Item 1. BUSINESS (all dollars in thousands unless otherwise stated)
General -------
American Skandia Life Assurance Corporation ("ASLAC" or the "Company"), with its principal offices in Shelton, Connecticut, is a wholly-owned subsidiary of American Skandia, Inc. ("ASI"). 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, entered into a definitive agreement (the "Purchase Agreement") with Prudential Financial, Inc., a New Jersey corporation ("Prudential Financial"), whereby Prudential Financial will acquire the Company and certain of its affiliates (the "Acquisition"). Consummation of the transaction is subject to various closing conditions, including regulatory approvals and approval of certain matters by the board of directors and shareholders of the mutual funds advised by American Skandia Investment Services, Inc., a subsidiary of ASI. The transaction is expected to close during the second quarter of 2003.
The Company has 99.9% ownership in Skandia Vida, S.A. de C.V. ("Skandia Vida") which is a life insurance company domiciled in Mexico. Revenues and total assets generated from Skandia Vida represent less than one-half of one percent of the Company's consolidated revenues and total assets. As part of the Acquisition, it is expected that the Company will sell its ownership interest in Skandia Vida to SICL. The Company has filed for regulatory approvals from the State of Connecticut and Mexico related to the sale of Skandia Vida.
The Company was established in 1988 and is a significant provider of variable annuity contracts for the individual market in the United States. Affiliates of the Company sponsor and distribute shares of registered investment companies ("mutual funds"). Because these mutual funds are not sponsored or distributed by the Company, such products are not discussed herein and are not reflected on the Company's financial statements.
The Company's products are sold primarily to individuals to provide for long-term savings and retirement and to address the economic impact of premature death, estate planning concerns and supplemental retirement needs. The investment performance of the funds supporting the variable annuity contracts, which in turn correlates, principally, with equity market performance, can significantly impact the market for the Company's products.
Products --------
The Company offers a wide array of annuities, including: a) certain deferred and immediate annuities that are registered with the Securities and Exchange Commission, including variable annuities with fixed interest rate investment options that include a market value adjustment feature; b) certain other fixed deferred annuities that are not registered with the Securities and Exchange Commission; and c) fixed, adjustable and variable immediate annuities. 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. The Company also offers and sells single premium variable life insurance products, and, prior to April 15, 2002, offered and sold 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.
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. 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.
Certain of the Company's variable annuity products contain a feature called "Performance Advantage". This feature is comprised of two benefits. First, the contract holder receives an immediate one percent increase to their account value upon initial deposit. The contract holder earns this one percent bonus upon reaching the original deposit's tenth anniversary. If the contract holder surrenders prior to the tenth anniversary, the one percent bonus is returned to the Company. The second benefit occurs if the contract holder's account value has not doubled from the original deposit by the original deposit's tenth anniversary. At the option of the contract holder, this benefit will be distributed in the form of a reduction in future charges applied against the contract or, if annuitization is selected, a lump-sum credit to the contract owner's account. Updated versions of the Company's core products no longer contain this feature.
Distribution ------------
The Company sells its wide array of annuity products through multiple distribution channels including, (a) independent financial planners; (b) broker-dealers that generally are members of the New York Stock Exchange, including "wirehouse" and regional broker-dealer firms; and (c) broker-dealers affiliated with banks or that specialize in marketing to customers of banks. Although the Company is active in each of those distribution channels, the majority of the Company's sales have come from independent financial planners. The Company has selling agreements with approximately twelve hundred broker/dealer firms and financial institutions.
Although many of the Company's competitors have acquired or are looking to acquire their distribution channels as a means of securing sales, the Company has not done so. Instead, the Company believes its success is dependent on its ability to enhance its relationships with both the selling firms and their registered representatives. In cooperation with its affiliated broker-dealer, American Skandia Marketing, Incorporated, the Company uses marketing teams to provide support to its primary distribution channels. In addition, the Company also offers a number of private label and proprietary products distributed by select large distributors.
Segments --------
The Company's reporting is confined to one reporting segment. Revenues, net income and total assets for this segment can be found on the Company's consolidated statements of financial condition as of December 31, 2002 and 2001 and consolidated statements of income for the years ended December 31, 2002, 2001 and 2000. The Company's total assets as of December 31, 2002, 2001 and 2000 were $23,708,585, $28,009,782 and $31,702,705, 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.
Reserves --------
The Company is obligated by the insurance laws and regulations in the jurisdictions in which the Company does business to carry in its statutory financial statements, as liabilities, actuarially calculated reserves to meet its obligations on outstanding annuity and life insurance contracts. Such reserves are based on mortality and/or morbidity tables in general use in the United States. In general, reserves are computed amounts that, with additions from premiums to be received, and with interest on such reserves compounded at certain assumed rates, are expected to be sufficient to meet contractual obligations. In the accompanying financial statements, these reserves for contractual obligations are determined in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") and are included in the balance sheet captions "separate account liabilities" and "reserves for future policy and contract benefits." The Company's statutory-based reserves differ from those reported under U.S. GAAP, primarily because U.S. GAAP does not require an explicit reserve for guaranteed minimum death benefits and reserves held for annuity contracts are held at account value under U.S. GAAP, rather than at an actuarially calculated amount.
Competition -----------
The Company is competing for management of an 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 Company was ranked 13th in sales of variable annuities for the year ended December 31, 2002, and 10th in assets under management as of December 31, 2002. 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. The Company believes it derives its competitive advantage from its innovative and creative product designs, and its strong relationship with the sales force through service and education. The Company's financial strength or claims paying ratings from Fitch Ratings, A.M. Best Co. and Standard and Poor's is A-. The Company's ratings position relative to its competitors was a significant factor in SICL's decision to sell the Company. See the Liquidity and Capital Resources section within Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion of the Company's ratings.
Employees ---------
As of December 31, 2002, the Company had 725 employees.
Item 2.
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. The Company believes that its current facilities are satisfactory for its near term needs.
Item 3.
Item 3. LEGAL PROCEEDINGS
In recent years, a number of annuity companies have been named as defendants in class action lawsuits relating to the use of variable annuities as funding vehicles for tax-qualified retirement accounts. The Company is currently a defendant in one such lawsuit. A purported class action complaint was filed in the United States District Court for the Southern District of New York on December 12, 2002, by Diane C. Donovan against the Company and certain of its affiliates (the "Donovan Complaint"). The Donovan Complaint seeks unspecified compensatory damages and injunctive relief from the Company and certain of its affiliates. The Donovan Complaint claims that the Company and certain of its affiliates violated federal securities laws in marketing variable annuities. This litigation is in the preliminary stages. The Company believes this action is without merit, and intends to vigorously defend against this action.
The Company is also involved in other lawsuits arising, for the most part, in the ordinary course of its business operations. While the outcome of these other lawsuits cannot be determined at this time, after consideration of the defenses available to the Company, applicable insurance coverage and any related reserves established, these other lawsuits are not expected to result in liability for amounts material to the financial condition of the Company, although they may adversely affect results of operations in future periods.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ASI owns all of the Company's outstanding shares. The Company did not pay any dividends to ASI in 2002 or 2001. Under various state insurance laws, the maximum amount of dividends that can be paid to shareholders without prior approval of the state insurance department is subject to restrictions relating to statutory surplus and net gain from operations. Based on these restrictions, the Company currently may not pay any dividends without prior approval.
Item 6.
Item 6. SELECTED FINANCIAL DATA (dollars in thousands)
The following table summarizes information with respect to the operations of the Company:
For the Year Ended December 31, 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- STATEMENTS OF INCOME DATA Revenues: Annuity and life insurance $ 370,004 $ 388,696 $ 424,578 $ 289,989 $ 186,211 charges and fees (a) (b) Fee income (b) 97,650 111,196 130,610 83,243 50,839 Net investment income 19,632 20,126 18,595 11,477 11,130 Net realized capital (losses) gains and other revenues (e) (7,438) 2,698 4,195 3,688 1,360 ------------- ------------ ------------ ------------ ------------
Total revenues $ 479,848 $ 522,716 $ 577,978 $ 388,397 $ 249,540 ============ ============ ============ ============ ============
Benefits and Expenses: Annuity and life insurance $ 3,391 $ 1,955 $ 751 $ 612 $ 558 benefits Change in annuity and life insurance policy reserves 2,741 (39,898) 49,339 (671) 1,053 (c) Guaranteed minimum death benefit claims, net of 23,256 20,370 2,618 4,785 - hedge (b) Return credited to contract 5,196 5,796 8,463 (1,639) (8,930) owners Underwriting, acquisition and other insurance expenses 188,728 196,755 150,597 125,434 86,306 Amortization of deferred acquisition costs (b) (d) 510,059 224,047 184,616 83,861 86,628 Interest expense 14,544 73,424 85,998 69,502 41,004 ------------ ------------ ------------ ------------ ------------
Total benefits and expenses $ 747,915 $ 482,449 $ 482,382 $ 281,884 $ 206,619 ============ ============ ============ ============ ============
Income tax (benefit) expense $ (102,810) $ 7,168 $ 30,779 $ 30,344 $ 8,154 ============ ============ ============ ============ ============
Net (loss) income $ (165,257) $ 33,099 $ 64,817 $ 76,169 $ 34,767 ============ ============ ============ ============ ============
STATEMENTS OF FINANCIAL CONDITION DATA Total assets (b) $ 23,708,585 $ 28,009,782 $ 31,702,705 $ 30,881,579 $ 18,848,273 ============ ============ ============ ============ ============
Future fees payable to parent $ 708,249 $ 799,472 $ 934,410 $ 576,034 $ 368,978 ============ ============ ============ ============ ============
Surplus notes $ 110,000 $ 144,000 $ 159,000 $ 179,000 $ 193,000 ============ ============ ============ ============ ============
Shareholder's equity $ 683,061 $ 577,668 $ 496,911 $ 359,434 $ 250,417 ============ ============ ============ ============ ============
a. On annuity and life insurance sales of $3,472,044, $3,834,167, $8,216,167, $6,862,968, and $4,159,662, during the years ended December 31, 2002, 2001, 2000, 1999, and 1998, respectively, with contract owner assets under management of $21,894,636, $26,017,847, $29,751,822, $29,396,693, and $17,854,761, as of December 31, 2002, 2001, 2000, 1999, and 1998, respectively. b. These items are significantly impacted by equity market volatility. c. For the year ended December 31, 2000, change in annuity and life insurance policy reserves reflected increases to those reserves for guaranteed minimum death benefit ("GMDB") exposure. For the year ended December 31, 2001, the Company changed certain of its assumptions related to its GMDB exposure resulting in a benefit to operations. See Results of Operations in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") for a further discussion. d. During the year ended December 31, 2002, the Company recorded an acceleration of amortization of $206,000 against the deferred acquisition cost asset. See the MD&A for a further discussion. e. Net realized capital (losses) gains and other revenues include $5,845 of net realized capital losses on sales of securities during 2002 and an other than temporary impairment charge of $3,769 recorded during 2002 on the Company's equity securities.
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollars in thousands)
Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated financial statements and the notes thereto and Item 6, Selected Financial Data.
