ING (lion logo)
ING USA ANNUITY AND LIFE INSURANCE COMPANY
(FORMERLY GOLDEN AMERICAN LIFE INSURANCE COMPANY)
PROSPECTUS SUPPLEMENT
DATED JANUARY 2, 2004
SUPPLEMENT TO PROSPECTUSES FOR
GOLDENSELECT GUARANTEE ANNUITY AND SMARTDESIGN MULTI-RATE INDEX ANNUITY
GROUP AND INDIVIDUAL MODIFIED GUARANTEED ANNUITY CONTRACTS AND
FIXED ACCOUNT I, FIXED ACCOUNT II, AND GOLDEN AMERICAN GUARANTEED ACCOUNT
The information in this Supplement updates and amends certain information
contained in the May 1, 2003 Prospectuses for the GoldenSelect Guarantee Annuity
and SmartDesign Multi-Rate Index Annuity group and individual modified
guaranteed annuity contracts and the Fixed Account I, Fixed Account II, and
Golden American Guaranteed Accounts. Please read this Supplement carefully and
keep it with your Prospectus for future reference.
MERGER AND NAME CHANGE
Effective January 1, 2004 (the "Merger Date") and pursuant to certain regulatory
approvals, Equitable Life Insurance Company of Iowa, United Life & Annuity
Insurance Company, and USG Annuity & Life Company (the "Merger Companies")
merged with and into their affiliate, Golden American Life Insurance Company
("Golden American").
As of the Merger Date, the Merger Companies ceased to exist and were succeeded
by Golden American. All contracts previously issued by the Merger Companies
became contracts of Golden American. The merger will have no effect on your
contract. The merger was structured to have no adverse tax consequences
(including federal tax consequences) for any contract owner.
On the Merger Date, Golden American was renamed ING USA Annuity and Life
Insurance Company ("ING USA").
REDOMESTICATION
Immediately prior to the merger, Golden American changed its state of domicile
from Delaware to Iowa and became an Iowa stock life insurance company.
The redomestication, merger and name change were all effective January 1, 2004.
FINANCIAL INFORMATION
Attached to this Supplement is a copy of the Current Report on Form 8-K filed by
ING USA with the Securities and Exchange Commission on January 2, 2004. This
Report contains additional information about the merger, including certain
financial statements of the Merger Companies and of ING USA.
ADDITIONAL INFORMATION
If you have any questions, please contact your registered representative, or
write or call our Customer Contact Center at P.O. Box 9271, Des Moines, Iowa
50306-9271, 1-800-366-0066.
ING USA ANNUITY AND LIFE INSURANCE COMPANY
ING USA Annuity and Life Insurance Company is a stock company domiciled in
Iowa.
127479--Golden MVA Post Merger 01/02/04
INDEX
Page
----
Item 2. Acquisition or Disposition of Assets 3
Item 5. Other Events 3
Item 7. Financial Statements and Exhibits 5
(a) Financial Statements of Business Acquired 5
(b) Pro Forma Financial Information in Accordance
with Accounting Principles Generally Accepted
in the United States of America 5
(c) Exhibits 14
2
Item 2. Acquisition or Disposition of Assets
On January 1, 2004 (the "merger date"), Equitable Life Insurance
Company of Iowa ("ELIC"), USG Annuity & Life Company ("USG"), and
United Life & Annuity Insurance Company ("ULA") (the "Merger
Companies"), merged with and into Golden American Life Insurance
Company ("Golden"). Also on January 1, 2004, immediately after the
merger, Golden changed its name to ING USA Annuity and Life Insurance
Company ("ING USA" or the "Company"). As of the merger date, the
Merger Companies ceased to exist and were succeeded by the Company.
ING USA is domiciled in Iowa and is a wholly-owned subsidiary of Lion
Connecticut Holdings Inc., which is an indirect, wholly-owned
subsidiary of ING Groep N.V. ("ING"), a global financial services
holding company based in The Netherlands.
Statement of Financial Accounting Standards No. 141, Business
Combinations, excludes transfers of net assets or exchanges of shares
between entities under common control, and notes that certain
provisions under Accounting Principles Board Opinion No. 16, Business
Combinations ("APB 16"), provide a source of guidance for such
transactions. In accordance with APB 16, financial information of the
combined entity is presented as if the entities had been combined for
the full year, and all comparative financial statements are restated
and presented as if the entities had previously been combined, in a
manner similar to a pooling-of-interests.
Prior to the merger date, the Merger Companies were affiliated
companies of ING USA and indirect, wholly-owned subsidiaries of ING.
ELIC was domiciled in Iowa and offered various insurance products,
including deferred and immediate annuities, variable annuities, and
interest sensitive and traditional life insurance. ULA was also
domiciled in Iowa and primarily offered annuity related insurance
products, as well as life and health insurance that was ceded to other
insurers. USG was domiciled in Oklahoma and offered various insurance
products, including deferred fixed annuities, immediate annuities, and
interest-sensitive life insurance.
Each Board of Directors and each sole shareholder of the Merger
Companies and the Board of Directors and sole shareholder of the
Company approved the merger plan on June 25, 2003 (see Exhibit 99.8).
The State of Iowa Insurance Division and the Department of Insurance
of the State of Oklahoma also approved the merger.
Item 5. Other Events
Golden was renamed from "Golden American Life Insurance Company" to
"ING USA Annuity and Life Insurance Company." The name change occurred
immediately after the merger of ELIC, USG, and ULA with and into
Golden, with the Company remaining as the surviving corporation under
the name ING USA Annuity and Life Insurance Company.
3
The Company, formerly a Delaware insurance company, changed its state
of domicile from Delaware to Iowa and became an Iowa insurance company
immediately prior to the merger of ELIC, USG, and ULA, with and into
Golden. On July 16, 2003, the Insurance Division of the State of Iowa
approved the Restated Articles of Incorporation, effectively approving
the re-domestication of the Company. The re-domestication was
effective on January 1, 2004.
4
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired
Included are the financial statements of ELIC (the survivor to
the merger with Ameribest Life Insurance Company, an affiliate,
on January 1, 2003), USG, and ULA, prepared in conformity with
statutory accounting principles ("SAP") (financial statements for
these entities were not historically prepared in conformity with
accounting principles generally accepted in the United States of
America ("GAAP")). These statements include audited statutory
basis financial statements for the years ended December 31, 2002
and 2001, as well as unaudited statutory basis financial
statements for the nine months ended September 30, 2003 and
September 30, 2002 (financial statements for the three months
ended September 30 are not required for statutory purposes).
See (c) Exhibits for financial statements.
(b) Pro Forma Financial Information in Accordance with Accounting
Principles Generally Accepted in the United States of America
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
September 30, 2003
Unaudited Pro Forma Condensed Consolidated Statements of Income
for the Nine Months Ended September 30, 2003 and 2002
Unaudited Pro Forma Condensed Consolidated Statements of Income
for the Years Ended December 31, 2002, 2001, and 2000
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements as of September 30, 2003, and for the periods
ended December 31, 2002, 2001, and 2000, and September 30,
2003 and 2002
The following unaudited pro forma condensed consolidated
financial information is based on the historical financial
statements of ING USA, ELIC, USG, and ULA, and has been prepared
to illustrate the effects of the merger of ELIC, USG, and ULA,
with and into Golden. The unaudited pro forma condensed
consolidated financial information is presented for illustration
purposes only, and is not necessarily indicative of the operating
results or financial position that would have occurred if the
merger had been consummated, nor is it necessarily indicative of
future operating results or financial position of the
consolidated company.
5
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of
September 30, 2003
- --------------------------------------------------------------------------------
Pro Forma Pro Forma
(Millions) ING USA ELIC USG ULA Adjustments Consolidated
------------- ------------ ------------ --------- ----------------- -------------
Assets
Investments:
Fixed maturities, available for sale,
at fair value $ 5,458.8 $ 3,800.2 $ 6,337.5 $ 611.7 $ - $ 16,208.2
Equity securities, at fair value:
Common stock - 20.5 - - - 20.5
Preferred stock - 0.4 1.3 - - 1.7
Investment in mutual funds 9.3 120.0 - - - 129.3
Investment in subsidiaries - 1,878.8 - - (1,878.8)(1) -
Mortgage loans on real estate 770.3 954.3 1,501.3 38.0 - 3,263.9
Real estate - 3.0 3.7 - - 6.7
Policy loans 17.2 127.9 31.9 0.9 - 177.9
Short-term investments - 127.2 22.0 - - 149.2
Other investments 26.6 207.0 (77.3) 8.4 (135.0)(2) 29.7
------------- ------------ ------------ --------- ----------------- -------------
Total investments 6,282.2 7,239.3 7,820.4 659.0 (2,013.8) 19,987.1
Cash and cash equivalents 55.5 22.3 570.7 2.0 - 650.5
Accrued investment income 64.5 48.5 77.8 7.0 - 197.8
Reinsurance recoverable 14.3 6.4 0.7 - - 21.4
Receivable for securities sold 21.7 37.5 58.1 14.9 - 132.2
Deferred policy acquisition costs 796.9 791.5 145.8 2.8 - 1,737.0
Value of business acquired 8.7 70.2 33.8 3.3 - 116.0
Other assets 16.2 9.4 1.4 (0.1) - 26.9
Assets held in separate accounts 14,692.5 980.4 - 60.8 - 15,733.7
------------- ------------ ------------ --------- ----------------- -------------
Total assets $ 21,952.5 $ 9,205.5 $ 8,708.7 $ 749.7 $ (2,013.8) $ 38,602.6
============= ============ ============ ========= ================= =============
Liabilities and Shareholder's Equity
Policy liabilities and accruals:
Future policy benefits and
claims reserves $ 5,395.9 $ 5,449.0 $ 7,266.4 $ 577.5 $ - $ 18,688.8
Notes to affiliates 170.0 - - - (135.0)(2) 35.0
Due to affiliates 9.1 22.2 20.7 1.3 - 53.3
Payables for securities purchased 42.4 66.6 83.3 14.8 - 207.1
Borrowed money 111.0 207.8 784.6 - - 1,103.4
Current income taxes 22.2 (19.3) (22.4) (1.7) - (21.2)
Deferred income taxes 129.3 (75.2) (47.8) (8.9) - (2.6)
Other liabilities 36.4 99.4 88.8 1.7 - 226.3
Liabilities related to separate accounts 14,692.5 980.4 - 60.7 - 15,733.6
------------- ------------ ------------ --------- ----------------- -------------
Total liabilities 20,608.8 6,730.9 8,173.6 645.4 (135.0) 36,023.7
------------- ------------ ------------ --------- ----------------- -------------
Shareholder's equity
Common stock 2.5 5.0 2.5 8.4 (15.9)(1)(3) 2.5
Additional paid-in capital 1,358.4 3,600.3 1,468.2 188.7 (2,815.7)(1)(3) 3,799.9
Accumulated other comprehensive income 77.0 289.7 130.6 13.6 (207.6)(1) 303.3
Retained deficit (94.2) (1,420.4) (1,066.2) (106.4) 1,160.4 (1) (1,526.8)
------------- ------------ ------------ --------- ----------------- -------------
Total shareholder's equity 1,343.7 2,474.6 535.1 104.3 (1,878.8) 2,578.9
------------- ------------ ------------ --------- ----------------- -------------
Total liabilities and shareholder's equity $ 21,952.5 $ 9,205.5 $ 8,708.7 $ 749.7 $ (2,013.8) $ 38,602.6
============= ============ ============ ========= ================= =============
6
Unaudited Pro Forma Condensed Consolidated Statement of Income for the
9 Months Ended September 30, 2003
- --------------------------------------------------------------------------------
Pro Forma Pro Forma
(Millions) ING USA ELIC USG ULA Adjustments Consolidated
------------- ------------ ----------- ----------- ---------------- -------------
Revenue:
Premiums $ - $ 20.6 $ 0.7 $ - $ - $ 21.3
Fee income 221.2 35.6 11.2 1.8 - 269.8
Net investment income 167.8 221.1 345.9 27.3 (7.6)(2) 754.5
Net realized capital gains (losses) 87.8 (1.5) (0.6) 8.9 - 94.6
Other income (loss) (0.1) 6.3 1.0 - - 7.2
------------- ------------ ----------- ----------- ---------------- -------------
Total revenue 476.7 282.1 358.2 38.0 (7.6) 1,147.4
------------- ------------ ----------- ----------- ---------------- -------------
Benefits, losses and expenses:
Benefits:
Interest credited and other
benefits to policyholders 271.7 226.0 276.3 20.0 - 794.0
Underwriting, acquisition, and
insurance expenses:
General expenses 81.7 45.0 26.2 2.4 - 155.3
Commissions 175.2 26.6 34.1 0.4 - 236.3
Policy acquisition costs deferred (150.3) (151.3) (43.3) (0.3) - (345.2)
Amortization of deferred policy
acquisition costs and value of
business acquired 129.9 56.1 44.5 5.7 - 236.2
Other:
Expense and charges reimbursed
under modified coinsurance agreements (88.8) 89.3 - - - 0.5
Interest expense 10.3 5.0 4.6 - (7.6)(2) 12.3
------------- ------------ ----------- ----------- ---------------- -------------
Total benefits, losses and expenses 429.7 296.7 342.4 28.2 (7.6) 1,089.4
------------- ------------ ----------- ----------- ---------------- -------------
Income (loss) before income taxes 47.0 (14.6) 15.8 9.8 - 58.0
Income tax expense (benefit) 7.3 (5.6) 5.5 3.4 - 10.6
Equity in subsidiaries - 50.0 - - (50.0)(4) -
------------- ------------ ----------- ----------- ---------------- -------------
Net income (loss) $ 39.7 $ 41.0 $ 10.3 $ 6.4 $ (50.0) $ 47.4
============= ============ =========== =========== ================ =============
7
Unaudited Pro Forma Condensed Consolidated Statement of Income for the
9 Months Ended September 30, 2002
- --------------------------------------------------------------------------------
Pro Forma Pro Forma
(Millions) ING USA ELIC USG ULA Adjustments Consolidated
------------- ------------ ----------- ----------- ----------------- -------------
Revenue:
Premiums $ - $ 23.4 $ 0.9 $ - $ - $ 24.3
Fee income 167.3 42.0 16.1 3.0 - 228.4
Net investment income 132.3 162.9 293.8 33.3 (9.6)(2) 612.7
Net realized capital gains (losses) 0.4 (34.3) (55.2) (6.9) - (96.0)
Other income (loss) - 6.3 2.0 - - 8.3
------------- ------------ ----------- ----------- ----------------- -------------
Total revenue 300.0 200.3 257.6 29.4 (9.6) 777.7
------------- ------------ ----------- ----------- ----------------- -------------
Benefits, losses and expenses:
Benefits:
Interest credited and other
benefits to policyholders 212.1 178.3 274.2 20.3 - 684.9
Underwriting, acquisition, and
insurance expenses:
General expenses 106.1 36.2 24.4 1.2 - 167.9
Commissions 239.8 33.7 60.3 0.4 - 334.2
Policy acquisition costs deferred (242.9) (145.3) (66.2) - - (454.4)
Amortization of deferred policy
acquisition costs and value of
business acquired 129.2 72.5 36.3 3.4 - 241.4
Other:
Expense and charges reimbursed
under modified coinsurance
agreements (77.6) 74.1 - - - (3.5)
Interest expense 12.7 5.1 4.6 - (9.6)(2) 12.8
------------- ------------ ----------- ----------- ----------------- -------------
Total benefits, losses and expenses 379.4 254.6 333.6 25.3 (9.6) 983.3
------------- ------------ ----------- ----------- ----------------- -------------
Income (loss) before income taxes (79.4) (54.3) (76.0) 4.1 - (205.6)
Income tax expense (benefit) (25.7) (19.5) (26.6) 1.4 - (70.4)
Equity in subsidiaries - (103.1) - - 103.1(4) -
------------- ------------ ----------- ----------- ----------------- -------------
Income (loss) before cumulative effect
of change in accounting principle $ (53.7) $ (137.9) $ (49.4) $ 2.7 $ 103.1 $ (135.2)
============= ============ =========== =========== ================= =============
8
Unaudited Pro Forma Condensed Consolidated Statement of Income for the
Year Ended December 31, 2002
- --------------------------------------------------------------------------------
Pro Forma Pro Forma
(Millions) ING USA ELIC USG ULA Adjustments Consolidated
------------- ------------ ----------- ----------- ----------------- -------------
Revenue:
Premiums $ - $ 30.2 $ 1.1 $ - $ - $ 31.3
Fee income 204.0 54.0 20.0 3.7 - 281.7
Net investment income 197.7 249.7 416.6 44.1 (12.2)(2) 895.9
Net realized capital gains (losses) 4.2 (43.7) (65.7) 2.1 - (103.1)
Other income (loss) 3.5 10.3 2.4 0.1 - 16.3
------------- ------------ ----------- ----------- ----------------- -------------
Total revenue 409.4 300.5 374.4 50.0 (12.2) 1,122.1
------------- ------------ ----------- ----------- ----------------- -------------
Benefits, losses and expenses:
Benefits:
Interest credited and other
benefits to policyholders 276.5 246.0 370.5 26.8 - 919.8
Underwriting, acquisition, and
insurance expenses:
General expenses 139.7 46.5 33.0 1.0 - 220.2
Commissions 288.7 41.5 71.7 0.6 - 402.5
Policy acquisition costs deferred (292.2) (186.6) (80.2) - - (559.0)
Amortization of deferred policy
acquisition costs and value
of business acquired 127.8 126.0 44.5 3.8 - 302.1
Other:
Expense and charges reimbursed
under modified coinsurance
agreements (104.9) 100.9 - - - (4.0)
Interest expense 16.0 6.9 6.1 - (12.2)(2) 16.8
------------- ------------ ----------- ----------- ----------------- -------------
Total benefits, losses and expenses 451.6 381.2 445.6 32.2 (12.2) 1,298.4
------------- ------------ ----------- ----------- ----------------- -------------
Income (loss) before income taxes (42.2) (80.7) (71.2) 17.8 - (176.3)
Income tax expense (benefit) (12.5) (29.0) (24.9) 6.2 - (60.2)
Equity in subsidiaries - (76.0) - - 76.0(4) -
------------- ------------ ----------- ----------- ----------------- -------------
Income (loss) before cumulative effect
of change in accounting principle $ (29.7) $ (127.7) $ (46.3) $ 11.6 $ 76.0 $ (116.1)
============= ============ =========== =========== ================= =============
9
Unaudited Pro Forma Condensed Consolidated Statement of Income for the
Year Ended December 31, 2001
- --------------------------------------------------------------------------------
Pro Forma Pro Forma
(Millions) ING USA ELIC USG ULA Adjustments Consolidated
------------- ------------ ----------- ----------- ----------------- -------------
Revenue:
Premiums $ - $ 33.2 $ 1.1 $ - $ - $ 34.3
Fee income 188.9 56.7 23.9 4.8 - 274.3
Net investment income 94.4 234.7 481.0 54.1 (14.3)(2) 849.9
Net realized capital gains (losses) (6.5) (32.7) (55.5) 1.3 - (93.4)
Other income (loss) - 9.4 1.4 - - 10.8
------------- ------------ ----------- ----------- ----------------- -------------
Total revenue 276.8 301.3 451.9 60.2 (14.3) 1,075.9
------------- ------------ ----------- ----------- ----------------- -------------
Benefits, losses and expenses:
Benefits:
Interest credited and other
benefits to policyholders 209.0 179.2 356.1 38.9 - 783.2
Underwriting, acquisition, and
insurance expenses:
General expenses 119.9 94.7 23.3 3.3 - 241.2
Commissions C 232.4 51.0 35.4 0.7 - 319.5
Policy acquisition costs deferred (128.2) (312.6) (47.1) (0.6) - (488.5)
Amortization of deferred policy
acquisition costs and value of
business acquired 49.6 55.6 65.3 4.4 - 174.9
Goodwill 4.2 13.0 19.1 1.1 - 37.4
Other:
Expense and charges reimbursed
under modified coinsurance
agreements (225.6) 224.6 - - - (1.0)
Interest expense 19.4 7.3 10.8 0.3 (14.3)(2) 23.5
------------- ------------ ----------- ----------- ----------------- -------------
Total benefits, losses and expenses 280.7 312.8 462.9 48.1 (14.3) 1,090.2
------------- ------------ ----------- ----------- ----------------- -------------
Income (loss) before income taxes (3.9) (11.5) (11.0) 12.1 - (14.3)
Income tax expense (benefit) 0.1 0.5 2.8 4.6 - 8.0
Equity in subsidiaries - (17.8) - - 17.8(4) -
------------- ------------ ----------- ----------- ----------------- -------------
Net income (loss) $ (4.0) $ (29.8) $ (13.8) $ 7.5 $ 17.8 $ (22.3)
============= ============ =========== =========== ================= =============
10
Unaudited Pro Forma Condensed Consolidated Statement of Income for the
Year Ended December 31, 2000
- --------------------------------------------------------------------------------
Pro Forma Pro Forma
(Millions) ING USA ELIC USG ULA Adjustments Consolidated
------------- ------------ ----------- ----------- ----------------- -------------
Revenue:
Premiums $ - $ 33.0 $ 2.3 $ - $ - $ 35.3
Fee income 167.9 68.7 42.5 7.6 - 286.7
Net investment income 64.1 198.6 506.1 60.8 (14.3)(2) 815.3
Net realized capital gains (losses) (6.6) (25.8) (84.8) (8.2) - (125.4)
Other income (loss) - 10.0 1.4 - - 11.4
------------- ------------ ----------- ----------- ----------------- -------------
Total revenue 225.4 284.5 467.5 60.2 (14.3) 1,023.3
------------- ------------ ----------- ----------- ----------------- -------------
Benefits, losses and expenses:
Benefits:
Interest credited and other
benefits to policyholders 199.9 183.7 352.6 44.1 - 780.3
Underwriting, acquisition, and
insurance expenses:
General expenses 89.5 86.4 10.8 2.5 - 189.2
Commissions 213.7 70.7 41.3 3.9 - 329.6
Policy acquisition costs deferred (168.4) (303.1) (59.3) (4.1) - (534.9)
Amortization of deferred policy
acquisition costs and value of
business acquired 60.0 31.8 18.8 2.9 - 113.5
Goodwill 4.2 13.0 19.1 1.1 - 37.4
Other:
Expense and charges reimbursed
under modified coinsurance
agreements (225.8) 218.8 - - - (7.0)
Interest expense 19.9 2.8 0.8 - (14.3)(2) 9.2
------------- ------------ ----------- ----------- ----------------- -------------
Total benefits, losses and expenses 193.0 304.1 384.1 50.4 (14.3) 917.3
------------- ------------ ----------- ----------- ----------------- -------------
Income (loss) before income taxes 32.4 (19.6) 83.4 9.8 - 106.0
Income tax expense (benefit) 13.2 (2.2) 35.8 3.8 - 50.6
Equity in subsidiaries - 66.8 - - (66.8)(4) -
------------- ------------ ----------- ----------- ----------------- -------------
Net income (loss) $ 19.2 $ 49.4 $ 47.6 $ 6.0 $ (66.8) $ 55.4
============= ============ =========== =========== ================= =============
11
1. Pro Forma Consolidation
Statement of Financial Accounting Standards No. 141, Business Combinations
("FAS 141"), excludes transfers of net assets or exchanges of shares
between entities under common control, and notes that certain provisions
under Accounting Principles Board Opinion No. 16, Business Combinations
("APB 16"), provide a source of guidance for such transactions. In
accordance with APB 16, financial information of the combined entity is
presented as if the entities had been combined for the full year, and all
comparative financial statements are restated and presented as if the
entities had previously been combined, in a manner similar to a
pooling-of-interests.
The unaudited pro forma condensed consolidated financial statements have
been prepared in a manner similar to a pooling-of-interests, in accordance
with the provisions of APB 16 in order to present the condensed financial
position and results of operations of ING USA Annuity and Life Insurance
Company ("ING USA"), Equitable Life Insurance Company of Iowa ("ELIC"),
United Life & Annuity Insurance Company ("ULA"), and USG Annuity & Life
Company ("USG"), as if the entities had previously been combined. The
unaudited pro forma condensed consolidated balance sheet and income
statements give effect to the consolidation transaction as if it had
occurred on September 30, 2003 and January 1, 2000, respectively.
Following is a description of the pro forma adjustments that have been made
to the financial statements. All pro forma adjustments are elimination
entries related to intercompany transactions between the entities, as
required by accounting principles generally accepted in the United States
of America. There were no other pro forma adjustments.
(1) Prior to the merger, ING USA and USG were wholly owned subsidiaries of
ELIC. The pro forma adjustment eliminates the ELIC investment in ING
USA and USG subsidiaries.
(2) Prior to the merger, ING USA had an outstanding surplus note payable
to ELIC. The pro forma adjustment eliminates the surplus note and
related interest between ING USA and ELIC.
(3) All of the shares of capital stock of ELIC, USG, and ULA, will be
canceled and retired, and ceased to exist, as of the merger with ING
USA.
(4) Prior to the merger, ING USA and USG were wholly owned subsidiaries of
ELIC. The pro forma adjustment eliminates the ELIC equity in ING USA
and USG income.
12
2. Accounting for Goodwill and Intangible Assets
The cumulative effect of change in accounting principle for the unaudited
pro forma condensed consolidated income statements for the nine months
ended September 30, 2002, and the year ended December 31, 2002, reflects
the adoption of Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, ("FAS
142"). During 2002, ING USA and the Merger Companies adopted FAS 142.
The adoption of this standard resulted in an impairment loss of $1,298.5
million in 2002. This impairment loss represented the entire carrying
amount of goodwill, net of accumulated amortization, and is recorded as a
change in accounting principle for the nine months ended September 30, 2002
and the year ended December 31, 2002.
Effective January 1, 2002, ING USA and the Merger Companies applied the
non-amortization provision (net of tax) of the new standard, which resulted
in an increase in net income of $37.0 million for the twelve months ended
December 31, 2002. Had ING USA and the Merger Companies been accounting for
goodwill under FAS 142 for all periods presented, the Company's net income
(loss) would have been as follows:
Year ended Year ended
December 31, December 31,
(Millions) 2001 2000
-------------- --------------
Pro forma consolidated net income (loss) $ (22.3) $ 55.4
Add back goodwill amortization, net of tax 37.0 37.0
-------------- --------------
Adjusted pro forma consolidated net income $ 14.7 $ 92.4
============== ==============
3. Statutory Merger
On January 1, 2003, Ameribest Life Insurance Company ("AMB"), an affiliated
life insurance company domiciled in Georgia, was merged with ELIC.
As FAS 141 excludes transfers of net assets or exchanges of shares between
entities under common control, the merger was based on certain provisions
under APB 16, which provide a source of guidance for such transactions.
The unaudited pro forma condensed consolidated financial statements have
been prepared in a manner similar to a pooling-of-interests, in accordance
with the provisions of APB 16, in order to present the condensed results of
operations of ELIC and AMB as if the entities had previously been combined.
The pro forma condensed consolidated income statements give effect to the
consolidation transaction as if it had occurred on January 1, 2000.
The September 30, 2002, balances within the September 30, 2003, statutory
financial statements have been restated as a result of this merger (see
Exhibit 99.5).
13
(c) Exhibits
Reference
Number Page Exhibit Description
99.1 1-44 Audited statutory basis financial statements for the years ended December 31, 2002 and
2001, for Equitable Life Insurance Company of Iowa, including Report of Independent
Auditors.
99.2 1-27 Audited statutory basis financial statements for the years ended December 31, 2002 and
2001, for Ameribest Life Insurance Company, including Report of Independent Auditors.
99.3 1-4 Unaudited statutory basis financial statements for the nine months ended September 30,
2003 and 2002, for Equitable Life Insurance Company of Iowa (including the effects of
the merger with Ameribest Life Insurance Company, an affiliate).
99.4 1-35 Audited statutory basis financial statements for the years ended December 31, 2002 and
2001, for USG Annuity & Life Company, including Report of Independent Auditors.
99.5 1-4 Unaudited statutory basis financial statements for the nine months ended September 30,
2003 and 2002, for USG Annuity & Life Company.
99.6 1-34 Audited statutory basis financial statements for the years ended December 31, 2002 and
2001, for United Life & Annuity Insurance Company, including Report of Independent
Auditors.
99.7 1-4 Unaudited statutory basis financial statements for the nine months ended September 30,
2003 and 2002, for United Life & Annuity Insurance Company.
99.8 1-4 Agreement and plan of merger of USG Annuity & Life Company, United Life & Annuity
Insurance Company, and Equitable Life Insurance Company of Iowa into Golden American
Life Insurance Company to be renamed ING USA Annuity & Life Insurance Company
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ING USA Annuity and Life Insurance Company
-------------------------------------------------
(Registrant)
Date January 2, 2004 /s/ David A. Wheat
--------------- -------------------------------------------------
David A. Wheat
Senior Vice President and Chief Financial Officer
/s/ Keith Gubbay
-------------------------------------------------
Keith Gubbay
President
15
Exhibit 99.1
Report of Independent Auditors
Board of Directors and Stockholder
Equitable Life Insurance Company of Iowa
We have audited the accompanying statutory basis balance sheets of Equitable
Life Insurance Company of Iowa ("the Company" and a wholly owned subsidiary of
ING America Insurance Holdings, Inc.) as of December 31, 2002 and 2001, and the
related statutory basis statements of operations, changes in capital and
surplus, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Iowa Department of Regulatory Agencies of the State of Iowa,
Iowa Insurance Division, which practices differ from accounting principles
generally accepted in the United States. The variances between such practices
and accounting principles generally accepted in the United States are described
in Note 1. The effects on the financial statements of these variances are not
reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with accounting principles generally accepted in the United States,
the financial position of Equitable Life Insurance Company of Iowa at December
31, 2002 and 2001 or the results of its operations or its cash flows for the
years then ended.
1
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Equitable Life
Insurance Company of Iowa at December 31, 2002 and 2001, and the results of its
operations and its cash flows for the years then ended, in conformity with
accounting practices prescribed or permitted by the Iowa Insurance Division.
As discussed in Note 3 to the financial statements, in 2001 the Company changed
various accounting policies to be in accordance with the revised NAIC Accounting
Practices and Procedures Manual, as adopted by the Iowa Insurance Division.
/s/ Ernst & Young LLP
March 21, 2003
2
Equitable Life Insurance Company of Iowa
Balance Sheets - Statutory Basis
- --------------------------------------------------------------------------------
December 31
2002 2001
--------------- ---------------
(In Thousands)
Admitted assets
Cash and invested assets:
Bonds $ 2,925,958 $ 2,628,098
Preferred stocks 441 490
Common stocks 120,285 306
Subsidiaries 811,079 761,039
Mortgage loans 859,953 842,253
Real estate, less accumulated depreciation
(2002 - $339; 2001- $531) 3,651 5,254
Policy loans 130,790 139,826
Other invested assets 180,117 266,358
Cash and short-term investments 25,102 67,592
--------------- ---------------
Total cash and invested assets 5,057,376 4,711,216
Deferred and uncollected premiums, less loading
(2002 - $785, 2001 - $751) 64,607 5,736
Accrued investment income 43,330 40,604
Reinsurance balances recoverable 785 1,020
Data processing equipment, less accumulated
depreciation (2002-$5,459; 2001-$3,243) 186 373
Indebtedness from related parties 107,057 29,687
Federal income tax recoverable 50,531 34,688
Separate account assets 959,377 1,406,693
Other assets 303,168 273,482
--------------- ---------------
Total admitted assets $ 6,586,417 $ 6,503,499
=============== ===============
See accompanying notes - statutory basis.
3
Equitable Life Insurance Company of Iowa
Balance Sheets - Statutory Basis (continued)
- --------------------------------------------------------------------------------
December 31
2002 2001
--------------- ---------------
(In Thousands,
except share amounts)
Liabilities and capital and surplus
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $ 4,015,244 $ 3,580,706
Deposit type contracts 189,296 152,193
Policyholders' funds 310 282
Dividends payable 23,795 24,385
Unpaid claims 2,227 8,122
--------------- ---------------
Total policy and contract liabilities 4,230,872 3,765,688
Accounts payable and accrued expenses 26,439 26,012
Indebtedness to related parties 66,200 21,091
Asset valuation reserve 25,738 26,060
Interest maintenance reserve 13,573 17,123
Borrowed money 148,996 135,948
Other liabilities (14,220) 66,062
Separate account liabilities 959,377 1,406,693
--------------- ---------------
Total liabilities 5,456,975 5,464,677
Capital and surplus:
Common stock: $1.00 par value; authorized 7,500,000
shares, issued and outstanding 5,000,300 shares 5,000 5,000
Additional paid-in capital 1,215,324 700,324
Unassigned (deficit) surplus (90,882) 333,498
--------------- ---------------
Total capital and surplus 1,129,442 1,038,822
--------------- ---------------
Total liabilities and capital and surplus $ 6,586,417 $ 6,503,499
=============== ===============
See accompanying notes - statutory basis.
