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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 33-44202
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(Exact name of Registrant as specified in its charter)
Connecticut 06-1241288
- ----------------------------------------- --------------------------------------
(State or other jurisdiction, (IRS Employer Identification No.)
incorporation or organization)
One Corporate Drive, Shelton, Connecticut 06484
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(Address of principal executive offices) (Zip Code)
(203) 926-1888
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(Registrant's Telephone Number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
NONE
Securities registered pursuant to Section 12 (g) of the Act:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES X NO ___
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES ___ NO X
State the aggregate market value of the voting stock held by non-affiliates of the registrant: NONE
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of
November 14, 2003. Common stock, par value of $100 per share: 25,000 shares outstanding
American Skandia Life Assurance Corporation meets the conditions set
forth in General Instruction (H) (1) (a) and (b) on Form 10-Q and
is therefore filing this Form with the reduced disclosure format.
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AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
INDEX TO FINANCIAL STATEMENTS
Page No.
Cover Page 1
Index 2
PART I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Financial Position
As of September 30, 2003 (unaudited) and December 31, 2002 3
Consolidated Statements of Operations and Comprehensive Income (unaudited)
Three months ended September 30, 2003 and 2002, Five months ended September 30, 2003,
Four months ended April 30, 2003 and Nine months ended September 30, 2002 4
Consolidated Statements of Stockholder's Equity
Periods ended September 30, 2003 (unaudited), April 30, 2003 (unaudited) and
December 31, 2002 and 2001 5
Consolidated Statements of Cash Flows (unaudited)
Five months ended September 30, 2003, Four months ended April 30, 2003 and
Nine months ended September 30, 2002 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 4. Controls and Procedures 16
PART II - Other Information
Item 1. Legal Proceedings 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
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
Consolidated Statements of Financial Position
As of September 30, 2003 (unaudited) and December 31, 2002 (in thousands)
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Successor Predecessor
------------------ -----------------
September 30, December 31,
2003 2002
------------------ -----------------
ASSETS
Fixed maturities available for sale,
at fair value (amortized cost, 2003: $425,595; 2002: $379,422) $ 426,480 $ 398,601
Equity securities trading, at fair value (cost of $54,624) 57,860 -
Equity securities available for sale, at fair value (cost of $52,017) - 51,769
Policy loans 8,077 7,559
Other short-term investments - 10,370
------------------ -----------------
Total investments 492,417 468,299
Cash and cash equivalents - 51,339
Deferred policy acquisition costs 73,490 1,117,544
Accrued investment income 4,360 4,196
Reinsurance recoverable 4,204 5,447
Receivables from Parent and affiliates 5,590 2,810
Deferred tax asset 279,253 38,206
Valuation of business acquired 416,537 -
Other assets 71,633 115,131
Separate account assets 23,958,403 21,905,613
------------------ -----------------
TOTAL ASSETS $ 25,305,887 $ 23,708,585
================== =================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Policyholders' account balances $ 143,593 $ 140,496
Future policy benefits and other policyholder liabilities 14,242 8,853
Income taxes payable 36,488 6,547
Other liabilities 185,173 133,543
Payables to Parent and affiliates 14,352 2,223
Short-term borrowing 66,000 10,000
Future fees payable to American Skandia, Inc. ("ASI") 337,119 708,249
Surplus notes - 110,000
Separate account liabilities 23,958,403 21,905,613
------------------ -----------------
Total liabilities 24,755,370 23,025,524
------------------ -----------------
Contingencies (See Footnote 3)
Stockholder's Equity
Common stock, $100 par value;
25,000 shares, authorized,
issued and outstanding 2,500 2,500
Paid-in-capital 485,064 595,049
Retained earnings 62,368 73,821
Accumulated other comprehensive income 585 11,691
----------------- -----------------
------------------ -----------------
Total stockholder's equity 550,517 683,061
------------------ -----------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 25,305,887 $ 23,708,585
================== =================
See Notes to 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 wholly-owned by Prudential Financial, Inc. are
not comparable in many material respects.
