Attached files
file | filename |
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EX-3.3 - EX-3.3 - TRANSAMERICA ADVISORS LIFE INSURANCE Co | w79409exv3w3.htm |
EX-3.2 - EX-3.2 - TRANSAMERICA ADVISORS LIFE INSURANCE Co | w79409exv3w2.htm |
EX-32.1 - EX-32.1 - TRANSAMERICA ADVISORS LIFE INSURANCE Co | w79409exv32w1.htm |
EX-32.2 - EX-32.2 - TRANSAMERICA ADVISORS LIFE INSURANCE Co | w79409exv32w2.htm |
EX-31.2 - EX-31.2 - TRANSAMERICA ADVISORS LIFE INSURANCE Co | w79409exv31w2.htm |
EX-31.1 - EX-31.1 - TRANSAMERICA ADVISORS LIFE INSURANCE Co | w79409exv31w1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 2010
COMMISSION FILE NUMBERS 33-26322; 33-46827; 33-52254; 33-60290;
33-58303; 333-33863; 333-34192; 333-133223; 333-133225
33-58303; 333-33863; 333-34192; 333-133223; 333-133225
TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
ARKANSAS | 91-1325756 | |
(State or other jurisdiction | (IRS Employer | |
of incorporation or organization) | Identification No.) |
4333 Edgewood Road, NE
Cedar Rapids, Iowa
52499-0001
(Address of Principal Executive Offices)
Cedar Rapids, Iowa
52499-0001
(Address of Principal Executive Offices)
(800) 346-3677
(Registrant telephone number including area code)
(Registrant telephone number including area code)
MERRILL
LYNCH LIFE INSURANCE COMPANY
(Former Name of Registrant)
(Former Name of Registrant)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,
if any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes o No þ
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes o No o
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date.
COMMON 250,000
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
PART 1. Financial Information
Item 1. Financial Statements
TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
BALANCE SHEETS
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
BALANCE SHEETS
June 30, | December 31, | |||||||
(dollars in thousands, except share data) | 2010 | 2009 | ||||||
(unaudited) | (audited) | |||||||
ASSETS |
||||||||
Investments |
||||||||
Fixed maturity available-for-sale securities, at estimated fair value
(amortized cost: 2010 $1,632,702; 2009 $1,359,281) |
$ | 1,686,167 | $ | 1,345,291 | ||||
Equity available-for-sale securities, at estimated fair value
(cost: 2010 $15,202; 2009 $15,202) |
12,679 | 11,805 | ||||||
Limited partnerships |
13,696 | 12,620 | ||||||
Mortgage loans on real
estate |
69,461 | 70,854 | ||||||
Policy loans |
847,906 | 867,361 | ||||||
Total investments |
2,629,909 | 2,307,931 | ||||||
Cash and cash equivalents |
219,826 | 428,848 | ||||||
Accrued investment income |
43,618 | 34,237 | ||||||
Deferred policy acquisition costs |
40,609 | 26,730 | ||||||
Deferred sales inducements |
9,454 | 6,296 | ||||||
Value of business acquired |
371,189 | 374,737 | ||||||
Goodwill |
2,800 | 2,800 | ||||||
Federal income taxes deferred |
890 | 890 | ||||||
Reinsurance receivables |
22,573 | 35,806 | ||||||
Affiliated short term note receivable |
40,000 | 40,000 | ||||||
Receivable for investments sold net |
1,485 | 2,009 | ||||||
Other assets |
35,114 | 38,835 | ||||||
Separate Accounts assets |
7,501,896 | 8,313,833 | ||||||
Total Assets |
$ | 10,919,363 | $ | 11,612,952 | ||||
See Notes to Financial Statements
1
TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
BALANCE SHEETS Continued
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
BALANCE SHEETS Continued
June 30, | December 31, | |||||||
(dollars in thousands, except share data) | 2010 | 2009 | ||||||
(unaudited) | (audited) | |||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Liabilities |
||||||||
Policyholder liabilities and accruals |
||||||||
Policyholder account balances |
$ | 1,588,578 | $ | 1,626,415 | ||||
Future policy benefits |
498,733 | 439,634 | ||||||
Claims and claims settlement expenses |
34,953 | 32,846 | ||||||
2,122,264 | 2,098,895 | |||||||
Other policyholder funds |
4,389 | 10,346 | ||||||
Payables for collateral under securities loaned and reverse
repurchase agreements |
199,005 | 149,050 | ||||||
Federal income taxes current |
991 | 4,191 | ||||||
Affiliated payables net |
1,309 | 7,129 | ||||||
Other liabilities |
4,657 | 8,459 | ||||||
Separate Accounts liabilities |
7,501,896 | 8,313,833 | ||||||
Total Liabilities |
9,834,511 | 10,591,903 | ||||||
Stockholders Equity |
||||||||
Common stock ($10 par value; authorized 1,000,000 shares;
issued and outstanding: 250,000 shares) |
2,500 | 2,500 | ||||||
Additional paid-in capital |
1,366,636 | 1,366,636 | ||||||
Accumulated other comprehensive income (loss), net of taxes |
24,489 | (10,104 | ) | |||||
Retained deficit |
(308,773 | ) | (337,983 | ) | ||||
Total Stockholders Equity |
1,084,852 | 1,021,049 | ||||||
Total Liabilities and Stockholders Equity |
$ | 10,919,363 | $ | 11,612,952 | ||||
See Notes to Financial Statements
2
TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF INCOME
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF INCOME
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(dollars in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
(unaudited) | ||||||||||||||||
Revenues |
||||||||||||||||
Policy charge revenue |
$ | 51,495 | $ | 48,132 | $ | 104,187 | $ | 96,499 | ||||||||
Net investment income |
33,125 | 32,106 | 64,372 | 63,931 | ||||||||||||
Net realized investment gains
(losses) |
||||||||||||||||
Other-than-temporary impairment losses on securities |
(3,310 | ) | (1,066 | ) | (3,310 | ) | (5,250 | ) | ||||||||
Portion of other-than-temporary impairment losses
recognized in other comprehensive income |
2,449 | 14 | 2,449 | 14 | ||||||||||||
Portion of other-than-temporary impairment losses
previously recognized in other comprehensive income |
| | (423 | ) | | |||||||||||
Net other-than-temporary impairment losses on
securities
recognized in
income |
(861 | ) | (1,052 | ) | (1,284 | ) | (5,236 | ) | ||||||||
Net realized investment gains (losses), excluding
other-than-temporary impairment losses on securities |
15,598 | (33,851 | ) | 7,158 | (12,349 | ) | ||||||||||
Net realized investment gains (losses) |
14,737 | (34,903 | ) | 5,874 | (17,585 | ) | ||||||||||
Total Revenues |
99,357 | 45,335 | 174,433 | 142,845 | ||||||||||||
Benefits and Expenses |
||||||||||||||||
Interest credited to
policyholder liabilities |
19,762 | 19,776 | 39,639 | 40,783 | ||||||||||||
Policy
benefits, net of reinsurance recoveries: (2010 $1,598, $12,678; 2009 $1,056, $2,134) |
92,221 | (26,481 | ) | 109,421 | 42,325 | |||||||||||
Reinsurance premium ceded |
2,754 | 2,765 | 7,461 | 5,441 | ||||||||||||
Amortization (accretion) of deferred policy acquisition costs |
(9,149 | ) | 5,644 | (13,375 | ) | 10,937 | ||||||||||
Amortization (accretion) and impairment of value of
business acquired |
(8,769 | ) | 24,458 | (11,244 | ) | 140,753 | ||||||||||
Insurance expenses and taxes |
14,528 | 19,263 | 32,361 | 36,930 | ||||||||||||
Total Benefits and Expenses |
111,347 | 45,425 | 164,263 | 277,169 | ||||||||||||
Income (Loss) Before Taxes |
(11,990 | ) | (90 | ) | 10,170 | (134,324 | ) | |||||||||
Federal Income Tax Expense
(Benefit) |
||||||||||||||||
Current |
(578 | ) | | | | |||||||||||
Deferred |
(18,462 | ) | (37,803 | ) | (19,040 | ) | 65,812 | |||||||||
Federal Income Tax Expense (Benefit) |
(19,040 | ) | (37,803 | ) | (19,040 | ) | 65,812 | |||||||||
Net Income (Loss) |
$ | 7,050 | $ | 37,713 | $ | 29,210 | $ | (200,136 | ) | |||||||
See Notes to Financial Statements
3
TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF COMPREHENSIVE INCOME
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(dollars in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
(unaudited) | ||||||||||||||||
Net Income (Loss) |
$ | 7,050 | $ | 37,713 | $ | 29,210 | $ | (200,136 | ) | |||||||
Other Comprehensive Income (Loss) |
||||||||||||||||
Net unrealized gains (losses) on available-for-sale securities |
||||||||||||||||
Net unrealized holding gains (losses) arising
during the period |
39,127 | 55,209 | 65,637 | 43,904 | ||||||||||||
Reclassification adjustment for (gains) losses included in
net income |
4,637 | 886 | 3,524 | 6,711 | ||||||||||||
43,764 | 56,095 | 69,161 | 50,615 | |||||||||||||
Net unrealized other-than-temporary impairment gains
(losses) on securities |
||||||||||||||||
Net unrealized other-than-temporary impairment
losses arising during the period |
(2,449 | ) | (14 | ) | (2,449 | ) | (14 | ) | ||||||||
Change in previously recognized unrealized other-than-temporary impairments |
350 | 277 | 1,193 | 277 | ||||||||||||
Reclassification adjustment for other-than-temporary
impairments included in net income |
| | 423 | | ||||||||||||
(2,099 | ) | 263 | (833 | ) | 263 | |||||||||||
Adjustments |
||||||||||||||||
Policyholder liabilities |
26 | 3,720 | (1,235 | ) | 5,552 | |||||||||||
Deferred policy acquisition costs |
| (2,209 | ) | | (1,480 | ) | ||||||||||
Value of business acquired |
(5,450 | ) | (32,276 | ) | (13,459 | ) | (20,421 | ) | ||||||||
Deferred federal income taxes |
(12,866 | ) | (7,748 | ) | (19,041 | ) | (10,875 | ) | ||||||||
(18,290 | ) | (38,513 | ) | (33,735 | ) | (27,224 | ) | |||||||||
Total other comprehensive income, net of taxes |
23,375 | 17,845 | 34,593 | 23,654 | ||||||||||||
Comprehensive Income (Loss) |
$ | 30,425 | $ | 55,558 | $ | 63,803 | $ | (176,482 | ) | |||||||
See Notes to Financial Statements
4
TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF STOCKHOLDERS EQUITY
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF STOCKHOLDERS EQUITY
June 30, | December 31, | |||||||
(dollars in thousands) | 2010 | 2009 | ||||||
(unaudited) | (audited) | |||||||
Common Stock |
$ | 2,500 | $ | 2,500 | ||||
Additional Paid-in Capital |
$ | 1,366,636 | $ | 1,366,636 | ||||
Accumulated Other Comprehensive Income (Loss) |
||||||||
Balance at beginning of period |
$ | (10,104 | ) | $ | (65,178 | ) | ||
Total other comprehensive income, net of taxes |
34,593 | 58,531 | ||||||
Cumulative effect of adoption of other-than-temporary
impairment guidance (ASC 320) |
| (3,457 | ) | |||||
Balance at end of period |
$ | 24,489 | $ | (10,104 | ) | |||
Retained Earnings (Deficit) |
||||||||
Balance at beginning of period |
$ | (337,983 | ) | $ | (138,339 | ) | ||
Net income (loss) |
29,210 | (203,101 | ) | |||||
Cumulative effect of adoption of other-than-temporary
impairment guidance (ASC 320) |
| 3,457 | ||||||
Balance at end of period |
$ | (308,773 | ) | $ | (337,983 | ) | ||
Total Stockholders Equity |
$ | 1,084,852 | $ | 1,021,049 | ||||
See Notes to Financial Statements
5
TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF CASH FLOWS
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF CASH FLOWS
Six Months Ended | ||||||||
June 30, | ||||||||
(dollars in thousands) | 2010 | 2009 | ||||||
(unaudited) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income (loss) |
$ | 29,210 | $ | (200,136 | ) | |||
Adjustment to reconcile net income (loss) to net cash and cash
equivalents provided by operating activities: |
||||||||
Changes in: |
||||||||
Deferred policy acquisition costs |
(13,879 | ) | 1,997 | |||||
Deferred sales inducements |
(3,158 | ) | 1,908 | |||||
Value of business acquired |
(11,244 | ) | 140,753 | |||||
Benefit reserves |
71,633 | (4,211 | ) | |||||
Federal income tax accruals |
(22,240 | ) | 71,212 | |||||
Claims and claims settlement expenses |
2,108 | (7,734 | ) | |||||
Other policyholder funds |
(5,957 | ) | 6,643 | |||||
Other operating assets and liabilities, net |
(1,530 | ) | 9,147 | |||||
Amortization (accretion) of investments |
143 | (3,393 | ) | |||||
Limited partnership asset distributions |
(62 | ) | | |||||
Interest credited to policyholder liabilities |
39,639 | 40,783 | ||||||
Net realized investment (gains) losses |
(5,874 | ) | 17,585 | |||||
Net cash and cash equivalents provided by operating activities |
78,789 | 74,554 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Sales of available-for-sale securities |
302,580 | 255,391 | ||||||
Maturities of available-for-sale securities and mortgage loans |
97,614 | 73,184 | ||||||
Purchases of available-for-sale securities |
(670,850 | ) | (127,310 | ) | ||||
Sales of limited partnerships |
857 | 615 | ||||||
Change in affiliated short term note receivable |
| (40,000 | ) | |||||
Change in payable for collateral under securities loaned
and reverse repurchase agreements |
49,954 | (23,299 | ) | |||||
Policy loans on insurance contracts, net |
19,455 | 29,781 | ||||||
Net settlement on futures contracts |
5,033 | (11,628 | ) | |||||
Other |
(1,210 | ) | 3,221 | |||||
Net cash and cash equivalents provided by (used in) investing activities |
(196,567 | ) | 159,955 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Policyholder deposits |
20,289 | 165,346 | ||||||
Policyholder withdrawals |
(111,533 | ) | (297,432 | ) | ||||
Net cash and cash equivalents used in financing activities |
(91,244 | ) | (132,086 | ) | ||||
Net increase (decrease) in cash and cash equivalents (1) |
(209,022 | ) | 102,423 | |||||
Cash and cash equivalents, beginning of year |
428,848 | 428,904 | ||||||
Cash and cash equivalents, end of period |
$ | 219,826 | $ | 531,327 | ||||
(1) | Included in net increase (decrease) in cash and cash equivalents is interest received (2010 $65; 2009 $0); interest paid (2010 $22; 2009 $16); Federal income taxes paid (2010 $3,200; 2009 $0); Federal income taxes received (2010 $0; 2009 $5,400) |
See Notes to Financial Statements
6
TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
NOTES TO FINANCIAL STATEMENTS (unaudited)
(Dollars in Thousands)
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
NOTES TO FINANCIAL STATEMENTS (unaudited)
(Dollars in Thousands)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
Transamerica Advisors Life Insurance Company (TALIC or the Company) is a wholly owned
subsidiary of AEGON USA, LLC (AUSA). Prior to July 1, 2010, the Company was known as Merrill
Lynch Life Insurance Company (MLLIC). AUSA is an indirect wholly owned subsidiary of AEGON N.V.,
a limited liability share company organized under Dutch law. During 2009, the Company, in addition
to not issuing life insurance products, ceased issuing variable annuity and market value adjusted
annuity products. The Company is domiciled in the State of Arkansas.
