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: 333-104540
ReliaStar Life Insurance Company of New York
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(Exact name of registrant as specified in its charter)
New York 53-0242530
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(State or other jurisdiction (IRS employer identification no.)
of incorporation or organization)
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 former 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: 1,377,863 shares of Common
Stock as of November 12, 2003, all of which were directly owned by
Security-Connecticut Life Insurance Company.
NOTE: WHEREAS RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK 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 September 30, 2003
INDEX
Page
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PART I. FINANCIAL INFORMATION (Unaudited)
Item 1. Financial Statements:
Condensed Statements of Income 3
Condensed Balance Sheets 4
Condensed Statements of Changes in Shareholder's Equity 5
Condensed Statements of Cash Flows 6
Notes to Condensed Financial Statements 7
Item 2. Management's Narrative Analysis of the Results of
Operations and Financial Condition 12
Item 4. Controls and procedures 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
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 Nine months ended
September 30, September 30,
2003 2002 2003 2002
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Revenue:
Premiums $ 20.8 $ 16.1 $ 60.3 $ 49.5
Fee income 21.6 24.6 69.0 71.7
Net investment income 30.0 34.1 92.1 101.3
Net realized capital gains (losses) 1.0 5.8 7.1 (2.3)
Other income 1.8 3.1 6.1 8.6
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Total revenue 75.2 83.7 234.6 228.8
Benefits, losses and expenses:
Benefits:
Interest credited and other
benefits to policyholders 40.1 49.3 122.9 133.3
Underwriting, acquisition, and
insurance expenses:
General expenses 9.9 6.4 32.8 30.2
Amortization of deferred policy acquisition
costs and value of business acquired 9.8 9.0 21.7 17.8
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59.8 64.7 177.4 181.3
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Income before income taxes and cumulative
effect of change in accounting principle 15.4 19.0 57.2 47.5
Income tax expense 5.3 6.9 19.9 16.7
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Income before cumulative effect of
change in accounting principle 10.1 12.1 37.3 30.8
Cumulative effect of change in accounting
principle - - - (865.0)
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Net income (loss) $ 10.1 $ 12.1 $ 37.3 $ (834.2)
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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)
September 30,
2003 December 31,
(Unaudited) 2002
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Assets
Investments:
Fixed maturities, available for sale, at fair value
(amortized cost of $1,520.4 at 2003 and $1,523.0 at 2002) $ 1,606.8 $ 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 217.6 243.6
Policy loans 85.8 85.2
Short-term investments 152.8 55.6
Other investments 14.1 11.9
Securities pledged to creditors (amortized cost of
$119.8 at 2003 and $0.9 at 2002) 123.8 0.9
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Total investments 2,205.5 2,003.1
Cash and cash equivalents 28.1 2.4
Accrued investment income 19.9 19.3
Accounts and notes receivable 6.4 6.9
Reinsurance recoverable 55.9 54.6
Deferred policy acquisition costs 60.7 61.3
Value of business acquired 38.9 48.2
Deferred income taxes 32.2 26.1
Receivable for securities sold 10.2 0.5
Other assets 5.9 4.7
Assets held in separate accounts 468.0 429.4
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Total assets $ 2,931.7 $ 2,656.5
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Liabilities and Shareholder's Equity
Policy liabilities and accruals:
Future policy benefits and claims' reserves $ 1,604.9 $ 1,580.5
Unearned premiums 0.3 0.2
Other policy claims and benefits payable 39.0 41.7
Other policyholder's funds 26.5 23.3
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Total liabilities and accruals 1,670.7 1,645.7
Current income taxes 4.2 12.3
Other borrowed money 247.2 74.2
Payables for securities purchased 20.8 -
Other liabilities 77.6 69.1
Liabilities related to separate accounts 468.0 429.4
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Total liabilities 2,488.5 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 1,206.6 1,225.6
Accumulated other comprehensive income 34.5 35.4
Retained deficit (800.7) (838.0)
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Total shareholder's equity 443.2 425.8
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Total liabilities and shareholder's equity $ 2,931.7 $ 2,656.5
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The accompanying notes are an integral part of these financial statements.
4
RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK
(A wholly-owned subsidiary of Security-Connecticut Life Insurance Company)
Condensed Statements of Changes in Shareholder's Equity
(Unaudited)
(Millions)
Nine Months Ended September 30,
2003 2002
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Shareholder's equity, beginning of period $ 425.8 $ 1,212.7
Comprehensive income (loss):
Net income (loss) 37.3 (834.2)
Other comprehensive income (loss) net of tax:
Unrealized gain (loss) on securities ($(1.4) and
$33.5, pretax year to date) (0.9) 21.8
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Total comprehensive income (loss) 36.4 (812.4)
Additional paid-in capital - 31.4
Dividends paid (19.0) (10.8)
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Shareholder's equity, end of period $ 443.2 $ 420.9
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The accompanying notes are an integral part of these financial statements.
