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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, 1998.
Commission file number 33-87272, 333-51353, 333-28765, 333-28681,
333-28743, 333-51949, 333-65009, 333-66745
GOLDEN AMERICAN LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Delaware 41-0991508
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
N/A
________________________________________________________________________________
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 (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 25, 1999, 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 10K, THIS FORM
IS BEING FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION I (2).
DOCUMENTS INCORPORATED BY REFERENCE
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"), became licensed as a life insurance company under the laws of
the State of New York on January 2, 1997 and the State of Delaware on
December 23, 1997 and has since received regulatory product approvals to sell
insurance products in these states. See Note 10 of the financial statements
for further information regarding related party transactions.
PRODUCTS
The Companies offer a portfolio of variable products designed to meet
customer needs for tax-advantaged methods of saving for retirement and
protection from unexpected 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 products currently offered by the Companies include six variable
annuity products and two 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. Variable life products are
fund-linked life products for which the policyowner accepts the investment
risk in exchange for the potential of a higher rate of return. At December
31, 1998, funds on deposit in the Companies' variable product separate and
fixed accounts totaled $3.4 billion and $881.1 million, respectively.
Variable 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, and some products
provide for a cost of insurance product charge.
MARKETING AND DISTRIBUTION
The Companies continued to expand distribution systems during 1998. Broad-
based distribution networks are key to realizing a growing share of the
wealth accumulation marketplace. The principal distributors of the Companies'
variable products include national and regional stock brokerage firms, life
insurance companies with captive agency sales forces 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,
as a result of the merger with ING, growth opportunities exist through
utilizing the ING broker/dealer network and developing cross-selling agreements
with affiliated companies.
BUSINESS ENVIRONMENT
The current business and regulatory environment presents many challenges to
the insurance industry. The variable annuity competitive environment is
intense and is dominated by a number of large variable product companies with
strong distribution, name recognition and wholesaling capabilities.
Increasing competition from traditional insurance carriers as well as banks
and mutual fund companies offers consumers many choices. However, overall
demand for variable products remains strong for several reasons including:
strong stock market performance over the last 4 years; relatively low
interest rates; an aging U.S. population that is increasingly concerned about
retirement and estate planning, as well as 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.
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. Previously, Golden American's business
operations were performed in leased facilities located in Wilmington, Delaware
and various leased facilities in Pennsylvania, which are being leased on a
short-term basis for use in the transition to the new office buiding. First
Golden's business operations are performed in a leased facility 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. In some class action
and other lawsuits involving insurers, substantial damages have been sought
and/or material settlement payments have been made. The Companies believe
that currently there are no pending or threatened lawsuits 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. 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 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 1999, Golden American cannot pay dividends to its parent without prior
approval of statutory authorities. Golden American did not pay common stock
dividends during 1998, 1997 or 1996.
First Golden is required to maintain a minimum total statutory-basis capital
and surplus of not less than $4 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
unless a notice of its intent to declare a dividend and amount of the
dividend has been filed at least thirty days in advance of the proposed
declaration. If the Superintendent 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 1998
or 1997.
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 has also been 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. The Companies report financial results on a consol-
idated 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
_____________________
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 of Iowa Companies 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 for the
period August 14, 1996 through October 24, 1997 are presented on the Post-
Acquisition basis of accounting and for August 13, 1996 and prior periods are
presented on the Pre-Acquisition basis of accounting.
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.
The following analysis combines Post-Merger and Post-Acquisition activity for
1997.
PREMIUMS
| POST-
POST-MERGER COMBINED POST-MERGER | ACQUISITION
_________________________________________|_____________
For the| For the
period| period
For the year For the year October 25,| Jannuary 1,
ended ended 1997 through| 1997 through
December 31, December 31, December 31,| October 24,
1998 1997 1997| 1997
_____________ _____________ _____________|_____________
(Dollars in millions)
|
Variable annuity |
premiums: |
Separate account $1,513.3 $291.2 $111.0 | $180.2
Fixed account 588.7 318.0 60.9 | 257.1
_____________ _____________ _____________|_____________
2,102.0 609.2 171.9 | 437.3
Variable life premiums 13.8 15.6 1.2 | 14.4
_____________ _____________ _____________|_____________
Total premiums $2,115.8 $624.8 $173.1 | $451.7
=======================================================
For the Companies' variable contracts, premiums collected are not reported as
revenues, but are reported as deposits to insurance liabilities. Revenues for
these products are recognized over time in the form of investment income and
product charges.
Variable annuity separate account premiums increased 419.7% in 1998 primarily
due to increased sales of the Premium Plus product introduced in October
of 1997 and the increased sales levels of the Companies' other products. The
fixed account portion of the Companies' variable annuity premiums increased
85.1% in 1998. Variable life premiums decreased 11.4% in 1998. Total premiums
increased 238.7% in 1998.
During 1998, the Companies' sales were further diversified among
broker/dealers. Premiums, net of reinsurance, for variable products from two
significant broker/dealers having at least ten percent of total sales for the
year ended December 31, 1998 totaled $580.7 million, or 27% of premiums
($328.2 million, or 53% from two significant broker/dealers for the year
ended December 31, 1997).
REVENUES
| POST-
POST-MERGER COMBINED POST-MERGER | ACQUISITION
___________________________________________| _____________
For the| For the
period| period
For the year For the year October 25,| Jannuary 1,
ended ended 1997 through| 1997 through
December 31, December 31, December 31,| October 24,
1998 1997 1997| 1997
_____________ _____________ _____________| _____________
(Dollars in millions)
|
Annuity and interest |
sensitive life |
product charges $39.1 $22.1 $3.8 | $18.3
Management fee revenue 4.8 2.8 0.5 | 2.3
Net investment income 42.5 26.8 5.1 | 21.7
Realized gains (losses) |
on investments (1.5) 0.1 -- | 0.1
Other income 5.6 0.7 0.3 | 0.4
_____________ _____________ _____________| _____________
$90.5 $52.5 $9.7 | $42.8
==========================================================
Total revenues increased 72.3%, or $38.0 million, to $90.5 million in 1998.
