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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
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 jurisdiction, (IRS Employer Identification No.)
incorporation or organization)
213 WASHINGTON STREET, NEWARK, NEW JERSEY 07102
---------------------------------------------------
(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__
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of May 13, 2005. 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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TABLE OF CONTENTS
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Page No.
--------
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (Unaudited):
Interim Statements of Financial Position,
As of March 31, 2005 and December 31, 2004 3
Interim Statements of Operations and Comprehensive Income,
Three months ended March 31, 2005 and 2004 4
Interim Statement of Stockholder's Equity,
Three months ended March 31, 2005 5
Interim Statements of Cash Flows,
Three months ended March 31, 2005 and 2004 6
Notes to Interim Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 4. Controls and Procedures 12
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal proceedings 12
Item 6. Exhibits 13
Signatures 14
FORWARD-LOOKING STATEMENTS
Some of the statements included in this Quarterly Report on Form 10-Q,
including but not limited to those in Management's Discussion and
Analysis of Financial Condition and Results of Operations, may
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," "should," "will," "shall" 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. There can be no assurance that future developments affecting
Pruco Life Insurance Company of New Jersey 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, among others: (1) general
economic, market and political conditions, including the performance of
financial markets and interest rate fluctuations; (2) domestic or
international military or terrorist activities or conflicts; (3)
volatility in the securities markets; (4) regulatory or legislative
changes, including changes in tax law; (5) changes in statutory or U.S.
GAAP accounting principles, practices or policies; (6) differences
between actual experience regarding mortality, morbidity, persistency,
surrender experience, interest rates, or market returns and the
assumptions we use in pricing our products, establishing liabilities
and reserves or for other purposes; (7) re-estimates of our reserves
for future policy benefits and claims; (8) changes in our assumptions
related to deferred policy acquisition costs; (9) events resulting in
catastrophic loss of life; (10) investment losses and defaults; (11)
changes in our claims-paying ratings; (12) competition in our product
lines and for personnel; (13) adverse determinations in litigation or
regulatory matters and our exposure to contingent liabilities; and (14)
the effects of acquisitions, divestitures and restructurings, including
possible difficulties in integrating and realizing the projected
results of acquisitions. Pruco Life Insurance Company of New Jersey
does not intend, and is under no obligation, to update any particular
forward-looking statement included in this document.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
INTERIM STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
AS OF MARCH 31, 2005 AND DECEMBER 31, 2004 (IN THOUSANDS)
- --------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
2005 2004
---------- ----------
ASSETS
Fixed maturities available for sale,
at fair value (amortized cost, 2005: $943,142 and 2004: $874,200) $ 955,682 $ 903,685
Policy loans 154,066 153,359
Short-term investments 44,799 44,549
Other long-term investments 2,031 1,977
---------- ----------
Total investments 1,156,578 1,103,570
Cash and cash equivalents 72,456 108,117
Deferred policy acquisition costs 195,158 183,219
Accrued investment income 17,116 15,045
Reinsurance recoverable 68,920 67,411
Receivables from affiliates 18,591 17,152
Other assets 83,618 13,789
Separate account assets 2,073,806 2,112,866
---------- ----------
TOTAL ASSETS $3,686,243 $3,621,169
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Policyholders' account balances 809,498 796,421
Future policy benefits and other policyholder liabilities 196,443 189,673
Cash collateral for loaned securities 68,297 74,527
Securities sold under agreements to repurchase 42,841 24,754
Income taxes payable 62,429 76,878
Other liabilities 113,644 27,788
Separate account liabilities 2,073,806 2,112,866
---------- ----------
TOTAL LIABILITIES 3,366,958 3,302,907
---------- ----------
CONTINGENCIES (SEE NOTE 2)
STOCKHOLDER'S EQUITY
Common stock, $5 par value;
400,000 shares, authorized;
issued and outstanding at
March 31, 2005 and December 31, 2004 2,000 2,000
Additional paid-in capital 168,842 168,810
Deferred compensation (168) (152)
Retained earnings 141,289 134,358
Accumulated other comprehensive income 7,322 13,246
---------- ----------
TOTAL STOCKHOLDER'S EQUITY 319,285 318,262
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $3,686,243 $3,621,169
========== ==========
SEE NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
