10-Q 1 form10q_rnyoo-06302004.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to Commission file number: 333-114338 ---------- ReliaStar Life Insurance Company of New York -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) New York 53-0242530 -------------------------------------------------------------------------------- State or other jurisdiction of incorporation or organization) (IRS employer identification no.) 1000 Woodbury Road, Suite 208, Woodbury, New York 11797 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (516)682-8700 ------------- -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 1,377,863 shares of Common Stock as of August 12, 2004, all of which were directly owned by ReliaStar Life Insurance Company. NOTE: WHEREAS RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10Q, THIS FORM IS BEING FILED WITH THE REDUCED DISCLOSURE FORMAT PURSUANT TO GENERAL INSTRUCTION H(2). 1 ReliaStar Life Insurance Company of New York (A wholly-owned subsidiary of ReliaStar Life Insurance Company) Form 10-Q for the period ended June 30, 2004 INDEX PAGE ---- PART I. FINANCIAL INFORMATION (Unaudited) Item 1. Financial Statements: Condensed Statements of Income 3 Condensed Balance Sheets 4 Condensed Statements of Changes in Shareholder's Equity 6 Condensed Statements of Cash Flows 7 Notes to Condensed Financial Statements 8 Item 2. Management's Narrative Analysis of the Results of Operations and Financial Condition 18 Item 4. Controls and Procedures 27 PART II. OTHER INFORMATION Item 1. Legal Proceedings 28 Item 6. Exhibits and Reports on Form 8-K 28 Signatures 29 2 ReliaStar Life Insurance Company of New York (A wholly-owned subsidiary of ReliaStar Life Insurance Company) PART I. FINANCIAL INFORMATION (UNAUDITED) Item 1. Financial Statements Condensed Statements of Income (Unaudited) (Millions) Three months ended June 30, Six months ended June 30, 2004 2003 2004 2003 ------------------------------- ------------------------------- Revenue: Premiums $ 15.0 $ 16.8 $ 31.1 $ 36.2 Fee income 23.9 22.7 48.3 47.3 Net investment income 30.2 33.1 60.3 62.1 Net realized capital (losses) gains (0.3) 6.3 5.2 6.1 Other income (loss) 0.2 (0.2) 2.0 1.7 ------------------------------- ------------------------------- Total revenue 69.0 78.7 146.9 153.4 ------------------------------- ------------------------------- Benefits, losses and expenses: Benefits: Interest credited and other benefits to policyholders 45.0 37.4 87.6 81.7 Underwriting, acquisition, and insurance expenses: Commissions 6.3 7.2 12.9 14.6 General expenses 12.8 9.1 23.5 20.1 Policy acquisition costs deferred (4.0) (7.7) (8.9) (16.7) Amortization of deferred policy acquisition costs and value of business acquired 8.0 7.9 13.4 11.9 ------------------------------- ------------------------------- Total benefits, losses and expenses 68.1 53.9 128.5 111.6 ------------------------------- ------------------------------- Income before income taxes and cumulative effect of change in accounting principle 0.9 24.8 18.4 41.8 Income tax expense 0.3 8.7 6.4 14.6 ------------------------------- ------------------------------- Income before cumulative effect of change in accounting principle 0.6 16.1 12.0 27.2 Cumulative effect of change in accounting principle - - (7.0) - ------------------------------- ------------------------------- Net income $ 0.6 $ 16.1 $ 5.0 $ 27.2 =============================== ===============================

The accompanying notes are an integral part of these financial statements. 3 ReliaStar Life Insurance Company of New York (A wholly-owned subsidiary of ReliaStar Life Insurance Company) Condensed Balance Sheets (Millions, except share data) June 30, December 31, 2004 2003 ------------------ ------------------ (Unaudited) Assets Investments: Fixed maturities, available for sale, at fair value (amortized cost of $1,562.2 at 2004 and $1,642.8 at 2003) $ 1,593.7 $ 1,718.0 Equity securities, at fair value: Common stock (cost of $4.4 at 2004 and 2003) 4.6 4.2 Investment in mutual funds 2.5 2.5 Mortgage loans on real estate 208.2 209.7 Policy loans 88.6 86.6 Short-term investments - 0.2 Other investments 13.5 12.8 Securities pledged under securities lending agreement (amortized cost of $149.8 at 2004 and $1.9 at 2003) 150.0 1.9 ------------------ ------------------ Total investments 2,061.1 2,035.9 Cash and cash equivalents 38.0 10.4 Short-term investments under securities loan agreement 154.3 1.9 Accrued investment income 18.7 18.9 Due from affiliates - 13.1 Premium receivable 8.7 9.6 Reinsurance recoverable 78.2 58.2 Deferred policy acquisition costs 80.3 74.6 Value of business acquired 35.6 36.5 Sales inducements to contractholders 1.0 - Current income taxes 1.2 - Deferred income taxes 39.4 7.1 Receivable for securities sold - 20.2 Other assets 7.7 10.2 Assets held in separate accounts 542.6 520.6 ------------------ ------------------ Total assets $ 3,066.8 $ 2,817.2 ================== ==================

The accompanying notes are an integral part of these financial statements. 4 ReliaStar Life Insurance Company of New York (A wholly-owned subsidiary of ReliaStar Life Insurance Company) Condensed Balance Sheets (Millions, except share data) June 30, December 31, 2004 2003 ------------------ ------------------ Liabilities and Shareholder's Equity Policy liabilities and accruals: Future policy benefits and claims' reserves $ 1,677.4 $ 1,614.3 Unearned premiums 0.3 0.3 Other policy claims and benefits payable 54.5 37.4 Other policyholder's funds 24.5 25.3 ------------------ ------------------ Total liabilities and accruals 1,756.7 1,677.3 Due to affiliates 7.7 - Borrowed money 109.6 101.5 Note payable 11.7 - Payable under securities loan agreement 154.3 1.9 Payables for securities purchased 19.1 - Current income taxes - 3.7 Other liabilities 39.8 57.6 Liabilities related to separate accounts 542.6 520.6 ----------------- ----------------- Total liabilities 2,641.5 2,362.6 ----------------- ----------------- Shareholder's equity Common stock (1,377,863 shares authorized, issued and outstanding; $2.00 per share par value) 2.8 2.8 Additional paid-in capital 1,186.5 1,200.1 Accumulated other comprehensive income 15.1 35.8 Retained deficit (779.1) (784.1) ----------------- ----------------- Total shareholder's equity 425.3 454.6 ----------------- ----------------- Total liabilities and shareholder's equity $ 3,066.8 $ 2,817.2 ================= =================

The accompanying notes are an integral part of these financial statements. 5 ReliaStar Life Insurance Company of New York (A wholly-owned subsidiary of ReliaStar Life Insurance Company) Condensed Statements of Changes in Shareholder's Equity (Unaudited) (Millions) Six months ended June 30, 2004 2003 ------------------ ------------------ Shareholder's equity, beginning of period $ 454.6 $ 425.8 Comprehensive income: Net income 5.0 27.2 Other comprehensive income net of tax: Unrealized gain (loss) on securities ($(31.8) and $21.7, pretax year to date) (20.7) 13.9 ------------------ ------------------ Total comprehensive income (15.7) 41.3 Dividends paid (13.6) (12.5) ------------------ ------------------ Shareholder's equity, end of period $ 425.3 $ 454.4 ================== ==================

