UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1999
Commission file numbers: 33-62953, 33-88360,
33-89676, 33-91400, 333-00995,
333-02867, 333-24989, 333-25733,
333-25761, 333-26695, and 333-77213
American Skandia Life Assurance Corporation
Incorporated in the State of Connecticut
06-1241288
(Federal Employer Identification No.)
One Corporate Drive
Shelton, Connecticut 06484
Telephone Number (203) 926-1888
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months and (2) has been subject to such filing requirements for the
past 90 days.
Yes x No __
As of November 10, 1999, there were 25,000 shares of outstanding common stock,
par value $80 per share, of the registrant, consisting of 100 shares of voting
and 24,900 shares of non-voting common stock, all of which were owned by
American Skandia Investment Holding Corporation, a wholly-owned subsidiary of
Skandia Insurance Company Ltd., a Swedish corporation.
<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 -
September 30, 1999 (unaudited)
and December 31, 1998 3
Consolidated Statements of Income (unaudited) -
Nine months ended September 30, 1999
and September 30, 1998 4
Consolidated Statements of Income (unaudited) -
Three months ended September 30, 1999
and September 30, 1998 5
Consolidated Statements of Shareolder's Equity
Nine months ended September 30, 1999 (unaudited)
and year ended December 31, 1998 6
Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 1999
and September 30, 1998 7
Notes to Unaudited Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations -
Nine months ended September 30, 1999 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibit Index 20
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(unaudited)
---------------- ---------------
ASSETS
Investments:
<S> <C> <C>
Fixed maturities - at amortized cost $ 6,026 $ 8,289
Fixed maturities - at fair value 138,026 141,195
Mutual funds 10,599 8,210
Short-term investments - at amortized cost 30,697 -
Derivative Instruments 4,796 -
Policy loans 1,041 569
---------------- ---------------
Total investments $ 191,185 $ 158,263
Cash and cash equivalents 68,315 77,525
Accrued investment income 2,957 2,880
Fixed assets 398 328
Deferred acquisition costs 967,768 721,507
Reinsurance receivable 5,584 4,191
Receivable from affiliates - 1,161
Income tax receivable - deferred 36,112 38,861
Income tax recoverable 2,254 -
State insurance licenses 4,300 4,413
Other assets 7,270 3,744
Separate account assets 22,796,470 17,835,400
---------------- ---------------
Total assets $ 24,082,613 $ 18,848,273
================ ===============
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Reserve for future contractowner benefits $ 24,254 $ 37,508
Policy reserves 31,651 25,545
Drafts outstanding 37,141 28,941
Accounts payable and accrued expenses 118,605 91,827
Income tax payable - 6,657
Payable to affiliates 114,087 -
Future fees payable to parent 448,682 368,978
Short-term borrowing 10,000 10,000
Surplus notes 193,000 193,000
Separate account liabilities 22,796,470 17,835,400
---------------- ---------------
Total liabilities $ 23,773,890 $ 18,597,856
---------------- ---------------
SHAREHOLDER'S EQUITY:
Common stock, $80 par, 25,000 shares
authorized, issued and outstanding $ 2,000 $ 2,000
Additional paid-in capital 191,579 179,889
Retained earnings 116,162 64,993
Accumulated other comprehensive income (loss) (1,018) 3,535
---------------- ---------------
Total shareholder's equity 308,723 250,417
---------------- ---------------
Total liabilities and shareholder's equity $ 24,082,613 $ 18,848,273
================ ===============
</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 INCOME
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
------------- ----------------
REVENUES
<S> <C> <C>
Annuity and life insurance charges & fees $ 204,103 $ 133,730
Fee income 58,184 36,913
Net investment income 8,231 8,141
Premium income 1,236 81
Net realized capital gains 526 124
Other 1,279 260
------------- ----------------
Total Revenues 273,559 179,249
------------- ----------------
BENEFITS AND EXPENSES
Benefits:
Annuity benefits 480 908
Change in annuity policy reserves 2,519 594
Cost of minimum death benefit reinsurance 2,946 3,645
Return credited to contractowners (1,208) (7,164)
------------- ----------------
4,737 (2,017)
------------- ----------------
Expenses:
Underwriting, acquisition and other insurance expenses 152,264 109,970
Interest expense 46,505 29,502
------------- ----------------
198,769 139,472
------------- ----------------
Total Benefits and Expenses 203,506 137,455
------------- ----------------
Income from operations before income taxes 70,053 41,794
Income tax expense 18,884 7,573