3
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
INTERIM STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (IN THOUSANDS)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31
-------------------------------
2005 2004
-------- --------
REVENUES
Premiums $ 2,046 $ 11,770
Policy charges and fee income 17,384 18,338
Net investment income 14,003 12,610
Realized investment gains (losses), net (1,551) 499
Asset management fees 1,339 1,200
Other income 634 490
-------- --------
TOTAL REVENUES 33,855 44,907
-------- --------
BENEFITS AND EXPENSES
Policyholders' benefits 6,082 12,213
Interest credited to policyholders' account balances 6,771 6,612
General, administrative and other expenses 14,045 16,281
-------- --------
TOTAL BENEFITS AND EXPENSES 26,898 35,106
-------- --------
Income from operations before income tax expense and
cumulative effect of accounting change 6,957 9,801
-------- --------
Income tax expense 26 2,705
-------- --------
NET INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 6,931 7,096
Cumulative effect of accounting change, net of taxes - (184)
-------- --------
NET INCOME 6,931 6,912
-------- --------
Change in net unrealized investment gains, net of taxes (5,924) 3,843
Cumulative effect of accounting change, net of taxes - 547
-------- --------
Other comprehensive income (loss), net of taxes (5,924) 4,390
-------- --------
TOTAL COMPREHENSIVE INCOME $ 1,007 $ 11,302
======== ========
SEE NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
4
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
INTERIM STATEMENTS OF STOCKHOLDER'S EQUITY
THREE MONTHS ENDED MARCH 31, 2005 (IN THOUSANDS)
- ------------------------------------------------
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID - IN RETAINED DEFERRED COMPREHENSIVE STOCKHOLDER'S
STOCK CAPITAL EARNINGS COMPENSATION INCOME (LOSS) EQUITY
-------- ----------- ---------- ------------ --------------- -------------
BALANCE, DECEMBER 31, 2004 $ 2,000 $ 168,810 $ 134,358 $ (152) $ 13,246 $ 318,262
Net income - - 6,931 - - 6,931
Stock-based compensation
programs - 32 - (16) - 16
Change in net unrealized
investment gains, net of
taxes - - - - (5,924) (5,924)
------- --------- --------- -------- -------- ---------
BALANCE, MARCH 31, 2005 $ 2,000 $ 168,842 $ 141,289 $ (168) $ 7,322 $ 319,285
======= ========= ========= ======== ======== =========
SEE NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
5
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
INTERIM STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (IN THOUSANDS)
- ---------------------------------------------------------
THREE MONTHS ENDED, MARCH 31
----------------------------
2005 2004
--------- ---------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income $ 6,931 $ 6,912
Adjustments to reconcile net income to net cash (used in)
provided by
Operating activities:
Policy charges and fee income (4,246) (4,465)
Interest credited to policyholders' account balances 5,304 6,612
Realized investment (gains) losses, net 2,785 (499)
Amortization and other non-cash items 12,721 (8,317)
Cumulative effect of accounting change, net of taxes - 184
Change in:
Future policy benefits and other policyholders'
liabilities 6,770 7,010
Reinsurance recoverable (1,509) (3,530)
Accrued investment income (2,071) (1,362)
Policy loans (707) 1,553
Receivable from affiliates (1,439) (431)
Deferred policy acquisition costs (11,939) 509
Income taxes payable (14,449) 5,174
Other, net 16,016 804
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES 14,167 10,154
--------- ---------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities available for sale 350,846 13,098
Payments for the purchase of:
Fixed maturities available for sale (422,116) (57,247)
Other long-term investments 240 (23)
Short term investments, net (297) 12,650
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES (71,327) (31,522)
--------- ---------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 40,396 53,735
Withdrawals (30,770) (37,927)
Cash collateral for loaned securities, net (6,230) (19,876)
Securities sold under agreements to repurchase, net 18,087 9,479
Deferred compensation (16) (154)
Stock based compensation 32 18
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES 21,499 5,275
--------- ---------
Net decrease in cash and cash equivalents (35,661) (16,093)
Cash and cash equivalents, beginning of year 108,117 72,547
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 72,456 $ 56,454
========= =========
SEE NOTES TO INTERIM FINANCIAL STATEMENTS(UNAUDITED)
6
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
NOTES TO INTERIM 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, or "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 that, in the opinion of management, are necessary to
provide a fair presentation of the results of operations and financial condition
of Pruco Life Insurance Company of New Jersey, or the "Company," for the interim
periods presented. The Company is a wholly owned subsidiary of the Pruco Life
Insurance Company, or "Pruco Life," which in turn is a wholly owned subsidiary
of The Prudential Insurance Company of America, or "Prudential Insurance."
