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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, 2004
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
Commission file number 33-18053
PRUCO LIFE INSURANCE COMPANY
OF NEW JERSEY
(Exact name of Registrant as specified in its charter)
NEW JERSEY 22-2426091
- ------------------------------------------- ---------------------------------
(State or other (IRS Employer Identification No.)
jurisdiction, incorporation or organization)
213 WASHINGTON STREET, NEWARK, NEW JERSEY 07102
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(Address of principal executive offices) (Zip Code)
(973) 802-6000
----------------------------------------------------
(Registrant's Telephone Number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
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 13, 2004. 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, 2004 and December 31, 2003 3
Statements of Operations and Comprehensive Income
Three and six months ended June 30, 2004 and 2003 4
Statements of Stockholder's Equity
Periods ended June 30, 2004 and December 31, 2003 and 2002 5
Statements of Cash Flows
Six months ended June 30, 2004 and 2003 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 4. Controls and Procedures 11
PART II - OTHER INFORMATION
Item 1. Legal proceedings 11
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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 and interest rate fluctuations;
various domestic or international military or terrorist activities or conflicts;
volatility in the securities markets; re-estimates 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 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, 2004 AND DECEMBER 31, 2003 (IN THOUSANDS)
- --------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
2004 2003
----------- -----------
ASSETS
Fixed maturities available for sale,
at fair value (amortized cost, 2004: $824,980; and 2003: $746,370) $ 885,480 $ 782,685
Policy loans 152,949 154,659
Short-term investments 29,517 44,571
Other long-term investments 2,147 2,765
----------- -----------
Total investments 1,070,093 984,680
Cash and cash equivalents 78,211 72,547
Deferred policy acquisition costs 198,052 176,529
Accrued investment income 15,286 13,635
Reinsurance recoverable 25,573 17,850
Receivables from affiliates 16,233 17,173
Other assets 17,989 9,954
Separate account assets 1,978,645 1,926,301
----------- -----------
TOTAL ASSETS $ 3,400,082 $ 3,218,669
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Policyholders' account balances $ 758,658 $ 675,823
Future policy benefits and other policyholder liabilities 175,787 158,752
Cash collateral for loaned securities 63,534 78,855
Securities sold under agreements to repurchase 33,074 14,483
Income taxes payable 65,939 51,383
Other liabilities 26,350 20,317
Separate account liabilities 1,978,645 1,926,301
----------- -----------
TOTAL LIABILITIES 3,101,987 2,925,914
----------- -----------
CONTINGENCIES - (SEE FOOTNOTE 2)
STOCKHOLDER'S EQUITY
Common stock, $5 par value;
400,000 shares, authorized;
issued and outstanding at
June 30, 2004 and December 31, 2003 2,000 2,000
Paid-in-capital 168,785 168,742
Deferred compensation (221) (108)
Retained earnings 120,629 108,943
Accumulated other comprehensive income 6,902 13,178
----------- -----------
TOTAL STOCKHOLDER'S EQUITY 298,095 292,755
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 3,400,082 $ 3,218,669
=========== ===========
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, 2004 AND 2003 (IN THOUSANDS)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2004 2003 2004 2003
-------- -------- -------- --------
REVENUES
Premiums $ 12,092 $ 9,697 $ 23,862 $ 19,195
Policy charges and fee income 20,955 19,347 39,293 34,977
Net investment income 13,039 11,367 25,649 22,010
Realized investment gains (losses), net (1,526) 619 (1,027) (1,126)
Asset management fees 1,209 1,055 2,409 2,005
Other income 528 336 1,018 770
-------- -------- -------- --------
TOTAL REVENUES 46,297 42,421 91,204 77,831
-------- -------- -------- --------
BENEFITS AND EXPENSES
Policyholders' benefits 12,674 13,028 24,887 26,600
Interest credited to policyholders' account balances 7,427 5,566 14,039 10,315
General, administrative and other expenses 19,545 15,176 35,826 28,959
-------- -------- -------- --------
TOTAL BENEFITS AND EXPENSES 39,646 33,770 74,752 65,874
-------- -------- -------- --------
Income from operations before income taxes and
cumulative effect of changes in accounting principle 6,651 8,651 16,452 11,957
