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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 March 31, 2004
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
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(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 May 14,
2004. Common stock, par value of $100 per share: 25,000 shares outstanding, 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 wholly-owned
subsidiary of Prudential Financial, Inc., a New Jersey corporation.
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 March 31, 2004 (unaudited) and December 31, 2003 3
Consolidated Statements of Operations and Comprehensive Income (unaudited)
Three months ended March 31, 2004 and 2003 4
Consolidated Statements of Stockholder's Equity
Periods ended March 31, 2004 (unaudited), December 31, 2003,
April 30, 2003 (unaudited) and December 31, 2002 5
Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31, 2004 and 2003 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 4. Controls and Procedures 12
PART II - Other Information
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
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 March 31, 2004 (unaudited) and December 31, 2003 (in thousands)
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Successor Successor
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March 31, December 31,
2004 2003
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ASSETS
Fixed maturities available for sale,
At fair value (amortized cost, 2004: $2,068,840; 2003: $427,705) $ 2,108,537 $ 425,231
Equity securities available for sale, at fair value (cost of $11,238) 11,774 -
Trading account assets, at fair value 58,828 59,485
Policy loans 9,272 8,371
Short-term investments 210,775 39,587
------------------ -----------------
Total investments 2,399,186 532,674
Cash and cash equivalents - -
Deferred policy acquisition costs 176,678 122,572
Accrued investment income 28,019 3,969
Reinsurance recoverable - 3,819
Receivables from Parent and affiliates 2,098 3,200
Income taxes receivable 248,713 222,422
Valuation of business acquired 262,321 402,169
Other assets 115,208 94,568
Separate account assets 24,857,471 25,817,612
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TOTAL ASSETS $ 28,089,694 $ 27,203,005
================== =================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Policyholders' account balances $ 1,719,710 $ 132,234
Future policy benefits and other policyholder liabilities 28,299 13,681
Payables to Parent and affiliates 20,763 16,396
Cash collateral for loaned securities 143,423 -
Securities sold under agreement to repurchase 44,392 20,850
Short-term borrowing 46,000 116,000
Long-term borrowing 135,000 -
Future fees payable to American Skandia, Inc. ("ASI") 279,389 307,879
Other liabilities 206,955 201,856
Separate account liabilities 24,857,471 25,817,612
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Total liabilities 27,481,402 26,626,508
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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 485,195 485,100
Retained earnings 100,663 90,856
Deferred compensation (1,400) (360)
Accumulated other comprehensive income (loss) 21,334 (1,599)
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Total stockholder's equity 608,292 576,497
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TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 28,089,694 $ 27,203,005
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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 March 31, 2004 and 2003 (in thousands)
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Successor Predecessor
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Three months ended Three months ended
March 31, March 31,
2004 2003
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REVENUES
Premiums $ 2,712 $ 1,452
Policy charges and fee income 90,056 81,635
Net investment income 19,311 960
Realized investment losses, net (257) (1,220)
Asset management fees 27,342 21,052
Other income 1,295 467
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Total revenues 140,459 104,346
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BENEFITS AND EXPENSES
Policyholders' benefits 19,731 17,797
Interest credited to policyholders' account 20,553 12,171
balances
General, administrative and other expenses 61,156 94,151
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Total benefits and expenses 101,440 124,119
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INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGE 39,019 (19,773)
----------------------- ----------------------
Income tax expense (benefit) 12,133 (8,219)
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INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
26,886 (11,554)
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Cumulative effect of accounting change, net of taxes (17,079) -
----------------------- ----------------------
NET INCOME (LOSS) 9,807 (11,554)
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Change in net unrealized investment gains, net of
reclassification adjustment and taxes 19,512 (4,629)
Cumulative effect of accounting change, net of taxes 3,421 -
----------------------- ----------------------
Other comprehensive income (loss), net of tax 22,933 (4,629)
