UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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: 333-114338
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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 (IRS employer identification no.)
of incorporation or organization)
1000 Woodbury Road, Suite 208, Woodbury, New York 11797
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (516)682-8700
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Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 1,377,863 shares of Common
Stock as of November 12, 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 September 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 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 6. Exhibits 29
Signatures 31
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 September 30, Nine months ended September 30,
2004 2003 2004 2003
------------------ ----------------- ------------------ -----------------
Revenue:
Premiums $ 16.7 $ 20.3 $ 47.8 $ 56.5
Fee income 23.6 23.8 71.9 71.1
Net investment income 32.7 31.6 93.0 93.7
Net realized capital gains 1.3 1.0 6.5 7.1
Other income 1.3 2.3 3.3 4.0
------------------ ----------------- ------------------ -----------------
Total revenue 75.6 79.0 222.5 232.4
Benefits, losses and expenses:
Benefits:
Interest credited and other
benefits to policyholders 46.1 43.6 133.7 125.3
Underwriting, acquisition, and
insurance expenses:
Commissions 3.8 7.2 16.7 21.8
General expenses 11.0 10.7 34.5 30.8
Policy acquisition costs deferred (2.5) (7.7) (11.4) (24.4)
Amortization of deferred
policy acquisition costs and
value of business acquired 0.3 9.8 13.7 21.7
------------------ ----------------- ------------------ -----------------
Total benefits, losses and expenses 58.7 63.6 187.2 175.2
------------------ ----------------- ------------------ -----------------
Income before income taxes
and cumulative effect of change
in accounting principle 16.9 15.4 35.3 57.2
Income tax expense 5.9 5.3 12.3 19.9
------------------ ----------------- ------------------ -----------------
Income before cumulative effect of
change in accounting principle 11.0 10.1 23.0 37.3
Cumulative effect of change
in accounting principle - - (7.0) -
------------------ ----------------- ------------------ -----------------
Net income $ 11.0 $ 10.1 $ 16.0 $ 37.3
================== ================= ================== =================
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)
September 30, December 31,
2004 2003
-------------------- ------------------
(Unaudited)
Assets
Investments:
Fixed maturities, available for sale, at fair value (amortized
cost of $1,520.9 at 2004 and $1,538.5 at 2003) $ 1,584.7 $ 1,614.2
Equity securities, available for sale, at fair value:
Common stock (cost of $0.4 at 2004 and 2003) 0.6 0.2
Preferred stock (cost of $4.0 at 2004 and 2003) 4.0 4.0
Investment in mutual fund 2.5 2.5
Mortgage loans on real estate 204.6 209.7
Policy loans 89.3 86.6
Short-term investments - 0.2
Other investments 18.0 12.8
Securities pledged (amortized cost of $173.9 at 2004 and $106.2 at 2003) 173.9 105.7
-------------------- ------------------
Total investments 2,077.6 2,035.9
Cash and cash equivalents 23.9 10.4
Short-term investments under securities loan agreement 75.5 1.9
Accrued investment income 18.1 18.9
Due from affiliates 6.0 13.1
Premium receivable 7.4 9.6
Reinsurance recoverable 85.2 58.2
Deferred policy acquisition costs 81.0 74.6
Value of business acquired 30.7 36.5
Sales inducements to contractholders 1.1 -
Deferred income taxes 29.4 20.2
Receivable for securities sold 16.6 7.1
Other assets 8.4 10.2
Assets held in separate accounts 533.3 520.6
-------------------- ------------------
Total assets $ 2,994.2 $ 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)
September 30, December 31,
2004 2003
-------------------- ------------------
(Unaudited)
Liabilities and Shareholder's Equity
Policy liabilities and accruals:
Future policy benefits and claims reserves $ 1,701.4 $ 1,614.3
Unearned premiums 0.3 0.3
Other policy claims and benefits payable 55.4 37.4
Other policyholder's funds 16.0 25.3
-------------------- ------------------
Total liabilities and accruals 1,773.1 1,677.3
Due to affiliates 4.1 -
Borrowed money 100.3 101.5
Dividend payable 6.8 -
Note payable 0.8 -
Payable under securities loan agreement 75.5 1.9
Payables for securities purchased 16.0 -
Current income taxes 0.9 3.7
Other liabilities 37.2 57.6
Liabilities related to separate accounts 533.3 520.6
-------------------- ------------------
Total liabilities 2,548.0 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 1,179.7 1,200.1
Accumulated other comprehensive income 31.8 35.8
Retained deficit (768.1) (784.1)
-------------------- ------------------
Total shareholder's equity 446.2 454.6
-------------------- ------------------
Total liabilities and shareholder's equity $ 2,994.2 $ 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)
Nine months ended September 30,
