================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 333-18117-01
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New Jersey 22-2426091
- ------------------------------ --------------------------------
(State or other jurisdiction, (IRS Employer Identification No.)
incorporation or organization)
213 Washington Street, Newark, New Jersey 07102
--------------------------------------------------
(Address of principal executive offices) (Zip Code)
(973) 802-6000
---------------------------------------------------
(Registrant's Telephone Number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant: NONE
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of March 31, 1998. Common stock, par value of $5 per
share: 400,000 shares outstanding
================================================================================
<PAGE>
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
(Registrant)
INDEX
-----
Item Page
No. No.
--- ----
Cover Page -
Index 2
PART I
1. Business 3
2. Properties 3
3. Legal Proceedings 3
4. Submission of Matters to a Vote of Security Holders 3
PART II
5. Market for the Registrant's Common Equity and Related
Stockholders' Matters 4
6. Selected Financial Data 4
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 4
8. Financial Statements and Supplementary Data 10
9. Changes in and Disagreements with Independent Accountants
on Accounting and Financial Disclosure 11
PART III
10. Directors and Executive Officers of Registrant 12
11. Executive Compensation 13
12. Security Ownership of Certain Beneficial Owners
and Management 13
13. Certain Relationships and Related Transactions 13
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 14
Exhibit Index 14
Signatures 15
2
<PAGE>
PART I
------
ITEM 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 and deferred 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 meet its reserve requirements and 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. There are approximately 1,900 stock,
mutual and other types of insurers in the life insurance business in the United
States.
ITEM 2. PROPERTIES
- ------------------
Not applicable.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
Several actions were 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
No actions were taken during the fourth quarter of 1997. However, in an action
in lieu of an annual meeting, Pruco Life, the sole shareholder of the Company,
elected the following Directors of the Company, effective as of May 5, 1997.
William M. Bethke
Ira J. Kleinman
Mendel A. Melzer
Esther H. Milnes
I. Edward Price
William F. Yelverton
Upon the resignation of Mr. Yelverton, Pruco Life, elected Mr. James A. Avery,
Jr. as a director of the Company effective as of June 27, 1997.
3
<PAGE>
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS'
- ----------------------------------------------------------------------------
MATTERS
-------
The Company is a wholly-owned subsidiary of Pruco Life. There is no public
market for the Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
<TABLE>
<CAPTION>
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
(In Thousands)
|
GAAP | Statutory
Basis | Basis
1997 1996 1995 1994 | 1993
---- ---- ---- ---- | ----
<S> <C> <C> <C> <C> <C>
Revenues |
Premiums and other revenue $ 64,480 $ 65,184 $ 68,049 $ 51,781 | $ 114,287
Net investment income 46,324 43,784 43,530 42,357 | 47,700
----------------------------------------------------------|--------------
|
Total revenues 110,804 108,968 111,579 94,138 | 161,987
|
Benefits and expenses |
Current and future benefits and |
claims 53,371 48,722 47,695 44,939 | 103,552
Other expenses 27,236 12,848 21,881 23,716 | 19,182
----------------------------------------------------------|--------------
|
Total benefits and expenses 80,607 61,570 69,576 68,655 | 122,734
----------------------------------------------------------|--------------
|
Income before income tax provision 30,197 47,398 42,003 25,483 | 39,253
|
Income tax provision 10,974 15,611 15,002 9,483 | 19,460
----------------------------------------------------------|--------------
Net income $ 19,223 $ 31,787 $ 27,001 $ 16,000 | $ 19,793
==========================================================|==============
Assets $2,002,432 $1,695,616 $1,558,282 $1,424,886 | $1,352,455
=========================================================================
</TABLE>
In 1996, the Company retroactively adopted, as of January 1, 1995, applicable
accounting pronouncements to present its financial statements in conformity
with generally accepted accounting principles.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS.
--------------
The Company markets individual life insurance, variable life insurance, variable
annuities and deferred 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 faced with an increased tightening of
the regulatory environment with particular emphasis placed on company solvency
and sales practices. The legal barriers which have historically segregated the
markets of the financial services industry are being challenged through both
legislative and judicial process. Regulatory changes which opened the insurance
industry to other financial institutions, particularly banks and mutual funds,
heightened competition in
4
<PAGE>
investment type products since those institutions were positioned to deliver the
same products through large, stable distribution channels.
The Company held $2.0 billion in assets at December 31, 1997 compared to $1.7
billion at December 31, 1996, of which $1.1 billion and $.9 billion were held in
Separate Accounts in 1997 and 1996, respectively under variable life insurance
policies and variable annuity contracts. The remaining assets were held in the
general account for investment primarily in bonds, short-term investments and
policy loans.
1. RESULTS OF OPERATIONS
Net income for the year ended December 31, 1997 amounted to $19.2 million, a
decrease of $12.6 million or 39.6% compared to the $31.8 million earned in the
year ended December 31, 1996. Net income for the year ended December 31, 1995
amounted to $27.0 million.
(a) 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 investments in
retirement type products rather than in 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 to an increase in 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.
Investment Results
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
$772.1 million at December 31, 1997, versus $686.8 million at December 31, 1996.
A diversified portfolio of publicly traded bonds and private placement
investments is managed under strategies intended to maintain optimal asset mix
consistent with current and anticipated cash flow requirements of the related
obligations. The risk tolerance reflects the Company's aggregate capital
position, exposure to business risk, liquidity and rating agency considerations.
The asset management strategy for the portfolio is set in accordance with an
investment policy statement developed and coordinated within the Prudential by
the Portfolio Management Group and 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
based on performance. Asset mix strategies are developed with criteria intended
to match asset structure to product liabilities considering the underlying
income and return characteristics of investment alternatives,
5
<PAGE>
seeking to closely approximate the interest rate sensitivity of the asset
portfolio with the estimated interest rate sensitivity of the product
liabilities. Other objectives include maintenance of broad diversification
across asset classes, issuers and sectors; effective utilization of capital
while maintaining liquidity funds 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
reduce risk and more effectively 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."
"Available for sale" securities are carried in the Statements of Financial
Position at fair value, with unrealized gains and losses recognized by credits
and charges to equity capital.
At December 31, 1997, the net unrealized capital gains on the fixed maturity
portfolio totaled $7 million compared to $4 million at December 31, 1996. The
increase in the net unrealized gain position is primarily attributable to
declining interest rates. The following table details the amortized cost and
fair value of the fixed maturity portfolio.
<TABLE>
<CAPTION>
1997 1996
--------------------------------------- -----------------------------------------
NET NET
AMORTIZED ESTIMATED UNREALIZED AMORTIZED ESTIMATED UNREALIZED
COST FAIR VALUE GAINS COST FAIR VALUE GAINS
------------- ------------- ---------- ------------- ------------- -------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
FIXED MATURITIES-
AVAILABLE FOR SALE:
Publicly Traded $575 $582 $7 $552 $556 $4
Privately Traded 10 10 0 0 0 0
---- ---- ---- ---- ---- ----
Total $585 $592 $7 $552 $556 $4
==== ==== ==== ===== ===== ====
</TABLE>
At December 31, 1997, the Company's holdings of private placement fixed
maturities totaled $10 million and constituted 2% of total fixed maturities.
The public fixed maturity portfolio increased from $556 million for the year
ended December 31, 1996 to $582 million at December 31, 1997. Investment grade
fixed maturities comprised approximately 96% and 98% of total publicly traded
fixed maturities at December 31, 1997 and 1996, respectively.
The Company reviews all fixed maturities quarterly and identifies potential
problem assets which require additional monitoring.
(b) 1996 versus 1995
Realized investment gains decreased $2.4 million from $3.6 million for the year
ended December 31, 1995 to $1.2 million for the same period in 1996. This
decrease is a result of trading activity in the bond portfolio and current
market conditions.
