-----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, VXHC2q3WpE7dSXt/0VmjSQh2bIwiHQ34pl3rWuUJfoqT6fFNMB7mNrsRlVf9uarw CTgXToMjChjj2t/ZuXuqFw== 0000881453-98-000058.txt : 19980326 0000881453-98-000058.hdr.sgml : 19980326 ACCESSION NUMBER: 0000881453-98-000058 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980325 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-K SEC ACT: SEC FILE NUMBER: 033-44202 FILM NUMBER: 98572807 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-K 1 ASLAC 10-K AS OF 12/31/97 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended 12/31/97 Commission file numbers 33-62791, 33-62953, 33-88360, 33-89566, 33-89676, 33-89678, 33-91400, 333-00995, 333-02867, 333-24989, 333-25733, 333-25761 and 333-26695 AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (Exact name of registrant as specified in its charter) Connecticut 06-1241288 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) One Corporate Drive, Shelton, Connecticut 06484 (Address of Principal Executive Offices, Zip Code) Registrant's telephone number, including area code: (203) 926-1888 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ As of March 10, 1998, 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 all of which were owned by American Skandia Investment Holding Corporation, a wholly-owned subsidiary of Skandia Insurance Company Ltd., a Swedish corporation. PART I Item 1. Business American Skandia Life Assurance Corporation ("ASLAC" or "the Company") is a Connecticut corporation with its principal offices in Shelton, Connecticut. American Skandia Investment Holding Corporation (the "Parent") owns all of the issued and outstanding shares of the Company's common stock. The Parent is a wholly-owned ultimate subsidiary of Skandia Insurance Company Ltd., a Swedish corporation. The Company currently develops and offers annuity products. All annuity products requiring registration as securities are offered through its affiliated broker-dealer company, American Skandia Marketing, Incorporated. ASLAC currently offers single or flexible premium variable and guaranteed maturity deferred annuities and immediate annuities. The Company may, in the future, offer other forms of life and health insurance. Annuity contracts represent a contractual obligation to make payments over a given period of time (often measured by the life of the recipient), undertaken by the insurer in return for the payment of either a single premium or a series of scheduled or flexible premiums. The insurer's obligation to pay may commence immediately or be deferred. The amount to be paid may be either fixed or variable. The product is sold to pension plans and individuals, primarily for the management of financial assets and for retirement. Income earned by or credited to a deferred annuity contract generally is not taxed until distributed. For immediate annuities, or annuitized deferred annuities, a portion of each annuity distribution received is taxed as ordinary income to the policyholder, based on the ratio of the investment in the contract to the total distribution expected to be received. The Company is obligated to carry in its statutory financial statements, as liabilities, actuarial reserves to meet its obligations on outstanding annuity or life insurance contracts. This is required by the life insurance laws and regulations in the jurisdictions in which ASLAC does business. 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 our contractual obligations at their maturities if death occurs in accordance with the mortality tables employed. In the accompanying financial statements, these reserves for contractual obligations are determined in accordance with generally accepted accounting principles and are included in the separate account liabilities, reserve for future contractowner benefits and annuity policy reserves. ASLAC is engaged in a business that is highly competitive due to the large number of insurance companies and other entities competing in the marketing and sale of insurance products. There are approximately 2,300 stock, mutual, and other types of insurance companies in the life insurance business in the United States. As of December 31, 1997, the Company had 548 direct salaried employees. Item 2. Properties The Company occupies office space leased from an affiliate, American Skandia Information Services and Technology Corporation, and believes that the current facilities are satisfactory for its near term needs. Item 3. Legal Proceedings As of the date of this filing, the Company is not involved in any litigation outside of the ordinary course of business, and knows of no such material claims. Item 4. Submission of Matters to a Vote of Security Holders None PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters All of ASLAC's outstanding shares are owned by American Skandia Investment Holding Corporation, a wholly-owned subsidiary of Skandia Insurance Company Ltd. The Company did not pay any dividends to its Parent in 1997, 1996 and 1995. Item 6. Selected Financial Data The following table summarizes information with respect to the operation of the Company. The selected financial data should be read in conjunction with the financial statements and the notes thereto and Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations.
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Income Statement Data: Revenues: Annuity charges and fees* $ 121,157,846 $ 69,779,522 $ 38,837,358 $ 24,779,785 $ 11,752,984 Fee income 27,587,231 16,419,690 6,205,719 2,111,801 938,336 Net investment income 8,181,073 1,585,819 1,600,674 1,300,217 692,758 Annuity premium income and other revenues 1,088,144 265,103 45,524 92,608 432,936 --------------- -------------- -------------- -------------- -------------- Total revenues $ 158,014,294 $ 88,050,134 $ 46,689,275 $ 28,284,411 $ 13,817,014 =============== ============== ============== ============== ============== Benefits and Expenses: Annuity benefits 2,033,275 613,594 555,421 369,652 383,515 Increase/(decrease) in annuity policy reserves 37,270 634,540 (6,778,756) 5,766,003 1,208,454 Cost of minimum death benefit reinsurance 4,544,697 2,866,835 2,056,606 - - Return credited to contractowners (2,018,635) 672,635 10,612,858 (516,730) 252,132 Underwriting, acquisition and other insurance expenses 90,496,952 49,887,147 35,914,392 18,942,720 9,547,951 Interest expense 24,895,456 10,790,716 6,499,414 3,615,845 187,156 --------------- -------------- -------------- -------------- -------------- Total benefits and expenses $ 119,989,015 $ 65,465,467 $ 48,859,935 $ 28,177,490 $ 11,579,208 =============== ============== ============== ============== ============== Income tax (benefit) expense $ 10,477,746 $ (4,038,357) $ 397,360 $ 247,429 $ 182,965 =============== ============== ============== ============== ============== Net income (loss) $ 27,547,533 $ 26,623,024 $ (2,568,020) $ (140,508) $ 2,054,841 =============== ============== ============== ============== ============== Balance Sheet Data: Total Assets $12,972,416,108 $8,347,695,595 $5,021,012,890 $2,864,416,329 $1,558,548,537 =============== ============== ============== ============== ============== Future fees payable to parent $ 233,033,818 $ 47,111,936 $ 0 $ 0 $ 0 =============== ============== ============== ============== ============== Surplus Notes $ 213,000,000 $ 213,000,000 $ 103,000,000 $ 69,000,000 $ 20,000,000 =============== ============== ============== ============== ============== Shareholder's Equity $ 184,421,044 $ 126,345,031 $ 59,713,000 $ 52,205,524 $ 52,387,687 =============== ============== ============== ============== ==============