4
Equitable Life Insurance Company of Iowa
Statements of Operations - Statutory Basis
- --------------------------------------------------------------------------------
Year ended December 31
2002 2001
--------------- ---------------
(In Thousands)
Premiums and other revenues:
Life, annuity, and accident and health premiums $ 1,832,175 $ 2,645,375
Policy proceeds and dividends left on deposit 1,840 1,263
Net investment income 228,150 232,779
Amortization of interest maintenance reserve (2,570) 2,299
Commissions, expense allowances and reserve adjustments on
reinsurance ceded (80) 91
Other income 23,058 41,581
--------------- ---------------
Total premiums and other revenues 2,082,573 2,923,388
Benefits paid or provided:
Death benefits 44,630 41,922
Annuity benefits 119,150 103,305
Surrender benefits 638,053 464,583
Interest on policy or contract funds 6,192 7,043
Other benefits 7,209 6,906
Life contract withdrawals 47,009 49,110
Increase in life, annuity, and accident and health reserves 1,186,223 2,055,065
Net transfers from separate accounts (135,686) (98,628)
--------------- ---------------
Total benefits paid or provided 1,912,780 2,629,306
Insurance expenses:
Commissions 157,842 205,363
General expenses 45,159 81,288
Insurance taxes, licenses and fees, excluding federal income
taxes 3,801 9,080
--------------- ---------------
Total insurance expenses 206,802 295,731
--------------- ---------------
Loss from operations before policyholder dividends, (37,009) (1,649)
federal income taxes and net realized capital losses
5
Equitable Life Insurance Company of Iowa
Statements of Operations - Statutory Basis (continued)
- --------------------------------------------------------------------------------
Year ended December 31
2002 2001
--------------- ---------------
(In Thousands)
Dividends to policyholders 23,406 25,228
--------------- ---------------
Loss from operations before federal income taxes and (60,415) (26,877)
net realized capital losses
Federal income taxes 38,715 (1,605)
--------------- ---------------
Loss from operations before net realized capital losses (99,130) (25,272)
Net realized capital losses net of income taxes 2002 - $(10,288);
2001 - $(7,441) and excluding net transfers to the interest
maintenance reserve 2002- $3,295; 2001- $3,720 (20,665) (37,807)
--------------- ---------------
Net loss $ (119,795) $ (63,079)
=============== ===============
See accompanying notes - statutory basis.
6
Equitable Life Insurance Company of Iowa
Statements of Changes in Capital and Surplus - Statutory Basis
- --------------------------------------------------------------------------------
Year ended December 31
2002 2001
--------------- ---------------
(In Thousands)
Common stock:
Balance at beginning and end of year $ 5,000 $ 5,000
=============== ================
Paid-in and contributed surplus:
Balance at beginning of year 700,324 248,743
Capital contributions 515,000 451,581
--------------- ----------------
Balance at end of year $ 1,215,324 $ 700,324
=============== ================
Unassigned deficit:
Balance at beginning of year 333,498 344,924
Net loss (119,795) (63,079)
Change in net unrealized capital gains or losses (307,450) 35,976
Change in nonadmitted assets (58,477) 65,659
Change in asset valuation reserve 322 12,378
Change in net deferred income tax excluding tax effect
of nonadmitted assets 61,020 30,125
Change in accounting principle, net of tax - (6,073)
Transfer of prepaid pension assets - (87,412)
Cession of existing risks, net of tax - 1,000
--------------- ----------------
Balance at end of year $ (90,882) $ 333,498
=============== ================
Total capital and surplus $ 1,129,442 $ 1,038,822
=============== ================
See accompanying notes - statutory basis.
7
Equitable Life Insurance Company of Iowa
Statements of Cash Flows - Statutory Basis
- --------------------------------------------------------------------------------
Year ended December 31
2002 2001
--------------- ---------------
(In Thousands)
Operations
Premiums, policy proceeds, and other considerations received,
net of reinsurance paid $ 1,775,113 $ 2,647,810
Net investment income received 274,233 243,697
Commission and expense allowances received on reinsurance ceded (54) 91
Benefits paid (862,628) (673,320)
Net transfers to separate accounts 148,848 111,689
Insurance expenses paid (199,451) (274,085)
Dividends paid to policyholders (23,568) (25,413)
Federal income taxes (paid) received (45,836) 71,450
Net other (expenses) revenues (697,081) 41,873
--------------- ---------------
Net cash provided by operations 369,576 2,143,792
Investments
Proceeds from sales, maturities, or repayments of investments:
Bonds 3,559,637 2,401,946
Preferred stocks 357 11,844
Common stocks 103,451 61,428
Mortgage loans 2,241 -
Other invested assets 51,647 6,951
Miscellaneous proceeds 84,561 1,989
Net tax on capital gains - (7,441)
--------------- ---------------
Net proceeds from sales, maturities, or repayments of investments 3,801,894 2,476,717
Cost of investments acquired:
Bonds 3,938,840 2,938,801
Preferred stocks 556,492 451,581
Mortgage loans 121,122 179,837
Other invested assets 844 3,835
Miscellaneous applications 106,945 -
--------------- ---------------
Total cost of investments acquired 4,724,243 3,574,054
Net (decrease) increase in policy loans (9,656) 1,185
--------------- ---------------
Net cash used in investment activities (912,693) (1,098,522)
8
Equitable Life Insurance Company of Iowa
Statements of Cash Flows - Statutory Basis (continued)
- --------------------------------------------------------------------------------
Year ended December 31
2002 2001
--------------- ---------------
(In Thousands)
Financing and miscellaneous activities
Cash provided:
Capital and surplus paid-in 506,300 446,508
Borrowed money 13,008 13,660
Premium and other deposit type funds 20,799 (21,565)
Other uses (39,480) (1,699,700)
--------------- ---------------
Net cash provided by (used in) financing and
miscellaneous activities 500,627 (1,261,097)
--------------- ---------------
Net decrease in cash and short-term investments (42,490) (215,827)
Cash and short-term investments:
Beginning of year 67,592 283,419
--------------- ---------------
End of year $ 25,102 $ 67,592
=============== ===============
See accompanying notes - statutory basis.
9
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies
Equitable Life Insurance Company of Iowa (the Company) is domiciled in Iowa
and is a wholly owned subsidiary of ING America Insurance Holdings, Inc.
("ING AIH"). The Company offers various insurance products including
deferred and immediate annuities, variable annuities, and interest
sensitive and traditional life insurance. These products are marketed by
the Company's career agency force, independent insurance agents,
broker/dealers, and financial institutions. The Company's primary customers
are individuals. The Company is presently licensed in 49 states, the
District of Columbia and Puerto Rico.
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported
in the financial statements and accompanying notes. Such estimates and
assumptions could change in the future as more information becomes known,
which could impact the amounts reported and disclosed herein.
Basis of Presentation
The accompanying financial statements of the Company have been prepared in
conformity with accounting practices prescribed or permitted by the State
of Iowa (Iowa Insurance Division), which practices differ from accounting
principles generally accepted in the United States ("GAAP"). The most
significant variances from GAAP are as follows:
Investments: Investments in bonds and mandatorily redeemable preferred
stocks are reported at amortized cost or market value based on the National
Association of Insurance Commissioners ("NAIC") rating; for GAAP, such
fixed maturity investments are designated at purchase as held-to-maturity,
trading or available-for-sale. Held-to-maturity investments are reported at
amortized cost, and the remaining fixed maturity investments are reported
at fair value with unrealized capital gains and losses reported in
operations for those designated as trading and as a separate component of
other comprehensive income in stockholder's equity for those designated as
available-for-sale.
For structured securities, when a negative yield results from a revaluation
based on new prepayment assumptions (i.e., undiscounted cash flows are less
than current book value), an other than temporary impairment is considered
to have occurred and the asset is written down to the value of the
undiscounted cash flows. For GAAP, assets are re-evaluated based on the
discounted cash flows using a current market rate. Impairments are
recognized when there has been an adverse change in cash flows and the fair
value is less than book. The asset is then written down to fair value.
10
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Basis of Presentation (continued)
Investments in real estate are reported net of related obligations rather
than on a gross basis. Real estate owned and occupied by the Company is
included in investments rather than reported as an operating asset as under
GAAP, and investment income and operating expenses include rent for the
Company's occupancy of those properties. Changes between depreciated cost
and admitted asset investment amounts are credited or charged directly to
unassigned surplus rather than income as would be required under GAAP.
Derivative instruments that meet the criteria of an effective hedge are
valued and reported in a manner that is consistent with the hedged asset or
liability. Embedded derivatives are not accounted for separately from the
host contract. Under GAAP, the effective and ineffective portions of a
single hedge are accounted for separately, an embedded derivative within a
contract that is not clearly and closely related to the economic
characteristics and risk of the host contract is accounted for separately
from the host contract and valued and reported at fair value, and the
change in fair value for cash flow hedges is credited or charged directly
to a separate component of shareholders' equity rather than to income as
required for fair value hedges.
In addition, the Company invests in structured securities including
mortgage-backed securities/collateralized mortgage obligations,
asset-backed securities, collateralized debt obligations, and commercial
mortgage-backed securities. For these structured securities, management
compares the undiscounted cash flows to the carrying value. An other than
temporary impairment is considered to have occurred when the undiscounted
cash flows are less than the carrying value.
Valuation Reserves: The asset valuation reserve ("AVR") is determined by an
NAIC-prescribed formula and is reported as a liability rather than as a
valuation allowance or an appropriation of surplus. The change in AVR is
reported directly to unassigned surplus.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized gains and losses on sales of fixed-income investments, principally
bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to
maturity based on groupings of individual securities sold in five-year
bands. The net deferral is reported as the interest maintenance reserve
(IMR) in the accompanying balance sheets.
11
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Basis of Presentation (continued)
Realized gains and losses on investments are reported in operations net of
federal income tax and transfers to the IMR. Under GAAP, realized capital
gains and losses are reported in the statements of operations on a pretax
basis in the period that the asset giving rise to the gain or loss is sold
and valuation allowances are provided when there has been a decline in
value deemed other than temporary, in which case the provision for such
declines is charged to income.
Valuation allowances, if necessary, are established for mortgage loans
based on the difference between the net value of the collateral, determined
as the fair value of the collateral less estimated costs to obtain and
sell, and the recorded investment in the mortgage loan. Under GAAP, such
allowances are based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, if foreclosure is
probable, on the estimated fair value of the collateral.
The initial valuation allowance and subsequent changes in the allowance for
mortgage loans as a result of a temporary impairment are charged or
credited directly to unassigned surplus, rather than being included as a
component of earnings as would be required under GAAP.
Policy Acquisition Costs: The costs of acquiring and renewing business are
expensed when incurred. Under GAAP, acquisition costs related to
traditional life insurance, to the extent recoverable from future policy
revenues, are deferred and amortized over the premium-paying period of the
related policies using assumptions consistent with those used in computing
policy benefit reserves. For universal life insurance and investment
products, to the extent recoverable from future gross profits, acquisition
costs are amortized generally in proportion to the present value of
expected gross margins from surrender charges and investment, mortality,
and expense margins.
Premiums: Life premiums are recognized as revenue when due. Premiums for
annuity policies with mortality and morbidity risk, except for guaranteed
interest and group annuity contracts, are also recognized as revenue when
due. Premiums received for annuity policies without mortality or morbidity
risk and for guaranteed interest and group annuity contracts are recorded
using deposit accounting.
12
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Basis of Presentation (continued)
Under GAAP, premiums for traditional life insurance products, which include
those products with fixed and guaranteed premiums and benefits and consist
primarily of whole life insurance policies, are recognized as revenue when
due. Group insurance premiums are recognized as premium revenue over the
time period to which the premiums relate. Revenues for universal life,
annuities and guaranteed interest contracts consist of policy charges for
the cost of insurance, policy administration charges, amortization of
policy initiation fees and surrender charges assessed during the period.
Benefit and Contract Reserves: Life policy and contract reserves under
statutory accounting practices are calculated based upon both the net level
premium and Commissioners' Reserve Valuation methods using statutory rates
for mortality and interest. GAAP requires that policy reserves for
traditional products be based upon the net level premium method utilizing
reasonably conservative estimates of mortality, interest, and withdrawals
prevailing when the policies were sold. For interest-sensitive products,
the GAAP policy reserve is equal to the policy fund balance plus an
unearned revenue reserve which reflects the unamortized balance of early
year policy loads over renewal year policy loads.
Reinsurance: For business ceded to unauthorized reinsurers, statutory
accounting practices require that reinsurance credits permitted by the
treaty be recorded as an offsetting liability and charged against
unassigned surplus. Under GAAP, an allowance for amounts deemed
uncollectible would be established through a charge to earnings. Statutory
income recognized on certain reinsurance treaties representing financing
arrangements is not recognized on a GAAP basis.
Policy and contract liabilities ceded to reinsurers have been reported as
reductions of the related reserves rather than as assets as required under
GAAP.
Commissions allowed by reinsurers on business ceded are reported as income
when received rather than being deferred and amortized with deferred policy
acquisition costs as required under GAAP.
Subsidiaries: The accounts and operations of the Company's subsidiaries are
not consolidated with the accounts and operations of the Company as would
be required under GAAP.
13
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Basis of Presentation (continued)
Nonadmitted Assets: Certain assets designated as "nonadmitted," principally
deferred federal income tax assets, disallowed interest maintenance
reserves, non-operating software, past-due agents' balances, furniture and
equipment, intangible assets, and other assets not specifically identified
as an admitted asset within the Accounting Practices and Procedures Manual
are excluded from the accompanying balance sheets and are charged directly
to unassigned surplus. Under GAAP, such assets are included in the balance
sheet.
Employee Benefits: For purposes of calculating the Company's postretirement
benefit obligation, only vested participants and current retirees are
included in the valuation. Under GAAP, active participants not currently
vested are also included.
Universal Life and Annuity Policies: Revenues for universal life and
annuity policies consist of the entire premium received and benefits
incurred represent the total of death benefits paid and the change in
policy reserves. Under GAAP, premiums received in excess of policy charges
would not be recognized as premium revenue and benefits would represent the
excess of benefits paid over the policy account value and interest credited
to the account values.
Policyholder Dividends: Policyholder dividends are recognized when declared
rather than over the term of the related policies.
Deferred Income Taxes: Deferred tax assets are provided for and admitted to
an amount determined under a standard formula. This formula considers the
amount of differences that will reverse in the subsequent year, taxes paid
in prior years that could be recovered through carrybacks, surplus limits
and the amount of deferred tax liabilities available for offset. Any
deferred tax assets not covered under the formula are non-admitted.
Deferred taxes do not include any amounts for state taxes. Under GAAP, a
deferred tax asset is recorded for the amount of gross deferred tax assets
that are expected to be realized in future years and a valuation allowance
is established for the portion that is not realizable.
Surplus Notes: Surplus notes are reported as a component of surplus. Under
statutory accounting practices, no interest is recorded on the surplus
notes until payment has been approved by the Iowa Division of Insurance.
Under GAAP, surplus notes are reported as liabilities and the related
interest is reported as a charge to earnings over the term of the note.
Statements of Cash Flows: Cash and short-term investments in the statements
of cash flows represent cash balances and investments with initial
maturities of one year or less.
14
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Under GAAP, the corresponding caption of cash and cash equivalents include
cash balances and investments with initial maturities of three months or
less.
Reconciliation to GAAP
The effects of the preceding variances from GAAP on the accompanying
statutory basis financial statements have not been determined, but are
presumed to be material.
Other significant accounting practices are as follows:
Investments
Bonds, preferred stocks, common stocks, short-term investments and
derivative instruments are stated at values prescribed by the NAIC, as
follows:
Bonds not backed by other loans are principally stated at amortized
cost using the interest method.
Single class and multi-class mortgage-backed/asset-backed securities
are valued at amortized cost using the interest method including
anticipated prepayments. Prepayment assumptions are obtained from
dealer surveys or internal estimates and are based on the current
interest rate and economic environment. The retrospective adjustment
method is used to value all such securities except for higher-risk
asset backed securities, which are valued using the prospective
method.
Redeemable preferred stocks rated as high quality or better are
reported at cost or amortized cost. All other redeemable preferred
stocks are reported at the lower of cost, amortized cost, or market
value. Nonredeemable preferred stocks are reported at market value or
the lower of cost or market value as determined by the Securities
Valuation Office of the NAIC ("SVO").
Common stocks are reported at market value as determined by the SVO
and the related unrealized capital gains/(losses) are reported in
unassigned surplus along with adjustment for federal income taxes.
The Company analyzes the general account investments to determine
whether there has been an other than temporary decline in fair value
below the amortized cost basis. Management considers the length of the
time and the extent to which the market value has been less than cost;
the financial condition and near-term prospects of the issuer; future
economic conditions and market forecasts; and the Company's intent and
ability to retain the investment in the issuer for a period of time
sufficient to allow for recovery in market value. If it is probable
that all amounts due according to the contractual terms of a debt
security will not be collected, an other than temporary impairment is
considered to have occurred.
15
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Investments (continued)
The Company uses interest rate swaps, caps and floors, options and
certain other derivatives as part of its overall interest rate risk
management strategy for certain life insurance and annuity products.
As the Company only uses derivatives for hedging purposes, the Company
values all derivative instruments on a consistent basis with the
hedged item. Upon termination, gains and losses on those instruments
are included in the carrying values of the underlying hedged items and
are amortized over the remaining lives of the hedged items as
adjustments to investment income or benefits from the hedged items.
Any unamortized gains or losses are recognized when the underlying
hedged items are sold.
Interest rate swap contracts are used to convert the interest rate
characteristics (fixed or variable) of certain investments to match
those of the related insurance liabilities that the investments are
supporting. The net interest effect of such swap transactions is
reported as an adjustment of interest income from the hedged items as
incurred.
Interest rate caps and floors are used to limit the effects of
changing interest rates on yields of variable rate or short-term
assets or liabilities. The initial cost of any such agreement is
amortized to net investment income over the life of the agreement.
Periodic payments that are receivable as a result of the agreements
are accrued as an adjustment of interest income or benefits from the
hedged items.
The derivatives are reported in a manner that is consistent with the
hedged asset or liability. All derivatives are reported at amortized
cost with the exception of the S&P Options. The S&P Options are
reported at fair value since the liabilities that are being hedged are
reported at fair value. The unrealized gains or losses from the S&P
Options are reported in investment income. Upon termination of a
derivative that qualified for hedge accounting, the gain or loss is
deferred in IMR or adjusts the basis of the hedged item.
The Company's insurance subsidiaries are reported at their underlying
statutory basis net assets plus the admitted portion of goodwill.
Dividends from subsidiaries are included in net investment income. The
remaining net change in the subsidiaries' equity is included in the
change in net unrealized capital gains or losses.
Mortgage loans are reported at amortized cost, less allowance for
impairments.
Policy loans are reported at unpaid principal balances.
16
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Investments (continued)
Land is reported at cost. Real estate occupied by the company is
reported at depreciated cost; other real estate is reported at the
lower of depreciated cost or fair value. Depreciation is calculated on
a straight-line basis over the estimated useful lives of the
properties.
For reverse repurchase agreements, Company policies require a minimum
of 102% of the fair value of securities purchased under reverse
repurchase agreements to be maintained as collateral. Cash collateral
received is invested in short-term investments and the offsetting
collateral liability is included in miscellaneous liabilities.
Rollover dollar repurchase agreements are accounted for as collateral
borrowings, where the amount borrowed is equal to the sales price of
the underlying securities.
Short-term investments are reported at amortized cost. Short-term
investments include investments with maturities of less than one year
at the date of acquisition.
Other invested assets are reported at amortized cost using the
effective interest method. Other invested assets primarily consist of
residual collateralized mortgage obligations and partnership
interests.
Realized capital gains and losses are determined using the specific
identification basis.
Aggregate Reserve for Life Policies and Contracts
Life, annuity, and accident and health reserves are developed by actuarial
methods and are determined based on published tables using statutorily
specified interest rates and valuation methods that will provide, in the
aggregate, reserves that are greater than or equal to the minimum or
guaranteed policy cash value or the amounts required by law. Interest rates
range from 2.25% to 10%.
The Company waives the deduction of deferred fractional premiums upon the
death of the insured. It is the Company's practice to return a pro rata
portion of any premium paid beyond the policy month of death, although it
is not contractually required to do so for certain issues.
17
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Aggregate Reserve for Life Policies and Contracts (continued)
The methods used in valuation of substandard policies are as follows:
For life, endowment and term policies issued substandard, the standard
reserve during the premium-paying period is increased by 50% of the
gross annual extra premium. Standard reserves are held on Paid-Up
Limited Pay contracts.
For reinsurance accepted with table rating, the reserve established is
a multiple of the standard reserve corresponding to the table rating.
For reinsurance with flat extra premiums, the standard reserve is
increased by 50% of the flat extra.
The amount of insurance in force for which the gross premiums are less than
the net premiums, according to the standard of valuation required by the
State of Iowa is $246,911,000 at December 31, 2002. The amount of reserves
for policies on which gross premiums are less than the net premiums
deficiency reserves is $1,617,000 at December 31, 2002.
The tabular interest has been determined from the basic data for the
calculation of policy reserves for all direct ordinary life insurance and
for the portion of group life insurance classified as group Section 79. The
tabular interest of funds not involving life contingencies is calculated as
the current year reserves, plus payments, less prior year reserves, less
funds added.
Guaranteed Minimum Death Benefits
Guaranteed minimum death benefits ("GMDB") are features offered with a
variable annuity contract that provide a minimum level of proceeds,
regardless of account balance, in the event of the policyholder's death.
The GMDB can either remain constant or increase, depending on the
underlying guarantee. The GMDB features of many companies' variable annuity
contracts contain a "dollar-for-dollar" withdrawal provision, which
provides for a reduction in the GMDB on a dollar-for-dollar basis when a
partial withdrawal occurs.
18
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Guaranteed Minimum Death Benefits (continued)
As a result of the equity market performance over the past several years, a
number of variable annuity policies could have account values that are less
than the GMDB. A policy holder with a sizeable minimum death benefit and a
policy with a dollar-for-dollar withdrawal provision could withdraw all but
a required minimal account value or transfer a portion of their variable
annuity contract to another carrier, while maintaining a significant GMDB.
For Statutory reserves, Actuarial Guideline 33, "Determining CARVM Reserves
for Annuity Contract with Elective Benefits" (AG 33), defines the
methodology and assumptions that are to be used to determine the minimum
statutory reserves for annuity contracts. The purpose of Actuarial
Guideline 34, "Variable Annuity Minimum Guaranteed Death Benefit Reserves"
(AG 34) is "to interpret the standards for the valuation of reserves for
Minimum Guaranteed Death Benefits included in variable annuity contracts."
There is currently discussion whether AG 34 supersedes AG 33 when
calculating the GMDB reserves or whether AG 33 and AG 34 should be applied
jointly. Given the inherent ambiguity and controversy as to whether AG 34
supersedes AG 33 or whether AG 33 and AG 34 both apply in determining the
appropriate reserves, and given the heightened interest of rating agencies
regarding this issue, the Company has performed an initial assessment of
its potential exposure related to GMDB's under the dollar-for-dollar
features of its variable annuity products. The difference in interpretation
as to the appropriate integration of AG 33 and AG 34 computational guidance
could result in higher statutory reserve balances of approximately
$35,000,000 as of December 31, 2002. The company has a wholly owned
insurance subsidiary in which the difference in interpretation could result
in higher reserve balances of approximately $85,000,000 as of December 31,
2002.
Reinsurance
Reinsurance premiums, commissions, expense reimbursements, and reserves
related to reinsured business are accounted for on bases consistent with
those used in accounting for the original policies issued and the terms of
the reinsurance contracts. Reserves are based on the terms of the
reinsurance contract and are consistent with the risks assumed. Premiums
and benefits ceded to other companies have been reported as a reduction of
premium revenue and benefits expense. Amounts applicable to reinsurance
ceded for reserves and unpaid claim liabilities have been reported as
reductions of these items, and expense allowances received in connection
with reinsurance ceded have been reflected in operations.
19
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Electronic Data Processing Equipment
Electronic data processing equipment is carried at cost less accumulated
depreciation. Depreciation for major classes of assets is calculated on a
straight-line basis over the estimated useful lives of the assets.
Participating Insurance
Participating business approximates less than 11% of the Company's ordinary
life insurance in force and 2% of premium income. The amount of dividends
to be paid is determined annually by the Board of Directors. Amounts
allocable to participating policyholders are based on published dividend
projections or expected dividend scales. Dividends of $23,406,000 and
$25,228,000 were incurred 2002 and 2001, respectively.
Pension Plans
The Company provides noncontributory retirement plans for substantially all
employees and certain agents. Pension costs are charged to operations as
contributions are made to the plan. The Company also provides a
contributory retirement plan for substantially all employees.
Nonadmitted Assets
Nonadmitted assets are summarized as follows:
December 31
2002 2001
--------------- ---------------
(In Thousands)
Deferred federal income taxes $ 157,392 $ 94,807
Agents' debit balances 253 705
Furniture and equipment 4,337 6,411
Leasehold improvements 1,033 -
Deferred and uncollected premium 426 372
Commuted commission 1,108 -
Suspense debts 3,586 5,135
Other 231 2,459
--------------- --------------
Total nonadmitted assets $ 168,366 $ 109,889
=============== ==============
Changes in nonadmitted assets are generally reported directly in surplus as
an increase or decrease in nonadmitted assets. Certain changes are reported
directly in surplus as a change in unrealized capital gains or losses.
20
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Cash Flow Information
Cash and short-term investments include cash on hand, demand deposits and
short-term fixed maturity instruments (with a maturity of less than one
year at date of acquisition).
The Company borrowed $1,253,710,000 and repaid $1,253,710,000 in 2002, and
borrowed $784,500,000 and repaid $784,500,000 during, 2001. These
borrowings were on a short-term basis, at an interest rate that
approximated current money market rates and exclude borrowings from reverse
dollar repurchase transactions. Interest paid on borrowed money was
$204,000 and $1,646,000 during 2002 and 2001, respectively.
Separate Accounts
Separate account assets and liabilities held by the Company represent funds
held for the benefit of the Company's variable life and annuity policy and
contract holders who bear all of the investment risk associated with the
policies. Such policies are of a non-guaranteed nature. All net investment
experience, positive or negative, is attributed to the policy and contract
holders' account values. The assets and liabilities of these accounts are
carried at fair value.
Reserves related to the Company's mortality risk associated with these
policies are included in life and annuity reserves. The operations of the
separate accounts are not included in the accompanying statements of
operations.
Reclassifications
Certain prior year amounts in the Company's statutory basis financial
statements have been reclassified to conform to the 2002 financial
statement presentation.
21
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
2. Permitted Statutory Basis Accounting Practices
The financial statements of the Company are presented on the basis of
accounting practices prescribed or permitted by the State of Iowa. The Iowa
State Insurance Division recognizes only statutory accounting practices
prescribed or permitted by the State of Iowa for determining and reporting
the financial condition and results of operations of an insurance company,
for determining its solvency in under the Iowa Insurance Laws. The National
Association of Insurance Commissioners' (NAIC) Accounting Practices and
Procedures Manual has been adopted as a component of prescribed or
permitted practices by the state of Iowa. The Commissioner of Insurance has
the right to permit other specific practices that deviate from prescribed
practices.
The Company is required to identify those significant accounting practices
that are permitted, and obtain written approval of the practices from the
Iowa Division of Insurance. As of December 31, 2002 and 2001, the Company
had no such permitted accounting practices.
3. Accounting Changes
The Company prepares its statutory financial statements in conformity with
accounting practices prescribed or permitted by the State of Iowa.
Effective January 1, 2001, the State of Iowa required that insurance
companies domiciled in the State of Iowa prepare their statutory basis
financial statements in accordance with the NAIC Accounting Practices and
Procedures Manual subject to any deviations prescribed or permitted by the
State of Iowa insurance commissioner.
Accounting changes adopted to conform to the provisions of the NAIC
Accounting Practices and Procedures Manual are reported as changes in
accounting principles. The cumulative effect of changes in accounting
principles is reported as an adjustment to unassigned surplus in the period
of the change in accounting principle. The cumulative effect is the
difference between the amount of capital and surplus at the beginning of
the year and the amount of capital and surplus that would have been
reported at that date if the new accounting principles had been applied
retroactively for all prior periods.
As a result of these changes, the Company reported a change of accounting
principle, as an adjustment that decreased unassigned funds surplus, by
$6,073,000 as of January 1, 2001. Included in this total adjustment is a
reduction in unassigned funds of approximately $12,670,000 related to
guaranty funds, post retirement benefits and other assessments and an
increase in unassigned funds of approximately $6,597,000 related to
mortgage loans and bonds.
22
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
4. Investments
The amortized cost and fair value of bonds and equity securities are as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- --------------- --------------- ---------------
(In Thousands)
At December 31, 2002:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 6,605 $ 643 $ - $ 7,248
States, municipalities, and political
subdivisions 248 11 - 259
Foreign government 172,130 12,466 4,538 180,058
Public utilities securities 185,449 8,495 3,681 190,263
Corporate securities 1,324,320 85,202 12,026 1,397,496
Mortgage-backed securities 874,791 38,253 20,820 892,224
Other structured securities 363,055 22,346 19,667 365,734
--------------- --------------- --------------- ---------------
Total fixed maturities 2,926,598 167,416 60,732 3,033,282
Preferred stocks 441 - - 441
Common stocks 120,051 234 - 120,285
--------------- --------------- --------------- ---------------
Total equity securities 120,492 234 - 120,726
--------------- --------------- --------------- ---------------
Total $ 3,047,090 $ 167,650 $ 60,732 $ 3,154,008
=============== =============== =============== ===============
At December 31, 2001:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 35,463 $ 306 $ 730 $ 35,039
States, municipalities, and political
subdivisions 248 - 1 247
Foreign government 111,157 3,952 3,077 112,032
Public utilities securities 103,304 1,839 4,541 100,602
Corporate securities 1,130,256 37,173 22,792 1,144,637
Mortgage-backed securities 873,372 27,484 17,543 883,313
Other structured securities 374,298 13,007 20,626 366,679
--------------- ---------------- --------------- ----------------
Total fixed maturities 2,628,098 83,761 69,310 2,642,549
Preferred stocks 490 - - 490
Common stocks 306 - - 306
--------------- ---------------- --------------- ----------------
Total equity securities 796 - - 796
--------------- ---------------- --------------- ----------------
Total $ 2,628,894 $ 83,761 $ 69,310 $ 2,643,345
=============== ================ =============== ================
23
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
4. Investments (continued)
The amortized cost and fair value of investments in bonds at December 31,
2002, by contractual maturity, are shown below. Expected maturities may
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
--------------- ---------------
(In Thousands)
December 31, 2002
Maturity:
Due in 1 year or less $ 16,683 $ 16,833
Due after 1 year through 5 years 499,720 530,636
Due after 5 years through 10 years 863,485 909,340
Due after 10 years 308,864 318,514
--------------- ---------------
1,688,752 1,775,323
Mortgage-backed securities 874,791 892,225
Other structured securities 363,055 365,734
--------------- ---------------
Total $ 2,926,598 $ 3,033,282
=============== ===============
At December 31, 2002, investments in certificates of deposit and bonds,
with an admitted asset value of $3,809,000, were on deposit with state
insurance departments to satisfy regulatory requirements.
Reconciliation of bonds from amortized cost to carrying value as of
December 31, 2002 and 2001 is as follows:
December 31
2002 2001
--------------- ---------------
(In Thousands)
Amortized cost $ 2,926,598 $ 2,628,098
Less nonadmitted bonds (640) -
--------------- --------------
Carrying value $ 2,925,958 $ 2,628,098
=============== ==============
Proceeds from the sales of investments in bonds and other fixed maturity
interest securities were $1,740,357,000 and $797,331,000 in 2002 and 2001,
respectively. Gross gains of $37,919,000 and $22,517,000 and gross losses
of $36,614,000 and $10,345,000 during 2002 and 2001, respectively, were
realized on those sales. A portion of the gains realized in 2002 and 2001
has been deferred to future periods in the interest maintenance reserve.
24
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
4. Investments (continued)
Major categories of net investment income are summarized as follows:
December 31
2002 2001
--------------- ---------------
(In Thousands)
Equity securities - affiliated $ 35 $ 351
Equity securities - unaffiliated - 26,000
Bonds 230,384 205,052
Mortgage loans 65,648 62,637
Contract loans 7,840 7,844
Real estate 757 362
Other (58,410) (51,849)
--------------- --------------
Total investment income 246,254 250,397
Investment expenses (18,104) (17,618)
--------------- --------------
Net investment income $ 228,150 $ 232,779
=============== ==============
As part of its overall investment strategy, the Company has entered into
agreements to purchase securities as follows:
December 31
2002 2001
--------------- ---------------
(In Thousands)
Investment purchase commitments $ 47,317 $ 14,909
The Company entered into reverse dollar repurchase transactions to increase
its return on investments and improve liquidity. Reverse dollar repurchases
involve a sale of securities and an agreement to repurchase substantially
the same securities as those sold. The reverse dollar repurchases are
accounted for as short term collateralized financing and the repurchase
obligation is reported in borrowed money. The repurchase obligation totaled
$95,801,000 at December 31, 2002. The securities underlying these
agreements are mortgage-backed securities with a book value and fair value
of $95,936,000 at December 31, 2002. The securities have a weighted average
coupon of 5.6% and have maturities ranging from December 2017 through
December 2032. The primary risk associated with short-term collateralized
borrowings is that the counterparty may be unable to perform under the
terms of the contract. The Company's exposure is limited to the excess of
the net replacement cost of the securities over the value of the short-term
investments, which was not material at December 31, 2002. The Company
believes the counterparties to the reverse dollar repurchase agreements are
financially responsible and that the counterparty risk is minimal.
