UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2002
Commission file number: 333-76150, 333-84394, 333-57212, 333-96597,333-96599
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GOLDEN AMERICAN LIFE INSURANCE COMPANY
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(Exact name of registrant as specified in its charter)
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Delaware 41-0991508
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(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
1475 Dunwoody Drive, West Chester, Pennsylvania 19380-1478
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (610) 425-3400
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Former name, former address and former fiscal year, if changed since last report
Securities registered pursuant to Section 12(b) of Act: None
Securities registered pursuant to Section 12(g) of Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K.
Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 250,000 shares of Common Stock
as of March 10, 2003, all of which were directly owned by Equitable Life
Insurance Company of Iowa.
NOTE: WHEREAS GOLDEN AMERICAN LIFE INSURANCE COMPANY MEETS THE CONDITIONS SET
FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K, THIS FORM IS BEING
FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION I(2).
1
GOLDEN AMERICAN LIFE INSURANCE COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Equitable Life Insurance Company of Iowa)
Annual Report on Form 10-K
For the Year Ended December 31, 2002
TABLE OF CONTENTS
Form 10-K
Item No. Page
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PART I
Item 1. Business**.............................................................................. 3
Item 2. Properties**............................................................................ 5
Item 3. Legal Proceedings....................................................................... 5
Item 4. Submission of Matters to a Vote of Security Holders*.................................... 5
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................... 5
Item 6. Selected Financial Data*................................................................ 5
Item 7. Management's Narrative Analysis of the Results of Operations and Financial Condition**.. 5
Item 7A. Quantitative and Qualitative Disclosure About Market Risk............................... 12
Item 8. Financial Statements and Supplementary Data............................................. 13
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.... 44
PART III
Item 10. Directors and Executive Officers of the Registrant*..................................... 44
Item 11. Executive Compensation*................................................................. 44
Item 12. Security Ownership of Certain Beneficial Owners and Management*......................... 44
Item 13. Certain Relationship and Related Transactions*.......................................... 44
Item 14. Controls and Procedures................................................................. 44
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 45
Index on Financial Statement Schedules.................................................. 49
Signatures.............................................................................. 53
* Item omitted pursuant to General Instruction I(2) of Form 10-K
** Item prepared in accordance with General Instruction I(2) of Form 10-K
2
PART I
ITEM 1. BUSINESS
ORGANIZATION OF BUSINESS
Golden American Life Insurance Company ("Golden American"), a wholly-owned
subsidiary of Equitable Life Insurance Company of Iowa ("Equitable Life" or the
"Parent"), is a stock life insurance company organized under the laws of the
State of Delaware. Golden American was originally incorporated under the laws of
the State of Minnesota on January 2, 1973, in the name of St. Paul Life
Insurance Company. Equitable Life is a wholly-owned subsidiary of Lion
Connecticut Holding, Inc. ("Lion Connecticut") which is an indirect wholly-owned
subsidiary of ING Groep N.V. ("ING"), a global financial services holding
company based in The Netherlands. Golden American is authorized to do business
in the District of Columbia and all states except New York. Golden American's
wholly-owned life insurance subsidiary, First Golden American Life Insurance
Company of New York ("First Golden,") and collectively with Golden American, the
("Company"), is licensed as a life insurance company under the laws of the
States of New York and Delaware.
Formerly, from October 24, 1997, until December 30, 2001, Equitable of Iowa
Company, Inc. ("EIC" or "Former Holding Company") directly owned 100% of Golden
American's stock. On December 3, 2001, the Board of Directors of EIC approved a
plan to contribute its holding of stock of Golden American to another
wholly-owned subsidiary, Equitable Life. The contribution of stock occurred on
December 31, 2001, following approval granted by the Insurance Department of the
State of Delaware.
As of April 1, 2002, Golden American sold First Golden to its sister company,
ReliaStar Life Insurance Company ("ReliaStar"). ReliaStar Life, the parent of
Security-Connecticut Life Insurance Company ("Security-Connecticut") which in
turn is the parent of ReliaStar Life Insurance Company of New York ("RLNY"),
merged the First Golden business into RLNY operations and dissolved First Golden
at book value for $27.7 million in cash and a receivable totaling $0.2 million
from RLNY. The receivable from RLNY was assumed by Equitable Life, and
ultimately by ING. The consideration was based on First Golden's statutory-basis
book value. RLNY's payable to the Company was assumed by ING and subsequently
forgiven. Golden American realized a loss of $3.0 million related to the sale of
First Golden, which was recorded as a capital transaction. Approval for the
merger was obtained from the Insurance Departments of the States of New York and
Delaware.
Statement of Financial Accounting Standards ("FAS") No. 141 "Business
Combinations" excludes transfers of net assets or exchanges of shares between
entities under common control and is therefore covered by Accounting Principles
Board ("APB") Opinion No. 16 "Business Combinations." RLNY presented combined
results of operations including First Golden activity as of the beginning of the
period ending December 31, 2002. The first three months of First Golden activity
is not reflected in the Golden statement of financial position or other
financial information for the period ended December 31, 2002, as the amounts
were not material.
PRODUCTS AND SERVICES
Management has determined that under FAS No. 131 "Disclosure about Segments of
an Enterprise and Related Information," the Company has one operating segment,
ING U.S. Financial Services ("USFS").
3
The Company offers a portfolio of variable and fixed insurance products designed
to meet customer needs for tax-advantaged saving for retirement and protection
from death. The Company believes longer life expectancies, an aging population,
and growing concern over the stability and availability of the Social Security
system have made retirement planning a priority for many Americans. The target
market for all products is consumers and corporations throughout the United
States.
Variable and fixed insurance products currently offered by Golden American
include eighteen variable annuity products, and two fixed annuity products.
During the year ended December 31, 2002, Golden American began selling three new
variable annuity products, GoldenSelect Opportunities, SmartDesign Multi-Rate
Index Annuity, and Customized Solutions - ING Focus Variable Annuity, and two
new fixed annuity products, SmartDesign Classic Flex Annuity and SmartDesign
Classic Guarantee Annuity. Variable annuities are long-term savings vehicles in
which contract owner premiums (purchase payments) are recorded and maintained in
subaccounts within a separate account established and registered with the
Securities Exchange Commission ("SEC") as a unit investment trust. Many of the
variable annuities issued by Golden American are combination variable and fixed
deferred annuity contracts under which some or all of the premiums may be
allocated by the contract owner to a fixed account available under the contract.
PRINCIPAL MARKETS AND METHOD OF DISTRIBUTION
The Company continued to expand distribution systems during 2002. Broad-based
distribution networks are key to realizing a growing share of the wealth
accumulation marketplace. The principal distribution channels of the Company's
variable and fixed insurance products include national wirehouses, regional
securities firms, independent National Association of Securities Dealers, Inc.
("NASD") firms with licensed registered representatives, banks, life insurance
companies with captive agency sales forces, independent insurance agents and
independent marketing organizations. The Company plans to establish new
relationships and increase penetration with key distributors in existing
channels. In addition, growth opportunities exist through increased utilization
of the ING broker/dealer network and the cross-selling of ING products.
COMPETITION
The current business and regulatory environment presents many challenges to the
insurance industry. The variable and fixed annuity competitive environment
remains intense and is dominated by a number of large highly-rated insurance
companies. Increasing competition from traditional insurance carriers as well as
banks and mutual fund companies offers consumers many choices. The economic
environment during 2002 was characterized by a relatively weak economy, low
interest rates and a volatile equity market which experienced a major decline.
However, there is an aging U.S. population which is increasingly concerned about
retirement, estate planning, maintaining its standard of living in retirement;
and potential reductions in government and employer-provided benefits at
retirement, as well as lower public confidence in the adequacy of those
benefits. Despite an economic downturn in the near term, these factors should
contribute to wealth accumulation needs.
REGULATION
The Company's insurance operations are conducted in a highly regulated
environment. Golden American is subject to the insurance laws of the state in
which organized and of the other jurisdictions in which it transacts business.
4
The primary regulator of the Golden American insurance operations is the
Commissioner of Insurance for the State of Delaware. The Company is also
regulated by the SEC, and sales of its products are generally regulated by the
NASD.
ITEM 2. PROPERTIES
The Company's home office is located at 1475 Dunwoody Drive, West Chester,
Pennsylvania, 19380-1478. All Company office space is leased or subleased by the
Company or its other affiliates. The Company pays substantially all expenses
associated with its leased and subleased office properties. Expenses not paid
directly by the Company are paid for by an affiliate and allocated back to the
Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to threatened or pending lawsuits arising from the normal
conduct of business. Due to the climate in insurance and business litigation,
suits against the Company sometimes include claims for substantial compensatory,
consequential or punitive damages and other types of relief. Moreover, certain
claims are asserted as class actions, purporting to represent a group of
similarly situated individuals. While it is not possible to forecast the outcome
of such lawsuits, in light of existing insurance, reinsurance and established
reserves, it is the opinion of management that the disposition of such lawsuits
will not have a materially adverse effect on the Company's operations or
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
All of the Company's outstanding shares are owned by Equitable Life Insurance
Company of Iowa, which is a wholly-owned subsidiary of Equitable Life Insurance
Company of Iowa whose ultimate parent is ING.
ITEM 6. SELECTED FINANCIAL DATA
Omitted pursuant to General Instruction I(2)(a) of Form 10-K.
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
The following narrative analysis of the results of operations and financial
condition presents a review of the Company for the twelve month periods ended
December 31, 2002 versus 2001. This review should be read in conjunction with
the consolidated financial statements and other data presented herein.
5
CHANGE IN ACCOUNTING PRINCIPLE
In June 2001, the Financial Accounting Standards Board ("FASB") issued FAS No.
142, "Goodwill and Other Intangible Assets," effective for fiscal years
beginning after December 15, 2001. Under FAS No. 142, goodwill and intangible
assets deemed to have indefinite lives are no longer amortized but are subject
to annual impairment tests. Other intangible assets are still amortized over
their estimated useful lives. The Company adopted the new standard effective
January 1, 2002.
As required under FAS No. 142, the Company completed the first of the required
impairment tests as of January 1, 2002. Step one of the impairment test was a
screen for potential impairment, while step two measured the amount of the
impairment. All of the Company's operations fall under one reporting unit, USFS,
due to the consolidated nature of the Company's operations. Step one of the
impairment test required the Company to estimate the fair value of the reporting
unit and compare the estimated fair value to its carrying value. The Company
determined the estimated fair value utilizing a discounted cash flow approach
and applying a discount rate equivalent to the Company's weighted average cost
of capital. Fair value was determined to be less than carrying value which
required the Company to complete step two of the test. In step two, the Company
allocated the fair value of the reporting unit determined in step one to the
assets and liabilities of the reporting unit resulting in an implied fair value
of goodwill of zero.
The comparison of the fair value amount allocated to goodwill and the carrying
value of goodwill resulted in an impairment loss upon adoption of $135.3 million
(net of taxes), which represents the entire carrying amount of goodwill, net of
accumulated amortization. This impairment charge is shown as a change in
accounting principle on the Consolidated Income Statement.
RESULTS OF OPERATIONS
Fee income and other income for the year ended December 31, 2002 increased by
$18.6 million compared to the same period in 2001, primarily due to an increase
in the average assets under management by the company. Average assets under
management administration increased due to business growth partially affected by
decreases due to equity market declines.
Net investment income for the year ended December 31, 2002 increased by $103.3
million compared to the same period in 2001. This increase in net investment
income is primarily due to higher assets under management with fixed options,
partially offset by lower investments yields.
Net realized capital gains (losses) for the year ended December 31, 2002
increased by $10.7 million compared to the same period in 2001. The capital
losses are due to impairments of certain fixed maturities (referred to in Note 2
of the Notes to Financial Statements).
Interest credited and other benefits to the policyholders for the year ended
December 31, 2002 increased by $67.5 million compared to the same period in
2001. This increase reflects the growth of assets under management.
General expenses for the year ended December 31, 2002 increased by $19.8 million
compared to the same period in 2001. General expenses increased during the
period due to a higher allocation of corporate and internal service charges from
6
the Company's parent, increased production based incentive compensation, and
increased staffing costs required to manage the growth of the business.
Commissions for the year ended December 31, 2002 increased by $56.3 million
compared to the same period in 2001. The increase in commissions is due to the
growth of business during 2002.
Policy acquisition costs deferred for the year ended December 31, 2002 increased
by $164.0 million compared to the same period in 2001 due to business growth.
Amortization of deferred policy acquisition costs and value of business acquired
for the year ended December 31, 2002, increased by $78.2 million compared to the
same period in 2001. Amortization of long-duration products is reflected in
proportion to actual and estimated future gross profits. Estimated future gross
profits are computed based on underlying assumptions related to the underlying
contracts, including but not limited to interest margins, mortality lapse,
premium persistency, expenses, and asset growth. The increase in the
amortization of deferred policy acquisition costs and value of insurance
acquired reflects the impact of these variables on the overall book of business.
Expense and charges reimbursed under modified coinsurance ("MODCO") agreements
for the year ended December 31, 2002, decreased by $120.7 million compared to
the same period in 2001. This balance represents the net cashflows from the
MODCO agreements. Since the Company is selling less premium in products which
are covered by the MODCO agreements, the amount will continue to decline.