-------- -------- -------- --------
Income tax expense 1,877 2,719 4,582 3,392
-------- -------- -------- --------
NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 4,774 5,932 11,870 8,565
Cumulative effect of change in accounting principle,
net of tax - - (184) -
-------- -------- -------- --------
NET INCOME 4,774 5,932 11,686 8,565
-------- -------- -------- --------
Change in net unrealized investment gains, net of
taxes (10,666) 5,317 (6,823) 6,670
Cumulative effect of accounting change, net of tax - - 547 -
-------- -------- -------- --------
Other comprehensive income, net of tax (10,666) 5,317 (6,276) 6,670
TOTAL COMPREHENSIVE INCOME $ (5,892) $ 11,249 $ 5,410 $ 15,235
======== ======== ======== ========
SEE NOTES TO FINANCIAL STATEMENTS
4
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
STATEMENTS OF STOCKHOLDER'S EQUITY
PERIODS ENDED JUNE 30, 2004 AND DECEMBER 31, 2003 AND 2002 (IN THOUSANDS)
- --------------------------------------------------------------------------------
ACCUMULATED
OTHER TOTAL
COMMON PAID-IN- RETAINED DEFERRED COMPREHENSIVE STOCKHOLDER'S
STOCK CAPITAL EARNINGS COMPENSATION INCOME (LOSS) EQUITY
------- -------- -------- ------------ ------------- -------------
BALANCE, JANUARY 1, 2002 2,000 128,689 72,959 - 3,724 207,372
Net income - - 15,368 - - 15,368
Adjustments to policy
credits issued to eligible
policyholders - - (1) - - (1)
Change in net unrealized
investment gains, net of
taxes - - - - 5,971 5,971
------- --------- --------- ------ ------- ---------
BALANCE, DECEMBER 31, 2002 2,000 128,689 88,326 - 9,695 228,710
Net income - - 20,617 - - 20,617
Contribution from Parent - 40,000 - - - 40,000
Stock-based compensation
programs - 53 - (108) - (55)
Change in net unrealized
investment gains, net of
taxes - - - - 3,483 3,483
------- --------- --------- ------ ------- ---------
BALANCE, DECEMBER 31, 2003 2,000 168,742 108,943 (108) 13,178 292,755
Net income - - 11,686 - - 11,686
Stock-based compensation
programs - 43 - (113) - (70)
Cumulative effect of change
in accounting principle,
net of taxes - - - - 547 547
Change in net unrealized
investment gains, net of
taxes - - - - (6,823) (6,823)
------- --------- --------- ------ ------- ---------
BALANCE, JUNE 30, 2004 $ 2,000 $ 168,785 $ 120,629 $ (221) $ 6,902 $ 298,095
======= ========= ========= ====== ======= =========
SEE NOTES TO FINANCIAL STATEMENTS
5
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003 (IN THOUSANDS)
- --------------------------------------------------------------------------------
SIX MONTHS ENDED,
JUNE 30,
2004 2003
-------- ---------
CASH FLOWS (USED IN) FROM OPERATING ACTIVITIES:
Net income $ 11,686 $ 8,565
Adjustments to reconcile net income to net cash (used in) provided by
Operating activities:
Policy charges and fee income (9,246) (7,570)
Interest credited to policyholders' account balances 14,039 10,315
Realized investment (gains) losses, net 1,023 1,126
Amortization and other non-cash items (25,416) (8,162)
Cumulative effect of accounting change 184 -
Change in:
Future policy benefits and other policyholders' liabilities 15,380 8,827
Reinsurance recoverable (6,848) (3,133)
Accrued investment income (1,025) (880)
Policy loans 1,710 1,780
Receivable from affiliates 65 10,917
Deferred policy acquisition costs (21,135) (9,912)
Income taxes payable 14,657 10,783
Other, net (1,995) 15,877
-------- ---------
CASH FLOWS (USED IN) FROM OPERATING ACTIVITIES (6,921) 38,533
-------- ---------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities available for sale 219,585 110,925
Payments for the purchase of:
Fixed maturities available for sale (263,121) (205,296)
Cash collateral for loaned securities, net (15,321) 11,082
Securities sold under agreements to repurchase, net 18,591 19,734
Other long-term investments (141) (754)
Short term investments, net 17,325 5,114
-------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES (23,082) (59,195)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 117,900 86,164
Withdrawals (82,163) (28,036)
Contribution from Parent - 40,000
Deferred compensation (113) (149)
Stock based compensation 43 39
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES 35,667 98,018
-------- ---------
Net (decrease) increase in Cash and cash equivalents 5,664 77,356
Cash and cash equivalents, beginning of year 72,547 61,482
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 78,211 $ 138,838
======== =========
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 ("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.
