UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1998
Commission file numbers: 33-62791, 33-62953, 33-88360,
33-89676, 33-89678, 33-91400, 333-00995,
333-02867, 333-24989, 333-25733, 333-25761 and 333-26695.
American Skandia Life Assurance Corporation
Incorporated in the State of Connecticut
06-1241288
(Federal Employer Identification No.)
One Corporate Drive
Shelton, Connecticut 06484
Telephone Number (203) 926-1888
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.
Yes x No __
As of November 6, 1998, there were 25,000 shares of outstanding common stock,
par value $80 per share, of the registrant, consisting of 100 shares of voting
and 24,900 shares of non-voting common stock, all of which were owned by
American Skandia Investment Holding Corporation, a wholly-owned subsidiary of
Skandia Insurance Company Ltd., a Swedish corporation.
<PAGE>
American Skandia Life Assurance Corporation
Table of Contents
Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Statements of Financial Condition -
September 30, 1998 (unaudited)
and December 31, 1997 3
Consolidated Statements of Operations (unaudited) -
Nine months ended September 30, 1998
and September 30, 1997 4
Consolidated Statements of Operations (unaudited) -
Three months ended September 30, 1998
and September 30, 1997 5
Consolidated Statements of Shareholder's
Equity Nine months ended September 30, 1998 (unaudited)
and year ended December 31, 1997 6
Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 1998
and September 30, 1997 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2.
Management's Discussion and Analysis
of Financial Condition and Results of
Operations - Nine months ended
September 30, 1998 15
PART II. OTHER INFORMATION:
Item 4. Action Taken by Shareholder 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature 21
Exhibit Index 23
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
<S> <C> <C>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------------ ---------------------
(unaudited)
ASSETS
- ------
Investments:
Fixed maturities - at amortized cost $ 8,296,514 $ 9,366,671
Fixed maturities - at fair value 132,385,354 108,323,668
Investment in mutual funds - at fair value 6,872,319 6,710,851
Policy loans 557,433 687,267
------------------ ---------------------
Total investments 148,111,620 125,088,457
Cash and cash equivalents 22,687,636 81,974,204
Accrued investment income 2,296,345 2,441,671
Fixed assets 310,742 356,153
Deferred acquisition costs 692,244,653 546,703,051
Reinsurance receivable 12,125,256 6,342,938
Receivable from affiliates 1,379,884 1,910,895
Income tax receivable - current 10,191,421 1,047,493
Income tax receivable - deferred 22,449,368 26,174,369
State insurance licenses 4,450,000 4,562,500
Other assets 2,807,528 2,524,581
Separate account assets 14,698,628,982 12,095,163,569
------------------ ---------------------
Total Assets $ 15,617,683,435 $ 12,894,289,881
================== =====================
LIABILITIES AND SHAREHOLDER'S EQUITY
- ------------------------------------
LIABILITIES:
Reserve for future contractowner benefits $ 39,363,630 $ 43,204,443
Policy reserves 31,607,153 24,414,999
Drafts outstanding 19,767,193 19,277,706
Accounts payable and accrued expenses 86,062,118 71,190,019
Payable to affiliates 20,121,151 584,283
Future fees payable to parent 271,655,055 233,033,818
Short-term borrowing 10,000,000 10,000,000
Surplus notes 213,000,000 213,000,000
Separate account liabilities 14,698,628,982 12,095,163,569
------------------ ---------------------
Total Liabilities 15,390,205,282 12,709,868,837
------------------ ---------------------
SHAREHOLDER'S EQUITY:
Common stock, $80 par, 25,000 shares
authorized, issued and outstanding 2,000,000 2,000,000
Additional paid-in capital 157,289,714 151,527,229
Retained earnings 64,446,673 30,225,784
Accumulated other comprehensive income 3,741,766 668,031
------------------ ---------------------
Total Shareholder's Equity 227,478,153 184,421,044
------------------ ---------------------
Total Liabilities and Shareholder's Equity $ 15,617,683,435 $ 12,894,289,881
================== =====================
</TABLE>
See notes to unaudited consolidated financial statements.
