UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
-------------
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: 333-114338
----------
ReliaStar Life Insurance Company of New York
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 53-0242530
- --------------------------------------------------------------------------------
State or other jurisdiction of incorporation or organization) (IRS employer
identification no.)
1000 Woodbury Road, Suite 208, Woodbury, New York 11797
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (516)682-8700
-------------
- --------------------------------------------------------------------------------
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 August 12, 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 June 30, 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 18
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
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 June 30, Six months ended June 30,
2004 2003 2004 2003
------------------------------- -------------------------------
Revenue:
Premiums $ 15.0 $ 16.8 $ 31.1 $ 36.2
Fee income 23.9 22.7 48.3 47.3
Net investment income 30.2 33.1 60.3 62.1
Net realized capital (losses) gains (0.3) 6.3 5.2 6.1
Other income (loss) 0.2 (0.2) 2.0 1.7
------------------------------- -------------------------------
Total revenue 69.0 78.7 146.9 153.4
------------------------------- -------------------------------
Benefits, losses and expenses:
Benefits:
Interest credited and other benefits to policyholders 45.0 37.4 87.6 81.7
Underwriting, acquisition, and insurance expenses:
Commissions 6.3 7.2 12.9 14.6
General expenses 12.8 9.1 23.5 20.1
Policy acquisition costs deferred (4.0) (7.7) (8.9) (16.7)
Amortization of deferred policy acquisition costs
and value of business acquired 8.0 7.9 13.4 11.9
------------------------------- -------------------------------
Total benefits, losses and expenses 68.1 53.9 128.5 111.6
------------------------------- -------------------------------
Income before income taxes and cumulative
effect of change in accounting principle 0.9 24.8 18.4 41.8
Income tax expense 0.3 8.7 6.4 14.6
------------------------------- -------------------------------
Income before cumulative effect of change in
accounting principle 0.6 16.1 12.0 27.2
Cumulative effect of change in accounting principle - - (7.0) -
------------------------------- -------------------------------
Net income $ 0.6 $ 16.1 $ 5.0 $ 27.2
=============================== ===============================
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)
June 30, December 31,
2004 2003
------------------ ------------------
(Unaudited)
Assets
Investments:
Fixed maturities, available for sale, at fair value
(amortized cost of $1,562.2 at 2004 and $1,642.8 at 2003) $ 1,593.7 $ 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 funds 2.5 2.5
Mortgage loans on real estate 208.2 209.7
Policy loans 88.6 86.6
Short-term investments - 0.2
Other investments 13.5 12.8
Securities pledged under securities lending agreement (amortized
cost of $149.8 at 2004 and $1.9 at 2003) 150.0 1.9
------------------ ------------------
Total investments 2,061.1 2,035.9
Cash and cash equivalents 38.0 10.4
Short-term investments under securities loan agreement 154.3 1.9
Accrued investment income 18.7 18.9
Due from affiliates - 13.1
Premium receivable 8.7 9.6
Reinsurance recoverable 78.2 58.2
Deferred policy acquisition costs 80.3 74.6
Value of business acquired 35.6 36.5
Sales inducements to contractholders 1.0 -
Current income taxes 1.2 -
Deferred income taxes 39.4 7.1
Receivable for securities sold - 20.2
Other assets 7.7 10.2
Assets held in separate accounts 542.6 520.6
------------------ ------------------
Total assets $ 3,066.8 $ 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)
June 30, December 31,
2004 2003
------------------ ------------------
Liabilities and Shareholder's Equity
Policy liabilities and accruals:
Future policy benefits and claims' reserves $ 1,677.4 $ 1,614.3
Unearned premiums 0.3 0.3
Other policy claims and benefits payable 54.5 37.4
Other policyholder's funds 24.5 25.3
------------------ ------------------
Total liabilities and accruals 1,756.7 1,677.3
Due to affiliates 7.7 -
Borrowed money 109.6 101.5
Note payable 11.7 -
Payable under securities loan agreement 154.3 1.9
Payables for securities purchased 19.1 -
Current income taxes - 3.7
Other liabilities 39.8 57.6
Liabilities related to separate accounts 542.6 520.6
----------------- -----------------
Total liabilities 2,641.5 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 1,186.5 1,200.1
Accumulated other comprehensive income 15.1 35.8
