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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________

FORM 10-Q

________________________________________

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from              to             

Commission File Number 333-18053

 ____________________________________________________________ 

Pruco Life Insurance Company of New Jersey

(Exact Name of Registrant as Specified in its Charter)

New Jersey		22-2426091
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

213 Washington Street

Newark, NJ 07102

(973) 802-6000

(Address and Telephone Number of Registrant’s Principal Executive Offices)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Not Applicable	Not Applicable	Not Applicable

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  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of the Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer", "accelerated filer", "smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	☐	Accelerated Filer	☐
Non-accelerated Filer	☒	Smaller Reporting Company	☐
		Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐    No  ☒

As of August 13, 2019, 400,000 shares of the registrant’s Common Stock (par value $5) were outstanding. As of such date, Pruco Life Insurance Company, an Arizona 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 10-Q in the reduced disclosure format.

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TABLE OF CONTENTS

 

		Page Number
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Unaudited Interim Statements of Financial Position as of June 30, 2019 and December 31, 2018	4
	Unaudited Interim Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2019 and 2018	5
	Unaudited Interim Statements of Equity for the three and six months ended June 30, 2019 and 2018	6
	Unaudited Interim Statements of Cash Flows for the six months ended June 30, 2019 and 2018	7
	Notes to Unaudited Interim Financial Statements	8
	1.    Business and Basis of Presentation	8
	2.    Significant Accounting Policies and Pronouncements	9
	3.    Investments	11
	4.    Derivative Instruments	20
	5.    Fair Value of Assets and Liabilities	25
	6.    Reinsurance	35
	7.    Income Taxes	37
	8.    Equity	38
	9.    Related Party Transactions	40
	10.  Commitments and Contingent Liabilities	43
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	45
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52
Item 4.	Controls and Procedures	53
PART II—OTHER INFORMATION		54
Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 6.	Exhibits	55
SIGNATURES		56

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FORWARD-LOOKING STATEMENTS

Certain 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, 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 and its subsidiary. There can be no assurance that future developments affecting Pruco Life Insurance Company of New Jersey and its subsidiary 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) losses on investments or financial contracts due to deterioration in credit quality or value, or counterparty default; (2) losses on insurance products due to mortality experience or policyholder behavior experience that differs significantly from our expectations when we price our products; (3) changes in interest rates and equity prices that may (a) adversely impact the profitability of our products, the value of separate accounts supporting these products or the value of assets we manage, (b) result in losses on derivatives we use to hedge risk or increase collateral posting requirements and (c) limit opportunities to invest at appropriate returns; (4) guarantees within certain of our products which are market sensitive and may decrease our earnings or increase the volatility of our results of operations or financial position; (5) liquidity needs resulting from (a) derivative collateral market exposure, (b) asset/liability mismatches, (c) the lack of available funding in the financial markets or (d) unexpected cash demands due to severe mortality calamity or lapse events; (6) financial or customer losses, or regulatory and legal actions, due to inadequate or failed processes or systems, external events and human error or misconduct such as (a) disruption of our systems and data, (b) an information security breach, (c) a failure to protect the privacy of sensitive data or (d) reliance on third-parties; (7) changes in the regulatory landscape, including related to (a) financial sector regulatory reform, (b) changes in tax laws, (c) fiduciary rules and other standards of care, (d) state insurance laws and developments regarding group-wide supervision, capital and reserves, and (e) privacy and cybersecurity regulation; (8) technological changes which may adversely impact companies in our investment portfolio or cause insurance experience to deviate from our assumptions; (9) ratings downgrades; (10) market conditions that may adversely affect the sales or persistency of our products; (11) competition; and (12) reputational damage. 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. See “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2018 for discussion of certain risks relating to our business and investment in our securities.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Unaudited Interim Statements of Financial Position

June 30, 2019 and December 31, 2018 (in thousands, except share amounts)

	June 30, 2019				December 31, 2018
ASSETS
Fixed maturities available for sale, at fair value (amortized cost: 2019–$1,373,556; 2018–$1,297,892)	$	1,449,052			$	1,277,824
Fixed maturities, trading, at fair value (amortized cost: 2019–$10,491; 2018–$7,466)	9,304				5,770
Equity securities, at fair value (cost: 2019–$5,186; 2018–$8,136)	7,457				9,870
Policy loans	209,578				206,448
Commercial mortgage and other loans	122,644				118,636
Other invested assets (includes $22,012 and $10,673 measured at fair value at June 30, 2019 and December 31, 2018, respectively)	79,201				58,413
Total investments	1,877,236				1,676,961
Cash and cash equivalents	45,641				70,441
Deferred policy acquisition costs	165,502				165,478
Accrued investment income	18,810				17,764
Reinsurance recoverables	3,099,079				2,723,518
Receivables from parent and affiliates	32,603				40,388
Income taxes receivable	8,406				19,134
Other assets	23,936				23,973
Separate account assets	15,132,687				13,382,345
TOTAL ASSETS	$	20,403,900			$	18,120,002
LIABILITIES AND EQUITY
LIABILITIES
Policyholders’ account balances	$	2,352,257			$	2,314,958
Future policy benefits	2,227,311				1,820,092
Cash collateral for loaned securities	2,447				2,702
Payables to parent and affiliates	17,412				20,413
Other liabilities	132,995				134,771
Separate account liabilities	15,132,687				13,382,345
Total liabilities	19,865,109				17,675,281
COMMITMENTS AND CONTINGENT LIABILITIES (See Note 10)
EQUITY
Common stock ($5 par value; 400,000 shares authorized, issued and outstanding)	2,000				2,000
Additional paid-in capital	213,261				213,261
Retained earnings	264,533				243,827
Accumulated other comprehensive income (loss)	58,997				(14,367		)
Total equity	538,791				444,721
TOTAL LIABILITIES AND EQUITY	$	20,403,900			$	18,120,002

See Notes to Unaudited Interim Financial Statements

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Unaudited Interim Statements of Operations and Comprehensive Income (Loss)

Three and Six Months Ended June 30, 2019 and 2018 (in thousands)

	Three Months Ended June 30,								Six Months Ended June 30,
	2019				2018				2019				2018
REVENUES
Premiums	$	3,281			$	3,152			$	6,619			$	5,649
Policy charges and fee income	22,605				20,538				42,454				45,352
Net investment income	19,472				17,608				38,213				34,157
Asset administration fees	1,449				1,334				2,792				2,640
Other income	1,329				(27		)		2,643				344
Realized investment gains (losses), net:
Other-than-temporary impairments on fixed maturity securities	0				0				(2,784		)		0
Other-than-temporary impairments on fixed maturity securities transferred to other comprehensive income	0				0				(379		)		0
Other realized investment gains (losses), net	(5,056		)		(1,896		)		(8,003		)		(5,827		)
Total realized investment gains (losses), net	(5,056		)		(1,896		)		(11,166		)		(5,827		)
TOTAL REVENUES	43,080				40,709				81,555				82,315
BENEFITS AND EXPENSES
Policyholders’ benefits	10,351				8,607				20,328				17,159
Interest credited to policyholders’ account balances	10,005				8,911				19,058				17,475
Amortization of deferred policy acquisition costs	6,174				6,027				7,399				11,994
General, administrative and other expenses	6,858				10,103				13,956				17,859
TOTAL BENEFITS AND EXPENSES	33,388				33,648				60,741				64,487
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES	9,692				7,061				20,814				17,828
Income tax expense (benefit)	(805		)		745				(228		)		1,492
NET INCOME (LOSS)	$	10,497			$	6,316			$	21,042			$	16,336
Other comprehensive income (loss), before tax:
Foreign currency translation adjustments	4				(917		)		4				(1,152		)
Net unrealized investment gains (losses)	46,263				(20,757		)		92,861				(57,318		)
Total	46,267				(21,674		)		92,865				(58,470		)
Less: Income tax expense (benefit) related to other comprehensive income (loss)	9,715				(4,551		)		19,501				(12,279		)
Other comprehensive income (loss), net of taxes	36,552				(17,123		)		73,364				(46,191		)
Comprehensive income (loss)	$	47,049			$	(10,807	)		$	94,406			$	(29,855	)

See Notes to Unaudited Interim Financial Statements

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Unaudited Interim Statements of Equity

Three and Six Months Ended June 30, 2019 and 2018 (in thousands)

	Common Stock				Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total Equity
Balance, December 31, 2018	$	2,000			$	213,261			$	243,827			$	(14,367	)		$	444,721
Cumulative effect of adoption of accounting changes(1)									(336		)		0				(336		)
Contributed capital					0												0
Comprehensive income (loss):
Net income (loss)									10,545								10,545
Other comprehensive income (loss), net of tax													36,812				36,812
Total comprehensive income (loss)																	47,357
Balance, March 31, 2019	2,000				213,261				254,036				22,445				491,742
Contributed capital					0												0
Comprehensive income:
Net income (loss)									10,497								10,497
Other comprehensive income (loss), net of taxes													36,552				36,552
Total comprehensive income (loss)																	47,049
Balance, June 30, 2019	$	2,000			$	213,261			$	264,533			$	58,997			$	538,791

	Common Stock				Additional Paid-in Capital				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total Equity
Balance, December 31, 2017	$	2,000			$	211,961			$	218,067			$	34,330			$	466,358
Cumulative effect of adoption of ASU 2016-01									372				(175		)		197
Cumulative effect of adoption of ASU 2018-02									(5,893		)		5,893				0
Contributed capital					1,300												1,300
Comprehensive income (loss):
Net income (loss)									10,020								10,020
Other comprehensive income (loss), net of tax													(29,068		)		(29,068		)
Total comprehensive income (loss)																	(19,048		)
Balance, March 31, 2018	2,000				213,261				222,566				10,980				448,807
Contributed capital					(113		)										(113		)
Comprehensive income:
Net income (loss)									6,316								6,316
Other comprehensive income (loss), net of tax													(17,123		)		(17,123		)
Total comprehensive income (loss)																	(10,807		)
Balance, Balance, June 30, 2018	$	2,000			$	213,148			$	228,882			$	(6,143	)		$	437,887

(1)	Includes the impact from the adoption of ASUs 2017-08 and 2017-12. See Note 2.

See Notes to Unaudited Interim Financial Statements

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Unaudited Interim Statements of Cash Flows

Six Months Ended June 30, 2019 and 2018 (in thousands)

	2019				2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	21,042			$	16,336
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Policy charges and fee income	(25,026		)		(16,804		)
Interest credited to policyholders’ account balances	19,058				17,475
Realized investment (gains) losses, net	11,166				5,827
Amortization and other non-cash items	(7,220		)		(4,744		)
Change in:
Future policy benefits	148,113				92,246
Reinsurance recoverables	(133,304		)		(87,886		)
Accrued investment income	(1,046		)		(881		)
Net payables to/receivables from parent and affiliates	(1,306		)		(5,069		)
Deferred policy acquisition costs	(7,803		)		(3,107		)
Income taxes	(8,684		)		(995		)
Derivatives, net	(1,378		)		(4,275		)
Other, net	(16,605		)		3,564
Cash flows from (used in) operating activities	(2,993		)		11,687
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale	33,123				27,469
Fixed maturities, trading	0				0
Equity securities	3,298				5
Policy loans	12,885				10,873
Ceded policy loans	(713		)		(608		)
Commercial mortgage and other loans	6,576				1,193
Other invested assets	1,161				1,639
Payments for the purchase/origination of:
Fixed maturities, available-for-sale	(111,939		)		(94,921		)
Fixed maturities, trading	(3,045		)		0
Equity securities	(50		)		(2,002		)
Policy loans	(12,010		)		(13,040		)
Ceded policy loans	1,036				1,163
Commercial mortgage and other loans	(10,557		)		(1,595		)
Other invested assets	(8,939		)		(2,673		)
Notes receivable from parent and affiliates, net	6,127				220
Derivatives, net	25				(16		)
Other, net	(139		)		2
Cash flows from (used in) investing activities	(83,161		)		(72,291		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders’ account deposits	284,528				249,188
Ceded policyholders’ account deposits	(172,340		)		(167,109		)
Policyholders’ account withdrawals	(162,051		)		(134,241		)
Ceded policyholders’ account withdrawals	113,527				86,696
Net change in securities sold under agreement to repurchase and cash collateral for loaned securities	(256		)		(11,317		)
Drafts outstanding	(2,054		)		7,726
Cash flows from (used in) financing activities	61,354				30,943
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(24,800		)		(29,661		)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR	70,441				44,618
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	45,641			$	14,957

Significant Non-Cash Transactions

There were no significant non-cash transactions for the six months ended June 30, 2019 and 2018.

See Notes to Unaudited Interim Financial Statements

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements

1.    BUSINESS AND BASIS OF PRESENTATION

Pruco Life Insurance Company of New Jersey ("PLNJ") is a wholly-owned subsidiary of 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 direct wholly-owned subsidiary of Prudential Financial, Inc. (“Prudential Financial”). PLNJ is a stock life insurance company organized in 1982 under the laws of the State of New Jersey. It is licensed to sell life insurance and annuities in New Jersey and New York only, and sells such products primarily through affiliated and unaffiliated distributors.

PLNJ had one subsidiary, formed in 2009 for the purpose of holding certain commercial mortgage loans and other investments which ceased operations and was dissolved as of December 31, 2018.

Basis of Presentation

The Unaudited Interim Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. 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 (“SEC”). Intercompany balances and transactions have been eliminated.

In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The most significant estimates include those used in determining deferred policy acquisition costs ("DAC") and related amortization; amortization of deferred sales inducements ("DSI"); valuation of investments including derivatives and the recognition of other-than-temporary impairments (“OTTI”); future policy benefits including guarantees; reinsurance recoverables; provision for income taxes and valuation of deferred tax assets; and accruals for contingent liabilities, including estimates for losses in connection with unresolved legal and regulatory matters.

Reclassifications

Certain amounts in prior periods have been reclassified to conform to the current period presentation.

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

2.    SIGNIFICANT ACCOUNTING POLICIES AND PRONOUNCEMENTS

Recent Accounting Pronouncements

Changes to U.S. GAAP are established by the Financial Accounting Standards Board ("FASB") in the form of Accounting Standards Updates ("ASU") to the FASB Accounting Standards Codification. The Company considers the applicability and impact of all ASU. ASU listed below include those that have been adopted during the current fiscal year and/or those that have been issued but not yet adopted as of the date of this filing. ASU not listed below were assessed and determined to be either not applicable or not material.

ASU adopted during the six months ended June 30, 2019.

Standard		Description		Effective date and method of adoption		Effect on the financial statements or other significant matters
ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities		This ASU requires certain premiums on callable debt securities to be amortized to the earliest call date.		January 1, 2019 using the modified retrospective method which included cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption.		Adoption of the ASU did not have a significant impact on the Company’s Financial Statements and Notes to the Financial Statements. The impact of the cumulative-effect adjustment to retained earnings was immaterial.
ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities		This ASU makes targeted changes to the existing hedge accounting model to better portray the economics of an entity’s risk management activities and to simplify the use of hedge accounting. The ASU eliminates separate measurement and recording of hedge ineffectiveness. It requires entities to present the earnings effect of the hedging instrument in the same income statement line item in which the hedged item is reported and also requires expanded disclosures.		January 1, 2019 using the modified retrospective method which included cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption.		Adoption of the ASU did not have a significant impact on the Company’s Financial Statements and Notes to the Financial Statements. The impact of the cumulative-effect adjustment to retained earnings and accumulated other comprehensive income (loss) ("AOCI") related to ineffectiveness of the hedge instruments outstanding at the date of the adoption was immaterial. See Note 4 for additional required disclosures.

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

ASU issued but not yet adopted as of June 30, 2019 — ASU 2018-12

ASU 2018-12, Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts, was issued by the FASB on August 15, 2018 and is expected to have a significant impact on the Company’s Financial Statements and Notes to the Financial Statements. In July 2019, the FASB made a tentative decision to defer the effective date of this ASU to January 1, 2022 (with early adoption permitted), representing a one year extension from the original effective date of January 1, 2021. A final decision regarding the effective date is expected in the third quarter of 2019. This ASU will impact, at least to some extent, the accounting and disclosure requirements for all long-duration insurance and investment contracts issued by the Company. Outlined below are four key areas of change, although there are other changes not noted below. In addition to the impacts to the balance sheet upon adoption, the Company also expects an impact to how earnings emerge thereafter.

