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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1996.
Commission file number 33-87272
GOLDEN AMERICAN LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Delaware 41-0991508
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1001 Jefferson Street, Suite 400
Wilmington, Delaware 19801
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code : (302) 576-3400
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
N/A
________________________________________________________________________________
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ].
The aggregate market value of voting stock (Common Stock) held by affiliates of
the registrant as of March 21, 1997, was $250,000.
As of March 21, 1997, 250,000 shares of Common Stock are issued and
outstanding.
NOTE: WHEREAS GOLDEN AMERICAN LIFE INSURANCE COMPANY MEETS THE CONDITIONS SET
FORTH IN GENERAL INSTRUCTION J (1)(a) AND (b) OF FORM 10K, THIS FORM IS BEING
FILED WITH THE REDUCED DISCLOSURE FORMAT.
DOCUMENTS INCORPORATED BY REFERENCE
PART I
ITEM 1. Business
OVERVIEW
Golden American Life Insurance Company ("Golden American" or "Company") is a
stock life insurance company organized under the laws of the State of Delaware.
On August 13, 1996, Equitable of Iowa Companies ("Equitable") acquired all of
the outstanding capital stock of BT Variable, Inc. (Golden American's parent)
from Whitewood Properties Corporation ("Whitewood"), a wholly-owned subsidiary
of Bankers Trust Company ("Bankers Trust"), pursuant to the terms of a Stock
Purchase Agreement between Equitable and Whitewood. On August 14, 1996, BT
Variable, Inc. was formally renamed EIC Variable, Inc. Golden American is
authorized to do business in the District of Columbia and all states except
New York. Golden American offers variable insurance products.
On May 24, 1996, First Golden American Life Insurance Company of New York
("First Golden"), a wholly-owned life insurance subsidiary of Golden American
was incorporated. First Golden was capitalized in December 1996 and on
January 2, 1997, First Golden became licensed as a life insurance company
under the laws of the State of New York. First Golden recently received
regulatory product approvals to sell insurance products in the State of New
York. See Note 7 for further information regarding related party
transactions.
BUSINESS ENVIRONMENT
The current business and regulatory environment remains challenging for the
insurance industry. Increasing competition from traditional insurance carriers
as well as banks and mutual fund companies offer consumers many choices.
However, overall demand for variable products remains strong for several
reasons including: strong stock market performance over the last 3 years;
relatively low interest rates; an aging U.S. population that is increasingly
concerned about retirement and estate planning, as well as maintaining their
standard of living in retirement; potential reductions in government and
employer-provided benefits at retirement as well as lower public confidence in
the adequacy of those benefits.
ITEM 2. Properties
Golden American's business operations are performed in leased facilities
located at 1001 Jefferson Street, Wilmington, Delaware. In addition, a
facility was leased in 1997 at 230 Park Avenue in New York, New York to carry
on business through First Golden.
ITEM 3. Legal Proceedings
In the ordinary course of business, the Company is engaged in certain
litigation, none of which management believes is material.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Information called for by this item is omitted pursuant to General Instruction
I. (2) (c) of Form 10-K.
PART II.
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Registrant is a wholly-owned indirect subsidiary of Equitable of Iowa
Companies. There is no public trading market for Registrant's common stock.
Golden American is required to maintain a minimum total statutory-basis capital
and surplus of not less than $5,000,000 under the provisions of the insurance
laws of certain states in which it is presently licensed to sell insurance
products. The ability of Golden American to pay dividends to its parent is
restricted because prior approval of insurance regulatory authorities is
required for payment of dividends to the stockholder which exceed an annual
limitation. During 1997, Golden American could pay dividends to its parent of
approximately $2,186,000 without prior approval of statutory authorities.
Golden American did not pay common stock dividends during 1996 or 1995.
ITEM 6. Selected Financial Data
Information called for by this item is omitted pursuant to General Instruction
I. (2)(a) of Form 10-K.
ITEM 7. Management's Narrative Analysis of Results of Operations.
The purpose of this section is to discuss and analyze the Company's
consolidated results of operations. In addition, some analysis and information
regarding financial condition and liquidity and capital resources has also been
provided. This analysis should be read in conjunction with the consolidated
financial statements and related notes which appear elsewhere in this report.
The Company reports financial results on a consolidated basis. The
consolidated financial statements include the accounts of the Golden American
Life Insurance Company ("Golden American") and its subsidiary, First Golden
American Life Insurance Company of New York ("First Golden", and collectively
with Golden American the "Company").
RESULTS OF OPERATIONS
_____________________
CHANGE IN CONTROL
On August 13, 1996, Equitable acquired all of the outstanding capital stock
of BT Variable, Inc. ("BT Variable") and its wholly-owned subsidiaries Golden
American and Directed Services, Inc. ("DSI") for $144,000,000. The purchase
price consisted of $93,000,000 in cash paid to Whitewood (parent of BT
Variable) and $51,000,000 in cash paid to Bankers Trust (parent of Whitewood)
to retire certain debt owed by BT Variable to Bankers Trust.
For financial statement purposes, the change in control of Golden American
through the acquisition of BT Variable was accounted for as a purchase
acquisition effective August 14, 1996. This acquisition resulted in a new
basis of accounting reflecting estimated fair values of assets and liabilities
at that date. As a result, the Company's financial statements for periods
subsequent to August 13, 1996, are presented on the Post-Acquisition new basis
of accounting, while the financial statements for August 13, 1996 and prior
periods are presented on the Pre-Acquisition historical cost basis of
accounting.
The purchase price was allocated to the three companies purchased - BT
Variable, DSI, and Golden American. Goodwill of $39,254,000 was established
for the excess of the acquisition cost over the fair value of the assets and
liabilities and pushed down to Golden American. The acquisition cost is
preliminary with respect to the final settlement of taxes with Bankers Trust
and estimated expenses and, as a result, goodwill may change. The allocation
of the purchase price to Golden American was approximately $139,872,000.
Goodwill resulting from the acquisition is being amortized over 25 years on a
straight line basis. The carrying value will be reviewed periodically for
any indication of impairment in value.
The analysis following combines the Post-Acquisition and Pre-Acquisition
activity for 1996 in order to compare the results to 1995. Such a comparison
does not recognize the impact of the purchase accounting and goodwill
amortization except for the period after August 13, 1996.
PREMIUMS
POST-ACQUISITION| COMBINED | PRE-ACQUISITION
________________|_____________|______________________________
For the period |For the year |For the period
August 14, 1996 | ended |January 1, 1996 For the year
through |December 31, | through ended
December 31, | 1996 | August 13, December 31,
Year to Date 1996 | Combined | 1996 1995
__________________________________|_____________|______________________________
(Dollars in thousands)
| |
Variable annuity | |
premiums $169,258 | $427,630 | $258,372 $110,587
Variable life | |
premiums 3,619 | 14,125 | 10,506 5,114
________________|_____________|______________________________
Total premiums $172,877 | $441,755 | $268,878 $115,701
=============================================================
Variable annuity premiums increased 286.4%, or $317,043, in 1996, and variable
life premiums increased 176.2%, or $9,011,000 in 1996. Strong stock market
returns, a relatively low interest rate environment and flat yield curve have
made returns provided by variable annuities and mutual funds more attractive
than fixed rate products such as certificates of deposits and fixed annuities.
During 1995, the fund offerings underlying Golden American's variable products
were improved and a fixed account option was added. These changes and the
current environment have contributed to the significant growth in the Company's
variable annuity premiums from 1995. Premiums, net of reinsurance, for
variable products from two significant sellers for the year ended December 31,
1996, totaled $298,000,000, or 67% of premiums.
REVENUES
POST-ACQUISITION| COMBINED | PRE-ACQUISITION
________________|______________|_____________________________
For the period |For the year |For the period
August 14, 1996 | ended |January 1, 1996 For the year
through | December 31, | through ended
December 31, | 1996 | August 13, December 31,
1996 | Combined | 1996 1995
__________________________________|______________|_____________________________
(Dollars in thousands)
| |
Annuity and | |
interest sensi- | |
tive life | |
product charges $8,768 | $21,027 | $12,259 $18,388
Management fee | |
revenue 877 | 2,267 | 1,390 987
Net investment | |
income 5,795 | 10,785 | 4,990 2,818
Realized gains | |
(losses) on | |
investments 42 | (378)| (420) 297
Other income 486 | 556 | 70 63
________________|______________|_____________________________
$15,968 | $34,257 | $18,289 $22,553
=============================================================
Total revenues increased 51.9%, or $11,704,000, to $34,257,000 in 1996.
Annuity and interest sensitive life product charges increased 14.4%, or
$2,639,000 in 1996. The increase is due to additional fees earned from the
increasing block of business under management in the Separate Accounts and an
increase in the collection of surrender charges partially offset by a decrease
in the revenue recognition of net distribution fees.
Golden American provides certain managerial and supervisory services to DSI.
This fee, calculated as a percentage of average assets in the variable separate
accounts, was $2,267,000 for 1996 and $987,000 for 1995.
Net investment income increased 282.7%, or $7,967,000, to $10,785,000 in 1996
from $2,818,000 in 1995. This increase resulted from growth in invested
assets. During 1996, the Company had realized losses on the disposal of
investments, which were the result of voluntary sales, of $378,000 compared
to realized gains of $297,000 in 1995.
EXPENSES
POST-ACQUISITION| COMBINED | PRE-ACQUISITION
________________|_____________|_____________________________
For the period |For the year |For the period
August 14, 1996 | ended |January 1, 1996 For the year
through |December 31, | through ended
December 31, | 1996 | August 13, December 31,
Quarter 1996 | Combined | 1996 1995
____________________________________|_____________|_____________________________
(Dollars in thousands)
| |
Insurance benefits | |
and expenses: | |
Annuity and | |
interest sensi- | |
tive life benefits: | |
Interest credited | |
to account | |
balances $5,741 | $10,096 | $4,355 $1,322
Benefit claims | |
incurred in | |
excess of | |
account balances 1,262 | 2,177 | 915 1,824
Underwriting, | |
acquisition, and | |
insurance expenses: | |
Commissions 9,866 | 26,415 | 16,549 7,983
General expenses 5,906 | 15,328 | 9,422 12,650
Insurance taxes 672 | 1,897 | 1,225 952
Policy acquisition | |
costs deferred (11,712)| (31,012)| (19,300) (9,804)
Amortization: | |
Deferred policy | |
acquisition costs 244 | 2,680 | 2,436 2,710
Present value of | |
in force acquire 2,745 | 3,696 | 951 1,552
Goodwill 589 | 589 | -- --
________________|_____________|_____________________________
| |
$15,313 | $31,866 | $16,553 $19,189
============================================================
Total insurance benefits and expenses increased 66.1%, or $12,677,000, in 1996
from $19,189,000 in 1995. Interest credited to account balances increased
663.6%, or $8,774,000, in 1996 as a result of higher account balances
associated with the Company's fixed account option within its variable
products. Benefit claims incurred in excess of account balances increased
19.4%, or 353,000, in 1996 from $1,824,000 in 1995.
Commissions increased 230.9%, or $18,432,000, in 1996 from $7,983,000 in 1995.
Insurance taxes increased 99.3%, or $945,000, in 1996 from $952,000 in 1995.
Increases and decreases in commissions and insurance taxes are generally
related to changes in the level of variable product sales. Most costs incurred
as the result of new sales have been deferred, thus having very little impact
on earnings.
