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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, 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
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(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
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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
--- ---
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 November 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.
1
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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, 2003 and
December 31, 2002 3
Statements of Operations and Comprehensive Income Three and
Nine months ended September 30, 2003 and 2002 4
Statements of Stockholder's Equity Periods ended September 30,
2003 and December 31, 2002 and 2001 5
Statements of Cash Flows Nine months ended September 30, 2003
and 2002 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 4. Controls and Procedures 19
PART II - Other Information
Item 1. Legal Proceedings 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
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 September 30, 2003 and December 31, 2002 (in thousands)
- -----------------------------------------------------------------------------------------------------------------
September 30, December 31,
2003 2002
----------- -----------
ASSETS
Fixed maturities available for sale,
at fair value (amortized cost, 2003: $709,556; and 2002: $525,866) $ 751,177 $ 553,901
Policy loans 155,276 158,431
Short-term investments 28,068 30,158
Other long-term investments 4,198 3,561
----------- -----------
Total investments 938,719 746,051
Cash and cash equivalents 76,363 61,482
Deferred policy acquisition costs 159,206 137,053
Accrued investment income 14,122 11,291
Receivables from affiliates 16,423 24,686
Other assets 22,973 11,644
Separate account assets 1,789,327 1,590,335
----------- -----------
TOTAL ASSETS $ 3,017,133 $ 2,582,542
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Policyholders' account balances $ 638,040 $ 529,333
Future policy benefits and other policyholder liabilities 151,018 134,208
Cash collateral for loaned securities 39,643 25,035
Securities sold under agreements to repurchase 51,733 31,713
Income taxes payable 46,125 33,646
Other liabilities 15,341 9,562
Separate account liabilities 1,789,327 1,590,335
----------- -----------
Total liabilities 2,731,227 2,353,832
----------- -----------
Contingencies - (See Footnote 2)
Stockholder's Equity
Common stock, $5 par value;
400,000 shares, authorized;
issued and outstanding at
September 30, 2003 and December 31, 2002 2,000 2,000
Paid-in-capital 168,727 128,689
Deferred compensation (114) -
Retained earnings 100,120 88,326
Accumulated other comprehensive income 15,173 9,695
----------- -----------
Total stockholder's equity 285,906 228,710
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 3,017,133 $ 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 Nine Months Ended September 30, 2003 and 2002 (in thousands)
- -----------------------------------------------------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
--------- --------- --------- ---------
REVENUES
Premiums $ 9,953 $ 7,030 $ 29,148 $ 16,352
Policy charges and fee income 16,841 14,791 51,818 43,355
Net investment income 11,311 11,888 33,321 34,423
Realized investment losses, net (612) (3,186) (1,738) (8,709)
Asset management fees 1,069 127 3,074 360
Other income 331 571 1,101 911
--------- --------- --------- ---------
Total revenues 38,893 31,221 116,724 86,692
--------- --------- --------- ---------
BENEFITS AND EXPENSES
Policyholders' benefits 11,347 9,131 37,947 24,533
Interest credited to policyholders' account balances 6,146 5,298 16,461 15,135
General, administrative and other expenses 15,804 18,717 44,763 44,728
--------- --------- --------- ---------
Total benefits and expenses 33,297 33,146 99,171 84,396
--------- --------- --------- ---------
Income from operations before income taxes 5,596 (1,925) 17,553 2,296
--------- --------- --------- ---------
Income tax expense (benefit) 2,367 (3,443) 5,759 (2,012)
--------- --------- --------- ---------
NET INCOME 3,229 $ 1,518 11,794 $ 4,308
--------- --------- --------- ---------
Net unrealized investment (losses) gains on securities,
net of reclassification adjustment and taxes (1,192) 3,247 5,478 3,577
--------- --------- --------- ---------
TOTAL COMPREHENSIVE INCOME $ 2,037 $ 4,765 $ 17,272 $ 7,885
========= ========= ========= =========
See Notes to Financial Statements
4
Pruco Life Insurance Company of New Jersey
Statements of Stockholder's Equity (Unaudited)
Periods ended September 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 - - 11,794 - - 11,794
Stock-based compensation
programs - 38 - (114) - (76)
Contribution from Parent - 40,000 - - - 40,000
Change in net unrealized
investment gains, net of
reclassification and taxes - - - - 5,478 5,478
--------- --------- --------- --------- --------- ---------