<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>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
----------------------- -----------------------
REVENUES
- --------
Annuity charges and fees $ 133,729,829 $ 85,051,449
Fee income 36,913,358 19,309,148
Net investment income 8,140,502 6,026,646
Annuity premium income 80,801 795,042
Net realized capital gains 123,610 84,617
Other 260,427 188,111
----------------------- -----------------------
Total Revenues 179,248,527 111,455,013
----------------------- -----------------------
BENEFITS AND EXPENSES
- ---------------------
Benefits:
Annuity benefits 907,877 1,464,570
Change in annuity policy reserves 593,800 (280,205)
Cost of minimum death benefit reinsurance 3,645,055 3,256,884
Return credited to contractowners (7,164,052) (7,540,458)
----------------------- -----------------------
(2,017,320) (3,099,209)
----------------------- -----------------------
Expenses:
Underwriting, acquisition and other insurance expenses 109,857,341 64,884,324
Amortization of state insurance licenses 112,500 112,500
Interest expense 29,502,465 18,066,407
----------------------- -----------------------
139,472,306 83,063,231
----------------------- -----------------------
Total Benefits and Expenses 137,454,986 79,964,022
----------------------- -----------------------
Income from operations before income taxes 41,793,541 31,490,991
Income tax expense 7,572,652 10,226,817
----------------------- -----------------------
Net income $ 34,220,889 $ 21,264,174
======================= =======================
</TABLE>
See notes to unaudited consolidated financial statements.
<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
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
----------------------- ------------------------
REVENUES:
- --------
Annuity charges and fees $ 48,646,807 $ 33,219,774
Fee income 13,685,731 7,545,509
Net investment income 2,469,003 2,031,187
Annuity premium income - 215,042
Net realized capital gains (losses) (46,051) 20,553
Other 112,637 122,056
----------------------- ------------------------
Total Revenues 64,868,127 43,154,121
----------------------- ------------------------
BENEFITS AND EXPENSES:
- ---------------------
Benefits:
Annuity benefits 348,870 248,959
Change in annuity policy reserves 190,769 (1,454,354)
Cost of minimum death benefit reinsurance 970,746 1,445,511
Return credited to contractowners (148,310) (2,824,484)
----------------------- ------------------------
1,362,075 (2,584,368)
----------------------- ------------------------
Expenses:
Underwriting, acquisition and other insurance expenses 36,365,815 26,701,795
Amortization of state insurance licenses 37,500 37,500
Interest expense 10,705,254 7,024,476
----------------------- ------------------------
47,108,569 33,763,771
----------------------- ------------------------
Total benefits and expenses 48,470,644 31,179,403
----------------------- ------------------------
Income from operations before income taxes 16,397,483 11,974,718
Income tax expense 2,223,798 3,353,306
----------------------- ------------------------
Net income $ 14,173,685 $ 8,621,412
======================= ========================
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
NINE MONTHS YEAR
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------------------- -----------------------
(unaudited)
Common Stock, balance at beginning and end of period $ 2,000,000 $ 2,000,000
-------------------------- -----------------------
Additional paid-in capital:
Balance at beginning of period 151,527,229 122,250,117
Additional contributions 5,762,485 29,277,112
-------------------------- -----------------------
Balance at end of period 157,289,714 151,527,229
-------------------------- -----------------------
Retained earnings:
Balance at beginning of period 30,225,784 2,678,251
Net income 34,220,889 27,547,533
-------------------------- -----------------------
Balance at end of period 64,446,673 30,225,784
-------------------------- -----------------------
Accumulated other comprehensive income:
Balance at beginning of period 668,031 (583,337)
Change in other comprehensive income 3,073,735 1,251,368
-------------------------- -----------------------
Balance at end of period 3,741,766 668,031
-------------------------- -----------------------
Total Shareholder's Equity $ 227,478,153 $ 184,421,044
========================== =======================
</TABLE>
<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>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
----------------------- -------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 34,220,889 $ 21,264,174
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in policy reserves 7,192,154 3,570
Amortization of bond discount 74,805 56,397
Amortization of insurance licenses 112,500 112,500
Change in receivable from/payable to affiliates 20,067,879 63,494,692
Change in income tax receivable/payable (9,143,928) 1,209,562
Increase in other assets (282,947) (2,063,551)
(Increase)/decrease in accrued investment income 145,326 (46,663)
(Increase)/decrease in reinsurance receivable (5,782,318) 2,287,168
Increase in deferred acquisition costs, net (145,541,602) (145,984,394)
(Increase)/decrease in income tax receivable - 3,725,001 (7,859,728)
deferred
Increase in accounts payable and accrued expenses 14,872,099 25,630,696
Increase in drafts outstanding 489,487 -
Change in foreign currency translation, net 124,555 (80,986)