Annuity and interest sensitive life product charges increased 76.8%, or $17.0
million, to $39.1 million in 1998 due to additional fees earned from the
increasing block of business under management in the separate accounts and an
increase in surrender charge revenues. This increase was partially offset by
the elimination of the unearned revenue reserve related to in force acquired
business at the merger date, which resulted in lower annuity and interest
sensitive life product charges compared to Post-Acquisition levels.
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 $4.8
million for 1998 and $2.8 million for 1997.
Net investment income increased 58.6%, or $15.7 million, to $42.5 million in
1998 from $26.8 million in 1997 due to growth in invested assets. During
1998, the Company had net realized losses on investments of $1.5 million,
which includes a $1.0 million write down of two impaired bonds, compared to
gains of $0.1 million in 1997. Other income increased $4.9 million to $5.6
million in 1998 due primarily to income received under a modified coinsurance
agreement with an unaffiliated reinsurer as a result of increased sales.
EXPENSES
| POST-
POST-MERGER COMBINED POST-MERGER | ACQUISITION
_________________________________________|_____________
For the| For the
period| period
For the year For the year October 25,| Jannuary 1,
ended ended 1997 through| 1997 through
December 31, December 31, December 31,| October 24,
1998 1997 1997| 1997
_____________ _____________ _____________|_____________
(Dollars in millions)
|
Insurance benefits |
and expenses: |
Annuity and interest |
sensitive life benefits: |
Interest credited to |
account balances $94.9 $26.7 $7.4 | $19.3
Benefit claims incurred |
in excess of account |
balances 2.1 0.1 -- | 0.1
Underwriting, acquisition |
and insurance expenses: |
Commissions 121.2 36.3 9.4 | 26.9
General expenses 37.6 17.3 3.4 | 13.9
Insurance taxes 4.1 2.3 0.5 | 1.8
Policy acquisition costs |
deferred (197.8) (42.7) (13.7)| (29.0)
Amortization: |
Deferred policy |
acquisition costs 5.1 2.6 0.9 | 1.7
Value of purchased |
insurance in force 4.7 6.1 0.9 | 5.2
Goodwill 3.8 2.0 0.6 | 1.4
_____________ _____________ _____________|_____________
$75.7 $50.7 $9.4 | $41.3
=======================================================
Total insurance benefits and expenses increased 49.2%, or $25.0 million, in
1998 from $50.7 million in 1997. Interest credited to account balances
increased 255.4%, or $68.2 million, in 1998 from $26.7 in 1997. The extra
credit bonus on the Premium Plus product introduced in October of 1997
generated a $51.6 million increase in interest credited during 1998 compared
to 1997. The remaining increase in interest credited relates to higher
account balances associated with the Companies' fixed account option within
its variable products.
Commissions increased 234.2%, or $84.9 million, in 1998 from $36.3 million in
1997. Insurance taxes increased 77.0%, or $1.8 million, in 1998 from $2.3
million in 1997. Changes in commissions and insurance taxes are generally
related to changes in the level of variable product sales. Insurance taxes
are impacted by several other factors, which include an increase in FICA
taxes primarily due to bonuses. Most costs incurred as the result of new
sales including the extra credit bonus have been deferred, thus having very
little impact on current earnings.
General expenses increased 117.7%, or $20.3 million, in 1998 from $17.3
million in 1997. Management expects general expenses to continue to increase
in 1999 as a result of the emphasis on expanding the salaried wholesaler
distribution network. The Companies use a network of wholesalers to
distribute products and the salaries of these wholesalers are included in
general expenses. The portion of these salaries and related expenses that
varies with production levels is deferred thus having little impact on
current earnings. The increase in general expenses was partially offset by
reimbursements received from Equitable Life, an affiliate, for certain
advisory, computer and other resources and services provided by Golden
American.
At the merger date, the Companies' deferred policy acquisition costs
("DPAC"), previous balance of 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 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. VPIF decreased $2.6 million in the second quarter of 1998 to adjust
the value of other receivables recorded at the time of merger and increased
$0.2 million in the first quarter of 1998 as the result of an adjustment to
the merger costs. The amortization of VPIF and DPAC increased $1.1 million,
or 13.0%, in 1998. During the second quarter of 1997, VPIF was adjusted by
$2.3 million to reflect narrower spreads than the gross profit model assumed.
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, 1998 is $4.3 million in 1999, $4.0
million in 2000, $3.9 million in 2001, $3.7 million in 2002 and $3.3 million
in 2003. Actual amortization may vary based upon changes in assumptions and
experience.
Amortization of goodwill for the year ended December 31, 1998 totaled $3.8
million compared to $2.0 million for the year ended December 31, 1997.
Goodwill resulting from the merger is being amortized on a straight-line
basis over 40 years.
Interest expense on the $25 million surplus note issued December 1996 and
expiring December 2026 was $2.1 million for the year ended December 31, 1998,
unchanged from the same period of 1997. In addition, Golden American incurred
interest expense of $0.2 million in 1998 compared to $0.5 million in 1997 on
the line of credit with Equitable which was repaid with a capital
contribution. Golden American also paid $1.8 million in 1998 to ING America
Insurance Holdings, Inc. ("ING AIH") for interest on the reciprocal loan
agreement. Interest expense on the revolving note payable with SunTrust Bank,
Atlanta was $0.3 million for the year ended December 31, 1998.
INCOME
Net income for 1998 was $5.1 million, an increase of $4.8 million from $0.3
million in 1997.
Comprehensive income for 1998 was $3.9 million, an increase of $1.8 million
from $2.1 million in 1997.
