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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2002
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
06-1241288
(Federal Employer Identification No.)
One Corporate Drive
Shelton, Connecticut 06484
Telephone Number (203) 926-1888
Indicate by check mark whether the registrant (1) has filed all reports 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 __
---
As of August 12, 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 common stock, all of which were owned by American Skandia, Inc., a
wholly-owned subsidiary of Skandia Insurance Company Ltd., a Swedish corporation.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Statements of Financial Condition -
June 30, 2002 (unaudited) and December 31, 2001 3
Consolidated Statements of Income (unaudited) -
Six months ended June 30, 2002 and June 30, 2001 4
Consolidated Statements of Income (unaudited) -
Three months ended June 30, 2002 and June 30, 2001 5
Consolidated Statements of Shareholder's Equity -
Six months ended June 30, 2002 (unaudited) and year ended December 31, 2001 6
Consolidated Statements of Cash Flows (unaudited) -
Six months ended June 30, 2002 and June 30, 2001 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations - Six months ended June 30, 2002 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures 17
Exhibit Index 18
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Consolidated Statements of Financial Condition
(in thousands except for number of shares and par value)
June 30, December 31,
2002 2001
---- ----
(unaudited)
ASSETS
- ------
Investments:
Fixed maturities - at fair value $ 378,483 $ 362,831
Equity securities - at fair value 51,009 45,083
Derivative instruments - at fair value 12,650 5,525
Policy loans 6,977 6,559
--------------- ---------------
Total investments 449,119 419,998
Cash and cash equivalents 100,341 32,231
Accrued investment income 4,540 4,737
Deferred acquisition costs 1,357,100 1,383,281
Reinsurance receivable 6,629 7,249
Receivable from affiliates 5,345 3,283
Income tax receivable 36,336 30,537
Fixed assets 17,930 17,752
Other assets 101,862 103,912
Separate account assets 23,981,429 26,038,549
--------------- ---------------
Total assets $ 26,060,631 $ 28,041,529
=============== ===============
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
Liabilities:
Reserves for future policy and contract benefits $ 109,008 $ 91,126
Drafts outstanding 74,582 64,438
Accounts payable and accrued expenses 136,229 160,261
Deferred income taxes 49,225 54,980
Payable to affiliates 3,951 103,452
Future fees payable to American Skandia, Inc. ("ASI") 808,896 797,055
Short-term borrowing 125,270 10,000
Surplus notes 144,000 144,000
Separate account liabilities 23,981,429 26,038,549
--------------- ---------------
Total liabilities 25,432,590 27,463,861
--------------- ---------------
Shareholder's equity:
Common stock, $100 par value, 25,000 shares authorized,
issued and outstanding 2,500 2,500
Additional paid-in capital 397,309 335,329
Retained earnings 227,307 239,078
Accumulated other comprehensive income 925 761
--------------- ---------------
Total shareholder's equity 628,041 577,668
--------------- ---------------
Total liabilities and shareholder's equity $ 26,060,631 $ 28,041,529
=============== ===============
See notes to unaudited consolidated financial statements.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Consolidated Statements of Income
(in thousands)
Six Months Ended June 30,
2002 2001
---- ----
(unaudited)
REVENUES
- --------
Annuity and life insurance charges and fees $ 182,155 $ 200,146
Fee income 52,169 57,976
Net investment income 9,679 10,378
Premium income 806 1,012
Net realized capital (losses) gains (3,424) 2,275
Other 543 627
----------- -----------
Total revenues 241,928 272,414
----------- -----------
EXPENSES
- --------
Benefits:
Annuity and life insurance benefits 1,538 759
Change in annuity and life insurance policy reserves 1,402 (29,817)
Return credited to contractowners 4,480 9,190
----------- -----------
7,420 (19,868)
Expenses:
Underwriting, acquisition and other insurance expenses 91,161 99,999
