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, 2001.
Commission file number 33-87272, 333-51353, 333-28765, 333-28681, 333-28743,
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333-51949, 333-65009, 333-66745, 333-76941, 333-76945,
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333-35592, 333-95511, 333-30186, 333-40596, 333-33924,
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333-95457, 333-59386, 333-59398, 333-59408, 333-52320
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333-57212, 333-63694, 333-67660, 333-68138, 333-70602
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333-63694, 333-57212, 333-76150
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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 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, 2002, 250,000 shares of Common Stock, $10 Par Value, are
authorized, issued and outstanding.
As of March 27, 2002, 50,000 shares of Preferred Stock, $5000 Par Value, are
authorized.
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 47. Page 1 of 58
PART I
ITEM 1. BUSINESS.
OVERVIEW
Golden American Life Insurance Company ("Golden American"), a wholly owned
subsidiary of Equitable Life Insurance Company of Iowa ("Equitable Life" or the
"Parent"), is a stock life insurance company organized under the laws of the
State of Delaware. Golden American was originally incorporated under the laws of
the State of Minnesota on January 2, 1973 in the name of St. Paul Life Insurance
Company. Equitable Life is a wholly owned subsidiary of Equitable of Iowa
Companies, Inc. ("EIC") which is an indirect wholly owned subsidiary of ING
Groep N.V. ("ING"), a global financial services holding company based in The
Netherlands. Golden American 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.
Formerly, from October 24, 1997 until December 30, 2001, EIC directly owned 100%
of Golden American's stock. On December 3, 2001, the Board of Directors of EIC
approved a plan to contribute its holding of stock of Golden American to another
wholly owned subsidiary, Equitable Life. The contribution of stock occurred on
December 31, 2001, following approval granted by the Insurance Department of the
State of Delaware.
On October 24, 1997 ("the Merger Date"), PFHI Holding, Inc. ("PFHI"), a Delaware
corporation, acquired all of the outstanding capital stock of Equitable of Iowa
Companies ("Equitable") according to the terms of an Agreement and Plan of
Merger dated July 7, 1997 among Equitable, PFHI, and ING Groep N.V. ("ING").
PFHI is a wholly owned subsidiary of ING, a global financial services holding
company based in The Netherlands. As a result of this transaction, Equitable was
merged into PFHI, which was simultaneously renamed Equitable of Iowa Companies,
Inc., a Delaware corporation.
PRODUCTS
The Companies offer a portfolio of variable and fixed 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 and fixed insurance products currently offered by the Companies include
twelve variable annuity products, and two fixed annuity products. During the
year ended December 31, 2001, Golden American began selling four new variable
annuity products, GoldenSelect Landmark, SmartDesign Advantage, SmartDesign
Variable Annuity and Retirement Solutions- ING Rollover Choice, and two fixed
annuity products, FGA New York Flex and FGA New York MYGA. In August 1999,
Golden American discontinued offering variable life products. Variable annuities
are long-term savings vehicles in which contract owner premiums (purchase
payments) are recorded and maintained in subaccounts within a separate account
established and registered with the SEC as a unit investment trust. Many of the
variable annuities issued by Golden American are combination variable and fixed
deferred annuity contracts under which some or all of the premiums may be
allocated by the contract owner to a fixed account available under the contract.
In addition, First Golden also issues fixed annuity contracts which offer only
one or more fixed accounts, and do not provide for allocation to any of the
variable subaccounts.
At December 31, 2001, funds on deposit in the Companies' variable and fixed
insurance product separate and fixed accounts totaled $11.0 billion and $2.2
billion, respectively ($9.8 billion and $1.1 billion, respectively, at December
31, 2000, and $7.6 billion and $1.0 billion, respectively, at December 31,
1999). Variable and fixed 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.
2
MARKETING AND DISTRIBUTION
The Companies continued to expand distribution systems during 2001. Broad-based
distribution networks are key to realizing a growing share of the wealth
accumulation marketplace. The principal distribution channels of the Companies'
variable and fixed insurance products include national wirehouses, regional
securities firms, independent National Association of Securities Dealers, Inc.
("NASD") firms with licensed registered representatives, banks, life insurance
companies with captive agency sales forces, independent insurance agents and
Independent Marketing Organizations. The Companies plan to establish new
relationships and increase penetration with key distributors in existing
channels. In addition, growth opportunities exist through increased utilization
of the ING broker/dealer network and the cross-selling of ING products.
BUSINESS ENVIRONMENT
The current business and regulatory environment presents many challenges to the
insurance industry. The variable and fixed annuity competitive environment
remains intense and is dominated by a number of large highly-rated insurance
companies. Increasing competition from traditional insurance carriers as well as
banks and mutual fund companies offers consumers many choices. The economic
environment during 2001 was characterized by a relatively weak economy, low
interest rates and a volatile equity market which experienced a major decline.
However, there is an aging U.S. population which is increasingly concerned about
retirement, estate planning, maintaining their standard of living in retirement;
and potential reductions in government and employer-provided benefits at
retirement, as well as lower public confidence in the adequacy of those
benefits. Despite an economic downturn in the near term, these factors should
contribute to wealth accumulation needs.
REGULATION
The Companies' insurance operations are conducted in a highly regulated
environment. Golden American and First Golden are each subject to the insurance
laws of the state in which organized and of the other jurisdictions in which
each transacts 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 sales of their products are generally regulated by the
NASD. See Item 7, Management's Discussion and Analysis of Results of Operations.
ITEM 2. PROPERTIES.
During 2001, Golden American occupied 125,000 square feet of leased space in
West Chester, Pennsylvania. From January 1, 2001 to September 30, 2001, First
Golden's business operations were housed in a leased facility in New York, New
York, where certain of the Company's records were maintained. The 2,568 square
feet of office space was leased through 2001. As of October 1, 2001, First
Golden's principal office moved to Woodbury, 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.
3
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 Life. On December 3,
2001, the Board of Directors of EIC approved a plan to contribute its holding of
100% of the stock of its wholly owned subsidiary, Golden American or the
Registrant, to another wholly owned subsidiary, Equitable Life. The contribution
of stock occurred on December 31, 2001, following approval granted by the
Insurance Department of the State of Delaware. 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. Golden American did not pay common stock dividends during 2001, 2000,
or 1999.
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. First Golden did not pay common stock dividends during 2001, 2000, or
1999.
With regard to restrictions on the payment of dividends, refer to the Liquidity
and Capital Resources section.
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's
consolidated results of operations. In addition, some analysis and information
regarding financial condition and liquidity and capital resources is provided.
This analysis should be read jointly with the consolidated financial statements,
related notes, and the Cautionary Statement Regarding Forward-Looking
Statements, which appear elsewhere in this report. Golden American reports
financial results on a consolidated basis. The consolidated financial statements
include the accounts of Golden American and its wholly owned subsidiary, First
Golden.
4
RESULTS OF OPERATIONS
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PREMIUMS
Percentage Dollar
Year Ended December 31 2001 Change Change 2000
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(DOLLARS IN MILLIONS)
Variable annuity premiums:
Separate account........................................ $621.5 (52.5)% $(685.8) $1,307.3
Fixed account........................................... 1,898.1 139.3 1,105.0 793.1
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Total variable annuity premiums............................ 2,519.6 20.0 419.2 2,100.4
Fixed annuity premiums..................................... 3.1 -- 3.1 --
Variable life premiums..................................... 1.5 (6.3) (0.1) 1.6
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Total premiums............................................. $2,524.2 20.1% $422.2 $2,102.0
================================================================
For the Companies' variable and fixed insurance contracts, premiums collected
are not reported as revenues, but as deposits to insurance liabilities. Revenues
for these products are recognized over time in the form of investment spread and
product charges.
Variable annuity premiums net of reinsurance increased 20.0% in 2001. This
increase is primarily due to sales of the Guarantee product, a registered fixed
account product introduced in the last quarter of 2000. Sales for this product
totaled $962.2 million and $139.1 million in 2001 and 2000, respectively. Also
contributing to the increase in variable annuity premiums were sales of new
variable annuity products, including GoldenSelect Landmark, SmartDesign
Advantage, SmartDesign Variable Annuity, and Retirement Solutions-ING Rollover
Choice. Offsetting these increases are higher ceded variable annuity separate
account premiums from $1.8 billion in 2000 to $1.9 billion in 2001. Further,
there was a reduction of $587.4 million in the sales of variable annuity
separate account products in 2001.
During 2001, First Golden began selling two fixed annuity products, Flex Annuity
and Multi-Year Guarantee Annuity ("MYGA").
Premiums, net of reinsurance, for variable products from two significant
broker/dealers having at least ten percent of total sales for the year ended
December 31, 2001 totaled $538.1 million (21% of total premiums), compared to
$235.3 million (11%) from a significant broker/dealer for the year ended
December 31, 2000. Gross premiums for variable products from two significant
broker/dealers (having at least ten percent of total sales) for the year ended
December 31, 2001, totaled $985.7 million (22%) of total gross premiums compared
to $831.0 million (21%), from two significant broker/dealers for the year ended
December 31, 2000.
