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 March 31, 2004
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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 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 May 14, 2004, all of which were directly owned by ReliaStar Life
Insurance Company.
NOTE: WHEREAS RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK MEETS THE CONDITIONS
SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10Q, THIS FORM IS BEING
FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2).
1
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Form 10-Q for the period ended March 31, 2004
INDEX
PAGE
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 6
Condensed Statements of Cash Flows 7
Notes to Condensed Financial Statements 8
Item 2. Management's Narrative Analysis of the Results of
Operations and Financial Condition 15
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
2
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
Condensed Statements of Income
(Unaudited)
(Millions)
Three months ended March 31,
2004 2003
--------------- ---------------
Revenue:
Premiums $ 16.1 $ 19.4
Fee income 24.4 24.6
Net investment income 30.1 29.0
Net realized capital gains (losses) 5.5 (0.2)
Other income 1.8 1.9
--------------- ---------------
Total revenue 77.9 74.7
Benefits, losses and expenses:
Benefits:
Interest credited and other
benefits to policyholders 42.6 44.3
Underwriting, acquisition, and
insurance expenses:
Commissions 6.6 7.4
General expenses 10.7 11.0
Policy acquisition costs deferred (4.9) (9.0)
Amortization of deferred policy acquisition
Costs and value of business acquired 5.4 4.0
--------------- ---------------
Total benefits, losses and expenses 60.4 57.7
--------------- ---------------
Income before income taxes and cumulative
effect of change in accounting principle 17.5 17.0
Income tax expense 6.1 5.9
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Income before cumulative effect of
change in accounting principle 11.4 11.1
Cumulative effect of change in accounting
principle (7.0) -
--------------- ---------------
Net income $ 4.4 $ 11.1
=============== ===============
The accompanying notes are an integral part of these financial statements.
3
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Condensed Balance Sheets
(Millions, except share data)
March 31, December 31,
2004 2003
--------------- ---------------
(Unaudited)
Assets
Investments:
Fixed maturities, available for sale, at fair value (amortized cost
of $1,599.7 at 2004 and $1,642.8 at 2003) $ 1,692.7 $ 1,718.0
Equity securities at fair value:
Common stock (cost of $4.4 at 2004 and 2003) 4.6 4.2
Investment in mutual fund 2.5 2.5
Mortgage loans on real estate 214.8 209.7
Policy loans 87.3 86.6
Short-term investments 0.2 0.2
Other investments 13.4 12.8
Securities pledged to creditors (amortized cost of
$112.0 at 2004 and $1.9 at 2003) 115.9 1.9
--------------- ---------------
Total investments 2,131.4 2,035.9
Cash and cash equivalents 8.0 10.4
Short-term investments under securities loan agreement 119.2 1.9
Accrued investment income 19.0 18.9
Due from affiliates 6.1 13.1
Reinsurance recoverable 73.2 67.8
Deferred policy acquisition 75.9 74.6
Value of business acquired 31.9 36.5
Sales inducements to contractholders 0.6 -
Deferred income taxes 17.6 7.1
Receivable for securities sold 12.5 20.2
Other assets 11.5 10.2
Assets held in separate accounts 546.4 520.6
--------------- ---------------
Total assets $ 3,053.3 $ 2,817.2
=============== ===============
The accompanying notes are an integral part of these financial statements.
4
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Condensed Balance Sheets
(Millions, except share data)
March 31, December 31,
2004 2003
--------------- ---------------
(Unaudited)
Liabilities and Shareholder's Equity
Policy liabilities and accruals:
Future policy benefits and claims' reserves $ 1,634.6 $ 1,614.3
Unearned premiums 0.4 0.3
Other policy claims and benefits payable 31.6 37.4
Other policyholder's funds 24.6 25.3
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Total liabilities and accruals 1,691.2 1,677.3
Current income taxes 7.8 3.7
Due to affiliates 10.0 -
Other borrowed money 222.9 103.4
Payables for securities purchased 39.9 -
Other liabilities 69.0 57.6
Liabilities related to separate accounts 546.4 520.6
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Total liabilities 2,587.2 2,362.6
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 1,193.3 1,200.1
Accumulated other comprehensive income 49.7 35.8
Retained deficit (779.7) (784.1)
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Total shareholder's equity 466.1 454.6
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Total liabilities and shareholder's equity $ 3,053.3 $ 2,817.2
=============== ===============
The accompanying notes are an integral part of these financial statements.