Policyholders' benefits for the year ending December 31, 1996 were $28.7 million
compared to $26.3 million for the same period in 1995. This increase of $2.4
million is attributable to increased reserves and the mortality costs associated
with new and existing policies.
Interest credited to policyholders' account balances decreased $1.3 million from
$21.4 million for the year ended December 31, 1995 to $20.1 million for the same
period in 1996. This decrease is primarily attributable to slightly lower
interest rates for the Company's fixed annuity products.
Other operating costs and expenses decreased $9.0 million from $21.9 million for
the twelve months ended 1995 to $12.9 million for the same period in 1996. This
is primarily due to a decrease in the amortization of deferred policy
acquisition costs, and a company wide initiative to reduce expenses.
6
<PAGE>
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, consistent with prior years. As of December 31, 1997, the Company's
assets included $610.7 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 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, implemention 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. RISK MANAGEMENT
As an indirect subsidiary of Prudential, the Company benefits from the risk
management strategies implemented by Prudential.
Risk management includes the identification and measurement of various forms of
risk, establishment of acceptable risk thresholds, and 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 product risk, market
risk, credit risk, liquidity risk, and operating risk. These risk categories,
and Prudential's strategies relative to each, are discussed below.
Prudential's risk management is centrally controlled through a Corporate Risk
Management Unit (CRMU) which sets standards for risk identification, policies
and procedures, and limits, as well as standards for measurement and management
reporting. CRMU interfaces with the Company's business groups through an
enterprise level Financial Controls Council and Enterprise Financial Management
Risk Management Committee, as well as through frequent informal meetings. Risk
limits are set at multiple levels throughout the Company, with different limits
at the desk, portfolio, subsidiary, and enterprise level. Risks are generally
managed as close as possible to their origin, subject to review and oversight by
CRMU to monitor compliance with established standards. Where appropriate, such
as with
7
<PAGE>
respect to credit concentration risk and foreign exchange risk, exposures are
aggregated and managed at the enterprise level.
Prudential'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, desk-level reports are generally produced daily, while portfolio
level reports are typically semi-monthly or monthly and high level reports may
be quarterly or semi-annually.
Product Risk is the risk of adverse results due to deviation of experience from
expected levels reflected in pricing. Prudential, in its insurance and annuity
operations, sells traditional and interest sensitive individual insurance
products, individual annuity products, a variety of group annuity products, and
group life insurance products. Products are priced to reflect the expected
levels of risk and to allow a margin for adverse deviation. The level of margins
varies with product design and pricing strategy with respect to the targeted
market. Prudential seeks to maintain underwriting standards so that premium
charged is consistent with risk assumed on an overall basis. Additionally, most
of Prudential's policies and contracts allow the Company to adjust credits (via
crediting interest 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 experience. The competitive environment is an important
element in determining pricing elements including premiums, crediting rates and
non-guaranteed charges.
Mortality risks, generally inherent in most of the Company's life insurance and
annuity products, are incorporated in pricing based on the Company's experience
(if available and relevant) 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. Expense risk relates to all products and is influenced by management
practices as well as general price level changes. Persistency risk represents
the risk that the pattern of policy surrenders will deviate from assumed levels
so that policies do not remain in force for a sufficient period to allow the
Company to recover its acquisition costs. Certain products are designed, by
implementation 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.
Market Risk is the risk of change in value of financial instruments as a result
of changes in interest rates, currency exchange rates, and securities market
conditions. The Company's asset/liability management strategies provide for
targeting of asset durations within specified ranges based on the estimated
durations of the associated product liabilities. Portfolio managers are directed
to maintain interest rate exposures within the established ranges, which are
subject to adjustment based on market conditions and product design. Prudential
uses statistical techniques such as duration and convexity analysis to measure
price sensitivity to interest rate changes. The Company also performs portfolio
stress testing annually as part of its cash flow testing in which various
interest-sensitive assumptions (such as asset calls and prepayments and 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 statutory reserves or change portfolio management
strategies such as alteration of asset duration and/or composition. For
fee-based (variable, separate account and mutual fund) products, equity risk is
borne primarily by the contractholders rather than the Company (subject to any
minimum guarantees). However, in the event of subpar performance, asset based
fees will be reduced and competitive factors may impede the Company's ability to
cultivate this business.
Credit Risk is the risk that counterparties 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, and various investment operations functions. The Company
attempts to manage risk associated with customer activities through proprietary
credit analysis, establishment of credit limits and by requiring maintenance
of margin and/or collateral in compliance with established internal control and
regulatory standards.
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. Prudential 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 assumed
unusual events.
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 Prudential, 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 over contract
documentation, marketing processes, or other operations. Internal controls
responsive to regulatory, legal, credit, asset stewardship
8
<PAGE>
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 revelations and negative publicity surrounding the issue of sales
practices, Prudential has implemented a strategy to emphasize ethical conduct in
the recruitment and training of agents and in the sales process. The Company 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 impact of the Year 2000 on computer operations are discussed below.
4. 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 Insurance
Department (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 condition as of the end of that year. Regulation by the Insurance
Department includes periodic examination to determine contract liabilities and
reserves so that the Insurance Department may certify that these items are
correct. 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.
In addition, 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.
5. THE YEAR 2000 ISSUE
The Company is an indirect subsidiary of Prudential; and therefore, is impacted
by the enterprise focus on the Year 2000 Issue. The Year 2000 issue is best
understood as a computer hardware and software problem involving the way dates
are stored and processed in computers. Many computer systems are programmed to
recognize only the last two digits in a date. As a result, any computer programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. 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
9
<PAGE>
invoices, or engage in similar normal business activities. The Year 2000 issue
presents critical business risks for public and private sector entities across
the globe.
Prudential identified the Year 2000 issue as a critical priority in 1995 and
established a Company-wide Program Office (CPO) to develop and coordinate an
operating framework for the Year 2000 compliance activities. The CPO assessed
potential business impact, identified software and hardware components that will
require upgrading, renovating, or replacing, and developed a strategy for
renovation, replacement or retirement of all affected business applications. The
initial assessment, completed in 1995, provided an estimate of the magnitude of
the project and necessary resources.
Prudential's CPO has established quality assurance procedures including a
certification process to monitor and evaluate enterprise-wide conversion and
upgrading of systems for Year 2000 compliance. Prudential is utilizing both
internal and external resources to reprogram or replace and test software.
Prudential plans to complete its adaptation, testing and certification of
software for Year 2000 compliance by December 31, 1998 and to conduct additional
testing pertaining to the securities industry (in a scheduled industry-wide
effort) as well as complete its "business partner" analysis and contingency
planning during 1999. Prudential believes that it is well positioned to achieve
the necessary modifications and mitigate the Year 2000 risks.
Prudential has commenced contacting and communicating formally with major
suppliers and customers, including brokers, vendors, health care providers, and
institutions that pass electronic information to Prudential, to determine the
significance of the potential exposure that could result from their failure to
achieve Year 2000 compliance on a timely basis.
While, as indicated above, Prudential believes that it is well positioned to
mitigate its Year 2000 issue, this issue by its nature carries the risk of
unforeseen problems of internal or external origin. There can be no assurance
that the required systems modifications will be completed in accordance with
current estimates of timing and cost, or that the systems of other companies
with which some of Prudential's systems interface will be converted on a timely
and compatible basis. In the event that the required adaptations to mitigate the
Year 2000 issue are not completed on a timely basis, this issue could have a
material adverse impact on the Company's operations. The discussion of the Year
2000 issue herein, and in particular the Company's plans to remediate this issue
and estimated costs thereof, are forward-looking in nature. See cautionary
statement below relating to forward-looking 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 condition 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
Information required with respect to this Item 8 regarding Financial Statements
and Supplementary Data is set forth commencing on page F-4 hereof. See Index to
Financial Statements elsewhere in this Annual Report.
