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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 June 30, 2003
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 jurisdiction, (IRS Employer Identification No.)
incorporation or organization)
213 Washington Street, Newark, New Jersey 07102
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
(973) 802-3274
----------------------------------------------------
(Registrant's Telephone Number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
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 August 14, 2003. 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 June 30, 2003 and December 31, 2002 3
Statements of Operations and Comprehensive Income
Three and Six months ended June 30, 2003 and 2002 4
Statements of Stockholder's Equity
Periods ended June 30, 2003 and December 31, 2002 and 2001 5
Statements of Cash Flows
Six months ended June 30, 2003 and 2002 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 18
PART II - Other Information
Item 1. Legal proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Forward-Looking Statement Disclosure
Certain of the statements included in this Quarterly Report on Form 10-Q,
including but not limited to those in the Management's Discussion and Analysis
of Financial Condition and Results of Operations, constitute forward-looking
statements within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995. Words such as "expects," "believes," "anticipates," "includes,"
"plans," "assumes," "estimates," "projects," "intends", or variations of such
words are generally part of forward-looking statements. Forward-looking
statements are made based on management's current expectations and beliefs
concerning future developments and their potential effects upon Pruco Life
Insurance Company 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 negative impact of the current economic environment; various
domestic or international military or terrorist activities or conflicts;
volatility in the securities markets; reestimates of our reserves for future
policy benefits and claims; changes in our assumptions related to deferred
policy acquisition costs; our exposure to contingent liabilities; catastrophe
losses; investment losses and defaults; changes in our claims-paying or credit
ratings; competition in our product lines and for personnel; fluctuations in
foreign currency exchange rates and foreign securities markets; 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 June 30, 2003 and December 31, 2002 (in thousands)
June 30, December 31,
2003 2002
------------ ------------
ASSETS
Fixed maturities available for sale,
at fair value (amortized cost, 2003: $617,890; and 2002: $525,866) $ 663,438 $ 553,901
Policy loans 156,651 158,431
Short-term investments 25,046 30,158
Other long-term investments 4,216 3,561
------------ ------------
Total investments 849,351 746,051
Cash and cash equivalents 138,838 61,482
Deferred policy acquisition costs 146,965 137,053
Accrued investment income 12,171 11,291
Receivables from affiliates 13,769 24,686
Other assets 17,772 11,644
Separate account assets 1,750,226 1,590,335
------------ ------------
TOTAL ASSETS $ 2,929,092 $ 2,582,542
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Policyholders' account balances $ 591,569 $ 529,333
Future policy benefits and other policyholder liabilities 143,035 134,208
Cash collateral for loaned securities 36,117 25,035
Securities sold under agreements to repurchase 51,447 31,713
Income taxes payable 44,429 33,646
Other liabilities 28,434 9,562
Separate account liabilities 1,750,226 1,590,335
------------ ------------
Total liabilities 2,645,257 2,353,832
------------ ------------
Contingencies - (See Footnote 2)
Stockholder's Equity
Common stock, $5 par value;
400,000 shares, authorized;
issued and outstanding at
June 30, 2003 and December 31, 2002 2,000 2,000
Paid-in-capital 168,728 128,689
Deferred compensation (149) -
Retained earnings 96,891 88,326
Accumulated other comprehensive income 16,365 9,695
------------ ------------
Total stockholder's equity 283,835 228,710
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 2,929,092 $ 2,582,542
============ ============
See Notes to Financial Statements
3
Pruco Life Insurance Company of New Jersey
Statements of Operations and Comprehensive Income (Unaudited)
Three and Six Months Ended June 30, 2003 and 2002 (in thousands)
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2002
--------- --------- --------- ---------
REVENUES
Premiums $ 9,697 $ 5,239 $ 19,195 $ 9,322
Policy charges and fee income 19,347 15,281 34,977 28,564
Net investment income 11,367 11,356 22,010 22,535
Realized investment gains (losses), net 619 (3,391) (1,126) (5,523)
Asset management fees 1,055 200 2,005 233
Other income 336 194 770 340
--------- --------- --------- ---------
Total revenues 42,421 28,879 77,831 55,471
--------- --------- --------- ---------
BENEFITS AND EXPENSES
Policyholders' benefits 13,028 7,424 26,600 15,402
Interest credited to policyholders' account 5,566 5,036 10,315 9,837
balances
General, administrative and other expenses 15,176 15,665 28,959 26,011
--------- --------- --------- ---------
Total benefits and expenses 33,770 28,125 65,874 51,250
--------- --------- --------- ---------
Income from operations before income taxes 8,651 754 11,957 4,221
--------- --------- --------- ---------
Income tax expense 2,719 452 3,392 1,431
--------- --------- --------- ---------
NET INCOME 5,932 302 8,565 2,790
--------- --------- --------- ---------
Net unrealized investment gains on securities,
net of reclassification adjustment and taxes 5,317 1,826 6,670 330
--------- --------- --------- ---------
TOTAL COMPREHENSIVE INCOME $ 11,249 $ 2,128 $ 15,235 $ 3,120
========= ========= ========= =========
See Notes to Financial Statements
4
Pruco Life Insurance Company of New Jersey
Statements of Stockholder's Equity (Unaudited)
Periods ended June 30, 2003 and December 31, 2002 and 2001 (in thousands)
Accumulated other Total
Common Paid - in - Retained Deferred comprehensive stockholder's
stock capital earnings Compensation Income (loss) equity
--------- ----------- --------- ------------ ----------------- -------------
Balance, January 1, 2001 $ 2,000 $ 128,689 $ 253,641 $ - $ (763) $ 383,567
Net income - - 15,593 - - 15,593
Change in net unrealized
investment gains, net of
reclassification and taxes - - - - 4,487 4,487
Dividend to Parent - - (186,000) - - (186,000)
Policy credits issued to eligible
policyholders - - (10,275) - - (10,275)
--------- ----------- --------- ------------ ----------------- -------------
Balance, December 31, 2001 2,000 128,689 72,959 3,724 207,372
Net income - - 15,368 - - 15,368
Change in net unrealized
investment gains, net of
reclassification and taxes - - - - 5,971 5,971
Adjustments to policy credits
issued to eligible policyholders - - (1) - - (1)
--------- ----------- --------- ------------ ----------------- -------------
Balance, December 31, 2002 2,000 128,689 88,326 - 9,695 228,710
Net income - - 8,565 - - 8,565
Stock-based compensation - 39 - - - 39
Contribution from Parent - 40,000 - - - 40,000