ASU 2018-12 Amended Topic		Description		Method of adoption		Effect on the financial statements or other significant matters
Cash flow assumptions used to measure the liability for future policy benefits for non-participating traditional and limited-pay insurance products		Requires an entity to review, and if necessary, update the cash flow assumptions used to measure the liability for future policy benefits, for both changes in future assumptions and actual experience, at least annually using a retrospective update method with a cumulative catch-up adjustment recorded in a separate line item in the Statements of Operations.		An entity may choose one of two adoption methods for the liability for future policy benefits: (1) a modified retrospective transition method whereby the entity will apply the amendments to contracts in force as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or (2) a full retrospective transition method.		The options for method of adoption and the impacts of such methods are under assessment.
Discount rate assumption used to measure the liability for future policy benefits for non-participating traditional and limited-pay insurance products		Requires discount rate assumptions to be based on an upper-medium grade fixed income instrument yield and will be required to be updated each quarter with the impact recorded through Other Comprehensive Income ("OCI").		As noted above, an entity may choose either a modified retrospective transition method or full retrospective transition method for the liability for future policy benefits. Under either method, for balance sheet remeasurement purposes, the liability for future policy benefits will be remeasured using current discount rates as of the beginning of the earliest period presented with the impact recorded as a cumulative effect adjustment to AOCI.		Upon adoption, under either transition method, there will be an adjustment to AOCI as a result of remeasuring in force contract liabilities using current upper-medium grade fixed income instrument yields. The adjustment upon adoption will largely reflect the difference between the discount rate locked-in at contract inception versus current discount rates at transition. The magnitude of such adjustment is currently being assessed.
Amortization of DAC and other balances		Requires DAC and other balances, such as unearned revenue reserves and DSI, to be amortized on a constant level basis over the expected term of the related contract, independent of expected profitability.		An entity may apply one of two adoption methods: (1) a modified retrospective transition method whereby the entity will apply the amendments to contracts in force as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or (2) if an entity chooses a full retrospective transition method for its future policy benefits, as described above, it is required to also use a retrospective transition method for DAC and other balances.		The options for method of adoption and the impacts of such methods are under assessment. Under the modified retrospective transition method, the Company would not expect a significant impact to the balance sheet, other than the impact of the removal of any related amounts in AOCI.
Market Risk Benefits		Requires an entity to measure all market risk benefits (e.g., living benefit and death benefit guarantees associated with variable annuities) at fair value with changes in value attributable to changes in an entity’s non-performance risk ("NPR") to be recognized in OCI.		An entity will apply a retrospective transition method which will include a cumulative-effect adjustment on the balance sheet as of the earliest period presented.		Upon adoption, the Company expects an impact to retained earnings for the difference between the fair value and carrying value of benefits not currently measured at fair value (e.g., guaranteed minimum death benefits on variable annuities) and an impact from reclassifying the cumulative effect of changes in NPR from retained earnings to AOCI. The magnitude of such adjustments is currently being assessed.

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

Other ASU issued but not yet adopted as of June 30, 2019

Standard		Description		Effective date and method of adoption		Effect on the financial statements or other significant matters
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments		This ASU provides a new current expected credit loss model to account for credit losses on certain financial assets and off-balance sheet exposures (e.g., loans held for investment, debt securities held to maturity, reinsurance receivables, net investments in leases and loan commitments). The model requires an entity to estimate lifetime credit losses related to such financial assets and exposures based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The standard also modifies the current other-than-temporary impairment standard for available-for-sale debt securities to require the use of an allowance rather than a direct write down of the investment, and replaces existing standard for purchased credit deteriorated loans and debt securities.		January 1, 2020 using the modified retrospective method which will include a cumulative-effect adjustment on the balance sheet as of the beginning of the fiscal year of adoption. However, prospective application is required for purchased credit deteriorated assets previously accounted for under ASU 310-30 and for debt securities for which an other-than-temporary-impairment was recognized prior to the date of adoption. Early adoption is permitted beginning January 1, 2019.		The Company is continuing to develop its expected credit loss models and related systems, processes and controls for assets held on the Statement of Financial Position at amortized cost, the most significant of which are the commercial mortgage and other loans. The allowance for credit losses will likely increase when the ASU is adopted to cover expected credit losses over the lifetime of the commercial mortgage and other loans, incorporating reasonable and supportable forecasts and expected changes in future economic conditions. The extent of the impact of adoption of this ASU on the Company’s Financial Statements and Notes to the Financial Statements will depend on various factors including the economic environment and the size and type of the commercial mortgage and other loans held on the date of adoption.

3.    INVESTMENTS

Fixed Maturity Securities

The following tables set forth the composition of fixed maturity securities (excluding investments classified as trading), as of the dates indicated:

	June 30, 2019
	Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value				OTTI in AOCI(3)
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	15,189			$	1,156			$	0			$	16,345			$	0
Obligations of U.S. states and their political subdivisions	120,450				8,259				0				128,709				0
Foreign government bonds	70,733				3,978				10				74,701				0
U.S. public corporate securities	553,331				44,374				1,311				596,394				0
U.S. private corporate securities	233,673				9,042				1,066				241,649				0
Foreign public corporate securities	50,777				3,343				418				53,702				0
Foreign private corporate securities	155,829				4,346				2,757				157,418				0
Asset-backed securities(1)	19,323				1,015				18				20,320				(31		)
Commercial mortgage-backed securities	149,791				5,116				10				154,897				0
Residential mortgage-backed securities(2)	4,460				457				0				4,917				(58		)
Total fixed maturities, available-for-sale	$	1,373,556			$	81,086			$	5,590			$	1,449,052			$	(89	)

(1)	Includes credit-tranched securities collateralized by loan obligations, sub-prime mortgages, education loans and other asset types.

(2)	Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.

(3)	Represents the amount of unrealized losses remaining in AOCI, from the impairment measurement date. Amount excludes $0.6 million of net unrealized losses on impaired available-for-sale securities relating to changes in the value of such securities subsequent to the impairment measurement date.

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

	December 31, 2018
	Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value				OTTI in AOCI(3)
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	15,388			$	940			$	0			$	16,328			$	0
Obligations of U.S. states and their political subdivisions	121,031				1,830				555				122,306				0
Foreign government bonds	68,720				96				3,522				65,294				0
U.S. public corporate securities	486,872				8,798				14,945				480,725				0
U.S. private corporate securities	231,953				1,935				7,522				226,366				0
Foreign public corporate securities	49,684				476				1,945				48,215				0
Foreign private corporate securities	149,611				736				5,584				144,763				0
Asset-backed securities(1)	22,352				1,040				41				23,351				(40		)
Commercial mortgage-backed securities	147,464				915				3,173				145,206				0
Residential mortgage-backed securities(2)	4,817				460				7				5,270				(66		)
Total fixed maturities, available-for-sale	$	1,297,892			$	17,226			$	37,294			$	1,277,824			$	(106	)

(1)	Includes credit-tranched securities collateralized by loan obligations, sub-prime mortgages, auto loans, education loans and other asset types.

(2)	Includes publicly-traded agency pass-through securities and collateralized mortgage obligations.

(3)	Represents the amount of unrealized losses remaining in AOCI, from the impairment measurement date. Amount excludes $0.2 million of net unrealized gains on impaired available-for-sale securities relating to changes in the value of such securities subsequent to the impairment measurement date.

The following tables set forth the fair value and gross unrealized losses aggregated by investment category and length of time that individual fixed maturity securities had been in a continuous unrealized loss position, as of the dates indicated:

	June 30, 2019
	Less Than Twelve Months								Twelve Months or More								Total
	Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
	(in thousands)
Fixed maturities, available-for-sale:
Obligations of U.S. states and their political subdivisions	$	0			$	0			$	0			$	0			$	0			$	0
Foreign government bonds	0				0				5,600				10				5,600				10
U.S. public corporate securities	0				0				37,873				1,311				37,873				1,311
U.S. private corporate securities	9,853				212				11,803				854				21,656				1,066
Foreign public corporate securities	0				0				8,344				418				8,344				418
Foreign private corporate securities	20,309				340				26,349				2,417				46,658				2,757
Asset-backed securities	4,785				15				999				3				5,784				18
Commercial mortgage-backed securities	0				0				2,961				10				2,961				10
Residential mortgage-backed securities	0				0				0				0				0				0
Total fixed maturities, available-for-sale	$	34,947			$	567			$	93,929			$	5,023			$	128,876			$	5,590

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

	December 31, 2018
	Less Than Twelve Months								Twelve Months or More								Total
	Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses
	(in thousands)
Fixed maturities, available-for-sale:
Obligations of U.S. states and their political subdivisions	$	36,191			$	356			$	7,585			$	199			$	43,776			$	555
Foreign government bonds	28,009				1,002				30,924				2,520				58,933				3,522
U.S. public corporate securities	182,958				7,696				124,396				7,249				307,354				14,945
U.S. private corporate securities	57,562				4,549				106,828				2,973				164,390				7,522
Foreign public corporate securities	20,062				695				16,791				1,250				36,853				1,945
Foreign private corporate securities	97,538				4,321				14,107				1,263				111,645				5,584
Asset-backed securities	7,762				41				0				0				7,762				41
Commercial mortgage-backed securities	26,453				163				61,338				3,010				87,791				3,173
Residential mortgage-backed securities	535				4				243				3				778				7
Total fixed maturities, available-for-sale	$	457,070			$	18,827			$	362,212			$	18,467			$	819,282			$	37,294

As of June 30, 2019 and December 31, 2018, the gross unrealized losses on fixed maturity securities were composed of $3.5 million and $31.0 million, respectively, related to “1” highest quality or “2” high quality securities based on the National Association of Insurance Commissioners (“NAIC”) or equivalent rating and $2.1 million and $6.3 million, respectively, related to other than high or highest quality securities based on NAIC or equivalent rating. As of June 30, 2019, the $5.0 million of gross unrealized losses of twelve months or more were concentrated in the Company’s corporate securities within the finance, transportation and utility sectors. As of December 31, 2018, the $18.5 million of gross unrealized losses of twelve months or more were concentrated in commercial mortgage-backed securities and in the Company’s corporate securities within the finance, utility and consumer non-cyclical sectors. In accordance with its policy described in Note 2 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, the Company concluded that an adjustment to earnings for OTTI for these fixed maturity securities was not warranted at either June 30, 2019 or December 31, 2018. These conclusions were based on a detailed analysis of the underlying credit and cash flows on each security. Gross unrealized losses are primarily attributable to general credit spread widening, increases in interest rates and foreign currency exchange rate movements. As of June 30, 2019, the Company did not intend to sell these securities, and it was not more likely than not that the Company would be required to sell these securities before the anticipated recovery of the remaining amortized cost basis.

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

The following table sets forth the amortized cost and fair value of fixed maturities by contractual maturities, as of the date indicated:

	June 30, 2019
	Amortized Cost				Fair Value
	(in thousands)
Fixed maturities, available-for-sale:
Due in one year or less	$	41,356			$	41,328
Due after one year through five years	192,513				195,343
Due after five years through ten years	242,095				248,729
Due after ten years	724,018				783,518
Asset-backed securities	19,323				20,320
Commercial mortgage-backed securities	149,791				154,897
Residential mortgage-backed securities	4,460				4,917
Total fixed maturities, available-for-sale	$	1,373,556			$	1,449,052

Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Asset-backed, commercial mortgage-backed and residential mortgage-backed securities are shown separately in the table above, as they do not have a single maturity date.

The following table sets forth the sources of fixed maturity proceeds and related investment gains (losses), as well as losses on impairments of fixed maturities, for the periods indicated:

	Three Months Ended June 30,								Six Months Ended June 30,
	2019				2018				2019				2018
	(in thousands)
Fixed maturities, available-for-sale:
Proceeds from sales(1)	$	8,383			$	1,565			$	11,639			$	1,565
Proceeds from maturities/prepayments	19,043				21,510				22,206				30,311
Gross investment gains from sales and maturities	40				(56		)		143				(54		)
Gross investment losses from sales and maturities	(424		)		(130		)		(459		)		(130		)
OTTI recognized in earnings(2)	0				0				(3,163		)		0

(1)	Includes $0.7 million and $4.4 million of non-cash related proceeds due to the timing of trade settlements for the six months ended June 30, 2019 and 2018, respectively.

(2)	Excludes the portion of OTTI amounts remaining in OCI, representing any difference between the fair value of the impaired debt security and the net present value of its projected future cash flows at the time of the impairment.

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

The following table sets forth a rollforward of pre-tax amounts remaining in OCI related to fixed maturity securities with credit loss impairments recognized in earnings, for the periods indicated:

	Three Months Ended June 30,								Six Months Ended June 30,
	2019				2018				2019				2018
	(in thousands)
Credit loss impairments:
Balance, beginning of period	$	3,142			$	560			$	179			$	561
New credit loss impairments	1				0				3,022				0
Increases due to the passage of time on previously recorded credit losses	18				4				21				15
Reductions for securities which matured, paid down, prepaid or were sold during the period	(6		)		(387		)		(9		)		(399		)
Accretion of credit loss impairments previously recognized due to an increase in cash flows expected to be collected	(6		)		0				(64		)		0
Balance, end of period	$	3,149			$	177			$	3,149			$	177

Equity Securities

The net change in unrealized gains (losses) from equity securities still held at period end, recorded within “Other income,” was $0.3 million and $(0.2) million during the three months ended June 30, 2019 and 2018, respectively, and $0.5 million and $(0.7) million during the six months ended June 30, 2019 and 2018, respectively.

Commercial Mortgage and Other Loans

The following table sets forth the composition of “Commercial mortgage and other loans,” as of the dates indicated:

	June 30, 2019							December 31, 2018
	Amount (in thousands)				% of Total			Amount (in thousands)				% of Total
Commercial mortgage and agricultural property loans by property type:
Apartments/Multi-Family	$	43,457			35.5	%		$	41,775			35.2	%
Hospitality	9,846				8.0			9,988				8.4
Industrial	15,731				12.8			12,264				10.3
Office	19,609				16.0			16,930				14.3
Other	16,858				13.7			19,024				16.0
Retail	13,661				11.1			13,838				11.6
Total commercial mortgage loans	119,162				97.1			113,819				95.8
Agricultural property loans	3,600				2.9			4,968				4.2
Total commercial mortgage and agricultural property loans by property type	122,762				100.0	%		118,787				100.0	%
Allowance for credit losses	(118		)					(151		)
Total commercial mortgage and other loans	$	122,644						$	118,636

As of June 30, 2019, the commercial mortgage and agricultural property loans were secured by properties geographically dispersed throughout the United States (with the largest concentrations in New York (15%), Illinois (14%) and Texas (12%)) and included loans secured by properties in Europe (7%).

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

The following table sets forth the activity in the allowance for credit losses for commercial mortgage and other loans, as of the dates indicated:

	Commercial Mortgage Loans				Agricultural Property Loans				Total
	(in thousands)
Balance at December 31, 2017	$	179			$	1			$	180
Addition to (release of) allowance for credit losses	(29		)		0				(29		)
Charge-offs, net of recoveries	0				0				0
Balance at December 31, 2018	150				1				151
Addition to (release of) allowance for credit losses	(32		)		(1		)		(33		)
Charge-offs, net of recoveries	0				0				0
Balance at June 30, 2019	$	118			$	0			$	118

The following tables set forth the allowance for credit losses and the recorded investment in commercial mortgage and other loans, as of the dates indicated:

	June 30, 2019
	Commercial Mortgage Loans				Agricultural Property Loans				Total
	(in thousands)
Allowance for credit losses:
Individually evaluated for impairment	$	0			$	0			$	0
Collectively evaluated for impairment	118				0				118
Total ending balance(1)	$	118			$	0			$	118
Recorded investment(2):
Individually evaluated for impairment	$	0			$	0			$	0
Collectively evaluated for impairment	119,162				3,600				122,762
Total ending balance(1)	$	119,162			$	3,600			$	122,762

(1)	As of June 30, 2019, there were no loans acquired with deteriorated credit quality.

(2)	Recorded investment reflects the carrying value gross of related allowance.