10
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT ACCOUNTANTS ON ACCOUNTING
- -------------------------------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------
In connection with its audits for the two most recent fiscal years, there have
been no disagreements with Price Waterhouse LLP on any matter of accounting
principles, financial statement disclosure or auditing scope or procedure, which
if not resolved to the satisfaction of the independent accountant, would have
caused them to make a reference to the matter in their report.
On March 12, 1996, The Board of Directors of Prudential approved the
recommendation of the Auditing Committee to dismiss Deloitte & Touche LLP as the
independent accountants of Prudential and its subsidiaries, including the
Company.
On May 14, 1996, The Board of Directors of Prudential approved the
recommendation of the Auditing Committee to engage Price Waterhouse LLP as the
independent accountants of Prudential and its subsidiaries, including the
Company.
11
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS THE REGISTRANT
- --------------------------------------------------------
Name Position Age
- ---- -------- ---
James J. Avery, Jr. Chairman of the Board
and Director 46
I. Edward Price Vice Chairman of the Board
and Director 55
Esther H. Milnes President and Director 47
James Drozanowski Senior Vice President 55
Frank Marino Senior Vice President 53
Edward A. Minogue Senior Vice President 55
Hwei-Chung Shao Senior Vice President
and Chief Actuary 43
Karen L. Shapiro Senior Vice President 42
James M. Schlomann Vice President, Comptroller
and Chief Accounting Officer 49
William M. Bethke Director 50
Ira J. Kleinman Director 50
Mendel M. Melzer Director 37
James J. Avery, Jr., age 46 was elected Chairman of the Board of Directors of
the Company on June 27, 1997. Mr. Avery joined the Prudential Insurance Company
of America in 1988 and has served as the Senior Vice President, CFO and Chief
Actuary for the Prudential Individual Insurance Group since 1997.
I. Edward Price, age 55, has been Senior Vice President and Actuary of
Prudential Individual Insurance since 1995. From 1994 to 1995, he was Chief
Executive Officer of Prudential International Insurance. From 1993 to 1994 he
was President of Prudential International Insurance. Prior to 1993, he was
Senior Vice President and Company Actuary of Prudential.
Esther H. Milnes, age 47, has been Vice President and Actuary of Prudential
Individual Insurance Group since 1996. From 1993 to 1995, she was Senior Vice
President and Chief Actuary of Prudential Insurance and Financial Services.
Prior to 1993, she was Vice President and Associate Actuary of Prudential.
James C. Drozanowski, age 55, has been Vice President and Operations Executive,
Prudential Individual Insurance Group since 1996; 1995 to 1996: President and
Chief Executive Officer of Chase Manhattan Bank; 1993 to 1995: Vice President,
North America Customer Services, Chase Manhattan Bank; Prior to 1993: Operations
Executive, Global Securities Services, Chase Manhattan Bank.
Frank P. Marino, age 53, has been Vice President, Policyowner Relations
Department, Prudential Individual Insurance Group since 1996; Prior to 1996:
Senior Vice President, Prudential Mutual Fund Services.
Edward A. Minogue, age 55, was elected a Senior Vice President of the Company on
September 1, 1997. Mr. Minogue has been a Vice President of the Prudential
Insurance Company of America since July, 1997. Prior to 1997, Mr. Minogue was a
director of Merrill Lynch, Pierce & Smith, Inc.
12
<PAGE>
Hwei-Chung Shao, age 43, has been Vice President and Associate Actuary,
Prudential.
Karen L. Shapiro, age 42, has been Vice President, Prudential Individual
Insurance Group since 1996; Vice President and Associate General Counsel,
Prudential Securities Incorporated 1993 to 1996; Prior to 1993: Senior Associate
with Shaw, Pittman, Potts and Trowbridge.
James M. Schlomann, age 49, joined the Prudential in August of 1997 and was
elected the Vice President, Comptroller and Chief Accounting Officer of the
Company effective November 18, 1997. He was a Senior Executive Vice President
and Chief Financial Officer of USLIFE Corp. from 1993 to 1997. Prior to 1993,
Mr. Schlomann was a Senior Vice President and Comptroller of Frank B. Hall &
Co., Inc.
William M. Bethke, age 50, has been President, Prudential Capital Markets Group
since 1992.
Ira J. Kleinman, age 50, has been Chief Marketing and Product Development
Officer of Prudential Individual Insurance Group since 1995. From 1993 to 1995,
he was President of Prudential Select. From 1992 to 1993, he was Senior Vice
President of Prudential. Prior to 1992, he was Vice President of Prudential.
Mendel A. Melzer, age 37, has been Chief Investment Officer, Mutual Funds and
Annuities, Prudential Investments since 1996; 1995 to 1996: Chief Financial
Officer of the Money Management Group of Prudential; 1993 to 1995: Senior Vice
President and Chief Financial Officer of Prudential Preferred Financial
Services; Prior to 1993: Managing Director, Prudential Investment Corporation.
ITEM 11. EXECUTIVE COMPENSATION
- -------------------------------
The following table shows the 1997 annual compensation, paid by Prudential, to
each named executive for services provided to the Company. The amounts have been
determined based on each individual's time devoted to the duties as an executive
of the Company.
<TABLE>
<CAPTION>
NAME AND PRINCIPAL OTHER ANNUAL
POSITION YEAR SALARY BONUS COMPENSATION
- --------------------------- -------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Esther H. Milnes 1997 $ 5,598 $ 6,419 $ 0
Chief Executive Officer 1996 5,417 3,641 0
1995 5,148 2,515 0
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -----------------------------------------------------------------------
Not applicable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
Refer to Note 9 in the Notes to the Financial Statements on page F-18.
13
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- ------------------------------------------------------------------------
(a) (1) and (2) Financial Statements and Schedules of Registrant are listed
in the accompanying "Index to Financial Statements and Financial Statement
Schedules" on page F-1 hereof and are filed as part of this Report.
(a) (3) EXHIBITS
--------
REGULATION S-K
--------------
2. Not applicable.
3. Documents Incorporated by Reference
(i) The Articles of Incorporation of Pruco Life of New Jersey as
amended March 11, 1983 and the Bylaws of Pruco Life Insurance Company
of New Jersey, as amended February 1, 1991 are incorporated herein by
reference to Post-Effective Amendment No. 26 to Form S-6, Registration
No. 2-89780, filed April 28, 1997 on behalf of the Company; (ii)
Bylaws of Pruco Life of New Jersey as amended May 5, 1997 are
incorporated herein by reference to Form 10-Q, Registration No.
333-18117-01, filed August 15, 1997 on behalf of Pruco Life Insurance
Company of New Jersey.
4. Exhibits
Market-Value Annuity Contract, incorporated by reference to
Registrant's Form S-1 Registration Statement, Registration No.
333-18053, filed December 17, 1996, on behalf of Pruco Life
Insurance Company of New Jersey.
9. None.
10. None.
11. Not applicable.
12. Not applicable.
13. Not applicable.
16. Not applicable.
18. None.
21. None.
22. None.
23. Not applicable.
24. Powers of Attorney for I. Edward Price, Esther H. Milnes, William M.
Bethke, Ira Kleinman and Mendel Melzer are incorporated by reference
to Form N-4, Registration No. 333-18117, filed December 18, 1996 on
behalf of Pruco Life of New Jersey Flexible Premium Variable Annuity
Account. A Power of Attorney for James J. Avery, Jr. is incorporated
by reference to Post- Effective Amendment No. 9 to Form S-1,
Registration No. 33-20018, filed June 25, 1997 on behalf of the Pruco
Life of New Jersey Variable Contract Real Property Account.