American Skandia Life Assurance Corporation
Consolidated Statements of Operations and Comprehensive Income (unaudited)
Three Months Ended September 30, 2003 and 2002, Five Months Ended September 30, 2003,
- --------------------------------------------------------------------------------------------------------------------------------------------------------
Four Months Ended April 30, 2003 and Nine Months Ended September 30, 2002 (in thousands)
Successor Predecessor Successor Predecessor Predecessor
------------ ------------ -------------- ------------- --------------
-------------- --------------
Five months Four months Nine months
Three months ended ended ended April ended
September 30, September 30, 30, September 30,
2003 2002 2003 2003 2002
------------ ------------ -------------- ------------- --------------
REVENUES
Premiums $
$ 4,572 $ 798 $ 6,579 $ 2,496 $ 2,803
Policy charges and fee income
90,515 95,997 148,363 109,213 275,103
Net investment income
5,974 14,790 18,020 (1,553) 20,849
Realized investment (losses) gains,
net (234) 27,307 (308) (5,812) 43,962
Asset management fees
24,429 23,202 39,894 28,092 75,371
Other income (losses)
1,616 (152) 4,201 617 826
------------ ------------ -------------- ------------- --------------
Total revenues 126,872 161,942 216,749 133,053 418,914
------------ ------------ -------------- ------------- --------------
BENEFITS AND EXPENSES
Policyholders' benefits 19,499 24,176 30,152 23,946 41,566
Interest credited to policyholders'
account balances 1,211 42,017 2,071 13,693 71,243
General, administrative and other
expenses 51,891 300,546 93,285 97,797 532,716
------------ ------------ -------------- ------------- --------------
Total benefits and expenses 72,601 366,739 125,508 135,436 645,525
------------ ------------ -------------- ------------- --------------
Income (loss) from operations before
income taxes 54,271 (204,797) 91,241 (2,383) (226,611)
------------ ------------ -------------- ------------- --------------
Income tax expense (benefit) 17,088 (72,754) 28,873 (9,122) (82,797)
------------ ------------ -------------- ------------- --------------
NET INCOME (LOSS) 37,183 (132,043) 62,368 6,739 (143,814)
------------ ------------ -------------- ------------- --------------
Other comprehensive (loss) income, net
of tax (3,051) 7,371 585 786 7,535
------------ ------------ -------------- ------------- --------------
------------ ------------ -------------- ------------- --------------
TOTAL COMPREHENSIVE INCOME
(LOSS) $ 34,132 $ (124,672) $ 62,953 $ 7,525 $ (136,279)
============ ============ ============== ============= ==============
See Notes to 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 wholly-owned by Prudential Financial, Inc. are
not comparable in many material respects.
American Skandia Life Assurance Corporation
Statements of Stockholder's Equity
Periods Ended September 30, 2003 (unaudited), April 30, 2003 (unaudited) and December 31, 2002 and 2001 (in thousands)
- ---------------------------------------------------------------------------------------------------------------------------
Accumulated
other Total
Common Paid-in- Retained comprehensive stockholder's
stock capital earnings income equity
----------------------------- ----------------------------------- -----------------
----------------------------- ----------------------------------- -----------------
Balance, January 1, 2001 $ 2,500 $ 287,329 $ 205,979 $ 1,103 $ 496,911
Net income - - 33,099 - 33,099
Capital contributions - 48,000 - 48,000
Change in foreign currency translation
adjustments, net of taxes - - - (67) (67)
Change in net unrealized investment
gains, net of reclassification
adjustment and taxes - - - (275) (275)
----------------------------- ----------------------------------- -----------------
----------------------------- ----------------------------------- -----------------
Balance, December 31, 2001 2,500 335,329 239,078 761 577,668
Net loss - - (165,257) - (165,257)
Capital contributions - 259,720 - - 259,720
Change in foreign currency translation
adjustments, net of taxes - - - (630) (630)
Change in net unrealized investment
gains, net of reclassification
adjustment and taxes - - - 11,560 11,560
----------------------------- ----------------------------------- -----------------
----------------------------- ----------------------------------- -----------------
Balance, December 31, 2002 2,500 595,049 73,821 11,691 683,061
Net income - - 6,739 - 6,739
Capital contributions - 2,183 - - 2,183
Change in foreign currency translation
adjustments, net of taxes - - - 615 615
Change in net unrealized investment
gains, net of reclassification
adjustment and taxes - - - 171 171
