The Company occupies office space in Shelton, Connecticut leased from an affiliate, American Skandia Information Services and Technology Corporation. The Company entered into a lease for office space in Westminster, Colorado, effective January 1, 2001, and established an additional customer service center at that location. The Company believes that its current facilities are satisfactory for its near term needs.
(table in thousands) For the Year Ended December 31, 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA Revenues: Annuity and life insurance charges and fee$* 378,693 $ 424,578 $ 289,989 $ 186,211 $ 121,158 Fee income 111,196 130,610 83,243 50,839 27,593 Net investment income 20,126 11,656 10,441 11,130 8,181 Premium income and other revenues 3,368 4,778 3,688 1,360 1,082 ------------ ------------ ------------ ------------ ------------
Total revenues $ 513,383 $ 571,622 $ 387,361 $ 249,540 $ 158,014 ============ ============ ============ ============ ============
Benefits and Expenses: Annuity and life insurance benefits $ 1,955 $ 751 $ 612 $ 558 $ 2,033 Change in annuity and life insurance policy reserves (39,898) 45,018 3,078 1,053 37 Cost of minimum death benefit - - 2,945 5,144 4,545 reinsurance Return credited to contractowners 16,833 9,046 (1,639) (8,930) (2,018) Underwriting, acquisition and other insurance expenses 420,802 335,213 206,350 167,790 90,496 Interest expense 73,424 85,998 69,502 41,004 24,895 ------------ ------------ ------------ ------------ ------------
Total benefits and expenses $ 473,116 $ 476,026 $ 280,848 $ 206,619 $ 119,988 ============ ============ ============ ============ ============
Income tax expense $ 7,168 $ 30,779 $ 30,344 $ 8,154 $ 10,478 ============ ============ ============ ============ ============
STATEMENT OF FINANCIAL CONDITION DATA Total Assets $ 28,036,860 $ 31,702,705 $ 30,881,579 $ 18,848,273 $ 12,894,290 ============ ============ ============ ============ ============
Surplus Notes $ 144,000 $ 159,000 $ 179,000 $ 193,000 $ 213,000 ============ ============ ============ ============ ============
Shareholder's Equity $ 577,668 $ 496,911 $ 359,434 $ 250,417 $ 184,421 ============ ============ ============ ============ ============
* On annuity and life insurance sales of $3,834,167, $8,216,167, $6,862,968, $4,159,662, and $3,697,990, during the years ended December 31, 2001, 2000, 1999, 1998 and 1997, respectively, with contractowner assets under management of $26,017,847, $29,751,822, $29,396,693, $17,854,761, and $12,119,191, as of December 31, 2001, 2000, 1999, 1998, and 1997, respectively.
Premium income represents premiums earned on the sale of ancillary contracts such as immediate annuities with life contingencies, supplementary contracts with life contingencies and certain life insurance products. Sales of these products will increase or decrease over time depending on the payout elections of the policyholders. Management expects supplementary contracts to grow over time with the maturing of the core business lines.
Net realized investment gains totaled $928,000 in 2001, compared to losses of $688,000 in 2000. The gross gain in 2001 was partially offset by losses on securities in the fixed maturity portfolio. The most significant loss was $2,636,000 related to Enron securities. In addition net realized losses were incurred due to redemption's of mutual fund holdings in support of the Company's non-qualified deferred compensation program. The change from 1999 to 2000 was primarily due to realized losses on sales of securities in the fixed maturity portfolio. These losses were partially offset by realized gains on sales of fixed maturity investments and mutual funds.
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 ("GMDB") liability. The GMDB reserve decreased $43,984,000 in 2001, as the result of an update of certain reserve assumptions during 2001 to reflect more realistic expectations as to risks inherent in the GMDB liability. These changes reduced the GMDB liability significantly. Previous assumptions had been based on statutory valuation principles as an approximation for accounting principles generally accepted in the United States ("U.S. GAAP"). In addition, future mortality rates have been lowered to reflect favorable past experience. This decrease in 2001 compares to an increase in GMDB reserves of $44,186,000 in 2000.
Certain assumptions were also updated in the calculation of the deferred acquisition cost asset, however, offsetting the resulting increase in earnings and equity as a result of changes in the GMDB liability. The amortization of such costs are determined in large part by changes in the expectations of future gross profits of the variable annuity business. In 2001, the decline in equity markets resulted in a significantly lower estimate of future gross profits, thereby increasing the expenses recognized through amortization.
(table in thousands) 2001 2000 1999 ---- ---- ---- Commissions and purchase credits $ 238,847 $ 393,494 $ 358,279 General operating expenses 167,044 252,206 214,269 Acquisition costs deferred during the year (209,136) (495,103) (450,059) Acquisition costs amortized during the year 224,047 184,616 83,861 --------- --------- --------- Net amortization of deferred acquisition costs 14,911 (310,487) (366,198) --------- ---------- ---------- Underwriting, acquisition and other insurance expenses $ 420,802 $ 335,213 $ 206,350 ========= ========= =========
General operating expenses decreased 34% from 2000 as a result of lower sales-based compensation and expense reduction programs implemented in 2001 (see Note 18 to the consolidated financial statements). In addition, variable compensation and long-term incentive plan expense have decreased due to the slowdown in sales and decline in equity markets. Significant investments in new product development and Internet-based technology contributed to general operating expense increases in both 2001 and 2000.
The effective income tax rates for the years ended December 31, 2001, 2000 and 1999 were 18%, 32% and 28%, 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 the past two years, as well as continued growth in annuity sales, the Company will produce sufficient taxable income in future years to realize its deferred tax assets.
The Company generated net income after tax of $33,099,000, $64,817,000 and $76,169,000 in 2001, 2000 and 1999, respectively. Equity market volatility during 2001 directly impacted revenues, sales and ultimately expenses for the company. Revenues were lower than expected due to the significant drop in sales year over year, as well as the negative performance of the mutual funds underlying annuity and insurance contracts. Benefits were higher than expected due to the death claims paid in excess of the account values of the specific contracts due to GMDB provisions in such contracts. Expenses were relatively higher compared to sales and assets than in prior periods. Expense reduction programs were implemented during the year to better match expenses incurred with sales activity and management of the book of business. Revenue increases in 2000 were more than offset by higher benefits and expenses driven primarily from the increase in the reserve requirement related to the GMDB as a result of the decline in the equity markets. Investments in new product development and technology also contributed to the increase in expenses.
In 2001, the Company had net positive operating cash flow as a result of increased cash from insurance operations and a decreased acquisition cost cash flow strain due to the reduction in sales activity. In 2000, the majority of the operating cash outflow resulted from the sale of variable annuity and variable life products that 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 cash made available by insurance operations and investments of the Company to financing in the form of surplus notes, capital contributions, cash advances, securitization transactions and modified coinsurance reinsurance arrangements:
o In 2001, in anticipation of more permanent financing, the Company received approximately $100,000,000 from ASI in the form of cash advances. These amounts are reported as Payable to Affiliates in the Consolidated Statements of Financial Condition.
o Funds received from new securitization transactions amounted to $476,288,000 in 2000 (see Note 8 to the consolidated financial statements).
The Company has long-term surplus notes and short-term borrowings from ASI. No dividends have been paid to ASI.
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 that 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 rate risk and business risk. The Company has complied with the NAIC's RBC reporting requirements and has total adjusted capital well above required capital.
These forward-looking statements rely on a number of assumptions concerning future events, and are subject to a number of significant uncertainties and results to differ materially from these statements. You should not put undue reliance on these forward-looking statements. We disclaim any intention or obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.
See index to Consolidated Financial Statements and Supplementary Data on page 16.