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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001
Commission file numbers:
33-62953, 33-88360, 33-89676, 33-91400, 333-00995, 333-02867,
333-24989, 333-25761, 333-53596, 333-26695,
333-51896 and 333-55608
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
Incorporated in the State of Connecticut
Connecticut 06-1241288
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
One Corporate Drive, Shelton, Connecticut 06484
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(Address of Principal Executive Offices, Zip Code)
Registrant's telephone number, including area code: (203) 926-1888
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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 and (2) has been subject to such filing requirements for the past 90 days.
Yes X No ____
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As of March 28, 2002, there were 25,000 shares of outstanding common stock, par value $100 per share, of the registrant, consisting
of 100 shares of voting and 24,900 shares of non-voting all of which were owned by American Skandia, Inc., a wholly-owned subsidiary
of Skandia Insurance Company Ltd., a Swedish corporation.
PART I
Item 1. BUSINESS
General
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American Skandia Life Assurance Corporation ("the Company"), with its principal offices in Shelton, Connecticut, is a wholly-owned
subsidiary of American Skandia, Inc. ("ASI"), whose ultimate parent is Skandia Insurance Company Ltd. (publ) ("SICL"), a Swedish
corporation. The Company has 99.9% ownership in Skandia Vida, S.A. de C.V. ("Skandia Vida") which is a life insurance company
domiciled in Mexico.
The Company was established in 1988 and was one of the larger providers of variable annuity contracts for the individual market in the
United States during 2001, according to Info-One's Variable Annuity Research & Data Service ("VARDS"). The Company also offers
variable life insurance and fixed annuity products. Affiliates of the Company also sponsor and distribute shares of registered
investment companies (mutual funds). Because these mutual funds are not sponsored or distributed by the Company, such products are not
discussed herein and are not reflected on the Company's financial statements.
The Company's products are sold primarily to individuals to provide for long-term savings and retirement purposes and to address the
economic impact of premature death, estate planning concerns and supplemental retirement needs. The investment performance of the
mutual funds supporting the variable annuity and variable life insurance contracts can significantly impact the market for the
Company's products.
Products
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The Company offers a wide array of annuities, including: a) certain deferred and immediate annuities that are registered with the
Securities and Exchange Commission, including variable annuities and fixed interest rate annuities that include a market value
adjustment feature; b) certain other fixed deferred annuities that are not registered with the Securities and Exchange Commission; c)
non-registered group variable annuities designed as funding vehicles for various types of qualified retirement plans; and d) fixed,
adjustable and variable immediate annuities. On March 15, 2002, the Company announced that it will no longer accept new business for
the funding of qualified retirement plans, effective July 31, 2002. The Company intends to continue to accept additional
contributions to existing qualified plans following that date.
Annuity contracts represent a contractual obligation to make payments over a given period of time (often measured by the life of the
recipient), undertaken by the insurer in return for the payment of either a single purchase payment or a series of scheduled or flexible
purchase payments. The insurer's obligation to pay may commence immediately or be deferred. If the payments are deferred, the insurer
generally incurs an obligation to make a surrender value available during the deferral period based on an account value established using
the purchase payments. The account value may be credited interest, or may vary with the performance of investments made by the insurer.
Gains in the contracts before distribution generally are tax deferred. Distributions are taxed as ordinary income. During the deferral
period, distributions are assumed to come first from any gain in contract. Distributions may be subject to a tax penalty. For immediate
annuities and annuitized deferred annuities, a portion of each distribution may be treated as the return of the taxpayer's investment in
the contract.
During 1998 and 1999, the Company expanded its product offerings with the introduction of single premium and flexible premium
variable life insurance products and a term life insurance product. On March 15, 2002, the Company announced that it will no longer
accept applications for it's flexible premium variable insurance products that are signed after April 1, 2002 or received after April
15, 2002. The Company intends to continue to service and accept additional premiums for its existing flexible premium variable
insurance contracts after that time, and to continue to offer and sell its single premium variable life insurance products. Life
insurance policies represent a contractual obligation to pay proceeds to a beneficiary upon the death of the insured. This
obligation is undertaken by the insurer in return for either a single premium, or a series of scheduled or flexible premiums. Cash
value life insurance represents an additional obligation to make amounts available upon surrender or, in many cases, for loans
collateralized by policy values. Distributions upon the death of the insured are tax free in most circumstances. Gains in the
contracts before distribution are tax deferred. Distributions subject to tax are subject to ordinary income treatment.
Distributions before the death of the insured from policies deemed to be modified endowment contracts ("MEC") are generally taxed in
a manner similar to deferred annuities. Distributions from non-MEC policies before the insured's death are assumed to come first
from the taxpayer's investment in the policy and loans are not deemed distributions.
Certain variable annuity products contain a benefit feature (called "Performance Advantage") which provide certain benefits if the
policyowner's account value has not reached a "target value" on its tenth anniversary. At the option of the policyowner, the benefit
will be distributed in the form of an annual or, if annuitization is selected, a lump-sum credit to the contractowner's account.
Distribution
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The Company sells its wide array of annuity products through multiple distribution channels including, (a) independent financial
planners; (b) broker-dealers that generally are members of the New York Stock Exchange, including "wirehouse" and regional
broker-dealer firms; and (c) broker-dealers affiliated with banks or that specialize in marketing to customers of banks. The Company
continues to be successful in expanding the number of selling agreements to include relationships with approximately 1,200
broker/dealer firms and financial institutions.
The Company believes its continued success is dependent on its ability to enhance its relationships with both the selling firms and
their registered representatives. In cooperation with its affiliated broker-dealer, American Skandia Marketing, Incorporated, the
Company uses marketing teams to provide support to its primary distribution channels. In addition, the Company also offers a number
of private label and proprietary products distributed by select large distributors.
Segments
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Segment reporting is aligned based on the three major product offerings: variable annuity, variable life insurance and qualified
retirement plans. In recent years, the Company developed variable life insurance and qualified retirement plan funding products.
The marketing and distribution of these plans were in the early stages and had not yet generated significant sales when the Company
announced, on March 15, 2002, its intention to focus on its core variable annuity business.
Reserves
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The Company is obligated to carry in its statutory financial statements, as liabilities, actuarial reserves to meet its obligations on
outstanding annuity or life insurance contracts. This is required by the life insurance laws and regulations in the jurisdictions in
which the Company does business. Such reserves are based on mortality and/or morbidity tables in general use in the United States. In
general, reserves are computed amounts that, with additions from premiums to be received, and with interest on such reserves compounded
at certain assumed rates, are expected to be sufficient to meet contractual obligations. In the accompanying financial statements,
these reserves for contractual obligations are determined in accordance with generally accepted accounting principles and are included
in the balance sheet captions "separate account liabilities" and "reserve for future insurance policy and contract benefits."
Employees
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As of December 31, 2001, the Company had 764 employees.
Item 2. PROPERTIES
The Company occupies office space in Shelton, Connecticut leased from an affiliate, American Skandia Information Services and
Technology Corporation. The Company entered into a lease for office space in Westminster, Colorado, effective January 1, 2001, and
established an additional customer service center at that location. The Company believes that its current facilities are
satisfactory for its near term needs.
Item 3. LEGAL PROCEEDINGS
As of the date of this filing, the Company is not involved in any legal proceedings outside of the ordinary course of its business
operations. The Company is involved in pending and threatened legal proceedings in the ordinary course of its business operations.
While the outcome of these legal proceedings cannot be determined at this time, after consideration of the defenses available to
the Company, applicable insurance coverage and any related reserves established, these legal proceedings are not expected to result
in liability for amounts material to the financial condition of the Company, although they may adversely affect results of operations
in future periods.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the Company's outstanding shares are owned by American Skandia, Inc., a wholly-owned subsidiary of Skandia Insurance Company
Ltd. (publ). The Company did not pay any dividends to ASI in 2001, 2000 or 1999.
Item 6. SELECTED FINANCIAL DATA
The following table summarizes information with respect to the operations of the Company:
(table in thousands) For the Year Ended December 31,
2001 2000 1999 1998 1997
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STATEMENT OF OPERATIONS DATA
Revenues:
Annuity and life insurance charges and fee$* 378,693 $ 424,578 $ 289,989 $ 186,211 $ 121,158
Fee income 111,196 130,610 83,243 50,839 27,593
Net investment income 20,126 11,656 10,441 11,130 8,181
Premium income and other revenues 3,368 4,778 3,688 1,360 1,082
------------ ------------ ------------ ------------ ------------
Total revenues $ 513,383 $ 571,622 $ 387,361 $ 249,540 $ 158,014
============ ============ ============ ============ ============
Benefits and Expenses:
Annuity and life insurance benefits $ 1,955 $ 751 $ 612 $ 558 $ 2,033
Change in annuity and life insurance
policy reserves (39,898) 45,018 3,078 1,053 37
Cost of minimum death benefit - - 2,945 5,144 4,545
reinsurance
Return credited to contractowners 16,833 9,046 (1,639) (8,930) (2,018)
Underwriting, acquisition and other
insurance expenses 420,802 335,213 206,350 167,790 90,496
Interest expense 73,424 85,998 69,502 41,004 24,895
------------ ------------ ------------ ------------ ------------
Total benefits and expenses $ 473,116 $ 476,026 $ 280,848 $ 206,619 $ 119,988
============ ============ ============ ============ ============
Income tax expense $ 7,168 $ 30,779 $ 30,344 $ 8,154 $ 10,478
============ ============ ============ ============ ============
Net income $ 33,099 $ 64,817 $ 76,169 $ 34,767 $ 27,548
============ ============ ============ ============ ============
STATEMENT OF FINANCIAL CONDITION DATA
Total Assets $ 28,036,860 $ 31,702,705 $ 30,881,579 $ 18,848,273 $ 12,894,290
============ ============ ============ ============ ============
Future fees payable to parent $ 797,055 $ 934,410 $ 576,034 $ 368,978 $ 233,034
============ ============ ============ ============ ============
Surplus Notes $ 144,000 $ 159,000 $ 179,000 $ 193,000 $ 213,000
============ ============ ============ ============ ============
Shareholder's Equity $ 577,668 $ 496,911 $ 359,434 $ 250,417 $ 184,421
============ ============ ============ ============ ============
* On annuity and life insurance sales of $3,834,167, $8,216,167, $6,862,968, $4,159,662, and $3,697,990, during the years
ended December 31, 2001, 2000, 1999, 1998 and 1997, respectively, with contractowner assets under management of $26,017,847,
$29,751,822, $29,396,693, $17,854,761, and $12,119,191, as of December 31, 2001, 2000, 1999, 1998, and 1997, respectively.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the
consolidated financial statements and the notes thereto and Item 6, Selected Financial Data.