----------------------------- ----------------------------------- -----------------
----------------------------- ----------------------------------- -----------------
Balance, April 30, 2003 2,500 597,232 80,560 12,477 692,769
Acquisition purchase accounting
adjustments (See Footnote 10) - (112,187) (80,560) (12,477) (205,224)
----------------------------- ----------------------------------- -----------------
Balance, April 30, 2003 opening
balance sheet 2,500 485,045 - - 487,545
Net income - - 62,368 - 62,368
Stock-based compensation - 19 - - 19
Change in net unrealized investment
gains, net of reclassification
adjustment and taxes - - - - 585 585
----------------------------- ----------------------------------- -----------------
----------------------------- ----------------------------------- -----------------
Balance, September 30, 2003 $ 2,500 $ 485,064 $ 62,368 $ 585 $ 550,517
============================= =================================== =================
See Notes to 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 wholly-owned by Prudential Financial, Inc. are
not comparable in many material respects.
American Skandia Life Assurance Corporation
Consolidated Statements of Cash Flows (unaudited)
Five Months Ended September 30, 2003, Four Months Ended April 30, 2003
- ------------------------------------------------------------------------------------------------------------------------------------------
and Nine Months Ended September 30, 2002 (in thousands)
Successor Predecessor Predecessor
------------------ ------------------ -------------------
Five months Four months Nine months ended
ended September ended April 30, September 30, 2002
30, 2003 2003
------------------ ------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 62,368 $ 6,739 $ (143,814)
Adjustments to reconcile net income (loss) to net
cash from (used in) operating activities:
Realized investment losses (gains), net 308 5,812 (43,962)
Amortization and depreciation 36,623 5,290 10,829
Change in:
Policy reserves 7,739 4,288 2,938
Accrued investment income 124 (288) 405
Net receivable/payable to Parent and affiliates 9,075 124 (98,479)
Policy loans (480) (38) (816)
Deferred policy acquisition costs (73,490) (12,601) 242,332
Income taxes payable/receivable (1,070) (463) (4,711)
Other, net (10,059) (3,747) (165,245)
------------------ ------------------ -------------------
Cash Flows From (Used in) Operating Activities 31,138 5,116 (200,523)
------------------ ------------------ -------------------
CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of
fixed maturities available for sale 53,358 131,628 305,767
Payments for the purchase of
fixed maturities available for sale (77,607) (135,885) (328,206)
Proceeds from the sale of shares in equity 23,809 10,955 28,178
securities
Payments for the purchase of shares in
equity (11,172) (24,809) (39,430)
securities and dividend
reinvestments
Other short-term investments, net - 1,019 35,068
1,019 1,019
------------------ ------------------ -------------------
Cash Flows (Used in) From Investing Activities (11,612) (17,092) 1,377
------------------ ------------------ -------------------
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES:
Capital contribution - 2,183 258,920
Decrease in future fees payable to ASI, net (51,153) (63,343) (42,514)
Net increase in short-term borrowing 21,000 35,000 95,270
Pay down of surplus notes - - (34,000)
Stock-based compensation 19 - -
Deposits to contract owner accounts 31,337 155,034 129,568
Withdrawals from contract owner accounts (93,884) (63,357) (118,941)
Change in contract owner accounts, net of
45,137 (77,809) 41,244
investment earnings
------------------ ------------------ -------------------
Cash Flows (Used in) From Financing Activities (47,544) (12,292) 329,547
------------------ ------------------ -------------------
Net (decrease) increase in cash and cash (28,018) (24,268) 130,401
equivalents
Change in foreign currency translation, net - 947 (920)
Cash and cash equivalents, beginning of period 28,018 51,339 -
------------------ ------------------ -------------------
------------------ ------------------ -------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD
$ - $ 28,018 $ 129,481
================== ================== ===================
================== ================== ===================
Income taxes paid $ 877 $ 13 $ 1,598
================== ================== ===================
================== ================== ===================
Interest paid (received) $ 9,202 $ (7,788) $ 24,385
================== ================== ===================
See Notes to 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 wholly-owned by Prudential Financial, Inc. are
not comparable in many material respects.
