As filed with the Securities and Exchange Commission on April 8, 2004
Registration No. 333-104548
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Post-Effective Amendment No. 1
to
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ING USA Annuity and Life Insurance Company
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41-0991508
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Linda E. Senker, Esq. Kimberly J. Smith, Esq.
ING ING
1475 Dunwoody Drive 1475 Dunwoody Drive
West Chester, PA 19380-1478 West Chester, PA 19380-1478
(610) 425-4139 (610) 425-3427
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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The annuities covered by this registration statement are to be issued from time
to time after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box............................................ [XX]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box................................... [XX]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ______________
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ] ______________
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ______________
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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PART I
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ING USA ANNUITY AND LIFE INSURANCE COMPANY
DEFERRED MODIFIED GUARANTEED ANNUITY PROSPECTUS
ING GOLDENSELECT GUARANTEE ANNUITY
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April 30, 2004
This prospectus describes ING GoldenSelect Guarantee Annuity, a group and
individual deferred modified guaranteed annuity contract (the "Contract")
offered by ING USA Annuity and Life Insurance Company ("ING USA," the "Company,"
"we" or "our") (formerly, Golden American Life Insurance Company. The Contract
is available in connection with certain retirement plans that qualify for
special federal income tax treatment ("qualified Contracts") as well as those
that do not qualify for such treatment ("non-qualified Contracts").
The Contract provides a means for you to invest your single premium payment
in the fixed account with guaranteed interest periods. Your contract value will
vary to reflect interest credited. We will credit your contract value with a
fixed rate of interest. We set the interest rates periodically. We generally
offer several guaranteed interest periods. We may offer additional guaranteed
interest periods in some or all states, may not offer all guaranteed interest
periods on all contracts, and the rates for a given guaranteed interest period
may vary among contracts. The interest earned on your money as well as your
principal is guaranteed as long as you hold them until the maturity date. If you
take your money out before the applicable maturity date, we will apply a market
value adjustment ("Market Value Adjustment"). A Market Value Adjustment could
increase or decrease your contract value and/or the amount you take out. You
bear the risk that you may receive less than your principal if we take a Market
Value Adjustment. A surrender charge may also apply to withdrawals from your
contract.
For Contracts sold in some states, not all guaranteed interest periods are
available. You have a right to return a Contract within 10 days after you
receive it for a refund of the adjusted contract value (which may be more or
less than the premium payment you paid), or, if required by your state, the
original amount of your premium payment. Longer free look periods apply in some
states and in certain situations.
REPLACING AN EXISTING ANNUITY WITH THE CONTRACT MAY NOT BE BENEFICIAL TO
YOU. YOUR EXISTING ANNUITY MAY BE SUBJECT TO FEES OR PENALTIES ON SURRENDER, AND
THE CONTRACT MAY HAVE NEW CHARGES.
This prospectus provides information that you should know before investing
and should be kept for future reference.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THIS CONTRACT IS NOT A BANK DEPOSIT AND IS NOT INSURED OR
GUARANTEED BY ANY BANK OR BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENT AGENCY.
Guarantee Annuity - 131798
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TABLE OF CONTENTS
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PAGE
Index of Special Terms.................................................... ii
Fees and Expenses......................................................... 1
ING USA Annuity and Life Insurance Company................................ 1
Financial Statements...................................................... 1
The Fixed Account......................................................... 1
The Annuity Contract...................................................... 4
Contract Date and Contract Year........................................ 4
Annuity Start Date..................................................... 4
Contract Owner......................................................... 4
Joint Owner............................................................ 4
Annuitant.............................................................. 4
Beneficiary............................................................ 5
Change of Contract Owner or Beneficiary................................ 5
Purchase and Availability of the Contract.............................. 5
Crediting of Premium Payment........................................... 6
Administrative Procedures.............................................. 6
Contract Value......................................................... 6
Cash Surrender Value................................................... 6
Surrendering to Receive the Cash Surrender Value....................... 7
The Fixed Account...................................................... 7
Other Important Provisions............................................. 7
Withdrawals............................................................... 7
Death Benefit............................................................. 9
Death Benefit During the Accumulation Phase............................ 9
Death Benefit During the Income Phase.................................. 10
Required Distributions upon Contract Owner's Death..................... 10
Charges and Fees.......................................................... 11
Charges Deducted from the Contract Value............................... 11
Surrender Charge.................................................... 11
Waiver of Surrender Charge for Extended Medical Coverage............ 11
Free Withdrawal Amount.............................................. 11
Surrender Charge for Excess Withdrawals............................. 12
Premium Taxes....................................................... 12
The Annuity Options....................................................... 12
Other Contract Provisions................................................. 14
Other Information......................................................... 16
State Regulation....................................................... 16
Legal Proceedings...................................................... 16
Experts............................................................. 16
Further Information.................................................... 16
Incorporation of Certain Documents by
Reference........................................................... 17
Federal Tax Considerations................................................ 17
Appendix A
Market Value Adjustment Examples....................................... A1
Appendix B
Surrender Charge Examples............................................... B1
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INDEX OF SPECIAL TERMS
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The following special terms are used throughout this prospectus. Refer to the
page(s) listed for an explanation of each term:
SPECIAL TERM PAGE
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Annuitant 4
Annuity Start Date 4
Cash Surrender Value 6
Contract Date 4
Contract Owner 4
Contract Value 6
Contract Year 6
Free Withdrawal Amount 11
Market Value Adjustment 3
The following terms as used in this prospectus have the same or substituted
meanings as the corresponding terms currently used in the Contract:
TERM USED IN THIS PROSPECTUS CORRESPONDING TERM USED IN THE CONTRACT
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Annuity Start Date Annuity Commencement Date
Contract Owner Owner or Certificate Owner
Contract Value Accumulation Value
Free Look Period Right to Examine Period
Guaranteed Interest Period Guarantee Period
Withdrawals Partial Withdrawals
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FEES AND EXPENSES
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CONTRACT OWNER TRANSACTION EXPENSES*
SURRENDER CHARGE:
COMPLETE YEARS ELAPSED 0 1 2 3 4 5 6 7 8+
SINCE START OF GUARANTEE PERIOD
SURRENDER CHARGE 8% 7% 6% 5% 4% 3% 2% 1% 0%
* A Market Value Adjustment may apply to certain transactions. This may
increase or decrease your contract value and/or your surrender amount.
In addition, if you withdraw money from your Contract, or if you begin
receiving annuity payments, we may deduct a premium tax charge of 0%
to 3.5% to pay to your state.
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ING USA ANNUITY AND LIFE INSURANCE COMPANY
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ING USA Annuity and Life Insurance Company (formerly Golden American Life
Insurance Company) is an Iowa stock life insurance company, which was originally
incorporated in Minnesota on January 2, 1973. ING USA is a wholly owned
subsidiary of Lion Connecticut Holdings Inc. ("Lion Connecticut"), which in turn
is a wholly owned subsidiary of ING Groep N.V. ("ING"), a global financial
services holding company based in The Netherlands. ING USA is authorized to sell
insurance and annuities in all states, except New York, and the District of
Columbia. Lion Connecticut is the holding company for ING USA, Directed
Services, Inc., the distributor of the Contracts, and other interests.
Our principal office is located at 1475 Dunwoody Drive, West Chester,
Pennsylvania 19380.
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FINANCIAL STATEMENTS
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The audited consolidated financial statements of ING USA as of December 31, 2003
and 2002, and for each of the three years in the period ended December 31, 2003,
are included in this prospectus.
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THE FIXED ACCOUNT
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Assets supporting your contract value are invested in our Fixed Account. Your
premium payment (less withdrawals and less applicable premium taxes, if any)
will earn interest at the initial guarantee rate which is an annual effective
rate of interest. You may select the duration of your initial guarantee period
from among the durations offered by us. The duration you select will determine
your initial guarantee rate. We generally offer several guaranteed interest,
although we may not offer all these periods in the future or through all
broker-dealers. We may offer additional guaranteed interest periods in some or
all states, may not offer all guaranteed interest periods on all contracts, and
the rates for a given guaranteed interest period may vary among contracts. We
will credit your premium payment with a guaranteed interest rate for the
interest period you select, so long as you do not withdraw money before the end
of the guaranteed interest period. Each guaranteed interest period ends on its
maturity date which is the last day of the last contract year in the guarantee
period.
Guarantee Annuity - 131798
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If you surrender, withdraw, or annuitize your investment before the 30-day
period prior to the end of the guaranteed interest period, we will apply a
Market Value Adjustment to the amount of the transaction in excess of the free
withdrawal amount. A Market Value Adjustment could increase or decrease the
amount you surrender, withdraw, or annuitize, depending on current interest
rates at the time of the transaction. You bear the risk that you may receive
less than your principal if we apply a Market Value Adjustment. Assets
supporting your contract value are available to fund the claims of all classes
of our customers, contract owners and other creditors. Interests under your
Contract are registered under the Securities Act of 1933, but the Fixed Account
is not registered under the 1940 Act.
SELECTING A GUARANTEED INTEREST PERIOD
A guaranteed interest period is the period that a rate of interest is guaranteed
to be credited to your contract value. We may at any time decrease or increase
the number of guaranteed interest periods offered. Your contract value is the
sum of your premium payment and the interest credited as adjusted for any
withdrawals (including any Market Value Adjustment applied to such withdrawal)
or other charges we may impose. Your contract value will be credited with the
guaranteed interest rate in effect for the guaranteed interest period you
selected when we receive and accept your premium. We will credit interest daily
at a rate which yields the quoted guaranteed interest rate.
GUARANTEED INTEREST RATES
The interest rate to be credited to your contract value is guaranteed as long as
you do not take your money out until the period beginning 30 days before the
applicable maturity date. We do not have a specific formula for establishing the
guaranteed interest rates for the different guaranteed interest periods. We
determine guaranteed interest rates at our sole discretion. To find out the
current guaranteed interest rate for a guaranteed interest period you are
interested in, please contact our Customer Service Center or your registered
representative. The determination may be influenced by the interest rates on
fixed income investments in which we may invest with the amounts we receive
under the Contracts. We will invest these amounts primarily in investment-grade
fixed income securities (i.e., rated by Standard & Poor's rating system to be
suitable for prudent investors) although we are not obligated to invest
according to any particular strategy, except as may be required by applicable
law. You will have no direct or indirect interest in these investments. We will
also consider other factors in determining the guaranteed interest rates,
including regulatory and tax requirements, sales commissions and administrative
expenses borne by us, general economic trends and competitive factors. We cannot
predict the level of future interest rates.
We may from time to time at our discretion offer interest rate specials for new
premiums that are higher than the current base interest rate. Renewal rates for
such rate specials will be based on the base interest rate and not on the
special rates initially declared.
RENEWAL INTEREST RATES
Unless you elect to surrender your contract, a subsequent guarantee period will
automatically begin at the end of a guarantee period. We may not offer the same
guarantee interest periods for renewal as for initial periods. If offered at the
time of your renewal, each subsequent guarantee period will be of the same
duration as the previous guarantee period unless you elect in writing, on any
day within the 30-day period preceding the end of the current guarantee period,
a guarantee period of a different duration from among those offered by us at
that time. At least 30 calendar days before the maturity date of the current
guarantee period, or earlier if required by state law, we will send you a notice
of the guaranteed interest periods that are available. If you do not elect a
different guarantee period, and your current guaranteed interest period is not
available as a renewal period or would go beyond the annuity start date, we will
transfer your contract value to the next shortest guaranteed interest period
which does not go beyond the annuity start date. Your contract value will then
earn interest at a guarantee rate that we have declared for that duration. The
guarantee rate for the guarantee period automatically applied in these
circumstances may be higher or lower than the guarantee rate for longer
durations.
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The contract value at the beginning of any renewal guarantee period will be
equal to the contract value at the end of the guarantee period just ending. This
contract value, less withdrawals made after the beginning of the subsequent
guarantee period, will earn interest compounded annually at the renewal
guarantee rate.
WITHDRAWALS
During the accumulation phase, you may withdraw a portion of your contract
value. Beginning 28 days after the contract date, you may make systematic
withdrawals of only the interest earned during the prior month, quarter or year,
depending on the frequency chosen, under our systematic withdrawal option. A
withdrawal may be subject to a Market Value Adjustment and, in some cases, a
surrender charge (see "Charges and Fees"). Be aware that withdrawals may have
federal income tax consequences, including a 10% penalty tax.
MARKET VALUE ADJUSTMENT
A Market Value Adjustment may decrease, increase or have no effect on your
contract value. We will apply a Market Value Adjustment to amounts in excess of
the free withdrawal amount (i) whenever you withdraw money (unless made within
the 30 day period before the maturity date of the applicable guaranteed interest
period) and (ii) if on the annuity start date a guaranteed interest period does
not end on or within 30 days of the annuity start date. The Market Value
Adjustment resets at the start of each guarantee period. We determine the Market
Value Adjustment by multiplying the amount you withdraw or apply to an income
plan by the following factor:
{ (1+I)/(1+J+.0050) }^(N/365) }-1*
where:
"I" is the Index Rate (as defined below), determined at the beginning of
the current guarantee period;
"J" is the Index Rate, determined at the time of surrender or withdrawal
for a security with time to maturity equal to the number of years
(fractional years rounded up to the next full year) remaining in the
guarantee period from the date of surrender or withdrawal; and
"N" is the number of days from the date of surrender or withdrawal to the
end of the current guarantee period.
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* For contracts issued in Florida, the factor is [(1+I)/(1+J+.0025)]^N/365 - 1.
The Index Rate is the average of the Ask Yields for U.S. Treasury Strips as
quoted by a national quoting service for a period equal to an applicable
guaranteed interest period. The average currently is based on the period
starting from the 22nd day of the calendar month two months prior to the month
of the Index Rate determination and ending the 21st day of the calendar month
immediately before the month of determination. We currently calculate the Index
Rate once each calendar month but have the right to calculate it more
frequently. The Index Rate will always be based on a period of at least 28 days.
If the Ask Yields are no longer available, we will determine the Index Rate by
using a suitable and approved, if required, replacement method.
A Market Value Adjustment may be positive, negative or result in no change. In
general, if interest rates are rising, you bear the risk that any Market Value
Adjustment will likely be negative and reduce your contract value. On the other
hand, if interest rates are falling, it is more likely that you will receive a
positive Market Value Adjustment that increases your contract value. In the
event of a full surrender or annuitization, we will add or subtract any Market
Value Adjustment from the amount surrendered or annuitized. In the event of a
partial withdrawal or annuitization, we will add or subtract any Market Value
Adjustment from the total amount withdrawn or annuitized in order to provide the
amount requested. If a negative Market Value Adjustment exceeds your contract
value, we will consider your request to be a full surrender or annuitization.
Several examples which illustrate how the Market Value Adjustment works are
included in Appendix A.
Guarantee Annuity - 131798
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THE ANNUITY CONTRACT
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The Contract described in this prospectus is a deferred fixed annuity contract.
The Contract provides a means for you to invest in the Fixed Account of the
Company.
CONTRACT DATE AND CONTRACT YEAR
The date the Contract became effective is the contract date. Each 12-month
period following the contract date is a contract year.
ANNUITY START DATE
The annuity start date is the date you start receiving annuity payments under
your Contract. The Contract, like all deferred annuity contracts, has two
phases: the accumulation phase and the income phase. The accumulation phase is
the period between the contract date and the annuity start date. The income
phase begins when you start receiving regular annuity payments from your
Contract on the annuity start date.
CONTRACT OWNER
You are the contract owner. You are also the annuitant unless another annuitant
is named in the application. You have the rights and options described in the
Contract. One or more persons may own the Contract. The death benefit becomes
payable when you die. In the case of a sole contract owner who dies before the
income phase begins, we will pay the beneficiary the death benefit then due. The
sole contract owner's estate will be the beneficiary if no beneficiary has been
designated or the beneficiary has predeceased the contract owner. In the case of
a joint owner of the Contract dying before the income phase begins, we will
designate the surviving contract owner as the beneficiary. This will override
any previous beneficiary designation. If the contract owner is a trust and a
beneficial owner of the trust has been designated, the beneficial owner will be
treated as the contract owner for determining the death benefit. If a beneficial
owner is changed or added after the contract date, this will be treated as a
change of contract owner for determining the death benefit.
JOINT OWNER. For non-qualified Contracts only, joint owners may be named in a
written request before the Contract is in effect. Joint owners may independently
exercise transfers and other transactions allowed under the Contract. All other
rights of ownership must be exercised by both owners. Joint owners own equal
shares of any benefits accruing or payments made to them. All rights of a joint
owner end at death of that owner if the other joint owner survives. The entire
interest of the deceased joint owner in the Contract will pass to the surviving
joint owner.
ANNUITANT
The annuitant is the person designated by you to be the measuring life in
determining annuity payments. The annuitant's age determines when the income
phase must begin and the amount of the annuity payments to be paid. You are the
annuitant unless you choose to name another person. The annuitant may not be
changed after the Contract is in effect.
The contract owner will receive the annuity benefits of the Contract if the
annuitant is living on the annuity start date. If the annuitant dies before the
annuity start date, and a contingent annuitant has been named, the contingent
annuitant becomes the annuitant (unless the contract owner is not an individual,
in which case the death benefit becomes payable).
When the annuitant dies before the annuity start date, the contract owner will
become the annuitant. The contract owner may designate a new annuitant within 60
days of the death of the annuitant.
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If there is no contingent annuitant when the annuitant dies before the annuity
start date and the contract owner is not an individual, we will pay the
designated beneficiary the death benefit then due. If a beneficiary has not been
designated, or if there is no designated beneficiary living, the contract owner
will be the beneficiary. If the annuitant was the sole contract owner and there
is no beneficiary designation, the annuitant's estate will be the beneficiary.
Regardless of whether a death benefit is payable, if the annuitant dies and any
contract owner is not an individual, distribution rules under federal tax law
will apply. You should consult your tax advisor for more information if you are
not an individual.
BENEFICIARY
The beneficiary is named by you in a written request. The beneficiary is the
person who receives any death benefit proceeds and who may become the successor
contract owner if the contract owner who is a spouse (or the annuitant if the
contract owner is other than an individual) dies before the annuity start date.
We pay death benefits to the primary beneficiary (unless there are joint owners,
in which case death proceeds are payable to the surviving owner(s)).
If the beneficiary dies before the annuitant or the contract owner, the death
benefit proceeds are paid to the contingent beneficiary, if any. If there is no
surviving beneficiary, we pay the death benefit proceeds to the contract owner's
estate.
One or more persons may be a beneficiary or contingent beneficiary. In the case
of more than one beneficiary, we will assume any death benefit proceeds are to
be paid in equal shares to the surviving beneficiaries, unless you indicate
otherwise in writing.
You have the right to change beneficiaries during the annuitant's lifetime
unless you have designated an irrevocable beneficiary. When an irrevocable
beneficiary has been designated, you and the irrevocable beneficiary may have to
act together to exercise some of the rights and options under the Contract.
CHANGE OF CONTRACT OWNER OR BENEFICIARY. During the annuitant's lifetime, you
may transfer ownership of a non-qualified Contract. You may also change the
beneficiary. All requests for changes must be in writing and submitted to our
Customer Service Center in good order. The change will be effective as of the
day we receive the request. The change will not affect any payment made or
action taken by us before recording the change.
A change of owner likely has tax consequences. See "Federal Tax Considerations
in this prospectus.
PURCHASE AND AVAILABILITY OF THE CONTRACT
We will issue a Contract only if both the annuitant and the contract owner are
age 90 or younger. The single premium payment must be $5,000 or more ($1,500 for
qualified Contracts). Under certain circumstances, we may waive the minimum
premium payment requirement. We may also change the minimum initial premium
requirement for certain group or sponsored arrangements. Any premium payment
that would cause the contract value of all annuities that you maintain with us
to exceed $1,000,000 requires our prior approval.
The Contract is designed for people seeking long-term tax-deferred accumulation
of assets, generally for retirement or other long-term purposes. The
tax-deferred feature is more attractive to people in high federal and state tax
brackets. YOU SHOULD NOT BUY THIS CONTRACT: (1) IF YOU ARE LOOKING FOR A
SHORT-TERM INVESTMENT; (2) IF YOU CANNOT RISK GETTING BACK LESS MONEY THAN YOU
PUT IN; OR (3) IF YOUR ASSETS ARE IN A PLAN WHICH PROVIDES FOR TAX-DEFERRAL AND
YOU SEE NO OTHER REASON TO PURCHASE THIS CONTRACT.
IRAs and other qualified plans already have the tax-deferral feature found in
this Contract. For an additional cost, the Contract provides other features and
benefits including death benefits and the ability to receive a lifetime income.
You should not purchase a qualified Contract unless you want these other
features and benefits, taking into account their cost. See "Fees and Expenses"
in this prospectus.
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We and our affiliates offer other variable products that may offer some of the
same investment portfolios. These products have different benefits and charges,
and may or may not better match your needs.
CREDITING OF PREMIUM PAYMENT
We will process your premium payment within 2 business days after receipt, if
the application and all information necessary for processing the Contract are
complete. In certain states we also accept premium payments by wire order. Wire
transmittals must be accompanied by sufficient electronically transmitted data.
We may retain your premium payment for up to 5 business days while attempting to
complete an incomplete application. If the application cannot be completed
within this period, we will inform you of the reasons for the delay. We will
also return the premium payment immediately unless you direct us to hold the
premium payment until the application is completed. If you choose to have us
hold the premium payment, it will be held in a non-interest bearing account.
If your premium payment was transmitted by wire order from your broker-dealer,
we will follow one of the following two procedures after we receive and accept
the wire order and investment instructions. The procedure we follow depends on
state availability and the procedures of your broker-dealer.
(1) If either your state or broker-dealer do not permit us to issue a
Contract without an application, we reserve the right to rescind
the Contract if we do not receive and accept a properly completed
application or enrollment form within 5 days of the premium
payment. If we do not receive the application or form within 5 days
of the premium payment, we will refund the contract value plus any
charges we deducted, and the Contract will be voided. Some states
require that we return the premium paid, in which case we will
comply.
(2) If your state and broker-dealer allow us to issue a Contract
without an application, we will issue and mail the Contract to you
or your representative, together with a Contract Acknowledgement
and Delivery Statement for your execution. Until our Customer
Service Center receives the executed Contract Acknowledgement and
Delivery Statement, neither you nor the broker-dealer may execute
any financial transactions on your Contract unless they are
requested in writing by you. We may require additional information
before complying with your request (e.g., signature guarantee).
We may also refuse to accept certain forms of premium payments or loan
repayments, if applicable, (traveler's checks, for example) or restrict the
amount of certain forms of premium payments or loan repayments (money orders
totaling more than $500, for example). In addition, we may require information
as to why a particular form of payment was used (third party checks, for
example) and the source of the funds of such payment in order to determine
whether or not we will accept it. Use of an unacceptable form of payment may
result in us returning your premium payment and not issuing the contract.
ADMINISTRATIVE PROCEDURES
We may accept a request for Contract service in writing, by telephone, or other
approved electronic means, subject to our administrative procedures, which vary
depending on the type of service requested and may include proper completion of
certain forms, providing appropriate identifying information, and/or other
administrative requirements.
CONTRACT VALUE
We determine your contract value on a daily basis beginning on the contract
date. Your contract value is the sum of the premium payment plus credited
interest, minus any withdrawals (including any Market Value Adjustment applied
to such withdrawal), contract fees, and premium taxes. If you surrender your
contract during the 30-day period preceding a maturity date, you will receive
the contract value.
CASH SURRENDER VALUE
The cash surrender value is the amount you receive when you surrender the
Contract, other than during the 30-day period prior to a maturity date. The cash
surrender value will fluctuate daily based on the interest credited to the
contract value and any Market Value Adjustment. We do not guarantee any minimum
cash
Guarantee Annuity - 131798
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surrender value. On any date during the accumulation phase, we calculate
the cash surrender value as follows: we start with your contract value, then we
adjust for any Market Value Adjustment, then we deduct any surrender charge, any
charge for premium taxes, and any other charges incurred but not yet deducted.
SURRENDERING TO RECEIVE THE CASH SURRENDER VALUE
You may surrender the Contract at any time while the annuitant is living and
before the annuity start date. A surrender will be effective on the date your
written request and the Contract are received at our Customer Service Center. We
will determine and pay the cash surrender value after receipt of all paperwork
required in order for us to process your surrender. Once paid, all benefits
under the Contract will be terminated. You may receive the cash surrender value
in a single sum payment or apply it under one or more annuity options. We will
usually pay the cash surrender value within 7 days.
Consult your tax advisor regarding the tax consequences associated with
surrendering your Contract. A surrender made before you reach age 59 1/2 may
result in a 10% tax penalty. See "Federal Tax Considerations" for more details.
THE FIXED ACCOUNT
The Fixed Account is a segregated asset account which contains the assets that
support a contract owner's contract value. See "The Fixed Account" for more
information.
OTHER IMPORTANT PROVISIONS
See "Withdrawals," "Death Benefit," "Charges and Fees," "The Annuity Options"
and "Other Contract Provisions" in this prospectus for information on other
important provisions in your Contract.
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WITHDRAWALS
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Any time during the accumulation phase and before the death of the owner, you
may withdraw all or part of your money. Keep in mind that your contract value
after the withdrawal must equal or exceed $1,000 or we will treat the withdrawal
request as a request to surrender the Contract. We deduct a surrender charge if
you surrender your Contract or withdraw an amount exceeding the free withdrawal
amount. The free withdrawal amount is equal to the prior 12 months' interest
earned and not previously withdrawn. The surrender charge varies by the length
of the guarantee period selected, beginning with 8% during year 1 and reducing
by 1% per year to the end of the guarantee period. No surrender charge is
imposed upon a surrender made during the 30-day period immediately preceding the
end of a guarantee period. The surrender charge period resets at the beginning
of each guarantee period. It is charged against the contract value and is based
on the amount of the withdrawal.
We will apply a Market Value Adjustment to any withdrawal in excess of the free
withdrawal amount taken prior to the 30-day period before the maturity date.
Definitive guidance on the proper federal tax treatment of the market value
adjustment has not been issued. You may want to discuss the potential tax
consequences of a market value adjustment with your tax adviser. We will
determine the contract value as of the close of business on the day we receive
your withdrawal request at our Customer Service Center. The contract value may
be more or less than the premium payment made.
Upon surrender, surrender charges and a Market Value Adjustment will be applied
retroactively with respect to any free withdrawal amount previously withdrawn
within the same contract year as the surrender.
We offer the following three withdrawal options:
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REGULAR WITHDRAWALS
After the free look period, you may make regular withdrawals. Each withdrawal
must be a minimum of $100. We will apply a surrender charge and Market Value
Adjustment to any regular withdrawal in excess of the free withdrawal amount
that is taken prior to the 30-day period before the maturity date.
SYSTEMATIC WITHDRAWALS
You may choose to receive automatic systematic withdrawal payments. Systematic
withdrawals are limited to interest earnings during the prior month, quarter, or
year, depending on the frequency you chose. Systematic withdrawals are not
subject to a Market Value Adjustment, unless you have added the Fixed Dollar
Systematic Withdrawal Feature discussed below and the payments exceed the free
withdrawal amount. Systematic withdrawals under the Fixed Dollar Systematic
Withdrawal Feature are available only in connection with Section 72(q) or 72(t)
distributions.
Systematic withdrawals may be taken monthly, quarterly or annually. You decide
when you would like systematic payments to start as long as they start at least
28 days after your contract date. You also select the date on which the
systematic withdrawals will be made, but this date cannot be later than the 28th
day of the month. If you have elected to receive systematic withdrawals but have
not chosen a date, we will make the withdrawals on the same calendar day of each
month as your contract date. If your contract date is after the 28th , your
systematic withdrawal will be made on the 28th day of each month.
Each systematic withdrawal amount must be a minimum of $100. The amount of your
systematic withdrawal can either be (1) a fixed dollar amount, or (2) an amount
based on a percentage of the interest earned and not previously withdrawn, but
in either case is limited to interest earnings. If your systematic withdrawal is
a fixed dollar amount and the amount to be withdrawn would exceed the applicable
free withdrawal amount on any withdrawal date, we will automatically reduce the
amount withdrawn so that it equals such free withdrawal amount. Thus, your fixed
dollar systematic withdrawals will never exceed the free withdrawal amount. If
you want fixed dollar systematic withdrawals to exceed the free withdrawal
amount and are willing to incur associated surrender charges, consider the Fixed
Dollar Systematic Withdrawal Feature which you may add to your regular
systematic withdrawal program.
You may change the amount or percentage of your systematic withdrawal once each
contract year or cancel this option at any time by sending satisfactory notice
to our Customer Service Center at least 7 days before the next scheduled
withdrawal date. The systematic withdrawal option may commence in a contract
year where a regular withdrawal has been taken but you may not change the amount
or percentage of your withdrawals in any contract year during which you have
previously taken a regular withdrawal. You may not elect the systematic
withdrawal option if you are taking IRA withdrawals.
Subject to availability, a spousal or non-spousal beneficiary may elect to
receive death benefits as payments over the beneficiary's lifetime ("stretch").
"Stretch" payments will be subject to the same limitations as systematic
withdrawals, and non-qualified "stretch" payments will be reported on the same
basis as other systematic withdrawals.
FIXED DOLLAR SYSTEMATIC WITHDRAWAL FEATURE. You may add the Fixed Dollar
Systematic Withdrawal Feature to your regular fixed dollar systematic withdrawal
program. This feature allows you to receive a systematic withdrawal in a fixed
dollar amount regardless of any surrender charges or Market Value Adjustments.
Systematic withdrawals under the Fixed Dollar Systematic Withdrawal Feature are
available only in connection with Section 72(q) or 72(t) distributions. You
choose the amount of the fixed systematic withdrawals. We will assess a
surrender charge and Market Value Adjustment on the withdrawal date if the
withdrawal exceeds the free withdrawal amount on the withdrawal date. We will
apply the surrender charge and any Market Value Adjustment directly to your
contract value (rather than to the systematic withdrawal) so that the amount of
each systematic withdrawal remains fixed.
Flat dollar systematic withdrawals which are intended to satisfy the
requirements of Section 72(q) or 72(t) of the Tax Code may exceed the free
withdrawal amount. Such withdrawals are subject to surrender charges and Market
Value Adjustment when they exceed the applicable free withdrawal amount.
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IRA WITHDRAWALS
If you have a non-Roth IRA Contract and will be at least age 70 1/2 during the
current calendar year, you may elect to have distributions made to you to
satisfy requirements imposed by Federal tax law. IRA withdrawals provide payout
of amounts required to be distributed by the Internal Revenue Service rules
governing mandatory distributions under qualified plans. We will send you a
notice before your distributions commence. You may elect to take IRA withdrawals
at that time, or at a later date. You may not elect IRA withdrawals and
participate in systematic withdrawals at the same time. If you do not elect to
take IRA withdrawals, and distributions are required by Federal tax law,
distributions adequate to satisfy the requirements imposed by Federal tax law
may be made. Thus, if you are participating in systematic withdrawals,
distributions under that option must be adequate to satisfy the mandatory
distribution rules imposed by federal tax law.
You may choose to receive IRA withdrawals on a monthly, quarterly or annual
basis. Under this option, you may elect payments to start as early as 28 days
after the contract date. You select the day of the month when the withdrawals
will be made, but it cannot be later than the 28th day of the month. If no date
is selected, we will make the withdrawals on the same calendar day of the month
as the contract date.
You may request that we calculate for you the amount that is required to be
withdrawn from your Contract each year based on the information you give us and
various choices you make. For information regarding the calculation and choices
you have to make, see the Statement of Additional Information. Or, we will
accept your written instructions regarding the calculated amount required to be
withdrawn from your Contract each year. The minimum dollar amount you can
withdraw is $100. When we determine the required IRA withdrawal amount for a
taxable year based on the frequency you select, if that amount is less than
$100, we will pay $100. At any time where the IRA withdrawal amount is greater
than the contract value, we will cancel the Contract and send you the amount of
the cash surrender value.
You may change the payment frequency of your IRA withdrawals once each contract
year or cancel this option at any time by sending us satisfactory notice to our
Customer Service Center at least 7 days before the next scheduled withdrawal
date.
An IRA withdrawal in excess of the amount allowed under systematic withdrawals
will be subject to a Market Value Adjustment.
CONSULT YOUR TAX ADVISER REGARDING THE TAX CONSEQUENCES ASSOCIATED WITH TAKING
WITHDRAWALS. You are responsible for determining that withdrawals comply with
applicable law. A withdrawal made before the taxpayer reaches age 59 1/2 may
result in a 10% penalty tax. See "Federal Tax Considerations" for more details.
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DEATH BENEFIT
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DEATH BENEFIT DURING THE ACCUMULATION PHASE
During the accumulation phase, a death benefit is payable when either, the
contract owner or the first of joint owners dies, or the annuitant dies (when a
contract owner is not an individual). Assuming you are the contract owner, your
beneficiary will receive a death benefit unless the beneficiary is your
surviving spouse and elects to continue the Contract. The death benefit is equal
to the contract value. The death benefit value is calculated at the close of the
business day on which we receive written notice and due proof of death, as well
as any required paperwork, at our Customer Service Center ("claim date").
Amounts could be reduced by a charge for premium taxes owed and withdrawals not
previously deducted.
If your beneficiary elects to delay receipt of the death benefit until a date
after the time of death, the amount of the benefit payable in the future may be
affected. The death benefit value will not continue to accrue at the current
guaranteed interest period rate, but will be credited with the rate being
offered under new contracts at such time for the guarantee period elected by the
beneficiary. Please note if your beneficiary elects a guarantee period of more
than five years, the distribution may be subject to a Market Value
Guarantee Annuity - 131798
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Adjustment. The proceeds may be received in a single sum, applied to any of the
annuity options, or, if available, paid over the beneficiary's lifetime. (See
"Systematic Withdrawals" above). A beneficiary's right to elect an income phase
payment option or receive a lump-sum payment may have been restricted by the
contract owner. If so, such rights or options will not be available to the
beneficiary.
If we do not receive a request to apply the death benefit proceeds to an annuity
option, we will make a single sum distribution. Unless you elect otherwise, the
distribution will be made into an interest bearing account, backed by our
general account, that is accessed by the beneficiary through a checkbook
feature. The beneficiary may access death benefit proceeds at any time without
penalty. We will generally distribute death benefit proceeds within 7 days after
the claim date. For information on required distributions under federal income
tax laws, you should see "Required Distributions upon Contract Owner's Death."
The death benefit applies on the first person to die of the contract owner,
joint owner, or annuitant (if a contract owner is not an individual). Assuming
you are the contract owner, if you die during the accumulation phase, your
beneficiary will receive a death benefit unless the beneficiary is the surviving
spouse and elects to continue the Contract.
DEATH BENEFIT DURING THE INCOME PHASE
If any contract owner or the annuitant dies after the annuity start date, we
will pay the beneficiary any certain benefit remaining under the annuity in
effect at the time.
REQUIRED DISTRIBUTIONS UPON CONTRACT OWNER'S DEATH
We will not allow any payment of benefits provided under a non-qualified
Contract which do not satisfy the requirements of Section 72(s) of the Code.
If any contract owner of a non-qualified contract dies before the annuity start
date, the death benefit payable to the beneficiary (calculated as described
under "Death Benefit Choices" in this prospectus) will be distributed as
follows: (a) the death benefit must be completely distributed within 5 years of
the contract owner's date of death; or (b) the beneficiary may elect, within the
1-year period after the contract owner's date of death, to receive the death
benefit in the form of an annuity from us, provided that (i) such annuity is
distributed in substantially equal installments over the life of such
beneficiary or over a period not extending beyond the life expectancy of such
beneficiary; and (ii) such distributions begin not later than 1 year after the
contract owner's date of death.
Notwithstanding (a) and (b) above, if the sole contract owner's beneficiary is
the deceased owner's surviving spouse, then such spouse may elect to continue
the Contract under the same terms as before the contract owner's death. Upon
receipt of such election from the spouse at our Customer Service Center: (1) all
rights of the spouse as contract owner's beneficiary under the Contract in
effect prior to such election will cease; (2) the spouse will become the owner
of the Contract and will also be treated as the contingent annuitant, if none
has been named and only if the deceased owner was the annuitant; and (3) all
rights and privileges granted by the Contract or allowed by ING USA will belong
to the spouse as contract owner of the Contract. This election will be deemed to
have been made by the spouse if such spouse fails to make a timely election as
described in this paragraph. If the owner's beneficiary is a nonspouse, the
distribution provisions described in subparagraphs (a) and (b) above, will apply
even if the annuitant and/or contingent annuitant are alive at the time of the
contract owner's death.
Subject to availability, and our then current rules, a spousal or non-spousal
beneficiary may elect to receive death benefits as payments over the life
expectancy of the beneficiary ("stretch"). "Stretch" payments will be subject to
the same limitations as systematic withdrawals, and non-qualified "stretch"
payments will be reported on the same basis as other systematic withdrawals.
If we do not receive an election from a nonspouse owner's beneficiary within the
1-year period after the contract owner's date of death, then we will pay the
death benefit to the owner's beneficiary in a cash payment within five years
from date of death. We will determine the death benefit as of the date we
receive proof of death. We will make payment of the proceeds on or before the
end of the 5-year period starting on
Guarantee Annuity - 131798
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the owner's date of death. Such cash payment will be in full settlement of all
our liability under the Contract. If the contract owner dies after the annuity
start date, we will continue to distribute any benefit payable at least as
rapidly as under the annuity option then in effect. All of the contract owner's
rights granted under the Contract or allowed by us will pass to the contract
owner's beneficiary.
If the Contract has joint owners we will consider the date of death of the first
joint owner as the death of the contract owner, and the surviving joint owner
will become the beneficiary of the Contract.
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CHARGES AND FEES
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We deduct the Contract charges described below to compensate us for our cost and
expenses, services provided and risks assumed under the Contracts. We incur
certain costs and expenses for distributing and administering the Contracts,
including compensation and expenses paid in connection with sales of the
Contracts, for paying the benefits payable under the Contracts and for bearing
various risks associated with the Contracts. The amount of a Contract charge
will not always correspond to the actual costs associated with the charge. For
example, the surrender charge collected may not fully cover all of the
distribution expenses incurred by us with the service or benefits provided. In
the event there are any profits from fees and charges deducted under the
Contract, including the mortality and expense risk charge and rider and benefit
charges, we may use such profits to finance the distribution of Contracts.
CHARGES DEDUCTED FROM THE CONTRACT VALUE We deduct the following charges from
your contract value:
SURRENDER CHARGE. We will deduct a contingent deferred sales charge (a
"surrender charge") if you surrender your Contract or if you take a withdrawal
in excess of the free withdrawal amount during the guarantee period. The free
withdrawal amount is equal to the prior 12 months' interest earned and not
previously withdrawn. The surrender charge is charged against the contract value
and is based on the amount of the withdrawal. This charge is intended to cover
sales expenses that we have incurred. We may in the future reduce or waive the
surrender charge in certain situations and will never charge more than the
maximum surrender charges. The percentage deducted at the time of surrender or
excess withdrawal depends on the number of complete years that have elapsed
since the beginning of the guarantee period.
The surrender charge varies by the length of the guarantee period selected,
beginning with 8% during year 1 and reducing by 1% per year to the earlier of
the end of the guarantee period or the 8th policy year. No surrender charge is
imposed upon a surrender made during the 30-day period immediately preceding the
end of a guarantee period.
The surrender charge period resets at the beginning of each guarantee period.
Upon withdrawal, it is charged against the remaining contract value and is based
on the amount of the withdrawal. Upon surrender, a surrender charge and a Market
Value Adjustment will be applied retroactively with respect to any free
withdrawal amount previously withdrawn within the same contract year as the
surrender. The following table shows the schedule of the surrender charge that
will apply.
COMPLETE YEARS ELAPSED 0 1 2 3 4 5 6 7 8+
SINCE START OF GUARANTEE PERIOD
SURRENDER CHARGE 8% 7% 6% 5% 4% 3% 2% 1% 0%
WAIVER OF SURRENDER CHARGE FOR EXTENDED MEDICAL CARE. We will waive the
surrender charge in most states in the following events: (i) you begin receiving
qualified extended medical care on or after the first contract anniversary for
at least 45 days during a 60-day period and your request for the surrender or
withdrawal, together with all required documentation is received at our Customer
Service Center during the term of your care or within 90 days after the last day
of your care; or (ii) you are first diagnosed by a
Guarantee Annuity - 131798
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qualifying medical professional, on or after the first contract anniversary, as
having a qualifying terminal illness. We have the right to require an
examination by a physician of our choice. If we require such an examination, we
will pay for it. You are required to send us satisfactory written proof of
illness. See your Contract for more information. The waiver of surrender charge
may not be available in all states.
