-----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, SnuBxqTZrt5lt23Mu4Hssso6iYAwKmQkwzTvHNMnNF4EBgQd9vhY0rZG9AnPTvQn 576Q94K4WR+x1UJeGl4Gkw== 0000881453-98-000165.txt : 19981116 0000881453-98-000165.hdr.sgml : 19981116 ACCESSION NUMBER: 0000881453-98-000165 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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: SEC FILE NUMBER: 033-44202 FILM NUMBER: 98748166 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 SEPTEMBER 30, 1998 QUARTERLY SUBMISSION 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 September 30, 1998 Commission file numbers: 33-62791, 33-62953, 33-88360, 33-89676, 33-89678, 33-91400, 333-00995, 333-02867, 333-24989, 333-25733, 333-25761 and 333-26695. American Skandia Life Assurance Corporation Incorporated in the State of Connecticut 06-1241288 (Federal 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 November 6, 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 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 - September 30, 1998 (unaudited) and December 31, 1997 3 Consolidated Statements of Operations (unaudited) - Nine months ended September 30, 1998 and September 30, 1997 4 Consolidated Statements of Operations (unaudited) - Three months ended September 30, 1998 and September 30, 1997 5 Consolidated Statements of Shareholder's Equity Nine months ended September 30, 1998 (unaudited) and year ended December 31, 1997 6 Consolidated Statements of Cash Flows (unaudited) Nine months ended September 30, 1998 and September 30, 1997 7 Notes to Unaudited Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Nine months ended September 30, 1998 15 PART II. OTHER INFORMATION: Item 4. Action Taken by Shareholder 20 Item 6. Exhibits and Reports on Form 8-K 20 Signature 21 Exhibit Index 23 AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, DECEMBER 31, 1998 1997 ------------------ --------------------- (unaudited) ASSETS - ------ Investments: Fixed maturities - at amortized cost $ 8,296,514 $ 9,366,671 Fixed maturities - at fair value 132,385,354 108,323,668 Investment in mutual funds - at fair value 6,872,319 6,710,851 Policy loans 557,433 687,267 ------------------ --------------------- Total investments 148,111,620 125,088,457 Cash and cash equivalents 22,687,636 81,974,204 Accrued investment income 2,296,345 2,441,671 Fixed assets 310,742 356,153 Deferred acquisition costs 692,244,653 546,703,051 Reinsurance receivable 12,125,256 6,342,938 Receivable from affiliates 1,379,884 1,910,895 Income tax receivable - current 10,191,421 1,047,493 Income tax receivable - deferred 22,449,368 26,174,369 State insurance licenses 4,450,000 4,562,500 Other assets 2,807,528 2,524,581 Separate account assets 14,698,628,982 12,095,163,569 ------------------ --------------------- Total Assets $ 15,617,683,435 $ 12,894,289,881 ================== ===================== LIABILITIES AND SHAREHOLDER'S EQUITY - ------------------------------------ LIABILITIES: Reserve for future contractowner benefits $ 39,363,630 $ 43,204,443 Policy reserves 31,607,153 24,414,999 Drafts outstanding 19,767,193 19,277,706 Accounts payable and accrued expenses 86,062,118 71,190,019 Payable to affiliates 20,121,151 584,283 Future fees payable to parent 271,655,055 233,033,818 Short-term borrowing 10,000,000 10,000,000 Surplus notes 213,000,000 213,000,000 Separate account liabilities 14,698,628,982 12,095,163,569 ------------------ --------------------- Total Liabilities 15,390,205,282 12,709,868,837 ------------------ --------------------- SHAREHOLDER'S EQUITY: Common stock, $80 par, 25,000 shares authorized, issued and outstanding 2,000,000 2,000,000 Additional paid-in capital 157,289,714 151,527,229 Retained earnings 64,446,673 30,225,784 Accumulated other comprehensive income 3,741,766 668,031 ------------------ --------------------- Total Shareholder's Equity 227,478,153 184,421,044 ------------------ --------------------- Total Liabilities and Shareholder's Equity $ 15,617,683,435 $ 12,894,289,881 ================== =====================
See notes to unaudited consolidated financial statements. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