American Skandia Life Assurance Corporation
Notes to Consolidated Financial Statements
(Unaudited)
1. ORGANIZATION AND OPERATION
American Skandia Life Assurance Corporation (the "Company"), with its principal offices in Shelton, Connecticut, is an indirect
wholly-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
initial phase of the Acquisition was consummated. This included Prudential Financial acquiring 90% of Skandia U.S. Inc.'s ("SUSI"),
an indirect parent of the Company, outstanding common stock. On September 9, 2003, Prudential Financial acquired the remaining 10%
of SUSI's outstanding common stock for $165 million (see Notes 10 and 11 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. 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 unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America on a basis consistent with reporting interim financial information in accordance with
instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. These interim financial
statements are unaudited but reflect all adjustments, which in the opinion of management, are necessary to provide a fair
presentation of the consolidated results of operations and financial condition of the Company for the interim periods presented. The
Company is a wholly owned subsidiary of American Skandia, Inc. ("ASI"), which in turn is an indirect wholly owned subsidiary of
Prudential Financial. All such adjustments are of a normal recurring nature. The results of operations for any interim period are
not necessarily indicative of results for a full year. Certain amounts in the Company's prior year consolidated financial statements
have been reclassified to conform with the current year presentation. These financial statements should be read in conjunction with
the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002.
3. CONTINGENCIES AND LITIGATION
Contingencies
On an ongoing basis, our internal supervisory and control functions review the quality of our sales, marketing and other customer
interface procedures and practices and may recommend modifications or enhancements. In certain cases, if appropriate, we may offer
customers remediation and may incur charges, including the cost of such remediation, administrative costs and regulatory fines.
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 as a result of payments in connection with the matters discussed above depending, in part, upon the results of
operations or cash flow for such period. Management believes, however, that the ultimate payments in connection with these matters
should not have a material adverse effect on the Company's financial position.
Litigation
The Company is subject to legal and regulatory actions in the ordinary course of its businesses, including class actions and
individual lawsuits. Pending legal and regulatory actions include proceedings relating to aspects of the businesses 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
American Skandia Life Assurance Corporation
Notes to Consolidated Financial Statements
(Unaudited)
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. On August 29, 2003, Plaintiffs filed a notice of appeal of that decision with the United States Court of Appeals for the
Second Circuit.
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 thousand
individually. Further, SICL's indemnification obligations arise only in the event that a total of $10 million 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 million 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.
4. RELATED PARTY TRANSACTIONS
Affiliated Asset Management Fee Income
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.
Debt Agreements
As of September 30, 2003 and December 31, 2002, the Company had a $10 million short-term loan payable to its parent company, ASI as
part of a revolving loan agreement. This loan has an interest rate of 1.71% and matures on October 30, 2003. Interest expense
related to this borrowing amounted to $73 thousand and $44 thousand for the five and three months ended September 30, 2003,
respectively, and $60 thousand for the four months ended April 30, 2003.
On January 3, 2002, the Company entered into a $150 million 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% per annum for the relevant
interest period. Interest expense related to these borrowings was $264 thousand and $167 thousand for the five and three months
ended September 30, 2003, respectively, and $56 thousand for the four months ended April 30, 2003. As of September 30, 2003, $56
million 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 million and related interest of $32.2 million. Interest expense for the four months ended April 30, 2003
was $3 million.
5. 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 Statement of Financial Accounting Standards ("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.