FREE WITHDRAWAL AMOUNT. No surrender charge or Market Value Adjustment
applies to withdrawals made during the 30-day period prior to the end of a
guarantee interest period. The interest earned during the prior 12 months and
not previously withdrawn may be withdrawn without surrender charge or Market
Value Adjustment.
SURRENDER CHARGE FOR EXCESS WITHDRAWALS. We will deduct a surrender charge
for excess withdrawals, which may include a withdrawal you make to satisfy
required minimum distribution requirements under the code. We consider a
withdrawal to be an "excess withdrawal" when the amount you withdraw in any
contract year exceeds the free withdrawal amount. Where you are receiving
systematic withdrawals, any combination of regular withdrawals taken and any
systematic withdrawals expected to be received in a contract year will be
included in determining the amount of the excess withdrawal. Such a withdrawal
will be considered a partial surrender of the Contract and we will impose a
surrender charge and any associated premium tax. ANY EXCESS WITHDRAWAL MORE THAN
30 DAYS BEFORE A MATURITY DATE WILL TRIGGER A MARKET VALUE ADJUSTMENT.
PREMIUM TAXES. We may make a charge for state and local premium taxes
depending on your state of residence. The tax can range from 0% to 3.5% of the
premium payment. We have the right to change this amount to conform with changes
in the law or if you change your state of residence.
We deduct the premium tax from your contract value on the annuity start date.
However, some jurisdictions impose a premium tax at the time that premiums are
paid, regardless of when the annuity payments begin. In those states we may
defer collection of the premium taxes from your contract value and deduct it
when you surrender the Contract, when you take an excess withdrawal, or on the
annuity start date.
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THE ANNUITY OPTIONS
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ANNUITIZATION OF YOUR CONTRACT
If the annuitant and contract owner are living on the annuity start date, we
will begin making payments to the contract owner under an income plan. We will
make these payments under the annuity option chosen. You may change your annuity
option by making a written request to us at least 30 days before the annuity
start date. The amount of the payments will be determined by applying your
contract value adjusted for any applicable market value adjustment on the
annuity start date in accordance with the annuity option you chose.
You may also elect an annuity option on surrender of the Contract for its cash
surrender value or you may choose one or more annuity options for the payment of
death benefit proceeds while it is in effect and before the annuity start date.
If, at the time of the contract owner's death or the annuitant's death (if the
contract owner is not an individual), no option has been chosen for paying death
benefit proceeds, the beneficiary may choose an annuity option within 60 days.
In all events, payments of death benefit proceeds must comply with the
distribution requirements of applicable federal tax law.
The minimum monthly annuity income payment that we will make is $20. We may
require that a single sum payment be made if the contract value is less than
$2,000 or if the calculated monthly annuity income payment is less than $20.
For each annuity option we will issue a separate written agreement putting the
annuity option into effect. Before we pay any annuity benefits, we require the
return of your Contract. If your Contract has been lost, we will require that
you complete and return the applicable lost Contract form. Various factors will
affect the level of annuity benefits, such as the annuity option chosen and the
applicable payment rate used.
Guarantee Annuity - 131798
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Our current annuity options provide only for fixed payments. Fixed annuity
payments are regular payments, the amount of which is fixed and guaranteed by
us. Some fixed annuity options provide fixed payments either for a specified
period of time or for the life of the annuitant. The amount of life income
payments will depend on the form and duration of payments you chose, the age of
the annuitant or beneficiary (and gender, where appropriate under applicable
law), the total contract value applied, and the applicable payment rate.
Our approval is needed for any option where:
(1) The person named to receive payment is other than the contract owner
or beneficiary;
(2) The person named is not a natural person, such as a corporation; or
(3) Any income payment would be less than the minimum annuity income
payment allowed.
SELECTING THE ANNUITY START DATE
You select the annuity start date, which is the date on which the annuity
payments commence. The annuity start date must be at least 1 year from the
contract date but before the month immediately following the annuitant's 90th
birthday, or 10 years from the contract date, if later. For Contracts offered
through representatives of Merrill Lynch, Pierce, Fenner & Smith, Incorporated,
the annuity start date must be on or before the annuitant's 95th birthday. If,
on the annuity start date, a surrender charge remains, the elected annuity
option must include a period certain of at least 5 years.
If you do not select an annuity start date, it will automatically begin in the
month following the annuitant's 90th birthday, or 10 years from the contract
date, if later.
If the annuity start date occurs when the annuitant is at an advanced age, such
as after age 85, it is possible that the Contract will not be considered an
annuity for federal tax purposes. See "Federal Tax Considerations." For a
Contract purchased in connection with a qualified plan, other than a Roth IRA,
distributions must commence not later than April 1st of the calendar year
following the calendar year in which you attain age 70 1/2 or, in some cases,
retire. Distributions may be made through annuitization or withdrawals. You
should consult your tax adviser for tax advice.
FREQUENCY OF ANNUITY PAYMENTS
You choose the frequency of the annuity payments. They may be monthly,
quarterly, semi-annually or annually. If we do not receive written notice from
you, we will make the payments monthly. There may be certain restrictions on
minimum payments that we will allow.
THE ANNUITY OPTIONS
We offer the 3 annuity options shown below. Payments under Options 1, 2 and 3
are fixed. The contract value can be applied to any other annuitization plan
that we choose to offer on the annuity start date. Annuity payments under other
available options may be fixed and/or variable.
OPTION 1. INCOME FOR A FIXED PERIOD. Under this option, we make monthly
payments in equal installments for a fixed number of years based on the contract
value on the annuity start date. We guarantee that each monthly payment will be
at least the amount stated in your Contract. If you prefer, you may request that
payments be made in annual, semi-annual or quarterly installments. We will
provide you with illustrations if you ask for them. If the cash surrender value
or contract value is applied under this option, a 10% penalty tax may apply to
the taxable portion of each income payment until the contract owner reaches age
59 1/2.
OPTION 2. INCOME FOR LIFE WITH A PERIOD CERTAIN. Payment is made for the
life of the annuitant in equal monthly installments and guaranteed for at least
a period certain such as 10 or 20 years. Other periods certain may be available
to you on request. You may choose a refund period instead. Under this
arrangement, income is guaranteed until payments equal the amount applied. If
the person named lives beyond the guaranteed period, payments continue until his
or her death. We guarantee that each payment will be at least the amount
specified in the Contract corresponding to the person's age on his or her last
Guarantee Annuity - 131798
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birthday before the annuity start date. Amounts for ages not shown in the
Contract are available if you ask for them.
OPTION 3. JOINT LIFE INCOME. This option is available when there are 2
persons named to determine annuity payments. At least one of the persons named
must be either the contract owner or beneficiary of the Contract. We guarantee
monthly payments will be made as long as at least one of the named persons is
living. There is no minimum number of payments. Monthly payment amounts are
available if you ask for them.
The contract value can be applied to any other annuitization plan that we choose
to offer on the annuity start date. Annuity payments under other available
options may be fixed and/or variable. If variable and subject to the Investment
Company Act of 1940 it will comply with requirements of such Act.
PAYMENT WHEN NAMED PERSON DIES
When the person named to receive payment dies, we will pay any amounts still due
as provided in the annuity agreement between you and ING USA. The amounts we
will pay are determined as follows:
(1) For Option 1, or any remaining guaranteed payments under Option 2, we
will continue payments.
(2) For Option 3, no amounts are payable after both named persons have
died. For other available options, the annuity option agreement will
state the amount we will pay, if any.
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OTHER CONTRACT PROVISIONS
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REPORTS TO CONTRACT OWNERS
We will send you an annual report within 31 days after the end of each contract
year. The report will show the contract value, cash surrender value, and the
death benefit as of the end of the contract year. The report will also show the
amounts deducted from or added to the contract value since the last report. You
have 30 days to notify our Customer Service Center of any errors or
discrepancies contained in the report or in any confirmation notices. We will
also send you any other reports, notices or documents we are required by law to
furnish to you.
SUSPENSION OF PAYMENTS
The Company reserves the right to delay payment for up to 6 months.
IN CASE OF ERRORS IN YOUR APPLICATION
If an age or sex given in the application or enrollment form is misstated, the
amounts payable or benefits provided by the Contract shall be those that the
premium payment would have bought at the correct age or sex.
ASSIGNING THE CONTRACT AS COLLATERAL
You may assign a non-qualified Contract as collateral security for a loan but
you should understand that your rights and any beneficiary's rights may be
subject to the terms of the assignment. An assignment likely has federal tax
consequences. You must give us satisfactory written notice at our Customer
Service Center in order to make or release an assignment. We are not responsible
for the validity of any assignment.
CONTRACT CHANGES -- APPLICABLE TAX LAW
We have the right to make changes in the Contract to continue to qualify the
Contract as an annuity under applicable federal tax law. You will be given
advance notice of such changes.
Guarantee Annuity - 131798
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FREE LOOK
You may cancel your Contract within your 10-day free look period. We deem the
free look period to expire 15 days after we mail the Contract to you. Some
states may require a longer free look period. To cancel, you need to send your
Contract to our Customer Service Center or to the agent from whom you purchased
it. We will refund the contract value . For purposes of the refund during the
free look period, (i) we adjust your contract value for any Market Value
Adjustment, and (ii) then we include a refund of any charges deducted from your
contract value. The Market Value Adjustment during the free look period is
determined as described on page 4, but without adding .005 in the denominator of
the formula. Because of the potential positive or negative effect of the Market
Value Adjustment, the contract value returned may be greater or less than the
premium payment you paid. Some states require us to return to you the amount of
the paid premium (rather than the adjusted contract value) in which case you
will not be subject to investment risk during the free look period. Your
Contract is void as of the day we receive your Contract and cancellation
request. We determine your contract value at the close of business on the day we
receive your written request.
SPECIAL ARRANGEMENTS
We may reduce or waive any Contract, rider, or benefit fees or charges for
certain group or sponsored arrangements, under special programs, and for certain
employees, agents, and related persons of our parent corporation and its
affiliates. We reduce or waive these items based on expected economies, and the
variations are based on differences in costs or services.
SELLING THE CONTRACT
Our affiliate Directed Services, Inc. ("DSI"), 1475 Dunwoody Dr., West Chester,
PA 19380 is the principal underwriter and distributor of the Contract as well as
for other ING USA contracts. DSI, a New York corporation, is registered with the
SEC as a broker-dealer under the Securities Exchange Act of 1934, and is a
member of the National Association of Securities Dealers, Inc. ("NASD").
DSI does not retain any commissions or compensation paid to it by ING USA for
Contract sales. DSI enters into selling agreements with affiliated and
unaffiliated broker-dealers to sell the Contracts through their registered
representatives who are licensed to sell securities and variable insurance
products ("selling firms"). Selling firms are also registered with the SEC and
NASD member firms.
DSI pays selling firms compensation for the promotion and sale of the Contracts.
Registered representatives of the selling firms who solicit sales of the
Contracts typically receive a portion of the compensation paid by DSI to the
selling firm in the form of commissions or other compensation, depending on the
agreement between the selling firm and the registered representative. This
compensation, as well as other incentives or payments, is not paid directly by
contract owners or the Separate Account. We intend to recoup this compensation
and other sales expenses paid to selling firms through fees and charges imposed
under the Contracts.
DSI pays selling firms for Contract sales according to one or more schedules.
This compensation is generally based on a percentage of premium payments.
Selling firms may receive commissions of up to 4.5% of premium payments. In
addition, selling firms may receive ongoing annual compensation of up to 0.55%
of all, or a portion, of values of Contracts sold through the firm. Individual
representatives may receive all or a portion of compensation paid to their
selling firm, depending on their firm's practices. Commissions and annual
compensation, when combined, could exceed 4.5% of total premium payments. To the
extent permitted by SEC and NASD rules and other applicable laws and
regulations, DSI may pay or allow other promotional incentives or payments in
the form of cash or other compensation to selling firms.
DSI may also pay selling firms additional compensation or reimbursement for
their efforts in selling Contracts to you and other customers, including for,
among other things, training of sales personnel, marketing or other
sales-related services they provide to us or our affiliates. This compensation
or reimbursement is not reflected in the fees and expenses listed in the fee
table section of this prospectus. In addition, DSI may enter into special
compensation arrangements with certain selling firms based on those firms'
aggregate or anticipated sales of the Contracts or other criteria. These special
compensation
Guarantee Annuity - 131798
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arrangements will not be offered to all selling firms, and the terms of such
arrangements may differ among selling firms based on various factors. Any such
compensation payable to a selling firm will not result in any additional direct
charge to you by us.
Affiliated selling firms may include Baring Investment Services, Inc., Compulife
Investor Services, Inc., Financial Network Investment Corporation, Granite
Investment Services, Inc., Guaranty Brokerage Services, Inc., ING America
Equities, Inc., ING Barings Corp., ING Direct Funds Limited, ING DIRECT
Securities, Inc., ING Financial Advisers LLC, ING Financial Partners, Inc., ING
Funds Distributor, LLC, ING Furman Selz Financial Services LLC, ING TT&S (U.S.)
Securities, Inc., Multi-Financial Securities Corporation, PrimeVest Financial
Services, Inc.and Systematized Benefits Administrators, Inc., DSI may also
compensate wholesalers/distributors, and their sales management personnel, for
Contract sales within the wholesale/distribution channel. This compensation may
be based on a percentage of premium payments, and/or a percentage of Contract
values.
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OTHER INFORMATION
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STATE REGULATION
We are regulated by the Insurance Department of the State of Iowa. We are also
subject to the insurance laws and regulations of all jurisdictions where we do
business. The Contract offered by this prospectus has been approved where
required by those jurisdictions. We are required to submit annual statements of
our operations, including financial statements, to the Insurance Departments of
the various jurisdictions in which we do business to determine solvency and
compliance with state insurance laws and regulations.
LEGAL PROCEEDINGS
We are, or may be in the future, a defendant in various legal proceedings in
connection with the normal conduct of our insurance operations. Some of these
cases may seek class action status and may include a demand for punitive damages
as well as for compensatory damages. In the opinion of management, the ultimate
resolution of any existing legal proceeding is not likely to have a material
adverse effect on our ability to meet our obligations under the contract.
Directed Services, Inc., the principal underwriter and distributor of the
contract, is not involved in any legal proceeding which, in the opinion of
management, is likely to have a material adverse effect on its ability to
distribute the contract.
EXPERTS
We have included and incorporated by reference into the Registration Statement
of which this prospectus is a part and / or into this prospectus the
consolidated financial statements and schedules of ING USA Annuity and Life
Insurance Company (formerly Golden American Life Insurance Company), as of
December 31, 2003 and 2002 and for each of the three years in the period ended
December 31, 2003, which have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing and incorporated by
reference in this prospectus and in the Registration Statement of which this
prospectus is a part. These consolidated financial statements and schedules of
the Company appearing in the Company's annual report on Form 10-K for the year
ended December 31, 2003 have been audited by Ernst & Young. Such financial
statements and schedules are included and incorporated herein by reference in
reliance upon such reports given authority of such firm as experts in accounting
and auditing.
FURTHER INFORMATION
This prospectus does not contain all of the information contained in the
registration statement of which this prospectus is a part. Portions of the
registration statement have been omitted from this prospectus as allowed by the
Securities and Exchange Commission (SEC). You may obtain the omitted information
from the offices of the SEC, as described below. We are required by the
Securities Exchange Act of 1934 to file
Guarantee Annuity - 131798
A16
periodic reports and other information with the SEC. You may inspect or copy
information concerning the Company at the Public Reference Room of the SEC at:
Securities and Exchange Commission
450 Fifth Street NW
Washington, DC 20549
You may also obtain copies of these materials at prescribed rates from the
Public Reference Room of the above office. You may obtain information on the
operation of the Public Reference Room by calling the SEC at either
1-800-SEC-0330 or 1-202-942-8090. You may also find more information about the
Company at www.ing.com.
A copy of the Company's annual report on Form 10-K for the year ended December
31, 2003 accompanies this prospectus. We refer to Form 10-K for a description of
the Company and its business, including financial statements. We intend to send
contract holders annual account statements and other such legally required
reports. We do not anticipate such reports will include periodic financial
statements or information concerning the Company.
You can find this prospectus and other information the Company files
electronically with the SEC on the SEC's web site at www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
We have incorporated by reference the Company's latest Annual Report on Form
10-K, as filed with the SEC and in accordance with the Securities and Exchange
Act of 1934. The Annual Report must accompany this prospectus. Form 10-K
contains additional information about the Company including financial
statements for the latest fiscal year. We were not required to file any other
reports pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act
since the end of the fiscal year covered by that Form 10-K. The registration
statement for this prospectus incorporates some documents by reference. We will
provide a free copy of any such documents upon the written or oral request of
anyone who has received this prospectus. We will not include exhibits to those
documents unless they are specifically incorporated by reference into the
document. Direct requests to:
ING
Customer Service Center
P.O. Box 9271
Des Moines, Iowa 50306-9271
1-800-366-0066
INQUIRIES
You may contact us directly by writing or calling us at the address or phone
number shown above.
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FEDERAL TAX CONSIDERATIONS
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INTRODUCTION
This section discusses our understanding of current federal income tax laws
affecting the contract. You should keep the following in mind when reading it:
o Your tax position (or the tax position of the designated beneficiary,
as applicable) determines federal taxation of amounts held or paid out
under the contract;
o Tax laws change. It is possible that a change in the future could
affect contracts issued in the past;
o This section addresses federal income tax rules and does not discuss
federal estate and gift tax implications, state and local taxes,
foreign taxes or any other tax provisions; and
o We do not make any guarantee about the tax treatment of the contract
or transactions involving the contract.
We do not intend this information to be tax advice. For advice about the effect
of federal income taxes or any other taxes on amounts held or paid out under the
contract, consult a tax adviser. For more comprehensive information, contact the
Internal Revenue Service (IRS).
TYPES OF CONTRACTS: NON-QUALIFIED OR QUALIFIED
The Contract may be purchased on a non-tax-qualified basis or purchased on a
tax-qualified basis. Non-qualified contracts are purchased with after tax
contributions and are not related to retirement plans that receive special
income tax treatment under the Code.
Qualified Contracts are designed for use by individuals whose premium payments
are comprised solely of proceeds from and/or contributions under retirement
plans that are intended to qualify as plans entitled to special income tax
treatment under Sections 401(a), 403(a), 403(b), 408, 408A or 457 of the Code.
The ultimate effect of federal income taxes on the amounts held under a
Contract, or annuity payments, depends on the type of retirement plan, on the
tax and employment status of the individual concerned, and on your tax status.
In addition, certain requirements must be satisfied in purchasing a qualified
Contract with proceeds from a tax-qualified plan in order to continue receiving
favorable tax treatment. Some retirement plans are subject to additional
distribution and other requirements that are not incorporated into our Contract.
Because the Plan is not part of the Contract, we are not bound by any Plan's
terms or conditions. Contract owners, participants and beneficiaries are
responsible for determining that contributions, distributions and other
transactions with respect to the Contract comply with applicable law. Therefore,
you should seek competent legal and tax advice regarding the suitability of a
Contract for your particular situation. The following discussion assumes that
qualified Contracts are purchased with proceeds from and/or contributions under
retirement plans that qualify for the intended special federal income tax
treatment.
TAXATION OF NON-QUALIFIED CONTRACTS
TAXATION PRIOR TO DISTRIBUTION
We believe that if you are a natural person you will generally not be taxed
on increases in the value of a non-qualified Contract until a distribution
occurs or until annuity payments begin. This assumes that the Contract will
qualify as an annuity contract for federal income tax purposes. For these
purposes, the agreement to assign or pledge any portion of the contract value
generally will be treated as a distribution. In order to receive deferral of
taxation, the following requirements must be satisfied:
REQUIRED DISTRIBUTIONS. In order to be treated as an annuity contract
forfederal income tax purposes, the Code requires any non-qualified Contract to
contain certain provisions specifying how your interest in the Contract will be
distributed in the event of your death. The non-qualified Contracts contain
provisions that are intended to comply with these Code requirements, although no
regulations interpreting these requirements have yet been issued. We intend to
review such distribution provisions and modify them if necessary to assure that
they comply with the applicable requirements when such requirements are
clarified by regulation or otherwise. See "Death Benefit" for additional
information on required distributions from non-qualified contracts.
NON-NATURAL PERSONS. The owner of any annuity contract who is not a
natural person generally must include in income any increase in the excess of
the contract value over the "investment in the contract" (generally, the
premiums or other consideration you paid for the contract less any nontaxable
withdrawals)during the taxable year. There are some exceptions to this rule and
a prospective contract owner that is not a natural person may wish to discuss
these with a tax adviser.
DELAYED ANNUITY STARTING DATE. If the Contract's annuity starting date
occurs(or is scheduled to occur) at a time when the annuitant has reached an
advanced age (e.g., age 85), it is possible that the Contract would not be
treated as an annuity for federal income tax purposes. In that event, the income
and gains under the Contract could be currently includible in your income.
TAXATION OF DISTRIBUTIONS
GENERAL. When a withdrawal from a non-qualified Contract occurs, the
amount received will be treated as ordinary income subject to tax up to an
amount equal to the excess (if any) of the contract value (unreduced by the
amount of any surrender charge) immediately before the distribution over the
contract owner's investment in the contract at that time. Investment in the
contract is generally equal to the amount of all contributions to the contract,
less the aggregate amount of non-taxable distributions previously made.
The contract value that applies for this purpose is unclear in some respects.
For example, the market value adjustment could increase the contract value that
applies. Thus, the income on the Contracts could be higher than the amount of
income that would be determined without regard to such adjustment. As a result,
you could have higher amounts of income than will be reported to you.
In the case of a surrender under a non-qualified Contract, the amount received
generally will be taxable only to the extent it exceeds the contract owner's
investment in the contract.
10% PENALTY TAX. A distribution from a non-qualified Contract may be
subject to a federal tax penalty equal to 10% of the amount treated as income.
In general, however, there is no penalty on distributions:
o made on or after the taxpayer reaches age 59 1/2;
o made on or after the death of a contract owner;
o attributable to the taxpayer's becoming disabled; or
o made as part of a series of substantially equal periodic
payments for the life (or life expectancy) of the taxpayer.
Other exceptions may be applicable under certain circumstances and special rules
may be applicable in connection with the exceptions enumerated above. A tax
adviser should be consulted with regard to exceptions from the penalty tax.
TAX-FREE EXCHANGES. Section 1035 of the Tax Code permits the
exchange of a life insurance, endowment or annuity contract for an annuity
contract on a tax-free basis. In such instance, the "investment in the contract"
in the old contract will carry over to the new contract. You should consult with
your tax advisor regarding procedures for making Section 1035 exchanges.
If your Contract is purchased through a tax-free exchange of a life insurance,
endowment or annuity contract that was purchased prior to August 14, 1982, then
any distributions other than annuity payments will be treated, for tax purposes,
as coming:
o First, from any remaining "investment in the contract" made
prior to August 14, 1982 and exchanged into the Contract;
o Next, from any "income on the contract" attributable to the
investment made prior to August 14, 1982;
o Then, from any remaining "income on the contract"; and
o Lastly, from any remaining "investment in the contract".
The IRS has concluded that in certain instances, the partial exchange of a
portion of one annuity contract for another contract will be tax-free. However,
the IRS has reserved the right to treat transactions it considers abusive as
ineligible for favorable partial 1035 tax-free exchange treatment. The IRS has
not provided any additional guidance on what it considers abusive. It is not
certain whether the IRS would treat an immediate withdrawal or annuitization
after a partial exchange as abusive. In addition, it is unclear how the IRS will
treat a partial exchange from a life insurance, endowment, or annuity contract
directly into an immediate annuity. Currently, we will accept a partial 1035
exchange from a non-qualified annuity into a deferred annuity or an immediate
annuity as a tax-free transaction unless we believe that we would be expected to
treat the transaction as abusive. We are not responsible for the manner in which
any other insurance company, for tax reporting purposes, or the IRS, with
respect to the ultimate tax treatment, recognizes or reports a partial exchange.
We strongly advise you to discuss any proposed 1035 exchange with your tax
advisor prior to proceeding with the transaction.
TAXATION OF ANNUITY PAYMENTS. Although tax consequences may vary
depending on the payment option elected under an annuity contract, a portion of
each annuity payment is generally not taxed and the remainder is taxed as
ordinary income. The non-taxable portion of an annuity payment is generally
determined in a manner that is designed to allow you to recover your investment
in the contract ratably on a tax-free basis over the expected stream of annuity
payments, as determined when annuity payments start. Once your investment in the
contract has been fully recovered, however, the full amount of each annuity
payment is subject to tax as ordinary income. The tax treatment of partial
annuitizations is unclear. We currently treat any partial annuitizations, [such
as those associated with the MGIB benefit,] as withdrawals rather than as
annuity payments. Please consult your tax adviser before electing a partial
annuitization.
DEATH BENEFITS. Amounts may be distributed from a Contract because
of your death or the death of the annuitant. Generally, such amounts are
includible in the income of recipient as follows: (i) if distributed in a lump
sum, they are taxed in the same manner as a surrender of the Contract, or (ii)
if distributed under a payment option, they are taxed in the same way as annuity
payments. Special rules may apply to amounts distributed after a Beneficiary has
elected to maintain Contract value and receive payments.
ASSIGNMENTS AND OTHER TRANSFERS. A transfer, pledge or assignment
of ownership of a Contract, or the designation of an annuitant or payee other
than an owner, may result in certain tax consequences to you that are not
discussed herein. A contract owner contemplating any such transfer, pledge,
assignment, or designation or exchange, should consult a tax adviser as to the
tax consequences.
IMMEDIATE ANNUITIES. Under section 72 of the Tax Code, an
immediate annuity means an annuity (1) which is purchased with a single premium,
(2) with annuity payments starting within one year from the date of purchase,
and (3) which provides a series of substantially equal periodic payments made
annually or more frequently. Treatment as an immediate annuity will have
significance with respect to exceptions from the 10% early withdrawal penalty,
to contracts owned by non-natural persons, and for certain policy exchanges.
MULTIPLE CONTRACTS. The tax law requires that all non-qualified
deferred annuity contracts that are issued by a company or its affiliates to the
same contract owner during any calendar year are treated as one non-qualified
deferred annuity contract for purposes of determining the amount includible in
such contract owner's income when a taxable distribution occurs.
WITHHOLDING. We will withhold and remit to the U.S. government a
part of the taxable portion of each distribution made under a Contract unless
the distributee notifies us at or before the time of the distribution that he or
she elects not to have any amounts withheld. The withholding rates applicable to
the taxable portion of periodic annuity payments are the same as the withholding
rates generally applicable to payments of wages. In addition, a 10% withholding
rate applies to the taxable portion of non-periodic payments. Regardless of
whether you elect not to have federal income tax withheld, you are still liable
for payment of federal income tax on the taxable portion of the payment.
TAXATION OF QUALIFIED CONTRACTS
GENERAL
The Contracts are designed for use with several types of qualified plans.
The tax rules applicable to participants in these qualified plans vary according
to the type of plan and the terms and conditions of the plan itself. Special
favorable tax treatment may be available for certain types of contributions and
distributions. Adverse tax consequences may result from: contributions in excess
of specified limits; distributions before age 59 1/2 (subject to certain
exceptions); distributions that do not conform to specified commencement and
minimum distribution rules; and in other specified circumstances. Therefore, no
attempt is made to provide more than general information about the use of the
Contracts with the various types of qualified retirement plans. Contract owners,
annuitants, and beneficiaries are cautioned that the rights of any person to any
benefits under these qualified retirement plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the Contract, but we shall not be bound by the terms and conditions of such
plans to the extent such terms contradict the Contract, unless the Company
consents.
You will not generally pay taxes on earnings from the annuity contract described
in this prospectus until they are withdrawn. When an annuity contract is used to
fund one of these tax qualified retirement arrangements, you should know that
the annuity contract does not provide any additional tax deferral of earnings
beyond the tax deferral provided by the tax-qualified retirement arrangement.
Tax-qualified retirement arrangements under Tax Code sections 401(a), 401(k),
403(a), 403(b) or governmental 457 plans also generally defer payment of taxes
on earnings until they are withdrawn (or in the case of a non-governmental 457
plan, paid or made available to you or a designated beneficiary). However,
annuities do provide other features and benefits which may be valuable to you.
You should discuss your alternatives with your local representative.
DISTRIBUTIONS - GENERAL
For qualified plans under Section 401(a) and 403(b), the Code requires that
distributions generally must commence no later than the later of April 1 of the
calendar year following the calendar year in which the plan participant for
whose benefit the contract is purchased (i) reaches age 70 1/2 or (ii) retires,
and must be made in a specified form or manner. If the plan participant is a "5
percent owner" (as defined in the Code), distributions generally must begin no
later than April 1 of the calendar year following the calendar year in which the
plan participant reaches age 70 1/2. For IRAs described in Section 408,
distributions generally must commence no later than by April 1 of the calendar
year following the calendar year in which the individual contract owner reaches
age 70 1/2. Roth IRAs under Section 408A do not require distributions at any
time before the contract owner's death. Please note that required minimum
distributions under qualified Contracts may be subject to surrender charge
and/or market value adjustment, in accordance with the terms of the Contract.
This could affect the amount that must be taken from the Contract in order to
satisfy required minimum distributions.
DIRECT ROLLOVERS
If the Contract is used in connection with a pension, profit-sharing, or
annuity plan qualified under sections 401(a) or 403(a) of the Code, or is a
tax-sheltered annuity under section 403(b) of the Code, or is used with an
eligible deferred compensation plan that has a government sponsor and that is
qualified under section 457(b), any "eligible rollover distribution" from the
Contract will be subject to direct rollover and mandatory withholding
requirements. An eligible rollover distribution generally is any taxable
distribution from a qualified pension plan under section 401(a) of the Code,
qualified annuity plan under section 403(a) of the Code, section 403(b) annuity
or custodial account, or an eligible section 457(b) deferred compensation plan
that has a government sponsor, excluding certain amounts (such as minimum
distributions required under section 401(a)(9) of the Code, distributions which
are part of a "series of substantially equal periodic payments" made for life or
a specified period of 10 years or more, or hardship distributions as defined in
the tax law).
Under these requirements, federal income tax equal to 20% of the eligible
rollover distribution will be withheld from the amount of the distribution.
Unlike withholding on certain other amounts distributed from the Contract,
discussed below, you cannot elect out of withholding with respect to an eligible
rollover distribution. However, this 20% withholding will not apply if, instead
of receiving the eligible rollover distribution, you elect to have it directly
transferred to certain qualified plans. Prior to receiving an eligible rollover
distribution, you will receive a notice (from the plan administrator or us)
explaining generally the direct rollover and mandatory withholding requirements
and how to avoid the 20% withholding by electing a direct rollover.
CORPORATE AND SELF-EMPLOYED PENSION AND PROFIT SHARING PLANS
Section 401(a) of the Code permits corporate employers to establish various
types of retirement plans for employees, and permits self-employed individuals
to establish these plans for themselves and their employees. These retirement
plans may permit the purchase of the Contracts to accumulate retirement savings
under the plans. Adverse tax or other legal consequences to the plan, to the
participant, or to both may result if this Contract is assigned or transferred
to any individual as a means to provide benefit payments, unless the plan
complies with all legal requirements applicable to such benefits before transfer
of the Contract. Employers intending to use the Contract with such plans should
seek competent advice.
INDIVIDUAL RETIREMENT ANNUITIES - GENERAL
Section 408 of the Code permits eligible individuals to contribute to an
individual retirement program known as an "Individual Retirement Annuity" or
"IRA." These IRAs are subject to limits on the amount that can be contributed,
the deductible amount of the contribution, the persons who may be eligible, and
the time when distributions commence. Also, distributions from certain other
types of qualified retirement plans may be "rolled over" on a tax-deferred basis
into an IRA. Also, amounts in another IRA or individual retirement account can
be rolled over or transferred tax-free to an IRA. There are significant
restrictions on rollover or transfer contributions from Savings Incentive Match
Plans for Employees (SIMPLE), under which certain employers may provide
contributions to IRAs on behalf of their employees, subject to special
restrictions. Employers may establish Simplified Employee Pension (SEP) Plans to
provide IRA contributions on behalf of their employees. If you make a tax-free
rollover of a distribution from any of these IRAs, you may not make another
tax-free rollover from the IRA within a 1-year period. Sales of the Contract for
use with IRAs may be subject to special requirements of the IRS.
INDIVIDUAL RETIREMENT ANNUITIES - DISTRIBUTIONS
All distributions from a traditional IRA are taxed as received unless
either one of the following is true:
o The distribution is rolled over to a plan eligible to receive
rollovers or to another traditional IRA or certain qualified
plans in accordance with the Tax Code; or
o You made after-tax contributions to the IRA. In this case, the
distribution will be taxed according to rules detailed in the Tax
Code.
To avoid certain tax penalties, you and any designated beneficiary must also
meet the minimum distribution requirements imposed by the Tax Code. The
requirements do not apply to Roth IRA contracts while the owner is living. These
rules may dictate one or more of the following:
o Start date for distributions;
o The time period in which all amounts in your account(s) must be
distributed; or
o Distribution amounts.
Generally, you must begin receiving distributions from a traditional IRA by
April 1 of the calendar year following the calendar year in which you attain age
70 1/2. We must pay out distributions from the contract over one of the
following time periods:
o Over your life or the joint lives of you and your designated
beneficiary; or
o Over a period not greater than your life expectancy or the joint
life expectancies of you and your designated beneficiary.
The amount of each periodic distribution must be calculated in accordance with
IRS regulations. If you fail to receive the minimum required distribution for
any tax year, a 50% excise tax is imposed on the required amount that was not
distributed.
The following applies to the distribution of death proceeds under 408(b) and
408A (Roth IRA - See below) plans. Different distribution requirements apply
after your death.
If your death occurs after you begin receiving minimum distributions under the
contract, distributions must be made at least as rapidly as under the method in
effect at the time of your death. Code section 401(a)(9) provides specific rules
for calculating the required minimum distributions at your death. The death
benefit under the contract and also certain other contract benefits, such as
living benefits, may affect the amount of the required minimum distribution that
must be taken.
If your death occurs before you begin receiving minimum distributions under the
contract, your entire balance must be distributed by December 31 of the calendar
year containing the fifth anniversary of the date of your death. For example, if
you die on September 1, 2004, your entire balance must be distributed to the
designated beneficiary by December 31, 2009. However, if the distributions begin
by December 31 of the calendar year following the calendar year of your death,
and you have named a designated beneficiary, then payments may be made over
either of the following time frames:
o Over the life of the designated beneficiary; or
o Over a period not extending beyond the life expectancy of the
designated beneficiary.
If the designated beneficiary is your spouse, distributions must begin on or
before the later of the following:
o December 31 of the calendar year following the calendar year of
your death; or
o December 31 of the calendar year in which you would have attained
age 70 1/2.
ROTH IRAS - GENERAL
Section 408A of the Code permits certain eligible individuals to contribute
to a Roth IRA. Contributions to a Roth IRA, which are subject to limits on the
amount of the contributions and the persons who may be eligible to contribute,
are not deductible, and must be made in cash or as a rollover or transfer from
another Roth IRA or other IRA. Certain qualifying individuals may convert an
IRA, SEP, or SIMPLE IRA, to a Roth IRA. Such rollovers and conversions are
subject to tax, and other special rules may apply. If you make a tax-free
rollover of a distribution from a Roth IRA to another Roth IRA, you may not make
another tax-free rollover from the Roth IRA from which the rollover was made
within a 1-year period. A 10% penalty may apply to amounts attributable to a
conversion to a Roth IRA if the amounts are distributed during the five taxable
years beginning with the year in which the conversion was made.
ROTH IRAS - DISTRIBUTIONS
A qualified distribution from a Roth IRA is not taxed when it is received.
A qualified distribution is a distribution:
o Made after the five-taxable year period beginning with the first
taxable year for which a contribution was made to a Roth IRA of
the owner; and
o Made after you attain age 59 1/2, die, become disabled as defined
in the Tax Code, or for a qualified first-time home purchase.
If a distribution is not qualified, it will be taxable to the extent of the
accumulated earnings. Under special ordering rules, a partial distribution will
first be treated generally as a return of contributions which is not taxable and
then as taxable accumulated earnings.
TAX SHELTERED ANNUITIES - GENERAL
Section 403(b) of the Code allows employees of certain Section 501(c)(3)
organizations and public schools to exclude from their gross income the premium
payments made, within certain limits, on a Contract that will provide an annuity
for the employee's retirement. These premium payments may be subject to FICA
(Social Security) tax. Distributions of (1) salary reduction contributions made
in years beginning after December 31, 1988; (2) earnings on those contributions;
and (3) earnings on amounts held as of the last year beginning before January 1,
1989, are not allowed prior to age 59 1/2, severance from employment, death or
disability. Distributions allocable to salary reduction contributions, but not
earnings on such contributions, may also be distributed upon hardship. Certain
penalties may apply.
TAX SHELTERED ANNUITIES - DISTRIBUTIONS
All distributions from Section 403(b) plans are taxed as received unless
either of the following is true:
o The distribution is rolled over to another plan eligible to
receive rollovers or to a traditional individual retirement
annuity/account (IRA) in accordance with the Tax Code; or
o You made after-tax contributions to the plan. In this case, the
amount will be taxed according to rules detailed in the Tax Code.
Generally, you must begin receiving distributions by April 1 of the calendar
year following the calendar year in which you attain age 70 1/2 or retire,
whichever occurs later, unless you had amounts under the contract as of December
31, 1986. In this case, distribution of these amounts generally must begin by
the end of the calendar year in which you attain age 75 or retire, if later. The
death benefit under the contract and also certain other contract benefits, such
as the living benefits, may affect the amount of the required minimum
distribution that must be taken. If you take any distributions in excess of the
required minimum amount, then special rules require that some or all of the
December 31, 1986 balance be distributed earlier.
OTHER TAX CONSEQUENCES
As noted above, the foregoing comments about the federal tax consequences under
the Contracts are not exhaustive, and special rules are provided with respect to
other tax situations not discussed in this prospectus. Further, the federal
income tax consequences discussed herein reflect our understanding of current
law, and the law may change. Federal estate and state and local estate,
inheritance and other tax consequences of ownership or receipt of distributions
under a Contract depend on the individual circumstances of each contract owner
or recipient of the distribution. A competent tax adviser should be consulted
for further information.
POSSIBLE CHANGES IN TAXATION
Although the likelihood of legislative change is uncertain, there is always the
possibility that the tax treatment of the Contracts could change by legislation
or other means. It is also possible that any change could be retroactive (that
is, effective before the date of the change). You should consult a tax adviser
with respect to legislative developments and their effect on the Contract.
FEDERAL INCOME TAX WITHHOLDING
We will withhold and remit to the U.S. government a part of the taxable portion
of each distribution made under a Contract unless the distributee notifies us at
or before the time of the distribution that he or she elects not to have any
amounts withheld. In certain circumstances, we may be required to withhold tax,
as explained above. The withholding rates applicable to the taxable portion of
periodic annuity payments (other than eligible rollover distributions) are the
same as the withholding rates generally applicable to payments of wages. In
addition, a 10% withholding rate applies to the taxable portion of non-periodic
payments (including withdrawals prior to the annuity starting date) and
conversions of, and rollovers from, non-Roth IRAs to Roth IRAs. Regardless of
whether you elect not to have federal income tax withheld, you are still liable
for payment of federal income tax on the taxable portion of the payment. As
discussed above, the withholding rate applicable to eligible rollover
distributions is 20%.
ASSIGNMENTS
Adverse tax consequences to the plan and/or to you may result if your beneficial
interest in the contract is assigned or transferred to persons other than: a
plan participant as a means to provide benefit payments; an alternate payee
under a qualified domestic relations order in accordance with code section
414(p); or to the Company as collateral for a loan.
TAXATION OF COMPANY
We are taxed as a life insurance company under the Tax Code. The Separate
Account is not a separate entity from us. Therefore, it is not taxed separately
as a "regulated investment company," but is taxed as part of the Company.
Guarantee Annuity - 131798
A26
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APPENDIX A
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MARKET VALUE ADJUSTMENT EXAMPLES
EXAMPLE #1: FULL SURRENDER -- EXAMPLE OF A NEGATIVE MARKET VALUE ADJUSTMENT
Assume $100,000 was allocated to a Fixed Interest Allocation with a
guaranteed interest period of 10 years, an initial Index Rate ("I") of 5%; that
a full surrender is requested 3 years into the guaranteed interest period; that
the Account Value on the date of surrender is $115,000; that the then Index Rate
for a 7-year guaranteed interest period ("J") is 6%; and that no prior transfers
or withdrawals affecting this Fixed Interest Allocation have been made.