Results of Operations
---------------------
Annuity and life insurance sales decreased 53% in 2001 to $3,834,167,000 as compared to a 20% increase in 2000. The decrease in
sales in 2001 was consistent with the general decline in sales throughout the variable annuity industry, attributed in large part to
the decline in the equity markets. The sales growth in 2000 was driven by significant sales volume in the first quarter of 2000 due
to the strong equity market performance. However, the decline in the equity markets during the remainder of the year negatively
impacted sales as the first quarter level of sales was not sustained. The Company has announced its intention to focus on the growth
of its core variable annuity business, with a continuing focus on increasing sales through innovative product development activities,
the expansion of its wholesaling force through recruitment and retention of top producers, and providing consistently good customer
service.
Average assets under management totaled $27,020,489,000 in 2001, $31,413,809,000 in 2000 and $21,984,759,000 in 1999, representing a
decrease of 14% in 2001 and an increase of 46% in 2000. As a result of the decrease in sales volume and average assets under
management, annuity and life insurance charges and fees decreased 11% in 2001, as compared to an increase of 46% in 2000. Fee income
generated from transfer agency-type and investment support activities decreased 15% in 2001 and increased 57% in 2000.
Net investment income increased 73% in 2001 compared to 2000 and increased 12% in 2000 compared to 1999. The increase in 2001 was
primarily due to a higher level of fixed maturity investments in support of the Company's risk-based capital objectives. The increase
in 2000 was primarily due to the higher level of fixed maturity investments partially offset by $6,939,000 of amortization of
premiums paid on derivative instruments. Excluding the derivative amortization, net investment income increased 62% in 2000 as a
result of increased fixed maturity investments in support of the Company's risk-based capital objectives.
Premium income represents premiums earned on the sale of ancillary contracts such as immediate annuities with life contingencies,
supplementary contracts with life contingencies and certain life insurance products. Sales of these products will increase or
decrease over time depending on the payout elections of the policyholders. Management expects supplementary contracts to grow over
time with the maturing of the core business lines.
Net realized investment gains totaled $928,000 in 2001, compared to losses of $688,000 in 2000. The gross gain in 2001 was
partially offset by losses on securities in the fixed maturity portfolio. The most significant loss was $2,636,000 related to Enron
securities. In addition net realized losses were incurred due to redemption's of mutual fund holdings in support of the Company's
non-qualified deferred compensation program. The change from 1999 to 2000 was primarily due to realized losses on sales of
securities in the fixed maturity portfolio. These losses were partially offset by realized gains on sales of fixed maturity
investments and mutual funds.
The change in annuity policy reserves includes changes in reserves related to annuity contracts with mortality risks as well as the
company's guaranteed minimum death benefit ("GMDB") liability. The GMDB reserve decreased $43,984,000 in 2001, as the result of an
update of certain reserve assumptions during 2001 to reflect more realistic expectations as to risks inherent in the GMDB liability.
These changes reduced the GMDB liability significantly. Previous assumptions had been based on statutory valuation principles as an
approximation for accounting principles generally accepted in the United States ("U.S. GAAP"). In addition, future mortality rates
have been lowered to reflect favorable past experience. This decrease in 2001 compares to an increase in GMDB reserves of
$44,186,000 in 2000.
Certain assumptions were also updated in the calculation of the deferred acquisition cost asset, however, offsetting the resulting
increase in earnings and equity as a result of changes in the GMDB liability. The amortization of such costs are determined in large
part by changes in the expectations of future gross profits of the variable annuity business. In 2001, the decline in equity markets
resulted in a significantly lower estimate of future gross profits, thereby increasing the expenses recognized through amortization.
In 1999, the Company began to develop a program utilizing equity put options to manage the risks embedded in the GMDB in annuity
contracts that would result from significant declines in the equity markets. Prior to the implementation of the hedge strategies
utilizing equity put options, the Company had reinsured substantially all of its exposure on the GMDB liability. The reinsurance was
terminated during the second quarter of 1999 as the reinsurer exited this market.
Return credited to contractowners consists of revenues on the variable and market value adjusted annuities and variable life insurance,
offset by the benefit payments and changes in reserves required on this business. Market value adjusted annuity activity has the largest
impact on this benefit. In 2001 and 2000, the Separate Account investment returns on the assets supporting market value adjusted
annuities were less than the expected returns as calculated in the reserves, contributing to the significant increase in the return
credited to contractholders benefit. In addition, this benefit increased as a result of the amortization of unearned Performance
Advantage target value credits, which increased $12,814,581 in 2001 over 2000 due primarily to increased sales of products containing
this feature. Other significant contributors to the change from 2000 to 2001 include guaranteed minimum death benefit payments on
variable annuities, which were driven up due to the market declines in 2001, totaling $2,569,000 net of gains on equity put options as
well as increased costs associated with processing of backdated financial transactions.
Underwriting, acquisition and other insurance expenses for 2001, 2000 and 1999 were as follows:
(table in thousands) 2001 2000 1999
---- ---- ----
Commissions and purchase credits $ 238,847 $ 393,494 $ 358,279
General operating expenses 167,044 252,206 214,269
Acquisition costs deferred during the year (209,136) (495,103) (450,059)
Acquisition costs amortized during the year 224,047 184,616 83,861
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Net amortization of deferred acquisition costs 14,911 (310,487) (366,198)
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Underwriting, acquisition and other insurance
expenses $ 420,802 $ 335,213 $ 206,350
========= ========= =========
Underwriting, acquisition and other insurance expenses increased 26% and 62% in 2001 and 2000, respectively. Lower sales and asset
levels in 2001 led to a 39% decease in commissions and purchase credits. Partially offsetting this decline, the company launched a
commission promotion program during 2001, which increased commissions as a percentage of new sales. Increased commissions and
purchase credits reflect the increase in sales in both 2000 and 1999.
General operating expenses decreased 34% from 2000 as a result of lower sales-based compensation and expense reduction programs
implemented in 2001 (see Note 18 to the consolidated financial statements). In addition, variable compensation and long-term
incentive plan expense have decreased due to the slowdown in sales and decline in equity markets. Significant investments in new
product development and Internet-based technology contributed to general operating expense increases in both 2001 and 2000.
The company updated certain assumptions in the calculation of expected gross profits used to develop deferred acquisition cost
amortization rates to reflect more recent experience and current equity market conditions. As a result of this the amortization of
such costs increased significantly over the year 2000.
The amortization of acquisition costs increased substantially in 2000 compared to 1999 as the associated costs from record sales in
late 1999 and early 2000 were recognized in accordance with profit and expense recognition models under U.S. GAAP.
Interest expense decreased $12,574,000 in 2001 as a result of the reduction in borrowing and increased $16,496,000 in 2000 as a
result of additional securitized financing transactions, which consist of the transfer of rights to receive future fees to ASI, which
fees collateralize notes issued in private placements by ASI through special purpose trusts ("securitization transactions"). In
addition, the Company paid down surplus notes on December 3, 2001 and December 10, 2000 of $15,000,000 and $20,000,000 respectively.
Surplus notes outstanding as of December 31, 2001 and 2000 totaled $144,000,000 and $159,000,000, respectively.
The effective income tax rates for the years ended December 31, 2001, 2000 and 1999 were 18%, 32% and 28%, respectively. The
effective rate is lower than the corporate rate of 35% due to permanent differences, with the most significant item being the dividend
received deduction. Management believes that, based on the taxable income produced in the past two years, as well as continued growth
in annuity sales, the Company will produce sufficient taxable income in future years to realize its deferred tax assets.
The Company generated net income after tax of $33,099,000, $64,817,000 and $76,169,000 in 2001, 2000 and 1999, respectively. Equity
market volatility during 2001 directly impacted revenues, sales and ultimately expenses for the company. Revenues were lower than
expected due to the significant drop in sales year over year, as well as the negative performance of the mutual funds underlying
annuity and insurance contracts. Benefits were higher than expected due to the death claims paid in excess of the account values of
the specific contracts due to GMDB provisions in such contracts. Expenses were relatively higher compared to sales and assets than in
prior periods. Expense reduction programs were implemented during the year to better match expenses incurred with sales activity and
management of the book of business. Revenue increases in 2000 were more than offset by higher benefits and expenses driven primarily
from the increase in the reserve requirement related to the GMDB as a result of the decline in the equity markets. Investments in new
product development and technology also contributed to the increase in expenses.
The Company considers Mexico an emerging market and has invested in the Skandia Vida operations with the expectation of generating
profits from long-term savings products in future years. As such, Skandia Vida has generated net losses of $2,619,000, $2,540,000 and
$2,523,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
Total assets declined 12% in 2001 as a direct result of the decrease in separate account assets. Separate account assets declined
consistent with the drop in the equity market, offset in part by new net sales activity.
Liabilities declined 12% in 2001 as a result of several factors. Reserves and Separate Account liabilities required to support the
annuity and life insurance business declined consistent with market valuing of the underlying assets as well as the changes in the GMDB
reserve. Payable to affiliate increased due to borrowing from ASI to support temporary operating cash needs. Reduction in Future Fees
Payable to ASI declined, consistent with the securitization transaction cash flow realized on the designated block of contracts.
Significant Accounting Policies
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For information on the Company's significant accounting policies, see Notes to Consolidated Financial Statements. Specifically, for
Deferred Acquisition Costs, see Note 2L, for Separate Accounts, see Note 2O and for the Company's employee profit sharing programs,
see Note 13.
Liquidity and Capital Resources
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The Company's liquidity requirement was met by cash from insurance operations, investment activities and borrowings from ASI.
In 2001, the Company had net positive operating cash flow as a result of increased cash from insurance operations and a decreased
acquisition cost cash flow strain due to the reduction in sales activity. In 2000, the majority of the operating cash outflow resulted
from the sale of variable annuity and variable life products that carry a contingent deferred sales charge. This type of product
causes a temporary cash strain in that 100% of the proceeds are invested in separate accounts supporting the product leaving a cash
(but not capital) strain caused by the acquisition cost for the new business. This cash strain required the Company to look beyond the
cash made available by insurance operations and investments of the Company to financing in the form of surplus notes, capital
contributions, cash advances, securitization transactions and modified coinsurance reinsurance arrangements:
o During 2001 and 2000, the Company received $45,500,000 and $69,000,000, respectively, from ASI to support the solvency
capital needs and anticipated growth in business of its U.S. operations. In addition, the Company received $2,500,000 and
$2,450,000 from ASI in 2001 and 2000, respectively, to support its investment in Skandia Vida.
o In 2001, in anticipation of more permanent financing, the Company received approximately $100,000,000 from ASI in the form
of cash advances. These amounts are reported as Payable to Affiliates in the Consolidated Statements of Financial Condition.
o Funds received from new securitization transactions amounted to $476,288,000 in 2000 (see Note 8 to the consolidated
financial statements).
o During 2001 and 2000, the Company extended its reinsurance agreements. The Company also entered into a reinsurance
agreement with SICL in 2000. The reinsurance agreements are modified coinsurance arrangements where the reinsurer shares in the
experience of a specific book of business.