The accompanying notes are an integral part of these financial statements. 6 ReliaStar Life Insurance Company of New York (A wholly-owned subsidiary of ReliaStar Life Insurance Company) Condensed Statements of Cash Flows (Unaudited) (Millions) Six months ended June 30, 2004 2003 ------------------ ------------------ Net cash provided by operating activities $ 49.1 $ 33.1 Cash flows from investing activities Proceeds from the sale, maturity, or redemption of: Fixed maturities, available for sale 1,321.8 1,471.3 Mortgage loans on real estate 14.5 16.4 Short-term investments 130.5 1,062.5 Acquisition of investments: Fixed maturities, available for sale (1,377.1) (1,560.1) Equity securities (0.2) (0.2) Mortgage loans on real estate (12.8) - Short-term investments (130.3) (1.099.1) Policy loans (2.0) - Other - (2.7) ------------------ ------------------ Net cash used in investing activities (55.6) (111.9) ------------------ ------------------ Cash flows from financing activities Deposits and interest credited for investment contracts 79.6 28.5 Maturities and withdrawals from insurance and investment contracts (51.7) (23.9) Borrowed money 19.8 87.1 Intercompany dividends (13.6) (12.5) ------------------ ------------------ Net cash provided by financing activities 34.1 79.2 ------------------ ------------------ Net increase in cash and cash equivalents 27.6 0.4 Cash and cash equivalents, beginning of period 10.4 2.4 ------------------ ------------------ Cash and cash equivalents, end of period $ 38.0 $ 2.8 ================== ==================

The accompanying notes are an integral part of these financial statements. 7 ReliaStar Life Insurance Company of New York (A wholly-owned subsidiary of ReliaStar Life Insurance Company) Notes to Condensed Financial Statements (Unaudited) -------------------------------------------------------------------------------- 1. Basis of Presentation Until October 1, 2003, ReliaStar Life Insurance Company of New York ("RLNY" or the "Company") was a wholly-owned subsidiary of Security-Connecticut Life Insurance Company ("Security-Connecticut Life"), a Minnesota domiciled insurance company, which provides financial products and services in the United States. Effective October 1, 2003, Security-Connecticut merged with and into ReliaStar Life Insurance Company ("ReliaStar Life") causing the Company to be a direct subsidiary of ReliaStar Life. ReliaStar Life is a wholly-owned subsidiary of Lion Connecticut Holdings Inc. ("Lion"), a Connecticut holding and management company. Lion's ultimate parent is ING Groep, N.V. ("ING"), a global financial services company based in The Netherlands. The condensed financial statements and notes as of June 30, 2004 and December 31, 2003 and for the three and six-month periods ended June 30, 2004 and 2003 ("interim periods") have been prepared in accordance with U.S. generally accepted accounting principles and are unaudited. The condensed financial statements reflect all normal recurring adjustments, which are, in the opinion of the management, necessary for the fair presentation of the consolidated financial position, results of operations and cash flows for the interim periods. These condensed financial statements and notes should be read in conjunction with the financial statements and related notes as presented in the Company's 2003 Annual Report on Form 10-K. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year. Certain reclassifications have been made to 2003 financial information to conform to the 2004 presentation. The Company primarily conducts its business through one operating segment, U.S. Financial Services ("USFS"), and all revenue reported by the Company is predominantly derived from external customers. 2. Recently Adopted Accounting Standards Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts The Company adopted Statement of Position ("SOP") 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts," on January 1, 2004. SOP 03-1 established several new accounting and disclosure requirements for certain nontraditional long-duration contracts and for separate accounts including, among other things, a requirement that assets and liabilities of separate account arrangements that do not meet certain criteria be accounted for as general account assets and liabilities, and the revenues and expenses related to such arrangements be consolidated with the respective line items in the statements of income. In addition, the SOP requires additional liabilities be established for certain guaranteed death benefits and for products with certain patterns of cost of insurance charges, and that sales inducements provided to contractholders be recognized on the balance sheet 8 ReliaStar Life Insurance Company of New York (A wholly-owned subsidiary of ReliaStar Life Insurance Company) Notes to Condensed Financial Statements (Unaudited) -------------------------------------------------------------------------------- separately from deferred acquisition costs and amortized as a component of benefits expense using methodology and assumptions consistent with those used for amortization of deferred policy acquisition costs. The Company evaluated all requirements of SOP 03-1 and determined that it is affected by the SOP's requirements to account for certain separate account arrangements as general account arrangements, to establish additional liabilities for certain guaranteed benefits and for products with patterns of cost of insurance charges that result in gains followed by losses in later policy durations from the insurance benefit function, and to defer and amortize sales inducements to contractholders. Upon adoption of the SOP, the Company recognized a cumulative effect of a change in accounting principle of $(10.8) million, before tax or $(7.0) million, net of $3.8 million of income taxes, as of January 1, 2004. The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments In March 2004, the Emerging Issues Task Force ("EITF") reached a final consensus on EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments," adopting a three-step impairment model for securities within its scope. The three-step model is to be applied on a security-by-security basis as follows: Step 1: Determine whether an investment is impaired. An investment is impaired if its fair value of the investment is less than its cost basis. Step 2: Evaluate whether an impairment is other-than-temporary. Step 3: If the impairment is other-than-temporary, recognize an impairment loss equal to the difference between the investment's cost and its fair value. The Company included this three-step model in the impairment evaluation for the quarter ended June 30, 2004. This guidance resulted in no additional impairments for the Company. Earlier consensus reached by the EITF on this issue required that certain quantitative and qualitative disclosures be made for unrealized losses on debt and equity securities that have not been recognized as other-than-temporary impairments. These disclosures were adopted by the Company, effective December 31, 2003, and included in the Investments footnote of the Notes to Consolidated Financial Statements included in the Company's 2003 Form 10-K. In addition to the disclosure requirements adopted by the Company effective December 31, 2003, the final consensus of EITF 03-01 reached in March 2004 included additional disclosure requirements that are effective for fiscal years ending after June 15, 2004. 