REVENUES
Percentage Dollar
Year Ended December 31 2001 Change Change 2000
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(DOLLARS IN MILLIONS)
Annuity and interest sensitive life product charges........ $163.8 13.0% $18.9 $144.9
Management fee revenue..................................... 25.1 9.1 2.1 23.0
Net investment income...................................... 94.4 47.3 30.3 64.1
Realized losses on investments............................. (6.5) 1.5 0.1 (6.6)
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$276.8 22.8% $51.4 $225.4
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Total revenues increased 22.8%, or $51.4 million, to $276.8 million in 2001.
Annuity and interest sensitive life product charges increased 13.0%, or $18.9
million, to $163.8 million in 2001, primarily due to additional fees earned from
the higher average level of assets in the variable separate accounts.
Golden American provides certain managerial and supervisory services to Directed
Services, Inc. ("DSI"), a wholly owned subsidiary of EIC. The fee paid to Golden
American for these services, which is calculated as a percentage of average
5
assets in the variable separate accounts, was $23.1 million for 2001 and $21.3
million for 2000. This increase was due to the increasing average assets in the
variable separate accounts.
Net investment income increased 47.3%, or $30.3 million, to $94.4 million in
2001 from $64.1 million in 2000. This was due to a growth during 2001 in
invested assets backing the fixed account options within the variable products.
This increase is mainly related to the introduction of the Guarantee product at
the end of 2000.
During 2001, the Companies had net realized losses on investments of $6.5
million, mainly due to write downs of $4.4 million from eleven impaired fixed
maturities, as well as sales of equity securities. In 2000, the Companies had
net realized losses on investments of $6.6 million, including a $142,000 write
down of an impaired fixed maturity.
EXPENSES
Percentage Dollar
Year Ended December 31 2001 Change Change 2000
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(DOLLARS IN MILLIONS)
Insurance benefits and expenses:
Annuity and interest sensitive life benefits:
Interest credited to account balances................ $191.9 4.9% $8.9 $183.0
Guaranteed benefits reserve change................... 14.0 15.7 1.9 12.1
Benefit claims incurred in excess of account
balances............................................ 3.2 (34.7) (1.7) 4.9
Underwriting, acquisition, and insurance expenses:
Commissions.......................................... 232.4 8.8 18.7 213.7
General expenses..................................... 113.2 33.3 28.3 84.9
Insurance taxes, state licenses, and fees............ 6.6 46.7 2.1 4.5
Policy acquisition costs deferred.................... (128.2) 23.9 40.2 (168.4)
Amortization:
Deferred policy acquisition costs.................. 45.2 (18.1) (10.0) 55.2
Value of purchased insurance in force.............. 4.4 (8.3) (0.4) 4.8
Goodwill........................................... 4.2 -- -- 4.2
Expenses and charges reimbursed under modified
coinsurance agreements............................. (225.6) 0.1 0.2 (225.8)
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$261.3 51.0% $88.2 $173.1
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Total insurance benefits and expenses increased 51.0%, or $88.2 million, in 2001
from $173.1 million in 2000. Interest credited to account balances increased
4.9%, or $8.9 million, in 2001 from $183.0 million in 2000. This increase was
largely due to higher average account balances associated with the Companies'
fixed account options, mainly due to the introduction of the Guarantee product
in the fourth quarter of 2000. This was partially offset by lower premium
credits on the Premium Plus product within the variable separate accounts. The
premium credit payments decreased by $36.2 million due to a decrease in variable
annuity sales of the separate account product.
The guaranteed benefits reserve change was $14.0 million at December 31, 2001,
an increase of $1.9 million, mainly due to the downturn in the equity markets.
Commissions increased 8.8%, or $18.7 million, in 2001 from $213.7 million in
2000 due to increased sales of the fixed account options in 2001. Insurance
taxes, state licenses, and fees increased 46.7%, or $2.1 million, in 2001 from
$4.5 million in 2000. Changes in commissions and insurance taxes, state
licenses, and fees are generally related to changes in the level and mix or
composition of fixed and variable product sales. Most costs incurred as the
result of sales have been deferred, having little impact on current earnings.
General expenses increased 33.3%, or $28.3 million, in 2001 from $84.9 million
in 2000. The Companies use a network of wholesalers to distribute products, and
the salaries and sales bonuses of these wholesalers are included in general
expenses. The portion of these salaries and related expenses that varies
directly with production levels is deferred, thus having little impact on
6
current earnings. Contributing to the increase in general expenses are
additional salary expenses and cost allocations during 2001. The increase in
general expenses was partially offset by reimbursements received from the
Companies' affiliates including DSI, Equitable Life, ING Mutual Funds Management
Co., LLC, Security Life of Denver Insurance Company, Southland Life Insurance
Company, and United Life & Annuity Insurance Company, for certain advisory,
computer, and other resources and services provided by the Companies.
The Companies' previous balances of deferred policy acquisition costs ("DPAC"),
value of purchased insurance in force ("VPIF"), and unearned revenue reserve
were eliminated and a new asset of $44.3 million representing VPIF was
established for all policies in force at the Merger Date. During 2001 and 2000,
VPIF was adjusted to increase amortization by $648,000 and $1.6 million,
respectively, to reflect changes in the assumptions related to the timing of
estimated gross profits. Based on current conditions and assumptions as to the
impact of future events on acquired policies in force, the expected approximate
net amortization relating to VPIF as of December 31, 2001 is $3.1 million in
2002, $2.8 million in 2003, $2.4 million in 2004, $1.9 million in 2005, and $1.4
million in 2006. Actual amortization may vary based upon changes in assumptions
and experience.
Policy acquisition costs deferred decreased $40.2 million, or 23.9%, in 2001.
The decline in the policy acquisition costs deferred was mainly due to an
increase in the amount of deferred costs that have been offset due to modified
coinsurance agreements. Further, there was a lower deferral of the premium
credit on the Premium Plus product, slightly offset by an increase in deferred
commissions. Amortization DPAC decreased $10.0 million, or 18.1%, in 2001. The
decrease in the amortization was mainly due to the lower net amount of deferred
costs.
Expenses and charges reimbursed under modified coinsurance agreements decreased
from $225.8 million for the year ended December 31, 2000 to $225.6 million for
the year ended December 31, 2001. This reimbursement is primarily due to a
modified coinsurance agreement which was entered into during the second quarter
of 2000, with Equitable Life covering a considerable portion of Golden
American's variable annuities issued after January 1, 2000, excluding those with
an interest rate guarantee. Under this reinsurance agreement, $224.5 million and
$218.8 in expenses and charges were reimbursed during 2001 and 2000,
respectively. This reimbursement offset deferred policy acquisition costs and
non-deferrable costs related to policies reinsured under this agreement.
Interest expense decreased 3.1%, or $0.6 million, in 2001 from $19.9 million in
2000. Interest expense on a $25 million surplus note issued December 1996 and
expiring December 2026 was $2.1 million for the year ended December 31, 2001,
unchanged from the same period of 2000. Interest expense on a $60 million
surplus note issued in December 1998 and expiring December 2028 was $4.4 million
for the year ended December 31, 2001, unchanged from the year ended December 31,
2000. Interest expense on a $75 million surplus note, issued September 30, 1999
and expiring September 29, 2029 was $5.8 million for the year ended December 31,
2001, unchanged from the year ended December 31, 2000. Interest expense on a $50
million surplus note, issued December 1999 and expiring December 2029 was $4.1
million for the year ended December 31, 2001, unchanged from the year ended
December 31, 2000. Interest expense on a $35 million surplus note issued
December 1999 and expiring December 2029 was $2.8 million for the year ended
December 31, 2001, and $3.0 million for the year ended December 31, 2000. Golden
American also paid $26,000 in 2001 and $482,000 in 2000 to ING America Insurance
Holdings, Inc. ("ING AIH") for interest on a reciprocal loan agreement. Interest
expense on a revolving note payable with SunTrust Bank, Atlanta was $119,000 and
$87,000 for the years ended December 31, 2001 and 2000, respectively.
INCOME
Net loss for 2001 was $4.0 million, a decrease from net income of $19.2 million
for 2000. Comprehensive income for 2001 was $3.9 million, a decrease of $20.4
million from comprehensive income of $24.3 million for 2000.
The net loss for Golden American as determined in accordance with statutory
accounting practices was $156.4 million in 2001, $71.1 million in 2000, and
$85.6 million in 1999. The increase in statutory loss during 2001 was mainly due
to increases in expense allocations, acquisition costs, guaranteed death and
living benefit reserves, and initial reserves resulting from higher premiums
during 2001 as compared to 2000.
7
FINANCIAL CONDITION
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RATINGS
Currently, the Companies' ratings are A+ by A. M. Best Company, AA+ by Fitch
Ratings, and AA+ by Standard & Poor's Rating Services ("Standard & Poor's").