CALCULATE THE MARKET VALUE ADJUSTMENT
1. N = 2,555 ( 365 x 7 )
2. Market Value Adjustment = $115,000 x [ { (1.05/1.0650) }^(2,555/365) -1 ]
= $-10,870
Therefore, the amount paid to you on full surrender ignoring any surrender
charge is $104,130 ($115,000 - $10,870).
EXAMPLE #2: FULL SURRENDER -- EXAMPLE OF A POSITIVE MARKET VALUE ADJUSTMENT
Assume $100,000 was allocated to a Fixed Interest Allocation with a
guaranteed interest period of 10 years, an initial Index Rate ("I") of 5%; that
a full surrender is requested 3 years into the guaranteed interest period; that
the Account Value on the date of surrender is $115,000; that the then Index Rate
for a 7-year guaranteed interest period ("J") is 4%; and that no prior transfers
or withdrawals affecting this Fixed Interest Allocation have been made.
CALCULATE THE MARKET VALUE ADJUSTMENT
1. N = 2,555 ( 365 x 7 )
2. Market Value Adjustment = $115,000 x [ { (1.05/1.0450) }^(2,555/365) -1 ]
= $3,907
Therefore, the amount paid to you on full surrender ignoring any surrender
charge is $118,907 ($115000 + $3,907).
EXAMPLE #3: WITHDRAWAL -- EXAMPLE OF A NEGATIVE MARKET VALUE ADJUSTMENT
Assume $200,000 was allocated to a Fixed Interest Allocation with a
guaranteed interest period of 10 years, an initial Index Rate ("I") of 5%; that
a withdrawal of $128,000 is requested 3 years into the guaranteed interest
period; that the Account Value on the date of withdrawal is $250,000; that the
then Index Rate ("J") for a 7-year guaranteed interest period is 6%; and that no
prior transfers or withdrawals affecting this Fixed Interest Allocation have
been made.
Guarantee Annuity - 131798
A27
First calculate the amount that must be withdrawn from the Fixed Interest
Allocation to provide the amount requested.
1. N = 2,555 ( 365 x 7 )
2. Amount that must be withdrawn = [$128,000/ { (1.05/1.0650) }^(2,555/365) ]
= $141,362
Then calculate the Market Value Adjustment on that amount.
3. Market Value Adjustment = $141,362 x [ { (1.05/1.0650) }^(2,555/365) -1]
= $-13,362
Therefore, the amount of the withdrawal paid to you ignoring any surrender
charge is $128,000, as requested. The Fixed Interest Allocation will be reduced
by the amount of the withdrawal, $128,000, and also reduced by the Market Value
Adjustment of $13,362, for a total reduction in the Fixed Interest Allocation of
$141,362.
EXAMPLE #4: WITHDRAWAL -- EXAMPLE OF A POSITIVE MARKET VALUE ADJUSTMENT
Assume $200,000 was allocated to a Fixed Interest Allocation with a
guaranteed interest period of 10 years, an initial Index Rate of 5%; that a
withdrawal of $128,000 requested 3 years into the guaranteed interest period;
that the Account Value on the date of withdrawal is $250,000; that the then
Index Rate ("J") for a 7-year guaranteed interest period is 4%; and that no
prior transfers or withdrawals affecting this Fixed Interest Allocation have
been made.
First calculate the amount that must be withdrawn from the Fixed Interest
Allocation to provide the amount requested.
1. N = 2,555 ( 365 x 7 )
2. Amount that must be withdrawn = [$128,000/ { (1.05/1.0450) }^(2,555/365) ]
= $123,794
Then calculate the Market Value Adjustment on that amount.
3. Market Value Adjustment = $123,794 x [ { (1.05/1.0450) }^(2,555/365) -1]
= $4,206
Therefore, the amount of the withdrawal paid to you ignoring any surrender
charge is $128,000, as requested. The Fixed Interest Allocation will be reduced
by the amount of the withdrawal, $128,000, but increased by the Market Value
Adjustment of $4,206, for a total reduction in the Fixed Interest Allocation of
$123,794.
Guarantee Annuity - 131798
A28
- --------------------------------------------------------------------------------
APPENDIX B
- --------------------------------------------------------------------------------
SURRENDER CHARGE EXAMPLES
EXAMPLE #1: SURRENDER CHARGES -- PARTIAL WITHDRAWAL IN EXCESS OF FREE WITHDRAWAL
AMOUNT
The following assumes you made an initial single premium payment of $100,000
into the 10-year guarantee period with an interest rate of 7.50%. It also
assumes a withdrawal at the beginning of the fifth contract year of 20% of the
contract value. The accumulation value as of the beginning of the fifth contract
year is $133,546.91. The interest earned in the last 12 months as of the
beginning of the fifth contract year is $9,317.23.
In this example, $9,317.23 (last 12 months' interest earnings) is the maximum
free withdrawal amount that you may withdraw during the contract year without a
surrender charge. The total amount withdrawn from the Contract would be
$26,709.39 ($133,546.91 x .20). Therefore, $17,392.16 ($26,709.39 - $9,317.23)
is considered an excess withdrawal and would be subject to a 4% surrender charge
of $695.69 ($17,392.16 x .04). The amount of the withdrawal paid to you will be
$26,013.70 ($26,709.39 - $695.69).
This example does not take into account any Market Value Adjustment or deduction
of any premium taxes.
EXAMPLE #2: SURRENDER CHARGES -- FREE PARTIAL WITHDRAWAL FOLLOWED BY FULL
SURRENDER
The following assumes you made an initial single premium payment of $100,000
into the 10-year guarantee period with an interest rate of 6.00%. It also
assumes a free partial withdrawal at the beginning of the fifth contract year of
$7,146.10, followed by a full surrender 183 days later.
The accumulation value as of the beginning of the fifth contract year is
$126,247.70. The interest earned in the last 12 months as of the beginning of
the fifth contract year is $7,146.10. In this example, $7,146.10 (last 12
months' interest earnings) is the maximum free withdrawal amount that you may
withdraw during the contract year without a surrender charge. The accumulation
value immediately after the partial withdrawal is $119,101.60.
Assume that 183 days later the policy is surrendered. The accumulation value has
grown to $122,632.40 ($119,101.60 x (1.06(183/365))). On full surrender,
surrender charges are applied to all amounts withdrawn in that contract year.
The cash surrender value is calculated as follows.
1. The surrender charge on the free partial withdrawal amount is $297.75
($7146.10 x (1/(1-.04) -1)).
2. The adjusted accumulation value is $122,334.65 ($122,632.40 - $297.75).
3. The surrender charge upon surrender is $4,893.39 ($122,334.65 x .04).
4. The cash surrender value is $117,441.26 ($122,334.65 - $4,893.39).
This example does not take into account any Market Value Adjustment or deduction
of any premium taxes.
Guarantee Annuity - 131798
B1
ING USA ANNUITY AND LIFE INSURANCE COMPANY
ING USA ANNUITY AND LIFE INSURANCE COMPANY IS A STOCK COMPANY
DOMICILED IN IOWA.
Guarantee Annuity - 131798 04/30/2004
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2003
-----------------
Commission file number: 333-57212, 333-104539, 333-104546,
333-104547, and 333-104548
----------------------------------
ING USA Annuity and Life Insurance Company
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Iowa 41-0991508
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS employer
of incorporation or organization identification no.)
1475 Dunwoody Drive, West Chester, Pennsylvania 19380-1478
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (610) 425-3400
--------------
Golden American Life Insurance Company
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Securities registered pursuant to Section 12(b) of Act: None
Securities registered pursuant to Section 12(g) of Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 250,000 shares of Common Stock
as of March 25, 2004, all of which were directly owned by Lion Connecticut
Holdings Inc.
NOTE: WHEREAS ING USA ANNUITY AND LIFE INSURANCE COMPANY MEETS THE CONDITIONS
SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K, THIS FORM IS
BEING FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION
I(2).
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Annual Report on Form 10-K
For the Year Ended December 31, 2003
TABLE OF CONTENTS
Form 10-K
Item No. Page
PART I
Item 1. Business** 3
Item 2. Properties** 5
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders* 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 6
Item 6. Selected Financial Data* 6
Item 7. Management's Narrative Analysis of the Results of Operations and
Financial Condition** 6
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 16
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 56
Item 9A. Controls and Procedures 56
PART III
Item 10. Directors and Executive Officers of the Registrant* 56
Item 11. Executive Compensation* 57
Item 12. Security Ownership of Certain Beneficial Owners and Management* 57
Item 13. Certain Relationships and Related Transactions* 57
Item 14. Principal Accountant Fees and Services* 57
PART IV
Item 15. Exhibits, Consolidated Financial Statement Schedules and
Reports on Form 8-K 58
Index on Financial Statement Schedules 62
Signatures 66
* Item omitted pursuant to General Instruction I(2) of Form 10-K, except as
to Part III, Item 10 with respect to compliance with Sections 406 and 407
of the Sarbanes Oxley Act of 2002
** Item prepared in accordance with General Instruction I(2) of Form 10-K
PART I
Item 1. Business
Organization of Business
ING USA Annuity and Life Insurance Company (formerly known as Golden
American Life Insurance Company) ("ING USA" or the "Company" as
appropriate), a wholly-owned subsidiary of Lion Connecticut Holdings
Inc. ("Lion" or "Parent"), is a stock life insurance company organized
under the laws of the State of Iowa. ING USA was originally
incorporated under the laws of the State of Minnesota on January 2,
1973, in the name of St. Paul Life Insurance Company. On December 21,
1993, the Company redomesticated from Minnesota to Delaware. On
January 1, 2004 several events occurred. First, the Company
redomesticated from Delaware to Iowa. Secondly, on January 1, 2004
(the "merger date"), Equitable Life Insurance Company of Iowa
("Equitable Life"), 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
American"). Also on January 1, 2004, immediately after the merger,
Golden American changed its name to ING USA Annuity and Life Insurance
Company. As of the merger date, the Merger Companies ceased to exist
and were merged into ING USA. Lion is an indirect, wholly-owned
subsidiary of ING Groep N.V. ("ING"), a global financial services
holding company based in The Netherlands. ING USA is authorized to do
business in the District of Columbia and all states except New York.
ING USA is licensed as a life insurance company under the laws of the
State of Delaware until December 31, 2003 and Iowa since January 1,
2004.
Prior to the merger date, ING USA was a wholly-owned subsidiary of
Equitable Life from December 30, 2001 through December 31, 2003.
Formerly, from October 24, 1997, until December 30, 2001, Equitable of
Iowa Companies, Inc. ("EIC" or "Former Holding Company") directly
owned 100% of Golden American's stock.
On December 3, 2001, the Board of Directors of EIC approved a plan to
contribute its holding of stock of Golden American to another
wholly-owned subsidiary, Equitable Life. The contribution of stock
occurred on December 31, 2001, following approval by the Insurance
Department of Delaware.
As of April 1, 2002, ING USA sold First Golden American Life Insurance
Company of New York ("First Golden") to its sister company, ReliaStar
Life Insurance Company ("ReliaStar"). ReliaStar, the parent of
Security-Connecticut Life Insurance Company ("Security-Connecticut")
which in turn is the parent of ReliaStar Life Insurance Company of New
York ("RLNY"), merged the First Golden business into RLNY operations
and dissolved First Golden at book value for $27.7 million in cash and
a receivable totaling $0.2 million from RLNY. The receivable from RLNY
was assumed by Equitable Life, and ultimately by ING. The
consideration was based on First Golden's statutory-basis book value.
RLNY's payable to the Company was assumed by ING and subsequently
forgiven. ING USA realized a loss of $3.0 million related to the sale
of First Golden, which was recorded as a capital transaction. Approval
for the merger was obtained from the Insurance Departments of the
States of New York and Delaware.
3
As of October 1, 2003, RLNY's parent, Security-Connecticut merged with
and into its parent, ReliaStar.
Statement of Financial Accounting Standards ("FAS") No. 141, "Business
Combinations" excludes transfers of net assets or exchanges of shares
between entities under common control and is therefore covered by
Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations". RLNY presented combined results of operations including
First Golden activity as of the beginning of the period ending
December 31, 2002. The first three months of First Golden activity is
not reflected in the Golden statement of financial position or other
financial information for the period ended December 31, 2002, as the
amounts were not material.
Products and Services
Management has determined that under FAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information", the Company has
one operating segment, ING U.S. Financial Services ("USFS").
The Company offers a portfolio of variable and fixed insurance
products designed to meet customer needs for tax-advantaged savings
for retirement and protection from death. The Company believes longer
life expectancies, an aging population, and growing concern over the
stability and availability of the Social Security system have made
retirement planning a priority for many Americans. The target market
for all products is consumers and corporations throughout the United
States.
Variable annuities are long-term savings vehicles in which contract
owner premiums (purchase payments) are recorded and maintained in
subaccounts within a separate account established and registered with
the Securities Exchange Commission ("SEC") as a unit investment trust.
Many of the variable annuities issued by ING USA are combination
variable and fixed deferred annuity contracts under which some or all
of the premiums may be allocated by the contract owner to a fixed
account available under the contract.
Principal Markets and Method of Distribution
The Company continued to expand distribution systems during 2003.
Broad-based distribution networks are key to realizing a growing share
of the wealth accumulation marketplace. The principal distribution
channels of the Company's variable and fixed insurance products
include national wirehouses, regional securities firms, independent
National Association of Securities Dealers, Inc. ("NASD") firms with
licensed registered representatives, banks, life insurance companies
with captive agency sales forces, independent insurance agents and
independent marketing organizations. The Company plans to establish
new relationships and increase penetration with key distributors in
existing channels. In addition, growth opportunities exist through
increased utilization of the ING broker/dealer network and the
cross-selling of ING products.
4
Competition
The current business and regulatory environment presents many
challenges to the insurance industry. The variable and fixed annuity
competitive environment remains intense and is dominated by a number
of large highly-rated insurance companies. Increasing competition from
traditional insurance carriers as well as banks and mutual fund
companies offers consumers many choices. The economic environment
during 2003 was characterized by record low interest rates, a modest
recovery in the economy and a strong recovery in the equity market as
evidenced by a 26.4% growth rate in the S&P 500 indices. There is an
aging U.S. population which is increasingly concerned about
retirement, estate planning, maintaining its standard of living in
retirement; and potential reductions in government and
employer-provided benefits at retirement, as well as lower public
confidence in the adequacy of those benefits.
Regulation
The Company's operations are subject to comprehensive regulation
throughout the United States. The laws of the various jurisdictions
establish supervisory agencies, including the state insurance
departments, with board authority to grant licenses to transact
business and regulate many aspects of the products and services
offered by the Company, as well as solvency and reserve adequacy. Many
agencies also regulate investment activities on the basis of quality,
diversification, and other quantitative criteria. The Company's
operations and accounts are subject to examination at regular
intervals by certain of these regulators.
ING USA is subject to the insurance laws of the state in which
organized and of the other jurisdictions in which it transacts
business. Through December 31, 2003, the primary regulator of the ING
USA insurance operations is the Commissioner of Insurance for the
State of Delaware; beginning January 1, 2004, its primary regulator
will be the Division of Insurance for the State of Iowa.
The Securities and Exchange Commission ("SEC"), the National
Association of Securities Dealers ("NASD") and, to a lesser extent,
the states regulate sales and investment management activities and
operations of the Company. Regulations of the SEC, Department of Labor
("DOL") and Internal Revenue Service also impact certain of the
Company's annuity and other investment products. These products
involve Separate Accounts and mutual funds registered under the
Investment Company Act of 1940.
Item 2. Properties
The Company's principal executive office is located at 1475 Dunwoody
Drive, West Chester, Pennsylvania, 19380-1478. All Company office
space is leased or subleased by the Company or its other affiliates.
The Company pays substantially all expenses associated with its leased
and subleased office properties. Expenses not paid directly by the
Company are paid for by an affiliate and allocated back to the
Company.
5
Item 3. Legal Proceedings
The Company is a party to threatened or pending lawsuits arising from
the normal conduct of business. Due to the climate in insurance and
business litigation, suits against the Company sometimes include
claims for substantial compensatory, consequential or punitive damages
and other types of relief. Moreover, certain claims are asserted as
class actions, purporting to represent a group of similarly situated
individuals. While it is not possible to forecast the outcome of such
lawsuits, in light of existing insurance, reinsurance and established
reserves, it is the opinion of management that the disposition of such
lawsuits will not have a materially adverse effect on the Company's
operations or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
As of December 31, 2003, all of the Company's outstanding shares were
owned by Equitable Life, which is a wholly-owned subsidiary of Lion,
whose ultimate parent is ING. As of January 1, 2004, all of the
Company's outstanding shares are owned by Lion as a result of the
affiliate mergers described in Part I, Item 1.
Item 6. Selected Financial Data
Omitted pursuant to General Instruction I(2)(a) of Form 10-K.
Item 7. Management's Narrative Analysis of the Results of Operations and
Financial Condition
Overview
The following narrative analysis of the results of operations and
financial condition presents a review of the Company for the twelve
month periods ended December 31, 2003 versus 2002. This review should
be read in conjunction with the consolidated financial statements and
other data presented herein.
6
Change in Accounting Principle
During 2002, the Company adopted Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("FAS") No. 142,
"Goodwill and Other Intangible Asset" ("FAS No. 142"). The adoption of
this standard resulted in an impairment loss of $135.3 million. The
Company, in accordance with FAS No. 142, recorded the impairment loss
retroactive to the first quarter of 2002; prior quarters of 2002 were
restated accordingly. This impairment loss represented the entire
carrying amount of goodwill, net of accumulated amortization. This
impairment charge was shown as a change in accounting principle on the
December 31, 2002 Consolidated Income Statement.
Results of Operations
Fee income and other income for the year ended December 31, 2003
increased by $80.6 million compared to the same period in 2002,
primarily due to an increase in the average variable assets under
management by the Company. The increase in average variable assets
under administration reflects continued business growth in the
Company's variable product lines, as well as the impact of the 2003
equity market recovery on contract holder account values.
Net investment income for the year ended December 31, 2003 increased
by $122.6 million compared to the same period in 2002. This increase
in net investment income is primarily due to higher average fixed
assets under management during the year, resulting from having strong
fixed product sales in mid-year 2002, which increased the average
inforce for the full year in 2003. This increase was partially offset
by reduced new money yields, which were negatively impacted by the low
interest rate environment.
Net realized capital gains (losses) for the year ended December 31,
2003 decreased by $40.4 million compared to the same period in 2002.
The decrease was primarily due to futures trading losses related to
the Company's dynamic hedging program to mitigate the Company's
product living and death benefit guarantee exposures resulting from
the volatility in the equity markets. Excluding the futures losses
there is an increase in net realized capital gains of $94.5 million.
Net realized gains result from sale of fixed maturity investments
having a fair value greater than book value primarily due to declining
interest rates.
Interest credited and other benefits to the policyholders for the year
ended December 31, 2003 increased by $1.7 million compared to the same
period in 2002. The increase is primarily due to the Company's growth
in interest credited related to its higher average fixed account
values in force being largely offset by reduced guaranteed living and
death benefit reserves related to the strong equity market recovery.
General expenses for the year ended December 31, 2003 decreased by
$15.9 million compared to the same period in 2002. The decrease is
primarily due to a lower allocation of corporate and service charges
from the Company's parent and other affiliates who provide service to
the Company, as a result of increased efficiencies gained from ING's
7
company-wide cost reduction efforts. Also contributing to the decrease
is a decline in fixed business sales resulting in lower general
expenses.
Commissions for the year ended December 31, 2003 decreased by $38.4
million compared to the same period in 2002. This decrease is
primarily due to lower sales in the Company's fixed product portfolio.
Also contributing to the decrease is a negative ceding commission
related to the recapture of an affiliate reinsurance agreement in the
first quarter of the year.
Policy acquisition costs deferred for the year ended December 31, 2003
decreased by $81.4 million compared to the same period in 2002. The
decrease was primarily due to lower selling expenses on lower fixed
product sales, as well as the deferral of a net gain attributed to the
recapture of an affiliated reinsurance agreement.
Amortization of deferred policy acquisition costs and value of
business acquired for the year ended December 31, 2003, increased by
$56.9 million compared to the same period in 2002. Amortization of
long-duration products is reflected in proportion to actual and
estimated future gross profits. Estimated future gross profits are
computed based on underlying assumptions related to the underlying
contracts, including but not limited to interest margins, surrenders,
withdrawals, expenses, and asset growth. The increase in the
amortization of deferred policy acquisition costs and value of
insurance acquired reflects the impact of these variables on the
overall book of business.
Expense and charges reimbursed under modified coinsurance ("MODCO")
agreements for the year ended December 31, 2003, increased by $26.7
million compared to the same period in 2002. This balance reflects the
net cash flows associated with affiliate MODCO agreements covering
certain variable annuity business. The increase is primarily due to an
increase in expense allowance related to new business written and
covered by MODCO.
Interest expense for the year ended December 31, 2003, decreased by
$2.3 million compared to the same period in 2002. Interest expense
reduced for the year of 2003, due to the repayment of two surplus
notes on June 28, 2002 to Equitable Life. Principal amounts of the
notes were for $50 million and $25 million. The Insurance Department
of the State of Delaware approved the repayments of these notes.
The cumulative effect of the change in accounting principle for the
year ended December 31, 2002, was a loss of $135.3 million net of
taxes, related to the adoption of FAS No. 142, which addresses the
value of Goodwill and Other Intangible Assets.
8
Net income, excluding change in accounting principle and net realized
capital gains and losses (net of taxes), increased by $131.5 million
for the year ended December 31, 2003, as compared to the year ended
December 31, 2002. The increase in net earnings is primarily the
result of increased fee income, reduced variable product benefit
guarantees related to the equity market recovery, partially offset by
lower fixed margins resulting from the depressed interest rate
environment, and increased amortization of deferred policy acquisition
costs and value of business acquired.
Financial Condition
Investments
Fixed Maturities
Total fixed maturities reflected net unrealized capital gains of
$176.3 million and $216.3 million at December 31, 2003 and 2002,
respectively.
It is management's objective that the portfolio of fixed maturities be
of high quality and be well diversified by market sector. The fixed
maturities in the Company's portfolio are generally rated by external
rating agencies and, if not externally rated, are rated by the Company
on a basis believed to be similar to that used by the rating agencies.
The average quality rating of the Company's fixed maturities portfolio
was A+ and AA+ at December 31, 2003 and 2002.
Fixed maturities rated BBB and below may have speculative
characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity of the
issuer to make principal and interest payments than is the case with
higher rated fixed maturities.
In addition, the Company invests in structured securities that meet
the criteria of Emerging Issues Task Force ("EITF") Issue No. 99-20,
"Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets". Under
EITF Issue No. 99-20, a determination of the required impairment is
based on credit risk and the possibility of significant prepayment
risk that restricts the Company's ability to recover the investment.
An impairment is recognized if the fair value of the security is less
than book value and there has been an adverse change in cash flow
since the last remeasurement date.
When a decline in fair value is determined to be other than temporary,
the individual security is written down to fair value and the loss is
accounted for as a realized loss.
Liquidity and Capital Resources
Liquidity is the ability of the Company to generate sufficient cash
flows to meet the cash requirements of operating, investing, and
financing activities. The Company's principal sources of liquidity are
annuity premiums and product charges, investment income, maturing
investments, proceeds from debt issuance, and capital contributions.
Primary uses of these funds are payments of commissions and operating
expenses, interest and premium credits, investment purchases,
repayment of debt, as well as withdrawals and surrenders.
9
The Company's liquidity position is managed by maintaining adequate
levels of liquid assets, such as cash or cash equivalents and
short-term investments. Additional sources of liquidity include
borrowing facilities to meet short-term cash requirements. The Company
maintains a $40.0 million revolving note facility with ING America
Insurance Holdings, Inc. ("ING AIH"), a perpetual $75.0 million
revolving note facility with Bank of New York and a $125.0 million
revolving note facility with SunTrust Bank which expires on July 30,
2004. Management believes that these sources of liquidity are adequate
to meet the Company's short-term cash obligations.
The National Association of Insurance Commissioners ("NAIC")
risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula.
These requirements are intended to allow insurance regulators to
monitor the capitalization of insurance companies based upon the type
and mixture of risks inherent in a Company's operations. The formula
includes components for asset risk, liability risk, interest rate
exposure, and other factors. The Company has complied with the NAIC's
risk-based capital reporting requirements. Amounts reported indicate
that the Company has total adjusted capital above all required capital
levels.
During 2003, 2002 and 2001, ING USA received capital contributions of
$230.0 million, $356.3 million and $196.8 million, respectively.
Critical Accounting Policies
General
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the use of
estimates and assumptions in certain circumstances that affect amounts
reported in the accompanying consolidated financial statements and
related footnotes. These estimates and assumptions are evaluated on an
on-going basis based on historical developments, market conditions,
industry trends and other information that is reasonable under the
circumstances. There can be no assurance that actual results will
conform to estimates and assumptions, and that reported results of
operations will not be affected in a materially adverse manner by the
need to make future accounting adjustments to reflect changes in these
estimates and assumptions from time to time.
The Company has identified the following estimates as critical in that
they involve a higher degree of judgment and are subject to a
significant degree of variability: investment impairment testing,
amortization of deferred acquisition costs and value of business
acquired and goodwill impairment testing. In developing these
estimates, management makes subjective and complex judgments that are
inherently uncertain and subject to material changes as facts and
circumstances develop. Although variability is inherent in these
estimates, management believes the amounts provided are appropriate
based upon the facts available upon compilation of the consolidated
financial statements.
10
Investment Impairment Testing
The Company reviews the general account investments for impairments by
analyzing the amount and length of time amortized cost has exceeded
fair value, and by making certain estimates and assumptions regarding
the issuing companies' business prospects, future economic conditions
and market forecasts. Based on the facts and circumstances of each
case, management uses judgment in deciding whether any calculated
impairments are temporary or other than temporary. For those
impairments judged to be other than temporary, the Company reduces the
carrying value of those investments to the current fair value and
records impairment losses for the difference (refer to Note 2).
Amortization of Deferred Acquisition Costs and Value of Business
Acquired
Deferred policy acquisition costs ("DAC") and value of business
acquired ("VOBA") are amortized with interest over the life of the
contracts (usually 25 years) in relation to the present value of
estimated gross profits from projected interest margins, asset-based
fees, policy administration and surrender charges less policy
maintenance fees and non-capitalized commissions.
Changes in assumptions can have a significant impact on the
calculation of DAC/VOBA and its related amortization patterns. Due to
the relative size of DAC/VOBA balance and the sensitivity of the
calculation to minor changes in the underlying assumptions and the
related volatility that could result in the reported DAC/VOBA balance,
the Company performs a quarterly analysis of DAC/VOBA. At each balance
sheet date, actual historical gross profits are reflected and expected
future gross profits and related assumptions are evaluated for
continued reasonableness. Any adjustment in estimated profit requires
that the amortization rate be revised retroactively to the date of
policy or contract issuance ("unlocking"), which could be significant.
The cumulative difference related to prior periods is recognized as a
component of current period's amortization, along with amortization
associated with the actual gross profits of the period. In general,
increases in estimated returns result in increased expected future
profitability and may lower the rate of amortization, while increases
in lapse/surrender and mortality assumptions or decreases in returns
reduce the expected future profitability of the underlying business
and may increase the rate of amortization.
One of the most significant assumptions involved in the estimation of
future gross profits for variable universal life and variable deferred
annuity products is the assumed return associated with future variable
account performance. To reflect the near-term and long-term volatility
in the equity markets, this assumption involves a combination of
near-term expectations and a long-term assumption about market
performance. The overall return generated by the variable account is
dependent on several factors, including the relative mix of the
underlying sub-accounts among bond funds and equity funds as well as
equity sector weightings.
As part of the regular analysis of DAC/VOBA, at the end of third
quarter of 2002, the Company unlocked its long-term rate of return
assumptions. The Company reset long-term assumptions for the separate
account returns to 9.0% (gross before fund management fees and
mortality and expense and other policy charges), as of December 31,
2002, reflecting a blended return of equity and other sub-accounts.
11
The initial unlocking adjustment in 2002 was primarily driven by the
sustained downturn in the equity markets and revised expectations for
future returns. During 2002, the Company recorded an acceleration of
DAC/VOBA amortization totaling $91.5 million before tax, or $59.5
million, net of $32.0 million of federal income tax benefit.
The Company has remained unlocked during 2003, and reset long-term
assumptions for the separate account returns from 9.0% to 8.5% (gross
before fund management fees and mortality and expense and other policy
charges), as of December 31, 2003, maintaining a blended return of
equity and other sub-accounts. The 2003 unlocking adjustment from the
previous year was primarily driven by improved market performance. For
the year ended December 31, 2003, the Company recorded a deceleration
of DAC/VOBA amortization totaling $41.3 million before tax, or $26.9
million, net of $14.4 million of federal income tax expense.
Goodwill Impairment Testing
The Company tested goodwill as of January 1, 2002 for impairment using
fair value calculations based on the present value of estimated future
cash flows from business currently in force and business that we
estimate we will add in the future. These calculations require
management to make estimates on the amount of future revenues and the
appropriate discount rate. The calculated fair value of goodwill and
the resulting impairment loss recorded is based on these estimates,
which require a significant amount of management judgment. The
adoption of FAS No. 142 resulted in the impairment of the Company's
entire goodwill balance during 2002. Refer to Note 1 of the
consolidated financial statements for a discussion of the results of
the Company's goodwill testing procedures and to Management's
Narrative Analysis of the Results of Operations for the impact these
procedures had on the Company's income.
Off-Balance Sheet Arrangements
In January 2003, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation 46, "Consolidation of Variable Interest
Entities", an Interpretation of ARB No.51 (FIN 46). In December 2003,
the FASB modified FIN 46 to make certain technical corrections and
address certain implementation issues that had arisen. FIN 46 provides
a new framework for identifying variable interest entities (VIEs) and
determining when a company should include the assets, liabilities,
noncontrolling interests and results of activities of a VIE in its
consolidated financial statements.
In general, a VIE is a corporation, partnership, limited-liability
corporation, trust, or any other legal structure used to conduct
activities or hold assets that either (1) has an insufficient amount
of equity to carry out its principal activities without additional
subordinated financial support, (2) has a group of equity owners that
are unable to make significant decisions about its activities, or (3)
has a group of equity owners that do not have the obligation to absorb
losses or the right to receive returns generated by its operations.
FIN 46 requires a VIE to be consolidated if a party with an ownership,
contractual or other financial interest in the VIE (a variable
12
interest holder) is obligated to absorb a majority of the risk of loss
from the VIE's activities, is entitled to receive a majority of the
VIE's residual returns (if no party absorbs a majority of the VIE's
losses), or both. A variable interest holder that consolidates the VIE
is called the primary beneficiary. Upon consolidation, the primary
beneficiary generally must initially record all of the VIE's assets,
liabilities and noncontrolling interests at fair value and
subsequently account for the VIE as if it were consolidated based on
majority voting interest. FIN 46 also requires disclosures about VIEs
that the variable interest holder is not required to consolidate but
in which it has a significant variable interest.
At December 31, 2003, the Company held the following investments that,
for purposes of FIN 46, were evaluated and determined that the
investments do not require consolidation in the Company's financial
statements:
Asset Type Purpose Book Value (1) Market Value
---------------------- ------------------- ------------------- ------------------
Private Corporate Securities - synthetic
leases; project financings; credit tenant
leases Investment Holdings $ 1,057.2 $ 1,114.6
Foreign Securities - US VIE subsidiaries
of foreign companies Investment Holdings 190.3 203.0
Commercial Mortgage Obligations (CMO) Investment Holdings 888.5 893.9
Collateralized Debt Obligations (CDO) Investment Holdings
and/or
Collateral Manager 4.9 4.3
Asset-Backed Securities (ABS) Investment Holdings 479.9 482.3
Commercial Mortgage Backed Securities (CMBS) Investment Holdings 325.4 342.0
(1) Represents maximum exposure to loss except for those structures for which the Company also receives asset
management fees.
Contractual Obligations
As of December 31, 2003, the Company had certain contractual
obligations due over a period of time as summarized in the following
table:
Payments due by Period (in millions)
--------------------------------------------------------------------
Less than More than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
----------------------- ------- --------- --------- --------- ----------
Long-Term Debt $ 502.5 $ 13.0 $ 25.9 $ 25.9 $ 437.7
Operating Lease Obligations 15.1 2.2 4.7 4.8 3.4
Purchase Obligations 25.2 25.2 - - -
------- --------- --------- --------- ----------
Total $ 542.8 $ 40.4 $ 30.6 $ 30.7 $ 441.1
======= ========= ========= ========= ==========
The Company's long-term debt consists of three surplus notes and the
related interest payable. Two of the notes are with Equitable Life and
have outstanding principal balances of $60.0 million and $75.0
million, respectively. The related interest rates and maturity dates
for the Equitable Life notes are 7.25% and 7.75%, and December 29,
2028 and September 29, 2029, respectively. The remaining surplus note
of the Company is with Security Life of Denver Insurance Company, and
has an outstanding principal, interest rate and maturity date of $35.0
million, 7.98% and December 7, 2029, respectively. As a result of the
13
Company's merger with Equitable Life, USG, and ULA effective January
1, 2004, the surplus notes with Equitable Life will no longer exist
effective as of the date of the merger.
Operating lease obligations relate to the rental of office space under
various non-cancelable operating lease agreements that expire through
May 2010.
Purchase obligations consist of commitments to enter into mortgage
loan arrangements during 2004.
Legislative Initiatives
The Jobs and Growth Tax Relief Reconciliation Act of 2003, which was
enacted in the second quarter, may impact the Company. The Act's
provisions, which reduce the tax rates on long-term capital gains and
corporate dividends, impact the relative competitiveness of the
Company's products especially variable annuities.
Other legislative proposals under consideration include repealing the
estate tax, changing the taxation of products, changing life insurance
company taxation and making changes to nonqualified deferred
compensation arrangements. Some of these proposals, if enacted, could
have a material effect on life insurance, annuity and other retirement
savings product sales.
The impact on the Company's tax position and products cannot be
predicted.
Other Regulatory Matters
Like many financial services companies, certain U.S. affiliates of ING
Groep N.V. have received informal and formal requests for information
since September 2003 from various governmental and self-regulatory
agencies in connection with investigations related to mutual funds and
variable insurance products. ING has cooperated fully with each
request.
In addition to responding to regulatory requests, ING management
initiated an internal review of trading in ING insurance, retirement,
and mutual fund products. The goal of this review has been to identify
whether there have been any instances of inappropriate trading in
those products by third parties or by ING investment professionals and
other ING personnel. This internal review is being conducted by
independent special counsel and auditors. Additionally, ING reviewed
its controls and procedures in a continuing effort to deter improper
frequent trading in ING products. ING's internal reviews related to
mutual fund trading are continuing.
The internal review has identified several arrangements allowing third
parties to engage in frequent trading of mutual funds within our
variable insurance and mutual fund products, and identified other
circumstances where frequent trading occurred despite measures taken
by ING intended to combat market timing. Most of the identified
arrangements were initiated prior to ING's acquisition of the
businesses in question. In each arrangement identified, ING has
terminated the inappropriate trading, taken steps to discipline or
terminate employees who were involved, and modified policies and
procedures to deter inappropriate activity. While the review is not
14
completed, management believes the activity identified does not
represent a systemic problem in the businesses involved.
These instances included agreements (initiated in 1998) that permitted
one variable life insurance customer of Reliastar Life Insurance
Company ("Reliastar") to engage in frequent trading, and to submit
orders until 4pm Central Time, instead of 4pm Eastern Time. Reliastar
was acquired by ING in 2000. The late trading arrangement was
immediately terminated when current senior management became aware of
it in 2002. ING believes that no profits were realized by the customer
from the late trading aspect of the arrangement.
In addition, the review has identified five arrangements that allowed
frequent trading of funds within variable insurance products issued by
Reliastar and by ING USA; and in certain ING Funds. ING entities did
not receive special benefits in return for any of these arrangements,
which have all been terminated. The internal review also identified
two investment professionals who engaged in improper frequent trading
in ING Funds.
ING will reimburse any ING Fund or its shareholders affected by
inappropriate trading for any profits that accrued to any person who
engaged in improper frequent trading for which ING is responsible.
Management believes that the total amount of such reimbursements will
not be material to ING or its U.S. business.
Subsequent Event
On January 1, 2004, Equitable Life, USG, and ULA, merged with and into
the Company. Also on January 1, 2004, immediately after the merger,
the Company changed its name to ING USA Annuity and Life Insurance
Company. As of the merger date, the Merger Companies ceased to exist
and were succeeded by ING USA.
The merger was accounted for based on the pooling-of-interests method.
FAS 141 excludes transfers of net assets or exchanges of shares
between entities under common control, and notes that certain
provisions under APB 16, provide a source of guidance for such
transactions.
Prior to the merger date, the Merger Companies were affiliated
companies of ING USA and indirect, wholly-owned subsidiaries of ING.
Equitable Life 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.
A Form 8-K for ING USA describing the merger, was filed on January 4,
2004 and includes unaudited pro forma condensed consolidated financial
information as of, and for the periods ended, September 30, 2003 and
2002, and December 31, 2002, 2001, and 2000. Revenues and net income
for the period ended December 31, 2003, had the pooling been
consummated at the date of the financial statements, is $1,509.0
million and $57.2 million, respectively (unaudited).
15
Forward-Looking Information/Risk Factors
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company cautions readers
regarding certain forward-looking statements contained in this report
and in any other statements made by, or on behalf of, the Company,
whether or not in future filings with the SEC. Forward-looking
statements are statements not based on historical information and
which relate to future operations, strategies, financial results, or
other developments. Statements using verbs such as "expect,"
"anticipate," "believe" or words of similar import generally involve
forward-looking statements. Without limiting the foregoing,
forward-looking statements include statements which represent the
Company's beliefs concerning future levels of sales and redemptions of
the Company's products, investment spreads and yields, or the earnings
and profitability of the Company's activities.
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of
which are beyond the Company's control and many of which are subject
to change. These uncertainties and contingencies could cause actual
results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable
developments. Some may be national in scope, such as general economic
conditions, changes in tax law and changes in interest rates. Some may
be related to the insurance industry generally, such as pricing
competition, regulatory developments and industry consolidation.
Others may relate to the Company specifically, such as credit,
volatility and other risks associated with the Company's investment
portfolio. Investors are also directed to consider other risks and
uncertainties discussed in documents filed by the Company with the
SEC. The Company disclaims any obligation to update forward-looking
information.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Asset/liability management is integrated into many aspects of the
Company's operations, including investment decisions, product
development, and determination of crediting rates. As part of the risk
management process, different economic scenarios are modeled,
including cash flow testing required for insurance regulatory
purposes, to determine that existing assets are adequate to meet
projected liability cash flows. Key variables in the modeling process
include interest rates, anticipated contractholder behavior and
variable separate account performance. Contractholders bear the
investment risk related to variable separate account products.
The fixed account liabilities are supported by a portfolio principally
composed of fixed rate investments that can generate predictable,
steady rates of return. The portfolio management strategy for the
fixed account considers the assets available for sale. This enables
the Company to respond to changes in market interest rates, changes in
prepayment risk, changes in relative values of asset sectors and
individual securities and loans, changes in credit quality outlook,
and other relevant factors. The objective of portfolio management is
to maximize returns, taking into account interest rate and credit
risk, as well as other risks. The Company's asset/liability management
16
discipline includes strategies to minimize exposure to loss as
interest rates and economic and market conditions change.
On the basis of these analyses, management believes there is currently
no material solvency risk to the Company.
17
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
Report of Independent Auditors 19
Consolidated Financial Statements:
Consolidated Income Statements for the years ended
December 31, 2003, 2002 and 2001 20
Consolidated Balance Sheets as of December 31, 2003 and 2002 21
Consolidated Statements of Changes in Shareholder's Equity for
the years ended December 31, 2003, 2002 and 2001 22
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 23
Notes to Consolidated Financial Statements 24
Report of Independent Auditors
The Board of Directors
ING USA Annuity and Life Insurance Company
We have audited the accompanying consolidated balance sheets of ING USA Annuity
and Life Insurance Company (formerly Golden American Life Insurance Company) and
Subsidiary as of December 31, 2003 and 2002, and the related consolidated income
statements, statements of changes in shareholder's equity, and statements of
cash flows for each of the three years in the period ended December 31, 2003.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ING USA Annuity
and Life Insurance Company as of December 31, 2003 and 2002, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States.