Results of Operations ---------------------
Annuity and life insurance sales were $3,472,044, $3,834,167 and $8,216,167, in 2002, 2001 and 2000, respectively. The decrease in sales in 2002 and 2001 was primarily the result of the general decline in sales in the industry, attributed in large part to the continued uncertainty in the equity markets. In addition, the Company believes uncertainty regarding its future ownership has adversely impacted sales, primarily in the latter part of 2002. The Company announced, in the first quarter of 2002, its intention to focus on the growth of its core variable annuity business.
Average assets under management totaled $23,637,559 in 2002, $26,792,877 in 2001 and $31,581,902 in 2000, representing a decrease of 12% and 15% in 2002 and 2001, respectively, due primarily to weak equity markets. The decrease in annuity and life insurance charges and fees and fee income before surrender charge income and reinsurance was consistent with the decline in assets under management. Surrender charge income increased in 2002 as compared to 2001. This was caused by higher lapses when compared to the applicable prior year periods, and was primarily attributable, the Company believes, to concerns by contract holders, rating agencies and the Company's distribution channels, surrounding the uncertainty in the equity markets and its impact on variable annuity companies generally and, prior to the announcement of the Acquisition, uncertainty concerning the Company's future (See Liquidity and Capital Resources for rating agency actions).
Net realized capital losses in 2002 were primarily from $9,593 of losses on sales and $3,769 of other-than-temporary impairments of mutual fund investments that are held in support of a deferred compensation program for certain of the Company's employees. The deferred compensation program losses were offset by net gains of $3,746 during 2002 on sales of fixed maturities. Included in those net gains on sales of fixed maturities for 2002, was a realized loss of approximately $1,236 on the sale of a WorldCom, Inc. bond. The net capital gains in 2001 related primarily to sales of fixed maturity investments, were partially offset by losses on securities in the fixed maturity portfolio. The most significant loss was $2,636 related to Enron securities. In addition net realized capital losses of $3,534 in 2001 were incurred due to sales of mutual fund holdings in support of the Company's non-qualified deferred compensation program.
The change in annuity and life insurance policy reserves includes changes in reserves related to annuity contracts with mortality risks. During 2001, the Company's Guaranteed Minimum Death Benefit ("GMDB") reserve decreased $43,984, as the result of an update of certain reserve assumptions as to risks inherent in the benefit. Previous assumptions had been based on statutory valuation principles as an approximation for U.S. GAAP. In addition, future mortality rates were lowered in 2001 to reflect favorable past experience. However, offsetting the resulting increase in earnings and equity as a result of changes in the GMDB liability in 2001, assumptions related to GMDB claim costs were also updated in the calculation of the deferred acquisition cost asset, resulting in additional amortization of this asset.
The Company uses derivative instruments, which consist of equity option contracts for risk management purposes, and not for trading or speculation. The Company hedges the economic GMDB exposure associated with equity market fluctuations. GMDB claims, net of hedge, consist of GMDB claims offset by the mark to market and realized capital gain/loss results of the Company's option contracts. During 2002 and 2001, the fluctuations in GMDB claims, net of hedge, were driven by an increase in hedge related benefits of $19,776 and $14,646, respectively. Hedge related benefits were partially offset by increases in GMDB claims of $22,662 and $32,398 during 2002 and 2001, respectively.
Return credited to contract owners consists primarily of net investment results from the Company's fixed, market value adjusted, separate account investment option and changes in the Company's experience rated reinsurance receivables. The decrease in 2002 was primarily due to increased net investment results on the Company's fixed, market value adjusted, separate account investment option. As the equity markets decline, movement from variable investment options to fixed investment options, primarily due to one of the Company's product features, has increased the assets invested in the fixed separate account investment option. Included in 2002 net investment results is $9,849 of realized and unrealized losses on certain securities, of which $5,427 related to WorldCom, Inc. bonds. The increase in net investment results was partially offset by a decrease in experience rated reinsurance receivables in 2002 due to unfavorable experience on certain blocks of variable annuity business. In 2001, return credited to contract owners decreased primarily due to favorable experience on certain blocks of variable annuity contracts increasing the experience rated reinsurance receivable. Partially offsetting the 2001 decrease is net investment losses of $1,662 related to Enron securities.
Underwriting, acquisition and other insurance expenses for 2002, 2001 and 2000 were as follows:
2002 2001 2000 ---- ---- ---- Commissions and purchase credits $ 287,612 $ 248,187 $ 430,743 General operating expenses 145,438 157,704 214,957 Acquisition costs deferred (244,322) (209,136) (495,103) ----------- ----------- ----------- Underwriting, acquisition and other insurance expenses $ 188,728 $ 196,755 $ 150,597 =========== =========== ===========
New products launched, as well as a larger proportion of sales of products with higher commissions as compared to 2001 led to an increase in commissions and purchase credits during 2002. Lower sales and asset levels led to a decrease in commissions and purchase credits during 2001. Partially offsetting this decline in 2001, the company launched a commission promotion program that increased commissions as a percentage of new sales. Commission promotions in 2002 were approximately equivalent as compared to 2001.
General operating expenses decreased during 2002 and 2001 as a result of lower sales-based compensation, as well as expense reduction programs implemented during 2001 and continued strong expense management in 2002. Variable compensation and long-term incentive plan expenses have decreased due to the slowdown in sales and the decline in the equity markets.
Amortization of deferred acquisition costs increased over the past two years, in general, due to the further depressed equity markets in 2002 and 2001, thereby decreasing expectations of future gross profits and actual gross profits from asset based fees and increased expected and actual claim costs associated with minimum death benefit guarantees. During 2002, the Company also performed a recoverability study and an analysis of its short-term assumptions of future gross profits and determined those assumptions of future profits to be excessive. This analysis resulted in a current year acceleration of amortization of $206,000. During 2002 and 2001, 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. See Note 2 of Notes to Consolidated Financial Statements for a further discussion on amortization of deferred acquisition costs.
Interest expense decreased during 2002 primarily due to lower interest expense related to the future fees payable to ASI liability (See Note 8). Interest expense on these obligations is driven by the cash flows from the underlying annuity contracts acting as collateral. Due to the depressed asset values of those annuity contracts driven by the decline in the equity markets, the cash flows, and therefore the interest expense, decreased from prior year levels. Interest expense decreased in 2001 as a result of a reduction in borrowing.
The Company's income tax (benefit) expense varies directly with increases or decreases in (loss) income from operations. The effective income tax rate varied from the corporate rate of 35% due primarily to the deduction for dividends received.
Total assets and liabilities decreased $4,301,197 and $4,406,590, respectively, from December 31, 2001. This change resulted primarily from the declining equity markets.
Significant Accounting Policies -------------------------------
Deferred Acquisition Costs
The costs of acquiring new business, which vary with and are primarily related to new business generated, are deferred, net of reinsurance. These costs include commissions, purchase credits, costs of contract issuance, and certain selling expenses that vary with production.
The Company uses the retrospective deposit method for amortizing deferred acquisition costs. This method results in deferred acquisition costs being amortized in proportion to expected gross profits from surrender charges and policy and asset based fees, net of operating and claim costs. The deferred acquisition cost asset is adjusted retrospectively and prospectively when estimates of current and future gross profits to be realized from a group of products are revised. Critical assumptions in estimating gross profits include those for surrenders, long-term fund growth rate, expenses and death benefits. The long-term fund growth rate, in large part, determines the estimated future asset levels on which the most significant revenues are based. The Company's long-term fund growth rate assumption is 8% (net of charges assessed against the underlying mutual fund, but before charges assessed at the separate account and contract level). When current period actual asset growth is greater or less than the Company's long-term expectation, the Company adjusts the short-term asset growth rate to a level that will allow the Company, in the short-term, to resume the long-term asset growth rate expectation. The short-term asset growth rate is subject to constraints surrounding actual market conditions. If the Company's long-term fund growth rate assumption was 7% instead of 8%, the Company's deferred acquisition cost asset at December 31, 2002 would be reduced by $26,273.
Future Fees Payable to ASI
In a series of transactions with ASI, the Company transferred certain rights to receive a portion of future fees and contract charges expected to be realized on designated blocks of deferred annuity contracts.
The proceeds from the transfers have been recorded as a liability and are being amortized over the remaining surrender charge period of the designated contracts using the interest method. The Company did not transfer the right to receive future fees and charges after the expiration of the surrender charge period.
In connection with these transactions, ASI, through special purpose trusts, issued collateralized notes in private placements, which are secured by the rights to receive future fees and charges purchased from the Company.
Under the terms of the securitization purchase agreements, the rights transferred provide for ASI to receive a percentage (60%, 80% or 100% depending on the underlying commission option) of future mortality and expense charges and contingent deferred sales charges, after reinsurance, expected to be realized over the remaining surrender charge period of the designated contracts (generally 6 to 8 years). The liability for future fees payable to ASI at the balance sheet date is based on the consideration received less principal repayments according to amortization schedules that were developed at the inception of the transactions. 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. As account values associated with the designated contracts have declined, consistent with the overall decline in the equity markets, historical mortality and expense charges have been lower than expected on certain transactions and it is likely that future mortality and expense charges, on those same transactions, will be lower than originally projected. As a result, the ultimate cash flows associated with these transactions that will transfer to ASI may be lower than the current carrying amount of the liability.
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 present value of future payments to ASI would be $429,773.
Deferred Taxes
The Company evaluates the necessity of recording a valuation allowance against its deferred tax asset in accordance with Statement of Financial Accounting Standards No. 109, Income Taxes ("SFAS 109"). In performing this evaluation, the Company considers all available evidence in making the determination as to whether it is more likely than not that deferred tax assets are not realizable. For the Company, that evidence includes: cumulative U.S. GAAP pre-tax income in recent years past, whether or not operating losses have expired unused in the past, the length of remaining carryback or carryforward periods, and net taxable income or loss expectations in early future years. The net taxable income or loss projections are based on profit assumptions consistent with those used to amortize deferred acquisition costs (see above discussion on deferred acquisition costs).
As of December 31, 2002, the Company has approximately $361,000 gross deferred tax assets related principally to net operating loss carryforwards that expire in 2016 and 2017 and insurance reserve differences. After considering the impact of gross reversing temporary liabilities of $323,000, the Company estimates that the Company will generate sufficient taxable income to fully utilize gross deferred tax assets within 2 years (prior to the expiration of the net operating losses).
Liquidity and Capital Resources -------------------------------
The Company's liquidity requirements have generally been met by cash from insurance operations, investment activities, borrowings from ASI, reinsurance, capital contributions and securitization transactions with ASI (see Note 8).
The Company's cash from insurance operations is primarily comprised of fees generated off of assets under management, less commission expense on sales, sales and marketing expenses and other operating expenses. Fund performance driven by the equity markets directly impact assets under management and therefore, the fees the Company can generate off of those assets. During 2002 and 2001, assets under management declined consistent with the equity market declines resulting in reductions in fee revenues. In addition, the equity markets impact sales of variable annuities. As sales have declined in a declining equity market, non-promotional commission expense declined, however, in order to boost sales levels, the Company has offered various sales promotions increasing the use of cash for commission expense.