For a complete discussion of the Companys 2009 Financial Statements and accounting policies, refer
to the Companys Annual Report on Form 10-K for the year ended December 31, 2009.
The interim Financial Statements for the three and six month periods are unaudited; however in the
opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a
fair statement of the Financial Statements have been included. These unaudited Financial
Statements should be read in conjunction with the audited Financial Statements included in the 2009
Annual Report on Form 10-K. The nature of the Companys business is such that results of any
interim period are not necessarily indicative of results for a full year.
Basis of Reporting
The accompanying financial statements have been prepared in conformity with U.S. generally accepted
accounting principles (GAAP). The Company also submits financial statements to insurance
industry regulatory authorities, which are prepared on the basis of statutory accounting principles
(SAP). The significant accounting policies and related judgments underlying the Companys
financial statements are summarized below.
Certain reclassifications and format changes have been made to prior period financial statements,
where appropriate, to conform to the current period presentation. These reclassifications have no
effect on net income or stockholders equity of the prior periods.
Accounting Estimates and Assumptions
The preparation of financial statements requires management to make estimates and assumptions
affecting the reported amounts of assets, liabilities, revenues and expenses and the disclosures
of contingent assets and liabilities. Those estimates are inherently subject to change and actual
results could differ from those estimates. Included among the material (or potentially material)
reported amounts and disclosures that require extensive use of estimates are: fair value of
certain invested assets, asset valuation allowances, deferred policy acquisition costs, deferred
sales inducements, value of business acquired, goodwill, policyholder liabilities, income taxes,
and potential effects of unresolved litigated matters.
Reverse Repurchase Agreements
The Company enters into dollar roll repurchase agreement transactions whereby the Company takes
delivery of mortgage-backed securities (MBS) pools and sells them to a counterparty along with an
agreement to repurchase substantially the same pools at some point in the future, typically one
month forward. These transactions are accounted for as collateralized borrowings and the
repurchase agreement liability is included in the Balance Sheet in payables for collateral under
securities loaned and reverse repurchase agreements.
Subsequent Events
The financial statements are adjusted to reflect events that occurred between the balance sheet
date and the date when the financial statements are issued, provided they give evidence of
conditions that existed at the balance sheet date.
Events that are indicative of conditions that arose after the balance sheet date are disclosed, but
do not result in an adjustment of the financial statements themselves.
7
Recent Accounting Guidance
Current Adoption of Recent Accounting Guidance
Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures
The Company adopted guidance (Accounting Standards Update (ASU) 2010-06, Improving Disclosures
about Fair Value Measurements) which includes new disclosures and clarifications of existing
disclosures about fair value measurements as of the period ended March 31, 2010. The guidance
requires disclosure of significant transfers in and out of Levels 1 and 2 of the fair value
hierarchy and reasons for the transfers. Additionally, the ASU clarifies the level of
disaggregation for fair value disclosures, requiring disclosures for each class of assets and
liabilities. The guidance clarifies that a reporting entity should provide disclosures about the
valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair
value measurements that fall in either Level 2 or Level 3. The adoption required updates to the
Companys financial statement disclosures, but did not impact the Companys results of operations
or financial position.
Accounting Guidance Adopted in 2009
ASC 105, Generally Accepted Accounting Principles
The Company adopted guidance that established the Financial Accounting Standards Board (FASB)
Accounting Standards CodificationTM (Codification) as the source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental entities as of the period ended September
30, 2009. All guidance contained in the Codification carries an equal level of authority. The
adoption required updates to the Companys financial statement disclosures, but did not impact the
Companys results of operations or financial position.
ASC 320, Investments Debt and Equity Securities
The Company adopted guidance that made other-than-temporary impairment (OTTI) guidance for debt
securities more operational and improved the presentation and disclosure of OTTI on debt and equity
securities in the financial statements as of the period ended June 30, 2009. The adoption resulted
in a net increase to retained earnings and decrease to accumulated other comprehensive income
(loss) of $3,457 at June 30, 2009.
ASC 820, Fair Value Measurements and Disclosures
| The Company adopted guidance on measuring the fair value of certain alternative investments (i.e., investments in hedge funds, private equity funds, venture capital funds, offshore fund vehicles, funds of funds, and real estate funds) as of the period ended December 31, 2009 (ASU 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)). The adoption did not have a material impact on the Companys financial statements. | ||
| The Company adopted guidance, as of the period ended December 31, 2009, which clarified that when a quoted price in an active market for an identical liability is not available, an entity should measure fair value using one of the following approaches that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs: a) a valuation technique that uses the quoted price of the identical liability when traded as an asset; b) a valuation technique that uses quoted prices for similar liabilities or similar liabilities when traded as assets; or c) another valuation technique that is consistent with fair value measurement guidance (e.g., income approach or a market approach) (ASU 2009-05, Measuring Liabilities at Fair Value). The adoption did not have a material impact on the Companys financial statements. | ||
| The Company adopted guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased as well as guidance on identifying circumstances that indicate a transaction is not orderly as of the period ended June 30, 2009. The guidance provides a list of factors that an entity should consider when determining whether there has been a significant decrease in the volume and level of activity for an asset or liability when compared to normal market activity for that asset or liability. The guidance also requires interim disclosures of the inputs and valuation techniques used to measure fair value and disclosure of any changes to those inputs and valuation techniques during the period. The adoption did not have a material impact on the Companys financial statements. | ||
| The Company adopted guidance requiring disclosures about fair value of financial instruments in interim reporting periods as well as annual periods as of the period ended June 30, 2009. The guidance requires an entity to disclose the methods and significant assumptions used to estimate fair value of financial instruments and to describe changes, if any, to those methods and assumptions during the period. The adoption affected disclosures but did not impact the Companys results of operations or financial position. |
8
ASC 855, Subsequent Events
The Company adopted guidance that established general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements are issued or are
available to be issued as of the period ended June 30, 2009. The Company adopted revised guidance
as of the period ended December 31, 2009, which eliminated the requirement for entities that file
or furnish financial statements to the Securities Exchange Commission (SEC) to disclose the date
through which subsequent events have been evaluated. The adoption did not impact the Companys
results of operations or financial position.
ASC 815, Derivatives and Hedging
On January 1, 2009, the Company adopted guidance that amended and expanded the disclosure
requirements related to derivative instruments and hedging activities to provide users of financial
statements with an enhanced understanding of a) how and why an entity uses derivative instruments,
b) how derivative instruments and related hedged items are accounted for, and c) how derivative
instruments and related hedged items affect an entitys financial position, financial performance,
and cash flows. The adoption did not impact the Companys results of operations or financial
position.
ASC 805, Business Combinations
On January 1, 2009, the Company adopted guidance that established the principles and requirements
for how the acquirer in a business combination: a) measures and recognizes the identifiable assets
acquired, liabilities assumed, and any noncontrolling interests in the acquired entity, b) measures
and recognizes positive goodwill acquired or a gain from bargain purchase (negative goodwill), and
c) determines the disclosure information that is decision-useful to users of financial statements
in evaluating the nature and financial effects of the business combination. The adoption did not
have a material impact on the results of operation or financial position.
ASC 350, IntangiblesGoodwill and Other
On January 1, 2009, the Company adopted guidance that amended the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset. The adoption did not impact the Companys results of operations or financial
position.
Future Adoption of Accounting Guidance
ASC 820, Fair Value Measurements and Disclosures
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements,
which requires separate presentation of information about purchases, sales, issuances, and
settlements in the Level 3 reconciliation for fair value measurements using significant
unobservable inputs. This disclosure requirement is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2010. The Company will adopt the guidance
on January 1, 2011, which affects disclosures and therefore will not impact the Companys results
of operations or financial position.
In April 2010, the FASB issued ASU 2010-15, How Investments Held Through Separate Accounts Affect
an Insurers Consolidation Analysis of Those Investments. This guidance clarifies that an
insurance entity should not consider any separate account interest held for the benefit of
policyholders in an investment to be the insurers interests and should not combine those interests
with its general account interest in the same investment when assessing the investment for
consolidation. The guidance is effective for fiscal years, and interim periods within those fiscal
years, beginning January 1, 2011 with early adoption permitted with the guidance applied
retrospectively to all prior periods upon the date of adoption. The Company will adopt the guidance on January 1, 2011 and does not expect this
to have a material impact to its results of operations and financial position.
Note 2. Fair Value of Financial Instruments
Fair Value Measurements
ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair
value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure
requirements for fair value measurements.
Fair Value Hierarchy
The Company has categorized its financial instruments into a three level hierarchy which is based
on the priority of the inputs to the valuation technique. The fair value hierarchy gives the
highest priority to quoted prices in active markets for identical assets or liabilities (Level 1)
and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value
fall within
9
different levels of the hierarchy, the category level is based on the lowest priority
level input that is significant to the fair value measurement of the instrument.
Assets and liabilities recorded at fair value on the Balance Sheets are categorized as follows:
Level 1. Unadjusted quoted prices for identical assets or liabilities in an active market.
Level 2. Quoted prices in markets that are not active or inputs that are observable either
directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs
include the following:
a) | Quoted prices for similar assets or liabilities in active markets | ||
b) | Quoted prices for identical or similar assets or liabilities in non-active markets | ||
c) | Inputs other than quoted market prices that are observable | ||
d) | Inputs that are derived principally from or corroborated by observable market data through correlation or other means |
Level 3. Prices or valuation techniques that require inputs that are both unobservable and
significant to the overall fair value measurement. They reflect managements own assumptions
about the assumptions a market participant would use in pricing the asset or liability.
The Company recognizes transfers between levels as of the beginning of the period.
The following table presents the Companys hierarchy for its assets and liabilities measured at
fair value on a recurring basis:
June 30, 2010 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets |
||||||||||||||||
Fixed maturity securities |
||||||||||||||||
Corporate securities |
$ | | $ | 1,164,030 | $ | | $ | 1,164,030 | ||||||||
Asset-backed securities |
| 102,157 | 11,181 | 113,338 | ||||||||||||
Commercial mortgage-backed securities |
| 147,023 | 3,581 | 150,604 | ||||||||||||
Residential mortgage-backed securities |
| 102,180 | 23,320 | 125,500 | ||||||||||||
Municipals |
| 1,581 | | 1,581 | ||||||||||||
Government and government agencies |
||||||||||||||||
United States |
121,388 | | | 121,388 | ||||||||||||
Foreign |
3,660 | 6,066 | | 9,726 | ||||||||||||
Fixed maturity securities (a) |
125,048 | 1,523,037 | 38,082 | 1,686,167 | ||||||||||||
Equity securities |
||||||||||||||||
Banking securities |
| 7,051 | | 7,051 | ||||||||||||
Other financial services securities |
| 428 | | 428 | ||||||||||||
Industrial securities |
| 5,200 | | 5,200 | ||||||||||||
Equity securities (a) |
| 12,679 | | 12,679 | ||||||||||||
Cash equivalents (b) |
| 225,082 | | 225,082 | ||||||||||||
Limited partnerships (c) |
| | 8,772 | 8,772 | ||||||||||||
Separate Accounts assets (d) |
7,501,896 | | | 7,501,896 | ||||||||||||
Total assets |
$ | 7,626,944 | $ | 1,760,798 | $ | 46,854 | $ | 9,434,596 | ||||||||
Liabilities |
||||||||||||||||
Future policy benefits
(embedded derivatives only) (e) |
$ | | $ | | $ | 31,884 | $ | 31,884 | ||||||||
Total liabilities |
$ | | $ | | $ | 31,884 | $ | 31,884 | ||||||||
10
December 31, 2009 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets |
||||||||||||||||
Fixed maturity securities |
||||||||||||||||
Corporate securities |
$ | | $ | 722,159 | $ | 11,440 | $ | 733,599 | ||||||||
Asset-backed securities |
| 89,281 | 22,410 | 111,691 | ||||||||||||
Commercial mortgage-backed securities |
| 152,173 | | 152,173 | ||||||||||||
Residential mortgage-backed securities |
| 114,979 | 3,191 | 118,170 | ||||||||||||
Municipals |
| 1,488 | | 1,488 | ||||||||||||
Government and government agencies |
||||||||||||||||
United States |
215,828 | | | 215,828 | ||||||||||||
Foreign |
3,463 | 8,879 | | 12,342 | ||||||||||||
Fixed maturity securities (a) |
219,291 | 1,088,959 | 37,041 | 1,345,291 | ||||||||||||
Equity securities |
||||||||||||||||
Banking securities |
| 6,361 | | 6,361 | ||||||||||||
Other financial services securities |
| 363 | | 363 | ||||||||||||
Industrial securities |
| 5,081 | | 5,081 | ||||||||||||
Equity securities (a) |
| 11,805 | | 11,805 | ||||||||||||
Cash equivalents (b) |
| 433,875 | | 433,875 | ||||||||||||
Limited partnerships (c) |
| | 7,604 | 7,604 | ||||||||||||
Separate Accounts assets (d) |
8,313,833 | | | 8,313,833 | ||||||||||||
Total assets |
$ | 8,533,124 | $ | 1,534,639 | $ | 44,645 | $ | 10,112,408 | ||||||||
Liabilities |
||||||||||||||||
Future policy benefits
(embedded derivatives only) (e) |
$ | | $ | | $ | (12,759 | ) | $ | (12,759 | ) | ||||||
Total liabilities |
$ | | $ | | $ | (12,759 | ) | $ | (12,759 | ) | ||||||
(a) | Securities are classified as Level 1 if the fair value is determined by observable inputs that reflect quoted prices for identical assets in active markets that the Company has the ability to access at the measurement date. Level 1 securities include highly liquid U.S. Treasury and U.S. Government Agency securities. Securities are classified as Level 2 if the fair value is determined by observable inputs, other than quoted prices included in Level 1, for the asset or prices for similar assets. Level 2 securities include fixed maturity securities and preferred stock for which the Company utilized pricing services and corroborated broker quotes. Securities are classified as Level 3 if the valuations are derived from techniques in which one or more of the significant inputs are unobservable. Level 3 consists principally of fixed maturity securities whose fair value is estimated based on non-binding broker quotes. | |
(b) | Cash equivalents are primarily valued at amortized cost, which approximates fair value. Operating cash is not included in the abovementioned table. | |
(c) | The Company has an investment in a limited partnership for which the fair value was derived from managements review of the underlying financial statements that were prepared on a GAAP basis. The remaining limited partnership is carried at cost and is not included in the abovementioned table. | |
(d) | Separate Accounts assets are carried at the net asset value provided by the fund managers. | |
(e) | The Company issued contracts containing guaranteed minimum withdrawal benefits riders (GMWB) and obtained reinsurance on guaranteed minimum income benefit riders (GMIB reinsurance). GMWB and GMIB reinsurance are treated as embedded derivatives and are required to be reported separately from the host variable annuity contract. The fair value of these guarantees are calculated as the present value of future expected payments to policyholders less the present value of assessed rider fees attributable to the guarantees. Given the complexity and long-term nature of these guarantees, their fair values are determined using stochastic techniques under a variety of market return, discount rates and actuarial assumptions. Since many of the assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability included in future policy benefits has been reflected within Level 3 of the fair value hierarchy. |
At June 30, 2010, there were no transfers between level 1 and 2, respectively.