NINE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 ----------------------- ----------------------- REVENUES - -------- Annuity charges and fees $ 133,729,829 $ 85,051,449 Fee income 36,913,358 19,309,148 Net investment income 8,140,502 6,026,646 Annuity premium income 80,801 795,042 Net realized capital gains 123,610 84,617 Other 260,427 188,111 ----------------------- ----------------------- Total Revenues 179,248,527 111,455,013 ----------------------- ----------------------- BENEFITS AND EXPENSES - --------------------- Benefits: Annuity benefits 907,877 1,464,570 Change in annuity policy reserves 593,800 (280,205) Cost of minimum death benefit reinsurance 3,645,055 3,256,884 Return credited to contractowners (7,164,052) (7,540,458) ----------------------- ----------------------- (2,017,320) (3,099,209) ----------------------- ----------------------- Expenses: Underwriting, acquisition and other insurance expenses 109,857,341 64,884,324 Amortization of state insurance licenses 112,500 112,500 Interest expense 29,502,465 18,066,407 ----------------------- ----------------------- 139,472,306 83,063,231 ----------------------- ----------------------- Total Benefits and Expenses 137,454,986 79,964,022 ----------------------- ----------------------- Income from operations before income taxes 41,793,541 31,490,991 Income tax expense 7,572,652 10,226,817 ----------------------- ----------------------- Net income $ 34,220,889 $ 21,264,174 ======================= =======================
See notes to unaudited consolidated financial statements. 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 SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 ----------------------- ------------------------ REVENUES: - -------- Annuity charges and fees $ 48,646,807 $ 33,219,774 Fee income 13,685,731 7,545,509 Net investment income 2,469,003 2,031,187 Annuity premium income - 215,042 Net realized capital gains (losses) (46,051) 20,553 Other 112,637 122,056 ----------------------- ------------------------ Total Revenues 64,868,127 43,154,121 ----------------------- ------------------------ BENEFITS AND EXPENSES: - --------------------- Benefits: Annuity benefits 348,870 248,959 Change in annuity policy reserves 190,769 (1,454,354) Cost of minimum death benefit reinsurance 970,746 1,445,511 Return credited to contractowners (148,310) (2,824,484) ----------------------- ------------------------ 1,362,075 (2,584,368) ----------------------- ------------------------ Expenses: Underwriting, acquisition and other insurance expenses 36,365,815 26,701,795 Amortization of state insurance licenses 37,500 37,500 Interest expense 10,705,254 7,024,476 ----------------------- ------------------------ 47,108,569 33,763,771 ----------------------- ------------------------ Total benefits and expenses 48,470,644 31,179,403 ----------------------- ------------------------ Income from operations before income taxes 16,397,483 11,974,718 Income tax expense 2,223,798 3,353,306 ----------------------- ------------------------ Net income $ 14,173,685 $ 8,621,412 ======================= ========================
See notes to unaudited consolidated financial statements. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
NINE MONTHS YEAR ENDED ENDED SEPTEMBER 30, DECEMBER 31, 1998 1997 -------------------------- ----------------------- (unaudited) Common Stock, balance at beginning and end of period $ 2,000,000 $ 2,000,000 -------------------------- ----------------------- Additional paid-in capital: Balance at beginning of period 151,527,229 122,250,117 Additional contributions 5,762,485 29,277,112 -------------------------- ----------------------- Balance at end of period 157,289,714 151,527,229 -------------------------- ----------------------- Retained earnings: Balance at beginning of period 30,225,784 2,678,251 Net income 34,220,889 27,547,533 -------------------------- ----------------------- Balance at end of period 64,446,673 30,225,784 -------------------------- ----------------------- Accumulated other comprehensive income: Balance at beginning of period 668,031 (583,337) Change in other comprehensive income 3,073,735 1,251,368 -------------------------- ----------------------- Balance at end of period 3,741,766 668,031 -------------------------- ----------------------- Total Shareholder's Equity $ 227,478,153 $ 184,421,044 ========================== =======================
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
NINE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 ----------------------- ------------------------- CASH FLOW FROM OPERATING ACTIVITIES: Net income $ 34,220,889 $ 21,264,174 Adjustments to reconcile net income to net cash provided by operating activities: Increase in policy reserves 7,192,154 3,570 Amortization of bond discount 74,805 56,397 Amortization of insurance licenses 112,500 112,500 Change in receivable from/payable to affiliates 20,067,879 63,494,692 Change in income tax receivable/payable (9,143,928) 1,209,562 Increase in other assets (282,947) (2,063,551) (Increase)/decrease in accrued investment income 145,326 (46,663) (Increase)/decrease in reinsurance receivable (5,782,318) 2,287,168 Increase in deferred acquisition costs, net (145,541,602) (145,984,394) (Increase)/decrease in income tax receivable - 3,725,001 (7,859,728) deferred Increase in accounts payable and