As discussed in Note 1 to the financial statements, the Company changed the
accounting principle for goodwill and other intangible assets effective January
1, 2002.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 22, 2004
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Consolidated Income Statements
(Millions)
Year ended Year ended Year ended
December 31, December 31, December 31,
2003 2002* 2001*
------------------ ------------------- ------------------
Revenues:
Fee income $ 330.2 $ 245.9 $ 219.1
Net investment income 320.3 197.7 94.4
Net realized capital gains (losses) (36.2) 4.2 (6.5)
Other income (loss) (0.2) 3.5 -
------------------ ------------------- ------------------
Total revenue $ 614.1 $ 451.3 $ 307.0
------------------ ------------------- ------------------
Benefits, losses and expenses:
Benefits:
Interest credited and other benefits
to policyholders 320.1 318.4 239.2
Underwriting, acquisition, and insurance expenses:
General expenses 123.8 139.7 119.9
Commissions 250.3 288.7 232.4
Policy acquisition costs deferred (210.8) (292.2) (128.2)
Amortization:
Deferred policy acquisition costs and value
of business acquired 184.7 127.8 49.6
Goodwill - - 4.2
Other:
Expense and charges reimbursed under
modified coinsurance agreements (131.6) (104.9) (225.6)
Interest expense 13.7 16.0 19.4
------------------ ------------------- ------------------
Total benefits, losses and expenses 550.2 493.5 310.9
------------------ ------------------- ------------------
Income (loss) before income taxes and cumulative
effect of change in accounting principle 63.9 (42.2) (3.9)
Income tax expense (benefit) 2.5 (12.5) 0.1
------------------ ------------------- ------------------
Income (loss) before cumulative effect of change
in accounting principle 61.4 (29.7) (4.0)
Cumulative effect of change in accounting principle - (135.3) -
------------------ ------------------- ------------------
Net income (loss) $ 61.4 $ (165.0) $ (4.0)
================== =================== ==================
*See Note 1.
The accompanying notes are an integral part of these consolidated financial statements.
20
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Consolidated Balance Sheets
(Millions)
As of December 31,
2003 2002
----------------- -----------------
Assets
Investments:
Fixed maturities, available for sale, at fair value
(amortized cost of $5,047.0 at 2003 and $4,720.1 at 2002) $ 5,223.3 $ 4,936.4
Equity securities at fair value:
Investment in mutual funds (cost of $5.3 at 2003 and $22.9 at 2002) 5.6 19.0
Mortgage loans on real estate 847.6 482.4
Policy loans 17.5 16.0
Short-term investments 17.7 2.2
----------------- -----------------
Total investments 6,111.7 5,456.0
Cash and cash equivalents 17.9 148.5
Accrued investment income 65.4 61.9
Reinsurance recoverable 13.0 196.9
Deferred policy acquisition costs 835.3 678.0
Value of business acquired 8.5 8.5
Receivable for securities sold 10.2 -
Due from affiliates 4.2 -
Other assets 14.7 5.3
Assets held in separate accounts 17,112.6 11,029.3
----------------- -----------------
Total assets $ 24,193.5 $ 17,584.4
================= =================
Liabilities and Shareholder's Equity
Policy liabilities and accruals:
Future policy benefits and claims' reserves $ 5,277.3 $ 5,159.1
----------------- -----------------
Total policy liabilities and accruals 5,277.3 5,159.1
Surplus notes 170.0 170.0
Current income taxes 3.9 42.4
Deferred income taxes 126.0 79.8
Dollar roll obligations 120.1 40.0
Other liabilities 31.0 64.7
Liabilities related to separate accounts 17,112.6 11,029.3
----------------- -----------------
Total liabilities 22,840.9 16,585.3
----------------- -----------------
Shareholder's equity:
Common stock (250,000 shares authorized, issued and outstanding;
$10.00 per share par value) 2.5 2.5
Additional paid-in capital 1,358.4 1,128.4
Accumulated other comprehensive income 64.2 2.1
Retained deficit (72.5) (133.9)
----------------- -----------------
Total shareholder's equity 1,352.6 999.1
----------------- -----------------
Total liabilities and shareholder's equity $ 24,193.5 $ 17,584.4
================= =================
The accompanying notes are an integral part of these consolidated financial statements.
21
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(Millions)
Accumulated
Additional Other Retained Total
Common Paid-In Comprehensive Earnings Shareholder's
Stock Capital Income (Loss) (Deficit) Equity
--------------- --------------- ---------------- ---------------- ----------------
Balance at December 31, 2000 $ 2.5 $ 583.6 $ (4.1) $ 35.1 $ 617.1
Contribution of capital 196.8 196.8
Comprehensive income:
Net (loss) - - - (4.0) (4.0)
Other comprehensive income
net of tax:
Unrealized gain on securities
($12.2 pretax) - - 7.9 - 7.9
----------------
Comprehensive income 3.9
--------------- --------------- ---------------- ---------------- ----------------
Balance at December 31, 2001 2.5 780.4 3.8 31.1 817.8
Contribution of capital 356.3 356.3
Other (8.3) (8.3)
Comprehensive income:
Net (loss) - - - (165.0) (165.0)
Other comprehensive income
net of tax:
Unrealized (loss) on securities
($(2.6) pretax) - - (1.7) - (1.7)
----------------
Comprehensive loss (166.7)
--------------- --------------- ---------------- ---------------- ----------------
Balance at December 31, 2002 2.5 1,128.4 2.1 (133.9) 999.1
Contribution of capital - 230.0 - - 230.0
Comprehensive income:
Net income - - - 61.4 61.4
Other comprehensive income
net of tax:
Unrealized gain on securities
($95.6 pretax) - - 62.1 - 62.1
----------------
Comprehensive income 123.5
--------------- --------------- ---------------- ---------------- ----------------
Balance at December 31, 2003 $ 2.5 $ 1,358.4 $ $ 64.2 $ (72.5) $ 1,352.6
=============== =============== ================ ================ ================
The accompanying notes are an integral part of these consolidated financial statements.
22
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Consolidated Statements of Cash Flows
(Millions)
Year ended Year ended Year ended
December 31, December 31, December 31,
2003 2002 2001
----------------- ------------------ -----------------
Cash Flows from Operating Activities:
Net income (loss) $ 61.4 $ (165.0) $ (4.0)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Interest credited and charges on interest sensitive products 306.3 282.2 191.0
Net realized capital (gains) losses 36.2 (4.2) 6.5
Increase in accrued investment income (3.5) (39.5) (13.2)
Increase in guaranteed benefits reserve (91.6) 107.1 28.2
Other changes in insurance reserve liabilities 13.3 - -
Policy acquisition cost deferred (210.8) (292.2) (128.2)
Amortization of deferred policy acquisition costs 180.4 121.2 45.2
Amortization of value of business acquired 4.3 6.6 4.4
Impairment of goodwill - 151.3 -
Other non-cash reconciling items and other changes in
assets and liabilities (87.0) 21.3 110.6
Provision for deferred income taxes 12.8 (85.7) (0.6)
----------------- ------------------ -----------------
Net cash provided by operating activities 221.8 103.1 239.9
----------------- ------------------ -----------------
Cash Flows from Investing Activities:
Proceeds from the sale, maturity, or repayment of:
Fixed maturities available for sale 7,025.8 7,297.1 880.7
Equity securities 16.2 7.8 6.9
Mortgage loans 51.9 285.0 136.0
Acquisition of investments:
Fixed maturities available for sale (7,267.3) (10,068.3) (2,070.8)
Equity securities - (22.8) -
Short-term and other investments (15.4) - (4.7)
Mortgage loans (417.1) (553.7) (250.3)
Increase in policy loans (1.5) (1.2) (1.5)
(Increase) decrease in property and equipment (0.7) 1.1 1.2
Proceeds from sale of interest in subsidiary - 27.7 -
Loss on valuation of interest in subsidiary - 3.0 -
Other - 0.6 -
----------------- ------------------ -----------------
Net cash used for investing activities (608.1) (3,023.7) (1,302.5)
----------------- ------------------ -----------------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 1,383.5 3,818.5 1,933.1
Maturities and withdrawals from insurance contracts (332.3) (171.2) (134.8)
Transfers to separate accounts (1,160.0) (1,053.8) (902.9)
Proceeds received on reinsurance recapture 134.5 - -
Proceeds of notes payable - - 3.1
Repayment of notes payable - (1.4) (1.7)
Proceeds from reciprocal loan agreement borrowings - - 69.3
Repayment of reciprocal loan agreement borrowings - (75.0) (69.3)
Contributions of capital by parent 230.0 356.3 196.8
----------------- ------------------ -----------------
Net cash provided by financing activities 255.7 2,873.4 1,093.6
----------------- ------------------ -----------------
Net increase (decrease) in cash and cash equivalents (130.6) (47.2) 31.0
Cash and cash equivalents, beginning of period 148.5 195.7 164.7
----------------- ------------------ -----------------
Cash and cash equivalents, end of period $ 17.9 $ 148.5 $ 195.7
================= ================== =================
Supplemental cash flow information:
Income taxes (received) paid, net $ 28.2 $ (141.5) $ 0.4
================= ================== =================
Interest paid $ 13.0 $ 20.8 $ 15.0
================= ================== =================
The accompanying notes are an integral part of these consolidated financial statements.
23
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Principles of Consolidation
ING USA Annuity and Life Insurance Company (formerly known as Golden
American Life Insurance Company) ("ING USA" or the "Company" as
appropriate), a wholly-owned subsidiary of Lion Connecticut Holdings Inc.
("Lion" or "Parent"), is a stock life insurance company organized under the
laws of the State of Iowa. ING USA was originally incorporated under the
laws of the State of Minnesota on January 2, 1973, in the name of St. Paul
Life Insurance Company. On December 21, 1993, the Company redomesticated
from Minnesota to Delaware. On January 1, 2004 several events occurred.
First, the Company redomesticated from Delaware to Iowa. Secondly, on
January 1, 2004 (the "merger date"), Equitable Life Insurance Company of
Iowa ("Equitable Life"), 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 American"). Also
on January 1, 2004, immediately after the merger, Golden American changed
its name to ING USA Annuity and Life Insurance Company. As of the merger
date, the Merger Companies ceased to exist and were merged into ING USA.
Lion is an indirect, wholly-owned subsidiary of ING Groep N.V. ("ING"), a
global financial services holding company based in The Netherlands. ING USA
is authorized to do business in the District of Columbia and all states
except New York. ING USA is licensed as a life insurance company under the
laws of the State of Delaware until December 31, 2003 and Iowa since
January 1, 2004.
Prior to the merger date, ING USA was a wholly-owned subsidiary of
Equitable Life from December 30, 2001 through December 31, 2003. Formerly,
from October 24, 1997, until December 30, 2001, Equitable of Iowa
Companies, Inc. ("EIC" or "Former Holding Company") directly owned 100% of
Golden American's stock.
On December 3, 2001, the Board of Directors of EIC approved a plan to
contribute its holding of stock of Golden American to another wholly-owned
subsidiary, Equitable Life. The contribution of stock occurred on December
31, 2001, following approval by the Insurance Department of Delaware.
As of April 1, 2002, ING USA sold First Golden American Life Insurance
Company of New York ("First Golden") to its sister company, ReliaStar Life
Insurance Company ("ReliaStar"). ReliaStar, the parent of
Security-Connecticut Life Insurance Company ("Security-Connecticut"), which
in turn is the parent of ReliaStar Life Insurance Company of New York
("RLNY"), merged the First Golden business into RLNY operations and
dissolved First Golden at book value for $27.7 million in cash and a
receivable totaling $0.2 million from RLNY. The receivable from RLNY was
assumed by Equitable Life, and ultimately by ING. The consideration was
based on First Golden's statutory-basis book value. RLNY's payable to the
Company was assumed by ING and subsequently forgiven. ING USA realized a
loss of $3.0 million related to the sale of First Golden, which was
recorded as a capital transaction. Approval for the merger was obtained
from the Insurance Departments of the States of New York and Delaware.
24
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
As of October 1, 2003, RLNY's parent, Security-Connecticut merged with and
into its parent, ReliaStar.
Statement of Financial Accounting Standards ("FAS") No. 141, "Business
Combinations" excludes transfers of net assets or exchanges of shares
between entities under common control and is therefore covered by
Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations". RLNY presented combined results of operations including
First Golden activity as of the beginning of the period ending December 31,
2002. The first three months of First Golden activity is not reflected in
the ING USA statement of financial position or other financial information
for the period ended December 31, 2002, as the amounts were not material.
Description of Business
The Company offers a portfolio of variable and fixed insurance products
designed to meet customer needs for a tax-advantaged savings for retirement
and protection from death. The Company's variable and fixed insurance
products are marketed by broker/dealers, financial institutions, and
insurance agents. The Company's primary customers are consumers and
corporations.
Recently Adopted Accounting Standards
Accounting for Goodwill and Intangible Assets
During 2002, the Company adopted Financial Accounting Standards Board
("FASB") FAS No. 142, "Goodwill and Other Intangible Assets". The adoption
of this standard resulted in an impairment loss of $135.3 million. The
Company, in accordance with FAS No. 142, recorded the impairment loss
retroactive to the first quarter of 2002; prior quarters of 2002 were
restated accordingly. This impairment loss represented the entire carrying
amount of goodwill, net of accumulated amortization. This impairment charge
was shown as a change in accounting principle on the December 31, 2002
Consolidated Income Statement.
25
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Application of the nonamortization provision (net of tax) of the standard
resulted in an increase in net income of $3.8 million for the twelve months
ended December 31, 2002. Had the Company been accounting for goodwill under
FAS No. 142 for all periods presented, the Company's net income (loss)
would have been as follow:
Year ended
December 31,
(Millions) 2001
Reported net income (loss) $ (4.0)
Add back goodwill amortization, net of tax 3.8
-----------------
Adjusted net income (loss) $ (0.2)
=================
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended and interpreted by FAS No.
137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement 133, and FAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of FASB 133, and certain FAS 133 implementation
issues". This standard, as amended, requires companies to record all
derivatives on the balance sheet as either assets or liabilities and
measure those instruments at fair value. The manner in which companies are
to record gains or losses resulting from changes in the fair values of
those derivatives depends on the use of the derivative and whether it
qualifies for hedge accounting. FAS No. 133 was effective for the Company's
financial statements beginning January 1, 2001. Adoption of FAS No. 133 did
not have a material effect on the Company's financial position or results
of operations given the Company's limited derivative holdings and embedded
derivatives.
The Company occasionally purchases a financial instrument that contains a
derivative that is "embedded" in the instrument. In addition, the Company's
insurance products are reviewed to determine whether they contain an
embedded derivative. The Company assesses whether the economic
characteristics of the embedded derivative are clearly and closely related
to the economic characteristics of the remaining component of the financial
instrument or insurance product (i.e., the host contract) and whether a
separate instrument with the same terms as the embedded instrument would
meet the definition of a derivative instrument. When it is determined that
the embedded derivative possesses economic characteristics that are not
clearly and closely related to the economic characteristics of the host
contract and that a separate instrument with the same terms would qualify
as a derivative instrument, the embedded derivative is separated from the
host contract and carried at fair value. However, in cases where the host
contract is measured at fair value, with changes in fair value reported in
current period earnings or the Company is unable to reliably identify and
measure the embedded derivative for separation from its host contracts, the
entire contract is carried on the balance sheet at fair value and is not
26
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
designated as a hedging instrument. The Company did not have embedded
derivatives at December 31, 2003 or 2002.
The Derivative Implementation Group ("DIG") responsible for issuing
guidance on behalf of the FASB for implementation of FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" recently
issued Statement Implementation Issue No. B36, "Embedded Derivatives:
Modified Coinsurance Arrangements and Debt Instruments" That Incorporate
Credit Risk Exposures That Are Unrelated or Only Partially Related to the
Credit Worthiness of the Obligor under Those Instruments ("DIG B36"). Under
this interpretation, modified coinsurance and coinsurance with funds
withheld reinsurance agreements as well as other types of receivables and
payables where interest is determined by reference to a pool of fixed
maturity assets or total return debt index may be determined to contain
embedded derivatives that are required to be bifurcated. The required date
of adoption of DIG B36 for the Company was October 1, 2003. The Company
completed its evaluation of DIG B36 and determined that the Company had
modified coinsurance treaties that required implementation of the guidance.
The applicable contracts, however, were determined to generate embedded
derivatives with a fair value of zero. Therefore, the guidance, while
implemented, did not impact the Company's financial position, results of
operations or cash flows.
Guarantees
In November 2002, the FASB issued Interpretation No.45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others", to clarify
accounting and disclosure requirements relating to a guarantor's issuance
of certain types of guarantees, or groups of similar guarantees, even if
the likelihood of the guarantor's having to make any payments under the
guarantee is remote. The disclosure provisions are effective for financial
statements for fiscal years ended after December 15, 2002. For certain
guarantees, the interpretation also requires that guarantors recognize a
liability equal to the fair value of the guarantee upon its issuance. This
initial recognition and measurement provision is to be applied only on a
prospective basis to guarantees issued or modified after December 31, 2002.
The Company has performed an assessment of its guarantees and believes that
all of its guarantees are excluded from the scope of this interpretation.
Variable Interest Entities
In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No.51" (FIN 46). In December 2003, the FASB modified
FIN 46 to make certain technical corrections and address certain
implementation issues that had arisen. FIN 46 provides a new framework for
identifying variable interest entities (VIEs) and determining when a
company should include the assets, liabilities, noncontrolling interests
and results of activities of a VIE in its consolidated financial
statements.
27
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In general, a VIE is a corporation, partnership, limited- liability
corporation, trust, or any other legal structure used to conduct activities
or hold assets that either (1) has an insufficient amount of equity to
carry out its principal activities without additional subordinated
financial support, (2) has a group of equity owners that are unable to make
significant decisions about its activities, or (3) has a group of equity
owners that do not have the obligation to absorb losses or the right to
receive returns generated by its operations.
FIN 46 requires a VIE to be consolidated if a party with an ownership,
contractual or other financial interest in the VIE (a variable interest
holder) is obligated to absorb a majority of the risk of loss from the
VIE's activities, is entitled to receive a majority of the VIE's residual
returns (if no party absorbs a majority of the VIE's losses), or both. A
variable interest holder that consolidates the VIE is called the primary
beneficiary. Upon consolidation, the primary beneficiary generally must
initially record all of the VIE's assets, liabilities and noncontrolling
interests at fair value and subsequently account for the VIE as if it were
consolidated based on majority voting interest. FIN 46 also requires
disclosures about VIEs that the variable interest holder is not required to
consolidate but in which it has a significant variable interest.
At December 31, 2003, the Company held the following investments that, for
purposes of FIN 46, were evaluated and determined that the investments do
not require consolidation in the Company's financial statements:
Asset Type Purpose Book Value (1) Market Value
---------------------- ------------------- ------------------- ------------------
Private Corporate Securities - synthetic
leases; project financings; credit tenant
leases Investment Holdings $ 1,057.2 $ 1,114.6
Foreign Securities - US VIE subsidiaries
of foreign companies Investment Holdings 190.3 203.0
Commercial Mortgage Obligations (CMO) Investment Holdings 888.5 893.9
Collateralized Debt Obligations (CDO) Investment Holdings
and/or
Collateral Manager 4.9 4.3
Asset-Backed Securities (ABS) Investment Holdings 479.9 482.3
Commercial Mortgage Backed Securities (CMBS) Investment Holdings 325.4 342.0
(1) Represents maximum exposure to loss except for those structures for which the Company also receives asset management fees.
New Accounting Pronouncements
In July 2003, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts," which the Company intends to adopt
during first quarter 2004. The impact on the financial statements is not
known at this time.
28
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Reclassifications and Changes to Prior Year Presentation
Certain reclassifications have been made to prior year financial
information to conform to the current year classifications.
During 2003, certain changes were made to the 2002 and 2001 Income
Statements to reflect the correct balances. These changes had no impact on
net income or net shareholder's equity of the Company. The following
summarizes the corrections to each financial statement line item (in
millions):
Previously
Reported Restated
2002 Adjustments 2002
------------------- ------------------ ------------------
Fee income $ 204.0 $ 41.9 $ 245.9
------------------- ------------------ ------------------
Total revenue $ 409.4 $ 41.9 $ 451.3
=================== ================== ==================
Interest credited and other benefits to
policyholders 276.5 41.9 318.4
------------------- ------------------ ------------------
Total expense $ 451.6 $ 41.9 $ 493.5
=================== ================== ==================
Previously
Reported Restated
2002 Adjustments 2002
------------------- ------------------ ------------------
Fee income $ 188.9 $ 30.2 $ 219.1
------------------- ------------------ ------------------
Total revenue $ 276.8 $ 30.2 $ 307.0
=================== ================== ==================
Interest credited and other benefits to
policyholders 209.0 30.2 239.2
------------------- ------------------ ------------------
Total expense $ 280.7 $ 30.2 $ 310.9
=================== ================== ==================
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from reported results using those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments
and other debt issues with a maturity of 90 days or less when purchased.
29
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Investments
All of the Company's fixed maturity and equity securities are currently
designated as available-for-sale. Available-for-sale securities are
reported at fair value and unrealized gains and losses on these securities
are included directly in shareholder's equity, after adjustment for related
charges in deferred policy acquisition costs, value of business acquired,
and deferred income taxes.
The Company analyzes the general account investments to determine whether
there has been an other than temporary decline in fair value below the
amortized cost basis in accordance with FAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Management considers
the length of the time and the extent to which the market value has been
less than cost; the financial condition and near-term prospects of the
issuer; future economic conditions and market forecasts; and the Company's
intent and ability to retain the investment in the issuer for a period of
time sufficient to allow for recovery in market value. If it is probable
that all amounts due according to the contractual terms of a debt security
will not be collected, an other than temporary impairment is considered to
have occurred.
In addition, the Company invests in structured securities that meet the
criteria of Emerging Issues Task Force ("EITF") Issue No. 99-20,
"Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets". Under Issue No. EITF
99-20, a determination of the required impairment is based on credit risk
and the possibility of significant prepayment risk that restricts the
Company's ability to recover the investment. An impairment is recognized if
the fair value of the security is less than amortized cost and there has
been an adverse change in cash flow since the remeasurement date.
When a decline in fair value is determined to be other than temporary, the
individual security is written down to fair value and the loss is accounted
for as a realized loss.
Realized capital gains and losses on all other investments are included in
the consolidated income statements.
Unrealized capital gains and losses on all other investments are reflected
in shareholder's equity, net of related income taxes.
Purchases and sales of fixed maturities and equity securities (excluding
private placements) are recorded on the trade date. Purchases and sales of
private placements and mortgage loans are recorded on the closing date.
Fair values for fixed maturities are obtained from independent pricing
services or broker/dealer quotations. Fair values for privately placed
bonds are determined using a matrix-based model. The matrix-based model
considers the level of risk-free interest rates, current corporate spreads,
the credit quality of the issuer and cash flow characteristics of the
30
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
security. The fair values for equity securities are based on quoted market
prices. For equity securities not actively traded, estimated fair values
are based upon values of issues of comparable yield and quality or
conversion value where applicable.
The Company engages in securities lending whereby certain securities from
its portfolio are loaned to other institutions for short periods of time.
Initial collateral, primarily cash, is required at a rate of 102% of the
market value of the loaned domestic securities. The collateral is deposited
by the borrower with a lending agent, and retained and invested by the
lending agent according to the Company's guidelines to generate additional
income. The market value of the loaned securities is monitored on a daily
basis with additional collateral obtained or refunded as the market value
of the loaned securities fluctuates.
Reverse dollar repurchase agreement and reverse repurchase agreement
transactions are accounted for as collateralized borrowings, where the
amount borrowed is equal to the sales price of the underlying securities.
The investment in mutual funds represents an investment in mutual funds
managed by the Company, and is carried at fair value.
Mortgage loans on real estate are reported at amortized cost less
impairment writedowns. If the value of any mortgage loan is determined to
be impaired (i.e., when it is probable the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement), the carrying value of the mortgage loan is reduced to the
present value of expected cash flows from the loan, discounted at the
loan's effective interest rate, or to the loan's observable market price,
or the fair value of the underlying collateral. The carrying value of the
impaired loans is reduced by establishing a permanent writedown charged to
realized loss.
Policy loans are carried at unpaid principal balances, net of impairment
reserves.
Short-term investments, consisting primarily of money market instruments
and other fixed maturities issues purchased with an original maturity of 91
days to one year, are considered available for sale and are carried at fair
value, which approximates amortized cost.
The Company's use of derivatives is limited to hedging purposes. The
Company enters into interest rate and currency contracts, including swaps,
caps, and floors to reduce and manage risks associated with changes in
value, yield, price, cash flow or exchange rates of assets or liabilities
held or intended to be held. Changes in the fair value of open derivative
contracts are recorded in net realized capital gains and losses.
On occasion, the Company sells call options written on underlying
securities that are carried at fair value. Changes in fair value of these
options are recorded in net realized capital gains or losses.
31
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Deferred Policy Acquisition Costs and Value of Business Acquired
Deferred Policy Acquisition Costs ("DAC") is an asset, which represents
certain costs of acquiring certain insurance business, which are deferred
and amortized. These costs, all of which vary with and are primarily
related to the production of new and renewal business, consist principally
of commissions, certain underwriting and contract issuance expenses, and
certain agency expenses. Value of Business Acquired ("VOBA") is an asset,
which represents the present value of estimated net cash flows embedded in
the Company's contracts, which existed at the time the Company was acquired
by ING. DAC and VOBA are evaluated for recoverability at each balance sheet
date and these assets would be reduced to the extent that gross profits are
inadequate to recover the asset.
The amortization methodology varies by product type based upon two
accounting standards: FAS No. 60, "Accounting and Reporting by Insurance
Enterprises" ("FAS No. 60") and FAS No. 97, "Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and Realized
Gains and Losses from the Sale of Investments" ("FAS No. 97").
Under FAS No. 60, acquisition costs for traditional life insurance
products, which primarily include whole life and term life insurance
contracts, are amortized over the premium payment period in proportion to
the premium revenue recognition.
Under FAS No. 97, acquisition costs for universal life and investment-type
products, which include universal life policies and fixed and variable
deferred annuities, are amortized over the life of the blocks of policies
(usually 25 years) in relation to the emergence of estimated gross profits
from surrender charges, investment margins, mortality and expense margins,
asset-based fee income, and actual realized gains (losses) on investments.
Amortization is adjusted retrospectively when estimates of current or
future gross profits to be realized from a group of products are revised.
DAC and VOBA are written off to the extent that it is determined that
future policy premiums and investment income or gross profits are not
adequate to cover related expenses.
32
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Activity for the years ended December 31, 2003, 2002 and 2001 within VOBA
was as follows:
(Millions)
Balance at December 31, 2000 $ 25.9
Adjustment for FAS No. 115 (1.3)
Interest accrued at 7% 1.6
Amortization (6.0)
-----------------
Balance at December 31, 2001 20.2
Adjustment for FAS No. 115 (5.1)
Additions (3.3)
Interest accrued at 7% 1.3
Amortization (4.6)
-----------------
Balance at December 31, 2002 8.5
Adjustment for FAS No. 115 4.3
Additions -
Interest accrued at (4% - 5%) 0.4
Amortization (4.7)
-----------------
Balance at December 31, 2003 $ 8.5
=================
The estimated amount of VOBA to be amortized, net of interest, over the
next five years is $7.7 million, $5.7 million, $4.1 million, $3.3 million
and $2.6 million for the years 2004, 2005, 2006, 2007 and 2008,
respectively. Actual amortization incurred during these years may vary as
assumptions are modified to incorporate actual results.
As part of the regular analysis of DAC/VOBA, at the end of third quarter of
2002, the Company unlocked its long-term rate of return assumptions. The
Company reset long-term assumptions for the separate account returns to
9.0% (gross before fund management fees and mortality and expense and other
policy charges), as of December 31, 2002, reflecting a blended return of
equity and other sub-accounts. The initial unlocking adjustment in 2002 was
primarily driven by the sustained downturn in the equity markets and
revised expectations for future returns. During 2002, the Company recorded
an acceleration of DAC/VOBA amortization totaling $91.5 million before tax,
or $59.5 million, net of $32.0 million of federal income tax benefit.
The Company has remained unlocked during 2003, and reset long-term
assumptions for the separate account returns from 9.0% to 8.5% (gross
before fund management fees and mortality and expense and other policy
charges), as of December 31, 2003, maintaining a blended return of equity
and other sub-accounts. The 2003 unlocking adjustment from the previous
year was primarily driven by improved market performance. For the year
ended December 31, 2003, the Company recorded a deceleration of DAC/VOBA
amortization totaling $41.3 million before tax, or $26.9 million, net of
$14.4 million of federal income tax expense.
33
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Policy Liabilities and Accruals
Reserves for immediate annuities with life contingent payout contracts are
computed on the basis of assumed investment yield, mortality, and expenses,
including a margin for adverse deviations. Such assumptions generally vary
by plan, year of issue and policy duration. Reserve interest rates range
from 3.0% to 3.5% for all years presented. Investment yield is based on the
Company's experience.
Mortality and withdrawal rate assumptions are based on relevant Company
experience and are periodically reviewed against both industry standards
and experience.
Other policyholders' funds include reserves for deferred annuity investment
contracts and immediate annuities without life contingent payouts. Reserves
on such contracts are equal to cumulative deposits less charges and
withdrawals plus credited interest thereon (rates range from 2.4% to 7.5%
for all years presented) net of adjustments for investment experience that
the Company is entitled to reflect in future credited interest.
Revenue Recognition
For certain annuity contracts, charges assessed against policyholders'
funds for the cost of insurance, surrender, expenses, actuarial margin and
other fees are recorded as revenue as charges are assessed against
policyholders. Other amounts received for these contracts are reflected as
deposits and are not recorded as revenue. Related policy benefits are
recorded in relation to the associated premiums or gross profit so that
profits are recognized over the expected lives of the contracts. When
annuity payments with life contingencies begin under contracts that were
initially investment contracts, the accumulated balance in the account is
treated as a single premium for the purchase of an annuity and reflected as
an offsetting amount in both premiums and current and future benefits in
the Consolidated Income Statement.
Separate Accounts
Separate Account assets and liabilities generally represent funds
maintained to meet specific investment objectives of contractholders who
bear the investment risk, subject, in some cases, to minimum guaranteed
rates. Investment income and investment gains and losses generally accrue
directly to such contractholders. The assets of each account are legally
segregated and are not subject to claims that arise out of any other
business of the Company.
Separate Account assets supporting variable options under universal life
and annuity contracts are invested, as designated by the contractholder or
participant under a contract (who bears the investment risk subject, in
limited cases, to minimum guaranteed rates) in shares of mutual funds which
are managed by the Company, or other selected mutual funds not managed by
the Company.
34
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Separate Account assets are carried at fair value. At December 31, 2003 and
2002, unrealized gains of $112.8 million and of $133.4 million,
respectively, after taxes, on assets supporting a guaranteed interest
option are reflected in shareholder's equity.
Separate Account liabilities are carried at fair value, except for those
relating to the guaranteed interest option. Reserves relating to the
guaranteed interest option are maintained at fund value and reflect
interest credited at rates ranging from 2.4% to 7.5% in 2003 and 2.4% to
11.0% in 2002.
Separate Account assets and liabilities are shown as separate captions in
the Consolidated Balance Sheets. Deposits, investment income and net
realized and unrealized capital gains and losses of the Separate Accounts
are not reflected in the Consolidated Financial Statements (with the
exception of realized and unrealized capital gains and losses on the assets
supporting the guaranteed interest option). The Consolidated Statements of
Cash Flows do not reflect investment activity of the Separate Accounts.
Reinsurance
The Company utilizes indemnity reinsurance agreements to reduce its
exposure to large losses in all aspects of its insurance business. Such
reinsurance permits recovery of a portion of losses from reinsurers,
although it does not discharge the primary liability of the Company as
direct insurer of the risks reinsured. The Company evaluates the financial
strength of potential reinsurers and continually monitors the financial
condition of reinsurers. Only those reinsurance recoverable balances deemed
probable of recovery are reflected as assets on the Company's Balance
Sheets.
Income Taxes
The Company is taxed at regular corporate rates after adjusting income
reported for financial statement purposes for certain items. Deferred
income tax expenses/benefits result from changes during the year in
cumulative temporary differences between the tax basis and book basis of
assets and liabilities.
35
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Deferred corporate tax is stated at the face value and is calculated for
temporary valuation differences between carrying amounts of assets and
liabilities in the balance sheet and tax bases based on tax rates that are
expected to apply in the period when the assets are realized or the
liabilities are settled.
Deferred tax assets are recognized to the extent that it is probable that
taxable profits will be available against which the deductible temporary
differences can be utilized. A deferred tax asset is recognized for the
carryforward of unused tax losses to the extent that it is probable that
future taxable profits will be available for compensation.
2. Investments
Fixed maturities available for sale as of December 31 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- -------------- -------------
2003
(Millions)
U.S. government and government
agencies and authorities $ 23.8 $ 0.1 $ - $ 23.9
State, municipalities and political subdivisions 5.0 - 0.4 4.6
U.S. corporate securities:
Public utilities 482.1 35.7 3.7 514.1
Other corporate securities 2,630.8 128.7 12.1 2,747.4
------------- ------------- -------------- -------------
Total U.S. corporate securities 3,112.9 164.4 15.8 3,261.5
------------- ------------- -------------- -------------
Foreign securities:
Government 68.5 1.0 1.0 68.5
Other 559.7 30.3 5.5 584.5
------------- ------------- -------------- -------------
Total foreign securities 628.2 31.3 6.5 653.0
------------- ------------- -------------- -------------
Mortgage-backed securities 790.0 6.0 4.6 791.4
Other assets-backed securities 487.1 5.5 3.7 488.9
------------- ------------- -------------- -------------
Total fixed maturities $ 5,047.0 $ 207.3 $ 31.0 $ 5,223.3
============= ============= ============== =============
36
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Fixed maturities available for sale as of December 31 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- -------------- -------------
2002
(Millions)
U.S. government and government
agencies and authorities $ 207.3 $ 2.3 $ 0.1 $ 209.5
U.S. corporate securities:
Public utilities 335.7 15.5 1.9 349.3
Other corporate securities 2,739.5 163.2 6.4 2,896.4
------------- ------------- -------------- -------------
Total U.S. corporate securities 3,075.2 178.7 8.3 3,245.7
------------- ------------- -------------- -------------
Foreign securities:
Government 64.8 2.9 - 67.7
Other 436.3 27.7 2.6 461.3
------------- ------------- -------------- -------------
Total foreign securities 501.1 30.6 2.6 529.0
------------- ------------- -------------- -------------
Mortgage-backed securities 641.7 12.0 0.2 653.5
Other assets-backed securities 294.8 7.0 3.1 298.7
------------- ------------- -------------- -------------
Total fixed maturities $ 4,720.1 $ 230.6 $ 14.3 $ 4,936.4
============= ============= ============== =============
At December 31, 2003 and 2002, net unrealized appreciation is $176.3
million and $216.3 million, respectively, on available-for-sale fixed
maturities.
The aggregate unrealized losses and related fair values of investments with
unrealized losses as of December 31, 2003, are shown below by duration:
Unrealized Fair
Loss Value
------------ -----------
(Millions)
Duration category:
Less than six months below cost $ 9.3 $ 675.3
More than six months and less than twelve months below cost 20.4 679.7
More than twelve months below cost 1.3 7.9
------------ -----------
Fixed maturities $ 31.0 $ 1,362.9
============ ===========
37
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Of the losses more than 6 months and less than 12 months in duration of
$20.4 million, there were $9.1 million in unrealized losses that are
primarily related to interest rate movement or spread widening for other
than credit-related reasons. Business and operating fundamentals are
performing as expected. The remaining losses of $11.3 million as of
December 31, 2003 included the following significant items:
$3.6 million of unrealized losses related to securities reviewed for
impairment under the guidance prescribed by EITF 99-20. This category
includes U.S. government-backed securities, principal protected
securities and structured securities which did not have an adverse
change in cash flows for which the carrying amount was $195.1 million.
$6.3 million of unrealized losses relating to the energy/utility
industry, for which the carrying amount was $125.7 million. During
2003, the energy sector recovered due to a gradually improving
economic picture and the lack of any material accounting
irregularities similar to those experienced in the prior two years.
The Company's year-end analysis indicates that the Company expects the
debt to be serviced in accordance with the contractual terms.
The remaining unrealized losses totaling $1.4 million relate to a
carrying amount of $61.9 million.
Of the losses more than 12 months in duration of $1.3 million, there were
$0.6 million related to securities reviewed for impairment under the
guidance prescribed by EITF 99-20. This category includes U.S.
government-backed securities, principal protected securities and structured
securities which did not have an adverse change in cash flows for which the
carrying amount was $4.0 million.
The amortized cost and fair value of total fixed maturities for the
year-ended December 31, 2003 are shown below by contractual maturity.
Actual maturities may differ from contractual maturities because securities
may be restructured, called, or prepaid.
Amortized Fair
Cost Value
------------ -----------
(Millions)
Due to mature:
One year or less $ 30.6 $ 31.0
After one year through five years 880.9 921.1
After five years through ten years 1,866.6 1,962.7
After ten years 666.4 686.2
Mortgage-backed securities 1,115.4 1,133.3
Other asset-backed securities 487.1 489.0
------------ -----------
Fixed maturities $ 5,047.0 $ 5,223.3
============ ===========
38
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
At December 31, 2003 and 2002, fixed maturities with fair values of $2.9
million and $7.5 million, respectively, were on deposit as required by
regulatory authorities.
The Company did not have any investments in a single issuer, other than
obligations of the U.S. government, with a carrying value in excess of 10%
of the Company's shareholder's equity at December 31, 2003.
Beginning in April 2001, the Company entered into reverse dollar repurchase
agreement and reverse repurchase agreement transactions to increase its
return on investments and improve liquidity. These transactions involve a
sale of securities and an agreement to repurchase substantially the same
securities as those sold. The dollar rolls and reverse repurchase
agreements are accounted for as short-term collateralized financings and
the repurchase obligation is reported on the Consolidated Balance Sheets.
The repurchase obligation totaled $120.1 and $40.0 million at December 31,
2003 and 2002, respectively.
The primary risk associated with short-term collateralized borrowings is
that the counterparty will be unable to perform under the terms of the
contract. The Company's exposure is limited to the excess of the net
replacement cost of the securities over the value of the short-term
investments, an amount that was not material at December 31, 2003. The
Company believes the counterparties to the dollar roll and reverse
repurchase agreements are financially responsible and that the counterparty
risk is immaterial.
During 2003, the Company determined that five fixed maturities had other
than temporary impairments. As a result, at December 31, 2003, the Company
recognized a pre-tax loss of $5.7 million to reduce the carrying value of
the fixed maturities to their fair value of $4.2 million. During 2002, the
Company determined that thirteen fixed maturities had other than temporary
impairments. As a result, at December 31, 2002, the Company recognized a
pre-tax loss of $8.9 million to reduce the carrying value of the fixed
maturities to their combined fair value of $123.5 million. During 2001, the
Company determined that ten fixed maturities had other than temporary
impairments. As a result, at December 31, 2001, the Company recognized a
pre-tax loss of $0.7 million to reduce the carrying value of the fixed
maturities to their fair value of $0.7 million.
3. Financial Instruments
Estimated Fair Value
The following disclosures are made in accordance with the requirements of FAS
No. 107, "Disclosures about Fair Value of Financial Instruments". FAS No. 107
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
39
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates, in many cases, could not be
realized in immediate settlement of the instrument. FAS No. 107 excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The following valuation methods and assumptions were used by the Company in
estimating the fair value of the above financial instruments:
Fixed maturities securities: The fair values for the actively traded
marketable bonds are determined based upon the quoted market prices. The
fair values for marketable bonds without an active market are obtained
through several commercial pricing services which provide the estimated
fair values. Fair values of privately placed bonds are determined using a
matrix-based pricing model. The model considers the current level of
risk-free interest rates, current corporate spreads, the credit quality of
the issuer and cash flow characteristics of the security. Using this data,
the model generates estimated market values which the Company considers
reflective of the fair value of each privately placed bond. Fair values for
privately placed bonds are determined through consideration of factors such
as the net worth of the borrower, the value of collateral, the capital
structure of the borrower, the presence of guarantees and the Company's
evaluation of the borrower's ability to compete in their relevant market.
Equity securities: Fair values of these securities are based upon quoted
market value.