American Skandia Life Assurance Corporation
Notes to Consolidated Financial Statements
(Unaudited)
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 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.
6. TRADING SECURITIES
As of the date of the 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".
7. 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 million as of December 31, 2002 and had generated
losses of $2.2 million for the four months ended April 30, 2003, and $1.9 million and $479 thousand for the nine and three months
ended September 30, 2002, respectively. As part of the Acquisition, the Company sold its ownership interest in Skandia Vida to SICL
on April 30, 2003 for $4.6 million. This transaction resulted in a loss of $422 thousand.
8. INCOME TAXES
The Company recorded income tax expense (benefit) of $28.9 million and $17.1 million for the five and three months ended September
30, 2003, respectively, ($9.1) million for the four months ended April 30, 2003, and ($82.8) million and ($72.8) million for the nine
and three months ended September 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.
9. DEFERRED POLICY 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
American Skandia Life Assurance Corporation
Notes to Consolidated Financial Statements
(Unaudited)
part of purchase accounting. Amortization expense related to deferred acquisition costs was $1.5 million and $1.3 million for the
five and three months ended September 30, 2003, respectively, and $46.8 million for the four months ended April 30, 2003, and $385.4
million and $251.6 million for the nine and three months ended September 30, 2002, respectively.
10. 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.The purchase accounting adjustments have been "pushed-down" to the Company, as applicable.
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 (in thousands):
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
=============
11. 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 overall expected life of
the contracts 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.
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 GMDB is higher than the current
account value at the time of death, the Company may incur a loss on the contract for that reporting period. This feature 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 SOP 03-01, 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 GMDB costs would be charged against the explicit GMDB liability.
American Skandia Life Assurance Corporation
Notes to Consolidated Financial Statements
(Unaudited)
Details of VOBA and related interest and gross amortization for the five months ended September 30, 2003 is as follows (in thousands):
Balance, May 1, 2003 $ 440,130
Interest 10,218
Amortization (33,811)
---------
Balance, September 30, 2003 $ 416,537
==========
Estimated future net amortization of VOBA as of September 30, 2003 is as follows (in thousands):
2003 $ 17,667
2004 64,141
2005 55,379
2006 46,794
2007 39,917
2008 and thereafter 192,639
--------
Total $ 416,537
==========
12. 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
American Skandia Life Assurance Corporation meets the conditions set forth in General Instruction H(1)(a) and (b) on Form 10-Q and is
filing this form with reduced disclosure.
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") addresses the consolidated financial
condition of American Skandia Life Assurance Corporation (the "Company") as of September 30, 2003, compared with December 31, 2002,
and its consolidated results of operations for the three and nine month periods ended September 30, 2003 and September 30, 2002. You
should read the following analysis of our consolidated financial condition and results of operations in conjunction with the
Company's MD&A and audited Consolidated Financial statements included in the Company's Report on Form 10-K for the year ended December
31, 2002.
For purposes of MD&A, 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 wholly-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 initial phase of the Acquisition was consummated. This included
Prudential Financial acquiring 90% of Skandia U.S., Inc.'s ("SUSI"), an indirect parent of the Company, outstanding common stock. On
September 9, 2003, Prudential Financial acquired the remaining 10% of SUSI's outstanding common stock for $165 million (see Notes 10
and 11 in the September 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 $4.6 million. This transaction resulted in a loss of $422 thousand.
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.
The Company's Changes in Financial Position and Results of Operations are described below.
1. Analysis of Financial Condition
From December 31, 2002 to September 30, 2003 there was an increase of $1,597.3 million in total assets from $23,708.6 million to
$25,305.9 million. The largest increase was in separate account assets, which increased by $2,052.8 million primarily from market
value appreciation as a result of recoveries in the equity markets in the second and third quarters. Deferred acquisition costs
("DAC") decreased by $1,044.1 million, deferred tax asset increased by $241 million and valuation of business acquired ("VOBA")
increased by $416.5 million, all primarily due to purchase accounting.