2004 2003
------------------ ------------------
Shareholder's equity, beginning of period $ 454.6 $ 425.8
Comprehensive income:
Net income 16.0 37.3
Other comprehensive income net of tax:
Unrealized loss on securities ($(6.2) and $(1.4),
pretax year to date) (4.0) (0.9)
------------------ ------------------
Total comprehensive income 12.0 36.4
Dividends paid (20.4) (19.0)
------------------ ------------------
Shareholder's equity, end of period $ 446.2 $ 443.2
================== ==================
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)
Nine months ended September 30,
2004 2003
------------------ ------------------
Net cash (used for) provided by operating activities $ (8.1) $ 38.8
Cash flows from investing activities
Proceeds from the sale, maturity, and redemption of:
Fixed maturities, available for sale 2,022.5 2,117.2
Mortgage loans on real estate 18.2 21.1
Short-term investments 533.8 2,212.2
Acquisition of investments:
Fixed maturities, available for sale (2,059.9) (2,226.9)
Mortgage loans on real estate (12.8) (2.7)
Short-term investments (533.6) (2,309.4)
Policy loans (2.7) (0.6)
Other (4.5) (2.4)
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Net cash used for investing activities (39.0) (191.5)
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Cash flows from financing activities
Deposits and interest credited for investment contracts 131.1 31.3
Maturities and withdrawals from investment contracts (56.5) (6.9)
Borrowed money (0.4) 173.0
Intercompany dividends (13.6) (19.0)
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Net cash provided by financing activities 60.6 178.4
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Net increase in cash and cash equivalents 13.5 25.7
Cash and cash equivalents, beginning of period 10.4 2.4
------------------- -------------------
Cash and cash equivalents, end of period $ 23.9 $ 28.1
=================== ===================
The accompanying notes are an integral part of these financial statements.
7
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 September 30, 2004 and
December 31, 2003 and for the three and nine-month periods ended September
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 may
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
separately from deferred acquisition costs and amortized as a component of
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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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 implementation of SOP 03-1 raised questions regarding the
interpretation of the requirements of Financial Accounting Standard ("FAS")
No. 97, concerning when it is appropriate to record an unearned revenue
liability related to the insurance benefit function. To clarify its
position, the Financial Accounting Standards Board ("FASB") issued FASB
Staff Position No. FAS 97-1 ("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," effective for fiscal periods
beginning subsequent to the date the guidance was issued, June 18, 2004.
The Company adopted FSP FAS 97-1 on July 1, 2004 and has evaluated the
impact of the guidance on whether the Company is required to establish an
unearned revenue reserve on its existing and new business. The adoption of
FSP FAS 97-1 did not have an impact on the Company's financial position,
results of operations or cash flows.
The Meaning of Other Than Temporary Impairment and its Application to
Certain Investments
In March 2004, the Emerging Issues Task Force ("EITF") reached a consensus
on EITF Issue No. 03-1 ("EITF 03-1"), "The Meaning of Other Than Temporary
Impairment and Its Application to Certain Investments," requiring that a
three-step impairment model be applied to 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 the 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.
9
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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On September 30, 2004, the FASB issued FASB Staff Position No. EITF Issue
03-1-1 ("FSP EITF 03-1-1"), "Effective Date of Paragraphs 10-20 of EITF
Issue No. 03-1, `The Meaning of Other Than Temporary Impairment and Its
Application to Certain Investments,'" which delayed EITF 03-1's original
effective date of July 1, 2004 for the paragraphs of the guidance
surrounding steps two and three of the impairment model introduced. The
delay is in effect until a final consensus can be reached on such guidance.
Despite the delay of the implementation of steps two and three, other than
temporary impairments are still to be recognized as required by existing
guidance.
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
December 31, 2003 Form 10-K. In addition to the disclosure requirements
adopted by the Company effective December 31, 2003, the final consensus of
EITF 03-1 reached in March 2004 included additional disclosure requirements
that are effective for annual financial statements for fiscal years ending
after June 15, 2004.
