Exhibit 99.1
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 Equitable
Life Insurance Company of Iowa ("the Company" and 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 Iowa Department of Regulatory Agencies of the State of Iowa,
Iowa Insurance Division, 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 Equitable Life Insurance Company of Iowa 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 Equitable Life
Insurance Company of Iowa 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 Iowa Insurance Division.
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 Iowa Insurance Division.
/s/ Ernst & Young LLP
March 21, 2003
2
Equitable Life Insurance Company of Iowa
Balance Sheets - Statutory Basis
- --------------------------------------------------------------------------------
December 31
2002 2001
--------------- ---------------
(In Thousands)
Admitted assets
Cash and invested assets:
Bonds $ 2,925,958 $ 2,628,098
Preferred stocks 441 490
Common stocks 120,285 306
Subsidiaries 811,079 761,039
Mortgage loans 859,953 842,253
Real estate, less accumulated depreciation
(2002 - $339; 2001- $531) 3,651 5,254
Policy loans 130,790 139,826
Other invested assets 180,117 266,358
Cash and short-term investments 25,102 67,592
--------------- ---------------
Total cash and invested assets 5,057,376 4,711,216
Deferred and uncollected premiums, less loading
(2002 - $785, 2001 - $751) 64,607 5,736
Accrued investment income 43,330 40,604
Reinsurance balances recoverable 785 1,020
Data processing equipment, less accumulated
depreciation (2002-$5,459; 2001-$3,243) 186 373
Indebtedness from related parties 107,057 29,687
Federal income tax recoverable 50,531 34,688
Separate account assets 959,377 1,406,693
Other assets 303,168 273,482
--------------- ---------------
Total admitted assets $ 6,586,417 $ 6,503,499
=============== ===============
See accompanying notes - statutory basis.
3
Equitable Life Insurance Company of Iowa
Balance Sheets - Statutory Basis (continued)
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December 31
2002 2001
--------------- ---------------
(In Thousands,
except share amounts)
Liabilities and capital and surplus
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $ 4,015,244 $ 3,580,706
Deposit type contracts 189,296 152,193
Policyholders' funds 310 282
Dividends payable 23,795 24,385
Unpaid claims 2,227 8,122
--------------- ---------------
Total policy and contract liabilities 4,230,872 3,765,688
Accounts payable and accrued expenses 26,439 26,012
Indebtedness to related parties 66,200 21,091
Asset valuation reserve 25,738 26,060
Interest maintenance reserve 13,573 17,123
Borrowed money 148,996 135,948
Other liabilities (14,220) 66,062
Separate account liabilities 959,377 1,406,693
--------------- ---------------
Total liabilities 5,456,975 5,464,677
Capital and surplus:
Common stock: $1.00 par value; authorized 7,500,000
shares, issued and outstanding 5,000,300 shares 5,000 5,000
Additional paid-in capital 1,215,324 700,324
Unassigned (deficit) surplus (90,882) 333,498
--------------- ---------------
Total capital and surplus 1,129,442 1,038,822
--------------- ---------------
Total liabilities and capital and surplus $ 6,586,417 $ 6,503,499
=============== ===============
See accompanying notes - statutory basis.
4
Equitable Life Insurance Company of Iowa
Statements of Operations - Statutory Basis
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Year ended December 31
2002 2001
--------------- ---------------
(In Thousands)
Premiums and other revenues:
Life, annuity, and accident and health premiums $ 1,832,175 $ 2,645,375
Policy proceeds and dividends left on deposit 1,840 1,263
Net investment income 228,150 232,779
Amortization of interest maintenance reserve (2,570) 2,299
Commissions, expense allowances and reserve adjustments on
reinsurance ceded (80) 91
Other income 23,058 41,581
--------------- ---------------
Total premiums and other revenues 2,082,573 2,923,388
Benefits paid or provided:
Death benefits 44,630 41,922
Annuity benefits 119,150 103,305
Surrender benefits 638,053 464,583
Interest on policy or contract funds 6,192 7,043
Other benefits 7,209 6,906
Life contract withdrawals 47,009 49,110
Increase in life, annuity, and accident and health reserves 1,186,223 2,055,065
Net transfers from separate accounts (135,686) (98,628)
--------------- ---------------
Total benefits paid or provided 1,912,780 2,629,306
Insurance expenses:
Commissions 157,842 205,363
General expenses 45,159 81,288
Insurance taxes, licenses and fees, excluding federal income
taxes 3,801 9,080
--------------- ---------------
Total insurance expenses 206,802 295,731
--------------- ---------------
Loss from operations before policyholder dividends, (37,009) (1,649)
federal income taxes and net realized capital losses
5
Equitable Life Insurance Company of Iowa
Statements of Operations - Statutory Basis (continued)
- --------------------------------------------------------------------------------
Year ended December 31
2002 2001
--------------- ---------------
(In Thousands)
Dividends to policyholders 23,406 25,228
--------------- ---------------
Loss from operations before federal income taxes and (60,415) (26,877)
net realized capital losses
Federal income taxes 38,715 (1,605)
--------------- ---------------
Loss from operations before net realized capital losses (99,130) (25,272)
Net realized capital losses net of income taxes 2002 - $(10,288);
2001 - $(7,441) and excluding net transfers to the interest
maintenance reserve 2002- $3,295; 2001- $3,720 (20,665) (37,807)
--------------- ---------------
Net loss $ (119,795) $ (63,079)
=============== ===============
See accompanying notes - statutory basis.
6
Equitable Life Insurance Company of Iowa
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 $ 5,000 $ 5,000
=============== ================
Paid-in and contributed surplus:
Balance at beginning of year 700,324 248,743
Capital contributions 515,000 451,581
--------------- ----------------
Balance at end of year $ 1,215,324 $ 700,324
=============== ================
Unassigned deficit:
Balance at beginning of year 333,498 344,924
Net loss (119,795) (63,079)
Change in net unrealized capital gains or losses (307,450) 35,976
Change in nonadmitted assets (58,477) 65,659
Change in asset valuation reserve 322 12,378
Change in net deferred income tax excluding tax effect
of nonadmitted assets 61,020 30,125
Change in accounting principle, net of tax - (6,073)
Transfer of prepaid pension assets - (87,412)
Cession of existing risks, net of tax - 1,000
--------------- ----------------
Balance at end of year $ (90,882) $ 333,498
=============== ================
Total capital and surplus $ 1,129,442 $ 1,038,822
=============== ================
See accompanying notes - statutory basis.