The Company expects the continued use of reinsurance and securitization transactions to fund the cash strain anticipated from the
acquisition costs on future years' sales volume.
As of December 31, 2001 and 2000, shareholder's equity totaled $577,668,000 and $496,911,000, respectively. The increases were driven
by the previously mentioned capital contributions received from ASI and net income from operations.
The Company has long-term surplus notes and short-term borrowings from ASI. No dividends have been paid to ASI.
The National Association of Insurance Commissioners ("NAIC") requires insurance companies to report information regarding minimum Risk
Based Capital ("RBC") requirements. These requirements are intended to allow insurance regulators to identify companies that may need
regulatory attention. The RBC model law requires that insurance companies apply various factors to asset, premium and reserve items, all
of which have inherent risks. The formula includes components for asset risk, insurance risk, interest rate risk and business risk. The
Company has complied with the NAIC's RBC reporting requirements and has total adjusted capital well above required capital.
Effects of Inflation
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The rate of inflation has not had a significant effect on the Company's financial statements.
Outlook
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The Company believes that it is well positioned to retain and enhance its position as a leading provider of financial products for
long-term savings and retirement purposes as well as to address the economic impact of premature death, estate planning concerns and
supplemental retirement needs. The Company has renewed its focus on its core variable annuity business, offering innovative
long-term savings and income products, strengthening its wholesaling efforts and providing consistently good customer service in
order to gain market share and improve profitability in an increasingly competitive market.
The Gramm-Leach-Bliley Act of 1999 (the Financial Services Modernization Act) permits affiliation among banks, securities firms and
insurance companies. This legislative change has created opportunities for continued consolidation in the financial services
industry and increased competition as large companies offer a wide array of financial products and services.
Various other legislative initiatives could impact the Company such as pension reform, capital gains and estate tax changes, privacy
standards and Internet regulation. Additional pension reform may change current tax deferral rules and allow increased contributions
to retirement plans, which may lead to higher investments in tax-deferred products and create growth opportunities for the Company.
A capital gains tax reduction may cause tax-deferred products to be less attractive to consumers, which could adversely impact the
Company. New privacy standards and Internet regulation may impact the Company's strategic initiatives, especially related to
potential business relationships with web-based technology providers.
Forward Looking Information
---------------------------
The Private Securities Litigation Reform Act of 1995 (the "1995 Act") provides a "safe harbor" for forward-looking statements, so
long as those statements are identified as forward-looking, and the statements are accompanied by meaningful cautionary statements
that identify important factors that could cause actual results to differ materially from those discussed in the statement. We want
to take advantage of these safe harbor provisions.
Certain information contained in the Management's Discussion and Analysis of Financial Condition and Results of Operations is
forward-looking within the meaning of the 1995 Act or Securities and Exchange Commission rules.
These forward-looking statements rely on a number of assumptions concerning future events, and are subject to a number of significant
uncertainties and results to differ materially from these statements. You should not put undue reliance on these forward-looking
statements. We disclaim any intention or obligation to update or revise forward-looking statements, whether as a result of new
information, future events or otherwise.
Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to potential fluctuations in earnings and the fair value of certain of its assets and liabilities, as well as
variations in expected cash flows due to changes in market interest rates and equity prices. The following discussion focuses on
specific exposures the Company has to interest rate and equity price risk and describes strategies used to manage these risks, and
includes "forward-looking statements" that involve risk and uncertainties. The discussion is limited to financial instruments
subject to market risks and is not intended to be a complete discussion of all of the risks to which the Company is exposed.
Interest Rate Risk
------------------
Fluctuations in interest rates can potentially impact the Company's profitability and cash flows. At December 31, 2001, 97% of assets
held under management by the Company are in non-guaranteed Separate Accounts for which the Company's exposure is not significant, as
the contractowner assumes substantially all the investment risk. On the remaining 3% of assets, the interest rate risk from
contracts that carry interest rate exposure is managed through an asset/liability matching program which takes into account the risk
variables of the insurance liabilities supported by the assets.
At December 31, 2001, the Company held fixed maturity investments in its general account that are sensitive to changes in interest
rates. These securities are held in support of the Company's fixed immediate annuities, fixed supplementary contracts, the fixed
investment option offered in its variable life insurance contracts, and in support of the Company's target solvency capital. The
Company has a conservative investment philosophy with regard to these investments. All investments are investment grade corporate
securities, government agency or U.S. government securities.
The Company's deferred annuity products offer a fixed option which subjects the Company to interest rate risk. The fixed option
guarantees a fixed rate of interest for a period of time selected by the contractowner. Guarantee period options available range
from one to ten years. Withdrawal of funds, or transfer of funds to variable investment options, before the end of the guarantee
period subjects the contractowner to a market value adjustment ("MVA"). In the event of rising interest rates, which make the fixed
maturity securities underlying the guarantee less valuable, the MVA could be negative. In the event of declining interest rates,
which make the fixed maturity securities underlying the guarantee more valuable, the MVA could be positive. The resulting increase
or decrease in the value of the fixed option, from calculation of the MVA, should substantially offset the increase or decrease in
the market value of the securities underlying the guarantee. The Company maintains strict asset/liability matching to enable this
offset. However, the Company still takes on the default risk for the underlying securities, the interest rate risk of reinvestment
of interest payments and the risk of failing to maintain the asset/liability matching program with respect to duration and convexity.
Liabilities held in the Company's guaranteed separate account as of December 31, 2001 totaled $1,092,944,000. Fixed income
investments supporting those liabilities had a fair value of $1,092,944,000. The Company performed a sensitivity analysis on these
interest-sensitive liabilities and assets at December 31, 2001. The analysis showed that an immediate decrease of 100 basis points
in interest rates would result in a net increase in liabilities and the corresponding assets of approximately $37,300,000 and
$41,500,000, respectively. An analysis of a 100 basis point decline in interest rates at December 31, 2000 showed a net increase in
interest-sensitive liabilities and the corresponding assets of approximately $39,800,000 and $39,900,000, respectively.
Equity Market Exposure
----------------------
The primary equity market risk to the Company comes from the nature of the variable annuity and variable life products sold by the
Company. Various fees and charges earned are substantially derived as a percentage of the market value of assets under management.
In a market decline, this income would be reduced. This could be further compounded by customer withdrawals, net of applicable
surrender charge revenues, partially offset by transfers to the fixed option discussed above. A 10% decline in the market value of
the assets under management at December 31, 2001, sustained throughout 2002, would result in an approximate drop in related annual
fee income of $49,727,000. This result was not materially different than the result obtained from the analysis performed as of
December 31, 2000.
Another equity market risk exposure of the Company relates to the guaranteed minimum death benefit liability. Declines in equity
markets and, correspondingly, the performance of the mutual funds underlying the Company's products, increase the guaranteed minimum
death benefit liabilities. As discussed in Note 2E of the consolidated financial statements, the Company uses derivative instruments
to hedge against the risk of significant decreases in equity markets. Prior to the implementation of this program, the Company used
reinsurance to mitigate this risk.
The Company has a small portfolio of equity investments consisting of mutual funds, which are held in support of a deferred
compensation program. In the event of a decline in market values of underlying securities, the value of the portfolio would decline;
however the accrued benefits payable under the related deferred compensation program would decline by a corresponding amount.
Estimates of interest rate risk and equity price risk were obtained using computer models that take into consideration various
assumptions about the future. Given the uncertainty of future interest rate movements, volatility in the equity markets and consumer
behavior, actual results may vary from those predicted by the Company's models.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index to Consolidated Financial Statements and Supplementary Data on page 16.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name of Executive Officer
- -------------------------
and/or Director Principal Position Age*
--------------- ------------------ ----
Wade A. Dokken President and Chief Executive Officer 42
Patricia J. Abram Senior Vice President, Marketing 50
Lincoln R. Collins Senior Vice President, Chief Operating Officer and Director 41
Thomas M. Mazzaferro Executive Vice President, Chief Financial Officer and Director 48
Michael A. Murray Senior Vice President 33
Robert G. Whitcher Director 56
Kirk P. Wickman Senior Vice President and General Counsel 44
Brett M. Winson Senior Vice President, Human Resources 46
- --------------------------------
* As of March 25, 2002
Executive Officers' and Directors' Business Experience During Past Five Years
- -----------------------------------------------------------------------------
Wade A. Dokken became President and Chief Executive Officer of the Company in June, 2000. Previously, Mr. Dokken served in
management positions with the Company since 1989.
Patricia J. Abram joined the Company in 1998. Previously, she held the position of Senior Vice President, Chief Marketing Officer
with Mutual Service Corporation, where she was employed beginning in 1982.
Lincoln R. Collins became Senior Vice President and Chief Operating Officer of the Company in 2001. Previously, Mr. Collins served
in management positions with the Company since 1988. Mr. Collins has been a Director of the Company since February, 1996.
Thomas M. Mazzaferro joined the Company in 1988 and has been Chief Financial Officer of the Company since 1990. Mr. Mazzaferro has
been a Director of the Company since September, 1994.
Michael A. Murray joined the Company in 1994. Mr. Murray principally serves as an executive officer of the Company's affiliate,
American Skandia Marketing, Incorporated, with responsibility for marketing of mutual funds.
Robert G. Whitcher has served as a Director of the Company since October, 2001. Mr. Whitcher joined the Company in 1997 and has been
Executive Assistant to the President and Chief Executive Officer of the Company since June 2000. Prior to joining the Company, Mr.
Whitcher served as Director of Business Development for Technology Service Corporation from November 1996 until May 1997.
Kirk P. Wickman joined the Company as Senior Vice President and General Counsel in March 2001. Previously, Mr. Wickman held
positions with Aetna Inc. since 1992, most recently as Senior Vice President and General Counsel of Aetna Financial Services.
