As filed with the Securities and Exchange Commission on April 29, 2002
Registration No. 333-84394
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
GOLDEN AMERICAN LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Amendment No. 1
GOLDEN AMERICAN LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 6355 41-0991508
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
1475 Dunwoody Drive
West Chester, Pennsylvania 19380-1478
(610) 425-3400
(Address, and telephone number of registrant's principal executive office)
Linda E. Senker, Esq. Kimberly J. Smith
ING ING
1475 Dunwoody Drive 1475 Dunwoody Drive
West Chester, PA 19380-1478 West Chester, PA 19380-1478
(610) 425-4139 (610) 425-3427
(Name and Address of Agent for Service)
Approximate date of commencement of proposed sale to the public:
As soon as practical after the effective date of the Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box ................................................ [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering [ ]..............
If this Form is post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering [ ].....................................
If this Form is post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering [ ].....................................
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box [ ]
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Pursuant to Rule 429 under the Securities Act of 1933, a prospectus herein
also related to Registration Statement Nos. 333-28681, 333-76941, 333-95511,
333-59386, 333-68138, 333-30186, 333-59408, 333-28743, 333-51949, 333-65009,
333-76945, 333-95457, 333-33924, 333-66745, 333-70602.
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The registrant hereby amends this registration statement statement on such
date or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states that
this registration statement shall thereafter become effective in accordance
with section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission acting
pursuant to said section 8(a), may determine.
PART I
The Prospectus filed herein describes certain interests in a fixed account
offered by Golden American Life Insurance Company under contracts issued by the
insurance company. These interests (and the fixed account) are not offered as a
seperate product but in connection with combination variable and fixed annuity
products whose prospectuses describe the contract in more detail and must
accompany or precede the delivery of this prospectus.
ING VARIABLE ANNUITIES
GOLDEN AMERICAN LIFE INSURANCE COMPANY
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FIXED ACCOUNT II
MAY 1, 2002
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Fixed Account II ("Fixed Account") is an optional fixed interest allocation
offered during the accumulation phase of your variable annuity contract between
you and Golden American Life Insurance Company ("Golden American," the
"Company," "we" or "our"). The Fixed Account, which is a segregated asset
account of Golden American, provides a means for you to invest on a tax-deferred
basis and earn a guaranteed interest for guaranteed interest periods (Fixed
Interest Allocation(s)). We will credit your Fixed Interest Allocation(s) with a
fixed rate of interest. We currently offer Fixed Interest Allocations with
guaranteed interest periods of 1, 3, 5, 7 and 10 years. We may offer additional
guaranteed interest periods in some or all states, may not offer all guaranteed
interest periods on all contracts, and the rates for a given guaranteed interest
period may vary among contracts. We set the interest rates periodically. We may
credit a different interest rate for each interest period. The interest you earn
in the Fixed Account as well as your principal is guaranteed by Golden American,
as long as you do not take your money out before the maturity date for the
applicable interest period. If you take your money out from a Fixed Interest
Allocation more than 30 days before the applicable maturity date, we will apply
a market value adjustment ("Market Value Adjustment"). A Market Value Adjustment
could increase or decrease your contract value and/or the amount you take out. A
surrender charge may also apply to withdrawals from your contract. You bear the
risk that you may receive less than your principal because of the Market Value
Adjustment.
For contracts sold in some states, not all Fixed Interest Allocations are
available. You have a right to return a contract for a refund as described in
the variable annuity contract prospectus.
The variable annuity contract prospectus describes a deferred group and
individual variable annuity contract (the "Contract") offered by Golden
American. The Contract is available in connection with certain retirement plans
that qualify for special federal income tax treatment as well as those that do
not qualify for such treatment. Please refer to the Contract prospectus for more
information.
This prospectus accompanies a Contract prospectus and provides information that
you should know before investing in the Fixed Account and should be kept for
future reference. If you need more information after reading this prospectus,
please contact us at Customer Service Center, P.O. Box 2700, West Chester,
Pennsylvania 19380 or call (800) 366-0066 or your registered representative.
Either prospectus is available without charge upon request. To obtain a copy of
these documents, write to or call our Customer Service Center or access the
SEC's website (http://www.sec.gov).
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THE FIXED ACCOUNT IS NOT A BANK DEPOSIT AND IS NOT INSURED OR
GUARANTEED BY ANY BANK OR BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY.
THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR A
VARIABLE CONTRACT.
Fixed Account II--121813
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TABLE OF CONTENTS
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PAGE
Fees and Expenses...................................................... 2
Golden American Life Insurance Company................................. 2
Financial Statements................................................... 2
The Fixed Interest Allocation.......................................... 2
Selecting a Guaranteed Interest Period.............................. 3
Guaranteed Interest Rates........................................... 3
Transfers from a Fixed Interest Allocation.......................... 3
Withdrawals from a Fixed Interest Allocation........................ 4
Market Value Adjustment............................................. 4
Special Funds.......................................................... 5
The Annuity Contract................................................... 5
Contract Value in the Fixed Interest Allocations.................... 5
Cash Surrender Value................................................ 6
Withdrawals............................................................ 6
Regular Withdrawals................................................. 6
Systematic Withdrawals.............................................. 6
Fixed Dollar Systematic Withdrawal Feature.......................... 7
IRA Withdrawals..................................................... 7
Transfers Among Your Investments....................................... 7
Dollar Cost Averaging from Fixed Interest Allocations............... 8
Charges and Fees....................................................... 8
Death Benefit and Optional Riders...................................... 9
Other Contract Provisions.............................................. 9
Suspension of Payments.............................................. 9
Other Information...................................................... 9
State Regulation.................................................... 9
Legal Proceedings................................................... 9
Legal Matters....................................................... 9
Experts............................................................. 9
Federal Tax Considerations............................................. 9
More Information About Golden American Life Insurance Company.......... 10
Financial Statements of Golden American Life Insurance Company.........
Appendix A
Market Value Adjustment Examples.................................... A1
Fixed Account II--121813
i
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FEES AND EXPENSES
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The variable contract has insurance features and investment features, and there
are charges related to each. For more information about these contract fees and
expenses please refer to the Contract prospectus.
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GOLDEN AMERICAN LIFE INSURANCE COMPANY
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Golden American Life Insurance Company is a Delaware stock life insurance
company, which was originally incorporated in Minnesota on January 2, 1973. As
of December 31, 2000, Golden American became a wholly owned subsidiary of
Equitable Life Insurance Company of Iowa ("Equitable Life"). Equitable Life is a
wholly owned subsidiary of Equitable of Iowa Companies, Inc. ("Equitable of
Iowa") which in turn is a wholly owned subsidiary of ING Groep N.V. ("ING"), a
global financial services holding company based in The Netherlands. Golden
American is authorized to sell insurance and annuities in all states, except New
York, and the District of Columbia. In May 1996, Golden American established a
subsidiary, First Golden American Life Insurance Company of New York, which was
authorized to sell annuities in New York and Delaware. Effective April 1, 2002
First Golden was merged into ReliaStar Life Insurance Company of New York, an
affiliate. Golden American's consolidated financial statements appear in this
prospectus. Equitable of Iowa is the holding company for Equitable Life,
Directed Services, Inc., the investment manager of the GCG Trust and the
distributor of the Contracts, and other interests.
Our principal office is located at 1475 Dunwoody Drive, West Chester,
Pennsylvania 19380.
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FINANCIAL STATEMENTS
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The audited consolidated financial statements of Golden American as of December
31, 2001, and for each of the three years in the period ended December 31, 2001,
are included in this prospectus.
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THE FIXED INTEREST ALLOCATION
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You may allocate premium payments and transfer your Contract value to the
guaranteed interest periods of the Fixed Account during the accumulation period
as described in the prospectus for the Contract. Every time you allocate money
to the Fixed Account, we set up a Fixed Interest Allocation for the guaranteed
interest period you select. We currently offer guaranteed interest periods of
1,3, 5, 7 and 10 years; we may offer additional guaranteed interest periods;
and/or may not offer all these periods under all Contracts now or in the future.
You may select one or more guaranteed interest periods at any one time. We will
credit your Fixed Interest Allocation with a guaranteed interest rate for the
interest period you select, so long as you do not withdraw money from that Fixed
Interest Allocation before the end of the guaranteed interest period. Each
guaranteed interest period ends on its maturity date which is the last day of
the month in which the interest period is scheduled to expire.
If you surrender, withdraw, transfer or annuitize your investment in a Fixed
Interest Allocation more than 30 days before the end of the guaranteed interest
period, we will apply a Market Value Adjustment to the transaction. A Market
Value Adjustment could increase or decrease the amount you surrender, withdraw,
transfer or annuitize, depending on current interest rates at the time of the
transaction. You bear the risk that you may receive less than your principal
because of the Market Value Adjustment.
Assets supporting amounts allocated to the Fixed Account are available to fund
the claims of all classes of our customers, contract owners and other creditors.
Interests under your Contract relating to the Fixed Account are registered under
the Securities Act of 1933, but the Fixed Account is not registered.
Fixed Account II--121813
2
SELECTING A GUARANTEED INTEREST PERIOD
You may select one or more Fixed Interest Allocations with specified guaranteed
interest periods. A guaranteed interest period is the period that a rate of
interest is guaranteed to be credited to your Fixed Interest Allocation. We may
at any time decrease or increase the number of guaranteed interest periods
offered. In addition, we may offer DCA Fixed Interest Allocations, which are
6-month and 1-year Fixed Interest Allocations available exclusively in
connection with our dollar cost averaging program. For more information on DCA
Fixed Interest Allocations, see "Transfers Among Your Investments -- Dollar Cost
Averaging from Fixed Interest Allocations."
Your Contract value in the Fixed Account is the sum of your Fixed Interest
Allocations and the interest credited as adjusted for any withdrawals, transfers
or other charges we may impose, including any Market Value Adjustment. Your
Fixed Interest Allocation will be credited with the guaranteed interest rate in
effect for the guaranteed interest period you selected when we receive and
accept your premium or reallocation of Contract value. We will credit interest
daily at a rate that yields the quoted guaranteed interest rate.
GUARANTEED INTEREST RATES
Each Fixed Interest Allocation will have an interest rate that is guaranteed as
long as you do not take your money out until its maturity date. We do not have a
specific formula for establishing the guaranteed interest rates for the
different guaranteed interest periods. We determine guaranteed interest rates at
our sole discretion. To find out the current guaranteed interest rate for a
guaranteed interest period you are interested in, please contact our Customer
Service Center or your registered representative. The determination may be
influenced by the interest rates on fixed income investments in which we may
invest with the amounts we receive under the Contracts. We will invest these
amounts primarily in investment-grade fixed income securities (i.e., rated by
Standard & Poor's rating system to be suitable for prudent investors) although
we are not obligated to invest according to any particular strategy, except as
may be required by applicable law. You will have no direct or indirect interest
in these investments. We will also consider other factors in determining the
guaranteed interest rates, including regulatory and tax requirements, sales
commissions and administrative expenses borne by us, general economic trends and
competitive factors. We cannot predict the level of future interest rates but no
Fixed Interest Allocation will ever have a guaranteed interest rate declared of
less than 3% per year.
We may from time to time at our discretion offer interest rate specials for new
premiums that are higher than the current base interest rate then offered.
Renewal rates for such rate specials will be based on the base interest rate and
not on the special rates initially declared.
TRANSFERS FROM A FIXED INTEREST ALLOCATION
You may transfer your Contract value in a Fixed Interest Allocation to one or
more new Fixed Interest Allocations with new guaranteed interest periods, or to
any of the subaccounts of Golden American's Separate Account B as described in
the Contract prospectus. We will transfer amounts from your Fixed Interest
Allocations starting with the guaranteed interest period nearest its maturity
date, until we have honored your transfer request.
The minimum amount that you can transfer to or from any Fixed Interest
Allocation is $100. If a transfer request would reduce the Contract value
remaining in a Fixed Interest Allocation to less than $100, we will treat such
transfer request as a request to transfer the entire Contract value in such
Fixed Interest Allocation. Transfers from a Fixed Interest Allocation may be
subject to a Market Value Adjustment. If you have a special Fixed Interest
Allocation that was offered exclusively with our dollar cost averaging program,
cancelling dollar cost averaging will cause a transfer of the entire Contract
value in such Fixed Interest Allocation to the Liquid Asset subaccount, and such
a transfer will be subject to a Market Value Adjustment.
On the maturity date of a guaranteed interest period, you may transfer amounts
from the applicable Fixed Interest Allocation to the subaccounts and/or to new
Fixed Interest Allocations with guaranteed interest periods of any length we are
offering at that time. You may not, however, transfer amounts to any Fixed
Interest Allocation with a guaranteed interest period that extends beyond the
annuity start date.
Fixed Account II--121813
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At least 30 calendar days before a maturity date of any of your Fixed Interest
Allocations, or earlier if required by state law, we will send you a notice of
the guaranteed interest periods that are available. You must notify us which
subaccounts or new guaranteed interest periods you have selected before the
maturity date of your Fixed Interest Allocations. If we do not receive timely
instructions from you, we will transfer the Contract value in the maturing Fixed
Interest Allocation to a new Fixed Interest Allocation with a guaranteed
interest period that is the same as the expiring guaranteed interest period. If
such guaranteed interest period is not available or would go beyond the annuity
start date, we will transfer your Contract value in the maturing Fixed Interest
Allocation to the next shortest guaranteed interest period which does not go
beyond the annuity start date. If no such guaranteed interest period is
available, we will transfer the Contract value to a subaccount specially
designated by the Company for such purpose. Currently we use the Liquid Asset
subaccount for such purpose.
Please be aware that the benefit we pay under certain optional benefit riders
will be adjusted by any transfers you make to and from the Fixed Interest
Allocations during specified periods while the rider is in effect. See "Optional
Riders" in the Contract prospectus.
WITHDRAWALS FROM A FIXED INTEREST ALLOCATION
During the accumulation phase, you may withdraw a portion of your Contract value
in any Fixed Interest Allocation. You may make systematic withdrawals of only
the interest earned during the prior month, quarter or year, depending on the
frequency chosen, from a Fixed Interest Allocation under our systematic
withdrawal option. Systematic withdrawals from a Fixed Interest Allocation are
not permitted if such Fixed Interest Allocation is currently participating in
the dollar cost averaging program. A withdrawal from a Fixed Interest Allocation
may be subject to a Market Value Adjustment and a contract surrender charge. Be
aware that withdrawals may have federal income tax consequences, including a 10%
penalty tax, as well as state income tax consequences.
If you tell us the Fixed Interest Allocation from which your withdrawal will be
made, we will assess the withdrawal against that Fixed Interest Allocation. If
you do not, we will assess your withdrawal against the subaccounts in which you
are invested, unless the withdrawal exceeds the Contract value in the
subaccounts. If the withdrawal exceeds the Contract value in those subaccounts,
we will deduct your withdrawal from your Fixed Interest Allocations starting
with the guaranteed interest periods nearest their maturity dates until we have
honored your request.
Please be aware that the benefit we pay under any of the optional benefit riders
will be reduced by any withdrawals you made from the Fixed Interest Allocations
during the period while the rider is in effect. See "Optional Riders" in the
Contract prospectus.
MARKET VALUE ADJUSTMENT
A Market Value Adjustment may decrease, increase or have no effect on your
Contract value. We will apply a Market Value Adjustment (i) whenever you
withdraw or transfer money from a Fixed Interest Allocation (unless made within
30 days before the maturity date of the applicable guaranteed interest period,
or under the systematic withdrawal or dollar cost averaging program) and (ii) if
on the annuity start date a guaranteed interest period for any Fixed Interest
Allocation does not end on or within 30 days of the annuity start date.
We determine the Market Value Adjustment by multiplying the amount you withdraw,
transfer or apply to an income plan by the following factor:
( (1+I)/1+J+.0050 )^N/365 - 1
Fixed Account II--121813
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Where,
o "I" is the Index Rate for a Fixed Interest Allocation on the first day
of the guaranteed interest period;
o "J" is the Index Rate for a new Fixed Interest Allocation with a
guaranteed interest period equal to the time remaining (rounded up to
the next full year) in the guaranteed interest period, except for a
Fixed Interest Allocation of 6 months, where "J" is, at the time of
calculation, the lesser of the Index Rate for a new Fixed Interest
Allocation with (i) a 6-month guaranteed interest period, or (ii) a
1-year guaranteed interest period; and
o "N" is the remaining number of days in the guaranteed interest period
at the time of calculation.
The Index Rate is the average of the Ask Yields for U.S. Treasury Strips as
quoted by a national quoting service for a period equal to the applicable
guaranteed interest period. The average currently is based on the period
starting from the 22nd day of the calendar month two months prior to the month
of the Index Rate determination and ending the 21st day of the calendar month
immediately before the month of determination. We currently calculate the Index
Rate once each calendar month but have the right to calculate it more
frequently. The Index Rate will always be based on a period of at least 28 days.
If the Ask Yields are no longer available, we will determine the Index Rate by
using a suitable and approved, if required, replacement method.
A Market Value Adjustment may be positive, negative or result in no change. In
general, if interest rates are rising, you bear the risk that any Market Value
Adjustment will likely be negative and reduce your Contract value. On the other
hand, if interest rates are falling, it is more likely that you will receive a
positive Market Value Adjustment that increases your Contract value. In the
event of a full surrender, transfer or annuitization from a Fixed Interest
Allocation, we will add or subtract any Market Value Adjustment from the amount
surrendered, transferred or annuitized. In the event of a partial withdrawal,
transfer or annuitization, we will add or subtract any Market Value Adjustment
from the total amount withdrawn, transferred or annuitized in order to provide
the amount requested. If a negative Market Value Adjustment exceeds your
Contract value in the Fixed Interest Allocation, we will consider your request
to be a full surrender, transfer or annuitization of the Fixed Interest
Allocation.
Several examples which illustrate how the Market Value Adjustment works are
included in Appendix A.
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SPECIAL FUNDS
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We use the term Special Funds in the discussion of the enhanced death benefit
options and the optional riders. The Special Funds currently include Fixed
Interest Allocations and certain variable subaccounts as described in your
Contract prospectus. The Company may, at any time, designate any new and/or
existing subaccount as a Special Fund with 30 days notice with respect to new
premiums added or transfers to such subaccount. Allocations to Special Funds
will not affect the death benefit that may be available under the earnings
multiplier benefit rider. Designation of a subaccount as a Special Fund may vary
by benefit. For example, a subaccount may be designated a Special Fund for
purposes of calculating a living benefit, but not a death benefit or for
calculating one death benefit and not another.
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THE ANNUITY CONTRACT
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The Contract is described in another prospectus. This prospectus describes the
Fixed Account and the operations of any Fixed Interest Allocation under your
Contract.
CONTRACT VALUE IN THE FIXED INTEREST ALLOCATIONS. On the contract date, the
Contract value in any Fixed Interest Allocation in which you are invested is
equal to the portion of the initial premium paid and
Fixed Account II--121813
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designated for allocation to the Fixed Interest Allocation. On each business day
after the contract date, we calculate the amount of Contract value in each Fixed
Interest Allocation as follows:
(1) We take the Contract value in the Fixed Interest Allocation at the end
of the preceding business day.
(2) We credit a daily rate of interest on (1) at the guaranteed rate since
the preceding business day.
(3) We add (1) and
(4) We subtract from (3) any transfers from that Fixed Interest
Allocation.
(5) We subtract from (4) any withdrawals, and then subtract any contract
fees (including any rider charges) and premium taxes.
Additional premium payments and transfers allocated to the Fixed Account will be
placed in a new Fixed Interest Allocation. The Contract value on the date of
allocation will be the amount allocated.
CASH SURRENDER VALUE
The cash surrender value is the amount you receive when you surrender the
Contract. The cash surrender value will fluctuate daily based on the interest
credited to Fixed Interest Allocations, any Market Value Adjustment, and any
surrender charge. We do not guarantee any minimum cash surrender value. On any
date during the accumulation phase, we calculate the cash surrender value as
follows: we start with your Contract value, then we adjust for any Market Value
Adjustment, and then we deduct any surrender charge, any charge for premium
taxes, the annual contract administrative fee (unless waived), and any optional
benefit rider charge, and any other charges incurred but not yet deducted.
Several examples which illustrate how the Market Value Adjustment works are
included in Appendix A.
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WITHDRAWALS
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Any time during the accumulation phase and before the death of the contract
owner, except under certain qualified contracts, you may withdraw all or part of
your money. Keep in mind that if you request a withdrawal for more than 90% of
the cash surrender value, we will treat it as a request to surrender the
Contract.
You need to submit to us a written request specifying the Fixed Interest
Allocations or subaccounts from which amounts are to be withdrawn, otherwise the
withdrawal will be made on a pro rata basis from all of the allocations and
subaccounts in which you are invested. If there is not enough Contract value in
the subaccounts, we will deduct the balance of the withdrawal from your Fixed
Interest Allocations starting with the guaranteed interest periods nearest their
maturity dates until we have honored your request. We will apply a Market Value
Adjustment to any withdrawal from your Fixed Interest Allocation taken more than
30 days before its maturity date. We will determine the Contract value as of the
close of business on the day we receive your withdrawal request at our Customer
Service Center. The Contract value may be more or less than the premium payments
made.
We offer the following three withdrawal options:
REGULAR WITHDRAWALS
After the free look period, you may make regular withdrawals. Each withdrawal
must be a minimum of $100. We will apply a Market Value Adjustment to any
regular withdrawal from a Fixed Interest Allocation that is taken more than 30
days before its maturity date.
Fixed Account II--121813
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SYSTEMATIC WITHDRAWALS
See the Contract prospectus for general information on Systematic Withdrawals.
Systematic withdrawals from Fixed Interest Allocations are limited to interest
earnings during the prior month, quarter, or year, depending on the frequency
you chose. Systematic withdrawals are not subject to a Market Value Adjustment,
unless you have added the Fixed Dollar Systematic Withdrawal Feature discussed
below and the payments exceed interest earnings. Systematic withdrawals from
Fixed Interest Allocations under the Fixed Dollar Systematic Withdrawal Feature
are available only in connection with Section 72(q) and 72(t) distributions. A
Fixed Interest Allocation may not participate in both the systematic withdrawal
option and the dollar cost averaging program at the same time.
FIXED DOLLAR SYSTEMATIC WITHDRAWAL FEATURE. You may add the Fixed Dollar
Systematic Withdrawal Feature to your regular fixed dollar systematic withdrawal
program. This feature allows you to receive a systematic withdrawal in a fixed
dollar amount regardless of any Market Value Adjustments. Systematic withdrawals
from Fixed Interest Allocations under the Fixed Dollar Systematic Withdrawal
Feature are available only in connection with Section 72(q) and 72(t)
distributions. We will assess a Market Value Adjustment on the withdrawal date
if the withdrawal from a Fixed Interest Allocation exceeds your interest
earnings on the withdrawal date. We will adjust the amount withdrawn to include
any Market Value Adjustment so that the amount of each systematic withdrawal
remains fixed, unless you direct otherwise.
IRA WITHDRAWALS
See the Contract prospectus for general information on IRA Withdrawals.
An IRA withdrawal from a Fixed Interest Allocation in excess of the amount
allowed under systematic withdrawals will be subject to a Market Value
Adjustment.
CONSULT YOUR TAX ADVISER REGARDING THE TAX CONSEQUENCES ASSOCIATED WITH TAKING
WITHDRAWALS. You are responsible for determining that withdrawals comply with
applicable law. A withdrawal made before the taxpayer reaches age 59 1/2 may
result in a 10% penalty tax. See "Federal Tax Considerations" in the Contract
prospectus for more details.