------------- ----------------
Net income $ 51,169 $ 34,221
============= ================
</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 INCOME
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30,
1999 1998
------------- ---------------
REVENUES
<S> <C> <C>
Annuity and life insurance charges & fees $ 75,296 $ 48,647
Fee income 21,894 13,687
Net investment income 2,735 2,470
Premium income 328 -
Net realized capital gains 206 (47)
Other 437 112
------------- ---------------
Total Revenues 100,896 64,869
------------- ---------------
BENEFITS AND EXPENSES
Benefits:
Annuity benefits 100 349
Change in annuity policy reserves (6,759) 191
Cost of minimum death benefit reinsurance (9) 971
Return credited to contractowners 2,654 (148)
------------- ---------------
(4,014) 1,363
------------- ---------------
Expenses:
Underwriting, acquisition and other insurance expenses 58,323 36,403
Interest expense 17,288 10,705
------------- ---------------
75,611 47,108
------------- ---------------
Total Benefits and Expenses 71,597 48,471
------------- ---------------
Income from operations before income taxes 29,299 16,398
Income tax expense 7,898 2,224
------------- ---------------
Net income $ 21,401 $ 14,174
============= ===============
</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
(in thousands)
<TABLE>
<CAPTION>
September 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 51,169 34,767
---------------- ---------------
Ending balance 116,162 64,993
Accumulated other comprehensive income:
Beginning balance 3,535 668
Other comprehensive income (loss) (4,553) 2,867
---------------- ---------------
Ending balance (1,018) 3,535
---------------- ---------------
Total shareholder's equity $ 308,723 $ 250,417
================ ===============
</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 CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
------------- ----------------
Cash Flow from operating activities:
<S> <C> <C>
Net income $ 51,169 $ 34,221
Adjustments to reconcile net income to net cash
used in operating activities:
Increase in policy reserves 6,106 7,192
Amortization of bond discount 86 75
Amortization of insurance licenses 113 113
Change in receivable from/payable to affiliates 115,248 20,068
Change in income tax receivable/payable (8,911) (9,144)
Increase in other assets (3,596) (283)
Increase in accrued investment income (77) 145
Increase in reinsurance receivable (1,393) (5,782)
Increase in deferred acquisition costs, net (246,261) (145,542)
Decrease in income tax receivable - deferred 5,200 3,725
Increase in accounts payable and accrued expenses 26,777 14,872
Increase in drafts outstanding 8,200 489
Change in foreign currency translation, net 771 125
Unrealized loss on derivative instruments 178 -
Net realized capital gain on sale of investments (526) (124)
------------- ----------------
Net cash used in operating activities (46,916) (79,850)
------------- ----------------
Cash flow from investing activities:
Purchase of fixed maturity investments (36,517) (21,660)
Proceeds from sale and maturity of fixed maturity investments 33,561 4,049
Purchase of derivative investments (4,974) -
Purchase of shares in mutual funds (15,564) (6,412)
Proceeds from sale of shares in mutual funds 14,229 6,250
Purchase of short term investments (30,697) -
Increase in policy loans (472) 130
------------- ----------------
Net cash used in investing activities (40,434) (17,643)
------------- ----------------
Cash flow from financing activities:
Capital contributions from parent 11,690 5,762
Increase in future fees payable to parent 79,704 38,621
Net withdrawals from contractowner accounts (13,254) (6,176)
------------- ----------------
Net cash provided by financing activities 78,140 38,207
------------- ----------------
Net decrease in cash and cash equivalents (9,210) (59,286)
Cash and cash equivalents at beginning of period 77,525 81,974
------------- ----------------
Cash and cash equivalents at end of period $ 68,315 $ 22,688
============= ================
Supplemental cash flow disclosure:
Income taxes paid $ 16,867 $ 14,619
============= ================
Interest paid $ 45,434 $ 22,243
============= ================
</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, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of
American Skandia Life Assurance Corporation (the Company) have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the nine-month period ended September
30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. For further
information, refer to the consolidated financial statements and
footnotes thereto in the Company's audited consolidated financial
statements for the year ended December 31, 1998.