Realized gain on sale of investments (123,610) (84,617)
----------------------- -----------------------
Net cash used in operating activities (79,849,710) (42,061,179)
----------------------- -----------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of fixed maturity investments (21,660,049) (13,723,543)
Proceeds from sale and maturity of fixed maturity investments 4,049,150 5,755,550
Purchase of shares in mutual funds (6,411,575) (4,248,877)
Proceeds from sale of shares in mutual funds 6,250,087 1,318,458
Net purchase of mutual funds - (7,900,000)
Decrease in policy loans 129,834 -
Change in investments of separate account assets (3,149,627,509) (2,779,722,388)
----------------------- -------------------------
Net cash used in investing activities (3,167,270,062) (2,798,520,800)
----------------------- -------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Capital contributions from parent 5,762,485 947,944
Increase in future fees payable to parent 38,621,237 53,825,601
Proceeds from life annuity sales 3,143,449,482 2,784,972,447
----------------------- -------------------------
Net cash provided by financing activities 3,187,833,204 2,839,745,992
----------------------- -------------------------
Net decrease in cash and cash equivalents (59,286,568) (835,987)
----------------------- -------------------------
Cash and cash equivalents at beginning of period 81,974,204 14,199,412
----------------------- -------------------------
Cash and cash equivalents at end of period $ 22,687,636 $ 13,363,425
======================= =========================
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Income taxes paid $ 14,618,966 $ 17,776,982
======================= =========================
Interest paid $ 6,227,483 $ 11,711,001
======================= =========================
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Unaudited Consolidated Financial Statements
September 30, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements
of American Skandia Life Assurance Corporation (the Company)
have been prepared in accordance with generally accepted
accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the
nine-month period ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to
the consolidated financial statements and footnotes thereto in
the Company's audited consolidated financial statements for
the year ended December 31, 1997.
Certain reclassifications have been made to prior year amounts
to conform with the current year presentation.
B. New Accounting Pronouncement
----------------------------
As of January 1, 1998 the Company adopted Statement of
Financial Accounting Standards ("SFAS") 130, "Reporting
Comprehensive Income". SFAS 130 sets standards for the
reporting and display of comprehensive income and its
components; however, the adoption of this Statement had no
impact on the Company's financial position or net income. SFAS
130 requires unrealized gains and losses on the Company's
available-for-sale securities and foreign currency translation
adjustments, which prior to adoption were reported separately
in shareholder's equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified
to conform to the requirements of SFAS 130.
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Unaudited Consolidated Financial Statements
September 30, 1998
The components of comprehensive income, net of tax, for the nine months ended
September 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
---- ----
Net income $34,220,889 $21,264,174
Other comprehensive income:
Unrealized investment gains and
losses 3,198,290 765,734
Foreign currency translation (124,555) (52,641)
-------------------- -------------------
Other comprehensive income 3,073,735 713,093
-------------------- -------------------
Comprehensive income $37,294,624 $21,977,267
==================== ===================
The components of accumulated other comprehensive income, net of tax,
as of September 30, 1998 and December 31, 1997 were as follows:
1998 1997
---- ----
Unrealized investment gains and
losses $4,152,359 $ 954,069
Foreign currency translation (410,593) (286,038)
------------------- --------------------
Accumulated other comprehensive
income $3,741,766 $ 668,031
=================== ====================
</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 $5,465,303 as of September 30, 1998.
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Unaudited Consolidated Financial Statements
September 30, 1998
3. SURPLUS NOTES
The Company has issued surplus notes to American Skandia Investment Holding
Corporation (the "Parent") in exchange for cash. Surplus notes outstanding
as of September 30, 1998 were as follows.
Issue Date Amount Interest Rate
---------- ------ -------------
December 29, 1993 $20,000,000 6.84%
February 18, 1994 10,000,000 7.28%
March 28, 1994 10,000,000 7.90%
September 30, 1994 15,000,000 9.13%
December 28, 1994 14,000,000 9.78%
December 19, 1995 10,000,000 7.52%
December 20, 1995 15,000,000 7.49%
December 22, 1995 9,000,000 7.47%
June 28, 1996 40,000,000 8.41%
December 30, 1996 70,000,000 8.03%
------------
Total $213,000,000
============
Payment of interest and repayment of principal for these notes is subject
to certain conditions and requires approval by the Insurance Commissioner
of the State of Connecticut. As of September 30, 1998, $12,593,944 of
accrued interest on surplus notes was not approved for payment under these
criteria.