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TOTAL COMPREHENSIVE INCOME (LOSS) $ 32,740 $ (16,183)
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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 Stockholder's Equity
Periods Ended March 31, 2004 (unaudited), December 31, 2003, April 30, 2003 (unaudited) and December 31, 2002 (in thousands)
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Accumulated
other Total
Paid-in- Retained Deferred comprehensive stockholder's
Common capital earnings compensation income equity
Stock
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Balance, January 31, 2002
(Predecessor) $ 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 - - - - (630) (630)
taxes
Change in net unrealized investment
gains, net of reclassification
adjustment and taxes - - - - 11,560 11,560
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Balance, December 31, 2002
(Predecessor) 2,500 595,049 73,821 - 11,691 683,061
Net income - - 7,794 - - 7,794
Capital contributions - 2,183 - - - 2,183
Change in foreign currency
translation adjustments, net of - - - - 615 615
taxes
Change in net unrealized investment
gains, net of reclassification
adjustment and taxes - - - - (884) (884)
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Balance, April 30, 2003 (Predecessor) 2,500 597,232 81,615 - 11,422 692,769
Acquisition purchase accounting
adjustments - (112,187) (81,615) - (11,422) (205,224)
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Balance, May 1, 2003 opening balance
sheet (Successor) 2,500 485,045 - - - 487,545
Net income - - 90,856 - - 90,856
Stock-based compensation - 55 - - - 55
Deferred compensation program - - - (360) - (360)
Change in net unrealized investment
gains, net of reclassification
adjustment and taxes - - - - (1,599) (1,599)
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Balance, December 31, 2003 (Successor) 2,500 485,100 90,856 (360) (1,599) 576,497
Net income - - 9,807 - - 9,807
Stock-based compensation - 95 - - - 95
Deferred compensation program - - - (1,040) - (1,040)
Change in net unrealized investment
gains, net of reclassification
adjustment and taxes - - - - 19,512 19,512
Cumulative effect of accounting
change, net of taxes - - - - 3,421 3,421
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Balance, March 31, 2004 (Successor) $ 2,500 $ 485,195 $ 100,663 $ (1,400) $ 21,334 $ 608,292
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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)
Three Months Ended March 31, 2004 and 2003 (in thousands)
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Successor Predecessor
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Three months ended Three months ended
March 31, 2004 March 31, 2003
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 9,807 $ (11,554)
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Realized investment losses, net 257 1,220
Amortization and depreciation 15,922 4,663
Cumulative effect of accounting change, net of taxes 17,079 -
Change in:
Policy reserves 11,233 3,826
Accrued investment income 337 (430)
Net receivable/payable to Parent and affiliates 5,469 (1,219)
Policy loans (901) (25)
Deferred policy acquisition costs (53,712) 16,799
Income taxes receivable (29,499) 14
Other, net 25,606 2,688
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Cash Flows From Operating Activities 1,598 15,982
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CASH FLOWS USED IN INVESTING ACTIVITIES:
Proceeds from the sale/maturity of
fixed maturities available for sale 225,987 68,455
Payments for the purchase of
fixed maturities available for sale (147,864) (91,955)
Proceeds from the sale of shares in equity securities 15,276 9,507
Payments for the purchase of shares in equity
securities and dividend reinvestments (13,848) (23,568)
Other short-term investments, net (164,692) 1,019
----------------------- ---------------------
Cash Flows Used in Investing Activities (85,141) (36,542)
----------------------- ---------------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Capital contribution - 1,284
Decrease in future fees payable to ASI, net (28,490) (48,247)
Cash collateral for loaned securities 143,423 -
Securities sold under agreement to repurchase 23,542 -
Net (decrease) increase in short-term borrowing (70,000) 15,000
Net increase in long-term borrowing 135,000 -
Stock-based compensation 95 -
Deferred compensation program (1,040) -
Deposits to contract owner accounts 8,155 145,737
Withdrawals from contract owner accounts (111,378) (45,519)
Change in contract owner accounts, net of (15,764) (81,220)
investment earnings
----------------------- ---------------------
Cash Flows From (Used in) Financing Activities 83,543 (12,965)
----------------------- ---------------------
Net decrease in cash and cash equivalents - (33,525)
Change in foreign currency translation, net - 151
Cash and cash equivalents, beginning of period - 51,339
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ - $ 17,965
======================= =====================
Income taxes paid (received) $ 41,632 $ (10)
======================= =====================
Interest paid (received) $ 5,095 $ (5,510)
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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.
