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, 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,
333-26695 and 333-38119.
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 5, 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.
<PAGE>
American Skandia Life Assurance Corporation
Table of Contents
Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Statements of Financial Condition -
June 30, 1998 (unaudited)
and December 31, 1997 3
Consolidated Statements of Operations (unaudited) -
Six months ended June 30, 1998
and June 30, 1997 4
Consolidated Statements of Operations (unaudited) -
Three months ended June 30, 1998
and June 30, 1997 5
Consolidated Statements of Cash Flows (unaudited) -
Six months ended June 30, 1998
and June 30, 1997 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results of
Operations - Six months ended
June 30, 1998 13
PART II. OTHER INFORMATION:
Item 4. Action Taken by Shareholder 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
Exhibit Index 20
(2)
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------------- ---------------------
(unaudited)
ASSETS
- ------
<S> <C> <C>
Investments:
Fixed maturities - at amortized cost $ 9,304,512 $ 9,366,671
Fixed maturities - at fair value 127,158,997 108,323,668
Investment in mutual funds - at fair value 7,815,717 6,710,851
Policy loans 564,871 687,267
------------------- ---------------------
Total investments 144,844,097 125,088,457
Cash and cash equivalents 84,261,811 81,974,204
Accrued investment income 2,716,384 2,441,671
Fixed assets 371,703 356,153
Deferred acquisition costs 718,098,460 628,051,995
Reinsurance receivable 2,201,743 3,120,221
Receivable from affiliates 1,701,761 1,910,895
Income tax receivable - current - 1,047,493
Income tax receivable - deferred 31,315,162 26,174,369
State insurance licenses 4,487,500 4,562,500
Other assets 3,041,389 2,524,581
Separate account assets 15,116,451,311 12,095,163,569
------------------- ---------------------
Total Assets $ 16,109,491,321 $ 12,972,416,108
=================== =====================
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
LIABILITIES:
Reserve for future contractowner benefits $ 38,739,923 $ 43,204,443
Policy reserves 23,685,548 24,414,999
Income tax payable 5,698,172 -
Drafts outstanding 23,946,635 19,277,706
Accounts payable and accrued expenses 103,988,639 71,190,019
Payable to affiliates 4,565,964 584,283
Future fees payable to parent 280,541,047 233,033,818
Payable to reinsurer 82,249,143 78,126,227
Short-term borrowing 10,000,000 10,000,000
Surplus notes 213,000,000 213,000,000
Separate account liabilities 15,116,451,311 12,095,163,569
------------------- ---------------------
Total Liabilities 15,902,866,382 12,787,995,064
------------------- ---------------------
SHAREHOLDER'S EQUITY:
Common stock, $80 par, 25,000 shares
authorized, issued and outstanding 2,000,000 2,000,000
Additional paid-in capital 152,589,729 151,527,229
Retained earnings 50,272,988 30,225,784
Accumulated other comprehensive income 1,762,222 668,031
------------------- ---------------------
Total Shareholder's Equity 206,624,939 184,421,044
------------------- ---------------------
Total Liabilities and Shareholder's Equity $ 16,109,491,321 $ 12,972,416,108
=================== =====================
</TABLE>
See notes to unaudited consolidated financial statements.
(3)
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
---------------------- -----------------------
REVENUES:
- --------
<S> <C> <C>
Annuity charges and fees $ 85,083,022 $ 51,831,675
Fee income 23,227,627 11,763,639
Net investment income 5,671,499 3,995,459
Annuity premium income 80,801 580,000
Net realized capital gains 169,661 64,064
Other 147,790 66,055
----------------------- -----------------------
Total Revenues 114,380,400 68,300,892
----------------------- -----------------------
BENEFITS AND EXPENSES:
- ---------------------
Benefits:
Annuity benefits 559,007 1,215,611
Increase in annuity policy reserves 403,031 1,174,149
Cost of minimum death benefit reinsurance 2,674,309 1,811,373
Return credited to contractowners (7,015,742) (4,715,974)
----------------------- -----------------------
(3,379,395) (514,841)
----------------------- -----------------------
Expenses:
Underwriting, acquisition and other insurance expenses 73,491,526 38,182,529
Amortization of state insurance licenses 75,000 75,000
Interest expense 18,797,211 11,041,931
----------------------- -----------------------
92,363,737 49,299,460
----------------------- -----------------------
Total Benefits and Expenses 88,984,342 48,784,619
----------------------- -----------------------
Income from operations before income taxes 25,396,058 19,516,273
Income tax expense 5,348,854 6,873,511
----------------------- -----------------------
Net income $ 20,047,204 $ 12,642,762
======================= =======================
</TABLE>
See notes to unaudited consolidated financial statements.