5
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Condensed Statements of Changes in Shareholder's Equity
(Unaudited)
(Millions)
Three months ended March 31,
2004 2003
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Shareholder's equity, beginning of period $ 454.6 $ 425.8
Comprehensive income:
Net income 4.4 11.1
Other comprehensive income net of tax:
Unrealized gain on securities ($21.4 and $13.7,
Pretax year to date) 13.9 8.9
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Total comprehensive income 18.3 20.0
Dividends paid (6.8) (6.0)
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Shareholder's equity, end of period $ 466.1 $ 439.8
============== ===============
The accompanying notes are an integral part of these financial statements.
6
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Condensed Statements of Cash Flows
(Unaudited)
(Millions)
Three months ended March 31,
2004 2003
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Net cash provided by operating activities $ 48.3 $ 47.3
Cash flows from investing activities
Proceeds from the sale maturities and
collections of:
Fixed maturities available for sale 719.3 733.1
Mortgage loan 7.7 5.1
Acquisition of investments:
Fixed maturities available for sale (774.2) (818.3)
Equity securities - (0.1)
Mortgages (12.8) (105.6)
Short-term investments (117.3) 0.2
Increase in policy loans (0.7) -
Other, net (0.6) (1.4)
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Net cash used for investing activities (178.6) (187.0)
--------------- --------------
Cash flows from financing activities
Deposits and interest credited for investment contracts 36.2 37.9
Maturities and withdrawals from insurance and investment contracts (21.0) (41.8)
Increase in borrowed money 119.5 173.9
Dividends to shareholders (6.8) (6.0)
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Net cash provided by financing activities 127.9 164.0
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Net increase (decrease) in cash and cash equivalents (2.4) 24.3
Cash and cash equivalents, beginning of period 10.4 2.4
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Cash and cash equivalents, end of period $ 8.0 $ 26.7
=============== ==============
The accompanying notes are an integral part of these financial statements.
7
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Condensed Financial Statements (Unaudited)
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1. Basis of Presentation
Until October 1, 2003, ReliaStar Life Insurance Company of New York ("RLNY"
or the "Company") was a wholly-owned subsidiary of Security-Connecticut
Life Insurance Company ("Security-Connecticut Life"), a Minnesota domiciled
insurance company, which provides financial products and services in the
United States. Effective October 1, 2003, Security-Connecticut merged with
and into ReliaStar Life Insurance Company ("ReliaStar Life") causing the
Company to be a direct subsidiary of ReliaStar Life. ReliaStar Life is a
wholly-owned subsidiary of Lion Connecticut Holdings Inc. ("Lion"), a
Connecticut holding and management company. Lion's ultimate parent is ING
Groep, N.V. ("ING"), a global financial services company based in The
Netherlands.
The condensed financial statements and notes as of March 31, 2004 and
December 31, 2003 and for the three-month periods ended March 31, 2004 and
2003 ("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
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 2003 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 2003 financial information to conform
to the 2004 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
The Company adopted Statement of Position ("SOP") 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts," on January 1, 2004. SOP 03-1
established several new accounting and disclosure requirements for certain
nontraditional long-duration contracts and for separate accounts including,
among other things, a requirement that assets and liabilities of separate
account arrangements that do not meet certain criteria be accounted for as
general account assets and liabilities, and the revenues and expenses
related to such arrangements be consolidated with the respective line items
in the statements of income. In addition, the SOP requires additional
liabilities be established for certain guaranteed death benefits and for
products with certain patterns of cost of insurance charges, and that sales
inducements provided to contractholders be recognized on the balance sheet
separately from deferred acquisition costs and amortized as a component of
benefits expense using methodology and assumptions consistent with those
used for amortization of deferred policy acquisition costs.