3. New Accounting Pronouncements
In September 2004, the AICPA issued Technical Practice Aid 6300.05 -
6300.08 "Q&As Related to the Implementation of SOP 03-1, Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration
Contracts and for Separate Accounts" (the "TPA"). The TPA provides
additional guidance regarding certain implicit assessments that may be used
in testing of the base mortality function on contracts, which is performed
to determine whether additional liabilities are required in conjunction
with SOP 03-1. In addition, the TPA provides additional guidance
surrounding the allowed level of aggregation of additional liabilities
determined under the SOP. The Company is currently evaluating the impact of
the TPA on the cumulative effect of a change in accounting principle
recognized on January 1, 2004 and anticipates a potential decrease in the
net liability established as part of the accounting change. The TPA will be
fully implemented during the fourth quarter 2004 and will be reported as a
cumulative effect of a change in accounting principle applied retroactively
to January 1, 2004.
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
10
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
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 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 nine months ended September 30, 2004 was as follows:
(Millions)
Balance at December 31, 2003 $ 36.5
Adjustment for FAS No. 115 4.0
Additions 2.4
Interest accrued at 4% - 6% 2.0
Amortization (14.2)
-----------------
Balance at September 30, 2004 $ 30.7
=================
11
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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VOBA activity for the nine months ended September 30, 2003 was as follows:
(Millions)
Balance at December 31, 2002 $ 48.2
Adjustment for FAS No. 115 1.3
Additions 1.0
Interest accrued at 5% - 7% 0.4
Amortization (12.0)
-----------------
Balance at September 30, 2003 $ 38.9
=================
5. Investments
Impairments
During the three months ended September 30, 2004, the Company determined
that 1 fixed maturity had other than temporary impairments. As a result,
for the three months ended September 30, 2004, the Company recognized a
pre-tax loss of $0.7 million to reduce the carrying value of the fixed
maturity to its fair value at the time of impairment. During the three
months ended September 30, 2003, the Company determined that no fixed
maturities had other than temporary impairments.
During the nine months ended September 30, 2004, the Company determined
that 1 fixed maturity had other than temporary impairments. As a result,
for the nine months ended September 30, 2004, the Company recognized a
pre-tax loss of $0.7 million to reduce the carrying value of the fixed
maturity to its fair value at the time of impairment. During the nine
months ended September 30, 2003, the Company determined that 9 fixed
maturities had other than temporary impairments. As a result, for the nine
months ended September 30, 2003, the Company recognized a pre-tax loss of
$4.8 million to reduce the carrying value of the fixed maturities to their
fair value at the time of impairment.
The fair value of the remaining impaired fixed maturities at September 30,
2004 and 2003 is $7.6 million and $1.9 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)
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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 September 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 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 September 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 $196.9 million and
$0.3 million, respectively. During the nine months ended September 30,
2004, incurred guaranteed benefits and paid guaranteed benefits were $30.0
thousand and $11.0 thousand, respectively. The net amount at risk (net of
reinsurance) is $24.5 million, and the weighted average attained age of
contractholders is 63, as of September 30, 2004.
The aggregate fair value of assets is $196.9 million of equity securities
(including mutual funds) supporting separate accounts with additional
insurance benefits and minimum investment return guarantees as of September
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 September 30,
2004, the Company capitalized $0.3 million and amortized $0.2 million of
sales inducements. During the nine months ended September 30, 2004, the
Company capitalized $0.9 million and amortized $0.4 million of sales
inducements. The unamortized balance of capitalized sales inducements as of
September 30, 2004 is $1.1 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 rate for both the three months ended September 30, 2004
and September 30, 2003 was 34.9% and 34.4%, respectively, which
approximates the federal income tax rate of 35%.
The effective tax rate for both the nine months ended September 30, 2004
and September 30, 2003 was 34.8%, 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 September 30, 2004 and December 31, 2003, the Company had off-balance
sheet commitments to purchase investments equal to the fair value of $17.0
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.
15
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
11. Reclassification and Changes in Prior Year Presentation
During 2004, certain changes were made to the 2003 Income Statement
presentation to conform to present year presentation. 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
shareholder's equity of the Company. The following summarizes the changes
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 losses (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
================= ================= =================
16
ReliaStar Life Insurance Company of New York
(A wholly-owned subsidiary of ReliaStar Life Insurance Company)
Notes to Condensed Financial Statements (Unaudited)
- --------------------------------------------------------------------------------
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
================= ================= =================
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 September 30,
2004 and December 31, 2003 and for the three and nine month periods
ended September 30, 2004 and September 30, 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 implementation of SOP 03-1 raised questions regarding the
interpretation of the requirements of Financial Accounting Standard
("FAS") No. 97, concerning when it is appropriate to record an
unearned revenue liability related to the insurance benefit function.
