UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2003
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Commission file number: 333-57212, 333-104539, 333-104546,
333-104547, and 333-104548
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ING USA Annuity and Life Insurance Company
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(Exact name of registrant as specified in its charter)
Iowa 41-0991508
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(State or other jurisdiction (IRS employer
of incorporation or organization identification no.)
1475 Dunwoody Drive, West Chester, Pennsylvania 19380-1478
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (610) 425-3400
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Golden American Life Insurance Company
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Former name, former address and former fiscal year, if changed since last report
Securities registered pursuant to Section 12(b) of Act: None
Securities registered pursuant to Section 12(g) of Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 250,000 shares of Common Stock
as of March 25, 2004, all of which were directly owned by Lion Connecticut
Holdings Inc.
NOTE: WHEREAS ING USA ANNUITY AND LIFE INSURANCE COMPANY MEETS THE CONDITIONS
SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K, THIS FORM IS
BEING FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION
I(2).
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Annual Report on Form 10-K
For the Year Ended December 31, 2003
TABLE OF CONTENTS
Form 10-K
Item No. Page
PART I
Item 1. Business** 3
Item 2. Properties** 5
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders* 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 6
Item 6. Selected Financial Data* 6
Item 7. Management's Narrative Analysis of the Results of Operations and
Financial Condition** 6
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 16
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 56
Item 9A. Controls and Procedures 56
PART III
Item 10. Directors and Executive Officers of the Registrant* 56
Item 11. Executive Compensation* 57
Item 12. Security Ownership of Certain Beneficial Owners and Management* 57
Item 13. Certain Relationships and Related Transactions* 57
Item 14. Principal Accountant Fees and Services* 57
PART IV
Item 15. Exhibits, Consolidated Financial Statement Schedules and
Reports on Form 8-K 58
Index on Financial Statement Schedules 62
Signatures 66
* Item omitted pursuant to General Instruction I(2) of Form 10-K, except as
to Part III, Item 10 with respect to compliance with Sections 406 and 407
of the Sarbanes Oxley Act of 2002
** Item prepared in accordance with General Instruction I(2) of Form 10-K
PART I
Item 1. Business
Organization of Business
ING USA Annuity and Life Insurance Company (formerly known as Golden
American Life Insurance Company) ("ING USA" or the "Company" as
appropriate), a wholly-owned subsidiary of Lion Connecticut Holdings
Inc. ("Lion" or "Parent"), is a stock life insurance company organized
under the laws of the State of Iowa. ING USA was originally
incorporated under the laws of the State of Minnesota on January 2,
1973, in the name of St. Paul Life Insurance Company. On December 21,
1993, the Company redomesticated from Minnesota to Delaware. On
January 1, 2004 several events occurred. First, the Company
redomesticated from Delaware to Iowa. Secondly, on January 1, 2004
(the "merger date"), Equitable Life Insurance Company of Iowa
("Equitable Life"), USG Annuity & Life Company ("USG") and United Life
& Annuity Insurance Company ("ULA") (the "Merger Companies"), merged
with and into Golden American Life Insurance Company ("Golden
American"). Also on January 1, 2004, immediately after the merger,
Golden American changed its name to ING USA Annuity and Life Insurance
Company. As of the merger date, the Merger Companies ceased to exist
and were merged into ING USA. Lion is an indirect, wholly-owned
subsidiary of ING Groep N.V. ("ING"), a global financial services
holding company based in The Netherlands. ING USA is authorized to do
business in the District of Columbia and all states except New York.
ING USA is licensed as a life insurance company under the laws of the
State of Delaware until December 31, 2003 and Iowa since January 1,
2004.
Prior to the merger date, ING USA was a wholly-owned subsidiary of
Equitable Life from December 30, 2001 through December 31, 2003.
Formerly, from October 24, 1997, until December 30, 2001, Equitable of
Iowa Companies, Inc. ("EIC" or "Former Holding Company") directly
owned 100% of Golden American's stock.
On December 3, 2001, the Board of Directors of EIC approved a plan to
contribute its holding of stock of Golden American to another
wholly-owned subsidiary, Equitable Life. The contribution of stock
occurred on December 31, 2001, following approval by the Insurance
Department of Delaware.
As of April 1, 2002, ING USA sold First Golden American Life Insurance
Company of New York ("First Golden") to its sister company, ReliaStar
Life Insurance Company ("ReliaStar"). ReliaStar, the parent of
Security-Connecticut Life Insurance Company ("Security-Connecticut")
which in turn is the parent of ReliaStar Life Insurance Company of New
York ("RLNY"), merged the First Golden business into RLNY operations
and dissolved First Golden at book value for $27.7 million in cash and
a receivable totaling $0.2 million from RLNY. The receivable from RLNY
was assumed by Equitable Life, and ultimately by ING. The
consideration was based on First Golden's statutory-basis book value.
RLNY's payable to the Company was assumed by ING and subsequently
forgiven. ING USA realized a loss of $3.0 million related to the sale
of First Golden, which was recorded as a capital transaction. Approval
for the merger was obtained from the Insurance Departments of the
States of New York and Delaware.
3
As of October 1, 2003, RLNY's parent, Security-Connecticut merged with
and into its parent, ReliaStar.
Statement of Financial Accounting Standards ("FAS") No. 141, "Business
Combinations" excludes transfers of net assets or exchanges of shares
between entities under common control and is therefore covered by
Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations". RLNY presented combined results of operations including
First Golden activity as of the beginning of the period ending
December 31, 2002. The first three months of First Golden activity is
not reflected in the Golden statement of financial position or other
financial information for the period ended December 31, 2002, as the
amounts were not material.
Products and Services
Management has determined that under FAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information", the Company has
one operating segment, ING U.S. Financial Services ("USFS").
The Company offers a portfolio of variable and fixed insurance
products designed to meet customer needs for tax-advantaged savings
for retirement and protection from death. The Company believes longer
life expectancies, an aging population, and growing concern over the
stability and availability of the Social Security system have made
retirement planning a priority for many Americans. The target market
for all products is consumers and corporations throughout the United
States.
Variable annuities are long-term savings vehicles in which contract
owner premiums (purchase payments) are recorded and maintained in
subaccounts within a separate account established and registered with
the Securities Exchange Commission ("SEC") as a unit investment trust.
Many of the variable annuities issued by ING USA are combination
variable and fixed deferred annuity contracts under which some or all
of the premiums may be allocated by the contract owner to a fixed
account available under the contract.
Principal Markets and Method of Distribution
The Company continued to expand distribution systems during 2003.
Broad-based distribution networks are key to realizing a growing share
of the wealth accumulation marketplace. The principal distribution
channels of the Company's variable and fixed insurance products
include national wirehouses, regional securities firms, independent
National Association of Securities Dealers, Inc. ("NASD") firms with
licensed registered representatives, banks, life insurance companies
with captive agency sales forces, independent insurance agents and
independent marketing organizations. The Company plans to establish
new relationships and increase penetration with key distributors in
existing channels. In addition, growth opportunities exist through
increased utilization of the ING broker/dealer network and the
cross-selling of ING products.
4
Competition
The current business and regulatory environment presents many
challenges to the insurance industry. The variable and fixed annuity
competitive environment remains intense and is dominated by a number
of large highly-rated insurance companies. Increasing competition from
traditional insurance carriers as well as banks and mutual fund
companies offers consumers many choices. The economic environment
during 2003 was characterized by record low interest rates, a modest
recovery in the economy and a strong recovery in the equity market as
evidenced by a 26.4% growth rate in the S&P 500 indices. There is an
aging U.S. population which is increasingly concerned about
retirement, estate planning, maintaining its standard of living in
retirement; and potential reductions in government and
employer-provided benefits at retirement, as well as lower public
confidence in the adequacy of those benefits.