7
Equitable Life Insurance Company of Iowa
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 $ 1,775,113 $ 2,647,810
Net investment income received 274,233 243,697
Commission and expense allowances received on reinsurance ceded (54) 91
Benefits paid (862,628) (673,320)
Net transfers to separate accounts 148,848 111,689
Insurance expenses paid (199,451) (274,085)
Dividends paid to policyholders (23,568) (25,413)
Federal income taxes (paid) received (45,836) 71,450
Net other (expenses) revenues (697,081) 41,873
--------------- ---------------
Net cash provided by operations 369,576 2,143,792
Investments
Proceeds from sales, maturities, or repayments of investments:
Bonds 3,559,637 2,401,946
Preferred stocks 357 11,844
Common stocks 103,451 61,428
Mortgage loans 2,241 -
Other invested assets 51,647 6,951
Miscellaneous proceeds 84,561 1,989
Net tax on capital gains - (7,441)
--------------- ---------------
Net proceeds from sales, maturities, or repayments of investments 3,801,894 2,476,717
Cost of investments acquired:
Bonds 3,938,840 2,938,801
Preferred stocks 556,492 451,581
Mortgage loans 121,122 179,837
Other invested assets 844 3,835
Miscellaneous applications 106,945 -
--------------- ---------------
Total cost of investments acquired 4,724,243 3,574,054
Net (decrease) increase in policy loans (9,656) 1,185
--------------- ---------------
Net cash used in investment activities (912,693) (1,098,522)
8
Equitable Life Insurance Company of Iowa
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 506,300 446,508
Borrowed money 13,008 13,660
Premium and other deposit type funds 20,799 (21,565)
Other uses (39,480) (1,699,700)
--------------- ---------------
Net cash provided by (used in) financing and
miscellaneous activities 500,627 (1,261,097)
--------------- ---------------
Net decrease in cash and short-term investments (42,490) (215,827)
Cash and short-term investments:
Beginning of year 67,592 283,419
--------------- ---------------
End of year $ 25,102 $ 67,592
=============== ===============
See accompanying notes - statutory basis.
9
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
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1. Nature of Operations and Significant Accounting Policies
Equitable Life Insurance Company of Iowa (the Company) is domiciled in Iowa
and is a wholly owned subsidiary of ING America Insurance Holdings, Inc.
("ING AIH"). The Company offers various insurance products including
deferred and immediate annuities, variable annuities, and interest
sensitive and traditional life insurance. These products are marketed by
the Company's career agency force, independent insurance agents,
broker/dealers, and financial institutions. The Company's primary customers
are individuals. The Company is presently licensed in 49 states, the
District of Columbia and Puerto Rico.
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 State
of Iowa (Iowa Insurance Division), 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 and mandatorily redeemable preferred
stocks 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.
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 re-evaluated 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.
10
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Basis of Presentation (continued)
Investments in real estate are reported net of related obligations rather
than on a gross basis. Real estate owned and occupied by the Company is
included in investments rather than reported as an operating asset as under
GAAP, and investment income and operating expenses include rent for the
Company's occupancy of those properties. Changes between depreciated cost
and admitted asset investment amounts are credited or charged directly to
unassigned surplus rather than income as would be required under GAAP.
Derivative instruments that meet the criteria of an effective hedge are
valued and reported in a manner that is consistent with the hedged asset or
liability. Embedded derivatives are not accounted for separately from the
host contract. Under GAAP, the effective and ineffective portions of a
single hedge are accounted for separately, an embedded derivative within a
contract that is not clearly and closely related to the economic
characteristics and risk of the host contract is accounted for separately
from the host contract and valued and reported at fair value, and the
change in fair value for cash flow hedges is credited or charged directly
to a separate component of shareholders' equity rather than to income as
required for fair value hedges.
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.
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.
11
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Basis of Presentation (continued)
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.
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.
12
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Basis of Presentation (continued)
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.
Subsidiaries: The accounts and operations of the Company's subsidiaries are
not consolidated with the accounts and operations of the Company as would
be required under GAAP.
13
Equitable Life Insurance Company of Iowa
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.
Employee Benefits: For purposes of calculating the Company's postretirement
benefit obligation, only vested participants and current retirees are
included in the valuation. Under GAAP, active participants not currently
vested are also included.
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.
Policyholder Dividends: Policyholder dividends are recognized when declared
rather than over the term of the related policies.
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.
Surplus Notes: Surplus notes are reported as a component of surplus. Under
statutory accounting practices, no interest is recorded on the surplus
notes until payment has been approved by the Iowa Division of Insurance.
Under GAAP, surplus notes are reported as liabilities and the related
interest is reported as a charge to earnings over the term of the note.
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.
14
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Under GAAP, the corresponding caption of cash and cash equivalents include
cash balances and investments with initial maturities of three months or
less.
Reconciliation to GAAP
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:
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.
Redeemable preferred stocks rated as high quality or better are
reported at cost or amortized cost. All other redeemable preferred
stocks are reported at the lower of cost, amortized cost, or market
value. Nonredeemable preferred stocks are reported at market value or
the lower of cost or market value as determined by the Securities
Valuation Office of the NAIC ("SVO").
Common stocks are reported at market value as determined by the SVO
and the related unrealized capital gains/(losses) are reported in
unassigned surplus along with adjustment for federal 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. 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.
15
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Investments (continued)
The Company uses interest rate swaps, caps and floors, options and
certain other derivatives as part of its overall interest rate risk
management strategy for certain life insurance and annuity products.
As the Company only uses derivatives for hedging purposes, the Company
values all derivative instruments on a consistent basis with the
hedged item. Upon termination, gains and losses on those instruments
are included in the carrying values of the underlying hedged items and
are amortized over the remaining lives of the hedged items as
adjustments to investment income or benefits from the hedged items.
Any unamortized gains or losses are recognized when the underlying
hedged items are sold.