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, 2003.
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,
after consideration of applicable reserves and indemnification, 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.
American Skandia Life Assurance Corporation
Notes to Consolidated Financial Statements (unaudited)
3. CONTINGENCIES AND LITIGATION (continued)
The Company has received formal requests for information from regulators including, among others, the New York Attorney General's
Office and the Securities and Exchange Commission in connection with its variable annuity businesses. The Company believes these
matters may lead to proceedings. The Company is engaged in ongoing discussions with the above organizations and is fully cooperating
with them. The Company has expanded the disclosure in its variable annuity prospectuses concerning its policies and procedures
regarding market timing, and the discussions with the above organizations have focused on the Company's previous disclosures relating
to these policies and procedures.
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, which held
oral arguments on April 29, 2004.
The Company's parent and sole shareholder, ASI, is currently a named defendant in six purported nationwide class action lawsuits.
Each of these lawsuits alleges that ASI and others violated federal securities laws in connection with late trading and market timing
activities and seeks remedies, including compensatory and punitive damages in unspecified amounts. The cases are as follows:
Lowinger v. Invesco Advantage Health Sciences Fund, et al., filed in the United States District Court for the Southern District of
New York in December, 2003 and served on ASI in February, 2004; Russo, et al. v. Invesco Advantage Health Sciences Fund, et al.,
filed in the United States District Court for the Southern District of New York in December, 2003, this suit has not been served on
ASI; Lori Weinrib v. Invesco Advantage Health Sciences Fund, et al., filed in the United States District Court for the Southern
District of New York in January, 2004, this suit has not been served on ASI; Erhlich v. Invesco Advantage Health Sciences Fund et
al., filed in the United States District Court for the District of Colorado in December, 2003, this suit was served on ASI in
February, 2004; Fattah v. Invesco Advantage Health Sciences Fund, et al., filed in the United States District Court for the District
of Colorado in December, 2003, this suit has not been served on ASI. The Company believes that these cases will be consolidated in
Multi-District litigation located in the Baltimore Division of the United States District Court for the District of Maryland.
The Company is also aware that ASI is a defendant designated as "Does 1-500" in a suit filed in October, 2003 in the United States
District Court for the Central District of California entitled Mike Sayegh v. Janus Capital Corporation, et al. This suit alleges
that various defendants engaged in improper late trading and market timing activities in various funds also named as defendants. The
complaint further alleges that such activities were in violation of California Business and Professional Code Section 17200. This
suit has not been served on ASI. The Company believes that this suit may be included in the Multi-District action discussed
above.
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, after consideration of applicable reserves and
indemnification, 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, administrative and regulatory
matters, including the complaints described above, may, in whole or in part, after satisfaction of certain retention requirements,
fall within the purview of SICL's indemnification obligations to Prudential Financial and its subsidiaries under the terms of the
Acquisition. Those obligations of SICL provide for indemnification of certain judgments, settlements, and costs and expenses
associated with lawsuits and other claims against the Company ("matters"), and apply only to matters, or groups of related matters,
for which the costs and expenses exceed $25 thousand individually. Those obligations only apply to such costs and expenses that
exceed $10 million in the aggregate, subject to reduction for insurance proceeds, certain accruals and any tax benefit applicable to
such amounts, and those obligations do not apply to the extent that such aggregate exceeds $1 billion.
American Skandia Life Assurance Corporation
Notes to Consolidated Financial Statements (unaudited)
4. RELATED PARTY TRANSACTIONS
Debt Agreements
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. During the first quarter of 2004, the Company borrowed an additional $20 million against this credit facility. The
proceeds were used to support working capital needs.
On March 12, 2004, the Company entered into a $45 million loan with Prudential Funding LLC. This loan matures on March 12, 2007 and
has an interest rate of 1.43%. The proceeds were used to support working capital needs.
