UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to
Commission file number: 333-104539, 333-104546, 333-104547,
333-104548, 333-57212
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Golden American Life Insurance Company
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(Exact name of registrant as specified in its charter)
Delaware 41-0991508
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(State or other jurisdiction (IRS employer identification no.)
of incorporation or organization)
1475 Dunwoody Drive, West Chester, Pennsylvania 19380-1478
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (610) 425-3400
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Former name, former address and formal fiscal year, if changed since last report
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of November 12, 2003,
250,000 shares of Common Stock, $10 Par Value, are authorized, issued, and
outstanding, all of which were directly owned by Equitable Life Insurance
Company of Iowa. As of November 12, 2003, 50,000 shares of Preferred Stock,
$5,000 Par Value, are authorized. None Outstanding.
NOTE: WHEREAS GOLDEN AMERICAN LIFE INSURANCE COMPANY MEETS THE CONDITIONS SET
FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10Q, THIS FORM IS BEING
FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).
GOLDEN AMERICAN LIFE INSURANCE COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Equitable Life Insurance Company of Iowa)
Form 10Q for the period ended September 30, 2003
INDEX
Page
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PART I. FINANCIAL INFORMATION (Unaudited)
Item 1. Financial Statements:
Condensed Consolidated Statements of Income 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Changes in
Shareholder's Equity 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Narrative Analysis of the Results of
Operations and Financial Condition 13
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
GOLDEN AMERICAN LIFE INSURANCE COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Equitable Life Insurance Company of Iowa)
Condensed Consolidated Statements of Income
(Unaudited)
(Millions)
Three months ended September 30, Nine months ended September 30,
2003 2002 2003 2002
---------------- ---------------- ---------------- ----------------
Revenue:
Fee income $ 89.4 $ 58.2 $ 221.2 $ 167.3
Net investment income 52.7 58.0 167.8 132.3
Net realized capital gains 15.6 25.2 87.8 0.4
Other loss - - (0.1) -
---------------- ---------------- ---------------- ----------------
Total revenue 157.7 141.4 476.7 300.0
---------------- ---------------- ---------------- ----------------
Benefits, losses and expenses:
Benefits:
Interest credited and other
benefits to policyholders 108.5 100.9 271.7 212.1
Underwriting, acquisition, and
insurance expenses:
General expenses 28.7 31.8 81.7 106.1
Commissions 72.4 75.9 175.2 239.8
Policy acquisition costs deferred (58.4) (86.4) (150.3) (242.9)
Amortization of deferred policy
acquisition costs and value of
business acquired 41.7 96.5 129.9 129.2
Other:
Expense and charges reimbursed
under modified coinsurance
agreements (37.7) (20.4) (88.8) (77.6)
Interest expense 3.5 3.3 10.3 12.7
---------------- ---------------- ---------------- ----------------
Total benefits, losses and expenses 158.7 201.6 429.7 379.4
---------------- ---------------- ---------------- ----------------
(Loss) income before income taxes
and cumulative effect of change in
accounting principle (1.0) (60.2) 47.0 (79.4)
Income tax (benefit) expense (7.8) (19.2) 7.3 (25.7)
---------------- --------------- ---------------- ----------------
Income (loss) before cumulative effect of
change in accounting principle 6.8 (41.0) 39.7 (53.7)
Cumulative effect of change in
accounting principle - - - (135.3)
---------------- ---------------- ---------------- ----------------
Net income (loss) $ 6.8 $ (41.0) $ 39.7 $ (189.0)
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The accompanying notes are an integral part of these financial statements.
3
GOLDEN AMERICAN LIFE INSURANCE COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Equitable Life Insurance Company of Iowa)
Condensed Consolidated Balance Sheets
(Millions, except share data)
September 30,
2003 December 31,
(Unaudited) 2002
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Assets
Investments:
Fixed maturities, available for sale, at
fair value (amortized cost of $5,229.3 at 2003 and $4,720.1 at 2002) $ 5,458.8 $ 4,936.4
Equity securities, at fair value:
Investment in mutual funds (cost of $9.9 at 2003 and $22.9 at 2002) 9.3 19.0
Mortgage loans on real estate 770.3 482.4
Policy loans 17.2 16.0
Other investments 26.6 2.2
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Total investments 6,282.2 5,456.0
Cash and cash equivalents 55.5 148.5
Accrued investment income 64.5 61.9
Reinsurance recoverable 14.3 196.9
Receivable for securities sold 21.7 -
Deferred policy acquisition costs 796.9 678.0
Value of business acquired 8.7 8.5
Other assets 16.2 5.3
Assets held in separate accounts 14,692.5 11,029.3
---------------- ----------------
Total assets $ 21,952.5 $ 17,584.4
================ ================
Liabilities and Shareholder's Equity
Policy liabilities and accruals:
Future policy benefits and claims reserves $ 5,395.9 $ 5,159.1
Notes to affiliates 170.0 170.0
Due to affiliates 9.1 -
Payables for securities purchased 42.4 -
Dollar roll obligations 111.0 40.0
Current income taxes 22.2 42.4
Deferred income taxes 129.3 79.8
Other liabilities 36.4 64.7
Liabilities related to separate accounts 14,692.5 11,029.3
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Total liabilities 20,608.8 16,585.3
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Shareholder's equity
Common stock (250,000 shares authorized, issued and
outstanding; $10.00 per share par value) 2.5 2.5
Additional paid-in capital 1,358.4 1,128.4
Accumulated other comprehensive income 77.0 2.1
Retained deficit (94.2) (133.9)
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Total shareholder's equity 1,343.7 999.1
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Total liabilities and shareholder's equity $ 21,952.5 $ 17,584.4
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The accompanying notes are an integral part of these financial statements.