9 ReliaStar Life Insurance Company of New York (A wholly-owned subsidiary of ReliaStar Life Insurance Company) Notes to Condensed Financial Statements (Unaudited) -------------------------------------------------------------------------------- In 2003, the Derivative Implementation Group ("DIG") responsible for issuing guidance on behalf of the FASB for implementation of FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" issued Statement Implementation Issue No. B36, "Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Credit Worthiness of the Obligor under Those Instruments" ("DIG B36"). Under this interpretation, modified coinsurance and coinsurance with funds withheld reinsurance agreements as well as other types of receivables and payables where interest is determined by reference to a pool of fixed maturity assets or total return debt index may be determined to contain embedded derivatives that are required to be bifurcated. The Company adopted DIG B36 on October 1, 2003. The Company has no investment or insurance products that are applicable to require implementation of the guidance, and therefore, the guidance has no impact on the Company's financial position, results of operations or cash flows. 3. New Accounting Pronouncements The implementation of the American Institute of Certified Public Accountants ("AICPA") SOP 03-01, "Accounting and Reporting by Insurance Enterprises for certain Nontraditional Long-Duration Contracts and for Separate Accounts," has raised questions regarding the interpretation of the requirements of SFAS No. 97, concerning when it is appropriate to record an unearned revenue liability related to the insurance benefit function. To clarify its position, in June of 2004 the Financial Accounting Standards Board ("FASB") issued FSP FAS 97-1, "Situations in which paragraphs 17(b) and 20 of FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, Permit or Require Accrual of an Unearned Revenue Liability." FSP FAS 97-1 outlines that SFAS No. 97 is clear in its intent and language, and requires the recognition of an unearned revenue liability for amounts that have been assessed to compensate insurers for services provided over future periods. The requirement of SOP 03-01 is not intended to amend or limit the requirement of SFAS No. 97 to recognize a liability for unearned revenue only to those situations where profits are expect to be followed by a loss. The guidance contained in FSP FAS 97-1 is effective for financial statements with fiscal periods beginning subsequent to July 18, 2004. The Company is currently evaluating the impact of FSP FAS 97-1 and related accounting guidance and anticipates a potential increase in the (net) liability established under SOP 03-01 in future accounting periods. 10 ReliaStar Life Insurance Company of New York (A wholly-owned subsidiary of ReliaStar Life Insurance Company) Notes to Condensed Financial Statements (Unaudited) -------------------------------------------------------------------------------- 4. Deferred Policy Acquisition Costs and Value of Business Acquired Deferred Policy Acquisition Costs ("DAC") is an asset, which represents certain costs of acquiring certain insurance business, which are deferred and amortized. These costs, all of which vary with and are primarily related to the production of new and renewal business, consist principally of commissions, certain underwriting and contract issuance expenses, and certain agency expenses. Value of business acquired ("VOBA") is an asset, which represents the present value of estimated net cash flows embedded in the Company's contracts, which existed at the time the Company was acquired by ING. DAC and VOBA are evaluated for recoverability at each balance sheet date and these assets would be reduced to the extent that gross profits are inadequate to recover the asset. The amortization methodology varies by product type based upon two accounting standards: FAS No. 60, "Accounting and Reporting by Insurance Enterprises" ("FAS No. 60") and FAS No. 97, "Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and Realized Gains and Losses from the Sale of Investments" ("FAS No. 97"). The Company identified an overstatement of DAC/VOBA and unearned revenue ("URR") of $4.1 million for RLNY ($4.4 million to VOBA, $0.1 million to DAC, and an offset of $0.4 million to URR), which was amortized off during the first quarter of 2004. Under FAS No. 60, acquisition costs for traditional life insurance products, which primarily include whole life and term life insurance contracts, are amortized over the premium payment period in proportion to the premium revenue recognition. Under FAS No. 97, acquisition costs for universal life and investment-type products, which include universal life policies and fixed and variable deferred annuities, are amortized over the life of the blocks of policies (usually 25 years) in relation to the emergence of estimated gross profits from surrender charges, investment margins, mortality and expense margins, asset-based fee income, and actual realized gains (losses) on investments. Amortization is adjusted retrospectively when estimates of current or future gross profits to be realized from a group of products are revised. VOBA activity for the six months ended June 30, 2004 was as follows: (Millions) Balance at December 31, 2003 $ 36.5 Adjustment for FAS No. 115 9.0 Additions 1.6 Interest accrued at 4% - 6% 1.4 Amortization (12.9) ------------------ Balance at June 30, 2003 $ 35.6 ================== 11 ReliaStar Life Insurance Company of New York (A wholly-owned subsidiary of ReliaStar Life Insurance Company) Notes to Condensed Financial Statements (Unaudited) -------------------------------------------------------------------------------- VOBA activity for the six months ended June 30, 2003 was as follows: Balance at December 31, 2002 $ 48.2 Adjustment for FAS No. 115 (3.4) Additions 5.0 Interest accrued at 5% - 7% 0.5 Amortization (4.7) ------------------ Balance at June 30, 2004 $ 45.6 ================== 5. Investments Impairments During the three months ended June 30, 2004, the Company determined that no fixed maturities had other than temporary impairments. During the three months ended June 30, 2003, the Company determined that 3 fixed maturities had other than temporary impairments. As a result, for the three months ended June 30, 2003, the Company recognized a pre-tax loss of $0.2 million to reduce the carrying value of the fixed maturities to their fair value at the time of impairment. During the six months ended June 30, 2004, the Company determined that no fixed maturities had other than temporary impairments. During the six months ended June 30, 2003, the Company determined that 9 fixed maturities had other than temporary impairments. As a result, for the six months ended June 30, 2003, the Company recognized a pre-tax loss of $4.7 million to reduce the carrying value of the fixed maturities to their fair value at the time of impairment. The fair value of the remaining impaired fixed maturities at June 30, 2004 and 2003 is $5.3 million and $3.5 million, respectively. 6. Separate Accounts Separate Account assets and liabilities generally represent funds maintained to meet specific investment objectives of contractholders who bear the investment risk, subject, in limited cases, to minimum guaranteed rates. Investment income and investment gains and losses generally accrue directly to such contractholders. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company. 