General expenses increased 21.2%, or $2,678,000, in 1996 from $12,650,000 in
1995. The Company uses a network of wholesalers to distribute its products
and the salaries of these wholesalers are included in general expenses. The
portion of these salaries and related expenses which vary with sales production
levels are deferred, thus having little impact on earnings. Management expects
general expenses to continue to increase in 1997 as a result of the emphasis on
expanding the salaried wholesaler distribution network.
The Company's deferred policy acquisition costs ("DPAC"), previous balance of
present value of in force acquired ("PVIF") and unearned revenue reserve, as
of the purchase date, were eliminated and an asset of $85,796,000 representing
the PVIF was established for all policies in force at the acquisition date.
The amortization of PVIF and DPAC increased $2,114,000, or 49.6%, in 1996.
Based on current conditions and assumptions as to the impact of future events
on acquired policies in force, amortization of PVIF is expected to be
approximately $9,700,000 in 1997, $10,100,000 in 1998, $9,200,000 in 1999,
$7,900,000 in 2000 and $6,800,000 in 2001. The elimination of the unearned
revenue reserve, related to in force acquired at the acquisition date, will
result in lower annuity and interest sensitive life product charges compared
to 1995 levels.
Amortization of goodwill during the period from the acquisition date to
December 31, 1996 totaled $589,000. Goodwill resulting from the acquisition
is being amortized on a straight-line basis over 25 years and is expected to
total $1,570,000 annually.
INCOME
Net income on a combined basis for 1996 was $3,549,000, an increase of
$185,000, or 5.5%, from 1995.
FINANCIAL CONDITION
___________________
INVESTMENTS
The financial statement carrying value of the Company's total investments
grew 381.9% in 1996. The amortized cost basis of the Company's total
investment portfolio grew 388.3% during the same period. All of the Company's
investments, other than mortgage loans, are carried at fair value in the
Company's financial statements. As such, growth in the carrying value of the
Company's investment portfolio included changes in unrealized appreciation and
depreciation of fixed maturity and equity securities as well as growth in the
cost basis of these securities. Growth in the cost basis of the Company's
investment portfolio resulted from the investment of premiums from the sale of
the Company's variable insurance products. Late in 1995, the fixed account
option was offered within the Company's variable products. The large growth in
invested assets during 1996 was primarily a result of premium inflow from this
fixed account option. The Company manages the growth of its insurance
operations in order to maintain adequate capital ratios.
To support the fixed account option of the Company's variable insurance
products, cash flow was invested primarily in fixed maturity securities. At
December 31, 1996, the Company's investment portfolio at amortized cost was
$314,712,000 with a yield of 6.9% and carrying value of $315,119,000.
Fixed Maturity Securities: At December 31, 1996 the company had fixed
maturities with an amortized cost of $275,153,000 and a market value of
$275,563,000. The ratings assigned by Standard & Poor's Corporation
("Standard & Poor's") to the individual securities in the companies fixed
maturities portfolio (shown at amortized cost) include investment grade
securities comprising U.S. governments, agencies and AAA corporates to BBB-
($242,697,000 or 88.2%), and below investment grade securities BB+ to BB-
($28,403,000 or 10.3%). Securities not rated by Standard & Poor's had an NAIC
rating of 1 or 2 ($4,053,000 or 1.5%).
The Company classifies 100% of its securities as available for sale. On
December 31, 1996, fixed income securities with an amortized cost of
$275,153,000 and an estimated fair value of $275,563,000 were designated as
available for sale. Net unrealized appreciation of fixed maturity securities
of $410,000 was comprised of gross appreciation of $1,221,000 and gross
depreciation of $811,000. Unrealized holding gains on these securities, net
of adjustments to deferred policy acquisition costs and deferred income taxes,
increased stockholder's equity by $265,000 at December 31, 1996.
The Company began investing in below investment grade securities during 1996.
At December 31, 1996, the amortized cost value of the Company's total
investment in below investment grade securities was $25,921,000, or 8.2%, of
the Company's investment portfolio. The Company intends to purchase additional
below investment grade securities, but it does not expect the percentage of its
portfolio invested in below investment grade securities to exceed 10% of its
investment portfolio. At December 31, 1996, the yield at amortized cost on the
Company's below investment grade portfolio was 8.4% compared to 6.7% for the
Company's investment grade corporate bond portfolio. The Company estimates
that the fair value of its below investment grade portfolio was $26,114,000, or
100.7% of amortized cost value, at December 31, 1996.
Below investment grade securities have different characteristics than
investment grade corporate debt securities. Risk of loss upon default by the
borrower is significantly greater with respect to below investment grade
securities than with other corporate debt securities. Below investment grade
securities are generally unsecured and are often subordinated to other
creditors of the issuer. Also, issuers of below investment grade securities
usually have higher levels of debt and are more sensitive to adverse economic
conditions, such as recession or increasing interest rates, than are investment
grade issuers. The Company attempts to reduce the overall risk in its below
investment grade portfolio, as in all of its investments, through careful
credit analysis, strict investment policy guidelines, and diversification by
company and by industry.
The Company analyzes its investment portfolio, including below investment
grade securities, at least quarterly in order to determine if its ability to
realize its carrying value on any investment has been impaired. For debt and
equity securities, if impairment in value is determined to be other than
temporary (i.e. if it is probable that the Company will be unable to collect
all amounts due according to the contractual terms of the security), the cost
basis of the impaired security is written down to fair value, which becomes
the security's new cost basis. The amount of the writedown is included in
earnings as a realized loss. Future events may occur, or additional or updated
information may be received, which may necessitate future write-downs of
securities in the Company's portfolio. Significant write-downs in the
carrying value of investments could materially adversely affect the Company's
net income in future periods.
At December 31, 1996, no fixed maturity securities were deemed to have
impairments in value that are other than temporary. The Company's fixed
maturity investment portfolio had a combined yield at amortized cost of 6.9%
at December 31, 1996.
Mortgage Loans: Mortgage loans represent 10.0% of the Company's investment
portfolio. Subsequent to the acquisition, the Company purchased mortgage
loans from an affiliate to broaden its investment alternatives. Mortgages
outstanding were $31,459,000 at December 31, 1996 with an estimated fair value
of $30,979,000. The Company's mortgage loan portfolio includes 18 loans with
an average size of $1,748,000 and average seasoning of 1.9 years if weighted by
the number of loans, and 2.0 years if weighted by mortgage loan carrying
values. The Company's mortgage loans are typically secured by occupied
buildings in major metropolitan locations and not speculative developments,
and are diversified by type of property and geographic location. At December
31, 1996, the yield on the Company's mortgage loan portfolio was 7.6%.
At December 31, 1996, no mortgage loans were delinquent by 90 days or more.
The Company does not expect to incur material losses from its mortgage loan
portfolio. The Company's loan investment strategy is consistent with that of
other life insurance subsidiaries of its ultimate parent, Equitable. Equitable
has experienced a historically low default rate in its mortgage loan portfolio
and has been able to recover 99% of the principal amount of problem mortgages
resolved in the last three years.
At December 31, 1996, the Company had no investments in default. The Company
estimates its total investment portfolio, excluding policy loans, had a fair
value approximately equal to 100.0% of its amortized cost value for accounting
purposes at December 31, 1996.
OTHER ASSETS
Accrued investment income increased $3,371,000 during 1996 due to an increase
in new fixed income investments and in the overall size of the portfolio
resulting from the investment of premiums allocated to the fixed account option
of the Company's variable products.
The Company's DPAC and previous balance of PVIF, as of the purchase date, were
eliminated and an asset representing the PVIF was established for all policies
in force at the acquisition date. PVIF is amortized into income in proportion
to the expected gross profits of the in force acquired in a manner similar to
DPAC amortization. Any expenses which vary with the sales of the Company's
products are deferred and amortized. At December 31, 1996, the Company had
DPAC and PVIF balances of $11,468,000 and $83,051,000, respectively.
Goodwill totaling $39,254,000, representing the excess of the acquisition cost
over the fair value of net assets acquired, was established at the acquisition
date. Amortization of goodwill through December 31, 1996 was $589,000.
At December 31, 1996, the Company had $1,207,247,000 of separate account assets
compared to $1,048,953,000 at December 31, 1995. The increase in separate
account assets is due to growth in sales of the Company's variable products.
At December 31, 1996, the Company had total assets of $1,677,899,000, an
increase of 39.5% over total assets at December 31, 1995.
LIABILITIES
In conjunction with the volume of variable insurance sales, the Company's
total liabilities increased $432,483,000, or 39.1%, during 1996 and totaled
$1,537,415,000 at December 31, 1996. Future policy benefits for annuity and
interest sensitive life products increased $251,614,000, or 747.2%, to
$285,287,000 reflecting large premium growth in the Company's fixed account
option of its variable products. Premium growth also accounted for the
$158,294,000, or 15.1%, increase in separate account liabilities to
$1,207,247,000 at December 31, 1996.
As of the acquisition date, the Company's existing unearned revenue reserve
was eliminated. This treatment corresponds with treatment of the present
value of in force acquired.
On December 17, 1996, Golden American issued a $25,000,000, 8.25% surplus
note to Equitable. The note matures on December 17, 2026. On December 17,
1996, Golden American contributed the $25,000,000 to First Golden, acquiring
200,000 shares of common stock (100% of shares outstanding) of First Golden.
EQUITY
On December 30, 1994, the Company issued $50 million of redeemable preferred
stock to its immediate parent, BT Variable. On September 23, 1996, the
preferred stock was redeemed and the proceeds were contributed to the Company
as additional paid-in capital.
The effects of inflation and changing prices on the Company are not material
since insurance assets and liabilities are both primarily monetary and remain
in balance. An effect of inflation, which has been low in recent years, is a
decline in purchasing power when monetary assets exceed monetary liabilities.
LIQUIDITY AND CAPITAL RESOURCES
The liquidity requirements of the Company are met by cash flow from variable
insurance premiums, investment income and maturities of fixed maturity
investments and mortgage loans. The Company primarily uses funds for the
payment of insurance benefits, commissions, operating expenses and the purchase
of new investments.
The Company's home office operations are currently housed in a leased location
in Wilmington, Delaware and a leased location in New York, New York. The
Company intends to spend approximately $1,000,000 on capital needs for 1997.
The ability of Golden American to pay dividends to its parent is restricted
because prior approval of insurance regulatory authorities is required for
payment of dividends to the stockholder which exceed an annual limitation.
During 1997, Golden American could pay dividends to its parent of approximately
$2,186,000 without prior approval of statutory authorities. The Company has
maintained adequate statutory capital and surplus and have not used surplus
relief or financial reinsurance, which have come under scrutiny by many state
insurance departments.
The NAIC's risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula. These
requirements are intended to allow insurance regulators to identify
inadequately capitalized insurance companies based upon the type and mixture
of risks inherent in the company's operations. The formula includes components
for asset risk, liability risk, interest rate exposure and other factors.
Golden American has complied with the NAIC's risk-based capital reporting
requirements. Amounts reported indicate that Golden American has total
adjusted capital which is well above all required capital levels. First Golden
intends to comply with these requirements in 1997, as its insurance license was
approved on January 2, 1997, and expects to exceed levels that require
regulatory action.
Surplus Note: On December 17, 1996, Golden American issued a surplus note in
the amount of $25,000,000 to Equitable. The note matures on December 17, 2026
and will accrue interest of 8.25% per annum until paid. The note and accrued
interest thereon shall be subordinate to payments due to policyholders,
claimant and beneficiary claims, as well as debts owed to all other classes of
debtors of Golden American. Any payment of principal made shall be subject to
the prior approval of the Delaware Insurance Commissioner. On December 17,
1996, Golden American contributed the $25,000,000 to First Golden acquiring
200,000 shares of common stock (100% of shares outstanding) of First Golden.