Balance, September 30, 2003 $ 2,000 $ 168,727 $ 100,120 $ (114) $ 15,173 $ 285,906
========= ========= ========= ========= ========= =========
See Notes to Financial Statements
5
Pruco Life Insurance Company of New Jersey
Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2003 and 2002 (in thousands)
- -----------------------------------------------------------------------------------------------
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,794 $ 4,308
Adjustments to reconcile net income to net cash provided by
(used in)
Operating activities:
Policy charges and fee income (11,556) (8,733)
Interest credited to policyholders' account balances 16,461 15,135
Realized investment losses, net 1,738 8,709
Amortization and other non-cash items (13,472) (7,350)
Change in:
Future policy benefits and other policyholders' 16,810 8,333
liabilities
Accrued investment income (2,831) (1,825)
Policy loans 3,155 (191)
Receivable from affiliates 8,263 (4,121)
Deferred policy acquisition costs (22,153) (11,241)
Income taxes payable 12,479 (256)
Other, net (5,627) (1,085)
--------- ---------
Cash Flows From Operating Activities 15,061 1,683
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities available for sale 203,148 201,939
Payments for the purchase of:
Fixed maturities available for sale (391,272) (250,830)
Cash collateral for loaned securities, net 14,608 4,256
Securities sold under agreements to repurchase, net 20,020 21,136
Other long-term investments, net (495) (2,732)
Short term investments, net 2,189 12,516
--------- ---------
Cash Flows Used in Investing Activities (151,802) (13,715)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 152,834 109,014
Withdrawals (41,212) (56,818)
Contribution from Parent 40,000 -
Cash payments to eligible policyholders - (9,121)
--------- ---------
Cash Flows From Financing Activities 151,622 43,075
--------- ---------
Net increase in Cash and cash equivalents 14,881 31,043
Cash and cash equivalents, beginning of year 61,482 58,212
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 76,363 $ 89,255
========= =========
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-X 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. NEW ACCOUNTING POLICIES AND ACCOUNTING PRONOUNCEMENTS
In July 2003, the Accounting Standards Executive Committee ("AcSEC") of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position ("SOP") 03-01, "Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate Accounts." AcSEC
has developed the SOP to address the evolution of product designs since the
issuance of SFAS No. 60, "Accounting and Reporting by Insurance Enterprises,"
and SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sale of
Investments" and the need for interpretive guidance to be developed in three
areas: separate account presentation and valuation; the accounting recognition
given sales inducements (bonus interest, bonus credits, persistency bonuses);
and the classification and valuation of certain long-duration contract
liabilities.
The most significant accounting implications of the SOP are as follows: (1)
reporting and measuring assets and liabilities of separate account products as
general account assets and liabilities when specified criteria are not met; (2)
reporting and measuring seed money in separate accounts as general account
assets based on the insurer's proportionate beneficial interest in the separate
account's underlying assets; (3) capitalizing sales inducements that meet
specified criteria and amortizing such amounts over the life of the contracts
using the same methodology as used for amortizing deferred acquisition costs,
but immediately expensing those sales inducements accrued or credited if such
criteria are not met; (4) recognizing contractholder liabilities for: (a)
modified guaranteed (market value adjusted) annuities at accreted balances that
do not include the then current market value surrender adjustment, (b) two-tier
annuities at the lower (non-annuitization) tier account value, (c) persistency
bonuses at amounts that are not reduced for expected forfeitures, (d) group
pension participating and similar general account "pass through" contracts that
are not accounted for under SFAS No. 133 at amounts based on the fair value of
the assets or index that determines the investment return pass through; (5)
establishing an additional liability for guaranteed minimum death and similar
mortality and morbidity benefits only for contracts determined to have mortality
and morbidity risk that is other than nominal and when the risk charges made for
a period are not proportionate to the risk borne during that period; and (6) for
contracts containing an annuitization benefits contract feature, if such
contract feature is not accounted for under the provisions of SFAS No. 133
establishing an additional liability for the contract feature if the present
value of expected annuitization payments at the expected annuitization date
exceeds the expected account balance at the expected annuitization date.