* On annuity sales of $3,697,990,000, $2,795,114,000, $1,628,486,000, $1,372,874,000 and $890,640,000 during the years ended December 31, 1997, 1996, 1995, 1994, and 1993, respectively, with contractowner assets under management of $12,119,191,000, $7,764,891,000, $4,704,044,000, $2,661,161,000 and $1,437,554,000 as of December 31, 1997, 1996, 1995, 1994 and 1993, respectively. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations American Skandia Life Assurance Corporation (the "Company") is a stock life insurance company domiciled in Connecticut with licenses in all 50 states. It is a wholly-owned subsidiary of American Skandia Investment Holding Corporation (the "Parent"), 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; c) certain group variable annuities that are not registered with the Securities and Exchange Commission that serve as funding vehicles for various types of qualified pension and profit sharing plans; and d) fixed and adjustable immediate annuities. The Company markets its products to broker-dealers and financial planners through an internal field marketing staff. In addition, the Company markets through and in conjunction with financial institutions such as banks that are permitted directly, or through affiliates, to sell annuities. In addition, the Company has 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. The Company's investment in Skandia Vida, S.A. de C.V. is $1.5 million at December 31,1997. RESULTS OF OPERATIONS The Company's long term business plan was developed reflecting the current sales and marketing approach. Annuity sales increased 32%, 72% and 19% in 1997, 1996 and 1995, respectively. The Company continues to show significant growth in sales volume and increased market share within the variable annuity industry. This growth is a result of innovative product development activities, expansion of distribution channels and a focused effort on customer orientation. The Company primarily offers and sells a wide range of deferred annuities through three focused marketing, sales and service teams. Each team specializes in addressing one of the Company's primary distribution channels: (a) financial planning firms; (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 which specialize in marketing to customers of banks. The Company also offers a number of specialized products distributed by select, large distributors. In 1995 and 1996, the Company restructured its internal operations to better support the specialized marketing, sales and service needs of the primary distribution channels and of the select distributors of specialized products. There has been continued growth and success in expanding the number of selling agreements in the primary distribution channels. There has also been increased success in enhancing the relationships with the registered representatives/insurance agents of all the selling firms. Total assets grew 55%, 66% and 75% in 1997, 1996 and 1995, respectively. These increases were a direct result of the substantial sales volume increasing separate account assets and deferred acquisition costs as well as 1997 and 1996 growth in fixed maturity investments in support of the Company's risk based capital requirements. Liabilities grew 56%, 65%, and 76% in 1997, 1996 and 1995, respectively, as a result of the reserves required for the increased sales activity along with borrowings during these periods. The borrowings are needed to fund the acquisition costs of the Company's variable annuity business. The Company experienced a net gain after tax in 1997 and 1996 and a net loss after tax in 1995. The 1997 and 1996 result was related to the strong sales volume, favorable market climate, expense savings relative to sales volume and recognition of certain tax benefits. The 1995 result was related to higher than anticipated expense levels and additional reserving requirements on our market value adjusted annuities. The increase in expenses was primarily attributable to improving our service infrastructure and marketing related costs, which was in part responsible for the strong sales and financial performance in 1996. REVENUES Increasing volume of annuity sales results in higher assets under management. The fees realized on assets under management have resulted in annuity charges and fees increasing 74%, 80% and 57% in 1997, 1996 and 1995, respectively. Fee income has increased 68%, 165% and 194% in 1997, 1996 and 1995, respectively, as a result of income from transfer agency type activities. These increases are also as a result of increases in assets under management. Net investment income increased 416% in 1997, decreased 1% in 1996 and increased 23% in 1995. The increase in 1997 was a direct result of increased bond holdings in support of the Company's risk based capital. The level net investment income in 1996 was a result of the consistent investment holdings throughout most of the year. The increase in 1995 was a result of a higher average level of Company bonds and short-term investments. Annuity premium income represents premiums earned on sales of immediate annuities with life contingencies and supplementary contracts with life contingencies. BENEFITS Annuity benefits represent payments on annuity contracts with mortality risks, these being immediate annuity contracts with life contingencies and supplementary contracts with life contingencies. Increase/(decrease) in annuity policy reserves represents change in reserves for the immediate annuity with life contingencies, supplementary contracts with life contingencies and guaranteed minimum death benefits. During 1995, the Company entered into an agreement to reinsure the guaranteed minimum death benefit exposure on most of the variable annuity contracts. The costs associated with reinsuring the guaranteed minimum death benefit reserve exceeded the change in the guaranteed minimum death benefit reserve during 1997 and 1996 as a result of minimum required premiums within the reinsurance contract. The costs associated with reinsuring the guaranteed minimum death benefit reserve approximate the change in the guaranteed minimum death benefit reserve during 1995, thereby having no significant effect on the statement of operations. Return credited to contractowners represents revenues on the variable and market value adjusted annuities offset by the benefit payments and change in reserves required on this business. Also included are the benefit payments and change in reserves on immediate annuity contracts without significant mortality risks. The 1997 return credited to contractowners in the amount of ($2.0) million in income represents a break-even year for our market value adjusted product line for the year. The 1996 return credited to contractowners in the amount of $0.7 million represents a favorable investment return on the market value adjusted contracts relating to the benefits and required reserves, offset by the effect of bond market fluctuations on December 31, 1996 in the amount of $1.8 million. While the assets relating to the market value adjusted contracts reflect the market interest rate fluctuations which occurred on December 31, 1996, the liabilities are based on the interest rates set for new contracts which are generally based on the prior day's interest rates. During the first week of January 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. Consequently, the gain realized in 1997 was a result of this liability shift. In 1995, the Company earned a lower than anticipated separate account investment return on the market value adjusted contracts in support of the benefits and required reserves. In addition, the 1995 result includes an increase in the required reserves associated with this product. EXPENSES Underwriting, acquisition and other insurance expenses for 1997 were made up of $186.9 million of commissions and $94.5 million of general expenses offset by the net capitalization of deferred acquisition costs totaling $191.1 million. This compares to the same period last year of $140.4 million of commissions and $63.2 million of general expenses offset by the net capitalization of deferred acquisition costs totaling $153.9 million. Underwriting, acquisition and other insurance expenses for 1995 is made up of $62.8 million of commissions and $42.2 million of general expenses offset by the net capitalization of deferred acquisition costs totaling $69.2 million. Interest expense increased $14.1 million, $4.3 million and $2.9 million in 1997, 1996 and 1995, respectively, as a result of Surplus Notes totaling $213 million, $213 million and $103 million, at December 31, 1997, 1996 and 1995, respectively, along with interest on Securitization (future fees payable to Parent) transactions for the year 1997. Income tax reflected an expense of $10.5 million for the year ended December 31, 1997, a benefit of $4 million for the year ended December 31, 1996 and an expense of $0.4 million for the year ended December 31, 1995. The 1997 income tax expense is a net result of applying the federal income tax rate of 35% to pre-tax earnings reduced by permanent differences, with the most significant item being the dividend received deduction. The 1996 benefit is related to management's release of the deferred tax valuation allowance of $9.3 million, established prior to 1996. Management believes that based on the taxable income produced in the current year and the continued growth in annuity products, the Company will produce sufficient taxable income in the future to realize its deferred tax assets. Income tax expense in 1995 relates principally to an increase in the deferred tax valuation allowance of $1.7 million, as well as, the Company being in an Alternative Minimum Tax position for the year. LIQUIDITY AND CAPITAL RESOURCES The liquidity requirement of ASLAC was met by cash from insurance operations, investment activities, borrowings from its Parent and sale of rights to future fees and charges to its Parent. As previously stated, the Company continued to have significant growth during 1997. The sales volume of $3.698 billion was primarily (approximately 94%) variable annuities, most of 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 cost for the new business. This cash strain required the Company to look beyond the cash made available by insurance operations and investments of the Company. During 1996, the Company borrowed an additional $110 million from its Parent in the form of Surplus Notes. Also, during 1997 and 1996, the Company extended its reinsurance agreements (which were initiated in 1993, 1994 and 1995). 