Prudential Insurance is a wholly owned subsidiary of Prudential Financial, Inc.,
or "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, 2004.
2. CONTINGENCIES AND LITIGATION
CONTINGENCIES
On an ongoing basis, our internal supervisory and control functions review the
quality of our sales, marketing and other customer interface procedures and
practices and may recommend modifications or enhancements. In certain cases, if
appropriate, we may offer customers remediation and may incur charges, including
the cost of such remediation, administrative costs and regulatory fines.
It is possible that the results of operations or the cash flow of the Company in
a particular quarterly or annual period could be materially affected as a result
of payments in connection with the matters discussed above, depending, in part,
upon the results of operations or cash flow for such period. Management
believes, however, that the ultimate payments in connection with these matters
should not have a material adverse effect on the Company's financial position.
LITIGATION AND REGULATORY MATTERS
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 payments 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 and regulatory matters are subject to many
uncertainties, and given their complexity and scope, the outcomes cannot be
predicted. It is possible that the results of operations or the cash flow of the
Company in a particular quarterly or annual period could be materially affected
by an ultimate unfavorable resolution of pending litigation and regulatory
matters. Management believes, however, that the ultimate outcome of all pending
litigation and regulatory matters should not have a material adverse effect on
the Company's financial position.
7
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ADOPTION OF STATEMENT OF POSITION 03-1
In July 2003, the Accounting Standards Executive Committee, or "AcSEC," of the
American Institute of Certified Public Accountants, or "AICPA," issued Statement
of Position, or "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. 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, or "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, or "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.
The cumulative effect of the adoption of this SOP is shown in the statement of
cash flows under "Cumulative Effect of Accounting Change" and includes 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. This activity also includes the establishment of
the GMDB reserves of approximately $1.6 million and the increase in DAC of $0.4
million. Other balance sheet accounts that were affected include other long-term
investments and deferred taxes payable.
STOCK OPTIONS
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 (R), "Share-Based Payment," which
replaces FASB Statement No. 123, "Accounting for Stock-Based Compensation." SFAS
No. 123 (R) requires all entities to apply the fair value based measurement
method in accounting for share-based payment transactions with employees, except
for equity instruments held by employee share ownership plans. Under this
method, compensation costs of awards to employees, such as stock options, are
measured at fair value and expensed over the period during which an employee is
required to provide service in exchange for the award (the vesting period). The
Company had previously adopted the fair value recognition provision of the
original SFAS No. 123, prospectively for all new stock options issued to
employees on or after January 1, 2003. As issued, SFAS No. 123 (R) is effective
for interim and annual periods beginning after June 15, 2005. However, the SEC
has recently deferred the effective date and as a result the Company will adopt
SFAS No. 123 (R) on January 1, 2006. By that date, there will be no unvested
stock options issued prior to January 1, 2003.
