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, 2004
-----------------
Commission file number: 333-114338
ReliaStar Life Insurance Company of New York
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 53-0242530
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)
1000 Woodbury Road, Suite 208, Woodbury, NY 11797
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (516) 682-8700
---------------
- --------------------------------------------------------------------------------
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 29, 2005 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, 2004
TABLE OF CONTENTS
Form 10-K
Item No. Page
PART I
Item 1. Business* 3
Item 2. Properties* 12
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders** 13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 14
Item 6. Selected Financial Data*** 15
Item 7. Management's Narrative Analysis of the Results of
Operations and Financial Condition* 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 37
Item 8. Financial Statements and Supplementary Data 39
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 83
Item 9A. Controls and Procedures 83
Item 9B Other Information 83
PART III
Item 10. Directors and Executive Officers of the Registrant** 84
Item 11. Executive Compensation** 84
Item 12. Security Ownership of Certain Beneficial Owners
and Management** 84
Item 13. Certain Relationships and Related Transactions** 84
Item 14. Principal Accountant Fees and Services 85
PART IV
Item 15. Exhibits and Financial Statement Schedules 87
Index to Financial Statement Schedules 90
Signatures 94
* Item prepared in accordance with General Instruction I(2) of Form 10-K
** 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
*** Although item may be omitted pursuant to General Instruction I(2) of
Form 10-K, the Company has provided certain disclosure under this Item.
2
PART I
Item 1. Business
(Dollar amounts in millions, unless otherwise stated)
Organization of Business
ReliaStar Life Insurance Company of New York ("RLNY" or the
"Company"), a direct, wholly-owned subsidiary of ReliaStar Life
Insurance Company ("ReliaStar Life"), is a stock life insurance
company organized under the laws of the State of New York.
ReliaStar Life is a wholly-owned subsidiary of Lion Connecticut
Holdings Inc. ("Lion"), a Connecticut holding and management
company. Lion is an indirect, wholly-owned subsidiary of ING
Groep N.V. ("ING"), a global financial services holding company
based in The Netherlands, with American Depository Shares listed
on the New York Stock Exchange under the symbol "ING".
Until October 1, 2003, the Company was a wholly-owned subsidiary
of Security-Connecticut Life Insurance Company
("Security-Connecticut Life"), a Minnesota domiciled insurance
company, which provided financial products and services in the
United States. Effective October 1, 2003, Security-Connecticut
merged with and into ReliaStar Life.
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 in cash and $0.2
in receivables. The purchase price was based on First Golden's
statutory-basis book value per generally accepted accounting
principles in the United States ("GAAP"). 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 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.
The Company has one operating segment, ING U.S. Financial
Services ("USFS").
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 benefits products and services and qualified
group annuity contracts that include a variety of funding and
payout options for employer sponsored retirement plans qualified
under Internal Revenue Code Section 401. The Company's strategy
is to offer, principally in the education market, 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.
3
Individual Life Insurance and Annuities: Products, Principal
Markets, and Methods of Distribution
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 fixed and 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 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 contractowner.
Variable annuities are long-term savings vehicles in which
contract owner premiums (purchase payments) are recorded and
maintained in sub-accounts within separate accounts 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 contractowner 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 contractowner
or policyholder to withdraw or surrender their contracts under
defined circumstances. These contracts generally contain
provisions which apply penalties or otherwise limit the ability
of contractowners and policyholders 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.
4
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, Principal Markets, and Methods of
Distribution
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.
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 medical stop loss coverage to employer
sponsors of self-funded employee health benefit plans. Prior to
2003, the Company marketed individual cancer policies to
employees at the worksite as well.
Group Annuities: Products, Principal Markets and Methods of
Distribution
Group annuity contracts may be deferred or immediate (payout
annuities). These products include programs offered to qualified
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.
Group annuity contracts offered by the Company contain variable
and/or fixed investment options. Variable options generally
provide for full assumption by the customer of investment risks.
Assets supporting variable annuity options are held in Separate
5
Accounts that invest in mutual funds managed and/or distributed
by RLNY or its affiliates, or managed and/or distributed by
unaffiliated entities. Variable Separate Account investment
income and realized capital gains and losses are not reflected in
the Company's consolidated statements of income. Fixed options
are "fully guaranteed". Fully-guaranteed fixed options provide
guarantees on investment return, maturity values and, if
applicable, benefit payments.
Although the Company has offered group annuity contracts
primarily to small businesses, it is not actively marketing these
products. The Company's group annuity products generally were
sold through pension professionals, independent agents and
brokers, third party administrators, banks, dedicated career
agents and financial planners.
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.
Competition
The businesses in which the Company engages 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.
Investment Overview and Strategy
The Company's investment strategy involves diversification by
asset class, and seeks to add economic diversification and to
reduce the risks of credit, liquidity, and embedded options
within certain investment products, such as convexity risk on
collateralized mortgage obligations and call options. The
investment management function is centralized under ING
Investment Management LLC ("IIM"), an affiliate of the Company,
pursuant to an investment advisory agreement. Separate portfolios
are established for each general type of product within the
Company.
6
The Company's general account invests primarily in fixed maturity
investments, including publicly issued bonds (including
government bonds), privately placed notes and bonds,
mortgage-backed securities, and asset-backed securities. The
primary investment strategy is to optimize the risk-adjusted
return on capital through superior asset selection predicated on
a developed relative value approach, credit research and
monitoring, superior management of interest rate risk, and active
exploration into new investment product opportunities.
Investments are purchased when market returns, adjusted for risk,
capital and expenses, are sufficient to profitably support growth
of the liability block of business. In addition, assets and
liabilities are analyzed and reported for internal management
purposes on an option-adjusted basis. The level of required
capital of given transactions is a primary factor in determining
relative value among different investment and liability
alternatives, within the scope of each product type's objective.
An active review of existing holdings identifies specific assets
that could be effectively traded in order to enhance the
risk-adjusted returns of the portfolio, while minimizing adverse
tax and accounting impacts. The Company strives to maintain a
portfolio average asset quality rating of A, excluding mortgage
loans, but including mortgage-backed securities, which are
reported with bonds, based on Standard & Poor's ratings
classifications.
Ratings
On December 15, 2004, Standard & Poor's reaffirmed its AA (Very
Strong) counterparty credit and financial strength rating of
ING's primary U.S. insurance operating companies ("ING U.S."),
including the Company. Standard & Poor's also, on this date,
revised the outlook on the core insurance operating companies
from negative to stable, reflecting ING's commercial position and
diversification, financial flexibility, reduced capital leverage,
and improved profitability. The outlook revisions recognize ING's
progress in setting a more focused and decisive strategic
direction and implementing more integrated financial management
across banking and insurance.
