SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission file number 33-87272, 333-51353, 333-28765, 333-28681,
333-28743, 333-51949, 333-65009, 333-66745,
333-76941, 333-76945
GOLDEN AMERICAN LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
Delaware 41-0991508
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
1475 Dunwoody Drive, West Chester, Pennsylvania 19380-1478
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (610) 425-3400
___________________________________________________________________________
Former name, former address and formal fiscal year, if changed since last
report
Indicate by check 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 / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
250,000 shares of Common Stock as of November 8, 1999.
NOTE: WHEREAS GOLDEN AMERICAN LIFE INSURANCE COMPANY MEETS THE CONDITIONS
SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10Q, THIS FORM IS
BEING FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL
INSTRUCTION H(2).
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Person for whom the Financial Information is given: Golden American Life
Insurance Company
Condensed Consolidated Statements of Operations (Unaudited):
<TABLE>
<CAPTION>
For the Three For the Three
Months Ended Months Ended
September 30, 1999 September 30, 1998
_____________________________________
(Dollars in thousands)
<S> <C> <C>
Revenues:
Annuity and interest sensitive life
product charges $20,412 $10,114
Management fee revenue 2,659 1,234
Net investment income 14,513 10,675
Realized gains (losses) on investments (498) 303
Other income 1,259 1,899
_____________________________________
38,345 24,225
Insurance benefits and expenses:
Annuity and interest sensitive life
benefits:
Interest credited to account balances 42,977 26,141
Benefit claims incurred in excess of
account balances 1,727 451
Underwriting, acquisition, and
insurance expenses:
Commissions 51,359 32,781
General expenses 18,764 9,949
Insurance taxes, state licences,
and fees 909 891
Policy acquisition costs deferred (94,852) (52,760)
Amortization:
Deferred policy acquisition costs 8,986 1,938
Value of purchased insurance in force 1,572 289
Goodwill 945 945
_____________________________________
32,387 20,625
Interest expense 2,056 1,026
_____________________________________
34,443 21,651
_____________________________________
Income before income taxes 3,902 2,574
Income taxes 1,773 1,271
_____________________________________
Net income $2,129 $1,303
=====================================
</TABLE>
See accompanying notes.
Condensed Consolidated Statements of Operations (Unaudited):
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
September 30, 1999 September 30, 1998
_____________________________________
(Dollars in thousands)
<S> <C> <C>
Revenues:
Annuity and interest sensitive life
product charges $55,195 $26,984
Management fee revenue 6,755 3,257
Net investment income 42,671 29,296
Realized gains (losses) on investments (2,215) 436
Other income 7,448 4,805
_____________________________________
109,854 64,778
Insurance benefits and expenses:
Annuity and interest sensitive life
benefits:
Interest credited to account balances 125,404 64,110
Benefit claims incurred in excess of
account balances 3,452 862
Underwriting, acquisition, and
insurance expenses:
Commissions 134,585 84,958
General expenses 47,551 23,480
Insurance taxes, state licences,
and fees 3,545 2,680
Policy acquisition costs deferred (244,840) (133,616)
Amortization:
Deferred policy acquisition costs 19,699 4,014
Value of purchased insurance in force 4,803 3,252
Goodwill 2,834 2,834
_____________________________________
97,033 52,574
Interest expense 5,552 3,033
_____________________________________
102,585 55,607
_____________________________________
Income before income taxes 7,269 9,171
Income taxes 3,718 4,294
_____________________________________
Net income $3,551 $4,877
=====================================
</TABLE>
See accompanying notes.
Condensed Consolidated Balance Sheets (Unaudited):
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
_____________________________________
(Dollars in thousands,
except per share data)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, available for sale,
at fair value (cost: 1999 - $815,027;
1998 - $739,772) $798,708 $741,985
Equity securities, at fair value
(cost: 1999 - $14,437; 1998 - $14,437) 13,679 11,514
Mortgage loans on real estate 93,884 97,322
Policy loans 13,454 11,772
Short-term investments 66,519 41,152
_____________________________________
Total investments 986,244 903,745
Cash and cash equivalents 12,908 6,679
Due from affiliates 1,460 2,983
Accrued investment income 11,896 9,645
Deferred policy acquisition costs 439,176 204,979
Value of purchased insurance in force 32,984 35,977
Current income taxes recoverable 204 628
Deferred income tax asset 29,690 31,477
Property and equipment, less allowances for
depreciation of $2,807 in 1999 and $801
in 1998 13,017 7,348
Goodwill, less accumulated amortization of
$7,242 in 1999 and $4,408 in 1998 143,886 146,719
Other assets 42,072 6,239
Separate account assets 5,598,490 3,396,114
_____________________________________
Total assets $7,312,027 $4,752,533
=====================================
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
_____________________________________
(Dollars in thousands,
except per share data)
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Policy liabilities and accruals:
Future policy benefits:
Annuity and interest sensitive life
products $1,009,382 $881,112
Unearned revenue reserve 5,855 3,840
Other policy claims and benefits 15 --
_____________________________________
1,015,252 884,952
Surplus notes 160,000 85,000
Due to affiliates 4,328 --
Other liabilities 80,081 32,573
Separate account liabilities 5,598,490 3,396,114
_____________________________________
6,858,151 4,398,639
Commitments and contingencies
Stockholder's equity:
Common stock, par value $10 per share,
authorized, issued, and outstanding
250,000 shares 2,500 2,500
Additional paid-in capital 447,640 347,640
Accumulated other comprehensive loss (4,464) (895)
Retained earnings 8,200 4,649
_____________________________________
Total stockholder's equity 453,876 353,894
_____________________________________
Total liabilities and stockholder's
equity $7,312,027 $4,752,533
=====================================
</TABLE>
See accompanying notes.
Condensed Consolidated Statements of Cash Flows (Unaudited):
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
September 30, 1999 September 30, 1998
_____________________________________
(Dollars in thousands)
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES ($60,026) ($22,666)
INVESTING ACTIVITIES
Sale, maturity, or repayment of
investments:
Fixed maturities - available for sale 170,548 92,707
Mortgage loans on real estate 4,241 3,145
Short-term investments - net -- 2,575
_____________________________________
174,789 98,427
Acquisition of investments:
Fixed maturities - available for sale (250,277) (291,687)
Equity securities -- (10,000)
Mortgage loans on real estate (1,034) (16,390)
Policy loans - net (1,682) (1,385)
Short term investments - net (25,367) --
_____________________________________
(278,360) (319,462)
Net purchase of property and equipment (7,700) (3,470)
_____________________________________
Net cash used in investing activities (111,271) (224,505)
FINANCING ACTIVITIES
Proceeds from reciprocal loan agreement
borrowings 488,950 242,847
Repayment of reciprocal loan agreement
borrowings (488,950) (202,847)
Proceeds from revolving note payable 131,595 20,082
Repayment of revolving note payable (131,595) --
Proceeds from surplus note 75,000 --
Repayment of line of credit borrowings -- (5,309)
Receipts from annuity and interest
sensitive life policies credited to
account balances 540,464 350,385
Return of account balances on annuity
and interest sensitive life policies (98,715) (50,370)
Net reallocations to Separate Accounts (439,223) (163,455)
Contributions from parent 100,000 53,750
_____________________________________
Net cash provided by financing activities 177,526 245,083
_____________________________________
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
For the Nine For the Nine
Months Ended Months Ended
September 30, 1999 September 30, 1998
_____________________________________
(Dollars in thousands)
<S> <C> <C>
Increase (decrease) in cash and cash
equivalents $6,229 ($2,088)
Cash and cash equivalents at beginning
of period 6,679 21,039
_____________________________________
Cash and cash equivalents at end of period $12,908 $18,951
=====================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the period for:
Interest $5,078 $3,493
Taxes 10 80
Non-cash financing activities:
Non-cash adjustment to additional paid in
capital for adjusted merger costs -- 143
Non-cash contribution of capital from
parent to repay line of credit borrowings -- 18,750
</TABLE>
See accompanying notes.