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Unaudited Consolidated Financial Statements
September 30, 1998
4. FUTURE FEES PAYABLE TO PARENT
On December 17, 1996, the Company sold to its Parent, effective September
1, 1996, certain rights to receive future fees and charges expected to be
realized on the variable portion of a designated block of deferred annuity
contracts issued during the period from January 1, 1994 through June 30,
1996 (Transaction 1996-1). In addition, the Company entered into the
following similar transactions during 1997 and 1998:
Closing Effective Contract Issue
Transaction Date Date Period
----------- -------- --------- -----------------
1997-1 7/23/97 6/1/97 3/1/96 - 4/30/97
1997-2 12/30/97 12/1/97 5/1/95 - 12/31/96
1997-3 12/30/97 12/1/97 5/1/96 - 10/31/97
1998-1 6/30/98 6/1/98 1/1/97 - 5/31/98
In connection with these transactions, the Parent, through a trust, issued
collateralized notes in private placements which are secured by the rights
to receive future fees and charges purchased from the Company.
Under the terms of the Purchase Agreements, the rights sold provide for the
Parent to receive 80% (100% for Transaction 1997-3) of future mortality and
expense charges and contingent deferred sales charges, after reinsurance,
expected to be realized over the remaining surrender charge period of the
designated contracts (6 to 8 years). The Company did not sell the right to
receive future fees and charges after the expiration of the surrender
charge period.
The proceeds from the sales have been recorded as liabilities and are being
amortized over the remaining surrender charge period of the designated
contracts using the interest method. The present value of the transactions
(discounted at 7.5%) as of the Effective Date was as follows:
Present Value as
Transaction of Effective Date
----------- -----------------
1996-1 $50,221,438
1997-1 58,766,633
1997-2 77,551,736
1997-3 58,193,264
1998-1 61,179,515
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Unaudited Consolidated Financial Statements
September 30, 1998
Payments representing fees and charges realized during the period
January 1, 1998 through September 30, 1998 in the aggregate amount of
$47,989,273 were made by the Company to the Parent. Interest expense of
$16,008,724 has been included in the statement of operations.
Expected payments of future fees payable to Parent are as follows:
Year Ending
December 31, Amount
----------- ------
1998 $ 12,351,641
1999 51,188,963
2000 53,840,643
2001 52,032,259
2002 46,756,435
2003 35,839,640
2004 18,262,429
2005 1,383,045
-------------
Total $271,655,055
=============
The Commissioner of the State of Connecticut has approved the sale of
future fees and charges; however, in the event that the Company becomes
subject to an order of liquidation or rehabilitation, the Commissioner
has the ability to stop the payments due to the Parent under the
Purchase Agreements subject to certain terms and conditions.
5. REINSURANCE
The Company cedes reinsurance under modified co-insurance arrangements.
The reinsurance arrangements provide additional capacity for growth in
supporting the cash flow strain from the Company's variable annuity
business. The reinsurance is effected under quota share contracts.
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Unaudited Consolidated Financial Statements
September 30, 1998
In addition, the Company reinsures certain mortality risks pertaining
to the Guaranteed Minimum Death Benefit feature in the variable annuity
products.
The effect of the reinsurance agreements on the Company's operations
was to reduce annuity charges and fee income, death benefit expense,
and reserve exposure. The effect of reinsurance is summarized as
follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
<S> <C> <C> <C>
Annuity Increase in Annuity Return Credited
Charges & Fees Policy Reserves to Contractowners
-------------- ------------------- -----------------
Gross $155,314,801 $ 6,113,204 ($7,164,052)
Ceded (21,584,972) (5,519,404) -
------------- ------------ ------------
Net $133,729,829 $ 593,800 ($7,164,052)
============= ============ ============
Nine Months Ended September 30, 1997
Annuity Increase in Annuity Return Credited
Charges & Fees Policy Reserves to Contractowners
-------------- ------------------- -----------------
Gross $101,999,925 ($ 1,110,474) ($7,561,239)
Ceded 16,948,476 (830,269) 20,781
-------------- ------------- ------------
Net $ 85,051,449 ($ 280,205) ($7,540,458)
============== ============== ============
</TABLE>
Such ceded reinsurance does not relieve the Company from its
obligations to policyholders. The Company remains liable to its
policyholders for the portion reinsured to the extent that any
reinsurer does not meet the obligations assumed under the reinsurance
agreement.
