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 June 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: 333-104540
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ReliaStar Life Insurance Company of New York
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(Exact name of registrant as specified in its charter)
New York 53-0242530
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State or other jurisdiction of incorporation or organization) (IRS employer
identification no.)
1000 Woodbury Road, Suite 208, Woodbury, New York 11797
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (516) 682-8700
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Former name, former address and 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 [ ]
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 August 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 August 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).
RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK
(A wholly-owned subsidiary of Security-Connecticut Life Insurance Company
Form 10-Q for the period ended June 30, 2003
INDEX
PART I. FINANCIAL INFORMATION (Unaudited) PAGE
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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 11
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Certifications 21
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK
(A wholly-owned subsidiary of Security-Connecticut Life Insurance Company)
Condensed Statements of Income
(Unaudited)
(Millions)
Three months ended June 30, Six months ended June 30,
2003 2002 2003 2002
---------------- ---------------- ---------------- ----------------
Revenue:
Premiums $ 21.5 $ 19.1 $ 41.4 $ 33.4
Fee income 22.5 23.2 47.4 47.1
Net investment income 33.5 38.4 62.1 67.2
Net realized capital gains (losses) 6.3 (2.2) 6.1 (8.1)
Other income 2.3 3.5 4.3 5.5
---------------- ---------------- ---------------- ----------------
Total revenue 86.1 82.0 161.3 145.1
---------------- ---------------- ---------------- ----------------
Benefits, losses and expenses:
Benefits:
Interest credited and other
benefits to policyholders 42.1 45.1 85.9 84.0
Underwriting, acquisition, and
insurance expenses:
General expenses 11.3 7.0 21.7 23.7
Amortization of deferred policy
acquisition costs and value of
business acquired 7.9 (0.4) 11.9 8.8
---------------- ---------------- ---------------- ----------------
Total benefits, losses and expenses 61.3 51.7 119.5 116.5
---------------- ---------------- ---------------- ----------------
Income before income taxes 24.8 30.3 41.8 28.6
Income tax expense 8.7 10.6 14.6 9.8
---------------- ---------------- ---------------- ----------------
Net income $ 16.1 $ 19.7 $ 27.2 $ 18.8
================ ================ ================ ================
The accompanying notes are an integral part of these financial statements
3
RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK
(A wholly-owned subsidiary of Security-Connecticut Life Insurance Company)
Condensed Balance Sheets
(Millions, except share data)
June 30, 2003 December 31,
(Unaudited) 2002
---------------- ----------------
Assets
Investments:
Fixed maturities, available for sale, at fair value (amortized cost of
$1,538.9 at 2003 and $1,523.0 at 2002) $ 1,653.7 $ 1,601.5
Equity securities at fair value (cost of $4.6 at 2003 and $4.4 at 2002) 4.6 4.4
Mortgage loans on real estate 227.2 243.6
Policy loans 85.8 85.2
Short-term investments 92.2 55.6
Other investments 14.0 11.9
Securities pledged to creditors (amortized cost of
$79.8 at 2003 and $0.9 at 2002) 82.4 0.9
---------------- ----------------
Total investments 2,159.9 2,003.1
Cash and cash equivalents 2.8 2.4
Accrued investment income 19.9 19.3
Accounts and notes receivable 4.8 6.9
Reinsurance recoverable 56.2 54.6
Deferred policy acquisition costs 51.2 61.3
Value of business acquired 45.6 48.2
Deferred income taxes 9.9 26.1
Receivable for securities sold 12.1 0.5
Other assets 6.5 4.7
Assets held in separate accounts 448.5 429.4
---------------- ----------------
Total assets $ 2,817.4 $ 2,656.5
================ ================
Liabilities and Shareholder's Equity
Policy liabilities and accruals:
Future policy benefits and claims' reserves $ 1,596.9 $ 1,580.5
Unearned premiums 0.4 0.2
Other policy claims and benefits payable 40.8 41.7
Other policyholder's funds 25.1 23.3
---------------- ----------------
Total liabilities and accruals 1,663.2 1,645.7
Current income taxes 4.4 12.3
Other borrowed money 161.3 74.2
Payables for securities purchased 18.6 -
Other liabilities 67.0 69.1
Liabilities related to separate accounts 448.5 429.4
---------------- ----------------
Total liabilities
2,363.0 2,230.7
Shareholder's equity
Common stock (1,377,863 shares authorized, issued and
outstanding; $2.00 per share par value) 2.8 2.8
Additional paid-in capital 1,213.1 1,225.6
Accumulated other comprehensive income 49.3 35.4
Retained deficit (810.8) (838.0)
---------------- ----------------
Total shareholder's equity 454.4 425.8
---------------- ----------------
Total liabilities and shareholder's equity $ 2,817.4 $ 2,656.5
================ ================
The accompanying notes are an integral part of these financial statements
4
Condensed Statements of Changes in Shareholder's Equity
(Unaudited)
(Millions)
Six Months Ended June 30,
2003 2002
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Shareholder's equity, beginning of period $ 425.8 $ 1,212.7