NOTE 1 -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, the financial statements do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. All adjustments were of a normal recurring nature, unless
otherwise noted in Management's Discussion and Analysis and the Notes to
Financial Statements. Operating results for the nine months ended September
30, 1999 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1999. These financial statements should be
read in conjunction with the financial statements and related notes included
in the Golden American Life Insurance Company's annual report on Form 10-K
for the year ended December 31, 1998.
CONSOLIDATION
The condensed consolidated financial statements include Golden American Life
Insurance Company ("Golden American") and its wholly owned subsidiary, First
Golden American Life Insurance Company of New York ("First Golden," and with
Golden American, collectively, the "Companies"). All significant
intercompany accounts and transactions have been eliminated.
ORGANIZATION
Golden American is a wholly owned subsidiary of Equitable of Iowa Companies,
Inc. ("EIC" or the "Parent"). 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 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., a Delaware corporation.
FAIR VALUES
Estimated fair values of publicly traded fixed maturities for 1999 are as
reported by an independent pricing service.
STATUTORY
Net loss for Golden American as determined in accordance with statutory
accounting practices was $75,508,000 and $32,198,000 for the nine months
ended September 30, 1999 and 1998, respectively. Total statutory capital and
surplus was $285,674,000 at September 30, 1999 and $183,045,000 at December
31, 1998.
RECLASSIFICATIONS
Certain amounts in the September 30, 1998 and December 31, 1998 financial
statements have been reclassified to conform to the September 30, 1999
financial statement presentation.
NOTE 2 -- COMPREHENSIVE INCOME
As of January 1, 1998, the Companies adopted the Statement of Financial
Accounting Standard ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this statement had no
impact on the Companies' net income or stockholder's equity. SFAS No. 130
requires unrealized gains or losses on the Companies' available for sale
securities (net of adjustments for value of purchased insurance in force
("VPIF"), deferred policy acquisition costs ("DPAC"), and deferred income
taxes) to be included in other comprehensive income.
During the third quarter and first nine months of 1999, other comprehensive
income (loss) for the Companies amounted to $2,059,000 and $(18,000),
respectively ($2,426,000 and $5,478,000, respectively, for the same periods
of 1998). Included in these amounts are other comprehensive income (loss)
for First Golden of $(14,000) and $(258,000) for the third quarter and first
nine months of 1999, respectively ($601,000 and $1,174,000, respectively, for
the same periods of 1998). 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 $(460,000) and $(2,512,000) during the third quarter and first nine
months of 1999, respectively ($263,000 and $388,000, respectively, for the
same periods of 1998). Such amounts, which have been measured through the
date of sale, are net of income taxes and adjustments for VPIF and DPAC
totaling $(38,000) and $297,000 for the third quarter and first nine months
of 1999, respectively ($40,000 and $48,000, respectively, for the same
periods of 1998).
NOTE 3 -- INVESTMENTS
INVESTMENT VALUATION ANALYSIS: The Companies analyze the investment
portfolio at least quarterly in order to determine if the carrying value of
any investment has been impaired. The carrying value of debt and equity
securities is written down to fair value by a charge to realized losses when
an impairment in value appears to be other than temporary.
During the fourth quarter of 1998, Golden American determined that the
carrying value of two bonds exceeded their estimated net realizable value.
As a result, at December 31, 1998, Golden American recognized a total pre-tax
loss of $973,000 to reduce the carrying value of the bonds to their combined
net realizable value of $2,919,000. During the second quarter of 1999,
further information was received regarding these bonds and Golden American
determined that the carrying value of the two bonds exceeded their estimated
net realizable value. As a result, at June 30, 1999, Golden American
recognized a total pre-tax loss of $1,639,000 to further reduce the carrying
value of the bonds to their combined net realizable value of $1,137,000.
NOTE 4 -- RELATED PARTY TRANSACTIONS
OPERATING AGREEMENTS: Directed Services, Inc. ("DSI"), an affiliate, 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
insurance products issued by the Companies. DSI is authorized to enter into
agreements with broker/dealers to distribute the Companies' variable
insurance products and appoint representatives of the broker/dealers as
agents. The Companies paid commissions and expenses to DSI totaling
$50,131,000 in the third quarter and $130,419,000 for the first nine months
of 1999 ($32,104,000 and $82,548,000, respectively, for the same periods of
1998).
Golden American provides certain managerial and supervisory services to DSI.
The fee paid by DSI for these services is calculated as a percentage of
average assets in the variable separate accounts. For the third quarter and
first nine months of 1999, the fee was $2,659,000 and $6,755,000,
respectively ($1,234,000 and $3,257,000, respectively, for the same periods
of 1998).
The Companies have 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 Companies
record a fee based on the value of the assets under management. The fee is
payable quarterly. For the third quarter and first nine months of 1999, the
Companies incurred fees of $523,000 and $1,637,000, respectively, under this
agreement ($341,000 and $1,013,000, respectively, for the same periods of
1998).
Golden American has a guaranty agreement with Equitable Life Insurance
Company of Iowa ("Equitable Life"), an affiliate. In consideration of an
annual fee, payable June 30, Equitable Life guarantees to Golden American
that it will make funds available, if needed, to Golden American to pay the
contractual claims made under the provisions of Golden American's life
insurance and annuity contracts. The agreement is not, and nothing contained
therein or done pursuant thereto by Equitable Life shall be deemed to
constitute, a direct or indirect guaranty by Equitable Life of the payment of
any debt or other obligation, indebtedness or liability, of any kind or
character whatsoever, of Golden American. The agreement does not guarantee
the value of the underlying assets held in separate accounts in which funds
of variable life insurance and variable annuity policies have been invested.
The calculation of the annual fee is based on risk based capital. As Golden
American's risk based capital level was above required amounts, no annual fee
was payable at June 30, 1999 or 1998.
Golden American provides certain advisory, computer and other resources and
services to Equitable Life. Revenues for these services, which reduce
general expenses incurred by Golden American, totaled $237,000 in the third
quarter of 1999 and $898,000 for the first nine months of 1999 ($1,524,000
and $5,091,000, respectively, for the same periods of 1998).
The Companies have a service agreement with Equitable Life in which Equitable
Life provides administrative and financial related services. Under this
agreement, the Companies incurred expenses of $50,000 in the third quarter of
1999 and $855,000 for the first nine months of 1999 ($261,000 and $575,000,
respectively, for the same periods of 1998).
The Companies provide resources and services to DSI. Revenues for these
services, which reduce general expenses incurred by the Companies, totaled
$276,000 in the third quarter of 1999 and $759,000 for the first nine months
of 1999 ($19,000 and $57,000, respectively, for the same periods of 1998).
Golden American provides resources and services to ING Mutual Funds
Management Co., LLC, an affiliate. Revenues for these services, which reduce
general expenses incurred by Golden American, totaled $159,000 in the third
quarter of 1999 and $376,000 for the first nine months of 1999.