	December 31, 2018
	Commercial Mortgage Loans				Agricultural Property Loans				Total
	(in thousands)
Allowance for credit losses:
Individually evaluated for impairment	$	0			$	0			$	0
Collectively evaluated for impairment	150				1				151
Total ending balance(1)	$	150			$	1			$	151
Recorded investment(2):
Individually evaluated for impairment	$	0			$	0			$	0
Collectively evaluated for impairment	113,819				4,968				118,787
Total ending balance(1)	$	113,819			$	4,968			$	118,787

(1)	As of December 31, 2018, there were no loans acquired with deteriorated credit quality.

(2)	Recorded investment reflects the carrying value gross of related allowance.

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

The following tables set forth certain key credit quality indicators for commercial mortgage and agricultural property loans based upon the recorded investment gross of allowance for credit losses, as of the dates indicated:

	June 30, 2019
	Debt Service Coverage Ratio
	≥ 1.2X				1.0X to < 1.2X				< 1.0X				Total
	(in thousands)
Loan-to-Value Ratio:
0%-59.99%	$	93,881			$	3,083			$	0			$	96,964
60%-69.99%	20,727				3,531				0				24,258
70%-79.99%	0				1,540				0				1,540
80% or greater	0				0				0				0
Total commercial mortgage and agricultural property loans	$	114,608			$	8,154			$	0			$	122,762

	December 31, 2018
	Debt Service Coverage Ratio
	≥ 1.2X				1.0X to < 1.2X				< 1.0X				Total
	(in thousands)
Loan-to-Value Ratio:
0%-59.99%	$	88,427			$	1,210			$	0			$	89,637
60%-69.99%	19,975				5,513				0				25,488
70%-79.99%	2,102				1,560				0				3,662
80% or greater	0				0				0				0
Total commercial mortgage and agricultural property loans	$	110,504			$	8,283			$	0			$	118,787

The following tables set forth an aging of past due commercial mortgage and other loans based upon the recorded investment gross of allowance for credit losses, as well as the amount of commercial mortgage and other loans on non-accrual status, as of the dates indicated:

	June 30, 2019
	Current				30-59 Days Past Due				60-89 Days Past Due				90 Days or More Past Due(1)				Total Loans				Non-Accrual Status(2)
	(in thousands)
Commercial mortgage loans	$	119,162			$	0			$	0			$	0			$	119,162			$	0
Agricultural property loans	3,600				0				0				0				3,600				0
Total	$	122,762			$	0			$	0			$	0			$	122,762			$	0

(1)	As of June 30, 2019, there were no loans in this category accruing interest.

(2)	For additional information regarding the Company’s policies for accruing interest on loans, see Note 2 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

	December 31, 2018
	Current				30-59 Days Past Due				60-89 Days Past Due				90 Days or More Past Due(1)				Total Loans				Non-Accrual Status(2)
	(in thousands)
Commercial mortgage loans	$	113,819			$	0			$	0			$	0			$	113,819			$	0
Agricultural property loans	4,968				0				0				0				4,968				0
Total	$	118,787			$	0			$	0			$	0			$	118,787			$	0

(1)	As of December 31, 2018, there were no loans in this category accruing interest.

(2)	For additional information regarding the Company’s policies for accruing interest on loans, see Note 2 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

Other Invested Assets

The following table sets forth the composition of “Other invested assets,” as of the dates indicated:

	June 30, 2019				December 31, 2018
	(in thousands)
Company’s investment in separate accounts	$	3,147			$	3,008
LPs/LLCs:
Equity method:
Private equity	20,178				15,081
Hedge funds	30,114				28,266
Real estate-related	3,750				1,385
Subtotal equity method	54,042				44,732
Fair value:
Private equity	871				920
Hedge funds	107				105
Real estate-related	2,456				1,856
Subtotal fair value	3,434				2,881
Total LPs/LLCs	57,476				47,613
Derivative instruments	18,578				7,792
Total other invested assets	$	79,201			$	58,413

Net Investment Income

The following table sets forth “Net investment income” by investment type, for the periods indicated:

	Three Months Ended June 30,								Six Months Ended June 30,
	2019				2018				2019				2018
	(in thousands)
Fixed maturities, available-for-sale	$	14,248			$	12,957			$	27,806			$	25,596
Fixed maturities, trading	86				81				163				163
Equity securities, at fair value	91				91				182				182
Commercial mortgage and other loans	1,324				1,220				2,501				2,459
Policy loans	2,846				2,751				5,580				5,408
Short-term investments and cash equivalents	322				61				602				150
Other invested assets	1,414				1,315				3,096				1,988
Gross investment income	20,331				18,476				39,930				35,946
Less: investment expenses	(859		)		(868		)		(1,717		)		(1,789		)
Net investment income	$	19,472			$	17,608			$	38,213			$	34,157

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

Realized Investment Gains (Losses), Net 

The following table sets forth “Realized investment gains (losses), net” by investment type, for the periods indicated:

	Three Months Ended June 30,								Six Months Ended June 30,
	2019				2018				2019				2018
	(in thousands)
Fixed maturities(1)	$	(384	)		$	(186	)		$	(3,479	)		$	(184	)
Commercial mortgage and other loans	21				7				33				(1		)
LPs/LLCs	0				1				11				49
Derivatives	(4,689		)		(1,718		)		(7,733		)		(5,691		)
Short term investments and cash equivalents	(4		)		0				2				0
Realized investment gains (losses), net	$	(5,056	)		$	(1,896	)		$	(11,166	)		$	(5,827	)

(1)	Includes fixed maturity securities classified as available-for-sale and excludes fixed maturity securities classified as trading.

Net Unrealized Gains (Losses) on Investments within AOCI

The following table sets forth net unrealized gains (losses) on investments, as of the dates indicated:

	June 30, 2019				December 31, 2018
	(in thousands)
Fixed maturity securities, available-for-sale—with OTTI	$	(660	)		$	143
Fixed maturity securities, available-for-sale—all other	76,156				(20,211		)
Derivatives designated as cash flow hedges(1)	3,128				1,793
Affiliated notes	543				509
Other investments	159				145
Net unrealized gains (losses) on investments	$	79,326			$	(17,621	)

(1)	For more information on cash flow hedges, see Note 4.

Repurchase Agreements and Securities Lending

In the normal course of business, the Company sells securities under agreements to repurchase and enters into securities lending transactions. As of June 30, 2019 and December 31, 2018, the Company had no repurchase agreements.

The following table sets forth the composition of “Cash collateral for loaned securities,” which represents the liability to return cash collateral received for the following types of securities loaned, as of the dates indicated:

	June 30, 2019												December 31, 2018
	Remaining Contractual Maturities of the Agreements												Remaining Contractual Maturities of the Agreements
	Overnight & Continuous				Up to 30 Days				Total				Overnight & Continuous				Up to 30 Days				Total
	(in thousands)
U.S. public corporate securities	$	0			$	0			$	0			$	437			$	0			$	437
Foreign public corporate securities	2,447				0				2,447				2,265				0				2,265
Total cash collateral for loaned securities(1)	$	2,447			$	0			$	2,447			$	2,702			$	0			$	2,702

(1)	The Company did not have any agreements with remaining contractual maturities of thirty days or greater, as of the dates indicated.

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

4.    DERIVATIVE INSTRUMENTS

Types of Derivative Instruments and Derivative Strategies

The Company utilizes various derivative instruments and strategies to manage its risk. Commonly used derivative instruments include, but are not necessarily limited to:

•Interest rate contracts: futures, swaps, options, swaptions, caps and floors

•Equity contracts: futures, options and total return swaps

•Foreign exchange contracts: futures, options, forwards and swaps

•Credit contracts: single and index reference credit default swaps

Other types of financial contracts that the Company accounts for as derivatives include:

•Embedded derivatives

For detailed information on these contracts and the related strategies, see Note 4 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Primary Risks Managed by Derivatives

The table below provides a summary of the gross notional amount and fair value of derivative contracts by the primary underlying risks, excluding embedded derivatives and associated reinsurance recoverables. Many derivative instruments contain multiple underlying risks. The fair value amounts below represent the value of derivative contracts prior to taking into account the netting effects of master netting agreements, cash collateral, and NPR.

		June 30, 2019												December 31, 2018
Primary Underlying Risk/Instrument Type						Fair Value												Fair Value
		Gross Notional				Assets				Liabilities				Gross Notional				Assets				Liabilities
		(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Currency/Interest Rate
Foreign Currency Swaps		$	123,132			$	5,042			$	(1,946	)		$	119,611			$	3,787			$	(2,271	)
Total Derivatives Designated as Hedge Accounting Instruments:		$	123,132			$	5,042			$	(1,946	)		$	119,611			$	3,787			$	(2,271	)
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate
Interest Rate Swaps		$	59,075			$	3,462			$	0			$	59,075			$	2,360			$	0
Credit
Credit Default Swaps		0				0				0				756				0				(9		)
Currency/Interest Rate
Foreign Currency Swaps		25,998				2,801				(99		)		16,815				2,364				(111		)
Foreign Currency
Foreign Currency Forwards		1,434				16				(4		)		1,460				21				0
Equity
Equity Options		328,549				13,816				(4,486		)		281,400				2,616				(749		)
Total Derivatives Not Qualifying as Hedge Accounting Instruments:		$	415,056			$	20,095			$	(4,589	)		$	359,506			$	7,361			$	(869	)
Total Derivatives(1)(2)		$	538,188			$	25,137			$	(6,535	)		$	479,117			$	11,148			$	(3,140	)

(1)	Excludes embedded derivatives and associated reinsurance recoverables which contain multiple underlying risks.

(2)	Recorded in "Other invested assets" and "Other liabilities" on the Unaudited Interim Consolidated Statements of Financial Position.

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

The fair value of the embedded derivatives, included in "Future policy benefits," was a net liability of $757 million and $489 million as of June 30, 2019 and December 31, 2018, respectively. The fair value of the related reinsurance recoverables, included in "Reinsurance recoverables," was a net asset of $757 million and $489 million as of June 30, 2019 and December 31, 2018, respectively. See Note 6 for additional information on these reinsurance agreements.

The fair value of the embedded derivatives, included in "Policyholders' account balances," was a net liability of $112 million and $2 million as of June 30, 2019 and December 31, 2018, respectively. There were no related reinsurance recoverables at each respective period.

Offsetting Assets and Liabilities

The following table presents recognized derivative instruments (excluding embedded derivatives and associated reinsurance recoverables), and repurchase and reverse repurchase agreements that are offset in the Unaudited Interim Statements of Financial Position, and/or are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in the Unaudited Interim Statements of Financial Position.

	June 30, 2019
	Gross Amounts of Recognized Financial Instruments				Gross Amounts Offset in the Statements of Financial Position				Net Amounts Presented in the Statements of Financial Position				Financial Instruments/ Collateral(1)				Net Amount
	(in thousands)
Offsetting of Financial Assets:
Derivatives(1)	$	25,137			$	(6,559	)		$	18,578			$	(18,528	)		$	50
Securities purchased under agreements to resell	0				0				0				0				0
Total Assets	$	25,137			$	(6,559	)		$	18,578			$	(18,528	)		$	50
Offsetting of Financial Liabilities:
Derivatives(1)	$	6,535			$	(6,535	)		$	0			$	0			$	0
Securities sold under agreements to repurchase	0				0				0				0				0
Total Liabilities	$	6,535			$	(6,535	)		$	0			$	0			$	0

	December 31, 2018
	Gross Amounts of Recognized Financial Instruments				Gross Amounts Offset in the Statements of Financial Position				Net Amounts Presented in the Statements of Financial Position				Financial Instruments/ Collateral(1)				Net Amount
	(in thousands)
Offsetting of Financial Assets:
Derivatives(1)	$	11,148			$	(3,355	)		$	7,793			$	(7,307	)		$	486
Securities purchased under agreements to resell	10,000				0				10,000				(10,000		)		0
Total Assets	$	21,148			$	(3,355	)		$	17,793			$	(17,307	)		$	486
Offsetting of Financial Liabilities:
Derivatives(1)	$	3,140			$	(3,140	)		$	0			$	0			$	0
Securities sold under agreements to repurchase	0				0				0				0				0
Total Liabilities	$	3,140			$	(3,140	)		$	0			$	0			$	0

(1)	Amounts exclude the excess of collateral received/pledged from/to the counterparty.

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

For information regarding the rights of offset associated with the derivative assets and liabilities in the table above see “Credit Risk” below and Note 9. For securities purchased under agreements to resell and securities sold under agreements to repurchase, the Company monitors the value of the securities and maintains collateral, as appropriate, to protect against credit exposure. Where the Company has entered into repurchase and resale agreements with the same counterparty, in the event of default, the Company would generally be permitted to exercise rights of offset. For additional information on the Company’s accounting policy for securities repurchase and resale agreements, see Note 2 to the Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Cash Flow Hedges

The primary derivative instruments used by the Company in its cash flow hedge accounting relationships are currency swaps. These instruments are only designated for hedge accounting in instances where the appropriate criteria are met. The Company does not use futures, options, credit, equity or embedded derivatives in any of its cash flow hedge accounting relationships.

The following tables provide the financial statement classification and impact of derivatives used in qualifying and non-qualifying hedge relationships, excluding the offset of the hedged item in an effective hedge relationship.

	Three Months Ended June 30, 2019
	Realized Investment Gains (Losses)				Net Investment Income				Other Income				AOCI (1)
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	0			$	411			$	235			$	1,543
Total cash flow hedges	0				411				235				1,543
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	850				0				0				0
Currency	9				0				0				0
Currency/Interest Rate	492				0				2				0
Credit	0				0				0				0
Equity	1,839				0				0				0
Embedded Derivatives	(7,879		)		0				0				0
Total Derivatives Not Qualifying as Hedge Accounting Instruments:	(4,689		)		0				2				0
Total	$	(4,689	)		$	411			$	237			$	1,543

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

	Six Months Ended June 30, 2019
	Realized Investment Gains (Losses)				Net Investment Income				Other Income				AOCI (1)
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	(10	)		$	808			$	26			$	1,326
Total cash flow hedges	(10		)		808				26				1,326
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	1,359				0				0				0
Currency	15				0				0				0
Currency/Interest Rate	602				0				0				0
Credit	(1		)		0				0				0
Equity	5,979				0				0				0
Embedded Derivatives	(15,677		)		0				0				0
Total Derivatives Not Qualifying as Hedge Accounting Instruments:	(7,723		)		0				0				0
Total	$	(7,733	)		$	808			$	26			$	1,326

	Three Months Ended June 30, 2018(2)
	Realized Investment Gains (Losses)				Net Investment Income				Other Income				AOCI(1)
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	60			$	333			$	651			$	6,042
Total cash flow hedges	60				333				651				6,042
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	(264		)		0				0				0
Currency	105				0				0				0
Currency/Interest Rate	1,025				0				11				0
Credit	0				0				0				0
Equity	917				0				0				0
Embedded Derivatives	(3,561		)		0				0				0
Total Derivatives Not Qualifying as Hedge Accounting Instruments:	(1,778		)		0				11				0
Total	$	(1,718	)		$	333			$	662			$	6,042

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

	Six Months Ended June 30, 2018(2)
	Realized Investment Gains (Losses)				Net Investment Income				Other Income				AOCI(1)
	(in thousands)
Derivatives Designated as Hedge Accounting Instruments:
Cash flow hedges
Currency/Interest Rate	$	(497	)		$	646			$	241			$	1,605
Total cash flow hedges	(497		)		646				241				1,605
Derivatives Not Qualifying as Hedge Accounting Instruments:
Interest Rate	(1,137		)		0				0				0
Currency	52				0				0				0
Currency/Interest Rate	660				0				4				0
Credit	(2		)		0				0				0
Equity	343				0				0				0
Embedded Derivatives	(5,110		)		0				0				0
Total Derivatives Not Qualifying as Hedge Accounting Instruments:	(5,194		)		0				4				0
Total	$	(5,691	)		$	646			$	245			$	1,605

(1)	Net change in AOCI.

(2)	Prior period amounts have been updated to conform to current period presentation.