Interest expense for the year ended December 31, 2002, decreased by $3.4 million
compared to the same period in 2001. Interest expense reduced for the year of
2002, due to the repayment of two notes on June 28, 2002. Both notes were due to
Equitable Life. Principal amounts of the notes were for $50 million and $25
million. The Insurance Department of the State of Delaware approved the
repayments of these notes.
The cumulative effect of the change in accounting principle for the year ended
December 31, 2002, was a decrease of $135.3 million net of taxes. As noted in
the Change in Accounting Principle section, this write down is related to FAS
No. 142, which addresses the value of Goodwill and Other Intangible Assets.
Earnings, excluding goodwill amortization, change in accounting principle and
net realized capital gains and losses (net of taxes), decreased by $36.8 million
for the year ended December 31, 2002, as compared to the year ended December 31,
2001. The decrease in net earnings is the result of increased amortization of
deferred policy acquisition costs and value of business acquired due to
declining equity markets and a change in management's ultimate expected gross
return.
FINANCIAL CONDITION
INVESTMENTS
FIXED MATURITIES
Total fixed maturities reflected net unrealized capital gains of $216.3 million
and $12.4 million at December 31, 2002 and 2001, respectively.
7
It is management's objective that the portfolio of fixed maturities be of high
quality and be well diversified by market sector. The fixed maturities in the
Company's portfolio are generally rated by external rating agencies and, if not
externally rated, are rated by the Company on a basis believed to be similar to
that used by the rating agencies. The average quality rating of the Company's
fixed maturities portfolio was AA+ and A+ at December 31, 2002 and 2001.
Fixed maturities rated BBB and below may have speculative characteristics, and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity of the issuer to make principal and interest payments than
is the case with higher rated fixed maturities.
The percentage of total fixed maturities by quality rating category is as
follows:
December 31, 2002 December 31, 2001
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AAA 34.1% 43.6%
AA 9.2 7.3
A 23.4 11.9
BBB 30.2 32.1
BB 2.3 3.8
B and Below 0.8 1.3
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Total 100.0% 100.0%
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The percentage of total fixed maturities by market sector is as follows:
December 31, 2002 December 31, 2001
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U.S. Corporate 65.7% 57.9%
Residential Mortgage-backed 13.2 8.5
Commercial/Multifamily
Mortgage-backed 6.0 6.5
Foreign (1) 4.9 -
U.S. Treasuries/Agencies 4.2 19.7
Asset-backed 6.0 7.4
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Total 100.0% 100.0%
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(1) Primarily U.S. dollar denominated
The Company analyzes the general account investments to determine whether there
has been an other than temporary decline in fair value below the amortized cost
basis in accordance with FAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Management considers the length of the time and the
extent to which the market value has been less than cost; the financial
condition and near term prospects of the issuer; future economic conditions and
market forecasts; and the Company's intent and ability to retain the investment
in the issuer for a period of time sufficient to allow for recovery in market
value. If it is probable that all amounts due according to the contractual terms
of a debt security will not be collected, an other than temporary impairment is
considered to have occurred.
8
When a decline in fair value is determined to be other than temporary, the
individual security is written down to fair value and the loss is accounted for
as a realized loss.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of the Company to generate sufficient cash flows to
meet the cash requirements of operating, investing, and financing activities.
The Company's principal sources of liquidity are annuity premiums and product
charges, investment income, maturing investments, proceeds from debt issuance,
and capital contributions. Primary uses of these funds are payments of
commissions and operating expenses, interest and premium credits, investment
purchases, repayment of debt, as well as withdrawals and surrenders.
The Company's liquidity position is managed by maintaining adequate levels of
liquid assets, such as cash or cash equivalents and short-term investments.
Additional sources of liquidity include borrowing facilities to meet short-term
cash requirements. The Company maintains a $40.0 million reciprocal loan
agreement with ING America Insurance Holdings, Inc. ("ING AIH"), a perpetual
$75.0 million revolving note facility with Bank of New York and a $75.0 million
revolving note facility with SunTrust Bank which expires on July 31, 2003.
Management believes that these sources of liquidity are adequate to meet the
Company's short-term cash obligations.
The National Association of Insurance Commissioners ("NAIC") risk-based capital
requirements require insurance company to calculate and report information under
a risk-based capital formula. These requirements are intended to allow insurance
regulators to monitor the capitalization of insurance companies based upon the
type and mixture of risks inherent in a Company's operations. The formula
includes components for asset risk, liability risk, interest rate exposure, and
other factors. The Company has complied with the NAIC's risk-based capital
reporting requirements. Amounts reported indicate that the Company has total
adjusted capital above all required capital levels.
GUARANTEED MINIMUM DEATH BENEFITS
Guaranteed minimum death benefits ("GMDB") are features offered with a variable
annuity ("VA") contract that provides a minimum level of proceeds, regardless of
account balance, in the event of the policyholder's death. The GMDB can either
remain constant or increase, depending on the underlying guarantee. The GMDB
features of many companies' VA contracts contain a "dollar-for-dollar"
withdrawal provision, which provides for a reduction in the GMDB on a
dollar-for-dollar basis when a partial withdrawal occurs.
As a result of the equity market performance over the past several years, a
number of variable annuity policies could have account values that are less than
the GMDB. A policyholder with a sizeable GMDB and a policy with a
dollar-for-dollar withdrawal provision could withdraw all but a required minimal
account value or transfer a portion of its VA contract to another carrier, while
maintaining a significant GMDB.
For statutory reserves, Actuarial Guideline 33, "Determining CARVM Reserves for
Annuity Contracts with Elective Benefits" ("AG 33"), defines the methodology and
assumptions that are to be used in determining the minimum statutory reserves
for annuity contracts. The purpose of Actuarial Guideline 34, "Variable Annuity
9
Minimum Guaranteed Death Benefit Reserves" (AG34) is "to interpret the standards
for the valuation of reserves for Minimum Guaranteed Death Benefits included in
variable annuity contracts."
There is a question of whether AG 34 supercedes AG 33 when calculating the GMDB
reserves or if AG 33 and AG 34 should be applied jointly. Given the inherent
ambiguity and controversy as to whether AG 34 supercedes AG 33 or whether AG33
and AG 34 both apply in determining the appropriate reserves, and given the
heightened interest of rating agencies regarding this issue, the Company has
performed an initial assessment of its potential exposure as it relates to GMDBs
under the dollar-for-dollar features of its VA products. The difference in
interpretation as to the appropriate integration of AG33 and AG34 computational
guidance could result in higher statutory reserve balances of approximately $85
million as of December 31, 2002. If necessary, the Parent will contribute
capital to the company to cover any surplus declines.
CRITICAL ACCOUNTING POLICIES
GENERAL
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires the use of estimates and
assumptions in certain circumstances that affect amounts reported in the
accompanying consolidated financial statements and related footnotes. These
estimates and assumptions are evaluated on an on-going basis based on historical
developments, market conditions, industry trends and other information that is
reasonable under the circumstances. There can be no assurance that actual
results will conform to estimates and assumptions, and that reported results of
operations will not be affected in a materially adverse manner by the need to
make future accounting adjustments to reflect changes in these estimates and
assumptions from time to time.
The Company has identified the following estimates as critical in that they
involve a higher degree of judgment and are subject to a significant degree of
variability: goodwill impairment testing, investment impairment testing and
amortization of deferred acquisition costs and value of business acquired. In
developing these estimates management makes subjective and complex judgments
that are inherently uncertain and subject to material changes as facts and
circumstances develop. Although variability is inherent in these estimates,
management believes the amounts provided are appropriate based upon the facts
available upon compilation of the consolidated financial statements.
GOODWILL IMPAIRMENT TESTING
The Company tested goodwill as of January 1, 2002 for impairment using fair
value calculations based on the present value of estimated future cash flows
from business currently in force and business that we estimate we will add in
the future. These calculations require management to make estimates on the
amount of future revenues and the appropriate discount rate. The calculated fair
value of goodwill and the resulting impairment loss recorded is based on these
estimates, which require a significant amount of management judgment. Refer to
Note 1 of the consolidated financial statements for a discussion of the results
of the Company's goodwill testing procedures and to Management's Narrative
Analysis of the Results of Operations for the impact these procedures had on the
Company's income.
10
INVESTMENT IMPAIRMENT TESTING
The Company reviews the general account investments for impairments by analyzing
the amount and length of time amortized cost has exceeded fair value, and by
making certain estimates and assumptions regarding the issuing companies'
business prospects, future economic conditions and market forecasts. Based on
the facts and circumstances of each case, management uses judgment in deciding
whether any calculated impairments are temporary or other than temporary. For
those impairments judged to be other than temporary, the Company reduces the
carrying value of those investments to the current fair value and record
impairment losses for the difference (refer to Note 2).
AMORTIZATION OF DEFERRED ACQUISITION COSTS AND VALUE OF BUSINESS ACQUIRED
Deferred policy acquisition costs ("DAC") and value of business acquired
("VOBA") are amortized with interest over the life of the contracts (usually 25
years) in relation to the present value of estimated gross profits from
projected interest margins, asset-based fees, policy administration and
surrender charges less policy maintenance fees.
Changes in assumptions can have a significant impact on the calculation of
DAC/VOBA and its related amortization patterns. Due to the relative size of
DAC/VOBA balance and the sensitivity of the calculation to minor changes in the
underlying assumptions and the related volatility that could result in the
reported DAC/VOBA balance, the Company performs a quarterly analysis of
DAC/VOBA. At each balance sheet date, actual historical gross profits are
reflected and expected future gross profits and related assumptions are
evaluated for continued reasonableness. Any adjustment in estimated profit
requires that the amortization rate be revised retroactively to the date of
policy or contract issuance ("unlocking"), which could be significant. The
cumulative difference related to prior periods is recognized as a component of
current period's amortization, along with amortization associated with the
actual gross profits of the period. In general, increases in estimated returns
result in increased expected future profitability and may lower the rate of
amortization, while increases in lapse/surrender and mortality assumptions or
decreases in returns reduce the expected future profitability of the underlying
business and may increase the rate of amortization.
One of the most significant assumptions involved in the estimation of future
gross profits for deferred annuity products is the assumed return associated
with future separate account performance. To reflect the near term and long-term
volatility in the equity markets this assumption involves a combination of near
term expectations and a long-term assumption about market performance. The
overall return generated by the separate account is dependent on several
factors, including the relative mix of the underlying sub-accounts among bond
funds and equity funds as well as equity sector weightings.
As part of the regular analysis of DAC/VOBA, at the end of third quarter 2002,
the Company unlocked its assumptions by resetting its near term and long-term
assumptions for the separate account returns to 9% (gross before fund management
fees and mortality and expense and other policy charges), reflecting a blended
return of equity and other sub-accounts. This unlocking adjustment was primarily
driven by the sustained downturn in the equity markets and revised expectations
for future returns. For the year ended December 31, 2002, the Company recorded
an acceleration of DAC/VOBA amortization totaling $91.5 million before tax, or
$59.5 million, net of $32.0 million of federal income tax benefit.
If the actual performance during 2003 of the separate accounts declines less
than approximately 11% from their December 31, 2002 levels, then the DAC asset
will continue to be supportable by the expected future gross profits generated
by the company. In the event that the actual performance of the separate
accounts declines more than approximately 11% during 2003, the DAC asset may
become impaired and an additional reduction of the DAC asset may be needed.
11
FORWARD-LOOKING INFORMATION/RISK FACTORS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions readers regarding certain
forward-looking statements contained in this report and in any other statements
made by, or on behalf of, the Company, whether or not in future filings with the
SEC. Forward-looking statements are statements not based on historical
information and which relate to future operations, strategies, financial
results, or other developments. Statements using verbs such as "expect,"
"anticipate," "believe" or words of similar import generally involve
forward-looking statements. Without limiting the foregoing, forward-looking
statements include statements which represent the Company's beliefs concerning
future levels of sales and redemptions of the Company's products, investment
spreads and yields, or the earnings and profitability of the Company's
activities.
Forward-looking statements are necessarily based on estimates and assumptions
that are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond the Company's control
and many of which are subject to change. These uncertainties and contingencies
could cause actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company. Whether or not
actual results differ materially from forward-looking statements may depend on
numerous foreseeable and unforeseeable developments. Some may be national in
scope, such as general economic conditions, changes in tax law and changes in
interest rates. Some may be related to the insurance industry generally, such as
pricing competition, regulatory developments and industry consolidation. Others
may relate to the Company specifically, such as credit, volatility and other
risks associated with the Company's investment portfolio. Investors are also
directed to consider other risks and uncertainties discussed in documents filed
by the Company with the SEC. The Company disclaims any obligation to update
forward-looking information.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Asset/liability management is integrated into many aspects of the Company's
operations, including investment decisions, product development, and
determination of crediting rates. As part of the risk management process,
different economic scenarios are modeled, including cash flow testing required
for insurance regulatory purposes, to determine that existing assets are
adequate to meet projected liability cash flows. Key variables in the modeling
process include interest rates, anticipated contractholder behavior and variable
separate account performance. Contractholders bear the majority of the
investment risk related to variable insurance products.
The fixed account liabilities are supported by a portfolio principally composed
of fixed rate investments that can generate predictable, steady rates of return.