Deferred compensation
program - - - (149) - (149)
Change in net unrealized
investment gains, net of
reclassification and taxes - - - - 6,670 6,670
--------- ----------- --------- ------------ ----------------- -------------
Balance, June 30, 2003 $ 2,000 $ 168,728 $ 96,891 $ (149) $ 16,365 $ 283,835
========= =========== ========= ============ ================= =============
See Notes to Financial Statements
5
Pruco Life Insurance Company of New Jersey
Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2003 and 2002 (in thousands)
2003 2002
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,565 $ 2,790
Adjustments to reconcile net income to net cash (used in)
provided by
Operating activities:
Policy charges and fee income (7,570) (5,589)
Interest credited to policyholders' account balances 10,315 9,837
Realized investment losses, net 1,126 5,523
Amortization and other non-cash items (8,162) (825)
Change in:
Future policy benefits and other policyholders'
liabilities 8,827 2,552
Accrued investment income (880) (682)
Policy loans 1,780 (554)
Receivable from affiliates 10,917 818
Deferred policy acquisition costs (9,912) (12,920)
Income taxes payable 10,783 1,382
Other, net 12,744 81
---------- ----------
Cash Flows From Operating Activities 38,533 2,413
---------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities available for sale 110,925 123,752
Payments for the purchase of:
Fixed maturities available for sale (205,296) (179,568)
Cash collateral for loaned securities, net 11,082 (843)
Securities sold under agreements to repurchase, net 19,734 6,932
Other long-term investments, net (754) (1,655)
Short term investments, net 5,114 14,084
---------- ----------
Cash Flows Used in Investing Activities (59,195) (37,298)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 86,164 69,699
Withdrawals (28,036) (35,823)
Contribution from Parent 40,000 -
Deferred compensation (149) -
Stock based compensation 39 -
Cash payments to eligible policyholders - (9,121)
---------- ----------
Cash Flows From Financing Activities 98,018 24,755
---------- ----------
Net increase in Cash and cash equivalents 77,356 (10,130)
Cash and cash equivalents, beginning of year 61,482 58,212
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 138,838 $ 48,082
========== ==========
See Notes to Financial Statements
6
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements (Unaudited)
1. BASIS OF PRESENTATION
The unaudited interim financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("GAAP") on a basis consistent with reporting interim financial information in
accordance with instructions to Form 10-Q and Article 10 of Regulation S-K of
the Securities and Exchange Commission. These interim financial statements are
unaudited but reflect all adjustments which, in the opinion of management, are
necessary to provide a fair presentation of the 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 Insurance"). Prudential Insurance is a wholly owned subsidiary of
Prudential Financial, Inc ("Prudential Financial"). All such adjustments are of
a normal recurring nature. The results of operations for any interim period are
not necessarily indicative of results for a full year. Certain amounts in the
Company's prior year 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, 2002.
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
The Company is subject to legal and regulatory actions in the ordinary course of
its businesses, including class actions. Pending legal and regulatory actions
include proceedings relating to aspects of the businesses and operations that
are specific to the Company and that are typical of the businesses in which the
Company operates. Class action and individual lawsuits involve a variety of
issues and/or allegations, which include sales practices, underwriting
practices, claims payment and procedures, premium charges, policy servicing and
breach of fiduciary duties to customers. We are also subject to litigation
arising out of our general business activities, such as our investments and
third party contracts. In certain of these matters, the plaintiffs are seeking
large and/or indeterminate amounts, including punitive or exemplary damages.
The Company's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted. It is possible that the
results of operations or the cash flow of the Company in a particular quarterly
or annual period could be materially affected by an ultimate unfavorable
resolution of pending litigation and regulatory matters. Management believes,
however, that the ultimate outcome of all pending litigation and regulatory
matters should not have a material adverse effect on the Company's financial
position.
7
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements(Unaudited)
3. RELATED PARTY TRANSACTIONS
The Company has extensive transactions and relationships with Prudential
Insurance and other affiliates. It is possible that the terms of these
transactions are not the same as those that would result from transactions among
wholly unrelated parties.
Expense Charges and Allocations
Many of the Company's expenses are allocations or charges from Prudential
Insurance or other affiliates. These expenses can be grouped into the following
categories: general and administrative expenses and agency distribution
expenses.
The Company's general and administrative expenses are charged to the Company
using allocation methodologies based on business processes. Management believes
that the methodology is reasonable and reflects costs incurred by Prudential
Insurance to process transactions on behalf of the Company. The Company operates
under service and lease agreements whereby services of officers and employees,
supplies, use of equipment and office space are provided by Prudential
Insurance. Beginning in 2003, general and administrative expenses include
allocations of stock compensation expenses related to a stock option program and
a deferred compensation program issued by Prudential Financial.
The Company is allocated estimated distribution expenses from Prudential
Insurance's agency network for both its life and annuity products. The estimate
of allocated distribution expenses is intended to reflect a market based pricing
arrangement. The Company has capitalized the majority of these distribution
expenses as deferred policy acquisition costs.
Affiliated Asset Management Fee Income
In accordance with a servicing agreement with Prudential Investments LLC, the
Company receives fee income from policyholder account balances invested in the
Prudential Series Funds ("PSF"). These revenues are recorded as "Asset
management fees" in the Statements of Operations and Comprehensive Income.
Corporate Owned Life Insurance
The Company has sold two Corporate Owned Life Insurance ("COLI") polices to
Prudential Insurance. The cash surrender value included in Separate accounts was
$402.0 million and $359.6 million at June 30, 2003 and December 31, 2002,
respectively.
Reinsurance with Affiliates
The Company currently has a reinsurance agreement in place with Prudential
Insurance ("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.
