10-Q: Quarterly report [Sections 13 or 15(d)]
Published on
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
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(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
- - EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 33-18053
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PRUCO LIFE INSURANCE COMPANY
OF NEW JERSEY
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(Exact name of Registrant as specified in its charter)
NEW JERSEY 22-2426091
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(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) 802-6000
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(Registrant's Telephone Number, including area code)
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
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Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES NO X
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As of August 12, 2005, 400,000 shares of the registrant's Common Stock
(par value $5), were outstanding. As of such date, Pruco Life Insurance Company,
an Arizona company and an indirect wholly owned subsidiary of Prudential
Financial, Inc., a New Jersey Corporation, owned all of the registrant's Common
Stock.
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
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
AS OF JUNE 30, 2005 AND DECEMBER 31, 2004 (IN THOUSANDS)
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SEE NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
3
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
INTERIM STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (IN THOUSANDS)
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SEE NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
4
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
INTERIM STATEMENTS OF STOCKHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 2005 (IN THOUSANDS)
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SEE NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
5
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
INTERIM STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (IN THOUSANDS)
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SEE NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
6
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
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1. BASIS OF PRESENTATION
Pruco Life Insurance Company of New Jersey, or 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."
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 the Company for the interim periods presented. 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 unaudited 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 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 that period. Management
believes, however, that the ultimate payments in connection with currently
pending 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 operations, 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. 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 has received formal requests for information relating to its
variable annuity business from regulators, including, among others, the
Securities and Exchange Commission and the State of New York Attorney General's
Office. As part of a broad initiative by the NAIC, the Company has received a
request for information from the New Jersey Department of Banking and Insurance
related to producer compensation and fee arrangements. It is possible that other
regulators will issue similar requests.
Prudential Financial and its subsidiaries currently use reinsurance primarily to
transfer mortality risk, to acquire or dispose of blocks of business and to
manage capital more effectively. Given the recent publicity surrounding certain
reinsurance transactions involving other companies in the insurance industry,
Prudential Financial voluntarily commenced a review of the accounting for the
reinsurance arrangements of Prudential Financial and its subsidiaries to confirm
that it complied with applicable accounting rules. This review includes an
inventory and examination of current and past arrangements. This review is
ongoing and not yet complete. Subsequent to commencing this voluntary review,
Prudential Financial and certain subsidiaries received formal requests for
information from the Connecticut Attorney General, the Connecticut Insurance
Department and the Securities and Exchange Commission requesting information
regarding their participation in certain reinsurance transactions. Prudential
Financial believes that a number of other insurance industry participants have
also received similar requests. It is possible that Prudential Financial and its
subsidiaries may receive additional requests from regulators relating to
reinsurance arrangements. Prudential Financial and its subsidiaries intend to
cooperate fully with all such requests.
7
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
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2. CONTINGENCIES AND LITIGATION (CONTINUED)
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.
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 six
months ended June 30, 2004. This charge primarily reflected 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. Upon adoption of
this SOP, reclassifications within the statement of financial position included
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.
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.
STOCK OPTIONS
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123(R), "Share-Based Payment," that 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 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.
4. RELATED PARTY TRANSACTIONS
CORPORATE OWNED LIFE INSURANCE
Prudential Insurance owns Corporate Owned Life Insurance Policies issued by the
Company. The cash surrender value, which approximates the contract value of
these policies, included in separate account liabilities was $463 million and
$462 million at June 30, 2005 and December 31, 2004, respectfully. Fees related
to the COLI policies in each the three months ended June 30, 2005 and June 30,
2004 were $1 million. Fees related to the COLI policies in the six months ended
June 30, 2005 and June 30, 2004 were $3 million and $2 million, respectively.
8
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
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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 a coinsurance agreement. The Company is not relieved of its
primary obligation to the policyholder as a result of these reinsurance
transactions. This coinsurance agreement replaced yearly renewable term
agreements with external reinsurers that were previously in effect with respect
to 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 recoverable related to this agreement was $75 million as
of June 30, 2005.
In December 2004, the Company recaptured the excess of loss reinsurance
agreement with Prudential Insurance and replaced it with a revised yearly
renewable term agreement to reinsure all risks, not otherwise reinsured.