On December 17, 2004, Moody's Investor's Service, Inc.
("Moody's") issued a credit opinion affirming the financial
strength rating of ING U.S., including the Company, of Aa3
(Excellent) with a stable outlook. The rating is based on the
strong implicit support and financial strength of the parent
company, ING. Furthermore, Moody's noted that ING U.S. has built
a leading market share in the domestic individual life insurance,
annuity, and retirement plan businesses. ING U.S. enjoys product
diversity, further enhancing its credit profile through the use
of these multiple distribution channels.
7
On December 22, 2004, A.M. Best Company, Inc. ("A.M. Best")
reaffirmed the financial strength rating of A+ (Superior) of ING
U.S., including the Company, while maintaining its negative
outlook for ING U.S. These rating actions follow ING's
announcement of its intention to sell Life Insurance Company of
Georgia ("LOG"), as well as the conclusion of A.M. Best's review
of ING's plan to exit the U.S. individual reinsurance business.
ING closed the transaction to exit the U.S. individual life
reinsurance business on December 31, 2004 and the sale of LOG is
expected to be completed during the second quarter of 2005,
subject to regulatory approval. Neither of these transactions
directly impact the Company.
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 broad 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 the investment activities
of insurance companies 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.
Operations conducted by the Company are subject to regulation by
various state insurance departments in the states where the
Company conducts business, in particular the insurance department
of its state of domicile, New York. Among other matters, these
agencies may regulate premium rates, trade practices, agent
licensing, policy forms, underwriting and claims practices, and
the maximum interest rates that can be charged on policy loans.
The SEC, the National Association of Securities Dealers ("NASD")
and, to a lesser extent, the states regulate investment
management activities and operations of the Company. Generally,
the Company's variable life and variable annuity products and
certain of its fixed annuities are registered as securities with
the SEC. Regulations of the SEC, Department of Labor ("DOL") and
Internal Revenue Service also impact certain of the Company's
annuity, life insurance, and other investment and retirement
products. These products involve separate accounts and mutual
funds registered under the Investment Company Act of 1940. The
Company also provides a variety of products and services to
employee benefit plans that are covered by the Employee
Retirement Income Security Act of 1974 ("ERISA").
8
Insurance Holding Company Laws
A number of states regulate affiliated groups of insurers such as
the Company under holding company statutes. These laws, among
other things, place certain restrictions on transactions between
affiliates such as dividends and other distributions that may be
paid to the Company's parent corporation.
Insurance Company Guaranty Fund Assessments
Insurance companies are assessed the costs of funding the
insolvencies of other insurance companies by the various state
guaranty associations, generally based on the amount of premiums
companies collect in that state. The Company accrues the cost of
future guaranty fund assessments based on estimates of insurance
company insolvencies provided by the National Organization of
Life and Health Insurance Guaranty Association ("NOLHGA") and the
amount of premiums written in each state. The Company has
recorded $0.3 and $0.2 for this liability as of December 31, 2004
and 2003, respectively. The Company has also recorded an asset of
$0.2 as of December 31, 2004 and a minimal asset as of December
31, 2003, for future credits to premium taxes for assessments
already paid.
For information regarding certain other potential regulatory
changes related to the Company's business see "Risk Factors"
relating to the Company in Item 1, "Business".
Employees
The Company had 93 employees as of December 31, 2004, primarily
focused on managing the product distribution, marketing, customer
service, and product and financial management of the Company. The
Company also utilizes services provided by ING North America
Insurance Corporation, Inc. and other affiliates. These services
include underwriting and new business processing, actuarial, risk
management, human resources, investment management, finance,
information technology, and legal and compliance services. The
affiliated companies are reimbursed for the Company's use of
various services and facilities under a variety of intercompany
agreements.
Risk Factors
In addition to the normal risks of business, the Company is
subject to significant risks and uncertainties, including those
which are discussed below.
9
The Company's efforts to reduce the impact of interest rate
changes on its profitability and financial condition may not be
effective
The Company attempts to reduce the impact of changes in interest
rates on the profitability and financial condition of its
interest-sensitive life and annuity operations. The Company
accomplishes this reduction primarily by managing the duration of
its assets relative to the duration of its liabilities. During a
period of rising interest rates, surrenders of life insurance
policies and withdrawal of annuity contracts may increase as
customers seek to achieve higher returns. Despite its efforts to
reduce the impact of rising interest rates, the Company may be
required to sell assets to raise the cash necessary to respond to
such surrenders and withdrawals, thereby realizing capital losses
on the assets sold. An increase in policy surrenders and
withdrawals may also require the Company to accelerate
amortization of policy acquisition costs relating to these
contracts, which would further reduce its net income.
During periods of declining interest rates, borrowers may prepay
or redeem mortgages and bonds that the Company owns, which would
force it to reinvest the proceeds at lower interest rates. The
Company may have the ability to lower the rates it credits to
contractowners and policyholders but may be forced to maintain
crediting rates for products containing minimum interest rate
guarantees or for competitive reasons. Therefore, it may be more
difficult for the Company to maintain its desired spread between
the investment income it earns and the interest it credits to its
customers, thereby reducing its profitability.
A downgrade in any of the Company's ratings may, among other
things, increase case/policy lapses, surrenders, and withdrawals
reduce new sales, and terminate relationships with distributors,
any of which could adversely affect its profitability and
financial condition
Ratings are important factors in establishing the competitive
position of insurance companies. A downgrade, or the potential
for such a downgrade, of any of the Company's ratings could,
among other things:
o Materially increase the number of interest-sensitive life
and annuity contract surrenders and withdrawals and
case/policy lapses;
o Result in the termination of relationships with
broker-dealers, banks, agents, wholesalers and other
distributors of our products and services; and
o Reduce new product sales.
Any of these consequences could adversely affect the Company's
profitability and financial condition.
10
Rating organizations assign ratings based upon several factors.
While most of the factors relate to the rated company, some of
the factors relate to the views of the rating organization,
general economic conditions and circumstances outside the rated
company's control. In addition, rating organizations may employ
different models and formulas to assess financial strength of the
rated company, and from time to time rating organizations have,
in their discretion, altered the models. Changes to the models,
general economic conditions, or circumstances outside the
Company's control could impact a rating organization's judgment
of its rating and the subsequent rating it assigns to the
Company. The Company cannot predict what actions rating
organizations may take, or what actions we may be required to
take in response to the actions of rating organizations, which
could adversely affect the Company.