Regulation
The Company's operations are subject to comprehensive regulation
throughout the United States. The laws of the various jurisdictions
establish supervisory agencies, including the state insurance
departments, with board authority to grant licenses to transact
business and regulate many aspects of the products and services
offered by the Company, as well as solvency and reserve adequacy. Many
agencies also regulate investment activities on the basis of quality,
diversification, and other quantitative criteria. The Company's
operations and accounts are subject to examination at regular
intervals by certain of these regulators.
ING USA is subject to the insurance laws of the state in which
organized and of the other jurisdictions in which it transacts
business. Through December 31, 2003, the primary regulator of the ING
USA insurance operations is the Commissioner of Insurance for the
State of Delaware; beginning January 1, 2004, its primary regulator
will be the Division of Insurance for the State of Iowa.
The Securities and Exchange Commission ("SEC"), the National
Association of Securities Dealers ("NASD") and, to a lesser extent,
the states regulate sales and investment management activities and
operations of the Company. Regulations of the SEC, Department of Labor
("DOL") and Internal Revenue Service also impact certain of the
Company's annuity and other investment products. These products
involve Separate Accounts and mutual funds registered under the
Investment Company Act of 1940.
Item 2. Properties
The Company's principal executive office is located at 1475 Dunwoody
Drive, West Chester, Pennsylvania, 19380-1478. All Company office
space is leased or subleased by the Company or its other affiliates.
The Company pays substantially all expenses associated with its leased
and subleased office properties. Expenses not paid directly by the
Company are paid for by an affiliate and allocated back to the
Company.
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Item 3. Legal Proceedings
The Company is a party to threatened or pending lawsuits arising from
the normal conduct of business. Due to the climate in insurance and
business litigation, suits against the Company sometimes include
claims for substantial compensatory, consequential or punitive damages
and other types of relief. Moreover, certain claims are asserted as
class actions, purporting to represent a group of similarly situated
individuals. While it is not possible to forecast the outcome of such
lawsuits, in light of existing insurance, reinsurance and established
reserves, it is the opinion of management that the disposition of such
lawsuits will not have a materially adverse effect on the Company's
operations or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
Omitted pursuant to General Instruction I(2)(c) of Form 10-K.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
As of December 31, 2003, all of the Company's outstanding shares were
owned by Equitable Life, which is a wholly-owned subsidiary of Lion,
whose ultimate parent is ING. As of January 1, 2004, all of the
Company's outstanding shares are owned by Lion as a result of the
affiliate mergers described in Part I, Item 1.
Item 6. Selected Financial Data
Omitted pursuant to General Instruction I(2)(a) of Form 10-K.
Item 7. Management's Narrative Analysis of the Results of Operations and
Financial Condition
Overview
The following narrative analysis of the results of operations and
financial condition presents a review of the Company for the twelve
month periods ended December 31, 2003 versus 2002. This review should
be read in conjunction with the consolidated financial statements and
other data presented herein.
6
Change in Accounting Principle
During 2002, the Company adopted Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("FAS") No. 142,
"Goodwill and Other Intangible Asset" ("FAS No. 142"). The adoption of
this standard resulted in an impairment loss of $135.3 million. The
Company, in accordance with FAS No. 142, recorded the impairment loss
retroactive to the first quarter of 2002; prior quarters of 2002 were
restated accordingly. This impairment loss represented the entire
carrying amount of goodwill, net of accumulated amortization. This
impairment charge was shown as a change in accounting principle on the
December 31, 2002 Consolidated Income Statement.
Results of Operations
Fee income and other income for the year ended December 31, 2003
increased by $80.6 million compared to the same period in 2002,
primarily due to an increase in the average variable assets under
management by the Company. The increase in average variable assets
under administration reflects continued business growth in the
Company's variable product lines, as well as the impact of the 2003
equity market recovery on contract holder account values.
Net investment income for the year ended December 31, 2003 increased
by $122.6 million compared to the same period in 2002. This increase
in net investment income is primarily due to higher average fixed
assets under management during the year, resulting from having strong
fixed product sales in mid-year 2002, which increased the average
inforce for the full year in 2003. This increase was partially offset
by reduced new money yields, which were negatively impacted by the low
interest rate environment.
Net realized capital gains (losses) for the year ended December 31,
2003 decreased by $40.4 million compared to the same period in 2002.
The decrease was primarily due to futures trading losses related to
the Company's dynamic hedging program to mitigate the Company's
product living and death benefit guarantee exposures resulting from
the volatility in the equity markets. Excluding the futures losses
there is an increase in net realized capital gains of $94.5 million.
Net realized gains result from sale of fixed maturity investments
having a fair value greater than book value primarily due to declining
interest rates.
Interest credited and other benefits to the policyholders for the year
ended December 31, 2003 increased by $1.7 million compared to the same
period in 2002. The increase is primarily due to the Company's growth
in interest credited related to its higher average fixed account
values in force being largely offset by reduced guaranteed living and
death benefit reserves related to the strong equity market recovery.
General expenses for the year ended December 31, 2003 decreased by
$15.9 million compared to the same period in 2002. The decrease is
primarily due to a lower allocation of corporate and service charges
from the Company's parent and other affiliates who provide service to
the Company, as a result of increased efficiencies gained from ING's
7
company-wide cost reduction efforts. Also contributing to the decrease
is a decline in fixed business sales resulting in lower general
expenses.
Commissions for the year ended December 31, 2003 decreased by $38.4
million compared to the same period in 2002. This decrease is
primarily due to lower sales in the Company's fixed product portfolio.
Also contributing to the decrease is a negative ceding commission
related to the recapture of an affiliate reinsurance agreement in the
first quarter of the year.
Policy acquisition costs deferred for the year ended December 31, 2003
decreased by $81.4 million compared to the same period in 2002. The
decrease was primarily due to lower selling expenses on lower fixed
product sales, as well as the deferral of a net gain attributed to the
recapture of an affiliated reinsurance agreement.
Amortization of deferred policy acquisition costs and value of
business acquired for the year ended December 31, 2003, increased by
$56.9 million compared to the same period in 2002. Amortization of
long-duration products is reflected in proportion to actual and
estimated future gross profits. Estimated future gross profits are
computed based on underlying assumptions related to the underlying
contracts, including but not limited to interest margins, surrenders,
withdrawals, expenses, and asset growth. The increase in the
amortization of deferred policy acquisition costs and value of
insurance acquired reflects the impact of these variables on the
overall book of business.
Expense and charges reimbursed under modified coinsurance ("MODCO")
agreements for the year ended December 31, 2003, increased by $26.7
million compared to the same period in 2002. This balance reflects the
net cash flows associated with affiliate MODCO agreements covering
certain variable annuity business. The increase is primarily due to an
increase in expense allowance related to new business written and
covered by MODCO.
Interest expense for the year ended December 31, 2003, decreased by
$2.3 million compared to the same period in 2002. Interest expense
reduced for the year of 2003, due to the repayment of two surplus
notes on June 28, 2002 to Equitable Life. Principal amounts of the
notes were for $50 million and $25 million. The Insurance Department
of the State of Delaware approved the repayments of these notes.
The cumulative effect of the change in accounting principle for the
year ended December 31, 2002, was a loss of $135.3 million net of
taxes, related to the adoption of FAS No. 142, which addresses the
value of Goodwill and Other Intangible Assets.
8
Net income, excluding change in accounting principle and net realized
capital gains and losses (net of taxes), increased by $131.5 million
for the year ended December 31, 2003, as compared to the year ended
December 31, 2002. The increase in net earnings is primarily the
result of increased fee income, reduced variable product benefit
guarantees related to the equity market recovery, partially offset by
lower fixed margins resulting from the depressed interest rate
environment, and increased amortization of deferred policy acquisition
costs and value of business acquired.
Financial Condition
Investments
Fixed Maturities
Total fixed maturities reflected net unrealized capital gains of
$176.3 million and $216.3 million at December 31, 2003 and 2002,
respectively.
