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: 333-104540
ReliaStar Life Insurance Company of New York
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(Exact name of registrant as specified in its charter)
New York 53-0242530
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(State or other jurisdiction of incorporation or organization (IRS employer
identification no.)
1000 WOODBURY ROAD, SUITE 208, WOODBURY, NY 11797
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (516) 682-8700
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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: 1,377,863 shares of Common
Stock as of March 25, 2004 all of which were directly owned by ReliaStar Life
Insurance Company.
NOTE: WHEREAS RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK 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).
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
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** 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders* 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 9
Item 6. Selected Financial Data* 9
Item 7. Management's Narrative Analysis of the Results of Operations and Financial Condition** 9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 19
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure * 57
Item 9A. Controls and Procedures 57
PART III
Item 10. Directors and Executive Officers of the Registrant* 57
Item 11. Executive Compensation* 58
Item 12. Security Ownership of Certain Beneficial Owners and Management* 58
Item 13. Certain Relationships and Related Transactions* 58
Item 14. Principal Accountant Fees and Services* 58
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 59
Index to 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
2
PART I
Item 1. Business
Organization of Business
Until October 1, 2003, ReliaStar Life Insurance Company of New
York ("RLNY" or the "Company") was a wholly-owned subsidiary of
Security-Connecticut Life Insurance Company ("Security-Connecticut
Life"), a Minnesota domiciled insurance company, which provides
financial products and services in the United States. Effective
October 1, 2003, Security-Connecticut merged with and into
ReliaStar Life Insurance Company ("ReliaStar Life") causing the
Company to be a direct subsidiary of ReliaStar Life. ReliaStar
Life is a wholly-owned subsidiary of Lion Connecticut Holdings
Inc. ("Lion"), a Connecticut holding and management company.
Lion's ultimate parent is ING Groep, N.V. ("ING"), a global
financial services company based in The Netherlands.
On September 1, 2000, ING America Insurance Holdings, Inc. ("ING
AIH"), an indirect, wholly-owned subsidiary of ING, acquired
ReliaStar Financial Corp. ("ReliaStar"), of which the Company is
part, for approximately $6 billion. The purchase price was
comprised of approximately $5.1 billion in cash and the assumption
of $917 million of outstanding debt and other net liabilities.
On April 1, 2002, ReliaStar Life acquired First Golden American
Life Insurance Company of New York ("First Golden"), an affiliated
entity, for a purchase price of $27.7 million in cash and $0.2
million in receivables. The purchase price was based on First
Golden's statutory-basis book value. ReliaStar Life contributed
First Golden to Security-Connecticut at GAAP book value.
Security-Connecticut contributed First Golden to RLNY and First
Golden was dissolved into RLNY at GAAP book value. The
contribution of First Golden to RLNY was recorded as an increase
to stockholder's equity of $31.4 million which equaled First
Golden's April 1, 2002 GAAP book value. Approval for the merger
was obtained from the Insurance Departments of the States of New
York and Delaware.
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." In accordance with Opinion No. 16,
the statement of financial position and other financial
information is presented as of the beginning of the period being
presented in the financial statements. The Company has recorded
amounts as though the assets and liabilities had been transferred
at January 1, 2002 on a combined basis. The 2001 information was
not restated due to the immateriality of the First Golden amounts
to the prior periods.
3
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 is principally engaged in the business of providing
life insurance and related financial services products. The
Company provides and distributes individual life insurance and
annuities, employee benefits products and services and retirement
plans. The Company's strategy is to offer, principally through
education-based marketing, a wide variety of products and services
designed to address customers needs for financial security,
especially tax-advantaged savings for retirement and protection in
the event of death.
The Company offers qualified and nonqualified annuity contracts
that include a variety of funding and payout options for
individuals and employer sponsored retirement plans qualified
under Internal Revenue Code Sections 401, 403 and 457, as well as
non-qualified deferred compensation plans. Annuity contracts may
be deferred or immediate (payout annuities). These products also
include programs offered to qualified plans and non-qualified
deferred compensation plans that package administrative and
record-keeping services along with a variety of investment
options, including affiliated and nonaffiliated mutual funds and
variable and fixed investment options. In addition, the Company
also offers wrapper agreements entered into with retirement plans
which contain certain benefit responsive guarantees (i.e.
liquidity guarantees of principal and previously accrued interest
for benefits paid under the terms of the plan) with respect to
portfolios of plan-owned assets not invested with the Company. The
Company also offers investment advisory services and pension plan
administrative services.