The provisions of the SOP are effective for fiscal years beginning after
December 15, 2003, and, as such, the Company 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. The Company is currently
completing an assessment of the impact of the SOP on its operations; however, we
do not believe that the implementation of the SOP will have a material effect on
the Company's financial position.
7
3. 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.
8
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
4. 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
$413.8 million and $359.6 million at September 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 September
30, 2003 or December 31, 2002.
9
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 September 30, 2003, compared with December 31, 2002,
and its results of operations for the three and nine month periods ended
September 30, 2003 and September 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 September 30, 2003 there was an increase of $434
million in total assets from $2,583 million to $3,017 million. Separate account
assets increased by $199 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 $197 million as a result of
investing general account policyholder deposits, positive cash flows from
insurance operations and the capital contribution from its Parent into these
investments. Fixed maturities also benefited from unrealized appreciation.
Deferred acquisition costs ("DAC") increased by $22 million, as capitalization
of distribution expenses from new sales exceeded the amortization of DAC.
During this nine-month period, liabilities increased by $377 million from $2,354
million to $2,731 million. Corresponding with the asset change, Separate account
liabilities increased by $199 million, as described above. Policyholder account
balances increased by $109 million due primarily to positive net sales of
annuity products with fixed rate options. A higher level of securities lending
activity increased liabilities by $35 million. Income taxes payable, which is a
net number comprised of payables and receivables, increased by $12 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 $17 million
as a result of growth in the term insurance business. Other liabilities
increased by $6 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 $57 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
approximately $12 million and other accumulated comprehensive income increased
by approximately $5 million due to unrealized appreciation on fixed maturities.
10
2. Results of Operations
September 2003 to September 2002 Three Month Comparison
Net Income
Net income of $3.2 million for the third quarter of 2003 was $1.7 million more
than the $1.5 million earned for the third quarter of 2002. The third quarter of
2002 had additional amortization of DAC of $5.4 million to reflect our lower
estimate of future gross profits on annuities based on asset value declines as
of September 30, 2002. Premiums, policy charges and related policyholder benefit
expenses increased in the current quarter due to growth of the life and annuity
in-force business. Income tax expense was also higher due to an increase in
income. Further details regarding the components of revenues and expenses are
described in the following paragraphs.
Revenues
Revenues increased by $7.7 million from the prior year comparable quarter.
Premiums increased by $2.9 million primarily from higher term insurance sales
and renewals of $4.5 million. Partially offsetting this, were lower premiums of
$1.7 million on term insurance we issued, under policy provisions, to customers
who previously had lapsing variable life insurance policies with us ("extended
term insurance"). Extended term life insurance decreased as a result of
favorable market performance in the previous quarter, which caused a decrease 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 $2.1 million. The increase was
a result of a $2.1 million increase for individual life products while policy
charges and fee income for annuity products was flat with the previous year
quarter. Mortality and sales based loading charges for life products increased
as a result of growth in the in-force business and the sale of newer
interest-sensitive products that generally carry higher expense charges in the
first few years of the contract. The in-force business (excluding term
insurance) grew to $9.9 billion at September 30, 2003 from $8.0 billion at
September 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 increased in the current
year as a result of favorable market performance in the current year. However,
the average balance for the current year quarter is similar to the prior year
quarter resulting in policy charges remaining flat.
Realized investment losses decreased by $2.6 million as a result of lower losses
on fixed maturities of $1.9 million and lower derivative losses of $.7 million.
