The following table summarizes information with respect to the operations of the Company:
Net income $ 33,099 $ 64,817 $ 76,169 $ 34,767 $ 27,548 ============ ============ ============ ============ ============
Future fees payable to parent $ 797,055 $ 934,410 $ 576,034 $ 368,978 $ 233,034 ============ ============ ============ ============ ============
Annuity and life insurance sales decreased 53% in 2001 to $3,834,167,000 as compared to a 20% increase in 2000. The decrease in sales in 2001 was consistent with the general decline in sales throughout the variable annuity industry, attributed in large part to the decline in the equity markets. The sales growth in 2000 was driven by significant sales volume in the first quarter of 2000 due to the strong equity market performance. However, the decline in the equity markets during the remainder of the year negatively impacted sales as the first quarter level of sales was not sustained. The Company has announced its intention to focus on the growth of its core variable annuity business, with a continuing focus on increasing sales through innovative product development activities, the expansion of its wholesaling force through recruitment and retention of top producers, and providing consistently good customer service.
Average assets under management totaled $27,020,489,000 in 2001, $31,413,809,000 in 2000 and $21,984,759,000 in 1999, representing a decrease of 14% in 2001 and an increase of 46% in 2000. As a result of the decrease in sales volume and average assets under management, annuity and life insurance charges and fees decreased 11% in 2001, as compared to an increase of 46% in 2000. Fee income generated from transfer agency-type and investment support activities decreased 15% in 2001 and increased 57% in 2000.
Net investment income increased 73% in 2001 compared to 2000 and increased 12% in 2000 compared to 1999. The increase in 2001 was primarily due to a higher level of fixed maturity investments in support of the Company's risk-based capital objectives. The increase in 2000 was primarily due to the higher level of fixed maturity investments partially offset by $6,939,000 of amortization of premiums paid on derivative instruments. Excluding the derivative amortization, net investment income increased 62% in 2000 as a result of increased fixed maturity investments in support of the Company's risk-based capital objectives.
In 1999, the Company began to develop a program utilizing equity put options to manage the risks embedded in the GMDB in annuity contracts that would result from significant declines in the equity markets. Prior to the implementation of the hedge strategies utilizing equity put options, the Company had reinsured substantially all of its exposure on the GMDB liability. The reinsurance was terminated during the second quarter of 1999 as the reinsurer exited this market.
Return credited to contractowners consists of revenues on the variable and market value adjusted annuities and variable life insurance, offset by the benefit payments and changes in reserves required on this business. Market value adjusted annuity activity has the largest impact on this benefit. In 2001 and 2000, the Separate Account investment returns on the assets supporting market value adjusted annuities were less than the expected returns as calculated in the reserves, contributing to the significant increase in the return credited to contractholders benefit. In addition, this benefit increased as a result of the amortization of unearned Performance Advantage target value credits, which increased $12,814,581 in 2001 over 2000 due primarily to increased sales of products containing this feature. Other significant contributors to the change from 2000 to 2001 include guaranteed minimum death benefit payments on variable annuities, which were driven up due to the market declines in 2001, totaling $2,569,000 net of gains on equity put options as well as increased costs associated with processing of backdated financial transactions.
Underwriting, acquisition and other insurance expenses for 2001, 2000 and 1999 were as follows:
The company updated certain assumptions in the calculation of expected gross profits used to develop deferred acquisition cost amortization rates to reflect more recent experience and current equity market conditions. As a result of this the amortization of such costs increased significantly over the year 2000.
The amortization of acquisition costs increased substantially in 2000 compared to 1999 as the associated costs from record sales in late 1999 and early 2000 were recognized in accordance with profit and expense recognition models under U.S. GAAP.
Interest expense decreased $12,574,000 in 2001 as a result of the reduction in borrowing and increased $16,496,000 in 2000 as a result of additional securitized financing transactions, which consist of the transfer of rights to receive future fees to ASI, which fees collateralize notes issued in private placements by ASI through special purpose trusts ("securitization transactions"). In addition, the Company paid down surplus notes on December 3, 2001 and December 10, 2000 of $15,000,000 and $20,000,000 respectively. Surplus notes outstanding as of December 31, 2001 and 2000 totaled $144,000,000 and $159,000,000, respectively.
The Company considers Mexico an emerging market and has invested in the Skandia Vida operations with the expectation of generating profits from long-term savings products in future years. As such, Skandia Vida has generated net losses of $2,619,000, $2,540,000 and $2,523,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
Liabilities declined 12% in 2001 as a result of several factors. Reserves and Separate Account liabilities required to support the annuity and life insurance business declined consistent with market valuing of the underlying assets as well as the changes in the GMDB reserve. Payable to affiliate increased due to borrowing from ASI to support temporary operating cash needs. Reduction in Future Fees Payable to ASI declined, consistent with the securitization transaction cash flow realized on the designated block of contracts.
For information on the Company's significant accounting policies, see Notes to Consolidated Financial Statements. Specifically, for Deferred Acquisition Costs, see Note 2L, for Separate Accounts, see Note 2O and for the Company's employee profit sharing programs, see Note 13.
The Company's liquidity requirement was met by cash from insurance operations, investment activities and borrowings from ASI.
o During 2001 and 2000, the Company received $45,500,000 and $69,000,000, respectively, from ASI to support the solvency capital needs and anticipated growth in business of its U.S. operations. In addition, the Company received $2,500,000 and $2,450,000 from ASI in 2001 and 2000, respectively, to support its investment in Skandia Vida.
The Company expects the continued use of reinsurance and securitization transactions to fund the cash strain anticipated from the acquisition costs on future years' sales volume.
As of December 31, 2001 and 2000, shareholder's equity totaled $577,668,000 and $496,911,000, respectively. The increases were driven by the previously mentioned capital contributions received from ASI and net income from operations.
Various other legislative initiatives could impact the Company such as pension reform, capital gains and estate tax changes, privacy standards and Internet regulation. Additional pension reform may change current tax deferral rules and allow increased contributions to retirement plans, which may lead to higher investments in tax-deferred products and create growth opportunities for the Company. A capital gains tax reduction may cause tax-deferred products to be less attractive to consumers, which could adversely impact the Company. New privacy standards and Internet regulation may impact the Company's strategic initiatives, especially related to potential business relationships with web-based technology providers.
Certain information contained in the Management's Discussion and Analysis of Financial Condition and Results of Operations is forward-looking within the meaning of the 1995 Act or Securities and Exchange Commission rules.