SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1999.
Commission file number 333-16279, 333-77385
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FIRST GOLDEN AMERICAN LIFE INSURANCE COMPANY OF NEW YORK
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(Exact name of registrant as specified in its charter)
New York 13-3919096
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
230 Park Avenue, Suite 966
New York, New York 10169-0999
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(Address of principal (Zip Code)
executive offices)
Registrant's Telephone Number, including area code : (212) 973-9647
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Securities Registered Pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
N/A
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Securities Registered Pursuant to Section 12(g) of the Act: None
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 .
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X].
As of March 27, 2000, 200,000 shares of Common Stock, $10 par value, are issued
and outstanding.
NOTE: WHEREAS FIRST GOLDEN AMERICAN LIFE INSURANCE COMPANY OF NEW YORK MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION I (1)(a) AND (b) OF FORM 10-K, THIS
FORM IS BEING FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTIONS I (2).
DOCUMENTS INCORPORATED BY REFERENCE
See exhibit index - page 35.
Page 1 of 36
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PART I
ITEM 1. BUSINESS.
OVERVIEW
First Golden American Life Insurance Company of New York ("First Golden" or
"Company") is a stock life insurance company organized under the laws of the
State of New York. The Company was incorporated on May 24, 1996 and is a wholly
owned life insurance subsidiary of Golden American Life Insurance Company
("Golden American"). Golden American is a wholly owned subsidiary of Equitable
of Iowa Companies, Inc. ("EIC"). EIC is an indirect wholly owned subsidiary of
ING Groep N.V., a global financial services holding company based in The
Netherlands.
First Golden was capitalized in December 1996. First Golden became licensed as a
life insurance company under the laws of the State of New York on January 2,
1997 and the State of Delaware on December 23, 1997 and has since received
regulatory product approvals to sell insurance products in these states. First
Golden offers variable annuity products. See Note 8 of the financial statements
for further information regarding related party transactions.
PRODUCTS
The Company offers variable annuity products designed to meet customer needs for
tax-advantaged saving for retirement and protection from death. The Company
believes longer life expectancies, an aging population, and growing concern over
the stability and availability of the Social Security system have made
retirement planning a priority for many Americans. The target market for all
products is consumers and corporations in New York and Delaware.
Variable annuities are long-term savings vehicles in which contractowner
premiums (purchase payments) are recorded and maintained in a fixed account or
variable separate account. The variable separate account is established as a
registered unit investment trust. At December 31, 1999, funds on deposit in the
Company's variable annuity separate and fixed accounts totaled $47.2 million and
$7.6 million, respectively. Variable annuities provide the Company with fee
based revenues in the form of various charges and fees charged to the
contractowner's account. Revenues include charges for mortality and expense
risk, contract administration, and surrender charges.
Marketing of the variable products in New York is primarily through
broker/dealers.
BUSINESS ENVIRONMENT
The current business and regulatory environment presents many challenges to the
insurance industry. The variable annuity competitive environment remains intense
and is dominated by a number of large highly rated insurance companies.
Increasing competition from traditional insurance carriers as well as banks and
mutual fund companies offers consumers many choices. However, overall demand for
variable products remains strong for several reasons including: strong stock
market performance over the last four years; relatively low interest rates; an
aging U. S. population that is increasingly concerned about retirement, estate
planning, and maintaining their standard of living in retirement; and potential
reductions in government and employer-provided benefits at retirement, as well
as lower public confidence in the adequacy of those benefits.
REGULATION
The Company's operations are conducted in a highly regulated environment. The
primary regulator of First Golden's insurance operations is the Superintendent
of Insurance for the State of New York. The Company is also regulated by the
Securities and Exchange Commission and the National Association of Securities
Dealers, Inc. See Item 7, Management's Discussion and Analysis of Results of
Operations.
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ITEM 2. PROPERTIES.
First Golden's business operations are housed in leased facilities located at
230 Park Avenue in New York, New York. Property and equipment primarily
represent leasehold improvements, office furniture, and equipment and are not
considered to be significant to the Company's overall operations. Property and
equipment are reported at cost less allowances for depreciation.
ITEM 3. LEGAL PROCEEDINGS.
The Company, like other insurance companies, may be named or otherwise involved
in lawsuits, including class action lawsuits and arbitrations. In some class
action and other actions involving insurers, substantial damages have been
sought and/or material settlement or award payments have been made. The Company
currently believes no pending or threatened lawsuits or actions exist that are
reasonably likely to have a material adverse impact on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Information called for by this item is omitted pursuant to General Instruction I
(2) (c) of Form 10-K.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Registrant is a wholly owned subsidiary of Golden American Life Insurance
Company. There is no public trading market for the Registrant's common stock.
First Golden is required to maintain a minimum total statutory-basis capital and
surplus of not less than $6 million under the provisions of the insurance laws
of the State of New York in which it is presently licensed to sell insurance
products.
Under the provisions of the insurance laws of the State of New York, First
Golden cannot distribute any dividends to its stockholder, Golden American Life
Insurance Company, unless a notice of its intent to declare a dividend and the
amount of the dividend has been filed with the New York Insurance Department at
least thirty days in advance of the proposed declaration. If the Superintendent
of the New York Insurance Department finds the financial condition of First
Golden does not warrant the distribution, the Superintendent may disapprove the
distribution by giving written notice to First Golden within thirty days after
the filing. First Golden did not pay common stock dividends during 1999, 1998,
or 1997.
ITEM 6. SELECTED FINANCIAL DATA.
Information called for by this item is omitted pursuant to General Instruction I
(2) (a) of Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS.
The purpose of this section is to discuss and analyze First Golden American Life
Insurance Company of New York's ("First Golden" or the "Company") results of
operations. In addition, some analysis and information regarding financial
condition and liquidity and capital resources is also provided. This analysis
should be read jointly with the financial statements, related notes, and the
Cautionary Statement Regarding Forward-Looking Statements, which appear
elsewhere in this report.
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RESULTS OF OPERATIONS
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MERGER
On October 23, 1997, Equitable of Iowa Companies' ("Equitable") shareholders
approved an Agreement and Plan of Merger ("Merger Agreement") dated July 7, 1997
among Equitable, PFHI Holdings, Inc. ("PFHI"), and ING Groep N.V. ("ING"). On
October 24, 1997, PFHI, a Delaware corporation, acquired all of the outstanding
capital stock of Equitable according to the Merger Agreement. PFHI is a wholly
owned subsidiary of ING, a global financial services holding company based in
The Netherlands. Equitable, an Iowa corporation, in turn, owned all the
outstanding capital stock of Equitable Life Insurance Company of Iowa and Golden
American Life Insurance Company ("Golden American" or "Parent") and their wholly
owned subsidiaries. In addition, Equitable owned all the outstanding capital
stock of Locust Street Securities, Inc., Equitable Investment Services, Inc.
(subsequently dissolved), Directed Services, Inc., Equitable of Iowa Companies
Capital Trust, Equitable of Iowa Companies Capital Trust II, and Equitable of
Iowa Securities Network, Inc. (subsequently renamed ING Funds Distributor,
Inc.). In exchange for the outstanding capital stock of Equitable, ING paid
total consideration of approximately $2.1 billion in cash and stock and assumed
approximately $400 million in debt. As a result of this transaction, Equitable
was merged into PFHI, which was simultaneously renamed Equitable of Iowa
Companies, Inc. ("EIC"), a Delaware corporation.
For financial statement purposes, the change in control of the Company through
the ING merger was accounted for as a purchase effective October 25, 1997. This
merger resulted in a new basis of accounting reflecting estimated fair values of
assets and liabilities at the merger date. As a result, the Company's financial
statements for the periods after October 24, 1997 are presented on the
Post-Merger new basis of accounting. The financial statements for October 24,
1997 and prior periods are presented on the Pre-Merger historical cost basis of
accounting.
The purchase price was allocated to EIC and its subsidiaries with $25.9 million
allocated to the Company. Goodwill of $1.4 billion was established for the
excess of the merger cost over the fair value of the assets and liabilities of
EIC with $96,000 attributed to the Company. Goodwill resulting from the merger
is being amortized over 40 years on a straight-line basis. The carrying value
will be reviewed periodically for any indication of impairment in value.
PREMIUMS
The Company reported variable annuity premiums of $11.7 million for the year
ended December 31, 1999 and $29.2 million for the year ended December 31, 1998.
This decrease was mainly due to the discontinuance of a sales relationship with
a distributor that sold 62.1% of the Company's products during 1998. This
distributor discontinued the sales relationship as of July, 1999 for new
business.
For the Company's variable contracts, premiums collected are not reported as
revenues, but as deposits to insurance liabilities. Revenues for these products
are recognized over time in the form of investment spread and product charges.
Premiums, net of reinsurance, for variable products from three significant
broker/dealers, each having at least ten percent of total sales, for the year
ended December 31, 1999 totaled $10.6 million, or 90.6% of premiums compared to
$27.5 million, or 94.4% from three significant broker/dealers for the year ended
December 31, 1998.
REVENUES
Product charges from variable annuities totaled $556,000 in 1999 and $239,000 in
1998. This increase is due to higher account balances associated with the
Company's fixed account and separate account options. Net investment income was
$2.1 million for the year ended December 31, 1999. This was an increase of 16.4%
compared to net investment income of $1.8 million for the year ended December
31, 1998. The Company recognized realized losses of $166,000 during 1999
compared to a realized gain of $24,000 from the sale of investments during 1998.
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EXPENSES
The Company reported total insurance benefits and expenses of $1.2 million for
the year ended December 31, 1999 and $830,000 for the year ended December 31,
1998. Insurance benefits and expenses consisted of interest credited to account
balances, benefit claims incurred in excess of account balances, commissions,
general expenses, insurance taxes, state licenses, and fees, amortization of
deferred policy acquisition expenses, goodwill, and value of purchased insurance
in force, net of deferred policy acquisition costs. Interest credited to account
balances was $590,000 and $376,000 for the years ended December 31, 1999 and
December 31, 1998, respectively. This increase is primarily due to higher
average account balances associated with the Company's fixed account option
within the variable product.
Commissions, general expenses, and insurance taxes, state licenses, and fees
were $697,000, $362,000 and $128,000, respectively, for the year ended December
31, 1999. For the year ended December 31, 1998, commissions, general expenses,
and insurance taxes, state licenses, and fees were $1.8 million, $834,000 and
$44,000, respectively. Most costs incurred as the result of sales have been
deferred, thus having very little impact on current earnings.