25
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
4. Investments (continued)
The Company participates in reverse repurchase transactions. Such
transactions include the sale of corporate securities to a major securities
dealer and a simultaneous agreement to repurchase the same security in the
near term. The proceeds are invested in new securities of intermediate
durations. The terms of the reverse repurchase agreements call for payment
of interest at a rate of 1.4%. The agreements mature prior to the end of
January 2003. At December 31, 2002 the amount due on these agreements
included in borrowed money is $3,000,000. The securities underlying these
agreements are mortgage-backed securities with a book value and fair value
of $3,176,000. The securities have a weighted average coupon of 6.0% and
have a maturity of November 2032.
The maximum and minimum lending rates for long-term mortgage loans during
2002 were 7.7% and 3.0%. Fire insurance is required on all properties
covered by mortgage loans and must at least equal the excess of the loan
over the maximum loan which would be permitted by law on the land without
the buildings.
The maximum percentage of any loan to the value of collateral at the time
of the loan, exclusive of insured or guaranteed or purchase money
mortgages, was 81.9% on commercial properties. As of December 31, 2002, the
Company held no mortgages with interest more than 180 days overdue. Total
interest due on mortgages as of December 31, 2002 is $23,000.
5. Derivative Financial Instruments Held for Purposes Other than Trading
The Company enters into interest rate and currency contracts, including
swaps, caps, floors, and options, to reduce and manage risks, which include
the risk of a change in the value, yield, price, cash flows, exchange rates
or quantity of, or a degree of exposure with respect to, assets,
liabilities, or future cash flows, which the Company has acquired or
incurred. Hedge accounting practices are supported by cash flow matching,
scenario testing and duration matching.
The Company uses interest rate swaps to reduce market risks from changes in
interest rates and to alter interest rate exposure arising from mismatches
between assets and liabilities. Interest rate swap agreements generally
involve the exchange of fixed and floating interest payments over the life
of the agreement without an exchange of the underlying principal amount.
Currency swap agreements generally involve the exchange of local and
foreign currency payments over the life of the agreements without an
exchange of the underlying principal amount. Interest rate cap and interest
rate floor agreements owned entitle the Company to receive payments to the
extent reference interest rates exceed or fall below strike levels in the
contracts based on the notional amounts.
26
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
5. Derivative Financial Instruments Held for Purposes Other than Trading
(continued)
Premiums paid for the purchase of interest rate contracts are included in
other invested assets and are being amortized to interest expense over the
remaining terms of the contracts or in a manner consistent with the
financial instruments being hedged.
Amounts paid or received, if any, from such contracts are included in
interest expense or income. Accrued amounts payable to or receivable from
counterparties are included in other liabilities or other invested assets.
Gains or losses realized as a result of early terminations of interest rate
contracts are amortized to investment income over the remaining term of the
items being hedged to the extent the hedge is considered to be effective;
otherwise, they are recognized upon termination.
Interest rate contracts that are matched or otherwise designated to be
associated with other financial instruments are recorded at fair value if
the related financial instruments mature, are sold, or are otherwise
terminated or if the interest rate contracts cease to be effective hedges.
Changes in the fair value of derivatives are recorded as investment income.
The Company manages the potential credit exposure from interest rate
contracts through careful evaluation of the counterparties' credit
standing, collateral agreements, and master netting agreements.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate contracts; however, the Company does not
anticipate nonperformance by any of these counterparties. The amount of
such exposure is generally the unrealized gains in such contracts.
The table below summarizes the Company's interest rate contracts included
in other invested assets at December 31, 2002 and 2001:
December 31, 2002
-------------------------------------------------
Notional Carrying Fair
Amount Value Value
--------------- ------------- ------------
(In Thousands)
Interest rate contracts:
Swaps $ 266,098 $ - $ (4,428)
Caps owned 743,000 2,508 908
Options owned 856,438 30,325 30,325
--------------- ------------ ------------
Total derivatives $ 1,865,536 $ 32,833 $ 26,805
=============== ============ ============
27
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
5. Derivative Financial Instruments Held for Purposes Other than Trading
(continued)
December 31, 2001
-------------------------------------------------
Notional Carrying Fair
Amount Value Value
--------------- ------------- ------------
(In Thousands)
Interest rate contracts:
Swaps $ 50,000 $ 69 $ 2
Caps owned 1,115,000 2,547 2,256
Options owned 762,920 60,495 45,720
--------------- ------------ ------------
Total derivatives $ 1,927,920 $ 63,111 $ 47,978
=============== ============ ============
6. Concentrations of Credit Risk
The Company held less-than-investment-grade corporate bonds with an
aggregate book value of $215,727,000 and $251,252,000 and with an aggregate
market value of $200,968,000 and $236,887,000 at December 31, 2002 and
2001, respectively. Those holdings amounted to 7.4% of the Company's
investments in bonds and 3.37% of total admitted assets at December 31,
2002. The holdings of less-than-investment-grade bonds are widely
diversified and of satisfactory quality based on the Company's investment
policies and credit standards.
The Company held unrated bonds of $68,548,000 and $196,630,000 with an
aggregate NAIC market value of $73,861,000 and $199,043,000 at December 31,
2002 and 2001, respectively. The carrying value of these holdings amounted
to 2.3% of the Company's investment in bonds and 1.0% of the Company's
total admitted assets at December 31, 2002.
At December 31, 2002, the Company's commercial mortgages involved a
concentration of properties located in California (17.7%) and Texas (8%).
The remaining commercial mortgages relate to properties located in 38 other
states. The portfolio is well diversified; covering many different types of
income-producing properties on which the Company has first mortgage liens.
The maximum mortgage outstanding on any individual property is $17,353,000.
28
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
7. Annuity Reserves
At December 31, 2002 and 2001, the Company's annuity reserves, including
those held in separate accounts and deposit fund liabilities that are
subject to discretionary withdrawal with adjustment, subject to
discretionary withdrawal without adjustment, and not subject to
discretionary withdrawal provisions are summarized as follows:
December 31, 2002
Amount Percent
--------------- ---------------
(In Thousands)
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 1,538,465 34%
At book value less surrender charge 846,121 18
At fair value 1,079,649 23
--------------- ---------------
Subtotal 3,464,235 75
Subject to discretionary withdrawal (without adjustment)
at book value with minimal or no charge or adjustment 447,961 10
Not subject to discretionary withdrawal 664,896 15
--------------- ---------------
Total annuity reserves and deposit fund liabilities before reinsurance 4,577,092 100%
===============
Less reinsurance ceded 559,044
---------------
Net annuity reserves and deposit fund liabilities $ 4,018,048
===============
December 31, 2001
Amount Percent
--------------- ---------------
(In Thousands)
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 1,329,562 30%
At book value less surrender charge 718,764 16
At fair value 1,365,750 30
--------------- ---------------
Subtotal 3,414,076 76
Subject to discretionary withdrawal (without adjustment)
at book value with minimal or no charge or adjustment 452,336 10
Not subject to discretionary withdrawal 653,795 14
--------------- ---------------
Total annuity reserves and deposit fund liabilities before reinsurance 4,520,207 100%
===============
Less reinsurance ceded 542,676
---------------
Net annuity reserves and deposit fund liabilities $ 3,977,531
===============
29
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
8. Employee Benefit Plans
Pension Plan and Postretirement Benefits
Effective December 31, 2001, the qualified noncontributory defined benefit
retirement plans of the Company, along with certain other US subsidiaries
of ING AIH, were merged into one plan which is recognized in ING AIH's
financial statements. As a result of this plan merger, the Company
transferred its qualified pension asset to ING North America Insurance
Corporation, an affiliate. In addition, the Company maintains a
nonqualified unfunded Supplemental Employees Retirement Plan ("SERP").
The Company also provides certain health care and life insurance benefits
for retired employees.
Pension Benefits Other Benefits
2002 2001 2002 2001
---------- ---------- ---------- ----------
(In Thousands)
Change in plan assets
Fair value of plan assets at beginning of year $ - $ 151,069 $ - $ -
Actual return on plan assets - (7,383) - -
Employer contribution 301 199 471 383
Plan participants' contributions - - 376 234
Benefits paid (301) (5,086) (847) (617)
Business combinations, divestitures and
settlements - (138,799) - -
---------- ---------- ---------- ----------
Fair value of plan assets at end of year $ - $ - $ - $ -
========== ========== ========== ==========
Funded status
Unamortized prior service credit $ 318 $ 346 $ 746 $ 844
Unrecognized net (gain) or loss 3,715 (2,539) (2,566) 885
Remaining net obligation at initial date of
application (31) (33) - (3,341)
Accrued liabilities (12,117) (10,789) (4,874) (3,771)
---------- ---------- ---------- ----------
Net liability recorded $ (8,115) $ (13,015) $ (6,694) $ (5,383)
========== ========== ========== ==========
30
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
8. Employee Benefit Plans (continued)
Pension Plan and Postretirement Benefits (continued)
A summary of assets, obligations and assumptions of the Pension and Other
Postretirement Benefits Plans are as follows:
Pension Benefits Other Benefits
2002 2001 2002 2001
---------- ---------- ---------- ----------
(In Thousands)
Change in benefit obligation
Benefit obligation at beginning of year $ 13,015 $ 73,510 $ 5,383 $ 7,452
Service cost 546 1,820 210 211
Interest cost 1,008 5,643 400 564
Contribution by plan participants - - 376 234
Actuarial gain (loss) (6,153) 5,767 373 (2,811)
Benefits paid (301) (5,085) (847) (618)
Plan amendments - (114) 799 -
Business combinations, divestitures,
curtailments, settlements and special
termination benefits - (68,526) - 351
---------- ---------- ---------- ----------
Benefit obligation at end of year $ 8,115 $ 13,015 $ 6,694 $ 5,383
========== ========== ========== ==========
Components of net periodic benefit cost
Service cost $ 546 $ 1,820 $ 210 $ 212
Interest cost 1,008 5,643 400 565
Expected return on plan assets - (13,750) - -
Amortization of recognized transition obligation
or transition asset 2 (2,452) 304 304
Amount of recognized gains and losses 100 - (42) 109
Amount of prior service cost recognized (28) - 701 (98)
Amount of gain or loss recognized due to a
settlement or curtailment - - - 351
---------- ---------- ---------- ----------
Total net periodic benefit cost $ 1,628 $ (8,739) $ 1,573 $ 1,443
========== ========== ========== ==========
31
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
8. Employee Benefit Plans (continued)
Pension Plan and Postretirement Benefits (continued)
In addition, the Company has a pension benefit obligation and another
benefits obligation for non-vested employees as of December 31, 2002 and
2001 in the amount of $682,000 and $842,000, and $2,633,000 and $1,708,000
(OPEB obligation), respectively.
Assumptions used in determining the accounting for the defined benefit
plans and other post-retirement benefit plans as of December 31, 2002 and
2001 were as follows:
2002 2001
--------------- ---------------
Weighted-average discount rate 6.75% 7.50%
Rate of increase in compensation level 3.75% 4.50%
Expected long-term rate of return on assets 9.00% 9.25%
The annual assumed rate of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) for the medical plan is 10%
graded to 5.0% thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. For example, increasing the
assumed health care cost trend rates by one percentage point in each year
would increase the accumulated postretirement benefit obligation for the
medical plan as of December 31, 2002 by $1,159,000. Decreasing the assumed
health care cost trend rates by one percentage point in each year would
decrease the accumulated postretirement benefit obligation for the medical
plan as of December 31, 2002 by $1,139,000.
401(k) Plan
The Savings Plan is a defined contribution plan, which is available to
substantially all employees. Participants may make contributions to the
plan through salary reductions up to a maximum of $11,000 for 2002 and
$10,500 for 2001. Such contributions are not currently taxable to the
participants. The Company matches up to 6% of pre-tax eligible pay at 100%.
Company matching contributions were $681,000 and $522,000 for 2002 and
2001, respectively.
32
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
9. Separate Accounts
Separate account assets and liabilities represent funds segregated by the
Company for the benefit of certain policy and contract holders who bear the
investment risk. All such policies are of a nonguaranteed return nature.
Revenues and expenses on the separate account assets and related
liabilities equal the benefits paid to the separate account policy and
contract holders.
A reconciliation of the amounts transferred to and from the separate
accounts is presented below:
December 31,
2002 2001
--------------- ---------------
(In Thousands)
Transfers as reported in the summary of operations of the Separate Accounts
Statement:
Transfers to separate accounts $ 33,970 $ 52,388
Transfers from separate accounts 169,689 151,018
--------------- ---------------
Net transfers from separate accounts (135,719) (98,630)
Reconciling adjustments:
Miscellaneous transfers 33 2
--------------- ---------------
Transfers as reported in the Statement of Operations $ (135,686) $ (98,628)
=============== ===============
December 31,
2002 2001
--------------- ---------------
(In Thousands)
Reserves for separate accounts by withdrawal characteristics:
Subject to discretionary withdrawal:
With market value adjustment $ - $ -
At book value without market value adjustment less current
surrender charge
of 5% or more 931,533 1,365,751
At market value - -
At book value without market value adjustment less current
surrender charge
of less than 5% - -
Subtotal - -
Not subject to discretionary withdrawal - -
--------------- --------------
Total separate account reserves $ 931,533 $ 1,365,751
=============== ==============
33
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
10. Reinsurance
The Company is involved in both ceded and assumed reinsurance with other
companies for the purpose of diversifying risk and limiting exposure on
larger risks. As of December 31, 2002, the Company's retention limit for
acceptance of risk on life insurance policies had been set at various
levels up to $500,000.
To the extent that the assuming companies become unable to meet their
obligations under these treaties, the Company remains contingently liable
to its policyholders for the portion reinsured. To minimize its exposure to
significant losses from retrocessionaire insolvencies, the Company
evaluates the financial condition of the retrocessionaire and monitors
concentrations of credit risk.
Assumed premiums amounted to $1,299,151,000 and $2,113,275,000 for the
years ended December 31, 2002 and 2001, respectively.
The Company's ceded reinsurance arrangements reduced certain items in the
accompanying financial statements by the following amounts:
December 31,
2002 2001
--------------- ---------------
(In Thousands)
Premiums $ 4,833 $ 4,080
Benefits paid or provided 7,821 8,023
Policy and contract liabilities at year end 586,918 592,643
During 2002 and 2001, the Company had ceded blocks of insurance under
reinsurance treaties to provide funds for financing and other purposes.
These reinsurance transactions, generally known as "financial reinsurance,"
represent financing arrangements. Financial reinsurance has the effect of
increasing current statutory surplus while reducing future statutory
surplus as the reinsurers recapture amounts.
34
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
11. Federal Income Taxes
The Company files a consolidated federal income tax return with its
subsidiaries. The method of tax allocation is governed by a written tax
sharing agreement. The tax sharing agreement provides that each member of
the consolidated return shall reimburse the Company for its respective
share of the consolidated federal income tax liability and shall receive a
benefit for its losses at the statutory rate.
The components of the net deferred tax asset/(liability) at December 31 are
as follows:
December 31,
2002 2001
--------------- ---------------
(In Thousands)
Total gross deferred tax assets $ 162,399 $ 102,914
Total deferred tax liabilities (5,007) (6,542)
--------------- ---------------
Net deferred tax asset 157,392 96,372
Deferred tax asset nonadmitted (157,392) (94,807)
--------------- ---------------
Net admitted deferred tax asset - 1,565
=============== ===============
(Increase) in nonadmitted asset $ (62,585) $ (28,560)
=============== ===============
Current income taxes incurred consist of the following major components:
December 31,
2002 2001
--------------- ---------------
(In Thousands)
Federal taxes on stand alone operations $ (17,296) $ (1,605)
Federal taxes paid to affiliates under tax sharing agreement 67,278 -
Consolidated operations loss carryback utilized (11,267) -
--------------- ---------------
Total taxes on operations 38,715 (1,605)
Federal taxes on capital gains (1,559) 7,441
Federal taxes paid to affiliates under tax sharing agreement 3,896 -
Consolidated capital loss carrybacks utilized (12,625) -
--------------- ----------------
Total current taxes incurred $ 28,427 $ 5,836
================ ================
35
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
11. Federal Income Taxes (continued)
The main components of deferred tax assets and deferred tax liabilities are
as follows:
December 31,
2002 2001
--------------- ---------------
(In Thousands)
Deferred tax assets resulting from book/tax differences in:
Operations loss carryforwards $ 72,725 $ -
Deferred acquisition costs 30,319 23,779
Investments 19,753 24,545
Insurance reserves 19,428 36,376
Policyholder dividends 8,328 8,535
Nonadmitted assets 3,709 4,886
Unrealized loss on investments 704 288
Other 7,433 4,505
--------------- --------------
Total deferred tax assets 162,399 102,914
Deferred tax assets nonadmitted (157,392) (94,807)
--------------- --------------
Admitted deferred tax assets $ 5,007 $ 8,107
=============== ==============
Deferred tax liabilities resulting from book/tax differences in:
Due & deferred premiums $ 2,488 $ 2,410
Fixed assets 2,164 3,516
Other 355 616
--------------- --------------
Total deferred tax liabilities 5,007 6,542
--------------- --------------
Net admitted deferred tax asset $ - $ 1,565
=============== ==============
The change in net deferred income taxes is comprised of the following:
December 31,
2002 2001 Change
--------------- --------------- ----------
(In Thousands)
Total deferred tax assets $ 162,399 $ 102,914 $ 59,485
Total deferred tax liabilities 5,007 6,542 (1,535)
--------------- --------------- ---------
Net deferred tax asset $ 157,392 $ 96,372 61,020
=============== ===============
Tax effect of items in surplus:
Unrealized gains (losses) (416)
Change in non-admitted assets 1,191
---------
Change in net deferred income tax $ 61,795
=========
36
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
11. Federal Income Taxes (continued)
The provision for federal income tax expense and change in deferred taxes
differs from the amount obtained applying the statutory Federal income tax
rate to income (including capital losses) before income taxes for the
following reasons:
Year Ended
December 31,
2002
---------------
(In Thousands)
Ordinary income $ (60,415)
Capital gains (losses) (37,073)
---------------
Total pre-tax book income $ (97,488)
===============
Provision computed at statutory rate $ (34,121)
Interest maintenance reserve 900
Other (147)
---------------
Total $ (33,368)
===============
Federal income taxes incurred $ 28,427
Change in net deferred income taxes (61,795)
---------------
Total statutory income taxes $ (33,368)
===============
The amount of federal income taxes incurred that will be available for
recoupment in event of future net losses is $12,514,000 from 2001.
The Company has operations loss carryforwards of $207,784,000, which expire
in 2017.
The Company has a receivable from United States Treasury of $52,531,000 and
$34,688,000 for federal income taxes as of December 31, 2002 and 2001,
respectively.
Prior to 1984, the Company was allowed certain special deductions for
federal income tax reporting purposes that were required to be accumulated
in a "policyholders' surplus account" (PSA). In the event those amounts are
distributed to shareholders, or the balance of the account exceeds certain
limitations prescribed by the Internal Revenue Code, the excess amounts
would be subject to income tax at current rates. Income taxes also would be
payable at current rates if the Company ceases to qualify as a life
insurance company for tax reporting purposes, or if the income tax deferral
status of the PSA is modified by future tax legislation. Management does
not intend to take any actions nor does management expect any events to
occur that would cause income taxes to become payable on the PSA balance.
Accordingly, the Company has not accrued income taxes on the PSA balance of
$14,388,000 at December 31, 2002. However, if such taxes were assessed, the
amount of the taxes payable would be $5,036,000. No deferred tax
liabilities are recognized related to the PSA.
37
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
12. Investment in and Advances to Subsidiaries
Amounts invested in and advanced to the Company's subsidiaries are
summarized as follows:
December 31,
2002 2001
--------------- ---------------
(In Thousands)
Common stock $ 811,079 $ 761,038
(Payable) receivable from subsidiaries 2,102 2,445
Summarized financial information for these subsidiaries is as follows:
December 31,
2002 2001
--------------- ---------------
(In Thousands)
Revenue s $ 7,929,991 $ 5,911,580
Income before net realized gains on investments (235,729) (75,842)
Net loss (277,136) (126,933)
Admitted assets 24,301,380 20,556,877
Liabilities 23,490,301 19,795,838
13. Capital and Surplus
Under Iowa insurance regulations, the Company is required to maintain a
minimum total capital and surplus which is the lower of $5,000,000 or risk
based capital. Additionally, the amount of dividends which can be paid by
the Company to its stockholder without prior approval of the Iowa Division
of Insurance is limited to the greater of 10% of statutory surplus or the
statutory net gain from operations.
38
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
14. Fair Values of Financial Instruments
Life insurance liabilities that contain mortality risk and all nonfinancial
instruments have been excluded from the disclosure requirements. However,
the fair values of liabilities under all insurance contracts are taken into
consideration in the Company's overall management of interest rate risk,
such that the Company's exposure to changing interest rates is minimized
through the matching of investment maturities with amounts due under
insurance contracts. The carrying amounts and fair values of the Company's
financial instruments are summarized as follows:
December 31
2002 2001
------------------------------------ -------------------------------------
------------------ ----------------- ------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------ ----------------- ------------------ ------------------
(In Thousands)
Assets:
Bonds $ 2,925,958 $ 3,033,282 $ 2,628,098 $ 2,642,549
Preferred stocks 441 441 490 490
Unaffiliated common stocks 285 285 306 306
Mortgage loans 859,953 943,421 842,243 875,493
Policy loans 130,790 130,790 139,826 139,826
Derivative securities 32,833 26,805 63,111 47,978
Short-term investments 19,971 19,971 53,000 53,000
Cash 5,131 5,131 14,592 14,592
Investment in surplus notes 135,000 191,228 185,000 268,149
Indebtedness from related
parties 107,057 107,056 29,867 29,867
Separate account assets 959,377 959,377 1,406,693 1,406,693
Receivable for securities 207 207 3,950 3,950
Liabilities:
Individual and group annuities 2,852,482 2,794,933 2,611,782 2,439,374
Deposit type contract 189,296 190,706 152,194 152,194
Policyholder funds 26,333 26,333 26,893 26,893
Indebtedness to related parties 66,200 66,200 21,091 21,091
Separate account liabilities 959,377 959,377 1,406,693 1,406,693
Payable for securities - - 56,485 56,485
39
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
14. Fair Values of Financial Instruments (continued)
The following methods and assumptions were used by the Company in
estimating the fair value disclosures for financial instruments in the
accompanying financial statements and notes thereto:
Cash and short-term investments: The carrying amounts reported in the
accompanying balance sheets for these financial instruments
approximate their fair values.
Fixed maturities and equity securities: The fair values for bonds,
preferred stocks and common stocks, reported herein, are based on
quoted market prices, where available. For securities not actively
traded, fair values are estimated using values obtained from
independent pricing services or, in the case of private placements,
collateralized mortgage obligations and other mortgage derivative
investments, are estimated by discounting the expected future cash
flows. The discount rates used vary as a function of factors such as
yield, credit quality, and maturity, which fall within a range between
2% and 15% over the total portfolio. Fair values determined on this
basis can differ from values published by the NAIC Securities
Valuation Office. Fair value as determined by the NAIC as of December
31, 2002 and 2001 is $3,945,966,000 and $3,402,211,000 respectively.
Mortgage loans: Estimated fair values for commercial real estate loans
were generated using a discounted cash flow approach. Loans in good
standing are discounted using interest rates determined by U.S.
Treasury yields on December 31 and spreads applied on new loans with
similar characteristics. The amortizing features of all loans are
incorporated in the valuation. Where data on option features is
available, option values are determined using a binomial valuation
method, and are incorporated into the mortgage valuation. Restructured
loans are valued in the same manner; however, these loans were
discounted at a greater spread to reflect increased risk. All
residential loans are valued at their outstanding principal balances,
which approximate their fair values.
Derivative financial instruments: Fair values for on-balance-sheet
derivative financial instruments (caps, options and floors) and
off-balance-sheet derivative financial instruments (swaps) are based
on broker/dealer valuations or on internal discounted cash flow
pricing models taking into account current cash flow assumptions and
the counterparties' credit standing.
Investment in surplus notes: Estimated fair values for investment in
surplus notes are generated using a discounted cash flow approach.
Cash flows were discounted using interest rates determined by U.S.
Treasury yields on December 31 and spreads applied on surplus notes
with similar characteristics.
40
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
14. Fair Values of Financial Instruments (continued)
Guaranteed investment contracts: The fair values of the Company's
guaranteed investment contracts are estimated using discounted cash
flow calculations, based on interest rates currently being offered for
similar contracts with maturities consistent with those remaining for
the contracts being valued.
Other investment-type insurance contracts: The fair values of the
Company's deferred annuity contracts are estimated based on the cash
surrender values. The carrying values of other policyholder
liabilities, including immediate annuities, dividend accumulations,
supplementary contracts without life contingencies, and premium
deposits, approximate their fair values.
The carrying value of all other financial instruments approximates
their fair value.
15. Commitments and Contingencies
The Company leases its home office space and certain other equipment under
operating leases that expire through 2017. During the years ended December
31, 2002 and 2001, rent expense totaled $4,951,000 and $3,254,000,
respectively. At December 31, 2002 minimum rental payments due under all
non-cancelable operating leases are: 2003- $5,268,000, 2004 - $5,324,000,
2005 - $5,324,000, 2006 - $5,324,000, 2007 - $5,135,000 and $47,414,000
thereafter.
Litigation
The Company is a party to threatened or pending lawsuits arising from the
normal conduct of business. Due to the climate in insurance and business
litigation, suits against the Company sometimes include claims for
substantial compensatory, consequential or punitive damages and other types
of relief. Moreover, certain claims are asserted as class actions,
purporting to represent a group of similarly situated individuals. While it
is not possible to forecast the outcome of pending lawsuits, in light of
existing insurance, reinsurance and established reserves, it is the opinion
of management that the disposition of such lawsuits will not have a
materially adverse effect on the Company's operations or financial
position.
41
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
16. Financing Agreements
The Company maintains a revolving loan agreement with SunTrust Bank,
Atlanta (the "Bank"). Under this agreement, which expires July 31, 2003,
the Company can borrow up to $100,000,000 from the Bank. Interest on any
borrowing accrues at an annual rate equal to the cost of funds for the Bank
for the period applicable for the advance plus 0.225% or a rate quoted by
the Bank to the Company for the borrowing. Under this agreement, the
Company incurred interest expense of $171,000 for the year ended December
31, 2002. At December 31, 2002, the Company had $0 payable to the Bank.
The Company also maintains a revolving loan agreement with Bank of New
York, New York (the "Bank"). Under this agreement, the Company can borrow
up to $100,000,000 from the Bank. Interest on any of the Company borrowing
accrues at an annual rate equal to the cost of funds for the Bank for the
period applicable for the advance plus 0.225% or a rate quoted by the Bank
to the Company for the borrowing. Under this agreement, the Company
incurred interest expense of $16,000 for the year ended December 31, 2002.
At December 31, 2002, the Company had $0 payable to the Bank.
17. Related Party Transactions
Affiliates
Management and service contracts and all cost sharing arrangements with
other affiliated ING US life insurance companies are allocated among
companies in accordance with normal, generally accepted expense and cost
allocation methods.
Investment Management: The Company has entered into an investment advisory
agreement and an administrative services agreement with ING Investment
Management, LLC ("IIM") under which IIM provides the Company with
investment management and asset liability management services. Total fees
under the agreement were approximately $10,395,000 and $9,730,000 for the
year ended December 31, 2002 and 2001, respectfully.
Inter-insurer Services Agreement: The Company has entered into a services
agreement with certain of its affiliated insurance companies in the United
States ("affiliated insurers") whereby the affiliated insurers provide
certain administrative, management, professional, advisory, consulting and
other services to each other. Net amounts received (paid) under these
agreements were $3,292,000 and $16,610,000 for the year ended December 31,
2002 and 2001, respectfully.
42
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
17. Related Party Transactions (continued)
Affiliates (continued)
Reciprocal Loan Agreement: The Company has entered into a reciprocal or
revolving loan agreement with ING AIH, to facilitate the handling of
unusual and/or unanticipated short-term cash requirements. Under this
agreement, which expires December 31, 2007, the Company and ING AIH can
borrow up to $104,000,000 from one another. Interest on any borrowing is
charged at the rate of ING AIH's cost of funds for the interest period plus
0.15%. Interest on any ING AIH borrowings is charged at a rate based on the
prevailing interest rate of U.S. commercial paper available for purchase
with a similar duration. Under this agreement, the Company incurred
interest expense of $170,000 and interest income of $615,000 for the year
ended December 31, 2002. At December 31, 2002, the Company had $0 payable
to ING AIH and $0 receivable from ING AIH.
Tax Sharing Agreements: The Company has entered into federal tax sharing
agreements with members of an affiliated group as defined in Section 1504
of the Internal Revenue Code of 1986, as amended. The agreement provides
for the manner of calculation and the amounts/timing of the payments
between the parties as well as other related matters in connection with the
filing of consolidated federal income tax returns. The Company has also
entered into a state tax sharing agreement with ING AIH and each of the
specific subsidiaries that are parties to the agreement. The state tax
agreement applies to situations in which ING AIH and all or some of the
subsidiaries join in the filing of a state or local franchise, income tax
or other tax return on a consolidated, combined or unitary basis.
Service Agreement with ING Financial Adviser, LLC: The Company has entered
into a services agreement with ING Financial Advisors, LLC ("ING FA") to
provide certain administrative, management, professional advisory,
consulting and other services to the Company for the benefit of its
customers. Charges for these services are to be determined in accordance
with fair and reasonable standards with neither party realizing a profit
nor incurring a loss as a result of the services provided to the Company.
The Company will reimburse ING FA for direct and indirect costs incurred on
behalf of the Company.
Subsidiaries
The Company owns, as of December 31, 2002, the capital stock of, valued on
the equity basis, USG Annuity and Life Insurance Company (an Oklahoma
domestic insurer) and Golden American Life Insurance Company (a Delaware
domestic insurer).
43
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
18. Guaranty Fund Assessments
Insurance companies are assessed the costs of funding the insolvencies of
other insurance companies by the various state guaranty associations,
generally based on the amount of premiums companies collect in that state.
The Company accrues the cost of future guaranty fund assessments based on
estimates of insurance company insolvencies provided by the National
Organization of Life and Health Insurance Guaranty Associations (NOLHGA)
and the amount of premiums written in each state. The Company reduces the
accrual by credits allowed in some states to reduce future premium taxes by
a portion of assessments in that state. The Company has estimated this
liability to be $3,465,000 and $3,759,000 as of December 31, 2002 and 2001,
respectively and has recorded a reserve. The Company has also recorded an
asset of $473,000 and $771,000 as of December 31, 2002 and 2001,
respectively, for future credits to premium taxes for assessments already
paid.
19. Regulatory Risk-Based Capital
Life and health insurance companies are subject to certain Risk-Based
Capital ("RBC") requirements as specified by the NAIC. Under those
requirements, the amount of capital and surplus maintained by a life and
health insurance company is to be determined based on the various risk
factors related to it. At December 31, 2002, the Company met the RBC
requirements.
44
EXHIBIT 99.2
Report of Independent Auditors
Board of Directors and Stockholder
Equitable Life Insurance Company of Iowa
We have audited the accompanying statutory basis balance sheets of Ameribest
Life Insurance Company ("the Company," which, effective January 1, 2003, merged
into an affiliate, Equitable Life Insurance Company of Iowa, a wholly owned
subsidiary of ING America Insurance Holdings, Inc.) as of December 31, 2002 and
2001, and the related statutory basis statements of operations, changes in
capital and surplus, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Office of Commissioner of Insurance of the State of Georgia
(Georgia Insurance Department), which practices differ from accounting
principles generally accepted in the United States. The variances between such
practices and accounting principles generally accepted in the United States are
described in Note 1. The effects on the financial statements of these variances
are not reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with accounting principles generally accepted in the United States,
the financial position of Ameribest Life Insurance Company at December 31, 2002
and 2001 or the results of its operations or its cash flows for the years then
ended.
1
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Ameribest Life
Insurance Company at December 31, 2002 and 2001, and the results of its
operations and its cash flows for the years then ended, in conformity with
accounting practices prescribed or permitted by the Georgia Insurance
Department.
As discussed in Note 3 to the financial statements, in 2001 the Company changed
various accounting policies to be in accordance with the revised NAIC Accounting
Practices and Procedures Manual, as adopted by the Georgia Insurance Department.