Certain reclassifications have been made to prior period amounts to
conform to the current period presentation.
2. NEW ACCOUNTING PRONOUNCEMENT
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Software Developed or Obtained for Internal Use. The SOP, which has
been adopted prospectively as of January 1, 1999, requires the
capitalization of certain costs incurred in connection with developing
or obtaining internal use software. Prior to the adoption of SOP 98-1,
the Company expensed all internal use software related costs as
incurred. The Company has identified and capitalized $1,993,000 of
costs associated with internal use software through the nine months
1999, and is amortizing the applicable costs on a straight-line basis
over a three-year period.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards Statement 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133). Subsequently,
in July 1999, FASB issued FAS 137 "Deferral of the Effective Date of
FASB Statement 133". The adoption date was delayed to fiscal years
beginning after June 15, 2000. The Company is currently evaluating the
potential impact on its financial position.
3. SEGMENT REPORTING
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS 131 establishes standards
for the way that public enterprises report information about operating
segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes
standards related to disclosures about products and services,
geographic areas and major customers. SFAS 131 is effective for
financial statement periods beginning after December 15, 1997.
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1999
During 1998, to complement its annuity products, the Company launched
specific marketing and operational activities towards the release of
variable life insurance and qualified retirement plan annuity products.
As of September 30, 1999, sales were not significant enough to warrant
full segment disclosures. Sales, as measured by premium received, for
the year ended September 30, 1999 and assets under management as of
September 30, 1999, for the Company's respective reporting segments
were as follows:
<TABLE>
<CAPTION>
(in thousands) Variable Variable Qualified
Annuity Life Plans Total
<S> <C> <C> <C> <C>
Sales $4,895,558 $14,951 $77,417 $4,987,926
========== ======= ======= ==========
Assets under management $22,671,188 $15,760 $126,923 $22,813,871
=========== ======= ======== ===========
</TABLE>
4. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") 130, "Reporting Comprehensive Income".
SFAS 130 sets standards for the reporting and display of comprehensive
income and its components; however, the adoption of this Statement had
no impact on the Company's financial position or net income. SFAS 130
requires unrealized gains and losses on the Company's
available-for-sale securities and foreign currency translation
adjustments, which prior to adoption were reported separately in
shareholder's equity to be included in other comprehensive income.
The components of comprehensive income, net of tax, for the nine months
ended September 30, 1999 and 1998 were as follows:
(in thousands) 1999 1998
---- ----
Net income $51,169 $34,221
Other comprehensive income:
Net unrealized gains/(losses) on securities (5,054) 3,198
Foreign currency translation 501 (124)
------- -------
Other comprehensive income (4,553) 3,074
------- -------
Comprehensive income $46,616 $37,295
======= =======
The components of accumulated other comprehensive income, net of tax,
as of September 30, 1999 and December 31, 1998 were as follows:
(in thousands) 1999 1998
---- ----
Unrealized investment gains $(1,211) $3,843
Foreign currency translation 193 (308)
------- ------
Accumulated other comprehensive income $(1,018) $3,535
======== ======
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1999
5. FOREIGN ENTITY
The Company has a 99.9% ownership in Skandia Vida, S.A. de C.V.