(4)
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
---------------------- -----------------------
REVENUES:
- --------
Annuity charges and fees $ 45,297,327 $ 27,463,051
Fee income 12,539,967 6,239,382
Net investment income 2,409,958 2,626,776
Annuity premium income 30,801 305,000
Net realized capital gains 13,329 43,460
Other 77,923 48,116
----------------------- -----------------------
Total Revenues 60,369,305 36,725,785
----------------------- -----------------------
BENEFITS AND EXPENSES:
- ---------------------
Benefits:
Annuity benefits 192,576 1,070,924
Increase in annuity policy reserves 164,840 390,599
Cost of minimum death benefit reinsurance 1,305,230 935,295
Return credited to contractowners (8,682,735) 2,029,600
----------------------- -----------------------
(7,020,089) 4,426,418
----------------------- -----------------------
Expenses:
Underwriting, acquisition and other insurance expenses 39,236,654 20,499,063
Amortization of state insurance licenses 37,500 37,500
Interest expense 9,965,967 5,502,357
----------------------- -----------------------
49,240,121 26,038,920
----------------------- -----------------------
Total Benefits and Expenses 42,220,032 30,465,338
----------------------- -----------------------
Income from operations before income taxes 18,149,273 6,260,447
Income tax expense 4,174,433 2,613,660
----------------------- -----------------------
Net income $ 13,974,840 $ 3,646,787
======================= =======================
</TABLE>
See notes to unaudited consolidated financial statements.
(5)
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
-------------------- ----------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 20,047,204 $ 12,642,762
Adjustments to reconcile net income to net cash
Provided by operating activities:
Increase in policy reserves 729,451 378,127
Amortization of bond discount 46,729 50,648
Amortization of insurance licenses 75,000 75,000
Change in receivable from/payable to affiliates 4,190,816 87,755,905
Change in income tax receivable/payable 6,745,665 309,562
Increase in other assets (532,356) (741,248)
(Increase) in accrued investment income (274,713) (305,034)
(Increase)/decrease in reinsurance receivable (918,478) 848,260
Increase in deferred acquisition costs, net (90,046,465) (99,038,639)
Increase in income tax receivable - deferred (5,140,793) (3,633,497)
Increase in accounts payable and accrued expenses 32,798,620 12,847,202
Increase in drafts outstanding 4,668,929 -
Change in foreign currency translation, net 46,499 163,512
Realized gain on sale of investments (169,661) (64,064)
-------------------- --------------------
Net cash provided by operating activities (27,733,553) 11,288,496
-------------------- ----------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of fixed maturity investments (17,684,369) -
Proceeds from sale and maturity of fixed maturity investments 50,000 200,000
Purchase of shares in mutual funds (5,083,541) (3,369,679)
Proceeds from sale of shares in mutual funds 4,769,431 1,106,387
Increase/(decrease) in policy loans (122,396) 29,380
Change in investments of separate account assets (1,927,357,712) (1,733,356,331)
-------------------- ----------------------
Net cash used in investing activities (1,945,428,587) (1,735,390,243)
-------------------- ----------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Capital contributions from parent 1,062,500 805,000
Increase (decrease) in future fees payable to parent 47,507,229 (2,283,457)
Increase in payable to reinsurer 4,122,916 6,221,399
Proceeds from annuity sales 1,922,757,102 1,737,165,984
-------------------- ----------------------
Net cash provided by financing activities 1,975,449,747 1,741,908,926
-------------------- ----------------------
Net (decrease)/increase in cash and cash equivalents (2,287,607) 17,807,179
-------------------- ----------------------
Cash and cash equivalents at beginning of period 81,974,204 14,199,412
-------------------- ----------------------
Cash and cash equivalents at end of period $ 84,261,811 $ 32,006,591
==================== ======================
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Income taxes paid $ 1,619,665 $ 10,197,446
==================== ======================
Interest paid $ 6,309,188 $ 4,501,751
==================== ======================
</TABLE>
See notes to unaudited consolidated financia statements.
(6)
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Unaudited Consolidated Financial Statements
June 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 six
month period ended June 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.