Mortgage loans on real estate: The fair values for mortgage loans on real
estate are estimated using discounted cash flow analyses and rates
currently being offered in the marketplace for similar loans to borrowers
with similar credit ratings. Loans with similar characteristics are
aggregated for purposes of the calculations.
Cash, short-term investments and policy loans: The carrying amounts for
these assets approximate the assets' fair values.
Assets held in separate accounts: Assets held in separate accounts are
reported at the quoted fair values of the individual securities in the
separate accounts.
Surplus notes: Estimated fair value of the Company's surplus notes were
based upon discounted future cash flows using a discount rate approximating
the current market value.
Investment contract liabilities (included in future policy benefits and
claims' reserves):
With a fixed maturity: Fair value is estimated by discounting cash flows at
interest rates currently being offered by, or available to, the Company for
similar contracts.
40
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Without a fixed maturity: Fair value is estimated as the amount payable to
the policyholder upon demand. However, the Company has the right under such
contracts to delay payment of withdrawals which may ultimately result in
paying an amount different than that determined to be payable on demand.
Liabilities related to separate accounts: Liabilities related to separate
accounts are reported at full account value in the Company's historical
balance sheet. Estimated fair values of separate account liabilities are
equal to their carrying amount.
The carrying values and estimated fair values of certain of the Company's
financial instruments at December 31, 2003 and 2002 were as follows:
2003 2002
-------------------------- --------------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- --------- ---------- ---------
(Millions)
Assets:
Fixed maturity $ 5,223.3 $ 5,223.3 $ 4,936.4 $ 4,936.4
Equity securities 5.6 5.6 19.0 19.0
Mortgage loans on real estate 847.6 878.1 482.4 522.2
Policy loans 17.5 17.5 16.0 16.0
Cash and short-term investments 35.6 35.6 150.7 150.7
Assets held in separate accounts 17,112.6 17,112.6 11,029.3 11,029.3
Liabilities:
Surplus notes 170.0 267.7 170.0 260.0
Investment contract liabilities:
Deferred annuities 5,180.2 4,872.0 5,128.0 4,802.9
Supplementary contracts and
immediate annuities 12.9 12.9 8.0 8.0
Liabilities related to separate account 17,112.6 17,112.6 11,029.3 11,029.3
Fair value estimates are made at a specific point in time, based on
available market information and judgment about various financial
instruments, such as estimates of timing and amounts of future cash flows.
Such estimates do not reflect any premium or discount that could result
from offering for sale at one time the Company's entire holdings of a
particular financial instrument, nor do they consider the tax impact of the
realization of unrealized gains or losses. In many cases, the fair value
estimates cannot be substantiated by comparison to independent markets, nor
can the disclosed value be realized in immediate settlement of the
instruments. In evaluating the Company's management of interest rate, price
and liquidity risks, the fair values of all assets and liabilities should
be taken into consideration, not only those presented above.
41
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Derivative Financial Instruments
Interest Rate Swaps
Interest rate swaps are used to manage the interest rate risk in the
Company's bond portfolio as well as the Company's liabilities. Interest
rate swaps represent contracts that require the exchange of cash flows at
regular interim periods, typically monthly or quarterly. The notional
amount, carrying value and estimated fair value of the Company's open
interest rate swaps as of December 31, 2003 were $250.0 million, $22.8
million and $22.8 million, respectively. The Company did not have interest
rate swaps at December 31, 2002.
4. Net Investment Income
Sources of net investment income were as follows:
Year ended Year ended Year ended
December 31, December 31, December 31,
2003 2002 2001
------------------- -------------------- -------------------
(Millions)
Fixed maturities $ 287.7 $ 185.6 $ 83.7
Mortgage loans 36.2 19.6 11.2
Policy loans 0.8 0.6 0.8
Short-term investments and cash equivalents 0.7 2.6 2.6
Other 16.1 0.4 0.6
------------------- -------------------- -------------------
Gross investment income 341.5 208.8 98.9
Less: investment expenses 21.2 11.1 4.5
------------------- -------------------- -------------------
Net investment $ 320.3 $ 197.7 $ 94.4
=================== ==================== ===================
5. Dividend Restrictions and Shareholder's Equity
The Company's ability to pay dividends to its Parent is subject to the
prior approval of insurance regulatory authorities for payment of
dividends, which exceed an annual limit. The Company did not pay common
stock dividends during 2003, 2002 and 2001.
The Insurance Departments of the State of Delaware and the State of Iowa
(the "Department") recognize as net income and capital and surplus those
amounts determined in conformity with statutory accounting practices
prescribed or permitted by the Department, which differ in certain respects
from accounting principles generally accepted in the United States.
Statutory net income (loss) was $7.6 million, $(303.0) million, and
$(156.4) million for the years ended December 31, 2003, 2002 and 2001,
respectively. Statutory capital and surplus was $733.9 million and $424.9
million as of December 31, 2003 and 2002, respectively.
42
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
As of December 31, 2003, the Company does not utilize any statutory
accounting practices, which are not prescribed by state regulatory
authorities that, individually or in the aggregate, materially affect
statutory capital and surplus.
The Company maintains a $40.0 million revolving note facility with ING
America Insurance Holdings, Inc. ("ING AIH"), a perpetual $75.0 million
revolving note facility with Bank of New York and a $125.0 million
revolving note facility with SunTrust Bank, which expires on July 30, 2004.
6. Capital Gains and Losses
Realized capital gains or losses are the difference between the carrying
value and sale proceeds of specific investments sold. Net realized capital
(losses) gains on investments were as follows:
Year ended Year ended Year ended
December 31, December 31, December 31,
(Millions) 2003 2002 2001
----------------- ----------------- ------------------
Fixed maturities $ 99.7 $ 4.2 $ (4.9)
Equity securities (1.0) - (1.6)
Derivatives (134.9) - -
----------------- ----------------- ------------------
Pretax realized capital gains (losses) $ (36.2) $ 4.2 $ (6.5)
================= ================= ==================
After-tax realized capital gains (losses) $ (23.5) $ 2.7 $ (4.2)
================= ================= ==================
Proceeds from the sale of total fixed maturities and the related gross
gains and losses were as follows:
Year ended Year ended Year ended
December 31, December 31, December 31,
(Millions) 2003 2002 2001
----------------- ----------------- ------------------
Proceeds on sales $ 5,806.4 $ 6,281.7 $ 880.7
Gross gains 136.3 76.8 6.9
Gross losses 36.6 72.6 11.8
43
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Changes in shareholder's equity related to changes in accumulated other
comprehensive income were as follows:
Year ended Year ended Year ended
December 31, December 31, December 31,
(Millions) 2003 2002 2001
----------------- ----------------- ------------------
Fixed maturities $ (40.0) $ 204.0 $ 18.4
Equity securities 4.2 (3.9) -
DAC/VOBA 131.4 (202.8) (8.4)
----------------- ----------------- ------------------
Subtotal 95.6 (2.7) 10.0
Increase in deferred income taxes 33.5 1.0 2.1
----------------- ----------------- ------------------
Net changes in accumulated other
comprehensive income (loss) $ 62.1 $ (1.7) $ 7.9
================= ================= ==================
Shareholder's equity included the following accumulated other comprehensive
income (loss):
As of As of As of
December 31, December 31, December 31,
(Millions) 2003 2002 2001
----------------- ----------------- ------------------
Net unrealized capital gains (losses):
Fixed maturities $ 176.3 $ 216.3 $ 12.3
Equity securities 0.3 (3.9) -
DAC/VOBA (77.8) (209.2) (6.4)
----------------- ----------------- ------------------
Subtotal 98.8 3.2 5.9
Less: deferred income taxes 34.6 1.1 2.1
----------------- ----------------- ------------------
Net accumulated other comprehensive
income $ 64.2 $ 2.1 $ 3.8
================= ================= ==================
Changes in accumulated other comprehensive income related to changes in
unrealized gains (losses) on securities, were as follows:
Year ended Year ended Year ended
December 31, December 31, December 31,
(Millions) 2003 2002 2001
----------------- ----------------- ------------------
Unrealized holding gains (losses) arising the year(1) $ (2.1) $ (8.7) $ 11.1
Less: reclassification adjustment for gains (losses)
and other items included in net income(2) 64.2 7.0 (3.2)
----------------- ----------------- ------------------
Net unrealized gains (losses) on securities $ 62.1 $ (1.7) $ 7.9
================= ================= ==================
44
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) Pretax unrealized holding gains (losses) arising during the year were
$(3.3) million, $(13.4) million and $17.1 million for the years ended
December 31, 2003, 2002 and 2001, respectively.
(2) Pretax reclassification adjustments for gains (losses) and other items
included in net income were $98.8 million, $10.8 million and $(4.9)
million for the years ended December 31, 2003, 2002 and 2001,
respectively.
7. Severance
In December 2001, ING announced its intentions to further integrate and
streamline the U.S. based operations of ING Americas, (which includes the
Company), in order to build a more customer-focused organization. During
the first quarter 2003, the Company performed a detail analysis of its
severance accrual. As part of this analysis, the Company corrected the
initial planned number of people to eliminate from 252 to 228 (corrected
from the 2002 Annual Report on Form 10K) and extended the date of expected
completion for severance actions to June 30, 2003. Activity for the year
ended December 31, 2003 within the severance liability and positions
elimination related to such actions were as follows:
Severance
(Millions) Liability Positions
--------------- ---------------
Balance at December 31, 2002 $ 0.8 34
Payments (0.8) -
Positions eliminated due to internal replacement jobs - (34)
--------------- ---------------
Balance at December 31, 2003 $ - -
=============== ===============
8. Income Taxes
In 2003 and 2002, ING USA joined in the filing of a consolidated federal
income tax return with its former parent, Equitable Life and other
affiliates. The Company had a tax allocation agreement with Equitable Life
whereby the Company was charged for taxes it would have incurred were it
not a member of the consolidated group and was credited for losses at the
statutory tax rate. Prior to joining the Equitable Life consolidated group,
the Company was the parent of a different consolidated group.
At December 31, 2003, the Company has net operating loss carryforwards of
approximately $206.5 million for federal income tax purposes which are
available to offset future taxable income. If not used, these carryforwards
will expire between 2014 and 2016.
45
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Income tax expense (benefit) from continuing operations included in the
consolidated financial statements are as follows:
Year ended Year ended Year ended
December 31, December 31, December 31,
(Millions) 2003 2002 2001
----------------- ----------------- -----------------
Current taxes (benefits):
Federal $ (10.3) $ (98.2) $ 0.6
----------------- ----------------- -----------------
Total current taxes (benefits) (10.3) (98.2) 0.6
----------------- ----------------- -----------------
Deferred taxes (benefits):
Operations and capital loss carryforwards 53.3 (3.9) (55.3)
Other federal deferred taxes (40.5) 89.6 54.8
----------------- ----------------- -----------------
Total deferred taxes (benefits) 12.8 85.7 (0.5)
----------------- ----------------- -----------------
Total income tax expense $ 2.5 $ (12.5) $ 0.1
================= ================= =================
Income taxes were different from the amount computed by applying the
federal income tax rate to income from continuing operations before income
taxes for the following reasons:
Year ended Year ended, Year ended,
December 31, December 31, December 31,
(Millions) 2003 2002 2001
----------------- ----------------- -----------------
Income before income taxes $ 63.9 $ (42.2) $ (3.9)
Tax rate 35% 35% 35%
----------------- ----------------- -----------------
Income tax at federal statutory rate 22.4 (14.8) (1.4)
Tax effect of:
Goodwill amortization - - 1.0
Meals and entertainment 0.3 0.6 0.5
Dividend received deduction (10.8) - -
Refinement of deferred tax balances (9.5) - -
Other 0.1 1.7 -
----------------- ----------------- -----------------
Income taxes $ 2.5 $ (12.5) $ 0.1
================= ================= =================
46
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities at December 31 are presented below:
(Millions) 2003 2002
----------------- -----------------
Deferred tax assets:
Operations and capital loss carryforwards $ 72.3 $ 125.6
Future policy benefits 86.9 134.5
Goodwill 9.8 11.1
Investments 0.2 0.2
Other 12.2 -
----------------- -----------------
Total gross assets 181.4 271.4
----------------- -----------------
Deferred tax liabilities:
Unrealized gains on investments (61.9) (74.3)
Deferred policy acquisition cost (232.6) (254.8)
Value of purchased insurance in force (3.0) (5.0)
Other (9.9) (17.1)
----------------- -----------------
Deferred tax liability before allowance (307.4) (351.2)
----------------- -----------------
Valuation allowance - -
----------------- -----------------
Net deferred income tax liability $ (126.0) $ (79.8)
================= =================
The Company establishes reserves for possible proposed adjustments by
various taxing authorities. Management believes there are sufficient
reserves provided for, or adequate defenses against any such adjustments.
9. Benefit Plans
Defined Benefit Plan
ING North America Insurance Corporation ("ING North America") sponsors the
ING Americas Retirement Plan (the "Retirement Plan"), effective as of
December 31, 2001. Substantially all employees of ING North America and its
subsidiaries and affiliates (excluding certain employees) are eligible to
participate, including the Company's employees.
The Retirement Plan is a tax-qualified defined benefit plan, the benefits
of which are guaranteed (within certain specified legal limits) by the
Pension Benefit Guaranty Corporation ("PBGC"). As of January 1, 2002, each
participant in the Retirement Plan (except for certain specified employees)
earn a benefit under a final average compensation formula. Subsequent to
December 31, 2001, ING North America is responsible for all Retirement Plan
liabilities. The costs allocated to the Company for its employees'
participation in the Retirement Plan were $7.3 million for 2003, $3.4
million for 2002, and $1.2 million for 2001, respectively.
47
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Defined Contribution Plan
ING North America sponsors the ING Savings Plan and ESOP (the "Savings
Plan"). Substantially all employees of ING North America and its
subsidiaries and affiliates (excluding certain employees) are eligible to
participate, including the Company's employees. The Savings Plan is a
tax-qualified profit sharing and stock bonus plan, which includes an
employee stock ownership plan ("ESOP") component. Savings Plan benefits are
not guaranteed by the PBGC. The Savings Plan allows eligible participants
to defer into the Savings Plan a specified percentage of eligible
compensation on a pre-tax basis. ING North America matches such pre-tax
contributions, up to a maximum of 6% of eligible compensation. All matching
contributions are subject to a 4-year graded vesting schedule (although
certain specified participants are subject to a 5-year graded vesting
schedule). All contributions made to the Savings Plan are subject to
certain limits imposed by applicable law. Pre-tax charges of operations of
the Company for the Savings Plan were $2.3 million in 2003, $2.3 million in
2002, and $0.9 million in 2001, respectively.
Other Benefit Plans
During 2003 and 2002, benefit charges to the Company related to the ING
Americas Supplemental Executive Retirement Plan that covers certain
employees of the Company were not significant.
10. Related Party Transactions
Operating Agreements
The Company has certain agreements whereby it generates revenues and incurs
expenses with affiliated entities. The agreements are as follows:
Resources and services are provided to Security Life of Denver
Insurance Company ("SLDIC) and Southland Life Insurance Company
("SLIC"). For the years ended December 31, 2003, 2002 and 2001
revenues for these services, which reduced general expenses incurred,
were $4.8 million, $4.2 million and $0.3 million, respectively for
SLDIC and $1.6 million, $1.0 million and $0.1 million, respectively
for SLIC.
Underwriting and distribution agreement with Directed Services, Inc.
("DSI"), for the variable insurance products issued by the Company.
DSI is authorized to enter into agreements with broker/dealers to
distribute the Company's' variable products and appoint
representatives of the broker/dealers as agents. For the years ended
December 31, 2003, 2002 and 2001 commission expenses were incurred in
the amounts of $253.8 million, $282.9 million and $229.7 million,
respectively.
Asset management agreement with ING Investment Management LLC ("IIM"),
in which IIM provides asset management and accounting services. The
Company records a fee, which is paid quarterly, based on the value of
48
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
the assets under management. For the years ended December 31, 2003,
2002 and 2001 expenses were incurred in the amounts of $20.8 million,
$11.0 million and $4.4 million, respectively.
Service agreement with Equitable Life in which administrative and
financial related services are provided. For the years ended December
31, 2003, 2002 and 2001 expenses were incurred in the amounts of $2.4
million, $0.6 million and $0.3 million, respectively.
Managerial and supervisory services to DSI. The fee paid by DSI for
these services is calculated as a percentage of average assets in the
variable separate accounts. For the years ended December 31, 2003,
2002 and 2001 revenue for these services was $26.0 million, $23.7
million and $23.1 million, respectively.
Advisory, computer, and other resources and services are provided to
Equitable Life and United Life & Annuity Insurance Company ("ULAIC").
For the years ended December 31, 2003, 2002 and 2001 revenues for
these services, which reduced general expenses incurred, totaled $10.8
million, $9.8 million and $8.2 million, respectively for Equitable
Life and $0.3 million, $0.3 million and $0.4 million, respectively for
ULAIC.
Expense sharing agreements with ING AIH for administrative,
management, financial, and information technology services, which were
approved in 2001. For the years ended December 31, 2003 and 2002, ING
USA incurred expenses of $30.2 million and $41.0 million,
respectively.
Guaranty agreement with Equitable Life. In consideration of an annual
fee, payable June 30, Equitable Life guarantees that it will make
funds available, if needed, to pay the contractual claims made under
the provisions of ING USA's life insurance and annuity contracts. The
agreement is not, and nothing contained therein or done pursuant
thereto by Equitable Life shall be deemed to constitute, a direct or
indirect guaranty by Equitable Life of the payment of any debt or
other obligation, indebtedness, or liability, of any kind or character
whatsoever, of ING USA. The agreement does not guarantee the value of
the underlying assets held in separate accounts in which funds of
variable life insurance and variable annuity policies have been
invested. The calculation of the annual fee is based on risk based
capital. No amounts were payable under this agreement as of December
31, 2003, 2002 and 2001.
Reinsurance Agreements
ING USA participates in a modified coinsurance agreement with Equitable
Life, covering a considerable portion of ING USA's variable annuities
issued on or after January 1, 2000, excluding those with an interest rate
guarantee. The financial statements are presented net of the effects of the
agreement.
Under this agreement, ING USA received a net reimbursement of expenses and
charges of $132.5 million, $100.9 million and $224.5 million for the years
ended December 31, 2003, 2002 and 2001, respectively. This was offset by a
decrease in policy acquisition costs deferred of $182.1 million, $143.5
million and $257.5 million, respectively, for the same periods. At December
31, 2003, 2002 and 2001, ING USA also had a payable to Equitable Life of
$34.5 million, $7.1 million, and $22.6 million, respectively, due to the
49
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
overpayment by Equitable Life of the cash settlement for the modified
coinsurance agreement.
ING USA entered into a reinsurance agreement with Security Life of Denver
International, Ltd. ("SLDI"), an affiliate, covering variable annuity
minimum guaranteed death benefits and minimum guaranteed living benefits of
variable annuities issued after January 1, 2000. In March 2003, the Company
amended its reinsurance agreement with SLDI. Under this amendment, the
Company terminated the reinsurance agreement for all inforce and new
business and recaptured all inforce business reinsured under the
reinsurance agreement between the Company and SLDI retroactive to January
1, 2003 and the Company reduced its reinsurance recoverable related to
these liabilities by $150.1 million. On March 28, 2003, SLDI transferred
assets to the Company in the amount of $185.6 million. The difference in
amounts transferred on March 28, 2003 and the reduction of the reinsurance
recoverables as of January 1, 2003 reflects adjustments on the investment
of the reinsurance recoverable as of January 1, 2003 reflects adjustments
on the investment income on the assets and letter of credit costs between
January 1, 2003 and the date of the asset transfer. It also encompasses the
net effect of a recapture fee paid in the amount of $5.0 million offset by
the receipt of a $24.1 million negative ceding commission. The net impact
of which was deferred in policy acquisition costs and is being amortized
over the period of estimated future profits.
Reciprocal Loan Agreement
ING USA maintains a reciprocal loan agreement with ING AIH, a Delaware
corporation and affiliate, to facilitate the handling of unusual and/or
unanticipated short-term cash requirements. Under this agreement, which
expires December 31, 2007, ING USA and ING AIH can borrow up to $40.0
million from one another. Prior to lending funds to ING AIH, ING USA must
obtain the approval from the Department of Insurance of the State of
Delaware. Interest on any ING USA borrowings is charged at the rate of ING
AIH's cost of funds for the interest period plus 0.15%. Interest on any ING
AIH borrowings is charged at a rate based on the prevailing interest rate
of U.S. commercial paper available for purchase with a similar duration.
Under this agreement, ING USA incurred interest expense of $66,087,
$33,000, and $26,000 for the years ended December 31, 2003, 2002 and 2001,
respectively. At December 31, 2003, 2002 and 2001, ING USA did not have any
borrowings or receivables from ING AIH under this agreement.
Surplus Notes
ING USA issued multiple 30-year surplus notes (see below table). Payment of
the notes and related accrued interest is subordinate to payments due to
policyholders, claimant and beneficiary claims, as well as debts owed to
all other classes of debtors, other than surplus note holders, of ING USA.
Any payment of principal and/or interest made is subject to the prior
50
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
approval of the Delaware Insurance Commissioner. Interest expense for the
years ended December 31:
(Millions)
Surplus Maturity
Note Amount Affiliate Date 2003 2002 2001
8.2% 50.0 *Equitable Life 12/29/2029 - 2.0 4.1
8.0% 35.0 Security Life of Denver 12/7/2029 2.8 2.8 2.8
7.8% 75.0 Equitable Life 9/29/2029 5.8 5.8 5.8
7.3% 60.0 Equitable Life 12/29/2028 4.4 4.4 4.4
8.3% 25.0 *Equitable Life 12/17/2026 - 1.0 2.1
*Surplus notes redeemed June 28, 2002.
Capital Transactions
During 2003, 2002 and 2001, ING USA received capital contributions of
$230.0 million, $356.3 million and $196.8 million respectively.
11. Reinsurance
At December 31, 2003, ING USA had reinsurance treaties with four
unaffiliated reinsurers and two affiliated reinsurers covering a
significant portion of the mortality risks and guaranteed death and living
benefits under its variable contracts. ING USA remains liable to the extent
its reinsurers do not meet their obligations under the reinsurance
agreements.
Reinsurance ceded in force for life mortality risks were $79.3 million and
$90.7 million at December 31, 2003 and 2002, respectively. At December 31,
2003 and 2002, the Company had net receivables of $13.0 million and $196.9
million, respectively for reinsurance claims, reserve credits, or other
receivables from these reinsurers. At December 31, 2003 and 2002,
respectively, these net receivables were comprised of the following: $15.0
million and $36.7 million for claims recoverable from reinsurers; $5.8
million and $6.3 million payable for reinsurance premiums; $(20.2) million
and $137.2 million for reserve credits; and $21.1 million and $24.0 million
for reinsured surrenders and allowances due from an unaffiliated reinsurer.
Included in the accompanying consolidated financial statements, excluding
the modified coinsurance agreements, are net considerations to reinsurers
of $8.9 million, $50.8 million and $30.3 million and net policy benefits
recoveries of $34.1 million, $49.5 million and $21.8 million for the years
ended December 21, 2003, 2002 and 2001, respectively.
ING USA participates in a modified coinsurance agreement with an
unaffiliated reinsurer. The accompanying consolidated financial statements
are presented net of the effects of the treaty which increased (decreased)
income by $(1.9) million, $(2.9) million and $(0.5) million for the years
ended December 31, 2003, 2002 and 2001, respectively.
51
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
12. Commitments and Contingent Liabilities
Leases
For the year ended December 31, 2003 and 2002 rent expense for leases was
$2.6 million and $2.4 million, respectively. The future net minimum
payments under noncancelable leases for the years ended December 31, 2004
through 2008 are estimated to be $2.2 million, $2.3 million, $2.4 million,
$2.4 million and $2.4 million, respectively, and $3.4 million, thereafter.
The Company pays substantially all expenses associated with its leased and
subleased office properties. Expenses not paid directly by the Company are
paid for by an affiliate and allocated back to the Company.
Commitments
Through the normal course of investment operations, the Company commits to
either purchase or sell securities, commercial mortgage loans or money
market instruments at a specified future date and at a specified price or
yield. The inability of counterparties to honor these commitments may
result in either higher or lower replacement cost. Also, there is likely to
be a change in the value of the securities underlying the commitments. At
December 31, 2003 and 2002, the Company had off-balance sheet commitments
to purchase investments equal to their fair value of $25.2 million and
$77.0 million, respectively.
Litigation
The Company is a party to threatened or pending lawsuits arising from the
normal conduct of business. Due to the climate in insurance and business
litigation, suits against the Company sometimes include claims for
substantial compensatory, consequential or punitive damages and other types
of relief. Moreover, certain claims are asserted as class actions,
purporting to represent a group of similarly situated individuals. While it
is not possible to forecast the outcome of such lawsuits, in light of
existing insurance, reinsurance and established reserves, it is the opinion
of management that the disposition of such lawsuits will not have a
materially adverse effect on the Company's operations or financial
position.
Other Regulatory Matters
Like many financial services companies, certain U.S. affiliates of ING
Groep N.V. have received informal and formal requests for information since
September 2003 from various governmental and self-regulatory agencies in
connection with investigations related to mutual funds and variable
insurance products. ING has cooperated fully with each request.
In addition to responding to regulatory requests, ING management initiated
an internal review of trading in ING insurance, retirement, and mutual fund
products. The goal of this review has been to identify whether there have
52
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
been any instances of inappropriate trading in those products by third
parties or by ING investment professionals and other ING personnel. This
internal review is being conducted by independent special counsel and
auditors. Additionally, ING reviewed its controls and procedures in a
continuing effort to deter improper frequent trading in ING products. ING's
internal reviews related to mutual fund trading are continuing.
The internal review has identified several arrangements allowing third
parties to engage in frequent trading of mutual funds within our variable
insurance and mutual fund products, and identified other circumstances
where frequent trading occurred despite measures taken by ING intended to
combat market timing. Most of the identified arrangements were initiated
prior to ING's acquisition of the businesses in question. In each
arrangement identified, ING has terminated the inappropriate trading, taken
steps to discipline or terminate employees who were involved, and modified
policies and procedures to deter inappropriate activity. While the review
is not completed, management believes the activity identified does not
represent a systemic problem in the businesses involved.
These instances included agreements (initiated in 1998) that permitted one
variable life insurance customer of Reliastar Life Insurance Company
("Reliastar") to engage in frequent trading, and to submit orders until 4pm
Central Time, instead of 4pm Eastern Time. Reliastar was acquired by ING in
2000. The late trading arrangement was immediately terminated when current
senior management became aware of it in 2002. ING believes that no profits
were realized by the customer from the late trading aspect of the
arrangement.
In addition, the review has identified five arrangements that allowed
frequent trading of funds within variable insurance products issued by
Reliastar and by ING USA; and in certain ING Funds. ING entities did not
receive special benefits in return for any of these arrangements, which
have all been terminated. The internal review also identified two
investment professionals who engaged in improper frequent trading in ING
Funds.
ING will reimburse any ING Fund or its shareholders affected by
inappropriate trading for any profits that accrued to any person who
engaged in improper frequent trading for which ING is responsible.
Management believes that the total amount of such reimbursements will not
be material to ING or its U.S. business.
13. Subsequent Event
On January 1, 2004, Equitable Life, USG, and ULA, merged with and into the
Company. Also on January 1, 2004, immediately after the merger, the Company
changed its name to ING USA Annuity and Life Insurance Company. As of the
merger date, the Merger Companies ceased to exist and were succeeded by ING
USA.
The merger was accounted for based on the pooling-of-interests method. FAS
141, excludes transfers of net assets or exchanges of shares between
entities under common control, and notes that certain provisions under APB
16, provide a source of guidance for such transactions.
53
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Prior to the merger date, the Merger Companies were affiliated companies of
ING USA and indirect, wholly-owned subsidiaries of ING. Equitable Life 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.
A Form 8-K for ING USA describing the merger, was filed on January 4, 2004
and includes unaudited pro forma condensed consolidated financial
information as of, and for the periods ended, September 30, 2003 and 2002,
and December 31, 2002, 2001, and 2000. Revenue and net income for the
period ended December 31, 2003, had the pooling been consummated at the
date of the financial statements, is $1,509.5 million and $57.3 million,
respectively (unaudited).
54
QUARTERLY DATA (UNAUDITED)
(Millions)
2003 First Second Third Fourth
- ---- --------------- --------------- ---------------- ----------------
Total revenue $ 173.1 $ 150.3 $ 159.8 $ 130.9
--------------- --------------- ---------------- ----------------
Income (loss) before income taxes (12.4) 60.3* (1.0) 17.0
Income tax expense (benefit) (4.3) 19.4 (7.8) (4.8)
--------------- --------------- ---------------- ----------------
Net income (loss) $ (8.1) 40.9 $ 6.8 $ 21.8
=============== =============== ================ ================
(Millions)
2002 First Second Third Fourth
- ---- --------------- --------------- ---------------- ----------------
Total revenue previously reported $ 69.4 $ 89.2 $ 141.4 $ 109.4
Adjustment (see Note 1) 12.6 12.6 11.1 5.6
--------------- --------------- ---------------- ----------------
Total revenue restated 82.0 101.8 152.5 115.0
--------------- --------------- ---------------- ----------------
Income (loss) before income taxes (3.2) (16.0) (60.2) 37.2
Income tax expense (benefit) (1.0) (5.5) (19.2) 13.2
--------------- --------------- ---------------- ----------------
Income (loss) before cumulative effect
of change in accounting principle (2.2) (10.5) (41.0) 24.0
--------------- --------------- ---------------- ----------------
Cumulative effect of change in accounting
principle (135.3) - - -
--------------- --------------- ---------------- ----------------
Net income (loss) $ (137.5) $ (10.5) $ (41.0) $ 24.0
=============== =============== ================ ================
* The Amendment No. 1 on Form 10-Q/A was filed with respect to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003,
filed with the Securities and Exchange Commission on August 12, 2003. The
amendment No. 1 reflected an adjustment to the Company's net income for the
six months ended June 30, 2003 and did not impact results for the three
months ended June 30, 2003. The adjustment for the six months ended June
30, 2003 related to a transposition error in the line item "Policy
acquisition costs deferred," with a corresponding tax effect in the line
item "Income tax expense (Benefit)" in Part 1, Item I, Condensed
Consolidated Statements of Income. Consequently, Part I, Item 2,
Management's Narrative Analysis of the Results of Operations and Financial
Condition, was updated to reflect these adjustments. Additionally, in
accordance with Regulation S-X, the Certifications required by Section 302
and Section 906 of the Sarbanes-Oxley Act of 2002 were attached as exhibits
to the 10-Q/A in Part II, Item 6, Exhibits and Reports on Form 8-K. The
Amendment No. 1 did not contain updates to reflect any events occurring
after the original August 12, 2003 filing of the Company's Form 10-Q for
the quarterly period ended June 30, 2003. All information contained in the
Amendment No. 1 was subject to updating and supplementing as provided in
the Company's reports filed with the Securities and Exchange Commission, as
may be amended, for periods subsequent to the date of the original filing
of the Form 10-Q for the quarterly period ended June 30, 2003.
55
GE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
a) Within the 90-day period prior to the filing of this report, the
Company carried out an evaluation, under the supervision and with
the participation of its management, including its Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rule 13a-14 of
the Securities Exchange Act of 1934). Based on that evaluation,
the Chief Executive Officer and the Chief Financial Officer have
concluded that the Company's current disclosure controls and
procedures are effective in ensuring that material information
relating to the Company required to be disclosed in the Company's
periodic SEC filings is made known to them in a timely manner.
b) There have not been any significant changes in the internal
controls of the Company or other factors that could significantly
affect these internal controls subsequent to the date the Company
carried out its evaluation.
PART III
Item 10. Directors and Executive Officers of the Registrant
Omitted pursuant to General Instruction I(2) of Form 10-K, except with
respect to compliance with Sections 406 and 407 of the Sarbanes-Oxley
Act of 2002:
a) Code of Ethics for Financial Professionals
------------------------------------------
The Company has approved and adopted a Code of Ethics for
Financial Professionals (attached as Exhibit 14), pursuant to the
requirements of Section 406 of the Sarbanes-Oxley Act of 2002.
Any waiver of the Code of Ethics will be disclosed by the Company
by way of a Form 8-K filing.
b) Designation of Board Financial
------------------------------
Expert The Company has designated David A. Wheat, Director and
Chief Financial Officer of the Company, as its Board Financial
Expert, pursuant to the requirements of Section 407 of the
Sarbanes-Oxley Act of 2002. Because the Company is a wholly-owned
subsidiary of Lion, it does not have any outside directors.
56
Item 11. Executive Compensation
Omitted pursuant to General Instruction I(2) of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Omitted pursuant to General Instruction I(2) of Form 10-K.
Item 13. Certain Relationships and Related Transactions
Omitted pursuant to General Instruction I(2) of Form 10-K.
Item 14. Principal Accountant Fees and Services
Omitted pursuant to General Instruction I(2) of Form 10-K.
57
PART IV
Item 15. Exhibits, Consolidated Financial Statement Schedules and Reports on
Form 8-K
(a) The following documents are filed as part of this report:
1. Financial statements. See Item 8 on Page 18.
2. Financial statement schedules. See Index to Consolidated
Financial Statement Schedules on Page 62.
Exhibits
1.(a) Underwriting Agreement between Golden American Life
Insurance Company ("Golden American" or "Registrant")
and Directed Services, Inc., incorporated by
reference from Exhibit 1 to Amendment No. 9 to
Registrant's Registration Statement on Form S-1 filed
with the Securities and Exchange Commission ("SEC")
on or about February 17, 1998 (File No. 333-87272).
2.(a) Agreement and Plan of Merger dated June 25, 2003, by
and between USG Annuity & Life Company, United Life &
Annuity Insurance Company, Equitable Life Insurance
Company of Iowa and Golden American, incorporated by
reference in Exhibit 99-8 in the Company's Form 8K
filed with the SEC on January 2, 2004 (File No.
333-87270).
3.(a)(i) Articles of Incorporation and By-Laws Articles of
Incorporation of Golden American, incorporated by
reference from Exhibit 3(a) to Registrant's
Registration Statement on Form S-1 filed with the SEC
on June 30, 2000 (File No. 333-40596).
(ii) Restated Articles of Incorporation of Golden American
dated June 25, 2003, providing for the
redomestication of the Company to Iowa, effective
January 1, 2004.
(iii) Amendment to Articles of Incorporation of Golden
American to change the Company's name to ING USA
Annuity and Life Insurance Company dated November 11,
2003, effective January 1, 2004.
(b)(i) By-laws of Golden American, as amended, incorporated
by reference from Exhibit 3(b)(ii) to the
Registrant's Registration Statement on Form S-1 filed
with the SEC on June 30, 2000 (File No. 333-40596).
(ii) Certificate of Amendment of the By-laws of MB
Variable Life Insurance Company, as amended,
incorporated by reference from Exhibit 3(b)(iii) to
Registrant's Registration Statement on Form S-1 filed
with the SEC on June 30, 2000 (File No. 333-40596).
58
(iii) Restated By-laws of Golden American dated June 25,
2003, providing for redomestication to Iowa, effective
January 1, 2004.
(iv) Amendment to By-laws of Golden American dated June 25,
2003 to change the Company's name to ING USA Annuity
and Life Insurance Company, effective January 1, 2004.
4.(a) Single Premium Deferred Modified Guaranteed Annuity
Contract, incorporated herein by reference to the
initial Registration Statement for Golden American
filed with the SEC on April 15, 2003 on Form S-2 (File
No. 333-104547).
(b) Single Premium Deferred Modified Guaranteed Annuity
Contract, incorporated herein by reference to the
initial Registration Statement for Golden American
filed with the SEC on April 15, 2003 on Form S-2 (File
No. 333-104548).
(c) Interest in Fixed Account I under Variable Annuity
Contracts, incorporated herein by reference to the
initial Registration Statement for Golden American
filed with the SEC on April 15, 2003 on Form S-2 (File
No. 333-104539).
(d) Interests in Fixed Account II under Variable Annuity
Contracts, incorporated herein by reference to the
initial Registration Statement for Golden American
filed with the SEC on April 15, 2003 on Form S-2 (File
No. 333-104546).
(e) Interest in the Guaranteed Account under Variable
Annuity Contracts, incorporated herein by reference to
the initial Registration Statement for Golden American
filed with the SEC on April 15, 2003 on Form S-2 (File
No. 333-57212).
10.A Material Contracts
(a) Service Agreement, dated as of January 1, 1994, between
Golden American and Directed Services, Inc.,
incorporated by reference from Exhibit 10(b) to a
Registration Statement on Form S-1 filed with the SEC
on April 29, 1998 (File No. 333-51353).
(b) Asset Management Agreement, dated January 20, 1998,
between Golden American and ING Investment Management
LLC, incorporated by reference from Exhibit 10(f) to
Golden American's Form 10-Q filed with the SEC on
August 14, 1998 (File No. 33-87272).
59
(c) Reciprocal Loan Agreement, dated January 1, 1998, as
amended March 20, 1998, between Golden American and ING
America Insurance Holdings, Inc., incorporated by
reference from Exhibit 10(g) to Golden American's Form
10-Q filed with the SEC on August 14, 1998 (File No.
33-87272).
(d) Surplus Note, dated December 8, 1999, between Golden
American and First Columbine Life Insurance Company,
incorporated by reference from Exhibit 10(g) to
Amendment No. 7 to a Registration Statement for Golden
American on Form S-1 filed with the SEC on or about
January 27, 2000 (File No. 333-28765).
(e) Reinsurance Agreement, dated June 30, 2000, between
Golden American and Equitable Life Insurance Company of
Iowa, incorporated by reference from Exhibit 10(s) to
Golden American's Form 10-Q filed with the SEC on
August 11, 2000 (File No. 33-87272).
(f) Services Agreement between Golden American and the
affiliated companies listed on Exhibit B to that
Agreement, effective January 1, 2001.
(g) Services Agreement between Golden American and ING
North American Insurance Corporation, Inc., effective
January 1, 2001.
(h) Form of Shared Services Center Services Agreement by
and among ING North America Insurance Corporation
("Service Provider") and Ameribest Life Insurance
Company, a Georgia corporation; Equitable Life
Insurance Company of Iowa, an Iowa corporation; USG
Annuity & Life Company, an Oklahoma corporation; Golden
American, a Delaware corporation; First Columbine Life
Insurance Company, a Colorado corporation; Life
Insurance Company of Georgia, a Georgia corporation;
Southland Life Insurance Company, a Texas corporation;
Security Life of Denver Insurance Company, a Colorado
corporation; Midwestern United Life Insurance Company,
an Indiana corporation; and United Life & Annuity
Insurance Company, a Texas corporation, incorporated by
reference from Exhibit 10(r) to Pre-Effective Amendment
No. 1 to a Registration Statement on Form S-1 filed by
Registrant with the SEC on or about December 11, 2001
(File No. 333-70602)
(i) Tax Sharing Agreement between Golden American,
Equitable Life Insurance Company of Iowa and USG
Annuity and Life Company, effective January 1, 2001.
(j) Tax Sharing Agreement between Golden American, ING
America Insurance Holdings, Inc. and affiliated
companies, effective January 1, 2001.
(k) Amendment to Services Agreement between Golden American
and affiliated companies listed in Exhibit B to that
Agreement, effective January 1, 2002.
60
(l) Amendment to Asset Management Agreement between Golden
American and ING Investment Management LLC, effective
January 1, 2003.
(m) Administrative Services Agreement between Golden
American, ReliaStar Life Insurance Company of New York
and affiliated companies listed on Exhibit A to the
Agreement, effective March 1, 2003.
(n) Third Amendment to the Asset Management Agreement,
between Golden American and ING Investment Management
LLC, effective August 18, 2003.
(o) Lease Agreement, dated as of April 16, 1998, by and
between Golden American and Dunwoody Associates.
(p) First Amendment to Lease Agreement, dated November 4,
1998, between Golden American and Dunwoody Associates.
(q) Second Amendment to Lease Agreement, dated June 1,
2000, between Golden American and Dunwoody Associates.
10.B. Reports on Form 8K
Form 8K Report filed January 2, 2004, to disclose the
redomestication, merger and name change of Golden
American, effective January 1, 2004, incorporated by
reference (File No. 033-87270).