accrued expenses 14,872,099 25,630,696 Increase in drafts outstanding 489,487 - Change in foreign currency translation, net 124,555 (80,986) Realized gain on sale of investments (123,610) (84,617) ----------------------- ----------------------- Net cash used in operating activities (79,849,710) (42,061,179) ----------------------- ----------------------- CASH FLOW FROM INVESTING ACTIVITIES: Purchase of fixed maturity investments (21,660,049) (13,723,543) Proceeds from sale and maturity of fixed maturity investments 4,049,150 5,755,550 Purchase of shares in mutual funds (6,411,575) (4,248,877) Proceeds from sale of shares in mutual funds 6,250,087 1,318,458 Net purchase of mutual funds - (7,900,000) Decrease in policy loans 129,834 - Change in investments of separate account assets (3,149,627,509) (2,779,722,388) ----------------------- ------------------------- Net cash used in investing activities (3,167,270,062) (2,798,520,800) ----------------------- ------------------------- CASH FLOW FROM FINANCING ACTIVITIES: Capital contributions from parent 5,762,485 947,944 Increase in future fees payable to parent 38,621,237 53,825,601 Proceeds from life annuity sales 3,143,449,482 2,784,972,447 ----------------------- ------------------------- Net cash provided by financing activities 3,187,833,204 2,839,745,992 ----------------------- ------------------------- Net decrease in cash and cash equivalents (59,286,568) (835,987) ----------------------- ------------------------- Cash and cash equivalents at beginning of period 81,974,204 14,199,412 ----------------------- ------------------------- Cash and cash equivalents at end of period $ 22,687,636 $ 13,363,425 ======================= ========================= SUPPLEMENTAL CASH FLOW DISCLOSURE: Income taxes paid $ 14,618,966 $ 17,776,982 ======================= ========================= Interest paid $ 6,227,483 $ 11,711,001 ======================= =========================
See notes to unaudited consolidated financial statements. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Unaudited Consolidated Financial Statements September 30, 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. 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 nine-month period ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. 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, 1997. Certain reclassifications have been made to prior year amounts to conform with the current year presentation. B. New Accounting Pronouncement ---------------------------- As of January 1, 1998 the Company adopted Statement of Financial Accounting Standards ("SFAS") 130, "Reporting Comprehensive Income". SFAS 130 sets standards for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's financial position or net income. SFAS 130 requires unrealized gains and losses on the Company's available-for-sale securities and foreign currency translation adjustments, which prior to adoption were reported separately in shareholder's equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of SFAS 130. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Unaudited Consolidated Financial Statements September 30, 1998 The components of comprehensive income, net of tax, for the nine months ended September 30, 1998 and 1997 were as follows:
1998 1997 ---- ---- Net income $34,220,889 $21,264,174 Other comprehensive income: Unrealized investment gains and losses 3,198,290 765,734 Foreign currency translation (124,555) (52,641) -------------------- ------------------- Other comprehensive income 3,073,735 713,093 -------------------- ------------------- Comprehensive income $37,294,624 $21,977,267 ==================== =================== The components of accumulated other comprehensive income, net of tax, as of September 30, 1998 and December 31, 1997 were as follows: 1998 1997 ---- ---- Unrealized investment gains and losses $4,152,359 $ 954,069 Foreign currency translation (410,593) (286,038) ------------------- -------------------- Accumulated other comprehensive income $3,741,766 $ 668,031 =================== ====================