4
GOLDEN AMERICAN LIFE INSURANCE COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Equitable Life Insurance Company of Iowa)
Condensed Consolidated Statements of Changes in Shareholder's Equity
(Unaudited)
(Millions)
Nine Months Ended September 30,
2003 2002
---------------- ----------------
Shareholder's equity, beginning of period $ 999.1 $ 817.8
Comprehensive income (loss):
Net income (loss) 39.7 (189.0)
Other comprehensive income net of tax: unrealized gain
on securities ($115.2 and $20.8, pretax year to date) 74.9 13.5
---------------- ----------------
Total comprehensive income (loss) 114.6 (175.5)
Loss on sale to affiliate - (3.0)
Contribution of capital 230.0 239.7
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Shareholder's equity, end of period $ 1,343.7 $ 879.0
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The accompanying notes are an integral part of these financial statements.
5
GOLDEN AMERICAN LIFE INSURANCE COMPANY AND SUBSIDIARIES
(A wholly-owned subsidiary of Equitable Life Insurance Company of Iowa)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Millions)
Nine months ended September 30,
2003 2002
---------------- ----------------
Net cash provided by operating activities $ 260.0 $ 92.0
Cash Flows from Investing Activities
Proceeds from the sale, maturity, or repayment of:
Fixed maturities available for sale 5,696.4 5,534.2
Equity securities 11.4 -
Mortgage loans on real estate 36.5 12.4
Acquisition of investments:
Fixed maturities available for sale (6,126.8) (8,043.7)
Equity securities - (22.8)
Mortgage loans on real estate (324.4) (135.1)
Other investments (24.4) (0.1)
Disposal of subsidiary at book value - (31.6)
Proceeds from sale of interest in subsidiary - 27.7
(Increase) decrease in policy loans (1.2) (0.9)
Purchase of property and equipment (0.6) (0.4)
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Net cash used in investing activities (733.1) (2,660.3)
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Cash Flows from Financing Activities
Deposits and interest credited for investment contracts 1,152.7 3,345.4
Maturities and withdrawals from insurance and investment contracts (249.0) (136.1)
Transfers to separate accounts (888.1) (791.6)
Repayment of notes payable - (76.4)
Cash received on reinsurance recapture 134.5 -
Contribution of capital from parent 230.0 245.0
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Net cash provided by financing activities 380.1 2,586.3
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Net (decrease) increase in cash and cash equivalents (93.0) 18.0
Cash and cash equivalents, beginning of period 148.5 195.7
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Cash and cash equivalents, end of period $ 55.5 $ 213.7
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The accompanying notes are an integral part of these financial statements.
6
GOLDEN AMERICAN LIFE INSURANCE COMPANY
(A wholly-owned subsidiary of Equitable Life Insurance Company of Iowa)
Notes to Condensed Financial Statements (Unaudited)
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1. Basis of Presentation
Golden American Life Insurance Company ("Golden American") and through
April 1, 2002, its wholly-owned subsidiary, First Golden American Life
Insurance Company of New York ("First Golden") (collectively the "Company")
are providers of financial products and services in the United States.
Golden American, a wholly-owned subsidiary of Equitable Life Insurance
Company of Iowa ("Equitable Life" or the "Parent"), is a stock life
insurance company organized under the laws of the State of Delaware. Golden
American was originally incorporated under the laws of the State of
Minnesota on January 2, 1973, in the name of St. Paul Life Insurance
Company. Equitable Life is a wholly-owned subsidiary of Lion Connecticut
Holding, Inc. ("Lion Connecticut") which is an indirect wholly-owned
subsidiary of ING Groep N.V. ("ING"), a global financial services holding
company based in The Netherlands.
On June 25, 2003, each Board of Directors and each sole shareholder of
Equitable Life Insurance Company of Iowa, United Life & Annuity Insurance
Company and USG Annuity & Life Company (the "Merger Companies") and the
Board of Directors and sole shareholder of the Company approved a plan to
merge the Merger Companies with and into the Company. It is anticipated
that the merger will be effective on January 1, 2004 (the "merger date"),
subject to certain regulatory approvals. As of the merger date, the Merger
Companies will cease to exist and will be succeeded by the Company. The
Merger Companies, as well as the Company, are indirect, wholly-owned
subsidiaries of ING. The Company is currently a Delaware stock life
insurance company. Immediately prior to the merger, it is anticipated that
the Company will become an Iowa insurance company. It is also anticipated
that upon the merger the Company will be renamed ING USA Annuity and Life
Insurance Company. On July 21, 2003, the Insurance Division of the State of
Iowa approved the Articles of Merger of Golden American with the Merger
Companies. Also on July 21, 2003, the Insurance Division of the State of
Iowa approved the Restated Articles of Incorporation, effectively approving
the re-domestication of the Company upon merger.
