DISCOVERY SELECT(R)
- --------------------------------------------------------------------------------
VARIABLE ANNUITY
- --------------------------------------------------------------------------------
PROSPECTUS: MAY 1, 1999
THIS PROSPECTUS DESCRIBES AN INDIVIDUAL VARIABLE ANNUITY CONTRACT OFFERED BY
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY (PRUCO LIFE OF NEW JERSEY). PRUCO
LIFE OF NEW JERSEY IS A WHOLLY OWNED SUBSIDIARY OF THE PRUDENTIAL INSURANCE
COMPANY OF AMERICA.
THE FUNDS
- --------------------------------------
Discovery Select offers a wide variety of investment choices, including 24
variable investment options that invest in mutual funds managed by these leading
asset managers.
PRUDENTIAL INVESTMENTS
AIM ADVISORS
AMERICAN CENTURY
FRANKLIN ADVISERS
JANUS CAPITAL
MFS
OPPENHEIMER CAPITAL
T. ROWE PRICE
WARBURG PINCUS
PLEASE READ THIS PROSPECTUS
- --------------------------------------
Please read this prospectus before purchasing a Discovery Select variable
annuity contract and keep it for future reference. Current prospectuses for each
of the underlying mutual funds accompany this prospectus. These prospectuses
contain important information about the mutual funds. Please read these
prospectuses and keep them for reference.
TO LEARN MORE ABOUT DISCOVERY SELECT
- --------------------------------------
To learn more about the Discovery Select variable annuity, you can request a
copy of the Statement of Additional Information (SAI) dated May 1, 1999. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is legally
a part of this prospectus. The SEC maintains a Web site (http://www.sec.gov)
that contains the Discovery Select SAI, material incorporated by reference, and
other information regarding registrants that file electronically with the SEC.
The Table of Contents of the SAI is on Page 30 of this prospectus.
FOR A FREE COPY OF THE SAI CALL US AT:
- --------------------------------------
O (888) PRU-2888 or write to us at:
O Pruco Life Insurance Company of New Jersey
213 Washington Street
Newark, New Jersey 07102-2992
O Prudential Annuity Service Center
P.O. Box 14215
New Brunswick, New Jersey 08906
THE SEC HAS NOT DETERMINED THAT THIS CONTRACT IS A GOOD INVESTMENT, NOR HAS THE
SEC DETERMINED THAT THIS PROSPECTUS IS COMPLETE OR ACCURATE. IT IS A CRIMINAL
OFFENSE TO STATE OTHERWISE. INVESTMENT IN A VARIABLE ANNUITY CONTRACT IS SUBJECT
TO RISK, INCLUDING THE POSSIBLE LOSS OF YOUR MONEY. AN INVESTMENT IN DISCOVERY
SELECT IS NOT A BANK DEPOSIT AND IS NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
1
<PAGE>
CONTENTS
- --------------------------------------------------------------------------------
PART I: DISCOVERY SELECT PROSPECTUS
- -------------------------------------
SUMMARY
Glossary..........................................4
Summary ..........................................5
Summary of Contract Expenses......................7
Expense Examples..................................9
PART II: DISCOVERY SELECT PROSPECTUS
- -------------------------------------
SECTIONS 1-9
Section 1: What is the Discovery Select
Variable Annuity?................................12
Short Term Cancellation Right or "Free Look".....12
Section 2: What Investment Options
Can I Choose.....................................13
Variable Investment Options......................13
Fixed Interest-Rate Options......................14
Transfers Among Options..........................14
Dollar Cost Averaging............................14
Asset Allocation Program.........................15
Auto-Rebalancing.................................15
Voting Rights....................................15
Substitution.....................................15
Section 3: What Kind of Payments Will I Receive
During the Income Phase?(Annuitization)..........16
Payment Provisions...............................16
Option 1: Annuity Payments for a
Fixed Period................................16
Option 2: Life Annuity with 120 Payments
(10 Years) Certain..........................16
Option 3: Interest Payment Option................16
Option 4: Other Annuity Options..................16
Section 4: What is the Death Benefit?............17
Beneficiary......................................17
Calculation of the Death Benefit.................17
Section 5: How Can I Purchase a Discovery
Select Contract?.................................18
Purchase Payments................................18
Allocation of Purchase Payments..................18
Calculating Contract Value.......................18
Section 6: What are the Expenses Associated
with the Discovery Select Contract?..............19
Insurance Charges................................19
Annual Contract Fee..............................19
Withdrawal Charge................................19
Premium Taxes....................................20
Transfer Fee.....................................20
Company Taxes....................................20
Section 7: How Can I Access My Money?............21
Automated Withdrawals............................21
Suspension of Payments or Transfers..............21
Section 8: What are the Tax Considerations
Associated with the Discovery Select Contract?...22
Taxes Payable by You.............................22
Taxes on Withdrawals and Surrender...............22
Taxes on Annuity Payments........................22
Penalty Taxes on Withdrawals and
Annuity Payments ...........................22
Taxes Payable by Beneficiaries...................23
Withholding of Tax from Distributions............23
Annuity Qualification............................23
Diversification and Investor Control.............23
Required Distributions Upon Your Death...........23
Changes in the Contract..........................23
Additional Information...........................23
Contracts Held by Tax Favored Plans..............23
Section 9: Other Information.....................28
Pruco Life Insurance Company of New Jersey.......28
The Separate Account.............................28
Experts..........................................28
Sale of the Contract and Distributor.............28
Assignment.......................................29
Financial Statements.............................29
Year 2000 Compliance.............................29
Statement of Additional Information..............30
Accumulation Unit Values.........................31
Market-Value Adjustment Formula..................33
PART III: DISCOVERY SELECT PROSPECTUS
- -------------------------------------
ADDITIONAL FINANCIAL INFORMATION
Further Information About Pruco Life of
New Jersey.................................A-1
Pruco Life of New Jersey Financial
Information................................B-1
PART IV: VARIABLE INVESTMENT OPTIONS'
- -------------------------------------
PROSPECTUSES
The Prudential Series Fund
AIM Variable Insurance Funds, Inc.
American Century Variable Portfolios, Inc.
Janus Aspen Series
MFS Variable Insurance Trust
OCC Accumulation Trust
Templeton Variable Products Series Fund
T. Rowe Price
Warburg Pincus Trust
2
<PAGE>
PART I SUMMARY
- --------------------------------------------------------------------------------
DISCOVERY SELECT PROSPECTUS
3
<PAGE>
GLOSSARY
- --------------------------------------------------------------------------------
WE HAVE TRIED TO MAKE THIS PROSPECTUS AS EASY TO READ AND UNDERSTAND AS
POSSIBLE. BY THE NATURE OF THE CONTRACT, HOWEVER, CERTAIN TECHNICAL WORDS OR
TERMS ARE UNAVOIDABLE. WE HAVE IDENTIFIED THE FOLLOWING AS SOME OF THESE WORDS
OR TERMS.
ACCUMULATION PHASE
The period that begins with the contract date (see below definition) and ends
when you start receiving income payments or earlier if the contract is
terminated through a full withdrawal or payment of a death benefit.
ANNUITANT
The person whose life determines how long the contract lasts and the amount of
income payments that will be paid.
ANNUITY DATE
The date when income payments are scheduled to begin.
BENEFICIARY
The person(s) or entity you have chosen to receive a death benefit.
CASH VALUE
This is the total value of your contract minus any withdrawal charge(s) or
market-value adjustment, if applicable.
CONTRACT DATE
The date we receive your initial purchase payment and all necessary paperwork in
good order at the Prudential Annuity Service Center. Contract anniversaries are
measured from the contract date. A contract year starts on the contract date or
on a contract anniversary.
CONTRACTOWNER, OWNER OR YOU
The person entitled to the ownership rights under the contract.
CONTRACT VALUE
The total value of the amounts in a contract allocated to the variable
investment options and the interest rate options as of a particular date.
DEATH BENEFIT
If the sole or last surviving annuitant dies, the designated person(s) or the
beneficiary, will receive, at a minimum, the total amount invested or a
potentially greater amount related to market appreciation. See "What is the
Death Benefit?" on page 17.
INCOME OPTIONS
Options under the contract that define the frequency and duration of income
payments. In your contract, these are referred to as payout or annuity options.
INTEREST-RATE OPTION
An investment option that offers a fixed-rate of interest for either a one-year
(fixed-rate option) or a seven-year period (market-value adjustment option).
PURCHASE PAYMENTS
The amount of money you pay us to purchase the contract. Generally, you can make
additional purchase payments at any time during the accumulation phase.
PRUDENTIAL ANNUITY SERVICE CENTER
P.O. Box 14215, New Brunswick, New Jersey, 08906. The phone number is
1-888-PRU-2888.
SEPARATE ACCOUNT
Purchase payments allocated to the variable investment options are held by us in
a separate account called the Pruco Life of New Jersey Flexible Premium Variable
Annuity Account. The Separate Account is set apart from all of the general
assets of Pruco Life of New Jersey.
TAX DEFERRAL
This is a way to increase your assets without currently being taxed. You do not
pay taxes on your contract earnings until you take money out of your contract.
VARIABLE INVESTMENT OPTION
When you choose a variable investment option, we purchase shares of the mutual
fund which are held as an investment for that option. We hold these shares in
the Separate Account. The division of the Separate Account of Pruco Life of New
Jersey that invests in a particular mutual fund is referred to in your contract
as a subaccount.
- --------------------------------------------------------------------------------
4
<PAGE>
SUMMARY OF SECTIONS 1-9
- --------------------------------------------------------------------------------
FOR A MORE COMPLETE DISCUSSION OF THE FOLLOWING TOPICS, SEE THE CORRESPONDING
SECTION IN THE PROSPECTUS.
SECTION 1
WHAT IS THE DISCOVERY SELECT VARIABLE ANNUITY?
This variable annuity contract, offered by Pruco Life of New Jersey, is a
contract between you, as the owner, and us. The contract allows you to invest on
a tax-deferred basis in one or more of 24 variable investment options. There are
also two fixed interest rate options which are available in most states. The
contract is intended for retirement savings or other long-term investment
purposes and provides a death benefit and guaranteed income options.
The variable investment options are designed to offer the opportunity over
the long term for a better return than the fixed interest rate option. However,
this is NOT guaranteed. It is possible, due to market changes, that your
investments may decrease in value.
The fixed interest-rate options offer an interest rate that is guaranteed.
While your money is in the fixed account, you principal amount is guaranteed and
the interest amount that your money will earn guaranteed by us to always be at
least 3.0%.
You can invest your money in any or all of the variable investment options
and the interest-rate options. You are allowed 12 transfers each contract year
among the variable investment options, without a charge. There are certain
restrictions on transfers involving the interest-rate options.
The contract, like all deferred annuity contracts, has two phases: the
accumulation phase and the income phase. During the accumulation phase, earnings
grow on a tax-deferred basis and are taxed as income when you make a withdrawal.
The income phase starts when you begin receiving regular payments from your
contract. The amount of money you are able to accumulate in your contract during
the accumulation phase will help determine the amount of payments you will
receive during the income phase. Other factors will affect the amount of your
payments such as, age, gender and payout option you selected.
FREE LOOK. If you change your mind about owning Discovery Select, you may cancel
your contract within 10 days after receiving it (or whatever time period is
required in the state where the contract was issued).
SECTION 2
WHAT INVESTMENT OPTIONS CAN I CHOOSE?
You can invest your money in any or all of the variable investment options that
invest in the mutual funds described in the fund prospectuses provided with this
prospectus:
THE PRUDENTIAL SERIES FUND
Diversified Bond Portfolio
Diversified Conservative Growth Portfolio
Equity Income Portfolio Equity Portfolio
Global Portfolio
High Yield Bond Portfolio
Money Market Portfolio
Prudential Jennison Portfolio
Small Capitalization Stock Portfolio
Stock Index Portfolio
20/20 Focus Portfolio
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Growth and Income Fund
AIM V.I. Value Fund
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
American Century VP Value
JANUS ASPEN SERIES
Growth Portfolio
International Growth Portfolio
MFS VARIABLE INSURANCE TRUST
Emerging Growth Series
Research Series
OCC ACCUMULATION TRUST
Managed Portfolio
Small Cap Portfolio
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Franklin Small Cap Investments Fund - Class 2
T.ROWE PRICE
Equity Series - Equity Income Portfolio
International Series - International Stock Portfolio
WARBURG PINCUS TRUST
Post-Venture Capital Portfolio
- --------------------------------------------------------------------------------
5
<PAGE>
SUMMARY OF SECTIONS 1-9 CONTINUED
- --------------------------------------------------------------------------------
Depending upon market conditions, you may earn or lose money in any of these
options. The value of your contract will fluctuate depending upon the investment
performance of the mutual funds used by the variable investment options you
choose. Performance information for the variable investment options is provided
in the Statement of Additional Information (SAI). Past performance is not a
guarantee of future results.
You can also put your money into one or both of the fixed interest-rate
options.
SECTION 3
WHAT KIND OF PAYMENTS WILL I RECEIVE DURING THE
INCOME PHASE? (ANNUITIZATION)
If you want to receive regular income from your annuity, you can choose one of
several options, including guaranteed payments for the annuitant's lifetime.
Once you begin receiving regular payments, you cannot change your payment plan.
SECTION 4
WHAT IS THE DEATH BENEFIT?
If the sole or last surviving annuitant dies the designated person(s) or the
beneficiary will receive at a minimum, the total amount invested or a
potentially greater amount related to market appreciation.
SECTION 5
HOW CAN I PURCHASE A DISCOVERY SELECT ANNUITY CONTRACT?
You can purchase this contract, under most circumstances, with a minimum initial
purchase payment of $10,000. You can add $1,000 or more at any time during the
accumulation phase of the contract. Your representative can help you fill out
the proper forms.
SECTION 6
WHAT ARE THE EXPENSES ASSOCIATED WITH THE DISCOVERY SELECT CONTRACT?
The contract has insurance features and investment features, and there are costs
related to each.
Each year we deduct a $30 contract maintenance charge if your contract value
is less than $50,000. For insurance and administrative costs, we also deduct an
annual charge of 1.40% of the average daily value of all assets allocated to the
variable investment options. This charge is not assessed against amounts
allocated to the interest-rate investment options.
There are a few states/jurisdictions that assess a premium tax when you
begin receiving regular income payments from your annuity. In those states, we
will assess the required premium tax charge which can range up to 5%.
There are also charges associated with the mutual funds. The annual charges
currently of the mutual funds range from 0.37% to 1.40% of a fund's assets.
SECTION 7
HOW CAN I ACCESS MY MONEY?
You may take money out at any time during the accumulation phase. Each year, you
withdraw up to 10% of your total purchase payments without charge. Withdrawals
greater than 10% of your purchase payments will be subject to a withdrawal
charge. This charge decreases 1% each year. After the 7th year, there is no
charge for a withdrawal. You may also be subject to income tax and a tax penalty
if you make an early withdrawal.
SECTION 8
WHAT ARE THE TAX CONSIDERATIONS ASSOCIATED WITH
THE DISCOVERY SELECT CONTRACT?
Your earnings are not taxed until withdrawn. If you take money out during the
accumulation phase, purchase payments are withdrawn first and are taxed as
income. If you are younger than 59-1/2 when you take money out, you may be
charged a 10% federal tax penalty on the earnings in addition to ordinary
taxation. A portion of the payments you receive during the income phase is
considered partly a return of your original investment. As a result, that
portion of each payment is not taxable as income. Generally, all amounts
withdrawn from IRA contracts are fully taxable and subject to the 10% penalty if
withdrawn prior to age 59-1/2.
SECTION 9
OTHER INFORMATION
This contract is issued by Pruco Life of New Jersey, a subsidiary of The
Prudential Insurance Company of America.
- --------------------------------------------------------------------------------
6
<PAGE>
SUMMARY OF CONTRACT EXPENSES
- --------------------------------------------------------------------------------
THE PURPOSE OF THIS SUMMARY IS TO HELP YOU TO UNDERSTAND THE COSTS YOU WILL PAY
FOR DISCOVERY SELECT. THIS SUMMARY INCLUDES THE EXPENSES OF THE MUTUAL FUNDS
USED BY THE VARIABLE INVESTMENT OPTIONS BUT DOES NOT INCLUDE ANY PREMIUM TAXES
THAT MIGHT BE APPLICABLE IN YOUR STATE.
FOR MORE DETAILED INFORMATION:
More detailed information can be found on page 19 under the section called,
"What Are The Expenses Associated With The Discovery Select Variable Annuity?"
For more detailed expense information about the mutual funds, please refer to
the individual fund prospectuses which you will find at the back of this
prospectus.
TRANSACTION EXPENSES
- --------------------------------------------------------------
WITHDRAWAL CHARGE (SEE NOTE 1 BELOW)
- --------------------------------------------------------------
During contract year 1 7%
During contract year 2 6%
During contract year 3 5%
During contract year 4 4%
During contract year 5 3%
During contract year 6 2%
During contract year 7 1%
TRANSFER FEE (SEE NOTE 2 BELOW)
- --------------------------------------------------------------
first 12 transfers per year $ 0.00
each transfer after 12 $ 25.00
ANNUAL CONTRACT FEE AND FULL WITHDRAWAL FEE (SEE NOTE 3 BELOW)
- --------------------------------------------------------------
$ 30.00
ANNUAL ACCOUNT EXPENSES
- --------------------------------------------------------------
AS A PERCENTAGE OF THE AVERAGE ACCOUNT VALUE
Mortality and Expense Risk: 1.25%
Administrative Fee: 0.15%
Total: 1.40%
NOTE 1: AS OF THE BEGINNING OF THE CONTRACT YEAR, YOU MAY WITHDRAW UP TO 10% OF
THE TOTAL PURCHASE PAYMENTS PLUS ANY CHARGE-FREE AMOUNT CARRIED OVER FROM THE
PREVIOUS CONTRACT YEAR WITHOUT CHARGE. THERE IS NO WITHDRAWAL CHARGE ON ANY
WITHDRAWALS MADE UNDER THE CRITICAL CARE ACCESS OPTION (SEE PAGE __) OR ON ANY
AMOUNT USED TO PROVIDE INCOME UNDER THE LIFE ANNUITY WITH 120 PAYMENTS (10
YEARS) CERTAIN OPTION. (SEE PAGE 16). SURRENDER CHARGES ARE WAIVED WHEN A DEATH
BENEFIT IS PAID.
NOTE 2: YOU WILL NOT BE CHARGED FOR TRANSFERS MADE IN CONNECTION WITH DOLLAR
COST AVERAGING AND AUTO-REBALANCING
NOTE 3: THERE IS NO CHARGE ON WITHDRAWALS IF THE VALUE OF YOUR CONTRACT IS
$50,000 OR MORE.
NOTES FOR ANNUAL MUTUAL FUND EXPENSES:
THESE EXPENSES ARE BASED ON THE HISTORICAL FUND EXPENSES FOR THE YEAR ENDED
DECEMBER 31, 1998, EXCEPT AS INDICATED. FUND EXPENSES ARE NOT FIXED OR
GUARANTEED BY THE DISCOVERY SELECT CONTRACT AND MAY VARY FROM YEAR TO YEAR.
(1) THE PRUDENTIAL SERIES FUND
BECAUSE THIS IS THE FIRST YEAR OF OPERATION FOR DIVERSIFIED CONSERVATIVE GROWTH
PORTFOLIO AND THE 20/20 FOCUS PORTFOLIO, OTHER EXPENSES ARE ESTIMATED BASED ON
MANAGEMENT'S PROJECTION OF NON-MANAGEMENT FEE EXPENSES.
(2) AMERICAN CENTURY VARIABLE PORTFOLIOS INC. AND T. ROWE PRICE FUNDS
INVESTMENT MANAGEMENT FEES INCLUDE ORDINARY EXPENSES OF OPERATING THE FUNDS.
(3) JANUS ASPEN SERIES
FEE REDUCTIONS REDUCE THE INVESTMENT MANAGEMENT FEE TO THE LEVELS OF THE
CORRESPONDING JANUS RETAIL FUND. JANUS HAS AGREED TO CONTINUE THE APPLICABLE
WAIVERS AND FEE REDUCTIONS UNTIL AT LEAST THE NEXT ANNUAL RENEWAL OF THE
ADVISORY AGREEMENT.
(4) TEMPLETON VARIABLE PRODUCTS SERIES FUND
FIGURES REFLECT EXPENSES FROM THE FUND'S INCEPTION ON MAY 1, 1998 AND ARE
ANNUALIZED. THE MANAGER AGREED IN ADVANCE TO LIMIT MANAGEMENT FEES AND MAKE
CERTAIN PAYMENTS TO REDUCE THE FUND'S EXPENSES AS NECESSARY SO THAT TOTAL ACTUAL
EXPENSES DID NOT EXCEED 1.25% OF THE FUND'S CLASS 2 NET ASSETS IN 1998. THE
MANAGER IS CONTRACTUALLY OBLIGATED TO CONTINUE THIS ARRANGEMENT THROUGH 1999.
INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES IN 1998 AFTER THESE WAIVERS WERE
0.15% AND 1.25%. THE FUND MAINTAINS A DISTRIBUTION OR "12B-1 PLAN" FOR CLASS 2
WITH A MAXIMUM ANNUAL OF 0.25% WHICH IS INCLUDED IN OTHER EXPENSES AND IS
DISCUSSED IN THE FUND'S PROSPECTUS.
(5) WARBURG PINCUS TRUST
ACTUAL FEES AND EXPENSES FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 WERE 1.08%
AND 0.32% FOR INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES, RESPECTIVELY. FEE
WAIVERS AND EXPENSE REIMBURSEMENT OR CREDITS REDUCED FEES AND EXPENSES DURING
1998 BUT MAY BE DISCONTINUED AT ANY TIME.
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
ANNUAL MUTUAL FUND EXPENSES (AFTER REIMBURSEMENT, IF ANY):
- --------------------------------------------------------------------------------
AS A PERCENTAGE OF EACH FUND'S AVERAGE DAILY NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT OTHER TOTAL CONTRACTUAL TOTAL ACTUAL
MANAGEMENT FEE EXPENSES EXPENSES EXPENSES*
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
THE PRUDENTIAL SERIES FUND(1)
- -----------------------------------------------------------------------------------------------------------------------
Diversified Bond Portfolio 0.40% 0.02% 0.42% 0.42%
Diversified Conservative Growth Portfolio 0.75% 0.20% 0.95% 0.95%
Equity Income Portfolio 0.40% 0.02% 0.42% 0.42%
Equity Portfolio 0.45% 0.02% 0.47% 0.47%
Global Portfolio 0.75% 0.11% 0.86% 0.86%
High Yield Bond Portfolio 0.55% 0.03% 0.58% 0.58%
Money Market Portfolio 0.40% 0.01% 0.41% 0.41%
Prudential Jennison Portfolio 0.60% 0.03% 0.63% 0.63%
Small Capitalization Stock Portfolio 0.40% 0.07% 0.47% 0.47%
Stock Index Portfolio 0.35% 0.02% 0.37% 0.37%
20/20 Focus Portfolio 0.75% 0.20% 0.95% 0.95%
AIM VARIABLE INSURANCE FUNDS, INC.