8
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Condensed Financial Statements (Unaudited)
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The Company evaluated all requirements of SOP 03-1 and determined that it
is affected by the SOP's requirements to account for certain separate
account arrangements as general account arrangements, to establish
additional liabilities for certain guaranteed benefits and for products
with patterns of cost of insurance charges that result in gains followed by
losses in later policy durations from the insurance benefit function, and
to defer and amortize sales inducements to contractholders. Upon adoption
of the SOP, the Company recognized a cumulative effect of a change in
accounting principle of $(10.8) million, before tax or $(7.0) million, net
of $3.8 million of income taxes, as of January 1, 2004.
In 2003, 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" 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 Company adopted DIG B36
on October 1, 2003. The Company has no investment or insurance products
that are applicable to require implementation of the guidance, and
therefore, the guidance has no impact on the Company's financial position,
results of operations or cash flows.
3. 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"). The Company
identified an overstatement of DAC/VOBA and unrecognized revenue ("URR") of
$4.1 million for RLNY ($4.4 million to VOBA, $0.1 million to DAC, and an
9
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
offset of $0.4 million to URR), which was amortized off during the first
quarter of 2004.
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 three months ended March 31, 2004 was as follows:
(Millions)
----------
Balance at December 31, 2003 $ 36.5
Adjustment for FAS No. 115 1.4
Interest accrued at 5% - 7% 0.1
Amortization (6.1)
--------------
Balance at March 31, 2004 $ 31.9
==============
VOBA activity for the three months ended March 31, 2003 was as follows:
(Millions)
------------
Balance at December 31, 2002 $ 48.2
Adjustment for FAS No. 115 2.7
Additions 1.0
Interest accrued at 5% - 7% 0.6
Amortization (2.0)
--------------
Balance at March 31, 2003 $ 50.5
==============
10.
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
4. Investments
Impairments
During the first three months of 2004, the Company determined that no fixed
maturities had other than temporary impairments. During the first three
months of 2003, the Company determined that seven fixed maturities had
other than temporary impairments. As a result, for the three months ended
March 31, 2003, the Company recognized a pre-tax loss of $4.6 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 March 31, 2003 was $6.5 million.
5. Separate Accounts
Separate Account assets and liabilities generally represent funds
maintained to meet specific investment objectives of contractholders who
bear the investment risk, subject, in limited cases, to minimum guaranteed
rates. Investment income and investment gains and losses generally accrue
directly to such contractholders. The assets of each account are legally
segregated and are not subject to claims that arise out of any other
business of the Company.
Separate Account assets supporting variable options under universal life
and annuity contracts are invested, as designated by the policyholder or
participant (who bears the investment risk subject, in limited cases, to
minimum guaranteed rates) under a contract in shares of mutual funds which
are managed by the Company, or in other selected mutual funds not managed
by the Company.
Separate Account assets and liabilities are carried at fair value and shown
as separate captions in the Consolidated Balance Sheets. Deposits,
investment income and net realized and unrealized capital gains and losses
of the Separate Accounts are not reflected in the Consolidated Financial
Statements (with the exception of realized and unrealized capital gains and
losses on the assets supporting the guaranteed interest option). The
Consolidated Statements of Cash Flows do not reflect investment activity of
the Separate Accounts.
Assets and liabilities of separate account arrangements that do not meet
the criteria in SOP 03-1 for separate presentation in the Condensed Balance
Sheets (those arrangements supporting the guaranteed interest option) were
reclassified to the general account on January 1, 2004, in accordance with
the SOP 03-1 requirements.
11.