It is management's objective that the portfolio of fixed maturities be
of high quality and be well diversified by market sector. The fixed
maturities in the Company's portfolio are generally rated by external
rating agencies and, if not externally rated, are rated by the Company
on a basis believed to be similar to that used by the rating agencies.
The average quality rating of the Company's fixed maturities portfolio
was A+ and AA+ at December 31, 2003 and 2002.
Fixed maturities rated BBB and below may have speculative
characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity of the
issuer to make principal and interest payments than is the case with
higher rated fixed maturities.
In addition, the Company invests in structured securities that meet
the criteria of Emerging Issues Task Force ("EITF") Issue No. 99-20,
"Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets". Under
EITF Issue No. 99-20, a determination of the required impairment is
based on credit risk and the possibility of significant prepayment
risk that restricts the Company's ability to recover the investment.
An impairment is recognized if the fair value of the security is less
than book value and there has been an adverse change in cash flow
since the last remeasurement date.
When a decline in fair value is determined to be other than temporary,
the individual security is written down to fair value and the loss is
accounted for as a realized loss.
Liquidity and Capital Resources
Liquidity is the ability of the Company to generate sufficient cash
flows to meet the cash requirements of operating, investing, and
financing activities. The Company's principal sources of liquidity are
annuity premiums and product charges, investment income, maturing
investments, proceeds from debt issuance, and capital contributions.
Primary uses of these funds are payments of commissions and operating
expenses, interest and premium credits, investment purchases,
repayment of debt, as well as withdrawals and surrenders.
9
The Company's liquidity position is managed by maintaining adequate
levels of liquid assets, such as cash or cash equivalents and
short-term investments. Additional sources of liquidity include
borrowing facilities to meet short-term cash requirements. The Company
maintains a $40.0 million revolving note facility with ING America
Insurance Holdings, Inc. ("ING AIH"), a perpetual $75.0 million
revolving note facility with Bank of New York and a $125.0 million
revolving note facility with SunTrust Bank which expires on July 30,
2004. Management believes that these sources of liquidity are adequate
to meet the Company's short-term cash obligations.
The National Association of Insurance Commissioners ("NAIC")
risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula.
These requirements are intended to allow insurance regulators to
monitor the capitalization of insurance companies based upon the type
and mixture of risks inherent in a Company's operations. The formula
includes components for asset risk, liability risk, interest rate
exposure, and other factors. The Company has complied with the NAIC's
risk-based capital reporting requirements. Amounts reported indicate
that the Company has total adjusted capital above all required capital
levels.
During 2003, 2002 and 2001, ING USA received capital contributions of
$230.0 million, $356.3 million and $196.8 million, respectively.
Critical Accounting Policies
General
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the use of
estimates and assumptions in certain circumstances that affect amounts
reported in the accompanying consolidated financial statements and
related footnotes. These estimates and assumptions are evaluated on an
on-going basis based on historical developments, market conditions,
industry trends and other information that is reasonable under the
circumstances. There can be no assurance that actual results will
conform to estimates and assumptions, and that reported results of
operations will not be affected in a materially adverse manner by the
need to make future accounting adjustments to reflect changes in these
estimates and assumptions from time to time.
The Company has identified the following estimates as critical in that
they involve a higher degree of judgment and are subject to a
significant degree of variability: investment impairment testing,
amortization of deferred acquisition costs and value of business
acquired and goodwill impairment testing. In developing these
estimates, management makes subjective and complex judgments that are
inherently uncertain and subject to material changes as facts and
circumstances develop. Although variability is inherent in these
estimates, management believes the amounts provided are appropriate
based upon the facts available upon compilation of the consolidated
financial statements.
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Investment Impairment Testing
The Company reviews the general account investments for impairments by
analyzing the amount and length of time amortized cost has exceeded
fair value, and by making certain estimates and assumptions regarding
the issuing companies' business prospects, future economic conditions
and market forecasts. Based on the facts and circumstances of each
case, management uses judgment in deciding whether any calculated
impairments are temporary or other than temporary. For those
impairments judged to be other than temporary, the Company reduces the
carrying value of those investments to the current fair value and
records impairment losses for the difference (refer to Note 2).
Amortization of Deferred Acquisition Costs and Value of Business
Acquired
Deferred policy acquisition costs ("DAC") and value of business
acquired ("VOBA") are amortized with interest over the life of the
contracts (usually 25 years) in relation to the present value of
estimated gross profits from projected interest margins, asset-based
fees, policy administration and surrender charges less policy
maintenance fees and non-capitalized commissions.
Changes in assumptions can have a significant impact on the
calculation of DAC/VOBA and its related amortization patterns. Due to
the relative size of DAC/VOBA balance and the sensitivity of the
calculation to minor changes in the underlying assumptions and the
related volatility that could result in the reported DAC/VOBA balance,
the Company performs a quarterly analysis of DAC/VOBA. At each balance
sheet date, actual historical gross profits are reflected and expected
future gross profits and related assumptions are evaluated for
continued reasonableness. Any adjustment in estimated profit requires
that the amortization rate be revised retroactively to the date of
policy or contract issuance ("unlocking"), which could be significant.
The cumulative difference related to prior periods is recognized as a
component of current period's amortization, along with amortization
associated with the actual gross profits of the period. In general,
increases in estimated returns result in increased expected future
profitability and may lower the rate of amortization, while increases
in lapse/surrender and mortality assumptions or decreases in returns
reduce the expected future profitability of the underlying business
and may increase the rate of amortization.
One of the most significant assumptions involved in the estimation of
future gross profits for variable universal life and variable deferred
annuity products is the assumed return associated with future variable
account performance. To reflect the near-term and long-term volatility
in the equity markets, this assumption involves a combination of
near-term expectations and a long-term assumption about market
performance. The overall return generated by the variable account is
dependent on several factors, including the relative mix of the
underlying sub-accounts among bond funds and equity funds as well as
equity sector weightings.
As part of the regular analysis of DAC/VOBA, at the end of third
quarter of 2002, the Company unlocked its long-term rate of return
assumptions. The Company reset long-term assumptions for the separate
account returns to 9.0% (gross before fund management fees and
mortality and expense and other policy charges), as of December 31,
2002, reflecting a blended return of equity and other sub-accounts.
11
The initial unlocking adjustment in 2002 was primarily driven by the
sustained downturn in the equity markets and revised expectations for
future returns. During 2002, the Company recorded an acceleration of
DAC/VOBA amortization totaling $91.5 million before tax, or $59.5
million, net of $32.0 million of federal income tax benefit.
The Company has remained unlocked during 2003, and reset long-term
assumptions for the separate account returns from 9.0% to 8.5% (gross
before fund management fees and mortality and expense and other policy
charges), as of December 31, 2003, maintaining a blended return of
equity and other sub-accounts. The 2003 unlocking adjustment from the
previous year was primarily driven by improved market performance. For
the year ended December 31, 2003, the Company recorded a deceleration
of DAC/VOBA amortization totaling $41.3 million before tax, or $26.9
million, net of $14.4 million of federal income tax expense.
Goodwill Impairment Testing
The Company tested goodwill as of January 1, 2002 for impairment using
fair value calculations based on the present value of estimated future
cash flows from business currently in force and business that we
estimate we will add in the future. These calculations require
management to make estimates on the amount of future revenues and the
appropriate discount rate. The calculated fair value of goodwill and
the resulting impairment loss recorded is based on these estimates,
which require a significant amount of management judgment. The
adoption of FAS No. 142 resulted in the impairment of the Company's
entire goodwill balance during 2002. Refer to Note 1 of the
consolidated financial statements for a discussion of the results of
the Company's goodwill testing procedures and to Management's
Narrative Analysis of the Results of Operations for the impact these
procedures had on the Company's income.
Off-Balance Sheet Arrangements
In January 2003, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation 46, "Consolidation of Variable Interest
Entities", an Interpretation of ARB No.51 (FIN 46). In December 2003,
the FASB modified FIN 46 to make certain technical corrections and
address certain implementation issues that had arisen. FIN 46 provides
a new framework for identifying variable interest entities (VIEs) and
determining when a company should include the assets, liabilities,
noncontrolling interests and results of activities of a VIE in its
consolidated financial statements.