- -----------------------------------------------------------------------------------------------------------------------
AIM V.I. Growth and Income Fund 0.61% 0.04% 0.65% 0.65%
AIM V.I. Value Fund 0.61% 0.05% 0.66% 0.66%
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC(2)
- -----------------------------------------------------------------------------------------------------------------------
American Century VP Value 1.00% 0.00% 1.00% 1.00%
JANUS ASPEN SERIES(3)
- -----------------------------------------------------------------------------------------------------------------------
Growth Portfolio 0.72% 0.03% 0.75% 0.68%
International Growth Portfolio 0.75% 0.20% 0.95% 0.86%
MFS VARIABLE INSURANCE TRUST
- -----------------------------------------------------------------------------------------------------------------------
Emerging Growth Series 0.75% 0.10% 0.85% 0.85%
Research Series 0.75% 0.11% 0.86% 0.86%
OCC ACCUMULATION TRUST
- -----------------------------------------------------------------------------------------------------------------------
Managed Portfolio 0.78% 0.04% 0.82% 0.82%
Small Cap Portfolio 0.80% 0.08% 0.88% 0.88%
TEMPLETON VARIABLE PRODUCTS SERIES FUND(4)
- -----------------------------------------------------------------------------------------------------------------------
Franklin Small Cap Investments Fund - Class 2 0.75% 1.25% 2.00% 1.25%
T. ROWE PRICE(2)
- -----------------------------------------------------------------------------------------------------------------------
Equity Series - Equity Income Portfolio 0.85% 0.00% 0.85% 0.85%
International Series -
International Stock Portfolio 1.05% 0.00% 1.05% 1.05%
WARBURG PINCUS TRUST(5)
- -----------------------------------------------------------------------------------------------------------------------
Post-Venture Capital Portfolio 1.25% 0.45% 1.70% 1.40%
</TABLE>
- ------------
* REFLECTS THE EFFECT MANAGEMENT FEE WAIVERS AND REIMBURSEMENT OF EXPENSES, IF
ANY. SEE NOTES ON PAGE 7.
THE "EXPENSES EXAMPLES" ON THE FOLLOWING PAGES ARE CALCULATED USING THE TOTAL
ACTUAL EXPENSES.
- --------------------------------------------------------------------------------
8
<PAGE>
EXPENSE EXAMPLES
- --------------------------------------------------------------------------------
THESE EXAMPLES WILL HELP YOU COMPARE THE FEES AND EXPENSES OF THE DIFFERENT
VARIABLE INVESTMENT OPTIONS OFFERED BY DISCOVERY SELECT. YOU CAN ALSO USE THE
EXAMPLES TO COMPARE THE COST OF DISCOVERY SELECT WITH OTHER VARIABLE ANNUITY
CONTRACTS.
EXAMPLE 1: IF YOU WITHDRAW YOUR ASSETS
Example 1 assumes that you invest $10,000 in Discovery Select and that you
allocate all of your assets to one of the variable investment options and
withdraw all your assets at the end of the time period indicated. The example
also assumes that your investment has a 5% return each year and that the mutual
fund's operating expenses remain the same. Your actual costs may be higher or
lower.
EXAMPLE 2: IF YOU DO NOT WITHDRAW YOUR ASSETS
Example 2 assumes that you invest $10,000 in Discovery Select and allocate all
of your assets to one of the variable investment options and DO NOT WITHDRAW any
of your assets at the end of the time period indicated. The example also assumes
that your investment has a 5% return each year and that the mutual fund's
operating expenses remain the same. Your actual costs may be higher or lower.
On the following page are examples of what your costs would be using these
assumptions.
NOTES FOR ANNUAL MUTUAL FUND EXPENSES:
- --------------------------------------------
THESE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
THE CHARGES SHOWN IN THE 10 YEAR COLUMN ARE THE SAME FOR EXAMPLE 1 AND EXAMPLE
2. THIS IS BECAUSE AFTER 10 YEARS THE WITHDRAWAL CHARGES ARE NO LONGER DEDUCTED
BY US WHEN YOU MAKE A WITHDRAWAL OR WHEN YOU BEGIN THE INCOME PHASE OF YOUR
CONTRACT.
IF YOUR CONTRACT VALUE IS LESS THAN $50,000, ON YOUR CONTRACT ANNIVERSARY (AND
UPON A SURRENDER), WE DEDUCT A $30 FEE. THE EXAMPLES USE AN AVERAGE NUMBER AS
THE AMOUNT OF THE ANNUAL CONTRACT FEE. THIS AMOUNT WAS CALCULATED BY TAKING THE
TOTAL ANNUAL CONTRACT FEES COLLECTED IN 1998 AND THEN DIVIDING THAT NUMBER BY
THE TOTAL ASSETS ALLOCATED TO THE VARIABLE INVESTMENT OPTIONS. BASED ON THIS
CALCULATION THE ANNUAL CONTRACT FEE IS INCLUDED AS AN ANNUAL CHARGE OF 0.23% OF
CONTRACT VALUE.
YOUR ACTUAL FEES WILL VARY BASED ON THE AMOUNT OF YOUR CONTRACT AND YOUR
SPECIFIC ALLOCATION(S). A TABLE OF ACCUMULATION UNIT VALUES OF INTERESTS IN EACH
VARIABLE INVESTMENT OPTION, APPEARS ON PAGE 31. PREMIUM TAXES ARE NOT REFLECTED.
IN THESE EXAMPLES. PREMIUM TAXES MAY APPLY DEPENDING ON THE STATE WHERE YOU
LIVE.
- --------------------------------------------------------------------------------
9
<PAGE>
<TABLE>
<CAPTION>
EXPENSE EXAMPLES 1 AND 2
- -----------------------------------------------------------------------------------------------------------------------
EXAMPLE 1: EXAMPLE 2:
IF YOU WITHDRAW YOUR ASSETS IF YOU DO NOT WITHDRAW YOUR ASSETS
----------------------------------------------------------------------
1 YR 3 YRS 5 YRS 10 YRS 1 YR 3 YRS 5 YRS 10 YRS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
THE PRUDENTIAL SERIES FUND
- -----------------------------------------------------------------------------------------------------------------------
Diversified Bond Portfolio $817 $930 $1147 $2162 $187 $580 $997 $2162
Diversified Conservative Growth Portfolio $870 $1090 $1417 $2709 $240 $740 $1267 $2709
Equity Income Portfolio $817 $930 $1147 $2162 $187 $580 $997 $2162
Equity Portfolio $822 $945 $1173 $2215 $192 $595 $1023 $2215
Global Portfolio $861 $1063 $1372 $2618 $231 $713 $1222 $2618
High Yield Bond Portfolio $833 $978 $1229 $2330 $203 $628 $1079 $2330
Money Market Portfolio $816 $926 $1142 $2151 $186 $576 $992 $2151
Prudential Jennison Portfolio $838 $994 $1255 $2382 $208 $644 $1105 $2382
Small Capitalization Stock Portfolio $822 $945 $1173 $2215 $192 $595 $1023 $2215
Stock Index Portfolio $812 $914 $1121 $2108 $182 $564 $971 $2108
20/20 Focus Portfolio $870 $1090 $1417 $2709 $240 $740 $1267 $2709
AIM VARIABLE INSURANCE FUNDS, INC.
- -----------------------------------------------------------------------------------------------------------------------
AIM V.I. Growth and Income Fund $840 $1000 $1265 $2403 $210 $650 $1115 $2403
AIM V.I. Value Fund $841 $1003 $1270 $2414 $211 $653 $1120 $2414
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
- -----------------------------------------------------------------------------------------------------------------------
American Century VP Value $875 $1105 $1442 $2759 $245 $755 $1292 $2759
JANUS ASPEN SERIES
- -----------------------------------------------------------------------------------------------------------------------
Growth Portfolio $843 $1009 $1280 $2434 $213 $659 $1130 $2434
International Growth Portfolio $861 $1063 $1372 $2618 $231 $713 $1222 $2618
MFS VARIABLE INSURANCE TRUST
- -----------------------------------------------------------------------------------------------------------------------
Emerging Growth Series $860 $1060 $1367 $2608 $230 $710 $1217 $2608
Research Series $861 $1063 $1372 $2618 $231 $713 $1222 $2618
OCC ACCUMULATION TRUST
- -----------------------------------------------------------------------------------------------------------------------
Managed Portfolio $857 $1051 $1351 $2578 $227 $701 $1201 $2578
Small Cap Portfolio $863 $1069 $1382 $2639 $233 $719 $1232 $2639
TEMPLETON VARIABLE PRODUCTS SERIES FUND
- -----------------------------------------------------------------------------------------------------------------------
Franklin Small Cap Investments
Fund - Class 2 $900 $1180 $1566 $3006 $270 $830 $1416 $3006
T.ROWE PRICE
- -----------------------------------------------------------------------------------------------------------------------
Equity Series - Equity Income Portfolio $860 $1060 $1367 $2608 $230 $710 $1217 $2608
International Series -
Intn'l Stock Portfolio $880 $1120 $1467 $2809 $250 $770 $1317 $2809
WARBURG PINCUS TRUST
- -----------------------------------------------------------------------------------------------------------------------
Post-Venture Capital Portfolio $915 $1225 $1640 $3150 $285 $875 $1490 $3150
</TABLE>
THESE EXAMPLES DO NOT SHOW PAST OR FUTURE EXPENSES. ACTUAL EXPENSES FOR A
PARTICULAR YEAR MAY BE MORE OR LESS THAN THOSE SHOWN IN THE EXAMPLES.
- --------------------------------------------------------------------------------
10
<PAGE>
PART II SECTIONS 1-9
- --------------------------------------------------------------------------------
DISCOVERY SELECT PROSPECTUS
11
<PAGE>
1:
WHAT IS THE DISCOVERY SELECT
VARIABLE ANNUITY?
- --------------------------------------------------------------------------------
THE DISCOVERY SELECT VARIABLE ANNUITY IS A CONTRACT BETWEEN YOU, THE OWNER, AND
US, THE INSURANCE COMPANY, PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY (PRUCO
LIFE OF NEW JERSEY, WE OR US).
Under our contract or agreement, in exchange for your payment to us, we promise
to pay you a guaranteed income stream that can begin any time after the first
contract anniversary. Your annuity is in the accumulation phase until you decide
to begin receiving annuity payments. The date you begin receiving annuity
payments is the annuity date. On the annuity date, your contract switches to the
income phase.
THIS ANNUITY CONTRACT BENEFITS FROM TAX DEFERRAL.
Tax deferral means that you are not taxed on earnings or appreciation on the
assets in your contract until you withdraw money from your contract.
DISCOVERY SELECT IS A VARIABLE ANNUITY CONTRACT.
This means that during the accumulation phase, you can allocate your assets
among 24 variable investment options as well as 2 guaranteed interest-rate
options. If you select a variable investment option, the amount of money you are
able to accumulate in your contract during the accumulation phase depends upon
the investment performance of the mutual fund associated with that variable
investment option. Because the mutual funds' portfolios fluctuate in value
depending upon market conditions, your contract value can either increase or
decrease. This is important, since the amount of the annuity payments you
receive during the income phase depends upon the value of your contract at the
time you begin receiving payments.
AS MENTIONED ABOVE, DISCOVERY SELECT ALSO CONTAINS TWO GUARANTEED INTEREST-RATE
OPTIONS: a fixed-rate option and a market-value adjustment option. The
fixed-rate option offers an interest rate that is guaranteed by us for one year
and will always be at least 3.0% per year. The market-value adjustment option
guarantees a stated interest rate, generally higher than the fixed-rate option.
However, in order to get the full benefit of the stated interest rate, assets in
this option must be held for a seven-year period.
AS THE OWNER OF THE CONTRACT, YOU HAVE ALL OF THE DECISION-MAKING RIGHTS UNDER
THE CONTRACT. You will also be the annuitant unless you designate someone else.
The annuitant is the person who receives the annuity payments when the income
phase begins. The annuitant is also the person whose life is used to determine
how much and how long these payments will continue. On and after the annuity
date, the annuitant is the owner and may not be changed. The beneficiary becomes
the owner when a death benefit is payable.
THE BENEFICIARY IS: the person(s) or entity designated to receive any death
benefit if the annuitant(s) dies during the accumulation phase. You may change
the beneficiary any time prior to the annuity date by making a written request
to us. Your request becomes effective when we approve it.
SHORT TERM CANCELLATION RIGHT OR "FREE LOOK"
If you change your mind about owning Discovery Select, you may cancel your
contract within 10 days after receiving it (or whatever period is required by
applicable law). You can request a refund by returning the contract either to
the representative who sold it to you, or to the Prudential Annuity Service
Center at the address shown on the first page of this prospectus. You will
receive, depending on applicable law:
o Your full purchase payment; or
o The amount your contract is worth as of the day we receive your request.
This amount may be more or less than your original payment.
- --------------------------------------------------------------------------------
12
<PAGE>
2:
WHAT INVESTMENT OPTIONS
CAN I CHOOSE?
- --------------------------------------------------------------------------------
THE CONTRACT GIVES YOU THE CHOICE OF ALLOCATING YOUR PURCHASE PAYMENTS TO ANY
ONE OR MORE OF 24 VARIABLE INVESTMENT OPTIONS, AS WELL AS TWO GUARANTEED
INTEREST-RATE OPTIONS.
The 24 variable investment options invest in mutual funds managed by leading
investment advisors. Each of these mutual funds has a separate prospectus that
is provided with this prospectus. You should read the mutual fund prospectus
before you decide to allocate your assets to the variable investment option
using that fund.
VARIABLE INVESTMENT OPTIONS
Listed below are the mutual funds in which the variable investment options
invest. Each variable investment option has a different investment objective.
THE PRUDENTIAL SERIES FUND, INC.
o Diversified Bond Portfolio
o Diversified Conservative Growth Portfolio
o Equity Income Portfolio
o Equity Portfolio
o Global Portfolio
o High Yield Bond Portfolio
o Money Market Portfolio
o Prudential Jennison Portfolio (domestic equity)
o Small Capitalization Stock Portfolio
o Stock Index Portfolio
o 20/20 Focus Fund (domestic equity)
THE PRUDENTIAL SERIES FUND, INC. IS MANAGED BY PRUDENTIAL THROUGH ANOTHER
COMPANY IT OWNS CALLED THE PRUDENTIAL INVESTMENT CORPORATION. THE PRUDENTIAL
INVESTMENT CORPORATION MANAGES EACH OF THE PORTFOLIOS OF THE PRUDENTIAL SERIES
FUND EXCEPT THE PRUDENTIAL JENNISON PORTFOLIO AND THE DIVERSIFIED CONSERVATIVE
GROWTH PORTFOLIO. FOR THE JENNISON PORTFOLIO, PRUDENTIAL INVESTMENT CORPORATION
OVERSEES ANOTHER COMPANY OWNED BY PRUDENTIAL CALLED JENNISON ASSOCIATES CAPITAL
CORP. WHICH PROVIDES THE DAY TO DAY INVESTMENT ADVISORY SERVICES. FOR THE
DIVERSIFIED CONSERVATIVE GROWTH PORTFOLIO, PRUDENTIAL INVESTMENTS CORPORATION
OVERSEES THE DREYFUS CORPORATION AND PACIFIC INVESTMENTS MANAGEMENT COMPANY,
WHICH PROVIDE THE DAY TO DAY INVESTMENT ADVISORY SERVICES.
AIM VARIABLE INSURANCE FUNDS, INC.
o AIM V.I. Growth and Income Fund
o AIM V.I. Value Fund
AIM ADVISORS, INC. SERVES AS INVESTMENT ADVISER TO BOTH OF THESE FUNDS.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
o American Century VP Value
AMERICAN CENTURY INVESTMENT MANAGEMENT, INC. IS THE INVESTMENT ADVISER FOR
AMERICAN CENTURY VP VALUE.
JANUS ASPEN SERIES
o Growth Portfolio
o International Growth Portfolio
JANUS CAPITAL CORPORATION SERVES AS INVESTMENT ADVISER TO THE GROWTH PORTFOLIO
AND THE INTERNATIONAL GROWTH PORTFOLIO.
MFS VARIABLE INSURANCE TRUST
o Emerging Growth Series
o Research Series (long-term growth and future income)
MASSACHUSETTS FINANCIAL SERVICES COMPANY, A DELAWARE CORPORATION, IS THE
INVESTMENT ADVISER TO THE EMERGING GROWTH SERIES AND THE RESEARCH SERIES.
OCC ACCUMULATION TRUST
o Managed Portfolio (equity)
o Small Cap Portfolio
OPCAP ADVISORS IS THE INVESTMENT ADVISER TO THE MANAGED PORTFOLIO AND THE SMALL
CAP PORTFOLIO.
T. ROWE PRICE
o T. Rowe Price Equity Series, Inc., Equity Income Portfolio
o T. Rowe Price International Series, Inc., International Stock Portfolio
T. ROWE PRICE ASSOCIATES, INC. IS THE INVESTMENT MANAGER FOR THE EQUITY INCOME
PORTFOLIO AND ROWE PRICE-FLEMING INTERNATIONAL, INC. IS THE INVESTMENT MANAGER
FOR THE INTERNATIONAL STOCK PORTFOLIO.
TEMPLETON VARIABLE PRODUCTS SERIES FUND
o Franklin Small Cap Investments Fund--Class 2
FRANKLIN ADVISERS, INC. IS THE INVESTMENT MANAGER FOR THIS PORTFOLIO OF THE
TEMPLETON VARIABLE PRODUCTS SERIES FUND.
WARBURG PINCUS TRUST
o Post-Venture Capital Portfolio
WARBURG PINCUS COUNSELORS, INC. SERVES AS INVESTMENT ADVISER AND ABBOTT CAPITAL
MANAGEMENT, L.P. SERVES AS SUB-
- --------------------------------------------------------------------------------
13
<PAGE>
2:
WHAT INVESTMENT OPTIONS CAN I CHOOSE? CONTINUED
- --------------------------------------------------------------------------------
INVESTMENT ADVISE FOR THAT PORTION OF THE POST-VENTURE CAPITAL PORTFOLIO
ALLOCATED TO PRIVATE LIMITED PARTNERSHIPS OR OTHER INVESTMENT FUNDS.
Except for the Prudential Series Fund Inc., we are paid by the fund or an
affiliate of each fund for administrative and other services that we provide.
The amount we receive is based on an annual percentage of the average assets of
Discovery Select invested in the fund held by the associated variable investment
option.
FIXED INTEREST-RATE OPTIONS
We offer two interest-rate options: a fixed-rate option and a market-value
adjustment option. We set a one year guaranteed annual interest rate that is
always available for the one-year fixed-rate option. For the market-value
adjustment option, We set a seven-year guaranteed interest rate.
When you select one of these options, your payment will earn interest at the
established rate for the applicable interest rate period. A new interest rate
period is established every time you allocate or transfer money into a fixed
interest-rate option. You may have money allocated in more than one interest
rate period at the same time. This could result in your money earning interest
at different rates and each interest rate period maturing at a different time.
While these interest rates may change from time to time, the minimum rate will
never be less than 3.0%.
If you transfer or withdraw assets or annuitize from the market-value
adjustment option before an interest rate period is over, the assets will be
subject to a market value adjustment.
The market-value adjustment may increase or decrease the amount being
withdrawn or transferred and may be substantial. The adjustment, whether up or
down will never be greater than 40%. The amount of the market-value adjustment
is based on the difference between the:
1) Guaranteed interest rate for the amount you are withdrawing or transferring;
and
2) Interest rate that is in effect on the date of the withdrawal or transfer.
The amount of time left in the interest rate period is also a factor. You
will find a detailed description of how the market-value adjustment is
calculated on Page 28 of this prospectus.
TRANSFERS AMONG OPTIONS
You can transfer money among the variable investment options and the fixed
interest-rate options. Your transfer request may be made by telephone or in
writing to the Prudential Annuity Service Center. Only two transfers per month
may be made by telephone. After that, all transfer requests must be in writing
with an original signature. We have procedures in place to confirm that
instructions received by telephone are genuine. We will not be liable for
following telephone instructions that we reasonably believe to be genuine. Your
transfer request will take effect at the end of the business day on which it was
received. Our business day closes at 4:15 p.m. Eastern time.
YOU CAN MAKE TRANSFERS OUT OF A FIXED INTEREST-RATE OPTION ONLY DURING THE
30-DAY PERIOD FOLLOWING THE END OF AN INTEREST RATE PERIOD. IF YOU TRANSFER
MONEY FROM A MARKET-VALUE ADJUSTMENT OPTION AFTER THE 30-DAY PERIOD HAS ENDED,
THE MONEY WILL BE SUBJECT TO A MARKET-VALUE ADJUSTMENT.
During the contract accumulation phase, you can make 12 transfers each
contract year, among the investment options, without charge. If you make more
than 12 transfers in one contract year, you will be charged $25 for each
additional transfer. (Dollar Cost Averaging and Auto-Rebalancing transfers do
not count toward the 12 free transfers per year.)
DOLLAR COST AVERAGING
The dollar cost averaging (DCA) feature allows you to systematically transfer
either a fixed dollar amount or a percentage out of any variable investment
option or the one-year fixed interest-rate option and into any variable
investment option(s). You can transfer money to more than one variable
investment option. The investment option used for the transfers is designated as
the DCA account. You can have these automatic transfers made from the DCA
account monthly, quarterly, semiannually or annually. By allocating amounts on a
regular schedule instead of allocating the total amount at one particular time,
you may be less susceptible to the impact of market fluctuations.
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
Transfers must be at least $100 from your DCA account. After that, transfers
will continue automatically until the entire amount in your DCA account has been
transferred or until you tell us to discontinue the transfers. If your DCA
account balance drops below $100, the entire remaining balance of the account
will be transferred on the next transfer date, You can allocate subsequent
purchase payments to re-open the DCA account at any time.
Your transfers will be made on the last calendar day of each transfer period
you have selected, provided that the New York Stock Exchange is open on that
date. If the New York Stock Exchange is not open on a particular transfer date,
the transfer will take effect on the next business day.
Any transfers you make because of dollar cost averaging are not counted
toward the 12 free transfers you are allowed per year. This feature is available
only during the contract accumulation phase.
ASSET ALLOCATION PROGRAM
We recognize the value of having advice when deciding on the allocation of your
money. If you choose to participate in the Asset Allocation Program, your
financial professional will give you a questionnaire to complete that will help
determine a program that is appropriate for you. Your asset allocation will be
prepared based on your answers to the questionnaire. You will not be charged for
this service and you are not obligated to participate or to invest according to
program recommendations.
AUTO-REBALANCING
Once your money has been allocated among the variable investment options, the
actual performance of the investment options may cause your allocation to shift.
