EXHIBIT 99.2
Report of Independent Auditors
Board of Directors and Stockholder
Equitable Life Insurance Company of Iowa
We have audited the accompanying statutory basis balance sheets of Ameribest
Life Insurance Company ("the Company," which, effective January 1, 2003, merged
into an affiliate, Equitable Life Insurance Company of Iowa, a wholly owned
subsidiary of ING America Insurance Holdings, Inc.) as of December 31, 2002 and
2001, and the related statutory basis statements of operations, changes in
capital and surplus, and cash flows for the years then ended. 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.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Office of Commissioner of Insurance of the State of Georgia
(Georgia Insurance Department), which practices differ from accounting
principles generally accepted in the United States. The variances between such
practices and accounting principles generally accepted in the United States are
described in Note 1. The effects on the financial statements of these variances
are not reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with accounting principles generally accepted in the United States,
the financial position of Ameribest Life Insurance Company at December 31, 2002
and 2001 or the results of its operations or its cash flows for the years then
ended.
1
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Ameribest Life
Insurance Company at December 31, 2002 and 2001, and the results of its
operations and its cash flows for the years then ended, in conformity with
accounting practices prescribed or permitted by the Georgia Insurance
Department.
As discussed in Note 3 to the financial statements, in 2001 the Company changed
various accounting policies to be in accordance with the revised NAIC Accounting
Practices and Procedures Manual, as adopted by the Georgia Insurance Department.
/s/ Ernst & Young LLP
April 25, 2003
2
Ameribest Life Insurance Company
Balance Sheets - Statutory Basis
- --------------------------------------------------------------------------------
December 31
2002 2001
--------------- --------------
(In Thousands)
Admitted assets
Cash and invested assets:
Bonds $ 281,391 $ 259,073
Mortgage loans 4,644 4,761
Policy loans - 10
Other invested assets 3 87
Cash and short-term investments ,900 17,812
--------------- ---------------
Total cash and invested assets 288,938 281,743
Accrued investment income 3,677 3,561
Indebtedness from related parties 1,263 105
Federal income tax including net admitted deferred
tax asset for 2002 - $571; 2001 - $409 3,381 572
Other assets - 28
--------------- ---------------
Total admitted assets $ 297,259 $ 286,009
=============== ===============
3
Ameribest Life Insurance Company
Balance Sheets - Statutory Basis (continued)
- --------------------------------------------------------------------------------
December 31
2002 2001
--------------- ---------------
(In Thousands,
except share amounts)
Liabilities and capital and surplus
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $ 279,079 $ 264,158
Deposit type contracts 905 121
--------------- ---------------
Total policy and contract liabilities 279,984 264,279
Interest maintenance reserve 1,899 2,400
Accounts payable and accrued expenses 146 1,324
Indebtedness to related parties 65 367
Asset valuation reserve 385 733
Other liabilities 12 -
--------------- ---------------
Total liabilities 282,491 269,103
Capital and surplus:
Common stock: authorized - 3,000,000 shares of
$1.50 par value; 1,666,667 shares issued and outstanding 2,500 2,500
Additional paid-in capital 18,808 18,808
Unassigned deficit (6,540) (4,402)
--------------- ---------------
Total capital and surplus 14,768 16,906
--------------- ---------------
Total liabilities and capital and surplus $ 297,259 $ 286,009
=============== ===============
See accompanying notes - statutory basis.
4
Ameribest Life Insurance Company
Statements of Operations - Statutory Basis
- --------------------------------------------------------------------------------
Year ended December 31
2002 2001
--------------- ---------------
(In Thousands)
Premiums and other revenues:
Life, annuity, and accident and health premiums $ 7,643 $ 72,077
Net investment income 19,043 19,930
Amortization of interest maintenance reserve 640 206
Commissions, expense allowances and reserve adjustments
on reinsurance ceded 259 1,757
--------------- ---------------
Total premiums and other revenues 27,585 93,970
Benefits paid or provided:
Annuity benefits 5,440 3,452
Surrender benefits 7,880 6,391
Interest on policy or contract funds (18) (3)
Increase in life, annuity, and accident and health reserves 14,921 76,332
--------------- ---------------
Total benefits paid or provided 28,223 86,172
Insurance expenses:
Commissions 691 3,738
General expenses 348 2,038
Insurance taxes, licenses and fees, excluding federal
income taxes 23 183
--------------- ---------------
Total insurance expenses 1,062 5,959
--------------- ---------------
(Loss) gain from operations before federal income taxes
and net realized capital losses (1,700) 1,839
Federal income tax benefit (905) -
--------------- ---------------
(Loss) gain from operations before net realized capital losses (795) 1,839
Net realized capital (losses) gains net of income taxes 2002 -
$(258); 2001 - $ (729) and excluding net transfers to the
interest maintenance reserve 2002- $(138); 2001- $(2,925) (1,856) 846
--------------- ---------------
Net income $ (2,651) $ 2,685
=============== ===============
See accompanying notes - statutory basis.
