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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-K
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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 (I.R.S. Employer
of Incorporation or Organization) Identification Number)
One Corporate Drive
Shelton, Connecticut 06484
(203) 926-1888
(Address and Telephone Number of Registrant's Principal Executive Offices)
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No|X|
State the aggregate market value of the voting stock held by non-affiliates of the registrant: NONE
As of March 30, 2005, 25,000 shares of the registrant's Common Stock (par value $100) consisting of 100 voting shares and
24,900 non-voting shares, were outstanding. As of such date, American Skandia, Inc., an indirect wholly-owned subsidiary of
Prudential Financial, Inc., a New Jersey corporation, owned all of the registrant's Common Stock.
American Skandia Life Assurance Corporation meets the conditions set
forth in General Instruction (I) (1) (a) and (b) on Form 10-K and
is therefore filing this Form with the reduced disclosure format.
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TABLE OF CONTENTS
Page
Number
PART I Item 1. Business........................................................................................ 3
Item 2. Properties...................................................................................... 5
Item 3. Legal Proceedings............................................................................... 6
PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities............................................................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 7
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................... 12
Item 8. Financial Statements and Supplementary Data..................................................... 14
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure............ 14
Item 9A. Controls and Procedures......................................................................... 14
Item 9B. Other Information............................................................................... 14
PART III Item 10. Directors and Executive Officers of the Registrant ............................................. 14
Item 14. Principal Accounting Fees and Services ......................................................... 14
PART IV Item 15. Exhibits and Financial Statement Schedules...................................................... 15
SIGNATURES........................................................................................................... 16
Forward-Looking Statements
Some of the statements included in this Annual Report on Form 10-K, including but not limited to those in Management's Discussion and
Analysis of Financial Condition and Results of Operations, may 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," "should," "will," "shall" 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. There can be no assurance that future developments
affecting American Skandia Life Assurance Corporation 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, among others: (1) general economic, market and political conditions, including the performance of financial markets and
interest rate fluctuations; (2) domestic or international military or terrorist activities or conflicts; (3) volatility in the
securities markets; (4) fluctuations in foreign currency exchange rates and foreign securities markets; (5) regulatory or legislative
changes, including changes in tax law; (6) changes in statutory or U.S. GAAP accounting principles, practices or policies; (7)
differences between actual experience regarding mortality, morbidity, persistency, surrender experience, interest rates, or market
returns and the assumptions we use in pricing our products, establishing liabilities and reserves or for other purposes; (8)
re-estimates of our reserves for future policy benefits and claims; (9) changes in our assumptions related to deferred policy
acquisition costs; (10) events resulting in catastrophic loss of life; (11) investment losses and defaults; (12) changes in our
claims-paying or credit ratings; (13) competition in our product lines and for personnel; (14) adverse determinations in litigation
or regulatory matters and our exposure to contingent liabilities; and (15) the effects of acquisitions, divestitures and
restructurings, including possible difficulties in integrating and realizing the projected results of acquisitions. American Skandia
Life Assurance Corporation does not intend, and is under no obligation, to update any particular forward-looking statement included
in this document.
PART 1
Item 1. Business
Overview
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 the outstanding common stock
of Skandia U.S., Inc. ("SUSI"), an indirect parent of the Company. On September 9, 2003, Prudential Financial acquired the remaining
10% of SUSI's outstanding common stock. See Notes 4 and 6 to the Consolidated Financial Statements included herein for additional
information on the Acquisition.
Prior to April 30, 2003, the Company had a 99.9% ownership interest in Skandia Vida, S.A. de C.V. ("Skandia Vida") 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. 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 registered investment companies supporting the variable annuity contracts, which is principally correlated to
equity market performance, can significantly impact the market for the Company's products.
American Skandia, Inc. ("ASI"), the direct parent of the Company, may make additional capital contributions to the Company, as
needed, to enable it to comply with its reserve requirements and fund expenses in connection with its business. Generally, ASI is
under no obligation to make such contributions and its assets do not back the benefits payable under the Company's policyholder
contracts. During 2004, ASI made no capital contributions to the Company. During 2003 and 2002, ASI made capital contributions to
the Company of $2.2 million and $259.7 million, respectively. The Company has complied with the National Association of Insurance
Commissioner's ("NAIC") Risk-Based Capital ("RBC") reporting requirements and has total adjusted capital in excess of required
capital. The Company expects to maintain statutory capital above 300% of Company Action Level Risk Based Capital. The Company is
engaged in a business that is highly competitive because of the large number of stock and mutual life insurance companies and other
entities engaged in marketing individual annuities.
The following paragraphs describe the Company's products, marketing, distribution, underwriting and pricing.
Products
The Company offers a wide array of annuities, including (1) 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; (2) certain other fixed deferred annuities that are not registered with the Securities and Exchange
Commission; and (3) fixed, adjustable and variable immediate annuities. Prior to July 31, 2002, the Company had offered
non-registered group variable annuities designed as funding vehicles for various types of qualified retirement plans. The Company
has continued to accept additional contributions to qualified plans existing on July 31, 2002. Prior to June 30, 2003, the Company
also offered and sold single premium variable life insurance products, and, prior to April 15, 2002, flexible premium variable life
insurance products. The Company has continued to service and accept additional premiums for its existing flexible premium variable
life insurance contracts but is no longer accepting new variable life business.
Annuity contracts represent the insurer's contractual obligation to make payments over a given period of time, often measured by the
life of the recipient, in return for a single deposit or a series of scheduled or flexible deposits. The insurer's obligation to pay
may commence immediately or be deferred. If the insurer's payments are deferred, the insurer generally incurs an obligation to make
a surrender value available during the deferral period based on an account value, and guarantees as applicable. The account value
consists of the deposits and may earn interest, or may vary with the performance of investments in the funds selected by the insurer
and made available for election by contract holders. Gains on deposits made by the contract holder, before distribution, generally
are tax deferred for the contract holder. Distributions are taxed as ordinary income to the contract holder. During the deferral
period, distributions are assumed to come first from any gains in the contract and may be subject to a tax penalty. For immediate
annuities and annuitized deferred annuities, a portion of each distribution may be treated as a return of the taxpayer's investment
in the contract.
Marketing and Distribution
The Company sells its wide array of annuity products through multiple distribution channels, including (1) independent financial
planners; (2) broker-dealers that generally are members of the New York Stock Exchange, including "wirehouse" and regional
broker-dealer firms; and (3) 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 seeking to acquire their distribution channels as a means of securing
sales, the Company has not done so. Instead, the Company believes that 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.
Underwriting and Pricing
We earn fees calculated on the average separate account assets invested in the mutual funds underlying our variable annuity products,
and mortality and expense fees and other fees for various insurance-related options and features based on average daily net assets of
the value of the annuity separate accounts. We price the fixed-rate options of our variable annuities based on assumptions as to
investment returns, expenses and persistency. Competition also influences our pricing. We seek to maintain a spread between the
return on our invested assets and the interest we credit on our fixed-rate option annuities. To encourage persistency, all of our
variable annuities have withdrawal restrictions and declining surrender or withdrawal charges for a specified number of years.
Reserves
We establish reserve and policyholder fund liabilities to recognize our future benefit obligations for our in force life and annuity
policies, including the minimum death benefit and living benefit guarantee features of some of these policies. We establish
policyholders' account balances representing cumulative gross premium payments plus credited interest and/or fund performance, less
withdrawals, expenses and mortality charges.
Reinsurance
During 2004, we entered into two new reinsurance agreements with affiliates as part of our risk management and capital management
strategies. We entered into a 100% coinsurance agreement with The Prudential Insurance Company of America providing for the
reinsurance of our guaranteed minimum withdrawal benefit feature (GMWB). We also entered into a 100% coinsurance agreement with
Pruco Reinsurance providing for the reinsurance of our guaranteed return option (GRO). In prior years, the Company entered into
reinsurance agreements to provide additional capacity for growth in supporting the cash flow strain from the Company's variable
annuity and variable life insurance business.
Regulatory Environment
In order to continue to market annuity products, the Company must meet or exceed the statutory capital and surplus requirements of
the state insurance regulators of the states in which it conducts business. Statutory accounting practices differ from U.S. GAAP in
two major respects. First, under statutory accounting practices, the acquisition costs of new business are charged to expense, while
under U.S. GAAP they are initially deferred and amortized over a period of time. Second, under statutory accounting practices, the
required additions to statutory reserves for new business in some cases may initially exceed the statutory revenues attributable to
such business. These practices result in a reduction of statutory income and surplus at the time of recording new business.
Insurance companies are subject to RBC guidelines, monitored by state insurance regulators, that measure the ratio of the Company's
statutory surplus with certain adjustments to its required capital, based on the risk characteristics of its insurance liabilities
and investments. Required capital is determined by statutory formulas that consider risks related to the type and quality of invested
assets, insurance-related risks associated with the Company's products, interest rate risks and general business risks. The RBC
calculations are intended to assist regulators in measuring the adequacy of the Company's statutory capitalization.
The Company considers RBC implications in its asset/liability management strategies. Each year, the Company conducts a thorough
review of the adequacy of statutory insurance reserves and other actuarial liabilities. The review is performed to ensure that the
Company's statutory reserves are computed in accordance with accepted actuarial standards, reflect all contractual obligations, meet
the requirements of state laws and regulations and include adequate provisions for any other actuarial liabilities that need to be
established. All significant statutory reserve changes are reviewed by the Board of Directors and are subject to approval by the
State of Connecticut Insurance Department (the "Insurance Department"). The Company believes that its statutory capital is adequate
for its currently anticipated levels of risk as measured by applicable regulatory guidelines.
The NAIC has developed a set of financial relationships or tests known as the Insurance Regulatory Information System ("IRIS") to
assist state regulators in monitoring the financial condition of insurance companies and identifying companies that require special
attention or action by insurance regulatory authorities. Insurance companies generally submit data annually to the NAIC, which in
turn analyzes the data using prescribed financial data ratios, each with defined "usual ranges." Generally, regulators will begin to
investigate or monitor an insurance company if its ratios fall outside the usual ranges for four or more of the ratios. If an
insurance company has insufficient capital, regulators may act to reduce the amount of insurance it can issue. The Company is not
currently subject to regulatory scrutiny based on these ratios.
The Company is subject to the regulations of the Insurance Department. A detailed financial statement in the prescribed form (the
"Annual Statement") is filed with the Insurance Department each year covering the Company's operations for the preceding year and its
financial position as of the end of that year. Regulation by the Insurance Department includes periodic examinations to verify the
accuracy of our contract liabilities and reserves. The Company's books and accounts are subject to review by the Insurance Department
at all times. A full examination of the Company's operations is conducted periodically by the Insurance Department and under the
auspices of the NAIC.
The Company is subject to regulation under the insurance laws of all jurisdictions in which it operates. The laws of the various
jurisdictions establish supervisory agencies with broad administrative powers with respect to various matters, including licensing to
transact business, overseeing trade practices, licensing agents, approving contract forms, establishing reserve requirements, fixing
maximum interest rates on life insurance contract loans and minimum rates for accumulation of surrender values, prescribing the form
and content of required financial statements and regulating the type and amounts of permitted investments. The Company is required to
file the Annual Statement with supervisory agencies in each of the jurisdictions in which it does business, and its operations and
accounts are subject to examination by these agencies at regular intervals.
Although the federal government generally does not directly regulate the business of insurance, federal initiatives often have an
impact on our business in a variety of ways. Certain insurance products of the Company are subject to various federal securities laws
and regulations. In addition, current and proposed federal measures that may significantly affect the insurance business include
regulation of insurance company solvency, employee benefit regulation, the removal of barriers preventing banks from engaging in the
insurance business, tax law changes affecting the taxation of insurance companies and the tax treatment of insurance products and its
impact on the relative desirability of various personal investment vehicles.
Competition
The Company is competing for management of individuals' savings dollars in the United States. Competitors in this business include
banks, investment companies, insurance companies and other financial institutions. According to Info-One's Variable Annuity Research
& Data Service ("VARDS"), the combined annuity business of Prudential Financial, which includes the Company, was ranked 10th in sales
of variable annuities for the year ended December 31, 2004, and 8th in assets under management as of December 31, 2004. Competitive
factors in this industry include investment performance, product design, visibility in the marketplace, financial strength ratings,
distribution capabilities, levels of charges and credited rates, reputation, customer service and sales force service and education.
As of the filing date, the Company's financial strength or claims paying ratings from Fitch Ratings, A.M. Best Co. and Standard and
Poor's is AA-, A+ and AA-, respectively.
Segments
The Company currently operates as one reporting segment. Revenues, net income and total assets for this segment can be found on the
Company's Consolidated Statements of Financial Position as of December 31, 2004 and 2003 and Consolidated Statements of Operations
and Comprehensive Income for the year ended December 31, 2004, eight months ended December 31, 2003, four months ended April 30, 2003
and year ended December 31, 2002. The Company's total assets as of December 31, 2004, 2003 and 2002 were $30.3 billion, $27.2
billion and $23.7 billion, respectively. Revenues and assets generated from the Company's variable life and qualified plan product
offerings have been insignificant in comparison to the revenues and assets generated from the Company's core product, variable
annuities.
Employees
As of December 31, 2004, the Company had 435 employees.
Item 2. Properties
The Company occupies office space in Shelton, Connecticut, which is leased from an affiliate, American Skandia Information Services
and Technology Corporation. The Company entered into a lease for office space in Westminster, Colorado, effective January 1, 2001,
and established an additional customer service center at that location. Effective December 31, 2004, the Company closed its customer
service center in Colorado. The Company believes that its current facilities are satisfactory for its near term needs.
Item 3. 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 and other American Skandia entities have 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 and other American Skandia entities are engaged in ongoing discussions with the above organizations and are
fully cooperating with them. The Company believes these matters are likely to lead to proceedings and/or settlements. 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 was 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 alleged that the Company and certain of its affiliates violated
federal securities laws in marketing variable annuities and sought injunctive relief and compensatory damages in unspecified
amounts. In July 2003, the court granted the Company's motion to dismiss the complaint with prejudice. As previously reported, the
United States Court of Appeals for the Second Circuit, upheld the dismissal in May 2004. The United States Court of Appeals for the
Second Circuit denied plaintiffs petition for the appeal to be reheard en banc and plaintiffs sought review by the United States
Supreme Court, which request was denied.
The Company's parent and sole shareholder, ASI, initially was a named defendant in six purported nationwide class action lawsuits.
Each of these lawsuits alleged 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. These cases have been consolidated in multi-district litigation
located in the Baltimore Division of the United States District Court for the District of Maryland. Consolidated amended complaints
were filed in the multi-district litigation in September, 2004, and ASI was not named as a defendant.
The Company is also aware that ASI may be a defendant designated as one of "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. This suit has been included in the multi-district action, discussed above.
The Company's litigation is subject to many uncertainties, and given its 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, and contingencies, including the complaints described above, may, in whole or in part, after satisfaction of certain
retention requirements, fall within Skandia Insurance Company Ltd. (SICL) 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 $25,000 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.
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Isuer Purchases of Equity Securities
The Company is a wholly-owned subsidiary of ASI. There is no public market for the Company's common stock.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") addresses the consolidated financial
condition of American Skandia Life Assurance Corporation as of December 31, 2004, compared with December 31, 2003, and its
consolidated results of operations for the years ended December 31, 2004 and 2003.
For purposes of MD&A, no explicit distinction is made between the pre-purchase accounting periods and the post purchase accounting
periods.
Overview
The Company offers a wide array of annuities, including: (1) 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; (2) certain other fixed deferred annuities that are not registered with the Securities and Exchange
Commission; and (3) fixed, adjustable and variable immediate annuities. These markets are subject to regulatory oversight with
particular emphasis placed on company solvency and sales practices. These markets are also subject to increasing competitive
pressure as the legal barriers, which have historically segregated the markets of the financial services industry, have been changed
through both legislative and judicial processes. Regulatory changes have opened the insurance industry to competition from other
financial institutions, particularly banks and mutual funds that are positioned to deliver competing investment products through
large, stable distribution channels.
Besides policy charges and fee income, the Company also earns revenues from asset management fees calculated on the average separate
account fund balances. The Company's operating expenses principally consist of insurance benefits provided, general business
expenses, commissions and other costs of selling and servicing the various products we sell.
The Company's profitability depends principally on its ability and Prudential Financial's ability to price and manage risk on
insurance products, to attract and retain customer assets, and to manage expenses. Specific drivers of our profitability include:
o our ability to manufacture and distribute products and services and to introduce new products gaining market acceptance on
a timely basis;
o our ability to price our insurance products at a level that enables us to earn a margin over the cost of providing benefits
and the expense of acquiring customers and administering those products;
o our mortality and morbidity experience on annuity products;
o our persistency experience, which affects our ability to recover the cost of acquiring new business over the lives of the
contracts;
o our cost of administering insurance contracts and providing asset management products and services;
o our returns on invested assets, net of the amounts we credit to policyholders' accounts;
o our amount of assets under management and changes in their fair value, which affect the amount of asset management fees we
receive;
o our ability to generate favorable investment results through asset/liability management and strategic and tactical asset
allocation; and
o our ability to maintain our credit and financial strength ratings.
Application of Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America,
or GAAP, requires the application of accounting policies that often involve a significant degree of judgment. Management, on an
ongoing basis, reviews estimates and assumptions used in the preparation of financial statements. If management determines that
modifications in assumptions and estimates are appropriate given current facts and circumstances, results of operations and financial
position as reported in the Consolidated Financial Statements could change significantly.
