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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1999.
Commission file number 33-87272, 333-51353, 333-28765, 333-28681, 333-28743,
333-51949, 333-65009, 333-66745
GOLDEN AMERICAN LIFE INSURANCE COMPANY
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(Exact name of registrant as specified in its charter)
Delaware 41-0991508
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1475 Dunwoody Drive
West Chester, Pennsylvania 19380-1478
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(Address of principal (Zip Code)
executive offices)
Registrant's Telephone Number, including area code: (610) 425-3400
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Securities Registered Pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
N/A
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Securities Registered Pursuant to Section 12(g) of the 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 (ss.229.405 of this chapter) 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. [X].
As of March 27, 2000, 250,000 shares of Common Stock, $10 Par Value, are issued
and outstanding.
NOTE: WHEREAS GOLDEN AMERICAN 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).
DOCUMENTS INCORPORATED BY REFERENCE
See exhibit index - page 46. Page 1 of 53
PART I
ITEM 1. BUSINESS.
OVERVIEW
Golden American Life Insurance Company ("Golden American"), a wholly owned
subsidiary of Equitable of Iowa Companies, Inc. ("EIC"), is a stock life
insurance company organized under the laws of the State of Delaware. EIC is an
indirect wholly owned subsidiary of ING Groep N.V. ("ING"), a global financial
services holding company based in The Netherlands. Golden American offers
variable insurance products and is authorized to do business in the District of
Columbia and all states except New York. Golden American's wholly owned life
insurance subsidiary, First Golden American Life Insurance Company of New York
("First Golden," and collectively with Golden American, the "Companies"), is
licensed as a life insurance company under the laws of the States of New York
and Delaware. See Note 10 of the financial statements for further information
regarding related party transactions.
PRODUCTS
The Companies offer a portfolio of variable insurance products designed to meet
customer needs for tax-advantaged saving for retirement and protection from
death. The Companies believe 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 insurance products currently offered by the Companies include six
variable annuity products. In August 1999, Golden American discontinued offering
variable life products. Variable annuities are long-term savings vehicles in
which contractowner premiums (purchase payments) are recorded and maintained in
a fixed account or variable separate accounts established as registered unit
investment trusts. At December 31, 1999, funds on deposit in the Companies'
variable insurance product separate and fixed accounts totaled $7.6 billion and
$1.0 billion, respectively. Variable insurance products provide the Companies
with fee based revenues including charges for mortality and expense risk,
contract administration, and surrender charges. In addition, some contracts
provide for a distribution fee collected for a limited number of years after
each premium deposit.
MARKETING AND DISTRIBUTION
The Companies continued to expand distribution systems during 1999. Broad-based
distribution networks are key to realizing a growing share of the wealth
accumulation marketplace. The principal distributors of the Companies' variable
insurance products include national and regional wirehouses, life insurance
companies with captive agency sales forces, banks, and independent National
Association of Securities Dealers, Inc. ("NASD") firms with licensed registered
representatives. The Companies plan to establish new relationships and increase
penetration with key distributors in existing channels. In addition, growth
opportunities exist through utilizing the ING broker/dealer network.
BUSINESS ENVIRONMENT
The current business and regulatory environment presents many challenges to the
insurance industry. The variable 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. However, overall demand for
variable insurance products remains strong for several reasons including: strong
stock market performance over the last four years; relatively low interest
rates; an aging U.S. population that is increasingly concerned about retirement,
estate planning, and maintaining their standard of living in retirement; and
potential reductions in government and employer-provided benefits at retirement,
as well as lower public confidence in the adequacy of those benefits.
2
REGULATION
The Companies' insurance operations are conducted in a highly regulated
environment. Both Golden American and First Golden are subject to the insurance
laws of the state in which they are organized and of the other jurisdictions in
which they transact business. The primary regulator of the Golden American
insurance operations is the Commissioner of Insurance for the State of Delaware.
First Golden is subject to the regulation of the Superintendent of Insurance for
the State of New York. The Companies are also regulated by the Securities and
Exchange Commission and the NASD. See Item 7, Management's Discussion and
Analysis of Results of Operations.
ITEM 2. PROPERTIES.
During the first quarter of 1999, Golden American's operations were moved to a
new site in West Chester, Pennsylvania. During 1999, Golden American occupied
105,000 square feet of leased space; its affiliate occupies 20,000 square feet.
Previously, Golden American's business operations were housed in leased
facilities located in Wilmington, Delaware and leased facilities in
Pennsylvania. First Golden's business operations are housed in a leased
facilities in New York, New York. Property and equipment primarily represent
leasehold improvements, office furniture, certain other equipment, and
capitalized computer software and are not considered to be significant to the
Companies' overall operations. Property and equipment are reported at cost less
allowances for depreciation.
ITEM 3. LEGAL PROCEEDINGS.
The Companies, like other insurance companies, may be named or otherwise
involved in lawsuits, including class action lawsuits and arbitrations. In some
class action and other actions involving insurers, substantial damages have been
sought and/or material settlement or award payments have been made. The
Companies currently believe no pending or threatened lawsuits or actions exist
that are reasonably likely to have a material adverse impact on the Companies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Information called for by this item is 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.
The Registrant is a wholly owned subsidiary of Equitable of Iowa Companies, Inc.
("EIC" or the "Parent"). There is no public trading market for the Registrant's
common stock.
Under the provisions of the insurance laws of certain states in which Golden
American is licensed to sell insurance products, Golden American is required to
maintain a minimum total statutory-basis capital and surplus of at least $5
million. The ability of Golden American to pay dividends to the Parent is
restricted. Prior approval of insurance regulatory authorities is required for
payment of dividends to the stockholder which exceed an annual limit. During
2000, Golden American cannot pay dividends to the Parent without prior approval
of statutory authorities. Golden American did not pay common stock dividends
during 1999, 1998, or 1997.
First Golden is required to maintain a minimum total statutory-basis capital and
surplus of no less than $6 million under the provisions of the insurance laws of
the State of New York in which it is presently licensed to sell insurance
products. Under the provisions of the insurance laws of the State of New York,
First Golden cannot distribute any dividends to its stockholder, Golden
American, unless a notice of its intent to declare a dividend and the amount of
the dividend has been filed with the New York Insurance Department at least
thirty days in advance of the proposed declaration. If the Superintendent of the
New York Insurance Department finds the financial condition of First Golden does
not warrant the distribution, the Superintendent may disapprove the distribution
by giving written notice to First Golden within thirty days after the filing.
First Golden did not pay common stock dividends during 1999, 1998, or 1997.
3
ITEM 6. SELECTED FINANCIAL DATA.
Information called for by this item is omitted pursuant to General Instruction I
(2) (a) of Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS.
The purpose of this section is to discuss and analyze Golden American Life
Insurance Company's ("Golden American") consolidated results of operations. In
addition, some analysis and information regarding financial condition and
liquidity and capital resources is also provided. This analysis should be read
jointly with the consolidated financial statements, related notes, and the
Cautionary Statement Regarding Forward-Looking Statements, which appear
elsewhere in this report. Golden American reports financial results on a
consolidated basis. The consolidated financial statements include the accounts
of Golden American and its wholly owned subsidiary, First Golden American Life
Insurance Company of New York ("First Golden," and collectively with Golden
American, the "Companies").
RESULTS OF OPERATIONS
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MERGER
On October 23, 1997, Equitable of Iowa Companies' ("Equitable") shareholders
approved an Agreement and Plan of Merger ("Merger Agreement") dated July 7, 1997
among Equitable, PFHI Holdings, Inc. ("PFHI"), and ING Groep N.V. ("ING"). On
October 24, 1997, PFHI, a Delaware corporation, acquired all of the outstanding
capital stock of Equitable according to the Merger Agreement. PFHI is a wholly
owned subsidiary of ING, a global financial services holding company based in
The Netherlands. Equitable, an Iowa corporation, in turn owned all the
outstanding capital stock of Equitable Life Insurance Company of Iowa
("Equitable Life") and Golden American and their wholly owned subsidiaries. In
addition, Equitable owned all the outstanding capital stock of Locust Street
Securities, Inc., Equitable Investment Services, Inc. (subsequently dissolved),
Directed Services, Inc. ("DSI"), Equitable of Iowa Companies Capital Trust,
Equitable of Iowa Companies Capital Trust II, and Equitable of Iowa Securities
Network, Inc. (subsequently renamed ING Funds Distributor, Inc.). In exchange
for the outstanding capital stock of Equitable, ING paid total consideration of
approximately $2.1 billion in cash and stock and assumed approximately $400
million in debt. As a result of this transaction, Equitable was merged into
PFHI, which was simultaneously renamed Equitable of Iowa Companies, Inc. ("EIC"
or "Parent"), a Delaware corporation.