Interest rate swap contracts are used to convert the interest rate
characteristics (fixed or variable) of certain investments to match
those of the related insurance liabilities that the investments are
supporting. The net interest effect of such swap transactions is
reported as an adjustment of interest income from the hedged items as
incurred.
Interest rate caps and floors are used to limit the effects of
changing interest rates on yields of variable rate or short-term
assets or liabilities. The initial cost of any such agreement is
amortized to net investment income over the life of the agreement.
Periodic payments that are receivable as a result of the agreements
are accrued as an adjustment of interest income or benefits from the
hedged items.
The derivatives are reported in a manner that is consistent with the
hedged asset or liability. All derivatives are reported at amortized
cost with the exception of the S&P Options. The S&P Options are
reported at fair value since the liabilities that are being hedged are
reported at fair value. The unrealized gains or losses from the S&P
Options are reported in investment income. Upon termination of a
derivative that qualified for hedge accounting, the gain or loss is
deferred in IMR or adjusts the basis of the hedged item.
The Company's insurance subsidiaries are reported at their underlying
statutory basis net assets plus the admitted portion of goodwill.
Dividends from subsidiaries are included in net investment income. The
remaining net change in the subsidiaries' equity is included in the
change in net unrealized capital gains or losses.
Mortgage loans are reported at amortized cost, less allowance for
impairments.
Policy loans are reported at unpaid principal balances.
16
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Investments (continued)
Land is reported at cost. Real estate occupied by the company is
reported at depreciated cost; other real estate is reported at the
lower of depreciated cost or fair value. Depreciation is calculated on
a straight-line basis over the estimated useful lives of the
properties.
For reverse repurchase agreements, Company policies require a minimum
of 102% of the fair value of securities purchased under reverse
repurchase agreements to be maintained as collateral. Cash collateral
received is invested in short-term investments and the offsetting
collateral liability is included in miscellaneous liabilities.
Rollover dollar repurchase agreements are accounted for as collateral
borrowings, where the amount borrowed is equal to the sales price of
the underlying securities.
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.
Other invested assets are reported at amortized cost using the
effective interest method. Other invested assets primarily consist of
residual collateralized mortgage obligations and partnership
interests.
Realized capital gains and losses are determined using the specific
identification basis.
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 2.25% to 10%.
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.
17
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Aggregate Reserve for Life Policies and Contracts (continued)
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 amount of insurance in force for which the gross premiums are less than
the net premiums, according to the standard of valuation required by the
State of Iowa is $246,911,000 at December 31, 2002. The amount of reserves
for policies on which gross premiums are less than the net premiums
deficiency reserves is $1,617,000 at December 31, 2002.
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.
Guaranteed Minimum Death Benefits
Guaranteed minimum death benefits ("GMDB") are features offered with a
variable annuity contract that provide 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' variable annuity
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.
18
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Guaranteed Minimum Death Benefits (continued)
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 policy holder with a sizeable minimum death benefit and a
policy with a dollar-for-dollar withdrawal provision could withdraw all but
a required minimal account value or transfer a portion of their variable
annuity contract to another carrier, while maintaining a significant GMDB.
For Statutory reserves, Actuarial Guideline 33, "Determining CARVM Reserves
for Annuity Contract with Elective Benefits" (AG 33), defines the
methodology and assumptions that are to be used to determine the minimum
statutory reserves for annuity contracts. The purpose of Actuarial
Guideline 34, "Variable Annuity Minimum Guaranteed Death Benefit Reserves"
(AG 34) is "to interpret the standards for the valuation of reserves for
Minimum Guaranteed Death Benefits included in variable annuity contracts."
There is currently discussion whether AG 34 supersedes AG 33 when
calculating the GMDB reserves or whether AG 33 and AG 34 should be applied
jointly. Given the inherent ambiguity and controversy as to whether AG 34
supersedes AG 33 or whether AG 33 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 related to GMDB's under the dollar-for-dollar
features of its variable annuity products. The difference in interpretation
as to the appropriate integration of AG 33 and AG 34 computational guidance
could result in higher statutory reserve balances of approximately
$35,000,000 as of December 31, 2002. The company has a wholly owned
insurance subsidiary in which the difference in interpretation could result
in higher reserve balances of approximately $85,000,000 as of December 31,
2002.
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.
19
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Electronic Data Processing Equipment
Electronic data processing equipment is carried at cost less accumulated
depreciation. Depreciation for major classes of assets is calculated on a
straight-line basis over the estimated useful lives of the assets.
Participating Insurance
Participating business approximates less than 11% of the Company's ordinary
life insurance in force and 2% of premium income. The amount of dividends
to be paid is determined annually by the Board of Directors. Amounts
allocable to participating policyholders are based on published dividend
projections or expected dividend scales. Dividends of $23,406,000 and
$25,228,000 were incurred 2002 and 2001, respectively.
Pension Plans
The Company provides noncontributory retirement plans for substantially all
employees and certain agents. Pension costs are charged to operations as
contributions are made to the plan. The Company also provides a
contributory retirement plan for substantially all employees.
Nonadmitted Assets
Nonadmitted assets are summarized as follows:
December 31
2002 2001
--------------- ---------------
(In Thousands)
Deferred federal income taxes $ 157,392 $ 94,807
Agents' debit balances 253 705
Furniture and equipment 4,337 6,411
Leasehold improvements 1,033 -
Deferred and uncollected premium 426 372
Commuted commission 1,108 -
Suspense debts 3,586 5,135
Other 231 2,459
--------------- --------------
Total nonadmitted assets $ 168,366 $ 109,889
=============== ==============
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.
20
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
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 $1,253,710,000 and repaid $1,253,710,000 in 2002, and
borrowed $784,500,000 and repaid $784,500,000 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
$204,000 and $1,646,000 during 2002 and 2001, respectively.
Separate Accounts
Separate account assets and liabilities held by the Company represent funds
held for the benefit of the Company's variable life and annuity policy and
contract holders who bear all of the investment risk associated with the
policies. Such policies are of a non-guaranteed nature. All net investment
experience, positive or negative, is attributed to the policy and contract
holders' account values. The assets and liabilities of these accounts are
carried at fair value.