Amortization of deferred acquisition costs 154,839 119,349
Interest expense 10,322 34,104
----------- -----------
256,322 253,452
----------- -----------
Total benefits and expenses 263,742 233,584
----------- -----------
(Loss) income from operations before income tax (benefit)
expense (21,814) 38,830
Income tax (benefit) expense (10,043) 11,485
------------ -----------
Net (loss) income $ (11,771) $ 27,345
============ ===========
See notes to unaudited consolidated financial statements.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Consolidated Statements of Income
(in thousands)
Three Months Ended June 30,
2002 2001
---- ----
(unaudited)
REVENUES
- --------
Annuity and life insurance charges and fees $ 96,506 $ 99,646
Fee income 26,001 28,464
Net investment income 4,714 4,997
Premium income 609 171
Net realized capital (losses) gains (1,584) 373
Other 308 384
----------- -----------
Total revenues 126,554 134,035
----------- -----------
EXPENSES
- --------
Benefits:
Annuity and life insurance benefits 813 428
Change in annuity and life insurance policy reserves 1,029 (33,013)
Return credited to contractowners (2,477) (5,089)
------------ ------------
(635) (37,674)
Expenses:
Underwriting, acquisition and other insurance expenses 44,043 50,905
Amortization of deferred acquisition costs 107,912 82,763
Interest expense 6,211 14,650
----------- -----------
158,166 148,318
----------- -----------
Total benefits and expenses 157,531 110,644
----------- -----------
(Loss) income from operations before income tax (benefit)
expense (30,977) 23,391
Income tax (benefit) expense (11,746) 7,451
------------ -----------
Net (loss) income $ (19,231) $ 15,940
============ ===========
See notes to unaudited consolidated financial statements.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Consolidated Statements of Shareholder's Equity
(in thousands)
June 30, December 31,
2002 2001
---- ----
(unaudited)
Common stock:
Beginning and ending balance $ 2,500 $ 2,500
----------- -----------
Additional paid in capital:
Beginning balance 335,329 287,329
Capital contributions 61,980 48,000
----------- -----------
Ending balance 397,309 335,329
----------- -----------
Retained earnings:
Beginning balance 239,078 205,979
Net (loss) income (11,771) 33,099
------------ -----------
Ending balance 227,307 239,078
----------- -----------
Accumulated other comprehensive income (loss):
Beginning balance 761 1,103
Other comprehensive income (loss) 164 (342)
----------- ------------
Ending balance 925 761
----------- -----------
Total shareholder's equity $ 628,041 $ 577,668
=========== ===========
See notes to unaudited consolidated financial statements.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Consolidated Statements of Cash Flows
(in thousands)
Six Months Ended June 30,
2002 2001
---- ----
(unaudited)
Cash flow from operating activities:
Net (loss) income $ (11,771) $ 27,345
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Amortization and depreciation 3,230 771
Deferred tax (benefit) expense (6,121) 23,301
Change in unrealized gains on derivatives (9,197) (6,044)
Increase (decrease) in policy reserves 1,530 (24,140)
(Decrease) increase in net receivable/payable to affiliates (101,563) 48,618
(Increase) decrease in income tax receivable (5,799) 32,478
Decrease (increase) in other assets 2,050 (8,842)
Decrease (increase) in accrued investment income 197 (286)
(Decrease) increase in reinsurance receivable 620 (17,975)
Net decrease (increase) in deferred acquisition costs 26,181 (1,303)
(Decrease) increase in accounts payable and accrued expenses (24,632) 19,535
Increase (decrease) in drafts outstanding 10,144 (15,329)
Net realized capital (gains) losses on derivatives (10,882) 5,061
Net realized capital losses (gains) on investments 3,424 (2,275)
------------ -------------
Net cash (used in) provided by operating activities (122,589) 80,915
------------- ------------
Cash flow from investing activities:
Purchase of fixed maturity investments (206,479) (220,174)
Proceeds from sale and maturity of fixed maturity investments 192,320 216,224
Purchase of derivatives (22,814) (11,383)