12 ReliaStar Life Insurance Company of New York (A wholly-owned subsidiary of ReliaStar Life Insurance Company) Notes to Condensed Financial Statements (Unaudited) -------------------------------------------------------------------------------- Separate Account assets supporting variable options under universal life and annuity contracts are invested, as designated by the policyholder or participant (who bears the investment risk subject, in limited cases, to minimum guaranteed rates) under a contract in shares of mutual funds which are managed by the Company, or in other selected mutual funds not managed by the Company. Separate Account assets and liabilities are carried at fair value and shown as separate captions in the Consolidated Balance Sheets. Deposits, investment income and net realized and unrealized capital gains and losses of the Separate Accounts are not reflected in the Consolidated Financial Statements (with the exception of realized and unrealized capital gains and losses on the assets supporting the guaranteed interest option). The Consolidated Statements of Cash Flows do not reflect investment activity of the Separate Accounts. Assets and liabilities of separate account arrangements that do not meet the criteria in SOP 03-1 for separate presentation in the Condensed Balance Sheets (those arrangements supporting the guaranteed interest option) were reclassified to the general account on January 1, 2004, in accordance with the SOP 03-1 requirements. 7. Additional Insurance Benefits and Minimum Guarantees Under SOP 03-1, the Company calculates additional liabilities ("SOP reserves") for certain guaranteed benefits and for Universal Life products with certain patterns of cost of insurance charges. The SOP reserve recognized for such products is in addition to the liability previously held (the Account Value) and is to recognize the portion of contract assessments received in early years used to compensate the insurer for services provided in later years. In accordance with the methodology outlined in the SOP, the SOP reserve for life insurance products is calculated using the same assumptions used in the determination of estimated gross profits, according to which, deferred acquisition costs are amortized. RLNY calculates a benefit ratio for each block of business subject to the SOP, and calculates an SOP reserve by accumulating amounts equal to the benefit ratio multiplied by the assessments for each period, reduced by excess death benefits during the period. The SOP reserve is accumulated at interest using the contract-credited rate for the period. The calculated reserve includes a provision for Universal Life contracts with patterns of cost of insurance charges that produce expected gains from the insurance benefit function followed by losses from that function in later years. 13 ReliaStar Life Insurance Company of New York (A wholly-owned subsidiary of ReliaStar Life Insurance Company) Notes to Condensed Financial Statements (Unaudited) -------------------------------------------------------------------------------- The SOP reserve for minimum guaranteed death benefits ("MGDB") is determined each period by estimating the expected value of death benefits in excess of the projected account balance and recognizing the excess ratably over the accumulation period based on total expected assessments. The Company regularly evaluates estimates used to adjust the additional liability balance, with a related charge or credit to benefit expense, if actual experience or other evidence suggests that earlier assumptions should be revised. The following assumptions and methodology were used to determine the MGDB SOP reserve at June 30, 2004: Area Assumptions/Basis for Assumptions --------------------------------- ----------------------------------------- Data used Based on 101 investment performance scenarios stratified based on 10,000 random generated scenarios Mean investment performance 8.5% Volatility 18.0% Mortality 60.0% of the 90-95 ultimate mortality table Lapse rates Vary by contract type and duration; range between 1.0% and 40.0% Discount rates 6.5%, based on the portfolio earned rate of the general account As of June 30, 2004, the separate account liability for annuities subject to SOP 03-1 due to minimum guaranteed benefits and the additional liability recognized related to minimum guarantees is $194.7 million and $0.3 million, respectively. During the six months ended June 30, 2004, incurred guaranteed benefits and paid guaranteed benefits were $0.0 million. The net amount at risk (net of reinsurance) is $4.0 million, and the weighted average attained age of contractholders is 63, as of June 30, 2004. The aggregate fair value of assets is $194.7 million of equity securities (including mutual funds) supporting separate accounts with additional insurance benefits and minimum investment return guarantees as of June 30, 2004. 8. Sales Inducements Sales inducements represent benefits paid to contractholders that are incremental to the amounts the Company credits on similar contracts and are higher than the contracts expected ongoing crediting rates for periods after the inducement. As of January 1, 2004, such amounts are reported separately on the balance sheet in accordance with SOP 03-01. Prior to 2004, sales inducements were recorded as a component of DAC on the Condensed Balance Sheets. Sales inducements are amortized as a component of benefit expense using methodology and assumptions consistent with those used for amortization of DAC. During the three months ended June 30, 2004, the Company capitalized $0.5 and amortized $0.1 million of sales inducements. During the six months ended June 30, 2004, the Company capitalized $0.6 and amortized $0.2 million of sales inducements. The unamortized balance of capitalized sales inducements as of June 30, 2004 is $1.0 million. 14 ReliaStar Life Insurance Company of New York (A wholly-owned subsidiary of ReliaStar Life Insurance Company) Notes to Condensed Financial Statements (Unaudited) -------------------------------------------------------------------------------- 9. Income Taxes The effective tax rates for the three months ended June 30, 2004 and 2003 were 33.3% and 35.1%, respectively. The decrease in effective tax rate resulted from significantly lower pre-tax earnings relative to a minor refuction in the deduction allowed for dividends received. The effective tax rates for the six months ended June 30, 2004 and 2003 were 34.8% and 34.9%, respectively, which approximates the federal income tax rate of 35%. 10. Commitments and Contingent Liabilities Commitments Through the normal course of investment operations, the Company commits to either purchase or sell securities, commercial mortgage loans or money market instruments at a specified future date and at a specified price or yield. The inability of counterparties to honor these commitments may result in either higher or lower replacement cost. Also, there is likely to be a change in the value of the securities underlying the commitments. The Company makes investments in limited partnerships on a subscription basis. At June 30, 2004 and December 31, 2003, the Company had off-balance sheet commitments to purchase investments equal to the fair value of $18.7 million and $28.9 million, respectively. Litigation The Company is a party to threatened or pending lawsuits/arbitrations arising from the normal conduct of business. Due to the climate in insurance and business litigation, suits against the Company sometimes include claims for substantial compensatory, consequential or punitive damages and other types of relief. Moreover, certain claims are asserted as class actions, purporting to represent a group of similarly situated individuals. While it is not possible to forecast the outcome of such lawsuits/arbitrations, in light of existing insurance, reinsurance and established reserves, it is the opinion of management that the disposition of such lawsuits/arbitrations will not have a materially adverse effect on the Company's operations or financial position. 