The following sections discuss the accounting policies applied in preparing our financial statements that management believes are
most dependent on the application of estimates and assumptions.
Purchase accounting
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 assigning the unamortized deferred policy acquisition costs ("DAC") asset a
value of zero, the future fees payable to ASI liability was decreased by $256.6 million and an asset for valuation of business
acquired ("VOBA") was established for $440.1 million (see Notes 4, 5 and 6 in the December 31, 2004 financial statements included
herein for further discussion).
Valuation of investments
As prescribed by GAAP, we present our investments classified as available for sale, including fixed maturity and equity securities,
and our investments classified as trading, at fair value in the statements of financial position. The fair values for our public
fixed maturity securities and our public equity securities are based on quoted market prices or estimates from independent pricing
services. However, for our investments in private securities such as private placement fixed maturity securities, which comprise 3%
of our investments as of December 31, 2004, this information is not available. For these private investments, fair value is
determined typically by using a discounted cash flow model, which considers current market credit spreads for publicly traded issues
with similar terms by companies of comparable credit quality, and an additional spread component for the reduced liquidity associated
with private placements. This additional spread component is determined based on surveys of various third party financial
institutions.
For fixed maturities classified as available for sale, the impact of changes in fair value is recorded in "Accumulated other
comprehensive (loss) income," a separate component of equity. However, the carrying value of these securities is reduced, with a
corresponding charge to earnings, when a decline in value is considered to be other than temporary. Factors we consider in
determining whether a decline in value is other than temporary include: the extent (generally if greater than 20%) and duration
(generally if greater than six months) of the decline; the reasons for the decline in value (credit event or interest rate related);
our ability and intent to hold the investment for a period of time that will allow for a recovery of value; and the financial
condition and near-term prospects of the issuer. When it is determined that a decline in value is other than temporary, the carrying
value of the security is reduced to fair value, with a corresponding charge to earnings. This corresponding charge is referred to as
an impairment and is reflected in "Realized investment (losses) gains, net" in the Consolidated Statements of Operations and
Comprehensive Income. The level of impairment losses can be expected to increase when economic conditions worsen and decrease when
economic conditions improve.
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 Consolidated Statements of Operations and Comprehensive Income, as a component of "Other income."
Deferred policy acquisition costs
We capitalize costs that vary with and are related primarily to the acquisition of new and renewal annuity contracts. These costs
include primarily commissions, costs of policy issuance and underwriting and other variable expenses. We amortize these deferred
policy acquisition costs, or DAC, over the expected lives of the contracts, based on the level and timing of either gross margins,
gross profits, or gross premiums, depending on the type of contract. As of December 31, 2004 and 2003, DAC in our annuity business
was $300.9 million and $122.5 million, respectively.
DAC associated with our annuity contracts is amortized over the life of these policies in proportion to gross profits. In calculating
gross profits, we consider mortality, persistency, and other elements as well as rates of returns on investments associated with
these contracts. We regularly evaluate and adjust the related DAC balance with a corresponding charge or credit to current period
earnings for the effects of our actual gross profits and changes in our assumptions regarding estimated future gross profits. Our
evaluation of DAC related to variable annuity contracts considers expected gross profits that would be generated within a
pre-established reasonably possible range, or corridor, of future rate of return scenarios. Adjustments to DAC are made only when
our long-term view of investment returns considered in our estimates of future gross profits results in a DAC balance outside of the
corridor. However, notwithstanding our corridor approach, we may determine that a revision of our expected gross profits and a
related adjustment to our DAC is necessary if changes in additional factors, such as policyholder activity, suggest that our current
view of expected gross profits may no longer represent our best estimate. For variable annuity contracts, DAC is more sensitive to
these effects due primarily to the significant portion of gross profits that is dependent upon the total rate of return on assets
held in separate account investment options, and the shorter average life of the contracts. This rate of return influences the fees
we earn, costs we incur associated with minimum death benefit and other contractual guarantees specific to our variable annuity
contracts, as well as other sources of profit.
In evaluating the DAC for our annuity products future rate of return assumptions are evaluated using a reversion to mean approach, a
common industry practice. Under this approach, we consider actual returns over a period of time and project returns for the future
period so that the assets grow at the expected rate of return for the entire period. If the projected future rate of return is
greater than our maximum future rate of return, we use our maximum reasonable future rate of return. For variable annuities products,
our expected rate of return is 8% per annum, which reflects an expected rate of return of 8.9% per anum for equity type assets. The
future equity rate of return used varies by annuity product, but was under 8.9% per annum for all of our variable annuity products
for our evaluation of deferred policy acquisition costs as of December 31, 2004.
To demonstrate the sensitivity of our variable annuity DAC balance relative to our future rate of return, increasing or decreasing
our future rate of return by 100 basis points would have required us to consider adjustments, subject to our application of the
corridor approach, to that DAC balance as follows. The information provided in the table below considers only the effect of changes
in our projected rate of return and not changes in any other assumptions such as persistency, mortality, or expenses included in our
evaluation of DAC.
Increase/(Reduction)
in DAC
-----------------------
-----------------------
(in millions)
Increase in projected rate of return by 100 basis points..... $ 3.6
Decrease in projected rate of return by 100 basis points..... $ (3.7)
Future fees payable to ASI
In a series of transactions with ASI, the Company sold certain rights to receive a portion of future fees and contract charges
expected to be realized on designated blocks of deferred annuity contracts.
The proceeds from the sales have been recorded as a liability and are being amortized over the remaining surrender charge period of
the designated contracts using the interest method. The Company did not sell the right to receive future fees and charges after the
expiration of the surrender charge period.
In connection with these sales, ASI, through special purpose trusts, issued collateralized notes in private placements, which were
secured by the rights to receive future fees and charges purchased from the Company. As part of the Acquisition, the notes issued by
ASI were repaid.
Under the terms of the securitization purchase agreements, the rights sold provide for ASI to receive a percentage (60%, 80% or 100%
depending on the underlying commission option) of future mortality and expense charges and contingent deferred sales charges, after
reinsurance, expected to be realized over the remaining surrender charge period of the designated contracts (generally 6 to 8
years). As a result of purchase accounting, the liability was reduced to reflect the discounted estimated future payments to be
made and has been subsequently reduced by amortization according to a revised schedule. If actual mortality and expense charges and
contingent deferred sales charges are less than those projected in the original amortization schedules, calculated on a transaction
by transaction basis, ASI has no recourse against the Company.
The Company has determined, using assumptions for lapses, mortality, free withdrawals and a long-term fund growth rate of 8% on the
Company's assets under management, that the discounted estimated future payments to ASI would be $222.6 million and $337.1 million as
of December 31, 2004 and 2003, respectively.
Taxes on Income
Tax regulations require items to be included in the tax return at different times than the items are reflected in the financial
statements. As a result, the effective tax rate reflected in the financial statements is different than the actual rate applied on
the tax return. Some of these differences are permanent such as expenses that are not deductible in our tax return, and some
differences are temporary, reversing over time, such as valuation of insurance reserves. Timing differences create deferred tax
assets and liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in future years
for which we have already recorded the tax benefit in our income statement. Deferred tax liabilities generally represent tax expense
recognized in our financial statements for which payment has been deferred, or expenditures for which we have already taken a
deduction in our tax return but have not yet recognized in our financial statements. The application of GAAP requires us to evaluate
the recoverability of our deferred tax assets and establish a valuation allowance if necessary to reduce our deferred tax asset to an
amount that is more likely than not to be realized. Realization of certain deferred tax assets is dependent upon generating
sufficient taxable income in the appropriate jurisdiction prior to the expiration of the carry-forward periods. Although realization
is not assured, management believes it is more likely than not the deferred tax assets, net of valuation allowances, will be
realized.
Our accounting represents management's best estimate of future events that can be appropriately reflected in the accounting
estimates. Certain changes or future events, such as changes in tax legislation, geographic mix of earnings and completion of tax
audits could have an impact on our estimates and effective tax rate.
To the extent our effective tax rate increases or decreases by 1 percent of income from operations before income taxes and
cumulative effect of accounting change, consolidated income before and cumulative effect of accounting change would have increased or
declined by $1.4 million in 2004.
The amount of income taxes paid by the Company is subject to ongoing audits in various jurisdictions. We reserve for our best
estimate of potential payments/settlements to be made to the Internal Revenue Service and other taxing jurisdictions for audits
on-going or not yet commenced.
Reserves for contingencies
A contingency is an existing condition that involves a degree of uncertainty that will ultimately be resolved upon the occurrence of
future events. Under U.S. GAAP, reserves for contingencies are required to be established when the future event is probable and its
impact can be reasonably estimated. An example is the establishment of a reserve for losses in connection with an unresolved legal
matter. The initial reserve reflects management's best estimate of the probable cost of ultimate resolution of the matter and is
revised accordingly as facts and circumstances change and, ultimately, when the matter is brought to closure. In situations in which
the Company is to be indemnified by SICL, there will be no financial impact on the Consolidated Statements of Operations and
Comprehensive Income. See Note 12 to the Consolidated Financial Statements for a further discussion of indemnification agreements.
Other significant estimates
In addition to the items discussed above, the application of U.S. GAAP requires management to make other estimates and assumptions.
Recently Issued Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements for a discussion of recently issued accounting pronouncements.
The Company's Changes in Financial Position and Results of Operations are described below.
Changes in Financial Position
2004 versus 2003
From December 31, 2003 to December 31, 2004 total assets increased by $3.1 billion from $27.2 billion to $30.3 billion. Sales
activity during the year ended December 31, 2004 resulted in an increase in deferred policy acquisition costs ("DAC") and deferred
purchase credits of $178.3 million and $74.2 million, respectively. In addition, fixed maturities increased by $1.3 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
has the effect of establishing reserves for guaranteed minimum death benefit ("GMDB") provisions of the Company's annuity contracts.
Separate account assets increased by $1.2 billion, which includes a $3.0 billion increase primarily from market value appreciation
and positive net flows and a $1.8 billion decrease due to the SOP 03-1 reclassification of the assets supporting the fixed, MVA
liability to general account accounting treatment. Short-term investments increased by $384.4 million primarily due to the adoption
of SOP 03-1 in addition to the initiation of a securities lending program and the expansion of repurchase agreements. Valuation of
business acquired ("VOBA") decreased by $168.0 million, primarily related to the adoption of SOP 03-1.
During the year, liabilities increased by $3.0 billion from $26.6 billion to $29.6 billion. Policyholders' account balances
increased by $1.3 billion primarily due to the SOP 03-1 reclassification of the fixed, MVA liability to general account accounting
treatment 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 as well as negative net flows activity. As a result of favorable
market returns during 2004, we experienced significant transfers of customer account values from the MVA option to mutual fund
options included in separate account liabilities. Separate account liabilities increased by $1.2 billion, as described above. SOP
03-1 also required the Company to record a GMDB liability for $8.6 million on January 1, 2004 which grew to $26.4 million as of
December 31, 2004. During the year, short-term and long-term borrowings increased $24.4 million and $135.0 respectively. The
proceeds from these borrowings were used to support working capital needs. During 2004, the Company initiated a securities lending
program and expanded its repurchase agreements to enhance yield performance, which resulted in an increase in cash collateral for
loan securities and securitizations sold under agreement to repurchase of $291.3 million and $12.5 million, respectively. Future
fees payable to ASI decreased $107.3 million during the year due to amortization.
Other liabilities increased by $160.1 million from $208.2 million to $368.3 million due to an increase in drafts outstanding of
$103.0 million. In addition, during the third quarter of 2004, the Company identified a system-generated calculation error in its
annuity contract administration system. This error related to the calculation of amounts due to customers for certain transactions
subject to a market value adjustment upon the surrender or transfer of monies out of their annuity contract's fixed allocation
options. The error resulted in an aggregate underpayment to policyholders of approximately $27.0 million. A reserve of $32.0
million for the amount of the underpayment and related costs to the company is included in Other liabilities at December 31, 2004.
Current year net income was reduced by $3 million for the effect of the error in respect of transactions that occurred in prior
years, net of related amortization and taxes.
Results of Operations
2004 versus 2003
Net Income
Net income of $89.9 million for 2004 decreased $8.8 million from $98.7 million in 2003. Net income in 2004 includes a cumulative
effect of accounting change charge of $17.1 million, net of taxes, related to the January 1, 2004 adoption of SOP 03-1. Excluding
the cumulative effect charge, net income increased by $8.3 million. Policy charges and fee income increased $7.4 million and asset
management fees increased by $17.9 due to favorable market conditions partially offset by higher general, administrative and other
expenses of $6.9 million and higher benefit costs. Further details regarding the components of revenues and expenses are described
in the following paragraphs.
Revenues
Consolidated revenues increased by $91.5 million, from $484.1 million to $575.6 million. Net investment income increased by $65.0
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 $7.4 million. Mortality and expense charges ("M&E") increased by $56.9 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 $41.7 million realized market value adjustment expense on the Company's fixed, market value adjusted
investment option related to the adoption of SOP 03-1. In addition, surrender charges declined by $5.0 million.
Asset management fees increased by $17.9 million from December 31, 2003 to December 31, 2004 as a result of higher average assets
under management compared to 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 $19.3 million from $67.6 million in 2003 to $86.9 million in 2004. Although claims paid under
our minimum death benefit guarantees declined by $11.9 million as a result of improved equity markets, we increased our reserve for
guaranteed minimum death and living benefits by $18.5 million as required under SOP 03-01. In addition, policyholder's benefits
increased due to an increase in reserves for payout annuity contracts with life contingency as a result of increased premiums as well
as an increase in costs incurred relating to reinsurance transactions.
As of December 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 $2.9 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 December 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" through that date. The GMDB reserve as of December 31,
2004 amounted to $26.4 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 market value adjustment ("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.or an index rate at time of
surrender, if applicable. The MVA may increase or decrease the amount due to the contract holder. 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 valuation of
business acquired ("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 $61.7 million primarily due to the adoption of SOP 03-1, which
accounted for $68.2 million of the increase. As discussed above, prior to January 1, 2004, interest credited was recorded within net
investment income. This increase was partially offset by decreased amortization of deferred purchase credits of $2.3 million
consistent with decreased amortization of DAC, primarily as a result of purchase accounting.
General, administrative, and other expenses increased by $6.9 million from the prior year. There was an increase of allocated
corporate overhead from Prudential Financial to the Company of $13.6 million in 2004. There was also a $13.2 million increase in
expense related to future fees payable to ASI. Expenses result when the actual cash flow payable to ASI under the sale purchase
agreements exceed the amortization of the fees payable liability. Due to purchase accounting and increasing asset values of those
annuity contracts, driven by the improving equity markets, cash flows, and therefore expenses have increased from prior year levels.
Additionally, commissions, net of capitalization, increased by $12.2 million in the current year as a result of increased average
assets under management as well as increased sales levels in the current year. The current year also included a contingent reserve
of $5 million for anticipated costs associated with the remediation of a calculation error of amount due to customers upon surrender
or transfer from the Company's MVA option. Offsetting the increase was a decrease in DAC amortization of $22.0 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. Additionally, VOBA amortization decreased by $14.9 million due to the adjustment of VOBA recorded upon adoption of SOP
03-1, as explained above.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Risk Management and Market Risk
As an indirect wholly-owned subsidiary of Prudential Financial, the Company benefits from the risk management strategies implemented
by its parent. Risk management includes the identification and measurement of various forms of risk, establishment of acceptable
risk thresholds, and creation of processes intended to maintain risks within these thresholds while optimizing returns on the
underlying assets or liabilities. Prudential Financial considers risk management an integral part of its core businesses.
Market risk is the risk of change in the value of financial instruments as a result of absolute or relative changes in interest
rates, foreign currency exchange rates or equity or commodity prices. To varying degrees, the investment activities supporting all
of the Company's products and services generate market risks. Market risks incurred and the strategies for managing these risks vary
by product.
With respect to our fixed rate options in our variable annuity products, the Company incurs market risk primarily in the form of
interest rate risk. The Company manages this risk through asset/liability management strategies that seek to match the interest rate
sensitivity of the assets to that of the underlying liabilities. The Company also mitigates this risk through a MVA provision on the
Company's fixed investment option. This MVA provision limits interest rate risk when a contract owner withdraws funds or transfers
funds to variable investment options before the end of the guarantee period. The Company's overall objective in these strategies is
to limit the net change in value of assets and liabilities arising from interest rate movements. While it is more difficult to
measure the interest sensitivity of the Company's insurance liabilities than that of the related assets, to the extent the Company
can measure such sensitivities the Company believes that interest rate movements will generate asset value changes that substantially
offset changes in the value of the liabilities relating to the underlying products.
For variable annuities, excluding the fixed rate options in these products, the Company's main exposure is the risk that asset-based
fees may decrease as a result of declines in assets under management due to changes in market performance. For variable annuity
products with minimum guaranteed death and living benefits, the Company also faces the risk that declines in the value of underlying
investments as a result of changes in securities prices may increase the Company's net exposure to death and living benefits under
these contracts.
Asset/Liability Management
The Company's asset/liability management strategies seek to match the interest rate sensitivity of the assets to that of the
underlying liabilities and to construct asset mixes consistent with product features, such as interest crediting strategies. The
Company also considers risk-based capital implications in its asset/liability management strategies. The Company seeks to maintain
interest rate and equity exposures within established ranges, which are periodically adjusted based on market conditions and the
design of related insurance products sold to customers. The Company's risk managers, who work with portfolio and asset managers but
under separate management, establish investment risk limits for exposures to any issuer, or type of security and oversee efforts to
manage risk within policy constraints set by management and approved by the Board of Directors.