/s/ Ernst & Young LLP
April 25, 2003
2
Ameribest Life Insurance Company
Balance Sheets - Statutory Basis
- --------------------------------------------------------------------------------
December 31
2002 2001
--------------- --------------
(In Thousands)
Admitted assets
Cash and invested assets:
Bonds $ 281,391 $ 259,073
Mortgage loans 4,644 4,761
Policy loans - 10
Other invested assets 3 87
Cash and short-term investments ,900 17,812
--------------- ---------------
Total cash and invested assets 288,938 281,743
Accrued investment income 3,677 3,561
Indebtedness from related parties 1,263 105
Federal income tax including net admitted deferred
tax asset for 2002 - $571; 2001 - $409 3,381 572
Other assets - 28
--------------- ---------------
Total admitted assets $ 297,259 $ 286,009
=============== ===============
3
Ameribest Life Insurance Company
Balance Sheets - Statutory Basis (continued)
- --------------------------------------------------------------------------------
December 31
2002 2001
--------------- ---------------
(In Thousands,
except share amounts)
Liabilities and capital and surplus
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $ 279,079 $ 264,158
Deposit type contracts 905 121
--------------- ---------------
Total policy and contract liabilities 279,984 264,279
Interest maintenance reserve 1,899 2,400
Accounts payable and accrued expenses 146 1,324
Indebtedness to related parties 65 367
Asset valuation reserve 385 733
Other liabilities 12 -
--------------- ---------------
Total liabilities 282,491 269,103
Capital and surplus:
Common stock: authorized - 3,000,000 shares of
$1.50 par value; 1,666,667 shares issued and outstanding 2,500 2,500
Additional paid-in capital 18,808 18,808
Unassigned deficit (6,540) (4,402)
--------------- ---------------
Total capital and surplus 14,768 16,906
--------------- ---------------
Total liabilities and capital and surplus $ 297,259 $ 286,009
=============== ===============
See accompanying notes - statutory basis.
4
Ameribest Life Insurance Company
Statements of Operations - Statutory Basis
- --------------------------------------------------------------------------------
Year ended December 31
2002 2001
--------------- ---------------
(In Thousands)
Premiums and other revenues:
Life, annuity, and accident and health premiums $ 7,643 $ 72,077
Net investment income 19,043 19,930
Amortization of interest maintenance reserve 640 206
Commissions, expense allowances and reserve adjustments
on reinsurance ceded 259 1,757
--------------- ---------------
Total premiums and other revenues 27,585 93,970
Benefits paid or provided:
Annuity benefits 5,440 3,452
Surrender benefits 7,880 6,391
Interest on policy or contract funds (18) (3)
Increase in life, annuity, and accident and health reserves 14,921 76,332
--------------- ---------------
Total benefits paid or provided 28,223 86,172
Insurance expenses:
Commissions 691 3,738
General expenses 348 2,038
Insurance taxes, licenses and fees, excluding federal
income taxes 23 183
--------------- ---------------
Total insurance expenses 1,062 5,959
--------------- ---------------
(Loss) gain from operations before federal income taxes
and net realized capital losses (1,700) 1,839
Federal income tax benefit (905) -
--------------- ---------------
(Loss) gain from operations before net realized capital losses (795) 1,839
Net realized capital (losses) gains net of income taxes 2002 -
$(258); 2001 - $ (729) and excluding net transfers to the
interest maintenance reserve 2002- $(138); 2001- $(2,925) (1,856) 846
--------------- ---------------
Net income $ (2,651) $ 2,685
=============== ===============
See accompanying notes - statutory basis.
5
Ameribest Life Insurance Company
Statements of Changes in Capital and Surplus - Statutory Basis
- --------------------------------------------------------------------------------
Year ended December 31
2002 2001
--------------- ---------------
(In Thousands)
Common stock:
Balance at beginning and end of year $ 2,500 $ 2,500
--------------- ---------------
Paid-in and contributed surplus:
Balance at beginning and end of year 18,808 18,808
--------------- ---------------
Unassigned deficit:
Balance at beginning of year (4,402) (7,421)
Net income (2,651) 2,685
Change in nonadmitted assets (419) 2,630
Change in asset valuation reserve 348 (459)
Change in net deferred income tax 584 (1,418)
Change in accounting principle, net of tax - 215
Other - (634)
--------------- ---------------
Balance at end of year (6,540) (4,402)
--------------- ---------------
Total capital and surplus $ 14,768 $ 16,906
=============== ===============
See accompanying notes - statutory basis.
6
Ameribest Life Insurance Company
Statements of Cash Flows - Statutory Basis
- --------------------------------------------------------------------------------
Year ended December 31
2002 2001
--------------- ---------------
(In Thousands)
Operations
Premiums, policy proceeds, and other considerations received,
net of reinsurance paid $ 7,643 $ 72,076
Net investment income received 19,205 19,249
Commission and expense allowances received on reinsurance ceded 260 1,757
Benefits paid (12,488) (9,843)
Insurance expenses paid (1,131) (5,995)
Federal income taxes paid (2,000) (163)
Other revenues in excess of (expenses) other 28 (28)
--------------- ---------------
Net cash provided by operations 11,517 77,053
Investments
Proceeds from sales, maturities, or repayments of investments:
Bonds 154,954 223,743
Mortgage Loans 116 994
Miscellaneous proceeds 87 (47)
Net tax on capital gains - (729)
--------------- ---------------
Net proceeds from sales, maturities, or
repayments of investments 155,157 223,961
Cost of investments acquired:
Bonds 179,003 280,372
Mortgage loans - 5,754
Miscellaneous applications (receipts) 32 -
--------------- ---------------
Total cost of investments acquired 179,035 286,126
Net decrease (increase) in policy loans 10 (10)
--------------- ---------------
Net cash used in investment activities (23,868) (62,175)
7
Ameribest Life Insurance Company
Statements of Cash Flows - Statutory Basis (continued)
- --------------------------------------------------------------------------------
Year ended December 31
2002 2001
--------------- ---------------
(In Thousands)
Financing and miscellaneous activities
Cash provided:
Capital and surplus paid-in $ - $ 215
Borrowed money 817 124
Other sources (3,378) (11,210)
--------------- ---------------
Net cash used in financing and miscellaneous activities (2,561) (10,871)
--------------- ---------------
Net (decrease) increase in cash and short-term investments (14,912) 4,007
Cash and short-term investments:
Beginning of year 17,812 13,805
--------------- ---------------
End of year $ 2,900 $ 17,812
=============== ===============
See accompanying notes - statutory basis.
8
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies
Ameribest Life Insurance Company (the Company) is domiciled in Georgia.
Effective January 1, 2003, the Company merged into an affiliate, Equitable
Life Insurance Company of Iowa, a wholly owned subsidiary of ING America
Insurance Holdings, Inc. ("ING AIH"). The Company offers fixed annuity
products. Operations are conducted in the United States and the Company is
presently licensed in 46 states.
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported
in the financial statements and accompanying notes. Such estimates and
assumptions could change in the future as more information becomes known,
which could impact the amounts reported and disclosed herein.
Basis of Presentation
The accompanying financial statements of the Company have been prepared in
conformity with accounting practices prescribed or permitted by the Office
of Commissioner of Insurance of the State of Georgia (Georgia Insurance
Department), which practices differ from accounting principles generally
accepted in the United States ("GAAP"). The most significant variances from
GAAP are as follows:
Investments: Investments in bonds are reported at amortized cost or market
value based on the National Association of Insurance Commissioners ("NAIC")
rating; for GAAP, such fixed maturity investments are designated at
purchase as held-to-maturity, trading or available-for-sale.
Held-to-maturity investments are reported at amortized cost, and the
remaining fixed maturity investments are reported at fair value with
unrealized capital gains and losses reported in operations for those
designated as trading and as a separate component of other comprehensive
income in stockholder's equity for those designated as available-for-sale.
The Company invests in structured securities including mortgage-backed
securities/collateralized mortgage obligations, asset-backed securities,
collateralized debt obligations, and commercial mortgage-backed securities.
For structured securities, when a negative yield results from a revaluation
based on new prepayment assumptions (i.e. undiscounted cash flows are less
than current book value), an other than temporary impairment is considered
to have occurred and the asset is written down to the value of the
undiscounted cash flows. For GAAP, assets are reevaluated based on the
discounted cash flows using a current market rate. Impairments are
recognized when there has been an adverse change in cash flows and the fair
value is less than book. The asset is then written down to fair value.
9
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Basis of Presentation (continued)
Valuation Reserves: The asset valuation reserve ("AVR") is determined by an
NAIC-prescribed formula and is reported as a liability rather than as a
valuation allowance or an appropriation of surplus. The change in AVR is
reported directly to unassigned surplus. Under a formula prescribed by the
NAIC, the Company defers the portion of realized gains and losses on sales
of fixed-income investments, principally bonds and mortgage loans,
attributable to changes in the general level of interest rates and
amortizes those deferrals over the remaining period to maturity based on
groupings of individual securities sold in five-year bands. The net
deferral is reported as the interest maintenance reserve ("IMR") in the
accompanying balance sheets.
Realized gains and losses on investments are reported in operations net of
federal income tax and transfers to the IMR. Under GAAP, realized capital
gains and losses are reported in the statements of operations on a pretax
basis in the period that the asset giving rise to the gain or loss is sold
and valuation allowances are provided when there has been a decline in
value deemed other than temporary, in which case the provision for such
declines is charged to income.
Valuation allowances, if necessary, are established for mortgage loans
based on the difference between the net value of the collateral, determined
as the fair value of the collateral less estimated costs to obtain and
sell, and the recorded investment in the mortgage loan. Under GAAP, such
allowances are based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, if foreclosure is
probable, on the estimated fair value of the collateral.
The initial valuation allowance and subsequent changes in the allowance for
mortgage loans as a result of a temporary impairment are charged or
credited directly to unassigned surplus, rather than being included as a
component of earnings as would be required under GAAP.
Policy Acquisition Costs: The costs of acquiring and renewing business are
expensed when incurred. Under GAAP, acquisition costs related to
traditional life insurance, to the extent recoverable from future policy
revenues, are deferred and amortized over the premium-paying period of the
related policies using assumptions consistent with those used in computing
policy benefit reserves. For universal life insurance and investment
products, to the extent recoverable from future gross profits, acquisition
costs are amortized generally in proportion to the present value of
expected gross margins from surrender charges and investment, mortality,
and expense margins.
10
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Basis of Presentation (continued)
Premiums: Life premiums are recognized as revenue when due. Premiums for
annuity policies with mortality and morbidity risk, except for guaranteed
interest and group annuity contracts, are also recognized as revenue when
due. Premiums received for annuity policies without mortality or morbidity
risk and for guaranteed interest and group annuity contracts are recorded
using deposit accounting.
Under GAAP, premiums for traditional life insurance products, which include
those products with fixed and guaranteed premiums and benefits and consist
primarily of whole life insurance policies, are recognized as revenue when
due. Group insurance premiums are recognized as premium revenue over the
time period to which the premiums relate. Revenues for universal life,
annuities and guaranteed interest contracts consist of policy charges for
the cost of insurance, policy administration charges, amortization of
policy initiation fees and surrender charges assessed during the period.
Benefit and Contract Reserves: Life policy and contract reserves under
statutory accounting practices are calculated based upon both the net level
premium and Commissioners' Reserve Valuation methods using statutory rates
for mortality and interest. GAAP requires that policy reserves for
traditional products be based upon the net level premium method utilizing
reasonably conservative estimates of mortality, interest, and withdrawals
prevailing when the policies were sold. For interest-sensitive products,
the GAAP policy reserve is equal to the policy fund balance plus an
unearned revenue reserve which reflects the unamortized balance of early
year policy loads over renewal year policy loads.
Reinsurance: For business ceded to unauthorized reinsurers, statutory
accounting practices require that reinsurance credits permitted by the
treaty be recorded as an offsetting liability and charged against
unassigned surplus. Under GAAP, an allowance for amounts deemed
uncollectible would be established through a charge to earnings. Statutory
income recognized on certain reinsurance treaties representing financing
arrangements is not recognized on a GAAP basis.
Policy and contract liabilities ceded to reinsurers have been reported as
reductions of the related reserves rather than as assets as required under
GAAP.
Commissions allowed by reinsurers on business ceded are reported as income
when received rather than being deferred and amortized with deferred policy
acquisition costs as required under GAAP.
11
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Basis of Presentation (continued)
Nonadmitted Assets: Certain assets designated as "nonadmitted," principally
deferred federal income tax assets, disallowed interest maintenance
reserves, non-operating software, past-due agents' balances, furniture and
equipment, intangible assets, and other assets not specifically identified
as an admitted asset within the Accounting Practices and Procedures Manual
are excluded from the accompanying balance sheets and are charged directly
to unassigned surplus. Under GAAP, such assets are included in the balance
sheet.
Universal Life and Annuity Policies: Revenues for universal life and
annuity policies consist of the entire premium received and benefits
incurred represent the total of death benefits paid and the change in
policy reserves. Under GAAP, premiums received in excess of policy charges
would not be recognized as premium revenue and benefits would represent the
excess of benefits paid over the policy account value and interest credited
to the account values.
Deferred Income Taxes Deferred tax assets are provided for and admitted to
an amount determined under a standard formula. This formula considers the
amount of differences that will reverse in the subsequent year, taxes paid
in prior years that could be recovered through carrybacks, surplus limits
and the amount of deferred tax liabilities available for offset. Any
deferred tax assets not covered under the formula are non-admitted.
Deferred taxes do not include any amounts for state taxes. Under GAAP, a
deferred tax asset is recorded for the amount of gross deferred tax assets
that are expected to be realized in future years and a valuation allowance
is established for the portion that is not realizable.
Statements of Cash Flows: Cash and short-term investments in the statements
of cash flows represent cash balances and investments with initial
maturities of one year or less. Under GAAP, the corresponding caption of
cash and cash equivalents include cash balances and investments with
initial maturities of three months or less.
The effects of the preceding variances from GAAP on the accompanying
statutory basis financial statements have not been determined, but are
presumed to be material.
Other significant accounting practices are as follows:
Investments
Bonds, preferred stocks, common stocks, short-term investments and
derivative instruments are stated at values prescribed by the NAIC, as
follows:
12
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Investments (continued)
Bonds not backed by other loans are principally stated at amortized
cost using the interest method.
Single class and multi-class mortgage-backed/asset-backed securities
are valued at amortized cost using the interest method including
anticipated prepayments. Prepayment assumptions are obtained from
dealer surveys or internal estimates and are based on the current
interest rate and economic environment. The retrospective adjustment
method is used to value all such securities except for higher-risk
asset backed securities, which are valued using the prospective
method.
The Company analyzes the general account investments to determine
whether there has been an other than temporary decline in fair value
below the amortized cost basis. Management considers the length of the
time and the extent to which the market value has been less than cost;
the financial condition and near-term prospects of the issuer; future
economic conditions and market forecasts; and the Company's intent and
ability to retain the investment in the issuer for a period of time
sufficient to allow for recovery in market value. If it is probable
that all amount due according to the contractual terms of a debt
security will not be collected, an other than temporary impairment is
considered to have occurred.
In addition, the Company invests in structured securities including
mortgage-backed securities/collateralized mortgage obligations,
asset-backed securities, collateralized debt obligations, and
commercial mortgage-backed securities. For these structured
securities, management compares the undiscounted cash flows to the
carrying value. An other than temporary impairment is considered to
have occurred when the undiscounted cash flows are less than the
carrying value.
When a decline in fair value is determined to be other than temporary,
the individual security is written down to fair value and the loss
accounted for as a realized loss.
Mortgage loans are reported at amortized cost, less allowance for
impairments.
Policy loans are reported at unpaid principal balances.
Short-term investments are reported at amortized cost. Short-term
investments include investments with maturities of less than one year
at the date of acquisition.
Realized capital gains and losses are determined using the specific
identification basis.
13
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Aggregate Reserve for Life Policies and Contracts
Life, annuity, and accident and health reserves are developed by actuarial
methods and are determined based on published tables using statutorily
specified interest rates and valuation methods that will provide, in the
aggregate, reserves that are greater than or equal to the minimum or
guaranteed policy cash value or the amounts required by law. Interest rates
range from 3.00% to 7.50%.
The Company waives the deduction of deferred fractional premiums upon the
death of the insured. It is the Company's practice to return a pro rata
portion of any premium paid beyond the policy month of death, although it
is not contractually required to do so for certain issues.
The methods used in valuation of substandard policies are as follows:
For life, endowment and term policies issued substandard, the standard
reserve during the premium-paying period is increased by 50% of the
gross annual extra premium. Standard reserves are held on Paid-Up
Limited Pay contracts.
For reinsurance accepted with table rating, the reserve established is
a multiple of the standard reserve corresponding to the table rating.
For reinsurance with flat extra premiums, the standard reserve is increased
by 50% of the flat extra.
The tabular interest has been determined from the basic data for the
calculation of policy reserves for all direct ordinary life insurance and
for the portion of group life insurance classified as group Section 79. The
tabular interest of funds not involving life contingencies is calculated as
the current year reserves, plus payments, less prior year reserves, less
funds added.
Reinsurance
Reinsurance premiums, commissions, expense reimbursements, and reserves
related to reinsured business are accounted for on bases consistent with
those used in accounting for the original policies issued and the terms of
the reinsurance contracts. Reserves are based on the terms of the
reinsurance contract and are consistent with the risks assumed. Premiums
and benefits ceded to other companies have been reported as a reduction of
premium revenue and benefits expense. Amounts applicable to reinsurance
ceded for reserves and unpaid claim liabilities have been reported as
reductions of these items, and expense allowances received in connection
with reinsurance ceded have been reflected in operations.
14
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Nonadmitted Assets
Nonadmitted assets are summarized as follows:
December 31
2002 2001
--------------- ---------------
(In Thousands)
Deferred federal income taxes $ 3,098 $ 2,676
Agents' debit balances 14 17
--------------- ---------------
Total nonadmitted assets $ 3,112 $ 2,693
=============== ===============
Changes in nonadmitted assets are generally reported directly in surplus as
an increase or decrease in nonadmitted assets. Certain changes are reported
directly in surplus as a change in unrealized capital gains or losses.
Claims and Claims Adjustment Expenses
Claims expenses represent the estimated ultimate net cost of all reported
and unreported claims incurred through December 31, 2002. The Company does
not discount claims and claims adjustment expense reserves. Such estimates
are based on actuarial projections applied to historical claims payment
data. Such liabilities are considered to be reasonable and adequate to
discharge the Company's obligations for claims incurred but unpaid as of
December 31, 2002.
Cash Flow Information
Cash and short-term investments include cash on hand, demand deposits and
short-term fixed maturity instruments (with a maturity of less than one
year at date of acquisition).
The Company borrowed $13,825,000 and repaid $13,825,000 in 2002, borrowed
$27,000,000 and repaid $27,000,000 during 2001. These borrowings were on a
short-term basis, at an interest rate that approximated current money
market rates and exclude borrowings from reverse dollar repurchase
transactions. Interest paid on borrowed money was $2,000 and $8,000 during
2002 and 2001, respectively.
Reclassifications
Certain prior year amounts in the Company's statutory basis financial
statements have been reclassified to conform to the 2002 financial
statement presentation.
15
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
2. Permitted Statutory Basis Accounting Practices
The financial statements of the Company are presented on the basis of
accounting practices prescribed or permitted by the Georgia Insurance
Department. The Georgia Insurance Department recognizes only statutory
accounting practices prescribed or permitted by the State of Georgia for
determining and reporting the financial condition and results of operations
of an insurance company, for determining its solvency in under the Georgia
Insurance Laws. The National Association of Insurance Commissioners' (NAIC)
Accounting Practices and Procedures Manual has been adopted as a component
of prescribed or permitted practices by the state of Georgia. The
Commissioner of Insurance has the right to permit other specific practices
that deviate from prescribed practices.
The Company is required to identify those significant accounting practices
that are permitted, and obtain written approval of the practices from the
Georgia Department of Insurance. As of December 31, 2002 and 2001, the
Company had no such permitted accounting practices.
3. Accounting Changes
The Company prepares its statutory financial statements in conformity with
accounting practices prescribed or permitted by the State of Georgia.
Effective January 1, 2001, the Georgia Insurance Department required that
insurance companies domiciled in the State of Georgia prepare their
statutory basis financial statements in accordance with the NAIC Accounting
Practices and Procedures Manual subject to any deviations prescribed or
permitted by the State of Georgia insurance commissioner.
Accounting changes adopted to conform to the provisions of the NAIC
Accounting Practices and Procedures Manual are reported as changes in
accounting principles. The cumulative effect of changes in accounting
principles is reported as an adjustment to unassigned deficit in the period
of the change in accounting principle. The cumulative effect is the
difference between the amount of capital and surplus at the beginning of
the year and the amount of capital and surplus that would have been
reported at that date if the new accounting principles had been applied
retroactively for all prior periods.
As a result of these changes, the Company reported a change of accounting
principle, as an adjustment that decreased unassigned deficit, by $215,000
as of January 1, 2001.
16
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
4. Investments
The amortized cost and fair value of bonds and equity securities are as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
(In Thousands)
At December 31, 2002:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 16,917 $ 974 $ - $ 17,891
Public utilities securities 28,304 1,532 41 29,795
Corporate securities 184,124 12,389 380 196,133
Other structured securities 15,468 767 - 16,235
Commercial mortgage-backed securities 36,578 3,386 - 39,964
---------- ---------- ---------- ----------
Total fixed maturities $ 281,391 $ 19,048 $ 421 $ 300,018
========== ========== ========== ==========
At December 31, 2001:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 11,087 $ 456 $ 70 $ 11,473
Public utilities securities 10,289 621 - 10,910
Corporate securities 188,501 5,664 2,305 191,860
Other structured securities 23,980 800 - 24,780
Commercial mortgage-backed securities 25,216 1,054 - 26,270
---------- ---------- ---------- ----------
Total fixed maturities $ 259,073 $ 8,595 $ 2,375 $ 265,293
========== ========== ========== ==========
17
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
4. Investments (continued)
The amortized cost and fair value of investments in bonds at December 31,
2002, by contractual maturity, are shown below. Expected maturities may
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
--------------- ---------------
(In Thousands)
December 31, 2002
Maturity:
Due in 1 year or less $ - $ -
Due after 1 year through 5 years 118,229 125,133
Due after 5 years through 10 years 96,562 102,989
Due after 10 years 14,554 15,697
--------------- ---------------
229,345 243,819
Mortgage-backed securities - -
Other structured securities 15,468 16,235
Commercial mortgage-backed securities 36,578 39,964
--------------- ---------------
Total $ 281,391 $ 300,018
=============== ===============
At December 31, 2002, investments in certificates of deposit and bonds,
with an admitted asset value of $6,802,000 were on deposit with state
insurance departments to satisfy regulatory requirements.
Proceeds from the sales of investments in bonds and other fixed maturity
interest securities were $140,855,000 and $205,473,000 in 2002 and 2001,
respectively. Gross gains of $2,693,000 and $6,015,000 and gross losses of
$3,959,000 and $1,515,000 during 2002 and 2001, respectively, were realized
on those sales. A portion of the gains realized in 2002 and 2001 has been
deferred to future periods in the interest maintenance reserve.
Major categories of net investment income are summarized as follows:
December 31
2002 2001
--------------- ---------------
(In Thousands)
Income:
Bonds $ 19,304 $ 19,813
Mortgage loans 356 409
Other 119 378
--------------- --------------
Total investment income 19,779 20,600
Investment expenses (736) (670)
--------------- --------------
Net investment income $ 19,043 $ 19,930
=============== ==============
18
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
4. Investments (continued)
As part of its overall investment strategy, the Company has entered into
agreements to purchase securities as follows:
December 31
2002 2001
--------------- ---------------
(In Thousands)
Investment Purchase Commitments $ - $ 10,000
There were no new loans during 2002. Fire insurance is required on all
properties covered by mortgage loans and must at least equal the excess of
the loan over the maximum loan which would be permitted by law on the land
without the buildings. As of December 31, 2002, the Company held no
mortgages with interest more than 180 days overdue.
5. Concentrations of Credit Risk
The Company held less-than-investment-grade bonds with an aggregate book
value of $240,000 and $11,537,000 and with an aggregate market value of
$240,000 and $11,432,000 at December 31, 2002 and 2001, respectively. Those
holdings amounted to 0.1% of the Company's investments in bonds and 0.1% of
total admitted assets at December 31, 2002. The holdings of
less-than-investment-grade bonds are widely diversified and of satisfactory
quality based on the Company's investment policies and credit standards.
The Company held unrated bonds of $5,000,000 and $17,903,000 with an
aggregate NAIC market value of $5,195,000 and $17,782,000 at December 31,
2002 and 2001, respectively. The carrying value of these holdings amounted
to 1.8% of the Company's investment in bonds and 1.7% of the Company's
total admitted assets at December 31, 2002.
At December 31, 2002, the Company's commercial mortgages involved a
concentration of properties located in California (59.4%) and Arizona
(40.6%). The portfolio is well diversified; covering many different types
of income-producing properties on which the Company has first mortgage
liens. The maximum mortgage outstanding on any individual property is
$1,887,000.
19
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
6. Annuity Reserves
At December 31, 2002 and 2001, the Company's annuity reserves, including
deposit fund liabilities that are subject to discretionary withdrawal with
adjustment, subject to discretionary withdrawal without adjustment, and not
subject to discretionary withdrawal provisions are summarized as follows:
December 31, 2002
Amount Percent
--------------- ---------------
(In Thousands)
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 275,105 92.4%
At book value less surrender charge 17,936 6.0
--------------- ---------------
Subtotal 293,041 98.4
Subject to discretionary withdrawal (without adjustment)
at book value with minimal or no charge or adjustment - -
Not subject to discretionary withdrawal 4,879 1.6
--------------- ---------------
Total annuity reserves and deposit fund liabilities before reinsurance 297,920 100.0%
===============
Less reinsurance ceded 17,936
---------------
Net annuity reserves and deposit fund liabilities $ 279,984
===============
December 31, 2001
Amount Percent
--------------- ---------------
(In Thousands)
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 261,524 92.4%
At book value less surrender charge 18,699 6.6
--------------- ---------------
Subtotal $ 280,223 99.0
Subject to discretionary withdrawal (without adjustment)
at book value with minimal or no charge or adjustment - -
Not subject to discretionary withdrawal 2,755 1.0
--------------- ---------------
Total annuity reserves and deposit fund liabilities before reinsurance 282,978 100.0%
===============
Less reinsurance ceded 18,699
---------------
Net annuity reserves and deposit fund liabilities $ 264,279
===============
20
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
7. Reinsurance
The Company is involved in ceded reinsurance with other companies for the
purpose of diversifying risk and limiting exposure on larger risks. The
Company remains obligated for amounts ceded in the event that the
reinsurers do not meet their obligations.
The Company's ceded reinsurance arrangements reduced certain items in the
accompanying financial statements by the following amounts:
December 31, 2002
Amount Percent
--------------- ---------------
(In Thousands)
Premiums $ 390 $ 11,440
Benefits paid or provided 660 192
Policy and contract liabilities at year end 17,943 18,705
8. Federal Income Taxes
The Company files a separate federal income tax return.
The components of the net deferred tax asset (liability) at December 31 are
as follows:
2002 2001
--------------- ---------------
(In Thousands)
Total gross deferred tax assets $ 3,801 $ 3,085
Total deferred tax liabilities (132) -
--------------- ---------------
Net deferred tax asset 3,669 3,085
Deferred tax asset nonadmitted (3,098) (2,676)
--------------- ---------------
Net admitted deferred tax asset $ 571 $ 409
=============== ===============
(Increase) decrease in nonadmitted asset $ (422) $ (1,827)
=============== ===============
Significant components of income taxes incurred as of December 31 are:
2002 2001
--------------- ---------------
(In Thousands)
Current income taxes incurred consist of the following major components:
Federal taxes on operations $ (905) $ 810
Operations loss carryovers utilized - (810)
Federal tax on capital gains 258 1,575
Capital loss carryovers utilized - (846)
--------------- ---------------
Total current taxes incurred $ (647) $ 729
=============== ===============
21
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
8. Federal Income Taxes (continued)
The main components of deferred tax assets and deferred tax liabilities are
as follows:
December 31
2002 2001
--------------- ---------------
(In Thousands)
Deferred tax assets resulting from book/tax differences in:
Deferred acquisition costs $ 919 $ 963
Insurance reserves 1,822 1,161
Goodwill 880 961
Operations loss carry forward 165 -
Other 15 -
--------------- ---------------
Total deferred tax assets 3,801 3,085
Deferred tax assets nonadmitted (3,098) (2,676)
--------------- ---------------
Admitted deferred tax assets $ 703 $ 409
--------------- ---------------
Deferred tax liabilities resulting from book/tax differences in:
Other $ 132 $ -
--------------- ---------------
Total deferred tax liabilities 132 -
--------------- ---------------
Net admitted deferred tax asset $ 571 $ 409
=============== ===============
The change in net deferred income taxes is comprised of the following:
December 31
2002 2001 Change
--------------- --------------- ---------------
(In Thousands)
Total deferred tax assets $ 3,801 $ 3,085 $ 716
Total deferred tax liabilities (132) - (132)
--------------- --------------- ---------------
Net deferred tax asset (liability) $ 3,669 $ 3,085 $ 584
=============== ===============
Tax effect of items in surplus:
Nonadmitted assets (5)
---------------
Change in net deferred income tax $ 579
===============
22
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
8. Federal Income Taxes (continued)
The provision for federal income taxes expense and change in deferred taxes
differs from the amount obtained by applying the statutory Federal income
tax rate to income (including capital losses) before income taxes for the
following reasons:
Year Ended
December 31, 2002
-----------------
(In Thousands)
Ordinary income $ (1,700)
Capital gains (losses) (1,460)
-----------------
Total pre-tax book income $ (3,160)
=================
Provisions computed at statutory rate $ (1,106)
Interest maintenance reserve (224)
Nondeductible general expense 82
Other 22
-----------------
Total $ (1,226)
=================
Federal income taxes incurred $ (647)
Change in net deferred income taxes (579)
-----------------
Total statutory income taxes $ (1,226)
=================
The Company has a recoverable of $2,810,000 at December 31, 2002 and
$163,000 at December 31, 2001 from the United States Treasury for federal
income taxes.
The Company has operating loss carryforwards of $473,000 that expire in
2017.
9. Capital and Surplus
Under Georgia insurance regulations, the Company is required to maintain a
minimum total capital and surplus of $3,000,000. Additionally, the amount
of dividends that can be paid by the Company to its stockholder without
prior approval of the Georgia Insurance Department is limited to the
greater of 10% of statutory surplus or statutory net gain from operations.
23
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
10. Fair Values of Financial Instruments
In cases where quoted market prices are not available, fair values are
based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. In that regard, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the financial instrument. Accordingly, the aggregate fair
value amounts presented herein do not represent the underlying value of the
Company.
Life insurance liabilities that contain mortality risk and all nonfinancial
instruments have been excluded from the disclosure requirements. However,
the fair values of liabilities under all insurance contracts are taken into
consideration in the Company's overall management of interest rate risk,
such that the Company's exposure to changing interest rates is minimized
through the matching of investment maturities with amounts due under
insurance contracts. The carrying amounts and fair values of the Company's
financial instruments are summarized as follows:
December 31
2002 2001
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
(In Thousands)
Assets:
Bonds $ 281,391 $ 300,018 $ 259,073 $ 265,293
Mortgage loans 4,644 5,329 4,761 4,950
Policy loans - - 10 10
Short-term investments 2,850 2,850 - -
Cash 50 50 17,812 17,812
Indebtedness from related parties 1,263 1,263 105 105
Receivable for securities 3 3 87 87
Liabilities:
Individual and group annuities 279,079 257,978 264,158 243,639
Deposit type contract 905 971 121 130
Indebtedness to related parties 65 65 367 367
24
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
10. Fair Values of Financial Instruments (continued)
The following methods and assumptions were used by the Company in
estimating the fair value disclosures for financial instruments in the
accompanying financial statements and notes thereto:
Cash and short-term investments: The carrying amounts reported in the
accompanying balance sheets for these financial instruments approximate
their fair values.
Fixed maturities and equity securities: The fair values for bonds,
preferred stocks and common stocks, reported herein, are based on quoted
market prices, where available. For securities not actively traded, fair
values are estimated using values obtained from independent pricing
services or, in the case of private placements, collateralized mortgage
obligations and other mortgage derivative investments, are estimated by
discounting the expected future cash flows. The discount rates used vary as
a function of factors such as yield, credit quality, and maturity, which
fall within a range between 0% and 15% over the total portfolio. Fair
values determined on this basis can differ from values published by the
NAIC Securities Valuation Office.
Market value as determined by the NAIC as of December 31, 2002 and 2001 is
$286,211,000 and $264,074,000 respectively.