For example, an investment option that initially holds only a small percentage
of your assets could perform much better than another investment option. Over
time, this option could increase to a larger percentage of your assets than you
desire. You can direct us to automatically rebalance your assets to return to
your original allocation or to change allocations by selecting the
Auto-Rebalancing feature. The fixed interest-rate options and the DCA account
cannot participate in this feature.
Your rebalancing will be done monthly, quarterly, semiannually or annually
based on your choice. The rebalancing will be done on the last calendar day of
the period you have chosen, provided that the New York Stock Exchange is open on
that date. If the New York Stock Exchange is not open on that date, the
rebalancing will take effect on the next business day.
Any transfers you make because of Auto-Rebalancing are not counted toward
the 12 free transfers you are allowed per year. This feature is available only
during the contract accumulation phase. If you choose auto-rebalancing and
dollar cost averaging, auto-rebalancing will take place after the transfers from
your DCA account.
VOTING RIGHTS
We are the legal owner of the shares in the mutual funds associated with the
variable investment options. However, we vote the shares of the mutual funds
according to voting instructions we receive from contractowners. We will mail
you a proxy which is a form you need to complete and return to us to tell us how
you wish us to vote. When we receive those instructions, we will vote all of the
shares we own on your behalf, in accordance with those instructions. We will
vote the shares for which we do not receive instructions, and shares that we
own, in the same proportion as the shares for which instructions are received.
We may change the way your voting instructions are calculated if it is required
by federal regulation.
SUBSTITUTION
We may substitute one or more of the mutual funds used by the variable
investment options. We may also cease to allow investments in existing funds. We
would do this only if events such as investment policy changes or tax law
changes make the mutual fund unsuitable. We would not do this without the
approval of the Securities and Exchange Commission and necessary state insurance
department approvals. You will be given specific notice in advance of any
substitution we intend to make.
- --------------------------------------------------------------------------------
15
<PAGE>
3:
WHAT KIND OF PAYMENTS WILL I RECEIVE DURING THE
INCOME PHASE?(ANNUITIZATION)
- --------------------------------------------------------------------------------
PAYMENT PROVISIONS
The annuitant can begin receiving annuity payments any time after the first
contract anniversary. Annuity payments must begin no later than the contract
anniversary that coincides with or follows the annuitant's 90th birthday.
You may choose among the income plans described below at any time before the
annuity date. These plans are called annuity options. During the income phase,
all of the annuity options under this contract are fixed annuity options. This
means that your participation in the variable investment options ends on the
annuity date. If you have not selected an annuity option by the annuity date,
the Interest Payment Option (Option 3, described below) will automatically be
selected unless prohibited by applicable law. ONCE THE ANNUITY PAYMENTS BEGIN,
YOU CANNOT CHANGE THE ANNUITY OPTION.
OPTION 1
ANNUITY PAYMENTS FOR A FIXED PERIOD
Under this option, we will make equal payments for a period you choose, up to 25
years. The annuity payments may be made monthly, quarterly, semiannually, or
annually for as long as the annuitant is alive. If the annuitant dies during the
income phase, a lump sum payment will be made to the beneficiary. The amount of
the lump sum payment is determined by calculating the present value of the
unpaid future payments. This is done by using the interest rate used to compute
the actual payments. The interest rate used will always be at least 3.50% a
year. For payment periods of 10 years or more, we will waive any withdrawal
charges that otherwise would have been applied.
OPTION 2
LIFE ANNUITY WITH 120 PAYMENTS (10 YEARS) CERTAIN
Under this option, we will make annuity payments to the annuitant monthly,
quarterly, semiannually, or annually as long as the annuitant is alive. If the
annuitant dies before we have made 10 years worth of payments, we will pay the
beneficiary the present value of the remaining annuity payments in one lump sum
unless the annuitant has specifically instructed that the remaining monthly
annuity payments continue to be paid to the beneficiary. The present value of
the remaining annuity payments is calculated by using the interest rate used to
compute the amount of the original 120 payments. The interest rate used will
always be at least 3.50% a year.
OPTION 3
INTEREST PAYMENT OPTION
Under this option, you can choose to have us hold all or a portion of your
contract value in order to accumulate interest. You can receive interest
payments on a monthly, quarterly, semiannual, or annual basis or you can allow
the interest to accrue on your contract assets. If you have not selected an
annuity option by the annuity date, this is the option we will automatically
select for you, unless prohibited by applicable law. Under this option, we will
pay you interest at an effective rate of at least 3.0% a year.
This option is not available if your contract is held in an Individual
Retirement Account.
OPTION 4
OTHER ANNUITY OPTIONS
We currently offer a variety of other annuity options not described above. At
the time you choose to receive your annuity payments, we may make available to
you any of the fixed annuity options that are offered at your annuity date.
You should be aware that depending on your contract date and the annuity
option you choose, you may have to pay withdrawal charges.
- --------------------------------------------------------------------------------
16
<PAGE>
4:
WHAT IS THE
DEATH BENEFIT?
- --------------------------------------------------------------------------------
THE DEATH BENEFIT FEATURE PROTECTS THE VALUE OF THE CONTRACT FOR THE
BENEFICIARY.
BENEFICIARY
The beneficiary is the person(s) or entity you name to receive any death
benefit. The beneficiary is named at the time the contract is issued, unless you
change it at a later date. Unless an irrevocable beneficiary has been named, you
can change the beneficiary at any time before the annuitant or last surviving
annuitant dies.
CALCULATION OF THE DEATH BENEFIT
If the annuitant (or the last surviving annuitant, if there are co-annuitants)
dies during the accumulation phase, we will, upon receiving appropriate proof of
death, pay a death benefit to the beneficiary designated by the contractowner.
If death is prior to age 80, the beneficiary will receive the greater of the
following:
o Current value of your contract (as of the time we receive appropriate proof
of death); or
o Guaranteed Minimum Death Benefit --
This is the highest value of the contract on any contract anniversary
date. This is called the step-up value. Between anniversary dates, the
step-up value is only increased by additional purchase payments and
reduced proportionally by withdrawals.
If death is on or after age 80, the beneficiary will receive the greater of:
1) the current contract value as of the date that due proof of death is
received, and 2) the Guaranteed Minimum Death benefit as of age 80, increased by
additional purchase payments, and reduced proportionally by the withdrawals. For
this purpose, an annuitant is deemed to reach age 80 on the contract anniversary
on or following the annuitant's actual 80th birthday.
If the sole or older annuitant is age 80 or older at the time the contract
is issued, upon death, the beneficiary will receive the greater of: 1) current
contract value as of the date that due proof of death is received; and 2) the
total purchase payments reduced proportionally by withdrawals.
Here is an example of a proportional reduction:
If an owner withdrew 50% of a contract valued at $100,000 and if the step-up
value was $80,000, the new step-up value following the withdrawal, would be
$40,000 or 50% of what it had been prior to the withdrawal.
If the contractowner and annuitant are not the same, the death benefit is
payable only in the event of the death of a sole annuitant or last surviving
annuitant, not the death of the contractowner.
This death benefit was enhanced in January, 1998, to provide for the
Guaranteed Minimum Death Benefit. Certain contractowners must have elected an
endorsement in order for this enhanced death benefit to apply. See the Statement
of Additional Information (SAI) for details.
- --------------------------------------------------------------------------------
17
<PAGE>
5:
HOW CAN I PURCHASE A
DISCOVERY SELECT CONTRACT?
- --------------------------------------------------------------------------------
PURCHASE PAYMENTS
A purchase payment is the amount of money you give us to purchase the contract.
The minimum purchase payment is $10,000. You can make additional purchase
payments of at least $1,000 or more at any time during the accumulation phase.
You must get our prior approval for any purchase payments over $2 million.
ALLOCATION OF PURCHASE PAYMENTS
When you purchase a contract, we will allocate your purchase payment among the
variable investment options and the fixed interest-rate options based on the
percentages you choose. The percentage of your allocation to a specific
investment option can range in whole percentages from 0% to 100%. If you make
additional purchase payments, they will be allocated in the same way as your
most recent purchase payment, unless you tell us otherwise.
We will credit these purchase payments to your contract as of the end of the
business day on which the payment is received at the Prudential Annuity Service
Center. Our business day closes at 4:15 p.m. Eastern time. If, however, your
first payment is made without enough information for us to set up your contract
we may need to contact you to get the required information. If we are not able
to get this information within five business days we will either return your
purchase payment or get your consent to continue holding it until we receive the
necessary information.
CALCULATING CONTRACT VALUE
The value of the variable portion of your contract will go up or down depending
on the investment performance of the variable investment option(s) you choose.
To determine the value of your contract, we use a unit of measure called an
accumulation unit. An accumulation unit works like a share of a mutual fund.
Every day we determine the value of an accumulation unit for each of the
variable investment options. We do this by:
1) Adding up the total amount of money allocated to a specific investment
option;
2) Subtracting from that amount insurance charges and any other applicable
charges; and
3) Dividing this amount by the number of outstanding accumulation units.
When you make a purchase payment, we credit your contract with accumulation
units relating to the variable investment options you have chosen. The number of
accumulation units credited to your contract is determined by dividing the
amount of the purchase payment allocated to an investment option by the unit
price of the accumulation unit for that investment option. We calculate the unit
price for each investment option after the New York Stock Exchange closes each
day and then credit your contract. The value of the accumulation units can
increase, decrease, or remain the same from day to day. The Accumulation Unit
Values chart provided in Appendix A to this prospectus gives you more detailed
information about the accumulation units of the variable investment options.
We cannot guarantee that the value of your contract will increase or that it
will not fall below the amount of your total purchase payments. However, we do
guarantee a minimum interest rate of 3.0% a year on that portion of the contract
value allocated to the fixed interest-rate options.
- --------------------------------------------------------------------------------
18
<PAGE>
6:
WHAT ARE THE EXPENSES ASSOCIATED WITH THE
DISCOVERY SELECT CONTRACT?
- --------------------------------------------------------------------------------
THERE ARE CHARGES AND OTHER EXPENSES ASSOCIATED WITH THE CONTRACT THAT REDUCE
THE RETURN ON YOUR INVESTMENT. THESE CHARGES AND EXPENSES ARE DESCRIBED BELOW.
INSURANCE CHARGES
Each day, we makes a deduction for its insurance charges. The insurance charges
have two parts:
1) Mortality and expense risk charge
2) Administrative expense charge
1) MORTALITY AND EXPENSE RISK CHARGE
The mortality risk charge is for assuming the risk that the annuitant(s) will
live longer than expected based on our life expectancy tables. When this
happens, we pay a greater number of annuity payments. The expense risk charge is
for assuming that the current charges will be insufficient in the future to
cover the cost of administering the contract.
The mortality and expense risk charge is equal, on an annual basis, to 1.25%
of the daily value of the contract invested in the variable investment options,
after expenses have been deducted. This charge is not assessed against amounts
allocated to the interest-rate options.
If the charges under the contract are not sufficient, then we will bear the
loss. We do, however, expect to profit from this charge. The mortality and
expense risk charge cannot be increased. Any profits made from this charge may
be used by us to pay for the costs of distributing the contracts.
2) ADMINISTRATIVE EXPENSE CHARGE
This charge is for the expenses associated with the administration of the
contract. The administration of the contract includes preparing and issuing the
contract, establishing and maintaining contract records, issuing confirmations
and annual reports, personnel costs, legal and accounting fees, filing fees, and
systems costs.
This charge is equal, on an annual basis, to 0.15% of the daily value of the
contract invested in the variable investment options, after expenses have been
deducted.
ANNUAL CONTRACT FEE
During the accumulation phase, if your contract value is less than $50,000, we
will deduct $30 per contract year (this fee may differ in certain states). This
annual contract fee is used for administrative expenses and cannot be increased.
The $30 charge will be deducted proportionately from each of the contract's
investment options. This charge will also be deducted when you surrender your
contract if your contract value is less than $50,000.
WITHDRAWAL CHARGE
During the accumulation phase you can make withdrawals from your contract. When
you make a withdrawal, money will be taken first from your purchase payments for
purposes of determining withdrawal charges. When your purchase payments have
been used up, then we will take the money from your earnings. You will not have
to pay any withdrawal charge when you withdraw your earnings.
The withdrawal charge is for the payment of the expenses involved in selling
and distributing the contracts, including sales commissions, printing of
prospectuses, sales administration, preparation of sales literature and other
promotional activities.
You can withdraw up to 10% of your total purchase payments each contract
year without paying a withdrawal charge. This amount is referred to as the
"charge-free amount." If any of the charge-free amount is not used during a
contract year, it will be carried over to the next contract year. During the
first seven contract years, if your withdrawal of purchase payments is more than
the charge-free amount, a withdrawal charge will be applied. This charge is
based on your contract date.
- --------------------------------------------------------------------------------
19
<PAGE>
6:
DISCOVERY SELECT CONTRACT EXPENSES CONTINUED
- --------------------------------------------------------------------------------
The following table shows the percentage of withdrawal charges that would
apply:
PERCENTAGE OF APPLICABLE WITHDRAWAL CHARGES
- ------------------------------------------------
During contract year 1 7%
During contract year 2 6%
During contract year 3 5%
During contract year 4 4%
During contract year 5 3%
During contract year 6 2%
During contract year 7 1%
After that 0%
PREMIUM TAXES
Some states and/or municipalities charge premium taxes or similar taxes. We are
responsible for the payment of these taxes and will make a deduction from the
value of the contract to pay them. Some of these taxes are due when the contract
is issued, others are due when annuity payments begin. It is our current
practice not to deduct these taxes until annuity payments begin. In the few
states that impose a tax, the current rates range up to 5.0%. If, in the future,
we are charged for additional taxes that are based on purchase payments, that
charge may be passed on to contractholders.
TRANSFER FEE
You can make 12 free transfers every year. We measure a year from the date we
issue your contract (contract date). If you make more than 12 transfers in a
year (excluding Dollar Cost Averaging and Auto-Rebalancing), we will deduct a
transfer fee of $25 for each additional transfer. The transfer fee will be
deducted proportionately from all the affected investment options. The transfer
fee is deducted before the MVA is calculated.
COMPANY TAXES
We will pay the taxes on the earnings of the Separate Account. We are not
currently charging the Separate Account for taxes. We will periodically review
the issue of charging the Separate Account for these taxes, and may impose such
a charge in the future.
- --------------------------------------------------------------------------------
20
<PAGE>
7:
HOW CAN I
ACCESS MY MONEY?
- --------------------------------------------------------------------------------
YOU CAN ACCESS YOUR MONEY BY:
o MAKING A WITHDRAWAL
(EITHER PARTIAL OR COMPLETE); OR
o ELECTING TO RECEIVE ANNUITY
PAYMENTS DURING THE INCOME PHASE.
YOU CAN MAKE WITHDRAWALS ONLY DURING THE ACCUMULATION PHASE
When you make a complete withdrawal, you will receive the value of your contract
on the day you made the withdrawal, less any applicable charges. We will
calculate the value of your contract, and charges, if any, as of the date we
receive your request in good order at the Prudential Annuity Service Center.
Unless you tell us otherwise, any partial withdrawal will be made
proportionately from all of the affected investment options and interest-rate
options you have selected. You will have to receive our consent to make a
partial withdrawal if the requested withdrawal is less than $500.
We will generally pay the withdrawal amount, less any required tax
withholding, within seven days after we receive a properly completed withdrawal
request. We will deduct applicable charges, and apply a market-value adjustment,
if any, from the assets in your contract.
INCOME TAXES, TAX PENALTIES AND CERTAIN RESTRICTIONS MAY APPLY TO ANY
WITHDRAWAL YOU MAKE. FOR A MORE COMPLETE EXPLANATION, SEE SECTION 8 OF THIS
PROSPECTUS AND THE TAX DISCUSSION IN THE STATEMENT OF ADDITIONAL INFORMATION.
AUTOMATED WITHDRAWALS
We offer an Automated Withdrawal feature. This feature enables you to receive
periodic withdrawals in monthly, quarterly, semiannual or annual intervals. We
will process your withdrawals at the end of the business day at the intervals
you specify. We will continue at these intervals until you tell us otherwise.
You can make withdrawals from any designated investment option or
proportionally from all investment options. Market-value adjustments may apply.
Withdrawal charges may be deducted if the withdrawals in any contract year are
more than the charge-free amount. The minimum automated withdrawal amount you
can make is $250.
INCOME TAXES AND A 10% PENALTY TAX ON EARNINGS MAY APPLY TO AUTOMATED
WITHDRAWALS AS WELL AS ANY OTHER WITHDRAWALS MADE FROM YOUR CONTRACT.
SUSPENSION OF PAYMENTS OR TRANSFERS
We may be required to suspend or postpone payments made in connection with
withdrawals or transfers for any period when:
o The New York Stock Exchange is closed (other than customary weekend and
holiday closings);
o Trading on the New York Stock Exchange is restricted;
o An emergency exists during which sales of shares of the mutual funds are not
reasonable or we cannot reasonably value the accumulation units; or
o The Securities and Exchange Commission, by order, so permits suspension or
postponement of payments for the protection of owners.
We expect to pay the amount of any withdrawal or transfer made from the
interest-rate options promptly upon request.
- --------------------------------------------------------------------------------
21
<PAGE>
8:
WHAT ARE THE TAX CONSIDERATIONS ASSOCIATED WITH THE
DISCOVERY SELECT CONTRACT?
- --------------------------------------------------------------------------------
The tax considerations associated with the Discovery Select contact vary
depending on whether the contract is (i) owned by an individual and not
associated with a tax-favored retirement plan, or (ii) held under a tax-favored
plan. We discuss the tax considerations for these categories of contracts below.
The discussion is general in nature and describes only federal income tax law
(not state or other tax laws). It is based on current law and interpretations,
which may change. It is not intended as tax advice. A qualified tax adviser
should be consulted for complete information and advice.
We believe the contract is an annuity contract for tax purposes.
Accordingly, as a general rule, you should not pay any tax until you receive
money under the contract.
CONTRACTS OWNED BY INDIVIDUALS (NOT ASSOCIATED WITH TAX FAVORED RETIREMENT
PLANS)
TAXES PAYABLE BY YOU
Generally, annuity contracts issued by the same company (and affiliates) to you
during the same calendar year must be treated as one annuity contract for
purposes of determining the amount subject to tax under the rules described
below.
TAXES ON WITHDRAWALS AND SURRENDER
If you make a withdrawal from your contract or surrender it before annuity
payments begin, the amount you receive will be taxed as ordinary income, rather
than as return of purchase payments, until all gain has been withdrawn.
If you assign all or part of your contract as collateral for a loan, the
part assigned will be treated as a withdrawal. Also, if you elect the interest
payment option, you will be treated, for tax purposes, as surrendering your
contract.
If you transfer your contract for less than full consideration, such as by
gift, you will trigger tax on the gain in the contract. This rule does not apply
if you transfer the contract to your spouse or incident to divorce.
TAXES ON ANNUITY PAYMENTS
A portion of each annuity payment you receive will be treated as a partial
return of your purchase payments and will not be taxed. The remaining portion
will be taxed as ordinary income. Generally, the nontaxable portion is
determined by multiplying the annuity payment you receive by a fraction, the
numerator of which is your purchase payments (less any amounts previously
received tax-free) and the denominator of which is the total expected payments
under the contract.
After the full amount of your purchase payments have been recovered
tax-free, the full amount of the annuity payments will be taxable. If annuity
payments stop due to the death of the annuitant before the full amount of your
purchase payments have been recovered, a tax deduction is allowed for the
unrecovered amount.
PENALTY TAXES ON WITHDRAWALS AND ANNUITY PAYMENTS
Any taxable amount you receive under your contract may be subject to a 10
percent penalty tax. Amounts are not subject to this penalty tax if:
o the amount is paid on or after you reach age 59-1/2 or die;
o the amount received is attributable to your becoming disabled;
o the amount paid or received is in the form of level annuity payments not
less frequently than annually under a lifetime annuity; and
o the amount received is paid under an immediate annuity contract (in which
annuity payments begin within one year of purchase).
If you modify the lifetime annuity payment stream (other than as a result of
death or disability) before you reach age 59-1/2 (or before the end of the five
year period beginning with the first payment and ending after you reach age
59-1/2), your tax for the year of modification will be increased by the penalty
tax that would have been imposed without the exception, plus interest for the
deferral.
- --------------------------------------------------------------------------------
22
<PAGE>
- --------------------------------------------------------------------------------
TAXES PAYABLE BY BENEFICIARIES
Generally, the same tax rules apply to amounts received by your beneficiary as
those set forth above with respect to you. The election of an annuity payment
option instead of a lump sum death benefit may defer taxes. Certain minimum
distribution requirements apply upon your death, as discussed further below.
WITHHOLDING OF TAX FROM DISTRIBUTIONS
Taxable amounts distributed from your annuity contracts are subject to tax
withholding. You may generally elect not to have tax withheld from your
payments. These elections must be made on the appropriate Pruco Life of New
Jersey forms.
ANNUITY QUALIFICATION
DIVERSIFICATION AND INVESTOR CONTROL
In order to qualify for the tax rules applicable to annuity contracts described
above, the contract must be an annuity contract for tax purposes. This means
that the assets underlying the annuity contract must be diversified, according
to certain rules. It also means that Pruco Life of New Jersey, and not you as
the contractowner, must have sufficient control over the underlying assets to be
treated as the owner of the underlying assets for tax purposes. We believe these
rules, which are further discussed in the Statement of Additional Information,
will be met.
REQUIRED DISTRIBUTIONS UPON YOUR DEATH
Upon your death (or the death of a joint owner, if earlier), certain
distributions must be made under the contract. The required distributions depend
on whether you die on or before you start taking annuity payments under the
contract or after you start taking annuity payments under the contract.
If you die on or after the annuity date, the remaining portion of the
interest in the contract must be distributed at least as rapidly as under the
method of distribution being used as of the date of death.
If you die before the annuity date, the entire interest in the contract must
be distributed within 5 years after the date of death. However, if an annuity
payment option is selected by your designated beneficiary and if annuity
payments begin within 1 year of your death, the value of the contract may be
distributed over the beneficiary's life or a period not exceeding the
beneficiary's life expectancy. Your designated beneficiary is the person to whom
ownership of the contract passes by reason of death, and must be a natural
person.
If any portion of the contract is payable to (or for the benefit of) your
surviving spouse, such portion of the contract may be continued with your spouse
as the owner.
CHANGES IN THE CONTRACT
We reserve the right to make any changes we deem necessary to assure that the
contract qualifies as an annuity contract for tax purposes. Any such changes
will apply to all contractowners and you will be given notice to the extent
feasible under the circumstances.
ADDITIONAL INFORMATION
You should refer to the Statement of Additional Information if:
o The contract is held by a corporation or other entity instead of by an
individual or as agent for an individual.
o Your contract was issued in exchange for a contract containing purchase
payments made before August 14, 1982.
o You are a nonresident alien.
o You transfer your contract to, or designate, a beneficiary who is either
37-1/2 years younger than you or a grandchild.
o You wish additional information on withholding taxes.