The condensed consolidated financial statements and notes as of September
30, 2003 and December 31, 2002 and for the three and nine-month periods
ended September 30, 2003 and 2002 ("interim periods") have been prepared in
accordance with accounting principles generally accepted in the United
States of America and are unaudited. The condensed consolidated financial
statements reflect all adjustments (consisting only of normal recurring
accruals) which are, in the opinion of management, necessary for the fair
presentation of the consolidated financial position, results of operations
and cash flows for the interim periods. These condensed consolidated
financial statements and notes should be read in conjunction with the
consolidated financial statements and related notes as presented in the
Company's 2002 Annual Report on Form 10-K. The results of operations for
the interim periods should not be considered indicative of results to be
expected for the full year. Certain reclassifications have been made to
2002 financial information to conform to the 2003 presentation.
7
The Company conducts its business through one operating segment, U.S.
Financial Services ("USFS"), and revenue reported by the Company is
predominantly derived from external customers.
2. Recently Adopted Accounting Standards
Accounting for Goodwill and Other Intangible Assets
During 2002, the Company adopted Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("FAS") No. 142,
Goodwill and Other Intangible Assets ("FAS No.142"). Effective January 1,
2002, the Company applied the non-amortization provision of the new
standard, therefore, the Company's net income is comparable for all periods
presented.
The adoption of this standard resulted in an impairment loss of $135.3
million, which was recorded by the Company in the fourth quarter of 2002.
This impairment loss represented the entire carrying amount of goodwill,
net of accumulated amortization. This impairment charge was shown as a
change in accounting principle on the December 31, 2002 Consolidated Income
Statement.
In accordance with FAS No. 142, a transitional impairment loss for goodwill
should be recognized in the first interim period of the year of initial
adoption, regardless of the period in which it was measured. The aggregate
amount of the accounting change should be included in restated net income
of the first interim period, and each subsequent period of that year should
be presented on the restated basis. As such, net income for the nine months
ended September 30, 2002, has been restated to reflect the January 1, 2002
impairment charge, which was recorded in the fourth quarter of 2002.
3. New Accounting Pronouncements
In July 2003, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 03-1, Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts, which the Company intends to adopt on
January 1, 2004. The impact on the financial statements is not known at
this time.
8
The Derivative Implementation Group ("DIG") responsible for issuing
guidance on behalf of the FASB for implementation of FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities recently
issued Statement Implementation Issue No. B36, Embedded Derivatives:
Modified Coinsurance Arrangements and Debt Instruments That Incorporate
Credit Risk Exposures That Are Unrelated or Only Partially Related to the
Credit Worthiness of the Obligor under Those Instruments ("DIG B36"). Under
this interpretation, modified coinsurance and coinsurance with funds
withheld reinsurance agreements as well as other types of receivables and
payables where interest is determined by reference to a pool of fixed
maturity assets or total return debt index may be determined to contain
embedded derivatives that are required to be bifurcated. The required date
of adoption of DIG B36 for the Company is October 1, 2003. The Company has
completed its evaluation of DIG B36 and determined that the Company has
modified coinsurance treaties that are applicable to require implementation
of the guidance. The applicable contracts, however, have been determined to
generate embedded derivatives with a fair value of zero. Therefore, the
guidance, while implemented, will have no impact on the Company's financial
position, results of operations or cash flows.
4. Deferred Policy Acquisition Costs and Value of Business Acquired
Deferred Policy Acquisition Costs ("DAC") is an asset, which represents
certain costs of acquiring certain insurance business, which are deferred
and amortized. These costs, all of which vary with and are primarily
related to the production of new and renewal business, consist principally
of commissions, certain underwriting and contract issuance expenses, and
certain agency expenses. Value of business acquired ("VOBA") is an asset,
which represents the present value of estimated net cash flows embedded in
the Company's contracts, which existed at the time the Company was acquired
by ING. DAC and VOBA are evaluated for recoverability at each balance sheet
date and these assets would be reduced to the extent that gross profits are
inadequate to recover the asset.
The amortization methodology varies by product type based upon two
accounting standards: FAS No. 60, Accounting and Reporting by Insurance
Enterprises ("FAS No. 60") and FAS No. 97, Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and Realized
Gains and Losses from the Sale of Investments ("FAS No. 97").
Under FAS No. 60, acquisition costs for traditional life insurance
products, which primarily include whole life and term life insurance
contracts, are amortized over the premium payment period in proportion to
the premium revenue recognition.
9
Under FAS No. 97, acquisition costs for universal life and investment-type
products, which include universal life policies and fixed and variable
deferred annuities, are amortized over the life of the blocks of policies
(usually 25 years) in relation to the emergence of estimated gross profits
from surrender charges, investment margins, mortality and expense margins,
asset-based fee income, and actual realized gains (losses) on investments.
Amortization is adjusted retrospectively when estimates of current or
future gross profits to be realized from a group of products are revised.
VOBA activity for the nine months ended September 30, 2003 was as follows:
(Millions)
----------
Balance at December 31, 2002 $ 8.5
Adjustment for FAS No. 115 (8.8)
Interest accrued at 7% 0.4
Amortization 8.6
----------------
Balance at Sepember 30, 2003 $ 8.7
================
5. Investments
Impairments
During the three months ended September 30, 2003, the Company determined
that no fixed maturities had other than temporary impairments. During the
three months ended September 30, 2002, the Company determined that four
fixed maturities had other than temporary impairments. As a result, for the
three months ended September 30, 2002, the Company recognized a pre-tax
loss of $0.3 million to reduce the carrying value of the fixed maturities
to their fair value at the time of impairment.