14. ING Code of Ethics for Financial Professionals.
31.1 Certificate of David A. Wheat pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Keith Gubbay pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certificate of David A. Wheat pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certificate of Keith Gubbay pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
61
Index to Consolidated Financial Statement Schedules
Page
Report of Independent Auditors 63
I. Summary of Investments - Other than Investments in Affiliates as of
December 31, 2003 64
IV. Reinsurance as of and for the years ended December 31, 2003, 2002 and 2001 65
Schedules other than those listed above are omitted because they are not
required or not applicable.
Report of Independent Auditors
The Board of Directors
ING USA Annuity and Life Insurance Company
We have audited the consolidated financial statements of ING USA Annuity and
Life Insurance Company (formerly Golden American Life Insurance Company) and
Subsidiary as of December 31, 2003 and 2002, and for each of the three years in
the period ended December 31, 2003, and have issued our report thereon dated
March 22, 2004. Our audits also included the financial statement schedules
listed in Item 15. These schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 22, 2004
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Schedule I
Summary of Investments - Other than Investments in Affiliates
As of December 31, 2003
(Millions)
Amount
Shown on
Type of Investments Cost Value* Balance Sheet
--------------- --------------- ----------------
Fixed maturities:
U.S. government and government agencies and authorities $ 23.8 $ 23.9 $ 23.9
State, municipalities and political subdivisions 5.0 4.6 4.6
Public utilities securities 482.1 514.1 514.1
Other U.S. corporate securities 2,630.8 2,747.4 2,747.4
Foreign securities (1) 628.2 653.0 653.0
Mortgage-backed securities 790.0 791.4 791.4
Other asset-backed securities 487.1 488.9 488.9
--------------- --------------- ----------------
Total fixed maturities 5,047.0 5,223.3 5,223.3
--------------- --------------- ----------------
Total equity securities 5.3 5.6 5.6
--------------- --------------- ----------------
Short term investments 17.7 17.7 17.7
Mortgage loans 847.6 878.1 847.6
Policy loans 17.5 17.5 17.5
--------------- --------------- ----------------
Total other investments $ 882.8 $ 913.3 $ 882.8
=============== =============== ================
* See Notes 2 and 3 of Notes to Consolidated Financial Statements.
(1) The term "foreign" includes foreign governments, foreign political
subdivisions, foreign public utilities and all other bonds of foreign
issuers. Substantially all of the Company's foreign securities are
denominated in U.S. dollars.
64
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Schedule IV
Reinsurance Inforamtion
As of and for the years ended December 31, 2003, 2002 and 2001
(Millions)
Percentage of
(Millions) Gross Ceded Assumed Net assumed to net
------------- ------------- ------------- ------------- ---------------
Year ended December 31, 2003
Life insurance in force $ 154.0 $ 79.3 $ - $ 74.7 0.0%
Year ended December 31, 2002
Life insurance in force $ 158.7 $ 90.7 $ - $ 68.0 0.0%
Year ended December 31, 2001
Life insurance in force $ 169.3 $ 94.8 $ - $ 74.5 0.0%
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
ING USA Annuity and Life Insurance Company
(Registrant)
March 25, 2004 By /s/ David A. Wheat
- --------------- -----------------------------------------
(Date) David A. Wheat
Director, Senior Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on or before March 25, 2004.
Signatures
Title
/s/ David A. Wheat Director, Senior Vice President and
-------------------------------------- Chief Financial Officer
David A. Wheat
/s/ Keith Gubbay Director and President
- ---------------------------------------
Keith Gubbay
/s/ Thomas J. McInerney Director and Chairman
- ---------------------------------------
Thomas J. McInerney
/s/ Jacques de Vaucleroy Director
- ---------------------------------------
Jacques de Vaucleroy
/s/ Kathleen A. Murphy Director
- ---------------------------------------
Kathleen A. Murphy
EXHIBIT 31.1
CERTIFICATION
I, David A. Wheat, certify that:
1. I have reviewed this annual report on Form 10-K of ING USA Annuity and
Life Insurance Company and Subsidiary;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: March 25, 2004
By /s/ David A. Wheat
----------------------------------------------------
David A. Wheat
Director, Senior Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
EXHIBIT 31.2
CERTIFICATION
I, Keith Gubbay, certify that:
1. I have reviewed this annual report on Form 10-K of ING USA Annuity and
Life Insurance Company and Subsidiary;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: March 25, 2004
By /s/ Keith Gubbay
----------------------------------------
Keith Gubbay
Director and President
(Duly Authorized Officer and Principal Officer)
EXHIBIT 32.1
CERTIFICATION
Pursuant to 18 U.S.C. ss.1350, the undersigned officer of ING USA Annuity and
Life Insurance Company (the "Company") hereby certifies that, to the officer's
knowledge, the Company's Annual Report on Form 10-K for the year ended December
31, 2003 (the "Report") fully complies with the requirements of Section 13 or
15(d), as applicable, of the Securities Exchange Act of 1934 and that the
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
March 25, 2004 By /s/ David A. Wheat
- --------------- ------------------------------------------
(Date) David A. Wheat
Director, Senior Vice President and
Chief Financial Officer
EXHIBIT 32.2
CERTIFICATION
Pursuant to 18 U.S.C. ss.1350, the undersigned officer of ING USA Annuity and
Life Insurance Company (the "Company") hereby certifies that, to the officer's
knowledge, the Company's Annual Report on Form 10-K for the year ended December
31, 2002 (the "Report") fully complies with the requirements of Section 13 or
15(d), as applicable, of the Securities Exchange Act of 1934 and that the
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
March 25, 2004 By /s/ Keith Gubbay
- --------------- -------------------------------------------
(Date) Keith Gubbay
Director and President
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, 2003
and 2002.
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 December 31,
2003
Unaudited Pro Forma Condensed Consolidated Statements of Income for the
Years Ended December 31, 2003, 2002 and 2001.
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements as
of December 31, 2003, and for the periods ended December 31, 2003, 2002 and
2001.
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.
1
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of December 31, 2003
- --------------------------------------------------------------------------------
Pro Forma Pro Forma
(Millions) ING USA ELIC USG ULA Adjustments Consolidated
-------------------------------------------------------------------------------
Assets
Investments:
Fixed maturities, available for
sale, at fair value $ 5,223.3 $ 3,873.7 $ 6,406.5 $ 594.4 $ - $16,097.9
Equity securities, at fair value:
Common stock 5.6 18.1 - - - 23.7
Preferred stock - 0.4 1.3 - - 1.7
Investment in mutual funds - 94.9 - - - 94.9
Investment in subsidiaries - 1,799.0 - - (1,799.0)(1) -
Mortgage loans on real estate 847.6 1,027.2 1,477.0 36.8 - 3,388.6
Real estate - 1.8 2.7 - - 4.5
Policy loans 17.5 126.5 32.2 0.9 - 177.1
Short-term investments 17.7 - 0.3 - - 18.0
Other investments - 237.9 (72.3) 7.7 (135.0)(2) 38.3
-------------------------------------------------------------------------------
Total investments 6,111.7 7,179.5 7,847.7 639.8 (1,934.0) 19,844.7
Cash and cash equivalents 17.9 32.3 34.0 3.7 - 87.9
Accrued investment income 65.4 44.1 68.6 7.6 - 185.7
Reinsurance recoverable 13.0 2.1 0.3 - - 15.4
Receivable for securities sold 10.2 0.1 0.3 - - 10.6
Deferred policy acquisition costs 835.3 825.1 162.9 3.4 - 1,826.7
Value of business acquired 8.5 64.3 34.4 4.3 - 111.5
Due from affiliates 4.2 - - - - 4.2
Other assets 14.7 8.0 (2.4) 0.9 - 21.2
Assets held in separate accounts 17,112.6 1,044.4 - 63.2 - 18,220.2
-------------------------------------------------------------------------------
Total assets $ 24,193.5 $ 9,199.9 $ 8,145.8 $ 722.9 $(1,934.0) $ 40,328.1
===============================================================================
Liabilities and Shareholder's Equity
Policy liabilities and accruals:
Future policy benefits and claims
reserves $ 5,277.3 $ 5,644.7 $ 7,298.2 $ 560.8 $ - $ 18,781.0
Notes to affiliates 170.0 - - - (135.0)(2) 35.0
Due to affiliates - (54.4) 0.2 1.4 - (52.8)
Payables for securities purchased - - - - - -
Borrowed money 120.1 177.0 309.8 - - 606.9
Current income taxes 3.9 18.4 (2.3) (0.6) - 19.4
Deferred income taxes 126.0 (54.8) 10.6 (2.8) - 79.0
Other liabilities 31.0 94.4 82.9 1.8 - 210.1
Liabilities related to separate
accounts 17,112.6 1,044.4 - 63.2 - 18,220.2
-------------------------------------------------------------------------------
Total liabilities 22,840.9 6,869.7 7,699.4 623.8 (135.0) 37,898.8
-------------------------------------------------------------------------------
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 64.2 138.6 48.2 5.4 (112.4)(1) 144.0
Retained deficit (72.5) (1,413.7) (1,072.5) (103.4) 1,145.0 (1) (1,517.1)
-------------------------------------------------------------------------------
Total shareholder's equity 1,352.6 2,330.2 446.4 99.1 (1,799.0) 2,429.3
-------------------------------------------------------------------------------
Total liabilities and shareholder's
equity $ 24,193.5 $ 9,199.9 $ 8,145.8 $ 722.9 $(1,934.0) $ 40,328.1
===============================================================================
2
Unaudited Pro Forma Condensed Consolidated Statement of Income for the
Year Ended December 31, 2003
- --------------------------------------------------------------------------------
Pro Forma Pro Forma
(Millions) ING USA ELIC USG ULA Adjustments Consolidated
-------------- ------------- -------------- -------------- -------------- --------------
Revenue:
Premiums $ - $ 26.7 $ 0.8 $ - $ - $ 27.5
Fee income 330.2 47.8 16.0 2.2 - 396.2
Net investment income 320.3 314.3 452.5 34.0 (10.2)(2) 1,110.9
Net realized capital gains (losses) (36.2) (0.5) (3.7) 11.0 - (29.4)
Other income (loss) (0.2) 4.5 (1.1) 0.6 - 3.8
-------------- ------------- -------------- -------------- -------------- --------------
Total revenue 614.1 392.8 464.5 47.8 (10.2) 1,509.0
-------------- ------------- -------------- -------------- -------------- --------------
Benefits, losses and expenses:
Benefits:
Interest credited and other
benefits to policyholders 320.1 306.6 370.7 23.7 - 1,021.1
Underwriting, acquisition, and
insurance expenses:
General expenses 123.8 58.2 37.6 3.3 - 222.9
Commissions 250.3 37.2 48.1 0.5 - 336.1
Policy acquisition costs deferred (210.8) (219.5) (61.4) (0.4) - (492.1)
Amortization of deferred policy
acquisition costs and value of
business acquired 184.7 99.4 57.8 6.1 - 348.0
Other:
Expense and charges reimbursed
under modified coinsurance
agreements (131.6) 132.5 - - - 0.9
Interest expense 13.7 6.5 5.7 - (10.2)(2) 15.7
-------------- ------------- -------------- -------------- -------------- --------------
Total benefits, losses and expenses 550.2 420.9 458.5 33.2 (10.2) 1,452.6
-------------- ------------- -------------- -------------- -------------- --------------
Income (loss) before income taxes 63.9 (28.1) 6.0 14.6 - 56.4
Income tax expense (benefit) 2.5 (10.5) 2.1 5.1 - (0.8)
Equity in subsidiaries - 65.3 - - (65.3)(4) -
-------------- ------------- -------------- -------------- -------------- --------------
Net income (loss) $ 61.4 $ 47.7 $ 3.9 $ 9.5 $ (65.3) $ 57.2
============== ============= ============== ============== ============== ==============
3
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)
============ ============= ============ ============ ============== ==============
4
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 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)
============== ============== ============= ============== ============== ==============
5
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 December 31, 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.
6
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 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 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
December 31,
(Millions) 2001
--------------
Pro forma consolidated net income (loss) $ (22.3)
Add back goodwill amortization, net of tax 37.0
--------------
Adjusted pro forma consolidated net income $ 14.7
==============
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, 2001.
(c) Exhibits
Reference
Number Page Exhibit Description
99.1 1-40 Audited statutory basis financial
statements for the years ended December 31,
2003 and 2002, for Equitable Life Insurance
Company of Iowa, including Report of
Independent Auditors.
99.2 1-33 Audited statutory basis financial statements
for the years ended December 31, 2003 and
2002, for USG Annuity & Life Company, including
Report of Independent Auditors.
99.3 1-32 Audited statutory basis financial
statements for the years ended December 31,
2003 and 2002, for United Life & Annuity
Insurance Company, including Report of
Independent Auditors.
Exhibit 99.1
Report of Independent Auditors
Board of Directors and Stockholder
ING USA Annuity and Life Insurance Company
We have audited the accompanying statutory basis balance sheets of Equitable
Life Insurance Company of Iowa ("the Company" which, effective January 1, 2004,
merged with an affiliate ING USA Annuity and Life Insurance Company, an indirect
wholly owned subsidiary of ING America Insurance Holdings, Inc.) as of December
31, 2003 and 2002, 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 Division 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, 2003 and 2002 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, 2003 and 2002, 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.
/s/ Ernst & Young
March 22, 2004
2
Equitable Life Insurance Company of Iowa
Balance Sheets - Statutory Basis
December 31
2003 2002
-----------------------------------
(In Thousands)
Admitted assets
Cash and invested assets:
Bonds $ 3,758,375 $ 3,207,349
Preferred stocks 441 441
Common stocks 112,959 120,285
Subsidiaries 1,073,826 811,079
Mortgage loans 1,024,031 864,597
Real estate, less accumulated depreciation (2003-$0;
2002-$339) 1,800 3,651
Contract loans 126,488 130,790
Other invested assets 247,753 180,120
Cash and short-term investments 136,325 28,002
-----------------------------------
Total cash and invested assets 6,481,998 5,346,314
Deferred and uncollected premiums, less loading (2003- $801,
2002- $785) 63,386 64,607
Accrued investment income 44,056 47,007
Reinsurance balances recoverable 1,805 785
Data processing equipment, less accumulated depreciation
(2003-$6,791; 2002-$5,459) 58 186
Indebtedness from related parties 5,015 108,320
Federal income tax recoverable (including $20,472 and $571 net
deferred tax assets at December 31, 2003 and 2002, respectively) 20,472 53,912
Separate account assets 1,044,925 959,377
Other assets 442,871 303,168
-----------------------------------
Total admitted assets $ 8,104,586 $ 6,883,676
===================================
The accompanying notes are an integral part of these financial statements.
3
Equitable Life Insurance Company of Iowa
Balance Sheets - Statutory Basis
December 31
2003 2002
----------------------------------
(In Thousands,
except share amounts)
Liabilities and capital surplus
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $ 4,818,747 $ 4,294,323
Deposit type contracts 620,717 190,201
Policyholders' funds 252 310
Dividends payable 16,905 23,795
Unpaid claims 1,195 2,227
----------------------------------
Total policy and contract liabilities 5,457,816 4,510,856
Accounts payable and accrued expenses 36,740 31,714
Indebtedness to related parties 133,258 66,265
Asset valuation reserve 38,410 26,123
Interest maintenance reserve 29,987 15,472
Federal income taxes payable 18,417 -
Borrowed money, net 176,983 148,996
Other liabilities (13,244) (19,337)
Separate account liabilities 1,044,925 959,377
----------------------------------
Total liabilities 6,923,292 5,739,466
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
Paid in and contributed surplus 1,236,632 1,236,632
Unassigned deficit (60,338) (97,422)
----------------------------------
Total capital and surplus 1,181,294 1,144,210
----------------------------------
Total liabilities and capital and surplus $ 8,104,586 $ 6,883,676
==================================
The accompanying notes are an integral part of these financial statements.
4
Equitable Life Insurance Company of Iowa
Statements of Operations - Statutory Basis
Year ended December 31
2003 2002
----------------------------------
(In Thousands)
Premiums and other revenues:
Life, annuity, and accident and health premiums $ 2,133,311 $ 1,839,818
Policy proceeds and dividends left on deposit 2,026 1,840
Net investment income 307,296 247,193
Amortization of interest maintenance reserve (2,855) (1,930)
Commissions, expenses paid and other miscellaneous expenses 86 179
Other income 17,534 23,058
----------------------------------
Total premiums and other revenues 2,457,398 2,110,158
Benefits paid or provided:
Death benefits 41,587 44,630
Annuity benefits 114,717 124,590
Surrender benefits 683,949 692,942
Interest on policy or contract funds 10,524 5,440
Other benefits 6,398 7,943
Increase in life, annuity, and accident and health reserves 1,433,202 1,201,144
Net transfers from separate accounts (121,443) (135,686)
----------------------------------
Total benefits paid or provided 2,168,934 1,941,003
Insurance expenses:
Commissions 206,214 158,533
General expenses 54,442 44,751
Insurance taxes, licenses and fees, excluding federal income taxes 2,581 3,824
Other deductions 2,281 756
----------------------------------
Total insurance expenses 265,518 207,864
----------------------------------
Gain (loss) from operations before policyholder dividends, federal
income taxes and net realized capital gains (losses) 22,946 (38,709)
Dividends to policyholders 13,683 23,406
----------------------------------
Gain (loss) from operations before federal income taxes and net realized
capital gains (losses) 9,263 (62,115)
Federal income taxes 26,865 37,810
----------------------------------
Loss from operations before net realized capital gains (losses) (17,602) (99,925)
Net realized capital gains (losses) net of income tax expense (benefit)
2003 - $(9,263) and 2002 - $(10,546); and excluding net transfers to the
interest maintenance reserve 2003 - $11,660 and 2002 - $3,157 2,597 (22,521)
----------------------------------
Net loss $ (15,005) $ (122,446)
==================================
The accompanying notes are an integral part of these financial statements.
5
Equitable Life Insurance Company of Iowa
Statements of Changes in Capital and Surplus - Statutory Basis
Year ended December 31
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 - 515,000
------------- -------------
Balance at end of year 1,236,632 1,236,632
------------- -------------
Unassigned deficit:
Balance at beginning of year (97,422) 329,096
Net loss (15,005) (122,446)
Change in net unrealized capital gains or losses 40,085 (307,450)
Change in nonadmitted assets 7,194 (58,896)
Change in asset valuation reserve (12,287) 670
Change in net deferred income tax 17,097 61,604
------------- -------------
Balance at end of year (60,338) (97,422)
------------- -------------
Total capital and surplus $ 1,181,294 $ 1,144,210
============= =============
The accompanying notes are an integral part of these financial statements.
6
Equitable Life Insurance Company of Iowa
Statements of Cash Flows - Statutory Basis
Year ended December 31
2003 2002
------------- ---------------
(In Thousands)
Operations
Premiums, policy proceeds, and other
considerations received, net of reinsurance paid $ 2,134,739 $ 1,780,915
Net investment income received 375,667 293,438
Commissions, expenses paid and miscellaneous expenses (1,130,672) (920,278)
Benefits paid (990,503) (875,116)
Net transfers from separate accounts 125,168 148,848
Dividends paid to policyholders (20,097) (23,568)
Federal income taxes received (paid) 54,155 (47,836)
Other revenues 19,771 24,690
------------- ---------------
Net cash provided by operations 568,228 381,093
Investment activities
Proceeds from sales, maturities, or repayments of investments:
Bonds 4,136,759 3,714,591
Preferred and common stocks 28,835 357
Mortgage loans 164,802 103,567
Real estate 1,550 2,241
Other invested assets 970 51,647
Net (losses) gains on cash and short term investments (312) 3
Miscellaneous proceeds 139 84,645
------------- --------------
Net proceeds from sales, maturities, or repayments of investments 4,332,743 3,957,051
Cost of investments acquired:
Bonds 4,739,924 4,117,843
Preferred and common stocks 246,024 556,492
Mortgage loans 324,206 121,122
Other invested assets 509 844
Miscellaneous applications 71,432 106,949
------------- --------------
Total cost of investments acquired 5,382,095 4,903,250
Net change in contract loans 4,302 9,638
------------- --------------
Net cash used in investment activities (1,045,050) (936,561)
Financing and miscellaneous activities
Cash provided:
Capital and surplus paid-in - 506,300
Borrowed money 27,987 13,008
Net deposits on deposit-type contract funds 412,265 21,616
Other uses 144,893 (42,858)
------------- --------------
Net cash provided by financing and miscellaneous activities 585,145 498,066
------------- --------------
Net change in cash and short-term investments 108,323 (57,402)
Cash and short-term investments:
Beginning of year 28,002 85,404
------------- --------------
End of year $ 136,325 $ 28,002
============= ==============
The accompanying notes are an integral part of these financial statements.
7
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 Lion Connecticut Holdings, Inc., which
is a wholly-owned subsidiary of ING America Insurance Holdings, Inc. ("ING
AIH"). Effective January 1, 2004, the Company merged into an affiliate, ING
USA Annuity and Life Insurance Company, a wholly-owned subsidiary of Lion
Connecticut Holdings, Inc.
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.
On December 12, 2002, the Board of Directors of the Company approved a plan
of merger with an affiliate of the Company, Ameribest Life Insurance
Company, a Georgia domiciled company, effective January 1, 2003. The
Company was the surviving corporation of the transaction. The 1,666,666.67
issued and outstanding shares of Ameribest Life Insurance Company were
retired and canceled upon the effective time and date of the merger. The
Georgia Department of Insurance approved the merger on December 18, 2002
and the Iowa Department of Insurance approved the merger on December 27,
2002, with the effective date of the merger being January 1, 2003. The
accompanying financial statements have been restated as though the merger
took place prior to all periods presented. Pre-merger separate company
revenue, net loss and other capital and surplus adjustments for the twelve
months ended December 31, 2002, were $2,082,573,000, $(119,795,000) and
$210,415,000 respectively for the Company and $27,585,000, $(2,651,000) and
$513,000 respectively for Ameribest.
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:
8
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
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.
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.
SSAP 31 applies to derivative transactions prior to January 1, 2003. The
Company also follows the newly adopted hedge accounting guidance in SSAP 86
for derivative transactions entered into or modified on or after January 1,
2003. Under this guidance, derivatives that are deemed effective hedges are
accounted for in a manner which is consistent with the underlying hedged
item. Derivatives used in hedging transactions that do not meet the
requirements of SSAP 86 as an effective hedge are carried at fair value
with the change in value recorded in surplus as unrealized gains or losses.
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.
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.
9
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
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.
10
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
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.
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.
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.
11
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
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. 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
Investments 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.
12
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
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.
The Company uses derivatives such as interest rate swaps, caps and
floors and options 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.
13
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
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.
Contract 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 95% 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.
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.
Partnership agreements, which are included in other invested assets,
are reported at the underlying audited GAAP equity of the investee.
Residual collateralized mortgage obligations, which are included in
other invested assets, are reported at amortized cost using the
effective interest rate method.
Realized capital gains and losses are determined using the specific
identification method.
Cash on hand includes cash equivalents. Cash equivalents are
short-term investments that are both readily convertible to cash and
have an original maturity date of three months or less. Short-term
investments are carried at amortized cost, which approximates market
value.
14
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory 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.
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 $239,161,000 at December 31, 2003. The amount of reserves
for policies on which gross premiums are less than the net premiums
deficiency reserves is $1,514,000 at December 31, 2003.
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.
15
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
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 12% of the Company's ordinary
life insurance in force and less than 1% 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 $13,683,000
and $23,406,000 were incurred 2003 and 2002, 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
2003 2002
---------------- ---------------
(In Thousands)
Deferred federal income taxes $ 154,178 $ 160,490
Agents' debt balances 376 267
Furniture and equipment 2,668 4,337
Leasehold improvements 902 1,033
Deferred and uncollected premium 145 426
Commuted commission 829 1,108
Suspense debts 4,264 3,586
Other 922 231
---------------- ---------------
Total nonadmitted assets $ 164,284 $ 171,478
================ ===============
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.
16
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
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 $665,500,000 and repaid $698,900,000 in 2003, and
borrowed $1,267,535,000 and repaid $1,267,535,000 in 2002. 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 $61,876 and $206,000
during 2003 and 2002, respectively.
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 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 2003 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 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. 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, 2003 and 2002, the Company
had no such permitted accounting practices.
17
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
3. 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, 2003:
U.S. Treasury securities $ 63,442 $ 746 $ 41 $ 64,147
obligations of U.S. government
corporations and agencies
States, municipalities,
and political subdivisions 15,248 12 1,208 14,052
Foreign government 95,347 9,942 525 104,764
Public utilities securities 358,013 18,034 2,097 373,950
Corporate securities 1,767,783 96,572 12,490 1,851,865
Mortgage-backed securities 947,342 17,669 16,982 948,029
Commercial mortgage-backed securities 172,654 11,602 584 183,672
Other structured securities 339,186 5,674 11,660 333,200
----------- ---------- ----------- ----------
Total fixed maturities 3,759,015 160,251 45,587 3,873,679
----------- ---------- ----------- ----------
Preferred stocks 441 - - 441
Common stocks 108,680 4,304 25 112,959
----------- ---------- ----------- ----------
Total equity securities 109,121 4,304 25 113,400
----------- ---------- ----------- ----------
Total $3,868,136 $ 164,555 $ 45,612 $3,987,079
=========== ========== =========== ==========
December 31, 2002:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 23,522 $ 1,617 $ - $ 25,139
States, municipalities,
and political subdivisions 248 11 - 259
Foreign government 172,130 12,466 4,538 180,058
Public utilities securities 213,753 10,027 3,722 220,058
Corporate securities 1,508,444 97,591 12,406 1,593,629
Mortgage-backed securities 911,369 41,639 20,820 932,188
Other structured securities 378,523 23,113 19,667 381,969
----------- ---------- ----------- ----------
Total fixed maturities 3,207,989 186,464 61,153 3,333,300
----------- ---------- ----------- ----------
Preferred stocks 441 - - 441
Common stocks 120,051 234 - 120,285
----------- ---------- ----------- ----------
Total equity securities 120,492 234 - 120,726
----------- ---------- ----------- ----------
Total $3,328,481 $ 186,698 $ 61,153 $3,454,026
=========== ========== =========== ==========
18
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
As of December 31, 2003, the aggregate fair value of debt securities with
unrealized losses and the time period that cost exceeded fair value are as
follows:
More than 6
months and less
Less than 6 than 12 months More than 12
months below cost below cost months below cost Total
------------------- ------------------- ------------------- ------------------
(In Thousands)
Fair value $ 521,371 $ 315,592 $ 53,556 $ 890,519
Unrealized loss 4,839 21,102 19,646 45,587
Of the unrealized losses more than 6 months and less than 12 months in
duration of $21,102,000, there were $4,481,000 in unrealized losses that
are primarily related to interest rate movement or spread widening for
other than credit-related reasons. Business and operating fundamentals are
performing as expected. The remaining unrealized losses of $16,621,000 as
of December 31, 2003 included the following significant items:
$9,004,000 of unrealized losses related to mortgage-backed and
structure securities reviewed for impairment under the guidance
prescribed by SSAP No. 43 Loan-backed and Structured Securities. This
category includes U.S. government-backed securities, principal
protected securities and structured securities which did not have an
adverse change in cash flows for which the fair value was
$118,777,000.
$4,324,000 of unrealized losses related to the energy/utility
industry, for which the fair value was $75,347,000. During 2003, the
energy sector recovered due to a gradually improving economic picture.
Current analysis indicates the debt will be serviced in accordance
with the contractual terms.
$1,895,000 of unrealized losses relating to non-domestic issues, with
no unrealized loss exposure per country in excess of $1,858,000 for
which the fair value was $11,796,000. Credit exposures are in the
beverage industry in Italy and Great Britain.
$1,398,000 of unrealized losses related to the
telecommunications/cable/media industry, for which the fair value was
$26,033,000. During 2003, the sector recovered somewhat due to a
gradually improving economy. Credit exposure is primarily focused in
what management believes to be the largest and most financially secure
companies in the sector.
19
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
Of the unrealized losses more than 12 months in duration of $19,645,000,
there were $197,000 in unrealized losses that are primarily related to
interest rate movement or spread widening for other than credit-related
reasons. Business and operating fundamentals are performing as expected.
The remaining losses of $19,448,000 as of December 31, 2003 included the
following significant items:
$17,930,000 of unrealized losses related to mortgage-backed and
structured securities reviewed for impairment under the guidance
prescribed by SSAP No. 43 Loan-backed and Structured Securities. This
category includes U.S. government-backed securities, principal
protected securities and structured securities which did not have an
adverse change in cash flows for which the fair value was $31,213,000.
$654,000 of unrealized losses related to the airline industry, for
which the fair value was $10,725,000. During 2003, the airline
industry continued to suffer from decreased passenger volumes
partially offset by a gradually improving economy. The majority of the
airline investments are comprised of Enhanced Equipment Trust
Certificates for which the specific collateral is represented by newer
models that are expected to be retained as individual airlines reduce
their fleets.
The remaining unrealized losses totaling $864,000 relate to a fair
value of $9,161,000.
The amortized cost and fair value of investments in bonds at December 31,
2003, 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, 2003
Maturity:
Due in 1 year or less $ 23,004 $ 23,270
Due after 1 year through 5 years 948,836 997,266
Due after 5 years through 10 years 950,055 997,168
Due after 10 years 377,938 391,074
---------------- ----------------
2,299,833 2,408,778
Mortgage-backed securities 947,342 948,029
Commercial mortgage-backed securities 172,654 183,672
Other structured securities 339,186 333,200
---------------- ----------------
Total $ 3,759,015 $ 3,873,679
================ ================
At December 31, 2003, investments in certificates of deposit and bonds,
with an admitted asset value of $2,434,000, were on deposit with state
insurance departments to satisfy regulatory requirements.
20
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
Reconciliation of bonds from amortized cost to carrying value as of
December 31, 2003 and 2002 is as follows:
December 31
2003 2002
---------------- ----------------
(In Thousands)
Amortized cost $ 3,759,015 $ 3,207,989
Less nonadmitted bonds (640) (640)
---------------- ----------------
Carrying value $ 3,758,375 $ 3,207,349
================ ================
Proceeds from the sales of investments in bonds and other fixed maturity
interest securities were $2,329,158,000 and $2,334,028,000 in 2003 and
2002, respectively. Gross gains of $48,928,000 and $43,441,000 and gross
losses of $11,521,000 and $37,946,000 during 2003 and 2002, respectively,
were realized on those sales. A portion of the gains realized in 2003 and
2002 has been deferred to future periods in the interest maintenance
reserve.
Major categories of net investment income are summarized as follows:
December 31
2003 2002
---------------- ----------------
(In Thousands)
Equity securities - affiliated $ 5,349 $ 35
Equity securities - unaffiliated 215 -
Bonds 222,611 249,688
Mortgage loans 67,158 66,004
Contract loans 6,464 7,840
Real estate 367 757
Other 26,435 (58,291)
---------------- ----------------
Total investment income 328,599 266,033
Investment expenses (21,303) (18,840)
---------------- ----------------
Net investment income $ 307,296 $ 247,193
================ ================
As part of its overall investment strategy, the Company has entered into
agreements to purchase securities as follows:
December 31
2003 2002
---------------- ----------------
(In Thousands)
Investment purchase commitments $ 37,678 $ 47,317
21
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
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
$126,983,000 and $95,972,777 at December 31, 2003 and 2002, respectively.
The securities underlying these agreements are mortgage-backed securities
with a book value of $126,317,000 and $95,936,000 and a fair value of
$127,423,000 and $97,433,000 at December 31, 2003 and 2002, respectively.
The securities have a weighted average coupon of 5.4% and have maturities
ranging from December 2018 through December 2033. 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, 2003. The Company believes the counterparties to
the reverse dollar repurchase agreements are financially responsible and
that the counterparty risk is minimal.
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. As of December 31, 2003 and 2002, the amounts outstanding on
these agreements were $0 and $3,000,000, respectively. The securities
underlying these agreements are mortgage-backed securities with a book
value of $0 and $3,135,000 and a fair value of $0 and $3,163,000 at
December 31, 2003 and 2002, respectively.
The maximum and minimum lending rates for new long-term commercial mortgage
loans during 2003 were 6.20% and 2.78%. 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 89.7% on commercial properties. As of December 31, 2003, the
Company held no mortgages with interest more than 180 days overdue. Total
interest due on mortgages as of December 31, 2003 and 2002 was $54,000 and
$23,000, respectively.
4. 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.
22
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
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.
The Company uses S&P Options to hedge against an increase in the S&P Index.
Such increase results in increased reserve liabilities, and the options
offset this increased expense. The options are accounted for in a
consistent manner with the underlying reserve liabilities, both of which
are carried at far value with the change in value running through the
income statement. If the options mature in the money, the amount received
is recorded in income to offset the increased expense for the reserve
liabilities.
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 derivative 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.
23
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
The table below summarizes the Company's interest rate contracts included
in other invested assets at December 31, 2003 and 2002:
Notional Carrying Fair
Amount Value Value
---------- ---------- ---------
(In Thousands)
December 31, 2003
Interest rate contracts:
Swaps $ 316,584 $ - $ (9,103)
Caps owned 595,000 1,231 10
Options owned 1,287,802 100,942 100,942
---------- ---------- ---------
Total derivatives $2,199,386 $ 102,173 $ 91,849
========== ========== =========
December 31, 2002
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
========== ========== =========
5. Concentrations of Credit Risk
The Company held less-than-investment-grade corporate bonds with an
aggregate book value of $244,590,000 and $215,967,000 and with an aggregate
market value of $256,968,000 and $201,208,000 at December 31, 2003 and
2002, respectively. Those holdings amounted to 6.5% of the Company's
investments in bonds and 3.5% of total admitted assets at December 31,
2003. 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 $96,917,000 and $73,548,000 with an
aggregate NAIC market value of $99,937,000 and $79,056,000 at December 31,
2003 and 2002, respectively. The carrying value of these holdings amounted
to 2.5% of the Company's investment in bonds and 1.4% of the Company's
total admitted assets at December 31, 2003.
At December 31, 2003, the Company's commercial mortgages involved a
concentration of properties located in California (18.74%) and Texas
(9.18%). 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 $29,000,000.
24
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
6. Annuity Reserves
At December 31, 2003 and 2002, 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:
Amount Percent
------------- ----------
(In Thousands)
December 31, 2003
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 2,005,225 34.0%
At book value less surrender charge 1,270,988 21.5
At fair value 1,020,807 17.3
------------- ----------
Subtotal 4,297,020 72.8
Subject to discretionary withdrawal (without adjustment):
At book value with minimal or no charge or adjustment 716,305 12.1
Not subject to discretionary withdrawal 885,463 15.1
------------- ----------
Total annuity reserves and deposit
fund liabilities before reinsurance 5,898,788 100.0%
==========
Less reinsurance ceded 556,052
-------------
Net annuity reserves and deposit fund liabilities $ 5,342,736
=============
December 31, 2002
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 1,813,570 37.2%
At book value less surrender charge 864,057 17.7
At fair value 1,079,649 22.2
------------- ----------
Subtotal 3,757,276 77.1
Subject to discretionary withdrawal (without adjustment):
At book value with minimal or no charge or adjustment 447,961 9.2
Not subject to discretionary withdrawal 669,775 13.7
------------- ----------
Total annuity reserves and deposit
fund liabilities before reinsurance 4,875,012 100.0%
==========
Less reinsurance ceded 576,980
-------------
Net annuity reserves and deposit fund liabilities $ 4,298,032
=============
25
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
7. 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.
A summary of assets, obligations and assumptions of the Pension and Other
Postretirement Benefits Plans are as follows:
Pension Benefits Other Benefits
----------------------- ----------------------
2003 2002 2003 2002
---------- ----------- ---------- ----------
(In Thousands)
Change in benefit obligation
Benefit obligation at beginning of year $ 8,115 $ 13,015 $ 6,694 $ 5,383
Service cost - 546 676 210
Interest cost 540 1,008 410 400
Contribution by plan participants - - 2,048 376
Actuarial gain (loss) 2,103 (6,153) (1,471) 373
Benefits paid (415) (301) (2,667) (847)
Plan amendments - - - 799
---------- ----------- ---------- ----------
Benefit obligation at end of year $ 10,343 $ 8,115 $ 5,690 $ 6,694
========== =========== ========== ==========
Change in plan assets
Fair value of plan assets at beginning of year $ - $ - $ - $ -
Actual return on plan assets - - - -
Employer contribution 415 301 619 471
Plan participants' contributions - - 2,048 376
Benefits paid (415) (301) (2,667) (847)
---------- ----------- ---------- ----------
Fair value of plan assets at end of year $ - $ - $ - $ -
========== =========== ========== ==========
26
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
Pension Benefits Other Benefits
------------------------- ------------------------
2003 2002 2003 2002
----------- ------------ ------------ -----------
(In Thousands)
Funded status $ (10,343) $ (8,115) $ (5,690) $ (6,694)
Unamortized prior service credit (290) (318) (648) (746)
Unrecognized net (gain) or loss (1,276) (3,715) (1,917) 2,566
Remaining net obligation 28 31 2,733 -
----------- ------------ ------------ -----------
Net amount recognized $ (11,881) $(12,117) $ (5,522) $ (4,874)
=========== ============ ============ ===========
Components of net periodic benefit cost
Service cost $ - $ 546 $ 676 $ 210
Interest cost 540 1,008 410 400
Expected return on plan assets - - - -
Amortization of unrecognized transition
obligation or transition assets 2 2 304 304
Amount of recognized gains and losses (336) 100 (25) (42)
Amount of prior service cost recognized (28) (28) (98) 701
Amount of gain or loss recognized
due to a settlement or curtailment - - - -
------------ ------------ ------------ -----------
Total net periodic benefit cost $ 178 $ 1,628 $ 1,267 $ 1,573
============ ============ ============ ===========
In addition, the Company has a pension benefit obligation and an other
benefit obligation for non-vested employees as of December 31, 2003 and
2002 in the amount of $623,000 and $682,000, and $3,665,000 and $2,633,000
(OPEB obligation), respectively.
Assumptions used in determining the accounting for the defined benefit
plans and other post-retirement benefit plans as of December 31, 2003 and
2002 were as follows:
2003 2002
---------------- -----------------
Weighted-average discount rate 6.25 % 6.75 %
Rate of increase in compensation level 3.75 % 3.75 %
Expected long-term rate of return on assets 8.75 % 9.00 %
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 10.0%
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, 2003 by $48,000. 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, 2003 by $46,000.
27
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
401(k) Plan
The ING 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 $12,000 for 2003 and
$11,000 for 2002. 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 $569,000 and $681,000 for 2003 and
2002, respectively.
8. 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.
28
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
The general nature and characteristics of the separate accounts business
follows:
Nonguaranteed
Separate
Accounts
--------------
(In Thousands)
December 31, 2003
Premium, consideration or deposits for year ended December 31, 2003 $ 23,144
==============
Reserves for accounts with assets at:
Market value $ 1,020,807
Amortized cost -
--------------
Total reserves $ 1,020,807
==============
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 1,020,807
At book value without market value adjustment
less current surrender charge of less than 5% -
--------------
Subtotal 1,020,807
Not subject to discretionary withdrawal -
--------------
Total separate account reserves $ 1,020,807
==============
December 31, 2002
Premium, consideration or deposits for year ended December 31, 2002 $ 33,970
==============
Reserves for accounts with assets at:
Market value $ 931,533
Amortized cost -
--------------
Total reserves $ 931,533
==============
Reserves for separate accounts by withdrawal characteristics:
Subject to descretionary withdrawal:
With market value adjustment $ -
At book value without market value adjustment
less current surrender charge of 5% or more -
At market value 931,533
At book value without market value adjustment
less current surrender charge of less than 5% -
--------------
Subtotal 931,533
Not subject to discretionary withdrawal -
--------------
Total separate account reserves $ 931,533
==============
29
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
A reconciliation of the amounts transferred to and from the separate
accounts is presented below:
December 31
2003 2002
---------------- ----------------
(In Thousands)
Transfers as reported in the Summary of Operations
of the Separate Accounts Statement:
Transfers to separate accounts $ 23,144 $ 33,970
Transfers from separate accounts 144,588 169,689
---------------- ----------------
Net transfers from separate accounts (121,444) (135,719)
Reconciling adjustments:
Other transfers 1 33
---------------- ----------------
Transfers as reported in the Statement of Operations $ (121,443) $ (135,686)
================ ================
9. 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. 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 $1,912,796,000 and $1,299,151,000 for the
years ended December 31, 2003 and 2002, respectively.
The Company's ceded reinsurance arrangements reduced certain items in the
accompanying financial statements by the following amounts:
December 31
2003 2002
------------- -------------
(In Thousands)
Premiums $ 5,107 $ 5,223
Benefits paid or provided 7,356 8,481
Policy and contract liabilities at year end 585,318 604,861
During 2003 and 2002, 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.