INVESTMENTS
The financial statement carrying value and amortized cost basis of the
Companies' total investments increased 143.3% and 139.9%, respectively, in 2001.
All of the Companies' investments, other than mortgage loans on real estate, are
carried at fair value in the Companies' financial statements. The increase in
the carrying value of the Companies' investment portfolio was mainly due to net
purchases, as well as changes in unrealized appreciation and depreciation of
fixed maturities. Growth in the cost basis of the Companies' investment
portfolio resulted from the investment of premiums from the sale of the
Companies' fixed account options mainly due to the introduction of the Guarantee
product. The Companies manage the growth of insurance operations in order to
maintain adequate capital ratios. To support the fixed account options of the
Companies' insurance products, cash flow was invested primarily in fixed
maturities and mortgage loans on real estate.
At December 31, 2001, the Companies had 18 investments in default. The
Companies' investments had an average yield of 6.3% at December 31, 2001. The
Companies estimate the total investment portfolio, excluding policy loans, had a
fair value approximately equal to 100.8% of amortized cost value at December 31,
2001.
FIXED MATURITIES: At December 31, 2001, the Companies had fixed maturities with
an amortized cost and an estimated fair value of $2.0 billion. The Companies
classify 100% of securities as available for sale. Net unrealized appreciation
of fixed maturities of $12.4 million was comprised of gross appreciation of
$30.0 million and gross depreciation of $17.6 million. Net unrealized holding
gains on these securities of $3.8 million were included in stockholder's equity
at December 31, 2001 (net of adjustments for VPIF of $0.5 million, DPAC of $6.0
million, and deferred income taxes of $2.1 million).
The individual securities in the Companies' fixed maturities portfolio (at
amortized cost) include investment grade securities, which include securities
issued by the U.S. government, its agencies, and corporations that are rated at
least A- by Standard & Poor's ($1.0 billion or 52.0%), that are rated BBB+ to
BBB- by Standard & Poor's ($446.8 million or 22.5%), and below investment grade
securities, which are securities issued by corporations that are rated BB+ and
lower by Standard & Poor's ($101.1 million or 5.1%). Securities not rated by
Standard & Poor's had a National Association of Insurance Commissioners ("NAIC")
rating of 1, 2, 3, 4, or 5, with 1 being the highest rating (totaling $403.5
million or 20.4%), and investments with a rating of 6 on which impairment
writedowns have been recognized ($0.3 million or 0.0%). The Companies' fixed
maturity investment portfolio had a combined yield at amortized cost of 6.5% on
December 31, 2001.
Fixed maturities rated BBB+ to BBB- may have speculative characteristics and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity of the issuer to make principal and interest payments than
is the case with higher rated fixed maturities.
At December 31, 2001, the amortized cost value of the Companies' total
investment in below investment grade securities, excluding mortgage-backed
securities, was $82.8 million, or 3.6%, of the Companies' investment portfolio.
The Companies intend to purchase additional below investment grade securities,
but do not expect the percentage of the portfolio invested in such securities to
exceed 10% of the investment portfolio. At December 31, 2001, the average yield
at amortized cost on the Companies' below investment grade portfolio was 8.5%
compared to 6.5% for the Companies' investment grade corporate bond portfolio.
The Companies estimate the fair value of the below investment grade portfolio
was $82.7 million, or 99.9% of amortized cost value, at December 31, 2001.
Below investment grade securities have different characteristics than investment
grade corporate debt securities. Risk of loss upon default by the borrower is
significantly greater with respect to below investment grade securities than
with other corporate debt securities. Below investment grade securities are
generally unsecured and are often subordinated to other creditors of the issuer.
8
Also, issuers of below investment grade securities usually have higher levels of
debt and are more sensitive to adverse economic conditions, such as recession or
increasing interest rates, than are investment grade issuers. The Companies
attempt to reduce the overall risk in the below investment grade portfolio, as
in all investments, through careful credit analysis, strict investment policy
guidelines, and diversification by issuer and/or guarantor and by industry.
The Companies analyze the investment portfolio, including below investment grade
securities, at least quarterly in order to determine if the Companies' ability
to realize the carrying value on any investment has been impaired. For debt and
equity securities, if impairment in value is determined to be other than
temporary (i.e., if it is probable the Companies will be unable to collect all
amounts due according to the contractual terms of the security), the cost basis
of the impaired security is written down to fair value, which becomes the new
cost basis. The amount of the write-down is included in earnings as a realized
loss. Future events may occur, or additional or updated information may be
received, which may necessitate future write-downs of securities in the
Companies' portfolio. Significant write-downs in the carrying value of
investments could materially adversely affect the Companies' net income in
future periods.
In 2001, fixed maturities designated as available for sale with a combined
amortized cost of $881.1 million were sold, called, or repaid by their issuers.
In total, net pre-tax losses from sales, calls, and repayments of fixed
maturities amounted to $0.5 million in 2001.
In 2001, Golden American determined that the carrying value of eleven impaired
fixed maturity investments exceeded their estimated net realizable value. As a
result, during 2001, Golden American recognized a total pre-tax loss of
approximately $4.4 million to reduce the carrying value of all impaired fixed
maturity investments to their net realizable value of $5.5 million.
EQUITY SECURITIES: Equity securities with a cost of $8.6 million were redeemed
during 2001, resulting in a realized loss of $1.6 million. At December 31, 2001,
the Companies owned equity securities with a cost of $74,000.
MORTGAGE LOANS ON REAL ESTATE: Mortgage loans on real estate represent 9.6% of
the Companies' investment portfolio. Mortgages outstanding at amortized cost
were $213.9 million at December 31, 2001 with an estimated fair value of $219.2
million. The Companies' mortgage loan portfolio includes 79 loans with an
average size of $2.7 million. The Companies' mortgage loans on real estate are
typically secured by occupied buildings in major metropolitan locations and are
diversified by type of property and geographic location. Mortgage loans on real
estate have been analyzed by geographical location with concentrations by state
identified as Ohio (20% in 2001 and 4% in 2000) and California (18% in 2001 and
15% in 2000). There are no other concentrations of mortgage loans on real estate
in any state exceeding ten percent of the Companies' mortgage loans investment
at December 31, 2001 and 2000. Mortgage loans on real estate have also been
analyzed by collateral type with significant concentrations identified in
multi-family apartments (36% in 2001 and 10% in 2000), industrial buildings (19%
in 2001, 35% in 2000), retail facilities (20% in 2001, 18% in 2000), and office
buildings (21% in 2001, 29% in 2000). At December 31, 2001, the average yield on
the Companies' mortgage loan portfolio was 7.1%.
At December 31, 2001, no mortgage loan on real estate was delinquent by 90 days
or more. The Companies' loan investment strategy is consistent with other life
insurance subsidiaries of ING in the United States. The Companies have
experienced a historically low default rate in their mortgage loan portfolios.
OTHER ASSETS
Reinsurance recoverables increased $22.0 million during 2001, due largely to an
increase of $14.2 million in reinsurance reserves from an intercompany
reinsurance agreement between Golden American and Security Life of Denver
International, Ltd.. On December 28, 2000, effective January 1, 2000, Golden
American entered into a reinsurance agreement with Security Life of Denver
International, Ltd., an affiliate, covering variable annuity minimum guaranteed
death benefits and minimum guaranteed living benefits. Negative equity market
returns during 2001 led to the increase in the reinsurance reserves under this
agreement.
9
Amounts due from affiliates were $20,000 and $38.8 million at December 31, 2001
and 2000, respectively. At December 31, 2000, the Companies had a receivable of
$35.0 million related to a capital contribution from EIC, which was settled
during 2001.
Accrued investment income increased $13.2 million during 2001, due to an
increase in investments in fixed maturities in 2001, which lead to an increase
in investment income from fixed maturities.
DPAC represents certain deferred costs of acquiring insurance business,
principally first year commissions and interest bonuses, premium credits, and
other expenses related to the production of business after the Merger Date. The
Companies' previous balances of DPAC and VPIF were eliminated as of the Merger
Date, and an asset representing VPIF was established for all policies in force
at the Merger Date. VPIF is amortized into income in proportion to the expected
gross profits of in force acquired business in a manner similar to DPAC
amortization. Any expenses which vary directly with the sales of the Companies'
products are deferred and amortized. At December 31, 2001, the Companies had
DPAC and VPIF balances of $709.0 million and $20.2 million, respectively, as
compared to DPAC and VPIF balances of $635.1 million and $25.9 million,
respectively, at December 31, 2000. During 2001 and 2000, the amount of policy
acquisition costs deferred was reduced due to the effects of expenses reimbursed
under the modified coinsurance agreements. See Liquidity and Capital Resources
for further information regarding the modified coinsurance agreements.
Goodwill totaling $169.0 million, representing the excess of the acquisition
cost over the fair value of net assets acquired, was established at the Merger
Date. Accumulated amortization of goodwill as of December 31, 2001 was $17.6
million.
Other assets decreased $19.2 million during 2001, due mainly to a decrease in
the receivable for securities sold.