Individual Life and Annuity Insurance Products
The Company offers a wide range of individual life insurance
products, including term, universal life, second-to-die universal
life, variable universal life, as well as variable annuities
through a network of independent agents and financial
professionals. These products are marketed to individual customers
who prefer to purchase insurance and investment products from a
personal financial adviser. These products target middle and
upper-income families and niche markets including U.S. military
personnel and small-business owners.
Variable universal life and fixed universal life insurance
products represent a significant portion of the individual life
insurance premium volume. Variable universal life insurance
policies contain alternative investment options (generally mutual
funds) and policy values which will vary based upon the investment
returns of the fund(s) selected by the policyholder, while
providing certain benefits associated with traditional life
insurance, such as death benefits and cash values. Fixed universal
4
life policies provide for guaranteed levels of insurance
protection and minimum interest rate guarantees. Interest
sensitive products provide for interest crediting rates which may
be adjusted periodically, subject to minimum guaranteed rates as
set forth in policyholder contracts. Adjustments are made to the
crediting rates on interest sensitive products based upon a
variety of factors, including investment performance, market
interest rates and competitive factors. Profits recognized on
interest-sensitive products are affected by mortality experience,
the margin between interest rates earned on investments and
interest credited to policyholders, as well as capital gains and
losses on investments, persistency and expenses.
The variable annuity products offered contain alternative
investment options (generally mutual funds) and policy values
which will vary based upon the investment returns of the fund(s)
selected by the policyholder.
Variable annuities are long-term savings vehicles in which
contract owner premiums (purchase payments) are recorded and
maintained in sub-accounts with a separate account established and
registered with the Securities and Exchange Commission ("SEC") as
a unit investment trust. Variable annuities issued by the Company
are a combination of 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.
The Company discourages premature surrenders of interest-sensitive
products through contractual surrender charges and the adjustment
of interest crediting rates. The policies and annuities sold
contain provisions which allow the contractholder to withdraw or
surrender their contracts under defined circumstances. These
contracts generally contain provisions which apply penalties or
otherwise limit the ability of contractholders to make such
withdrawals or surrenders. The interest rates that the Company
might be required to credit under their interest-sensitive
insurance products to forestall surrenders, particularly in a time
of rapidly rising market interest rates, could have an adverse
effect on operating income.
Individual life insurance business is subject to risks in the
event that the Company's mortality experience deviates from the
assumptions used in establishing its premium rates.
Employee Benefit Products
The Company targets the sale of employee benefits and financial
services to medium and large corporate employers and affinity
groups. Additionally, the Company sells individual and
payroll-deduction products to employees of its corporate clients.
Principal products include group and individual life insurance and
non-medical group insurance products. The Company also maintains
an in-force block of 401(k) retirement plan business.
5
Group life and disability insurance and employee benefit related
services are offered by the Company. Employee benefits products
are marketed through major brokerage operations and through direct
sales to employers.
Group term life insurance is marketed to employer groups in the
Company's target market. Premiums for these policies are based
largely upon the experience of the Company, and in some instances,
on the experience of the particular group policyholder. The
primary risks related to this line of business include deviations
from expected mortality, expenses and investment income. The
Company seeks to control the mortality risk through reinsurance
treaties.
The Company also markets group disability income insurance. This
coverage compensates employees for loss of income due to sickness
or injury. The profitability of this business is affected by
morbidity experience and the investment return on assets
supporting the policy reserves.
The Company markets individual life insurance policies to
employees at the worksite and to members of affinity groups. The
products delivered to these markets include universal life
insurance policies, whole life insurance policies and individual
term life policies.
The Company also markets individual cancer policies to employees
at the worksite as well as medical stop loss coverage to employer
sponsors of self-funded employee health benefit plans.
Competition
The businesses in which the Company engages in are each highly
competitive. The products compete in marketplaces characterized by
a large number of competitors with similar products. Competition
is based largely upon the crediting rates under the policies, the
credit and claims paying ratings of competing insurers, name
recognition, the commission structures of competing insurers and
the levels of service afforded distributors. Competing investment
opportunities are also made available by mutual funds, banks and
other financial intermediaries, many of which have greater
resources than the Company. The products are not generally
eligible for legal protection from being copied by others, and
capital is the most significant barrier to entry by new
competitors.
Group life insurance is a homogeneous product sold in a highly
competitive market. The Company's competitors include all of the
largest insurers doing business in the United States.