Brett M. Winson has been Senior Vice President, Human Resources since 1998. He previously held the position of Senior Vice President
of Sakura Bank, Ltd. since 1990.
Item 11. EXECUTIVE COMPENSATION
Summary Compensation Table: The summary table below summarizes the compensation paid to the Chief Executive Officer and to the four
most highly compensated of our executive officers whose compensation exceeded $100,000 in 2001.
(Dollars in thousands) Annual Compensation Long-Term
------------
Compensation
------------
All Other
Name and Principal Position Year Salary Bonus Payouts Compensation
- --------------------------- ---- ------ ----- ------- ------------
Wade A. Dokken 2001 $816 $350 $1,092 $10
President& Chief Executive 2000 546 1,604 882 10
Officer (effective 6/1/00) 1999 274 1,150 480 10
Michael A. Murray 2001 206 396 28 10
Senior Vice President 2000 167 628 17 10
1999 126 738 9 10
Bayard F. Tracy 2001 272 320 419 10
Senior Vice President (Former) 2000 163 870 339 10
1999 161 541 150 10
Brett M. Winson 2001 320 228 0 10
Senior Vice President 2000 261 396 0 10
1999 241 100 0 10
Kirk P. Wickman 2001 290 236 0 6
Senior Vice President and 2000 0 0 0 0
General Counsel 1999 0 0 0 0
Long Term Incentive Plan Awards in the last fiscal year: The following table provides information regarding the long-term incentive
plan units awarded in 2001. Units are awarded to executive officers and other employees. The table shows units awarded to the Chief
Executive Officer and the four most highly compensated of our executive officers whose compensation exceeded $100,000 in 2001. This
program is designed to induce participants to remain with the Company over long periods of time and to tie a portion of their
compensation to the fortunes of the Company.
Currently, the program consists of multiple plans for executives and employees. Participants are awarded units at the beginning
of a plan. Generally, participants must remain employed by the Company or its affiliates at the time such units are payable in order
to receive any payments under the plan. There are certain exceptions, such as in cases of retirement or death.
Changes in the value of units reflect changes in the "embedded value" of the Company and certain of its affiliates. "Embedded value" is
the net asset value of the Company and certain of its affiliates (valued at market value and not including the present value of
future profits), plus the present value of the anticipated future profits (valued pursuant to state insurance law) on existing
business in force. Units will not have any value for participants if the embedded value does not increase by certain target
percentages during the first four years of a plan (the growth period). The target percentages may differ between each plan. Any
amounts available under an executive plan are paid out in the fifth year and under an employee plan are paid out in the fourth year.
The amount to be received by a participant after the growth period is the appreciation multiplied by the number of units held.
(dollars in thousands)
Long-Term Incentive Plans - Awards in Last Fiscal Year
------------------------------------------------------
Number of Period Until Estimated Future Payments
-------------------------
Name Units Maturation Threshold Target Maximum
- ---- ----- ---------- --------- ------ -------
Wade A. Dokken 311,688 12/31/2004 $0.0 $1,200.0 $2,400.0
Bayard F. Tracy 187,013 12/31/2004 $0.0 $357.2 $1,080.0
Michael A. Murray 124,675 12/31/2004 $0.0 $238.1 $720.0
Brett M. Winson 218,182 12/31/2004 $0.0 $416.7 $1,260.0
6,300 12/31/2003 $0.0 $47.3 -
Kirk P. Wickman 93,506 12/31/2004 $0.0 $178.6 $540.0
The Company's directors, each of whom is an officer of the Company, did not receive any additional compensation in 2001 for their
service as directors of the Company.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
None.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Information
(1) Financial Statements See Index to Consolidated Financial
Statements on Page 16
(2) Financial Statement Schedules None*
(b) Exhibits
(2) Plans of acquisition, reorganization, None
arrangement, liquidation or succession
(3) Articles of Incorporation and By-Laws Incorporated by reference to the
Company's Form N-4 (Reg. 33-19363)
(4) Instruments defining the right of security Incorporated by reference to the
holders including indentures Company's Reg. 33-62953, 33-88360,
33-89676, 33-91400, 333-00995,
333-02867,333-24989, 333-25761,
333-53596, 333-26695,
333-51896 and 333-55608
(9) Voting Trust Agreement None
(10) Material Contracts Incorporated by reference to the
Company's Forms S-2 (Reg. 33-53596)
(11) Statement of Computation of per share earnings Not required to be filed
(12) Statements of Computation of Ratios Not required to be filed
(13) Annual Report to security holders None
(18) Letter re change in accounting principles None
(19) Previously unfiled documents None
(21) Subsidiaries of the registrant Incorporated by reference to Reg.
333-80710
(22) Published report regarding matters submitted to None
vote of security holders
(23) Consents of experts and counsel Not required to be filed
(24) Powers of Attorney Incorporated by reference to the
Company's Form S-2 (Reg. 333-53596)
(99) Additional exhibits None
* Schedules are omitted because they are either not applicable or because the information required therein is included in the Notes
to Consolidated Financial Statements.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Consolidated Financial Statements
December 31, 2001
Index
Page
Report of Independent Auditors 18
Consolidated Statements of Financial Condition as of December 31, 2001 and 2000 19
Consolidated Statements of Income for the Years ended December 31, 2001, 2000 and 1999 20
Consolidate Statements of Shareholder's Equity for the Years ended December 31, 2001, 2000 and 1999 21
Consolidate Statements of Cash Flows for the Years ended December 31, 2001, 2000 and 1999 22
Notes to Consolidated Financial Statements 23
Schedules are omitted because they are either not applicable or because the information required therein is included in the Notes to
Consolidated Financial Statements.
Report of Independent Auditors
To the Board of Directors and Shareholder of
American Skandia Life Assurance Corporation
Shelton, Connecticut
We have audited the consolidated statements of financial condition of American Skandia Life Assurance Corporation (the "Company"
which is a wholly-owned subsidiary of Skandia Insurance Company Ltd.) as of December 31, 2001 and 2000, and the related consolidated
statements of income, shareholder's equity and cash flows for each of the three years in the period ended December 31, 2001. These
consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial
position of American Skandia Life Assurance Corporation at December 31, 2001 and 2000, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 2, the Company adopted Financial Accounting Standards (FAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities.
/s/ Ernst & Young LLP
- ------------------------------------
Hartford, Connecticut
February 2, 2002
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Consolidated Statements of Financial Condition
(table in thousands)
As of December 31,
2001 2000
---- ----
ASSETS
- ------
Investments:
Fixed maturities - at fair value $ 362,831 $ 285,708
Equity securities - at fair value 45,083 20,402
Derivative instruments 5,525 3,015
Policy loans 6,559 3,746
--------------- ---------------
Total investments 419,998 312,871
Cash and cash equivalents 32,231 76,499
Accrued investment income 4,737 5,209
Deferred acquisition costs 1,383,281 1,398,192
Reinsurance receivable 5,863 3,642
Receivable from affiliates 3,283 3,327
Income tax receivable 30,537 34,620
State insurance licenses 3,963 4,113
Fixed assets 20,734 10,737
Other assets 96,967 96,403
Separate account assets 26,038,549 29,757,092
--------------- ---------------
Total assets $ 28,040,143 $ 31,702,705
=============== ===============
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
Liabilities:
Reserves for future insurance policy and contract benefits $ 89,740 $ 135,545
Drafts outstanding 64,438 63,758
Accounts payable and accrued expenses 160,261 137,040
Deferred income taxes 54,980 8,949
Payable to affiliates 103,452 -
Future fees payable to American Skandia, Inc. ("ASI") 797,055 934,410
Short-term borrowing 10,000 10,000
Surplus notes 144,000 159,000
Separate account liabilities 26,038,549 29,757,092
--------------- ---------------
Total Liabilities 27,462,475 31,205,794
--------------- ---------------
Shareholder's equity:
Common stock, $100 par value, 25,000 shares authorized,
issued and outstanding 2,500 2,500
Additional paid-in capital 335,329 287,329
Retained earnings 239,078 205,979
Accumulated other comprehensive income 761 1,103
--------------- ---------------
Total Shareholder's equity 577,668 496,911
--------------- ---------------
Total liabilities and shareholder's equity $ 28,040,143 $ 31,702,705
=============== ===============
See notes to consolidated financial statements.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Consolidated Statements of Income
(tables in thousands)
For the Year Ended December 31,
2001 2000 1999
---- ---- ----
REVENUES
- --------
Annuity and life insurance charges and fees $ 378,693 $ 424,578 $ 289,989
Fee income 111,196 130,610 83,243
Net investment income 20,126 11,656 10,441
Premium income 1,218 3,118 1,278
Net realized capital gains (losses) 928 (688) 578
Other 1,222 2,348 1,832
------------ ------------ ------------
Total revenues 513,383 571,622 387,361
------------ ------------ ------------
EXPENSES
- --------
Benefits:
Annuity and life insurance benefits 1,955 751 612
Change in annuity and life insurance policy reserves (39,898) 45,018 3,078
Cost of minimum death benefit reinsurance - - 2,945
Return credited to contractowners 16,833 9,046 (1,639)
------------ ------------ -------------
(21,110) 54,815 4,996
Other:
Underwriting, acquisition and other insurance
expenses 420,802 335,213 206,350
Interest expense 73,424 85,998 69,502
------------ ------------ ------------
494,226 421,211 275,852
------------ ------------ ------------
Total benefits and expenses 473,116 476,026 280,848
------------ ------------ ------------
Income from operations before income tax 40,267 95,596 106,513
Income tax expense 7,168 30,779 30,344
------------ ------------ ------------
Net income $ 33,099 $ 64,817 $ 76,169
============ ============ ============
See notes to consolidated financial statements.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Consolidated Statements of Shareholder's Equity
(table in thousands)
For the Year Ended December 31,
2001 2000 1999
---- ---- ----
Common stock:
Beginning balance $ 2,500 $ 2,500 $ 2,000
Increase in par value - - 500
----------- ----------- -----------
Ending balance 2,500 2,500 2,500
----------- ----------- -----------
Additional paid in capital:
Beginning balance 287,329 215,879 179,889
Transferred to common stock - - (500)
Additional contributions 48,000 71,450 36,490
----------- ----------- -----------
Ending balance 335,329 287,329 215,879
----------- ----------- -----------
Retained earnings:
Beginning balance 205,979 141,162 64,993
Net income 33,099 64,817 76,169
----------- ----------- -----------
Ending balance 239,078 205,979 141,162
----------- ----------- -----------
Accumulated other comprehensive income (loss):
Beginning balance 1,103 (107) 3,535
Other comprehensive income (342) 1,210 (3,642)
------------ ----------- ------------
Ending balance 761 1,103 (107)
----------- ----------- ------------
Total shareholder's equity $ 577,668 $ 496,911 $ 359,434
=========== =========== ===========
See notes to consolidated financial statements.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Consolidated Statements of Cash Flows
(table in thousands)
For the Year Ended December 31,
2001 2000 1999
---- ---- ----
Cash flow from operating activities:
Net income $ 33,099 $ 64,817 $ 76,169
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Amortization and depreciation 1,833 7,565 1,495
Deferred tax expense 46,215 60,023 (10,903)
(Decrease) increase in policy reserves (34,679) 50,892 4,367
Increase (decrease) in payable to affiliates, net 103,496 (72,063) 69,897
Change in income tax receivable 4,083 (58,888) 17,611