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. In addition, 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 (Transaction 1996-1). Also, the Company entered into the following similar transactions during 1997. Closing Effective Contract Issue Transaction Date Date Period ----------- ------- --------- -------------- 1997-1 7/23/97 6/1/97 3/1/96 - 4/30/97 1997-2 12/30/97 12/1/97 5/1/95 - 12/31/96 1997-3 12/30/97 12/1/97 5/1/96 - 10/31/97 In connection with these transactions, the Parent, through a trust, 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 Agreements, the rights sold provide for the Parent to receive 80% (100% for Transaction 1997-3) 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 (6 to 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 sales have been recorded as a liability and are being amortized over the remaining surrender charge period of the designated contracts using the interest method. The present value of the transactions (discounted at 7.5%) of future fees as of the respective Effective Date was as follows (amounts in millions): Present Transaction Value ----------- ------- 1996-1 $50.2 1997-1 58.8 1997-2 77.6 1997-3 58.2 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 the coming years' sales volume. The tremendous growth of this young organization has depended on capital support from its Parent. During December 1997, the Company received $27.7 million from its Parent to support the capital needs of its increased business during 1997 and the anticipated 1998 growth in business. As of December 31, 1997 and 1996, shareholder's equity was $184.4 million and $126.3 million, respectively, which includes the carrying value of state insurance licenses in the amount of $4.6 million and $4.7 million, respectively. ASLAC has long term surplus notes with its Parent and a short-term borrowing with an affiliate. No dividends have been paid to its parent company. YEAR 2000 COMPLIANCE American Skandia is a relatively young company whose internally developed systems were designed from the start with the correct four digit date fields. As a result, the Company anticipates few technical problems related to the year 2000. However, we take this matter seriously and continue to take precautions to ensure year 2000 compliance. Steps taken to date include: 1. Any new, externally developed software is evaluated for year 2000 compliance before purchase. We also evaluate all new service providers. 2. An external specialist had been engaged to perform a complete assessment of American Skandia's operating systems and internally developed software. 3. The Company is working with external business partners and software providers to request and review their year 2000 compliance status and plans. We anticipate full internal compliance by September 1998, followed by continuous evaluation of internal systems, external business partners and software providers until the year 2000. Item 8. Financial Statements and Supplementary Data FINANCIAL STATEMENTS INDEX Page(s) Independent Auditors' Reports 12-13 Consolidated Statements of Financial Condition as of December 31, 1997 and 1996 14 Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995 15 Consolidated Statements of Shareholder's Equity for the Years Ended December 31, 1997, 1996 and 1995 16 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 17 Notes to Consolidated Financial Statements 18-33 Schedules are omitted because they are either not applicable or because the information required therein is included in the Notes to Consolidated Financial Statements. INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Shareholder of American Skandia Life Assurance Corporation Shelton, Connecticut We have audited the consolidated statement of financial condition of American Skandia Life Assurance Corporation (the "Company" which is a wholly-owned subsidiary of Skandia Insurance Company Ltd.) as of December 31, 1997, and the related consolidated statements of operations, shareholder's equity, and cash flows for the year then ended. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1997 consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Skandia Life Assurance Corporation at December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/Ernst & Young LLP - -------------------- Hartford, Connecticut February 20, 1998 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholder of American Skandia Life Assurance Corporation Shelton, Connecticut We have audited the accompanying consolidated statement of financial condition of American Skandia Life Assurance Corporation and subsidiary (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) as of December 31, 1996, and the related consolidated statements of operations, shareholder's equity, and cash flows for each of the two years in the period ended December 31, 1996. 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 generally accepted auditing standards. 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, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of American Skandia Life Assurance Corporation and subsidiary as of December 31, 1996, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/Deloitte & Touche LLP - ------------------------ New York, New York March 10, 1997 AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF DECEMBER 31, 1997 1996 --------------- -------------- ASSETS Investments: Fixed maturities - at amortized cost $ 9,366,671 $ 10,090,369 Fixed maturities - at fair value 108,323,668 87,369,724 Investment in mutual funds - at fair value 6,710,851 2,637,731 Policy loans 687,267 159,482 --------------- -------------- Total investments 125,088,457 100,257,306 Cash and cash equivalents 81,974,204 45,332,131 Accrued investment income 2,441,671 1,958,546 Fixed assets 356,153 229,780 Deferred acquisition costs 628,051,995 438,640,918 Reinsurance receivable 3,120,221 2,167,818 Receivable from affiliates 1,910,895 691,532 Income tax receivable - current 1,047,493 - Income tax receivable - deferred 26,174,369 17,217,582 State insurance licenses 4,562,500 4,712,500 Other assets 2,524,581 2,047,689 Separate account assets 12,095,163,569 7,734,439,793 --------------- -------------- Total Assets $12,972,416,108 $8,347,695,595 =============== ============== LIABILITIES AND SHAREHOLDER'S EQUITY LIABILITIES: Reserve for future contractowner benefits $ 43,204,443 $ 36,245,936 Policy reserves 24,414,999 21,238,749 Income tax payable - 1,124,151 Drafts outstanding 19,277,706 13,032,719 Accounts payable and accrued expenses 71,190,019 65,471,294 Payable to affiliates 584,283 685,724 Future fees payable to parent 233,033,818 47,111,936 Payable to reinsurer 78,126,227 79,000,262 Short-term borrowing 10,000,000 10,000,000 Surplus notes 213,000,000 213,000,000 Separate account liabilities 12,095,163,569 7,734,439,793 --------------- -------------- Total Liabilities 12,787,995,064 8,221,350,564 --------------- -------------- SHAREHOLDER'S EQUITY: Common stock, $80 par, 25,000 shares authorized, issued and outstanding 2,000,000 2,000,000 Additional paid-in capital 151,527,229 122,250,117 Unrealized investment gains and losses, net 954,069 (319,631) Foreign currency translation, net (286,038) (263,706) Retained earnings 30,225,784 2,678,251 --------------- -------------- Total Shareholder's Equity 184,421,044 126,345,031 --------------- -------------- Total Liabilities and Shareholder's Equity $12,972,416,108 $8,347,695,595 =============== ==============