At December 31, 2001, the Companies had $11.0 billion of separate account assets
compared to $9.8 billion at December 31, 2000. The increase in separate account
assets resulted from sales of the Companies' variable annuity products, net of
redemptions, and from net policyholder transfers to the separate account options
from the fixed account options within the variable products. The increase was
partially offset by negative equity market returns.
At December 31, 2001, the Companies had total assets of $14.4 billion, a 21.2%
increase from December 31, 2000.
LIABILITIES
Future policy benefits for annuity and interest sensitive life products
increased $1.1 billion (104.3%), to $2.2 billion reflecting net sales of the
Companies' fixed account options, net of transfers to the separate account.
Separate account liabilities increased $1.2 billion (11.5%) to $11.0 billion at
December 31, 2001. Net contributions to the separate account were partially
offset by a decrease in separate account liabilities resulting from negative
equity market returns.
On December 30, 1999, Golden American issued a $50 million, 8.179% surplus note
to Equitable Life, which matures on December 29, 2029.
On December 8, 1999, Golden American issued a $35 million, 7.979% surplus note
to First Columbine Life Insurance Company, an affiliate, which matures on
December 7, 2029.
On September 30, 1999, Golden American issued a $75 million, 7.75% surplus note
to ING AIH, which matures on September 29, 2029. On December 30, 1999, ING AIH
assigned the surplus note to Equitable Life.
On December 30, 1998, Golden American issued a $60 million, 7.25% surplus note
to Equitable Life, which matures on December 29, 2028.
On December 17, 1996, Golden American issued a $25 million, 8.25% surplus note
to Equitable, which matures on December 17, 2026. As a result of the merger of
Equitable into EIC, the surplus note is now payable to EIC.
10
Amounts due to affiliates increased by $5.2 million from $19.9 million at
December 31, 2000 to $25.1 million at December 31, 2001. This is mainly due to
an overpayment by Equitable Life to Golden American of the cash settlement of a
liability for the modified coinsurance agreement.
Other liabilities increased $55.9 million from $69.4 million at December 31,
2000 to $125.3 at December 31, 2001, due primarily to the increase in amounts
payable for securities purchased. Also contributing to this increase is the
timing of the settlement of account transfers and an increase in outstanding
checks.
In conjunction with the volume of variable annuity sales, the Companies' total
liabilities increased $2.3 billion, or 20.5%, during 2001 and totaled $13.6
billion at December 31, 2001.
The effects of inflation and changing prices on the Companies' financial
position are not material since insurance assets and liabilities are both
primarily monetary and remain in balance. An effect of inflation, which has been
low in recent years, is a decline in stockholder's equity when monetary assets
exceed monetary liabilities.
STOCKHOLDER'S EQUITY
Additional paid-in capital increased $196.8 million, or 33.7%, from December 31,
2000 to $780.4 million at December 31, 2001, due to capital contributions from
EIC.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Liquidity is the ability of the Companies to generate sufficient cash flows to
meet the cash requirements of operating, investing, and financing activities.
The Companies' principal sources of cash are variable annuity premiums and
product charges, investment income, maturing investments, proceeds from debt
issuance, and capital contributions. Primary uses of these funds are payments of
commissions and operating expenses, interest and premium credits, investment
purchases, repayment of debt, as well as withdrawals and surrenders.
Net cash provided by operating activities was $239.9 million in 2001 compared to
net cash provided by operating activities of $72.7 million in 2000. The
Companies have predominantly had negative cash flows from operating activities
since Golden American started issuing variable insurance products in 1989. These
negative operating cash flows result primarily from the funding of commissions
and other deferrable expenses related to the continued growth in the sales of
variable annuity products. For 2001 and 2000, negative operating cash flows have
been offset by the effects of a modified coinsurance agreement entered into
during the second quarter of 2000 with Equitable Life. This resulted in a net
cash settlement of $224.5 million during 2001. For 2000, this modified
coinsurance resulted in a net cash settlement of $218.8 million. A further
source of cash provided from operating activities is the decrease in other
assets and receivables from affiliates, together with an increase in other
liabilities and payables to affiliates.
Net cash used in investing activities was $1.3 billion during 2001 as compared
to net cash provided by investing activities of $49.3 million in 2000. This
increase in the net cash used in investing activities is primarily due to net
purchases of fixed maturities and mortgage loans on real estate during 2001
versus net sales for these types of investments in 2000. Net purchases of fixed
maturities reached $1.2 billion in 2001 versus net sales of $51.1 million in
2000. Net purchases of mortgage loans on real estate reached $114.3 million in
2001 versus net purchases of $0.2 million during the same period in 2000. These
investment purchases were mainly due to an increase in sales of the Companies'
fixed account options, primarily from the introduction of the Guarantee product
in the fourth quarter of 2000.
Net cash provided by financing activities was $1.1 billion during 2001 as
compared to net cash used in financing activities of $51.9 million during the
prior year. In 2001, net cash provided by financing activities was positively
impacted by net fixed account deposits of $1.8 billion compared to $660.4
million in 2000 primarily due to the introduction of the Guarantee product in
the fourth quarter of 2000. In 2001, net cash provided by financing activities
was also positively impacted by an increase in capital contributions from EIC.
11
The Companies received $196.8 million in capital contributions from EIC in 2001
compared to $115.0 million in 2000. Offsetting these increases, during 2001,
were net reallocations to the Companies' separate accounts, which increased to
$902.9 million from $825.9 million during the prior year.
The Companies' liquidity position is managed by maintaining adequate levels of
liquid assets, such as cash or cash equivalents and short-term investments.
Additional sources of liquidity include borrowing facilities to meet short-term
cash requirements. Golden American maintains a $65.0 million reciprocal loan
agreement with ING America Insurance Holdings, Inc. ("ING AIH"), and the
Companies have established an $85.0 million revolving note facility with
SunTrust Bank. This revolving note payable was amended and restated in April
2001 with an expiration date of May 31, 2002. Management believes that these
sources of liquidity are adequate to meet the Companies' short-term cash
obligations.
Based on current trends, the Companies expect to continue to use net cash in
operating activities, given the continued growth of annuity sales. It is
anticipated that a continuation of capital contributions from its Parent, the
issuance of additional surplus notes, and/or the use of modified coinsurance
agreements will cover these net cash outflows. ING AIH is committed to the
sustained growth of Golden American. During 2002, ING AIH will maintain Golden
American's statutory capital and surplus at the end of each quarter at a level
such that: 1) the ratio of Total Adjusted Capital divided by Company Action
Level Risk Based Capital exceeds 300%; 2) the ratio of Total Adjusted Capital
(excluding surplus notes) divided by Company Action Level Risk Based Capital
exceeds 200%; and 3) Golden American's statutory capital and surplus exceeds the
"Amounts Accrued for Expense Allowances Recognized in Reserves" as disclosed on
page 3, Line 13 of Golden American's statutory statement.
During 2000 and 2001, Golden American occupied 125,000 square feet of leased
space in West Chester, Pennsylvania. From January 1, 2001 to September 30, 2001,
First Golden's principal office was located in New York, New York, where certain
of the Company's records were maintained. As of October 1, 2001, First Golden's
principal office moved to Woodbury, New York.
The ability of Golden American to pay dividends to the Parent is restricted.
Prior approval of insurance regulatory authorities is required for payment of
dividends to the stockholder which exceed an annual limit. During 2002, Golden
American cannot pay dividends to Equitable Life without prior approval of
statutory authorities. Golden American did not pay common stock dividends during
2001, 2000, or 1999.
Under the provisions of the insurance laws of the State of New York, First
Golden cannot distribute any dividends to its stockholder, Golden American,
unless a notice of its intent to declare a dividend and the amount of the
dividend has been filed with the New York Insurance Department at least thirty
days in advance of the proposed declaration. If the Superintendent of the New
York Insurance Department finds the financial condition of First Golden does not
warrant the distribution, the Superintendent may disapprove the distribution by
giving written notice to First Golden within thirty days after the filing. The
management of First Golden does not anticipate paying dividends to Golden
American during 2002. First Golden did not pay common stock dividends during
2001, 2000, or 1999.
The NAIC's risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula. These
requirements are intended to allow insurance regulators to monitor the
capitalization of insurance companies based upon the type and mixture of risks
inherent in a company's operations. The formula includes components for asset
risk, liability risk, interest rate exposure, and other factors. The Companies
have complied with the NAIC's risk-based capital reporting requirements. Amounts
reported indicate that the Companies have total adjusted capital well above all
required capital levels.
REINSURANCE: At December 31, 2001, Golden American had reinsurance treaties with
five unaffiliated reinsurers and three affiliated reinsurers covering a
significant portion of the mortality risks and guaranteed death and living
benefits under its variable contracts. Golden American remains liable to the
extent its reinsurers do not meet their obligations under the reinsurance
agreements.
On June 30, 2000, effective January 1, 2000, Golden American entered into a
modified coinsurance agreement with Equitable Life covering a considerable
portion of Golden American's variable annuities issued after January 1, 2000,
excluding those with an interest rate guarantee.