11
The following table provides a summary of the change in fair value of the Companys Level 3 assets
at June 30, 2010 and December 31, 2009:
June 30, 2010 | December 31, 2009 | |||||||||||||||
Limited | Fixed | Limited | Fixed | |||||||||||||
Partnership | Maturity | Partnership | Maturity | |||||||||||||
Balance at beginning of period (a) |
$ | 7,604 | $ | 37,041 | $ | 9,895 | $ | 112,200 | ||||||||
Change in unrealized gains (losses) (b) |
| 2,661 | | 9,805 | ||||||||||||
Purchases |
| 27,941 | | 20,021 | ||||||||||||
Sales |
(104 | ) | (1,960 | ) | (745 | ) | (26,854 | ) | ||||||||
Transfers into Level 3 |
| 3,256 | | 27,473 | ||||||||||||
Transfers out of Level 3 |
| (30,935 | ) | | (100,605 | ) | ||||||||||
Changes in valuation (c) |
1,211 | 78 | (1,957 | ) | 605 | |||||||||||
Net realized investment gains (losses) (d) |
62 | | 411 | (5,604 | ) | |||||||||||
Balance at end of period (a) |
$ | 8,772 | $ | 38,082 | $ | 7,604 | $ | 37,041 | ||||||||
(a) | Recorded as a component of limited partnerships and fixed maturity available-for-sale securities in the Balance Sheets. | |
(b) | Recorded as a component of other comprehensive income (loss). | |
(c) | Recorded as a component of net investment income in the Statements of Income. | |
(d) | Recorded as a component of net realized investment gains (losses) for fixed maturity and net investment income for limited partnerships in the Statements of Income |
In certain circumstances, the Company will obtain non-binding broker quotes from brokers to assist
in the determination of fair value. If those quotes can be corroborated by other market observable
data, the investments will be classified as Level 2 investments. If not, the investments are
classified as Level 3 due to the unobservable nature of the brokers valuation processes. The
Level 3 fixed maturity securities at June 30, 2010 are relatively flat compared to December 31,
2009. The decrease in Level 3 fixed maturity securities at December 31, 2009 is primarily due to an
increase in market activity and securities being vendor priced (Level 2).
The Companys Level 3 liabilities (assets) consist of provisions for GMWB and GMIB reinsurance. The
fair value of these guarantees are calculated as the present value of future expected payments to
policyholders less the present value of assessed rider fees attributable to the guarantees. Given
the complexity and long-term nature of these guarantees which are unlike instruments available in
financial markets, their fair values are determined using stochastic techniques under a variety of
market return scenarios. A variety of factors are considered, including expected market rates of
return, equity and interest rate volatility, credit spread, correlations of market returns,
discount rates and actuarial assumptions.
The expected returns are based on risk-free rates, such as the current London Inter-Bank Offered
Rate (LIBOR) forward curve. The credit spread is set by using the credit default swap (CDS)
spreads of a reference portfolio of life insurance companies, adjusted to reflect the subordination
of senior debt holders at the holding company level to the position of policyholders at the
operating company level (who have priority in payments to other creditors).
For equity volatility, the Company uses a term structure assumption with market-based implied
volatility inputs for the first five years and a long-term forward rate assumption of 25%
thereafter. The volume of observable option trading from which volatilities are derived generally
declines as the contracts term increases, therefore, the volatility curve grades from implied
volatilities for five years to the ultimate rate. The resulting volatility assumption in year 20
for the S&P 500 index (expressed as a spot rate) was 26.7% at June 30, 2010 and 25.3% at December
31, 2009. Correlations of market returns across underlying indices are based on historical market
returns and their inter-relationships over a number of years preceding the valuation date.
Assumptions regarding policyholder behavior, such as lapses, included in the models are derived in
the same way as the assumptions used to measure insurance liabilities. These assumptions are
reviewed at each valuation date and updated based on historical experience and observable market
data as required.
12
The following table provides a summary of the changes in fair value of the Companys Level 3
liabilities (assets) at June 30, 2010 and December 31, 2009:
June 30, 2010 | December 31, 2009 | |||||||||||||||
GMIB | GMIB | |||||||||||||||
GMWB | Reinsurance | GMWB | Reinsurance | |||||||||||||
Balance at beginning of period (b) |
$ | 45,987 | $ | (58,746 | ) | $ | 114,457 | $ | (79,134 | ) | ||||||
Changes in interest rates (a) |
50,738 | (19,074 | ) | (35,381 | ) | 12,922 | ||||||||||
Changes in equity markets (a) |
22,552 | (9,573 | ) | (24,462 | ) | 13,503 | ||||||||||
Other (a) |
| | (8,627 | ) | (6,037 | ) | ||||||||||
Balance at end of period (b) |
$ | 119,277 | $ | (87,393 | ) | $ | 45,987 | $ | (58,746 | ) | ||||||
(a) | Recorded as a component of policy benefits in the Statements of Income. | |
(b) | Recorded as a component of future policy benefits in the Balance Sheets. |
At June 30, 2010, the increase in the GMWB reserves and GMIB Reinsurance was principally driven
by the decline in the risk neutral rate and unfavorable equity markets during the quarter. In
2009, the change in GMWB reserves and GMIB insurance was driven by the increase in risk neutral
rates, improved equity markets, and policyholder behavior assumption updates, slightly offset by a
lower credit spread.
Note 3. Investments
Fixed Maturity and Equity Securities
The amortized cost/cost and estimated fair value of investments in fixed maturity and equity
securities at June 30, 2010 and December 31, 2009 were:
June 30, 2010 | ||||||||||||||||||||
Estimated | ||||||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||||||
Cost/Cost | Gains | Losses | OTTI (1) | Value | ||||||||||||||||
Fixed maturity securities |
||||||||||||||||||||
Corporate securities |
$ | 1,115,865 | $ | 58,129 | $ | (10,185 | ) | $ | 221 | $ | 1,164,030 | |||||||||
Asset-backed securities |
114,013 | 6,845 | (5,036 | ) | (2,484 | ) | 113,338 | |||||||||||||
Commercial mortgage-backed securities |
149,976 | 7,537 | (6,909 | ) | | 150,604 | ||||||||||||||
Residential mortgage-backed securities |
125,966 | 4,090 | (1,377 | ) | (3,179 | ) | 125,500 | |||||||||||||
Municipals |
1,548 | 33 | | | 1,581 | |||||||||||||||
Government and government agencies |
||||||||||||||||||||
United States |
116,237 | 6,655 | (1,504 | ) | | 121,388 | ||||||||||||||
Foreign |
9,097 | 629 | | | 9,726 | |||||||||||||||
Total fixed maturity securities |
$ | 1,632,702 | $ | 83,918 | $ | (25,011 | ) | $ | (5,442 | ) | $ | 1,686,167 | ||||||||
Equity securities preferred stocks |
||||||||||||||||||||
Banking securities |
$ | 9,246 | $ | | $ | (2,195 | ) | $ | | $ | 7,051 | |||||||||
Other financial services securities |
165 | 263 | | | 428 | |||||||||||||||
Industrial securities |
5,791 | | (591 | ) | | 5,200 | ||||||||||||||
Total equity securities |
$ | 15,202 | $ | 263 | $ | (2,786 | ) | $ | | $ | 12,679 | |||||||||
13
December 31, 2009 | ||||||||||||||||||||
Estimated | ||||||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||||||
Cost/Cost | Gains | Losses | OTTI (1) | Value | ||||||||||||||||
Fixed maturity securities |
||||||||||||||||||||
Corporate securities |
$ | 718,740 | $ | 23,767 | $ | (8,807 | ) | $ | (101 | ) | $ | 733,599 | ||||||||
Asset-backed securities |
118,400 | 4,830 | (8,164 | ) | (3,375 | ) | 111,691 | |||||||||||||
Commercial mortgage-backed securities |
165,844 | 1,819 | (15,490 | ) | | 152,173 | ||||||||||||||
Residential mortgage-backed securities |
122,400 | 3,400 | (6,496 | ) | (1,134 | ) | 118,170 | |||||||||||||
Municipals |
1,551 | 7 | (70 | ) | | 1,488 | ||||||||||||||
Government and government agencies |
||||||||||||||||||||
United States |
220,313 | 1,427 | (5,912 | ) | | 215,828 | ||||||||||||||
Foreign |
12,033 | 369 | (60 | ) | | 12,342 | ||||||||||||||
Total fixed maturity securities |
$ | 1,359,281 | $ | 35,619 | $ | (44,999 | ) | $ | (4,610 | ) | $ | 1,345,291 | ||||||||
Equity securities preferred stocks |
||||||||||||||||||||
Banking securities |
$ | 9,246 | $ | | $ | (2,885 | ) | $ | | $ | 6,361 | |||||||||
Other financial services securities |
165 | 198 | | | 363 | |||||||||||||||
Industrial securities |
5,791 | | (710 | ) | | 5,081 | ||||||||||||||
Total equity securities |
$ | 15,202 | $ | 198 | $ | (3,595 | ) | $ | | $ | 11,805 | |||||||||
(1) | Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI. |
Excluding investments in U.S. government and government agencies, the Company is not exposed
to any significant concentration of credit risk in its fixed maturity securities portfolio.
The amortized cost and estimated fair value of fixed maturity securities by investment grade at
June 30, 2010 and December 31, 2009 were:
June 30, 2010 | December 31, 2009 | |||||||||||||||
Estimated | Estimated | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
Investment grade |
$ | 1,550,211 | $ | 1,613,377 | $ | 1,273,913 | $ | 1,272,291 | ||||||||
Below investment grade |
82,491 | 72,790 | 85,368 | 73,000 | ||||||||||||
Total fixed maturity securities |
$ | 1,632,702 | $ | 1,686,167 | $ | 1,359,281 | $ | 1,345,291 | ||||||||
At June 30, 2010 and December 31, 2009 the estimated fair value of fixed maturity securities
rated BBB- were $41,576 and $38,945, respectively, which is the lowest investment grade rating
given by Standard & Poors (S&P).
14
The amortized cost and estimated fair value of fixed maturity securities at June 30, 2010 and
December 31, 2009 by contractual maturities were:
June 30, 2010 | December 31, 2009 | |||||||||||||||
Estimated | Estimated | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
Fixed maturity securities |
||||||||||||||||
Due in one year or less |
$ | 32,617 | $ | 33,088 | $ | 107,985 | $ | 108,234 | ||||||||
Due after one year through five years |
226,137 | 239,315 | 265,145 | 273,128 | ||||||||||||
Due after five years through ten years |
832,854 | 864,916 | 421,437 | 423,225 | ||||||||||||
Due after ten years |
151,139 | 159,406 | 158,070 | 158,670 | ||||||||||||
1,242,747 | 1,296,725 | 952,637 | 963,257 | |||||||||||||
Mortgage-backed securities and other asset-backed securities |
389,955 | 389,442 | 406,644 | 382,034 | ||||||||||||
Total fixed maturity securities |
$ | 1,632,702 | $ | 1,686,167 | $ | 1,359,281 | $ | 1,345,291 | ||||||||
In the preceding table fixed maturity securities not due at a single maturity date, have been
included in the year of final maturity. Actual maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties.
Unrealized Gains (Losses) on Fixed Maturity and Equity Securities
The Companys investments in fixed maturity and equity securities are classified as
available-for-sale and are carried at estimated fair value. Unrealized gains and losses on
available-for-sale securities are included in stockholders equity as a component of accumulated
other comprehensive income (loss), net of taxes.
The estimated fair value and gross unrealized losses and OTTI of fixed maturity and equity
securities aggregated by length of time that individual securities have been in a continuous
unrealized loss position, at June 30, 2010 and December 31, 2009 were as follows:
June 30, 2010 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
Value | Cost/Cost | OTTI (1) | ||||||||||
Less than or equal to six months |
||||||||||||
Fixed maturity securities |
||||||||||||
Corporate securities |
$ | 94,668 | $ | 100,114 | $ | (5,446 | ) | |||||
Asset-backed securities |
7,829 | 7,976 | (147 | ) | ||||||||
Commercial mortgage-backed securities |
4,350 | 4,826 | (476 | ) | ||||||||
Residential mortgage-backed securities |
4,299 | 5,675 | (1,376 | ) | ||||||||
Total fixed maturity and equity securities |
111,146 | 118,591 | (7,445 | ) | ||||||||
Greater than six months but less than or equal to one year |
||||||||||||
Fixed maturity securities corporate securities |
2,328 | 2,528 | (200 | ) | ||||||||
Total fixed maturity and equity securities |
$ | 2,328 | $ | 2,528 | $ | (200 | ) | |||||
15
June 30, 2010 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
(continued) | Value | Cost/Cost | OTTI (1) | |||||||||
Greater than one year |
||||||||||||
Fixed maturity securities |
||||||||||||
Corporate securities |
$ | 37,705 | $ | 42,023 | $ | (4,318 | ) | |||||
Asset-backed securities |
22,635 | 30,008 | (7,373 | ) | ||||||||
Commercial mortgage-backed securities |
22,540 | 28,973 | (6,433 | ) | ||||||||
Residential mortgage-backed securities |
16,288 | 19,468 | (3,180 | ) | ||||||||
Government and government agencies United States |
31,901 | 33,405 | (1,504 | ) | ||||||||
Equity securities |
||||||||||||
Banking securities |
7,051 | 9,246 | (2,195 | ) | ||||||||
Industrial securities |
5,200 | 5,791 | (591 | ) | ||||||||
Total fixed maturity and equity securities |
143,320 | 168,914 | (25,594 | ) | ||||||||
Total fixed maturity and equity securities |
$ | 256,794 | $ | 290,033 | $ | (33,239 | ) | |||||
December 31, 2009 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
Value | Cost/Cost | OTTI (1) | ||||||||||
Less than or equal to six months |
||||||||||||
Fixed maturity securities |
||||||||||||
Corporate securities |
$ | 169,107 | $ | 171,407 | $ | (2,300 | ) | |||||
Asset-backed securities |
3,690 | 3,767 | (77 | ) | ||||||||
Commercial mortgage-backed securities |
11,798 | 12,094 | (296 | ) | ||||||||
Residential mortgage-backed securities |
19,885 | 20,021 | (136 | ) | ||||||||
Government and government agencies |
||||||||||||
United States |
25,969 | 26,201 | (232 | ) | ||||||||
Foreign |
3,563 | 3,623 | (60 | ) | ||||||||
Total fixed maturity and equity securities |
234,012 | 237,113 | (3,101 | ) | ||||||||
Greater than six months but less than or equal to one year |
||||||||||||
Fixed maturity securities |
||||||||||||
Corporate securities |
6,173 | 6,813 | (640 | ) | ||||||||
Asset-backed securities |
12,892 | 14,470 | (1,578 | ) | ||||||||
Commercial mortgage-backed securities |
5,046 | 5,770 | (724 | ) | ||||||||
Residential mortgage-backed securities |
4 | 4 | | |||||||||
Government and government agencies United States |
83,657 | 89,337 | (5,680 | ) | ||||||||
Total fixed maturity and equity securities |
107,772 | 116,394 | (8,622 | ) | ||||||||
Greater than one year |
||||||||||||
Fixed maturity securities |
||||||||||||
Corporate securities |
81,631 | 87,599 | (5,968 | ) | ||||||||
Asset-backed securities |
22,950 | 32,834 | (9,884 | ) | ||||||||
Commercial mortgage-backed securities |
50,799 | 65,269 | (14,470 | ) | ||||||||
Residential mortgage-backed securities |
19,805 | 27,299 | (7,494 | ) | ||||||||
Municipals |
860 | 930 | (70 | ) | ||||||||
Equity securities |
||||||||||||
Banking securities |
6,361 | 9,246 | (2,885 | ) | ||||||||
Industrial securities |
5,081 | 5,791 | (710 | ) | ||||||||
Total fixed maturity and equity securities |
187,487 | 228,968 | (41,481 | ) | ||||||||
Total fixed maturity and equity securities |
$ | 529,271 | $ | 582,475 | $ | (53,204 | ) | |||||
(1) | Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI. |
16
The total number of securities in an unrealized loss position was 63 and 119 at June 30, 2010
and December 31, 2009, respectively.