CONTRACTS HELD BY TAX FAVORED PLANS
Currently, the contract may be purchased for use in connection with individual
retirement accounts and annuities ("IRAs") which are subject to Sections 408(a),
408(b) and 408A of the Code. At some future time we may allow the contract to be
purchased in connection with other retirement arrangements which are also
entitled to favorable federal income tax treatment ("tax favored plans"). These
other tax favored plans include:
- --------------------------------------------------------------------------------
23
<PAGE>
8:
TAX CONSIDERATIONS ASSOCIATED WITH THE DISCOVERY SELECT CONTRACT CONTINUED
- --------------------------------------------------------------------------------
o Simplified employee pension plans ("SEPs") under Section 408(k) of the Code;
o Saving incentive match plans for employees-IRAs ("SIMPLE-IRAs") under
Section 408(p) of the Code; and
o Tax-deferred annuities ("TDAs") under Section 403(b) of the Code.
This description assumes that (i) we will be offering this to both IRA and
non-IRA tax favored plans, and (ii) you have satisfied the general requirements
for eligibility for these products.
TYPES OF TAX FAVORED PLANS
IRAS
If you buy a contract for use as an IRA, we will provide you a copy of the
prospectus, contract and a brochure containing information about eligibility,
contribution limits, tax particulars and other IRA information. In addition to
this information (some of which is summarized below), the IRS requires that you
have a "free look" after making an initial contribution to the contract. During
this time, you can cancel the contract by notifying us in writing, and we will
refund all of the purchase payments under the contract (or, if greater, the
amount credited under the contract, calculated as of the valuation period that
we receive this cancellation notice).
Contributions Limits/Rollovers: Because of the way the contract is designed,
you may only purchase a contract for an IRA in connection with a "rollover" of
amounts from a qualified retirement plan. You must make a minimum initial
payment of $10,000 to purchase a contract. This minimum is greater than the
maximum amount of any annual contribution you may make to an IRA (which is
generally $2,000/year). The "rollover" rules under the Code are fairly
technical; however, an individual (or his or her surviving spouse) may generally
"roll over" certain distributions from tax favored retirement plans (either
directly or within 60 days from the date of these distributions) if he or she
meets the requirements for distribution. Once you buy the contract, you can make
regular IRA contributions under the contract (to the extent permitted by
law). However, if you make such regular IRA contributions, you should note that
you will not be able to treat the contract as a "conduit IRA," which means that
you will not be able subsequently to "roll over" the contract funds into another
Section 401(a) plan or TDA (although you may be able to transfer the funds to
another IRA).
Required Provisions: Contracts that are IRAs (or endorsements that are part
of the contract) must contain certain provisions:
o You, as owner of the contract, must be the "annuitant" under the contract
(except in certain cases involving the division of property under a decree
of divorce); o Your rights as owner are non-forfeitable;
o You cannot sell, assign or pledge the contract, other than to us;
o The annual premium you pay cannot be greater than $2,000 (which does not
include any rollover amounts);
o The date on which annuity payments must begin cannot be later than the April
1st of the calendar year after the calendar year you turn age 70-1/2; and
o Death and annuity payments must meet "minimum distribution requirements"
(described below).
Usually, the full amount of any distribution from an IRA (including a
distribution from this contract) which is not a rollover is taxable. As taxable
income, these distributions are subject to the general tax withholding rules
described earlier. In addition to this normal tax liability, you may also be
liable for the following, depending on your actions:
o A 10% "early distribution penalty" (described below);
o Liability for "prohibited transactions" if you, for example, borrow against
the value of an IRA; or
o Failure to take a minimum distribution (also generally described below).
SEPS
SEPs are a variation on a standard IRA, and contracts issued to a SEP must
satisfy the same general requirements described under IRAs (above). There are,
however, some differences:
- --------------------------------------------------------------------------------
24
<PAGE>
- --------------------------------------------------------------------------------
o If you participate in a SEP, you generally do not include into income any
employer contributions made to the SEP on your behalf up to the lesser of
(a) $30,000 or (b) 15% of the employee's earned income (not including the
employer contribution amount as "earned income" for these purposes);
o SEPs must satisfy certain participation and nondiscrimination requirements
not generally applicable to IRAs; and
o Some SEPs for small employers permit salary deferrals (up to $10,000 in
1999) with the employer making these contributions to the SEP. However, no
new "salary reduction" or "SAR-SEPs" can be established after 1996.
You will also be provided the same information, and have the same "free
look" period, as you would have if you were purchasing the contract for a
standard IRA.
SIMPLE-IRAS
SIMPLE-IRAs are another variation on the standard IRA, available to small
employers (under 100 employees, on a "controlled group" basis) that do not offer
other tax favored plans. SIMPLE-IRAs are also subject to the same basic IRA
requirements with the following exceptions:
o Participants in a SIMPLE-IRA may contribute up to $6,000 (in 1999, indexed),
as opposed to the usual $2,000 limit, and employer contributions may also be
provided as either a match (up to 3% of your compensation); and
o SIMPLE -IRAs are not subject to the SEP nondiscrimination rules.
ROTH IRAS
Congress amended the Code in 1997 to add a new Section 408A, creating the "Roth
IRA" as a new type of individual retirement plan. Like standard IRAs, income
within a Roth IRA accumulates tax-free, and contributions are subject to
specific limits. Roth IRAs have, however, the following differences:
o Contributions to a Roth IRA cannot be deducted from your gross income;
o "Qualified distributions" (generally, held for 5 years and payable on
account of death, disability, attainment of age 59-1/2, or first
time-homebuyer) from Roth IRAs are excludable from your gross income; and
o If eligible, you may make contributions to a Roth IRA after attaining age
70-1/2, and distributions are not required to begin upon attaining such age
or at any time thereafter.
Because the contract's minimum initial payment of $10,000 is greater than
the maximum annual contribution permitted to be made to a Roth IRA (generally,
$2,000 less any contributions to a traditional IRA), you may purchase a contract
as a Roth IRA only in connection with a "rollover" or "conversion" of the
proceeds of another traditional IRA, conduit IRA, SEP, SIMPLE-IRA, or Roth IRA.
The Code permits persons who meet certain income limitations (generally,
adjusted gross income under $100,000), and who receive certain qualifying
distributions from such non-Roth IRAs, to directly rollover or make, within 60
days, a "rollover" of all or any part of the amount of such distribution to a
Roth IRA which they establish. This conversion triggers current taxation (but is
not subject to a 10% early distribution penalty). Once the contract has been
purchased, regular Roth IRA contributions will be accepted to the extent
permitted by law.
TDAS
You may own a TDA generally if you are either an employer or employee of a
tax-exempt organization (as defined under Code Section 501(c)(3)) or a public
educational organization, you may make contributions to a TDA so long as the
employee's rights to the annuity are nonforfeitable. Contributions to a TDA, and
any earnings, are not taxable until distribution. You may also make
contributions to a TDA under a salary reduction agreement, generally up to a
maximum of $10,000 (1999, indexed). Further, you may roll over TDA amounts to
another TDA or an IRA.
A contract may only qualify as a TDA if distributions (other than
"grandfathered" amounts held as of
- --------------------------------------------------------------------------------
25
<PAGE>
8:
TAX CONSIDERATIONS ASSOCIATED WITH THE DISCOVERY SELECT CONTRACT CONTINUED
- --------------------------------------------------------------------------------
December 31, 1988) may be made only on account of:
o Your attainment of age 59-1/2;
o Your severance of employment;
o Your death;
o Your total and permanent disability; OR
o Hardship (under limited circumstances, and only related to salary deferrals
and any earnings attributable to these amounts).
In any event, you must begin receiving distributions from your TDA by April
1st of the calendar year after the calendar year you turn age 70-1/2 or retire,
whichever is later.
These distribution limits do not apply either to transfers or exchanges of
investments under the contract, or to any "direct transfer" of your interest in
the contract to another TDA or to a mutual fund "custodial account" described
under Code Section 403(b)(7).
Employer contributions to TDAs are subject to the same general contribution,
nondiscrimination, and minimum participation rules applicable to "qualified"
retirement plans.
ADDITIONAL TAX FEATURES FOR TAX
FAVORED PLANS
MINIMUM DISTRIBUTION OPTION
If you hold the contract under an IRA or other tax favored plan, you can satisfy
the IRS minimum distribution requirements described above (generally,
distribution after age 70-1/2) under the contract without either annuitizing or
"cash surrendering" a portion of the contract. You, as owner of the contract,
can select either a "calculation" or "recalculation" method to determine the
minimum distribution. We will send you a check for the minimum distribution
amount, less any other partial withdrawals that you made during the year. More
information on the mechanics of this calculation is available on request.
PENALTY FOR EARLY WITHDRAWALS
You may owe a 10% penalty tax to the taxable part of distributions received from
an IRA, SEP, SIMPLE-IRA (which may increase to 25%), Roth IRA, TDA or qualified
retirement plan before you attain age 59-1/2. There are only limited exceptions
to this tax, and you should consult your tax adviser for further details.
WITHHOLDING
The Code requires a mandatory 20% federal income tax withholding for certain
distributions from a TDA or qualified retirement plan, unless the distribution
is an eligible rollover contribution that is "directly" rolled into another
qualified plan, IRA (including the IRA variations described above) or TDA. For
all other distributions, unless you elect otherwise, we will withhold federal
income tax from the taxable portion of such distribution at an appropriate
percentage. The rate of withholding on annuity payments where no mandatory
withholding is required is determined on the basis of the withholding
certificate that you file with us. If you do not file a certificate, we will
automatically withhold federal taxes on the following basis:
o For any annuity payments not subject to mandatory withholding, you will have
taxes withheld by us as if you are a married individual, with 3 exemptions;
and
o For all other distributions, you will be withheld at a 10% rate.
We will provide you with forms and instructions concerning the right to
elect that no amount be withheld from payments in the ordinary course. However,
you should know that, in any event, you are liable for payment of federal income
taxes on the taxable portion of the distributions, and you should consult with
your tax advisor to find out more information on your potential liability if you
fail to pay such taxes.
ERISA DISCLOSURE/REQUIREMENTS
ERISA (the "Employee Retirement Income Security Act of 1974") and the Code
prevents a fiduciary and other "parties in interest" with respect to a plan
(and, for these purposes, an IRA would also constitute a "plan") from receiving
any benefit from any party dealing with the plan, as a result of the sale of the
contract Administrative exemptions under ERISA generally permit the sale of
insurance/annuity products to plans, provided that certain information is
disclosed to the person purchasing the contract. This information has to do
primarily
- --------------------------------------------------------------------------------
26
<PAGE>
- --------------------------------------------------------------------------------
with the fees, charges, discounts and other costs related to the contract, as
well as any commissions paid to any agent selling the contract.
Information about any applicable fees, charges, discounts, penalties or
adjustments may be found under "What Are the Expenses Associated with the
Discovery Select Contract" starting on page 13. Information about sales
representatives and commissions may be found under "Other Information and "Sale
of the Contract and Distributor".
In addition, other relevant information required by the exemptions is
contained in the contract and accompanying documentation. Please consult your
tax advisor if you have any additional questions.
- --------------------------------------------------------------------------------
27
<PAGE>
9:
OTHER
INFORMATION
- --------------------------------------------------------------------------------
PRUCO LIFE INSURANCE COMPANY ON NEW JERSEY
Pruco Life Insurance Company of New Jersey is a stock life insurance company
organized in 1982 under the laws of the State of New Jersey. Pruco Life of New
Jersey is licensed to sell life insurance and annuities in the states of New
Jersey and New York and therefore is subject to the insurance laws and
regulations of those states where it is licensed to do business. Pruco Life of
New Jersey is a wholly-owned subsidiary of Pruco Life Insurance Company, which
is a wholly-owned subsidiary of The Prudential Life Insurance Company of America
(Prudential), a mutual insurance company founded in 1875 under the laws of the
State of New Jersey.
Prudential is currently considering reorganizing itself into a publicly
traded stock company though a process known as "demutualization." On February
10, 1998, the company's Board of Directors authorized management to take the
preliminary steps necessary to allow the company to demutalize. On July 1, 1998,
legislation was enacted in New Jersey that would permit this conversion to occur
and that specified the process for conversion. Demutualization is a complex
process involving development of a plan of reorganization, adoption of a plan by
the company's Board of Directors, a public hearing, voting by qualified
policyholders and regulatory approval. This process could take two or more years
to complete. Prudential's management and Board of Directors have not yet
determined to demutalize and it is possible that, after careful review,
Prudential could decide not to go public.
The plan of reorganization, which has not been developed and approved, would
provide the criteria for determining eligibility and the methodology for
allocating shares or other consideration to those who would be eligible.
Generally, the amount of shares or other consideration eligible customers would
receive would be based on a number of factors, including the types, amounts and
issue years of their policies. As a general rule, owners of Prudential-issued
insurance policies and annuity contracts would be eligible, while mutual fund
customers and customers of the company's subsidiaries, such as the Pruco Life
insurance companies, would not be. It has not yet been determined whether any
exceptions to that general rule will be made with respect to policyholders and
contractowners of Prudential's subsidiaries.
THE SEPARATE ACCOUNT
We have established a separate account, the Pruco Life of New Jersey Flexible
Premium Variable Annuity Account (Separate Account), to hold the assets that are
associated with the contracts. The Separate Account was established under New
Jersey law on May 20, 1996, and is registered with the U.S. Securities and
Exchange Commission under the Investment Company Act of 1940, as a unit
investment trust, which is a type of investment company. The assets of the
Separate Account are held in the name of Pruco Life of New Jersey and legally
belong to us. These assets are kept separate from all of our other assets and
may not be charged with liabilities arising out of any other business we may
conduct. More detailed information about Pruco Life of New Jersey, including its
audited financial statements, is provided in Part III of this prospectus.
EXPERTS
The financial statements of Pruco Life of New Jersey as of December 31, 1998 and
1997 and for each of the three years in the period ended December 31, 1998
included in this Prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting. PricewaterhouseCoopers LLP's
principal business address is 1177 Avenue of the Americas, New York, New York,
10036.
SALE OF THE CONTRACT AND DISTRIBUTOR
Prudential Investment Management Services LLC ("PIMS"), 751 Broad Street,
Newark, New Jersey 07102-3777, acts as the distributor of the contracts. PIMS is
a wholly-owned subsidiary of Prudential and is a limited liability corporation
organized under Delaware law in 1996. It is a registered broker-dealer under the
Securities Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc. Commissions for the sales of contracts are paid to
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
Prudential representatives and to other independent broker-dealers who sell the
contracts. Registered representatives of independent broker-dealers may be paid
on a different basis than those affiliated with PIMS. The maximum commission
that will be paid to the broker-dealer to cover both the individual
representative's commission and other distribution expenses will not be more
than 6.0% of the purchase payment.
ASSIGNMENT
You can assign the contract at any time during your lifetime. We will not be
Bound by the assignment until we receive written notice. We will not be liable
For any payment or other action we take in accordance with the contract if that
Action occurs before we receive notice of the assignment. An assignment, like
Any other change in ownership, may trigger a taxable event.
If the contract is issued under a qualified plan, there may be limitations
on your ability to assign the contract. For further information please speak to
your financial professional.
FINANCIAL STATEMENTS
The financial statements of the Separate Account associated with Discovery
Select are included in the Statement of Additional Information.
YEAR 2000 COMPLIANCE
The services provided to you as a purchaser of Discovery Select depend on the
smooth functioning of numerous computer systems. Many computer systems in use
today are programmed to recognize only the last two digits of a date as the
year. As a result, any systems using this kind of programming can not
distinguish a date using "00" and may treat it as "1900" instead of "2000." This
problem may impact computer systems that store business information, but it
could also affect other equipment used in our business like telephone, fax
machines and elevators. If this problem is not corrected, the "Year 2000" issue
could affect the accuracy and integrity of business records. Prudential's
regular business operations could be interrupted as well as those of other
companies that deal with us.
In addition, the operations of the mutual funds associated with Discovery
Select could experience problems resulting from the Year 2000 issue. Please
refer to the respective mutual fund's prospectus for information regarding their
approach to Year 2000 concerns. The following describes Prudential's effort to
address Year 2000 concerns.
To address this potential problem Prudential as the parent company of Pruco
Life of New Jersey organized its Year 2000 efforts around the following three
areas:
o BUSINESS SYSTEMS - Computer programs directly used to support our business;
o INFRASTRUCTURE - Computers and other business equipment like telephones and
fax machines; and
o BUSINESS PARTNERS - Year 2000 readiness of essential business partners.
BUSINESS SYSTEMS. The business systems component includes a wide range of
computer programs that directly support Prudential's business operations
including systems for: insurance product processing, securities trading,
personnel record keeping and general accounting systems. All business systems
were analyzed to determine whether each computer program with a Year 2000
problem should be retired, replaced or renovated. The majority of this work has
been completed. A few remaining programs are currently being tested and
completion of this process is expected by June 1999.
INFRASTRUCTURE. As with business applications, we established a specific
methodology and process for addressing infrastructure issues. The infrastructure
effort includes mainframe computer system hardware and operating system
software, mid-range systems and servers, telecommunications equipment and
systems, buildings and facilities systems, personal computers, and vendor
hardware and software. Other than desktop systems, substantially all other
infrastructure systems have been tested. Presently, a small number of midrange
computers, and building and facility systems are still in the testing phase. We
expect to have the infrastructure implementation process completed by June 1999.
BUSINESS PARTNERS. Prudential recognizes the importance of determining the
Year 2000 readiness of
- --------------------------------------------------------------------------------
29
<PAGE>
OTHER INFORMATION CONTINUED
- --------------------------------------------------------------------------------
external business relationships especially those that involve electronic data
transfer product and services, and products that impact our essential business
processes. Prudential first classified each business partner as "highly
critical" or "less critical" to our business, and then began to develop risk
assessment and contingency plans to address the potential that a business
partner could experience a Year 2000 failure. All highly critical business
partner relationships have been assessed and contingency planning is complete.
Risk assessment and contingency planning continues for less critical business
partners, and the target completion date for these relationships is June 1999.
Prudential believes that the Business Application, Infrastructure and
Business Partners components of the Year 2000 project are substantially on
schedule. A small number of the projects may not meet their targeted completion
date. However, Prudential expects that these projects will be completed by
September, 1999. If there are any delays, they should not have a significant
impact on the timing of the project as a whole.
THE COST OF YEAR 2000 READINESS
Prudential is funding the Year 2000 program from internal operating budgets, and
estimates that its total costs to address the Year 2000 issue will total
approximately $220 million. Because these expenses were part of the operating
budget, they did not impact the management of Discovery Select. During the
course of the Year 2000 program, some optional computer projects have been
delayed, but these delays have not had any material effect on Discovery Select.
YEAR 2000 RISKS AND CONTINGENCY PLANNING
Prudential believes that it is well positioned to lessen the impact of the Year
2000 problem. However, given the nature of this issue, we can not be 100%
certain that we are completely prepared, particularly because we can not be
certain of Year 2000 readiness of third parties. As a result, we are unable to
determine at this time whether the consequences of Year 2000 failures may have a
material adverse effect on the results of Prudential's operations, liquidity or
financial condition. In the worst case, it is possible that a Year 2000
technology failure, whether internal or external, could have a material impact
on Prudential's results of operations, liquidity, or financial position. If
Prudential is unable to address the Year 2000 problem, we may have difficulty in
responding to your incoming phone calls, calculating your unit values or
processing withdrawals and purchase payments. It is also possible that the
mutual funds associated with Discovery Select will be unable to value their
securities, in turn creating difficulties in purchasing or selling shares of the
respective mutual fund and calculating corresponding unit asset values. The
objective of Prudential's Year 2000 program has been to reduce these risks as
much as possible.
Most of the operations of Discovery Select involve such a large number of
individual transactions that they can only be handled with the help of
computers. As a result, our current contingency plans include responses to the
failure of specific business programs or infrastructure components. However, our
contingency responses are now being reviewed and we expect to finalize them by
June, 1999 to ensure that they are workable under the special conditions of a
Year 2000 failure. Prudential believes that with the completion of its Year 2000
program as scheduled, the possibility of significant interruptions of normal
operations will be reduced.