Comprehensive income:
Net income 27.2 18.8
Other comprehensive income net of tax: Unrealized gain
on securities ($21.4 and $24.2, pretax year to date) 13.9 15.7
--------------- --------------
Total comprehensive income 41.1 34.5
Additional paid-in capital - 31.1
Dividends (12.5) (7.2)
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Shareholder's equity, end of period $ 454.4 $ 1,271.1
=============== ==============
The accompanying notes are an integral part of these financial statements
5
Condensed Statements of Cash Flows
(Unaudited)
(Millions)
Six months ended June 30,
2003 2002
---------------- ----------------
Net cash provided by operating activities $ 33.1 $ 112.3
Cash Flows from Investing Activities
Proceeds from the sale of:
Fixed maturities available for sale 1,471.3 856.8
Equity securities (0.2) (1.3)
Investment maturities and collections of:
Fixed maturities available for sale - 17.5
Mortgage loans 16.4 7.2
Acquisition of investments:
Fixed maturities available for sale (1,560.1) (980.1)
Short-term investments (36.6) (86.6)
Other, net (2.7) (2.2)
---------------- ----------------
Net cash used for investing activities (111.9) (188.7)
---------------- ----------------
Cash Flows from Financing Activities
Deposits and interest credited for investment contracts 28.5 75.2
Maturities and withdrawals from insurance and investment contracts (23.9) (68.7)
Increase in borrowed money 87.1 87.1
Dividends to shareholders (12.5) (7.2)
---------------- ----------------
Net cash provided by financing activities 79.2 86.4
---------------- ----------------
Net increase in cash and cash equivalents 0.4 10.0
Cash received from First Golden - 5.8
Cash and cash equivalents (cash overdraft), beginning of period 2.4 (17.5)
---------------- ----------------
Cash and cash equivalents (cash overdraft), end of period $ 2.8 $ (1.7)
================ ================
The accompanying notes are an integral part of these financial statements
6
RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK
(A wholly-owned subsidiary of Security-Connecticut Life Insurance Company)
Notes to Condensed Financial Statements (Unaudited)
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1. Basis of Presentation
ReliaStar Life Insurance Company of New York ("RLNY", or the "Company") is a
provider of financial products and services in the United States. The Company is
a wholly-owned subsidiary of Security-Connecticut Life Insurance Company
("Security-Connecticut"). Security-Connecticut is a wholly-owned subsidiary of
ReliaStar Life Insurance Company ("ReliaStar Life"). ReliaStar Life's ultimate
parent is ING Groep N.V. ("ING"), a financial services company based in The
Netherlands.
The condensed financial statements and notes as of June 30, 2003 and December
31, 2002 and for the three and six-month periods ended June 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 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 financial position, results of operations and
cash flows for the interim periods. These condensed financial statements and
notes should be read in conjunction with the 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.
The Company conducts its business through one operating segment, U.S. Financial
Services ("USFS"), and all 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"). The adoption of this standard resulted in an
impairment loss of $865.0 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 Income
Statement. 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.
7
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 consolidated financial statements is not known at this time.
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.
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.
8
VOBA activity for the six months ended June 30, 2003 was as follows:
(Millions)
------------
Balance at December 31, 2002 $ 48.2
Adjustment for FAS No. 115 (3.4)
Additions 5.0
Interest accrued at 7% 0.5
Amortization (4.7)
------------
Balance at June 30, 2003 $ 45.6
============
5. Investments
Impairments
During the three months ended June 30, 2003, the Company determined that three
fixed maturities had other than temporary impairments. As a result, for the
three months ended June 30, 2003, the Company recognized a pre-tax loss of $0.2
million to reduce the carrying value of the fixed maturities to their fair value
of $1.2 million at the time of impairment. During the three months ended June
30, 2002, the Company determined that four fixed maturities had other than
temporary impairments. As a result, for the three months ended June 30, 2002,
the Company recognized a pre-tax loss of $0.6 million to reduce the carrying
value of the fixed maturities to their fair value of $1.8 million at the time of
impairment.
During the first six months of 2003, the Company determined that nine fixed
maturities had other than temporary impairments. As a result, for the six months
ended June 30, 2003, the Company recognized a pre-tax loss of $4.8 million to
reduce the carrying value of the fixed maturities to their fair value of $3.5
million at the time of impairment. During the first six months of 2002, the
Company determined that six fixed maturities had other than temporary
impairments. As a result, for the six months ended June 30, 2002, the Company
recognized a pre-tax loss of $1.5 million to reduce the carrying value of the
fixed maturities to their fair value of $2.7 million at the time of impairment.