The Company's ability to grow may depend in large part upon the
continued availability of capital
The Company believes it has sufficient capital to fund its
immediate growth and capital needs. The amount of capital
required and the amount of capital available can vary from period
to period due to a variety of circumstances, some of which are
neither predictable nor foreseeable, nor necessarily within its
control. A lack of sufficient capital could hinder the Company's
ability to grow.
The Company's investment portfolio is subject to several risks
that may diminish the value of its invested assets and adversely
affect its sales, profitability and the investment returns
credited to certain of its customers
The Company's investment portfolio is subject to several risks,
including default, liquidity, environmental and economic, among
other things:
o The Company may experience an increase in defaults or
delinquency in the investment portfolios, including the
commercial mortgage loan portfolio.
o The Company may have greater difficulty selling privately
placed fixed maturity securities, commercial mortgage loans,
and real estate investments at attractive prices, in a
timely manner, or both, because they are less liquid than
its publicly traded fixed maturity securities.
o Environmental liability exposure may result from the
Company's commercial mortgage loan portfolio and real estate
investments.
o The Company may experience losses in its commercial mortgage
loan portfolio as a result of economic downturns or losses
attributable to natural disasters in certain regions.
Any of these consequences may diminish the value of the Company's
invested assets and adversely affect its sales, profitability or
the investment returns credited to its customers.
11
Changes in regulation in the United States may reduce the
Company's profitability
The Company's insurance business is subject to comprehensive
regulation and supervision throughout the United States by both
state and federal regulators. The primary purpose of state
regulation of the insurance business is to protect policyholders
and contractowners and not necessarily to protect other
constituencies such as creditors or investors. State insurance
regulators, state attorneys general, the National Association of
Insurance Commissioners, the SEC, and the NASD continually
reexamine existing laws and regulations and may impose changes in
the future. Changes in federal legislation and administrative
policies in areas such as employee benefit plan regulation,
financial services regulation, and federal taxation could lessen
the advantages of certain of the Company's products as compared
to competing products, or possibly result in the surrender of
some existing contracts and policies or reduced sales of new
products and, therefore, could reduce the Company's
profitability.
The insurance industry has recently become the focus of greater
regulatory scrutiny due to questionable business practices
relating to trading and pricing within the mutual fund and
variable annuity industries, allegations related to improper
special payments, price-fixing, conflicts of interest and
improper accounting practices, and other misconduct alleged by
and initiatives of the New York Attorney General, state insurance
departments, and in related litigation. As a result, a large
number of insurance companies, including certain ING affiliates,
have been requested to provide information to regulatory
authorities. In some cases, this regulatory scrutiny has led to
new proposed legislation regulating insurance companies,
regulatory penalties, and related litigation. At this time, the
Company does not believe that any such regulatory scrutiny will
materially adversely impact it; however, the Company cannot
guarantee that new laws, regulations or other regulatory action
aimed at the business practices under scrutiny would not
adversely affect its business. The adoption of new laws or
regulations, enforcement actions or litigation, whether or not
involving the Company, could influence the manner in which it
distributes its insurance products, which could adversely impact
the Company.
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. Affiliates within ING's U.S.
operations provide the Company with various management, finance,
investment management and other administrative services, from
facilities located at 5780 Powers Ferry Road, N.W., Atlanta,
Georgia 30327-4390. Affiliates also provide the Company with
product development, sales, marketing, customer service and other
administrative services from facilities located in Minneapolis,
Minnesota, West Chester, Pennsylvania and Minot, North Dakota.
The affiliated companies are reimbursed for the Company's use of
these services and facilities under a variety of intercompany
agreements.
12
Item 3. Legal Proceedings
The Company is a party to threatened or pending
lawsuits/arbitrations, arising from the normal conduct of
business. Due to the climate in insurance and business
litigation/arbitration, 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/arbitrations, in light
of existing insurance, reinsurance and established reserves, it
is the opinion of management that the disposition of such
lawsuits/arbitrations, 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.
13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
(Dollar amounts in millions, unless otherwise stated).
There is no public trading market for the Company's common stock.
As of October 1, 2003, all of the Company's outstanding common
stock is owned by ReliaStar Life, which is a wholly-owned
subsidiary of Lion, whose ultimate parent is ING. Prior to that
date, the Company's outstanding shares were owned by
Security-Connecticut Life.
The Company's ability to pay dividends to its parent is subject
to the prior approval of the insurance regulatory authorities of
the State of New York for payment of dividends, which exceed an
annual limit of the lesser of (1) ten percent (10%) of the
Company's statutory surplus at prior year end or (2) the
Company's prior year statutory net gain from operations, not
including realized capital gains. The Company paid $27.2, $25.5
and $14.4 in cash dividends to ReliaStar Life in 2004, 2003 and
2002, respectively.
The Company did not receive capital contributions in 2004 and
2003. The Company received capital contributions of $31.4 in 2002
from Security-Connecticut Life, related to the First Golden
merger with and into the Company.
14
Item 6. Selected Financial Data
(Dollar amounts in millions, unless otherwise stated).
RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK
3-YEAR SUMMARY OF SELECTED FINANCIAL DATA
2004 2003 2002
-----------------------------------------
OPERATING RESULTS
Net investment income $ 122.2 $ 124.4 $ 133.1
Fee income 95.9 94.7 98.2
Premiums 64.7 61.8 55.0
Net realized capital gains and (losses) 9.2 10.6 (3.2)
Total revenue 296.9 295.5 288.6
Interest credited and other benefits
to contractowners and policyholders 189.0 147.5 176.3
Amortization of deferred policy acquisition
costs and value of business acquired 9.4 30.9 32.6
Income before cumulative effect
of change in accounting principles 30.8 53.9 32.6
Cumulative effect of change in accounting
principles, after-tax 0.8 - (865.0)
Net income (loss) 31.6 53.9 (832.4)
FINANCIAL POSITION
Total investments $ 2,090.1 $ 2,035.8 $ 1,951.1
Assets held in separate accounts 537.7 513.8 426.8
Total assets 2,972.2 2,824.1 2,656.5
Policy liabilities and accruals 1,772.5 1,677.2 1,645.8
Liabilities related to separate accounts 537.7 513.8 426.8
Shareholder's equity 451.6 454.6 425.8
15
Item 7. Management's Narrative Analysis of the Results of Operations and
Financial Condition
(Dollar amounts in millions, unless otherwise stated).