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. 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, 2003.
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.
Prudential Insurance and its affiliates have received formal requests for
information relating to their variable annuity business from regulators and
governmental authorities. The regulators and authorities include, among others,
the Securities and Exchange Commission, the NASD and the State of New York
Attorney General's Office. Prudential Insurance and its affiliates are
cooperating with all such inquiries and are conducting their own internal
review.
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.
7
The Company's litigation is subject to many uncertainties, and given the
complexity and scope, the outcomes cannot be predicted. It is possible that the
results of operations or the cash flow of the Company in a particular quarterly
or annual period could be materially affected by an ultimate unfavorable
resolution of pending litigation and regulatory matters. Management believes,
however, that the ultimate outcome of all pending litigation and regulatory
matters should not have a material adverse effect on the Company's financial
position.
3. ADOPTION OF STATEMENT OF POSITION 03-1
In July 2003, the Accounting Standards Executive Committee ("AcSEC") of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position ("SOP") 03-1, "Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate Accounts". AcSEC
issued the SOP to address 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 Company adopted the SOP effective January 1, 2004. The effect of initially
adopting SOP 03-1 was a net of tax charge of $0.2 million, reported as a
cumulative effect of accounting change in the results of operations for the
three months ended March 31, 2004 and six months ended June 30,2004. This charge
reflects primarily the net impact of converting certain individual market value
adjusted annuity contracts from separate account accounting treatment to general
account accounting treatment and the effect of establishing reserves for
guaranteed minimum death benefit ("GMDB") provisions of the Company's annuity
contracts. In addition, the Company recorded an increase in other comprehensive
income of $0.5 million after tax related to recording the cumulative unrealized
investment gains, net of shadow deferred acquisition costs (DAC), on fixed
maturities reclassified from the separate account to the general account as of
January 1, 2004.
In June 2004, the FASB issued FASB Staff Position ("FSP") 97-1, "Situations in
Which Paragraphs 17(b) and 20 of FASB Statement No. 97, Accounting and Reporting
by Insurance Enterprises for Certain Long-Duration Contracts and for Realized
Gains and Losses from the Sale of Investments, Permit or Require an Accrual of
an Unearned Revenue Liability." FSP 97-1 clarifies the accounting for unearned
revenue liabilities of certain universal-life contracts under SOP 03-1. The
Company's adoption of FSP 97-1 on July 1, 2004 did not change the accounting for
unearned revenue liabilities and, therefore, had no impact on Company's results
of operations.
On the Statement of Cash Flows, the cumulative effect of the SOP is shown on one
line rather than on the individual asset and liability lines that were affected.
The major components of this line are increases in fixed maturities and
policyholder account balances of approximately $40 million related to the
reclassifications of annuity contracts from the separate account to the general
account. In addition, the establishment of the GMDB reserves of approximately
$1.6 million and the increase in DAC of $0.4 million are also shown on this
line. Other balance sheet accounts that were affected include other long-term
investments and deferred taxes payable.
4. RELATED PARTY TRANSACTIONS
CORPORATE OWNED LIFE INSURANCE
The Company sold two corporate owned life insurance policies to Prudential
Insurance. The cash surrender value included in separate accounts was $431.7
million at June 30, 2004. During the current quarter, the Company recorded a
$0.4 million after tax claim expense that related to claims under these
contracts that were incurred in the prior quarter. Although the claims were
incurred in the prior quarter, they were not material to the results of either
the current or the prior quarters.
8
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
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, 2004, compared with December 31, 2003, and
its results of operations for the three and six month periods ended June 30,
2004 and June 30, 2003. 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, 2003.
