------------------------------
Item 1. (Unaudited) Financial Statements
Statements of Financial Position As of
September 30, 2002 and December 31, 2001 3
Statements of Operations and Comprehensive
Income Nine and Three months ended
September 30, 2002 and 2001 4
Statements of Changes in Stockholder's Equity
Periods ended September 30, 2002 and
December 31, 2001 and 2000 5
Statements of Cash Flows Nine months ended
September 30, 2002 and 2001 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 4. Controls and Procedures 11
PART II - Other Information
---------------------------
Item 6. Exhibits and Reports on Form 8-K 12
Signature Page 13
Certifications 14
Forward-Looking Statement Disclosure
Certain of the statements included in this Quarterly Report on Form 10-Q,
including but not limited to those in the Management's Discussion and Analysis
of Financial Condition and Results of Operations, constitute forward-looking
statements within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. Words such as "expects," "believes," "anticipates," "includes,"
"plans," "assumes," "estimates," "projects," 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; risks to our international operations; the impact of
changing regulation or accounting practices; adverse litigation results; and
changes in tax law. The Company does not intend, and is under no obligation to,
update any particular forward-looking statement included in this document.
2
Pruco Life Insurance Company of New Jersey
Statements of Financial Position (Unaudited) As of September 30, 2002 and
December 31, 2001 (In Thousands)
- --------------------------------------------------------------------------------
September 30, December 31,
2002 2001
------------- -------------
ASSETS
Fixed maturities:
Available for sale, at fair value (amortized cost, 2002: $520,510; and
2001: $478,996) $ 541,702 $ 490,734
Policy loans 158,945 158,754
Short-term investments 20,464 32,983
Other long-term investments 3,875 2,614
-------------- -------------
Total investments 724,986 685,085
Cash and cash equivalents 89,255 58,212
Deferred policy acquisition costs 130,216 118,975
Accrued investment income 12,224 10,399
Receivables from affiliates 21,391 17,270
Other assets 9,610 3,919
Separate Account assets 1,355,440 1,631,113
-------------- -------------
TOTAL ASSETS $ 2,343,122 $2,524,973
============== =============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Policyholders' account balances $ 514,155 $ 457,172
Future policy benefits and other policyholder liabilities 127,733 119,400
Cash collateral for loaned securities 40,348 36,092
Securities sold under agreements to repurchase 39,650 18,514
Income taxes payable 35,756 36,012
Other liabilities 14,783 19,298
Separate Account liabilities 1,355,440 1,631,113
-------------- -------------
Total liabilities $ 2,127,865 2,317,601
-------------- -------------
Contingencies - (See Footnote 2)
Stockholder's Equity
Common stock, $5 par value;
400,000 shares, authorized;
issued and outstanding at
September 30, 2002 and December 31, 2001 2,000 2,000
Paid-in-capital 128,689 128,689
Retained earnings 77,267 72,959
Accumulated other comprehensive income 7,301 3,724
-------------- -------------
Total stockholder's equity 215,257 207,372
-------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 2,343,122 $2,524,973
============== =============
See Notes to Financial Statements
3
Pruco Life Insurance Company of New Jersey
Statements of Operations and Comprehensive Income (Unaudited) Nine and Three
Months Ended September 30, 2002 and 2001 (In Thousands)
- --------------------------------------------------------------------------------
Nine months ended Three months ended
September 30, September 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES
Premiums $ 16,352 $ 10,477 $ 7,030 $ 3,151
Policy charges and fee income 43,355 37,076 14,791 12,746
Net investment income 34,423 42,731 11,888 14,788
Realized investment losses (8,709) (6,486) (3,186) (6,661)
Asset management fees 360 472 127 173
Other income 911 538 571 328
------------ ------------ ------------ ------------
Total revenues 86,692 84,808 31,221 24,525
------------ ------------ ------------ ------------
BENEFITS AND EXPENSES
Policyholders' benefits 24,533 23,402 9,131 6,238
Interest credited to policyholders' account balances 15,135 15,524 5,298 5,180
General, administrative and other expenses 44,728 30,505 18,717 10,877
------------ ------------ ------------ ------------