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") 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts". AcSEC issued the SOP to address 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 certain long-duration contract liabilities.
The Company adopted the SOP effective January 1, 2004. The effect of initially adopting SOP 03-1 was a charge of $17.1 million, net
of $9.4 million of taxes, which was reported as a "cumulative effect of accounting change, net of taxes" in the results of operations
for the three months ended March 31, 2004. This charge reflects the net impact of converting certain individual market value
adjusted annuity contracts from separate account accounting treatment to general account accounting treatment and the effect of
establishing reserves for guaranteed minimum death benefit provisions of the Company's annuity contracts. The Company also
recognized a cumulative effect of accounting change related to unrealized investment gains within "Other comprehensive income, net of
taxes" of $3.4 million, net of $1.9 million of taxes. Upon adoption of the SOP $1.8 billion in "separate account assets" were
reclassified resulting in a $1.7 billion increase in "fixed maturities, available for sale," as well as changes in other non-separate
account assets. Similarly, upon adoption, $1.8 billion in "separate account liabilities" were reclassified resulting in increases in
"policyholders' account balances," as well as changes in other non-separate account liabilities.
6. INCOME TAXES
Income taxes for interim periods have been computed using an estimated annual effective tax rate. This rate is revised, if
necessary, at the end of each successive interim period to reflect the current estimate of the annual effective tax rate.
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 March 31, 2004, compared with December 31, 2003, and
its consolidated results of operations for the three month periods ended March 31, 2004 and March 31, 2003. 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, 2003.
General
The Company, with its principal offices in Shelton, Connecticut, is an indirect wholly-owned subsidiary of Prudential Financial, Inc.
("Prudential Financial"). 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 strongly 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 ("MVA") 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, 2003 to March 31, 2004 there was an increase of $886.7 million in total assets from $27.2 billion to $28.1
billion. The largest increase was in fixed maturities, which increased by $1.7 billion primarily due to the January 1, 2004 adoption
of Statement of Position ("SOP") 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts" issued by the Accounting Standards Executive Committee ("AcSEC") of the American Institute of
Certified Public Accountants ("AICPA"). SOP 03-1 requires the conversion of certain individual MVA annuity contracts from separate
account accounting treatment to general account accounting treatment and the effect of establishing reserves for guaranteed minimum
death benefit ("GMDB") provisions of the Company's annuity contracts. Separate account assets decreased by $960.1 million, which
includes a $1.8 billion decrease due to the SOP 03-1 reclassification of the assets supporting the fixed, MVA liability to the
general account and a $853 million increase primarily from positive net flows and market value appreciation. Short-term investments
increased by $171.2 million also due to the reclassification from the separate account to the general account. Valuation of business
acquired ("VOBA") decreased by $139.8 million, primarily related to the adoption of SOP 03-1 (see the "Benefits and Expenses" section
for a further discussion of the VOBA decrease).
During this three-month period, liabilities increased by $854.9 million from $26.6 billion to $27.5 billion. Policyholders' account
balances increased by $1.6 billion primarily due to the SOP 03-1 reclassification of the fixed, MVA liability to the general account
for $1.8 billion partially offset by a $117.1 million decrease in this liability because of the SOP 03-01 requirement to record this
liability at accreted value instead of market value and a $119.9 million decrease mainly due to first quarter negative net flows
activity. Separate account liabilities decreased by $960.1 million, as described above. SOP 03-1 also required the Company to
record a GMDB liability for $8.6 million on January 1, 2004 (see the "Benefits and Expenses" section for a further discussion of the
GMDB liability calculation).
2. Results of Operations
March 2004 to March 2003 Three Month Comparison
Net Income
Net income of $9.8 million for the first quarter of 2004 was an improvement of $21.4 million from the loss of $11.6 million incurred
in the first quarter of 2003. The first quarter of 2004 had a cumulative effect of accounting change charge of $17.1 million, net of
tax, related to the January 1, 2004 adoption of SOP 03-1. Excluding the cumulative effect charge, net income increased by 38.4
million. Deferred policy acquisition costs ("DAC") amortization decreased by $52 million during the first three months of 2004
compared to 2003 due to purchase accounting. Further details regarding the components of revenues and expenses are described in the
following paragraphs.