12
On December 28, 2000, Golden American entered into a reinsurance agreement with
Security Life of Denver International, Ltd., an affiliate, covering variable
annuity minimum guaranteed death benefits and minimum guaranteed living benefits
of variable annuities issued after January 1, 2000. Golden American also
obtained an irrevocable letter of credit was obtained through Bank of New York
in the amount of $25 million related to this agreement. Effective December 24,
2001, the letter of credit amount was revised to $70 million.
On December 29, 2000, First Golden entered into a reinsurance treaty with London
Life Reinsurance Company of Pennsylvania, an unaffiliated reinsurer, covering
the minimum guaranteed death benefits of First Golden's variable annuities
issued on or after January 1, 2000.
MARKET RISK AND RISK MANAGEMENT
- -------------------------------
Asset/liability management is integrated into many aspects of the Companies'
operations, including investment decisions, product development, and crediting
rates determination. As part of the risk management process, different economic
scenarios are modeled, including cash flow testing required for insurance
regulatory purposes, to determine that existing assets are adequate to meet
projected liability cash flows. Key variables in the modeling process include
anticipated contractholder behavior, and variable separate account performance.
Contractholders bear the majority of the investment risks related to variable
insurance products. The Companies' products also provide certain minimum death
and guaranteed living benefits; the Companies' liabilities related to these
benefits which depend in part on the performance of the variable separate
accounts. Currently, the majority of death and living benefit risks are
reinsured, which protects the Companies from adverse mortality experience and
prolonged capital market decline.
A surrender, partial withdrawal, transfer, or annuitization made prior to the
end of a guarantee period under a fixed account or product may be subject to a
market value adjustment. As the majority of the liabilities in the fixed account
are subject to market value adjustment, the Companies do not face a material
amount of market risk volatility. The fixed account liabilities are supported by
a portfolio principally composed of fixed rate investments that can generate
predictable, steady rates of return. The portfolio management strategy for the
fixed account considers the assets available for sale. This enables the
Companies to respond to changes in market interest rates, changes in prepayment
risk, changes in relative values of asset sectors and individual securities and
loans, changes in credit quality outlook, and other relevant factors. The
objective of portfolio management is to maximize returns, taking into account
interest rate and credit risk, as well as other risks. The Companies'
asset/liability management discipline includes strategies to minimize exposure
to loss as interest rates and economic and market conditions change.
On the basis of these analyses, management believes there is currently no
material solvency risk to the Companies. With respect to a 10% drop in equity
values from year end 2001 levels, variable separate account funds, which
represent 84% of the Companies' in force business, pass the risk in underlying
fund performance to the contractholder (except for certain minimum benefits
guarantees, described above). With respect to interest rate movements up or down
100 basis points from year end 2001 levels, the remaining 16% of the in force
are fixed account funds, and almost all of these have market value adjustments
which provide significant protection to the Companies against changes in
interest rates.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
GENERAL
We have identified the accounting policies below as critical to our business
operations and understanding of our results of operations. For a detailed
discussion of the application of these and other accounting policies, see Note 1
in the Notes to Consolidated Financial Statements. Note that the application of
these accounting policies in the preparation of this report requires management
to use judgments involving assumptions and estimates concerning future results
or other developments including the likelihood, timing or amount of one or more
future transactions or events. There can be no assurance that actual results
will not differ from those estimates. These judgments are reviewed frequently by
13
senior management, and an understanding of them may enhance the reader's
understanding of the Company's financial statements and Management's Discussion
and Analysis.
AMORTIZATION OF DEFERRED ACQUISITION COSTS AND VALUE OF PURCHASED INSURANCE IN
FORCE
We amortize our deferred policy acquisition costs and value of purchased
insurance in force on our annuity contracts in proportion to estimated gross
profits. The amortization is adjusted to reflect actual gross profits over the
life of the contracts (up to 30 years for annuity contracts). Our estimated
gross profits are computed based on assumptions related to the underlying
contracts including, but not limited to, charges assessed against policyholders,
margins, lapse, persistency, expenses and asset growth rates.
Our current estimated gross profits include certain judgments concerning charges
assessed against policyholders, margins, lapse, persistency, expenses and asset
growth that are based on a combination of actual company experience and
historical market experience of equity and fixed income returns. Estimated gross
profits are adjusted periodically to take into account the actual experience to
date and changes in assumptions as regards the future. Short-term variances of
actual results from the judgments made by management can impact quarter to
quarter earnings.
INCOME TAXES
The Companies establish reserves for possible proposed adjustments by various
taxing authorities. Management believes there are sufficient reserves provided
for, or adequate defenses against any such adjustments.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
- ---------------------------------------------------------
Any forward-looking statement contained herein or in any other oral or written
statement by the Companies or any of their officers, directors, or employees is
qualified by the fact that actual results of the Companies may differ materially
from such statement, among other risks and uncertainties inherent in the
Companies' business, due to the following important factors:
1. Prevailing interest rate levels and equity performance, which may affect
the ability of the Companies to sell their products, the market value and
liquidity of the Companies' investments, fee revenue, and the lapse rate of
the Companies' products, notwithstanding product design features intended
to enhance persistency of the Companies' products.
2. Changes in the federal income tax laws and regulations, which benefit the
tax treatment of investments that compete with annuity products for
retirement savings may adversely affect the tax treatment of the Companies'
products and benefits thereunder.
3. Changes in the regulation of financial services, including potential
federal regulation of insurance, bank sales, and underwriting of insurance
products, which may affect the competitive environment for the Companies'
products.
4. Increasing competition from other market participants for the sale of
annuity products.
5. Other factors that could affect the performance of the Companies,
including, but not limited to, market conduct claims against the Companies
and/or firms selling the Companies' product, litigation, insurance industry
insolvencies, availability of competitive reinsurance on new business,
investment performance of the underlying portfolios of the variable
products, variable product design, and sales volume by significant sellers
of the Companies' variable products.
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.
14
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, 2001 and 2000, and the related
consolidated statements of operations, changes in stockholder's equity, and cash
flows for each of the three years in the period ended December 31, 2001. 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, 2001 and 2000, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States. 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
Atlanta, Georgia
March 15, 2002
15
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
December 31, 2001 December 31, 2000
-----------------------------------------------
ASSETS
Investments:
Fixed maturities, available for sale, at fair value
(cost: 2001 - $1,982,527; 2000 - $798,751)............................. $1,994,913 $792,578
Equity securities, at fair value (cost: 2001 - $74; 2000 - $8,611)....... 55 6,791
Mortgage loans on real estate............................................ 213,883 99,916
Policy loans............................................................. 14,847 13,323
Short-term investments................................................... 10,021 5,300
-----------------------------------------------
Total investments........................................................... 2,233,719 917,908
Cash and cash equivalents................................................... 195,726 164,682
Reinsurance recoverable..................................................... 27,151 19,331
Reinsurance recoverable from affiliates .................................... 28,800 14,642
Due from affiliates......................................................... 20 38,786
Accrued investment income................................................... 22,771 9,606
Deferred policy acquisition costs........................................... 709,042 635,147
Value of purchased insurance in force....................................... 20,203 25,942
Current income taxes recoverable............................................ 400 511
Property and equipment, less allowances for depreciation
of $10,624 in 2001 and $5,638 in 2000.................................... 10,468 14,404
Goodwill, less accumulated amortization of $17,600 in 2001
and $13,376 in 2000...................................................... 151,363 155,587
Other assets................................................................ 12,788 32,019
Separate account assets..................................................... 10,958,191 9,831,489
-----------------------------------------------
Total assets................................................................ $14,370,642 $11,860,054
===============================================
SEE ACCOMPANYING NOTES.
16
CONSOLIDATED BALANCE SHEETS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
December 31, 2001 December 31, 2000
------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Policy liabilities and accruals:
Future policy benefits:
Annuity and interest sensitive life products......................... $2,178,189 $1,062,891
Unearned revenue reserve............................................. 6,241 6,817
Other policy claims and benefits........................................ 836 82
------------------------------------------------
2,185,266 1,069,790
Surplus notes............................................................. 245,000 245,000
Revolving note payable.................................................... 1,400 --
Due to affiliates......................................................... 25,080 19,887
Deferred income tax liability............................................. 12,612 7,377
Other liabilities......................................................... 125,264 69,374
Separate account liabilities.............................................. 10,958,191 9,831,489
------------------------------------------------
13,552,813 11,242,917
Commitments and contingencies
Stockholder's equity:
Preferred Stock, par value $5,000 per share, authorized
50,000 shares........................................................ -- --
Common stock, par value $10 per share, authorized,
issued, and outstanding 250,000 shares............................... 2,500 2,500
Additional paid-in capital.............................................. 780,436 583,640
Accumulated other comprehensive gain (loss)............................. 3,804 (4,046)
Retained earnings....................................................... 31,089 35,043
------------------------------------------------
Total stockholder's equity................................................ 817,829 617,137
------------------------------------------------
Total liabilities and stockholder's equity................................ $14,370,642 $11,860,054
================================================
SEE ACCOMPANYING NOTES.