Increase in other assets (564) (59,987) (32,954)
Decrease in accrued investment income 472 (1,155) (1,174)
(Increase) decrease in reinsurance receivable (2,221) 420 129
Net decrease (increase) in deferred acquisition costs 14,911 (310,487) (366,198)
Increase (decrease) in accounts payable and accrued
expenses 23,221 (21,550) 66,763
Increase in drafts outstanding 680 12,699 22,118
Investment losses (gains) on derivatives 2,902 (3,435) 3,749
Net realized capital (gains) losses on investments (928) 688 (578)
----------------------- ------------
Net cash provided by (used in) operating activities 192,520 (330,461) (149,509)
----------- ------------------------
Cash flow from investing activities:
Purchase of fixed maturity investments (462,820) (380,737) (99,250)
Proceeds from sale and maturity of fixed
maturity investments 390,816 303,736 36,226
Purchase of derivatives (66,487) (6,722) (4,974)
Proceeds from exercise of derivative instruments 61,075 - -
Purchase of shares in equity securities (55,430) (18,136) (17,703)
Proceeds from sale of shares in equity securities 25,228 8,345 14,657
Purchase of fixed assets (10,773) (7,348) (3,178)
Increase in policy loans (2,813) (2,476) (701)
------------------------------------
Net cash used in investing activities (121,204) (103,338) (74,923)
------------------------------------
Cash flow from financing activities:
Capital contribution from parent 48,000 71,450 36,490
Repayment of surplus notes (15,000) (20,000) (14,000)
(Decrease) increase in future fees payable to ASI, net (137,355) 358,376 207,056
Net (withdrawals) deposits (from) to contractowner accounts (11,126) 11,361 5,872
-----------------------------------
Net cash (used in) provided by financing activities (115,481) 421,187 235,418
----------------------- -----------
Net (decrease) increase in cash and cash equivalents (44,165) (12,612) 10,986
Cash and cash equivalents at beginning of period 76,499 89,212 77,525
Change in foreign currency translation, net (103) (101) 701
-----------------------------------
Cash and cash equivalents at end of period $ 32,231 $ 76,499 $ 89,212
=========== =========== ===========
Income taxes (received) paid $ (43,130)$ 29,644 $ 23,637
======================= ===========
Interest paid $ 43,843 $ 85,551 $ 69,697
=========== ========== ===========
See notes to consolidated financial statements.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements
December 31, 2001
1. ORGANIZATION AND OPERATION
American Skandia Life Assurance Corporation (the "Company") is a wholly-owned subsidiary of American Skandia, Inc. ("ASI")
whose ultimate parent is Skandia Insurance Company Ltd., ("SICL") a Swedish Corporation.
The Company develops long-term savings and retirement products which are distributed through its affiliated broker/dealer
company, American Skandia Marketing, Incorporated ("ASM"). The Company currently issues variable and term life insurance and
variable, fixed, market value adjusted deferred and immediate annuities for individuals, groups and qualified pension plans.
The Company has announced its intention to focus on its core variable annuity business by exiting the qualified pension plan
market and limiting its variable life insurance offerings to single premium products, as well as term life. The Company does
not expect to incur any significant costs to exit these businesses.
The Company has 99.9% ownership in Skandia Vida, S.A. de C.V. ("Skandia Vida"), which is a life insurance company domiciled in
Mexico. Skandia Vida had total shareholder's equity of approximately $4,179,000 and $4,402,000 as of December 31, 2001, and
2000, respectively. The Company considers Mexico an emerging market and has invested in the Skandia Vida operations with the
expectation of generating profits from long-term savings products in future years. As such, Skandia Vida has generated net
losses of approximately $2,619,000, $2,540,000 and $2,523,000 in 2001, 2000 and 1999, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Reporting
------------------
The accompanying consolidated financial statements have been prepared in conformity with accounting principles
generally accepted in the United States ("U.S. GAAP"). Intercompany transactions and balances between the Company
and Skandia Vida have been eliminated in consolidation.
Certain reclassifications have been made to prior year amounts to conform with current year presentation.
B. New Accounting Standard
-----------------------
Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS 137 and SFAS 138 (collectively "SFAS 133").
Derivative instruments held by the Company consist of equity option contracts utilized to manage the economic risks
associated with the guaranteed minimum death benefits ("GMDB"). These derivative instruments are carried at fair
value. Realized and unrealized gains and losses are reported in the Consolidated Statement of Income, consistent with
the item being hedged, as a component of return credited to contractowners. The adoption of SFAS No. 133 did not have a
material effect on the Company's financial statements.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Effective April 1, 2001, the Company adopted the Emerging Issues Task Force ("EITF") Issue 99-20, "Recognition of
Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets." Under
the consensus, investors in certain asset-backed securities are required to record changes in their estimated yield on a
prospective basis and to evaluate these securities for an other than temporary decline in value. If the fair value of
the asset-backed security has declined below its carrying amount and the decline is determined to be other than
temporary, the security is written down to fair value. The adoption of EITF Issue 99-20 did not have a significant
effect on the Company's financial statements.
C. Future Accounting Standard
--------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards.
No. 142 "Accounting for Goodwill and Intangible Assets." ("SFAS 142"). Under the new standard, goodwill and
intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the new standard. Other intangible assets will continue to be amortized over
their useful lives.
The Company will apply the new rules on the accounting for goodwill and other intangible assets beginning in the
first quarter of 2002. The Company is still assessing the impact of the new standard, however, the adoption of SFAS
142 is not expected to have a significant impact on the Company's financial statements.
D. Investments
- --------------------
The Company has classified its fixed maturity investments as available-for-sale and, as such, they are carried at
fair value with changes in unrealized gains and losses reported as a component of other comprehensive income.
The Company has classified its mutual fund investments held in support of a deferred compensation plan (see Note 13)
as available-for-sale. Such investments are carried at fair value with changes in unrealized gains and losses
reported as a component of other comprehensive income.
Policy loans are carried at their unpaid principal balances.
Realized gains and losses on disposal of investments are determined by the specific identification method and are
included in revenues.
E. Derivative Instruments
----------------------
The Company uses derivative instruments which consist of equity option contracts for risk management purposes, and
not for trading or speculation. The Company economically hedges the GMDB exposure associated with market value
fluctuations.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Based on criteria described in SFAS 133, the Company's hedges do not qualify as "effective" hedges and, therefore,
hedge accounting may not be applied. Accordingly, the derivative investments are carried at fair value with changes
in unrealized gains and losses being recorded in income. As such, both realized and unrealized gains and losses are
reported in the Consolidated Statements of Income, consistent with the item being hedged, as a component of return
credited to contractowners.
F. Cash Equivalents
----------------
The Company considers all highly liquid time deposits, commercial paper and money market mutual funds purchased with
a maturity at date of acquisition of three months or less to be cash equivalents.
G. Fair Values of Financial Instruments
------------------------------------
The methods and assumptions used to determine the fair value of financial instruments are as follows:
Fair values of fixed maturities with active markets are based on quoted market prices. For fixed maturities that
trade in less active markets, fair values are obtained from an independent pricing service.
Fair values of equity securities are based on quoted market prices.
The fair value of derivative instruments is determined based on the current value of the underlying index.
The carrying value of cash and cash equivalents (cost) approximates fair value due to the short-term nature of these
investments.
The carrying value of short-term borrowings (cost) approximates fair value due to the short-term nature of these
liabilities.
Fair values of certain financial instruments, such as future fees payable to ASI and surplus notes are not readily
determinable and are excluded from fair value disclosure requirements.
H. State Insurance Licenses
------------------------
Licenses to do business in all states have been capitalized and reflected at the purchase price of $6,000,000
less accumulated amortization. The cost of the licenses is being amortized on a straight-line basis over 40
years.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
I. Software Capitalization
-----------------------
The Company capitalizes certain costs associated with internal use software in accordance with the American
Institute of Certified Public Accountants Statement of Position 98-1, "Accounting for the Costs of Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1, which was adopted prospectively as of
January 1, 1999, requires the capitalization of certain costs incurred in connection with developing or obtaining
internal use software. Prior to the adoption of SOP 98-1, the Company expensed all internal use software related
costs as incurred. Details of the capitalized software costs, which are included in fixed assets, and related
amortization for the years ended December 31, are as follows:
(table in thousands) 2001 2000 1999
---- ---- ----
Balance at beginning of year $ 7,212 $ 2,920 $ -
Software costs capitalized during the year 5,210 4,804 3,035
Software costs amortized during the year (2,660) (512) (115)
----------- ----------- -----------
Balance at end of year $ 9,762 $ 7,212 $ 2,920
=========== =========== ===========
Capitalized software costs are amortized on a straight-line basis over three years.
J. Income Taxes
------------
The Company is included in the consolidated federal income tax return filed by Skandia U.S. Inc. and its U.S.
subsidiaries. In accordance with the tax sharing agreement, the federal income tax provision is computed on a
separate return basis as adjusted for consolidated items. Pursuant to the terms of this agreement, the Company has
the right to recover the value of losses utilized by the consolidated group in the year of utilization. To the extent
the Company generates income in future years, the Company is entitled to offset future taxes on that income through
the application of its loss carryforward generated in the current year.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes.
K. Recognition of Revenue and Contract Benefits
--------------------------------------------
Revenues for variable deferred annuity contracts consist of charges against contractowner account values for
mortality and expense risks, administration fees, surrender charges and an annual maintenance fee per contract.
Benefit reserves for variable annuity contracts represent the account value of the contracts and are included in the
separate account liabilities.
Fee income from mutual fund organizations is realized based on assets under management.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenues for variable immediate annuity and supplementary contracts with and without life contingencies consist of
certain charges against contractowner account values including mortality and expense risks and administration fees.