We use duration and convexity analyses to measure price sensitivity to interest rate changes. Duration measures the relative
sensitivity of the fair value of a financial instrument to changes in interest rates. Convexity measures the rate of change of
duration with respect to changes in interest rates. We seek to manage our interest rate exposure by legal entity by matching the
relative sensitivity of asset and liability values to interest rate changes, or controlling "duration mismatch" of assets and
liabilities. We have target duration mismatch constraints for each entity. As of December 31, 2004 and 2003, the difference between
the pre-tax duration of assets and the target duration of liabilities in our duration managed portfolios was within our constraint
limits. We consider risk-based capital implications in our asset/liability management strategies.
The Company also performs portfolio stress testing as part of its regulatory cash flow testing. In this testing, the Company
evaluates the impact of altering its interest-sensitive assumptions under various moderately adverse interest rate environments.
These interest-sensitive assumptions relate to the timing and amounts of redemptions and pre-payments of fixed-income securities and
lapses and surrenders of insurance products. The Company evaluates any shortfalls that this cash flow testing reveals to determine if
there is a need to increase statutory reserves or adjust portfolio management strategies.
Market Risk Related to Interest Rate Risk
Fluctuations in interest rates can potentially impact the Company's profitability and cash flows. At December 31, 2004, 95% of
assets held under management by the Company are in non-guaranteed separate accounts for which the Company's interest rate and equity
market exposure is not significant, as the contract owner assumes substantially all of the investment risk. Of the remaining 5% of
assets, the interest rate risk from contracts that carry interest rate exposure is managed through an asset/liability matching
program which takes into account estimates of the risk variables of the insurance liabilities supported by the assets.
At December 31, 2004, the Company held fixed maturity investments in its general account that are sensitive to changes in interest
rates. These securities are held in support of the Company's fixed immediate annuities, fixed supplementary contracts, the fixed
investment option offered in its variable life insurance contracts, and in support of the Company's target solvency capital.
The Company assesses interest rate sensitivity for its financial assets, financial liabilities and derivatives using hypothetical
test scenarios which assume both upward and downward 100 basis point parallel shifts in the yield curve from prevailing interest
rates. The following tables set forth the potential loss in fair value from a hypothetical 100 basis point upward shift at December
31, 2004 and 2003, because this scenario results in the greatest net exposure to interest rate risk of the hypothetical scenarios
tested at those dates. While the test scenario is for illustrative purposes only and does not reflect management's expectations
regarding future interest rates or the performance of fixed income markets, it is a near-term, reasonably possible hypothetical
change that illustrates the potential impact of such events. These test scenarios do not measure the changes in value that could
result from non-parallel shifts in the yield curve, which would be expected to produce different changes in discount rates for
different maturities. As a result, the actual loss in fair value from a 100 basis point change in interest rates could be different
from that indicated by these calculations.
December 31, 2004
-----------------------------------------------------------
----------------------------------------------------------
Hypothetical
Fair Value
After + 100
Notional Fair Basis Point Hypothetical
Value Value Parallel Change in
(Derivatives) Yield Curve Fair Value
Shift
----------------------------------------------------------
Financial Assets with Interest (In millions)
Rate Risk:
Financial Assets:
Fixed Maturities:
Available for Sale $ 1,772 $ 1,695 $ (77)
Policy Loans 10 10 -
Derivatives:
Futures $ 117 (1) 6 (7)
--------------
Total Estimated Potential Loss $ (84)
==============
December 31, 2003
-----------------------------------------------
-----------------------------------------------
Hypothetical
Fair Value
After + 100
Basis Point Hypothetical
Fair Parallel Change in
Value Yield Curve Fair Value
Shift
-----------------------------------------------
Financial Assets with Interest Rate (In millions)
Risk:
Financial Assets:
Fixed Maturities:
Available for Sale $ 425 $ 411 $ (14)
Policy Loans 8 8 -
----------------
Total Estimated Potential Loss $ (14)
================
The estimated changes in fair values of the financial assets shown above relate to assets invested in support of the Company's
insurance liabilities, but do not include assets associated with products for which investment risk is borne primarily by the
contract holders rather than the Company.
The Company's deferred annuity products offer a fixed investment option which subjects the Company to interest rate risk. The fixed
option guarantees a fixed rate of interest for a period of time selected by the contract owner. Guarantee period options available
range from one to ten years. Withdrawal of funds, or transfer of funds to variable investment options, before the end of the
guarantee period subjects the contract owner to a MVA. In the event of rising interest rates, which make the fixed maturity
securities underlying the guarantee less valuable, the MVA could be negative. In the event of declining interest rates, which make
the fixed maturity securities underlying the guarantee more valuable, the MVA could be positive. The resulting increase or decrease
in the value of the fixed option, from calculation of the MVA, should substantially offset the decrease or increase in the market
value of the securities underlying the guarantee. However, the Company still takes on the default risk for the underlying securities
and the interest rate risk of reinvestment of interest payments.
Market Risk Related to Equity Prices
The Company has a portfolio of equity investments consisting of mutual funds, which are held in support of a deferred compensation
program. In the event of a decline in market values of underlying securities, the value of the portfolio would decline; however the
accrued benefits payable under the related deferred compensation program would decline by a corresponding amount.
For equity investments within the separate accounts, the investment risk is borne primarily by the contract holder rather than by the
Company.
Item 8. Financial Statements and Supplementary Data
Information required with respect to this Item 8 regarding Financial Statements and Supplementary Data is set forth commencing on
page F-3 hereof. See Index to Consolidated Financial Statements elsewhere in this Annual Report.
Item 9. Changes in and Disagreements with Independent Accountants on Accounting and Financial Disclosure
None.
Item 9a. 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 December 31, 2004. Based on such evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that, as of December 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 December 31, 2004, that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
Item 9b. Other Information
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
We have adopted a code of conduct, known as "Making the Right Choices", which applies to our chief executive officer, chief financial
officer, and our controller, as well as to our directors and other employees. Making the Right Choices contains a code of ethics,
which is posted on our website at www.investor.prudential.com. Our code of ethics, any amendments and any waiver under our code of
ethics granted to any of our directors or executive officers will be available free of charge on our website at
www.investor.prudential.com.
Item 14. Principal Accounting Fees and Services
The Audit Committee of the Board of Directors of Prudential Financial has appointed PricewaterhouseCoopers LLP as the independent
auditor of Prudential Financial and certain of its domestic and international subsidiaries, including the Registrant. The Audit
Committee has established a policy requiring its pre-approval of all audit and permissible non-audit services provided by the
independent auditor. The specific information called for by this item is hereby incorporated by reference to the section entitled
"Item 2 - Ratification of the Appointment of Independent Auditors" in Prudential Financial's definitive proxy statement for the Annual
Meeting of Shareholders to be held on June 7, 2005, to be filed with the Securities and Exchange Commission pursuant to Regulation
14A within 120 days after December 31, 2004.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)
(1) Financial Statements Financial Statements of the Registrant and its subsidiary are listed in the
accompanying "Index to Consolidated Financial Statements" on page F-1 hereof and
are filed as part of this Report.
(2) Financial Statement Schedules None.*
(3) Exhibits
2. None.
3. (i) Certificate Restating the Certificate of Incorporation of American Skandia Life Assurance Corporation, dated
February 8, 1988 is incorporated by reference to the Company's Form 10-K, Registration No. 33-44202, filed March 27,
2004.
(ii) Certificate of Amendment to the Restated Certificate of Incorporation of American Skandia Life Assurance
Corporation, dated December 17, 1999 is incorporated by reference to the Company's Form 10-K, Registration No.
33-44202, filed March 27, 2004.
(iii) By-Laws of American Skandia Life Assurance Corporation, as amended June 17, 1998, are incorporated by
reference to the Company's Form 10-K, Registration No. 33-44202, filed March 27, 2004.
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.
9. None.
10. None.
11. Not applicable.
12. Not applicable.
13. Not applicable.
14. Not applicable.
16. None.
18. None.
21. Not applicable.
22. None.
23. Not applicable.
24. Powers of Attorney are filed herewith.
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 Section 13, or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Shelton, and state of Connecticut on
the 30th day of March 2005.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(Registrant)
By: /s/ Michael A. Bohm
Michael A. Bohm
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities indicated on March 30, 2005.
Name Title
James J. Avery, Jr. * Director
James J. Avery, Jr.
/s/ Michael A. Bohm Executive Vice President and Chief Financial Officer
Michael A. Bohm
Charles E. Chaplin * Director
Charles E. Chaplin
Helen M. Galt * Director
Helen M. Galt
Bernard J. Jacob * Director
Bernard J. Jacob
Ronald Paul Joelson * Director
Ronald Paul Joelson
/s/ David R. Odenath, Jr. Chief Executive Officer, President and
Director
David R. Odenath, Jr.
Andrew J. Mako * Director
Andrew J. Mako
* By: /s/ Michael A. Bohm
Michael A. Bohm
(Attorney-in-Fact)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
Consolidated Financial Statements and
Report of Independent Auditors
December 31, 2004 and 2003
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements Page No.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
Report of Independent Registered Public Accounting Firm F - 2
Consolidated Financial Statements:
Consolidated Statements of Financial Position
December 31, 2004 and 2003 F - 4
Consolidated Statements of Operations and Comprehensive Income
Year ended December 31, 2004, Eight months ended December 31, 2003,
Four months ended April 30, 2003 and Year ended December 31, 2002 F - 5
Consolidated Statements of Stockholder's Equity
Year ended December 31,2004, Eight months ended December 31, 2003,
Four months ended April 30, 2003 and Year ended December 31, 2002 F - 6
Consolidated Statements of Cash Flows
Year ended December 31, 2004, Eight months ended December 31, 2003,
Four months ended April 30, 2003 and Year ended December 31, 2002 F - 7
Notes to Consolidated Financial Statements F - 8
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholder
of American Skandia Life Assurance Corporation:
In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the financial
position of American Skandia Life Assurance Corporation (an indirect wholly-owned subsidiary of Prudential Financial, Inc.,
effective May 1, 2003) at December 31, 2004 and December 31, 2003, and the results of its operations and its cash flows for the year
ended December 31, 2004 and the eight months ended December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2, effective January 1, 2004, the Company adopted Statement of Position 03-1, "Accounting and Reporting by
Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts."
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
March 17, 2005
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholder
of American Skandia Life Assurance Corporation:
In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the results of
operations and cash flows of American Skandia Life Assurance Corporation (an indirect wholly-owned subsidiary of Prudential
Financial, Inc., effective May 1, 2003) for the period January 1, 2003 through April 30, 2003 in conformity with accounting
principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit
of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
February 27, 2004
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of
American Skandia Life Assurance Corporation
Shelton, Connecticut
We have audited the consolidated statements of operations and comprehensive income (loss),stockholder's equity, and cash
flows of American Skandia Life Assurance Corporation (the Company) for the year ended December 31, 2002. These financial statements
are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results
of operations and cash flows of American Skandia Life Assurance Corporation for the year ended December 31, 2002, in
conformity with U.S. generally accepted accounting principles.
As discussed in Note 2, in 2002 the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets.
/s/ ERNST & YOUNG LLP
Hartford, Connecticut
February 3, 2003
American Skandia Life Assurance Corporation
Consolidated Statements of Financial Position
December 31, 2004 and 2003 (in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
2004 2003
------------------ -----------------
ASSETS
Fixed maturities available for sale,
at fair value (amortized cost, 2004: $1,737,949; 2003: $427,705) $ 1,771,976 $ 425,231
Trading account assets, at fair value 47,316 59,485
Equity securities available for sale, at fair value (cost of $11,238) 11,567 -
Policy loans 10,323 8,371
Short-term investments 423,971 39,587
------------------ -----------------
Total investments 2,265,153 532,674
Cash and cash equivalents 72,854 6,300
Deferred policy acquisition costs 300,901 122,572
Accrued investment income 22,321 3,969
Reinsurance recoverable - 3,819
Receivables from Parent and affiliates 5,098 3,200
Income taxes receivable 244,932 222,422
Valuation of business acquired 234,167 402,169
Deferred purchase credits 144,395 70,188
Other assets 53,332 24,380
Separate account assets 26,984,413 25,817,612
------------------ -----------------
TOTAL ASSETS $ 30,327,566 $ 27,209,305
================== =================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities
Policyholders' account balances $ 1,411,483 $ 132,234
Future policy benefits and other policyholder liabilities 51,078 13,681
Payables to Parent and affiliates 24,182 16,396
Cash collateral for loaned securities 291,299 -
Securities sold under agreements to repurchase 33,373 20,850
Short-term borrowing 140,363 116,000
Long-term borrowing 135,000 -
Future fees payable to American Skandia, Inc. ("ASI") 200,597 307,879
Other liabilities 368,308 208,156
Separate account liabilities 26,984,413 25,817,612
------------------ -----------------
Total liabilities 29,640,096 26,632,808
------------------ -----------------
Contingencies (See Note 12)
Stockholder's Equity
Common stock, $100 par value;
25,000 shares, authorized,
issued and outstanding 2,500 2,500
Additional paid-in capital 484,425 485,100
Retained earnings 180,759 90,856
Deferred compensation (904) (360)
Accumulated other comprehensive income (loss) 20,690 (1,599)
-----------------
------------------ -----------------
Total stockholder's equity 687,470 576,497
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 30,327,566 $ 27,209,305
================== =================
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 has most notably resulted in decreased amortization and
depreciation compared to periods prior to the Acquisition. 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
Year ended December 31, 2004, Eight months ended December 31, 2003, Four months ended April 30, 2003 and
- ----------------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2002 (in thousands)
Successor Successor Predecessor Predecessor
-------------- ------------- -------------- ---------------
-------------- ------------- ---------------
Eight months Four months
ended ended April
December 31, 30,
2004 2003 2003 2002
-------------- ------------- -------------- ---------------
--------------
REVENUES
Premiums $ 17,568 $ 7,439 $ 2,496 $ 3,895
Policy charges and fee income 358,533 241,955 109,213 363,420
Net investment income (losses) 90,459 26,707 (1,289) 18,415
Realized investment (losses) gains, (8,409) (472) (4,601) 22,189
net
Asset management fees 112,100 66,108 28,092 97,650
Other income 5,331 7,862 618 1,945
-------------- ------------- -------------- ---------------
--------------
Total revenues 575,582 349,599 134,529 507,514
-------------- ------------- -------------- ---------------
--------------
BENEFITS AND EXPENSES
Policyholders' benefits 86,948 43,680 23,946 60,415
Interest credited to policyholders'
account balances 80,120 4,689 13,693 83,911
General, administrative and other
expenses 264,514 159,973 97,640 631,255
-------------- ------------- -------------- ---------------
--------------
Total benefits and expenses 431,582 208,342 135,279 775,581
-------------- ------------- -------------- ---------------
--------------
INCOME (LOSS) FROM OPERATIONS BEFORE
INCOME TAXES AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE
144,000 141,257 (750) (268,067)
-------------- ------------- -------------- ---------------
--------------
Income tax expense (benefit) 37,019 50,401 (8,544) (102,810)
-------------- ------------- -------------- ---------------
--------------
INCOME (LOSS) FROM OPERATIONS BEFORE
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
106,981 90,856 7,794 (165,257)
-------------- ------------- -------------- ---------------
-------------- ------------- -------------- ---------------
Cumulative effect of accounting
change, net of taxes (17,079) - - -
------------- -------------- ---------------
-------------- ------------- -------------- ---------------
NET INCOME (LOSS) 89,903 90,856 7,794 (165,257)
-------------- ------------- -------------- ---------------
--------------
Other comprehensive income(loss), net
of taxes 21,341 (1,599) (269) 10,930
-------------- ------------- -------------- ---------------
-------------- ------------- -------------- ---------------
COMPREHENSIVE INCOME (LOSS)
$ 111,244 $ 89,257 $ 7,525 $(154,327)
============== ============= ============== ===============
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 has most notably resulted in decreased amortization and
depreciation compared to periods prior to the Acquisition. 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
Year ended December 31, 2004, Eight months ended December 31, 2003, Four months ended April 30, 2003 and Year ended December 31, 2002 (in
thousands)
- ------------------------------------------------------------------------------------------------------------------------------------------------
Accumulated
------------- Adiditional other Total
paid-in - Retained Deferred comprehensive stockholder's
Common capital earnings compensation income equity
Stock
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
Balance, December 31, 2001
(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
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
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)
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
Balance, April 30, 2003 (Predecessor) 2,500 597,232 81,615 - 11,422 692,769
Acquisition purchase accounting
adjustments (See Footnote 4) - (112,187) (81,615) - (11,422) (205,224)
-----------------------------------------------------------------------------------------------
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)
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
Balance, December 31, 2003 (Successor) 2,500 485,100 90,856 (360) (1,599) 576,497
Net income 89,903 89,903
Purchase of fixed maturities from an - (948) - - 948 -
affiliate, net of taxes
Stock-based compensation 273 273
Deferred compensation program (544) (544)
Change in net unrealized investment
gains 21,341 21,341
-----------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------
Balance, December 31, 2004 (Successor) $ 2,500 $ 484,425 $ 180,759 $ (904) $ 20,690 $ 687,470
===============================================================================================
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 has most notably resulted in decreased amortization and
depreciation compared to periods prior to the Acquisition. 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
Year ended December 31, 2004, Eight months ended December 31, 2003, Four months ended April 30, 2003
- ------------------------------------------------------------------------------------------------------------------------------------------------
and Year ended December 31, 2003 (in thousands)
Successor Successor Predecessor Predecessor
----------------- ---------------- ---------------- ---------------
Eight months
ended December Four months
31, 2003 ended April
2004 30, 2003 2002
----------------- ---------------- ---------------- ---------------
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ 89,903 $ 90,856 $ 7,794 $ (165,257)
Adjustments to reconcile net income (loss) to net cash from
(used in) operating activities:
Realized investment losses (gains), net 8,409 472 4,601 (22,189)
Amortization and depreciation 46,765 58,447 5,288 21,649
Cumulative effect of accounting change, net of taxes 17,079 - - -
Change in:
Policy reserves 34,361 6,580 4,288 3,293
Accrued investment income 6,035 515 (288) 541
Net receivable/payable to Parent and affiliates 5,888 13,509 124 (98,339)
Policy loans (1,952) (774) (38) (1,000)
Deferred policy acquisition costs (177,935) (122,572) (12,601) 265,737
Income taxes (receivable) payable (24,826) (3,030) (464) 37,084
Other, net 12,140 (1,249) (3,588) (169,312)
----------------- ---------------- ---------------- ---------------
Cash Flows From (Used in) Operating Activities 15,867 42,754 5,116 (127,793)
----------------- ---------------- ---------------- ---------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Proceeds form the sale/maturity of fixed maturities 2,580,125 75,101 131,628 367,263
available for sale
Payments for the purchase of fixed maturities available for (2,196,424) (103,237) (135,885) (388,053)
sale
Proceeds from the sale of shares in equity securities 88,663 39,920 10,955 34,220
Payments for the purchase of shares in equity
securities and dividend reinvestments (74,646) (25,951) (24,809) (49,713)
Other short-term investments, net (377,888) (39,587) 1,019 26,958
----------------- ---------------- ---------------- ---------------
Cash Flows From (Used in) Investing Activities 19,830 (53,754) (17,092) (9,325)
----------------- ---------------- ---------------- ---------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Capital contribution - - 2,183 259,720
Paid in capital transaction associated with the purchase of
fixed (948) - - -
maturities from an affiliate
Decrease in future fees payable to ASI, net (107,282) (80,393) (63,343) (91,223)
Cash collateral for loaned securities 291,299 - - -
Securities sold under agreement to repurchase 12,523 20,850 - -
Net increase in long-term borrowing 135,000 - - -
Net increase in short-term borrowing 24,363 71,000 35,000 -
Drafts outstanding 103,736 (45,853) (14,362) 35,430
Pay down of surplus notes - - - (34,000)
Stock-based compensation 273 55 - -
Deferred compensation program (544) (360) - -
Deposits to contract owner accounts 66,268 42,361 155,034 192,263
Withdrawals from contract owner accounts (271,613) (153,384) (63,357) (164,964)
Change in contract owner accounts, net of investment earnings (222,218) 82,853 (77,809) 27,631
----------------- ---------------- ---------------- ---------------
Cash Flows From (Used in) Financing Activities 30,857 (62,871) (26,654) 224,857
----------------- ---------------- ---------------- ---------------
Net (decrease) increase in cash and cash equivalents 66,554 (73,871) (38,630) 87,739
Change in foreign currency translation, net - - 947 (970)
Cash and cash equivalents, beginning of period 6,300 80,171 117,854 31,085
----------------- ---------------- ---------------- ---------------
----------------- ---------------- ---------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 72,854 $ 6,300 $ 80,171 $ 117,854
================= ================ ================ ===============
================= ================ ================ ===============
Income taxes paid (received) $ 39,199 $ 877 $ 13 $ (40,823)
================= ================ ================ ===============
================= ================ ================ ===============
Interest paid (received) $ 11,261 $ 14,454 $ (7,788) $ 23,967
================= ================ ================ ===============
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 has most notably resulted in decreased amortization and
depreciation compared to periods prior to the Acquisition. 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
- ---------------------------------------------------------------------------------------------------------------------------------------
1. BUSINESS
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"), a New Jersey corporation. The Company is a
wholly-owned subsidiary of American Skandia, Inc. ("ASI"), which in turn is an indirect wholly-owned subsidiary of 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 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 the outstanding common stock of Skandia U.S. Inc. ("SUSI"), an indirect parent of the Company. On September 9, 2003,
Prudential Financial acquired the remaining 10% of SUSI's outstanding common stock (see Notes 4 and 6 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.