Presented below is a rollforward of current period cash flow hedges in AOCI before taxes:

	(in thousands)
Balance, December 31, 2018	$	1,793
Cumulative-effect adjustment from the adoption of ASU 2017-12(1)	9
Amount recorded in AOCI
Currency/Interest Rate	2,151
Total amount recorded in AOCI	2,151
Amount reclassified from AOCI to income
Currency/Interest Rate	(825		)
Total amount reclassified from AOCI to income	(825		)
Balance, June 30, 2019	$	3,128

(1)	See Note 2 for details.

The changes in fair value of cash flow hedges are deferred in AOCI and are included in “Net unrealized investment gains (losses)” in the Unaudited Interim Statements of Operations and Comprehensive Income (Loss); these amounts are then reclassified to earnings when the hedged item affects earnings. Using June 30, 2019 values, it is estimated that a pre-tax gain of $1.6 million is expected to be reclassified from AOCI to earnings during the subsequent twelve months ending June 30, 2020, offset by amounts pertaining to the hedged items.

The exposures the Company is hedging with these qualifying cash flow hedges include the variability of the payment or receipt of interest or foreign currency amounts on existing financial instruments.

There were no material amounts reclassified from AOCI into earnings relating to instances in which the Company discontinued cash flow hedge accounting because the forecasted transaction did not occur by the anticipated date or within the additional time period permitted by the authoritative guidance for the accounting for derivatives and hedging.

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

 

Credit Derivatives

The Company has no exposure from credit derivative positions where it has written credit protection as of June 30, 2019 and December 31, 2018.

The Company has purchased credit protection using credit derivatives in order to hedge specific credit exposures in the Company’s investment portfolio. The Company has outstanding notional amounts of $0.0 million and $1 million reported as of June 30, 2019 and December 31, 2018, respectively with a fair value of $0.0 million for both periods.

Credit Risk

The Company is exposed to credit-related losses in the event of non-performance by counterparty to financial derivative transactions with a positive fair value. The Company manages credit risk by entering into derivative transactions with its affiliate, Prudential Global Funding LLC (“PGF”), related to its over-the-counter ("OTC") derivatives. PGF, in turn, manages its credit risk by: (i) entering into derivative transactions with highly rated major international financial institutions and other creditworthy counterparties governed by master netting agreement, as applicable; (ii) trading through central clearing and OTC parties; (iii) obtaining collateral, such as cash and securities, when appropriate; and (iv) setting limits on single-party credit exposures which are subject to periodic management review.

Substantially all of the Company’s derivative agreements have zero thresholds which require daily full collateralization by the party in a liability position.

5.    FAIR VALUE OF ASSETS AND LIABILITIES

Fair Value Measurement – Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The authoritative fair value guidance establishes a framework for measuring fair value that includes a hierarchy used to classify the inputs used in measuring fair value. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The levels of the fair value hierarchy are as follows:

Level 1 - Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities.

Level 2 - Fair value is based on significant inputs, other than quoted prices included in Level 1, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability through corroboration with observable market data. Level 2 inputs include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities, and other market observable inputs.

Level 3 - Fair value is based on at least one significant unobservable input for the asset or liability. The assets and liabilities in this category may require significant judgment or estimation in determining the fair value.

For a discussion of the Company's valuation methodologies for assets and liabilities measured at fair value and the fair value hierarchy, see Note 5 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

Assets and Liabilities by Hierarchy Level – The tables below present the balances of assets and liabilities reported at fair value on a recurring basis, as of the dates indicated.

	As of June 30, 2019
	Level 1				Level 2				Level 3				Netting(1)				Total
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	0			$	16,345			$	0			$	0			$	16,345
Obligations of U.S. states and their political subdivisions	0				128,709				0				0				128,709
Foreign government bonds	0				74,701				0				0				74,701
U.S. corporate public securities	0				596,394				0				0				596,394
U.S. corporate private securities	0				240,468				1,181				0				241,649
Foreign corporate public securities	0				53,702				0				0				53,702
Foreign corporate private securities	0				156,564				854				0				157,418
Asset-backed securities(2)	0				20,320				0				0				20,320
Commercial mortgage-backed securities	0				154,897				0				0				154,897
Residential mortgage-backed securities	0				4,917				0				0				4,917
Subtotal	0				1,447,017				2,035				0				1,449,052
Fixed maturities, trading	0				9,304				0				0				9,304
Equity securities	0				251				7,206				0				7,457
Cash equivalents	0				43,147				0				0				43,147
Other invested assets(3)	0				25,137				0				(6,559		)		18,578
Reinsurance recoverables	0				0				757,236				0				757,236
Receivables from parent and affiliates	0				2,732				0				0				2,732
Subtotal excluding separate account assets	0				1,527,588				766,477				(6,559		)		2,287,506
Separate account assets(4)(5)	0				13,220,641				0				0				13,220,641
Total assets	$	0			$	14,748,229			$	766,477			$	(6,559	)		$	15,508,147
Future policy benefits(6)	$	0			$	0			$	757,236			$	0			$	757,236
Policyholders' account balances	0				0				112,417				0				112,417
Payables to parent and affiliates	0				6,535				0				(6,535		)		0
Total liabilities	$	0			$	6,535			$	869,653			$	(6,535	)		$	869,653

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

	As of December 31, 2018
	Level 1				Level 2				Level 3				Netting(1)				Total
	(in thousands)
Fixed maturities, available-for-sale:
U.S. Treasury securities and obligations of U.S. government authorities and agencies	$	0			$	16,328			$	0			$	0			$	16,328
Obligations of U.S. states and their political subdivisions	0				122,306				0				0				122,306
Foreign government bonds	0				65,294				0				0				65,294
U.S. corporate public securities	0				480,725				0				0				480,725
U.S. corporate private securities	0				224,278				2,088				0				226,366
Foreign corporate public securities	0				48,215				0				0				48,215
Foreign corporate private securities	0				143,969				794				0				144,763
Asset-backed securities(2)	0				23,351				0				0				23,351
Commercial mortgage-backed securities	0				145,206				0				0				145,206
Residential mortgage-backed securities	0				5,270				0				0				5,270
Subtotal	0				1,274,942				2,882				0				1,277,824
Fixed maturities, trading	0				5,770				0				0				5,770
Equity securities	0				3,248				6,622				0				9,870
Cash equivalents	19,972				39,946				0				0				59,918
Other invested assets(3)	0				11,148				0				(3,355		)		7,793
Reinsurance recoverables	0				0				488,825				0				488,825
Receivables from parent and affiliates	0				8,824				0				0				8,824
Subtotal excluding separate account assets	19,972				1,343,878				498,329				(3,355		)		1,858,824
Separate account assets(4)(5)	0				11,648,322				0				0				11,648,322
Total assets	$	19,972			$	12,992,200			$	498,329			$	(3,355	)		$	13,507,146
Future policy benefits(6)	$	0			$	0			$	488,825			$	0			$	488,825
Policyholders' account balances	0				0				1,949				0				1,949
Payables to parent and affiliates	0				3,140				0				(3,140		)		0
Total liabilities	$	0			$	3,140			$	490,774			$	(3,140	)		$	490,774

(1)	“Netting” amounts represent cash collateral of $0.0 million and $0.2 million as of June 30, 2019 and December 31, 2018, respectively, and the impact of offsetting asset and liability positions held with the same counterparty, subject to master netting arrangements.

(2)	Includes credit-tranched securities collateralized by syndicated bank loans, sub-prime mortgages, auto loans, credit cards, education loans and other asset types.

(3)	Other invested assets excluded from the fair value hierarchy include certain hedge funds, private equity funds and other funds for which fair value is measured at net asset value ("NAV") per share (or its equivalent) as a practical expedient. As of June 30, 2019 and December 31, 2018, the fair values of such investments were $3.4 million and $2.9 million, respectively.

(4)

Separate account assets included in the fair value hierarchy exclude investments in entities that calculate NAV per share (or its equivalent) as a practical expedient. Such investments excluded from the fair value hierarchy include investments in real estate, hedge funds and a corporate owned life insurance fund, for which fair value is measured at NAV per share (or its equivalent). At June 30, 2019 and December 31, 2018, the fair value of such investments was $1,912 million and $1,734 million, respectively.

(5)

Separate account assets represent segregated funds that are invested for certain customers. Investment risks associated with market value changes are borne by the customers, except to the extent of minimum guarantees made by the Company with respect to certain accounts. Separate account liabilities are not included in the above table as they are reported at contract value and not fair value in the Company’s Unaudited Interim Statements of Financial Position.

(6)

As of June 30, 2019, the net embedded derivative liability position of $757 million includes $50 million of embedded derivatives in an asset position and $807 million of embedded derivatives in a liability position. As of December 31, 2018, the net embedded derivative liability position of $489 million includes $60 million of embedded derivatives in an asset position and $549 million of embedded derivatives in a liability position.

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

Quantitative Information Regarding Internally Priced Level 3 Assets and Liabilities – The tables below present quantitative information on significant internally-priced Level 3 assets and liabilities.

	As of June 30, 2019
	Fair Value				Valuation  Techniques		Unobservable  Inputs		Minimum				Maximum				Weighted Average				Impact of Increase in Input on Fair Value(1)
	(in thousands)
Assets:
Corporate securities(2)	$	2,035			Discounted cash flow		Discount rate		13.50	%			13.50	%			13.50	%			Decrease
Reinsurance recoverables	$	757,236			Fair values are determined using the same unobservable inputs as future policy benefits.
Liabilities:
Future policy benefits(3)	$	757,236			Discounted cash flow		Lapse rate(5)		1	%			18	%							Decrease
							Spread over LIBOR(6)		0.16	%			1.24	%							Decrease
							Utilization rate(7)		43	%			97	%							Increase
							Withdrawal rate								See table footnote (8) below
							Mortality rate (9)		0	%			15	%							Decrease
							Equity volatility curve		13	%			23	%							Increase
Policyholders' account balances(4)	$	112,417			Discounted cash flow		Lapse rate(5)		1	%			6	%							Decrease
							Spread over LIBOR(6)		0.16	%			1.24	%							Decrease
							Mortality rate (9)		0	%			24	%							Decrease
							Equity volatility curve		10	%			23	%							Increase

	As of December 31, 2018
	Fair Value				Valuation  Techniques		Unobservable Inputs		Minimum				Maximum				Weighted Average				Impact of Increase in Input on Fair Value(1)
	(in thousands)
Assets:
Corporate securities(2)	$	2,882			Discounted cash flow		Discount rate		7	%			16.33	%			9.93	%			Decrease
Reinsurance recoverables	$	488,825			Fair values are determined using the same unobservable inputs as future policy benefits.
Liabilities:
Future policy benefits(3)	$	488,825			Discounted cash flow		Lapse rate(5)		1	%			13	%							Decrease
							Spread over LIBOR(6)		0.36	%			1.60	%							Decrease
							Utilization rate(7)		50	%			97	%							Increase
							Withdrawal rate		See table footnote(8) below.
							Mortality rate(9)		0	%			15	%							Decrease
							Equity volatility curve		18	%			22	%							Increase

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

(1)	Conversely, the impact of a decrease in input would have the opposite impact on fair value as that presented in the table.

(2)	Includes assets classified as fixed maturities available-for-sale.

(3)

Future policy benefits primarily represent general account liabilities for the living benefit features of the Company’s variable annuity contracts which are accounted for as embedded derivatives. Since the valuation methodology for these liabilities uses a range of inputs that vary at the contract level over the cash flow projection period, presenting a range, rather than weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.

(4)

Policyholders’ account balances primarily represent general account liabilities for the index-linked interest credited on certain of the Company’s life products that are accounted for as embedded derivatives. Since the valuation methodology for these liabilities uses a range of inputs that vary at the contract level over the cash flow projection period, presenting a range, rather than weighted average, is a more meaningful representation of the unobservable inputs used in the valuation.

(5)

Lapse rates for contracts with living benefit guarantees are adjusted at the contract level based on the in-the-moneyness of the living benefit and reflect other factors, such as the applicability of any surrender charges. Lapse rates are reduced when contracts are more in-the-money. Lapse rates for contracts with index-linked crediting guarantees may be adjusted at the contract level based on the applicability of any surrender charges, product type, and market related factors such as interest rates. Lapse rates are also generally assumed to be lower for the period where surrender charges apply. For any given contract, lapse rates vary throughout the period over which cash flows are projected for the purposes of valuing these embedded derivatives.

(6)

The spread over the London Inter-Bank Offered Rate ("LIBOR") swap curve represents the premium added to the proxy for the risk-free rate (LIBOR) to reflect the Company's estimates of rates that a market participant would use to value the living benefits in both the accumulation and payout phases and index-linked interest crediting guarantees. This spread includes an estimate of NPR, which is the risk that the obligation will not be fulfilled by the Company. NPR is primarily estimated by utilizing the credit spreads associated with issuing funding agreements, adjusted for any illiquidity risk premium. In order to reflect the financial strength ratings of the Company, credit spreads associated with funding agreements, as opposed to credit spread associated with debt, are utilized in developing this estimate because funding agreements, living benefit guarantees, and index-linked interest crediting guarantees are insurance liabilities and are therefore senior to debt.

(7)

The utilization rate assumption estimates the percentage of contracts that will utilize the benefit during the contract duration and begin lifetime withdrawals at various time intervals from contract inception. The remaining contractholders are assumed to either begin lifetime withdrawals immediately or never utilize the benefit. Utilization assumptions may vary by product type, tax status and age. The impact of changes in these assumptions is highly dependent on the product type, the age of the contractholder at the time of the sale, and the timing of the first lifetime income withdrawal. Range reflects the utilization rate for the vast majority of business with living benefits.

(8)

The withdrawal rate assumption estimates the magnitude of annual contractholder withdrawals relative to the maximum allowable amount under the contract. These assumptions vary based on the age of the contractholder, the tax status of the contract and the duration since the contractholder began lifetime withdrawals. As of June 30, 2019 and December 31, 2018, the minimum withdrawal rate assumption is 78% and the maximum withdrawal rate assumption may be greater than 100%. The fair value of the liability will generally increase the closer the withdrawal rate is to 100% and decrease as the withdrawal rate moves further away from 100%.

(9)

The range reflects the mortality rates for the vast majority of business with living benefits and other contracts, with policyholders ranging from 45 to 90 years old. While the majority of living benefits have a minimum age requirement, certain other contracts do not have an age restriction. This results in contractholders with mortality rates approaching 0% for certain benefits. Mortality rates may vary by product, age and duration. A mortality improvement assumption is also incorporated into the overall mortality table.

Interrelationships Between Unobservable Inputs – In addition to the sensitivities of fair value measurements to changes in each unobservable input in isolation, as reflected in the table above, interrelationships between these inputs may also exist, such that a change in one unobservable input may give rise to a change in another, or multiple, inputs. For the discussion of the relationships between unobservable inputs as well as market factors that may affect the range of inputs used in the valuation of Level 3 assets and liabilities, see Note 5 to the Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

Changes in Level 3 Assets and Liabilities – The following tables describe changes in fair values of Level 3 assets and liabilities as of the dates indicated, as well as the portion of gains or losses included in income attributable to unrealized gains or losses related to those assets and liabilities still held at the end of their respective periods. When a determination is made to classify assets and liabilities within Level 3, the determination is based on significance of the unobservable inputs in the overall fair value measurement. All transfers are based on changes in the observability of the valuation inputs, including the availability of pricing service information that the Company can validate. All transfers are generally reported at the value as of the beginning of the quarter in which transfers occur for any such assets still held at the end of the quarter.