Benefit reserves for variable immediate annuity contracts represent the account value of the contracts and are
included in the separate account liabilities.
Revenues for market value adjusted fixed annuity contracts consist of separate account investment income reduced by
benefit payments and changes in reserves in support of contractowner obligations, all of which are included in
return credited to contractowners. Benefit reserves for these contracts represent the account value of the
contracts, and are included in the general account
reserve for future contractowner benefits to the extent in excess of the separate account assets.
Revenues for fixed immediate annuity and fixed supplementary contracts without life contingencies consist of net
investment income. Revenues for fixed immediate annuity contracts with life contingencies consist of single premium
payments recognized as annuity considerations when received. Benefit reserves for these contracts are based on
applicable actuarial standards with assumed interest rates that vary by issue year. Assumed interest rates ranged
from 6.25% to 8.25% at December 31, 2001 and 2000.
Revenues for variable life insurance contracts consist of charges against contractowner account values for mortality
and expense risk fees, administration fees, cost of insurance fees, taxes and surrender charges. Certain contracts
also include charges against premium to pay state premium taxes. Benefit reserves for variable life insurance
contracts represent the account value of the contracts and are included in the separate account liabilities.
L. Deferred Acquisition Costs
--------------------------
The costs of acquiring new business, which vary with and are primarily related to the production of new business,
are being deferred, net of reinsurance. These costs include commissions, costs of contract issuance, and certain
selling expenses that vary with production. These costs are being amortized generally in proportion to expected
gross profits from surrender charges, policy and asset based fees and mortality and expense margins. This
amortization is adjusted retrospectively and prospectively when estimates of current and future gross profits to be
realized from a group of products are revised.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Details of the deferred acquisition costs and related amortization for the years ended December 31, are as follows:
(in thousands) 2001 2000 1999
---- ---- ----
Balance at beginning of year $ 1,398,192 $ 1,087,705 $ 721,507
Acquisition costs deferred during the year
209,136 495,103 450,059
Acquisition costs amortized during the
year (224,047) (184,616) (83,861)
------------- ------------- -------------
Balance at end of year $ 1,383,281 $ 1,398,192 $ 1,087,705
============ ============ ============
M. Reinsurance
-----------
The Company cedes reinsurance under modified co-insurance arrangements. These reinsurance arrangements provide
additional capacity for growth in supporting the cash flow strain from the Company's variable annuity and variable
life insurance business. The reinsurance is effected under quota share contracts.
The Company reinsured its exposure to market fluctuations associated with its GMDB liability in the first half of
1999. Under this reinsurance agreement, the Company ceded premiums of approximately $2,945,000; received claim
reimbursements of approximately $242,000; and, recorded a decrease in ceded reserves of approximately $2,763,000 in
1999.
At December 31, 2001 and 2000, in accordance with the provisions of modified coinsurance agreements, the Company accrued approximately $7,733,000
and $4,339,000, respectively, for amounts receivable from favorable reinsurance experience on certain blocks of
variable annuity business.
N. Translation of Foreign Currency
-------------------------------
The financial position and results of operations of Skandia Vida are measured using local currency as the functional
currency. Assets and liabilities are translated at the exchange rate in effect at each year-end. Statements of
income and changes in shareholder's equity accounts are translated at the average rate prevailing during the year.
Translation adjustments arising from the use of differing exchange rates from period to period are reported as a
component of other comprehensive income.
O. Separate Accounts
-----------------
Assets and liabilities in Separate Accounts are included as separate captions in the consolidated statements of
financial condition. Separate Account assets consist principally of long term bonds, investments in mutual funds,
short-term securities and cash and cash equivalents, all of which are carried at fair value. The investments are
managed predominately through the Company's investment
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
advisory affiliate, American Skandia Investment Services, Inc. ("ASISI"), utilizing various fund managers as
sub-advisors. The remaining investments are managed by independent investment firms. The contractowner has the
option of directing funds to a wide variety of investment options, most of which invest in mutual funds. The
investment risk on the variable portion of a contract is borne by the contractowner. Fixed options with minimum
guaranteed interest rates are also available. The Company bears the credit risk associated with the investments
that support these fixed options.
Included in Separate Account liabilities are reserves of approximately $1,092,944,000 and $1,059,987,000 at December 31,
2001 and 2000, respectively, relating to annuity contracts for which the contractowner is guaranteed a fixed rate of
return. Separate
Account assets of approximately $1,092,944,000 and $1,059,987,000 at December 31, 2001 and 2000, respectively,
consisting of long term bonds, short-term securities, transfers due from the general account and cash and cash
equivalents are held in support of these annuity obligations, pursuant to state regulation.
P. Estimates
---------
The preparation of financial statements in conformity with U.S. GAAP requires that management make estimates and
assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The more significant estimates and
assumptions are related to deferred acquisition costs and involve policy lapses, investment return and maintenance
expenses. Actual results could differ from those estimates.
3. COMPREHENSIVE INCOME
The components of comprehensive income, net of tax, for the years ended December 31 were as follows:
(table in thousands) 2001 2000 1999
---- ---- ----
Net income $ 33,099 $ 64,817 $ 76,169
Other comprehensive income:
Unrealized investment losses on available sale securities
(448) (1,681) (3,438)
Reclassification adjustment for realized losses (gains)
included in investment income 173 2,957 (660)
--------- --------- ----------
Net unrealized gains (losses) on securities (275) 1,276 (4,098)
Foreign currency translation (67) (66) 456
---------- ---------- ---------
Other comprehensive (loss) income (342) 1,210 (3,642)
---------- --------- ----------
Comprehensive income $ 32,757 $ 66,027 $ 72,527
========= ========= =========
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
3. COMPREHENSIVE INCOME (continued)
Other comprehensive (loss) income is shown net of tax (benefit) expense of approximately ($184) thousand, $651 thousand and
($1,961) thousand for 2001, 2000 and 1999 respectively.
The components of accumulated other comprehensive income, net of tax, as of December 31 were as follows:
(table in thousands) 2001 2000
---- ----
Unrealized investment gains $ 746 $ 1,021
Foreign currency translation 15 82
------ --------
Accumulated other comprehensive income $ 761 $ 1,103
====== ========
4. INVESTMENTS
The amortized cost, gross unrealized gains and losses and estimated fair value of fixed maturities and investments in equity
securities as of December 31, 2001 and 2000 are shown below. All securities held at December 31, 2001 and 2000 were
publicly traded.
Investments in fixed maturities as of December 31, 2001 consisted of the following:
Gross Gross
Amortized Unrealized Unrealized Estimated
(table in thousands) Cost Gains Losses Fair Value
---- ----- ------ ----------
U.S. Government obligations $198,136 $2,869 $(413) $200,592
Obligations of state and political
subdivisions 252 8 - 260
Corporate securities 158,494 4,051 (566) 161,979
------- ----- ----- -------
Totals $356,882 $6,928 $(979) $362,831
======== ====== ====== ========
The amortized cost and fair value of fixed maturities, by contractual maturity, at December 31, 2001 are shown below.
Actual maturities may differ from contractual maturities due to call or prepayment provisions.
Amortized
(table in thousands) Cost Fair Value
---- ----------
Due in one year or less $ 14,755 $ 14,784
Due after one through five years 232,199 235,845
Due after five through ten years 92,984 94,289
Due after ten years 16,944 17,913
----------- -----------
Total $ 356,882 $ 362,831
=========== ===========
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
4. INVESTMENTS (continued)
Investments in fixed maturities as of December 31, 2000 consisted of the following:
Gross Gross
Amortized Unrealized Unrealized Estimated
(table in thousands) Cost Gains Losses Fair Value
---- ----- ------ ----------
U.S. Government obligations $ 206,041 $ 4,445 $ (11) $ 210,475
Foreign government obligations 2,791 195 - 2,986
Obligations of state and political
subdivisions 253 1 - 254
Corporate securities 72,237 1,565 (1,809) 71,993
------------ ------------ ------------- ------------
Totals $ 281,322 $ 6,206 $ (1,820) $ 285,708
============ ============ ============= ============
Proceeds from sales of fixed maturities during 2001, 2000 and 1999 and were approximately $386,816,000, $302,632,000 and
$32,196,000, respectively. Proceeds from maturities during 2001, 2000 and 1999 were approximately $4,000,000, $1,104,000
and $4,030,000, respectively.
The cost, gross unrealized gains/losses and fair value of investments in equity securities at December 31are shown below:
(table in thousands) Gross Gross
Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
2001 $ 49,886 $ 122 $(4,925) $45,083
2000 $ 23,218 $ 372 $(3,188) $20,402
Net realized investment gains (losses) were as follows for the years ended December 31:
(table in thousands) 2001 2000 1999
---- ---- ----
Fixed maturities:
Gross gains $ 7,597 $ 1,002 $ 253
Gross losses (4,387) (3,450) (228)
Investment in equity securities:
Gross gains 1,910 1,913 990
Gross losses (4,192) (153) (437)
--------- --------- ---------
Totals $ 928 $ (688) $ 578
======== ========= ========
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
5. NET INVESTMENT INCOME
The sources of net investment income for the years ended December 31 were as follows:
(table in thousands) 2001 2000 1999
---- ---- ----
Fixed maturities $ 18,788 $ 13,502 $ 9,461
Cash and cash equivalents 773 5,154 2,159
Investment in equity securities 622 99 32
Policy loans 244 97 31
Derivative instruments - (6,939) (1,036)
---------- ----------- -----------
Total investment income 20,427 11,913 10,647
Investment expenses (301) (257) (206)
----------- ----------- -----------
Net investment income $ 20,126 $ 11,656 $ 10,441
========== ============ =========
6. INCOME TAXES
The significant components of income tax expense for the years ended December 31 were as follows:
(table in thousands) 2001 2000 1999
---- ---- ----
Current tax (benefit) expense $ (39,047) $ (29,244) $ 41,248
Deferred tax expense (benefit) 46,215 60,023 (10,904)
----------- ----------- ------------
Total income tax expense $ 7,168 $ 30,779 $ 30,344
=========== =========== ===========
Deferred tax assets (liabilities) include the following at December 31:
---------------------------------------------
(table in thousands) 2001 2000
---- ----
---------------------------------------------
Deferred tax assets:
---------------------------------------------
GAAP to tax reserve differences $ 241,503 $ 382,826
---------------------------------------------
Future fees payable to ASI 63,240 -
---------------------------------------------
Deferred compensation 20,520 17,869
---------------------------------------------
Net operating loss carryforward 14,372 -
---------------------------------------------
Surplus notes interest 9,040 5,536
---------------------------------------------
AMT credit carryforward 5,451 -
---------------------------------------------
Other 1,114 907
----------- -----------
---------------------------------------------
Total deferred tax assets 355,240 407,138
----------- -----------
---------------------------------------------
---------------------------------------------
Deferred tax liabilities:
---------------------------------------------
Deferred acquisition costs (404,758) (411,417)
---------------------------------------------
Internal use software (3,417) (2,524)
---------------------------------------------
Policy fees (1,634) (1,551)
---------------------------------------------
Net unrealized gains (411) (595)
---------------------------------------------
Total deferred tax liabilities (410,220) (416,087)
------------ ------------
---------------------------------------------
Net deferred tax asset (liability) $ (54,980) $ (8,949)
============ ============
---------------------------------------------
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (continued)
The income tax expense was different from the amount computed by applying the federal statutory tax rate of 35% to pre-tax
income from continuing operations as follows:
(table in thousands) 2001 2000 1999
---- ---- ----
Income (loss) before taxes
Domestic $ 42,886 $ 98,136 $ 109,036
Foreign (2,619) (2,540) (2,523)
----------- ----------- -----------
Total 40,267 95,596 106,513
Income tax rate 35% 35% 35%
----------- ----------- -----------
Tax expense at federal statutory income tax rate 14,094 33,459 37,280
Tax effect of:
Dividend received deduction (8,400) (7,350) (9,572)
Losses of foreign subsidiary 917 889 883
Meals and entertainment 603 841 664
State income taxes (62) (524) 1,071
Other 16 3,464 18
---------- ---------- ----------
Income tax expense $ 7,168 $ 30,779 $ 30,344
========== ========== ==========
The Company's net operating loss carryforwards, totaling approximately $41,063,000 at December 31, 2001, will expire in 2016.