FINANCIAL CONDITION
___________________
RATINGS
During 1998, the Companies' ratings were upgraded by Standard & Poor's Rating
Services ("Standard & Poor's") from AA to AA+. During the first quarter of
1999, the Companies' ratings were upgraded by Duff & Phelps Credit Rating
Company from AA+ to AAA.
INVESTMENTS
The financial statement carrying value and amortized cost basis of the
Companies' total investments increased 72.3% and 72.6%, respectively, in
1998. All of the Companies' investments, other than mortgage loans, are
carried at fair value in the Companies' financial statements. As such, growth
in the carrying value of the Companies' investment portfolio included 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 option. The Companies manage the
growth of insurance operations in order to maintain adequate capital ratios.
To support the fixed account option of the Companies' variable insurance
products, cash flow was invested primarily in fixed maturities, short-term
investments and mortgage loans.
At December 31, 1998, the Companies had no investment in default. At December
31, 1998, the Companies' investment portfolio had a yield of 6.4%. The
Companies estimate the total investment portfolio, excluding policy loans,
had a fair value approximately equal to 100.2% of its amortized cost value
for accounting purposes at December 31, 1998.
FIXED MATURITIES: At December 31, 1998, the Companies had fixed maturities
with an amortized cost of $739.8 million and an estimated fair value of
$742.0 million. The individual securities in the Companies' fixed maturities
portfolio (at amortized cost) include investment grade securities, which
include securities issued by the U.S. government, its agencies and
corporations that are rated at least A- by Standard & Poor's ($477.4 million
or 64.5%), that are rated BBB+ to BBB- by Standard & Poor's ($124.0 million
or 16.8%) and below investment grade securities which are securities issued
by corporations that are rated BB+ to B- by Standard & Poor's ($51.6 million
or 7.0%). Securities not rated by Standard & Poor's had a National
Association of Insurance Commissioners ("NAIC") rating of 1, 2 or 3 ($86.8
million or 11.7%). The Companies' fixed maturity investment portfolio had a
combined yield at amortized cost of 6.5% at December 31, 1998.
The Companies classify 100% of securities as available for sale. Net
unrealized appreciation of fixed maturities of $2.2 million was comprised of
gross appreciation of $6.7 million and gross depreciation of $4.5 million.
Net unrealized holding gains on these securities, net of adjustments to VPIF,
DPAC and deferred income taxes of $1.0 million was included in stockholder's
equity at December 31, 1998.
At December 31, 1998, the amortized cost value of the Companies' total
investment in below investment grade securities, excluding mortgage-backed
securities, was $52.7 million, or 5.9%, 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, 1998,
the yield at amortized cost on the Companies' below investment grade
portfolio was 7.9% compared to 6.4% for the Companies' investment grade
corporate bond portfolio. The Companies estimate the fair value of the below
investment grade portfolio was $51.7 million, or 98.1% of amortized cost
value, at December 31, 1998.
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 1998, fixed maturities designated as available for sale with a combined
amortized cost of $145.3 million were called or repaid by their issuers. In
total, net pre-tax losses from sales, calls and repayments of fixed maturity
investments amounted to $0.5 million in 1998.
During the fourth quarter of 1998, Golden American determined that the
carrying value of two of its bonds exceeded their estimated net realizable
value. As a result, 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.
EQUITY SECURITIES: Equity securities represent 1.6% of the Companies'
investment portfolio. At December 31, 1998, the Companies owned equity
securities with a cost of $14.4 million and an estimated fair value of $11.5
million. Net unrealized depreciation of equity securities was comprised
entirely of gross depreciation of $2.9 million. Equity securities are
primarily comprised of the Companies' investment in shares of the mutual
funds underlying the Companies' registered separate accounts.
MORTGAGE LOANS: Mortgage loans represent 10.9% of the Companies' investment
portfolio. Mortgages outstanding were $97.3 million at December 31, 1998 with
an estimated fair value of $99.8 million. The Companies' mortgage loan
portfolio includes 57 loans with an average size of $1.7 million and average
seasoning of 0.9 years if weighted by the number of loans. The Companies'
mortgage loans 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 1998 and 1997), Utah (11% in 1998, 13% in
1997) and Georgia (10% in 1998, 11% in 1997). There are no other
concentrations of mortgage loans in any state exceeding ten percent at
December 31, 1998 and 1997. Mortgage loans on real estate have also been
analyzed by collateral type with significant concentrations identified in
office buildings (36% in 1998, 43% in 1997), industrial buildings (32% in
1998, 33% in 1997) and retail facilities (20% in 1998, 15% in 1997). At
December 31, 1998, the yield on the Companies' mortgage loan portfolio was
7.3%.
At December 31, 1998, no mortgage loan was delinquent by 90 days or more. The
Companies' loan investment strategy is consistent with other life insurance
subsidiaries of EIC. The insurance subsidiaries have experienced a
historically low default rate in their mortgage loan portfolios.
OTHER ASSETS
Accrued investment income increased $3.2 million during 1998 due to an
increase in the overall size of the portfolio resulting from the investment
of premiums allocated to the fixed account option of the Companies' variable
products.
DPAC represents certain deferred costs of acquiring insurance business,
principally first year commissions and interest bonuses, extra credit bonuses
and other expenses related to the production of new business after the merger.
The Companies' DPAC and previous balance of 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, 1998, the
Companies had DPAC and VPIF balances of $205.0 million and $36.0 million,
respectively. VPIF decreased $2.6 million in the second quarter of 1998 for
an adjustment to the value of other receivables recorded at the time of the
merger and increased $0.2 million in the first quarter of 1998 for an
adjustment made to the merger costs.
Property and equipment increased $5.8 million during 1998, due to
installation of a new policy administration system, introduction of an
imaging system as well as the 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 through December 31, 1998
was $4.4 million.
Other assets increased $5.5 million during 1998 due mainly to an increase in
amounts due from an unaffiliated reinsurer under a modified coinsurance
agreement.