In order to fund the cash strain generated from acquisition costs on current sales, the Company has relied on cash generated from its direct insurance operations as well as reinsurance and securitization transactions. The Company has used modified coinsurance reinsurance arrangements whereby the reinsurer shares in the experience of a specified book of business. These reinsurance transactions result in the Company receiving from the reinsurer an upfront ceding commission on the book of business ceded in exchange for the reinsurer receiving , the future fees generated from that book of business. These reinsurance agreements also mitigate the recoverability risk associated with the payment of up-front commissions and other acquisition costs. Similarly, the Company has entered into securitization transactions whereby the Company issues to ASI, in exchange for cash, the right to receive future fees generated off of a specific book of business. On April 12, 2002, the Company entered into a new securitization transaction with ASI. This transaction covers designated blocks of business issued from November 1, 2000 through December 31, 2001. The estimated present value of the transaction at April 12, 2002, using a discount rate of 6.00%, was approximately $101,713.
As of December 31, 2002, 2001 and 2000, the Company had short-term borrowings of $10,000, $10,000 and $10,000, respectively, and had long-term surplus notes liabilities of $110,000, $144,000 and $159,000, respectively. During 2002, the Company borrowed $263,091 and paid back $263,091 related to short-term borrowing. During 2002 and 2001, the Company received permission from the State of Connecticut Insurance Department to pay down surplus notes in the amount of $34,000 and $15,000, respectively. See Notes 14 and 15 of Notes to Consolidated Financial Statements for more information on surplus notes and short-term borrowing, respectively.
As of December 31, 2002, 2001 and 2000, shareholder's equity totaled $683,061, $577,668 and $496,911, respectively. The Company received capital contributions of $259,720 and $48,000 from ASI during 2002 and 2001, respectively. Of this, $4,520 and $2,500, respectively, was used to support its investment in Skandia Vida. Net (loss) income of ($165,257) and $33,099, for the years ended December 31, 2002 and 2001, respectively, contributed to the respective changes in shareholder's equity in 2002 and 2001.
The National Association of Insurance Commissioners ("NAIC") requires insurance companies to report information regarding minimum Risk Based Capital ("RBC") requirements. These requirements are intended to allow insurance regulators to identify companies that may need regulatory attention. The RBC model law requires that insurance companies apply various factors to asset, premium and reserve items, all of which have inherent risks. The formula includes components for asset risk, insurance risk, interest rate risk and business risk. The Company has complied with the NAIC's RBC reporting requirements and has total adjusted capital well above required capital.
During 2002, all of the major rating agencies reviewed the U.S. life insurance sector, including the Company. Based on these reviews the rating agencies have evolving concerns surrounding the risk profile of variable annuity companies due to their significant exposure to equity market performance. This exposure has resulted, and may continue to result, in earnings volatility. Based on the reviews made during 2002, the following ratings actions took place:
On May 8, 2002, Fitch Ratings downgraded the Company's "insurer financial strength" rating to A+ from AA- with a "stable" outlook.
On September 19, 2002, Fitch Ratings lowered the Company's "insurer financial strength" rating to A- from A+ with an "evolving" outlook.
On September 27, 2002, A.M. Best Co. lowered the Company's "financial strength" rating to A- from A with negative implications.
On October 16, 2002, Standard and Poor's lowered the Company's "counter party credit" and "financial strength" ratings to A- from A+ with a negative outlook and removed the Company from Credit Watch.
Subsequent to the announcement of the Acquisition, Standard and Poor's placed the Company on CreditWatch with positive implications.
Effects of Inflation --------------------
The rate of inflation has not had a significant effect on the Company's financial statements.
Outlook -------
The Company believes that it is well positioned to retain and enhance its position as a leading provider of financial products for long-term savings and retirement purposes as well as to address the economic impact of premature death, estate planning concerns and supplemental retirement needs. The Company has renewed its focus on its core variable annuity business, offering innovative long-term savings and income products, strengthening its wholesaling efforts and providing consistently good customer service in order to gain market share and improve profitability in an increasingly competitive market.
The Gramm-Leach-Bliley Act of 1999 (the Financial Services Modernization Act) permits affiliation among banks, securities firms and insurance companies. This legislative change has created opportunities for continued consolidation in the financial services industry and increased competition as large companies offer a wide array of financial products and services.
Various other legislative initiatives could impact the Company such as pension reform and capital gains and estate tax changes. These include the proposed exclusion from tax for corporate dividends, potential changes to the deductibility of dividends received from the Company's separate accounts and newly proposed tax-advantaged savings programs. Additional pension reform may change current tax deferral rules and allow increased contributions to retirement plans, which may lead to higher investments in tax-deferred products and create growth opportunities for the Company. A capital gains tax reduction may cause tax-deferred products to be less attractive to consumers, which could adversely impact the Company.
In addition, NAIC statutory reserving guidelines and/or interpretations of those guidelines may change in the future. Such changes may require the Company to modify, perhaps materially, its statutory-based reserves for variable annuity contracts.
Forward Looking Information ---------------------------
The Private Securities Litigation Reform Act of 1995 (the "1995 Act") provides a "safe harbor" for forward-looking statements, so long as those statements are identified as forward-looking, and the statements are accompanied by meaningful cautionary statements that identify important factors that could cause actual results to differ materially from those discussed in the statement. We want to take advantage of these safe harbor provisions.
Certain information contained in the Management's Discussion and Analysis of Financial Condition and Results of Operations is forward-looking within the meaning of the 1995 Act or Securities and Exchange Commission rules.
These forward-looking statements rely on a number of assumptions concerning future events, and are subject to a number of significant uncertainties and results may differ materially from these statements. You should not put undue reliance on these forward-looking statements. We disclaim any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.
Item 7A.
Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to potential fluctuations in earnings and the fair value of certain of its assets and liabilities, as well as variations in expected cash flows due to changes in market interest rates and equity prices. The following discussion focuses on specific exposures the Company has to interest rate and equity price risk and describes strategies used to manage these risks, and includes "forward-looking statements" that involve risk and uncertainties. The discussion is limited to financial instruments subject to market risks and is not intended to be a complete discussion of all of the risks to which the Company is exposed.
Interest Rate Risk ------------------
Fluctuations in interest rates can potentially impact the Company's profitability and cash flows. At December 31, 2002, 91% 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 9% 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 the risk variables of the insurance liabilities supported by the assets.
At December 31, 2002, 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 has a conservative investment philosophy with regard to these investments. All investments are investment grade corporate securities, government agency or U.S. government securities.
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 market value adjustment ("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 increase or decrease in the market value of the securities underlying the guarantee. The Company maintains strict asset/liability matching to enable this offset. However, the Company still takes on the default risk for the underlying securities, the interest rate risk of reinvestment of interest payments and the risk of failing to maintain the asset/liability matching program with respect to duration and convexity.
Liabilities held in the Company's guaranteed separate account as of December 31, 2002 totaled $1,828,048. Assets, primarily fixed income investments, supporting those liabilities had a fair value of $1,828,048. The Company performed a sensitivity analysis on these interest-sensitive liabilities and assets at December 31, 2002. The analysis showed that an immediate decrease of 100 basis points in interest rates would result in a net increase in liabilities and the corresponding assets of approximately $69,150 and $68,500, respectively. An analysis of a 100 basis point decline in interest rates at December 31, 2001, showed a net increase in interest-sensitive liabilities and the corresponding assets of approximately $39,800 and $39,900, respectively.
Equity Market Exposure ----------------------
The primary equity market risk to the Company comes from the nature of the variable annuity and variable life products sold by the Company. Various fees and charges earned are substantially derived as a percentage of the market value of assets under management. In a market decline, this income will be reduced. This could be further compounded by customer withdrawals, net of applicable surrender charge revenues, partially offset by transfers to the fixed option discussed above. A 10% decline in the market value of the assets under management at December 31, 2002, sustained throughout 2003, would result in an approximate drop in related mortality and expense charges and annual fee income of $36,350.
Another equity market risk exposure of the Company relates to guaranteed minimum death benefit payments. Declines in equity markets and, correspondingly, the performance of the funds underlying the Company's products, increase exposure to guaranteed minimum death benefit payments. As discussed in Note 2D of the consolidated financial statements, the Company uses derivative instruments to hedge against the risk of significant decreases in equity markets. Prior to the implementation of this program, the Company used reinsurance to mitigate this risk.
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.
Estimates of interest rate risk and equity price risk were obtained using computer models that take into consideration various assumptions about the future. Given the uncertainty of future interest rate movements, volatility in the equity markets and consumer behavior, actual results may vary from those predicted by the Company's models.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index to Consolidated Financial Statements and Supplementary Data on page 19.
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name of Executive Officer ------------------------- and/or Director Principal Position Age* --------------- ------------------ ---- Wade A. Dokken President and Chief Executive Officer 43 Patricia J. Abram Senior Vice President, Marketing 51 Lincoln R. Collins Senior Vice President, Chief Operating Officer and Director 42 Thomas M. Mazzaferro Executive Vice President, Chief Financial Officer and Director 49 Michael A. Murray Senior Vice President 34 Robert G. Whitcher Director 57 Kirk P. Wickman Senior Vice President and General Counsel 45 Brett M. Winson Senior Vice President, Human Resources 47
-------------------------------- * As of March 27, 2003
Executive Officers' and Directors' Business Experience During Past Five Years -----------------------------------------------------------------------------
Wade A. Dokken became President and Chief Executive Officer of the Company in June, 2000. Previously, Mr. Dokken served in management positions with the Company since 1989.
Patricia J. Abram joined the Company in 1998. Previously, she held the position of Senior Vice President, Chief Marketing Officer with Mutual Service Corporation, where she was employed beginning in 1982.
Lincoln R. Collins became Senior Vice President and Chief Operating Officer of the Company in 2001. Previously, Mr. Collins served in management positions with the Company since 1988. Mr. Collins has been a Director of the Company since February, 1996.
Thomas M. Mazzaferro joined the Company in 1988 and has been Chief Financial Officer of the Company since 1990. Mr. Mazzaferro has been a Director of the Company since September, 1994.
Michael A. Murray joined the Company in 1994. Mr. Murray principally serves as an executive officer of the Company's affiliate, American Skandia Marketing, Incorporated, with responsibility for marketing of mutual funds.
Robert G. Whitcher has served as a Director of the Company since October, 2001. Mr. Whitcher joined the Company in 1997 and has been Executive Assistant to the President and Chief Executive Officer of the Company since June 2000. Prior to joining the Company, Mr. Whitcher served as Director of Business Development for Technology Service Corporation from November 1996 until May 1997.
Kirk P. Wickman joined the Company as Senior Vice President and General Counsel in March 2001. Previously, Mr. Wickman held positions with Aetna Inc. since 1992, most recently as Senior Vice President and General Counsel of Aetna Financial Services.
Brett M. Winson has been Senior Vice President, Human Resources since 1998. He previously held the position of Senior Vice President of Sakura Bank, Ltd. since 1990.
Item 11.
Item 11. EXECUTIVE COMPENSATION
Summary Compensation Table: The summary table below summarizes the compensation paid to the Chief Executive Officer and to the four most highly compensated of our executive officers whose compensation exceeded $100,000 in 2002.