The Company's deferred policy acquisition costs ("DPAC") was eliminated and an
asset of $132,000 representing value of purchased insurance in force ("VPIF")
was established for policies in force at the merger date. The Company deferred
$879,000 of expenses associated with the sale of variable annuity contracts for
the year ended December 31, 1999. Expenses of $2.3 million were deferred for the
year ended December 31, 1998. These acquisition costs are amortized in
proportion to the expected gross profits. Amortization of DPAC was $201,000 and
$76,000 for the years ended December 31, 1999 and 1998, respectively. The
amortization of VPIF was $35,000 for the year ended December 31, 1999 and $8,000
for the year ended December 31, 1998. During 1999 and 1998, VPIF was adjusted to
increase amortization by $3,000 and $6,000, respectively, to reflect changes in
the assumptions related to the timing of future gross profits. Based on current
conditions and assumptions as to the impact of future events on acquired
policies in force, the expected approximate net amortization relating to VPIF as
of December 31, 1999 is $12,000 in 2000, $10,000 in 2001, $9,000 in 2002, $8,000
in 2003, and $7,000 in 2004. Actual amortization may vary based upon changes in
assumptions and experience.
INCOME
Net income for the year ended December 31, 1999 was $811,000. This was an
increase of $36,000 from net income for the year ended December 31, 1998.
Comprehensive loss for 1999 was $452,000, a decrease of approximately $1.5
million from $1.0 million for 1998.
FINANCIAL CONDITION
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RATINGS
Currently, the Company's ratings are A+ by A.M. Best Company, AAA by Duff &
Phelps Credit Rating Company, and AA+ by Standard & Poor's Rating Services
("Standard & Poor's").
INVESTMENTS
First Golden's assets are invested in accordance with applicable laws. These
laws govern the nature and the quality of investments that may be made by life
insurance companies and the percentage of their assets that may be committed to
any particular type of investment. In general, these laws permit investments,
within specified limits subject to certain qualifications, in federal, state,
and municipal obligations, corporate bonds, preferred or common stocks, real
estate mortgages, real estate, and certain other investments.
First Golden purchases investments in accordance with investment guidelines that
take into account investment quality, liquidity, and diversification and invests
primarily in investment grade securities. All of First Golden's assets except
for variable separate account assets are available to meet its obligations under
the contracts.
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All of the Company's investments are carried at fair value in the Company's
financial statements. The decrease in the carrying value of the Company's
investment portfolio was due to changes in unrealized depreciation of fixed
maturities. The Company manages the growth of insurance operations in order to
maintain adequate capital ratios.
FIXED MATURITIES: At December 31, 1999, the Company had fixed maturities with an
amortized cost of $29.2 million and an estimated fair value of $28.1 million.
The Company classifies 100% of its securities as available for sale. Net
unrealized depreciation on fixed maturities of $1.1 million was comprised
entirely of gross depreciation. Net unrealized holding losses on these
securities, net of adjustments for VPIF, DPAC, and deferred income taxes of
$603,000 was included in stockholder's equity at December 31, 1999.
The individual securities in the Company's fixed maturities portfolio (at
amortized cost) include investment grade securities, which include securities
issued by the U. S. government, its agencies, and corporations that are rated at
least A- by Standard & Poor's ($18.6 million or 63.6%), that are rated BBB+ to
BBB- by Standard & Poor's ($9.1 million or 31.1%), and below investment grade
securities which are securities issued by corporations that are rated BB+ to BB-
by Standard & Poor's ($1.5 million or 5.3%).
Fixed maturities rated BBB+ to BBB- may have speculative characteristics and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity of the issuer to make principal and interest payments than
is the case with higher rated fixed maturities. The Company intends to purchase
additional below investment grade securities, but it does not expect the
percentage of its portfolio invested in such securities to exceed 10% of its
investment portfolio. At December 31, 1999, the yield at amortized cost on the
Company's below investment grade portfolio was 7.3% compared to 6.7% for the
Company's investment grade corporate bond portfolio. The Company estimates the
fair value of its below investment grade portfolio was $1.4 million, or 94.0% of
amortized cost value, at December 31, 1999.
Below investment grade securities have different characteristics than investment
grade corporate debt securities. Risk of loss upon default by the borrower is
significantly greater with respect to below investment grade securities than
with other corporate debt securities. Below investment grade securities are
generally unsecured and are often subordinated to other creditors of the issuer.
Also, issuers of below investment grade securities usually have higher levels of
debt and are more sensitive to adverse economic conditions, such as a recession
or increasing interest rates, than are issuers of investment grade securities.
The Company attempts to reduce the overall risk in its below investment grade
portfolio, as in all of its investments, through careful credit analysis, strict
investment policy guidelines, and diversification by company and by industry.
The Company analyzes its investment portfolio, including below investment grade
securities, at least quarterly in order to determine if the Company's ability to
realize the carrying value on any investment has been impaired. For debt
securities, if impairment in value is determined to be other than temporary
(i.e., if it is probable the Company will be unable to collect all amounts due
according to the contractual terms of the security), the cost basis of the
impaired security is written down to fair value, which becomes the new cost
basis. The amount of the write-down is included in earnings as a realized loss.
Future events may occur, or additional or updated information may be received,
which may necessitate future write-downs of securities in the Company's
portfolio. Significant write-downs in the carrying value of investments could
materially adversely affect the Company's net income in future periods.
During the year ended December 31, 1999, the amortized cost basis of the
Company's fixed maturities portfolio was reduced by $10.8 million as a result of
sales, maturities, and scheduled principal repayments. In total, net pre-tax
losses from sales, calls, and scheduled principal repayments of fixed maturities
amounted to $166,000 in 1999.
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At December 31, 1999, no fixed maturities were deemed to have impairments in
value that are other than temporary. At December 31, 1999, the Company had no
investment in default. The Company's fixed maturities portfolio had a combined
yield at amortized cost of 6.5% at December 31, 1999.
OTHER ASSETS
DPAC represents certain deferred costs of acquiring new insurance business,
principally first year commissions and interest bonuses and other expenses
related to the production of new business after the merger. The Company's DPAC
was eliminated as of the merger date and an asset of $132,000 representing VPIF
was established for all policies in force at the merger date. VPIF is amortized
into income in proportion to the expected gross profits of in force acquired in
a manner similar to DPAC amortization. Any expenses which vary directly with the
sales of the Company's products are deferred and amortized. At December 31,
1999, the Company had VPIF and DPAC balances of $102,000 and $3.2 million,
respectively.
Goodwill totaling $96,000, representing the excess of the acquisition cost over
the fair value of net assets acquired, was established at the merger date.
Accumulated amortization of goodwill as of December 31, 1999 was approximately
$5,000.
At December 31, 1999, the Company had $47.2 million of separate account assets
compared to $26.7 million at December 31, 1998. The increase in separate account
assets resulted from market appreciation, increased transfer activity, and sales
of the Company's variable products, net of redemptions.
At December 31, 1999, the Company had total assets of $83.1 million, an increase
of 25.8% over total assets at December 31, 1998.
LIABILITIES
Future policy benefits decreased $3.2 million during 1999 to $7.6 million, due
to net reallocations to the Company's separate account. Policy reserves
represent the premiums received plus accumulated interest less mortality and
administration charges. At December 31, 1999, the Company had $47.2 million of
separate account liabilities. This is an increase of 76.7% over separate account
liabilities as of December 31, 1998, and is primarily related to market
appreciation, increased transfer activity, and sales of the Company's variable
annuity products, net of redemptions.
Other liabilities decreased $187,000 during 1999. The decrease results primarily
due to a decrease in outstanding checks and accounts payable.
The Company's total liabilities increased $17.3 million, or 45.0%, during 1999
and totaled $56.4 million at December 31, 1999. The increase is primarily the
result of an increase in separate account liabilities.
The effects of inflation and changing prices on the Company's financial position
are not material since insurance assets and liabilities are both primarily
monetary and remain in balance. An effect of inflation, which has been low in
recent years, is a decline in stockholder's equity when monetary assets exceed
monetary liabilities.
LIQUIDITY AND CAPITAL RESOURCES
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Liquidity is the ability of the Company to generate sufficient cash flows to
meet the cash requirements of its operating, investing, and financing
activities. The Company's principal sources of cash are variable annuity
premiums and product charges, investment income, and maturing investments.
Primary uses of these funds are payments of commissions and operating expenses,
investment purchases, as well as withdrawals and surrenders.
Net cash provided by operating activities was $892,000 in 1999 compared to net
cash used in operations of $307,000 in 1998. The operating cash flows result
primarily from an increase in annuity product charges, net investment income,
and decreased commission expense.
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Net cash provided by investing activities was $1.9 million during 1999 as
compared to $6.3 million net cash used in investing activities in 1998. This
increase is primarily due to greater net sales of fixed maturities. Net sales of
fixed maturities were $1.0 million in 1999 versus net purchases of fixed
maturities of $3.9 million in 1998.
Net cash used in financing activities was $3.7 million during 1999 as compared
to net cash provided by financing activities of $8.0 million during the prior
year. In 1999, net cash used in financing activities was impacted by net fixed
account deposits of $780,000 compared to $8.8 million in 1998. The change was
also impacted by net reallocations to the Company's separate account, which
increased to $4.6 million from $872,000 during the prior year.
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
cash requirements. The Company has a $10.0 million revolving note facility with
SunTrust Bank, Atlanta, which expires on July 31, 2000. Management believes
these sources of liquidity are adequate to meet the Company's short-term cash
obligations.
First Golden believes it will be able to fund the capital required for projected
new business primarily with existing capital and future capital contributions
from its Parent. First Golden expects to continue to receive capital
contributions from Golden American, if necessary. It is ING's policy to ensure
adequate capital and surplus is provided for the Company and, if necessary,
additional funds will be contributed.
The Golden American Board of Directors has agreed by resolution to provide funds
as needed for the Company to maintain policyholders' surplus that meets or
exceeds the greater of: (1) the minimum capital adequacy standards to maintain a
level of capitalization necessary to meet A.M. Best Company's guidelines for a
rating one level less than the one originally given to First Golden or (2) the
New York State Insurance Department risk-based capital minimum requirements as
determined in accordance with New York statutory accounting principles. No funds
were transferred from Golden American in 1998 or 1999. On January 31, 2000,
Golden American provided a cash capital contribution of $2.1 million to First
Golden.
First Golden's principal office is located in New York, New York, where certain
of the Company's records are maintained. The 2,568 square feet of office space
is leased through 2001.
First Golden is required to maintain a minimum capital and surplus of not less
than $6 million under the provisions of the insurance laws of the State of New
York.
Under the provisions of the insurance laws of the State of New York, First
Golden cannot distribute any dividends to its stockholder, Golden American,
unless a notice of its intent to declare a dividend and the amount of the
dividend has been filed with the New York Insurance Department at least thirty
days in advance of the proposed declaration. If the Superintendent of the New
York Insurance Department finds the financial condition of First Golden does not
warrant the distribution, the Superintendent may disapprove the distribution by
giving written notice to the Company within thirty days after the filing. The
management of First Golden does not anticipate paying dividends to its Parent
during 2000.
The NAIC's 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 the Company has total adjusted capital well above all required
capital levels.