Debt Agreements
The Company and its parent, Pruco Life, have a revolving line of credit facility
of up to $800 million with Prudential Funding, LLC, a wholly owned subsidiary of
Prudential Insurance. The total of asset-based financing and borrowing under
this credit facility for the Company and its parent cannot be more than $800
million. There is no outstanding debt to Prudential Funding, LLC as of June 30,
2003 or December 31, 2002.
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.
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the financial condition of Pruco Life Insurance
Company of New Jersey as of June 30, 2003, compared with December 31, 2002, and
its results of operations for the three and six month periods ended June 30,
2003 and June 30, 2002. You should read the following analysis of our financial
condition and results of operations in conjunction with the Company's MD&A and
audited financial statements included in the Company's Report on Form 10-K for
the year ended December 31, 2002.
The Company sells interest-sensitive individual life insurance and variable life
insurance, term life insurance, and individual variable annuities primarily
through Prudential Insurance'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 pressure as the legal barriers, which have historically
segregated the markets of the financial services industry, have been changed
through both legislative and judicial processes. Regulatory changes have opened
the insurance industry to competition from other financial institutions,
particularly banks and mutual funds that are positioned to deliver competing
investment products through large, stable distribution channels.
Generally, policyholders who purchase the Company's products have the option of
investing in the Separate accounts, segregated funds for which investment risks
are borne by the customer, or the Company's portfolio, referred to as the
General account. The Company earns its profits through policy fees charged to
Separate account annuity and life policyholders and through the interest spread
for General account annuity and life products. Policy charges and fee income
consist mainly of three types, sales charges or loading fees on new sales,
mortality and expense charges ("M&E") assessed on fund balances, and mortality
and related charges based on total life insurance in-force business.
Policyholder fund values are affected by net sales (sales less withdrawals)
changes in interest rates and investment returns. The interest spread represents
the difference between the investment income earned by the Company on its
investment portfolio and the amount of interest credited to the policyholders'
accounts. Products that generate spread income primarily include general account
life insurance products, fixed annuities and the fixed-rate option of variable
annuities.
1. Analysis of Financial Condition
From December 31, 2002 to June 30, 2003 there was an increase of $346 million in
total assets from $2,583 million to $2,929 million. Separate account assets
increased by $160 million primarily from market value appreciation as a result
of recoveries in the equity markets and from positive net sales (sales less
withdrawals). Fixed maturities increased by $110 million and cash and cash
equivalents increased by $77 million as a result of investing general account
policyholder deposits and positive cash flows from insurance operations into
these investments. Fixed maturities also benefited from unrealized appreciation.
A higher level of securities lending activity and an equity contribution from
its Parent of $40 million also contributed to the increase in cash and cash
equivalents.
During this six-month period, liabilities increased by $291 million from $2,354
million to $2,645 million. Corresponding with the asset change, Separate account
liabilities increased by $160 million, as described above. Policyholder account
balances increased by $62 million due primarily to positive net sales of annuity
products with fixed rate options. A higher level of securities lending activity
increased liabilities by $31 million. Income taxes payable, which is a net
number comprised of payables and receivables, increased by $11 million mainly as
a result of tax expense and a tax refund received from Prudential Financial. In
accordance with the tax sharing agreement with Prudential Financial, the Company
was reimbursed for operating losses utilized in the consolidated federal tax
return. Future policy benefits increased by $9 million as a result of growth in
the term insurance business. Other liabilities increased by $19 million due to
an increase in payables resulting from purchases of securities that had not
settled at the balance sheet date.
Stockholder's equity increased by $55.1 million from December 31, 2002. The
largest factor in this increase was a capital contribution of $40 million
received from the Parent Company. Retained earnings increased from net income of
$8.6 million and other accumulated comprehensive income increased by $6.7 due to
unrealized appreciation on fixed maturities.
9
2. Results of Operations
June 2003 to June 2002 Three Month Comparison
Net Income
Net income of $5.9 million for the second quarter of 2003 was $5.6 million more
than the $.3 million earned for the second quarter of 2002. The second quarter
of 2002 included a charge for additional amortization of DAC of $3.5 million to
reflect our lower estimate of future gross profits on annuities based on asset
value declines and expected equity market returns as of June 30, 2002. Both
revenues and expenses increased as growth of the life and annuity in-force
business resulted in increased premiums, policy charges and related policyholder
benefit expenses.
Revenues
Revenues increased by $13.5 million from the prior year comparable quarter.
Premiums increased by $4.5 million from higher term insurance sales and renewals
of the Term Essential and Term Elite products of $2.9 million and higher
extended term insurance of $1.6 million. Extended term life insurance increased
as a result of less favorable market performance in previous quarters, which
caused an increase in lapses.
Policy charges and fee income, consisting primarily of mortality and expense
("M&E"), loading and other insurance charges assessed on General and Separate
Account policyholder fund balances, increased by $4.1 million. The increase was
a result of a $4.4 million increase for individual life products offset
partially by a $.3 million decrease for annuity products. Mortality and sales
based loading charges for life products increased as a result of growth in the
in-force business. The in-force business (excluding term insurance) grew to $9.6
billion at June 30, 2003 from $7.6 billion at June 30, 2002 and $8.9 billion at
December 31, 2002. In contrast, annuity fees are mainly asset-based fees, which
are dependent on the fund balances. Fund balances are affected by net sales as
well as asset depreciation or appreciation on the underlying investment funds in
which the customer has the option to invest. Annuity Separate account fund
balances have declined as a result of unfavorable valuation changes in the
securities market over the past several years. There was a positive market
recovery in the current quarter, but overall annuity Separate account fund
values are lower than the same period last year.
Realized investment gains (losses) increased by $4.0 million as a result of
lower losses on fixed maturities of $3.2 million and lower derivative losses of
$.8 million. The second quarter of 2002 had $2.6 million of losses on fixed
maturities from impairments and credit related sales whereas the current year
quarter had gains on sales of $.6 million. Net investment income remained flat
from the previous year quarter as the effect of lower reinvestment rates offset
the benefit of a higher fixed maturity portfolio balance.