To clarify its position, the Financial Accounting Standards Board
("FASB") issued FASB Staff Position No. FAS 97-1 ("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," effective for fiscal periods beginning subsequent to the
date the guidance was issued, June 18, 2004. The Company adopted FSP
FAS 97-1 on July 1, 2004 and has evaluated the impact of the guidance
on whether the Company is required to establish an unearned revenue
reserve on its existing and new business. The adoption of FSP FAS 97-1
did not have an impact on the Company's financial position, results of
operations or cash flows.
The Meaning of Other Than Temporary Impairment and its Application to
Certain Investments
In March 2004, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 03-1 ("EITF 03-1"), "The Meaning of Other
Than Temporary Impairment and Its Application to Certain Investments,"
requiring that a three-step impairment model be applied to 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 the 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.
On September 30, 2004, the FASB issued FASB Staff Position No. EITF
Issue 03-1-1 ("FSP EITF 03-1-1"), "Effective Date of Paragraphs 10-20
of EITF Issue No. 03-1, `The Meaning of Other Than Temporary
Impairment and Its Application to Certain Investments,'" which delayed
EITF 03-1's original effective date of July 1, 2004 for the paragraphs
of the guidance surrounding steps two and three of the impairment
model introduced. The delay is in effect until a final consensus can
be reached on such guidance. Despite the delay of the implementation
of steps two and three, other than temporary impairments are still to
be recognized as required by existing guidance.
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 December 31, 2003 Form 10-K. In
addition to the disclosure requirements adopted by the Company
effective December 31, 2003, the final consensus of EITF 03-1 reached
in March 2004 included additional disclosure requirements that are
effective for annual financial statements for fiscal years ending
after June 15, 2004.
19
New Accounting Pronouncements
In September 2004, the AICPA issued Technical Practice Aid 6300.05 -
6300.08 "Q&As Related to the Implementation of SOP 03-1, Accounting
and Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts" (the "TPA"). The
TPA provides additional guidance regarding certain implicit
assessments that may be used in testing of the base mortality function
on contracts, which is performed to determine whether additional
liabilities are required in conjunction with SOP 03-1. In addition,
the TPA provides additional guidance surrounding the allowed level of
aggregation of additional liabilities determined under the SOP. The
Company is currently evaluating the impact of the TPA on the
cumulative effect of a change in accounting principle recognized on
January 1, 2004 and anticipates a potential decrease in the net
liability established as part of the accounting change. The TPA will
be fully implemented during the fourth quarter 2004 and will be
reported as a cumulative effect of a change in accounting principle
applied retroactively to January 1, 2004.
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 nine months ended September 30, 2004
decreased by $3.6 million and $8.7 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 nine months ended September 30, 2004 is
comparable to that for the same periods in 2003.
Net investment income for the three and nine months ended September
30, 2004 is comparable to that for the same periods in 2003.
Net realized capital gains for the three months ended September 30,
2004 increased by $0.3 million is comparable to the same period in
2003. Net realized capital gains decreased $0.6 million for the nine
months ended September 30, 2004 compared to the nine months ended
September 30, 2003, primarily due to a decrease in the year-to-date
average interest rate. A year-to-date average interest rate
measurement is analyzed when interest rates do not show either a
steady increase or decrease within a period of time. In a declining
rate environment, the market value of fixed maturities held in the
Company's portfolio increases, assuming no credit deterioration. In a
rising rate environment, the market value of fixed maturities held
decreases. The fluctuations in net realized gains reflect the impact
of the interest rate environment on the overall sale of fixed
maturities during the respective time periods.
Other income for the three and nine months ended September 30, 2004 is
comparable to that for the same periods in 2003.
Interest credited and other benefits to the policyholders for the
three months ended September 30, 2004 increased by $2.5 million
compared to the same period in 2003. This increase is the result of
higher future policy benefits and claim reserve. Interest credited and
other benefits to the policyholders for the nine months ended
September 30, 2004 increased by $8.4 million compared to the same
period in 2003. This increase is primarily the result of a large claim
in the retail life business incurred during 2004.
Commission expense for the three and nine months ended September 30,
2004 decreased by $3.4 million and $5.1 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 nine months ended
September 30, 2004 decreased by $5.2 million and $13.0 million,
respectively, compared to the same periods in 2003. Sales on interest
sensitive life business for the periods ended September 30, 2004, are
down approximately 60% 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 nine months ended September 30,
2004, increased by $0.3 million and $3.7 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 nine months ended September 30,
2004, decreased by $9.5 million and $8.0 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 decrease in the
amortization of deferred policy acquisition costs and value of
insurance acquired reflects the impact of these variables on the
overall book of business.