Reinsurance recoverable related to this agreement was $6 million as of June 30,
2005. 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, HAD A REVOLVING LINE OF CREDIT FACILITY
OF UP TO $800 MILLION WITH PRUDENTIAL FUNDING, LLC, A WHOLLY OWNED SUBSIDIARY OF
PRUDENTIAL INSURANCE. THIS CREDIT FACILITY WAS REVISED IN JULY 2005 LIMIT THE
TOTAL CREDIT LINE AVAILABLE TO THE COMPANY TO $250 MILLION, OF WHICH, THE AMOUNT
OF BORROWINGS CANNOT EXCEED $100 MILLION. AS OF JUNE 30, 2005 AND DECEMBER 31,
2004, THERE WAS $92 MILLION AND $99 MILLION, RESPECTIVELY, OF ASSET-BASED
FINANCING. THERE WAS $35 MILLION OF DEBT OUTSTANDING TO PRUDENTIAL FUNDING, LLC
AS OF JUNE 30, 2005 AND NONE AT DECEMBER 31, 2004.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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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, or "MD&A," of Financial Condition and
Results of Operations addresses the financial condition of Pruco Life Insurance
Company of New Jersey, or the "Company," as of June 30, 2005, compared with
December 31, 2004, and its results of operations for the three and six month
periods ended June 30, 2005 and June 30, 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.
GENERAL
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.
PRODUCTS
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.
1. CHANGES IN FINANCIAL POSITION
JUNE 30, 2005 VERSUS DECEMBER 31, 2004
From December 31, 2004 to June 30, 2005, total assets increased by $103 million,
from $3.621 billion to $3.724 billion. Fixed maturities increased by $105
million, from $904 million to $1.009 billion, as a result of investing positive
cash flows. Separate account assets increased by $35 million, from $2.113
billion at December 31, 2004 to $2.148 billion at June 30, 2005, due to positive
cash flows (sales less withdrawals) and market performance in the current year.
Reinsurance recoverable increased by $14 million, from $67 million at December
31, 2004, largely as a result of increased ceded reserves held under the PARCC
agreement (see Note 4 to the Interim Unaudited Financial Statements). Deferred
acquisition costs, or "DAC," increased $9 million driven by higher
capitalization from new sales and a $3 million increase in the shadow DAC
adjustment due to lower unrealized gains.
Short-term investments and cash and cash equivalents combined, decreased by $58
million over the period because cash used in investing activities exceeded cash
provided from operating and financing activities during the period.
From December 31, 2004 to June 30, 2005, total liabilities increased by $89
million, from $3.303 billion to $3.392 billion. Corresponding with the asset
change, separate account liabilities increased by $35 million from $2.113
billion at December 31, 2004, as described above. The Company had short-term
borrowings from an affiliate of $35 million at June 30, 2005 to provide
short-term working capital. There were no such borrowings outstanding at
December 31, 2004. Policyholders' account balances increased by $20 million,
from $796 million in 2004, primarily due to positive net sales in the life
business. Future policy benefits and other policyholder liabilities increased by
$18 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 $9 million, primarily as a result of a $12 million tax payment made in the
first quarter of 2005.
10
Stockholder's equity increased by $14 million, from $318 million at December 31,
2004, to $332 million at June 30, 2005, primarily as a result of net income and
change in unrealized gains in the fixed maturity portfolios.
2. RESULTS OF OPERATIONS
JUNE 30, 2005 TO JUNE 30, 2004 THREE MONTH COMPARISON
NET INCOME
Net income increased by $3 million, from $5 million in the three months ended
June 30, 2004 to $8 million in the three months ended June 30, 2005. The
increase reflects increased fees and more favorable claims experience, net of
reinsurance, compared to the prior year period. In addition, results for the
three months ended June 30, 2005 include a higher contribution from investment
income, net of interest credited and interest expense, reflecting improved
investment yields and higher asset balances compared to the prior year period.
REVENUES
Revenues decreased by $8 million, from $46 million in the three months ended
June 30, 2004 to $38 million in the three months ended June 30, 2005. Premiums
decreased by nearly $10 million, from $12 million for the three months ended
June 30, 2004 to $2 million for the three months ended June 30, 2005, due to
increased ceded reinsurance premiums in the life business resulting from the
coinsurance agreement with PARCC, an affiliate, to reinsure 90% of the entire
term book of business (See Note 4 to the Interim Unaudited Financial Statements)
in 2004. Premiums in the annuity business resulting from annuitizations were
relatively unchanged from the prior year quarter.