Asset management fees increased by $.9 million in 2003 as the Company received,
in accordance with a servicing agreement with Prudential Investments LLC, asset
management fees on the policyholder account balances invested in the Prudential
Series Funds ("PSF"). The Company did not begin receiving these fees in the
prior year until October 2002.
Benefits and Expenses
Policyholder benefits increased by $5.6 million from increased reserve
provisions for life insurance reserves and less favorable mortality experience.
The change in reserves for life products increased by $4.7 million from the
prior year primarily as a result of higher term and extended term insurance, as
discussed in the premium section. There were also increased death claims paid on
term insurance and variable life insurance policies of $.9 million as a result
of the increasing in-force business. Annuity death benefits were slightly higher
by $.1 million primarily due to higher guaranteed minimum death benefits.
As of June 30, 2003, the death benefit coverage in force (representing the
amount that we would have to pay if all annuitants had died on that date) was
approximately $.2 billion. The death benefit coverage in force represents the
excess of the guaranteed benefit amount over the account value. The guaranteed
minimum death benefit feature provides annuity contract holders with a guarantee
that the benefit received at death will be no less than a prescribed minimum
amount. This minimum amount is based on the net deposits paid into the contract,
the highest historical account value on a contract anniversary, or more
typically, the greatest of these values, depending on features offered in
various contracts and elected by the contract holders. These contracts generally
require payment of additional charges for guarantees other than those based on
net deposits paid into the contract. To the extent that the guaranteed minimum
death benefit is higher than the current account value at the time of death, we
incur a cost. This results in increased annuity policy benefits in periods of
declining financial markets and in periods of stable financial markets following
a decline. Current accounting literature does not prescribe advance recognition
of the expected future net costs associated with these guarantees, and
accordingly, we currently do not record a liability corresponding to these
projected future obligations for death benefits in excess 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
10
unamortized deferred policy acquisition costs are based. AICPA Statement of
Position 03-01, "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts." (the "SOP"),
will require the recording of a liability for the expected net costs associated
with these guarantees under certain circumstances. The provisions of the SOP are
effective for financial statements for fiscal years beginning after December 15,
2003, and, as such, we will adopt the SOP effective January 1, 2004. The effect
of initially adopting this SOP will be reported as a cumulative effect of a
change in accounting principle with restatement of prior financial statements
prohibited. We are currently evaluating the impact of the SOP.
Interest credited increased by $.5 million due to growth in the policyholders'
account balances for annuity products.
General, administrative and other expenses decreased by $.5 million from the
prior year comparable quarter. This resulted mainly from decreases to
amortization of deferred acquisition costs ("DAC") of $2.0 million partially
offset by increases to commissions and general and administrative expenses of
$1.5 million due to growth of the in-force business. DAC amortization is lower
for annuity products by $3.5 million primarily as a result of a charge in the
second quarter of 2002 for additional amortization of DAC to reflect our lower
estimate of future gross profits on annuities based on asset value declines and
expected equity market returns as of June 30, 2002. DAC amortization for life
products was higher by $1.5 million as a result of growth in the business
partially offset by favorable fund performance for the quarter.
June 2003 to June 2002 Six Month Comparison
Net Income
Net income of $8.6 million for the six months of 2003 was $5.8 million more than
the $2.8 million earned for the six months of 2002. Both revenues and expenses
increased as growth of the life and annuity in-force business resulted in
increased premiums, policy charges and related policyholder benefit expenses.
Revenues
Revenues increased by $22.4 million from the prior year comparable quarter.
Premiums increased by $9.9 million from higher term insurance sales and renewals
of the Term Essential and Term Elite products of $7.0 million and higher
extended term insurance of $3.0 million. Extended term life insurance increased
as a result of less favorable market performance in previous quarters, which
caused an increase in lapses.
Policy charges and fee income increased by $6.4 million. The increase was a
result of a $7.2 million increase for individual life products offset partially
by a $.8 million decrease for annuity products. Mortality and sales based
loading charges for life products increased as a result of growth in the
in-force business. In contrast, annuity fees are mainly asset-based fees, which
are dependent on the fund balances. Annuity Separate account fund balances have
declined as a result of unfavorable valuation changes in the securities market
over the past several years resulting in a decrease in policy charges and fee
income for annuity products. There was a positive market recovery in the current
quarter, but overall annuity Separate account fund values are still down from
the same period last year.
Realized investment losses decreased by $4.4 million as a result of lower losses
on fixed maturities of $3.5 million and lower derivative losses of $.9 million.
The prior year had fixed maturity losses of $4.6 million consisting of $1.7
million of impairments and $2.9 million of credit related losses. The current
year has fixed maturity losses of $1.0 million consisting of $2.0 million of
impairments and $.9 million of gains on sales. Net investment income was lower
by $.5 million from the previous year as the effect of lower reinvestment rates
offset the benefit of a higher fixed maturity portfolio balance.
Asset management fees increased by $1.8 million in 2003 as the Company did not
begin receiving these fees in the prior year until October 2002.
Benefits and Expenses
Policyholder benefits increased by $11.2 million from increased reserve
provisions for life insurance reserves and less favorable mortality experience.
The change in reserves for life products increased by $7.3 million from the
prior year primarily as a result of higher term and extended term insurance, as
discussed in the premium section. There were also increased death claims paid on
term insurance and variable life insurance policies of $3.3 million as a result
of the increasing in-force business. Annuity death benefits were slightly higher
by $.8 million primarily due to higher guaranteed minimum death benefits.
Interest credited increased by $.5 million due to growth in the policyholders'
account balances for annuity products.
11
General, administrative and other expenses increased by $2.9 million from the
prior year comparable period. This resulted mainly from increases to commissions
and general and administrative expenses due to growth of the in-force business.
DAC amortization remained flat with the prior year, as decreases in annuity
products DAC amortization were offset with increases in DAC amortization from
life products. Amortization related to annuity products was $3.5 million lower
primarily as a result of a charge for additional amortization as described above
in the prior year of $3.4 million. DAC amortization for life products was higher
by $3.4 million primarily as a result of growth in the business offset partially
by favorable fund performance.