(dollars in thousands) Annual Compensation Long-Term ------------ Compensation ------------ All Other Name and Principal Position Year Salary Bonus Payouts Compensation --------------------------- ---- ------ ----- ------- ------------ Wade A. Dokken 2002 $1,003 $650* $944 $6 President & Chief Executive 2001 816 800** 1,092 10 Officer (effective 6/1/00) 2000 546 1,604 882 10
Michael A. Murray 2002 221 450 135 6 Senior Vice President 2001 206 396 28 10 2000 167 628 17 10
Lincoln R. Collins 2002 311 348 479 6 Senior Vice President, Chief 2001 305 175 362 11 Operating Officer 2000 261 276 285 10
Patricia J. Abram 2002 302 297 123 6 Senior Vice President 2001 217 132 - 11 2000 201 187 - 10
Kirk P. Wickman 2002 350 210 60 6 Senior Vice President and 2001 290 236 - 6 General Counsel 2000 - - - - * Represents portion of Mr. Dokken's 2002 earned bonus that has been paid to date. The total bonus earned by Mr. Dokken for 2002 is not calculable as of the date of this filing. ** Includes a bonus of $450 earned by Mr. Dokken for the 2001 fiscal year that was not calculable prior to the filing of the Company's Annual Report on Form 10-K for 2001.
Long Term Incentive Plan Awards in the last fiscal year: The following table provides information regarding the long-term incentive plan units awarded in 2002. Units are awarded to executive officers and other employees. The table shows units awarded to the Chief Executive Officer and the four most highly compensated executive officers whose compensation exceeded $100,000 in 2002. This program is designed to induce participants to remain with the Company over long periods of time and to tie a portion of their compensation to the fortunes of the Company.
Currently, the program consists of multiple plans for executives and employees. Participants are awarded units at the beginning of a plan. 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 plan. There are certain exceptions, such as in cases of retirement or death. Units become payable upon a change of control of the Company (including the Acquisition) in accordance with their terms.
Changes in the value of units reflect changes in the "embedded value" of the Company and certain of its affiliates. "Embedded value" is the net asset value of the Company and certain of its affiliates (valued at market value and not including the present value of future profits), plus the present value of the anticipated future profits (valued pursuant to state insurance law) on existing business in force. Units will not have any value for participants if the embedded value does not increase by certain target percentages during the first four years of a plan (the growth period), except, in certain cases, upon a change of control, including the Acquisition. The target percentages may differ between each plan. Any amounts available under an executive plan are paid out in the fifth year and under an employee plan are paid out in the fourth year. The amount to be received by a participant after the growth period is the appreciation multiplied by the number of units held.
(dollars in thousands) Long-Term Incentive Plans - Awards in Last Fiscal Year ------------------------------------------------------
Number of Period Until Estimated Future Payments ------------------------- Name Units Maturation Threshold Target Maximum ---- ----- ---------- --------- ------ -------
Wade A. Dokken 606,061 12/31/2005 $0 $1,000 $2,000 Michael A. Murray 363,636 12/31/2005 $0 $600 $1,200 Lincoln R. Collins 509,091 12/31/2005 $0 $840 $1,680 Patricia J. Abram 363,636 12/31/2005 $0 $600 $1,200 Kirk P. Wickman 363,636 12/31/2005 $0 $600 $1,200
The Company's directors, each of whom is an officer of the Company, did not receive any additional compensation in 2002 for their service as directors of the Company.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
None.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
Item 14.
Item 14. CONTROLS AND PROCEDURES
The Chief Executive Officer and Chief Financial Officer have conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, within the past 90 days, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in ensuring that all material information required to be filed in this annual report has been made known to them in a timely fashion. There have been no significant changes in internal control, or in factors that could significantly affect internal control, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation.
Item 15.
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements See Index to Consolidated Financial Statements on Page 19 (2) Financial Statement Schedules None* (3) Exhibits (a) Plans of acquisition, reorganization, None arrangement, liquidation or succession (b) Articles of Incorporation and By-Laws Incorporated by reference to the Company's Form N-4 (Reg. 33-87010) (c) Instruments defining the right of security Incorporated by reference to the Company's holders including indentures Reg. 333-103889, 33-88360, 33-89676, 33-91400, 333-00995, 333-02867, 333-24989, 333-25761, 333-97939, 333-26695, 333-97943 and 333-97941 (d) Voting Trust Agreement None (e) Material Contracts Incorporated by reference to the Company's Forms S-2 (Reg. 33-53596) (f) Statement of Computation of per share Not required to be filed earnings (g) Statements of Computation of Ratios Not required to be filed (h) Annual Report to security holders None (i) Letter re change in accounting principles None (j) Previously unfiled documents None (k) Subsidiaries of the registrant Incorporated by reference to Reg. 33-87010 (l) Published report regarding matters submitted None to vote of security holders (m) Consents of experts and counsel Not required to be filed (n) Powers of Attorney Incorporated by reference to the Company's Form S-2 (Reg. 333-53596) (o) Additional exhibits None (b) Reports on Form 8-K Current Report on Form 8-K, December 20, 2002, filing a statement announcing that the Company's ultimate parent company, Skandia Insurance Company Ltd. (publ) had entered into a definitive Stock Purchase Agreement with Prudential Financial, Inc. ("Prudential"), pursuant to which Prudential will acquire the Company and certain of its affiliates.
* Schedules are omitted because they are either not applicable or because the information required therein is included in the Notes to Consolidated Financial Statements.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Consolidated Financial Statements
December 31, 2002
Index
Page Report of Independent Auditors 20 Consolidated Statements of Financial Condition as of December 31, 2002 and 2001 21 Consolidated Statements of Income for the Years ended December 31, 2002, 2001 and 2000 22 Consolidated Statements of Shareholder's Equity for the Years ended December 31, 2002, 2001 and 23 Consolidated Statements of Cash Flows for the Years ended December 31, 2002, 2001 and 2000 24 Notes to Consolidated Financial Statements 25
Schedules are omitted because they are either not applicable or because the information required therein is included in the Notes to Consolidated Financial Statements.
Report of Independent Auditors
To the Board of Directors and Shareholder of American Skandia Life Assurance Corporation Shelton, Connecticut
We have audited the consolidated statements of financial condition of American Skandia Life Assurance Corporation (the "Company" which is an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.) as of December 31, 2002 and 2001, and the related consolidated statements of income, shareholder's equity and cash flows for each of the three years in the period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Skandia Life Assurance Corporation at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.
As discussed in Note 2, in 2002 the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
As discussed in Note 2, effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities.
/s/ Ernst & Young LLP
Hartford, Connecticut February 3, 2003
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Consolidated Statements of Financial Condition (in thousands, except share data)
As of December 31, 2002 2001 ---- ---- ASSETS ------ Investments: Fixed maturities - at fair value (amortized cost of $379,422 and $356,882, respectively) $ 398,601 $ 362,831 Equity securities - at fair value (amortized cost of $52,017 and $49,886, respectively) 51,769 45,083 Derivative instruments - at fair value 10,370 5,525 Policy loans 7,559 6,559 --------------- ---------------
Total investments 468,299 419,998
Cash and cash equivalents 51,339 - Accrued investment income 4,196 4,737 Deferred acquisition costs 1,117,544 1,383,281 Reinsurance receivable 5,447 7,733 Receivable from affiliates 3,961 3,283 Income tax receivable - 30,537 Deferred income taxes 38,206 - Fixed assets, at depreciated cost (accumulated depreciation of $7,555 and $4,266, respectively) 12,132 17,752 Other assets 101,848 103,912 Separate account assets 21,905,613 26,038,549 --------------- ---------------
Total assets $ 23,708,585 $ 28,009,782 =============== ===============
LIABILITIES AND SHAREHOLDER'S EQUITY ------------------------------------ Liabilities: Reserves for future policy and contract benefits $ 149,349 $ 91,126 Accounts payable and accrued expenses 133,543 192,952 Income tax payable 6,547 - Deferred income taxes - 54,980 Payable to affiliates 2,223 101,035 Future fees payable to American Skandia, Inc. ("ASI") 708,249 799,472 Short-term borrowing 10,000 10,000 Surplus notes 110,000 144,000 Separate account liabilities 21,905,613 26,038,549 --------------- ---------------
Total liabilities 23,025,524 27,432,114 --------------- ---------------
Commitments and contingent liabilities (Note 18)
Shareholder's equity: Common stock, $100 par value, 25,000 shares authorized, issued and outstanding 2,500 2,500 Additional paid-in capital 595,049 335,329 Retained earnings 73,821 239,078 Accumulated other comprehensive income 11,691 761 --------------- ---------------
Total shareholder's equity 683,061 577,668 --------------- ---------------
Total liabilities and shareholder's equity $ 23,708,585 $ 28,009,782 =============== ===============
See notes to consolidated financial statements.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Consolidated Statements of Income (in thousands)
For the Years Ended December 31, 2002 2001 2000 ---- ---- ----
REVENUES --------
Annuity and life insurance charges and fees $ 370,004 $ 388,696 $ 424,578 Fee income 97,650 111,196 130,610 Net investment income 19,632 20,126 18,595 Net realized capital (losses) gains (9,614) 928 (688) Other 2,176 1,770 4,883 ------------ ------------ ------------
Total revenues 479,848 522,716 577,978 ------------ ------------ ------------
EXPENSES --------
Benefits: Annuity and life insurance benefits 3,391 1,955 751 Change in annuity and life insurance policy reserves 2,741 (39,898) 49,339 Guaranteed minimum death benefit claims, net of hedge 23,256 20,370 2,618 Return credited to contract owners 5,196 5,796 8,463 ------------ ------------ ------------
Total benefits 34,584 (11,777) 61,171
Other: Underwriting, acquisition and other insurance expenses 188,728 196,755 150,597 Amortization of deferred acquisition costs 510,059 224,047 184,616 Interest expense 14,544 73,424 85,998 ------------ ------------ ------------
713,331 494,226 421,211 ------------ ------------ ------------
Total benefits and expenses 747,915 482,449 482,382 ------------ ------------ ------------
(Loss) income from operations before income tax (benefit) expense (268,067) 40,267 95,596
Income tax (benefit) expense (102,810) 7,168 30,779 ------------ ------------ ------------
Net (loss) income $ (165,257) $ 33,099 $ 64,817 ============ ============ ============
See notes to consolidated financial statements.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Consolidated Statements of Shareholder's Equity (in thousands)
Accumulated Other Comprehensive Income ---------------------------- -------------- ------------- Additional Foreign Unrealized Common Paid in Retained Currency Gains Stock Capital Earnings Translation (Losses) Total ----------- ------------ ----------- -------------- ------------- ------------ ----------- ------------ ----------- -------------- ------------- ------------ As of December 31, 1999 $2,500 $215,879 $141,162 $148 ($255) $359,434 Net income 64,817 64,817 Other comprehensive income: Unrealized capital gains 843 843 Reclassification adjustment for realized losses included in net realized capital (losses) gains 433 433 Foreign currency translation (66) (66) ------------ ------------ Other comprehensive income 1,210 ------------ ------------ Comprehensive income 66,027 Capital contributions 71,450 71,450 ----------- ------------ ----------- -------------- ------------- ------------ ----------- ------------ ----------- -------------- ------------- ------------ As of December 31, 2000 2,500 287,329 205,979 82 1,021 496,911 Net income 33,099 33,099 Other comprehensive loss: Unrealized capital losses (261) (261) Reclassification adjustment for realized gains included in net realized capital (losses) gains (14) (14) Foreign currency translation (67) (67) ------------ ------------ Other comprehensive loss (342) ------------ ------------ Comprehensive income 32,757 Capital contributions 48,000 48,000 ----------- ------------ ----------- -------------- ------------- ------------ ----------- ------------ ----------- -------------- ------------- ------------ As of December 31, 2001 2,500 335,329 239,078 15 746 577,668 Net loss (165,257) (165,257) Other comprehensive income: Unrealized capital gains 10,434 10,434 Reclassification adjustment for realized losses included in net realized capital (losses) gains 1,126 1,126 Foreign currency translation (630) (630) ------------ ------------ Other comprehensive income 10,930 ------------ ------------ Comprehensive loss (154,327) Capital contributions 259,720 259,720 ----------- ------------ ----------- -------------- ------------- ------------ ----------- ------------ ----------- -------------- ------------- ------------ As of December 31, 2002 $2,500 $595,049 $73,821 $(615) $12,306 $683,061
Unrealized capital gains (losses) is shown net of tax expense (benefit) of $5,618, ($140) and $454 for 2002, 2001 and 2000, respectively. Reclassification adjustment for realized losses (gains) included in net realized capital (losses) gains is shown net of tax expense (benefit) of $606, ($8) and $233 for 2002, 2001 and 2000, respectively. Foreign currency translation is shown net of tax benefit of $339, $36 and $36 for 2002, 2001 and 2000, respectively.