Overview
The following narrative analysis presents a review of the results
of operations of ReliaStar Life Insurance Company of New York
("RLNY" or the "Company") for the periods ended December 31, 2004
versus 2003 and of the financial condition as of December 31,
2004 and 2003. This review should be read in its entirety and in
conjunction with the selected financial data, financial
statements, related notes and other supplemental data which can
be found under Part II, Item 6 and Item 8 contained herein.
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 Securities
and Exchange Commission ("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 litigation, regulatory action, and risks
associated with the Company's investment portfolio, such as
change in credit quality, price volatility and liquidity.
Investors are also directed to consider other risks and
uncertainties discussed in "Risk Factors" in Item 1 contained
herein and in other documents filed by the Company with the SEC.
Except as may be required by the federal securities laws, the
Company disclaims any obligation to update forward-looking
information.
16
Critical Accounting Policies
General
The preparation of financial statements in conformity with
generally accepted accounting principles 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 materially adversely affected 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: reserves,
other-than-temporary impairment testing and amortization of
deferred acquisition costs and value of business acquired. 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 financial statements.
Reserves
The Company establishes and carries actuarially determined
reserves which are calculated to meet its future obligations.
Reserves are calculated using mortality and withdrawal rate
assumptions that are based on relevant Company experience and are
periodically reviewed against both industry standards and
experience. Changes in or deviations from the assumptions used
can significantly affect the Company's reserve levels and related
future operations.
Future policy benefits include reserves for universal life,
immediate annuities with life contingent payouts, and traditional
life insurance contracts. Reserves for universal life products
are equal to cumulative deposits less withdrawals and charges
plus credited interest thereon. In addition, the Company holds
reserves as required by SOP 03-1 for certain products with
anticipated losses in later policy durations. Reserves for
traditional life insurance contracts represent the present value
of future benefits to be paid to or on behalf of policyholders
and related expenses less the present value of future net
premiums.
17
Reserves for immediate annuities with life contingent payout
benefits are computed on the basis of interest discount rates,
mortality, and expenses, including a margin for adverse
deviations. Such assumptions generally vary by plan, year of
issue and policy duration. Reserve interest rates range from
3.95% to 13.19% for all years presented. Changes in or deviations
from the assumptions used can significantly affect the Company's
reserve level and related future operations.
Reserves for deferred annuity investment contracts and immediate
annuities without life contingent benefits are equal to
cumulative deposits less charges and withdrawals plus credited
interest thereon (reserve interest rates vary by product up to
7.1% for 2004, 2003, and 2002).
Other-Than-Temporary Impairment Testing
The Company's accounting policy requires that a decline in the
value of an investment below its amortized cost basis be assessed
to determine if the decline is other-than-temporary. If so, the
investment is deemed to be other-than-temporary impaired, and a
charge is recorded in net realized capital losses equal to the
difference between fair value and the amortized cost basis of the
investment. The fair value of the other-than-temporarily impaired
investment becomes its new cost basis.
In addition, the Company invests in structured securities that
meet the criteria of 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.
The evaluation of other-than-temporary impairments, included in
the Company's general account, is a quantitative and qualitative
process, which is subject to risks and uncertainties and is
intended to determine whether declines in the fair value of
investments should be recognized in current period earnings. The
risks and uncertainties include the length of time and extent to
which the fair value has been less than amortized cost, changes
in general economic conditions, the issuer's financial condition
or near-term recovery prospects and the effects of changes in
interest rates.
Amortization of Deferred Acquisition Costs and Value of Business
Acquired
Deferred policy acquisition costs ("DAC") represent policy
acquisition costs that have been capitalized and are subject to
amortization. Such costs consist principally of certain
commissions, underwriting, contract issuance, and agency
expenses, related to the production of new and renewal business.
18
Value of business acquired ("VOBA") represents the outstanding
value of in force business capitalized and is subject to
amortization in purchase accounting when the Company was
acquired. The value is based on the present value of estimated
net cash flows embedded in the Company's contracts.
The amortization methodology used for DAC and VOBA varies by
product type. Statement of Financial Accounting Standards ("FAS")
No. 60, "Accounting and Reporting by Insurance Enterprises,"
applies to traditional life insurance products, primarily whole
life and term life insurance contracts. Under FAS No. 60, DAC and
VOBA are amortized over the premium payment period, in proportion
to the premium revenue recognized.
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," applies to universal life and
investment-type products, such as fixed and variable deferred
annuities. Under FAS No. 97, DAC and VOBA are amortized, with
interest, over the life of the related contracts (usually 25
years) in relation to the present value of estimated future gross
profits from investment, mortality, and expense margins;
asset-based fees, policy administration, and surrender charges;
less policy maintenance fees and non-capitalized commissions, as
well as realized gains and losses on investments.
Changes in assumptions can have a significant impact on DAC and
VOBA balances and amortization rates. Several assumptions are
considered significant in the estimation of future gross profits
associated with variable universal life and variable deferred
annuity products. One of the most significant assumptions
involved in the estimation of future gross profits is the assumed
return associated with the variable account performance. To
reflect the volatility in the equity markets, this assumption
involves a combination of near-term expectations and long-term
assumptions regarding market performance. The overall return on
the variable account is dependent on multiple factors, including
the relative mix of the underlying sub-accounts among bond funds
and equity funds, as well as equity sector weightings. Other
significant assumptions include surrender and lapse rates,
estimated interest spread, and estimated mortality.
Due to the relative size and sensitivity to minor changes in
underlying assumptions of DAC and VOBA balances, the Company
performs a quarterly and annual analysis of DAC and VOBA for the
annuity and life businesses, respectively. The DAC and VOBA
balances are evaluated for recoverability and are reduced to the
extent that estimated future gross profits are inadequate to
recover the asset.
At each evaluation date, actual historical gross profits are
reflected, and estimated future gross profits and related
assumptions are evaluated for continued reasonableness. Any
adjustment in estimated profit requires that the amortization
rate be revised ("unlocking") retroactively to the date of the
policy or contract issuance. The cumulative prior period
adjustment is recognized as a component of current period
19
amortization. In general, increases in investment, mortality, and
expense margins, and thus estimated future profits, lower the
rate of amortization. However, decreases in investment,
mortality, and expense margins, and thus estimated future
profits, increase the rate of amortization.
Analysis of DAC/VOBA - Annuity
The actual separate account return exhibited by the variable
funds associated with the Company's liabilities in 2004 exceeded
the long-term assumption, thereby producing for the year ended
December 31, 2004 deceleration of DAC/VOBA amortization of $0.1
before tax, or $0.07, net of $0.03 of federal income tax expense.