See notes to consolidated financial statements. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995 ------------ ------------ ----------- REVENUES: Annuity charges and fees $121,157,846 $69,779,522 $38,837,358 Fee income 27,587,231 16,419,690 6,205,719 Net investment income 8,181,073 1,585,819 1,600,674 Annuity premium income 920,042 125,000 - Net realized capital gains 87,103 134,463 36,774 Other 80,999 5,640 8,750 ------------ ----------- ----------- Total Revenues 158,014,294 88,050,134 46,689,275 ------------ ----------- ----------- BENEFITS AND EXPENSES: Benefits: Annuity benefits 2,033,275 613,594 555,421 Increase/(decrease) in annuity policy reserves 37,270 634,540 (6,778,756) Cost of minimum death benefit reinsurance 4,544,697 2,866,835 2,056,606 Return credited to contractowners (2,018,635) 672,635 10,612,858 ------------ ----------- ----------- 4,596,607 4,787,604 6,446,129 ------------ ----------- ----------- Expenses: Underwriting, acquisition and other insurance expenses 90,346,952 49,737,147 35,764,392 Amortization of state insurance licenses 150,000 150,000 150,000 Interest expense 24,895,456 10,790,716 6,499,414 ------------ ----------- ----------- 115,392,408 60,677,863 42,413,806 ------------ ----------- ----------- Total Benefits and Expenses 119,989,015 65,465,467 48,859,935 ------------ ----------- ----------- Income (loss) from operations before income taxes 38,025,279 22,584,667 (2,170,660) Income tax expense (benefit) 10,477,746 (4,038,357) 397,360 ------------ ----------- ----------- Net income (loss) $ 27,547,533 $26,623,024 $(2,568,020) ============ =========== ===========
See notes to consolidated financial statements. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995 ------------ ------------ ------------ Common stock, balance at beginning and end of year $ 2,000,000 $ 2,000,000 $ 2,000,000 ------------ ------------ ------------ Additional paid-in capital: Balance at beginning of year 122,250,117 81,874,666 71,623,932 Additional contributions 29,277,112 40,375,451 10,250,734 ------------ ------------ ------------ Balance at end of year 151,527,229 122,250,117 81,874,666 ------------ ------------ ------------ Unrealized investment gains and losses: Balance at beginning of year (319,631) 111,359 (41,655) Change in unrealized investment gains and losses, net 1,273,700 (430,990) 153,014 ------------ ------------ ------------ Balance at end of year 954,069 (319,631) 111,359 ------------ ------------ ------------ Foreign currency translation: Balance at beginning of year (263,706) (328,252) - Change in foreign currency translation, net (22,332) 64,546 (328,252) ------------ ------------ ------------ Balance at end of year (286,038) (263,706) (328,252) ------------ ------------ ------------ Retained earnings (deficit): Balance at beginning of year 2,678,251 (23,944,773) (21,376,753) Net income (loss) 27,547,533 26,623,024 (2,568,020) ------------ ------------ ------------ Balance at end of year 30,225,784 2,678,251 (23,944,773) ------------ ------------ ------------ Total Shareholder's Equity $184,421,044 $126,345,031 $ 59,713,000 ============ ============ ============
See notes to consolidated financial statements. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995 --------------- --------------- -------------- CASH FLOW FROM OPERATING ACTIVITIES: Net income/(loss) $ 27,547,533 26,623,024 (2,568,020) Adjustments to reconcile net income/(loss) to net cash used in operating activities: Increase/(decrease) in policy reserves 3,176,250 1,852,259 (4,667,765) Amortization of bond discount 72,986 27,340 23,449 Amortization of insurance licenses 150,000 150,000 150,000 Change in receivable from/payable to affiliates (1,320,804) 540,484 (347,884) Change in income tax receivable/payable (2,171,644) 1,688,001 (600,849) Increase in other assets (603,265) (661,084) (372,120) Increase in accrued investment income (483,125) (1,764,472) (20,420) Increase in reinsurance receivable (952,403) (179,776) (1,988,042) Increase in deferred acquisition costs, net (189,411,077) (168,418,535) (96,212,774) Increase in income tax receivable - deferred (9,630,603) (16,903,477) - Increase in accounts payable and accrued expenses 5,718,725 32,322,727 945,483 Increase in drafts outstanding 6,244,987 13,032,719 - Change in foreign currency translation, net (34,356) (77,450) (328,252) Realized gain on sale of investments (87,103) (134,463) (36,774) --------------- --------------- -------------- Net cash used in operating activities (161,783,899) (111,902,703) (106,023,968) --------------- --------------- -------------- CASH FLOW FROM INVESTING ACTIVITIES: Purchase of fixed maturity investments (28,905,493) (96,812,903) (614,289) Proceeds from sale and maturity of fixed maturity investments 10,755,550 8,947,390 100,000 Purchase of shares in mutual funds (5,595,342) (2,160,347) (1,566,194) Proceeds from sale of shares in mutual funds 1,415,576 1,273,640 867,744 Increase in policy loans (527,785) (104,427) (37,807) Change in investments of separate account assets (3,691,031,470) (2,789,361,685) (1,609,415,439) --------------- --------------- --------------- Net cash used in investing activities (3,713,888,964) (2,878,218,332) (1,610,665,985) --------------- --------------- --------------- CASH FLOW FROM FINANCING ACTIVITIES: Capital contributions from parent 29,277,112 40,375,451 10,250,734 Surplus notes - 110,000,000 34,000,000 Increase in future fees payable to parent 185,921,882 47,111,936 - Increase/(decrease) in payable to reinsurer (874,035) 14,004,792 24,890,064 Proceeds from annuity sales 3,697,989,977 2,795,114,603 1,628,486,076 --------------- --------------- --------------- Net cash provided by financing activities 3,912,314,936 3,006,606,782 1,697,626,874 --------------- --------------- --------------- Net increase/(decrease) in cash and cash equivalents 36,642,073 16,485,747 (19,063,079) --------------- --------------- --------------- Cash and cash equivalents at beginning of year 45,332,131 28,846,384 47,909,463 --------------- --------------- --------------- Cash and cash equivalents at end of year $ 81,974,204 45,332,131 28,846,384 =============== =============== =============== SUPPLEMENTAL CASH FLOW DISCLOSURE: Income taxes paid $ 22,307,992 11,177,120 995,496 =============== =============== =============== Interest paid $ 16,915,835 7,094,767 540,319 =============== =============== ===============
See notes to consolidated financial statements. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Consolidated Financial Statements December 31, 1997 1. ORGANIZATION AND OPERATION American Skandia Life Assurance Corporation (the "Company") is a wholly-owned subsidiary of American Skandia Investment Holding Corporation (the "Parent"); whose ultimate parent is Skandia Insurance Company Ltd., a Swedish corporation. The Company develops annuity products and issues its products through its affiliated broker/dealer company, American Skandia Marketing, Incorporated. The Company currently issues variable, fixed, market value adjusted and immediate annuities. The Company has 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 $1,509,146 as of December 31, 1997. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Basis of Reporting The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles. Intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications have been made to prior year amounts to conform with the current year presentation. B. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") 130, "Reporting Comprehensive Income", which is effective for fiscal years beginning after December 15, 1997. SFAS 130 sets standards for the reporting and display of comprehensive income and its components in financial statements. Application of the new rules will not impact the Company's financial position or net income. The Company expects to adopt this pronouncement in the first quarter of 1998, which will include the presentation of comprehensive income for prior periods presented for comparative purposes, as required by SFAS 130. The primary element of comprehensive income applicable to the Company is changes in unrealized gains and losses on securities classified as available for sale. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Consolidated Financial Statements (continued) C. Investments The Company has classified its fixed maturity investments as either held-to-maturity or available-for-sale. Investments classified as held-to-maturity are investments that the Company has the ability and intent to hold to maturity. Such investments are carried at amortized cost. Those investments which are classified as available-for-sale are carried at fair value and changes in unrealized gains and losses are reported as a component of shareholder's equity. The Company has classified its mutual fund investments as available-for-sale. Such investments are carried at fair value and changes in unrealized gains and losses are reported as a component of shareholder's equity. Policy loans are carried at their unpaid principal balances. Realized gains and losses on disposal of investments are determined by the specific identification method and are included in revenues. D. Cash Equivalents The Company considers all highly liquid time deposits, commercial paper and money market mutual funds purchased with a maturity of three months or less to be cash equivalents. E. State Insurance Licenses Licenses to do business in all states have been capitalized and reflected at the purchase price of $6 million less accumulated amortization. The cost of the licenses is being amortized over 40 years. F. Fixed Assets Fixed assets consisting of furniture, equipment and leasehold improvements are carried at cost and depreciated on a straight line basis over a period of three to five years. Accumulated depreciation amounted to $95,823 and $32,641 at December 31, 1997 and 1996, respectively. Depreciation expense for the years ended December 31, 1997 and 1996 was $63,182 and $28,892, respectively. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Consolidated Financial Statements (continued) G. Recognition of Revenue and Contract Benefits Annuity contracts without significant mortality risk, as defined by SFAS 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts", are classified as investment contracts (variable, market value adjusted and certain immediate annuities) and those with mortality risk (immediate annuities) as insurance products. The policy for revenue and contract benefit recognition is described below. Revenues for variable annuity contracts consist of charges against contractowner account values for mortality and expense risks, administration fees, surrender charges and an annual maintenance fee per contract. Benefit reserves for variable annuity contracts represent the account value of the contracts and are included in the separate account liabilities. Revenues for market value adjusted annuity contracts consist of separate account investment income reduced by benefit payments and changes in reserves in support of contractowner obligations, all of which is included in return credited to contractowners. Benefit reserves for these contracts represent the account value of the contracts, and are included in the general account liability for future contractowner benefits to the extent in excess of the separate account liabilities. Revenues for immediate annuity contracts without life contingencies consist of net investment income. Revenues for 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 the Society of Actuaries 1983 Table-a with assumed interest rates that vary by issue year. Assumed interest rates ranged from 6.5% to 8.25% at both December 31, 1997 and 1996. Annuity sales were $3,697,990,000, $2,795,114,000 and $1,628,486,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Annuity contract assets under management were $12,119,191,000, $7,764,891,000 and $4,704,044,000 at December 31, 1997, 1996 and 1995, respectively. H. Deferred Acquisition Costs The costs of acquiring new business, which vary with and are primarily related to the production of new business, are being deferred. These costs include commissions, cost of contract issuance, and certain selling expenses that vary with production. These costs are being amortized generally in proportion to expected gross profits from surrender charges, policy and asset based fees and mortality and expense margins. This amortization is adjusted retrospectively and prospectively when estimates of current and future gross profits to be realized from a group of products are revised. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Consolidated Financial Statements (continued) Details of the deferred acquisition costs and related amortization for the years ended December 31, are as follows:
1997 1996 1995 ---- ---- ---- Balance at beginning of year $438,640,918 $270,222,383 $174,009,609 Acquisition costs deferred during the year 262,257,543 190,995,588 106,063,698 Acquisition costs amortized during the year 72,846,466 22,577,053 9,850,924 ------------ ------------ ------------ Balance at end of year $628,051,995 $438,640,918 $270,222,383 ============ ============ ============
I. Separate Accounts Assets and liabilities in Separate Accounts are shown as separate captions in the consolidated statements of financial condition. Separate Account assets consist principally of long term bonds, investments in mutual funds and short-term securities, all of which are carried at fair value. Included in Separate Account liabilities are $773,066,633 and $644,233,883 at December 31, 1997 and 1996, respectively, relating to annuity contracts for which the contractholder is guaranteed a fixed rate of return. Separate Account assets of $773,066,633 and $644,233,883 at December 31, 1997 and 1996, respectively, consisting of long term bonds, short term securities, transfers due from general account and cash are held in support of these annuity contracts, pursuant to state regulation. J. 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 investments in mutual funds are based on quoted market prices. The carrying value of cash and cash equivalents approximates fair value due to the short-term nature of these investments. Fair values of certain financial instruments, such as future fees payable to the parent and surplus notes are not readily determinable and are excluded from fair value disclosure requirements. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Consolidated Financial Statements (continued) K. Income Taxes The Company is included in the consolidated federal income tax return of Skandia U.S. Holding Corporation and its subsidiaries. In accordance with the tax sharing agreement, the federal and state income tax provision is computed on a separate return basis, as adjusted for consolidated items, such as net operating loss carryforwards. Income taxes are provided in accordance with the SFAS 109, "Accounting for Income Taxes", which requires the asset and liability method of accounting for deferred taxes. The object of this method is to recognize an asset and liability for the expected future tax effects due to temporary differences between the financial reporting and the tax basis of assets and liabilities, based on enacted tax rates and other provisions of the tax law. L. Translation of Foreign Currency The financial position and results of operations of the Company's Mexican subsidiary are measured using local currency as the functional currency. Assets and liabilities of the subsidiary are translated at the exchange rate in effect at each year-end. Statements of operations and 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 included in shareholder's equity. M. Estimates The preparation of financial statements in conformity with generally accepted accounting principles 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 policy lapses, investment return and maintenance expenses. Actual results could differ from those estimates. N. 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 also reinsures certain mortality risks. These risks result from the guaranteed minimum death benefit feature in the variable annuity products. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Consolidated Financial Statements (continued) 3. INVESTMENTS The amortized cost, gross unrealized gains (losses) and estimated fair value of available-for-sale and held-to-maturity fixed maturities and investments in mutual funds as of December 31, 1997 and 1996 are shown below. All securities held at December 31, 1997 are publicly traded. Investments in fixed maturities as of December 31, 1997 consisted of the following: Held-to-Maturity ----------------
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ----- U.S. Government Obligations $3,789,498 $71,197 $ 8,517 $3,852,178 Obligations of State and Political Subdivisions 50,000 - - 50,000 Corporate Securities 5,527,173 1,949 19,487 5,509,635 ----------- ------- -------- ----------- Totals $9,366,671 $73,146 $28,004 $9,411,813 ========== ======= ======= ========== Available-for-Sale ------------------ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ----- U.S. Government Obligations $ 14,999,291 $ 201,664 - $15,200,955 Obligations of State and Political Subdivisions 202,224 318 - 202,542 Corporate Securities 91,469,384 1,505,656 54,869 92,920,171 -------------- ----------- -------- ------------ Totals $106,670,899 $1,707,638 $54,869 $108,323,668 ============ ========== ======= ============
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Consolidated Financial Statements (continued) The amortized cost and fair value of fixed maturities, by contractual maturity, at December 31, 1997 are shown below.