Line of Credit: Golden American maintains a line of credit agreement with
Equitable to facilitate the handling of unusual and/or unanticipated short-
term cash requirements. The maximum borrowing allowed under this facility is
$25,000,000 expiring on December 31, 1997. At December 31, 1996, no amounts
were outstanding under this agreement.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
_________________________________________________________
Any forward-looking statement contained herein or in any other oral or written
statement by the Company or any of its officers, directors or employees is
qualified by the fact that actual results of the Company may differ materially
from such statement due to the following important factors, among other risks
and uncertainties inherent in the Company's business:
1. Prevailing interest rate levels which may affect the ability of the Company
to sell its products, the market value of the Company's investments and the
lapse rate of the Company's policies, notwithstanding product design
features intended to enhance persistency of the Company's products.
2. Changes in the federal income tax laws and regulations which may affect the
relative tax advantages of the Company's products.
3. Changes in the regulation of financial services, including bank sales and
underwriting of insurance products, which may affect the competitive
environment for the Company's products.
4. Other factors affecting the performance of the Company, including, but not
limited to, market conduct issues, stock market performance, litigation,
insurance industry insolvencies, investment performance of the underlying
portfolios of the variable products, variable product design and sales
volume by significant sellers of the Company's variable products.
REPORT OF INDEPENDENT AUDITORS
________________________________________________________________________________
The Board of Directors and Stockholder
Golden American Life Insurance Company
We have audited the accompanying consolidated balance sheets of Golden American
Life Insurance Company as of December 31, 1996 and 1995, and the related
consolidated statements of income, changes in stockholder's equity, and cash
flows for the post-acquisition period from August 14, 1996 to December 31, 1996
and the pre-acquisition period from January 1, 1996 to August 13, 1996 and for
each of the years ended December 31, 1995 and 1994. Our audits also included
the financial statements schedules listed in the Index at Item 14(a). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Golden
American Life Insurance Company at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the post-
acquisition period from August 14, 1996 to December 31, 1996 and the pre-
acquisition period from January 1, 1996 to August 13, 1996 and for each of
the years ended December 31, 1995 and 1994, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
s/Ernst & Young LLP
Des Moines, Iowa
February 11, 1997
ITEM 8. Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
POST-ACQUISITION | PRE-ACQUISITION
___________________ | _________________
December 31, 1996 | December 31, 1995
___________________ | _________________
|
ASSETS |
|
Investments: |
Fixed maturities, available for sale, |
at fair value (cost: 1996 - $275,153; |
1995 - $48,671) $275,563 | $49,629
Equity securities, at fair value |
(cost: 1996 - $36; 1995 - $27) 33 | 29
Mortgage loans on real estate 31,459 | --
Policy loans 4,634 | 2,021
Short-term investments 12,631 | 15,614
___________________ | _________________
Total investments 324,320 | 67,293
|
Cash and cash equivalents 5,839 | 5,046
|
Accrued investment income 4,139 | 768
|
Deferred policy acquisition costs 11,468 | 67,314
|
Present value of in force acquired 83,051 | 6,057
|
Property and equipment, less allowances |
for depreciaition of $63 in 1996 and |
$86 in 1995 699 | 490
|
Goodwill, less accumulated amortization |
of $589 in 1996 38,665 | --
|
Other assets 2,471 | 7,136
|
Separate account assets 1,207,247 | 1,048,953
___________________ | _________________
Total assets $1,677,899 | $1,203,057
=================== | =================
See accompanying notes.
CONSOLIDATED BALANCE SHEETS - CONTINUED
(Dollars in thousands, except per share data)
POST-ACQUISITION | PRE-ACQUISITION
___________________ | _________________
December 31, 1996 | December 31, 1995
___________________ | _________________
|
LIABILITIES AND STOCKHOLDER'S |
EQUITY |
|
Policy liabilities and accruals: |
Future policy benefits: |
Annuity and interest sensitive life |
products $285,287 | $33,673
Unearned revenue reserve 2,063 | 6,556
___________________ | _________________
287,350 | 40,229
|
Deferred income taxes 365 | --
Surplus note 25,000 | --
Due to affiliates 1,504 | 675
Other liabilities 15,949 | 15,075
Separate account liabilities 1,207,247 | 1,048,953
___________________ | _________________
1,537,415 | 1,104,932
|
Commitments and contingencies |
|
Stockholder's equity: |
Common stock, par value $10 per share, |
authorized, issued and outstanding |
250,000 shares 2,500 | 2,500
Redeemable preferred stock, par value |
$5,000 per share, 50,000 shares |
authorized (1995 - 10,000 shares |
issued and outstanding) -- | 50,000
Additional paid-in capital 137,372 | 45,030
Unrealized appreciation (depreciation) |
of securities at fair value 262 | 658
Retained earnings (deficit) 350 | (63)
___________________ | _________________
Total stockholder's equity 140,484 | 98,125
___________________ | _________________
Total liabilities and stockholder's |
equity $1,677,899 | $1,203,057
=================== | =================
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
POST-ACQUISITION | PRE-ACQUISITION
__________________| ________________
For the period | For the period
August 14, 1996 | January 1, 1996
through | through
December 31, 1996 | August 13, 1996
__________________| ________________
|
|
Revenues: |
Annuity and interest sensitive life |
product charges $8,768 | $12,259
Management fee revenue 877 | 1,390
Net investment income 5,795 | 4,990
Realized gains (losses) on investments 42 | (420)
Other income 486 | 70
__________________| ________________
15,968 | 18,289
|
|
Insurance benefits and expenses: |
Annuity and interest sensitive life benefits: |
Interest credited to account balances 5,741 | 4,355
Benefit claims incurred in excess of |
account balances 1,262 | 915
Underwriting, acquisition and insurance |
expenses: |
Commissions 9,866 | 16,549
General expenses 5,906 | 9,422
Insurance taxes 672 | 1,225
Policy acquisition costs deferred (11,712)| (19,300)
Amortization: |
Deferred policy acquisition costs 244 | 2,436
Present value of in force acquired 2,745 | 951
Goodwill 589 | --
__________________| ________________
15,313 | 16,553
|
Interest expense 85 | --
__________________| ________________
15,398 | 16,553
__________________| ________________
570 | 1,736
|
Income taxes 220 | (1,463)
__________________| ________________
|
Net income $350 | $3,199
==================| ================
See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME - CONTINUED
(Dollars in thousands)
PRE-ACQUISITION
____________________________________
For the For the
year ended year ended
December 31, December 31,
1995 1994
____________________________________
Revenues:
Annuity and interest sensitive life
product charges $18,388 $17,519
Management fee revenue 987 --
Net investment income 2,818 560
Realized gains (losses) on investments 297 65
Other income 63 --
__________________ ________________
22,553 18,144
Insurance benefits and expenses:
Annuity and interest sensitive life benefits:
Interest credited to account balances 1,322 40
Benefit claims incurred in excess of
account balances 1,824 (5)
Underwriting, acquisition and insurance
expenses:
Commissions 7,983 16,978
General expenses 12,650 12,921
Insurance taxes 952 373
Policy acquisition costs deferred (9,804) (23,119)
Amortization:
Deferred policy acquisition costs 2,710 4,608
Present value of in force acquired 1,552 2,164
Goodwill -- --
__________________ ________________
19,189 13,960
Interest expense -- 1,962
__________________ ________________
19,189 15,922
__________________ ________________
3,364 2,222
Income taxes -- --
__________________ ________________
Net income $3,364 $2,222
================== ================
See accompanying notes.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(Dollars in thousands, except per share data)
PRE-ACQUISITION
__________________________________________________________
Unreal-
ized
Appre-
ciation
(Depre-
ciation)
Addi- of Total
Redeemable tional Securities Retained Stock-
Common Preferred Paid-In at Earnings holder's
Stock Stock Capital Fair Value (Deficit) Equity
__________________________________________________________
Balance at
January 1, 1994 $2,500 $28,336 $62 ($2,301) $28,597
Issuance of 10,000
shares of preferred
stock -- $50,000 -- -- -- 50,000
Contribution of
capital -- -- 8,750 -- -- 8,750
Net income for 1994 -- -- -- -- 2,222 2,222
Unrealized deprecia-
tion of securities
at fair value -- -- -- (63) -- (63)
__________________________________________________________
Balance at
December 31, 1994 2,500 50,000 37,086 (1) (79) 89,506
Contribution of
capital -- -- 7,944 -- -- 7,944
Net income for 1995 -- -- -- -- 3,364 3,364
Preferred stock
dividends -- -- -- -- (3,348) (3,348)
Unrealized apprecia-
tion of securities
at fair value -- -- -- 659 -- 659
__________________________________________________________
Balance at
December 31, 1995 2,500 50,000 45,030 658 (63) 98,125
Net income for the
period January 1, 1996
to August 13, 1996 -- -- -- -- 3,199 3,199
Preferred stock
dividends -- -- -- -- (719) (719)
Unrealized deprecia-
tion of securities
at fair value -- -- -- (1,175) -- (1,175)
__________________________________________________________
Balance at
August 13, 1996 $2,500 $50,000 $45,030 ($517) $2,417 $99,430
==========================================================
See accompanying notes.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY - CONTINUED
(Dollars in thousands, except per share data)
POST-ACQUISITION
__________________________________________________________
Unreal-
ized
Appre-
ciation
(Depre-
ciation)
Addi- of Total
Redeemable tional Securities Retained Stock-
Common Preferred Paid-In at Earnings holder's
Stock Stock Capital Fair Value (Deficit) Equity
__________________________________________________________
Balance at
August 14, 1996 $2,500 $50,000 $87,372 -- -- $139,872
Contribution of
preferred stock
to additional
paid-in capital -- (50,000) 50,000 -- -- --
Net income for period
August 14, 1996 to
December 31, 1996 -- -- -- -- $350 350
Unrealized apprecia-
tion of securities
at fair value -- -- -- $262 -- 262
__________________________________________________________
Balance at
December 31, 1996 $2,500 $ -- $137,372 $262 $350 $140,484
==========================================================
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
POST-ACQUISITION | PRE-ACQUISITION
___________________| ___________________
For the period | For the period
August 14, 1996 | January 1, 1996
through | through
December 31, 1996 | August 13, 1996
___________________| ___________________
|
|
OPERATING ACTIVITIES |
Net income $350 | $3,199
Adjustments to reconcile net income |
to net cash provided by (used in) |
operations: |
Adjustments related to annuity and |
interest sensitive life products: |
Change in annuity and interest |
sensitive life product reserves 5,106 | 4,472
Change in unearned revenues 2,063 | 2,084
Increase in accrued investment income (877)| (2,494)
Policy acquisition costs deferred (11,712)| (19,300)
Amortization of deferred policy |
acquisition costs 244 | 2,436
Amortization of present value of in |
force acquired 2,745 | 951
Change in other assets, other |
liabilities and accrued income taxes (96)| 4,672
Provision for depreciation and |
amortization 1,242 | 703
Provision for deferred income taxes 220 | (1,463)
Realized (gains) losses on investments (42)| 420
___________________| ___________________
Net cash provided by (used in) |
operating activities (757)| (4,320)
|
|
INVESTING ACTIVITIES |
Sale, maturity or repayment of |
investments: |
Fixed maturities - available for sale 47,453 | 55,091
Fixed maturities - held for investment -- | --
Equity securities -- | --
Mortgage loans on real estate 40 | --
Short-term investments - net 2,629 | 354
___________________| ___________________
50,122 | 55,445
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)
POST-ACQUISITION | PRE-ACQUISITION
__________________| _________________
For the period | For the period
August 14, 1996 | January 1, 1996
through | through
December 31, 1996 | August 13, 1996
__________________| _________________
|
|
INVESTING ACTIVITIES - CONTINUED |
Acquisition of investments: |
Fixed maturities - available for sale ($147,170)| ($184,589)
Fixed maturities - held for investment -- | --
Equity securities (5)| --
Mortgage loans on real estate (31,499)| --
Policy loans - net (637)| (1,977)