STATEMENT OF ADDITIONAL INFORMATION
Contents:
o Company
o Experts
o Litigation
o Legal Opinions
o Principal Underwriter
o Determination of Accumulation Unit Values
o Performance Information
o Comparative Performance Information
o Further Information about the Death Benefit
o Financial Information
- --------------------------------------------------------------------------------
30
<PAGE>
ACCUMULATION UNIT VALUES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATION UNIT VALUES: AS A PERCENTAGE OF EACH FUND'S AVERAGE DAILY NET ASSETS
ACCUMULATION UNIT VALUE ACCUMULATION UNIT VALUE NUMBER OF ACCUMULATION UNITS
AT BEGINNING OF PERIOD AT END OF PERIOD OUTSTANDING AT END OF PERIOD
<S> <C> <C> <C>
PRUDENTIAL DIVERSIFIED BOND PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
1/24/97* TO 12/31/97 $1.05924 $1.13525 4,451,359
1/1/98 TO 12/31/98 $1.13525 $1.19977 28,376,932
PRUDENTIAL EQUITY INCOME PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
1/24/97* TO 12/31/97 $1.24933 $1.66167 5,978,495
1/1/98 TO 12/31/98 $1.66167 $1.59960 25,310,440
PRUDENTIAL EQUITY PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
1/24/97* TO 12/31/97 $1.23280 $1.48518 9,062,852
1/1/98 TO 12/31/98 $1.48518 $1.60144 27,877,412
PRUDENTIAL GLOBAL PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
1/24/97* TO 12/31/97 $1.20025 $1.26079 1,544,582
1/1/98 TO 12/31/98 $1.26079 $1.55516 3,115,243
PRUDENTIAL HIGH YIELD PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
1/24/97* TO 12/31/97 $1.12690 $1.25972 5,397,207
1/1/98 TO 12/31/98 $1.25972 $1.21296 23,777,679
PRUDENTIAL MONEY MARKET PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
1/24/97* TO 12/31/97 $1.04778 $1.08688 5,366,453
1/1/98 TO 12/31/98 $1.08688 $1.12985 16,317,010
PRUDENTIAL JENNISON PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
1/24/97* TO 12/31/97 $1.19836 $1.48006 4,356,135
1/1/98 TO 12/31/98 $1.48006 $2.00651 19,579,080
PRUDENTIAL SMALL CAPITALIZATION STOCK PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
9/1/98* TO 12/31/98 $1.02621 $1.25353 514,051
PRUDENTIAL STOCK INDEX PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
1/24/97* TO 12/31/97 $1.18151 $1.48876 8,543,943
1/1/98 TO 12/31/98 $1.48876 $1.88540 25,485,050
AIM VI GROWTH AND INCOME FUND
- ------------------------------------------------------------------------------------------------------------------------------
1/24/97* TO 12/31/97 $1.08005 $1.28644 2,414,429
1/1/98 TO 12/31/98 $1.28644 $1.61976 5,636,579
AIM VI VALUE FUND
- ------------------------------------------------------------------------------------------------------------------------------
1/24/97* TO 12/31/97 $1.06636 $1.27997 2,687,877
1/1/98 TO 12/31/98 $1.27997 $1.67125 6,623,349
AMERICAN CENTURY VP VALUE FUND
- ------------------------------------------------------------------------------------------------------------------------------
9/1/98* TO 12/31/98 $1.02098 $1.17305 122,871
THIS CHART CONTINUES ON THE NEXT PAGE
- --------------------------------------------------------------------------------
31
</TABLE>
<PAGE>
ACCUMULATION UNIT VALUES CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATION UNIT VALUES (CONTINUED): AS A PERCENTAGE OF EACH FUND'S AVERAGE DAILY NET ASSETS
ACCUMULATION UNIT VALUE ACCUMULATION UNIT VALUE NUMBER OF ACCUMULATION UNITS
AT BEGINNING OF PERIOD AT END OF PERIOD OUTSTANDING AT END OF PERIOD
<S> <C> <C> <C>
JANUS ASPEN SERIES GROWTH PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
1/24/97* TO 12/31/97 $1.04112 $1.22056 2,360,624
1/1/98 TO 12/31/98 $1.22056 $1.63278 6,145,905
JANUS ASPEN SERIES INTN'L GROWTH PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
1/24/97* TO 12/31/97 $1.07728 $1.23121 3,626,939
1/1/98 TO 12/31/98 $1.23121 $1.42337 7,490,614
MFS EMERGING GROWTH SERIES
- ------------------------------------------------------------------------------------------------------------------------------
1/24/97* TO 12/31/97 $0.99843 $1.15186 2,636,905
1/1/98 TO 12/31/98 $1.15186 $1.52386 8,147,991
MFS RESEARCH SERIES
- ------------------------------------------------------------------------------------------------------------------------------
1/24/97* TO 12/31/97 $1.05478 $1.21695 2,159,262
1/1/98 TO 12/31/98 $1.21695 $1.48048 4,582,935
OCC ACCUMULATION TRUST MANAGED PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
1/24/97* TO 12/31/97 $1.08859 $1.26668 7,302,011
1/1/98 TO 12/31/98 $1.26668 $1.34022 21,770,163
OCC ACCUMULATION TRUST SMALL CAP PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
1/24/97* TO 12/31/97 $1.05425 $1.26710 2,630,491
1/1/98 TO 12/31/98 $1.26710 $1.13668 6,811,750
TEMPLETON VARIABLE PRODUCTS SERIES FUND
FRANKLIN SMALL CAP INVESTMENTS FUND - CLASS 2
- ------------------------------------------------------------------------------------------------------------------------------
9/1/98* TO 12/31/98 $1.00945 $1.24477 253,350
T. ROWE PRICE EQUITY INCOME PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
1/24/97* TO 12/31/97 $1.07051 $1.33212 3,846,266
1/1/98 TO 12/31/98 $1.33212 $1.43277 9,576,908
T. ROWE PRICE INTN'L SERIES - INTN'L STOCK PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
1/24/97* TO 12/31/97 $1.02164 $1.05690 1,286,791
1/1/98 TO 12/31/98 $1.05690 $1.20747 2,623,440
WARBURG PINCUS TRUST POST-VENTURE CAPITAL PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------
1/24/97* TO 12/31/97 $0.98396 $1.07018 624,929
1/1/98 TO 12/31/98 $1.07018 $1.12410 1,555,894
* COMMENCEMENT OF BUSINESS
</TABLE>
- --------------------------------------------------------------------------------
32
<PAGE>
MARKET-VALUE
ADJUSTMENT FORMULA
- --------------------------------------------------------------------------------
MARKET-VALUE ADJUSTMENT FORMULA
The Market-Value Adjustment, which is applied to withdrawals and transfers
made at any time other than the 30-day period following the end of an interest
rate period, involves three amounts:
1) The number of whole months remaining in the existing interest rate period.
2) The guaranteed interest rate.
3) The interest rate that Pruco Life declares for a duration of one year longer
than the number of whole years remaining on the existing cell being
withdrawn from.
STATED AS A FORMULA, THE MARKET VALUE IS EQUAL TO:
(M/12) X (R-C)
NOT TO EXCEED +0.40 OR BE LESS THAN -0.40; WHERE,
- --------------------------------------------------------------------------------
M = the number of whole months (not to be less than one) remaining in the
interest-rate period.
R = the Contract's guaranteed interest-rate expressed as a decimal. Thus 6.2% is
converted to 0.062.
C = the interest-rate, expressed as a decimal, that Pruco Life declares for a
duration equal to the number of whole years remaining in the present
interest-rate period, plus 1 year as of the date the request for a
withdrawal or transaction is received.
- --------------------------------------------------------------------------------
The Market-Value Adjustment is then equal to the Market Value Factor multiplied
by the amount subject to a Market-Value Adjustment.
STEP BY STEP
THE STEPS BELOW EXPLAIN HOW A MARKET-VALUE ADJUSTMENT IS CALCULATED.
STEP 1: Divide the number of whole months left in the existing interest rate
period (not to be less than one) by 12.
STEP 2: Divide the interest rate Pruco Life declares on the date the request for
withdrawal or transfer is received for a duration of years equal to the whole
number of years determined in Step 1, plus 1 additional year. Subtract this
interest rate from the guaranteed interest rate. The result could be negative.
STEP 3: Multiply the results of Step 1 and Step 2. Again, the result could be
negative. If the result is less than -0.4, use the value -0.4. If the result is
in between -0.4 and 0.4, use the actual value. If the result is more than 0.4,
use the value 0.4.
STEP 4: Multiply the result of Step 3 (which is the Market Value Factor) by the
value of the amount subject to a Market-Value Adjustment. The result is the
Market-Value Adjustment.
STEP 5: The result of Step 4 is added to the interest cell. If the Market-Value
Adjustment is positive, the interest cell will go up in value. If the
Market-Value Adjustment is negative, the interest cell will go down in value.
DEPENDING UPON WHEN THE WITHDRAWAL REQUEST IS MADE, A WITHDRAWAL CHARGE MAY
APPLY.
THE FOLLOWING EXAMPLE WILL ILLUSTRATE THE APPLICATION OF A MARKET-VALUE
ADJUSTMENT AND THE DETERMINATION OF THE WITHDRAWAL CHARGE:
SUPPOSE A CONTRACTOWNER MADE TWO INVESTED PURCHASE PAYMENTS, THE FIRST IN THE
AMOUNT OF $10,000 ON DECEMBER 1 1995, ALL OF WHICH WAS ALLOCATED TO THE EQUITY
SUBACCOUNT, AND THE SECOND IN THE AMOUNT OF $5,000 ON OCTOBER 1 1997, ALL OF
WHICH WAS ALLOCATED TO THE MVA OPTION WITH A GUARANTEED INTEREST RATE OF 8%
(0.08) FOR 7 YEARS. A REQUEST FOR WITHDRAWAL OF $8,500 IS MADE ON FEBRUARY 1,
2000 (THE CONTRACT OWNER DOES NOT PROVIDE ANY WITHDRAWAL INSTRUCTIONS). ON THAT
DATE THE AMOUNT IN THE EQUITY SUBACCOUNT IS EQUAL TO $12,000 AND THE AMOUNT IN
THE INTEREST CELL WITH A MATURITY DATE OF SEPTEMBER 30, 2004 IS $5,985.23, SO
THAT THE CONTRACT FUND ON THAT DATE IS EQUAL TO $17,985.23.
ON FEBRUARY 1, 2000, THE INTEREST RATES DECLARED BY PRUCO LIFE FOR THE
DURATION OF 5 YEARS (4 WHOLE YEARS REMAINING UNTIL SEPTEMBER 30, 2004, PLUS 1
YEAR) IS 11%.
- --------------------------------------------------------------------------------
33
<PAGE>
MARKET-VALUE ADJUSTMENT FORMULA CONTINUED
- --------------------------------------------------------------------------------
THE FOLLOWING COMPUTATIONS WOULD BE MADE:
1) Calculate the Contract Fund value as of the effective date of the
transaction. This would be $17,985.23.
2) Calculate the charge-free amount (the amount of the withdrawal that is not
subject to a withdrawal charge).
DATE PAYMENT FREE
-------------------------------------------------
12/1/95 $10,000 $1,000
12/1/96 $2,000
10/1/97 $5,000 $2,500
12/1/97 $4,000
12/1/98 $5,500
12/1/99 $7,000
The charge-free amount in the fifth Contract year is 10% of $15,000 (total
purchase payments) plus $5,500 (the charge-free amount available in the
fourth Contract year) for a total of $7,000.
3) Since the withdrawal request is in the fifth Contract year, a 3% withdrawal
charge rate applies to any portion of the withdrawal which is not
charge-free.
-------------------------------------------------
$8,500.00 REQUESTED WITHDRAWAL AMOUNT
-$7,000.00 CHARGE-FREE
-------------------------------------------------
$1,500.00 ADDITIONAL AMOUNT NEEDED TO
COMPLETE WITHDRAWAL
The Contract provides that the Contract Fund will be reduced by an amount
which, when reduced by the withdrawal charge, will equal the amount
requested. Therefore, in order to produce the amount needed to complete the
withdrawal request ($1,500), we must "gross-up" that amount, before applying
the withdrawal charge rate. This is done by dividing by 1 minus the
withdrawal charge rate.
-------------------------------------------------
$1,500.00 / (1-.03) =
$1,500.00 / 0.97 = $1,546.39 GROSSED-UP AMOUNT
Please note that a 3% withdrawal charge on this grossed-up amount reduces it
to $1,500, the balance needed to complete the request.
-------------------------------------------------
$1,546.39 GROSSED-UP AMOUNT
X .03 WITHDRAWAL CHARGE RATE
-------------------------------------------------
$46.39 WITHDRAWAL CHARGE
4) The Market Value Factor is determined as described in steps 1 through 5,
above. In this case, it is equal to 0.08 (8% is the guaranteed rate in the
existing cell) minus 0.11 (11% is the interest-rate that would be offered
for an interest cell with a duration of the remaining whole years plus 1),
which is -0.03, multiplied by 4.58333 (55 months remaining until September
30, 2004, divided by 12) or -0.13750. Thus, there will be a negative
Market-Value Adjustment of 14% of the amount in the interest cell that is
subject to the adjustment.
-------------------------------------------------
-0.13750 X $5,985.23 =
-------------------------------------------------
-822.97 NEGATIVE MVA
$5,985.23 UNADJUSTED VALUE
-------------------------------------------------
$5,162.26 ADJUSTED VALUE
$12,000.00 EQUITY VALUE
-------------------------------------------------
$17,162.26 ADJUSTED CONTRACT FUND
5) The total amount to be withdrawn, $8,546.39, (sum of the surrender charge,
$46.39, and the requested withdrawal amount of $8,500) is apportioned over
all accounts making up the Contract Fund following the Market-Value
Adjustments, if any, associated with the MVA option.
--------------------------------------------------
EQUITY
($12,000/$17,162.26) X $8,546.39 = $5,975.71
--------------------------------------------------
7-YR MVA
($5,162.26/$17,162.26) X $8,546.39= $2,570.68
---------
$8,546.39
6) The adjusted value of the interest cell, $5,162.26, reduced by the
withdrawal of $2,570.68 leaves $2,591.58. This amount must be "unadjusted"
by dividing it by 0.86250 (1 plus the Market-Value Adjustment of -0.13750)
to determine the amount remaining in the interest cell to which the
guaranteed interest-rate of 8% will continue to be credited until September
30, 2004 or a subsequent withdrawal. That amount is $3,004.73.
- --------------------------------------------------------------------------------
34
<PAGE>
<TABLE>
DISCOVERY SELECT(R) VARIABLE ANNUITY
FURTHER INFORMATION ABOUT PRUCO LIFE OF NEW JERSEY
This section provides further information about Pruco Life of New Jersey. Presented first is selected financial data
followed by a discussion of Pruco Life of New Jersey's overall business status. We have also provided a listing of
Pruco Life of New Jersey's officers and directors as well as a complete set of audited financial statements.
SELECTED FINANCIAL DATA
<CAPTION>
Pruco Life Insurance Company of New Jersey
For the Years Ended December 31,
--------------------------------
(In Thousands)
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues
Premiums and other revenue............................... $ 63,347 $ 62,773 $ 63,963 $ 64,457 $ 60,091
Realized investment gains, net........................... 8,446 1,707 1,221 3,592 (8,310)
Net investment income.................................... 47,032 46,324 43,784 43,530 42,357
------------- ------------- ------------- ------------- -------------
Total revenues 118,825 110,804 108,968 111,579 94,138
Benefits and expenses
Current and future benefits and claims................... 47,327 53,371 48,722 47,695 44,939
Other expenses........................................... 22,105 27,236 12,848 21,881 23,716
------------- ------------- ------------- ------------- -------------
Total benefits and expenses............................... 69,432 80,607 61,570 69,576 68,655
------------- ------------- ------------- ------------- -------------
Income before income tax provision........................ 49,393 30,197 47,398 42,003 25,483
Income tax provision...................................... 17,570 10,974 15,611 15,002 9,483
------------- ------------- ------------- ------------- -------------
Net income................................................ $ 31,823 $ 19,223 $ 31,787 $ 27,001 $ 16,000
============= ============= ============= ============= =============
Total assets at period end................................ $ 2,411,157 $ 2,002,432 $ 1,695,616 $ 1,558,282 $ 1,424,886
============= ============= ============= ============= =============
Separate Account liabilities.............................. $ 1,450,986 $ 1,108,994 $ 880,065 $ 787,566 $ 639,928
============= ============= ============= ============= =============
</TABLE>
A-1
<PAGE>
DISCOVERY SELECT(R) VARIABLE ANNUITY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
AND RESULTS OF OPERATIONS.
The following analysis should be read in conjunction with the Notes to Financial
Statements.
The Company markets individual life insurance, variable life insurance, variable
annuities, and fixed annuities through Prudential's sales force in New Jersey
and New York.
The Company markets its products in the life insurance and annuity sectors of
the insurance industry. These markets are subject to regulatory oversight with
particular emphasis placed on company solvency and sales practices. These
markets are also subject to increasing competitive pressures as the legal
barriers which have historically segregated the markets of the financial
services industry are being challenged through both legislative and judicial
processes. Regulatory changes have opened the insurance industry to competition
from other financial institutions, particularly banks and mutual funds, that are
positioned to deliver competing investment products through large, stable
distribution channels.
The Company had $2.4 billion in assets at December 31, 1998 compared to $2.0
billion at December 31, 1997, of which $1.5 billion and $1.1 billion were held
in Separate Accounts in 1998 and 1997, respectively under variable life
insurance policies and variable annuity contracts. The remaining assets
consisted primarily of general account investments in bonds, policy loans, and
short-term investments.
1. RESULTS OF OPERATIONS
Net income for the year ended December 31, 1998 was $31.8 million, an increase
of $12.6 million or 66% from $19.2 million earned in the year ended December 31,
1997. Net income for the year ended December 31, 1996 was $31.8 million.
(a) 1998 versus 1997
Total insurance revenues, consisting of premiums and policy charges and fee
income increased $.1 million for the year ended December 31, 1998 to $57.6
million from $57.5 million for the year ended December 31, 1997. This increase
in insurance revenues is primarily attributable to an increase in sales of
Discovery Select, a variable annuity retirement type product. This has proven to
be a successful product of the Company's portfolio since its introduction in
January 1997. However, these gains were offset by a decline in the number of
traditional life insurance policies in force in 1998 compared to 1997.
The Company's net investment income increased $.7 million for the year ended
December 31, 1998 to $47.0 million from $46.3 million for the year ended
December 31, 1997. Realized investment gains, net, increased $6.7 million for
the year ended December 31, 1998 to $8.4 million from $1.7 million for the year
ended December 31, 1997. Please refer to the section below titled "Investment
Portfolio and Investment Strategies" for a discussion of investment income and
net unrealized investment gains by asset type.
Other income increased $.5 million for the year ended December 31, 1998 to $5.8
million from $5.3 million for the year ended December 31, 1997. The portfolio of
mutual fund investments related to the Company's Separate Account products are
known as The Prudential Series Fund. The Company receives an allocated portion
of investment management fees that Prudential earns from the Prudential Series
Fund and records these fees in "Other income."
Policyholders' benefits decreased $5.7 million for the year ended December 31,
1998 to $28.3 million from $34.0 million for the year ended December 31, 1997.
This decrease is attributable to a favorable change in reserves due to better
than expected mortality experiences.
Interest credited to policyholders' account balances decreased by $.4 million
for the year ended December 31, 1998 to $19.0 million from $19.4 million for the
year ended December 31, 1997. This decrease is primarily
A-2
<PAGE>
DISCOVERY SELECT(R) VARIABLE ANNUITY
attributable to a decrease in interest crediting rates, partially offset by
increased interest credited to policy loans as well as increased fund values due
to new sales of Separate Account products.
Other operating costs and expenses decreased $5.1 million for the year ended
December 31, 1998 to $22.1 million compared to $27.2 million for the year ended
December 31, 1997. This decrease is primarily attributable to refinements in the
DAC amortization model leading to comparably lower 1998 expenses. Offsetting
this decrease was an increase in sales volume of Discovery Select which resulted
in a corresponding increase in expenses. In addition to the increased sales
volume, the Parent company's expense allocation methodology changed in 1998,
resulting in increased expenses allocated to the Company.
INVESTMENT PORTFOLIO AND INVESTMENT STRATEGIES
The Company's investment portfolio supports its insurance and annuity
liabilities and other obligations to customers for which it assumes investment
related risks. The portfolio was comprised of total investments amounting to
$816.2 million at December 31, 1998, versus $772.1 million at December 31, 1997.
A diversified portfolio of publicly traded bonds, private placement investments
and short term investments is managed under strategies intended to maintain
optimal asset mix consistent with current and anticipated cash flow requirements
of the related obligations.
The asset management strategy for the portfolio is set in accordance with an
investment policy statement developed and coordinated within the Company by the
Portfolio Management Group, agreed to by senior management, and approved by the
Board of Directors. In managing the investment portfolio, the long term
objective is to generate favorable investment results through asset-liability
management, strategic and tactical asset allocation and asset manager selection.
Asset mix strategies are constrained by the need to match asset structure to
product liabilities, considering the underlying income and return
characteristics of investment alternatives and seeking to closely approximate
the interest rate sensitivity of the asset portfolio with the estimated interest
rate sensitivity of the product liabilities. Asset mix strategies also include
maintenance of broad diversification across asset classes, issuers and sectors;
effective utilization of capital while maintaining liquidity believed to be
adequate to satisfy cash flow requirements; and achievement of competitive
performance. The major categories of invested assets, quality across the
portfolio, and recent activities to manage the portfolio are discussed below.
FIXED MATURITIES
The fixed maturity portfolio is diversified across maturities, sectors and
issuers. The Company has classified all securities as "available for sale".
Fixed maturities totaled $622.9 million, an increase of $30.6 million compared
to December 31, 1997. The increase is primarily attributable to a higher
beginning of year asset base.
<TABLE>
<CAPTION>
1998 1997
---------------------------------------- ------------------------------------------
NET NET
AMORTIZED ESTIMATED UNREALIZED AMORTIZED ESTIMATED UNREALIZED
COST FAIR VALUE GAINS COST FAIR VALUE GAINS
------------- ------------ ------------- ------------- ------------- -------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
FIXED MATURITIES - AVAILABLE FOR SALE
Publicly traded............................... $ 537,339 $ 541,874 $ 4,535 $ 575,110 $ 582,315 $ 7,205
Privately traded.............................. 80,419 81,116 697 9,999 10,046 47
------------- ------------ ------------- ------------- ------------- -------------
TOTAL......................................... $ 617,758 $ 622,990 $ 5,232 $ 585,109 $ 592,361 $ 7,252
============= ============ ============= ============= ============= =============
</TABLE>
At December 31, 1998, the net unrealized capital gains on the fixed maturity
portfolio totaled $5.2 million compared to $7.3 million at December 31, 1997.
The decrease is primarily due to the effect of a higher level of sales activity,
offset in part by the effect of lower interest rates.
A-3
<PAGE>
DISCOVERY SELECT(R) VARIABLE ANNUITY
At December 31, 1998, the Company's holdings of private placement fixed
maturities totaled $81.1 million and constituted 13% of total fixed maturities
compared to $10.0 million representing 2% in 1997. These investments generally
offer higher yields than comparable quality public market securities, increase
the diversification of the portfolio, and contain tighter covenant protection
than public securities.
Gross investment income was relatively unchanged from year to year, despite the
increase in the average size of the fixed maturity portfolio from 1997 to 1998.
Realized gains increased by $4.7 million from 1997 primarily due to the sale of
fixed maturities during a period of declining interest rates. The table below
presents a summary of investment results from fixed maturity investments.
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997
----------- -----------
(In Thousands)
Gross investment income................. $ 39,478 $ 37,563
Yield (1)............................... 6.94% 6.97%
Realized capital gains.................. $ 6,360 $ 1,707
(1) Yields are determined by dividing gross investment income by the average of
quarter-end asset carrying values, excluding unrealized gains and losses, less
one-half of gross investment income.
A-4
<PAGE>
DISCOVERY SELECT(R) VARIABLE ANNUITY
CREDIT QUALITY
The following table describes the credit quality of the fixed maturity
portfolio, based on ratings assigned by the National Association of Insurance
Commissioners ("NAIC") or Standard & Poor's Corporation, an independent rating
agency:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------------------------------- ----------------------------------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
NAIC STANDARD & POOR'S COST % FAIR VALUE % COST % FAIR VALUE %
---- ------------------ ------------------------ ------------------------- -------------------------- -----------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 AAA to AA- $ 303,209 49.1% $ 306,693 49.2% $ 310,409 53.0% $ 313,746 53.0%
2 BBB+ to BBB- 286,640 46.4 287,888 46.2 254,084 43.4 257,024 43.4
3 BB+ to BB- 27,134 4.4 27,692 4.5 20,616 3.6 21,591 3.6
4 B+ to B- 704 0.1 638 0.1 -- -- -- --
5 CCC or lower 71 -- 79 -- -- -- -- --
6 In or near default -- -- -- -- -- -- -- --
------------- -------------- ------------- --------------
TOTAL $ 617,758 $ 622,990 $ 585,109 $ 592,361
============= ============== ============== ==============
</TABLE>
The fixed maturity portfolio consists largely of investment grade assets (rated
"1" or "2" by the NAIC), with such investments accounting for 95% and 96% of the
portfolio at December 31, 1998 and 1997, respectively, based on fair value.
The Company continually reviews fixed maturities and identifies potential
problem assets which require additional monitoring. The Company defines
"problem" fixed maturities as those for which principal and/or interest payments
are in default. The Company defines "potential problem" fixed maturities as
assets which are believed to present default risk associated with future debt
service obligations and therefore require more active management. Management has
identified no fixed maturity investments as problem or potential problem asset
at December 31, 1998 and 1997.