(7)
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Unaudited Consolidated Financial Statements
June 30, 1998
The components of comprehensive income, net of tax, for the six months ended
June 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Net income $20,047,204 $12,642,762
Other comprehensive income:
Unrealized investment gains and
losses 1,140,690 (400,716)
Foreign currency translation (46,499) 106,283
----------------- -------------------
Other comprehensive income 1,094,191 (294,433)
------------------ -------------------
Comprehensive income $21,141,395 $12,348,329
================== ===================
The components of accumulated other comprehensive income, net of tax,
as of June 30, 1998 and December 31, 1997 were as follows:
1998 1997
---- ----
Unrealized investment gains and
losses $ 2,094,759 $ 954,069
Foreign currency translation (332,537) (286,038)
------------------ -------------------
Accumulated other comprehensive
income $ 1,762,222 $ 668,031
================== ===================
</TABLE>
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 $1,313,872 as of June 30, 1998.
(8)
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Unaudited Consolidated Financial Statements
June 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 June 30, 1998 were as follows.
<TABLE>
<CAPTION>
<S> <C> <C>
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
=============
</TABLE>
Payment of interest and repayment of principal for these notes is
subject to certain conditions and requires approval by the Insurance
Commissioner of the State of Connecticut.
Interest accrued at June 30, 1998 amounted to $14,017,156, of which $0
has been approved for payment.
(9)
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Unaudited Consolidated Financial Statements
June 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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
</TABLE>
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
(10)
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Unaudited Consolidated Financial Statements
June 30, 1998
Payments representing fees and charges realized during the period
January 1, 1998 through June 30, 1998 in the aggregate amount of
$29,878,911 were made by the Company to the Parent. Interest expense of
$9,845,684 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 $ 24,201,836
1999 50,650,014
2000 53,268,405
2001 51,455,229
2002 46,202,361
2003 35,378,622
2004 18,020,843
2005 1,363,737
---------------
Total $280,541,047
===============
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.
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.
(11)
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Unaudited Consolidated Financial Statements
June 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:
Six Months Ended June 30, 1998
Increase
Annuity in Annuity Return Credited
Charges & Fees Policy Reserves to Contractowners
-------------- --------------- -----------------
Gross $99,230,092 $1,287,513 ($7,015,742)
Ceded 14,147,070 884,482 -
----------- ---------- ------------
Net $85,083,022 $ 403,031 ($7,015,742)
=========== ========== ============
Six Months Ended June 30, 1997
Increase
Annuity in Annuity Return Credited
Charges & Fees Policy Reserves to Contractowners
-------------- --------------- -----------------
Gross $62,467,438 $ 325,889 ($4,736,755)
Ceded 10,635,763 (848,260) (20,781)
----------- ------------ ------------
Net $51,831,675 $ 1,174,149 ($4,715,974)
=========== ============ ============
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.
(12)
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Six months ended June 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. Before year end, 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 six month periods ended June
30, 1998 and 1997 was $1,923 million and $1,737 million, respectively, an
increase of 11%. This increase is a direct result of the marketing efforts by
the Company coupled with an overall increase in the variable annuity
marketplace, particularly during the second quarter. Assets grew $3,132 million
or 24% 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 performance of the stock market over the same period,
which also has contributed to the growth in separate account assets. Liabilities
grew $3,117 million or 24% since December 31, 1997 as a result of the reserves
required for the increased sales activity and market growth of separate account
assets as well as an increase in borrowings and reinsurance to support the
acquisition costs of the Company's variable annuity business.
(13)
<PAGE>
The Company experienced a net gain of $20 million after tax for the current
period which was $7.4 million greater than the same period last year. This gain
is a result of the strong sales activity for the six months ended June 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 64% increase in annuity
charges & fees for the six month period ended June 30, 1998. This is compared to
an increase of 73% for the six month period ended June 30, 1997.
Fee income includes income earned for transfer agency type activities. This
income increased 97% for the six month period ended June 30, 1998 compared to an
increase of 67% for the six month period ended June 30, 1997. These increases
are driven by the continued increase in assets under management.
Net investment income increased 42% for the six month period ended June 30,
1998. This is compared to an increase of 441% for the six month period ended
June 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. In
September 1995, the Company entered into an agreement to reinsure the guaranteed
minimum death benefit exposure on most of its variable annuity contracts. For
the periods ended June 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 six months ended June
30, 1997.
