-----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, GFVn1lIYpx07Lh1vqNH35JG/mWcFYTrAcvh1wu64KKtQKe1Hjnsm1T6invvvDZfp +UryYX1ni2aQVQPdpfsSJQ== 0000881453-99-000084.txt : 19990816 0000881453-99-000084.hdr.sgml : 19990816 ACCESSION NUMBER: 0000881453-99-000084 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 99686732 BUSINESS ADDRESS: STREET 1: ONE CORPORATE DRIVE CITY: SHELTON STATE: CT ZIP: 06484 BUSINESS PHONE: 2039261888 MAIL ADDRESS: STREET 1: ONE CORPORATE DRIVE CITY: SHELTON STATE: CT ZIP: 06484 10-Q 1 ASLAC 06/30/1999 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 1999 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 August 10, 1999, 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 (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION: Item 1. Financial Statements: Consolidated Statements of Financial Condition - June 30, 1999 (unaudited) and December 31, 1998 3 Consolidated Statements of Income (unaudited) - Six months ended June 30, 1999 and June 30, 1998 4 Consolidated Statements of Income (unaudited) - Three months ended June 30, 1999 and June 30, 1998 5 Consolidated Statements of Shareholder's Equity - June 30, 1999 (unaudited) and December 31, 1998 6 Consolidated Statements of Cash Flows (unaudited) Six months ended June 30, 1999 and June 30, 1998 7 Notes to Unaudited Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Six months ended June 30, 1999 11 Item 3. Quantitative and Qualitative Disclosures about Market Risk 15 PART II. OTHER INFORMATION: Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 Exhibit Index 18 AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company, Ltd.) CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands)
June 30, December 31, 1999 1998 (unaudited) --------------- --------------- ASSETS Investments: Fixed maturities - at amortized cost $ 8,060 $ 8,289 Fixed maturities - at fair value 134,281 141,195 Mutual funds 11,446 8,210 Policy loans 737 569 --------------- --------------- Total investments $ 154,524 $ 158,263 Cash and cash equivalents 69,670 77,525 Accrued investment income 3,100 2,880 Fixed assets 368 328 Deferred acquisition costs 885,098 721,507 Reinsurance receivable 4,829 4,191 Receivable from affiliates 523 1,161 Income tax receivable - deferred 41,487 38,861 State insurance licenses 4,338 4,413 Other assets 4,772 3,744 Separate account assets 22,074,578 17,835,400 --------------- --------------- Total assets $ 23,243,287 $ 18,848,273 =============== =============== LIABILITIES AND SHAREHOLDER'S EQUITY LIABILITIES: Reserve for future contractowner benefits $ 33,957 $ 37,508 Policy reserves 37,178 25,545 Drafts outstanding 31,074 28,941 Accounts payable and accrued expenses 108,231 91,827 Income tax payable 2,112 6,657 Future fees payable to parent 464,910 368,978 Short-term borrowing 10,000 10,000 Surplus notes 193,000 193,000 Separate account liabilities 22,074,578 17,835,400 --------------- --------------- Total liabilities $ 22,955,040 $ 18,597,856 --------------- --------------- SHAREHOLDER'S EQUITY: Common stock, $80 par, 25,000 shares authorized, issued and outstanding $ 2,000 $ 2,000 Additional paid-in capital 191,579 179,889 Retained earnings 94,760 64,993 Accumulated other comprehensive income (92) 3,535 --------------- --------------- Total shareholder's equity 288,247 250,417 --------------- --------------- Total liabilities and shareholder's equity $ 23,243,287 $ 18,848,273 =============== ===============
See notes to unaudited consolidated financial statements. 3 AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company, Ltd.) CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands)
Six Months Ended June 30, 1999 1998 ------------- ------------- REVENUES Annuity and life insurance charges & fees $ 128,807 $ 85,083 Fee income 36,290 23,227 Net investment income 5,496 5,671 Premium income 908 81 Net realized capital gains 320 170 Other 842 148 ------------- ------------- Total Revenues 172,663 114,380 ------------- ------------- BENEFITS AND EXPENSES Benefits: Annuity benefits 380 559 Change in annuity policy reserves 9,278 403 Cost of minimum death benefit reinsurance 2,955 2,674 Return credited to contractowners (3,862) (7,016) ------------- ------------- 8,751 (3,380) ------------- ------------- Expenses: Underwriting, acquisition and other insurance expenses 93,941 73,567 Interest expense 29,218 18,797 ------------- ------------- 123,159 92,364 ------------- ------------- Total Benefits and Expenses 131,910 88,984 ------------- ------------- Income from operations before income taxes 40,753 25,396 Income tax expense 10,986 5,349 ------------- ------------- Net income $ 29,767 $ 20,047 ============= =============
See notes to unaudited consolidated financial statements. 4 AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company, Ltd.) CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands)