In general, a VIE is a corporation, partnership, limited-liability
corporation, trust, or any other legal structure used to conduct
activities or hold assets that either (1) has an insufficient amount
of equity to carry out its principal activities without additional
subordinated financial support, (2) has a group of equity owners that
are unable to make significant decisions about its activities, or (3)
has a group of equity owners that do not have the obligation to absorb
losses or the right to receive returns generated by its operations.
FIN 46 requires a VIE to be consolidated if a party with an ownership,
contractual or other financial interest in the VIE (a variable
12
interest holder) is obligated to absorb a majority of the risk of loss
from the VIE's activities, is entitled to receive a majority of the
VIE's residual returns (if no party absorbs a majority of the VIE's
losses), or both. A variable interest holder that consolidates the VIE
is called the primary beneficiary. Upon consolidation, the primary
beneficiary generally must initially record all of the VIE's assets,
liabilities and noncontrolling interests at fair value and
subsequently account for the VIE as if it were consolidated based on
majority voting interest. FIN 46 also requires disclosures about VIEs
that the variable interest holder is not required to consolidate but
in which it has a significant variable interest.
At December 31, 2003, the Company held the following investments that,
for purposes of FIN 46, were evaluated and determined that the
investments do not require consolidation in the Company's financial
statements:
Asset Type Purpose Book Value (1) Market Value
---------------------- ------------------- ------------------- ------------------
Private Corporate Securities - synthetic
leases; project financings; credit tenant
leases Investment Holdings $ 1,057.2 $ 1,114.6
Foreign Securities - US VIE subsidiaries
of foreign companies Investment Holdings 190.3 203.0
Commercial Mortgage Obligations (CMO) Investment Holdings 888.5 893.9
Collateralized Debt Obligations (CDO) Investment Holdings
and/or
Collateral Manager 4.9 4.3
Asset-Backed Securities (ABS) Investment Holdings 479.9 482.3
Commercial Mortgage Backed Securities (CMBS) Investment Holdings 325.4 342.0
(1) Represents maximum exposure to loss except for those structures for which the Company also receives asset
management fees.
Contractual Obligations
As of December 31, 2003, the Company had certain contractual
obligations due over a period of time as summarized in the following
table:
Payments due by Period (in millions)
--------------------------------------------------------------------
Less than More than
Contractual Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
----------------------- ------- --------- --------- --------- ----------
Long-Term Debt $ 502.5 $ 13.0 $ 25.9 $ 25.9 $ 437.7
Operating Lease Obligations 15.1 2.2 4.7 4.8 3.4
Purchase Obligations 25.2 25.2 - - -
------- --------- --------- --------- ----------
Total $ 542.8 $ 40.4 $ 30.6 $ 30.7 $ 441.1
======= ========= ========= ========= ==========
The Company's long-term debt consists of three surplus notes and the
related interest payable. Two of the notes are with Equitable Life and
have outstanding principal balances of $60.0 million and $75.0
million, respectively. The related interest rates and maturity dates
for the Equitable Life notes are 7.25% and 7.75%, and December 29,
2028 and September 29, 2029, respectively. The remaining surplus note
of the Company is with Security Life of Denver Insurance Company, and
has an outstanding principal, interest rate and maturity date of $35.0
million, 7.98% and December 7, 2029, respectively. As a result of the
13
Company's merger with Equitable Life, USG, and ULA effective January
1, 2004, the surplus notes with Equitable Life will no longer exist
effective as of the date of the merger.
Operating lease obligations relate to the rental of office space under
various non-cancelable operating lease agreements that expire through
May 2010.
Purchase obligations consist of commitments to enter into mortgage
loan arrangements during 2004.
Legislative Initiatives
The Jobs and Growth Tax Relief Reconciliation Act of 2003, which was
enacted in the second quarter, may impact the Company. The Act's
provisions, which reduce the tax rates on long-term capital gains and
corporate dividends, impact the relative competitiveness of the
Company's products especially variable annuities.
Other legislative proposals under consideration include repealing the
estate tax, changing the taxation of products, changing life insurance
company taxation and making changes to nonqualified deferred
compensation arrangements. Some of these proposals, if enacted, could
have a material effect on life insurance, annuity and other retirement
savings product sales.
The impact on the Company's tax position and products cannot be
predicted.
Other Regulatory Matters
Like many financial services companies, certain U.S. affiliates of ING
Groep N.V. have received informal and formal requests for information
since September 2003 from various governmental and self-regulatory
agencies in connection with investigations related to mutual funds and
variable insurance products. ING has cooperated fully with each
request.
In addition to responding to regulatory requests, ING management
initiated an internal review of trading in ING insurance, retirement,
and mutual fund products. The goal of this review has been to identify
whether there have been any instances of inappropriate trading in
those products by third parties or by ING investment professionals and
other ING personnel. This internal review is being conducted by
independent special counsel and auditors. Additionally, ING reviewed
its controls and procedures in a continuing effort to deter improper
frequent trading in ING products. ING's internal reviews related to
mutual fund trading are continuing.
The internal review has identified several arrangements allowing third
parties to engage in frequent trading of mutual funds within our
variable insurance and mutual fund products, and identified other
circumstances where frequent trading occurred despite measures taken
by ING intended to combat market timing. Most of the identified
arrangements were initiated prior to ING's acquisition of the
businesses in question. In each arrangement identified, ING has
terminated the inappropriate trading, taken steps to discipline or
terminate employees who were involved, and modified policies and
procedures to deter inappropriate activity. While the review is not
14
completed, management believes the activity identified does not
represent a systemic problem in the businesses involved.
These instances included agreements (initiated in 1998) that permitted
one variable life insurance customer of Reliastar Life Insurance
Company ("Reliastar") to engage in frequent trading, and to submit
orders until 4pm Central Time, instead of 4pm Eastern Time. Reliastar
was acquired by ING in 2000. The late trading arrangement was
immediately terminated when current senior management became aware of
it in 2002. ING believes that no profits were realized by the customer
from the late trading aspect of the arrangement.
In addition, the review has identified five arrangements that allowed
frequent trading of funds within variable insurance products issued by
Reliastar and by ING USA; and in certain ING Funds. ING entities did
not receive special benefits in return for any of these arrangements,
which have all been terminated. The internal review also identified
two investment professionals who engaged in improper frequent trading
in ING Funds.
ING will reimburse any ING Fund or its shareholders affected by
inappropriate trading for any profits that accrued to any person who
engaged in improper frequent trading for which ING is responsible.
Management believes that the total amount of such reimbursements will
not be material to ING or its U.S. business.
Subsequent Event
On January 1, 2004, Equitable Life, USG, and ULA, merged with and into
the Company. Also on January 1, 2004, immediately after the merger,
the Company changed its name to ING USA Annuity and Life Insurance
Company. As of the merger date, the Merger Companies ceased to exist
and were succeeded by ING USA.
The merger was accounted for based on the pooling-of-interests method.
FAS 141 excludes transfers of net assets or exchanges of shares
between entities under common control, and notes that certain
provisions under APB 16, provide a source of guidance for such
transactions.
Prior to the merger date, the Merger Companies were affiliated
companies of ING USA and indirect, wholly-owned subsidiaries of ING.
Equitable Life was domiciled in Iowa and offered various insurance
products, including deferred and immediate annuities, variable
annuities, and interest sensitive and traditional life insurance. ULA
was also domiciled in Iowa and primarily offered annuity related
insurance products, as well as life and health insurance that was
ceded to other insurers. USG was domiciled in Oklahoma and offered
various insurance products, including deferred fixed annuities,
immediate annuities, and interest-sensitive life insurance.