Held-to-Maturity Available-for-Sale ---------------- ------------------ Amortized Fair Amortized Fair Cost Value Cost Value --------- ----- --------- ----- Due in one year or less $1,049,977 $1,050,001 $ 2,990,584 $ 2,992,050 Due after one through five years 8,062,630 8,105,822 26,857,218 27,121,041 Due after five through ten years 254,064 255,990 76,823,097 78,210,577 ---------- ---------- ------------ ------------ Total $9,366,671 $9,411,813 $106,670,899 $108,323,668 ========== ========== ============ ============
Investments in fixed maturities as of December 31, 1996 consisted of the following:
Held-to-Maturity ---------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ----- U.S. Government Obligations $ 4,299,803 $88,268 $22,937 $ 4,365,134 Obligations of State and Political Subdivisions 250,119 229 - 250,348 Corporate Securities 5,540,447 - 62,660 5,477,787 ----------- ---------- -------- ----------- Totals $10,090,369 $88,497 $85,597 $10,093,269 =========== ======= ======= ===========
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Consolidated Financial Statements (continued)
Available for Sale ------------------ Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ----- U.S. Government Obligations $14,508,780 - $ 79,745 $14,429,035 Obligations of State and Political Subdivisions 202,516 26 - 202,542 Other Government Obligations 5,047,790 - 7,440 5,040,350 Corporate Securities 68,101,413 83,312 486,928 67,697,797 ----------- ------- -------- ----------- Totals $87,860,499 $83,338 $574,113 $87,369,724 =========== ======= ======== ===========
Proceeds from sales of fixed maturities during 1997, 1996 and 1995 were $5,055,550, $8,732,390 and $0, respectively. Proceeds from maturities during 1997, 1996 and 1995 were $5,700,000, $215,000 and $100,000, respectively. The cost, gross unrealized gains (losses) and fair value of investments in mutual funds at December 31, 1997 and 1996 are shown below:
Gross Gross Unrealized Unrealized Fair Cost Gains Losses Value ---- ---------- ---------- ----- 1997 $6,895,821 $43,506 $228,476 $6,710,851 ========== ======= ======== ========== 1996 $2,638,695 $59,278 $ 60,242 $2,637,731 ========== ======= ========= ==========
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Consolidated Financial Statements (continued) Net realized investment gains (losses) were as follows for the years ended December 31:
1997 1996 1995 ---- ---- ---- Fixed Maturities: Gross gains $ 9,800 $ - $ - Gross losses - - - Investment in Mutual Funds: Gross gains 115,824 139,814 65,236 Gross losses (38,521) (5,351) (28,462) ---------- ----------- -------- Totals $ 87,103 $134,463 $36,774 ========= ======== =======
4. NET INVESTMENT INCOME The sources of net investment income for the years ended December 31, 1997, 1996 and 1995 were as follows:
1997 1996 1995 ---- ---- ---- Fixed maturities $6,616,560 $ 836,591 $ 629,743 Cash and cash equivalents 1,153,790 684,653 986,932 Investment in mutual funds 553,864 143,737 59,895 Policy loans 28,243 5,274 4,025 ---------- ---------- ---------- Total investment income 8,352,457 1,670,255 1,680,595 Investment expenses 171,384 84,436 79,921 ---------- ---------- ---------- Net investment income $8,181,073 $1,585,819 $1,600,674 ========== ========== ==========
5. INCOME TAXES The significant components of income tax expense (benefit) are as follows:
1997 1996 1995 ---- ---- ---- Current tax expense $20,108,348 $12,865,120 $397,360 Deferred tax benefit (9,630,602) (16,903,477) - ----------- ---------- -------- Total income tax expense (benefit) $10,477,746 $(4,038,357) $397,360 =========== ============ ========
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Consolidated Financial Statements (continued) The tax effects of significant items comprising the Company's deferred tax balance as of December 31, 1997 and 1996, are as follows:
1997 1996 ---- ---- Deferred Tax (Liabilities): Deferred acquisition costs ($159,765,795) ($103,072,477) Payable to reinsurer (25,369,078) (23,025,326) Policy fees (656,311) (491,640) Unrealized investment gains and losses (513,731) 172,109 ------------- -------------- Total (186,304,915) (126,417,334) ------------ ------------ Deferred Tax Assets: Net separate account liabilities 175,872,109 121,092,798 Reserve for future contractowner benefits 15,121,555 12,686,078 Other reserve differences 10,534,160 4,527,886 Deferred compensation 7,186,789 4,392,526 Surplus notes interest 2,728,676 548,730 Foreign exchange translation 154,020 141,996 Other 881,975 244,902 ------------- ------------- Total 212,479,284 143,634,916 ------------ ------------ Net deferred tax balance $ 26,174,369 $ 17,217,582 ============ ============
Management believes that based on the taxable income produced in the current year and the continued growth in annuity products, the Company will produce sufficient taxable income in the future to realize its deferred tax asset. As such, the Company released the deferred tax valuation allowance of $9,324,853 in 1996. The income tax 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:
1997 1996 1995 ---- ---- ---- Income (loss) before taxes $38,025,279 $22,584,667 ($2,170,660) Income tax rate 35% 35% 35% ----------- ----------- ----------- Tax expense at federal statutory income tax rate 13,308,848 7,904,633 (759,731) Tax effect of: Change in valuation allowance - (9,324,853) 1,680,339 Dividend received deduction (4,585,000) (2,266,051) (477,139) Other 866,973 (707,685) (48,821) State income taxes 886,925 355,599 2,712 ----------- ----------- ----------- Income tax expense (benefit) $10,477,746 ($ 4,038,357) $ 397,360 =========== =========== ===========
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Consolidated Financial Statements (continued) 6. RECEIVABLE FROM/PAYABLE TO AFFILIATES Certain operating costs (including personnel, rental of office space, furniture, and equipment) have been charged to the Company at cost by American Skandia Information Services and Technology Corporation, an affiliated company; and likewise, the Company has charged operating costs to American Skandia Investment Services, Incorporated, an affiliated company. The total cost to the Company for these items was $5,572,404, $11,581,114 and $12,687,337 for the years ended December 31, 1997, 1996 and 1995, respectively. Income received for these items was $3,224,645, $1,148,364 and $396,573 for the years ended December 31, 1997, 1996 and 1995, respectively. Amounts receivable from affiliates under these arrangements were $548,887 and $548,792 as of December 31, 1997 and 1996, respectively. Amounts payable to affiliates under these arrangements were $263,742 and $619,089 as of December 31, 1997 and 1996, respectively. 7. 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 from January 1, 1994 through June 30, 1996 (Transaction 1996-1). In addition, the Company entered into the following similar transactions during 1997: Closing Effective Contract Issue Transaction Date Date Period ----------- ------- --------- -------------- 1997-1 7/23/97 6/1/97 3/1/96 - 4/30/97 1997-2 12/30/97 12/1/97 5/1/95 - 12/31/96 1997-3 12/30/97 12/1/97 5/1/96 - 10/31/97 In connection with these transactions, the Parent, through a trust, 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 Agreements, the rights sold provide for the Parent to receive 80% (100% for Transaction 1997-3) 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 (6.0 to 8.0 years). The Company did not sell the right to receive future fees and charges after the expiration of the surrender charge period. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Consolidated Financial Statements (continued) The proceeds from the sales have been recorded as a liability and are being amortized over the remaining surrender charge period of the designated contracts using the interest method. The present value of the transactions (discounted at 7.5%) as of the respective Effective Date was as follows: Present Transaction Value ----------- ------- 1996-1 $ 50,221,438 1997-1 58,766,633 1997-2 77,551,736 1997-3 58,193,264 Payments representing fees and charges realized during the period January 1, 1997 through December 31, 1997 in the aggregate amount of $22,250,158, were made by the Company to the Parent. Interest expense of $6,842,469 has been included in the statement of operations. Expected payments of future fees payable to Parent are as follows: Year Ending December 31, Amount ------------ ------ 1998 $ 39,637,610 1999 41,845,736 2000 43,500,530 2001 40,738,800 2002 34,533,624 2003 22,835,020 2004 9,490,399 2005 452,099 -------------- Total $ 233,033,818 ============== 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. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Consolidated Financial Statements (continued) 8. LEASES The Company leases office space under a lease agreement established in 1989 with American Skandia Information Services and Technology Corporation. The lease expense for 1997, 1996 and 1995 was $2,427,502, $1,583,391 and $1,218,806, respectively. Future minimum lease payments per year and in aggregate as of December 31, 1997 are as follows: 1998 $ 2,371,509 1999 2,595,272 2000 2,753,324 2001 2,753,324 2002 2,753,324 2003 and thereafter 21,465,933 ------------ Total $34,692,686 9. RESTRICTED ASSETS In order to comply with certain state insurance departments' requirements, the Company maintains cash, bonds and notes on deposit with various states. The carrying value of these deposits amounted to $3,756,572 and $3,766,564 as of December 31, 1997, and 1996, respectively. These deposits are required to be maintained for the protection of contractowners within the individual states. 10. RETAINED EARNINGS AND DIVIDEND RESTRICTIONS Statutory basis shareholder's equity was $294,585,500, $275,835,076 and $132,493,899 at December 31, 1997, 1996 and 1995, respectively. The statutory basis net loss was $8,970,459, $5,405,179 and $7,183,003 for the years ended December 31, 1997, 1996 and 1995, respectively. Under state insurance laws, the maximum amount of dividends that can be paid to shareholders without prior approval of the state insurance departments is subject to restrictions relating to statutory surplus and net gain from operations. At December 31, 1997, no amounts may be distributed without prior approval. 11. EMPLOYEE BENEFITS In 1989, the Company established a 401(k) plan for which substantially all employees are eligible. Under this plan, the Company contributes 3% of salary for all participating employees and matches employee contributions at a 50% level up to an additional 3% Company contribution. Company contributions to this plan on behalf of the participants were $1,220,214, $850,111 and $627,161 for the years ended December 31, 1997, 1996 and 1995, respectively. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Consolidated Financial Statements (continued) The Company and an affiliate cooperatively have a long-term incentive plan under which units are awarded to executive officers and other personnel. The program consists of multiple plans. A new plan is 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 plan. The accrued liability representing the value of these units is $15,720,067 and $9,212,369 as of December 31, 1997 and 1996, respectively. Payments under this plan were $1,118,803, $601,603 and $0 for the years ended December 31, 1997, 1996, and 1995, respectively. In 1994, the Company established a deferred compensation plan which is available to the internal field marketing staff and certain officers. Company contributions to this plan on behalf of the participants were $269,616 in 1997, $244,601 in 1996 and $139,209 in 1995. 12. REINSURANCE The effect of the reinsurance agreements on the Company's operations was to reduce annuity charges and fee income, death benefit expense and policy reserves. The effect of reinsurance for the years ended December 31, 1997, 1996 and 1995 are as follows:
1997 Annuity Change in Annuity Return Credited Charges and Fees Policy Reserves to Contractowners ---------------- ----------------- ----------------- Gross $144,417,045 $955,677 ($1,971,959) Ceded 23,259,199 918,407 46,676 ------------ --------- ---------- Net $121,157,846 $ 37,270 ($2,018,635) ============ ========= ========== 1996 Annuity Change in Annuity Return Credited Charges and Fees Policy Reserves to Contractowners ---------------- ----------------- ----------------- Gross $87,369,693 $814,306 $779,070 Ceded 17,590,171 179,766 106,435 ----------- -------- -------- Net $69,779,522 $634,540 $672,635 =========== ======== ======== 1995 Annuity Change in Annuity Return Credited Charges and Fees Policy Reserves to Contractowners ---------------- ----------------- ----------------- Gross $50,334,280 ($4,790,714) $10,945,831 Ceded 11,496,922 1,988,042 332,973 ----------- ---------- ----------- Net $38,837,358 ($6,778,756) $10,612,858 =========== ========== ===========
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 agreements. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Consolidated Financial Statements (continued) 13. SURPLUS NOTES The Company has issued surplus notes to its Parent in exchange for cash. Surplus notes outstanding as of December 31, 1997, 1996 and 1995 were as follows:
Interest for the Years Ended December 31, ------------------------ Interest Issue Date Amount Rate 1997 1996 1995 ---------- ------ ---- ---- ---- ---- December 29, 1993 $ 20,000,000 6.84% $ 1,387,000 $ 1,390,800 $1,387,000 February 18, 1994 10,000,000 7.28% 738,111 740,133 738,111 March 28, 1994 10,000,000 7.90% 800,972 803,167 800,972 September 30, 1994 15,000,000 9.13% 1,388,521 1,392,325 1,388,521 December 28, 1994 14,000,000 9.78% 1,388,217 1,392,020 1,392,008 December 19, 1995 10,000,000 7.52% 762,444 764,533 27,156 December 20, 1995 15,000,000 7.49% 1,139,104 1,142,225 37,450 December 22, 1995 9,000,000 7.47% 681,638 683,505 18,675 June 28, 1996 40,000,000 8.41% 3,410,722 1,747,411 - December 30, 1996 70,000,000 8.03% 5,699,069 31,228 - ------------ ----------- ------------ ---------- Total $213,000,000 $17,395,798 $10,087,347 $5,789,893 ============ =========== =========== ==========
All surplus notes mature 7 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, 1997 and 1996, $7,796,218 and $1,567,800, respectively, of accrued interest on surplus notes was not approved for payment under these criteria. 14. SHORT-TERM BORROWING The Company has a $10,000,000 loan from the parent which matures on March 10, 1998 and bears interest at 6.39%. The total interest expense to the Company was $641,532, $642,886 and $709,521 and for the years ended December 31, 1997, 1996 and 1995, respectively, of which $200,575 and $206,361 was payable as of December 31, 1997 and 1996, respectively. 15. CONTRACT WITHDRAWAL PROVISIONS Approximately 98% of the Company's separate account liabilities are subject to discretionary withdrawal with market value adjustment by contractholders. Separate account assets which are carried at market value are adequate to pay such withdrawals which are generally subject to surrender charges ranging from 8.5% to 1% for contracts held less than 8 years. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Consolidated Financial Statements (continued) 16. QUARTERLY FINANCIAL DATA (UNAUDITED) The following table summarizes information with respect to the operations of the Company on a quarterly basis:
Three Months Ended ------------------ 1997 March 31 June 30 September 30 December 31 ---- -------- ------- ------------ ----------- Premiums and other insurance revenues $30,185,820 $34,055,549 $41,102,381 $44,402,368 Net investment income 1,368,683 2,626,776 2,031,187 2,154,427 Net realized capital gains 20,604 43,460 20,553 2,486 ----------- ----------- ----------- ----------- Total revenues $31,575,107 $36,725,785 $43,154,121 $46,559,281 =========== =========== =========== =========== Benefits and expenses $18,319,281 $30,465,338 $31,179,403 $40,024,993 =========== =========== =========== =========== Net income $ 8,995,975 $ 3,646,787 $ 8,621,412 $ 6,283,359 ============ ============ ============ ============ Three Months Ended ------------------ 1996 March 31 June 30 September 30 December 31 ---- -------- ------- ------------ ----------- Premiums and other insurance revenues $16,605,765 $20,452,733 $22,366,166 $26,933,702 Net investment income 455,022 282,926 270,092 577,779 Net realized capital gains 92,072 13,106 5,606 23,679 ----------- ----------- ----------- ----------- Total revenues $17,152,859 $20,748,765 $22,641,864 $27,535,160 =========== =========== =========== =========== Benefits and expenses $12,725,411 $ 9,429,735 $17,007,137 $25,191,857 =========== ============ =========== =========== Net income $ 2,658,941 $ 7,695,490 $ 2,538,513 $14,470,976 ============ ============ ============ =========== Three Months Ended ------------------ 1995 March 31 June 30 September 30 December 31 ---- -------- ------- ------------ ----------- Premiums and other insurance revenues $ 8,891,903 $10,066,478 $11,960,530 $14,189,048 Net investment income 551,690 434,273 293,335 321,376 Net realized capital gains (losses) (16,082) (370) 44,644 8,582 ------------ ----------- ----------- ----------- Total revenues $ 9,427,511 $10,500,381 $12,298,509 $14,519,006 ============ =========== =========== =========== Benefits and expenses $11,438,798 $ 9,968,595 $11,600,587 $15,908,087 =========== ============ =========== =========== Net income (loss) ($ 2,026,688) $ 531,486 $ 678,312 ($ 1,751,130) ============= ============= ============= ============
As described in Note 5, the valuation allowance relating to deferred income taxes was released during the three months ended December 31, 1996. PART III Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None Item 10. Directors and Executive Officers of the Registrant Information contained in the "Executive Officers and Directors" section of the prospectus of the Company's registration statement on Form S-1, (Reg. #333-00941) is incorporated herein by reference. Item 11. Executive Compensation Summary Compensation Table: The summary table below summarizes the compensation payable to the Chief Executive Officer and to the most highly compensated of our executive officers whose compensation exceeded $100,000 in 1997.