The portfolio management strategy for the fixed account considers the assets
available for sale. This enables the Company to respond to changes in market
interest rates, changes in prepayment risk, changes in relative values of asset
sectors and individual securities and loans, changes in credit quality outlook,
and other relevant factors. The objective of portfolio management is to maximize
returns, taking into account interest rate and credit risk, as well as other
risks. The Company's asset/liability management discipline includes strategies
to minimize exposure to loss as interest rates and economic and market
conditions change.
On the basis of these analyses, management believes there is currently no
material solvency risk to the Company.
12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
------------
Report of Independent Auditors .................................... 14
Consolidated Financial Statements:
Consolidated Income Statements for the years ended December 31,
2002, 2001, and 2000............................................. 15
Consolidated Balance Sheets as of December 31, 2002 and 2001..... 16
Consolidated Statements of Changes in Shareholder's Equity for
the years ended December 31, 2002, 2001, and 2000................ 17
Consolidated Statements of Cash Flows for the years ended
December 31, 2002,
2001, and 2000................................................... 18
Notes to Consolidated Financial Statements....................... 19
13
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Golden American Life Insurance Company
We have audited the accompanying consolidated balance sheets of Golden American
Life Insurance Company and Subsidiary as of December 31, 2002 and 2001, and the
related income statements, statements of changes in shareholder's equity, and
statements of cash flows for each of the three years in the period ended
December 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Golden American
Life Insurance Company at December 31, 2002 and 2001, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States.
As discussed in Note 1 to the financial statements, the Company changed the
accounting principle for goodwill and other intangible assets effective January
1, 2002.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 21, 2003
14
GOLDEN AMERICAN LIFE INSURANCE COMPANY AND SUBSIDIARY
(A wholly-owned subsidiary of Equitable Life Insurance Company of Iowa)
CONSOLIDATED INCOME STATEMENTS
(Millions)
For the Years Ended December 31,
------------------------------------------------
2002 2001 2000
------------- -------------- -------------
Revenues:
Fee income $ 204.0 $ 188.9 $ 167.9
Net investment income 197.7 94.4 64.1
Net realized capital gains (losses) 4.2 (6.5) (6.6)
Other income 3.5 - -
------------- -------------- -------------
Total revenue 409.4 276.8 225.4
------------- -------------- -------------
Benefits, losses and expenses:
Benefits:
Interest credited and other benefits to
policyholders 276.5 209.0 199.9
Underwriting, acquisition, and insurance expenses:
General expenses 139.7 119.9 89.5
Commissions 288.7 232.4 213.7
Policy acquisition costs deferred (292.2) (128.2) (168.4)
Amortization:
Deferred policy acquisition costs and
value of business acquired 127.8 49.6 60.0
Goodwill - 4.2 4.2
Other:
Expense and charges reimbursed under
modified coinsurance agreements (104.9) (225.6) (225.8)
Interest expense 16.0 19.4 19.9
------------- -------------- -------------
Total benefits, losses and expenses 451.6 280.7 193.0
------------- -------------- -------------
Income (loss) before income taxes (42.2) (3.9) 32.4
Income tax expense (benefit) (12.5) 0.1 13.2
------------- -------------- -------------
Income (loss) before cumulative effect of change in
accounting principle (29.7) (4.0) 19.2
Cumulative effect of change in accounting principle (135.3) - -
------------- -------------- -------------
Net income (loss) $ (165.0) $ (4.0) $ 19.2
============= ============== =============
See Notes to Consolidated Financial Statements
15
GOLDEN AMERICAN LIFE INSURANCE COMPANY AND SUBSIDIARY
(A wholly-owned subsidiary of Equitable Life Insurance Company of Iowa)
CONSOLIDATED BALANCE SHEETS
(Millions, except share data)
As of December 31,
-------------------------------------
Assets 2002 2001
------ ----------------- ----------------
Investments:
Fixed maturities, available for sale, at fair value
(amortized cost of $4,720.1 at 2002 and $1,982.5 at 2001) $ 4,936.4 $1,994.9
Equity securities, at fair value:
Investment in mutual funds (cost of $22.9 at 2002) 19.0 -
Mortgage loans on real estate 482.4 213.9
Policy loans 16.0 14.8
Short-term investments 2.2 10.1
----------------- ----------------
Total investments 5,456.0 2,233.7
Cash and cash equivalents 148.5 195.7
Accrued investment income 61.9 22.8
Reinsurance recoverable 196.9 56.0
Deferred policy acquisition costs 678.0 709.0
Value of business acquired 8.5 20.2
Goodwill (net of accumulated amortization of $17.6 at 2001) - 151.3
Other assets 5.3 23.7
Assets held in separate accounts 11,029.3 10,958.2
----------------- ----------------
Total assets $ 17,584.4 $14,370.6
================= ================
Liabilities and Shareholder's Equity
------------------------------------
Policy liabilities and accruals:
Future policy benefits and claims reserves $ 5,159.1 $2,185.3
----------------- ----------------
Total policy liabilities and accruals 5,159.1 2,185.3
Surplus notes 170.0 245.0
Due to affiliates - 25.1
Payables for securities purchased - 36.4
Current income taxes 42.4 -
Deferred income taxes 79.8 12.6
Dollar roll obligations 40.0 3.9
Other borrowed money - 1.4
Other liabilities 64.7 84.9
Liabilities related to separate accounts 11,029.3 10,958.2
----------------- ----------------
Total liabilities 16,585.3 13,552.8
----------------- ----------------
Shareholder's equity:
Common stock (250,000 shares authorized, issued and
outstanding; $10.00 per share par value) 2.5 2.5
Additional paid-in capital 1,128.4 780.4
Accumulated other comprehensive income 2.1 3.8
Retained earnings (deficit) (133.9) 31.1
----------------- ----------------
Total shareholder's equity 999.1 817.8
----------------- ----------------
Total liabilities and shareholder's equity $ 17,584.4 $ 14,370.6
================= ================
See Notes to Consolidated Financial Statements
16
GOLDEN AMERICAN LIFE INSURANCE COMPANY AND SUBSIDIARY
(A wholly-owned subsidiary of Equitable Life Insurance Company of Iowa)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(Millions)
Accumulated Total
Additional Other Retained Share-
Common Paid-in- Comprehensive Earnings holder's
Stock Paid-in-Capit Income (loss) (Deficit) Equity
------------ ------------- ------------------ ----------- ------------
Balance at December 31, 1999 $ 2.5 $ 468.6 $ (9.2) $ 15.9 $ 477.8
Contribution of capital 115.0 115.0
Comprehensive income:
Net income - - - 19.2 19.2
Other comprehensive income net of tax:
Unrealized gain on securities
($9.8 pretax) - - 5.1 - 5.1
------------
Comprehensive income 24.3
------------ ------------- ------------------ ----------- ------------
Balance at December 31, 2000 2.5 583.6 (4.1) 35.1 617.1
Contribution of capital 196.8 196.8
Comprehensive income:
Net (loss) - - - (4.0) (4.0)
Other comprehensive income net of tax:
Unrealized gain on securities
($12.2 pretax) - - 7.9 - 7.9
------------
Comprehensive income 3.9
------------ ------------- ------------------ ----------- ------------
Balance at December 31, 2001 2.5 780.4 3.8 31.1 817.8
Contribution of capital 356.3 356.3
Other (8.3) (8.3)
Comprehensive income:
Net (loss) - - - (165.0) (165.0)
Other comprehensive income net of tax:
Unrealized (loss) on securities
($(2.6) pretax) - - (1.7) - (1.7)
------------
Comprehensive (loss) (166.7)
------------ ------------- ------------------ ----------- ------------
Balance at December 31, 2002 $ 2.5 $ 1,128.4 $ 2.1 $ (133.9) $ 999.1
============ ============= ================== =========== ============
See Notes to Consolidated Financial Statements
17
GOLDEN AMERICAN LIFE INSURANCE COMPANY AND SUBSIDIARY
(A wholly-owned subsidiary of Equitable Life Insurance Company of Iowa)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions)
For the years Ended December 31,
2002 2001 2000
---------------- ------------- ---------------
Cash Flows from Operating Activities:
Net income (loss) $ (165.0) $ (4.0) $ 19.2
Adjustments to reconcile net income to net cash provided
by operating activities:
Interest credited and charges on interest sensitive products 282.2 191.0 183.1
Net realized capital (gains) losses (4.2) 6.5 6.6
Accrued investment income (39.5) (13.2) 1.6
Increase in guaranteed benefits reserve 107.1 28.2 26.7
Acquisition costs deferred (292.2) (128.2) (168.4)
Amortization of deferred policy acquisition costs 121.2 45.2 55.2
Amortization of value of business acquired 6.6 4.4 4.8
Impairment of Goodwill 151.3 - -
Change in other assets and liabilities 21.3 110.6 (69.4)
Provision for deferred income taxes (85.7) (0.6) 13.3
---------------- ------------- ---------------
Net cash provided by operating activities 103.1 239.9 72.7
Cash Flows from Investing Activities:
Proceeds from the sale of:
Fixed maturities available for sale 7,297.1 880.7 205.1
Equity securities 7.8 6.9 6.1
Mortgages 285.0 136.0 12.7
Acquisition of investments:
Fixed maturities available for sale (10,068.3) (2,070.8) (154.0)
Equity securities (22.8) - -
Short-term investments - (4.7) (5.3)
Mortgages (553.7) (250.3) (12.9)
Increase (decrease) in policy loans (1.2) (1.5) 0.8
Increase (decrease) in property and equipment 1.1 1.2 (3.2)
Proceeds from sale of interest in subsidiary 27.7 - -
Loss on valuation of interest in subsidiary 3.0 - -
Other 0.6 - -
---------------- ------------- ---------------
Net cash (used for) provided by investing activities (3,023.7) (1,302.5) 49.3
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 3,818.5 1,933.1 801.8
Maturities and withdrawals from insurance contracts (171.2) (134.8) (141.5)
Transfers from (to) separate accounts (1,053.8) (902.9) (825.8)
Proceeds of notes payable - 3.1 67.2
Repayment of notes payable (1.4) (1.7) (68.6)
Proceeds from reciprocal loan agreement borrowings - 69.3 178.9
Repayment of reciprocal loan agreement borrowings (75.0) (69.3) (178.9)
Contributions of capital by parent 356.3 196.8 115.0
---------------- ------------- ---------------
Net cash provided by (used for) financing activities 2,873.4 1,093.6 (51.9)
---------------- ------------- ---------------
Net increase (decrease) in cash and cash equivalents (47.2) 31.0 70.1
Cash and cash equivalents, beginning of period 195.7 164.7 94.6
---------------- ------------- ---------------
Cash and cash equivalents, end of period $ 148.5 $ 195.7 $ 164.7
================ ============= ===============
See Notes to Consolidated Financial Statements
18
GOLDEN AMERICAN LIFE INSURANCE COMPANY AND SUBSIDIARY
(A WHOLLY-OWNED SUBSIDIARY OF EQUITABLE LIFE INSURANCE COMPANY OF IOWA)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Golden American Life Insurance Company ("Golden American"), a wholly-owned
subsidiary of Equitable Life Insurance Company of Iowa ("Equitable Life" or the
"Parent"), is a stock life insurance company organized under the laws of the
State of Delaware. Golden American was originally incorporated under the laws of
the State of Minnesota on January 2, 1973, in the name of St. Paul Life
Insurance Company. Equitable Life is a wholly-owned subsidiary of Lion
Connecticut Holding Inc. ("Lion Connecticut") which is an indirect wholly-owned
subsidiary of ING Groep N.V. ("ING"), a global financial services holding
company based in The Netherlands. Golden American is authorized to do business
in the District of Columbia and all states except New York. Golden American's
wholly-owned life insurance subsidiary, First Golden American Life Insurance
Company of New York ("First Golden,") and collectively with Golden American, the
("Company"), is licensed as a life insurance company under the laws of the
States of New York and Delaware. There is no public trading market for the
Registrant's of common stock.
Formerly, from October 24, 1997, until December 30, 2001, Equitable of Iowa
Company, Inc. ("EIC" or "Former Holding Company"), directly owned 100% of Golden
American's stock. On December 3, 2001, the Board of Directors of the Former
Holding Company approved a plan to contribute its holding of stock of Golden
American to another wholly-owned subsidiary, Equitable Life. The contribution of
stock occurred on December 31, 2001, following approval granted by the Insurance
Department of the State of Delaware. There is no public trading market for the
Registrant's common stock.
As of April 1, 2002, Golden American sold First Golden to its sister company,
ReliaStar Life Insurance Company ("ReliaStar"). ReliaStar Life, the parent of
Security-Connecticut Life Insurance Company ("Security-Connecticut") which in
turn is the parent of ReliaStar Life Insurance Company of New York ("RLNY"),
merged the First Golden business into RLNY operations and dissolved First Golden
at book value for $27.7 million in cash and a receivable totaling $0.2 million
from RLNY. The receivable from RLNY was assumed by Equitable Life, and
ultimately by ING. The consideration was based on First Golden's statutory-basis
book value. RLNY's payable to the Company was assumed by ING and subsequently
forgiven. Golden American realized a loss of $3.0 million related to the sale of
First Golden, which was recorded as a capital transaction. Approval for the
merger was obtained from the Insurance Departments of the States of New York and
Delaware.