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TRANSFERS AMONG YOUR INVESTMENTS
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You may transfer your Contract value among the subaccounts in which you are
invested and your Fixed Interest Allocations at the end of the free look period
until the annuity start date. See the Contract prospectus for general
information regarding transfers including transfers by third parties. We will
apply a Market Value Adjustment to transfers from a Fixed Interest Allocation
taken more than 30 days before its maturity date, unless the transfer is made
under the dollar cost averaging program. Keep in mind that transfers between
Special Funds and other investment portfolios may negatively impact your death
benefit or rider benefits.
If you allocate Contract value to an investment option that has been designated
as a Restricted Fund, your ability to transfer Contract value to the Restricted
Fund may be limited. A transfer to the Restricted Funds will not be permitted to
the extent that it would increase the Contract value in the Restricted Fund to
more than the applicable limits following the transfer. We do not limit
transfers from Restricted Funds. If the result of multiple reallocations is to
lower the percentage of total Contract value in the Restricted Fund, the
reallocation will be permitted even if the percentage of Contract value in the
Restricted Fund is greater than the limit.
Please be aware that the benefit we pay under an optional benefit rider may be
affected by certain transfers you make while the rider is in effect. Transfers,
including those involving Special Funds, may also affect your optional rider
base. See "The Annuity Contract -- Optional Riders" in the Contract prospectus.
Fixed Account II--121813
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Transfers will be based on values at the end of the business day in which the
transfer request is received at our Customer Service Center.
The minimum amount that you may transfer is $100 or, if less, your entire
Contract value held in a subaccount or a Fixed Interest Allocation.
DOLLAR COST AVERAGING FROM FIXED INTEREST ALLOCATIONS
You may elect to participate in our dollar cost averaging program if you have at
least $1,200 of Contract value in Fixed Account Interest Allocations with a
guaranteed interest period of 1 year or less. The Fixed Interest Allocations
serve as the source accounts from which we will, on a monthly basis,
automatically transfer a set dollar amount of money to other Fixed Interest
Allocations or contract investment portfolio subaccounts selected by you.
The dollar cost averaging program is designed to lessen the impact of market
fluctuation on your investment. Since we transfer the same dollar amount to
subaccounts each month, more units of a subaccount are purchased if the value of
its unit is low and fewer units are purchased if the value of its unit is high.
Therefore, a lower than average value per unit may be achieved over the long
term. However, we cannot guarantee this. When you elect the dollar cost
averaging program, you are continuously investing in securities regardless of
fluctuating price levels. You should consider your tolerance for investing
through periods of fluctuating price levels.
You elect the dollar amount you want transferred under this program. Each
monthly transfer must be at least $100. You may change the transfer amount once
each contract year.
Transfers from a Fixed Interest Allocation under the dollar cost averaging
program are not subject to a Market Value Adjustment.
If you do not specify the subaccounts to which the dollar amount of the source
account is to be transferred, we will transfer the money to the subaccounts in
which you are invested on a proportional basis. The transfer date is the same
day each month as your contract date. If, on any transfer date, your Contract
value in a source account is equal or less than the amount you have elected to
have transferred, the entire amount will be transferred and the program will
end. You may terminate the dollar cost averaging program at any time by sending
satisfactory notice to our Customer Service Center at least 7 days before the
next transfer date. A Fixed Interest Allocation may not participate in the
dollar cost averaging program and in systematic withdrawals at the same time.
See "Dollar Cost Averaging" in the Contract prospectus for a discussion of
transferring to a Restricted Fund.
We may in the future offer additional subaccounts or withdraw any subaccount or
Fixed Interest Allocation to or from the dollar cost averaging program or
otherwise modify, suspend or terminate this program. Of course, such change will
not affect any dollar cost averaging programs in operation at the time.
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CHARGES AND FEES
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The Contract has insurance features and investment features, and there are
charges related to each. For the insurance features, the Company deducts a
mortality and expense risk charge, an asset-based administrative charge, and an
annual contract administrative charge of $40. You may also purchase optional
benefit riders, charges for which are deducted from your Contract value. We
deduct the mortality and expense risk charge and the asset-based administrative
charges daily directly from your Contract value in the subaccounts and in the
case of the earnings multiplier benefit rider from your Fixed Interest
Allocations, as well.
When deducting the other contract charges and rider charges, if the value in the
subaccounts is insufficient, the contract charges and rider charge will be
deducted from the Fixed Interest Allocations starting with the guaranteed
interest periods nearest their maturity dates until the charge has been paid and
the amount deducted may be subject to a Market Value Adjustment. See the
Contract prospectus for more information.
Fixed Account II--121813
8
- --------------------------------------------------------------------------------
DEATH BENEFIT AND OPTIONAL RIDERS
- --------------------------------------------------------------------------------
Please refer to your Contract prospectus for descriptions of benefits and
optional riders under the Contract and the effect of your Fixed Interest
Allocations on those benefits and riders. For purposes of calculating the death
benefits and optional riders, certain investment portfolios and the Fixed
Account are designated as "Special Funds." Selecting a Special Fund may limit or
reduce the death benefit.
- --------------------------------------------------------------------------------
OTHER CONTRACT PROVISIONS
- --------------------------------------------------------------------------------
SUSPENSION OF PAYMENTS
We have the right to delay payment of amounts from a Fixed Interest Allocation
for up to 6 months.
- --------------------------------------------------------------------------------
OTHER INFORMATION
- --------------------------------------------------------------------------------
STATE REGULATION
We are regulated by the Insurance Department of the State of Delaware. We are
also subject to the insurance laws and regulations of all jurisdictions where we
do business. We are required to submit annual statements of our operations,
including financial statements, to the Insurance Departments of the various
jurisdictions in which we do business to determine solvency and compliance with
state insurance laws and regulations.
LEGAL PROCEEDINGS
The Company, like other insurance companies, may be involved in lawsuits,
including class action lawsuits. In some class action and other lawsuits
involving insurers, substantial damages have been sought and/or material
settlement payments have been made. We believe that currently there are no
pending or threatened lawsuits that are reasonably likely to have a material
adverse impact on the Company or Separate Account B.
LEGAL MATTERS
The legal validity of the Contracts was passed on by Kimberly J. Smith,
Executive Vice President, General Counsel and Assistant Secretary, Golden
American.
EXPERTS
The audited consolidated financial statements of Golden American at December 31,
2001 and 2000 and for each of the three years in the period ended December 31,
2001 appearing in this prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing in this prospectus and in the Registration Statement, and are included
or incorporated by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
- --------------------------------------------------------------------------------
FEDERAL TAX CONSIDERATIONS
- --------------------------------------------------------------------------------
For a general description of the federal income tax considerations associated
with the Contract please refer to the Contract prospectus. The "Federal Tax
Considerations" section of the Contract prospectus and does not purport to be
complete or to cover all tax situations. The discussion is not intended as tax
advice. You should consult your counsel or other competent tax advisers for more
complete information. The discussion is based upon our understanding of the
present federal income tax laws. We do not make any representations as to the
likelihood of continuation of the present federal income tax laws or as to how
they may be interpreted by the IRS.
Fixed Account II--121813
9
- --------------------------------------------------------------------------------
MORE INFORMATION ABOUT GOLDEN AMERICAN LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
The following selected financial data prepared in accordance with generally
accepted accounting principles ("GAAP") for Golden American should be read in
conjunction with the financial statements and notes thereto included in this
prospectus.
On October 24, 1997, ("the Merger Date") PFHI Holdings, Inc. ("PFHI"), a
Delaware corporation, acquired all of the outstanding capital stock of
Equitable of Iowa Companies ("Equitable of Iowa"), according to a merger
agreement among Equitable of Iowa, PFHI and ING Groep N.V. (the "ING
acquisition"). On August 13, 1996, Equitable of Iowa acquired all of the
outstanding capital stock of BT Variable, Inc., then the parent of Golden
American (the "Equitable acquisition"). For financial statement purposes, the
ING acquisition was accounted for as a purchase effective October 25, 1997 and
the Equitable acquisition was accounted for as a purchase effective August 14,
1996. As a result, the financial data presented below for periods after October
24, 1997, are presented on the Post-Merger new basis of accounting, for the
period August 14, 1996 through October 24, 1997, are presented on the
Post-Acquisition basis of accounting, and for August 13, 1996 and prior periods
are presented on the Pre-Acquisition basis of accounting.
SELECTED GAAP BASIS FINANCIAL DATA
(IN THOUSANDS)
POST-MERGER
----------------------------------------------------------------------------
For the Period
For the Year For the Year For the Year For the Year October 25,
Ended Ended Ended Ended 1997 through
December 31, December 31, December 31, December 31, December 31,
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
Annuity and Interest
Sensitive Life Product
Charges............................ $ 163,805 $ 144,877 $ 82,935 $ 39,119 $ 3,834
Net Income (Loss) before
Federal Income Tax................. $ (3,778) $ 32,416 $ 19,291 $ 9,907 $ (279
Net Income (Loss)..................... $ (3,954) $ 19,180 $ 11,214 $ 5,074 $ (425)
Total Assets.......................... $ 14,370,642 $ 11,860,054 $ 9,392,857 $ 4,754,623 $ 2,446,395
Total Liabilities..................... $ 13,552,813 $ 11,242,917 $ 8,915,008 $ 4,400,729 $ 2,219,082
Total Stockholder's Equity............ $ 817,829 $ 617,137 $ 477,849 $ 353,894 $ 227,313
POST-ACQUISITION
----------------
For the Period
January 1,1997
through
October 24,
1997
----------------
Annuity and Interest
Sensitive Life Product Charges.......................... $ 18,288
Net Income (Loss) before Federal Income Tax................ $ (608)
Net Income (Loss)........................................... $ 729
Total Assets................................................ N/A
Total Liabilities........................................... N/A
Total Stockholder's Equity.................................. N/A
1
BUSINESS ENVIRONMENT
The current business and regulatory environment presents many challenges to the
insurance industry. The variable and fixed annuity competitive environment
remains intense and is dominated by a number of large highly-rated insurance
companies. Increasing competition from traditional insurance carriers as well as
banks and mutual fund companies offers consumers many choices. The economic
environment during 2001 was characterized by a relatively weak economy, low
interest rates and a volatile equity market which experienced a major decline.
However, there is an aging U.S. population which is increasingly concerned about
retirement, estate planning, maintaining their standard of living in retirement;
and potential reductions in government and employer-provided benefits at
retirement, as well as lower public confidence in the adequacy of those
benefits. Despite an economic downturn in the near term, these factors should
contribute to wealth accumulation needs.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
The purpose of this section is to discuss and analyze Golden American's
consolidated results of operations. In addition, some analysis and information
regarding financial condition and liquidity and capital resources is provided.
This analysis should be read jointly with the consolidated financial statements,
related notes, and the Cautionary Statement Regarding Forward-Looking
Statements, which appear elsewhere in this report. Golden American reports
financial results on a consolidated basis. The consolidated financial statements
include the accounts of Golden American and its wholly owned subsidiary, First
Golden.
RESULTS OF OPERATIONS
- ---------------------
2001 COMPARED TO 2000
PREMIUMS
PERCENTAGE DOLLAR
YEAR ENDED DECEMBER 31 2001 CHANGE CHANGE 2000
- -----------------------------------------------------------------------------------------------------------
(Dollars in millions)
Variable annuity premiums:
Separate account ........................................ $ 621.5 (52.5)% $ (685.8) $1,307.3
Fixed account ........................................... 1,898.1 139.3 1,105.0 793.1
--------------------------------------------
Total variable annuity premiums ............................ 2,519.6 20.0 419.2 2,100.4
Fixed annuity premiums ..................................... 3.1 -- 3.1 --
Variable life premiums ..................................... 1.5 (6.3) (0.1) 1.6
--------------------------------------------
Total premiums ............................................. $2,524.2 20.1% $ 422.2 $2,102.0
============================================
For the Companies' variable and fixed insurance contracts, premiums collected
are not reported as revenues, but as deposits to insurance liabilities. Revenues
for these products are recognized over time in the form of investment spread and
product charges.
Variable annuity premiums net of reinsurance increased 20.0% in 2001. This
increase is primarily due to sales of the Guarantee product, a registered fixed
account product introduced in the last quarter of 2000. Sales for this product
totaled $962.2 million and $139.1 million in 2001 and 2000, respectively. Also
contributing to the increase in variable annuity premiums were sales of new
variable annuity products, including GoldenSelect Landmark, SmartDesign
Advantage, SmartDesign Variable Annuity, and Retirement Solutions-ING Rollover
Choice. Offsetting these increases are higher ceded variable annuity separate
account premiums from $1.8 billion in 2000 to $1.9 billion in 2001. Further,
there was a reduction of $587.4 million in the sales of variable annuity
separate account products in 2001.
2
During 2001, First Golden began selling two fixed annuity products, Flex Annuity
and Multi-Year Guarantee Annuity ("MYGA").
Premiums, net of reinsurance, for variable products from two significant
broker/dealers having at least ten percent of total sales for the year ended
December 31, 2001 totaled $538.1 million (21% of total premiums), compared to
$235.3 million (11%) from a significant broker/dealer for the year ended
December 31, 2000. Gross premiums for variable products from two significant
broker/dealers (having at least ten percent of total sales) for the year ended
December 31, 2001, totaled $985.7 million (22%) of total gross premiums compared
to $831.0 million (21%), from two significant broker/dealers for the year ended
December 31, 2000.
REVENUES
PERCENTAGE DOLLAR
YEAR ENDED DECEMBER 31 2001 CHANGE CHANGE 2000
- -----------------------------------------------------------------------------------------------------------
(Dollars in millions)
Annuity and interest sensitive life product charges ........ $ 163.8 13.0% $ 18.9 $ 144.9
Management fee revenue ..................................... 25.1 9.1 2.1 23.0
Net investment income ...................................... 94.4 47.3 30.3 64.1
Realized losses on investments ............................. (6.5) 1.5 0.1 (6.6)
--------------------------------------------
$ 276.8 22.8% $ 51.4 $ 225.4
============================================
Total revenues increased 22.8%, or $51.4 million, to $276.8 million in 2001.
Annuity and interest sensitive life product charges increased 13.0%, or $18.9
million, to $163.8 million in 2001, primarily due to additional fees earned from
the higher average level of assets in the variable separate accounts.
Golden American provides certain managerial and supervisory services to Directed
Services, Inc. ("DSI"), a wholly owned subsidiary of EIC. The fee paid to Golden
American for these services, which is calculated as a percentage of average
assets in the variable separate accounts, was $23.1 million for 2001 and $21.3
million for 2000. This increase was due to the increasing average assets in the
variable separate accounts.
Net investment income increased 47.3%, or $30.3 million, to $94.4 million in
2001 from $64.1 million in 2000. This was due to a growth during 2001 in
invested assets backing the fixed account options within the variable products.
This increase is mainly related to the introduction of the Guarantee product at
the end of 2000.
During 2001, the Companies had net realized losses on investments of $6.5
million, mainly due to write downs of $4.4 million from eleven impaired fixed
maturities, as well as sales of equity securities. In 2000, the Companies had
net realized losses on investments of $6.6 million, including a $142,000 write
down of an impaired fixed maturity.
3
EXPENSES
PERCENTAGE DOLLAR
YEAR ENDED DECEMBER 31 2001 CHANGE CHANGE 2000
- -----------------------------------------------------------------------------------------------------------
(Dollars in millions)
Insurance benefits and expenses:
Annuity and interest sensitive life benefits:
Interest credited to account balances ................. $ 191.9 4.9% $ 8.9 $ 183.0
Guaranteed benefits reserve change .................... 14.0 15.7 1.9 12.1
Benefit claims incurred in excess of account balances . 3.2 (34.7) (1.7) 4.9
Underwriting, acquisition, and insurance expenses:
Commissions ........................................... 232.4 8.8 18.7 213.7
General expenses ...................................... 113.2 33.3 28.3 84.9
Insurance taxes, state licenses, and fees ............. 6.6 46.7 2.1 4.5
Policy acquisition costs deferred ..................... (128.2) 23.9 40.2 (168.4)
Amortization:
Deferred policy acquisition costs ................... 45.2 (18.1) (10.0) 55.2
Value of purchased insurance in force ............... 4.4 (8.3) (0.4) 4.8
Goodwill ............................................ 4.2 -- -- 4.2
Expenses and charges reimbursed under modified
coinsurance agreements .............................. (225.6) 0.1 0.2 (225.8)
--------------------------------------------
$ 261.3 51.0% $ 88.2 $ 173.1
============================================
Total insurance benefits and expenses increased 51.0%, or $88.2 million, in 2001
from $173.1 million in 2000. Interest credited to account balances increased
4.9%, or $8.9 million, in 2001 from $183.0 million in 2000. This increase was
largely due to higher average account balances associated with the Companies'
fixed account options, mainly due to the introduction of the Guarantee product
in the fourth quarter of 2000. This was partially offset by lower premium
credits on the Premium Plus product within the variable separate accounts. The
premium credit payments decreased by $36.2 million due to a decrease in variable
annuity sales of the separate account product.
The guaranteed benefits reserve change was $14.0 million at December 31, 2001,
an increase of $1.9 million, mainly due to the downturn in the equity markets.
Commissions increased 8.8%, or $18.7 million, in 2001 from $213.7 million in
2000 due to increased sales of the fixed account options in 2001. Insurance
taxes, state licenses, and fees increased 46.7%, or $2.1 million, in 2001 from
$4.5 million in 2000. Changes in commissions and insurance taxes, state
licenses, and fees are generally related to changes in the level and mix or
composition of fixed and variable product sales. Most costs incurred as the
result of sales have been deferred, having little impact on current earnings.
General expenses increased 33.3%, or $28.3 million, in 2001 from $84.9 million
in 2000. The Companies use a network of wholesalers to distribute products, and
the salaries and sales bonuses of these wholesalers are included in general
expenses. The portion of these salaries and related expenses that varies
directly with production levels is deferred, thus having little impact on
current earnings. Contributing to the increase in general expenses are
additional salary expenses and cost allocations during 2001. The increase in
general expenses was partially offset by reimbursements received from the
Companies' affiliates including DSI, Equitable Life Insurance Company of Iowa ,
ING Mutual Funds Management Co., LLC, Security Life of Denver Insurance Company,
Southland Life Insurance Company, and United Life & Annuity Insurance Company,
for certain advisory, computer, and other resources and services provided by the
Companies.
The Companies' previous balances of deferred policy acquisition costs ("DPAC"),
value of purchased insurance in force ("VPIF"), and unearned revenue reserve
were eliminated and a new asset of $44.3 million
4
representing VPIF was established for all policies in force at the Merger Date.
During 2001 and 2000, VPIF was adjusted to increase amortization by $648,000 and
$1.6 million, respectively, to reflect changes in the assumptions related to the
timing of estimated gross profits. Based on current conditions and assumptions
as to the impact of future events on acquired policies in force, the expected
approximate net amortization relating to VPIF as of December 31, 2001 is $3.1
million in 2002, $2.8 million in 2003, $2.4 million in 2004, $1.9 million in
2005, and $1.4 million in 2006. Actual amortization may vary based upon changes
in assumptions and experience.
Policy acquisition costs deferred decreased $40.2 million, or 23.9%, in 2001.
The decline in the policy acquisition costs deferred was mainly due to an
increase in the amount of deferred costs that have been offset due to modified
coinsurance agreements. Further, there was a lower deferral of the premium
credit on the Premium Plus product, slightly offset by an increase in deferred
commissions. Amortization of DPAC decreased $10.0 million, or 18.1%, in 2001.
The decrease in the amortization was mainly due to the lower net amount of
deferred costs.
Expenses and charges reimbursed under modified coinsurance agreements decreased
from $225.8 million for the year ended December 31, 2000 to $225.6 million for
the year ended December 31, 2001. This reimbursement is primarily due to a
modified coinsurance agreement which was entered into during the second quarter
of 2000, with Equitable Life covering a considerable portion of Golden
American's variable annuities issued after January 1, 2000, excluding those with
an interest rate guarantee. Under this reinsurance agreement, $224.5 million and
$218.8 in expenses and charges were reimbursed during 2001 and 2000,
respectively. This reimbursement offset deferred policy acquisition costs and
non-deferrable costs related to policies reinsured under this agreement.
Interest expense decreased 3.1%, or $0.6 million, in 2001 from $19.9 million in
2000. Interest expense on a $25 million surplus note issued December 1996 and
expiring December 2026 was $2.1 million for the year ended December 31, 2001,
unchanged from the same period of 2000. Interest expense on a $60 million
surplus note issued in December 1998 and expiring December 2028 was $4.4 million
for the year ended December 31, 2001, unchanged from the year ended December 31,
2000. Interest expense on a $75 million surplus note, issued September 30, 1999
and expiring September 29, 2029 was $5.8 million for the year ended December 31,
2001, unchanged from the year ended December 31, 2000. Interest expense on a $50
million surplus note, issued December 1999 and expiring December 2029 was $4.1
million for the year ended December 31, 2001, unchanged from the year ended
December 31, 2000. Interest expense on a $35 million surplus note issued
December 1999 and expiring December 2029 was $2.8 million for the year ended
December 31, 2001, and $3.0 million for the year ended December 31, 2000. Golden
American also paid $26,000 in 2001 and $482,000 in 2000 to ING America Insurance
Holdings, Inc. ("ING AIH") for interest on a reciprocal loan agreement. Interest
expense on a revolving note payable with SunTrust Bank, Atlanta was $119,000 and
$87,000 for the years ended December 31, 2001 and 2000, respectively.
INCOME
Net loss for 2001 was $4.0 million, a decrease from net income of $19.2 million
for 2000. Comprehensive income for 2001 was $3.9 million, a decrease of $20.4
million from comprehensive income of $24.3 million for 2000.
The net loss for Golden American as determined in accordance with statutory
accounting practices was $156.4 million in 2001, $71.1 million in 2000, and
$85.6 million in 1999. The increase in statutory loss during 2001 was mainly due
to increases in expense allocations, acquisition costs, guaranteed death and
living benefit reserves, and initial reserves resulting from higher premiums
during 2001 as compared to 2000.
5
2000 COMPARED TO 1999
PREMIUMS
PERCENTAGE DOLLAR
YEAR ENDED DECEMBER 31 2000 CHANGE CHANGE 1999
- -----------------------------------------------------------------------------------------------------------
(Dollars in millions)
Variable annuity premiums:
Separate account ........................................ $1,307.3 (48.0)% $(1,204.4) $2,511.7
Fixed account ........................................... 793.1 2.9 22.4 770.7
Total variable annuity premiums ............................ 2,100.4 (36.0) (1,182.0) 3,282.4
Variable life premiums ..................................... 1.6 (81.8) (7.0) 8.6
-------- -------- -------- --------
Total premiums ............................................. $2,102.0 (36.1)% $(1,189.0) $3,291.0
======== ======== ======== ========
For the Companies' variable insurance contracts, premiums collected are not
reported as revenues, but as deposits to insurance liabilities. Revenues for
these products are recognized over time in the form of investment spread and
product charges.
Variable annuity separate account premiums decreased 48.0% in 2000. Excluded
from the variable annuity separate account premiums above are $1,787.9 million
and $97.9 million for the years ended December 31, 2000 and 1999, respectively,
related to modified coinsurance agreements. The fixed account portion of the
Companies' variable annuity premiums increased 2.9% in 2000. Excluding the
effect of the modified coinsurance agreements, the increase in premiums resulted
from increased sales of existing annuity products and from the introduction of a
new annuity product during 2000 called GoldenSelect Guarantee Annuity.
Variable life premiums decreased 81.8% in 2000. In August 1999, Golden American
discontinued offering variable life products, but the Companies continue to
accept additional premiums from existing policyholders.