6
Regulation
Insurance companies are subject to regulation and supervision by
the jurisdictions in which they are domiciled and transact
business. The Company is domiciled in New York. The laws of the
state of New York establishes supervisory agencies with broad
administrative and supervisory powers relative to granting and
revoking licenses to transact business, regulating trade
practices, licensing agents, approving policy forms, filing
certain premium rates, setting insurance liability and investment
reserve requirements, determining the form and content of required
financial statements, determining the reasonableness and adequacy
of capital and surplus and prescribing the types, amounts and
concentrations of investments permitted. The Company is subject to
periodic examinations by the regulatory agencies, including market
conduct examinations of sales practices. A number of states
require insurance companies to participate in assigned risk or
other pools providing insurance for people who cannot qualify in
the regular markets.
The state of New York imposes National Association of Insurance
Commissioners ("NAIC") developed minimum risk-based capital
requirements on insurance enterprises. The formulas for
determining the amount of risk-based capital specify various
weighting factors that are applied to financial balances and
various levels of activity, based upon the nature and perceived
degree of risk associated with such balances and levels of
activity. Regulatory compliance is measured by a company's
risk-based capital ratio, which is calculated as a company's
regulatory total adjusted capital, as defined, divided by its
authorized control level risk-based capital, as defined. Companies
with ratios below specific trigger points are classified within
certain regulatory action levels, each of which requires specified
corrective action. The risk-based capital ratio of the Company
exceeds the ratio at which regulatory corrective action would be
required.
In addition to state insurance laws, the Company is also subject
to general business and corporation laws, federal and state
securities laws, the Employee Retirement Income Security Act of
1974, as amended, the Internal Revenue Code of 1986, as amended,
consumer protection laws, fair credit reporting acts and other
laws.
Some annuities and insurance policies issued by the Company are
funded by separate accounts, the interests in which are registered
under the Securities Act of 1933, as amended, and subject to
review by the SEC. These laws and regulations are primarily
intended to protect investors in the securities markets and
generally grant supervisory agencies broad administrative power,
including the power to limit or restrict the conduct of business
for failure to comply with such laws and regulations.
7
Geographic Distribution
The Company operates primarily in the United States and is
authorized to conduct business in all 50 states and the District
of Columbia.
Item 2. Properties
The Company's home office is located at 1000 Woodbury Road, Suite
208, Woodbury, NY 11797. 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.
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 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.
8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
As of October 1, 2003, all of the Company's outstanding shares are
owned by ReliaStar Life, which is a wholly-owned subsidiary of
Lion Connecticut Holdings, whose ultimate parent is ING. Prior to
that date, the Company's outstanding shares were owned by
Security-Connecticut Life.
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 financial statements
and other data presented herein.
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
$865.0 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
Premiums for the year ended December 31, 2003, increased by $6.8
million compared to the same period in 2002. The increase in
premiums is primarily due to higher cancer and stop loss renewal
premiums resulting from growth in sales in 2002 and 2001.
Additionally, the growth of premiums is attributed to higher
renewal premiums in 2003 that were not offset by a corresponding
increase in ceded premiums.
9
Fee income for the year ended December 31, 2003, decreased by $3.5
million compared to the same period in 2002. The variance is
primarily due to decreased fees on lower average variable annuity
assets under management resulting from market volatility and net
product withdrawals.
Net investment income for the year ended December 31, 2003,
decreased by $8.7 million compared to the same period in 2002. The
decrease in net investment income was due to the decrease in yield
and declining interest rates.
Net realized capital gains (losses) for the year ended December
31, 2003, increased by $13.8 million compared to the same period
in 2002. Net realized gains resulted from sales of fixed maturity
investments having a fair value greater than book value primarily
due to declining interest rates.
Other income for the year ended December 31, 2003, decreased $1.5
million compared to the same period in 2002. Other income for the
year ended December 31, 2003, is comparable to that for the same
period.
Interest credited and other benefits to policyholders for the year
ended December 31, 2003, decreased by $28.8 million compared to
the same period in 2002. The decrease in interest credited and
other benefit expense is due to a smaller increase in life
reserves which resulted from lower interest credited for FAS 97
products, and favorable net contractual charges.
General expenses for the year ended December 31, 2003, increased
by $7.6 million compared to the same period in 2002. The
unfavorable expense variance is due to staff expenses, allocations
from affiliates and lower reinsurance ceding fees.
Amortization of deferred policy acquisition costs and value of
business acquired for the year ended December 31, 2003, decreased
by $1.7 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,
mortality, surrenders, premium persistency, expenses, and asset
growth. The decrease 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.
10
The cumulative effect of the change in accounting principle for
the year ended December 31, 2003, was $865.0 million, related to
the adoption of FAS No. 142, which addresses the value of goodwill
and other intangible assets.