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 $5.0 million as of December 31, 2002 and had generated
losses of $2.2 million and $2.7 million for the four months ended April 30, 2003 and year ended December 31, 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.
American Skandia, Inc. ("ASI"), the direct parent of the Company, intends to make additional capital contributions to the Company, as
needed, to enable it to comply with its reserve requirements and fund expenses in connection with its business. The Company has
complied with the National Association of Insurance Commissioner's ("NAIC") Risk-Based Capital ("RBC") reporting requirements and has
total adjusted capital well above required capital. The Company expects to maintain statutory capital above 300% of Company Action
Level Risk Based Capital. Generally, ASI is under no obligation to make such contributions and its assets do not back the benefits
payable under the Company's policyholder contracts. The Company received no capital contributions during the year ended December 31,
2004 and eight months ended December 31, 2003. The Company received capital contributions of $2.2 million and $259.7 million during
the four months ended April 30, 2003 and year ended December 31, 2002, respectively. Of this, $1.3 million and $4.5 million,
received during the four months ended April 30, 2003 and year ended December 31, 2002, was used to support its investment in Skandia
Vida.
The Company is engaged in a business that is highly competitive because of the large number of stock and mutual life insurance
companies and other entities engaged in marketing insurance products, and individual and group annuities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements include the accounts of the Company and until April 30, 2003, its ownership interest in
Skandia Vida. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States ("U.S. GAAP"). The Company has extensive transactions and relationships with Prudential affiliates, as more
fully described in Footnote 13. Due to these relationships, it is possible that the terms of these transactions are not the same as
those that would result from transactions among wholly unrelated parties.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, in particular deferred policy acquisition costs ("DAC") and future policy
benefits, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ from those estimates.
Investments
Fixed maturities classified as "available for sale" are carried at fair value. The amortized cost of fixed maturities is written
down to estimated fair value if a decline in value is considered to be other than temporary. See the discussion below on realized
investment gains and losses for a description of the accounting for impairment adjustments. Unrealized gains and losses on fixed
maturities "available for sale" are included in "Accumulated other comprehensive (loss) income", net of income taxes.
American Skandia Life Assurance Corporation
- ---------------------------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Equity securities, trading, 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. Prior to May 1, 2003, these equity securities were carried at estimated fair value with
unrealized gains and losses included in "Accumulated other comprehensive (loss) income", net of income taxes. 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
Consolidated Statements of Operations and Comprehensive Income, as a component of "Other income". The cost of equity securities is
written down to estimated fair value when a decline in value is considered to be other than temporary. See the discussion below on
realized investment gains and losses for a description of the accounting for impairment adjustments.
Policy loans are carried at unpaid principal balances.
Short-term investments consist of highly liquid debt instruments with a maturity of greater than three months and less than twelve
months when purchased. These investments are carried at amortized cost, which because of their short-term nature, approximates fair
value.
Derivative Financial Instruments
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended, on January 1, 2001. The
adoption of this statement did not have a material impact on the results of operations of the Company.
Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices, or the
value of securities or commodities. Derivative financial instruments used by the Company include swaps and futures, and may be
exchange-traded or contracted in the over-the-counter market. Derivative positions are carried at estimated fair value, generally by
obtaining quoted market prices or through the use of pricing models. Values can be affected by changes in interest rates, foreign
exchange rates, credit spreads, market volatility and liquidity. Values can also be affected by changes in estimates and assumptions
used in pricing models.
Derivatives are used to manage the characteristics of the Company's asset/liability mix, manage the interest rate and currency
characteristics of assets or liabilities. Additionally, derivatives may be used to seek to reduce exposure to interest rate and
foreign currency risks associated with assets held or expected to be purchased or sold, and liabilities incurred or expected to be
incurred.
The Company designates derivatives as either (1) a hedge of the fair value of a recognized asset or liability or unrecognized firm
commitment ("fair value" hedge), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid
related to a recognized asset or liability ("cash flow" hedge), (3) a foreign currency fair value or cash flow hedge ("foreign
currency" hedge), (4) a hedge of a net investment in a foreign operation, or (5) a derivative that does not qualify for hedge
accounting. During the years ended December 31, 2004, 2003 and 2002 none of the Company's derivatives qualified for hedge accounting
treatment.
If a derivative does not qualify for hedge accounting, all changes in its fair value, including net receipts and payments, are
included in "Realized investment gains (losses), net" without considering changes in the fair value of the economically associated
assets or liabilities.
The Company is a party to financial instruments that may contain derivative instruments that are "embedded" in the financial
instruments. At inception, the Company assesses whether the economic characteristics of the embedded derivative are clearly and
closely related to the economic characteristics of the remaining component of the financial instrument (i.e., the host contract) and
whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument.
When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to
the economic characteristics of the host contract, and (2) a separate instrument with the same terms would qualify as a derivative
instrument, the embedded derivative is separated from the host contract, carried at fair value, and changes in its fair value are
included in "Realized investment gains (losses), net."
Realized investment (losses) gains, net are computed using the specific identification method. Costs of fixed maturities and equity
securities are adjusted for impairments, which are declines in value that are considered to be other than temporary. Impairment
adjustments are included in "Realized investment (losses) gains, net". In evaluating whether a decline in value is other than
temporary, the Company considers several factors including, but not limited to the following: (1) whether the decline is substantial;
(2) the duration (generally greater than six months); (3) the reasons for the decline in value (credit event, interest related or
market fluctuation); (4) the Company's ability and intent to hold the investments for a period of time to allow for a recovery of
value; and (5) the financial condition of and near-term prospects of the issuer.
American Skandia Life Assurance Corporation
- ---------------------------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
There are a number of significant risks and uncertainties inherent in the process of monitoring impairments and determining if an
impairment is other than temporary. These risks and uncertainties include, but are not limited to: (1) the risk that our assessment
of an issuer's ability to meet its obligations could change, (2) the risk that the economic outlook could be worse than expected or
have more of an impact on the issuer than anticipated, (3) the risk that we are making decisions based on fraudulent or misstated
information in the financial statements provided by issuers and (4) the risk that new information obtained by us or changes in other
facts and circumstances, including those not related to the issuer, could lead us to change our intent to hold the security to
maturity or until it recovers in value. Any of these situations could result in a change in our impairment determination, and hence
a charge to earnings in a future period.
Cash and cash equivalents
Cash and cash equivalents include cash on hand, amounts due from banks, money market instruments, and other debt issues with a
maturity of three months or less when purchased.
Valuation of business acquired
As a result of purchase accounting, the Company reports a financial asset representing the valuation of business acquired ("VOBA").
VOBA represents the present value of future profits embedded in acquired insurance and annuity contracts. VOBA is determined by
estimating the net present value of future cash flows from the contracts in force at the date of acquisition. Future positive cash
flows generally include fees and other charges assessed to the contracts as long as they remain in force as well as fees collected
upon surrender, if applicable, while future negative cash flows include costs to administer contracts and benefit payments. The
Company amortizes VOBA over the effective life of the acquired contracts. VOBA is amortized in proportion to estimated gross profits
arising from the contracts and anticipated future experience, which is evaluated regularly. The effect of changes in estimated gross
profits on unamortized VOBA is reflected in "General, administrative and other expenses" in the period such estimates of expected
future profits are revised.
Deferred policy acquisition costs
The costs that vary with and that are related primarily to the production of new insurance and annuity business are deferred to the
extent such costs are deemed recoverable from future profits. Such costs include commissions, costs of policy issuance and
underwriting, and variable expenses. DAC is subject to recoverability testing at the end of each accounting period. DAC, for
applicable products, is adjusted for the impact of unrealized gains or losses on investments as if these gains or losses had been
realized, with corresponding credits or charges included in "Accumulated other comprehensive income (loss)."
Policy acquisition costs are deferred and amortized over the expected life of the contracts (approximately 25 years) in proportion to
estimated gross profits arising principally from investment results, mortality and expense margins, and surrender charges based on
historical and anticipated future experience, which is updated periodically. The effect of changes to estimated gross profits on
unamortized deferred acquisition costs is reflected in "General administrative and other expenses" in the period such estimated gross
profits are revised. The deferred policy acquisition cost asset was assigned a fair value of zero, net of tax, as part of purchase
accounting.
As asset growth rates, during 2002 and 2001, were far below the Company's long-term assumption, the adjustment to the short-term
asset growth rate had risen to a level, before being capped, that in management's opinion was excessive in the current market
environment. Based on an analysis of those short-term rates, the related estimates of future gross profits and an impairment study,
management of the Company determined that the short-term asset growth rate should be reset to the level of the long-term growth rate
expectation as of September 30, 2002. This resulted in an acceleration of amortization of approximately $206.0 million during 2002.
Throughout 2002, the Company also updated its future estimated gross profits with respect to certain mortality assumptions reflecting
actual experience and the decline in the equity markets resulting in additional increased amortization of approximately $72.0 million.
Securities sold under agreements to repurchase and securities lending transactions
Securities repurchase and resale agreements and securities borrowed and loaned transactions are used to generate income, to borrow
funds, or to facilitate trading activity. Securities repurchase and resale agreements are generally short-term in nature, and
therefore, the carrying amounts of these instruments approximate fair value. Securities repurchase and resale agreements are
collateralized principally by U.S. government and government agency securities. Securities borrowed or loaned are collateralized
principally by cash or U.S. government securities. For securities repurchase agreements and securities loaned transactions used to
generate income, the cash received is typically invested in cash equivalents, short-term investments or fixed maturities.
American Skandia Life Assurance Corporation
- ---------------------------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Securities repurchase and resale agreements that satisfy certain criteria are treated as collateralized financing arrangements. These
agreements are carried at the amounts at which the securities will be subsequently resold or reacquired, as specified in the
respective agreements. For securities purchased under agreements to resell, the Company's policy is to take possession or control of
the securities and to value the securities daily. Securities to be resold are the same, or substantially the same, as the securities
received. For securities sold under agreements to repurchase, the market value of the securities to be repurchased is monitored, and
additional collateral is obtained where appropriate, to protect against credit exposure. Securities to be repurchased are the same,
or substantially the same as those sold. Income and expenses related to these transactions are reported as "Net investment income."
Securities borrowed and securities loaned transactions are treated as financing arrangements and are recorded at the amount of cash
advanced or received. With respect to securities loaned transactions, the Company obtains collateral in an amount equal to 102% and
105% of the fair value of the domestic and foreign securities, respectively. The Company monitors the market value of the securities
borrowed and loaned on a daily basis with additional collateral obtained or provided as necessary. Substantially all of the Company's
securities borrowed transactions are with brokers and dealers, commercial banks and institutional clients. Substantially all of the
Company's securities loaned transactions are with large brokerage firms. Income and expenses associated with securities borrowing
transactions are reported as "Net investment income." Income and expenses associated with securities loaned transactions used to
generate income are generally reported as "Net investment income;" however, for securities loaned transactions used for funding
purposes the associated rebate is reported as interest expense (included in "General, administrative and other expenses").
Separate account assets and liabilities
Separate account assets and liabilities are reported at fair value and represent segregated funds, which are invested for certain
policyholders and other customers. "Separate account assets" are predominately shares in American Skandia Trust co-managed by
American Skandia Investment Services, Incorporated ("ASISI") and Prudential Investments LLC, which utilizes various fund managers as
sub-advisors. The remaining assets are shares in other mutual funds, which are managed by independent investment firms. The
contract holder has the option of directing funds to a wide variety of investment options, most of which invest in mutual funds. The
investment risk on the variable portion of a contract is borne by the contract holder, except to the extent of any guarantees by the
Company, which are not separate account liabilities. The assets of each account are legally segregated and are generally not subject
to claims that arise out of any other business of the Company. The investment income and gains or losses for separate accounts
accrue to the policyholders and are not included in the Consolidated Statements of Operations and Comprehensive Income. Mortality,
policy administration and surrender charges on the accounts are included in "Policy charges and fee income". Asset management fees
calculated on account assets are included in "Asset management fees".
Included in "Separate account liabilities" are reserves of $1.8 billion at December 31, 2003 relating to deferred annuity investment
options for which the contract holder is guaranteed a fixed rate of return. Prior to the adoption of SOP 03-1, these reserves were
calculated using the Commissioners Annuity Reserve Valuation Method. "Separate account assets" of $1.8 billion at December 31, 2003,
consisting of fixed maturities, equity securities, short-term securities, cash and cash equivalents, accrued investment income,
accrued liabilities and amounts due to/from the General Account, are held in support of these annuity obligations, pursuant to state
regulation.
Included in the general account, within "Policyholders' account balances", is the difference between the statutory liability, which
is held in the separate account, and the U.S. GAAP liability associated with the guaranteed, fixed rate investment options. As of
January 1, 2004, these assets and liabilities were classified as assets and liabilities of the general account.
Deferred purchase credits
The Company provides sales inducements to contract holders, which reflect an up-front bonus added to the contract holder's initial
deposit for certain annuity contracts. These costs are deferred and recognized in "Deferred purchase credits". They are amortized
using the same methodology and assumptions used to amortize DAC. The amortization expense is included as a component of "Interest
credited to policyholders' account balances".