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
6. Additional Insurance Benefits and Minimum Guarantees
Under SOP 03-1, the Company calculates additional liabilities ("SOP
reserves") for certain guaranteed benefits and for Universal Life products
with certain patterns of cost of insurance charges. The SOP reserve
recognized for such products is in addition to the liability previously
held (the Account Value) and is to recognize the portion of contract
assessments received in early years used to compensate the insurer for
services provided in later years.
In accordance with the methodology outlined in the SOP, the SOP reserve for
life insurance products is calculated using the same assumptions used in
the determination of estimated gross profits, according to which, deferred
acquisition costs are amortized. RLNY calculates a benefit ratio for each
block of business subject to the SOP, and calculates an SOP reserve by
accumulating amounts equal to the benefit ratio multiplied by the
assessments for each period, reduced by excess death benefits during the
period. The SOP reserve is accumulated at interest using the
contract-credited rate for the period. The calculated reserve includes a
provision for Universal Life contracts with patterns of cost of insurance
charges that produce expected gains from the insurance benefit function
followed by losses from that function in later years.
The SOP reserve for minimum guaranteed death benefits ("MGDB") is
determined each period by estimating the expected value of death benefits
in excess of the projected account balance and recognizing the excess
ratably over the accumulation period based on total expected assessments.
The company regularly evaluates estimates used to adjust the additional
liability balance, with a related charge or credit to benefit expense, if
actual experience or other evidence suggests that earlier assumptions
should be revised. The following assumptions and methodology were used to
determine the MGDB SOP reserve at March 31, 2004:
Area Assumptions/Basis for Assumptions
----------------------- ----------------------------------------
Data used Based on 101 investment performance
scenarios stratified based on
10,000 random generated scenarios
Mean investment performance 8.5%
Volatility 20.0%
Mortality 60.0% of the 90-95 ultimate
mortality table
Lapse rates Vary by contract type and duration;
range between 1.0% and 40.0%
Discount rates 6.5%, based on the portfolio earned
rate of the general account
As of March 31, 2004, the separate account liability for annuities subject
to SOP 03-1 due to minimum guaranteed benefits and the additional liability
recognized related to minimum guarantees is $190.7 million and $0.3
million, respectively. During the three months ended March 31, 2004,
incurred guaranteed benefits and paid guaranteed benefits were $0.0
million. The net amount at risk (net of reinsurance) is $4.0 million, and
the weighted average attained age of contractholders is 63, as of March 31,
2004.
12.
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
The aggregate fair value of assets is $190.7 million of public corporate
securities supporting separate accounts with additional insurance benefits
and minimum investment return guarantees as of March 31, 2004 are:
7. Sales Inducements
Sales inducements represent benefits paid to contractholders that are
incremental to the amounts the Company credits on similar contracts and are
higher than the contracts expected ongoing crediting rates for periods
after the inducement. As of January 1, 2004, such amounts are reported
separately on the balance sheet in accordance with SOP 03-01. Prior to
2004, sales inducements were recorded as a component of DAC on the
Condensed Balance Sheets. Sales inducements are amortized as a component of
benefit expense using methodology and assumptions consistent with those
used for amortization of DAC. During the three months ended March 31, 2004,
the Company capitalized and amortized $0.1 million of sales inducements.
The unamortized balance of capitalized sales inducements as of March 31,
2004 is $0.6 million.
8. Income Taxes
The effective tax rates for the three months ended March 31, 2004 and March
31, 2003, were 34.9% and 34.7%, respectively. These rates approximate the
federal income tax rate of 35.0%.
9. 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 March 31, 2004 and December 31, 2003, the Company had off-balance sheet
commitments to purchase investments equal to the fair value of $24.6
million and $28.9 million, respectively.
13.
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
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.
14.