VULNERABILITY FROM CONCENTRATIONS: First Golden's operations consist of one
business segment, the sale of variable annuity products. First Golden is not
dependent upon any single customer, however, three broker/dealers accounted for
a significant portion of its sales volume in 1999. One distributor sold 62.1% of
the Company's products in 1998. This distributor discontinued the sales
relationship as of July, 1999 for new business. All premiums are generated from
consumers and corporations in the states of New York and Delaware.
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REINSURANCE: At December 31, 1999, First Golden had a reinsurance treaty with an
unaffiliated reinsurer covering a significant portion of the mortality risks
under its variable contracts. First Golden remains liable to the extent its
reinsurer does not meet its obligation under the reinsurance agreement.
The reinsurance treaty that covered the nonstandard minimum guaranteed death
benefits for new business has been terminated for business issued after December
31, 1999. The Company is currently pursuing alternative reinsurance arrangements
for new business issued after December 31, 1999. There can be no assurance that
such alternative arrangements will be available. Any reinsurance covering
business in force at December 31, 1999 will continue to apply in the future.
IMPACT OF YEAR 2000: In prior years, the Company discussed the nature and
progress of Golden American's plans for the Company to become Year 2000 ready.
In late 1999, Golden American completed remediation and testing of the Company's
systems. As a result of those planning and implementation efforts, the Company
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believes those systems
successfully responded to the Year 2000 date change. Golden American incurred
all expenses during 1999 in connection with remediating the Company's systems.
The Company is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems, or the products and
services of third parties. Golden American will continue to monitor the
Company's mission critical computer applications and those of suppliers and
vendors throughout the Year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
MARKET RISK AND RISK MANAGEMENT
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Asset/liability management is integrated into many aspects of the Company's
operations, including investment decisions, product development, and crediting
rates determination. As part of its risk management process, different economic
scenarios are modeled, including cash flow testing required for insurance
regulatory purposes, to determine that existing assets are adequate to meet
projected liability cash flows. Key variables include contractowner behavior and
the variable separate account's performance.
Contractowners bear the majority of the investment risks related to the variable
annuity products. Therefore, the risks associated with the investments
supporting the variable separate account are assumed by contractowners, not by
the Company (subject to, among other things, certain minimum guarantees). The
Company's products also provide certain minimum death benefits that depend on
the performance of the variable separate account. Currently the majority of
death benefit risks are reinsured, which protects the Company from adverse
mortality experience and prolonged capital market decline.
A surrender, partial withdrawal, transfer, or annuitization made prior to the
end of a guarantee period from the fixed account may be subject to a market
value adjustment. As the liabilities in the fixed account are subject to market
value adjustment, the Company does not face a material amount of market risk
volatility. The fixed account liabilities are supported by a portfolio
principally composed of fixed rate investments that can generate predictable,
steady rates of return. The portfolio management strategy for the fixed account
considers the assets available for sale. This enables the Company to respond to
changes in market interest rates, changes in prepayment risk, changes in
relative values of asset sectors and individual securities and loans, changes in
credit quality outlook, and other relevant factors. The objective of portfolio
management is to maximize returns, taking into account interest rate and credit
risks, as well as other risks. The Company's asset/liability management
discipline includes strategies to minimize exposure to loss as interest rates
and economic and market conditions change.
On the basis of these analyses, management believes there is no material
solvency risk to the Company. With respect to a 10% drop in equity values from
year end 1999 levels, variable separate account funds, which represent 86% of
the in force, pass the risk in underlying fund performance to the contractowner
(except for certain minimum guarantees). With respect to interest rate movements
up or down 100 basis points from year end 1999 levels, the remaining 14% of the
in force are fixed account funds and almost all of these have market value
adjustments which provide significant protection against changes in interest
rates.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
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Any forward-looking statements contained herein or in any other oral or written
statement by the Company or any of its officers, directors, or employees is
qualified by the fact that actual results of the Company may differ materially
from such statement, among other risks and uncertainties inherent in the
Company's business, due to the following important factors:
1. Prevailing interest rate levels and stock market performance, which may
affect the ability of the Company to sell its products, the market value
and liquidity of the Company's investments, fee revenue, and the lapse rate
of the Company's policies, notwithstanding product design features intended
to enhance persistency of the Company's products.
2. Changes in the federal income tax laws and regulations, which may affect
the tax status of the Company's products.
3. Changes in the regulation of financial services, including bank sales and
underwriting of insurance products, which may affect the competitive
environment for the Company's products.
4. Increasing competition in the sale of the Company's products.
5. Other factors that could affect the performance of the Company, including,
but not limited to, market conduct claims, litigation, insurance industry
insolvencies, availability of competitive reinsurance on new business,
investment performance of the underlying portfolios of the variable
products, variable product design, and sales volume by significant sellers
of the Company's variable products.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The matters set forth under the caption "Market Risk and Risk Management" in
Management's Discussion and Analysis of Results of Operations (Item 7 of this
report) are incorporated herein by reference.
10
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The Board of Directors and Stockholder
First Golden American Life Insurance Company of New York
We have audited the accompanying balance sheets of First Golden American Life
Insurance Company of New York as of December 31, 1999 and 1998, and the related
statements of operations, changes in stockholder's equity, and cash flows for
the years ended December 31, 1999 and 1998 and for the periods from October 25,
1997 through December 31, 1997 and January 1, 1997 through October 24, 1997. Our
audits also included the financial statement schedules listed in the Index at
Item 14(a). These financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First Golden American Life
Insurance Company of New York at December 31, 1999 and 1998, and the results of
its operations and its cash flows for the years ended December 31, 1999 and 1998
and for the periods from October 25, 1997 through December 31, 1997 and January
1, 1997 through October 24, 1997, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
s/Ernst & Young LLP
Des Moines, Iowa
February 4, 2000
11
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
POST-MERGER
---------------------------------------------------
December 31, 1999 December 31, 1998
------------------------- -------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale, at fair value
(Cost: 1999 - $29,178; 1998 - $30,431)..................... $28,095 $30,994
Short-term investments........................................ 2,309 3,231
------------------------- -------------------------
Total investments............................................... 30,404 34,225
Cash and cash equivalents....................................... 1,026 1,932
Due from affiliates............................................. 539 37
Accrued investment income....................................... 443 414
Deferred policy acquisition costs............................... 3,198 2,347
Value of purchased insurance in force........................... 102 117
Property and equipment, less allowances for
depreciation of $31 in 1999 and $16 in 1998.................. 41 48
Goodwill, less accumulated amortization of $5 in
1999 and $3 in 1998.......................................... 91 93
Current income taxes recoverable................................ -- 89
Other assets.................................................... 19 15
Separate account assets......................................... 47,215 26,717
------------------------- -------------------------
Total assets.................................................... $83,078 $66,034
========================= =========================
</TABLE>
See accompanying notes.
12
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEETS - CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
POST-MERGER
---------------------------------------------------
December 31, 1999 December 31, 1998
------------------------- -------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Policy liabilities and accruals:
Future policy benefits:
Annuity products........................................... $7,583 $10,830
Current income taxes payable.................................... 557 --
Deferred income tax liability................................... 610 850
Revolving note payable.......................................... 100 --
Due to affiliates............................................... 32 17
Other liabilities............................................... 323 510
Separate account liabilities.................................... 47,215 26,717
------------------------- -------------------------
56,420 38,924
Commitments and contingencies
Stockholder's equity:
Preferred stock, par value $5,000 per share,
authorized 6,000 shares.................................... -- --
Common stock, par value $10 per share, authorized,
issued, and outstanding 200,000 shares..................... 2,000 2,000
Additional paid-in capital................................... 23,936 23,936
Accumulated other comprehensive income (loss)................ (927) 336
Retained earnings............................................ 1,649 838
------------------------- -------------------------
Total stockholder's equity...................................... 26,658 27,110
------------------------- -------------------------
Total liabilities and stockholder's equity...................... $83,078 $66,034
========================= =========================
</TABLE>
See accompanying notes.
13
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
POST-MERGER | PRE-MERGER
------------------------------------------------------------------------
For the period | For the period
October 25, | January 1,
For the year For the year 1997 | 1997
ended ended through | through
December 31, December 31, December 31, | October 24,
1999 1998 1997 | 1997
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues |
Annuity product charges........................ $556 $239 $8 | $4
Net investment income.......................... 2,147 1,844 286 | 1,449
Realized gains (losses) on investments......... (166) 24 1 | --
Other income................................... 63 -- -- | --
------------------------------------------------------------------------
2,600 2,107 295 | 1,453
|
Insurance benefits and expenses: |
Annuity benefits: |
Interest credited to account balances....... 590 376 26 | 48
Benefit claims incurred in excess of account |
balances.................................. 72 -- -- | --
Underwriting, acquisition, and insurance |
expenses: |
Commissions................................. 697 1,754 141 | 267
General expenses............................ 362 834 124 | 461
Insurance taxes, state licenses, and fees... 128 44 94 | 15
Policy acquisition costs deferred........... (879) (2,264) (204) | (298)
Amortization: |
Deferred policy acquisition costs......... 201 76 13 | 7
Value of purchased insurance in |
force................................... 35 8 3 | --
Goodwill.................................. 2 2 1 | --
------------------------------------------------------------------------
1,208 830 198 | 500
|
Interest expense................................. 12 -- -- | --
------------------------------------------------------------------------
1,220 830 198 | 500
------------------------------------------------------------------------
|
Income before income taxes....................... 1,380 1,277 97 | 953
|
Income taxes..................................... 569 502 34 | 287
------------------------------------------------------------------------
|
Net income....................................... $811 $775 $63 | $666
========================================================================
</TABLE>
See accompanying notes.
14
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
Accumulated
Additional Other Total
Common Paid-in Comprehensive Retained Stockholder's
Stock Capital Income (Loss) Earnings Equity
-------------------------------------------------------------------------------------
PRE-MERGER
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997............... $2,000 $23,000 $(99) $42 $24,943
Comprehensive income:
Net income............................. -- -- -- 666 666
Change in net unrealized investment
gains (losses)......................... -- -- (130) -- (130)
-----------------
Comprehensive income..................... 536
-------------------------------------------------------------------------------------
Balance at October 24, 1997.............. $2,000 $23,000 $(229) $708 $25,479
=====================================================================================
POST-MERGER
-------------------------------------------------------------------------------------
Balance at October 25, 1997.............. $2,000 $23,936 -- -- $25,936
Comprehensive income:
Net income............................. -- -- -- $63 63
Change in net unrealized investment
gains (losses)...................... -- -- $96 -- 96
-----------------
Comprehensive income..................... 159
-------------------------------------------------------------------------------------
Balance at December 31,1997.............. 2,000 23,936 96 63 26,095
Comprehensive income:
Net income............................. -- -- -- 775 775
Change in net unrealized investment
gains (losses)...................... -- -- 240 -- 240
-----------------
Comprehensive income..................... 1,015
-------------------------------------------------------------------------------------
Balance at December 31,1998.............. 2,000 23,936 336 838 27,110
Comprehensive income:
Net income............................. -- -- -- 811 811
Change in net unrealized investment
gains (losses)...................... -- -- (1,263) -- (1,263)
-----------------
Comprehensive income..................... (452)
-------------------------------------------------------------------------------------
Balance at December 31,1999.............. $2,000 $23,936 $(927) $1,649 $26,658
=====================================================================================
</TABLE>
See accompanying notes.
