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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2003
Commission file number: 33-44202
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 (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No
[ X ]
As of August 14, 2003, 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., an indirect
majority-owned subsidiary of Prudential Financial, Inc., a New Jersey corporation.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect majority-owned subsidiary of Prudential Financial, Inc., beginning May 1, 2003)
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Statements of Financial Position -
June 30, 2003 (unaudited) and December 31, 2002 3
Statement of Operations and Comprehensive Income (unaudited) -
Two months ended June 30, 2003 4
Consolidated Statements of Operations and Comprehensive Income (unaudited) -
Four months ended April 30, 2003 and six months ended June 30, 2002 5
Consolidated Statements of Operations and Comprehensive Income (unaudited) -
One month ended April 30, 2003 and three months ended June 30, 2002 6
Consolidated Statements of Shareholder's Equity -
Two months ended June 30, 2003 (unaudited), four months ended April 30, 2003
(unaudited) and year ended December 31, 2002 7
Statement of Cash Flows (unaudited) -
Two months ended June 30, 2003 8
Consolidated Statements of Cash Flows (unaudited) -
Four months ended April 30, 2003 and six months ended June 30, 2002 9
Notes to Unaudited Consolidated Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 25
Item 6. Exhibits and Reports on Form 8-K 27
Signature 28
Exhibit 31.1 - Section 302 Certification of the Chief Executive 29
Officer
Exhibit 31.2 - Section 302 Certification of the Chief Financial Officer 30
Exhibit 32.1 - Section 906 Certification of the Chief Executive Officer 31
Exhibit 32.2 - Section 906 Certification of the Chief Financial Officer 32
Forward-Looking Statement Disclosure
Certain of the statements included in this Quarterly Report on Form 10-Q, including but not limited to those in the Management's
Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of
the U.S. Private Securities Litigation Reform Act of 1995. Words such as "expects," "believes," "anticipates," "includes," "plans,"
"assumes," "estimates," "projects," "intends", or variations of such words are generally part of forward-looking statements.
Forward-looking statements are made based on management's current expectations and beliefs concerning future developments and their
potential effects upon American Skandia Life Assurance Corporation ("the Company"). There can be no assurance that future
developments affecting the Company will be those anticipated by management. These forward-looking statements are not a guarantee of
future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to
differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including without
limitation: general economic, market and political conditions, including the performance of financial markets, interest rate
fluctuations and the continuing negative impact of the current economic environment; various domestic or international military or
terrorist activities or conflicts; volatility in the securities markets; reestimates of our reserves for future policy benefits and
claims; changes in our assumptions related to deferred policy acquisition costs; our exposure to contingent liabilities; catastrophe
losses; investment losses and defaults; changes in our claims-paying or credit ratings; competition in our product lines and for
personnel; fluctuations in foreign currency exchange rates and foreign securities markets; the impact of changing regulation or
accounting practices; adverse litigation results; and changes in tax law. The Company does not intend, and is under no obligation,
to update any particular forward-looking statement included in this document.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect majority-owned subsidiary of Prudential Financial, Inc., beginning May 1, 2003)
Consolidated Statements of Financial Position
(in thousands except for number of shares and par value)
Successor Predecessor
June 30, December 31,
2003 2002
(unaudited)
ASSETS
Investments:
Fixed maturities - available for sale, at fair value (amortized
cost of $428,255 and $379,422, respectively) $ 433,879 $ 398,601
Equity securities - trading, at fair value (amortized cost of 57,001 -
$55,050)
Equity securities - available for sale, at fair value (amortized
cost of $52,017) - 51,769
Policy loans 7,776 7,559
Other short-term investments - 10,370
------- -------
Total investments 498,656 468,299
Cash and cash equivalents - 51,339
Deferred policy acquisition costs 27,151 1,117,544
Accrued investment income 4,049 4,196
Reinsurance receivable 4,616 5,447
Receivables from Parent and affiliates 1,743 3,961
Deferred tax asset 294,704 38,206
Present value of future profits 428,830 -
Other assets 50,212 113,980
Separate account assets 23,318,878 21,905,613
---------- ----------
Total assets $ 24,628,839 $ 23,708,585
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Policyholders' account balances $ 146,715 $ 140,496
Future policy benefits and other policyholder liabilities 11,304 8,853
Income taxes payable 36,681 6,547
Other liabilities 182,279 133,543
Payables to Parent and affiliates 4,589 2,223
Short-term borrowing 45,000 10,000
Future fees payable to American Skandia, Inc. ("ASI") 367,028 708,249
Surplus notes - 110,000
Separate account liabilities 23,318,878 21,905,613
---------- ----------
Total liabilities 24,112,474 23,025,524
---------- ----------
Contingencies and litigation (Note 12)
Shareholder's equity:
Common stock, $100 par value, 25,000 shares authorized,
issued and outstanding 2,500 2,500
Paid-in-capital 485,045 595,049
Retained earnings 25,184 73,821
Accumulated other comprehensive income 3,636 11,691
------- -------
Total shareholder's equity 516,365 683,061
------- -------
Total liabilities and shareholder's equity $ 24,628,839 $ 23,708,585
---------- ----------
---------- ----------
See notes to unaudited consolidated financial statements.
The purchase method of accounting was used to record the fair values of assets acquired and liabilities assumed by Prudential
Financial, Inc. and "pushed-down" to the Company. This accounting will most notably result in decreased amortization and
depreciation reported in future periods. Accordingly, the accompanying financial statements of the Company, when indirectly
wholly-owned by Skandia Insurance Company Ltd. and the Company, currently indirectly majority-owned by Prudential Financial, Inc. are
not comparable in all material respects.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect majority-owned subsidiary of Prudential Financial, Inc., beginning May 1, 2003)
Statement of Operations and Comprehensive Income - Successor
(in thousands)
Two Months Ended
June 30,
2003
(unaudited)
REVENUES
Premiums $ 1,746
Policy charges and fee income 58,109
Net investment income 12,046
Realized investment losses, net (74)
Asset management fees 15,465
Other income 2,585
------
Total revenues 89,877
------
BENEFITS AND EXPENSES
Policyholders' benefits 10,653
Interest credited to policyholders' account balances 860
General, administrative and other expenses 41,394
------
Total benefits and expenses 52,907
------
Income from operations before income taxes 36,970
------
Income taxes:
Current -
Deferred 11,786
------
Total income tax expense 11,786
------
Net income 25,184
------
Other comprehensive income, net of tax 3,636
------
Total comprehensive income $ 28,820
------
See notes to unaudited consolidated financial statements.
