UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1999
Commission file numbers: 33-62791,
33-62953, 33-88360, 33-89676, 33-89678,
33-91400, 333-00995, 333-02867, 333-24989,
333-25733, 333-25761 and 333-26695
American Skandia Life Assurance Corporation
Incorporated in the State of Connecticut
06-1241288
(Federal Employer Identification No.)
One Corporate Drive
Shelton, Connecticut 06484
Telephone Number (203) 926-1888
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.
Yes x No __
As of August 10, 1999, there were 25,000 shares of outstanding common stock, par
value $80 per share, of the registrant, consisting of 100 shares of voting and
24,900 shares of non-voting common stock, all of which were owned by American
Skandia Investment Holding Corporation, a wholly-owned subsidiary of Skandia
Insurance Company Ltd., a Swedish corporation.
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Statements of Financial Condition -
June 30, 1999 (unaudited)
and December 31, 1998 3
Consolidated Statements of Income (unaudited) -
Six months ended June 30, 1999
and June 30, 1998 4
Consolidated Statements of Income (unaudited) -
Three months ended June 30, 1999
and June 30, 1998 5
Consolidated Statements of Shareholder's Equity -
June 30, 1999 (unaudited)
and December 31, 1998 6
Consolidated Statements of Cash Flows (unaudited) Six months
ended June 30, 1999
and June 30, 1998 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
- Six months ended June 30, 1999 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit Index 18
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company, Ltd.)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(unaudited)
--------------- ---------------
ASSETS
Investments:
<S> <C> <C>
Fixed maturities - at amortized cost $ 8,060 $ 8,289
Fixed maturities - at fair value 134,281 141,195
Mutual funds 11,446 8,210
Policy loans 737 569
--------------- ---------------
Total investments $ 154,524 $ 158,263
Cash and cash equivalents 69,670 77,525
Accrued investment income 3,100 2,880
Fixed assets 368 328
Deferred acquisition costs 885,098 721,507
Reinsurance receivable 4,829 4,191
Receivable from affiliates 523 1,161
Income tax receivable - deferred 41,487 38,861
State insurance licenses 4,338 4,413
Other assets 4,772 3,744
Separate account assets 22,074,578 17,835,400
--------------- ---------------
Total assets $ 23,243,287 $ 18,848,273
=============== ===============
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Reserve for future contractowner benefits $ 33,957 $ 37,508
Policy reserves 37,178 25,545
Drafts outstanding 31,074 28,941
Accounts payable and accrued expenses 108,231 91,827
Income tax payable 2,112 6,657
Future fees payable to parent 464,910 368,978
Short-term borrowing 10,000 10,000
Surplus notes 193,000 193,000
Separate account liabilities 22,074,578 17,835,400
--------------- ---------------
Total liabilities $ 22,955,040 $ 18,597,856
--------------- ---------------
SHAREHOLDER'S EQUITY:
Common stock, $80 par, 25,000 shares
authorized, issued and outstanding $ 2,000 $ 2,000
Additional paid-in capital 191,579 179,889
Retained earnings 94,760 64,993
Accumulated other comprehensive income (92) 3,535
--------------- ---------------
Total shareholder's equity 288,247 250,417
--------------- ---------------
Total liabilities and shareholder's equity $ 23,243,287 $ 18,848,273
=============== ===============
</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 INCOME
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
------------- -------------
REVENUES
<S> <C> <C>
Annuity and life insurance charges & fees $ 128,807 $ 85,083
Fee income 36,290 23,227
Net investment income 5,496 5,671
Premium income 908 81
Net realized capital gains 320 170
Other 842 148
------------- -------------
Total Revenues 172,663 114,380
------------- -------------
BENEFITS AND EXPENSES
Benefits:
Annuity benefits 380 559
Change in annuity policy reserves 9,278 403
Cost of minimum death benefit reinsurance 2,955 2,674
Return credited to contractowners (3,862) (7,016)
------------- -------------
8,751 (3,380)
------------- -------------
Expenses:
Underwriting, acquisition and other insurance expenses 93,941 73,567
Interest expense 29,218 18,797
------------- -------------
123,159 92,364
------------- -------------
Total Benefits and Expenses 131,910 88,984
------------- -------------
Income from operations before income taxes 40,753 25,396
Income tax expense 10,986 5,349
------------- -------------
Net income $ 29,767 $ 20,047
============= =============
</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 INCOME
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended June 30,
1999 1998
