-----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, PNLzt/OeRMWk2TOKZGhfjz5JRMo9ic/NJzc8jLx7WHDoxTJuWktuMT86Hz3+UdSu jxB5hXp2HfJ7vVunQqEQlg== 0000881453-99-000163.txt : 19991117 0000881453-99-000163.hdr.sgml : 19991117 ACCESSION NUMBER: 0000881453-99-000163 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99755415 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 3RD QUARTER 1999 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, 1999 Commission file numbers: 33-62953, 33-88360, 33-89676, 33-91400, 333-00995, 333-02867, 333-24989, 333-25733, 333-25761, 333-26695, and 333-77213 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 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 - September 30, 1999 (unaudited) and December 31, 1998 3 Consolidated Statements of Income (unaudited) - Nine months ended September 30, 1999 and September 30, 1998 4 Consolidated Statements of Income (unaudited) - Three months ended September 30, 1999 and September 30, 1998 5 Consolidated Statements of Shareolder's Equity Nine months ended September 30, 1999 (unaudited) and year ended December 31, 1998 6 Consolidated Statements of Cash Flows (unaudited) Nine months ended September 30, 1999 and September 30, 1998 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, 1999 12 Item 3. Quantitative and Qualitative Disclosures about Market Risk 17 PART II. OTHER INFORMATION: Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18 Exhibit Index 20 AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (in thousands)
September 30, December 31, 1999 1998 (unaudited) ---------------- --------------- ASSETS Investments: Fixed maturities - at amortized cost $ 6,026 $ 8,289 Fixed maturities - at fair value 138,026 141,195 Mutual funds 10,599 8,210 Short-term investments - at amortized cost 30,697 - Derivative Instruments 4,796 - Policy loans 1,041 569 ---------------- --------------- Total investments $ 191,185 $ 158,263 Cash and cash equivalents 68,315 77,525 Accrued investment income 2,957 2,880 Fixed assets 398 328 Deferred acquisition costs 967,768 721,507 Reinsurance receivable 5,584 4,191 Receivable from affiliates - 1,161 Income tax receivable - deferred 36,112 38,861 Income tax recoverable 2,254 - State insurance licenses 4,300 4,413 Other assets 7,270 3,744 Separate account assets 22,796,470 17,835,400 ---------------- --------------- Total assets $ 24,082,613 $ 18,848,273 ================ =============== LIABILITIES AND SHAREHOLDER'S EQUITY LIABILITIES: Reserve for future contractowner benefits $ 24,254 $ 37,508 Policy reserves 31,651 25,545 Drafts outstanding 37,141 28,941 Accounts payable and accrued expenses 118,605 91,827 Income tax payable - 6,657 Payable to affiliates 114,087 - Future fees payable to parent 448,682 368,978 Short-term borrowing 10,000 10,000 Surplus notes 193,000 193,000 Separate account liabilities 22,796,470 17,835,400 ---------------- --------------- Total liabilities $ 23,773,890 $ 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 116,162 64,993 Accumulated other comprehensive income (loss) (1,018) 3,535 ---------------- --------------- Total shareholder's equity 308,723 250,417 ---------------- --------------- Total liabilities and shareholder's equity $ 24,082,613 $ 18,848,273 ================ ===============
See notes to unaudited consolidated financial statements. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands)
Nine Months Ended September 30, 1999 1998 ------------- ---------------- REVENUES Annuity and life insurance charges & fees $ 204,103 $ 133,730 Fee income 58,184 36,913 Net investment income 8,231 8,141 Premium income 1,236 81 Net realized capital gains 526 124 Other 1,279 260 ------------- ---------------- Total Revenues 273,559 179,249 ------------- ---------------- BENEFITS AND EXPENSES Benefits: Annuity benefits 480 908 Change in annuity policy reserves 2,519 594 Cost of minimum death benefit reinsurance 2,946 3,645 Return credited to contractowners (1,208) (7,164) ------------- ---------------- 4,737 (2,017) ------------- ---------------- Expenses: Underwriting, acquisition and other insurance expenses 152,264 109,970 Interest expense 46,505 29,502 ------------- ---------------- 198,769 139,472 ------------- ---------------- Total Benefits and Expenses 203,506 137,455 ------------- ---------------- Income from operations before income taxes 70,053 41,794 Income tax expense 18,884 7,573 ------------- ---------------- Net income $ 51,169 $ 34,221 ============= ================
See notes to unaudited consolidated financial statements. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands)
Three Months Ended September 30, 1999 1998 ------------- --------------- REVENUES Annuity and life insurance charges & fees $ 75,296 $ 48,647 Fee income 21,894 13,687 Net investment income 2,735 2,470 Premium income 328 - Net realized capital gains 206 (47) Other 437 112 ------------- --------------- Total Revenues 100,896 64,869 ------------- --------------- BENEFITS AND EXPENSES Benefits: Annuity benefits 100 349 Change in annuity policy reserves (6,759) 191 Cost of minimum death benefit reinsurance (9) 971 Return credited to contractowners 2,654 (148) ------------- --------------- (4,014) 1,363 ------------- --------------- Expenses: Underwriting, acquisition and other insurance expenses 58,323 36,403 Interest expense 17,288 10,705 ------------- --------------- 75,611 47,108 ------------- --------------- Total Benefits and Expenses 71,597 48,471 ------------- --------------- Income from operations before income taxes 29,299 16,398 Income tax expense 7,898 2,224 ------------- --------------- Net income $ 21,401 $ 14,174 ============= ===============