During the first nine months of 2003, the Company determined that five
fixed maturities had other than temporary impairments. As a result, for the
nine months ended September 30, 2003, the Company recognized a pre-tax loss
of $5.7 million to reduce the carrying value of the fixed maturities to
their fair value at the time of impairment. During the first nine months of
2002, the Company determined that ten fixed maturities had other than
temporary impairments. As a result, for the nine months ended September 30,
2002, the Company recognized a pre-tax loss of $7.2 million to reduce the
carrying value of the fixed maturities to their fair value at the time of
impairment.
The fair value of the remaining impaired fixed maturities at September 30,
2003 and 2002 is $1.5 million and $4.1 million, respectively.
10
6. Severance
In December 2001, ING announced its intentions to further integrate and
streamline the U.S.-based operations of ING Americas (which includes the
Company) in order to build a more customer-focused organization. During the
first quarter 2003, the Company performed a detail analysis of its
severance accrual. As part of this analysis, the Company corrected the
initial planned number of people to eliminate from 252 to 228 (corrected
from the 2002 Annual Report on Form 10K) and extended the date of expected
completion for severance actions to June 30, 2003. Activity for the nine
months ended September 30, 2003 within the severance liability and
positions eliminated related to such actions were as follows:
(Millions, except positions data) Liability Positions
--------------------------------- ----------------- ----------------
Balance at December 31, 2002 $ 0.8 34.0
Payments (0.8) -
Positions eliminated due to internal replacement jobs - (34.0)
---------------- -----------------
Balance at September 30, 2003 $ - -
================ =================
7. Income Taxes
The effective tax rates for the three months ended September 30, 2003 and
September 30, 2002 were 780.0% and 31.9%, respectively. The change in the
three months rate was primarily caused by an increase in the deduction
allowed for dividends received combined with a decrease in pre-tax income.
The Company's effective tax rates for the nine months ended September 30,
2003 and 2002 were 15.5% and 32.4%, respectively. The change in the
year-to-date rate was primarily caused by an increase in the deduction
allowed for dividends received.
8. Commitments and Contingent Liabilities
Commitments
Through the normal course of investment operations, the Company commits to
either purchase or sell securities, commercial mortgage loans or money
market instruments at a specified future date and at a specified price or
yield. The inability of counterparties to honor these commitments may
result in either higher or lower replacement cost. Also, there is likely to
be a change in the value of the securities underlying the commitments. At
September 30, 2003 and December 31, 2002, the Company had off-balance sheet
commitments to purchase investments equal to their fair value of $113.6
million and $77.0 million, respectively.
11
Litigation
The Company is a party to threatened or pending lawsuits arising from the
normal conduct of business. Due to the climate in insurance and business
litigation, suits against the Company sometimes include claims for
substantial compensatory, consequential or punitive damages and other types
of relief. Moreover, certain claims are asserted as class actions,
purporting to represent a group of similarly situated individuals. While it
is not possible to forecast the outcome of such lawsuits, in light of
existing insurance, reinsurance and established reserves, it is the opinion
of management that the disposition of such lawsuits will not have a
materially adverse effect on the Company's operations or financial
position.
9. Reinsurance
In March 2003, the Company amended its reinsurance agreement with Security
Life of Denver International ("SLDI"), an affiliate. Under this amendment,
the Company terminated the reinsurance agreement for all inforce and new
business and recaptured all in force business reinsured under the
reinsurance agreement between the Company and SLDI retroactive to January
1, 2003. SLDI was released from all of its liabilities under the
reinsurance agreement retroactive to January 1, 2003 and the Company
reduced its reinsurance recoverable related to these liabilities by $150.1
million. On March 28, 2003, SLDI transferred assets to the Company in the
amount of $185.6 million. The difference in amounts transferred on March
28, 2003 and the reduction of the reinsurance recoverable as of January 1,
2003 reflects adjustments on the investment income on the assets and letter
of credit costs between January 1, 2003 and the date of the asset transfer.
It also encompasses the net effect of a recapture fee paid in the amount of
$5.0 million offset by the receipt of a $24.1 million negative ceding
commission. The net impact of which was deferred in policy acquisition
costs and is being amortized over the period of estimated future profits.
12
Item 2. Management's Narrative Analysis of the Results of Operations and
Financial Condition
Overview
The following narrative analysis of the results of operations and
financial condition presents a review of Golden American Life
Insurance Company ("Golden American") and through April 1, 2002, its
wholly-owned subsidiary, First Golden American Life Insurance Company
of New York ("First Golden") (collectively the "Company") as of
September 30, 2003 and December 31, 2002 and for the three and
nine-month periods ended September 30, 2003 and 2002. This review
should be read in conjunction with the condensed consolidated
financial statements and other data presented herein, as well as the
"Management's Narrative Analysis of the Results of Operations and
Financial Condition" section contained in the Company's 2002 Annual
Report on Form 10-K.