------------- -------------
REVENUES
<S> <C> <C>
Annuity and life insurance charges & fees $ 68,486 $ 45,297
Fee income 19,313 12,540
Net investment income 2,842 2,410
Premium income 159 31
Net realized capital gains 25 13
Other 477 78
------------- -------------
Total Revenues 91,302 60,369
------------- -------------
BENEFITS AND EXPENSES
Benefits:
Annuity benefits 159 193
Change in annuity policy reserves 8,521 165
Cost of minimum death benefit reinsurance 1,206 1,305
Return credited to contractowners (432) (8,683)
------------- -------------
9,454 (7,020)
------------- -------------
Expenses:
Underwriting, acquisition and other insurance expenses 42,956 39,274
Interest expense 15,393 9,966
------------- -------------
58,349 49,240
------------- -------------
Total Benefits and Expenses 67,803 42,220
------------- -------------
Income from operations before income taxes 23,499 18,149
Income tax expense 7,142 4,174
------------- -------------
Net income $ 16,357 $ 13,975
============= =============
</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 SHAREHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(unaudited)
--------------- ---------------
Common stock:
<S> <C> <C>
Beginning and ending balance $ 2,000 $ 2,000
Additional paid in capital:
Beginning balance 179,889 151,527
Additional contributions 11,690 28,362
--------------- ---------------
Ending balance 191,579 179,889
Retained earnings:
Beginning balance 64,993 30,226
Net income 29,767 34,767
--------------- ---------------
Ending balance 94,760 64,993
Accumulated other comprehensive income:
Beginning balance 3,535 668
Other comprehensive income (3,627) 2,867
--------------- ---------------
Ending balance (92) 3,535
--------------- ---------------
Total shareholders equity $ 288,247 $ 250,417
=============== ===============
</TABLE>
See notes to unaudited consolidated financial statements.
6
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company, Ltd.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998
------------- -------------
Cash Flow from operating activities:
<S> <C> <C>
Net income $ 29,767 $ 20,047
Adjustments to reconcile net income to net cash
used in operating activities:
Increase in policy reserves 11,633 729
Amortization of bond discount 60 47
Amortization of insurance licenses 75 75
Change in receivable from/payable to affiliates 638 4,191
(Decrease)/increase in income tax payable (4,545) 6,746
Increase in other assets (1,068) (532)
Increase in accrued investment income (220) (275)
Increase in reinsurance receivable (638) (918)
Increase in deferred acquisition costs, net (163,591) (85,923)
Increase in income tax receivable - deferred (673) (5,141)
Increase in accounts payable and accrued expenses 16,404 32,799
Increase in drafts outstanding 2,133 4,669
Change in foreign currency translation, net 704 46
Realized gain on sale of investments (320) (170)
------------- -------------
Net cash used in operating activities (109,641) (23,610)
------------- -------------
Cash flow from investing activities:
Purchase of fixed maturity investments (29,582) (17,684)
Proceeds from sale and maturity of fixed maturity investments 29,504 50
Purchase of shares in mutual funds (13,918) (5,084)
Proceeds from sale of shares in mutual funds 11,879 4,769
Increase in policy loans (168) (122)
------------- -------------
Net cash used in investing activities (2,285) (18,071)
------------- -------------
Cash flow from financing activities:
Capital contributions from parent 11,690 1,063
Increase in future fees payable to parent 95,932 47,507
Net (withdrawals from)/deposits to contractowner accounts (3,551) (4,601)
------------- -------------
Net cash provided by financing activities 104,071 43,969
------------- -------------
Net (decrease)/increase in cash and cash equivalents (7,855) 2,288
Cash and cash equivalents at beginning of period 77,525 81,974
------------- -------------
Cash and cash equivalents at end of period $ 69,670 $ 84,262
============= =============
Supplemental cash flow disclosure:
Income taxes paid $ 16,205 $ 1,620
============= =============
Interest paid $ 29,900 $ 16,080
============= =============
</TABLE>
See notes to unaudited consolidated financial statements.
7
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
American Skandia Life Assurance Corporation (the Company) have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the six-month period ended June 30,
1999 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1999. For further information, refer
to the consolidated financial statements and footnotes thereto in the
Company's audited consolidated financial statements for the year ended
December 31, 1998.