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 for the current year period, decreased by
$3 million, from $21 million in the three months ended June 30,2004. The
decrease resulted from a $4 million decrease for individual life products while
annuity products were relatively unchanged from the prior year period,
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 and universal life in force business
grew nearly 3% to $11.8 billion at June 30, 2005, from $11.5 billion at December
31, 2004. Reinsurance ceded premiums increased on variable and universal life
due to the new excess of loss reinsurance agreement (see Note 4 to the Interim
Unaudited Financial Statements) entered into in 2004 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 by nearly 10% over last year as a
result of favorable market performance.
Net investment income increased by $2 million, from $13 million for the three
months ended June 30, 2004 to $15 million for the three months ended June 30,
2005, as a result of increased income from fixed maturities due to an increase
in the portfolio balance from proceeds from short-term borrowings and investment
of positive cash flows.
Realized investment gains increased by $3 million as a result of gains from
sales of fixed maturities in a declining interest rate environment during the
current quarter.
BENEFITS AND EXPENSES
Total benefits and expenses decreased $13 million, from $40 million in the three
months ended June 30, 2004 to $27 million in the same period in 2005.
Policyholders' benefits, including related changes in reserves, decreased by $8
million from the prior year quarter. Policyholders' benefits decreased by $4
million, from $6 million in the prior year quarter to $2 million in the current
quarter, due to increased reinsurance coverage from the new excess of loss
reinsurance treaty with Prudential Insurance (see Note 4 to the Interim
Unaudited Financial Statements) entered into in 2004. Reserve provisions also
decreased by $4 million, from $6 million for the three months ended June 30,
2004, as a result of increased reinsurance reserves from the coinsurance
agreement with PARCC discussed above.
DAC amortization of $6 million for the three months ended June 30, 2005
decreased by $1 million from the prior year quarter as increases in the annuity
business from higher gross profits were more than offset by lower amortization
in the life business. Life amortization was $2 million lower in the three months
ended June 30, 2005 than in the prior year quarter, primarily because current
period amortization was reduced by ceded DAC amortization associated with the
coinsurance treaty with PARCC (see Note 4 to the Interim Unaudited Financial
Statements).
11
General, administrative and other expenses, excluding DAC amortization, were $5
million lower in the three months ended June 30, 2005 than the prior year
period. General and administrative expenses decreased $1 million from the prior
year quarter, while net distribution costs decreased by $4 million due to
reinsurance expense allowances, net of capitalization, in the life business as a
result of the PARCC coinsurance agreement discussed above. These allowances are
included in net distribution expense and reduce overall operating expense.
Tax expense for the three months ended June 30, 2005 increased $1 million, from
$2 million in the three months ended June 30, 2004 to $3 million in the current
quarter. The increase is primarily due to higher net income before taxes, in the
current year quarter.
JUNE 30, 2005 TO JUNE 30, 2004 SIX MONTH COMPARISON
NET INCOME
Net income increased by $3 million, from $12 million in the six months ended
June 30, 2004 to $15 million in the six months ended June 30, 2005. The increase
reflected increased fees and more favorable claims experience, net of
reinsurance, compared to the prior year period. In addition, results for the six
months ended June 30, 2005 included a higher contribution from investment
income, net of interest credited, reflecting improved investment yields and
higher asset balances compared to the prior year.
REVENUES
Revenues decreased by $19 million, from $91 million in the six months ended June
30, 2004 to $72 million in the same period in 2005. Premiums decreased by nearly
$20 million, from $24 million for the six months ended June 30, 2004 to $4
million for the six months ended June 30, 2005, due to increased reinsurance
premiums resulting from the coinsurance agreement with PARCC (see Note 4 to the
Interim Unaudited Financial Statements). Premiums in the annuity business
resulting from annuitizations increased less than $1 million from the prior year
period.
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 $4 million, from $39 million
in 2004. The decrease resulted from a $5 million decrease for individual life
products while annuity products were slightly higher than last 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 and universal life in force business grew nearly
3% to $11.8 billion at June 30, 2005, from $11.5 billion at December 31, 2004.
Reinsurance ceded premiums increased on variable and universal life due to the
new excess of loss reinsurance agreement (see Note 4 to the Interim Unaudited
Financial Statements) 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 nearly 10% over last year primarily as a result of favorable
market performance.