15
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
POST-MERGER | PRE-MERGER
----------------------------------------------------|----------------
For the period | For the period
October 25, | January 1,
For the year For the year 1997 | 1997
ended ended through | through
December 31, December 31, December 31, | October 24,
1999 1998 1997 | 1997
----------------------------------------------------|---------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES |
|
Net income.............................................. $811 $775 $63 | $666
Adjustments to reconcile net income to net cash |
provided by (used in) operations: |
Adjustments related to annuity products: |
Interest credited to account balances.............. 590 376 26 | 48
Charges for mortality and administration........... (11) (11) -- | (1)
Decrease (increase) in accrued investment income...... (29) (38) 35 | (73)
Policy acquisition costs deferred..................... (879) (2,264) (204) | (298)
Amortization of deferred policy acquisition costs..... 201 76 13 | 7
Amortization of value of purchased insurance in force. 35 8 3 | --
Change in other assets, due to/from affiliates, other |
liabilities, and accrued income taxes.............. (32) 248 (625) | 739
Provision for depreciation and amortization........... 90 82 12 | 17
Provision for deferred income taxes................... (50) 465 98 | 26
Realized gains (losses) on investments................ 166 (24) (1) | --
----------------------------------------------------|----------------
Net cash provided by (used in) operating activities..... 892 (307) (580) | 1,131
|
INVESTING ACTIVITIES |
|
Sale, maturity, or repayment of investments: |
Fixed maturities - available for sale................. 10,849 1,644 556 | 226
Short-term investments - net.......................... 922 -- -- | --
----------------------------------------------------|----------------
11,771 1,644 556 | 226
Acquisition of investments: |
Fixed maturities - available for sale................. (9,835) (5,549) (2,635) | --
Short-term investments - net.......................... -- (2,432) (59) | (390)
----------------------------------------------------|----------------
(9,835) (7,981) (2,694) | (390)
|
Purchase of property and equipment...................... (8) (4) (2) | (64)
----------------------------------------------------|----------------
Net cash provided by (used in) investing activities..... 1,928 (6,341) (2,140) | (228)
</TABLE>
See accompanying notes.
16
<PAGE>
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS - CONTINUED
(DOLLARS IN THOUSANDS)
POST-MERGER | PRE-MERGER
---------------------------------------------------|-----------------
For the period | For the period
October 25, | January 1,
For the year For the year 1997 | 1997
ended ended through | through
December 31, December 31, December 31, | October 24,
1999 1998 1997 | 1997
---------------------------------------------------|-----------------
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES |
|
Proceeds from revolving note payable.................... $13,000 -- -- | --
Repayment of revolving note payable..................... (12,900) -- -- | --
Receipts from investment contracts credited to account |
balances.............................................. 1,008 $9,009 $354 | $2,160
Return of account balances on investment contracts...... (228) (178) (8)| (15)
Net reallocations to separate account................... (4,606) (872) (20)| (38)
---------------------------------------------------|-----------------
Net cash provided by (used in) financing activities..... (3,726) 7,959 326 | 2,107
---------------------------------------------------|-----------------
|
Increase (decrease) in cash and cash equivalents........ (906) 1,311 (2,394)| 3,010
|
Cash and cash equivalents at beginning of period........ 1,932 621 3,015 | 5
---------------------------------------------------|----------------
Cash and cash equivalents at end of period.............. $1,026 $1,932 $621 | $3,015
===================================================|=================
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
Cash paid during the period for: |
Interest............................................. $1 -- -- | --
Income taxes......................................... -- $99 -- | $283
</TABLE>
See accompanying notes.
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
ORGANIZATION
First Golden American Life Insurance Company of New York ("First Golden" or
"Company"), a wholly owned subsidiary of Golden American Life Insurance Company
("Golden American" or "Parent"), was incorporated on May 24, 1996. Golden
American is a wholly owned subsidiary of Equitable of Iowa Companies, Inc. On
January 2, 1997 and December 23, 1997, First Golden became licensed as a life
insurance company under the laws of the states of New York and Delaware,
respectively. First Golden received policy approvals on March 25, 1997 and
December 23, 1997 in New York and Delaware, respectively. The Company's products
are marketed by broker/dealers, financial institutions, and insurance agents.
The Company's primary customers are consumers and corporations. See Note 8 for
further information regarding related party transactions.
On October 24, 1997, PFHI Holdings, Inc. ("PFHI"), a Delaware corporation,
acquired all of the outstanding capital stock of Equitable of Iowa Companies
("Equitable") according to the terms of an Agreement and Plan of Merger ("Merger
Agreement") dated July 7, 1997 among Equitable, PFHI, and ING Groep N.V.
("ING"). PFHI is a wholly owned subsidiary of ING, a global financial services
holding company based in The Netherlands. As a result of this transaction,
Equitable was merged into PFHI, which was simultaneously renamed Equitable of
Iowa Companies, Inc. ("EIC"), a Delaware corporation. See Note 6 for additional
information regarding the merger.
For financial statement purposes, the ING merger was accounted for as a purchase
effective October 25, 1997. The merger resulted in a new basis of accounting
reflecting estimated fair values of assets and liabilities. As a result, the
Company's financial statements for the periods after October 24, 1997 are
presented on the Post-Merger new basis of accounting and financial statements
for October 24, 1997 and prior periods are presented on the Pre-Merger
historical cost basis of accounting.
INVESTMENTS
FIXED MATURITIES: The Company accounts for investments under the Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," which requires fixed maturities to
be designated as either "available for sale," "held for investment," or
"trading." Sales of fixed maturities designated as "available for sale" are not
restricted by SFAS No. 115. Available for sale securities are reported at fair
value and unrealized gains and losses on these securities are included directly
in stockholder's equity, after adjustment for related changes in value of
purchased insurance in force ("VPIF"), deferred policy acquisition costs
("DPAC"), and deferred income taxes. At December 31, 1999 and 1998, all of the
Company's fixed maturities are designated as available for sale, although the
Company is not precluded from designating fixed maturities as held for
investment or trading at some future date.
Securities determined to have a decline in value that is other than temporary
are written down to estimated fair value, which becomes the new cost basis by a
charge to realized losses in the Company's Statements of Operations. Premiums
and discounts are amortized/accrued utilizing a method which results in a
constant yield over the securities' expected lives. Amortization/accrual of
premiums and discounts on mortgage and other asset-backed securities
incorporates a prepayment assumption to estimate the securities' expected lives.
OTHER INVESTMENTS: Short-term investments are reported at cost, adjusted for
amortization of premiums and accrual of discounts.
REALIZED GAINS AND LOSSES: Realized gains and losses are determined on the basis
of specific identification.
FAIR VALUES: Estimated fair values, as reported herein, of conventional
mortgage-backed securities not actively traded in a liquid market are estimated
using a third party pricing process. This pricing process uses a matrix
calculation assuming a spread over U. S. Treasury bonds based upon the expected
average lives of the securities. Estimated fair values of publicly traded fixed
maturities are reported by an independent pricing service. Fair values of
private placement bonds are estimated using a matrix that assumes a spread
(based on interest rates and a risk assessment of the bonds) over U. S. Treasury
bonds.
18
<PAGE>
CASH AND CASH EQUIVALENTS
For purposes of the accompanying Statements of Cash Flows, the Company considers
all demand deposits and interest-bearing accounts not related to the investment
function to be cash equivalents. All interest-bearing accounts classified as
cash equivalents have original maturities of three months or less.
DEFERRED POLICY ACQUISITION COSTS
Certain costs of acquiring new insurance business, principally first year
commissions, interest bonuses, and other expenses related to the production of
new business, have been deferred. Acquisition costs for variable annuity
products are being amortized generally in proportion to the present value (using
the assumed crediting rate) of expected future gross profits. This amortization
is adjusted retrospectively when the Company revises its estimate of current or
future gross profits to be realized from a group of products. DPAC is adjusted
to reflect the pro forma impact of unrealized gains and losses on fixed
maturities the Company has designated as "available for sale" under SFAS No.
115.
VALUE OF PURCHASED INSURANCE IN FORCE
As the result of the merger, a portion of the purchase price was allocated to
the right to receive future cash flows from existing insurance contracts. This
allocated cost represents VPIF which reflects the value of those purchased
policies calculated by discounting actuarially determined expected future cash
flows at the discount rate determined by the purchaser. Amortization of VPIF is
charged to expense in proportion to expected gross profits of the underlying
business. This amortization is adjusted retrospectively when the Company revises
its estimate of current or future gross profits to be realized from the
insurance contracts acquired. VPIF is adjusted to reflect the pro forma impact
of unrealized gains and losses on available for sale fixed maturities. See Note
6 for additional information on VPIF resulting from the merger.
PROPERTY AND EQUIPMENT
Property and equipment primarily represent leasehold improvements and office
furniture and equipment and are not considered to be significant to the
Company's overall operations. Property and equipment are reported at cost less
allowances for depreciation. Depreciation expense is computed primarily on the
basis of the straight-line method over the estimated useful lives of the assets.
GOODWILL
Goodwill was established as a result of the merger and is being amortized over
40 years on a straight-line basis. See Note 6 for additional information on the
merger.
FUTURE POLICY BENEFITS
Future policy benefits for the fixed interest division of the variable products
are established utilizing the retrospective deposit accounting method. Policy
reserves represent the premiums received plus accumulated interest, less
mortality and administration charges. Interest credited to these policies ranged
from 4.10% to 6.00% during 1999, 3.95% to 7.10% during 1998, and 5.60% to 7.50%
during 1997.
SEPARATE ACCOUNT
Assets and liabilities of the separate account reported in the accompanying
Balance Sheets represent funds that are separately administered principally for
variable annuity contracts. Contractowners, rather than the Company, bear the
investment risk for the variable products. At the direction of the
contractowners, the separate account invests the premiums from the sale of
variable annuity products in shares of specified mutual funds. The assets and
liabilities of the separate account are clearly identified and segregated from
other assets and liabilities of the Company. The portion of the separate account
assets equal to the reserves and other liabilities of variable annuity contracts
cannot be charged with liabilities arising out of any other business the Company
may conduct.
Variable separate account assets are carried at fair value of the underlying
investments and generally represent contractowner investment values maintained
in the accounts. Variable separate account liabilities represent account
balances for the variable annuity contracts invested in the separate account;
the fair value of these liabilities is equal to their carrying amount. Net
investment income and realized and unrealized capital gains and losses related
to separate account assets are not reflected in the accompanying Statements of
Operations.