The estimated fair value, gross unrealized losses, OTTI and number of securities where the fair
value had declined below amortized cost by greater than 20% and greater than 40% at June 30, 2010
and December 31, 2009 were as follows:
June 30, 2010 | ||||||||||||||||
Estimated | Gross | |||||||||||||||
Fair | Unrealized | Number of | ||||||||||||||
Value | Losses | OTTI (1) | Securities | |||||||||||||
Decline > 20% |
||||||||||||||||
Less than or equal to six months |
$ | 15,924 | $ | (4,889 | ) | $ | | 2 | ||||||||
Greater than one year |
22,121 | (9,655 | ) | (2,484 | ) | 7 | ||||||||||
Total |
$ | 38,045 | $ | (14,544 | ) | $ | (2,484 | ) | 9 | |||||||
Decline > 40% |
||||||||||||||||
Greater than one year |
$ | 7,654 | $ | (5,581 | ) | $ | | 2 | ||||||||
Total |
$ | 7,654 | $ | (5,581 | ) | $ | | 2 | ||||||||
December 31, 2009 | ||||||||||||||||
Estimated | Gross | |||||||||||||||
Fair | Unrealized | Number of | ||||||||||||||
Value | Losses | OTTI (1) | Securities | |||||||||||||
Decline > 20% |
||||||||||||||||
Greater than one year |
$ | 68,806 | $ | (28,168 | ) | $ | (4,509 | ) | 17 | |||||||
Total |
$ | 68,806 | $ | (28,168 | ) | $ | (4,509 | ) | 17 | |||||||
Decline > 40% |
||||||||||||||||
Greater than one year |
$ | 12,943 | $ | (10,989 | ) | $ | | 4 | ||||||||
Total |
$ | 12,943 | $ | (10,989 | ) | $ | | 4 | ||||||||
(1) | Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI. |
Unrealized gains (losses) incurred during the first half of 2010 and 2009 were primarily due
to price fluctuations resulting from changes in interest rates and credit spreads. As the Company
does not have the intent to sell and the Company is not more likely than not required to sell these
securities prior to the anticipated recovery of the amortized cost, the Company did not consider
these securities to be other-than-temporarily impaired.
The components of net unrealized gains (losses) and OTTI included in accumulated other
comprehensive income (loss), net of taxes at June 30, 2010 and December 31, 2009 was as follows:
June 30, | December 31, | |||||||
2010 | 2009 | |||||||
Assets |
||||||||
Fixed maturity securities |
$ | 53,465 | $ | (13,990 | ) | |||
Equity securities |
(2,523 | ) | (3,397 | ) | ||||
Value of business acquired |
(14,679 | ) | (1,219 | ) | ||||
36,263 | (18,606 | ) | ||||||
Liabilities |
||||||||
Policyholder account balances |
1,827 | 3,062 | ||||||
Federal income taxes deferred |
(13,601 | ) | 5,440 | |||||
(11,774 | ) | 8,502 | ||||||
Stockholders equity |
||||||||
Accumulated other comprehensive income (losses), net of taxes |
$ | 24,489 | $ | (10,104 | ) | |||
The Company records certain adjustments to policyholder account balances in conjunction with
the unrealized holding gains or losses on investments classified as available-for-sale. The Company
adjusts a portion of these liabilities as if the unrealized
17
holding gains or losses had actually
been realized, with corresponding credits or charges reported in accumulated other comprehensive
loss, net of taxes.
Mortgage Loans on Real Estate
Mortgage loans on real estate consist entirely of mortgages on commercial real estate. Prepayment
premiums are collected when borrowers elect to prepay their debt prior to the stated maturity.
There were no prepayment premiums for the three and six months ended June 30, 2010 and 2009.
The fair value for mortgage loans on real estate is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with similar credit
ratings and/or similar remaining maturities. The estimated fair value of the mortgages on
commercial real estate at June 30, 2010 and December 31, 2009 was $69,052 and $67,707,
respectively.
Loans are considered impaired when it is probable that based upon current information and events,
the Company will be unable to collect all amounts due under the contractual terms of the loan
agreement. A valuation allowance is established when a loan is impaired for the excess carrying
value of the loan over its estimated value. In addition to the valuation allowance for specific
loans, a reserve is estimated based on a percent of the outstanding loan balance. The reserve at
June 30, 2010 and December 31, 2009 was $40 and $41, respectively. The change in the reserve is
reflected in net realized investment gains (losses), excluding OTTI on securities in the Statements
of Income. There were no impaired mortgage loans at June 30, 2010 and December 31, 2009,
respectively.
The commercial mortgages are geographically diversified throughout the United States with the
largest concentrations in Pennsylvania, New Hampshire, California, Virginia, Ohio, and Washington
which account for approximately 80% of mortgage loans as of June 30, 2010.
Policy Loans
Policy loans on insurance contracts are stated at unpaid principal balances. The Company estimates
the fair value of policy loans as equal to the book value of the loans. The estimated fair value
of the policy loans at June 30, 2010 and December 31, 2009 was $847,906 and $867,361, respectively.
Policy loans are fully collateralized by the account value of the associated insurance contracts,
and the spread between the policy loan interest rate and the interest rate credited to the account
value held as collateral is fixed.
Securities Lending
The Company loans securities under securities lending agreements. The amortized cost of securities
out on loan at June 30, 2010 and December 31, 2009 was $155,018 and $149,374, respectively. The
estimated fair value of securities out on loan at June 30, 2010 and December 31, 2009 was $159,133
and $145,209, respectively.
Reverse Repurchase Agreements
The Company enters into dollar roll repurchase agreement transactions. The amortized cost of the
reverse repurchase agreements at June 30, 2010 was $32,344. The estimated fair value of the
securities that were pledged was $32,501 at June 30, 2010. There were no reverse repurchase
agreements at December 31, 2009.
Derivatives
The Company uses derivatives to manage the capital market risk associated with the GMWB. The
derivatives, which are S&P 500 Composite Stock Price Index futures contracts, are used to hedge the
equity risk associated with these types of variable guaranteed products, in particular the claim
and/or revenue risks of the liability portfolio. The Company will not seek hedge accounting on
these hedges because, in most cases, the derivatives change in value will create a natural offset
in the Statements of Income with the change in reserves. Net settlements on the futures occur
daily. As of June 30, 2010, the Company had 620 outstanding short futures contracts with a notional
value of $159,123. As of December 31, 2009, the Company had 570 outstanding short futures
contracts with a notional value of $158,275.
18
Realized Investment Gains (Losses)
The Company considers fair value at the date of sale to be equal to proceeds received. Proceeds
and gross realized investment gains (losses) from the sale of available-for-sale securities for the
three and six months ended June 30 were as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Proceeds |
$ | 212,467 | $ | 170,413 | $ | 302,580 | $ | 255,391 | ||||||||
Gross realized investment gains |
2,534 | 1,933 | 4,905 | 2,661 | ||||||||||||
Gross realized investment losses |
(1,683 | ) | (2,689 | ) | (1,846 | ) | (3,757 | ) | ||||||||
Proceeds on available-for-sale securities
sold at a realized loss |
67,431 | 27,871 | 90,552 | 66,309 |
Net realized investment gains (losses) for the three and six months ended June 30 were as
follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Fixed maturity securities |
$ | (272 | ) | $ | (1,808 | ) | $ | 1,514 | $ | (8,687 | ) | |||||
Equity securities |
| | | (930 | ) | |||||||||||
Limited partnerships |
660 | | 660 | 471 | ||||||||||||
Mortgages |
5 | (3 | ) | | 6 | |||||||||||
Derivatives |
14,417 | (32,982 | ) | 5,033 | (11,629 | ) | ||||||||||
Adjustment related to value of business acquired |
(73 | ) | (110 | ) | (1,333 | ) | 3,184 | |||||||||
Net realized investment gains (losses) |
$ | 14,737 | $ | (34,903 | ) | $ | 5,874 | $ | (17,585 | ) | ||||||
OTTI
If management determines that a decline in the value of an available-for-sale equity security is
other-than-temporary, the cost basis is adjusted to estimated fair value and the decline in value
is recorded as a net realized investment loss. For debt securities, the manner in which an OTTI is
recorded depends on whether management intends to sell a security or it is more likely than not
that it will be required to sell a security in an unrealized loss position before its anticipated
recovery. If management intends to sell or more likely than not will be required to sell the debt
security before recovery, the OTTI is recognized in earnings for the difference between amortized
cost and fair value. If these criteria are not met, the OTTI is bifurcated into two pieces: a
credit loss is recognized in earnings at an amount equal to the difference between the amortized
cost of the debt security and the present value of the securitys anticipated cash flows, and a non
credit loss is recognized in OCI for any difference between the fair value and the net present
value of the debt security at the impairment measurement date.
The following tables sets forth the amount of credit loss impairments on fixed maturity securities
held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized
in OCI, and the corresponding changes in such amounts:
Balance, December 31, 2009 |
$ | 1,445 | ||
Credit loss impairment recognized in the current period on
securities not previously impaired |
722 | |||
Additional credit loss impairments recognized in the current period on
securities previously impaired through other comprehensive income |
423 | |||
Accretion of credit loss impairments previously recognized |
(199 | ) | ||
Balance, June 30, 2010 |
$ | 2,391 | ||
19
The components of OTTI reflected in the Statements of Income for the three and six months
ended June 30 was as follows:
Three Months Ended June 30, 2010 | Six Months Ended June 30, 2010 | |||||||||||||||||||||||
Net | Net OTTI | Net | Net OTTI | |||||||||||||||||||||
OTTI | OTTI Losses | Losses | OTTI | OTTI Loss | Losses | |||||||||||||||||||
Losses on | Recognized | Recognized | Losses on | Recognized | Recognized | |||||||||||||||||||
Securities | in OCI | in Income | Securities | in OCI | in Income | |||||||||||||||||||
Gross OTTI losses |
$ | 3,568 | $ | 2,449 | $ | 1,119 | $ | 3,991 | $ | 2,449 | $ | 1,542 | ||||||||||||
Deferred acquisition costs and
value of business acquired |
(258 | ) | | (258 | ) | (258 | ) | | (258 | ) | ||||||||||||||
Net OTTI losses |
$ | 3,310 | $ | 2,449 | $ | 861 | $ | 3,733 | $ | 2,449 | $ | 1,284 | ||||||||||||
Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 | |||||||||||||||||||||||
Net | Net OTTI | Net | Net OTTI | |||||||||||||||||||||
OTTI | OTTI Losses | Losses | OTTI | OTTI Loss | Losses | |||||||||||||||||||
Losses on | Recognized | Recognized | Losses on | Recognized | Recognized | |||||||||||||||||||
Securities | in OCI | in Income | Securities | in OCI | in Income | |||||||||||||||||||
Gross OTTI losses |
$ | 1,066 | $ | 14 | $ | 1,052 | $ | 8,538 | $ | 14 | $ | 8,524 | ||||||||||||
Deferred acquisition
costs and
value of business acquired |
| | | (3,288 | ) | | (3,288 | ) | ||||||||||||||||
Net OTTI losses |
$ | 1,066 | $ | 14 | $ | 1,052 | $ | 5,250 | $ | 14 | $ | 5,236 | ||||||||||||
For the three and six months ended June 30, 2010, the Companys impairment losses were $861
and $1,284, respectively, net of associated amortization of value of business acquired. The gross impairment losses were principally the result of the Company
impairing its holding of a 2005 vintage residential mortgage-backed security for $722 due to an
adverse change in cash flows. A corporate bond was also impaired for $397 due to the intent to
sell or being more likely than not required to sell during the second quarter. During the first
quarter 2010, the Company impaired its holding of a 2007 vintage subprime mortgage asset-backed
security for $423. For the three and six months ended June 30, 2009, the Companys impairment
losses were $1,052 and $5,236, respectively, net of value of business acquired amortization. The
Company impaired its holding in Lear Corp to discounted cash flows in the first six months of 2009
for $1,052. Eighteen unique issuers accounted for the remaining gross impairment of $7,475. During
the second quarter 2009, the Company adopted revised guidance for OTTI recognition, which resulted
in a cumulative adjustment of $12,576 to retained earnings and amortized cost for fixed maturity
securities and cost for equity securities for the non credit portion of previously recorded
impairments on securities still in inventory upon adoption. Of this, $3,495 related to non credit
impairments previously recorded in income during the first quarter of 2009.
Note 4. Value of Business Acquired (VOBA), Deferred Acquisition Costs (DAC), and Deferred Sales Inducements (DSI)
VOBA reflects the estimated fair value of in force contracts acquired and represents the portion of
the purchase price that is allocated to the value of the right to receive future cash flows from
the life insurance and annuity contracts in force at the acquisition date. VOBA is based on
actuarially determined projections, for each block of business, of future policy and contract
charges, premiums, mortality, Separate Account performance, surrenders, operating expenses,
investment returns and other factors. Actual experience on the purchased business may vary from
these projections. If estimated gross profits or premiums differ from expectations, the
amortization of VOBA is adjusted to reflect actual experience.