Statement of Financial Accounting Standards ("FAS") No. 141 "Business
Combinations" excludes transfers of net assets or exchanges of shares between
entities under common control and is therefore covered by Accounting Principles
Board ("APB") Opinion No. 16 "Business Combinations." Since RLNY presented
combined results of operations including First Golden activity as of the
beginning of the period ending December 31, 2002. The first three months of
First Golden activity is not reflected in the Golden statement of financial
position or other financial information for the period ended December 31, 2002,
as the amounts were not material.
19
DESCRIPTION OF BUSINESS
The Company offers a portfolio of variable and fixed insurance products designed
to meet customer needs for a tax-advantaged saving for retirement and protection
from death. The Company's variable and fixed insurance products are marketed by
broker/dealers, financial institutions, and insurance agents. The Company's
primary customers are consumers and corporations.
NEW ACCOUNTING STANDARDS
ACCOUNTING FOR GOODWILL AND INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board ("FASB") issued FAS No.
142, "Goodwill and Other Intangible Assets," effective for fiscal years
beginning after December 15, 2001. Under FAS No. 142, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests. Other intangible assets are still amortized
over their estimated useful lives. The Company adopted the new standard
effective January 1, 2002.
As required under FAS No. 142, the Company completed the first of the required
impairment tests as of January 1, 2002. Step one of the impairment test was a
screen for potential impairment, while step two measured the amount of the
impairment. All of the Company's operations fall under one reporting unit, USFS,
due to the consolidated nature of the Company's operations. Step one of the
impairment test required the Company to estimate the fair value of the reporting
unit and compare the estimated fair value to its carrying value. The Company
determined the estimated fair value utilizing a discounted cash flow approach
and applying a discount rate equivalent to the Company's weighted average cost
of capital. Fair value was determined to be less than carrying value which
required the Company to complete step two of the test. In step two, the Company
allocated the fair value of the reporting unit determined in step one to the
assets and liabilities of the reporting unit resulting in an implied fair value
of goodwill of zero.
The comparison of the fair value amount allocated to goodwill and the carrying
value of goodwill resulted in an impairment loss of $135.3 million net of taxes,
which represents the entire carrying amount of goodwill, net of accumulated
amortization. This impairment charge is shown as a change in accounting
principle on the Consolidated Statements of Income.
Application of the nonamortization provision (net of tax) of the new standard
resulted in an increase in net income of $3.8 million for the twelve months
ended December 31, 2002. Had the Company been accounting for goodwill under FAS
No. 142 for all periods presented, the Company's net (loss) income would have
been as follows:
(Millions) Year ended Year ended
December 31, 2001 December 31, 2001
------------------------------------------------------------------------
Reported net income (loss) $ (4.0) $ 19.2
Add back goodwill amortization,
net of tax 3.8 3.8
------------------------------------------------------------------------
Adjusted net income $ (0.2) $ 23.0
========================================================================
20
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended and interpreted by FAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement 133, FAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of FASB
133, and certain FAS 133 implementation issues." This standard, as amended,
requires companies to record all derivatives on the balance sheet as either
assets or liabilities and measure those instruments at fair value. The manner in
which companies are to record gains or losses resulting from changes in the fair
values of those derivatives depends on the use of the derivative and whether it
qualifies for hedge accounting. FAS No. 133 was effective for the Company's
financial statements beginning January 1, 2001. Adoption of FAS No. 133 did not
have a material effect on the Company's financial position or results of
operations given the Company's limited derivative and embedded derivative
holdings.
The Company occasionally purchases a financial instrument that contains a
derivative that is "embedded" in the instrument. In addition, the Company's
insurance products are reviewed to determine whether they contain an embedded
derivative. The Company assesses whether the economic characteristics of the
embedded derivative are clearly and closely related to the economic
characteristics of the remaining component of the financial instrument or
insurance product (i.e., the host contract) and whether a separate instrument
with the same terms as the embedded instrument would meet the definition of a
derivative instrument. When it is determined that the embedded derivative
possesses economic characteristics that are not clearly and closely related to
the economic characteristics of the host contract and that a separate instrument
with the same terms would qualify as a derivative instrument, the embedded
derivative is separated from the host contract and carried at fair value.
However, in cases where the host contract is measured at fair value, with
changes in fair value reported in current period earnings or the Company is
unable to reliably identify and measure the embedded derivative for separation
from its host contracts, the entire contract is carried on the balance sheet at
fair value and is not designated as a hedging instrument. The Company did not
have embedded derivatives at December 31, 2002.
GUARANTEES
In November 2002, the FASB issued Interpretation No.45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," to clarify accounting and disclosure
requirements relating to a guarantor's issuance of certain types of guarantees,
or groups of similar guarantees, even if the likelihood of the guarantor's
having to make any payments under the guarantee is remote. The disclosure
provisions are effective for financial statements for fiscal years ended after
December 15, 2002. For certain guarantees, the interpretation also requires that
guarantors recognize a liability equal to the fair value of the guarantee upon
its issuance. This initial recognition and measurement provision is to be
applied only on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company has performed an assessment of its guarantees and
believes that all of its guarantees are excluded from the scope of this
interpretation.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"), Consolidation
of Variable Interest Entities ("VIE"), an interpretation of Accounting Research
Bulletin ("ARB") No. 51. This Interpretation addresses consolidation by business
21
enterprises of variable interest entities, which have one or both of the
following characteristics: a) insufficient equity investment at risk, or b)
insufficient control by equity investors. This guidance is effective for VIEs
created after January 31, 2003 and for existing VIEs as of July 1, 2003. An
entity with variable interests in VIEs created before February 1, 2003 shall
apply the guidance no later than the beginning of the first interim or annual
reporting period beginning after June 15, 2003.
In conjunction with the issuance of this guidance, the Company conducted a
review of its involvement with VIEs and does not believe it has any significant
investments or ownership in VIEs.
FUTURE ACCOUNTING STANDARDS
EMBEDDED DERIVATIVES
The FASB issued FAS No.133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS 133") in 1998 and continues to issue guidance for
implementation through its Derivative Implementation Group ("DIG"). DIG recently
released a draft of FASB Statement 133 Implementation Issue B36 "Embedded
Derivatives: Bifurcation of a Debt Instrument That Incorporates Both Interest
Rate Risk and Credit Risk Exposures That are Unrelated or Only Partially Related
to the Creditworthiness of the Issuer of That Instrument" ("DIG B36"). Under
this interpretation, modified coinsurance and coinsurance with funds withheld
reinsurance agreements as well as other types of receivables and payables where
interest is determined by reference to a pool of fixed maturity assets or total
return debt index may be determined to contain bifurcatable embedded
derivatives. The required date of adoption of DIG B36 has not been determined.
If the guidance is finalized in its current form, the Company has determined
that certain of its existing reinsurance receivables (payables), investments or
insurance products contain embedded derivatives that may require bifurcation.
The Company has not yet completed its evaluation of the potential impact, if
any, on its consolidated financial positions, results of operations, or cash
flows.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from reported
results using those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial information to
conform to the current year classifications.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, money market instruments and
other debt issues with a maturity of 90 days or less when purchased.
22
INVESTMENTS
All of the Company's fixed maturity and equity securities are currently
designated as available-for-sale. Available-for-sale securities are reported at
fair value and unrealized gains and losses on these securities are included
directly in shareholder's equity, after adjustment for related charges in
deferred policy acquisition costs, value of business acquired, and deferred
income taxes.
The Company analyzes the general account investments to determine whether there
has been an other than temporary decline in fair value below the amortized cost
basis in accordance with FAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Management considers the length of the time and the
extent to which the market value has been less than cost; the financial
condition and near-term prospects of the issuer; future economic conditions and
market forecasts; and the Company's intent and ability to retain the investment
in the issuer for a period of time sufficient to allow for recovery in market
value. If it is probable that all amounts due according to the contractual terms
of a debt security will not be collected, an other than temporary impairment is
considered to have occurred.
When a decline in fair value is determined to be other than temporary, the
individual security is written down to fair value and the loss is accounted for
as a realized loss.
Realized capital gains and losses on all other investments are reflected in the
Company's results of operations.
Unrealized capital gains and losses on all other investments are reflected in
shareholder's equity, net of related income taxes.
Purchases and sales of fixed maturities and equity securities (excluding private
placements) are recorded on the trade date. Purchases and sales of private
placements and mortgage loans are recorded on the closing date.
Fair values for fixed maturity securities are obtained from independent pricing
services or broker/dealer quotations. Fair values for privately placed bonds are
determined using a matrix-based model. The matrix-based model considers the
level of risk-free interest rates, current corporate spreads, the credit quality
of the issuer and cash flow characteristics of the security. The fair values for
equity securities are based on quoted market prices. For equity securities not
actively traded, estimated fair values are based upon values of issues of
comparable yield and quality or conversion value where applicable.
23
The Company engages in securities lending whereby certain securities from its
portfolio are loaned to other institutions for short periods of time. Initial
collateral, primarily cash, is required at a rate of 102% of the market value of
the loaned domestic securities. The collateral is deposited by the borrower with
a lending agent, and retained and invested by the lending agent according to the
Company's guidelines to generate additional income. The market value of the
loaned securities is monitored on a daily basis with additional collateral
obtained or refunded as the market value of the loaned securities fluctuates.
Reverse dollar repurchase agreement and reverse repurchase agreement
transactions are accounted for as collateralized borrowings, where the amount
borrowed is equal to the sales price of the underlying securities.
The investment in mutual funds represents an investment in mutual funds managed
by the Company, and is carried at fair value.
Mortgage loans on real estate are reported at amortized cost less impairment
writedowns. If the value of any mortgage loan is determined to be impaired
(i.e., when it is probable the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement), the carrying value of
the mortgage loan is reduced to the present value of expected cash flows from
the loan, discounted at the loan's effective interest rate, or to the loan's
observable market price, or the fair value of the underlying collateral. The
carrying value of the impaired loans is reduced by establishing a permanent
writedown charged to realized loss.
Policy loans are carried at unpaid principal balances, net of impairment
reserves.
Short-term investments, consisting primarily of money market instruments and
other fixed maturity securities issues purchased with an original maturity of 91
days to one year, are considered available for sale and are carried at fair
value, which approximates amortized cost.
On occasion, the Company sells call options written on underlying securities
that are carried at fair value. Changes in fair value of these options are
recorded in net realized capital gains or losses.
DEFERRED POLICY ACQUISITION COSTS AND VALUE OF BUSINESS ACQUIRED
Deferred Policy Acquisition Costs ("DAC") is an asset, which represents certain
costs of acquiring certain insurance business, which are deferred and amortized.
These costs, all of which vary with and are primarily related to the production
of new and renewal business, consist principally of commissions, certain
underwriting and contract issuance expenses, and certain agency expenses. Value
of Business Acquired ("VOBA") is an asset, which represents the present value of
estimated net cash flows embedded in the Company's contracts, which existed at
the time the Company was acquired by ING. DAC and VOBA are evaluated for
recoverability at each balance sheet date and these assets would be reduced to
the extent that gross profits are inadequate to recover the asset.
24
The amortization methodology varies by product type based upon two accounting
standards: FAS No. 60, "Accounting and Reporting by Insurance Enterprises" ("FAS
No. 60") and FAS No. 97, "Accounting and Reporting by Insurance Enterprises for
Certain Long-Duration Contracts and Realized Gains and Losses from the Sale of
Investments" ("FAS No. 97").
Under FAS No. 60, acquisition costs for traditional life insurance products,
which primarily include whole life and term life insurance contracts, are
amortized over the premium payment period in proportion to the premium revenue
recognition.
Under FAS No. 97, acquisition costs for universal life and investment-type
products, which include universal life policies and fixed and variable deferred
annuities, are amortized over the life of the blocks of policies (usually 25
years) in relation to the emergence of estimated gross profits from surrender
charges, investment margins, mortality and expense margins, asset-based fee
income, and actual realized gains (losses) on investments. Amortization is
adjusted retrospectively when estimates of current or future gross profits to be
realized from a group of products are revised.
Activity for the year-ended December 31, 2002 within VOBA was as follows:
(Millions)
-------------------------------------------------------------------
Balance at December 31,2001 $ 20.2
Adjustment for FAS No. 115 (5.1)
Additions (3.3)
Interest accrued at 7% 1.3
Amortization (4.6)
-------------------------------------------------------------------
Balance at December 31,2002 $ 8.5
===================================================================
The estimated amount of VOBA to be amortized, net of interest, over the next
five years is $3.0 million, $2.0 million, $1.5 million, $1.5 million and $1.1
million and $1.0 million for the years 2003, 2004, 2005, 2006 and 2007,
respectively. Actual amortization incurred during these years may vary as
assumptions are modified to incorporate actual results.
As part of the regular analysis of DAC/VOBA, at the end of third quarter 2002,
the Company unlocked its assumptions by resetting its near term and long-term
assumptions for the separate account returns to 9% (gross before fund management
fees and mortality and expense and other policy charges), reflecting a blended
return of equity and other sub-accounts. This unlocking adjustment was primarily
driven by the sustained downturn in the equity markets and revised expectations
for future returns. For the year ended December 31, 2002, the Company recorded
an acceleration of DAC/VOBA amortization totaling $91.5 million before tax, or
$59.5 million, net of $32.0 million of federal income tax benefit.