RECLASSIFICATIONS
Certain amounts in the prior years have been reclassified to conform to the
current year presentation.
4. RELATED PARTY TRANSACTIONS
CORPORATE OWNED LIFE INSURANCE
Prudential Insurance owns Corporate Owned Life Insurance Policies issued by the
Company. The cash surrender value of these policies included in separate account
liabilities was $454 million and $462 million at March 31, 2005 and December 31,
2004, respectfully.
8
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
4. RELATED PARTY TRANSACTIONS (CONTINUED)
REINSURANCE WITH AFFILIATES
On August 1, 2004, the Company entered into an agreement to reinsure its term
life insurance policies known as Term Elite and Term Essential, or "Term," with
an affiliated company, Prudential Arizona Reinsurance Captive Company, or
"PARCC." The Company reinsured with PARCC, 90 percent of the risks under such
policies through an automatic and facultative coinsurance agreement. The Company
is not relieved of its primary obligation to the policyholder as a result of
these reinsurance transactions. This coinsurance agreement replaces the yearly
renewable term agreements with external reinsurers that were previously in
effect on this block of business. There was no net cost associated with the
initial transaction, which was accounted for in accordance with SFAS No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts." Reinsurance recoverables related to this agreement were $59 million
at March 31, 2005.
In December 2004, the Company recaptured the excess of loss reinsurance
agreement with Prudential Insurance Company of America, or "Prudential
Insurance," and replaced it with a revised yearly renewable term agreement to
reinsure all risks, not otherwise reinsured. Reinsurance recoverables related to
this agreement were $8 million as of March 31, 2005. The Company is not relieved
of its primary obligation to the policyholder as a result of these reinsurance
transactions.
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 THEREFORE IS FILING THIS
FORM WITH THE REDUCED DISCLOSURE FORMAT.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations, or "MD&A," addresses the financial condition of Pruco Life Insurance
Company of New Jersey, or the "Company," as of March 31, 2005, compared with
December 31, 2004, and its results of operations for the three month periods
ended March 31, 2005 and March 31, 2004. 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 Annual
Report on Form 10-K for the year ended December 31, 2004, and Interim Financial
Statements (unaudited) included elsewhere in this Quarterly Report on Form 10-Q.
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, the Company's products offer the option of investing in 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, or
"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.
In addition to policy charges and fee income, the Company earns revenues from
insurance premiums from term life insurance and asset management fees from
separate account fund balances. The Company's benefits and 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 to policyholders' account balances.
The Company's Changes in Financial Position and Results of Operations are
described below.
1. ANALYSIS OF FINANCIAL CONDITION
MARCH 31, 2005 VERSUS DECEMBER 31, 2004
From December 31, 2004 to March 31, 2005 total assets increased by $65 million,
from $3.621 billion to $3.686 billion. Fixed maturities increased by $52
million, from $904 million to $956 million, as a result of investing positive
cash flows. Other assets increased by $70 million due to a higher level of
receivables for securities on unsettled trades. Cash and cash equivalents are
lower by $36 million as cash used in investing activities exceeded cash provided
from operating and financing activities in the first three months of 2005. DAC
increased $12 million driven by a $9 million increase in the shadow DAC
adjustment lower unrealized gains and higher capitalization from new sales. The
largest decrease was in separate account assets, which declined by $39 million
in the first quarter of 2005, primarily due to a decrease in market value of $31
million as a result of weaker equity markets and negative cash flows (sales less
withdrawals).
From December 31, 2004 to March 31, 2005, total liabilities increased by $64
million, from $3.303 billion to $3.367 billion. Other liabilities increased by
$86 million primarily due to increased investment payables on unsettled trades.