Product charges recorded by the Company from variable annuity products consist
of charges applicable to each contract for mortality and expense risk, contract
administration, and surrender charges.
19
<PAGE>
DEFERRED INCOME TAXES
Deferred tax assets or liabilities are computed based on the difference between
the financial statement and income tax bases of assets and liabilities using the
enacted marginal tax rate. Deferred tax assets or liabilities are adjusted to
reflect the pro forma impact of unrealized gains and losses on fixed maturities
the Company has designated as available for sale under SFAS No. 115. Changes in
deferred tax assets or liabilities resulting from this SFAS No. 115 adjustment
are charged or credited directly to stockholder's equity. Deferred income tax
expenses or credits reflected in the Company's Statements of Operations are
based on the changes in the deferred tax asset or liability from period to
period (excluding the SFAS No. 115 adjustment).
DIVIDEND RESTRICTIONS
Under the provisions of the insurance laws of the State of New York, First
Golden cannot distribute any dividends to its stockholder, Golden American,
unless a notice of its intent to declare a dividend and the amount of the
dividend has been filed with the New York Insurance Department at least thirty
days in advance of the proposed declaration. If the Superintendent of the New
York Insurance Department finds the financial condition of the Company does not
warrant the distribution, the Superintendent may disapprove the distribution by
giving written notice to the Company within thirty days after the filing.
SEGMENT REPORTING
The Company manages its business as one segment, the sale of variable products
designed to meet customer needs for tax-advantaged saving for retirement and
protection from death. Variable products are sold to consumers and corporations
throughout New York.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions affecting the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Management is required to utilize historical experience and assumptions about
future events and circumstances in order to develop estimates of material
reported amounts and disclosures. Included among the material (or potentially
material) reported amounts and disclosures that require extensive use of
estimates and assumptions are: (1) estimates of fair values of investments in
securities and other financial instruments, as well as fair values of
policyholder liabilities, (2) policyholder liabilities, (3) deferred policy
acquisition costs and value of purchased insurance in force, (4) fair values of
assets and liabilities recorded as a result of the merger transaction, (5) asset
valuation allowances, (6) deferred tax benefits (liabilities), and (7) estimates
for commitments and contingencies including legal matters, if a liability is
anticipated and can be reasonably estimated. Estimates and assumptions regarding
all of the preceding items are inherently subject to change and are reassessed
periodically. Changes in estimates and assumptions could materially impact the
financial statements.
RECLASSIFICATIONS
Certain amounts for the periods ended in the 1998 and 1997 financial statements
have been reclassified to conform to the 1999 financial statement presentation.
2. BASIS OF FINANCIAL REPORTING
- --------------------------------------------------------------------------------
The financial statements of the Company differ from related statutory-basis
financial statements principally as follows: (1) acquisition costs of acquiring
new business are deferred and amortized over the life of the policies rather
than charged to operations as incurred; (2) an asset representing the present
value of future cash flows from insurance contracts acquired was established as
a result of the merger and is amortized and charged to expense; (3) future
policy benefit reserves for the fixed interest division of the variable products
are based on full account values, rather than the greater of cash surrender
value or amounts derived from discounting methodologies utilizing statutory
interest rates; (4) reserves are reported before reduction for reserve credits
related to reinsurance ceded and a receivable is established, net of an
allowance for uncollectible amounts, for these credits rather than presented net
of these credits; (5) fixed maturity investments are designated as "available
for sale" and valued at fair value with unrealized appreciation/depreciation,
net of adjustments to value of purchased insurance in force, deferred policy
acquisition costs, and deferred income taxes (if applicable), credited/charged
directly to stockholder's equity rather than valued at amortized cost; (6) the
carrying value of fixed maturities is reduced to fair value by a charge to
realized losses in the Statements of Operations when declines in carrying value
20
<PAGE>
are judged to be other than temporary, rather than through the establishment of
a formula-determined statutory investment reserve (carried as a liability),
changes in which are charged directly to surplus; (7) deferred income taxes are
provided for the difference between the financial statement and income tax bases
of assets and liabilities; (8) net realized gains or losses attributed to
changes in the level of interest rates in the market are recognized when the
sale is completed rather than deferred and amortized over the remaining life of
the fixed maturity security; (9) revenues for variable annuity products consist
of policy administration charges and surrender charges assessed rather than
premiums received; and (10) assets and liabilities are restated to fair values
when a change in ownership occurs, with provisions for goodwill and other
intangible assets, rather than continuing to be presented at historical cost.
A reconciliation of net income and stockholder's equity as reported to
regulatory authorities under statutory accounting principles to equivalent
amounts reported under generally accepted accounting principles follows:
<TABLE>
<CAPTION>
| PRE- |
POST-MERGER | MERGER | POST-MERGER
------------------------------------------------|---------------|---------------------------------
Net Income | Net Income | Stockholder's Equity
------------------------------------------------|---------------|---------------------------------
For the period |For the period |
For the year For the year October 25, | January 1, |
ended ended 1997 through | 1997 through |
December 31, December 31, December 31 | October 24, | December 31, December 31,
1999 1998 1997 | 1997 | 1999 1998
------------------------------------------------|---------------|---------------------------------
(DOLLARS IN THOUSANDS) |
<S> <C> <C> <C> <C> <C> <C>
| |
As reported under statutory | |
accounting principles......... $790 $(966) $(142)| $581 | $25,082 $24,377
Interest maintenance reserve.... (52) 14 1 | -- | -- 15
Asset valuation reserve......... -- -- -- | -- | 145 96
Future policy benefits.......... (681) 45 115 | (179) | (697) (16)
Nonadmitted assets.............. -- -- -- | -- | 41 43
Net unrealized appreciation | |
(depreciation) of fixed | |
maturities at fair value...... -- -- -- | -- | (1,083) 563
Change in investment basis as | |
result of merger.............. (118) (39) (1)| -- | 200 318
Deferred policy acquisition | |
costs......................... 678 2,188 191 | 291 | 3,198 2,347
Value of purchased insurance in | |
force......................... (35) (8) (3)| -- | 102 117
Current income taxes | |
payable....................... 193 -- -- | -- | 193 --
Goodwill........................ (2) (2) (1)| -- | 91 93
Deferred income taxes........... 50 (465) (98)| (26) | (610) (850)
Other........................... (12) 8 1 | (1) | (4) 7
------------------------------------------------|---------------|---------------------------------
As reported herein.............. $811 $775 $63 | $666 | $26,658 $27,110
==================================================================================================
</TABLE>
21
<PAGE>
3. INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------
INVESTMENT RESULTS
Major categories of net investment income are summarized below:
<TABLE>
<CAPTION>
POST-MERGER | PRE-MERGER
-----------------------------------------------------|-------------------
For the period | For the period
For the year For the year October 25, | January 1,
ended ended 1997 through | 1997 through
December 31, December 31, December 31, | October 24,
1999 1998 1997 | 1997
-----------------------------------------------------|-------------------
(DOLLARS IN THOUSANDS) |
|
<S> <C> <C> <C> <C>
Fixed maturities................................ $1,901 $1,726 $294 | $1,449
Short-term investments.......................... 148 157 13 | 30
Other, net...................................... 171 -- -- | 2
-----------------------------------------------------|-------------------
Gross investment income......................... 2,220 1,883 307 | 1,481
Less investment expenses........................ (73) (39) (21) | (32)
-----------------------------------------------------|-------------------
Net investment income........................... $2,147 $1,844 $286 | $1,449
=========================================================================
</TABLE>
The change in unrealized appreciation (depreciation) on fixed maturities
designated as available for sale at fair value for the year ended December 31,
1999, the year ended December 31, 1998, the period October 25, 1997 through
December 31, 1997, and the period January 1, 1997 through October 24, 1997 were
$(1,646,000), $412,000, $(212,000), and $516,000, respectively.
At December 31, 1999 and December 31, 1998, amortized cost, gross unrealized
gains and losses, and estimated fair values of fixed maturities, all of which
are designated as available for sale, follows:
<TABLE>
<CAPTION>
POST-MERGER
-------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1999
-------------------------------------------------
U.S. government and governmental agencies and
authorities................................ $3,486 -- $(88) $3,398
Public utilities.............................. 2,030 -- (77) 1,953
Corporate securities.......................... 21,994 -- (910) 21,084
Mortgage-backed securities.................... 1,556 -- (8) 1,548
Other asset-backed securities................. 112 -- -- 112
-------------------------------------------------------------------------
Total......................................... $29,178 -- $(1,083) $28,095
=========================================================================
December 31, 1998
-------------------------------------------------
U. S. government and governmental agencies and
authorities................................ $3,997 $118 $(3) $4,112
Public utilities.............................. 2,543 63 (4) 2,602
Corporate securities.......................... 20,351 426 (53) 20,724
Mortgage-backed securities.................... 3,540 17 (1) 3,556
-------------------------------------------------------------------------
Total......................................... $30,431 $624 $(61) $30,994
=========================================================================
</TABLE>
Short-term investments with maturities of 30 days or less have been excluded
from the above schedules. Amortized cost approximates fair values for these
securities.
22
<PAGE>
At December 31, 1999, net unrealized investment losses on fixed maturities
designated as available for sale totaled $1,083,000. Depreciation of $603,000
was included in stockholder's equity at December 31, 1999 (net of adjustments of
$16,000 to VPIF, $141,000 to DPAC, and $324,000 to deferred income taxes). At
December 31, 1998, net unrealized investment gains on fixed maturities
designated as available for sale totaled $563,000. Appreciation of $336,000 was
included in stockholder's equity at December 31, 1998 (net of adjustments of
$5,000 to VPIF, $32,000 to DPAC, and $190,000 to deferred income taxes).
Amortized cost and estimated fair value of fixed maturities designated as
available for sale, by contractual maturity, at December 31, 1999 are shown
below. Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
POST-MERGER
------------------------------------
Amortized Estimated
December 31, 1999 Cost Fair Value
- ----------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Due in one year or less.................................... $1,690 $1,616
Due after one year through five years...................... 11,465 11,107
Due after five years through ten years..................... 14,355 13,712
------------------------------------
27,510 26,435
Mortgage-backed securities................................. 1,556 1,548
Other asset-backed securities.............................. 112 112
------------------------------------
Total ..................................................... $29,178 $28,095
====================================
</TABLE>
An analysis of sales, maturities, and principal repayments of the Company's
fixed maturities portfolio follows:
<TABLE>
<CAPTION>
Gross Gross Proceeds
Amortized Realized Realized from
Cost Gains Losses Sale
------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
POST-MERGER:
FOR THE YEAR ENDED DECEMBER 31, 1999:
Scheduled principal repayments, calls, and
tenders.................................... $2,385 -- -- $2,385
Sales........................................ 8,630 $4 $(170) 8,464
-----------------------------------------------------------------------
Total........................................ $11,015 $4 $(170) $10,849
=======================================================================
FOR THE YEAR ENDED DECEMBER 31, 1998:
Scheduled principal repayments, calls, and
tenders.................................... $1,080 -- -- $1,080
Sales........................................ 540 $24 -- 564
-----------------------------------------------------------------------
Total........................................ $1,620 $24 -- $1,644
=======================================================================
FOR THE PERIOD OCTOBER 25, 1997 THROUGH
DECEMBER 31, 1997:
Scheduled principal repayments, calls, and
tenders.................................... $555 $1 -- $556
=======================================================================
PRE-MERGER:
FOR THE PERIOD JANUARY 1, 1997 THROUGH
OCTOBER 24, 1997:
Scheduled principal repayments, calls, and
tenders.................................... $226 -- -- $226
=======================================================================
</TABLE>
23
<PAGE>
INVESTMENT VALUATION ANALYSIS: The Company analyzes its investment portfolio at
least quarterly in order to determine if the carrying value of any investment
has been impaired. The carrying value of fixed maturities is written down to
fair value by a charge to realized losses when an impairment in value appears to
be other than temporary. During 1999, 1998, and 1997, no investments were
identified as having an impairment other than temporary.