During this nine-month period, liabilities increased by $1,729.8 million from $23,025.5 million to $24,755.4 million. Corresponding
with the asset change, Separate account liabilities increased by $2,052.8 million, as described above. Income taxes payable, which
is a net number comprised of payables and receivables, increased by $29.9 million primarily as a result of purchase accounting.
Other liabilities increased by $51.6 million primarily due to the establishment of liabilities through purchase accounting for vacant
office space, severance and an indemnification agreement. Short-term borrowing increased by $56 million in order to fund the cash
strain generated from acquisition costs. Future fees payable to American Skandia, Inc. ("ASI") decreased by $371.1 million primarily
due to purchase accounting.
2. Results of Operations
September 2003 to September 2002 Three Month Comparison
Net Income
Consolidated net income of $37.2 million for the third quarter of 2003 was an improvement of $169.2 million from the loss of $132.0
million incurred in the third quarter of 2002. The third quarter of 2002 had a charge for additional DAC amortization of
approximately $206 million, which did not recur in the current quarter. Further details regarding the components of revenues and
expenses are described in the following paragraphs.
Revenues
Consolidated revenues decreased by $35.1 million, from $161.9 million to $126.9 million. Realized investment gains decreased by
$27.5 million. The prior year quarter included hedge related gains from the Company's derivative investments of $29.6 million.
There were no hedge related gains in the current year quarter as the Company had no outstanding derivative positions.
Policy charges and fee income, consisting primarily of mortality and expense ("M&E") and other insurance charges assessed on separate
account policyholder fund balances, decreased by $5.5 million. The decrease was a result of lower surrender charge revenue of $5.3
million due to a decrease in lapses. Annuity fees are mainly asset-based fees, which are dependent on the fund balances. Fund
balances are affected by net sales as well as asset depreciation or appreciation on the underlying investment funds in which the
customer has the option to invest. Annuity separate account fund balances have declined as a result of unfavorable valuation changes
in the securities market over the past several years. Annuity separate account fund values are higher than the same period last year
due to a positive market recovery in the second and third quarters of 2003. Higher asset-based fees were partially offset by higher
reinsured policy fees.
Net investment income decreased by $8.8 million as a result of decreased net investment results of $6.4 million on the Company's
separate account supporting its fixed, market value adjusted investment option.
Asset management fees increased by $1.2 million as a result of higher assets under management compared to the same period last year.
Asset management fees are asset-based fees, which are dependent on the amount of assets under management.
Other income increased by $1.8 million due to the Company changing its classification of equity securities held in support of the
Company's non-qualified deferred compensation program from available-for-sale to trading. Prior to the date of the Acquisition, the
Company recorded realized gains and losses on these investments in the Statement of Operations and Comprehensive Income, as a
component of "Realized investment (losses) gains, net". Such investments are now carried at fair value with realized gains and
losses and changes in unrealized gains and losses reported in the Statement of Operations and Comprehensive Income, as a component of
"Other income".
Benefits and Expenses
Policyholders' benefits decreased by $4.7 million primarily from decreased guaranteed minimum death benefit ("GMDB") payments.
GMDB payments decreased from $16.5 million in the third quarter of 2002 to $14.1 million in the third quarter of 2003. As of
September 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 $4.5 billion. The death benefit coverage in force represents the excess of the guaranteed benefit
amount over the account value. The GMDB 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 September 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 GMDB is higher than the current account value
at the time of death, the Company incurs 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, the Company currently does not record
a liability corresponding to these projected future obligations for death benefits in excess of annuity account values. However, the
Company considers 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 VOBA are based. American
Institute of Certified Public Accountants 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 adopting the SOP on January 1, 2004, the Company will establish an explicit liability for GMDB associated with the contracts
in-force at the time of the Acquisition. 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 GMDB costs would be charged against the
explicit GMDB liability.
Interest credited to policyholder account balances decreased by $40.8 million due to decreased amortization of deferred purchase
credits consistent with decreased amortization of DAC primarily as a result of purchase accounting.