Certain reclassifications have been made to prior period amounts to
conform to the current period presentation.
2. NEW ACCOUNTING PRONOUNCEMENT
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Software Developed or Obtained for Internal Use. The SOP, which has
been adopted prospectively as of January 1, 1999, requires the
capitalization of certain costs incurred in connection with developing
or obtaining internal use software. Prior to the adoption of SOP 98-1,
the Company expensed all internal use software related costs as
incurred. The Company has identified and capitalized $1,186,000 of
costs associated with internal use software through the first six
months of 1999, and is amortizing the applicable costs on a straight
line basis over a three-year period.
3. SEGMENT REPORTING
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS 131 establishes standards
for the way that public enterprises report information about operating
segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards related to disclosures about products and services,
geographic areas and major customers. SFAS 131 is effective for
financial statement periods beginning after December 15, 1997.
During 1998, to complement its annuity products, the Company launched
specific marketing and operational activities towards the release of
variable life insurance and qualified retirement plan annuity products.
As of June 30, 1999, sales were not significant enough to warrant full
segment disclosures. Sales, as measured by premium received, for the
year ended June 30, 1999 and assets under management as of June 30,
1999, for the respective segments were as follows:
<TABLE>
<CAPTION>
(in thousands) Variable Variable Qualified
Annuity Life Plans Total
<S> <C> <C> <C> <C>
Sales $ 3,213,942 $6,109 $40,129 $ 3,260,180
============ ====== ======= ============
Assets under management $21,995,491 $7,455 $93,345 $22,096,291
=========== ====== ======= =============
</TABLE>
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1999
4. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") 130, "Reporting Comprehensive Income".
SFAS 130 sets standards for the reporting and display of comprehensive
income and its components; however, the adoption of this Statement had
no impact on the Company's financial position or net income. SFAS 130
requires unrealized gains and losses on the Company's
available-for-sale securities and foreign currency translation
adjustments, which prior to adoption were reported separately in
shareholder's equity to be included in other comprehensive income.
The components of comprehensive income, net of tax, for the six months
ended June 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
---- ----
<S> <C> <C>
Net income $29,767 $20,047
Other comprehensive income:
Net unrealized gains/(losses) on securities (4,083) 1,141
Foreign currency translation 456 (47)
---------- -------------
Other comprehensive income (3,627) 1,094
--------- ----------
Comprehensive income $26,140 $21,141
======= =======
</TABLE>
The components of accumulated other comprehensive income, net of tax,
as of June 30, 1999 and December 31, 1998 were as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998
---- ----
<S> <C> <C>
Unrealized investment gains $(240) $3,843
Foreign currency translation 148 (308)
------- -------
Accumulated other comprehensive income $ (92) $3,535
======= ======
</TABLE>
5. FOREIGN ENTITY
The Company has a 99.9% ownership in Skandia Vida, S.A. de C.V.
("Skandia Vida") which is a life insurance company domiciled in Mexico,
selling long-term savings products within Mexico. Skandia Vida, which
is fully consolidated in the accompanying financial statements, had
total shareholders' equity of $5,897,000 as of June 30, 1999 and
$4,724,000 as of December 31, 1998 and has generated losses of
$1,220,000 and $979,000 for the six months ended June 30, 1999 and
1998, respectively.
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
June 30, 1999
6. FUTURE FEES PAYABLE TO PARENT
On June 23, 1999, the Company sold to its Parent, effective June 1,
1999, certain rights to receive future fees and charges expected to be
realized on the variable portion of a designated block of deferred
annuity contracts issued during the period April 1994 through April
1999. In connection with this transaction, the Parent issued
collateralized notes in a private placement which are secured by the
rights to receive future fees and charges purchased from the Company.
Under the terms of the Purchase Agreement, the rights sold provide for
the Parent to receive 80% of future mortality and expense charges and
contingent deferred sales charges expected to be realized over the
remaining surrender charge period of the designated contracts
(generally, 7 years). The Company did not sell the right to receive
future fees and charges after the expiration of the surrender charge
period.
The proceeds from the sale will be recorded as a liability and will be
amortized over the remaining surrender charge period of the designated
contracts using the interest method. The present value at June 1, 1999
(discounted at 7.5%), of future fees and charges expected to be
realized on the designated contracts was $120,632,000.