The cumulative effect of the change in accounting principle for nine
months ended September 30, 2004, was a charge of $7.0 million, net of
tax, due to the implementation of SOP 03-1, which was adopted during
the first quarter of 2004.
Net income for the three months ended September 30, 2004, increased by
$0.9 million compared to the same period in 2003. This increase is
primarily due to decreased amortization of deferred acquisition cost.
Net income for the nine months ended September 30, 2004, decreased by
$21.3 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 September 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 $63.8 million and $84.9
million at September 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 A+ at September 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:
September 30, December 31,
2004 2003
----------------- ------------------
AAA 39.9 % 39.2 %
AA 4.8 5.7
A 24.1 22.3
BBB 26.8 26.9
BB 3.7 4.9
B and below 0.7 1.0
----------------- ------------------
Total 100.0 % 100.0 %
================= ==================
The percentage of total fixed maturities by market sector is as
follows:
September 30, December 31,
2004 2003
----------------- ------------------
U.S. Corporate 48.0 % 53.0 %
Residential Mortgaged-Backed 22.7 23.4
U.S. Treasuries/Agencies 3.7 0.5
Foreign (1) 11.7 10.1
Commercial/Multifamily
Mortgage-Backed 7.0 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 America
Insurance Holdings Inc., a Delaware corporation and affiliate, a
perpetual $30.0 million revolving note facility with Bank of New York
and a $30.0 million revolving note facility with SunTrust Bank, which
expires on July 30, 2005. 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 second quarter 2003, 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.
On October 22, 2004, the President signed the American Jobs Creation
Act of 2004. The act allows tax-free distributions to be made from the
Policyholders' Surplus Account in 2005 and 2006. Under prior law, the
Company was allowed to defer from taxation a portion of statutory
income under certain circumstances. The deferred income was
accumulated in the Policyholders' Surplus Account and is taxable only
under conditions that management considers to be remote. Therefore, no
federal income taxes have been provided on the accumulated balance of
$11.3 million as of September 30, 2004. Based on currently available
information, the Company anticipates that the new law will permanently
eliminate any tax on the accumulated balance of $11.3 million.
26
Other legislative proposals under consideration include repealing the
estate tax, changing the taxation of products and changing life
insurance company taxation. Some of these proposals, if enacted, could
have a material effect on life insurance, annuity and other retirement
savings product sales. The impact on the Company's products cannot be
predicted.
27
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.
28
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 and its
affiliates have received informal and formal requests for information
from various governmental and self-regulatory agencies in connection
with investigations of the products and business practices of the
financial services industry. In each case, full cooperation has been
and is being provided. Reference is made to "Other Regulatory Matters"
in Note 12 to the Notes to Financial Statements in Part II, Item 8 of
the Company's Form 10-K Annual Report, filed on March 29, 2004 (SEC
File No. 333-75938); the Company's Form 8-K/A Current Report filed on
September 8, 2004 (SEC File No. 333-75938); and the Company's Form 8-K
Current Report filed on October 29, 2004 (SEC File No. 333-75938).
Item 6. Exhibits
3.(i)Articles of Incorporation of RLNY, incorporated by reference from
Exhibit 3 (a) to a Pre-Effective Amendment No. 1 of Registrant's
Registration Statement on Form S-1 filed with the SEC on or about
April 1, 2002 (File No. 333-75938).
(ii)By-laws of RLNY, incorporated by reference from Exhibit 3(b) to a
Pre-Effective Amendment No. 1 of Registrant's Registration
Statement on Form S-1 filed with the SEC on or about April 1,
2002 (File No. 333-75938).
4. Instruments Defining the Rights of Security Holders, Including
Indentures (Annuity Contracts)
Interests in Fixed Account I under Variable Annuity Contracts,
incorporated herein by reference to the initial Registration
Statement for RLNY filed with the SEC on April 15, 2003 (File No.
333-104540).
29
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.
30
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)
By /s/ David A. Wheat
November 12, 2004 ------------------------------------------
- ----------------- David A. Wheat
(Date) Director, Senior Vice President and
Chief Financial Officer
31
Exhibit 31.1
CERTIFICATION
I, David A. Wheat, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ReliaStar Life
Insurance Company of New York;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date:
November 12, 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
November 12, 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 September 30, 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.
By /s/ David A. Wheat
November 12, 2004 -----------------------------------------
- ----------------- David A. Wheat
(Date) 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 September 30, 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.
By /s/ James R. Gelder
November 12, 2004 -----------------------------------------
- ----------------- James R. Gelder
(Date) Director, President and
Chief Executive Officer