Retained deficit (779.1) (784.1)
----------------- -----------------
Total shareholder's equity 425.3 454.6
----------------- -----------------
Total liabilities and shareholder's equity $ 3,066.8 $ 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)
Six months ended June 30,
2004 2003
------------------ ------------------
Shareholder's equity, beginning of period $ 454.6 $ 425.8
Comprehensive income:
Net income 5.0 27.2
Other comprehensive income net of tax:
Unrealized gain (loss) on securities ($(31.8) and $21.7,
pretax year to date) (20.7) 13.9
------------------ ------------------
Total comprehensive income (15.7) 41.3
Dividends paid (13.6) (12.5)
------------------ ------------------
Shareholder's equity, end of period $ 425.3 $ 454.4
================== ==================
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)
Six months ended June 30,
2004 2003
------------------ ------------------
Net cash provided by operating activities $ 49.1 $ 33.1
Cash flows from investing activities
Proceeds from the sale, maturity, or redemption of:
Fixed maturities, available for sale 1,321.8 1,471.3
Mortgage loans on real estate 14.5 16.4
Short-term investments 130.5 1,062.5
Acquisition of investments:
Fixed maturities, available for sale (1,377.1) (1,560.1)
Equity securities (0.2) (0.2)
Mortgage loans on real estate (12.8) -
Short-term investments (130.3) (1.099.1)
Policy loans (2.0) -
Other - (2.7)
------------------ ------------------
Net cash used in investing activities (55.6) (111.9)
------------------ ------------------
Cash flows from financing activities
Deposits and interest credited for investment contracts 79.6 28.5
Maturities and withdrawals from insurance and investment contracts (51.7) (23.9)
Borrowed money 19.8 87.1
Intercompany dividends (13.6) (12.5)
------------------ ------------------
Net cash provided by financing activities 34.1 79.2
------------------ ------------------
Net increase in cash and cash equivalents 27.6 0.4
Cash and cash equivalents, beginning of period 10.4 2.4
------------------ ------------------
Cash and cash equivalents, end of period $ 38.0 $ 2.8
================== ==================
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)
- --------------------------------------------------------------------------------
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 June 30, 2004 and
December 31, 2003 and for the three and six-month periods ended June 30,
2004 and 2003 ("interim periods") have been prepared in accordance with
U.S. generally accepted accounting principles and are unaudited. The
condensed financial statements reflect all normal recurring adjustments,
which are, in the opinion of the management, necessary for the fair
presentation of the consolidated 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
Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts
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
8
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
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 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.
The Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments
In March 2004, the Emerging Issues Task Force ("EITF") reached a final
consensus on EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments," adopting a
three-step impairment model for securities within its scope. The three-step
model is to be applied on a security-by-security basis as follows:
Step 1: Determine whether an investment is impaired. An investment is
impaired if its fair value of the investment is less than its
cost basis.
Step 2: Evaluate whether an impairment is other-than-temporary.
Step 3: If the impairment is other-than-temporary, recognize an
impairment loss equal to the difference between the
investment's cost and its fair value.
The Company included this three-step model in the impairment evaluation for
the quarter ended June 30, 2004. This guidance resulted in no additional
impairments for the Company.
Earlier consensus reached by the EITF on this issue required that certain
quantitative and qualitative disclosures be made for unrealized losses on
debt and equity securities that have not been recognized as
other-than-temporary impairments. These disclosures were adopted by the
Company, effective December 31, 2003, and included in the Investments
footnote of the Notes to Consolidated Financial Statements included in the
Company's 2003 Form 10-K. In addition to the disclosure requirements
adopted by the Company effective December 31, 2003, the final consensus of
EITF 03-01 reached in March 2004 included additional disclosure
requirements that are effective for fiscal years ending after June 15,
2004.