The short-term equity growth rate and the long-term growth rate for the amortization of VOBA, DAC
and DSI were as follows:
June 30, | December 31, | June 30, | ||||||||||
2010 | 2009 | 2009 | ||||||||||
Gross short-term equity growth rate for five years |
9.00 | % | 7.25 | % | 11.00 | % | ||||||
Gross long-term growth rate |
9.00 | % | 9.00 | % | 9.00 | % |
20
The change in carrying amount of VOBA for the three and six months ended June 30 was as
follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Accretion (amortization)
expense |
$ | 17,315 | $ | (23,329 | ) | $ | 12,850 | $ | 9,474 | |||||||
Unlocking |
(8,546 | ) | (1,130 | ) | (1,606 | ) | (86,334 | ) | ||||||||
Impairment charge |
| | | (63,894 | ) | |||||||||||
Adjustment related to realized
(gains) losses on investments |
(73 | ) | (110 | ) | (1,333 | ) | 3,184 | |||||||||
Adjustment related to unrealized gains
and OTTI on investments |
(5,450 | ) | (39,533 | ) | (13,459 | ) | (27,677 | ) | ||||||||
Change in VOBA carrying amount |
$ | 3,246 | $ | (64,101 | ) | $ | (3,548 | ) | $ | (165,247 | ) | |||||
Unfavorable equity market movement in the second quarter of 2010 resulted in negative future
gross profits which caused unfavorable unlocking and accretion expense for the three and six months
ended June 30, 2010. The six months ended June 30, 2009 were impacted by the negative economic
outlook, principally during the first quarter 2009, which resulted in unfavorable unlocking and
accretion expense. In addition, an impairment charge was taken at March 31, 2009, as estimated
future gross profits were less than the unamortized balance.
The change in the carrying amount of DAC and DSI for the three and six months ended June 30 was as
follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
DAC | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Capitalization |
$ | 230 | $ | 5,357 | $ | 504 | $ | 8,940 | ||||||||
Accretion (amortization) expense |
9,863 | (5,125 | ) | 14,124 | (10,563 | ) | ||||||||||
Unlocking |
(714 | ) | (519 | ) | (749 | ) | (374 | ) | ||||||||
Adjustment related to unrealized gains
and OTTI on investments |
| (2,209 | ) | | (1,481 | ) | ||||||||||
Change in DAC carrying amount |
$ | 9,379 | $ | (2,496 | ) | $ | 13,879 | $ | (3,478 | ) | ||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
DSI | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Capitalization |
$ | 3 | $ | 456 | $ | 9 | $ | 871 | ||||||||
Accretion (amortization) expense |
2,257 | (1,495 | ) | 3,260 | (3,225 | ) | ||||||||||
Unlocking |
(116 | ) | 247 | (111 | ) | 446 | ||||||||||
Change in DSI carrying amount |
$ | 2,144 | $ | (792 | ) | $ | 3,158 | $ | (1,908 | ) | ||||||
During the three and six months ended June 30, 2010, unfavorable equity market movements in
the second quarter of 2010 resulted in negative future gross profits which resulted in accretion
and negative unlocking in DAC and DSI. During the first half of 2009, the Company experienced
lower than expected gross profits for amortization as a result of increases in reserves for
guaranteed benefits.
21
Note 5. Variable Contracts Containing Guaranteed Benefits
The Company records liabilities for contracts containing guaranteed minimum death benefits (GMDB)
and guaranteed minimum income benefits (GMIB) as a component of future policy benefits in the
Balance Sheets and changes in the liabilities are included as a component of policy benefits in the
Statements of Income.
The components of the change in the variable annuity GMDB and GMIB liabilities for the three and
six months ended June 30 were as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
GMDB | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Guaranteed benefits incurred |
$ | 9,170 | $ | 11,335 | $ | 18,648 | $ | 20,038 | ||||||||
Guaranteed benefits paid |
(13,401 | ) | (15,299 | ) | (23,297 | ) | (32,066 | ) | ||||||||
Unlocking |
21,797 | (7,576 | ) | 17,541 | 38,540 | |||||||||||
Total |
$ | 17,566 | $ | (11,540 | ) | $ | 12,892 | $ | 26,512 | |||||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
GMIB | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Guaranteed benefits incurred |
$ | 4,229 | $ | 4,610 | $ | 8,867 | $ | 7,725 | ||||||||
Unlocking |
7,236 | (1,405 | ) | 5,641 | 6,659 | |||||||||||
Total |
$ | 11,465 | $ | 3,205 | $ | 14,508 | $ | 14,384 | ||||||||
Unfavorable unlocking for the three and six months ended June 30, 2010 was primarily due to
unfavorable equity market performance resulting in higher estimates of future benefit amounts. The
six months ended June 30, 2009 were impacted by the negative economic outlook during the first
quarter 2009 which resulted in unfavorable unlocking.
The variable annuity GMDB liability at June 30, 2010 and December 31, 2009 was $158,425 and
$145,533, respectively. The variable annuity GMIB liability at June 30, 2010 and December 31, 2009
was $53,677 and $39,169, respectively.
The Company has issued variable life contracts in which the Company contractually guarantees to the
contract owner a GMDB. As of June 30, 2010 and 2009, an insignificant amount of variable life
guaranteed benefits were recorded as a component of policy benefits in the Statements of Income as
incurred or paid.
Note 6. Federal Income Taxes
The effective tax rate was (187%) and (49%) for the six months ended June 30, 2010 and 2009,
respectively. Differences between the effective rate and the U.S. statutory rate of 35% during the
first half of 2010 principally were the result of Separate Accounts dividends-received deduction
(DRD) and the valuation allowance on net operating loss carryforward.
The valuation allowance for deferred tax assets as of June 30, 2010 and December 31, 2009 was
$128,067 and $145,504, respectively. The valuation allowance is related to a net operating loss
carryforward and other deferred tax assets that, in the judgment of management, is not more likely
than not to be realized. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that all or some of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets depends on generation of further
taxable income during the periods in which those temporary differences are deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected taxable income, and
tax-planning strategies in making the assessment.
The Company has analyzed all material tax positions under the guidance of ASC 740, Income Taxes,
related to the accounting for uncertainty in income tax, and determined there were tax benefits of
$3,623 that should not be recognized as of June 30, 2010 and December 31, 2009, respectively, which
primarily relates to uncertainty regarding the sustainability of certain deductions taken on the
2008 U.S. Federal income tax return. There were no additions based on tax positions related to the
current and prior year. To the extent these unrecognized tax benefits are ultimately recognized,
they will not impact the effective tax rate in a future period.
22
It is not anticipated that the
total amounts of unrecognized tax benefits will significantly increase within twelve months of the
reporting date.
At June 30, 2010 and December 31, 2009, the Company had an operating loss carryforward for federal
income tax purposes of $309,556 (net of the ASC 740 reduction of $10,351) and $176,009 (net of the
ASC 740 reduction of $10,351), respectively, with a carryforward period of fifteen years that
expire at various dates up to 2024. In addition, at June 30, 2010 and December 31, 2009, the
Company also has a capital loss carryforward for federal income tax purposes of $5,873 and $9,796,
respectively, with a carryforward period of five years that will expire at various dates up to
2014. At June 30, 2010 and December 31, 2009, the Company had a foreign tax credit carryforward of
$6,876 and $5,810, respectively, with a carryforward period of ten years that will expire at
various dates up to 2019. Also, the Company has an Alternative Minimum Tax tax credit carryforward
for federal income tax purposes of $3,668 at June 30, 2010 and December 31, 2009, respectively,
with an indefinite carryforward period.
The Company classifies interest and penalties related to income taxes as interest expense and
penalty expense, respectively. The Company has recognized no material penalties in its financial
statements at June 30, 2010 and December 31, 2009, respectively. The Company recognized interest
expense of ($119) and $119 at June 30, 2010 and December 31, 2009, respectively. The accrued
interest expense related to federal income tax was released at June 30, 2010 based on the
expectation that the net operating loss will offset any taxable income generated by the uncertain
tax position for the Company in future tax periods.
The Company files a separate federal income tax return for the years 2008 through 2012. Beginning
in 2013 and assuming no changes in ownership, the Company will join the affiliated consolidated tax
group. A tax return has been filed for 2008, but no examination by the Internal Revenue Service
has yet commenced.
Note 7. Stockholders Equity and Statutory Accounting Principles
The Companys statutory financial statements are presented on the basis of accounting practices
prescribed or permitted by the Insurance Department of the State of Arkansas. The State of
Arkansas has adopted the National Association of Insurance Commissioners (NAIC) statutory
accounting principles as the basis of its statutory accounting principles.
The Companys statutory net income (loss) for the six months ended June 30, 2010 and 2009 was
($98,421) and $72,678, respectively. Statutory capital and surplus at June 30, 2010 and December
31, 2009 was $521,272 and $599,014, respectively.
During the first half of 2010 and 2009, the Company did not pay any dividends to AUSA or receive
any capital contribution from AUSA.
Note 8. Reinsurance
In the normal course of business, the Company seeks to limit its exposure to loss on any single
insured life and to recover a portion of benefits paid by ceding mortality risk to other insurance
enterprises or reinsurers under indemnity reinsurance agreements, primarily quota share coverage
and coinsurance agreements. The maximum amount of mortality risk retained by the Company is
approximately $1,000 on single and joint life policies. Effective second quarter of 2008, the
Company began to recapture the majority of its life reinsurance, which is expected to be finalized
in 2010.
Indemnity reinsurance agreements do not relieve the Company from its obligations to contract
owners. Failure of reinsurers to honor their obligations could result in losses to the Company.
The Company regularly evaluates the financial condition of its reinsurers so as to minimize its
exposure to significant losses from reinsurer insolvencies. At June 30, 2010 and December 31,
2009, reinsurance receivables were $22,573 and $35,806 respectively, primarily related to the
recapture of life reinsurance and refined calculations in conjunction with system conversions
($15,199 and $29,682, respectively). At June 30, 2010 and December 31, 2009, these reinsurance
receivables were primarily from Swiss Re, Lincoln National Life Insurance Company, Reinsurance
Group of America (RGA), Employers Reassurance Corporation (ERAC), and Munich American
Reassurance Company.
The Company is party to an indemnity reinsurance agreement with an unaffiliated insurer whereby the
Company coinsures, on a modified coinsurance basis, 50% of the unaffiliated insurers variable
annuity contracts sold from January 1, 1997 to June 30, 2001.
In addition, the Company seeks to limit its exposure to guaranteed benefit features contained in
certain variable annuity contracts. Specifically, the Company reinsures certain GMIB and GMDB
provisions to the extent reinsurance capacity is available in the
23
marketplace. At June 30, 2010
and December 31, 2009, 45% and 12% of the account value for variable annuity contracts containing
GMIB and GMDB provisions, respectively, were reinsured, respectively.
Note 9. Related Party Transactions
As of June 30, 2010, the Company had the following related party agreements in effect:
The Company is party to a common cost allocation service agreement between AUSA companies in which
various affiliated companies may perform specified administrative functions in connection with the
operation of the Company, in consideration of reimbursement of actual costs of services rendered.
During the three and six months ended June 30, 2010, the Company incurred $2,008 and $7,772,
respectively, in expenses under this agreement. During the three and six months ended June 30,
2009, the Company incurred $6,699 and $12,621, respectively, in expenses under this agreement.
Charges attributable to this agreement are included in insurance expenses and taxes, net of amounts
capitalized.
The Company is party to intercompany short-term note receivable arrangements with its parent and
affiliates at various times during the year. On April 29, 2010, the Company had an intercompany
short-term note receivable of $40,000 with an interest rate of 0.21% that is due April 29, 2011. On
June 29, 2009, the Company had an intercompany short-term note receivable of $40,000 with an
interest rate of 0.30% that was paid off in April 2010. During the three and six months ended June
30, 2010, the Company accrued and/or received $19 and $92 of interest, respectively. During the
three and six months ended June 30, 2009, the Company accrued and/or received $34 and $34 of
interest, respectively. Interest related to these arrangements is included in net investment
income.
AEGON USA Realty Advisors, Inc. acts as the manager and administrator for the Companys mortgage
loans on real estate under an administrative and advisory agreement with the Company. Charges
attributable to this agreement are included in net investment income. During the three and six
months ended June 30, 2010, the Company incurred $38 and $76, respectively, under this agreement.
During the three and six months ended June 30, 2009, the Company incurred $41 and $82,
respectively, under this agreement. There were no mortgage loan origination fees during the three
and six months ended June 30, 2010 and 2009, respectively. Mortgage loan origination fees are
amortized into net investment income over the life of the mortgage loans.
AEGON USA Investment Management, LLC acts as a discretionary investment manager under an investment
management agreement with the Company. During the three and six months ended June 30, 2010, the
Company incurred $641 and $1,057, respectively, in expenses under this agreement. During the three
and six months ended June 30, 2010, the Company incurred $569 and $1,144, respectively, in expenses
under this agreement. Charges attributable to this agreement are included in net investment
income.
Transamerica Capital, Inc. provides underwriting services for the Company under an underwriting
agreement. During the three and six months ended June 30, 2010, the Company incurred $9,283 and
$18,595, respectively, in expenses under this agreement. During the three and six months ended
June 30, 2009, the Company incurred $12,617 and $23,029, respectively, in expenses under this
agreement. Charges attributable to this agreement are included in insurance expenses and taxes,
net of amounts capitalized.
The Company has a participation agreement with Transamerica Series Trust to offer certain funds in
the Companys Separate Accounts. Transamerica Capital, Inc. acts as the distributor for said
related party funds. The Company has entered into a distribution and shareholder services
agreement for certain of the said funds. During the three and six months ended June 30, 2010, the
Company received $48 and $94, respectively, in revenue under this agreement. During the three and
six months ended June 30, 2009, the Company received $1 and $1, respectively, in revenue under this
agreement. Revenue attributable to this agreement is included in policy charge revenue.
The Company has a reinsurance agreement with Transamerica Life Insurance Company. During the three
and six months ended June 30, 2010, the Company incurred $30 and $40, respectively, in reinsurance
premium ceded expense under this agreement and there were no reinsurance recoveries on death claims
incurred. During the three and six months ended June 30, 2009, the Company incurred $79 and $150,
respectively, in reinsurance premium ceded expense under this agreement and there were no
reinsurance recoveries on death claims incurred.
The Company is party to the purchasing and selling of investments between various affiliated
companies. The investments are purchased and sold at fair value and are included in fixed maturity
available-for-sale securities in the Balance Sheets. During the three months ended June 30, 2010,
the Company did not sell any fixed maturity available-for-sale securities to affiliated companies
During the six months ended June 30, 2010, the Company sold $48,177 of fixed maturity
available-for-sale securities to affiliated companies. During the three and six months ended June
30, 2009, the Company sold $78,525 and $78,525, respectively, of fixed maturity available-for-sale
securities to affiliated companies.