5
Ameribest Life Insurance Company
Statements of Changes in Capital and Surplus - Statutory Basis
- --------------------------------------------------------------------------------
Year ended December 31
2002 2001
--------------- ---------------
(In Thousands)
Common stock:
Balance at beginning and end of year $ 2,500 $ 2,500
--------------- ---------------
Paid-in and contributed surplus:
Balance at beginning and end of year 18,808 18,808
--------------- ---------------
Unassigned deficit:
Balance at beginning of year (4,402) (7,421)
Net income (2,651) 2,685
Change in nonadmitted assets (419) 2,630
Change in asset valuation reserve 348 (459)
Change in net deferred income tax 584 (1,418)
Change in accounting principle, net of tax - 215
Other - (634)
--------------- ---------------
Balance at end of year (6,540) (4,402)
--------------- ---------------
Total capital and surplus $ 14,768 $ 16,906
=============== ===============
See accompanying notes - statutory basis.
6
Ameribest Life Insurance Company
Statements of Cash Flows - Statutory Basis
- --------------------------------------------------------------------------------
Year ended December 31
2002 2001
--------------- ---------------
(In Thousands)
Operations
Premiums, policy proceeds, and other considerations received,
net of reinsurance paid $ 7,643 $ 72,076
Net investment income received 19,205 19,249
Commission and expense allowances received on reinsurance ceded 260 1,757
Benefits paid (12,488) (9,843)
Insurance expenses paid (1,131) (5,995)
Federal income taxes paid (2,000) (163)
Other revenues in excess of (expenses) other 28 (28)
--------------- ---------------
Net cash provided by operations 11,517 77,053
Investments
Proceeds from sales, maturities, or repayments of investments:
Bonds 154,954 223,743
Mortgage Loans 116 994
Miscellaneous proceeds 87 (47)
Net tax on capital gains - (729)
--------------- ---------------
Net proceeds from sales, maturities, or
repayments of investments 155,157 223,961
Cost of investments acquired:
Bonds 179,003 280,372
Mortgage loans - 5,754
Miscellaneous applications (receipts) 32 -
--------------- ---------------
Total cost of investments acquired 179,035 286,126
Net decrease (increase) in policy loans 10 (10)
--------------- ---------------
Net cash used in investment activities (23,868) (62,175)
7
Ameribest Life Insurance Company
Statements of Cash Flows - Statutory Basis (continued)
- --------------------------------------------------------------------------------
Year ended December 31
2002 2001
--------------- ---------------
(In Thousands)
Financing and miscellaneous activities
Cash provided:
Capital and surplus paid-in $ - $ 215
Borrowed money 817 124
Other sources (3,378) (11,210)
--------------- ---------------
Net cash used in financing and miscellaneous activities (2,561) (10,871)
--------------- ---------------
Net (decrease) increase in cash and short-term investments (14,912) 4,007
Cash and short-term investments:
Beginning of year 17,812 13,805
--------------- ---------------
End of year $ 2,900 $ 17,812
=============== ===============
See accompanying notes - statutory basis.
8
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies
Ameribest Life Insurance Company (the Company) is domiciled in Georgia.
Effective January 1, 2003, the Company merged into an affiliate, Equitable
Life Insurance Company of Iowa, a wholly owned subsidiary of ING America
Insurance Holdings, Inc. ("ING AIH"). The Company offers fixed annuity
products. Operations are conducted in the United States and the Company is
presently licensed in 46 states.
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported
in the financial statements and accompanying notes. Such estimates and
assumptions could change in the future as more information becomes known,
which could impact the amounts reported and disclosed herein.
Basis of Presentation
The accompanying financial statements of the Company have been prepared in
conformity with accounting practices prescribed or permitted by the Office
of Commissioner of Insurance of the State of Georgia (Georgia Insurance
Department), which practices differ from accounting principles generally
accepted in the United States ("GAAP"). The most significant variances from
GAAP are as follows:
Investments: Investments in bonds are reported at amortized cost or market
value based on the National Association of Insurance Commissioners ("NAIC")
rating; for GAAP, such fixed maturity investments are designated at
purchase as held-to-maturity, trading or available-for-sale.
Held-to-maturity investments are reported at amortized cost, and the
remaining fixed maturity investments are reported at fair value with
unrealized capital gains and losses reported in operations for those
designated as trading and as a separate component of other comprehensive
income in stockholder's equity for those designated as available-for-sale.
The Company invests in structured securities including mortgage-backed
securities/collateralized mortgage obligations, asset-backed securities,
collateralized debt obligations, and commercial mortgage-backed securities.
For structured securities, when a negative yield results from a revaluation
based on new prepayment assumptions (i.e. undiscounted cash flows are less
than current book value), an other than temporary impairment is considered
to have occurred and the asset is written down to the value of the
undiscounted cash flows. For GAAP, assets are reevaluated based on the
discounted cash flows using a current market rate. Impairments are
recognized when there has been an adverse change in cash flows and the fair
value is less than book. The asset is then written down to fair value.