The third quarter of 2002 had $2.7 million of losses on fixed maturities from
impairments and credit related sales whereas the current year quarter had losses
on sales of $.8 million and no impairments. Net investment income decreased by
$.6 million 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 $2.2 million from increased reserve
provisions for life insurance reserves and higher death claims. The change in
reserves for life and annuity products increased by $1.6 million from the prior
year primarily as a result of higher term insurance reserves partially offset by
lower extended term insurance reserves, as discussed in the premium section.
There were also increased death claims paid on term insurance policies of $1.0
million as a result of the increasing in-force business. Annuity death benefits
were slightly lower by $.4 million primarily due to lower guaranteed minimum
death benefits.
As of September 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 $142 million. 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
11
typically, the greater 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 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 $.8 million due to growth in the policyholders'
account balances for annuity products.
General, administrative and other expenses decreased by $2.9 million from the
prior year comparable quarter. This resulted mainly from decreases to DAC
amortization of $5.4 million partially offset by increases to distribution
expenses and general and administrative expenses of $2.5 million due to growth
of the in-force business. DAC amortization is lower as a result of a charge in
the third quarter of 2002 for additional amortization of DAC to reflect our
lower estimate of future gross profits on annuities based on asset value
declines as of September 30, 2002.
September 2003 to September 2002 Nine Month Comparison
Net Income
Net income of $11.8 million for the nine months of 2003 was $7.5 million more
than the $4.3 million earned for the nine 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 $30.0 million from the prior year. Premiums increased by
$12.8 million from higher term insurance sales and renewals of $11.5 million and
higher extended term insurance of $1.2 million.
Policy charges and fee income increased by $8.5 million from the prior year. The
increase was a result of a $9.3 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 of
the in-force business and the sale of newer interest-sensitive products that
generally carry higher expense charges in the first few years of the contract.
Annuity Separate account fund balances have increased in the current year as a
result of favorable market performance during the current year. However, the
average balance for the current year is slightly lower than the prior year
resulting in a decline in policy charges.
Realized investment losses decreased by $7.0 million as a result of lower losses
on fixed maturities of $5.4 million and lower derivative losses of $1.5 million.
The prior year had fixed maturity losses of $7.2 million consisting of $5.4
million of impairments and $1.8 million of credit related losses. The current
year has fixed maturity losses of $1.8 million consisting of $2.0 million of
impairments and $.2 million of gains on sales. Net investment income was lower
by $1.1 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 $2.7 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 $13.4 million from increased reserve
provisions for life insurance reserves and higher death claims. The change in
reserves for life and annuity products increased by $8.7 million from the prior
year primarily as a result of higher reserves for term and extended term
insurance due to increased premiums, as discussed in the premium section. There
were also increased death claims of $4.7 million primarily paid on term
insurance and variable life insurance policies as a result of the increasing
in-force business.
Interest credited increased by $1.3 million due to growth in the policyholders'
account balances for annuity products.
12
General, administrative and other expenses were flat with the prior year
comparable period. This resulted mainly from decreases to DAC amortization of
$5.5 million offset by increases to distribution expenses and general and
administrative expenses of $5.5 million due to growth of the in-force business.
Amortization related to annuity products was $8.7 million lower primarily as a
result of charges for additional DAC amortization recorded in the prior year to
reflect our lower estimate of future gross profits on annuities based on asset
value declines and expected equity market returns as of September 30, 2002. DAC
amortization for life products was higher by $3.2 million primarily as a result
of growth in the business offset partially by favorable fund performance.
General Account Investments
The Company's investment portfolio supports its insurance and annuity
liabilities and other obligations to customers for which it assumes investment
related risks. The portfolio was comprised of total investments amounting to
$938.7 million at September 30, 2003, versus $746.1 million at December 31,
2002. A diversified portfolio of publicly traded bonds and private placements is
managed under strategies intended to maintain a competitive asset mix consistent
with current and anticipated cash flow requirements of the related obligations.
The risk tolerance reflects the Company's aggregate capital position, exposure
to business risk, liquidity and rating agency considerations.