Total benefits and expenses 84,396 69,431 33,146 22,295
------------ ------------ ------------ ------------
Income from operations before income taxes 2,296 15,377 (1,925) 2,230
------------ ------------ ------------ ------------
Income tax (benefit) provision (2,012) 4,398 (3,443) 444
------------ ------------ ------------ ------------
NET INCOME $ 4,308 $ 10,979 $ 1,518 $ 1,786
------------ ------------ ------------ ------------
Net unrealized investment gains on securities,
net of reclassification adjustment and taxes 3,577 6,785 3,247 4,674
------------ ------------ ------------ ------------
TOTAL COMPREHENSIVE INCOME $ 7,885 $ 17,764 $ 4,765 $ 6,460
============ ============ ============ ============
See Notes to Financial Statements
4
Pruco Life Insurance Company of New Jersey
Statements of Changes in Stockholder's Equity (Unaudited) Periods ended
September 30, 2002 and December 31, 2001 and 2000 (In Thousands)
- --------------------------------------------------------------------------------
Accumulated
other Total
Common Paid - in - Retained comprehensive stockholder's
stock capital earnings income (loss) Equity
----------- ------------- ------------- ------------- -------------
Balance, January 1, 2000 $ 2,000 $ 125,000 $ 230,057 $ (6,088) $ 350,969
Net income - - 23,584 - 23,584
Contribution - 3,689 - - 3,689
Change in net unrealized
investment losses, net of
reclassification and taxes - - - 5,325 5,325
----------- ------------- ------------- ------------- -------------
Balance, December 31, 2000 2,000 128,689 253,641 (763) 383,567
Net income - - 15,593 - 15,593
Dividend to Parent - - (186,000) - (186,000)
Policy credits issued to
Eligible policyholders - - (10,275) - (10,275)
Change in net unrealized
investment losses, net of
reclassification and taxes - - - 4,487 4,487
----------- ------------- ------------- ------------- -------------
Balance, December 31, 2001 2,000 128,689 72,959 3,724 207,372
Net income - - 4,308 - 4,308
Change in net unrealized
investment gains, net of
reclassification and taxes - - - 3,577 3,577
----------- ------------- ------------- ------------- -------------
Balance, September 30, 2002 $ 2,000 $ 128,689 $ 77,267 $ 7,301 $ 215,257
=========== ============= ============= ============= =============
See Notes to Financial Statements
5
Pruco Life Insurance Company of New Jersey
Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2002 and 2001 (In Thousands)
- ------------------------------------------------------------
Nine months ended,
September 30,
2002 2001
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,308 $ 10,979
Adjustments to reconcile net income to net cash provided by (used in)
Operating activities:
Policy charges and fee income (8,733) (7,442)
Interest credited to policyholders' account balances 15,135 15,524
Realized investment losses, net 8,709 6,486
Amortization and other non-cash items (7,350) (15,305)
Change in:
Future policy benefits and other policyholders' liabilities 8,333 7,116
Accrued investment income (1,825) (702)
Policy loans (191) (5,493)
Receivables from affiliates (4,121) 4,280
Deferred policy acquisition costs (11,241) 5,094
Income taxes payable (256) 870
Other, net (1,085) 4,990
------------ -------------
Cash Flows From Operating Activities 1,683 26,397
------------ -------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities available for sale 201,939 533,252
Payments for the purchase of:
Fixed maturities available for sale (250,830) (569,062)
Cash collateral for loaned securities, net 4,256 (4,757)
Securities sold under agreements to repurchase, net 21,136 9,931
Other long-term investments, net (2,732) (423)
Short term investments, net 12,516 16,679
------------ -------------
Cash Flows Used In Investing Activities (13,715) (14,380)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 109,014 60,975
Withdrawals (56,818) (55,455)
Cash payments to eligible policyholders (9,121) -
------------ -------------
Cash Flows From Financing Activities 43,075 5,520
------------ -------------
Net increase in Cash and cash equivalents 31,043 17,537
Cash and cash equivalents, beginning of year 58,212 65,237
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $89,255 $82,774
============ =============
See Notes to Financial Statements
6
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying interim financial statements have been prepared pursuant to the
rules and regulations for reporting on Form 10-Q on the basis of accounting
principles generally accepted in the United States. These interim financial