Income before cumulative effect of change in accounting principle,
increased by $21.3 million for the year ended December 31, 2003,
as compared to the year ended December 31, 2002. The increase is a
result of increased renewal premiums, increased net realized
capital gains and a decrease in interest credited and other
benefits to policyholders offset by lower net investment income
and increased corporate overhead.
For the period ended December 31, 2003, the company reported
negative cash flows from operations primarily resulting from the
timing of intercompany payables and receivables. The Company
intends to meet its cash requirements and maintain operations
through cash flows from operations and its existing reciprocal
loan agreement with ING AIH.
Financial Condition
Investments
Fixed Maturities
Total fixed maturities reflected net unrealized capital gains of
$75.2 million and $78.5 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 an A+ 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.
11
The percentage of total fixed maturities by quality rating
category is as follows:
December 31, December 31,
2003 2002
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AAA 39.2% 44.9%
AA 5.7 4.7
A 22.3 20.6
BBB 26.9 23.6
BB 4.9 4.2
B and below 1.0 2.0
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Total 100.0% 100.0%
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The percentage of total fixed maturities by market sector is as
follows:
December 31, December 31,
2003 2002
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U.S. Corporate 53.0% 49.9%
Residential Mortgage-backed 23.4 23.4
Commercial/Multifamily Mortgage-backed 6.7 7.0
Foreign (1) 10.1 4.2
U.S. Treasuries/Agencies 0.5 6.1
Asset-backed 6.3 9.4
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Total 100.0% 100.0%
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(1) Primarily U.S. dollar denominated
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 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
market value of the security is less than book value and there has
been an adverse change in cash flow since the last remeasurement
date.
12
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 premiums, 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 and repayment of debt, as well as withdrawals
and surrenders.
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 $121.9 million reciprocal loan agreement
with ING AIH, a perpetual $30 million revolving note facility with
Bank of New York and a $30.0 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 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.
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
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.
13
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 change 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.
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, we reduce the carrying value of those investments to
the current fair value and record impairment losses for the
difference (refer to Note 2 of the Financial Statements).
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 to 30 years) in relation to the present
value of estimated gross profits from projected interest and
mortality 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 for
the annuity business (annually for the life business).
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 gross profits 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
14
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.
As part of the regular analysis of DAC/VOBA, at the end of third
quarter of 2002, the Company unlocked its long-term rate of return
assumptions. The Company reset long-term assumptions for the
separate account returns to 9.0% (gross before fund management
fees and mortality and expense and other policy charges), as of
December 31, 2002, reflecting a blended return of equity and other
sub-accounts. The initial unlocking adjustment in 2002 was
primarily driven by the sustained downturn in the equity markets
and revised expectations for future returns. During 2002, the
Company recorded an acceleration of DAC/VOBA amortization totaling
$1.5 million before tax, or $1.0 million, net of $0.5 million of
federal income tax benefit.
During 2003, the Company 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 an acceleration of DAC/VOBA amortization totaling $5.4
million before tax, or $3.5 million, net of $1.9 million of
federal income tax benefit due to the change in the equity return
assumption along with other prospective assumption changes.
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.
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 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.
15
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 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 $ 220.6 $ 235.6
Foreign Securities - US VIE subsidiaries of
foreign companies Investment Holdings 23.3 24.2
Commercial Mortgage Obligations (CMO) Investment Holdings
and/or Collateral
Manager 403.9 406.5
Collateralized Debt Obligations (CDO) Investment Holdings 20.3 21.4
Asset-Backed Securities (ABS) Investment Holdings 70.3 75.6
Commercial Mortgage Backed Securities (CMBS) Investment Holdings 106.1 115.4
(1)Represents maximum exposure to loss except for those structures
for which the Company also reserves asset management fees.
16
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
---------------------------------- ----------- ------------- ------------- ------------ -------------
Operating Lease Obligations $ 0.4 $ 0.1 $ 0.2 $ 0.1 $ -
Purchase Obligations 28.9 28.9 - - -
----------- ------------- ------------- ------------ -------------
Total $ 29.3 $ 29.0 $ 0.2 $ 0.1 $ -
=========== ============= ============= ============ =============
Operating lease obligations relate to the rental of office space
under various non-cancelable operating lease agreements that
expire through January 2009.
Purchase obligations consist of primarily of commitments to fund
additional limited partnerships 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
17
review is being conducted by independent special counsel and
auditors. Additionally, ING reviewed its controls and procedures
in a continuing effort to deter improper frequent trading in ING
products. ING's internal reviews related to mutual fund trading
are continuing.