6. Income Taxes
The Company's effective tax rates for the six months ended June 30, 2003 and
2002 were 34.9% and 34.3%, respectively. The effective tax rates for the three
months ended June 30, 2003 and June 30, 2002, were 35.1% and 35.0%,
respectively. These rates approximate the federal income tax rate of 35.0%.
9
7. 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. The Company makes
investments in limited partnerships on a subscription basis. At June 30, 2003
and December 31, 2002, the Company had off-balance sheet commitments to purchase
investments equal to the fair value of $36.8 million and $26.2 million,
respectively.
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.
10
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 the ReliaStar Life Insurance Company of New York
("RLNY", or the "Company") as of June 30, 2003 and December 31, 2002 and for the
three and six-month periods ended June 30, 2003 and 2002. This review should be
read in conjunction with the condensed 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.
Nature of Business
The Company is principally engaged in the business of providing life
insurance and related financial services products. The Company provides and
distributes individual life insurance and annuities, employee benefit products
and services and retirement plans.
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"). The adoption of this standard
resulted in an impairment loss of $865.0 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 Income Statement. 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. New Accounting Pronouncements
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 consolidated financial statements is not known at this time.
11
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 condensed financial statements and related footnotes. These
estimates and assumptions are evaluated on an on-going basis based on historical
developments, market conditions, industry trends and other information that is
reasonable under the circumstances. There can be no assurance that actual
results will conform to estimates and assumptions, and that reported results of
operations will not be materially adversely affected by the need to make future
accounting adjustments to reflect changes in these estimates and assumptions
from time to time.
The Company has identified the following estimates as critical in that they
involve a higher degree of judgment and are subject to a significant degree of
variability. In developing these estimates management makes subjective and
complex judgments that are inherently uncertain and subject to material change
as facts and circumstances develop. Although variability is inherent in these
estimates, management believes the amounts provided are appropriate based upon
the facts available upon compilation of the condensed financial statements.
Investment Impairment Testing
The Company reviews the general account investments for impairments by
considering the length of time and the extent to which the fair value has been
less than amortized 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, mortality
margins and surrender charges less policy maintenance costs.
12
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 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.
13
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 Legal Initiatives
section below). Some may be related to the insurance industry generally, such as
pricing competition, regulatory developments and industry consolidation. Others
may relate to the Company specifically, such as credit, volatility and other
risks associated with the Company's investment portfolio. Investors are also
directed to consider other risks and uncertainties discussed in documents filed
by the Company with the SEC. The Company disclaims any obligation to update
forward-looking information.
Results of Operations
Premiums increased by $2.4 million for the three months ended June 30, 2003,
compared to the same period in 2002. Premiums increased by $8.0 for the six
months ended June 30, 2003, compared to the same period in 2002. Premium income
was primarily attributed to growth in the Company's employee benefit products.
Fee income decreased by $0.7 million for the three months ended June 30, 2003,
compared to the same period in 2002. Fee income increased by $0.3 for the six
months ended June 30, 2003, compared to the same period in 2002. The variance is
primarily due to the increase due to growth in the life insurance products being
offset by decreases in fee income on variable annuity assets which decreased as
a result of market declines.
Net investment income for the three and six months ended June 30, 2003 decreased
by $4.9 million and $5.1 million, respectively, compared to the same periods in
2002. The variance is due primarily to the decrease in yield caused by declining
interest rates in the market partially offset by an increase in assets.
Net realized capital gains for the three and six months ended June 30, 2003
increased by $8.5 million and $14.2 million, respectively, compared to the same
period in 2002, primarily due to a decrease in the treasury rate. The 10-year
treasury yield (constant maturities) was 4.8% at June 30, 2002, and 3.5% at June
30, 2003. In a declining rate environment, the market value of fixed maturities
held in the Company's portfolio increases assuming no credit deterioration. The
increase in net realized gains reflects the impact of this variable on the
overall sale of fixed maturities and the trend in realized gain is consistent
with the interest rate environment.
Interest credited and other benefits to the policyholders for the three months
ended June 30, 2003, decreased by $3.0 million due to a decrease in interest
credited rates compared to the same period in 2002. Interest credited and other
benefits to the policyholders for the six months ended June 30, 2003, increased
by $1.9 million compared to the same period in 2002. This increase is the result
of higher future policy benefits and claim reserves, due to business growth,
offset by a decrease in interest credited rates.