("Skandia Vida") which is a life insurance company domiciled in Mexico,
selling long-term savings products within Mexico. Skandia Vida, which
is fully consolidated in the accompanying financial statements, had
total shareholders' equity of $5,438,000 as of September 30, 1999 and
$4,724,000 as of December 31, 1998 and has generated losses of
$1,747,000 and $1,407,000 for the nine months ended September 30, 1999
and 1998, respectively.
6. FUTURE FEES PAYABLE TO PARENT
On June 23, 1999, the Company sold to its Parent, effective June 1,
1999, certain rights to receive future fees and charges expected to be
realized on the variable portion of a designated block of deferred
annuity contracts issued during the period April 1994 through April
1999. In connection with this transaction, the Parent issued
collateralized notes in a private placement which are secured by the
rights to receive future fees and charges purchased from the Company.
Under the terms of the Purchase Agreement, the rights sold provide for
the Parent to receive 80% of future mortality and expense charges and
contingent deferred sales charges expected to be realized over the
remaining surrender charge period of the designated contracts
(generally, 7 years). The Company did not sell the right to receive
future fees and charges after the expiration of the surrender charge
period.
The proceeds from the sale will be recorded as a liability and will be
amortized over the remaining surrender charge period of the designated
contracts using the interest method. The present value at June 1, 1999
(discounted at 7.5%), of future fees and charges expected to be
realized on the designated contracts was $120,632,000.
Expected payments of future fees payable to Parent under this
transaction are as follows:
(in thousands)
Period Ending
December 31, Amount
------------ --------
1999 $ 13,906
2000 23,014
2001 21,778
2002 19,858
2003 16,671
2004 13,270
2005 8,517
2006 3,327
2007 291
------------ --------
Total $120,632
<PAGE>
AMERICAN SKANDIA LIFE ASSURANCE CORPORATION
(a wholly-owned subsidiary of Skandia Insurance Company Ltd.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (continued)
September 30, 1999
7. SUBSEQUENT EVENT
On November 8, 1999, the Board of Directors authorized the Company to
increase the par value of its capital stock from $80 per share to $100
per share in order to comply with minimum capital levels as required by
the California Department of Insurance. This transaction resulted in a
corresponding decrease in additional paid-in capital of $500,000 and
had no effect on total shareholder's equity.
<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
Nine months ended September 30, 1999
American Skandia Life Assurance Corporation (the "Company") is a stock life
insurance company domiciled in Connecticut with licenses in all 50 states and
the District of Columbia. It is a wholly-owned subsidiary of American Skandia
Investment Holding Corporation (the "Parent"), whose ultimate parent is Skandia
Insurance Company Ltd., a Swedish company.
The Company is primarily in the business of issuing long-term savings and
retirement products to individuals, groups and qualified pension plans. Since
its business inception in 1988, the Company has offered an increasingly wide
array of annuities, including: a) certain deferred annuities that are registered
with the Securities and Exchange Commission, including variable annuities and
fixed interest rate annuities that include a market value adjustment feature; b)
certain other fixed deferred annuities that are not registered with the
Securities and Exchange Commission; c) non-registered group variable annuities
designed as funding vehicles for various types of qualified retirement plans;
and d) fixed and adjustable immediate annuities.
In April 1998, the Company began offering a term life insurance product in
support of an affiliate's mutual fund products. In May 1998, the Company
launched a single premium variable life insurance product and in January 1999,
the Company launched its second variable life product, which was designed as a
flexible premium product.
In May 1999, the Company introduced a benefit feature to all of its variable
annuity products which provides certain benefits if the policyowner's account
value has not reached a "target value" on its tenth anniversary. At the option
of the policyowner, the benefit will be distributed in the form of an annual or
lump-sum credit to the policyowner's account.
The Company markets its products to independent financial planners and
broker-dealers through an internal field marketing staff. In addition, the
Company markets through and in conjunction with financial institutions such as
banks that are permitted directly, or through affiliates, to sell annuities and
life insurance.