The internal review has identified several arrangements allowing
third parties to engage in frequent trading of mutual funds within
our variable insurance and mutual fund products, and identified
other circumstances where frequent trading occurred despite
measures taken by ING intended to combat market timing. Most of
the identified arrangements were initiated prior to ING's
acquisition of the businesses in question. In each arrangement
identified, ING has terminated the inappropriate trading, taken
steps to discipline or terminate employees who were involved, and
modified policies and procedures to deter inappropriate activity.
While the review is not completed, management believes the
activity identified does not represent a systemic problem in the
businesses involved.
These instances included agreements (initiated in 1998) that
permitted one variable life insurance customer of Reliastar Life
Insurance Company ("Reliastar") to engage in frequent trading, and
to submit orders until 4pm Central Time, instead of 4pm Eastern
Time. Reliastar was acquired by ING in 2000. The late trading
arrangement was immediately terminated when current senior
management became aware of it in 2002. ING believes that no
profits were realized by the customer from the late trading aspect
of the arrangement.
In addition, the review has identified five arrangements that
allowed frequent trading of funds within variable insurance
products issued by Reliastar and by ING USA Annuity & Life
Insurance Company; and in certain ING Funds. ING entities did not
receive special benefits in return for any of these arrangements,
which have all been terminated. The internal review also
identified two investment professionals who engaged in improper
frequent trading in ING Funds.
ING will reimburse any ING Fund or its shareholders affected by
inappropriate trading for any profits that accrued to any person
who engaged in improper frequent trading for which ING is
responsible. Management believes that the total amount of such
reimbursements will not be material to ING or its U.S. business.
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
18
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 majority of the investment risk related
to variable insurance 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
in to account interest rate and credit risk, as well as other
risks. The Company's asset/liability management discipline
includes strategies to minimize exposure to loss as interest rates
and economic and market conditions change.
Term life products for employee benefits are short term in nature,
with some longer term claim reserves. Cash flow testing and
19
additional sensitivity testing (with varying mortality, morbidity
and expense levels) provides assurance that the existing assets
are adequate to meet projected liability cash flows.
For universal life products, cash flow testing of higher
mortality, surrender and expense levels than expected indicate
that solvency is not impaired by reasonable variations in these
risks. There is currently a gap between the charges that are made
to the policies for cost of insurance and expenses and the
guaranteed maximums, allowing some margin for adverse experience.
Crediting rates are also changed regularly to reflect changes in
the portfolio.
On the basis of these analyses, management believes there is
currently no material solvency risk to the Company.
20
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Page
Report of Independent Auditors 22
Financial Statements:
Income Statements for the years ended December 31, 2003, 2002 and 2001 23
Balance Sheets as of December 31, 2003 and 2002 24
Statements of Changes in Shareholder's Equity for the years ended December 31,
2003, 2002 and 2001 25
Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 26
Notes to Financial Statements 27
Report of Independent Auditors
The Board of Directors
ReliaStar Life Insurance Company of New York
We have audited the accompanying balance sheets of ReliaStar Life Insurance
Company of New York as of December 31, 2003 and 2002 and the related 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 financial position of ReliaStar Life Insurance
Company of New York as of December 31, 2003 and 2002, and the results of its
operations and its cash flows for 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 its
accounting for goodwill and other intangible assets effective January 1, 2002.
/s/ Ernst & Young LLP
Atlanta, Georgia
March 22, 2004
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Income Statements
(Millions)
Year ended Year ended Year ended
December 31, December 31, December 31,
2003 2002* 2001
----------------- ----------------- -----------------
Revenues:
Premiums $ 61.8 $ 55.0 $ 60.2
Fee income 94.7 98.2 90.4
Net investment income 124.4 133.1 142.3
Net realized capital gains (losses) 10.6 (3.2) 10.6
Other income 4.0 5.5 7.6
----------------- ----------------- -----------------
Total revenue 295.5 288.6 311.1
----------------- ----------------- -----------------
Benefits, losses and expenses:
Benefits:
Interest credited and other benefits
to policyholders 147.5 176.3 158.6
Underwriting, acquisition, and insurance expenses:
General expenses 36.9 29.3 51.5
Amortization:
Deferred policy acquisition costs and value
of business acquired 30.9 32.6 26.5
Goodwill - - 22.6
----------------- ----------------- -----------------
Total benefits, losses and expenses 215.3 238.2 259.2
----------------- ----------------- -----------------
Income before income taxes 80.2 50.4 51.9
Income tax expense 26.3 17.8 26.1
----------------- ----------------- -----------------
Income before cumulative effect of change
in accounting principle 53.9 32.6 25.8
Cumulative effect of change in accounting principle - (865.0) -
----------------- ----------------- -----------------
Net income (loss) $ 53.9 $ (832.4) $ 25.8
================= ================= =================
* See Note 1.