5
RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK
(A wholly-owned subsidiary of Security-Connecticut Life Insurance Company)
Condensed Statements of Cash Flows
(Unaudited)
(Millions)
Nine Months Ended September 30,
2003 2002
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Net cash provided by operating activities $ 38.8 $ 99.5
Cash Flows from Investing Activities
Proceeds from the sale of:
Fixed maturities available for sale 2,117.2 1,405.5
Other investments - 0.3
Investment maturities and collections of:
Fixed maturities available for sale - 28.2
Mortgage loans 21.1 18.1
Acquisition of investments:
Fixed maturities available for sale (2,226.9) (1,467.6)
Equity securities - (1.1)
Mortgages (2.7) (7.5)
Short-term investments (97.2) (71.6)
Decrease in policy loans (0.6) (0.4)
Other, net (2.4) (77.1)
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Net cash used for investing activities (191.5) (173.2)
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Cash Flows from Financing Activities
Deposits and interest credited for investment contracts 31.3 119.5
Maturities and withdrawals from insurance and investment contracts (6.9) (104.6)
Increase in borrowed money 173.0 55.4
Dividends to shareholders (19.0) (10.8)
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Net cash provided by financing activities 178.4 59.5
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Net increase in cash and cash equivalents 25.7 (14.2)
Cash received from First Golden - 31.4
Cash and cash equivalents (cash overdraft), beginning of period 2.4 (17.5)
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Cash and cash equivalents (cash overdraft), end of period $ 28.1 $ (0.3)
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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 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 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 primarily 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"). 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 $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.
7
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 as of January
1, 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 consolidated
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 it has no investment or
insurance products that are applicable to require implementation of
the guidance, and therefore, the guidance 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
8
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"). The Company identified $6.1 million of VOBA that was improperly
capitalized during 2000 and 2001. During the third quarter of 2003,
the Company has reversed this capitalization which resulted in a
reduction to the VOBA asset balance and an increase to VOBA
amortization.
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.
VOBA activity for the nine months ended September 30, 2003 was as
follows:
(Millions)
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Balance at December 31, 2002 $ 48.2
Adjustment for FAS No. 115 1.3
Additions 1.0
Interest accrued at 7% 0.4
Amortization (12.0)
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Balance at September 30, 2003 $ 38.9
==============
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 six 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 $4.1 million to reduce
the carrying value of the fixed maturities to their fair value at the
time of impairment.
9
During the first nine months of 2003, the Company determined that nine
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 $4.8 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 14 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 $5.7 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 $1.9 million and $7.8 million, respectively.
6. Income Taxes
The effective tax rates for the three months ended September 30, 2003
and September 30, 2002, were 34.4% and 36.3%, respectively. The
Company's effective tax rates for the nine months ended September 30,
2003 and 2002 were 34.8% and 35.2%, respectively. These rates
approximate the federal income tax rate of 35.0%.
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 September 30, 2003
and December 31, 2002, the Company had off-balance sheet commitments
to purchase investments equal to the fair value of $23.9 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
8. Subsequent Events
Security-Connecticut is a wholly-owned subsidiary of ReliaStar Life.
Effective October 1, 2003 Security-Connecticut merged into ReliaStar
Life. Therefore, after October 1, 2003 the Company will be a
wholly-owned subsidiary of ReliaStar Life as a result of a merger.
11
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 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 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"). 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 $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.
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.
12
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.
The Derivative Implementation Group ("DIG") responsible for issuing
guidance on behalf of the FASB for implementation of FAS No. 133,
Accounting for Derivative Instruments and Hedging Activities recently
issued Statement Implementation Issue No. B36, Embedded Derivatives:
Modified Coinsurance Arrangements and Debt Instruments That
Incorporate Credit Risk Exposures That Are Unrelated or Only Partially
Related to the Credit Worthiness of the Obligor under Those
Instruments ("DIG B36"). Under this interpretation, modified
coinsurance and coinsurance with funds withheld reinsurance agreements
as well as other types of receivables and payables where interest is
determined by reference to a pool of fixed maturity assets or total
return debt index may be determined to contain embedded derivatives
that are required to be bifurcated. The required date of adoption of
DIG B36 for the Company is October 1, 2003. The Company has completed
its evaluation of DIG B36 and determined that it has no investment or
insurance products that are applicable to require implementation of
the guidance, and therefore, the guidance will have no impact on the
Company's financial position, results of operations or cash flows.
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.
13
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.
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.
14
Forward-Looking Information/Risk Factors
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company cautions readers
regarding certain forward-looking statements contained in this report
and in any other statements made by, or on behalf of, the Company,
whether or not in future filings with the Securities and Exchange
Commission ("SEC"). Forward-looking statements are statements not
based on historical information and which relate to future operations,
strategies, financial results, or other developments. Statements using
verbs such as "expect," "anticipate," "believe" or words of similar
import generally involve forward-looking statements. Without limiting
the foregoing, forward-looking statements include statements which
represent the Company's beliefs concerning future levels of sales and
redemptions of the Company's products, investment spreads and yields,
or the earnings and profitability of the Company's activities.