The purchase method of accounting was used to record the fair values of assets acquired and liabilities assumed by Prudential
Financial, Inc. and "pushed-down" to the Company. This accounting will most notably result in decreased amortization and
depreciation reported in future periods. Accordingly, the accompanying financial statements of the Company, when indirectly
wholly-owned by Skandia Insurance Company Ltd. and the Company, currently indirectly majority-owned by Prudential Financial, Inc. are
not comparable in all material respects.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect majority-owned subsidiary of Prudential Financial, Inc., beginning May 1, 2003)
Consolidated Statements of Operations and Comprehensive Income - Predecessor
(in thousands)
Four Months Six months Ended
Ended April 30, June 30,
2003 2002
(unaudited)
REVENUES
Premiums $ 1,926 $ 901
Policy charges and fee income 109,783 180,210
Net investment (losses) income (1,553) 6,059
Realized investment (losses) gains, net (3,370) 20,426
Asset management fees 28,092 52,169
Other income (1,825) (2,793)
------- -------
Total revenues 133,053 256,972
------- -------
BENEFITS AND EXPENSES
Policyholders' benefits 23,946 17,390
Interest credited to policyholders' account balances 13,693 29,226
General, administrative and other expenses 97,797 232,170
------- -------
Total benefits and expenses 135,436 278,786
------- -------
Loss from operations before income taxes (2,383) (21,814)
------- -------
Income taxes:
Current (452) (4,200)
Deferred (8,670) (5,843)
------- -------
Total income tax benefit (9,122) (10,043)
------- --------
Net income (loss) 6,739 (11,771)
------- --------
Other comprehensive income, net of tax 786 164
------- --------
Total comprehensive income (loss) $ 7,525 $ (11,607)
------- --------
------- --------
See notes to unaudited consolidated financial statements.
The purchase method of accounting was used to record the fair values of assets acquired and liabilities assumed by Prudential
Financial, Inc. and "pushed-down" to the Company. This accounting will most notably result in decreased amortization and
depreciation reported in future periods. Accordingly, the accompanying financial statements of the Company, when indirectly
wholly-owned by Skandia Insurance Company Ltd. and the Company, currently indirectly majority-owned by Prudential Financial, Inc. are
not comparable in all material respects.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect majority-owned subsidiary of Prudential Financial, Inc., beginning May 1, 2003)
Consolidated Statements of Operations and Comprehensive Income - Predecessor
(in thousands)
One Month Ended Three Months
April 30, Ended June 30,
2003 2002
(unaudited)
REVENUES
Premiums $ 888 $ 692
Policy charges and fee income 27,733 95,565
Net investment losses (2,758) (2,927)
Realized investment (losses) gains, net (2,935) 24,313
Asset management fees 7,040 26,001
Other income 49 (983)
------ -------
Total revenues 30,017 142,661
------ -------
------ -------
BENEFITS AND EXPENSES
Policyholders' benefits 6,025 12,406
Interest credited to policyholders' account balances 1,522 19,858
General, administrative and other expenses 3,525 141,374
------ -------
Total benefits and expenses 11,072 173,638
------ -------
Income (loss) from operations before income taxes 18,945 (30,977)
------ -------
Income taxes:
Current (456) (4,200)
Deferred 104 (7,546)
------ -------
Total income tax benefit (352) (11,746)
------ -------
Net income (loss) 19,297 (19,231)
------ -------
Other comprehensive income, net of tax 4,411 2,774
------ ------
Total comprehensive income (loss) $ 23,708 $ (16,457)
------ ------
------ ------
See notes to unaudited consolidated financial statements.
The purchase method of accounting was used to record the fair values of assets acquired and liabilities assumed by Prudential
Financial, Inc. and "pushed-down" to the Company. This accounting will most notably result in decreased amortization and
depreciation reported in future periods. Accordingly, the accompanying financial statements of the Company, when indirectly
wholly-owned by Skandia Insurance Company Ltd. and the Company, currently indirectly majority-owned by Prudential Financial, Inc. are
not comparable in all material respects.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect majority-owned subsidiary of Prudential Financial, Inc., beginning May 1, 2003)
Consolidated Statements of Shareholder's Equity
(in thousands)
Accumulated Other
Comprehensive Income
----------------------------
-------------- -------------
Additional Foreign Unrealized
Common Paid in Retained Currency Gains
Stock Capital Earnings Translation (Losses) Total
----------- ------------ ----------- -------------- ------------- ------------
----------- ------------ ----------- -------------- ------------- ------------
As of December 31, 2001 $2,500 $335,329 $239,078 $15 $746 $577,668
Net loss (165,257) (165,257)
Unrealized capital gains 10,434 10,434
Reclassification adjustment for
realized losses included in
realized investment losses, net 1,126 1,126
Foreign currency translation, net of
taxes (630) (630)
Capital contributions 259,720 259,720
----------- ------------ ----------- -------------- ------------- ------------
As of December 31, 2002 2,500 595,049 73,821 (615) 12,306 683,061
Net income 6,739 6,739
Unrealized capital gains 3,571 3,571
Reclassification adjustment for
realized gains included in
realized investment losses, net (3,400) (3,400)
Foreign currency translation, net of
taxes 615 615
Capital contributions 2,183 2,183
----------- ------------ ----------- -------------- ------------- ------------
As of April 30, 2003 2,500 597,232 80,560 - 12,477 692,769
Acquisition purchase accounting
adjustments - (112,187) (80,560) - (12,477) (205,224)
----------- ------------ ----------- -------------- ------------- ------------
As of April 30, 2003 opening balance
sheet 2,500 485,045 - - - 487,545
Net income 25,184 25,184
Unrealized capital gains 3,636 3,636
----------- ------------ ----------- -------------- ------------- ------------
As of June 30, 2003 $2,500 $485,045 $25,184 $- $3,636 $516,365
=========== ============ =========== ============== ============= ============
Unrealized capital gains is shown net of tax expense of $1,958, $1,923 and $5,618 for the two months ended June 30, 2003, for the
four months ended April 30, 2003 and year ended December 31, 2002, respectively. Reclassification adjustment for realized (gains)
losses included in realized investment losses, net is shown net of tax (benefit) expense of ($1,831) and $606 for the four months
ended April 30, 2003 and the year ended December 31, 2002, respectively. Foreign currency translation is shown net of tax expense
(benefit) of $331 and ($339) for the four months ended April 30, 2003 and the year ended December 31, 2002, respectively.
See notes to unaudited consolidated financial statements.
The purchase method of accounting was used to record the fair values of assets acquired and liabilities assumed by Prudential
Financial, Inc. and "pushed-down" to the Company. This accounting will most notably result in decreased amortization and
depreciation reported in future periods. Accordingly, the accompanying financial statements of the Company, when indirectly
wholly-owned by Skandia Insurance Company Ltd. and the Company, currently indirectly majority-owned by Prudential Financial, Inc. are
not comparable in all material respects.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect majority-owned subsidiary of Prudential Financial, Inc., beginning May 1, 2003)
Statement of Cash Flows - Successor
(in thousands)
Two Months Ended
June 30,
2003
(unaudited)
Cash flow from operating activities:
Net income $ 25,184
Adjustments to reconcile net income to net
cash provided by operating activities:
Realized investment losses, net 74
Amortization and depreciation 16,650
Change in:
Policy reserves 2,973
Accrued investment income 435
Net receivable/payable to Parent and affiliates 3,159
Policy loans (179)
Deferred policy acquisition costs (27,151)
Income taxes payable (877)
Reinsurance receivable 262
Other, net (1,969)
------
Net cash provided by operating activities 18,561
------
Cash flow from investing activities:
Purchase of fixed maturity investments (61,043)
Proceeds from sale and maturity of fixed maturity investments 35,964
Purchase of shares in equity securities and dividend
reinvestments (2,957)
Proceeds from sale of shares in equity securities 15,161
------
Net cash used in investing activities (12,875)
------
Cash flow from financing activities:
Decrease in future fees payable to ASI, net (21,244)
Deposits to contract owner accounts 13,271
Withdrawals from contract owner accounts (215,354)
Change in contract owner accounts, net of investment earnings 189,623
-------
Net cash used in financing activities (33,704)
------
Net decrease in cash and cash equivalents (28,018)
Cash and cash equivalents at beginning of period 28,018
------
Cash and cash equivalents at end of period $ -
------
------
Income taxes paid $ 877
------
------
Interest paid $ 2,773
------
------
See notes to unaudited consolidated financial statements.