POLICY LIABILITIES AND ACCRUALS
Reserves for immediate annuities with life contingent payout contracts are
computed on the basis of assumed investment yield, mortality, and expenses,
including a margin for adverse deviations. Such assumptions generally vary by
plan, year of issue and policy duration. Reserve interest rates range from 3.0%
to 3.5% for all years presented. Investment yield is based on the Company's
experience.
25
Mortality and withdrawal rate assumptions are based on relevant Company
experience and are periodically reviewed against both industry standards and
experience.
Other policyholders' funds include reserves for deferred annuity investment
contracts and immediate annuities without life contingent payouts. Reserves on
such contracts are equal to cumulative deposits less charges and withdrawals
plus credited interest thereon (rates range from 2.4% to 11.0% for all years
presented) net of adjustments for investment experience that the Company is
entitled to reflect in future credited interest.
REVENUE RECOGNITION
For certain annuity contracts, charges assessed against policyholders' funds for
the cost of insurance, surrender, expenses, actuarial margin and other fees are
recorded as revenue as charges are assessed against policyholders. Other amounts
received for these contracts are reflected as deposits and are not recorded as
revenue. Related policy benefits are recorded in relation to the associated
premiums or gross profit so that profits are recognized over the expected lives
of the contracts. When annuity payments with life contingencies begin under
contracts that were initially investment contracts, the accumulated balance in
the account is treated as a single premium for the purchase of an annuity and
reflected as an offsetting amount in both premiums and current and future
benefits in the Consolidated Income Statement.
SEPARATE ACCOUNTS
Separate Account assets and liabilities generally represent funds maintained to
meet specific investment objectives of contractholders who bear the investment
risk, subject, in some cases, to minimum guaranteed rates. Investment income and
investment gains and losses generally accrue directly to such contractholders.
The assets of each account are legally segregated and are not subject to claims
that arise out of any other business of the Company.
Separate Account assets supporting variable options under universal life and
annuity contracts are invested, as designated by the contractholder or
participant under a contract (who bears the investment risk subject, in limited
cases, to minimum guaranteed rates) in shares of mutual funds which are managed
by the Company, or other selected mutual funds not managed by the Company.
Separate Account assets are carried at fair value. At December 31, 2002 and
2001, unrealized gains of $133.4 million and of $6.9 million, respectively,
after taxes, on assets supporting a guaranteed interest option are reflected in
shareholder's equity.
Separate Account liabilities are carried at fair value, except for those
relating to the guaranteed interest option. Reserves relating to the guaranteed
interest option are maintained at fund value and reflect interest credited at
rates ranging from 2.4% to 11.0% in 2002 and 2.4% to 14.0% in 2001.
26
Separate Account assets and liabilities are shown as separate captions in the
Consolidated Balance Sheets. Deposits, investment income and net realized and
unrealized capital gains and losses of the Separate Accounts are not reflected
in the Consolidated Financial Statements (with the exception of realized and
unrealized capital gains and losses on the assets supporting the guaranteed
interest option). The Consolidated Statements of Cash Flows do not reflect
investment activity of the Separate Accounts.
REINSURANCE
The Company utilizes indemnity reinsurance agreements to reduce its exposure to
large losses in all aspects of its insurance business. Such reinsurance permits
recovery of a portion of losses from reinsurers, although it does not discharge
the primary liability of the Company as direct insurer of the risks reinsured.
The Company evaluates the financial strength of potential reinsurers and
continually monitors the financial condition of reinsurers. Only those
reinsurance recoverable balances deemed probable of recovery are reflected as
assets on the Company's Balance Sheets.
INCOME TAXES
The Company is taxed at regular corporate rates after adjusting income reported
for financial statement purposes for certain items. Deferred income tax
expenses/benefits result from changes during the year in cumulative temporary
differences between the tax basis and book basis of assets and liabilities.
27
2. INVESTMENTS
Fixed maturities available for sale as of December 31 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
2002 (Millions) Cost Gains Losses Value
-----------------------------------------------------------------------------------------------------------
U.S. government and government agencies and
authorities $ 207.3 $ 2.3 $ 0.1 $ 209.5
U.S. corporate securities:
Public utilities 335.7 15.5 1.9 349.3
Other corporate securities 3,012.0 178.7 7.8 3,182.9
-----------------------------------------------------------------------------------------------------------
Total U.S. corporate securities 3,347.7 194.2 9.7 3,532.2
-----------------------------------------------------------------------------------------------------------
Foreign securities:
Government 64.8 2.9 - 67.7
Other 163.8 12.2 1.2 174.8
-----------------------------------------------------------------------------------------------------------
Total foreign securities 228.6 15.1 1.2 242.5
-----------------------------------------------------------------------------------------------------------
Mortgage-backed securities 641.7 12.0 0.2 653.5
Other asset-backed securities 294.8 7.0 3.1 298.7
-----------------------------------------------------------------------------------------------------------
Total fixed maturities, including fixed
maturities pledged to creditors 4,720.1 230.6 14.3 4,936.4
Less: Fixed maturities pledged to creditors - - - -
-----------------------------------------------------------------------------------------------------------
Fixed maturities $4,720.1 $ 230.6 $ 14.3 $ 4,936.4
===========================================================================================================
28
Fixed maturities available for sale as of December 31 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
2001 (Millions) Cost Gains Losses Value
-----------------------------------------------------------------------------------------------------------
U.S. government and government agencies and
authorities $ 132.1 $ 0.5 $ 3.4 $ 129.2
U.S. corporate securities:
Public utilities 39.8 0.3 1.4 38.7
Other corporate securities 1,111.8 15.2 10.1 1,116.9
-----------------------------------------------------------------------------------------------------------
Total U.S. corporate securities 1,151.6 15.5 11.5 1,155.6
-----------------------------------------------------------------------------------------------------------
Foreign securities:
Government 143.6 3.3 0.2 146.7
-----------------------------------------------------------------------------------------------------------
Total foreign securities 143.6 3.3 0.2 146.7
-----------------------------------------------------------------------------------------------------------
Mortgage-backed securities 167.0 3.6 0.9 169.7
Other asset-backed securities 388.2 7.2 1.7 393.7
-----------------------------------------------------------------------------------------------------------
Total fixed maturities, including fixed
maturities pledged to creditors 1,982.5 30.1 17.7 1,994.9
Less: Fixed maturities pledged to creditors - - - -
-----------------------------------------------------------------------------------------------------------
Fixed maturities $1,982.5 $ 30.1 $ 17.7 $ 1,994.9
===========================================================================================================
The amortized cost and fair value of total fixed maturities for the year-ended
December 31, 2002 are shown below by contractual maturity. Actual maturities may
differ from contractual maturities because securities may be restructured,
called, or prepaid.
(Millions) Amortized Cost Fair Value
------------------------------------------------------------------------
Due to mature:
One year or less $ - $ -
After one year through five years 401.0 419.7
After five years through ten years 1,681.3 1,773.1
After ten years 1,701.3 1,791.4
Mortgage-backed securities 641.7 653.5
Other asset-backed securities 294.8 298.7
------------------------------------------------------------------------
------------------------------------------------------------------------
Fixed maturities $4,720.1 $4,936.4
========================================================================
At December 31, 2002 and 2001, fixed maturities with carrying values of $6.5
million and $6.9 million, respectively, were on deposit as required by
regulatory authorities.
The Company did not have any investments in a single issuer, other than
obligations of the U.S. government, with a carrying value in excess of 10% of
the Company's shareholder's equity at December 31, 2002.
29
Beginning in April 2001, the Company entered into reverse dollar repurchase
agreement and reverse repurchase agreement transactions to increase its return
on investments and improve liquidity. These transactions involve a sale of
securities and an agreement to repurchase substantially the same securities as
those sold. The dollar rolls and reverse repurchase agreements are accounted for
as short-term collateralized financings and the repurchase obligation is
reported on the Consolidated Balance Sheets. The repurchase obligation totaled
$40.0 and $3.9 million at December 31, 2002 and 2001, respectively.
The primary risk associated with short-term collateralized borrowings is that
the counterparty will be unable to perform under the terms of the contract. The
Company's exposure is limited to the excess of the net replacement cost of the
securities over the value of the short-term investments, an amount that was not
material at December 31, 2001. The Company believes the counterparties to the
dollar roll and reverse repurchase agreements are financially responsible and
that the counterparty risk is immaterial.
During 2002, the Company determined that thirteen fixed maturities had other
than temporary impairments. As a result, at December 31, 2002, the Company
recognized a pre-tax loss of $8.9 million to reduce the carrying value of the
fixed maturities to their combined fair value of $123.5 million. During 2001,
the Company determined that ten fixed maturities had other than temporary
impairments. As a result, at December 31, 2001, the Company recognized a pre-tax
loss of $0.7 million to reduce the carrying value of the fixed maturities to
their fair value of $0.07 million.
3. FINANCIAL INSTRUMENTS
ESTIMATED FAIR VALUE
The following disclosures are made in accordance with the requirements of FAS
No. 107, "Disclosures about Fair Value of Financial Instruments." FAS No. 107
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates, in many cases, could not be realized in immediate
settlement of the instrument.
FAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
30
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the above financial instruments:
FIXED MATURITIES SECURITIES: The fair values for the actively traded marketable
bonds are determined based upon the quoted market prices. The fair values for
marketable bonds without an active market are obtained through several
commercial pricing services which provide the estimated fair values. Fair values
of privately placed bonds are determined using a matrix-based pricing model. The
model considers the current level of risk-free interest rates, current corporate
spreads, the credit quality of the issuer and cash flow characteristics of the
security. Using this data, the model generates estimated market values which the
Company considers reflective of the fair value of each privately placed bond.
Fair values for privately placed bonds are determined through consideration of
factors such as the net worth of the borrower, the value of collateral, the
capital structure of the borrower, the presence of guarantees and the Company's
evaluation of the borrower's ability to compete in their relevant market.
EQUITY SECURITIES: Fair values of these securities are based upon quoted market
value.
MORTGAGE LOANS ON REAL ESTATE: The fair values for mortgage loans on real estate
are estimated using discounted cash flow analyses and rates currently being
offered in the marketplace for similar loans to borrowers with similar credit
ratings. Loans with similar characteristics are aggregated for purposes of the
calculations.
CASH, SHORT-TERM INVESTMENTS AND POLICY LOANS: The carrying amounts for these
assets approximate the assets' fair values.
ASSETS HELD IN SEPARATE ACCOUNTS: Assets held in separate accounts are reported
at the quoted fair values of the individual securities in the separate accounts.
SURPLUS NOTES: Estimated fair value of the Company's surplus notes were based
upon discounted future cash flows using a discount rate approximating the
current market value.
INVESTMENT CONTRACT LIABILITIES (INCLUDED IN FUTURE POLICY BENEFITS AND CLAIMS
RESERVES):
SUPPLEMENTARY CONTRACTS AND IMMEDIATE ANNUITIES: Estimated fair values of the
Company's liabilities for future policy benefits for the divisions of the
variable annuity products with fixed interest guarantees and for supplemental
contracts without life contingencies are stated at cash surrender value, the
cost the Company would incur to extinguish the liability.
LIABILITIES RELATED TO SEPARATE ACCOUNTS: Liabilities related to separate
accounts are reported at full account value in the Company's historical balance
sheet. Estimated fair values of separate account liabilities are equal to their
carrying amount.
31
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 2002 and 2001 were as follows:
2002 2001
--------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
(Millions) Value Value Value Value
--------------------------------------------------------------------------------------------------------
Assets:
Fixed maturities $ 4,936.4 $4,936.4 $ 1,994.9 $ 1,994.9
Equity securities 19.0 19.0 - -
Mortgage loans on real estate 482.4 522.2 213.9 219.2
Policy loans 16.0 16.0 14.8 14.8
Cash and short-term investments 150.7 150.7 205.8 205.8
Assets held in separate accounts 11,029.3 11,029.3 10,958.2 10,958.2
Liabilities:
Surplus notes (170.0) (260.0) (245.0) (358.1)
Investment contract liabilities:
Deferred annuities (5,128.0) (4,802.9) (2,155.3) (1,976.7)
Supplementary contracts and
immediate annuities (8.0) (8.0) (7.1) (7.1)
Liabilities related to separate
accounts (11,029.3) (11,029.3) (10,958.2) (10,958.2)
--------------------------------------------------------------------------------------------------------
Fair value estimates are made at a specific point in time, based on available
market information and judgments about various financial instruments, such as
estimates of timing and amounts of future cash flows. Such estimates do not
reflect any premium or discount that could result from offering for sale at one
time the Company's entire holdings of a particular financial instrument, nor do
they consider the tax impact of the realization of unrealized gains or losses.
In many cases, the fair value estimates cannot be substantiated by comparison to
independent markets, nor can the disclosed value be realized in immediate
settlement of the instruments. In evaluating the Company's management of
interest rate, price and liquidity risks, the fair values of all assets and
liabilities should be taken into consideration, not only those presented above.