9
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
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. New Accounting Pronouncements
The implementation of the American Institute of Certified Public
Accountants ("AICPA") SOP 03-01, "Accounting and Reporting by Insurance
Enterprises for certain Nontraditional Long-Duration Contracts and for
Separate Accounts," has raised questions regarding the interpretation of
the requirements of SFAS No. 97, concerning when it is appropriate to
record an unearned revenue liability related to the insurance benefit
function. To clarify its position, in June of 2004 the Financial Accounting
Standards Board ("FASB") issued FSP FAS 97-1, "Situations in which
paragraphs 17(b) and 20 of FASB Statement No. 97, Accounting and Reporting
by Insurance Enterprises for certain Long-Duration Contracts and for
Realized Gains and Losses from the Sale of Investments, Permit or Require
Accrual of an Unearned Revenue Liability." FSP FAS 97-1 outlines that SFAS
No. 97 is clear in its intent and language, and requires the recognition of
an unearned revenue liability for amounts that have been assessed to
compensate insurers for services provided over future periods. The
requirement of SOP 03-01 is not intended to amend or limit the requirement
of SFAS No. 97 to recognize a liability for unearned revenue only to those
situations where profits are expect to be followed by a loss. The guidance
contained in FSP FAS 97-1 is effective for financial statements with fiscal
periods beginning subsequent to July 18, 2004. The Company is currently
evaluating the impact of FSP FAS 97-1 and related accounting guidance and
anticipates a potential increase in the (net) liability established under
SOP 03-01 in future accounting periods.
10
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
4. Deferred Policy Acquisition Costs and Value of Business Acquired
Deferred Policy Acquisition Costs ("DAC") is an asset, which represents
certain costs of acquiring certain insurance business, which are deferred
and amortized. These costs, all of which vary with and are primarily
related to the production of new and renewal business, consist principally
of commissions, certain underwriting and contract issuance expenses, and
certain agency expenses. Value of business acquired ("VOBA") is an asset,
which represents the present value of estimated net cash flows embedded in
the Company's contracts, which existed at the time the Company was acquired
by ING. DAC and VOBA are evaluated for recoverability at each balance sheet
date and these assets would be reduced to the extent that gross profits are
inadequate to recover the asset.
The amortization methodology varies by product type based upon two
accounting standards: FAS No. 60, "Accounting and Reporting by Insurance
Enterprises" ("FAS No. 60") and FAS No. 97, "Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and Realized
Gains and Losses from the Sale of Investments" ("FAS No. 97"). The Company
identified an overstatement of DAC/VOBA and unearned revenue ("URR") of
$4.1 million for RLNY ($4.4 million to VOBA, $0.1 million to DAC, and an
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 six months ended June 30, 2004 was as follows:
(Millions)
Balance at December 31, 2003 $ 36.5
Adjustment for FAS No. 115 9.0
Additions 1.6
Interest accrued at 4% - 6% 1.4
Amortization (12.9)
------------------
Balance at June 30, 2003 $ 35.6
==================
11
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
VOBA activity for the six months ended June 30, 2003 was as follows:
Balance at December 31, 2002 $ 48.2
Adjustment for FAS No. 115 (3.4)
Additions 5.0
Interest accrued at 5% - 7% 0.5
Amortization (4.7)
------------------
Balance at June 30, 2004 $ 45.6
==================
5. Investments
Impairments
During the three months ended June 30, 2004, the Company determined that no
fixed maturities had other than temporary impairments. During the three
months ended June 30, 2003, the Company determined that 3 fixed maturities
had other than temporary impairments. As a result, for the three months
ended June 30, 2003, the Company recognized a pre-tax loss of $0.2 million
to reduce the carrying value of the fixed maturities to their fair value at
the time of impairment.
During the six months ended June 30, 2004, the Company determined that no
fixed maturities had other than temporary impairments. During the six
months ended June 30, 2003, the Company determined that 9 fixed maturities
had other than temporary impairments. As a result, for the six months ended
June 30, 2003, the Company recognized a pre-tax loss of $4.7 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 June 30, 2004
and 2003 is $5.3 million and $3.5 million, respectively.
6. 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.
12
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
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.
7. 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.
13
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
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 June 30, 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 18.0%
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 June 30, 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 $194.7 million and $0.3
million, respectively. During the six months ended June 30, 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 June 30, 2004.
The aggregate fair value of assets is $194.7 million of equity securities
(including mutual funds) supporting separate accounts with additional
insurance benefits and minimum investment return guarantees as of June 30,
2004.
8. 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 June 30, 2004,
the Company capitalized $0.5 and amortized $0.1 million of sales
inducements. During the six months ended June 30, 2004, the Company
capitalized $0.6 and amortized $0.2 million of sales inducements. The
unamortized balance of capitalized sales inducements as of June 30, 2004 is
$1.0 million.