24
While management believes that the service agreements referenced above are calculated on a
reasonable basis, they may not necessarily be indicative of the costs that would have been incurred
with an unrelated third party. Affiliated agreements generally contain reciprocal indemnity
provisions pertaining to each partys representations and contractual obligations thereunder.
Note 10. Segment Information
In reporting to management, the Companys operating results are categorized into two business
segments: Annuity and Life Insurance. The Companys Annuity segment consists of variable annuities
and interest-sensitive annuities. The Companys Life Insurance segment consists of variable life
insurance products and interest-sensitive life insurance products. The accounting policies of the
business segments are the same as those for the Companys financial statements included herein. All
revenue and expense transactions are recorded at the product level and accumulated at the business
segment level for review by management.
The following tables summarize each business segments contribution to net revenues and net income
(loss):
Three Months Ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Net revenues (a) |
||||||||
Annuity |
$ | 59,321 | $ | 3,107 | ||||
Life Insurance |
20,274 | 22,452 | ||||||
Net revenues (a) |
$ | 79,595 | $ | 25,559 | ||||
Net income |
||||||||
Annuity |
$ | 2,764 | $ | 20,246 | ||||
Life Insurance |
4,286 | 17,467 | ||||||
Net income |
$ | 7,050 | $ | 37,713 | ||||
Six Months Ended | ||||||||
June 30, | ||||||||
2010 | 2009 | |||||||
Net revenues (a) |
||||||||
Annuity |
$ | 94,978 | $ | 57,091 | ||||
Life Insurance |
39,816 | 44,971 | ||||||
Net revenues (a) |
$ | 134,794 | $ | 102,062 | ||||
Net income (loss) |
||||||||
Annuity |
$ | 18,396 | $ | (168,974 | ) | |||
Life Insurance |
10,814 | (31,162 | ) | |||||
Net income (loss) |
$ | 29,210 | $ | (200,136 | ) | |||
(a) | Net revenues include total revenues net of interest credited to policyholder liabilities. |
25
Item 2. Managements Narrative Analysis of Results of Operations
This Managements Narrative Analysis of Results of Operations should be read in conjunction with
the Financial Statements and Notes to Financial Statements included herein.
Forward Looking Statements
Certain statements in this report may be considered forward-looking, including those about
management expectations, strategic objectives, growth opportunities, business prospects,
anticipated financial results and other similar matters. These forward-looking statements
represent only managements beliefs regarding future performance, which is inherently uncertain.
There are a variety of factors, many of which are beyond the Companys control, which affect its
operations, performance, business strategy and results and could cause its actual results and
experience to differ materially from the expectations and objectives expressed in any
forward-looking statements. These factors include, but are not limited to, actions and initiatives
taken by current and potential competitors, general economic conditions, the effects of current,
pending and future legislation, regulation and regulatory actions, and the other risks and
uncertainties detailed in this report. See Risk Factors in the 2009 Annual Report on Form 10-K.
Accordingly, readers are cautioned not to place undue reliance on forward-looking statements, which
speak only as of the dates on which they are made. The Company does not undertake to update
forward-looking statements to reflect the impact of circumstances or events that arise after the
dates they are made. The reader should, however, consult further disclosures the Company may make
in future filings of its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K.
Business
Overview
Transamerica Advisors Life Insurance Company (TALIC, Registrant, the Company, we, our, or
us) is a wholly owned subsidiary of AEGON USA, LLC (AUSA). Prior to July 1, 2010, the Company
was known as Merrill Lynch Life Insurance Company (MLLIC). AUSA is an indirect wholly owned
subsidiary of AEGON N.V., a limited liability share company organized under Dutch law. The Company
is domiciled in Arkansas.
TALIC conducts its business primarily in the annuity markets and to a lesser extent in the life
insurance markets of the financial services industry. During 2009, the Company, in addition to not
issuing life insurance products, ceased issuing variable annuity and market value adjusted annuity
products. The Company offered the following guaranteed benefits within its variable annuity
product suite: guaranteed minimum death benefits (GMDB), guaranteed minimum income benefits
(GMIB) and guaranteed minimum withdrawal benefits (GMWB).
The Companys gross earnings are principally derived from two sources:
| the charges imposed on variable annuity and variable life insurance contracts, and | ||
| the net earnings from investment of fixed rate life insurance and annuity contract owner deposits less interest credited to contract owners, commonly known as interest spread. |
The costs associated with acquiring contract owner deposits (deferred policy acquisition costs) are
amortized over the period in which the Company anticipates holding those funds, as noted in the
Critical Accounting Policies and Estimates section below. Insurance expenses and taxes reported in
the Statements of Income are net of amounts deferred. In addition, the Company incurs expenses
associated with the maintenance of in force contracts.
Deposits
Total direct deposits (including internal exchanges) were $10.5 million and $23.0 million,
respectively, during the three and six months ended June 30, 2010. Total direct deposits
(including internal exchanges) were $98.5 million and $171.5 million, respectively, during the
three and six months ended June 30, 2009. The decrease in deposits was due to the Company ceasing
to issue new variable annuity and market value adjusted annuity products in 2009. Internal
exchanges during the three and six months ended June 30, 2010 were $1.8 million and $2.7 million,
respectively. Internal exchanges during the three and six months ended June 30, 2009 were $3.5
million and $6.3 million, respectively.
Financial Condition
At June 30, 2010, the Companys assets were $10.9 billion or $693.6 million lower than the $11.6
billion in assets at December 31, 2009. Assets excluding Separate Accounts assets increased $118.3
million. Separate Accounts assets, which represent 69% of total assets, decreased $811.9 million
to $7.5 billion.
26
Changes in Separate Accounts assets were as follows:
Six | ||||
Months Ended | ||||
(dollars in millions) | June 30, 2010 | |||
Investment
performance |
$ | (305.0 | ) | |
Deposits |
22.5 | |||
Policy fees and charges |
(92.1 | ) | ||
Surrenders, benefits and withdrawals |
(437.3 | ) | ||
Net change |
$ | (811.9 | ) | |
During the first half of 2010 and 2009, fixed contract owner deposits were $0.1 million and $1.5
million, respectively, and fixed contract owner withdrawals were $59.4 million and $99.4 million,
respectively.
Environment
The Companys financial position and/or results of operations are primarily impacted by the
following economic factors: equity market performance, fluctuations in medium term interest rates,
and the corporate credit environment via credit quality and fluctuations in credit spreads.
Equity Market Performance
The investment performance of the underlying U.S. equity-based mutual funds supporting the
Companys variable products do not replicate the returns of any specific U.S. equity market index.
However, investment performance will generally increase or decrease with corresponding increases
or decreases of the overall U.S. equity market. There are several standard indices published on a
daily basis that measure performance of selected components of the U.S. equity market. Examples
include the Dow Jones Industrial Average (Dow), the NASDAQ Composite Index (NASDAQ) and the
Standard & Poors 500 Composite Stock Price Index (S&P). The Dow, NASDAQ and S&P ended June 30,
2010 with decreases of 10%, 12% and 12%, respectively, from March 31, 2010 and decreases of 6%, 7%
and 8%, respectively from December 31, 2009.
Changes in the U.S. equity market directly affect the values of the underlying U.S. equity-based
mutual funds supporting Separate Accounts assets and, accordingly, the values of variable contract
owner account balances. Approximately 74% of Separate Accounts assets were invested in
equity-based mutual funds at June 30, 2010. Since asset-based fees collected on in force variable
contracts represent a significant source of revenue, the Companys financial condition will be
impacted by fluctuations in investment performance of equity-based Separate Accounts assets.
During the six months ended June 30, 2010, average variable account balances increased $1.0 billion
(or 13%) to $8.1 billion as compared to the same period in 2009. The change in average variable
account balances contributed $2.5 million and $7.7 million, respectively, to the increase in
asset-based policy charge revenue during the three and six months ended June 30, 2010 as compared
to the same period in 2009.
Fluctuations in the U.S. equity market also directly impact the Companys exposure to guaranteed
benefit provisions contained in the variable contracts it manufactures. Minimal or negative
investment performance generally results in greater exposure to guarantee provisions. Prolonged
periods of minimal or negative investment performance will result in greater guaranteed benefit
costs as compared to assumptions. If the Company determines that it needs to increase its
estimated long term cost of guaranteed benefits, it will result in establishing greater guaranteed
benefit liabilities as compared to current practice.
Medium Term Interest Rates, Corporate Credit and Credit Spreads
Changes in interest rates affect the value of investments, primarily fixed maturity securities and
preferred equity securities, as well as interest-sensitive liabilities. Changes in interest rates
have an inverse relationship to the value of investments and interest-sensitive liabilities. Also,
since the Company has certain fixed products that contain guaranteed minimum crediting rates,
decreases in interest rates can decrease the amount of interest spread earned.
Changes in the corporate credit environment directly impact the value of the Companys investments,
primarily fixed maturity securities. The Company primarily invests in investment-grade corporate
debt to support its fixed rate product liabilities.
27
Credit spreads represent the credit risk premiums required by market participants for a given
credit quality, i.e. the additional yield that a debt instrument issued by a AA-rated entity must
produce over a risk-free alternative (e.g., U.S. Treasury instruments). Changes in credit spreads
have an inverse relationship to the value of interest sensitive investments.
The impact of changes in medium term interest rates, corporate credit and credit spreads on market
valuations were as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Average medium term interest rate yield (a) |
0.91 | % | 1.40 | % | 0.91 | % | 1.40 | % | ||||||||
Increase (decrease) in medium term interest
rates (in basis points) |
(25 | ) | 39 | (52 | ) | 51 | ||||||||||
Credit spreads (in basis points) (b) |
208 | 348 | 208 | 348 | ||||||||||||
Expanding (contracting) of credit spreads (in basis points) |
48 | (306 | ) | 8 | (387 | ) | ||||||||||
Increase on market valuations (in millions) |
||||||||||||||||
Available-for-sale investment securities |
$ | 41.7 | $ | 56.3 | $ | 68.3 | $ | 50.8 | ||||||||
Interest-sensitive policyholder liabilities |
| 3.7 | (1.2 | ) | 5.6 | |||||||||||
Net increase on market valuations |
$ | 41.7 | $ | 60.0 | $ | 67.1 | $ | 56.3 | ||||||||
(a) | The Company defines medium term interest rates as the average interest rate on U.S. Treasury securities with terms of one to five years. | |
(b) | The Company defines credit spreads according to the Merrill Lynch U.S. Corporate Bond Index for BBB-A Rated bonds with three to five year maturities. |
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles
(GAAP) requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and the reported amounts of revenues and expenses. Estimates, by their
nature, are based on judgment and available information. Therefore, actual results could differ
and could have a material impact on the financial statements, and it is possible that such changes
could occur in the near term.
The Companys critical accounting policies and estimates are discussed below. For a full
description of these and other accounting policies see Note 1 of the 2009 Annual Report on Form
10-K.
Valuation of Fixed Maturity and Equity Securities
The Companys investments in fixed maturity and equity securities are classified as
available-for-sale and reported at estimated fair value. The fair values of fixed maturity and
equity securities are determined by management after taking into consideration several sources of
data. The Companys valuation policy dictates that publicly available prices are initially sought
from several third party pricing services. In the event that pricing is not available from these
services, those securities are submitted to brokers to obtain quotes. Lastly, securities are
priced using internal cash flow modeling techniques. These valuation methodologies commonly use
reported trades, bids, offers, issuer spreads, benchmark yields, estimated prepayment speeds,
and/or estimated cash flows.
Each month, the Company performs an analysis of the information obtained from third party services
and brokers to ensure that the information is reasonable and produces a reasonable estimate of
fair value. The Company considers both qualitative and quantitative factors as part of this
analysis, including but not limited to, recent transactional activity for similar fixed
maturities, review of pricing statistics and trends, and consideration of recent relevant market
events.
The Companys portfolio of private placement securities is valued using a matrix pricing
methodology. The pricing methodology is obtained from a third party service and indicates current
spreads for securities based on weighted average life, credit rating and industry sector. Monthly
the Company reviews the matrix to ensure the spreads are reasonable by comparing them to observed
spreads for similar securities traded in the market. In order to account for the illiquid nature
of these securities, illiquidity premiums are included in the valuation and are determined based
upon the pricing of recent transactions in the private placement market as well as comparing the
value of the privately offered security to a similar public security. The impact of the
illiquidity premium to the overall valuation is less than 1% of the value.
28
At June 30, 2010 and December 31, 2009, approximately, $186.8 million (or 11%) and $161.4 million
(or 12%), respectively, of the Companys fixed maturity and equity securities portfolio consisted
of non-publicly traded securities. Since significant judgment is required for the valuation of
non-publicly traded securities, the estimated fair value of these securities may differ from
amounts realized upon an immediate sale.
Changes in the fair value of fixed maturity and equity securities are reported as a component of
accumulated other comprehensive income (loss), net of taxes on the Balance Sheets and are not
reflected in the Statements of Income until a sale transaction occurs or when credit-related
declines in estimated fair value are deemed other-than-temporary.
Securities Lending
Financial assets that are lent to a third party or that are transferred subject to a repurchase
agreement at a fixed price are not derecognized as the Company retains substantially all the risks
and rewards of asset ownership. The lent securities are included in fixed maturity
available-for-sale securities in the Balance Sheets. A liability is recognized for cash collateral
received, required initially at 102%, on which interest is accrued. If the fair value of the
collateral is at any time less than 102% of the fair value of the loaned securities, the
counterparty is mandated to deliver additional collateral, the fair value of which, together with
the collateral already held in connection with the lending transaction, is at least equal to 102%
of the fair value of the loaned securities. At June 30, 2010 and December 31, 2009, the payable
for collateral under securities loaned was $166.7 million and $149.1 million, respectively.
Reverse Repurchase Agreements
The Company enters into dollar roll repurchase agreement transactions whereby the Company takes
delivery of mortgage-backed securities (MBS) pools and sells them to a counterparty along with an
agreement to repurchase substantially the same pools at some point in the future, typically one
month forward. These transactions are accounted for as collateralized borrowings and the
repurchase agreement liability is included in the Balance Sheet in payables for collateral under
securities loaned and reverse repurchase agreements. At June 30, 2010 the amortized cost of the
reverse repurchase agreements was $32.3 million. The estimated fair value of the securities that were
pledged to the counterparty to support the initial dollar roll was $32.5 million at June 30, 2010.
There was no reverse repurchase agreement payable at December 31, 2009.
Derivative Instruments
Derivatives are financial instruments in which the value changes in response to an underlying
variable, that require little or no net initial investment and are settled at a future date. All
derivatives recognized on the Balance Sheets are carried at fair value. All changes in fair value
are recognized in the Statements of Income. The fair value for exchange traded derivatives, such
as futures, are calculated net of the interest accrued to date and is based on quoted market
prices. Net settlements on the futures occur daily. As of June 30, 2010, the Company had 620
outstanding short futures contracts with a notional amount of $159.1 million. As of December 31,
2009, the Company had 570 outstanding short futures contracts with a notional amount of $158.3
million.