For the third quarter of 1999, the Companies received 7.8% of total premiums
(9.7% in the same period of 1998), net of reinsurance, for variable products
sold through four affiliates, Locust Street Securities, Inc. ("LSSI"), Vestax
Securities Corporation ("Vestax"), DSI, and Multi-Financial Securities
Corporation ("Multi-Financial") of $46,600,000, $12,900,000, $0, and
$11,000,000, respectively ($34,600,000, $14,200,000, $1,800,000, and
$4,100,000, respectively, for the same period of 1998). For the first nine
months of 1999, the Companies received 9.5% of total premiums (10.0% in the
same period of 1998), net of reinsurance, from LSSI, Vestax, DSI, and Multi-
Financial of $121,900,000, $72,000,000, $2,300,000, and $24,400,000,
respectively ($92,700,000, $30,000,000, $10,700,000, and $10,000,000,
respectively, for the same period of 1998).
RECIPROCAL LOAN AGREEMENT: Golden American maintains a reciprocal loan
agreement with ING America Insurance Holdings, Inc. ("ING AIH"), a Delaware
corporation and affiliate, to facilitate the handling of unusual and/or
unanticipated short-term cash requirements. Under this agreement, which
became effective January 1, 1998 and expires December 31, 2007, Golden
American and ING AIH can borrow up to $65,000,000 from one another. Prior to
lending funds to ING AIH, Golden American must obtain approval from the
Department of Insurance of the State of Delaware. Interest on any Golden
American borrowings is charged at the rate of ING AIH's cost of funds for the
interest period plus 0.15%. Interest on any ING AIH borrowings is charged at
a rate based on the prevailing interest rate of U.S. commercial paper
available for purchase with a similar duration. Under this agreement, Golden
American incurred interest expense of $397,000 in the third quarter of 1999
and $633,000 for the first nine months of 1999 ($505,000 and $1,269,000,
respectively, for the same periods of 1998). At September 30, 1999, Golden
American did not have any borrowings or receivables from ING AIH under this
agreement.
LINE OF CREDIT: Golden American maintained a line of credit agreement with
Equitable to facilitate the handling of unusual and/or unanticipated short-
term cash requirements. Under this agreement, which became effective
December 1, 1996 and expired December 31, 1997, Golden American could borrow
up to $25,000,000. Interest on any borrowings was charged at the rate of
Equitable's monthly average aggregate cost of short-term funds plus 1.00%.
Under this agreement, Golden American incurred interest expense of $211,000
for the first quarter of 1998. The outstanding balance was paid by a capital
contribution from the Parent and with funds borrowed from ING AIH.
SURPLUS NOTES: On September 30, 1999, Golden American issued a 7.75% surplus
note in the amount of $75,000,000 to ING AIH. The note matures on September
29, 2029. Payment of the note and related accrued interest is subordinate to
payments due to policyholders, claimant and beneficiary claims, as well as
debts owed to all other classes of debtors, other than surplus note holders,
of Golden American. Any payment of principal and/or interest made is subject
to the prior approval of the Delaware Insurance Commissioner. Under this
agreement, Golden American incurred no interest expense in the third quarter
of 1999.
On December 30, 1998, Golden American issued a 7.25% surplus note in the
amount of $60,000,000 to Equitable Life. The note matures on December 29,
2028. Payment of the note and related accrued interest is subordinate to
payments due to policyholders, claimant and beneficiary claims, as well as
debts owed to all other classes of debtors, other than surplus note holders,
of Golden American. Any payment of principal and/or interest made is subject
to the prior approval of the Delaware Insurance Commissioner. Under this
agreement, Golden American incurred interest expense of $1,088,000 in the
third quarter of 1999 and $3,263,000 for the first nine months of 1999.
On December 17, 1996, Golden American issued an 8.25% surplus note in the
amount of $25,000,000 to Equitable. The note matures on December 17, 2026.
Payment of the note and related accrued interest is subordinate to payments
due to policyholders, claimant and beneficiary claims, as well as debts owed
to all other classes of debtors of Golden American. Any payment of principal
made is subject to the prior approval of the Delaware Insurance Commissioner.
Golden American incurred interest totaling $516,000 in the third quarter of
1999 and $1,547,000 for the first nine months of 1999, unchanged from the
same periods of 1998. As a result of the merger, the surplus note is now
payable to EIC.
STOCKHOLDER'S EQUITY: During the third quarter of 1999 and the first nine
months of 1999, Golden American received capital contributions from its
Parent of $20,000,000 and $100,000,000, respectively ($0 and $72,500,000,
respectively, for the same periods of 1998).
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
REINSURANCE: At September 30, 1999, Golden American had reinsurance treaties
with four unaffiliated reinsurers and one affiliated reinsurer covering a
significant portion of the mortality risks under its variable contracts.
Golden American remains liable to the extent its reinsurers do not meet their
obligations under the reinsurance agreements. At September 30, 1999 and 1998,
the Companies had a net receivable of $14,041,000 and $6,539,000,
respectively, for reserve credits, reinsurance claims, or other receivables
from these reinsurers comprised of $2,268,000 and $257,000, respectively, for
claims recoverable from reinsurers, $918,000 and $451,000, respectively, for
a payable for reinsurance premiums and $12,691,000 and $6,733,000,
respectively, for a receivable from an unaffiliated reinsurer. Included in
the accompanying financial statements are net considerations to reinsurers of
$2,638,000 in the third quarter of 1999 and $6,656,000 for the first nine
months of 1999 compared to $1,293,000 and $3,259,000, respectively, for the
same periods in 1998. Also included in the accompanying financial statements
are net policy benefits of $2,569,000 in the third quarter of 1999 and
$4,008,000 for the first nine months of 1999 compared to $1,272,000 and
$2,096,000, respectively, for the same periods in 1998.
Effective June 1, 1994, Golden American entered into a modified coinsurance
agreement with an unaffiliated reinsurer. The accompanying financial
statements are presented net of the effects of the treaty.
GUARANTY FUND ASSESSMENTS: Assessments are levied on the Companies by life
and health guaranty associations in most states in which the Companies are
licensed to cover losses of policyholders of insolvent or rehabilitated
insurers. In some states, these assessments can be partially recovered
through a reduction in future premium taxes. The Companies cannot predict
whether and to what extent legislative initiatives may affect the right to
offset. The associated cost for a particular insurance company can vary
significantly based upon its fixed account premium volume by line of business
and state premiums as well as its potential for premium tax offset. The
Companies have established an undiscounted reserve to cover such assessments,
review information regarding known failures, and revise estimates of future
guaranty fund assessments. Accordingly, the Companies accrued and charged to
expense an additional $208,000 and $598,000 in the third quarter and first
nine months of 1998, respectively. At September 30, 1999, the Companies have
an undiscounted reserve of $2,444,000 to cover estimated future assessments
(net of related anticipated premium tax credits) and have established an
asset totaling $586,000 for assessments paid which may be recoverable through
future premium tax offsets. The Companies believe this reserve is sufficient
to cover expected future guaranty fund assessments based upon previous
premiums and known insolvencies at this time.
LITIGATION: The Companies, 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 Companies currently believe no pending or
threatened lawsuits or actions exist that are reasonably likely to have a
material adverse impact on the Companies.
VULNERABILITY FROM CONCENTRATIONS: The Companies have various concentrations
in the investment portfolio. The Companies' asset growth, net investment
income, and cash flow are primarily generated from the sale of variable
products and associated future policy benefits and separate account
liabilities. Substantial changes in tax laws that 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 on the Companies' financial condition.