Proceeds from exercise or sale of derivative instruments 35,768 4,816
Purchase of shares in equity securities (20,262) (47,673)
Proceeds from sale of shares in equity securities 10,133 18,273
Purchase of fixed assets (2,476) (1,684)
Increase in policy loans (418) (1,519)
------------- -------------
Net cash used in investing activities (14,228) (43,120)
------------- -------------
Cash flow from financing activities:
Capital contribution 61,980 2,000
Increase (decrease) in future fees payable to ASI, net 11,841 (74,623)
Increase in short-term borrowing 115,270 -
Net deposits (withdrawals) to contractowner accounts 16,352 (507)
------------ -------------
Net cash provided by (used in) financing activities 205,443 (73,130)
------------ -------------
Net increase (decrease) in cash and cash equivalents 68,626 (35,335)
Change in foreign currency translation, net (516) 261
Cash and cash equivalents at beginning of period 32,231 76,499
------------ ------------
Cash and cash equivalents at end of period $ 100,341 $ 41,425
============ ============
Income taxes paid (received) $ 1,598 $ (44,294)
============ =============
Interest paid $ 4,009 $ 27,676
============ ============
See notes to unaudited consolidated financial statements.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of American Skandia Life Assurance Corporation ("the Company")
have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") for
interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and
Exchange Commission. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for
complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30,
2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further
information, refer to the consolidated financial statements and footnotes thereto in the Company's audited consolidated
financial statements on Form 10-K for the year ended December 31, 2001.
Certain reclassifications have been made to prior period amounts to conform to the current period presentation.
2. NEW ACCOUNTING STANDARD
Effective January 1, 2002, the Company adopted 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 be amortized over their useful lives. The adoption of SFAS 142 did not have a significant impact on
the Company's financial statements.
3. COMPREHENSIVE INCOME
The components of comprehensive income (loss), net of tax, for the six months ended June 30, 2002 and 2001 were as follows:
(table in thousands) 2002 2001
---- ----
Net (loss) income $ (11,771) $ 27,345
Other comprehensive income (loss):
Change in net unrealized gains on securities 680 759
Foreign currency translation (516) 170
----------- ---------
Other comprehensive income 164 929
---------- ---------
Comprehensive income $ (11,607) $ 28,274
=========== ==========
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd. )
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2002
3. COMPREHENSIVE INCOME (continued)
Other comprehensive income is shown net of taxes of approximately $88,000 and $500,000 for the six months ended June 30, 2002
and 2001, respectively.
The components of accumulated other comprehensive income, net of tax, as of June 30, 2002 and December 31, 2001 were as
follows:
(table in thousands) 2002 2001
---- ----
Net unrealized gains on securities $ 1,426 $ 746
Foreign currency translation (501) 15
--------- --
Accumulated other comprehensive income $ 925 $ 761
======== ======
4. SHORT-TERM BORROWING
As of June 30, 2002, the Company had a $10,000,000 short-term loan payable to its parent company, American Skandia, Inc.
("ASI") as part of a revolving loan agreement. This loan has an interest rate of 2.58% and matures on September 12, 2002.
On January 3, 2002, the Company entered into a credit facility agreement with ASI. This credit facility terminates on
December 31, 2005 and bears interest at the offered rate in the London interbank market (LIBOR) plus 0.35 percent per annum
for the relevant interest period. Interest expense related to these borrowings was approximately $1,238,000 for the six
months ended June 30, 2002. As of June 30, 2002, the amount outstanding under this credit facility was approximately
$115,270,000.