As of September 30, As of December 31,
2003 % of Total 2002 % of Total
----------------------- ----------------------
($ in thousands)
Fixed maturities
Public, available for sale, at fair value $595,017 63.4% $377,969 50.7%
Private, available for sale, at fair value 156,160 16.6% 175,932 23.6%
Policy loans, at outstanding balance 155,276 16.5% 158,431 21.2%
Short-term investments 28,068 3.0% 30,158 4.0%
Other long-term investments (1) 4,198 0.5% 3,561 0.5%
-------- ----- -------- -----
Total investments $938,719 100.0% $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 September 30, 2003, our investment portfolio consisted primarily of $751.2
million of fixed maturity securities, representing 80% of the total portfolio as
of September 30, 2003 versus 74% as of December 31, 2002. The remaining
investment portfolio, comprised of policy loans, short-term investments and
other long-term investments, represents 20% of the total portfolio as of
September 30, 2003 versus 26% as of December 31, 2002.
13
Investment Results
The following table sets forth the income yield and investment income, excluding
realized investment losses, net for each major asset category of the Company for
the periods indicated.
For the three months ended September 30,
-------------------------------------------------
2003 2002
---------------------- -----------------------
(1) Yield Amount Yield Amount
-------------------------------------------------
($ in thousands)
Fixed maturities 5.67% $ 9,343 7.01% $ 9,130
Policy loans 5.56 2,153 5.79 2,285
Short-term investments 1.15 346 3.84 403
Other long-term investments (6.38) (67) 58.98 493
----- -------- ----- --------
Investment income before investment expenses 5.37 11,775 6.90 12,311
Investment expenses (0.11) (464) (0.11) (423)
----- -------- ----- --------
Total after investment expenses 5.26% $ 11,311 6.79% $ 11,888
===== ======== ===== ========
(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 5.26% and 6.79% for the third
quarter of 2003 and 2002, respectively. The change in yield between periods is
primarily attributable to reinvestment activities and investment of new funds in
a declining interest rate environment.
For the three months ended September 30,
-------------------------------------------------
2003 2002
---------------------- -----------------------
(1) Yield Amount Yield Amount
-------------------------------------------------
($ in thousands)
Fixed maturities 6.01% $ 26,675 7.17% $ 26,551
Policy loans 5.48 6,329 5.58 6,527
Short-term investments 1.46 1,125 3.57 1,370
Other long-term investments 22.57 603 60.01 1,263
----- -------- ----- --------
Investment income before investment expenses 5.78 34,732 6.89 35,711
Investment expenses (0.12) (1,411) (0.11) (1,288)
----- -------- ----- --------
Total after investment expenses 5.66% $ 33,321 6.78% $ 34,423
===== ======== ===== ========
(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 5.66% and 6.78% for the first nine
months of 2003 and 2002, respectively. The change in yield between periods is
primarily due to reinvestment activities and investment of new funds in a
declining interest rate environment.
14
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 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 September 30, 2003 the fixed maturities portfolio
totaled $751.2 million, an increase of $197.3 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 September
30, 2003, we held approximately 80% of invested assets in fixed maturity
securities (versus 74% as of December 31, 2002) with a total amortized cost of
$709.6 million and an estimated fair value of $751.2 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 September
30, 2003 were $565.0 million at amortized cost and $595.0 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 September 30, 2003 were $144.6 million at amortized cost and
$156.2 million at estimated fair value compared to $167.7 million at amortized
cost and $175.9 million at estimated fair value as of December 31, 2002.
Fixed Maturity Securities and Unrealized Gains and Losses by Industry Category
The following table sets forth the composition of our fixed maturity securities
portfolio by industry category as of the dates indicated and the associated
gross unrealized gains and losses.