Reserves related to the Company's mortality risk associated with these
policies are included in life and annuity reserves. The operations of the
separate accounts are not included in the accompanying statements of
operations.
Reclassifications
Certain prior year amounts in the Company's statutory basis financial
statements have been reclassified to conform to the 2002 financial
statement presentation.
21
Equitable Life Insurance Company of Iowa
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 State of Iowa. The Iowa
State Insurance Division recognizes only statutory accounting practices
prescribed or permitted by the State of Iowa for determining and reporting
the financial condition and results of operations of an insurance company,
for determining its solvency in under the Iowa 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 Iowa. 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
Iowa Division 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 Iowa.
Effective January 1, 2001, the State of Iowa required that insurance
companies domiciled in the State of Iowa 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 Iowa 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 surplus 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 funds surplus, by
$6,073,000 as of January 1, 2001. Included in this total adjustment is a
reduction in unassigned funds of approximately $12,670,000 related to
guaranty funds, post retirement benefits and other assessments and an
increase in unassigned funds of approximately $6,597,000 related to
mortgage loans and bonds.
22
Equitable Life Insurance Company of Iowa
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 $ 6,605 $ 643 $ - $ 7,248
States, municipalities, and political
subdivisions 248 11 - 259
Foreign government 172,130 12,466 4,538 180,058
Public utilities securities 185,449 8,495 3,681 190,263
Corporate securities 1,324,320 85,202 12,026 1,397,496
Mortgage-backed securities 874,791 38,253 20,820 892,224
Other structured securities 363,055 22,346 19,667 365,734
--------------- --------------- --------------- ---------------
Total fixed maturities 2,926,598 167,416 60,732 3,033,282
Preferred stocks 441 - - 441
Common stocks 120,051 234 - 120,285
--------------- --------------- --------------- ---------------
Total equity securities 120,492 234 - 120,726
--------------- --------------- --------------- ---------------
Total $ 3,047,090 $ 167,650 $ 60,732 $ 3,154,008
=============== =============== =============== ===============
At December 31, 2001:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 35,463 $ 306 $ 730 $ 35,039
States, municipalities, and political
subdivisions 248 - 1 247
Foreign government 111,157 3,952 3,077 112,032
Public utilities securities 103,304 1,839 4,541 100,602
Corporate securities 1,130,256 37,173 22,792 1,144,637
Mortgage-backed securities 873,372 27,484 17,543 883,313
Other structured securities 374,298 13,007 20,626 366,679
--------------- ---------------- --------------- ----------------
Total fixed maturities 2,628,098 83,761 69,310 2,642,549
Preferred stocks 490 - - 490
Common stocks 306 - - 306
--------------- ---------------- --------------- ----------------
Total equity securities 796 - - 796
--------------- ---------------- --------------- ----------------
Total $ 2,628,894 $ 83,761 $ 69,310 $ 2,643,345
=============== ================ =============== ================
23
Equitable Life Insurance Company of Iowa
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 $ 16,683 $ 16,833
Due after 1 year through 5 years 499,720 530,636
Due after 5 years through 10 years 863,485 909,340
Due after 10 years 308,864 318,514
--------------- ---------------
1,688,752 1,775,323
Mortgage-backed securities 874,791 892,225
Other structured securities 363,055 365,734
--------------- ---------------
Total $ 2,926,598 $ 3,033,282
=============== ===============
At December 31, 2002, investments in certificates of deposit and bonds,
with an admitted asset value of $3,809,000, were on deposit with state
insurance departments to satisfy regulatory requirements.
Reconciliation of bonds from amortized cost to carrying value as of
December 31, 2002 and 2001 is as follows:
December 31
2002 2001
--------------- ---------------
(In Thousands)
Amortized cost $ 2,926,598 $ 2,628,098
Less nonadmitted bonds (640) -
--------------- --------------
Carrying value $ 2,925,958 $ 2,628,098
=============== ==============
Proceeds from the sales of investments in bonds and other fixed maturity
interest securities were $1,740,357,000 and $797,331,000 in 2002 and 2001,
respectively. Gross gains of $37,919,000 and $22,517,000 and gross losses
of $36,614,000 and $10,345,000 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.
24
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
4. Investments (continued)
Major categories of net investment income are summarized as follows:
December 31
2002 2001
--------------- ---------------
(In Thousands)
Equity securities - affiliated $ 35 $ 351
Equity securities - unaffiliated - 26,000
Bonds 230,384 205,052
Mortgage loans 65,648 62,637
Contract loans 7,840 7,844
Real estate 757 362
Other (58,410) (51,849)
--------------- --------------
Total investment income 246,254 250,397
Investment expenses (18,104) (17,618)
--------------- --------------
Net investment income $ 228,150 $ 232,779
=============== ==============
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 $ 47,317 $ 14,909
The Company entered into reverse dollar repurchase transactions to increase
its return on investments and improve liquidity. Reverse dollar repurchases
involve a sale of securities and an agreement to repurchase substantially
the same securities as those sold. The reverse dollar repurchases are
accounted for as short term collateralized financing and the repurchase
obligation is reported in borrowed money. The repurchase obligation totaled
$95,801,000 at December 31, 2002. The securities underlying these
agreements are mortgage-backed securities with a book value and fair value
of $95,936,000 at December 31, 2002. The securities have a weighted average
coupon of 5.6% and have maturities ranging from December 2017 through
December 2032. The primary risk associated with short-term collateralized
borrowings is that the counterparty may 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, which was not material at December 31, 2002. The Company
believes the counterparties to the reverse dollar repurchase agreements are
financially responsible and that the counterparty risk is minimal.
25
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
4. Investments (continued)
The Company participates in reverse repurchase transactions. Such
transactions include the sale of corporate securities to a major securities
dealer and a simultaneous agreement to repurchase the same security in the
near term. The proceeds are invested in new securities of intermediate
durations. The terms of the reverse repurchase agreements call for payment
of interest at a rate of 1.4%. The agreements mature prior to the end of
January 2003. At December 31, 2002 the amount due on these agreements
included in borrowed money is $3,000,000. The securities underlying these
agreements are mortgage-backed securities with a book value and fair value
of $3,176,000. The securities have a weighted average coupon of 6.0% and
have a maturity of November 2032.