Policyholders' account balances increased by $13 million, from $796 million in
2004, primarily due to positive net sales in the annuity business. Future policy
benefits and other policyholder liabilities increased by $7 million, from $190
million at December 31, 2004, as a result of growth in the term insurance
business. Income taxes payable, net of receivables, decreased by $14 million
primarily as a result of a $12 million tax payment made in the first three
months of 2005. Corresponding with the asset change, separate account
liabilities decreased by $39 million from $2.113 billion at December 31, 2004,
as described above.
Stockholder's equity increased by $1 million, from $318 million at December 31,
2004, to $319 million at March 31, 2005, primarily as a result of net income.
Details of results of operations are discussed below.
10
2. RESULTS OF OPERATIONS
MARCH 31, 2005 TO MARCH 31, 2004 THREE MONTH COMPARISON
NET INCOME
Net income of $7 million for the three months ended March 31, 2005 was
essentially unchanged from the same period in 2004. Increased earnings from
higher spread revenues and the impact of a lower effective tax rate in 2005 from
a reduction of tax reserves of approximately $2 million, reflecting the
resolution of certain items with the Internal Revenue Service, were offset by
lower underwriting gains and realized capital losses in the current quarter.
REVENUES
Revenues decreased by $11 million, from $45 million in the three months ended
March 31, 2004 to $34 million in the same period in 2005. Policy charges and fee
income, consisting primarily of mortality and expense charges, loading and other
insurance charges assessed on general and separate account policyholders' fund
balances, decreased by $1 million, from $18 million in 2004. The decrease
resulted from a $1 million decrease for individual life products while annuity
products were relatively unchanged from the prior year, increasing by less than
$1 million. Although mortality and sales based loading charges for life products
increased as a result of continued growth in the in force business, reinsurance
premiums on variable and universal life products increased even more. The gross
variable in force business grew to $11.6 billion at March 31, 2005, from $11.5
billion at December 31, 2004. Reinsurance ceded premiums increased on Variable
and Univeral Life due to the new excess of loss reinsurance agreement (see Note
4) and are reflected within policy charges. Annuity fees are mainly asset based
fees which are dependent on fund balances that are affected by net sales as well
as asset depreciation or appreciation on the underlying investment funds in
which customers may invest. Average annuity fund balances have increased
slightly over last year as a result of favorable market performance.
Net investment income increased by $1 million, from $13 million for the three
months ended March 31, 2004 to $14 million for the three months ended March 31,
2005, as a result of increased income from fixed maturities due to an increase
in the portfolio balance from the investment of positive cash flows into the
fixed maturity portfolio.
Premiums decreased by nearly $10 million, from $12 million for the three months
ended March 31, 2004 to $2 million for the three months ended March 31, 2005,
due to increased reinsurance premiums resulting from the new coinsurance
agreement with PARCC, effective August 1, 2004, to reinsure 90% of the entire
term book of business, replacing existing yearly renewable term, or "YRT",
reinsurance on that business. Coinsurance premiums are generally greater than
YRT and, as a result, total reinsurance term premiums during the first three
months of 2005 were $14 million higher than the prior year period, exceeding $4
million of growth in the direct term business. Premiums in the annuity business
resulting from annuitizations increased less than $1 million from the prior year
period.
Realized investment gains and losses declined by $2 million as a result of
losses from sales of fixed maturities in a rising interest rate environment.
Asset management fees and other revenues increased slightly as a result of an
increase in average separate account balances from market appreciation and
positive cash flows
BENEFITS AND EXPENSES
Total benefits and expenses decreased $8 million, from $35 million in the three
months ended March 31, 2004 to $27 million in the same period in 2005.
Policyholders' benefits, including related changes in reserves, were $6 million
lower in the first three months of 2005 than in the prior year period.
Policyholders' benefits decreased by $4 million, from $9 million in the first
quarter of 2004 to $5 million in the first quarter of 2005, due to increased
reinsurance coverage from the new excess of loss reinsurance treaty with
Prudential Insurance (see Note 4). Reserve provisions decreased by $2 million,
from $3 million for the three months ended March 31, 2004, as a result of
increased reinsurance reserves from the new coinsurance reinsurance ceded
agreement with PARCC mentioned above.