Short-term investments - net -- | --
__________________| _________________
(179,311)| (186,566)
Funds held in escrow pursuant to |
an Exchange Agreement -- | --
Purchase of property and equipment (137)| --
__________________| _________________
Net cash used in investing activities (129,326)| (131,121)
|
FINANCING ACTIVITIES |
Retirement of short-term debt -- | --
Proceeds from issuance of surplus note 25,000 | --
Receipts from annuity and interest |
sensitive life policies credited |
to policyholder account balances 116,819 | 149,750
Return of policyholder account balances |
on annuity and interest sensitive |
life policies (3,315)| (2,695)
Net reallocations (to) from Separate |
Accounts (10,237)| (8,286)
Contributions of capital by parent -- | --
Issuance of preferred stock -- | --
Dividends paid on preferred stock -- | (719)
__________________| _________________
Net cash provided by financing |
activities 128,267 | 138,050
__________________| _________________
Increase (decrease) in cash and |
cash equivalents (1,816)| 2,609
|
Cash and cash equivalents at |
beginning of period 7,655 | 5,046
__________________| _________________
Cash and cash equivalents at end |
of period $5,839 | $7,655
==================| =================
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)
PRE-ACQUISITION
________________________________
For the For the
year ended year ended
December 31, December 31,
1995 1994
________________________________
OPERATING ACTIVITIES
Net income $3,364 $2,222
Adjustments to reconcile net income
to net cash provided by (used in)
operations:
Adjustments related to annuity and
interest sensitive life products:
Change in annuity and interest
sensitive life product reserves 4,664 (1,370)
Change in unearned revenues 4,949 1,594
Increase in accrued investment income (676) (24)
Policy acquisition costs deferred (9,804) (23,119)
Amortization of deferred policy
acquisition costs 2,710 4,608
Amortization of present value of in
force acquired 1,552 2,164
Change in other assets, other
liabilities and accrued income taxes 4,686 (4,543)
Provision for depreciation and
amortization (142) 13
Provision for deferred income taxes -- --
Realized (gains) losses on investments (297) (65)
______________ ______________
Net cash provided by (used in)
operating activities 11,006 (18,520)
INVESTING ACTIVITIES
Sale, maturity or repayment of
investments:
Fixed maturities - available for sale 24,026 --
Fixed maturities - held for investment -- 321
Equity securities -- 313
Mortgage loans on real estate -- --
Short-term investments - net -- 1,299
______________ ______________
24,026 1,933
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(Dollars in thousands)
PRE-ACQUISITION
________________________________
For the For the
year ended year ended
December 31, December 31,
1995 1994
________________________________
INVESTING ACTIVITIES - CONTINUED
Acquisition of investments:
Fixed maturities - available for sale ($61,723) --
Fixed maturities - held for investment -- ($857)
Equity securities (10) (7)
Mortgage loans on real estate -- --
Policy loans - net (1,508) (369)
Short-term investments - net (1,681) --
______________ ______________
(64,922) (1,233)
Funds held in escrow pursuant to
an Exchange Agreement (1,242) (1,382)
Purchase of property and equipment -- --
______________ ______________
Net cash used in investing activities (42,138) (682)
FINANCING ACTIVITIES
Retirement of short-term debt -- (40,000)
Proceeds from issuance of surplus note -- --
Receipts from annuity and interest
sensitive life policies credited
to policyholder account balances 29,501 --
Return of policyholder account balances
on annuity and interest sensitive
life policies (1,543) --
Net reallocations (to) from Separate
Accounts -- --
Contributions of capital by parent 7,944 8,750
Issuance of preferred stock -- 50,000
Dividends paid on preferred stock (3,348) --
______________ ______________
Net cash provided by financing
activities 32,554 18,750
______________ ______________
Increase (decrease) in cash and
cash equivalents 1,422 (452)
Cash and cash equivalents at
beginning of period 3,624 4,076
______________ ______________
Cash and cash equivalents at end
of period $5,046 $3,624
============== ==============
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
________________________________________________________________________________
CONSOLIDATION
The consolidated financial statements include Golden American Life Insurance
Company ("Golden American") and its wholly-owned subsidiary, First Golden
American Life Insurance Company of New York ("First Golden") collectively the
"Company". First Golden was capitalized by Golden American on December 17,
1996. All significant intercompany accounts and transactions have been
eliminated.
ORGANIZATION
Golden American offers variable insurance products and is licensed as a life
insurance company in the District of Columbia and all states except New York.
On January 2, 1997, First Golden became licensed to sell insurance products
in the state of New York. The Company's products are marketed by
broker/dealers, financial institutions and insurance agents. The Company's
primary customers are individuals and families.
On August 13, 1996, Equitable of Iowa Companies ("Equitable") acquired all of
the outstanding capital stock of BT Variable, Inc. ("BT Variable") and its
wholly-owned subsidiaries, Golden American and Directed Services, Inc. ("DSI")
from Whitewood Properties Corporation ("Whitewood") pursuant to the terms of a
Stock Purchase Agreement between Equitable and Whitewood (the "Purchase
Agreement"). See Note 5 for additional information.
For financial statement purposes, the change in control of Golden American
through the acquisition of BT Variable was accounted for as a purchase
acquisition effective August 14, 1996. This acquisition resulted in a new
basis of accounting reflecting estimated fair values of assets and liabilities
at that date. As a result, the Company's financial statements for periods
subsequent to August 13, 1996, are presented on the Post-Acquisition new basis
of accounting, while the financial statements for August 13, 1996 and prior
periods are presented on the Pre-Acquisition historical cost basis of
accounting.
INVESTMENTS
Fixed Maturities: Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities"
requires fixed maturity securities to be designated as either "available for
sale", "held for investment" or "trading". Sales of fixed maturities
designated as "available for sale" are not restricted by SFAS No. 115.
Available for sale securities are reported at fair value and unrealized gains
and losses on these securities are included directly in stockholder's equity,
after adjustment for related changes in deferred policy acquisition costs,
present value of in force acquired, policy reserves and deferred income taxes.
At December 31, 1996 and 1995, all of the Company's fixed maturity securities
are designated as available for sale although the Company is not precluded
from designating fixed maturity securities as held for investment or trading at
some future date. Securities the Company has the positive intent and ability
to hold to maturity are designated as "held for investment". Held for
investment securities are reported at cost adjusted for amortization of
premiums and discounts. Changes in the fair value of these securities, except
for declines that are other than temporary, are not reflected in the Company's
financial statements. Sales of securities designated as held for investment
are severely restricted by SFAS No. 115. Securities that are bought and held
principally for the purpose of selling them in the near term are designated as
trading securities. Unrealized gains and losses on trading securities are
included in current earnings. Transfers of securities between categories are
restricted and are recorded at fair value at the time of the transfer.
Securities that are determined to have a decline in value that is other than
temporary are written down to estimated fair value which becomes the security's
new cost basis by a charge to realized losses in the Company's Statements of
Income. Premiums and discounts are amortized/accrued utilizing the scientific
interest method which results in a constant yield over the security's expected
life. Amortization/accrual of premiums and discounts on mortgage-backed
securities incorporates a prepayment assumption to estimate the securities'
expected lives.
Equity Securities: Equity securities are reported at estimated fair value if
readily marketable or at cost if not readily marketable. The change in
unrealized appreciation and depreciation of marketable equity securities (net
of related deferred income taxes, if any) is included directly in stockholder's
equity. Equity securities that are determined to have a decline in value that
is other than temporary are written down to estimated fair value which becomes
the security's new cost basis by a charge to realized losses in the Company's
Statement of Income.
Mortgage loans: Mortgage loans on real estate are reported at cost adjusted
for amortization of premiums and accrual of discounts. If the value of any
mortgage loan is determined to be impaired (i.e., when it is probable that
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 future cash flows from the
loan, discounted at the loan's effective interest rate, or to the loan's
observable market price, or the fair value of the underlying collateral. The
carrying value of impaired loans is reduced by the establishment of a valuation
allowance which is adjusted at each reporting date for significant changes in
the calculated value of the loan. Changes in this valuation allowance are
charged or credited to income.
Other investments: Policy loans are reported at unpaid principal. Short-term
investments are reported at cost adjusted for amortization of premiums and
accrual of discounts.
Fair Values: Estimated fair values, as reported herein, of publicly traded
fixed maturity securities are as reported by an independent pricing service.
Fair values of conventional mortgage-backed securities not actively traded in
a liquid market are estimated using a third party pricing system. This pricing
system uses a matrix calculation assuming a spread over U.S. Treasury bonds
based upon the expected average lives of the securities. Fair values of
private placement bonds are estimated using a matrix that assumes a spread
(based on interest rates and a risk assessment of the bonds) over U.S. Treasury
bonds. Estimated fair values of equity securities which consists of the
Company's investment in its registered separate accounts are based upon the
quoted fair value of the securities comprising the individual portfolios
underlying the separate accounts. Realized gains and losses are determined
on the basis of specific identification and average cost methods for manager
initiated and issuer initiated disposals, respectively.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, the Company considers
all demand deposits and interest-bearing accounts not related to the investment
function to be cash equivalents. All interest-bearing accounts classified as
cash equivalents have original maturities of three months or less.
DEFERRED POLICY ACQUISITION COSTS
Certain costs of acquiring new insurance business, principally commissions and
other expenses related to the production of new business, have been deferred.
Acquisition costs for variable annuity and life products are being amortized
generally in proportion to the present value (using the assumed crediting rate)
of expected future gross profits. This amortization is adjusted
retrospectively, or "unlocked", when the Company revises its estimate of
current or future gross profits to be realized from a group of products.
Deferred policy acquisition costs are adjusted to reflect the pro forma impact
of unrealized gains and losses on fixed maturity securities the Company has
designated as "available for sale" under SFAS No. 115.
PRESENT VALUE OF IN FORCE ACQUIRED
As a result of the acquisition of Golden American, a portion of the acquisition
cost was allocated to the right to receive future cash flows from the existing
insurance contracts. This allocated cost represents the present value of in
force acquired ("PVIF") which reflects the value of those purchased policies
calculated by discounting actuarially determined expected cash flows at the
discount rate determined by the purchaser. Interest is imputed on the
unamortized balance of PVIF at rates of 7.70% to 7.80%. Amortization of PVIF
is charged to expense in proportion to expected gross profits. This
amortization is adjusted retrospectively, or "unlocked", when the Company
revises its estimate of current or future gross profits to be realized from
the insurance contracts acquired. PVIF is adjusted to reflect the pro forma
impact of unrealized gains (losses) on available for sale fixed maturities.