The maximum and minimum lending rates for long-term mortgage loans during
2002 were 7.7% and 3.0%. 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.
The maximum percentage of any loan to the value of collateral at the time
of the loan, exclusive of insured or guaranteed or purchase money
mortgages, was 81.9% on commercial properties. As of December 31, 2002, the
Company held no mortgages with interest more than 180 days overdue. Total
interest due on mortgages as of December 31, 2002 is $23,000.
5. Derivative Financial Instruments Held for Purposes Other than Trading
The Company enters into interest rate and currency contracts, including
swaps, caps, floors, and options, to reduce and manage risks, which include
the risk of a change in the value, yield, price, cash flows, exchange rates
or quantity of, or a degree of exposure with respect to, assets,
liabilities, or future cash flows, which the Company has acquired or
incurred. Hedge accounting practices are supported by cash flow matching,
scenario testing and duration matching.
The Company uses interest rate swaps to reduce market risks from changes in
interest rates and to alter interest rate exposure arising from mismatches
between assets and liabilities. Interest rate swap agreements generally
involve the exchange of fixed and floating interest payments over the life
of the agreement without an exchange of the underlying principal amount.
Currency swap agreements generally involve the exchange of local and
foreign currency payments over the life of the agreements without an
exchange of the underlying principal amount. Interest rate cap and interest
rate floor agreements owned entitle the Company to receive payments to the
extent reference interest rates exceed or fall below strike levels in the
contracts based on the notional amounts.
26
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
5. Derivative Financial Instruments Held for Purposes Other than Trading
(continued)
Premiums paid for the purchase of interest rate contracts are included in
other invested assets and are being amortized to interest expense over the
remaining terms of the contracts or in a manner consistent with the
financial instruments being hedged.
Amounts paid or received, if any, from such contracts are included in
interest expense or income. Accrued amounts payable to or receivable from
counterparties are included in other liabilities or other invested assets.
Gains or losses realized as a result of early terminations of interest rate
contracts are amortized to investment income over the remaining term of the
items being hedged to the extent the hedge is considered to be effective;
otherwise, they are recognized upon termination.
Interest rate contracts that are matched or otherwise designated to be
associated with other financial instruments are recorded at fair value if
the related financial instruments mature, are sold, or are otherwise
terminated or if the interest rate contracts cease to be effective hedges.
Changes in the fair value of derivatives are recorded as investment income.
The Company manages the potential credit exposure from interest rate
contracts through careful evaluation of the counterparties' credit
standing, collateral agreements, and master netting agreements.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate contracts; however, the Company does not
anticipate nonperformance by any of these counterparties. The amount of
such exposure is generally the unrealized gains in such contracts.
The table below summarizes the Company's interest rate contracts included
in other invested assets at December 31, 2002 and 2001:
December 31, 2002
-------------------------------------------------
Notional Carrying Fair
Amount Value Value
--------------- ------------- ------------
(In Thousands)
Interest rate contracts:
Swaps $ 266,098 $ - $ (4,428)
Caps owned 743,000 2,508 908
Options owned 856,438 30,325 30,325
--------------- ------------ ------------
Total derivatives $ 1,865,536 $ 32,833 $ 26,805
=============== ============ ============
27
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
5. Derivative Financial Instruments Held for Purposes Other than Trading
(continued)
December 31, 2001
-------------------------------------------------
Notional Carrying Fair
Amount Value Value
--------------- ------------- ------------
(In Thousands)
Interest rate contracts:
Swaps $ 50,000 $ 69 $ 2
Caps owned 1,115,000 2,547 2,256
Options owned 762,920 60,495 45,720
--------------- ------------ ------------
Total derivatives $ 1,927,920 $ 63,111 $ 47,978
=============== ============ ============
6. Concentrations of Credit Risk
The Company held less-than-investment-grade corporate bonds with an
aggregate book value of $215,727,000 and $251,252,000 and with an aggregate
market value of $200,968,000 and $236,887,000 at December 31, 2002 and
2001, respectively. Those holdings amounted to 7.4% of the Company's
investments in bonds and 3.37% 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 $68,548,000 and $196,630,000 with an
aggregate NAIC market value of $73,861,000 and $199,043,000 at December 31,
2002 and 2001, respectively. The carrying value of these holdings amounted
to 2.3% of the Company's investment in bonds and 1.0% 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 (17.7%) and Texas (8%).
The remaining commercial mortgages relate to properties located in 38 other
states. 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 $17,353,000.
28
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
7. Annuity Reserves
At December 31, 2002 and 2001, the Company's annuity reserves, including
those held in separate accounts and 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 $ 1,538,465 34%
At book value less surrender charge 846,121 18
At fair value 1,079,649 23
--------------- ---------------
Subtotal 3,464,235 75
Subject to discretionary withdrawal (without adjustment)
at book value with minimal or no charge or adjustment 447,961 10
Not subject to discretionary withdrawal 664,896 15
--------------- ---------------
Total annuity reserves and deposit fund liabilities before reinsurance 4,577,092 100%
===============
Less reinsurance ceded 559,044
---------------
Net annuity reserves and deposit fund liabilities $ 4,018,048
===============
December 31, 2001
Amount Percent
--------------- ---------------
(In Thousands)
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 1,329,562 30%
At book value less surrender charge 718,764 16
At fair value 1,365,750 30
--------------- ---------------
Subtotal 3,414,076 76
Subject to discretionary withdrawal (without adjustment)
at book value with minimal or no charge or adjustment 452,336 10
Not subject to discretionary withdrawal 653,795 14
--------------- ---------------
Total annuity reserves and deposit fund liabilities before reinsurance 4,520,207 100%
===============
Less reinsurance ceded 542,676
---------------
Net annuity reserves and deposit fund liabilities $ 3,977,531
===============
29
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
8. Employee Benefit Plans
Pension Plan and Postretirement Benefits
Effective December 31, 2001, the qualified noncontributory defined benefit
retirement plans of the Company, along with certain other US subsidiaries
of ING AIH, were merged into one plan which is recognized in ING AIH's
financial statements. As a result of this plan merger, the Company
transferred its qualified pension asset to ING North America Insurance
Corporation, an affiliate. In addition, the Company maintains a
nonqualified unfunded Supplemental Employees Retirement Plan ("SERP").