27. Exhibit 27, Financial Data Schedule appended to this form in
accordance with EDGAR instructions.
28. Not applicable.
99. Exhibit 99, Form SR.
14
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13, or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
(Registrant)
Date: March 31, 1998 By: /s/ ESTHER H. MILNES
----------------- --------------------
Esther H. Milnes
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
* Chairman of the Board March 31, 1998
- ------------------------
James J. Avery, Jr.
* Vice Chairman of the Board March 31, 1998
- ------------------------ and Director
I. Edward Price
* President and Director March 31, 1998
- ------------------------
Esther H. Milnes
/s/ JAMES M. SCHLOMANN
- ------------------------ Vice President and Comptroller March 31, 1998
James M. Schlomann and Chief Accounting Officer
* Director March 31, 1998
- ------------------------
William M. Bethke
* Director March 31, 1998
- ------------------------
Ira J. Kleinman
* Director March 31, 1998
- ------------------------
Mendel A. Melzer
* By: /s/ THOMAS C. CASTANO
------------------------
Thomas C. Castano
(Attorney-in-Fact)
15
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
FINANCIAL STATEMENTS
December 31, 1997, 1996, and 1995
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
16
<PAGE>
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
INDEX TO FINANCIAL STATEMENTS
-----------------------------
<TABLE>
<CAPTION>
Financial Statements Page
- --------------------
<S> <C>
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
Independent Auditors' Reports F-2
Financial Statements:
Statements of Financial Position - December 31, 1997 and 1996 F-4
Statements of Operations - Years Ended December 31, 1997, 1996, and 1995 F-5
Statements of Stockholder's Equity - Years Ended December 31, 1997, 1996,
and 1995 F-6
Statements of Cash Flows - Years Ended December 31, 1997, 1996, and 1995 F-7
Notes to Financial Statements - December 31, 1997, 1996, and 1995 F-8
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
---------------------------------
To the Board of Directors of
The 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, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended 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 express
above.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
New York, New York
March 23, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors of
Pruco Life Insurance Company of New Jersey
Newark, New Jersey
We have audited the accompanying statements of operations, changes in
stockholder's equity and cash flows of Pruco Life Insurance Company of New
Jersey for the year ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such statements of operations, changes in stockholder's equity,
and cash flows present fairly, in all material respects, the results of
operations and cash flows of Pruco Life Insurance Company of New Jersey for
the year ended December 31, 1995 in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
Parsippany, NJ
December 19, 1996
F-3
<PAGE>
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, 1997 AND 1996 (IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------
1997 1996
------------------- ------------------
<S> <C> <C>
ASSETS
Fixed maturities
Available for sale, at fair value (amortized cost, 1997: $585,109;
and 1996: $551,728) $ 592,361 $ 555,898
Policy loans 127,306 113,918
Short-term investments 52,464 17,002
------------------- ------------------
Total investments 772,131 686,818
Cash 3 3,928
Deferred policy acquisition costs 101,625 106,965
Accrued investment income 14,075 12,908
Other assets 4,037 1,736
Separate Account assets 1,110,561 883,261
------------------- ------------------
TOTAL ASSETS $2,002,432 $1,695,616
=================== ==================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Policyholders' account balances $ 379,744 $ 375,448
Future policy benefits and other policyholder liabilities 108,077 100,663
Cash collateral for loaned securities 33,663 -
Income taxes payable 12,963 1,970
Deferred income tax liability 22,188 24,175
Payable to affiliates 4,307 6,059
Other liabilities 17,103 11,990
Separate Account liabilities 1,108,994 880,065
------------------- ------------------
TOTAL LIABILITIES 1,687,039 1,400,370
------------------- ------------------
CONTINGENCIES -(SEE NOTE 10)
STOCKHOLDER'S EQUITY
Common stock, $5 par value;
400,000 shares, authorized;
issued and outstanding at
December 31, 1997 and 1996 2,000 2,000
Paid-in-capital 125,000 125,000
Retained earnings 185,437 166,214
Net unrealized investment gains 2,956 2,032
------------------- ------------------
TOTAL STOCKHOLDER'S EQUITY 315,393 295,246
------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $2,002,432 $1,695,616
=================== ==================
</TABLE>
See Notes to Financial Statements
F-4
<PAGE>
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------- ------------------ ------------------
<S> <C> <C> <C>
REVENUES
Premiums $ 1,105 $ 1,345 $ 1,042
Policy charges and fee income 56,382 58,571 59,515
Net investment income 46,324 43,784 43,530
Realized investment gains, net 1,707 1,221 3,592
Other income 5,286 4,047 3,900
------------------- ------------------ ------------------
TOTAL REVENUES 110,804 108,968 111,579
------------------- ------------------ ------------------
BENEFITS AND EXPENSES
Policyholders' benefits 33,999 28,653 26,331
Interest credited to policyholders' account balances 19,372 20,069 21,364
General, administrative and other expenses 27,236 12,848 21,881
------------------- ------------------ ------------------
TOTAL BENEFITS AND EXPENSES 80,607 61,570 69,576
------------------- ------------------ ------------------
Income from operations before income taxes 30,197 47,398 42,003
------------------- ------------------ ------------------
Income taxes
Current 13,279 12,682 15,248
Deferred (2,305) 2,929 (246)
------------------- ------------------ ------------------
Total income taxes 10,974 15,611 15,002
------------------- ------------------ ------------------
NET INCOME $ 19,223 $ 31,787 $ 27,001
=================== ================== ==================
</TABLE>
See Notes to Financial Statements
F-5
<PAGE>
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET UNREALIZED TOTAL
RETAINED INVESTMENT STOCKHOLDER'S
COMMON STOCK PAID-IN-CAPITAL EARNINGS GAINS EQUITY
---------------- ---------------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $2,000 $125,000 $107,426 $(11,189) $223,237
Net income -- -- 27,001 -- 27,001
Change in net
unrealized
investment gains -- -- -- 17,777 17,777
---------------- ---------------- ------------ ------------- --------------
BALANCE, DECEMBER 31, 1995 2,000 125,000 134,427 6,588 268,015
Net income -- -- 31,787 -- 31,787
Change in net
unrealized
investment gains -- -- -- (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 -- -- -- 924 924
investment gains
---------------- ---------------- ------------ ------------- --------------
BALANCE, DECEMBER 31, 1997 $2,000 $125,000 $185,437 $ 2,956 $315,393
================ ================ ============ ============= ==============
</TABLE>
See Notes to Financial Statements
F-6
<PAGE>
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,223 $ 31,787 $ 27,001
Adjustments to reconcile net income to net cash provided by
operating activities:
Policy charges and fee income (7,841) (9,963) (11,931)
Interest credited to policyholders' account balances 19,372 20,069 21,364
Net decrease (increase) in Separate Accounts 1,629 (1,335) 260
Realized investment gains, net (1,707) (1,221) (3,592)
Amortization and other non-cash items 521 8,908 (6,839)
Change in:
Future policy benefits and other policyholders' liabilities 7,414 8,618 900
Accrued investment income (1,167) (1,329) (317)
Policy loans (13,388) (15,724) (12,917)
Payable to affiliates (1,752) 4,300 (982)
Deferred policy acquisition costs 5,340 (10,934) 9,074
Income taxes payable 10,993 1,970 8,328
Deferred income tax liability (1,987) 366 3,460
Other, net 2,812 4,669 1,024
--------------- --------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES 39,462 40,181 34,833
--------------- --------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of:
Fixed maturities:
Available for sale 645,355 901,775 553,681
Payments for the purchase of:
Fixed maturities:
Available for sale (679,709) (956,483) (522,757)
Cash collateral for loaned securities, net 33,663 - -
Short term investments, net (35,461) 28,306 (3,613)
--------------- --------------- --------------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES (36,152) (26,402) 27,311
--------------- --------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyholders' account balances:
Deposits 134,020 16,754 18,348
Withdrawals (141,255) (26,605) (80,509)
--------------- --------------- --------------
CASH FLOWS USED IN FINANCING ACTIVITIES (7,235) (9,851) (62,161)
--------------- --------------- --------------
Net (decrease) increase in Cash (3,925) 3,928 (17)
Cash, beginning of year 3,928 - 17
--------------- --------------- --------------
CASH, END OF YEAR $ 3 $ 3,928 $ -
=============== =============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Income taxes paid $ 1,896 $ 11,673 $ 7,900
=============== =============== ==============
</TABLE>
See Notes to Financial Statements
F-7
<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 and deferred annuities 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 it's needed to enable it
to meet its reserve requirements and 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 only reportable industry segment of the Company is "Life Insurance."