Mortgage loans: Estimated market values for commercial real estate loans
were generated using a discounted cash flow approach. Loans in good
standing are discounted using interest rates determined by U.S. Treasury
yields on December 31 and spreads applied on new loans with similar
characteristics. The amortizing features of all loans are incorporated in
the valuation. Where data on option features is available, option values
are determined using a binomial valuation method, and are incorporated into
the mortgage valuation. Restructured loans are valued in the same manner;
however, these loans were discounted at a greater spread to reflect
increased risk. All residential loans are valued at their outstanding
principal balances, which approximate their fair values.
Other investment-type insurance contracts: The fair values of the Company's
deferred annuity contracts are estimated based on the cash surrender
values. The carrying values of other policyholder liabilities, including
immediate annuities, dividend accumulations, supplementary contracts
without life contingencies, and premium deposits, approximate their fair
values.
The carrying value of all other financial instruments approximates their
fair value.
25
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
11. Commitments and Contingencies
The Company is a party to threatened or pending lawsuits arising from the
normal conduct of business. Due to the climate in insurance and business
litigation, suits against the Company sometimes include claims for
substantial compensatory, consequential or punitive damages and other types
of relief. Moreover, certain claims are asserted as class actions,
purporting to represent a group of similarly situated individuals. While it
is not possible to forecast the outcome of pending lawsuits, in light of
existing insurance, reinsurance and established reserves, it is the opinion
of management that the disposition of such lawsuits will not have a
materially adverse effect on the Company's operations or financial
position.
12. Financing Agreements
The Company maintains a revolving loan agreement with SunTrust Bank,
Atlanta (the "Bank"). Under this agreement, which expires July 31, 2003,
the Company can borrow up to $10,000,000 from the Bank. Interest on any
borrowing accrues at an annual rate equal to the cost of funds for the Bank
for the period applicable for the advance plus 0.225% or a rate quoted by
the Bank to the Company for the borrowing. Under this agreement, the
Company incurred interest expense of $677 for the year ended December 31,
2002. At December 31, 2002, the Company had $0 payable to the Bank.
The Company also maintains a revolving loan agreement with Bank of New
York, New York (the "Bank"). Under this agreement, the Company can borrow
up to $5,000,000 from the Bank. Interest on any of the Company borrowing
accrues at an annual rate equal to the cost of funds for the Bank for the
period applicable for the advance plus 0.225% or a rate quoted by the Bank
to the Company for the borrowing. Under this agreement, the Company
incurred interest expense of $0 for the year ended December 31, 2002. At
December 31, 2002, the Company had $0 payable to the Bank.
13. Related Party Transactions
Affiliates
Management and service contracts and all cost sharing arrangements with
other affiliated ING US life insurance companies are allocated among
companies in accordance with normal, generally accepted expense and cost
allocation methods.
Investment Management: The Company has entered into an investment advisory
agreement and an administrative services agreement with ING Investment
Management, LLC ("IIM") under which IIM provides the Company with
investment management and asset liability management services. Total fees
under the agreement were approximately $723,000 and $643,000 for the year
ended December 2002 and 2001, respectively.
26
Ameribest Life Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
13. Related Party Transactions (continued)
Affiliates (continued)
Inter-insurer Services Agreement: The Company has entered into a services
agreement with certain of its affiliated insurance companies in the United
States ("affiliated insurers") whereby the affiliated insurers provide
certain administrative, management, professional, advisory, consulting and
other services to each other. Net amounts received (paid) under these
agreements were ($263,000) and $1,807,000 for the year ended December 31,
2002 and 2001, respectively.
Reciprocal Loan Agreement: The Company has entered into a reciprocal or
revolving loan agreement with ING AIH, a Delaware corporation and
affiliate, to facilitate the handling of unusual and/or unanticipated
short-term cash requirements. Under this agreement, which expires December
31, 2008, the Company can borrow up to $1,400,000 from ING AIH. Interest on
any borrowing is charged at the rate of ING AIH's cost of funds for the
interest period plus 0.15%. Under this agreement, the company incurred
interest expense of $1,274 for the year ended December 31, 2002. At
December 31, 2002, the company had $0 payable to ING AIH.
14. Guaranty Fund Assessments
Insurance companies are assessed the costs of funding the insolvencies of
other insurance companies by the various state guaranty associations,
generally based on the amount of premiums companies collect in that state.
The Company accrues the cost of future guaranty fund assessments based on
estimates of insurance company insolvencies provided by the National
Organization of Life and Health Insurance Guaranty Associations (NOLHGA)
and the amount of premiums written in each state. The Company reduces the
accrual by credits allowed in some states to reduce future premium taxes by
a portion of assessments in that state. The Company has estimated this
liability to be $29,000 and $100,000 as of December 31, 2002 and 2001,
respectively and has recorded a reserve. The Company has also recorded an
asset of $0 and $28,000 as of December 31, 2002 and 2001, respectively, for
future credits to premium taxes for assessments already paid.
15. Regulatory Risk-Based Capital
Life and health insurance companies are subject to certain Risk-Based
Capital ("RBC") requirements as specified by the NAIC. Under those
requirements, the amount of capital and surplus maintained by a life and
health insurance company is to be determined based on the various risk
factors related to it. At December 31, 2002, the Company meets the RBC
requirements.
27
Exhibit 99.3
Equitable Life Insurance Company of Iowa
Balance Sheet - Statutory Basis
- --------------------------------------------------------------------------------
September 30,
2003
--------------
(In Thousands)
Admitted assets
Cash and invested assets:
Bonds $ 3,658,954
Preferred stocks 441
Common stocks 1,232,540
Mortgage loans 950,456
Real Estate 2,968
Policy loans 127,934
Other invested assets 251,805
Cash and short-term investments 149,468
--------------
Total cash and invested assets 6,374,566
Deferred and uncollected premiums 4,954
Accrued investment income 48,458
Reinsurance balances recoverable 5,797
Data processing equipment 92
Indebtedness from related parties 34,330
Federal income tax recoverable 19,328
Separate account assets 980,432
Other assets 376,094
--------------
Total admitted assets $ 7,844,051
==============
Liabilities and capital and surplus
Liabilities:
Policy and contract liabilities:
Life and annuity reserves 4,639,169
Deposit type contracts 620,616
Policyholders' funds 301
Dividend payable 16,935
Unpaid claims 3,445
--------------
Total policy and contract liabilities 5,280,466
Accounts payable and accrued expenses 28,110
Indebtedness to related parties 50,703
Interest maintenance reserve 25,466
Asset valuation reserve 33,398
Borrowed money 207,767
Other liabilities 65,941
Separate account liabilities 980,432
--------------
Total liabilities 6,672,283
Capital and surplus:
Common stock 5,000
Additional paid-in capital 1,236,632
Unassigned surplus (69,864)
Total capital and surplus 1,171,768
--------------
Total liabilities and capital and surplus $ 7,844,051
==============
1
Equitable Life Insurance Company of Iowa
Statements of Operations - Statutory Basis
- --------------------------------------------------------------------------------
Nine months ended September 30,
2003 2002
-------------- --------------
(In Thousands)
Premiums and other revenues:
Life, annuity, and accident and health premiums $ 1,465,594 $ 1,459,082
Policy proceeds and dividends left on deposit 1,615 1,528
Net investment income 219,545 159,853
Amortization of interest maintenance reserve (1,996) (1,694)
Commissions, expense allowances and reserve adjustments
on reinsurance ceded 56 393
Other income 13,255 24,526
-------------- --------------
Total premiums and other revenues 1,698,069 1,643,688
Benefits paid or provided:
Death benefits 33,945 33,338
Annuity benefits 85,821 100,014
Surrender benefits 512,112 500,073
Interest on policy or contract funds 7,410 4,897
Other benefits 121 1,469
Life contract withdrawals 4,608 4,625
Change in life, annuity, and accident and health reserves 344,825 410,507
Net transfers to separate accounts (95,353) (100,078)
-------------- --------------
Total benefits paid or provided 893,489 954,845
Insurance expenses:
Commissions 128,805 118,638
General expenses 41,281 36,435
Insurance taxes, licenses and fees, excluding
federal income taxes 1,933 3,201
Other 629,060 598,866
-------------- --------------
Total insurance expenses 801,079 757,140
-------------- --------------
Gain (loss) from operations before policyholder dividends,
federal income taxes and net realized capital losses 3,501 (68,298)
Dividends to policyholders 9,272 17,618
-------------- --------------
Gain (loss) from operations before federal income taxes
and net realized capital losses (5,771) (85,916)
Federal income taxes (2,842) 27,581
-------------- --------------
Gain from operations before net realized capital losses (2,929) (113,497)
Net realized capital gains or (losses), net of income
taxes 2003 - $3,633; 2002 - $(6,927) and excluding net
transfers to the interest maintenance reserve 2003- $4,307; 2002- $1,856 (17,564) (19,005)
-------------- --------------
Net income (loss) $ (20,493) $ (132,502)
============== ==============
2
Equitable Life Insurance Company of Iowa
Statements of Changes in Capital and Surplus - Statutory Basis
- --------------------------------------------------------------------------------
Nine months ended September 30,
2003 2002
-------------- --------------
(In Thousands)
Common stock:
Balance at beginning and end of year $ 5,000 $ 5,000
Paid-in and contributed surplus:
Balance at beginning of year 1,236,632 721,632
Capital contributions - 195,000
-------------- --------------
Balance at end of year 1,236,632 916,632
Unassigned surplus:
Balance at beginning of year (97,422) 329,096
Net income (20,493) (132,502)
Change in net unrealized capital gains or losses 54,643 (297,737)
Change in nonadmitted assets (12,433) 20,696
Change in asset valuation reserve (7,274) 4,783
Change in net deferred income tax 13,115 (10,971)
-------------- --------------
Balance at end of year (69,864) (86,635)
Total capital and surplus $ 1,171,768 $ 834,997
============== ==============
3
Equitable Life Insurance Company of Iowa
Statements of Cash Flows - Statutory Basis
- --------------------------------------------------------------------------------
Nine months ended September 30,
2003 2002
-------------- --------------
(In Thousands)
Operations
Premiums, policy proceeds, and other considerations
received, net of reinsurance paid $ 1,462,703 $ 1,450,381
Net investment income received 263,891 254,823
Commission and expense allowances received on reinsurance ceded - 393
Benefits paid (729,890) (643,942)
Net transfers to separate accounts 98,088 114,056
Insurance expenses paid (778,614) (151,228)
Dividends paid to policyholders (15,966) (17,942)
Federal income taxes (paid) received 28,915 (57,692)
Net other (expenses) revenues 14,300 (573,936)
-------------- --------------
Net cash provided by operations
343,427 374,913
Investments
Proceeds from sales, maturities, or repayments of investments:
Bonds 3,039,822 2,688,381
Stocks - 357
Mortgage loans 132,417 66,595
Real estate 750 491
Other invested assets 828 52,576
Miscellaneous proceeds 66,555 (20,336)
Net gains or (losses) on cash and short-term investments (169) -
Net tax on capital gains - 6,927
-------------- --------------
Net proceeds from sales, maturities, or repayments of investments 3,240,203 2,794,991
Cost of investments acquired:
Bonds 3,535,481 3,147,911
Preferred stocks 246,024 245,192
Mortgage loans 218,253 51,840
Other invested assets 460 804
Miscellaneous applications 73,382 28,163
-------------- --------------
Total cost of investments acquired 4,073,600 3,473,910
Net increase (decrease) in policy loans 2,857 (9,373)
-------------- --------------
Net cash used in investment activities (830,540) (669,546)
Financing and miscellaneous activities Cash provided (used):
Capital and surplus paid-in - 195,000
Borrowed money 58,771 48,416
Net deposits on deposit-type contract funds 430,415 (822)
Other sources 119,393 12,406
-------------- --------------
Net cash provided by financing and miscellaneous activities 608,579 255,000
Net change in cash and short-term investments 121,466 (39,633)
Cash and short-term investments:
Beginning of year 28,002 85,403
-------------- --------------
End of year $ 149,468 $ 45,770
============== ==============
4
EXHIBIT 99.4
Report of Independent Auditors
Board of Directors and Stockholder
USG Annuity & Life Company
We have audited the accompanying statutory basis balance sheets of USG Annuity &
Life Company ("the Company" and a wholly owned subsidiary of ING America
Insurance Holdings, Inc.) as of December 31, 2002 and 2001, and the related
statutory basis statements of operations, changes in capital and surplus, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Commissioner of Insurance of the State of Oklahoma (Oklahoma
Insurance Department), which practices differ from accounting principles
generally accepted in the United States. The variances between such practices
and accounting principles generally accepted in the United States are described
in Note 1. The effects on the financial statements of these variances are not
reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with accounting principles generally accepted in the United States,
the financial position of USG Annuity & Life Company at December 31, 2002 and
2001 or the results of its operations or its cash flows for the years then
ended.
1
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of USG Annuity & Life
Company at December 31, 2002 and 2001, and the results of its operations and its
cash flows for the years then ended, in conformity with accounting practices
prescribed or permitted by the Oklahoma Insurance Department.
As discussed in Note 3 to the financial statements, in 2001 the Company changed
various accounting policies to be in accordance with the revised NAIC Accounting
Practices and Procedures Manual, as adopted by the Oklahoma Insurance
Department.
/s/ Ernst & Young LLP
April 25, 2003
2
USG Annuity & Life Company
Balance Sheets - Statutory Basis
- --------------------------------------------------------------------------------
December 31
2002 2001
-------------- --------------
(In Thousands)
Admitted assets
Cash and invested assets:
Bonds $ 6,116,495 $ 5,285,956
Preferred stocks 1,088 134
Common stocks - 22
Mortgage loans 1,483,855 1,659,518
Real estate, less accumulated depreciation (2002- $304,
2001-$242) 1,477 2,964
Policy loans 32,454 32,732
Other invested assets 47,704 40,847
Cash and short-term investments 9,116 102,848
-------------- --------------
Total cash and invested assets 7,692,189 7,125,021
Deferred and uncollected premiums, less loading (2002- ($58),
2001- $49) 386 1,304
Accrued investment income 77,674 72,706
Reinsurance balances recoverable 335 90
Indebtedness from related parties 25 3,945
Federal income tax recoverable, including a deferred
tax asset (2002 - $15,601, 2001 - $6,976) 22,163 6,976
Other assets 2,451 5,484
-------------- --------------
Total admitted assets $ 7,795,223 $ 7,215,526
============== ==============
3
USG Annuity & Life Company
Balance Sheets - Statutory Basis (continued)
- --------------------------------------------------------------------------------
December 31
2002 2001
-------------- --------------
(In Thousands)
except share amounts)
Liabilities and capital and surplus
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $ 6,859,914 $ 6,211,216
Deposit type contracts 246,501 232,745
Policyholders' funds 53 33
Unpaid claims 3,622 3,930
-------------- --------------
Total policy and contract liabilities 7,110,090 6,447,924
Interest maintenance reserve 11,799 4,992
Accounts payable and accrued expenses 27,197 69,739
Indebtedness to related parties 22,147 6,548
Contingency reserve 876 1,907
Asset valuation reserve 50,634 71,621
Borrowed money 184,450 183,094
Other liabilities 1,844 120,244
-------------- --------------
Total liabilities 7,409,037 6,906,069
Capital and surplus:
Common stock: authorized - 1,000 shares of $3,000 par value;
833 issued and outstanding 2,500 2,500
Additional paid-in capital 316,963 286,963
Unassigned surplus 66,723 19,994
-------------- --------------
Total capital and surplus 386,186 309,457
-------------- --------------
Total liabilities and capital and surplus $ 7,795,223 $ 7,215,526
============== ==============
See accompanying notes - statutory basis.
4
USG Annuity & Life Company
Statements of Operations - Statutory Basis
- --------------------------------------------------------------------------------
2002 2001
-------------- --------------
(In Thousands)
Premiums and other revenues:
Life, annuity, and accident and health premiums $ 1,285,640 $ 833,347
Policy proceeds and dividends left on deposit 9,267 11,396
Net investment income 536,206 520,614
Amortization of interest maintenance reserve (7,446) 2,383
Commissions, expense allowances and reserve adjustments
on reinsurance ceded 14,159 23,933
Other income 1,619 17,445
-------------- --------------
Total premiums and other revenues 1,839,445 1,409,118
Benefits paid or provided:
Death benefits 112,299 141,633
Annuity benefits 250,411 274,447
Surrender benefits 582,708 739,979
Interest on policy or contract funds 8,033 11,409
Other benefits:
Life contract withdrawals 8,968 6,081
Increase in life, annuity, and accident and
health reserves 648,698 25,124
-------------- --------------
Total benefits paid or provided 1,611,117 1,198,673
Insurance expenses:
Commissions 86,074 59,252
General expenses 33,272 22,962
Insurance taxes, licenses and fees, excluding
federal income taxes (231) (1,827)
Other 856 (291)
-------------- --------------
Total insurance expenses 119,971 80,096
5
USG Annuity & Life Company
Statements of Operations - Statutory Basis (continued)
- --------------------------------------------------------------------------------
2002 2001
-------------- --------------
(In Thousands)
Gain from operations before federal income taxes and
net realized capital losses 108,357 130,349
Federal income taxes 41,015 49,747
-------------- --------------
Gain from operations before net realized capital losses 67,342 80,602
Net realized capital losses net of income taxes 2002 - $6,049;
2001 - $ (7,981) and excluding net transfers to the interest
maintenance reserve 2002- $638; 2001- $(13,377) (41,467) (51,090)
-------------- --------------
Net income $ 25,875 $ 29,512
============== ==============
See accompanying notes - statutory basis.
6
USG Annuity & Life Company
Statements of Changes in Capital and Surplus--Statutory Basis
- --------------------------------------------------------------------------------
2002 2001
-------------- --------------
(In Thousands)
Common stock:
Balance at beginning and end of year $ 2,500 $ 2,500
-------------- --------------
Paid-in and contributed surplus:
Balance at beginning and end of year 286,963 286,963
Capital contributions 30,000 -
-------------- --------------
Balance at end of year 316,963 286,963
Unassigned surplus (deficit):
Balance at beginning of year 19,994 (16,701)
Net income 25,875 29,512
Change in net unrealized capital losses (7,240) (1,001)
Change in non-admitted assets 3,284 (15,515)
Change in asset valuation reserve 20,987 18,143
Change in net deferred income tax 3,480 26,376
Change in accounting principle, net of tax - 5,180
Dividends to stockholder - (26,000)
Other 343 -
-------------- --------------
Balance at end of year 66,723 19,994
-------------- --------------
Total capital and surplus $ 386,186 $ 309,457
============== ==============
See accompanying notes - statutory basis.
7
USG Annuity & Life Company
Statements of Cash Flows--Statutory Basis
- --------------------------------------------------------------------------------
2002 2001
-------------- --------------
(In Thousands)
Operations
Premiums, policy proceeds, and other considerations received,
net of reinsurance paid $ 1,295,738 $ 844,992
Net investment income received 647,957 565,770
Commission and expense allowances received on reinsurance ceded 14,159 23,933
Benefits paid (998,100) (1,195,459)
Insurance expenses paid (122,791) (70,176)
Federal income taxes paid (58,643) (41,271)
Net other revenue 89 10,907
-------------- --------------
Net cash provided by operations 778,409 138,696
-------------- --------------
Investments
Proceeds from sales, maturities, or repayments of investments:
Bonds 8,709,883 5,845,574
Preferred stocks 133 961
Common stocks 224 46,233
Mortgage loans 275,949 170,155
Other invested assets 6,856 7,254
Net loss on cash and short term investment - (75)
Net tax on capital gains 4,947 3,874
-------------- --------------
Net proceeds from sales, maturities, or repayments of investments 8,997,992 6,073,976
Cost of investments acquired:
Bonds 9,713,052 6,229,459
Preferred stocks 17,047 2,085
Common stocks (15,817) (2,085)
Mortgage loans 100,251 93,125
Other invested assets 14,594 19,254
-------------- --------------
Total cost of investments acquired 9,829,127 6,341,838
Net decrease (increase) in policy loans 279 (938)
-------------- --------------
Net cash used in investment activities (830,856) (268,800)
8
USG Annuity & Life Company
Statements of Cash Flows--Statutory Basis (continued)
- --------------------------------------------------------------------------------
2002 2001
-------------- --------------
(In Thousands)
Financing and miscellaneous activities
Cash provided:
Capital and surplus paid-in 30,000 -
Borrowed money 1,356 135,270
Net deposits on deposit-type contract funds (8) (38,422)
Interest paid on indebtedness (254) -
Other (uses) sources (72,379) 124,461
Dividends to stockholder - (26,000)
-------------- --------------
Net cash (used in) provided by financing and miscellaneous
activities (41,285) 195,309
Net (decrease) increase in cash and short-term investments (93,732) 65,205
Cash and short-term investments:
Beginning of year 102,848 37,643
-------------- ---------------
End of year $ 9,116 $ 102,848
============== ===============
See accompanying notes - statutory basis.
9
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies
USG Annuity & Life Company (the "Company") is domiciled in Oklahoma and is
a wholly owned subsidiary of Equitable Life Insurance Company of Iowa
("Equitable"), an Iowa domiciled insurance company. Equitable, in turn, is
a wholly owned subsidiary of ING America Insurance Holdings, Inc. ("ING
AIH").
The Company offers various insurance products including deferred fixed
annuities, immediate annuities, and interest-sensitive life insurance.
These products are primarily marketed to individuals by independent
insurance broker/dealers, financial institutions, and the career agency
force. The Company is licensed in 48 states and the District of Columbia.
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported
in the financial statements and accompanying notes. Such estimates and
assumptions could change in the future as more information becomes known,
which could impact the amounts reported and disclosed herein.
Basis of Presentation
The accompanying financial statements of the Company have been prepared in
conformity with accounting practices prescribed or permitted by the
Commissioner of Insurance of the State of Oklahoma (Oklahoma Insurance
Department), which practices differ from accounting principles generally
accepted in the United States ("GAAP"). The most significant variances from
GAAP are as follows:
Investments: Investments in bonds and mandatorily redeemable preferred
stocks are reported at amortized cost or market value based on the National
Association of Insurance Commissioners ("NAIC") rating; for GAAP, such
fixed maturity investments are designated at purchase as held-to-maturity,
trading or available-for-sale. Held-to-maturity investments are reported at
amortized cost, and the remaining fixed maturity investments are reported
at fair value with unrealized capital gains and losses reported in
operations for those designated as trading and as a component of other
comprehensive income in stockholder's equity for those designated as
available-for-sale.
10
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Basis of Presentation (continued)
Investments in real estate are reported net of related obligations rather
than on a gross basis. Real estate owned and occupied by the Company is
included in investments rather than reported as an operating asset as under
GAAP, and investment income and operating expenses include rent for the
Company's occupancy of those properties. Changes between depreciated cost
and admitted asset investment amounts are credited or charged directly to
unassigned surplus rather than income as would be required under GAAP.
Derivative instruments that meet the criteria of an effective hedge are
valued and reported in a manner that is consistent with the hedged asset or
liability. Embedded derivatives are not accounted for separately from the
host contract. Under GAAP, the effective and ineffective portions of a
single hedge are accounted for separately, an embedded derivative within a
contract that is not clearly and closely related to the economic
characteristics and risk of the host contract is accounted for separately
from the host contract and valued and reported at fair value, and the
change in fair value for cash flow hedges is credited or charged directly
to a separate component of shareholders' equity rather than to income as
required for fair value hedges.
The Company invests in structured securities including mortgage-backed
securities/collateralized mortgage obligations, asset-backed securities,
collateralized debt obligations, and commercial mortgage-backed securities.
For these structured securities, management compares the undiscounted cash
flows to the carrying value. An other than temporary impairment is
considered to have occurred when the undiscounted cash flows are less than
the carrying value. For structured securities, when a negative yield
results from a revaluation based on new prepayment assumptions (i.e.,
undiscounted cash flows are less than current book value), an other than
temporary impairment is considered to have occurred and the asset is
written down to the value of the undiscounted cash flows. For GAAP, assets
are re-evaluated based on the discounted cash flows using a current market
rate. Impairments are recognized when there has been an adverse change in
cash flows and the fair value is less than book. The asset is then written
down to fair value.
When a decline in fair value is determined to be other than temporary, the
individual security is written down to fair value and the loss accounted
for as a realized loss.
Valuation Reserves: The asset valuation reserve ("AVR") is determined by an
NAIC-prescribed formula and is reported as a liability rather than as a
valuation allowance or an appropriation of surplus. The change in AVR is
reported directly to unassigned surplus.
11
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Basis of Presentation (continued)
Under a formula prescribed by the NAIC, the Company defers the portion of
realized gains and losses on sales of fixed-income investments, principally
bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to
maturity based on groupings of individual securities sold in five-year
bands. The net deferral is reported as the interest maintenance reserve
(IMR) in the accompanying balance sheets.
Realized gains and losses on investments are reported in operations net of
federal income tax and transfers to the IMR. Under GAAP, realized capital
gains and losses are reported in the statements of operations on a pretax
basis in the period that the asset giving rise to the gain or loss is sold
and valuation allowances are provided when there has been a decline in
value deemed other than temporary, in which case the provision for such
declines is charged to income.
Valuation allowances, if necessary, are established for mortgage loans
based on the difference between the net value of the collateral, determined
as the fair value of the collateral less estimated costs to obtain and
sell, and the recorded investment in the mortgage loan. Under GAAP, such
allowances are based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, if foreclosure is
probable, on the estimated fair value of the collateral.
The initial valuation allowance and subsequent changes in the allowance for
mortgage loans as a result of a temporary impairment are charged or
credited directly to unassigned surplus, rather than being included as a
component of earnings as would be required under GAAP.
Policy Acquisition Costs: The costs of acquiring and renewing business are
expensed when incurred. Under GAAP, acquisition costs related to
traditional life insurance, to the extent recoverable from future policy
revenues, are deferred and amortized over the premium-paying period of the
related policies using assumptions consistent with those used in computing
policy benefit reserves. For universal life insurance and investment
products, to the extent recoverable from future gross profits, acquisition
costs are amortized generally in proportion to the present value of
expected gross margins from surrender charges and investment, mortality,
and expense margins.
Premiums: Life premiums are recognized as revenue when due. Premiums for
annuity policies with mortality and morbidity risk, except for guaranteed
interest and group annuity contracts, are also recognized as revenue when
due. Premiums received for annuity policies without mortality or morbidity
risk and for guaranteed interest and group annuity contracts are recorded
using deposit accounting.
12
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Basis of Presentation (continued)
Under GAAP, premiums for traditional life insurance products, which include
those products with fixed and guaranteed premiums and benefits and consist
primarily of whole life insurance policies, are recognized as revenue when
due. Group insurance premiums are recognized as premium revenue over the
time period to which the premiums relate. Revenues for universal life,
annuities and guaranteed interest contracts consist of policy charges for
the cost of insurance, policy administration charges, amortization of
policy initiation fees and surrender charges assessed during the period.
Benefit and Contract Reserves: Life policy and contract reserves under
statutory accounting practices are calculated based upon both the net level
premium and Commissioners' Reserve Valuation methods using statutory rates
for mortality and interest. GAAP requires that policy reserves for
traditional products be based upon the net level premium method utilizing
reasonably conservative estimates of mortality, interest, and withdrawals
prevailing when the policies were sold. For interest-sensitive products,
the GAAP policy reserve is equal to the policy fund balance plus an
unearned revenue reserve which reflects the unamortized balance of early
year policy loads over renewal year policy loads.
Reinsurance: For business ceded to unauthorized reinsurers, statutory
accounting practices require that reinsurance credits permitted by the
treaty be recorded as an offsetting liability and charged against
unassigned surplus. Under GAAP, an allowance for amounts deemed
uncollectible would be established through a charge to earnings. Statutory
income recognized on certain reinsurance treaties representing financing
arrangements is not recognized on a GAAP basis.
Policy and contract liabilities ceded to reinsurers have been reported as
reductions of the related reserves rather than as assets as required under
GAAP.
Commissions allowed by reinsurers on business ceded are reported as income
when received rather than being deferred and amortized with deferred policy
acquisition costs as required under GAAP.
Nonadmitted Assets: Certain assets designated as "nonadmitted," principally
deferred federal income tax assets, disallowed interest maintenance
reserves, non-operating software, past-due agents' balances, furniture and
equipment, intangible assets, and other assets not specifically identified
as an admitted asset within the NAIC Accounting Practices and Procedures
Manual are excluded from the accompanying balance sheets and are charged
directly to unassigned surplus. Under GAAP, such assets are included in the
balance sheet.
13
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Basis of Presentation (continued)
Universal Life and Annuity Policies: Revenues for universal life and
annuity policies consist of the entire premium received and benefits
incurred represent the total of death benefits paid and the change in
policy reserves. Under GAAP, premiums received in excess of policy charges
would not be recognized as premium revenue and benefits would represent the
excess of benefits paid over the policy account value and interest credited
to the account values.
Deferred Income Taxes: Deferred tax assets are provided for and admitted to
an amount determined under a standard formula. This formula considers the
amount of differences that will reverse in the subsequent year, taxes paid
in prior years that could be recovered through carrybacks, surplus limits
and the amount of deferred tax liabilities available for offset. Any
deferred tax assets not covered under the formula are non-admitted.
Deferred taxes do not include any amounts for state taxes. Under GAAP, a
deferred tax asset is recorded for the amount of gross deferred tax assets
that are expected to be realized in future years and a valuation allowance
is established for the portion that is not realizable.
Statements of Cash Flows: Cash and short-term investments in the statements
of cash flows represent cash balances and investments with initial
maturities of one year or less. Under GAAP, the corresponding caption of
cash and cash equivalents include cash balances and investments with
initial maturities of three months or less.
Reconciliation to GAAP
The effects of the preceding variances from GAAP on the accompanying
statutory basis financial statements have not been determined, but are
presumed to be material.
Other significant accounting practices are as follows:
Investments
Bonds, preferred stocks, common stocks, short-term investments and
derivative instruments are stated at values prescribed by the NAIC, as
follows:
Bonds not backed by other loans are principally stated at amortized cost
using the interest method.
14
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Investments (continued)
Single class and multi-class mortgage-backed/asset-backed securities are
valued at amortized cost using the interest method including anticipated
prepayments. Prepayment assumptions are obtained from dealer surveys or
internal estimates and are based on the current interest rate and economic
environment. The retrospective adjustment method is used to value all such
securities except for higher-risk asset backed securities, which are valued
using the prospective method.
Redeemable preferred stocks rated as high quality or better are reported at
cost or amortized cost. All other redeemable preferred stocks are reported
at the lower of cost, amortized cost, or market value and nonredeemable
preferred stocks are reported at market value or the lower of cost or
market value as determined by the Securities Valuation Office of the NAIC
("SVO").
Common stocks are reported at market value as determined by the SVO and the
related unrealized capital gains/(losses) are reported in unassigned
surplus along with adjustment for federal income taxes.
The Company analyzes the general account investments to determine whether
there has been an other than temporary decline in fair value below the
amortized cost basis. Management considers the length of the time and the
extent to which the market value has been less than cost; the financial
condition and near-term prospects of the issuer; future economic conditions
and market forecasts; and the Company's intent and ability to retain the
investment in the issuer for a period of time sufficient to allow for
recovery in market value. If it is probable that all amounts due according
to the contractual terms of a debt security will not be collected, an other
than temporary impairment is considered to have occurred.
In addition, the Company invests in structured securities including
mortgage-backed securities/collateralized mortgage obligations,
asset-backed securities, collateralized debt obligations, and commercial
mortgage-backed securities. For these structured securities, management
compares the undiscounted cash flows to the carrying value. An other than
temporary impairment is considered to have occurred when the undiscounted
cash flows are less than the carrying value.
When a decline in fair value is determined to be other than temporary, the
individual security is written down to fair value and the loss accounted
for as a realized loss.
15
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Investments (continued)
The Company uses interest rate swaps, caps and floors, options and certain
other derivatives as part of its overall interest rate risk management
strategy for certain life insurance and annuity products. As the Company
only uses derivatives for hedging purposes, the Company values all
derivative instruments on a consistent basis with the hedged item. Upon
termination, gains and losses on those instruments are included in the
carrying values of the underlying hedged items and are amortized over the
remaining lives of the hedged items as adjustments to investment income or
benefits from the hedged items. Any unamortized gains or losses are
recognized when the underlying hedged items are sold.
Interest rate swap contracts are used to convert the interest rate
characteristics (fixed or variable) of certain investments to match those
of the related insurance liabilities that the investments are supporting.
The net interest effect of such swap transactions is reported as an
adjustment of interest income from the hedged items as incurred.
Interest rate caps and floors are used to limit the effects of changing
interest rates on yields of variable rate or short-term assets or
liabilities. The initial cost of any such agreement is amortized to net
investment income over the life of the agreement. Periodic payments that
are receivable as a result of the agreements are accrued as an adjustment
of interest income or benefits from the hedged items.
Mortgage loans are reported at amortized cost, less allowance for
impairments.
Policy loans are reported at unpaid principal balances.
Land is reported at cost. Real estate occupied by the company is reported
at depreciated cost; other real estate is reported at the lower of
depreciated cost or fair value. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the properties.