See notes to consolidated financial statements.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Consolidated Statements of Cash Flows (in thousands)
For the Years Ended December 31, 2002 2001 2000 ---- ---- ---- Cash flow from operating activities: Net (loss) income $ (165,257) $ 33,099 $ 64,817 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Amortization and depreciation 21,649 13,374 5,758 Deferral of acquisition costs (244,322) (209,136) (495,103) Amortization of deferred acquisition costs 510,059 224,047 184,616 Deferred tax (benefit) expense (99,071) 46,215 60,023 Change in unrealized (gains) losses on derivatives (5,149) 2,902 (2,936) Increase (decrease) in policy reserves 3,293 (38,742) 50,892 (Decrease) increase in net receivable/payable to affiliates (99,490) 103,496 (72,063) Change in net income tax receivable/payable 37,084 4,083 (58,888) Increase in other assets (9,546) (12,105) (65,119) Decrease (increase) in accrued investment income 541 472 (1,155) Decrease (increase) in reinsurance receivable 2,286 (1,849) 420 (Decrease) increase in accounts payable and accrued expenses (59,409) 55,912 (21,550) Net realized capital (gains) losses on derivatives (26,654) (14,929) 5,554 Net realized capital losses (gains) on investments 9,616 (928) 688 ---------- ---------- ---------- Net cash (used in) provided by operating activities (124,370) 205,911 (344,046) ---------- ---------- ----------
Cash flow from investing activities: Purchase of fixed maturity investments (388,053) (462,820) (380,737) Proceeds from sale and maturity of fixed maturity investments 367,263 390,816 303,736 Purchase of derivatives (61,998) (103,533) (14,781) Proceeds from exercise or sale of derivative instruments 88,956 113,051 5,936 Purchase of shares in equity securities and dividend reinvestments (49,713) (55,430) (18,136) Proceeds from sale of shares in equity securities 34,220 25,228 8,345 Purchase of fixed assets (2,423) (10,773) (7,348) Increase in policy loans (1,000) (2,813) (2,476) ---------- ---------- ---------- Net cash used in investing activities (12,748) (106,274) (105,461) ---------- ---------- ----------
Cash flow from financing activities: Capital contribution 259,720 48,000 71,450 Pay down of surplus notes (34,000) (15,000) (20,000) (Decrease) increase in future fees payable to ASI, net (91,223) (137,355) 358,376 Deposits to contract owner accounts 808,209 59,681 172,441 Withdrawals from contract owner accounts (164,964) (130,476) (102,603) Change in contract owner accounts, net of investment earnings (588,315) 62,875 (55,468) ---------- ---------- ---------- Net cash provided by (used in) financing activities 189,427 (112,275) 424,196 ---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 52,309 (12,638) (25,311) Change in foreign currency translation (970) (103) (101) Cash and cash equivalents at beginning of period - 12,741 38,153 Cash and cash equivalents at end of period $ 51,339 $ - $ 12,741 ========== ========== ========== Income taxes (received) paid $ (40,823) $ (43,130) $ 29,644 ========== ========== ========== Interest paid $ 23,967 $ 56,831 $ 114,394 ========== ========== ========= See notes to consolidated financial statements.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements December 31, 2002 (dollars in thousands)
1. ORGANIZATION AND OPERATION
American Skandia Life Assurance Corporation ("ASLAC" or the "Company"), with its principal offices in Shelton, Connecticut, is a wholly-owned subsidiary of American Skandia, Inc. ("ASI"). 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, entered into a definitive purchase agreement with Prudential Financial, Inc., a New Jersey corporation ("Prudential Financial"), whereby Prudential Financial will acquire the Company and certain of its affiliates (the "Acquisition"). Consummation of the transaction is subject to various closing conditions, including regulatory approvals and approval of certain matters by the board of directors and shareholders of the mutual funds advised by American Skandia Investment Services, Inc. ("ASISI"), a subsidiary of ASI. The transaction is expected to close during the second quarter of 2003.
The Company develops long-term savings and retirement products, which are distributed through its affiliated broker/dealer company, American Skandia Marketing, Incorporated ("ASM"). The Company currently issues term and variable universal life insurance and variable deferred and immediate annuities for individuals and groups in the United States of America and its territories.
The Company has 99.9% ownership in Skandia Vida, S.A. de C.V. ("Skandia Vida"), which is a life insurance company domiciled in Mexico. Skandia Vida had total shareholder's equity of $5,023 and $4,179 as of December 31, 2002, and 2001, respectively. Skandia Vida has generated net losses of $2,706, $2,619 and $2,540 in 2002, 2001 and 2000, respectively. As part of the Acquisition, it is expected that the Company will sell its ownership interest in Skandia Vida to SICL. The Company has filed for required regulatory approvals from the State of Connecticut and Mexico related to the sale of Skandia Vida.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Reporting ------------------
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States ("U.S. GAAP"). Skandia Vida has been consolidated in these financial statements. Intercompany transactions and balances between the Company and Skandia Vida have been eliminated in consolidation.
Certain reclassifications have been made to prior year amounts to conform with the current year presentation.
B. New Accounting Standard -----------------------
Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS 137 and SFAS 138 (collectively "SFAS 133"). Derivative instruments held by the Company consist of equity put option contracts utilized to AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
manage the economic risks associated with guaranteed minimum death benefits ("GMDB"). These derivative instruments are carried at fair value. Realized and unrealized gains and losses are reported in the Consolidated Statements of Income, together with GMDB claims expense, as a component of Guaranteed Minimum Death Benefit Claims, Net of Hedge. The adoption of SFAS No. 133 did not have a material effect on the Company's financial statements.
Effective April 1, 2001, the Company adopted the Emerging Issues Task Force ("EITF") Issue 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets." Under the consensus, investors in certain asset-backed securities are required to record changes in their estimated yield on a prospective basis and to evaluate these securities for an other than temporary decline in value. If the fair value of the asset-backed security has declined below its carrying amount and the decline is determined to be other than temporary, the security is written down to fair value. The adoption of EITF Issue 99-20 did not have a significant effect on the Company's financial statements.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards. No. 142 "Accounting for Goodwill and Intangible Assets" ("SFAS 142"). Under the new standard, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the new standard. Other intangible assets will continue to be amortized over their useful lives.
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.
C. Investments -----------
The Company has classified its fixed maturity investments as available-for-sale and, as such, they are carried at fair value with changes in unrealized gains and losses reported as a component of other comprehensive income.
The Company has classified its equity securities held in support of a deferred compensation plan (see Note 12) as available-for-sale. Such investments are carried at fair value with changes in unrealized gains and losses reported as a component of other comprehensive income.
Policy loans are carried at their unpaid principal balances.
Realized capital gains and losses on disposal of investments are determined by the specific identification method.
Other than temporary impairment charges are determined based on an analysis that is performed on a security by security basis and includes quantitative and qualitative factors.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
D. Derivative Instruments ----------------------
The Company uses derivative instruments, which consist of equity put option contracts, for risk management purposes, and not for trading or speculation. The Company hedges the economic GMDB exposure associated with equity market fluctuations. As the equity markets decline, the Company's exposure to future GMDB claims increases. Conversely, as the equity markets increase the Company's exposure to future GMDB claims decreases. The claims exposure is reduced by the market value effect of the option contracts purchased.
Based on criteria described in SFAS 133, the Company's fair value hedges do not qualify as "effective" hedges and, therefore, hedge accounting may not be applied. Accordingly, the derivative investments are carried at fair value with changes in unrealized gains and losses being recorded in income as those changes occur. As such, both realized and unrealized gains and losses are reported in the Consolidated Statements of Income, together with GMDB claims expense, as a component of Guaranteed Minimum Death Benefit Claims, Net of Hedge.
As of December 31, 2002 and 2001, the accumulated difference between cost and market value on the Company's derivatives was an unrealized gain of $1,434 and an unrealized loss of $3,715, respectively. The amount of realized and unrealized gains (losses) on the Company's derivatives recorded during the years ended December 31, 2002, 2001 and 2000 was $31,803, $12,027 and ($2,619), respectively.
E. Cash Equivalents ----------------
The Company considers all highly liquid time deposits, commercial paper and money market mutual funds purchased with a maturity date, at acquisition, of three months or less to be cash equivalents.
As of December 31, 2002, $50 of cash reflected on the Company's financial statements was restricted in compliance with regulatory requirements.
F. State Insurance Licenses ------------------------
Licenses to do business in all states have been capitalized and reflected at the purchase price of $6,000 less accumulated amortization of $2,038 at December 31, 2002. Due to the adoption of SFAS 142, the cost of the licenses is no longer being amortized but is subjected to an annual impairment test. As of December 31, 2002, 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.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
G. Income Taxes ------------
The Company is included in the consolidated federal income tax return filed by Skandia U.S. Inc. and its U.S. subsidiaries. In accordance with the tax sharing agreement, the federal income tax provision is computed on a separate return basis as adjusted for consolidated items. Pursuant to the terms of this agreement, the Company has the right to recover the value of losses utilized by the consolidated group in the year of utilization. To the extent the Company generates income in future years, the Company is entitled to offset future taxes on that income through the application of its loss carry forward generated in the current year.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
H. Recognition of Revenue and Contract Benefits --------------------------------------------
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 the separate account liabilities.
Fee income from mutual fund organizations is recognized when assessed against assets under management.
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 the separate account liabilities.
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 return credited to contract owners on the consolidated statements of income. Benefit reserves for these contracts represent the account value of the contracts plus a
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
market value adjustment, and are included in the general account reserve for future policy and contract benefits to the extent in excess of the separate account assets, typically for the market value adjustment at the reporting date.
Revenues for fixed immediate annuity and fixed supplementary contracts without life contingencies consist of net investment income, reported as a component of return credited to contract owners. Revenues for fixed immediate annuity contracts with life contingencies 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 and are included in the general account reserve for future policy and contract benefits. Assumed interest rates ranged from 6.25% to 8.25% at December 31, 2002 and 2001.
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 the separate account liabilities.