Revenues
Consolidated revenues increased by $36.1 million, from $104.3 million to $140.5 million. Net investment income increased by $18.4
million primarily due to the adoption of SOP 03-1 as a result of classifying interest credited on account balances of our MVA annuity
contracts as interest credited in the current year as opposed to net investment income in the prior year period.
Policy charges and fee income increased by $8.4 million. Mortality and expense ("M&E") charges increased by $20.5 million as a
result of the increase in the in-force business. Annuity fees are mainly asset-based fees, which are dependent on the fund
balances. Average annuity separate account fund balances have increased as a result of favorable valuation changes in the securities
market over the past year and positive net flows, resulting in an increase in policy charges and fee income. The increase in M&E
fees was partially offset by a $10.5 million realized market value adjustment expense on the Company's fixed, market value adjusted
investment option related to the adoption of SOP 03-1.
Asset management fees increased by $6.3 million as a result of higher average 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.
Benefits and Expenses
Policyholders' benefits increased by $1.9 million primarily from an increase in the supplementary contracts with life reserve of $1.0
million.
As of March 31, 2004, 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 $3.5 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 March 31, 2004, 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. Effective January 1, 2004, the Company adopted SOP 03-1,
which requires us to record such a liability based on application of an expected benefit ratio to "cumulative assessments" through
the balance sheet date, and then subtracting "cumulative excess payments" from that date. The GMDB reserve as of March 31, 2004
amounted to $13.1 million.
In addition to establishing a liability associated with the GMDB feature, SOP 03-1 required a change in valuation and presentation of
our liability associated with the MVA feature contained in certain annuity contracts. The MVA feature requires the Company to pay to
the contract holder upon surrender the accreted value of the fund as well as a MVA based on the crediting rates on the contract
surrendered compared to crediting rates on newly issued contracts. At December 31, 2003, this liability was recorded at market
value, which considered the effects of unrealized gains and losses in contract value resulting from changes in crediting rates. Upon
adoption of SOP 03-1, the Company reclassified this liability from "Separate account liabilities" to "Policyholders' account
balances" and reduced it by $117.1 million to reflect accreted value, which excludes the effect of unrealized gains and losses in
contract value resulting from changes in crediting rates. However, in valuing the VOBA established at the date of acquisition, we
considered the effect of unrealized gains and losses in contract value associated with annuities containing the MVA feature on future
cash flows. As a result, the reduction in the liability for the MVA feature resulted in a net decrease in VOBA of $128.9 million,
and lower future amortization.
Interest credited to policyholder account balances increased by $8.4 million primarily due to the adoption of SOP 03-1 amounting to
an increase of $16.9 million. As discussed above, previously interest credited was recorded within net investment income. This
increase was partially offset by decreased amortization of deferred purchase credits of $8.5 million consistent with decreased
amortization of DAC primarily as a result of purchase accounting.
General, administrative, and other expenses decreased by $33.0 million from the prior year quarter. The primary reason was a decrease
in DAC amortization of $52 million due to the Company's DAC asset being assigned a fair value of zero, consistent with purchase
accounting guidance as of the date of the acquisition. Partially offsetting this was a $11.9 million increase in expense related to
the future fees payable to ASI liability. Expense on these obligations is driven by the cash flows from the underlying annuity
contracts acting as collateral. Due to purchase accounting and increasing asset values of those annuity contracts, driven by the
improving equity markets, the cash flows, and therefore the expense has increased from prior year levels.
4. Significant Accounting Policies
For 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, 2003.
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 March 31, 2004. Based on such evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that, as of March 31, 2004, our disclosure controls and procedures were effective in timely alerting them to
material information relating to us 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 March 31, 2004, 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.
The Company has received formal requests for information from regulators including, among others, the New York Attorney General's
Office and the Securities and Exchange Commission in connection with its variable annuity businesses. The Company believes these
matters may lead to proceedings. The Company is engaged in ongoing discussions with the above organizations and is fully cooperating
with them. The Company has expanded the disclosure in its variable annuity prospectuses concerning its policies and procedures
regarding market timing, and the discussions with the above organizations have focused on the Company's previous disclosures relating
to these policies and procedures.