Two broker/dealers, each having at least ten percent of total sales,
generated 29% of the Companies' sales during the first nine months of 1999
(10% by one broker/dealer in the same period of 1998). The Premium Plus
variable annuity product generated 78% of the Companies' sales during the
first nine months of 1999 (59% in the same period of 1998).
REVOLVING NOTE PAYABLE: To enhance short-term liquidity, the Companies
established a revolving note payable effective July 27, 1998 and expiring
July 31, 1999 with SunTrust Bank, Atlanta (the "Bank"). The note was
approved by the Boards of Directors of Golden American and First Golden on
August 5, 1998 and September 29, 1998, respectively. As of July 31, 1999,
the SunTrust Bank, Atlanta revolving note facility was extended to July 31,
2000. The total amount the Companies may have outstanding is $85,000,000, of
which Golden American and First Golden have individual credit sublimits of
$75,000,000 and $10,000,000, respectively. 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
Companies for the advance. The terms of the agreement require the Companies
to maintain the minimum level of Company Action Level Risk Based Capital as
established by applicable state law or regulation. During the quarter and
nine months ended September 30, 1999, the Companies paid interest expense of
$55,000 and $109,000, respectively ($6,000 for the same periods of 1998). At
September 30, 1999, the Companies did not have any borrowings under this
agreement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS.
The purpose of this section is to discuss and analyze Golden American Life
Insurance Company's ("Golden American") condensed consolidated 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 condensed consolidated financial
statements, related notes, and the Cautionary Statement Regarding Forward-
Looking Statements, which appear elsewhere in this report. Golden American
reports financial results on a consolidated basis. The condensed
consolidated financial statements include the accounts of Golden American and
its subsidiary, First Golden American Life Insurance Company of New York
("First Golden," and collectively with Golden American, the "Companies").
Golden American is a wholly owned subsidiary of Equitable of Iowa Companies,
Inc. ("EIC" or the "Parent"). 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 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., a Delaware corporation.
RESULTS OF OPERATIONS
_____________________
PREMIUMS
<TABLE>
<CAPTION>
Percentage Dollar
Nine Months Ended September 30 1999 Change Change 1998
________________________________________________________________________________
(Dollars in millions)
<S> <C> <C> <C> <C>
Variable annuity
premiums:
Separate account $1,783.5 64.9% $702.1 $1,081.4
Fixed account 539.4 55.6 192.8 346.6
__________________________________________________
Total variable annuity
premiums 2,322.9 62.7 894.9 1,428.0
Variable life
premiums 7.0 (38.9) (4.4) 11.4
__________________________________________________
Total premiums $2,329.9 61.9% $890.5 $1,439.4
==================================================
</TABLE>
For the Companies' 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 income and
product charges.
Variable annuity separate account premiums increased 64.9% during the first
nine months of 1999. The fixed account portion of the Companies' variable
annuity premiums increased 55.6% during the first nine months of 1999. These
increases resulted from increased sales of the Premium Plus variable annuity
product.
Premiums, net of reinsurance, for variable products from two significant
broker/dealers each having at least ten percent of total sales for the nine
months ended September 30, 1999 totaled $664.2 million, or 29% of total
premiums ($142.6 million, or 10%, from the one significant broker/dealer for
the nine months ended September 30, 1998).
REVENUES
<TABLE>
<CAPTION>
Percentage Dollar
Nine Months Ended September 30 1999 Change Change 1998
________________________________________________________________________________
(Dollars in millions)
<S> <C> <C> <C> <C>
Annuity and interest
sensitive life
product charges $55.2 104.5% $28.2 $27.0
Management fee revenue 6.8 107.4 3.5 3.3
Net investment income 42.7 45.7 13.4 29.3
Realized gains (losses)
on investments (2.2) (607.5) (2.6) 0.4
Other income 7.4 55.0 2.6 4.8
__________________________________________________
$109.9 69.6% $45.1 $64.8
==================================================
</TABLE>
Total revenues increased 69.6% in the first nine months of 1999 from the same
period in 1998. Annuity and interest sensitive life product charges increased
104.5% in the first nine months of 1999 due to additional fees earned from
the increasing block of business in the separate accounts.
Golden American provides certain managerial and supervisory services to
Directed Services, Inc. ("DSI"). The fee paid to Golden American for these
services, which is calculated as a percentage of average assets in the
variable separate accounts, was $6.8 million and $3.3 million for the first
nine months of 1999 and 1998, respectively.
Net investment income increased 45.7% in the first nine months of 1999 due to
growth in invested assets from September 30, 1998. The Companies had $2.2
million of realized losses resulting from the writedown of two fixed
maturities in the second quarter of 1999 and from the sale of investments in
the first nine months of 1999, compared to gains of $0.4 million in the same
period of 1998. Other income increased $2.6 million to $7.4 million in the
first nine months of 1999 due primarily to income received due to a modified
coinsurance agreement with an unaffiliated reinsurer, which was offset by a
reduction in the Companies' deferred policy acquisition costs.
EXPENSES
Total insurance benefits and expenses increased $44.5 million, or 84.6%, to
$97.0 million in the first nine months of 1999. Interest credited to account
balances increased $61.3 million, or 95.6%, to $125.4 million in the first
nine months of 1999. The extra credit bonus on the Premium Plus variable
annuity product increased $49.9 million to $85.7 million at September 30,
1999 resulting in an increase in interest credited during the first nine
months of 1999 compared to the same period in 1998. The bonus interest on
the fixed account increased $2.6 million to $7.6 million at September 30,
1999 resulting in an increase in interest credited during the first nine
months of 1999 compared to the same period in 1998. The remaining increase in
interest credited relates to higher account balances associated with the
Companies' fixed account option within the variable products.
Commissions increased $49.6 million, or 58.4%, to $134.6 million in the first
nine months of 1999. Insurance taxes, state licenses, and fees increased $0.9
million, or 32.3%, to $3.5 million in the first nine months of 1999. Changes
in commissions and insurance taxes, state licenses, and fees are generally
related to changes in the level and composition of variable product sales.
Insurance taxes, state licenses, and fees are impacted by several other
factors, which include an increase in FICA taxes primarily due to bonuses and
expenses for the triennial insurance department examination of Golden
American. Most costs incurred as the result of sales have been deferred,
thus having very little impact on current earnings.
General expenses increased $24.1 million, or 102.5%, to $47.6 million in the
first nine months of 1999. Management expects general expenses to continue to
increase in 1999 as a result of the emphasis on expanding the salaried
wholesaler distribution network and the growth in sales. The Companies use a
network of wholesalers to distribute products and the salaries and sales
bonuses of these wholesalers are included in general expenses. The portion of
these salaries and related expenses that varies directly with production
levels is deferred thus having little impact on current earnings. The
increase in general expenses was partially offset by reimbursements received
from DSI and Equitable Life Insurance Company of Iowa ("Equitable Life"), an
affiliate, for certain advisory, computer, and other resources and services
provided by Golden American.
The Companies' previous balances of deferred policy acquisition costs
("DPAC"), value of purchased insurance in force ("VPIF"), and unearned
revenue reserve were eliminated and an asset of $44.3 million representing
VPIF was established for all policies in force at the merger date. During
the first nine months of 1999, VPIF was adjusted to increase amortization by
$0.7 million to reflect changes in the assumptions related to the timing of
estimated gross profits. During the first nine months of 1998, VPIF
decreased $2.7 million to adjust the value of other receivables and increased
$0.2 million as a result of an adjustment to the merger costs. Amortization
of DPAC increased $15.7 million, or 390.7%, in the first nine months of 1999.