statements are unaudited but reflect all adjustments which, in the opinion of
management, are necessary to provide a fair presentation of the results of
operations and financial condition of the Pruco Life Insurance Company of New
Jersey ("the Company"), for the interim periods presented. The Company is a
wholly owned subsidiary of the Pruco Life Insurance Company ("Pruco Life"),
which in turn is a wholly owned subsidiary of The Prudential Insurance Company
of America ("Prudential"). Prudential is a wholly owned subsidiary of Prudential
Financial, Inc. All such adjustments are of a normal recurring nature. The
results of operations for any interim period are not necessarily indicative of
results for a full year. Certain amounts in the Company's prior year financial
statements have been reclassified to conform to the current year presentation.
These financial statements should be read in conjunction with the financial
statements and notes thereto contained in the Company's Annual Report on Form
10-K for the year ended December 31, 2001.
2. CONTINGENCIES AND LITIGATION
Contingencies
On an ongoing basis, our internal supervisory and control functions review the
quality of our sales, marketing and other customer interface procedures and
practices and may recommend modifications or enhancements. In certain cases, if
appropriate, we may offer customers remediation and may incur charges, including
the cost of such remediation, administrative costs and regulatory fines.
It is possible that the results of operations or the cash flow of the Company in
a particular quarterly or annual period could be materially affected as a result
of payments in connection with the matters discussed above depending, in part,
upon the results of operations or cash flow for such period. Management
believes, however, that the ultimate payments in connection with these matters
should not have a material adverse effect on the Company's financial position.
Litigation
Prudential and the Company are subject to legal and regulatory actions in the
ordinary course of our businesses, including class actions. Pending legal and
regulatory actions include proceedings relating to aspects of our 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 September 30, 2002, Prudential and/or the Company remained a party to
approximately 40 individual sales practices actions filed by policyholders who
"opted out" of the class action settlement relating to permanent life insurance
policies issued in the United States between 1982 and 1995. In addition, there
were 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 expect 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.
7
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
2. CONTINGENCIES AND LITIGATION (continued)
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.
3. RELATED PARTY TRANSACTIONS
The Company has extensive transactions and relationships with Prudential and
other affiliates. It is possible that the terms of these transactions are not
the same as those that would result from transactions among wholly unrelated
parties.
Expense Charges and Allocations
All of the 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 and retail distribution expenses.
The Company's general and administrative expenses are charged to the Company
using allocation methodologies based on business processes. Management believes
that the methodology is reasonable and reflects costs incurred by Prudential 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
estimate of allocated distribution expenses is intended to reflect a market
based pricing arrangement. The Company has capitalized the majority of these
distribution expenses as deferred policy acquisition costs.
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 $168.0
million and $165.7 million at September 30, 2002 and December 31, 2001,
respectively.
Reinsurance with Affiliates
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 periods ended September 30, 2002 and 2001.
Debt Agreements
The Company has a revolving line of credit facility of up to $700 million with
Prudential Funding LLC, a wholly owned subsidiary of Prudential. There was no
outstanding debt relating to this credit facility as of September 30, 2002 or
December 31, 2001.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Pruco Life Insurance Company of New Jersey meets the conditions set forth in
General Instruction H(1)(a) and (b) on Form 10-Q and is filing this form with
reduced disclosure.