7. COST ALLOCATION AGREEMENTS WITH AFFILIATES
Certain operating costs (including personnel, rental of office space, furniture, and equipment) have been charged to the
Company at cost by American Skandia Information Services and Technology Corporation ("ASIST"), an affiliated company. The
Company has also charged operating costs to several of its affiliates. The total cost to the Company for these items was
approximately $6,179,000, $13,974,000 and $11,136,000 in 2001, 2000 and 1999, respectively. Income received for these items
was approximately $13,166,000, $11,186,000 and $3,919,000 in 2001, 2000 and 1999, respectively.
Beginning in 1999, the Company was reimbursed by ASM for certain distribution related costs associated with the sales of
business through an investment firm where ASM serves as an introducing broker dealer. Under this agreement, the expenses
reimbursed were approximately $6,391,000, $5,842,000 and $1,441,000 in 2001, 2000 and 1999, respectively. As of December 31,
2001 and 2000, amounts receivable under this agreement were approximately $639,000 and $492,000, respectively.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
8. FUTURE FEES PAYABLE TO ASI
In a series of transactions with ASI, the Company transferred certain rights to receive a portion of future fees and
contract charges expected to be realized on designated blocks of deferred annuity contracts.
The proceeds from the transfers have been recorded as a liability and are being amortized over the remaining surrender
charge period of the designated contracts using the interest method. The Company did not transfer the right to receive
future fees and charges after the expiration of the surrender charge period.
In connection with these transactions, ASI, through special purpose trusts, issued collateralized notes in private
placements, which are secured by the rights to receive future fees and charges purchased from the Company.
Under the terms of the Purchase Agreements, the rights transferred provide for ASI to receive a percentage (60%, 80% or 100%
depending on the underlying commission option) of future mortality and expense charges and contingent deferred sales
charges, after reinsurance, expected to be realized over the remaining surrender charge period of the designated contracts
(generally 6 to 8 years).
Payments, representing fees and charges in the aggregate amount, of approximately $207,731,000, $219,454,000 and
$131,420,000 were made by the Company to ASI in 2001, 2000 and 1999, respectively. Related interest expense of
approximately $59,873,000, $70,667,000 and $52,840,000 has been included in the statement of income for 2001, 2000 and1999,
respectively.
The Commissioner of the State of Connecticut has approved the transfer of future fees and charges; however, in the
event that the Company becomes subject to an order of liquidation or rehabilitation, the Commissioner has the ability
to stop the payments due to ASI under the Purchase Agreement subject to certain terms and conditions.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
8. FUTURE FEES PAYABLE TO ASI (continued)
The present values of the transactions as of the respective effective date were as follows:
Closing Effective Contract Issue Discount Present
Transaction Date Date Period Rate Value
----------- ---- ---- ------ ---- -----
1996-1 12/17/96 9/1/96 1/1/94 - 6/30/96 7.5% $50,221
1997-1 7/23/97 6/1/97 3/1/96 - 4/30/97 7.5% 58,767
1997-2 12/30/97 12/1/97 5/1/95 - 12/31/96 7.5% 77,552
1997-3 12/30/97 12/1/97 5/1/96 - 10/31/97 7.5% 58,193
1998-1 6/30/98 6/1/98 1/1/97 - 5/31/98 7.5% 61,180
1998-2 11/10/98 10/1/98 5/1/97 - 8/31/98 7.0% 68,573
1998-3 12/30/98 12/1/98 7/1/96 - 10/31/98 7.0% 40,128
1999-1 6/23/99 6/1/99 4/1/94 - 4/30/99 7.5% 120,632
1999-2 12/14/99 10/1/99 11/1/98 - 7/31/99 7.5% 145,078
2000-1 3/22/00 2/1/00 8/1/99 - 1/31/00 7.5% 169,459
2000-2 7/18/00 6/1/00 2/1/00 - 4/30/00 7.25% 92,399
2000-3 12/28/00 12/1/00 5/1/00 - 10/31/00 7.25% 107,291
2000-4 12/28/00 12/1/00 1/1/98 - 10/31/00 7.25% 107,139
Expected payments of future fees payable to ASI as of December 31, 2001 are as follows:
(table in thousands) Year Amount
---- ------
2002 $ 175,357
2003 171,345
2004 156,842
2005 132,702
2006 102,188
2007 50,821
2008 7,800
-----------
Total $797,055
========
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
9. LEASES
The Company leases office space under a lease agreement established in 1989 with ASIST. The Company entered into a lease
agreement for office space in Westminster, Colorado, effective January 1, 2001. Lease expense for 2001, 2000 and 1999 was
approximately $8,404,000, $6,593,000 and $5,003,000, respectively. Future minimum lease payments per year and in aggregate
as of December 31, 2001 are as follows:
(table in thousands) 2002 $ 7,913
2003 8,087
2004 8,570
2005 8,609
2006 8,698
2007 and thereafter 41,711
---------
Total $ 83,588
=========
10. RESTRICTED ASSETS
To comply with certain state insurance departments' requirements, the Company maintains cash, bonds and notes on deposit
with various states. The carrying value of these deposits amounted to approximately $4,822,000 and $4,636,000 as of
December 31, 2001 and 2000, respectively. These deposits are required to be maintained for the protection of contractowners
within the individual states.
11. RETAINED EARNINGS AND DIVIDEND RESTRICTIONS
Statutory basis shareholder's equity was approximately $226,780,000 and $342,804,000 at December 31, 2001 and 2000,
respectively.
The Company incurred statutory basis net losses for 2001 of approximately $121,957,000 due primarily to significant declines
in the equity markets during the year as well as increased levels of operating expenses relative to revenues. Statutory
basis net income for 2000 was $11,550,000, as compared to losses of $17,672,000 in 1999.
Under various state insurance laws, the maximum amount of dividends that can be paid to shareholders without prior approval
of the state insurance department is subject to restrictions relating to statutory surplus and net gain from operations. At
December 31, 2001, no amounts may be distributed without prior approval.
On November 8, 1999, the Board of Directors authorized the Company to increase the par value of its capital stock from $80
per share to $100 per share in order to comply with minimum capital levels as required by the California Department of
Insurance. This transaction resulted in a corresponding decrease in paid in and contributed surplus of $500,000 and had no
effect on capital and surplus.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
12. STATUTORY ACCOUNTING PRACTICES
The Company prepares its statutory basis financial statements in accordance with accounting practices prescribed by the
State of Connecticut Insurance Department. Prescribed statutory accounting practices include publications of the National
Association of Insurance Commissioners (NAIC), as well as state laws, regulations and general administrative rules.
The NAIC adopted the Codification of Statutory Accounting Principles (Codification) in March 1998. The effective date for
codification was January 1, 2001. The Company's state of domicile, Connecticut, has adopted codification and the Company
has made the necessary changes in its statutory accounting and reporting required for implementation. The overall impact of
adopting codification was a one-time, cumulative change in accounting benefit recorded directly in statutory surplus of
approximately $12,047,000.
In addition, during 2001, based on a recommendation from the State of Connecticut Insurance Department, the Company changed
its statutory method of accounting for its liability associated with securitized variable annuity fees. Under the new
method of accounting, the liability for securitized fees is established consistent with the method of accounting for the
liability associated with variable annuity fees ceded under reinsurance contracts. This equates to the statutory liability
at any valuation date being equal to the Commissioners Annuity Reserve Valuation Method (CARVM) offset related to the
securitized contracts. The impact of this change in accounting, representing the difference in the liability calculated
under the old method versus the new method as of January 1, 2001, was reported as a cumulative effect of change in
accounting benefit recorded directly in statutory surplus of approximately $20,215,000.
13. EMPLOYEE BENEFITS
The Company has a 401(k) plan for which substantially all employees are eligible. Under this plan, the Company provides a
50% match on employees' contributions up to 6% of an employee's salary (for an aggregate match of up to 3% of the
employee's salary). Additionally, the Company may contribute additional amounts based on profitability of the Company and
certain of its affiliates. Company contributions to this plan on behalf of the participants were approximately $2,738,000,
$3,734,000 and $3,164,000 in 2001, 2000 and 1999, respectively.
The Company has a deferred compensation plan, which is available to the field marketing staff and certain other employees.
Company contributions to this plan on behalf of the participants were approximately $345,000, $399,000 and $193,000 in 2001,
2000 and 1999, respectively.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
13. EMPLOYEE BENEFITS (continued)
The Company and certain affiliates cooperatively have a long-term incentive program under which units are awarded to
executive officers and other personnel. The Company and certain affiliates also have a profit sharing program, which
benefits all employees below the officer level. These programs consist of multiple plans with new plans instituted each
year. Generally, participants must remain employed by the Company or its affiliates at the time such units are payable in
order to receive any payments under the programs. The accrued liability representing the value of these units was
approximately $13,645,000 and $31,632,000 as of December 31, 2001 and 2000, respectively. Payments under these programs
were approximately $8,377,000, $13,542,000, and $4,079,000 in 2001, 2000 and 1999, respectively.