9
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Basis of Presentation (continued)
Valuation Reserves: The asset valuation reserve ("AVR") is determined by an
NAIC-prescribed formula and is reported as a liability rather than as a
valuation allowance or an appropriation of surplus. The change in AVR is
reported directly to unassigned surplus. Under a formula prescribed by the
NAIC, the Company defers the portion of realized gains and losses on sales
of fixed-income investments, principally bonds and mortgage loans,
attributable to changes in the general level of interest rates and
amortizes those deferrals over the remaining period to maturity based on
groupings of individual securities sold in five-year bands. The net
deferral is reported as the interest maintenance reserve ("IMR") in the
accompanying balance sheets.
Realized gains and losses on investments are reported in operations net of
federal income tax and transfers to the IMR. Under GAAP, realized capital
gains and losses are reported in the statements of operations on a pretax
basis in the period that the asset giving rise to the gain or loss is sold
and valuation allowances are provided when there has been a decline in
value deemed other than temporary, in which case the provision for such
declines is charged to income.
Valuation allowances, if necessary, are established for mortgage loans
based on the difference between the net value of the collateral, determined
as the fair value of the collateral less estimated costs to obtain and
sell, and the recorded investment in the mortgage loan. Under GAAP, such
allowances are based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, if foreclosure is
probable, on the estimated fair value of the collateral.
The initial valuation allowance and subsequent changes in the allowance for
mortgage loans as a result of a temporary impairment are charged or
credited directly to unassigned surplus, rather than being included as a
component of earnings as would be required under GAAP.
Policy Acquisition Costs: The costs of acquiring and renewing business are
expensed when incurred. Under GAAP, acquisition costs related to
traditional life insurance, to the extent recoverable from future policy
revenues, are deferred and amortized over the premium-paying period of the
related policies using assumptions consistent with those used in computing
policy benefit reserves. For universal life insurance and investment
products, to the extent recoverable from future gross profits, acquisition
costs are amortized generally in proportion to the present value of
expected gross margins from surrender charges and investment, mortality,
and expense margins.
10
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Basis of Presentation (continued)
Premiums: Life premiums are recognized as revenue when due. Premiums for
annuity policies with mortality and morbidity risk, except for guaranteed
interest and group annuity contracts, are also recognized as revenue when
due. Premiums received for annuity policies without mortality or morbidity
risk and for guaranteed interest and group annuity contracts are recorded
using deposit accounting.
Under GAAP, premiums for traditional life insurance products, which include
those products with fixed and guaranteed premiums and benefits and consist
primarily of whole life insurance policies, are recognized as revenue when
due. Group insurance premiums are recognized as premium revenue over the
time period to which the premiums relate. Revenues for universal life,
annuities and guaranteed interest contracts consist of policy charges for
the cost of insurance, policy administration charges, amortization of
policy initiation fees and surrender charges assessed during the period.
Benefit and Contract Reserves: Life policy and contract reserves under
statutory accounting practices are calculated based upon both the net level
premium and Commissioners' Reserve Valuation methods using statutory rates
for mortality and interest. GAAP requires that policy reserves for
traditional products be based upon the net level premium method utilizing
reasonably conservative estimates of mortality, interest, and withdrawals
prevailing when the policies were sold. For interest-sensitive products,
the GAAP policy reserve is equal to the policy fund balance plus an
unearned revenue reserve which reflects the unamortized balance of early
year policy loads over renewal year policy loads.
Reinsurance: For business ceded to unauthorized reinsurers, statutory
accounting practices require that reinsurance credits permitted by the
treaty be recorded as an offsetting liability and charged against
unassigned surplus. Under GAAP, an allowance for amounts deemed
uncollectible would be established through a charge to earnings. Statutory
income recognized on certain reinsurance treaties representing financing
arrangements is not recognized on a GAAP basis.
Policy and contract liabilities ceded to reinsurers have been reported as
reductions of the related reserves rather than as assets as required under
GAAP.
Commissions allowed by reinsurers on business ceded are reported as income
when received rather than being deferred and amortized with deferred policy
acquisition costs as required under GAAP.
11
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Basis of Presentation (continued)
Nonadmitted Assets: Certain assets designated as "nonadmitted," principally
deferred federal income tax assets, disallowed interest maintenance
reserves, non-operating software, past-due agents' balances, furniture and
equipment, intangible assets, and other assets not specifically identified
as an admitted asset within the Accounting Practices and Procedures Manual
are excluded from the accompanying balance sheets and are charged directly
to unassigned surplus. Under GAAP, such assets are included in the balance
sheet.
Universal Life and Annuity Policies: Revenues for universal life and
annuity policies consist of the entire premium received and benefits
incurred represent the total of death benefits paid and the change in
policy reserves. Under GAAP, premiums received in excess of policy charges
would not be recognized as premium revenue and benefits would represent the
excess of benefits paid over the policy account value and interest credited
to the account values.