The accompanying notes are an integral part of these financial statements.
23
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Balance Sheets
(Millions)
As of December 31,
2003 2002
--------------- ----------------
Assets
Investments:
Fixed maturities, available for sale, at fair value
(amortized cost of $1,642.8 at 2003 and $1,523.0 at 2002) $ 1,718.0 $ 1,601.5
Equity securities, at fair value (cost of $4.4 at 2003 and 2002) 4.2 4.4
Mortgage loans on real estate 209.7 243.6
Policy loans 86.6 85.2
Short-term investments 2.1 55.6
Other investments 12.8 11.9
Securities pledged to creditors (amortized cost of $1.9 at 2003 and $0.9
at 2002) 1.9 0.9
--------------- ----------------
Total investments 2,035.3 2,003.1
Cash and cash equivalents 10.4 2.4
Accrued investment income 18.9 19.3
Accounts and notes receivable 13.1 6.9
Reinsurance recoverable 67.8 54.6
Deferred policy acquisition costs 74.6 61.3
Value of business acquired 36.5 48.2
Receivable for securities sold 7.1 0.5
Deferred income taxes 20.2 26.1
Other assets 10.2 4.7
Assets held in separate accounts 523.1 429.4
--------------- ----------------
Total assets $ 2,817.2 $ 2,656.5
=============== ================
Liabilities and Shareholder's Equity
Policy liabilities and accruals:
Future policy benefits and claims reserves $ 1,614.3 $ 1,580.5
Unearned premiums 0.3 0.2
Other policy claims, policyholders' and benefits payable 37.4 41.7
Other policyholder's funds 25.3 23.3
--------------- ----------------
Total policy liabilities and accruals 1,677.3 1,645.7
Current income taxes 3.7 12.3
Other borrowed money 103.4 74.2
Other liabilities 55.1 69.1
Liabilities related to separate accounts 523.1 429.4
--------------- ----------------
Total liabilities 2,362.6 2,230.7
--------------- ----------------
Shareholder's equity:
Common stock (1,377,863 shares authorized, issued and outstanding,
$2.00 per share par value) 2.8 2.8
Additional paid-in capital 1,200.1 1,225.6
Accumulated other comprehensive income 35.8 35.4
Retained deficit (784.1) (838.0)
--------------- ----------------
Total shareholder's equity 454.6 425.8
--------------- ----------------
Total liabilities and shareholder's equity $ 2,817.2 $ 2,656.5
=============== ================
The accompanying notes are an integral part of these financial statements.
24
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Statements of Changes in Shareholder's Equity
(Millions)
Accumulated
Additional Other Retained Total
Common Paid-In Comprehensive Earnings Shareholder's
Stock Capital Income (Deficit) Equity
-------------- -------------- ------------------ -------------- ---------------
Balance at December 31, 2000 $ 2.8 $ 1,194.6 $ 9.4 $ 1.0 $ 1,207.8
Dividends to Shareholder - - - (18.0) (18.0)
Comprehensive income:
Net income - - - 25.8 25.8
Other comprehensive income,
net of tax:
Unrealized (loss) on
securities ($(4.5) pretax) - - (2.9) - (2.9)
---------------
Comprehensive income 22.9
-------------- -------------- ------------------ -------------- ---------------
Balance at December 31, 2001 2.8 1,194.6 6.5 8.8 1,212.7
Capital contribution - 31.4 - - 31.4
Other - (0.4) - - (0.4)
Dividends to Shareholder - - - (14.4) (14.4)
Comprehensive income:
Net loss - - - (832.4) (832.4)
Other comprehensive income,
net of tax:
Unrealized gain on
securities ($45.1 pretax) - - 28.9 - 28.9
---------------
Comprehensive loss (803.5)
-------------- -------------- ------------------ -------------- ---------------
Balance at December 31, 2002 2.8 1,225.6 35.4 (838.0) 425.8
Dividends to Shareholder - (25.5) - - (25.5)
Comprehensive income:
Net income - - - 53.9 53.9
Other comprehensive income,
net of tax:
Unrealized gain on
securities ($0.6 pretax) - - 0.4 - 0.4
---------------
Comprehensive income 54.3
-------------- -------------- ------------------ -------------- ---------------
Balance at December 31, 2003 $ 2.8 $ 1,200.1 $ 35.8 $ (784.1) $ 454.6
============== ============== ================== ============== ===============
The accompanying notes are an integral part of these financial statements.