This increase resulted from growth in policy acquisition costs deferred from
$133.6 million at September 30, 1998 to $244.8 million at September 30, 1999,
which was generated by expenses associated with the large sales volume
experienced since September 30, 1998. 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 September
30, 1999 is $1.1 million for the remainder of 1999, $4.3 million in 2000,
$4.0 million in 2001, $3.6 million in 2002, $3.2 million in 2003, and $2.4
million in 2004. Actual amortization may vary based upon changes in
assumptions and experience.
Amortization of goodwill during the first nine months of 1999 totaled $2.8
million, unchanged from the first nine months of 1998. Goodwill resulting
from the merger is being amortized on a straight-line basis over 40 years.
Interest expense on the $25 million surplus note issued in December 1996 and
expiring December 2026 was $1.5 million in the first nine months of 1999,
unchanged from the same period of 1998. Interest expense on the $60 million
surplus note issued in December 1998 and expiring December 2028 was $3.3
million in the first nine months of 1999. Golden American also paid $0.7
million in the first nine months of 1999 compared to $1.3 million in the same
period of 1998 to ING America Insurance Holdings, Inc. ("ING AIH") for
interest on the reciprocal loan agreement. Interest expense on the revolving
note payable with SunTrust Bank, Atlanta was $0.1 million for the first nine
months of 1999. In addition, Golden American paid interest of $0.2 million
during the first quarter of 1998 on the line of credit with Equitable, which
was repaid with a capital contribution from the Parent and with funds
borrowed from ING AIH.
INCOME
Net income for the first nine months of 1999 was $3.6 million, a decrease of
$1.3 million from net income of $4.9 million in the same period of 1998.
Comprehensive loss for the first nine months of 1999 was $18,000, a decrease
of $5.5 million from comprehensive income of $5.5 million in the same period
of 1998.
FINANCIAL CONDITION
___________________
INVESTMENTS
The financial statement carrying value and amortized cost basis of the
Companies' total investment portfolio grew 8.7% and 10.5%, respectively,
during the first nine months of 1999. All of the Companies' investments,
other than mortgage loans on real estate, are carried at fair value in the
Companies' financial statements. As such, growth in the carrying value of the
Companies' investment portfolio included changes in unrealized appreciation
and depreciation of fixed maturities as well as growth in the cost basis of
these securities. Growth in the cost basis of the Companies' investment
portfolio resulted from the investment of premiums from the sale of the
Companies' fixed account options. The Companies manage the growth of
insurance operations in order to maintain adequate capital ratios. To
support the fixed account options of the Companies' variable insurance
products, cash flow was invested primarily in fixed maturities and short-term
investments.
At September 30, 1999, the Companies had no investments in default, and the
Companies' investment portfolio had a yield of 6.6%. The Companies estimate
the total investment portfolio, excluding policy loans, had a fair value
approximately equal to 98.0% of amortized cost value at September 30, 1999.
FIXED MATURITIES: At September 30, 1999, the Companies had fixed maturities
with an amortized cost of $815.0 million and an estimated fair value of
$798.7 million. The Companies classify 100% of securities as available for
sale. Net unrealized depreciation on fixed maturities of $16.3 million was
comprised of gross appreciation of $0.8 million and gross depreciation of
$17.1 million. Net unrealized holding losses on these securities, net of
adjustments for VPIF, DPAC, and deferred income taxes of $4.0 million, was
included in stockholder's equity at September 30, 1999.
The individual securities in the Companies' 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 Rating Services ("Standard & Poor's")
($528.0 million or 64.8%), that are rated BBB+ to BBB- by Standard & Poor's
($138.0 million or 16.9%), and below investment grade securities, which are
securities issued by corporations that are rated BB+ to CCC- by Standard &
Poor's ($72.3 million or 8.9%). Securities not rated by Standard & Poor's
had a National Association of Insurance Commissioners ("NAIC") rating of 1,
2, 3, or 4 ($76.7 million or 9.4 %). The Companies' fixed maturity investment
portfolio had a combined yield at amortized cost of 6.6% at September 30,
1999.
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.
At September 30, 1999, the amortized cost value of the Companies' total
investments in below investment grade securities, excluding mortgage-backed
securities, was $73.7 million, or 7.4%, of the Companies' investment
portfolio. The Companies intend to purchase additional below investment
grade securities but do not expect the percentage of the portfolio invested
in such securities to exceed 10% of the investment portfolio. At September
30, 1999, the yield at amortized cost on the Companies' below investment
grade portfolio was 7.8% compared to 6.6% for the Companies' investment grade
corporate bond portfolio. The Companies estimate the fair value of the below
investment grade portfolio was $70.5 million, or 95.6% of amortized cost
value, at September 30, 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 recession or increasing interest rates, than are
investment grade issuers. The Companies attempt to reduce the overall risk in
the below investment grade portfolio, as in all investments, through careful
credit analysis, strict investment policy guidelines, and diversification by
company and by industry.
The Companies analyze the investment portfolio, including below investment
grade securities, at least quarterly in order to determine if the Companies'
ability to realize the carrying value on any investment has been impaired.
For debt and equity securities, if impairment in value is determined to be
other than temporary (i.e. if it is probable the Companies 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 Companies' portfolio. Significant write-downs in the
carrying value of investments could materially adversely affect the
Companies' net income in future periods.
During the nine months ended September 30, 1999, fixed maturities designated
as available for sale with a combined amortized cost of $170.6 million were
called or repaid by their issuers. In total, net pre-tax losses from sales,
calls, and repayments of fixed maturities amounted to $2.2 million in the
first nine months of 1999.
During the fourth quarter of 1998, Golden American determined that the
carrying value of two bonds exceeded their estimated net realizable value.
As a result, at December 31, 1998, Golden American recognized a total pre-tax
loss of approximately $1.0 million to reduce the carrying value of the bonds
to their combined net realizable value of $2.9 million. During the second
quarter of 1999, further information was received regarding these bonds and
Golden American determined that the carrying value of the two bonds exceeded
their estimated net realizable value. As a result, at June 30, 1999, Golden
American recognized a total pre-tax loss of approximately $1.6 million to
further reduce the carrying value of the bonds to their combined net
realizable value of $1.1 million.
EQUITY SECURITIES: Equity securities represent 1.5% of the Companies'
investment portfolio. At September 30, 1999, the Companies owned equity
securities with a cost of $14.4 million and an estimated fair value of $13.7
million. Net unrealized depreciation of equity securities of $0.7 million was
comprised of gross appreciation of $0.3 million and gross depreciation of
$1.0 million. Equity securities are primarily comprised of investments in
shares of the mutual funds underlying the Companies' registered separate
accounts.
MORTGAGE LOANS ON REAL ESTATE: Mortgage loans on real estate represent 9.5%
of the Companies' investment portfolio. Mortgages outstanding at amortized
cost were $93.9 million at September 30, 1999 with an estimated fair value of
$91.2 million. The Companies' mortgage loan portfolio includes 57 loans with
an average size of $1.6 million and average seasoning of 0.8 years if
weighted by the number of loans. The Companies' mortgage loans on real
estate are typically secured by occupied buildings in major metropolitan
locations and not speculative developments and are diversified by type of
property and geographic location. At September 30, 1999, the yield on the
Companies' mortgage loan portfolio was 7.3%.
At September 30, 1999, no mortgage loan on real estate was delinquent by 90
days or more. The Companies' loan investment strategy is consistent with
other life insurance subsidiaries of ING in the U.S. The insurance
subsidiaries of EIC have experienced a historically low default rate in their
mortgage loan portfolios.