PROPERTY AND EQUIPMENT
Property and equipment primarily represent leasehold improvements at the Golden
American headquarters, office furniture and equipment and capitalized computer
software and are not considered to be significant to the Company's overall
operations. Property and equipment are reported at cost less allowances for
depreciation. Depreciation expense is computed primarily on the basis of
straight-line method over the estimated useful lives of the assets.
GOODWILL
Goodwill was established as a result of the acquisition discussed above and is
being amortized over 25 years on a straight line basis. See Note 5 for
additional information.
FUTURE POLICY BENEFITS
Future policy benefits for fixed interest divisions of the variable products,
are established utilizing the retrospective deposit accounting method. Policy
reserves represent the premiums received plus accumulated interest, less
mortality and administration charges. Interest credited to these policies
ranged from 4.00% to 7.25% during 1996.
The unearned revenue reserve represents unearned distribution fees discussed
below. These distribution fees have been deferred and are amortized over the
life of the contract in proportion to its expected gross profits.
SEPARATE ACCOUNTS
Assets and liabilities of the separate accounts reported in the accompanying
balance sheets represent funds that are separately administered principally
for variable annuity and variable life contracts. Contractholders, rather
than the Company, bear the investment risk for variable products. At the
direction of the contractholders, the separate accounts invest the premiums
from the sale of variable annuity and variable life products in shares of
specified mutual funds. The assets and liabilities of the separate accounts
are clearly identified and segregated from other assets and liabilities of
the Company. The portion of the separate account assets applicable to
variable annuity and variable life contracts cannot be charged with liabilities
arising out of any other business the Company may conduct.
Variable separate account assets carried at fair value of the underlying
investments generally represent contractholder investment values maintained
in the accounts. Variable separate account liabilities represent account
balances for the variable annuity and variable life contracts invested in the
separate accounts. Net investment income and realized and unrealized capital
gains and losses related to separate account assets are not reflected in the
accompanying Statement of Income.
Product charges recorded by the Company from variable annuity and variable
life products consist of charges applicable to each contract for mortality and
expense risk, cost of insurance, contract administration and surrender charges.
In addition, some variable annuity and all variable life contracts provide for
a distribution fee collected for a limited number of years after each premium
deposit. Revenue recognition of collected distribution fees is amortized over
the life of the contract in proportion to its expected gross profits. The
balance of unrecognized revenue related to the distribution fees is reported as
an unearned revenue reserve.
DEFERRED INCOME TAXES
Deferred tax assets or liabilities are computed based on the difference between
the financial statement and income tax bases of assets and liabilities using the
enacted marginal tax rate. Deferred tax assets or liabilities are adjusted to
reflect the pro forma impact of unrealized gains and losses on equity securities
and fixed maturity securities the Company has designated as available for sale
under SFAS No. 115. Changes in deferred tax assets or liabilities resulting
from this SFAS No. 115 adjustment are charged or credited directly to
stockholder's equity. Deferred income tax expenses or credits reflected in the
Company's Statement of Income are based on the changes in the deferred tax
asset or liability from period to period (excluding the SFAS No. 115
adjustment).
DIVIDEND RESTRICTIONS
Golden American's ability to pay dividends to its parent is restricted because
prior approval of insurance regulatory authorities is required for payment of
dividends to the stockholder which exceed an annual limitation. During 1997,
Golden American could pay dividends to its parent of approximately $2,186,000
without prior approval of statutory authorities. The Company has maintained
adequate statutory capital and surplus and has not used surplus relief or
financial reinsurance, which have come under scrutiny by many state insurance
departments.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the preparation period. Actual results
could differ from those estimates.
Management is required to utilize historical experience and assumptions about
future events and circumstances in order to develop estimates of material
reported amounts and disclosures. Included among the material (or potentially
material) reported amounts and disclosures that require extensive use of
estimates and assumptions are (1) estimates of fair values of investments in
securities and other financial instruments, as well as fair values of
policyholder liabilities, (2) policyholder liabilities, (3) deferred policy
acquisition costs and present value of in force acquired, (4) fair values of
assets and liabilities recorded as a result of acquisition transactions, (5)
asset valuation allowances, (6) guaranty fund assessment accruals, (7)
deferred tax benefits (liabilities) and (8) estimates for commitments and
contingencies including legal matters, if a liability is anticipated and can be
reasonably estimated. Estimates and assumptions regarding all of the preceding
are inherently subject to change and are reassessed periodically. Changes in
estimates and assumptions could materially impact the financial statements.
RECLASSIFICATION
Certain amounts in the 1995 and 1994 financial statements have been
reclassified to conform to the 1996 financial statement presentation.
2. BASIS OF FINANCIAL REPORTING
________________________________________________________________________________
The financial statements of the Company differ from related statutory-basis
financial statements principally as follows: (1) acquisition costs of acquiring
new business are deferred and amortized over the life of the policies rather
than charged to operations as incurred; (2) an asset representing the present
value of future cash flows from insurance contracts acquired was established as
a result of an acquisition and is amortized and charged to expense; (3) future
policy benefit reserves for the fixed interest divisions of the variable
products are based on full account values, rather than the greater of cash
surrender value or amounts derived from discounting methodologies utilizing
statutory interest rates; (4) reserves are reported before reduction for
reserve credits related to reinsurance ceded and a receivable is established,
net of an allowance for uncollectible amounts, for these credits rather than
presented net of these credits; (5) fixed maturity investments are designated
as "available for sale" and valued at fair value with unrealized
appreciation/depreciation, net of adjustments to deferred income taxes
(if applicable) and deferred policy acquisition costs, credited/charged directly
to stockholder's equity rather than valued at amortized cost; (6) the carrying
value of fixed maturity securities is reduced to fair value by a charge to
realized losses in the Statements of Income when declines in carrying value are
judged to be other than temporary, rather than through the establishment of a
formula-determined statutory investment reserve (carried as a liability),
changes in which are charged directly to surplus; (7) deferred income taxes
are provided for the difference between the financial statement and income tax
bases of assets and liabilities; (8) net realized gains or losses attributed
to changes in the level of interest rates in the market are recognized when the
sale is completed rather than deferred and amortized over the remaining life of
the fixed maturity security; (9) a liability is established for anticipated
guaranty fund assessments, net of related anticipated premium tax credits,
rather than capitalized when assessed and amortized in accordance with
procedures permitted by insurance regulatory authorities; (10) revenues for
variable annuity and variable life products consist of policy charges for the
cost of insurance, policy administration charges, amortization of policy
initiation fees and surrender charges assessed rather than premiums received;
and (11) assets and liabilities are restated to fair values when a change in
ownership occurs, with provisions for goodwill and other intangible assets,
rather than continuing to be presented at historical cost.
Net income (loss) for Golden American, as determined in accordance with
statutory accounting practices was $(9,188,000) in 1996, $(4,117,000) in 1995
and $(11,260,000) in 1994. Total statutory capital and surplus was
$80,430,000 at December 31, 1996 and $66,357,000 at December 31, 1995.
3. INVESTMENT OPERATIONS
________________________________________________________________________________
INVESTMENT RESULTS
Major categories of net investment income are summarized below:
POST-
ACQUISITION PRE-ACQUISITION
_______________________________________________________
For the | For the
period | period
August 14, | January 1, For the For the
1996 through| 1996 through year ended year ended
December 31,| August 13, December 31, December 31,
1996 | 1996 1995 1994
____________| _________________________________________
(Dollars in thousands)
|
Fixed maturities $5,083 | $4,507 $1,610 $142
Equity securities 103 | -- -- 1
Mortgage loans on real |
estate 203 | -- -- --
Policy loans 78 | 73 56 11
Short-term investments 441 | 341 899 226
Other, net 2 | 22 148 99
Funds held in escrow -- | 145 166 83
____________| _________________________________________
Gross investment income 5,910 | 5,088 2,879 562
Less investment expenses (115)| (98) (61) (2)
____________| _________________________________________
Net investment income $5,795 | $4,990 $2,818 $560
============| =========================================
Realized gains (losses) are as follows:
REALIZED*
POST-
ACQUISITION PRE-ACQUISITION
_______________________________________________________
For the | For the
period | period
August 14, | January 1,
1996 through| 1996 through Year ended Year ended
December 31,| August 13, December 31, December 31,
1996 | 1996 1995 1994
____________| _________________________________________
(Dollars in thousands)
|
Fixed maturities: |
Available for sale $42 | ($420) $297
Held for investment -- | -- -- $2
Equity securities -- | -- -- 63
____________| _________________________________________
Realized gains (losses) |
on investments $42 | ($420) $297 $65
=======================================================
*See Note 6 for the income tax effects attributable to realized gains and
losses on investments.
The change in unrealized appreciation (depreciation) on securities at fair
value is as follows:
UNREALIZED
POST-
ACQUISITION PRE-ACQUISITION
_______________________________________________________
For the | For the
period | period
August 14, | January 1,
1996 through| 1996 through Year ended Year ended
December 31,| August 13, December 31, December 31,
1996** | 1996 1995 1994
____________| _________________________________________
(Dollars in thousands)
|
Fixed maturities: |
Available for sale $410 | ($2,087) $958 ($65)
Held for investment -- | -- 90 --
Equity securities (3)| 1 3 (63)
____________| _________________________________________
Unrealized appreciation |
(depreciation) of |
securities $407 | ($2,086) $1,051 ($128)
=======================================================
**On August 13, 1996, all fixed maturities and equity securities in the
Company's investment portfolio were marked to market.
At December 31, 1996 and December 31, 1995, amortized cost, gross unrealized
gains and losses and estimated fair values of fixed maturity securities, all of
which are designated as available for sale, are as follows:
POST-ACQUISITION
_______________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
______________________________________________________________________________
(Dollars in thousands)
U.S. government and
governmental agencies
and authorities:
Mortgage-backed securities $70,902 $122 ($247) $70,777
Other 3,082 2 (4) 3,080
Public utilities 35,893 193 (38) 36,048
Investment grade corporate 134,487 586 (466) 134,607
Below investment grade
corporate 25,921 249 (56) 26,114
Mortgage-backed securities 4,868 69 -- 4,937
___________ ___________ ___________ ___________
Total $275,153 $1,221 ($811) $275,563
=========== =========== =========== ===========
PRE-ACQUISITION
_______________________________________________
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
December 31, 1995 Cost Gains Losses Value
______________________________________________________________________________
(Dollars in thousands)
U.S. government and
governmental agencies
and authorities - Other $13,334 $176 $13,510
Public utilities 5,276 26 5,302
Investment grade corporate 27,042 700 ($31) 27,711
Mortgage-backed securities 3,019 87 -- 3,106
___________ ___________ ___________ ___________
Total $48,671 $989 ($31) $49,629
=========== =========== =========== ===========
At December 31, 1996, net unrealized investment gains on fixed maturities
designated as available for sale totaled $410,000. This appreciation caused
an increase to stockholder's equity of $265,000 at December 31, 1996 (net of
deferred income taxes of $145,000). No fixed maturity securities were
designated as held for investment at December 31, 1996 or 1995. Short-term
investments with maturities of 30 days or less have been excluded from the
above schedules. Amortized cost approximates fair value for these securities.