Deferred Income Taxes Deferred tax assets are provided for and admitted to
an amount determined under a standard formula. This formula considers the
amount of differences that will reverse in the subsequent year, taxes paid
in prior years that could be recovered through carrybacks, surplus limits
and the amount of deferred tax liabilities available for offset. Any
deferred tax assets not covered under the formula are non-admitted.
Deferred taxes do not include any amounts for state taxes. Under GAAP, a
deferred tax asset is recorded for the amount of gross deferred tax assets
that are expected to be realized in future years and a valuation allowance
is established for the portion that is not realizable.
Statements of Cash Flows: Cash and short-term investments in the statements
of cash flows represent cash balances and investments with initial
maturities of one year or less. Under GAAP, the corresponding caption of
cash and cash equivalents include cash balances and investments with
initial maturities of three months or less.
The effects of the preceding variances from GAAP on the accompanying
statutory basis financial statements have not been determined, but are
presumed to be material.
Other significant accounting practices are as follows:
Investments
Bonds, preferred stocks, common stocks, short-term investments and
derivative instruments are stated at values prescribed by the NAIC, as
follows:
12
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Investments (continued)
Bonds not backed by other loans are principally stated at amortized
cost using the interest method.
Single class and multi-class mortgage-backed/asset-backed securities
are valued at amortized cost using the interest method including
anticipated prepayments. Prepayment assumptions are obtained from
dealer surveys or internal estimates and are based on the current
interest rate and economic environment. The retrospective adjustment
method is used to value all such securities except for higher-risk
asset backed securities, which are valued using the prospective
method.
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. 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 amount due according to the contractual terms of a debt
security will not be collected, an other than temporary impairment is
considered to have occurred.
In addition, the Company invests in structured securities including
mortgage-backed securities/collateralized mortgage obligations,
asset-backed securities, collateralized debt obligations, and
commercial mortgage-backed securities. For these structured
securities, management compares the undiscounted cash flows to the
carrying value. An other than temporary impairment is considered to
have occurred when the undiscounted cash flows are less than the
carrying value.
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
accounted for as a realized loss.
Mortgage loans are reported at amortized cost, less allowance for
impairments.
Policy loans are reported at unpaid principal balances.
Short-term investments are reported at amortized cost. Short-term
investments include investments with maturities of less than one year
at the date of acquisition.
Realized capital gains and losses are determined using the specific
identification basis.
13
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Aggregate Reserve for Life Policies and Contracts
Life, annuity, and accident and health reserves are developed by actuarial
methods and are determined based on published tables using statutorily
specified interest rates and valuation methods that will provide, in the
aggregate, reserves that are greater than or equal to the minimum or
guaranteed policy cash value or the amounts required by law. Interest rates
range from 3.00% to 7.50%.
The Company waives the deduction of deferred fractional premiums upon the
death of the insured. It is the Company's practice to return a pro rata
portion of any premium paid beyond the policy month of death, although it
is not contractually required to do so for certain issues.
The methods used in valuation of substandard policies are as follows:
For life, endowment and term policies issued substandard, the standard
reserve during the premium-paying period is increased by 50% of the
gross annual extra premium. Standard reserves are held on Paid-Up
Limited Pay contracts.
For reinsurance accepted with table rating, the reserve established is
a multiple of the standard reserve corresponding to the table rating.
For reinsurance with flat extra premiums, the standard reserve is increased
by 50% of the flat extra.
The tabular interest has been determined from the basic data for the
calculation of policy reserves for all direct ordinary life insurance and
for the portion of group life insurance classified as group Section 79. The
tabular interest of funds not involving life contingencies is calculated as
the current year reserves, plus payments, less prior year reserves, less
funds added.
Reinsurance
Reinsurance premiums, commissions, expense reimbursements, and reserves
related to reinsured business are accounted for on bases consistent with
those used in accounting for the original policies issued and the terms of
the reinsurance contracts. Reserves are based on the terms of the
reinsurance contract and are consistent with the risks assumed. Premiums
and benefits ceded to other companies have been reported as a reduction of
premium revenue and benefits expense. Amounts applicable to reinsurance
ceded for reserves and unpaid claim liabilities have been reported as
reductions of these items, and expense allowances received in connection
with reinsurance ceded have been reflected in operations.
14
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Nonadmitted Assets
Nonadmitted assets are summarized as follows:
December 31
2002 2001
--------------- ---------------
(In Thousands)
Deferred federal income taxes $ 3,098 $ 2,676
Agents' debit balances 14 17
--------------- ---------------
Total nonadmitted assets $ 3,112 $ 2,693
=============== ===============
Changes in nonadmitted assets are generally reported directly in surplus as
an increase or decrease in nonadmitted assets. Certain changes are reported
directly in surplus as a change in unrealized capital gains or losses.