The purchase method of accounting was used to record the fair values of assets acquired and liabilities assumed by Prudential
Financial, Inc. and "pushed-down" to the Company. This accounting will most notably result in decreased amortization and
depreciation reported in future periods. Accordingly, the accompanying financial statements of the Company, when indirectly
wholly-owned by Skandia Insurance Company Ltd. and the Company, currently indirectly majority-owned by Prudential Financial, Inc. are
not comparable in all material respects.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect majority-owned subsidiary of Prudential Financial, Inc., beginning May 1, 2003)
Consolidated Statements of Cash Flows - Predecessor
(in thousands)
Four Months Six Months Ended
Ended April 30, June 30,
2003 2002
(unaudited)
Cash flow from operating activities:
Net income (loss) $ 6,739 $ (11,771)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Realized investment losses (income), net 3,370 (20,426)
Amortization and depreciation 5,290 8,021
Change in:
Policy reserves 4,288 1,530
Accrued investment income (288) 197
Net receivable/payable to Parent and affiliates 1,275 (99,146)
Policy loans (38) (418)
Deferred policy acquisition costs (12,601) 26,181
Income taxes payable (463) (5,799)
Reinsurance receivable 569 1,104
Other, net (3,025) (64,612)
------- -------
Net cash provided by (used in) operating activities 5,116 (165,139)
------- -------
Cash flow from investing activities:
Purchase of fixed maturity investments (135,885) (206,479)
Proceeds from sale and maturity of fixed maturity investments 131,628 192,320
Purchase of shares in equity securities and dividend
reinvestments (24,809) (20,262)
Proceeds from sale of shares in equity securities 10,955 10,133
Net purchase of other short-term investments (9,442) (22,814)
Net proceeds from other short-term investments 10,461 35,768
------- ------
Net cash used in investing activities (17,092) (11,334)
------- ------
Cash flow from financing activities:
Capital contribution 2,183 61,980
Decrease in future fees payable to ASI, net (63,343) 9,424
Net increase in short-term borrowing 35,000 115,270
Deposits to contract owner accounts 356,539 184,202
Withdrawals from contract owner accounts (63,357) (70,779)
Change in contract owner accounts, net of investment earnings (279,314) (97,071)
------- ------
Net cash (used in) provided by financing activities (12,292) 203,026
------- -------
Net (decrease) increase in cash and cash equivalents (24,268) 26,553
Change in foreign currency translation, net 947 (794)
Cash and cash equivalents at beginning of period 51,339 -
------- ------
Cash and cash equivalents at end of period $ 28,018 $ 25,759
------- ------
------- ------
Income taxes paid $ 13 $ 1,598
------- ------
------- ------
Interest (received) paid $ (7,788) $ 10,963
------- ------
------- ------
See notes to unaudited consolidated financial statements.
The purchase method of accounting was used to record the fair values of assets acquired and liabilities assumed by Prudential
Financial, Inc. and "pushed-down" to the Company. This accounting will most notably result in decreased amortization and
depreciation reported in future periods. Accordingly, the accompanying financial statements of the Company, when indirectly
wholly-owned by Skandia Insurance Company Ltd. and the Company, currently indirectly majority-owned by Prudential Financial, Inc. are
not comparable in all material respects.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect majority-owned subsidiary of Prudential Financial, Inc., beginning May 1, 2003)
Notes to Unaudited Consolidated Financial Statements
June 30, 2003
(dollars in thousands)
1. ORGANIZATION AND OPERATION
American Skandia Life Assurance Corporation (the "Company"), with its principal offices in Shelton, Connecticut, is an indirect
majority-owned subsidiary of Prudential Financial, Inc. ("Prudential Financial"). On December 19, 2002, Skandia Insurance
Company Ltd. (publ) ("SICL"), an insurance company organized under the laws of the Kingdom of Sweden, and the ultimate parent
company of the Company prior to May 1, 2003, entered into a definitive purchase agreement with Prudential Financial, a New
Jersey corporation, whereby Prudential Financial would acquire the Company and certain of its affiliates (the "Acquisition").
On May 1, 2003, the first step of the Acquisition was consummated. This step included Prudential Financial acquiring 90% of
Skandia U.S. Inc.'s ("SUSI"), an indirect parent of the Company, outstanding common stock. Under an agreement entered into on
May 1, 2003 ("the date of acquisition"), Prudential Financial has the right to acquire the remaining 10% of SUSI's outstanding
common stock beginning July 30, 2003, which right extends to September 13, 2003. Additionally, under the same agreement, SICL
has the right to require Prudential Financial to acquire the remaining 10% of SUSI's common stock beginning September 8, 2003,
which right extends to September 13, 2003 (see Notes 9 and 10 for additional information on the Acquisition).
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 deferred and immediate
annuities for individuals and groups in the United States of America and its territories.
2. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of 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 two month period ended June 30, 2003, the four month period ended April 30, 2003 and the one month
period ended April 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December
31, 2003. In addition, the purchase method of accounting was used to record the fair values of assets acquired and
liabilities assumed by Prudential Financial and "pushed-down" to the Company. This accounting will most notably result in
decreased amortization and depreciation reported in future periods. Accordingly, the accompanying financial statements of
the Company, when indirectly wholly-owned by Skandia Insurance Company Ltd. and the Company, currently indirectly
majority-owned by Prudential Financial are not comparable in all material respects.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect majority-owned subsidiary of Prudential Financial, Inc., beginning May 1, 2003)
Notes to Unaudited Consolidated Financial Statements (continued)
2. BASIS OF PRESENTATION (continued)
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, 2002.
Certain reclassifications have been made to prior period amounts to conform to the current period presentation.
3. NEW ACCOUNTING POLICIES AND ACCOUNTING PRONOUNCEMENTS
In July, 2003, the Accounting Standards Executive Committee ("AcSEC") of the American Institute Of Certified Public
Accountants ("AICPA") issued Statement of Position ("SOP") 03-01, "Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate Accounts." AcSEC has developed the SOP to address the
evolution of product designs since the issuance of SFAS No. 60, "Accounting and Reporting by Insurance Enterprises," and
SFAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains
and Losses from the Sale of Investments" and the need for interpretive guidance to be developed in three areas: separate
account presentation and valuation; the accounting recognition given sales inducements (bonus interest, bonus credits,
persistency bonuses); and, the classification and valuation of long-duration contract liabilities.
The most significant accounting implications of the SOP are as follows: (1) reporting and measuring assets and liabilities
of separate account products as general account assets and liabilities when specified criteria are not met; (2) reporting
and measuring seed money in separate accounts as general account assets based on the insurer's proportionate beneficial
interest in the separate account's underlying assets; (3) capitalizing sales inducements that meet specified criteria and
amortizing such amounts over the life of the contracts using the same methodology as used for amortizing deferred
acquisition costs, but immediately expensing those sales inducements accrued or credited if such criteria are not met; (4)
recognizing contract holder liabilities for: (a) modified guaranteed (market value adjusted) annuities at accreted balances
that do not include the then current market value surrender adjustment, (b) two-tier annuities at the lower
(non-annuitization) tier account value, (c) persistency bonuses at amounts that are not reduced for expected forfeitures,
(d) group pension participating and similar general account "pass through" contracts that are not accounted for under SFAS
No. 133 at amounts based on the fair value of the assets or index that determines the investment return pass through; (5)
establishing an additional liability for guaranteed minimum death and similar mortality and morbidity benefits only for
contracts determined to have mortality and morbidity risk that is other than nominal and when the risk charges made for a
period are not proportionate to the risk borne during that period; and (6) for contracts containing an annuitization
benefits contract feature, if such contract feature is not accounted for under the provisions of SFAS No. 133 establishing
an additional liability for the contract feature if the present value of expected annuitization payments at the expected
annuitization date exceeds the expected account balance at the expected annuitization date.