OTHER ASSETS
Accrued investment income increased $2.3 million during the first nine months
of 1999, due to an increase in the overall size of the portfolio resulting
from the investment of premiums allocated to the fixed account options of the
Companies' variable products.
DPAC represents certain deferred costs of acquiring new insurance business,
principally first year commissions and interest bonuses, extra credit
bonuses, and other expenses related to the production of new business after
the merger. The Companies' previous balances of DPAC and VPIF were eliminated
as of the merger date, and an asset 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 business in a
manner similar to DPAC amortization. Any expenses which vary directly with
the sales of the Companies' products are deferred and amortized. At
September 30, 1999, the Companies had DPAC and VPIF balances of $439.2
million and $33.0 million, respectively. During the first nine months of
1998, VPIF decreased $2.7 million to adjust the value of other receivables
and increased $0.2 million as a result of an adjustment to the merger costs.
Property and equipment increased $5.7 million, or 77.1%, during the first
nine months of 1999, due to the purchase of furniture and other equipment for
Golden American's new offices in West Chester, Pennsylvania.
Goodwill totaling $151.1 million, 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 September 30, 1999
was $7.2 million.
Other assets increased $35.8 million during the first nine months of 1999,
due mainly to an increase in a receivable from the separate account.
At September 30, 1999, the Companies had $5.6 billion of separate account
assets compared to $3.4 billion at December 31, 1998. The increase in
separate account assets resulted from market appreciation, increased transfer
activity, and sales of the Companies' variable annuity products, net of
redemptions.
At September 30, 1999, the Companies had total assets of $7.3 billion, a
53.9% increase from December 31, 1998.
LIABILITIES
In conjunction with the volume of variable annuity sales, the Companies'
total liabilities increased $2.5 billion, or 55.9%, during the first nine
months of 1999 and totaled $6.9 billion at September 30, 1999. Future policy
benefits for annuity and interest sensitive life products increased $128.3
million, or 14.6%, to $1.0 billion reflecting premium growth in the
Companies' fixed account options of the variable products, net of transfers
to the separate accounts. Market appreciation, increased transfer activity,
and premiums, net of redemptions, accounted for the $2.2 billion, or 64.9%,
increase in separate account liabilities to $5.6 billion at September 30,
1999.
On September 30, 1999, Golden American issued a $75 million, 7.75% surplus
note to ING AIH, which matures on September 29, 2029.
On December 30, 1998, Golden American issued a $60 million, 7.25% surplus
note to Equitable Life, which matures on December 29, 2028.
On December 17, 1996, Golden American issued a $25 million, 8.25% surplus
note to Equitable, which matures on December 17, 2026. As a result of the
merger, the surplus note is now payable to EIC.
Other liabilities increased $47.5 million from $32.6 million at December 31,
1998, due primarily to increases in securities payables and remittances to be
applied.
The effects of inflation and changing prices on the Companies' 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.
STOCKHOLDER'S EQUITY
Additional paid-in capital increased $100.0 million, or 28.8%, from December
31, 1998 to $447.6 million at September 30, 1999 due to capital contributions
from the Parent.
LIQUIDITY AND CAPITAL RESOURCES
_______________________________
Liquidity is the ability of the Companies to generate sufficient cash flows
to meet the cash requirements of operating, investing, and financing
activities. The Companies' principal sources of cash are variable annuity
premiums and product charges, investment income, maturing investments,
proceeds from debt issuance, and capital contributions made by the Parent.
Primary uses of these funds are payments of commissions and operating
expenses, interest and extra premium credits, investment purchases, repayment
of debt, as well as withdrawals and surrenders.
Net cash used in operating activities was $60.0 million in the first nine
months of 1999 compared to $22.7 million in the same period of 1998. The
Companies have predominantly had negative cash flows from operating
activities since Golden American started issuing variable insurance products
in 1989. These negative operating cash flows result primarily from the
funding of commissions and other deferrable expenses related to the continued
growth in the variable annuity products.
Net cash used in investing activities was $111.3 million during the first
nine months of 1999 compared to $224.5 million in the same period of 1998.
This decrease is primarily due to greater net purchases of fixed maturities,
equity securities, and mortgage loans on real estate during the first nine
months of 1998 than in the same period of 1999. Net purchases of fixed
maturities reached $79.7 million during the first nine months of 1999 versus
$199.0 million in the same period of 1998. Net sales of mortgage loans on
real estate were $3.2 million during the first nine months of 1999 compared
to net purchases of $13.2 million during the first nine months of 1998.
Net cash provided by financing activities was $177.5 million during the first
nine months of 1999 compared to $245.1 million during the same period in
1998. In the first nine months of 1999, net cash provided by financing
activities was positively impacted by net fixed account deposits of $441.7
million compared to $300.0 million in the same period of 1998. This increase
was offset by net reallocations to the Companies' separate accounts, which
increased to $439.2 million from $163.5 million during the prior year, and by
a decrease in net borrowings of $54.8 million in the first nine months of
1999 compared to the first nine months of 1998. In the first nine months of
1999, another important source of cash provided by financing activities was
$100.0 million in capital contributions from the Parent compared to $53.8
million in the first nine months of 1998. In addition, another source of cash
provided by financing activities during the third quarter of 1999 was $75.0
million in proceeds from a surplus note with ING AIH.
The Companies' 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. Golden American maintains a $65.0 million
reciprocal loan agreement with ING AIH, which expires on December 31, 2007.
In addition, the Companies have an $85.0 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 Companies' short-term
cash obligations.
Based on current trends, the Companies expect to continue to use net cash in
operating activities, given the continued growth of the variable annuity
products. It is anticipated that a continuation of capital contributions
from the Parent and the issuance of additional surplus notes will cover these
net cash outflows. ING is committed to the sustained growth of Golden
American. During 1999, ING will maintain Golden American's statutory capital
and surplus at the end of each quarter at a level such that: 1) the ratio of
Total Adjusted Capital divided by Company Action Level Risk Based Capital
exceeds 300%; 2) the ratio of Total Adjusted Capital (excluding surplus
notes) divided by Company Action Level Risk Based Capital exceeds 200%; and
3) Golden American's statutory capital and surplus exceeds the "Amounts
Accrued for Expense Allowances Recognized in Reserves," as disclosed on page
3, Line 13A of Golden American's Statutory Statement.
During the first quarter of 1999, Golden American's operations were moved to
a new site in West Chester, Pennsylvania. During the third quarter of 1999,
Golden American occupied an additional 20,000 square feet and currently
occupies 85,000 square feet of leased space, its affiliate occupies 20,000
square feet, and it has made commitments for an additional 20,000 square feet
to be occupied by itself or its affiliates during the fourth quarter of 1999.
Golden American's New York subsidiary is housed in leased space in New York,
New York. The Companies intend to spend approximately $1.0 million on
capital needs during the remainder of 1999.
The ability of Golden American to pay dividends to its Parent is restricted.
Prior approval of insurance regulatory authorities is required for payment of
dividends to the stockholder which exceed an annual limit. During 1999,
Golden American cannot pay dividends to its Parent without prior approval of
statutory authorities.
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 First Golden within thirty days
after the filing. The management of First Golden does not anticipate paying
any dividends to Golden American during 1999.
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
Companies have complied with the NAIC's risk-based capital reporting
requirements. Amounts reported indicate the Companies have total adjusted
capital well above all required capital levels.