(14)
<PAGE>
Expenses:
Underwriting, acquisition and other insurance expenses consists of $101.5
million of commissions and $58.2 million of general expenses offset by the net
capitalization of deferred acquisition costs totaling $86.2 million. This
compares to $87.4 million of commissions and $44.1 million of general expenses
offset by the net capitalization of deferred acquisition costs totaling $93.3
million for the same period last year.
Interest expense increased 70% over the same period last year as a result of the
securitization (future fees payable to Parent) transactions during 1997. This
compares to an increase in interest expense of 146% for the six months ended
June 30, 1998, which was the result of the 1997 increase in surplus notes of
$110 million.
Income tax expense was $5.3 million for the period ended June 30, 1998, compared
with $6.9 million for the same period last year. The effective federal income
tax rates for the periods were 21% and 35% respectively. The effective rate was
lower than the federal statutory income tax rate due to permanent differences.
Management believes that based on the taxable income produced in 1997 and the
first half 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, and reinsurance.
The Company had significant growth during the six month period in 1998. The
sales volume of $1,923 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 Note 4 of the Notes to Unaudited Consolidated
Financial Statements.
(15)
<PAGE>
While the tremendous growth of this young organization has depended on capital
support from its parent, the Company expects to use borrowing, reinsurance and
the sale of future fee revenues to fund the cash strain anticipated from the
acquisition costs on expected future sales volume.
As of June 30, 1998 and December 31, 1997, shareholder's equity was $206.6
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
--------------------
American Skandia is a relatively young company whose internally developed
systems were designed from the start with the correct four digit date fields. As
a result, the Company anticipates few technical problems related to the year
2000. However, we take this matter seriously and continue to take precautions to
ensure year 2000 compliance.
Steps taken to date include:
1. Any new, externally developed software is evaluated for year 2000
compliance before purchase. We also evaluate all new service providers.
2. An external specialist had been engaged to perform a complete assessment
of American Skandia's operating systems and internally developed software.
3. The Company is working with external business partners and software
providers to request and review their year 2000 compliance status and plans.
We anticipate full internal compliance by September 1998, followed by continuous
evaluation of internal systems, external business partners and software
providers until the year 2000.
(16)
<PAGE>
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.
(17)
<PAGE>
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 6, 1998
(18)
<PAGE>
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 6, 1998
(19)
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Location
------- ----------- --------
(2) Plan of acquisition, reorganization,
arrangement, liquidation or succession None
(4) Instruments defining the rights of
security holders, including indentures None
(10) Material Contracts None
(11) Statement Re: Computation of per share
earnings None
(15) Letter Re: Unaudited interim financial
information None
(18) Letter Re: Change in accounting
principles None
(19) Report furnished to security holders None
(22) Published report regarding matters
submitted to vote of security holders None
(23) Consents of experts and counsel None
(24) Power of attorney None
(99) Additional exhibits None
(20)
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 881453
<NAME> ASLAC0698
<MULTIPLIER> 1
<CURRENCY> U.S Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 127,158,997
<DEBT-CARRYING-VALUE> 136,463,509
<DEBT-MARKET-VALUE> 136,497,919
<EQUITIES> 7,815,717
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 144,844,097
<CASH> 84,261,811
<RECOVER-REINSURE> 2,201,743
<DEFERRED-ACQUISITION> 718,098,460
<TOTAL-ASSETS> 15,116,451,311 <F1>
<POLICY-LOSSES> 62,425,471
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 213,000,000
0
0
<COMMON> 2,000,000
<OTHER-SE> 204,624,939
<TOTAL-LIABILITY-AND-EQUITY> 16,109,491,321 <F2>
80,801
<INVESTMENT-INCOME> 5,671,499
<INVESTMENT-GAINS> 169,661
<OTHER-INCOME> 147,790 <F3>
<BENEFITS> (3,379,395)
<UNDERWRITING-AMORTIZATION> 41,028,082
<UNDERWRITING-OTHER> 32,538,444
<INCOME-PRETAX> 25,396,058
<INCOME-TAX> 5,348,854
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,047,204
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> Included in Total Assets are Assets Held in Separate Accounts of
$15,116,451,311.
<F2> Included in Total Liabilities and Equity are Liabilities Related to
Separate Accounts of $15,116,451,311.
<F3> Other income includes annuity charges and fees of $85,083,022 and fee
income of $23,227,627.
</FN>
</TABLE>