INVESTMENTS ON DEPOSIT: At December 31, 1999 and 1998, affidavits of deposits
covering bonds with a par value of $400,000 were on deposit with regulatory
authorities pursuant to certain statutory requirements.
INVESTMENT DIVERSIFICATIONS: The Company's investment policies related to its
investment portfolio require diversification by asset type, company, and
industry and set limits on the amount which can be invested in an individual
issuer. Such policies are at least as restrictive as those set forth by
regulatory authorities. The following percentages relate to holdings at December
31, 1999 and December 31, 1998. Fixed maturities included investments in
industrials (48% in 1999, 40% in 1998), financial companies (29% in 1999, 24% in
1998), various government bonds and government or agency mortgage-backed
securities (14% in 1999, 13% in 1998), and conventional mortgage-backed
securities (6% in 1999, 11% in 1998).
No investment in any person or its affiliates (other than bonds issued by
agencies of the United States government) exceed ten percent of stockholder's
equity at December 31, 1999.
4. COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
Comprehensive income includes all changes in stockholder's equity during a
period except those resulting from investments by and distributions to the
stockholder. Other comprehensive income (loss) excludes net investment gains
(losses) included in net income which merely represent transfers from unrealized
to realized gains and losses. These amounts totaled $(108,000) and $16,000 in
1999 and 1998, respectively. Such amounts, which have been measured through the
date of sale, are net of income taxes and adjustments to VPIF and DPAC totaling
$(58,000) and $8,000 in 1999 and 1998, respectively.
5. FAIR VALUES OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of estimated fair value of all financial instruments, including both
assets and liabilities recognized and not recognized in a company's balance
sheet, unless specifically exempted. SFAS No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments," requires
additional disclosures about derivative financial instruments. Most of the
Company's investments, investment contracts and debt fall within the standards'
definition of a financial instrument. In cases where quoted market prices are
not available, estimated fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. Accounting, actuarial, and regulatory bodies are continuing to study the
methodologies to be used in developing fair value information, particularly as
it relates to such things as liabilities for insurance contracts. Accordingly,
care should be exercised in deriving conclusions about the Company's business or
financial condition based on the information presented herein.
The Company closely monitors the composition and yield of its invested assets,
the duration and interest credited on insurance liabilities and resulting
interest spreads and timing of cash flows. These amounts are taken into
consideration in the Company's overall management of interest rate risk, which
attempts to minimize exposure to changing interest rates through the matching of
investment cash flows with amounts expected to be due under insurance contracts.
These assumptions may not result in values consistent with those obtained
through an actuarial appraisal of the Company's business or values that might
arise in a negotiated transaction.
24
<PAGE>
The following compares carrying values as shown for financial reporting purposes
with estimated fair values:
<TABLE>
<CAPTION>
POST-MERGER
--------------------------------------------------------------
December 31 1999 1998
--------------------------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
--------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Fixed maturities, available for sale................. $28,095 $28,095 $30,994 $30,994
Short-term investments............................... 2,309 2,309 3,231 3,231
Cash and cash equivalents............................ 1,026 1,026 1,932 1,932
Separate account assets.............................. 47,215 47,215 26,717 26,717
LIABILITIES
Annuity products...................................... 7,583 7,170 10,830 10,166
Revolving note payable................................ 100 100 -- --
Separate account liabilities.......................... 47,215 47,215 26,717 26,717
</TABLE>
The following methods and assumptions were used by the Company in estimating
fair values.
FIXED MATURITIES: Estimated fair values of conventional mortgage-backed
securities not actively traded in a liquid market and publicly traded fixed
maturities are estimated using a third party pricing process. This pricing
process uses a matrix calculation assuming a spread over U. S. Treasury bonds
based upon the expected average lives of the securities.
SHORT-TERM INVESTMENTS AND CASH AND CASH EQUIVALENTS: Carrying values reported
in the Company's historical cost basis balance sheet approximate estimated fair
value for these instruments due to their short-term nature.
SEPARATE ACCOUNT ASSETS: Separate account assets are reported at the quoted fair
values of the individual securities in the separate account.
ANNUITY PRODUCTS: Estimated fair values of the Company's liabilities for future
policy benefits for the fixed interest division of the variable products are
stated at cash surrender value, the cost the Company would incur to extinguish
the liability.
REVOLVING NOTE PAYABLE: Carrying value reported in the Company's historical cost
basis balance sheet approximates estimated fair value for this instrument, as
the agreement carries a variable interest rate provision.
SEPARATE ACCOUNT LIABILITIES: Separate account liabilities are reported at full
account value in the Company's historical cost balance sheet. Estimated fair
values of separate account liabilities are equal to their carrying amount.
6. MERGER
- --------------------------------------------------------------------------------
TRANSACTION: On October 23, 1997, Equitable's shareholders approved the Merger
Agreement dated July 7, 1997 among Equitable, PFHI, and ING. On October 24,
1997, PFHI, a Delaware corporation, acquired all of the outstanding capital
stock of Equitable according to the Merger Agreement. PFHI is a wholly owned
subsidiary of ING, a global financial services holding company based in The
Netherlands. Equitable, an Iowa corporation, in turn, owned all the outstanding
capital stock of Equitable Life Insurance Company of Iowa and Golden American
and their wholly owned subsidiaries. In addition, Equitable also owned all the
outstanding capital stock of Locust Street Securities, Inc., Equitable
Investment Services, Inc. (subsequently dissolved), Directed Services, Inc.,
Equitable of Iowa Companies Capital Trust, Equitable of Iowa Companies Capital
Trust II, and Equitable of Iowa Securities Network, Inc. (subsequently renamed
ING Funds Distributor, Inc.). In exchange for the outstanding capital stock of
Equitable, ING paid total consideration of approximately $2.1 billion in cash
and stock and assumed approximately $400 million in debt. As a result of this
transaction, Equitable was merged into PFHI, which was simultaneously renamed
Equitable of Iowa Companies, Inc. All costs of the merger, including expenses to
terminate certain benefit plans, were paid by EIC.
25
<PAGE>
ACCOUNTING TREATMENT: The merger has been accounted for as a purchase resulting
in a new basis of accounting, reflecting estimated fair values for assets and
liabilities at October 24, 1997. The purchase price was allocated to EIC and its
subsidiaries with $25,936,000 allocated to the Company. Goodwill was established
for the excess of the merger cost over the fair value of the net assets and
attributed to EIC and its subsidiaries including Golden American and First
Golden. The amount of goodwill allocated to the Company relating to the merger
was $96,000 at the merger date and is being amortized over 40 years on a
straight-line basis. The carrying value of goodwill will be reviewed
periodically for any indication of impairment in value.
VALUE OF PURCHASED INSURANCE IN FORCE: As part of the merger, a portion of the
acquisition cost was allocated to the right to receive future cash flows from
the insurance contracts existing with the Company at the merger date. This
allocated cost represents VPIF reflecting the value of those purchased policies
calculated by discounting the actuarially determined expected future cash flows
at the discount rate determined by ING.
An analysis of the VPIF asset follows:
<TABLE>
<CAPTION>
POST-MERGER
----------------------------------------------------------
For the period
October 25,
For the year For the year 1997
ended ended through
December 31, December 31, December 31,
1999 1998 1997
----------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance...................................... $117 $126 $132
----------------------------------------------------------
Imputed interest....................................... 8 9 3
Amortization........................................... (40) (23) (6)
Changes in assumptions of timing of gross profits...... (3) 6 --
----------------------------------------------------------
Net amortization....................................... (35) (8) (3)
Adjustment for unrealized gains (losses) on available
for sale securities................................. 20 (1) (3)
----------------------------------------------------------
Ending balance......................................... $102 $117 $126
==========================================================
</TABLE>
Interest is imputed on the unamortized balance of VPIF at a rate of 7.33% for
the year ended December 31, 1999, 7.06% for the year ended December 31, 1998,
and 7.03% for the period October 25, 1997 through December 31, 1997. The
amortization of VPIF, net of imputed interest, is charged to expense. VPIF is
adjusted for the unrealized gains (losses) on available for sale securities;
such changes are included directly in stockholder's equity. Based on current
conditions and assumptions as to the impact of future events on acquired
policies in force, the expected approximate net amortization relating to VPIF as
of December 31, 1999 is $12,000 in 2000, $10,000 in 2001, $9,000 in 2002, $8,000
in 2003, and $7,000 in 2004. Actual amortization may vary based upon changes in
assumptions and experience.
26
<PAGE>
7. INCOME TAXES
- --------------------------------------------------------------------------------
The Company files a consolidated federal income tax return with Golden American,
also a life insurance company.