On June 25, 2003, each Board of Directors and each sole shareholder of
Equitable Life Insurance Company of Iowa, United Life & Annuity
Insurance Company and USG Annuity & Life Company (the "Merger
Companies") and the Board of Directors and sole shareholder of the
Company approved a plan to merge the Merger Companies with and into
the Company. It is anticipated that the merger will be effective on
January 1, 2004 (the "merger date"), subject to certain regulatory
approvals. As of the merger date, the Merger Companies will cease to
exist and will be succeeded by the Company. The Merger Companies, as
well as the Company, are indirect, wholly-owned subsidiaries of ING.
The Company is currently a Delaware stock life insurance company.
Immediately prior to the merger, it is anticipated that the Company
will become an Iowa insurance company. It is also anticipated that
upon the merger the Company will be renamed ING USA Annuity and Life
Insurance Company.
Nature of Business
The Company offers a portfolio of variable and fixed insurance
products designed to meet customer needs for tax-advantaged savings
for retirement and protection from death. The Company's variable and
fixed insurance products are marketed by broker/dealers, financial
institutions, and insurance agents. The Company's primary customers
are consumers and corporations.
13
Recently Adopted Accounting Standards
Accounting for Goodwill and Other Intangible Assets
During 2002, the Company adopted Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("FAS") No. 142,
"Goodwill and Other Intangible Assets" ("FAS No.142"). Effective
January 1, 2002, the Company applied the non-amortization provision of
the new standard, therefore, the Company's net income is comparable
for all periods presented.
The adoption of this standard resulted in an impairment loss of $135.3
million which was recorded by the Company in the fourth quarter of
2002. This impairment loss represented the entire carrying amount of
goodwill, net of accumulated amortization. This impairment charge was
shown as a change in accounting principle on the December 31, 2002
Consolidated Income Statement.
In accordance with FAS No. 142, a transitional impairment loss for
goodwill should be recognized in the first interim period of the year
of initial adoption, regardless of the period in which it was
measured. The aggregate amount of the accounting change should be
included in restated net income of the first interim period, and each
subsequent period of that year should be presented on the restated
basis. As such, net income for the nine months ended September 30,
2002, has been restated to reflect the January 1, 2002 impairment
charge, which was recorded in the fourth quarter of 2002.
New Accounting Pronouncements
In July 2003, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 03-1, Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts, which the Company
intends to adopt on January 1, 2004. The impact on the financial
statements is not known at this time.
The Derivative Implementation Group ("DIG") responsible for issuing
guidance on behalf of the FASB for implementation of FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities recently
issued Statement Implementation Issue No. B36, Embedded Derivatives:
Modified Coinsurance Arrangements and Debt Instruments That
Incorporate Credit Risk Exposures That Are Unrelated or Only Partially
Related to the Credit Worthiness of the Obligor under Those
Instruments ("DIG B36"). Under this interpretation, modified
coinsurance and coinsurance with funds withheld reinsurance agreements
as well as other types of receivables and payables where interest is
determined by reference to a pool of fixed maturity assets or total
return debt index may be determined to contain embedded derivatives
that are required to be bifurcated. The required date of adoption of
DIG B36 for the Company is October 1, 2003. The Company has completed
its evaluation of DIG B36 and determined that the Company has modified
coinsurance treaties that are applicable to require implementation of
the guidance. The applicable contracts, however, have been determined
to generate embedded derivatives with a fair value of zero. Therefore,
the guidance, while implemented, will have no impact on the Company's
financial position, results of operations or cash flows.
14
Critical Accounting Policies
General
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires the use of
estimates and assumptions in certain circumstances that affect amounts
reported in the accompanying consolidated financial statements and
related footnotes. These estimates and assumptions are evaluated on an
on-going basis based on historical developments, market conditions,
industry trends and other information that is reasonable under the
circumstances. There can be no assurance that actual results will
conform to estimates and assumptions, and that reported results of
operations will not be affected in a materially adverse manner by the
need to make future accounting adjustments to reflect changes in these
estimates and assumptions from time to time.
The Company has identified the following estimates as critical in that
they involve a higher degree of judgment and are subject to a
significant degree of variability. In developing these estimates
management makes subjective and complex judgments that are inherently
uncertain and subject to material changes as facts and circumstances
develop. Although variability is inherent in these estimates,
management believes the amounts provided are appropriate based upon
the facts available upon compilation of the condensed consolidated
financial statements.
Investment Impairment Testing
The Company reviews the general account investments for impairments by
considering the length of the time and the extent to which the market
value has been less than cost; the financial condition and near term
prospects of the issuer; future economic conditions and market
forecasts; and the Company's intent and ability to retain the
investment in the issuer for a period of time sufficient to allow for
recovery in market value. Based on the facts and circumstances of each
case, management uses judgment in deciding whether any calculated
impairments are temporary or other than temporary. For those
impairments judged to be other than temporary, the Company reduces the
carrying value of those investments to the current fair value and
records impairment losses for the difference.
Amortization of Deferred Acquisition Costs and Value of Business
Acquired
Deferred policy acquisition costs ("DAC") and value of business
acquired ("VOBA") are amortized with interest over the life of the
contracts (usually 25 years) in relation to the present value of
estimated gross profits from projected interest margins, asset-based
fees, policy administration and surrender charges less policy
maintenance fees.