RESULTS OF OPERATIONS
Annuity and life insurance sales volume for the nine months ended September 30,
1999 and 1998 was $4,987,926,000 and $3,143,449,000, respectively, an increase
of 59%. This increase was the result of innovative product development
activities, favorable market conditions, the development of business
relationships with and the retention of top producers, as well as, the continued
success of the Company's highly rated customer service teams. Assets grew
$5,234,340,000 or 28% since December 31, 1998. This increase, reflected
primarily in the growth of deferred acquisition costs and separate account
assets, was the result of high sales volume and the strong performance of the
stock markets in the first half of 1999. Decreases in the stock market over the
past three months were offset by continued strong sales, allowing for a further
growth in assets. Liabilities grew $5,176,034,000 or 28% since December 31, 1998
as a result of an increase in additional reserves required for the market and
sales-related growth of separate account assets, advances from the Parent and an
increase in future fees payable to Parent, due to the closing of a
securitization transaction in June 1999.
The Company experienced a net gain of $51,169,000 after tax for the current
period compared with $34,221,000 for the same period last year. The increase was
the result of greater than expected sales levels and substantial growth in
assets under management, which generated higher amounts of asset based charges
and fees and transfer agency type fee income, combined with favorable expense
levels relative to sales volume.
<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)
REVENUES
Due to strong market conditions and as a result of the significant growth in
sales and assets under management, contract owner fees and charges and fees
generated from transfer agency type activities increased $91,644,000 or 54% for
the nine month period ended September 30, 1999 over the same period of 1998.
This is compared to an increase of 57% for the nine months ended September 30,
1998.
Net investment income increased 1% as compared with an increase of 35% in 1998.
The insignificant change in 1999 was because general account investment levels
remained relatively consistent from year to year. The increase in 1998 was the
result of income generated from bond holdings, which were increased in early
1998 and late 1997 to meet risk based capital goals, which in turn, increased as
a result of the growth in business.
Premium income represents premiums earned on sales of immediate annuities with
life contingencies, supplementary contracts with life contingencies and certain
life insurance products. There have been minimal sales of these ancillary
products during both 1999 and 1998.
BENEFITS
Annuity benefits relate to annuity contracts with mortality risks, such as,
immediate annuity contracts with life contingencies and supplementary contracts
with life contingencies. Due to the age of these policies in force and the
relative insignificance of these products to the Company's overall portfolio of
products, fluctuations in these benefits were of marginal importance to the
Company's total operations.
The change in annuity policy reserves includes changes in reserves related to
annuity contracts with mortality risks as well as the Company's guaranteed
minimum death benefit liability ("GMDB") on its variable annuity product. During
the second quarter of 1999, the Company's agreement to reinsure substantially
all of its exposure on the GMDB was terminated and the business was recaptured,
as the reinsurer had recently announced its intention to exit this market.
During the third quarter, the Company changed its reserving methodology for the
GMDB to comply with the National Association of Insurance Commissioners
Actuarial Guideline 34. This change resulted in a $5,760,000 reduction of
reserves at September 30, 1999.
The Company has instituted a hedge program to effectively manage the interest
rate risk associated with the GMDB reserve fluctuations. In September 1999, the
Company purchased equity put options which mature in January 2000 and will
continue to evaluate alternative hedging strategies. The GMDB reserve as of
September 30, 1999 was $9,134,000.
The reinsurance premium associated with reinsuring the guaranteed minimum death
benefit exposure is based on levels of assets under management. Due to increased
sales and account growth this cost had increased from the prior year through May
1999. The termination of this treaty as of May 31, 1999 resulted in the year to
year decrease in this benefit at September 30, 1999.
Return credited to contractowners includes primarily revenues on the variable
and market value adjusted annuities and variable life insurance, offset by the
benefit payments and change in reserves required on this business. The change in
the return credited to contractowners for the nine months ended September 30,
1999 compared with September 30, 1998 represents a decline in the expected
return on market value adjusted contracts. This return was higher than expected
in 1998 and lower than expected in 1999.