PORTFOLIO DIVERSITY
The fixed maturity portfolio is broadly diversified by type and industry of
issuer. The greatest industry concentrations within the public portfolio were
finance, manufacturing, and utilities. While the greatest concentration within
the private portfolio was asset backed securities. The total portfolio is
summarized below by issuer category:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------------- ------------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
------------ ------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C> <C>
United States government securities
and obligations............................................... $ 51,663 $ 51,605 $ 42,885 $ 43,222
Mortgage backed securities........................................ 1,507 1,505 2,039 2,036
Asset backed securities (1)....................................... 78,396 79,075 5,076 5,070
Manufacturing .................................................... 95,713 96,369 92,805 94,041
Utilities......................................................... 101,287 102,487 87,416 88,996
Retail and wholesale.............................................. 9,992 9,834 0 0
Finance........................................................... 120,084 121,470 221,624 223,900
Services.......................................................... 78,586 78,727 54,075 54,494
Transportation.................................................... 49,695 50,331 40,856 41,717
Other............................................................. 30,835 31,587 38,333 38,885
------------ ------------ ------------ ------------
TOTAL............................................................. $ 617,758 $ 622,990 $ 585,109 $ 592,361
============ ============ ============ ============
</TABLE>
(1) The asset backed securities are primarily backed by credit card receivables,
home equity loans, trade receivables and auto loans.
A-5
<PAGE>
DISCOVERY SELECT(R) VARIABLE ANNUITY
SHORT-TERM INVESTMENTS
Short-term investments include highly liquid debt instruments such as commercial
paper and are purchased with an original maturity of twelve months or less.
These securities are carried at amortized cost, which approximates fair value.
As of December 31, 1998, the Company's short-term investments totaled $53.8
million versus $52.5 million at December 31, 1997. While assets and income are
relatively unchanged, the short-term yield decreased 210 basis points primarily
due to lower average interest rates in 1998 compared to 1997. The table below
presents summary data with respect to the Company's short-term investment
positions:
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997
----------- -----------
(In Thousands)
Carrying amount at end of period........ $ 53,761 $ 52,464
Net investment income................... $ 3,502 $ 3,023
Yield (1)............................... 5.38% 7.48%
(1) Yields are determined by dividing net investment income by the average of
quarter-end asset carrying values, less one-half of net investment income.
(b) 1997 versus 1996
Total insurance revenues, consisting of premiums and policy charges and fee
income, decreased $2.4 million for the year ended December 31, 1997 to $57.5
million from $59.9 million for the year ended December 31, 1996. This decrease
in insurance revenues is primarily attributable to a decrease of $2.2 million in
policy charges and fee income. This is a result of an aging book of business
along with an increased emphasis in the domestic market place on retirement type
products rather than life insurance protection products.
The Company's net investment income increased $2.5 million for the year ended
December 31, 1997 to $46.3 million from $43.8 million for the year ended
December 31, 1996. Increase in cash flows from insurance operations and average
assets as well as the asset mix strategies, produced favorable investment
results in 1997. Fixed maturity income increased in 1997 due to higher
investment returns as a result of a shift to higher yielding securities. Income
from short-term investments increased because of higher fixed maturity assets
available to lend to third parties as part of the Company's securities lending
program.
Other income increased $1.3 million for the year ended December 31, 1997 to $5.3
million from $4.0 million for the year ended December 31, 1996. This increase is
due a higher level of advisory fees attributable to the Discovery Preferred and
Discovery Select Separate Account products.
Policyholders' benefits increased $5.3 million for the year ended December 31,
1997 to $34.0 million from $28.7 million for the year ended December 31, 1996.
This increase is attributable to an increase in mortality costs associated with
the aging book of business.
Other operating costs and expenses increased $14.4 million for the year ended
December 31, 1997 to $27.2 million compared to $12.8 million for the year ended
December 31, 1996. The increase reflects factors including the refinement of
estimated gross profit margins used to amortize deferred policy acquisition
costs (DAC). Favorable mortality experience and reduction in cost of insurance
charges contributed to a change in net amortization. Also, increased operating
costs resulted from higher sales activity of Discovery Select and Discovery
Preferred annuity products, and technological advancements made in annuity
processing, customer service, and product development.
A-6
<PAGE>
DISCOVERY SELECT(R) VARIABLE ANNUITY
2. LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements include the payment of sales commissions
and other underwriting expenses and the funding of its contractual obligations
for the life insurance and annuity contracts it has in-force. The Company has
developed and utilizes a cash flow projection system and regularly performs
asset/liability duration matching in the management of its asset and liability
portfolios. The Company anticipates funding all its cash requirements utilizing
cash from operations, normal investment maturities and anticipated calls and
repayments or through short term lending from its affiliate Prudential Funding
Corporation (see Item 13 Certain Relationships and Related Transactions). As of
December 31, 1998, the Company's assets included $567.5 million of cash,
short-term investments and investment grade publicly traded fixed maturity
securities that could be liquidated if funds were required.
In order to continue to market life insurance and annuity products, the Company
must meet or exceed the statutory capital and surplus requirements of the
insurance departments of the states in which it conducts business. Statutory
accounting practices differ from generally accepted accounting principles
("GAAP") in two major respects. First, under statutory accounting practices, the
acquisition costs of new business are charged to expense, while under GAAP they
are initially deferred and amortized over a period of time. Second, under
statutory accounting practices, the required additions to statutory reserves for
new business in some cases may initially exceed the statutory revenues
attributable to such business. These practices result in a reduction of
statutory income and surplus at the time of recording new business.
Insurance companies are subject to Risk-Based Capital (RBC) guidelines,
monitored by insurance regulatory authorities, that measure the ratio of the
Company's statutory equity with certain adjustments ("Adjusted Capital") to its
required capital, based on the risk characteristics of its insurance liabilities
and investments. Required capital is determined by statutory formulae that
consider risks related to the type and quality of invested assets,
insurance-related risks associated with the Company's products, interest rate
risks, and general business risks. The RBC calculations are intended to assist
regulators in measuring the adequacy of the Company's statutory capitalization.
The Company considers RBC implications in its asset/liability management
strategies. Each year, the Company conducts a thorough review of the adequacy of
statutory insurance reserves and other actuarial liabilities. The review is
performed to ensure that the Company's statutory reserves are computed in
accordance with accepted actuarial standards, reflect all contractual
obligations, meet the requirements of state laws and regulations and include
adequate provisions for any other actuarial liabilities that need to be
established. All significant reserve changes are reviewed by the Board of
Directors and are subject to approval by the New Jersey Department of Banking
and Insurance. The Company believes that its statutory capital is adequate for
its currently anticipated levels of risk as measured by regulatory guidelines.
The National Association of Insurance Commissioners recently approved a series
of codified statutory accounting standards for consideration by the various
state regulators. Certain of the proposed standards, if adopted by insurance
regulatory authorities, could have an impact on the measurement of statutory
capital which, in turn, could affect RBC ratios of insurance companies. If
adopted, implementation could commence with 1999 statutory financial statements.
At the present time, the Company cannot estimate the potential impact of these
proposed standards on its RBC position.
3. REGULATORY ENVIRONMENT
The Company is subject to the laws of the State of New Jersey as governing
insurance companies and to the regulations of the New Jersey Department of
Banking and Insurance (the "Insurance Department"). A detailed financial
statement in the prescribed form (the "Annual Statement") is filed with the
Insurance Department each year covering the Company's operations for the
preceding year and its financial position as of the end of that year. Regulation
by the Insurance Department includes periodic examination to verify the accuracy
of contract
A-7
<PAGE>
DISCOVERY SELECT(R) VARIABLE ANNUITY
liabilities and reserves. The Company's books and accounts are subject to review
by the Insurance Department at all times.
A full examination of the Company's operations is conducted periodically by the
Insurance Department and under the auspices of the NAIC.
The Company is subject to regulation under the insurance laws of all
jurisdictions in which it operates. The laws of the various jurisdictions
establish supervisory agencies with broad administrative powers with respect to
various matters, including licensing to transact business, overseeing trade
practices, licensing agents, approving contract forms, establishing reserve
requirements, fixing maximum interest rates on life insurance contract loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required financial statements and regulating the type and amounts of
investments permitted. The Company is required to file the Annual Statement with
supervisory agencies in each of the jurisdictions in which it does business, and
its operations and accounts are subject to examination by these agencies at
regular intervals.
The NAIC has adopted several regulatory initiatives designed to improve the
surveillance and financial analysis regarding the solvency of insurance
companies in general. These initiatives include the development and
implementation of a risk-based capital formula for determining adequate levels
of capital and surplus. Insurance companies are required to calculate their
risk-based capital in accordance with this formula and to include the results in
their Annual Statement. It is anticipated that these standards will have no
significant effect upon the Company.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Certain insurance products of the Company are subject to
various federal securities laws and regulations. In addition, current and
proposed federal measures which may significantly affect the insurance business
include regulation of insurance company solvency, employee benefit regulation,
removal of barriers preventing banks from engaging in the insurance business,
tax law changes affecting the taxation of insurance companies and the tax
treatment of insurance products and its impact on the relative desirability of
various personal investment vehicles.
4. THE YEAR 2000 ISSUE
Pruco Life of New Jersey utilizes many of the same business applications,
infrastructure and business partners as Prudential. Prudential has addressed the
Year 2000 issue on an enterprise-wide basis. Therefore, it is not possible to
differentiate Pruco Life of New Jersey's Year 2000 issue from that of
Prudential. The accompanying discussion of the Year 2000 issue reflects steps
taken by Prudential to mitigate the Year 2000 risks.
Many computer systems are programmed to recognize only the last two digits in a
date. As a result, any computer system that has date-sensitive programming may
recognize a date using "00" as the year 1900 rather than the year 2000. This
problem can affect non-information technology systems that include embedded
technology, such as microprocessors included in "infrastructure" equipment used
for telecommunications and other services as well as computer systems. If this
anomaly is not corrected, the year "00" could cause systems to perform date
comparisons and calculations incorrectly, which could in turn affect the
accuracy and compromise the integrity of business records. Business operations
could be interrupted when companies are unable to process transactions, send
invoices, or engage in similar normal business activities.
Prudential established a Company-wide Program Office (CPO) to develop and
coordinate an operating framework for the Year 2000 compliance activities.
Prudential's CPO structured the Year 2000 program into three major components:
Business Applications, Infrastructure and Business Partners. The CPO also
established quality assurance procedures including a certification process to
monitor and evaluate enterprise-wide progress of each component of Prudential's
program for conversion and upgrading of systems for Year 2000 compliance.
A-8
<PAGE>
DISCOVERY SELECT(R) VARIABLE ANNUITY
BUSINESS APPLICATIONS
The scope of the Business Applications component includes a wide range of
computer systems that directly support Prudential's business operations and
accounting systems. The entire application portfolio was analyzed in 1996 to
determine appropriate Year 2000 readiness strategies (i.e., renovate, replace or
retire). Rigorous testing standards have been employed for all applications that
will not be retired, including those that are newly developed or purchased.
Application replacement and renovation projects follow a similar path toward
Year 2000 compliance. The key project phases include Year 2000 analysis and
design, programming activities, testing, and implementation. Replacement
projects are also tracked until the existing applications are removed from
production.
Of Prudential's total application portfolio, approximately 70% of the
applications are being renovated, 13% are being replaced by Year 2000 compliant
systems, and the remaining 17% are being retired from production. At December
31, 1998, the percentage of business applications (based on application count)
at Prudential in the implementation phase for Year 2000 compliance for
renovation, replacement and retirement are 99%, 96% and 99%, respectively. The
overall completion date for Business Applications is June 1999.
INFRASTRUCTURE
The scope of Prudential's Year 2000 Infrastructure initiatives include mainframe
computer system hardware and operating system software, mid-range systems and
servers, telecommunications equipment, buildings and facilities systems,
personal computers, and vendor hardware and software.
Although there are minor differences among these various components, the
approach to Year 2000 readiness for Infrastructure generally involves phases
identified as inventory, assessment, remediation activities (e.g., upgrading
hardware or software), testing and implementation. The overall completion date
for Infrastructure is June 1999.
BUSINESS PARTNERS
Prudential's approach to business partner readiness includes classification of
each partner's status as "highly critical" or "less critical" and the
development of contingency plans to address the potential that a business
partner could experience a Year 2000 failure. Approximately 30% of Prudential's
business partners have been identified as highly critical and the remaining 70%
as less critical. Project phases include inventory, risk assessment, and
contingency planning activities. All project phases for highly critical business
partner readiness were achieved in December 1998; Prudential has an overall
completion date for less critical business partner readiness of June 1999.
THE COST OF YEAR 2000 READINESS
Prudential is funding the Year 2000 program from operating cash flows. Some of
the expenses of Prudential's Year 2000 readiness are allocated across its
various businesses and subsidiaries, including Pruco Life of New Jersey.
Expenses related to the Year 2000 initiatives allocated to Pruco Life of New
Jersey are part of systems overhead costs to date and are included in Pruco Life
of New Jersey's general and administrative expenses. The Year 2000 costs
allocated to Pruco Life of New Jersey to date are not material to its operations
and financial position. Moreover, the forecasted allocated Year 2000 costs are
not expected to have a material impact on Pruco Life of New Jersey's ability to
meet its contractual commitments.
YEAR 2000 RISKS AND CONTINGENCY PLANNING
The major portion of the Prudential's transactions are of such volume that they
can only be effectively processed through the use of automated systems.
Therefore, substantially all of Prudential's contingency plans include the
ultimate resolution of any causative technology failures that may be
encountered.
A-9
<PAGE>
DISCOVERY SELECT(R) VARIABLE ANNUITY
Prudential believes that the Business Application, Infrastructure and Business
Partners components of the Year 2000 project are substantially on schedule.
While management expects a small number of the projects may not meet their
targeted completion date, it is anticipated that these projects will be
completed by September 1999 so that any delays, if experienced, would not have a
significant impact on the timing of the project as a whole. During the course of
the Year 2000 program, some discretionary technology projects have been delayed
in favor of the completion of Year 2000 projects. However, this impact has been
minimized by Prudential's strategic decision to outsource most of the Year 2000
renovation work.
While Prudential and its subsidiaries believe that they are well positioned to
mitigate its Year 2000 issue, this issue, by its nature, contains inherent
uncertainties, including the uncertainty of Year 2000 readiness of third
parties. Consequently, the Company is unable to determine at this time whether
the consequences of Year 2000 failures will have a material adverse effect on
the Company's results of operations, liquidity or financial position. In the
worst case, it is possible that any technology failure, including an internal or
external Year 2000 failure, could have a material impact on the Company's
results of operations, liquidity, or financial position.
Prudential is enhancing existing business contingency plans to mitigate Year
2000 risk. Current contingency plans include planned responses to the failure of
specific business applications or infrastructure components. These responses are
being reviewed and expected to be finalized by June 1999 to ensure that they are
workable under the special conditions of a Year 2000 failure. The plans are also
being updated to reduce the level of uncertainty about the Year 2000 problem
including readiness of Prudential's business partners.
The discussion of the Year 2000 Issue herein, and in particular Prudential's
plans to remediate this issue and the estimated costs thereof, are
forward-looking in nature. See cautionary statement below relating to
forward-looking statements.
5. EFFECTIVE NEW ACCOUNTING PRONOUNCEMENTS
Refer to Note 2, "Summary of Significant Accounting Policies," of the Notes to
Financial Statements.
6. INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in Management's Discussion and Analysis may
be considered forward-looking statements. Words such as "expects," "believes,"
"anticipates," "intends," "plans," or variations of such words are generally
part of forward-looking statements. Forward-looking statements are made based
upon management's current expectations and beliefs concerning future
developments and their potential effects upon the Company. There can be no
assurance that future developments affecting the Company will be those
anticipated by management. There are certain important factors that could cause
actual results to differ materially from estimates or expectations reflected in
such forward-looking statements including without limitation, changes in general
economic conditions, including the performance of financial markets and interest
rates; market acceptance of new products and distribution channels; competitive,
regulatory or tax changes that affect the cost or demand for the Company's
products; and adverse litigation results. While the Company reassesses material
trends and uncertainties affecting its financial position and results of
operations, it does not intend to review or revise any particular
forward-looking statement referenced in this Management's Discussion and
Analysis in light of future events. The information referred to above should be
considered by readers when reviewing any forward-looking statements contained in
this Management's Discussion and Analysis.
A-10
<PAGE>
DISCOVERY SELECT(R) VARIABLE ANNUITY
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As an indirect subsidiary of Prudential, the Company benefits from the risk
management strategies implemented by its parent.
Risk management includes the identification and measurement of various forms of
risk, establishment of acceptable risk thresholds, and creation of processes
intended to maintain risks within these thresholds while maximizing returns.
Prudential considers risk management an integral part of its core businesses.
The risks inherent in the Company's operations include market risk, product
risk, credit risk, concentration risk, liquidity risk, and operating risk. These
risk categories, and the Company's strategies relative to each, are discussed
below.
The Company's risk monitoring processes include preparation and review of risk
reports on a regular basis, with frequency based on the purpose of the report.
For example, reports associated with specific strategies or assets are produced
daily, while portfolio level reports are typically semi-monthly or monthly and
high level reports are produced quarterly.
MARKET RISK is the risk of change in the value of financial instruments as a
result of changes in interest rates, currency exchange rates, equity and
commodity prices. To varying degrees, the investment activities supporting all
of the Company's products and services generate market risks. These products and
services include life insurance and annuities. Market risks incurred and the
strategies for managing these risks vary by product.
Insurance products and annuities, incur market risk primarily in the form of
interest rate risk. This is controlled through asset/liability management
strategies that seek to match the interest rate sensitivity of the assets to
that of the underlying liabilities, with the objective of insulating the
portfolio's underlying capital from market value changes due to interest rate
movements. If perfectly matched, interest rate movements will generate asset
market value changes that offset changes in the value of the liabilities
relating to the underlying insurance products.
For fee-based products, including variable contracts and separate accounts,
investment risk is borne primarily by the contractholders rather than the
Company (subject to any minimum guarantees). The greatest market-related risk to
the Company for these products is the indirect one that, in the event of sub-par
performance, asset based fee revenues could decline and that competitive factors
could impede the Company's ability to maintain or grow assets under management.
However, since this is primarily an operating risk it is not quantified as part
of the Company's analysis of market risk.
The Company's exposure to market risk results from "other than trading"
activities in its insurance businesses. Market risks in the Company's insurance
business are managed through an investment process that incorporates
asset/liability management techniques and other risk management policies and
limits. Derivatives, as discussed further below, are used for hedging purposes
in the asset/liability management process.
INSURANCE ASSET/LIABILITY MANAGEMENT
Interest rate and equity exposures are maintained within established ranges,
which are subject to adjustment based on market conditions and the design of
related insurance products sold to customers. Risk managers, independent of
portfolio and asset managers, establish investment risk limits on
asset/liability management and oversee ongoing efforts to manage risk within
policy constraints.
The Company uses duration and convexity analyses to measure price sensitivity to
interest rate changes. Duration measures the relative sensitivity of the fair
value of a financial instrument to changes in interest rates. Convexity measures
the rate of change of duration with respect to changes in yield, recognizing
that the price of a bond is usually expected to fall at a slower rate as yield
increases.
A-11
<PAGE>
DISCOVERY SELECT(R) VARIABLE ANNUITY
While duration and convexity are useful indicators of asset price sensitivity to
interest rate changes, pricing models used in the portfolio management process
also consider the effects of optionality. This entails a variety of option
pricing model applications.
The Company also performs portfolio stress testing as part of its regulatory
cash flow testing in which interest-sensitive assumptions (such as asset calls
and prepayments and insurance product contract persistency) are evaluated under
various severe interest rate environments. Any shortfalls revealed by cash flow
testing are evaluated to determine whether there is a need to increase reserves
or adjust portfolio management strategies.
INTEREST RATE RELATED MARKET RISK ON ASSETS
Assets with interest rate risk include fixed maturities and policy loans which,
in the aggregate, comprise 85% of the Company's invested assets (excluding
assets held in Separate Accounts) as of December 31, 1998.
INTEREST RATE Related MARKET RISK ON LIABILITIES
In addition to insurance reserves, which are not measured by the sensitivity
analysis below, the Company has policyholder account balances relating to
interest-sensitive life and annuity contracts through which it is exposed to
interest rate risk.
INTEREST RATE SENSITIVITY
Interest rate sensitivity for the indicated classes of financial assets and
financial liabilities is assessed using hypothetical test scenarios which assume
both upward and downward 100 basis point parallel shifts in the yield curve from
prevailing interest rates at December 31, 1998. The following table summarizes
the potential loss in fair value associated with a hypothetical 100 basis point
upward parallel shift in the yield curve from prevailing interest rates at
December 31, 1998. This scenario results in the greatest net exposure to
interest rate risk of the hypothetical scenarios tested. The test scenario is
for illustrative purposes only and is not intended to reflect management's
expectations regarding future interest rates or performance of fixed income
markets.
In addition, this presentation includes only assets, liabilities and derivatives
required by the Rules and does not include $90 million of insurance liabilities.
Management includes the interest rate sensitivities implicit in these insurance
liabilities in its internal measurements and believes these insurance
liabilities substantially offset the interest rate risk summarized in the
following table.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------------------
FAIR VALUE AFTER + 100 HYPOTHETICAL
FAIR BASIS POINT YIELD CHANGE IN
VALUE CURVE SHIFT (1) FAIR VALUE
----------------------- ------------------------ --------------------
(In Millions)
<S> <C> <C> <C>
FINANCIAL ASSETS AND LIABILITIES WITH
INTEREST RATE RISK:
Financial Assets:
Fixed maturities:
Available for sale ...................................... 623 601 (22)
Policy loans ............................................ 147 138 (9)
Financial Liabilities:
Policyholders' account balances ............................. (415) (418) (3)
-----------
Total estimated potential loss .............................. (34)
===========
</TABLE>
The estimated changes in fair values of financial assets shown above relate to
assets invested in support of the Company's insurance liabilities, and do not
include assets associated with products for which investment risk is borne
primarily by the contractholders rather than the Company.
A-12
<PAGE>
DISCOVERY SELECT(R) VARIABLE ANNUITY
PRODUCT RISK is the risk of adverse results due to deviation of experience from
expected levels reflected in pricing. The Company, in its insurance and annuity
operations, sells traditional and interest sensitive individual insurance
products and annuity products. Products are priced to reflect the expected
levels of risk and to allow a margin for adverse deviation. The level of margin
varies with product design and pricing strategy with respect to the targeted
market. The Company seeks to maintain underwriting standards so that premium
charged is consistent with risk assumed on an overall basis. Additionally, most
of the Company's policies and contracts allow the Company to adjust credits (via
interest crediting rates) and/or charges (in contracts where elements such as
mortality and expense charges are not guaranteed), allowing the Company to
respond to changes in actuarial experience. The competitive environment is also
an important element in determining pricing elements including premiums,
crediting rates and non-guaranteed charges.