General, administrative, and other expenses decreased by $248.7 million from the prior year quarter. The primary reason was a
decrease in DAC amortization of $250.3 million as the prior year quarter had a charge for additional DAC amortization of
approximately $206 million to reflect our lower estimate of future gross profits on annuities based on asset value declines and
expected equity market returns as of September 30, 2002. Also contributing to decreased DAC amortization was the Company's DAC asset
being assigned a fair value of zero, consistent with purchase accounting guidance as of the date of acquisition. Partially
offsetting this was an increase in net VOBA amortization of $12.3 million related to purchase accounting.
September 2003 to September 2002 Nine Month Comparison
Net Income
Consolidated net income of $69.1 million for the nine months of 2003 was an improvement of $212.9 million from the loss of $143.8
million for the nine months of 2002. The nine months of 2002 had an additional charge for DAC amortization of approximately $206
million, which did not recur in the current year. Further details regarding the components of revenues and expenses are described in
the following paragraphs.
Revenues
Consolidated revenues decreased by $69.1 million, from $418.9 million to $349.8 million. Realized investment gains decreased by
$50.1 million mainly due to lower derivative income of $59.1 million. The prior year included hedge related gains from the Company's
derivative investments of $49.7 million compared to losses of $9.4 million in the current year. The Company has had no outstanding
derivative positions since May 2003.
Policy charges and fee income decreased by $17.5 million. M&E charges decreased by $22.3 million as a result of the decline in the
in-force business. Annuity fees are mainly asset-based fees, which are dependent on the fund balances. Annuity separate account
fund balances have declined as a result of unfavorable valuation changes in the securities market over the past several years
resulting in a decrease in policy charges and fee income.
Net investment income decreased by $4.4 million as a result of decreased income from fixed maturities of $3.8 million.
Asset management fees decreased by $7.4 million as a result of lower assets under management compared to the same period last year.
Asset management fees are asset-based fees, which are dependent on the amount of assets under management.
Other income increased by $4.0 million due to the Company's decision to change its classification of equity securities from
available-for-sale to trading which resulted in an increase of $3.2 million of unrealized gains in the current year.
Benefits and Expenses
Policyholders' benefits increased by $12.5 million primarily from increased GMDB payments. Annuity death benefits increased by $9.9
million primarily as a result of an increase in GMDBs. GMDB payments increased from $36.9 million in 2002 to $46.8 million for 2003.
Interest credited to policyholder account balances decreased by $55.5 million due to decreased amortization of deferred purchase
credits consistent with decreased amortization of DAC primarily as a result of purchase accounting.
General, administrative, and other expenses decreased by $341.6 million from the prior year. The primary reason was a decrease in
DAC amortization of $337.1 million as the prior year had an additional charge for DAC amortization of approximately $206 million to
reflect our lower estimate of future gross profits on annuities based on asset value declines and expected equity market returns as
of September 30, 2002. Also contributing to decreased DAC amortization was the Company's DAC asset being assigned a fair value of
zero, consistent with purchase accounting guidance as of the date of acquisition. Partially offsetting this was an increase in VOBA
amortization of $23.6 million related to purchase accounting.
3. 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 based on 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 nine months 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 in exchange for the
reinsurer receiving a portion of the future fees generated from the book of business covered under the reinsurance agreement. 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 September 30, 2003 and December 31, 2002, the Company had short-term borrowings of $66 million and $10 million, respectively,
and had long-term surplus notes liabilities of $110 million at December 31, 2002. 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 million and related
interest of $32.2 million.
As of September 30, 2003 and December 31, 2002, shareholder's equity totaled $550.5 million and $683.1 million, respectively. The
Company received capital contributions of $2.2 million from ASI during 2003. Of this, $1.3 million was received to support its
investment in Skandia Vida, which was sold to SICL on April 30, 2003 (see Note 7 in the September 30, 2003 financial statements for
further discussion). Purchase accounting adjustments, including assigning the Company's DAC 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 expects to maintain statutory capital between 310% and 330% of Company Action Level Risk Based Capital.