Net investment income increased by $3 million, from $26 million for the six
months ended June 30, 2004 to $29 million for the six months ended June 30,
2005, as a result of increased income from fixed maturities due to an increase
in the portfolio balance from proceeds of short-term borrowings and the
investment of positive cash flows into the fixed maturity portfolio.
BENEFITS AND EXPENSES
Total benefits and expenses decreased $21 million, from $75 million in the six
months ended June 30, 2004 to $54 million in the six months ended June 30, 2005.
Policyholders' benefits, including related changes in reserves, were $14 million
lower in the first six months of 2005 than in the prior year period.
Policyholders' benefits decreased by $8 million, from $15 million in the prior
year period to $7 million in 2005, due to increased reinsurance coverage from
the new excess of loss reinsurance agreement with Prudential Insurance (see Note
4 to the Interim Unaudited Financial Statements). Reserve provisions decreased
by $6 million, from $10 million for the six months ended June 30, 2004, as a
result of increased reinsurance reserves from the coinsurance reinsurance ceded
agreement with PARCC discussed above.
DAC amortization of $13 million for the six months ended June 30, 2005, was $1
million, or slightly lower than the prior year period as increases in the
annuity business from higher gross profits were more than offset by lower
amortization in the life business. Life amortization was lower in the six months
ended June 30, 2005 than in the prior year period as current year amortization
was reduced due to ceded DAC amortization associated with the coinsurance treaty
with PARCC (see Note 4 to the Interim Unaudited Financial Statements).
12
General, administrative and other expenses, excluding DAC amortization, were $7
million lower in the six months ended June 30, 2005 than the prior year period.
Net general and administrative expenses were $1 million less, or slightly lower
than the prior year, while net distribution costs decreased by $6 million due to
reinsurance expense allowances, net of capitalization, in the life business as a
result of the PARCC coinsurance agreement discussed above. These allowances are
included in net distribution expense within operating expenses and reduce
overall distribution costs.
Tax expense for the six months ended June 30, 2005 decreased $2 million, from $5
million in the six months ended June 30, 2004 to $3 million in the current year
period. The decrease is primarily due to a reduction of reserves of
approximately $2 million, reflecting the resolution of certain items with the
IRS during the first quarter of 2005.
ITEM 4. CONTROLS AND PROCEDURES
In order to ensure that the information we must disclose in our filings with the
Securities Exchange Commission, or "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 Rules 13a-15(e) and 15d - 15(e), as of June 30, 2005. Based on such
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that, as of June 30, 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 June 30, 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 was 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.
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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 has received formal requests for information relating to its
variable annuity business from regulators, including, among others, the
Securities and Exchange Commission and the State of New York Attorney General's
Office. As part of a broad initiative by the NAIC, the Company has received a
request for information from the New Jersey Department of Banking and Insurance
related to producer compensation and fee arrangements. It is possible that other
regulators will issue similar requests.
Prudential Financial and its subsidiaries currently use reinsurance primarily to
transfer mortality risk, to acquire or dispose of blocks of business and to
manage capital more effectively. Given the recent publicity surrounding certain
reinsurance transactions involving other companies in the insurance industry,
Prudential Financial voluntarily commenced a review of the accounting for the
reinsurance arrangements of Prudential Financial and its subsidiaries to confirm
that it complied with applicable accounting rules. This review includes an
inventory and examination of current and past arrangements. This review is
ongoing and not yet complete. Subsequent to commencing this voluntary review,
Prudential Financial and certain subsidiaries received formal requests for
information from the Connecticut Attorney General, the Connecticut Insurance
Department and the Securities and Exchange Commission requesting information
regarding their participation in certain reinsurance transactions. Prudential
Financial believes that a number of other insurance industry participants have
also received similar requests. It is possible that Prudential Financial and its
subsidiaries may receive additional requests from regulators relating to
reinsurance arrangements. Prudential Financial and its subsidiaries intend to
cooperate fully with all such requests.
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.
ITEM 6. EXHIBITS
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.
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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 by the
undersigned thereunto duly.
Pruco Life Insurance Company of New Jersey
By: /s/ John Chieffo
-------------------------------------------------
John Chieffo
Chief Accounting Officer
(Authorized Signatory and Principal Financial Officer)
Date: August 12, 2005
15
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.
16