For reverse repurchase agreements, Company policies require a minimum of
102% of the fair value of securities purchased under reverse repurchase
agreements to be maintained as collateral. Cash collateral received is
invested in short-term investments and the offsetting collateral liability
is included in miscellaneous liabilities.
Reverse dollar repurchase agreements are accounted for as collateral
borrowings, where the amount borrowed is equal to the sales price of the
underlying securities.
16
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Investments (continued)
The Company engages in securities lending whereby certain domestic bonds
from its portfolio are loaned to other institutions for short periods of
time. Collateral, primarily cash, which is in excess of the market value of
the loaned securities, is deposited by the borrower with a lending agent,
and retained and invested by the lending agent to generate additional
income for the Company. The Company does not have access to the collateral.
The Company's policy requires a minimum of 102% of the fair value of
securities loaned to be maintained as collateral. The market value of the
loaned securities is monitored on a daily basis with additional collateral
obtained or refunded as the market value fluctuates.
At December 31, 2002 and 2001, the Company had loaned securities (which are
reflected as invested assets on the Balance Sheets) with a market value of
approximately $32,662,000 and $62,905,000, respectively.
Short-term investments are reported at amortized cost. Short-term
investments include investments with maturities of less than one year at
the date of acquisition.
Other invested assets are reported at amortized cost using the effective
interest method. Other invested assets primarily consist of residual
collateralized mortgage obligations and partnership interests.
Realized capital gains and losses are determined using the specific
identification basis.
Aggregate Reserve for Life Policies and Contracts
Life, annuity, and accident and health reserves are developed by actuarial
methods and are determined based on published tables using statutorily
specified interest rates and valuation methods that will provide, in the
aggregate, reserves that are greater than or equal to the minimum or
guaranteed policy cash value or the amounts required by law. Interest rates
range from 4.00% to 8.75%.
The Company waives the deduction of deferred fractional premiums upon the
death of the insured. It is the Company's practice to return a pro rata
portion of any premium paid beyond the policy month of death, although it
is not contractually required to do so for certain issues.
17
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Aggregate Reserve for Life Policies and Contracts (continued)
The methods used in valuation of substandard policies are as follows:
For life, endowment and term policies issued substandard, the standard
reserve during the premium-paying period is increased by 50% of the
gross annual extra premium. Standard reserves are held on Paid-Up
Limited Pay contracts.
For reinsurance accepted with table rating, the reserve established is
a multiple of the standard reserve corresponding to the table rating.
For reinsurance with flat extra premiums, the standard reserve is increased
by 50% of the flat extra.
The tabular interest has been determined from the basic data for the
calculation of policy reserves for all direct ordinary life insurance and
for the portion of group life insurance classified as group Section 79. The
tabular interest of funds not involving life contingencies is calculated as
the current year reserves, plus payments, less prior year reserves, less
funds added.
Reinsurance
Reinsurance premiums, commissions, expense reimbursements, and reserves
related to reinsured business are accounted for on bases consistent with
those used in accounting for the original policies issued and the terms of
the reinsurance contracts. Reserves are based on the terms of the
reinsurance contract and are consistent with the risks assumed. Premiums
and benefits ceded to other companies have been reported as a reduction of
premium revenue and benefits expense. Amounts applicable to reinsurance
ceded for reserves and unpaid claim liabilities have been reported as
reductions of these items, and expense allowances received in connection
with reinsurance ceded have been reflected in operations.
18
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Nonadmitted Assets
Nonadmitted assets are summarized as follows:
December 31
2002 2001
-------------- --------------
(In Thousands)
Deferred federal income taxes $ 54,496 $ 55,833
Agents' debit balances 519 255
Deferred and uncollected premium 119 120
Other 885 3,095
-------------- --------------
Total nonadmitted assets $ 56,019 $ 59,303
============== ==============
Changes in nonadmitted assets are generally reported directly in surplus as
an increase or decrease in nonadmitted assets. Certain changes are reported
directly in surplus as a change in unrealized capital gains or losses.
Claims and Claims Adjustment Expenses
Claims expenses represent the estimated ultimate net cost of all reported
and unreported claims incurred through December 31, 2002. The Company does
not discount claims and claims adjustment expense reserves. Such estimates
are based on actuarial projections applied to historical claims payment
data. Such liabilities are considered to be reasonable and adequate to
discharge the Company's obligations for claims incurred but unpaid as of
December 31, 2002.
Cash Flow Information
Cash and short-term investments include cash on hand, demand deposits and
short-term fixed maturity instruments (with a maturity of less than one
year at date of acquisition).
The Company borrowed $1,021,035,000 and repaid $1,021,035,000 in 2002 and
borrowed $880,600,000 and repaid $928,400,000 during 2001. These borrowings
were on a short-term basis, at an interest rate that approximated current
money market rates and exclude borrowings from reverse dollar repurchase
transactions. Interest paid on borrowed money was $109,000 and $645,000
during 2002 and 2001, respectively.
Reclassifications
Certain prior year amounts in the Company's statutory basis financial
statements have been reclassified to conform to the 2002 financial
statement presentation.
19
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
2. Permitted Statutory Basis Accounting Practices
The financial statements of the Company are presented on the basis of
accounting practices prescribed or permitted by the Oklahoma Insurance
Department. The Oklahoma Insurance Department recognizes only statutory
accounting practices prescribed or permitted by the State of Oklahoma for
determining and reporting the financial condition and results of operations
of an insurance company, for determining its solvency under the Oklahoma
Insurance Laws. NAIC Accounting Practices and Procedures Manual has been
adopted as a component of prescribed or permitted practices by the state of
Oklahoma. The Commissioner of Insurance has the right to permit other
specific practices that deviate from prescribed practices.
The Company is required to identify those significant accounting practices
that are permitted, and obtain written approval of the practices from the
Oklahoma Insurance Department. As of December 31, 2002 and 2001, the
Company had no such permitted accounting practices.
3. Accounting Changes
The Company prepares its statutory financial statements in conformity with
accounting practices prescribed or permitted by the State of Oklahoma.
Effective January 1, 2001, the State of Oklahoma required that insurance
companies domiciled in the State of Oklahoma prepare their statutory basis
financial statements in accordance with the NAIC Accounting Practices and
Procedures Manual subject to any deviations prescribed or permitted by the
State of Oklahoma insurance commissioner.
Accounting changes adopted to conform to the provisions of the NAIC
Accounting Practices and Procedures Manual are reported as changes in
accounting principles. The cumulative effect of changes in accounting
principles is reported as an adjustment to unassigned surplus in the period
of the change in accounting principle. The cumulative effect is the
difference between the amount of capital and surplus at the beginning of
the year and the amount of capital and surplus that would have been
reported at that date if the new accounting principles had been applied
retroactively for all prior periods.
As a result of these changes, the Company reported a change of accounting
principle, as an adjustment that increased unassigned surplus, by
$5,180,000 as of January 1, 2001. These changes are primarily attributed to
an increase in unassigned surplus of approximately $5,911,000 related to
deferred tax assets, $15,384,000 related to prepayment penalties on bonds
and mortgage loans released from the IMR liability. Offsetting this
increase is a reduction of approximately $15,988,000 to guaranty fund
assessment and $127,000 to cost of collection of premiums.
20
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
4. Investments
The amortized cost and fair value of bonds and equity securities are as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
(In Thousands)
At December 31, 2002:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 285,347 $ 4,998 $ 36 $ 290,309
States, municipalities, and political subdivisions - - - -
Foreign government 120,649 4,200 2,385 122,464
Public utilities securities 270,390 14,526 4,008 280,908
Corporate securities 3,244,826 182,420 34,973 3,392,273
Mortgage-backed securities 1,668,901 90,300 46,006 1,713,195
Other structured securities 320,274 9,786 28,080 301,980
Commercial mortgage-backed securities 217,028 18,254 76 235,206
----------- ----------- ----------- -----------
Total fixed maturities 6,127,415 324,484 115,564 6,336,335
Preferred stocks 1,088 - - 1,088
----------- ----------- ----------- -----------
Total equity securities 1,088 - - 1,088
----------- ----------- ----------- -----------
Total $6,128,503 $ 324,484 $ 115,564 $6,337,423
=========== =========== =========== ===========
At December 31, 2001:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 38,620 $ 244 $ 82 $ 38,782
Public utilities securities 136,285 3,665 4,478 135,472
Corporate securities 2,785,911 97,406 68,734 2,814,583
Mortgage-backed securities 1,700,989 163,964 118,566 1,746,387
Other structured securities 463,485 12,125 27,898 447,712
Commercial mortgage-backed securities 161,939 6,507 1,499 166,947
----------- ----------- ----------- -----------
Total fixed maturities 5,287,229 283,911 221,257 5,349,883
Preferred stocks 134 - - 134
Common stocks 22 - - 22
----------- ----------- ----------- -----------
Total equity securities 156 - - 156
----------- ----------- ----------- -----------
Total $5,287,385 $ 283,911 $ 221,257 $5,350,039
=========== =========== =========== ===========
21
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
4. Investments (continued)
The amortized cost and fair value of investments in bonds at December 31,
2002, by contractual maturity, are shown below. Expected maturities may
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
-------------- --------------
December 31, 2002 (In Thousands)
Maturity:
Due in 1 year or less $ 44,173 $ 45,096
Due after 1 year through 5 years 1,118,169 1,177,925
Due after 5 years through 10 years 1,886,593 1,962,788
Due after 10 years 872,277 900,145
-------------- --------------
Total Maturity 3,921,212 4,085,954
Mortgage-backed securities 1,668,901 1,713,195
Other structured securities 320,274 301,980
Commercial mortgage-backed securities 217,028 235,206
-------------- --------------
Total $ 6,127,415 $ 6,336,335
============== ==============
At December 31, 2002, investments in certificates of deposit and bonds,
with an admitted asset value of $3,285,000, were on deposit with state
insurance departments to satisfy regulatory requirements.
Reconciliation of bonds from amortized cost to carrying value as of
December 31, 2002 and 2001 is as follows:
December 31
2002 2001
-------------- --------------
(In Thousands)
Amortized cost $ 6,127,415 $ 5,287,229
Less nonadmitted bonds 10,920 1,273
-------------- --------------
Carrying value $ 6,116,495 $ 5,285,956
============== ==============
Proceeds from the sales of investments in bonds and other fixed maturity
interest securities were $4,334,623,000 and $1,852,588,000 in 2002 and
2001, respectively. Gross gains of $109,772,000 and $49,178,000 and gross
losses of $97,962,000 and $34,222,000 during 2002 and 2001, respectively,
were realized on those sales. A portion of the gains realized in 2002 and
2001 has been deferred to future periods in the interest maintenance
reserve.
22
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
4. Investments (continued)
Major categories of net investment income are summarized as follows:
December 31
2002 2001
-------------- --------------
(In Thousands)
Income:
Bonds $ 459,813 $ 415,872
Mortgage loans 128,230 137,032
Policy loans 1,091 1,199
Company-occupied property 376 204
Other (26,548) (4,625)
-------------- --------------
Total investment income 562,962 549,682
Investment expenses 26,756 29,068
-------------- --------------
Net investment income $ 536,206 $ 520,614
============== ==============
As part of its overall investment strategy, the Company has entered into
agreements to purchase securities as follows:
December 31
2002 2001
-------------- --------------
(In Thousands)
Investment purchase commitments $ 87,963 $ 55,776
============== ==============
The Company entered into reverse dollar repurchase transactions to increase
its return on investments and improve liquidity. Reverse dollar repurchases
involve a sale of securities and an agreement to repurchase substantially
the same securities as those sold. The reverse dollar repurchases are
accounted for as short term collateralized financing and the repurchase
obligation is reported in borrowed money. The repurchase obligation totaled
$173,189,000 and $177,558,000 at December 31, 2002 and 2001, respectively.
The securities underlying these agreements are mortgage-backed securities
with a book value and fair value of $173,245,000 at December 31, 2002. The
securities have a weighted average coupon of 5.99% and have maturities
ranging from December 2017 through December 2032. The primary risk
associated with short-term collateralized borrowings is that the
counterparty may be unable to perform under the terms of the contract. The
Company's exposure is limited to the excess of the net replacement cost of
the securities over the value of the short-term investments, which was not
material at December 31, 2002. The Company believes the counterparties to
the reverse dollar repurchase agreements are financially responsible and
that the counterparty risk is minimal.
23
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
4. Investments (continued)
The Company participates in reverse repurchase transactions. Such
transactions include the sale of corporate securities to a major securities
dealer and a simultaneous agreement to repurchase the same security in the
near term. The proceeds are invested in new securities of intermediate
durations. The terms of the reverse repurchase agreements call for payment
of interest at a rate of 1.4%. The agreements mature prior to the end of
January 2003. The amount due on these agreements included in borrowed money
is $11,000,000. The securities underlying these agreements are
mortgage-backed securities with a book value and fair value of $12,687,000.
The securities have a weighted average coupon of 6.5% and have a maturity
of August 2032.
The maximum and minimum lending rates for long-term mortgage loans during
2002 were 7.66% and 2.99%. Fire insurance is required on all properties
covered by mortgage loans and must at least equal the excess of the loan
over the maximum loan which would be permitted by law on the land without
the buildings.
The maximum percentage of any loan to the value of collateral at the time
of the loan, exclusive of insured or guaranteed or purchase money
mortgages, was 66.7% on commercial properties. As of December 31, 2002, the
Company held no mortgages with interest more than 180 days overdue. Total
interest due, as of December 31, 2002 is $0.
5. Derivative Financial Instruments Held for Purposes Other than Trading
The Company enters into interest rate and currency contracts, including
swaps, caps, floors, and options, to reduce and manage risks, which include
the risk of a change in the value, yield, price, cash flows, exchange rates
or quantity of, or a degree of exposure with respect to, assets,
liabilities, or future cash flows, which the Company has acquired or
incurred. Hedge accounting practices are supported by cash flow matching,
scenario testing and duration matching.
The Company uses interest rate swaps to reduce market risks from changes in
interest rates and to alter interest rate exposure arising from mismatches
between assets and liabilities. Interest rate swap agreements generally
involve the exchange of fixed and floating interest payments over the life
of the agreement without an exchange of the underlying principal amount.
Currency swap agreements generally involve the exchange of local and
foreign currency payments over the life of the agreements without an
exchange of the underlying principal amount. Interest rate cap and interest
rate floor agreements owned entitle the Company to receive payments to the
extent reference interest rates exceed or fall below strike levels in the
contracts based on the notional amounts.
24
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
5. Derivative Financial Instruments Held for Purposes Other than Trading
(continued)
Premiums paid for the purchase of interest rate contracts are included in
other invested assets and are being amortized to interest expense over the
remaining terms of the contracts or in a manner consistent with the
financial instruments being hedged.
Amounts paid or received, if any, from such contracts are included in
interest expense or income. Accrued amounts payable to or receivable from
counterparties are included in other liabilities or other invested assets.
Gains or losses realized as a result of early terminations of interest rate
contracts are amortized to investment income over the remaining term of the
items being hedged to the extent the hedge is considered to be effective;
otherwise, they are recognized upon termination.
Interest rate contracts that are matched or otherwise designated to be
associated with other financial instruments are recorded at fair value if
the related financial instruments mature, are sold, or are otherwise
terminated or if the interest rate contracts cease to be effective hedges.
Changes in the fair value of derivatives are recorded as investment income.
The Company manages the potential credit exposure from interest rate
contracts through careful evaluation of the counterparties' credit
standing, collateral agreements, and master netting agreements.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate contracts; however, the Company does not
anticipate nonperformance by any of these counterparties. The amount of
such exposure is generally the unrealized gains in such contracts.
25
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
5. Derivative Financial Instruments Held for Purposes Other than Trading
(continued)
The table below summarizes the Company's interest rate contracts included
in other invested assets at December 31, 2002 and 2001:
Notional Amount Carrying Value Fair Value
--------------- --------------- ---------------
(In Thousands)
December 31, 2002
Interest rate contracts
Swaps $ 1,146,498 $ - $ (138,473)
Caps and floors 548,465 3,393 1,296
--------------- --------------- ---------------
Total derivatives $ 1,694,963 $ 3,393 $ (137,177)
=============== =============== ===============
Notional Amount Carrying Value Fair Value
--------------- --------------- ---------------
(In Thousands)
December 31, 2001
Interest rate contracts:
Swaps $ 921,000 $ 936 $ (56,090)
Caps and floors 298,465 547 2,302
--------------- --------------- ---------------
Total derivatives $ 1,219,465 $ 1,483 $ (53,788)
=============== =============== ===============
6. Concentrations of Credit Risk
The Company held less-than-investment-grade bonds with an aggregate book
value of $435,061,000 and $520,834,000 and with an aggregate market value
of $413,437,000 and $477,494,000 at December 31, 2002 and 2001,
respectively. Those holdings amounted to 7.1% of the Company's investments
in bonds and 5.6% of total admitted assets at December 31, 2002. The
holdings of less-than-investment-grade bonds are widely diversified and of
satisfactory quality based on the Company's investment policies and credit
standards.
The Company held unrated bonds of $204,268,000 and $357,815,000 with an
aggregate NAIC market value of $208,297,000 and $356,506,000 at December
31, 2002 and 2001, respectively. The carrying value of these holdings
amounted to 3.3% of the Company's investment in bonds and 2.6% of the
Company's total admitted assets at December 31, 2002.
At December 31, 2002, the Company's commercial mortgages involved a
concentration of properties located in California (11.6%) and Pennsylvania
(9.9%). The remaining commercial mortgages relate to properties located in
37 other states. The portfolio is well diversified; covering many different
types of income-producing properties on which the Company has first
mortgage liens. The maximum mortgage outstanding on any individual property
is $23,935,000.
26
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
7. Annuity Reserves
At December 31, 2002 and 2001, the Company's annuity reserves, including
those held in separate accounts and deposit fund liabilities that are
subject to discretionary withdrawal with adjustment, subject to
discretionary withdrawal without adjustment, and not subject to
discretionary withdrawal provisions are summarized as follows:
December 31, 2002
Amount Percent
-------------- --------------
(In Thousands)
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 4,447,295 56%
At book value less surrender charge 1,635,038 21
-------------- --------------
Subtotal 6,082,333 77
Subject to discretionary withdrawal (without adjustment) at book
value with minimal or no charge or adjustment 1,194,281 15
Not subject to discretionary withdrawal 641,496 8
-------------- --------------
Total annuity reserves and deposit fund liabilities before reinsurance 7,918,110 100%
==============
Less reinsurance ceded 895,734
--------------
Net annuity reserves and deposit fund liabilities $ 7,022,376
==============
December 31, 2001
Amount Percent
-------------- --------------
(In Thousands)
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 3,927,063 55%
At book value less surrender charge 1,568,029 22
-------------- --------------
Subtotal 5,495,092 77
Subject to discretionary withdrawal (without adjustment) at book
value with minimal or no charge or adjustment 1,030,501 15
Not subject to discretionary withdrawal 588,714 8
-------------- --------------
Total annuity reserves and deposit fund liabilities before reinsurance 7,114,307 100%
==============
Less reinsurance ceded 744,333
--------------
Net annuity reserves and deposit fund liabilities $ 6,369,974
==============
27
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
8. Reinsurance
The Company is involved in both ceded and assumed reinsurance with other
companies for the purpose of diversifying risk and limiting exposure on
larger risks. As of December 31, 2002, the Company's retention limit for
acceptance of risk on life insurance policies had been set at various
levels up to $500,000.
To the extent that the assuming companies become unable to meet their
obligations under these treaties, the Company remains contingently liable
to its policyholders for the portion reinsured. To minimize its exposure to
significant losses from retrocessionaire insolvencies, the Company
evaluates the financial condition of the retrocessionaire and monitors
concentrations of credit risk.
Assumed premiums amounted to $136,400,000 and $147,163,000 for the years
ended December 31, 2002 and 2001, respectively.
The Company's ceded reinsurance arrangements reduced certain items in the
accompanying financial statements by the following amounts:
December 31
2002 2001
-------------- --------------
(In Thousands)
Premiums $ 260,544 $ 234,110
Benefits paid or provided 9,447 6,950
Policy and contract liabilities at year end $ 896,762 $ 775,452
9. Federal Income Taxes
The Company joins in filing a consolidated federal income tax return with
its parent, Equitable, and other affiliates. The method of tax allocation
is governed by a written tax sharing agreement. The tax sharing agreement
provides that each member of the consolidated return shall reimburse
Equitable for its respective share of the consolidated federal income tax
liability and shall receive a benefit for its losses at the statutory rate.
Significant components of income taxes incurred as of December 31 are:
December 31
2002 2001
-------------- --------------
(In Thousands)
Current income taxes incurred consist of the following major components:
Federal taxes on operations $ 41,015 $ 49,747
Federal taxes on capital gains (6,049) 7,981
-------------- --------------
Total current taxes incurred $ 34,966 $ 57,728
============== ==============
28
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
9. Federal Income Taxes (continued)
The components of the net deferred tax asset/(liability) at December 31 are
as follows:
December 31
2002 2001
-------------- --------------
(In Thousands)
Total gross deferred tax assets $ 70,328 $ 63,290
Total deferred tax liabilities (231) (481)
-------------- --------------
Net deferred tax asset 70,097 62,809
Deferred tax asset non-admitted (54,496) (55,833)
-------------- --------------
Net admitted deferred tax asset 15,601 6,976
============== ==============
Decrease (increase) in non-admitted asset $ 1,337 $ (25,312)
============== ==============
The main components of deferred tax assets and deferred tax liabilities are
as follows:
December 31
2002 2001
-------------- --------------
(In Thousands)
Deferred tax assets resulting from book/tax differences in:
Investments $ 32,290 $ 17,875
Deferred acquisition costs 23,431 26,735
Guaranty assessments 4,339 5,596
Insurance reserves 8,423 8,957
Unrealized loss on investments 499 3,309
Other 1,346 818
-------------- --------------
Total deferred tax assets 70,328 63,290
Deferred tax assets non-admitted (54,496) (55,833)
-------------- --------------
Admitted deferred tax assets 15,832 7,457
Deferred tax liabilities resulting from book/tax differences in:
Due and deferred premiums 231 481
-------------- --------------
Total deferred tax liabilities 231 481
-------------- --------------
Net admitted deferred tax asset $ 15,601 $ 6,976
============== ==============
29
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
9. Federal Income Taxes (continued)
The change in net deferred income taxes in comprised of the following:
December 31
2002 2001 Change
-------------- -------------- --------------
(In Thousands)
Total deferred tax assets $ 70,328 $ 63,290 $ 7,038
Total deferred tax liabilities 231 481 (250)
-------------- -------------- --------------
Net deferred tax asset $ 70,097 $ 62,809 7,288
============== ==============
Tax effect of items in surplus:
Unrealized gains (losses) 2,278
--------------
Change in net deferred income tax $ 9,566
==============
The provision for federal income taxes expense and change in deferred taxes
differs from the amount obtained applying the statutory federal income tax
rate to income (including capital losses) before income taxes for the
following reasons:
Year ended
December 31,
2002
--------------
(In Thousands)
Ordinary income $ 108,357
Capital losses (48,154)
--------------
Total pre-tax book income $ 60,203
==============
Provision computed at statutory rate $ 21,071
Audit settlement not provided for 5,185
Interest maintenance reserve 2,606
Nondeductible general expenses 22
Refinement of deferred tax balances (3,488)
Other 4
---------------
Total $ 25,400
===============
Federal income taxes incurred $ 34,966
Change in net deferred income taxes (9,566)
---------------
Total statutory income taxes $ 25,400
===============
The amount of federal income taxes incurred that will be available for
recoupment in the event of future net losses is $0 and $6,791,473 from 2002
and 2001, respectively.
The Company has a recoverable of $6,561,673 at December 31, 2002 and had a
payable of $17,114,498 at December 31, 2001 for federal income taxes under
the intercompany tax sharing agreement.
30
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
10. Capital and Surplus
Under Oklahoma insurance regulations, the Company is required to maintain a
minimum total capital and surplus of $750,000. Additionally, the amount of
dividends which can be paid by the Company to its stockholder without prior
approval of the Oklahoma Insurance Department is limited to the greater of
10% of statutory surplus or the statutory net gain from operations.
11. Fair Values of Financial Instruments
Life insurance liabilities that contain mortality risk and all nonfinancial
instruments have been excluded from the disclosure requirements. However,
the fair values of liabilities under all insurance contracts are taken into
consideration in the Company's overall management of interest rate risk,
such that the Company's exposure to changing interest rates is minimized
through the matching of investment maturities with amounts due under
insurance contracts. The carrying amounts and fair values of the Company's
financial instruments are summarized as follows:
December 31, 2002 December 31, 2001
--------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
(In Thousands)
Assets:
Bonds $6,116,495 $6,336,335 $5,285,956 $5,349,883
Preferred stocks 1,088 1,088 134 134
Unaffiliated common stocks - - 22 22
Mortgage loans 1,483,855 1,632,720 1,659,518 1,738,458
Policy loans 32,454 32,454 32,732 32,732
Derivative securities 3,393 (137,177) 1,483 (53,788)
Short-term investments 5,650 5,650 84,678 84,678
Cash 3,466 3,466 18,170 18,170
Indebtedness from related parties 25 25 3,945 3,945
Receivable for securities 2,873 2,873 4,268 4,268
Liabilities:
Individual and group annuities 6,775,875 6,621,753 6,339,976 6,218,709
Deposit type contract 246,501 258,945 232,745 247,377
Indebtedness to related parties 22,147 22,147 6,548 6,548
Payable for securities - - 101,206 101,206
The following methods and assumptions were used by the Company in
estimating the fair value disclosures for financial instruments in the
accompanying financial statements and notes thereto:
31
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
11. Fair Values of Financial Instruments (continued)
Cash and short-term investments: The carrying amounts reported in the
accompanying balance sheets for these financial instruments
approximate their fair values.
Fixed maturities and equity securities: The fair values for bonds,
preferred stocks and common stocks, reported herein, are based on
quoted market prices, where available. For securities not actively
traded, fair values are estimated using values obtained from
independent pricing services or, in the case of private placements,
collateralized mortgage obligations and other mortgage derivative
investments, are estimated by discounting the expected future cash
flows. The discount rates used vary as a function of factors such as
yield, credit quality, and maturity, which fall within a range between
0% and 15% over the total portfolio. Fair values determined on this
basis can differ from values published by the NAIC Securities
Valuation Office. Market value as determined by the NAIC as of
December 31, 2002 and 2001 is $6,154,770,000 and $5,317,444,000,
respectively.
Mortgage loans: Estimated market values for commercial real estate
loans were generated using a discounted cash flow approach. Loans in
good standing are discounted using interest rates determined by U.S.
Treasury yields on December 31 and spreads applied on new loans with
similar characteristics. The amortizing features of all loans are
incorporated in the valuation. Where data on option features is
available, option values are determined using a binomial valuation
method, and are incorporated into the mortgage valuation. Restructured
loans are valued in the same manner; however, these loans were
discounted at a greater spread to reflect increased risk. All
residential loans are valued at their outstanding principal balances,
which approximate their fair values.
Derivative financial instruments: Fair values for on-balance-sheet
derivative financial instruments (caps, options and floors) and
off-balance-sheet derivative financial instruments (swaps) are based
on broker/dealer valuations or on internal discounted cash flow
pricing models taking into account current cash flow assumptions and
the counterparties' credit standing.
Other investment-type insurance contracts: The fair values of the
Company's deferred annuity contracts are estimated based on the cash
surrender values. The carrying values of other policyholder
liabilities, including immediate annuities, dividend accumulations,
supplementary contracts without life contingencies, and premium
deposits, approximate their fair values.
The carrying value of all other financial instruments approximates
their fair value.
32
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
12. Commitments and Contingencies
The Company is a party to threatened or pending lawsuits arising from the
normal conduct of business. Due to the climate in insurance and business
litigation, suits against the Company sometimes include claims for
substantial compensatory, consequential or punitive damages and other types
of relief. Moreover, certain claims are asserted as class actions,
purporting to represent a group of similarly situated individuals. While it
is not possible to forecast the outcome of pending lawsuits, in light of
existing insurance, reinsurance and established reserves, it is the opinion
of management that the disposition of such lawsuits will not have a
materially adverse effect on the Company's operations or financial
position.
The Company has committed to provide additional capital contributions of
$42,012,000 in partnership investments at December 31, 2002.
13. Financing Agreements
The Company maintains a revolving loan agreement with SunTrust Bank,
Atlanta (the "Bank"). Under this agreement, which expires July 31, 2003,
the Company can borrow up to $75,000,000 from the Bank. Interest on any
borrowing accrues at an annual rate equal to: the cost of funds for the
Bank for the period applicable for the advance plus 0.225% or a rate quoted
by the Bank to the Company for the borrowing. Under this agreement, the
Company incurred interest expense of $20,000 for the year ended December
31, 2002. At December 31, 2002, the Company had $0 payable to the Bank.
The Company also maintains a revolving loan agreement with Bank of New
York, New York (the "Bank"). Under this agreement, the Company can borrow
up to $100,000,000 from the Bank. Interest on any of the Company borrowing
accrues at an annual rate equal to: the cost of funds for the Bank for the
period applicable for the advance plus 0.225% or a rate quoted by the Bank
to the Company for the borrowing. Under this agreement, the Company
incurred interest expense of $31,000 for the year ended December 31, 2002.
At December 31, 2002, the Company had $0 payable to the Bank.
33
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
14. Related Party Transactions
Affiliates
Management and service contracts and all cost sharing arrangements with
other affiliated ING US life insurance companies are allocated among
companies in accordance with normal, generally accepted expense and cost
allocation methods.
Investment Management: The Company has entered into an investment advisory
agreement and an administrative services agreement with ING Investment
Management, LLC ("IIM") under which IIM provides the Company with
investment management and asset liability management services. Total fees
under the agreement were approximately $19,698,000 and $17,852,000 for the
year ended December 31, 2002 and 2001, respectively.
Inter-insurer Services Agreement: The Company has entered into a services
agreement with certain of its affiliated insurance companies in the United
States ("affiliated insurers") whereby the affiliated insurers provide
certain administrative, management, professional, advisory, consulting and
other services to each other. Net amounts received under these agreements
were $31,437,000 and $19,154,000 for the year ended December 31, 2002 and
2001, respectively.
Tax Sharing Agreements: The Company has entered into federal tax sharing
agreements with members of an affiliated group as defined in Section 1504
of the Internal Revenue Code of 1986, as amended. The agreement provides
for the manner of calculation and the amounts/timing of the payments
between the parties as well as other related matters in connection with the
filing of consolidated federal income tax returns. The Company has also
entered into a state tax sharing agreement with ING AIH and each of the
specific subsidiaries that are parties to the agreement. The state tax
agreement applies to situations in which ING AIH and all or some of the
subsidiaries join in the filing of a state or local franchise, income tax
or other tax return on a consolidated, combined or unitary basis.
34
USG Annuity & Life Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
15. Guaranty Fund Assessments
Insurance companies are assessed the costs of funding the insolvencies of
other insurance companies by the various state guaranty associations,
generally based on the amount of premiums companies collect in that state.
The Company accrues the cost of future guaranty fund assessments based on
estimates of insurance company insolvencies provided by the National
Organization of Life and Health Insurance Guaranty Associations (NOLHGA)
and the amount of premiums written in each state. The Company reduces the
accrual by credits allowed in some states to reduce future premium taxes by
a portion of assessments in that state. The Company has estimated this
liability to be $12,397,000 and 15,988,000 as of December 31, 2002 and
2001, respectively and has recorded a reserve. The Company has also
recorded an asset of $2,451,000 and $5,447,000 as of December 31, 2002 and
2001, respectively, for future credits to premium taxes for assessments
already paid.
16. Regulatory Risk-Based Capital
Life and health insurance companies are subject to certain Risk-Based
Capital ("RBC") requirements as specified by the NAIC. Under those
requirements, the amount of capital and surplus maintained by a life and
health insurance company is to be determined based on the various risk
factors related to it. At December 31, 2002, USG Annuity & Life Company
meets the RBC requirements.