For financial statement purposes, the change in control of the Companies through
the ING merger was accounted for as a purchase effective October 25, 1997. This
merger resulted in a new basis of accounting reflecting estimated fair values of
assets and liabilities at the merger date. As a result, the Companies' financial
statements for periods after October 24, 1997 are presented on the Post-Merger
new basis of accounting.
The purchase price was allocated to EIC and its subsidiaries with $227.6 million
allocated to the Companies. Goodwill of $1.4 billion was established for the
excess of the merger cost over the fair value of the assets and liabilities of
EIC with $151.1 million attributed to the Companies. Goodwill resulting from the
merger is being amortized over 40 years on a straight-line basis. The carrying
value will be reviewed periodically for any indication of impairment in value.
CHANGE IN CONTROL - ACQUISITION
On August 13, 1996, Equitable acquired all of the outstanding capital stock of
BT Variable, Inc. ("BT Variable") and its wholly owned subsidiaries, Golden
American and DSI. After the acquisition, the BT Variable, Inc. name was changed
to EIC Variable, Inc. On April 30, 1997, EIC Variable, Inc. was liquidated and
its investments in Golden American and DSI were transferred to Equitable, while
the remainder of its net assets were contributed to Golden American. On December
30, 1997, EIC Variable, Inc. was dissolved.
For financial statement purposes, the change in control of Golden American
through the acquisition of BT Variable was accounted for as a purchase effective
August 14, 1996. This acquisition resulted in a new basis of accounting
reflecting estimated fair values of assets and liabilities at the acquisition
date. As a result, the Companies' financial statements included for the period
January 1, 1997 through October 24, 1997 are presented on the Post-Acquisition
basis of accounting.
4
The purchase price was allocated to the three companies purchased - BT Variable,
DSI, and Golden American. The allocation of the purchase price to Golden
American was approximately $139.9 million. Goodwill of $41.1 million was
established for the excess of the acquisition cost over the fair value of the
assets and liabilities and attributed to Golden American. At June 30, 1997,
goodwill was increased by $1.8 million, due to the adjustment of the value of a
receivable existing at the acquisition date. Before the ING merger, goodwill
resulting from the acquisition was being amortized over 25 years on a
straight-line basis.
PREMIUMS
Percentage Dollar
For the Year Ended December 31 1999 Change Change 1998
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(DOLLARS IN MILLIONS)
Variable annuity premiums:
Separate account........................................ $2,511.7 71.9% $1,050.5 $1,461.2
Fixed account........................................... 770.7 30.9 182.0 588.7
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Total variable annuity premiums............................ 3,282.4 60.1 1,232.5 2,049.9
Variable life premiums..................................... 8.6 (37.8) (5.2) 13.8
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Total premiums............................................. $3,291.0 59.5% $1,227.3 $2,063.7
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For the Companies' variable insurance contracts, premiums collected are not
reported as revenues, but as deposits to insurance liabilities. Revenues for
these products are recognized over time in the form of investment spread and
product charges.
Variable annuity separate account premiums increased 71.9% in 1999. The fixed
account portion of the Companies' variable annuity premiums increased 30.9% in
1999. These increases resulted from increased sales of the Premium Plus variable
annuity product.
Variable life premiums decreased 37.8% in 1999. In August 1999, Golden American
discontinued offering variable life products.
Premiums, net of reinsurance, for variable products from two significant
broker/dealers each having at least ten percent of total sales for the year
ended December 31, 1999 totaled $918.4 million, or 28% of premiums compared to
$528.9 million, or 26%, from two significant broker/dealers for the year ended
December 31, 1998.
REVENUES
Percentage Dollar
For the Year Ended December 31 1999 Change Change 1998
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(DOLLARS IN MILLIONS)
Annuity and interest sensitive life product charges........ $82.9 112.0% $43.8 $39.1
Management fee revenue..................................... 10.1 112.5 5.3 4.8
Net investment income...................................... 59.2 39.3 16.7 42.5
Realized gains (losses) on investments..................... (2.9) 96.1 (1.4) (1.5)
Other income............................................... 10.8 94.4 5.2 5.6
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$160.1 77.0% $69.6 $90.5
===============================================================
Total revenues increased 77.0%, or $69.6 million, to $160.1 million in 1999.
Annuity and interest sensitive life product charges increased 112.0%, or $43.8
million, to $82.9 million in 1999, primarily due to additional fees earned from
the increasing block of business in the separate accounts.
Golden American provides certain managerial and supervisory services to DSI. The
fee paid to Golden American for these services, which is calculated as a
percentage of average assets in the variable separate accounts, was $10.1
million for 1999 and $4.8 million for 1998.
5
Net investment income increased 39.3%, or $16.7 million, to $59.2 million in
1999 from $42.5 million in 1998, due to growth in invested assets from December
31, 1998, increasing interest rates, and a relative increase in below investment
grade investments.
During 1999, the Company had net realized losses on investments of $2.9 million,
which includes a $1.6 million write down of two impaired fixed maturities,
compared to net realized losses on investments of $1.5 million in 1998 which
included a $1.0 million write down of two impaired fixed maturities.
Other income increased $5.2 million to $10.8 million in 1999, due primarily to
income received under a modified coinsurance agreement with an unaffiliated
reinsurer.
EXPENSES
Percentage Dollar
For the Year Ended December 31 1999 Change Change 1998
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(DOLLARS IN MILLIONS)
Insurance benefits and expenses:
Annuity and interest sensitive life benefits:
Interest credited to account balances................ $175.9 85.4% $81.0 $94.9
Benefit claims incurred in excess of account
balances........................................... 6.3 200.2 4.2 2.1
Underwriting, acquisition, and insurance expenses:
Commissions.......................................... 188.4 55.5 67.2 121.2
General expenses..................................... 60.2 60.2 22.6 37.6
Insurance taxes, state licenses, and fees............ 4.0 (4.0) (0.1) 4.1
Policy acquisition costs deferred.................... (346.4) 75.1 (148.6) (197.8)
Amortization:
Deferred policy acquisition costs.................. 33.1 543.3 28.0 5.1
Value of purchased insurance in force.............. 6.2 32.0 1.5 4.7
Goodwill........................................... 3.8 -- -- 3.8
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$131.5 73.7% $55.8 $75.7
================================================================
Total insurance benefits and expenses increased 73.7%, or $55.8 million, in 1999
from $75.7 million in 1998. Interest credited to account balances increased
85.4%, or $81.0 million, in 1999 from $94.9 million in 1998. The premium credit
on the Premium Plus variable annuity product increased $69.3 million to $123.8
million at December 31, 1999. The bonus interest on the fixed account increased
$3.0 million to $10.9 million at December 31, 1999. The remaining increase in
interest credited relates to higher account balances associated with the
Companies' fixed account options within the variable products.
Commissions increased 55.5%, or $67.2 million, in 1999 from $121.2 million in
1998. Insurance taxes, state licenses, and fees decreased 4.0%, or $0.1 million,
in 1999 from $4.1 million in 1998. Changes in commissions and insurance taxes,
state licenses, and fees are generally related to changes in the level and
composition of variable product sales. Insurance taxes, state licenses, and fees
are impacted by several other factors, which include an increase in FICA taxes
primarily due to bonuses and expenses for the triennial insurance department
examination of Golden American, which were offset by a decrease in 1999 of
guaranty fund assessments paid. Most costs incurred as the result of sales have
been deferred, thus having very little impact on current earnings.
General expenses increased 60.2%, or $22.6 million, in 1999 from $37.6 million
in 1998. Management expects general expenses to continue to increase in 2000 as
a result of the emphasis on expanding the salaried wholesaler distribution
network and the growth in sales. The Companies use a network of wholesalers to
distribute products, and the salaries and sales bonuses of these wholesalers are
included in general expenses. The portion of these salaries and related expenses
that varies directly with production levels is deferred thus having little
impact on current earnings. The increase in general expenses was partially
offset by reimbursements received from DSI, Equitable Life, ING Mutual Funds
Management Co., LLC, an affiliate, Security Life of Denver Insurance Company, an
affiliate, Southland Life Insurance Company, an affiliate, and United Life &
Annuity Insurance Company, an affiliate, for certain advisory, computer, and
other resources and services provided by Golden American.
6
The Companies' previous balances of deferred policy acquisition costs ("DPAC"),
value of purchased insurance in force ("VPIF"), and unearned revenue reserve
were eliminated and a new asset of $44.3 million representing VPIF was
established for all policies in force at the merger date. During 1999, VPIF was
adjusted to increase amortization by $0.7 million to reflect changes in the
assumptions related to the timing of estimated gross profits. During 1998, VPIF
decreased $2.7 million to adjust the value of other receivables and increased
$0.2 million as a result of an adjustment to the merger costs. During 1998, VPIF
was adjusted to reduce amortization by $0.2 million to reflect changes in the
assumptions related to the timing of future gross profits. Amortization of DPAC
increased $28.0 million, or 543.3%, in 1999. This increase resulted from growth
in policy acquisition costs deferred from $197.8 million at December 31, 1998 to
$346.4 million at December 31, 1999, which was generated by expenses associated
with the large sales volume experienced since December 31, 1998. Based on
current conditions and assumptions as to the impact of future events on acquired
policies in force, the expected approximate net amortization relating to VPIF as
of December 31, 1999 is $4.0 million in 2000, $3.6 million in 2001, $3.3 million
in 2002, $2.8 million in 2003, and $2.3 million in 2004. Actual amortization may
vary based upon changes in assumptions and experience.