DAC amortization of $6 million for the three months ended March 31, 2005, was
unchanged from the year ago quarter as increases in the annuity business from
higher gross profits were offset by lower amortization in the life business.
Life amortization was slightly lower in the three months ended March 31, 2005
than in the year ago quarter as current period amortization was reduced due to
ceded DAC amortization associated with the new coinsurance treaty with PARCC
(see Note 4).
Tax expense for three months ended March 31, 2005 benefited from a reduction of
tax reserves of approximately $2 million, reflecting the resolution of certain
items with the Internal Revenue Service.
General, administrative and other expenses, excluding DAC amortization, were $2
million lower in the three months ended March 31, 2005 than the same period in
2004. General and administrative expenses were relatively unchanged from the
prior year period, while net distribution costs decreased by $3 million due to
reinsurance expense allowances, net of capitalization, in the life business as a
result of the PARCC coinsurance agreement mentioned above. These allowances are
included in net distribution expense within operating expenses and reduce
overall distribution costs.
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ITEM 4. CONTROLS AND PROCEDURES
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In order to ensure that the information we must disclose in our filings with the
SEC 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 Rule 13a-15(e) and 15d -
15(e), as of March 31, 2005. Based on such evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that, as of March 31, 2005,
our disclosure controls and procedures were effective in timely alerting them to
material information relating to us and our consolidated subsidiaries required
to be included in our periodic SEC filings. Other than discussed in the
following paragraphs, no change in our internal control over financial
reporting, as defined in Exchange Act Rule 13a-15(f) and 15d-15(f), occurred
during the quarter ended March 31, 2005, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
As previously reported, in determining the Company's state income tax expense
for the three months ended June 30, 2004, an error was made relating to the
treatment of state net operating loss carryforwards. This error resulted in an
understatement of tax expense, and corresponding overstatement of net income for
the three and six months ended June 30, 2004 and nine months ended September 30,
2004. Correction of this error has been reflected in the Company's results of
operations for the three months ended December 31, 2004. Management of the
Company does not believe the effect of the error on any prior period to be
material. The error was identified by the Company in the course of a review and
inventory by the Company of its deferred tax balances undertaken during the
fourth quarter of 2004.
The Company has implemented, or is implementing enhancements to its internal
control over financial reporting to provide reasonable assurance that errors of
this type will not recur. These steps include the completion of the Company's
comprehensive review and inventory of deferred tax assets and liabilities. The
Company is in the process of implementing definitive standards for detailed
documentation supporting deferred tax balances and expects to complete this
implementation in 2005. The Company is also in the process of implementing an
automated application to further enhance control with respect to the collection
of detailed deferred tax information, and it expects to fully implement such
application in 2005.
Effective January 1, 2005, we implemented a new general ledger and financial
reporting platform. The new platform is intended to improve efficiencies through
the use of more current technology. Although the implementation of the new
platform resulted in changes in certain of our internal controls over financial
reporting, we do not believe that the implementation or the related changes in
internal controls materially affect the effectiveness of 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 and regulatory matters are is subject to many
uncertainties, and given their 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.
12
ITEM 6. EXHIBITS
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31.1 Section 302 Certification of the Chief Executive Officer,
31.2 Section 302 Certification of the Chief Accounting Officer,
32.1 Section 906 Certification of the Chief Executive Officer,
32.2 Section 906 Certification of the Chief Accounting Officer.
13
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 by the
undersigned thereunto duly authorized in the City of Newark and the State of New
Jersey on the 13th day of May 2005.
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
By: /s/ John Chieffo
--------------------------------------------------
John Chieffo
Chief Accounting Officer
(Authorized Signatory and Principal Financial Officer)
Date: May 13, 2005
14
EXHIBIT INDEX
EXHIBIT NUMBER AND DESCRIPTION
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.
15