Expected payments of future fees payable to Parent under this
transaction are as follows:
(in thousands)
Period Ending
December 31, Amount
------------ --------
1999 $13,906
2000 23,014
2001 21,778
2002 19,858
2003 16,671
2004 13,270
2005 8,517
2006 3,327
2007 291
----------- --------
Total $120,632
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Six months ended June 30, 1999
American Skandia Life Assurance Corporation (the "Company") is a stock life
insurance company domiciled in Connecticut with licenses in all 50 states and
the District of Columbia. It is a wholly-owned subsidiary of American Skandia
Investment Holding Corporation (the "Parent"), whose ultimate parent is Skandia
Insurance Company Ltd., a Swedish company.
The Company is primarily in the business of issuing long-term savings and
retirement products to individuals, groups and qualified pension plans. Since
its business inception in 1988, the Company has offered an increasingly wide
array of annuities, including: a)certain deferred annuities that are registered
with the Securities and Exchange Commission, including variable annuities and
fixed interest rate annuities that include a market value adjustment feature; b)
certain other fixed deferred annuities that are not registered with the
Securities and Exchange Commission; c) non-registered group variable annuities
designed as funding vehicles for various types of qualified retirement plans;
and d) fixed and adjustable immediate annuities.
In April 1998, the Company began offering a term life insurance product in
support of an affiliate's mutual fund products. In May 1998, the Company
launched a single premium variable life insurance product and in January 1999
the Company launched its second variable life product, which was designed as a
flexible premium product.
The Company markets its products to independent financial planners and
broker-dealers through an internal field marketing staff. In addition, the
Company markets through and in conjunction with financial institutions such as
banks that are permitted directly, or through affiliates, to sell annuities and
life insurance.
RESULTS OF OPERATIONS
Annuity and life insurance sales volume for the six months ended June 30, 1999
and 1998 was $3,260,180,000 and $1,922,757,000, respectively, an increase of
70%. This increase was the result of innovative product development activities,
favorable market conditions, the development of business relationships with and
retention of top producers, and the continued success of the Company's highly
rated customer service teams. Assets grew $4,395,014,000 or 23% since December
31, 1998. This increase is a direct result of the strong performance of the
stock markets over the first half of 1999, which has contributed to the growth
in separate account assets, combined with increases in separate account assets
and deferred acquisition costs over the same period due to sales volume.
Liabilities grew $4,357,184,000 or 23% since December 31, 1998 as a result of an
increase in additional reserves required for the market and sales-related growth
of separate account assets as well as an increase in future fees payable to
Parent due to the closing of another securitization transaction in June 1999.
The Company experienced a net gain of $29,767,000 after tax for the current
period compared with $20,047,000 for the same period last year.The increase was
the result of greater than expected sales levels and substantial growth in
assets under management, which generated higher amounts of annuity charges and
fees and transfer agency type fee income, combined with favorable expense levels
compared with the level of sales volume.
REVENUES
Due to strong market conditions and as a result of the significant growth in
sales and assets under management, contract owner fees and charges and fees
generated from transfer agency type activities increased $56,787,000 or 52% in
the first half of 1999 over the first half of 1998. This is compared to an
increase of 64% for the six months ended June 30, 1998.
Net investment income decreased 3% as compared with an increase of 42% in 1998.
The insignificant change in 1999 was because general account investment levels
remained relatively consistent from year to year. The increase in 1998 was the
result of income generated from bond holdings, which were increased in early
1998 and late 1997 to meet risk based capital goals, which in turn, increased as
a result of the growth in business.
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Premium income represents premiums earned on sales of immediate annuities with
life contingencies, supplementary contracts with life contingencies and certain
life insurance products. There have been minimal sales of these ancillary
products during both 1999 and 1998.
BENEFITS
Annuity benefits relate to annuity contracts with mortality risks,
these being immediate annuity contracts with life contingencies and
supplementary contracts with life contingencies. Due to the age of these
policies in force and the relative insignificance of these products to the
Company's overall portfolio of products, fluctuations in these benefits were of
marginal importance to the Company's total operations.