30
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
10. 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
2003 2002
------------- ------------
(In Thousands)
Total gross deferred tax assets $ 180,746 $ 166,200
Total deferred tax liabilities (6,096) (5,139)
------------- ------------
Net deferred tax asset 174,650 161,061
Deferred tax asset nonadmitted (154,178) (160,490)
------------- ------------
Net admitted deferred tax asset $ 20,472 $ 571
============= ============
Decrease (increase) in nonadmitted asset $ 6,312 $ (63,007)
============= ============
Significant components of income taxes incurred as of December 31 are:
Current income taxes incurred consisted of the following major components:
December 31
2003 2002
------------- ------------
(In Thousands)
Federal taxes on stand alone operations $ 26,865 $ (18,201)
Federal taxes paid to affiliates under tax sharing agreement - 67,278
Consolidated operations loss carryback utilized - (11,267)
------------- ------------
Total taxes on operations 26,865 37,810
------------- ------------
Federal taxes on capital gains (9,263) (1,301)
Federal taxes paid to affiliates under tax sharing agreement - 3,896
Consolidated operations loss carryback utilized - (12,625)
------------- ------------
Total taxes on capital gains (9,263) (10,030)
------------- ------------
Total taxes incurred $ 17,602 $ 27,780
============= ============
31
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
The main components of deferred tax assets and deferred tax liabilities are
as follows:
December 31
2003 2002
-------------- --------------
(In Thousands)
Deferred tax assets resulting from book/tax differences in:
Deferred acquisition costs $ 25,293 $ 31,238
Insurance reserves 21,429 21,250
Investments 18,791 19,753
Policyholder dividends 5,917 8,328
Nonadmitted assets 3,484 3,700
Unrealized loss on investments - 704
Goodwill 799 880
Operations loss carryforwards 92,808 72,890
AMT carryforward 4,000 -
Other 8,225 7,457
-------------- --------------
Total deferred tax assets 180,746 166,200
Deferred tax assets nonadmitted (154,178) (160,490)
-------------- --------------
Admitted deferred tax assets 26,568 5,710
-------------- --------------
Deferred tax liabilities resulting from book/tax differences in:
Fixed assets 62 2,164
Investments 746 132
Due & deferred premiums 2,196 2,488
Unrealized gains on investments 3,092 -
Other - 355
-------------- --------------
Total deferred tax liabilities 6,096 5,139
-------------- --------------
Net admitted deferred tax asset $ 20,472 $ 571
============== ==============
The change in net deferred income taxes is comprised of the following:
December 31
2003 2002 Change
---------- ---------- ----------
(In Thousands)
Total deferred tax asset $ 180,746 $ 166,199 $ 14,547
Total deferred tax liabilities 6,096 5,139 957
---------- ---------- ----------
Net deferred tax asset $ 174,650 $ 161,060 $ 13,590
========== ==========
Remove current year change in unrealized gains 3,507
----------
Change in net deferred income tax 17,097
Remove other items in surplus:
Current year change in non-admitted assets 216
Other 289
---------
$ 17,602
=========
32
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
The provision for federal income taxes incurred and change in deferred
taxes is different from that which would be obtained by applying the
statutory Federal income tax rate to income, (including capital items)
before income taxes. The significant items causing this difference are:
Year Ended
December 31, 2003
-----------------
(In Thousands)
Ordinary income $ 9,263
Capital gains (losses) 4,994
-----------------
Total pre-tax income $ 14,257
=================
Provision computed at statutory rate $ 4,990
Refinement of deferred tax balances (4,529)
Interest maintenance reserve 999
Dividends received deduction (1,483)
Other 23
-----------------
Total $ -
=================
Federal income taxes incurred $ 17,602
Change in net deferred income taxes (17,602)
-----------------
Total statutory income taxes $ -
=================
The Company has operations loss carryforwards of $265,165,000, which expire
in 2017.
The Company had a payable to the United States Treasury of $15,723,000 and
a receivable from the United States Treasury of $55,341,000 for federal
income taxes as of December 31, 2003 and 2002, respectively. In addition,
under the inter-company tax sharing agreement, the Company has a net
payable of $11,526,000 and a net receivable of $28,301,000 at December 31,
2003 and 2002, respectively, for federal income taxes with its
subsidiaries.
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, 2003. 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.
33
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
11. Investment in and Advances to Subsidiaries
Amounts invested in and advanced to the Company's subsidiaries are
summarized as follows:
December 31
2003 2002
---------------- ----------------
(In Thousands)
Common stock $ 1,073,826 $ 811,079
(Payable to) receivable from subsidiaries (94,524) 2,102
Summarized financial information for these subsidiaries is as follows:
December 31
2003 2002
---------------- ----------------
(In Thousands)
Revenues $ 5,835,610 $ 7,929,991
Income (loss) before net realized gains on investments 113,648 (235,729)
Net loss 39,172 (277,136)
Admitted assets 31,161,112 24,301,380
Liabilities 30,087,287 23,490,301
12. 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 the statutory net gain from
operations or ten percent of surplus at December 31 of the preceding year.
In 2004, the Company can pay dividends of $118,000,000 without prior
approved from the Iowa Division of Insurance.
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, 2003, the Company met the RBC
requirements.
34
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
13. 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
2003 2002
------------------------ ------------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------ ------------ ------------ -----------
(In Thousands)
Assets:
Bonds $ 3,758,375 $ 3,873,679 $ 3,207,349 $ 3,333,300
Preferred stocks 441 441 441 441
Unaffiliated common stocks 108,680 112,959 285 285
Mortgage loans 1,024,031 1,086,163 864,597 948,750
Contract loans 126,488 126,488 130,790 130,790
Derivative securities 102,173 91,849 32,833 26,805
Short-term investments 104,000 104,000 22,821 22,821
Cash 32,325 32,325 5,181 5,181
Investment in surplus notes 135,000 167,805 135,000 191,228
Indebtedness from related parties 5,015 5,015 108,320 108,319
Separate account assets 1,044,925 1,044,925 959,377 959,377
Receivable for securities 176 176 210 210
Liabilities:
Individual and group annuities 3,701,212 3,591,686 3,131,561 3,052,911
Guaranteed investment contracts 425,401 425,449 - -
Deposit type contract 195,316 195,316 190,201 191,677
Policyholder funds 18,351 18,351 26,333 26,333
Indebtedness to related parties 133,258 133,258 66,265 66,265
Separate account liabilities 1,044,925 1,044,925 959,377 959,377
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.
35
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
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 11% 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, 2003 and 2002 is $4,968,378,000 and $4,232,177,000, 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.
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.
36
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
14. Commitments and Contingencies
Subsidiary Guarantees
The Company guarantees contractual policy claims of its subsidiaries,
Golden American Life Insurance Company and USG Annuity & Life Company. In
the unlikely event that Golden American Life Insurance Company and USG
Annuity & Life Company were unable to fulfill their obligations to
policyholders, the Company would be obligated to assume the guaranteed
policy obligations, but any ultimate contingent losses in connection with
such guarantees will not have a material adverse impact on the Company's
future operations or financial position.
The Company leases its home office space and certain other equipment under
operating leases that expire through 2017. During the years ended December
31, 2003 and 2002, rent expense totaled $5,528,000 and $4,951,000,
respectively. At December 31, 2003, minimum rental payments due under all
non-cancelable operating leases are: 2004 - $5,326,000, 2005 - $5,324,000,
2006 - $5,324,000, 2007 - $5,135,000 and 2008 - $4,948,000 and $42,466,000
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.
Other Matters
Like many financial services companies, certain U.S. affiliates of ING
Groep N.V. ("ING"), the Company's ultimate parent, ave received informal
and formal requests for information since September 2003 from various
governmental and self-regulatory agencies in connection with investigations
related to mutual funds and variable insurance products. ING has cooperated
fully with each request.
In addition to reporting to regulatory requests, ING management initiated
an internal review of trading in ING insurance, retirement, and mutual fund
products. The goal of this review has been to identify whether there have
been any instances of inappropriate trading in those products by third
parties or by ING investment professionals and other ING personnel. This
internal review is being conducted by independent special counsel and
auditors. Additionally, ING reviewed its controls and procedures in a
continuing effort to deter improper frequent trading in ING products. ING's
internal reviews related to mutual fund trading are continuing.
37
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
The internal review has identified several arrangements allowing third
parties to engage in frequent trading of mutual funds within our variable
insurance and mutual fund products, and identified other circumstances
where frequent trading occurred despite measures taken by ING intended to
combat market timing. Most of the identified arrangements were initiated
prior to ING's acquisition of the businesses in question. In each
arrangement identified, ING has terminated the inappropriate trading, taken
steps to discipline or terminate employees who were involved, and modified
policies and procedures to deter inappropriate activity. While the review
is not completed, management believes the activity identified does not
represent a systemic problem in the businesses involved.
These instances included agreements (initiated in 1998) that permitted on
variable life insurance customer or ReliaStar Life Insurance Company
("ReliaStar"), an affiliate of the Company, to engage in frequent trading,
and to submit orders until 4pm Central Time, instead of 4pm Eastern Time.
ReliaStar was acquired by ING in 2000. The late trading arrangement was
immediately terminated when current senior management became aware of it in
2002. ING believes that no profits were realized by the customer from the
late trading aspect of the arrangement.
ING will reimburse any ING Fund or its shareholders affected by
inappropriate trading for any profits that accrued to any person who
engaged in improper frequent trading for which ING is responsible.
Management believes that the total amount of such reimbursements will not
be material to ING or its U.S. business.
15. Financing Agreements
The Company maintains a revolving loan agreement with SunTrust Bank,
Atlanta (the "Bank"). Under this agreement, which expires July 30, 2004,
the Company can borrow up to $100,000,000 from the Bank. Interest on any
borrowing accrues at an annual rate equal to: (1) the cost of funds for the
Bank for the period applicable for the advance plus 0.225% or (2) a rate
quoted by the Bank to the Company for the borrowing. Under the agreement,
the Company incurred interest expense of $0 and $171,000 for the years
ended December 31, 2003 and 2002, respectively. At December 31, 2003 and
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 "BONY"). Under this agreement, the Company can borrow
up to $100,000,000 from BONY. Interest on any of the Company borrowing
accrues at an annual rate equal to: (1) the cost of funds for BONY for the
period applicable for the advance plus 0.35% or (2) a rate quoted by BONY
to the Company for the borrowing. Under this agreement, the Company
incurred interest expense of $0 and $16,000 for the years ended December
31, 2003 and 2002, respectively. At December 31, 2003 and 2002, the Company
had $0 payable to BONY.
38
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
16. Related Party Transactions
Affiliates
Management and service contracts and all cost sharing arrangements with
other affiliated ING United States 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 $14,461,000 and $11,118,000 for the
years ended December 31, 2003 and 2002, 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 $15,551,000 and $3,029,000 for the years ended December 31, 2003 and
2002, respectively.
Reciprocal Loan Agreement: The Company maintains a reciprocal 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 Company 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 $61,000 and interest income of $730,000 for the year
ended December 31, 2003. At December 31, 2003, the Company had $0 payable
to ING AIH and $104,000,000 receivable from ING AIH, which is reported on
the balance sheets in cash and short-term investments.
Promissory note: The Company has a promissory note in the amount of
$50,000,000 payable to Lion Connecticut Holdings, Inc. The note was issued
on April 15, 1997. Interest is charged at an annual rate of 8.75%, and the
face amount is due on April 1, 2007. The Company incurred interest expense
of $4,375,000 on this note for the years ended December 31, 2003 and 2002,
respectively. There are no collateral requirements on this promissory note.
This note is reported on the balance sheets in borrowed money.
Tax Sharing Agreements: The Company has entered into federal tax sharing
agreements with a member 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.
39
Equitable Life Insurance Company of Iowa
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
Services 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 owned, as of December 31, 2003, 100% of the capital stock,
valued on the equity basis of, USG Annuity and Life Insurance Company (an
Oklahoma domestic insurer) and Golden American Life Insurance Company (a
Delaware domestic insurer).
Assets and liabilities along with related revenues and expenses recorded as
a result of transactions and agreements with affiliates may not be the same
as those recorded if the Company was not a wholly-owned subsidiary of its
parent.
17. 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 and the
amount of premiums written in each state. The Company has estimated this
liability to be $3,492,000 and $3,494,000 as of December 31, 2003 and 2002,
respectively, and has recorded a liability. The Company has also recorded
an asset of $81,000 and $473,000 as of December 31, 2003 and 2002,
respectively, for future credits to premium taxes for assessments already
paid.
18. Subsequent Events
Golden American Life Insurance Company ("Golden"), requested that the
Delaware Insurance Department approve the redomestication of Golden from
Delaware to Iowa effective January 1, 2004. The Company, United Life &
Annuity Insurance Company ("ULA"), and USG Annuity and Life Company ("USG")
requested the Iowa Division of Insurance (for the Company and ULA) and the
Oklahoma Department of Insurance (for USG) approve the merger of the
affiliated life insurance company operations of the Company, ULA, Golden,
and USG with Golden being the survivor. The sequence of events, effective
January 1, 2004, is as follows: redomestication of Golden to Iowa, merger
of the four affiliated insurers with Golden being the survivor, and the
renaming of Golden to ING USA Annuity and Life Insurance Company ("ING
USA").
The Delaware Insurance Department provided a "no objection letter" for the
redomestication of Golden to Iowa on August 25, 2003. The Iowa Division of
Insurance approved the merger on July 21, 2003 and the Oklahoma Department
of Insurance on August 11, 2003.
40
Exhibit 99.2
Report of Independent Auditors
Board of Directors and Stockholder
ING USA Annuity and Life Insurance Company
We have audited the accompanying statutory basis balance sheets of United Life &
Annuity Insurance Company ("the Company" which, effective January 1, 2004,
merged into an affiliate, ING USA Annuity and Life Insurance Company, a wholly
owned subsidiary of ING America Insurance Holdings, Inc.) as of December 31,
2003 and 2002, 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, 2003 and 2002 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, 2003 and 2002, 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.
/s/ Ernst and Young
March 22, 2004
2
United Life & Annuity Insurance Company
Balance Sheets - Statutory Basis
December 31
2003 2002
--------------- ---------------
(In Thousands)
Admitted assets
Cash and invested assets:
Bonds $ 580,896 $ 608,870
Common stocks 2 10
Subsidiary 25 25
Mortgage loans 36,853 34,829
Policy loans 880 933
Other invested assets 6,739 13,908
Cash and short-term investments 3,700 14,741
--------------- ---------------
Total cash and invested assets 629,095 673,316
Deferred and uncollected premiums, less loading (2003 - $0; 2002 - $0) (30) (30)
Accrued investment income 7,614 8,523
Reinsurance balances recoverable 45 112
Federal income tax recoverable (including $2,639 and $5,385 net deferred tax
assets at December 31, 2003 and 2002, respectively) 3,246 6,791
Separate account assets 63,193 64,410
Other assets 784 375
--------------- ---------------
Total admitted assets $ 703,947 $ 753,497
=============== ===============
The accompanying notes are an integral part of these financial statements.
3
United Life & Annuity Insurance Company
Balance Sheets - Statutory Basis
December 31
2003 2002
--------------- ---------------
(In Thousands)
except share amounts)
Liabilities and capital and surplus
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $ 540,198 $ 586,755
Deposit type contracts 13,869 14,926
Unpaid claims - 25
---------------- ---------------
Total policy and contract liabilities 554,067 601,706
Interest maintenance reserve 4,800 188
Accounts payable and accrued expenses 2,657 1,243
Indebtedness to related parties 1,293 1,634
Asset valuation reserve 5,966 5,743
Other liabilities (2,878) (2,633)
Separate account liabilities 63,193 64,410
---------------- ---------------
Total liabilities 629,098 672,291
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
Paid-in and contributed surplus 41,241 41,241
Unassigned surplus 25,207 31,564
---------------- ---------------
Total capital and surplus 74,849 81,206
---------------- ---------------
Total liabilities and capital and surplus $ 703,947 $ 753,497
================ ===============
The accompanying notes are an integral part of these financial statements.
4
United Life & Annuity Insurance Company
Statements of Operations - Statutory Basis
Year ended December 31
2003 2002
---------------- ----------------
(In Thousands)
Premiums and other revenues:
Life, annuity, and accident and health premiums $ 1,629 $ 1,228
Policy proceeds and dividends left on deposit 491 205
Net investment income 34,743 44,256
Amortization of interest maintenance reserve 1,075 1,656
Commissions, expense allowances and reserve adjustments on
reinsurance ceded 383 502
Other income 1,599 1,598
---------------- ----------------
Total premiums and other revenues 39,920 49,445
Benefits paid or provided:
Annuity benefits 19,306 20,309
Surrender benefits 67,727 100,443
Interest on policy or contract funds 231 598
Other benefits (25) 25
Life contract withdrawals 1,712 1,170
Decrease in life, annuity, and accident and health reserves (46,557) (69,041)
Net transfers from separate accounts (12,060) (17,382)
---------------- ----------------
Total benefits paid or provided 30,334 36,122
Insurance expenses:
Commissions 529 611
General expenses 3,478 1,877
Insurance taxes, licenses and fees, excluding federal income taxes 464 (536)
Other - 4
---------------- ----------------
Total insurance expenses 4,471 1,956
---------------- ----------------
Gain from operations before federal income taxes and net realized
capital gains (losses) 5,115 11,367
Federal income tax benefit (1,413) (5,786)
---------------- ----------------
Gain from operations before net realized capital gains (losses) 6,528 17,153
Net realized capital gains (losses) net of income tax expense (benefit):
2003 - $0; 2002 - $(3,926) and excluding net transfers to the interest
maintenance reserve 2003- $5,687; 2002- $(2,310) 2,501 (5,602)
---------------- ----------------
Net income $ 9,029 $ 11,551
================ ================
The accompanying notes are an integral part of these financial statements.
5
United Life & Annuity Insurance Company
Statements of Operations - Statutory Basis
Year ended December 31
2003 2002
---------------- ----------------
(In Thousands)
Common stock:
Balance at beginning and end of year $ 8,401 $ 8,401
---------------- ----------------
Paid-in and contributed surplus
Balance at beginning and end of year 41,241 41,241
---------------- ----------------
Unassigned surplus:
Balance at beginning of year 31,564 16,997
Net income 9,029 11,551
Change in net unrealized capital gains or losses 86 (1,396)
Change in nonadmitted assets 2,016 (5,406)
Change in asset valuation reserve (223) 2,909
Change in surplus as a result of reinsurance (359) (475)
Change in net deferred income tax (4,506) 7,388
Dividends to stockholder (12,400) -
Other adjustments - (4)
---------------- ----------------
Balance at end of year 25,207 31,564
---------------- ----------------
Total capital and surplus $ 74,849 $ 81,206
================ ================
The accompanying notes are an integral part of these financial statements.
6
United Life & Annuity Insurance Company
Statements of Cash Flows - Statutory Basis
Year ended December 31
2003 2002
---------------- ----------------
(In Thousands)
Operations
Premiums, policy proceeds, and other
considerations received, net of reinsurance paid $ 1,627 $ 1,219
Net investment income received 36,628 47,009
Commissions, expenses paid and miscellaneous expenses (2,790) (2,766)
Benefits paid (89,793) (125,136)
Net transfers to separate accounts 12,010 19,650
Federal income taxes received 2,210 1,697
Other revenues 1,989 1,637
---------------- --------------
Net cash used in operations (38,119) (56,690)
Investment activities
Proceeds from sales, maturities, or repayments of investments:
Bonds 997,840 697,696
Mortgage loans 2,456 3,117
Other invested assets 308 82
Net losses on cash and short-term investments - (262)
Miscellaneous proceeds 7,923 660
---------------- --------------
Net proceeds from sales, maturities, or repayments of investments 1,008,527 701,293
Cost of investments acquired:
Bonds 962,486 632,726
Mortgage loans 4,480 7,078
Other invested assets 396 229
Miscellaneous applications 690 9,273
---------------- --------------
Total cost of investments acquired 968,052 649,306
Net change in contract loans (53) (95)
---------------- --------------
Net cash provided by investment activities 40,528 52,082
Financing and miscellaneous activities
Cash provided:
Borrowed money, net (4) -
Net deposits on deposit-type contract funds 117 (2,938)
Dividends to stockholder (12,400) -
Other sources (1,163) 3,988
---------------- --------------
Net cash (used) provided by financing and miscellaneous activities (13,450) 1,050
---------------- --------------
Net decrease in cash and short-term investments (11,041) (3,558)
Cash and short-term investments:
Beginning of year 14,741 18,299
---------------- --------------
End of year $ 3,700 $ 14,741
================ ==============
The accompanying notes are an integral part of these financial statements.
7
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 direct, wholly-owned subsidiary of Lion Connecticut Holdings,
Inc., which in turn is a wholly-owned subsidiary of ING America Insurance
Holdings, Inc. ("ING AIH"). Effective January 1, 2004, the Company merged
into an affiliate, ING USA Annuity and Life Insurance Company, a
wholly-owned subsidiary of Lion Connecticut Holdings, Inc. 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.
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 value. The asset is then written down to fair
value.
8
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
Common stocks are reported at market value as determined by the Securities
Valuation Office of the NAIC ("SVO") and the related unrealized capital
gains/losses are reported in unassigned surplus along with adjustment for
federal income taxes.
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 or interest maintenance reserve ("IMR") is reported
as a component of other liabilities 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.
9
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
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.
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.
10
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
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
sheets.
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
Investments 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.
11
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
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 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
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.
The Company's noninsurance subsidiary is carried at cost.
Mortgage loans are reported at amortized cost, less allowance for
impairments.
Contract 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.
Partnership interests, which are included in other invested assets,
are reported at the underlying GAAP equity of the investee.
Realized capital gains and losses are determined using the specific
identification method.
Cash on hand includes cash equivalents. Cash equivalents are
short-term investments that are both readily convertible to cash and
have an original maturity date of three months or less. Short-term
investments are carried at amortized cost, which approximates market
value.
12
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory 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 3% 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.
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.
13
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
Nonadmitted Assets
Nonadmitted assets are summarized as follows:
December 31
2003 2002
---------------- ---------------
(In Thousands)
Deferred federal income taxes $ 10,369 $ 12,175
Agents' debit balances (7) 22
Other - 181
---------------- ---------------
Total nonadmitted assets $ 10,362 $ 12,378
================ ===============
Changes in nonadmitted assets are generally reported directly in unassigned
surplus as an increase or decrease in nonadmitted assets. Certain changes
are reported directly in unassigned 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, 2003. 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, 2003.
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 $123,000,000 and repaid $123,000,000 in 2003 and
borrowed $91,220,000 and repaid $91,220,000 in 2002. 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 $17,000 and $13,000
during 2003 and 2002, respectively.
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.
14
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 2003 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 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, 2003 and 2002, the Company
had no such permitted accounting practices.
15
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
3. 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, 2003:
U.S. Treasury securities and obligations $ 48,426 $ 798 $ 69 $ 49,155
States, municipalities,
and political subdivisions 418 29 - 447
Foreign government 30,752 113 75 30,790
Public utilities securities 30,435 1,509 83 31,861
Corporate securities 322,331 13,447 2,135 333,643
Mortgage-backed securities 80,500 739 1,778 79,461
Commercial mortgage-backed securities 27,892 1,563 130 29,325
Other asset-backed securities 40,142 420 824 39,738
------------- ------------ ------------ -------------
Total fixed maturities 580,896 18,618 5,094 594,420
Common stocks - 2 - 2
------------- ------------ ------------ -------------
Total equity securities - 2 - 2
------------- ------------ ------------ -------------
Total $ 580,896 $ 18,620 $ 5,094 $ 594,422
============= ============ ============ =============
At December 31, 2002:
U.S. Treasury securities and obligations $ 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
Commerical mortgage-backed securities 24,221 1,465 62 25,624
Other asset-backed securities 32,357 330 6,202 26,485
------------- ------------ ------------ -------------
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
============= ============ ============ =============
16
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
As of December 31, 2003, the aggregate fair value of debt securities with
unrealized losses and the time period that cost exceeded fair value are as
follows:
More than 6
Less than 6 months and less More than 12
months below than 12 months months below
cost below cost cost Total
----------------- ------------------ ----------------- ------------------
(In Thousands)
Fair value $ 77,073 $ 86,922 $ 13,324 $ 177,389
Unrealized loss 497 2,725 1,872 5,094
Of the unrealized losses more than 6 months and less than 12 months in
duration of $2,725,000, there were $958,000 in unrealized losses that are
primarily related to interest rate movement or spread widening for other
than credit-related reasons. Business and operating fundamentals are
performing as expected. The remaining unrealized losses of $1,767,000 as of
December 31, 2003 included the following significant items:
$1,258,000 of unrealized losses related to mortgage-backed and
structured securities reviewed for impairment under the guidance
prescribed by SSAP 43 Loan-backed and Structured Securities. This
category includes U.S. government-backed securities, principal
protected securities and structured securities which did not have an
adverse change in cash flows for which the fair value was $35,618,000.
$384,000 of unrealized losses related to the energy/utility industry,
for which the fair value was $12,734,000. During 2003, the energy
sector recovered due to a gradually improving economic picture and the
lack of any material accounting irregularities similar to those
experienced in the prior two years. Current analysis indicates that
the debt will be serviced in accordance with the contractual terms.
The remaining unrealized losses totaling $125,000 relate to a fair
value of $4,754,000.
Of the unrealized losses more than 12 months in duration of $1,872,000,
there were $1,413,000 in unrealized losses that are primarily related to
mortgage-backed and structured securities reviewed for impairment under the
guidance prescribed by SSAP 43 Loan-backed and Structured Securities. This
category includes U.S. government-backed securities, principal protected
securities and structured securities which did not have an adverse change
in cash flows for which the fair value was $8,574,000. The remaining
unrealized losses of $459,000 as of December 31, 2003 included the
following:
$446,000 of unrealized losses related to the airline industry, for
which the fair value was $3,265,000. During 2003, the airline industry
continued to suffer from decreased passenger volumes offset by a
gradually improving economy. The majority of the airline investments
are comprised of Enhanced Equipment Trust Certificates ("EETC").
Current analysis indicates the specific collateral backing EETC
investments is predominantly represented by newer models that are
expected to be retained as individual airlines reduce their
fleets.
17
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
The amortized cost and fair value of investments in bonds at December 31,
2003, 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)
Maturity:
Due in 1 year or less $ 19,841 $ 20,040
Due after 1 year through 5 years 227,329 232,957
Due after 5 years through 10 years 122,529 127,444
Due after 10 years 62,663 65,455
-------------- ---------------
Total maturities 432,362 445,896
Mortgage-backed securities 80,500 79,461
Commercial mortgage-backed securities 27,892 29,325
Other asset-backed securities 40,142 39,738
-------------- ---------------
Total $ 580,896 $ 594,420
============== ===============
At December 31, 2003, investments in certificates of deposit and bonds,
with an admitted asset value of $11,377,000, 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 $890,061,000 and $600,173,000 in 2003 and 2002,
respectively. Gross gains of $12,342,000 and $15,128,000 and gross losses
of $2,375,000 and $13,017,000 during 2003 and 2002, respectively, were
realized on those sales. A portion of the gains realized in 2003 and 2002
has been deferred to future periods in the interest maintenance reserve.
Major categories of net investment income are summarized as follows:
Year ended December 31
2003 2002
---------------- ----------------
(In Thousands)
Income:
Bonds $ 33,926 $ 42,754
Mortgage loans 2,568 2,617
Contract loans 72 27
Other 309 635
---------------- ----------------
Total investment income 36,875 46,033
Investment expenses 2,132 1,777
---------------- ----------------
Net investment income $ 34,743 $ 44,256
================ ================
18
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
As part of its overall investment strategy, the Company has entered into
agreements to purchase securities as follows:
December 31
2003 2002
---------------- ----------------
(In Thousands)
Investment purchase commitments $ 165 $ 558
The lending rate for long-term mortgage loans during 2003 was 4.21%. 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 62.1% on commercial properties. As of December 31, 2003, the
Company held no mortgages with interest more than 180 days overdue.
4. Concentrations of Credit Risk
The Company held less-than-investment-grade bonds with an aggregate book
value of $49,623,000 and $40,723,000 and with an aggregate market value of
$51,584,000 and $40,582,000 at December 31, 2003 and 2002, respectively.
Those holdings amounted to 8.5% of the Company's investments in bonds and
7.7% of total admitted assets at December 31, 2003. 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 $2,480,000 and $17,624,000 with an
aggregate NAIC market value of $1,951,000 and $17,726,000 at December 31,
2003 and 2002, respectively. The carrying value of these holdings amounted
to 0.43% of the Company's investment in bonds and 0.35% of the Company's
total admitted assets at December 31, 2003.
At December 31, 2003, the Company's commercial mortgages involved a
concentration of properties located in California (46.0%) and Pennsylvania
(13.5%). The remaining commercial mortgages relate to properties located in
18 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 $6,290,000.
19
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
5. Annuity Reserves
At December 31, 2003 and 2002, 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:
Amount Percent
---------------- --------------
(In Thousands)
December 31, 2003
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 1,124 0.2%
At book value less surrender charge of 5% or more 44,238 7.2
At fair value 60,233 9.7
---------------- --------------
Subtotal 105,595 17.1
Subject to discretionary withdrawal (without adjustment):
At book value with minimal or no charge or adjustment 490,524 79.4
Not subject to discretionary withdrawal 21,806 3.5
---------------- --------------
Total annuity reserves and deposit fund liabilities
before reinsurance 617,925 100.0%
=============
Less reinsurance ceded 5,739
----------------
Net annuity reserves and deposit fund liabilities $ 612,186
================
December 31, 2002
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 889 0.1%
At book value less surrender charge of 5% or more 94,326 14.2
At fair value 61,500 9.3
---------------- --------------
Subtotal 156,715 23.6
Subject to discretionary withdrawal (without adjustment):
At book value with minimal or no charge or adjustment 482,267 72.6
Not subject to discretionary withdrawal 25,543 3.8
---------------- --------------
Total annuity reserves and deposit fund liabilities
before reinsurance 664,525 100.0%
==============
Less reinsurance ceded 1,925
----------------
Net annuity reserves and deposit fund liabilities $ 662,600
================
20
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
6. 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 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, 2003 and 2002 were $201,000 and $408,000, respectively.
The general nature and characteristics of the Company's nonguaranteed
separate accounts business follows:
December 31
2003 2002
---------------- ----------------
(In Thousands)
December 31, 2003
Premium, consideration or deposits $ 201 $ 408
================ ================
Reserves for accounts with assets at:
Market value $ 60,233 $ 61,500
Amortized cost - -
---------------- ----------------
Total reserves $ 60,233 $ 61,500
================ ================
Reserves for separate accounts by withdrawal characteristics:
Subject to descretionary withdrawal:
With market value adjustment $ - $ -
At book value without market value adjustments
and with current surrender charge of 5% or more - -
At market value 60,233 61,500
At book value without market value adjustments
and with current surrender charge of less than 5% - -
---------------- ----------------
Subtotal 60,233 61,500
Not subject to discretionary withdrawal - -
---------------- ----------------
Total separate account aggregate reserves $ 60,233 $ 61,500
================ ================
21
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
A reconciliation of the amounts transferred to and from the separate
accounts is presented below:
Year ended December 31
2003 2002
---------------- ----------------
(In Thousands)
Transfers as reported in the Summary of Operations
of the Separate Accounts Statement:
Transfers to separate accounts $ 201 $ 408
Transfers from separate accounts (12,261) (17,790)
---------------- ----------------
Transfers as reported in the Statement of Operations $ (12,060) $ (17,382)
================ ================
7. 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
2003 2002
-------------- ---------------
(In Thousands)
Premiums $ 2,550 $ 2,832
Benefits paid or provided 11,049 6,101
Policy and contract liabilities at year end 83,857 91,095
22
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
8. Federal Income Taxes
The components of the net deferred tax asset/(liability) are as follows:
December 31
2003 2002
---------------- ----------------
(In Thousands)
Total deferred tax assets $ 13,725 $ 18,420
Total deferred tax liabilities (717) (859)
---------------- ----------------
Net deferred tax assets 13,008 17,561
Deferred tax asset nonadmitted (10,369) (12,176)
---------------- ----------------
Net admitted deferred tax asset $ 2,639 $ 5,385
================ ================
Decrease (increase) in nonadmitted asset $ 1,807 $ (6,537)
================ ================
Current income taxes incurred consisted of the following major components:
Year ended December 31
2003 2002
--------------- ----------------
(In Thousands)
Federal taxes on operations $ (1,413) $ (5,786)
Federal taxes on capital gains 2,925 3,926
Capital loss on carryovers utilized (2,925) (675)
--------------- ----------------
Total current taxes incurred $ (1,413) $ (2,535)
=============== ================
23
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
The main components of deferred tax assets and deferred tax liabilities are
as follows:
December 31
2003 2002
--------------- ----------------
(In Thousands)
Deferred tax assets resulting from book/tax differences in:
Present value of insurance in force $ 7,291 $ 8,751
Capital loss carryovers 705 3,446
Investments 3,155 3,270
Deferred acquisition costs 924 1,096
Unrealized loss on investments 972 1,019
Insurance reserves 185 113
Other 493 725
--------------- ----------------
Total deferred tax assets 13,725 18,420
Deferred tax assets nonadmitted 10,369 12,176
--------------- ----------------
Admitted deferred tax assets 3,356 6,244
--------------- ----------------
Deferred tax liabilities resulting from book/tax differences in:
Investments 633 725
Other 84 134
--------------- ----------------
Total deferred tax liabilities 717 859
--------------- ----------------
Net admitted deferred tax asset $ 2,639 $ 5,385
=============== ================
The change in net deferred income taxes is comprised of the following:
December 31
2003 2002 Change
-------------- -------------- --------------
(In Thousands)
Total deferred tax assets $ 13,725 $ 18,420 $ (4,695)
Total deferred tax liabilities 717 859 (142)
-------------- -------------- --------------
Net deferred tax asset $ 13,008 $ 17,561 (4,553)
============== ==============
Remove current year change in unrealized gains 47
--------------
Change in net deferred income tax (4,506)
Remove other items in surplus:
Current year change in non-admitted assets 74
--------------
Change in deferred taxes for rate reconciliation $ (4,432)
==============
24
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
The provision for federal income taxes incurred and change in deferred
taxes is different from that which would be obtained by applying the
statutory Federal income tax rate to income (including capital items)
before income taxes. The significant items causing this difference are:
Year Ended
December 31, 2003
---------------------
(In Thousands)
Ordinary income $ 5,115
Capital gains 8,188
---------------------
Total pre-tax book income $ 13,303
=====================
Provision computed at statutory rate $ 4,656
Refinement of deferred tax balances (455)
Interest maintenance reserve (376)
Nondeductible general expenses 2
Amortization of reinsurance gain (764)
Other (44)
---------------------
Total $ 3,019
=====================
Federal income taxes incurred $ (1,413)
Change in net deferred income taxes 4,432
---------------------
Total statutory income taxes $ 3,019
=====================
The amount of federal income taxes incurred that will be available for
recoupment in the event of future net losses is $0 and $738,000 from 2003
and 2002 respectively.
The Company has a recoverable of $607,000 at December 31, 2003 and
$1,406,000 at December 31, 2002 from the United States Treasury for federal
income taxes.
The Company has gross capital loss carry forwards, which expire as follows:
Expiration Year Amount
---------------------- --------------------
(In Thousands)
2005 $ 2,014
9. Investment in and Advances to Subsidiaries
The Company has one wholly owned noninsurance subsidiary at December 31,
2003, United Variable Services, Inc.
25
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
Amounts invested in and advanced to the Company's subsidiary is summarized
as follows:
December 31
2003 2002
--------------- ---------------
(In Thousands)
Common stock (cost $25,000 in 2003 and in 2002) $ 25 $ 25
10. 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 that 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 of
the preceding year.
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, 2003, the Company meets the RBC
requirements.
26
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
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
2003 2002
----------------------------- ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------ ------------- -------------
(In Thousands)
Assets:
Bonds $ 580,896 $ 594,420 $ 608,870 $ 624,349
Unaffiliated common stocks 2 2 10 10
Mortgage loans 36,853 40,955 34,829 39,729
Policy loans 880 880 933 933
Short-term investments 3,450 3,450 14,450 14,450
Cash 250 250 291 291
Separate account assets 63,193 63,193 64,410 64,410
Receivable for securities 1,081 1,081 8,308 8,308
Liabilities:
Individual and group annuities 530,146 529,848 578,170 575,913
Deposit type contract 13,869 13,882 14,926 14,939
Indebtedness to related parties 1,293 1,293 1,634 1,634
Separate account liabilities 63,193 63,193 64,410 64,410
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.
27
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
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, 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 3% and 8% over the total portfolio. Fair values
determined on this basis can differ from values published by the SVO.
Fair value as determined by the SVO as of December 31, 2003 and 2002
is $584,169,000 and $611,948,000, 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.
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.
28
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
Other Matters
Like many financial services companies, certain U.S. affiliates of ING
Groep N.V. ("ING"), the Company's ultimate parent, have received informal
and formal requests for information since September 2003 from various
governmental and self-regulatory agencies in connection with investigations
related to mutual funds and variable insurance products. ING has cooperated
fully with each request.
In addition to responding to regulatory requests, ING management initiated
an internal review of trading in ING insurance, retirement, and mutual fund
products. The goal of this review has been to identify whether there have
been any instances of inappropriate trading in those products by third
parties or by ING investment professionals and other ING personnel. This
internal review is being conducted by independent special counsel and
auditors. Additionally, ING reviewed its controls and procedures in a
continuing effort to deter improper frequent trading in ING products. ING's
internal reviews related to mutual fund trading are continuing.
The internal review has identified several arrangements allowing third
parties to engage in frequent trading of mutual funds within the Company's
variable insurance and mutual fund products, and identified other
circumstances where frequent trading occurred despite measures taken by ING
intended to combat market timing. Most of the identified arrangements were
initiated prior to ING's acquisition of the businesses in question. In each
arrangement identified, ING has terminated the inappropriate trading, taken
steps to discipline or terminate employees who were involved, and modified
policies and procedures to deter inappropriate activity. While the review
is not completed, management believes the activity identified does not
represent a systemic problem in the businesses involved.
These instances included agreements (initiated in 1998) that permitted one
variable life insurance customer of Reliastar Life Insurance Company
("Reliastar"), an affiliate of the Company, to engage in frequent trading,
and to submit orders until 4pm Central Time, instead of 4pm Eastern Time.
Reliastar was acquired by ING in 2000. The late trading arrangement was
immediately terminated when current senior management became aware of it in
2002. ING believes that no profits were realized by the customer from the
late trading aspect of the arrangement.
In addition, the review has identified five arrangements that allowed
frequent trading of funds within variable insurance products issued by
Reliastar and by ING USA Annuity & Life Insurance Company and in certain
ING Funds. ING entities did not receive special benefits in return for any
of these arrangements, which have all been terminated. The internal review
also identified two investment professionals who engaged in improper
frequent trading in ING Funds.
ING will reimburse any ING Fund or its shareholders affected by
inappropriate trading for any profits that accrued to any person who
engaged in improper frequent trading for which ING is responsible.
Management believes that the total amount of such reimbursements will not
be material to ING or its U.S. business.
29
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
13. Financing Agreements
The Company maintains a revolving loan agreement with SunTrust Bank,
Atlanta (the "Bank"). Under this agreement, which expires July 31, 2004,
the Company can borrow up to $25,000,000 from the Bank. Interest on any
Company borrowing accrues at an annual rate equal to: (1) the cost of funds
for the Bank for the period applicable for the advance plus 0.225% or (2) a
rate quoted by the Bank to the Company for the borrowing. Under this
agreement, the Company incurred interest expense of $182 for the year ended
December 31, 2003. At December 31, 2003, the Company had no amounts payable
to the Bank.
The Company also maintains a revolving loan agreement with Bank of New
York, New York ("BONY"). Under this agreement, the Company can borrow up to
$50,000,000 from BONY. Interest on any Company borrowing accrues at an
annual rate equal to: (1) the cost of funds for BONY for the period
applicable for the advance plus 0.35% or (2) a rate quoted by BONY to the
Company for the borrowing. Under this agreement, the Company incurred no
interest expense for the year ended December 31, 2003. At December 31,
2003, the Company had no amounts payable to BONY.