General Account Investments
The Pruco Life Insurance Company of New Jersey (the "Company") investment
portfolio supports its insurance and annuity liabilities and other obligations
to customers for which it assumes investment related risks. The portfolio was
comprised of total investments amounting to $849.4 million at June 30, 2003,
versus $746.1 million at December 31, 2002. A diversified portfolio of publicly
traded bonds, private placements, is managed under strategies intended to
maintain a competitive asset mix consistent with current and anticipated cash
flow requirements of the related obligations. The risk tolerance reflects the
Company's aggregate capital position, exposure to business risk, liquidity and
rating agency considerations.
As of June 30, As of December 31,
2003 % of Total 2002 % of Total
---------- ---------- ---------- ----------
($ in thousands)
Fixed maturities
Public, available for sale, at fair value $ 510,232 60.1% $ 377,969 50.7%
Private, available for sale, at fair value 153,206 18.0% 175,932 23.6%
Short-term investments 25,046 3.0% 30,158 4.0%
Policy loans, at outstanding balance 156,651 18.4% 158,431 21.2%
Other long-term investments (1) 4,216 0.5% 3,561 0.5%
---------- ---------- ---------- ----------
Total investments $ 849,351 100.0% $ 746,051 100.0%
========== ========== ========== ==========
- ----------
(1) Other long-term investments consist of the Company's interest in separate
account investments.
The asset management strategy for the portfolio is in accordance with an
investment policy statement developed and coordinated within the Company by the
Asset Liability and Risk Management Group, agreed to by senior management, and
approved by the Board of Directors. In managing the investment portfolio, the
long-term objective is to generate favorable investment results through
asset-liability management, strategic and tactical asset allocation and asset
manager selection. Asset management strategies take into account the need to
match asset structure to product liabilities, considering the underlying income
and return characteristics of investment alternatives and seeking to closely
approximate the interest rate sensitivity of the asset portfolio with the
estimated interest rate sensitivity of the product liabilities. Asset management
strategies also include broad diversification across asset classes, issuers and
sectors; effective utilization of capital while maintaining liquidity believed
to be adequate to satisfy cash flow requirements; and achievement of competitive
performance. The major categories of invested assets, the quality of the
portfolio, and recent activities to manage the portfolio are discussed below.
As of June 30, 2003, our investment portfolio consisted primarily of $663.4
million of fixed maturity securities (78% of the total portfolio as of June 30,
2003 versus 74% as of December 31, 2002), and $185.9 million of other
investments (22% of the total portfolio as of June 30, 2003 versus 26% as of
December 31, 2002). The other investments were comprised of other long-term
investments, policy loans and short-term investments.
12
Investment Results
The following table sets forth the income yield and investment income, excluding
realized investment losses, net for each major asset category of the Company for
the periods indicated.
For the three months ended June 30,
--------------------------------------------
2003 2002
-------------------- --------------------
(1) Yield Amount Yield Amount
-------- -------- -------- --------
($ in thousands)
Fixed maturities 5.86% $ 8,619 6.88% $ 8,764
Policy loans 5.36 2,091 5.45 2,156
Short-term investments 1.10 398 5.05 452
Other long-term investments 83.38 728 56.58 412
-------- -------- -------- --------
Investment income before investment expenses 5.79 11,836 6.71 11,784
Investment expenses (0.11) (469) (0.11) (428)
-------- -------- -------- --------
Total after investment expenses 5.68% $ 11,367 6.61% $ 11,356
======== ======== ======== ========
(1) Yields are based on quarterly average carrying values except for fixed
maturities and securities lending activity. Yields for fixed maturities are
based on amortized cost. Yields for securities lending activity are
calculated net of corresponding liabilities and rebate expenses. Yields for
prior year are presented on a basis consistent with our current reporting
practices.
The overall income yield on our invested assets after investment expenses,
excluding realized investment losses, net was 5.68% and 6.61% for the second
quarter of 2003 and 2002, respectively. The change in yield between periods is
primarily attributable to reinvestment in a declining interest rate environment.
For the six months ended June 30,
--------------------------------------------
2003 2002
-------------------- --------------------
(1) Yield Amount Yield Amount
-------- -------- -------- --------
($ in thousands)
Fixed maturities 6.17% $ 17,332 7.06% $ 17,421
Policy loans 5.37 4,176 5.40 4,242
Short-term investments 1.14 779 4.22 967
Other long-term investments 39.17 670 60.02 770
-------- -------- -------- --------
Investment income before investment expenses 5.85 22,957 6.78 23,400
Investment expenses (0.11) (947) (0.12) (865)
-------- -------- -------- --------
Total after investment expenses 5.74% $ 22,010 6.66% $ 22,535
======== ======== ======== ========
(1) Yields are based on quarterly average carrying values except for fixed
maturities, equity securities and securities lending activity. Yields for
fixed maturities are based on amortized cost. Yields for securities lending
activity are calculated net of corresponding liabilities and rebate
expenses. Yields for prior year are presented on a basis consistent with
our current reporting practices.
The overall income yield on our invested assets after investment expenses,
excluding realized investment losses, net was 5.74% and 6.66% for the first six
months of 2003 and 2002, respectively. The change in yield between periods is
primarily due to reinvestment activities in a declining interest rate
environment.
Continuation of the low interest rate environment will result in our
reinvestment of maturing securities at lower rates and would reduce the yield we
are able to earn on our investments, which support our obligations for certain
products, including fixed annuities. On products with crediting rates that do
not fully reflect changes in yields currently available in fixed income markets,
this reduction in yield would also have a corresponding impact on the "spread,"
the difference between the yield on our investments and the amounts that we are
required to pay our customers related to these products, which would have a
negative impact on our future profitability.
13
Fixed Maturity Securities
Investment Mix
We manage our public portfolio to a risk profile directed by the Asset Liability
and Risk Management Group, consistent with the investment policy statement
agreed to by senior management and approved by the Board of Directors. We seek
to employ relative value analysis both in credit selection and in purchasing and
selling securities. To the extent that we actively purchase and sell securities
as part of credit selection and portfolio rebalancing, the total return that we
earn on the portfolio will be reflected both as investment income and also as
realized gains or losses on investments.