17
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
Year Ended December 31 2001 2000 1999
---------------------------------------------------------
Revenues:
Annuity and interest sensitive life product charges........ $163,805 $144,877 $82,935
Management fee revenue..................................... 25,079 22,982 11,133
Net investment income...................................... 94,396 64,140 59,169
Realized losses on investments............................ (6,470) (6,554) (2,923)
---------------------------------------------------------
276,810 225,445 150,314
Insurance benefits and expenses:
Annuity and interest sensitive life benefits:
Interest credited to account balances.................... 191,885 183,003 175,257
Guaranteed benefits reserve change....................... 14,015 12,085 -
Benefit claims incurred in excess of account balances.... 3,182 4,943 6,370
Underwriting, acquisition, and insurance expenses:
Commissions.............................................. 2,686 4,836 6,847
Commissions - affiliates................................. 229,726 208,883 181,536
General expenses......................................... 113,259 84,936 60,205
Insurance taxes, state licenses, and fees................ 6,610 4,528 3,976
Policy acquisition costs deferred........................ (128,249) (168,444) (346,396)
Amortization:
Deferred policy acquisition costs....................... 45,229 55,154 33,119
Value of purchased insurance in force................... 4,403 4,801 6,238
Goodwill................................................ 4,224 4,224 4,224
Expenses and charges reimbursed under modified
coinsurance agreements................................... (1,085) (7,030) (9,247)
Expenses and charges reimbursed under modified
coinsurance agreements - affiliates...................... (224,549) (218,757) --
---------------------------------------------------------
261,336 173,162 122,129
Interest expense.............................................. 19,252 19,867 8,894
---------------------------------------------------------
280,588 193,029 131,023
---------------------------------------------------------
Income (loss) before income taxes............................. (3,778) 32,416 19,291
Income taxes.................................................. 176 13,236 8,077
---------------------------------------------------------
Net income (loss)............................................. $(3,954) $19,180 $11,214
=========================================================
SEE ACCOMPANYING NOTES.
18
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
Accumulated
Additional Other Total
Common Paid-in Comprehensive Retained Stockholder's
Stock Capital Income (Loss) Earnings Equity
-----------------------------------------------------------------------------
Balance at December 31, 1998................... $2,500 $347,640 $(895) $4,649 $353,894
Comprehensive income:
Net income................................ -- -- -- 11,214 11,214
Change in net unrealized investment
losses.................................. -- -- (8,259) -- (8,259)
-----------------
Comprehensive income........................ 2,955
Contribution of capital..................... -- 121,000 -- -- 121,000
-----------------------------------------------------------------------------
Balance at December 31, 1999................... $2,500 $468,640 $(9,154) $15,863 $477,849
Comprehensive income:
Net income................................ -- -- -- 19,180 19,180
Change in net unrealized investment
gains .................................. -- -- 5,108 -- 5,108
-----------------
Comprehensive income........................ 24,288
Contribution of capital..................... -- 115,000 -- -- 115,000
-----------------------------------------------------------------------------
Balance at December 31, 2000................... $2,500 $583,640 $(4,046) $35,043 $617,137
Comprehensive income:
Net loss.................................. -- -- -- (3,954) (3,954)
Change in net unrealized investment
gains .................................. -- -- 7,850 -- 7,850
-----------------
Comprehensive income........................ 3,896
Contribution of capital..................... -- 196,796 -- -- 196,796
-----------------------------------------------------------------------------
Balance at December 31, 2001................... $2,500 $780,436 $3,804 $31,089 $817,829
=============================================================================
SEE ACCOMPANYING NOTES.
19
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Year Ended December 31 2001 2000 1999
---------------------------------------------------
OPERATING ACTIVITIES
Net income (loss)............................................. $(3,954) $19,180 $11,214
Adjustments to reconcile net income to net cash
provided by (used in) operations:
Adjustments related to annuity and
interest sensitive life products:
Interest credited and other charges on
interest sensitive products............................ 191,885 183,003 175,257
Charges for mortality and administration................. (341) (313) 524
Change in unearned revenues.............................. (576) 517 2,460
Increase in policy liabilities and accruals................ 754 74 8
Increase in guaranteed benefits reserve.................... 28,173 26,727 --
Decrease (increase) in accrued investment income........... (13,165) 1,592 (1,553)
Policy acquisition costs deferred.......................... (128,249) (168,444) (346,396)
Amortization of deferred policy acquisition costs.......... 45,229 55,154 33,119
Amortization of value of purchased insurance in force...... 4,403 4,801 6,238
Change in other assets, due to/from affiliates, other
liabilities, and accrued income taxes.................... 108,578 (78,482) 24,845
Provision for depreciation and amortization................ 1,341 9,062 9,296
Provision for deferred income taxes........................ (606) 13,282 8,077
Realized losses on investments............................. 6,470 6,554 2,923
---------------------------------------------------
Net cash provided by (used in) operating activities........... 239,942 72,707 (73,988)
---------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity, or repayment of investments:
Fixed maturities - available for sale...................... 880,688 205,136 220,547
Mortgage loans on real estate.............................. 135,996 12,701 6,572
Equity securities.......................................... 6,956 6,128 --
Policy loans - net......................................... -- 834 --
Short-term investments - net............................... -- -- 980
---------------------------------------------------
1,023,640 224,799 228,099
Acquisition of investments:
Fixed maturities - available for sale...................... (2,070,849) (154,028) (344,587)
Equity securities.......................................... (40) -- --
Mortgage loans on real estate.............................. (250,314) (12,887) (9,659)
Policy loans - net......................................... (1,524) -- (2,385)
Short-term investments - net............................... (4,721) (5,300) --
---------------------------------------------------
(2,327,448) (172,215) (356,631)
Issuance of reciprocal loan agreement receivables............. -- (16,900) --
Receipt of repayment of reciprocal loan agreement
receivables................................................. -- 16,900 --
Net sale (purchase) of property and equipment................. 1,248 (3,285) (8,968)
---------------------------------------------------
Net cash provided by (used in) investing activities........... (1,302,560) 49,299 (137,500)
SEE ACCOMPANYING NOTES.
20
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(DOLLARS IN THOUSANDS)
Year Ended December 31 2001 2000 1999
----------------------------------------------------
FINANCING ACTIVITIES
Proceeds from reciprocal loan agreement
borrowings with affiliates................................ $69,300 $178,900 $396,350
Repayment of reciprocal loan agreement
borrowings with affiliates................................ (69,300) (178,900) (396,350)
Proceeds from revolving note payable......................... 3,078 67,200 220,295
Repayment of revolving note payable.......................... (1,678) (68,600) (218,895)
Proceeds from surplus note with affiliates................... -- -- 160,000
Receipts from annuity and interest
sensitive life policies credited to
account balances.......................................... 1,933,148 801,793 773,685
Return of account balances on annuity
and interest sensitive life policies...................... (134,787) (141,440) (146,607)
Net reallocations to separate accounts....................... (902,895) (825,848) (650,270)
Contributions of capital by EIC.............................. 196,796 115,000 121,000
----------------------------------------------------
Net cash provided by (used in) financing activities.......... 1,093,662 (51,895) 259,208
----------------------------------------------------
Increase in cash and cash equivalents........................ 31,044 70,111 47,720
Cash and cash equivalents at beginning of period............. 164,682 94,571 46,851
----------------------------------------------------
Cash and cash equivalents at end of period................... $195,726 $164,682 $94,571
====================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest.................................................. $14,955 $22,444 $6,392
Income taxes.............................................. -- 957 --
SEE ACCOMPANYING NOTES.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001
1. SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
CONSOLIDATION
The consolidated financial statements include Golden American Life Insurance
Company ("Golden American") and its wholly owned subsidiary, First Golden
American Life Insurance Company of New York ("First Golden," and collectively
with Golden American, the "Companies"). All significant intercompany accounts
and transactions have been eliminated.
ORGANIZATION
Golden American, a wholly owned subsidiary of Equitable Life Insurance Company
of Iowa ("Equitable Life" or the "Parent"), offers variable insurance products
and is licensed as a life insurance company in the District of Columbia and all
states except New York. Equitable Life is a wholly owned subsidiary of Equitable
of Iowa Companies, Inc. ("EIC"). First Golden is licensed to sell insurance
products in New York and Delaware. The Companies' variable and fixed insurance
products are marketed by broker/dealers, financial institutions, and insurance
agents. The Companies' primary customers are consumers and corporations.
On December 3, 2001, the Board of Directors of EIC approved a plan to contribute
its holding of 100% of the stock of its wholly owned subsidiary, Golden American
to another wholly owned subsidiary, Equitable Life. The contribution of stock
occurred on December 31, 2001, following approval granted by the Insurance
Department of the State of Delaware.