Claims and Claims Adjustment Expenses
Claims expenses represent the estimated ultimate net cost of all reported
and unreported claims incurred through December 31, 2002. The Company does
not discount claims and claims adjustment expense reserves. Such estimates
are based on actuarial projections applied to historical claims payment
data. Such liabilities are considered to be reasonable and adequate to
discharge the Company's obligations for claims incurred but unpaid as of
December 31, 2002.
Cash Flow Information
Cash and short-term investments include cash on hand, demand deposits and
short-term fixed maturity instruments (with a maturity of less than one
year at date of acquisition).
The Company borrowed $13,825,000 and repaid $13,825,000 in 2002, borrowed
$27,000,000 and repaid $27,000,000 during 2001. These borrowings were on a
short-term basis, at an interest rate that approximated current money
market rates and exclude borrowings from reverse dollar repurchase
transactions. Interest paid on borrowed money was $2,000 and $8,000 during
2002 and 2001, respectively.
Reclassifications
Certain prior year amounts in the Company's statutory basis financial
statements have been reclassified to conform to the 2002 financial
statement presentation.
15
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
2. Permitted Statutory Basis Accounting Practices
The financial statements of the Company are presented on the basis of
accounting practices prescribed or permitted by the Georgia Insurance
Department. The Georgia Insurance Department recognizes only statutory
accounting practices prescribed or permitted by the State of Georgia for
determining and reporting the financial condition and results of operations
of an insurance company, for determining its solvency in under the Georgia
Insurance Laws. The National Association of Insurance Commissioners' (NAIC)
Accounting Practices and Procedures Manual has been adopted as a component
of prescribed or permitted practices by the state of Georgia. The
Commissioner of Insurance has the right to permit other specific practices
that deviate from prescribed practices.
The Company is required to identify those significant accounting practices
that are permitted, and obtain written approval of the practices from the
Georgia Department of Insurance. As of December 31, 2002 and 2001, the
Company had no such permitted accounting practices.
3. Accounting Changes
The Company prepares its statutory financial statements in conformity with
accounting practices prescribed or permitted by the State of Georgia.
Effective January 1, 2001, the Georgia Insurance Department required that
insurance companies domiciled in the State of Georgia prepare their
statutory basis financial statements in accordance with the NAIC Accounting
Practices and Procedures Manual subject to any deviations prescribed or
permitted by the State of Georgia insurance commissioner.
Accounting changes adopted to conform to the provisions of the NAIC
Accounting Practices and Procedures Manual are reported as changes in
accounting principles. The cumulative effect of changes in accounting
principles is reported as an adjustment to unassigned deficit in the period
of the change in accounting principle. The cumulative effect is the
difference between the amount of capital and surplus at the beginning of
the year and the amount of capital and surplus that would have been
reported at that date if the new accounting principles had been applied
retroactively for all prior periods.
As a result of these changes, the Company reported a change of accounting
principle, as an adjustment that decreased unassigned deficit, by $215,000
as of January 1, 2001.
16
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
4. Investments
The amortized cost and fair value of bonds and equity securities are as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
(In Thousands)
At December 31, 2002:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 16,917 $ 974 $ - $ 17,891
Public utilities securities 28,304 1,532 41 29,795
Corporate securities 184,124 12,389 380 196,133
Other structured securities 15,468 767 - 16,235
Commercial mortgage-backed securities 36,578 3,386 - 39,964
---------- ---------- ---------- ----------
Total fixed maturities $ 281,391 $ 19,048 $ 421 $ 300,018
========== ========== ========== ==========
At December 31, 2001:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 11,087 $ 456 $ 70 $ 11,473
Public utilities securities 10,289 621 - 10,910
Corporate securities 188,501 5,664 2,305 191,860
Other structured securities 23,980 800 - 24,780
Commercial mortgage-backed securities 25,216 1,054 - 26,270
---------- ---------- ---------- ----------
Total fixed maturities $ 259,073 $ 8,595 $ 2,375 $ 265,293
========== ========== ========== ==========
17
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
4. Investments (continued)
The amortized cost and fair value of investments in bonds at December 31,
2002, by contractual maturity, are shown below. Expected maturities may
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
--------------- ---------------
(In Thousands)
December 31, 2002
Maturity:
Due in 1 year or less $ - $ -
Due after 1 year through 5 years 118,229 125,133
Due after 5 years through 10 years 96,562 102,989
Due after 10 years 14,554 15,697
--------------- ---------------
229,345 243,819
Mortgage-backed securities - -
Other structured securities 15,468 16,235
Commercial mortgage-backed securities 36,578 39,964
--------------- ---------------
Total $ 281,391 $ 300,018
=============== ===============
At December 31, 2002, investments in certificates of deposit and bonds,
with an admitted asset value of $6,802,000 were on deposit with state
insurance departments to satisfy regulatory requirements.