6. SUBSEQUENT EVENT
On November 10, 1998 the Company sold to its Parent, effective October
1, 1998, certain rights to receive future fees and charges expected to
be realized on the variable portion of a designated block of deferred
annuity contracts issued during the period May 1, 1997 through August
31, 1998. In connection with this transaction, the Parent issued
collateralized notes in a private placement which are secured by the
rights to receive future fees and charges purchased from the Company.
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
Notes to Unaudited Consolidated Financial Statements
September 30, 1998
Under the terms of the Purchase Agreement, the rights sold provide for
the Parent to receive 80% of future mortality and expense charges and
contingent deferred sales charges expected to be realized over the
remaining surrender charge period of the designated contracts
(generally, 8 years). The Company did not sell the right to receive
future fees and charges after the expiration of the surrender charge
period.
The proceeds from the sale will be recorded as a liability and will be
amortized over the remaining surrender charge period of the designated
contracts using the interest method. The present value at October 1,
1998 (discounted at 7.0%), of future fees and charges expected to be
realized on the designated contracts was $68,573,258.
Expected payments of future fees payable to Parent are as follows:
Period Ending
December 31, Amount
------------- ------
1998 $ 1,842,961
1999 7,742,574
2000 8,362,986
2001 9,087,882
2002 9,985,657
2003 10,586,804
2004 10,877,346
2005 8,663,401
2006 1,423,647
-----------
Total $68,573,258
===========
The Commissioner of the State of Connecticut has approved the sale of
future fees and charges; however, in the event that the Company becomes
subject to an order of liquidation or rehabilitation, the Commissioner
has the ability to stop the payments due to the Parent under the
Purchase Agreement, subject to certain terms and conditions.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nine months ended September 30, 1998
American Skandia Life Assurance Corporation (the Company) is a stock insurance
company domiciled in Connecticut with licenses in all 50 states. It is a
wholly-owned subsidiary of American Skandia Investment Holding Corporation,
whose ultimate parent is Skandia Insurance Company Ltd., a Swedish company.
The Company mainly is in the business of issuing annuity policies, and has been
so since its business inception in 1988. The Company currently offers the
following annuity products: a) certain deferred annuities that are registered
with the Securities and Exchange Commission, including variable annuities and
fixed interest rate annuities that include a market value adjustment feature; b)
certain other fixed deferred annuities that are not registered with the
Securities and Exchange Commission; c) non-registered group variable annuities
designed as funding vehicles for certain qualified retirement plans; and d)
fixed and adjustable immediate annuities.
In April, the Company began offering a term life insurance product in support of
an affiliate's mutual fund products. In May, the Company launched its first
variable life insurance product. Early in 1999, the Company expects to release
its second variable life insurance product. Consistent sales activity is not
anticipated until more state approvals are secured and the launch of the second
variable life insurance product is completed.
The Company markets its products through an internal field marketing staff to
broker-dealers, financial planners and in conjunction with financial
institutions such as banks that are permitted directly, or through affiliates,
to sell annuities.
Results of Operations
---------------------
The Company's long term business plan was developed reflecting the current sales
and marketing approach. The sales volume for the nine month periods ended
September 30, 1998 and 1997 was $3,143 million and $2,785 million, respectively,
an increase of 13%. This increase is a direct result of the marketing efforts by
the Company coupled with an overall increase in the variable annuity
marketplace. Assets grew $2,723 million or 21% since December 31, 1997. This
increase is a direct result of the sales volume increasing separate account
assets and deferred acquisition costs combined with the strong first quarter
stock market performance partially offset by the impact of the third quarter
stock market decline, which impacted the growth in separate account assets.
Liabilities grew $2,680 million or 21% since December 31, 1997 as a result of
the reserves required for the increased sales activity as well as an increase in
borrowings and reinsurance to support the acquisition costs of the Company's
variable annuity business.
<PAGE>
The Company experienced a net gain of $34.2 million after tax for the current
period which was $12.9 million greater than the same period last year. This gain
is a result of the strong sales activity for the nine months ended September 30,
1998, expense levels consistent with sales activity, with the exception of
development activities, and an increased asset base, which generates additional
fee revenue.
Revenues:
Increasing annuity sales volume results in greater assets under management.
Growth in assets under management has resulted in a 57% increase in annuity
charges & fees for the nine-month period ended September 30, 1998. This is
compared to an increase of 71% for the nine-month period ended September 30,
1997.