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 interest-spread primarily include general
account life insurance products, fixed annuities and the fixed-rate option of
variable annuities.
Besides policy charges and fee income, the Company also earns revenues from
insurance premiums from term life insurance and asset management fees on the
separate account fund balances. The Company's operating expenses principally
consist of insurance benefits provided, general business expenses, commissions
and other costs of selling and servicing the various products we sell and
interest credited on general account liabilities.
1. ANALYSIS OF FINANCIAL CONDITION
From December 31, 2003 to June 30, 2004 there was an increase of $181 million in
total assets from $3,219 million to $3,400 million. Fixed maturities increased
by $103 million partially as a result of the implementation of Statement of
Position 03-1 ("SOP 03-1"). SOP 03-1 requires among other things, that certain
individual market value adjusted annuity ("MVA") contracts be accounted for
under general account accounting treatment. As a result of the adoption,
approximately $40 million of fixed maturities were reclassified from separate
account assets to general account accounting treatment. Fixed maturities also
increased as a result of investing general account policyholder deposits and
positive cash flows from insurance operations into these investments and from
unrealized investment gains. Separate account assets increased by $52 million
despite the reclassification of approximately $40 million of assets to the
general account due to positive market performance of approximately $50 million
and positive net sales.
During this six-month period, liabilities increased by $176 million from $2,926
million to $3,102 million. Policyholder account balances increased by $83
million due primarily to the reclassification of MVA contracts as described
above and positive net sales. Corresponding with the asset change described
above, separate account liabilities increased by $52 million. Future policy
benefits increased by $17 million primarily due to the growth in the term life
business and the establishment of guaranteed minimum death benefit reserves
("GMDB") of $2 million. Income taxes payable increased by $15 million as a
result of tax expenses related to positive income and unrealized gains. A lower
level of securities lending activity decreased liabilities by $10 million.
9
2. RESULTS OF OPERATIONS
JUNE 2004 TO JUNE 2003 THREE-MONTH COMPARISON
NET INCOME
Net income of $4.8 million for the second quarter of 2004 was $1.2 million lower
than the same quarter of 2003. Further details regarding the components of
revenues and expenses are described in the following paragraphs.
REVENUES
Revenues increased by $3.9 million from the prior year period. Policy charges
and fee income, consisting primarily of mortality and expense, loading and other
insurance charges assessed on general and separate account policyholder fund
balances, increased by $1.6 million. The increase was a result of a $1.3 million
increase for individual life products and a $0.3 million increase for annuity
products. Mortality and sales based loading charges for life products increased
as a result of growth in the in-force business. The gross in-force business
(excluding term insurance) grew to $11.0 billion at June 30, 2004 from $9.6
billion at June 30, 2003 and $10.3 billion at December 31, 2003. Annuity fees
are mainly asset based fees which are dependent on the fund balances that 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 fund balances have increased as a result of favorable market performance
and positive net sales.
Premiums increased by $2.4 million from higher term insurance sales and renewals
of the Term life products of $4.2 million, net of reinsurance. Partially
offsetting this was a reduction in extended term premiums of $1.7 million due to
lower policy lapses as a result of favorable market conditions.
Realized investment gains and losses decreased by $2.1 million mainly as a
result of increased losses on sales of fixed maturities in 2004 due to rising
interest rates in the current quarter.
Net investment income increased by $1.7 million as a result of an increase in
the fixed income portfolio balance from positive operating and financing cash
flows and the reclassification of fixed maturities from the separate account to
the general account. This was partially offset by the effect of lower
reinvestment rates for fixed maturities and short-term investments.
BENEFITS AND EXPENSES
Policyholder benefits decreased by $0.4 million as mortality experience in the
Company's life products was essentially unchanged from the prior year quarter.
Interest credited to policyholder account balances increased by $1.9 million due
to growth in policyholder account balances primarily from the reclassification
of the MVA annuity products from separate account to policyholder account
balances and from positive net sales.
General, administrative and other expenses increased by $4.4 million from the
prior year quarter. There was an increase in commission expense and general and
administrative expenses, net of capitalization, of $2.2 million due to growth in
the business and comparatively less favorable fund performance in the current
quarter. In addition, DAC amortization increased by $2.2 million primarily as a
result of a growing in-force in the individual life business.