Proceeds from the sales of investments in bonds and other fixed maturity
interest securities were $140,855,000 and $205,473,000 in 2002 and 2001,
respectively. Gross gains of $2,693,000 and $6,015,000 and gross losses of
$3,959,000 and $1,515,000 during 2002 and 2001, respectively, were realized
on those sales. A portion of the gains realized in 2002 and 2001 has been
deferred to future periods in the interest maintenance reserve.
Major categories of net investment income are summarized as follows:
December 31
2002 2001
--------------- ---------------
(In Thousands)
Income:
Bonds $ 19,304 $ 19,813
Mortgage loans 356 409
Other 119 378
--------------- --------------
Total investment income 19,779 20,600
Investment expenses (736) (670)
--------------- --------------
Net investment income $ 19,043 $ 19,930
=============== ==============
18
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
4. Investments (continued)
As part of its overall investment strategy, the Company has entered into
agreements to purchase securities as follows:
December 31
2002 2001
--------------- ---------------
(In Thousands)
Investment Purchase Commitments $ - $ 10,000
There were no new loans during 2002. Fire insurance is required on all
properties covered by mortgage loans and must at least equal the excess of
the loan over the maximum loan which would be permitted by law on the land
without the buildings. As of December 31, 2002, the Company held no
mortgages with interest more than 180 days overdue.
5. Concentrations of Credit Risk
The Company held less-than-investment-grade bonds with an aggregate book
value of $240,000 and $11,537,000 and with an aggregate market value of
$240,000 and $11,432,000 at December 31, 2002 and 2001, respectively. Those
holdings amounted to 0.1% of the Company's investments in bonds and 0.1% of
total admitted assets at December 31, 2002. The holdings of
less-than-investment-grade bonds are widely diversified and of satisfactory
quality based on the Company's investment policies and credit standards.
The Company held unrated bonds of $5,000,000 and $17,903,000 with an
aggregate NAIC market value of $5,195,000 and $17,782,000 at December 31,
2002 and 2001, respectively. The carrying value of these holdings amounted
to 1.8% of the Company's investment in bonds and 1.7% of the Company's
total admitted assets at December 31, 2002.
At December 31, 2002, the Company's commercial mortgages involved a
concentration of properties located in California (59.4%) and Arizona
(40.6%). The portfolio is well diversified; covering many different types
of income-producing properties on which the Company has first mortgage
liens. The maximum mortgage outstanding on any individual property is
$1,887,000.
19
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
6. Annuity Reserves
At December 31, 2002 and 2001, the Company's annuity reserves, including
deposit fund liabilities that are subject to discretionary withdrawal with
adjustment, subject to discretionary withdrawal without adjustment, and not
subject to discretionary withdrawal provisions are summarized as follows:
December 31, 2002
Amount Percent
--------------- ---------------
(In Thousands)
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 275,105 92.4%
At book value less surrender charge 17,936 6.0
--------------- ---------------
Subtotal 293,041 98.4
Subject to discretionary withdrawal (without adjustment)
at book value with minimal or no charge or adjustment - -
Not subject to discretionary withdrawal 4,879 1.6
--------------- ---------------
Total annuity reserves and deposit fund liabilities before reinsurance 297,920 100.0%
===============
Less reinsurance ceded 17,936
---------------
Net annuity reserves and deposit fund liabilities $ 279,984
===============
December 31, 2001
Amount Percent
--------------- ---------------
(In Thousands)
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 261,524 92.4%
At book value less surrender charge 18,699 6.6
--------------- ---------------
Subtotal $ 280,223 99.0
Subject to discretionary withdrawal (without adjustment)
at book value with minimal or no charge or adjustment - -
Not subject to discretionary withdrawal 2,755 1.0
--------------- ---------------
Total annuity reserves and deposit fund liabilities before reinsurance 282,978 100.0%
===============
Less reinsurance ceded 18,699
---------------
Net annuity reserves and deposit fund liabilities $ 264,279
===============
20
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
7. Reinsurance
The Company is involved in ceded reinsurance with other companies for the
purpose of diversifying risk and limiting exposure on larger risks. The
Company remains obligated for amounts ceded in the event that the
reinsurers do not meet their obligations.
The Company's ceded reinsurance arrangements reduced certain items in the
accompanying financial statements by the following amounts:
December 31, 2002
Amount Percent
--------------- ---------------
(In Thousands)
Premiums $ 390 $ 11,440
Benefits paid or provided 660 192
Policy and contract liabilities at year end 17,943 18,705
8. Federal Income Taxes
The Company files a separate federal income tax return.
