The Company 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; and c) fixed and adjustable immediate annuities.
The Company's long term business plan was developed reflecting the current sales and marketing approach. Annuity sales increased 19%, 54% and 210% in 1995, 1994 and 1993, respectively. The Company continues to show significant growth in sales volume and increased market share within the variable annuity industry. Total assets grew 75%, 84% and 182% in 1995, 1994 and 1993, respectively. These increases were a direct result of the substantial sales volume increasing separate account assets and deferred acquisition costs. Liabilities grew 76%, 87%, and 198% in 1995, 1994 and 1993, respectively, as a result of the reserves required for the increased sales activity and borrowing during 1995, 1994 and 1993. The borrowing is needed to fund the acquisition costs of the Company's variable annuity business.
The Company experienced a net loss after tax in 1995 and 1994, which was in excess of plan. The 1995 result was related to higher than anticipated expense levels and additional reserving requirements on our market value adjusted annuities. The increase in expenses was primarily attributable to improving our service infrastructure and marketing related costs.
The 1994 loss is a result of additional reserving of approximately $4.6 million to cover the minimum death benefit exposure in the Company's annuity contracts along with higher than expected general expenses relative to sales volume. The additional reserve may be required from time to time, within the variable annuity market place, and is a result of volatility in the financial markets as it relates to the underlying separate account investments. The Company achieved profits in 1993 of $2 million which was expected.
Increasing volume of annuity sales results in higher assets under management. The fees realized on assets under management has resulted in annuity charges and fees to increase 57%, 111% and 143% in 1995, 1994 and 1993, respectively.
Net investment income increased 23% and 88% in 1995 and 1994 respectively, and decreased 22% in 1993. The increase in 1995 is a result of a higher average level of Company bonds and short-term investments. The increase in 1994 is a result of an increase in the Company's bonds and short-term investments, which were $33.6 million and $29.1 million at December 31, 1994 and 1993, respectively. The decrease in 1993 is a result of the need to liquidate investments to support the cash needs required to fund the acquisition costs on the variable annuity business.
Annuity benefits represent payments on annuity contracts with mortality risks, this being the immediate annuity with life contingencies and supplementary contracts with life contingencies.
Return credited to contractowners represents revenues on the variable and market value adjusted annuities offset by the benefit payments and change in reserves required on this business. Also included are the benefit payments and change in reserves on immediate annuity contracts without significant mortality risks. In 1995, the Company earned a lower than anticipated separate account investment return on the market value adjusted contracts in support of the benefits and required reserves. In addition, the 1995 result includes an increase in the required reserves associated with this product.
The result for 1994 was better than anticipated due to separate account investment return on the market value adjusted contracts being in excess of the benefits and required reserves.
Underwriting, acquisition and other insurance expenses for 1995 is made up of $62.8 million of commissions and $42.2 million of general expenses offset by the net capitalization of deferred acquisition costs totaling $69.2 million. This compares to the same period last year of $46.2 million of commissions and $26.2 million of general expenses offset by the net capitalization of deferred acquisition costs totaling $53.7 million.
As previously stated, the Company had significant growth during 1995. The sales volume of $1.628 billion was primarily (approximately 80%) variable annuities 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 cost for the new business. This cash strain required the Company to look beyond the insurance operations and investments of the Company. During 1995, the Company borrowed an additional $34 million from its parent in the form of Surplus Notes and extended the reinsurance agreement (which was initiated in 1993 and 1994) along with entering into a third reinsurance agreement with a large reinsurer in support of its cash needs. 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.
ASLAC has long term surplus notes with its parent and a short term borrowing with an affiliate. No dividends have been paid to its parent company.
Schedules are omitted because they are either not applicable or because the information required therein is included in the Notes to Financial Statements.
In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of American Skandia Life Assurance Corporation as of December 31, 1995 and 1994, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP New York, New York March 14, 1996
During 1995, Skandia Vida, S.A. de C.V. was formed by the ultimate parent Skandia Insurance Company Ltd. The Company owns 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 product within Mexico.
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities", effective January 1, 1994. The adoption of SFAS No. 115 had no impact on the Company's financial statements.
Licenses to do business in all states have been capitalized and reflected at the purchase price of $6 million less accumulated amortization. The cost of the licenses is being amortized over 40 years.
Annuity contracts without significant mortality risk, as defined by Financial Accounting Standard No. 97, are classified as investment contracts (variable, market value adjusted and certain immediate annuities) and those with mortality risk (immediate annuities) as insurance products. The policy of revenue and contract benefit recognition is described below.
Revenues for variable annuity contracts consist of charges against contractowner account values for mortality and expense risks and administration fees and an annual maintenance fee per contract. Benefit reserves for variable annuity contracts represent the account value of the contracts, and are included in the separate account liabilities.