---------------------------------------------- --------------------------------------------------
As of September 30, 2003 As of December 31, 2002
---------------------------------------------- --------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Amortized Unrealized Unrealized
(1) Cost Gains Losses Fair Value Cost Gains Losses Fair Value
---------------------------------------------- --------------------------------------------------
($ in thousands)
Industry
U.S. Government $ 59,462 $ 1,297 $ 7 $ 60,752 $ 42,149 $ 1,222 $ - $ 43,371
Manufacturing 161,922 10,122 154 171,890 119,244 6,714 538 125,420
Utilities 88,061 6,484 178 94,367 64,765 3,874 1,190 67,449
Finance 149,270 8,825 83 158,012 88,285 7,467 26 95,726
Services 91,532 4,547 66 96,013 29,927 1,456 255 31,128
Mortgage Backed 14,629 318 - 14,947 15,455 342 - 15,797
Foreign Government 1,024 196 - 1,220 4,027 280 - 4,307
Retail and Wholesale 55,942 4,113 28 60,027 42,695 3,999 113 46,581
Asset-Backed
Securities 60,721 4,357 241 64,837 69,183 1,965 775 70,373
Transportation 26,818 2,122 19 28,921 22,772 1,175 53 23,894
Energy 175 16 - 191 27,364 2,498 7 29,855
Other - - - - - - - -
-------- -------- -------- -------- -------- -------- -------- --------
Total $709,556 $ 42,397 $ 776 $751,177 $525,866 $ 30,992 $ 2,957 $553,901
======== ======== ======== ======== ======== ======== ======== ========
15
As a percentage of amortized cost, fixed maturity investments as of September
30, 2003 consist primarily of the following sectors: 23% manufacturing, 21%
finance, 13% services and 12% utilities compared to 23% manufacturing, 17%
finance, 13% asset-backed securities and 12% utilities as of December 31, 2002.
All of the mortgage-backed securities were publicly traded agency pass-through
securities. The Company did not invest in collateralized mortgage obligations as
of September 30, 2003 and December 31, 2002.
The gross unrealized losses related to our fixed maturity portfolio were $0.8
million as of September 30, 2003 compared to $3.0 million as of December 31,
2002. The gross unrealized losses as of September 30, 2003 and December 31, 2003
were concentrated primarily in the asset-backed securities, utilities,
manufacturing, and finance sectors. Non-investment grade securities represented
36% of the gross unrealized losses as of September 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 $56.7 million, or 8%, of the total fixed maturities as of
September 30, 2003, compared to $63.8 million, or 12%, of total fixed maturities
as of December 31, 2002.
Public Fixed Maturities - Credit Quality
The following table sets forth our public fixed maturity portfolios by NAIC
rating as of the dates indicated.
------------------------------------------------- -----------------------------------------------
As of September 30, 2003 As of December 31, 2002
------------------------------------------------- -----------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Amortized Unrealized Unrealized
Cost Gains Losses Fair Value Cost Gains Losses Fair Value
------------------------------------------------- -----------------------------------------------
(1) ($ in thousands)
NAIC Rating Agency
Designation Equivalent
- ----------- -----------------
1 Aaa, Aa, A $302,446 $ 14,499 $ 88 $316,857 $200,153 $ 12,626 $ 35 $212,744
2 Baa 223,365 13,360 207 236,518 132,938 8,798 874 140,862
3 Ba 21,010 817 52 21,775 11,993 309 96 12,206
4 B 15,025 1,287 115 16,197 9,232 266 636 8,862
5 C and lower 1,697 606 61 2,242 2,330 82 450 1,962
6 In or near default 1,412 65 49 1,428 1,491 - 158 1,333
-------- -------- -------- -------- -------- -------- -------- --------
Public Fixed Maturities $564,955 $ 30,634 $ 572 $595,017 $358,137 $ 22,081 $ 2,249 $377,969
======== ======== ======== ======== ======== ======== ======== ========
(1) Includes, as of September 30, 2003 and December 31, 2002, respectively, 10
securities with amortized cost of $2 million (fair value, $2 million) and 6
securities with amortized cost of $3 million (fair value, $3 million) that
have been categorized based on expected NAIC designations pending receipt
of SVO ratings.
16
Private Fixed Maturities - Credit Quality
The following table sets forth our private fixed maturity portfolios by NAIC
rating as of the dates indicated.