14
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
9. Income Taxes
The effective tax rates for the three months ended June 30, 2004 and 2003
were 33.3% and 35.1%, respectively. The decrease in effective tax rate
resulted from significantly lower pre-tax earnings relative to a minor
refuction in the deduction allowed for dividends received.
The effective tax rates for the six months ended June 30, 2004 and 2003
were 34.8% and 34.9%, respectively, which approximates the federal income
tax rate of 35%.
10. Commitments and Contingent Liabilities
Commitments
Through the normal course of investment operations, the Company commits to
either purchase or sell securities, commercial mortgage loans or money
market instruments at a specified future date and at a specified price or
yield. The inability of counterparties to honor these commitments may
result in either higher or lower replacement cost. Also, there is likely to
be a change in the value of the securities underlying the commitments. The
Company makes investments in limited partnerships on a subscription basis.
At June 30, 2004 and December 31, 2003, the Company had off-balance sheet
commitments to purchase investments equal to the fair value of $18.7
million and $28.9 million, respectively.
Litigation
The Company is a party to threatened or pending lawsuits/arbitrations
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/arbitrations, in light of existing insurance, reinsurance and
established reserves, it is the opinion of management that the disposition
of such lawsuits/arbitrations will not have a materially adverse effect on
the Company's operations or financial position.
11. Reclassification and Changes to Prior Year Presentation
During 2004, certain changes were made to the 2003 Income Statement
presentation to reflect the correct balances. These changes were properly
reflected in the 12 months ended December 31, 2003, in the Form 10-K;
however, the 2003 unaudited quarterly data was not updated to reflect such
reclassifications. These changes had no impact on net income or net
15
shareholder's equity of the Company. The following summarizes
thecorrections to each financial statement line item for the first three
quarters of 2003 (in millions):
Three months ended March 31, 2003
Previously Restated
reported 2003 Adjustment 2003
Revenues:
Premiums $ 19.9 $ 0.5 $ 19.4
Fee income 24.9 0.3 24.6
Net investment income 28.6 (0.4) 29.0
Net realized capital gains (0.2) 0.0 (0.2)
Other 2.0 0.1 1.9
----------------------------------------
Total revenue $ 75.2 $ 0.5 $ 74.7
========================================
Benefits, losses and expenses:
Interest credited and other
benefits to policyholders $ 43.8 $ (0.5) $ 44.3
General expenses 10.4 1.0 9.4
Amortization of DAC/VOBA 4.0 0.0 4.0
----------------------------------------
Total expenses $ 58.2 $ 0.5 $ 57.7
========================================
Six months ended June 30, 2003
Previously Restated
reported 2003 Adjustment 2003
Revenues:
Premiums $ 41.4 $ 5.2 $ 36.2
Fee income 47.4 0.1 47.3
Net investment income 62.1 0.0 62.1
Net realized capital gains 6.1 0.0 6.1
Other 4.3 2.6 1.7
----------------------------------------
Total revenue $ 161.3 $ 7.9 $153.4
========================================
Benefits, losses and expenses:
Interest credited and other
benefits to policyholders $ 85.9 $ 4.2 $ 81.7
General expenses 21.7 3.7 18.0
Amortization of DAC/VOBA 11.9 0.0 11.9
----------------------------------------
Total expenses $ 119.5 $ 7.9 $111.6
========================================
16
Nine months ended September 30, 2003
Previously Restated
reported 2003 Adjustment 2003
Revenues:
Premiums $ 60.3 $ 3.8 $ 56.5
Fee income 69.0 (2.1) 71.1
Net investment income 92.1 (1.6) 93.7
Net realized capital gains 7.1 0.0 7.1
Other 6.1 2.1 4.0
----------------------------------------
Total revenue $ 234.6 $ 2.2 $ 232.4
========================================
Benefits, losses and expenses:
Interest credited and other
benefits to policyholders $ 122.9 $ (2.4) $125.3
General expenses 32.8 4.6 28.2
Amortization of DAC/VOBA 21.7 0.0 21.7
----------------------------------------
Total expenses $ 177.4 $ 2.2 $175.2
========================================
17
Item 2. Management's Narrative Analysis of the Results of Operations
and Financial Condition
Overview
The following narrative analysis of the results of operations and
financial condition presents a review of the ReliaStar Life Insurance
Company of New York ("RLNY", or the "Company") as of June 30, 2004 and
December 31, 2003 and for the three and six month periods ended June
30, 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
Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts
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.