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The financial statements include the accounts of Pruco Life Insurance Company of
New Jersey, 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 are written down to estimated
fair value when considered impaired and the decline in value is considered to be
other than temporary. Unrealized gains and losses on fixed maturities "available
for sale", net of income tax, the effect on deferred policy acquisition costs
and participating annuity contracts that would result from the realization of
unrealized gains and losses are included in a separate component of equity, "Net
unrealized investment gains."
POLICY LOANS are carried at unpaid principal balances.
SHORT-TERM INVESTMENTS, including highly liquid debt instruments purchased with
an original maturity of twelve months or less, 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.
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 such costs 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.
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. Amortization
of deferred policy acquisition costs was $14,176 thousand, $(2,183) thousand,
and $8,918 thousand for the years ended December 31, 1997, 1996, and 1995,
respectively. 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
F-8
<PAGE>
PRUCO LIFE INSURANCE OF NEW JERSEY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
profits on unamortized deferred acquisition costs is reflected in earnings in
the period such estimated gross profits are revised.
FUTURE POLICY BENEFITS AND POLICYHOLDERS' ACCOUNT BALANCES
Future policy benefits includes reserves for annuities in payout status as well
as reserves for riders and supplemental benefits. Reserves for annuities in
payout status are generally calculated as the present value of estimated future
benefit payments and related expenses, using interest rates ranging from 6.5% to
8.75% The mortality assumption is generally the 1983 Individual Annuity
Mortality Table. Reserves for riders and supplemental benefits are calculated
using rates ranging from 2.5% to 7.25% and various mortality and morbidity
tables derived from company or industry experience.
For the above categories, premium deficiency reserves are established, if
necessary, when the liabilities for future policy benefits plus the present
value of expected future gross premiums are insufficient to provide for expected
future policy benefits and expenses.
Policyholders' account balances for interest-sensitive life and investment-type
contracts are equal to the policy account values. The policy account values
represent an accumulation of gross premium payments plus credited interest, less
expense and mortality charges and withdrawals. Interest crediting rates on life
insurance products range from 4.2% to 6.5% and on investment-type products range
from 4.0% to 7.0%.
SECURITIES LOANED 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
domestic 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.
These transactions are used to generate net investment income and facilitate
trading activity. These instruments are short-term in nature (usually 30 days or
less) and are collateralized principally by U.S. Government and mortgage-backed
securities. 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, pension
fund and other customers. The assets consist of 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 generally 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
Amounts received as payment for interest sensitive life, investment contracts
and deferred 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, surrender charges, and interest earned from the investment of these
account balances. Benefits and
F-9
<PAGE>
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives include futures subject to market risk, all of which are used by the
Company in other than trading activities. Income and expenses related to
derivatives used to hedge are recorded on the accrual basis on the Statement of
Financial Position. Gains and losses relating to derivatives used to hedge the
risks associated with anticipated transactions are realized in Realized
investment gains, net, once it has closed. If it is determined that the
transaction will not close, such gains and losses are included in "Realized
investment gains, net".
Derivatives held for purposes other than trading are primarily used to hedge or
reduce exposure to interest rates. Additionally, other than trading derivatives
are used to change the characteristics of the Company's asset/liability mix
consistent with the Company's risk management.
INCOME TAXES
The Company is a member of a group of affiliated companies which join in filing
a consolidated federal income tax return in addition to 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 which
management believes is more likely than not 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 is to be 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 provisions, including repurchase
agreements, dollar rolls, securities lending and similar transactions. The
Company will delay implementation with respect to those affected provisions.
Adoption of SFAS 125 has not, and will not have a material impact on the
Company's results of operations, financial condition and liquidity.
In June of 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for years beginning after December 15, 1997. This statement
defines comprehensive income as "the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources, excluding investments by owners and distributions to owners"
and establishes standards for reporting and displaying comprehensive income and
its components in financial statements. The statement requires that the Company
classify items of other comprehensive income by their nature and display the
accumulated balance of other comprehensive income separately from retained
earnings in the equity section of the Statements of Financial Position. In
addition, reclassification of financial statements for earlier periods must be
provided for comparative purposes.
RECLASSIFICATIONS
Certain amounts in the prior years have been reclassified to conform to current
year presentations.
F-10
<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>
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>
<TABLE>
<CAPTION>
1996
--------------------------------------------------------------------
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 $ 29,386 $ 1 $ 174 $ 29,213
Foreign government bonds 38,853 420 52 39,221
Corporate securities 483,439 5,108 1,133 487,414
Mortgage-backed securities 50 -- -- 50
-------------- ----------------- -------------- ------------------
Total fixed maturities available for sale $ 551,728 $ 5,529 $ 1,359 $ 555,898
============== ================= ============== ==================
</TABLE>
F-11
<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 maturity at December 31, 1997, are shown below:
AVAILABLE FOR SALE
----------------------------------
ESTIMATED FAIR
AMORTIZED COST VALUE
----------------- -----------------
(IN THOUSANDS)
Due in one year or less $ 28,866 $ 28,987
Due after one year through five years 460,874 465,687
Due after five years through ten years 83,430 85,481
Due after ten years 11,939 12,206
----------------- ----------------
Total $ 585,109 $ 592,361
================= ================
Actual maturities will differ from contractual maturities because issuers have
the right to call or prepay obligations.
Proceeds from the sale of fixed maturities available for sale during 1997, 1996,
and 1995 were $635,355 thousand, $854,758 thousand and $525,672 thousand,
respectively. Gross gains of $2,898 thousand, $3,942 thousand, and $6,349
thousand and gross losses of $1,191 thousand, $3,839 thousand, and $3,018
thousand were realized on those sales during 1997, 1996, and 1995, respectively.
Proceeds from maturities of fixed maturities available for sale during 1997,
1996, and 1995 were $10,000 thousand, $47,017 thousand, and $28,009 thousand,
respectively.
The following table describes the amortized cost and estimated fair value of
fixed maturity securities by agency rating equivalent as of December 31, 1997:
AVAILABLE FOR SALE
----------------------------------
ESTIMATED FAIR
AMORTIZED COST VALUE
----------------- -----------------
(IN THOUSANDS)
AAA/AA/A $ 310,409 $ 313,746
BBB 254,084 257,024
BB 20,616 21,591
----------------- ----------------
Total $ 585,109 $ 592,361
================= ================
SPECIAL DEPOSITS
Fixed maturities of $460 thousand and $459 thousand at December 31, 1997 and
1996, respectively, were on deposit with governmental authorities or trustees as
required by certain insurance laws.