During 2003, the Company reset long-term assumptions for the
separate account returns from 9.0% to 8.5% (gross before fund
management fees, mortality, expense, and other policy charges),
reflecting a blended return of equity and other sub-accounts. The
2003 unlocking adjustment was driven by this change in the
separate account returns assumption along with other prospective
assumption changes. For the year ended December 31, 2003, the
Company recorded an acceleration of DAC/VOBA amortization
totaling $5.4 before tax, or $3.5, net of $1.9 of federal income
tax benefit.
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, mortality, expense, and other policy charges) as
of December 31, 2002, reflecting a blended return of equity and
other sub-accounts. The unlocking adjustment 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
before tax, or $1.0, net of $0.5 of federal income tax benefit.
Analysis of DAC/VOBA - Life
As part of the regular analysis of DAC/VOBA, at the end of each
of the years ended December 31, 2004, 2003, and 2002, the Company
unlocked its long-term rate of return assumptions due to
assumption changes related to mortality, lapse, expense and
interest amounts, portfolio return, as well as modeling
improvements. The impact of unlocking on the amortization of
DAC/VOBA was a decrease of $9.8 in 2004, an increase of $5.5 in
2003, and a decrease of $4.4 in 2002.
20
Results of Operations
Year ended December 31, 2004 compared to year ended December 31,
2003
Income: Income before cumulative effect of change in accounting
principles decreased by $23.1 to $30.8 for 2004 from $53.9 for
2003. The decrease in net income was primarily related to higher
mortality cost and operating expenses, partially offset by a
decrease in the amortization of DAC/VOBA.
Net Investment Income: Net investment income decreased by $2.2 to
$122.2 for 2004 from $124.4 for 2003. The decrease is primarily
due to lower investment yields in 2004.
Fee Income: Fee income is primarily generated through cost of
insurance charges assessed to universal life policyholders. Fee
income for 2004 was essentially the same as in 2003. Although
universal life deposits increased during 2004, the net amount at
risk stayed relatively flat in 2004 since the insurance in force
amount was not significantly increased.
Premiums: Premiums increased by $2.9 to $64.7 for 2004 from $61.8
for 2003. The increase was primarily due to higher sales of group
products.
Net Realized Capital Gains (Losses): Net realized capital gains
(losses) decreased by $1.4 to $9.2 for 2004 from $10.6 for 2003.
The reduction in net realized gains was primarily due to the
increasing interest rate environment in 2004 that negatively
affected the market value of fixed maturities and led to lower
realized gains upon sales.
Interest Credited and Other Benefits to Contractowners and
Policyholders: Interest credited and other benefits to
contractowners and policyholders increased by $41.5 to $189.0 for
2004 from $147.5 for 2003. The increase is primarily related to
higher life claims experienced in 2004 in comparison with 2003.
Operating Expenses: Operating expenses increased by $14.2 to
$51.1 for 2004 from $36.9 for 2003. The increase in operating
expenses is primarily related to the general growth of the
business, higher reinsurance-related expenses, and a decrease in
deferred expenses.
Amortization of DAC and VOBA: Amortization of DAC and VOBA
decreased by $21.5 to $9.4 for 2004 from $30.9 for 2003. The
reduction in DAC and VOBA amortization primarily resulted from
the change of the Company's amortization rate due to assumption
changes related to mortality, lapse, expense, interest amounts,
portfolio return, as well as modeling improvements. The
assumption changes resulted in an increase in amortization in
2003 and a decrease in amortization in 2004. In addition, there
was no amortization recognized for the defined contribution
annuity business in 2004 due to the write-off of DAC and VOBA for
this part of the business in 2003.
The Cumulative Effect of the Change in Accounting Principle: The
cumulative effect of the change in accounting principle for 2004,
was $0.8 after tax, related to the adoption of Statement of
Position ("SOP") 03-1, "Accounting and Reporting by Insurance
21
Enterprises for Certain Nontraditional Long-Duration Contracts
and for Separate Accounts", and Technical Practice Aid 6300.05 -
6300.08, "Q&As Related to the Implementation of SOP 03-1,
"Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate
Accounting" (the "TPA"). (See "Recently Adopted Accounting
Standards" for further information.)
Financial Condition
Investments
Investment Strategy
The Company's investment strategy for its general account
investments involves diversification by asset class, and seeks to
add economic diversification and to reduce the risks of credit,
liquidity, and embedded options within certain investment
products, such as convexity risk on collateralized mortgage
obligations and call options. The investment management function
is centralized under ING Investment Management, LLC ("IIM")
pursuant to an investment advisory agreement. Separate portfolios
are established for each general type of product within RLNY.
The Company invests its general account primarily in fixed
maturity investments, including publicly issued bonds (including
government bonds), privately placed notes and bonds,
mortgage-backed securities, and asset-backed securities. The
primary investment strategy is to optimize the risk-adjusted
return through superior asset selection predicated on a developed
relative value approach, credit research and monitoring, superior
management of interest rate risk, and active exploration into new
investment product opportunities. Investments are purchased when
market returns, adjusted for risk and expenses, are sufficient to
profitably support growth of the liability block of business. In
addition, assets and liabilities are analyzed and reported for
internal management purposes on an option-adjusted basis. The
level of required capital of given transactions is a primary
factor in determining relative value among different investment
and liability alternatives, within the scope of each product
type's objective. An active review of existing holdings
identifies specific assets that could be effectively traded in
order to enhance the risk-adjusted returns of the portfolio,
while minimizing adverse tax and accounting impacts. The Company
strives to maintain a portfolio average asset quality rating of
A, excluding mortgage loans, but including mortgage-backed
securities that are reported with bonds, based on Standard &
Poor's ratings classifications.