2. FOREIGN ENTITY 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 $5,465,303 as of September 30, 1998. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Unaudited Consolidated Financial Statements September 30, 1998 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 September 30, 1998 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. As of September 30, 1998, $12,593,944 of accrued interest on surplus notes was not approved for payment under these criteria. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Unaudited Consolidated Financial Statements September 30, 1998 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 from January 1, 1994 through June 30, 1996 (Transaction 1996-1). In addition, the Company entered into the following similar transactions during 1997 and 1998: 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 1998-1 6/30/98 6/1/98 1/1/97 - 5/31/98 In connection with these transactions, the Parent, through a trust, issued collateralized notes in private placements which are secured by the rights to receive future fees and charges purchased from the Company. Under the terms of the 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 liabilities 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 Effective Date was as follows: Present Value as Transaction of Effective Date ----------- ----------------- 1996-1 $50,221,438 1997-1 58,766,633 1997-2 77,551,736 1997-3 58,193,264 1998-1 61,179,515 AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Unaudited Consolidated Financial Statements September 30, 1998 Payments representing fees and charges realized during the period January 1, 1998 through September 30, 1998 in the aggregate amount of $47,989,273 were made by the Company to the Parent. Interest expense of $16,008,724 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 $ 12,351,641 1999 51,188,963 2000 53,840,643 2001 52,032,259 2002 46,756,435 2003 35,839,640 2004 18,262,429 2005 1,383,045 ------------- Total $271,655,055 ============= 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 Agreements subject to certain terms and conditions. 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. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Unaudited Consolidated Financial Statements September 30, 1998 In addition, 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:
Nine Months Ended September 30, 1998 Annuity Increase in Annuity Return Credited Charges & Fees Policy Reserves to Contractowners -------------- ------------------- ----------------- Gross $155,314,801 $ 6,113,204 ($7,164,052) Ceded (21,584,972) (5,519,404) - ------------- ------------ ------------ Net $133,729,829 $ 593,800 ($7,164,052) ============= ============ ============ Nine Months Ended September 30, 1997 Annuity Increase in Annuity Return Credited Charges & Fees Policy Reserves to Contractowners -------------- ------------------- ----------------- Gross $101,999,925 ($ 1,110,474) ($7,561,239) Ceded 16,948,476 (830,269) 20,781 -------------- ------------- ------------ Net $ 85,051,449 ($ 280,205) ($7,540,458) ============== ============== ============
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. 6. SUBSEQUENT EVENT On November 10, 1998 the Company sold to its Parent, effective October 1, 1998, 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 May 1, 1997 through August 31, 1998. 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. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) Notes to Unaudited Consolidated Financial Statements September 30, 1998 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 October 1, 1998 (discounted at 7.0%), of future fees and charges expected to be realized on the designated contracts was $68,573,258. Expected payments of future fees payable to Parent are as follows: Period Ending December 31, Amount ------------- ------ 1998 $ 1,842,961 1999 7,742,574 2000 8,362,986 2001 9,087,882 2002 9,985,657 2003 10,586,804 2004 10,877,346 2005 8,663,401 2006 1,423,647 ----------- Total $68,573,258 =========== 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Nine months ended September 30, 1998 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 mainly 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) non-registered group variable annuities designed as funding vehicles for certain qualified retirement plans; and d) fixed and adjustable immediate annuities. In April, the Company began offering a term life insurance product in support of an affiliate's mutual fund products. In May, the Company launched its first variable life insurance product. Early in 1999, the Company expects to release its second variable life insurance product. Consistent sales activity is not anticipated until more state approvals are secured and the launch of the second variable life insurance product is completed. 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 nine month periods ended September 30, 1998 and 1997 was $3,143 million and $2,785 million, respectively, an increase of 13%. 