F-12
<PAGE>
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. INVESTMENTS (continued)
INVESTMENT INCOME AND INVESTMENT GAINS AND LOSSES
NET INVESTMENT INCOME arose from the following sources for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
(In Thousands)
<S> <C> <C> <C>
Fixed maturities - available for sale $37,563 $36,193 $36,861
Policy loans 6,596 5,761 5,029
Short-term investments 3,023 2,504 2,290
Other 333 28 51
----------------- ----------------- -----------------
Gross investment income 47,515 44,486 44,231
Less investment expenses (1,191) (702) (701)
----------------- ----------------- -----------------
Net investment income $46,324 $43,784 $43,530
================= ================= =================
</TABLE>
REALIZED INVESTMENT GAINS, NET, including charges for other than temporary
reductions in value, for the years ended December 31, were from the following
sources:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ---------------------------- -----------------
(In Thousands)
<S> <C> <C> <C>
Fixed maturities - available for sale
Realized investment gains $ 2,898 $ 5,232 $ 6,785
Realized investment losses (1,191) (4,011) (3,193)
----------------------- ---------------------------- -----------------
Realized investment gains, net $ 1,707 $ 1,221 $ 3,592
======================= ============================ =================
</TABLE>
NET UNREALIZED INVESTMENT GAINS are included in the statements of financial
position as a component of equity net of tax. Changes in these amounts for the
years ended December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ---------------------------- -----------------
(In Thousands)
<S> <C> <C> <C>
Balance, beginning of year $ 2,032 $ 6,588 $ (11,189)
Changes in unrealized investment gains
(losses) attributable to:
Fixed maturities 3,082 (11,222) 32,875
Participating group annuity contracts 332 (1,175) 1,387
Deferred policy acquisition costs (2,170) 5,277 (6,486)
Deferred federal income taxes (320) 2,564 (9,999)
----------------------- ---------------------------- -----------------
Balance, end of year $ 2,956 $ 2,032 $ 6,588
======================= ============================ =================
</TABLE>
F-13
<PAGE>
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INCOME TAXES
The components of income taxes for the years ended December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- -------------------- ----------------
(In Thousands)
<S> <C> <C> <C>
Current tax expense
U.S. $12,880 $13,589 $13,868
State and local 399 (907) 1,380
------------------- -------------------- -----------------
Total 13,279 12,682 15,248
------------------- -------------------- -----------------
Deferred tax expense (benefit):
U.S. (2,305) 2,848 (239)
State and local -- 81 (7)
------------------- -------------------- -----------------
Total (2,305) 2,929 (246)
------------------- -------------------- -----------------
Total income tax expense $10,974 $15,611 $15,002
=================== ==================== =================
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- -------------------- -----------------
(In Thousands)
<S> <C> <C> <C>
Expected federal income tax expense $10,569 $16,589 $14,702
State income taxes 259 (826) 1,373
Other 146 (152) (1,073)
------------------- -------------------- -----------------
Total income tax expense $10,974 $15,611 $15,002
=================== ==================== =================
</TABLE>
F-14
<PAGE>
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. INCOME TAXES (continued)
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the following table:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
Deferred income tax assets (In Thousands)
<S> <C> <C>
Insurance reserves $ 6,260 $ 6,189
Other 615 -
-------------------- --------------------
Total deferred income tax assets 6,875 6,189
-------------------- --------------------
Deferred income tax liabilities
Deferred acquisition costs 25,429 28,424
Net investment gains 3,634 1,940
-------------------- --------------------
Deferred income tax liabilities 29,063 30,364
-------------------- --------------------
Total deferred federal tax
liabilities $22,188 $24,175
==================== ====================
</TABLE>
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 assets that are realizable.
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. However, management 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.
5. REINSURANCE
The Company assumes and cedes reinsurance with Prudential. The effect of the
reinsurance for the years ended December 31, is summarized as follows:
1997 1996 1995
---- ------ ------
(In Thousands)
Life insurance premiums
Gross Amount $1,117 $1,345 $1,053
Ceded to other companies (12) -- (11)
Assumed from other companies -- -- --
------ ------ ------
Net amount $1,105 $1,345 $1,042
====== ====== ======
1997 1996 1995
---- ------ ------
(In Thousands)
Life insurance in force
Gross Amount $8,325,544 $8,599,647 $8,873,763
Ceded to other companies (1,808) (1,831) (1,818)
Assumed from other companies -- -- --
---------- ---------- ----------
Net amount $8,323,736 $8,597,816 $8,871,945
========== ========== ==========
F-15
<PAGE>
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. 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>
1997 1996 1995
------------------ ------------------ ------------------
(In Thousands)
<S> <C> <C> <C>
STATUTORY NET INCOME $ 18,306 $ 24,774 $ 25,567
Adjustments to reconcile to net income on a GAAP basis:
Deferred acquisition costs (3,170) 5,656 (2,589)
Deferred premium 198 221 (58)
Insurance liabilities 2,324 4,784 2,286
Deferred taxes 1,708 (2,883) 510
Valuation of investments (143) (765) 1,285
------------------ ------------------ ------------------
GAAP NET INCOME $ 19,223 $ 31,787 $ 27,001
================== ================== ==================
</TABLE>
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
(In Thousands)
<S> <C> <C>
STATUTORY SURPLUS $ 235,958 $ 216,019
Adjustments to reconcile to equity on a GAAP basis:
Valuation of investments 18,540 17,768
Deferred acquisition costs 101,837 106,965
Deferred premium (2,007) (2,205)
Insurance liabilities (10,726) (21,501)
Deferred taxes (28,238) (21,829)
Other, net 29 29
-------------------- --------------------
GAAP STOCKHOLDER'S EQUITY $ 315,393 $ 295,246
==================== ====================
</TABLE>
The New York State Insurance Department ("Department") recognizes only statutory
accounting for determining and reporting the financial condition of an insurance
company, for determining its solvency under the New York Insurance Law and for
determining whether its financial condition warrants the payment of a dividend
to its stockholders. No consideration is given by the Department to financial
statements prepared in accordance with GAAP in making such determinations.
F-16
<PAGE>
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The 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 fair value.)
FIXED MATURITIES
Fair values for fixed maturities are based on quoted market prices or estimates
from independent pricing services.
POLICY LOANS
The 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.
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>
1997 1996
ESTIMATED ESTIMATED
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
------------------ ------------------ ------------------ -------------------
(In Thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Fixed maturities available for
sale $ 592,361 $ 592,361 $ 555,898 $ 555,898
Policy loans 127,306 126,262 113,918 110,262
Short-term investments 52,464 52,464 17,002 17,002
Cash 3 3 3,928 3,928
Separate Accounts assets 1,110,561 1,110,561 883,261 883,261
Financial Liabilities:
Policyholders'
account balances $ 379,744 $ 379,744 $ 375,448 $ 375,448
Cash collateral for loaned
securities 33,663 33,663 - -
Separate Accounts liabilities 1,108,994 1,108,994 880,065 880,065
Derivatives 83 83 - -
</TABLE>
F-17
<PAGE>
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. DERIVATIVE
DERIVATIVE FINANCIAL INSTRUMENTS
The fair value of liability positions in future instruments, which represents
the Company's current exposure to credit loss from other parties'
non-performance, was $83 thousand at December 31, 1997. This includes the
estimated fair values of outstanding derivative positions only and does not
include the fair values of associated financial and non-financial assets and
liabilities, which generally offset derivative notional amounts. The fair value
amounts presented also do not reflect the netting of amounts pursuant to right
of setoff, qualifying master netting agreements with counterparties or
collateral arrangements.