See notes to unaudited consolidated financial statements. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (in thousands)
September 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 51,169 34,767 ---------------- --------------- Ending balance 116,162 64,993 Accumulated other comprehensive income: Beginning balance 3,535 668 Other comprehensive income (loss) (4,553) 2,867 ---------------- --------------- Ending balance (1,018) 3,535 ---------------- --------------- Total shareholder's equity $ 308,723 $ 250,417 ================ ===============
See notes to unaudited consolidated financial statements. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)
Nine Months Ended September 30, 1999 1998 ------------- ---------------- Cash Flow from operating activities: Net income $ 51,169 $ 34,221 Adjustments to reconcile net income to net cash used in operating activities: Increase in policy reserves 6,106 7,192 Amortization of bond discount 86 75 Amortization of insurance licenses 113 113 Change in receivable from/payable to affiliates 115,248 20,068 Change in income tax receivable/payable (8,911) (9,144) Increase in other assets (3,596) (283) Increase in accrued investment income (77) 145 Increase in reinsurance receivable (1,393) (5,782) Increase in deferred acquisition costs, net (246,261) (145,542) Decrease in income tax receivable - deferred 5,200 3,725 Increase in accounts payable and accrued expenses 26,777 14,872 Increase in drafts outstanding 8,200 489 Change in foreign currency translation, net 771 125 Unrealized loss on derivative instruments 178 - Net realized capital gain on sale of investments (526) (124) ------------- ---------------- Net cash used in operating activities (46,916) (79,850) ------------- ---------------- Cash flow from investing activities: Purchase of fixed maturity investments (36,517) (21,660) Proceeds from sale and maturity of fixed maturity investments 33,561 4,049 Purchase of derivative investments (4,974) - Purchase of shares in mutual funds (15,564) (6,412) Proceeds from sale of shares in mutual funds 14,229 6,250 Purchase of short term investments (30,697) - Increase in policy loans (472) 130 ------------- ---------------- Net cash used in investing activities (40,434) (17,643) ------------- ---------------- Cash flow from financing activities: Capital contributions from parent 11,690 5,762 Increase in future fees payable to parent 79,704 38,621 Net withdrawals from contractowner accounts (13,254) (6,176) ------------- ---------------- Net cash provided by financing activities 78,140 38,207 ------------- ---------------- Net decrease in cash and cash equivalents (9,210) (59,286) Cash and cash equivalents at beginning of period 77,525 81,974 ------------- ---------------- Cash and cash equivalents at end of period $ 68,315 $ 22,688 ============= ================ Supplemental cash flow disclosure: Income taxes paid $ 16,867 $ 14,619 ============= ================ Interest paid $ 45,434 $ 22,243 ============= ================
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, 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 nine-month period ended September 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 $1,993,000 of costs associated with internal use software through the nine months 1999, and is amortizing the applicable costs on a straight-line basis over a three-year period. In June 1998, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standards Statement 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). Subsequently, in July 1999, FASB issued FAS 137 "Deferral of the Effective Date of FASB Statement 133". The adoption date was delayed to fiscal years beginning after June 15, 2000. The Company is currently evaluating the potential impact on its financial position. 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. AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued) September 30, 1999 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 September 30, 1999, sales were not significant enough to warrant full segment disclosures. Sales, as measured by premium received, for the year ended September 30, 1999 and assets under management as of September 30, 1999, for the Company's respective reporting segments were as follows:
(in thousands) Variable Variable Qualified Annuity Life Plans Total Sales $4,895,558 $14,951 $77,417 $4,987,926 ========== ======= ======= ========== Assets under management $22,671,188 $15,760 $126,923 $22,813,871 =========== ======= ======== ===========