11. Reclassification and Changes to Prior Year Presentation During 2004, certain changes were made to the 2003 Income Statement presentation to reflect the correct balances. These changes were properly reflected in the 12 months ended December 31, 2003, in the Form 10-K; however, the 2003 unaudited quarterly data was not updated to reflect such reclassifications. These changes had no impact on net income or net 15 shareholder's equity of the Company. The following summarizes thecorrections to each financial statement line item for the first three quarters of 2003 (in millions): Three months ended March 31, 2003 Previously Restated reported 2003 Adjustment 2003 Revenues: Premiums $ 19.9 $ 0.5 $ 19.4 Fee income 24.9 0.3 24.6 Net investment income 28.6 (0.4) 29.0 Net realized capital gains (0.2) 0.0 (0.2) Other 2.0 0.1 1.9 ---------------------------------------- Total revenue $ 75.2 $ 0.5 $ 74.7 ======================================== Benefits, losses and expenses: Interest credited and other benefits to policyholders $ 43.8 $ (0.5) $ 44.3 General expenses 10.4 1.0 9.4 Amortization of DAC/VOBA 4.0 0.0 4.0 ---------------------------------------- Total expenses $ 58.2 $ 0.5 $ 57.7 ======================================== Six months ended June 30, 2003 Previously Restated reported 2003 Adjustment 2003 Revenues: Premiums $ 41.4 $ 5.2 $ 36.2 Fee income 47.4 0.1 47.3 Net investment income 62.1 0.0 62.1 Net realized capital gains 6.1 0.0 6.1 Other 4.3 2.6 1.7 ---------------------------------------- Total revenue $ 161.3 $ 7.9 $153.4 ======================================== Benefits, losses and expenses: Interest credited and other benefits to policyholders $ 85.9 $ 4.2 $ 81.7 General expenses 21.7 3.7 18.0 Amortization of DAC/VOBA 11.9 0.0 11.9 ---------------------------------------- Total expenses $ 119.5 $ 7.9 $111.6 ======================================== 16 Nine months ended September 30, 2003 Previously Restated reported 2003 Adjustment 2003 Revenues: Premiums $ 60.3 $ 3.8 $ 56.5 Fee income 69.0 (2.1) 71.1 Net investment income 92.1 (1.6) 93.7 Net realized capital gains 7.1 0.0 7.1 Other 6.1 2.1 4.0 ---------------------------------------- Total revenue $ 234.6 $ 2.2 $ 232.4 ======================================== Benefits, losses and expenses: Interest credited and other benefits to policyholders $ 122.9 $ (2.4) $125.3 General expenses 32.8 4.6 28.2 Amortization of DAC/VOBA 21.7 0.0 21.7 ---------------------------------------- Total expenses $ 177.4 $ 2.2 $175.2 ======================================== 17 Item 2. Management's Narrative Analysis of the Results of Operations and Financial Condition Overview The following narrative analysis of the results of operations and financial condition presents a review of the ReliaStar Life Insurance Company of New York ("RLNY", or the "Company") as of June 30, 2004 and December 31, 2003 and for the three and six month periods ended June 30, 2004 and 2003. This review should be read in conjunction with the condensed financial statements and other data presented herein, as well as the "Management's Narrative Analysis of the Results of Operations and Financial Condition" section contained in the Company's 2003 Annual Report on Form 10-K. Nature of Business The Company is principally engaged in the business of providing life insurance and related financial services products. The Company provides and distributes individual life insurance and annuities, employee benefit products and services and retirement plans. Recently Adopted Accounting Standards Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts The Company adopted Statement of Position ("SOP") 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts," on January 1, 2004. SOP 03-1 establishes several new accounting and disclosure requirements for certain nontraditional long-duration contracts and for separate accounts including, among other things, a requirement that assets and liabilities of separate account arrangements that do not meet certain criteria be accounted for as general account assets and liabilities. In addition, the SOP requires additional liabilities be established for certain guaranteed death benefits and for products with certain patterns of cost of insurance charges, and that sales inducements provided to contractholders be recognized on the balance sheet separately from deferred acquisition costs and amortized as a component of benefits expense using methodology and assumptions consistent with those used for amortization of deferred policy acquisition costs. The Company evaluated all requirements of SOP 03-1 and determined that it is affected by the SOP's requirements to account for certain separate account arrangements as general account arrangements, to establish additional liabilities for certain guaranteed benefits and for products with patterns of cost of insurance charges that result in losses in later policy durations from the insurance benefit function, and to defer and amortize sales inducements to contractholders. Upon adoption of the SOP, the Company recognized a cumulative effect of a change in accounting principle of $(10.8) million, before taxes, or $(7.0) million, net of $3.8 million of income taxes as of January 1, 2004. 18 The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments In March 2004, the Emerging Issues Task Force ("EITF") reached a final consensus on EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments," adopting a three-step impairment model for securities within its scope. The three-step model is to be applied on a security-by-security basis as follows: Step 1: Determine whether an investment is impaired. An investment is impaired if its fair value of the investment is less than its cost basis. Step 2: Evaluate whether an impairment is other-than-temporary. Step 3: If the impairment is other-than-temporary, recognize an impairment loss equal to the difference between the investment's cost and its fair value. The Company included this three-step model in the impairment evaluation for the quarter ended June 30, 2004. This guidance resulted in no additional impairments for the Company. Earlier consensus reached by the EITF on this issue required that certain quantitative and qualitative disclosures be made for unrealized losses on debt and equity securities that have not been recognized as other-than-temporary impairments. These disclosures were adopted by the Company, effective December 31, 2003, and included in the Investments footnote of the Notes to Consolidated Financial Statements included in the Company's 2003 Form 10-K. In addition to the disclosure requirements adopted by the Company effective December 31, 2003, the final consensus of EITF 03-01 reached in March 2004 included additional disclosure requirements that are effective for fiscal years ending after June 15, 2004. In 2003, the Derivative Implementation Group ("DIG") responsible for issuing guidance on behalf of the FASB for implementation of FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" issued Statement Implementation Issue No. B36, "Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Credit Worthiness of the Obligor under Those Instruments" ("DIG B36"). Under this interpretation, modified coinsurance and coinsurance with funds withheld reinsurance agreements as well as other types of receivables and payables where interest is determined by reference to a pool of fixed maturity assets or total return debt index may be determined to contain embedded derivatives that are required to be bifurcated. The Company adopted DIG B36 on October 1, 2003. The Company has no investment or insurance products that are applicable to require implementation of the guidance, and therefore, the guidance has no impact on the Company's financial position, results of operations or cash flows. 