I. Deferred Acquisition Costs --------------------------
The costs of acquiring new business, which vary with and are primarily related to new business generated, are being deferred, net of reinsurance. These costs include commissions, purchase credits, costs of contract issuance, and certain selling expenses that vary with production.
The Company uses the retrospective deposit method for amortizing deferred acquisition costs. This method results in deferred acquisition costs being amortized in proportion to expected gross profits, from surrender charges and policy and asset based fees, net of operating and claim costs. The deferred acquisition cost asset is adjusted retrospectively and prospectively when estimates of current and future gross profits to be realized from a group of products are revised. Critical assumptions in estimating gross profits include those for surrenders, long-term fund growth rate, expenses and death benefits. The long-term fund growth rate, in large part, determines the estimated future asset levels on which the most significant revenues are based. The Company's long-term fund growth rate assumption is 8% (net of charges assessed against the underlying mutual fund, but before charges assessed at the separate account and contract level). When current period actual asset growth is greater or less than the Company's long-term expectation, the Company adjusts the short-term asset growth rate to a level that will allow the Company, in the short-term, to resume the long-term asset growth rate expectation. The short-term asset growth rate is subject to constraints surrounding actual market conditions.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Details of deferred acquisition costs and related amortization for the years ended December 31, are as follows:
2002 2001 2000 ---- ---- ---- Balance at beginning of year $ 1,383,281 $ 1,398,192 $ 1,087,705 Acquisition costs deferred during the year 244,322 209,136 495,103 Acquisition costs amortized during the year (510,059) (224,047) (184,616) ------------- ------------- ------------- Balance at end of year $ 1,117,544 $ 1,383,281 $ 1,398,192 ============= ============= =============
As asset growth rates, during 2002 and 2001, have been 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 $206,000.
Throughout the year, 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 $72,000.
J. Reinsurance -----------
The Company cedes reinsurance under modified co-insurance arrangements. These reinsurance arrangements provide additional capacity for growth in supporting the cash flow strain from the Company's variable annuity and variable life insurance business. The reinsurance is effected under quota share contracts.
At December 31, 2002 and 2001, in accordance with the provisions of the modified coinsurance agreements, the Company accrued approximately $5,447 and $7,733, respectively, for amounts receivable from favorable reinsurance experience on certain blocks of variable annuity business.
K. Translation of Foreign Currency -------------------------------
The financial position and results of operations of Skandia Vida are measured using local currency as the functional currency. Assets and liabilities are translated at the exchange rate in effect at each year-end. Statements of income and changes in shareholder's equity accounts are translated at the average rate prevailing during the year. Translation adjustments arising from the use of differing exchange rates from period to period are reported as a component of other comprehensive income. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
L. Separate Accounts -----------------
Assets and liabilities in separate accounts are included as separate captions in the consolidated statements of financial condition. Separate account assets consist principally of long term bonds, investments in mutual funds, short-term securities and cash and cash equivalents, all of which are carried at fair value. The investments are managed predominately through ASISI, utilizing various fund managers as sub-advisors. The remaining investments 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. Fixed options with minimum guaranteed interest rates are also available. The Company bears the credit risk associated with the investments that support these fixed options.
Included in Separate Account liabilities are reserves of $1,828,048 and $1,092,944 at December 31, 2002 and 2001, respectively, relating to deferred annuity investment options for which the contract holder is guaranteed a fixed rate of return. These reserves are calculated using the Commissioners Annuity Reserve Valuation Method. Separate Account assets of $1,828,048 and $1,092,944 at December 31, 2002 and 2001, respectively, 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 Reserves for Future Policy and Contract Benefits, is the market value adjustment associated with the guaranteed, fixed rate investment options, assuming the market value adjustment at the reporting date.
Net investment income (including net realized capital gains and losses) and interest credited to contract holders on separate account assets are not separately reflected in the Consolidated Statements of Income.
M. Unearned Performance Credits ----------------------------
The Company defers certain bonus credits applied to contract holder deposits. The credit is reported as a contract holder liability within separate account liabilities and the deferred expense is 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 amortizes 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 is amortized in proportion to expected surrenders and mortality. As of December 31, 2002 and 2001, the unearned performance credit asset was $83,288 and $89,234, respectively.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
N. Estimates ---------
The preparation of financial statements in conformity with U.S. GAAP requires that management make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant estimates and assumptions are related to deferred acquisition costs and involve estimates of future policy lapses, investment returns and maintenance expenses. Actual results could differ from those estimates.
3. INVESTMENTS
The amortized cost, gross unrealized gains and losses and fair value of fixed maturities and investments in equity securities as of December 31, 2002 and 2001 are shown below. All securities held at December 31, 2002 and 2001 were publicly traded.
Investments in fixed maturities as of December 31, 2002 consisted of the following:
Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ---- ----- ------ ---------- U.S. Government obligations $ 270,969 $ 15,658 $ (78) $ 286,549 Obligations of state and political subdivisions 253 9 (1) 261 Corporate securities 108,200 3,631 (40) 111,791 ------------ ----------- -------- ------------ Totals $ 379,422 $ 19,298 $ (119) $ 398,601 ============ =========== ======== ============
The amortized cost and fair value of fixed maturities, by contractual maturity, at December 31, 2002 are shown below. Actual maturities may differ from contractual maturities due to call or prepayment provisions.
Amortized Cost Fair Value ---- ---------- Due in one year or less $ 12,793 $ 12,884 Due after one through five years 165,574 171,830 Due after five through ten years 186,609 198,913 Due after ten years 14,446 14,974 ----------- ----------- Total $ 379,422 $ 398,601 =========== ===========
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (continued)
Investments in fixed maturities as of December 31, 2001 consisted of the following:
Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ---- ----- ------ ---------- U.S. Government obligations $198,136 $2,869 $(413) $200,592 Obligations of state and political subdivisions 252 8 - 260 Corporate securities 158,494 4,051 (566) 161,979 ---------- ------- ------ ---------- Totals $356,882 $6,928 $(979) $362,831 ======== ====== ===== ========
Proceeds from sales of fixed maturities during 2002, 2001 and 2000 were $367,213, $386,816 and $302,632, respectively. Proceeds from maturities during 2002, 2001 and 2000 were $50, $4,000 and $1,104, respectively.
The cost, gross unrealized gains/losses and fair value of investments in equity securities at December 31 are shown below:
Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- 2002 $ 52,017 $ 136 $ (384) $ 51,769 2001 $ 49,886 $ 122 $ (4,925) $ 45,083
Net realized investment gains (losses), determined on a specific identification basis, were as follows for the years ended December 31:
2002 2001 2000 ---- ---- ---- Fixed maturities: Gross gains $ 8,213 $ 8,849 $ 1,002 Gross losses (4,468) (4,387) (3,450)
Investment in equity securities: Gross gains 90 658 1,913 Gross losses (13,451) (4,192) (153) ---------- -------- --------
Totals $ (9,616) $ 928 $ (688) ========== ======== ========
During 2002, the Company determined that certain amounts of its investment in equity securities were other than temporarily impaired and, accordingly, recorded a loss of $3,769.
As of December 31, 2002, the Company did not own any investments in fixed maturity securities whose carrying value exceeded 10% of the Company's equity.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
3. INVESTMENTS (continued)
As of December 31, 2002, the following fixed maturities were restricted in compliance with regulatory requirements:
Security Fair Value -------- ---------- U.S. Treasury Note, 6.25%, February 2003 $4,345 U.S. Treasury Note, 3.00%, November 2003 183 Puerto Rico Commonwealth, 4.60%, July 2004 210 Puerto Rico Commonwealth, 4.875%, July 2023 52
4. FAIR VALUES OF FINANCIAL INSTRUMENTS
The methods and assumptions used to determine the fair value of financial instruments are as follows:
Fair values of fixed maturities with active markets are based on quoted market prices. For fixed maturities that trade in less active markets, fair values are obtained from an independent pricing service.
Fair values of equity securities are based on quoted market prices.
The fair value of derivative instruments is determined based on the current value of the underlying index.
The carrying value of cash and cash equivalents (cost) approximates fair value due to the short-term nature of these investments.
The carrying value of policy loans approximates fair value.
Fair value of future fees payable to ASI are determined on a discounted cash flow basis, using best estimate assumptions of lapses, mortality, free withdrawals and a long-term fund growth rate of 8% on the Company's assets under management.
The carrying value of short-term borrowings (cost) approximates fair value due to the short-term nature of these liabilities.
Fair value of surplus notes are determined based on a discounted cash flow basis with a projected payment of principal and all accrued interest at the maturity date (see Note 14 for payment restrictions).
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
4. FAIR VALUES OF FINANCIAL INSTRUMENTS (continued)
The fair values and carrying values of financial instruments at December 31, 2002 and 2001 are as follows:
December 31, 2002 December 31, 2001 ----------------- ----------------- Fair Value Carrying Value Fair Value Carrying Value -------------- ------------------ ------------- ------------------ -------------- ------------------ ------------- ------------------ Assets ------ Fixed Maturities $398,601 $398,601 $362,831 $362,831 Equity Securities 51,769 51,769 45,083 45,083 Derivative Instruments 10,370 10,370 5,525 5,525 Policy Loans 7,559 7,559 6,559 6,559
Liabilities ----------- Future Fees Payable to ASI 429,773 708,249 546,357 799,472 Short-term Borrowing 10,000 10,000 10,000 10,000 Surplus Notes and accrued interest of $29,230 and $25,829 in 2002 and 2001, respectively 140,777 139,230 174,454 169,829
5. NET INVESTMENT INCOME
The sources of net investment income for the years ended December 31 were as follows:
2002 2001 2000 ---- ---- ---- Fixed maturities $ 18,015 $ 18,788 $ 13,502 Cash and cash equivalents 1,116 909 5,209 Equity securities 809 622 99 Policy loans 403 244 97 ---------- ---------- ---------- Total investment income 20,343 20,563 18,907 Investment expenses (711) (437) (312) ---------- ---------- ---------- Net investment income $19,632 $ 20,126 $ 18,595 ======== ========= == =========
6. INCOME TAXES
The significant components of income tax expense for the years ended December 31 were as follows:
2002 2001 2000 ---- ---- ---- Current tax benefit $ (3,739) $ (39,047) $ (29,244) Deferred tax expense, excluding operating loss carryforwards 35,915 60,587 60,023 Deferred tax benefit for operating and capital loss carryforwards (134,986) (14,372) - ----------- ---------- ----------- Total income tax (benefit) expense $ (102,810) $ 7,168 $ 30,779 =========== ========== ===========
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
6. INCOME TAXES (continued)
Deferred tax assets (liabilities) include the following at December 31:
2002 2001 ---- ---- Deferred tax assets: GAAP to tax reserve differences $ 165,348 $ 241,503 Future fees payable to ASI 21,475 63,240 Deferred compensation 20,603 20,520 Net operating loss carry forward 147,360 14,372 Other 6,530 17,276 ----------- ----------- Total deferred tax assets 361,316 356,911 ----------- -----------
Deferred tax liabilities: Deferred acquisition costs, net (312,933) (404,758) Net unrealized gains on fixed maturity securities (6,713) (2,082) Other (3,464) (5,051) ----------- ----------- Total deferred tax liabilities (323,110) (411,891) ----------- ----------- Net deferred tax asset (liability) $ 38,206 $ (54,980) =========== ===========
In accordance with SFAS 109, the Company has performed an analysis of its deferred tax assets to assess recoverability. Looking at a variety of items, most notably, the timing of the reversal of temporary items and future taxable income projections, the Company determined that no valuation allowance is needed.