Prior to May 1, 2003, the Company deferred certain bonus credits applied to contract holder deposits. The credit was reported as a
contract holder liability within "Separate account liabilities" and the deferred expense was reported as a component of "Other
assets". As the contract holder must keep the contract in-force for 10 years to earn the bonus credit, the Company amortized the
deferred expense on a straight-line basis over 10 years. If the contract holder surrenders the contract or the contract holder dies
prior to the end of 10 years, the bonus credit is returned to the Company. This component of the bonus credit was amortized in
proportion to expected surrenders and mortality. As of December 31, 2003 and 2002, the unearned performance credit asset was $0 and
$83.3 million, respectively. The deferred bonus credit asset was assigned a fair value of zero as part of purchase accounting.
Updated versions of the Company's core products no longer contain this feature.
American Skandia Life Assurance Corporation
- ---------------------------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Other assets and other liabilities
"Other assets" consists primarily of a receivable from SICL and accruals of fund manager income. "Other liabilities" consists
primarily of accrued expenses, technical overdrafts and a liability to the participants of a deferred compensation plan.
"Other assets" also consists of state insurance licenses. Licenses to do business in all states have been capitalized and reflected
at the purchase price of $4.0 million at December 31, 2003. Due to the adoption of SFAS No. 142 "Goodwill and Other Intangible
Assets", the cost of the licenses is no longer being amortized but is subjected to an annual impairment test. As of December 31,
2004, the Company estimated the fair value of the state insurance licenses to be in excess of book value and, therefore, no
impairment charge was required.
Future policy benefits
The Company's liability for future policy benefits is primarily comprised of the present value of estimated future payments to or on
behalf of policyholders, where the timing and amount of payment depends on policyholder mortality, less the present value of future
net premiums. Expected mortality is generally based on the Company's historical experience or standard industry tables. Interest rate
assumptions are based on factors such as market conditions and expected investment returns. Although mortality and interest rate
assumptions are "locked-in" upon the issuance of new insurance or annuity business with fixed and guaranteed terms, significant
changes in experience or assumptions may require the Company to provide for expected future losses on a product by establishing
premium deficiency reserves. The Company's liability for future policy benefits is also inclusive of liabilities for guarantee
benefits related to certain nontraditional long-duration life and annuity contracts, which are discussed more fully in Note 7.
Policyholders' account balances
The Company's liability for policyholders' account balances represents the contract value that has accrued to the benefit of the
policyholder as of the balance sheet date. This liability is generally equal to the accumulated account deposits, plus interest
credited, less policyholder withdrawals and other charges assessed against the account balance. These policyholders' account balances
also include provision for benefits under non-life contingent payout annuities.
Contingencies
Amounts related to contingencies are accrued if it is probable that a liability has been incurred and an amount is reasonably
estimable. Management evaluates whether there are incremental legal or other costs directly associated with the ultimate resolution
of the matter that are reasonably estimable and, if so, they are included in the accrual.
Insurance revenue and expense recognition
Revenues for variable deferred annuity contracts consist of charges against contract owner account values or separate accounts for
mortality and expense risks, administration fees, surrender charges and an annual maintenance fee per contract. Revenues for
mortality and expense risk charges and administration fees are recognized as assessed against the contract holder. Surrender charge
revenue is recognized when the surrender charge is assessed against the contract holder at the time of surrender. Annual maintenance
fees are earned ratably throughout the year.
Benefit reserves for the variable investment options on annuity contracts represent the account value of the contracts and are
included in "Separate account liabilities".
Revenues for variable immediate annuity and supplementary contracts with life contingencies consist of certain charges against
contract owner account values including mortality and expense risks and administration fees. These charges and fees are recognized
as revenue as assessed against the contract holder. Benefit reserves for variable immediate annuity contracts represent the account
value of the contracts and are included in "Separate account liabilities".
For the years ended December 31, 2003 and 2002, revenues for the market value adjusted fixed investment option on annuity contracts
consist of separate account investment income reduced by amounts credited to the contract holder for interest. This net spread is
included in "Net investment income (loss)" on the Consolidated Statements of Operations and Comprehensive Income. Benefit reserves
for these contracts represent the account value of the contracts plus a market value adjustment, and are included in the general
account "Policyholders' account balances" to the extent in excess of the separate account assets, typically for the market value
adjustment at the reporting date. As of January 1, 2004, assets and liabilities as well as related revenues and expenses associated
with the market value fixed investment option have been classified and reported in a manner consistent with the general account.
American Skandia Life Assurance Corporation
- ---------------------------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenues for fixed immediate annuity and fixed supplementary contracts with and without life contingencies consist of net investment
income. In additon, revenues for fixed immediate annuity contracts with life contingencies also consist of single premium payments
recognized as annuity considerations when received. Benefit reserves for these contracts are based on applicable actuarial standards
with assumed interest rates that vary by issue year. Reserves for contracts without life contingencies are included in
"Policyholders' account balances" while reserves for contracts with life contingencies are included in "future policy benefits and
other policyholder liabilities". Assumed interest rates ranged from 5.50% to 8.25% at December 31, 2004 and 2003.
Revenues for variable life insurance contracts consist of charges against contract owner account values or separate accounts for
mortality and expense risk fees, administration fees, cost of insurance fees, taxes and surrender charges. Certain contracts also
include charges against premium to pay state premium taxes. All of these charges are recognized as revenue when assessed against the
contract holder. Benefit reserves for variable life insurance contracts represent the account value of the contracts and are
included in "Separate account liabilities".
Certain annuity contracts provide the holder a guarantee that the benefit received upon death will be no less than a minimum
prescribed amount that is based upon a combination of net deposits to the contract, net deposits to the contract accumulated at a
specified rate or the highest historical account value on a contract anniversary. To the extent the guaranteed minimum death benefit
("GMDB") exceeds the current account value at the time of death, the Company incurs a cost that is recorded as "Policyholders'
benefits" for the period in which death occurs. GMDB and living benefit guarantees offered by the Company are discussed in further
detail in Note 7.
Premiums, benefits and expenses are stated net of reinsurance ceded to other companies. Estimated reinsurance recoverables and the
cost of reinsurance are recognized over the life of the reinsured policies using assumptions consistent with those used to account
for the underlying policies.
Foreign currency translation adjustments
Prior to the acquisition, the financial position and results of operations of Skandia Vida were measured using local currency as the
functional currency. Assets and liabilities were translated to U.S. dollars at the exchange rate in effect at the end of the
period. Revenues, benefits and other expenses were translated at the average rate prevailing during the period. Cumulative
translation adjustments arising from the use of differing exchange rates from period to period were charged or credited directly to
"Other comprehensive (loss) income." The cumulative effect of changes in foreign exchange rates was included in "Accumulated other
comprehensive (loss) income".
Asset management fees
In accordance with an agreement with ASISI, the Company receives fee income calculated on policyholder account balances invested in
the American Skandia Trust. In addition, the Company receives fees calculated on policyholder account balances invested in funds
managed by companies other than ASISI. Asset management fees are recognized as income when earned. These revenues are recorded as
"Asset management fees" in the Consolidated Statements of Operations and Comprehensive Income.
Income taxes
Prior to the acquisition of SUSI by Prudential Financial, the Company was included in the consolidated federal income tax return of
SUSI and filed separate state income tax returns. Due to provisions in the Internal Revenue Code, the Company will not be eligible
to join in the filing of the Prudential Financial consolidated federal income tax return until 2009. As a result, the Company will
file a separate federal tax return through 2008. In addition, the Company will continue to file separate state income tax returns.
Deferred income taxes are recognized, based on enacted rates, when assets and liabilities have different values for financial
statement and tax reporting purposes. A valuation allowance is recorded to reduce a deferred tax asset to the amount expected to be
realized.
Future fees payable to ASI
In a series of transactions with ASI, the Company sold certain rights to receive a portion of future fees and contract charges
expected to be realized on designated blocks of deferred annuity contracts. The proceeds from the sales have been recorded as a
liability and are being amortized over the remaining surrender charge period of the designated contracts using the interest method.
American Skandia Life Assurance Corporation
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock options
Effective January 1, 2003, Prudential Financial changed its accounting for employee stock options to adopt the fair value recognition
provisions of SFAS No. 123, "Accounting for stock Based Compensation" as amended, prospectively for all new awards granted to
employees on or after January 1, 2003. Accordingly, results of operations of the Company for the year ended December 31, 2004 and
eight months ended December 31, 2003, include costs of $742 thousand and $106 thousand, respectively, associated with stock-based
compensation issued by Prudential Financial to certain employees and non-employees of the Company and the statements of financial
position at December 31, 2004 and December 31, 2003, includes a reduction in equity for deferred compensation. Prior to January 1,
2003, Prudential Financial accounted for employee stock options using the intrinsic value method of APB No. 25 "Accounting for Stock
Issued to Employees," and related interpretations. Under this method, Prudential Financial and the Company did not recognize any
stock-based compensation costs as all options granted had an exercise price equaled to the market value of Prudential Financial's
Common Stock on the date of grant. Prudential Financial and the Company account for non-employee stock options using the fair value
method of SFAS No. 123 in accordance with Emerging Issues Task Force Issue ("EITF") No. 96-18 "Accounting for Equity Instruments That
Are Issued to Other Than Employees" and related interpretations in accounting for its non-employee stock options.
New accounting pronouncements
In March 2004, the EITF of the FASB reached a final consensus on Issue 03-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments." This Issue establishes impairment models for determining whether to record impairment losses
associated with investments in certain equity and debt securities. It also requires income to be accrued on a level-yield basis
following an impairment of debt securities, where reasonable estimates of the timing and amount of future cash flows can be made. The
Company's policy is generally to record income only as cash is received following an impairment of a debt security. In September
2004, the FASB issued FASB Staff Position ("FSP") EITF 03-1-1, which defers the effective date of a substantial portion of EITF 03-1,
from the third quarter of 2004, as originally required by the EITF, until such time as FASB issues further implementation guidance,
which is expected sometime in 2005. The Company will continue to monitor developments concerning this Issue and is currently unable
to estimate the potential effects of implementing EITF 03-1 on the Company's consolidated financial position or results of operations.
In December 2003, the FASB issued FIN No. 46(R), "Consolidation of Variable Interest Entities," which revised the original FIN No. 46
guidance issued in January 2003. FIN No. 46(R) addresses whether certain types of entities, referred to as variable interest entities
("VIEs"), should be consolidated in a company's financial statements. A VIE is an entity that either (1) has equity investors that
lack certain essential characteristics of a controlling financial interest (including the ability to control the entity, the
obligation to absorb the entity's expected losses and the right to receive the entity's expected residual returns) or (2) lacks
sufficient equity to finance its own activities without financial support provided by other entities, which in turn would be expected
to absorb at least some of the expected losses of the VIE. An entity should consolidate a VIE if, as the primary beneficiary, it
stands to absorb a majority of the VIE's expected losses or to receive a majority of the VIE's expected residual returns. On December
31, 2003, the Company adopted FIN No. 46(R) for all special purpose entities ("SPEs") and for relationships with all VIEs that began
on or after February 1, 2003. On March 31, 2004, the Company implemented FIN No. 46(R) for relationships with potential VIEs that are
not SPEs. The adoption of FIN No. 46(R) did not have a material effect on the Company's consolidated financial position or results of
operations.
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 03-1 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 SOP 3-01 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 year ended December 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 SOP 3-01 $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.
American Skandia Life Assurance Corporation
- ---------------------------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
As of December 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 $2.9 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 December 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 December 31, 2004
amounted to $26.4 million. See Note 7 for further details.
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 market value adjustment ("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. The MVA may increase or decrease
the amount due to the contract holder. 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 valuation of business acquired ("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. See Note 7 for further details.
In June 2001, the Financial Accounting Standards Board (the "FASB") issued SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 142 requires that an intangible asset acquired either individually or with a group of other assets shall initially be
recognized and measured based on fair value. An intangible asset with a finite life is amortized over its useful life to the
reporting entity; an intangible asset with an indefinite useful life, including goodwill, is not amortized. All intangible assets
shall be tested for impairment in accordance with the statement. The Company applied the new rules on the accounting for goodwill
and other intangible assets in the first quarter of 2002. The adoption of SFAS 142 did not have a significant impact on the
Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 generally applies to instruments that are mandatorily redeemable, that represent obligations that will be
settled with a variable number of company shares, or that represent an obligation to purchase a fixed number of company shares. For
instruments within its scope, the statement requires classification as a liability with initial measurement at fair value. Subsequent
measurement depends upon the certainty of the terms of the settlement (such as amount and timing) and whether the obligation will be
settled by a transfer of assets or by issuance of a fixed or variable number of equity shares. The Company's adoption of SFAS No.
150, as of July 1, 2003, did not have a material effect on the Company's consolidated financial position or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires
that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when
the liability is incurred. Prior to the adoption of SFAS No. 146, such amounts were recorded upon the Company's commitment to a
restructuring plan. The Company will adopt this statement for applicable transactions occurring on or after January 1, 2003.
In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN No. 45 expands existing accounting guidance and disclosure requirements for certain
guarantees and requires the recognition of a liability for the fair value of certain types of guarantees issued or modified after
December 31, 2002. The January 1, 2003 adoption of the Interpretation's guidance did not have a material effect on the Company's
financial position.
Reclassifications
Certain amounts in the prior years have been reclassified to conform to the current year presentation.
American Skandia Life Assurance Corporation
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------------
3. INVESTMENTS
Fixed Maturities and Equity Securities:
The following tables provide additional information relating to fixed maturities and equity securities as of December 31:
2004
----------------------------------------------------------------
------------- -------------- -------------- ---------------
Gross Gross
Amortized unrealized unrealized
cost gains losses Fair value
------------- -------------- -------------- ---------------
(in thousands)
Fixed maturities available for sale
Bonds:
U.S. Treasury securities and obligations
of
U.S. government corporations and
agencies $ 45,824 $ 271 $ (25) $ 46,070
States, municipalities and political
subdivisions 84,953 1,550 (178) 86,325
Mortgage-backed securities 54,653 30 (67) 54,616
Public utilities 200,335 4,727 (415) 204,647
All other corporate bonds 1,352,184 30,055 (1,921) 1,380,318
------------- -------------- -------------- --------------
Total fixed maturities available for sale $1,737,949 $ 36,633 $ (2,606) $1,771,976
============= ============== ============== ==============
Equity securities available for sale $ 11,238 $ 329 $ - $ 11,567
============= ============== ============== ==============
2003
---------------------------------------------------------------
-------------- -------------- -------------- --------------
Gross Gross
Amortized unrealized unrealized Fair value
cost gains losses
-------------- -------------- -------------- --------------
(in thousands)
Fixed maturities available for sale
Bonds:
U.S. Treasury securities and obligations
of
U.S. government corporations and
agencies $ 101,843 $ 115 $ (500) $ 101,458
States, municipalities and political
subdivisions 164,590 47 (1,434) 163,203
Mortgage-backed securities 2,638 9 - 2,647
Public utilities 11,192 47 (123) 11,116
All other corporate bonds 147,442 501 (1,136) 146,807
-------------- -------------- -------------- --------------
Total fixed maturities available for sale $ 427,705 $ 719 $ (3,193) $ 425,231
============== ============== ============== ==============
The amortized cost and fair value of fixed maturities, by contractual maturities at December 31, 2004 is shown below:
Available for sale
--------------------------------------
Amortized
Cost Fair value
----------------- -------------------
(in thousands)
Due in one year or less $ 43,444 $ 43,555
Due after one year through five years 841,488 850,578
Due after five years through ten years 671,256 692,892
Due after ten years 127,108 130,335
Mortgage-backed securities 54,653 54,616
----------------- -------------------
Total $ 1,737,949 $ 1,771,976
================= ===================
Actual maturities may differ from contractual maturities because issuers have the right to call or prepay obligations.
American Skandia Life Assurance Corporation
- ---------------------------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------------
3. INVESTMENTS (continued)
Proceeds from the sale of fixed maturities available for sale during the year ended December 31, 2004, eight months ended December
31, 2003, four months ended April 30, 2003 and year ended December 31, 2002, were $2.5 billion, $7.7 million, $129.0 million and
$367.2 million, respectively. Proceeds from the maturity of fixed maturities available for sale during the year ended December 31,
2004, eight months ended December 31, 2003, four months ended April 30, 2003, and year ended December 31, 2002, were $51.1 million,
$67.4 million, $2.6 million and $50 thousand, respectively. Gross gains of $9.0 million, $430 thousand, $5.6 million and $8.2
million, and gross losses of $18.1 million, $386 thousand, $150 thousand and $4.5 million were realized on those sales during the
year ended December 31, eight months ended December 31, 2003, four months ended April 30, 2003, and year ended December 31, 2002,
respectively.
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 Consolidated Statements of Operations and Comprehensive Income, as a component of "Other income".