1. Analysis of Financial Condition
Total assets of the Company decreased $181.9 million from $2,525.0 million to
$2,343.1 million during the first nine months of 2002. Separate Account assets
decreased $275.7 million as a result of market value declines. Partially
offsetting this was an increase in fixed maturities of $51.0 million from
investing policyholder deposits and unrealized market gains. Cash and cash
equivalents increased $31.0 million as a result of increased security lending
activity.
Total liabilities of the Company decreased $189.7 million during the first nine
months of 2002 from $2,317.6 million to $2,127.9 million. Corresponding with the
asset change, Separate Account liabilities decreased by $275.7 million resulting
from market value declines. Policyholder Account balances increased $57.0
million mainly from annuity deposits. Higher securities lending liabilities
increased liabilities by $25.4 million.
2. Results of Operations
For the nine months ended September 30, 2002 versus September 30, 2001
- ----------------------------------------------------------------------
Net Income
Net income for the nine months ended September 30, 2002 was $4.3 million, a
decrease of $6.7 million from the first nine months of 2001. The main factors in
the decline in net income are higher amortization of deferred acquisition costs
("DAC") of $8.6 million and lower net investment income of $8.3 million. These
declines were partially offset by higher policy charges and premiums and lower
taxes. Tax expense for the current year is lower than the prior year due to
reduced income from operations before taxes and a refinement of the estimated
benefits from nontaxable investment income.
Revenues
Revenues increased by $1.9 million from the prior year comparable period. Policy
charges and fee income increased by $6.3 million primarily driven by an increase
in life insurance charges of $7.4 million for assuming mortality and expense
risks due to the growth in the in-force business of our life insurance products.
The life insurance in-force (excluding term insurance) grew to $8.0 billion at
September 30, 2002 from $6.8 billion at September 30, 2001 and $6.9 billion at
December 31, 2001. This was partially offset by a decrease in annuity policy
charges and fees of $1.1 million due to decreased fund values as a result of
unfavorable market performance. Premiums increased $5.9 million from higher term
insurance sales and renewals of the Term Essential and Term Elite products of
$8.4 million. This was partially offset by decreased extended term insurance,
which represents term insurance issued under policy provisions to customers who
previously had lapsing variable life insurance with the Company.
Lower investment results partially offset these increases. Net investment income
declined by $8.3 million due to lower yields available on the reinvestment of
fixed maturities and short-term investments and a lower average fixed maturity
balance than the prior year resulting from the December 2001 dividend of $186
million. Realized investment losses increased $2.2 million primarily from credit
related losses on sales in 2002 of $1.8 million compared to gains on sales in
the prior year of $3.0 million. Losses on impairments declined $2.2 million from
$7.6 million in 2001 to $5.4 million in the current year.
Benefits and Expenses
Policyholder benefits increased by $1.1 million compared to the prior year as a
result of higher death benefits associated with the minimum death benefit
guarantee for annuities and the increase in life insurance in-force business.
The guaranteed minimum death benefit feature provides annuity contract holders
with a guarantee that the benefit received at death will be no less than a
prescribed minimum amount. This minimum amount is based on the net deposits paid
into the contract, the net deposits accumulated at a specified rate, the highest
historical account value on a contract anniversary, or more typically the
greatest of these values. To the extent that the guaranteed minimum death
benefit is higher than the current account value at the time of death, the
Company incurs a cost. This results in increased annuity policy benefits in
periods of declining financial markets and in periods of stable financial
markets following a decline. Current accounting literature does not prescribe
advance recognition of the expected future net costs associated with these
guarantees, and accordingly we currently do not record a liability corresponding
to these projected future obligations for death benefits in excess of annuity
account values. However, we consider the expected net costs associated with
these guarantees in our calculations of expected gross profits on variable
annuity business, on which our periodic evaluations of unamortized policy
9
acquisition costs are based. A proposed AICPA Statement of Position, "Accounting
and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts" (the "Proposed SOP"), would require
recording of a liability for the expected net costs associated with these
guarantees under certain circumstances, if adopted as proposed. We are currently
evaluating the impact of the proposed SOP, which has a proposed effective date
for fiscal years beginning after December 15, 2003.