The income tax (benefit) expense was different from the amount computed by applying the federal statutory tax rate of 35% to pre-tax income from continuing operations as follows:
2002 2001 2000 ---- ---- ---- (Loss) income before taxes Domestic $ (265,361) $ 42,886 $ 98,136 Foreign (2,706) (2,619) (2,540) ------------ ---------- ---------- Total (268,067) 40,267 95,596 Income tax rate 35% 35% 35% ------------- ----------- ----------- Tax (benefit) expense at federal statutory income tax rate (93,823) 14,093 33,459
Tax effect of: Dividend received deduction (12,250) (8,400) (7,350) Losses of foreign subsidiary 947 917 889 Meals and entertainment 603 603 841 State income taxes - (62) (524) Federal provision to return differences 709 (177) 3,235 Other 1,004 194 229 ------------ ---------- ---------- Income tax (benefit) expense $ (102,810) $ 7,168 $ 30,779 ============ ========== ==========
The Company's net operating loss carry forwards, totaling approximately $421,029 (pre-tax) at December 31, 2002, will expire in 2016 and 2017. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
7. 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. The Company has also paid and charged operating costs to several of its affiliates. The total cost to the Company for these items was $8,177, $6,179 and $13,974 in 2002, 2001 and 2000, respectively. Income received for these items was approximately $13,052, $13,166 and $11,186 in 2002, 2001 and 2000, respectively.
Allocated depreciation expense was $7,440, $8,764 and $9,073 in 2002, 2001 and 2000, respectively. Allocated lease expense was $5,808, $6,517 and $5,606 in 2002, 2001 and 2000, respectively. Allocated sub-lease rental income, recorded as a reduction to lease expense, was $738, $30 and $0 in 2002, 2001 and 2000, 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, 2002 are as follows:
Lease Sub-Lease ----- --------- 2003 $ 4,847 $ 1,616 2004 5,275 1,773 2005 5,351 1,864 2006 5,328 1,940 2007 5,215 1,788 2008 and thereafter 19,629 7,380 ----------- ----------- Total $ 45,645 $ 16,361 =========== ===========
Beginning in 1999, the Company was reimbursed by ASM for certain distribution related costs associated with the sales of business through an investment firm where ASM serves as an introducing broker dealer. Under this agreement, the expenses reimbursed were $8,255, $6,610 and $6,064 in 2002, 2001 and 2000, respectively. As of December 31, 2002 and 2001, amounts receivable under this agreement were approximately $458 and $639, respectively.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
8. FUTURE FEES PAYABLE TO ASI
In a series of transactions with ASI, the Company transferred certain rights to receive a portion of future fees and contract charges expected to be realized on designated blocks of deferred annuity contracts.
The proceeds from the transfers have been recorded as a liability and are being amortized over the remaining surrender charge period of the designated contracts using the interest method. The Company did not transfer the right to receive future fees and charges after the expiration of the surrender charge period.
In connection with these transactions, ASI, through special purpose trusts, issued collateralized notes in private placements, which are secured by the rights to receive future fees and charges purchased from the Company.
Under the terms of the securitization purchase agreements, the rights transferred provide for ASI to receive a percentage (60%, 80% or 100% depending on the underlying commission option) of future mortality and expense charges and contingent deferred sales charges, after reinsurance, expected to be realized over the remaining surrender charge period of the designated contracts (generally 6 to 8 years). The liability for future fees payable to ASI at the balance sheet date is based on the consideration received less principal repayments according to amortization schedules that were developed at the inception of the transactions. 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. As account values associated with the designated contracts have declined, consistent with the overall decline in the equity markets, current mortality and expense charges have been lower than expected on certain transactions and it is likely that future mortality and expense charges, on those same transactions, will be lower than originally projected. As a result, the ultimate cash flows associated with these transactions that will transfer to ASI may be lower than the current carrying amount of the liability (see Note 4).
On April 12, 2002, the Company entered into a new securitization purchase agreement with ASI. This transaction covers designated blocks of business issued from November 1, 2000 through December 31, 2001. The estimated present value of the transaction at April 12, 2002, using a discount rate of 6.00%, was $101,713.
Payments, representing fees and charges in the aggregate amount, of $186,810, $207,731 and $219,523 were made by the Company to ASI in 2002, 2001 and 2000, respectively. Related interest expense of $828, $59,873 and $70,667 has been included in the consolidated statements of income for 2002, 2001 and 2000, 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.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
8. FUTURE FEES PAYABLE TO ASI (continued)
The present values of the transactions as of the respective effective date were as follows:
Closing Effective Contract Issue Discount Present Transaction Date Date Period Rate Value ----------- ---- ---- ------ ---- -----
1996-1 12/17/96 9/1/96 1/1/94 - 6/30/96 7.5% $50,221 1997-1 7/23/97 6/1/97 3/1/96 - 4/30/97 7.5% 58,767 1997-2 12/30/97 12/1/97 5/1/95 - 12/31/96 7.5% 77,552 1997-3 12/30/97 12/1/97 5/1/96 - 10/31/97 7.5% 58,193 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 12/28/00 12/1/00 5/1/00 - 10/31/00 7.25% 107,291 2000-4 12/28/00 12/1/00 1/1/98 - 10/31/00 7.25% 107,139 2002-1 4/12/02 3/1/02 11/1/00 - 12/31/01 6.00% 101,713
Payments of future fees payable to ASI, according to original amortization schedules, as of December 31, 2002 are as follows:
Year Amount ---- ------
2003 $ 186,854 2004 171,093 2005 147,902 2006 117,761 2007 66,270 2008 18,369 ----------- Total $ 708,249 ===========
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
9. LEASES
The Company entered into an eleven year lease agreement for office space in Westminster, Colorado, effective January 1, 2001. Lease expense for 2002 and 2001 was $2,583 and $1,602, respectively. Sub-lease rental income was $227 in 2002 and $0 in 2001. Future minimum lease payments and sub-lease receipts per year and in aggregate as of December 31, 2002 are as follows:
Lease Sub-Lease ----- --------- 2003 $ 1,913 $ 426 2004 1,982 455 2005 2,050 500 2006 2,050 533 2007 2,050 222 2008 and thereafter 8,789 0 ---------- ---------- Total $ 18,834 $ 2,136 ========== ==========
10. RETAINED EARNINGS AND DIVIDEND RESTRICTIONS
Statutory basis shareholder's equity was $279,957 and $226,780 at December 31, 2002 and 2001, respectively.
The Company incurred statutory basis net losses in 2002 of $192,474 due primarily to significant declines in the equity markets, increasing GMDB reserves calculated on a statutory basis. Statutory basis net losses for 2001 were $121,957, as compared to income of $11,550 in 2000.
Under various state insurance laws, the maximum amount of dividends that can be paid to shareholders without prior approval of the state insurance department is subject to restrictions relating to statutory surplus and net gain from operations. For 2003, no amounts may be distributed without prior approval.
11. STATUTORY ACCOUNTING PRACTICES
The Company prepares its statutory basis financial statements in accordance with accounting practices prescribed by the State of Connecticut Insurance Department. Prescribed statutory accounting practices include publications of the National Association of Insurance Commissioners (NAIC), as well as state laws, regulations and general administrative rules.
The NAIC adopted the Codification of Statutory Accounting Principles (Codification) in March 1998. The effective date for codification was January 1, 2001. The Company's state of domicile, Connecticut, has adopted codification and the Company has made the necessary changes in its statutory accounting and reporting required for implementation. The overall impact of adopting codification in 2001 was a one-time, cumulative change in accounting benefit recorded directly in statutory surplus of $12,047.
In addition, during 2001, based on a recommendation from the State of Connecticut Insurance Department, the Company changed its statutory method of accounting for its AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
11. STATUTORY ACCOUNTING PRACTICES (continued)
liability associated with securitized variable annuity fees. Under the new method of accounting, the liability for securitized fees is established consistent with the method of accounting for the liability associated with variable annuity fees ceded under reinsurance contracts. This equates to the statutory liability at any valuation date being equal to the Commissioners Annuity Reserve Valuation Method (CARVM) offset related to the securitized contracts. The impact of this change in accounting, representing the difference in the liability calculated under the old method versus the new method as of January 1, 2001, was reported as a cumulative effect of change in accounting benefit recorded directly in statutory surplus of approximately $20,215.
In 2001, the Company, in agreement with the Connecticut Insurance Department, changed its reserving methodology to recognize free partial withdrawals and to reserve on a "continuous" rather than "curtate" basis. The impact of these changes, representing the difference in reserves calculated under the new methods versus the old methods, was recorded directly to surplus as changes in reserves on account of valuation basis. This resulted in an increase to the unassigned deficit of approximately $40,511.
Effective January 1, 2002, the Company adopted Statement of Statutory Accounting Principles No. 82, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use and Web Site Development Costs" ("SSAP 82"). SSAP 82 requires the capitalization of certain costs incurred in connection with developing or obtaining internal use software. Prior to the adoption of SSAP 82, the Company expensed all internal use software related costs as incurred. The Company has identified and capitalized $5,935 of costs associated with internal use software as of January 1, 2002 and is amortizing the applicable costs on a straight-line basis over a three year period. The costs capitalized as of January 1, 2002 resulted in a direct increase to surplus. Amortization expense for the year ended December 31, 2002 was $757.
12. EMPLOYEE BENEFITS
The Company has 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 related to this program in 2002, 2001 and 2000 were $719, $2,738 and $3,734, respectively. Company contributions to this plan on behalf of the participants were $921, $2,549 and $4,255 in 2002, 2001 and 2000, respectively.
The Company has a deferred compensation plan, which is available to the field marketing staff and certain other employees. Expenses related to this program in 2002, 2001 and 2000 were $3,522, $1,615 and $1,030, respectively. Company contributions to this plan on behalf of the participants were $5,271, $1,678 and $2,134 in 2002, 2001 and 2000, respectively.
The Company and certain affiliates cooperatively have a long-term incentive program under which units are awarded to executive officers and other personnel. The Company and certain affiliates also have a profit sharing program, which benefits all employees AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
12. EMPLOYEE BENEFITS (continued)
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 $7,083 and $13,645 as of December 31, 2002 and 2001, respectively. Expenses (income) related to these programs in 2002, 2001 and 2000, were $1,471, ($9,842) and $2,692, respectively. Payments under these programs were $8,033, $8,377 and $13,697 in 2002, 2001 and 2000, respectively.