25
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
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) $ 53.9 $ (832.4) $ 25.8
Adjustments to reconcile net income to net cash
provided by operating activities:
Interest credited to insurance 42.5 45.5 43.0
Future policy benefits (62.7) (75.3) (77.9)
Net realized capital (gains) losses (10.6) 2.7 (10.6)
Increase (decrease) in receivables and payables (5.0) (29.1) 28.9
(Increase) decrease in deferred policy acquisition costs (13.3) (19.7) (34.1)
(Increase) decrease in value of business acquired 11.7 16.7 26.5
Amounts due to related parties (43.8) 49.9 (58.4)
Provision for deferred income taxes 5.4 3.5 2.4
Impairment of goodwill - 865.0 -
Amortization of goodwill - - 22.6
Other 10.0 (1.6) (30.9)
----------------- ------------------ -----------------
Net cash provided by (used for) operating activities (11.9) 25.2 (62.7)
----------------- ------------------ -----------------
Cash Flows from Investing Activities:
Proceeds from the sale, maturity or repayment of:
Fixed maturities available for sale 2,767.9 2,248.5 1,354.5
Equity securities 0.1 - 1.0
Mortgages 32.3 21.9 10.2
Short-term investments 53.5 - -
Acquisition of investments:
Fixed maturities available for sale (2,879.3) (2,290.5) (1,371.2)
Equity securities - (0.8) -
Short-term investments - (35.1) (2.1)
Mortgages (10.0) - (29.5)
Decrease in policy loans (1.4) (0.2) (0.6)
Other, net (0.9) (5.1) (1.8)
----------------- ------------------ -----------------
Net cash used for investing activities (37.8) (61.3) (39.5)
----------------- ------------------ -----------------
Cash Flows from Financing Activities:
Deposits and interest credited for investment contracts 151.0 149.0 145.2
Maturities and withdrawals from insurance contracts (97.0) (83.2) (130.9)
Increase in borrowed money 29.2 (1.2) -
Dividends to shareholder (25.5) (14.4) (18.0)
Increase in borrowed money - - 90.5
----------------- ------------------ -----------------
Net cash provided by financing activities 57.7 50.2 86.8
----------------- ------------------ -----------------
Net increase (decrease) in cash and cash equivalents 8.0 14.1 (15.4)
Cash received from First Golden - 5.8 -
----------------- ------------------ -----------------
Cash and cash equivalents, beginning of period 2.4 (17.5) (2.1)
----------------- ------------------ -----------------
Cash and cash equivalents, end of period $ 10.4 $ 2.4 $ (17.5)
================= ================== =================
Supplemental cash flow information:
Income taxes paid, net $ 29.5 $ 2.7 $ 28.1
================= ================== =================
The accompanying notes are an integral part of these financial statements.
26
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Principles of Consolidation
Until October 1, 2003, ReliaStar Life Insurance Company of New York
("RLNY" or the "Company") was a wholly-owned subsidiary of
Security-Connecticut Life Insurance Company ("Security-Connecticut
Life"), a Minnesota domiciled insurance company, which provides
financial products and services in the United States. Effective October
1, 2003, Security-Connecticut merged with and into ReliaStar Life
Insurance Company ("ReliaStar Life") causing the Company to be a direct
subsidiary of ReliaStar Life. ReliaStar Life is a wholly-owned
subsidiary of Lion Connecticut Holdings, Inc. ("Lion"), a Connecticut
holding and management company. Lion's ultimate parent is ING Groep,
N.V. ("ING"), a global financial services company based in The
Netherlands.
On September 1, 2000, ING America Insurance Holdings, Inc. ("ING AIH"),
an indirect, wholly-owned subsidiary of ING, acquired ReliaStar
Financial Corp. ("ReliaStar"), of which the Company is part, for
approximately $6 billion. The purchase price was comprised of
approximately $5.1 billion in cash and the assumption of $917 million
of outstanding debt and other net liabilities.
On April 1, 2002, ReliaStar Life acquired First Golden American Life
Insurance Company of New York ("First Golden"), an affiliated entity,
for a purchase price of $27.7 million in cash and $0.2 million in
receivables. The purchase price was based on First Golden's
statutory-basis book value. ReliaStar Life contributed First Golden to
Security-Connecticut at GAAP book value. Security-Connecticut
contributed First Golden to RLNY and First Golden was dissolved into
RLNY at GAAP book value. The contribution of First Golden to RLNY was
recorded as an increase to stockholder's equity of $31.4 million which
equaled First Golden's April 1, 2002 GAAP book value. Approval for the
merger was obtained from the insurance departments of the states of New
York and Delaware.