32
4. NET INVESTMENT INCOME
Sources of net investment income were as follows:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
(Millions) 2002 2001 2000
-------------------------------------------------------------------------
Fixed maturities $ 185.6 $ 83.7 $ 55.3
Mortgage loans 19.6 11.2 7.8
Policy loans 0.6 0.8 0.5
Short term investments and
cash equivalents 2.6 2.6 2.3
Other 0.4 0.6 0.7
-------------------------------------------------------------------------
Gross investment income 208.8 98.9 66.6
Less: investment expenses 11.1 4.5 2.5
-------------------------------------------------------------------------
Net investment income $ 197.7 $ 94.4 $ 64.1
=========================================================================
5. DIVIDEND RESTRICTIONS AND SHAREHOLDER'S EQUITY
The ability of Golden American to pay dividends to the Parent is restricted.
Prior approval of insurance regulatory authorities is required for payment of
dividends to the stockholder which exceed an annual limit. During 2002, Golden
American cannot pay dividends to Equitable Life without prior approval of
statutory authorities. Golden American did not pay common stock dividends during
2002, 2001, or 2000.
The Department recognizes as net income and capital and surplus those amounts
determined in conformity with statutory accounting practices prescribed or
permitted by the Department, which differ in certain respects from accounting
principles generally accepted in the United States. Statutory net (loss) income
was $(303.0) million, $(156.4) million and $(71.1) million for the years ended
December 31, 2002, 2001, and 2000, respectively. Statutory capital and surplus
was $424.9 million and $451.6 million as of December 31, 2002 and 2001,
respectively.
As of December 31, 2002, the Company does not utilize any statutory accounting
practices, which are not prescribed by state regulatory authorities that,
individually or in the aggregate, materially affect statutory capital and
surplus.
For 2001, the Company was required to implement statutory accounting changes
("Codification") ratified by the National Association of Insurance Commissioners
("NAIC") and state insurance departments. The cumulative effect of Codification
to the Company's statutory surplus as of January 1, 2001 was a decrease of $5.9
million.
The Company maintains a $40.0 million reciprocal loan agreement with ING AIH
(refer to Note 10), a perpetual $75.0 million revolving note facility with Bank
of New York and a $75.0 million revolving note facility with SunTrust Bank which
expires on July 31, 2003.
6. CAPITAL GAINS AND LOSSES ON INVESTMENT OPERATIONS
Realized capital gains or losses are the difference between the carrying value
and sale proceeds of specific investments sold. Net realized capital (losses)
gains on investments were as follows:
33
Year ended Year ended Year ended
December 31, December 31, December 31,
(Millions) 2002 2001 2000
--------------------------------------------------------------------------------------
Fixed maturities $ 4.2 $ (4.9) $ (6.3)
Equity securities - (1.6) (0.2)
Mortgage loans on real estate - - (0.1)
--------------------------------------------------------------------------------------
Pretax realized capital gains (losses) $ 4.2 $ (6.5) $ (6.6)
======================================================================================
After-tax realized capital gains (losses) $ 2.7 $ (4.2) $ (4.3)
======================================================================================
Proceeds from the sale of total fixed maturities and the related gross gains and
losses were as follows:
Year ended Year ended Year ended
December 31, December 31, December 31,
(Millions) 2002 2001 2000
---------------------------------------------------------------------------
Proceeds on sales $ 7,297.1 $ 880.7 $ 205.1
Gross gains 76.8 6.9 0.2
Gross losses 72.6 11.8 6.5
Changes in shareholder's equity related to changes in accumulated other
comprehensive income were as follows:
(Millions) 2002 2001 2000
--------------------------------------------------------------------------
Fixed maturities $ 204.0 $18.4 $12.4
Equity securities (3.9) - -
DAC/VOBA (202.8) (8.4) (10.4)
--------------------------------------------------------------------------
(2.7) 10.0 2.0
Increase (decrease) in deferred income
taxes (1.0) 2.1 (3.1)
--------------------------------------------------------------------------
Net changes in accumulated other
comprehensive income (loss) $ (1.7) $ 7.9 $ 5.1
--------------------------------------------------------------------------
34
Shareholder's equity included the following accumulated other comprehensive
income (loss), at December 31:
(Millions) 2002 2001 2000
---------------------------------------------------------------------------
Net unrealized capital gains (losses):
Fixed maturities $ 216.3 $ 12.3 $ (6.1)
Equity securities (3.9) - -
DAC/VOBA (209.2) (6.4) 2.0
---------------------------------------------------------------------------
3.2 5.9 (4.1)
Deferred income taxes 1.1 2.1 -
---------------------------------------------------------------------------
Net accumulated other comprehensive
income (loss) $ 2.1 $ 3.8 $ (4.1)
===========================================================================
Changes in accumulated other comprehensive income related to changes in
unrealized gains (losses) on securities, were as follows:
(Millions) 2002 2001 2000
---------------------------------------------------------------------------
Unrealized holding gains (losses) arising $ (8.7) $ 11.1 $ 6.9
the year (1)
Less: reclassification adjustment for
gains (losses) and other items
included in net income (2) 7.0 (3.2) (1.8)
---------------------------------------------------------------------------
Net unrealized gains (losses) on securities $ (1.7) $ 7.9 $ 5.1
===========================================================================
(1) Pretax unrealized holding gains (losses) arising during the year were
$13.4 million, $17.1 million and $10.6 million for the years ended
December 31, 2002, 2001 and 2000, respectively.
(2) Pretax reclassification adjustments for gains (losses) and other items
included in net income were $10.8 million, $(4.9) million and $(2.8)
million for the years ended December 31, 2002, 2001 and 2000,
respectively.
35
7. SEVERANCE
In December 2001, ING announced its intentions to further integrate and
streamline the U.S. based operations of ING Americas, (which includes the
Company), in order to build a more customer-focused organization. In connection
with these actions, the Company recorded a charge of $4.9 million pretax. The
severance portion of this charge ($4.8 million pretax) is based on a plan to
eliminate 260 positions (primarily operations, information technology and other
administrative/staff support personnel). Severance actions are expected to be
substantially complete by March 31, 2003. The facilities portion ($.1 million
pretax) of the charge represents the amount to be incurred by the Company to
terminate a contractual lease obligation.
Activity for the year ended December 31, 2002 within the severance liability and
positions eliminated related to such actions were as follows:
(Millions) Severance Liability Positions
---------------------------------------------------------------------
Balance at December 31, 2001 $ 4.8 252
Actions taken (3.4) (194)
---------------------------------------------------------------------
Balance at December 31, 2002 $ 1.4 58
=====================================================================
8. INCOME TAXES
Starting in 2002, Golden American Life Insurance Company joins in the filing of
a consolidated federal income tax return with its parent, Equitable Life and
other affiliates. The Company has a tax allocation agreement with Equitable Life
whereby the Company is charged for taxes it would have incurred were it not a
member of the consolidated group and is credited for losses at the statutory tax
rate. Prior to joining the Equitable Life consolidated group, the Company was
the parent of a different consolidated group.
At December 31, 2002, the Company has net operating loss carryforwards of
approximately $369.2 million for federal income tax purposes which are available
to offset future taxable income. If not used, these carryforwards will expire
between 2011 and 2016.
Income tax expense (benefit) from continuing operations included in the
consolidated financial statements are as follows:
Year ended Year ended Year ended
December 31, December 31, December 31,
(Millions) 2002 2001 2000
---------------------------------------------------------------------------
Current taxes (benefits):
Federal $ (98.2) $ 0.6 $ (0.1)
---------------------------------------------------------------------------
Total current taxes
(benefits) (98.2) 0.6 (0.1)
---------------------------------------------------------------------------
Deferred taxes (benefits):
Federal 85.7 (0.5) 13.3
---------------------------------------------------------------------------
Total deferred taxes
(benefits) 85.7 (0.5) 13.3
---------------------------------------------------------------------------
Total $ (12.5) $ 0.1 $ 13.2
============================================================================
36
Income taxes were different from the amount computed by applying the federal
income tax rate to income from continuing operations before income taxes for the
following reasons:
Year ended Year ended Year ended
December 31, December 31, December 31,
(Millions) 2002 2001 2000
------------------------------------------------------------------------------------
Income before income taxes $ (42.2) $ (3.9) $ 32.4
Tax rate 35% 35% 35%
------------------------------------------------------------------------------------
Income tax at federal statutory rate (14.8) (1.4) 11.3
Tax effect of:
Goodwill amortization - 1.0 1.0
Meals and entertainment 0.6 0.5 0.3
Other 1.7 - 0.6
------------------------------------------------------------------------------------
Income tax expense (benefit) $ (12.5) $ 0.1 $ 13.2
------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities at December 31 are presented below:
(Millions) 2002 2001
------------------------------------------------------------------------------------
Deferred tax assets:
Operations and capital loss carryforwards $ 125.6 $ 121.7
Future policy benefits 214.1 176.3
Goodwill 11.1 -
Investments 0.2 0.1
------------------------------------------------------------------------------------
351.0 298.1
Deferred tax liabilities:
Goodwill - (3.5)
Unrealized gains on investments (1.1) (2.1)
Deferred policy acquisition cost (254.8) (222.8)
Value of purchased insurance in force (5.0) (6.9)
Other (169.9) (75.4)
------------------------------------------------------------------------------------
Deferred tax liability before allowance (430.8) (310.7)
------------------------------------------------------------------------------------
Valuation allowance - -
------------------------------------------------------------------------------------
Net deferred income tax liability $ (79.8) $ (12.6)
====================================================================================
The Company establishes reserves for possible proposed adjustments by various
taxing authorities. Management believes there are sufficient reserves provided
for, or adequate defenses against any such adjustments.
The Company establishes reserves for possible proposed adjustments by various
taxing authorities. Management believes there are sufficient reserves provided
for, or adequate defenses against any such adjustments.
37
9. BENEFIT PLANS
DEFINED BENEFIT PLANS
Prior to December 31, 2001, the Company's employees were covered by the ING
Retirement Plan for Employees of Equitable Life ("Equitable Plan"), a qualified,
defined contribution pension plan. The Company was allocated its share of the
pension liability associated with employees.
As of December 31, 2001, the qualified pension benefit plans of certain United
States subsidiaries of ING North America Insurance Corporation ("ING North
America"), including Equitable Life, were merged into the ING Americas
Retirement Plan. The Company transferred its pension liabilities to the Parent
at that date. In exchange for these liabilities, the Company received a capital
contribution, net of taxes, from the Parent. The costs allocated to the Company
for its members' participation in the ING Pension Plan were $3.0 million for
2002.
The following tables summarize the benefit obligations and the funded status for
pension benefits related to the Equitable Plan for the two-year period ended
December 31, 2001:
(Millions) 2001
- ------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at January 1 $ 7.9
Service cost 2.0
Interest cost 0.8
Actuarial (gain) loss (2.7)
Plan Amendments (0.2)
Transfer of benefit obligation to the Parent (7.8)
----------------------
Benefit obligation at December 31 $ -
======================
Funded status:
Funded status at December 31 prior to the transfer
of the benefit obligation to the Parent $ (7.8)
Unrecognized past service cost (1.1)
Unrecognized net loss -
Transfer of the funded status to the Parent 8.9
----------------------
Net amount recognized $ -
======================
Prior to the merger of the qualified benefit plans of ING's U.S. subsidiaries at
December 31, 2001, Equitable Life, held the plan assets.
The weighted-average assumptions used in the measurement of the Company's'
December 31, 2001 benefit obligation, prior to the merger of the qualified
benefit plans of ING, follows:
2001
- ------------------------------------------------------------------------------
Discount rate 7.50%
Expected return on plan assets 9.25
Rate of compensation increase 4.50
38
The following table provides the net periodic benefit cost for the fiscal years
2001 and 2000:
Year Ended December 31, 2001 2000
- ------------------------------------------------------------------------
(MILLIONS)
Service cost $ 2.0 $ 1.6
Interest cost 0.8 0.5
Unrecognized past service cost - -
------------------------------------
Net periodic benefit cost $ 2.8 $ 2.1
====================================
There were no gains or losses resulting from curtailments or settlements during
2001 or 2000.
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets were $0 as of December 31, 2001.
10. RELATED PARTY TRANSACTIONS
OPERATING AGREEMENTS:
The Company has certain agreements whereby it generates revenues and incurs
expenses with affiliated entities. The agreements are as follows:
o Resources and services are provided to Security Life of Denver
Insurance Company ("SLDIC) and Southland Life Insurance Company
("SLIC"). For the years ended December 31, 2002, 2001, and 2000
revenues for these services, which reduced general expenses incurred,
were $4.2 million, $0.3 million and $0.3 million, respectively for
SLDIC and $1.0 million, $0.1 million and $0.1 million, respectively
for SLIC.
o Underwriting and distribution agreement with Directed Services, Inc.
("DSI"), for the variable insurance products issued by the Company.
DSI is authorized to enter into agreements with broker/dealers to
distribute the Company's' variable products and appoint
representatives of the broker/dealers as agents. For the years ended
December 31, 2002, 2001 and 2000 commission expenses were incurred in
the amounts of $282.9 million, $229.7 million, and $208.9 million,
respectively.
o Asset management agreement with ING Investment Management LLC ("IIM"),
in which IIM provides asset management and accounting services. The
Company records a fee, which is paid quarterly, based on the value of
the assets under management. For the years ended December 31, 2002,
2001, and 2000 expenses were incurred in the amounts of $11.0 million,
$4.4 million, and $2.5 million, respectively.
o Service agreement with Equitable Life in which administrative and
financial related services are provided. For the years ended December
31, 2002, 2001, and 2000 expenses were incurred in the amounts of $0.6
million, $0.3 million, and $1.3 million, respectively.