14. Related Party Transactions
Affiliates
Management and service contracts and all cost sharing arrangements with
other affiliated ING U.S. 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 $1,871,000 and $1,617,000 for the
years ended December 31, 2003 and 2002, 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
$2,304,000 and $384,000 for the years ended December 31, 2003 and 2002,
respectively.
30
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
Reciprocal Loan Agreement: The Company maintains a reciprocal loan
agreement with ING AIH 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 $17,000 and
interest income of $36,000 for the year ended December 31, 2003. At
December 31, 2003, the Company had no amounts payable to or receivable from
ING AIH.
Assets and liabilities, along with related revenues and expenses, recorded
as a result of transactions and agreements with affiliates may not be the
same as those recorded if the Company was not a wholly-owned subsidiary of
its parent.
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 has recorded
$490,000 and $474,000 for this liability as of December 31, 2003 and 2002,
respectively. The Company has also recorded an asset of $26,000 and
$351,000 as of December 31, 2003 and 2002, respectively, for future credits
to premium taxes for assessments already paid.
16. Subsequent Events
Golden American Life Insurance Company ("Golden") requested that the
Delaware Insurance Department approve the redomestication of Golden from
Delaware to Iowa effective January 1, 2004. Equitable Life Insurance
Company of Iowa ("Equitable"), the Company, and USG Annuity and Life
Company ("USG") requested the Iowa Department of Insurance (for Equitable
and the Company) and the Oklahoma Department of Insurance (for USG) to
approve the merger of the affiliated life insurance company operations of
Equitable, the Company, Golden, and USG with Golden being the survivor. The
sequence of events, effective January 1, 2004, is as follows:
redomestication of Golden to Iowa, merger of the four affiliated insurers
with Golden being the survivor, and the renaming of Golden to ING USA
Annuity and Life Insurance Company ("ING USA").
31
United Life & Annuity Insurance Company
Notes to Financial Statements - Statutory Basis
- --------------------------------------------------------------------------------
The Delaware Insurance Department provided a "no objection letter" for the
redomestication of Golden to Iowa on August 25, 2003. The Iowa Department
of Insurance approved the merger on July 21, 2003 and the Oklahoma
Department of Insurance approved it on August 11, 2003.
17. Reconciliation to the Annual Statement
During 2002, the Company recorded prior year 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
============== ===============
32
Exhibit 99.3
Report of Independent Auditors
Board of Directors and Stockholder
ING USA Annuity and Life Insurance Company
We have audited the accompanying statutory basis balance sheets of USG Annuity &
Life Company ("the Company" which, effective January 1, 2004, merged into an
affiliate, ING USA Annuity and Life Insurance Company, a wholly owned subsidiary
of ING America Insurance Holdings, Inc.) as of December 31, 2003 and 2002, 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, 2003 and
2002 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, 2003 and 2002, 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.
/s/ Ernst & Young
March 22, 2004
USG Annuity & Life Company
Balance Sheets - Statutory Basis
December 31
2003 2002
--------------- ---------------
(In Thousands)
Admitted assets
Cash and invested assets:
Bonds $ 6,231,961 $ 6,116,495
Preferred stocks 1,273 1,088
Mortgage loans 1,471,607 1,483,855
Real estate, less accumulated depreciation (2003-$29, 2002-$304) 2,679 1,477
Contract loans 32,247 32,454
Other invested assets 41,017 47,704
Cash and short-term investments 27,739 9,116
--------------- ---------------
Total cash and invested assets 7,808,523 7,692,189
Deferred and uncollected premiums, less loading (2003-$12, 2002-$58) 284 386
Accrued investment income 68,590 77,674
Reinsurance balances recoverable 252 335
Indebtedness from related parties 19,597 25
Federal income tax recoverable (including $18,475 and $15,601 net
deferred tax assets at December 31, 2003 and 2002, respectively) 20,761 22,163
Other assets 33 2,451
--------------- ---------------
Total admitted assets $ 7,918,040 $ 7,795,223
=============== ===============
The accompanying notes are an integral part of these financial statements.
3
USG Annuity & Life Company
Balance Sheets - Statutory Basis
December 31
2003 2002
--------------- ---------------
(In Thousands)
except share amounts)
Liabilities and capital and surplus
Liabilities:
Policy and contract liabilities:
Life and annuity reserves $ 6,918,897 $ 6,859,914
Deposit type contracts 224,767 246,501
Policyholders' funds 16 53
Unpaid claims 3,064 3,622
--------------- ---------------
Total policy and contract liabilities 7,146,744 7,110,090
Interest maintenance reserve 41,337 11,799
Accounts payable and accrued expenses 17,684 13,807
Indebtedness to related parties 16,587 22,147
Asset valuation reserve 51,181 50,634
Borrowed money 286,886 184,450
Other liabilities 17,667 16,110
--------------- ---------------
Total liabilities 7,578,086 7,409,037
Capital and surplus:
Common stock: authorized 1,000 shares of $3,000 par value,
833 issued and outstanding 2,500 2,500
Paid-in and contributed surplus 316,963 316,963
Unassigned surplus 20,491 66,723
--------------- ---------------
Total capital and surplus 339,954 386,186
--------------- ---------------
Total liabilities and capital and surplus $ 7,918,040 $ 7,795,223
=============== ===============
The accompanying notes are an integral part of these financial statements.
4
USG Annuity & Life Company
Statements of Operations - Statutory Basis
Year ended December 31
2003 2002
--------------- ---------------
(In Thousands)
Premiums and other revenues:
Life, annuity, and accident and health premiums $ 423,362 $ 1,285,640
Policy proceeds and dividends left on deposit 7,710 9,267
Net investment income 452,278 536,206
Amortization of interest maintenance reserve (6,647) (7,446)
Commissions, expense allowances and reserve adjustments on
reinsurance ceded 42,615 14,159
Other income - 1,619
--------------- ---------------
Total premiums and other revenues 919,318 1,839,445
Benefits paid or provided:
Death benefits 5,182 112,299
Annuity benefits 250,745 250,411
Surrender benefits 522,262 582,708
Interest on policy or contract funds 6,384 8,033
Other benefits 11 -
Life contract withdrawals 9,827 8,968
Increase in life, annuity, and accident and health reserves 58,983 648,698
--------------- ---------------
Total benefits paid or provided 853,394 1,611,117
Insurance expenses:
Commissions 71,151 86,074
General expenses 32,567 33,272
Insurance taxes, licenses and fees, excluding federal income taxes 3,748 (231)
Other 1,287 856
--------------- ---------------
Total insurance expenses 108,753 119,971
--------------- ---------------
(Loss) gain from operations before federal income taxes and net realized
capital losses (42,829) 108,357
Federal income tax (benefit) expense (27,668) 41,015
--------------- ---------------
(Loss) gain from operations before net realized capital losses (15,161) 67,342
Net realized capital losses; net of income tax (benefit) expense:
2003 - $18,494 and 2002 - ($6,049); and excluding net transfers
to the interest maintenance reserve 2003- $22,891 and 2002- ($638) (31,599) (41,467)
--------------- ---------------
Net (loss) income $ (46,760) $ 25,875
=============== ===============
The accompanying notes are an integral part of these financial statements.
5
USG Annuity & Life Company
Statements of Changes and Surplus - Statutory Basis
Year ended December 31
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 of year 316,963 286,963
Capital contribution - 30,000
--------------- ---------------
Balance at end of year 316,963 316,963
--------------- ---------------
Unassigned surplus:
Balance at beginning of year 66,723 19,994
Net (loss) income (46,760) 25,875
Change in net unrealized capital losses (395) (7,240)
Change in nonadmitted assets (742) 3,284
Change in asset valuation reserve (547) 20,987
Change in net deferred income tax 2,212 3,480
Other - 343
--------------- ---------------
Balance at end of year 20,491 66,723
--------------- ---------------
Total capital and surplus $ 339,954 $ 386,186
=============== ===============
The accompanying notes are an integral part of these financial statements.
6
USG Annuity & Life Company
Statements of Cash Flows - Statutory Basis
Year ended December 31
2003 2002
--------------- ---------------
(In Thousands)
Operations
Premiums, policy proceeds, and other considerations received,
net of reinsurance paid $ 423,582 $ 1,295,738
Net investment income received 620,710 647,957
Commission and expense allowances received on reinsurance ceded - 14,159
Benefits paid (821,273) (998,100)
Insurance expenses paid (109,625) (122,791)
Federal income taxes received (paid) 13,451 (53,696)
Net other revenue 37,575 89
------------------ ------------------
Net cash provided by operations 164,420 783,356
Investment activities
Proceeds from sales, maturities, or repayments of investments:
Bonds 8,021,572 8,709,883
Stocks - 357
Mortgage loans 329,751 275,949
Real estate 1,450 -
Other invested assets 4,156 6,856
------------------ ------------------
Net proceeds from sales, maturities, or repayments of investments 8,356,929 8,993,045
Cost of investments acquired:
Bonds 8,253,561 9,713,052
Stocks 185 1,230
Mortgage loans 317,467 100,251
Real estate 2,708 -
Other invested assets 10,530 14,594
------------------ ------------------
Total cost of investments acquired 8,584,451 9,829,127
Change in contract loans (207) (279)
------------------ ------------------
Net cash used in investment activities (227,315) (835,803)
Financing and miscellaneous activities
Cash provided:
Capital and surplus paid-in - 30,000
Borrowed money, net 102,436 1,102
Net deposits on deposit-type contract funds (21,734) (8)
Other sources (uses) 816 (72,379)
------------------ ------------------
Net cash provided by (used in) financing and miscellaneous activities 81,518 (41,285)
------------------ ------------------
Net increase (decrease) in cash and short-term investments 18,623 (93,732)
Cash and short-term investments:
Beginning of year 9,116 102,848
------------------ ------------------
End of year $ 27,739 $ 9,116
================== ==================
The accompanying notes are an integral part of these financial statements.
7
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
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 is a wholly
owned subsidiary of Lion Connecticut Holdings, Inc., which in turn is a
wholly-owned subsidiary of ING America Insurance Holdings, Inc. ("ING
AIH"). Effective January 1, 2004, the Company merged into an affiliate, ING
USA Annuity and Life Insurance Company, a wholly-owned subsidiary of Lion
Connecticut Holdings, Inc.
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 a 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.
Investments in real estate are reported net of related obligations rather
than on a gross basis. 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. 7
8
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
SSAP 31 applies to derivative transactions prior to January 1, 2003. The
Company also follows the newly adopted hedge accounting guidance in SSAP 86
for derivative transactions entered into or modified on or after January 1,
2003. Under this guidance, derivatives that are deemed effective hedges are
accounted for in a manner which is consistent with the underlying hedged
item. Derivatives used in hedging transactions that do not meet the
requirements of SSAP 86 as an effective hedge are carried at fair value
with the change in value recorded in surplus as unrealized gains or losses.
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 shareholder's 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.
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.
9
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
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.
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.
10
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
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 sheets.
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 includes cash balances and investments with
initial maturities of three months or less.
11
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
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
Investments 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. The Company has elected to use the book value as of January 1,
1994, as the cost for applying the retrospective method to securities
purchased prior to that date where historical cash flows are not
readily available.
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").
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
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.
12
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
The Company uses derivatives such as interest rate swaps, caps and
floors, and options 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. 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.
Mortgage loans are reported at amortized cost, less allowance for
impairments.
Contract loans are reported at unpaid principal balances.
Land is reported at cost. 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 95% 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.
13
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
Reverse dollar repurchase agreements are accounted for as collateral
borrowings, where the amount borrowed is equal to the sales price of
the underlying securities.
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.
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.
Partnership interests, which are included in other invested assets,
are reported at the underlying audited GAAP equity of the investee.
Residual collateralized mortgage obligations, which are included in
other invested assets, are reported at amortized cost using the
effective interest method.
Realized capital gains and losses are determined using the specific
identification method.
Cash on hand includes cash equivalents. Cash equivalents are
short-term investments that are both readily convertible to cash and
have an original maturity date of three months or less. Short-term
investments are carried at amortized cost, which approximates market
value.
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 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.
14
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
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.
Nonadmitted Assets
Nonadmitted assets are summarized as follows:
December 31
2003 2002
---------------- ----------------
(In Thousands)
Deferred federal income taxes $ 55,372 $ 54,496
Agents' debit balances 603 519
Deferred and uncollected premium 35 119
Other 751 885
---------------- ----------------
Total nonadmitted assets $ 56,761 $ 56,019
================ ================
15
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
Changes in nonadmitted assets are generally reported directly in unassigned
surplus as an increase or decrease in nonadmitted assets. Changes in
nonadmitted invested assets are reported directly in unassigned surplus as
a component of the 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, 2003. 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, 2003.
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 $1,342,670,000 and repaid $1,342,670,000 in 2003 and
borrowed $1,021,035,000 and repaid $1,021,035,000 in 2002. 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 $140,000 and $109,000
during 2003 and 2002, respectively.
Reclassifications
Certain prior year amounts in the Company's statutory basis financial
statements have been reclassified to conform to the 2003 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 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. The 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, 2003 and 2002, the
Company had no such permitted accounting practices.
16
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
3. Investments
The amortized cost and fair value of fixed maturities and equity securities
are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------ ------------ -------------
(In Thousands)
At December 31, 2003:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 59,838 $ 363 $ 27 $ 60,174
States, municipalities,
and political subdivisions 11,000 - 886 10,114
Foreign government 292,529 10,584 2,314 300,799
Public utilities securities 468,119 31,654 2,243 497,530
Corporate securities 3,263,827 157,736 26,919 3,394,644
Mortgage-backed securities 1,447,813 40,896 40,369 1,448,340
Commercial mortgage-backed securities 249,580 13,801 429 262,952
Other structured securities 443,419 5,181 16,690 431,910
------------- ------------ ------------ -------------
Total fixed maturities 6,236,125 260,215 89,877 6,406,463
Preferred stocks 1,273 - - 1,273
------------- ------------ ------------ -------------
Total equity securities 1,273 - - 1,273
------------- ------------ ------------ -------------
Total $ 6,237,398 $ 260,215 $ 89,877 $ 6,407,736
============= ============ ============ =============
At December 31, 2002:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 285,347 $ 4,998 $ 36 $ 290,309
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
Commerical 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
============= ============ ============ =============
17
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
As of December 31, 2003, the aggregate market values of debt securities
with unrealized losses and the time period that cost exceeded market value
are as follows:
More than 6
Less than 6 months and less More than 12
months below that 12 months months below
cost below cost cost Total
----------------- ------------------ ----------------- ------------------
(In Thousands)
Fair value $ 912,922 $ 781,315 $ 99,880 $ 1,794,117
Unrealized loss 13,888 40,720 35,269 89,877
Of the unrealized losses more than 6 months and less than 12 months in
duration of $40,720,000, there were $8,509,000 in unrealized losses that
are primarily related to interest rate movement or spread widening for
other than credit-related reasons. For these securities business and
operating fundamentals are performing as expected. The remaining unrealized
losses of $32,211,000 as of December 31, 2003 included the following
significant items:
$18,193,000 of unrealized losses related to mortgage-backed and
structured securities reviewed for impairment under the guidance
prescribed by SSAP 43 Loan-backed and Structured Securities. This
category includes U.S. government-backed securities, principal
protected securities and structured securities which did not have an
adverse change in cash flows for which the fair value was
$257,131,000.
$3,265,000 of unrealized losses related to the energy/utility
industry, for which the fair value was $66,629,000. During 2003, the
energy sector recovered due to a gradually improving economic picture
and the lack of any material accounting irregularities similar to
those experienced in the prior two years. Current analysis indicates
that the debt will be serviced in accordance with the contractual
terms.
$8,488,000 of unrealized losses related to non-domestic issues, with
no unrealized loss exposure per country in excess of $2,036,000 for
which the fair value was $194,288,000. Credit exposures are primarily
in the construction industry in Italy.
The remaining unrealized losses totaling $2,265,000 related to a fair
value of $31,760,000.
Of the unrealized losses more than 12 months in duration of $35,269,000,
there were $449,000 in unrealized losses that are primarily related to
interest rate movement or spread widening for other than credit-related
reasons. Business and operating fundamentals are performing as expected.
The remaining losses of $34,820,000 as of December 31, 2003 included the
following significant items:
18
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
$32,683,000 of unrealized losses related to mortgage-backed and
structured securities reviewed for impairment under the guidance
prescribed by SSAP 43 Loan-backed and Structured Securities. This
category includes U.S. government-backed securities, principal
protected securities and structured securities which did not have an
adverse change in cash flows for which the fair value was $81,284,000.
$1,453,000 of unrealized losses related to the energy/utility
industry, for which the fair value was $9,278,000. During 2003, the
energy sector recovered due to a gradually improving economic picture
and the lack of any material accounting irregularities similar to
those experienced in the prior two years. Current analysis indicates
that the debt will be serviced in accordance with the contractual
terms.
$679,000 of unrealized losses related to the airline industries, for
which the fair value was $4,075,000. During 2003, the airline industry
continued to suffer from decreased passenger volumes offset by a
gradually improving economy. The majority of the airline investments
are comprised of Enhanced Equipment Trust Certificates ("EETC").
Current analysis indicates the specific collateral backing the EETC
investments is predominantly represented by newer models that are
expected to be retained as individual airlines reduce their fleets.
The remaining unrealized losses totaling $5,000 relate to a fair value
of $245,000.
The amortized cost and fair value of investments in bonds at December 31,
2003, 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)
Maturity:
Due in 1 year or less $ 57,631 $ 58,607
Due after 1 year through 5 years 1,320,691 1,382,661
Due after 5 years through 10 years 1,804,228 1,882,506
Due after 10 years 912,763 939,487
-------------- ---------------
4,095,313 4,263,261
Mortgage-backed securities 1,447,813 1,448,340
Commercial mortgage-backed securities 249,580 262,952
Other structured securities 443,419 431,910
-------------- ---------------
Total $ 6,236,125 $ 6,406,463
============== ===============
19
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
At December 31, 2003, investments in certificates of deposit and bonds,
with an admitted asset value of $3,310,000, were on deposit with state
insurance departments to satisfy regulatory requirements.
Reconciliation of bonds from amortized cost to carrying value is as
follows:
December 31
2003 2002
---------------- ----------------
(In Thousands)
Amortized cost $ 6,236,125 $ 6,127,415
Less nonadmitted bonds 4,164 10,920
---------------- ----------------
Carrying value $ 6,231,961 $ 6,116,495
================ ================
Proceeds from the sales of investments in bonds and other fixed maturity
interest securities were $4,610,345,000 and $5,811,132,000 in 2003 and
2002, respectively. Gross gains of $107,661,000 and $125,255,000 and gross
losses of $25,138,000 and $103,039,000 during 2003 and 2002, respectively,
were realized on those sales. A portion of the gains realized in 2003 and
2002 has been deferred to future periods in the interest maintenance
reserve.
Major categories of net investment income are summarized as follows:
Year ended December 31
2003 2002
---------------- ----------------
(In Thousands)
Income:
Bonds $ 404,578 $ 459,813
Mortgage loans 112,905 128,230
Contract loans 1,522 1,091
Company-occupied property 244 376
Other (34,857) (26,548)
---------------- ----------------
Total investment income 484,392 562,962
Investment expenses (32,114) (26,756)
---------------- ----------------
Net investment income $ 452,278 $ 536,206
================ ================
As part of its overall investment strategy, the Company has entered into
agreements to purchase securities as follows:
December 31
2003 2002
---------------- ----------------
(In Thousands)
Investment purchase commitments $ 90,956 $ 87,963
20
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
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
$286,886,000 and $173,448,000 at December 31, 2003 and 2002, respectively.
The securities underlying these agreements are mortgage-backed securities
with a book value of $285,832,000 and $173,246,000 and fair value of
$288,285,000 and $176,504,000 as of December 31, 2003 and 2002,
respectively. The securities have a weighted average coupon rate of 5.8%
and have maturities ranging from December 2018 through December 2033. 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, 2003. The Company believes the counterparties
to the reverse dollar repurchase agreements are financially responsible and
that the counterparty risk is minimal.
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. As of December 31, 2003, there were no outstanding amounts on
these agreements. The securities underlying these agreements are
mortgage-backed securities with a book value of $11,394,000 and fair value
of $11,520,000 at December 31, 2002.
At December 31, 2003 and 2002, the Company had loaned securities (which are
reflected as invested assets on the balance sheet) with a market value of
approximately $22,330,000 and $32,662,000, respectively.
The maximum and minimum lending rates for long-term mortgage loans during
2003 were 6.07% and 3.40%. 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 74.7% on commercial properties. As of December 31, 2003, the
Company held no mortgages with interest more than 180 days overdue. Total
interest due, as of December 31, 2003 is $9,000.
In the course of the Company's asset management, securities are sold and
reacquired within 30 days of the sale date to enhance the Company's return
on the investment portfolio or to manage interest rate risk.
21
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
The details by NAIC designation 3 or below of securities sold during 2003
and reacquired within 30 days of the sale date are:
Cost of
Number of Securities
Transactions Book Value Repurchased Gain
--------------- --------------- --------------- ---------------
(In Thousands)
NAIC 3 2 $ 4,730 $ 6,948 $ 1,095
4. Derivative Financial Instruments Held for Purposes Other than Trading
The Company enters into derivatives such as swaps caps and floors, 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.
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.
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.
22
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
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, 2003 and 2002:
Notional Carrying Fair
Amount Value Value
--------------- -------------- ---------------
(In Thousands)
December 31, 2003
Swaps $ 828,066 $ - $ (124,226)
Caps and floors 441,243 1,554 7
--------------- -------------- ---------------
Total derivatives $ 1,269,309 $ 1,554 $ (124,219)
=============== ============== ===============
December 31, 2002
Swaps $ 1,146,498 $ - $ (138,473)
Caps and floors 548,465 3,393 1,296
--------------- -------------- ---------------
Total derivatives $ 1,694,963 $ 3,393 $ (137,177)
=============== ============== ===============
5. Concentrations of Credit Risk
The Company held less-than-investment-grade bonds with an aggregate book
value of $479,259,000 and $435,061,000 and with an aggregate market value
of $497,620,000 and $413,437,000 at December 31, 2003 and 2002,
respectively. These holdings amounted to 7.7% of the Company's investments
in bonds and 6.1% of total admitted assets at December 31, 2003. 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 $159,686,000 and $204,268,000 with an
aggregate NAIC market value of $161,201,000 and $208,297,000 at December
31, 2003 and 2002, respectively. The carrying value of these holdings
amounted to 2.0% of the Company's investment in bonds and 2.0% of the
Company's total admitted assets at December 31, 2003.
23
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
At December 31, 2003, the Company's commercial mortgages involved a
concentration of properties located in California (14.06%) and Pennsylvania
(9.05%). 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 $30,000,000.
6. Annuity Reserves
At December 31, 2003 and 2002, the Company's annuity reserves, including
those held in 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:
Amount Percent
---------------- ----------------
(In Thousands)
December 31, 2003
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 4,536,520 54.0 %
At book value less surrender charge of 5% or more 1,995,432 23.7
---------------- --------------
Subtotal $ 6,531,952 77.7
Subject to discretionary withdrawal (without adjustment):
At book value with minimal or no charge or adjustment 1,258,530 15.0
Not subject to discretionary withdrawal 614,236 7.3
---------------- --------------
Total annuity reserves and deposit fund liabilities
before reinsurance $ 8,404,718 100.0 %
==============
Less reinsurance ceded 1,346,600
----------------
Net annuity reserves and deposit fund liabilities $ 7,058,118
================
December 31, 2002
Subject to discretionary withdrawal (with adjustment):
With market value adjustment $ 4,447,295 56.2 %
At book value less surrender charge of 5% or more 1,635,038 20.6
---------------- --------------
Subtotal 6,082,333 76.8
Subject to discretionary withdrawal (without adjustment):
At book value with minimal or no charge or adjustment 1,194,281 15.1
Not subject to discretionary withdrawal 641,496 8.1
---------------- --------------
Total annuity reserves and deposit fund liabilities
before reinsurance $ 7,918,110 100.0 %
==============
Less reinsurance ceded 895,734
----------------
Net annuity reserves and deposit fund liabilities $ 7,022,376
================
24
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
7. 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. 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 $7,000 and $136,400,000 for the years ended
December 31, 2003 and 2002, respectively.
The Company's ceded reinsurance arrangements reduced certain items in the
accompanying financial statements by the following amounts:
December 31
2003 2002
-------------- ---------------
(In Thousands)
Premiums $ 561,792 $ 260,544
Benefits paid or provided 13,168 9,447
Policy and contract liabilities at year end 1,347,473 896,762
8. 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.
The components of the net deferred tax asset (liability) are as follows:
December 31
2003 2002
---------------- ----------------
(In Thousands)
Total deferred tax assets $ 75,954 $ 70,328
Total deferred tax liabilities (2,107) (231)
---------------- ----------------
Net deferred tax asset 73,847 70,097
Deferred tax asset nonadmitted (55,372) (54,496)
---------------- ----------------
Net admitted deferred tax asset $ 18,475 $ 15,601
================ ================
(Increase) decrease in nonadmitted asset $ (876) $ 1,337
================ ================
25
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
Current income taxes incurred consist of the following major components:
Year ended December 31
2003 2002
--------------- ----------------
(In Thousands)
Federal tax (benefit) expense on operations $ (27,668) $ 41,015
Federal tax expense (benefit) on capital gains 18,494 (6,049)
--------------- ----------------
Total current tax (benefit) expense incurred $ (9,174) $ 34,966
=============== ================
The main components of deferred tax assets and deferred tax liabilities are
as follows:
December 31
2003 2002
---------------- ----------------
(In Thousands)
Deferred tax assets resulting from book/tax differences in:
Deferred acquisition costs $ 24,803 $ 23,431
Insurance reserves 10,751 8,423
Investments 29,808 32,290
Guaranty assessments 4,348 4,339
Unrealized loss on investments 5,346 499
Other 898 1,346
---------------- ----------------
Total deferred tax assets 75,954 70,328
Deferred tax assets nonadmitted (55,372) (54,496)
---------------- ----------------
Admitted deferred tax assets 20,582 15,832
---------------- ----------------
Deferred tax liabilities resulting from book/tax differences in:
Due and deferred premiums $ 150 231
Investments 1,951 -
Other 6 -
---------------- ----------------
Total deferred tax liabilities 2,107 231
---------------- ----------------
Net admitted deferred tax asset $ 18,475 $ 15,601
================ ================
26
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
The change in net deferred income taxes is comprised of the following:
December 31
2003 2002 Change
-------------- -------------- --------------
(In Thousands)
Total deferred tax assets $ 75,954 $ 70,328 $ 5,626
Total deferred tax liabilities 2,107 231 1,876
-------------- -------------- --------------
Net deferred tax asset $ 73,847 $ 70,097 $ 3,750
============== ==============
Remove current year change in unrealized gains (1,538)
--------------
Change in net deferred income tax 2,212
Remove other items in surplus:
Current year change in non-admitted assets 44
Other (3,310)
--------------
Change in deferred taxes for rate reconciliation $ (1,054)
==============
The provision for federal income taxes incurred and change in deferred
taxes is different from that which would be obtained by applying the
statutory federal income tax rate to income (including capital items)
before income taxes. The significant items causing this difference are:
Year Ended
December 31,
2003
-----------------
(In Thousands)
Ordinary loss $ (42,829)
Capital gains 9,786
------------------
Total pre-tax book loss (33,043)
==================
Provision (benefit) computed at statutory rate (11,565)
Refinement of deferred tax balances 1,116
Interest maintenance reserve 2,326
Other 2
------------------
Total $ (8,121)
==================
Federal income tax incurred $ (9,175)
Change in net deferred income tax 1,054
------------------
Total statutory income tax benefit $ (8,121)
==================
There are no federal income taxes incurred that will be available for
recoupment in the event of future net losses for 2003 and 2002.
The Company had receivables of $2,285,000 and $6,562,000 at December 31,
2003 and 2002, respectively, for federal income taxes under the
intercompany tax sharing agreement
27
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
9. 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 that 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.
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, 2003, the Company meets the RBC
requirements.
10. 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
2003 2002
----------------------------- ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------ ------------- -------------
(In Thousands)
Assets:
Bonds $ 6,231,961 $ 6,406,763 $ 6,116,495 $ 6,336,335
Preferred stocks 1,273 1,273 1,088 1,088
Mortgage loans 1,471,607 1,576,183 1,483,855 1,632,720
Contract loans 32,247 32,247 32,454 32,454
Derivative securities 1,554 (124,219) 3,393 (137,177)
Short-term investments 16,651 16,651 5,650 5,650
Cash 11,088 11,088 3,466 3,466
Receivable for securities 341 341 2,873 2,873
Liabilities:
Individual and group annuities 6,833,372 6,645,174 6,775,875 6,621,753
Deposit type contract 224,767 235,291 246,501 258,945
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:
28
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
Cash and short-term investments: The carrying amounts reported in
the accompanying balance sheets for these financial instruments
approximate their fair values.
Fixed maturities: The fair values for bonds and preferred 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 12% over the total portfolio. Fair
values determined on this basis can differ from values published by
the SVO. Market value as determined by the SVO as of December 31, 2003
and 2002 is $6,263,837,000 and $6,154,770,000, 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 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. 1.
29
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
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.
The Company has committed to provide additional capital contributions of
$31,599,000 in partnership investments at December 31, 2003.
12. Financing Agreements
The Company maintains a revolving loan agreement with SunTrust Bank,
Atlanta (the "Bank"). Under this agreement, which expires July 30, 2004,
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 $9,000 and $20,000 for the years
ended December 31, 2003 and 2002, respectively. At December 31, 2003 and
2002, the Company had no amounts payable to the Bank.
The Company also maintains a revolving loan agreement with Bank of New
York, New York (the "BONY"). Under this agreement, the Company can borrow
up to $100,000,000 from BONY. Interest on any of the Company borrowing
accrues at an annual rate equal to: the cost of funds for BONY for the
period applicable for the advance plus .35% or a rate quoted by BONY to the
Company for the borrowing. Under this agreement, the Company incurred
interest expense of $4,000 and $31,000 for the years ended December 31,
2003 and 2002, respectively. At December 31, 2003 and 2002, the Company had
no amounts payable to BONY.
13. Related Party Transactions
Affiliates
Management and service contracts and all cost sharing arrangements with
other affiliated ING U.S. life insurance companies are allocated among
companies in accordance with normal, generally accepted expense and cost
allocation methods.
31
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
The Company maintains a reciprocal loan agreement with ING AIH to
facilitate the handling of unusual and/or unanticipated short-term cash
requirements. Under this agreement, which expires April 1, 2007, the
companies can borrow up to $95,800,000 from one another. Interest on any
Company borrowings is charged at the rate of ING AIH's cost of funds for
the interest period plus 0.15%. Interest on any ING AIH borrowings is
charged at a rate based on the prevailing interest rate of U.S. commercial
paper available for purchase with a similar duration. Under this agreement,
the Company incurred interest expense of $125,000 and interest income of
$275,000 for the year ended December 31, 2003. At December 31, 2003, the
Company had no amounts payable to ING AIH and $16,400,000 receivable from
ING AIH.
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 $25,272,000 and $19,698,000 for the
years ended December 31, 2003 and 2002, 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 $30,727,000 and $31,437,000 for the years ended December 31, 2003 and
2002, 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.
Services Agreement with ING Financial Advisors, LLC: The Company has
entered into a services agreement with 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.
32
USG ANNUITY & LIFE COMPANY
Notes to Financial Statements - Statutory Policies
- --------------------------------------------------------------------------------
Assets and liabilities along with related revenues and expenses recorded as
a result of transactions and agreements with affiliates may not be the same
as those recorded if the Company was not a wholly-owned subsidiary of its
parent.
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 has estimated
this liability to be $12,422,000 and $12,397,000 as of December 31, 2003
and 2002, respectively and has recorded a reserve. The Company has also
recorded an asset of $34,000 and $2,451,000 as of December 31, 2003 and
2002, respectively, for future credits to premium taxes for assessments
already paid.
15. Subsequent Events
Effective January 1, 2004, the Company was a party to a merger with its
parent, Equitable, and two other affiliated companies, United Life and
Annuity Insurance Company ("ULA") and Golden American Life Insurance
Company ("Golden").
Golden requested that the Delaware Insurance Department approve the
redomestication of Golden from Delaware to Iowa effective January 1, 2004.
Equitable, ULA, and the Company requested the Iowa Department of Insurance
(for Equitable and ULA) and the Oklahoma Insurance Department (for the
Company) approve the merger of the affiliated life insurance company
operations of Equitable, ULA, Golden, and the Company with Golden being the
survivor. The sequence of events, effective January 1, 2004, was as
follows: redomestication of Golden to Iowa, merger of the four affiliated
insurers with Golden being the survivor, and the renaming of Golden to ING
USA Annuity and Life Insurance Company.
The Delaware Insurance Department provided a "no objection letter" for the
redomestication of Golden to Iowa on August 25, 2003. The Iowa Department
of Insurance approved the merger on July 21, 2003 and the Oklahoma
Insurance Department approved it on August 11, 2003.
33
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Not Applicable
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
ING USA Annuity and Life Insurance Company (ING USA) shall indemnify
(including therein the prepayment of expenses) any person who is or was a
director, officer or employee, or who is or was serving at the request of ING
USA as a director, officer or employee of another corporation, partnership,
joint venture, trust or other enterprise for expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him with respect to any threatened, pending or completed action,
suit or proceedings against him by reason of the fact that he is or was such a
director, officer or employee to the extent and in the manner permitted by law.
ING USA may also, to the extent permitted by law, indemnify any other
person who is or was serving ING USA in any capacity. The Board of
Directors shall have the power and authority to determine who may be indemnified
under this paragraph and to what extent (not to exceed the extent provided in
the above paragraph) any such person may be indemnified.
ING Groep N.V. maintains an umbrella insurance policy with an international
insurer. The policy covers ING Groep N.V. and any company in which ING Groep
N.V. has an ownership control of over 50%. This would encompass the principal
underwriter as well as the depositor. The policy provides for the following
types of coverage; errors and ommissions, directors and officers, employment
practices, fiduciary and fidelity.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant, as provided above or otherwise, the Registrant has
been advised that in the opinion of the SEC such indemnification by the
Depositor is against public policy, as expressed in the Securities Act of 1933,
and therefore may be unenforceable. In the event that a claim of such
indemnification (except insofar as it provides for the payment by the Depositor
of expenses incurred or paid by a director, officer or controlling person in the
successful defense of any action, suit or proceeding) is asserted against the
Depositor by such director, officer or controlling person and the SEC is still
of the same opinion, the Depositor or Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by the Depositor is against public policy as expressed by the Securities Act of
1933 and will be governed by the final adjudication of such issue.
ITEM 16. EXHIBITS
3(a) Amended and Restated Articles of Incorporation of ING USA Annuity and
Life Insurance Company, dated (01/01/04). (5)
(b) Amended and Restated By-Laws of ING USA annuity and Life Insurance
Company, dated (01/01/04). (5)
(c) Resolution of Board of Directors for Powers of Attorney. (04/23/99)(6)
(d) Articles of Merger and Agreement and Plan of Merger of USGALC, ULAIC,
ELICI into GALIC and renamed ING USA Annuity and Life Insurance
Company, dated (06/25/03). (5)
4 Instruments Defining the Rights of Security Holders:
(a) Single Premium Deferred Modified Guaranteed
Annuity Contract. (1)
(b) Single Premium Deferred Modified Guaranteed
Annuity Master Contract. (2)
(c) Single Premium Deferred Modified Guaranteed
Annuity Certificate. (2)
(d) Individual Retirement Annuity Rider. (3)
(e) Single Premium Deferred Modified Guaranteed
Annuity Application. (2)
(f) Single Premium Deferred Modified Guaranteed
Annuity Enrollment Form. (2)
(g) Roth Individual Retirement Annuity Rider. (3)
(h) Simple Retirement Account Rider. (3)
(i) 403(b) Rider. (4)
(j) Company Address and Name Change Endorsement. (5)
5 Opinion and Consent of Kimberly J. Smith
10 Material contracts are listed under Item 14(a)10 in the Company's Form
10-K for the fiscal year ended December 31, 2003 (File Nos. 333-57212,
333-104539, 333-104546, 333-104547, 333-104548), as filed with the
Commission on March 29, 2004. Each of the Exhibits so listed is
incorporated by reference as indicated in the Form 10-K.
13(a) ING USA Annuity and Life Insurance Company Form 10-K for the fiscal
year ended December 31, 2003.
(b) Unaudited pro forma financial statements for the merged company for
the fiscal year ended December 31, 2003.
(c) Audited Statutory financials for Equitable Life Insurance Company,
United Life and Annuity Insurance Company and USG Annuity & Life
Company for the fiscal year ended December 31, 2003.
23(a) Consent of Ernst & Young LLP, Independent Auditors.
(b) Consent of Counsel, incorporated in Item 5 of this
Part II, together with the Opinion of Counsel.
24 Powers of Attorney. (7)
Exhibits other than those listed above are omitted because they are not required
or are not applicable.
- ----------------------------------
(1) Incorporated herein by reference to an initial registration statement on
Form S-1 for Golden American Life Insurance Company filed with the
Securities and Exchange Commission on June 30, 2000 (File No. 333-40596).
(2) Incorporated herein by reference to Post-Effective Amendment No. 1 to
Registration Statement on Form S-1 for Golden American Life Insurance
Company filed with the Securities and Exchange Commission on September 13,
2000 (File No. 333-40596).
(3) Incorporated herein by reference to Post-Effective Amendment No. 34 to
Registration Statement on Form N-4 for Golden American Life Insurance
Company Separate Account B filed on April 15, 2003 (File Nos. 033-23351,
811-5626).
(4) Incorporated herein by reference to an initial registration statement on
Form S-2 for Golden American Life Insurance Company filed with the
Securities and Exchange Commission on April 15, 2003 (File No. 333-104548).
(5) Incorporated herein by reference to Post-Effective Amendment No. 25 to a
Registration Statement on Form N-4 for ING USA Annuity and Life Insurance
Company Separate Account B filed with the Securities and Exchange
Commission on February 13, 2004 (File Nos. 333-28679, 811-5626).
(6) Incorporated by reference to Amendment No. 5 to a Registration Statement
for Golden American Life Insurance Company filed with the Securities and
Exchange Commission on April 23, 1999 (File No. 333-28765).
(7) Powers of Attorney incorporated by reference to Post-Effective Amendment
No. 1 to Registration Statement on Form S-2 of ING Life Insurance and
Annuity Company (File No. 333-104456), as filed on April 5, 2004.
Item 17. Undertakings
- -----------------------
The undersigned registrant hereby undertakes as follows, pursuant to Item 512 of
Regulation S-K:
(a) Rule 415 offerings:
(1) To file, during any period in which offers or sales of the registered
securities are being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; and
(iii)To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material changes to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
(h) Request for Acceleration of Effective Date:
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 18. FINANCIAL STATEMENTS AND SCHEDULES
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized in the City of West Chester, Commonwealth of Pennsylvania, on
this 8th day of April, 2004.
By: ING USA ANNUITY AND LIFE
INSURANCE COMPANY
By:
--------------------
Keith Gubbay*
President (principle executive officer)
By: /s/ Linda E. Senker
------------------------
Linda E. Senker
Counsel
As required by the Securities Act of 1933, this Amendment to Registration
Statement has been signed by the following persons in the capacities indicated
on April 8, 2004.
Signature Title
- --------- -----
President and Director
- -------------------- (principle executive officer)
Keith Gubbay*
DIRECTORS
- ----------------------
David A. Wheat*
Chief Financial Officer (principle accounting officer)
- ----------------------
Thomas J. McInerney*
- ----------------------
Kathleen A. Murphy*
- ----------------------
Jacques de Vaucleroy*
By: /s/ Linda E. Senker
------------------------
Linda E. Senker
Counsel of Depositor
*Executed by Linda E. Senker on behalf of those indicated pursuant
to Power of Attorney.
EXHIBIT INDEX
ITEM EXHIBIT PAGE #
- ---- ------- ------
5 Opinion and Consent of Kimberly J. Smith EX-5
13(a) ING USA Annuity and Life Insurance Company Form 10-K *
for the fiscal year ended December 31, 2003.
13(b) Unaudited pro forma financial statements for the **
merged company for the fiscal year ended
December 31, 2003.
13(c) Audited Statutory financials for ELIC, ULA and USG ***
for the fiscal year ended December 31, 2003.
23(a) Consent of Independent Auditors EX-23.A
23(b) Consent of Legal Counsel ****
- -----------------------------
* See Module No. INGUSA10K123103
** See Module No. INGUSAPROFORMA
*** See Module No. ELI_ULA_USG
**** Included in Exhibit 5 above