14
General expenses for the three months ended June 30, 2003 increased by $4.3
million compared to the same period in 2002. The increase is due to higher
premium tax and an increase in general expenses due to business growth. General
expenses for the six months ended June 30, 2003 decreased by $2.0 million
compared to the same period in 2002. This reduction is attributed to a lower
allocation of corporate and service charges from the Company's parent and other
affiliates who provide services to the Company, due to increased efficiencies
gained from ING's company-wide cost reduction efforts.
Amortization of deferred policy acquisition costs and value of business acquired
for the three and six months ended June 30, 2003, increased by $8.3 million and
$3.1 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 increase
in the amortization of deferred policy acquisition costs and value of insurance
acquired reflects the impact of these variables on the overall book of business.
Net income decreased by $3.6 million for the three months ended June 30, 2003,
compared to the three months ended June 30, 2002, due to lower net investment
income, increased general expenses and increased amortization of deferred policy
acquisition costs and value of business acquired. The decrease was partially
offset by increased net capital gains. Net income increased by $8.4 million for
the six months ended June 30, 2003, compared to the six months ended June 30,
2002. Improved earnings are primarily the result of an increase in net realized
gain.
Financial Condition
Investments
Fixed Maturities
At June 30, 2003 and December 31, 2002, the Company's carrying value of
available for sale fixed maturities including securities pledged to creditors
(hereinafter referred to as "total fixed maturities") represented 80% of the
total general account invested assets for both periods. Total fixed maturities
reflected net unrealized capital gains of $117.4 million and $78.5 million at
June 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 June 30, 2003 and December 31, 2002,
respectively.
15
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.
The percentage of total fixed maturities by quality rating category is as
follows:
June 30, 2003 December 31, 2002
-------------------- --------------------
AAA 38.6 % 44.9 %
AA 5.4 4.7
A 24.0 20.6
BBB 25.9 23.6
BB 4.6 4.2
B and below 1.5 2.0
-------------------- --------------------
Total 100.0 % 100.0 %
==================== ====================
The percentage of total fixed maturities by market sector is as follows:
June 30, 2003 December 31, 2002
-------------------- ---------------------
U.S. Corporate 52.4 % 49.9 %
Residential Mortgaged-Backed 21.3 23.4
U.S. Treasuries/Agencies 3.1 6.1
Foreign (1) 9.1 4.2
Commercial/Multifamily Mortgage-Backed 6.8 7.0
Asset-Backed 7.3 9.4
-------------------- ---------------------
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 fair value has been less than amortized cost; the financial
condition and near-term prospects of the issuer; future economic conditions and
market forecasts; and the Company's intent and ability to retain the investment
in the issuer for a period of time sufficient to allow for recovery in market
value. If it is probable that all amounts due according to the contractual terms
of a debt security will not be collected, an other than temporary impairment is
considered to have occurred.
In addition, the Company invests in structured securities that meet the criteria
of Emerging Issues Task Force ("EITF") Issue No. 99-20 "Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets." Under EITF Issue No. 99-20, a determination of
the required impairment is based on credit risk and the possibility of
significant prepayment risk that restricts the Company's ability to recover the
investment. An impairment is recognized if the fair value of the security is
less than book value and there has been an adverse change in cash flow since the
last remeasurement date.
16
When a decline in fair value is determined to be other than temporary, the
individual security is written down to fair value and the loss accounted for as
a realized loss.
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 product charges, investment
income and maturing investments. Primary uses of these funds are payments of
commissions and operating expenses, interest credits, investment purchases, as
well as withdrawals and surrenders.
The Company's liquidity position is managed by maintaining adequate levels of
liquid assets, such as cash or cash equivalents and short-term investments.
Additional sources of liquidity include borrowing facilities to meet short-term
requirements. The Company maintains two $30.0 million revolving note facilities
with different national banks. Management believes that these sources of
liquidity are adequate to meet the Company's short-term cash obligations.
In April, 2002, the Company received $31.1 million additional paid in capital
due to the merger with First Golden American Life Insurance Company of New York.
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.
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.
17
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.
18
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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
19
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.
RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK
(Registrant)
August 12, 2003
- ---------------- By /s/ Cheryl L. Price
(Date) -------------------------------------------
Cheryl L. Price
Vice President and Chief Accounting Officer
By /s/ David A. Wheat
-------------------------------------------
David A. Wheat
Senior Vice President and
Chief Financial Officer
20
CERTIFICATION
I, David A. Wheat, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ReliaStar Life
Insurance Company of New York;
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: August 12, 2003
By /s/ David A. Wheat
---------------------------------------------------
David A. Wheat
Senior Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
21
CERTIFICATION
I, James R. Gelder, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ReliaStar Life
Insurance Company of New York;
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 August 12, 2003
By /s/ James R. Gelder
-----------------------------------------
James R. Gelder
President
(Duly Authorized Officer and Principal Executive Officer)
22