18
The Meaning of Other-Than-Temporary Impairment and its Application to
Certain Investments
In March 2004, the Emerging Issues Task Force ("EITF") reached a final
consensus on EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments," adopting a
three-step impairment model for securities within its scope. The
three-step model is to be applied on a security-by-security basis as
follows:
Step 1: Determine whether an investment is impaired. An investment is
impaired if its fair value of the investment is less than
its cost basis.
Step 2: Evaluate whether an impairment is other-than-temporary.
Step 3: If the impairment is other-than-temporary, recognize
an impairment loss equal to the difference between the
investment's cost and its fair value.
The Company included this three-step model in the impairment
evaluation for the quarter ended June 30, 2004. This guidance resulted
in no additional impairments for the Company.
Earlier consensus reached by the EITF on this issue required that
certain quantitative and qualitative disclosures be made for
unrealized losses on debt and equity securities that have not been
recognized as other-than-temporary impairments. These disclosures were
adopted by the Company, effective December 31, 2003, and included in
the Investments footnote of the Notes to Consolidated Financial
Statements included in the Company's 2003 Form 10-K. In addition to
the disclosure requirements adopted by the Company effective December
31, 2003, the final consensus of EITF 03-01 reached in March 2004
included additional disclosure requirements that are effective for
fiscal years ending after June 15, 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.
19
New Accounting Pronouncements
The implementation of the American Institute of Certified Public
Accountants ("AICPA") SOP 03-01, "Accounting and Reporting by
Insurance Enterprises for certain Nontraditional Long-Duration
Contracts and for Separate Accounts," has raised questions regarding
the interpretation of the requirements of SFAS No. 97, concerning when
it is appropriate to record an unearned revenue liability related to
the insurance benefit function. To clarify its position, in June of
2004 the Financial Accounting Standards Board ("FASB") issued FSP FAS
97-1, "Situations in which paragraphs 17(b) and 20 of FASB Statement
No. 97, Accounting and Reporting by Insurance Enterprises for certain
Long-Duration Contracts and for Realized Gains and Losses from the
Sale of Investments, Permit or Require Accrual of an Unearned Revenue
Liability." FSP FAS 97-1 outlines that SFAS No. 97 is clear in its
intent and language, and requires the recognition of an unearned
revenue liability for amounts that have been assessed to compensate
insurers for services provided over future periods. The requirement of
SOP 03-01 is not intended to amend or limit the requirement of SFAS
No. 97 to recognize a liability for unearned revenue only to those
situations where profits are expect to be followed by a loss. The
guidance contained in FSP FAS 97-1 is effective for financial
statements with fiscal periods beginning subsequent to July 18, 2004.
The Company is currently evaluating the impact of FSP FAS 97-1 and
related accounting guidance and anticipates a potential increase in
the (net) liability established under SOP 03-01 in future accounting
periods.
Critical Accounting Policies
General
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles 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.
20
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.
21
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.
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 for the three and six months ended June 30, 2004 decreased by
$1.8 million and $5.1 million, respectively, compared to the same
periods in 2003. The decrease in premium was primarily attributable to
ceding of premiums pursuant to a reinsurance treaty. The
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.
22
Fee income for the three and six months ended June 30, 2004 is
comparable to that for the same periods in 2003.
Net investment income for the three and six months ended June 30, 2004
is comparable to that for the same periods in 2003.
Net realized capital gains for the three months ended June 30, 2004
decreased by $6.6 million compared to the same period in 2003. The
decrease in capital gains is largely due to the interest rate
environment. Interest rates increased during the second quarter 2004,
resulting in higher net losses and a decrease in net realized capital
gains. Net realized capital gains for the six months ended June 30,
2004 decreased by $0.9 million, compared to the same period in 2003.
Interest rates decreased during the first quarter 2004 compared to the
fourth quarter of 2003, resulting in higher net realized gains during
the first quarter of 2004. Additionally, increased interest rates
during the second quarter of 2004, caused further decreases for the
year to date net realized capital gains.
Other income for the three and six months ended June 30, 2004 is
comparable to that for the same periods in 2003.