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 nine months ended September 30, 1999 and 1998 were as follows: (in thousands) 1999 1998 ---- ---- Net income $51,169 $34,221 Other comprehensive income: Net unrealized gains/(losses) on securities (5,054) 3,198 Foreign currency translation 501 (124) ------- ------- Other comprehensive income (4,553) 3,074 ------- ------- Comprehensive income $46,616 $37,295 ======= ======= The components of accumulated other comprehensive income, net of tax, as of September 30, 1999 and December 31, 1998 were as follows: (in thousands) 1999 1998 ---- ---- Unrealized investment gains $(1,211) $3,843 Foreign currency translation 193 (308) ------- ------ Accumulated other comprehensive income $(1,018) $3,535 ======== ====== AMERICAN SKANDIA LIFE ASSURANCE CORPORATION (a wholly-owned subsidiary of Skandia Insurance Company Ltd.) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued) September 30, 1999 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 $5,438,000 as of September 30, 1999 and $4,724,000 as of December 31, 1998 and has generated losses of $1,747,000 and $1,407,000 for the nine months ended September 30, 1999 and 1998, respectively. 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.) NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued) September 30, 1999 7. SUBSEQUENT EVENT On November 8, 1999, the Board of Directors authorized the Company to increase the par value of its capital stock from $80 per share to $100 per share in order to comply with minimum capital levels as required by the California Department of Insurance. This transaction resulted in a corresponding decrease in additional paid-in capital of $500,000 and had no effect on total shareholder's equity. 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 Nine months ended September 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. In May 1999, the Company introduced a benefit feature to all of its variable annuity products which provides certain benefits if the policyowner's account value has not reached a "target value" on its tenth anniversary. At the option of the policyowner, the benefit will be distributed in the form of an annual or lump-sum credit to the policyowner's account. 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 nine months ended September 30, 1999 and 1998 was $4,987,926,000 and $3,143,449,000, respectively, an increase of 59%. This increase was the result of innovative product development activities, favorable market conditions, the development of business relationships with and the retention of top producers, as well as, the continued success of the Company's highly rated customer service teams. Assets grew $5,234,340,000 or 28% since December 31, 1998. This increase, reflected primarily in the growth of deferred acquisition costs and separate account assets, was the result of high sales volume and the strong performance of the stock markets in the first half of 1999. Decreases in the stock market over the past three months were offset by continued strong sales, allowing for a further growth in assets. Liabilities grew $5,176,034,000 or 28% 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, advances from the Parent and an increase in future fees payable to Parent, due to the closing of a securitization transaction in June 1999. The Company experienced a net gain of $51,169,000 after tax for the current period compared with $34,221,000 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 asset based charges and fees and transfer agency type fee income, combined with favorable expense levels relative to sales volume. 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) 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 $91,644,000 or 54% for the nine month period ended September 30, 1999 over the same period of 1998. This is compared to an increase of 57% for the nine months ended September 30, 1998. Net investment income increased 1% as compared with an increase of 35% 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. 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, such as, 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 ("GMDB") on its variable annuity product. During the second quarter of 1999, the Company's agreement to reinsure substantially all of its exposure on the GMDB was terminated and the business was recaptured, as the reinsurer had recently announced its intention to exit this market. During the third quarter, the Company changed its reserving methodology for the GMDB to comply with the National Association of Insurance Commissioners Actuarial Guideline 34. This change resulted in a $5,760,000 reduction of reserves at September 30, 1999. The Company has instituted a hedge program to effectively manage the interest rate risk associated with the GMDB reserve fluctuations. In September 1999, the Company purchased equity put options which mature in January 2000 and will continue to evaluate alternative hedging strategies. The GMDB reserve as of September 30, 1999 was $9,134,000. 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 from the prior year through May 1999. The termination of this treaty as of May 31, 1999 resulted in the year to year decrease in this benefit at September 30, 1999. 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 nine months ended September 30, 1999 compared with September 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. 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) EXPENSES Underwriting, acquisition and other insurance expenses for the nine months ended September 30, 1999 and 1998 were as follows:
(in thousands) September 30, September 30, 1999 1998 Commissions $ 277,357 $168,873 General expenses 126,294 85,969 Net capitalization of deferred acquisition costs (251,387) (144,872) --------- -------- Underwriting, acquisition and other insurance expenses $ 152,264 $109,970 ========= =========
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. Interest expense increased $17,003,000 or 58% over the nine months ended September 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 September 30, 1999 and December 31, 1998 totaled $193,000,000. The effective income tax rates for the nine months ended September 30, 1999, and 1998 were 27% and 18%, 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 nine 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 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 nine 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 a 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. 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) 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. YEAR 2000 COMPLIANCE American Skandia's management understands that financial and operational losses could result from Year 2000 related service interruptions. American Skandia also recognizes the importance of maintaining emergency response, resumption, recovery and restoration strategies and acknowledges that the protection of its assets and business operations is a major responsibility to its employees, contract holders, and business associates. As part of the Company's Business Continuity Plan, the Company has developed a Year 2000 Contingency Plan which is designed and structured to respond to emergencies, resume time-sensitive business operations, recover less time-sensitive business operations and restore operations to an operating site. This plan involves virtually all aspects of the business and will continue to be a focus of management beyond the Year 2000 event. 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 American Skandia 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 ready. All investment managers and sub-advisors were required by the Securities and Exchange Commission to publicly disclose their Year 2000 status in December 1998 and September 1999. American Skandia continues to maintain 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 received written assurances from these firms that their interfaces will be Year 2000 ready. American Skandia has received favorable responses from its critical business partners, has tested various systems and has developed and continues to develop specific contingency plans in conjunction with these external parties. 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) Information Technology Systems All internally developed systems were designed from the start with four digit year codes. American Skandia engaged an external information technology specialist to review its 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. Although this project was completed during 1998 and a certificate of compliance has been received, American Skandia continues to review new and existing systems. Other non-critical internally developed applications in the client/server area have already been or will be remediated within the next two months. In addition, on November 4, 1999 American Skandia placed a temporary "freeze" through January 15, 2000 on non-critical changes to the production environment. Management believes that 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. In management's opinion, 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, American Skandia has contacted the non-information systems vendors and suppliers regarding their Year 2000 compliance status and has factored 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 of such losses, if any, 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 nine months ended September 30, 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 November 15, 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 November 15, 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 -- ASLAC 09/30/1999
7 0000881453 American Skandia Life Assurance Corporation 1,000 U.S. Dollars 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1 138,026 144,052 144,047 10,599 0 0 191,185 68,315 5,584 967,768 24,082,613 55,905 0 0 0 203,000 0 0 2,000 306,723 24,082,613 1,236 8,231 526 263,566 4,737 74,620 124,149 70,053 18,884 0 0 0 0 51,169 0 0 0 0 0 0 0 0 0 Included in Total Assets are Assets Held in Separate Accounts of $22,796,470. Included in Total Liabilities and Equity are Liabilities Related to Separate Accounts of $22,796,470. Other income includes annuity charges and fees of $204,103 and fee income of $58,184.
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