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 $2,723 million or 21% since December 31, 1997. This increase is a direct result of the sales volume increasing separate account assets and deferred acquisition costs combined with the strong first quarter stock market performance partially offset by the impact of the third quarter stock market decline, which impacted the growth in separate account assets. Liabilities grew $2,680 million or 21% since December 31, 1997 as a result of the reserves required for the increased sales activity as well as an increase in borrowings and reinsurance to support the acquisition costs of the Company's variable annuity business. The Company experienced a net gain of $34.2 million after tax for the current period which was $12.9 million greater than the same period last year. This gain is a result of the strong sales activity for the nine months ended September 30, 1998, expense levels consistent with sales activity, with the exception of development activities, 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 57% increase in annuity charges & fees for the nine-month period ended September 30, 1998. This is compared to an increase of 71% for the nine-month period ended September 30, 1997. Fee income includes income earned for transfer agency type activities. This income increased 91% for the nine month period ended September 30, 1998 compared to an increase of 70% for the nine month period ended September 30, 1997. These increases are driven by the continued increase in assets under management. Net investment income increased 35% for the nine-month period ended September 30, 1998. This is compared to an increase of 498% for the nine-month period ended September 30, 1997. These increases are a result of increased general account investment holdings for the periods. 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. The Company reinsures the guaranteed minimum death benefit exposure on most of its variable annuity contracts. For the periods ended September 30, 1998 and 1997, the costs associated with reinsuring the minimum death benefit reserve exceeded the change in the minimum death benefit reserve by approximately $1.6 million and $0.5 million, respectively. 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. The positive performance is consistent with the performance during the nine months ended September 30, 1997. Expenses: Underwriting, acquisition and other insurance expenses consists of $168.9 million of commissions and $86.6 million of general expenses offset by the net capitalization of deferred acquisition costs totaling $145.6 million. This compares to $140 million of commissions and $70.8 million of general expenses offset by the net capitalization of deferred acquisition costs totaling $145.9 million for the same period last year. Interest expense increased 63% over the same period last year as a result of the securitization (future fees payable to Parent) transactions during 1997 and 1998. This compares to an increase in interest expense of 138% for the nine months ended September 30, 1997, which was the result of the 1996 increase in surplus notes of $110 million and the 1996 and 1997 securitization transactions. Income tax expense was $7.6 million for the period ended September 30, 1998, compared with $10.2 million for the same period last year. The effective federal income tax rates for the periods were 18% and 32%, respectively. The 1998 effective rate was lower than the federal statutory income tax rate due to permanent differences and 1997 provision to return differences. The 1997 effective rate was lower than the statutory rate due to permanent differences. Management believes that based on the taxable income produced in 1997 and the first nine months of 1998 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, cash flow from the December 30, 1997 and June 30, 1998 sales of future fee revenue, intercompany advances and reinsurance. The Company had significant growth during the nine-month period in 1998. The sales volume of $3,143 million was made up of approximately 97% 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 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). 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, since December 1996, the Company has entered into a series of transactions in which the rights to receive future fees and charges expected to be realized on the variable portion of a designated block of deferred annuity contracts through their surrender charge period have been sold to the Parent. These transactions, designated as another means of financing growth, are discussed in more detail at Notes 4 and 6 of the Notes to Unaudited Consolidated Financial Statements. 