-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IxZYJEUjKIUrIdsR9ufpVRndvFXsBp24qW5nv1zViZtrMCG0Urnq9ueo/IIw/BcP q4jiH0Jx3rnRSkf43V/OvQ== 0000881453-97-000113.txt : 19970815 0000881453-97-000113.hdr.sgml : 19970815 ACCESSION NUMBER: 0000881453-97-000113 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN SKANDIA LIFE ASSURANCE CORP/CT CENTRAL INDEX KEY: 0000881453 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE CARRIERS, NEC [6399] IRS NUMBER: 061241288 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-44202 FILM NUMBER: 97662427 BUSINESS ADDRESS: STREET 1: ONE CORPORATE DRIVE CITY: SHELTON STATE: CT ZIP: 06484 BUSINESS PHONE: 2039261888 MAIL ADDRESS: STREET 1: ONE CORPORATE DRIVE CITY: SHELTON STATE: CT ZIP: 06484 10-Q 1 ASLAC 10-Q JUNE 30, 1997 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 1997 Commission file numbers: 33-62791, 33-62953, 33-88360, 33-89566, 33-89676, 33-89678, 33-91400, 333-25733, 333-00995, 333-25761, 333-02867 and 333-24989 American Skandia Life Assurance Corporation Incorporated in the State of Connecticut 06-1241288 (IRS Employer Identification No.) One Corporate Drive Shelton, Connecticut 06484 Telephone Number (203) 926-1888 Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x No __ As of July 31, 1997, there were 25,000 shares of outstanding common stock, par value $80 per share, of the registrant, consisting of 100 shares of voting and 24,900 shares of non-voting common stock, all of which were owned by American Skandia Investment Holding Corporation, a wholly-owned subsidiary of Skandia Insurance Company Ltd., a Swedish corporation. American Skandia Life Assurance Corporation Table of Contents Page PART I. FINANCIAL INFORMATION: Item 1. Financial Statements: Consolidated Statements of Financial Condition - June 30, 1997 (unaudited) and December 31, 1996 4 Consolidated Statements of Operations (unaudited) - Six months ended June 30, 1997 and June 30, 1996 5 Consolidated Statements of Operations (unaudited) - Three months ended June 30, 1997 and June 30, 1996 6 Consolidated Statements of Cash Flows (unaudited) - Six months ended June 30, 1997 and June 30, 1996 7 Notes to Unaudited Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Six months ended June 30, 1997 14 PART II. OTHER INFORMATION: Item 4. Action Taken by Shareholder 18 Item 6. Exhibits and Reports on Form 8-K 18 Signature 19 Exhibit Index 20 (2) PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS (3) AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, DECEMBER 31, 1997 1996 -------------------- ----------------------- (unaudited) ASSETS Investments: Fixed maturities - at amortized cost $ 9,375,850 $ 10,090,369 Fixed maturities - at market value 86,910,161 87,369,724 Investment in mutual funds - at market value 5,272,036 2,637,731 Short-term investments - at amortized cost 32,996,300 18,100,000 -------------------- ----------------------- Total investments 134,554,347 118,197,824 Cash and cash equivalents 17,037,179 14,199,412 Accrued investment income 2,263,580 1,958,546 Fixed assets 287,214 229,780 Deferred acquisition costs 537,679,557 438,640,918 Reinsurance receivable 1,319,558 2,167,818 Receivable from affiliates 4,458,491 691,532 Deferred income taxes 21,009,619 17,217,582 State insurance licenses 4,637,500 4,712,500 Other assets 2,861,605 2,207,171 Separate account assets 9,972,069,209 7,734,439,793 -------------------- ----------------------- Total Assets $ 10,698,177,859 $ 8,334,662,876 ==================== ======================= LIABILITIES AND SHAREHOLDER'S EQUITY LIABILITIES: Reserve for future contractowner benefits $ 40,055,589 $ 36,245,936 Annuity policy reserves 21,616,876 21,238,749 Income taxes payable 1,433,713 1,124,151 Accounts payable and accrued expenses 78,046,167 65,198,965 Payable to affiliates 92,208,588 685,724 Future fees payable to parent 44,828,479 47,111,936 Payable to reinsurer 85,221,661 79,000,262 Short-term borrowing 10,000,000 10,000,000 Surplus notes 213,000,000 213,000,000 Deferred contract charges 199,217 272,329 Separate account liabilities 9,972,069,209 7,734,439,793 -------------------- ----------------------- Total Liabilities 10,558,679,499 8,208,317,845 -------------------- ----------------------- SHAREHOLDER'S EQUITY: Common stock, $80 par, 25,000 shares authorized, issued and outstanding 2,000,000 2,000,000 Additional paid-in capital 123,055,117 122,250,117 Unrealized investment gains and losses, net (720,347) (319,631) Foreign currency translation, net (157,423) (263,706) Retained earnings 15,321,013 2,678,251 -------------------- ----------------------- Total Shareholder's Equity 139,498,360 126,345,031 -------------------- ----------------------- Total Liabilities and Shareholder's Equity $ 10,698,177,859 $ 8,334,662,876 ==================== =======================