At December 31, 1998, the Companies had $3.4 billion of separate account
assets compared to $1.6 billion at December 31, 1997. The increase in
separate account assets resulted from market appreciation and growth in sales
of the Companies' variable annuity products, net of redemptions.
At December 31, 1998, the Companies had total assets of $4.8 billion, an
increase of 94.3% over total assets at December 31, 1997.
LIABILITIES
In conjunction with the volume of variable annuity sales, the Companies'
total liabilities increased $2.2 billion, or 98.2%, during 1998 and totaled
$4.4 billion at December 31, 1998. Future policy benefits for annuity and
interest sensitive life products increased $375.8 million, or 74.4%, to
$881.1 million reflecting premium growth in the Companies' fixed account
option of its variable products. Market appreciation and premium growth, net
of redemptions, accounted for the $1.7 billion, or 106.3%, increase in
separate account liabilities to $3.4 billion at December 31, 1998.
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 Agreement, the surplus note is now payable to EIC.
Golden American maintained a line of credit agreement with Equitable to
facilitate the handling of unusual and/or unanticipated short-term cash
requirements. Under the agreement, which became effective December 1, 1996
and expired on December 31, 1997, Golden American could borrow up to $25
million. At December 31, 1997, $24.1 million was outstanding under this
agreement. The outstanding balance was repaid by a capital contribution.
Other liabilities increased $15.3 million from $17.3 million at December 31,
1997, due primarily to increases in accounts payable, outstanding checks,
guaranty fund assessment liability and pension liability.
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 purchasing power when monetary
assets exceed monetary liabilities.
STOCKHOLDER'S EQUITY
Additional paid-in capital increased $122.6 million, or 54.5%, from December
31, 1997 to $347.6 million at December 31, 1998 primarily 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 their 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 extra premium credits, investment purchases, repayment
of debt, as well as withdrawals and surrenders.
Net cash used in operating activities was $63.9 million in 1998 compared to
$4.8 million in 1997. Annually, 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 product line
of Golden American. The 1998 increase in net cash used in operating
activities resulted principally from the introduction of Golden American's
extra premium credit product in October 1997. In 1998, $54.4 million in extra
premium credits was added to contractholders' account values versus $2.8
million in 1997.
Net cash used in investing activities was $390.0 million during 1998 as
compared to $198.5 million in 1997. This increase is primarily due to greater
net purchases of fixed maturities resulting from an increase in funds
available from net fixed account deposits. Net purchases of fixed maturities
reached $331.3 million in 1998 versus $135.3 million in 1997. Net purchases
of mortgage loans on real estate, on the other hand, declined to $12.6
million from $51.2 million in the prior year. In 1998, net purchases of short-
term investments were unusually high due to the investment of the remaining
proceeds of Golden American's $60.0 million surplus note issued on
December 30, 1998.
Net cash provided by financing activities was $439.5 million during 1998 as
compared to $218.6 million during the prior year. In 1998, net cash provided
by financing activities was positively impacted by net fixed account deposits
of $520.8 million compared to $303.6 million in 1997. This increase was
partially offset by net reallocations to the Companies' separate accounts,
which increased to $239.7 million from $110.1 million during the prior year.
In 1998, other important sources of cash provided by financing activities
were $98.4 million of capital contributions from the Parent and $60.0 million
of proceeds from the issuance of a surplus note on December 30, 1998. The
Companies have used part of the proceeds of the surplus note to repay
outstanding short-term debt.
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 and the Companies have established an
$85.0 million revolving note facility with SunTrust Bank, Atlanta. Management
believes that these sources of liquidity are adequate to meet the Companies'
short-term cash obligations.
Based on current trends, the Companies expect to continue to use net cash in
operating activities, given the continued growth of the variable annuity
product line. It is anticipated that a continuation of capital contributions
from the Parent and the issuance of additional surplus notes will cover these
net cash outflows. It is ING's policy to ensure that adequate capital and
surplus is provided for the Companies and additional funds will be
contributed to the Companies in 1999.
During the first quarter of 1999, Golden American's operations were moved to
a new site in West Chester, Pennsylvania. Golden American currently occupies
65,000 square feet of leased space and has made commitments for an additional
60,000 square feet to be added during 1999 to be occupied by itself and its
affiliates. Previously, Golden Amerian's home office operations were housed in
leased locations in Wilmington, Delaware and various locations in Pennsylvania,
which are being leased on a short-term basis for use in the transition to the
new office building. Golden American's New York subsidiary is housed in leased
space in New York, New York. The Companies intend to spend approximately $7.0
million on capital needs for 1999.
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 1999,
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 unless a notice of
its intent to declare a dividend and the amount of the dividend has been
filed at least thirty days in advance of the proposed declaration. If the
Superintendent 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 any dividends to
Golden American during 1999.
The NAIC's risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula. These
requirements are intended to allow insurance regulators to monitor the
capitalization of insurance companies based upon the type and mixture of
risks inherent in a company's operations. The formula includes components for
asset risk, liability risk, interest rate exposure and other factors. The
Companies have complied with the NAIC's risk-based capital reporting
requirements. Amounts reported indicate that the Companies have total
adjusted capital well above all required capital levels.
REINSURANCE: At December 31, 1998, 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.
YEAR 2000 READINESS DISCLOSURE: Based on and in conjunction with a 1997 study
and an ongoing analysis of computer software and hardware, the Companies have
assessed their exposure to the Year 2000 change of the century date issue.
Some of the Companies' computer programs were originally written using two
digits rather than four to define a particular year. As a result, these
computer programs contain "time sensitive" software that may recognize "00"
as the year 1900 rather than the year 2000, which could cause system failure
or miscalculations resulting in disruptions to operations. These disruptions
could include, but are not limited to, a temporary inability to process
transactions. To a lesser extent, the Companies depend on various non-
information technology systems, which could also fail or misfunction as a
result of the Year 2000.