Interest credited to policyholder account balances decreased by $0.4 million
despite growth in policyholder account balances as interest crediting rates were
decreased in reaction to the declining investment portfolio yields.
General, administrative and other expenses increased by $14.2 million from the
prior year, primarily the result of increased DAC amortization of $8.6 million.
The majority of the DAC amortization increase, $4.9 million, was related to our
annuity products. This reflects our lower estimates of future gross profits due
to declines in asset values through September 30, 2002, decreased future asset
returns and other refinements, resulting in greater than expected costs from
minimum death benefit guarantees and lower expected fees under these contacts,
as described further below. The remaining increase in DAC amortization is
associated with our life products and is primarily due to the growth of the
in-force. In addition, general and administrative expenses increased due to
higher sales and renewals than the prior year.
Deferred acquisition costs related to annuity products are evaluated quarterly
by comparing our actual profitability to our expectations. Expected
profitability considers, among other assumptions, our best estimate of future
asset returns to estimate the future fees we expect to earn, the costs
associated with minimum death benefit guarantees we expect to incur and other
profitability factors. If actual asset returns do not differ significantly from
our expectations, they do not result in a change in the rate of amortization of
deferred acquisition costs. Where actual asset returns differ more significantly
from expectations, future asset return assumptions are evaluated using a
reversion to mean approach. Under the reversion to mean approach we have
considered a six-year period, consisting of two prior years and four future
years, over which we expect the investments underlying the annuities to grow at
a targeted return. For recent periods, the two-year historical period has been
gradually increased. A calculated rate of return over the four future years,
which we refer to as the look-forward period, is determined so that this
calculated rate, together with the actual rate of return for the previous two
years, produces the targeted return for the full six-year period. If the
calculated rate of return is consistent with our range of expectations in light
of market conditions, we will use it to project the asset growth for the next
four years. If the calculated rate of return is not supported by our current
expectations, we adjust our rate of return for purposes of these computations.
For contract years after the look-forward period, we project asset growth using
our long-term rate, currently an 8% annual blended rate of return which reflects
an assumed rate of return of 8.85% for equity type assets. During the second and
third quarters of 2002 we utilized a rate of return lower than the calculated
return, which contributed to our charges for additional amortization of deferred
acquisition costs. The equity rate of return used in the look-forward period
varies by product, but is under 15% for all of our variable annuity products for
our evaluation of deferred policy acquisition costs as of September 30, 2002.
For the average remaining life of our variable annuity contracts in force as of
September 30, 2002, our evaluation of deferred policy acquisition costs is based
on a 10% annual blended rate of return which reflects an assumed rate of return
of 11.5% for equity type assets. Continued deterioration in market conditions
may result in further increases in the amortization of deferred policy
acquisition costs, while a significant improvement in market conditions may
result in a decrease in amortization.
10
For the three months ended September 30, 2002 versus September 30, 2001
- -----------------------------------------------------------------------
Net Income
Net income declined by $0.3 million from the prior year comparable quarter. The
decrease resulted from an increase in DAC amortization and lower net investment
income offset by higher premiums and policy charges, lower realized losses and
lower taxes.
Revenues
Revenues increased compared to the prior year quarter by $6.7 million. Premiums
increased by $3.9 million as a result of increased sales of term insurance and
extended term premiums. Realized investment losses declined by $3.5 million
primarily from lower fixed maturity impairments and lower derivative losses on
US Treasury futures. Policy charges increased $2.0 million mainly from growth in
the in-force of our life insurance products. Offsetting these increases is lower
investment income of $2.9 million resulting from decreased yields on fixed
maturities and short-term investments and a lower average fixed maturity asset
balance.