See notes to unaudited consolidated financial statements. (4) AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, 1997 JUNE 30, 1996 ------------------- ------------------ REVENUES: Annuity charges & fees $ 51,831,675 $ 29,895,751 Fee income 11,763,639 7,042,113 Net investment income 3,995,459 737,948 Net realized capital gains 64,064 105,178 Annuity premium income 580,000 100,000 Other 66,055 20,634 -------------------- ---------------- Total Revenues 68,300,892 37,901,624 -------------------- ---------------- BENEFITS AND EXPENSES: Benefits: Annuity benefits 1,215,611 215,992 Increase in annuity policy reserves 1,174,149 534,930 Cost of minimum death benefit reinsurance 1,811,373 1,332,762 Return credited to contractowners (4,715,974) (1,245,994) -------------------- ---------------- (514,841) 837,690 -------------------- ---------------- Expenses: Underwriting, acquisition and other insurance expenses 38,182,529 16,762,970 Amortization of state insurance licenses 75,000 75,000 Interest expense 11,041,931 4,479,486 -------------------- ---------------- 49,299,460 21,317,456 -------------------- ------------------- Total Benefits and Expenses 48,784,619 22,155,146 -------------------- ------------------- Income from operations before income taxes 19,516,273 15,746,478 Income taxes 6,873,511 5,392,047 -------------------- ---------------- Net income $ 12,642,762 $ 10,354,431 ==================== ================
See notes to unaudited consolidated financial statements. (5) AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
THREE MONTHS THREE MONTHS ENDED ENDED JUNE 30, 1997 JUNE 30, 1996 ----------------- ----------------- REVENUES: Annuity charges & fees $ 27,463,051 $ 16,466,476 Fee income 6,239,382 3,880,073 Net investment income 2,626,776 282,926 Net realized capital gains 43,460 13,106 Annuity premium income 305,000 100,000 Other 48,116 6,184 --------------- --------------- Total Revenues 36,725,785 20,748,765 --------------- --------------- BENEFITS AND EXPENSES: Benefits: Annuity benefits 1,070,924 98,006 Increase in annuity policy reserves 390,599 361,057 Cost of minimum death benefit reinsurance 935,295 689,152 Return credited to contractowners 2,029,600 (2,250,424) --------------- --------------- 4,426,418 (1,102,209) --------------- --------------- Expenses: Underwriting, acquisition and other insurance expenses 20,499,063 8,246,643 Amortization of state insurance licenses 37,500 37,500 Interest expense 5,502,357 2,247,801 --------------- -------------- 26,038,920 10,531,944 --------------- -------------- Total Benefits and Expenses 30,465,338 9,429,735 --------------- --------------- Income from operations before income taxes 6,260,447 11,319,030 Income taxes 2,613,660 3,623,540 --------------- --------------- Net income $ 3,646,787 $ 7,695,490 =============== ===============
See notes to unaudited consolidated financial statements. (6) AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (wholly-owned subsidiary of Skandia Insurance Company Ltd.) CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
SIX MONTHS SIX MONTHS ENDED ENDED JUNE 30, 1997 JUNE 30, 1996 ------------------- ----------------- CASH FLOW FROM OPERATING ACTIVITIES: Net income $ 12,642,762 $ 10,354,431 Adjustments to reconcile net income (loss) to net cash used in operating activities: Increase in annuity policy reserves 378,127 875,444 Amortization of bond discount 50,648 10,416 Amortization of insurance licenses 75,000 75,000 Change in receivable from/payable to affiliates 87,755,905 (539,211) Change in income tax payable/receivable 309,562 1,907,590 Change in other assets (711,868) 25,562 Increase in accrued investment income (305,034) (41,773) Change in reinsurance receivable 848,260 (343,022) Increase in accounts payable and accrued expenses 12,847,202 8,456,621 Increase in deferred acquisition cost (99,038,639) (78,651,174) Decrease in deferred contract charges (73,112) (36,196) Decrease in foreign currency translation, net 163,512 3,447 Deferred income taxes (3,633,497) 0 Realized gain on sale of investments (64,064) (105,178) ----------------- ----------------- Net cash provided by (used in) operating activities 11,244,764 (58,008,043) ----------------- ----------------- CASH FLOW FROM INVESTING ACTIVITIES: Purchase of fixed maturity investments 0 (219,434) Proceeds from maturity of fixed maturity investments 200,000 215,000 Purchase of shares in mutual funds (3,369,679) (1,432,901) Proceeds from sale of mutual funds 1,106,387 1,024,378 Net (purchase)/sale of short-term investments (14,896,300) 8,700,000 Change in investments of separate account assets (1,733,356,331) (1,285,596,823) ----------------- ----------------- Net cash used in investing activities (1,750,315,923) (1,277,309,780) ----------------- ----------------- CASH