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 March 31, 2004
and December 31, 2003 and for the three month periods ended March 31,
2004 and 2003. 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
2003 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
The Company adopted Statement of Position ("SOP") 03-1, "Accounting
and Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts," on January 1,
2004. SOP 03-1 establishes several new accounting and disclosure
requirements for certain nontraditional long-duration contracts and
for separate accounts including, among other things, a requirement
that assets and liabilities of separate account arrangements that do
not meet certain criteria be accounted for as general account assets
and liabilities. In addition, the SOP requires additional liabilities
be established for certain guaranteed death benefits and for products
with certain patterns of cost of insurance charges, and that sales
inducements provided to contractholders be recognized on the balance
sheet separately from deferred acquisition costs and amortized as a
component of benefits expense using methodology and assumptions
consistent with those used for amortization of deferred policy
acquisition costs.
The Company evaluated all requirements of SOP 03-1 and determined that
it is affected by the SOP's requirements to account for certain
separate account arrangements as general account arrangements, to
establish additional liabilities for certain guaranteed benefits and
for products with patterns of cost of insurance charges that result in
losses in later policy durations from the insurance benefit function,
and to defer and amortize sales inducements to contractholders. Upon
adoption of the SOP, the Company recognized a cumulative effect of a
change in accounting principle of $(10.8) million, before taxes, or
$(7.0) million, net of $3.8 million of income taxes as of January 1,
2004.
15
In 2003, 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"
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 Company adopted DIG B36 on
October 1, 2003. The Company has no investment or insurance products
that are applicable to require implementation of the guidance, and
therefore, the guidance has 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.
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.
16
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.
Sales Inducements
Sales inducements represent benefits paid to contractholders that are
incremental to the amounts the Company credits on similar contracts
and are higher than the contract's expected ongoing crediting rates
for periods after the inducement. Such amounts are reported separately
on the balance sheet and are amortized as a component of benefit
expense using methodology and assumptions consistent with those used
for amortization of DAC.
17
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 decreased by $3.3 million for the three months ended March
31, 2004, compared to the same period in 2003. The decrease in premium
was primarily attributable to ceding of premiums pursuant to a
reinsurance treaty; discontinuance of new sales and voluntary lapses
resulting from rate increases with respect to the payroll deduct
cancer product also contributed to the decrease in premiums.
Fee income for the three months ended March 31, 2004 decreased by $0.2
million compared to the same periods in 2003. The variance is
comparable to the same period of 2003.
Net investment income for the three months ended March 31, 2004
increased by $1.1 million compared to the same periods in 2003. This
variance is comparable to the same period of 2003.
18
Net realized capital gains for the three months ended March 31, 2004,
increased by $5.7 million compared to the same period in 2003. Net
realized gains results from sales of fixed maturity investments
having a fair value greater than book value. Additionally, the
Company experienced no impairments for the three months ended
March 31, 2004, compared to $4.6 million in impairments for the same
period in 2003.
Other income for the three months ended March 31, 2004, decreased by
$0.1 million compared to the same periods in 2003. This variance is
comparable to the same period of 2003.
Interest credited and other benefits to the policyholders for the
three months ended March 31, 2004, decreased by $1.7 million compared
to the same periods in 2003. This variance is comparable to the same
period of 2003.
Commissions expense for the three months ended March 31, 2004
decreased by $0.8 million compared to the same period in 2003. This
variance is primarily due to a decrease in life insurance sales in the
first quarter of 2004 compared to the first quarter of 2003 causing
commissions to also decrease. The variance is slightly offset by an
increase in commission expense due to an increase in variable annuity
sales.
Policy acquisition cost deferred for the three months ended March 31,
2004 decreased by $4.1 million compared to the same period in 2003.
Sales on interest sensitive life business for the three months ended
March 31, 2004, are down approximately 50% from the same period in
2003. This decrease in sales led to lower policy acquisition deferrals
for that block of business.
General expenses for the three months ended March 31, 2004 decreased
by $0.3 million compared to the same period in 2003. General expenses
for the three months ended March 31, 2003, is comparable to the same
period of 2003.
Amortization of deferred policy acquisition costs and value of
business acquired for the three months ended March 31, 2004, increased
by $1.4 million compared to the same period in 2003. 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.