35
EXHIBIT 99.5
USG Annuity & Life Company
Balance Sheet - Statutory Basis
- --------------------------------------------------------------------------------
September 30,
2003
(In Thousands)
--------------
Admitted assets Cash and invested assets:
Bonds $ 6,118,513
Preferred stocks 1,273
Mortgage loans 1,494,360
Real estate 3,743
Policy loans 31,921
Other invested assets 102,237
Cash and short-term investments 38,475
-------------
Total cash and invested assets 7,790,522
Deferred and uncollected premiums 360
Accrued investment income 77,796
Reinsurance balances recoverable 597
Indebtedness from related parties 384
Federal income tax recoverable 39,903
Other assets 1,576
-------------
Total admitted assets $ 7,911,138
=============
Liabilities and capital and surplus
Liabilities:
Policy and contract liabilities:
Life and annuity reserves 6,863,230
Deposit type contracts 230,684
Policyholders' funds 43
Unpaid claims 957
-------------
Total policy and contract liabilities 7,094,914
Accounts payable and accrued expenses 41,931
Indebtedness to related parties 21,035
Interest maintenance reserve 33,230
Contingency reserve 75
Asset valuation reserve 53,269
Borrowed money 230,447
Payable for securities 83,330
-------------
Total liabilities 7,558,231
Capital and surplus:
Common stock 2,500
Additional paid-in capital 316,963
Unassigned surplus 33,444
-------------
Total capital and surplus 352,907
-------------
Total liabilities and capital and surplus $ 7,911,138
=============
1
USG Annuity & Life Company
Statements of Operations - Statutory Basis
- --------------------------------------------------------------------------------
Nine months ended September 30,
2003 2002
-------------- --------------
(In Thousands)
Premiums and other revenues:
Life, annuity, and accident and health premiums $ 279,075 $ 1,151,696
Policy proceeds and dividends left on deposit 5,877 6,694
Net investment income 346,810 411,994
Amortization of interest maintenance reserve (3,298) (6,073)
Commissions, expense allowances and reserve adjustments
on reinsurance ceded 16,395 10,725
Other income 203 9,108
-------------- --------------
Total premiums and other revenues 645,062 1,584,144
Benefits paid or provided:
Death benefits 3,933 110,810
Annuity benefits 191,961 194,775
Surrender benefits 389,140 435,457
Interest on policy or contract funds 4,541 5,111
Other benefits 3 8
Life contract withdrawals 5,200 4,698
Change in life, annuity, and accident and health reserves 3,316 653,995
-------------- --------------
Total benefits paid or provided 598,094 1,404,854
Insurance expenses:
Commissions 50,487 71,220
General expenses 24,408 23,635
Insurance taxes, licenses and fees, excluding federal income taxes 1,782 767
Other (36) 933
-------------- --------------
Total insurance expenses 76,641 96,555
-------------- --------------
Gain (loss) from operations before federal income
taxes and net realized capital losses (29,673) 82,735
Federal income taxes (21,514) 35,765
-------------- --------------
Gain from operations before net realized capital losses (8,159) 46,970
Net realized capital gains or (losses), net of income
taxes 2003 - $14,234; 2002 - $0 and excluding net
transfers to the interest maintenance reserve 2003 - $(9,764); 2002 - $0
(29,176) (29,856)
-------------- --------------
Net income (loss) $ (37,335) $ 17,114
============== ==============
2
USG Annuity & Life Company
Statements of Changes in Capital and Surplus - Statutory Basis
- --------------------------------------------------------------------------------
Nine months ended September 30,
2003 2002
-------------- --------------
(In Thousands)
Common stock:
Balance at beginning and end of year $ 2,500 $ 2,500
Paid-in and contributed surplus:
Balance at beginning and end of year 316,963 286,963
Unassigned surplus:
Balance at beginning of year 66,723 19,994
Net income (37,335) 17,114
Change in net unrealized capital gains or losses 3,085 (8,420)
Change in nonadmitted assets 3,844 (7,012)
Change in asset valuation reserve (2,635) 13,348
Change in net deferred income tax (238) 8,456
Other adjustments - 344
-------------- --------------
Balance at end of year 33,444 43,824
Total capital and surplus $ 352,907 $ 333,287
============== ==============
3
USG Annuity & Life Company
Statements of Changes in Capital and Surplus - Statutory Basis
- --------------------------------------------------------------------------------
Nine months ended September 30,
2003 2002
-------------- --------------
(In Thousands)
Operations
Premiums, policy proceeds, and other
considerations received, net of reinsurance paid $ 279,055 $ 1,158,497
Net investment income received 453,000 470,113
Commission and expense allowances received on reinsurance ceded (76,234) 10,725
Benefits paid (597,706) (766,933)
Insurance expenses paid - (87,379)
Federal income taxes (paid) received (7,368) (41,719)
Net other (expenses) revenues 23,350 7,774
-------------- --------------
Net cash provided by operations 74,097 751,078
Investments
Proceeds from sales, maturities, or repayments of investments:
Bonds 6,410,635 6,569,984
Stocks - 357
Mortgage loans 239,479 180,517
Other invested assets 2,643 6,190
Miscellaneous proceeds 86,405 -
Net tax on capital gains - 2,375
-------------- --------------
Net proceeds from sales, maturities, or repayments of investments 6,739,162 6,759,423
Cost of investments acquired:
Bonds 6,509,956 7,668,436
Preferred stocks 185 142
Mortgage loans 249,957 23,347
Real estate 2,708 -
Other invested assets 5,599 11,911
Miscellaneous applications 56,243 -
-------------- --------------
Total cost of investments acquired 6,824,648 7,703,836
Net increase (decrease) in policy loans (1,309) 441
-------------- --------------
Net cash used in investment activities 86,876 (944,854)
Financing and miscellaneous activities
Cash provided (used):
Borrowed money 45,998 147,060
Net deposits on deposit-type contract funds (15,814) (28,233)
Other sources 11,954 (11,699)
-------------- --------------
Net cash provided by financing and miscellaneous activities 42,138 107,128
Net change in cash and short-term investments 29,359 (86,648)
Cash and short-term investments:
Beginning of year 9,116 102,848
-------------- --------------
End of year $ 38,475 $ 16,200
============== ==============
4
EXHIBIT 99.6
Report of Independent Auditors
Board of Directors and Stockholder
United Life & Annuity Insurance Company
We have audited the accompanying statutory basis balance sheets of United Life &
Annuity Insurance Company ("the Company" and a wholly owned subsidiary of ING
America Insurance Holdings, Inc.) as of December 31, 2002 and 2001, and the
related statutory basis statements of operations, changes in capital and
surplus, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Insurance Department of the State of Iowa (Iowa Insurance
Department), which practices differ from accounting principles generally
accepted in the United States. The variances between such practices and
accounting principles generally accepted in the United States are described in
Note 1. The effects on the financial statements of these variances are not
reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matter described in the preceding
paragraph, the financial statements referred to above do not present fairly, in
conformity with accounting principles generally accepted in the United States,
the financial position of United Life & Annuity Insurance Company at December
31, 2002 and 2001 or the results of its operations or its cash flows for the
years then ended.
1
However, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of United Life &
Annuity Insurance Company at December 31, 2002 and 2001, and the results of its
operations and its cash flows for the years then ended, in conformity with
accounting practices prescribed or permitted by the Iowa Insurance Department.
As discussed in Note 3 to the financial statements, in 2001 the Company changed
various accounting policies to be in accordance with the revised NAIC Accounting
Practices and Procedures Manual, as adopted by the Iowa Insurance Department.
/s/ Ernst & Young LLP
April 25, 2003
2
United Life & Annuity Insurance Company
Balance Sheets - Statutory Basis
- --------------------------------------------------------------------------------
December 31
2002 2001
-------------- --------------
(In Thousands)
Admitted assets Cash and invested assets:
Bonds $ 608,870 $ 673,753
Common stocks 10 145
Subsidiary 25 25
Mortgage loans 34,829 31,004
Real estate, properties held for sale - 37
Policy loans 933 1,028
Other invested assets 13,908 8,323
Cash and short-term investments 14,741 18,299
-------------- --------------
Total cash and invested assets 673,316 732,614
Deferred and uncollected premiums (30) -
Accrued investment income 8,523 10,002
Reinsurance balances recoverable 112 -
Indebtedness from related parties - 19
Federal income tax recoverable, including a deferred
tax asset of $5,385 6,791 4,761
Separate account assets 64,410 103,520
Other assets 375 117
-------------- --------------
Total admitted assets $ 753,497 $ 851,033
============== ==============
3
United Life & Annuity Insurance Company
Balance Sheets - Statutory Basis (continued)
- --------------------------------------------------------------------------------
December 31
2002 2001
-------------- --------------
(In Thousands)
except share amounts)
Liabilities and capital and surplus
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $ 586,755 $ 655,796
Deposit type contracts 14,926 16,982
Unpaid claims 25 -
-------------- --------------
Total policy and contract liabilities 601,706 672,778
Interest maintenance reserve 188 -
Accounts payable and accrued expenses 1,485 2,369
Indebtedness to related parties 1,634 926
Asset valuation reserve 5,743 8,652
Other liabilities (2,875) (3,851)
Separate account liabilities 64,410 103,520
-------------- --------------
Total liabilities 672,291 784,394
Capital and surplus:
Common stock: authorized - 4,200,528 shares of $2.00 par
value, 4,200,528 issued and outstanding 8,401 8,401
Additional paid-in capital 41,241 41,241
Unassigned surplus 31,564 16,997
-------------- --------------
Total capital and surplus 81,206 66,639
-------------- --------------
Total liabilities and capital and surplus $ 753,497 $ 851,033
============== ==============
See accompanying notes - statutory basis.
4
United Life & Annuity Insurance Company
Statements of Operations - Statutory Basis
- --------------------------------------------------------------------------------
Year ended December 31
2002 2001
-------------- --------------
(In Thousands)
Premiums and other revenues:
Life, annuity, and accident and health premiums $ 1,228 $ 2,205
Policy proceeds and dividends left on deposit 205 217
Net investment income 44,256 55,342
Amortization of interest maintenance reserve 1,656 922
Commissions, expense allowances and reserve adjustments
on reinsurance ceded 502 643
Other income 1,598 4,052
-------------- --------------
Total premiums and other revenues $ 49,445 $ 63,381
--------------- --------------
Benefits paid or provided:
Annuity benefits 20,309 25,765
Surrender benefits 100,443 150,071
Interest on policy or contract funds 598 (2,997)
Other benefits 25 -
Life contract withdrawals 1,170 596
Decrease in life, annuity, and accident and health reserves (69,041) (112,483)
Net transfers from separate accounts (17,382) (18,868)
-------------- --------------
Total benefits paid or provided 36,122 42,084
Insurance expenses:
Commissions 611 695
General expenses 1,877 3,649
Insurance taxes, licenses and fees, excluding federal
income taxes (536) 231
Other 4 655
-------------- --------------
Total insurance expenses 1,956 5,230
-------------- --------------
38,078 47,314
-------------- --------------
5
United Life & Annuity Insurance Company
Statements of Operations - Statutory Basis (continued)
- --------------------------------------------------------------------------------
Year ended December 31
2002 2001
-------------- --------------
(In Thousands)
Gain from operations before federal income taxes and net
realized capital (losses) gains
$ 11,367 $ 16,067
Federal income taxes (5,786) 3,039
-------------- --------------
Gain from operations before net realized capital (losses) gains 17,153 13,028
Net realized capital (losses) gains net of income taxes 2002 -
($3,926), 2001 - $0 and excluding net transfers to the
interest maintenance reserve 2002- ($2,310); 2001- ($5,545) (5,602) 333
-------------- --------------
Net income $ 11,551 $ 13,361
============== ==============
See accompanying notes - statutory basis.
6
United Life & Annuity Insurance Company
Statements of Changes in Capital and Surplus-Statutory Basis
- --------------------------------------------------------------------------------
Year ended December 31
2002 2001
-------------- --------------
(In Thousands)
Common stock:
Balance at beginning and end of year $ 8,401 $ 8,401
-------------- --------------
Additional paid-in capital:
Balance at beginning and end of year 41,241 41,241
-------------- --------------
Unassigned surplus:
Balance at beginning of year 16,997 (226)
Net income 11,551 13,361
Change in net unrealized capital gains or losses (1,396) 1,927
Change in nonadmitted assets (5,406) 7,268
Change in asset valuation reserve 2,909 (1,277)
Change in net deferred income tax 7,388 (505)
Change in accounting principle, net of tax - 1,528
Other adjustments (479) (5,079)
-------------- --------------
Balance at end of year 31,564 16,997
-------------- --------------
Total capital and surplus $ 81,206 $ 66,639
============== ==============
See accompanying notes - statutory basis.
7
United Life & Annuity Insurance Company
Statements of Cash Flows - Statutory Basis
- --------------------------------------------------------------------------------
Year ended December 31
2002 2001
-------------- --------------
(In Thousands)
Operations
Premiums, policy proceeds, and other considerations received,
net of reinsurance paid $ 1,424 $ 715
Net investment income received 47,009 55,810
Commission and expense allowances received on reinsurance ceded 27 643
Benefits paid (125,136) (173,108)
Net transfers from separate accounts 19,650 21,767
Insurance expenses paid (2,613) (4,891)
Federal income taxes received (paid) 1,697 (6,898)
Other revenues in excess of expenses 1,252 1,593
-------------- --------------
Net cash used in operations (56,690) (104,369)
Investments
Proceeds from sales, maturities, or repayments of investments:
Bonds 697,696 509,231
Common stocks - 121
Mortgage loans 3,117 10,319
Real estate 53 -
Other invested assets 82 139
Net losses on cash & short term investments (262) (150)
Miscellaneous proceeds 607 (296)
-------------- --------------
Net proceeds from sales, maturities, or repayment of investments 701,293 519,364
Cost of investments acquired:
Bonds 632,726 407,492
Mortgage loans 7,078 13,140
Real estate - 280
Other invested assets 229 528
Miscellaneous applications 9,273 -
-------------- --------------
Total cost of investments acquired 649,306 421,440
Net decrease in policy loans 95 734
-------------- --------------
Net cash provided by investment activities $ 52,082 $ 98,658
8
United Life & Annuity Insurance Company
Statements of Cash Flows - Statutory Basis (continued)
- --------------------------------------------------------------------------------
Year ended December 31
2002 2001
-------------- --------------
(In Thousands)
Financing and miscellaneous activities
Cash provided:
Capital and surplus paid-in $ - $ 1,528
Borrowed money - 4
Net deposits on deposit-type contract funds (2,938) (5,592)
Other sources 3,988 16,762
-------------- --------------
Net cash provided by financing and miscellaneous activities 1,050 12,702
-------------- --------------
Net (decrease) increase in cash and short-term investments (3,558) 6,991
Cash and short-term investments:
Beginning of year 18,299 11,308
-------------- --------------
End of year $ 14,741 $ 18,299
============== ==============
See accompanying notes - statutory basis.
9
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies
United Life & Annuity Insurance Company (the Company) is domiciled in Iowa
and is a wholly owned subsidiary of ING America Insurance Holdings, Inc.
("ING AIH"). The primary insurance products offered by the Company are
annuity related. The Company also offers life and health insurance
products, however all life and health business is ceded to other insurers.
The Company is presently licensed in 47 states, the District of Columbia
and Puerto Rico.
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported
in the financial statements and accompanying notes. Such estimates and
assumptions could change in the future as more information becomes known,
which could impact the amounts reported and disclosed herein.
Basis of Presentation
The accompanying financial statements of the Company have been prepared in
conformity with accounting practices prescribed or permitted by the
Insurance Department of the State of Iowa (Iowa Insurance Department),
which practices differ from accounting principles generally accepted in the
United States ("GAAP"). The most significant variances from GAAP are as
follows:
Investments: Investments in bonds and mandatorily redeemable preferred
stocks are reported at amortized cost or market value based on the National
Association of Insurance Commissioners ("NAIC") rating; for GAAP, such
fixed maturity investments are designated at purchase as held-to-maturity,
trading or available-for-sale. Held-to-maturity investments are reported at
amortized cost, and the remaining fixed maturity investments are reported
at fair value with unrealized capital gains and losses reported in
operations for those designated as trading and as a separate component of
other comprehensive income in stockholder's equity for those designated as
available-for-sale.
Investments in real estate are reported net of related obligations rather
than on a gross basis as under GAAP. Changes between depreciated cost and
admitted asset investment amounts are credited or charged directly to
unassigned surplus rather than income as would be required under GAAP.
10
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Basis of Presentation (continued)
The Company invests in structured securities including mortgage-backed
securities/collateralized mortgage obligations, asset-backed securities,
collateralized debt obligations, and commercial mortgage-backed securities.
For these structured securities, management compares the undiscounted cash
flows to the carrying value. An other than temporary impairment is
considered to have occurred when the undiscounted cash flows are less than
the carrying value. For structured securities, when a negative yield
results from a revaluation based on new prepayment assumptions (i.e.,
undiscounted cash flows are less than current book value), an other than
temporary impairment is considered to have occurred and the asset is
written down to the value of the undiscounted cash flows. For GAAP, assets
are re-evaluated based on the discounted cash flows using a current market
rate. Impairments are recognized when there has been an adverse change in
cash flows and the fair value is less than book. The asset is then written
down to fair value.
When a decline in fair value is determined to be other than temporary, the
individual security is written down to fair value and the loss accounted
for as a realized loss.
Valuation Reserves: The asset valuation reserve ("AVR") is determined by an
NAIC-prescribed formula and is reported as a liability rather than as a
valuation allowance or an appropriation of surplus. The change in AVR is
reported directly to unassigned surplus.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized gains and losses on sales of fixed-income investments, principally
bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to
maturity based on groupings of individual securities sold in five-year
bands. The net deferral is reported as the interest maintenance reserve
(IMR) in the accompanying balance sheets.
Realized gains and losses on investments are reported in operations net of
federal income tax and transfers to the IMR. Under GAAP, realized capital
gains and losses are reported in the statements of operations on a pretax
basis in the period that the asset giving rise to the gain or loss is sold
and valuation allowances are provided when there has been a decline in
value deemed other than temporary, in which case the provision for such
declines is charged to income.
Valuation allowances, if necessary, are established for mortgage loans
based on the difference between the net value of the collateral, determined
as the fair value of the collateral less estimated costs to obtain and
sell, and the recorded investment in the mortgage loan. Under GAAP, such
allowances are based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, if foreclosure is
probable, on the estimated fair value of the collateral.
11
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Basis of Presentation (continued)
The initial valuation allowance and subsequent changes in the allowance for
mortgage loans as a result of a temporary impairment are charged or
credited directly to unassigned surplus, rather than being included as a
component of earnings as would be required under GAAP.
Policy Acquisition Costs: The costs of acquiring and renewing business are
expensed when incurred. Under GAAP, acquisition costs related to
traditional life insurance, to the extent recoverable from future policy
revenues, are deferred and amortized over the premium-paying period of the
related policies using assumptions consistent with those used in computing
policy benefit reserves. For universal life insurance and investment
products, to the extent recoverable from future gross profits, acquisition
costs are amortized generally in proportion to the present value of
expected gross margins from surrender charges and investment, mortality,
and expense margins.
Premiums: Life premiums are recognized as revenue when due. Premiums for
annuity policies with mortality and morbidity risk, except for guaranteed
interest and group annuity contracts, are also recognized as revenue when
due. Premiums received for annuity policies without mortality or morbidity
risk and for guaranteed interest and group annuity contracts are recorded
using deposit accounting.
Under GAAP, premiums for traditional life insurance products, which include
those products with fixed and guaranteed premiums and benefits and consist
primarily of whole life insurance policies, are recognized as revenue when
due. Group insurance premiums are recognized as premium revenue over the
time period to which the premiums relate. Revenues for universal life,
annuities and guaranteed interest contracts consist of policy charges for
the cost of insurance, policy administration charges, amortization of
policy initiation fees and surrender charges assessed during the period.
Benefit and Contract Reserves: Life policy and contract reserves under
statutory accounting practices are calculated based upon both the net level
premium and Commissioners' Reserve Valuation methods using statutory rates
for mortality and interest. GAAP requires that policy reserves for
traditional products be based upon the net level premium method utilizing
reasonably conservative estimates of mortality, interest, and withdrawals
prevailing when the policies were sold. For interest-sensitive products,
the GAAP policy reserve is equal to the policy fund balance plus an
unearned revenue reserve which reflects the unamortized balance of early
year policy loads over renewal year policy loads.
12
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Basis of Presentation (continued)
Reinsurance: For business ceded to unauthorized reinsurers, statutory
accounting practices require that reinsurance credits permitted by the
treaty be recorded as an offsetting liability and charged against
unassigned surplus. Under GAAP, an allowance for amounts deemed
uncollectible would be established through a charge to earnings. Statutory
income recognized on certain reinsurance treaties representing financing
arrangements is not recognized on a GAAP basis.
Policy and contract liabilities ceded to reinsurers have been reported as
reductions of the related reserves rather than as assets as required under
GAAP.
Commissions allowed by reinsurers on business ceded are reported as income
when received rather than being deferred and amortized with deferred policy
acquisition costs as required under GAAP.
Subsidiary: The accounts and operations of the Company's subsidiary are not
consolidated with the accounts and operations of the Company as would be
required under GAAP.
Nonadmitted Assets: Certain assets designated as "nonadmitted," principally
deferred federal income tax assets, disallowed interest maintenance
reserves, non-operating software, past-due agents' balances, furniture and
equipment, intangible assets, and other assets not specifically identified
as an admitted asset within the Accounting Practices and Procedures Manual
are excluded from the accompanying balance sheets and are charged directly
to unassigned surplus. Under GAAP, such assets are included in the balance
sheet.
Universal Life and Annuity Policies: Revenues for universal life and
annuity policies consist of the entire premium received and benefits
incurred represent the total of death benefits paid and the change in
policy reserves. Under GAAP, premiums received in excess of policy charges
would not be recognized as premium revenue and benefits would represent the
excess of benefits paid over the policy account value and interest credited
to the account values.
13
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Basis of Presentation (continued)
Deferred Income Taxes Deferred tax assets are provided for and admitted to
an amount determined under a standard formula. This formula considers the
amount of differences that will reverse in the subsequent year, taxes paid
in prior years that could be recovered through carrybacks, surplus limits
and the amount of deferred tax liabilities available for offset. Any
deferred tax assets not covered under the formula are non-admitted.
Deferred taxes do not include any amounts for state taxes. Under GAAP, a
deferred tax asset is recorded for the amount of gross deferred tax assets
that are expected to be realized in future years and a valuation allowance
is established for the portion that is not realizable.
Statements of Cash Flows: Cash and short-term investments in the statements
of cash flows represent cash balances and investments with initial
maturities of one year or less. Under GAAP, the corresponding caption of
cash and cash equivalents include cash balances and investments with
initial maturities of three months or less.
Reconciliation to GAAP
The effects of the preceding variances from GAAP on the accompanying
statutory basis financial statements have not been determined, but are
presumed to be material.
Other significant accounting practices are as follows:
Investments
Bonds, preferred stocks, common stocks, short-term investments and
derivative instruments are stated at values prescribed by the NAIC, as
follows:
Bonds not backed by other loans are principally stated at amortized
cost using the interest method.
Single class and multi-class mortgage-backed/asset-backed securities
are valued at amortized cost using the interest method including
anticipated prepayments. Prepayment assumptions are obtained from
dealer surveys or internal estimates and are based on the current
interest rate and economic environment. The retrospective adjustment
method is used to value all such securities except for higher-risk
asset backed securities, which are valued using the prospective
method.
Common stocks are reported at market value as determined by the SVO
and the related unrealized capital gains/(losses) are reported in
unassigned surplus along with adjustment for federal income taxes.
14
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Investments (continued)
The Company analyzes the general account investments to determine
whether there has been an other than temporary decline in fair value
below the amortized cost basis. Management considers the length of the
time and the extent to which the market value has been less than cost;
the financial condition and near-term prospects of the issuer; future
economic conditions and market forecasts; and the Company's intent and
ability to retain the investment in the issuer for a period of time
sufficient to allow for recovery in market value. If it is probable
that all amount due according to the contractual terms of a debt
security will not be collected, an other than temporary impairment is
considered to have occurred.
In addition, the Company invests in structured securities including
mortgage-backed securities/collateralized mortgage obligations,
asset-backed securities, collateralized debt obligations, and
commercial mortgage-backed securities. For these structured
securities, management compares the undiscounted cash flows to the
carrying value. An other than temporary impairment is considered to
have occurred when the undiscounted cash flows are less than the
carrying value.
When a decline in fair value is determined to be other than temporary,
the individual security is written down to fair value and the loss
accounted for as a realized loss.
The Company's noninsurance subsidiary is carried at cost.
Mortgage loans are reported at amortized cost, less allowance for
impairments.
Policy loans are reported at unpaid principal balances.
Real estate is reported at depreciated cost. Depreciation is
calculated on a straight-line basis over the estimated useful lives of
the properties.
Short-term investments are reported at amortized cost. Short-term
investments include investments with maturities of less than one year
at the date of acquisition.
Other invested assets are reported at amortized cost using the
effective interest method. Other invested assets primarily consist of
joint ventures and partnership interests.
Realized capital gains and losses are determined using the specific
identification basis.
15
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Aggregate Reserve for Life Policies and Contracts
Life, annuity, and accident and health reserves are developed by actuarial
methods and are determined based on published tables using statutorily
specified interest rates and valuation methods that will provide, in the
aggregate, reserves that are greater than or equal to the minimum or
guaranteed policy cash value or the amounts required by law. Interest rates
range from 3.00% to 10.00%.
The Company waives the deduction of deferred fractional premiums upon the
death of the insured. It is the Company's practice to return a pro rata
portion of any premium paid beyond the policy month of death, although it
is not contractually required to do so for certain issues.
The methods used in valuation of substandard policies are as follows:
For life, endowment and term policies issued substandard, the standard
reserve during the premium-paying period is increased by 50% of the
gross annual extra premium. Standard reserves are held on Paid-Up
Limited Pay contracts.
For reinsurance accepted with table rating, the reserve established is
a multiple of the standard reserve corresponding to the table rating.
For reinsurance with flat extra premiums, the standard reserve is increased
by 50% of the flat extra.
The tabular interest has been determined from the basic data for the
calculation of policy reserves for all direct ordinary life insurance and
for the portion of group life insurance classified as group Section 79. The
tabular interest of funds not involving life contingencies is calculated as
the current year reserves, plus payments, less prior year reserves, less
funds added.
Reinsurance
Reinsurance premiums, commissions, expense reimbursements, and reserves
related to reinsured business are accounted for on bases consistent with
those used in accounting for the original policies issued and the terms of
the reinsurance contracts. Reserves are based on the terms of the
reinsurance contract and are consistent with the risks assumed. Premiums
and benefits ceded to other companies have been reported as a reduction of
premium revenue and benefits expense. Amounts applicable to reinsurance
ceded for reserves and unpaid claim liabilities have been reported as
reductions of these items, and expense allowances received in connection
with reinsurance ceded have been reflected in operations.
16
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Nonadmitted Assets
Nonadmitted assets are summarized as follows:
December 31
2002 2001
-------------- --------------
(In Thousands)
except share amounts)
Deferred federal income taxes $ 12,176 $ 5,639
Agents' debit balances 22 37
Disallowed Interest Maintenance Reserves - 466
Other 180 830
-------------- --------------
Total nonadmitted assets $ 12,378 $ 6,972
============== ==============
Changes in nonadmitted assets are generally reported directly in surplus as
an increase or decrease in nonadmitted assets. Certain changes are reported
directly in surplus as a change in unrealized capital gains or losses.
Claims and Claims Adjustment Expenses
Claims expenses represent the estimated ultimate net cost of all reported
and unreported claims incurred through December 31, 2002. The Company does
not discount claims and claims adjustment expense reserves. Such estimates
are based on actuarial projections applied to historical claims payment
data. Such liabilities are considered to be reasonable and adequate to
discharge the Company's obligations for claims incurred but unpaid as of
December 31, 2002.
Cash Flow Information
Cash and short-term investments include cash on hand, demand deposits and
short-term fixed maturity instruments (with a maturity of less than one
year at date of acquisition).
The Company borrowed $91,220,000 and repaid $91,220,000 in 2002 and
borrowed $28,650,000 and repaid $28,650,000 during 2001. These borrowings
were on a short-term basis, at an interest rate that approximated current
money market rates and exclude borrowings from reverse dollar repurchase
transactions. Interest paid on borrowed money was $13,000 and $14,000
during 2002 and 2001, respectively.
17
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
- --------------------------------------------------------------------------------
1. Nature of Operations and Significant Accounting Policies (continued)
Separate Accounts
Separate account assets and liabilities held by the Company represent funds
held for the benefit of the Company's variable annuity policy and contract
holders who bear all of the investment risk associated with the policies.
Such policies are of a non-guaranteed nature. All net investment
experience, positive or negative, is attributed to the policy and contract
holders' account values. The assets and liabilities of these accounts are
carried at fair value.
Reserves related to the Company's mortality risk associated with these
policies are included in annuity reserves. The operations of the separate
accounts are not included in the accompanying statements of operations.
Reclassifications
Certain prior year amounts in the Company's statutory basis financial
statements have been reclassified to conform to the 2002 financial
statement presentation.
2. Permitted Statutory Basis Accounting Practices
The financial statements of the Company are presented on the basis of
accounting practices prescribed or permitted by the Iowa Insurance
Department. The Iowa Insurance Department recognizes only statutory
accounting practices prescribed or permitted by the State of Iowa for
determining and reporting the financial condition and results of operations
of an insurance company, for determining its solvency under the Iowa
Insurance Laws. The National Association of Insurance Commissioners' (NAIC)
Accounting Practices and Procedures Manual has been adopted as a component
of prescribed or permitted practices by the State of Iowa . The
Commissioner of Insurance has the right to permit other specific practices
that deviate from prescribed practices.
The Company is required to identify those significant accounting practices
that are permitted, and obtain written approval of the practices from the
Iowa Department of Insurance. As of December 31, 2002 and 2001, the Company
had no such permitted accounting practices.
18
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
- --------------------------------------------------------------------------------
3. Accounting Changes and Corrections of Errors
The Company prepares its statutory financial statements in conformity with
accounting practices prescribed or permitted by the State of Iowa.
Effective January 1, 2001, the State of Iowa required that insurance
companies domiciled in the State of Iowa prepare their statutory basis
financial statements in accordance with the NAIC Accounting Practices and
Procedures Manual subject to any deviations prescribed or permitted by the
State of Iowa insurance commissioner.
Accounting changes adopted to conform to the provisions of the NAIC
Accounting Practices and Procedures Manual are reported as changes in
accounting principles. The cumulative effect of changes in accounting
principles is reported as an adjustment to unassigned surplus in the period
of the change in accounting principle. The cumulative effect is the
difference between the amount of capital and surplus at the beginning of
the year and the amount of capital and surplus that would have been
reported at that date if the new accounting principles had been applied
retroactively for all prior periods.
As a result of these changes, the Company reported a change of accounting
principle, as an adjustment that increased unassigned surplus, by
$1,528,000 as of January 1, 2001.
19
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
- --------------------------------------------------------------------------------
4. Investments
The amortized cost and fair value of bonds and equity securities are as
follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
(In Thousands)
At December 31, 2002:
U.S. Treasury securities and obligations of U.S. government
corporations and agencies $ 112,154 $ 3,593 $ - $ 115,747
States, municipalities, and political subdivisions 452 39 - 491
Public utilities securities 22,776 853 780 22,849
Corporate securities 288,160 12,781 1,452 299,489
Mortgage-backed securities 128,750 6,063 1,149 133,664
Other structured securities 32,357 330 6,202 26,485
Commercial mortgage-backed securities 24,221 1,465 62 25,624
---------- ---------- ---------- ----------
Total fixed maturities 608,870 25,124 9,645 624,349
Common stocks 20 8 18 10
---------- ---------- ---------- ----------
Total equity securities 20 8 18 10
---------- ---------- ---------- ----------
Total $ 608,890 $ 25,132 $ 9,663 $ 624,359
========== ========== ========== ==========
At December 31, 2001:
U.S. Treasury securities and obligations of U.S. government
corporations and agencies $ 83,712 $ 1,013 $ 662 $ 84,063
States, municipalities, and political subdivisions 430 22 - 452
Public utilities securities 1,392 58 - 1,450
Corporate securities 336,745 10,010 4,478 342,277
Mortgage-backed securities 184,916 6,257 2,031 189,142
Other structured securities 43,242 370 6,608 37,004
Commercial mortgage-backed securities 23,381 211 1,815 21,777
---------- ---------- ---------- ----------
Total fixed maturities 673,818 17,941 15,594 676,165
Common stocks 67 120 42 145
---------- ---------- ---------- ----------
Total equity securities 67 120 42 145
---------- ---------- ---------- ----------
Total $ 673,885 $ 18,061 $ 15,636 $ 676,310
========== ========== ========== ==========
20
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
- --------------------------------------------------------------------------------
4. Investments (continued)
The amortized cost and fair value of investments in bonds at December 31,
2002, by contractual maturity, are shown below. Expected maturities may
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
-------------- --------------
(In Thousands)
December 31, 2002
Maturity:
Due in 1 year or less $ 45,649 $ 46,347
Due after 1 year through 5 years 176,154 184,182
Due after 5 years through 10 years 138,555 143,770
Due after 10 years 63,184 64,277
-------------- --------------
423,542 438,576
Mortgage-backed securities 128,750 133,664
Other structured securities 32,357 26,485
Commercial mortgage-backed securities 24,221 25,624
-------------- --------------
Total $ 608,870 $ 624,349
============== ==============
At December 31, 2002, investments in certificates of deposit and bonds,
with an admitted asset value of $23,570,000, were on deposit with state
insurance departments to satisfy regulatory requirements.