FLOW FROM FINANCING ACTIVITIES: Capital contributions from parent 805,000 581,482 Surplus notes 0 40,000,000 Decrease in future payable fees to parent (2,283,457) 0 Increase in payable to reinsurer 6,221,399 8,494,975 Proceeds from annuity sales 1,737,165,984 1,286,001,887 ----------------- ----------------- Net cash provided by financing activities 1,741,908,926 1,335,078,344 ----------------- ----------------- Net decrease in cash and cash equivalents 2,837,767 (239,479) ----------------- ----------------- Cash and cash equivalents at beginning of period 14,199,412 13,146,384 ----------------- ----------------- Cash and cash equivalents at end of period $ 17,037,179 $ 12,906,905 ================= ================= SUPPLEMENTAL CASH FLOW DISCLOSURE: Income taxes paid $ 10,197,446 $ 3,472,302 ================= ================= Interest paid $ 4,501,751 $ 341,250 ================= =================
See notes to unaudited consolidated financial statements. (7) AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Unaudited Consolidated Financial Statements June 30, 1997 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of American Skandia Life Assurance Corporation (the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ending December 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto in the Company's audited consolidated financial statements for the year ended December 31, 1996. 2. FOREIGN ENTITY As of July 1995 Skandia Vida, S.A. de C.V. was formed by the ultimate parent, Skandia Insurance Company, Ltd., a Swedish corporation. The Company has a 99.9% ownership in Skandia Vida, S.A. de C.V. which is a life insurance company domiciled in Mexico. This Mexican life insurer is a start up company with expectations of selling long term savings products within Mexico. Total shareholder's equity of Skandia Vida, S.A. de C.V. is $1,632,363 as of June 30, 1997. (8) AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Unaudited Consolidated Financial Statements June 30, 1997 3. SURPLUS NOTES The Company has issued surplus notes to American Skandia Investment Holding Corporation (the "Parent") in exchange for cash. Surplus notes outstanding as of June 30, 1997 were as follows. Issue Date Amount Interest Rate December 29, 1993 $ 20,000,000 6.84% February 18, 1994 10,000,000 7.28% March 28, 1994 10,000,000 7.90% September 30, 1994 15,000,000 9.13% December 28, 1994 14,000,000 9.78% December 19, 1995 10,000,000 7.52% December 20, 1995 15,000,000 7.49% December 22, 1995 9,000,000 7.47% June 28, 1996 40,000,000 8.41% December 30, 1996 70,000,000 8.03% ----------- Total $213,000,000 Payment of interest and repayment of principal for these notes is subject to certain conditions and requires approval by the Insurance Commissioner of the State of Connecticut. Interest accrued at June 30, 1997 amounted to $10,194,209, of which $4,414,379 has been approved for payment. 4. FUTURE FEES PAYABLE TO PARENT On December 17, 1996 the Company sold to its Parent, effective September 1, 1996, certain rights to receive future fees and charges expected to be realized on the variable portion of a designated block of deferred annuity contracts issued during the period January 1, 1994 through June 30, 1996. In connection with this transaction, the Parent issued collateralized notes in a private placement which are secured by the rights to receive future fees and charges purchased from the Company. (9) AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Unaudited Consolidated Financial Statements June 30, 1997 Under the terms of the Purchase Agreement, the rights sold provide for the Parent to receive 80% 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, 6.5 years). The Company did not sell the right to receive future fees and charges after the expiration of the surrender charge period. The proceeds from the sale 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 present value at September 1, 1996 (discounted at 7.5%), of future fees and charges expected to be realized on the designated contracts was $50,221,438. Interest expense of $2,092,688 has been included in the statement of operations. Expected payments of future fees payable to Parent are as follows: Period Ending December 31, Amount 1997 $ 7,025,070 1998 9,782,558 1999 10,002,274 2000 10,061,058 2001 6,412,114 2002 1,392,003 2003 153,402 ----------- Total $44,828,479 The Commissioner of the State of Connecticut has approved the sale 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 stop the payments due to the Parent under the Purchase Agreement, subject to certain terms and conditions. On July 23, 1997 the Company closed a similar transaction in which it raised $58,766,633. For further discussion see Note 6, Subsequent Event. (10) AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Unaudited