Premiums, net of reinsurance, for variable products from a significant
broker/dealer having at least ten percent of total sales for the year ended
December 31, 2000, totaled $235.3 million, or 11% of total net premiums compared
to $918.4 million, or 28%, from two significant broker/dealers for the year
ended December 31, 1999. Gross premiums for variable products from two
significant broker/dealers having at least ten percent of total sales for the
year ended December 31, 2000, totaled $831.0 million, or 21% of total gross
premiums compared to $1,018.9 million, or 30%, from two significant
broker/dealers for the year ended December 31, 1999.
REVENUES
PERCENTAGE DOLLAR
YEAR ENDED DECEMBER 31 2000 CHANGE CHANGE 1999
- -----------------------------------------------------------------------------------------------------------
(Dollars in millions)
Annuity and interest sensitive life product
charges ................................................. $ 144.9 74.7% $ 62.0 $ 82.9
Management fee revenue ..................................... 23.0 106.4 11.9 11.1
Net investment income ...................................... 64.1 8.4 4.9 59.2
Realized gains (losses) on investments ..................... (6.6) (124.2) (3.7) (2.9)
-------- -------- -------- --------
$ 225.4 50.0% $ 75.1 $ 150.3
======== ======== ======== ========
Total revenues increased 50.0%, or $75.1 million, to $225.4 million in 2000.
Annuity and interest sensitive life product charges increased 74.7%, or $62.0
million, to $144.9 million in 2000, primarily due to additional fees earned from
the increasing block of business in the separate accounts.
6
Golden American provides certain managerial and supervisory services to Directed
Services, Inc. ("DSI"), a wholly owned subsidiary of EIC. The fee paid to Golden
American for these services, which is calculated as a percentage of average
assets in the variable separate accounts, was $21.3 million for 2000 and $10.1
million for 1999. This increase is due to the increasing assets in the separate
accounts and renegotiation of the fee paid by DSI to Golden American.
Net investment income increased 8.4%, or $4.9 million, to $64.1 million in 2000
from $59.2 million in 1999, due to increasing investment yields, as well as a
larger average amount of assets backing the fixed account options within the
variable products.
During 2000, the Companies had net realized losses on investments of $6.6
million, mainly due to sales of fixed maturities, including a $142,000 write
down of an impaired fixed maturity. In 1999, the Companies had net realized
losses on investments of $2.9 million, including a $1.6 million write down of
two impaired fixed maturities.
EXPENSES
PERCENTAGE DOLLAR
YEAR ENDED DECEMBER 31 2001 CHANGE CHANGE 2000
- -----------------------------------------------------------------------------------------------------------
(Dollars in millions)
Insurance benefits and expenses:
Annuity and interest sensitive life benefits:
Interest credited to account balances ................. $ 183.0 4.4% $ 7.7 $ 175.3
Guaranteed benefits reserve charge .................... 12.1 -- 12.1 0
Benefit claims incurred in excess of
account balances .................................... 4.9 (22.4) (1.4) 6.3
Underwriting, acquisition, and insurance
expenses:
Commissions ........................................... 213.7 13.4 25.3 188.4
General expenses ...................................... 84.9 41.1 24.7 60.2
Insurance taxes, state licenses, and fees ............. 4.5 12.5 0.5 4.0
Policy acquisition costs deferred ..................... (168.4) (51.4) 178.0 (346.4)
Expenses and charges reimbursed under
modified coinsurance agreements ..................... (225.8) 2,341.7 (216.6) (9.2)
Amortization:
Deferred policy acquisition costs ................... 55.2 66.5 22.1 33.1
Value of purchased insurance in force ............... 4.8 (23.0) (1.4) 6.2
Goodwill ............................................ 3.8 -- -- 3.8
-------- -------- -------- --------
$ 172.7 41.9% $ 51.0 $ 121.7
======== ======== ======== ========
Total insurance benefits and expenses increased 41.9%, or $51.0 million, in 2000
from $121.7 million in 1999. Interest credited to account balances increased
4.4%, or $7.7 million, in 2000 from $175.3 million in 1999. The premium credit
on the Premium Plus variable annuity product increased $8.2 million to $132.0
million at December 31, 2000.
Commissions increased 13.4%, or $25.3 million, in 2000 from $188.4 million in
1999 due to increased sales of the fixed and separate account options in 2000.
Insurance taxes, state licenses, and fees increased 12.5%, or $0.5 million, in
2000 from $4.0 million in 1999. Changes in commissions and insurance taxes,
state licenses, and fees are generally related to changes in the level and
composition of variable product sales. Most costs incurred as the result of
sales have been deferred, thus having very little impact on current earnings.
General expenses increased 41.1%, or $24.7 million, in 2000 from $60.2 million
in 1999. Management expects general expenses to continue to increase in 2001 as
a result of the emphasis on expanding the salaried wholesaler distribution
network and the growth in sales. The Companies use a network of wholesalers to
distribute products, and the salaries and sales bonuses of these wholesalers are
included in
7
general expenses. The portion of these salaries and related expenses that varies
directly with production levels is deferred thus having little impact on current
earnings. The increase in general expenses was partially offset by
reimbursements received from DSI, Equitable Life Insurance Company of Iowa
("Equitable Life"), an affiliate, ING Mutual Funds Management Co., LLC, an
affiliate, Security Life of Denver Insurance Company, an affiliate, Southland
Life Insurance Company, an affiliate, and United Life & Annuity Insurance
Company, an affiliate, for certain advisory, computer, and other resources and
services provided by Golden American.
The Companies' previous balances of deferred policy acquisition costs ("DPAC"),
value of purchased insurance in force ("VPIF"), and unearned revenue reserve
were eliminated and a new asset of $44.3 million representing VPIF was
established for all policies in force at the merger date. During 2000, VPIF
established at the merger date of the Companies' Parent and ING, was adjusted to
reduce amortization by $1.6 million to reflect changes in the assumptions
related to the timing of estimated gross profits. During 1999, VPIF was adjusted
to increase amortization by $0.7 million to reflect changes in the assumptions
related to the timing of future gross profits. Amortization of DPAC increased
$22.1 million, or 66.5%, in 2000. This increase resulted from a growth in
deferred policy acquisition costs generated by expenses associated with the
large sales volume experienced since December 31, 1999. Deferred policy
acquisition costs decreased $178.0 million or 51.4% for the year ended December
31, 2000. This decrease was due to a modified coinsurance agreement which was
entered into during the second quarter of 2000, and which resulted in a $223.7
million decrease in deferred policy acquisition costs. Based on current
conditions and assumptions as to the impact of future events on acquired
policies in force, the expected approximate net amortization relating to VPIF as
of December 31, 2000, is $3.9 million in 2001, $3.6 million in 2002, $3.0
million in 2003, $2.4 million in 2004, and $1.9 million in 2005. Actual
amortization may vary based upon changes in assumptions and experience.
Expenses and charges reimbursed under modified coinsurance agreements increased
by $216.6 million to $225.8 million during 2000 as compared to the year ended
December 31, 1999. This was primarily due to a modified coinsurance agreement
which was entered into during the second quarter of 2000, with an affiliate,
Equitable Life, covering a part of the business issued after January 1, 2000.
This reinsurance agreement contributed $218.8 million to expenses and charges
reimbursed under modified coinsurance agreements during the year ended December
31, 2000. This was offset by a corresponding decrease in deferred policy
acquisition costs and reimbursement of non-deferrable costs related to policies
reinsured under this agreement.
Interest expense increased 123.4%, or $11.0 million, in 2000 from $8.9 million
in 1999. Interest expense on a $25 million surplus note issued December 1996 and
expiring December 2026 was $2.1 million for the year ended December 31, 2000,
unchanged from the same period of 1999. Interest expense on a $60 million
surplus note issued in December 1998 and expiring December 2028 was $4.4 million
for the year ended December 31, 2000, unchanged from the same period of 1999.
Interest expense on a $75 million surplus note, issued September 30, 1999 and
expiring September 29, 2029 was $5.8 million for the year ended December 31,
2000, and $1.5 million for the year ended December 31, 1999. Interest expense on
a $50 million surplus note, issued December 1999 and expiring December 2029 was
$4.1 million for the year ended December 31, 2000. Interest expense on a $35
million surplus note issued December 1999 and expiring December 2029 was $3.0
million for the year ended December 31, 2000. Golden American also paid $0.4
million in 2000 and $0.8 million in 1999 to ING America Insurance Holdings, Inc.
("ING AIH") for interest on a reciprocal loan agreement. Interest expense on a
revolving note payable with SunTrust Bank, Atlanta was $0.1 million and $0.2
million for the years ended December 31, 2000 and 1999, respectively.
INCOME. Net income for 2000 was $19.2 million, an increase of $8.0 million from
$11.2 million for 1999.
Comprehensive income for 2000 was $24.3 million, an increase of $21.3 million
from comprehensive income of $3.0 million for 1999.
8
FINANCIAL CONDITION
- -------------------
RATINGS
Currently, the Companies' ratings are A+ by A. M. Best Company, AA+ by Fitch
Ratings, and AA+ by Standard & Poor's Rating Services ("Standard & Poor's").
INVESTMENTS
The financial statement carrying value and amortized cost basis of the
Companies' total investments increased 143.3% and 139.9%, respectively, in 2001.
All of the Companies' investments, other than mortgage loans on real estate, are
carried at fair value in the Companies' financial statements. The increase in
the carrying value of the Companies' investment portfolio was mainly due to net
purchases, as well as changes in unrealized appreciation and depreciation of
fixed maturities. Growth in the cost basis of the Companies' investment
portfolio resulted from the investment of premiums from the sale of the
Companies' fixed account options mainly due to the introduction of the Guarantee
product. The Companies manage the growth of insurance operations in order to
maintain adequate capital ratios. To support the fixed account options of the
Companies' insurance products, cash flow was invested primarily in fixed
maturities and mortgage loans on real estate.
At December 31, 2001, the Companies had 18 investments in default. The
Companies' investments had an average yield of 6.3% at December 31, 2001. The
Companies estimate the total investment portfolio, excluding policy loans, had a
fair value approximately equal to 100.8% of amortized cost value at December 31,
2001.
Fixed Maturities: At December 31, 2001, the Companies had fixed maturities with
an amortized cost and an estimated fair value of $2.0 billion. The Companies
classify 100% of securities as available for sale. Net unrealized appreciation
of fixed maturities of $12.4 million was comprised of gross appreciation of
$30.0 million and gross depreciation of $17.6 million. Net unrealized holding
gains on these securities of $3.8 million were included in stockholder's equity
at December 31, 2001 (net of adjustments for VPIF of $0.5 million, DPAC of $6.0
million, and deferred income taxes of $2.1 million).
The individual securities in the Companies' fixed maturities portfolio (at
amortized cost) include investment grade securities, which include securities
issued by the U.S. government, its agencies, and corporations that are rated at
least A- by Standard & Poor's ($1.0 billion or 52.0%), that are rated BBB+ to
BBB- by Standard & Poor's ($446.8 million or 22.5%), and below investment grade
securities, which are securities issued by corporations that are rated BB+ and
lower by Standard & Poor's ($101.1 million or 5.1%). Securities not rated by
Standard & Poor's had a National Association of Insurance Commissioners ("NAIC")
rating of 1, 2, 3, 4, or 5, with 1 being the highest rating (totaling $403.5
million or 20.4%), and investments with a rating of 6 on which impairment
writedowns have been recognized ($0.3 million or 0.0%). The Companies' fixed
maturity investment portfolio had a combined yield at amortized cost of 6.5% on
December 31, 2001.
Fixed maturities rated BBB+ to BBB- may have speculative characteristics and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity of the issuer to make principal and interest payments than
is the case with higher rated fixed maturities.
At December 31, 2001, the amortized cost value of the Companies' total
investment in below investment grade securities, excluding mortgage-backed
securities, was $82.8 million, or 3.6%, of the Companies' investment portfolio.
The Companies intend to purchase additional below investment grade securities,
but do not expect the percentage of the portfolio invested in such securities to
exceed 10% of the investment portfolio. At December 31, 2001, the average yield
at amortized cost on the Companies' below investment grade portfolio was 8.5%
compared to 6.5% for the Companies' investment grade corporate bond portfolio.
The Companies estimate the fair value of the below investment grade portfolio
was $82.7 million, or 99.9% of amortized cost value, at December 31, 2001.
Below investment grade securities have different characteristics than investment
grade corporate debt securities. Risk of loss upon default by the borrower is
significantly greater with respect to below investment grade securities than
with other corporate debt securities. Below investment grade securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Also, issuers of below
9
investment grade securities usually have higher levels of debt and are more
sensitive to adverse economic conditions, such as recession or increasing
interest rates, than are investment grade issuers. The Companies attempt to
reduce the overall risk in the below investment grade portfolio, as in all
investments, through careful credit analysis, strict investment policy
guidelines, and diversification by issuer and/or guarantor and by industry.
The Companies analyze the investment portfolio, including below investment grade
securities, at least quarterly in order to determine if the Companies' ability
to realize the carrying value on any investment has been impaired. For debt and
equity securities, if impairment in value is determined to be other than
temporary (i.e., if it is probable the Companies will be unable to collect all
amounts due according to the contractual terms of the security), the cost basis
of the impaired security is written down to fair value, which becomes the new
cost basis. The amount of the write-down is included in earnings as a realized
loss. Future events may occur, or additional or updated information may be
received, which may necessitate future write-downs of securities in the
Companies' portfolio. Significant write-downs in the carrying value of
investments could materially adversely affect the Companies' net income in
future periods.
In 2001, fixed maturities designated as available for sale with a combined
amortized cost of $881.1 million were sold, called, or repaid by their issuers.
In total, net pre-tax losses from sales, calls, and repayments of fixed
maturities amounted to $0.5 million in 2001.
In 2001, Golden American determined that the carrying value of eleven impaired
fixed maturity investments exceeded their estimated net realizable value. As a
result, during 2001, Golden American recognized a total pre-tax loss of
approximately $4.4 million to reduce the carrying value of all impaired fixed
maturity investments to their net realizable value of $5.5 million.
Equity Securities: Equity securities with a cost of $8.6 million were redeemed
during 2001, resulting in a realized loss of $1.6 million. At December 31, 2001,
the Companies owned equity securities with a cost of $74,000.
Mortgage Loans on Real Estate: Mortgage loans on real estate represent 9.6% of
the Companies' investment portfolio. Mortgages outstanding at amortized cost
were $213.9 million at December 31, 2001 with an estimated fair value of $219.2
million. The Companies' mortgage loan portfolio includes 79 loans with an
average size of $2.7 million. The Companies' mortgage loans on real estate are
typically secured by occupied buildings in major metropolitan locations and are
diversified by type of property and geographic location. Mortgage loans on real
estate have been analyzed by geographical location with concentrations by state
identified as Ohio (20% in 2001 and 4% in 2000) and California (18% in 2001 and
15% in 2000). There are no other concentrations of mortgage loans on real estate
in any state exceeding ten percent of the Companies' mortgage loans investment
at December 31, 2001 and 2000. Mortgage loans on real estate have also been
analyzed by collateral type with significant concentrations identified in
multi-family apartments (36% in 2001 and 10% in 2000), industrial buildings (19%
in 2001, 35% in 2000), retail facilities (20% in 2001, 18% in 2000), and office
buildings (21% in 2001, 29% in 2000). At December 31, 2001, the average yield on
the Companies' mortgage loan portfolio was 7.1%.
At December 31, 2001, no mortgage loan on real estate was delinquent by 90 days
or more. The Companies' loan investment strategy is consistent with other life
insurance subsidiaries of ING in the United States. The Companies have
experienced a historically low default rate in their mortgage loan portfolios.
OTHER ASSETS
Reinsurance recoverables increased $22.0 million during 2001, due largely to an
increase of $14.2 million in reinsurance reserves from an intercompany
reinsurance agreement between Golden American and Security Life of Denver
International, Ltd.. On December 28, 2000, effective January 1, 2000, Golden
American entered into a reinsurance agreement with Security Life of Denver
International, Ltd., an affiliate, covering variable annuity minimum guaranteed
death benefits and minimum guaranteed living benefits. Negative equity market
returns during 2001 led to the increase in the reinsurance reserves under this
agreement.
10
Amounts due from affiliates were $20,000 and $38.8 million at December 31, 2001
and 2000, respectively. At December 31, 2000, the Companies had a receivable of
$35.0 million related to a capital contribution from EIC, which was settled
during 2001.
Accrued investment income increased $13.2 million during 2001, due to an
increase in investments in fixed maturities in 2001, which lead to an increase
in investment income from fixed maturities.
DPAC represents certain deferred costs of acquiring insurance business,
principally first year commissions and interest bonuses, premium credits, and
other expenses related to the production of business after the Merger Date. The
Companies' previous balances of DPAC and VPIF were eliminated as of the Merger
Date, and an asset representing VPIF was established for all policies in force
at the Merger Date. VPIF is amortized into income in proportion to the expected
gross profits of in force acquired business in a manner similar to DPAC
amortization. Any expenses which vary directly with the sales of the Companies'
products are deferred and amortized. At December 31, 2001, the Companies had
DPAC and VPIF balances of $709.0 million and $20.2 million, respectively, as
compared to DPAC and VPIF balances of $635.1 million and $25.9 million,
respectively, at December 31, 2000. During 2001 and 2000, the amount of policy
acquisition costs deferred was reduced due to the effects of expenses reimbursed
under the modified coinsurance agreements. See Liquidity and Capital Resources
for further information regarding the modified coinsurance agreements.
Goodwill totaling $169.0 million, representing the excess of the acquisition
cost over the fair value of net assets acquired, was established at the Merger
Date. Accumulated amortization of goodwill as of December 31, 2001 was $17.6
million.
Other assets decreased $19.2 million during 2001, due mainly to a decrease in
the receivable for securities sold.
At December 31, 2001, the Companies had $11.0 billion of separate account assets
compared to $9.8 billion at December 31, 2000. The increase in separate account
assets resulted from sales of the Companies' variable annuity products, net of
redemptions, and from net policyholder transfers to the separate account options
from the fixed account options within the variable products. The increase was
partially offset by negative equity market returns.
At December 31, 2001, the Companies had total assets of $14.4 billion, a 21.2%
increase from December 31, 2000.
LIABILITIES
Future policy benefits for annuity and interest sensitive life products
increased $1.1 billion (104.3%), to $2.2 billion reflecting net sales of the
Companies' fixed account options, net of transfers to the separate account.
Separate account liabilities increased $1.2 billion (11.5%) to $11.0 billion at
December 31, 2001. Net contributions to the separate account were partially
offset by a decrease in separate account liabilities resulting from negative
equity market returns.
On December 30, 1999, Golden American issued a $50 million, 8.179% surplus note
to Equitable Life, which matures on December 29, 2029.
On December 8, 1999, Golden American issued a $35 million, 7.979% surplus note
to First Columbine Life Insurance Company, an affiliate, which matures on
December 7, 2029.
On September 30, 1999, Golden American issued a $75 million, 7.75% surplus note
to ING AIH, which matures on September 29, 2029. On December 30, 1999, ING AIH
assigned the surplus note to Equitable Life.
On December 30, 1998, Golden American issued a $60 million, 7.25% surplus note
to Equitable Life, which matures on December 29, 2028.
11
On December 17, 1996, Golden American issued a $25 million, 8.25% surplus note
to Equitable, which matures on December 17, 2026. As a result of the merger of
Equitable into EIC, the surplus note is now payable to EIC.
Amounts due to affiliates increased by $5.2 million from $19.9 million at
December 31, 2000 to $25.1 million at December 31, 2001. This is mainly due to
an overpayment by Equitable Life to Golden American of the cash settlement of a
liability for the modified coinsurance agreement.
Other liabilities increased $55.9 million from $69.4 million at December 31,
2000 to $125.3 at December 31, 2001, due primarily to the increase in amounts
payable for securities purchased. Also contributing to this increase is the
timing of the settlement of account transfers and an increase in outstanding
checks.
In conjunction with the volume of variable annuity sales, the Companies' total
liabilities increased $2.3 billion, or 20.5%, during 2001 and totaled $13.6
billion at December 31, 2001.
The effects of inflation and changing prices on the Companies' financial
position are not material since insurance assets and liabilities are both
primarily monetary and remain in balance. An effect of inflation, which has been
low in recent years, is a decline in stockholder's equity when monetary assets
exceed monetary liabilities.
STOCKHOLDER'S EQUITY
Additional paid-in capital increased $196.8 million, or 33.7%, from December 31,
2000 to $780.4 million at December 31, 2001, due to capital contributions from
EIC.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Liquidity is the ability of the Companies to generate sufficient cash flows to
meet the cash requirements of operating, investing, and financing activities.
The Companies' principal sources of cash are variable annuity premiums and
product charges, investment income, maturing investments, proceeds from debt
issuance, and capital contributions. Primary uses of these funds are payments of
commissions and operating expenses, interest and premium credits, investment
purchases, repayment of debt, as well as withdrawals and surrenders.
Net cash provided by operating activities was $239.9 million in 2001 compared to
net cash provided by operating activities of $72.7 million in 2000. The
Companies have predominantly had negative cash flows from operating activities
since Golden American started issuing variable insurance products in 1989. These
negative operating cash flows result primarily from the funding of commissions
and other deferrable expenses related to the continued growth in the sales of
variable annuity products. For 2001 and 2000, negative operating cash flows have
been offset by the effects of a modified coinsurance agreement entered into
during the second quarter of 2000 with Equitable Life. This resulted in a net
cash settlement of $224.5 million during 2001. For 2000, this modified
coinsurance resulted in a net cash settlement of $218.8 million. A further
source of cash provided from operating activities is the decrease in other
assets and receivables from affiliates, together with an increase in other
liabilities and payables to affiliates.
Net cash used in investing activities was $1.3 billion during 2001 as compared
to net cash provided by investing activities of $49.3 million in 2000. This
increase in the net cash used in investing activities is primarily due to net
purchases of fixed maturities and mortgage loans on real estate during 2001
versus net sales for these types of investments in 2000. Net purchases of fixed
maturities reached $1.2 billion in 2001 versus net sales of $51.1 million in
2000. Net purchases of mortgage loans on real estate reached $114.3 million in
2001 versus net purchases of $0.2 million during the same period in 2000. These
investment purchases were mainly due to an increase in sales of the Companies'
fixed account options, primarily from the introduction of the Guarantee product
in the fourth quarter of 2000.
Net cash provided by financing activities was $1.1 billion during 2001 as
compared to net cash used in financing activities of $51.9 million during the
prior year. In 2001, net cash provided by financing activities
12
was positively impacted by net fixed account deposits of $1.8 billion compared
to $660.4 million in 2000 primarily due to the introduction of the Guarantee
product in the fourth quarter of 2000. In 2001, net cash provided by financing
activities was also positively impacted by an increase in capital contributions
from EIC. The Companies received $196.8 million in capital contributions from
EIC in 2001 compared to $115.0 million in 2000. Offsetting these increases,
during 2001, were net reallocations to the Companies' separate accounts, which
increased to $902.9 million from $825.9 million during the prior year.
The Companies' liquidity position is managed by maintaining adequate levels of
liquid assets, such as cash or cash equivalents and short-term investments.
Additional sources of liquidity include borrowing facilities to meet short-term
cash requirements. Golden American maintains a $65.0 million reciprocal loan
agreement with ING America Insurance Holdings, Inc. ("ING AIH"), and the
Companies have established an $85.0 million revolving note facility with
SunTrust Bank. This revolving note payable was amended and restated in April
2001 with an expiration date of May 31, 2002. Management believes that these
sources of liquidity are adequate to meet the Companies' short-term cash
obligations.