Investment Income and Investment Gains and Losses
Net investment income (loss) arose from the following sources for the year ended December 31, 2004, eight months ended December 31,
2003, four months ended April 30, 2003, and year ended December 31, 2002:
Successor Predessor
--------------------------------------------------------------------
-------------------- ----------------------------
Four months
Eight months ended April
Year ended ended 30, 2003
December 31, 2004 December 31, 2003 2002
--------------------------------------- ----------------------------
(in thousands)
Fixed maturities - available for sale $ 89,930 $ 7,547 $ 5,342 $ 18,015
Fixed, market value adjusted investment (3) 20,713 (6,350) 482
return
Equity securities - available for sale 703 - 412 809
Policy loans 547 335 101 403
Short-term investments and cash equivalents 4,903 230 319 1,116
--------------------------------------- ----------------------------
--------------------------------------- ----------------------------
Gross investment income (loss) 96,080 28,825 (176) 20,825
Less: investment expenses (5,621) (2,118) (1,113) (2,410)
--------------------------------------- ----------------------------
Net investment income (loss) $ 90,459 $ 26,707 $ (1,289) $ 18,415
======================================= ============================
Realized investment (losses) gains, net including charges for other than temporary reductions in value, for year ended December 31,
2004, eight months ended December 31, 2003, four months ended April 30, 2003, and year ended December 31, 2002 were from the
following sources:
Successor Predecessor
----------------------------------------------------------------------
-------------------- ---------------------------
Four
months
Eight months ended
Year ended ended April 30,
December 31, 2004 December 31, 2003 2003 2002
------------------------------------------ ---------------------------
(in thousands)
Fixed maturities $ 9,071 $ 44 $ 5,465 $ 3,746
Equity securities - available for sale - - (809) (13,362)
Derivatives (662) (516) (8,835) 31,803
Sale of Skandia Vida - - (422) -
Other - - - 2
------------------------------------------ ---------------------------
Realized investment (losses) gains, net $ 8,409 $ (472) $ (4,601) $ 22,189
========================================== ===========================
American Skandia Life Assurance Corporation
- ---------------------------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------------
3. INVESTMENTS (continued)
Net Unrealized Investment Gains (Losses)
Net unrealized investment gains (losses) on securities available for sale are included in the Consolidated Statements of Financial
Position as a component of "Accumulated other comprehensive (loss) income." Changes in these amounts include reclassification
adjustments to exclude from "Other comprehensive (loss) income," those items that are included as part of "Net income" for a period
that also had been part of "Other comprehensive (loss) income" in earlier periods. The amounts for the years ended December 31, net
of tax, are as follows:
Accumulated other
Deferred
Policy comprehensive
Acquisition income (loss)
Costs and Deferred related to net
Unrealized Valuation of Foreign income tax unrealized
gains (losses) Business currency (liability) investment
on investments Acquired translation benefit gains (losses)
-------------------------------------------- ---------------------------------
(in thousands)
Balance, January 1, 2002 (Predecessor) $ $ $ $ $ 761
1,146 - 23 (408)
Net investment gains on investments arising
during the period 16,053 - - (5,619) 10,434
Reclassification adjustment for losses
included in net income 1,732 - - (606) 1,126
Net investment losses on foreign currency
translation during the period - - (969) 339 (630)
-------------------------------------------- ---------------------------------
-------------------------------------------- ---------------------------------
Balance, December 31, 2002 (Predecessor) 18,931 - (946) (6,294) 11,691
Net investment gains on investments arising
during the period 3,861 - - (1,345) 2,516
Reclassification adjustment for gains included
in net income (5,231) - - 1,831 (3,400)
Net investment gains on foreign currency
translation during the period - - 946 (331) 615
-------------------------------------------- ---------------------------------
-------------------------------------------- ---------------------------------
Balance, April 30, 2003 (Predecessor) 17,561 - - (6,139) 11,422
Acquisition purchase accounting adjustments (17,561) - - 6,139 (11,422)
-------------------------------------------- ---------------------------------
-------------------------------------------- ---------------------------------
Balance, May 1, 2003 opening balance sheet
(Successor) - - - - -
Net investment losses on investments arising
during the period (2,474) - - 875 (1,599)
-------------------------------------------- ---------------------------------
Balance, December 31, 2003 (Successor) (2,474) - 875 (1,599)
-
Net investment losses on investments arising 36,795 (13,006) 23,789
during the period
Impact of net unrealized investment (gains)
losses on deferred policy acquisition costs
and valuation of business acquired (2,319) 819 (1,500)
-------------------------------------------- ---------------------------------
Balance, December 31, 2004 (Successor) $ 34,321 $ (2,319) $ - $(11,312) $ 20,690
============================================ =================================
The table below presents unrealized gains (losses) on investments by asset class at December 31,
2004 2003 2002
---------------- ------------------ ------------------
(in thousands)
Fixed maturities $ 34,027 $ (2,474) $ 19,179
Equity securities, available for sale 294 - (248)
---------------- ------------------ ------------------
---------------- ------------------ ------------------
Unrealized gains on investments $ 34,321 $ (2,474) $ 18,931
================ ================== ==================
All fixed maturities and equity securities, which are in an unrealized loss position as of December 31, 2004 and 2003, have been in
such a position for less than 12 months as of December 31, 2004 and 2003, respectively. Based on the above information in
conjunction with other factors as outlined in our policy surrounding other than temporary impairments (see Note 2), we have concluded
that an adjustment for other than temporary impairments is not warranted at December 31, 2004 or 2003. Writedowns for impairments
which were deemed to be other than temporary for equity securities was $3.8 million for the year ended December 31, 2002. There were
no writedowns during the other periods.
American Skandia Life Assurance Corporation
- ---------------------------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------------
3. INVESTMENTS (continued)
Securities Pledged and Special Deposits
The Company pledges investment securities it owns to unaffiliated parties through securities sold under agreements to repurchase
transactions. At December 31, 2004 and 2003, the carrying value of fixed maturities available for sale pledged to third parties as
reported in the Consolidated Statements of Financial Position were $33.4 million and $20.9 million, respectively.
Fixed maturities of $4.7 million and $4.9 million at December 31, 2004 and 2003, respectively, were on deposit with governmental
authorities or trustees as required by certain insurance laws.
4. PURCHASE PRICE AND INTEGRATION
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 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. 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
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
==============
Included in other liabilities above is an accrual of approximately $55 million representing costs relating to severance,
consolidation of leased office space and other exit costs expected to be incurred as a result of the integration of the Company with
Prudential Financial, of which $14.7 million has been paid through December 31, 2004. The integration is expected to continue
through the first quarter of 2005. During 2003, the distribution, marketing and product development functions as well as many
administrative, support, and control functions were combined and assimilated. In 2004, integration efforts included consolidating
systems platforms and operating functions. Key management from both organizations have been retained, and all major decisions
related to the integration have been communicated. As of December 31, 2004, the integration of the Company is substantially complete.
5. DEFERRED POLICY ACQUISITION COSTS
The balances of and changes in DAC as of and for the year ended December 31, 2004, eight months ended December 31, 2003, four months
ended April 30, 2003 and year ended December 31, 2002 are as follows:
Successor Predecessor
-----------------------------------------------------------------
--------------------------------
Eight months Four months
ended December ended April 30,
2004 31, 2003 2003 2002
--------------------------------- -------------------------------
Balance, beginning of period $ 122,572 $ - $ 1,117,544 $ 1,383,281
Capitalization of commissions, sales and issue 207,018 126,891 46,361 148,040
expenses
Capitalization of purchase credits - - 23,362 96,282
Amortization of deferred policy acquisition costs (29,083) (4,319) (46,791) (433,604)
Amortization of purchase credits - - (10,331) (76,455)
Impact of adoption of SOP 03-1 394 - - -
--------------------------------- -------------------------------
Balance, end of period $ 300,901 $ 122,572 $ 1,130,145 $ 1,117,544
================================= ===============================
The DAC asset was assigned a fair value of zero on May 1, 2003, as part of purchase accounting.
American Skandia Life Assurance Corporation
- ---------------------------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------------
6. VALUATION OF BUSINESS ACQUIRED
Details of VOBA and related interest and gross amortization for the year ended December 31, 2004 and eight months ended December 31,
2003 is as follows (in thousands):
Eight months
ended December
2004 31, 2003
Balance, beginning of period $ 402,169 $ 440,130
Amortization(1) (37,921) (54,038)
Interest(2) 14,866 16,077
Change in unrealized gains/losses (1,000) -
Impact of adoption of SOP 03-1 (130,211) -
Opening balance adjustments (13,736) -
------- -------
Balance, end of period $ 234,167 $ 402,169
============== ==============
(1) The average expected life of VOBA was approximately 10 years from the date of acquisition.
(2) The interest accrual rates was 5.9% for the VOBA related to the businesses acquired.
Certain contracts issued by the Company include a market value adjustment ("MVA") feature that requires the Company to pay to the
contractholder upon surrender the accreted value of the fund as well as a market value adjustment based on the crediting rates on the
contract surrendered compared to crediting rates on newly issued contracts or index rate at time of surrender, if applicable. As of
December 31, 2003, this liability was reflected at market value, which considers the effects of unrealized gains and losses in
contract value resulting from changes in crediting rates. Upon the adoption of SOP 03-1 on January 1, 2004, the Company changed its
accounting for American Skandia's contracts containing MVA features as described previously under "New Accounting Pronouncements."
The Company's net VOBA balance decreased $130 million upon the adoption of SOP 03-1, primarily due to the change in the liability for
the MVA feature since the expected cash flows on this business in force at the time of acquisition that corresponded to obligations
covered by SOP 03-1 were considered in establishing the initial VOBA.
Estimated future net amortization of VOBA as of December 31, 2004 is as follows (in thousands):
2005 $ 37,084
2006 31,901
2007 26,044
2008 21,158
2009 17,643
2010 and thereafter 100,337
---- -------
Total $ 234,167
==============
7. CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS
The Company issues traditional variable annuity contracts through its separate accounts for which investment income and investment
gains and losses accrue directly to, and investment risk is borne by, the contract holder. The Company also issues variable annuity
contracts with separate account options where the Company contractually guarantees to the contract holder a return of no less than
(a) total deposits made to the contract less any partial withdrawals, (b) total deposits made to the contract less any partial
withdrawals plus a minimum return ("minimum return"), or (c) the highest contract value on a specified anniversary date minus any
withdrawals following the contract anniversary ("anniversary contract value"). These guarantees include benefits that are payable in
the event of death, annuitization or at specified dates during the accumulation period.
The Company also issues annuity contracts with market value adjusted investment options ("MVAs"), which provide for a return of
principal plus a fixed rate of return if held to maturity, or, alternatively, a "market adjusted value" if surrendered prior to
maturity. The market value adjustment may result in a gain or loss to the Company, depending on crediting rates or an indexed rate at
surrender, as applicable.
The assets supporting the variable portion of both traditional variable annuities and certain variable contracts with guarantees are
carried at fair value and reported as "Separate account assets" with an equivalent amount reported as "Separate account liabilities."
Amounts assessed against the contract holders for mortality, administration, and other services are included within revenue in
"Policy charges and fee income" and changes in liabilities for minimum guarantees are generally included in "Policyholders' benefits".
American Skandia Life Assurance Corporation
- ---------------------------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------------
7. CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS (continued)
In 2004 there were no gains or losses on transfers of assets from the general account to a separate account.
For those guarantees of benefits that are payable in the event of death, the net amount at risk is generally defined as the current
guaranteed minimum death benefit in excess of the current account balance at the balance sheet date. For guarantees of benefits that
are payable at annuitization, the net amount at risk is generally defined as the present value of the minimum guaranteed annuity
payments available to the contract holder determined in accordance with the terms of the contract in excess of the current account
balance. For guarantees of accumulation balances, the net amount at risk is generally defined as the guaranteed minimum accumulation
balance minus the current account balance. The Company's contracts with guarantees may offer more than one type of guarantee in each
contract; therefore, the amounts listed may not be mutually exclusive. As of December 31, 2004, the Company had the following
guarantees associated with its contracts, by product and guarantee type:
December 31, 2004
--------------------------------------------
---------------------- ---------------------
At Annuitization /
In the Event of Death Accumulation/
---------------------- ---------------------
--------------------------------------------
Variable Annuity Contracts (dollars in millions)
Return of Net Deposits
Account value................................................ $23,693.9 N/A
Net amount at risk........................................... $2,775.7 N/A
Average attained age of contractholders...................... 62.4 years N/A
Anniversary contract value or minimum return
Account value................................................ $4,060.9 $6,637.0
Net amount at risk........................................... $158.1 $1.4
Average attained age of contractholders...................... 63.9 years 58.8 years
Average period remaining until expected annuitization........ N/A 6.5 years
Unadjusted Value Adjusted Value
Market value adjusted annuities
Account value $1,350.9 $1,407.3
Account balances of variable annuity contracts with guarantees were invested in separate account investment options as follows:
December 31, 2004
----------------------
----------------------
(in millions)
Equity funds................................................. $
17,158.1
Bond funds...................................................
4,967.2
Balanced funds...............................................
843.3
Money market funds...........................................
1,376.5
Specialty funds..............................................
2,058.8
---------------------- ---
Total .................................................. $ 26,403.9
====================== ===
In addition to the above mentioned amounts invested in separate account investment options, $1,350.9 million of account balances of
variable annuity contracts with guarantees, inclusive of contracts with MVA features, were invested in general account investment
options.
Liabilities For Guarantee Benefits
The table below summarizes the changes in general account liabilities for guarantees on variable contracts. The liabilities for GMDB
and guaranteed minimum income benefits ("GMIB") are included in the "Future policy benefits" and the related changes in the
liabilities are included in "Policyholders' benefits.". Guaranteed minimum withdrawal benefits ("GMWB") and guaranteed return option
("GRO") features are considered to be derivatives under SFAS No. 133, and changes in the fair value of the derivative are recognized
through "Realized investment gains (losses), net." At December 31, 2004, the liabilities recorded related to these derivatives were
insignificant.
American Skandia Life Assurance Corporation
- ---------------------------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------------
7. CERTAIN NONTRADITIONAL LONG-DURATION CONTRACTS (continued)
Guaranteed Minimum
Withdrawal Guaranteed
Guaranteed Minimum Benefit/Return Minimum Income Totals
Death Benefit (GMDB) Option (GMWB / GRO) Benefit (GMIB)
--------------------- --------------------- ------------------- -----------------
---------------------------------------------------------------------------------
(in millions)
Balance as of January 1, 2004 .
$ 8.6 $ - $ - $ 8.6
Incurred guarantee benefits .
62.5 - 0.7 63.2
Paid guarantee benefits .....
(44.7) - - (44.7 )
--------------------- --------------------- ------------------- -----------------
Balance as of December 31, 2004
$ 26.4 $ - $ 0.7 $ 27.1
===================== ===================== =================== =================
The GMDB liability is determined each period end by estimating the accumulated value of a percentage of the total assessments to date
less the accumulated value of the death benefits in excess of the account balance. The percentage of assessments used is chosen such
that, at the acquisition date the present value of expected death benefits in excess of the projected account balance and the
percentage of the present value of total expected assessments over the lifetime of the contracts are equal. The Company regularly
evaluates the estimates used and adjusts the additional GMDB liability balances, with a related charge or credit to earnings, if
actual experience or other evidence suggests that earlier assumptions should be revised. The GMIB liability was determined at
December 31, 2004 by estimating the accumulated value of a percentage of the total assessments to date less the accumulated value of
the projected income benefits in excess of the account balance.
The present value of death benefits in excess of the projected account balance and the present value of total expected assessments
for GMDB's was determined over a reasonable range of stochastically generated scenarios. For variable annuities, 5,000 scenarios were
stochastically generated and, from these, 200 scenarios were selected using a sampling technique.
The GRO features predominantly provide for a guaranteed return of initial account value over a contractually defined period equal to
seven years. One other variation of the GRO feature has an additional optional benefit that will provide for a base guarantee of
account value seven years after the benefit is effective and every anniversary date thereafter and, if elected, an enhanced guarantee
equal to the account value seven years after the effective date of any "step-up" and every anniversary date thereafter. All
guaranteed amounts include any additional purchase payments and credits less withdrawals. Significant or prolonged declines in the
value of any variable investment options a customer may choose as part of their GRO benefit may result in all or a substantial
portion of their account values being allocated to fixed investment allocations, in conjunction with the Company's automatic
rebalancing program associated with this feature.
The GMWB features provide the contractholder with a guaranteed remaining balance if the account value is reduced to zero through a
combination of market declines and withdrawals. The guaranteed remaining balance is generally equal to the protected value under the
contract, which is initially established as the greater of the account value or cumulative premiums when withdrawals commence, less
cumulative withdrawals. The contractholder also has the option, after a specified time period, to reset the guaranteed remaining
balance to the then-current account value, if greater.
Sales Inducements
The Company defers sales inducements and amortizes them over the life of the policy using the same methodology and assumptions used
to amortize deferred policy acquisition costs. These deferred sales inducements are included in "Deferred Purchase Credits" in the
Company's Statements of Financial Position. The Company offers a bonus whereby the policyholder's initial account balance is
increased by an amount equal to a specified percentage of the customer's initial deposit. Changes in deferred sales inducements are
as follows:
Sales Inducements
-----------------
-----------------
(in millions)
Balance as of January 1, 2004................................
$ 70.3
Capitalization.............................................
84.1
Amortization...............................................
(10.0)
-- -----------------
-- -----------------
Balance as of December 31, 2004..............................
$ 144.4
== =================
American Skandia Life Assurance Corporation
- ---------------------------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------------
8. REINSURANCE
The Company cedes insurance to other insurers in order to fund the cash strain generated from commission costs on current sales and
to limit its risk exposure. The Company uses modified coinsurance reinsurance arrangements whereby the reinsurer shares in the
experience of a specified book of business. These reinsurance transactions result in the Company receiving from the reinsurer an
upfront ceding commission on the book of business ceded in exchange for the reinsurer receiving in the future, a percentage of the
future fees generated from that book of business. Such transfer does not relieve the Company of its primary liability and, as such,
failure of reinsurers to honor their obligation could result in losses to the Company. The Company reduces this risk by evaluating
the financial condition and credit worthiness of reinsurers.