	Three Months Ended June 30, 2019
	Fair Value, beginning of period			Total realized and unrealized gains (losses)(1)			Purchases			Sales			Issuances			Settlements			Other			Transfers into Level 3			Transfers out of Level 3			Fair Value, end of period			Unrealized gains (losses) for assets still held(2)
	(in thousands)
Fixed maturities, available-for-sale:
Corporate securities(3)	$	2,344		$	(310	)	$	0		$	0		$	0		$	(638	)	$	0		$	639		$	0		$	2,035		$	0
Structured securities(4)	25,324			0			0			0			0			0			0			0			(25,324		)	0			0
Other assets:
Equity securities	6,576			630			0			0			0			0			0			0			0			7,206			630
Reinsurance recoverables	571,117			162,593			23,526			0			0			0			0			0			0			757,236			167,330
Receivables from parent and affiliates	0			0			0			0			0			0			0			0			0			0			0
Liabilities:
Future policy benefits	(571,117		)	(162,593		)	0			0			(23,526		)	0			0			0			0			(757,236		)	(167,330		)
Policyholders' account balances(5)	(7,529		)	(98,831		)	0			0			(6,057		)	0			0			0			0			(112,417		)	(98,831		)

	Three Months Ended June 30, 2019
	Total realized and unrealized gains (losses)													Unrealized gains (losses) for assets still held(2)
	Realized investment gains (losses), net(1)			Other income (loss)			Included in other comprehensive income (loss)			Net investment income				Realized investment gains (losses), net			Other income (loss)
	(in thousands)
Fixed maturities, available-for-sale	$	0		$	0		$	(447	)	$	137			$	0		$	0
Other assets:
Equity securities	0			630			0			0				0			630
Reinsurance recoverables	162,593			0			0			0				167,330			0
Receivables from parent and affiliates	0			0			0			0				0			0
Liabilities:
Future policy benefits	(162,593		)	0			0			0				(167,330		)	0
Policyholders' account balances	(98,831		)	0			0			0				(98,831		)	0

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

	Six Months Ended June 30, 2019
	Fair Value, beginning of period			Total realized and unrealized gains (losses)(1)			Purchases			Sales			Issuances			Settlements			Other			Transfers into Level 3			Transfers out of Level 3			Fair Value, end of period			Unrealized gains (losses) for assets still held(2)
	(in thousands)
Fixed maturities, available-for-sale:
Corporate securities(3)	$	2,882		$	(1,096	)	$	248		$	0		$	0		$	(638	)	$	0		$	639		$	0		$	2,035		$	(3,163	)
Structured securities(4)	0			432			0			0			0			(68		)	0			24,960			(25,324		)	0			0
Other assets:
Equity securities	6,622			584			0			0			0			0			0			0			0			7,206			584
Reinsurance recoverables	488,825			222,383			46,028			0			0			0			0			0			0			757,236			229,926
Receivables from parent and affiliates	0			0			0			0			0			0			0			0			0			0			0
Liabilities:
Future policy benefits	(488,825		)	(222,383		)	0			0			(46,028		)	0			0			0			0			(757,236		)	(229,926		)
Policyholders' account balances(5)	(1,949		)	(103,508		)	0			0			(6,960		)	0			0			0			0			(112,417		)	(103,504		)

	Six Months Ended June 30, 2019
	Total realized and unrealized gains (losses)													Unrealized gains (losses) for assets still held(2)
	Realized investment gains (losses), net(1)			Other income (loss)			Included in other comprehensive income (loss)			Net investment income				Realized investment gains (losses), net			Other income (loss)
	(in thousands)
Fixed maturities, available-for-sale	$	(3,163	)	$	0		$	2,353		$	146			$	(3,163	)	$	0
Other assets:
Equity securities	0			584			0			0				0			584
Reinsurance recoverables	222,383			0			0			0				229,926			0
Receivables from parent and affiliates	0			0			0			0				0			0
Liabilities:
Future policy benefits	(222,383		)	0			0			0				(229,926		)	0
Policyholders' account balances	(103,508		)	0			0			0				(103,504		)	0

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

	Three Months Ended June 30, 2018(6)
	Fair Value, beginning of period			Total realized and unrealized gains (losses)(1)			Purchases			Sales			Issuances			Settlements			Other			Transfers into Level 3			Transfers out of Level 3			Fair Value, end of period			Unrealized gains (losses) for assets still held(2)
	(in thousands)
Fixed maturities, available-for-sale:
Corporate securities(3)	$	14,621		$	(876	)	$	86		$	(45	)	$	0		$	(3,779	)	$	0		$	0		$	0		$	10,007		$	0
Structured securities(4)	8,455			(8		)	0			(196		)	0			(576		)	0			0			(5,383		)	2,292			0
Other assets:
Equity securities	7,183			(217		)	0			0			0			0			0			0			0			6,966			(217		)
Reinsurance recoverables	358,391			(43,932		)	21,625			0			0			0			0			0			0			336,084			(40,898		)
Receivables from parent and affiliates	6,029			0			0			0			0			0			0			0			(6,029		)	0			0
Liabilities:
Future policy benefits	(358,391		)	43,932			0			0			(21,625		)	0			0			0			0			(336,084		)	40,898
Policyholders' account balances(5)	(4,910		)	(943		)	0			0			0			226			0			0			0			(5,627		)	(7,860		)

	Three Months Ended June 30, 2018(6)
	Total realized and unrealized gains (losses)													Unrealized gains (losses) for assets still held(2)
	Realized investment gains (losses), net(1)			Other income (loss)			Included in other comprehensive income (loss)			Net investment income				Realized investment gains (losses), net			Other income (loss)
	(in thousands)
Fixed maturities, available-for-sale	$	(103	)	$	0		$	(831	)	$	50			$	0		$	0
Other assets:
Equity securities	0			(217		)	0			0				0			(217		)
Reinsurance recoverables	(43,932		)	0			0			0				(40,898		)	0
Receivables from parent and affiliates	0			0			0			0				0			0
Liabilities:
Future policy benefits	43,932			0			0			0				40,898			0
Policyholders' account balances	(943		)	0			0			0				(7,860		)	0

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

	Six Months Ended June 30, 2018(6)
	Fair Value, beginning of period			Total realized and unrealized gains (losses)(1)			Purchases			Sales			Issuances			Settlements			Other			Transfers into Level 3			Transfers out of Level 3			Fair Value, end of period			Unrealized gains (losses) for assets still held(2)
	(in thousands)
Fixed maturities, available-for-sale:
Corporate securities(3)	$	14,516		$	(684	)	$	146		$	(45	)	$	0		$	(3,926	)	$	0		$	0		$	0		$	10,007		$	0
Structured securities(4)	11,575			(3		)	190			(196		)	0			(581		)	0			196			(8,889		)	2,292			0
Other assets:
Equity securities	7,428			(462		)	0			0			0			0			0			0			0			6,966			(462		)
Reinsurance recoverables	472,157			(179,053		)	42,980			0			0			0			0			0			0			336,084			(171,183		)
Receivables from parent and affiliates	0			(18		)	0			0			0			0			0			6,047			(6,029		)	0			0
Liabilities:
Future policy benefits	(472,157		)	179,053			0			0			(42,980		)	0			0			0			0			(336,084		)	171,183
Policyholders' account balances(5)	(5,463		)	(326		)	0			0			0			162			0			0			0			(5,627		)	(326		)

	Six Months Ended June 30, 2018(6)
	Total realized and unrealized gains (losses)													Unrealized gains (losses) for assets still held(2)
	Realized investment gains (losses), net(1)			Other income (loss)			Included in other comprehensive income (loss)			Net investment income				Realized investment gains (losses), net			Other income (loss)
	(in thousands)
Fixed maturities, available-for-sale	$	(103	)	$	0		$	(666	)	$	82			$	0		$	0
Other assets:
Equity securities	0			(462		)	0			0				0			(462		)
Reinsurance recoverables	(179,053		)	0			0			0				(171,183		)	0
Receivables from parent and affiliates	0			0			(18		)	0				0			0
Liabilities:
Future policy benefits	179,053			0			0			0				171,183			0
Policyholders' account balances	(326		)	0			0			0				(326		)	0

(1)	Realized investment gains (losses) on future policy benefits and reinsurance recoverables primarily represent the change in the fair value of the Company's living benefit guarantees on certain of its variable annuity contracts.

(2)	Unrealized gains or losses related to assets still held at the end of the period do not include amortization or accretion of premiums and discounts.

(3)	Includes U.S. corporate public, U.S. corporate private, foreign corporate public and foreign corporate private securities.

(4)	Includes asset-backed, commercial mortgage-backed and residential mortgage-backed securities.

(5)	Issuances and settlements for Policyholders' account balances are presented net in the rollforward.

(6)	Prior period amounts have been updated to conform to current period presentation.

Fair Value of Financial Instruments

The table below presents the carrying amount and fair value by fair value hierarchy level of certain financial instruments that are not reported at fair value. The financial instruments presented below are reported at carrying value on the Company’s Unaudited Interim Statements of Financial Position. In some cases, as described below, the carrying amount equals or approximates fair value.

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

	June 30, 2019
	Fair Value																Carrying Amount(1)
	Level 1				Level 2				Level 3				Total				Total
	(in thousands)
Assets:
Commercial mortgage and other loans	$	0			$	0			$	128,103			$	128,103			$	122,644
Policy loans	0				0				209,578				209,578				209,578
Cash and cash equivalents	2,494				0				0				2,494				2,494
Accrued investment income	0				18,810				0				18,810				18,810
Receivables from parent and affiliates	0				29,871				0				29,871				29,871
Other assets	0				4,879				0				4,879				4,879
Total assets	$	2,494			$	53,560			$	337,681			$	393,735			$	388,276
Liabilities:
Policyholders’ account balances - investment contracts	$	0			$	188,247			$	40,466			$	228,713			$	228,735
Cash collateral for loaned securities	0				2,447				0				2,447				2,447
Payables to parent and affiliates	0				17,412				0				17,412				17,412
Other liabilities	0				43,869				0				43,869				43,869
Total liabilities	$	0			$	251,975			$	40,466			$	292,441			$	292,463

	December 31, 2018
	Fair Value																Carrying Amount(1)
	Level 1				Level 2				Level 3				Total				Total
	(in thousands)
Assets:
Commercial mortgage and other loans	$	0			$	0			$	119,659			$	119,659			$	118,636
Policy loans	0				0				206,448				206,448				206,448
Cash and cash equivalents	523				10,000				0				10,523				10,523
Accrued investment income	0				17,764				0				17,764				17,764
Receivables from parent and affiliates	0				31,564				0				31,564				31,564
Other assets	0				4,193				0				4,193				4,193
Total assets	$	523			$	63,521			$	326,107			$	390,151			$	389,128
Liabilities:
Policyholders’ account balances - investment contracts	$	0			$	179,239			$	40,349			$	219,588			$	220,553
Cash collateral for loaned securities	0				2,702				0				2,702				2,702
Payables to parent and affiliates	0				20,413				0				20,413				20,413
Other liabilities	0				58,357				0				58,357				58,357
Total liabilities	$	0			$	260,711			$	40,349			$	301,060			$	302,025

(1)	Carrying values presented herein differ from those in the Company’s Unaudited Interim Statements of Financial Position because certain items within the respective financial statement captions are not considered financial instruments or are out of scope under authoritative guidance relating to disclosures of the fair value of financial instruments.

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

6.    REINSURANCE

The Company participates in reinsurance with its affiliates Prudential Arizona Reinsurance Captive Company (“PARCC”), Prudential Arizona Reinsurance Term Company (“PAR Term”), Prudential Arizona Reinsurance Universal Company (“PAR U”), Prudential Term Reinsurance Company (“Term Re”) and Dryden Arizona Reinsurance Term Company (“DART”), its parent companies, Pruco Life and Prudential Insurance, as well as third parties. The reinsurance agreements provide risk diversification and additional capacity for future growth, limit the maximum net loss potential, manage statutory capital, and facilitate the Company's capital market hedging program. Life reinsurance is accomplished through various plans of reinsurance, primarily yearly renewable term and coinsurance. Reinsurance ceded arrangements do not discharge the Company as the primary insurer. Ceded balances would represent a liability of the Company in the event the reinsurers were unable to meet their obligations to the Company under the terms of the reinsurance agreements. The Company believes a material reinsurance liability resulting from such inability of reinsurers to meet their obligations is unlikely.

Reserves related to reinsured long-duration contracts are accounted for using assumptions consistent with those used to account for the underlying contracts. Amounts recoverable from reinsurers for long-duration reinsurance arrangements are estimated in a manner consistent with the claim liabilities and policy benefits associated with the reinsured policies. Reinsurance policy charges and fee income ceded for universal life and variable annuity products are accounted for as a reduction of policy charges and fee income. Reinsurance premiums ceded for term insurance products are accounted for as a reduction of premiums.

Realized investment gains and losses include the impact of reinsurance agreements, particularly reinsurance agreements involving living benefit guarantees. The Company has entered into a reinsurance agreement to transfer the risk related to living benefit guarantees on variable annuities to Prudential Insurance. These reinsurance agreements are derivatives and have been accounted for in the same manner as embedded derivatives and the changes in the fair value of these derivatives are recognized through “Realized investment gains (losses), net”. See Note 4 for additional information related to the accounting for embedded derivatives.

Reinsurance amounts included in the Company’s Unaudited Interim Statements of Financial Position as of June 30, 2019 and December 31, 2018 were as follows:

	June 30, 2019				December 31, 2018
	(in thousands)
Reinsurance recoverables	$	3,099,079			$	2,723,518
Policy loans	(17,892		)		(17,297		)
Deferred policy acquisition costs	(735,698		)		(754,569		)
Deferred sales inducements	(50,764		)		(52,875		)
Other assets	15,878				17,959
Other liabilities	76,839				65,225

The reinsurance recoverables by counterparty are broken out below:

	June 30, 2019				December 31, 2018
	(in thousands)
Prudential Insurance	$	1,214,078			$	924,847
PAR U	988,285				922,904
PARCC	471,848				480,627
PAR Term	216,322				205,972
Term Re	175,205				156,303
DART	24,990				13,367
Pruco Life	7,942				15,013
Unaffiliated	409				4,485
Total reinsurance recoverables	$	3,099,079			$	2,723,518

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

Reinsurance amounts, included in the Company’s Unaudited Interim Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, were as follows:

	Three Months Ended June 30,								Six Months Ended June 30,
	2019				2018				2019				2018
	(in thousands)
Premiums:
Direct	$	61,930			$	60,485			$	124,944			$	119,859
Ceded	(58,649		)		(57,333		)		(118,325		)		(114,210		)
Net premiums	3,281				3,152				6,619				5,649
Policy charges and fee income:
Direct	118,884				82,061				212,504				184,623
Ceded	(96,279		)		(61,523		)		(170,050		)		(139,271		)
Net policy charges and fee income	22,605				20,538				42,454				45,352
Net investment income:
Direct	19,634				17,741				38,543				34,445
Ceded	(162		)		(133		)		(330		)		(288		)
Net investment income	19,472				17,608				38,213				34,157
Asset administration fees:
Direct	9,394				9,039				18,273				18,060
Ceded	(7,945		)		(7,705		)		(15,481		)		(15,420		)
Net asset administration fees	1,449				1,334				2,792				2,640
Realized investment gains (losses), net:
Direct	(165,057		)		44,637				(227,900		)		177,775
Ceded	160,001				(46,533		)		216,734				(183,602		)
Realized investment gains (losses), net	(5,056		)		(1,896		)		(11,166		)		(5,827		)
Policyholders’ benefits (including change in reserves):
Direct	131,279				74,303				203,307				147,471
Ceded(1)	(120,928		)		(65,696		)		(182,979		)		(130,312		)
Net policyholders’ benefits (including change in reserves)	10,351				8,607				20,328				17,159
Interest credited to policyholders’ account balances:
Direct	17,271				16,608				32,488				33,130
Ceded	(7,266		)		(7,697		)		(13,430		)		(15,655		)
Net interest credited to policyholders’ account balances	10,005				8,911				19,058				17,475
Reinsurance expense allowances and general and administrative expenses, net of capitalization and amortization	(58,171		)		(36,960		)		(97,673		)		(81,446		)

(1)	"Policyholders’ benefits (including change in reserves) ceded" includes $1 million and $0.8 million of unaffiliated activity for the three months ended June 30, 2019 and 2018, respectively, and $2 million and $0.2 million for the six months ended June 30, 2019 and 2018, respectively.

The gross and net amounts of life insurance face amount in force as of June 30, 2019 and 2018 were as follows:

	2019				2018
	(in thousands)
Direct gross life insurance face amount in force	$	145,001,035			$	138,616,160
Reinsurance ceded	(132,123,416		)		(126,319,867		)
Net life insurance face amount in force	$	12,877,619			$	12,296,293

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

Information regarding significant affiliated reinsurance agreements is described below.