Three Months Ended June 30, 1999 1998 ------------- ------------- REVENUES Annuity and life insurance charges & fees $ 68,486 $ 45,297 Fee income 19,313 12,540 Net investment income 2,842 2,410 Premium income 159 31 Net realized capital gains 25 13 Other 477 78 ------------- ------------- Total Revenues 91,302 60,369 ------------- ------------- BENEFITS AND EXPENSES Benefits: Annuity benefits 159 193 Change in annuity policy reserves 8,521 165 Cost of minimum death benefit reinsurance 1,206 1,305 Return credited to contractowners (432) (8,683) ------------- ------------- 9,454 (7,020) ------------- ------------- Expenses: Underwriting, acquisition and other insurance expenses 42,956 39,274 Interest expense 15,393 9,966 ------------- ------------- 58,349 49,240 ------------- ------------- Total Benefits and Expenses 67,803 42,220 ------------- ------------- Income from operations before income taxes 23,499 18,149 Income tax expense 7,142 4,174 ------------- ------------- Net income $ 16,357 $ 13,975 ============= =============
See notes to unaudited consolidated financial statements. 5 AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company, Ltd.) CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (in thousands)
June 30, December 31, 1999 1998 (unaudited) --------------- --------------- Common stock: Beginning and ending balance $ 2,000 $ 2,000 Additional paid in capital: Beginning balance 179,889 151,527 Additional contributions 11,690 28,362 --------------- --------------- Ending balance 191,579 179,889 Retained earnings: Beginning balance 64,993 30,226 Net income 29,767 34,767 --------------- --------------- Ending balance 94,760 64,993 Accumulated other comprehensive income: Beginning balance 3,535 668 Other comprehensive income (3,627) 2,867 --------------- --------------- Ending balance (92) 3,535 --------------- --------------- Total shareholders equity $ 288,247 $ 250,417 =============== ===============
See notes to unaudited consolidated financial statements. 6 AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company, Ltd.) CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)
Six Months Ended June 30, 1999 1998 ------------- ------------- Cash Flow from operating activities: Net income $ 29,767 $ 20,047 Adjustments to reconcile net income to net cash used in operating activities: Increase in policy reserves 11,633 729 Amortization of bond discount 60 47 Amortization of insurance licenses 75 75 Change in receivable from/payable to affiliates 638 4,191 (Decrease)/increase in income tax payable (4,545) 6,746 Increase in other assets (1,068) (532) Increase in accrued investment income (220) (275) Increase in reinsurance receivable (638) (918) Increase in deferred acquisition costs, net (163,591) (85,923) Increase in income tax receivable - deferred (673) (5,141) Increase in accounts payable and accrued expenses 16,404 32,799 Increase in drafts outstanding 2,133 4,669 Change in foreign currency translation, net 704 46 Realized gain on sale of investments (320) (170) ------------- ------------- Net cash used in operating activities (109,641) (23,610) ------------- ------------- Cash flow from investing activities: Purchase of fixed maturity investments (29,582) (17,684) Proceeds from sale and maturity of fixed maturity investments 29,504 50 Purchase of shares in mutual funds (13,918) (5,084) Proceeds from sale of shares in mutual funds 11,879 4,769 Increase in policy loans (168) (122) ------------- ------------- Net cash used in investing activities (2,285) (18,071) ------------- ------------- Cash flow from financing activities: Capital contributions from parent 11,690 1,063 Increase in future fees payable to parent 95,932 47,507 Net (withdrawals from)/deposits to contractowner accounts (3,551) (4,601) ------------- ------------- Net cash provided by financing activities 104,071 43,969 ------------- ------------- Net (decrease)/increase in cash and cash equivalents (7,855) 2,288 Cash and cash equivalents at beginning of period 77,525 81,974 ------------- ------------- Cash and cash equivalents at end of period $ 69,670 $ 84,262 ============= ============= Supplemental cash flow disclosure: Income taxes paid $ 16,205 $ 1,620 ============= ============= Interest paid $ 29,900 $ 16,080 ============= =============
See notes to unaudited consolidated financial statements. 7 AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS June 30, 1999 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of American Skandia Life Assurance Corporation (the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. 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, 1998. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. 2. NEW ACCOUNTING PRONOUNCEMENT In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Software Developed or Obtained for Internal Use. The SOP, which has been adopted prospectively as of January 1, 1999, requires the capitalization of certain costs incurred in connection with developing or obtaining internal use software. Prior to the adoption of SOP 98-1, the Company expensed all internal use software related costs as incurred. The Company has identified and capitalized $1,186,000 of costs associated with internal use software through the first six months of 1999, and is amortizing the applicable costs on a straight line basis over a three-year period. 3. SEGMENT REPORTING In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 establishes standards for the way that public enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards related to disclosures about products and services, geographic areas and major customers. SFAS 131 is effective for financial statement periods beginning after December 15, 1997. During 1998, to complement its annuity products, the Company launched specific marketing and operational activities towards the release of variable life insurance and qualified retirement plan annuity products. As of June 30, 1999, sales were not significant enough to warrant full segment disclosures. Sales, as measured by premium received, for the year ended June 30, 1999 and assets under management as of June 30, 1999, for the respective segments were as follows:
(in thousands) Variable Variable Qualified Annuity Life Plans Total Sales $ 3,213,942 $6,109 $40,129 $ 3,260,180 ============ ====== ======= ============ Assets under management $21,995,491 $7,455 $93,345 $22,096,291 =========== ====== ======= =============
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1999 4. COMPREHENSIVE INCOME 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. The components of comprehensive income, net of tax, for the six months ended June 30, 1999 and 1998 were as follows:
(in thousands) 1999 1998 ---- ---- Net income $29,767 $20,047 Other comprehensive income: Net unrealized gains/(losses) on securities (4,083) 1,141 Foreign currency translation 456 (47) ---------- ------------- Other comprehensive income (3,627) 1,094 --------- ---------- Comprehensive income $26,140 $21,141 ======= =======
The components of accumulated other comprehensive income, net of tax, as of June 30, 1999 and December 31, 1998 were as follows:
(in thousands) 1999 1998 ---- ---- Unrealized investment gains $(240) $3,843 Foreign currency translation 148 (308) ------- ------- Accumulated other comprehensive income $ (92) $3,535 ======= ======
5. FOREIGN ENTITY The Company has a 99.9% ownership in Skandia Vida, S.A. de C.V. ("Skandia Vida") which is a life insurance company domiciled in Mexico, selling long-term savings products within Mexico. Skandia Vida, which is fully consolidated in the accompanying financial statements, had total shareholders' equity of $5,897,000 as of June 30, 1999 and $4,724,000 as of December 31, 1998 and has generated losses of $1,220,000 and $979,000 for the six months ended June 30, 1999 and 1998, respectively. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued) June 30, 1999 6. FUTURE FEES PAYABLE TO PARENT On June 23, 1999, the Company sold to its Parent, effective June 1, 1999, 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 April 1994 through April 1999. In connection with this transaction, the Parent issued collateralized notes in a private placement which are secured by the rights to receive future fees and charges purchased from the Company. Under the terms of the Purchase Agreement, the rights sold provide for the Parent to receive 80% of future mortality and expense charges and contingent deferred sales charges expected to be realized over the remaining surrender charge period of the designated contracts (generally, 7 years). The Company did not sell the right to receive future fees and charges after the expiration of the surrender charge period. The proceeds from the sale will be recorded as a liability and will be amortized over the remaining surrender charge period of the designated contracts using the interest method. The present value at June 1, 1999 (discounted at 7.5%), of future fees and charges expected to be realized on the designated contracts was $120,632,000. Expected payments of future fees payable to Parent under this transaction are as follows: (in thousands) Period Ending December 31, Amount ------------ -------- 1999 $13,906 2000 23,014 2001 21,778 2002 19,858 2003 16,671 2004 13,270 2005 8,517 2006 3,327 2007 291 ----------- -------- Total $120,632 AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Six months ended June 30, 1999 American Skandia Life Assurance Corporation (the "Company") is a stock life insurance company domiciled in Connecticut with licenses in all 50 states and the District of Columbia. 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 primarily in the business of issuing long-term savings and retirement products to individuals, groups and qualified pension plans. Since its business inception in 1988, the Company has offered an increasingly wide array of annuities, including: 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 various types of qualified retirement plans; and d) fixed and adjustable immediate annuities. In April 1998, the Company began offering a term life insurance product in support of an affiliate's mutual fund products. In May 1998, the Company launched a single premium variable life insurance product and in January 1999 the Company launched its second variable life product, which was designed as a flexible premium product. The Company markets its products to independent financial planners and broker-dealers 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 and life insurance. RESULTS OF OPERATIONS Annuity and life insurance sales volume for the six months ended June 30, 1999 and 1998 was $3,260,180,000 and $1,922,757,000, respectively, an increase of 70%. This increase was the result of innovative product development activities, favorable