22
Portfolio Composition
The following table presents the investment portfolio at December
31, 2004 and 2003:
2004 2003
---------------------------- ----------------------------
Carrying Value % Carrying Value %
----------------- --------- ----------------- ---------
Fixed maturities, including
securities pledged $ 1,761.6 84.3% $ 1,719.8 84.5%
Equity securities 7.6 0.4% 6.7 0.3%
Mortgage loans on real estate 213.0 10.2% 209.7 10.3%
Policy loans 90.9 4.3% 86.6 4.3%
Short-term investments - 0.0% 0.1 0.0%
Other investments 17.0 0.8% 12.9 0.6%
----------------- --------- ----------------- ---------
$ 2,090.1 100.0% $ 2,035.8 100.0%
================= ========= ================= =========
Fixed Maturities
Fixed maturities available-for-sale as of December 31, 2004, were
as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- ---------------- ---------------- ----------------
Fixed maturities:
U.S. government and government
agencies and authorities $ 56.2 $ 0.4 $ 0.2 $ 56.4
States, municipalities and political
subdivisions 1.6 0.1 - 1.7
U.S. corporate securities:
Public utilities 154.3 7.9 0.8 161.4
Other corporate securities 695.2 35.9 3.0 728.1
---------------- ---------------- ---------------- ----------------
Total U.S. corporate securities 849.5 43.8 3.8 889.5
---------------- ---------------- ---------------- ----------------
Foreign securities:
Government 28.0 0.6 0.2 28.4
Other 168.0 6.6 1.9 172.7
---------------- ---------------- ---------------- ----------------
Total foreign securities 196.0 7.2 2.1 201.1
---------------- ---------------- ---------------- ----------------
Residential mortgage-backed securities 373.5 2.5 2.1 373.9
Commercial mortgage-backed securities 119.0 8.2 0.3 126.9
Other asset-backed securities 107.1 6.1 1.1 112.1
---------------- ---------------- ---------------- ----------------
Total fixed maturities, including
fixed maturities pledged 1,702.9 68.3 9.6 1,761.6
Less: fixed maturities pledged 149.7 0.3 1.5 148.5
---------------- ---------------- ---------------- ----------------
Total fixed maturities $ 1,553.2 $ 68.0 $ 8.1 $ 1,613.1
================ ================ ================ ================
23
Fixed maturities available-for-sale as of December 31, 2003, were
as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- -------------
Fixed maturities:
U.S. government and government
agencies and authorities $ 7.4 $ 0.3 $ - $ 7.7
States, municipalities and political
subdivisions 1.8 0.1 - 1.9
U.S. corporate securities:
Public utilities 127.6 9.3 0.5 136.4
Other corporate securities 732.5 48.3 5.9 774.9
------------- ------------- ------------- -------------
Total U.S. corporate securities 860.1 57.6 6.4 911.3
------------- ------------- ------------- -------------
Foreign securities:
Government 28.0 0.4 0.2 28.2
Other 141.2 6.9 2.8 145.3
------------- ------------- ------------- -------------
Total foreign securities 169.2 7.3 3.0 173.5
------------- ------------- ------------- -------------
Residential mortgage-backed securities 399.7 4.0 1.3 402.4
Commercial mortgage-backed securities 106.1 9.6 0.3 115.4
Other asset-backed securities 100.3 8.6 1.3 107.6
------------- ------------- ------------- -------------
Total fixed maturities, including
fixed maturities pledged 1,644.6 87.5 12.3 1,719.8
Less: Fixed maturities pledged 106.2 0.5 1.1 105.6
------------- ------------- ------------- -------------
Total fixed maturities $ 1,538.4 $ 87.0 $ 11.2 $ 1,614.2
============= ============= ============= =============
At December 31, 2004 and 2003, net unrealized appreciation was
$58.7 and $75.2, respectively, on total fixed maturities,
including fixed maturities pledged to creditors.
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, 2004 and 2003. Ratings are calculated using a
rating hierarchy that considers S&P, Moody's and internal
ratings.
24
Total fixed maturities by quality rating category including fixed
maturities pledged to creditors were as follows as of:
December 31,
2004 2003
---------------------------- ---------------------------
Fair % of Fair % of
Value Total Value Total
------------- ------------- ------------- -------------
AAA $ 670.6 38.1% $ 674.2 39.2%
AA 94.3 5.4% 97.9 5.7%
A 408.7 23.2% 383.5 22.3%
BBB 513.4 29.1% 462.7 26.9%
BB 59.9 3.4% 84.5 4.9%
B and below 14.7 0.8% 17.0 1.0%
------------- ------------- ------------- -------------
Total $ 1,761.6 100.0% $ 1,719.8 100.0%
============= ============= ============= =============
95.8% and 94.1% of the fixed maturities were invested in
securities rated BBB and above (Investment Grade) at December 31,
2004 and 2003, respectively.
Fixed maturities rated BB and below (Below Investment Grade) 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.
Total fixed maturities by market sector, including fixed
maturities pledged to creditors were as follows as of:
December 31,
2004 2003
---------------------------- ---------------------------
Fair % of Fair % of
Value Total Value Total
------------- ------------- ------------- -------------
U.S. Corporate $ 891.2 50.6% $ 913.2 53.1%
Residential Mortgage-backed 373.9 21.2% 402.4 23.4%
Commercial/Multifamily
Mortgage-backed 126.9 7.2% 115.4 6.7%
Foreign (1) 201.1 11.4% 173.5 10.1%
U.S. Treasuries/Agencies 56.4 3.2% 7.7 0.4%
Asset-backed 112.1 6.4% 107.6 6.3%
------------- ------------- ------------- -------------
Total $ 1,761.6 100.0% $ 1,719.8 100.0%
============= ============= ============= =============
(1) Primarily U.S. dollar denominated.
25
The amortized cost and fair value of total fixed maturities for
the year-ended December 31, 2004 are shown below by contractual
maturity. Actual maturities may differ from contractual
maturities because securities may be restructured, called, or
prepaid.
Amortized Fair
Cost Value
---------------- ----------------
Due to mature:
One year or less $ 41.0 $ 41.8
After one year through five years 456.7 474.4
After five years through ten years 285.1 297.9
After ten years 320.5 334.6
Mortgage-backed securities 492.5 500.8
Other asset-backed securities 107.1 112.1
Less: fixed maturities pledged 149.7 148.5
---------------- ----------------
Fixed maturities, excluding fixed
maturities pledged $ 1,553.2 $ 1,613.1
================ ================
The Company did not have any investments in a single issuer,
other than obligations of the U.S. government, with a carrying
value in excess of 10% of the Company's shareholder's equity at
December 31, 2004.
At December 31, 2004 and 2003, fixed maturities with fair values
of $6.0 and $6.1, respectively, were on deposit as required by
regulatory authorities.
Mortgage Loans
Mortgage loans, primarily commercial mortgage loans, totaled
$213.0 at December 31, 2004 and $209.7 at December 31, 2003.
These loans 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 that the Company will be
unable to collect on all amounts due according to the contractual
terms of the loan agreement), the carrying value of the mortgage
loan is reduced to either the present value of expected cash
flows, cash flows from the loan (discounted at the loan's
effective interest rate), or fair value of the collateral. If the
loan is in foreclosure, the carrying value is reduced to the fair
value of the underlying collateral, net of estimated costs to
obtain and sell. The carrying value of the impaired loans is
reduced by establishing a permanent write down charged to
realized loss. At December 31, 2004 and 2003, the Company had no
allowance for mortgage loan credit losses.
Other-Than-Temporary-Impairments
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. 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
26
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 an investment 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.