The change in annuity policy reserves includes changes in reserves related to
annuity contracts with mortality risks as well as the Company's guaranteed
minimum death benefit liability on its variable annuity product. During the
second quarter of 1999, the Company's agreement to reinsure substantially all
of its exposure on the guaranteed minimum death benefit was terminated and the
business was recaptured, as the reinsurer had recently announced its intention
to exit this market. In addition, the Company has modified its reserving
methodology in accordance with the actuarial guidelines regarding guaranteed
minimum death benefit reserves. These changes resulted in an increase in the
guaranteed minimum death benefit reserves of $8,024,000. The Company is
evaluating alternatives to manage these risks going forward.
The reinsurance premium associated with reinsuring the guaranteed minimum death
benefit exposure is based on levels of assets under management.Due to increased
sales and account growth this cost had increased 11% in the first half of 1999
(payments made through May 31,1999 only) and 48% in the first half of 1998.
Return credited to contractowners includes primarily revenues on the variable
and market value adjusted annuities and variable life insurance, offset by the
benefit payments and change in reserves required on this business.The change in
the return credited to contractowners for the six months ended June 30, 1999
compared with June 30, 1998 represents a decline in the expected return on
market value adjusted contracts. This return was higher than expected in 1998
and lower than expected in 1999.
EXPENSES
Underwriting, acquisition and other insurance expenses for the
six months ended June 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
(in thousands) June 30, June 30,
1999 1998
<S> <C> <C>
Commissions $181,820 $101,489
General expenses 75,712 58,001
Net capitalization of deferred acquisition costs (163,591) (85,923)
-------- --------
Underwriting, acquisition and other insurance expenses $ 93,941 $ 73,567
======== ========
</TABLE>
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.
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
Interest expense increased $10,421,000 or 55% over the six months ended June 30,
1998 as a result of additional financing transactions, which consisted of the
sale of future fees to the Parent ("securitization transactions") initiated
throughout 1998 and 1999 offset by a decrease in surplus notes outstanding.
Surplus notes as of June 30, 1999 and December 31, 1998 totaled $193,000,000.
The effective income tax rates for the six months ended June 30, 1999, and 1998
were 27% and 21%, respectively. The effective rate is lower than the corporate
rate of 35% due to permanent differences, with the most significant item being
the dividend received deduction. Management believes that based on the taxable
income produced in 1998 and the first six months of 1999, as well as the
continued growth in annuity sales, the Company will produce sufficient taxable
income in the future to realize its deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's first half 1999 liquidity requirement was met by
cash from insurance operations reinsurance, investment activities, advances
from Parent and the sale of rights to future fees and charges to its Parent.
Through the first six months of 1999 and 1998 approximately 95%
and 97%, respectively, of sales were variable annuity and life insurance
products.Most products carry a contingent deferred sales charge, which causes a
temporary cash strain in that 100% of the proceeds are invested in separate
accounts supporting the product leaving a cash (but not capital) strain caused
by the acquisition cost for the new business. This cash strain required the
Company to look beyond the cash made available by insurance operations and
investments of the Company to financing through capital contributions, the sale
of certain rights to future fees and modified coinsurance arrangements.
On June 23,1999, the Company closed another securitization transaction in which
it received proceeds of $120,632,000. This transaction is further discussed at
Note 6 of the Notes to Unaudited Consolidated Financial Statements.
During 1999 the Company extended certain reinsurance agreements (which were
initiated prior to1996). The reinsurance agreements are modified coinsurance
arrangements where the reinsurer shares in the experience of a specific book of
business.
The Company expects the continued use of reinsurance and securitization
transactions to fund the cash strain anticipated from the acquisition costs on
the coming years' sales volume.
The Company has long-term surplus notes and short-term borrowings
with its Parent. No dividends have been paid to its Parent.
The National Association of Insurance Commissioners ("NAIC") requires
insurance companies to report information regarding minimum Risk Based Capital
("RBC") requirements. These requirements are intended to allow insurance
regulators to identify companies which may need regulatory attention. The RBC
model law requires that insurance companies apply various factors to asset,
premium and reserve items, all of which have inherent risks. The formula
includes components for asset risk, insurance risk, interest risk and business
risk.
The Company has complied with the NAIC's RBC reporting requirements and has
total adjusted capital well above required capital.