19 New Accounting Pronouncements The implementation of the American Institute of Certified Public Accountants ("AICPA") SOP 03-01, "Accounting and Reporting by Insurance Enterprises for certain Nontraditional Long-Duration Contracts and for Separate Accounts," has raised questions regarding the interpretation of the requirements of SFAS No. 97, concerning when it is appropriate to record an unearned revenue liability related to the insurance benefit function. To clarify its position, in June of 2004 the Financial Accounting Standards Board ("FASB") issued FSP FAS 97-1, "Situations in which paragraphs 17(b) and 20 of FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, Permit or Require Accrual of an Unearned Revenue Liability." FSP FAS 97-1 outlines that SFAS No. 97 is clear in its intent and language, and requires the recognition of an unearned revenue liability for amounts that have been assessed to compensate insurers for services provided over future periods. The requirement of SOP 03-01 is not intended to amend or limit the requirement of SFAS No. 97 to recognize a liability for unearned revenue only to those situations where profits are expect to be followed by a loss. The guidance contained in FSP FAS 97-1 is effective for financial statements with fiscal periods beginning subsequent to July 18, 2004. The Company is currently evaluating the impact of FSP FAS 97-1 and related accounting guidance and anticipates a potential increase in the (net) liability established under SOP 03-01 in future accounting periods. Critical Accounting Policies General The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the use of estimates and assumptions in certain circumstances that affect amounts reported in the accompanying condensed financial statements and related footnotes. These estimates and assumptions are evaluated on an on-going basis based on historical developments, market conditions, industry trends and other information that is reasonable under the circumstances. There can be no assurance that actual results will conform to estimates and assumptions, and that reported results of operations will not be materially adversely affected by the need to make future accounting adjustments to reflect changes in these estimates and assumptions from time to time. The Company has identified the following estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability. In developing these estimates management makes subjective and complex judgments that are inherently uncertain and subject to material change as facts and circumstances develop. Although variability is inherent in these estimates, management believes the amounts provided are appropriate based upon the facts available upon compilation of the condensed financial statements. 20 Investment Impairment Testing The Company reviews the general account investments for impairments by considering the length of time and the extent to which the fair value has been less than amortized cost; the financial condition and near-term prospects of the issuer; future economic conditions and market forecasts; and the Company's intent and ability to retain the investment in the issuer for a period of time sufficient to allow for recovery in market value. Based on the facts and circumstances of each case, management uses judgment in deciding whether any calculated impairments are temporary or other than temporary. For those impairments judged to be other than temporary, the Company reduces the carrying value of those investments to the current fair value and records impairment losses for the difference. Amortization of Deferred Acquisition Costs and Value of Business Acquired Deferred policy acquisition costs ("DAC") and value of business acquired ("VOBA") are amortized with interest over the life of the contracts (usually 25 years) in relation to the present value of estimated gross profits from projected interest margins, asset-based fees, policy administration, mortality margins and surrender charges less policy maintenance costs. Changes in assumptions can have a significant impact on the calculation of DAC/VOBA and its related amortization patterns. Due to the relative size of the DAC/VOBA balance and the sensitivity of the calculation to minor changes in the underlying assumptions and the related volatility that could result in the reported DAC/VOBA balance, the Company performs a quarterly analysis of DAC/VOBA. At each balance sheet date, actual historical gross profits are reflected and expected future gross profits and related assumptions are evaluated for continued reasonableness. Any adjustment in estimated profit requires that the amortization rate be revised retroactively to the date of policy or contract issuance ("unlocking"), which could be significant. The cumulative difference related to prior periods is recognized as a component of the current period's amortization, along with amortization associated with the actual gross profits of the period. In general, increases in estimated returns result in increased expected future profitability and may lower the rate of amortization, while increases in lapse/surrender and mortality assumptions or decreases in returns reduce the expected future profitability of the underlying business and may increase the rate of amortization. One of the most significant assumptions involved in the estimation of future gross profits for variable universal life and deferred annuity products is the assumed return associated with future separate account performance. To reflect the near-term and long-term volatility in the equity markets this assumption involves a combination of near-term expectations and a long-term assumption about market performance. The overall return generated by the separate account is dependent on several factors, including the relative mix of the underlying sub-accounts among bond funds and equity funds as well as equity sector weightings. 21 Sales Inducements Sales inducements represent benefits paid to contractholders that are incremental to the amounts the Company credits on similar contracts and are higher than the contract's expected ongoing crediting rates for periods after the inducement. Such amounts are reported separately on the balance sheet and are amortized as a component of benefit expense using methodology and assumptions consistent with those used for amortization of DAC. Forward-Looking Information/Risk Factors In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions readers regarding certain forward-looking statements contained in this report and in any other statements made by, or on behalf of, the Company, whether or not in future filings with the Securities and Exchange Commission ("SEC"). Forward-looking statements are statements not based on historical information and which relate to future operations, strategies, financial results, or other developments. Statements using verbs such as "expect," "anticipate," "believe" or words of similar import generally involve forward-looking statements. Without limiting the foregoing, forward-looking statements include statements which represent the Company's beliefs concerning future levels of sales and redemptions of the Company's products, investment spreads and yields, or the earnings and profitability of the Company's activities. Forward-looking statements are necessarily based on estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control and many of which are subject to change. These uncertainties and contingencies could cause actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Whether or not actual results differ materially from forward-looking statements may depend on numerous foreseeable and unforeseeable developments. Some may be national in scope, such as general economic conditions, changes in tax law and changes in interest rates (for additional information, see the Legislative Initiatives section below). Some may relate to the insurance industry generally, such as pricing competition, regulatory developments and industry consolidation. Others may relate to the Company specifically, such as credit, volatility and other risks associated with the Company's investment portfolio. Investors are also directed to consider other risks and uncertainties discussed in documents filed by the Company with the SEC. The Company disclaims any obligation to update forward-looking information. Results of Operations Premiums for the three and six months ended June 30, 2004 decreased by $1.8 million and $5.1 million, respectively, compared to the same periods in 2003. The decrease in premium was primarily attributable to ceding of premiums pursuant to a reinsurance treaty. The discontinuance of new sales and voluntary lapses resulting from rate increases with respect to the payroll deduct cancer product, also contributed to the decrease in premiums. 22 Fee income for the three and six months ended June 30, 2004 is comparable to that for the same periods in 2003. Net investment income for the three and six months ended June 30, 2004 is comparable to that for the same periods in 2003. Net realized capital gains for the three months ended June 30, 2004 decreased by $6.6 million compared to the same period in 2003. The decrease in capital gains is largely due to the interest rate environment. Interest rates increased during the second quarter 2004, resulting in higher net losses and a decrease in net realized capital gains. Net realized capital gains for the six months ended June 30, 2004 decreased by $0.9 million, compared to the same period in 2003. Interest rates decreased during the first quarter 2004 compared to the fourth quarter of 2003, resulting in higher net realized gains during the first quarter of 2004. Additionally, increased interest rates during the second quarter of 2004, caused further decreases for the year to date net realized capital gains. Other income for the three and six months ended June 30, 2004 is comparable to that for the same periods in 2003. Interest credited and other benefits to the policyholders for the three and six months ended June 30, 2004 increased by $7.6 million and $5.9 million, respectively, compared to the same periods in 2003. This increase is primarily the result of a large claim in the retail life business incurred during the three months ended June 30, 2004. This claim was not reinsured and the Company retained the full effect of the claim. Commission expense for the three and six months ended June 30, 2004 decreased by $0.9 million and $1.7 million, respectively, compared to the same periods in 2003. This variance is primarily due to a decrease in life insurance sales during 2004 compared to the same periods in 2003, causing commissions to decrease. This decrease is partially offset by an increase in commission expense due to an increase in variable annuity sales. Policy acquisition cost deferred for the three and six months ended June 30, 2004 decreased by $3.7 million and $7.8 million, respectively, compared to the same periods in 2003. Sales on interest sensitive life business for the periods ended June 30, 2004, are down approximately 57% from the same periods 2003. This decrease in sales led to lower policy acquisition deferrals for that block of business. General expenses for the three and six months ended June 30, 2004, increased by $3.7 million and $3.4 million, respectively, compared to the same periods in 2003. The unfavorable expense variance is due to staff expenses, allocations from affiliates and lower reinsurance ceding fees. 23 Amortization of deferred policy acquisition costs and value of business acquired for the three and six months ended June 30, 2004, increased by $0.1 million and $1.5 million, respectively, compared to the same periods in 2003. Amortization of long-duration products is reflected in proportion to actual and estimated future gross profits. Estimated gross profits are computed based on underlying assumptions related to the underlying contracts, including but not limited to interest margins, mortality, lapse, premium persistency, expenses, and asset growth. The increase in the amortization of deferred policy acquisition costs and value of insurance acquired reflects the impact of these variables on the overall book of business. The cumulative effect of the change in accounting principle for six months ended June 30, 2004,was a loss of $7.0, net of tax, due to the implementation of SOP 03-1. The change in accounting principle was taken during the first quarter of 2004. Net income for the three months ended June 30, 2004, decreased by $15.5 million compared to the same period in 2003. This decrease is primarily due to declines in net investment income and net realized capital gains, as well as increases in interest credited and other benefits to policyholders and general expenses. Net income for the six months ended June 30, 2004, decreased by $22.2 million compared to the same period in 2003. This decrease is attributable to the cumulative effect of the change in accounting principle, to decreased net investment income, and net realized capital gains, as well as increased interest credited and other benefits to policyholders and general expenses. Financial Condition Investments Fixed Maturities At June 30, 2004 and December 31, 2003, the Company's carrying value of available for sale fixed maturities including securities pledged under securities lending agreement (hereinafter referred to as "total fixed maturities") represented 84.6% and 84.5%, respectively, of the total invested assets for both periods. Total fixed maturities reflected net unrealized capital gains of $31.6 million and $84.9 million at June 30, 2004 and December 31, 2003, respectively. It is management's objective that the portfolio of fixed maturities be of high quality and be well diversified by market sector. The fixed maturities in the Company's portfolio are generally rated by external rating agencies and, if not externally rated, are rated by the Company on a basis believed to be similar to that used by the rating agencies. The average quality rating of the Company's fixed maturities portfolio was AA- and A+ at June 30, 2004 and December 31, 2003, respectively. Fixed maturities rated BBB and below may have speculative characteristics and changes in economic conditions or other circumstances are more likely to lead to a weakened capacity of the issuer to make principal and interest payments than is the case with higher rated fixed maturities. 