5. FOREIGN ENTITY
The Company has a 99.9% ownership in Skandia Vida, S.A. de C.V. ("Skandia Vida") which is a life insurance company domiciled
in Mexico, selling long-term savings products within Mexico. Skandia Vida, which is fully consolidated in the accompanying
financial statements, had total shareholders' equity of approximately $3,755,000 as of June 30, 2002 and approximately
$4,179,000 as of December 31, 2001 and has generated losses of approximately $1,410,000 and $1,467,000 for the six months
ended June 30, 2002 and 2001, respectively.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd. )
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 2002
6. 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 Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), and the Company does not anticipate that those sales or assets under
management will be significant 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 its flexible premium variable life insurance products that were 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 life insurance
contracts, and to continue to offer and sell its single premium variable life insurance products.
7. FUTURE FEES PAYABLE TO ASI
In a series of transactions with ASI, the Company has 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 Purchase Agreements between the Company and ASI, 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).
On April 12, 2002, the Company entered into a new Purchase Agreement with ASI. This transaction covers designated blocks of
business issued from November 1, 2000 through December 31, 2001. The estimated present value of the transaction at April
12, 2002, using a discount rate of 7.00%, was approximately $101,713,000.
******************************************************************************************************
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Six Months ended June 30, 2002
Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the June 30,
2002 financial statements and the notes included herein, as well as Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in American Skandia Life Assurance Corporation's ("the Company") 2001 Annual Report on Form 10-K.
General
- -------
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 is one of the larger providers of variable annuity contracts for the individual market in the
United States, 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 in 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 and Distribution
- -------------------------
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, effective July 31, 2002, it would no
longer accept new business for the funding of qualified retirement plans. The Company intends to continue to accept additional
contributions to existing qualified plans following July 31, 2002.
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 would no longer
accept applications for it's flexible premium variable life insurance products that were 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
life insurance contracts after that time, and to continue to offer and sell its single premium variable life insurance products.
The Company sells its 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.
Results of Operations
- ---------------------
Annuity and life insurance sales for the six months ended June 30, 2002 totaled approximately $1,763,271,000, compared to sales of
approximately $2,160,319,000 for the first six months of 2001. The decrease in sales was primarily the result of the general decline
in sales in the industry, attributed in large part to the continued uncertainty in the equity markets.
Average assets under management totaled approximately $25,272,685,000 in the first six months of 2002 and approximately
$28,347,335,000 in the first six months of 2001, representing a decrease of 11%. Contractowner fees and charges and charges
generated from transfer agency-type and investment support activities decreased approximately $23,797,000, or 9%, for the first six
months of 2002 compared to the same period in 2001, primarily as a result of the decline in assets under management.
Net investment income decreased approximately $699,000, or 7%, for the first six months of 2002 compared to the same period in 2001.
This decrease was principally driven by increased amortization of premium paid for bonds in lower interest rate environment and
reduced yields on both short-term money as well as fixed maturity investments in 2002 as compared to the same period in 2001.
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. Decreased sales of these products led to a
decrease in premium income in the first six months of 2002 compared to the first six months of 2001. Management expects supplementary
contracts to grow over time with the maturing of core business lines.
Net realized investment losses totaled approximately $3,424,000 for the first six months of 2002, as compared to gains of
approximately $2,275,000 for the first six months of 2001. During the first six months of 2002 losses on sales of mutual fund
investments that are held in support of a deferred compensation program for certain of the Company's employees were approximately
$3,772,000. The participants in this program bear the investment risk of these assets and, accordingly, there was a reduction in the
deferred compensation liability that offset these investment losses. The deferred compensation program losses were offset by net
gains of approximately $348,000 on sales of fixed maturities. Included in the net gains was a realized loss of approximately
$1,236,000 on the sale of a Worldcom, Inc. bond. The investment gains in the first six months of 2001 related primarily to sales of
fixed maturity investments.