Golden American has certain agreements whereby it generates revenues
and incurs expenses with affiliated entities.
39
The agreements are as follows:
o Managerial and supervisory services to DSI. The fee paid by DSI for
these services is calculated as a percentage of average assets in the
variable separate accounts. For the years ended December 31, 2002,
2001, and 2000 revenue for these services was $23.7 million, $23.1
million, and $21.3 million, respectively.
o Advisory, computer, and other resources and services are provided to
Equitable Life and United Life & Annuity Insurance Company ("ULAIC").
For the years ended December 31, 2002, 2001, and 2000 revenues for
these services, which reduced general expenses incurred, totaled $9.8
million, $8.2 million, and $6.2 million, respectively for Equitable
Life and $0.3 million, $0.4 million and $0.6 million, respectively for
ULAIC.
o Expense sharing agreements with ING America Insurance Holdings, Inc.
("ING AIH") for administrative, management, financial, and information
technology services, which were approved in 2001. For the years ended
December 31, 2002 and 2001, Golden American incurred expenses of $41.0
million and $23.2 million, respectively.
o Guaranty agreement with Equitable Life. In consideration of an annual
fee, payable June 30, Equitable Life guarantees that it will make
funds available, if needed, to pay the contractual claims made under
the provisions of Golden American's life insurance and annuity
contracts. The agreement is not, and nothing contained therein or done
pursuant thereto by Equitable Life shall be deemed to constitute, a
direct or indirect guaranty by Equitable Life of the payment of any
debt or other obligation, indebtedness, or liability, of any kind or
character whatsoever, of Golden American. The agreement does not
guarantee the value of the underlying assets held in separate accounts
in which funds of variable life insurance and variable annuity
policies have been invested. The calculation of the annual fee is
based on risk based capital. No amounts were payable under this
agreement as of December 31, 2002, 2001 and 2000.
REINSURANCE AGREEMENTS:
Golden American participates in a modified coinsurance agreement with Equitable
Life, covering a considerable portion of Golden American's variable annuities
issued on or after January 1, 2000, excluding those with an interest rate
guarantee. The financial statements are presented net of the effects of the
agreement.
Under this agreement, Golden American received a net reimbursement of expenses
and charges of $100.9 million, $224.5 million and $218.8 million for the years
ended December 31, 2002, 2001, and 2000, respectively. This was offset by a
decrease in policy acquisition costs deferred of $143.5 million, $257.5 million
and $223.7 million, respectively, for the same periods. As at December 31, 2002,
2001 and 2000, Golden American also had a payable to Equitable Life of $7.1
million, $22.6 million and $16.3 million, respectively, due to the overpayment
by Equitable Life of the cash settlement for the modified coinsurance agreement.
Golden American entered into a reinsurance agreement with Security Life of
Denver International, Ltd., an affiliate, covering variable annuity minimum
guaranteed death benefits and minimum guaranteed living benefits of variable
annuities issued after January 1, 2000. Golden American also obtained an
irrevocable letter of credit in the amount of $25 million related to this
agreement. In addition, the Company obtained a standby letter of credit in the
amount of $75 million.
40
RECIPROCAL LOAN AGREEMENT:
Golden American maintains a reciprocal loan agreement with ING AIH, a Delaware
corporation and affiliate, to facilitate the handling of unusual and/or
unanticipated short-term cash requirements. Under this agreement, which expires
December 31, 2007, Golden American and ING AIH can borrow up to $40.0 million
from one another. Prior to lending funds to ING AIH, Golden American must obtain
the approval from the Department of Insurance of the State of Delaware. Interest
on any Golden American borrowings is charged at the rate of ING AIH's cost of
funds for the interest period plus 0.15%. Interest on any ING AIH borrowings is
charged at a rate based on the prevailing interest rate of U.S. commercial paper
available for purchase with a similar duration. Under this agreement, Golden
American incurred interest expense of $33,000, $26,000, and $481,000 for the
years ended December 31, 2002, 2001 and 2000, respectively. At December 31,
2002, 2001, and 2000, Golden American did not have any borrowings or receivables
from ING AIH under this agreement.
SURPLUS NOTES:
Golden American issued multiple 30-year surplus notes (see below table). Payment
of the notes and related accrued interest is subordinate to payments due to
policyholders, claimant and beneficiary claims, as well as debts owed to all
other classes of debtors, other than surplus note holders, of Golden American.
Any payment of principal and/or interest made is subject to the prior approval
of the Delaware Insurance Commissioner. Interest expense for the years ended
December 31:
(Millions)
- -----------------------------------------------------------------------------------------------------------------------
Surplus Maturity
Note Amount Affiliate Date 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
8.2% 50.0 *Equitable Life 12/29/29 2.0 4.1 4.1
8.0 35.0 Security Life of Denver 12/07/29 2.8 2.8 3.0
7.8 75.0 Equitable Life 09/29/29 5.8 5.8 5.8
7.3 60.0 Equitable Life 12/29/28 4.4 4.4 4.4
8.3 25.0 *Equitable Life 12/17/26 1.0 2.1 2.1
- -----------------------------------------------------------------------------------------------------------------------
*Surplus notes redeemed June 28, 2002.
STOCKHOLDER'S EQUITY:
During 2002, 2001, and 2000, Golden American received capital contributions of
$356.3 million, $196.8 million, and $115.0 million respectively.
41
11. REINSURANCE
At December 31, 2002, Golden American had reinsurance treaties with four
unaffiliated reinsurers and three affiliated reinsurers covering a significant
portion of the mortality risks and guaranteed death and living benefits under
its variable contracts. Golden American remains liable to the extent its
reinsurers do not meet their obligations under the reinsurance agreements.
Reinsurance ceded in force for life mortality risks were $90.7 million and $94.8
million at December 31, 2002 and 2001, respectively. At December 31, 2002 and
2001, the Company had net receivables of $196.9 million and $56.0 million,
respectively for reinsurance claims, reserve credits, or other receivables from
these reinsurers. At December 31, 2002 and 2001, respectively, these net
receivables were comprised of the following: $36.7 and $7.8 million for claims
recoverable from reinsurers; $6.3 and $3.4 million for payable for reinsurance
premiums; $137.2 million and $28.8 million for reserve credits; and $24.0
million and $22.7 million for reinsured surrenders and allowances due from an
unaffiliated reinsurer. Included in the accompanying consolidated financial
statements, excluding the modified coinsurance agreements, are net
considerations to reinsurers of $50.8 million, $30.3 million and $21.7 million
and net policy benefits recoveries of $49.5 million, $21.8 million and $8.9
million for the years ended December 21, 2002, 2001 and 2000, respectively.
Golden participates in a modified coinsurance agreement with an unaffiliated
reinsurer. The accompanying consolidated financial statements are presented net
of the effects of the treaty which increased (decreased) income by $(2.9)
million, $(0.5) million and $1.7 million for the years ended December 31, 2002,
2001 and 2000, respectively.
12. COMMITMENTS AND CONTINGENT LIABILITIES
LEASES
For the year ended December 31, 2002 rent expense for leases was $4.6 million.
The future net minimum payments under noncancelable leases for the years ended
December 31, 2003 through 2007 are estimated to be $2.3 million, $2.3 million,
$2.4 million, $2.4 million and $2.4 million, respectively, and $2.4 million,
thereafter. The Company pays substantially all expenses associated with its
leased and subleased office properties. Expenses not paid directly by the
Company are paid for by an affiliate and allocated back to the Company.
COMMITMENTS
Through the normal course of investment operations, the Company commits to
either purchase or sell securities, commercial mortgage loans or money market
instruments at a specified future date and at a specified price or yield. The
inability of counterparties to honor these commitments may result in either
higher or lower replacement cost. Also, there is likely to be a change in the
value of the securities underlying the commitments. At December 31, 2002 and
2001, the Company had off-balance sheet commitments to purchase investments
equal to their fair value of $39.0 million and $25.2 million, respectively. The
Company makes investments in limited partnerships on a subscription basis. At
December 31, 2002 and 2001, the Company had to fund the subscriptions of $38.0
million and $0.0 million, respectively.
42
LITIGATION
The Company is a party to threatened or pending lawsuits arising from the normal
conduct of business. Due to the climate in insurance and business litigation,
suits against the Company sometimes include claims for substantial compensatory,
consequential or punitive damages and other types of relief. Moreover, certain
claims are asserted as class actions, purporting to represent a group of
similarly situated individuals. While it is not possible to forecast the outcome
of such lawsuits, in light of existing insurance, reinsurance and established
reserves, it is the opinion of management that the disposition of such lawsuits
will not have a materially adverse effect on the Company's operations or
financial position.
43
QUARTERLY DATA (UNAUDITED)
2002 (Millions) First Second Third Fourth
- ------------------------------------------------------------------------------------------------------
Total Revenue $ 69.4 $ 89.2 $ 141.4 $ 109.4
- ------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (3.2) (16.0) (60.2) 37.2
Income taxes (benefit) (1.0) (5.5) (19.2) 13.2
- ------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect
of change in accounting principal (2.2) (10.5) (41.0) 24.0
Cumulative effect of change in
accounting principle - - - (135.3)
- ------------------------------------------------------------------------------------------------------
Net income (loss) $ (2.2) $ (10.5) $ (41.0) $ (111.3)
======================================================================================================
2001 (Millions) First Second Third Fourth
- ------------------------------------------------------------------------------------------------------
Total Revenue $ 72.1 $ 65.4 $ 70.1 $ 69.2
- ------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 14.2 5.6 (14.3) (9.4)
Income taxes 5.3 2.4 (5.6) (2.0)
- ------------------------------------------------------------------------------------------------------
Net income (loss) $ 8.9 $ 3.2 $ (8.7) $ (7.4)
======================================================================================================
44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to General Instruction I(2) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction I(2) of Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted pursuant to General Instruction I(2) of Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to General Instruction I(2) of Form 10-K.
ITEM 14. CONTROLS AND PROCEDURES
a) Within the 90-day period prior to the filing of this report, the Company
carried out an evaluation, under the supervision and with the participation
of its management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rule 13a-14 of
the Securities Exchange Act of 1934). Based on that evaluation, the Chief
Executive Officer and the Chief Financial Officer have concluded that the
Company's current disclosure controls and procedures are effective in
ensuring that material information relating to the Company required to be
disclosed in the Company's periodic SEC filings is made known to them in a
timely manner.
b) There have not been any significant changes in the internal controls of the
Company or other factors that could significantly affect these internal
controls subsequent to the date the Company carried out its evaluation.
45
PART IV
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial statements. See Item 8 on Page 13.
2. Financial statement schedules. See Index to Consolidated Financial
Statement Schedules on Page 49.
EXHIBITS
2. (a) Plan of Acquisition Stock Purchase Agreement dated as of May 3, 1996,
between Equitable of Iowa Companies ("Equitable") and Whitewood
Properties Corp. (incorporated by reference from Exhibit 2 in
Equitable's Form 8-K filed August 28, 1996)
(b) Agreement and Plan of Merger dated as of July 7, 1997, among ING Groep
N.V., PFHI Holdings, Inc., and Equitable (incorporated by reference
from Exhibit 2 in Equitable's Form 8-K filed July 11, 1997)
3. (a) Articles of Incorporation and By-Laws Articles of Incorporation of
Golden American Life Insurance Company ("Registrant" or "Golden
American") (incorporated by reference from Exhibit 3(a) to
Registrant's Registration Statement on Form S-1 filed with the
Securities and Exchange Commission (the "SEC") on June 30, 2000 (File
No. 333-40596)
(b)(i)By-laws of Golden American, as amended (incorporated by reference
from Exhibit 3(b)(ii) to the Registrant's Registration Statement on
Form S-1 filed with the SEC on June 30, 2000 (File No. 333-40596)
(ii) By-laws of Golden American, as amended (incorporated by reference from
Exhibit 3(b)(ii) to the Registrant's Registration Statement on Form
S-1 filed with the SEC on June 30, 2000 (File No. 333-40596)
(iii)Certificate of Amendment of the By-laws of MB Variable Life Insurance
Company, as amended (incorporated by reference from Exhibit 3(b)(iii)
to Registrant's Registration Statement on Form S-1 filed with the SEC
on June 30, 2000 (File No. 333-40596)
(iv) By-laws of Golden American, as amended (12/21/93) (incorporated by
reference from Exhibit 3(b)(iv) to Registrant's Registration Statement
on Form S-1 filed with the SEC on June 30, 2000 (File No. 333-40596)
4. (a) Single Premium Deferred Modified Guaranteed Annuity Contract
incorporated herein by reference to the initial Registration Statement
for Golden American filed with the Securities and Exchange Commission
on June 30, 2000 (File No. 333-40596)
(b) Single Premium Deferred Modified Guaranteed Annuity Master Contract
incorporated herein by reference to Amendment No. 1 to the
Registration Statement for Golden American filed with the Securities
and Exchange Commission on September 13, 2000 (File No. 333-40596)
(c) Single Premium Deferred Modified Guaranteed Annuity Certificate
incorporated herein by reference to Amendment No. 1 to the
Registration Statement for Golden American filed with the Securities
and Exchange Commission on September 13, 2000 (File No. 333-40596)
46
(d) Single Premium Deferred Modified Guaranteed Annuity Contract
incorporated herein by reference Pre-Effective Amendment No. 1 to a
Registration Statement on Form S-1 for Golden American filed with the
Securities and Exchange Commission on February 8, 2002 (File No.