The cumulative effect of the change in accounting principle for the
three months ended March 31, 2004, was $(7.0) million, net of tax, due
to the implementation of SOP 03-1.
Net income decreased by $6.7 million for the three months ended March
31, 2004, compared to the three months ended March 31, 2003. The
decrease is attributable primarily to the cumulative effect of the
change in accounting principle due to the implementation of SOP 03-1.
Other significant fluctuations were on increased net realized capital
gains offset by a decrease in deferred policy acquisition cost.
19
Financial Condition
Investments
Fixed Maturities
At March 31, 2004 and December 31, 2003, the Company's carrying value
of available for sale fixed maturities including securities pledged to
creditors (hereinafter referred to as "total fixed maturities")
represented 84.9% and 84.5%, respectively, of the total invested
assets for both periods. Total fixed maturities reflected net
unrealized capital gains of $96.8 million and $75.2 million at March
31, 2004 and December 31, 2003, 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 March 31, 2004 and December 31, 2003, 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.
The percentage of total fixed maturities by quality rating category is
as follows:
March 31, December 31,
2004 2003
------------- -------------
AAA 39.9 % 39.2 %
AA 4.9 5.7
A 22.9 22.3
BBB 26.8 26.9
BB 4.6 4.9
B and below 0.9 1.0
-------------- -------------
Total 100.0 % 100.0 %
============== =============
The percentage of total fixed maturities by market sector is as
follows:
March 31, December 31,
2004 2003
-------------- -------------
U.S. Corporate 51.8 % 53.0 %
Residential Mortgaged-Backed 23.6 23.4
U.S. Treasuries/Agencies 1.8 0.5
Foreign (1) 9.5 10.1
Commercial/Multifamily
Mortgage-Backed 6.5 6.7
Asset-Backed 6.8 6.3
-------------- -------------
Total 100.0 % 100.0 %
============== =============
(1) Primarily U.S. dollar denominated
20
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.
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
premiums, product charges, investment income, maturing investments,
proceeds from debt issuance, and capital contributions. Primary uses
of these funds are payments of commissions and operating expenses,
interest and premium credits, investment purchases and replacement of
debt, 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 a $103.8 million reciprocal loan agreement with ING AIH, a
perpetual $30.0 million revolving note facility with Bank of New York
and a $30.0 million revolving note facilities with SunTrust Bank,
which expires on July 30, 2004. Management believes that these sources
of liquidity are adequate to meet the Company's short-term cash
obligations.
The 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
21
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 tax position of the Company's products cannot be
predicted.
22
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.
23
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, the Company's affiliates
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.
24
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)
May 14, 2004 By /s/ David A. Wheat
(Date) ----------------------------------------------
David A. Wheat
Director, Senior Vice President and
Chief Financial Officer
25
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: May 14, 2004
By /s/ David A. Wheat
_____________________________________________
David A. Wheat
Director, 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 May 14, 2004
By /s/ James R. Gelder
-------------------------------------------------------------
James R. Gelder
Director, President and Chief Executive Officer
(Duly Authorized Officer and Principal Executive Officer)
Exhibit 32.1
CERTIFICATION
Pursuant to 18 U.S.C. ss.1350, the undersigned officer of ReliaStar Life
Insurance Company of New York (the "Company") hereby certifies that, to the
officer's knowledge, the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2004 (the "Report") fully complies with the requirements of
Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934
and that the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
May 14, 2004 By /s/ David A. Wheat
- ------------------ ----------------------------------------------
(Date) David A. Wheat
Director, Senior Vice President and
Chief Financial Officer
Exhibit 32.2
CERTIFICATION
Pursuant to 18 U.S.C. ss.1350, the undersigned officer of ReliaStar Life
Insurance Company of New York (the "Company") hereby certifies that, to the
officer's knowledge, the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2004 (the "Report") fully complies with the requirements of
Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934
and that the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
May 14, 2004 By /s/ James R. Gelder
- ------------------ ----------------------------------------------
(Date) James R. Gelder
Director, President and
Chief Executive Officer