The change in annuity and life insurance 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. In the first quarter of 2001, the equity
markets, and, as a result, underlying fund performance, declined. In addition, in the first quarter of 2001, the Company updated
certain assumptions embedded in the calculation of the GMDB liability to reflect more realistic expectations as to risks inherent in
the benefit. Previous assumptions had been based on statutory valuation principles as an approximation for accounting principles
generally accepted in the United States. As a result, the GMDB reserve decreased $32,902,000 for the six months ended June 30,
2001. During the remainder of 2001, the Company continued to refine certain assumptions embedded in the calculation of the GMDB
liability which resulted in further decreases in the GMDB liability throughout the remainder of the year. However, offsetting the
resulting increase in earnings and equity as a result of changes in the GMDB liability in 2001, certain assumptions were also updated
in the calculation of the deferred acquisition cost asset. The amortizations 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. The GMDB
liability decreased approximately $623,000 during the first six months of 2002.
Return credited to contractowners consists primarily of guaranteed minimum death benefit claims, as well as the results of the
Company's hedging program used to mitigate the economic impact of the minimum death benefit guarantees and 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. Return credited to contractowners decreased for the first six months of 2002 as compared to the first six months of
2001. The most significant fluctuation was driven by hedge related benefits of approximately $20,079,000 during the first six months
of 2002 as compared to benefits of approximately $983,000 during the first six months of 2001. The hedge benefits were partially
offset by increased guaranteed minimum death benefit claims and lower investment returns on the market value adjusted annuities. The
lower investment returns in 2002 were led by approximately $8,837,000 of realized losses on sales and impairments of certain
securities, of which approximately $6,333,000 related to Worldcom, Inc. bonds.
The Company generally amortizes deferred acquisition costs 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. Amortization of deferred acquisition costs
for the first six months of 2002 increased $35,490,000 or 30% as compared to same period in 2001. Due to the depressed equity
markets during the first six months of 2002 as compared to 2001, expectations of future gross profits from asset based fees and
surrender charges have decreased. In addition, the Company updated its future estimated gross profits with respect to mortality
assumptions reflecting actual experience and the decline in the equity markets resulting in increased amortization.
Underwriting, acquisition and other insurance expenses for the six months ended June 30, 2002 and 2001 were as follows:
(table in thousands) 2002 2001
---- ----
Commissions and purchase credits $ 150,936 $136,256
General operating expenses 68,882 84,395
Acquisition costs deferred during the first six months (128,657) (120,652)
--------- ---------
Underwriting, acquisition and other insurance expenses $ 91,161 $ 99,999
=========== ========
A variety of sales promotional activities that were in place for the first six months of 2002 led to an 11% increase in commissions
and purchase credits. General operating expenses decreased 18% from a year ago as a result of lower sales-based compensation, as
well as expense reduction programs implemented during 2001. Variable compensation and long-term incentive plan expenses have
decreased due to the slowdown in sales and the decline in the equity markets. The increase in capitalized deferred acquisition costs
was mostly attributable to purchase credits deferred from one of the Company's redesigned bonus variable annuity products.
Interest expense, for the six months ended June 30, 2002, decreased approximately $23,782,000, or 70%, compared to the six months
ended June 30, 2001, primarily due to lower interest expense related to the future fees payable to ASI liability. Interest expense
on these obligations is driven by the cash flows from the underlying annuity contracts acting as collateral. Due to the depressed
asset values of those annuity contracts driven by the weak equity markets, the cash flows, and therefore the interest expense, has
decreased from prior year levels.
The Company recorded an income tax benefit of approximately $10,043,000 for the six months ended June 30, 2002 due to net increased
deferred tax benefits. The effective income tax rate for the six months ended June 30, 2002 was 46%. The effective rate in 2002 is
higher than the corporate rate of 35% due to the deduction for dividends received. Management believes that the Company will produce
sufficient taxable income in the future to realize its deferred tax assets.
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. However, Skandia Vida has generated net losses of approximately $1,410,000
and $1,467,000 for the six months ended June 30, 2002 and 2001, respectively.