Based on current trends, the Companies expect to continue to use net cash in
operating activities, given the continued growth of annuity sales. It is
anticipated that a continuation of capital contributions from its Parent, the
issuance of additional surplus notes, and/or the use of modified coinsurance
agreements will cover these net cash outflows. ING AIH is committed to the
sustained growth of Golden American. During 2002, ING AIH will maintain Golden
American's statutory capital and surplus at the end of each quarter at a level
such that: 1) the ratio of Total Adjusted Capital divided by Company Action
Level Risk Based Capital exceeds 300%; 2) the ratio of Total Adjusted Capital
(excluding surplus notes) divided by Company Action Level Risk Based Capital
exceeds 200%; and 3) Golden American's statutory capital and surplus exceeds the
"Amounts Accrued for Expense Allowances Recognized in Reserves" as disclosed on
page 3, Line 13 of Golden American's statutory statement.
During 2000 and 2001, Golden American occupied 125,000 square feet of leased
space in West Chester, Pennsylvania. From January 1, 2001 to September 30, 2001,
First Golden's principal office was located in New York, New York, where certain
of the Company's records were maintained. As of October 1, 2001, First Golden's
principal office moved to Woodbury, New York.
The ability of Golden American to pay dividends to the Parent is restricted.
Prior approval of insurance regulatory authorities is required for payment of
dividends to the stockholder which exceed an annual limit. During 2002, Golden
American cannot pay dividends to Equitable Life without prior approval of
statutory authorities. Golden American did not pay common stock dividends during
2001, 2000, or 1999.
Under the provisions of the insurance laws of the State of New York, First
Golden cannot distribute any dividends to its stockholder, Golden American,
unless a notice of its intent to declare a dividend and the amount of the
dividend has been filed with the New York Insurance Department at least thirty
days in advance of the proposed declaration. If the Superintendent of the New
York Insurance Department finds the financial condition of First Golden does not
warrant the distribution, the Superintendent may disapprove the distribution by
giving written notice to First Golden within thirty days after the filing. The
management of First Golden does not anticipate paying dividends to Golden
American during 2002. First Golden did not pay common stock dividends during
2001, 2000, or 1999.
The NAIC's risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula. These
requirements are intended to allow insurance regulators to monitor the
capitalization of insurance companies based upon the type and mixture of risks
inherent in a company's operations. The formula includes components for asset
risk, liability risk, interest rate exposure, and other factors. The Companies
have complied with the NAIC's risk-based capital reporting requirements. Amounts
reported indicate that the Companies have total adjusted capital well above all
required capital levels.
Reinsurance: At December 31, 2001, Golden American had reinsurance treaties with
five unaffiliated reinsurers and three affiliated reinsurers covering a
significant portion of the mortality risks and guaranteed death and living
benefits under its variable contracts. Golden American remains liable to the
extent its reinsurers do not meet their obligations under the reinsurance
agreements.
13
On June 30, 2000, effective January 1, 2000, Golden American entered into a
modified coinsurance agreement with Equitable Life covering a considerable
portion of Golden American's variable annuities issued after January 1, 2000,
excluding those with an interest rate guarantee.
On December 28, 2000, Golden American entered into a reinsurance agreement with
Security Life of Denver International, Ltd., an affiliate, covering variable
annuity minimum guaranteed death benefits and minimum guaranteed living benefits
of variable annuities issued after January 1, 2000. Golden American also
obtained an irrevocable letter of credit through Bank of New York in the amount
of $25 million related to this agreement. Effective December 24, 2001, the
letter of credit amount was revised to $70 million.
On December 29, 2000, First Golden entered into a reinsurance treaty with London
Life Reinsurance Company of Pennsylvania, an unaffiliated reinsurer, covering
the minimum guaranteed death benefits of First Golden's variable annuities
issued on or after January 1, 2000.
MARKET RISK AND RISK MANAGEMENT
- -------------------------------
Asset/liability management is integrated into many aspects of the Companies'
operations, including investment decisions, product development, and crediting
rates determination. As part of the risk management process, different economic
scenarios are modeled, including cash flow testing required for insurance
regulatory purposes, to determine that existing assets are adequate to meet
projected liability cash flows. Key variables in the modeling process include
anticipated contractholder behavior, and variable separate account performance.
Contractholders bear the majority of the investment risks related to variable
insurance products. The Companies' products also provide certain minimum death
and guaranteed living benefits; the Companies' liabilities related to these
benefits which depend in part on the performance of the variable separate
accounts. Currently, the majority of death and living benefit risks are
reinsured, which protects the Companies from adverse mortality experience and
prolonged capital market decline.
A surrender, partial withdrawal, transfer, or annuitization made prior to the
end of a guarantee period under a fixed account or product may be subject to a
market value adjustment. As the majority of the liabilities in the fixed account
are subject to market value adjustment, the Companies do not face a material
amount of market risk volatility. The fixed account liabilities are supported by
a portfolio principally composed of fixed rate investments that can generate
predictable, steady rates of return. The portfolio management strategy for the
fixed account considers the assets available for sale. This enables the
Companies to respond to changes in market interest rates, changes in prepayment
risk, changes in relative values of asset sectors and individual securities and
loans, changes in credit quality outlook, and other relevant factors. The
objective of portfolio management is to maximize returns, taking into account
interest rate and credit risk, as well as other risks. The Companies'
asset/liability management discipline includes strategies to minimize exposure
to loss as interest rates and economic and market conditions change.
On the basis of these analyses, management believes there is currently no
material solvency risk to the Companies. With respect to a 10% drop in equity
values from year end 2001 levels, variable separate account funds, which
represent 84% of the Companies' in force business, pass the risk in underlying
fund performance to the contractholder (except for certain minimum benefits
guarantees, described above). With respect to interest rate movements up or down
100 basis points from year end 2001 levels, the remaining 16% of the in force
are fixed account funds, and almost all of these have market value adjustments
which provide significant protection to the Companies against changes in
interest rates.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
GENERAL
We have identified the accounting policies below as critical to our business
operations and understanding of our results of operations. For a detailed
discussion of the application of these and other accounting policies,
14
see Note 1 in the Notes to Consolidated Financial Statements. Note that the
application of these accounting policies in the preparation of this report
requires management to use judgments involving assumptions and estimates
concerning future results or other developments including the likelihood, timing
or amount of one or more future transactions or events. There can be no
assurance that actual results will not differ from those estimates. These
judgments are reviewed frequently by senior management, and an understanding of
them may enhance the reader's understanding of the Company's financial
statements and Management's Discussion and Analysis.
AMORTIZATION OF DEFERRED ACQUISITION COSTS AND VALUE OF PURCHASED INSURANCE IN
FORCE
We amortize our deferred policy acquisition costs and value of purchased
insurance in force on our annuity contracts in proportion to estimated gross
profits. The amortization is adjusted to reflect actual gross profits over the
life of the contracts (up to 30 years for annuity contracts). Our estimated
gross profits are computed based on assumptions related to the underlying
contracts including, but not limited to, charges assessed against policyholders,
margins, lapse, persistency, expenses and asset growth rates.
Our current estimated gross profits include certain judgments concerning charges
assessed against policyholders, margins, lapse, persistency, expenses and asset
growth that are based on a combination of actual company experience and
historical market experience of equity and fixed income returns. Estimated gross
profits are adjusted periodically to take into account the actual experience to
date and changes in assumptions as regards the future. Short-term variances of
actual results from the judgments made by management can impact quarter to
quarter earnings.
INCOME TAXES
The Companies establish reserves for possible proposed adjustments by various
taxing authorities. Management believes there are sufficient reserves provided
for, or adequate defenses against any such adjustments.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
- ---------------------------------------------------------
Any forward-looking statement contained herein or in any other oral or written
statement by the Companies or any of their officers, directors, or employees is
qualified by the fact that actual results of the Companies may differ materially
from such statement, among other risks and uncertainties inherent in the
Companies' business, due to the following important factors:
1. Prevailing interest rate levels and equity performance, which may
affect the ability of the Companies to sell their products, the market
value and liquidity of the Companies' investments, fee revenue, and
the lapse rate of the Companies' products, notwithstanding product
design features intended to enhance persistency of the Companies'
products.
2. Changes in the federal income tax laws and regulations, which benefit
the tax treatment of investments that compete with annuity products
for retirement savings may adversely affect the tax treatment of the
Companies' products and benefits thereunder.
3. Changes in the regulation of financial services, including potential
federal regulation of insurance, bank sales, and underwriting of
insurance products, which may affect the competitive environment for
the Companies' products.
4. Increasing competition from other market participants for the sale of
annuity products.
5. Other factors that could affect the performance of the Companies,
including, but not limited to, market conduct claims against the
Companies and/or firms selling the Companies' product, litigation,
insurance industry insolvencies, availability of competitive
reinsurance on new business, investment performance of the underlying
portfolios of the variable products, variable product design, and
sales volume by significant sellers of the Companies' variable
products.
15
OTHER INFORMATION
- -----------------
SEGMENT INFORMATION. During the period since the acquisition by Bankers Trust,
September 30, 1992 to date of this Prospectus, Golden American's operations
consisted of one business segment, the sale of variable and fixed insurance
products. Golden American and its affiliate DSI are party to in excess of 620
sales agreements with broker-dealers, seven of whom, Locust Street Securities,
Inc., Vestax Securities Corporation, Compu Life Investors Services, Inc., IFG
Network Securities, Inc., Multi-Financial Securities Corporation, Primevest
Financial Services and Washington Square Securities, Inc. are affiliates of
Golden American.
In 2001, 2000, and 1999, the Companies received 14.0%, 11.3%, and 10.0% of total
premiums, net of reinsurance, for variable products sold through eight
affiliates as noted in the following table:
YEAR ENDED DECEMBER 31, 2001 2000 1999
- --------------------------------------------------------------------------------
(Dollars in thousands)
LSSI.................................. $124.4 $127.0 $168.5
Vestax Securities Corporation......... 35.3 47.2 88.1
DSI................................... 1.1 1.4 2.5
Multi-Financial Securities
Corporation ....................... 26.2 38.6 44.1
IFG Network Securities, Inc........... 12.8 23.1 25.8
Washington Square .................... 99.2 44.6 --
Primevest............................. 46.0 6.2 --
Compulife............................. 6.6 2.7 --
--------------------------------------
Total................................. $351.6 $290.8 $329.0
======================================
RESERVES. In accordance with the life insurance laws and regulations under which
Golden American operates, it is obligated to carry on its books, as liabilities,
actuarially determined reserves to meet its obligations on outstanding
Contracts. Reserves, based on valuation mortality tables in general use in the
United States, where applicable, are computed to equal amounts which, together
with interest on such reserves computed annually at certain assumed rates, make
adequate provision according to presently accepted actuarial standards of
practice, for the anticipated cash flows required by the contractual obligations
and related expenses of Golden American.
COMPETITION. Golden American is engaged in a business that is highly competitive
because of the large number of stock and mutual life insurance companies and
other entities marketing insurance products comparable to those of Golden
American. There are over 2500 stock, mutual and other types of insurers in the
life insurance business in the United States, a substantial number of which are
significantly larger than Golden American.
AGREEMENTS WITH AFFILIATES. Directed Services, Inc. ("DSI"), an affiliate, acts
as the principal underwriter (as defined in the Securities Act of 1933 and the
Investment Company Act of 1940, as amended) and distributor of the variable
insurance products issued by the Companies. DSI is authorized to enter into
agreements with broker/dealers to distribute the Companies' variable products
and appoint representatives of the broker/dealers as agents. For the years ended
December 31, 2001, 2000, and 1999, the Companies paid commissions to DSI
totaling $229,726,000, $208,883,000, and $181,536,000, respectively.
Golden American provides certain managerial and supervisory services to DSI. The
fee paid by DSI for these services is calculated as a percentage of average
assets in the variable separate accounts. For the
16
years ended December 31, 2001, 2000, and 1999, the fee was $23,138,000,
$21,296,000, and $10,136,000, respectively.
Effective January 1, 1998, the Companies have an asset management agreement with
ING Investment Management LLC ("ING IM"), an affiliate, in which ING IM provides
asset management and accounting services. Under the agreement, the Companies
record a fee based on the value of the assets under management. The fee is
payable quarterly. For the years ended December 31, 2001, 2000, and 1999, the
Companies incurred fees of $4,392,000, $2,521,000, and $2,227,000, respectively,
under this agreement.
Golden American has a guaranty agreement with Equitable Life. In consideration
of an annual fee, payable June 30, Equitable Life guarantees to Golden American
that it will make funds available, if needed, to Golden American to pay the
contractual claims made under the provisions of Golden American's life insurance
and annuity contracts. The agreement is not, and nothing contained therein or
done pursuant thereto by Equitable Life shall be deemed to constitute, a direct
or indirect guaranty by Equitable Life of the payment of any debt or other
obligation, indebtedness, or liability, of any kind or character whatsoever, of
Golden American. The agreement does not guarantee the value of the underlying
assets held in separate accounts in which funds of variable life insurance and
variable annuity policies have been invested. The calculation of the annual fee
is based on risk based capital. On June 30, 2001 and 2000, Golden American
incurred a fee of $12,000 and $7,000, respectively, under this agreement. No
annual fee was paid in 1999.
Golden American provides certain advisory, computer, and other resources and
services to Equitable Life. Revenues for these services, which reduced general
expenses incurred by Golden American, totaled $8,192,000, $6,193,000, and
$6,107,000 for the years ended December 31, 2001, 2000, and 1999, respectively.
The Companies have a service agreement with Equitable Life in which Equitable
Life provides administrative and financial related services. Under this
agreement, the Companies incurred expenses of $309,000, $1,270,000, and
$1,251,000 for the years ended December 31, 2001, 2000, and 1999, respectively.
During 2001, the State of Delaware Insurance Department approved expense sharing
agreements with ING America Insurance Holdings, Inc. ("ING AIH") for
administrative, management, financial, and information technology services.
Under these agreements with ING AIH, Golden American incurred expenses of
$23,153,000 for the year ended December 31, 2001.
First Golden provided resources and services to DSI. Revenues for these
services, which reduce general expenses incurred by the Companies, totaled
$139,000, $223,000, and $387,000 for the years ended December 31, 2001, 2000,
and 1999, respectively.
Golden American provides resources and services to ING Mutual Funds Management
Co., LLC, an affiliate. Revenues for these services, which reduced general
expenses incurred by Golden American, totaled $478,000, $455,000, and $244,000
for the years ended December 31, 2001, 2000, and 1999, respectively.
Golden American provides resources and services to United Life & Annuity
Insurance Company, an affiliate. Revenues for these services, which reduced
general expenses incurred by Golden American, totaled $383,000, $593,000 and
$460,000 for the years ended December 31, 2001, 2000, and 1999, respectively.
The Companies provide resources and services to Security Life of Denver
Insurance Company, an affiliate. Revenues for these services, which reduced
general expenses incurred by the Companies, totaled $326,000, $261,000 and
$216,000 for the years ended December 31, 2001, 2000, and 1999, respectively.
The Companies provide resources and services to Southland Life Insurance
Company, an affiliate. Revenues for these services, which reduce general
expenses incurred by the Companies, totaled $132,000, $115,000 and $103,000 for
the years ended December 31, 2001, 2000, and 1999, respectively.
DISTRIBUTION AGREEMENT. Under a distribution agreement, DSI acts as the
principal underwriter (as defined in the Securities Act of 1933 and the
Investment Company Act of 1940, as amended) of the variable insurance products
issued by Golden American which as of December 31, 2000, are sold through other
broker/dealer institutions. For the years 2001 and 2000, commissions paid by
Golden American to DSI (including commissions paid by First Golden) aggregated
$229.7 million and $208.9 million, respectively.
17
EMPLOYEES. Certain officers of Golden American are also officers of DSI, and
their salaries are allocated among both companies. Certain officers of Golden
American are also officers of other Equitable of Iowa subsidiaries. See
"Directors and Executive Officers."
PROPERTIES. Golden American's principal office is located at 1475 Dunwoody
Drive, West Chester, Pennsylvania 19380, where most of Golden American's records
are maintained. This office space is leased. Other records are maintained in Des
Moines and Atlanta at the offices of Equitable and ING, respectively.
STATE REGULATION. Golden American is subject to the laws of the State of
Delaware governing insurance companies and to the regulations of the Delaware
Insurance Department (the "Insurance Department"). A detailed financial
statement in the prescribed form (the "Annual Statement") is filed with the
Insurance Department each year covering Golden American's operations for the
preceding year and its financial condition as of the end of that year.
Regulation by the Insurance Department includes periodic examination to
determine contract liabilities and reserves so that the Insurance Department may
certify that these items are correct. Golden American's books and accounts are
subject to review by the Insurance Department at all times. A full examination
of Golden American's operations is conducted periodically by the Insurance
Department and under the auspices of the NAIC.
In addition, Golden American is subject to regulation under the insurance laws
of all jurisdictions in which it operates. The laws of the various jurisdictions
establish supervisory agencies with broad administrative powers with respect to
various matters, including licensing to transact business, overseeing trade
practices, licensing agents, approving contract forms, establishing reserve
requirements, fixing maximum interest rates on life insurance contract loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required financial statements and regulating the type and amounts of
investments permitted. Golden American is required to file the Annual Statement
with supervisory agencies in each of the jurisdictions in which it does
business, and its operations and accounts are subject to examination by these
agencies at regular intervals.
The NAIC has adopted several regulatory initiatives designed to improve the
surveillance and financial analysis regarding the solvency of insurance
companies in general. These initiatives include the development and
implementation of a risk-based capital formula for determining adequate levels
of capital and surplus. Insurance companies are required to calculate their
risk-based capital in accordance with this formula and to include the results in
their Annual Statement. It is anticipated that these standards will have no
significant effect upon Golden American. For additional information about the
Risk-Based Capital adequacy monitoring system and Golden American, see
"Management's Discussion and Analysis Results of Operations."
In addition, many states regulate affiliated groups of insurers, such as Golden
American, and its affiliates, under insurance holding company legislation. Under
such laws, inter-company transfers of assets and dividend payments from
insurance subsidiaries may be subject to prior notice or approval, depending on
the size of the transfers and payments in relation to the financial positions of
the companies involved.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed (up to prescribed limits) for contract owner losses
incurred by other insurance companies which have become insolvent. Most of these
laws provide that an assessment may be excused or deferred if it would threaten
an insurer's own financial strength. For information regarding Golden American's
estimated liability for future guaranty fund assessments, see Note 10 of Notes
to Financial Statements.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Certain insurance products of Golden American are subject
to various federal securities laws and regulations. In addition, current and
proposed federal measures which may significantly affect the insurance business
include regulation of insurance company solvency, employee benefit regulation,
removal of barriers preventing banks from engaging in the insurance business,
tax law changes affecting the taxation of insurance companies and the tax
treatment of insurance products and its impact on the relative desirability of
various personal investment vehicles.
18
DIRECTORS AND OFFICERS
NAME (AGE) POSITION(S) WITH THE COMPANY
- -------------------------- ---------------------------------------------
Chris D. Schreier (45) President
Wayne R. Huneke (49) Director and Chief Financial Officer
Thomas J. McInerney (45) Director
Mark A. Tullis (46) Director
P. Randall Lowery (49) Director
Paula Cludray-Engelke (45) Secretary
James R. McInnis (54) Executive Vice President and Chief
Marketing Officer
Stephen J. Preston (44) Executive Vice President and Chief Actuary
David S. Pendergrass (41) Vice President and Treasurer
David L. Jacobson (52) Senior Vice President and Assistant Secretary
William L. Lowe (38) Senior Vice President
Steven G. Mandel (42) Senior Vice President and Chief
Information Officer
Antonio M. Muniz (37) Senior Vice President, Actuarial
Robert W. Crispin (56) Senior Vice President, Investment
Boyd G. Combs (47) Senior Vice President, Taxation
Each director is elected to serve for one year or until the next annual meeting
of shareholders or until his or her successor is elected. Some directors are
directors of insurance company subsidiaries of Golden American's parent,
Equitable of Iowa. Golden American's directors and senior executive officers and
their principal positions for the past five years are listed below:
Mr. Chris D. Schreier was elected President of Golden American in March, 2001.
>From January, 1994 to September, 1996 he served as Assistant Vice President and
Assistant Controller for ReliaStar Financial Corp. He was elected Second Vice
President of ReliaStar Financial Corp. and ReliaStar Life Insurance Company from
September, 1996 to January, 1999. He has served as Vice President and Controller
of ReliaStar Financial Corp. since January, 1999.
Mr. Wayne R. Huneke was elected Director, Senior Vice President and Chief
Financial Officer of Golden American in March, 2001. Since October, 1995 he has
served as a Director of ReliaStar Life Insurance Company. He served ReliaStar
Financial Corp. as Senior Vice President, Chief Financial Officer from August,
1994 to November, 1997, from November, 1997 to May, 1999 he served as Senior
Vice President, ReliaStar Financial Markets. He became Senior Executive Vice
President of ReliaStar Financial Corp. in May, 1999.
Mr. Thomas J. McInerney was elected as a Director of Golden American in March,
2001. He served Aetna U.S. Healthcare, Inc. as Vice President, National Accounts
from April, 1996 to March, 1997. From August, 1997 to the present he has served
as Director and from September, 1997 to the present he has served as President
of Aetna Life Insurance & Annuity Company. He has served as President and
Director of Aetna Insurance Company of America from September, 1997 to the
present.
Mr. Mark A. Tullis became a Director of Golden American and First Golden in
December 1999. He has served as Executive Vice President, Strategy and
Operations for ING Americas Region since September 1999. From June, 1994 to
August, 1999, he was with Primerica, serving as Executive Vice President at the
time of his departure.
Mr. P. Randall Lowery became a Director of Golden American in April, 1999 and
First Golden in December, 1999. He has served as Executive Vice President and
Chief Actuary for ING Americas Region since 1990.
Ms. Paula Cludray-Engelke was elected Secretary of Golden American in March,
2001. From October, 1985 to October, 2000 Ms. Cludray-Engelke served with
ReliaStar Life Insurance Company (f/k/a Northwestern National Life Insurance
Company) in various compliance positions. From October, 2000 to the present she
has served as an Attorney with ING US Legal Services.
19
Mr. James R. McInnis joined Golden American and First Golden in December, 1997
as Executive Vice President. From 1982 through November, 1997, he held several
positions with the Endeavor Group and was President upon his departure.
Mr. David S. Pendergrass was elected Treasurer and Vice President of Golden
American in December, 2000. Since October, 1995 he has served as a Vice
President and Treasurer of ING North America Insurance Corporation.
Mr. David L. Jacobson joined Golden American in November, 1993 as Vice President
and Assistant Secretary and became Senior Vice President in December, 1993. He
was elected Senior Vice President and Assistant Secretary for First Golden in
June, 1996.
Mr. Stephen J. Preston joined Golden American in December, 1993 as Senior Vice
President, Chief Actuary and Controller. He became an Executive Vice President
and Chief Actuary in June, 1998. He was elected Senior Vice President and Chief
Actuary of First Golden in June, 1996 and elected Executive Vice President in
June, 1998.
Mr. William L. Lowe joined Equitable Life as Vice President, Sales & Marketing
in January, 1994. He became a Senior Vice President, Sales & Marketing, of
Golden American in August, 1997. He was also President of Equitable of Iowa
Securities Network, Inc. until October, 1998.
Mr. Steven G. Mandel joined Golden American in October 1988 and became Senior
Vice President and Chief Information Officer in June, 1998.