A Form 8-K for ING USA describing the merger, was filed on January 4,
2004 and includes unaudited pro forma condensed consolidated financial
information as of, and for the periods ended, September 30, 2003 and
2002, and December 31, 2002, 2001, and 2000. Revenues and net income
for the period ended December 31, 2003, had the pooling been
consummated at the date of the financial statements, is $1,509.0
million and $57.2 million, respectively (unaudited).
15
Forward-Looking Information/Risk Factors
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company cautions readers
regarding certain forward-looking statements contained in this report
and in any other statements made by, or on behalf of, the Company,
whether or not in future filings with the SEC. Forward-looking
statements are statements not based on historical information and
which relate to future operations, strategies, financial results, or
other developments. Statements using verbs such as "expect,"
"anticipate," "believe" or words of similar import generally involve
forward-looking statements. Without limiting the foregoing,
forward-looking statements include statements which represent the
Company's beliefs concerning future levels of sales and redemptions of
the Company's products, investment spreads and yields, or the earnings
and profitability of the Company's activities.
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of
which are beyond the Company's control and many of which are subject
to change. These uncertainties and contingencies could cause actual
results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable
developments. Some may be national in scope, such as general economic
conditions, changes in tax law and changes in interest rates. Some may
be related to the insurance industry generally, such as pricing
competition, regulatory developments and industry consolidation.
Others may relate to the Company specifically, such as credit,
volatility and other risks associated with the Company's investment
portfolio. Investors are also directed to consider other risks and
uncertainties discussed in documents filed by the Company with the
SEC. The Company disclaims any obligation to update forward-looking
information.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Asset/liability management is integrated into many aspects of the
Company's operations, including investment decisions, product
development, and determination of crediting rates. As part of the risk
management process, different economic scenarios are modeled,
including cash flow testing required for insurance regulatory
purposes, to determine that existing assets are adequate to meet
projected liability cash flows. Key variables in the modeling process
include interest rates, anticipated contractholder behavior and
variable separate account performance. Contractholders bear the
investment risk related to variable separate account products.
The fixed account liabilities are supported by a portfolio principally
composed of fixed rate investments that can generate predictable,
steady rates of return. The portfolio management strategy for the
fixed account considers the assets available for sale. This enables
the Company to respond to changes in market interest rates, changes in
prepayment risk, changes in relative values of asset sectors and
individual securities and loans, changes in credit quality outlook,
and other relevant factors. The objective of portfolio management is
to maximize returns, taking into account interest rate and credit
risk, as well as other risks. The Company's asset/liability management
16
discipline includes strategies to minimize exposure to loss as
interest rates and economic and market conditions change.
On the basis of these analyses, management believes there is currently
no material solvency risk to the Company.
17
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
Report of Independent Auditors 19
Consolidated Financial Statements:
Consolidated Income Statements for the years ended
December 31, 2003, 2002 and 2001 20
Consolidated Balance Sheets as of December 31, 2003 and 2002 21
Consolidated Statements of Changes in Shareholder's Equity for
the years ended December 31, 2003, 2002 and 2001 22
Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 23
Notes to Consolidated Financial Statements 24
Report of Independent Auditors
The Board of Directors
ING USA Annuity and Life Insurance Company
We have audited the accompanying consolidated balance sheets of ING USA Annuity
and Life Insurance Company (formerly Golden American Life Insurance Company) and
Subsidiary as of December 31, 2003 and 2002, and the related consolidated income
statements, statements of changes in shareholder's equity, and statements of
cash flows for each of the three years in the period ended December 31, 2003.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ING USA Annuity
and Life Insurance Company as of December 31, 2003 and 2002, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States.
As discussed in Note 1 to the financial statements, the Company changed the
accounting principle for goodwill and other intangible assets effective January
1, 2002.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 22, 2004
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Consolidated Income Statements
(Millions)
Year ended Year ended Year ended
December 31, December 31, December 31,
2003 2002* 2001*
------------------ ------------------- ------------------
Revenues:
Fee income $ 330.2 $ 245.9 $ 219.1
Net investment income 320.3 197.7 94.4
Net realized capital gains (losses) (36.2) 4.2 (6.5)
Other income (loss) (0.2) 3.5 -
------------------ ------------------- ------------------
Total revenue $ 614.1 $ 451.3 $ 307.0
------------------ ------------------- ------------------
Benefits, losses and expenses:
Benefits:
Interest credited and other benefits
to policyholders 320.1 318.4 239.2
Underwriting, acquisition, and insurance expenses:
General expenses 123.8 139.7 119.9
Commissions 250.3 288.7 232.4
Policy acquisition costs deferred (210.8) (292.2) (128.2)
Amortization:
Deferred policy acquisition costs and value
of business acquired 184.7 127.8 49.6
Goodwill - - 4.2
Other:
Expense and charges reimbursed under
modified coinsurance agreements (131.6) (104.9) (225.6)
Interest expense 13.7 16.0 19.4
------------------ ------------------- ------------------
Total benefits, losses and expenses 550.2 493.5 310.9
------------------ ------------------- ------------------
Income (loss) before income taxes and cumulative
effect of change in accounting principle 63.9 (42.2) (3.9)
Income tax expense (benefit) 2.5 (12.5) 0.1
------------------ ------------------- ------------------
Income (loss) before cumulative effect of change
in accounting principle 61.4 (29.7) (4.0)
Cumulative effect of change in accounting principle - (135.3) -
------------------ ------------------- ------------------
Net income (loss) $ 61.4 $ (165.0) $ (4.0)
================== =================== ==================
*See Note 1.
The accompanying notes are an integral part of these consolidated financial statements.
20
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Consolidated Balance Sheets
(Millions)
As of December 31,
2003 2002
----------------- -----------------
Assets
Investments:
Fixed maturities, available for sale, at fair value
(amortized cost of $5,047.0 at 2003 and $4,720.1 at 2002) $ 5,223.3 $ 4,936.4
Equity securities at fair value:
Investment in mutual funds (cost of $5.3 at 2003 and $22.9 at 2002) 5.6 19.0
Mortgage loans on real estate 847.6 482.4
Policy loans 17.5 16.0
Short-term investments 17.7 2.2
----------------- -----------------
Total investments 6,111.7 5,456.0
Cash and cash equivalents 17.9 148.5
Accrued investment income 65.4 61.9
Reinsurance recoverable 13.0 196.9
Deferred policy acquisition costs 835.3 678.0
Value of business acquired 8.5 8.5
Receivable for securities sold 10.2 -
Due from affiliates 4.2 -
Other assets 14.7 5.3
Assets held in separate accounts 17,112.6 11,029.3
----------------- -----------------
Total assets $ 24,193.5 $ 17,584.4
================= =================
Liabilities and Shareholder's Equity
Policy liabilities and accruals:
Future policy benefits and claims' reserves $ 5,277.3 $ 5,159.1
----------------- -----------------
Total policy liabilities and accruals 5,277.3 5,159.1
Surplus notes 170.0 170.0
Current income taxes 3.9 42.4
Deferred income taxes 126.0 79.8
Dollar roll obligations 120.1 40.0
Other liabilities 31.0 64.7
Liabilities related to separate accounts 17,112.6 11,029.3
----------------- -----------------
Total liabilities 22,840.9 16,585.3
----------------- -----------------
Shareholder's equity:
Common stock (250,000 shares authorized, issued and outstanding;
$10.00 per share par value) 2.5 2.5
Additional paid-in capital 1,358.4 1,128.4
Accumulated other comprehensive income 64.2 2.1
Retained deficit (72.5) (133.9)
----------------- -----------------
Total shareholder's equity 1,352.6 999.1
----------------- -----------------
Total liabilities and shareholder's equity $ 24,193.5 $ 17,584.4
================= =================
The accompanying notes are an integral part of these consolidated financial statements.