The effect of reinsurance for the year ended December 31, 2004, eight months ended December 31, 2003, four months ended April 30,
2003, and year ended December 31, 2002 was as follows (in thousands):
2004 (Successor) Gross Ceded Net
Policy charges and fee income $ 400,809 $ (42,276) $ 358,533
Policyholders' benefits $ 86,948 $ - $ 86,948
General, administrative and other expenses $ 268,318 $ (3,804) $ 264,514
Eight months ended December 31, 2003 (Successor)
Policy charges and fee income $ 264,835 $ (22,880) $ 241,955
Policyholders' benefits $ 43,246 $ 434 $ 43,680
General, administrative and other expenses $ 162,116 $ (2,143) $ 159,973
Four months ended April 30, 2003 (Predecessor)
Policy charges and fee income $ 120,392 $ (11,179) $ 109,213
Policyholders' benefits $ 24,355 $ (409) $ 23,946
General, administrative and other expenses $ 104,795 $ (7,155) $ 97,640
2002 (Predecessor)
Policy charges and fee income $ 401,974 $ (38,554) $ 363,420
Policyholders' benefits $ 60,440 $ (25) $ 60,415
General, administrative and other expenses $ 630,001 $ 1,254 $ 631,255
9. INCOME TAXES
The components of income tax expense (benefit) for the year ended December 31, 2004, eight months ended December 31, 2003, four
months ended April 30, 2003 and year ended December 31, 2002 are as follows:
Successor Predecessor
------------------------------------------------------------------------
Four months
Eight months ended ended April
2004 December 31, 2003 30, 2003 2002
------------------------------------------------------------------------
(in thousands)
Current tax (benefit) expense:
U.S. and foreign $ 3,936 $ (1,950) $ (2,706) $ (3,739)
State and local 135 (22) (464) -
------------------------------------------------------------------------
Total 4,071 (1,972) (3,170) (3,739)
------------------------------------------------------------------------
Deferred tax expense (benefit):
U.S. and foreign 31,595 51,475 (5,374) (99,071)
State and local 1,353 898 - -
------------------------------------------------------------------------
Total 32,948 52,373 (5,374) (99,071)
------------------------------------------------------------------------
Total income tax expense (benefit) $ 37,019 $ 50,401 $ (8,544) $(102,810)
========================================================================
American Skandia Life Assurance Corporation
- ---------------------------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------------
9. INCOME TAXES (continued)
The income tax expense (benefit) for the year ended December 31, 2004, eight months ended December 31, 2003, four months ended April
30, 2003 and year ended December 31, 2002 differs from the amount computed by applying the expected federal income tax rate of 35% to
income from operations before income taxes for the following reasons:
Successor Predecessor
------------------------------------------------------------------------
--------------------------------------------------
Four months
Eight months ended ended April
2004 December 31, 2003 30, 2003 2002
------------------------------------------------------------------------
(in thousands)
Expected federal income tax expense $ 50,400 $ 49,440 $ (263) $ (93,823)
(benefit)
Dividends received deduction (14,052) - (2,800) (12,250)
Loss on foreign subsidiary - - (5,374) 947
Meals and entertainment 4 490 113 603
State income taxes, net of federal 435 570 (301) -
benefit
Other 232 (99) 81 1,713
------------------------------------------------------------------------
Total income tax expense (benefit) $ 37,019 $ 50,401 $ (8,544) $(102,810)
========================================================================
Deferred tax assets and liabilities at December 31, resulted from the items listed in the following table:
2004 2003
------------------ ------------------
(in thousands)
Deferred tax assets
Insurance reserves $ 289,430 $ 251,486
Income taxed in advance 71,011 104,816
Compensation reserves 19,235 27,108
Net operating loss carryforwards 22,752 -
Net unrealized losses on securities - 876
Other 21,900 15,102
------------------ ------------------
------------------ ------------------
Deferred tax assets 424,328 399,388
------------------ ------------------
Deferred tax liabilities
VOBA and deferred acquisition cost (167,161) (133,750)
Net unrealized gains on fixed maturity (11,311) -
securities
Other (5,741) (8,688)
------------------ ------------------
Deferred tax liabilities (184,213) (135,172)
------------------ ------------------
Net deferred tax asset/(liability) $ 240,115 $ 256,950
================== ==================
The Company's federal and state net operating loss carryforwards, totaling approximately $64 million will expire, if not used,
between 2009 and 2019.
Management believes that based on its historical pattern of taxable income, the Company will produce sufficient income in the future
to realize its deferred tax assets. It is intended that the Company will join in the consolidated federal income tax return of
Prudential Financial once it becomes an eligible company. A valuation allowance would be recorded in the event of a change in
management's assessment of the amount of the deferred tax asset that is realizable.
10. STATUTORY NET INCOME AND SURPLUS AND DIVIDEND RESTRICTIONS
The Company is required to prepare statutory financial statements in accordance with accounting practices prescribed or permitted by
the State of Connecticut Insurance Department. Prescribed statutory accounting practices include publications of the NAIC, as well
as state laws, regulations and general administrative rules. Statutory accounting practices primarily differ from U.S. GAAP by
charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial
assumptions and valuing investments, deferred taxes, and certain assets on a different basis.
American Skandia Life Assurance Corporation
- ---------------------------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------------
10. STATUTORY NET INCOME AND SURPLUS AND DIVIDEND RESTRICTIONS (continued)
Statutory net income (loss) of the Company amounted to $101.1 million, ($13.7) million and ($192.5) million, for the years ended
December 31, 2004, 2003, and 2002, respectively. Statutory surplus of the Company amounted to $399.0 million and $329.5 million at
December 31, 2004 and 2003, respectively.
Without prior approval of its domiciliary commissioner, dividends to shareholders are limited by the laws of the Company's state of
incorporation, Connecticut. The State of Connecticut restricts dividend payments to the greater of 10% of the prior year's surplus
or net gain from operations from the prior year. Net gain from operations is defined as income after taxes but prior to realized
capital gains, as reported on the Summary of Operations. Based on 2004 earnings, there is capacity to pay a dividend of $99.2
million without prior approval in 2005.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values presented below have been determined using available market information and by applying valuation
methodologies. Considerable judgment is applied in interpreting data to develop the estimates of fair value. Estimated fair values
may not be realized in a current market exchange. The use of different market assumptions and/or estimation methodologies could have
a material effect on the estimated fair values. The following methods and assumptions were used in calculating the estimated fair
values (for all other financial instruments presented in the table, the carrying value approximates estimated fair value).
Fixed maturities and Equity securities
Estimated fair values for fixed maturities and equity securities are based on quoted market prices or estimates from independent
pricing services.
The following table discloses the carrying amounts and estimated fair values of the Company's financial instruments at December 31:
2004 2003
---------------------------------------------------------------------
---------------------------------------------------------------------
Estimated Estimated
Carrying value fair value Carrying value fair value
---------------------------------------------------------------------
(in thousands)
Financial assets:
Fixed maturities $ 1,771,976 $ 1,771,976 $ 425,231 $ 425,231
Trading securities 47,316 47,316 59,485 59,485
Equity securities 11,567 11,567 - -
Policy loans 10,323 10,323 8,371 8,371
Short-term investments 423,971 423,971 39,587 39,587
Cash and cash equivalents 72,854 72,854 - -
Separate account assets 26,984,413 26,984,413 25,817,612 25,817,612
Financial liabilities:
Securities sold under agreements to
repurchase 33,373 33,373 20,850 20,850
Short-term borrowing 140,363 140,363 116,000 116,000
Long-term borrowing 135,000 135,000 - -
Separate account liabilities 26,984,413 26,984,413 25,817,612 25,817,612
12. CONTINGENCIES AND LITIGATION
Contingencies
On an ongoing basis, our internal supervisory and control functions review the quality of our sales, marketing, annuity
administration and servicing, and other customer interface procedures and practices and may recommend modifications or enhancements.
From time to time this review process results in the discovery of product administration, servicing or other errors, including errors
relating to the timing or amount of payments due to customers. In these cases, we offer customers appropriate remediation and may
incur charges, including the costs of such remediation, administrative costs and regulatory fines.
American Skandia Life Assurance Corporation
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------------
12. CONTINGENCIES AND LITIGATION (continued)
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.
The Company and other American Skandia entities have 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 and other American Skandia entities are engaged in ongoing discussions with the above organizations and are
fully cooperating with them. The Company believes these matters are likely to lead to proceedings and/or settlements. 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 was 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 alleged that the Company and certain of its affiliates violated
federal securities laws in marketing variable annuities and sought injunctive relief and compensatory damages in unspecified
amounts. In July 2003, the court granted the Company's motion to dismiss the complaint with prejudice. As previously reported, the
United States Court of Appeals for the Second Circuit, upheld the dismissal in May 2004. The United States Court of Appeals for the
Second Circuit denied plaintiffs petition for the appeal to be reheard en banc and plaintiffs sought review by the United States
Supreme Court, which request was denied.
The Company's parent and sole shareholder, ASI, initially was a named defendant in six purported nationwide class action lawsuits.
Each of these lawsuits alleged 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. These cases have been consolidated in multi-district litigation
located in the Baltimore Division of the United States District Court for the District of Maryland. Consolidated amended complaints
were filed in the multi-district litigation in September, 2004, and ASI was not named as a defendant.
The Company is also aware that ASI may be a defendant designated as one of "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. This suit has been included in the multi-district action, discussed above.
The Company's litigation is subject to many uncertainties, and given its 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.
American Skandia Life Assurance Corporation
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------------
12. CONTINGENCIES AND LITIGATION (continued)
It should be noted that the judgments, settlements and expenses associated with many of these lawsuits, administrative and regulatory
matters, and contingencies, including the complaints described above, may, in whole or in part, after satisfaction of certain
retention requirements, fall within Skandia Insurance Company Ltd. (SICL) indemnification obligations to PFI 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 $25,000 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.
13. RELATED PARTY TRANSACTIONS
Affiliated Asset Management Fee Income
In accordance with an agreement with ASISI, the Company receives fee income calculated on policyholder account balances invested in
the American Skandia Trust. Income received from ASISI related to this agreement was $72.0 million, $43.7 million, $19.0 million and
$67.4 million for the year ended December 31, 2004, eight months ended December 31, 2003, four months ended April 30, 2003 and year
ended December 31, 2003, respectively. These revenues are recorded as "Asset management fees" in the Consolidated Statements of
Operations and Comprehensive Income.
Cost Allocation Agreements with Affiliates
Certain operating costs (including rental of office space, furniture, and equipment) have been charged to the Company at cost by
American Skandia Information Services and Technology Corporation ("ASIST"), an affiliated company. ASLAC signed a written service
agreement with ASIST for these services executed and approved by the Connecticut Insurance Department in 1995. This agreement
automatically continues in effect from year to year and may be terminated by either party upon 30 days written notice.
Allocated depreciation expense was $6.5 million, $4.2 million, $2.2 million, and $7.4 million for the year ended December 31,2004,
and the eight months ended December 31, 2003, four months ended April 30, 2003, and the year ended December 31, 2002, respectively.
Allocated lease expense was $9.1 million, $4.6 million, $2.0 million, $5.8 million for the year ended December 31, 2004, and the
eight months ended December 31, 2003, four months ended April 30, 2003 and year ended December 31, 2002, respectively. Allocated
sub-lease rental income, recorded as a reduction to lease expense, was $2.3 million, $1.2 million, $622 thousand, and $738 thousand
for the year ended December 31, 2004, and the eight months ended December 31, 2003, four months ended April 30, 2003 and year ended
December 31, 2002, respectively. Assuming that the written service agreement between ASLAC and ASIST continues indefinitely, ASLAC's
allocated future minimum lease payments and sub-lease receipts per year and in aggregate as of December 31, 2004 are as follows (in
thousands):
Lease Sub-Lease
---------------- --------------
---------------- --------------
2005 $ 8,606 $ 2,441
2006 8,586 2,400
2007 8,586 2,242
2008 8,586 1,816
2009 7,766 1,790
2010 and thereafter 13,531 4,676
---- ------ -----
Total $ 55,661 $ 15,365
=========== ===========
Beginning in 1999, the Company was reimbursed by its affiliate American Skandia Marketing, Incorporated ("ASM") for certain
distribution related costs associated with the sales of variable annuities from revenues ASM receives under a 12b-1 plan of AST.
Under this agreement, the expenses reimbursed were $4.3 million, $4.9 million, $2.1 million and $8.3 million for the year ended
December 31, 2004, eight months ended December 31, 2003, four months ended April 30, 2003 and year ended December 31, 2002,
respectively. As of December 31, 2004 and 2003, amounts receivable under this agreement were approximately $0 and $554 thousand,
respectively.
American Skandia Life Assurance Corporation
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------------
13. RELATED PARTY TRANSACTIONS (continued)
The Company and ASM have a written Service Agreement, approved by the Connecticut Insurance Department on September 13, 1996, whereby
ASM pays, on behalf of the Company, information consulting fees payable in connection with the sale of the Company's insurance
products. The Company reimburses ASM for ASM's payment of such fees on the Company's behalf. The Company paid ASM $32.8 million,
$21.4 million, $9.6 million and $34.2 million during the twelve months ended December 31, 2004, eight months ended December 31, 2003,
four months ended April 30, 2003, and year ended December 31, 2002, respectively, pursuant to the agreement. This Agreement will
automatically continue in effect from year to year. This Agreement may be terminated upon 30-calendar days' written notice to the
other party.
The Company pays commissions and certain other fees to ASM in consideration for ASM's marketing and underwriting of the Company's
products, which commissions and fees are paid by ASM to unaffiliated broker-dealers who sell the Company's products. Commissions and
fees paid by the Company to ASM during the year ended December 31, 2004, eight months ended December 31, 2003, four months ended
April 30, 2003, and year ended December 31, 2002 were $222.0 million, $136.5 million, $46.0 million and $193.4 million, respectively.
Reinsurance Agreements
During 2004, we entered into two new reinsurance agreements with affiliates as part of our risk management and capital management
strategies. We entered into a 100% coinsurance agreement with The Prudential Insurance Company of America providing for the
reinsurance of our guaranteed minimum withdrawal benefit feature (GMWB). We also entered into a 100% coinsurance agreement with
Pruco Reinsurance providing for the reinsurance of our guaranteed return option (GRO). In prior years, the Company entered into
reinsurance agreements to provide additional capacity for growth in supporting the cash flow strain from the Company's variable
annuity and variable life insurance business.
Debt Agreements
Short-term borrowing
The Company had a $10.0 million short-term loan payable to ASI at December 31, 2004 and 2003 as part of a revolving loan agreement.
The loan had an interest rate of 2.66% and matured on January 30, 2005. The loan was subsequently rolled over with a new interest
rate of 2.66% and a new maturity date of April 30, 2005. The total related interest expense to the Company was $232 thousand, $116
thousand, $60 thousand and $271 thousand for the year ended December 31, 2004, eight months ended December 31, 2003, four months
ended April 30, 2003, and year ended December 31, 2002, respectively. Accrued interest payable was $46 thousand, $29 thousand and
$10 thousand as of December 31, 2004, 2003 and 2002, respectively.
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 $2.6 million, $534 thousand, $56 thousand and $2.2 million for
the year ended December 31, 2004, eight months ended December 31, 2003, four months ended April 30, 2003 and year ended December 31,
2002. As of December 31, 2004 and December 31, 2003, $126 million and $106 million was outstanding under this credit facility.
Accrued interest payable was $250 thousand and $153 thousand as of December 31, 2004 and December 31, 2003, respectively.
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 2.78%. Interest paid related to these borrowings was $248 thousand for the year ended December 31, 2004. As
of December 31, 2004, $45 million was outstanding under this credit facility. Accrued interest payable was $73 thousand as of
December 31, 2004.
On May 1, 2004, the Company entered into a $500 million credit facility agreement with Prudential Funding LLC. Effective December 1,
2004, the credit facility agreement was increased to $750 million. Interest paid related to these borrowings was $678 thousand for
the year ended December 31, 2004. As of December 31, 2004, $94 million was outstanding under this credit facility. Accrued interest
payable was $95 thousand as of December 31, 2004.
Surplus notes
The Company had issued surplus notes to ASI in exchange for cash. On May 1, 2003, the Company converted all outstanding surplus
notes to additional paid-in capital as part of the Acquisition. The conversion included the principal amount of $110.0 million and
related interest of $32.2 million. Surplus notes outstanding as of December 31, 2002 was $110.0 million. Interest expense for the
eight months ended December 31, 2003, four months ended April 30, 2003 and year ended December 31, 2002 was $0, $3.0 million, and
$10.9 million, respectively. Payment of interest and repayment of principal for these notes was subject to certain conditions and
required approval by the Insurance Commissioner of the State of Connecticut. At December 31, 2003 and 2002, $0 and $29.2 million,
respectively, of accrued interest on surplus notes was not permitted for payment under these criteria.
American Skandia Life Assurance Corporation
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------------
13. RELATED PARTY TRANSACTIONS (continued)
Future fees payable to ASI
In a series of transactions with ASI, the Company sold certain rights to receive a portion of future fees and contract charges
expected to be realized on designated blocks of deferred annuity contracts.
The proceeds from the sales have been recorded as a liability and are being amortized over the remaining surrender charge period of
the designated contracts using the interest method. The Company did not sell the right to receive future fees and charges after the
expiration of the surrender charge period.