Interest expense increased 102.6%, or $4.5 million, in 1999 from $4.4 million in
1998. Interest expense on a $25 million surplus note issued December 1996 and
expiring December 2026 was $2.1 million for the year ended December 31, 1999,
unchanged from the same period of 1998. Interest expense on a $60 million
surplus note issued in December 1998 and expiring December 2028 was $4.3 million
for the year ended December 31, 1999. Interest expense on a $75 million surplus
note, issued September 30, 1999 and expiring September 29, 2029 was $1.5 million
for the year ended December 31, 1999. Golden American also paid $0.8 million in
1999 and $1.8 million in 1998 to ING America Insurance Holdings, Inc. ("ING
AIH") for interest on a reciprocal loan agreement. Interest expense on a
revolving note payable with SunTrust Bank, Atlanta was $0.2 million and $0.3
million for the years ended December 31, 1999 and 1998, respectively. In
addition, Golden American incurred interest expense of $0.2 million in 1998 on a
line of credit with Equitable.
INCOME
Net income for 1999 was $11.2 million, an increase of $6.1 million from $5.1
million for 1998.
Comprehensive income for 1999 was $3.0 million, a decrease of $0.9 million from
comprehensive income of $3.9 million for 1998.
FINANCIAL CONDITION
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RATINGS
Currently, the Companies' ratings are A+ by A. M. Best Company, AAA by Duff &
Phelps Credit Rating Company, and AA+ by Standard & Poor's Rating Services
("Standard & Poor's").
INVESTMENTS
The financial statement carrying value and amortized cost basis of the
Companies' total investments grew 15.5% and 17.5%, respectively, in 1999. All of
the Companies' investments, other than mortgage loans on real estate, are
carried at fair value in the Companies' financial statements. Therefore, growth
in the carrying value of the Companies' investment portfolio was due to changes
in unrealized appreciation and depreciation of fixed maturities as well as
growth in the cost basis of these securities. Growth in the cost basis of the
Companies' investment portfolio resulted from the investment of premiums from
the sale of the Companies' fixed account options. The Companies manage the
growth of insurance operations in order to maintain adequate capital ratios. To
support the fixed account options of the Companies' variable insurance products,
cash flow was invested primarily in fixed maturities and short-term investments.
At December 31, 1999, the Companies investments had a yield of 6.6%. The
Companies estimate the total investment portfolio, excluding policy loans, had a
fair value approximately equal to 97.6% of amortized cost value at December 31,
1999.
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FIXED MATURITIES: At December 31, 1999, the Companies had fixed maturities with
an amortized cost of $858.1 million and an estimated fair value of $835.3
million. The Companies classify 100% of securities as available for sale. Net
unrealized depreciation of fixed maturities of $22.8 million was comprised of
gross appreciation of $0.9 million and gross depreciation of $23.7 million. Net
unrealized holding losses on these securities, net of adjustments to VPIF, DPAC,
and deferred income taxes of $7.0 million were included in stockholder's equity
at December 31, 1999.
The individual securities in the Companies' fixed maturities portfolio (at
amortized cost) include investment grade securities, which include securities
issued by the U.S. government, its agencies, and corporations that are rated at
least A- by Standard & Poor's ($558.0 million or 65.0%), that are rated BBB+ to
BBB- by Standard & Poor's ($123.5 million or 14.4%), and below investment grade
securities, which are securities issued by corporations that are rated BB+ to B-
by Standard & Poor's ($64.6 million or 7.5%). Securities not rated by Standard &
Poor's had a National Association of Insurance Commissioners ("NAIC") rating of
1, 2, 3, 4, or 5 ($112.0 million or 13.1%). The Companies' fixed maturity
investment portfolio had a combined yield at amortized cost of 6.6% at December
31, 1999.
Fixed maturities rated BBB+ to BBB- may have speculative characteristics and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity of the issuer to make principal and interest payments than
is the case with higher rated fixed maturities.
At December 31, 1999, the amortized cost value of the Companies' total
investment in below investment grade securities, excluding mortgage-backed
securities, was $72.3 million, or 6.9%, of the Companies' investment portfolio.
The Companies intend to purchase additional below investment grade securities,
but do not expect the percentage of the portfolio invested in such securities to
exceed 10% of the investment portfolio. At December 31, 1999, the yield at
amortized cost on the Companies' below investment grade portfolio was 7.8%
compared to 6.5% for the Companies' investment grade corporate bond portfolio.
The Companies estimate the fair value of the below investment grade portfolio
was $69.1 million, or 95.5% of amortized cost value, at December 31, 1999.
Below investment grade securities have different characteristics than investment
grade corporate debt securities. Risk of loss upon default by the borrower is
significantly greater with respect to below investment grade securities than
with other corporate debt securities. Below investment grade securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Also, issuers of below investment grade securities usually have higher levels of
debt and are more sensitive to adverse economic conditions, such as a recession
or increasing interest rates, than are investment grade issuers. The Companies
attempt to reduce the overall risk in the below investment grade portfolio, as
in all investments, through careful credit analysis, strict investment policy
guidelines, and diversification by company and by industry.
The Companies analyze the investment portfolio, including below investment grade
securities, at least quarterly in order to determine if the Companies' ability
to realize the carrying value on any investment has been impaired. For debt and
equity securities, if impairment in value is determined to be other than
temporary (i.e. if it is probable the Companies will be unable to collect all
amounts due according to the contractual terms of the security), the cost basis
of the impaired security is written down to fair value, which becomes the new
cost basis. The amount of the write-down is included in earnings as a realized
loss. Future events may occur, or additional or updated information may be
received, which may necessitate future write-downs of securities in the
Companies' portfolio. Significant write-downs in the carrying value of
investments could materially adversely affect the Companies' net income in
future periods.
In 1999, fixed maturities designated as available for sale with a combined
amortized cost of $221.8 million were sold, called, or repaid by their issuers.
In total, net pre-tax losses from sales, calls, and repayments of fixed
maturities amounted to $1.3 million in 1999, excluding the $1.6 million pre-tax
loss on the write-down of two bonds in 1999.
During the fourth quarter of 1998, Golden American determined that the carrying
value of two bonds exceeded their estimated net realizable value. As a result,
at December 31, 1998, Golden American recognized a total pre-tax loss of
approximately $1.0 million to reduce the carrying value of the bonds to their
combined net realizable value of $2.9 million. During the second quarter of
1999, further information was received regarding these bonds and Golden American
8
determined that the carrying value of the two bonds exceeded their estimated net
realizable value. As a result, at June 30, 1999, Golden American recognized a
total pre-tax loss of approximately $1.6 million to further reduce the carrying
value of the bonds to their combined net realizable value of $1.1 million.
EQUITY SECURITIES: Equity securities represent 1.4% of the Companies' investment
portfolio. At December 31, 1999, the Companies owned equity securities with a
cost of $15.0 million and an estimated fair value of $17.3 million. Net
unrealized appreciation of equity securities was comprised entirely of gross
appreciation of $2.3 million. Equity securities are primarily comprised of
investments in shares of the mutual funds underlying the Companies' registered
separate accounts.
MORTGAGE LOANS ON REAL ESTATE: Mortgage loans on real estate represent 9.5% of
the Companies' investment portfolio. Mortgages outstanding at amortized cost
were $100.1 million at December 31, 1999 with an estimated fair value of $95.5
million. The Companies' mortgage loan portfolio includes 58 loans with an
average size of $1.7 million and average seasoning of 0.7 years if weighted by
the number of loans. The Companies' mortgage loans on real estate are typically
secured by occupied buildings in major metropolitan locations and not
speculative developments and are diversified by type of property and geographic
location. Mortgage loans on real estate have been analyzed by geographical
location with concentrations by state identified as California (12% in 1999 and
1998), Utah (10% in 1999, 11% in 1998), and Georgia (9% in 1999, 10% in 1998).
There are no other concentrations of mortgage loans on real estate in any state
exceeding ten percent at December 31, 1999 and 1998. Mortgage loans on real
estate have also been analyzed by collateral type with significant
concentrations identified in office buildings (34% in 1999, 36% in 1998),
industrial buildings (33% in 1999, 32% in 1998), retail facilities (19% in 1999,
20% in 1998), and multi-family apartments (10% in 1999 and 8% in 1998). At
December 31, 1999, the yield on the Companies' mortgage loan portfolio was 7.3%.