9. RELATED PARTY TRANSACTIONS
SERVICE AGREEMENTS
Prudential, Pruco Life, and Pruco Securities Corporation, an indirect
wholly-owned subsidiary of Prudential, operate under service and lease
agreements whereby services of officers and employees, supplies, use of
equipment and office space are provided. The net cost of these services
allocated to the Company were $16,210 thousand, $12,223 thousand and $15,947
thousand for the years ended December 31, 1997, 1996, and 1995, respectively.
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, 1997, 1996, and 1995.
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 limits the amount of dividends
that insurance companies can pay to stockholders. The maximum dividend which may
be paid in any twelve month period without prior approval of the New Jersey
Commissioner of Insurance is limited to the greater of 10% of statutory surplus
as of December 31 of the preceding year or the net gain from operations of the
preceding calendar year. Cash dividends may only be paid out of surplus derived
from realized net profits. Based on these limitations and the Company's surplus
position at December 31, 1997, the Company would be permitted a maximum of
$23,396 thousand in dividend distributions in 1998, all of which could be paid
in cash, without approval from The State of New Jersey Department of Insurance.
F-18
Exhibit 99
--------------------------------
- ----------- | OMB APPROVAL |
| | --------------------------------
| FORM SR | | OBM Number: 3235-0124 |
| | | Expires November 30, 1993 |
- ----------- | Estimated average burden |
| hours per response. . . 5.50 |
--------------------------------
--------------------------
| SEC USE ONLY |
--------------------------
| | | | |
| 2- | | - | |
| | | | | | | | | |
--------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT OF SALES OF SECURITIES AND USE OF PROCEEDS THEREFROM
MO DAY YEAR
--------- --------- --------
For period ending | 1 | 2 | | 3 | 1 | | 9 | 7 |.
--------- --------- --------
Indicate whether the report is an initial report [ ], an amendment [X], or a
final report [ ].
-----
If the report is an amendment, indicate the number of such amendment [ | ].
-----
GENERAL INSTRUCTIONS:
A. The report shall be filed in accordance with the provision of Rule 463
(17 CFR 230.463). The provisions of Rule 405 (17 CFR 230.405) regarding
definitions of terms and Rule 409 (17 CFR 230.409) regarding information unknown
or not reasonably available are applicable to the report.
B. Answer each item in the box(es) or space provided. If additional space
is required for any response, continue the response on the attached sheet. Where
the number of boxes provided exceeds the number required for the response, enter
zero(es) in any unnecessary box(es) to the left of the response. For example, if
the date August 1, 1981 is to be entered in the boxes provided, the entry should
appear as MO DAY YEAR
-------------------------------
| 0 | 8 | | 0 | 1 | | 8 | 1 |
-------------------------------
C. If the report is being filed by a sucessor issuer, answer each item with
respect to the successor issuer.
D. If the issuer is required to file any report(s) on this form subsequent
to its initial filing thereon, each subsequent filinq shall be deemed to be an
amendment to the initial filing. Do not report in any amendment on this form any
response to Items 3-12 unless the response reported on the most recent prior
filing has changed.
E. No fee is required to be paid in connection with the filing of the
report.
F. File four copies of the report at the office of the Commission where the
registration statement was filed. At least one copy shall be manually signed;
the other three copies may bear typed or printed signatures.
1. (a) State the name of the issuer or successor issuer filing the report.
--------------------------------------------------------------------
| |
| PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY |
| |
--------------------------------------------------------------------
(b) If a successor issuer is filing the report with respect to the
registration statement of its predecessor, state the name of such
predecessor issuer.
--------------------------------------------------------------------
| |
| |
| |
--------------------------------------------------------------------
SEC 1809 (2/91)
<PAGE>
- ----------- ----------
| | | |
| FORM SR | | Page 2 |
| | | |
- ----------- ----------
2. (a) Indicate the effective date of the registration statement for which this
form is filed. MO DAY YEAR
-------------------------------
| 0 | 2 | | 0 | 7 | | 9 | 7 |
-------------------------------
Regional
(b) Provide the SEC file number assigned to the Office
registration statement. Code
If any
------------- --------------------- -------
| 3 | 3 | 3 | - | 1 | 8 | 0 | 5 | 3 | - | | |
------------- --------------------- -------
(c) If the issuer has been assigned a CUSIP number, specify the first (6)
digits.
-------------------
| | | | | | |
-------------------
3. (a) Has the offering commenced? YES NO
[X] [ ]
(b) If yes, indicate the date the offering commenced.
MO DAY YEAR
-------------------------------
| 0 | 2 | | 2 | 4 | | 9 | 7 |
-------------------------------
If no, explain briefly______________________________________________
______________________________________________
______________________________________________
4. Did the offering terminate before any securities were sold?
YES NO
[ ] [X]
If yes, explain briefly______________________________________________
______________________________________________
______________________________________________
Note: If the offering terminated before anv securities were sold, see Rule
477 under Regulation C (17 CFR 230.477) regarding withdrawal of the
registration statement.
Instruction: If the answer to Item 4 is "Yes," do not answer Items 5-12.
5. Did the offering terminate prior to the sale of all securities registered?
YES NO
[ ] [X]
If yes, explain briefly______________________________________________
______________________________________________
______________________________________________
<PAGE>
- ----------- ----------
| | | |
| FORM SR | | Page 3 |
| | | |
- ----------- ----------
6. Furnish the name(s) of the managing underwriter(s), if any.
-----------------------------------------------------------------------------
| (01) |
| PRUCO SECURITIES CORPORATION (DISTRIBUTOR) |
| |
-----------------------------------------------------------------------------
| (02) |
| |
| |
-----------------------------------------------------------------------------
| (03) |
| |
| |
-----------------------------------------------------------------------------
| (04) |
| |
| |
-----------------------------------------------------------------------------
7. (a) Indicate the title and code of each class of securities registered and,
where a class of convertible securities is being registered, indicate
the title and code of any class of securities into which such securities
may be converted.
Title of security Code
-----------------------------------------------------------------------------
| (01) | |
| DISCOVERY SELECT VARIABLE ANNUITY | OT |
| | |
-----------------------------------------------------------------------------
| (02) | |
| | |
| | |
-----------------------------------------------------------------------------
| (03) | |
| | |
| | |
-----------------------------------------------------------------------------
| (04) | |
| | |
| | |
-----------------------------------------------------------------------------
Instruction: Select the appropriate code for each class of securities
registered. Debt--DE; Convertible Debt--CD; Equity--EQ; Limited
Partnership Interest--LP; Other (e.g., investment contracts, warrants,
rights, and options)--OT.
(b) Describe briefly any class of securities categorized as "other."
MARKET VALUE ADJUSTED FIXED-DOLLAR ANNUITY CONTRACT.
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
8. Indicate on the following table the amount and aggregate offering price of
securities registered and sold to date for the account of the issuer and for
the account(s) of any selling security holder(s).
<PAGE>
- ----------- ----------
| | | |
| FORM SR | | Page 4 |
| | | |
- ----------- ----------
<TABLE>
<CAPTION>
<S> <C> <C>
For the account of the issuer For the account(s) of any selling security holder(s)
| |
---------------------------------------- --------------------------------------
| | | |
- -----------------------------------------------------------------------------------------------------------------------
| Title | Amount | Aggregate | Amount | Aggregate | Amount | Aggregate | Amount | Aggregate |
| of | registered | price of | sold | offering | registered | offering | sold | offering |
| security | | offering | | price of | | price of | | price of |
| | | amount | | amount | | amount | | amount |
| | | registered | | sold | | registered | | sold |
- -----------------------------------------------------------------------------------------------------------------------
| (01) | | | | | | | | |
| | | | | | | | | |
| | # | $150,000,000 | # | $117,781,380| | | | |
| | | | | | | | | |
| | | | | | | | | |
- -----------------------------------------------------------------------------------------------------------------------
| (02) | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
- -----------------------------------------------------------------------------------------------------------------------
| (03) | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
- -----------------------------------------------------------------------------------------------------------------------
| (04) | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
- -----------------------------------------------------------------------------------------------------------------------
| (05) | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total | | | | | | | | |
| | | | | | | | | |
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Instructions: 1. List each class of securities registered except any
class of securities into which a class of
convertible securities registered may be converted
without additional payment to the issuer. Match any
class listed with the line on which it was listed in
Item 7(a) (e.g., the class listed on line (01) of
the table should be the same class as listed on line
(01) of Item 7(a)).