Prudential Insurance

The Company has a yearly renewable term reinsurance agreement with Prudential Insurance and reinsures the majority of all mortality risks not otherwise reinsured. Effective July 1, 2017, this agreement was terminated for certain new business, primarily Universal Life business, and such business was reinsured to Pruco Life under a yearly renewable term reinsurance agreement. Effective April 1, 2016, the Company entered into a reinsurance agreement with Prudential Insurance to reinsure its variable annuity base contracts, along with the living benefit guarantees. This reinsurance agreement covers new and in force business and excludes business reinsured externally.

PAR U

Effective July 1, 2012, the Company reinsures an amount equal to 95% of all risks associated with Universal Protector policies having no-lapse guarantees as well as certain of its universal policies, excluding those policies that are subject to principles-based reserving.

PARCC

The Company reinsures 90% of the risks under its term life insurance policies with effective dates prior to January 1, 2010 through an automatic coinsurance agreement with PARCC.

PAR Term

The Company reinsures 95% of the risks under its term life insurance policies, with effective dates January 1, 2010 through December 31, 2013, through an automatic coinsurance agreement with PAR Term.

Term Re

The Company reinsures 95% of the risks under its term life insurance policies with effective dates on or after January 1, 2014 through December 31, 2017, through an automatic coinsurance agreement with Term Re.

Pruco Life

Effective July 1, 2017, the Company entered into a yearly renewable term reinsurance agreement with Pruco Life for new business, primarily covering Universal Life policies. Under this agreement the majority of all mortality risk is ceded to Pruco Life. The Company also reinsures certain Corporate Owned Life Insurance (“COLI”) policies with Pruco Life.

DART

Effective January 1, 2018, the Company entered into an automatic coinsurance agreement with DART to reinsure an amount equal to 95% of the risks associated with its term life insurance policies with effective dates on or after January 1, 2018.

7.    INCOME TAXES

The Company uses a full year projected effective tax rate approach to calculate year-to-date taxes. In addition, certain items impacting total income tax expense are recorded in the periods in which they occur. The projected effective tax rate is the ratio of projected “Income tax expense (benefit)” divided by projected “Income (loss) from operations before income taxes". The interim period tax expense (or benefit) is the difference between the year-to-date income tax provision and the amounts reported for the previous interim periods of the fiscal year.  

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

The Company's income tax provision amounted to an income tax benefit of $(0.2) million, or (1.10)% of income (loss) from operations before income taxes in the first six months of 2019, compared to an income tax expense of $1.5 million, or 8.47%, in the first six months of 2018. The Company’s current and prior effective tax rates differed from the U.S. statutory tax rate of 21% primarily due to non-taxable investment income and tax credits.

8.    EQUITY

Accumulated Other Comprehensive Income (Loss)

AOCI represents the cumulative OCI items that are reported separate from net income and detailed on the Statements of Comprehensive Income. The balance of and changes in each component of AOCI as of and for the six months ended June 30, 2019 and 2018, are as follows:

	Accumulated Other Comprehensive Income (Loss)
	Foreign Currency Translation Adjustment				Net Unrealized Investment Gains (Losses)(1)				Total Accumulated Other Comprehensive Income (Loss)
	(in thousands)
Balance, December 31, 2018	$	(989	)		$	(13,378	)		$	(14,367	)
Change in OCI before reclassifications	4				88,557				88,561
Amounts reclassified from AOCI	0				4,304				4,304
Income tax benefit (expense)	(1		)		(19,500		)		(19,501		)
Balance, June 30, 2019	$	(986	)		$	59,983			$	58,997

	Accumulated Other Comprehensive Income (Loss)
	Foreign Currency Translation Adjustment				Net Unrealized Investment Gains (Losses)(1)				Total Accumulated Other Comprehensive Income (Loss)
	(in thousands)
Balance, December 31, 2017	$	(42	)		$	34,372			$	34,330
Change in OCI before reclassifications	(1,152		)		(57,112		)		(58,264		)
Amounts reclassified from AOCI	0				(206		)		(206		)
Income tax benefit (expense)	240				12,039				12,279
Cumulative effect of adoption of ASU 2016-01	0				(175		)		(175		)
Cumulative effect of adoption of ASU 2018-02	(8		)		5,901				5,893
Balance, June 30, 2018	$	(962	)		$	(5,181	)		$	(6,143	)

(1)	Includes cash flow hedges of $3 million and $2 million as of June 30, 2019 and December 31, 2018, respectively, and $(3) million and $(5) million as of June 30, 2018 and December 31, 2017, respectively.

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

Reclassifications out of Accumulated Other Comprehensive Income (Loss)

	Three Months Ended June 30,								Six Months Ended June 30,
	2019				2018				2019				2018
	(in thousands)
Amounts reclassified from AOCI (1)(2):
Net unrealized investment gains (losses):
Cash flow hedges - Currency/ Interest rate(3)	$	(646	)		$	1,044			$	(825	)		$	390
Net unrealized investment gains (losses) on available-for-sale securities	(384		)		(186		)		(3,479		)		(184		)
Total net unrealized investment gains (losses)(4)	(1,030		)		858				(4,304		)		206
Total reclassifications for the period	$	(1,030	)		$	858			$	(4,304	)		$	206

(1)	All amounts are shown before tax.

(2)	Positive amounts indicate gains/ benefits reclassified out of AOCI. Negative amounts indicate losses/ costs reclassified out of AOCI.

(3)	See Note 4 for additional information on cash flow hedges.

(4)	See table below for additional information on unrealized investment gains (losses), including the impact on deferred policy acquisition and other costs, future policy benefits, policyholders’ account balances and other liabilities.

Net Unrealized Investment Gains (Losses)

Net unrealized investment gains (losses) on securities classified as available-for-sale and certain other invested assets and other assets are included in the Company’s Unaudited Interim Statements of Financial Position as a component of AOCI. Changes in these amounts include reclassification adjustments to exclude from OCI those items that are included as part of “Net income” for a period that had been part of OCI in earlier periods. The amounts for the periods indicated below, split between amounts related to fixed maturity securities on which an OTTI loss has been recognized, and all other net unrealized investment gains (losses), are as follows:

Net Unrealized Investment Gains (Losses) on Fixed Maturity Securities on which an OTTI loss has been recognized

	Net Unrealized Gains (Losses) on  Investments				Deferred Policy Acquisition Costs and Other Costs(1)				Future Policy Benefits, Policyholders' Account Balances and Other Liabilities(2)				Deferred Income Tax (Liability) Benefit				Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses)
	(in thousands)
Balance, December 31, 2018	$	143			$	(54	)		$	42			$	(54	)		$	77
Net investment gains (losses) on investments arising during the period	(525		)		0				0				110				(415		)
Reclassification adjustment for (gains) losses included in net income	(71		)		0				0				15				(56		)
Reclassification adjustment for OTTI (gains) losses excluded from net income	(207		)		0				0				43				(164		)
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs	0				64				0				(13		)		51
Impact of net unrealized investment (gains) losses on future policy benefits, policyholders' account balances and other liabilities	0				0				(26		)		5				(21		)
Balance, June 30, 2019	$	(660	)		$	10			$	16			$	106			$	(528	)

(1)	"Other costs" primarily includes reinsurance recoverables and deferred reinsurance losses.

(2)	"Other liabilities" primarily includes reinsurance payables.

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

All Other Net Unrealized Investment Gains (Losses) in AOCI

	Net Unrealized Gains (Losses) on  Investments(2)				Deferred Policy Acquisition Costs and Other Costs(3)				Future Policy Benefits, Policyholders' Account Balances and Other Liabilities(4)				Deferred Income Tax (Liability) Benefit				Accumulated Other Comprehensive Income (Loss) Related To Net Unrealized Investment Gains (Losses)
	(in thousands)
Balance, December 31, 2018	$	(17,764	)		$	3,169			$	(2,472	)		$	3,612			$	(13,455	)
Net investment gains (losses) on investments arising during the period	93,168				0				0				(19,564		)		73,604
Reclassification adjustment for (gains) losses included in net income	4,375				0				0				(919		)		3,456
Reclassification adjustment for OTTI (gains) losses excluded from net income(1)	207				0				0				(43		)		164
Impact of net unrealized investment (gains) losses on deferred policy acquisition costs and other costs	0				4,552				0				(956		)		3,596
Impact of net unrealized investment (gains) losses on future policy benefits, policyholders' account balances and other liabilities	0				0				(8,676		)		1,822				(6,854		)
Balance, June 30, 2019	$	79,986			$	7,721			$	(11,148	)		$	(16,048	)		$	60,511

(1)	Represents "transfers out" related to the portion of OTTI losses recognized during the period that were not recognized in earnings for securities with no prior OTTI loss.

(2)	Includes cash flow hedges. See Note 4 for information on cash flow hedges.

(3)	"Other costs" primarily includes reinsurance recoverables and deferred reinsurance losses.

(4)	"Other liabilities" primarily includes reinsurance payables.

9.    RELATED PARTY TRANSACTIONS

The Company has extensive transactions and relationships with Prudential Insurance and other affiliates. Although we seek to ensure that these transactions and relationships are fair and reasonable, it is possible that the terms of these transactions are not the same as those that would result from transactions among unrelated parties.

Expense Charges and Allocations

Many of the Company’s expenses are allocations or charges from Prudential Insurance or other affiliates. These expenses can be grouped into general and administrative expenses and agency distribution expenses.

The Company’s general and administrative expenses are charged to the Company using allocation methodologies based on business production processes. Management believes that the methodology is reasonable and reflects costs incurred by Prudential Insurance to process transactions on behalf of the Company. The Company operates under service and lease agreements whereby services of officers and employees, supplies, use of equipment and office space are provided by Prudential Insurance. The Company reviews its allocation methodology periodically which it may adjust accordingly. General and administrative expenses include allocations of stock compensation expenses related to a stock-based awards program and a deferred compensation program issued by Prudential Financial. The expense charged to the Company for the stock-based awards program was $0.1 million for both the three and six months ended June 30, 2019 and 2018. The expense charged to the Company for the deferred compensation program was $0.1 million and $0.2 million for the three months ended June 30, 2019 and 2018, respectively, and $0.4 million and $0.5 million for the six months ended June 30, 2019 and 2018, respectively.

The Company is charged for its share of employee benefit expenses. These expenses include costs for funded and non-funded contributory and non-contributory defined benefit pension plans. Some of these benefits are based on final earnings and length of service while others are based on an account balance, which takes into consideration age, service and earnings during a career. The Company’s share of net expense for the pension plans was $0.6 million and $0.7 million for the three months ended June 30, 2019 and 2018, respectively, and $1 million for both the six months ended June 30, 2019 and 2018.

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

The Company is also charged for its share of the costs associated with welfare plans issued by Prudential Insurance. These expenses include costs related to medical, dental, life insurance and disability. The Company's share of net expense for the welfare plans was $0.7 million and $0.9 million for the three months ended June 30, 2019 and 2018, respectively, and $1 million and $2 million for the six months ended June 30, 2019 and 2018, respectively.

Prudential Insurance sponsors voluntary savings plans for its employee 401(k) plans. The plans provide for salary reduction contributions by employees and matching contributions by the Company of up to 4% of annual salary. The Company’s expense for its share of the voluntary savings plan was $0.3 million for both the three months ended June 30, 2019 and 2018, and $0.5 million and $0.6 million for the six months ended June 30, 2019 and 2018, respectively.

The Company is charged distribution expenses from Prudential Insurance’s agency network for both its domestic life and annuity products through a transfer pricing agreement, which is intended to reflect a market-based pricing arrangement.

The Company pays commissions and certain other fees to Prudential Annuities Distributors, Inc. (“PAD”) in consideration for PAD’s marketing and underwriting of the Company’s annuity products. Commissions and fees are paid by PAD to broker-dealers who sell the Company’s annuity products. Commissions and fees paid by the Company to PAD were $20 million and $18 million for the three months ended June 30, 2019 and 2018, respectively, and $39 million and $35 million for the six months ended June 30, 2019 and 2018, respectively.

The Company is charged for its share of corporate expenses incurred by Prudential Financial to benefit its businesses, such as advertising, executive oversight, external affairs and philanthropic activity. The Company’s share of corporate expenses was $2 million for both the three months ended June 30, 2019 and 2018, and $4 million for both the six months ended June 30, 2019 and 2018.

Corporate-Owned Life Insurance

The Company has sold three Corporate-Owned Life Insurance ("COLI") policies to Prudential Insurance and one to Prudential Financial. The cash surrender value included in separate accounts for these COLI policies was $2,603 million at June 30, 2019 and $2,239 million at December 31, 2018. Fees related to these COLI policies were $6 million for both the three months ended June 30, 2019 and 2018, and $13 million for both the six months ended June 30, 2019 and 2018. The Company retains 10% of the mortality risk associated with these COLI policies up to $0.1 million per individual policy.

Affiliated Investment Management Expenses

In accordance with an agreement with PGIM, Inc. (“PGIM”), the Company pays investment management expenses to PGIM who acts as investment manager to certain Company general account and separate account assets. Investment management expenses paid to PGIM related to this agreement were 0.6 million for both the three months ended June 30, 2019 and 2018, and $1 million for both the six months ended June 30, 2019 and 2018, respectively. These expenses are recorded as “Net investment income” in the Company's Unaudited Interim Statements of Operations and Comprehensive Income (Loss).

Derivative Trades

In its ordinary course of business, the Company enters into OTC derivative contracts with an affiliate, PGF. For these OTC derivative contracts, PGF has a substantially equal and offsetting position with an external counterparty. See Note 4 for additional information.

Joint Ventures

The Company has made investments in joint ventures with certain subsidiaries of Prudential Financial. "Other invested assets" includes $36 million and $33 million as of June 30, 2019 and December 31, 2018, respectively. "Net investment income" related to these ventures includes a gain of $0.8 million and $0.4 million for the three months ended June 30, 2019 and 2018, and $2 million and $1 million for the six months ended June 30, 2019 and 2018, respectively.

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

Affiliated Asset Administration Fee Income

The Company has a revenue sharing agreement with AST Investment Services, Inc. ("ASTISI") and PGIM Investments LLC ("PGIM Investments") whereby the Company receives fee income based on policyholders' separate account balances invested in the Advanced Series Trust. Income received from ASTISI and PGIM Investments related to this agreement was $8 million for both the three months ended June 30, 2019 and 2018, and $15 million for both the six months ended June 30, 2019 and 2018. These revenues are recorded as “Asset administration fees” in the Company's Unaudited Interim Statements of Operations and Comprehensive Income (Loss).

The Company has a revenue sharing agreement with PGIM Investments, whereby the Company receives fee income based on policyholders' separate account balances invested in The Prudential Series Fund. Income received from PGIM Investments related to this agreement was $1 million for both the three months ended June 30, 2019 and 2018, and $3 million for both the six months ended June 30, 2019 and 2018. These revenues are recorded as “Asset administration fees” in the Company’s Unaudited Interim Statements of Operations and Comprehensive Income (Loss).

Affiliated Notes Receivable

Affiliated notes receivable included in “Receivables from parent and affiliates” at June 30, 2019 and December 31, 2018 were as follows:

	Maturity Dates				Interest Rates					June 30, 2019				December 31, 2018
										(in thousands)
U.S. dollar floating rate notes	2028				3.74%	-	4.03	%		$	0			$	6,001
U.S. dollar fixed rate notes	2026	-	2027		0.00%	-	14.85	%		2,731				2,823
Total notes receivable - affiliated(1)										$	2,731			$	8,824

(1)	All notes receivable may be called for prepayment prior to the respective maturity dates under specified circumstances.

The affiliated notes receivable shown above are classified as available-for-sale securities and other trading assets carried at fair value. The Company monitors the internal and external credit ratings of these loans and loan performance. The Company also considers any guarantees made by Prudential Insurance for loans due from affiliates.

Accrued interest receivable related to these loans was $0.0 million and $0.1 million at June 30, 2019 and December 31, 2018, respectively, and is included in “Other assets”. Revenues related to these assets were $0.1 million for both the three months ended June 30, 2019 and 2018, and $0.1 million for both the six months ended June 30, 2019 and 2018, and are included in “Other income”.

Affiliated Asset Transfers

The Company participates in affiliated asset trades with parent and sister companies. Book and market value differences for trades with a parent and sister are recognized within "Additional paid-in capital" (“APIC”) and "Realized investment gains (losses), net", respectively. The table below shows affiliated asset trades for the six months ended June 30, 2019 and for the year ended December 31, 2018.