At December 31, 1999, no mortgage loan on real estate was delinquent by 90 days
or more. The Companies' loan investment strategy is consistent with other life
insurance subsidiaries of ING in the United States. The insurance subsidiaries
of EIC have experienced a historically low default rate in their mortgage loan
portfolios.
OTHER ASSETS
Accrued investment income increased $1.6 million during 1999, due to an increase
in the overall size of the portfolio resulting from the investment of premiums
allocated to the fixed account options of the Companies' variable insurance
products.
DPAC represents certain deferred costs of acquiring new insurance business,
principally first year commissions and interest bonuses, premium credit, and
other expenses related to the production of new business after the merger. The
Companies' previous balances of DPAC and VPIF were eliminated as of the merger
date, and an asset representing VPIF was established for all policies in force
at the merger date. VPIF is amortized into income in proportion to the expected
gross profits of in force acquired business in a manner similar to DPAC
amortization. Any expenses which vary directly with the sales of the Companies'
products are deferred and amortized. At December 31, 1999, the Companies had
DPAC and VPIF balances of $529.0 million and $31.7 million, respectively. During
1998, VPIF decreased $2.7 million to adjust the value of other receivables and
increased $0.2 million as a result of an adjustment to the merger costs.
Property and equipment increased $6.5 million, or 89.0%, during 1999, due to
leasehold improvements, the purchase of furniture and other equipment for Golden
American's new offices in West Chester, Pennsylvania, and growth in the
business.
Goodwill totaling $151.1 million, representing the excess of the acquisition
cost over the fair value of net assets acquired, was established at the merger
date. Accumulated amortization of goodwill as of December 31, 1999 was $8.2
million.
Other assets increased $1.8 million during 1999, due to increases in a
receivable from the separate account and accounts receivable.
9
At December 31, 1999, the Companies had $7.6 billion of separate account assets
compared to $3.4 billion at December 31, 1998. The increase in separate account
assets resulted from market appreciation, increased transfer activity, and
growth in sales of the Companies' variable annuity products, net of redemptions.
At December 31, 1999, the Companies had total assets of $9.4 billion, a 97.6%
increase from December 31, 1998.
LIABILITIES
Future policy benefits for annuity and interest sensitive life products
increased $152.6 million, or 17.3%, to $1.0 billion reflecting premium growth in
the Companies' fixed account options of the variable products, net of transfers
to the separate accounts. Market appreciation, increased transfer activity, and
premiums, net of redemptions, accounted for the $4.2 billion, or 122.7%,
increase in separate account liabilities to $7.6 billion at December 31, 1999.
On December 30, 1999, Golden American issued a $50 million, 8.179% surplus note
to Equitable Life, which matures on December 29, 2029.
On December 8, 1999, Golden American issued a $35 million, 7.979% surplus note
to First Columbine Life Insurance Company, an affiliate, which matures on
December 7, 2029.
On September 30, 1999, Golden American issued a $75 million, 7.75% surplus note
to ING AIH, which matures on September 29, 2029. On December 30, 1999, ING AIH
assigned the surplus note to Equitable Life.
On December 30, 1998, Golden American issued a $60 million, 7.25% surplus note
to Equitable Life, which matures on December 29, 2028.
On December 17, 1996, Golden American issued a $25 million, 8.25% surplus note
to Equitable, which matures on December 17, 2026. As a result of the merger, the
surplus note is now payable to EIC.
Other liabilities increased $21.7 million from $34.7 million at December 31,
1998, due primarily to increases in remittances to be applied, outstanding
checks, accrued interest payable, and pension liability.
In conjunction with the volume of variable annuity sales, the Companies' total
liabilities increased $4.5 billion, or 102.6%, during 1999 and totaled $8.9
billion at December 31, 1999.
The effects of inflation and changing prices on the Companies' financial
position are not material since insurance assets and liabilities are both
primarily monetary and remain in balance. An effect of inflation, which has been
low in recent years, is a decline in stockholder's equity when monetary assets
exceed monetary liabilities.
STOCKHOLDER'S EQUITY
Additional paid-in capital increased $121.0 million, or 34.8%, from December 31,
1998 to $468.6 million at December 31, 1999, due to capital contributions from
the Parent.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Liquidity is the ability of the Companies to generate sufficient cash flows to
meet the cash requirements of operating, investing, and financing activities.
The Companies' principal sources of cash are variable annuity premiums and
product charges, investment income, maturing investments, proceeds from debt
issuance, and capital contributions made by the Parent. Primary uses of these
funds are payments of commissions and operating expenses, interest and premium
credits, investment purchases, repayment of debt, as well as withdrawals and
surrenders.
Net cash used in operating activities was $73.4 million in 1999 compared to
$63.9 million in 1998. The Companies have predominantly had negative cash flows
from operating activities since Golden American started issuing variable
insurance products in 1989. These negative operating cash flows result primarily
from the funding of commissions and other deferrable expenses related to the
continued growth in the variable annuity products.
10
Net cash used in investing activities was $177.5 million during 1999 as compared
to $390.0 million in 1998. This decrease is primarily due to greater net
purchases of fixed maturities, equity securities, and mortgage loans on real
estate during 1998 than in 1999. Net purchases of fixed maturities reached
$124.0 million in 1999 versus $331.3 million in 1998. Net purchases of mortgage
loans on real estate declined to $3.1 million from $12.6 million in the prior
year.
Net cash provided by financing activities was $258.6 million during 1999 as
compared to $439.5 million during the prior year. In 1999, net cash provided by
financing activities was positively impacted by net fixed account deposits of
$626.5 million compared to $520.8 million in 1998 and by a $6.7 million increase
in net borrowings in 1999 compared to 1998. This increase was offset by net
reallocations to the Companies' separate accounts, which increased to $650.3
million from $239.7 million during the prior year. In 1999, another important
source of cash provided by financing activities was $121.0 million in capital
contributions from the Parent compared to $103.8 million in 1998. Another source
of cash provided by financing activities during 1999 was $160.0 million in
proceeds from surplus notes compared to $60.0 million in 1998.
The Companies' liquidity position is managed by maintaining adequate levels of
liquid assets, such as cash or cash equivalents and short-term investments.
Additional sources of liquidity include borrowing facilities to meet short-term
cash requirements. Golden American maintains a $65.0 million reciprocal loan
agreement with ING AIH, which expires on December 31, 2007. In addition, the
Companies have established an $85.0 million revolving note facility with
SunTrust Bank, Atlanta, which expires on July 31, 2000. Management believes
these sources of liquidity are adequate to meet the Companies' short-term cash
obligations.
Based on current trends, the Companies expect to continue to use net cash in
operating activities, given the continued growth of the variable annuity sales.
It is anticipated that a continuation of capital contributions from the Parent,
the issuance of additional surplus notes, and/or modified coinsurance agreements
will cover these net cash outflows. ING AIH is committed to the sustained growth
of Golden American. During 2000, ING AIH will maintain Golden American's
statutory capital and surplus at the end of each quarter at a level such that:
1) the ratio of Total Adjusted Capital divided by Company Action Level Risk
Based Capital exceeds 300%; 2) the ratio of Total Adjusted Capital (excluding
surplus notes) divided by Company Action Level Risk Based Capital exceeds 200%;
and 3) Golden American's statutory capital and surplus exceeds the "Amounts
Accrued for Expense Allowances Recognized in Reserves" as disclosed on page 3,
Line 13A of Golden American's statutory statement.
During the first quarter of 1999, Golden American's operations were moved to a
new site in West Chester, Pennsylvania. During 1999, Golden American occupied
105,000 square feet of leased space; its affiliate occupies 20,000 square feet.
Previously, Golden American's home office operations were housed in leased
locations in Wilmington, Delaware and locations in Pennsylvania. Golden
American's New York subsidiary is housed in leased space in New York, New York.
The Companies intend to spend approximately $2.4 million on capital needs for
2000.
The ability of Golden American to pay dividends to its Parent is restricted.
Prior approval of insurance regulatory authorities is required for payment of
dividends to the stockholder which exceed an annual limit. During 2000, Golden
American cannot pay dividends to its Parent without prior approval of statutory
authorities.
Under the provisions of the insurance laws of the State of New York, First
Golden cannot distribute any dividends to its stockholder, Golden American,
unless a notice of its intent to declare a dividend and the amount of the
dividend has been filed with the New York Insurance Department at least thirty
days in advance of the proposed declaration. If the Superintendent of the New
York Insurance Department finds the financial condition of First Golden does not
warrant the distribution, the Superintendent may disapprove the distribution by
giving written notice to First Golden within thirty days after the filing. The
management of First Golden does not anticipate paying dividends to Golden
American during 2000.
The NAIC's risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula. These
requirements are intended to allow insurance regulators to monitor the
capitalization of insurance companies based upon the type and mixture of risks
inherent in a company's operations. The formula includes components for asset
risk, liability risk, interest rate exposure, and other factors. The Companies
have complied with the NAIC's risk-based capital reporting requirements. Amounts
reported indicate that the Companies have total adjusted capital well above all
required capital levels.