Mortality risks, generally inherent in the Company's products, are incorporated
in pricing based on the Company's experience (if available and relevant) and/or
industry experience. Mortality studies are performed periodically to compare the
actual incidence of death claims in relation to business in force, to levels
assumed in pricing and to industry experience. Persistency risk represents the
risk that the pattern of policy surrenders will deviate from assumed levels so
that policies do not remain in force long enough to allow the Company to recover
its acquisition costs. Certain products are designed, by use of surrender
charges and other features, to discourage early surrenders and thus mitigate
this risk to the Company. Periodic studies are performed to compare actual
surrender experience to pricing assumptions and industry experience.
For fee-based products in which investment risk is borne by the client, the
Company retains the risk that fees charged may not adequately cover
administrative expenses. The ability to earn a spread between these fees and the
associated costs is dependent upon the competitive environment, product
performance, the ability to attract clients and assets, and the Company's
control of expense levels.
CREDIT RISK is the risk that counterparties or issuers may default or fail to
fully honor contractual obligations and is inherent in investment portfolio
asset positions including corporate bonds and mortgages, private placements and
other lending-type products, certain derivative transactions, and various
investment operations functions.
Limits of exposure by counterparty, country and industry are in place at the
portfolio level, and counterparty concentration risk is also reviewed at the
enterprise level. Credit concentration risks are limited based on credit
quality, and enterprise-level concentrations are reviewed on a quarterly basis.
Business group credit analysis units evaluate creditworthiness of counterparties
and assign internal credit ratings based on data from independent rating
agencies and their own fundamental analysis. Additionally, stress tests and
sensitivity analysis are utilized to estimate the exposure to credit losses from
unusual events.
LIQUIDITY RISK is the risk that the Company will be unable to liquidate
positions at a reasonable price in order to meet cash flow requirements under
various scenarios. As indicated above, the Company's asset/liability management
strategies seek to maintain asset positions that are consistent with the
expected cash flow demands associated with its liabilities under various
possible situations. Liquidity policies are formally managed at the enterprise
level, using various comparisons of asset liquidity to potential liability
outflows. The Company believes that the comparison of its general account net
liquidity to individual policy net cash surrender value is key to the periodic
evaluation of its ability to meet policyholder claim requirements, and stress
tests are utilized to measure the expected liquidity situation under
hypothetical unusual events. The Company believes that its liquidity position is
more than adequate to meet the expected cash flow demands associated with its
liabilities under reasonably possible stress situations.
OPERATING RISK is the risk of potential loss from internal or external events
such as mismanagement, fraud, systems breakdowns, business interruption, or
failure to satisfy legal or fiduciary responsibilities. All financial
institutions, including the Company, are exposed to the risk of unauthorized
activities by employees that are contrary to the internal controls designed to
manage such risks. Legal risk may arise from inadequate control
A-13
<PAGE>
DISCOVERY SELECT(R) VARIABLE ANNUITY
over contract documentation, marketing processes, or other operations. Internal
controls responsive to regulatory, legal, credit, asset stewardship and other
concerns are established at the business unit level for specific lines of
business and at the enterprise level for company-wide processes. Controls are
monitored by business unit management, internal and external auditors, and by an
enterprise level Management Internal Control unit, and in certain instances, are
subject to regulatory review.
Following recent revelations and negative publicity surrounding the issue of
sales practices, the Company has implemented a strategy to emphasize ethical
conduct in the recruitment and training of agents and in the sales process.
Prudential has also strengthened controls including the establishment of a
client acquisition program, in conjunction with the underwriting process,
intended to ascertain the appropriateness of insurance coverages sold and
mitigate the risk of inappropriate policy replacement activity.
Another aspect of operating risk relates to the Company's ability to conduct
transactions electronically and to gather, process, and disseminate information
and maintain data integrity and uninterrupted operations given the possibility
of unexpected or unusual events. The Company is implementing a business
continuation initiative to address these concerns. Considerations relative to
the potential impact of the Year 2000 on computer operations, infrastructural
support, and other matters are discussed above.
A-14
<PAGE>
DISCOVERY SELECT(R) VARIABLE ANNUITY
DIRECTORS AND OFFICERS
The directors and major officers of Pruco Life of New Jersey, listed with their
principal occupations during the past 5 years, are shown below.
DIRECTORS OF PRUCO LIFE OF NEW JERSEY
JAMES J. AVERY, JR. CHAIRMAN AND DIRECTOR--Senior Vice President, Chief Actuary
and CFO, Prudential Individual Insurance since 1997; 1995 to 1997: President,
Prudential Select; 1993 to 1995: Chief Operating Officer, Prudential Select. Age
47.
WILLIAM M. BETHKE, DIRECTOR--Chief Investment Officer since 1997; 1992 to 1997:
President, Prudential Capital Markets Group. Age 52.
IRA J. KLEINMAN, DIRECTOR--Executive Vice President, International Insurance
Group since 1997; 1995 to 1997: Chief Marketing and Product Development Officer,
Prudential Individual Insurance Group; 1993 to 1995: President, Prudential
Select. Age 52.
ESTHER H. MILNES, PRESIDENT AND DIRECTOR--Vice President and Actuary,
Prudential Individual Insurance Group since 1996; 1993 to 1996: Senior Vice
President and Chief Actuary, Prudential Insurance and Financial Services. Age
48.
I. EDWARD PRICE, VICE CHAIRMAN AND DIRECTOR--Senior Vice President and Actuary,
Prudential Individual Insurance Group since 1995; 1994 to 1995: Chief Executive
Officer, Prudential International Insurance. Age 56.
OFFICERS WHO ARE NOT DIRECTORS
C. EDWARD CHAPLIN, TREASURER--Vice President and Treasurer of Prudential since
1995; 1993 to 1995: Managing Director and Assistant Treasurer of Prudential. Age
42.
JAMES C. DROZANOWSKI, SENIOR VICE PRESIDENT--Vice President and Operations
Executive, Prudential Individual Insurance Group since 1996; 1995 to 1996: Vice
President, Credit Card Division, Chase Manhattan Bank; prior to 1995: Chase
Manhattan Bank. Age 56.
CLIFFORD E. KIRSCH, CHIEF LEGAL OFFICER AND SECRETARY--Chief Counsel, Variable
Products, Law Department of Prudential since 1995; 1994 to 1995: Associate
General Counsel with Paine Webber. Age 39.
FRANK P. MARINO, SENIOR VICE PRESIDENT--Vice President, Policyowner Relations
Department, Prudential Individual Insurance Group since 1996; Prior to 1996:
Senior Vice President, Prudential Mutual Fund Services. Age 54.
EDWARD A. MINOGUE, SENIOR VICE PRESIDENT--Vice President, Annuity Services,
Prudential Investments since 1997; prior to 1997: Director, Merrill Lynch. Age
56.
IMANTS SAKSONS, SENIOR VICE PRESIDENT--Vice President, Compliance, Prudential
Individual Financial Services since 1998; prior to 1998, Vice President, Market
Conduct, U.S. Operations, Manulife Financial. Age 48.
DENNIS G. SULLIVAN, VICE PRESIDENT, & CHIEF ACCOUNTING OFFICER--Vice President
and Deputy Controller, Prudential, since 1998; 1997 to 1998, Vice President and
Controller, Contifinancial Corporation. Prior to 1997, Director, Saloman
Brothers. Age 43.
SHIRLEY H. SHAO, SENIOR VICE PRESIDENT AND CHIEF ACTUARY--Vice President and
Associate Actuary, Prudential. Age 43.
The business address of all directors and officers of Pruco Life of New Jersey
(PLNJ) is 213 Washington Street, Newark, New Jersey 07102-2992. PLNJ directors
and officers are elected annually.
A-15
<PAGE>
DISCOVERY SELECT(R) VARIABLE ANNUITY
EXECUTIVE COMPENSATION
The following table shows the 1998 annual compensation, paid by Prudential, and
allocated based on time devoted to the duties as an executive of the Company for
services provided to the Company:
NAME AND PRINCIPAL OTHER ANNUAL
POSITION YEAR SALARY BONUS COMPENSATION
- ------------------ ---- -------- ------- ------------
Esther H. Milnes 1998 $ 6,231 $ 7,894 $ 0
President 1997 5,598 6,419 0
1996 5,417 3,641 0
A-16
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS OF PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
<TABLE>
Pruco Life Insurance Company of New Jersey
Statements of Financial Position
December 31, 1998 and 1997 (In Thousands)
- --------------------------------------------------------------------------------
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Fixed maturities
Available for sale, at fair value (amortized cost, 1998: $617,758; and
1997: $585,109) $ 622,990 $ 592,361
Policy loans 139,443 127,306
Short-term investments 53,761 52,464
---------- ----------
Total investments 816,194 772,131
Cash 45 3
Deferred policy acquisition costs 113,923 101,625
Accrued investment income 12,209 14,075
Other assets 15,379 4,037
Separate Account assets 1,453,407 1,110,561
---------- ----------
TOTAL ASSETS $2,411,157 $2,002,432
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Policyholders' account balances $ 413,848 $ 402,601
Future policy benefits and other policyholder liabilities 90,530 85,220
Cash collateral for loaned securities 34,424 33,663
Securities sold under agreements to repurchase 27,210 --
Income taxes payable 1,610 12,963
Net deferred income tax liability 23,715 22,188
Payable to affiliate 3,492 4,307
Other liabilities 19,489 17,103
Separate Account liabilities 1,450,986 1,108,994
---------- ----------
Total liabilities 2,065,304 1,687,039
Contingencies - (See Note 10) ---------- ----------
Stockholder's Equity
Common stock, $5 par value;
400,000 shares, authorized;
issued and outstanding at
December 31, 1998 and 1997 2,000 2,000
Paid-in-capital 125,000 125,000
Retained earnings 217,260 185,437
Accumulated other comprehensive income 1,593 2,956
---------- ----------
Total stockholder's equity 345,853 315,393
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $2,411,157 $2,002,432
========== ==========
</TABLE>
See Notes to Financial Statements
B-1
<PAGE>
<TABLE>
Pruco Life Insurance Company of New Jersey
Statements of Operations
Years Ended December 31, 1998, 1997, and 1996 (In Thousands)
- --------------------------------------------------------------------------------
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Premiums $ 1,345 $ 1,105 $ 1,345
Policy charges and fee income 56,247 56,382 58,571
Net investment income 47,032 46,324 43,784
Realized investment gains, net 8,446 1,707 1,221
Other income 5,755 5,286 4,047
--------- --------- ---------
Total revenues 118,825 110,804 108,968
--------- --------- ---------
BENEFITS AND EXPENSES
Policyholders' benefits 28,342 33,999 28,653
Interest credited to policyholders' account balances 18,985 19,372 20,069
General, administrative and other expenses 22,105 27,236 12,848
--------- --------- ---------
Total benefits and expenses 69,432 80,607 61,570
--------- --------- ---------
Income from operations before income taxes 49,393 30,197 47,398
--------- --------- ---------
Income taxes
Current 15,309 13,279 12,682
Deferred 2,261 (2,305) 2,929
--------- --------- ---------
Total income taxes 17,570 10,974 15,611
--------- --------- ---------
NET INCOME $ 31,823 $ 19,223 $ 31,787
========= ========= =========
Net unrealized investment gains (losses) on securities,
net of reclassification adjustment (1,363) 924 (4,556)
--------- --------- ---------
TOTAL COMPREHENSIVE INCOME $ 30,460 $ 20,147 $ 27,231
========= ========= =========
</TABLE>
See Notes to Financial Statements
B-2
<PAGE>
<TABLE>
Pruco Life Insurance Company of New Jersey
Statements of Changes in Stockholder's Equity
Years Ended December 31, 1998, 1997, and 1996 (In Thousands)
- --------------------------------------------------------------------------------
<CAPTION>
Accumulated
other Total
Common Paid-in- Retained comprehensive stockholder's
stock capital earnings income equity
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $ 2,000 $ 125,000 $ 134,427 $ 6,588 $ 268,015
Net income -- -- 31,787 -- 31,787
Change in net unrealized
investment gains, net of
reclassification adjustment -- -- -- (4,556) (4,556)
--------- --------- --------- --------- ---------
Balance, December 31, 1996 2,000 125,000 166,214 2,032 295,246
Net income -- -- 19,223 -- 19,223
Change in net unrealized
investment gains, net of
reclassification adjustment -- -- -- 924 924
--------- --------- --------- --------- ---------
Balance, December 31, 1997 2,000 125,000 185,437 2,956 315,393
Net income -- -- 31,823 -- 31,823
Change in net unrealized
investment gains, net of
reclassification adjustment -- -- -- (1,363) (1,363)
--------- --------- --------- --------- ---------
Balance, December 31, 1998 $ 2,000 $ 125,000 $ 217,260 $ 1,593 $ 345,853
========= ========= ========= ========= =========
</TABLE>
See Notes to Financial Statements
B-3
<PAGE>
<TABLE>
Pruco Life Insurance Company of New Jersey
Statements of Cash Flows
Years Ended December 31, 1998, 1997, and 1996 (In Thousands)
- --------------------------------------------------------------------------------
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,823 $ 19,223 $ 31,787
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Policy charges and fee income (10,871) (7,841) (9,963)
Interest credited to policyholders' account balances 18,985 19,372 20,069
Realized investment gains, net (8,446) (1,707) (1,221)
Amortization and other non-cash items 2,491 (1,046) 10,065
Change in:
Future policy benefits and other policyholders' liabilities 5,310 8,981 7,461
Accrued investment income 1,866 (1,167) (1,329)
Policy loans (12,137) (13,388) (15,724)
Separate Accounts (854) 1,629 (1,335)
Payable to affiliates (815) (1,752) 4,300
Deferred policy acquisition costs (12,298) 5,340 (10,934)
Income taxes payable (11,353) 10,993 1,970
Deferred income tax liability 1,527 (1,987) 366
Other, net (8,955) 2,812 4,669
----------- ----------- -----------
Cash Flows (Used in) From Operating Activities (3,727) 39,462 40,181
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities:
Available for sale 1,001,096 645,355 901,775
Payments for the purchase of:
Fixed maturities:
Available for sale (1,029,988) (679,709) (956,483)
Cash collateral for loaned securities, net 761 33,663 --
Securities sold under agreements to repurchase, net 27,210 -- --
Short term investments, net (1,297) (35,461) 28,306
----------- ----------- -----------
Cash Flows Used in Investing Activities (2,218) (36,152) (26,402)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 300,536 134,020 16,754
Withdrawals (294,549) (141,255) (26,605)
----------- ----------- -----------
Cash Flows From (Used in) Financing Activities 5,987 (7,235) (9,851)
----------- ----------- -----------
Net increase (decrease) in Cash 42 (3,925) 3,928
Cash, beginning of year 3 3,928 --
----------- ----------- -----------
CASH, END OF PERIOD $ 45 $ 3 $ 3,928
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid $ 27,083 $ 1,896 $ 11,673
=========== =========== ===========
</TABLE>
See Notes to Financial Statements
B-4
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. BUSINESS
Pruco Life Insurance Company of New Jersey (the Company) is a stock life
insurance company organized in 1982 under the laws of the state of New Jersey.
It is licensed to sell individual life insurance, variable life insurance,
variable annuities, and fixed annuities (the Contracts) only in the states of
New Jersey and New York.
The Company is a wholly owned subsidiary of Pruco Life Insurance Company (Pruco
Life), a stock life insurance company organized in 1971 under the laws of the
state of Arizona. Pruco Life, in turn, is a wholly owned subsidiary of The
Prudential Insurance Company of America (Prudential), a mutual insurance company
founded in 1875 under the laws of the state of New Jersey. Pruco Life intends to
make additional capital contributions to the Company, as needed, to enable it to
comply with its reserve requirements and fund expenses in connection with its
business. Generally, Pruco Life is under no obligation to make such
contributions and its assets do not back the benefits payable under the
Contracts.
The Company is engaged in a business that is highly competitive because of the
large number of stock and mutual life insurance companies and other entities
engaged in marketing insurance products, and individual annuities. There are
approximately 1,620 stock, mutual and other types of insurers in the life
insurance business in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements include the accounts of the Company, a stock life
insurance company. The financial statements have been prepared in accordance
with generally accepted accounting principles ("GAAP").
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the period. Actual results could differ from those estimates.
Investments
Fixed maturities classified as "available for sale" are carried at estimated
fair value. The amortized cost of fixed maturities is written down to estimated
fair value if a decline in value is considered to be other than temporary.
Unrealized gains and losses on fixed maturities "available for sale" including
the effect on deferred policy acquisition costs and participating annuity
contracts that would result from the realization of unrealized gains and losses,
net of income taxes, are included in a separate component of equity,
"Accumulated other comprehensive income."
Policy loans are carried at unpaid principal balances.
Short-term investments, consists primarily of highly liquid debt instruments
purchased with an original maturity of twelve months or less and are carried at
amortized cost, which approximates fair value.
Realized investment gains, net, are computed using the specific identification
method. Costs of fixed maturity are adjusted for impairments considered to be
other than temporary.
Cash
Cash includes cash on hand, amounts due from banks, and money market
instruments.
Deferred Policy Acquisition Costs
The costs which vary with and that are related primarily to the production of
new insurance business are deferred to the extent that they are deemed
recoverable from future profits. Such costs include certain commissions, costs
of policy issuance and underwriting, and certain variable field office expenses.
Deferred policy acquisition costs are subject to recoverability testing at the
time of policy issue and loss recognition testing at the end of each accounting
period. Deferred policy acquisition costs are adjusted for the impact of
unrealized gains or losses on investments as if these gains or losses had been
realized, with corresponding credits or charges included in equity.
B-5
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Acquisition costs related to interest-sensitive life products and
investment-type contracts are deferred and amortized in proportion to total
estimated gross profits arising principally from investment results, mortality
and expense margins and surrender charges based on historical and anticipated
future experience. Amortization periods range from 15 to 30 years. Deferred
policy acquisition costs are analyzed to determine if they are recoverable from
future income, including investment income. If such costs are determined to be
unrecoverable, they are expensed at the time of determination. The effect of
revisions to estimated gross profits on unamortized deferred acquisition costs
is reflected in earnings in the period such estimated gross profits are revised.
Securities loaned
Securities loaned are treated as financing arrangements and are recorded at the
amount of cash received as collateral. The Company obtains collateral in an
amount equal to 102% of the fair value of the securities. The Company monitors
the market value of securities loaned on a daily basis with additional
collateral obtained as necessary. Non-cash collateral received is not reflected
in the statements of financial position. Substantially all of the Company's
securities loaned are with large brokerage firms.
Securities sold under agreements to repurchase
Securities sold under agreements to repurchase are treated as financing
arrangements and are carried at the amounts at which the securities will be
subsequently reacquired, including accrued interest, as specified in the
respective agreements. The Company's policy is to take possession of securities
purchased under agreements to resell. The market value of securities to be
repurchased is monitored and additional collateral is requested, where
appropriate, to protect against credit exposure.
Securities lending and securities repurchase agreements are used to generate net
investment income and facilitate trading activity. These instruments are
short-term in nature (usually 30 days or less). Securities loaned are
collateralized principally by U.S. Government and mortgage-backed securities.
Securities sold under repurchase agreements are collateralized principally by
cash. The carrying amounts of these instruments approximate fair value because
of the relatively short period of time between the origination of the
instruments and their expected realization.
Separate Account Assets and Liabilities
Separate Account assets and liabilities are reported at estimated fair value and
represent segregated funds which are invested for certain policyholders and
other customers. Separate Account assets include common stocks, fixed
maturities, real estate related securities, and short-term investments. The
assets of each account are legally segregated and are not subject to claims that
arise out of any other business of the Company. 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. The investment
income and gains or losses for Separate Accounts generally accrue to the
policyholders and are not included in the Statement of Operations. Mortality,
policy administration and surrender charges on the accounts are included in
"Policy charges and fee income."
Separate Accounts represent funds for which investment income and investment
gains and losses accrue directly to, and investment risk is borne by, the
policyholders, with the exception of the Pruco Life of New Jersey Modified
Guaranteed Annuity Account. The Pruco Life of New Jersey Modified Guaranteed
Annuity Account is a non-unitized Separate Account, which funds the Modified
Guaranteed Annuity Contract and the Market Value Adjustment Annuity Contract.
Owners of the Pruco Life of New Jersey Modified Guaranteed Annuity and the
Market Value Adjustment Annuity Contracts do not participate in the investment
gain or loss from assets relating to such accounts. Such gain or loss is borne,
in total, by the Company.
Insurance Revenue and Expense Recognition
Premiums from insurance policies are generally recognized when due. Benefits are
recorded as an expense when they are incurred. For traditional life insurance
contracts, a liability for future policy benefits is recorded using the net
level premium method. For individual annuities in payout status, a liability for
future policy benefits is recorded for the present value of expected future
payments based on historical experience.
B-6
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Amounts received as payment for interest sensitive life, investment contracts
and variable annuities are reported as deposits to "Policyholders' account
balances." Revenues from these contracts are reflected as "Policy charges and
fee income" and consist primarily of fees assessed during the period against the
policyholders' account balances for mortality charges, policy administration
charges, and surrender charges. In addition, interest earned from the investment
of these account balances is reflected in "Net investment income." Benefits and
expenses for these products include claims in excess of related account
balances, expenses of contract administration, interest credited and
amortization of deferred policy acquisition costs.
Other Income
Other income consists primarily of asset management fees which are received by
the Company from Prudential for services Prudential provides to the Prudential
Series Fund, an underlying investment option of the Separate Accounts.
Derivative Financial Instruments
Derivatives are financial instruments whose values are derived from interest
rates, foreign exchange rates, various financial indices, or the value of
securities or commodities. Derivative financial instruments used by the Company
are futures and can be exchange-traded or contracted in the over-the-counter
market. The Company uses derivative financial instruments to hedge market risk
from changes in interest rates and to alter interest rate or currency exposures
arising from mismatches between assets and liabilities. All derivatives used by
the Company are for other than trading purposes.
To qualify as a hedge, derivatives must be designated as hedges for existing
assets, liabilities, firm commitments, or anticipated transactions which are
identified and probable to occur, and effective in reducing the market risk to
which the Company is exposed. The effectiveness of the derivatives must be
evaluated at the inception of the hedge and throughout the hedge period.
When derivatives qualify as hedges, the changes in the fair value or cash flows
of the derivatives and the hedged items are recognized in earnings in the same
period. If the Company's use of other than trading derivatives does not meet the
criteria to apply hedge accounting, the derivatives are recorded at fair value
in "Other liabilities" in the Statements of Financial Position, and changes in
their fair value are recognized in earnings in "Realized investment gains, net"
without considering changes in the hedged assets or liabilities. Cash flows from
other than trading derivative assets and liabilities are reported in the
operating activities section in the Statements of Cash Flows.
Income Taxes
The Company is a member of the consolidated federal income tax return of
Prudential and files separate company state and local tax returns. Pursuant to
the tax allocation arrangement, total federal income tax expense is determined
on a separate company basis. Members with losses record tax benefits to the
extent such losses are recognized in the consolidated federal tax provision.