The components of the net deferred tax asset (liability) at December 31 are
as follows:
2002 2001
--------------- ---------------
(In Thousands)
Total gross deferred tax assets $ 3,801 $ 3,085
Total deferred tax liabilities (132) -
--------------- ---------------
Net deferred tax asset 3,669 3,085
Deferred tax asset nonadmitted (3,098) (2,676)
--------------- ---------------
Net admitted deferred tax asset $ 571 $ 409
=============== ===============
(Increase) decrease in nonadmitted asset $ (422) $ (1,827)
=============== ===============
Significant components of income taxes incurred as of December 31 are:
2002 2001
--------------- ---------------
(In Thousands)
Current income taxes incurred consist of the following major components:
Federal taxes on operations $ (905) $ 810
Operations loss carryovers utilized - (810)
Federal tax on capital gains 258 1,575
Capital loss carryovers utilized - (846)
--------------- ---------------
Total current taxes incurred $ (647) $ 729
=============== ===============
21
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
8. Federal Income Taxes (continued)
The main components of deferred tax assets and deferred tax liabilities are
as follows:
December 31
2002 2001
--------------- ---------------
(In Thousands)
Deferred tax assets resulting from book/tax differences in:
Deferred acquisition costs $ 919 $ 963
Insurance reserves 1,822 1,161
Goodwill 880 961
Operations loss carry forward 165 -
Other 15 -
--------------- ---------------
Total deferred tax assets 3,801 3,085
Deferred tax assets nonadmitted (3,098) (2,676)
--------------- ---------------
Admitted deferred tax assets $ 703 $ 409
--------------- ---------------
Deferred tax liabilities resulting from book/tax differences in:
Other $ 132 $ -
--------------- ---------------
Total deferred tax liabilities 132 -
--------------- ---------------
Net admitted deferred tax asset $ 571 $ 409
=============== ===============
The change in net deferred income taxes is comprised of the following:
December 31
2002 2001 Change
--------------- --------------- ---------------
(In Thousands)
Total deferred tax assets $ 3,801 $ 3,085 $ 716
Total deferred tax liabilities (132) - (132)
--------------- --------------- ---------------
Net deferred tax asset (liability) $ 3,669 $ 3,085 $ 584
=============== ===============
Tax effect of items in surplus:
Nonadmitted assets (5)
---------------
Change in net deferred income tax $ 579
===============
22
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
8. Federal Income Taxes (continued)
The provision for federal income taxes expense and change in deferred taxes
differs from the amount obtained by applying the statutory Federal income
tax rate to income (including capital losses) before income taxes for the
following reasons:
Year Ended
December 31, 2002
-----------------
(In Thousands)
Ordinary income $ (1,700)
Capital gains (losses) (1,460)
-----------------
Total pre-tax book income $ (3,160)
=================
Provisions computed at statutory rate $ (1,106)
Interest maintenance reserve (224)
Nondeductible general expense 82
Other 22
-----------------
Total $ (1,226)
=================
Federal income taxes incurred $ (647)
Change in net deferred income taxes (579)
-----------------
Total statutory income taxes $ (1,226)
=================
The Company has a recoverable of $2,810,000 at December 31, 2002 and
$163,000 at December 31, 2001 from the United States Treasury for federal
income taxes.
The Company has operating loss carryforwards of $473,000 that expire in
2017.
9. Capital and Surplus
Under Georgia insurance regulations, the Company is required to maintain a
minimum total capital and surplus of $3,000,000. Additionally, the amount
of dividends that can be paid by the Company to its stockholder without
prior approval of the Georgia Insurance Department is limited to the
greater of 10% of statutory surplus or statutory net gain from operations.
23
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
10. Fair Values of Financial Instruments
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 cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the financial instrument. Accordingly, the aggregate fair
value amounts presented herein do not represent the underlying value of the
Company.
Life insurance liabilities that contain mortality risk and all nonfinancial
instruments have been excluded from the disclosure requirements. However,
the fair values of liabilities under all insurance contracts are taken into
consideration in the Company's overall management of interest rate risk,
such that the Company's exposure to changing interest rates is minimized
through the matching of investment maturities with amounts due under
insurance contracts. The carrying amounts and fair values of the Company's
financial instruments are summarized as follows:
December 31
2002 2001
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
(In Thousands)
Assets:
Bonds $ 281,391 $ 300,018 $ 259,073 $ 265,293
Mortgage loans 4,644 5,329 4,761 4,950
Policy loans - - 10 10
Short-term investments 2,850 2,850 - -
Cash 50 50 17,812 17,812
Indebtedness from related parties 1,263 1,263 105 105
Receivable for securities 3 3 87 87
Liabilities:
Individual and group annuities 279,079 257,978 264,158 243,639
Deposit type contract 905 971 121 130
Indebtedness to related parties 65 65 367 367
24
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
10. Fair Values of Financial Instruments (continued)
The following methods and assumptions were used by the Company in
estimating the fair value disclosures for financial instruments in the
accompanying financial statements and notes thereto:
Cash and short-term investments: The carrying amounts reported in the
accompanying balance sheets for these financial instruments approximate
their fair values.
Fixed maturities and equity securities: The fair values for bonds,
preferred stocks and common stocks, reported herein, are based on quoted
market prices, where available. For securities not actively traded, fair
values are estimated using values obtained from independent pricing
services or, in the case of private placements, collateralized mortgage
obligations and other mortgage derivative investments, are estimated by
discounting the expected future cash flows. The discount rates used vary as
a function of factors such as yield, credit quality, and maturity, which
fall within a range between 0% and 15% over the total portfolio. Fair
values determined on this basis can differ from values published by the
NAIC Securities Valuation Office.