Mr. Antonio M. Muniz was elected Senior Vice President of Golden American in
July, 2001. From November, 1999 to July, 2001 he was Vice President of Golden
American. He served as Director of Latin America for Transamerica Reinsurance
from January, 1998 to October, 1999. He served as Vice President at The Coventry
Group from October, 1997 to December, 1998. From March, 1994 to September, 1997
he was an Assistant Vice President for Golden American.
Mr. Boyd G. Combs was elected Senior Vice President, Tax of Golden American in
July, 2001. From 1994 to March, 2000 he served as Vice President of ING America
Insurance Holdings, Inc. He has served as Senior Vice President of Equitable of
Iowa Companies, Inc. since April, 1999. He has served as Senior Vice President
and Director of Taxes of ING America Insurance Holdings, Inc. and ING North
America Insurance Corporation since 2000.
Mr. Robert W. Crispin was elected Senior Vice President of Golden American in
October, 2001. From 1995 to 1999 he served as Executive Vice President of
UnumProvident Corporation. From 1999 to 2000 he served as Executive Vice
President of Massachusetts Mutual Life Insurance Co. From 2000 to June, 2001 Mr.
Crispin served with ING Investment Management LLC in various investment
positions.
COMPENSATION TABLE AND OTHER INFORMATION
The following sets forth information with respect to the Chief Executive Officer
of Golden American as well as the annual salary and bonus for the next five
highly compensated executive officers for the fiscal year ended December 31,
2001. Certain executive officers of Golden American are also officers of DSI and
First Golden. The salaries of such individuals are allocated among Golden
American, DSI and First Golden pursuant to an arrangement among these companies.
EXECUTIVE COMPENSATION TABLE
The following table sets forth information with respect to the annual salary and
bonus for Golden American's Chief Executive Officer and the four other most
highly compensated executive officers for the fiscal year ended December 31,
2001.
20
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------- --------------------------
RESTRICTED SECURITIES
NAME AND STOCK AWARDS UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS 1 OPTIONS OPTIONS COMPENSATION2
- ------------------ ---- --------- ----------- ------ ------- -------------
Barnett Chernow............ 2001 $ 450,000 $ 1,000,000 4,600 49,700 $ 27,000
President 2000 $ 409,447 $ 638,326 10,200 $ 26,887
1999 $ 300,009 $ 698,380 6,950 $ 20,464
James R. McInnis........... 2001 $ 300,000 $ 827,804 20,000 16,700 $ 18,000
Executive Vice 2000 $ 337,543 $ 1,210,898 5,200 $ 19,487
President 1999 $ 250,007 $ 955,646 5,550 $ 15,663
William L. Lowe............ 2001 $ 200,000 $ 736,564 7,500 --
Senior Vice 2000 $ 205,144 $ 821,545 3,500 $ 81
President 1999 $ 191,589 $ 737,933 $ 2,924
Stephen J. Preston......... 2001 $ 285,000 $ 81,824 11,900 17,000 $ 17,100
Executive Vice 2000 $ 230,170 $ 426,994 5,000 $ 14,713
President and 1999 $ 198,964 $ 235,002 2,050 $ 12,564
Chief Actuary
Gary Haynes................ 2001 $ 225,000 $ 235,412 8,480 $ 13,500
Senior Vice 2000 $ 201,136 $ 404,773 3,000 $ 14,735
President 1999 $ 159,030 $ 50,000 $ 9,540
- ---------------------
1 The amount shown relates to bonuses paid in 2001, 2000, and 1999.
2 Other compensation includes a business allowance for each named
executive which is required to be applied to specific business
expenses of the named executive.
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL
REALIZABLE VALUE AT
% OF TOTAL ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE FOR OPTION TERM
OPTIONS IN FISCAL OR BASE EXPIRATION -----------------------
NAME GRANTED YEAR PRICE DATE 5% 10%
- ---- ------- ---- ------ ------------- --------- ---------
Barnett Chernow.......... 49700 1.26% $25.72 March 11,2012 $ 63,914 $ 127,828
James R. McInnis......... 16700 0.42% $25.72 March 11,2012 $ 21,476 $ 42,952
William L. Lowe.......... 7500 0.19% $25.72 March 11,2012 $ 9,645 $ 19,290
Stephen J. Preston....... 17000 0.43% $25.72 March 11,2012 $ 21,862 $ 43,724
Gary Haynes.............. 0 0.00% $25.72 March 11,2012 $ 0 $ 0
21
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS OF GOLDEN AMERICAN LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Golden American Life Insurance Company
We have audited the accompanying consolidated balance sheets of Golden American
Life Insurance Company as of December 31, 2001 and 2000, and the related
consolidated statements of operations, changes in stockholder's equity, and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Golden American
Life Insurance Company at December 31, 2001 and 2000, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 15, 2002
22
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share date)
DECEMBER 31, DECEMBER 31,
2001 2000
-------------------------
ASSETS
Investments:
Fixed maturities, available for sale, at fair value
(cost: 2001 - $1,982,527; 2000 - $798,751) ..................... $ 1,994,913 $ 792,578
Equity securities, at fair value (cost: 2001 - $74; 2000 - $8,611) 55 6,791
Mortgage loans on real estate .................................... 213,883 99,916
Policy loans ..................................................... 14,847 13,323
Short-term investments ........................................... 10,021 5,300
-------------------------
Total investments ................................................... 2,233,719 917,908
Cash and cash equivalents ........................................... 195,726 164,682
Reinsurance recoverable ............................................. 27,151 19,331
Reinsurance recoverable from affiliates ............................. 28,800 14,642
Due from affiliates ................................................. 20 38,786
Accrued investment income ........................................... 22,771 9,606
Deferred policy acquisition costs ................................... 709,042 635,147
Value of purchased insurance in force ............................... 20,203 25,942
Current income taxes recoverable .................................... 400 511
Property and equipment, less allowances for depreciation
of $10,624 in 2001 and $5,638 in 2000 ............................ 10,468 14,404
Goodwill, less accumulated amortization of $17,600 in 2001
and $13,376 in 2000 .............................................. 151,363 155,587
Other assets ........................................................ 12,788 32,019
Separate account assets ............................................. 10,958,191 9,831,489
-------------------------
Total assets ........................................................ $14,370,642 $11,860,054
=========================
See accompanying notes.
23
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS-(Continued)
(Dollars in thousands, except per share data)
DECEMBER 31, DECEMBER 31,
2001 2000
---------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Policy liabilities and accruals:
Future policy benefits:
Annuity and interest sensitive life products ........ $ 2,178,189 $ 1,062,891
Unearned revenue reserve ............................ 6,241 6,817
Other policy claims and benefits ...................... 836 82
---------------------------
2,185,266 1,069,790
Surplus notes ............................................ 245,000 245,000
Revolving note payable ................................... 1,400 --
Due to affiliates ........................................ 25,080 19,887
Deferred income tax liability ............................ 12,612 7,377
Other liabilities ........................................ 125,264 69,374
Separate account liabilities ............................. 10,958,191 9,831,489
---------------------------
13,552,813 11,242,917
Commitments and contingencies
Stockholder's equity:
Preferred Stock, par value $5,000 per share, authorized
50,000 shares ....................................... -- --
Common stock, par value $10 per share, authorized,
issued, and outstanding 250,000 shares .............. 2,500 2,500
Additional paid-in capital ............................ 780,436 583,640
Accumulated other comprehensive gain (loss) ........... 3,804 (4,046)
Retained earnings ..................................... 31,089 35,043
---------------------------
Total stockholder's equity ............................... 817,829 617,137
---------------------------
Total liabilities and stockholder's equity ............... $ 14,370,642 $ 11,860,054
===========================
See accompanying notes.
24
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
YEAR ENDED DECEMBER 31 2001 2000 1999
-----------------------------------
REVENUES:
Annuity and interest sensitive life product charges ....... $ 163,805 $ 144,877 $ 82,935
Management fee revenue .................................... 25,079 22,982 11,133
Net investment income ..................................... 94,396 64,140 59,169
Realized losses on investments ........................... (6,470) (6,554) (2,923)
-----------------------------------
276,810 225,445 150,314
Insurance benefits and expenses:
Annuity and interest sensitive life benefits:
Interest credited to account balances ................... 191,885 183,003 175,257
Guaranteed benefits reserve change ...................... 14,015 12,085 --
Benefit claims incurred in excess of account balances ... 3,182 4,943 6,370
Underwriting, acquisition, and insurance expenses:
Commissions ............................................. 2,686 4,836 6,847
Commissions-- affiliates ................................ 229,726 208,883 181,536
General expenses ........................................ 113,259 84,936 60,205
Insurance taxes, state licenses, and fees ............... 6,610 4,528 3,976
Policy acquisition costs deferred ....................... (128,249) (168,444) (346,396)
Amortization:
Deferred policy acquisition costs ...................... 45,229 55,154 33,119
Value of purchased insurance in force .................. 4,403 4,801 6,238
Goodwill ............................................... 4,224 4,224 4,224
Expenses and charges reimbursed under modified coinsurance
agreements .............................................. (1,085) (7,030) (9,247)
Expenses and charges reimbursed under modified coinsurance
agreements - affiliates ................................. (224,549) (218,757) --
-----------------------------------
261,336 173,162 122,129
Interest expense ............................................. 19,252 19,867 8,894
-----------------------------------
280,588 193,029 131,023
-----------------------------------
Income (loss) before income taxes ............................ (3,778) 32,416 19,291
Income taxes ................................................. 176 13,236 8,077
-----------------------------------
Net income (loss) ............................................ $ (3,954) $ 19,180 $ 11,214
===================================
See accompanying notes.
25
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(Dollars in thousands)
Accumulated
Additional Other Total
Common Paid-in Comprehensive Retained Stockholder's
Stock Capital Income (Loss) Earnings Equity
-------------------------------------------------------------
Balance at December 31, 1998 .................. $ 2,500 $ 347,640 $ (895) $ 4,649 $ 353,894
Comprehensive income:
Net income ............................... -- -- -- 11,214 11,214
Change in net unrealized
investment losses ....................... -- -- (8,259) -- (8,259)
---------
Comprehensive income ....................... 2,955
Contribution of capital .................... -- 121,000 -- -- 121,000
-------------------------------------------------------------
Balance at December 31, 1999 .................. $ 2,500 $ 468,640 $ (9,154) $ 15,863 $ 477,849
Comprehensive income:
Net income ............................... -- -- -- 19,180 19,180
Change in net unrealized
investment gains ........................ -- -- 5,108 -- 5,108
---------
Comprehensive income ....................... 24,288
Contribution of capital .................... -- 115,000 -- -- 115,000
-------------------------------------------------------------
Balance at December 31, 2000 .................. $ 2,500 $ 583,640 $ (4,046) $ 35,043 $ 617,137
Comprehensive income:
Net loss ................................. -- -- -- (3,954) (3,954)
Change in net unrealized
investment gains ........................ -- -- 7,850 -- 7,850
---------
Comprehensive income ....................... 3,896
Contribution of capital .................... -- 196,796 -- -- 196,796
-------------------------------------------------------------
Balance at December 31, 2001 .................. $ 2,500 $ 780,436 $ 3,804 $ 31,089 $ 817,829
=============================================================
See accompanying notes.
26
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
YEAR ENDED DECEMBER 31 2001 2000 1999
-----------------------------------------
OPERATING ACTIVITIES
Net income (loss) ...................................... $ (3,954) $ 19,180 $ 11,214
Adjustments to reconcile net income to net cash
provided by (used in) operations:
Adjustments related to annuity and
interest sensitive life products:
Interest credited and other charges on
interest sensitive products ..................... 191,885 183,003 175,257
Charges for mortality and administration .......... (341) (313) 524
Change in unearned revenues ....................... (576) 517 2,460
Increase in policy liabilities and accruals ......... 754 74 8
Increase in guaranteed benefits reserve ............. 28,173 26,727 --
Decrease (increase) in accrued investment income .... (13,165) 1,592 (1,553)
Policy acquisition costs deferred ................... (128,249) (168,444) (346,396)
Amortization of deferred policy acquisition costs ... 45,229 55,154 33,119
Amortization of value of purchased
insurance in force ................................ 4,403 4,801 6,238
Change in other assets, due to/from affiliates, other
liabilities, and accrued income taxes ............. 108,578 (78,482) 24,845
Provision for depreciation and amortization ......... 1,341 9,062 9,296
Provision for deferred income taxes ................. (606) 13,282 8,077
Realized losses on investments ...................... 6,470 6,554 2,923
-----------------------------------------
Net cash provided by (used in) operating activities .... 239,942 72,707 (73,988)
-----------------------------------------
INVESTING ACTIVITIES
Sale, maturity, or repayment of investments:
Fixed maturities - available for sale ............... 880,688 205,136 220,547
Mortgage loans on real estate ....................... 135,996 12,701 6,572
Equity securities ................................... 6,956 6,128 --
Policy loans - net .................................. -- 834 --
Short-term investments - net ........................ -- -- 980
-----------------------------------------
1,023,640 224,799 228,099
Acquisition of investments:
Fixed maturities - available for sale ............... (2,070,849) (154,028) (344,587)
Equity securities ................................... (40) -- --
Mortgage loans on real estate ....................... (250,314) (12,887) (9,659)
Policy loans - net .................................. (1,524) -- (2,385)
Short-term investments - net ........................ (4,721) (5,300) --
-----------------------------------------
(2,327,448) (172,215) (356,631)
Issuance of reciprocal loan agreement receivables ...... -- (16,900) --
Receipt of repayment of reciprocal loan agreement
receivables .......................................... -- 16,900 --
Net sale (purchase) of property and equipment .......... 1,248 (3,285) (8,968)
-----------------------------------------
Net cash provided by (used in) investing activities .... (1,302,560) 49,299 (137,500)
See accompanying notes.
27
GOLDEN AMERICAN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(Dollars in thousands)
YEAR ENDED DECEMBER 31 2001 2000 1999
-----------------------------------------
FINANCING ACTIVITIES
Proceeds from reciprocal loan agreement
borrowings with affiliates .......................... $ 69,300 $ 178,900 $ 396,350
Repayment of reciprocal loan agreement
borrowings with affiliates .......................... (69,300) (178,900) (396,350)
Proceeds from revolving note payable ................... 3,078 67,200 220,295
Repayment of revolving note payable .................... (1,678) (68,600) (218,895)
Proceeds from surplus note with affiliates ............. -- -- 160,000
Receipts from annuity and interest
sensitive life policies credited to
account balances .................................... 1,933,148 801,793 773,685
Return of account balances on annuity
and interest sensitive life policies ................ (134,787) (141,440) (146,607)
Net reallocations to separate accounts ................. (902,895) (825,848) (650,270)
Contributions of capital by EIC ........................ 196,796 115,000 121,000
-----------------------------------------
Net cash provided by (used in) financing activities .... 1,093,662 (51,895) 259,208
-----------------------------------------
Increase in cash and cash equivalents .................. 31,044 70,111 47,720
Cash and cash equivalents at
beginning of period ................................. 164,682 94,571 46,851
-----------------------------------------
Cash and cash equivalents at
end of period ....................................... $ 195,726 $ 164,682 $ 94,571
=========================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest ............................................ $ 14,955 $ 22,444 $ 6,392
Income taxes ........................................ -- 957 --
See accompanying notes.
28
GOLDEN AMERICAN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2001
1. SIGNIFICANT ACCOUNTING POLICIES
- ------------------------------------
CONSOLIDATION
The consolidated financial statements include Golden American Life Insurance
Company ("Golden American") and its wholly owned subsidiary, First Golden
American Life Insurance Company of New York ("First Golden," and collectively
with Golden American, the "Companies"). All significant intercompany accounts
and transactions have been eliminated.
ORGANIZATION
Golden American, a wholly owned subsidiary of Equitable Life Insurance Company
of Iowa ("Equitable Life" or the "Parent"), offers variable insurance products
and is licensed as a life insurance company in the District of Columbia and all
states except New York. Equitable Life is a wholly owned subsidiary of Equitable
of Iowa Companies, Inc. (EIC). First Golden is licensed to sell insurance
products in New York and Delaware. The Companies' variable and fixed insurance
products are marketed by broker/dealers, financial institutions, and insurance
agents. The Companies' primary customers are consumers and corporations.
On December 3, 2001, the Board of Directors of EIC approved a plan to contribute
its holding of 100% of the stock of its wholly owned subsidiary, Golden American
to another wholly owned subsidiary, Equitable Life. The contribution of stock
occurred on December 31, 2001, following approval granted by the Insurance
Department of the State of Delaware.
On October 24, 1997 ("the merger date"), PFHI Holding, Inc. ("PFHI"), a Delaware
corporation, acquired all of the outstanding capital stock of Equitable of Iowa
Companies ("Equitable") according to the terms of an Agreement and Plan of
Merger ("the merger") dated July 7, 1997 among Equitable, PFHI, and ING Groep
N.V. ("ING"). PFHI is a wholly owned subsidiary of ING, a global financial
services holding company based in The Netherlands. As a result of this
transaction, Equitable was merged into PFHI, which was simultaneously renamed
Equitable of Iowa Companies, Inc., a Delaware corporation.
INVESTMENTS
Fixed Maturities: The Companies account for their investments under the
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," which requires fixed
maturities to be designated as either "available for sale," "held for
investment," or "trading." Sales of fixed maturities designated as "available
for sale" are not restricted by SFAS No. 115. Available for sale securities are
reported at fair value and unrealized gains and losses on these securities are
included directly in stockholder's equity, after adjustment for related changes
in value of purchased insurance in force ("VPIF"), deferred policy acquisition
costs ("DPAC"), and deferred income taxes. At December 31, 2001 and 2000, all of
the Companies' fixed maturities are designated as available for sale, although
the Companies are not precluded from designating fixed maturities as held for
investment or trading at some future date.
Securities determined to have a decline in value that is other than temporary
are written down to estimated fair value, which becomes the new cost basis by a
charge to realized losses in the Companies' Statements of Operations. Premiums
and discounts are amortized/accrued utilizing a method which results in a
constant yield over the securities' expected lives. Amortization/accrual of
premiums and discounts on mortgage and other asset-backed securities
incorporates a prepayment assumption to estimate the securities' expected lives.
Equity Securities: Equity securities are reported at estimated fair value if
readily marketable. The change in unrealized appreciation and depreciation of
marketable equity securities (net of related deferred income
29
taxes, if any) is included directly in stockholder's equity. Equity securities
determined to have a decline in value that is other than temporary are written
down to estimated fair value, which becomes the new cost basis by a charge to
realized losses in the Companies' Statements of Operations.
Mortgage Loans on Real Estate: Mortgage loans on real estate are reported at
cost adjusted for amortization of premiums and accrual of discounts. If the
value of any mortgage loan is determined to be impaired (i.e., when it is
probable the Companies will be unable to collect all amounts due according to
the contractual terms of the loan agreement), the carrying value of the mortgage
loan is reduced to the present value of expected future cash flows from the loan
discounted at the loan's effective interest rate, or to the loan's observable
market price, or the fair value of the underlying collateral. The carrying value
of impaired loans is reduced by the establishment of a valuation allowance,
which is adjusted at each reporting date for significant changes in the
calculated value of the loan. Changes in this valuation allowance are charged or
credited to income.
Other Investments: Policy loans are reported at unpaid principal. Short-term
investments are reported at cost, adjusted for amortization of premiums and
accrual of discounts.
Realized Gains and Losses: Realized gains and losses are determined on the basis
of specific identification.
Fair Values: Estimated fair values, as reported herein, of conventional
mortgage-backed securities not actively traded in a liquid market are estimated
using a third party pricing process. This pricing process uses a matrix
calculation assuming a spread over U.S. Treasury bonds based upon the expected
average lives of the securities. Estimated fair values of publicly traded fixed
maturities are reported by an independent pricing service. Fair values of
private placement bonds are estimated using a matrix that assumes a spread
(based on interest rates and a risk assessment of the bonds) over U.S. Treasury
bonds. Estimated fair values of equity securities, which consist of the
Companies' investment in its registered separate accounts, are based upon the
quoted fair value of the securities comprising the individual portfolios
underlying the separate accounts.
Accounting for Derivative Instruments and Hedging Activities: The Companies may
from time to time utilize various derivative instruments to manage interest rate
and price risk (collectively, market risk). The Companies have appropriate
controls in place, and financial exposures are monitored and managed by the
Companies as an integral part of their overall risk management program.
Derivatives are recognized on the balance sheet at their fair value.
The change in a derivative's fair value is generally to be recognized in current
period earnings, unless the derivative is specifically designated as a hedge of
an exposure. If certain conditions are met, a derivative may be specifically
designated as a hedge of an exposure to changes in fair value, variability of
cash flows, or certain foreign currency exposures. When designated as a hedge,
the fair value should be recognized currently in earnings or other comprehensive
income, depending on whether such designation is considered a fair value hedge
or a cash flow hedge. With respect to fair value hedges, the fair value of the
derivative, as well as changes in the fair value of the hedged item, are
reported in earnings. For cash flow hedges, changes in the derivatives' fair
value are reported in other comprehensive income and subsequently reclassified
into earnings when the hedged item affects earnings. The ineffective portion of
a derivative's change in fair value will be immediately recognized in earnings.
The Companies occasionally purchase a financial instrument that contains a
derivative that is "embedded" in the instrument. The Companies' insurance
products are also reviewed to determine whether they contain an embedded
derivative. The Companies assess whether the economic characteristics of the
embedded derivative are clearly and closely related to the economic
characteristics of the remaining component of the financial instrument or
insurance product (i.e., the host contract) and whether a separate instrument
with the same terms as the embedded instrument would meet the definition of a
derivative instrument. When it is determined that the embedded derivative
possesses economic characteristics that are not clearly and closely related to
the economic characteristics of the host contract and that a separate instrument
with the same terms would qualify as a derivative instrument, the embedded
derivative is separated from the host contract and carried at fair value. In
cases where the host contract is measured at fair value, with changes in fair
value reported in current period earnings, or the Companies are unable to
reliably identify and
30
measure the embedded derivative for separation from its host contract, the
entire contract is carried on the balance sheet at fair value and is not
designated as a hedging instrument.
CASH AND CASH EQUIVALENTS
For purposes of the accompanying Statements of Cash Flows, the Companies
consider all demand deposits and interest-bearing accounts not related to the
investment function to be cash equivalents. All interest-bearing accounts
classified as cash equivalents have original maturities of three months or less.
DEFERRED POLICY ACQUISITION COSTS
Certain costs of acquiring new insurance business, principally first year
commissions and interest bonuses, premium credit, and other expenses related to
the production of new business have been deferred. Other expenses related to the
production of new business that were deferred totaled $28.3 million during 2001,
$16.3 million during 2000, and $29.6 million during 1999. Acquisition costs for
variable insurance products are being amortized generally in proportion to the
present value (using the assumed crediting rate) of expected future gross
profits. This amortization is adjusted retrospectively when the Companies revise
their estimate of current or future gross profits to be realized from a group of
products. DPAC is adjusted to reflect the pro forma impact of unrealized gains
and losses on fixed maturities the Companies have designated as "available for
sale" under SFAS No. 115.
VALUE OF PURCHASED INSURANCE IN FORCE
As a result of the merger, a portion of the purchase price was allocated to the
right to receive future cash flows from existing insurance contracts. This
allocated cost represents VPIF, which reflects the value of those purchased
policies calculated by discounting actuarially determined expected future cash
flows at the discount rate determined by the purchaser. Amortization of VPIF is
charged to expense in proportion to expected gross profits of the underlying
business. This amortization is adjusted retrospectively when the Companies
revise the estimate of current or future gross profits to be realized from the
insurance contracts acquired. VPIF is adjusted to reflect the pro forma impact
of unrealized gains and losses on available for sale fixed maturities.