The Company also provides certain health care and life insurance benefits
for retired employees.
Pension Benefits Other Benefits
2002 2001 2002 2001
---------- ---------- ---------- ----------
(In Thousands)
Change in plan assets
Fair value of plan assets at beginning of year $ - $ 151,069 $ - $ -
Actual return on plan assets - (7,383) - -
Employer contribution 301 199 471 383
Plan participants' contributions - - 376 234
Benefits paid (301) (5,086) (847) (617)
Business combinations, divestitures and
settlements - (138,799) - -
---------- ---------- ---------- ----------
Fair value of plan assets at end of year $ - $ - $ - $ -
========== ========== ========== ==========
Funded status
Unamortized prior service credit $ 318 $ 346 $ 746 $ 844
Unrecognized net (gain) or loss 3,715 (2,539) (2,566) 885
Remaining net obligation at initial date of
application (31) (33) - (3,341)
Accrued liabilities (12,117) (10,789) (4,874) (3,771)
---------- ---------- ---------- ----------
Net liability recorded $ (8,115) $ (13,015) $ (6,694) $ (5,383)
========== ========== ========== ==========
30
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
8. Employee Benefit Plans (continued)
Pension Plan and Postretirement Benefits (continued)
A summary of assets, obligations and assumptions of the Pension and Other
Postretirement Benefits Plans are as follows:
Pension Benefits Other Benefits
2002 2001 2002 2001
---------- ---------- ---------- ----------
(In Thousands)
Change in benefit obligation
Benefit obligation at beginning of year $ 13,015 $ 73,510 $ 5,383 $ 7,452
Service cost 546 1,820 210 211
Interest cost 1,008 5,643 400 564
Contribution by plan participants - - 376 234
Actuarial gain (loss) (6,153) 5,767 373 (2,811)
Benefits paid (301) (5,085) (847) (618)
Plan amendments - (114) 799 -
Business combinations, divestitures,
curtailments, settlements and special
termination benefits - (68,526) - 351
---------- ---------- ---------- ----------
Benefit obligation at end of year $ 8,115 $ 13,015 $ 6,694 $ 5,383
========== ========== ========== ==========
Components of net periodic benefit cost
Service cost $ 546 $ 1,820 $ 210 $ 212
Interest cost 1,008 5,643 400 565
Expected return on plan assets - (13,750) - -
Amortization of recognized transition obligation
or transition asset 2 (2,452) 304 304
Amount of recognized gains and losses 100 - (42) 109
Amount of prior service cost recognized (28) - 701 (98)
Amount of gain or loss recognized due to a
settlement or curtailment - - - 351
---------- ---------- ---------- ----------
Total net periodic benefit cost $ 1,628 $ (8,739) $ 1,573 $ 1,443
========== ========== ========== ==========
31
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
8. Employee Benefit Plans (continued)
Pension Plan and Postretirement Benefits (continued)
In addition, the Company has a pension benefit obligation and another
benefits obligation for non-vested employees as of December 31, 2002 and
2001 in the amount of $682,000 and $842,000, and $2,633,000 and $1,708,000
(OPEB obligation), respectively.
Assumptions used in determining the accounting for the defined benefit
plans and other post-retirement benefit plans as of December 31, 2002 and
2001 were as follows:
2002 2001
--------------- ---------------
Weighted-average discount rate 6.75% 7.50%
Rate of increase in compensation level 3.75% 4.50%
Expected long-term rate of return on assets 9.00% 9.25%
The annual assumed rate of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) for the medical plan is 10%
graded to 5.0% thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year
would increase the accumulated postretirement benefit obligation for the
medical plan as of December 31, 2002 by $1,159,000. Decreasing the assumed
health care cost trend rates by one percentage point in each year would
decrease the accumulated postretirement benefit obligation for the medical
plan as of December 31, 2002 by $1,139,000.
401(k) Plan
The Savings Plan is a defined contribution plan, which is available to
substantially all employees. Participants may make contributions to the
plan through salary reductions up to a maximum of $11,000 for 2002 and
$10,500 for 2001. Such contributions are not currently taxable to the
participants. The Company matches up to 6% of pre-tax eligible pay at 100%.
Company matching contributions were $681,000 and $522,000 for 2002 and
2001, respectively.
32
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
9. Separate Accounts
Separate account assets and liabilities represent funds segregated by the
Company for the benefit of certain policy and contract holders who bear the
investment risk. All such policies are of a nonguaranteed return nature.
Revenues and expenses on the separate account assets and related
liabilities equal the benefits paid to the separate account policy and
contract holders.
A reconciliation of the amounts transferred to and from the separate
accounts is presented below:
December 31,
2002 2001
--------------- ---------------
(In Thousands)
Transfers as reported in the summary of operations of the Separate Accounts
Statement:
Transfers to separate accounts $ 33,970 $ 52,388
Transfers from separate accounts 169,689 151,018
--------------- ---------------
Net transfers from separate accounts (135,719) (98,630)
Reconciling adjustments:
Miscellaneous transfers 33 2
--------------- ---------------
Transfers as reported in the Statement of Operations $ (135,686) $ (98,628)
=============== ===============
December 31,
2002 2001
--------------- ---------------
(In Thousands)
Reserves for separate accounts by withdrawal characteristics:
Subject to discretionary withdrawal:
With market value adjustment $ - $ -
At book value without market value adjustment less current
surrender charge
of 5% or more 931,533 1,365,751
At market value - -
At book value without market value adjustment less current
surrender charge
of less than 5% - -
Subtotal - -
Not subject to discretionary withdrawal - -
--------------- --------------
Total separate account reserves $ 931,533 $ 1,365,751
=============== ==============
33
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
10. Reinsurance
The Company is involved in both ceded and assumed reinsurance with other
companies for the purpose of diversifying risk and limiting exposure on
larger risks. As of December 31, 2002, the Company's retention limit for
acceptance of risk on life insurance policies had been set at various
levels up to $500,000.