15
Changes in assumptions can have a significant impact on the
calculation of DAC/VOBA and its related amortization patterns. Due to
the relative size of the DAC/VOBA balance and the sensitivity of the
calculation to minor changes in the underlying assumptions and the
related volatility that could result in the reported DAC/VOBA balance,
the Company performs a quarterly analysis of DAC/VOBA. At each balance
sheet date, actual historical gross profits are reflected and expected
future gross profits and related assumptions are evaluated for
continued reasonableness.
Any adjustment in estimated profit requires that the amortization rate
be revised retroactively to the date of policy or contract issuance
("unlocking"), which could be significant. The cumulative difference
related to prior periods is recognized as a component of the current
period's amortization, along with amortization associated with the
actual gross profits of the period. In general, increases in estimated
returns result in increased expected future profitability and may
lower the rate of amortization, while increases in lapse/surrender and
mortality assumptions or decreases in returns reduce the expected
future profitability of the underlying business and may increase the
rate of amortization.
One of the most significant assumptions involved in the estimation of
future gross profits for variable universal life and variable deferred
annuity products is the assumed return associated with future separate
account performance. To reflect the near-term and long-term volatility
in the equity markets this assumption involves a combination of
near-term expectations and a long-term assumption about market
performance. The overall return generated by the separate account is
dependent on several factors, including the relative mix of the
underlying sub-accounts among bond funds and equity funds as well as
equity sector weightings.
Forward-Looking Information/Risk Factors
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company cautions readers
regarding certain forward-looking statements contained in this report
and in any other statements made by, or on behalf of, the Company,
whether or not in future filings with the Securities and Exchange
Commission ("SEC"). Forward-looking statements are statements not
based on historical information and which relate to future operations,
strategies, financial results, or other developments. Statements using
verbs such as "expect," "anticipate," "believe" or words of similar
import generally involve forward-looking statements. Without limiting
the foregoing, forward-looking statements include statements which
represent the Company's beliefs concerning future levels of sales and
redemptions of the Company's products, investment spreads and yields,
or the earnings and profitability of the Company's activities.
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of
which are beyond the Company's control and many of which are subject
to change. These uncertainties and contingencies could cause actual
results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
16
Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable
developments. Some may be national in scope, such as general economic
conditions, changes in tax law and changes in interest rates (for
additional information, see the Legislative Initiatives section
below). Some may relate to the insurance industry generally, such as
pricing competition, regulatory developments and industry
consolidation. Others may relate to the Company specifically, such as
credit, volatility and other risks associated with the Company's
investment portfolio. Investors are also directed to consider other
risks and uncertainties discussed in documents filed by the Company
with the SEC. The Company disclaims any obligation to update
forward-looking information.
Results of Operations
Fee income increased by $31.2 million and $53.9 million for the three
and nine months ended September 30, 2003, respectively, compared to
the same periods ended September 30, 2002. The increase is primarily
due to an increase in average variable assets under management between
the respective time periods.
Net investment income decreased by $5.3 million for the three months
ended September 30, 2003 compared to the same period in 2002,
primarily due to lower yields and futures losses. Net investment
income increased by $35.5 million for the nine months ended September
30, 2003 compared to the same period in 2002, primarily due to an
increase in investment asset levels, partially offset by futures
losses and lower yields.
Net realized capital gains for the three months ended September 30,
2003 decreased by $9.6 million compared to the same period in 2002,
primarily due to an increasing treasury rate during the three months
ended September 30, 2003, versus a decreasing treasury rate during the
same period in 2002. The 10-year treasury yield (constant maturities)
decreased from 4.8% to 3.6% during the three months ended September
30, 2002 and increased from 3.5% to 3.9% during the three months ended
September 30, 2003. Net realized capital gains for the nine months
ended September 30, 2003 increased by $87.4 million compared to the
same period in 2002 primarily due to a decrease in the year-to-date
average interest rate. A year-to-date average interest rate
measurement is used when interest rates do not show either a steady
increase or decrease over time. In a declining rate environment, the
market value of fixed maturities held in the Company's portfolio
increases, assuming no credit deterioration. In a rising rate
environment, the market value of fixed maturities held decreases. The
fluctuations in net realized gains reflect the impact of the interest
rate environment on the overall sale of fixed maturities during the
respective time periods.
17
Other income for the three and nine months ended September 30, 2003,
respectively, is comparable to that for the same periods in 2002.
Interest credited and other benefits to policyholders increased $7.6
million and $59.6 million for the three and nine months ended
September 30, 2003, respectively, compared to the same periods ended
September 30, 2002. The increase is primarily due to an overall
increase in fixed inforce business, partially offset by a reduction in
the guarantee benefits reserve associated with the recovery of the
equity markets.
General expenses decreased $3.1 million and $24.4 million for the
three and nine months ended September 30, 2003, respectively, compared
to the same periods ended September 30, 2002. The decrease is
primarily due to a decline in fixed business sales resulting in lower
general expenses. Also contributing to the decrease is a lower
allocation of corporate and service charges from the Company's parent
and other affiliates who provide services to the Company, as a result
of increased efficiencies gained from ING's company-wide cost
reduction efforts.