PROPERTY AND EQUIPMENT
Property and equipment primarily represent leasehold improvements, office
furniture, certain other equipment, and capitalized computer software and are
not considered to be significant to the Companies' overall operations. Property
and equipment are reported at cost less allowances for depreciation.
Depreciation expense is computed primarily on the basis of the straight-line
method over the estimated useful lives of the assets.
GOODWILL
Goodwill was established as a result of the merger and is being amortized over
40 years on a straight-line basis.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets," effective for fiscal years beginning
after December 15, 2001. For additional information, refer to the Pending
Accounting Standards disclosure in Note 1.
FUTURE POLICY BENEFITS
Future policy benefits for divisions of the variable products with fixed
interest guarantees are established utilizing the retrospective deposit
accounting method. Policy reserves represent the premiums received plus
accumulated interest, less mortality and administration charges. Interest
credited to these policies ranged from 3.00% to 12.00% during 2001, 3.00% to
14.00% during 2000 and 3.00% to 11.00% during 1999. The unearned revenue reserve
represents unearned distribution fees. These distribution fees have been
deferred and are amortized over the life of the contracts in proportion to
expected gross profits.
31
SEPARATE ACCOUNTS
Assets and liabilities of the separate accounts reported in the accompanying
Balance Sheets represent funds separately administered principally for variable
contracts. Contractholders, rather than the Companies, bear the investment risk
for variable products. At the direction of the contractholders, the separate
accounts invest the premiums from the sale of variable products in shares of
specified mutual funds. The assets and liabilities of the separate accounts are
clearly identified and segregated from other assets and liabilities of the
Companies. Under Delaware insurance law, the portion of the separate account
assets equal to the reserves and other liabilities of variable contracts cannot
be charged with liabilities arising out of any other business the Companies may
conduct.
Variable separate account assets are carried at fair value of the underlying
investments and generally represent contractholder investment values maintained
in the accounts. Variable separate account liabilities represent account
balances for the variable contracts invested in the separate accounts; the fair
value of these liabilities is equal to their carrying amount. Net investment
income and realized and unrealized capital gains and losses related to separate
account assets are not reflected in the accompanying Statements of Operations.
Product charges recorded by the Companies from variable insurance products
consist of charges applicable to each contract for mortality and expense risk,
cost of insurance, contract administration, and surrender charges. In addition,
some variable annuity and all variable life contracts provide for a distribution
fee collected for a limited number of years after each premium deposit. Revenue
recognition of collected distribution fees is amortized over the life of the
contract in proportion to its expected gross profits. The balance of
unrecognized revenue related to the distribution fees is reported as an unearned
revenue reserve.
DEFERRED INCOME TAXES
Deferred tax assets or liabilities are computed based on the difference between
the financial statement and income tax bases of assets and liabilities using the
enacted marginal tax rate. Deferred tax assets or liabilities are adjusted to
reflect the pro forma impact of unrealized gains and losses on equity securities
and fixed maturities the Companies have designated as available for sale under
SFAS No. 115. Changes in deferred tax assets or liabilities resulting from this
SFAS No. 115 adjustment are charged or credited directly to stockholder's
equity. Deferred income tax expenses or credits reflected in the Companies'
Statements of Operations are based on the changes in the deferred tax asset or
liability from period to period (excluding the SFAS No. 115 adjustment).
DIVIDEND RESTRICTIONS
Golden American's ability to pay dividends to its Parent is restricted. Prior
approval of insurance regulatory authorities is required for payment of
dividends to the stockholder which exceed an annual limit. During 2002, Golden
American cannot pay dividends to its Parent without prior approval of statutory
authorities. Under the provisions of the insurance laws of the State of New
York, First Golden cannot distribute any dividends to its stockholder, Golden
American, unless a notice of its intent to declare a dividend and the amount of
the dividend has been filed with the New York Insurance Department at least
thirty days in advance of the proposed declaration. If the Superintendent of the
New York Insurance Department finds the financial condition of First Golden does
not warrant the distribution, the Superintendent may disapprove the distribution
by giving written notice to First Golden within thirty days after the filing.
SEGMENT REPORTING
The Companies manage their business as one segment, the sale of variable and
fixed insurance products designed to meet customer needs for tax-advantaged
saving for retirement and protection from death. Variable insurance products are
sold to consumers and corporations throughout the United States.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
affecting the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
32
Management is required to utilize historical experience and assumptions about
future events and circumstances in order to develop estimates of material
reported amounts and disclosures. Included among the material (or potentially
material) reported amounts and disclosures that require extensive use of
estimates and assumptions are: (1) estimates of fair values of investments in
securities and other financial instruments, as well as fair values of
policyholder liabilities, (2) policyholder liabilities, (3) deferred policy
acquisition costs and value of purchased insurance in force, (4) fair values of
assets and liabilities recorded as a result of merger, (5) asset valuation
allowances, (6) guaranty fund assessment accruals, (7) deferred tax benefits
(liabilities), and (8) estimates for commitments and contingencies including
legal matters, if a liability is anticipated and can be reasonably estimated.
Estimates and assumptions regarding all of the preceding items are inherently
subject to change and are reassessed periodically. Changes in estimates and
assumptions could materially impact the financial statements.
NEW ACCOUNTING STANDARDS
Derivatives: As of January 1, 2001, the Companies adopted FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended and
interpreted by FAS No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, FAS No.
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of FASB Statement No. 133, and certain FAS No. 133
implementation issues. This standard, as amended, requires companies to record
all derivatives on the balance sheet as either assets or liabilities and measure
those instruments at fair value. The manner in which companies are to record
gains or losses resulting from changes in the fair values of those derivatives
depends on the use of the derivative and whether it qualifies for hedge
accounting.
Adoption of FAS No. 133 did not have a material effect on the Companies'
financial position or results of operations given the Companies' limited
derivative and embedded derivative holdings.
The Companies chose to elect a transition date of January 1, 1999 for embedded
derivatives. Therefore, only those derivatives embedded in hybrid instruments
issued, acquired or substantively modified by the entity on or after January 1,
1999 are recognized as separate assets or liabilities. The cumulative effect of
the accounting change upon adoption was not material.
Recognition of Interest Income and Impairment on Purchased and Beneficial
Interests in Securitized Financial Assets: Effective April 2001, the Companies
adopted Emerging Issues Task Force Issue "EITF" 99-20, Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets. EITF 99-20 states that interest income earned on
retained or purchased beneficial interests in securitized financial assets
should be recognized over the life of the investment based on an anticipated
yield determined by periodically estimating cash flows. Interest income should
be revised prospectively for changes in cash flows. Additionally, impairment
should be recognized if the fair value of the beneficial interest has declined
below its carrying amount and the decline is other than temporary. The impact of
adoption was not significant to the Companies financial position or results of
operations.
Pending Accounting Standards: Goodwill: In June 2001, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standards No. 141,
"Business Combinations", and No. 142, "Goodwill and Other Intangible Assets,"
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment tests in accordance
with the Statements. Other intangible assets will continue to be amortized over
their useful lives. The Companies are required to adopt the new rules effective
January 1, 2002. The Companies are evaluating the impact of the adoption of
these standards and have not yet determined the effect of adoption on their
financial position and results of operations.
RECLASSIFICATIONS
Certain amounts in the 2000 and 1999 financial statements have been reclassified
to conform to the 2001 financial statement presentation.
33
2. BASIS OF FINANCIAL REPORTING
- ---------------------------------
The financial statements of the Companies differ from related statutory-basis
financial statements principally as follows: (1) acquisition costs of acquiring
new business are deferred and amortized over the life of the policies rather
than charged to operations as incurred; (2) an asset representing the present
value of future cash flows from insurance contracts acquired was established as
a result of the merger/acquisition and is amortized and charged to expense; (3)
future policy benefit reserves for divisions with fixed interest guarantees of
the variable insurance products are based on full account values, rather than
the greater of cash surrender value or amounts derived from discounting
methodologies utilizing statutory interest rates; (4) reserves are reported
before reduction for reserve credits related to reinsurance ceded and a
receivable is established, net of an allowance for uncollectible amounts, for
these credits rather than presented net of these credits; (5) fixed maturity
investments are designated as "available for sale" and valued at fair value with
unrealized appreciation/depreciation, net of adjustments to value of purchased
insurance in force, deferred policy acquisition costs, and deferred income taxes
(if applicable), credited/charged directly to stockholder's equity rather than
valued at amortized cost; (6) the carrying value of fixed maturities is reduced
to fair value by a charge to realized losses in the Statements of Operations
when declines in carrying value are judged to be other than temporary, rather
than through the establishment of a formula-determined statutory investment
reserve (carried as a liability), changes in which are charged directly to
surplus; (7) deferred income taxes are provided for the difference between the
financial statement and income tax bases of assets and liabilities; (8) net
realized gains or losses attributed to changes in the level of interest rates in
the market are recognized when the sale is completed rather than deferred and
amortized over the remaining life of the fixed maturity security; (9) a
liability is established for anticipated guaranty fund assessments, net of
related anticipated premium tax credits, rather than capitalized when assessed
and amortized in accordance with procedures permitted by insurance regulatory
authorities; (10) revenues for variable insurance products consist of policy
charges applicable to each contract for the cost of insurance, policy
administration charges, amortization of policy initiation fees, and surrender
charges assessed rather than premiums received; (11) the financial statements of
Golden American's wholly owned subsidiary are consolidated rather than recorded
at the equity in net assets; (12) surplus notes are reported as liabilities
rather than as surplus; and (13) assets and liabilities are restated to fair
values when a change in ownership occurs, with provisions for goodwill and other
intangible assets, rather than continuing to be presented at historical cost.
The net loss for Golden American as determined in accordance with statutory
accounting practices was $156.4 million in 2001, $71.1 million in 2000, and
$85.6 million in 1999. Total statutory capital and surplus was $451.6 million
and $406.9 million at December 31, 2001 and 2000, respectively.
The National Association of Insurance Commissioners has revised the Accounting
Practices and Procedures Manual, the guidance that defines statutory accounting
principles. The revised manual was effective January 1, 2001, and has been
adopted, at least in part, by the States of Delaware and New York, which are the
states of domicile for Golden American and First Golden, respectively. The
revised manual resulted in changes to the accounting practices that the
Companies use to prepare their statutory-basis financial statements. The impact
of these changes to the Companies' statutory-basis capital and surplus as of
January 1, 2001 was not significant.
34
3. INVESTMENT OPERATIONS
- --------------------------
INVESTMENT RESULTS
Major categories of net investment income are summarized below:
YEAR ENDED DECEMBER 31, 2001 2000 1999
--------------------------------
(Dollars in thousands)
Fixed maturities ...................... $ 83,654 $ 55,302 $ 50,352
Equity securities ..................... -- 248 515
Mortgage loans on real estate ......... 11,205 7,832 7,074
Policy loans .......................... 793 516 485
Short-term investments and cash and
cash equivalents ................... 2,605 2,253 2,583
Other, net ............................ 598 543 388
--------------------------------
Gross investment income ............... 98,855 66,694 61,397
Less investment expenses .............. (4,459) (2,554) (2,228)
--------------------------------
Net investment income ................. $ 94,396 $ 64,140 $ 59,169
================================
Realized losses on investments follows:
YEAR ENDED DECEMBER 31, 2001 2000 1999
--------------------------------
(Dollars in thousands)
Fixed maturities, available for sale .. $ (4,848) $ (6,289) $ (2,910)
Equity securities ..................... (1,622) (213) --
Mortgage loans on real estate ......... -- (52) (13)
--------------------------------
Realized losses on investments ........ $ (6,470) $ (6,554) $ (2,923)
================================
The change in unrealized appreciation (depreciation) of securities at fair value
follows:
YEAR ENDED DECEMBER 31, 2001 2000 1999
--------------------------------
(Dollars in thousands)
Fixed maturities, available for sale .. $ 18,559 $ 16,558 $(24,944)
Equity securities ..................... 1,801 (4,198) 5,301
--------------------------------
Change in unrealized appreciation
(depreciation) of securities ....... $ 20,360 $ 12,360 $(19,643)
================================
35
At December 31, 2001 and December 31, 2000, amortized cost, gross unrealized
gains and losses, and estimated fair values of fixed maturities, all of which
are designated as available for sale, follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 2001 Cost Gains Losses Value
--------------------------------------------------
(Dollars in thousands)
U.S. government and governmental
agencies and authorities ...... $ 132,081 $ 479 $ (3,435) $ 129,125
Public utilities ............... 39,775 345 (1,374) 38,746
Foreign government ............. 143,574 3,326 (213) 146,687
Corporate securities ........... 1,111,798 15,027 (10,037) 1,116,788
Other asset-backed securities .. 388,250 7,233 (1,647) 393,836
Mortgage-backed securities ..... 167,049 3,554 (872) 169,731
--------------------------------------------------
Total .......................... $1,982,527 $ 29,964 $ (17,578) $1,994,913
==================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 2000 Cost Gains Losses Value
-------------------------------------------------
(Dollars in thousands)
U.S. government and governmental
agencies and authorities ...... $ 18,607 $ 580 $ (16) $ 19,171
Public utilities ............... 54,132 294 (1,600) 52,826
Corporate securities ........... 355,890 1,318 (8,006) 349,202
Other asset-backed securities .. 223,787 2,166 (1,831) 224,122
Mortgage-backed securities ..... 146,335 1,465 (543) 147,257
-------------------------------------------------
Total .......................... $ 798,751 $ 5,823 $ (11,996) $ 792,578
=================================================
Short-term investments and cash and cash equivalents have been excluded from the
above schedules. Amortized cost approximates fair value for these securities. At
December 31, 2001, net unrealized investment gain on fixed maturities designated
as available for sale totaled $12,386,000. Appreciation of $3,816,000 was
included in stockholder's equity at December 31, 2001 (net of adjustments of
$535,000 to VPIF, $5,979,000 to DPAC, and $2,056,000 to deferred income taxes).
At December 31, 2000, net unrealized investment loss on fixed maturities
designated as available for sale totaled $6,173,000. Depreciation of $1,447,000
was included in stockholder's equity at December 31, 2000 (net of adjustments of
$801,000 to VPIF, $3,146,000 to DPAC, and $779,000 to deferred income taxes).
At December 31, 2001, net unrealized depreciation on equity securities was
comprised entirely of gross depreciation of $19,000. At December 31, 2000, net
unrealized depreciation on equity securities was comprised entirely of gross
depreciation of $1,820,000.
Amortized cost and estimated fair value of fixed maturities designated as
available for sale, by contractual maturity, at December 31, 2001 are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
36
Amortized Estimated
December 31, 2001 Cost Fair Value
-----------------------
(Dollars in thousands)
Due within one year .............................. $ 78,928 $ 79,718
Due after one year through five years ............ 369,061 377,078
Due after five years through ten years ........... 731,087 729,731
Due after ten years .............................. 248,152 244,819
-----------------------
1,427,228 1,431,346
Other asset-backed securities .................... 388,250 393,836
Mortgage-backed securities ....................... 167,049 169,731
-----------------------
Total ............................................ $1,982,527 $1,994,913
=======================
An analysis of sales, maturities, and principal repayments of the Companies'
fixed maturities portfolio follows:
Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
------------------------------------------
(Dollars in thousands)
For the year ended December 31, 2001:
Scheduled principal repayments, calls, and
tenders ................................ $168,703 $ -- $ -- $168,703
Sales .................................... 712,443 6,569 (7,027) 711,985
------------------------------------------
Total .................................... $881,146 $ 6,569 $ (7,027) $880,688
==========================================
For the year ended December 31, 2000:
Scheduled principal repayments, calls, and
tenders ................................ $ 91,158 $ 122 $ (1) $ 91,279
Sales .................................... 120,125 285 (6,553) 113,857
------------------------------------------
Total .................................... $211,283 $ 407 $ (6,554) $205,136
==========================================
For the year ended December 31, 1999:
Scheduled principal repayments, calls, and
tenders ................................ $141,346 $ 216 $ (174) $141,388
Sales .................................... 80,472 141 (1,454) 79,159
------------------------------------------
Total .................................... $221,818 $ 357 $ (1,628) $220,547
==========================================
Investment Valuation Analysis: The Companies analyze the investment portfolio at
least quarterly in order to determine if the carrying value of any investment
has been impaired. The carrying value of debt and equity securities is written
down to fair value by a charge to realized losses when an impairment in value
appears to be other than temporary. These impairment losses are included in the
realized gains and losses on investments in the consolidated statement of
operations.
During 2001, Golden American determined that the carrying value of eleven bonds
exceeded their estimated net realizable value. As a result, as of December 31,
2001, Golden American recognized a total pre-tax loss of $4.4 million to reduce
the carrying value of the bonds to their combined net realizable value of $5.5
million.
37
During the second quarter of 2000, Golden American determined that the carrying
value of an impaired bond exceeded its estimated net realizable value. As a
result, on June 30, 2000, Golden American recognized a total pre-tax loss of
approximately $142,000 to reduce the carrying value of the bond to its net
realizable value of $315,000 at December 31, 2000.
During the fourth quarter of 1998, Golden American determined that the carrying
value of two bonds exceeded their estimated net realizable value. As a result,
at December 31, 1998, Golden American recognized a total pre-tax loss of
$973,000 to reduce the carrying value of the bonds to their combined net
realizable value of $2,919,000. During the second quarter of 1999, further
information was received regarding these bonds and Golden American determined
that the carrying value of the two bonds exceeded their estimated net realizable
value. As a result, at June 30, 1999, Golden American recognized a total pre-tax
loss of $1,639,000 to further reduce the carrying value of the bonds to their
combined net realizable value of $1,137,000. During the years 2000 and 2001,
these bonds had no further reduction in carrying value.
Investments on Deposit: At December 31, 2001, bonds with a par value of
$6,870,000, unchanged from December 31, 2000, were on deposit with regulatory
authorities pursuant to certain statutory requirements.
Investment Diversifications: The Companies' investment policies require
diversification by asset type and set limits on the amount which can be invested
in an individual issuer. Such policies are at least as restrictive as applicable
regulatory requirements. The following percentages relate to holdings at
December 31, 2001 and December 31, 2000. Fixed maturities includes investments
in industrials (37% in 2001, 29% in 2000), governmental securities (18% in 2001,
3% in 2000), mortgage-backed securities (16% in 2001, 26% in 2000), other
asset-backed securities (12% in 2001, 20% in 2000), and financial companies (10%
in 2001, 14% in 2000). Mortgage loans on real estate have been analyzed by
geographical location with concentrations by state identified as Ohio (20% in
2001 and 4% in 2000) and California (18% in 2001 and 15% in 2000). There are no
other concentrations of mortgage loans on real estate in any state exceeding ten
percent at December 31, 2001 and 2000. Mortgage loans on real estate have also
been analyzed by collateral type with significant concentrations identified in
multi-family apartments (36% in 2001 and 10% in 2000), industrial buildings (19%
in 2001, 35% in 2000), retail facilities (20% in 2001, 18% in 2000), and office
buildings (21% in 2001, 29% in 2000). Equity securities are not significant to
the Companies' overall investment portfolio.
No investment in any person or its affiliates (other than bonds issued by
agencies of the United States government) exceeded ten percent of stockholder's
equity at December 31, 2001.
4. DERIVATIVE INSTRUMENTS
- ---------------------------
The Companies may from time to time utilize various derivative instruments to
manage interest rate and price risk (collectively, market risk). The Companies
have appropriate controls in place, and financial exposures are monitored and
managed by the Companies as an integral part of their overall risk management
program. Derivatives are recognized on the balance sheet at their fair value. At
December 31, 2001, the Companies did not utilize any such derivatives.
The estimated fair values and carrying amounts of the Companies' embedded
derivatives at December 31, 2001 were $0, net of reinsurance. The estimated fair
values and carrying amounts of the embedded derivatives on a direct basis,
before reinsurance, were $3.1 million.
The fair value of these instruments was estimated based on quoted market prices,
dealer quotations or internal estimates.
38
5. COMPREHENSIVE INCOME
- -------------------------
Comprehensive income includes all changes in stockholder's equity during a
period except those resulting from investments by and distributions to the
stockholder. Other comprehensive income excludes net investment losses included
in net income, which merely represent transfers from unrealized to realized
gains and losses. These amounts total $3,213,000, $1,751,000, and $1,468,000 in
the years ended December 31, 2001, 2000, and 1999, respectively. Such amounts,
which have been measured through the date of sale, are net of income taxes and
adjustments to VPIF and DPAC totaling $3,257,000, $4,751,000, and $1,441,000 in
the years ended December 31, 2001, 2000, and 1999, respectively.
6. FAIR VALUES OF FINANCIAL INSTRUMENTS
- -----------------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of estimated fair value of all financial instruments, including both
assets and liabilities recognized and not recognized in a company's balance
sheet, unless specifically exempted. SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," requires additional disclosures about
derivative financial instruments. Most of the Companies' investments, investment
contracts, and debt fall within the standards' definition of a financial
instrument. Fair values for the Companies' insurance contracts other than
investment contracts are not required to be disclosed. In cases where quoted
market prices are not available, estimated 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. Accounting, actuarial, and regulatory bodies are
continuing to study the methodologies to be used in developing fair value
information, particularly as it relates to such things as liabilities for
insurance contracts. Accordingly, care should be exercised in deriving
conclusions about the Companies' business or financial condition based on the
information presented herein.
The Companies closely monitor the composition and yield of invested assets, the
duration and interest credited on insurance liabilities, and resulting interest
spreads and timing of cash flows. These amounts are taken into consideration in
the Companies' overall management of interest rate risk, which attempts to
minimize exposure to changing interest rates through the matching of investment
cash flows with amounts expected to be due under insurance contracts. These
assumptions may not result in values consistent with those obtained through an
actuarial appraisal of the Companies' business or values that might arise in a
negotiated transaction.
39
The following compares carrying values as shown for financial reporting purposes
with estimated fair values:
DECEMBER 31 2001 2000
----------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----------------------------------------------------
(Dollars in thousands)
ASSETS
Fixed maturities, available for sale ... $ 1,994,913 $ 1,994,913 $ 792,578 $ 792,578
Equity securities ...................... 55 55 6,791 6,791
Mortgage loans on real estate .......... 213,883 219,158 99,916 100,502
Policy loans ........................... 14,847 14,847 13,323 13,323
Short-term investments ................. 10,021 10,021 106,775 106,775
Cash and cash equivalents .............. 195,726 195,726 63,207 63,207
Separate account assets ................ 10,958,191 10,958,191 9,831,489 9,831,489
LIABILITIES
Annuity products ....................... 2,162,381 1,983,833 1,047,932 962,810
Surplus notes .......................... 245,000 358,064 245,000 204,455
Revolving note payable ................. 1,400 1,400 -- --
Separate account liabilities ........... 10,958,191 10,958,191 9,831,489 9,831,489
The following methods and assumptions were used by the Companies in estimating
fair values.
Fixed maturities: Estimated fair values of conventional mortgage-backed
securities not actively traded in a liquid market and publicly traded securities
are estimated using a third party pricing process. This pricing process uses a
matrix calculation assuming a spread over U.S. Treasury bonds based upon the
expected average lives of the securities.
Equity securities: Estimated fair values of equity securities, which consist of
the Companies' investment in the portfolios underlying its separate accounts,
are based upon the quoted fair value of individual securities comprising the
individual portfolios. For equity securities not actively traded, estimated fair
values are based upon values of issues of comparable returns and quality.
Mortgage loans on real estate: Fair values are estimated by discounting expected
cash flows, using interest rates currently offered for similar loans.