The Company has sold variable annuity contracts containing 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. Currently, the Life and Health Actuarial Taskforce, a sub-committee of
the NAIC, has made a recommendation that would clarify the interpretation of AG XXXIV. It has been approved by the "A" committee of
the NAIC. The last step before it goes into effect is to be approved by the Executive/Plenary Committee of the NAIC, which is
expected before the end of the year. If approved, the change would be effective for December 31, 2003 reserves. It clarifies that
reserves calculated under AG XXXIV do not need to reflect future partial withdrawals, however asset adequacy analysis must
incorporate analysis of the impact of partial withdrawal activity on aggregate reserves. If adopted, it is not anticipated that the
requirement will materially increase the statutory reserves held.
4. 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 DAC asset being assigned a value of zero, the
future fees payable to ASI liability was decreased by $256.6 million and an asset for VOBA was established for $440.1 million (see
Notes 9, 10 and 11 in the September 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 MD&A in the Company's audited consolidated financial
statements on Form 10-K for the year ended December 31, 2002.
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 September 30, 2003. Based on such evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that, as of September 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 September 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 its businesses, including class actions and
individual lawsuits. Pending legal and regulatory actions include proceedings relating to aspects of the businesses 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. On August 29,
2003, Plaintiffs filed a notice of appeal of that decision with the United States Court of Appeals for the Second Circuit.
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 thousand
individually. Further, SICL's indemnification obligations arise only in the event that a total of $10 million 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 million 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 5. Other Information
Recently, the Company received a formal request for information from the New York Attorney General's Office in connection with its
variable annuity business. The Company is cooperating with this inquiry and is conducting its own internal review.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3(i)(a) The Articles of Incorporation of American Skandia Life Assurance Corporation are incorporated by reference to Form
N-4, Registration No. 33-87010.
3(ii) By-Laws of American Skandia Life Assurance Corporation are incorporated by reference to Form N-4, Registration No.
33-87010.
4 Instruments defining the right of security holders including indentures are incorporated by reference to the
Company's Registration No. 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 are incorporated by reference to the Company's Form S-2, Registration No. 33-53596.
31.1 Section 302 Certification of the Chief Executive Officer
31.2 Section 302 Certification of the Chief Financial Officer
32.1 Section 906 Certification of the Chief Executive Officer
32.2 Section 906 Certification of the Chief Financial Officer
* Schedules are omitted because they are either not applicable or because the information required therein is included in
the Notes to Consolidated Financial Statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf of the undersigned, thereunto duly authorized.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(Registrant)
By: /s/ Zafar Rashid
Zafar Rashid
Executive Vice President and Chief Financial Officer
Signature Title Date
/s/ Zafar Rashid Executive Vice President and November 14, 2003
Zafar Rashid Chief Financial Officer
(Authorized Signatory and
Principal Financial Officer)
Exhibit 31.1
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 quarterly 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 we 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.
Date: November 14, 2003
/s/ David R. Odenath
David R. Odenath
Chief Executive Officer and President
Exhibit 31.2
I, Zafar Rashid, 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 quarterly 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 we 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.
Date: November 14, 2003
/s/ Zafar Rashid
Zafar Rashid
Executive Vice President and Chief Financial Officer
Exhibit 32.1
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350, I, David R. Odenath, Chief Executive Officer and President of American Skandia Life
Assurance Corporation (the "Company"), hereby certify that the Company's Quarterly Report on Form 10-Q for the quarter ended
September 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: November 14, 2003
/s/ David R. Odenath
- -----------------------------------------------------------------------------------------------------------
Name: David R. Odenath
Title: Chief Executive Officer and President
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 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. Section 1350, I, Zafar Rashid, Executive Vice President and 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 September 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: November 14, 2003
/s/ Zafar Rashid
- -----------------------------------------------------------------------------------------------------------
Name: Zafar Rashid
Title: Executive Vice President and Chief Financial Officer
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of
the Report or as a separate disclosure document.