The provisions of the SOP are effective for financial statements for fiscal years beginning after December 15, 2003, and, as
such, the Company will adopt the SOP effective January 1, 2004. The effect of initially adopting this SOP will be reported
as a cumulative effect of a change in accounting principle with restatement of prior financial statements
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect majority-owned subsidiary of Prudential Financial, Inc., beginning May 1, 2003)
Notes to Unaudited Consolidated Financial Statements (continued)
3. NEW ACCOUNTING POLICIES AND ACCOUNTING PRONOUNCEMENTS (continued)
prohibited. The Company is currently completing the assessment of the impact of the proposed SOP on its operations;
however, we do not believe that the implementation of the SOP will have a material effect on the Company's consolidated
financial position.
4. TRADING SECURITIES
As of the date of acquisition, the Company changed its classification of equity securities held in support of a deferred
compensation plan from available-for-sale to trading. New management made this decision to align with Prudential
Financial's accounting policy. These equity securities were fair valued on May 1, 2003 under purchase accounting and,
therefore, there was no income statement impact for the change in classification. Such investments are now carried at fair
value with changes in unrealized gains and losses reported in the Statement of Operations and Comprehensive Income, as a
component of "Other Income".
5. SHORT-TERM BORROWING AND SURPLUS NOTES
As of June 30, 2003 and December 31, 2002, the Company had a $10,000 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 1.71% and matures on July
30, 2003. Interest expense related to this borrowing amounted to $29 for the two months ended June 30, 2003 and $14 and $60
for the one and four months ended April 30, 2003, respectively.
On January 3, 2002, the Company entered into a $150,000 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 $97 for the two months ended June
30, 2003 and $38 and $56 for the one and four months ended April 30, 2003, respectively. As of June 30, 2003, $35,000 was
outstanding under this credit facility.
On May 1, 2003, the Company converted surplus notes to paid in capital as part of the Acquisition. The conversion included
the principal amount of $110,000 and related interest of $32,225. Interest expense for the four and one month ended April
30, 2003 was $2,995 and $749, respectively.
6. FOREIGN ENTITY
Prior to April 30, 2003, the Company had a 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 shareholders' equity of $5,023 as of December 31, 2002 and
had generated losses of $2,207 and $374 for the four and one months ended April 30, 2003, respectively, and $1,410 and $717
for the six and three months ended June 30, 2002, respectively. As part of the Acquisition, the Company sold its ownership
interest in Skandia Vida to SICL on April 30, 2003 for $4,625. This transaction resulted in a loss of $422.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect majority-owned subsidiary of Prudential Financial, Inc., beginning May 1, 2003)
Notes to Unaudited Consolidated Financial Statements (continued)
7. INCOME TAXES
The Company recorded income tax expense (benefit) of $11,786 for the two months ended June 30, 2003, ($9,122) and ($352) for
the four and one months ended April 30, 2003, respectively, and ($10,043) and ($11,746) for the six and three months ended
June 30, 2002, respectively. The effective income tax rate for all periods presented varied from the corporate rate of 35%
due primarily to the deduction for dividends received.
8. DEFERRED ACQUISITION COSTS
The costs of acquiring new business, which vary with and are primarily related to new business generated, are being
deferred, net of reinsurance. These costs include commissions, costs of contract issuance, and certain selling expenses
that vary with production. The deferred policy acquisition cost asset was assigned a fair value of zero, net of tax, as
part of purchase accounting. Amortization expense (benefit) related to deferred acquisition costs was $268 for the two
months ended June 30, 2003, ($9,807) and $46,791 for the one and four months ended April 30, 2003, respectively, and
$133,875 and $93,562 for the six and three months ended June 30, 2002, respectively.
9. PURCHASE PRICE
Prudential Financial's acquisition of SUSI was accounted for by applying the purchase method of accounting prescribed by
Statement of Financial Accounting Standards No. 141 through "push-down" accounting. Accordingly, the assets and liabilities
assumed of SUSI and its wholly owned subsidiaries, including the Company, were recorded at their fair values as of the date
of acquisition. The allocation of the purchase price attributed to the Company at May 1, 2003, was as follows:
Total investments at market value $ 479,046
Cash and cash equivalents 28,018
Valuation of business acquired ("VOBA") 440,130
Other assets at fair value 352,235
Separate account assets 22,311,085
Policyholder account balances (167,505)
Other liabilities at fair value (644,379)
Separate account liabilities (22,311,085)
----------
Total purchase price $ 487,545
----------
----------
10. VALUATION OF BUSINESS ACQUIRED
VOBA represents the present value of future profits embedded in the acquired contracts. The VOBA is determined by estimating
the net present value of future cash flows expected to result from contracts in force at the date of the transaction. Future
positive cash flows include fees and other charges assessed to the contracts for as long as they remain in force as well as
fees collected upon surrender, while future negative cash flows include costs to administer the contracts, and benefit
payments including payments under the guaranteed minimum death benefit ("GMDB") provisions of the contracts. VOBA will be
amortized over the expected life of the contracts (approximately 25 years) in proportion to estimated gross profits arising
principally from investment results, mortality and expense margins, and surrender charges based upon historical and
estimated future experience, which is updated periodically.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect majority-owned subsidiary of Prudential Financial, Inc., beginning May 1, 2003)
Notes to Unaudited Consolidated Financial Statements (continued)
10. VALUATION OF BUSINESS ACQUIRED (continued)
The GMDB provides annuity contract holders with a guarantee that the benefit received at death will be no less than a
prescribed minimum amount. This minimum amount is based on the net deposits paid into the contract, the net deposits
accumulated at a specified rate, the highest historical account value on a contract anniversary, or the greatest of these
values, depending on features offered in various contracts and elected by the contract holders. These contracts generally
require payment of additional charges for guarantees other than those based on net deposits paid into the contract. To the
extent that the guaranteed minimum death benefit is higher than the current account value at the time of death, the Company
may incur a loss on the contract. This results in increased annuity policy benefits in periods of declining financial
markets, and also in periods of stable financial markets following a decline. Current accounting literature does not
prescribe recognition of a liability for the expected future net costs associated with these guarantees, and accordingly,
the historical consolidated statements of financial position and the unaudited interim statements of financial position of
the Company do not reflect a liability corresponding to these projected future obligations for death benefits in excess of
annuity account values. However, AICPA Statement of Position 03-01, "Accounting and Reporting by Insurance Enterprises for
Certain Nontraditional Long-Duration Contracts and for Separate Accounts" (the "SOP"), effective for fiscal years beginning
after December 15, 2003, requires the recording of a liability associated with these guarantees under certain
circumstances. For contracts classified as insurance contracts that have amounts assessed against contractholders each
period for the insurance benefit features that are assessed in a manner that is expected to result in profits in earlier
years and subsequent losses from that insurance benefit function, a liability is required to be established in addition to
the account balance to recognize the portion of such assessments that compensates the insurance enterprise for benefits to
be provided in future periods. In valuing the contracts acquired, the Company considered the negative cash flows of future
benefit obligations associated with the GMDB on those contracts.