On October 24, 1997 ("the merger date"), PFHI Holding, Inc. ("PFHI"), a Delaware
corporation, acquired all of the outstanding capital stock of Equitable of Iowa
Companies ("Equitable") according to the terms of an Agreement and Plan of
Merger ("the merger") dated July 7, 1997 among Equitable, PFHI, and ING Groep
N.V. ("ING"). PFHI is a wholly owned subsidiary of ING, a global financial
services holding company based in The Netherlands. As a result of this
transaction, Equitable was merged into PFHI, which was simultaneously renamed
Equitable of Iowa Companies, Inc., a Delaware corporation.
INVESTMENTS
FIXED MATURITIES: The Companies account for their investments under the
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," which requires fixed
maturities to be designated as either "available for sale," "held for
investment," or "trading." Sales of fixed maturities designated as "available
for sale" are not restricted by SFAS No. 115. Available for sale securities are
reported at fair value and unrealized gains and losses on these securities are
included directly in stockholder's equity, after adjustment for related changes
in value of purchased insurance in force ("VPIF"), deferred policy acquisition
costs ("DPAC"), and deferred income taxes. At December 31, 2001 and 2000, all of
the Companies' fixed maturities are designated as available for sale, although
the Companies are not precluded from designating fixed maturities as held for
investment or trading at some future date.
Securities determined to have a decline in value that is other than temporary
are written down to estimated fair value, which becomes the new cost basis by a
charge to realized losses in the Companies' Statements of Operations. Premiums
and discounts are amortized/accrued utilizing a method which results in a
constant yield over the securities' expected lives. Amortization/accrual of
premiums and discounts on mortgage and other asset-backed securities
incorporates a prepayment assumption to estimate the securities' expected lives.
EQUITY SECURITIES: Equity securities are reported at estimated fair value if
readily marketable. The change in unrealized appreciation and depreciation of
marketable equity securities (net of related deferred income 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.
22
MORTGAGE LOANS ON REAL ESTATE: Mortgage loans on real estate are reported at
cost adjusted for amortization of premiums and accrual of discounts. If the
value of any mortgage loan is determined to be impaired (i.e., when it is
probable the Companies will be unable to collect all amounts due according to
the contractual terms of the loan agreement), the carrying value of the mortgage
loan is reduced to the present value of expected future cash flows from the loan
discounted at the loan's effective interest rate, or to the loan's observable
market price, or the fair value of the underlying collateral. The carrying value
of impaired loans is reduced by the establishment of a valuation allowance,
which is adjusted at each reporting date for significant changes in the
calculated value of the loan. Changes in this valuation allowance are charged or
credited to income.
OTHER INVESTMENTS: Policy loans are reported at unpaid principal. Short-term
investments are reported at cost, adjusted for amortization of premiums and
accrual of discounts.
REALIZED GAINS AND LOSSES: Realized gains and losses are determined on the basis
of specific identification.
FAIR VALUES: Estimated fair values, as reported herein, of conventional
mortgage-backed securities not actively traded in a liquid market are estimated
using a third party pricing process. This pricing process uses a matrix
calculation assuming a spread over U.S. Treasury bonds based upon the expected
average lives of the securities. Estimated fair values of publicly traded fixed
maturities are reported by an independent pricing service. Fair values of
private placement bonds are estimated using a matrix that assumes a spread
(based on interest rates and a risk assessment of the bonds) over U.S. Treasury
bonds. Estimated fair values of equity securities, which consist of the
Companies' investment in its registered separate accounts, are based upon the
quoted fair value of the securities comprising the individual portfolios
underlying the separate accounts.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: The Companies may
from time to time utilize various derivative instruments to manage interest rate
and price risk (collectively, market risk). The Companies have appropriate
controls in place, and financial exposures are monitored and managed by the
Companies as an integral part of their overall risk management program.
Derivatives are recognized on the balance sheet at their fair value.
The change in a derivative's fair value is generally to be recognized in current
period earnings, unless the derivative is specifically designated as a hedge of
an exposure. If certain conditions are met, a derivative may be specifically
designated as a hedge of an exposure to changes in fair value, variability of
cash flows, or certain foreign currency exposures. When designated as a hedge,
the fair value should be recognized currently in earnings or other comprehensive
income, depending on whether such designation is considered a fair value hedge
or a cash flow hedge. With respect to fair value hedges, the fair value of the
derivative, as well as changes in the fair value of the hedged item, are
reported in earnings. For cash flow hedges, changes in the derivatives' fair
value are reported in other comprehensive income and subsequently reclassified
into earnings when the hedged item affects earnings. The ineffective portion of
a derivative's change in fair value will be immediately recognized in earnings.
The Companies occasionally purchase a financial instrument that contains a
derivative that is "embedded" in the instrument. The Companies' insurance
products are also reviewed to determine whether they contain an embedded
derivative. The Companies assess whether the economic characteristics of the
embedded derivative are clearly and closely related to the economic
characteristics of the remaining component of the financial instrument or
insurance product (i.e., the host contract) and whether a separate instrument
with the same terms as the embedded instrument would meet the definition of a
derivative instrument. When it is determined that the embedded derivative
possesses economic characteristics that are not clearly and closely related to
the economic characteristics of the host contract and that a separate instrument
with the same terms would qualify as a derivative instrument, the embedded
derivative is separated from the host contract and carried at fair value. In
cases where the host contract is measured at fair value, with changes in fair
value reported in current period earnings, or the Companies are unable to
reliably identify and measure the embedded derivative for separation from its
host contract, the entire contract is carried on the balance sheet at fair value
and is not designated as a hedging instrument.
23
CASH AND CASH EQUIVALENTS
For purposes of the accompanying Statements of Cash Flows, the Companies
consider all demand deposits and interest-bearing accounts not related to the
investment function to be cash equivalents. All interest-bearing accounts
classified as cash equivalents have original maturities of three months or less.
DEFERRED POLICY ACQUISITION COSTS
Certain costs of acquiring new insurance business, principally first year
commissions and interest bonuses, premium credit, and other expenses related to
the production of new business have been deferred. Other expenses related to the
production of new business that were deferred totaled $28.3 million during 2001,
$16.3 million during 2000, and $29.6 million during 1999. Acquisition costs for
variable insurance products are being amortized generally in proportion to the
present value (using the assumed crediting rate) of expected future gross
profits. This amortization is adjusted retrospectively when the Companies revise
their estimate of current or future gross profits to be realized from a group of
products. DPAC is adjusted to reflect the pro forma impact of unrealized gains
and losses on fixed maturities the Companies have designated as "available for
sale" under SFAS No. 115.
VALUE OF PURCHASED INSURANCE IN FORCE
As a result of the merger, a portion of the purchase price was allocated to the
right to receive future cash flows from existing insurance contracts. This
allocated cost represents VPIF, which reflects the value of those purchased
policies calculated by discounting actuarially determined expected future cash
flows at the discount rate determined by the purchaser. Amortization of VPIF is
charged to expense in proportion to expected gross profits of the underlying
business. This amortization is adjusted retrospectively when the Companies
revise the estimate of current or future gross profits to be realized from the
insurance contracts acquired. VPIF is adjusted to reflect the pro forma impact
of unrealized gains and losses on available for sale fixed maturities.
PROPERTY AND EQUIPMENT
Property and equipment primarily represent leasehold improvements, office
furniture, certain other equipment, and capitalized computer software and are
not considered to be significant to the Companies' overall operations. Property
and equipment are reported at cost less allowances for depreciation.
Depreciation expense is computed primarily on the basis of the straight-line
method over the estimated useful lives of the assets.
GOODWILL
Goodwill was established as a result of the merger and is being amortized over
40 years on a straight-line basis.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets," effective for fiscal years beginning
after December 15, 2001. For additional information, refer to the Pending
Accounting Standards disclosure in Note 1.
FUTURE POLICY BENEFITS
Future policy benefits for divisions of the variable products with fixed
interest guarantees are established utilizing the retrospective deposit
accounting method. Policy reserves represent the premiums received plus
accumulated interest, less mortality and administration charges. Interest
credited to these policies ranged from 3.00% to 12.00% during 2001, 3.00% to
14.00% during 2000 and 3.00% to 11.00% during 1999. The unearned revenue reserve
represents unearned distribution fees. These distribution fees have been
deferred and are amortized over the life of the contracts in proportion to
expected gross profits.
SEPARATE ACCOUNTS
Assets and liabilities of the separate accounts reported in the accompanying
Balance Sheets represent funds separately administered principally for variable
contracts. Contractholders, rather than the Companies, bear the investment risk
for variable products. At the direction of the contractholders, the separate
accounts invest the premiums from the sale of variable products in shares of
specified mutual funds. The assets and liabilities of the separate accounts are
clearly identified and segregated from other assets and liabilities of the
Companies. Under Delaware insurance law, the portion of the separate account
assets equal to the reserves and other liabilities of variable contracts cannot
be charged with liabilities arising out of any other business the Companies may
conduct.