To the extent that the assuming companies become unable to meet their
obligations under these treaties, the Company remains contingently liable
to its policyholders for the portion reinsured. To minimize its exposure to
significant losses from retrocessionaire insolvencies, the Company
evaluates the financial condition of the retrocessionaire and monitors
concentrations of credit risk.
Assumed premiums amounted to $1,299,151,000 and $2,113,275,000 for the
years ended December 31, 2002 and 2001, respectively.
The Company's ceded reinsurance arrangements reduced certain items in the
accompanying financial statements by the following amounts:
December 31,
2002 2001
--------------- ---------------
(In Thousands)
Premiums $ 4,833 $ 4,080
Benefits paid or provided 7,821 8,023
Policy and contract liabilities at year end 586,918 592,643
During 2002 and 2001, the Company had ceded blocks of insurance under
reinsurance treaties to provide funds for financing and other purposes.
These reinsurance transactions, generally known as "financial reinsurance,"
represent financing arrangements. Financial reinsurance has the effect of
increasing current statutory surplus while reducing future statutory
surplus as the reinsurers recapture amounts.
34
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
11. Federal Income Taxes
The Company files a consolidated federal income tax return with its
subsidiaries. The method of tax allocation is governed by a written tax
sharing agreement. The tax sharing agreement provides that each member of
the consolidated return shall reimburse the Company for its respective
share of the consolidated federal income tax liability and shall receive a
benefit for its losses at the statutory rate.
The components of the net deferred tax asset/(liability) at December 31 are
as follows:
December 31,
2002 2001
--------------- ---------------
(In Thousands)
Total gross deferred tax assets $ 162,399 $ 102,914
Total deferred tax liabilities (5,007) (6,542)
--------------- ---------------
Net deferred tax asset 157,392 96,372
Deferred tax asset nonadmitted (157,392) (94,807)
--------------- ---------------
Net admitted deferred tax asset - 1,565
=============== ===============
(Increase) in nonadmitted asset $ (62,585) $ (28,560)
=============== ===============
Current income taxes incurred consist of the following major components:
December 31,
2002 2001
--------------- ---------------
(In Thousands)
Federal taxes on stand alone operations $ (17,296) $ (1,605)
Federal taxes paid to affiliates under tax sharing agreement 67,278 -
Consolidated operations loss carryback utilized (11,267) -
--------------- ---------------
Total taxes on operations 38,715 (1,605)
Federal taxes on capital gains (1,559) 7,441
Federal taxes paid to affiliates under tax sharing agreement 3,896 -
Consolidated capital loss carrybacks utilized (12,625) -
--------------- ----------------
Total current taxes incurred $ 28,427 $ 5,836
================ ================
35
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
11. 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:
Operations loss carryforwards $ 72,725 $ -
Deferred acquisition costs 30,319 23,779
Investments 19,753 24,545
Insurance reserves 19,428 36,376
Policyholder dividends 8,328 8,535
Nonadmitted assets 3,709 4,886
Unrealized loss on investments 704 288
Other 7,433 4,505
--------------- --------------
Total deferred tax assets 162,399 102,914
Deferred tax assets nonadmitted (157,392) (94,807)
--------------- --------------
Admitted deferred tax assets $ 5,007 $ 8,107
=============== ==============
Deferred tax liabilities resulting from book/tax differences in:
Due & deferred premiums $ 2,488 $ 2,410
Fixed assets 2,164 3,516
Other 355 616
--------------- --------------
Total deferred tax liabilities 5,007 6,542
--------------- --------------
Net admitted deferred tax asset $ - $ 1,565
=============== ==============
The change in net deferred income taxes is comprised of the following:
December 31,
2002 2001 Change
--------------- --------------- ----------
(In Thousands)
Total deferred tax assets $ 162,399 $ 102,914 $ 59,485
Total deferred tax liabilities 5,007 6,542 (1,535)
--------------- --------------- ---------
Net deferred tax asset $ 157,392 $ 96,372 61,020
=============== ===============
Tax effect of items in surplus:
Unrealized gains (losses) (416)
Change in non-admitted assets 1,191
---------
Change in net deferred income tax $ 61,795
=========
36
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
11. Federal Income Taxes (continued)
The provision for federal income tax expense and change in deferred taxes
differs from the amount obtained 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 $ (60,415)
Capital gains (losses) (37,073)
---------------
Total pre-tax book income $ (97,488)
===============
Provision computed at statutory rate $ (34,121)
Interest maintenance reserve 900
Other (147)
---------------
Total $ (33,368)
===============
Federal income taxes incurred $ 28,427
Change in net deferred income taxes (61,795)
---------------
Total statutory income taxes $ (33,368)
===============
The amount of federal income taxes incurred that will be available for
recoupment in event of future net losses is $12,514,000 from 2001.
The Company has operations loss carryforwards of $207,784,000, which expire
in 2017.
The Company has a receivable from United States Treasury of $52,531,000 and
$34,688,000 for federal income taxes as of December 31, 2002 and 2001,
respectively.
Prior to 1984, the Company was allowed certain special deductions for
federal income tax reporting purposes that were required to be accumulated
in a "policyholders' surplus account" (PSA). In the event those amounts are
distributed to shareholders, or the balance of the account exceeds certain
limitations prescribed by the Internal Revenue Code, the excess amounts
would be subject to income tax at current rates. Income taxes also would be
payable at current rates if the Company ceases to qualify as a life
insurance company for tax reporting purposes, or if the income tax deferral
status of the PSA is modified by future tax legislation. Management does
not intend to take any actions nor does management expect any events to
occur that would cause income taxes to become payable on the PSA balance.
Accordingly, the Company has not accrued income taxes on the PSA balance of
$14,388,000 at December 31, 2002. However, if such taxes were assessed, the
amount of the taxes payable would be $5,036,000. No deferred tax
liabilities are recognized related to the PSA.