13. FINANCIAL 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, 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 2002, 2001 and 2000 was as follows:
2002 Gross Ceded Net ---- ----- ----- --- Annuity and life insurance charges and fees $ 406,272 $ (36,268) $ 370,004 Return credited to contract owners $ 5,221 $ (25) $ 5,196 Underwriting, acquisition and other insurance expenses (deferal of acquisition costs) $ 154,588 $ 34,140 $ 188,728 Amortization of deferred acquisition costs $ 542,945 $ (32,886) $ 510,059
---- Annuity and life insurance charges and fees $ 430,914 $ (42,218) $ 388,696 Return credited to contract owners $ 5,704 $ 92 $ 5,796 Underwriting, acquisition and other insurance expenses (deferral of acquisition costs) $ 163,677 $ 33,078 $ 196,755 Amortization of deferred acquisition costs $ 231,290 $ (7,243) $ 224,047
---- Annuity and life insurance charges and fees $ 473,318 $ (48,740) $ 424,578 Return credited to contract owners $ 8,540 $ (77) $ 8,463 Underwriting, acquisition and other insurance expenses (deferral of acquisition costs) $ 108,399 $ 42,198 $ 150,597 Amortization of deferred acquisition costs $ 205,174 $ (20,558) $ 184,616
In December 2000, the Company entered into a modified coinsurance agreement with SICL covering certain contracts issued since January 1996. The impact of this treaty to the AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
13. FINANCIAL REINSURANCE (continued)
Company was pre-tax (loss) income of ($4,137), $8,394 and $23,341 in 2002, 2001 and 2000, respectively. At December 31, 2002 and 2001, $675 and $1,137, respectively, was receivable from SICL under this agreement.
14. SURPLUS NOTES
The Company has issued surplus notes to ASI in exchange for cash. Surplus notes outstanding as of December 31, 2002 and 2001, and interest expense for 2002, 2001 and 2000 were as follows:
Liability as of December 31, Interest Expense Interest For the Years Note Issue Date Rate 2002 2001 2002 2001 2000 ---------------------- --------- ---------- ---------- --------- --------- --------- ---------------------- --------- ----------
February 18, 1994 7.28% - - - - 732 March 28, 1994 7.90% - - - - 794 September 30, 1994 9.13% - - - 1,282 1,392 December 19, 1995 7.52% - 10,000 520 763 765 December 20, 1995 7.49% - 15,000 777 1,139 1,142 December 22, 1995 7.47% - 9,000 465 682 684 June 28, 1996 8.41% 40,000 40,000 3,411 3,411 3,420 December 30, 1996 8.03% 70,000 70,000 5,699 5,699 5,715 ---------- ---------- --------- --------- --------- ---------- ---------- --------- --------- ---------
Total $110,000 $144,000 $10,872 $12,976 $14,644 ========== ========== ========= ========= =========
On September 6, 2002, surplus notes for $10,000, dated December 19, 1995, $15,000, dated December 20, 1995, and $9,000, dated December 22, 1995, were repaid. On December 3, 2001, a surplus note, dated September 30, 1994, for $15,000 was repaid. On December 27, 2000, surplus notes for $10,000, dated February 18, 1994, and $10,000, dated March 28, 1994, were repaid. All surplus notes mature seven years from the issue date.
Payment of interest and repayment of principal for these notes is subject to certain conditions and require approval by the Insurance Commissioner of the State of Connecticut. At December 31, 2002 and 2001, $29,230 and $25,829, respectively, of accrued interest on surplus notes was not permitted for payment under these criteria.
15. SHORT-TERM BORROWING
The Company had a $10,000 short-term loan payable to ASI at December 31, 2002 and 2001 as part of a revolving loan agreement. The loan had an interest rate of 1.97% and matured on January 13, 2003. The loan was subsequently rolled over with a new interest rate of 1.82% and a new maturity date of March 13, 2003. The loan was further extended to April 30, 2003 and a new interest rate of 1.71%. The total related interest expense to the Company was $271, $522 and $687 in 2002, 2001 and 2000, respectively. Accrued interest payable was $10 and $113 as of December 31, 2002 and 2001, respectively.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
15. SHORT-TERM BORROWING (continued)
On January 3, 2002, the Company entered into a $150,000 credit facility with ASI. This credit facility terminates on December 31, 2005 and bears interest at the offered rate in the London interbank market (LIBOR) plus 0.35 percent per annum for the relevant interest period. Interest expense related to these borrowings was $2,243 for the year ended December 31, 2002. As of December 31, 2002, no amount was outstanding under this credit facility.
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. RESTRUCTURING CHARGES
On March 22, 2001 and December 3, 2001, the Company announced separate plans to reduce expenses to better align its operating infrastructure with the current investment market environment. As part of the two plans, the Company's workforce was reduced by approximately 140 positions and 115 positions, respectively, affecting substantially all areas of the Company. Estimated pre-tax severance benefits of $8,500 have been charged against 2001 operations related to these reductions. These charges have been reported in the Consolidated Statements of Income as a component of Underwriting, Acquisition and Other Insurance Expenses. As of December 31, 2002 and 2001, the remaining restructuring liability, relating primarily to the December 3, 2001 plan, was $12 and $4,104, respectively.
18. COMMITMENTS AND CONTINGENT LIABILITIES
In recent years, a number of annuity companies have been named as defendants in class action lawsuits relating to the use of variable annuities as funding vehicles for tax- qualified retirement accounts. The Company is currently a defendant in one such lawsuit. A purported class action complaint was filed in the United States District Court for the Southern District of New York on December 12, 2002, by Diane C. Donovan against the Company and certain of its affiliates (the "Donovan Complaint"). The Donovan Complaint seeks unspecified compensatory damages and injunctive relief from the Company and certain of its affiliates. The Donovan Complaint claims that the Company and certain of its affiliates violated federal securities laws in marketing variable annuities. This litigation is in the preliminary stages. The Company believes this action is without merit, and intends to vigorously defend against this action.
The Company is also involved in other lawsuits arising, for the most part, in the ordinary course of its business operations. While the outcome of these other lawsuits cannot be determined at this time, after consideration of the defenses available to the Company, applicable insurance coverage and any related reserves established, these other lawsuits are not expected to result in liability for amounts material to the financial condition of the Company, although it may adversely affect results of operations in future periods. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
18. COMMITMENTS AND CONTINGENT LIABILITIES (continued)
As discussed previously, on December 19, 2002, SICL entered into a definitive purchase agreement (the "Purchase Agreement") to sell its ownership interest in the Company and certain affiliates to Prudential Financial for approximately $1.265 billion. The closing of this transaction, which is conditioned upon certain customary regulatory and other approvals and conditions, is expected in the second quarter of 2003.
The purchase price that was agreed to between SICL and Prudential Financial was based on a September 30, 2002 valuation of the Company and certain affiliates. As a result, assuming the transaction closes, the economics of the Company's business from September 30, 2002 forward will inure to the benefit or detriment of Prudential Financial. Included in the Purchase Agreement, SICL has agreed to indemnify Prudential Financial for certain liabilities that may arise relating to periods prior to September 30, 2002. These liabilities generally include market conduct activities, as well as contract and regulatory compliance (referred to as "Covered Liabilities").
Related to the indemnification provisions contained in the Purchase Agreement, SICL has signed, for the benefit of the Company, an indemnity letter, effective December 19, 2002, to make the Company whole for certain Covered Liabilities that come to fruition during the period beginning December 19, 2002 and ending with the close of the transaction. This indemnification effectively transfers the risk associated with those Covered Liabilities from the Company to SICL concurrent with the signing of the definitive purchase agreement rather than waiting until the transaction closes.
19. 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 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.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes information with respect to the operations of the Company on a quarterly basis:
Three Months Ended ---------------------------------------------------------- 2002 March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- Premiums and other insurance revenues* $ 118,797 $ 126,614 $ 115,931 $ 108,488 Net investment income 4,965 4,714 5,128 4,825 Net realized capital losses (1,840) (1,584) (2,327) (3,863) ----------- ------------ ------------ ------------ Total revenues 121,922 129,744 118,732 109,450 Benefits and expenses* 112,759 160,721 323,529 150,906 ----------- ------------ ------------ ------------ Pre-tax net income (loss) 9,163 (30,977) (204,797) (41,456) Income tax expense (benefit) 1,703 (11,746) (72,754) (20,013) ----------- ------------ ------------ ------------ Net income (loss) $ 7,460 $ (19,231) $ (132,043) $ (21,443) =========== ============ ============ ============ * For the quarters ended March 31, 2002 and June 30, 2002, the Company had overstated premiums ceded in revenues. The above presentation reflects an equal and offsetting reclassification of these amounts to benefits and expenses with no net income impact.
Three Months Ended ---------------------------------------------------------- 2001 March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- Premiums and other insurance revenues*** $ 130,885 $ 128,465 $ 122,708 $ 119,604 Net investment income** 5,381 4,997 5,006 4,742 Net realized capital gains (losses) 1,902 373 376 (1,723) ----------- ------------ ------------ ------------ Total revenues 138,168 133,835 128,090 122,623 Benefits and expenses** *** 122,729 110,444 123,307 125,969 ----------- ------------ ------------ ------------ Pre-tax net income (loss) 15,439 23,391 4,783 (3,346) Income tax expense (benefit) 4,034 7,451 (480) (3,837) ----------- ------------ ------------- ------------ Net income $ 11,405 $ 15,940 $ 5,263 $ 491 =========== ============ ============ ============ ** For the quarters ended March 31, 2001, June 30, 2001 and September 30, 2001, the Company had reported investment performance associated with its derivatives as net investment income. The above presentation reflects a reclassification of these amounts to benefits and expenses. *** For the quarters ended September 30, 2001 and December 31, 2001, the Company had overstated premiums ceded in revenues. The above presentation reflects an equal and offsetting reclassification of these amounts to benefits and expenses with no net income impact.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (an indirect wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Consolidated Financial Statements (continued)
20. QUARTERLY FINANCIAL DATA (UNAUDITED) (continued)
Three Months Ended ---------------------------------------------------------- 2000 March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- Premiums and other insurance revenues $ 137,040 $ 139,346 $ 147,819 $ 135,866 Net investment income**** 4,343 4,625 4,619 5,008 Net realized capital gains (losses) 729 (1,436) (858) 877 ------------ ------------ ----------- ------------ Total revenues 142,112 142,535 151,580 141,751 Benefits and expenses**** 107,893 122,382 137,843 114,264 ------------ ------------ ----------- ------------ Pre-tax net income 34,219 20,153 13,737 27,487 Income tax expense 10,038 5,225 3,167 12,349 ------------ ------------ ----------- ------------ Net income $ 24,181 $ 14,928 $ 10,570 $ 15,138 ============ ============ =========== ============ **** For the quarters ended March 31, 2000, June 30, 2000, September 30, 2000 and December 31, 2000, the Company had reported investment performance associated with its derivatives as net investment income. The above presentation reflects a reclassification of these amounts to benefits and expenses.
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 on March 27, 2003.
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
By: /s/Thomas M. Mazzaferro ------------------------ Thomas M. Mazzaferro Executive Vice President and Chief Financial 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 27, 2003.
*Wade A. Dokken --------------- Wade A. Dokken President and Chief Executive Officer
Board of Directors
*Lincoln R. Collins *Thomas M. Mazzaferro *Robert Whitcher ------------------- --------------------- ----------------
By: /s/Kathleen Chapman ------------------------ Kathleen Chapman Corporate Secretary
*Pursuant to Powers of Attorney filed with the Registration Statement.
CERTIFICATIONS
I, Wade A. Dokken, 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 annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, 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 in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Dated: March 27, 2003 /s/ Wade A. Dokken -------------- ------------------ President and Chief Executive Officer
CERTIFICATIONS
I, Thomas M. Mazzaferro, 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 annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures 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 annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, 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 in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Dated: March 27, 2003 /s/ Thomas M. Mazzaferro -------------- ------------------------ Executive Vice President, Chief Financial Officer and Director