Upon adoption of the SOP on January 1, 2004, the Company will establish an explicit liability for GMDB associated with the
acquired contracts. This will result in an increase in VOBA and higher future amortization. The higher amortization will
be partially offset by lower benefit expenses, as a portion of the future guaranteed minimum death benefit costs would be
charged against the explicit GMDB liability.
Details of VOBA and related interest and amortization for the two months ended June 30, 2003 is as follows:
Balance, May 1, 2003 $ 440,130
Interest 4,151
Amortization (15,451)
-------
Balance, June 30, 2003 $ 428,830
-------
-------
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect majority-owned subsidiary of Prudential Financial, Inc., beginning May 1, 2003)
Notes to Unaudited Consolidated Financial Statements (continued)
10. VALUATION OF BUSINESS ACQUIRED (continued)
Estimated future amortization of VOBA as of June 30, 2003 is as follows:
2003 $ 29,911
2004 55,231
2005 49,202
2006 43,514
2007 37,329
2008 and thereafter 213,643
-------
Total $ 428,830
-------
-------
11. RELATED PARTY TRANSACTIONS
In accordance with a revenue sharing agreement with American Skandia Investment Services, Incorporated, the Company receives
fee income from policyholder account balances invested in the American Skandia Trust. These revenues are recorded as "Asset
management fees" in the Consolidated Statements of Operations and Comprehensive Income.
12. CONTINGENCIES AND LITIGATION
The Company is subject to legal and regulatory actions in the ordinary course of their businesses, including class actions.
Pending legal and regulatory actions include proceedings relating to aspects of the business and operations that are
specific to the Company and that are typical of the businesses in which the Company operates. Class action and individual
lawsuits involve a variety of issues and/or allegations, which include sales practices, underwriting practices, claims
payment and procedures, premium charges, policy servicing and breach of fiduciary duties to customers. We are also subject
to litigation arising out of our general business activities, such as our investments and third party contracts. In certain
of these matters, the plaintiffs are seeking large and/or indeterminate amounts, including punitive or exemplary damages.
In recent years, a number of annuity companies have been named as defendants in class action lawsuits relating to the use of
variable annuities as funding vehicles for tax-qualified retirement accounts. The Company is currently a defendant in one
lawsuit, a purported nationwide class action complaint, filed in the United States District Court for the Southern District
of New York in December 2002, Donovan v. American Skandia Life Ass. Corp. et al. The complaint alleges that the Company and
certain of its affiliates violated federal securities laws in marketing variable annuities and seeks injunctive relief and
compensatory damages in unspecified amounts. In July 2003, the court granted the Company's motion to dismiss the complaint
with prejudice. The time to appeal has not expired.
The Company's litigation is subject to many uncertainties, and given the complexity and scope, the outcomes cannot be
predicted. It is possible that the results of operations or the cash flow of the Company in a particular quarterly or
annual period could be materially affected by an ultimate unfavorable resolution of pending litigation and regulatory
matters. Management believes, however, that the ultimate outcome of all pending litigation and regulatory matters should
not have a material adverse effect on the Company's financial position.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect majority-owned subsidiary of Prudential Financial, Inc., beginning May 1, 2003)
Notes to Unaudited Consolidated Financial Statements (continued)
12. CONTINGENCIES AND LITIGATION (continued)
It should be noted that the judgments, settlements and expenses associated with many of these lawsuits, including the
Donovan complaint, may fall within the purview of SICL's indemnification obligations to Prudential Financial and its
subsidiaries, including the Company, pursuant to the agreement governing the Acquisition. Those obligations of SICL provide
for indemnification of certain judgments, settlements and expenses associated with lawsuits of the Company, which have costs
and expenses in excess of $25 individually. Further, SICL's indemnification obligations arise only in the event that a
total of $10,000 is spent by Prudential Financial in connection with the resolution of lawsuits and other various matters
involving the Company and any of its parent companies and affiliates, subject to the Acquisition. Amounts applied toward
this $10,000 retention are subject to reduction for insurance proceeds, certain accruals and any tax benefit applicable to
such amounts. Similarly, any tax cost incurred would be added to any such amounts to be applied toward this retention.
13. SEGMENT REPORTING
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", and the Company does not anticipate that they will be so in the future.
******************************************************************************************************
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect majority-owned subsidiary of Prudential Financial, Inc., beginning May 1, 2003)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Six and Three Months ended June 30, 2003
(dollars in thousands)
Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the June 30,
2003 unaudited 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") 2002 Annual Report on
Form 10-K.
For purposes of Management's Discussion and Analysis of Financial Condition and Results of Operations, no explicit distinction is
made between the pre-purchase accounting periods and the post purchase accounting periods.
General
The Company, with its principal offices in Shelton, Connecticut, is an indirect majority-owned subsidiary of Prudential Financial, Inc.
("Prudential Financial"). On December 19, 2002, Skandia Insurance Company Ltd. (publ) ("SICL"), an insurance company organized under
the laws of the Kingdom of Sweden, and the ultimate parent company of the Company prior to May 1, 2003, entered into a definitive
purchase agreement with Prudential Financial, a New Jersey corporation, whereby Prudential Financial would acquire the Company and
certain of its affiliates (the "Acquisition"). On May 1, 2003, the first step of the Acquisition was consummated. This step included
Prudential Financial acquiring 90% of Skandia U.S., Inc.'s ("SUSI"), an indirect parent of the Company, outstanding common stock.
Under an agreement entered into on May 1, 2003 ("the date of acquisition"), Prudential Financial has the right to acquire the remaining
10% of SUSI's outstanding common stock beginning July 30, 2003, which right extends to September 13, 2003. Additionally, under the
same agreement, SICL has the right to require Prudential Financial to acquire the remaining 10% of SUSI's common stock beginning
September 8, 2003, which right extends to September 13, 2003 (see Notes 9 and 10 in the June 30, 2003 financial statements included
herein for additional information on the Acquisition).
Prior to April 30, 2003, the Company had a 99.9% ownership in Skandia Vida, S.A. de C.V. ("Skandia Vida") which is a life insurance
company domiciled in Mexico. As part of the Acquisition, the Company sold its ownership interest in Skandia Vida to SICL on April
30, 2003 for $4,625. This transaction resulted in a loss of $422.
The Company was established in 1988 and is a significant provider of variable annuity contracts for the individual market in the
United States. Affiliates of the Company 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 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 contracts, which is principally correlated to equity market performance, 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 with fixed interest rate investment options that include a market
value adjustment feature; b) certain other fixed deferred annuities that are not registered with the Securities and Exchange
Commission; and c) fixed, adjustable and variable immediate annuities.
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. Although
the Company is active in each of those distribution channels, the majority of the Company's sales have come from independent
financial planners. The Company has selling agreements with approximately twelve hundred broker/dealer firms and financial
institutions.