Consolidated Financial Statements June 30, 1997 5. REINSURANCE The Company cedes reinsurance under modified co-insurance arrangements. The reinsurance arrangements provide additional capacity for growth in supporting the cash flow strain from the Company's variable annuity business. The reinsurance is effected under quota share contracts. The Company reinsures certain mortality risks pertaining to the Guaranteed Minimum Death Benefit feature in the variable annuity products. The effect of the reinsurance agreements on the Company's operations was to reduce annuity charges and fee income, death benefit expense, and reserve exposure. The effect of reinsurance is summarized as follows: Six Months Ended June 30, 1997
Annuity Increase in Annuity Return Credited Charges & Fees Policy Reserves to Contractowners Gross $62,467,438 $ 325,889 ($4,736,755) Ceded 10,635,763 (848,260) 20,781 ------------ ------------- -------------- Net $51,831,675 $1,174,149 ($4,715,974) =========== ============ =========== Six Months Ended June 30, 1996 Annuity Increase in Annuity Return Credited Charges & Fees Policy Reserves to Contractowners Gross $38,120,495 $877,952 ($1,206,035) Ceded 8,224,744 343,022 39,959 ------------- --------- ------------- Net $29,895,751 $534,930 ($1,245,994) =========== ======== ===========
Such ceded reinsurance does not relieve the Company from its obligations to policyholders. The Company remains liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet the obligations assumed under the reinsurance agreement. (11) AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Unaudited Consolidated Financial Statements June 30, 1997 6. SUBSEQUENT EVENT On July 23, 1997 the Company sold to its Parent, effective June 1, 1997, certain rights to receive future fees and charges expected to be realized on the variable portion of a designated block of deferred annuity contracts issued during the period March 1, 1996 through April 30, 1997. In connection with this transaction, the Parent issued collateralized notes in a private placement which are secured by the rights to receive future fees and charges purchased from the Company. Under the terms of the Purchase Agreement, the rights sold provide for the Parent to receive 80% of future mortality and expense charges and contingent deferred sales charges expected to be realized over the remaining surrender charge period of the designated contracts (generally, 8 years). The Company did not sell the right to receive future fees and charges after the expiration of the surrender charge period. The proceeds from the sale will be recorded as a liability and will be amortized over the remaining surrender charge period of the designated contracts using the interest method. The present value at June 1, 1997 (discounted at 7.5%), of future fees and charges expected to be realized on the designated contracts was $58,766,633 Expected payments of future fees payable to Parent are as follows: Period Ending December 31, Amount 1997 $ 3,556,092 1998 6,508,154 1999 7,064,520 2000 7,734,955 2001 8,526,105 2002 9,027,506 2003 9,257,879 2004 6,657,084 2005 434,338 ----------- Total $58,766,633 (12) AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Unaudited Consolidated Financial Statements June 30, 1997 The Commissioner of the State of Connecticut has approved the sale 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 stop the payments due to the Parent under the Purchase Agreement, subject to certain terms and conditions. (13) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Six months ended June 30, 1997 American Skandia Life Assurance Corporation (the Company) is a stock insurance company domiciled in Connecticut with licenses in all 50 states. It is a wholly-owned subsidiary of American Skandia Investment Holding Corporation, whose ultimate parent is Skandia Insurance Company Ltd., a Swedish company. The Company is in the business of issuing annuity policies, and has been so since its business inception in 1988. The Company currently offers the following annuity products: a) certain deferred annuities that are registered with the Securities and Exchange Commission, including variable annuities and fixed interest rate annuities 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 and adjustable immediate annuities. The Company markets its products through an internal field marketing staff to broker-dealers, financial planners and in conjunction with financial institutions such as banks that are permitted directly, or through affiliates, to sell annuities. Results of Operations The Company's long term business plan was developed reflecting the current sales and marketing approach. The sales volume for the six month periods ended June 30, 1997 and 1996 was $1,737 million and $1,286 million, respectively, an