Amortized cost and estimated fair value of fixed maturities designated as
available for sale, by contractual maturity, at December 31, 1996, are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
POST-ACQUISITION
_____________________________
Estimated
Amortized Fair
December 31, 1996 Cost Value
_____________________________________________________________________________
(Dollars in thousands)
Due within one year $15,908 $15,930
Due after one year through five years 122,958 123,487
Due after five years through ten years 60,517 60,432
_____________ _____________
199,383 199,849
Mortgage-backed securities 75,770 75,714
_____________ _____________
Total $275,153 $275,563
============= =============
An analysis of sales, maturities and principal repayments of the Company's
fixed maturities portfolio is as follows:
Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
______________________________________________________________________________
(Dollars in thousands)
For the period August 14,
1996 through
December 31, 1996:
Scheduled principal
repayments, calls and
tenders $1,612 $1,612
Sales 45,799 $115 ($73) 45,841
______________________________________________________
Total $47,411 $115 ($73) $47,453
======================================================
For the period January 1,
1996 through August 13,
1996:
Scheduled principal
repayments, calls and
tenders $1,801 $1,801
Sales 53,710 $152 ($572) 53,290
______________________________________________________
Total $55,511 $152 ($572) $55,091
======================================================
Year ended December 31,
1995:
Scheduled principal
repayments, calls and
tenders $20,279 $305 ($16) $20,568
Sales 3,450 8 -- 3,458
______________________________________________________
Total $23,729 $313 ($16) $24,026
======================================================
Year ended December 31,
1994:
Scheduled principal
repayments, tenders
(available for sale only)
and calls - held for
investment $319 $2 $ -- $321
______________________________________________________
Total $319 $2 $ -- $321
======================================================
Investment Valuation Analysis: The company analyzes its investment portfolio
at least quarterly in order to determine if the carrying value of any of its
investments has been impaired. The carrying value of debt and equity
securities is written down to fair value by a charge to realized losses when
an impairment in value appears to be other than temporary. During 1996 and
1995, no investments were identified as having an impairment other than
temporary.
Investments on Deposit: At December 31, 1996 and 1995, affidavits of deposits
covering bonds with a par value of $6,605,000 and $2,695,000, respectively,
were on deposit with regulatory authorities pursuant to certain statutory
requirements.
Investment Diversifications: The Company's investment policies related to its
investment portfolio require diversification by asset type, company and
industry and set limits on the amount which can be invested in an individual
issuer. Such policies are at least as restrictive as those set forth by
regulatory authorities. Fixed maturity investments included investments in
various government bonds and government or agency mortgage-backed securities
(27% in 1996 and 1995), public utilities (13% in 1996, 11% in 1995), basic
industrials (30% in 1996, 20% in 1995) and financial companies (18% in 1996,
30% in 1995). Mortgage loans on real estate have been analyzed by
geographical location and 17% of all mortgage loans are in Georgia. There are
no other concentrations of mortgage loans in any state exceeding ten percent in
1996. Mortgage loans on real estate have also been analyzed by collateral type
with significant concentrations identified in office buildings (36% in 1996),
industrial buildings (31% in 1996) and multi-family residential buildings
(27% in 1996). Equity securities and investments accounted for by the equity
method are not significant to the Company's overall investment portfolio.
No investment in any person or its affiliates (other than bonds issued by
agencies of the United States government) exceeded ten percent of stockholder's
equity at December 31, 1996.
4. FAIR VALUES OF FINANCIAL INSTRUMENTS
________________________________________________________________________________
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" requires
disclosure of estimated fair value of all financial instruments, including both
assets and liabilities recognized and not recognized in a Company's balance
sheet, unless specifically exempted. SFAS No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments"
requires additional disclosures about derivative financial instruments. Most
of the Company's investments, insurance liabilities and debt fall within the
standards' definition of a financial instrument. Although the Company's
insurance liabilities are specifically exempted from this disclosure
requirement, estimated fair value disclosure of these liabilities is also
provided in order to make the disclosures more meaningful. Accounting,
actuarial and regulatory bodies are continuing to study the methodologies to be
used in developing fair value information, particularly as it relates to such
things as liabilities for insurance contracts. Accordingly, care should be
exercised in deriving conclusions about the Company's business or financial
condition based on the information presented herein.
The Company closely monitors the composition and yield of its invested assets,
the duration and interest credited on insurance liabilities and resulting
interest spreads and timing of cash flows. These amounts are taken into
consideration in the Company's overall management of interest rate risk, which
attempts to minimize exposure to changing interest rates through the matching
of investment cash flows with amounts expected to be due under insurance
contracts. As discussed below, the Company has used discount rates in its
determination of fair values for its liabilities which are consistent with
market yields for related assets. The use of the asset market yield is
consistent with management's opinion that the risks inherent in its asset and
liability portfolios are similar. This assumption, however, might not result
in values consistent with those obtained through an actuarial appraisal of the
Company's business or values that might arise in a negotiated transaction.
The following compares carrying values as shown for financial reporting
purposes with estimated fair values.
December 31 1996
_______________________________________________________________________________
(Dollars in thousands)
Estimated
Carrying Fair
Value Value
____________ ____________
ASSETS
Balance sheet financial assets:
Fixed maturities available for sale $275,563 $275,563
Equity securities 33 33
Mortgage loans on real estate 31,459 30,979
Short-term investments 12,631 12,631
Cash and cash equivalents 5,839 5,839
Other receivables 4,214 4,214
Separate account assets 1,207,247 1,207,247
___________________________
1,536,986 1,536,506
Deferred policy acquisition costs 11,468 --
Present value of in force acquired 83,051 --
Goodwill 38,665 --
Deferred income taxes on fair value adjustments -- 7,741
Non-financial assets 3,095 3,095
___________________________
Total assets $1,673,265 $1,547,342
===========================
LIABILITIES AND STOCKHOLDER'S EQUITY
Balance sheet financial liabilities:
Future policy benefits (net of related policy
loans):
Annuity products $280,076 $253,012
Interest sensitive life products 2,640 2,368
___________________________
282,716 255,380
Surplus note 25,000 28,878
Separate account liabilities 1,207,247 1,119,158
___________________________
1,514,963 1,403,416
Non-financial liabilities 17,818 17,818
___________________________
Total liabilities 1,532,781 1,421,234
Stockholder's equity 140,484 126,108
___________________________
Total liabilities and stockholder's equity $1,673,265 $1,547,342
===========================
The following methods and assumptions were used by the Company in estimating
fair values.
Fixed maturities: Estimated fair values of publicly traded securities are
as reported by an independent pricing service. Estimated fair values of
conventional mortgage-backed securities not actively traded in a liquid market
are estimated using a third party pricing system. This pricing system uses a
matrix calculation assuming a spread over U.S. Treasury bonds based upon the
expected average lives of the securities.
Equity securities: Estimated fair values of equity securities, which consist
of the Company's investment in the portfolios underlying its separate accounts,
are based upon the quoted fair value of the individual securities comprising
the individual portfolios underlying the separate accounts. For equity
securities not actively traded, estimated fair values are based upon values of
issues of comparable yield and quality.
Mortgage loans on real estate: Fair values are estimated by discounting
expected cash flows, using interest rates currently offered for similar loans.
Short-term investments, cash and cash equivalents, and other receivables:
Carrying values reported in the Company's historical cost basis balance sheet
approximate estimated fair value for these instruments, due to their short-
term nature.
Deferred policy acquisition costs, present value of in force acquired and
goodwill: For historical cost purposes, the recovery of policy acquisition
costs and present value of in force acquired is based on the realization, among
other things, of future interest spreads and gross premiums on in force
business. Because these cash flows are considered in the computation of the
future policy benefit cash flows, the deferred policy acquisition cost and
present value of in force acquired balances do not appear on the estimated fair
value balance sheet. Goodwill does not appear in the estimated fair value
balance sheet because no cash flows are related to this asset.
Separate account assets: Separate account assets represent the estimated
fair values of the underlying securities in the Company's historical cost and
estimated fair value basis balance sheets.
Future policy benefits: Estimated fair values of the Company's liabilities
for future policy benefits for the fixed interest division of the variable
products are based upon discounted cash flow calculations. Cash flows of
future policy benefits are discounted using the market yield rate of the assets
supporting these liabilities. Estimated fair values are presented net of the
estimated fair value of corresponding policy loans due to the interdependent
nature of the cash flows associated with these items.
Surplus note: Estimated fair value of the Company's surplus note was based
upon discounted future cash flows using a discount rate approximating the
Company's return on invested assets.
Separate account liabilities: Separate account liabilities are reported at
full account value in the Company's historical cost balance sheet. Estimated
fair values of separate account liabilities are based upon assumptions using
an estimated long-term average market rate of return to discount future cash
flows. The reduction in fair values for separate account liabilities reflect
the present value of future revenue from product charges, distribution fees
or surrender charges.
Deferred income taxes on fair value adjustments: Deferred income taxes
have been reported at the statutory rate for the differences (except for those
attributed to permanent differences) between the carrying value and estimated
fair value of assets and liabilities set forth herein.
Non-financial assets and liabilities: Values are presented at historical
cost. Non-financial assets consist primarily of property and equipment,
receivable from the Separate Accounts and restricted stock assets. Non-
financial liabilities consist primarily of outstanding checks, guaranty fund
assessments payable, payables for investments and suspense accounts.
At December 31, 1995, the carrying amounts reported for the financial
instruments consisting primarily of short-term investments, policy loans, the
adjustable principal amount promissory note and insurance and annuity reserves
approximate fair value.
SFAS No. 107 and SFAS No. 119 require disclosure of estimated fair value
information about financial instruments, whether or not recognized in the
consolidated balance sheets, for which it is practicable to estimate that
value. In cases where quoted market prices are not available, estimated fair
values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. The above presentation should not be viewed as
an appraisal as there are several factors, such as the fair value associated
with customer or agent relationships and other intangible items, which have not
been considered. In addition, interest rates and other assumptions might be
modified if an actual appraisal were to be performed. Accordingly, the
aggregate estimated fair value amounts presented herein are limited by each of
these factors and do not purport to represent the underlying value of the
Company.
5. ACQUISITION
________________________________________________________________________________
Transaction: On August 13, 1996, Equitable acquired all of the outstanding
capital stock of BT Variable from Whitewood, a wholly-owned subsidiary of
Bankers Trust, pursuant to the terms of the Purchase Agreement dated as of
May 3, 1996 between Equitable and Whitewood. In exchange for the outstanding
capital stock of BT Variable, Equitable paid the sum of $93,000,000 in cash
to Whitewood in accordance with the terms of the Purchase Agreement. Equitable
also paid the sum of $51,000,000 in cash to Bankers Trust to retire certain
debt owed by BT Variable to Bankers Trust pursuant to a revolving credit
arrangement. Subsequent to the acquisition, the BT Variable, Inc. name was
changed to EIC Variable, Inc.
Accounting Treatment: The acquisition was accounted for as a purchase
resulting in a new basis of accounting, reflecting estimated fair values for
assets and liabilities at August 13, 1996. The purchase price was allocated
to the three companies purchased - BT Variable, DSI and Golden American.
Goodwill was established for the excess of the acquisition cost over the fair
value of the net assets acquired and pushed down to Golden American. The
acquisition cost is preliminary with respect to the final settlement of taxes
with Bankers Trust and estimated expenses and, as a result, goodwill may
change. The allocation of the purchase price to Golden American was
approximately $139,872,000. The amount of goodwill relating to the
acquisition was $39,254,000 at the acquisition date and is being amortized
over 25 years on a straight line basis. The carrying value of goodwill will
be reviewed periodically for any indication of impairment in value.
Pro Forma Information (Unaudited): The following pro forma information is
presented as if the acquisition had occurred on January 1, 1995. The
information is combined to reflect the purchase accounting in the pre-
acquisition periods of January 1, 1996 through August 13, 1996 and for the
year ended December 31, 1995. This information is intended for informational
purposes only and may not be indicative of the Company's future results of
operations.