The Companies have developed a plan to address the Year 2000 issue in a
timely manner. The following schedule details the plan's phases, progress
towards completion and actual or estimated completion dates:
% Complete Actual/
as of Estimated
March 15, Completion
1999 Dates
_______________________________________________________________________________
ASSESSMENT AND DEVELOPMENT of the steps to be taken to
address Year 2000 systems issues 100% 12/31/1997
REMEDIATION of business critical systems to address
Year 2000 issues 100% 2/28/1999
REMEDIATION of non-critical systems to address Year
2000 issues 76-99% 6/01/1999
TESTING of business critical systems 100% 3/05/1999
TESTING of non-critical systems and integrated testing
of hardware and infrastructure 25-50% 6/15/1999
POINT-TO-POINT TESTING of external interfaces with third
party computer systems that communicate with the
Companies' systems 50-75% 4/30/1999
IMPLEMENTATION of tested business critical software
addressing Year 2000 systems issues 100% 3/05/1999
IMPLEMENTATION of tested non-critical software
addressing Year 2000 systems issues 25-50% 6/30/1999
CONTINGENCY PLAN 76-99% 6/01/1999
The Companies' operations could be adversely affected if significant
customers, suppliers and other third parties, including underlying mutual
funds, would be unable to transact business in the Year 2000 and thereafter
as a result of the Year 2000 issue. To mitigate the effect of outside
influences and other dependencies relative to the Year 2000, the Companies
have identified and contacted these third parties to obtain assurances that
necessary steps are being taken to prepare for the Year 2000. The Companies
will continue these communications and establish compliance checkpoints
through the Year 2000 transition.
Management believes the Companies' systems are or will be substantially
compliant by Year 2000. Golden American has charged to expense approximately
$335,000 during 1998 for the Year 2000 project. The Companies anticipate
charging to expense an additional $200,000 to $300,000 in 1999 which includes
upgrade and internal resources costs.
Despite the Companies' efforts to modify or replace "time sensitive" computer
and information systems, the Companies could experience a disruption to their
operations as a result of the Year 2000. The Companies are currently
developing a contingency plan to address the content of third party
compliance statements and any systems that may malfunction despite the
testing being performed. The contingency plan is anticipated to be completed
by June 1, 1999.
The Year 2000 project costs and completion dates are based on management's
best estimates. These estimates were derived using numerous assumptions of
future events, including the continued availability of resources, third party
Year 2000 compliance and other factors. There is no guarantee these estimates
will be achieved and actual results could materially differ from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of trained
personnel, the ability to locate and correct all relevant computer codes and
other uncertainties.
It is the Companies' intention to make every reasonable effort to achieve
business continuity through appropriate planning, testing and establishing
contingency scenarios; however, the Companies do not make any representations
because of many unknown factors beyond the control of the Companies.
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 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 1998 levels, variable separate account funds, which represent
80% of the in force, pass the risk in underlying fund performance to the
contractholder (except for certain minimum guarantees that are mostly
reinsured). With respect to interest rate movements up or down 100 basis
points from year-end 1998 levels, the remaining 20% 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.
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 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 relative tax advantages 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.
6. To the extent third parties are unable to transact business in the Year
2000 and thereafter, the Companies' operations could be adversely
affected.
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.
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, 1998 and 1997, and the
related consolidated statements of operations, changes in stockholder's
equity, and cash flows for the year ended December 31, 1998 and for the
periods from October 25, 1997 through December 31, 1997, January 1, 1997
through October 24, 1997, August 14, 1996 through December 31, 1996 and
January 1, 1996 through August 13, 1996. 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 generally accepted auditing
standards. 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, 1998 and 1997, and the consolidated
results of its operations and its cash flows for the year ended December 31,
1998 and for the periods from October 25, 1997 through December 31, 1997,
January 1, 1997 through October 24, 1997, August 14, 1996 through December
31, 1996 and January 1, 1996 through August 13, 1996 in conformity with
generally accepted accounting principles. 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 12, 1999
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
POST-MERGER
______________________________________
December 31, 1998 December 31, 1997
___________________ _________________
ASSETS
Investments:
Fixed maturities, available for sale,
at fair value (cost: 1998 - $739,772;
1997 - $413,288) $741,985 $414,401
Equity securities, at fair value
(cost: 1998 - $14,437; 1997 - $4,437) 11,514 3,904
Mortgage loans on real estate 97,322 85,093
Policy loans 11,772 8,832
Short-term investments 41,152 14,460
___________________ _________________
Total investments 903,745 526,690
Cash and cash equivalents 6,679 21,039
Due from affiliates 2,983 827
Accrued investment income 9,645 6,423
Deferred policy acquisition costs 204,979 12,752
Value of purchased insurance in force 35,977 43,174
Current income taxes recoverable 628 272
Deferred income tax asset 31,477 36,230
Property and equipment, less allowances
for depreciation of $801 in 1998 and
$97 in 1997 7,348 1,567
Goodwill, less accumulated amortization
of $4,408 in 1998 and $630 in 1997 146,719 150,497
Other assets 6,239 755
Separate account assets 3,396,114 1,646,169
___________________ _________________
Total assets $4,752,533 $2,446,395
=================== =================
See accompanying notes.