Although many of the Company's competitors have acquired or are looking to acquire their distribution channels as a means of securing
sales, the Company has not done so. Instead, the Company believes its 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 and three months ended June 30, 2003 totaled $1,502,733 and $798,838,
respectively, compared to sales of $1,763,271 and $951,385, respectively, for the same periods in 2002. The Company believes that
its sales, generally consistent with the variable annuity industry, have been negatively impacted by the equity markets continued
poor performance and volatility during 2002 and into early 2003. In addition, ratings downgrades and uncertainty around the
Company's ownership further deteriorated sales levels, principally beginning in the third quarter of 2002. Sales have improved in the
second quarter of 2003 compared to the first quarter. The Company believes that this is primarily due to the close of the
transaction with Prudential Financial, as well as improvement in the equity markets and the overall economic outlook.
Average assets under management were $22,157,265 in the first six months of 2003 and $25,148,491 for the equivalent 2002 period,
representing a decrease of 12%. This decrease can be attributed to the poor fund performance in 2002 which deteriorated asset
levels, as well as higher than expected lapses driven by factors similar to those impacting sales. As a result of lower average
assets under management, asset-based fees, including mortality and expense ("M&E") charges, which are reported in "Policy Charges and
Fee Income", and asset management fees decreased in 2003 compared to 2002. This decrease in asset-based fees was partially offset by
higher surrender charge revenue due to the increased lapses.
Net investment income increased for the six and three months ended June 30, 2003 as compared to the same period in 2002 principally
driven by increased net investment results of $8,812 and $12,933 for the six and three months ended June 30, 2003, respectively, on
the Company's separate account supporting its fixed, market value adjusted investment option.
Net realized investment gains (losses) for the six and three months ended June 30, 2003 decreased compared to the same periods in
2002. This decline resulted primarily from increased hedge related losses from the Company's derivative investments of $29,430 and
$29,949 for the six and three months ended June 30, 2003, respectively. Hedge related losses were partially offset by increased
realized gains of $5,560 and $2,628 for the six and three months ended June 30, 2003, respectively, on sales of fixed maturities.
Policyholders' benefits increased for the six and three months of 2003 compared to the same periods in 2002 principally driven by a
$12,325 and $4,043 increase of guaranteed minimum death benefit claims for the six and three months ended June 30, 2003,
respectively, due to the decline in fund performance over the comparable prior year periods. Guaranteed minimum death benefit
payments were $32,702 and $14,312 for the six and three months ended June 30, 2003, respectively, compared to $20,377 and $10,269,
respectively, for the same periods in 2002. As of June 30, 2003, the death benefit coverage in force (representing the amount that
we would have to pay if all annuitants had died on that date) was approximately $4.8 billion. The death benefit coverage in force
represents the excess of the guaranteed benefit amount over the account value. The guaranteed minimum death benefit feature provides
annuity contract holders with a guarantee that the benefit received at death will be no less than a prescribed minimum amount. This
minimum amount is generally based on the net deposits paid into the contract and, for greater than 80% of the business in force as of
June 30, 2003, this minimum guarantee is applicable only for the first ten contract years or until a specified attained age. To the
extent that the guaranteed minimum death benefit is higher than the current account value at the time of death, we incur a cost. This
results in increased annuity policy benefits in periods of declining financial markets and in periods of stable financial markets
following a decline. Current accounting literature does not prescribe advance recognition of the expected future net costs
associated with these guarantees, and accordingly, we currently do not record a liability corresponding to these projected future
obligations for death benefits in excess of annuity account values. However, we consider the expected net costs associated with
these guarantees in our calculations of expected gross profits on variable annuity business, on which our periodic evaluations of
unamortized deferred policy acquisition costs and valuation of business acquired ("VOBA") are based. AICPA Statement of Position
03-01, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate
Accounts." (the "SOP"), effective for financial statements for fiscal years beginning after December 15, 2003, will require the
recording of a liability for the expected net costs associated with these guarantees under certain circumstances. For contracts
classified as insurance contracts that have amounts assessed against contractholders each period for the insurance benefit features
that are assessed in a manner that is expected to result in profits in earlier years and subsequent losses from that insurance
benefit function, a liability is required to be established in addition to the account balance to recognize the portion of such
assessments that compensates the insurance enterprise for benefits to be provided in future periods. In valuing the contracts
acquired, the Company considered the negative cash flows of future benefit obligations associated with the GMDB on those contracts.
Upon adoption of the SOP on January 1, 2004, the Company will establish an explicit liability for GMDB associated with the acquired
contracts. This will result in an increase in VOBA and higher future amortization. The higher amortization will be partially
offset by lower benefit expenses, as a portion of the future guaranteed minimum death benefit costs would be charged against the
explicit GMDB liability.
Interest credited to policyholders' account balances decreased for the first six and three months of 2003 compared to the same
periods in 2002 primarily due to decreased amortization of deferred purchase credits consistent with decreased amortization of
deferred acquisition costs. See discussion on amortization of deferred acquisition costs below.
Underwriting, acquisition and other insurance expenses for the six and three months ended June 30, 2003 and 2002 were as follows:
For the six months ended June 30, 2003 2002
Commissions $ 93,124 $107,711
General operating expenses 61,489 75,583
Amortization of VOBA, net 11,300 -
Acquisition costs deferred (73,781) (84,999)
Amortization of deferred acquisition costs 47,059 133,875
------- -------
General, administrative and other expenses $ 139,191 $ 232,170
------- -------
------- -------
For the three months ended June 30, 2003 2002
Commissions $ 51,323 $58,903
General operating expenses 31,816 36,419
Amortization of VOBA, net 11,300 -
Acquisition costs deferred (39,981) (47,510)
Amortization of deferred acquisition costs (9,539) 93,562
------- -------
General, administrative and other expenses $ 44,919 $ 141,374
------- -------
Commissions for the first six and three months of 2003 declined in comparison to the same period in 2002 primarily due to a decline
in asset based commissions consistent with the decline in assets under management and a decline in initial commissions consistent
with the decline in sales over the same periods. General operating expenses decreased during the first six and three months of 2003
as compared to the same periods in the prior year principally as a result of a $10,275 and $1,722 decrease in interest expense for
the six and three months ended June 30, 2003, respectively, 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. As a result of 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 decline in acquisition costs deferred was consistent with the decline in initial
commissions described above. Amortization of deferred acquisition costs decreased for the six and three months ended June 30, 2003,
as compared to the same periods in 2002. As of the date of acquisition, the Company's deferred acquisition cost asset was assigned a
fair value of zero, consistent with purchase accounting guidance. Amortization of the Company's deferred acquisition costs
subsequent to the acquisition was $268 for the two months ended June 30, 2003. In addition, at the date of the acquisition, the
Company established an asset for the value of business acquired (see Note 10 in the June 30, 2003 financial statements included
herein for further discussion). Amortization of this asset amounted to $11,300 for the two months ended June 30, 2003.
The Company's income tax expense (benefit) varies with increases or decreases in income (loss) from operations. The effective income
tax rate varied from the corporate rate of 35% due primarily to the deduction for dividends received.
Total assets and liabilities as of June 30, 2003 increased $920,254 and $1,086,950, respectively, from December 31, 2002. This change
resulted primarily from the improving equity markets over the first six months of 2003, in particular the months of May and June, 2003
partially offset by purchase accounting adjustments.
Significant Accounting Policies
In accordance with purchase accounting guidelines, the Company "fair valued" its assets and liabilities as of the date of
acquisition. The most significant adjustments related to the value of the unamortized deferred acquisition cost asset being assigned
a value of zero, the future fees payable to ASI liability was decreased by $256,634 and an asset for the value of business acquired
was established for $440,130 (see Notes 9 and 10 in the June 30, 2003 financial statements included herein for further discussion).