24
Variable separate account assets are carried at fair value of the underlying
investments and generally represent contractholder investment values maintained
in the accounts. Variable separate account liabilities represent account
balances for the variable contracts invested in the separate accounts; the fair
value of these liabilities is equal to their carrying amount. Net investment
income and realized and unrealized capital gains and losses related to separate
account assets are not reflected in the accompanying Statements of Operations.
Product charges recorded by the Companies from variable insurance products
consist of charges applicable to each contract for mortality and expense risk,
cost of insurance, contract administration, and surrender charges. In addition,
some variable annuity and all variable life contracts provide for a distribution
fee collected for a limited number of years after each premium deposit. Revenue
recognition of collected distribution fees is amortized over the life of the
contract in proportion to its expected gross profits. The balance of
unrecognized revenue related to the distribution fees is reported as an unearned
revenue reserve.
DEFERRED INCOME TAXES
Deferred tax assets or liabilities are computed based on the difference between
the financial statement and income tax bases of assets and liabilities using the
enacted marginal tax rate. Deferred tax assets or liabilities are adjusted to
reflect the pro forma impact of unrealized gains and losses on equity securities
and fixed maturities the Companies have designated as available for sale under
SFAS No. 115. Changes in deferred tax assets or liabilities resulting from this
SFAS No. 115 adjustment are charged or credited directly to stockholder's
equity. Deferred income tax expenses or credits reflected in the Companies'
Statements of Operations are based on the changes in the deferred tax asset or
liability from period to period (excluding the SFAS No. 115 adjustment).
DIVIDEND RESTRICTIONS
Golden American's ability to pay dividends to its Parent is restricted. Prior
approval of insurance regulatory authorities is required for payment of
dividends to the stockholder which exceed an annual limit. During 2002, Golden
American cannot pay dividends to its Parent without prior approval of statutory
authorities. Under the provisions of the insurance laws of the State of New
York, First Golden cannot distribute any dividends to its stockholder, Golden
American, unless a notice of its intent to declare a dividend and the amount of
the dividend has been filed with the New York Insurance Department at least
thirty days in advance of the proposed declaration. If the Superintendent of the
New York Insurance Department finds the financial condition of First Golden does
not warrant the distribution, the Superintendent may disapprove the distribution
by giving written notice to First Golden within thirty days after the filing.
SEGMENT REPORTING
The Companies manage their business as one segment, the sale of variable and
fixed insurance products designed to meet customer needs for tax-advantaged
saving for retirement and protection from death. Variable insurance products are
sold to consumers and corporations throughout the United States.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
affecting the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Management is required to utilize historical experience and assumptions about
future events and circumstances in order to develop estimates of material
reported amounts and disclosures. Included among the material (or potentially
material) reported amounts and disclosures that require extensive use of
estimates and assumptions are: (1) estimates of fair values of investments in
securities and other financial instruments, as well as fair values of
policyholder liabilities, (2) policyholder liabilities, (3) deferred policy
acquisition costs and value of purchased insurance in force, (4) fair values of
assets and liabilities recorded as a result of merger, (5) asset valuation
allowances, (6) guaranty fund assessment accruals, (7) deferred tax benefits
(liabilities), and (8) estimates for commitments and contingencies including
legal matters, if a liability is anticipated and can be reasonably estimated.
Estimates and assumptions regarding all of the preceding items are inherently
subject to change and are reassessed periodically. Changes in estimates and
assumptions could materially impact the financial statements.
25
NEW ACCOUNTING STANDARDS:
DERIVATIVES: As of January 1, 2001, the Companies adopted FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended and
interpreted by FAS No. 137, Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, FAS No.
138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of FASB Statement No. 133, and certain FAS No. 133
implementation issues. This standard, as amended, requires companies to record
all derivatives on the balance sheet as either assets or liabilities and measure
those instruments at fair value. The manner in which companies are to record
gains or losses resulting from changes in the fair values of those derivatives
depends on the use of the derivative and whether it qualifies for hedge
accounting.
Adoption of FAS No. 133 did not have a material effect on the Companies'
financial position or results of operations given the Companies' limited
derivative and embedded derivative holdings.
The Companies chose to elect a transition date of January 1, 1999 for embedded
derivatives. Therefore, only those derivatives embedded in hybrid instruments
issued, acquired or substantively modified by the entity on or after January 1,
1999 are recognized as separate assets or liabilities. The cumulative effect of
the accounting change upon adoption was not material.
RECOGNITION OF INTEREST INCOME AND IMPAIRMENT ON PURCHASED AND BENEFICIAL
INTERESTS IN SECURITIZED FINANCIAL ASSETS: Effective April 2001, the Companies
adopted Emerging Issues Task Force Issue "EITF" 99-20, Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets. EITF 99-20 states that interest income earned on
retained or purchased beneficial interests in securitized financial assets
should be recognized over the life of the investment based on an anticipated
yield determined by periodically estimating cash flows. Interest income should
be revised prospectively for changes in cash flows. Additionally, impairment
should be recognized if the fair value of the beneficial interest has declined
below its carrying amount and the decline is other than temporary. The impact of
adoption was not significant to the Companies financial position or results of
operations.
PENDING ACCOUNTING STANDARDS: GOODWILL: In June 2001, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standards No. 141,
"Business Combinations", and No. 142, "Goodwill and Other Intangible Assets,"
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment tests in accordance
with the Statements. Other intangible assets will continue to be amortized over
their useful lives. The Companies are required to adopt the new rules effective
January 1, 2002. The Companies are evaluating the impact of the adoption of
these standards and have not yet determined the effect of adoption on their
financial position and results of operations.
RECLASSIFICATIONS
Certain amounts in the 2000 and 1999 financial statements have been reclassified
to conform to the 2001 financial statement presentation.
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
26
valued at amortized cost; (6) the carrying value of fixed maturities is reduced
to fair value by a charge to realized losses in the Statements of Operations
when declines in carrying value are judged to be other than temporary, rather
than through the establishment of a formula-determined statutory investment
reserve (carried as a liability), changes in which are charged directly to
surplus; (7) deferred income taxes are provided for the difference between the
financial statement and income tax bases of assets and liabilities; (8) net
realized gains or losses attributed to changes in the level of interest rates in
the market are recognized when the sale is completed rather than deferred and
amortized over the remaining life of the fixed maturity security; (9) a
liability is established for anticipated guaranty fund assessments, net of
related anticipated premium tax credits, rather than capitalized when assessed
and amortized in accordance with procedures permitted by insurance regulatory
authorities; (10) revenues for variable insurance products consist of policy
charges applicable to each contract for the cost of insurance, policy
administration charges, amortization of policy initiation fees, and surrender
charges assessed rather than premiums received; (11) the financial statements of
Golden American's wholly owned subsidiary are consolidated rather than recorded
at the equity in net assets; (12) surplus notes are reported as liabilities
rather than as surplus; and (13) assets and liabilities are restated to fair
values when a change in ownership occurs, with provisions for goodwill and other
intangible assets, rather than continuing to be presented at historical cost.
The net loss for Golden American as determined in accordance with statutory
accounting practices was $156.4 million in 2001, $71.1 million in 2000, and
$85.6 million in 1999. Total statutory capital and surplus was $451.6 million
and $406.9 million at December 31, 2001 and 2000, respectively.
The National Association of Insurance Commissioners has revised the Accounting
Practices and Procedures Manual, the guidance that defines statutory accounting
principles. The revised manual was effective January 1, 2001, and has been
adopted, at least in part, by the States of Delaware and New York, which are the
states of domicile for Golden American and First Golden, respectively. The
revised manual resulted in changes to the accounting practices that the
Companies use to prepare their statutory-basis financial statements. The impact
of these changes to the Companies' statutory-basis capital and surplus as of
January 1, 2001 was not significant.
3. INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------
INVESTMENT RESULTS
Major categories of net investment income are summarized below:
Year Ended December 31, 2001 2000 1999
----------------------------------------------------------
(DOLLARS IN THOUSANDS)
Fixed maturities................................. $83,654 $55,302 $50,352
Equity securities................................ -- 248 515
Mortgage loans on real estate.................... 11,205 7,832 7,074
Policy loans..................................... 793 516 485
Short-term investments and cash and cash
equivalents..................................... 2,605 2,253 2,583
Other, net....................................... 598 543 388
----------------------------------------------------------
Gross investment income.......................... 98,855 66,694 61,397
Less investment expenses......................... (4,459) (2,554) (2,228)
----------------------------------------------------------
Net investment income............................ $94,396 $64,140 $59,169
==========================================================
27
Realized losses on investments follows:
Year Ended December 31, 2001 2000 1999
----------------------------------------------------------
(DOLLARS IN THOUSANDS)
Fixed maturities, available for sale............. $(4,848) $(6,289) $(2,910)
Equity securities................................ (1,622) (213) --
Mortgage loans on real estate.................... -- (52) (13)
----------------------------------------------------------
Realized losses on investments................... $(6,470) $(6,554) $(2,923)
==========================================================
The change in unrealized appreciation (depreciation) of securities at fair value
follows:
Year Ended December 31, 2001 2000 1999