CONSOLIDATED BALANCE SHEETS - CONTINUED
(Dollars in thousands, except per share data)
POST-MERGER
______________________________________
December 31, 1998 December 31, 1997
___________________ _________________
LIABILITIES AND STOCKHOLDER'S EQUITY
Policy liabilities and accruals:
Future policy benefits:
Annuity and interest sensitive life
products $881,112 $505,304
Unearned revenue reserve 3,840 1,189
Other policy claims and benefits -- 10
___________________ _________________
884,952 506,503
Line of credit with affiliate -- 24,059
Surplus notes 85,000 25,000
Due to affiliates -- 80
Other liabilities 32,573 17,271
Separate account liabilities 3,396,114 1,646,169
___________________ _________________
4,398,639 2,219,082
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 347,640 224,997
Accumulated other comprehensive income
(loss) (895) 241
Retained earnings (deficit) 4,649 (425)
___________________ _________________
Total stockholder's equity 353,894 227,313
___________________ _________________
Total liabilities and stockholder's
equity $4,752,533 $2,446,395
=================== =================
See accompanying notes.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
POST-MERGER
____________________________________
For the period
October 25, 1997
For the year ended through
December 31, 1998 December 31, 1997
__________________ _________________
Revenues:
Annuity and interest sensitive life
product charges $39,119 $3,834
Management fee revenue 4,771 508
Net investment income 42,485 5,127
Realized gains (losses) on investments (1,491) 15
Other income 5,569 236
__________________ _________________
90,453 9,720
Insurance benefits and expenses:
Annuity and interest sensitive life benefits:
Interest credited to account balances 94,845 7,413
Benefit claims incurred in excess of
account balances 2,123 --
Underwriting, acquisition and insurance
expenses:
Commissions 121,171 9,437
General expenses 37,577 3,350
Insurance taxes 4,140 450
Policy acquisition costs deferred (197,796) (13,678)
Amortization:
Deferred policy acquisition costs 5,148 892
Value of puchased insurance in force 4,724 948
Goodwill 3,778 630
__________________ _________________
75,710 9,442
Interest expense 4,390 557
__________________ _________________
80,100 9,999
__________________ _________________
Income (loss) before income taxes 10,353 (279)
Income taxes 5,279 146
__________________ _________________
Net income (loss) $5,074 ($425)
================== =================
See accompanying notes.
CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
(Dollars in thousands)
POST-ACQUISITION
____________________________________
For the period For the period
January 1, 1997 August 14, 1996
through through
October 24, 1997 December 31, 1996
__________________ _________________
Revenues:
Annuity and interest sensitive life
product charges $18,288 $8,768
Management fee revenue 2,262 877
Net investment income 21,656 5,795
Realized gains (losses) on investments 151 42
Other income 426 486
__________________ _________________
42,783 15,968
Insurance benefits and expenses:
Annuity and interest sensitive life benefits:
Interest credited to account balances 19,276 5,741
Benefit claims incurred in excess of
account balances 125 1,262
Underwriting, acquisition and insurance
expenses:
Commissions 26,818 9,866
General expenses 13,907 5,906
Insurance taxes 1,889 672
Policy acquisition costs deferred (29,003) (11,712)
Amortization:
Deferred policy acquisition costs 1,674 244
Value of puchased insurance in force 5,225 2,745
Goodwill 1,398 589
__________________ _________________
41,309 15,313
Interest expense 2,082 85
__________________ _________________
43,391 15,398
__________________ _________________
Income (loss) before income taxes (608) 570
Income taxes (1,337) 220
__________________ _________________
Net income (loss) $729 $350
================== =================
See accompanying notes.
CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
(Dollars in thousands)
PRE-ACQUISITION
__________________
For the period
January 1, 1996
through
August 13, 1996
__________________
Revenues:
Annuity and interest sensitive life
product charges $12,259
Management fee revenue 1,390
Net investment income 4,990
Realized gains (losses) on investments (420)
Other income 70
__________________
18,289
Insurance benefits and expenses:
Annuity and interest sensitive life benefits:
Interest credited to account balances 4,355
Benefit claims incurred in excess of
account balances 915
Underwriting, acquisition and insurance
expenses:
Commissions 16,549
General expenses 9,422
Insurance taxes 1,225
Policy acquisition costs deferred (19,300)
Amortization:
Deferred policy acquisition costs 2,436
Value of puchased insurance in force 951
Goodwill --
__________________
16,553
Interest expense --
__________________
16,553
__________________
Income (loss) before income taxes 1,736
Income taxes (1,463)
__________________
Net income (loss) $3,199
==================
See accompanying notes.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(Dollars in thousands)
Accumu-
lated
Other
Addi- Compre- Total
Redeemable tional hensive Retained Stock-
Common Preferred Paid-in Income Earnings holder's
Stock Stock Capital (Loss) (Deficit) Equity
__________________________________________________________
PRE-ACQUISITION
__________________________________________________________
Balance at
January 1, 1996 $2,500 $50,000 $45,030 $658 ($63) $98,125
Comprehensive income:
Net income -- -- -- -- 3,199 3,199
Change in net
unrealized invest-
ment gains
(losses) -- -- -- (1,175) -- (1,175)
_________
Comprehensive income 2,024
Preferred stock
dividends -- -- -- -- (719) (719)
__________________________________________________________
Balance at
August 13, 1996 $2,500 $50,000 $45,030 ($517) $2,417 $99,430
==========================================================
POST-ACQUISITION
__________________________________________________________
Balance at
August 14, 1996 $2,500 $50,000 $87,372 -- -- $139,872
Comprehensive income:
Net income -- -- -- -- $350 350
Change in net
unrealized invest-
ment gains
(losses) -- -- -- $262 -- 262
_________
Comprehensive income 612
Contribution of
preferred stock to
additional paid-in
capital -- (50,000) 50,000 -- -- --
__________________________________________________________
Balance at
December 31, 1996 $2,500 -- $137,372 $262 $350 $140,484
==========================================================
See accompanying notes.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY - CONTINUED
(Dollars in thousands)
Accumu-
lated
Other
Addi- Compre- Total
Redeemable tional hensive Retained Stock-
Common Preferred Paid-in Income Earnings holder's
Stock Stock Capital (Loss) (Deficit) Equity
__________________________________________________________
POST-ACQUISITION
__________________________________________________________
Balance at
December 31, 1996 $2,500 -- $137,372 $262 $350 $140,484
Comprehensive income:
Net income -- -- -- -- 729 729
Change in net
unrealized invest-
ment 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 invest-
ment gains
(losses) -- -- -- $241 -- 241
_________
Comprehensive loss (184)
__________________________________________________________
Balance at
December 31, 1997 $2,500 -- $224,997 $241 ($425) $227,313