24 The percentage of total fixed maturities by quality rating category is as follows: June 30, December 31, 2004 2003 -------------- ------------- AAA 40.9% 39.2% AA 5.0 5.7 A 22.8 22.3 BBB 26.5 26.9 BB 4.0 4.9 B and below 0.8 1.0 -------------- ------------- Total 100.0% 100.0% ============== ============= The percentage of total fixed maturities by market sector is as follows: June 30, December 31, 2004 2003 -------------- ------------- U.S. Corporate 48.9% 53.0% Residential Mortgaged-Backed 23.6 23.4 U.S. Treasuries/Agencies 5.5 0.5 Foreign (1) 8.2 10.1 Commercial/Multifamily Mortgage-Backed 6.9 6.7 Asset-backed 6.9 6.3 -------------- ------------- Total 100.0% 100.0% ============== ============= (1) Primarily U.S. dollar denominated The Company analyzes the general account investments to determine whether there has been an other than temporary decline in fair value below the amortized cost basis in accordance with FAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Management considers the length of the time and the extent to which the fair value has been less than amortized cost; the financial condition and near-term prospects of the issuer; future economic conditions and market forecasts; and the Company's intent and ability to retain the investment in the issuer for a period of time sufficient to allow for recovery in market value. If it is probable that all amounts due according to the contractual terms of a fixed maturity investment will not be collected, an other than temporary impairment is considered to have occurred. In addition, the Company invests in structured securities that meet the criteria of Emerging Issues Task Force ("EITF") Issue No. 99-20 "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets." Under EITF Issue No. 99-20, a determination of the required impairment is based on credit risk and the possibility of significant prepayment risk that restricts the Company's ability to recover the investment. An impairment is recognized if the fair value of the security is less than book value and there has been an adverse change in cash flow since the last remeasurement date. When a decline in fair value is determined to be other than temporary, the individual security is written down to fair value and the loss accounted for as a realized loss. 25 Liquidity and Capital Resources Liquidity is the ability of the Company to generate sufficient cash flows to meet the cash requirements of operating, investing, and financing activities. The Company's principal sources of liquidity are premiums, product charges, investment income, maturing investments, proceeds from debt issuance, and capital contributions. Primary uses of these funds are payments of commissions and operating expenses, interest and premium credits, investment purchases and replacement of debt, as well as withdrawals and surrenders. The Company's liquidity position is managed by maintaining adequate levels of liquid assets, such as cash or cash equivalents and short-term investments. Additional sources of liquidity include borrowing facilities to meet short-term requirements. The Company maintains a $103.8 million reciprocal loan agreement with ING AIH, a perpetual $30.0 million revolving note facility with Bank of New York and a $30.0 million revolving note facilities with SunTrust Bank, which expires on July 30, 2004. Management believes that these sources of liquidity are adequate to meet the Company's short-term cash obligations. The NAIC risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. These requirements are intended to allow insurance regulators to monitor the capitalization of insurance companies based upon the type and mixture of risks inherent in a company's operations. The formula includes components for asset risk, liability risk, interest rate exposure, and other factors. The Company has complied with the NAIC's risk-based capital reporting requirements. Amounts reported indicate that the Company has total adjusted capital above all required capital levels. Legislative Initiatives The Jobs and Growth Tax Relief Reconciliation Act of 2003, which was enacted in the second quarter, may impact the Company. The Act's provisions, which reduce the tax rates on long-term capital gains and corporate dividends, impact the relative competitiveness of the Company's products especially variable annuities. Other legislative proposals under consideration include repealing the estate tax, changing the taxation of products, changing life insurance company taxation and making changes to nonqualified deferred compensation arrangements. Some of these proposals, if enacted, could have a material effect on life insurance, annuity and other retirement savings product sales. The impact on the tax position of the Company's products cannot be predicted. 26 Item 4. Controls and Procedures a) The Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company's current disclosure controls and procedures are effective in ensuring that material information relating to the Company required to be disclosed in the Company's periodic SEC filings is made known to them in a timely manner. b) There has not been any change in the internal controls over financial reporting of the Company that occurred during the period covered by this report that has materially affected or is reasonably likely to materially affect these internal controls. 27 PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company is a party to threatened or pending lawsuits/arbitrations arising from the normal conduct of business. Due to the climate in insurance and business litigation, suits against the Company sometimes include claims for substantial compensatory, consequential or punitive damages and other types of relief. Moreover, certain claims are asserted as class actions, purporting to represent a group of similarly situated individuals. While it is not possible to forecast the outcome of such lawsuits/arbitrations, in light of existing insurance, reinsurance and established reserves, it is the opinion of management that the disposition of such lawsuits/arbitrations will not have a materially adverse effect on the Company's operations or financial position. As with many financial services companies, the Company's affiliates have received requests for information from various governmental and self-regulatory agencies in connection with investigations related to trading in investment company shares. In each case, full cooperation and responses are being provided. The Company is also reviewing its policies and procedures in this area. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 31.1 Certificate of David A. Wheat pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certificate of James R. Gelder pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certificate of David A. Wheat pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certificate of James R. Gelder pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K None. 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RELIASTAR LIFE INSURANCE COMPANY OF NEW YORK (Registrant) August 12, 2004 By:/s/ David A. Wheat --------------- ------------------------------------------- (Date) David A. Wheat Director, Senior Vice President and Chief Financial Officer 29 Exhibit 31.1 CERTIFICATION I, David A. Wheat, certify that: 1. I have reviewed this quarterly report on ; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 12, 2004 --------------- By /s/ David A. Wheat ----------------------------------- David A. Wheat Director, Senior Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) Exhibit 31.2 CERTIFICATION I, James R. Gelder, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Form 10-Q of ReliaStar Life Insurance Company of New York; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date August 12, 2004 --------------- By /s/ James R. Gelder ------------------------------------- James R. Gelder Director, President and Chief Executive Officer (Duly Authorized Officer and Principal Executive Officer)

RELIASTAR LIFE INSURANCE CO OF NEW YORK 10-Q