21
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Consolidated Statements of Changes in Shareholder's Equity
(Millions)
Accumulated
Additional Other Retained Total
Common Paid-In Comprehensive Earnings Shareholder's
Stock Capital Income (Loss) (Deficit) Equity
--------------- --------------- ---------------- ---------------- ----------------
Balance at December 31, 2000 $ 2.5 $ 583.6 $ (4.1) $ 35.1 $ 617.1
Contribution of capital 196.8 196.8
Comprehensive income:
Net (loss) - - - (4.0) (4.0)
Other comprehensive income
net of tax:
Unrealized gain on securities
($12.2 pretax) - - 7.9 - 7.9
----------------
Comprehensive income 3.9
--------------- --------------- ---------------- ---------------- ----------------
Balance at December 31, 2001 2.5 780.4 3.8 31.1 817.8
Contribution of capital 356.3 356.3
Other (8.3) (8.3)
Comprehensive income:
Net (loss) - - - (165.0) (165.0)
Other comprehensive income
net of tax:
Unrealized (loss) on securities
($(2.6) pretax) - - (1.7) - (1.7)
----------------
Comprehensive loss (166.7)
--------------- --------------- ---------------- ---------------- ----------------
Balance at December 31, 2002 2.5 1,128.4 2.1 (133.9) 999.1
Contribution of capital - 230.0 - - 230.0
Comprehensive income:
Net income - - - 61.4 61.4
Other comprehensive income
net of tax:
Unrealized gain on securities
($95.6 pretax) - - 62.1 - 62.1
----------------
Comprehensive income 123.5
--------------- --------------- ---------------- ---------------- ----------------
Balance at December 31, 2003 $ 2.5 $ 1,358.4 $ $ 64.2 $ (72.5) $ 1,352.6
=============== =============== ================ ================ ================
The accompanying notes are an integral part of these consolidated financial statements.
22
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Consolidated Statements of Cash Flows
(Millions)
Year ended Year ended Year ended
December 31, December 31, December 31,
2003 2002 2001
----------------- ------------------ -----------------
Cash Flows from Operating Activities:
Net income (loss) $ 61.4 $ (165.0) $ (4.0)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Interest credited and charges on interest sensitive products 306.3 282.2 191.0
Net realized capital (gains) losses 36.2 (4.2) 6.5
Increase in accrued investment income (3.5) (39.5) (13.2)
Increase in guaranteed benefits reserve (91.6) 107.1 28.2
Other changes in insurance reserve liabilities 13.3 - -
Policy acquisition cost deferred (210.8) (292.2) (128.2)
Amortization of deferred policy acquisition costs 180.4 121.2 45.2
Amortization of value of business acquired 4.3 6.6 4.4
Impairment of goodwill - 151.3 -
Other non-cash reconciling items and other changes in
assets and liabilities (87.0) 21.3 110.6
Provision for deferred income taxes 12.8 (85.7) (0.6)
----------------- ------------------ -----------------
Net cash provided by operating activities 221.8 103.1 239.9
----------------- ------------------ -----------------
Cash Flows from Investing Activities:
Proceeds from the sale, maturity, or repayment of:
Fixed maturities available for sale 7,025.8 7,297.1 880.7
Equity securities 16.2 7.8 6.9
Mortgage loans 51.9 285.0 136.0
Acquisition of investments:
Fixed maturities available for sale (7,267.3) (10,068.3) (2,070.8)
Equity securities - (22.8) -
Short-term and other investments (15.4) - (4.7)
Mortgage loans (417.1) (553.7) (250.3)
Increase in policy loans (1.5) (1.2) (1.5)
(Increase) decrease in property and equipment (0.7) 1.1 1.2
Proceeds from sale of interest in subsidiary - 27.7 -
Loss on valuation of interest in subsidiary - 3.0 -
Other - 0.6 -
----------------- ------------------ -----------------
Net cash used for investing activities (608.1) (3,023.7) (1,302.5)
----------------- ------------------ -----------------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 1,383.5 3,818.5 1,933.1
Maturities and withdrawals from insurance contracts (332.3) (171.2) (134.8)
Transfers to separate accounts (1,160.0) (1,053.8) (902.9)
Proceeds received on reinsurance recapture 134.5 - -
Proceeds of notes payable - - 3.1
Repayment of notes payable - (1.4) (1.7)
Proceeds from reciprocal loan agreement borrowings - - 69.3
Repayment of reciprocal loan agreement borrowings - (75.0) (69.3)
Contributions of capital by parent 230.0 356.3 196.8
----------------- ------------------ -----------------
Net cash provided by financing activities 255.7 2,873.4 1,093.6
----------------- ------------------ -----------------
Net increase (decrease) in cash and cash equivalents (130.6) (47.2) 31.0
Cash and cash equivalents, beginning of period 148.5 195.7 164.7
----------------- ------------------ -----------------
Cash and cash equivalents, end of period $ 17.9 $ 148.5 $ 195.7
================= ================== =================
Supplemental cash flow information:
Income taxes (received) paid, net $ 28.2 $ (141.5) $ 0.4
================= ================== =================
Interest paid $ 13.0 $ 20.8 $ 15.0
================= ================== =================
The accompanying notes are an integral part of these consolidated financial statements.
23
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Principles of Consolidation
ING USA Annuity and Life Insurance Company (formerly known as Golden
American Life Insurance Company) ("ING USA" or the "Company" as
appropriate), a wholly-owned subsidiary of Lion Connecticut Holdings Inc.
("Lion" or "Parent"), is a stock life insurance company organized under the
laws of the State of Iowa. ING USA was originally incorporated under the
laws of the State of Minnesota on January 2, 1973, in the name of St. Paul
Life Insurance Company. On December 21, 1993, the Company redomesticated
from Minnesota to Delaware. On January 1, 2004 several events occurred.
First, the Company redomesticated from Delaware to Iowa. Secondly, on
January 1, 2004 (the "merger date"), Equitable Life Insurance Company of
Iowa ("Equitable Life"), USG Annuity & Life Company ("USG") and United Life
& Annuity Insurance Company ("ULA") (the "Merger Companies"), merged with
and into Golden American Life Insurance Company ("Golden American"). Also
on January 1, 2004, immediately after the merger, Golden American changed
its name to ING USA Annuity and Life Insurance Company. As of the merger
date, the Merger Companies ceased to exist and were merged into ING USA.
Lion is an indirect, wholly-owned subsidiary of ING Groep N.V. ("ING"), a
global financial services holding company based in The Netherlands. ING USA
is authorized to do business in the District of Columbia and all states
except New York. ING USA is licensed as a life insurance company under the
laws of the State of Delaware until December 31, 2003 and Iowa since
January 1, 2004.
Prior to the merger date, ING USA was a wholly-owned subsidiary of
Equitable Life from December 30, 2001 through December 31, 2003. Formerly,
from October 24, 1997, until December 30, 2001, Equitable of Iowa
Companies, Inc. ("EIC" or "Former Holding Company") directly owned 100% of
Golden American's stock.
On December 3, 2001, the Board of Directors of EIC approved a plan to
contribute its holding of stock of Golden American to another wholly-owned
subsidiary, Equitable Life. The contribution of stock occurred on December
31, 2001, following approval by the Insurance Department of Delaware.
As of April 1, 2002, ING USA sold First Golden American Life Insurance
Company of New York ("First Golden") to its sister company, ReliaStar Life
Insurance Company ("ReliaStar"). ReliaStar, the parent of
Security-Connecticut Life Insurance Company ("Security-Connecticut"), which
in turn is the parent of ReliaStar Life Insurance Company of New York
("RLNY"), merged the First Golden business into RLNY operations and
dissolved First Golden at book value for $27.7 million in cash and a
receivable totaling $0.2 million from RLNY. The receivable from RLNY was
assumed by Equitable Life, and ultimately by ING. The consideration was
based on First Golden's statutory-basis book value. RLNY's payable to the
Company was assumed by ING and subsequently forgiven. ING USA realized a
loss of $3.0 million related to the sale of First Golden, which was
recorded as a capital transaction. Approval for the merger was obtained
from the Insurance Departments of the States of New York and Delaware.