REINSURANCE: At September 30, 1999, Golden American had reinsurance treaties
with four unaffiliated reinsurers and one affiliated reinsurer covering a
significant portion of the mortality risks under its variable contracts.
Golden American remains liable to the extent its reinsurers do not meet their
obligations under the reinsurance agreements.
YEAR 2000 READINESS DISCLOSURE: Based on and in conjunction with a 1997
study and an ongoing analysis of computer software and hardware, the
Companies have assessed their exposure to the Year 2000 change of the century
date issue. Some of the Companies' computer programs were originally written
using two digits rather than four to define a particular year. As a result,
these computer programs contain "time sensitive" software that may recognize
"00" as the year 1900 rather than the year 2000, which could cause system
failure or miscalculations resulting in disruptions to operations. These
disruptions could include, but are not limited to, a temporary inability to
process transactions. To a lesser extent, the Companies depend on various
non-information technology systems, which could also fail or malfunction as a
result of the Year 2000.
The Companies have developed a plan to address the Year 2000 issue in a
timely manner. The following schedule details the plan's phases and
completion dates:
<TABLE>
<CAPTION>
Phases % Complete Completion Dates
_____________________________________________________________________________
<S> <C> <C>
ASSESSMENT AND DEVELOPMENT of the steps to
be taken to address Year 2000 systems
issues 100% 12/31/1997
REMEDIATION of business critical systems
to address Year 2000 issues 100% 2/28/1999
REMEDIATION of non-critical systems
to address Year 2000 issues 100% 9/30/1999
TESTING of business critical systems 100% 3/05/1999
TESTING of non-critical systems and
integrated testing of hardware and
infrastructure 100% 9/30/1999
POINT-TO-POINT TESTING of external
interfaces with third party computer
systems that communicate with the
Companies' systems 100% 9/30/1999
IMPLEMENTATION of tested business
critical software addressing Year 2000
systems issues 100% 3/05/1999
IMPLEMENTATION of tested non-critical
software addressing Year 2000
systems issues 100% 9/30/1999
CONTINGENCY PLAN 100% 6/30/1999
</TABLE>
The Companies' operations could be adversely affected if significant
customers, suppliers, and other third parties, including underlying mutual
funds available through the Companies' variable products, would be unable to
transact business in the Year 2000 and thereafter as a result of the Year
2000 issue. To mitigate the effect of outside influences and other
dependencies relative to the Year 2000, the Companies have identified and
contacted these third parties to obtain assurances that necessary steps are
being taken to prepare for the Year 2000. The Companies will continue these
communications through the Year 2000 transition.
Management believes the Companies' systems are compliant. Through September
30, 1999, Golden American has spent approximately $550,000 in connection with
the Year 2000 project, which includes $215,000 of expenses charged during the
first nine months of 1999. These costs are incremental expenses that Golden
American does not anticipate recurring in the Year 2000 and thereafter. The
Companies anticipate charging to expense an additional $50,000 to $100,000
during the fourth quarter of 1999, which includes consulting costs to manage
the year end transition.
Despite the Companies' efforts to modify or replace "time sensitive" computer
and information systems, the Companies could experience a disruption to their
operations as a result of the Year 2000. On June 30, 1999, the Companies
completed a contingency plan to address the content of third party compliance
statements and any systems that may malfunction despite the testing being
performed.
The Year 2000 project costs and progress are based on management's best
estimates. These estimates were derived using numerous assumptions of future
events, including the continued availability of resources, third party Year
2000 compliance, and other factors. There is no guarantee these estimates
will be achieved and actual results could materially differ from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of trained
personnel, the ability to locate and correct all relevant computer codes, and
other uncertainties.
It is the Companies' intention to make every reasonable effort to achieve
business continuity through appropriate planning, testing, and establishing
contingency scenarios; however, the Companies do not make any representations
because of many unknown factors beyond the control of the Companies.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
_________________________________________________________
Any forward-looking statement contained herein or in any other oral or
written statement by the Companies or any of their officers, directors, or
employees is qualified by the fact that actual results of the Companies may
differ materially from such statement, among other risks and uncertainties
inherent in the Companies' business, due to the following important factors:
1. Prevailing interest rate levels and stock market performance, which may
affect the ability of the Companies to sell their products, the market
value and liquidity of the Companies' investments, and the lapse rate of
the Companies' policies, notwithstanding product design features intended
to enhance persistency of the Companies' products.
2. Changes in the federal income tax laws and regulations which may affect
the tax status of the Companies' 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 Companies' products.
4. Increasing competition in the sale of the Companies' products.
5. Other factors that could affect the performance of the Companies,
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 Companies' variable products.
6. To the extent third parties are unable to transact business in the Year
2000 and thereafter, the Companies' operations could be adversely
affected.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
A list of exhibits included as part of this report is set forth in the
Exhibit Index which immediately precedes such exhibits and is hereby
incorporated by reference herein.
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: November 12, 1999 GOLDEN AMERICAN LIFE INSURANCE COMPANY
By/s/ E. Robert Koster
__________________________________
E. Robert Koster
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
By/s/ Cheryl L. Harding
_________________________________
Cheryl L. Harding
Assistant Vice President and Chief
Accounting Officer
(Principal Accounting Officer)
INDEX
Exhibits to Form 10-Q
Nine Months ended September 30, 1999
GOLDEN AMERICAN LIFE INSURANCE COMPANY
2 PLAN OF ACQUISITION
(a) Stock Purchase Agreement dated as of May 3, 1996, between
Equitable of Iowa Companies ("Equitable") and Whitewood
Properties Corp. (incorporated by reference from Exhibit 2
in Equitable's Form 8-K filed August 28, 1996)
(b) Agreement and Plan of Merger dated as of July 7, 1997, among ING
Groep N.V., PFHI Holdings, Inc., and Equitable (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 Golden American Life Insurance
Company ("Registrant" or "Golden American") (incorporated by
reference from Exhibit 3(a) to Amendment No. 9 to Registrant's
Registration Statement on Form S-1 filed with the Securities and
Exchange Commission (the "SEC") on February 17, 1998
(File No. 33-87272))
(b)(i) By-laws of Golden American (incorporated by reference from
Exhibit 3(b)(i) to Amendment No. 9 to Registrant's Registration
Statement on Form S-1 filed with the SEC on February 17, 1998
(File No. 33-87272))
(ii) By-laws of Golden American, as amended (incorporated by reference
from Exhibit 3(b)(ii) to Amendment No. 9 to the Registrant's
Registration Statement on Form S-1 filed with the SEC on
February 17, 1998 (File No. 33-87272))
(iii) Certificate of Amendment of the By-laws of MB Variable Life
Insurance Company, as amended (incorporated by reference from
Exhibit 3(b)(iii) to Amendment No. 9 to Registrant's Registration
Statement on Form S-1 filed with the SEC on February 17, 1998