As of the date of acquisition, the Company changed its classification of equity securities held in support of a deferred compensation
plan from available-for-sale to trading. New management made this decision to align with Prudential Financial's accounting policy.
These equity securities were fair valued on May 1, 2003 under purchase accounting and therefore there was no income statement impact
for the change in classification. Such investments are now carried at fair value with changes in unrealized gains and losses
reported in the Statement of Operations and Comprehensive Income, as a component of Other Income.
For additional information on the Company's significant accounting policies, see Management's Discussion and Analysis of Financial
Condition and Results of Operations in the Company's audited consolidated financial statements on Form 10-K for the year ended
December 31, 2002.
Liquidity and Capital Resources
The Company's liquidity requirements have generally been met by cash from insurance operations, investment activities, borrowings
from ASI, reinsurance, capital contributions and securitization transactions with ASI.
The Company's cash from insurance operations is primarily comprised of fees generated off of assets under management, less commission
expense on sales, sales and marketing expenses and other operating expenses. Fund performance driven by the equity markets directly
impacts assets under management and therefore, the fees the Company can generate off of those assets. During the first half of 2003,
assets under management declined consistent with the equity market declines over the same period in the prior year resulting in
reductions in fee revenues.
In order to fund the cash strain generated from acquisition costs on historical and on-going sales, the Company has relied on cash
generated from its direct insurance operations as well as reinsurance and securitization transactions. The Company has used modified
coinsurance reinsurance arrangements whereby the reinsurer shares in the experience of a specified book of business. These
reinsurance transactions result in the Company receiving from the reinsurer an upfront ceding commission on the book of business
ceded in exchange for the reinsurer receiving the future fees generated from that book of business. These reinsurance agreements
also mitigate the recoverability risk associated with the payment of up-front commissions and other acquisition costs. Similarly,
the Company has entered into securitization transactions whereby the Company issues to ASI, in exchange for cash, the right to
receive future fees generated off of a specific book of business.
As of June 30, 2003 and December 31, 2002, the Company had short-term borrowings of $45,000 and $10,000, respectively, and had
long-term surplus notes liabilities of $110,000 at December 31, 2002. On May 1, 2003, the Company converted surplus notes to paid in
capital as part of purchase accounting adjustments. The conversion included the principal amount of $110,000 and related interest of
$32,225.
As of June 30, 2003 and December 31, 2002, shareholder's equity totaled $516,365 and $683,061, respectively. The Company received
capital contributions of $2,183 from ASI during 2003. Of this, $1,284 was received to support its investment in Skandia Vida, which was
sold to SICL on April 30, 2003 (see Note 4 in the June 30, 2003 financial statements for further discussion). Purchase accounting
adjustments, including assigning the Company's deferred acquisition cost asset a fair value of zero, net of tax, partially offset by the
establishment of a VOBA asset and the fair value adjustment to the liability for future fees payable to ASI, related to the sale of the
Company to Prudential Financial contributed to the change in shareholder's equity in 2003.
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.
The Company has sold variable annuity contracts containing guaranteed minimum death benefits (GMDBs) that reduce on a
dollar-for-dollar basis when a partial withdrawal occurs. Currently there is ambiguity as to the correct interpretation and
application of Actuarial Guideline XXXIII, "Determining CARVM Reserves for Annuity Contracts with Elective Benefits" (AG XXXIII) and
Actuarial Guideline XXXIV, "Variable Annuity Minimum Guaranteed Death Benefit Reserves" (AG XXXIV) in determining statutory reserves
for these products. In calculating the statutory GMDB reserves for these variable annuity contracts under AG XXXIV, the Company does
not consider the potential benefit stream where all policyholders immediately elect to maximize partial withdrawals under these
policies. This is consistent with the method applied in the prior year.
At the time of issuance of these financial statements, neither the NAIC nor the Connecticut Insurance Department, which is ultimately
responsible for determining the appropriate reserving methods for the statutory financial statements of Connecticut-domiciled
insurance companies, has provided specific guidance as to the correct interpretation of AG XXXIII and AG XXXIV with respect to
statutory GMDB reserves required for variable annuity contracts containing dollar-for-dollar withdrawal provisions. However, the
Connecticut Insurance Department conducted a financial examination on the Company during 2001 and the statutory reserves calculated
under the current method were deemed to meet minimum standards for Companies domiciled in the State of Connecticut. As a result, the
Connecticut Insurance Department has allowed the Company to continue to follow its current method of reserving on a statutory basis
for these variable annuity contracts. until such time that guidance is issued that clarifies the ambiguity between AG XXXIII and AG
XXXIV.
Although ambiguity exists, alternative interpretations of AG XXXIII and AG XXXIV, under which contractholders are assumed to
immediately maximize partial withdrawals, could result in an increase in statutory reserves that would be significantly in excess of
statutory surplus, resulting in a statutory surplus deficit.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(an indirect majority-owned subsidiary of Prudential Financial, Inc., beginning May 1, 2003)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of change in the value of financial instruments as a result of absolute or relative changes in interest
rates, foreign currency exchange rates or equity or commodity prices. To varying degrees, the investment activities supporting all of
our products and services generate market risks. There have been no material changes to the Company's market risk exposures from
December 31, 2002. The Company has provided a discussion of its market risks in Item 7A of Part II of the December 31, 2002 Form
10-K.
ITEM 4. CONTROLS AND PROCEDURES
In order to ensure that the information we must disclose in our filings with the Securities and Exchange Commission is recorded,
processed, summarized, and reported on a timely basis, the Company's management, including our Chief Executive Officer and Chief
Financial Officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures, as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e), as of June 30, 2003. Based on such evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that, as of June 30, 2003, our disclosure controls and procedures were effective in timely alerting them to
material information relating to us (and our consolidated subsidiaries) required to be included in our periodic SEC filings. There
has been no change in our internal control over financial reporting during the quarter ended June 30, 2003, that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to legal and regulatory actions in the ordinary course of their businesses, including class actions. Pending
legal and regulatory actions include proceedings relating to aspects of the business and operations that are specific to the Company
and that are typical of the businesses in which the Company operates. Class action and individual lawsuits involve a variety of
issues and/or allegations, which include sales practices, underwriting practices, claims payment and procedures, premium charges,
policy servicing and breach of fiduciary duties to customers. We are also subject to litigation arising out of our general business
activities, such as our investments and third party contracts. In certain of these matters, the plaintiffs are seeking large and/or
indeterminate amounts, including punitive or exemplary damages.
In recent years, a number of annuity companies have been named as defendants in class action lawsuits relating to the use of variable
annuities as funding vehicles for tax-qualified retirement accounts. The Company is currently a defendant in one lawsuit, a
purported nationwide class action complaint, filed in the United States District Court for the Southern District of New York in
December 2002, Donovan v. American Skandia Life Ass. Corp. et al. The complaint alleges that the Company and certain of its
affiliates violated federal securities laws in marketing variable annuities and seeks injunctive relief and compensatory damages in
unspecified amounts. In July 2003, the court granted the Company's motion to dismiss the complaint with prejudice. The time to
appeal has not expired.
The Company's litigation is subject to many uncertainties, and given the complexity and scope, the outcomes cannot be predicted. It
is possible that the results of operations or the cash flow of the Company in a particular quarterly or annual period could be
materially affected by an ultimate unfavorable resolution of pending litigation and regulatory matters. Management believes,
however, that the ultimate outcome of all pending litigation and regulatory matters should not have a material adverse effect on the
Company's financial position.