333-67660)
(e) Single Premium Deferred Modified Guaranteed Annuity Master Contract
incorporated herein by reference Pre-Effective Amendment No. 1 to a
initial Registration Statement on Form S-1 for Golden American filed
with the Securities and Exchange Commission on February 8, 2002 (File
No. 333-67660)
(f) Single Premium Deferred Modified Guaranteed Annuity Certificate
incorporated herein by reference Pre-Effective Amendment No. 1 to a
Registration Statement on Form S-1 for Golden American filed with the
Securities and Exchange Commission on February 8, 2002 (File No.
333-67660)
10 (a) MATERIAL CONTRACTS
Administrative Services Agreement, dated as of January 1, 1997,
between Golden American and Equitable Life Insurance Company of Iowa
(incorporated by reference from Exhibit 10(a) to a Registration
Statement for Golden American on Form S-1 filed with the SEC on April
29, 1998 (File No. 333-51353)
(b) Service Agreement, dated as of January 1, 1994, between Golden
American and Directed Services, Inc. (incorporated by reference from
Exhibit 10(b) to a Registration Statement for Golden American on Form
S-1 filed with the SEC on April 29, 1998 (File No. 333-51353)
(c) Service Agreement, dated as of January 1, 1997, between Golden
American and Equitable Investment Services, Inc. (incorporated by
reference from Exhibit 10(c) to a Registration Statement for Golden
American on Form S-1 filed with the SEC on April 29, 1998 (File No.
333-51353)
(d) Asset management Agreement, dated January 20, 1998, between Golden
American and ING Investment Management LLC (incorporated by reference
from Exhibit 10(f) to Golden American's Form 10-Q filed with the SEC
on August 14, 1998 (File No. 33-87272)
(e) Reciprocal Loan Agreement, dated January 1, 1998, as amended March 20,
1998, between Golden American and ING America Insurance Holdings, Inc.
(incorporated by reference from Exhibit 10(g) to Golden American's
Form 10-Q filed with the SEC on August 14, 1998 (File No. 33-87272)
(f) Underwriting Agreement between Golden American and Directed Services,
Inc. (incorporated by reference from Exhibit 1 to Amendment No. 9 to
Registrant's Registration Statement on Form S-1 filed with the SEC on
or about February 17, 1998 (File No. 33-87272)
(g) Surplus Note, dated December 17, 1996, between Golden American and
Equitable of Iowa Companies (incorporated by reference from Exhibit
10(l) to Golden American's Form 10-K filed with the SEC on March 29,
2000 (File No. 33-87272)
(h) Surplus Note, dated December 30, 1998, between Golden American and
Equitable Life Insurance Company of Iowa (incorporated by reference
from Exhibit 10(m) to Golden American's Form 10-K filed with the SEC
on March 29, 2000 (File No. 33-87272)
(i) Surplus Note, dated September 30, 1999, between Golden American and
ING America Insurance Holdings, Inc. (incorporated by reference from
Exhibit 10(n) to Golden American's Form 10-K filed with the SEC on
March 29, 2000 (File No. 33-87272)
47
(j) Surplus Note, dated December 8, 1999, between Golden American and
First Columbine Life Insurance Company (incorporated by reference from
Exhibit 10(g) to Amendment No. 7 to a Registration Statement for
Golden American on Form S-1 filed with the SEC on or about January 27,
2000 (File No. 333-28765)
(k) Surplus Note, dated December 30, 1999, between Golden American and
Equitable Life Insurance Company of Iowa (incorporated by reference
from Exhibit 10(h) to Amendment No. 7 to a Registration Statement for
Golden American on Form S-1 filed with the SEC on or about January 27,
2000 (File No. 333-28765)
(l) Reinsurance Agreement, effective January 1, 2000, between Golden
American Life Insurance Company and Security Life of Denver
International, Ltd. (incorporated by reference from Exhibit 10(q) to
Golden American's Form 10-K filed with the SEC on March 29, 2001 (File
No. 33-87272)
(m) Participation Agreement between Golden American and ING Variable
Insurance Trust (incorporated by reference from Exhibit 10(m) to
Registration Statement for Golden American on Form S-1 filed with the
SEC on or about April 26, 2000 (File No. 333-35592)
(n) Reinsurance Agreement, dated June 30, 2000, between Golden American
Life Insurance Company and Equitable Life Insurance Company of Iowa
(incorporated by reference from Exhibit 10(s) to Golden American's
Form 10-Q filed with the SEC on August 11, 2000 (File No. 33-87272)
(o) Letter of Credit between Security Life of Denver International, Ltd.
and The Bank of New York for the benefit of Golden American
(incorporated by reference to Exhibit 10(r) to Amendment No. 3 to a
Registration Statement on Form S-1 filed with the SEC on April 23,
2001 (File No. 333-35592)
(p) Form of Participation Agreement between Golden American and Pilgrim
Variable Products Trust (incorporated by reference to Exhibit 10(s) to
Amendment No. 3 to a Registration Statement on Form S-1 filed with the
SEC on April 23, 2001 (File No. 333-35592)
(q) Amendment to the Reinsurance Agreement between Golden American and
Security Life of Denver International, Ltd., amended September 28,
2001 (Incorporated by reference from Exhibit 10(n) Pre-Effective
Amendment No. 1 to a Registration Statement for Golden American on
Form S-1 filed with the SEC on October 26, 2001 (Filed No. 333-63694)
(r) Participation Agreement between Golden American Life Insurance
Company, Aetna Variable Fund, Aetna Variable Encore Fund, Aetna Income
Shares, Aetna Balanced VP, Inc., Aetna GET Fund, Aetna Variable
Portfolios, Inc. and Aeltus Investment Management, Inc. (incorporated
by reference from Exhibit 10(p) to Pre-Effective Amendment No. 1 to a
Registration Statement on Form S-1 filed by Registrant with the SEC on
or about October 26, 2001 (File No. 333-63694)
(s) Participation Agreement between Golden American Life Insurance Company
and ING Pilgrim Investors, LLC (incorporated by reference from Exhibit
10(w) to Pre-Effective Amendment No. 1 to a Registration Statement on
Form S-1 filed by Registrant with the SEC on or about October 26, 2001
(File No. 333-63694)
(t) Participation Agreement between Golden American Life Insurance Company
and ING Pilgrim Securities, Inc. (incorporated by reference from
Exhibit 10(x) to Pre-Effective Amendment No. 1 to a Registration
Statement on Form S-1 filed by Registrant with the SEC on or about
October 26, 2001 (File No. 333-63694)
48
(u) Form of Participation Agreement between Golden American Life Insurance
Company, Aetna Life Insurance and Annuity Company and Portfolio
Partners, Inc. (incorporated by reference from Exhibit 10(z) to
Pre-Effective Amendment No. 1 to a Registration Statement on Form S-1
filed by Registrant with the SEC on or about October 26, 2001(File No.
333-63694)
(v) Form of Services Agreement between Golden American Life Insurance
Company and the affiliated companies listed on Exhibit B to that
Agreement (incorporated by reference from Exhibit 10(p) to
Pre-Effective Amendment No. 1 to a Registration Statement on Form S-1
filed by Registrant with the SEC on or about December 11, 2001 (File
No. 333-70602)
(w) Form of Services Agreement between Golden American Life Insurance
Company and ING North American Insurance Corporation, Inc.
(incorporated by reference from Exhibit 10(q) to Pre-Effective
Amendment No. 1 to a Registration Statement on Form S-1 filed by
Registrant with the SEC on or about December 11, 2001 (File No.
333-70602)
(x) Form of Shared Services Center Services Agreement by and among ING
North America Insurance Corporation ("Service Provider") and Ameribest
Life Insurance Company, a Georgia corporation; Equitable Life
Insurance Company of Iowa, an Iowa corporation; USG Annuity & Life
Company, an Oklahoma corporation; Golden American Life Insurance
Company, a Delaware corporation; First Columbine Life Insurance
Company, a Colorado corporation; Life Insurance Company of Georgia, a
Georgia corporation; Southland Life Insurance Company, a Texas
corporation; Security Life of Denver Insurance Company, a Colorado
corporation; Midwestern United Life Insurance Company, an Indiana
corporation; and United Life & Annuity Insurance Company, a Texas
corporation (incorporated by reference from Exhibit 10(r) to
Pre-Effective Amendment No. 1 to a Registration Statement on Form S-1
filed by Registrant with the SEC on or about December 11, 2001(File
No. 333-70602)
49
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Page
------------
Report of Independent Auditors .................................. 50
I. Summary of Investments - Other than Investments in
Affiliates as of December 31, 2002........................... 51
IV. Reinsurance as of and for the years ended December 31, 2002,
2001 and 2000................................................ 52
Schedules other than those listed above are omitted because they
are not required or not applicable.
50
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Golden American Life Insurance Company
We have audited the consolidated financial statements of Golden American Life
Insurance Company and Subsidiary as of December 31, 2002 and 2001, and for each
of the three years in the period ended December 31, 2002, and have issued our
report thereon dated March 21, 2003. Our audits also included the financial
statement schedules listed in Item 15. These schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 21, 2003
51
SCHEDULE I
Summary of Investments - Other than Investments in Affiliates
As of December 31, 2002
(Millions)
Amount shown
on Balance
Type of Investment Cost Value* Sheet
-----------------------------------------------------------------------------------------------------------
Fixed maturities:
U.S. government and government agencies and authorities $ 207.3 $ 209.5 $ 209.5
Public Utilities Securities 335.7 349.3 349.3
U.S. corporate securities 3,012.0 3,182.9 3,182.9
Foreign securities (1) 228.6 242.5 242.5
Mortgage-backed securities 641.7 653.5 653.5
Other asset-backed securities 294.8 298.7 298.7
Less: Fixed maturities pledged to creditors - - -
----------------------------------------------
Total fixed maturities $ 4,720.1 $ 4,936.4 $ 4,936.4
----------------------------------------------
Equity securities:
----------------------------------------------
Total equity securities 22.9 19.0 19.0
----------------------------------------------
Short term investments 2.2 2.2 2.2
Mortgage loans 482.4 482.4 482.4
Policy loans 16.0 16.0 16.0
----------------------------------------------
Total other investments $ 500.6 $ 500.6 $ 500.6
===========================================================================================================
* See Notes 2 and 3 of Notes to Consolidated Financial Statements.
(1) The term "foreign" includes foreign governments, foreign political
subdivisions, foreign public utilities and all other bonds of foreign
issuers. Substantially all of the Company's foreign securities are
denominated in U.S. dollars.
52
SCHEDULE IV
Reinsurance Information
As of and for the years ended December 31, 2002, 2001 and 2000
(Millions)
(Millions) Ceded to Assumed Percentage of
Gross Other from Other Net Amount assumed
Amount Companies Companies Amount to net
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 2002
Life insurance in Force $ 158.7 $ 90.7 $ - $ 68.0 0.0%
AT DECEMBER 31, 2001
Life insurance in Force $ 169.3 $ 94.8 $ - $ 74.5 0.0%
AT DECEMBER 31, 2000
Life insurance in Force $ 196.3 $ 105.3 $ - $ 91.0 0.0%
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Golden American Life Insurance Company
--------------------------------------
(Registrant)
March 24, 2003 By /s/ Cheryl L. Price
- ------------------ ---------------------------
(Date) Cheryl L. Price
Vice President, Chief Financial Officer
and Chief Accounting Officer
(Duly Authorized Officer and
Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on or before March 27, 2003.
SIGNATURES TITLE
/s/ Cheryl L. Price Vice President,
- ---------------------------------- Chief Financial Officer
Cheryl L. Price and Chief Accounting Officer
/s/ Keith Gubbay Director and President
- ----------------------------------
Keith Gubbay
/s/ Thomas J. McInerney Director
- ---------------------------------
Thomas J. McInerney
/s/ P. Randall Lowery Director
- ---------------------------------
P. Randall Lowery
/s/ Mark A. Tullis Director
- ---------------------------------
Mark A. Tullis
54
CERTIFICATION
I, Cheryl L. Price, certify that:
1. I have reviewed this annual report on Form 10-K of Golden American Life
Insurance Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusion about the effectiveness
of the disclosure controls and procedures based on our evaluation as
of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies, defenses
and material weaknesses.
Date: March 24, 2003
--------------
By /s/ Cheryl L. Price
---------------------------------
Cheryl L. Price
Vice President, Chief Financial Officer and Chief Accounting Officer
Duly Authorized Officer and Principal Financial Officer)
55
CERTIFICATION
I, Keith Gubbay, certify that:
1. I have reviewed this annual report on Form 10-K of Golden American Life
Insurance Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusion about the effectiveness
of the disclosure controls and procedures based on our evaluation as
of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies, defenses
and material weaknesses.
Date: March 24, 2003
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By /s/ Keith Gubbay
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Keith Gubbay
President
(Duly Authorized Officer and Principal Officer)
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