Separate account assets and liabilities decreased $2,057,120 as compared with December 31, 2001. This change resulted primarily from
the declining equity markets.
Significant Accounting Policies
- -------------------------------
For information on the Company's significant accounting policies, see Notes to Consolidated Financial Statements in the Company's
audited consolidated financial statements on Form 10-K for the year ended December 31, 2001. 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
-------------------------------
The Company's liquidity requirements were generally met by cash from insurance operations, investment activities, borrowings from
ASI, reinsurance and the sale of rights to future fees and charges to ASI. Additionally, during the second quarter of 2002, the
Company received a capital contribution of $60,200,000 from ASI.
During the first six months of 2002 and 2001, the Company received approximately $1,780,000 and $2,000,000, respectively, from ASI to
support its investment in Skandia Vida.
The Company continues to extend its reinsurance agreements for new blocks of business. As of April 1, 2002, the Company has
renegotiated one of its reinsurance agreements to prospectively increase the quota share on one of its variable annuity products to
75%. 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
acquisition costs on future years' sales volume. On April 12, 2002, the Company entered into a new securitization transaction with
ASI. This transaction covers designated blocks of business issued from November 1, 2000 through December 31, 2001. The estimated
present value of the transaction at April 12, 2002, using a discount rate of 7.00%, was approximately $101,713,000.
The Company has long-term surplus notes and short-term borrowings with 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 risk and
business risk. The Company has complied with the NAIC's RBC reporting requirements and has total adjusted capital well above
required capital.
On May 8, 2002, Fitch Ratings downgraded the Company's "insurer financial strength" rating to A+ from AA- with a "stable" outlook.
This ratings action was based primarily on Fitch's evolving concerns surrounding the risk profile of variable annuity companies
related to exposure to equity market performance. Fitch believes that the Company's exposure to the equity markets has resulted in,
and may continue to result in, earnings volatility.
On July 30, 2002, Standard and Poor's placed the Company's A+ rating on CreditWatch with negative implications. This action was
concurrent with Standard and Poor's revision of its outlook on the U.S. life insurance sector to negative from stable. The revision
reflects the sector's sharply lower fee income on equity-linked product lines and growing credit losses on companies' investment
portfolios. The action by Standard and Poor's was not a result of any specific analysis of the Company by Standard and Poor's.
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.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Company's market risk during the first six months of 2002. The Company has provided a
discussion of its market risks in Item 7A of Part II of the December 31, 2001 Form 10-K.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index
(b) None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
American Skandia Life
Assurance Corporation
(Registrant)
by: /s/Thomas M. Mazzaferro
-----------------------
Thomas M. Mazzaferro
Executive Vice President and
Chief Financial Officer
August 12, 2002
EXHIBIT INDEX
- - -------------
Exhibit Number Description Location
(2) Plan of acquisition, reorganization, arrangement, liquidation or None
succession
(4) Instruments defining the rights of security holders, including None
indentures
(10) Material Contracts None
(11) Statement re: computation of per share earnings None
(15) Letter re: unaudited interim financial information None
(18) Letter re: change in accounting principles None
(19) Report furnished to security holders None
(22) Published report regarding matters submitted to vote of security holders None
(23) Consents of experts and counsel None
(24) Power of attorney None
(99) Certification Page 19
Exhibit 99
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United
States Code), each of the undersigned officers of American Skandia Life Assurance Corporation, a Connecticut corporation (the
"Company"), does hereby certify, to such officer's knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended June 30, 2002 (the "Form 10-Q") of the Company fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-Q fairly
presents, in all material respects, the financial condition and results of operations of the Company.
Dated: August 12, 2002 /s/ Wade A. Dokken
--------------- ------------------
President and Chief Executive Officer
Dated: August 12, 2002 /s/ Thomas M. Mazzaferro
--------------- ------------------------
Executive Vice President, Chief Financial Officer and Director
The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and
(b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of a separate disclosure document.