INCOME TAX EXPENSE
Income tax expense included in the financial statements follows:
<TABLE>
<CAPTION>
POST-MERGER | PRE-MERGER
-------------------------------------------------------|--------------------
For the period | For the period
October 25, | January 1,
For the year For the year 1997 | 1997
ended ended through | through
December 31, December 31, December 31, | October 24,
1999 1998 1997 | 1997
-------------------------------------------------------|--------------------
(DOLLARS IN THOUSANDS) |
|
<S> <C> <C> <C> <C>
Current.............................. $619 $37 $(64)| $261
Deferred............................. (50) 465 98 | 26
-------------------------------------------------------|--------------------
$569 $502 $34 | $287
============================================================================
</TABLE>
The effective tax rate on income before income taxes is different from the
prevailing federal income tax rate. A reconciliation of this difference follows:
<TABLE>
<CAPTION>
POST-MERGER | PRE-MERGER
-------------------------------------------------------|-------------------
For the period | For the period
October 25, | January 1,
For the year For the year 1997 | 1997
ended ended through | through
December 31, December 31, December 31, | October 24,
1999 1998 1997 | 1997
-------------------------------------------------------|-------------------
(DOLLARS IN THOUSANDS) |
|
<S> <C> <C> <C> | <C>
Income before income taxes.................... $1,380 $1,277 $97 | $953
=======================================================|===================
|
Income tax at federal statutory rate.......... $483 $447 $34 | $334
Tax effect (decrease) of: |
Compensatory stock option and |
Restricted stock expense................. -- -- -- | (35)
Other items................................. 86 55 -- | (12)
-------------------------------------------------------|-------------------
Income tax expense............................ $569 $502 $34 | $287
===========================================================================
</TABLE>
27
<PAGE>
DEFERRED INCOME TAXES
The tax effect of temporary differences giving rise to the Company's deferred
income tax assets and liabilities at December 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
POST-MERGER
----------------------------------------------------
December 31 1999 1998
- ----------------------------------------------------------------------- ----------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Future policy benefits......................................... $560 $11
Net unrealized depreciation of available for sale fixed
maturities................................................... 324 --
Net operating loss carryforwards............................... -- 327
--------------------------- ------------------------
884 338
Deferred tax liabilities:
Net unrealized appreciation of available for sale
fixed maturities............................................. -- (184)
Fixed maturities............................................... (68) (222)
Investment income.............................................. (117) --
Deferred policy acquisition costs ............................. (913) (714)
Value of purchased insurance in force.......................... (30) (41)
Other.......................................................... (42) (27)
--------------------------- ------------------------
(1,170) (1,188)
--------------------------- ------------------------
Valuation allowance................................................ (324) --
--------------------------- ------------------------
Deferred income tax liability...................................... $(610) $(850)
=========================== ========================
</TABLE>
At December 31, 1999, the Company reported, for financial statement purposes,
unrealized losses on certain investments which have not been recognized for tax
purposes. The Company has established a valuation allowance against the deferred
income tax assets associated with the unrealized depreciation on fixed
maturities available for sale as the Company is uncertain as to whether the
capital losses, if ever realized, could be utilized to offset future capital
gains.
8. RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
Directed Services, Inc. ("DSI") acts as the principal underwriter (as defined in
the Securities Act of 1933 and the Investment Company Act of 1940, as amended)
and distributor of the variable annuity products issued by the Company. DSI is
authorized to enter into agreements with broker/dealers to distribute the
Company's variable insurance products and appoint representatives of the
broker/dealers as agents. As of December 31, 1999, the Company's variable
annuity products were sold primarily through broker/dealer institutions. The
Company paid commissions and expenses to DSI totaling $697,000 and $1,754,000
for the years ended December 31, 1999 and 1998, respectively. For the period
October 25, 1997 through December 31, 1997 and January 1, 1997 through October
24, 1997, the commissions and expenses were $141,000 and $267,000, respectively.
The Company has service agreements with Golden American and Equitable Life
Insurance Company of Iowa ("Equitable Life"), an affiliate, in which Golden
American and Equitable Life provide administrative and financial related
services. Under the agreement with Golden American, the Company incurred
expenses of $137,000, $248,000, $8,000, and $16,000 for the years ended December
31, 1999 and 1998, the period October 25, 1997 through December 31, 1997, and
the period January 1, 1997 through October 24, 1997, respectively. Under the
agreement with Equitable Life, the Company incurred expenses of $142,000,
$165,000, $13,000, and $16,000 for the years ended December 31, 1999 and 1998,
the period October 25, 1997 through December 31, 1997, and the period January 1,
1997 through October 24, 1997, respectively.
The Company provides resources and services to Golden American and DSI. Revenues
for these services, which reduce general expenses incurred by the Company,
totaled $269,000 and $210,000 from Golden American, for the years ended December
31, 1999 and 1998, respectively. Revenues for these services, which reduce
general expenses incurred by the Company, totaled $387,000 and $75,000 from DSI
for the years ended December 31, 1999 and 1998, respectively.
28
<PAGE>
Effective January 1, 1998, the Company has an asset management agreement with
ING Investment Management LLC ("ING IM"), an affiliate, in which ING IM provides
asset management and accounting services. Under the agreement, the Company
records a fee based on the value of the assets under management. The fee is
payable quarterly. For the years ended December 31, 1999 and 1998, the Company
incurred fees of $73,000 and $56,000, respectively, under this agreement.
Prior to 1998, the Company had a service agreement with Equitable Investment
Services, Inc. ("EISI"), an affiliate, in which EISI provided investment
management services. Payments for these services totaled $11,000 and $51,000 for
the periods October 25, 1997 through December 31, 1997 and January 1, 1997
through October 24, 1997, respectively.
The Company provides resources and services to Security Life of Denver Insurance
Company ("Security Life"), an affiliate, and Southland Life Insurance Company
("Southland"), an affiliate. For the year ended December 31, 1999, charges for
these services were $149,000 to Security Life and $63,000 to Southland.
The Company had premiums, net of reinsurance, for variable annuity products for
the year ended December 31, 1999 and 1998, that totaled $2,000 and $94,000,
respectively, from Locust Street Securities, Inc. ("LSSI"), an affiliate. For
the year ended December 31, 1997, the premiums, net of reinsurance, for variable
products from LSSI totaled $13,000.
The Golden American Board of Directors has agreed by resolution to provide funds
as needed for the Company to maintain policyholders' surplus that meets or
exceeds the greater of: (1) the minimum capital adequacy standards to maintain a
level of capitalization necessary to meet A.M. Best Company's guidelines or one
level less than the one originally given to First Golden, or (2) the New York
State Insurance Department risk-based capital minimum requirements as determined
in accordance with New York statutory accounting principles. No funds were
transferred from Golden American in 1999, 1998, or 1997. On January 31, 2000,
Golden American provided a cash capital contribution of $2,100,000 to First
Golden.
9. COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
REINSURANCE: At December 31, 1999, First Golden had a reinsurance treaty with an
unaffiliated reinsurer covering a significant portion of the mortality risks
under its variable contracts. First Golden remains liable to the extent its
reinsurer does not meet its obligation under the reinsurance agreement. At
December 31, 1999 and December 31, 1998, the Company has a payable of $4,000 and
$1,000, respectively, for reinsurance premiums. Included in the accompanying
financial statements are net considerations to the reinsurer of $27,000, $9,000,
and $1,000 for the years ended December 31, 1999 and 1998 and for the period
October 25, 1997 through December 31, 1997, respectively. In addition, the
accompanying financial statements contain net policy benefits recoveries of
$7,000 for the year ended December 31, 1999.
The reinsurance treaty that covered the nonstandard minimum guaranteed death
benefits for new business has been terminated for business issued after December
31, 1999. The Company is currently pursuing alternative reinsurance arrangements
for new business issued after December 31, 1999. There can be no assurance that
such alternative arrangements will be available. Any reinsurance covering
business in force at December 31, 1999 will continue to apply in the future.
LITIGATION: The Company, like other insurance companies, may be named or
otherwise involved in lawsuits, including class action lawsuits and
arbitrations. In some class action and other lawsuits involving insurers,
substantial damages have been sought and/or material settlement or award
payments have been made. The Company currently believes no pending or threatened
lawsuits or actions exist that are reasonably likely to have a material adverse
impact on the Company.
VULNERABILITY FROM CONCENTRATIONS: The Company has various concentrations in its
investment portfolio (see Note 3 for further information). The Company's asset
growth, net investment income, and cash flow are primarily generated from the
sale of variable annuities and associated future policy benefits. Substantial
changes in tax laws would make these products less attractive to consumers and
extreme fluctuations in interest rates or stock market returns which may result
in higher lapse experience than assumed could cause a severe impact to the
29
<PAGE>
Company's financial condition. A significant portion of the Company's sales is
generated by three broker/dealers, each having at least ten percent of total
sales. One of these distributors sold 62.1% of the Company's products in 1998.
This relationship was discontinued as of July, 1999 for new business.
LEASES: The Company has a lease for its home office space which expires December
31, 2001. The Company also leases certain other equipment under operating leases
which expire in 2000. Rent expense for the years ended December 31, 1999 and
1998 and the periods October 25, 1997 through December 31, 1997 and January 1,
1997 through October 24, 1997 was $158,000, $95,000, $25,000, and $34,000,
respectively. At December 31, 1999, minimum rental payments due under the
operating leases are $82,000 in 2000 and $76,000 in 2001.
REVOLVING NOTE PAYABLE: To enhance short-term liquidity, the Company established
a revolving note payable effective July 31, 1999 and expiring July 31, 2000 with
SunTrust Bank, Atlanta (the "Bank"). The note was approved by the Company's
Board of Directors on September 29, 1998. The total amount the Company may have
outstanding is $10,000,000. The note accrues interest at an annual rate equal
to: (1) the cost of funds for the Bank for the period applicable for the advance
plus 0.25% or (2) a rate quoted by the Bank to the Company for the advance. The
terms of the agreement require the Company to maintain the minimum level of
Company Action Level Risk Based Capital as established by applicable state law
or regulation. Under this agreement, the Company incurred interest expense of
$12,000 in 1999. At December 31, 1999, the Company had borrowings of $100,000
under this agreement.
30
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III.
ITEMS 10 - 13.
Information called for by items 10 through 13 of this part is omitted pursuant
to General Instruction I (2) (c) of Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (a)(2) Financial statements and schedules
The following financial statements of First Golden American Life Insurance
Company of New York are included in Item 8:
PAGE
Balance Sheets - December 31, 1999 and 1998.............................12
Statements of Operations - For the years ended December 31,
1999 and 1998 and for the periods October 25, 1997 through
December 31, 1997 and January 1, 1997 through October 24, 1997........14
Statements of Changes in Stockholder's Equity - For the years
ended December 31, 1999 and 1998 and for the periods October
25, 1997 through December 31, 1997 and January 1, 1997 through
October 24, 1997......................................................15
Statements of Cash Flows - For the years ended December 31,
1999 and 1998 and for the periods October 25, 1997 through
December 31, 1997 and January 1, 1997 through October 24, 1997........16
Notes to Financial Statements...........................................18
The following financial statement schedules of First Golden American Life
Insurance Company of New York are included in Item 14(d):
PAGE
Schedule I - Summary of investments - other than investments
in related parties....................................................32
Schedule III - Supplementary insurance information......................33
All other schedules listed in Article 7 of Regulation S-X are not required under
the related instructions or are inapplicable and therefore have been omitted.
(a)(3), and (c) Exhibits
Exhibits filed are listed in the attached exhibit index.
(b) No reports on Form 8-K were filed for the quarter ended December 31, 1999.
31
<PAGE>
<TABLE>
<CAPTION>
ITEM 14(D). SCHEDULES.