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 September 30, 1998 and December 31, 1997, shareholder's equity was $227.5 million and $184.4 million, respectively, which includes the carrying value of the state insurance licenses in the amount of $4.5 million and $4.6 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. Year 2000 Compliance The Company is continuing its ongoing assessment of the potential impact of the year 2000 issue on various aspects of its business. The Company's computer support is provided by its affiliate, American Skandia Information Services and Technology Corporation, which also provides such support for the Company's affiliated broker-dealer, American Skandia Marketing, Incorporated, and the Company's affiliated investment advisory firm, American Skandia Investment Services, Incorporated. Because of the nature of the Company's business, any assessment of the potential impact of the year 2000 issues on the Company must be an assessment of the potential impact of these issues on all these companies, which are referred to below as "American Skandia". Business Partners: Management believes the Company is most vulnerable in its interfaces with computer systems of investment managers, sub-advisors, third party administrators, vendors and other business partners. The inability to properly recognize date sensitive electronic information and transfer data between systems could cause errors or even a complete systems failure which would result in a temporary inability to process transactions correctly or engage in normal business activities. The American Skandia's deferred annuity operational business partners report that all critical interfaces are or are expected to be Year 2000 compliant by the end of 1998. All investment managers and sub-advisors are required by the Securities and Exchange Commission to publicly disclose their Year 2000 status in December 1998 and June 1999. American Skandia has initiated formal communications with parties that provide third party administration, record keeping and trust services in connection with its life insurance and qualified retirement plan annuities business. Management expects to receive written assurances that these firms will be Year 2000 compliant by the end of 1998. American Skandia is currently developing contingency plans in the event that these targets are not met. Information Technology Systems: American Skandia is a relatively young company whose internally developed systems were designed from the start with four digit year codes. The Company engaged an external information technology specialist to review American Skandia's operating systems and internally developed software. The assessment was completed in December 1997 and the results were favorable. Specific modifications were suggested, evaluated and implemented for the Annuity Administration system. This project was completed recently and a certificate of compliance has been received. Other non-critical internally developed applications in the client/server area have already been or will be remediated during 1999. The costs associated with this aspect of Year 2000 compliance have not had a significant impact on the Company's results from operations. Suppliers and Non-Information Technology Systems: Like most companies, American Skandia is reliant on network, and desktop operating systems and software providers to release compliant versions of their respective systems. American Skandia's network is expected to be at the most compliant level available by the end of 1998. The standard desktop software will be replaced, as fully compliant versions become available. In addition, the Company is in the process of contacting the non-information systems vendors and suppliers regarding their Year 2000 compliance status and will factor the results of these assessments into its contingency plans. Management believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. However, should errors or disruptions in computer service occur, the Company could realize losses. Given the nature and uncertainty of such losses, the amounts cannot be reasonably determined. 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. 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 November 13, 1998 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: ________________________ Thomas M. Mazzaferro Executive Vice President and Chief Financial Officer November 13, 1998 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 EX-27 2 10-Q FDS
7 0000881453 ASLAC0998 1 U.S Dollars 3-MOS DEC-31-1998 JAN-1-1998 SEP-30-1998 1 132,385,354 140,681,868 140,806,646 6,872,319 0 0 148,111,620 22,687,636 12,125,256 692,244,653 15,617,683,435 70,970,783 0 0 0 213,000,000 0 0 2,000,000 225,478,153 15,617,683,435 80,801 8,140,502 123,610 260,427 (2,017,320) 59,460,341 50,509,500 41,793,541 7,572,652 0 0 0 0 34,220,889 0 0 0 0 0 0 0 0 0 Included in Total Assets are Assets Held in Separate Accounts of $14,698,628,982. Included in Total Liabilities and Equity are Liabilities Related to Separate Accounts of $14,698,628,982. Other income includes annuity charges and fees of $133,729,829 and fee income of $36,913,358.
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