It should be noted that the judgments, settlements and expenses associated with many of these lawsuits, including the Donovan
complaint, may fall within the purview of SICL's indemnification obligations to Prudential Financial and its subsidiaries, including
the Company, pursuant to the agreement governing the Acquisition. Those obligations of SICL provide for indemnification of certain
judgments, settlements and expenses associated with lawsuits of the Company, which have costs and expenses in excess of $25
individually. Further, SICL's indemnification obligations arise only in the event that a total of $10,000 is spent by Prudential
Financial in connection with the resolution of lawsuits and other various matters involving the Company and any of its parent
companies and affiliates, subject to the Acquisition. Amounts applied toward this $10,000 retention are subject to reduction for
insurance proceeds, certain accruals and any tax benefit applicable to such amounts. Similarly, any tax cost incurred would be added
to any such amounts to be applied toward this retention.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Information required by Item 701(f) of Regulation S-K:
(1) The Company offers a market value adjustment option as a companion product to several of its variable annuities.
Specifically, the Company offers such an option along with the following: (a) American Skandia Advisor PlanSM (ASAP)
variable annuity, in a Form S-2 registration statement (file no. 333-00995); (b) American Skandia Advisor PlanSM II
(ASAP II) (including Evergreen Skandia Harvester Variable Annuity and American Skandia Advisor Plan II Premier) variable
annuity, in a Form S-2 registration statement (file no. 333-97939); (c) American Skandia XTra CreditSM (XTra CreditSM)
(including Wells Fargo Stagecoach Extra Credit, Evergreen Skandia Harvester XTra CreditSM and American Skandia XTra
CreditSM Premier) variable annuity, in a Form S-2 registration statement (file no. 333-97943); (d) American Skandia
LifeVest(R)(ASL) (including Wells Fargo Variable Annuity Flex and American Skandia LifeVest(R)Premier) variable annuity,
in a Form S-2 registration statement (file no. 333-103889); (e) American Skandia ProtectorSM (AS Pro) variable annuity,
in a Form S-2 registration statement (file no. 333-26695); (f) American Skandia ApexSM (AS ApexSM)(including American
Skandia ApexSM II (ApexSM II), American Skandia LifeVest(R)II (ASL II), Wells Fargo Stagecoach Apex SM, American Skandia
XTra CreditSM FOUR (XTra CreditSM FOUR) and American Skandia XTra CreditSM SIX (XTra CreditSM SIX)) variable annuity, in
a Form S-2 registration statement (file no. 333-97941); (g) Wells Fargo Stagecoach Variable Annuity Plus (VA+) variable
annuity, in a Form S-2 registration statement (file no. 333-25761); (h) Advisors Choice(R)2000 (Including Select 2000)
variable annuity, in a Form S-2 registration statement (file no. 333-24989); (i) American Skandia ImpactSM (ASI)
(Including First Trust Portfolios Defined Investments Annuity) variable annuity, in a Form S-2 registration statement
(file no. 33-91400); (j) Galaxy Variable Annuity (GVA III) variable annuity, in a Form S-2 registration statement (file
no. 33-88360); and (k) Galaxy Variable Annuity (GVA) variable annuity, in a Form S-2 registration statement (file no.
333-02867).
The Company also offers a market value adjustment annuity as a stand-alone product. The Guaranteed Maturity Annuity
(GMA) market value adjustment annuity was first registered with the SEC on a Form S-2 (file no. 33-89676).
(2) Offering commenced immediately upon effectiveness of the registration statement.
(3) Not applicable.
(4) (i) The offering has not been terminated.
(ii) The managing underwriter of the offering is American Skandia Marketing, Incorporated.
(iii) Market-Value Adjustment Annuity Contracts (also known as modified guaranteed annuity contracts).
(iv) Securities registered and sold for the account of the Company:
Amount registered*: $5,037,005,593
Aggregate price of the offering amount registered: $5,037,005,593
Amount sold*: $3,615,812,802
Aggregate offering price of amount sold to date: $3,615,812,802
* Securities not issued in predetermined units. No securities have been registered for the account of any
selling security holder.
(v) Expenses associated with the issuance of the securities:
Underwriting discounts and commissions** $209,717,143
Other expenses** $159,095,763
------------
Total $368,812,906
** Amounts are estimated.
(vi) Net offering proceeds: $3,246,999,896
(vii)Not applicable.
(viii) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
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. 33-87010)
(4) Instruments defining the right of security Incorporated by reference to the Company's
holders including indentures Reg. 333-103889, 33-88360, 33-89676,
33-91400, 333-00995, 333-02867, 333-24989,
333-25761, 333-97939, 333-26695,
333-97943 and 333-97941
(10) Material Contracts Incorporated by reference to the Company's
Forms S-2 (Reg. 33-53596)
(11) Statement of Computation of per share Not required to be filed
earnings
(15) Letter re unaudited interim financial None
information
(18) Letter re change in accounting principles None
(19) Report furnished to security holders None
(22) Published report regarding matters submitted None
to vote of security holders
(23) Consents of experts and counsel Not required to be filed
(31.1) Section 302 Certification of the Chief Page 29
Executive Officer
(31.2) Section 302 Certification of the Chief Page 30
Financial Officer
(32.1) Section 906 Certification of the Chief Page 31
Executive Officer
(32.2) Section 906 Certification of the Chief Page 32
Financial Officer
(b) Reports on Form 8-K Current Report on Form 8-K, May 1, 2003,
filing a statement announcing that
Prudential Financial, Inc. had completed
the first step in the acquisition of
Skandia U.S. Inc.
* Schedules are omitted because they are either not applicable or because the information required therein is included in the Notes
to Consolidated Financial Statements.
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/ Anthony S. Piszel
Anthony S. Piszel
Chief Financial Officer
and Controller
(Authorized Signatory and Principal Financial Officer)
August 14, 2003
Exhibit 31.1
CERTIFICATIONS
I, David R. Odenath, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American Skandia Life Assurance Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Dated: August 14, 2003 /s/ David R. Odenath
Chief Executive Officer and President
Exhibit 31.2
CERTIFICATIONS
I, Anthony S. Piszel, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American Skandia Life Assurance Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant's internal control
over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors
(or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Dated: August 14, 2003 /s/ Anthony S. Piszel
Chief Financial Officer and Controller
Exhibit 32.1
Certification
Pursuant to 18 U.S.C.ss.1350, I, David R. Odenath, Chief Executive Officer of American Skandia Life Assurance Corporation
(the "Company"), hereby certify that the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (the "Report")
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information
contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: August 14, 2003 /s/ David R. Odenath
Chief Executive Officer and President
The foregoing certification is being furnished solely pursuant to 18 U.S.C.ss.1350 and is not being filed as part of the
Report or as a separate disclosure document.
Exhibit 32.2
Certification
Pursuant to 18 U.S.C.ss.1350, I, Anthony S. Piszel, Chief Financial Officer of American Skandia Life Assurance Corporation
(the "Company"), hereby certify that the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (the "Report")
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information
contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: August 14, 2003 /s/ Anthony S. Piszel
Chief Financial Officer and Controller
The foregoing certification is being furnished solely pursuant to 18 U.S.C.ss.1350 and is not being filed as part of the
Report or as a separate disclosure document.