Market value as determined by the NAIC as of December 31, 2002 and 2001 is
$286,211,000 and $264,074,000 respectively.
Mortgage loans: Estimated market values for commercial real estate loans
were generated using a discounted cash flow approach. Loans in good
standing are discounted using interest rates determined by U.S. Treasury
yields on December 31 and spreads applied on new loans with similar
characteristics. The amortizing features of all loans are incorporated in
the valuation. Where data on option features is available, option values
are determined using a binomial valuation method, and are incorporated into
the mortgage valuation. Restructured loans are valued in the same manner;
however, these loans were discounted at a greater spread to reflect
increased risk. All residential loans are valued at their outstanding
principal balances, which approximate their fair values.
Other investment-type insurance contracts: The fair values of the Company's
deferred annuity contracts are estimated based on the cash surrender
values. The carrying values of other policyholder liabilities, including
immediate annuities, dividend accumulations, supplementary contracts
without life contingencies, and premium deposits, approximate their fair
values.
The carrying value of all other financial instruments approximates their
fair value.
25
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
11. Commitments and Contingencies
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 pending 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.
12. Financing Agreements
The Company maintains a revolving loan agreement with SunTrust Bank,
Atlanta (the "Bank"). Under this agreement, which expires July 31, 2003,
the Company can borrow up to $10,000,000 from the Bank. Interest on any
borrowing accrues at an annual rate equal to the cost of funds for the Bank
for the period applicable for the advance plus 0.225% or a rate quoted by
the Bank to the Company for the borrowing. Under this agreement, the
Company incurred interest expense of $677 for the year ended December 31,
2002. At December 31, 2002, the Company had $0 payable to the Bank.
The Company also maintains a revolving loan agreement with Bank of New
York, New York (the "Bank"). Under this agreement, the Company can borrow
up to $5,000,000 from the Bank. Interest on any of the Company borrowing
accrues at an annual rate equal to the cost of funds for the Bank for the
period applicable for the advance plus 0.225% or a rate quoted by the Bank
to the Company for the borrowing. Under this agreement, the Company
incurred interest expense of $0 for the year ended December 31, 2002. At
December 31, 2002, the Company had $0 payable to the Bank.
13. Related Party Transactions
Affiliates
Management and service contracts and all cost sharing arrangements with
other affiliated ING US life insurance companies are allocated among
companies in accordance with normal, generally accepted expense and cost
allocation methods.
Investment Management: The Company has entered into an investment advisory
agreement and an administrative services agreement with ING Investment
Management, LLC ("IIM") under which IIM provides the Company with
investment management and asset liability management services. Total fees
under the agreement were approximately $723,000 and $643,000 for the year
ended December 2002 and 2001, respectively.
26
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
13. Related Party Transactions (continued)
Affiliates (continued)
Inter-insurer Services Agreement: The Company has entered into a services
agreement with certain of its affiliated insurance companies in the United
States ("affiliated insurers") whereby the affiliated insurers provide
certain administrative, management, professional, advisory, consulting and
other services to each other. Net amounts received (paid) under these
agreements were ($263,000) and $1,807,000 for the year ended December 31,
2002 and 2001, respectively.
Reciprocal Loan Agreement: The Company has entered into a reciprocal or
revolving 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, 2008, the Company can borrow up to $1,400,000 from ING AIH. Interest on
any borrowing is charged at the rate of ING AIH's cost of funds for the
interest period plus 0.15%. Under this agreement, the company incurred
interest expense of $1,274 for the year ended December 31, 2002. At
December 31, 2002, the company had $0 payable to ING AIH.
14. Guaranty Fund Assessments
Insurance companies are assessed the costs of funding the insolvencies of
other insurance companies by the various state guaranty associations,
generally based on the amount of premiums companies collect in that state.
The Company accrues the cost of future guaranty fund assessments based on
estimates of insurance company insolvencies provided by the National
Organization of Life and Health Insurance Guaranty Associations (NOLHGA)
and the amount of premiums written in each state. The Company reduces the
accrual by credits allowed in some states to reduce future premium taxes by
a portion of assessments in that state. The Company has estimated this
liability to be $29,000 and $100,000 as of December 31, 2002 and 2001,
respectively and has recorded a reserve. The Company has also recorded an
asset of $0 and $28,000 as of December 31, 2002 and 2001, respectively, for
future credits to premium taxes for assessments already paid.
15. Regulatory Risk-Based Capital
Life and health insurance companies are subject to certain Risk-Based
Capital ("RBC") requirements as specified by the NAIC. Under those
requirements, the amount of capital and surplus maintained by a life and
health insurance company is to be determined based on the various risk
factors related to it. At December 31, 2002, the Company meets the RBC
requirements.
27