------------------------------------------------- -----------------------------------------------
As of September 30, 2003 As of December 31, 2002
------------------------------------------------- -----------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Amortized Unrealized Unrealized
Cost Gains Losses Fair Value Cost Gains Losses Fair Value
------------------------------------------------- -----------------------------------------------
(1) ($ in thousands)
NAIC Rating Agency
Designation Equivalent
- ------------ ----------------
1 Aaa, Aa, A $ 44,528 $ 1,520 $ 141 $ 45,907 $ 39,178 $ 1,341 $ 199 $ 40,320
2 Baa 82,560 6,335 58 88,837 89,806 6,823 10 96,619
3 Ba 7,158 3,251 - 10,409 25,270 588 338 25,520
4 B 1,371 120 5 1,486 1,518 - 28 1,490
5 C and lower 3,642 256 - 3,898 11,957 158 132 11,983
6 In or near default 5,342 281 - 5,623 - - - -
-------- -------- -------- -------- -------- -------- -------- --------
Private Fixed Maturities $144,601 $ 11,763 $ 204 $156,160 $167,729 $ 8,910 $ 707 $175,932
======== ======== ======== ======== ======== ======== ======== ========
(1) Includes, as of September 30, 2003 and December 31, 2002, respectively, 8
securities with amortized cost of $13 million (fair value, $13 million) and
10 securities with amortized cost of $21 million (fair value, $22 million)
that have been categorized based on expected NAIC designations pending
receipt of SVO ratings.
Unrealized Losses from Fixed Maturity Securities
The following table sets forth the amortized cost and gross unrealized losses of
fixed maturity securities where the estimated fair value had declined and
remained below amortized cost by 20% or more for the following timeframes:
------------------------------ ------------------------------
As of September 30, 2003 As of December 31, 2002
------------------------------ ------------------------------
Gross Unrealized Gross Unrealized
Amortized Cost Losses Amortized Cost Losses
------------------------------ ------------------------------
($ in thousands)
Less than six months $ 351 $ 84 $2,969 $ 990
Greater than six months but less than nine months - - 706 260
Greater than nine months - - - -
------ ------ ------ ------
Total $ 351 $ 84 $3,675 $1,250
====== ====== ====== ======
Gross unrealized losses of fixed maturity securities where estimated fair value
has been 20% or more below amortized cost was $0.1 million as of September 30,
2003 and $1.3 million as of December 31, 2002. The gross unrealized losses as of
September 30, 2003 were primarily concentrated in the manufacturing sector while
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.
17
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 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 nine
months of 2003 and $5.4 million for the first nine 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 distribution expenses, 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 September 30, 2003 and December 31, 2002 we had cash and
short-term investments of approximately $104.4 million and $91.6 million,
respectively, and fixed maturity investments classified as "available for sale"
with fair values of $751.2 million and $553.9 million at those dates,
respectively.
18
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 $800 million, which includes both the
asset-based financing and borrowings from Prudential Funding, LLC. There was no
outstanding debt relating to the Prudential Funding LLC credit facility as of
September 30, 2003 or December 31, 2002. The secured financing arrangements
include transactions such as securities lending and repurchase agreements, which
we generally use to finance portfolios of liquid securities and earn additional
spread income.
September 30, December 31,
2003 2002
------------- ------------
Borrowings: ($ in millions)
General obligations $ - $ -
Total asset-based financing 91 57
----- -----
Total borrowings and asset-based
financings $ 91 $ 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 September 30, 2003. Based on such
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that, as of September 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 September
30, 2003, that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
19
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 5. Other Information
Recently, the Company received a formal request for information from the New
York Attorney General's Office in connection with its variable annuity business.
The Company is cooperating with this inquiry and is conducting its own internal
review.
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
February 27, 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
None
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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 November 14, 2003
- ------------------------- (Authorized Signatory)
Andrew J. Mako
/s/ William J. Eckert, IV Vice President and November 14, 2003
- ------------------------- Chief Financial Officer
William J. Eckert, IV (Principal Accounting Officer)
21