Commissions decreased $3.5 million and $64.6 million for the three and
nine months ended September 30, 2003, respectively, compared to the
same periods ended September 30, 2002. The decrease is primarily due
to lower sales resulting in less commission. Also contributing to the
decrease in commissions for the nine months ended September 30, 2003
is a negative ceding commission as a part of the recapture of a
reinsurance agreement that was deferred in the policy acquisition
costs deferred line.
Policy acquisition costs deferred decreased $28.0 million and $92.6
million for the three and nine months ended September 30, 2003,
respectively, compared to the same periods ended September 30, 2002.
The decrease was primarily due to lower sales during the respective
periods as well as to the deferral of a net gain attributed to the
recapture of a reinsurance agreement.
Amortization of deferred policy acquisition costs and value of
business acquired for the three months ended September 30, 2003,
decreased by $54.8 million, compared to the same period in 2002.
Amortization of long-duration products is recorded in proportion to
actual and estimated future gross profits. Estimated gross profits are
computed based on underlying assumptions related to the underlying
contracts, including but not limited to interest margins, mortality,
lapse, premium persistency, expenses, and asset growth. The decrease
in the amortization of deferred policy acquisition costs and value of
insurance acquired reflects the impact of these variables on the
overall book of business. Amortization of deferred policy acquisition
costs and value of business acquired for the nine months ended
September 30, 2003, is comparable to that for the same period in 2002.
Expenses and charges reimbursed under modified coinsurance ("MODCO")
agreements increased $17.3 million and $11.2 million for the three and
nine months ended September 30, 2003, respectively, compared to the
same periods ended September 30, 2002. The increase is primarily due
to an increase in expense allowances as a result of new business
written and covered by MODCO.
Interest expense for the three months ended September 30, 2003 is
comparable to that for the same period in 2002. The decrease of $2.4
million for the nine months ended September 30, 2003, compared to the
same period in 2002, however, is primarily due to the redemption of
two notes on June 28, 2002.
18
The cumulative effect of the change in accounting principle for the
nine months ended September 30, 2002 was a loss of $135.3 million. As
noted in the Recently Adopted Accounting Standards section, this write
down is related to FAS No. 142, which addresses the value of goodwill
and other intangible assets.
Net income increased by $47.9 million and $228.7 million for the three
and nine months ended September 30, 2003, respectively, compared to
the same periods in 2002. Higher earnings for the three months ended
September 30, 2003 are primarily the result of increased fee income,
reduced amortization of deferred acquisition costs and value of
business acquired, partially offset by decreased policy acquisition
costs deferred. Higher earnings for the nine months ended September
30, 2003, are primarily the result of increased fee income, increased
net investment income, increased net realized capital gains, combined
with a decrease of general expenses and commissions, partially offset
by decreased policy acquisition costs deferred. In addition, the
earnings for the nine months ended September 30, 2002 were reduced by
$132.3 million as a result of a cumulative effect of a change in
accounting principle resulting from the write off of goodwill in
accordance with FAS No. 142.
Financial Condition
Investments
Fixed Maturities
At September 30, 2003 and December 31, 2002, the Company's carrying
value of available for sale fixed maturities represented 86.9% and
90.5%, respectively, the total general account invested assets. Total
fixed maturities reflected net unrealized capital gains of $229.5
million and $216.3 million at September 30, 2003 and December 31,
2002, respectively.
It is management's objective that the portfolio of fixed maturities be
of high quality and be well diversified by market sector. The fixed
maturities in the Company's portfolio are generally rated by external
rating agencies and, if not externally rated, are rated by the Company
on a basis believed to be similar to that used by the rating agencies.
The average quality rating of the Company's fixed maturities portfolio
was A+ at September 30, 2003 and December 31, 2002.
Fixed maturities rated BBB and below may have speculative
characteristics and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity of the
issuer to make principal and interest payments than is the case with
higher rated fixed maturities.
19
The percentage of total fixed maturities by quality rating category is
as follows:
September 30, December 31,
2003 2002
---------------- ----------------
AAA 34.6 % 34.1 %
AA 4.3 9.2
A 22.8 23.4
BBB 34.9 30.2
BB 2.5 2.3
B and below 0.9 0.8
---------------- ----------------
Total 100.0 % 100.0 %
================ ================
The percentage of total fixed maturities by market sector is as
follows:
September 30, December 31,
2003 2002
---------------- ----------------
U.S. Corporate 56.5 % 59.8 %
Residential Mortgaged-backed 14.6 13.2
Commercial/Multifamily Mortgage-backed 6.5 6.0
Foreign (1) 13.2 10.7
U.S. Treasuries/Agencies 0.3 4.2
Asset-backed 8.9 6.1
---------------- ----------------
Total 100.0 % 100.0 %
================ ================
(1) Primarily U.S. dollar denominated
The Company analyzes the general account investments to determine
whether there has been an other than temporary decline in fair value
below the amortized cost basis in accordance with FAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
Management considers the length of the time and the extent to which
the market value has been less than cost; the financial condition and
near term prospects of the issuer; future economic conditions and
market forecasts; and the Company's intent and ability to retain the
investment in the issuer for a period of time sufficient to allow for
recovery in market value. If it is probable that all amounts due
according to the contractual terms of a fixed maturity investment will
not be collected, an other than temporary impairment is considered to
have occurred.
When a decline in fair value is determined to be other than temporary,
the individual security is written down to fair value and the loss is
accounted for as a realized loss.