11
REINSURANCE: At December 31, 1999, Golden American had reinsurance treaties with
four unaffiliated reinsurers and one affiliated reinsurer covering a significant
portion of the mortality risks under its variable contracts. Golden American
remains liable to the extent its reinsurers do not meet their obligations under
the reinsurance agreements.
The reinsurance treaties that covered the nonstandard minimum guaranteed death
benefits for new business have been terminated for business issued after
December 31, 1999. The Companies are currently pursuing alternative reinsurance
arrangements for new business issued after December 31, 1999. There can be no
such alternative arrangements will be available. The reinsurance covering
business in force at December 31, 1999 will continue to apply in the future.
IMPACT OF YEAR 2000: In prior years, the Companies discussed the nature and
progress of plans to become Year 2000 ready. In late 1999, the Companies
completed remediation and testing of systems. As a result of those planning and
implementation efforts, the Companies experienced no significant disruptions in
mission critical information technology and non-information technology systems
and believe those systems successfully responded to the Year 2000 date change.
Golden American expensed approximately $264,000 during 1999 in connection with
remediating systems. The Companies are not aware of any material problems
resulting from Year 2000 issues, either with products, internal systems, or the
products and services of third parties. The Companies will continue to monitor
mission critical computer applications and those of suppliers and vendors
throughout the Year 2000 to ensure that any latent Year 2000 matters that may
arise are addressed promptly.
MARKET RISK AND RISK MANAGEMENT
- -------------------------------
Asset/liability management is integrated into many aspects of the Companies'
operations, including investment decisions, product development, and crediting
rates determination. As part of the risk management process, different economic
scenarios are modeled, including cash flow testing required for insurance
regulatory purposes, to determine that existing assets are adequate to meet
projected liability cash flows. Key variables include contractholder behavior
and the variable separate accounts' performance.
Contractholders bear the majority of the investment risks related to the
variable insurance products. Therefore, the risks associated with the
investments supporting the variable separate accounts are assumed by
contractholders, not by the Companies (subject to, among other things, certain
minimum guarantees). The Companies' products also provide certain minimum death
benefits that depend on the performance of the variable separate accounts.
Currently, the majority of death benefit risks are reinsured, which protects the
Companies from adverse mortality experience and prolonged capital market
decline.
A surrender, partial withdrawal, transfer, or annuitization made prior to the
end of a guarantee period from the fixed account may be subject to a market
value adjustment. As the majority of the liabilities in the fixed account are
subject to market value adjustment, the Companies do not face a material amount
of market risk volatility. The fixed account liabilities are supported by a
portfolio principally composed of fixed rate investments that can generate
predictable, steady rates of return. The portfolio management strategy for the
fixed account considers the assets available for sale. This enables the
Companies to respond to changes in market interest rates, changes in prepayment
risk, changes in relative values of asset sectors and individual securities and
loans, changes in credit quality outlook, and other relevant factors. The
objective of portfolio management is to maximize returns, taking into account
interest rate and credit risks, as well as other risks. The Companies'
asset/liability management discipline includes strategies to minimize exposure
to loss as interest rates and economic and market conditions change.
On the basis of these analyses, management believes there is no material
solvency risk to the Companies. With respect to a 10% drop in equity values from
year end 1999 levels, variable separate account funds, which represent 88% of
the in force, pass the risk in underlying fund performance to the contractholder
(except for certain minimum guarantees). With respect to interest rate movements
up or down 100 basis points from year end 1999 levels, the remaining 12% of the
in force are fixed account funds and almost all of these have market value
adjustments which provide significant protection against changes in interest
rates.
12
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
- ---------------------------------------------------------
Any forward-looking statement contained herein or in any other oral or written
statement by the Companies or any of their officers, directors, or employees is
qualified by the fact that actual results of the Companies may differ materially
from such statement, among other risks and uncertainties inherent in the
Companies' business, due to the following important factors:
1. Prevailing interest rate levels and stock market performance, which may
affect the ability of the Companies to sell their products, the market
value and liquidity of the Companies' investments, fee revenue, and the
lapse rate of the Companies' policies, notwithstanding product design
features intended to enhance persistency of the Companies' products.
2. Changes in the federal income tax laws and regulations, which may affect
the tax status of the Companies' products.
3. Changes in the regulation of financial services, including bank sales and
underwriting of insurance products, which may affect the competitive
environment for the Companies' products.
4. Increasing competition in the sale of the Companies' products.
5. Other factors that could affect the performance of the Companies,
including, but not limited to, market conduct claims, litigation, insurance
industry insolvencies, availability of competitive reinsurance on new
business, investment performance of the underlying portfolios of the
variable products, variable product design, and sales volume by significant
sellers of the Companies' variable products.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The matters set forth under the caption "Market Risk and Risk Management" in
Management's Discussion and Analysis of Results of Operations (Item 7 of this
report) are incorporated herein by reference.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The Board of Directors and Stockholder
Golden American Life Insurance Company
We have audited the accompanying consolidated balance sheets of Golden American
Life Insurance Company as of December 31, 1999 and 1998, and the related
consolidated statements of operations, changes in stockholder's equity, and cash
flows for the years ended December 31, 1999 and 1998 and for the periods from
October 25, 1997 through December 31, 1997, and January 1, 1997 through October
24, 1997. Our audits also included the financial statement schedules listed in
the Index at Item 14(a). These financial statements and schedules are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Golden American
Life Insurance Company at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for the years ended December 31,
1999 and 1998 and for the periods from October 25, 1997 through December 31,
1997 and January 1, 1997 through October 24, 1997, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedules, 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
Des Moines, Iowa
February 4, 2000
14
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
POST-MERGER
-----------------------------------------------
December 31, 1999 December 31, 1998
-----------------------------------------------
ASSETS
Investments:
Fixed maturities, available for sale, at fair value
(Cost: 1999 - $858,052; 1998 - $739,772)............................... $835,321 $741,985
Equity securities, at fair value (cost: 1999 - $14,952;
1998 - $14,437)........................................................ 17,330 11,514
Mortgage loans on real estate............................................ 100,087 97,322
Policy loans............................................................. 14,157 11,772
Short-term investments................................................... 80,191 41,152
-----------------------------------------------
Total investments........................................................... 1,047,086 903,745
Cash and cash equivalents................................................... 14,380 6,679
Reinsurance recoverable..................................................... 14,834 7,586
Due from affiliates......................................................... 637 2,983
Accrued investment income................................................... 11,198 9,645
Deferred policy acquisition costs........................................... 528,957 204,979
Value of purchased insurance in force....................................... 31,727 35,977
Current income taxes recoverable............................................ 35 628
Deferred income tax asset................................................... 21,943 31,477
Property and equipment, less allowances for depreciation
of $3,229 in 1999 and $801 in 1998....................................... 13,888 7,348
Goodwill, less accumulated amortization of $8,186 in 1999
and $4,408 in 1998....................................................... 142,941 146,719
Other assets................................................................ 2,514 743
Separate account assets..................................................... 7,562,717 3,396,114
-----------------------------------------------
Total assets................................................................ $9,392,857 $4,754,623
===============================================
See accompanying notes.
15
CONSOLIDATED BALANCE SHEETS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
POST-MERGER
------------------------------------------------
December 31, 1999 December 31, 1998
------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Policy liabilities and accruals:
Future policy benefits:
Annuity and interest sensitive life products......................... $1,033,701 $881,112
Unearned revenue reserve............................................. 6,300 3,840
Other policy claims and benefits........................................ 8 --
------------------------------------------------
1,040,009 884,952
Surplus notes............................................................. 245,000 85,000
Revolving note payable.................................................... 1,400 --
Due to affiliates......................................................... 9,547 --
Other liabilities......................................................... 56,335 34,663
Separate account liabilities.............................................. 7,562,717 3,396,114
------------------------------------------------
8,915,008 4,400,729
Commitments and contingencies
Stockholder's equity:
Common stock, par value $10 per share, authorized,
issued, and outstanding 250,000 shares............................... 2,500 2,500
Additional paid-in capital.............................................. 468,640 347,640
Accumulated other comprehensive loss.................................... (9,154) (895)
Retained earnings....................................................... 15,863 4,649
------------------------------------------------
Total stockholder's equity................................................ 477,849 353,894
------------------------------------------------
Total liabilities and stockholder's equity................................ $9,392,857 $4,754,623
================================================
See accompanying notes.