<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)
EXPENSES
Underwriting, acquisition and other insurance expenses for the nine months ended
September 30, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
(in thousands) September 30, September 30,
1999 1998
<S> <C> <C>
Commissions $ 277,357 $168,873
General expenses 126,294 85,969
Net capitalization of deferred acquisition costs (251,387) (144,872)
--------- --------
Underwriting, acquisition and other insurance expenses $ 152,264 $109,970
========= =========
</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.
Interest expense increased $17,003,000 or 58% over the nine months ended
September 30, 1998 as a result of additional financing transactions, which
consisted of the sale of future fees to the Parent ("securitization
transactions") initiated throughout 1998 and 1999, offset by a decrease in
surplus notes outstanding. Surplus notes as of September 30, 1999 and December
31, 1998 totaled $193,000,000.
The effective income tax rates for the nine months ended September 30, 1999, and
1998 were 27% and 18%, respectively. The effective rate is lower than the
corporate rate of 35% due to permanent differences, with the most significant
item being the dividend received deduction. Management believes that based on
the taxable income produced in 1998 and the first nine months of 1999, as well
as the continued growth in annuity sales, the Company will produce sufficient
taxable income in the future to realize its deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company's 1999 liquidity requirement was met by cash from insurance
operations, reinsurance, investment activities, advances from Parent and the
sale of rights to future fees and charges to its Parent.
Through the first nine months of 1999 and 1998 approximately 95% and 97%,
respectively, of sales were variable annuity and life insurance products. Most
products carry a contingent deferred sales charge, which causes a temporary cash
strain in that 100% of the proceeds are invested in separate accounts supporting
the product leaving a cash (but not capital) strain caused by the acquisition
cost for the new business. This cash strain required the Company to look beyond
the cash made available by insurance operations and investments of the Company
to financing through capital contributions, the sale of certain rights to future
fees and modified coinsurance arrangements.
On June 23, 1999, the Company closed a securitization transaction in which it
received proceeds of $120,632,000. This transaction is further discussed at Note
6 of the Notes to Unaudited Consolidated Financial Statements.
During 1999 the Company extended certain reinsurance agreements (which were
initiated prior to1996). The reinsurance agreements are modified coinsurance
arrangements where the reinsurer shares in the experience of a specific book of
business.
The Company expects the continued use of reinsurance and securitization
transactions to fund the cash strain anticipated from the acquisition costs on
the coming years' sales volume.
<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)
The Company has long-term surplus notes and short-term borrowings with its
Parent. No dividends have been paid to its Parent.
The National Association of Insurance Commissioners ("NAIC") requires insurance
companies to report information regarding minimum Risk Based Capital ("RBC")
requirements. These requirements are intended to allow insurance regulators to
identify companies which may need regulatory attention. The RBC model law
requires that insurance companies apply various factors to asset, premium and
reserve items, all of which have inherent risks. The formula includes components
for asset risk, insurance risk, interest risk and business risk.
The Company has complied with the NAIC's RBC reporting requirements and has
total adjusted capital well above required capital.
YEAR 2000 COMPLIANCE
American Skandia's management understands that financial and operational losses
could result from Year 2000 related service interruptions. American Skandia also
recognizes the importance of maintaining emergency response, resumption,
recovery and restoration strategies and acknowledges that the protection of its
assets and business operations is a major responsibility to its employees,
contract holders, and business associates.
As part of the Company's Business Continuity Plan, the Company has developed a
Year 2000 Contingency Plan which is designed and structured to respond to
emergencies, resume time-sensitive business operations, recover less
time-sensitive business operations and restore operations to an operating site.
This plan involves virtually all aspects of the business and will continue to be
a focus of management beyond the Year 2000 event.
The Company's computer support is provided by its affiliate, American Skandia
Information Services and Technology Corporation, which also provides such
support for the Company's affiliated broker-dealer, American Skandia Marketing,
Incorporated and the Company's affiliated investment advisory firm, American
Skandia Investment Services, Incorporated. Because of the nature of the
Company's business, any assessment of the potential impact of the Year 2000
issues on the Company must be an assessment of the potential impact of these
issues on all these companies, which are referred to below as "American
Skandia".