increase of 35%. This increase is a direct result of the marketing efforts by the Company coupled with an overall increase in the variable annuity marketplace. Assets grew $2,364 million or 28% since December 31, 1996. This increase is a direct result of the sales volume increasing separate account assets and deferred acquisition costs combined with the strong performance of the stock market over the same period, which also has contributed to the growth in separate account assets. Liabilities grew $2,350 million or 29% since December 31, 1996 as a result of the reserves required for the increased sales activity and market growth of separate account assets as well as an increase in the amounts payable to affiliates and reinsurance to support the acquisition costs of the Company's variable annuity business. (14) The Company experienced a net gain of $12.6 million after tax for the current period which was $2.3 million greater than the same period last year, and in excess of plan. This gain is a result of the strong sales activity for the six months ended June 30, 1997, expense levels consistent with sales activity and an increased asset base, which generates additional fee revenue. Revenues: Increasing annuity sales volume results in greater assets under management. Growth in assets under management has resulted in a 73% increase in annuity charges & fees for the six month period ended June 30, 1997. This is compared to an increase of 77% for the six month period ended June 30, 1996. Fee income includes income earned for transfer agency type activities. This income increased 67% for the six month period ended June 30, 1997 compared to an increase of 247% for the six month period ended June 30, 1996. These increases are driven by the continued increase in assets under management. Net investment income increased 441% for the six month period ended June 30, 1997. This is compared to a decrease of 25% for the six month period ended June 30, 1996. The current period increase is the result of increased investment holdings for the period. The prior period decrease is a result of the need to liquidate short term investments to support cash needs. Annuity premium income represents sales of immediate annuities with life contingencies. Benefits: Annuity benefits represent payments on annuity contracts with mortality risks: immediate annuities with life contingencies and supplementary contracts with life contingencies. The increase in annuity policy reserves represents the change in reserves for immediate annuities with life contingencies, supplementary contracts with life contingencies and the guaranteed minimum death benefit on variable annuities. In September 1995, the Company entered into an agreement to reinsure the guaranteed minimum death benefit exposure on most of its variable annuity contracts. For both periods ended June 30, 1997 and 1996, the costs associated with reinsuring the minimum death benefit reserve exceeded the change in the minimum death benefit reserve by approximately $1.0 million. (15) Return credited to contractowners represents revenues on variable and market value adjusted annuities offset by benefit payments and change in reserves required on this business. Also included are benefit payments and change in reserves on immediate annuities and supplemental contracts without significant mortality risks. The result for the current period reflects a higher than expected separate account investment return on the market value adjusted contracts in support of the benefits and required reserves combined with the reversal of the effect of December 31, 1996 bond market fluctuations which had adversely impacted 1996 results by $1.8 million. While the assets relating to the market value adjusted contracts reflected the market interest rate fluctuations which occurred on December 31, 1996, the liabilities were based on interest rates set for new contracts which are generally based on the prior day's interest rates. During the first week of 1997, interest rates were established for new contracts, thereby bringing the liabilities relating to the market value adjusted contracts in line with the related assets. A similar situation occurred at June 30, 1997, which adversely affected June 30, 1997 results by $1.4 million and will reverse on July 1, 1997. Expenses: Underwriting, acquisition and other insurance expenses consists of $87.4 million of commissions and $44.1 million of general expenses offset by the net capitalization of deferred acquisition costs totaling $93.3 million. This compares to $61.6 million of commissions and $25.5 million of general expenses offset by the net capitalization of deferred acquisition costs totaling $70.3 million for the same period last year. Interest expense increased 146% over the same period