16
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
POST-
POST-MERGER ACQUISITION
--------------------------------------------------------|-------------------
For the period | For the period
October 25, | January 1,
For the year For the year 1997 | 1997
ended ended through | through
December 31, December 31, December 31, | October 24,
1999 1998 1997 | 1997
--------------------------------------------------------|-------------------
Revenues |
Annuity and interest sensitive |
life product charges.................... $82,935 $39,119 $3,834 | $18,288
Management fee revenue..................... 10,136 4,771 508 | 2,262
Net investment income...................... 59,169 42,485 5,127 | 21,656
Realized gains (losses) on investments..... (2,923) (1,491) 15 | 151
Other income............................... 10,827 5,569 236 | 426
--------------------------------------------------------|-------------------
160,144 90,453 9,720 | 42,783
|
Insurance benefits and expenses: |
Annuity and interest sensitive |
life benefits: |
Interest credited to account balances.... 175,851 94,845 7,413 | 19,276
Benefit claims incurred in excess of |
account balances....................... 6,370 2,123 -- | 125
Underwriting, acquisition, and insurance |
expenses: |
Commissions.............................. 188,383 121,171 9,437 | 26,818
General expenses......................... 60,194 37,577 3,350 | 13,907
Insurance taxes, state licenses, and fees 3,976 4,140 450 | 1,889
Policy acquisition costs deferred........ (346,396) (197,796) (13,678) | (29,003)
Amortization: |
Deferred policy acquisition costs....... 33,119 5,148 892 | 1,674
Value of purchased insurance in force... 6,238 4,724 948 | 5,225
Goodwill................................ 3,778 3,778 630 | 1,398
--------------------------------------------------------|-------------------
131,513 75,710 9,442 | 41,309
|
Interest expense.............................. 8,894 4,390 557 | 2,082
--------------------------------------------------------|-------------------
140,407 80,100 9,999 | 43,391
--------------------------------------------------------|-------------------
Income (loss) before income taxes............. 19,737 10,353 (279) | (608)
|
Income taxes.................................. 8,523 5,279 146 | (1,337)
--------------------------------------------------------|-------------------
|
Net income (loss)............................. $11,214 $5,074 $(425) | $729
============================================================================
See accompanying notes.
17
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
Accumulated
Additional Other Retained Total
Common Paid-in Comprehensive Earnings Stockholder's
Stock Capital Income (Loss) (Deficit) Equity
-----------------------------------------------------------------------------
POST-ACQUISITION
-----------------------------------------------------------------------------
Balance at January 1, 1997..................... $2,500 $137,372 $262 $350 $140,484
Comprehensive income:
Net income................................ -- -- -- 729 729
Change in net unrealized investment
gains (losses).......................... -- -- 1,543 -- 1,543
-----------------
Comprehensive income........................ 2,272
Contribution of capital..................... -- 1,121 -- -- 1,121
-----------------------------------------------------------------------------
Balance at October 24, 1997.................... $2,500 $138,493 $1,805 $1,079 $143,877
=============================================================================
POST-MERGER
-----------------------------------------------------------------------------
Balance at October 25, 1997.................... $2,500 $224,997 -- -- $227,497
Comprehensive loss:
Net loss.................................. -- -- -- $(425) (425)
Change in net unrealized investment
gains (losses).......................... -- -- $241 -- 241
-----------------
Comprehensive loss.......................... (184)
-----------------------------------------------------------------------------
Balance at December 31, 1997................... 2,500 224,997 241 (425) 227,313
Comprehensive income:
Net income................................ -- -- -- 5,074 5,074
Change in net unrealized investment
gains (losses).......................... -- -- (1,136) -- (1,136)
-----------------
Comprehensive income........................ 3,938
Contribution of capital..................... -- 122,500 -- -- 122,500
Other....................................... -- 143 -- -- 143
-----------------------------------------------------------------------------
Balance at December 31, 1998................... 2,500 347,640 (895) 4,649 353,894
Comprehensive income:
Net income................................ -- -- -- 11,214 11,214
Change in net unrealized investment
gains (losses).......................... -- -- (8,259) -- (8,259)
-----------------
Comprehensive income........................ 2,955
Contribution of capital..................... -- 121,000 -- -- 121,000
-----------------------------------------------------------------------------
Balance at December 31, 1999................... $2,500 $468,640 $(9,154) $15,863 $477,849
=============================================================================
See accompanying notes.
18
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
| POST-
POST-MERGER | ACQUISITION
---------------------------------------------------|-----------------
For the period | For the period
October 25, | January 1,
For the year For the year 1997 | 1997
ended ended through | through
December 31, December 31, December 31, | October 24,
1999 1998 1997 | 1997
---------------------------------------------------|------------------
OPERATING ACTIVITIES |
Net income (loss)................................. $11,214 $5,074 $(425) | $729
Adjustments to reconcile net income (loss) to net |
cash provided by (used in) operations: |
Adjustments related to annuity and |
interest sensitive life products: |
Interest credited and other charges on |
interest sensitive products................ 175,851 94,845 7,413 | 19,276
Charges for mortality and administration..... 524 (233) (62) | (99)
Change in unearned revenues.................. 2,460 2,651 1,189 | 3,292
Increase (decrease) in policy liabilities and |
accruals..................................... 8 (10) 10 | --
Decrease (increase) in accrued investment |
income....................................... (1,553) (3,222) 1,205 | (3,489)
Policy acquisition costs deferred.............. (346,396) (197,796) (13,678) | (29,003)
Amortization of deferred policy |
acquisition costs............................ 33,119 5,148 892 | 1,674
Amortization of value of purchased |
insurance in force........................... 6,238 4,724 948 | 5,225
Change in other assets, due to/from |
affiliates, other liabilities, and accrued |
income taxes................................. 24,845 9,979 4,205 | (8,944)
Provision for depreciation and amortization.... 8,850 8,147 1,299 | 3,203
Provision for deferred income taxes............ 8,523 5,279 146 | 316
Realized (gains) losses on investments......... 2,923 1,491 (15) | (151)
---------------------------------------------------|------------------
Net cash provided by (used in) operating |
activities..................................... (73,394) (63,923) 3,127 | (7,971)
|
INVESTING ACTIVITIES |
Sale, maturity, or repayment of investments: |
Fixed maturities - available for sale.......... 220,547 145,253 9,871 | 39,622
Mortgage loans on real estate.................. 6,572 3,791 1,644 | 5,828
Short-term investments - net................... -- -- -- | 11,415
---------------------------------------------------|------------------
227,119 149,044 11,515 | 56,865
Acquisition of investments: |
Fixed maturities - available for sale.......... (344,587) (476,523) (29,596) | (155,173)
Equity securities.............................. -- (10,000) (1) | (4,865)
Mortgage loans on real estate.................. (9,659) (16,390) (14,209) | (44,481)
Policy loans - net............................. (2,385) (2,940) (328) | (3,870)
Short-term investments - net................... (39,039) (26,692) (13,244) | --
---------------------------------------------------|------------------
(395,670) (532,545) (57,378) | (208,389)
Net purchase of property and equipment............ (8,968) (6,485) (252) | (875)
---------------------------------------------------|------------------
Net cash used in investing activities............. (177,519) (389,986) (46,115) | (152,399)
See accompanying notes.
19
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(DOLLARS IN THOUSANDS)
| POST-
POST-MERGER | ACQUISITION
----------------------------------------------------|-----------------
For the period | For the period
October 25, | January 1,
For the year For the year 1997 | 1997
ended ended through | through
December 31, December 31, December 31, | October 24,
1999 1998 1997 | 1997
----------------------------------------------------|-----------------
FINANCING ACTIVITIES |
Proceeds from reciprocal loan agreement |
borrowings................................ $396,350 $500,722 -- | --
Repayment of reciprocal loan agreement |
borrowings................................ (396,350) (500,722) -- | --
Proceeds from revolving note payable......... 220,295 108,495 -- | --
Repayment of revolving note payable.......... (218,895) (108,495) -- | --
Proceeds from surplus note................... 160,000 60,000 -- | --
Proceeds from line of credit borrowings...... -- -- $10,119 | $97,124
Repayment of line of credit borrowings....... -- (5,309) (2,207) | (80,977)
Receipts from annuity and interest |
sensitive life policies credited to |
account balances.......................... 773,685 593,428 62,306 | 261,549
Return of account balances on annuity |
and interest sensitive life policies...... (147,201) (72,649) (6,350) | (13,931)
Net reallocations to separate accounts....... (650,270) (239,671) (17,017) | (93,069)
Contributions of capital by parent........... 121,000 103,750 -- | 1,011
----------------------------------------------------|-----------------
Net cash provided by financing activities.... 258,614 439,549 46,851 | 171,707
----------------------------------------------------|-----------------
|
Increase (decrease) in cash and cash |
equivalents............................... 7,701 (14,360) 3,863 | 11,337
Cash and cash equivalents at |
beginning of period....................... 6,679 21,039 17,176 | 5,839
----------------------------------------------------|-----------------
Cash and cash equivalents at |
end of period............................. $14,380 $6,679 $21,039 | $17,176
====================================================|=================
|
SUPPLEMENTAL DISCLOSURE |
OF CASH FLOW INFORMATION |
Cash paid during the period for: |
Interest.................................. $6,392 $4,305 $295 | $1,912
Income taxes.............................. -- 99 -- | 283
Non-cash financing activities: |
Non-cash adjustment to additional |
paid-in capital for adjusted merger |
costs................................... -- 143 -- | --
Contribution of property and |
equipment from EIC Variable, |
Inc. net of $353 of accumulated |
depreciation............................ -- -- -- | 110
Contribution of capital from parent to |
repay line of credit borrowings......... -- 18,750 -- | --
See accompanying notes.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
CONSOLIDATION
The consolidated financial statements include Golden American Life Insurance
Company ("Golden American") and its wholly owned subsidiary, First Golden
American Life Insurance Company of New York ("First Golden," and collectively
with Golden American, the "Companies"). All significant intercompany accounts
and transactions have been eliminated.
