Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") addresses the financial condition of Pruco Life Insurance Company of New Jersey as of December 31, 2003, compared with December 31, 2002, and its results of operations for the years ended December 31, 2003 and 2002.
The Company sells individual interest-sensitive life insurance, variable life insurance, term insurance, and individual variable annuities through Prudential Insurance's sales force in New Jersey and New York. These markets are subject to regulatory oversight with particular emphasis placed on company solvency and sales practices. These markets are also subject to increasing competitive pressures as the legal barriers which have historically segregated the markets of the financial services industry have been changed through both legislative and judicial processes. Regulatory changes have opened the insurance industry to competition from other financial institutions, particularly banks and mutual funds that are positioned to deliver competing investment products through large, stable distribution channels.
o the ability of the Company and Prudential Insurance to manufacture and distribute products and services and to introduce new products gaining market acceptance on a timely basis;
o the mortality and morbidity experience on individual life insurance and annuity products;
o persistency experience, which affects our ability to recover the cost of acquiring new business over the lives of the contracts;
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires the application of accounting policies that often involve a significant degree of judgment. Management, on an ongoing basis, reviews estimates and assumptions used in the preparation of financial statements. If management determines that modifications in assumptions and estimates are appropriate given current facts and circumstances, results of operations and financial position as reported in the Consolidated Financial Statements may change significantly.
From December 31, 2002 to December 31, 2003 there was an increase of $636 million in total assets from $2,583 million to $3,219 million. Separate account assets increased by $336 million primarily from market value appreciation as a result of recoveries in the equity markets. Fixed maturities increased by $229 million as a result of investing general account policyholder deposits, positive cash flows from insurance operations and the capital contribution from its Parent into these investments. Fixed maturities also benefited from unrealized appreciation. Deferred acquisition costs ("DAC") increased by $39 million, as capitalization of distribution expenses from new sales exceeded the amortization of DAC. Cash and cash equivalents are higher by $11 million as cash is the collateral received from securities lending activities, which is higher in 2003. Other assets are higher by $9 million primarily from an increase in deferred expenses related to sales inducements for annuity products.
During the year, liabilities increased by $572 million from $2,354 million to $2,926 million. Corresponding with the asset change, Separate account liabilities increased by $336 million, as described above. Policyholder account balances increased by $146 million due primarily to positive net sales of annuity products with fixed rate options. A higher level of securities lending activity increased liabilities by $37 million. Future policy benefits increased
Premiums increased by $9.8 million from higher term insurance sales and renewals of $13.6 million partially offset by lower extended term insurance of $2.9 million. Extended term insurance is term insurance we issued, under policy provisions, to customers who previously had lapsing variable life insurance policies with us. Extended term life insurance decreased as a result of favorable market performance in the current year, which caused a decrease in lapses.
Policy charges and fee income, consisting primarily of mortality and expense ("M&E"), loading and other insurance charges assessed on General and Separate account policyholder fund balances, remained relatively flat with the prior year. There was a $.3 million increase for individual life products offset by a $.7 million decrease for annuity products. Current year recurring policy charges for life products are higher if you exclude the prior year affiliated sale to Prudential Insurance of Corporate Owned Life Insurance ("COLI"), which generated $12 million in up-front policy fees. That same COLI contract produced $1.2 million of policy charges in 2003. Excluding the COLI sale, mortality and sales based loading charges for life products increased as a result of growth of the in-force business and the sale of newer interest-sensitive products that generally carry higher expense charges in the first few years of the contract. The life in-force business (excluding term insurance) grew to $10.3 billion at December 31, 2003 from $8.9 billion at December 31, 2002. Annuity Separate account fund balances have increased in the current year as a result of favorable market performance during the current year. However, the average balance for the current year is slightly lower than the prior year resulting in a small decline in policy charges.
Net investment income increased by $.3 million as a result of increased income from fixed maturities due to an increase in the portfolio balance from the investment of positive operating and financing cash flows into the fixed maturity portfolio. This was partially offset by the effect of lower reinvestment rates for fixed maturities and short-term investments due to the lower interest rate environment.
In addition to establishing a liability associated with the guaranteed minimum death benefit feature, SOP 03-01 requires a change in valuation and presentation of our liability associated with the market value adjustment ("MVA") feature contained in certain annuity contracts. The MVA feature requires the Company to pay to the contract holder upon surrender the accreted value of the fund as well as a market value adjustment based on the crediting rates on the contract surrendered compared to crediting rates on newly issued contracts. Currently, this liability is reflected at market value, which considers the effects of unrealized gains and losses in contract value resulting from changes in crediting rates. Upon adoption of SOP 03-01, the Company will reclassify this liability from "Separate Account Liabilities" to "Policyholders' Account Balances" and reduce it to reflect accreted value, which excludes the effect of unrealized gains and losses in contract value resulting from changes in crediting rates. We currently estimate the impact of the reduction in liability associated with the MVA feature to be a benefit of approximately $1.0 million.
Interest credited increased by $2.2 million due to growth in the policyholders' account balances for annuity products. Overall net interest spread revenue, representing net investment income less interest credited, has declined from last year as investment yields on general account assets have declined as described above.
General, administrative and other expenses are $1.0 million lower than the prior year. This resulted mainly from decreases to DAC amortization of $7.2 million offset by increases to distribution expenses and general and administrative expenses of $6.2 million due to growth of the in-force business. Amortization related to annuity products was $12.6 million lower primarily as a result of charges for additional DAC amortization recorded in the prior year of $9 million to reflect our lower estimate of future gross profits on annuities based on asset value declines and expected equity market returns. The current year had favorable market performance, which benefited DAC amortization on annuity products by approximately $4 million. DAC amortization for life products was higher by $5.4 million primarily as a result of increasing amortization on the growing term life business offset partially by favorable fund performance.
General, administrative and other expenses, excluding DAC amortization, increased $6.2 million from the prior year due to an increase in distribution expenses of $3.8 million and allocated operating expenses of $2.4 million. Distribution expenses, net of capitalization increased $3.8 million, as renewal commissions on term insurance, which have been growing due to the increasing renewal base, are not fully capitalizable. Operating expenses are higher as a result of new business and the growing in-force business.