Reconciliation of bonds from amortized cost to carrying value as of
December 31, 2002 and 2001 is as follows:
December 31
2002 2001
-------------- --------------
(In Thousands)
Amortized cost $ 608,870 $ 673,818
Less nonadmitted bonds - 65
-------------- --------------
Carrying value $ 608,870 $ 673,753
============== ==============
Proceeds from the sales of investments in bonds and other fixed maturity
interest securities were $578,426,000 and $340,168,000 in 2002 and 2001,
respectively. Gross gains of $14,407,000 and $9,174,000 and gross losses of
$12,961,000 and $4,778,000 during 2002 and 2001, respectively, were
realized on those sales. A portion of the gains realized in 2002 and 2001
has been deferred to future periods in the interest maintenance reserve.
21
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
- --------------------------------------------------------------------------------
4. Investments (continued)
Major categories of net investment income are summarized as follows:
December 31
2002 2001
-------------- --------------
(In Thousands)
Income:
Bonds $ 42,754 $ 53,574
Mortgage loans 2,617 2,683
Policy loans 27 7
Company-occupied property - 40
Other 635 979
-------------- --------------
Total investment income 46,033 57,283
Investment expenses 1,777 1,941
-------------- --------------
Net investment income $ 44,256 $ 55,342
============== ==============
As part of its overall investment strategy, the Company has entered into
agreements to purchase securities as follows:
December 31
2002 2001
-------------- --------------
(In Thousands)
Investment purchase commitments $ 558 $ 3,182
============== ==============
The maximum and minimum lending rates for long-term mortgage loans during
2002 were 7.13% and 3.04%. Fire insurance is required on all properties
covered by mortgage loans and must at least equal the excess of the loan
over the maximum loan which would be permitted by law on the land without
the buildings.
The maximum percentage of any loan to the value of collateral at the time
of the loan, exclusive of insured or guaranteed or purchase money
mortgages, was 57.0% on commercial properties. As of December 31, 2002, the
Company held no mortgages with interest more than 180 days overdue.
22
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
- --------------------------------------------------------------------------------
5. Concentrations of Credit Risk
The Company held less-than-investment-grade bonds with an aggregate book
value of $40,723,000 and $65,103,000 and with an aggregate market value of
$40,582,000 and $60,181,000 at December 31, 2002 and 2001, respectively.
Those holdings amounted to 6.69% of the Company's investments in bonds and
5.40% of total admitted assets at December 31, 2002. The holdings of
less-than-investment-grade bonds are widely diversified and of satisfactory
quality based on the Company's investment policies and credit standards.
The Company held unrated bonds of $17,624,000 and $17,683,000 with an
aggregate NAIC market value of $17,726,000 and $17,206,000 at December 31,
2002 and 2001, respectively. The carrying value of these holdings amounted
to 2.89% of the Company's investment in bonds and 2.34% of the Company's
total admitted assets at December 31, 2002.
At December 31, 2002, the Company's commercial mortgages involved a
concentration of properties located in California (50%) and Pennsylvania
(14%). The remaining commercial mortgages relate to properties located in
10 other states. The portfolio is well diversified; covering many different
types of income-producing properties on which the Company has first
mortgage liens. The maximum mortgage outstanding on any individual property
is $6,430,000.
23
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
- --------------------------------------------------------------------------------
6. Annuity Reserves
At December 31, 2002 and 2001, the Company's annuity reserves, including
those held in separate accounts and deposit fund liabilities that are
subject to discretionary withdrawal with adjustment, subject to
discretionary withdrawal without adjustment, and not subject to
discretionary withdrawal provisions are summarized as follows:
December 31, 2002
Amount Percent
-------------- --------------
(In Thousands)
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 890 - %
At book value less surrender charge 94,326 14
At fair value 61,499 9
-------------- --------------
Subtotal 156,715 23
Subject to discretionary withdrawal (without adjustment)
at book value with minimal or no charge or adjustment 482,267 73
Not subject to discretionary withdrawal 25,543 4
-------------- --------------
Total annuity reserves and deposit fund liabilities
before reinsurance 664,525 100 %
==============
Less reinsurance ceded 1,925
--------------
Net annuity reserves and deposit fund liabilities $ 662,600
==============
December 31, 2001
Amount Percent
-------------- --------------
(In Thousands)
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 701 - %
At book value less surrender charge 130,812 17
At fair value 98,449 13
-------------- --------------
Subtotal 229,962 30
Subject to discretionary withdrawal (without adjustment)
at book value with minimal or no charge or adjustment 515,134 66
Not subject to discretionary withdrawal 28,311 4
-------------- --------------
Total annuity reserves and deposit fund liabilities
before reinsurance 773,407 100 %
==============
Less reinsurance ceded 2,391
--------------
Net annuity reserves and deposit fund liabilities $ 771,016
==============
24
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
- --------------------------------------------------------------------------------
7. Separate Accounts
Most separate account assets and liabilities held by the Company represent
funds held for the benefit of the Company's variable life and annuity
policy and contract holders who bear all the investment risk associated
with the policies. Such policies are of a non-guaranteed nature. All net
investment experience, positive or negative, is attributed to the policy
and contract holders' account values. The assets of these accounts are
carried at fair value.
Premiums, deposits, and other considerations received for the years ended
December 31, 2002 and 2001 were $408,000 and $1,022,000, respectively.
A reconciliation of the amounts transferred to and from the separate
accounts is presented below:
December 31
2002 2001
-------------- --------------
(In Thousands)
Transfers as reported in the summary of operations
of the Separate Accounts Statement:
Transfers to separate accounts $ 408 $ 1,022
Transfers from separate accounts 17,790 19,908
-------------- --------------
Net transfers from separate accounts (17,382) (18,886)
Reconciling adjustments:
Miscellaneous transfers - 18
-------------- --------------
Transfers as reported in the Statement of Operations $ (17,382) $ (18,868)
============== ==============
Reserves for separate accounts by withdrawal characteristics:
Subject to discretionary withdrawal:
With market value adjustment $ - $ -
At book value without market value adjustment less current
surrender charge of 5% or more - -
At market value 61,500 98,450
At book value without market value adjustment less current
surrender charge of less than 5% - -
-------------- --------------
Subtotal 61,500 98,450
Not subject to discretionary withdrawal - -
-------------- --------------
Total separate account liabilities $ 61,500 $ 98,450
============== ==============
25
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
- --------------------------------------------------------------------------------
8. Reinsurance
The Company is involved in ceded reinsurance with other companies for the
purpose of diversifying risk and limiting exposure on larger risks. To the
extent that the assuming companies become unable to meet their obligations
under these treaties, the Company remains contingently liable to its
policyholders for the portion reinsured. To minimize its exposure to
significant losses from retrocessionaire insolvencies, the Company
evaluates the financial condition of the retrocessionaire and monitors
concentrations of credit risk.
The Company's ceded reinsurance arrangements reduced certain items in the
accompanying financial statements by the following amounts:
December 31
2002 2001
-------------- --------------
(In Thousands)
Premiums $ 2,832 $ 3,090
Benefits paid or provided 6,101 6,440
Policy and contract liabilities at year end 91,095 92,451
9. Federal Income Taxes
The Company files a separate Federal income tax return.
Significant components of income taxes incurred as of December 31 are:
December 31
2002 2001
-------------- --------------
(In Thousands)
Current income taxes incurred for the year ended December 31,
consist of the following major components:
Federal tax on operations $ (5,786) $ 3,039
Federal tax on capital gains 3,926 -
Capital loss on carryovers utilized (675) -
-------------- --------------
Total current taxes incurred $ (2,535) $ 3,039
============== ==============
26
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
- --------------------------------------------------------------------------------
9. Federal Income Taxes (continued)
The components of deferred tax assets and deferred tax liabilities as of
December 31 are as follows:
December 31
2002 2001
-------------- --------------
(In Thousands)
Deferred tax assets resulting from book/tax differences in:
Deferred acquisition costs $ 1,096 $ 1,304
Insurance reserves 113 1,324
Investments 3,270 -
Capital loss carry forward 3,445 6,282
Present value of insurance in force 8,751 -
Unrealized loss on investments 1,019 5
Other 725 538
-------------- --------------
Total deferred tax assets 18,419 9,453
Deferred tax assets nonadmitted 12,175 5,640
-------------- --------------
Admitted deferred tax assets $ 6,244 $ 3,813
============== ==============
Deferred tax liabilities resulting from book/tax differences in:
Investments $ 725 $ 295
Other 134 -
-------------- --------------
Total deferred tax liabilities 859 295
-------------- --------------
Net admitted deferred tax asset $ 5,385 $ 3,518
============== ==============
The change in net deferred income taxes is comprised of the following:
December 31
2002 2001 Change
-------------- -------------- --------------
(In Thousands)
Total deferred tax assets $ 18,419 $ 9,453 $ 8,966
Total deferred tax liabilities 859 295 564
-------------- -------------- --------------
Net deferred tax asset $ 17,560 $ 9,158 8,402
============== ==============
Tax effect of items in surplus:
Nonadmitted assets 241
Unrealized losses (1,014)
--------------
Change in net deferred income tax $ 7,629
==============
27
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
- --------------------------------------------------------------------------------
9. Federal Income Taxes (continued)
The provision for federal income taxes expense and change in deferred taxes
differs from the amount obtained by applying the statutory Federal income
tax rate to income (including capital losses) before income taxes for the
following reasons:
Year ended
December 31,
2002
--------------
Ordinary income $ 11,367
Capital gains 634
--------------
Total pre-tax book income $ 12,001
==============
Provision computed at statutory rate $ 4,200
Refinement of deferred tax balances (14,813)
Interest maintenance reserve (579)
Other 1,028
--------------
Total $ (10,164)
==============
Federal income taxes incurred $ (2,535)
Change in net deferred income taxes (7,629)
--------------
Total statutory income taxes $ (10,164)
==============
The amount of federal income taxes incurred that will be available for
recoupment in the event of future net losses is $1,285,000 and $1,366,000
from 2002 and 2001 respectively.
The Company has a recoverable of $1,406,000 at December 31, 2002 and
$3,976,000 at December 31, 2001 from the United States Treasury for federal
income taxes.
The Company has capital loss carry forwards, which expire as follows:
Expiration Year Amount
--------------- ----------------
2005 $ 9,844,000
28
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
- --------------------------------------------------------------------------------
10. Investment in and Advances to Subsidiaries
The Company has one wholly owned noninsurance subsidiary at December 31,
2002, United Variable Services, Inc.
Amounts invested in and advanced to the Company's subsidiary is summarized
as follows:
December 31
2002 2001
-------------- --------------
(In Thousands)
Common stock (cost-$25,000 in 2002 and 2001) $ 25 $ 25
(Payable) receivable from subsidiary - -
11. Capital and Surplus
Under Iowa insurance regulations, the Company is required to maintain a
minimum total capital and surplus of $7,806,000. Additionally, the amount
of dividends which can be paid by the Company to its stockholder without
prior approval of the Iowa Insurance Department is limited to the greater
of 10% of statutory surplus or the statutory net gain from operations.
29
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
- --------------------------------------------------------------------------------
12. Fair Values of Financial Instruments
Life insurance liabilities that contain mortality risk and all nonfinancial
instruments have been excluded from the disclosure requirements. However,
the fair values of liabilities under all insurance contracts are taken into
consideration in the Company's overall management of interest rate risk,
such that the Company's exposure to changing interest rates is minimized
through the matching of investment maturities with amounts due under
insurance contracts. The carrying amounts and fair values of the Company's
financial instruments are summarized as follows:
December 31
2002 2001
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
(In Thousands)
Assets:
Bonds $ 608,870 $ 624,349 $ 673,753 $ 676,101
Unaffiliated common stocks 10 10 145 145
Mortgage loans 34,829 39,729 31,004 29,900
Policy loans 933 933 1,028 1,028
Short-term investments 14,450 14,450 4,000 4,000
Cash 291 291 14,299 14,299
Indebtedness from related parties - - 19 19
Separate account assets 64,410 64,410 103,520 103,520
Receivable for securities 8,308 8,308 476 476
Liabilities:
Individual and group annuities 578,170 575,913 646,841 675,314
Deposit type contract 14,926 14,939 16,982 17,907
Indebtedness to related parties 1,634 1,634 926 926
Separate account liabilities 64,410 64,410 103,520 103,520
Payable for securities - - 1,000 1,000
The following methods and assumptions were used by the Company in
estimating the fair value disclosures for financial instruments in the
accompanying financial statements and notes thereto:
Cash and short-term investments: The carrying amounts reported in the
accompanying balance sheets for these financial instruments
approximate their fair values.
30
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
- --------------------------------------------------------------------------------
12. Fair Values of Financial Instruments (continued)
Fixed maturities and equity securities: The fair values for bonds and
common stocks, reported herein, are based on quoted market prices,
where available. For securities not actively traded, fair values are
estimated using values obtained from independent pricing services or,
in the case of private placements, collateralized mortgage obligations
and other mortgage derivative investments, are estimated by
discounting the expected future cash flows. The discount rates used
vary as a function of factors such as yield, credit quality, and
maturity, which fall within a range between 2% and 15% over the total
portfolio. Fair values determined on this basis can differ from values
published by the NAIC Securities Valuation Office. Market value as
determined by the NAIC as of December 31, 2002 and 2001 is
$611,948,000 and $676,788,000, respectively.
Mortgage loans: Estimated market values for commercial real estate
loans were generated using a discounted cash flow approach. Loans in
good standing are discounted using interest rates determined by U.S.
Treasury yields on December 31 and spreads applied on new loans with
similar characteristics. The amortizing features of all loans are
incorporated in the valuation. Where data on option features is
available, option values are determined using a binomial valuation
method, and are incorporated into the mortgage valuation. Restructured
loans are valued in the same manner; however, these loans were
discounted at a greater spread to reflect increased risk. All
residential loans are valued at their outstanding principal balances,
which approximate their fair values.
Other investment-type insurance contracts: The fair values of the
Company's deferred annuity contracts are estimated based on the cash
surrender values. The carrying values of other policyholder
liabilities, including immediate annuities, dividend accumulations,
supplementary contracts without life contingencies, and premium
deposits, approximate their fair values.
The carrying value of all other financial instruments approximates
their fair value.
13. Commitments and Contingencies
The Company is a party to threatened or pending lawsuits arising from the
normal conduct of business. Due to the climate in insurance and business
litigation, suits against the Company sometimes include claims for
substantial compensatory, consequential or punitive damages and other types
of relief. Moreover, certain claims are asserted as class actions,
purporting to represent a group of similarly situated individuals. While it
is not possible to forecast the outcome of pending lawsuits, in light of
existing insurance, reinsurance and established reserves, it is the opinion
of management that the disposition of such lawsuits will not have a
materially adverse effect on the Company's operations or financial
position.
31
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
- --------------------------------------------------------------------------------
14. Financing Agreements
The Company maintains a revolving loan agreement with SunTrust Bank,
Atlanta (the "Bank"). Under this agreement, which expires July 31, 2003,
the Company can borrow up to $75,000,000 from the Bank. Interest on any
borrowing accrues at an annual rate equal to the cost of funds for the Bank
for the period applicable for the advance plus 0.225% or a rate quoted by
the Bank to the Company for the borrowing. Under this agreement, the
Company incurred interest expense of $3,000 for the year ended December 31,
2002. At December 31, 2002, the Company had $0 payable to the Bank.
The Company also maintains a revolving loan agreement with Bank of New
York, New York (the "Bank"). Under this agreement, the Company can borrow
up to $50,000,000 from the Bank. Interest on any of the Company borrowing
accrues at an annual rate equal to: the cost of funds for the Bank for the
period applicable for the advance plus 0.225% or a rate quoted by the Bank
to the Company for the borrowing. Under this agreement, the Company
incurred no interest expense for the year ended December 31, 2002. At
December 31, 2002, the Company had $0 payable to the Bank.
15. Related Party Transactions
Affiliates
Management and service contracts and all cost sharing arrangements with
other affiliated ING US life insurance companies are allocated among
companies in accordance with normal, generally accepted expense and cost
allocation methods.
Investment Management: The Company has entered into an investment advisory
agreement and an administrative services agreement with ING Investment
Management, LLC ("IIM") under which IIM provides the Company with
investment management and asset liability management services. Total fees
under this agreement were approximately $1,617,000 and $1,287,000 for the
year ended December 31, 2002 and 2001, respectively.
Inter-insurer Services Agreement: The Company has entered into a services
agreement with certain of its affiliated insurance companies in the United
States ("affiliated insurers") whereby the affiliated insurers provide
certain administrative, management, professional, advisory, consulting and
other services to each other. Net amounts paid under these agreements were
$384,000 and $816,000 for the year ended December 31, 2002 and 2001,
respectively.
32
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
- --------------------------------------------------------------------------------
15. Related Party Transactions (continued)
Reciprocal Loan Agreement: The Company has entered into a reciprocal or
revolving loan agreement with ING America Insurance Holdings, Inc. ("ING
AIH") a Delaware corporation and affiliate, to facilitate the handling of
unusual and/or unanticipated short-term cash requirements. Under this
agreement, which expires April 1, 2011, the Company and ING AIH can borrow
up to $22,400,000 from one another. Interest on any borrowing is charged at
the rate of ING AIH's cost of funds for the interest period plus 0.15%.
Interest on any ING AIH borrowings is charged at the rate based on the
prevailing interest rate of U.S. commercial paper available for purchase
with a similar duration. Under this agreement, the company incurred
interest expense of $10,000 and interest income of $40,000 for the year
ended December 31, 2002. At December 31, 2002, the company had $0 payable
to ING AIH and $0 receivable from ING AIH.
16. Guaranty Fund Assessments
Insurance companies are assessed the costs of funding the insolvencies of
other insurance companies by the various state guaranty associations,
generally based on the amount of premiums companies collect in that state.
The Company accrues the cost of future guaranty fund assessments based on
estimates of insurance company insolvencies provided by the National
Organization of Life and Health Insurance Guaranty Associations (NOLHGA)
and the amount of premiums written in each state. The Company reduces the
accrual by credits allowed in some states to reduce future premium taxes by
a portion of assessments in that state. The Company has estimated this
liability to be $474,000 and $474,000 as of December 31, 2002 and 2001,
respectively and has recorded a reserve. The Company has also recorded an
asset of $351,000 and $95,000 as of December 31, 2002 and 2001,
respectively, for future credits to premium taxes for assessments already
paid.
17. Regulatory Risk-Based Capital
Life and health insurance companies are subject to certain Risk-Based
Capital ("RBC") requirements as specified by the NAIC. Under those
requirements, the amount of capital and surplus maintained by a life and
health insurance company is to be determined based on the various risk
factors related to it. At December 31, 2002, the Company meets the RBC
requirements.
33
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis (continued)
- --------------------------------------------------------------------------------
18. Reconciliation to the Annual Statement
Subsequent to the filing of the 2001 Annual Statement, the Company
discovered adjustments that were recorded in the 2001 audited financial
statement but not the 2001 Annual Statement. During 2002, the Company
corrected these adjustments in its Summary of Operations in the 2002 Annual
Statement. As a result, the differences below exist between the 2002 Annual
Statement and the accompanying statutory basis financial statements:
Capital and
Net Income Surplus
-------------- --------------
(In Thousands)
Amounts as reported in the 2002 Annual Statement $ 8,817 $ 82,852
Capital gains tax (1,935) -
Mortgage loan income 198 -
Federal income taxes 4,471 -
Asset valuation reserve - (1,646)
-------------- --------------
$ 11,551 $ 81,206
============== ==============
At December 31, 2001, differences in amounts reported in the 2001 Annual
Statement, as revised, and amounts in the accompanying statutory-basis
financial statements are due to the following:
Capital and
Net Income Surplus
-------------- --------------
(In Thousands)
Amounts as reported in the 2001 Annual Statement $ 11,058 $ 67,443
Capital gains tax benefit 1,935 1,935
Mortgage loan income 368 (198)
Deferred tax asset - 1,930
Federal income tax recoverable - (4,471)
-------------- --------------
$ 13,361 $ 66,639
============== ==============
34
Exhibit 99.7
United Life & Annuity Insurance Company
Balance Sheet - Statutory Basis
- --------------------------------------------------------------------------------
September 30,
2003
--------------
(In Thousands)
Admitted assets
Cash and invested assets:
Bonds $ 595,547
Common stocks 2
Subsidiaries 25
Mortgage loans 38,032
Policy loans 930
Other invested assets 20,530
Cash and short-term investments 1,944
--------------
Total cash and invested assets 657,010
Deferred and uncollected premiums (27)
Accrued investment income 7,021
Reinsurance balances recoverable 53
Federal income tax recoverable 1,709
Net deferred tax asset 2,805
Separate account assets 60,745
Other assets 90
--------------
Total admitted assets $ 729,406
==============
Liabilities and capital and surplus
Liabilities:
Policy and contract liabilities:
Life and annuity reserves 556,238
Deposit type contracts 13,959
--------------
Total policy and contract liabilities 570,197
Accounts payable and accrued expenses 1,434
Indebtedness to related parties 1,219
Interest maintenance reserve 5,262
Asset valuation reserve 5,018
Other liabilities 11,344
Separate account liabilities 60,745
--------------
Total liabilities 655,219
Capital and surplus:
Common stock 8,401
Additional paid-in capital 41,241
Unassigned surplus 24,545
--------------
Total capital and surplus 74,187
--------------
Total liabilities and capital and surplus $ 729,406
==============
1
United Life & Annuity Insurance Company
Statements of Operations - Statutory Basis
- --------------------------------------------------------------------------------
Nine months ended September 30,
2003 2002
-------------- --------------
(In Thousands)
Premiums and other revenues:
Life, annuity, and accident and health premiums $ 1,469 $ 1,027
Policy proceeds and dividends left on deposit 462 179
Net investment income 26,962 33,648
Amortization of interest maintenance reserve 1,498 990
Commissions, expense allowances and reserve adjustments
on reinsurance ceded 286 374
Other income 887 2,064
-------------- --------------
Total premiums and other revenues 31,564 38,282
Benefits paid or provided:
Annuity benefits 15,542 16,562
Surrender benefits 49,821 82,125
Interest on policy or contract funds 55 497
Other benefits (25) -
Life contract withdrawals 877 887
Change in life, annuity, and accident and health reserves (30,518) (57,279)
Net transfers to separate accounts (10,229) (13,329)
-------------- --------------
Total benefits paid or provided 25,523 29,463
Insurance expenses:
Commissions 426 443
General expenses 1,940 1,556
Insurance taxes, licenses and fees, excluding federal
income taxes 337 43
-------------- --------------
Total insurance expenses 2,703 2,042
-------------- --------------
Gain (loss) from operations before federal income
taxes and net realized capital losses 3,338 6,777
Federal income taxes (1,298) (1,873)
-------------- --------------
Gain from operations before net realized capital losses 4,636 8,650
Net realized capital gains or (losses), net of income
taxes 2003 - $0; 2002 - $1,992 and excluding net transfers
to the interest maintenance reserve 2003 - $0; 2002 - $3,003 2,862 (6,482)
-------------- --------------
Net income (loss) $ 7,498 $ 2,168
============== ==============
2
United Life & Annuity Insurance Company
Statements of Changes in Capital and Surplus - Statutory Basis
- --------------------------------------------------------------------------------
Nine months ended September 30,
2003 2002
-------------- --------------
(In Thousands)
Common stock:
Balance at beginning and end of year $ 8,401 $ 8,401
Additional paid-in capital:
Balance at beginning and end of year 41,241 41,241
Unassigned surplus:
Balance at beginning and end of year 33,210 17,800
Net income 7,498 2,168
Change in net unrealized capital gains or losses 78 (2,178)
Change in nonadmitted assets 1,030 (9,847)
Change in asset valuation reserve (921) 4,529
Change in net deferred income tax (3,680) 12,811
Dividends to stockholders (12,400) -
Other adjustments (270) (356)
-------------- --------------
Balance at end of year 24,545 24,927
Total capital and surplus $ 74,187 $ 74,569
============== ==============
3
United Life & Annuity Insurance Company
Statements of Cash Flows - Statutory Basis
- --------------------------------------------------------------------------------
Nine months ended September 30,
2003 2002
-------------- --------------
(In Thousands)
Operations
Premiums, policy proceeds, and other considerations
received, net of reinsurance paid $ 1,469 $ 1,198
Net investment income received 28,981 36,526
Commission and expense allowances received on reinsurance ceded (2,802) 374
Benefits paid (67,204) (84,529)
Net transfers to separate accounts 9,675 15,206
Insurance expenses paid - (2,164)
Federal income taxes (paid) received 995 4,590
Net other (expenses) revenues 1,594 2,158
-------------- --------------
Net cash used in operations (27,292) (26,641)
Investments
Proceeds from sales, maturities, or repayments of investments:
Bonds 816,936 433,061
Mortgage loans 1,277 1,789
Real estate - 54
Other invested assets 64 81
Net gain or (losses) on cash and short-term investments - (264)
Miscellaneous proceeds 14,659 (4,722)
Net tax on capital gains - (1,992)
-------------- --------------
Net proceeds from sales, maturities, or repayments of investments 832,936 428,007
Cost of investments acquired:
Bonds 794,630 388,217
Mortgage loans 4,480 7,106
Other invested assets - 99
Miscellaneous applications 6,582 -
-------------- --------------
Total cost of investments acquired 805,692 395,422
Net increase (decrease) in policy loans (6) (68)
-------------- --------------
Net cash used in investment activities 27,238 32,653
Financing and miscellaneous activities
Cash provided (used):
Net deposits on deposit-type contract funds (967) -
Dividends to stockholders (12,400) -
Other sources 624 (19,537)
-------------- --------------
Net cash used in financing and miscellaneous activities (12,743) (19,537)
Net change in cash and short-term investments (12,797) (13,525)
Cash and short-term investments:
Beginning of year 14,741 18,299
-------------- --------------
End of year $ 1,944 $ 4,774
============== ==============
4
Exhibit 99.8
AGREEMENT AND PLAN OF MERGER
OF
USG ANNUITY & LIFE COMPANY
UNITED LIFE & ANNUITY INSURANCE COMPANY
AND
EQUITABLE LIFE INSURANCE COMPANY OF IOWA
INTO
GOLDEN AMERICAN LIFE INSURANCE COMPANY
TO BE RENAMED
ING USA ANNUITY AND LIFE INSURANCE COMPANY
AGREEMENT AND PLAN OF MERGER, dated as of June 25, 2003 (the "Agreement"),
by and between USG Annuity & Life Company ("USG"), an Oklahoma stock life
insurance company, United Life & Annuity Insurance Company ("ULA"), an Iowa
stock life insurance company, Equitable Life Insurance Company of Iowa ("ELIC"),
an Iowa stock life insurance company, and Golden American Life Insurance Company
("GALIC"), a Delaware stock life insurance company, each having its primary
office for books and records at 909 Locust Street, Des Moines, Iowa 50309;
WHEREAS, each of USG, ULA, ELIC and GALIC is a wholly owned subsidiary of
Lion Connecticut Holdings Inc.; and
WHEREAS, on the date of the Merger but prior to the Effective Time (as
hereinafter defined), GALIC shall have been duly redomesticated to Iowa in
accordance with the applicable provisions of the laws of the State of Delaware
and the State of Iowa (the "Redomestication");
NOW, THEREFORE, in consideration of the mutual agreements, covenants and
provisions contained herein, the parties hereto agree as follows:
1
ARTICLE I
THE MERGER
Section 1.1. The Merger. At the Effective Time (as hereinafter defined)
USG, pursuant to Title 18, Oklahoma Statutes, and ULA and ELIC, pursuant to
Chapter 490, Code of Iowa, will be statutorily merged with and into GALIC and
the separate corporate existence of USG, ULA and ELIC shall cease. GALIC as it
exists from and after the Effective Time is sometimes referred to as the
"Surviving Corporation."
Section 1.2. Effective Time of the Merger. Subject to the terms and
conditions of this Agreement, Articles of Merger shall be duly prepared,
executed and acknowledged by USG, ULA, ELIC and GALIC and shall be filed with
the Commissioner of the Iowa Insurance Division and a Certificate of Merger, as
prescribed by Oklahoma law, shall be duly prepared, executed and acknowledged by
GALIC and shall be filed with the Insurance Commissioner for the State of
Oklahoma. The merger described in Section 1.1 (the "Merger") shall become
effective upon the last to occur of (a) 12:02 a.m., January 1, 2004, (b) 12:02
a.m. on the date on which the Articles of Merger are filed with the Iowa
Secretary of State, or (c) 12:02 a.m. on the date on which the Certificate of
Merger is filed with the Oklahoma Secretary of State, provided the Articles of
Merger have been approved by the Commissioner of the Iowa Insurance Division and
the Certificate of Merger has been approved be the Insurance Commissioner for
the State of Oklahoma and, provided further, that the Redomestication shall have
been duly effected pursuant to Section 508.12 Code of Iowa and Delaware Code
Title 18 Section 4946. The date and time when the Merger shall become effective
is hereinafter referred to as the "Effective Time."
Section 1.3. Effects of the Merger. The Merger shall have the effects as
follows:
1. The parties to this Agreement shall be one insurance corporation which
shall be GALIC, the Surviving Corporation, which by virtue of the
Redomestication, shall be an Iowa stock life insurance company.
2. The separate existence of USG, ULA and ELIC shall cease.
3. The title to real estate and other property owned by each of USG, ULA
and ELIC is vested in GALIC without reversion or impairment.
4. GALIC has all liabilities of each corporation party to the Merger.
5. A proceeding pending against any of USG, ULA or ELIC may be continued
as if the merger did not occur or the Surviving Corporation may be
substituted in the proceeding for USG, ULA or ELIC, respectively.
2
ARTICLE II
THE SURVIVING CORPORATION
Section 2.1. Articles of Incorporation. The Articles of Incorporation of
GALIC as in effect at the Effective Time shall be and remain the Articles of
Incorporation of the Surviving Corporation and the name of the Surviving
Corporation shall be ING USA Annuity and Life Insurance Company.
Section 2.2. Bylaws. The Bylaws of GALIC in effect at the Effective Time
shall be and remain the Bylaws of the Surviving Corporation until altered,
amended or repealed in accordance with their terms and as provided by the
Articles of Incorporation of the Surviving Corporation.
Section 2.3. Directors and Officers. The directors and officers of GALIC in
office at the Effective Time shall continue in office and shall constitute the
directors and officers of the Surviving Corporation for the terms for which such
persons have been elected and until their respective successors shall be elected
or appointed and qualified.
ARTICLE III
CAPITALIZATION
All of the shares of capital stock of USG, ULA and ELIC which are issued
and outstanding immediately prior to the Effective Time, by virtue of the Merger
and by operation of law and without any action on the part of the holder
thereof, shall no longer be outstanding, shall be canceled and retired, and
cease to exist, and each holder of a certificate representing any such shares of
capital stock of USG, ULA and ELIC shall thereafter cease to have any rights
with respect to such shares of capital stock thereof.
ARTICLE IV
MISCELLANEOUS
Section 4.1. Cooperation. Each of USG, ULA, ELIC and GALIC shall take, or
cause to be taken, all action or do or cause to be done, all things necessary,
proper or advisable under the laws of the State of Oklahoma and the State of
Iowa to consummate and effectuate the Merger, subject, however, to the
appropriate vote or consent of the Board of Directors of each of USG, ULA, ELIC
and GALIC in accordance with the requirements of the applicable provisions of
the laws of the State of Oklahoma and the State of Iowa.
Section 4.2. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
Section 4.3. Governing Law. This Agreement shall be governed by and
construed under the laws of the State of Iowa, without regard to the conflict of
laws principles thereof.
3
IN WITNESS WHEREOF, each of USG, ULA, ELIC and GALIC have executed this
Agreement as of the date first written above.
USG Annuity & Life Company
By: /s/ Keith Gubbay
Name: Keith Gubbay
Its: President
United Life & Annuity Insurance Company
By: /s/ Keith Gubbay
Name: Keith Gubbay
Its: President
Equitable Life Insurance Company of Iowa
By: /s/ Keith Gubbay
Name: Keith Gubbay
Its: President
Golden American Life Insurance Company
By: /s/ Keith Gubbay
Name: Keith Gubbay
Its: President
4
Consent of Ernst and Young LLP, Independent Auditors
We consent to the use of the following: our report dated April 25, 2003, with
respect to the financial statements-statutory basis of Ameribest Life Insurance
Company as of December 31, 2002 and 2001, and for each of the two years in the
period ended December 31, 2002; our report dated March 21, 2003, with respect to
the financial statements-statutory basis of Equitable Life Insurance Company of
Iowa as of December 31, 2002 and 2001, and for each of the two years in the
period ended December 31, 2002; our report dated April 25, 2003, with respect to
the financial statements-statutory basis of United Life & Annuity Insurance
Company as of December 31, 2002 and 2001, and for each of the two years in the
period ended December 31, 2002; and our report dated April 25, 2003, with
respect to the financial statements-statutory basis of USG Annuity & Life
Company as of December 31, 2002 and 2001, and for each of the two years in the
period ended December 31, 2002, included in the Registration Statement under the
Securities Act of 1933 (No. 333-104548) and the related Prospectus Supplement of
ING USA Annuity and Life Insurance Company (formerly Golden American Life
Insurance Company).
/s/ Ernst & Young LLP
Atlanta, Georgia
January 7, 2004