14. REINSURANCE
The Company cedes insurance to other insurers in order to limit its risk exposure. Such transfer does not relieve the
Company of its primary liability and, as such, failure of reinsurers to honor their obligation could result in losses to the
Company. The Company reduces this risk by evaluating the financial condition and credit worthiness of reinsurers.
The effect of reinsurance for the 2001, 2000 and 1999 was as follows:
(table in thousands)
2001 Gross Ceded Net
---- ----- ----- ---
Annuity and life insurance charges and fees $ 430,913 $ (52,220) $ 378,693
Change in annuity and life insurance policy reserves $ (35,835) $ (4,063) $ (39,898)
Return credited to contractowners $ 16,741 $ 92 $ 16,833
2000
----
Annuity and life insurance charges and fees $ 477,802 $ (53,224) $ 424,578
Change in annuity and life insurance policy reserves $ 45,784 $ (766) $ 45,018
Return credited to contractowners $ 13,607 $ (4,561) $ 9,046
1999
----
Annuity and life insurance charges and fees $ 326,670 $ (36,681) $ 289,989
Change in annuity and life insurance policy reserves $ 4,151 $ (1,073) $ 3,078
Return credited to contractowners $ (1,382) $ (257) $ (1,639)
In December 2000, the Company entered into a modified coinsurance agreement with SICL covering certain contracts issued since
January 1996. The impact of this treaty to the Company was a pre tax loss of approximately $4,917,000 in 2001 and pre tax
income of approximately $7,067,453 in 2000. At December 31, 2001 and 2000, approximately $12,983,000 and $6,109,000,
respectively, was payable to SICL under this agreement.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
15. SURPLUS NOTES
The Company has issued surplus notes to ASI in exchange for cash. Surplus notes outstanding as of December 31, 2001 and
2000, and interest expense for 2001, 2000 and 1999 were as follows:
----------------------
Liability as of
(table in thousands) December 31, Interest Expense
----------------------
Interest For the Years
----------------------
Note Issue Date Rate 2001 2000 2001 2000 1999
---------------------- --------- ---------- ---------- --------- --------- ---------
---------------------- --------- ----------
----------------------
----------------------
February 18, 1994 7.28% - - - 732 738
----------------------
March 28, 1994 7.90% - - - 794 801
----------------------
September 30, 1994 9.13% - 15,000 1,282 1,392 1,389
----------------------
December 28, 1994 9.78% - - - - 1,308
----------------------
December 19, 1995 7.52% 10,000 10,000 763 765 762
----------------------
December 20, 1995 7.49% 15,000 15,000 1,139 1,142 1,139
----------------------
December 22, 1995 7.47% 9,000 9,000 682 684 682
----------------------
June 28, 1996 8.41% 40,000 40,000 3,411 3,420 3,411
----------------------
December 30, 1996 8.03% 70,000 70,000 5,699 5,715 5,698
---------- ---------- --------- --------- ---------
---------- ---------- --------- --------- ---------
----------------------
----------------------
Total $144,000 $159,000 $12,976 $14,644 $15,928
========== ========== ========= ========= =========
On December 3, 2001, a surplus note, dated September 30, 1994, for $15,000,000 was repaid. On December 27, 2000, surplus
notes for $10,000,000, dated February 18, 1994, and $10,000,000, dated March 28, 1994, were repaid. On December 10, 1999, a
surplus note, dated December 28, 1994, for $14,000,000 was repaid. All surplus notes mature seven years from the issue date.
Payment of interest and repayment of principal for these notes is subject to certain conditions and require approval by the
Insurance Commissioner of the State of Connecticut. At December 31, 2001 and 2000, approximately $25,829,000 and
$15,816,000, respectively, of accrued interest on surplus notes was not approved for payment under these criteria.
16. SHORT-TERM BORROWING
The Company had a $10,000,000 short-term loan payable to ASI at December 31, 2001 and 2000 as part of a revolving loan
agreement. The loan has an interest rate of 3.67% and matures on March 12, 2002. The total related interest expense to the
Company was approximately $522,000, $687,000 and $585,000 in 2001, 2000 and 1999, respectively. Accrued interest payable was
approximately $113,000 and $222,000 as of December 31, 2001 and 2000, respectively.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
17. CONTRACT WITHDRAWAL PROVISIONS
Approximately 99% of the Company's separate account liabilities are subject to discretionary withdrawal by contractowners at
market value or with market value adjustment. Separate account assets, which are carried at fair value, are adequate to pay
such withdrawals, which are generally subject to surrender charges ranging from 10% to 1% for contracts held less than 10
years.
18. RESTRUCTURING CHARGES
On March 22, 2001, and December 3, 2001, the Company announced separate plans to reduce expenses to better align its
operating infrastructure with the current investment market environment. As part of the two plans, the Company's workforce
was reduced by approximately 140 positions and 115 positions, respectively, affecting substantially all areas of the
Company. Estimated pre-tax severance benefits of approximately $8,500,000 have been charged against 2001 operations related
to these reductions. These charges have been reported in the Consolidated Statements of Income as a component of
Underwriting, Acquisition and Other Insurance Expenses. As of December 31, 2001, the remaining restructuring liability,
relating primarily to the December 3, 2001 plan, was approximately $4,104,000.
19. COMMITMENTS AND CONTINGENT LIABILITIES
As of the date of this filing, the Company is not involved in any legal proceedings outside of the ordinary course of its
business operations. The Company is involved in pending and threatened legal proceedings in the ordinary course of its
business operations. While the outcome of these legal proceedings cannot be determined at this time, after consideration
of the defenses available to the Company, applicable insurance coverage and any related reserves established, these legal
proceedings are not expected to result in liability for amounts material to the financial condition of the Company, although
they may adversely affect results of operations in future periods.
20. SEGMENT REPORTING
In recent years, in order to complete the array of products offered by the Company and its affiliates to meet a wide variety
of financial planning, the Company developed variable life insurance and qualified retirement plan annuity products. Assets
under management and sales for products other than variable annuities have not been significant enough to warrant full
segment disclosures as required by SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," and the
Company does not anticipate that they will do so in the future due to a change in the Company's strategy. On March 15,
2002, the Company announced that it will no longer accept new business for the funding of qualified retirement plans,
effective July 31, 2002 and will not accept applications for it's flexible premium variable insurance products that are
signed after April 1, 2002 or received after April 15, 2002. The Company intends to continue to accept additional
contributions to existing qualified plans, to service and accept additional premiums for its existing flexible premium
variable insurance contracts, and to continue to offer and sell its single premium variable life insurance products.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes information with respect to the operations of the Company on a quarterly basis:
(table in thousands) Three Months Ended
----------------------------------------------------------
2001 March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Premiums and other insurance revenues $ 131,096 $ 128,665 $ 114,714 $ 117,854
Net investment income* 5,381 4,997 5,006 4,742
Net realized capital gains (losses) 1,902 373 376 (1,723)
------------ ------------ ------------ -------------
Total revenues 138,379 134,035 120,096 120,873
Benefits and expenses* 122,940 110,644 115,313 124,219
------------ ------------ ------------ ------------
Pre-tax net income 15,439 23,391 4,783 (3,346)
Income taxes 4,034 7,451 (480) (3,837)
------------ ------------ ------------- -------------
Net income $ 11,405 $ 15,940 $ 5,263 $ 491
============ ============ ============ ============
* For the quarters ended March 31, 2001, June 30, 2001 and September 30, 2001, the Company had reported investment performance
associated with its derivatives as net investment income. The above presentation reflects a reclassification of these
amounts to benefits and expenses.
(table in thousands) Three Months Ended
----------------------------------------------------------
2000 March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Premiums and other insurance revenues $ 137,255 $ 139,317 $ 147,923 $ 136,159
Net investment income 2,876 3,628 4,186 966
Net realized capital gains (losses) 729 (1,436) (858) 877
------------ ------------- ------------- ------------
Total revenues 140,860 141,509 151,251 138,002
Benefits and expenses 106,641 121,356 137,514 110,515
------------ ------------ ------------ ------------
Pre-tax net income 34,219 20,153 13,737 27,487
Income taxes 10,038 5,225 3,167 12,349
------------ ------------ ------------ ------------
Net income $ 24,181 $ 14,928 $ 10,570 $ 15,138
============ ============ ============ ============
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
21. QUARTERLY FINANCIAL DATA (UNAUDITED) (continued)
(table in thousands) Three Months Ended
----------------------------------------------------------
1999 March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
Premiums and other insurance revenues $ 78,509 $ 88,435 $ 97,955 $ 111,443
Net investment income 2,654 2,842 2,735 2,210
Net realized capital gains 295 25 206 52
------------ ------------ ------------ ------------
Total revenues 81,458 91,302 100,896 113,705
Benefits and expenses 64,204 67,803 71,597 77,244
------------ ------------ ------------ ------------
Pre-tax net income 17,254 23,499 29,299 36,461
Income taxes 3,844 7,142 7,898 11,460
------------ ------------ ------------ ------------
Net income $ 13,410 $ 16,357 $ 21,401 $ 25,001
============ ============ ============ ============
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 on March 30, 2002.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
By: /s/Thomas M. Mazzaferro
------------------------
Thomas M. Mazzaferro
Executive Vice President and
Chief Financial Officer
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 indicated on March 30, 2002.
*Wade A. Dokken
---------------
Wade A. Dokken
President and Chief Executive Officer
Board of Directors
*Lincoln R. Collins *Thomas M. Mazzaferro *Robert Whitcher
------------------- --------------------- ----------------
By: /s/Kathleen Chapman
------------------------
Kathleen Chapman
Corporate Secretary
*Pursuant to Powers of Attorney filed with the Registration Statement.
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 on March 30, 2002.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
By:
Thomas M. Mazzaferro
Executive Vice President and
Chief Financial Officer
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 indicated on March 30, 2002.
*Wade A. Dokken
---------------
Wade A. Dokken
President and Chief Executive Officer
Board of Directors
*Lincoln R. Collins *Thomas M. Mazzaferro *Robert Whitcher
------------------- --------------------- ----------------
By:
-------------------------------
Kathleen Chapman
Corporate Secretary
*Pursuant to Powers of Attorney filed with the Registration Statement.