Fee income includes income earned for transfer agency type activities. This
income increased 91% for the nine month period ended September 30, 1998 compared
to an increase of 70% for the nine month period ended September 30, 1997. These
increases are driven by the continued increase in assets under management.
Net investment income increased 35% for the nine-month period ended September
30, 1998. This is compared to an increase of 498% for the nine-month period
ended September 30, 1997. These increases are a result of increased general
account investment holdings for the periods.
Annuity premium income represents sales of immediate annuities with life
contingencies.
Benefits:
Annuity benefits represent payments on annuity contracts with mortality risks,
immediate annuities with life contingencies and supplementary contracts with
life contingencies.
The increase in annuity policy reserves represents the change in reserves for
immediate annuities with life contingencies, supplementary contracts with life
contingencies and the guaranteed minimum death benefit on variable annuities.
The Company reinsures the guaranteed minimum death benefit exposure on most of
its variable annuity contracts. For the periods ended September 30, 1998 and
1997, the costs associated with reinsuring the minimum death benefit reserve
exceeded the change in the minimum death benefit reserve by approximately $1.6
million and $0.5 million, respectively.
Return credited to contractowners represents revenues on variable and market
value adjusted annuities offset by benefit payments and change in reserves
required on this business. Also included are benefit payments and change in
reserves on immediate annuities and supplemental contracts without significant
mortality risks. The result for the current period reflects a higher than
expected separate account investment return on the market value adjusted
contracts in support of the benefits and required reserves. The positive
performance is consistent with the performance during the nine months ended
September 30, 1997.
<PAGE>
Expenses:
Underwriting, acquisition and other insurance expenses consists of $168.9
million of commissions and $86.6 million of general expenses offset by the net
capitalization of deferred acquisition costs totaling $145.6 million. This
compares to $140 million of commissions and $70.8 million of general expenses
offset by the net capitalization of deferred acquisition costs totaling $145.9
million for the same period last year.
Interest expense increased 63% over the same period last year as a result of the
securitization (future fees payable to Parent) transactions during 1997 and
1998. This compares to an increase in interest expense of 138% for the nine
months ended September 30, 1997, which was the result of the 1996 increase in
surplus notes of $110 million and the 1996 and 1997 securitization transactions.
Income tax expense was $7.6 million for the period ended September 30, 1998,
compared with $10.2 million for the same period last year. The effective federal
income tax rates for the periods were 18% and 32%, respectively. The 1998
effective rate was lower than the federal statutory income tax rate due to
permanent differences and 1997 provision to return differences. The 1997
effective rate was lower than the statutory rate due to permanent differences.
Management believes that based on the taxable income produced in 1997 and the
first nine months of 1998 as well as the continued growth in annuity products,
the Company will produce sufficient taxable income in the future to realize its
deferred tax assets.
Liquidity and Capital Resources
-------------------------------
The liquidity requirement of the Company was met by cash from insurance
operations, investment activities, cash flow from the December 30, 1997 and June
30, 1998 sales of future fee revenue, intercompany advances and reinsurance.
The Company had significant growth during the nine-month period in 1998. The
sales volume of $3,143 million was made up of approximately 97% variable
annuities, most of which carry a contingent deferred sales charge. This type of
product causes a temporary cash strain in that 100% of the proceeds are invested
in separate accounts supporting the product leaving a cash (but not capital)
strain caused by the acquisition costs for the new business. This cash strain
required the Company to look beyond the insurance operations and investments of
the Company. To this end, the Company extended its reinsurance agreements
(initiated in 1993, 1994 and 1995). The reinsurance agreements are modified
coinsurance arrangements where the reinsurer shares in the experience of a
specific book of business. The income and expense items presented above are net
of reinsurance.
In addition, since December 1996, the Company has entered into a series of
transactions in which the rights to receive future fees and charges expected to
be realized on the variable portion of a designated block of deferred annuity
contracts through their surrender charge period have been sold to the Parent.
These transactions, designated as another means of financing growth, are
discussed in more detail at Notes 4 and 6 of the Notes to Unaudited Consolidated
Financial Statements.
<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 September 30, 1998 and December 31, 1997, shareholder's equity was $227.5
million and $184.4 million, respectively, which includes the carrying value of
the state insurance licenses in the amount of $4.5 million and $4.6 million
respectively.