Forward-looking statements are necessarily based on estimates and
assumptions that are inherently subject to significant business,
economic and competitive uncertainties and contingencies, many of
which are beyond the Company's control and many of which are subject
to change. These uncertainties and contingencies could cause actual
results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Whether or not actual results differ materially from forward-looking
statements may depend on numerous foreseeable and unforeseeable
developments. Some may be national in scope, such as general economic
conditions, changes in tax law and changes in interest rates (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
Premiums increased by $4.7 million for the three months ended
September 30, 2003, compared to the same period in 2002. Premiums
increased by $10.8 for the nine months ended September 30, 2003,
compared to the same period in 2002. Premium income was primarily
attributed to an increase in employee benefit products as the payroll
deduct cancer product is not being reinsured in 2003. This product was
95% reinsured in 2002.
Fee income for the three and nine months ended September 30, 2003
decreased by $3.0 million and $2.7 million, respectively, compared to
the same periods in 2002. The variance is primarily due to decreases
in fee income on variable annuity assets which decreased as a result
of market declines.
15
Net investment income for the three and nine months ended September
30, 2003 decreased by $4.1 million and $9.2 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 months ended September 30,
2003 decreased by $4.8 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 $9.4 million, respectively,
compared to the same period in 2002, primarily due to a decrease in
the treasury rate. The average 10-year treasury yield (constant
maturities) was 4.7% at September 30, 2002, and 3.9% at September 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.
Other income for the three months ended September 30, 2003, decreased
by $1.3 million and $2.5 million, respectively, compared to the same
periods in 2002. This decrease is due to the deferral of policy loans.
Interest credited and other benefits to the policyholders for the
three and nine months ended September 30, 2003 decreased by $9.2
million and $10.4 million, respectively, compared to the same periods
in 2002. This decrease is the result of a decrease in interest
credited rates.
General expenses for the three and nine months ended September 30,
2003 increased by $3.5 million and $2.6 million, respectively,
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.
Amortization of deferred policy acquisition costs and value of
business acquired for the three and nine months ended September 30,
2003, increased by $0.8 million and $3.9 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.
16
The cumulative effect of the change in accounting principle for the
nine months ended September 30, 2002, was $865.0 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 decreased by $2.0 million for the three months ended
September 30, 2003, compared to the three months ended September 30,
2002 due primarily to decreased net realized capital gains during
third quarter 2003. Net income increased by $871.5 million for the
nine months ended September 30, 2003, compared to the nine months
ended September 30, 2002. Improved earnings of $6.3 million were
primarily the result of a decrease in net realized gain. In addition,
the earnings for the nine months ended September 30, 2002, were
reduced by $865.0 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 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 $90.3 million and $78.5 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, respectively.
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.
17
The percentage of total fixed maturities by quality rating category is
as follows:
September 30, December 31,
2003 2002
-------------- --------------
AAA 37.7 % 44.9 %
AA 6.2 4.7
A 23.7 20.6
BBB 27.1 23.6
BB 3.9 4.2
B and below 1.4 2.0
-------------- --------------
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 54.1 % 49.9 %
Residential Mortgaged-Backed 20.4 23.4
U.S. Treasuries/Agencies 1.6 6.1
Foreign (1) 10.5 4.2
Commercial/Multifamily Mortgage-Backed 6.8 7.0
Asset-Backed 6.6 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 fixed maturity
investment will not be collected, an other than temporary impairment
is considered to have occurred.
In addition, the Company invests in structured securities that meet
the criteria of Emerging Issues Task Force ("EITF") Issue No. 99-20
"Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets." Under
EITF Issue No. 99-20, a determination of the required impairment is
based on credit risk and the possibility of significant prepayment
risk that restricts the Company's ability to recover the investment.
An impairment is recognized if the fair value of the security is less
than book value and there has been an adverse change in cash flow
since the last remeasurement date.
When a decline in fair value is determined to be other than temporary,
the individual security is written down to fair value and the loss
accounted for as a realized loss.
18
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.
Subsequent Events
Security-Connecticut is a wholly-owned subsidiary of ReliaStar Life.
Effective October 1, 2003 Security-Connecticut merged into ReliaStar
Life. Therefore, after October 1, 2003 the Company will be a
wholly-owned subsidiary of ReliaStar Life as a result of a merger.
19
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.
20
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 James R. Gelder 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 James R. Gelder pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
21
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)
November 12, 2003 By /s/ David A. Wheat
- ----------------- -------------------------------------------------
(Date) David A. Wheat
Senior Vice President and Chief Financial Officer
22
Exhibit 31.1
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: 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, 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 November 12, 2003
-----------------
By /s/ James R. Gelder
--------------------------------------------------------
James R. Gelder
President
(Duly Authorized Officer and Principal Executive Officer)