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, which held
oral arguments on April 29, 2004.
The Company's parent and sole shareholder, ASI, is currently a named defendant in six purported nationwide class action lawsuits.
Each of these lawsuits alleges that ASI and others violated federal securities laws in connection with late trading and market timing
activities and seeks remedies, including compensatory and punitive damages in unspecified amounts. The cases are as follows:
Lowinger v. Invesco Advantage Health Sciences Fund, et al., filed in the United States District Court for the Southern District of
New York in December, 2003 and served on ASI in February, 2004; Russo, et al. v. Invesco Advantage Health Sciences Fund, et al.,
filed in the United States District Court for the Southern District of New York in December, 2003, this suit has not been served on
ASI; Lori Weinrib v. Invesco Advantage Health Sciences Fund, et al., filed in the United States District Court for the Southern
District of New York in January, 2004, this suit has not been served on ASI; Erhlich v. Invesco Advantage Health Sciences Fund et
al., filed in the United States District Court for the District of Colorado in December, 2003, this suit was served on ASI in
February, 2004; Fattah v. Invesco Advantage Health Sciences Fund, et al., filed in the United States District Court for the District
of Colorado in December, 2003, this suit has not been served on ASI. The Company believes that these cases will be consolidated in
Multi-District litigation located in the Baltimore Division of the United States District Court for the District of Maryland.
The Company is also aware that ASI is a defendant designated as "Does 1-500" in a suit filed in October, 2003 in the United States
District Court for the Central District of California entitled Mike Sayegh v. Janus Capital Corporation, et al. This suit alleges
that various defendants engaged in improper late trading and market timing activities in various funds also named as defendants. The
complaint further alleges that such activities were in violation of California Business and Professional Code Section 17200. This
suit has not been served on ASI. The Company believes that this suit may be included in the Multi-District action discussed
above.
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, after consideration of applicable reserves and
indemnification, 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, administrative and regulatory
matters, including the complaints described above, may, in whole or in part, after satisfaction of certain retention requirements,
fall within the purview of SICL's indemnification obligations to Prudential Financial and its subsidiaries under the terms of the
Acquisition. Those obligations of SICL provide for indemnification of certain judgments, settlements, and costs and expenses
associated with lawsuits and other claims against the Company ("matters"), and apply only to matters, or groups of related matters,
for which the costs and expenses exceed $25 thousand individually. Those obligations only apply to such costs and expenses that
exceed $10 million in the aggregate, subject to reduction for insurance proceeds, certain accruals and any tax benefit applicable to
such amounts, and those obligations do not apply to the extent that such aggregate exceeds $1 billion.
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
10-K, Registration No. 33-44202, CIK No. 0000881453, Accession No. 0000881453-04-000025.
3(ii) By-Laws of American Skandia Life Assurance Corporation are incorporated by reference to Form 10-K, Registration No.
33-44202, CIK No. 0000881453, Accession No. 0000881453-04-000025.
4 Instruments defining the right of security holders including indentures are incorporated by reference to the
Company's Registration Nos. 333-114617, 33-88360, 33-89676, 33-91400, 333-00995, 333-02867, 333-24989, 333-25761,
333-97939, 333-26695, 333-97943 and 333-114615.
10 Material contracts are incorporated by reference to the Company's Form S-3, Registration No. 333-114617.
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 May 14, 2004
Zafar Rashid Chief Financial Officer
(Authorized Signatory and
Principal Financial Officer)
Exhibit 31.1
I, David R. Odenath, Jr. 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: May 14, 2004
/s/ David R. Odenath, Jr.
David R. Odenath, Jr.
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: May 14, 2004
/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, Jr., 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 March
31, 2004 (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: May 14, 2004
/s/ David R. Odenath, Jr.
----------------------------
Name: David R. Odenath, Jr.
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 March 31, 2004 (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: May 14, 2004
/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.