Affiliate		Date		Transaction		Security Type		Fair Value				Book Value				APIC, Net of Tax Increase/(Decrease)				Realized Investment Gain (Loss)
								(in thousands)
Gibraltar Universal Life Reinsurance Company		May 2018		Purchase		Fixed Maturities		$	17,904			$	17,904			$	0			$	0
Prudential Annuities Life Assurance Corporation		April 2019		Sale		Equity Securities		$	3,293			$	2,995			$	0			$	298

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

Debt Agreements

The Company is authorized to borrow funds up to $200 million from affiliates to meet its capital and other funding needs. As of June 30, 2019 and December 31, 2018, there was no debt outstanding.

The total interest expense to the Company related to loans payable to affiliates was $0.0 million for both the three months ended June 30, 2019 and 2018, and $0.0 million for both the six months ended June 30, 2019 and 2018.

Contributed Capital and Dividends

Through June 2019, the Company did not receive any capital contributions. In March 2018, the Company received a capital contribution in the amount of $1 million from Pruco Life.

Through June 2019, the Company did not pay any dividends. In 2018, the Company did not pay any dividends.

Reinsurance with Affiliates

As discussed in Note 6, the Company participates in reinsurance transactions with certain affiliates.

10.    COMMITMENTS AND CONTINGENT LIABILITIES

Commitments

The Company has made commitments to fund commercial mortgage loans. As of June 30, 2019, there were $8 million outstanding commitments to fund commercial loans, and none as of December 31, 2018. The Company has made commitments to purchase or fund investments, mostly private fixed maturities. As of June 30, 2019 and December 31, 2018, $44 million and $41 million, respectively, of these commitments were outstanding.

Contingent Liabilities

On an ongoing basis, the Company and its regulators review its operations including, but not limited to, sales and other customer interface procedures and practices, and procedures for meeting obligations to our customers and other parties. These reviews may result in the modification or enhancement of processes or the imposition of other action plans, including concerning management oversight, sales and other customer interface procedures and practices, and the timing or computation of payments to customers and other parties. In certain cases, if appropriate, the Company may offer customers or other parties remediation and may incur charges, including the cost of such remediation, administrative costs and regulatory fines.

The Company is subject to the laws and regulations of states and other jurisdictions concerning the identification, reporting and escheatment of unclaimed or abandoned funds, and is subject to audit and examination for compliance with these requirements.

It is possible that the results of operations or the cash flows 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 or other matters depending, in part, upon the results of operations or cash flows for such period. Management believes, however, that ultimate payments in connection with these matters, after consideration of applicable reserves and rights to indemnification, should not have a material adverse effect on the Company’s financial position.

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

Litigation and Regulatory Matters

The Company is subject to legal and regulatory actions in the ordinary course of its business. Pending legal and regulatory actions include proceedings specific to the Company and proceedings generally applicable to business practices in the industry in which it operates. The Company is subject to class action lawsuits and other litigation involving a variety of issues and allegations involving sales practices, claims payments and procedures, premium charges, policy servicing and breach of fiduciary duty to customers. The Company is also subject to litigation arising out of its general business activities, such as its investments, contracts, leases and labor and employment relationships, including claims of discrimination and harassment, and could be exposed to claims or litigation concerning certain business or process patents. In addition, the Company, along with other participants in the businesses in which it engages, may be subject from time to time to investigations, examinations and inquiries, in some cases industry-wide, concerning issues or matters upon which such regulators have determined to focus. In some of the Company’s pending legal and regulatory actions, parties are seeking large and/or indeterminate amounts, including punitive or exemplary damages. The outcome of litigation or a regulatory matter, and the amount or range of potential loss at any particular time, is often inherently uncertain.

The Company establishes accruals for litigation and regulatory matters when it is probable that a loss has been incurred and the amount of that loss can be reasonably estimated. For litigation and regulatory matters where a loss may be reasonably possible, but not probable, or is probable but not reasonably estimable, no accrual is established, but the matter, if material, is disclosed. The Company estimates that as of June 30, 2019, the aggregate range of reasonably possible losses in excess of accruals established for those litigation and regulatory matters for which such an estimate currently can be made is less than $10 million. This estimate is not an indication of expected loss, if any, or the Company's maximum possible loss exposure on such matters. The Company reviews relevant information with respect to its litigation and regulatory matters on a quarterly and annual basis and updates its accruals, disclosures and estimates of reasonably possible loss based on such reviews.

The following discussion of litigation and regulatory matters provides an update of those matters discussed in Note 14 to the Company’s Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, and should be read in conjunction with the complete descriptions provided in the Form 10-K.

Securities Lending and Foreign Tax Reclaim Matter

In 2016, Prudential Financial self-reported to the SEC and the U.S. Department of Labor ("DOL"), and notified other regulators, that in some cases it failed to maximize securities lending income for the benefit of certain separate account investments due to a long-standing restriction benefiting Prudential Financial that limited the availability of loanable securities. Prudential Financial has removed the restriction and implemented a remediation plan for the benefit of customers. As part of Prudential Financial’s review of this matter, in 2018 it further self-reported to the SEC, and notified other regulators, that in some cases it failed to timely process foreign tax reclaims for the separate account investments. Prudential Financial has corrected the foreign tax reclaim process and has implemented a remediation plan for the benefit of customers.

The DOL’s review of the securities lending matter is closed. Prudential Financial is cooperating with the SEC in its review of the securities lending and foreign tax reclaim matters (which includes a review of the remediation plans) and has entered into discussions with the SEC staff regarding a possible settlement of both matters that would potentially involve charges under the Investment Advisers Act and financial remedies. Prudential Financial cannot predict the outcome of the discussions with the SEC regarding these matters.

Summary

The Company’s litigation and regulatory matters are subject to many uncertainties, and given their complexity and scope, their outcome cannot be predicted. It is possible that the Company’s results of operations or cash flows in a particular quarterly or annual period could be materially affected by an ultimate unfavorable resolution of pending litigation and regulatory matters depending, in part, upon the results of operations or cash flows for such period. In light of the unpredictability of the Company’s litigation and regulatory matters, it is also possible that in certain cases an ultimate unfavorable resolution of one or more pending litigation or regulatory matters could have a material adverse effect on the Company’s financial position. Management believes, however, that, based on information currently known to it, the ultimate outcome of all pending litigation and regulatory matters, after consideration of applicable reserves and rights to indemnification, is not likely to have a material adverse effect on the Company’s financial position.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, or the “Company,” as of June 30, 2019, compared with December 31, 2018, and its results of operations for the three and six months ended June 30, 2019 and 2018. You should read the following analysis of our financial condition and results of operations in conjunction with the MD&A, the “Risk Factors” section, and the audited Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as well as the statements under “Forward-Looking Statements” and the Unaudited Interim Financial Statements included elsewhere in this Quarterly Report on Form 10-Q.

Overview

The Company is licensed to sell variable and fixed annuities, universal life insurance, variable life insurance and term life insurance in New Jersey and New York only and sells such products primarily through affiliated and unaffiliated distributors.

Regulatory Developments

SEC Best Interest Regulation

In June 2019, the SEC adopted a package of rulemakings and interpretative guidance that, among other things, requires broker-dealers to act in the best interest of retail customers when recommending securities transactions or investment strategies to them. The guidance also clarifies the SEC’s views of the fiduciary duty that investment advisers owe to their clients. The new best interest standards will become effective on June 30, 2020. We are evaluating the impact of the new standards and believe that they will apply to recommendations to purchase certain of our products, and will result in increased compliance costs, in particular in our Prudential Advisors distribution system.

SECURE Act

In May 2019, the U.S. House of Representatives passed the Setting Every Community up for Retirement Enhancement (“SECURE”) Act. If enacted into law in its current form, the SECURE Act would help promote retirement plan coverage by expanding access to and use of Multiple Employer Plans; facilitate access to lifetime income disclosures for plan participants to better understand how their retirement savings translate into monthly lifetime income in retirement; improve upon the current annuity selection safe harbor; and provide lifetime income portability. We cannot predict whether the SECURE Act will ultimately be adopted, or its impact on our business.

For additional information on the potential impacts of regulation on the Company see “Business—Regulation” and “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.

Impact of a Low Interest Rate Environment

As a financial services company, market interest rates are a key driver of our results of operations and financial condition. Changes in interest rates can affect our results of operations and/or our financial condition in several ways, including favorable or adverse impacts to:

• investment-related activity, including: investment income returns, net interest margins, net investment spread results,

new money rates, mortgage loan prepayments and bond redemptions;

• insurance reserve levels, market experience true-ups and amortization of deferred policy acquisition costs (“DAC”);

• customer account values, including their impact on fee income;

• product offerings, design features, crediting rates and sales mix; and

• policyholder behavior, including surrender or withdrawal activity.

Interest rates in the U.S. have experienced a period of historically low levels in large part due to Federal Reserve efforts to assist with the economic recovery subsequent to the financial crisis of 2008. While market conditions and events make uncertain the timing, amount and impact of any monetary policy decisions by the Federal Reserve, a trend of rising interest rates may enhance our reinvestment yields, primarily for our investments in fixed maturity securities and commercial mortgage loans. As interest rates rise, our reinvestment yield may approach or exceed the overall portfolio yield. Conversely, if interest rates were to decline, our reinvestment yield may fall below our overall portfolio yield, resulting in an unfavorable impact to earnings.

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For more information on interest rate risks, see “Risk Factors—Market Risk” included in our Annual Report on Form 10-K for the year ended December 31, 2018.

Revenues and Expenses

The Company earns revenues principally from insurance premiums, mortality and expense fees, asset administration fees from insurance and investment products, and from net investment income on the investment of general account and other funds. The Company receives premiums primarily from the sale of individual life insurance and annuity products. The Company earns mortality and expense fees, and asset administration fees, primarily from the sale and servicing of universal life insurance and separate account products including variable life insurance and variable annuities. The Company’s operating expenses principally consist of insurance benefits provided and reserves established for anticipated future insurance benefits, general business expenses, reinsurance premiums, commissions and other costs of selling and servicing the various products sold and interest credited on general account liabilities.

Profitability

The Company’s profitability depends principally on its ability to price our insurance and annuity products at a level that enables us to earn a margin over the costs associated with providing benefits and administering those products. Profitability also depends on, among other items, our actuarial and policyholder behavior experience on insurance and annuity products, our ability to attract and retain customer assets, generate and maintain favorable investment results, and manage expenses.

See “Risk Factors” in the Company's Annual Report on Form 10-K for the year ended December 31, 2018 for a discussion of risks that have materially affected and may affect in the future the Company’s business, results of operations or financial condition, or cause the Company’s actual results to differ materially from those expected or those expressed in any forward-looking statements made by or on behalf of the Company.

Accounting Policies & Pronouncements

Application of Critical Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP requires the application of accounting policies that often involve a significant degree of judgment. Management reviews estimates and assumptions used in the preparation of financial statements on an ongoing basis. If management determines that modifications in assumptions and estimates are appropriate given current facts and circumstances, the Company’s results of operations and financial position as reported in the Unaudited Interim Financial Statements could change significantly.

Management believes the accounting policies relating to the following areas are most dependent on the application of estimates and assumptions and require management’s most difficult, subjective, or complex judgments:

•	DAC and other costs, including deferred sales inducements (“DSI”);

•	Policyholder liabilities;

•	Valuation of investments, including derivatives, and the recognition of other-than-temporary impairments ("OTTI");

•	Reinsurance recoverables;

•	Taxes on income; and

•	Reserves for contingencies, including reserves for losses in connection with unresolved legal matters.

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Market Performance - Equity and Interest Assumptions

DAC and other costs associated with the variable and universal life policies and the variable and fixed annuity contracts are generally amortized over the expected lives of these policies in proportion to total gross profits. Total gross profits include both actual gross profits and estimates of gross profits for future periods. The quarterly adjustments for market performance reflect the impact of changes to our estimate of total gross profits to reflect actual fund performance and market conditions. A significant portion of gross profits for our variable annuity contracts and, to a lesser degree, our variable life policies are dependent upon the total rate of return on assets held in separate account investment options. This rate of return influences the fees we earn, costs we incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts, as well as other sources of profit. Returns that are higher than our expectations for a given period produce higher than expected account balances, which increase the future fees we expect to earn and decrease the future costs we expect to incur associated with the guaranteed minimum death and guaranteed minimum income benefit features related to our variable annuity contracts. The opposite occurs when returns are lower than our expectations. The changes in future expected gross profits are used to recognize a cumulative adjustment to all prior periods’ amortization.

Furthermore, the calculation of the estimated liability for future policy benefits related to certain insurance products includes an estimate of associated revenues and expenses that are dependent on both historical market performance as well as estimates of market performance in the future. Similar to DAC and other costs described above, these liabilities are subject to quarterly adjustments for experience including market performance, in addition to annual adjustments resulting from our annual reviews of assumptions.

The weighted average rate of return assumptions used in developing estimated market returns consider many factors specific to each business, including asset durations, asset allocations and other factors. With regard to equity market assumptions, the near-term future rate of return assumption used in evaluating DAC, other costs and liabilities for future policy benefits for certain of our products, primarily domestic variable annuity and variable life insurance products, is generally updated each quarter and is derived using a reversion to the mean approach, a common industry practice. Under this approach, we consider historical equity returns and adjust projected equity returns over an initial future period of five years (the “near-term”) so that equity returns converge to the long-term expected rate of return. If the near-term projected future rate of return is greater than our near-term maximum future rate of return of 15.0%, we use our maximum future rate of return. As of June 30, 2019, our variable annuities and variable life insurance businesses assume an 8.0% long-term equity expected rate of return and a 4.3% near-term mean reversion equity expected rate of return.

With regard to interest rate assumptions, we generally update the future interest rates used to project fixed income returns annually. As a result of our 2019 annual reviews and update of assumptions and other refinements, we kept our long-term expectation of the 10-year U.S. Treasury rate unchanged and continue to grade to a rate of 3.75% over ten years. As part of our market experience updates, in the second quarter of 2019, we updated our near-term projections of interest rates to reflect a decrease in current rates.

Adoption of New Accounting Pronouncements

See Note 2 to our Unaudited Interim Financial Statements for a discussion of newly adopted accounting pronouncements and accounting pronouncements issued but not yet adopted.

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Changes in Financial Position

June 30, 2019 versus December 31, 2018

Total assets increased $2,284 million, from $18,120 million at December 31, 2018 to $20,404 million at June 30, 2019. Significant components were:

•	Separate account assets increased $1,750 million primarily driven by favorable market performance and sales, partially offset by outflows to policyholders and policy charges.

•	Reinsurance recoverables increased $376 million, primarily related to the annuity reinsured living benefit liabilities resulting from an increase in future expected benefit payments driven by the decline in interest rates and non-performance risk ("NPR") spread tightening, partially offset by favorable equity markets, as well as, continued universal and term life business growth;

•	Total investments and cash and cash equivalents increased $200 million primarily driven by universal, term and variable life business growth and unrealized investment gains due to declining interest rates;

Total liabilities increased $2,190 million, from $17,675 million at December 31, 2018 to $19,865 million at June 30, 2019. Significant components were:    

•	Separate account liabilities increased $1,750 million, corresponding to the increase in separate account assets described above.

•	Future policy benefits increased $407 million primarily related to the variable annuity living benefit liabilities and universal and term life business growth, as discussed above.

•	Policyholders’ account balances increased $37 million primarily driven by universal life business growth.

Total equity increased $93 million from $445 million at December 31, 2018 to $539 million at June 30, 2019, primarily driven by unrealized investment gains due to the decline in interest rates and by after-tax income.

Results of Operations

Income (loss) from Operations before Income Taxes

2019 to 2018 Three Months Comparison

Income (loss) from operations before income taxes increased $3 million from $7 million for the three months ended June 30, 2018 to $10 million for the three months ended June 30, 2019. This was primarily driven by an increase in Policy charges and fee income as a result of business growth in the life business and by an increase in Net investment income primarily driven by higher income from non-coupon investments. This is partially offset by the unfavorable comparative net impacts from our annual reviews and update of assumptions and other refinements. The impact of this annual review for the second quarter of 2019 was not significant, and for the second quarter of 2018 was a $2 million net benefit, mainly driven by favorable impacts related to mortality and investment assumption updates.