Mortgage Loans on Real Estate
Mortgage loans on real estate are carried at unpaid principal balances adjusted for amortization of
premiums and accretion of discounts and are net of valuation allowances. The fair value for
mortgage loans on real estate is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit ratings and/or similar
remaining maturities. Interest income is accrued on the principal balance of the loan based on the
loans contractual interest rate. Premiums and discounts are amortized using the effective yield
method over the life of the loan. Interest income and amortization of premiums and discounts are
reported in net investment income along with mortgage loan fees, which are recorded as they are
incurred. Loans are considered impaired when it is probable that based upon current information
and events, the Company will be unable to collect all amounts due under the contractual terms of
the loan agreement. When the Company determines that a loan is impaired, a valuation allowance is
established for the excess carrying value of the loan over its estimated value. The Company does
not accrue interest on impaired loans and loans ninety days past due. The Company also establishes
a reserve based on a percentage of the outstanding loan balance. At June 30, 2010 and December 31,
2009, there was $69.5 million and $70.9 million, respectively, in mortgage loans on real estate
recorded on the Balance Sheet. The reserve at June 30, 2010 and December 31, 2009 was less than
$0.1 million. The change in the reserve is reflected in net realized investment gains (losses),
excluding other-than-temporary impairment losses on securities in the Statements of Income.
Other-Than-Temporary Impairment (OTTI) Losses on Investments
The Company regularly reviews each investment in its fixed maturity and equity securities portfolio
to evaluate the necessity of recording impairment losses for other-than-temporary declines in the
fair value of investments. Management makes this determination through a series of discussions with
the Companys portfolio managers and credit analysts, and information obtained from external
sources (i.e. company announcements, ratings agency announcements, or news wire services). For
equity securities,
the Company also considers the ability and intent to hold the investments for a period of time
sufficient for a forecasted market
29
price recovery up to or beyond the amortized cost of the
investment. The factors that may give rise to a potential OTTI include, but are not limited to, i)
certain credit-related events such as default of principal or interest payments by the issuer, ii)
bankruptcy of issuer, iii) certain security restructurings, and iv) fair market value less than
cost or amortized cost for an extended period of time. In the absence of a readily ascertainable
market value, the estimated fair value on these securities represents managements best estimate
and is based on comparable securities and other assumptions as appropriate. Management bases this
determination on the most recent information available.
For equity securities, once management determines a decline in the value of an available-for-sale
security is other-than-temporary, the cost basis of the equity security is reduced to its fair
value, with a corresponding charge to earnings.
For debt securities, an OTTI must be recognized in earnings when an entity either: a) has the
intent to sell the debt security or b) more likely than not will be required to sell the debt
security before its anticipated recovery. If the Company meets either of these criteria, the OTTI
is recognized in earnings in an amount equal to the entire difference between the securitys
amortized cost basis and its fair value at the balance sheet date. For debt securities in
unrealized loss positions that do not meet these criteria, the Company must analyze its ability to
recover the amortized cost by comparing the net present value of projected future cash flows with
the amortized cost of the security. The net present value is calculated by discounting the
Companys best estimate of projected future cash flows. If the net present value is less than the
amortized cost of the investment, an OTTI is recorded. The OTTI is separated into two pieces: an
amount representing the credit loss, where the present value of cash flows expected to be collected
is less than the amortized cost basis of the security, and an amount related to all other factors
(referred to as the non credit portion). The credit loss is recognized in earnings and the non
credit loss is recognized in other comprehensive income (OCI), net of applicable taxes and value
of business acquired. Management records subsequent changes in the estimated fair value (positive
and negative) of available-for-sale debt securities for which non credit OTTI was previously
recognized in OCI in OCI-OTTI.
For the three and six months ended June 30, 2010 the Company recorded an OTTI in income of $1.1
million and $1.3 million, respectively, net of value of business acquired amortization. For the
three and six months ended June 30, 2009, the Company recorded an OTTI in income, net of value of
business acquired amortization of $1.1 million and $5.2 million, respectively.
Value of Business Acquired (VOBA), Deferred Policy Acquisition Costs (DAC), and Deferred Sales
Inducements (DSI)
The short-term equity growth rate and the long-term growth rate for the amortization of VOBA, DAC
and DSI were as follows:
June 30, | December 31, | June 30, | ||||||||||
2010 | 2009 | 2009 | ||||||||||
Gross short-term equity growth rate for five years |
9.00 | % | 7.25 | % | 11.00 | % | ||||||
Gross long-term growth rate |
9.00 | % | 9.00 | % | 9.00 | % |
VOBA
VOBA represents the portion of the purchase price that is allocated to the value of the right to
receive future cash flows from the insurance and annuity contracts in force at the acquisition
date. VOBA is based on actuarially determined projections, for each block of business, of future
policy and contract charges, premiums, mortality, policyholder behavior, Separate Account
performance, operating expenses, investment returns, and other factors. Actual experience on the
purchased business may vary from these projections. Revisions in estimates result in changes to
the amounts expensed in the reporting period in which the revisions are made and could result in
the impairment of the asset and a charge to income if estimated future gross profits are less than
the unamortized balance. At June 30, 2010 and December 31, 2009, the Companys VOBA asset was
$371.2 million and $374.7 million, respectively. For the three and six months ended June 30, 2010,
the unfavorable impact to pre-tax income related to VOBA unlocking was $8.5 million and $1.6
million, respectively. For the three and six months ended June 30, 2009, the unfavorable impact to
pre-tax income related to VOBA unlocking was $1.1 million and $86.3 million, respectively. In
addition, during the first quarter of 2009, there was an impairment charge of $63.9 million. See
Note 4 to the Financial Statements for a further discussion.
DAC
The costs of acquiring business, principally commissions, certain expenses related to policy
issuance, and certain variable sales expenses that relate to and vary with the production of new
and renewal business, are deferred and amortized based on the
estimated future gross profits for a group of contracts. DAC are subject to recoverability testing
at the time of policy issuance and loss recognition testing at the end of each reporting period. At
June 30, 2010 and December 31, 2009, variable annuities accounted for the Companys entire DAC
asset of $40.6 million and $26.7 million, respectively.
30
DAC for variable annuities is amortized with interest over the anticipated lives of the insurance
contracts in relation to the present values of estimated future gross profits from asset-based
fees, guaranteed benefit rider fees, contract fees, and surrender charges, less a provision for
guaranteed death and living benefit expenses, policy maintenance expenses, and non-capitalized
commissions.
Future gross profit estimates are subject to periodic evaluation with necessary revisions applied
against amortization to date. The impact of revisions and assumptions to estimates on cumulative
amortization is recorded as a charge or credit to current operations, commonly referred to as
unlocking. Changes in assumptions can have a significant impact on the amount of DAC reported
and the related amortization patterns. In general, increases in the estimated Separate Accounts
return and decreases in surrender or mortality assumptions increase the expected future
profitability of the underlying business and may lower the rate of DAC amortization. Conversely,
decreases in the estimated Separate Accounts returns and increases in surrender or mortality
assumptions reduce the expected future profitability of the underlying business and may increase
the rate of DAC amortization. For the three and six months ended June 30, 2010, there was a
unfavorable impact to pre-tax income related to DAC unlocking of $0.7 million and $0.7 million,
respectively. For the three and six months ended June 30, 2009, there was an unfavorable impact to
pre-tax income related to DAC unlocking of $0.5 million and $0.4 million, respectively. See Note 4
to the Financial Statements for a further discussion.
DSI
The Company offers a sales inducement whereby the contract owner receives a bonus which increases
the initial account balance by an amount equal to a specified percentage of the contract owners
deposit. This amount may be subject to recapture under certain circumstances. Consistent with DAC,
sales inducements for variable annuity contracts are deferred and amortized based on the estimated
future gross profits for each group of contracts. These future gross profit estimates are subject
to periodic evaluation by the Company, with necessary revisions applied against amortization to
date. The impact of these revisions on cumulative amortization is recorded as a charge or credit to
current operations, commonly referred to as unlocking. It is reasonably possible that estimates
of future gross profits could be reduced in the future, resulting in a material reduction in the
carrying amount of the deferred sales inducement asset.
The expense and the subsequent capitalization and amortization are recorded as a component of
policy benefits in the Statements of Income. At June 30, 2010 and December 31, 2009, variable
annuities accounted for the Companys entire DSI asset of $9.4 million and $6.3 million,
respectively. See Note 4 to the Financial Statements for a further discussion.
Policyholder Account Balances
The Companys liability for policyholder account balances represents the contract value that has
accrued to the benefit of policyholders as of the Balance Sheet date. The liability is generally
equal to the accumulated account deposits plus interest credited less policyholders withdrawals
and other charges assessed against the account balance. Policyholder account balances at June 30,
2010 and December 31, 2009 were $1.6 billion and $1.6 billion, respectively.
Future Policy Benefits
Future policy benefits are actuarially determined liabilities, which are calculated to meet future
obligations and are generally payable over an extended period of time. Principal assumptions used
in the establishment of liabilities for future policy benefits are mortality, surrender rates,
policy expenses, equity returns, interest rates, and inflation. These estimates and assumptions
are influenced by historical experience, current developments and anticipated market trends. At
June 30, 2010 and December 31, 2009, future policy benefits were $498.7 million and $439.6 million,
respectively.
Included within future policy benefits are liabilities for GMDB and GMIB provisions contained in
the variable products that the Company issues. At June 30, 2010 and December 31, 2009, GMDB and
GMIB liabilities included within future policy benefits were as follows:
June 30, | December 31, | |||||||
(dollars in millions) | 2010 | 2009 | ||||||
GMDB liability |
$ | 158.4 | $ | 145.5 | ||||
GMIB liability |
53.7 | 39.2 |
The Company regularly evaluates the assumptions used to establish these liabilities, as well
as actual experience and adjusts GMDB and GMIB liabilities with a related charge or credit to
earnings (unlocking), if actual experience or evidence suggests
that the assumptions should be revised. For the three and six months ended June 30, 2010, the
unfavorable impact to pre-tax income related to GMDB and GMIB unlocking was $29.0 million and $23.2
million, respectively. For the three and six months ended June 30, 2009, the favorable
(unfavorable) impact to pre-tax income related to GMDB and GMIB unlocking was $9.0 million and
($45.2) million, respectively.
31
Future policy benefits also include liabilities, which can be either positive or negative, for
contracts containing GMWB provisions and for the reinsurance of GMIB provisions (GMIB
reinsurance) for variable annuities based on the fair value of the underlying benefit. GMWB and
GMIB reinsurance are treated as embedded derivatives and are required to be reported separately
from the host variable annuity contract. The fair value of these guarantees are calculated as the
present value of future expected payments to policyholders less the present value of assessed rider
fees attributable to the guarantees. Given the complexity and long-term nature of these
guarantees, which are unlike instruments available in financial markets, their fair values are
determined using stochastic techniques under a variety of market return scenarios. A variety of
factors are considered, including expected market rates of return, equity and interest rate
volatility, credit spread, correlations of market returns, discount rates and actuarial
assumptions.
At June 30, 2010 and December 31, 2009, GMWB liability and GMIB reinsurance asset included within
future policy benefits were as follows:
June 30, | December 31, | |||||||
(dollars in millions) | 2010 | 2009 | ||||||
GMWB liability |
$ | 119.3 | $ | 46.0 | ||||
GMIB reinsurance asset |
(87.4 | ) | (58.7 | ) |
Federal Income Taxes
The Company uses the asset and liability method in providing income taxes on all transactions that
have been recognized in the financial statements. The asset and liability method requires that
deferred taxes be adjusted to reflect the tax rates at which future taxable amounts will be settled
or realized. The Company provides for federal income taxes based on amounts it believes it will
ultimately owe. Inherent in the provision for federal income taxes are estimates regarding the
realization of certain tax deductions and credits.
Specific estimates include the realization of dividend-received deductions (DRD) and foreign tax
credits (FTC). A portion of the Companys investment income related to Separate Accounts
business qualifies for the DRD and FTC. Information necessary to calculate these tax adjustments is
typically not available until the following year. However, within the current years provision,
management makes estimates regarding the future tax deductibility of these items. These estimates
are primarily based on recent historic experience. See Note 6 to the Financial Statements for a
further discussion.
The valuation allowance for deferred tax assets at June 30, 2010 and December 31, 2009 was $128.1
million and $145.5 million, respectively. The valuation allowance is related to a net operating
loss carryforward and other deferred tax assets that, in the judgment of management, is not more
likely than not to be realized. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that all or some of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets depends on generation of further
taxable income during the periods in which those temporary differences are deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected taxable income, and
tax-planning strategies in making the assessment.
The Company files a return in the U.S. federal tax jurisdiction and various state tax
jurisdictions.
Recent Accounting Guidance
The following outlines the adoption of recent accounting guidance in 2010. See Note 1 to the
Financial Statements for a further discussion.
| Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosure, ASU 2010-06, Improving Disclosures about Fair Value Measurements guidance on new disclosures and clarifications of existing disclosures about fair value measurements adopted January 1, 2010. |
The following outlines the adoption of accounting guidance in 2009. See Note 1 to the Financial
Statements for a further discussion.
| ASC 105, Generally Accepted Accounting Principles established the Financial Accounting Standards Board (FASB) Accounting Standards CodificationTM (Codification) as the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities adopted September 30, 2009. | ||
| ASC 320, InvestmentsDebt and Equity Securities guidance that makes OTTI guidance for debt securities more operational and improves the presentation and disclosure of OTTI on debt and equity securities in the financial |
32
statements. The revised guidance resulted in a net increase to retained earnings and decrease to accumulated other comprehensive income (loss) of $3.5 million at time of adoption adopted June 30, 2009. | |||
| ASC 820, Fair Value Measurements and Disclosures |
o | ASU 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent guidance on measuring the fair value of certain alternative investments (i.e., investments in hedge funds, private equity funds, venture capital funds, offshore fund vehicles, funds of funds, and real estate funds) adopted December 31, 2009. | ||
o | ASU 2009-05, Measuring Liabilities at Fair Value guidance which clarified that when a quoted price in an active market for an identical liability is not available, an entity should measure fair value using one of the prescribed approaches that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs adopted December 31, 2009. | ||
o | Guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased as well as guidance on identifying circumstances that indicate a transaction is not orderly adopted June 30, 2009. | ||
o | Guidance required an entity to disclose the methods and significant assumptions used to estimate fair value of financial instruments and to describe changes, if any, to those methods and assumptions during the period adopted June 30, 2009. |
| ASC 855, Subsequent Events |
o | Guidance that establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued adopted June 30, 2009. | ||
o | Revised guidance which eliminated the requirement for entities that file or furnish financial statements to the Securities Exchange Commission (SEC) to disclose the date through which subsequent events have been evaluated adopted December 31, 2009. |
| ASC 815, Derivatives and Hedging guidance that amended and expanded the disclosure requirements related to derivative instruments and hedging activities to provide users of financial statements with an enhanced understanding of the instruments adopted January 1, 2009. | ||
| ASC 805, Business Combinations guidance that established the principles and requirements for how the acquirer in a business combination: a) measures and recognizes the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquired entity, b) measures and recognizes positive goodwill acquired or a gain from bargain purchase (negative goodwill), and c) determines the disclosure information that is decision-useful to users of financial statements in evaluating the nature and financial effects of the business combination adopted January 1, 2009. | ||
| ASC 350, IntangiblesGoodwill and Other guidance that amended the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset adopted January 1, 2009. |
In addition, the following is accounting guidance that will be adopted in the future. See Note 1 to
the Financial Statements for a further discussion.
| ASC 820, Fair Value Measurements and Disclosure, ASU 2010-06, Improving Disclosures about Fair Value Measurement requires separate presentation of information about purchases, sales, issuances, and settlements in the Level 3 reconciliation for fair value measurements using significant unobservable inputs will be adopted January 1, 2011. | ||
| ASC 944, Financial Services Insurance, ASU 2010-15, How Investments Held Through Separate Accounts Affect an Insurers Consolidation Analysis of Those Investments clarification that an insurance entity should not consider any separate account interest held for the benefit of policyholders in an investment to be the insurers interest and should not combine those interests with its general account interest in the same investment when assessing the investment for consolidation will be adopted January 1, 2011. |
33
Investments
The Company maintains a conservative general account investment portfolio comprised primarily of
investment grade fixed maturity securities, policy loans, cash and cash equivalents and mortgage
loans on real estate.