In connection with these sales, ASI, through special purpose trusts, issued collateralized notes in private placements, which were
secured by the rights to receive future fees and charges purchased from the Company. As part of the Acquisition, the notes issued by
ASI were repaid.
Under the terms of the securitization purchase agreements, the rights sold provide for ASI to receive a percentage (60%, 80% or 100%
depending on the underlying commission option) of future mortality and expense charges and contingent deferred sales charges, after
reinsurance, expected to be realized over the remaining surrender charge period of the designated contracts (generally 6 to 8
years). As a result of purchase accounting, the liability was reduced to reflect the discounted estimated future payments to be
made and has been subsequently reduced by amortization according to a revised schedule. If actual mortality and expense charges and
contingent deferred sales charges are less than those projected in the original amortization schedules, calculated on a transaction
by transaction basis, ASI has no recourse against the Company.
The Company has determined, using assumptions for lapses, mortality, free withdrawals and a long-term fund growth rate of 8% on the
Company's assets under management, that the discounted estimated future payments to ASI would be $222.6 million and $337.1 million as
of December 31, 2004 and 2003, respectively.
Payments, representing fees and charges in the aggregate amount, of $122.2 million, $94.3 million, $50.5 million and $186.8 million
were made by the Company to ASI during the year ended December 31,2004, eight months ended December 31, 2003, four months ended April
30, 2003 and year ended December 31, 2002, respectively. Related expense (income) of $12.7 million, $11.1 million, ($11.6) million
and $828 thousand has been included in the Consolidated Statements of Operations and Comprehensive Income for the year ended December
31,2004, eight months ended December 31, 2003, four months ended April 30, 2003 and year ended December 31, 2002, respectively.
The Commissioner of the State of Connecticut has approved the transfer of future fees and charges; however, in the event that the
Company becomes subject to an order of liquidation or rehabilitation, the Commissioner has the ability to restrict the payments due
to ASI, into a restricted account, under the Purchase Agreement subject to certain terms and conditions.
The present values of the transactions as of the respective effective date were as follows (dollars in thousands):
Closing Effective Contract Issue Discount Present
Transaction Date Date Period Rate Value
------------------- ------------- ------------- ------------------------ ------------- -------------
------------------- ------------- ------------- ------------------------ ------------- -------------
1997-1 7/23/97 6/1/97 3/1/96 - 4/30/97 7.5% 58,767
1998-1 6/30/98 6/1/98 1/1/97 - 5/31/98 7.5% 61,180
1998-2 11/10/98 10/1/98 5/1/97 - 8/31/98 7.0% 68,573
1998-3 12/30/98 12/1/98 7/1/96 - 10/31/98 7.0% 40,128
1999-1 6/23/99 6/1/99 4/1/94 - 4/30/99 7.5% 120,632
1999-2 12/14/99 10/1/99 11/1/98 - 7/31/99 7.5% 145,078
2000-1 3/22/00 2/1/00 8/1/99 - 1/31/00 7.5% 169,459
2000-2 7/18/00 6/1/00 2/1/00 - 4/30/00 7.25% 92,399
2000-3 1/18/01 12/1/00 5/1/00 - 10/31/00 7.25% 107,139
2000-4 12/28/00 12/1/00 1/1/98 - 10/31/00 7.25% 107,291
2002-1 4/12/02 3/1/02 11/1/00 - 12/31/01 6.00% 101,713
American Skandia Life Assurance Corporation
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------------
13. RELATED PARTY TRANSACTIONS (continued)
Future amortization of future fees payable to ASI as of December 31, 2004, according to a revised amortization schedule, are as
follows (in thousands):
Year Amount
-------------- ------------
-------------- ------------
2005 $ 87,446
2006 64,619
2007 36,361
2008 11,421
2009 750
---- ---
Total $ 200,597
===========
Inter-affiliate Asset Purchase
During the second quarter of 2004, the Company purchased bonds from an affiliate company, The Prudential Insurance Company of
America. The Company purchased fixed maturity investments for $30.7 million, the acquisition-date fair value, but reflected the cost
of the investments at the historic amortized cost to the affiliate. The difference between the historic amortized cost and the fair
value, net of taxes, was reflected as additional paid-in capital of $(0.9) million. The fixed maturity investments are categorized in
the Company's consolidated balance sheet as fixed maturities available -for sale, and are therefore carried at fair value, with the
difference between amortized cost and fair value reflected in accumulated other comprehensive income.
14. LEASES
The Company entered into an eleven-year lease agreement for office space in Westminster, Colorado, effective January 1, 2001. Lease
expense for the year ended December 31, 2004, and the eight months ended December 31, 2003, four months ended April 30, 2003 and year
ended December 31, 2002 was $2.9 million, $1.7 million, $899 thousand and $2.6 million, respectively. Sub-lease rental income was
$455 thousand, $297 thousand, $129 thousand and $227 thousand for the year ended December 31, 2004, eight months ended December 31,
2003, four months ended April 30, 2003 and years ended December 31, 2002. Future minimum lease payments and sub-lease receipts per
year and in aggregate as of December 31, 2004 are as follows (in thousands):
Lease Sub-Lease
------------------ -----------------
------------------ -----------------
2005 $ 3,040 $ 190
2006 3,041 -
2007 3,053 -
2008 3,187 -
2009 3,187 -
2010 and thereafter 6,109 -
---- -----
Total $ 21,617 $ 190
========== ==========
15. EMPLOYEE BENEFITS
On July 1, 2003, the Company's employees transitioned from SICL's benefit plans to Prudential Financial's. Prudential Financial
sponsors a noncontributory defined benefit pension plan that covers substantially all of the Company's employees. Benefits are
generally based on career average earnings and credited length of service. Prudential Financial's funding policy is to contribute
annually an amount necessary to satisfy the Internal Revenue Service contribution guidelines.
Prudential plans also provide certain life insurance and health care benefits for its retired employees, their beneficiaries and
covered dependents. The health-care plan is contributory; the life insurance plan is noncontributory.
The costs relating to the aforementioned benefit plans amounted to $7.2 million and $3.1 million for the twelve months ended December
31, 2004 and eight months ended December 31, 2003, respectively.
American Skandia Life Assurance Corporation
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------------
15. EMPLOYEE BENEFITS (continued)
Prior to May 1, 2003, the Company had a 401(k) plan for which substantially all employees are eligible. Under this plan, the Company
provides a 50% match on employees' contributions up to 6% of an employee's salary (for an aggregate match of up to 3% of the
employee's salary). Additionally, the Company may contribute additional amounts based on profitability of the Company and certain of
its affiliates. Expenses (income) related to this program for the eight months ended December 31, 2003, four months ended April 30,
2003, and year ended December 31, 2002 were ($70) thousand, $425 thousand and $719 thousand, respectively. Company contributions to
this plan on behalf of the participants were $4 thousand, $896 thousand and $921 thousand for the eight months ended December 31,
2003, four months ended April 30, 2003, and years ended December 31, 2002, respectively.
Prior to July 1, 2003, the Company had a deferred compensation plan, which is available to the field marketing staff and certain
other employees. (Income) expenses related to this program for the twelve months ended December 31, 2004, eight months ended
December 31, 2003, four months ended April 30, 2003, and the year ended December 31, 2002 were ($116) thousand, ($41) thousand, $279
thousand and $3.5 million, respectively. Company contributions to this plan on behalf of the participants were $27 thousand, $126
thousand and $5.3 million for the eight months ended December 31, 2003, four months ended April 30, 2003, and year ended December 31,
2002, respectively.
The Company and certain affiliates cooperatively have a long-term incentive program under which units are awarded to executive
officers and other personnel. This plan terminated in March 2004. Prior to May 1, 2003, the Company and certain affiliates also had
a profit sharing program, which benefits all employees below the officer level. These programs consist of multiple plans with new
plans instituted each year. Generally, participants must remain employed by the Company or its affiliates at the time such units are
payable in order to receive any payments under the programs. The accrued liability representing the value of these units was $74
thousand, $1.2 million and $7.1 million as of December 31, 2004, 2003 and 2002, respectively. (Income) expenses related to these
programs for the twelve months ended December 31, 2004, eight months ended December 31, 2003, four months ended April 30, 2003 and
year ended December 31, 2002 were $3 thousand, ($468) thousand, $249 thousand and $1.5 million, respectively. Payments under these
programs were $1.1 million, $1.0 million, $4.7 million, and $8.0 million for the twelve months ended December 31, 2004, eight months
ended December 31, 2003, four months ended April 30, 2003 and year ended December 31, 2002, respectively.
16. CONTRACT WITHDRAWAL PROVISIONS
Approximately 99% of the Company's separate account liabilities are subject to discretionary withdrawal by contract owners at market
value or with market value adjustment. Separate account assets, which are carried at fair value, are adequate to pay such
withdrawals, which are generally subject to surrender charges ranging from 10% to 1% for contracts held less than 10 years.
17. 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 SFAS 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 due to changes in the Company's strategy to focus on its core variable annuity
business.
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited quarterly results of operations for the years ended December 31, 2004 and 2003 are summarized in the table below:
Three months ended (Successor)
-------------------------------------------------------------
-------------------------------------------------------------
March 31 June 30 September 30 December 31
-------------------------------------------------------------
2004 (in thousands)
Total revenues $ 140,459 $ 142,537 $ 138,119 $ 154,467
Total benefits and expenses 101,440 106,263 101,229 122,650
Income (loss) from operations before income
taxes and cumulative effect of accounting
change 39,019 36,274 36,890 31,817
Net income (loss) 9,807 25,803 29,508 24,785
American Skandia Life Assurance Corporation
- ---------------------------------------------------------------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- ---------------------------------------------------------------------------------------------------------------------------------------
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (continued)
Predecessor Successor
-----------------------------------------------------------------------------
Three months One month Two months Three months Three months
ended ended ended ended ended
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
March 31 April 30 June 30 September 30 December 31
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
2003 (in thousands)
Total revenues $ 104,470 $ 30,059 $ 89,807 $ 126,498 $ 133,294
Total benefits and expenses 124,243 11,036 52,837 72,227 83,278
(Loss) income from operations before
income taxes (19,773) 19,023 36,970 54,271 50,016
Net (loss) income (11,554) 19,348 25,184 37,183 28,489
Exhibit 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints Timothy P.
Harris, David R. Odenath, Jr., and Michael Bohm, each of them severally, his true and lawful attorney-in-fact with power of
substitution and resubstitution to sign in his name, place and stead, in any and all capacities, to do any and all things and execute
any and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934, and any rules,
regulations and requirements of the Securities and Exchange Commission (the "Commission") in connection with filing with the
Commission of an Annual Report on Form 10-K of American Skandia Life Assurance Corporation (the "Registrant") for the fiscal year
ended December 31, 2004 ("Form 10-K"); including specifically, but without limiting the generality of the foregoing, the power and
authority to sign his name in his respective capacity as a member of the Board of Directors of the Registrant to the Form 10-K and
such other form or forms as may be appropriate to be filed with the Commission as any of them may deem appropriate, together will all
exhibits thereto, and to any and all amendments thereto and to any other documents filed with the Commission, as fully for all
intents and purposes as he might or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each
acting alone, and his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 30th day of March 2005.
/s/ James J. Avery, Jr.
James J. Avery, Jr.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints Timothy P.
Harris, David R. Odenath, Jr., and Michael Bohm, each of them severally, his true and lawful attorney-in-fact with power of
substitution and resubstitution to sign in his name, place and stead, in any and all capacities, to do any and all things and execute
any and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934, and any rules,
regulations and requirements of the Securities and Exchange Commission (the "Commission") in connection with filing with the
Commission of an Annual Report on Form 10-K of American Skandia Life Assurance Corporation (the "Registrant") for the fiscal year
ended December 31, 2004 ("Form 10-K"); including specifically, but without limiting the generality of the foregoing, the power and
authority to sign his name in his respective capacity as a member of the Board of Directors of the Registrant to the Form 10-K and
such other form or forms as may be appropriate to be filed with the Commission as any of them may deem appropriate, together will all
exhibits thereto, and to any and all amendments thereto and to any other documents filed with the Commission, as fully for all
intents and purposes as he might or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each
acting alone, and his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 30th day of March 2005.
/s/ Charles E. Chaplin
Charles E. Chaplin
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints Timothy P.
Harris, David R. Odenath, Jr., and Michael Bohm, each of them severally, his true and lawful attorney-in-fact with power of
substitution and resubstitution to sign in his name, place and stead, in any and all capacities, to do any and all things and execute
any and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934, and any rules,
regulations and requirements of the Securities and Exchange Commission (the "Commission") in connection with filing with the
Commission of an Annual Report on Form 10-K of American Skandia Life Assurance Corporation (the "Registrant") for the fiscal year
ended December 31, 2004 ("Form 10-K"); including specifically, but without limiting the generality of the foregoing, the power and
authority to sign his name in his respective capacity as a member of the Board of Directors of the Registrant to the Form 10-K and
such other form or forms as may be appropriate to be filed with the Commission as any of them may deem appropriate, together will all
exhibits thereto, and to any and all amendments thereto and to any other documents filed with the Commission, as fully for all
intents and purposes as he might or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each
acting alone, and his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 30th day of March 2005.
/s/ Helen M. Galt
Helen M. Galt
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints Timothy P.
Harris, David R. Odenath, Jr., and Michael Bohm, each of them severally, his true and lawful attorney-in-fact with power of
substitution and resubstitution to sign in his name, place and stead, in any and all capacities, to do any and all things and execute
any and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934, and any rules,
regulations and requirements of the Securities and Exchange Commission (the "Commission") in connection with filing with the
Commission of an Annual Report on Form 10-K of American Skandia Life Assurance Corporation (the "Registrant") for the fiscal year
ended December 31, 2004 ("Form 10-K"); including specifically, but without limiting the generality of the foregoing, the power and
authority to sign his name in his respective capacity as a member of the Board of Directors of the Registrant to the Form 10-K and
such other form or forms as may be appropriate to be filed with the Commission as any of them may deem appropriate, together will all
exhibits thereto, and to any and all amendments thereto and to any other documents filed with the Commission, as fully for all
intents and purposes as he might or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each
acting alone, and his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 30th day of March 2005.
/s/ Bernard J. Jacob
Bernard J. Jacob
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints Timothy P.
Harris, David R. Odenath, Jr., and Michael Bohm, each of them severally, his true and lawful attorney-in-fact with power of
substitution and resubstitution to sign in his name, place and stead, in any and all capacities, to do any and all things and execute
any and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934, and any rules,
regulations and requirements of the Securities and Exchange Commission (the "Commission") in connection with filing with the
Commission of an Annual Report on Form 10-K of American Skandia Life Assurance Corporation (the "Registrant") for the fiscal year
ended December 31, 2004 ("Form 10-K"); including specifically, but without limiting the generality of the foregoing, the power and
authority to sign his name in his respective capacity as a member of the Board of Directors of the Registrant to the Form 10-K and
such other form or forms as may be appropriate to be filed with the Commission as any of them may deem appropriate, together will all
exhibits thereto, and to any and all amendments thereto and to any other documents filed with the Commission, as fully for all
intents and purposes as he might or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each
acting alone, and his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 30th day of March 2005.
/s/ Ronald P. Joelson
Ronald P. Joelson
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the person whose signature appears below constitutes and appoints Timothy P.
Harris, David R. Odenath, Jr., and Michael Bohm, each of them severally, his true and lawful attorney-in-fact with power of
substitution and resubstitution to sign in his name, place and stead, in any and all capacities, to do any and all things and execute
any and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934, and any rules,
regulations and requirements of the Securities and Exchange Commission (the "Commission") in connection with filing with the
Commission of an Annual Report on Form 10-K of American Skandia Life Assurance Corporation (the "Registrant") for the fiscal year
ended December 31, 2004 ("Form 10-K"); including specifically, but without limiting the generality of the foregoing, the power and
authority to sign his name in his respective capacity as a member of the Board of Directors of the Registrant to the Form 10-K and
such other form or forms as may be appropriate to be filed with the Commission as any of them may deem appropriate, together will all
exhibits thereto, and to any and all amendments thereto and to any other documents filed with the Commission, as fully for all
intents and purposes as he might or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each
acting alone, and his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto set my hand this 30th day of March 2005.
/s/ Andrew J. Mako
Andrew J. Mako
Exhibit 31.1
SECTION 302 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
I, David R. Odenath, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of American Skandia Life Assurance Corporation;
2. Based on my knowledge, this annual 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: March 30, 2005
/s/ David R. Odenath, Jr.
David R. Odenath, Jr.
Chief Executive Officer and President
Exhibit 31.2
SECTION 302 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
I, Michael Bohm, certify that:
1. I have reviewed this annual report on Form 10-K of American Skandia Life Assurance Corporation;
2. Based on my knowledge, this annual 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: March 30, 2005
/s/ Michael A. Bohm
Michael A. Bohm
Executive Vice President and Chief Financial Officer
Exhibit 32.1
SECTION 906 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
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 Annual Report on Form 10-K for the year ended December 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: March 30, 2005
/s/ David R. Odenath, Jr.
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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
SECTION 906 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
Pursuant to 18 U.S.C. Section 1350, I, Michael Bohm, Executive Vice President and Chief Financial Officer of American Skandia Life
Assurance Corporation (the "Company"), hereby certify that the Company's Annual Report on Form 10-K for the year ended December 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: March 30, 2005
/s/ Michael A. Bohm
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Name: Michael A. Bohm
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.