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". In accordance with Opinion No. 16, the statement of
financial position and other financial information is presented as of
the beginning of the period being presented in the financial
statements. The Company has recorded amounts as though the assets and
liabilities had been transferred at January 1, 2002 on a combined
basis. The 2001 information was not restated due to the immateriality
of the First Golden amounts to the prior periods.
27
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
Description of Business
The Company is principally engaged in the business of providing life
insurance and related financial services products. The Company provides
and distributes individual life insurance and annuities; employee
benefit products and services and retirement plans. The Company
operates primarily in the United States and is authorized to conduct
business in all 50 states and the District of Columbia.
Recently Adopted Accounting Standards
Accounting for Goodwill and Intangible Assets
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 $865.0 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.
Application of the nonamortization provision (net of tax) of the
standard resulted in an increase in net income of $22.6 million for the
year ended December 31, 2001. Had the Company been accounting for
goodwill under FAS No. 142 for the period presented, the Company's net
income would have been as follows:
Year ended
December 31,
2001
-----------------
(Millions)
Reported net income after tax $ 25.8
Add back goodwill amortization, net of tax 22.6
-----------------
Adjusted net income after tax $ 48.4
=================
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", FAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of FAS No. 133", and certain FAS No.133
implementation issues. This Standard, as amended, requires companies to
28
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
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 derivative holdings.
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 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 is
October 1, 2003. The Company has completed its evaluation of DIG B36
and determined that it has no investment or insurance products that are
applicable to require implementation of the guidance, and therefore,
the guidance had no impact on the Company's financial position, results
of operations or cash flows.
29
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
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. FIN 45 requires entities to
disclose additional information about certain 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 significant guarantees are excluded from the
scope of this interpretation.
Variable Interest Entities
In January 2003, the 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 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.
30
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
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 $ 220.6 $ 235.6
Foreign Securities - US VIE subsidiaries of
foreign companies Investment Holdings 23.3 24.2
Commercial Mortgage Obligations (CMO) Investment Holdings
and/or Collateral
Manager 403.9 406.5
Collateralized Debt Obligations (CDO) Investment Holdings 20.3 21.4
Asset-Backed Securities (ABS) Investment Holdings 70.3 75.6
Commercial Mortgage Backed Securities (CMBS) Investment Holdings 106.1 115.4
(1)Represents maximum exposure to loss except for those structures
for which the Company also reserves 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.
Reclassifications and Changes to Prior Year Presentation
Certain reclassifications have been made to prior year financial
information to conform to the current year classifications.
31
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
During 2003, certain changes were made to the 2002 Income Statement
presentation 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
Revenues 2002 Adjustments 2002
----------------- ----------------- -----------------
Premiums $ 66.2 $ (11.2) $ 55.0
Fee income 94.3 3.9 98.2
Net investment income 130.8 2.3 133.1
Net realized capital gains (2.7) (0.5) (3.2)
Other 11.7 (6.2) 5.5
----------------- ----------------- -----------------
Total revenue $ 300.3 $ (11.7) $ 288.6
================= ================= =================
Benefits, losses and expenses:
Interest credited and other
benefits to policyholders $ 181.1 $ (4.8) $ 176.3
General expenses 36.2 (6.9) 29.3
Amortization of DAC/VOBA 32.6 - 32.6
----------------- ----------------- -----------------
Total expenses $ 249.9 $ (11.7) $ 238.2
================= ================= =================
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.
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.
32
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
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
fair 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 fair 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
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
accounted for as a realized loss.
Realized capital gains and losses on investments are included in the
income statement. Unrealized capital gains and losses on 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.
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 fair value of
the loaned securities fluctuates.
33
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
In accordance with FAS No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," general
account securities on loan are reflected on the Balance Sheets as
"securities pledged to creditors". Total securities pledged to
creditors at December 31, 2003 and 2002 consisted entirely of fixed
maturities.
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. These transactions are reported in "Other Liabilities."
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 maturity 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.
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
34
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Financial Statements
- --------------------------------------------------------------------------------
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 for 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 or 30 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.
Activity for the years ended December 31, 2003, 2002 and 2001 within
VOBA was as follows:
(Millions)
Balance at December 31, 2000 $ 93.8
Adjustment for FAS No. 115 (14.5)
Additions 8.6
Interest accrued at 5% - 7% 4.4
Amortization (27.6)
----------------
Balance at December 31, 2001 64.7
Adjustment for FAS No. 115 (4.0)
Additions