Business Partners
Management believes the area where American Skandia is most vulnerable to Year
2000 issues is in its interfaces with computer systems of investment managers,
sub-advisors, third party administrators, vendors and other business partners.
The inability to properly recognize date sensitive electronic information and
transfer data between systems could cause errors or even a complete systems
failure which would result in a temporary inability to process transactions
correctly or engage in normal business activities.
The American Skandia deferred annuity operational business partners report that
all critical interfaces are Year 2000 ready. All investment managers and
sub-advisors were required by the Securities and Exchange Commission to publicly
disclose their Year 2000 status in December 1998 and September 1999.
American Skandia continues to maintain formal communications with parties that
provide third party administration, record keeping and trust services in
connection with its life insurance and qualified retirement plan annuities
business. Management has received written assurances from these firms that their
interfaces will be Year 2000 ready.
American Skandia has received favorable responses from its critical business
partners, has tested various systems and has developed and continues to develop
specific contingency plans in conjunction with these external parties.
<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)
Information Technology Systems
All internally developed systems were designed from the start with four digit
year codes. American Skandia engaged an external information technology
specialist to review its operating systems and internally developed software.
The assessment was completed in December 1997 and the results were favorable.
Specific modifications were suggested, evaluated and implemented for the annuity
administration system. Although this project was completed during 1998 and a
certificate of compliance has been received, American Skandia continues to
review new and existing systems.
Other non-critical internally developed applications in the client/server area
have already been or will be remediated within the next two months. In addition,
on November 4, 1999 American Skandia placed a temporary "freeze" through January
15, 2000 on non-critical changes to the production environment.
Management believes that the costs associated with this aspect of Year 2000
compliance have not had, and are not expected to have, a significant impact on
the Company's results from operations.
Suppliers and Non-Information Technology Systems
Like most companies, American Skandia is reliant on network, and desktop
operating systems and software providers to release compliant versions of their
respective systems. In management's opinion, American Skandia's network is
currently at the most compliant level available. The standard desktop software
will be replaced, as fully compliant versions become available. In addition,
American Skandia has contacted the non-information systems vendors and suppliers
regarding their Year 2000 compliance status and has factored the results of
these assessments into its contingency plans.
Management believes it has an effective program in place to resolve the Year
2000 issue in a timely manner. However, should errors or disruptions in computer
service occur, the Company could realize losses. Given the nature and
uncertainty of such losses, the amounts of such losses, if any, cannot be
reasonably determined.
<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 nine
months ended September 30, 1999. The Company has provided a discussion of its
market risks in Item 7A of Part II of the December 31, 1998 Form 10-K.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index
(b) None
<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 15, 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
November 15, 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> American Skandia Life Assurance Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 138,026
<DEBT-CARRYING-VALUE> 144,052
<DEBT-MARKET-VALUE> 144,047
<EQUITIES> 10,599
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 191,185
<CASH> 68,315
<RECOVER-REINSURE> 5,584
<DEFERRED-ACQUISITION> 967,768
<TOTAL-ASSETS> 24,082,613 <F1>
<POLICY-LOSSES> 55,905
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 203,000
0
0
<COMMON> 2,000
<OTHER-SE> 306,723
<TOTAL-LIABILITY-AND-EQUITY> 24,082,613 <F2>
1,236
<INVESTMENT-INCOME> 8,231
<INVESTMENT-GAINS> 526
<OTHER-INCOME> 263,566 <F3>
<BENEFITS> 4,737
<UNDERWRITING-AMORTIZATION> 74,620
<UNDERWRITING-OTHER> 124,149
<INCOME-PRETAX> 70,053
<INCOME-TAX> 18,884
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,169
<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
$22,796,470.
<F2> Included in Total Liabilities and Equity are Liabilities Related to
Separate Accounts of $22,796,470.
<F3> Other income includes annuity charges and fees of $204,103 and fee
income of $58,184.
</FN>
</TABLE>