market conditions, the development of business relationships with and retention of top producers, and the continued success of the Company's highly rated customer service teams. Assets grew $4,395,014,000 or 23% since December 31, 1998. This increase is a direct result of the strong performance of the stock markets over the first half of 1999, which has contributed to the growth in separate account assets, combined with increases in separate account assets and deferred acquisition costs over the same period due to sales volume. Liabilities grew $4,357,184,000 or 23% since December 31, 1998 as a result of an increase in additional reserves required for the market and sales-related growth of separate account assets as well as an increase in future fees payable to Parent due to the closing of another securitization transaction in June 1999. The Company experienced a net gain of $29,767,000 after tax for the current period compared with $20,047,000 for the same period last year.The increase was the result of greater than expected sales levels and substantial growth in assets under management, which generated higher amounts of annuity charges and fees and transfer agency type fee income, combined with favorable expense levels compared with the level of sales volume. REVENUES Due to strong market conditions and as a result of the significant growth in sales and assets under management, contract owner fees and charges and fees generated from transfer agency type activities increased $56,787,000 or 52% in the first half of 1999 over the first half of 1998. This is compared to an increase of 64% for the six months ended June 30, 1998. Net investment income decreased 3% as compared with an increase of 42% in 1998. The insignificant change in 1999 was because general account investment levels remained relatively consistent from year to year. The increase in 1998 was the result of income generated from bond holdings, which were increased in early 1998 and late 1997 to meet risk based capital goals, which in turn, increased as a result of the growth in business. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Premium income represents premiums earned on sales of immediate annuities with life contingencies, supplementary contracts with life contingencies and certain life insurance products. There have been minimal sales of these ancillary products during both 1999 and 1998. BENEFITS Annuity benefits relate to annuity contracts with mortality risks, these being immediate annuity contracts with life contingencies and supplementary contracts with life contingencies. Due to the age of these policies in force and the relative insignificance of these products to the Company's overall portfolio of products, fluctuations in these benefits were of marginal importance to the Company's total operations. The change in annuity policy reserves includes changes in reserves related to annuity contracts with mortality risks as well as the Company's guaranteed minimum death benefit liability on its variable annuity product. During the second quarter of 1999, the Company's agreement to reinsure substantially all of its exposure on the guaranteed minimum death benefit was terminated and the business was recaptured, as the reinsurer had recently announced its intention to exit this market. In addition, the Company has modified its reserving methodology in accordance with the actuarial guidelines regarding guaranteed minimum death benefit reserves. These changes resulted in an increase in the guaranteed minimum death benefit reserves of $8,024,000. The Company is evaluating alternatives to manage these risks going forward. The reinsurance premium associated with reinsuring the guaranteed minimum death benefit exposure is based on levels of assets under management.Due to increased sales and account growth this cost had increased 11% in the first half of 1999 (payments made through May 31,1999 only) and 48% in the first half of 1998. Return credited to contractowners includes primarily revenues on the variable and market value adjusted annuities and variable life insurance, offset by the benefit payments and change in reserves required on this business.The change in the return credited to contractowners for the six months ended June 30, 1999 compared with June 30, 1998 represents a decline in the expected return on market value adjusted contracts. This return was higher than expected in 1998 and lower than expected in 1999. EXPENSES Underwriting, acquisition and other insurance expenses for the six months ended June 30, 1999 and 1998 were as follows:
(in thousands) June 30, June 30, 1999 1998 Commissions $181,820 $101,489 General expenses 75,712 58,001 Net capitalization of deferred acquisition costs (163,591) (85,923) -------- -------- Underwriting, acquisition and other insurance expenses $ 93,941 $ 73,567 ======== ========