Name and Annual LTIP Principal Position Year Salary Payouts ------------------ ---- ------ ------- Jan R. Carendi 1997 $609,168 $171,803 Chief Executive Officer 1996 505,694 114,993 1995 200,315 Gordon C. Boronow 1997 $260,938 $174,808 President & Deputy Chief 1996 179,426 54,000 Executive Officer 1995 157,620 Lincoln R. Collins 1997 $254,389 $ 57,756 Executive Vice President & 1996 208,346 19,099 Chief Operating Officer 1995 156,550 Thomas M. Mazzaferro 1997 $216,707 $ 78,134 Executive Vice President & 1996 139,830 45,000 Chief Financial Officer 1995 122,503 Nathan David Kuperstock 1997 $215,219 $ 61,989 Vice President 1996 145,283 27,148 Product Management 1995 133,120
Long Term Incentive Plans (LTIP) - Awards in the last fiscal year: The following table provides information regarding our long-term incentive plan. Units are awarded to executive officers and other personnel. The table shows units awarded to our Chief Executive Officer and the most highly compensated of our executive officers whose compensation exceeded $100,000 in the fiscal year immediately preceding the date of this submission. 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. A new plan may be instituted each year. 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. Changes in the value of units reflect changes in the "embedded value" of the Company. "Embedded value" is the net asset value of the Company (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 its existing contracts. 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 target percentages may differ between each plan. Any amounts available under a plan are paid out in the fifth through eighth years of a plan. Payments will be postponed if the payment would exceed 20% of any profit (as determined under state insurance law) earned by the Company and an affiliate in the prior fiscal year before tax or 30% of the individual's current year salary. The amount to be received by a participant at the time any payment is due will be the then current number of units payable multiplied by the then current value of such units.
Number Period until Estimated Future Payouts Name of Units Payout Threshold Target Maximum ---- -------- ------ --------- ------ ------- Jan R. Carendi 167,500 Various $ 1,946,360 Gordon C. Boronow 167,500 Various $ 1,915,195 Lincoln R. Collins 61,750 Various $ 690,523 Thomas M. Mazzaferro 115,000 Various $ 1,187,628 Nathan David Kuperstock 45,000 Various $ 562,471
The following directors' compensation is shown below in 1997: Jan R. Carendi 0 Gordon C. Boronow 0 Nancy F. Brunetti 0 Malcolm M. Campbell 0 Lincoln R. Collins 0 C. Henrik G. Danckwardt 0 Wade A. Dokken 0 Thomas M. Mazzaferro 0 Gunnar J. Moberg 0 Anders O. Soderstrom 0 Amanda C. Sutyak 0 C. Ake Svensson 0 Bayard F. Tracy 0 Item 12. Security Ownership of Certain Beneficial Owners and Management None Item 13. Certain Relationships and Related Transactions None PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Financial Information (1) Financial Statements See Index to Financial Statements of Page 6 (2) Financial Statement Schedules None (b) Exhibits (2) Plans of acquisition, reorganization, None Arrangement, liquidation or succession (3) Articles of Incorporation and By-Laws Incorporated by reference to the Company's Form N-4 (Reg. #33-19363) (4) Instruments defining the right of security holders including indentures Incorporated by reference to the Company's Reg. 333-08853, 33-59993, 33-86866, 33-87010, 33-62793, 33-62933, 333-26685, 33-88362 (9) Voting Trust Agreement None (10) Material Contracts Incorporated by reference to the Company's Forms S-1 (Reg. #33-26122 and #33-86918) (11) Statement of Computation of per share earnings Not required to be filed (12) Statements of Computation of Ratios Not required to be filed (13) Annual Report to security holders None (18) Letter re change in accounting principles None (19) Previously unfiled documents None (21) Subsidiaries of the registrant Incorporated by reference to Part II of Reg 333-26695 (22) Published report regarding matters submitted to vote of security holders None (23) Consents of experts and counsel Not required to be filed (24) Powers of Attorney Incorporated by reference to the Company's Forms S-2 (Reg. 333-25733) (99) Additional exhibits None 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 17, 1998. 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 17, 1998. *Jan R. Carendi Jan R. Carendi Chief Executive Officer, Chairman of the Board and Director Board of Directors *Gordon C. Boronow *Nancy F. Brunetti *Jan R. Carendi *Malcolm M. Campbell *Lincoln R. Collins *C. Henrik G. Danckwardt *Wade A. Dokken *Thomas M. Mazzaferro *Gunnar J. Moberg *Anders O. Soderstrom *Amanda C. Sutyak *C. Ake Svensson *Bayard F. Tracy By: /s/M. Priscilla Pannell ----------------------- M. Priscilla Pannell Corporate Secretary *Pursuant to Powers of Attorney filed with the Registration Statement. EX-27 2 ASLAC FDS FOR YEAR ENDED DECEMBER 31, 1997
7 881453 ASLAC1296 1 U.S Dollars 12-MOS DEC-31-1997 JAN-1-1997 DEC-31-1997 1 108,323,668 117,690,339 117,735,481 6,710,851 0 0 125,088,457 81,974,204 3,120,221 628,051,995 12,972,416,108 67,619,442 0 0 0 213,000,000 0 0 2,000,000 182,421,044 12,972,416,108 920,042 8,181,073 87,103 148,826,076 4,596,607 52,524,520 37,972,432 38,025,279 10,477,746 0 0 0 0 27,547,533 0 0 0 0 0 0 0 0 0 Included in Total Assets are Assets Held in Separate Accounts of $12,095,163. Included in Total Liabilities and Equity are Liabilities Related to Separate Accounts of $12,095,163,569. Other income includes annuity charges and fees of $121,157,846 and fee income of $27,587,231.
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