(File No. 33-87272))
(iv) By-laws of Golden American, as amended (12/21/93) (incorporated
by reference from Exhibit 3(b)(iv) to Amendment No. 9 to
Registrant's Registration Statement on Form S-1 filed with the
SEC on February 17, 1998 (File No. 33-87272))
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 Amendment
No. 3 of Registrant's Registration Statement on Form S-1 filed
with the SEC on or about April 23, 1999 (File No. 333-51353))
(b) Discretionary Group Deferred Combination Variable Annuity Contract
(incorporated by reference from Exhibit 4(b) to Amendment No. 3
of Registrant's Registration Statement on Form S-1 filed with the
SEC on or about April 23, 1999 (File No. 333-51353))
INDEX
Exhibits to Form 10-Q
Nine Months ended September 30, 1999
GOLDEN AMERICAN LIFE INSURANCE COMPANY
(c) Individual Deferred Variable Annuity Contract (incorporated by
reference from Exhibit 4(c) to Amendment No. 3 of Registrant's
Registration Statement on Form S-1 filed with the SEC on or about
April 23, 1999 (File No. 333-51353))
(d) Individual Deferred Combination Variable and Fixed Annuity
Application (incorporated by reference from Exhibit 4(g) to
Amendment No. 3 of Registrant's Registration Statement on Form
S-1 filed with the SEC on or about April 23, 1999
(File No. 333-51353))
(e) Group Deferred Combination Variable and Fixed Annuity Enrollment
Form (incorporated by reference from Exhibit 4(h) to Amendment
No. 3 of Registrant's Registration Statement on Form S-1 filed
with the SEC on or about April 23, 1999 (File No. 333-51353))
(f) Individual Deferred Variable Annuity Application (incorporated by
reference from Exhibit 4(i) to Amendment No. 3 of Registrant's
Registration Statement on Form S-1 filed with the SEC on or about
April 23, 1999 (File No. 333-51353))
(g) Individual Deferred Variable and Fixed Annuity Contract
(incorporated by reference from Exhibit 4(a) to Amendment No. 5
to Registrant's Registration Statement filed with the SEC on or
about April 23, 1999 (File No. 333-28765))
(h) Group Deferred Variable and Fixed Annuity Contract Individual
Deferred Variable and Fixed Annuity Contract (incorporated by
reference from Exhibit 4(b) to Amendment No. 5 to Registrant's
Registration Statement filed with the SEC on or about April 23,
1999 (File No. 333-28765))
(i) Individual Deferred Variable Annuity Contract (incorporated by
reference from Exhibit 4(c) to Amendment No. 5 to Registrant's
Registration Statement filed with the SEC on or about April 23,
1999 (File No. 333-28765))
(j) Individual Deferred Variable and Fixed Annuity Contract
(incorporated by reference from Exhibit 4(a) to a Registration
Statement for Golden American filed with the SEC on or about
April 23, 1999 (File No. 333-76941))
(k) Group Deferred Variable and Fixed Annuity Contract Individual
Deferred Variable and Fixed Annuity Contract (incorporated by
reference from Exhibit 4(b) to a Registration Statement for
Golden American filed with the SEC on or about April 23, 1999
(File No. 333-76941))
(l) Individual Deferred Variable Annuity Contract (incorporated by
reference from Exhibit 4(c) to a Registration Statement for
Golden American filed with the SEC on or about April 23, 1999
(File No. 333-76941))
INDEX
Exhibits to Form 10-Q
Nine Months ended September 30, 1999
GOLDEN AMERICAN LIFE INSURANCE COMPANY
(m) Individual Deferred Variable and Fixed Annuity Contract
(incorporated by reference from Exhibit 4(a) to a Registration
Statement for Golden American filed with the SEC on or about
April 23, 1999 (File No. 333-76945))
(n) Group Deferred Variable and Fixed Annuity Contract Individual
Deferred Variable and Fixed Annuity Contract (incorporated by
reference from Exhibit 4(b) to a Registration Statement for
Golden American filed with the SEC on or about April 23, 1999
(File No. 333-76945))
(o) Individual Deferred Variable Annuity Contract (incorporated by
reference from Exhibit 4(c) to a Registration Statement for
Golden American filed with the SEC on or about April 23, 1999
(File No. 333-76945))
(p) Individual Deferred Variable and Fixed Annuity Contract
(incorporated by reference from Exhibit 4(a) to Amendment No. 3
to Registrant's Registration Statement filed with the SEC on or
about April 23, 1999 (File No. 333-66745))
(q) Group Deferred Variable and Fixed Annuity Contract Individual
Deferred Variable and Fixed Annuity Contract (incorporated by
reference from Exhibit 4(b) to Amendment No. 3 to Registrant's
Registration Statement filed with the SEC on or about April 23,
1999 (File No. 333-66745))
(r) Individual Deferred Variable Annuity Contract (incorporated by
reference from Exhibit 4(c) to Amendment No. 3 to Registrant's
Registration Statement filed with the SEC on or about April 23,
1999 (File No. 333-66745))
10 MATERIAL CONTRACTS
(a) Administrative Services Agreement, dated as of January 1, 1997,
between Golden American and Equitable Life Insurance Company of
Iowa (incorporated by reference from Exhibit 10(a) to a
Registration Statement for Golden American on Form S-1 filed
with the SEC on April 29, 1998 (File No. 333-51353))
(b) Service Agreement, dated as of January 1, 1994, between Golden
American and Directed Services, Inc. (incorporated by reference
from Exhibit 10(b) to a Registration Statement for Golden American
on Form S-1 filed with the SEC on April 29, 1998
(File No. 333-51353))
(c) Service Agreement, dated as of January 1, 1997, between Golden
American and Equitable Investment Services, Inc. (incorporated by
reference from Exhibit 10(c) to a Registration Statement for
Golden American on Form S-1 filed with the SEC on April 29, 1998
(File No. 333-51353))
INDEX
Exhibits to Form 10-Q
Nine Months ended September 30, 1999
GOLDEN AMERICAN LIFE INSURANCE COMPANY
(d) Participation Agreement between Golden American and Warburg Pincus
Trust (incorporated by reference from Exhibit 8(a) to Amendment
No. 54 to Separate Account B of Golden American's Registration
Statement on Form N-4 filed with SEC on or about April 30, 1998
(File Nos. 333-28679 and 811-5626))
(e) Participation Agreement between Golden American and PIMCO Variable
Trust (incorporated by reference from Exhibit 8(b) to Amendment
No. 54 to Separate Account B of Golden American's Registration
Statement on Form N-4 filed with the SEC on or about April 30,
1998 (File Nos. 333-28679 and 811-5626))
(f) Asset Management Agreement, dated January 20, 1998, between Golden
American and ING Investment Management LLC (incorporated by
reference from Exhibit 10(f) to Golden American's Form 10-Q filed
with the SEC on August 14, 1998 (File No. 33-87272))
(g) Reciprocal Loan Agreement, dated January 1, 1998, as amended March
20, 1998, between Golden American and ING America Insurance
Holdings, Inc. (incorporated by reference from Exhibit 10(g) to
Golden American's Form 10-Q filed with the SEC on August 14, 1998
(File No. 33-87272))
(h) Underwriting Agreement between Golden American and Directed
Services, Inc. (incorporated by reference from Exhibit 1 to
Amendment No. 9 to Registrant's Registration Statement on Form
S-1 filed with the SEC on or about February 17, 1998
(File No. 33-87272))
(i) Revolving Note Payable, dated July 27, 1998, between Golden
American and SunTrust Bank, Atlanta (incorporated by reference
from Exhibit 10(i) to Golden American's Form 10-Q filed with the
SEC on November 13, 1998 (File No. 33-87272))
(j) Revolving Note Payable, dated July 31, 1999, between Golden
American and SunTrust Bank, Atlanta (incorporated by reference
from Exhibit 10(j) to Golden American's Form 10-Q filed with the
SEC on August 13, 1999 (File No. 33-87272))
27 FINANCIAL DATA SCHEDULE (ELECTRONIC FILING ONLY)
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THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONDENSED
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QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
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<DEBT-HELD-FOR-SALE> 798,708
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<MORTGAGE> 93,884
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<COMMON> 2,500
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<INVESTMENT-INCOME> 42,671
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