SCHEDULE I
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
(DOLLARS IN THOUSANDS)
BALANCE
SHEET
DECEMBER 31, 1999 COST 1 VALUE AMOUNT
- --------------------------------------------------------------------------------------- -------------- ------------ ---------------
<S> <C> <C> <C>
TYPE OF INVESTMENT
Fixed maturities, available for sale:
Bonds:
United States government and governmental agencies and
authorities.................................................................. $3,486 $3,398 $3,398
Public utilities............................................................... 2,030 1,953 1,953
Corporate securities........................................................... 21,994 21,084 21,084
Mortgage-backed securities..................................................... 1,556 1,548 1,548
Other asset-backed securities.................................................. 112 112 112
-------------- ------------ ---------------
Total fixed maturities, available for sale........................................ 29,178 28,095 28,095
Short-term investments............................................................ 2,309 2,309
-------------- ---------------
Total investments................................................................. $31,487 $30,404
============== ===============
</TABLE>
[FN]
Note 1: Cost is defined as amortized cost for bonds and short-term investments
adjusted for amortization of premiums and accrual of discounts.
</FN>
32
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
- ------------------- ----------- ---------- ---------- ----------- ---------- ---------- ---------- ----------- --------- ----------
FUTURE
POLICY AMORTIZA-
BENEFITS, OTHER BENEFITS TION OF
LOSSES, POLICY CLAIMS, DEFERRED
DEFERRED CLAIMS CLAIMS INSURANCE LOSSES POLICY
POLICY AND UNEARNED AND PREMIUMS NET AND ACQUI- OTHER
ACQUISITION LOSS REVENUE BENEFITS AND INVESTMENT SETTLEMENT SITION OPERATING PREMIUMS
SEGMENT COSTS EXPENSES RESERVE PAYABLE CHARGES INCOME EXPENSES COSTS EXPENSES WRITTEN
- -----------------------------------------------------------------------------------------------------------------------------------
POST-MERGER
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999:
LIFE INSURANCE $3,198 $7,583 -- -- $556 $2,147 $590 $201 $417 --
YEAR ENDED DECEMBER 31, 1998:
Life insurance $2,347 $10,830 -- -- $239 $1,844 $376 $76 $378 --
PERIOD OCTOBER 25, 1997 THROUGH
DECEMBER 31, 1997:
Life insurance $189 $2,506 -- -- $8 $286 $26 $13 $159 --
PRE-MERGER
- -----------------------------------------------------------------------------------------------------------------------------------
PERIOD JANUARY 1, 1997 THROUGH
OCTOBER 24, 1997:
Life insurance N/A N/A N/A N/A $4 $1,449 $48 $7 $445 --
</TABLE>
33
<PAGE>
<TABLE>
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.
FIRST GOLDEN AMERICAN LIFE INSURANCE COMPANY OF NEW YORK
(Registrant)
DATE: MARCH 29, 2000 BY /S/ Barnett Chernow
-------------------
Barnett Chernow
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE
<S> <C> <C>
----------------------------------- ----------------------------------------------|
|
/s/ Barnett Chernow President and Director |
----------------------------------- |
Barnett Chernow |
(principal executive officer) |
|
/s/ Mary Bea Wilkinson Senior Vice President and Treasurer |
----------------------------------- |
Mary Bea Wilkinson |
(principal financial officer) |
|
/s/ Cheryl L. Harding Assistant Vice President and |
----------------------------------- Chief Accounting Officer |
Cheryl L. Harding |
(principal accounting officer) |
|-- March 29, 2000
/s/ Myles R. Tashman Executive Vice President, General |
----------------------------------- Counsel, Secretary and Director |
Myles R. Tashman |
|
/s/ Carol V. Coleman |
----------------------------------- Director |
Carol V. Coleman |
|
/s/ Michael W. Cunningham |
----------------------------------- Director |
Michael W. Cunningham |
|
/s/ Stephen J. Friedman |
----------------------------------- Director |
Stephen J. Friedman |
|
/s/ Andrew J. Kalinowski |
----------------------------------- Director |
Andrew J. Kalinowski |
|
/s/ Bernard Levitt |
----------------------------------- Director |
Bernard Levitt |
|
/s/ Phillip R. Lowrey |
----------------------------------- Director |
Phillip R. Lowrey |
|
/s/ Roger A. Martin |
----------------------------------- Director |
Roger A. Martin |
|
/s/ Mark A. Tullis |
----------------------------------- Director |
Mark A. Tullis ------------------|
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
INDEX
Exhibits to Annual Report on Form 10-K
Year ended December 31, 1999
FIRST GOLDEN AMERICAN LIFE INSURANCE COMPANY OF NEW YORK
PAGE NUMBER
-----------
2 PLAN OF ACQUISITION
(a) Agreement and Plan of Merger dated July 7, 1997, among Equitable of Iowa Companies ("Equitable"),
ING Groep N.V. and PFHI Holdings, Inc. (incorporated by reference from Exhibit 2 in Equitable's
Form 8-K filed July 11, 1997.......................................................................
------
3 ARTICLES OF INCORPORATION AND BY-LAWS
(a) Articles of Incorporation of First Golden American Life Insurance Company of New York
("Registrant" or "First Golden") (incorporated by reference from Exhibit 3(i) to Amendment No. 1
to Registrant's Registration Statement on Form S-1 filed with the Securities and Exchange
Commission (the "SEC") on or about March 18, 1997 (File No. 333-16279))............................
------
(b) By-laws of First Golden (incorporated by reference from Exhibit 3(ii) to Amendment No. 1 to
Registrant's Registration Statement on Form S-1 filed with the SEC on or about March 18, 1997
(File No. 333-16279))..............................................................................
------
4 INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
(a) Individual Deferred Combination Variable and Fixed Annuity Contract (incorporated by reference
from Exhibit 4(a) to a Registration Statement for First Golden on Form S-1 filed with the SEC on
or about April 23, 1999 (File No. 333-77385))......................................................
------
(b) Individual Deferred Combination Variable and Fixed Annuity Contract Application (incorporated by
reference from Exhibit 4(b) to a Registration Statement for First Golden on Form S-1 filed with
the SEC on or about April 23, 1999 (File No. 333-77385))...........................................
------
(c) Schedule Page to the DVA Plus-NY Contract featuring the Galaxy VIP Fund (incorporated by
reference from Exhibit 4(f) to Amendment No. 1 to a Registration Statement for First Golden
on Form S-1 filed with the SEC on or about November 1, 1999 (File No. 333-77385))...............
------
10 MATERIAL CONTRACTS
(a) Services Agreement, dated November 8, 1996, between Directed Services, Inc. and First Golden
(incorporated by reference from Exhibit 10(a) to Amendment No. 1 to Registrant's Registration
Statement on Form S-1 filed with the SEC on or about March 18, 1997 (File No. 333-16279))..........
------
(b) Administrative Services Agreement, dated November 8, 1996, between First Golden and Golden
American Life Insurance Company (incorporated by reference from Exhibit 10(b) to Amendment No. 1
to Registrant's Registration Statement on Form S-1 filed with the SEC on or about March 18, 1997
(File No. 333-16279))..............................................................................
------
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
INDEX
Exhibits to Annual Report on Form 10-K
Year ended December 31, 1999
FIRST GOLDEN AMERICAN LIFE INSURANCE COMPANY OF NEW YORK
PAGE NUMBER
-----------
(c) Form of Administrative Services Agreement between First Golden and Equitable Life Insurance
Company of Iowa (incorporated by reference from Exhibit 10(c) to Amendment No. 1 to Registrant's
Registration Statement on Form S-1 filed with the SEC on or about March 18, 1997 (File No.
333-16279))........................................................................................
------
(d) Form of Custodial Agreement between Registrant and The Bank of New York (incorporated by reference
from Exhibit 10(d) to Amendment No. 1 to Registrant's Registration Statement on Form S-1 filed
with the SEC on or about March 18, 1997 (File No. 333-16279))......................................
------
(e) Form of Participation Agreement between First Golden and the Travelers Series Fund Inc.
(incorporated by reference from Exhibit 10(e) to a Registration Statement for First Golden on Form
S-1 filed with the SEC on or about April 23, 1999 (File No. 333-77385))............................
------
(f) Participation Agreement between First Golden and the Greenwich Street Series Fund Inc.
(incorporated by reference from Exhibit 10(f) to a Registration Statement for First Golden on Form
S-1 filed with the SEC on or about April 23, 1999 (File No. 333-77385))............................
------
(g) Participation Agreement between First Golden and the Smith Barney Concert Allocation Series Inc.
(incorporated by reference from Exhibit 10(g) to a Registration Statement for First Golden on Form
S-1 filed with the SEC on or about April 23, 1999 (File No. 333-77385))............................
------
(h) Form of Participation Agreement between First Golden and PIMCO Variable Insurance Trust
(incorporated by reference from Exhibit 10(h) to a Registration Statement for First Golden on Form
S-1 filed with the SEC on or about April 23, 1999 (File No. 333-77385))............................
------
(i) Form of Participation Agreement between Golden American and The Galaxy VIP Fund (incorporated
by reference from Exhibit 10(1) to Amendment No. 1 to a Registration Statement for First Golden
on Form S-1 filed with the SEC on or about September 24, 1999 (File No. 333-76945))
------
(j) Asset Management Agreement, dated March 30, 1998, between First Golden and ING Investment
Management LLC (incorporated by reference from Exhibit 10(g) to First Golden's Form 10-Q filed with
the SEC on August 14, 1998 (File No. 333-16279))...................................................
------
(k) Underwriting Agreement between First Golden and Directed Services, Inc. (incorporated by reference
from Exhibit 1 to Amendment No. 1 to Registrant's Registration Statement on Form S-1 filed with
the SEC on or about March 18, 1997 (File No. 333-16279))...........................................
------
(l) Revolving Note Payable, dated July 27, 1998, between First Golden and SunTrust Bank, Atlanta
(incorporated by reference from Exhibit 10(i) to First Golden's Form 10-Q filed with the SEC on
November 12, 1998 (File No. 333-16279))............................................................
------
(m) Revolving Note Payable, dated July 31, 1999, between First Golden and SunTrust Bank, Atlanta
(incorporated by reference from Exhibit 10(i) to First Golden's Form 10-Q filed with the SEC on
August 13, 1999 (File No. 333-16279))..............................................................
------
27 FINANCIAL DATA SCHEDULE (ELECTRONIC FILING ONLY)..........................................................
------
</TABLE>
36
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
BALANCE SHEETS AND STATEMENTS OF INCOME AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 28,095
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 30,404
<CASH> 1,026
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 3,198
<TOTAL-ASSETS> 83,078
<POLICY-LOSSES> 7,583
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 100
0
0
<COMMON> 2,000
<OTHER-SE> 24,658
<TOTAL-LIABILITY-AND-EQUITY> 83,078
0
<INVESTMENT-INCOME> 2,147
<INVESTMENT-GAINS> (166)
<OTHER-INCOME> 619
<BENEFITS> 662
<UNDERWRITING-AMORTIZATION> 201
<UNDERWRITING-OTHER> 345
<INCOME-PRETAX> 1,380
<INCOME-TAX> 569
<INCOME-CONTINUING> 811
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 811
<EPS-BASIC> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