We use our private placement and asset-backed portfolios to enhance the
diversification and yield of our overall fixed maturity portfolio. Our
investment staff directly originates approximately half of all of our private
placements. Our origination capability offers the opportunity to lead
transactions and gives us the opportunity for better terms, including covenants
and call protection, and to take advantage of innovative deal structures.
The Company has classified all private placements and publicly traded securities
as available for sale. "Available for sale" securities are carried in the
Consolidated Statement of Financial Position at fair value, with unrealized
gains and losses (after certain related adjustments) recognized by credits and
charges to equity capital. At June 30, 2003 the fixed maturities portfolio
totaled $663.4 million, an increase of $109.5 million compared to December 31,
2002.
Our fixed maturity securities portfolio consists principally of public and
private fixed maturities across an array of industry categories. As of June 30,
2003, we held approximately 78% of assets in fixed maturity securities (versus
74% as of December 31, 2002) with a total amortized cost of $617.9 million and
an estimated fair value of $663.4 million, compared to an amortized cost of
$525.9 million and estimated fair value of $553.9 million as of December 31,
2002. Our investments in public fixed maturities as of June 30, 2003 were $475.9
million at amortized cost and $510.2 million at estimated fair value compared to
$358.1 million at amortized cost and $378.0 million at estimated fair value as
of December 31, 2002. Our investments in private fixed maturities as of June 30,
2003 were $142.0 million at amortized cost and $153.2 million at estimated fair
value compared to $167.7 million at amortized cost and $175.9 million at
estimated fair value as of December 31, 2002.
Fixed Maturity Securities and Unrealized Gains and Losses by Industry Category
The following table sets forth the composition of our fixed maturity securities
portfolio by industry category as of the dates indicated and the associated
gross unrealized gains and losses.
As of June 30, 2003 As of December 31, 2002
------------------------------------------------- -------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Amortized Unrealized Unrealized
(1) Cost Gains Losses Fair Value Cost Gains Losses Fair Value
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
($ in Thousands)
Industry
U.S. Government $ 86,750 $ 2,262 $ 63 $ 88,949 $ 42,149 $ 1,222 $ - $ 43,371
Manufacturing 125,710 10,063 74 135,699 119,244 6,714 538 125,420
Utilities 73,230 7,166 102 80,294 64,765 3,874 1,190 67,449
Finance 119,068 10,712 72 129,708 88,285 7,467 26 95,726
Services 41,318 3,012 21 44,309 29,927 1,456 255 31,128
Mortgage Backed 11,630 294 - 11,924 15,455 342 - 15,797
Foreign Government 4,025 239 - 4,264 4,027 280 - 4,307
Retail and Wholesale 48,605 4,466 8 53,063 42,695 3,999 113 46,581
Asset-Backed
Securities 58,925 3,195 291 61,829 69,183 1,965 775 70,373
Transportation 19,713 2,225 - 21,938 22,772 1,175 53 23,894
Energy 27,702 2,410 1 30,111 27,364 2,498 7 29,855
Other 1,214 136 - 1,350
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 617,890 $ 46,180 $ 632 $ 663,438 $ 525,866 $ 30,992 $ 2,957 $ 553,901
========== ========== ========== ========== ========== ========== ========== ==========
14
As a percentage of amortized cost, fixed maturity investments as of June 30,
2003 consist primarily of the following sectors: 20% manufacturing, 19% finance,
14% U.S. government and 12% utilities compared to 23% manufacturing, 17%
finance, 13% asset-backed securities and 12% utilities as of December 31, 2002.
100% of the mortgage-backed securities were publicly traded agency pass-through
securities. The Company did not invest in collateralized mortgage obligations as
of June 30, 2003 and December 31, 2002.
The gross unrealized losses related to our fixed maturity portfolio were $0.6
million as of June 30, 2003 compared to $3.0 million as of December 31, 2002.
The gross unrealized losses as of June 30, 2003 were concentrated primarily in
the asset-backed securities, utilities, manufacturing, and finance sectors while
gross unrealized losses as of December 31, 2002 were concentrated in the
utilities, asset-backed securities, manufacturing and services sectors.
Non-investment grade securities represented 30% of the gross unrealized losses
as of June 30, 2003 versus 62% of gross unrealized losses as of December 31,
2002.
Fixed Maturity Securities Credit Quality
The Securities Valuation Office (SVO) of the NAIC evaluates the investments of
insurers for regulatory reporting purposes and assigns fixed maturity securities
to one of six categories called "NAIC Designations." NAIC designations of "1" or
"2" include fixed maturities considered investment grade, which include
securities rated Baa3 or higher by Moody's or BBB- or higher by S&P. NAIC
Designations of "3" through "6" are referred to as below investment grade, which
include securities rated Ba1 or lower by Moody's and BB+ or lower by S&P. As a
result of time lags between the funding of investments, finalization of legal
documents, and completion of the SVO filing process, the fixed maturity
portfolio generally includes securities that have not yet been rated by the SVO
as of each balance sheet date. Pending receipt of SVO ratings, the
categorization of these securities by NAIC designation is based on the expected
ratings indicated by internal analysis.
The amortized cost of our public and private below-investment grade fixed
maturities totaled $52.0 million, or 8%, of the total fixed maturities as of
June 30, 2003, compared to $63.8 million, or 12%, of total fixed maturities as
of December 31, 2002.
Public Fixed Maturities - Credit Quality
The following table sets forth our public fixed maturity portfolios by NAIC
rating as of the dates indicated.