Deferred income taxes are generally recognized, based on enacted rates, when
assets and liabilities have different values for financial statement and tax
reporting purposes. A valuation allowance is recorded to reduce a deferred tax
asset to that portion that is expected to be realized.
New Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board ("FASB") issued the
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("SFAS 125"). The statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
and provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. SFAS 125
became effective January 1, 1997 and was applied prospectively. Subsequent to
June 1996, FASB issued SFAS No. 127 "Deferral of the Effective Date of Certain
Provisions of SFAS 125" ("SFAS 127"). SFAS 127 delays the implementation of SFAS
125 for one year for certain transactions, including repurchase agreements,
dollar rolls, securities lending and similar transactions. Adoption of SFAS 125
did not have a material impact on the Company's results of operations, financial
position and liquidity.
On January 1, 1999, the Company adopted the American Institute of Certified
Public Accountants ("AICPA") Statement of Position 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments" ("SOP 97-3").
This statement provides guidance for determining when an insurance company or
other enterprise should recognize a liability for guaranty-fund assessments as
well as guidance for measuring the liability. The adoption of SOP 97-3 is not
expected to have a material effect on the Company's financial position or
results of operations.
B-7
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires that companies recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 provides, if certain conditions
are met, that a derivative may be specifically designated as (1) a hedge of the
exposure to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment (fair value hedge), (2) a hedge of the exposure to
variable cash flows of a forecasted transaction (cash flow hedge), or (3) a
hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale security or a
foreign-currency-denominated forecasted transaction (foreign currency hedge).
SFAS No. 133 does not apply to most traditional insurance contracts. However,
certain hybrid contracts that contain features which can affect settlement
amounts similarly to derivatives may require separate accounting for the "host
contract" and the underlying "embedded derivative" provisions. The latter
provisions would be accounted for as derivatives as specified by the statement.
Under SFAS No. 133, the accounting for changes in fair value of a derivative
depends on its intended use and designation. For a fair value hedge, the gain or
loss is recognized in earnings in the period of change together with the
offsetting loss or gain on the hedged item. For a cash flow hedge, the effective
portion of the derivative's gain or loss is initially reported as a component of
other comprehensive income and subsequently reclassified into earnings when the
forecasted transaction affects earnings. For a foreign currency hedge, the gain
or loss is reported in other comprehensive income as part of the foreign
currency translation adjustment. For all other items not designated as hedging
instruments, the gain or loss is recognized in earnings in the period of change.
The Company is required to adopt this statement by the first quarter of 2000 and
is currently assessing the effect of the new standard.
In October, 1998, the AICPA issued Statement of Position 98-7, "Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk," ("SOP 98-7"). This statement provides guidance on how
to account for insurance and reinsurance contracts that do not transfer
insurance risk. SOP 98-7 is effective for fiscal years beginning after June 15,
1999. The adoption of this statement is not expected to have a material effect
on the Company's financial position or results of operations.
Reclassifications
Certain amounts in the prior years have been reclassified to conform to current
year presentations.
B-8
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS
Fixed Maturities
The following tables provide additional information relating to fixed maturities
as of December 31:
<TABLE>
<CAPTION>
1998
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Fixed maturities available for sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 51,663 $ 260 $ 318 $ 51,605
Foreign government bonds 34,744 887 236 35,395
Corporate Securities 531,351 7,273 2,634 535,990
-------- -------- -------- --------
Total fixed maturities available for sale $617,758 $ 8,420 $ 3,188 $622,990
======== ======== ======== ========
<CAPTION>
1997
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Fixed maturities available for sale
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 42,885 $ 340 $ 3 $ 43,222
Foreign government bonds 38,332 551 -- 38,883
Corporate securities 503,892 6,545 181 510,256
-------- -------- -------- --------
Total fixed maturities available for sale $585,109 $ 7,436 $ 184 $592,361
======== ======== ======== ========
</TABLE>
B-9
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS (continued)
The amortized cost and estimated fair value of fixed maturities, categorized by
contractual maturities at December 31, 1998, are shown below:
Available for Sale
---------------------------
Amortized Estimated
Cost Fair Value
-------- ----------
(In Thousands)
Due in one year or less $ 13,645 $ 13,767
Due after one year through five years 269,252 271,525
Due after five years through ten years 255,280 257,992
Due after ten years 79,581 79,706
-------- --------
Total $617,758 $622,990
======== ========
Actual maturities will differ from contractual maturities because, in certain
circumstances, issuers have the right to call or prepay obligations.
Proceeds from the sale of fixed maturities available for sale during 1998, 1997,
and 1996 were $990.7 million, $635.4 million and $854.8 million, respectively.
Gross gains of $8.8 million, $2.9 million, and $3.9 million and gross losses of
$1.8 million, $1.2 million, and $3.8 million were realized on those sales during
1998, 1997, and 1996, respectively. Proceeds from maturities of fixed maturities
available for sale during 1998, 1997, and 1996 were $10.4 million, $10.0
million, and $47.0 million, respectively.
Writedowns for impairments of fixed maturities which were deemed to be other
than temporary were $.6 million for 1998. There were no impairments of fixed
maturities for the years 1997 and 1996.
The following table describes the credit quality of the fixed maturity
portfolio, based on ratings assigned by the National Association of Insurance
Commissioners ("NAIC") or Standard & Poor's Corporation, an independent rating
agency as of December 31, 1998:
Available for Sale
-------------------------------
Amortized Estimated
Cost Fair Value
--------- ----------
NAIC Standard & Poor's (In Thousands)
1 AAA to AA- $ 303,209 $ 306,693
2 BBB+ to BBB- 286,640 287,888
3 BB+ to BB- 27,134 27,692
4 B+ to B- 704 638
5 CCC or lower 71 79
6 In or near default -- --
--------- ---------
Total $ 617,758 $ 622,990
========= =========
B-10
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS (continued)
The fixed maturity portfolio consists largely of investment grade assets (rated
"1" or "2" by the NAIC), with such investments accounting for 95% and 96% of the
portfolio at December 31, 1998 and 1997, respectively, based on fair value. As
of both of those dates, no fixed maturities in the portfolio were rated "6" by
the NAIC, defined as public and private placement securities which are currently
non-performing or believed subject to default in the near-term.
The Company continually reviews fixed maturities and identifies potential
problem assets which require additional monitoring. The Company defines
"problem" fixed maturities as those for which principal and/or interest payments
are in default. The Company defines "potential problem" fixed maturities as
assets which are believed to present default risk associated with future debt
service obligations and therefore require more active management. No problem or
potential problem fixed maturities were identified in 1998 or 1997.
Special Deposits
Fixed maturities of $.5 million at both December 31, 1998 and 1997,
respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws.
Investment Income and Investment Gains and Losses
Net investment income arose from the following sources for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Fixed maturities - available for sale $ 39,478 $ 37,563 $ 36,193
Policy loans 7,350 6,596 5,761
Short-term investments 3,502 3,023 2,504
Other (842) 333 28
-------- -------- --------
Gross investment income 49,488 47,515 44,486
Less investment expenses (2,456) (1,191) (702)
-------- -------- --------
Net investment income $ 47,032 $ 46,324 $ 43,784
======== ======== ========
</TABLE>
Realized investment gains, net, including charges for other than temporary
reductions in value, for the years ended December 31, were as follows:
1998 1997 1996
-------- -------- --------
(In Thousands)
Realized investment gains $ 17,957 $ 2,898 $ 5,232
Realized investment losses (9,511) (1,191) (4,011)
-------- -------- --------
Realized investment gains, net $ 8,446 $ 1,707 $ 1,221
======== ======== ========
B-11
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
3. INVESTMENTS (continued)
Net Unrealized Investment Gains
Net unrealized investment gains on fixed maturities available for sale are
included in the Statements of Financial Position as a component of accumulated
other comprehensive income. Changes in these amounts include adjustments to
avoid double-counting in comprehensive income, items that are included as part
of net income for a period that also have been part of other comprehensive
income in earlier periods. The amounts for the years ended December 31, net of
tax, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Net unrealized investment gains, beginning of year $ 2,956 $ 2,032 $ 6,588
Changes in net unrealized investment gains attributable to:
Investments:
Net unrealized investment gains on investments arising during the period 3,227 3,228 (6,403)
Reclassification adjustment for gains included in net income 4,539 1,109 860
------- ------- -------
Change in net unrealized investment gains, net of adjustments (1,312) 2,119 (7,263)
Impact of net unrealized investment gains on:
Future policy benefits 57 216 (776)
Deferred policy acquisition costs (108) (1,411) 3,483
------- ------- -------
Change in net unrealized investment gains (1,363) 924 (4,556)
------- ------- -------
Net unrealized investment gains, end of year $ 1,593 $ 2,956 $ 2,032
======= ======= =======
</TABLE>
Unrealized gains (losses) on investments arising during the periods reported in
the above table are net of income tax expense (benefit) of $1.7 million, $1.7
million and $(3.6) million for the years ended December 31, 1998, 1997, and
1996, respectively.
Reclassification adjustments reported in the above table for the years ended
December 31, 1998, 1997, and 1996 are net of income tax expense of $(2.4)
million, $(.6) million and $(.5) million, respectively.
The future policy benefits reported in the above table are net of income tax
expense (benefit) of $.03 million, $0, and $(.4) million for the years ended
December 31, 1998, 1997 and 1996, respectively.
Deferred policy acquisition costs in the above tables for the years ended
December 31, 1998, 1997 and 1996 are net of income tax expense (benefit) of
$(.06) million, $(.8) million and $2.0 million, respectively.
4. POLICYHOLDERS' LIABILITIES
Future policy benefits and other policyholder liabilities at December 31 are as
follows:
1998 1997
------- -------
(In Thousands)
Life insurance $85,523 $80,464
Annuities 5,007 4,756
------- -------
$90,530 $85,220
======= =======
Life insurance liabilities include reserves for death and endowment policy
benefits. Annuity liabilities include reserves for immediate annuities.
B-12
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
4. POLICYHOLDERS' LIABILITIES (continued)
The following table highlights the key assumptions generally utilized in
calculating these reserves:
<TABLE>
<CAPTION>
Product Mortality Interest Rate Estimation Method
- ---------------------- ----------------------- ---------------------- ---------------------------
<S> <C> <C> <C>
Life insurance Generally rates 2.5% to 7.5% Net level premium based
guaranteed in on non-forfeiture
calculating interest rate
cash surrender values
Individual immediate 1983 Individual Annuity 6.25% to 8.75% Present value of
annuities Mortality Table with expected future payment
certain modifications based on historical experience
</TABLE>
Policyholders' account balances at December 31, are as follows:
1998 1997
-------- --------
(In Thousands)
Individual annuities $148,327 $145,120
Interest-sensitive life contracts 265,521 257,481
-------- --------
$413,848 $402,601
======== ========
Policyholders' account balances for interest-sensitive life, individual
annuities, and guaranteed investment contracts are equal to policy account
values plus unearned premiums. The policy account values represent an
accumulation of gross premium payments plus credited interest less withdrawals,
expenses, mortality charges.
Certain contract provisions that determine the policyholder account balances are
as follows:
<TABLE>
<CAPTION>
Product Interest Rate Withdrawal / Surrender Charges
------- ------------- ------------------------------
<S> <C> <C>
Interest sensitive life contracts 4.0% to 5.4% Various up to 10 years
Individual annuities 3.0% to 5.6% 0% to 8% for up to 8 years
</TABLE>
B-13
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
5. REINSURANCE
The Company participates in reinsurance, with Prudential and other companies, in
order to provide greater diversification of business, provide additional
capacity for future growth and limit the maximum net loss potential arising from
large risks. Reinsurance ceded arrangements do not discharge the Company or the
insurance subsidiaries as the primary insurer, except for cases involving a
novation. Ceded balances would represent a liability to the Company in the event
the reinsurers were unable to meet their obligations to the Company under the
terms of the reinsurance agreements. The likelihood of a material reinsurance
liability reassumed by the Company is considered to be remote.
Reinsurance amounts included in the Statement of Operations for the year ended
December 31 are below.
1998 1997 1996
------- ------- -------
(In Thousands)
Direct Premiums $ 1,373 $ 1,117 $ 1,345
Reinsurance ceded-affiliated (28) (12) --
------- ------- -------
Premiums $ 1,345 $ 1,105 $ 1,345
======= ======= =======
Policyholders' benefits ceded $ 15 $ 14 $ 13
======= ======= =======
Reinsurance recoverables, included in "Other assets" in the Company's Statements
of Financial Position, at December 31 include amounts recoverable on unpaid and
paid losses and were as follows:
1998 1997
---- ----
(In Thousands)
Life insurance - affiliated $31 $30
--- ---
$31 $30
=== ===
B-14
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
6. INCOME TAXES
The components of income taxes for the years ended December 31, are as follows:
1998 1997 1996
-------- -------- --------
(In Thousands)
Current tax expense (benefit):
U.S. $ 14,786 $ 12,880 $ 13,589
State and local 523 399 (907)
-------- -------- --------
Total 15,309 13,279 12,682
-------- -------- --------
Deferred tax expense (benefit):
U.S. 2,198 (2,305) 2,848
State and local 63 -- 81
-------- -------- --------
Total 2,261 (2,305) 2,929
-------- -------- --------
Total income tax expense $ 17,570 $ 10,974 $ 15,611
======== ======== ========
The Company's income tax expense for the years ended December 31, differs from
the amount computed by applying the expected federal income tax rate of 35% to
income from operations before income taxes for the following reasons:
1998 1997 1996
-------- -------- --------
(In Thousands)
Expected federal income tax expense $ 17,288 $ 10,569 $ 16,589
State and local income taxes 381 259 (537)
Other (99) 146 (441)
-------- -------- --------
Total income tax expense $ 17,570 $ 10,974 $ 15,611
======== ======== ========
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
1998 1997
------- -------
(In Thousands)
Deferred income tax assets:
Insurance reserves $10,016 $ 6,907
Other -- --
------- -------
Deferred tax assets $10,016 $ 6,907
------- -------
Deferred income tax liabilities:
Deferred acquisition costs 28,509 24,725
Net investment gains 2,847 4,284
Other 2,375 86
------- -------
Deferred tax liabilities 33,731 29,095
------- -------
Net deferred federal tax liability $23,715 $22,188
======= =======
B-15
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
6. INCOME TAXES (continued)
Management believes that based on its historical pattern of taxable income, the
Company will produce sufficient income in the future to realize its deferred tax
assets after valuation allowance. Adjustments to the valuation allowance will be
made if there is a change in management's assessment of the amount of the
deferred tax asset that is realizable. At December 31, 1998 and 1997,
respectively, the Company had no federal or state operating loss carryforwards
for tax purposes.
The Internal Revenue Service (the "Service") has completed examinations of the
consolidated federal income tax returns through 1989. The Service has examined
the years 1990 through 1992. Discussions are being held with the Service with
respect to proposed adjustments. Management, however, believes there are
adequate defenses against, or sufficient reserves to provide for, such
adjustments. The Service has begun their examination of the years 1993 through
1995.
B-16
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
7. EQUITY
Reconciliation of Statutory Surplus and Net Income
Accounting practices used to prepare statutory financial statements for
regulatory purposes differ in certain instances from GAAP. The following table
reconciles the Company's statutory net income and surplus as of and for the
years ended December 31, determined in accordance with accounting practices
prescribed or permitted by the New Jersey Department of Banking and Insurance
with net income and equity determined using GAAP.
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Statutory net income $ 18,704 $ 18,306 $ 24,774
Adjustments to reconcile to net income on a GAAP basis:
Deferred acquisition costs 12,464 (3,170) 5,656
Deferred premium 534 198 221
Insurance liabilities (808) 2,324 4,784
Deferred taxes (2,261) 2,305 (2,929)
Valuation of investments 3,794 (143) (765)
Other, net (604) (597) 46
-------- -------- --------
GAAP net income $ 31,823 $ 19,223 $ 31,787
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(In Thousands)
<S> <C> <C>
Statutory surplus $ 252,530 $ 235,958
Adjustments to reconcile to equity on a GAAP basis:
Valuation of investments 20,799 18,540
Deferred acquisition costs 113,923 101,625
Deferred premium (1,473) (2,007)
Insurance liabilities (18,141) (19,120)
Deferred taxes (23,715) (22,188)
Other, net 1,930 2,585
--------- ---------
GAAP stockholder's equity $ 345,853 $ 315,393
========= =========
</TABLE>
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values presented below have been determined using available
information and valuation methodologies. Considerable judgment is applied in
interpreting data to develop the estimates of fair value. Accordingly, such
estimates presented may not be realized in a current market exchange. The use of
different market assumptions and/or estimation methodologies could have a
material effect on the estimated fair values. The following methods and
assumptions were used in calculating the fair values (for all other financial
instruments presented in the table, the carrying value approximates estimated
fair value).
Fixed maturities
Estimated fair values for fixed maturities are based on quoted market prices or
estimates from independent pricing services.
Policy loans
Estimated fair value of policy loans is calculated using a discounted cash flow
model based upon current U.S. Treasury rates and historical loan repayments.
B-17
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
8. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Policyholders' account balances
Estimated fair values of policyholders' account balances are derived by using
discounted projected cash flows, based on interest rates being offered for
similar contracts, with maturities consistent with those remaining for the
contracts being valued.
Derivative financial instruments
The fair value of futures is estimated based on market quotes for transactions
with similar terms. The following table discloses the carrying amounts and
estimated fair values of the Company's financial instruments at December 31,:
<TABLE>
<CAPTION>
1998 1997
--------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Fixed maturities available for sale $ 622,990 $ 622,990 $ 592,361 $ 592,361
Policy loans 139,443 146,504 127,306 126,262
Short-term investments 53,761 53,761 52,464 52,464
Cash 45 45 3 3
Separate Accounts assets 1,453,407 1,453,407 1,110,561 1,110,561
Financial Liabilities:
Policyholders'
account balances $ 413,848 $ 414,602 $ 402,601 $ 401,267
Cash collateral for loaned
securities 61,634 61,634 33,663 33,663
Separate Accounts liabilities 1,450,986 1,450,986 1,108,994 1,108,994
Derivatives -- -- 83 83
</TABLE>
9. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS
Futures
The Company uses exchange-traded Treasury futures to reduce market risks from
changes in interest rates, to alter mismatches between the duration of assets in
a portfolio and the duration of liabilities supported by those assets, and to
hedge against changes in the value of securities it owns or anticipates
acquiring. The Company enters into exchange-traded futures with regulated
futures commissions merchants who are members of a trading exchange. The fair
value of futures is estimated based on market quotes for a transaction with
similar terms.
Under exchange-traded futures, the Company agrees to purchase a specified number
of contracts with other parties and to post variation margin on a daily basis in
an amount equal to the difference in the daily market values of those contracts.
Futures are typically used to hedge duration mismatches between assets and
liabilities by replicating Treasury performance. Treasury futures move
substantially in value as interest rates change and can be used to either
generate new or hedge existing interest rate risk. This strategy protects
against the risk that cash flow requirements may necessitate liquidation of
investments at unfavorable prices resulting from increases in interest rates.
This strategy can be a more cost effective way of temporarily reducing the
Company's exposure to a market decline than selling fixed income securities and
purchasing a similar portfolio when such a decline is believed to be over.
B-18
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
9. DERIVATIVE AND OFF-BALANCE SHEET CREDIT-RELATED INSTRUMENTS (continued)
For futures that meet hedge accounting criteria, changes in their fair value are
deferred and recognized as an adjustment to the carrying value of the hedged
item. Deferred gains or losses from the hedges for interest-bearing financial
instruments are amortized as a yield adjustment over the remaining lives of the
hedged item. Futures that do not qualify as hedges are carried at fair value
with changes in value reported in current period earnings. The fair value of
futures contracts was immaterial at December 31, 1998 and 1997.
Credit Risk
The current credit exposure of the Company's derivative contracts is limited to
the fair value at the reporting date. Credit risk is managed by entering into
transactions with creditworthy counterparties and obtaining collateral where
appropriate and customary. The Company also attempts to minimize its exposure to
credit risk through the use of various credit monitoring techniques. All of the
net credit exposure for the Company from derivative contracts is with
investment-grade counterparties.
10. CONTINGENCIES
Several actions have been brought against the Company on behalf of those persons
who purchased life insurance policies based on complaints about sales practices
engaged in by Prudential, the Company and agents appointed by Prudential and the
Company. Prudential has agreed to indemnify the Company for any and all losses
resulting from such litigation.
In the normal course of business, the Company is subject to various claims and
assessments. Management believes the settlement of these matters would not have
a material effect on the financial position or results of operations of the
Company.
11. DIVIDENDS
The Company is subject to New Jersey law which requires any shareholder dividend
or distribution must be filed with the New Jersey Commissioner of Insurance.
Cash dividends may only be paid out of surplus derived from realized net
profits.
12. RELATED PARTY TRANSACTIONS
Service Agreements
Prudential and Pruco Life of New Jersey operate under service and lease
agreements whereby services of officers and employees, supplies, use of
equipment and office space are provided by Prudential. The net cost of these
services allocated to the Company were $23.5 million, $16.2 million, and $12.2
million for the years ended December 31, 1998, 1997, and 1996, respectively.
These costs are treated in a manner consistent with the Company's policy on
deferred acquisition costs.
Prudential and Pruco Life of New Jersey have an agreement with respect to
administrative services for the Prudential Series Fund. The Company invests in
the various portfolios of the Series Fund through the Separate Accounts. Under
this agreement, Prudential pays compensation to Pruco Life of New Jersey in the
amount equal to a portion of the gross investment advisory fees paid by the
Prudential Series Fund. The Company received from Prudential its allocable
shares of such compensation in the amount of $5.6 million, $5.0 million, and
$3.5 million during 1998, 1997, and 1996 respectively, recorded in "Other
income."
B-19
<PAGE>
Pruco Life Insurance Company of New Jersey
Notes to Financial Statements
- --------------------------------------------------------------------------------
12. RELATED PARTY TRANSACTIONS (continued)
Reinsurance
The Company currently has a reinsurance agreement in place with Prudential (the
reinsurer). The reinsurance agreement is a yearly renewable term agreement in
which the Company may offer and the reinsurer may accept reinsurance on any life
in excess of the Company's maximum limit of retention. The Company is not
relieved of its primary obligation to the policyholder as a result of these
reinsurance transactions. These agreements had no material effect on net income
for the years ended December 31, 1998, 1997, and 1996.
Debt Agreements
In July 1998, the Company established a revolving line of credit facility with
Prudential Funding Corporation, a wholly-owned subsidiary of Prudential. There
is no outstanding debt relating to this credit facility as of December 31, 1998.
B-20
<PAGE>
Report of Independent Accountants
---------------------------------
To the Board of Directors of
Pruco Life Insurance Company of New Jersey
In our opinion, the accompanying statements of financial position and the
related statements of operations, of changes in stockholder's equity and of cash
flows present fairly, in all material respects, the financial position of Pruco
Life Insurance Company of New Jersey at December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
February 26, 1999
B-21