last year as a result of the 1996 increase in surplus notes of $110 million. Income tax expense was $6.9 million for the period ended June 30, 1997, compared with $5.4 million for the same period last year. The effective Federal income tax rates for the periods were 35% and 34% respectively. The 1996 effective rate was lower than the Federal statutory income tax rate due to an increase in the deferred tax valuation allowance offset by permanent differences. Such allowance was released at December 31, 1996. Management believes that based on the taxable income produced in 1996 and the first half of 1997 as well as the continued growth in annuity products, the Company will produce sufficient taxable income in the future to realize its deferred tax assets. Liquidity and Capital Resources The liquidity requirement of the Company was met by cash from insurance operations, investment activities and advances from the parent. (16) The Company had significant growth during the six month period in 1997. The sales volume of $1,737 million was made up of approximately 93% variable annuities, which carry a contingent, deferred sales charge. This type of product causes a temporary cash strain in that 100% of the proceeds are invested in separate accounts supporting the product leaving a cash (but not capital) strain caused by the acquisition costs for the new business. This cash strain required the Company to look beyond the insurance operations and investments of the Company. To this end, the Company extended its reinsurance agreements (initiated in 1993, 1994 and 1995) and was advanced $91 million by the parent. The reinsurance agreements are modified coinsurance arrangements where the reinsurer shares in the experience of a specific book of business. The income and expense items presented above are net of reinsurance. While the tremendous growth of this young organization has depended on capital support from its parent, the Company expects to use borrowing, reinsurance and the sale of future fee revenues to fund the cash strain anticipated from the acquisition costs on expected future sales volume. As of June 30, 1997 and December 31, 1996, shareholder's equity was $139.5 million and $126.3 million, respectively, which includes the carrying value of the state insurance licenses in the amount of $4.6 million and $4.7 million respectively. The Company has long term surplus notes and short term borrowing with its parent. No dividends have been paid to its parent company. On July 23, 1997 the Company closed a second transaction in which it sold future fee revenues to its Parent. The $58.8 million proceeds raised by this transaction were used to reduce the $91 million advance from the Parent. For further discussion of this transaction, refer to Note 6, Subsequent Event of the Notes to Unaudited Consolidated Financial Statements. (17) PART II. OTHER INFORMATION ITEM 4. ACTION TAKEN BY SHAREHOLDER Not applicable for this quarter. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) See Exhibit Index (b) American Skandia Life Assurance Corporation did not file any Report on Form 8-K during the quarter covered by this report. (18) SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. American Skandia Life Assurance Corporation (Registrant) by /s/Thomas M. Mazzaferro -------------------- Thomas M. Mazzaferro Executive Vice President and Chief Financial Officer August 13, 1997 (19) EXHIBIT INDEX Exhibit Number Description Location (2) Plan of acquisition, reorganization, arrangement, liquidation or succession None (4) Instruments defining the rights of security holders, including indentures None (10) Material Contracts None (11) Statement re computation of per share earnings None (15) Letter re unaudited interim financial information None (18) Letter re change in accounting principles None (19) Report furnished to security holders None (22) Published report regarding matters submitted to vote of security holders None (23) Consents of experts and counsel None (24) Power of attorney None (99) Additional exhibits None (20) EX-27 2 FDS -- ASLAC FINANCIALS 6/97
7 881453 ASLAC697 1 U.S Dollars 6-MOS JUN-30-1997 JAN-01-1997 JUN-30-1997 1 86,910,161 97,714,146 96,758,656 5,272,036 0 0 134,554,347 17,037,179 1,319,558 537,679,557 10,698,177,859 61,672,465 0 0 0 213,000,000 0 0 2,000,000 137,498,360 10,698,177,859 580,000 3,995,459 64,064 63,661,369 (514,841) 12,352,651 25,904,878 19,516,273 6,873,511 0 0 0 0 12,642,762 0 0 0 0 0 0 0 0 0 Included in Total Assets are Assets Held in Separate Accounts of $9,972,069,209. Included in Total Liabilities and Equity are Liabilities Related to Separate Accounts of $9,972,069,209. Other income includes annuity charges and fees of $51,831,675 and fee income of $11,763,639.
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