As of June 30, 2003 As of December 31, 2002
---------------------------------------------- -------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Amortized Unrealized Unrealized
Cost Gains Losses Fair Value Cost Gains Losses Fair Value
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
(1) ($ in Thousands)
NAIC Rating Agency
Designation Equivalent
- ----------- ------------------
1 Aaa, Aa, A $ 263,062 $ 17,183 $ 63 $ 280,182 $ 200,153 $ 12,626 $ 35 $ 212,744
2 Baa 177,980 14,637 66 192,551 132,938 8,798 874 140,862
3 Ba 17,335 780 91 18,024 11,993 309 96 12,206
4 B 14,281 1,344 62 15,563 9,232 266 636 8,862
5 C and lower 1,773 568 29 2,312 2,330 82 450 1,962
6 In or near default 1,458 142 0 1,600 1,491 - 158 1,333
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Public Fixed Maturities $ 475,889 $ 34,654 $ 311 $ 510,232 $ 358,137 $ 22,081 $ 2,249 $ 377,969
========== ========== ========== ========== ========== ========== ========== ===========
(1) Includes, as of June 30, 2003 and December 31, 2002, respectively, 15
securities with amortized cost of $4 million (fair value, $5 million) and 6
securities with amortized cost of $3 million (fair value, $3 million) that
have been categorized based on expected NAIC designations pending receipt
of SVO ratings.
15
Private Fixed Maturities - Credit Quality
The following table sets forth our private fixed maturity portfolios by NAIC
rating as of the dates indicated.
As of June 30, 2003 As of December 31, 2002
---------------------------------------------- -------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Amortized Unrealized Unrealized
Cost Gains Losses Fair Value Cost Gains Losses Fair Value
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
(1) ($ in Thousands)
NAIC Rating Agency
Designation Equivalent
- ----------- ------------------
1 Aaa, Aa, A $ 39,164 $ 1,731 $ 271 $ 40,624 $ 39,178 $ 1,341 $ 199 $ 40,320
2 Baa 85,680 7,249 42 92,887 89,806 6,823 10 96,619
3 Ba 7,251 2,017 0 9,268 25,270 588 338 25,520
4 B 659 65 0 724 1,518 - 28 1,490
5 C and lower 9,070 424 8 9,486 11,957 158 132 11,983
6 In or near default 177 40 - 217 - - - -
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Private Fixed Maturities $ 142,001 $ 11,526 $ 321 $ 153,206 $ 167,729 $ 8,910 $ 707 $ 175,932
========== ========== ========== ========== ========== ========== ========== ===========
(1) Includes, as of June 30, 2003 and December 31, 2002, respectively, 4
securities with amortized cost of $6 million (fair value, $6 million) and
10 securities with amortized cost of $21 million (fair value, $22 million)
that have been categorized based on expected NAIC designations pending
receipt of SVO ratings.
Unrealized Losses from Fixed Maturity Securities
The following table sets forth the amortized cost and gross unrealized losses of
fixed maturity securities where the estimated fair value had declined and
remained below amortized cost by 20% or more for the following timeframes:
As of June 30, 2003 As of December 31, 2002
---------------------------------- -------------------------------
Gross Unrealized Amortized Gross Unrealized
Amortized Cost Losses Cost Losses
--------------- ---------------- ----------- ----------------
($ in thousands)
Less than six months $ - $ - $ 2,969 $ 990
Greater than six months but less than nine months - - 706 260
Greater than nine months - - - -
--------------- ---------------- ----------- ----------------
Total $ - $ - $ 3,675 $ 1,250
=============== ================ =========== ================
Gross unrealized losses of fixed maturity securities where estimated fair value
has been 20% or more below amortized cost was $0 million as of June 30, 2003 and
$1.3 million as of December 31, 2002. The gross unrealized losses as of December
31, 2002 were concentrated in the utilities, manufacturing, and retail and
wholesale sectors.
Impairments of Fixed Maturity Securities
Our credit and portfolio management processes help ensure prudent controls over
valuation and management of the private portfolio. We have separate pricing and
authorization processes to establish "checks and balances" for new investments.
We apply consistent standards of credit analysis and due diligence for all
transactions, whether they originate through our own in-house origination staff
or through agents. Our regional offices closely monitor the portfolios in their
regions. We set all valuation standards centrally, and we assess the fair value
of all investments quarterly.
We maintain separate monitoring processes for public and private fixed
maturities and create watch lists to highlight securities which require special
scrutiny and management. Our public fixed maturity asset managers formally
review all public fixed maturity holdings on a monthly basis and more frequently
when necessary to identify potential credit deterioration whether due to ratings
downgrades, unexpected price variances, and/or industry specific concerns. We
classify public fixed maturity securities of issuers that have defaulted as
securities not in good standing and all other public watch list assets as
closely monitored.
Our private fixed maturity asset managers conduct specific servicing tests on
each investment on an ongoing basis to determine whether the investment is in
compliance or should be placed on the watch list or assigned an early warning
classification. We assign early warning classifications to those issuers that
have failed a servicing test or experienced a minor covenant default, and
16
we continue to monitor them for improvement or deterioration. In certain
situations, the Company benefits from negotiated rate increases or fees
resulting from a covenant breach. We assign closely monitored status to those
investments that have been recently restructured or for which restructuring is a
possibility due to substantial credit deterioration or material covenant
defaults. We classify as not in good standing securities of issuers that are in
more severe conditions, for example, bankruptcy or payment default.
We classify our fixed maturity securities as available for sale. As a result we
record unrealized gains and losses to the extent that amortized cost is
different from estimated fair value. All available for sale securities with
unrealized losses are subject to our review to identify other-than-temporary
impairments in value. In evaluating whether a decline in value is
other-than-temporary, we consider several factors including, but not limited to,
the following:
1) whether the decline is substantial;
2) the duration (generally greater than six months);
3) the reasons for the decline in value (credit event or interest rate
related);
4) our ability and intent to hold our investment for a period of time to
allow for a recovery of value; and
5) the financial condition of and near-term prospects of the issuer.
When we determine that there is an other-than-temporary impairment, we record a
writedown to estimated fair value which reduces the cost basis. The new cost
basis of an impaired security is not adjusted for subsequent increases in
estimated fair value. Estimated fair values for fixed maturities, other than
private placement securities are based on quoted market prices or prices
obtained from independent pricing services. Estimated fair values for private
placement fixed maturities are determined primarily by using a discounted cash
flow model which considers the current market spreads between the U.S. Treasury
yield curve and corporate bond yield curve, adjusted for type of issue, its
current credit quality and its remaining average life. The estimated fair value
of certain non-performing private placement fixed maturities is based on amounts
estimated by management.