Liquidity and Capital Resources
Liquidity is the ability of the Company to generate sufficient cash
flows to meet the cash requirements of operating, investing, and
financing activities. The Company's principal sources of liquidity are
annuity premiums and product charges, investment income, maturing
investments, proceeds from debt issuance, and capital contributions.
Primary uses of these funds are payments of commissions and operating
expenses, interest and premium credits, investment purchases,
repayment of debt, as well as withdrawals and surrenders.
20
The Company's liquidity position is managed by maintaining adequate
levels of liquid assets, such as cash or cash equivalents and
short-term investments. Additional sources of liquidity include
borrowing facilities to meet short-term cash requirements. The Company
maintains a $40.0 million revolving loan agreement with ING America
Insurance Holdings, Inc. ("ING AIH"), an affiliate of the Company, and
the Company has established a $75.0 million revolving note facility
with a national bank. Management believes that its sources of
liquidity are adequate to meet the Company's short-term cash
obligations.
The National Association of Insurance Commissioners' ("NAIC")
risk-based capital requirements require insurance companies to
calculate and report information under a risk-based capital formula.
These requirements are intended to allow insurance regulators to
monitor the capitalization of insurance companies based upon the type
and mixture of risks inherent in a Company's operations. The formula
includes components for asset risk, liability risk, interest rate
exposure, and other factors. The Company has complied with the NAIC's
risk-based capital reporting requirements. Amounts reported indicate
that the Company has total adjusted capital above all required capital
levels.
During the nine months ended September 30, 2003 and during the year
ended December 31, 2002, the Company received capital contributions of
$230.0 million and $356.3 million, respectively.
Under the MODCO agreement, Golden American received a net
reimbursement of expenses and charges of $89.3 million for the nine
months ended September 30, 2003 and $100.9 million for the year ended
December 31, 2002. The Company had a receivable from Equitable Life of
$6.0 million as of September 30, 2003 and a payable to Equitable Life
of $7.1 million as of December 31, 2002, each for a remaining amount
of net cash settlement for the modified coinsurance agreement.
Legislative Initiatives
The Jobs and Growth Tax Relief Reconciliation Act of 2003 which was
enacted in the second quarter may impact the Company. The Act's
provisions, which reduce the tax rates on long-term capital gains and
corporate dividends, impact the relative competitiveness of the
Company's products especially variable annuities.
Other legislative proposals under consideration include repealing the
estate tax, changing the taxation of products, changing life insurance
company taxation and making changes to nonqualified deferred
compensation arrangements. Some of these proposals, if enacted, could
have a material effect on life insurance, annuity and other retirement
savings product sales.
The impact on the Company's tax position and products cannot be
predicted.
21
Item 4. Controls and Procedures
a) The Company carried out an evaluation, under the supervision and
with the participation of its management, including its Chief
Executive Officer and Chief Financial Officer, of the
effectiveness of the Company's disclosure controls and procedures
(as defined in Rule 13a-15(e) and 15d-15(e)) of the Securities
Exchange Act of 1934) as of the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and
the Chief Financial Officer have concluded that the Company's
current disclosure controls and procedures are effective in
ensuring that material information relating to the Company
required to be disclosed in the Company's periodic SEC filings is
made known to them in a timely manner.
b) There has not been any change in the internal controls over
financial reporting of the Company that occurred during the
period covered by this report that has materially affected or is
reasonably likely to materially affect these internal controls.
22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to threatened or pending lawsuits arising from
the normal conduct of business. Due to the climate in insurance and
business litigation, suits against the Company sometimes include
claims for substantial compensatory, consequential or punitive damages
and other types of relief. Moreover, certain claims are asserted as
class actions, purporting to represent a group of similarly situated
individuals. While it is not possible to forecast the outcome of such
lawsuits, in light of existing insurance, reinsurance and established
reserves, it is the opinion of management that the disposition of such
lawsuits will not have a materially adverse effect on the Company's
operations or financial position.
As with many financial services companies, affiliates of the Company
have received requests for information from various governmental and
self-regulatory agencies in connection with investigations related to
trading in investment company shares. In each case, full cooperation
and responses are being provided. The Company is also reviewing its
policies and procedures in this area.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
31.1 Certificate of David A. Wheat pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certificate of Keith Gubbay pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certificate of David A. Wheat pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certificate of Keith Gubbay pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
A Third Amendment to Asset Management Agreement dated as of
August 18, 2003, between ING Investment Management LLC and
Golden American Life Insurance Company
(b) Reports on Form 8-K
None.
23
SIGNATURES
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
(Registrant)
November 12, 2003 By /s/ David A. Wheat
- ----------------- -------------------------------------------------
(Date) David A. Wheat
Senior Vice President and Chief Financial Officer
24
Exhibit 31.1
CERTIFICATION
I, David A. Wheat, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Golden American Life
Insurance Company;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date November 12, 2003
-------------------
By /s/ David A. Wheat
--------------------------------------------------------
David A. Wheat
Senior Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
Exhibit 31.2
CERTIFICATION
I, Keith Gubbay, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Golden American Life
Insurance Company;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date November 12, 2003
-------------------
By /s/ Keith Gubbay
--------------------------------------------------------
Keith Gubbay President
(Duly Authorized Officer and Principal Executive Officer)