Year ended December 31, 1996 1995
___________________________________________________________________
(Dollars in thousands) (Unaudited)
Revenues $35,955 $25,149
Net income 799 1,093
The primary pro forma effects are revised amortization of deferred policy
acquisition costs, present value of in force acquired, unearned revenue,
goodwill and the elimination of deferred tax benefits.
Present Value of In Force Acquired: As part of the acquisition, a portion of
the acquisition cost was allocated to the right to receive future cash flows
from the insurance contracts existing with Golden American at the date of
acquisition. This allocated cost represents the present value of in force
acquired ("PVIF") which reflects the value of those purchased policies
calculated by discounting the actuarially determined expected future cash
flows at the discount rate determined by Equitable.
An analysis of the PVIF asset is as follows:
POST-
ACQUISITION PRE-ACQUISITION
_______________________________________________
For the | For the
period | period
August | January
14, 1996 | 1, 1996 Year Year
through | through ended ended
December | August December December
31, 1996 | 13, 1996 31, 1995 31, 1994
____________| _________________________________
(Dollars in thousands)
|
Beginning balance $85,796 | $6,057 $7,620 $9,784
Imputed interest 2,465 | 273 548 696
Amortization (5,210)| (1,224) (2,100) (2,860)
Adjustment for unrealized gains |
on available for sale securities -- | 11 (11) --
____________| _________________________________
Ending balance $83,051 | $5,117 $6,057 $7,620
============ =================================
Pre-Acquisition PVIF represents the remaining value assigned to in force
contracts when Bankers Trust purchased Golden American from Mutual Benefit on
September 30, 1992. See Note 8, contingent liability for additional
information.
Interest is imputed on the unamortized balance of PVIF at rates of 7.70% to
7.80% for the period August 14, 1996 through December 31, 1996. PVIF is
charged to expense and adjusted for the unrealized gains (losses) on available
for sale securities. Based on current conditions and assumptions as to the
future events on acquired policies in force, the expected approximate net
amortization for the next five years, relating to the balance of the PVIF as of
December 31, 1996, is as follows:
Year Amount
_________________________________________________
(Dollars in thousands)
1997 $9,664
1998 10,109
1999 9,243
2000 7,919
2001 6,798
6. INCOME TAXES
________________________________________________________________________________
The Company files a federal income tax return separate from its parent company.
Under the Internal Revenue Service Code, a newly acquired insurance company
must file a separate return for 5 years. Deferred income taxes have been
established based upon the temporary differences, the reversal of which will
result in taxable or deductible amounts in future years when the related asset
or liability is recovered or settled.
At December 31, 1995 and 1994, Golden American had net operating loss ("NOL")
carryforwards for federal income tax purposes of approximately $22,600,000 and
$17,400,000, respectively. As a result of the election made in connection with
the acquisition, the Company will be treated as a new taxpayer commencing on
August 14, 1996. For the period August 14, 1996 through December 31, 1996, the
Company incurred a NOL of $4,725,000.
INCOME TAX EXPENSE
Income tax expenses (credits) are included in the consolidated financial
statements as follows:
POST-ACQUISITION PRE-ACQUISITION
____________________________________
For the period | For the period
August 14, 1996 | January 1, 1996
through | through
December 31, 1996| August 13, 1996
_________________| _________________
(Dollars in thousands)
|
Taxes provided in consolidated |
statements of income - deferred $220 | ($1,463)
|
Taxes provided in consolidated |
statement of changes in |
stockholder's equity on |
unrealized gains - deferred 145 | --
_________________| _________________
$365 | ($1,463)
=================| =================
Income tax expense (credits) attributed to realized gains and losses on
investments amounted to $15,000 and $(147,000) and for the periods August 14,
1996 through December 31, 1996, and January 1, 1996 through August 13, 1996,
respectively. The effective tax rate on income before income taxes and equity
income (loss) is different from the prevailing federal income tax rate as
follows:
POST-
ACQUISITION PRE-ACQUISITION
_______________________________________________________
For the | For the
period | period
August 14, | January 1,
1996 through| 1996 through Year ended Year ended
December 31,| August 13, December 31, December 31,
1996 | 1996 1995 1994
____________| _________________________________________
(Dollars in thousands)
|
Income before income |
taxes $570 | $1,736 $3,364 $2,222
Income tax at federal |
statutory rate 200 | 607 1,177 778
Tax effect (decrease) of: |
Realization of NOL |
carryforwards -- | (1,214) -- --
Dividends received |
deduction -- | -- (350) (368)
Other items 20 | -- 17 (210)
Valuation allowance -- | (856) (844) (200)
____________| _________________________________________
Income tax expense |
(benefit) $220 | ($1,463) $ -- $ --
============| =========================================
DEFERRED INCOME TAXES
The tax effect of temporary differences giving rise to the Company's deferred
income tax assets and liabilities at December 31, 1996 and 1995 is as follows:
POST-ACQUISITION PRE-ACQUISITION
___________________________________
December 31, 1996 | 1995
____________________________________________________________ | ________________
(Dollars in thousands)
|
Deferred tax assets: |
Future policy benefits $19,102 | $15,520
Deferred policy acquisition costs 1,985 | 3,666
Goodwill 5,918 | --
Net operating loss carryforwards 1,653 | 7,891
Other 235 | 57
________________ | ________________
28,893 | 27,134
Deferred tax liabilities: |
Net unrealized appreciation of available |
for sale fixed maturity securities 145 | --
Deferred policy acquisition costs -- | 23,560
Unamortized cost assigned to present |
value of in force acquired 29,068 | 2,120
Other 45 | 598
________________ | ________________
29,258 | 26,278
|
Valuation allowance, for deferred tax assets -- | (856)
________________ | ________________
Deferred income tax liability $365 | $ --
================ | ================
7. RELATED PARTY TRANSACTIONS
________________________________________________________________________________
DSI acts as the principal underwriter (as defined in the Securities Act of
1933 and the Investment Company Act of 1940, as amended) of the variable
insurance products issued by Golden American which as of December 31, 1996
are sold primarily through two broker/dealer institutions. For the periods
August 14, 1996, through December 31, 1996 and January 1, 1996 through August
13, 1996, Golden American paid commissions to DSI totaling $9,995,000 and
$17,070,000, respectively. For the years ended December 31, 1995, and 1994,
commissions paid by Golden American to DSI aggregated $8,440,000 and
$17,569,000, respectively.
Golden American charged DSI for various expenses and all other general and
administrative costs, first on the basis of direct charges when identifiable,
with the remainder allocated based on the estimated amount of time spent by
Golden American's employees on behalf of DSI. For the year ended December
31, 1994 expenses allocated to DSI were $1,983,000.
Golden American provides certain managerial and supervisory services to DSI.
In 1996 and 1995, this fee was calculated as a percentage of average assets
in the variable separate accounts. For the periods August 14, 1996 through
December 31, 1996 and January 1, 1996 through August 13, 1996 the fee was
$877,000 and $1,390,000, respectively. This fee was $987,000 for 1995.
On August 14, 1996, the Company began purchasing investment management
services from an affiliate. Payments for these services totaled $72,000
through December 31, 1996. On August 14, 1996, all employees of Golden
American, except wholesalers, became statutory employees of Equitable Life
Insurance Company, an affiliate.
Surplus Note: On December 17, 1996, Golden American issued a surplus note in
the amount of $25,000,000 to Equitable. The note matures on December 17, 2026
and will accrue interest of 8.25% per annum until paid. The note and accrued
interest thereon shall be subordinate to payments due to policyholders,
claimant and beneficiary claims, as well as debts owed to all other classes of
debtors of Golden American. Any payment of principal made shall be subject to
the prior approval of the Delaware Insurance Commissioner. On December 17,
1996, Golden American contributed the $25,000,000 to First Golden acquiring
200,000 shares of common stock (100% of outstanding stock) of First Golden.
Line of Credit: Golden American maintains a line of credit agreement with
Equitable to facilitate the handling of unusual and/or unanticipated short-
term cash requirements. Under the current agreement, which became effective
December 1, 1996 and expires on December 31, 1997, Golden American can borrow
up to $25,000,000. Interest on any borrowings is charged at the rate of
Equitable's monthly average aggregate cost of short-term funds plus 1.00%.
For the period August 14 through December 31, 1996, the Company paid $85,000
of interest under this agreement. At December 31, 1996, no amounts were
outstanding under this agreement.
Short-term Debt: All short-term debt was repaid as of December 30, 1994.
Interest paid during 1994 was $1,962,000. The repayment of amounts under this
loan had been guaranteed by Bankers Trust.
Stockholder's Equity: On September 23, 1996, EIC Variable, Inc. (formally
known as BT Variable, Inc.) contributed $50,000,000 of Preferred Stock to the
Company's additional paid-in capital.
8. COMMITMENTS AND CONTINGENCIES
________________________________________________________________________________
Contingent Liability: In a transaction that closed on September 30, 1992,
Bankers Trust Company ("Bankers Trust") acquired from Mutual Benefit Life
Insurance Company in Rehabilitation ("Mutual Benefit"), in accordance with
the terms of an Exchange Agreement, all of the issued and outstanding capital
stock of Golden American and DSI and certain related assets for consideration
with an aggregate value of $13,200,000 and contributed them to BT Variable.
The transaction involved settlement of pre-existing claims of Bankers Trust
against Mutual Benefit. The ultimate value of these claims has not yet been
determined by the Superior Court of New Jersey and, prior to August 13, 1996,
was contingently supported by a $5,000,000 note payable from Golden American
and a $6,000,000 letter of credit from Bankers Trust. Bankers Trust had
estimated that the contingent liability due from Golden American amounted to
$439,000 at August 13, 1996 and December 31, 1995. At August 13, 1996 the
balance of the escrow account established to fund the contingent liability was
$4,293,000 ($4,150,000 at December 31, 1995).
On August 13, 1996, Bankers Trust made a cash payment to Golden American in
an amount equal to the balance of the escrow account less the $439,000
contingent liability discussed above. In exchange, Golden American
irrevocably assigned to Bankers Trust all of Golden American's rights to
receive any amounts to be disbursed from the escrow account in accordance with
the terms of the Exchange Agreement. Bankers Trust also irrevocably agreed to
make all payments becoming due under the Golden American note and to indemnify
Golden American for any liability arising from the note.
Reinsurance: At December 31, 1996, Golden American had reinsurance treaties
with reinsurers covering a significant portion of the mortality risks under its
variable contracts with unaffiliated reinsurers. Golden American remains
liable to the extent its reinsurers do not meet their obligations under the
reinsurance agreements. Reinsurance in force for life mortality risks were
$58,368,000 and $24,709,000 at December 31, 1996 and 1995. Included in the
accompanying financial statements are net considerations to reinsurers of
$875,000, $600,000, $2,800,000 and $2,400,000 and net policy benefits
recoveries of $654,000, $1,267,000, $3,500,000 and $1,900,000 for the periods
August 14, 1996 through December 31, 1996, and January 1, 1996 through August
13, 1996 and the years ended 1995 and 1994, respectively.
Effective June 1, 1994, Golden American entered into a modified coinsurance
agreement with an unaffiliated reinsurer. The accompanying financial
statements are presented net of the effects of the treaty which increased
income by $10,000 and $56,000 for the periods August 14, 1996 through December
31, 1996 and January 1, 1996 through December 31, respectively. In 1995 and
1994, net income was reduced by $109,000 and $27,000, respectively.