37
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
12. Investment in and Advances to Subsidiaries
Amounts invested in and advanced to the Company's subsidiaries are
summarized as follows:
December 31,
2002 2001
--------------- ---------------
(In Thousands)
Common stock $ 811,079 $ 761,038
(Payable) receivable from subsidiaries 2,102 2,445
Summarized financial information for these subsidiaries is as follows:
December 31,
2002 2001
--------------- ---------------
(In Thousands)
Revenue s $ 7,929,991 $ 5,911,580
Income before net realized gains on investments (235,729) (75,842)
Net loss (277,136) (126,933)
Admitted assets 24,301,380 20,556,877
Liabilities 23,490,301 19,795,838
13. Capital and Surplus
Under Iowa insurance regulations, the Company is required to maintain a
minimum total capital and surplus which is the lower of $5,000,000 or risk
based capital. Additionally, the amount of dividends which can be paid by
the Company to its stockholder without prior approval of the Iowa Division
of Insurance is limited to the greater of 10% of statutory surplus or the
statutory net gain from operations.
38
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
14. Fair Values of Financial Instruments
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 $ 2,925,958 $ 3,033,282 $ 2,628,098 $ 2,642,549
Preferred stocks 441 441 490 490
Unaffiliated common stocks 285 285 306 306
Mortgage loans 859,953 943,421 842,243 875,493
Policy loans 130,790 130,790 139,826 139,826
Derivative securities 32,833 26,805 63,111 47,978
Short-term investments 19,971 19,971 53,000 53,000
Cash 5,131 5,131 14,592 14,592
Investment in surplus notes 135,000 191,228 185,000 268,149
Indebtedness from related
parties 107,057 107,056 29,867 29,867
Separate account assets 959,377 959,377 1,406,693 1,406,693
Receivable for securities 207 207 3,950 3,950
Liabilities:
Individual and group annuities 2,852,482 2,794,933 2,611,782 2,439,374
Deposit type contract 189,296 190,706 152,194 152,194
Policyholder funds 26,333 26,333 26,893 26,893
Indebtedness to related parties 66,200 66,200 21,091 21,091
Separate account liabilities 959,377 959,377 1,406,693 1,406,693
Payable for securities - - 56,485 56,485
39
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
14. 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
2% and 15% over the total portfolio. Fair values determined on this
basis can differ from values published by the NAIC Securities
Valuation Office. Fair value as determined by the NAIC as of December
31, 2002 and 2001 is $3,945,966,000 and $3,402,211,000 respectively.
Mortgage loans: Estimated fair 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.
Derivative financial instruments: Fair values for on-balance-sheet
derivative financial instruments (caps, options and floors) and
off-balance-sheet derivative financial instruments (swaps) are based
on broker/dealer valuations or on internal discounted cash flow
pricing models taking into account current cash flow assumptions and
the counterparties' credit standing.
Investment in surplus notes: Estimated fair values for investment in
surplus notes are generated using a discounted cash flow approach.
Cash flows were discounted using interest rates determined by U.S.
Treasury yields on December 31 and spreads applied on surplus notes
with similar characteristics.
40
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
14. Fair Values of Financial Instruments (continued)
Guaranteed investment contracts: The fair values of the Company's
guaranteed investment contracts are estimated using discounted cash
flow calculations, based on interest rates currently being offered for
similar contracts with maturities consistent with those remaining for
the contracts being valued.
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.
15. Commitments and Contingencies
The Company leases its home office space and certain other equipment under
operating leases that expire through 2017. During the years ended December
31, 2002 and 2001, rent expense totaled $4,951,000 and $3,254,000,
respectively. At December 31, 2002 minimum rental payments due under all
non-cancelable operating leases are: 2003- $5,268,000, 2004 - $5,324,000,
2005 - $5,324,000, 2006 - $5,324,000, 2007 - $5,135,000 and $47,414,000
thereafter.
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 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.
41
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
16. 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 $100,000,000 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 $171,000 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 $100,000,000 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 $16,000 for the year ended December 31, 2002.
At December 31, 2002, the Company had $0 payable to the Bank.
17. 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 $10,395,000 and $9,730,000 for the
year ended December 31, 2002 and 2001, respectfully.
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 $3,292,000 and $16,610,000 for the year ended December 31,
2002 and 2001, respectfully.
42
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
17. Related Party Transactions (continued)
Affiliates (continued)
Reciprocal Loan Agreement: The Company has entered into a reciprocal or
revolving loan agreement with ING AIH, to facilitate the handling of
unusual and/or unanticipated short-term cash requirements. Under this
agreement, which expires December 31, 2007, the Company and ING AIH can
borrow up to $104,000,000 from one another. Interest on any borrowing 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, the Company incurred
interest expense of $170,000 and interest income of $615,000 for the year
ended December 31, 2002. At December 31, 2002, the Company had $0 payable
to ING AIH and $0 receivable from ING AIH.
Tax Sharing Agreements: The Company has entered into federal tax sharing
agreements with members of an affiliated group as defined in Section 1504
of the Internal Revenue Code of 1986, as amended. The agreement provides
for the manner of calculation and the amounts/timing of the payments
between the parties as well as other related matters in connection with the
filing of consolidated federal income tax returns. The Company has also
entered into a state tax sharing agreement with ING AIH and each of the
specific subsidiaries that are parties to the agreement. The state tax
agreement applies to situations in which ING AIH and all or some of the
subsidiaries join in the filing of a state or local franchise, income tax
or other tax return on a consolidated, combined or unitary basis.
Service Agreement with ING Financial Adviser, LLC: The Company has entered
into a services agreement with ING Financial Advisors, LLC ("ING FA") to
provide certain administrative, management, professional advisory,
consulting and other services to the Company for the benefit of its
customers. Charges for these services are to be determined in accordance
with fair and reasonable standards with neither party realizing a profit
nor incurring a loss as a result of the services provided to the Company.
The Company will reimburse ING FA for direct and indirect costs incurred on
behalf of the Company.
Subsidiaries
The Company owns, as of December 31, 2002, the capital stock of, valued on
the equity basis, USG Annuity and Life Insurance Company (an Oklahoma
domestic insurer) and Golden American Life Insurance Company (a Delaware
domestic insurer).
43
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
18. 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 $3,465,000 and $3,759,000 as of December 31, 2002 and 2001,
respectively and has recorded a reserve. The Company has also recorded an
asset of $473,000 and $771,000 as of December 31, 2002 and 2001,
respectively, for future credits to premium taxes for assessments already
paid.
19. 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 met the RBC
requirements.
44