ORGANIZATION
Golden American, a wholly owned subsidiary of Equitable of Iowa Companies, Inc.,
offers variable insurance products and is licensed as a life insurance company
in the District of Columbia and all states except New York. First Golden is
licensed to sell insurance products in New York and Delaware. The Companies'
products are marketed by broker/dealers, financial institutions, and insurance
agents. The Companies' primary customers are consumers and corporations.
On October 24, 1997, PFHI Holding, Inc. ("PFHI"), a Delaware corporation,
acquired all of the outstanding capital stock of Equitable of Iowa Companies
("Equitable") according to the terms of an Agreement and Plan of Merger ("Merger
Agreement") dated July 7, 1997 among Equitable, PFHI, and ING Groep N.V.
("ING"). PFHI is a wholly owned subsidiary of ING, a global financial services
holding company based in The Netherlands. As a result of this transaction,
Equitable was merged into PFHI, which was simultaneously renamed Equitable of
Iowa Companies, Inc. ("EIC" or the "Parent"), a Delaware corporation. See Note 6
for additional information regarding the merger.
On August 13, 1996, Equitable acquired all of the outstanding capital stock of
BT Variable, Inc. (subsequently known as EIC Variable, Inc.) and its wholly
owned subsidiaries, Golden American and Directed Services, Inc. ("DSI") from
Whitewood Properties Corporation ("Whitewood"). See Note 7 for additional
information regarding the acquisition.
For financial statement purposes, the ING merger was accounted for as a purchase
effective October 25, 1997 and the change in control of Golden American through
the acquisition of BT Variable, Inc. ("BT Variable") was accounted for as a
purchase effective August 14, 1996. The merger and acquisition resulted in new
bases of accounting reflecting estimated fair values of assets and liabilities
at their respective dates. As a result, the Companies' financial statements
included for the periods after October 24, 1997 are presented on the Post-Merger
new basis of accounting and for the period January 1, 1997 through October 24,
1997 are presented on the Post-Acquisition basis of accounting.
INVESTMENTS
FIXED MATURITIES: The Companies account for their investments under the
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," which requires fixed
maturities to be designated as either "available for sale," "held for
investment," or "trading." Sales of fixed maturities designated as "available
for sale" are not restricted by SFAS No. 115. Available for sale securities are
reported at fair value and unrealized gains and losses on these securities are
included directly in stockholder's equity, after adjustment for related changes
in value of purchased insurance in force ("VPIF"), deferred policy acquisition
costs ("DPAC"), and deferred income taxes. At December 31, 1999 and 1998, all of
the Companies' fixed maturities are designated as available for sale, although
the Companies are not precluded from designating fixed maturities as held for
investment or trading at some future date.
Securities determined to have a decline in value that is other than temporary
are written down to estimated fair value, which becomes the new cost basis by a
charge to realized losses in the Companies' Statements of Operations. Premiums
and discounts are amortized/accrued utilizing a method which results in a
constant yield over the securities' expected lives. Amortization/accrual of
premiums and discounts on mortgage and other asset-backed securities
incorporates a prepayment assumption to estimate the securities' expected lives.
21
EQUITY SECURITIES: Equity securities are reported at estimated fair value if
readily marketable. The change in unrealized appreciation and depreciation of
marketable equity securities (net of related deferred income taxes, if any) is
included directly in stockholder's equity. Equity securities determined to have
a decline in value that is other than temporary are written down to estimated
fair value, which becomes the new cost basis by a charge to realized losses in
the Companies' Statements of Operations.
MORTGAGE LOANS ON REAL ESTATE: Mortgage loans on real estate are reported at
cost adjusted for amortization of premiums and accrual of discounts. If the
value of any mortgage loan is determined to be impaired (i.e., when it is
probable the Companies will be unable to collect all amounts due according to
the contractual terms of the loan agreement), the carrying value of the mortgage
loan is reduced to the present value of expected future cash flows from the loan
discounted at the loan's effective interest rate, or to the loan's observable
market price, or the fair value of the underlying collateral. The carrying value
of impaired loans is reduced by the establishment of a valuation allowance,
which is adjusted at each reporting date for significant changes in the
calculated value of the loan. Changes in this valuation allowance are charged or
credited to income.
OTHER INVESTMENTS: Policy loans are reported at unpaid principal. Short-term
investments are reported at cost, adjusted for amortization of premiums and
accrual of discounts.
REALIZED GAINS AND LOSSES: Realized gains and losses are determined on the basis
of specific identification.
FAIR VALUES: Estimated fair values, as reported herein, of conventional
mortgage-backed securities not actively traded in a liquid market are estimated
using a third party pricing process. This pricing process uses a matrix
calculation assuming a spread over U.S. Treasury bonds based upon the expected
average lives of the securities. Estimated fair values of publicly traded fixed
maturities are reported by an independent pricing service. Fair values of
private placement bonds are estimated using a matrix that assumes a spread
(based on interest rates and a risk assessment of the bonds) over U.S. Treasury
bonds. Estimated fair values of equity securities, which consist of the
Companies' investment in its registered separate accounts, are based upon the
quoted fair value of the securities comprising the individual portfolios
underlying the separate accounts.
CASH AND CASH EQUIVALENTS
For purposes of the accompanying Statements of Cash Flows, the Companies
consider all demand deposits and interest-bearing accounts not related to the
investment function to be cash equivalents. All interest-bearing accounts
classified as cash equivalents have original maturities of three months or less.
DEFERRED POLICY ACQUISITION COSTS
Certain costs of acquiring new insurance business, principally first year
commissions and interest bonuses, premium credit, and other expenses related to
the production of new business, have been deferred. Acquisition costs for
variable insurance products are being amortized generally in proportion to the
present value (using the assumed crediting rate) of expected future gross
profits. This amortization is adjusted retrospectively when the Companies revise
their estimate of current or future gross profits to be realized from a group of
products. DPAC is adjusted to reflect the pro forma impact of unrealized gains
and losses on fixed maturities the Companies have designated as "available for
sale" under SFAS No. 115.
VALUE OF PURCHASED INSURANCE IN FORCE
As a result of the merger and acquisition, a portion of the purchase price
related to each transaction was allocated to the right to receive future cash
flows from existing insurance contracts. This allocated cost represents VPIF,
which reflects the value of those purchased policies calculated by discounting
actuarially determined expected future cash flows at the discount rate
determined by the purchaser. Amortization of VPIF is charged to expense in
proportion to expected gross profits of the underlying business. This
amortization is adjusted retrospectively when the Companies revise the estimate
of current or future gross profits to be realized from the insurance contracts
acquired. VPIF is adjusted to reflect the pro forma impact of unrealized gains
and losses on available for sale fixed maturities. See Notes 6 and 7 for
additional information on VPIF resulting from the merger and acquisition.
22
PROPERTY AND EQUIPMENT
Property and equipment primarily represent leasehold improvements, office
furniture, certain other equipment, and capitalized computer software and are
not considered to be significant to the Companies' overall operations. Property
and equipment are reported at cost less allowances for depreciation.
Depreciation expense is computed primarily on the basis of the straight-line
method over the estimated useful lives of the assets.
GOODWILL
Goodwill was established as a result of the merger and is being amortized over
40 years on a straight-line basis. Goodwill established as a result of the
acquisition was being amortized over 25 years on a straight-line basis. See
Notes 6 and 7 for additional information on the merger and acquisition.
FUTURE POLICY BENEFITS
Future policy benefits for divisions of the variable products with fixed
interest guarantees are established utilizing the retrospective deposit
accounting method. Policy reserves represent the premiums received plus
accumulated interest, less mortality and administration charges. Interest
credited to these policies ranged from 3.00% to 11.00% during 1999, 3.00% to
10.00% during 1998, and 3.30% to 8.25% during 1997. The unearned revenue reserve
represents unearned distribution fees. These distribution fees have been
deferred and are amortized over the life of the contracts in proportion to
expected gross profits.