2. Compute all amounts from the effective date of the
registration statement to the ending date of the
reporting period for this report.
3. Round all amounts to the nearest dollar.
# These securities are not issued or sold in predetermined units.
<PAGE>
- ----------- ----------
| | | |
| FORM SR | | Page 5 |
| | | |
- ----------- ----------
9. State, if known, or furnish a reasonable estimate of, the amount of
expenses incurred for the issuer's account in connection with the
issuance and distribution of the securities registered for each category
listed below. Place an "X" in the box to the left of any amount given
that is an estimate.
Direct or indirect payments to Direct or indirect
directors, officers, general payments to others
partners of the issuer or their
associates; to persons owning
ten percent or more of any class
of equity securities of the
issuer; and to affiliates of the
issuer
(A) (B)
- --------------------------------------------------------------------------------
| (01) Underwriting | | |
| discounts and |---- |---- |
| commissions | X | $3,702,508* | | $ |
- --------------------------------------------------------------------------------
| (02) | | |
| Finders' Fees |---- |---- |
| | | | | |
- --------------------------------------------------------------------------------
| (03) Expenses paid | | |
| to or for |---- |---- |
| underwiters | | | | |
- --------------------------------------------------------------------------------
| (04) | | |
| Other expenes |---- |---- |
| | X | 2,714,076** | | |
- --------------------------------------------------------------------------------
| (05) | | |
| Total expenes |---- |---- |
| | X | $6,416,584 | | $ |
- --------------------------------------------------------------------------------
Instructions: 1. Compute all amounts from the effective date of the
registration statement to the ending date of the
reporting period for this report.
2. Round all amounts to the nearest dollar.
10. Indicate the net offering proceeds to the issuer after the total
expenses in Item 9 above.
-----------------
| $111,364,796 |
-----------------
11. State, if known, or furnish a reasonable estimate of, the amount of
net offering proceeds to the issuer used for each of the purposes
listed below. Do not include any amount in "working capital" to
which a more specific category is applicable. Place an "X" in the
box to the left of any amount given that is an estimate.
*Amount represents sales commissions paid to affiliated parties.
**Amount represents general administrative expenses paid to the parent under
service and lease agreement.
<PAGE>
- ----------- ----------
| | | |
| FORM SR | | Page 6 |
| | | |
- ----------- ----------
Direct or indirect payments to Direct or indirect
directors, officers, general payments to others
partners of the issuer or their
associates; to persons owning
ten percent or more of any class
of equity securities of the
issuer; and to affiliates of the
issuer
(A) (B)
- --------------------------------------------------------------------------------
| (01) Construction of | | |
| plant, building |---- |---- |
| and facilities | | $ | | $ |
- --------------------------------------------------------------------------------
| (02) Purchase and installation | | |
| of machinery and equipment |---- |---- |
| | | | | |
- --------------------------------------------------------------------------------
| (03) Purchase of real estate | | |
| |---- |---- |
| | | | | |
- --------------------------------------------------------------------------------
| (04) Acquistion of other | | |
| business(es) |---- |---- |
| | | | | |
- --------------------------------------------------------------------------------
| (05) Payment of indebtedness | | |
| |---- |---- |
| | | | | |
- --------------------------------------------------------------------------------
| (06) Working capital | | |
| |---- |---- |
| | | | | |
- --------------------------------------------------------------------------------
Temporary investment (specify)
- --------------------------------------------------------------------------------
| (07) | | |
| |---- |---- |
| | | $ | | $ |
- --------------------------------------------------------------------------------
| (08) | | |
| |---- |---- |
| | | | | |
- --------------------------------------------------------------------------------
| (09) | | |
| |---- |---- |
| | | | | |
- --------------------------------------------------------------------------------
| (10) | | |
| |---- |---- |
| | | | | |
- --------------------------------------------------------------------------------
Other purposes (specify)
- --------------------------------------------------------------------------------
| (11) | | |
| |---- |---- |
| | | $ | | $ |
- --------------------------------------------------------------------------------
| (12) | | |
| |---- |---- |
| | | | | |
- --------------------------------------------------------------------------------
| (13) | | |
| |---- |---- |
| | | | | |
- --------------------------------------------------------------------------------
| (14) | | |
| |---- |---- |
| | | | | |
- --------------------------------------------------------------------------------
| (15) | | |
| |---- |---- |
| | | | | |
- --------------------------------------------------------------------------------
| (16) | | |
| |---- |---- |
| | | | | |
- --------------------------------------------------------------------------------
Instructions: 1. Specify under "other purposes" any purpose for which at
least 5 percent of the issuer's total offering proceeds or
$50,000, whichever is less, has been used.
2. Compute all amounts from the effective date of the
registration statement to the ending date of the reporting
period for this report.
3. Round all amounts to the nearest dollar.
<PAGE>
- ----------- ----------
| | | |
| FORM SR | | Page 7 |
| | | |
- ----------- ----------
12. Do the use(s) of proceeds in Item 11 represent a material change in the
use(s) of proceeds described in the prospectus?
YES NO
[ ] [ ]
If yes, explain briefly ___________________________________________________
___________________________________________________
___________________________________________________
___________________________________________________
___________________________________________________
SIGNATURE
Pursuant to the requirements of Rule 463 under the Securities Act of 1933,
Pruco Life Insurance Company of New Jersey has caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
PRUCO LIFE INSURANCE COMPANY OF NEW JERSEY
------------------------------------------
ISSUER
3/31/98 By /s/ JAMES M. SCHLOMANN
- ----------------------- ------------------------------------------
DATE James M. Schlomann
Vice President and Comptroller
Instruction: The report shall be signed by an executive officer, general partner
or counsel of the issuer or by any other duly authorized person.
The name and any title of the person who signs the report shall be
typed or printed beneath his/her signature.
- --------------------------------------------------------------------------------
| ATTENTION: Intentional misstatements or omissions of facts constitute |
| Federal criminal violations (See 18 U.S.C. 1001). |
- --------------------------------------------------------------------------------
<PAGE>
- ------------------------------ ----------
| | | |
| FORM SR Continuation Sheet | | Page 8 |
| | | |
- ------------------------------ ----------
REPORT OF SALES OF SECURITIES
AND USE OF PROCEEDS THEREFROM
Item of Form
(identity) Answer
- --------------------------------------------------------------------------------
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
Exhibit 27
FINANCIAL DATA SCHEDULE
Article 7 of Regulation S-X
Pruco Life Insurance Company of New Jersey
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 592,361
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 772,131
<CASH> 3
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 101,625
<TOTAL-ASSETS> 2,002,432
<POLICY-LOSSES> 379,744
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 108,077
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 2,000
<OTHER-SE> 313,393
<TOTAL-LIABILITY-AND-EQUITY> 2,002,432
1,105
<INVESTMENT-INCOME> 46,324
<INVESTMENT-GAINS> 1,707
<OTHER-INCOME> 5,286
<BENEFITS> 53,371
<UNDERWRITING-AMORTIZATION> 14,176
<UNDERWRITING-OTHER> 6,634
<INCOME-PRETAX> 30,197
<INCOME-TAX> 10,974
<INCOME-CONTINUING> 19,223
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,223
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