Impairments of fixed maturity securities totaled $2.0 million for the first six
months of 2003 and $1.7 million for the first six months of 2002.
3. Liquidity and Capital Resources
Sources and Uses of Liquidity
Our principal cash flow sources are premiums and fund deposits, investment and
fee income and investment maturities and sales. These cash inflows may be
supplemented by financing activities either directly through asset-based
financing or through borrowing from an affiliated company, Prudential Funding,
LLC. We actively use our balance sheet capacity for financing activities on a
secured basis through securities lending and repurchase transactions to earn
additional spread income.
Cash outflow requirements principally relate to benefits, claims, and payments
to contract holders as well as amounts paid to policyholders and contract
holders in connection with surrenders, withdrawals, and net policy loan
activity. Uses of cash also include commissions, general and administrative
expenses, and purchase of investments. We regularly monitor our liquidity
requirements associated with our policyholder and contract holder obligations so
that we manage cash inflows to match anticipated cash outflow requirements. We
utilize a cash flow projection system and regularly perform asset/liability
duration matching in the management of our asset and liability portfolios.
We believe that cash flows from operating and investing activities of our
insurance and annuity products operations are adequate to satisfy liquidity
requirements of these operations based on our current liability structure and
considering a variety of reasonably foreseeable stress scenarios. The continued
adequacy of this liquidity will depend upon factors including future securities
market conditions, changes in interest rate levels and policyholder perceptions
of our financial strength, which could lead to reduced cash inflows or increased
cash outflows. As of June 30, 2003 and December 31, 2002 we had cash and
short-term investments of approximately $163.9 million and $91.6 million,
respectively, and fixed maturity investments classified as "available for sale"
with fair values of $663.4 million and $553.9 million at those dates,
respectively.
17
Financing Activities
Our financing principally consists of an affiliated revolving line of credit
with Prudential Funding, LLC, a wholly owned subsidiary of Prudential Insurance,
and asset-based or secured forms of financing. The total capacity to borrow for
the Company and its parent, Pruco Life, is $800 million, which includes both the
asset-based financing and borrowings from Prudential Funding, LLC. There was no
outstanding debt relating to the Prudential Funding LLC credit facility as of
June 30, 2003 or December 31, 2002. The secured financing arrangements include
transactions such as securities lending and repurchase agreements, which we
generally use to finance portfolios of liquid securities and earn additional
spread income.
June 30, December 31,
2003 2002
------------ -------------
Borrowings: ($ in millions)
General obligations $ - $ -
Total asset-based financing 88 57
------------ -------------
Total borrowings and asset-based
financings $ 88 $ 57
============ =============
Item 4. Controls and Procedures
In order to ensure that the information we must disclose in our filings with the
Securities and Exchange Commission is recorded, processed, summarized, and
reported on a timely basis, the Company's management, including our Chief
Executive Officer and Chief Financial Officer, have reviewed and evaluated the
effectiveness of our disclosure controls and procedures, as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e), as of June 30, 2003. Based on such
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that, as of June 30, 2003, our disclosure controls and procedures were
effective in timely alerting them to material information relating to us
required to be included in our periodic SEC filings. There has been no change in
our internal control over financial reporting during the quarter ended June 30,
2003, that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
18
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to legal and regulatory actions in the ordinary course of
its businesses, including class actions. Pending legal and regulatory actions
include proceedings relating to aspects of the businesses and operations that
are specific to the Company and that are typical of the businesses in which the
Company operates. Class action and individual lawsuits involve a variety of
issues and/or allegations, which include sales practices, underwriting
practices, claims payment and procedures, premium charges, policy servicing and
breach of fiduciary duties to customers. We are also subject to litigation
arising out of our general business activities, such as our investments and
third party contracts. In certain of these matters, the plaintiffs are seeking
large and/or indeterminate amounts, including punitive or exemplary damages.
The Company's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted. It is possible that the
results of operations or the cash flow of the Company in a particular quarterly
or annual period could be materially affected by an ultimate unfavorable
resolution of pending litigation and regulatory matters. Management believes,
however, that the ultimate outcome of all pending litigation and regulatory
matters should not have a material adverse effect on the Company's financial
position.
Item 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 (Discovery Select
variable annuity) is incorporated by reference to
Pre-Effective Amendment No. 1 to Form N-4, Registration No.
333-18053, filed December 18, 1996, on behalf of the Pruco
Life of New Jersey Flexible Premium Variable Annuity Account.
4(b) Market-Value Adjustment Annuity Contract (Strategic Partners
Select variable annuity) is incorporated by reference to the
Company's registration statement on Form S-3, Registration No.
333-62246, filed April 14, 2003.
4(c) Market-Value Adjustment Annuity Contract (Strategic Partners
Horizon annuity) is incorporated by reference to the Company's
Form S-3, Registration No. 333-100713, filed March 26, 2003.
4(d) Market-Value Adjustment Annuity Contract Endorsement
(Strategic Partners Annuity One variable annuity) is
incorporated by reference to the Company's registration
statement on Form S-3, Registration No. 333-103473, filed
April 23, 2003.
31.1 Section 302 Certification of the Chief Executive Officer
31.2 Section 302 Certification of the Chief Financial Officer
32.1 Section 906 Certification of the Chief Executive Officer
32.2 Section 906 Certification of the Chief Financial Officer
(b) Reports on Form 8-K
Current Report on Form 8-K, May 14, 2003, attaching (i) and
(ii) the certifications of Chief Executive Officer and Chief
Financial Officer, required pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
19
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)
By: /s/ Andrew J. Mako
-----------------------
Andrew J. Mako
President
Signature Title Date
- --------- ----- ----
/s/ Andrew J. Mako President August 14, 2003
- ---------------------------- (Authorized Signatory)
Andrew J. Mako
/s/ William J. Eckert, IV Vice President and August 14, 2003
- ---------------------------- Chief Financial Officer
William J. Eckert, IV (Principal Accounting Officer)
20