Policy loans: Carrying values approximate the estimated fair value for policy
loans.
Short-term investments and cash and cash equivalents: Carrying values reported
in the Companies' historical cost basis balance sheet approximate estimated fair
value for these instruments due to their short-term nature.
Separate account assets: Separate account assets are reported at the quoted fair
values of the individual securities in the separate accounts.
Annuity products: Estimated fair values of the Companies' liabilities for future
policy benefits for the divisions of the variable annuity products with fixed
interest guarantees and for supplemental contracts without life contingencies
are stated at cash surrender value, the cost the Companies would incur to
extinguish the liability.
Surplus notes: Estimated fair value of the Companies' surplus notes were based
upon discounted future cash flows using a discount rate approximating the
current market value.
40
Revolving note payable: Carrying value reported in the Companies' historical
cost basis balance sheet approximates estimated fair value for this instrument,
as the agreement carries a variable interest rate provision.
Separate account liabilities: Separate account liabilities are reported at full
account value in the Companies' historical cost balance sheet. Estimated fair
values of separate account liabilities are equal to their carrying amount.
7. VALUE OF PURCHASED INSURANCE IN FORCE
- ------------------------------------------
As a result of the merger, a portion of the purchase price was allocated to the
right to receive future cash flows from existing insurance contracts. This
allocated cost represents VPIF, which reflects the value of those purchased
policies calculated by discounting actuarially determined expected future cash
flows at the discount rate determined by the purchaser. Interest was accrued at
a rate of 7.37% during 2001 (7.32% during 2000, and 7.33% during 1999).
A reconciliation of the change in the VPIF asset follows:
YEAR ENDED DECEMBER 31, 2001 2000 1999
--------------------------------
(Dollars in thousands)
Beginning balance ..................... $ 25,942 $ 31,727 $ 35,977
Accretion of interest ............... 1,617 2,016 2,372
Amortization of asset ............... (6,020) (6,817) (8,610)
Adjustment for unrealized
gains (losses) .................... (1,336) (984) 1,988
--------------------------------
Ending balance ........................ $ 20,203 $ 25,942 $ 31,727
================================
Based on current conditions and assumptions as to the impact of future events on
acquired policies in force, the expected approximate net amortization relating
to VPIF as of December 31, 2001, is $3.1 million in 2002, $2.8 million in 2003,
$2.4 million in 2004, $1.9 million in 2005, and $1.4 million in 2006. Actual
amortization may vary based upon changes in assumptions and experience.
8. INCOME TAXES
- -----------------
Golden American files a consolidated federal income tax return with First
Golden. Golden American has a tax allocation agreement with First Golden whereby
Golden American charges its subsidiary for taxes it would have incurred were it
not a member of the consolidated group and credits the member for losses used in
consolidation.
At December 31, 2001, the Companies have net operating loss ("NOL")
carryforwards for federal income tax purposes of approximately $345,859,000.
Approximately $5,094,000, $3,354,000, $50,449,000, $94,078,000 $91,107,000 and
$101,777,000 of these NOL carryforwards are available to offset future taxable
income of the Companies through the years 2011, 2012, 2013, 2014, 2015 and 2016,
respectively.
41
Income Tax Expense (Benefit)
Income tax expense (benefit) included in the consolidated financial statements
follows:
YEAR ENDED DECEMBER 31, 2001 2000 1999
--------------------------------
(Dollars in thousands)
Current ............................... $ 782 $ (46) $ --
Deferred .............................. (606) 13,282 8,077
--------------------------------
$ 176 $ 13,236 $ 8,077
================================
The effective tax rate on income before income taxes is different from the
prevailing federal income tax rate. A reconciliation of this difference follows:
YEAR ENDED DECEMBER 31, 2001 2000 1999
--------------------------------
(Dollars in thousands)
Income before income taxes ............ $ (3,778) $ 32,416 $ 19,291
================================
Income tax at federal statutory rate .. $ (1,322) $ 11,346 $ 6,752
Tax effect of:
Goodwill amortization ............... 1,033 1,033 1,033
Meals and entertainment ............. 480 292 199
Other items ......................... (15) 565 93
--------------------------------
Income tax expense .................... $ 176 $ 13,236 $ 8,077
================================
42
DEFERRED INCOME TAXES
The tax effect of temporary differences giving rise to the Companies' deferred
income tax assets and liabilities at December 31, 2001 and 2000 follows:
DECEMBER 31 2001 2000
----------------------------------------------------------------------------
(Dollars in thousands)
Deferred tax assets:
Net unrealized depreciation of securities
at fair value ................................ $ 7 $ 637
Net unrealized depreciation of available
for sale fixed maturities .................... -- 779
Future policy benefits ......................... 176,331 163,691
Net operating loss carryforwards ............... 121,711 66,380
----------------------
298,049 231,487
Deferred tax liabilities:
Tax deductible goodwill ........................ (3,547) (2,696)
Net unrealized appreciation of available
for sale fixed maturities ................... (2,056) --
Fixed maturity securities ...................... (17,812) (17,774)
Deferred policy acquisition costs .............. (222,781) (184,743)
Value of purchased insurance in force .......... (6,894) (8,512)
Other .......................................... (57,571) (23,723)
----------------------
(310,661) (237,448)
----------------------
Valuation allowance ............................... -- (1,416)
----------------------
Net deferred income tax liability ................. $ (12,612) $ (7,377)
======================
At December 31, 2001, the Companies reported, for financial statement purposes,
net unrealized gains on certain investments that generated deferred tax
liabilities which have been recognized for tax purposes. At December 31, 2000,
the Companies reported, for financial statement purposes, unrealized losses on
certain investments, which have not been recognized for tax purposes. Since it
was uncertain as to whether these capital losses, if ever realized, could be
utilized to offset capital gains, a valuation allowance was established for the
tax effect of the financial statement losses.
The Companies establish reserves for possible proposed adjustments by various
taxing authorities. Management believes there are sufficient reserves provided
for, or adequate defenses against any such adjustments.
9. RETIREMENT PLANS AND EMPLOYEE STOCK COMPENSATION
- -----------------------------------------------------
DEFINED BENEFIT PLANS
In 2001, 2000 and 1999, the Companies were allocated their share of the pension
liability associated with their employees. During these years, the Companies'
employees were covered by the employee retirement plan of Equitable Life.
Further, Equitable Life sponsors a defined contribution plan that is qualified
under Internal Revenue Code Section 401(k).
As of December 31, 2001, the qualified pension benefit plans of certain United
States subsidiaries of ING North America Insurance Corporation ("ING North
America"), including Equitable Life, were merged into one plan which will be
recognized in ING North America's financial statements. The Companies also
transferred their pension liabilities to the Parent at that date. In exchange
for these liabilities, the Companies received a capital contribution, net of
taxes, from the Parent.
43
The following tables summarize the benefit obligations and the funded status for
pension benefits over the two-year period ended December 31, 2001:
2001 2000
----------------------
(Dollars in thousands)
Change in benefit obligation:
Benefit obligation at January 1 ............... $ 7,906 $ 4,221
Service cost .................................. 1,998 1,569
Interest cost ................................. 768 554
Actuarial (gain) loss ......................... (2,710) 1,562
Plan Amendments ............................... (171) --
Transfer of benefit obligation to the Parent .. (7,791) --
----------------------
Benefit obligation at December 31 ............. $ -- $ 7,906
======================
Funded status:
Funded status at December 31 prior to the
transfer of the benefit obligation to
the Parent .................................. $ (7,791) $ (7,906)
Unrecognized past service cost ................ (1,117) 141
Unrecognized net loss ......................... (8) 1,627
Transfer of the funded status to the Parent ... 8,916 --
----------------------
Net amount recognized ......................... $ -- $ (6,138)
======================
Prior to the merger of the qualified benefit plans of ING's US subsidiaries at
December 31, 2001, the Companies' plan assets were held by Equitable Life, an
affiliate. During 1998, the Equitable Life Employee Pension Plan began investing
in an undivided interest of the ING-NA Master Trust (the "Master Trust"). Boston
Safe Deposit and Trust Company holds the Master Trust's investment assets.
The weighted-average assumptions used in the measurement of the Companies'
December 31, 2001 benefit obligation, prior to the merger of the qualified
benefit plans of ING, follows:
DECEMBER 31 2001 2000
-------------------------
Discount rate ............................... 7.50% 7.75%
Expected return on plan assets .............. 9.25 9.25
Rate of compensation increase ............... 4.50 5.00
The following table provides the net periodic benefit cost for the fiscal years
2001, 2000, and 1999:
YEAR ENDED DECEMBER 31, 2001 2000 1999
-----------------------------
(Dollars in thousands)
Service cost ........................... $ 1,998 $ 1,569 $ 1,500
Interest cost .......................... 768 554 323
Unrecognized past service cost ......... 11 -- --
-----------------------------
Net periodic benefit cost .............. $ 2,777 $ 2,123 $ 1,823
=============================
44
There were no gains or losses resulting from curtailments or settlements during
2001, 2000, or 1999.
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets were $0 as of December 31, 2001 and $7,906,000, $4,701,000, and
$0, respectively, as of December 31, 2000.
10. RELATED PARTY TRANSACTIONS
- -------------------------------
Operating Agreements: Directed Services, Inc. ("DSI"), an affiliate, acts as the
principal underwriter (as defined in the Securities Act of 1933 and the
Investment Company Act of 1940, as amended) and distributor of the variable
insurance products issued by the Companies. DSI is authorized to enter into
agreements with broker/dealers to distribute the Companies' variable products
and appoint representatives of the broker/dealers as agents. For the years ended
December 31, 2001, 2000, and 1999, the Companies paid commissions to DSI
totaling $229,726,000, $208,883,000, and $181,536,000, respectively.
Golden American provides certain managerial and supervisory services to DSI. The
fee paid by DSI for these services is calculated as a percentage of average
assets in the variable separate accounts. For the years ended December 31, 2001,
2000, and 1999, the fee was $23,138,000, $21,296,000, and $10,136,000,
respectively.
Effective January 1, 1998, the Companies have an asset management agreement with
ING Investment Management LLC ("ING IM"), an affiliate, in which ING IM provides
asset management and accounting services. Under the agreement, the Companies
record a fee based on the value of the assets under management. The fee is
payable quarterly. For the years ended December 31, 2001, 2000, and 1999, the
Companies incurred fees of $4,392,000, $2,521,000, and $2,227,000, respectively,
under this agreement.
Golden American has a guaranty agreement with Equitable Life. In consideration
of an annual fee, payable June 30, Equitable Life guarantees to Golden American
that it will make funds available, if needed, to Golden American to pay the
contractual claims made under the provisions of Golden American's life insurance
and annuity contracts. The agreement is not, and nothing contained therein or
done pursuant thereto by Equitable Life shall be deemed to constitute, a direct
or indirect guaranty by Equitable Life of the payment of any debt or other
obligation, indebtedness, or liability, of any kind or character whatsoever, of
Golden American. The agreement does not guarantee the value of the underlying
assets held in separate accounts in which funds of variable life insurance and
variable annuity policies have been invested. The calculation of the annual fee
is based on risk based capital. On June 30, 2001 and 2000, Golden American
incurred a fee of $12,000 and $7,000, respectively, under this agreement. No
annual fee was paid in 1999.
Golden American provides certain advisory, computer, and other resources and
services to Equitable Life. Revenues for these services, which reduced general
expenses incurred by Golden American, totaled $8,192,000, $6,193,000, and
$6,107,000 for the years ended December 31, 2001, 2000, and 1999, respectively.
The Companies have a service agreement with Equitable Life in which Equitable
Life provides administrative and financial related services. Under this
agreement, the Companies incurred expenses of $309,000, $1,270,000, and
$1,251,000 for the years ended December 31, 2001, 2000, and 1999, respectively.
During 2001, the State of Delaware Insurance Department approved expense sharing
agreements with ING America Insurance Holdings, Inc. ("ING AIH") for
administrative, management, financial, and information technology services.
Under these agreements with ING AIH, Golden American incurred expenses of
$23,153,000 for the year ended December 31, 2001.
First Golden provided resources and services to DSI. Revenues for these
services, which reduce general expenses incurred by the Companies, totaled
$139,000, $223,000, and $387,000 for the years ended December 31, 2001, 2000,
and 1999, respectively.
45
Golden American provides resources and services to ING Mutual Funds Management
Co., LLC, an affiliate. Revenues for these services, which reduced general
expenses incurred by Golden American, totaled $478,000, $455,000, and $244,000
for the years ended December 31, 2001, 2000, and 1999, respectively.
Golden American provides resources and services to United Life & Annuity
Insurance Company, an affiliate. Revenues for these services, which reduced
general expenses incurred by Golden American, totaled $383,000, $593,000 and
$460,000 for the years ended December 31, 2001, 2000, and 1999, respectively.
The Companies provide resources and services to Security Life of Denver
Insurance Company, an affiliate. Revenues for these services, which reduced
general expenses incurred by the Companies, totaled $326,000, $261,000 and
$216,000 for the years ended December 31, 2001, 2000, and 1999, respectively.
The Companies provide resources and services to Southland Life Insurance
Company, an affiliate. Revenues for these services, which reduce general
expenses incurred by the Companies, totaled $132,000, $115,000 and $103,000 for
the years ended December 31, 2001, 2000, and 1999, respectively.
In 2001, 2000, and 1999, the Companies received 14.0%, 11.3%, and 10.0% of total
premiums, net of reinsurance, for variable products sold through eight
affiliates as noted in the following table:
YEAR ENDED DECEMBER 31, 2001 2000 1999
-------------------------------
(Dollars in thousands)
LSSI.................................... $ 124.4 $ 127.0 $ 168.5
Vestax Securities Corporation........... 35.3 47.2 88.1
DSI..................................... 1.1 1.4 2.5
Multi-Financial Securities Corporation..
26.2 38.6 44.1
IFG Network Securities, Inc............. 12.8 23.1 25.8
Washington Square ...................... 99.2 44.6 --
Primevest............................... 46.0 6.2 --
Compulife............................... 6.6 2.7 --
-------------------------------
Total................................... $ 351.6 $ 290.8 $ 329.0
===============================
Modified Coinsurance Agreement: On June 30, 2000, effective January 1, 2000,
Golden American entered into a modified coinsurance agreement with Equitable
Life, an affiliate, covering a considerable portion of Golden American's
variable annuities issued on or after January 1, 2000, excluding those with an
interest rate guarantee. The financial statements are presented net of the
effects of the agreement.
Under this agreement, Golden American received a net reimbursement of expenses
and charges of $224.5 million and $218.8 million for the years ended December
31, 2001 and 2000, respectively. This was offset by a decrease in policy
acquisition costs deferred of $257.5 million and $223.7 million, respectively,
for the same periods. As at December 31, 2001 and 2000, Golden American also had
a payable to Equitable Life of $22.6 million and $16.3 million, respectively,
due to the overpayment by Equitable Life of the cash settlement for the modified
coinsurance agreement.
Reinsurance Agreement Covering Minimum Guaranteed Benefits: On December 28,
2000, Golden American entered into a reinsurance agreement with Security Life of
Denver International, Ltd., an affiliate, covering variable annuity minimum
guaranteed death benefits and minimum guaranteed living benefits of variable
annuities issued on or after January 1, 2000. Golden American also obtained an
irrevocable letter of credit through Bank of New York in the amount of $25
million related to this agreement. Effective December 24, 2001, the letter of
credit amount was revised to $70 million. Under this agreement, Golden American
46
recorded a reinsurance recoverable of $28.8 million and $14.6 million at
December 31, 2001 and 2000, respectively.
Reciprocal Loan Agreement: Golden American maintains a reciprocal loan agreement
with ING AIH, a Delaware corporation and affiliate, to facilitate the handling
of unusual and/or unanticipated short-term cash requirements. Under this
agreement, which became effective January 1, 1998 and expires December 31, 2007,
Golden American and ING AIH can borrow up to $65,000,000 from one another. Prior
to lending funds to ING AIH, Golden American must obtain the approval from the
Department of Insurance of the State of Delaware. Interest on any Golden
American borrowings is charged at the rate of ING AIH's cost of funds for the
interest period plus 0.15%. Interest on any ING AIH borrowings is charged at a
rate based on the prevailing interest rate of U.S. commercial paper available
for purchase with a similar duration. Under this agreement, Golden American
incurred interest expense of $26,000, $481,000, and $815,000 for the years ended
December 31, 2001, 2000, and 1999, respectively. At December 31, 2001, 2000, and
1999, Golden American did not have any borrowings or receivables from ING AIH
under this agreement.
Surplus Notes: On December 30, 1999, Golden American issued an 8.179% surplus
note in the amount of $50,000,000 to Equitable Life. The note matures on
December 29, 2029. Payment of the note and related accrued interest is
subordinate to payments due to policyholders, claimant and beneficiary claims,
as well as debts owed to all other classes of debtors, other than surplus note
holders, of Golden American. Any payment of principal and/or interest made is
subject to the prior approval of the Delaware Insurance Commissioner. Under this
agreement, Golden American incurred interest expense of $4,089,000 and
$4,112,000 for the years ended December 31, 2001 and 2000, respectively. Golden
American incurred no interest expense during the year ended December 31, 1999.
On December 8, 1999, Golden American issued a 7.979% surplus note in the amount
of $35,000,000 to First Columbine Life Insurance Company ("First Columbine"), an
affiliate. The note matures on December 7, 2029. Payment of the note and related
accrued interest is subordinate to payments due to policyholders, claimant and
beneficiary claims, as well as debts owed to all other classes of debtors, other
than surplus note holders, of Golden American. Any payment of principal and/or
interest made is subject to the prior approval of the Delaware Insurance
Commissioner. Under this agreement, Golden American incurred interest expense of
$2,792,000, $2,961,000, and $0 for the years ended December 31, 2001, 2000, and
1999, respectively.
On September 30, 1999, Golden American issued a 7.75% surplus note in the amount
of $75,000,000 to ING AIH. The note matures on September 29, 2029. Payment of
the note and related accrued interest is subordinate to payments due to
policyholders, claimant, and beneficiary claims, as well as debts owed to all
other classes of debtors, other than surplus note holders, of Golden American.
Any payment of principal and/or interest made is subject to the prior approval
of the Delaware Insurance Commissioner. Under this agreement, Golden American
incurred interest expense of $5,813,000, $5,813,000, and $1,469,000 for the
years ended December 31, 2001, 2000, and 1999, respectively.
On December 30, 1999, ING AIH assigned the note to Equitable Life. On December
30, 1998, Golden American issued a 7.25% surplus note in the amount of
$60,000,000 to Equitable Life. The note matures on December 29, 2028. Payment of
the note and related accrued interest is subordinate to payments due to
policyholders, claimant, and beneficiary claims, as well as debts owed to all
other classes of debtors, other than surplus note holders, of Golden American.
Any payment of principal and/or interest made is subject to the prior approval
of the Delaware Insurance Commissioner. Under this agreement, Golden American
incurred interest expense of $4,350,000 in 2001, unchanged from 2000 and 1999.
On December 17, 1996, Golden American issued an 8.25% surplus note in the amount
of $25,000,000 to Equitable. The note matures on December 17, 2026. Payment of
the note and related accrued interest is subordinate to payments due to
policyholders, claimant, and beneficiary claims, as well as debts owed to all
other classes of debtors of Golden American. Any payment of principal made is
subject to the prior approval of the Delaware Insurance Commissioner. Golden
American incurred interest totaling $2,063,000 in 2001, unchanged from 2000 and
1999. On December 17, 1996, Golden American contributed the $25,000,000 to First
Golden acquiring 200,000 shares of common stock (100% of outstanding stock).
47
As at December 31, 2000, Golden American also had a receivable of $35,000,000
from capital contributions made by EIC.
Stockholder's Equity: During 2001, 2000, and 1999, Golden American received
capital contributions from EIC of $196,796,000, $80,000,000, and $121,000,000,
respectively.
11. COMMITMENTS AND CONTINGENCIES
- ----------------------------------
Reinsurance: At December 31, 2001, the Companies had reinsurance treaties with
five unaffiliated reinsurers and three affiliated reinsurers covering a
significant portion of the mortality risks and guaranteed death and living
benefits under its variable contracts. Golden American remains liable to the
extent reinsurers do not meet their obligations under the reinsurance
agreements. Reinsurance ceded in force for life mortality risks were
$94,783,000, and $105,334,000 at December 31, 2001 and 2000, respectively. At
December 31, 2001 and 2000, the Companies had net receivables of $55,951,000 and
$33,973,000, respectively, for reinsurance claims, reserve credits, or other
receivables from these reinsurers. At December 31, 2001 and 2000, respectively,
these net receivables were comprised of $7,820,000 and $1,820,000, respectively,
for claims recoverable from reinsurers, $3,376,000 and $4,007,000, respectively,
for a payable for reinsurance premiums, $28,800,000 and $14,642,000,
respectively, for reserve credits, and $22,707,000 and $21,518,000,
respectively, for reinsured surrenders and allowances due from an unaffiliated
reinsurer. Included in the accompanying financial statements, excluding the
modified coinsurance agreements, are net considerations to reinsurers of
$30,329,000, $21,655,000, and $9,883,000 and net policy benefits recoveries of
$21,750,000, $8,927,000, and $3,059,000 for the years ended December 31, 2001,
2000, and 1999, respectively.
On June 30, 2000, effective January 1, 2000, Golden American entered into a
modified coinsurance agreement with Equitable Life, an affiliate, covering a
considerable portion of Golden American's variable annuities issued on or after
January 1, 2000, excluding those with an interest rate guarantee. At December
31, 2001 and 2000, Golden American had received a total settlement of $224.5
million and $218.8 million, respectively, under this agreement. The carrying
value of the separate account liabilities covered under this agreement represent
31.9% and 17.6% of total separate account liabilities outstanding at December
31, 2001 and 2000, respectively. Golden American remains liable to the extent
Equitable Life does not meet its obligations under the agreement. The
accompanying statement of operations, statement of changes in stockholder's
equity and statement of cash flows are presented net of the effects of the
agreement.
On December 28, 2000, Golden American entered into a reinsurance agreement with
Security Life of Denver International, Ltd., an affiliate, covering variable
annuity minimum guaranteed death benefits and guaranteed living benefits of
variable annuities issued on or after January 1, 2000. Golden American also
obtained an irrevocable letter of credit was obtained through Bank of New York
in the amount of $25 million related to this agreement. Effective December 24,
2001, the letter of credit amount was revised to $70 million. Under this
agreement, Golden American had reserve credits of $28,800,000 and $14,642,000 at
December 31, 2001 and 2000, respectively.
On December 29, 2000, First Golden entered into a reinsurance treaty with London
Life Reinsurance Company of Pennsylvania, an unaffiliated reinsurer, covering
the minimum guaranteed death benefits of First Golden's variable annuities
issued on or after January 1, 2000.
Effective June 1, 1994, Golden American entered into a modified coinsurance
agreement with an unaffiliated reinsurer. The accompanying financial statements
are presented net of the effects of the treaty which decreased income by
$458,000 for the year ended December 31, 2001 and increased income by $736,000,
and $1,729,000 for the years ended December 31, 2000 and 1999, respectively.
Investment Commitments: At December 31, 2001, outstanding commitments to fund
mortgage loans totaled $3,182,000 and outstanding commitments to fund fixed
maturities totaled $22,000,000. There were no outstanding commitments to fund
mortgage loans and fixed maturities at December 31, 2000.