24
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
As of October 1, 2003, RLNY's parent, Security-Connecticut merged with and
into its parent, ReliaStar.
Statement of Financial Accounting Standards ("FAS") No. 141, "Business
Combinations" excludes transfers of net assets or exchanges of shares
between entities under common control and is therefore covered by
Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations". RLNY presented combined results of operations including
First Golden activity as of the beginning of the period ending December 31,
2002. The first three months of First Golden activity is not reflected in
the ING USA statement of financial position or other financial information
for the period ended December 31, 2002, as the amounts were not material.
Description of Business
The Company offers a portfolio of variable and fixed insurance products
designed to meet customer needs for a tax-advantaged savings for retirement
and protection from death. The Company's variable and fixed insurance
products are marketed by broker/dealers, financial institutions, and
insurance agents. The Company's primary customers are consumers and
corporations.
Recently Adopted Accounting Standards
Accounting for Goodwill and Intangible Assets
During 2002, the Company adopted Financial Accounting Standards Board
("FASB") FAS No. 142, "Goodwill and Other Intangible Assets". The adoption
of this standard resulted in an impairment loss of $135.3 million. The
Company, in accordance with FAS No. 142, recorded the impairment loss
retroactive to the first quarter of 2002; prior quarters of 2002 were
restated accordingly. This impairment loss represented the entire carrying
amount of goodwill, net of accumulated amortization. This impairment charge
was shown as a change in accounting principle on the December 31, 2002
Consolidated Income Statement.
25
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Application of the nonamortization provision (net of tax) of the standard
resulted in an increase in net income of $3.8 million for the twelve months
ended December 31, 2002. Had the Company been accounting for goodwill under
FAS No. 142 for all periods presented, the Company's net income (loss)
would have been as follow:
Year ended
December 31,
(Millions) 2001
Reported net income (loss) $ (4.0)
Add back goodwill amortization, net of tax 3.8
-----------------
Adjusted net income (loss) $ (0.2)
=================
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended and interpreted by FAS No.
137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement 133, and FAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of FASB 133, and certain FAS 133 implementation
issues". This standard, as amended, requires companies to record all
derivatives on the balance sheet as either assets or liabilities and
measure those instruments at fair value. The manner in which companies are
to record gains or losses resulting from changes in the fair values of
those derivatives depends on the use of the derivative and whether it
qualifies for hedge accounting. FAS No. 133 was effective for the Company's
financial statements beginning January 1, 2001. Adoption of FAS No. 133 did
not have a material effect on the Company's financial position or results
of operations given the Company's limited derivative holdings and embedded
derivatives.
The Company occasionally purchases a financial instrument that contains a
derivative that is "embedded" in the instrument. In addition, the Company's
insurance products are reviewed to determine whether they contain an
embedded derivative. The Company assesses whether the economic
characteristics of the embedded derivative are clearly and closely related
to the economic characteristics of the remaining component of the financial
instrument or insurance product (i.e., the host contract) and whether a
separate instrument with the same terms as the embedded instrument would
meet the definition of a derivative instrument. When it is determined that
the embedded derivative possesses economic characteristics that are not
clearly and closely related to the economic characteristics of the host
contract and that a separate instrument with the same terms would qualify
as a derivative instrument, the embedded derivative is separated from the
host contract and carried at fair value. However, in cases where the host
contract is measured at fair value, with changes in fair value reported in
current period earnings or the Company is unable to reliably identify and
measure the embedded derivative for separation from its host contracts, the
entire contract is carried on the balance sheet at fair value and is not
26
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
designated as a hedging instrument. The Company did not have embedded
derivatives at December 31, 2003 or 2002.
The Derivative Implementation Group ("DIG") responsible for issuing
guidance on behalf of the FASB for implementation of FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" recently
issued Statement Implementation Issue No. B36, "Embedded Derivatives:
Modified Coinsurance Arrangements and Debt Instruments" That Incorporate
Credit Risk Exposures That Are Unrelated or Only Partially Related to the
Credit Worthiness of the Obligor under Those Instruments ("DIG B36"). Under
this interpretation, modified coinsurance and coinsurance with funds
withheld reinsurance agreements as well as other types of receivables and
payables where interest is determined by reference to a pool of fixed
maturity assets or total return debt index may be determined to contain
embedded derivatives that are required to be bifurcated. The required date
of adoption of DIG B36 for the Company was October 1, 2003. The Company
completed its evaluation of DIG B36 and determined that the Company had
modified coinsurance treaties that required implementation of the guidance.
The applicable contracts, however, were determined to generate embedded
derivatives with a fair value of zero. Therefore, the guidance, while
implemented, did not impact the Company's financial position, results of
operations or cash flows.
Guarantees
In November 2002, the FASB issued Interpretation No.45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others", to clarify
accounting and disclosure requirements relating to a guarantor's issuance
of certain types of guarantees, or groups of similar guarantees, even if
the likelihood of the guarantor's having to make any payments under the
guarantee is remote. The disclosure provisions are effective for financial
statements for fiscal years ended after December 15, 2002. For certain
guarantees, the interpretation also requires that guarantors recognize a
liability equal to the fair value of the guarantee upon its issuance. This
initial recognition and measurement provision is to be applied only on a
prospective basis to guarantees issued or modified after December 31, 2002.
The Company has performed an assessment of its guarantees and believes that
all of its guarantees are excluded from the scope of this interpretation.
Variable Interest Entities
In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No.51" (FIN 46). In December 2003, the FASB modified
FIN 46 to make certain technical corrections and address certain
implementation issues that had arisen. FIN 46 provides a new framework for
identifying variable interest entities (VIEs) and determining when a
company should include the assets, liabilities, noncontrolling interests
and results of activities of a VIE in its consolidated financial
statements.
27
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
In general, a VIE is a corporation, partnership, limited- liability
corporation, trust, or any other legal structure used to conduct activities
or hold assets that either (1) has an insufficient amount of equity to
carry out its principal activities without additional subordinated
financial support, (2) has a group of equity owners that are unable to make
significant decisions about its activities, or (3) has a group of equity
owners that do not have the obligation to absorb losses or the right to
receive returns generated by its operations.
FIN 46 requires a VIE to be consolidated if a party with an ownership,
contractual or other financial interest in the VIE (a variable interest
holder) is obligated to absorb a majority of the risk of loss from the
VIE's activities, is entitled to receive a majority of the VIE's residual
returns (if no party absorbs a majority of the VIE's losses), or both. A
variable interest holder that consolidates the VIE is called the primary
beneficiary. Upon consolidation, the primary beneficiary generally must
initially record all of the VIE's assets, liabilities and noncontrolling
interests at fair value and subsequently account for the VIE as if it were
consolidated based on majority voting interest. FIN 46 also requires
disclosures about VIEs that the variable interest holder is not required to
consolidate but in which it has a significant variable interest.
At December 31, 2003, the Company held the following investments that, for
purposes of FIN 46, were evaluated and determined that the investments do
not require consolidation in the Company's financial statements:
Asset Type Purpose Book Value (1) Market Value
---------------------- ------------------- ------------------- ------------------
Private Corporate Securities - synthetic
leases; project financings; credit tenant
leases Investment Holdings $ 1,057.2 $ 1,114.6
Foreign Securities - US VIE subsidiaries
of foreign companies Investment Holdings 190.3 203.0
Commercial Mortgage Obligations (CMO) Investment Holdings 888.5 893.9
Collateralized Debt Obligations (CDO) Investment Holdings
and/or
Collateral Manager 4.9 4.3
Asset-Backed Securities (ABS) Investment Holdings 479.9 482.3
Commercial Mortgage Backed Securities (CMBS) Investment Holdings 325.4 342.0
(1) Represents maximum exposure to loss except for those structures for which the Company also receives asset management fees.
New Accounting Pronouncements
In July 2003, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts," which the Company intends to adopt
during first quarter 2004. The impact on the financial statements is not
known at this time.