2019 to 2018 Six Months Comparison.

 

Income from operations before income taxes increased $3 million from $18 million in the first six months of 2018 to $21 million in the first six months of 2019. This was primarily driven by favorable impact from deferred reinsurance activity in the annuities business and decrease in Amortization of deferred policy acquisition costs primarily driven by the impact of the internal Corporate-Owned Life Insurance ("COLI") restructure in the life business in the first quarter of 2018. This is partially offset by the unfavorable comparative net impacts from our annual reviews and update of assumptions and other refinements. The impact of this annual review for the second quarter of 2019 was not significant, and for the second quarter of 2018 was a $2 million net benefit, mainly driven by favorable impacts related to mortality and investment assumption updates.

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Revenues, Benefits and Expenses

2019 to 2018 Three Months Comparison

Revenues increased $2 million from $41 million for the three months ended June 30, 2018 to $43 million for the three months ended June 30, 2019. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues increased by $3 million. The increase is primarily driven by $3 million increase in policy charges and fee income driven by business growth in the life business, $2 million increase in Net investment income primarily driven by higher income from non-coupon investments and an increase of $1 million in Other income primarily driven by lower trading losses on fixed maturities and equities. This is partially offset by a decrease of $3 million in Realized investment gains (losses), net primarily driven by more fixed maturity losses.

Benefits and expenses remained flat with $34 million in both the three months ended June 30, 2018 and 2019. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses remained relatively flat. This is primarily driven by $1 million increase in Amortization of deferred policy acquisition costs driven by higher term amortization, higher interest credited to policyholders' account balances primarily driven by business growth in the life business. These increases are partially offset by a decrease in General, administrative and other expenses mainly driven by favorable impact from deferred reinsurance activity in the annuities business, as well as, lower premium taxes in the life business.

2019 to 2018 Six Months Comparison

Revenues remained flat with $82 million in both six months ended June 30, 2018 and 2019. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, revenues remained relatively flat as well. This is primarily driven by $4 million increase in Net investment income and an increase of $2 million in Other income, as discussed above. These increases were partially offset by a decrease of $2 million in Realized investment gains (losses), as discussed above, and lower policy charges and fee income primarily driven by lower amortization of unearned revenue reserve due to the internal COLI restructure in the life business in the first quarter of 2018.

Benefits and expenses decreased $4 million from $65 million for the six months ended June 30, 2018 to $61 million for the six months ended June 30, 2019. Excluding the impact of our annual reviews and update of assumptions and other refinements, as discussed above, benefits and expenses decreased by $3 million. This is primarily driven by $4 million decrease in General, administrative and other expenses primarily driven by favorable impact from deferred reinsurance activity in the annuities business, as well as, lower premium taxes in the life business and $4 million decrease in Amortization of deferred policy acquisition costs driven by the impact of the internal COLI restructure in the life business in the first quarter of 2018. This was partially offset by $2 million increase in Policyholders’ benefits primarily driven by less unfavorable mortality and an increase of $2 million in Interest credited to policyholders' account primarily driven by business growth in the life business.

Variable Annuity Risks and Risk Mitigants

The following is a summary of: (i) certain risks associated with individual annuity products and (ii) certain strategies in mitigating those risks, including any updates to those strategies since the previous year end. For a more detailed description of these items and their related accounting treatment, refer to the complete descriptions provided in our Annual Report on Form 10-K for the year ended December 31, 2018.

The primary risk exposures of our variable annuity contracts relate to actual deviations from, or changes to, the assumptions used in the original pricing of these products, including capital markets assumptions such as equity market returns, interest rates and market volatility, along with actuarial assumptions such as contractholder mortality, the timing and amount of annuitization and withdrawals, and contract lapses. For these risk exposures, achievement of our expected earnings and profitability is subject to the risk that actual experience will differ from the assumptions used in the original pricing of these products. Prudential Financial currently manages our exposure to certain risks driven by capital markets fluctuations primarily through a combination of product design features and an Asset Liability Management ("ALM") Strategy.

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Product Design Features

A portion of the variable annuity contracts that we offer include an asset transfer feature. This feature is implemented at the contract level, and transfers assets between certain variable investment sub-accounts selected by the annuity contractholder and, depending on the benefit feature, a fixed-rate account in the general account or a bond fund sub-account within the separate account. The objective of the asset transfer feature is to reduce our exposure to equity market risk and market volatility. The asset transfer feature associated with currently-sold highest daily living benefit products uses a designated bond fund sub-account within the separate account. The transfers are based on a static mathematical formula used with the particular benefit which considers a number of factors, including, but not limited to, the impact of investment performance on the contractholder’s total account value. Other product design features we utilize include, among others, asset allocation restrictions, minimum issuance age requirements and certain limitations on the amount of contractholder deposits, as well as a required minimum allocation to our general account for certain of our products. We have also introduced products that diversify our risk profile and have incorporated provisions in product design allowing frequent revisions of key pricing elements for certain products. In addition, there is diversity in our fee arrangements, as certain fees are primarily based on the benefit guarantee amount, the contractholder account value and/or premiums, which helps preserve certain revenue streams when market fluctuations cause account values to decline.

Asset Liability Management Strategy (including fixed income instruments and derivatives)

The current ALM strategy conducted within Prudential Insurance utilizes a combination of both traditional fixed income instruments and derivatives to defray potential claims associated with our variable annuity living benefit guarantees. The economic liability we manage with this ALM strategy consists of expected living benefit claims under less severe market conditions, which are managed using a traditional ALM strategy through the accumulation of fixed income and derivative instruments, and potential living benefit claims resulting from more severe market conditions, which are hedged using derivative instruments. For the portion of our ALM strategy executed with derivatives, Prudential Insurance enter into a range of exchange-traded, cleared, and over-the-counter (“OTC”) equity and interest rate derivatives, including, but not limited to: equity and treasury futures; total return and interest rate swaps; and options including equity options, swaptions, and floors and caps. Since the ALM strategy is conducted in Prudential Insurance, the results of the strategy do not directly impact the Company's results of operations or financial condition.

Income Taxes

For information regarding income taxes, see Note 7 to the Unaudited Interim Financial Statements.

Liquidity and Capital Resources

This section supplements and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” included in our Annual Report on Form 10-K for the year ended December 31, 2018.

Overview

Liquidity refers to the ability to generate sufficient cash resources to meet the payment obligations of the Company. Capital refers to the long-term financial resources available to support the operations of our business, fund business growth, and provide a cushion to withstand adverse circumstances. Our ability to generate and maintain sufficient liquidity and capital depends on the profitability of our business, general economic conditions, our ability to borrow from affiliates and our access to the capital markets through affiliates as described herein.

Effective and prudent liquidity and capital management is a priority across the organization. Management monitors the liquidity of Prudential Financial, Prudential Insurance and the Company on a daily basis and projects borrowing and capital needs over a multi-year time horizon through our periodic planning process. We believe that cash flows from the sources of funds available to us are sufficient to satisfy the current liquidity requirements of Prudential Insurance, Prudential Financial and the Company, including under reasonably foreseeable stress scenarios. Prudential Financial has a capital management framework in place that governs the allocation of capital and approval of capital uses.

Our businesses are subject to comprehensive regulation and supervision by domestic and international regulators. These regulations currently include, or may include in the future requirements and limitations (many of which are the subject of ongoing rule-making) relating to capital, leverage, liquidity, stress-testing, overall risk management, credit exposure reporting and credit concentration. For information on these regulatory initiatives and their potential impact on us, see “Business—Regulation” and “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2018.

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Capital

Our capital management framework is primarily based on statutory Risk-Based Capital ("RBC") measures. The RBC ratio is a primary measure of the capital adequacy of the Company. RBC is calculated based on statutory financial statements and risk formulas consistent with the practices of the National Association of Insurance Commissioners ("NAIC"). RBC considers, among other things, risks related to the type and quality of the invested assets, insurance-related risks associated with an insurer’s products and liabilities, interest rate risks and general business risks. RBC ratio calculation is intended to assist insurance regulators in measuring an insurer’s solvency and ability to pay future claims. The reporting of RBC measures is not intended for the purpose of ranking any insurance company or for use in connection with any marketing, advertising or promotional activities, but is available to the public. The Company’s capital levels substantially exceed the minimum level required by applicable insurance regulations. Our regulatory capital levels may be affected in the future by changes to the applicable regulations, proposals for which are currently under consideration by both domestic and international insurance regulators.

The regulatory capital level of the Company can be materially impacted by interest rate and equity market fluctuations, changes in the values of derivatives, the level of impairments recorded, and credit quality migration of the investment portfolio, among other items. In addition, the reinsurance of business or the recapture of business subject to reinsurance arrangements due to defaults by, or credit quality migration affecting, the reinsurers or for other reasons could negatively impact regulatory capital levels. The Company’s regulatory capital level is also affected by statutory accounting rules, which are subject to change by each applicable insurance regulator.

Capital Protection Framework

Prudential Financial and the Company employ a Capital Protection Framework (the "Framework”) to ensure that sufficient capital resources are available to maintain adequate capitalization and competitive RBC ratio and solvency margins under various stress scenarios. The Framework incorporates the potential impacts from market related stresses, including equity markets, real estate, interest rates, credit losses and foreign currency exchange rates.

The Framework accommodates periodic volatility within ranges that we deem acceptable, while also providing for additional potential sources of capital, including on-balance sheet capital, capacity, and contingent sources of capital. We believe we currently have access to sufficient resources, either directly, or indirectly through Prudential Financial, to maintain adequate capitalization.

Affiliated Captive Reinsurance Companies

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital—Affiliated Captive Reinsurance Companies” included in our Annual Report on Form 10-K for the year ended December 31, 2018, for a discussion of our use of captive reinsurance companies.

Liquidity

Our liquidity is managed to ensure stable, reliable and cost-effective sources of cash flows to meet all of our obligations. Liquidity is provided by a variety of sources, as described more fully below, including portfolios of liquid assets. Our investment portfolios are integral to the overall liquidity of the Company. We use a projection process for cash flows from operations to ensure sufficient liquidity to meet projected cash outflows, including claims. The impact of Prudential Funding, LLC ("Prudential Funding"), a wholly-owned subsidiary of Prudential Insurance, financing capacity on liquidity is considered in the internal liquidity measures of the Company.

Liquidity is measured against internally-developed benchmarks that take into account the characteristics of both the asset portfolio and the liabilities that they support. We consider attributes of the various categories of liquid assets (for example, type of asset and credit quality) in calculating internal liquidity measures to evaluate our liquidity under various stress scenarios, including company-specific and market-wide events. We continue to believe that cash generated by ongoing operations and the liquidity profile of our assets provide sufficient liquidity under reasonably foreseeable stress scenarios.

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Cash Flow

The principal sources of the Company’s liquidity are premiums and certain annuity considerations, investment and fee income, investment maturities, sales of investments and internal borrowings. The principal uses of that liquidity include benefits, claims, and payments to policyholders and contractholders in connection with surrenders, withdrawals and net policy loan activity. Other uses of liquidity include commissions, general and administrative expenses, purchases of investments, the payment of dividends and returns of capital to the parent company, hedging and reinsurance activity and payments in connection with financing activities.

Liquid Assets

Liquid assets include cash and cash equivalents, short-term investments, U.S. Treasury fixed maturities, and fixed maturities that are not designated as held-to-maturity and public equity securities. As of June 30, 2019 and December 31, 2018, the Company had liquid assets of $(7) million and $(13) million, respectively. The portion of liquid assets comprised of cash and cash equivalents and short-term investments was $(61) million and $(68) million as of June 30, 2019 and December 31, 2018, respectively. As of June 30, 2019, $1,370 million, or 95%, of the fixed maturity investments in company general account portfolios, were rated high or highest quality based on NAIC or equivalent rating.

Term and Universal Life Reserve Financing

The Company uses affiliated captive reinsurance companies to finance the portion of the statutory reserves required to be held under Regulation XXX and Guideline AXXX that is considered to be non-economic. The financing arrangements involve the reinsurance of term and universal life business to our affiliated captive reinsurers and the issuance of surplus notes by those affiliated captives that are treated as capital for statutory purposes. These surplus notes are subordinated to policyholder obligations, and the payment of principal and interest on the surplus notes can only be made with prior insurance regulatory approval.

As of June 30, 2019, the affiliated captive reinsurance companies have entered into agreements with external counterparties providing for the issuance of up to an aggregate of $13.7 billion of surplus notes by our affiliated captive reinsurers in return for the receipt of credit-linked notes (“Credit-Linked Note Structures”), of which $11.5 billion of surplus notes was outstanding as of June 30, 2019. Under the agreements, the affiliated captive receives in exchange for the surplus notes one or more credit-linked notes issued by a special-purpose affiliate of the Company with an aggregate principal amount equal to the surplus notes outstanding. The affiliated captive holds the credit-linked notes as assets supporting Regulation XXX or Guideline AXXX non-economic reserves, as applicable. For more information on the Credit-Linked Note Structures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Financing Activities” in the Annual Report on Form 10-K for the year ended December 31, 2018.

As of June 30, 2019, our affiliated captive reinsurance companies had outstanding an aggregate of $2.3 billion of debt issued for the purpose of financing Regulation XXX and Guideline AXXX non-economic reserves, of which approximately $0.6 billion relates to Regulation XXX reserves and approximately $1.7 billion relates to Guideline AXXX reserves. In addition, as of June 30, 2019, for purposes of financing Guideline AXXX reserves, our affiliated captives had outstanding approximately $4.0 billion of surplus notes that were issued to affiliates.

The Company has introduced updated versions of several products in its individual life product portfolio in conjunction with the requirement to adopt principle-based reserving by January 1, 2020. During 2017, the Company adopted principle-based reserving for its guaranteed universal life products and introduced updated versions of these products. The guaranteed universal life updated products support the principle-based statutory reserve level without the need for captive reserve financing. The Company is continuing to assess the impact of current and proposed amendments to principle-based reserving on projected statutory reserve levels and product pricing. The Company is on track to adopt principle-based reserving for its remaining portfolio of individual life product offerings by January 1, 2020.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of fluctuations in the value of financial instruments as a result of absolute or relative changes in interest rates, foreign currency exchange rates, equity prices or commodity prices. To varying degrees, our products and services, and the investment activities supporting them, generate exposure to market risk. The market risk incurred, and our strategies for managing this risk, vary by product. As of June 30, 2019, there have been no material changes in our economic exposure to market risk from December 31, 2018, a description of which may be found in our Annual Report on Form 10-K for the year ended December 31, 2018, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” filed with the SEC. See Item 1A, “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2018, for a discussion of how difficult conditions in the financial markets and the economy generally may materially adversely affect our business and results of our operations.

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PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY

Notes to Unaudited Interim Financial Statements—(Continued)

    

Item 4. Controls and Procedures

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 Securities Exchange Act of 1934, as amended (“Exchange Act”) Rule 13a-15(e), as of June 30, 2019. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2019, our disclosure controls and procedures were effective. No change in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), occurred during the quarter ended June 30, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

See Note 10 to the Unaudited Interim Financial Statements under “—Litigation and Regulatory Matters” for a description of certain pending litigation and regulatory matters affecting us, and certain risks to our business presented by such matters, which is incorporated herein by reference.

Item 1A. Risk Factors

You should carefully consider the risks described under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018. These risks could materially affect our business, results of operations or financial condition or cause our actual results to differ materially from those expected or those expressed in any forward-looking statements made by or on behalf of the Company. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” above and the risks of our business described elsewhere in this Quarterly Report on Form 10-Q.

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Item 6. Exhibits

EXHIBIT INDEX

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

101.INS - XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH - XBRL Taxonomy Extension Schema Document.

101.CAL - XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB - XBRL Taxonomy Extension Label Linkbase Document

101.PRE - XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF - XBRL Taxonomy Extension Definition Linkbase Document

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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 authorized.

	Pruco Life Insurance Company of New Jersey
	By:		/s/ John Chieffo
	Name:		John Chieffo
			Vice President and Chief Financial Officer
			(Authorized Signatory and Principal Financial Officer)

Date: August 13, 2019

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