Revenues for immediate annuity contracts without life contingencies consist of net investment income. Revenues for immediate annuity contracts with life contingencies consist of single premium payments recognized as annuity considerations when received. Benefit reserves for these contracts are based on the Society of Actuaries 1983 - a Table with an assumed interest rate of 8.25%.
Annuity sales were $1,628,486,000, $1,372,874,000 and $890,640,000 for 1995, 1994 and 1993, respectively. Annuity contract assets under management were $4,704,044,000, $2,661,161,000 and $1,437,554,000 at December 31, 1995, 1994 and 1993, respectively.
Assets and liabilities in Separate Account are shown as separate captions in the consolidated statement of financial condition. The assets consist of long-term bonds, investments in mutual funds and short-term securities, all of which are carried at market value.
The preparation of financial statements in conformity with generally accepted accounting principles requires that management make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant estimates and assumptions are related to deferred acquisition costs and involve policy lapses, investment return and maintenance expenses. Actual results could differ from those estimates.
Effective January 1, 1995, the Company reinsured certain mortality risks. These risks result from the guaranteed minimum death benefit feature in the variable annuity products.
The carrying value (amortized cost), gross unrealized gains (losses) and estimated market value of investments in fixed maturities by category as of December 31, 1995 and 1994 are shown below. All securities held at December 31, 1995 are publicly traded.
The amortized cost and market value of fixed maturities, by contractual maturity, at December 31, 1995 are shown below.
The cost, gross unrealized gains (losses) and market value of investments in mutual funds at December 31, 1995 and 1994 are shown below:
Proceeds from sales of investments in mutual funds during 1995 and 1994 were $867,744 and $38,588.
Additional information with respect to net investment income for the years ended December 31, 1995, 1994 and 1993 is as follows:
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating loss and tax credit carryforwards. The tax effects of significant items comprising the Company's deferred tax balance as of December 31, 1995 and 1994, are as follows:
The federal income tax expense was different from the amount computed by applying the federal statutory tax rate of 35% to pre-tax income from continuing operations as follows:
1996 1,178,550 1997 1,178,550 1998 1,178,550 1999 1,178,550 2000 and thereafter 6,831,312 -----------
Statutory basis shareholder's equity was $132,493,899, $95,001,971 and $60,666,243 at December 31, 1995, 1994 and 1993, respectively.
The statutory basis net income (loss) was ($7,183,003), ($9,789,297) and $387,695 for the years ended December 31, 1995, 1994 and 1993, respectively.
In 1989, the Company established a 401(k) plan for which substantially all employees are eligible. Company contributions to this plan on behalf of the participants were $627,161, $431,559 and $250,039 for the years ended December 31, 1995, 1994 and 1993, respectively.
The Company has a long-term incentive plan where units are awarded to executive officers and other personnel. The program consists of multiple plans. A new plan is instituted each year. Generally, participants must remain employed by the Company or its affiliates at the time such units are payable in order to receive any payments under the plan. The accrued liability representing the value of these units is $4,600,831 and $1,564,407 as of December 31, 1995 and 1994, respectively.
In 1994, the Company established a deferred compensation plan which is available to the internal field marketing staff and certain officers. Company contributions to this plan on behalf of the participants were $139,209 in 1995 and $106,882 in 1994.
The effect of the reinsurance agreements on the Company's operations was to reduce annuity charges and fee income, death benefit expense and policy reserves. The effect of reinsurance for the years ended December 31, 1995, 1994 and 1993 are as follows:
Gross $30,116,166 $12,446,277 Ceded 5,336,381 693,293 ------------- ------------- Net $24,779,785 $11,752,984 =========== ===========
During 1995, the Company received $34 million from its parent in exchange for three surplus notes. The amounts were $10 million, $15 million and $9 million, at interest rates of 7.52%, 7.49% and 7.47%, respectively. Interest expense for these notes was $83,281 for the year ended December 31, 1995.
During 1994, the Company received $49 million from its parent in exchange for four surplus notes, two in the amount of $10 million, one in the amount of $15 million and one in the amount of $14 million, at interest rates of 7.28%, 7.90%, 9.13% and 9.78%, respectively. Interest expense for these notes was $4,319,612 and $1,618,504 for the years ended December 31, 1995 and 1994, respectively.
During 1993, the Company received a $10 million loan from Skandia AB, a Swedish affiliate. Upon the last renewal the loan became payable to the Parent rather than Skandia AB. The loan matures on March 6, 1996 and bears interest at 6.75.%. The total interest expense to the Company was $709,521, $569,618 and $149,861 for the years ended December 31, 1995, 1994 and 1993, respectively, of which $219,375 and $50,174 was payable as of December 31, 1995 and 1994, respectively.
The following table summarizes information with respect to the operations of the Company.