28
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Reclassifications and Changes to Prior Year Presentation
Certain reclassifications have been made to prior year financial
information to conform to the current year classifications.
During 2003, certain changes were made to the 2002 and 2001 Income
Statements to reflect the correct balances. These changes had no impact on
net income or net shareholder's equity of the Company. The following
summarizes the corrections to each financial statement line item (in
millions):
Previously
Reported Restated
2002 Adjustments 2002
------------------- ------------------ ------------------
Fee income $ 204.0 $ 41.9 $ 245.9
------------------- ------------------ ------------------
Total revenue $ 409.4 $ 41.9 $ 451.3
=================== ================== ==================
Interest credited and other benefits to
policyholders 276.5 41.9 318.4
------------------- ------------------ ------------------
Total expense $ 451.6 $ 41.9 $ 493.5
=================== ================== ==================
Previously
Reported Restated
2002 Adjustments 2002
------------------- ------------------ ------------------
Fee income $ 188.9 $ 30.2 $ 219.1
------------------- ------------------ ------------------
Total revenue $ 276.8 $ 30.2 $ 307.0
=================== ================== ==================
Interest credited and other benefits to
policyholders 209.0 30.2 239.2
------------------- ------------------ ------------------
Total expense $ 280.7 $ 30.2 $ 310.9
=================== ================== ==================
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from reported results using those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, money market instruments
and other debt issues with a maturity of 90 days or less when purchased.
29
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Investments
All of the Company's fixed maturity and equity securities are currently
designated as available-for-sale. Available-for-sale securities are
reported at fair value and unrealized gains and losses on these securities
are included directly in shareholder's equity, after adjustment for related
charges in deferred policy acquisition costs, value of business acquired,
and deferred income taxes.
The Company analyzes the general account investments to determine whether
there has been an other than temporary decline in fair value below the
amortized cost basis in accordance with FAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Management considers
the length of the time and the extent to which the market value has been
less than cost; the financial condition and near-term prospects of the
issuer; future economic conditions and market forecasts; and the Company's
intent and ability to retain the investment in the issuer for a period of
time sufficient to allow for recovery in market value. If it is probable
that all amounts due according to the contractual terms of a debt security
will not be collected, an other than temporary impairment is considered to
have occurred.
In addition, the Company invests in structured securities that meet the
criteria of Emerging Issues Task Force ("EITF") Issue No. 99-20,
"Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets". Under Issue No. EITF
99-20, a determination of the required impairment is based on credit risk
and the possibility of significant prepayment risk that restricts the
Company's ability to recover the investment. An impairment is recognized if
the fair value of the security is less than amortized cost and there has
been an adverse change in cash flow since the remeasurement date.
When a decline in fair value is determined to be other than temporary, the
individual security is written down to fair value and the loss is accounted
for as a realized loss.
Realized capital gains and losses on all other investments are included in
the consolidated income statements.
Unrealized capital gains and losses on all other investments are reflected
in shareholder's equity, net of related income taxes.
Purchases and sales of fixed maturities and equity securities (excluding
private placements) are recorded on the trade date. Purchases and sales of
private placements and mortgage loans are recorded on the closing date.
Fair values for fixed maturities are obtained from independent pricing
services or broker/dealer quotations. Fair values for privately placed
bonds are determined using a matrix-based model. The matrix-based model
considers the level of risk-free interest rates, current corporate spreads,
the credit quality of the issuer and cash flow characteristics of the
30
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
security. The fair values for equity securities are based on quoted market
prices. For equity securities not actively traded, estimated fair values
are based upon values of issues of comparable yield and quality or
conversion value where applicable.
The Company engages in securities lending whereby certain securities from
its portfolio are loaned to other institutions for short periods of time.
Initial collateral, primarily cash, is required at a rate of 102% of the
market value of the loaned domestic securities. The collateral is deposited
by the borrower with a lending agent, and retained and invested by the
lending agent according to the Company's guidelines to generate additional
income. The market value of the loaned securities is monitored on a daily
basis with additional collateral obtained or refunded as the market value
of the loaned securities fluctuates.
Reverse dollar repurchase agreement and reverse repurchase agreement
transactions are accounted for as collateralized borrowings, where the
amount borrowed is equal to the sales price of the underlying securities.
The investment in mutual funds represents an investment in mutual funds
managed by the Company, and is carried at fair value.
Mortgage loans on real estate are reported at amortized cost less
impairment writedowns. If the value of any mortgage loan is determined to
be impaired (i.e., when it is probable the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement), the carrying value of the mortgage loan is reduced to the
present value of expected cash flows from the loan, discounted at the
loan's effective interest rate, or to the loan's observable market price,
or the fair value of the underlying collateral. The carrying value of the
impaired loans is reduced by establishing a permanent writedown charged to
realized loss.
Policy loans are carried at unpaid principal balances, net of impairment
reserves.
Short-term investments, consisting primarily of money market instruments
and other fixed maturities issues purchased with an original maturity of 91
days to one year, are considered available for sale and are carried at fair
value, which approximates amortized cost.
The Company's use of derivatives is limited to hedging purposes. The
Company enters into interest rate and currency contracts, including swaps,
caps, and floors to reduce and manage risks associated with changes in
value, yield, price, cash flow or exchange rates of assets or liabilities
held or intended to be held. Changes in the fair value of open derivative
contracts are recorded in net realized capital gains and losses.
On occasion, the Company sells call options written on underlying
securities that are carried at fair value. Changes in fair value of these
options are recorded in net realized capital gains or losses.
31
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Deferred Policy Acquisition Costs and Value of Business Acquired
Deferred Policy Acquisition Costs ("DAC") is an asset, which represents
certain costs of acquiring certain insurance business, which are deferred
and amortized. These costs, all of which vary with and are primarily
related to the production of new and renewal business, consist principally
of commissions, certain underwriting and contract issuance expenses, and
certain agency expenses. Value of Business Acquired ("VOBA") is an asset,
which represents the present value of estimated net cash flows embedded in
the Company's contracts, which existed at the time the Company was acquired
by ING. DAC and VOBA are evaluated for recoverability at each balance sheet
date and these assets would be reduced to the extent that gross profits are
inadequate to recover the asset.
The amortization methodology varies by product type based upon two
accounting standards: FAS No. 60, "Accounting and Reporting by Insurance
Enterprises" ("FAS No. 60") and FAS No. 97, "Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and Realized
Gains and Losses from the Sale of Investments" ("FAS No. 97").
Under FAS No. 60, acquisition costs for traditional life insurance
products, which primarily include whole life and term life insurance
contracts, are amortized over the premium payment period in proportion to
the premium revenue recognition.
Under FAS No. 97, acquisition costs for universal life and investment-type
products, which include universal life policies and fixed and variable
deferred annuities, are amortized over the life of the blocks of policies
(usually 25 years) in relation to the emergence of estimated gross profits
from surrender charges, investment margins, mortality and expense margins,
asset-based fee income, and actual realized gains (losses) on investments.
Amortization is adjusted retrospectively when estimates of current or
future gross profits to be realized from a group of products are revised.
DAC and VOBA are written off to the extent that it is determined that
future policy premiums and investment income or gross profits are not
adequate to cover related expenses.
32
ING USA Annuity and Life Insurance Company,
formerly Golden American Life Insurance Company
(A wholly-owned subsidiary of Lion Connecticut Holdings Inc.)
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Activity for the years ended December 31, 2003, 2002 and 2001 within VOBA
was as follows:
(Millions)
Balance at December 31, 2000 $ 25.9
Adjustment for FAS No. 115 (1.3)
Interest accrued at 7% 1.6
Amortization (6.0)
-----------------
Balance at December 31, 2001 20.2
Adjustment for FAS No. 115 (5.1)
Additions (3.3)
Interest accrued at 7% 1.3
Amortization (4.6)
-----------------
Balance at December 31, 2002 8.5
Adjustment for FAS No. 115 4.3
Additions -
Interest accrued at (4% - 5%) 0.4
Amortization (4.7)