JUNE 2004 TO JUNE 2003 SIX-MONTH COMPARISON
NET INCOME
Net income of $11.7 million for the first half of 2004 increased by $3.1 million
from the same period of 2003. Net income before the cumulative change in
accounting principle of $11.9 million was $3.3 million higher than the prior
year. The effect of the cumulative change in accounting principle related to the
adoption of SOP 03-1 was a charge to income of $0.2 million after tax in the
first quarter of 2004. This charge is primarily the result of an increase in
reserves for guaranteed minimum death benefits relating to our individual
variable annuity contracts and the impact of converting certain individual MVA
contracts from separate account accounting treatment to general account
accounting treatment. Further details regarding the components of revenues and
expenses are described in the following paragraphs.
REVENUES
Revenues increased by $13.4 million from the prior year. Policy charges and fee
income, consisting primarily of mortality and expense, loading and other
insurance charges assessed on general and separate account policyholder fund
balances, increased by $4.3 million. The increase was a result of a $3.4 million
increase for individual life products and a $0.9 million increase 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 $11.0 billion at June 30, 2004 from $9.6 billion at June
30, 2003 and $10.3 billion at December 31, 2003. Annuity fees are mainly asset
based fees which are dependent on the fund balances that 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 fund balances have
increased as a result of favorable market performance and positive net sales.
10
Premiums increased by $4.7 million from higher term insurance sales and renewals
of the Term life products of $7.5 million, net of reinsurance. Partially
offsetting this was a reduction in extended term premiums of $2.9 million due to
lower policy lapses as a result of comparatively favorable market conditions.
Realized investment gains and losses were relatively unchanged from the prior
year as losses on sales of fixed maturities from rising interest rates were
offset by a lower level of impairments in 2004.
Net investment income increased by $3.6 million as a result of an increase in
the fixed income portfolio balance from positive operating and financing cash
flows and the reclassification of fixed maturities from the separate account to
the general account. This was partially offset by the effect of lower
reinvestment rates for fixed maturities and short-term investments.
BENEFITS AND EXPENSES
Total benefits and expenses increased $9.9 million from the prior year.
Policyholder benefits decreased by $1.7 million from the prior year. Mortality
experience in the Company's term life business was favorable compared to the
prior year.
Interest credited to policyholder account balances increased by $3.7 million due
to growth in policyholder account balances primarily from the reclassification
of the MVA annuity products from separate account to policyholder account
balances and from positive net sales.
General, administrative and other expenses increased by $6.9 million from the
prior year. There was an increase in commission and general and administrative
expenses, net of capitalization, of $4.0 million due to growth in the business
and comparatively less favorable fund performance in the current year. In
addition, DAC amortization increased by $2.9 million primarily as a result of a
growing in-force in the individual life business.
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, 2004. Based on such
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that, as of June, 2004, 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,
2004, that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
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. The Company is also subject to
litigation arising out of its general business activities, such as its
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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3(i)(a) The Articles of Incorporation (as amended through March 11,
1983) of Pruco Life Insurance Company of New Jersey are
incorporated by reference to Post-effective Amendment No. 26
to the Registration Statement on Form S-6 of Pruco Life of New
Jersey Variable Appreciable Account as filed April 28, 1997,
Registration No. 2-89780.
3(i)(b) Amendment to the Articles of Incorporation dated February 12,
1998 is incorporated by reference to Post-Effective Amendment
No. 12 to the Registration Statement on Form S-1, of Pruco
Life of New Jersey Variable Contract Real Property Account as
filed on April 16, 1999, Registration No. 33-20018.
3(ii) By-Laws of Pruco Life Insurance Company of New Jersey (as
amended through May 5, 1997) are incorporated by reference to
Form 10-Q as filed by the Company on August 15, 1997,
Registration No. 333-18053.
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
Pre-effective Amendment No. 1 to the Company's Form S-3,
Registration No. 333-62246, filed November 27, 2001.
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 October 24, 2002.
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 8K
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/ John Chieffo
-----------------------------------------------------
John Chieffo
Vice President and Chief Financial Officer
(Authorized Signatory and Principal Financial Officer)
Date: August 13, 2004
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