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.
The following table identifies the Company's other-than-temporary
impairments by type as of December 31:
2004 2003 2002
--------------------------- -------------------------- --------------------------
No. of No. of No. of
Impairment Securities Impairment Securities Impairment Securities
------------- ------------ ------------- ------------ ------------- ------------
U.S. Corporate $ 0.8 1 $ 2.7 2 $ 0.7 1
Asset-backed - - 2.0 6 2.3 7
Equity - - 0.1 1 0.1 1
Limited Partnerships 0.1 2 - - - -
------------- ------------ ------------- ------------ ------------- ------------
Total $ 0.9 3 $ 4.8 9 $ 3.1 9
============= ============ ============= ============ ============= ============
The remaining fair value of impaired fixed maturities at December
2004, 2003, and 2002 was $4.0, $7.5 and $25.9, respectively.
Net Realized Capital Gains and Losses
Net realized capital gains (losses) are comprised of the
difference between the carrying value of investments and proceeds
from sale, maturity, and redemption, as well as losses incurred
due to the other-than-temporary impairment of investments. Net
realized capital gains (losses) on investments were as follows:
Year ended December 31,
2004 2003 2002
----------------- ----------------- -----------------
Fixed maturities $ 9.3 $ 10.2 $ (2.5)
Equity securities - (0.1) 0.2
Other (0.1) 0.5 (0.9)
----------------- ----------------- -----------------
Pretax net realized capital gains (losses) $ 9.2 $ 10.6 $ (3.2)
================= ================= =================
After-tax net realized capital gains (losses) $ 6.0 $ 6.9 $ (2.1)
================= ================= =================
27
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.
Sources and Uses of Liquidity
The Company's principal sources of liquidity are premiums,
product charges, investment income, proceeds from the maturing
and sale of 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 contract
maturities, 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. For a description of the
Company's asset/liability management, see Item 7A, "Quantitative
and Qualitative Disclosures About Market Risk."
Additional sources of liquidity include borrowing facilities to
meet short-term cash requirements. The Company maintains a
reciprocal loan agreement with ING America Insurance Holdings,
Inc. ("ING AIH"), a Delaware corporation and affiliate. Under
this agreement, during the period from February 1, 2003 to
January 31, 2004 and during the period from February 1, 2004 to
January 31, 2005, the Company and ING AIH could borrow from one
another up to 5% of RLNY's statutory admitted assets as of the
preceding December 31. The Company also maintains a perpetual
$30.0 revolving note facility with Bank of New York and a $30.0
revolving note facility with SunTrust Bank. At December 31, 2004,
the Company had a $2.3 balance payable to SunTrust Bank.
Management believes that these sources of liquidity are adequate
to meet the Company's short-term cash obligations.
Capital Contributions and Dividends
The Company paid $27.2, $25.5 and $14.4 in cash dividends to
ReliaStar Life Insurance Company ("ReliaStar Life") in 2004, 2003
and 2002, respectively.
The Company did not receive capital contributions in 2004 and
2003. The Company received capital contributions of $31.4 in 2002
from Security-Connecticut Life Insurance Company
("Security-Connecticut"), related to the First Golden American
Life Insurance Company of New York ("First Golden") merger with
and into the Company.
28
Separate Accounts
Separate account assets and liabilities generally represent funds
maintained to meet specific investment objectives of
contractowners and policyholders who bear the investment risk,
subject, in limited cases, to minimum guaranteed rates.
Investment income and investment gains and losses generally
accrue directly to such contractowners and policyholders. The
assets of each account are legally segregated and are not subject
to claims that arise out of any other business of the Company.
Separate Account assets supporting variable options under
universal life and annuity contracts are invested, as designated
by the contractowner/policyholder or participant (who bears the
investment risk subject, in limited cases, to minimum guaranteed
rates) under a contract in shares of mutual funds which are
managed by the Company or its affiliates, or in other selected
mutual funds not managed by the Company or its affiliates.
Variable universal life and annuity premiums are allocated to
various subaccounts established within the separate account. Each
subaccount represents a different investment option in which the
contractowner may allocate premiums. The account value of a
variable universal life or annuity contract is equal to the
aggregate value of the subaccounts selected by the contractowner
(including the value allocated to any fixed account) less fees
and expenses. The Company offers investment options for its
variable universal life and annuities covering a wide range of
investment styles, including large, mid and small cap equity
funds, as well as fixed income alternatives. Therefore, unlike
fixed annuities, under variable universal life and annuities the
contractowners bear the risk of investment gains and losses
associated with the selected investment allocation.
Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations
Through the normal course of investment operations, the Company
commits to either purchase or sell securities, commercial
mortgage loans, or money market instruments at a specified future
date and at a specified price or yield. The inability of
counterparties to honor these commitments may result in either a
higher or lower replacement cost. Also, there is likely to be a
change in the value of the securities underlying the commitments.
At December 31, 2004 and 2003, the Company had off-balance sheet
commitments to purchase investments equal to their fair value of
$15.4 and $28.9, respectively.
29
As of December 31, 2004, the Company had certain contractual
obligations due over a period of time as summarized in the
following table:
Payments due by Period
--------------------------------------------------------------------
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 15.4 15.4 - - -
Reserves for Insurance Obligations 1,623.5 93.3 163.1 166.9 1,200.2
------------ ------------ ------------ ------------ ------------
Total $ 1,639.3 $ 108.8 $ 163.3 $ 167.0 $ 1,200.2
============ ============ ============ ============ ============
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 primarily of commitments to purchase
investments during 2005.
Reserves for insurance obligations consist of actuarially
determined amounts required for the Company to meet its future
obligations under its universal life policies, variable universal
life policies, traditional life policies, fixed and variable
annuity contracts, accident and health policies, supplemental
contracts and miscellaneous supplemental benefits and riders.
Reinsurance
The Company utilizes reinsurance agreements to reduce its
exposure to large losses in all aspects of its insurance
business. Such reinsurance permits recovery of a portion of
losses from reinsurers, although it does not discharge the
primary liability of the Company as direct insurer of the risks
reinsured. The Company evaluates the financial strength of
potential reinsurers and continually monitors the financial
condition of reinsurers. Only those reinsurance recoverable
balances deemed probable of recovery are reflected as assets on
the Company's Balance Sheets.