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
YEAR 2000 COMPLIANCE
The Company is continuing its ongoing assessment of the potential impact of the
Year 2000 issue on various aspects of its business. The Company's computer
support is provided by its affiliate, American Skandia Information Services and
Technology Corporation, which also provides such support for the Company's
affiliated broker-dealer, American Skandia Marketing, Incorporated and the
Company's affiliated investment advisory firm, American Skandia Investment
Services, Incorporated. Because of the nature of the Company's business, any
assessment of the potential impact of the Year 2000 issues on the Company must
be an assessment of the potential impact of these issues on all these companies,
which are referred to below as "American Skandia".
Business Partners
Management believes the area where the Company is most vulnerable to Year 2000
issues is in its interfaces with computer systems of investment managers,
sub-advisors, third party administrators, vendors and other business partners.
The inability to properly recognize date sensitive electronic information and
transfer data between systems could cause errors or even a complete systems
failure which would result in a temporary inability to process transactions
correctly or engage in normal business activities.
The American Skandia deferred annuity operational business partners report that
all critical interfaces are Year 2000 compliant. All investment managers and
sub-advisors are required by the Securities and Exchange Commission to publicly
disclose their Year 2000 status in December 1998 and June 1999.
American Skandia has initiated formal communications with parties that provide
third party administration,record keeping and trust services in connection with
its life insurance and qualified retirement plan annuities business. Management
has already received several written assurances that these firms will be Year
2000 compliant. The Company expects to have certifications from all remaining
parties by August 1999. American Skandia is currently developing contingency
plans in the event that these targets are not met.
Information Technology Systems
American Skandia is a relatively young company whose internally developed
systems were designed from the start with four digit year codes. The Company
engaged an external information technology specialist to review American
Skandia's operating systems and internally developed software. The assessment
was completed in December 1997 and the results were favorable. Specific
modifications were suggested, evaluated and implemented for the annuity
administration system. This project was completed during 1998 and a certificate
of compliance has been received. Other non-critical internally developed
applications in the client/server area have already been or will be remediated
throughout 1999. The costs associated with this aspect of Year 2000 compliance
have not had, and are not expected to have, a significant impact on the
Company's results from operations.
Suppliers and Non-Information Technology Systems
Like most companies, American Skandia is reliant on network, and desktop
operating systems and software providers to release compliant versions of their
respective systems. American Skandia's network is currently at the most
compliant level available. The standard desktop software will be replaced, as
fully compliant versions become available. In addition, the Company is in the
process of contacting the non-information systems vendors and suppliers
regarding their Year 2000 compliance status and will factor the results of these
assessments into its contingency plans.
Management believes it has an effective program in place to resolve the Year
2000 issue in a timely manner. However,should errors or disruptions in computer
service occur, the Company could realize losses. Given the nature and
uncertainty of such losses, the amounts cannot be reasonably determined.
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Company's market risk during the
first half of 1999.The Company has provided a discussion of its market risks in
Item 7A of Part II of the December 31, 1998 Form 10-K.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index
(b) None
<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 10, 1999
<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 10, 1999
<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
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000881453
<NAME> ASLAC0699
<MULTIPLIER> 1,000
<CURRENCY> U.S Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 134,281
<DEBT-CARRYING-VALUE> 142,341
<DEBT-MARKET-VALUE> 142,348
<EQUITIES> 11,446
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 154,524
<CASH> 69,670
<RECOVER-REINSURE> 4,829
<DEFERRED-ACQUISITION> 885,098
<TOTAL-ASSETS> 23,243,287 <F1>
<POLICY-LOSSES> 71,135
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 203,000
0
0
<COMMON> 2,000
<OTHER-SE> 286,247
<TOTAL-LIABILITY-AND-EQUITY> 23,243,287 <F2>
908
<INVESTMENT-INCOME> 5,496
<INVESTMENT-GAINS> 320
<OTHER-INCOME> 165,939 <F3>
<BENEFITS> 8,751
<UNDERWRITING-AMORTIZATION> 43,966
<UNDERWRITING-OTHER> 79,193
<INCOME-PRETAX> 40,753
<INCOME-TAX> 10,986
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,767
<EPS-BASIC> 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
$22,074,578.
<F2> Included in Total Liabilities and Equity are Liabilities Related to
Separate Accounts of $22,074,578.
<F3> Other income includes annuity charges and fees of $128,807 and
fee income of $36,290.
</FN>
</TABLE>