Interest credited and other benefits to the policyholders for the
three and six months ended June 30, 2004 increased by $7.6 million and
$5.9 million, respectively, compared to the same periods in 2003. This
increase is primarily the result of a large claim in the retail life
business incurred during the three months ended June 30, 2004. This
claim was not reinsured and the Company retained the full effect of
the claim.
Commission expense for the three and six months ended June 30, 2004
decreased by $0.9 million and $1.7 million, respectively, compared to
the same periods in 2003. This variance is primarily due to a decrease
in life insurance sales during 2004 compared to the same periods in
2003, causing commissions to decrease. This decrease is partially
offset by an increase in commission expense due to an increase in
variable annuity sales.
Policy acquisition cost deferred for the three and six months ended
June 30, 2004 decreased by $3.7 million and $7.8 million,
respectively, compared to the same periods in 2003. Sales on interest
sensitive life business for the periods ended June 30, 2004, are down
approximately 57% from the same periods 2003. This decrease in sales
led to lower policy acquisition deferrals for that block of business.
General expenses for the three and six months ended June 30, 2004,
increased by $3.7 million and $3.4 million, respectively, compared to
the same periods in 2003. The unfavorable expense variance is due to
staff expenses, allocations from affiliates and lower reinsurance
ceding fees.
23
Amortization of deferred policy acquisition costs and value of
business acquired for the three and six months ended June 30, 2004,
increased by $0.1 million and $1.5 million, respectively, compared to
the same periods in 2003. Amortization of long-duration products is
reflected 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 six
months ended June 30, 2004,was a loss of $7.0, net of tax, due to the
implementation of SOP 03-1. The change in accounting principle was
taken during the first quarter of 2004.
Net income for the three months ended June 30, 2004, decreased by
$15.5 million compared to the same period in 2003. This decrease is
primarily due to declines in net investment income and net realized
capital gains, as well as increases in interest credited and other
benefits to policyholders and general expenses. Net income for the six
months ended June 30, 2004, decreased by $22.2 million compared to the
same period in 2003. This decrease is attributable to the cumulative
effect of the change in accounting principle, to decreased net
investment income, and net realized capital gains, as well as
increased interest credited and other benefits to policyholders and
general expenses.
Financial Condition
Investments
Fixed Maturities
At June 30, 2004 and December 31, 2003, the Company's carrying value
of available for sale fixed maturities including securities pledged
under securities lending agreement (hereinafter referred to as "total
fixed maturities") represented 84.6% and 84.5%, respectively, of the
total invested assets for both periods. Total fixed maturities
reflected net unrealized capital gains of $31.6 million and $84.9
million at June 30, 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 AA- and A+ at June 30, 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.
24
The percentage of total fixed maturities by quality rating category is
as follows:
June 30, December 31,
2004 2003
-------------- -------------
AAA 40.9% 39.2%
AA 5.0 5.7
A 22.8 22.3
BBB 26.5 26.9
BB 4.0 4.9
B and below 0.8 1.0
-------------- -------------
Total 100.0% 100.0%
============== =============
The percentage of total fixed maturities by market sector is as
follows:
June 30, December 31,
2004 2003
-------------- -------------
U.S. Corporate 48.9% 53.0%
Residential Mortgaged-Backed 23.6 23.4
U.S. Treasuries/Agencies 5.5 0.5
Foreign (1) 8.2 10.1
Commercial/Multifamily Mortgage-Backed 6.9 6.7
Asset-backed 6.9 6.3
-------------- -------------
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.
25
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
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.
26
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.
27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to threatened or pending lawsuits/arbitrations
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/arbitrations, in light of existing
insurance, reinsurance and established reserves, it is the opinion of
management that the disposition of such lawsuits/arbitrations 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.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RELIASTAR LIFE INSURANCE COMPANY OF
NEW YORK
(Registrant)
August 12, 2004 By:/s/ David A. Wheat
- --------------- -------------------------------------------
(Date) David A. Wheat
Director, Senior Vice President and
Chief Financial Officer
29
Exhibit 31.1
CERTIFICATION
I, David A. Wheat, certify that:
1. I have reviewed this quarterly report on ;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 12, 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 Form 10-Q of
ReliaStar Life Insurance Company of New York;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date August 12, 2004
---------------
By
/s/ James R. Gelder
-------------------------------------
James R. Gelder
Director, President and Chief Executive Officer
(Duly Authorized Officer and Principal Executive Officer)