SEPARATE ACCOUNTS
Assets and liabilities of the separate accounts reported in the accompanying
Balance Sheets represent funds separately administered principally for variable
contracts. Contractholders, rather than the Companies, bear the investment risk
for the variable insurance products. At the direction of the contractholders,
the separate accounts invest the premiums from the sale of variable insurance
products in shares of specified mutual funds. The assets and liabilities of the
separate accounts are clearly identified and segregated from other assets and
liabilities of the Companies. The portion of the separate account assets equal
to the reserves and other liabilities of variable contracts cannot be charged
with liabilities arising out of any other business the Companies may conduct.
Variable separate account assets are carried at fair value of the underlying
investments and generally represent contractholder investment values maintained
in the accounts. Variable separate account liabilities represent account
balances for the variable contracts invested in the separate accounts; the fair
value of these liabilities is equal to their carrying amount. Net investment
income and realized and unrealized capital gains and losses related to separate
account assets are not reflected in the accompanying Statements of Operations.
Product charges recorded by the Companies from variable insurance products
consist of charges applicable to each contract for mortality and expense risk,
cost of insurance, contract administration, and surrender charges. In addition,
some variable annuity and all variable life contracts provide for a distribution
fee collected for a limited number of years after each premium deposit. Revenue
recognition of collected distribution fees is amortized over the life of the
contract in proportion to its expected gross profits. The balance of
unrecognized revenue related to the distribution fees is reported as an unearned
revenue reserve.
DEFERRED INCOME TAXES
Deferred tax assets or liabilities are computed based on the difference between
the financial statement and income tax bases of assets and liabilities using the
enacted marginal tax rate. Deferred tax assets or liabilities are adjusted to
reflect the pro forma impact of unrealized gains and losses on equity securities
and fixed maturities the Companies have designated as available for sale under
SFAS No. 115. Changes in deferred tax assets or liabilities resulting from this
SFAS No. 115 adjustment are charged or credited directly to stockholder's
equity. Deferred income tax expenses or credits reflected in the Companies'
Statements of Operations are based on the changes in the deferred tax asset or
liability from period to period (excluding the SFAS No. 115 adjustment).
DIVIDEND RESTRICTIONS
Golden American's ability to pay dividends to its Parent is restricted. Prior
approval of insurance regulatory authorities is required for payment of
dividends to the stockholder which exceed an annual limit. During 2000, Golden
American cannot pay dividends to its Parent without prior approval of statutory
authorities.
23
Under the provisions of the insurance laws of the State of New York, First
Golden cannot distribute any dividends to its stockholder, Golden American,
unless a notice of its intent to declare a dividend and the amount of the
dividend has been filed with the New York Insurance Department at least thirty
days in advance of the proposed declaration. If the Superintendent of the New
York Insurance Department finds the financial condition of First Golden does not
warrant the distribution, the Superintendent may disapprove the distribution by
giving written notice to First Golden within thirty days after the filing.
SEGMENT REPORTING
The Companies manage their business as one segment, the sale of variable
insurance products designed to meet customer needs for tax-advantaged saving for
retirement and protection from death. Variable insurance products are sold to
consumers and corporations throughout the United States.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
affecting the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Management is required to utilize historical experience and assumptions about
future events and circumstances in order to develop estimates of material
reported amounts and disclosures. Included among the material (or potentially
material) reported amounts and disclosures that require extensive use of
estimates and assumptions are: (1) estimates of fair values of investments in
securities and other financial instruments, as well as fair values of
policyholder liabilities, (2) policyholder liabilities, (3) deferred policy
acquisition costs and value of purchased insurance in force, (4) fair values of
assets and liabilities recorded as a result of merger and acquisition
transactions, (5) asset valuation allowances, (6) guaranty fund assessment
accruals, (7) deferred tax benefits (liabilities), and (8) estimates for
commitments and contingencies including legal matters, if a liability is
anticipated and can be reasonably estimated. Estimates and assumptions regarding
all of the preceding items are inherently subject to change and are reassessed
periodically. Changes in estimates and assumptions could materially impact the
financial statements.
RECLASSIFICATIONS
Certain amounts for the periods ended in the 1998 and 1997 financial statements
have been reclassified to conform to the 1999 financial statement presentation.
2. BASIS OF FINANCIAL REPORTING
- --------------------------------------------------------------------------------
The financial statements of the Companies differ from related statutory-basis
financial statements principally as follows: (1) acquisition costs of acquiring
new business are deferred and amortized over the life of the policies rather
than charged to operations as incurred; (2) an asset representing the present
value of future cash flows from insurance contracts acquired was established as
a result of the merger/acquisition and is amortized and charged to expense; (3)
future policy benefit reserves for divisions with fixed interest guarantees of
the variable insurance products are based on full account values, rather than
the greater of cash surrender value or amounts derived from discounting
methodologies utilizing statutory interest rates; (4) reserves are reported
before reduction for reserve credits related to reinsurance ceded and a
receivable is established, net of an allowance for uncollectible amounts, for
these credits rather than presented net of these credits; (5) fixed maturity
investments are designated as "available for sale" and valued at fair value with
unrealized appreciation/depreciation, net of adjustments to value of purchased
insurance in force, deferred policy acquisition costs, and deferred income taxes
(if applicable), credited/charged directly to stockholder's equity rather than
valued at amortized cost; (6) the carrying value of fixed maturities is reduced
to fair value by a charge to realized losses in the Statements of Operations
when declines in carrying value are judged to be other than temporary, rather
than through the establishment of a formula-determined statutory investment
reserve (carried as a liability), changes in which are charged directly to
surplus; (7) deferred income taxes are provided for the difference between the
financial statement and income tax bases of assets and liabilities; (8) net
realized gains or losses attributed to changes in the level of interest rates in
the market are recognized when the sale is completed rather than deferred and
amortized over the remaining life of the fixed maturity security; (9) a
liability is established for anticipated guaranty fund assessments, net of
related anticipated premium tax credits, rather than capitalized when assessed
and amortized in accordance with procedures permitted by insurance regulatory
authorities; (10) revenues for variable insurance products consist of policy
charges applicable to each contract for the cost of insurance, policy
administration charges, amortization of policy initiation fees, and surrender
charges assessed rather than premiums received; (11) the financial statements of
Golden American's wholly owned subsidiary are consolidated rather than recorded
24
at the equity in net assets; (12) surplus notes are reported as liabilities
rather than as surplus; and (13) assets and liabilities are restated to fair
values when a change in ownership occurs, with provisions for goodwill and other
intangible assets, rather than continuing to be presented at historical cost.
The net loss for Golden American as determined in accordance with statutory
accounting practices was $85,578,000 in 1999, $68,002,000 in 1998, and $428,000
in 1997. Total statutory capital and surplus was $368,928,000 at December 31,
1999 and $183,045,000 at December 31, 1998.
3. INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------
INVESTMENT RESULTS
Major categories of net investment income are summarized below:
POST-MERGER | POST-ACQUISITION
---------------------------------------------------------|-------------------
For the period | For the period
October 25, | January 1,
For the year For the year 1997 | 1997
ended ended through | through
December 31, December 31, December 31, | October 24,
1999 1998 1997 | 1997
---------------------------------------------------------|-------------------
(DOLLARS IN THOUSANDS) |
|
Fixed maturities.......................... $50,352 $35,224 $4,443 | $18,488
Equity securities......................... 515 -- 3 | --
Mortgage loans on real estate............. 7,074 6,616 879 | 3,070
Policy loans.............................. 485 619 59 | 482
Short-term investments.................... 2,583 1,311 129 | 443
Other, net................................ 388 246 (154)| 24
---------------------------------------------------------|-------------------
Gross investment income................... 61,397 44,016 5,359 | 22,507
Less investment expenses.................. (2,228) (1,531) (232)| (851)
---------------------------------------------------------|-------------------
Net investment income..................... $59,169 $42,485 $5,127 | $21,656
=============================================================================
Realized gains (losses) on investments follows:
POST-MERGER | POST-ACQUISITION
--------------------------------------------------------|--------------------
For the period| For the period
October 25,| January 1,
For the year For the year 1997| 1997
ended ended through| through
December 31, December 31, December 31,| October 24,
1999 1998 1997| 1997
--------------------------------------------------------|--------------------
(DOLLARS IN THOUSANDS) |
|
|
Fixed maturities, available for sale....... $(2,910) $(1,428) $25 | $151
Mortgage loans on real estate.............. (13) (63) (10)| --
--------------------------------------------------------|--------------------
Realized gains (losses) on investments..... $(2,923) $(1,491) $15 | $151
=============================================================================
25
The change in unrealized appreciation (depreciation) of securities at fair value
follows:
POST-MERGER | POST-ACQUISITION
---------------------------------------------------------|------------------
For the period | For the period
October 25, | January 1,
For the year For the year 1997 | 1997
ended ended through | through
December 31, December 31, December 31, | October 24,
1999 1998 1997 | 1997