Benefits and Expenses
Policyholder benefits increased by $2.9 million related to reserve increases for
extended term premiums and higher term insurance reserves due to sales. The
increase in extended term premiums is a reflection of higher policy lapse
activity resulting from less favorable market performance during the second
quarter. General, administrative, and other expenses increased $7.8 million. The
decline in Separate Account assets resulting from unfavorable market conditions
contributed to increased amortization of DAC of $4.1 million reflecting a
decrease in expected future gross profits and other refinements. In addition,
other general and administrative expenses increased due to higher sales and
renewals than the prior year.
3. Liquidity and Capital Resources
Principal cash flow sources are investment and fee income, investment maturities
and sales, and premiums and fund deposits. These cash inflows may be
supplemented by financing activities through other Prudential affiliates.
Cash outflows consist principally of benefits, claims and amounts paid to
policyholders in connection with policy surrenders, withdrawals and net policy
loan activity. Uses of cash also include commissions, general and administrative
expenses, and purchases of investments. Liquidity requirements associated with
policyholder obligations are monitored regularly so that the Company can manage
cash inflows to match anticipated cash outflow requirements.
The Company believes that cash flow from operations together with proceeds from
scheduled maturities and sales of fixed maturity investments, are adequate to
satisfy liquidity requirements based on the Company's current liability
structure.
The Company had $2.3 billion and $2.5 billion of assets at September 30, 2002
and December 31, 2001 respectively, of which $1.4 billion and $1.6 billion were
held in Separate Accounts at September 30, 2002 and December 31, 2001,
respectively, under variable life insurance policies and variable annuity
contracts. The remaining assets consisted primarily of investments and deferred
policy acquisition costs.
Item 4. Controls and Procedures
- -------------------------------
Controls and Procedures
Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of the Company's
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective. No significant changes were made in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
11
PART II
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Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
3(i)(a) The Articles of Incorporation (as amended through March 11,
1983) of Pruco Life Insurance Company of New Jersey are
incorporated by reference to Post-effective Amendment No. 26
to the Registration Statement on Form S-6 of Pruco Life of New
Jersey Variable Appreciable Account as filed April 28, 1997,
Registration No. 2-89780.
3(i)(b) Amendment to the Articles of Incorporation dated February 12,
1998 is incorporated by reference to Post-Effective Amendment
No. 12 to the Registration Statement on Form S-1, of Pruco
Life of New Jersey Variable Contract Real Property Account as
filed on April 16, 1999, Registration No. 33-20018.
3(ii) By-Laws of Pruco Life Insurance Company of New Jersey (as
amended through May 5, 1997) are incorporated by reference to
Form 10-Q as filed by the Company on August 15, 1997.
4(a) Market-Value Adjustment Annuity Contract is incorporated by
reference to the Company's registration statement on Form S-1,
Registration No. 333-18053, as filed November 17, 1995.
4(b) Market-Value Adjustment Annuity Contract is incorporated by
reference to the Company's registration statement on Form S-3,
Registration No. 333-62246, as filed on April 12, 2002.
(b) Reports on Form 8K
Form 8K, Commission file number 333-18053, was filed on
April 16, 2002.
12
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf of the
undersigned, thereunto duly authorized.
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
(Registrant)
Signature Title Date
- --------- ----- ----
/s/ Andrew J. Mako
- ------------------------------ Executive Vice President November 14, 2002
Andrew J. Mako (Authorized Signatory)
/s/ William J. Eckert, IV
- ------------------------------ Vice President and November 14, 2002
William J. Eckert, IV Chief Accounting Officer
(Principal Accounting Officer)
13
CERTIFICATIONS
I, Vivian Banta certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pruco Life Insurance
Company of New Jersey;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Vivian Banta
------------------------
Vivian Banta
Chief Executive Officer
14
I, William J. Eckert, IV, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Pruco Life Insurance
Company of New Jersey;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002.
/s/ William J. Eckert, IV
----------------------------
William J. Eckert, IV
Chief Accounting Officer