==========================================================
See accompanying notes.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY - CONTINUED
(Dollars in thousands)
Accumu-
lated
Other
Addi- Compre- Total
Redeemable tional hensive Retained Stock-
Common Preferred Paid-in Income Earnings holder's
Stock Stock Capital (Loss) (Deficit) Equity
__________________________________________________________
POST-MERGER
__________________________________________________________
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 invest-
ment 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
==========================================================
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
POST-MERGER
___________________ ___________________
For the period
For the year October 25, 1997
ended through
December 31, 1998 December 31, 1997
___________________ ___________________
OPERATING ACTIVITIES
Net income (loss) $5,074 ($425)
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 94,690 7,361
Change in unearned revenues 2,651 1,189
Decrease (increase) in accrued
investment income (3,222) 1,205
Policy acquisition costs deferred (197,796) (13,678)
Amortization of deferred policy
acquisition costs 5,148 892
Amortization of value of purchased
insurance in force 4,724 948
Change in other assets, other
liabilities and accrued income taxes 9,891 4,205
Provision for depreciation and
amortization 8,147 1,299
Provision for deferred income taxes 5,279 146
Realized (gains) losses on investments 1,491 (15)
___________________ ___________________
Net cash provided by (used in)
operating activities (63,923) 3,127
INVESTING ACTIVITIES
Sale, maturity or repayment of
investments:
Fixed maturities - available for sale 145,253 9,871
Mortgage loans on real estate 3,791 1,644
Short-term investments - net -- --
___________________ ___________________
149,044 11,515
Acquisition of investments:
Fixed maturities - available for sale (476,523) (29,596)
Equity securities (10,000) (1)
Mortgage loans on real estate (16,390) (14,209)
Policy loans - net (2,940) (328)
Short-term investments - net (26,692) (13,244)
___________________ ___________________
(532,545) (57,378)
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)
POST-MERGER
___________________ ___________________
For the period
For the year October 25, 1997
ended through
December 31, 1998 December 31, 1997
___________________ ___________________
INVESTING ACTIVITIES - CONTINUED
Purchase of property and equipment ($6,485) ($252)
___________________ ___________________
Net cash used in investing activities (389,986) (46,115)
FINANCING ACTIVITIES
Proceeds from issuance of surplus note 60,000 --
Proceeds from reciprocal loan
agreement borrowings 500,722 --
Repayment of reciprocal loan
agreement borrowings (500,722) --
Proceeds from revolving note payable 108,495 --
Repayment from revolving note payable (108,495) --
Proceeds from line of credit borrowings -- 10,119
Repayment of line of credit borrowings -- (2,207)
Receipts from annuity and interest
sensitive life policies credited
to account balances 593,428 62,306
Return of account balances
on annuity and interest sensitive
life policies (72,649) (6,350)
Net reallocations to Separate
Accounts (239,671) (17,017)
Contributions of capital by parent 98,441 --
Dividends paid on preferred stock -- --
___________________ ___________________
Net cash provided by financing
activities 439,549 46,851
___________________ ___________________
Increase (decrease) in cash and
cash equivalents (14,360) 3,863
Cash and cash equivalents at
beginning of period 21,039 17,176
___________________ ___________________
Cash and cash equivalents at end
of period $6,679 $21,039
=================== ===================
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)
POST-MERGER
___________________ ___________________
For the period
For the year October 25, 1997
ended through
December 31, 1998 December 31, 1997
___________________ ___________________
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest $4,305 $295
Income taxes 99 --
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 -- --
Contribution of capital from parent to
repay line of credit borrowings 24,059 --
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)
POST-ACQUISITION
___________________ ___________________
For the period For the period
January 1, 1997 August 14, 1996
through through
October 24, 1997 December 31, 1996
___________________ ___________________
OPERATING ACTIVITIES
Net income (loss) $729 $350
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 19,177 5,106
Change in unearned revenues 3,292 2,063
Decrease (increase) in accrued
investment income (3,489) (877)
Policy acquisition costs deferred (29,003) (11,712)
Amortization of deferred policy
acquisition costs 1,674 244
Amortization of value of purchased
insurance in force 5,225 2,745
Change in other assets, other
liabilities and accrued income taxes (8,944) (96)
Provision for depreciation and
amortization 3,203 1,242
Provision for deferred income taxes 316 220
Realized (gains) losses on investments (151) (42)
___________________ ___________________
Net cash provided by (used in)
operating activities (7,971) (757)
INVESTING ACTIVITIES
Sale, maturity or repayment of
investments:
Fixed maturities - available for sale 39,622 47,453
Mortgage loans on real estate 5,828 40
Short-term investments - net 11,415 2,629
___________________ ___________________
56,865 50,122
Acquisition of investments:
Fixed maturities - available for sale (155,173) (147,170)
Equity securities (4,865) (5)
Mortgage loans on real estate (44,481) (31,499)
Policy loans - net (3,870) (637)
Short-term investments - net -- --
___________________ ___________________
(208,389) (179,311)
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)
POST-ACQUISITION
___________________ ___________________
For the period For the period
January 1, 1997 August 14, 1996
through through
October 24, 1997 December 31, 1996
___________________ ___________________
INVESTING ACTIVITIES - CONTINUED
Purchase of property and equipment ($875) ($137)
___________________ ___________________
Net cash used in investing activities (152,399) (129,326)
FINANCING ACTIVITIES
Proceeds from issuance of surplus note -- 25,000
Proceeds from reciprocal loan
agreement borrowings -- --
Repayment of reciprocal loan
agreement borrowings -- --
Proceeds from revolving note payable -- --
Repayment from revolving note payable -- --
Proceeds from line of credit borrowings 97,124 --
Repayment of line of credit borrowings (80,977) --
Receipts from annuity and interest
sensitive life policies credited
to account balances 261,549 116,819
Return of account balances
on annuity and interest sensitive
life policies (13,931) (3,315)
Net reallocations to Separate
Accounts (93,069) (10,237)
Contributions of capital by parent 1,011 --
Dividends paid on preferred stock -- --
___________________ ___________________
Net cash provided by financing
activities 171,707 128,267
___________________ ___________________
Increase (decrease) in cash and
cash equivalents 11,337 (1,816)
Cash and cash equivalents at
beginning of period 5,839 7,655
___________________ ___________________
Cash and cash equivalents at end
of period $17,176 $5,839
=================== ===================
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)