Commissions increased with the growth in sales and assets under management. General expenses increased with the growth in sales, along with start up costs associated with the Company's entry into variable life insurance and qualified plans. The net capitalization of deferred acquisition costs also increased with the growth in sales related costs. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Interest expense increased $10,421,000 or 55% over the six months ended June 30, 1998 as a result of additional financing transactions, which consisted of the sale of future fees to the Parent ("securitization transactions") initiated throughout 1998 and 1999 offset by a decrease in surplus notes outstanding. Surplus notes as of June 30, 1999 and December 31, 1998 totaled $193,000,000. The effective income tax rates for the six months ended June 30, 1999, and 1998 were 27% and 21%, respectively. The effective rate is lower than the corporate rate of 35% due to permanent differences, with the most significant item being the dividend received deduction. Management believes that based on the taxable income produced in 1998 and the first six months of 1999, as well as the continued growth in annuity sales, the Company will produce sufficient taxable income in the future to realize its deferred tax assets. LIQUIDITY AND CAPITAL RESOURCES The Company's first half 1999 liquidity requirement was met by cash from insurance operations reinsurance, investment activities, advances from Parent and the sale of rights to future fees and charges to its Parent. Through the first six months of 1999 and 1998 approximately 95% and 97%, respectively, of sales were variable annuity and life insurance products.Most products carry a contingent deferred sales charge, which 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 to financing through capital contributions, the sale of certain rights to future fees and modified coinsurance arrangements. On June 23,1999, the Company closed another securitization transaction in which it received proceeds of $120,632,000. This transaction is further discussed at Note 6 of the Notes to Unaudited Consolidated Financial Statements. During 1999 the Company extended certain reinsurance agreements (which were initiated prior to1996). The reinsurance agreements are modified coinsurance arrangements where the reinsurer shares in the experience of a specific book of business. The Company expects the continued use of reinsurance and securitization transactions to fund the cash strain anticipated from the acquisition costs on the coming years' sales volume. The Company has long-term surplus notes and short-term borrowings with its Parent. No dividends have been paid to its Parent. The National Association of Insurance Commissioners ("NAIC") requires insurance companies to report information regarding minimum Risk Based Capital ("RBC") requirements. These requirements are intended to allow insurance regulators to identify companies which may need regulatory attention. The RBC model law requires that insurance companies apply various factors to asset, premium and reserve items, all of which have inherent risks. The formula includes components for asset risk, insurance risk, interest risk and business risk. The Company has complied with the NAIC's RBC reporting requirements and has total adjusted capital well above required capital. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 area where the Company is most vulnerable to Year 2000 issues is 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 deferred annuity operational business partners report that all critical interfaces are Year 2000 compliant. 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 has already received several written assurances that these firms will be Year 2000 compliant. The Company expects to have certifications from all remaining parties by August 1999. 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 during 1998 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 throughout 1999. The costs associated with this aspect of Year 2000 compliance have not had, and are not expected to have, 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 currently at the most compliant level available. 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. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes to the Company's market risk during the first half of 1999.The Company has provided a discussion of its market risks in Item 7A of Part II of the December 31, 1998 Form 10-K. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) See Exhibit Index (b) None SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. American Skandia Life Assurance Corporation (Registrant) by: /s/Thomas M. Mazzaferro Thomas M. Mazzaferro Executive Vice President and Chief Financial Officer August 10, 1999 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 August 10, 1999 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 FDS -- 1999 2ND Q
7 0000881453 ASLAC0699 1,000 U.S Dollars 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1 134,281 142,341 142,348 11,446 0 0 154,524 69,670 4,829 885,098 23,243,287 71,135 0 0 0 203,000 0 0 2,000 286,247 23,243,287 908 5,496 320 165,939 8,751 43,966 79,193 40,753 10,986 0 0 0 0 29,767 0 0 0 0 0 0 0 0 0 Included in Total Assets are Assets Held in Separate Accounts of $22,074,578. Included in Total Liabilities and Equity are Liabilities Related to Separate Accounts of $22,074,578. Other income includes annuity charges and fees of $128,807 and fee income of $36,290.
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