48
Guaranty Fund Assessments: Assessments are levied on the Companies by life and
health guaranty associations in most states in which the Companies are licensed
to cover losses of policyholders of insolvent or rehabilitated insurers. In some
states, these assessments can be partially recovered through a reduction in
future premium taxes. The Companies cannot predict whether and to what extent
legislative initiatives may affect the right to offset. The associated cost for
a particular insurance company can vary significantly based upon its fixed
account premium volume by line of business and state premiums as well as its
potential for premium tax offset. The Companies have established an undiscounted
reserve to cover such assessments, review information regarding known failures,
and revise estimates of future guaranty fund assessments. Accordingly, the
Companies accrued and charged to expense an additional $4,000, $3,000, and
$3,000 for the years ended December 31, 2001, 2000, and 1999, respectively. At
December 31, 2001, the Companies have an undiscounted reserve of $2,430,000,
unchanged from December 31, 2000, to cover estimated future assessments (net of
related anticipated premium tax credits) and have established an asset totaling
$712,000, and $733,000, respectively, for assessments paid which may be
recoverable through future premium tax offsets. The Companies believe this
reserve is sufficient to cover expected future guaranty fund assessments based
upon previous premiums and known insolvencies at this time.
Litigation: The Companies, like other insurance companies, may be named or
otherwise involved in lawsuits, including class action lawsuits and
arbitrations. In some class action and other actions involving insurers,
substantial damages have been sought and/or material settlement or award
payments have been made. The Companies currently believe no pending or
threatened lawsuits or actions exist that are reasonably likely to have a
material adverse impact on the Companies.
Vulnerability from Concentrations: The Companies have various concentrations in
the investment portfolio (see Note 3 for further information). The Companies'
asset growth, net investment income, and cash flow are primarily generated from
the sale of variable insurance products and associated future policy benefits
and separate account liabilities. Substantial changes in tax laws that would
make these products less attractive to consumers and extreme fluctuations in
interest rates or stock market returns, which may result in higher lapse
experience than assumed, could cause a severe impact to the Companies' financial
condition. Two broker/dealers, having at least ten percent of total net
premiums, generated 21% of the Companies' variable annuity sales during 2001
(11% by one broker dealer during 2000 and 28% by two broker/dealers during
1999). Two broker dealers, having at least ten percent of total gross premiums,
generated 22% of the Companies' sales during 2001 (21% and 30% by two
broker/dealers during 2000 and 1999, respectively). The Premium Plus product
generated 43% of the Companies' sales during 2001 (71% during 2000 and 79%
during 1999). The ES II product generated 14% of the Companies' sales during
2001 (12% during 2000 and 9% during 1999). The Guarantee product, introduced in
the fourth quarter of 2000, generated 22% of the Companies' sales during 2001
(4% during 2000).
Leases: The Companies lease their home office space, certain other equipment,
and capitalized computer software under operating leases which expire through
2020. During the years ended December 31, 2001, 2000, and 1999, rent expense
totaled $4,298,000, $2,874,000, and $2,273,000, respectively. At December 31,
2001, minimum rental payments due under all non-cancelable operating leases with
initial terms of one year or more are: 2002 - $3,608,000; 2003 - $2,912,000;
2004 - $2,455,000; 2005 - $2,455,000; 2006 - $2,420,000, and 2007 and thereafter
- - $32,451,000.
Revolving Note Payable: To enhance short-term liquidity, the Companies
established a revolving note payable with SunTrust Bank, Atlanta (the "Bank").
These revolving notes payable were amended and restated in April 2001 with an
expiration date of May 31, 2002. The note was approved by the Boards of
Directors of Golden American and First Golden on August 5, 1998 and September
29, 1998, respectively. The total amount the Companies may have outstanding is
$85,000,000, of which Golden American and First Golden have individual credit
sublimits of $75,000,000 and $10,000,000, respectively. The note accrues
interest at an annual rate equal to: (1) the cost of funds for the Bank for the
period applicable for the advance plus 0.225% or (2) a rate quoted by the Bank
to the Companies for the advance. The terms of the agreement require the
Companies to maintain the minimum level of Company Action Level Risk Based
Capital as established by applicable state law or regulation. During the years
ended December 31, 2001, 2000, and 1999, the Companies incurred interest expense
of $119,000, $87,000, and $198,000, respectively.
49
At December 31, 2001, the Companies had a $1,400,000 note payable to the Bank
under this agreement. At December 31, 2000, there were no amounts outstanding
under this agreement.
12. CHANGE OF OWNERSHIP OF GOLDEN AMERICAN
- -------------------------------------------
On December 3, 2001, the Board of Directors of EIC approved a plan to contribute
its holding of 100% of the stock of its wholly owned subsidiary, Golden American
to another wholly owned subsidiary, Equitable Life. The contribution of stock
occurred on December 31, 2001, following approval granted by the Insurance
Department of the State of Delaware.
13. MERGER OF FIRST GOLDEN WITH RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK
- -----------------------------------------------------------------------------
A filing was made on October 31, 2001 in accordance with Item 5 of Form 8-K:
Other Events and Regulation FD Disclosure. The purpose of the filing was to
report that on September 25, 2001, the Board of Directors of First Golden
approved a plan of merger to merge First Golden into ReliaStar Life Insurance
Company of New York ("RLNY"), an affiliate. The merger is currently anticipated
to be effective on April 1, 2002, or shortly thereafter, subject to the approval
of the Insurance Departments of the States of New York and Delaware.
14. QUARTERLY DATA (UNAUDITED)
- -------------------------------
QUARTER ENDED 2001 FIRST SECOND THIRD FOURTH
------------------------------------------
(Dollars in thousands)
Total revenue ................... $ 72,139 $ 65,435 $ 70,108 $ 69,128
------------------------------------------
Income (loss) before income taxes 14,267 5,575 (14,329) (9,291)
Income taxes .................... 5,334 2,373 (5,638) (1,893)
------------------------------------------
Net income (loss) ............... $ 8,933 $ 3,202 $ (8,691) $ (7,398)
==========================================
QUARTER ENDED 2000 FIRST SECOND THIRD FOURTH
------------------------------------------
(Dollars in thousands)
Total revenue ................... $ 55,056 $ 53,672 $ 57,194 $ 59,523
------------------------------------------
Income before income taxes ...... 3,511 10,168 14,207 4,530
Income taxes .................... 1,621 3,981 4,200 3,434
------------------------------------------
Net income ...................... $ 1,890 $ 6,187 $ 10,007 $ 1,096
==========================================
50
- --------------------------------------------------------------------------------
APPENDIX A
- --------------------------------------------------------------------------------
MARKET VALUE ADJUSTMENT EXAMPLES
EXAMPLE #1: FULL SURRENDER -- EXAMPLE OF A NEGATIVE MARKET VALUE ADJUSTMENT
Assume $100,000 was allocated to a Fixed Interest Allocation with a
guaranteed interest period of 10 years, an initial Index Rate ("I") of 5%; that
a full surrender is requested 3 years into the guaranteed interest period; that
the Account Value on the date of surrender is $115,000; that the then Index Rate
for a 7 year guaranteed interest period ("J") is 6%; and that no prior transfers
or withdrawals affecting this Fixed Interest Allocation have been made.
CALCULATE THE MARKET VALUE ADJUSTMENT
1. N = 2,555 ( 365 x 7 )
2. Market Value Adjustment =
$115,000 x [( 1.05/1.0650 )^2,555/365 -1] = $-10,870
Therefore, the amount paid to you on full surrender ignoring any surrender
charge is $104,130 ($115,000 - $10,870).
EXAMPLE #2: FULL SURRENDER -- EXAMPLE OF A POSITIVE MARKET VALUE ADJUSTMENT
Assume $100,000 was allocated to a Fixed Interest Allocation with a
guaranteed interest period of 10 years, an initial Index Rate ("I") of 5%; that
a full surrender is requested 3 years into the guaranteed interest period; that
the Account Value on the date of surrender is $115,000; that the then Index Rate
for a 7 year guaranteed interest period ("J") is 4%; and that no prior transfers
or withdrawals affecting this Fixed Interest Allocation have been made.
CALCULATE THE MARKET VALUE ADJUSTMENT
1. N = 2,555 ( 365 x 7 )
2. Market Value Adjustment =
$115,000 x [( 1.05/1.0450 )^2,555/365 -1 ] = $3,907
Therefore, the amount paid to you on full surrender ignoring any surrender
charge is $118,907 ($115000 + $3,907).
EXAMPLE #3: WITHDRAWAL -- EXAMPLE OF A NEGATIVE MARKET VALUE ADJUSTMENT
Assume $200,000 was allocated to a Fixed Interest Allocation with a
guaranteed interest period of 10 years, an initial Index Rate ("I") of 5%; that
a withdrawal of $128,000 is requested 3 years into the guaranteed interest
period; that the Account Value on the date of withdrawal is $250,000; that the
then Index Rate ("J") for a 7 year guaranteed interest period is 6%; and that no
prior transfers or withdrawals affecting this Fixed Interest Allocation have
been made.
Fixed Account II--121813
A1
First calculate the amount that must be withdrawn from the Fixed Interest
Allocation to provide the amount requested.
1. N = 2,555 ( 365 x 7 )
2. Amount that must be withdrawn =
[ $128,000 / ( 1.05/1.0650 )^2,555/365 ] = $141,362
Then calculate the Market Value Adjustment on that amount.
3. Market Value Adjustment =
$141,362 x [( 1.05/1.0650 )^2,555/365 -1 ] = $-13,362
Therefore, the amount of the withdrawal paid to you ignoring any surrender
charge is $128,000, as requested. The Fixed Interest Allocation will be reduced
by the amount of the withdrawal, $128,000, and also reduced by the Market Value
Adjustment of $13,362, for a total reduction in the Fixed Interest Allocation of
$141,362.
EXAMPLE #4: WITHDRAWAL -- EXAMPLE OF A POSITIVE MARKET VALUE ADJUSTMENT
Assume $200,000 was allocated to a Fixed Interest Allocation with a
guaranteed interest period of 10 years, an initial Index Rate of 5%; that a
withdrawal of $128,000 requested 3 years into the guaranteed interest period;
that the Account Value on the date of withdrawal is $250,000; that the then
Index Rate ("J") for a 7 year guaranteed interest period is 4%; and that no
prior transfers or withdrawals affecting this Fixed Interest Allocation have
been made.
First calculate the amount that must be withdrawn from the Fixed Interest
Allocation to provide the amount requested.
1. N = 2,555 ( 365 x 7 )
2. Amount that must be withdrawn =
[ $128,000 / ( 1.05/1.0450 )^2,555/365 ] = $123,794
Then calculate the Market Value Adjustment on that amount.
3. Market Value Adjustment =
$123,794 x [( 1.05/1.0450 )^2,555/365 -1 ] = $4,206
Therefore, the amount of the withdrawal paid to you ignoring any surrender
charge is $128,000, as requested. The Fixed Interest Allocation will be reduced
by the amount of the withdrawal, $128,000, but increased by the Market Value
Adjustment of $4,206, for a total reduction in the Fixed Interest Allocation of
$123,794.
Fixed Account II--121813
A2
ING[LOGO]
GOLDEN AMERICAN LIFE INSURANCE COMPANY
Golden American Life Insurance Company is a stock company domiciled in Delaware.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Fixed Account II--121813 05/01/2002
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Not applicable.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The following provisions regarding the Indemnification of
Directors and Officers of the Registrant are applicable:
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
INCORPORATORS
Delaware General Corporation Law, Title 8, Section 145
provides that corporations incorporated in Delaware may
indemnify their officers, directors, employees or agents
for threatened, pending or past legal action by reason
of the fact he/she is or was a director, officer,
employee or agent. Such indemnification is provided for
under the Company's By-Laws under Article VI.
Indemnification includes all liability and loss suffered
and expenses (including attorneys' fees) reasonably
incurred by such indemnitee. Prepayment of expenses is
permitted, however, reimbursement is required if it is
ultimately determined that indemnification should not
have been given.
DIRECTORS' AND OFFICERS' INSURANCE
The directors, officers, and employees of the
registrant, in addition to the indemnifications
described above, are indemnified through the blanket
liability insurance policy of Registrant's ultimate
parent, ING Groep, N.V., or directly by Equitable of
Iowa Companies, Inc. for liabilities not covered through
the indemnification provided under the By-Laws.
SECURITIES AND EXCHANGE COMMISSION POSITION ON
INDEMNIFICATION
Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in
the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such
liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in
connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against
public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Not Applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
1 Underwriting Agreement Between Golden American Life Insurance Company and
Directed Services, Inc. incorporated by reference to Item 16(a)(1) of
Amendment No. 1 to a Registration Statement for Golden American Life
Insurance Company filed with the Securities and Exchange Commission ("SEC")
on September 24, 1997 (File No. 333-28681).
3(a)(i) Restated Certificate of Incorporation of Golden American Life Insurance
Company incorporated by reference to Item 16(a)(3)(a)(i) of an Initial
Registration Statement for Golden American Life Insurance Company filed
with the SEC on April 23, 1999 (File No. 333-76941).
3(a)(ii) Certificate of Amendment of the Restated Articles of Incorporation of
Golden American Life Insurance Company incorporated by reference to Item
16(a)(3)(a)(ii) of an Initial Registration Statement for Golden American
Life Insurance Company filed with the SEC on April 23, 1999 (File No.
333-76941).
3(b) By-Laws of Golden American Life Insurance Company incorporated by reference
to Item 16(a)(3)(b) of an Initial Registration Statement for Golden
American Life Insurance Company filed with the SEC on April 23, 1999 (File
No. 333-76941).
3(c) Resolution of Board of Directors for Powers of Attorney incorporated by
reference to Item 16(a)(3)(c) of an Initial Registration Statement for
Golden American Life Insurance Company filed with the SEC on April 23, 1999
(File No. 333-76941).
4(a) Individual Deferred Combination Variable and Fixed Annuity Contract
incorporated by reference to Item 16(a)(4)(a) of an Initial Registration
Statement for Golden American Life Insurance Company filed with the SEC on
April 23, 1999 (File No. 333-76941).
4(b) Group Deferred Combination Variable and Fixed Annuity Contract incorporated
by reference to Item 16(a)(4)(b) of an Initial Registration Statement for
Golden American Life Insurance Company filed with the SEC on April 23, 1999
(File No. 333-76941).
4(c) Individual Deferred Variable Annuity Contract incorporated by reference to
Item 16(a)(4)(c) of an Initial Registration Statement for Golden American
Life Insurance Company filed with the SEC on April 23, 1999 (File No.
333-76941).
4(d) Individual Retirement Annuity Rider Page incorporated by reference to Item
16(a)(4)(d) of Amendment No. 1 to a Registration Statement for Golden
American Life Insurance Company filed with the SEC on September 24, 1997
(File No. 333-28681).
4(e) Individual Deferred Combination Variable and Fixed Annuity Application
incorporated by reference to Item 16(a)(4)(e) of an Initial Registration
Statement for Golden American Life Insurance Company filed with the SEC on
January 27, 2000 (File No. 333-95511).
4(f) Group Deferred Combination Variable and Fixed Annuity Enrollment Form
incorporated by reference to Item 16(a)(4)(f) of an Initial Registration
Statement for Golden American Life Insurance Company filed with the SEC on
January 27, 2000 (File No. 333-95511).
4(g) Individual Deferred Variable Annuity Application incorporated by reference
to Item 16(a)(4)(g) of an Initial Registration Statement for Golden
American Life Insurance Company filed with the SEC on January 27, 2000
(File No. 333-95511).
4(h) Roth Individual Retirement Annuity Rider incorporated by reference to Item
16(a)(4)(h) of Amendment No. 2 to a Registration Statement for Golden
American filed with the SEC on February 12, 1998 (File No. 333-28681).
4(i) Minimum Guaranteed Accumulation Benefit Rider (REV) incorporated by
reference to Item 16(a)(4)(i) of an Initial Registration Statement for
Golden American Life Insurance Company filed with the SEC on April 23, 2001
(File No. 333-59386).
4(j) Minimum Guaranteed Income Benefit Rider (REV) incorporated by reference to
Item 16(a)(4)(j) of an Initial Registration Statement for Golden American
Life Insurance Company filed with the SEC on April 23, 2001 (File No.
333-59386).
4(k) Minimum Guaranteed Withdrawal Benefit Rider (REV) incorporated by reference
to Item 16(a)(4)(k) of an Initial Registration Statement for Golden
American Life Insurance Company filed with the SEC on April 23, 2001 (File
No. 333-59386).
4(l) Earnings Enhancement Death Benefit Rider incorporated by reference to Item
16(a)(4)(l) of an Initial Registration Statement for Golden American Life
Insurance Company filed with the SEC on April 23, 2001 (File No.
333-59386).
5 Opinion and Consent of Kimberly J. Smith
10(a) Administrative Services Agreement between Golden American Life Insurance
Company and Equitable Life Insurance Company of Iowa incorporated by
reference to Item 16(a)(10)(b) of Amendment No. 3 to a Registration
Statement for Golden American Life Insurance Company filed with the SEC on
April 29, 1998 (File No. 333-28681).
10(b) Service Agreement between Golden American Life Insurance Company and
Directed Services, Inc. incorporated by reference to Item 16(a)(10)(c) of
Amendment No. 3 to a Registration Statement for Golden American filed with
the SEC on April 29, 1998 (File No. 333-28681).
10(c) Form of Services Agreement among Golden American Life Insurance Company
and ING affiliated Insurance Companies incorporated by reference to Item
16(a)(10)(p) of an Initial filing to the Registration Statement for Golden
American filed with the SEC on March 15, 2002 (File No. 333-84394).
10(d) Form of Services Agreement between Golden American Life Insurance Company
and ING North American Insurance Corporation, Inc. incorporated by
reference to Item 16(a)(10)(q) of an Initial filing to the Registration
Statement for Golden American filed with the SEC on March 15, 2002 (File
No. 333-84394).
10(e) Form of Shared Services Center Agreement among ING North American
Insurance Corporation, Inc. and ING affiliated Insurance Companies.
incorporated by reference to Item 16(a)(10)(r) of an Initial filing to the
Registration Statement for Golden American filed with the SEC on March 15,
2002 (File No. 333-84394).
23(a) Consent of Independent Auditors.
23(c) Consent of Counsel, incorporated in Item 5 of this Part II, together with
the Opinion of Counsel.
24 Powers of Attorney incorporated herein by reference to Post-Effective
Amendment No. 32 to a Registration Statement on Form N-4 for Registrant's
Separate Account B (File Nos. 033-23351, 811-5626).
(b) FINANCIAL STATEMENT SCHEDULE.
(1) All financial statements are included in the Prospectus as indicated
therein
(2) Schedules I, III and IV follow. All other schedules to the
consolidated financial statements required by Article 7 of Regulation
S-X are omitted because they are not applicable or because the
information is included elsewhere in the consolidated financial
statements or notes thereto.
SCHEDULE I
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
(DOLLARS IN THOUSANDS)
BALANCE
SHEET
DECEMBER 31, 2001 COST(1) VALUE AMOUNT
- --------------------------------------------------------------------------------------------------------------------------------
TYPE OF INVESTMENT
Fixed maturities, available for sale:
Bonds:
United States government and governmental agencies and authorities.... $132,081 $129,125 $129,125
Public utilities...................................................... 39,775 38,746 38,746
Foreign government.................................................... 143,574 146,687 146,687
Corporate securities.................................................. 1,111,798 1,116,788 1,116,788
Other asset-backed securities......................................... 388,250 393,836 393,836
Mortgage-backed securities............................................ 167,049 169,731 169,731
----------------------------------------------
Total fixed maturities, available for sale............................ 1,982,527 1,994,913 1,994,913
Equity securities:
Common stocks: industrial, miscellaneous, and all other............... 74 55 55
Mortgage loans on real estate............................................ 213,883 213,883
Policy loans............................................................. 14,847 14,847
Short-term investments................................................... 10,021 10,021
--------------- --------------
Total investments........................................................ $2,221,352 $2,233,719
=============== ==============
Note 1: Cost is defined as original cost for common stocks, amortized cost for
bonds and short-term investments, and unpaid principal for policy loans and
mortgage loans on real estate, adjusted for amortization of premiums and accrual
of discounts.
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
- ------------------------------------------------------------------------------------------------------------------------------------
FUTURE
POLICY AMORTIZA-
BENEFITS, OTHER BENEFITS TION OF
LOSSES, POLICY CLAIMS, DEFERRED
DEFERRED CLAIMS CLAIMS INSURANCE LOSSES POLICY
POLICY AND UNEARNED AND PREMIUMS NET AND ACQUI- OTHER
ACQUISITION LOSS REVENUE BENEFITS AND INVESTMENT SETTLEMENT SITION OPERATING PREMIUMS
SEGMENT COSTS EXPENSES RESERVE PAYABLE CHARGES INCOME EXPENSES COSTS EXPENSES* WRITTEN
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2001:
Life insurance $709,042 $2,178,189 $6,241 $836 $163,805 $94,396 $209,082 $45,229 $232,659 --
YEAR ENDED DECEMBER 31, 2000:
Life insurance $635,147 $1,062,891 $6,817 $82 $144,877 $64,140 $200,031 $55,154 $143,764 --
YEAR ENDED DECEMBER 31, 1999:
Life insurance $528,957 $1,033,701 $6,300 $8 $82,935 $59,169 $182,221 $33,119 $(83,370) --
* This includes policy acquisition costs deferred for first year commissions
and interest bonuses, premium credit, and other expenses related to the
production of new business. The costs related to first year interest
bonuses and the premium credit are included in benefits claims, losses, and
settlement expenses.
SCHEDULE IV
REINSURANCE
Column A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- --------------------------------------------------------------------------------------------------------------------------------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
- --------------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 2001:
Life insurance in force................. $169,252,000 $94,783,000 -- $74,469,000 --
================================================================================
AT DECEMBER 31, 2000:
Life insurance in force................. $196,334,000 $105,334,000 -- $91,000,000 --
================================================================================
AT DECEMBER 31, 1999:
Life insurance in force................. $225,000,000 $119,575,000 -- $105,425,000 --
================================================================================
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the
registration statement (or the most recent post-
effective amendment thereof) which,
individually or in the aggregate, represent a
fundamental change in the information set forth
in the registration statement; and
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration
statement relating to the securities offered therein,
and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
(4) That, for purposes of determining any liability under
the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934
(and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d)
of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement
shall be deemed to be a new registration statement
relating to the securities offered therein, and the
offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
SIGNATURES
As required by the Securities Act of 1933 the Registrant has caused this
Registration Statement to be signed on its behalf in the City of West Chester,
and Commonwealth of Pennsylvania, on the 29th day of April, 2002.
By: GOLDEN AMERICAN LIFE
INSURANCE COMPANY
By:
--------------------
Chris D. Schreier*
President
Attest: /s/ Linda E. Senker
------------------------
Linda E. Senker
Vice President and Associate
General Counsel of Depositor
As required by the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities indicated on April 29, 2002.
Signature Title
- --------- -----
President
- --------------------
Chris D. Schreier*
Director, Senior Vice President
- -------------------- and Chief Financial Officer
Wayne R. Huneke*
DIRECTORS
- ----------------------
Thomas J. McInerney*
- ----------------------
Wayne R. Huneke*
- ----------------------
Mark A. Tullis*
- ----------------------
P. Randall Lowery*
Attest: /s/ Linda E. Senker
------------------------
Linda E. Senker
Vice President and Associate
General Counsel of Depositor
*Executed by Linda E. Senker on behalf of those indicated pursuant
to Power of Attorney.
EXHIBIT INDEX
ITEM EXHIBIT PAGE #
- ---- ------- ------
5 Opinion and Consent of Kimberly J. Smith EX-5
23(a) Consent of Ernst & Young LLP, Independent Auditors. EX-23.A