POST-ACQUISITION
___________________ ___________________
For the period For the period
January 1, 1997 August 14, 1996
through through
October 24, 1997 December 31, 1996
___________________ ___________________
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest $1,912 --
Income taxes 283 --
Non-cash financing activities:
Non-cash adjustment to additional
paid-in capital for adjusted merger
costs -- --
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 -- --
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)
PRE-ACQUISITION
_________________
For the period
January 1, 1996
through
August 13, 1996
_________________
OPERATING ACTIVITIES
Net income (loss) $3,199
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 4,472
Change in unearned revenues 2,084
Decrease (increase) in accrued
investment income (2,494)
Policy acquisition costs deferred (19,300)
Amortization of deferred policy
acquisition costs 2,436
Amortization of value of purchased
insurance in force 951
Change in other assets, other
liabilities and accrued income taxes 4,672
Provision for depreciation and
amortization 703
Provision for deferred income taxes (1,463)
Realized (gains) losses on investments 420
_________________
Net cash provided by (used in)
operating activities (4,320)
INVESTING ACTIVITIES
Sale, maturity or repayment of
investments:
Fixed maturities - available for sale 55,091
Mortgage loans on real estate --
Short-term investments - net 354
_________________
55,445
Acquisition of investments:
Fixed maturities - available for sale (184,589)
Equity securities --
Mortgage loans on real estate --
Policy loans - net (1,977)
Short-term investments - net --
_________________
(186,566)
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)
PRE-ACQUISITION
_________________
For the period
January 1, 1996
through
August 13, 1996
_________________
INVESTING ACTIVITIES - CONTINUED
Purchase of property and equipment --
_________________
Net cash used in investing activities ($131,121)
FINANCING ACTIVITIES
Proceeds from issuance of surplus note --
Proceeds from reciprocal loan
agreement borrowings --
Repayment of reciprocal loan
agreement borrowings --
Proceeds from revolving note payable --
Repayment from revolving note payable --
Proceeds from line of credit borrowings --
Repayment of line of credit borrowings --
Receipts from annuity and interest
sensitive life policies credited
to account balances 149,750
Return of account balances
on annuity and interest sensitive
life policies (2,695)
Net reallocations to Separate
Accounts (8,286)
Contributions of capital by parent --
Dividends paid on preferred stock (719)
_________________
Net cash provided by financing
activities 138,050
_________________
Increase (decrease) in cash and
cash equivalents 2,609
Cash and cash equivalents at
beginning of period 5,046
_________________
Cash and cash equivalents at end
of period $7,655
=================
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)
PRE-ACQUISITION
_________________
For the period
January 1, 1996
through
August 13, 1996
_________________
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest --
Income taxes --
Non-cash financing activities:
Non-cash adjustment to additional
paid-in capital for adjusted merger
costs --
Contribution of property and equipment
from EIC Variable, Inc. net of $353 of
accumulated depreciation --
Contribution of capital from parent to
repay line of credit borrowings --
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
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 with Golden
American, collectively, 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. On
January 2, 1997 and December 23, 1997, First Golden became licensed to sell
insurance products in New York and Delaware, respectively. 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. 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 for the periods after October 24, 1997 are presented on the Post-
Merger new basis of accounting, for the period August 14, 1996 through
October 24, 1997 are presented on the Post-Acquisition basis of accounting,
and for August 13, 1996 and prior periods are presented on the Pre-
Acquisition basis of accounting.
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, 1998 and 1997, all of the Companies' fixed maturities are
designated as available for sale, although the Companies are not precluded
from designating fixed maturities as held for investment or trading at some
future date.
Securities determined to have a decline in value that is other than temporary
are written down to estimated fair value, which becomes the new cost basis by
a charge to realized losses in the Companies' Statements of Operations.
Premiums and discounts are amortized/accrued utilizing a method which results
in a constant yield over the securities' expected lives. Amortization/accrual
of premiums and discounts on mortgage and other asset-backed securities
incorporates a prepayment assumption to estimate the securities' expected
lives.
EQUITY SECURITIES: Equity securities are reported at estimated fair value if
readily marketable. The change in unrealized appreciation and depreciation of
marketable equity securities (net of related deferred income 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 then becomes the new cost basis by a charge to
realized losses in the Companies' Statements of Operations.
MORTGAGE LOANS: 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 and average cost methods for manager
initiated and issuer initiated disposals, respectively.
FAIR VALUES: Estimated fair values, as reported herein, of conventional
mortgage-backed securities not actively traded in a liquid market and
publicly traded fixed maturities are estimated using a third party pricing
system. This pricing system uses a matrix calculation assuming a spread over
U.S. Treasury bonds based upon the expected average lives of the securities.
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, extra credit bonuses and other expenses
related to the production of new business, have been deferred. Acquisition
costs for variable annuity and variable life 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 the 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.
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 with fixed interest guarantees of the
variable products 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 10.00% during 1998, 3.30% to
8.25% during 1997 and 4.00% to 7.25% during 1996. 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 annuity and variable life contracts. Contractholders, rather than
the Companies, bear the investment risk for the variable products. At the
direction of the contractholders, the separate accounts invest the premiums
from the sale of variable products in shares of specified mutual funds. The
assets and liabilities of the separate accounts are clearly identified and
segregated from other assets and liabilities of the Companies. The portion of
the separate account assets equal to the reserves and other liabilities of
variable annuity and variable life 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 annuity and variable life 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 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