Guaranty Fund Assessments: Assessments are levied on the Company by life and
health guaranty associations in most states in which the Company is licensed
to cover losses of policyholders of insolvent or rehabilitated insurers. In
some states, these assessments can be partially recovered through a reduction
in future premium taxes. The Company cannot predict whether and to what extent
legislative initiatives may affect the right to offset. Based upon information
currently available from the National Organization of Life and Health Insurance
Guaranty Associations (NOLHGA), the Company believes that it is probable these
insolvencies will result in future assessments which could be material to the
Company's financial statements if the Company's reserve is not sufficient. The
Company regularly reviews its reserve for these insolvencies and updates its
reserve based upon the Company's interpretation of information from the NOLHGA
annual report. The associated cost for a particular insurance company can vary
significantly based upon its fixed account premium volume by line of business
and state premiums levels as well as its potential for premium tax offset.
Accordingly, the Company accrued and charged to expense an additional $291,000
for the period August 14, 1996 through December 31, 1996 and $480,000 for the
period January 1, 1996 through August 13, 1996. At December 31, 1996, the
Company has an undiscounted reserve of $771,000 to cover estimated future
assessments (net of related anticipated premium tax credits) and has
established an asset totaling $3,000 for assessments paid which may be
recoverable through future premium tax offsets. The Company believes this
reserve is sufficient to cover expected future insurance guaranty fund
assessments, based upon previous premium levels, and known insolvencies at this
time.
Litigation: In the ordinary course of business, the Company is engaged in
litigation, none of which management believes is material.
Vulnerability from Concentrations: The Company has various concentrations in
its investment portfolio (see Note 3 for further information). The Company's
asset growth, net investment income and cash flow are primarily generated from
the sale of variable products and associated future policy benefits and
separate account liabilities. A significant portion of the Company's sales are
generated by two broker/dealers. Substantial changes in tax laws that would
make these products less attractive to consumers, extreme fluctuations in
interest rates or stock market returns which may result in higher lapse
experience than assumed, could cause a severe impact to the Company's financial
condition.
Other Commitments: At December 31, 1996, outstanding commitments to fund
mortgage loans on real estate totaled $14,250,000.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III.
ITEMS 10 - 13.
Information called for by items 10 through 13 of this part is omitted pursuant
to General Instruction I. (2)(c) of Form 10-K.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) and (a)(2) Financial statements and schedules
The following consolidated financial statements of Golden American Life
Insurance Company are included in Item 8:
Balance sheets - December 31, 1996 and 1995
Statements of income - For the periods August 14, 1996 through December 31,
1996 and January 1, 1996 through August 13, 1996 and for the years ended
December 31, 1995 and 1994
Statements of stockholder's equity - For the periods August 14, 1996 through
December 31, 1996 and January 1, 1996 through August 13, 1996 and for the
years ended December 31, 1995 and 1994
Statements of cash flows - For the periods August 14, 1996 through December
31, 1996 and January 1, 1996 through August 13, 1996 and for the years ended
December 31, 1995 and 1994
Notes to financial statements
The following consolidated financial statement schedules of Golden American
Life Insurance Company are included in Item 14(d):
Schedule I - Summary of investments - other than investments in related
parties
Schedule III - Supplementary insurance information
Schedule IV - Reinsurance
All other schedules required by Article 7 of Regulation S-X are not required
under the related instructions or are inapplicable and therefore have been
omitted.
(a)(3), and (c) Exhibits
Exhibits filed are listed in the attached exhibit index.
(b) No reports on Form 8-K were filed for the quarter ended December 31, 1996.
ITEM 14(d). Schedules
SCHEDULE I
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
(Dollars in thousands)
Balance
Sheet
December 31, 1996 Cost 1 Value Amount
_______________________________________________________________________________
TYPE OF INVESTMENT
Fixed maturities, available for sale:
Bonds:
United States Government and govern-
mental agencies and authorities $73,984 $73,857 $73,857
Public utilities 35,893 36,048 36,048
Investment grade corporate 134,487 134,607 134,607
Below investment grade corporate 25,921 26,114 26,114
Mortgage-backed securities 4,868 4,937 4,937
___________ ___________ ___________
Total fixed maturities, available
for sale 275,153 275,563 275,563
Equity securities:
Common stocks: industrial, miscel-
laneous and all other 36 33 33
Mortgage loans on real estate 31,459 31,459
Policy loans 4,634 4,634
Short-term investments 12,631 12,631
___________ ___________
Total investments $323,913 $324,320
=========== ===========
Note 1: Cost is defined as original cost for stocks and other invested assets,
amortized cost for bonds and unpaid principal for policy loans and
mortgage loans on real estate, adjusted for amortization of premiums
and accrual of discounts.
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
(Dollars in thousands)
Column Column Column Column Column Column
A B C D E F
________________________________________________________________________________
Future
Policy Other
De- Benefits, Policy
ferred Losses, Claims Insur-
Policy Claims Un- and ance
Acqui- and earned Bene- Premiums
sition Loss Revenue fits and
Segment Costs Expenses Reserve Payable Charges
________________________________________________________________________________
POST-ACQUISITION
________________________________________________________________________________
Period August 14, 1996
through December 31, 1996:
Life insurance $11,469 $285,287 $2,063 -- $8,768
PRE-ACQUISITION
________________________________________________________________________________
Period January 1, 1996
through August 13, 1996:
Life insurance 85,265 176,914 8,826 -- 12,259
Year ended December 31, 1995:
Life insurance 67,314 33,673 6,556 -- 18,388
Year ended December 31, 1994:
Life insurance 60,662 1,051 1,759 -- 17,519
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION - CONTINUED
(Dollars in thousands)
Column Column Column Column Column Column
A G H I J K
________________________________________________________________________________
Amorti-
Benefits zation
Claims, of
Losses Deferred
Net and Policy Other
Invest- Settle- Acqui- Opera-
ment ment sition ting Premiums
Segment Income Expenses Costs Expenses Written
________________________________________________________________________________
POST-ACQUISITION
________________________________________________________________________________
Period August 14, 1996
through December 31, 1996:
Life insurance $5,795 $7,003 $244 $8,066 --
PRE-ACQUISITION
________________________________________________________________________________
Period January 1, 1996
through August 13, 1996:
Life insurance 4,990 5,270 2,436 8,847 --
Year ended December 31, 1995:
Life insurance 2,818 3,146 2,710 13,333 --
Year ended December 31, 1994:
Life insurance 560 35 4,608 9,317 --
SCHEDULE IV
REINSURANCE
GOLDEN AMERICAN LIFE INSURANCE COMPANY AND SUBSIDIARY
Column A Column B Column C Column D Column E Column F
_______________________________________________________________________________
Percentage
Ceded to Assumed of Amount
Gross Other from Other Net Assumed
Amount Companies Companies Amount to Net
_______________________________________________________________________________
At December 31, 1996:
Life insurance in
force $86,192,000 $58,368,000 -- $27,824,000 --
============ ============ ========= ============ ==========
At December 31, 1995:
Life insurance in
force $38,383,000 $24,709,000 -- $13,674,000 --
============ ============ ========= ============ ==========
At December 31, 1994:
Life insurance in
force $30,227,000 $23,061,000 -- $7,166,000 --
============ ============ ========= ============ ==========
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GOLDEN AMERICAN LIFE INSURANCE COMPANY
DATE: March 28, 1997 By/s/ Terry L. Kendall
_______________________
Terry L. Kendall
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title
_________________________ _________________________________
s/Terry L. Kendall President, Chief Executive
_________________________ Officer, and Director
Terry L. Kendall
(principal executive officer)
s/Paul E. Larson Executive Vice President, CFO
_________________________ Assistant Secretary and Director
Paul E. Larson
(principal financial officer)
s/David A. Terwilliger Vice President, Controller,
_________________________ Assistant Treasurer and
David A. Terwilliger Assistant Secretary
(principal accounting officer)
March 28, 1997
Chairman of the Board and
_________________________ Director
Frederick S. Hubbell
s/John A. Merriman Assistant Secretary and
_________________________ Director
John A. Merriman
s/Paul R. Schlaack Director
_________________________
Paul R. Schlaack
s/Beth B. Neppl Vice President Human Resources
_________________________ and Director
Beth B. Neppl
s/Lawrence V. Durland, Jr. Director
_________________________
Lawrence V. Durland, Jr.
Director
________________________
Thomas L. May
Signatures Title
_________________________ _________________________________
s/Jerome L. Sychowski Senior Vice President - Chief
________________________ Information Officer and
Jerome L. Sychowski Director
INDEX
Exhibits to Annual Report on Form 10-K
Year ended December 31, 1996
GOLDEN AMERICAN LIFE INSURANCE COMPANY
2 PLAN OF ACQUISITION
(a) Stock Purchase Agreement dated as of May 3, 1996, between
Equitable and Whitewood Properties Corp. (incorporated by
reference from Exhibit 2 in Form 8-K filed August 28, 1996)
3 ARTICLES OF INCORPORATION AND BY-LAWS
(a) Articles of Incorporation of Golden American Life Insurance
Company (incorporated by reference from the registrant's
post-effective amendment No. 17 to the registration statement
of Form N-4 filed with the Securities and Exchange Commission
on May 2, 1994 (File No. 33-23351))
(b)(i) By-laws of Golden American Life Insurance Company (incorporated
by reference from the registrant's initial registration statement
on Form N-4 filed with the Securities and Exchange Commission on
July 27, 1988 (File No. 33-23351))
(ii) By-laws of Golden American Life Insurance Company, as amended
(incorporated by reference from the registrant's post-effective
amendment No. 5 to the registration statement on Form N-4 filed
with the Securities and Exchange Commission on May 2, 1991
(File No. 33-23351))
(iii) Certificate of Amendment of the By-laws of MB Variable Life
Insurance Company, as amended (incorporated by reference from
the registrant's registration statement on Form N-3 filed with
the Securities and Exchange Commission on August 19, 1992
(File No. 33-51028))
(iv) By-laws of Golden American Life Insurance Company, as amended
(12/21/93) (incorporated by reference from the registrant's
post-effective amendment No. 17 to the registration statement
filed with the Securities and Exchange Commission on May 2, 1994
(File No. 33-23351))
4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITYHOLDERS, INCLUDING INDENTURES
(a) Deferred Combination Variable and Fixed Annuity Contract
(incorporated by reference from exhibit 4(a) to registrant's pre-
effective amendment No. 1 to registrant's registration statement
on Form S-1 dated February 13, 1995 (File No. 33-87272))
(b) Deferred Combination Variable and Fixed Annuity Contract
application (incorporated by reference from exhibit 4(b) to
registrant's pre-effective amendment No. 1 to registrant's
registration statement on Form S-1 dated February 13, 1995
(File No. 33-87272))
(c) Individual Deferred Combination Variable and Fixed Annuity
application (incorporated by reference from exhibit 4(c) to
registrant's pre-effective amendment No. 1 to registrant's
registration statement on Form S-1 dated February 13, 1995
(File No. 33-87272))
INDEX
Exhibits to Annual Report on Form 10-K
Year ended December 31, 1996
GOLDEN AMERICAN LIFE INSURANCE COMPANY
(d) Group Deferred Combination Variable and Fixed Enrollment Form
(incorporated by reference from exhibit 4(d) to registrant's pre-
effective amendment No. 1 to registrant's registration statement
on Form S-1 dated February 13, 1995 (File No. 33-87272))
27 FINANCIAL DATA SCHEDULE (ELECTRONIC FILING ONLY)