The Company has long term surplus notes and short term borrowing with its
parent. No dividends have been paid to its parent company.
Year 2000 Compliance
The Company is continuing its ongoing assessment of the potential impact of the
year 2000 issue on various aspects of its business.
The Company's computer support is provided by its affiliate, American Skandia
Information Services and Technology Corporation, which also provides such
support for the Company's affiliated broker-dealer, American Skandia Marketing,
Incorporated, and the Company's affiliated investment advisory firm, American
Skandia Investment Services, Incorporated. Because of the nature of the
Company's business, any assessment of the potential impact of the year 2000
issues on the Company must be an assessment of the potential impact of these
issues on all these companies, which are referred to below as "American
Skandia".
Business Partners:
Management believes the Company is most vulnerable in its interfaces with
computer systems of investment managers, sub-advisors, third party
administrators, vendors and other business partners. The inability to properly
recognize date sensitive electronic information and transfer data between
systems could cause errors or even a complete systems failure which would result
in a temporary inability to process transactions correctly or engage in normal
business activities.
The American Skandia's deferred annuity operational business partners report
that all critical interfaces are or are expected to be Year 2000 compliant by
the end of 1998. All investment managers and sub-advisors are required by the
Securities and Exchange Commission to publicly disclose their Year 2000 status
in December 1998 and June 1999. American Skandia has initiated formal
communications with parties that provide third party administration, record
keeping and trust services in connection with its life insurance and qualified
retirement plan annuities business. Management expects to receive written
assurances that these firms will be Year 2000 compliant by the end of 1998.
American Skandia is currently developing contingency plans in the event that
these targets are not met.
Information Technology Systems:
American Skandia is a relatively young company whose internally developed
systems were designed from the start with four digit year codes. The Company
engaged an external information technology specialist to review American
Skandia's operating systems and internally developed software. The assessment
was completed in December 1997 and the results were favorable. Specific
modifications were suggested, evaluated and implemented for the Annuity
Administration system. This project was completed recently and a certificate of
compliance has been received. Other non-critical internally developed
applications in the client/server area have already been or will be remediated
during 1999. The costs associated with this aspect of Year 2000 compliance have
not had a significant impact on the Company's results from operations.
Suppliers and Non-Information Technology Systems:
Like most companies, American Skandia is reliant on network, and desktop
operating systems and software providers to release compliant versions of their
respective systems. American Skandia's network is expected to be at the most
compliant level available by the end of 1998. The standard desktop software will
be replaced, as fully compliant versions become available. In addition, the
Company is in the process of contacting the non-information systems vendors and
suppliers regarding their Year 2000 compliance status and will factor the
results of these assessments into its contingency plans.
Management believes it has an effective program in place to resolve the Year
2000 issue in a timely manner. However, should errors or disruptions in computer
service occur, the Company could realize losses. Given the nature and
uncertainty of such losses, the amounts cannot be reasonably determined.
<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.
<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
November 13, 1998
<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
November 13, 1998
<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
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000881453
<NAME> ASLAC0998
<MULTIPLIER> 1
<CURRENCY> U.S Dollars
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 132,385,354
<DEBT-CARRYING-VALUE> 140,681,868
<DEBT-MARKET-VALUE> 140,806,646
<EQUITIES> 6,872,319
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 148,111,620
<CASH> 22,687,636
<RECOVER-REINSURE> 12,125,256
<DEFERRED-ACQUISITION> 692,244,653
<TOTAL-ASSETS> 15,617,683,435 <F1>
<POLICY-LOSSES> 70,970,783
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 213,000,000
0
0
<COMMON> 2,000,000
<OTHER-SE> 225,478,153
<TOTAL-LIABILITY-AND-EQUITY> 15,617,683,435 <F2>
80,801
<INVESTMENT-INCOME> 8,140,502
<INVESTMENT-GAINS> 123,610
<OTHER-INCOME> 260,427 <F3>
<BENEFITS> (2,017,320)
<UNDERWRITING-AMORTIZATION> 59,460,341
<UNDERWRITING-OTHER> 50,509,500
<INCOME-PRETAX> 41,793,541
<INCOME-TAX> 7,572,652
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,220,889
<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
$14,698,628,982.
<F2> Included in Total Liabilities and Equity are Liabilities Related to
Separate Accounts of $14,698,628,982.
<F3> Other income includes annuity charges and fees of $133,729,829 and fee
income of $36,913,358.
</FN>
</TABLE>