Repurchase Agreements
The Company engages in dollar repurchase agreements ("dollar
rolls") and repurchase agreements to increase its return on
investments and improve liquidity. These transactions involve a
sale of securities and an agreement to repurchase substantially
the same securities as those sold. Company policies require a
minimum of 95% of the fair value of securities pledged under
dollar rolls and repurchase agreement transactions to be
maintained as collateral. Cash collateral received is invested in
fixed maturities and the offsetting collateral liability is
included in borrowed money on the Balance Sheets. At December 31,
2004 and 2003, the carrying value of the securities pledged in
dollar rolls and repurchase agreement transactions was $100.7 and
$103.8, respectively. The carrying value of the securities
pledged in dollar rolls and repurchase agreement transactions is
30
included in pledged securities on the Balance Sheets. The
repurchase obligation related to dollar rolls and repurchase
agreements totaled $100.4 and $101.5 at December 31, 2004 and
2003, respectively.
The Company also enters into reverse repurchase agreements. These
transactions involve a purchase of securities and an agreement to
sell substantially the same securities as those purchased.
Company policies require a minimum of 102% of the fair value of
securities pledged under reverse repurchase agreements to be
pledged as collateral. At December 31, 2004 and 2003, the
carrying value of the securities in reverse repurchase agreements
was $32.0 and $8.0, respectively.
The primary risk associated with short-term collateralized
borrowings is that the counterparty will be unable to perform
under the terms of the contract. The Company's exposure is
limited to the excess of the net replacement cost of the
securities over the value of the short-term investments, an
amount that was not material at December 31, 2004. The Company
believes the counterparties to the dollar roll, repurchase and
reverse repurchase agreements are financially responsible and
that the counterparty risk is immaterial.
Securities Lending
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.
Risk-based Capital
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 as of December 31,
2004 the Company has total adjusted capital above all required
capital levels.
31
Recently Adopted Accounting Standards
(See Si1gnificant Accounting Policies Footnote to the Financial
Statements for further information.)
Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts
The Company adopted SOP 03-1 on January 1, 2004. SOP 03-1
establishes several new accounting and disclosure requirements
for certain nontraditional long-duration contracts and for
separate accounts including, among other things, a requirement
that assets and liabilities of separate account arrangements that
do not meet certain criteria be accounted for as general account
assets and liabilities, and the revenues and expenses related to
such arrangements be consolidated with the respective line items
in the Statements of Operations. In addition, the SOP requires
additional liabilities be established for certain guaranteed
death benefits and for products with certain patterns of cost of
insurance charges. Sales inducements provided to contractowners
and policyholders must also be recognized on the balance sheet
separately from deferred acquisition costs and amortized as a
component of benefits expense using methodology and assumptions
consistent with those used for amortization of deferred policy
acquisition costs.
The Company evaluated all requirements of SOP 03-1 and determined
that it is affected by the SOP's requirements to account for
certain separate account arrangements as general account
arrangements, to establish additional liabilities for certain
guaranteed benefits and for products with patterns of cost of
insurance charges that result in gains followed by losses in
later policy durations from the insurance benefit function, and
to defer and amortize sales inducements to contractowners and
policyholders. Upon adoption of the SOP, the Company recognized a
cumulative effect of a change in accounting principle of $(10.8),
before tax or $(7.0), net of $3.8 of income taxes, as of January
1, 2004.
In the fourth quarter of 2004, the cumulative effect of a change
in accounting principle was revised due to the implementation of
the TPA.
The TPA, which was approved in September 2004, provides
additional guidance regarding certain implicit assessments that
may be used in testing of the base mortality function on
contracts, which is performed to determine whether additional
liabilities are required in conjunction with SOP 03-1. In
addition, the TPA provides additional guidance surrounding the
allowed level of aggregation of additional liabilities determined
under the SOP. While the TPA was implemented during the fourth
quarter of 2004, the TPA was retroactive to the original
implementation date of SOP 03-1, January 1, 2004 and was reported
as an adjustment to SOP 03-1's cumulative effect of a change in
accounting principle. The adoption of the TPA increased the
Company's cumulative effect change in accounting principle by
$7.8, net of $4.2 of income tax.
The implementation of SOP 03-1 raised questions regarding the
interpretation of the requirements of FAS No. 97, concerning when
it is appropriate to record an unearned revenue liability related
to the insurance benefit function. To clarify its position, the
Financial Accounting Standards Board ("FASB") issued FASB Staff
Position No. FAS 97-1 ("FSP FAS 97-1"), "Situations in Which
32
Paragraphs 17(b) and 20 of FASB Statement No. 97, `Accounting and
Reporting by Insurance Enterprises for Certain Long-Duration
Contracts and for Realized Gains and Losses from the Sale of
Investments,' Permit or Require Accrual of an Unearned Revenue
Liability," effective for fiscal periods beginning subsequent to
the date the guidance was issued, June 18, 2004. The Company
adopted FSP FAS 97-1 on July 1, 2004. The adoption of FSP FAS
97-1 did not have an impact on the Company's financial position,
results of operations, or cash flows.
New Accounting Pronouncements
In December 2004, the FASB issued FAS No. 123 (revised 2004),
"Share-Based Payment" ("FAS 123R"), which requires all
share-based payments to employees be recognized in the financial
statements based upon the fair value. FAS 123R is effective at
the beginning of the first interim or annual period beginning
after June 15, 2005. Earlier adoption is encouraged. FAS 123R
provides two transition methods, modified-prospective and
modified-retrospective.
The modified-prospective method recognizes the grant-date fair
value of compensation for new awards granted after the effective
date and unvested awards beginning in the fiscal period in which
the recognition provisions are first applied. Prior periods are
not restated. The modified-retrospective method permits entities
to restate prior periods by recognizing the compensation cost
based on the amount previously reported in the pro forma footnote
disclosures as required under FAS No. 123, "Accounting for
Stock-Based Compensation".
The Company intends to early adopt the provisions of FAS 123R on
January 1, 2005, using the modified-prospective method. Due to
the Company's few number of employees, the adoption of FAS 123R
is not expected to have a material impact on the Company's
financial position, results of operations, or cash flows. Prior
to January 2005, the Company applied the intrinsic value-based
provisions set forth in Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees". Under
the intrinsic value method, compensation expense is determined on
the measurement date, which is the first date on which both the
number of shares the employee is entitled to receive and the
exercise price are known. Compensation expense, if any, is
measured based on the award's intrinsic value, which is the
excess of the market price of the stock over the exercise price
on the measurement date.
Legislative Initiatives
Certain elements of the Jobs and Growth Tax Relief Reconciliation
Act of 2003, in particular the reduction in the tax rates on
long-term capital gains and corporate dividends could impact the
relative competitiveness of the Company's products especially
variable annuities. While sales of the products do not appear to
have been reduced to date, the long term effect of the Jobs and
Growth