Fixed Maturities and Equity Securities
The amortized cost/cost and estimated fair value of investments in fixed maturity and equity
securities at June 30, 2010 and December 31, 2009 were:
June 30, 2010 | ||||||||||||||||||||||||
% of | ||||||||||||||||||||||||
Amortized | Gross Unrealized | Estimated | Estimated | |||||||||||||||||||||
(dollars in millions) | Cost/Cost | Gains | Losses | OTTI(1) | Fair Value | Fair Value | ||||||||||||||||||
Fixed maturity securities |
||||||||||||||||||||||||
Corporate bonds |
||||||||||||||||||||||||
Financial services |
$ | 287.7 | $ | 10.0 | $ | (4.7 | ) | $ | | $ | 293.0 | 17 | % | |||||||||||
Industrial |
720.6 | 40.6 | (4.9 | ) | 0.3 | 756.6 | 44 | |||||||||||||||||
Utility |
107.5 | 7.5 | (0.6 | ) | | 114.4 | 7 | |||||||||||||||||
Asset-backed securities |
||||||||||||||||||||||||
Housing related |
53.4 | 0.8 | (5.0 | ) | (2.5 | ) | 46.7 | 3 | ||||||||||||||||
Credit cards |
41.8 | 5.4 | | | 47.2 | 3 | ||||||||||||||||||
Structured settlements |
4.9 | 0.3 | | | 5.2 | | ||||||||||||||||||
Autos |
8.3 | 0.4 | | | 8.7 | 1 | ||||||||||||||||||
Student loan |
5.0 | | | | 5.0 | | ||||||||||||||||||
Timeshare |
0.7 | | | | 0.7 | | ||||||||||||||||||
Commercial mortgage-backed securities
non agency backed |
150.0 | 7.5 | (6.9 | ) | | 150.6 | 9 | |||||||||||||||||
Residential mortgage-backed securities |
||||||||||||||||||||||||
Agency backed |
101.9 | 4.1 | | | 106.0 | 6 | ||||||||||||||||||
Non agency backed |
24.1 | | (1.4 | ) | (3.2 | ) | 19.5 | 1 | ||||||||||||||||
Municipals tax exempt |
1.5 | | | | 1.5 | | ||||||||||||||||||
Government and government agencies |
||||||||||||||||||||||||
United States |
116.2 | 6.7 | (1.5 | ) | | 121.4 | 7 | |||||||||||||||||
Foreign |
9.1 | 0.6 | | | 9.7 | 1 | ||||||||||||||||||
Total fixed maturity securities |
1,632.7 | 83.9 | (25.0 | ) | (5.4 | ) | 1,686.2 | 99 | ||||||||||||||||
Equity securities |
||||||||||||||||||||||||
Banking securities |
9.2 | | (2.2 | ) | | 7.1 | 1 | |||||||||||||||||
Other financial services securities |
0.2 | 0.3 | | | 0.4 | | ||||||||||||||||||
Industrial securities |
5.8 | | (0.6 | ) | | 5.2 | | |||||||||||||||||
Total equity securities |
15.2 | 0.3 | (2.8 | ) | | 12.7 | 1 | |||||||||||||||||
Total fixed maturity and equity securities |
$ | 1,647.9 | $ | 84.2 | $ | (27.8 | ) | $ | (5.4 | ) | $ | 1,698.9 | 100 | % | ||||||||||
34
December 31, 2009 | ||||||||||||||||||||||||
% of | ||||||||||||||||||||||||
Amortized | Gross Unrealized | Estimated | Estimated | |||||||||||||||||||||
(dollars in millions) | Cost/Cost | Gains | Losses | OTTI (1) | Fair Value | Fair Value | ||||||||||||||||||
Fixed maturity securities |
||||||||||||||||||||||||
Corporate bonds |
||||||||||||||||||||||||
Financial services |
$ | 198.5 | $ | 5.1 | $ | (4.8 | ) | $ | | $ | 198.8 | 15 | % | |||||||||||
Industrial |
421.3 | 14.5 | (3.3 | ) | (0.1 | ) | 432.4 | 32 | ||||||||||||||||
Utility |
98.9 | 4.2 | (0.6 | ) | | 102.5 | 8 | |||||||||||||||||
Asset-backed securities |
||||||||||||||||||||||||
Housing related |
56.8 | 0.3 | (8.2 | ) | (3.4 | ) | 45.5 | 3 | ||||||||||||||||
Credit cards |
40.8 | 4.1 | | | 44.9 | 3 | ||||||||||||||||||
Autos |
11.2 | 0.4 | | | 11.6 | 1 | ||||||||||||||||||
Equipment lease |
1.8 | | | | 1.8 | | ||||||||||||||||||
Student loan |
7.0 | | | | 7.0 | 1 | ||||||||||||||||||
Timeshare |
0.8 | | | | 0.8 | | ||||||||||||||||||
Commercial mortgage-backed securities
non agency backed |
165.9 | 1.8 | (15.5 | ) | | 152.2 | 11 | |||||||||||||||||
Residential mortgage-backed securities |
||||||||||||||||||||||||
Agency backed |
95.1 | 3.4 | (0.1 | ) | | 98.4 | 7 | |||||||||||||||||
Non agency backed |
27.3 | | (6.4 | ) | (1.1 | ) | 19.8 | 1 | ||||||||||||||||
Municipals tax exempt |
1.6 | | (0.1 | ) | | 1.5 | | |||||||||||||||||
Government and government agencies |
||||||||||||||||||||||||
United States |
220.3 | 1.4 | (5.9 | ) | | 215.8 | 16 | |||||||||||||||||
Foreign |
12.0 | 0.4 | (0.1 | ) | | 12.3 | 1 | |||||||||||||||||
Total fixed maturity securities |
1,359.3 | 35.6 | (45.0 | ) | (4.6 | ) | 1,345.3 | 99 | ||||||||||||||||
Equity securities |
||||||||||||||||||||||||
Banking securities |
9.2 | | (2.9 | ) | | 6.3 | 1 | |||||||||||||||||
Other financial services securities |
0.2 | 0.2 | | | 0.4 | | ||||||||||||||||||
Industrial securities |
5.8 | | (0.7 | ) | | 5.1 | | |||||||||||||||||
Total equity securities |
15.2 | 0.2 | (3.6 | ) | | 11.8 | 1 | |||||||||||||||||
Total fixed maturity and equity securities |
$ | 1,374.5 | $ | 35.8 | $ | (48.6 | ) | $ | (4.6 | ) | $ | 1,357.1 | 100 | % | ||||||||||
(1) | Subsequent unrealized gains/losses on OTTI securities are included in OCI-OTTI. |
The Company regularly monitors industry sectors and individual debt securities for evidence of
impairment. This evidence may include one or more of the following: 1) deteriorating market to book
ratio, 2) increasing industry risk factors, 3) deteriorating financial condition of the issuer, 4)
covenant violations, 5) high probability of bankruptcy of the issuer, 6) nationally recognized
credit rating agency downgrades, and/or 7) intent and ability to hold to recovery. Additionally,
for asset-backed securities (ABS), cash flow trends and underlying levels of collateral are
monitored. A security is impaired if there is objective evidence that a loss event has occurred
after the initial recognition of the asset that has a negative impact on the estimated future cash
flows. A specific security is considered to be impaired when it is determined that it is probable
that not all amounts due (both principal and interest) will be collected as scheduled. For debt
securities, an OTTI must be recognized in earnings when an entity either a) has the intent to sell
the debt security or b) more likely than not will be required to sell the debt security before its
anticipated recovery. If the Company meets either of these criteria, the OTTI is recognized in
earnings in an amount equal to the entire difference between the securitys amortized cost basis
and its fair value at the balance sheet date. For debt securities in unrealized loss positions that
do not meet these criteria, the Company must analyze its ability to recover the amortized cost by
comparing the net present value of projected future cash flows with the amortized cost of the
security. The Company has evaluated the near-term prospects of the issuers in relation to the
severity and duration of the unrealized loss, and unless otherwise noted, does not consider these
investments to be impaired at June 30, 2010.
Seven issuers represent more than 5% of the total unrealized loss position, comprised of one
commercial mortgage-backed security (CMBS) holding, three subprime ABS housing holdings, two
corporate bonds and one residential mortgage-backed security (RMBS) holding. The Companys
largest single issuer unrealized loss is $3.5 million and relates to British Petroleum (BP) an
investment grade corporate non-convertible security. The Company also owns an investment grade
corporate non-convertible security that was issued by USB Capital and has an unrealized loss of
$1.6 million. The Companys CMBS unrealized loss is $3.3 million and contains 2004 vintage fixed
income positions where our holding is rated investment grade. The Companys ABS housing holdings
unrealized loss is $6.3 million and contains three below investment grade deals whereby the
collateral is comprised of 2006-2007 fixed rate, first lien subprime mortgages. The Companys RMBS
unrealized loss is $2.4 million and relates to a securitized portfolio of prime hybrid mortgages
that contain fixed income positions where our holding is rated below investment grade. Due to an
adverse change in cash flows, the security was impaired to discounted cash flows as of June 30,
2010.
35
At June 30, 2010 and December 31, 2009, approximately $105.9 million (or 38%) and $98.4 million
(or 36%), respectively, of RMBS and CMBS holdings were fully collateralized by the Government
National Mortgage Association, the Federal National Mortgage Association or the Federal Home Loan
Mortgage Corporation. RMBS are securitizations of underlying pools of non-commercial mortgages on
real estate. The underlying residential mortgages have varying credit ratings and are pooled
together and sold in tranches. The Companys RMBS includes collateralized mortgage obligations
(CMOs), government sponsored enterprise (GSE) guaranteed passthroughs, whole loan
passthroughs, and negative amortization mortgage-backed securities. RMBS and CMBS securities are
structured to allow the investor to determine, within certain limits, the amount of interest rate
risk, prepayment risk and default risk that the investor is willing to accept. It is this level
of risk that determines the degree to which the yields on RMBS and CMBS will exceed the yields
that can be obtained from corporate securities with similar credit ratings.
The following tables summarize the Companys CMBS exposure by rating and vintage at June 30, 2010
and December 31, 2009:
June 30, 2010 | ||||||||||||
Net | ||||||||||||
Estimated | Unrealized | |||||||||||
Amortized | Fair | Gains (Losses) | ||||||||||
(dollars in millions) | Cost | Value | and OTTI | |||||||||
AAA |
$ | 115.9 | $ | 121.7 | $ | 5.8 | ||||||
AA |
18.8 | 14.7 | (4.1 | ) | ||||||||
A |
15.3 | 14.2 | (1.1 | ) | ||||||||
Total |
$ | 150.0 | $ | 150.6 | $ | 0.6 | ||||||
December 31, 2009 | ||||||||||||
Net | ||||||||||||
Estimated | Unrealized | |||||||||||
Amortized | Fair | Gains (Losses) | ||||||||||
(dollars in millions) | Cost | Value | and OTTI | |||||||||
AAA |
$ | 131.2 | $ | 127.4 | $ | (3.8 | ) | |||||
AA |
18.7 | 13.5 | (5.2 | ) | ||||||||
A |
15.9 | 11.3 | (4.6 | ) | ||||||||
Total |
$ | 165.8 | $ | 152.2 | $ | (13.6 | ) | |||||
June 30, 2010 | ||||||||||||||||
Estimated Fair Value by Vintage | ||||||||||||||||
(dollars in millions) | AAA | AA | A | Total | ||||||||||||
2004 & Prior |
$ | 24.0 | $ | 9.5 | $ | 5.0 | $ | 38.5 | ||||||||
2005 |
10.1 | | | 10.1 | ||||||||||||
2006 |
65.6 | 5.2 | 5.1 | 75.9 | ||||||||||||
2007 |
22.0 | | 4.1 | 26.1 | ||||||||||||
Total |
$ | 121.7 | $ | 14.7 | $ | 14.2 | $ | 150.6 | ||||||||
December 31, 2009 | ||||||||||||||||
Estimated Fair Value by Vintage | ||||||||||||||||
(dollars in millions) | AAA | AA | A | Total | ||||||||||||
2004 & Prior |
$ | 30.1 | $ | 8.7 | $ | 2.8 | $ | 41.6 | ||||||||
2005 |
16.4 | | | 16.4 | ||||||||||||
2006 |
63.0 | 4.8 | 4.8 | 72.6 | ||||||||||||
2007 |
17.9 | | 3.7 | 21.6 | ||||||||||||
Total |
$ | 127.4 | $ | 13.5 | $ | 11.3 | $ | 152.2 | ||||||||
36
The amortized cost and estimated fair value of fixed maturity securities at June 30, 2010 and
December 31, 2009 by rating agency equivalent were:
June 30, 2010 | December 31, 2009 | |||||||||||||||
Estimated | Estimated | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
(dollars in millions) | Cost | Value | Cost | Value | ||||||||||||
AAA |
$ | 413.3 | $ | 430.7 | $ | 509.8 | $ | 501.1 | ||||||||
AA |
195.1 | 200.0 | 142.9 | 140.1 | ||||||||||||
A |
678.4 | 702.7 | 353.7 | 353.4 | ||||||||||||
BBB |
263.4 | 280.0 | 267.5 | 277.7 | ||||||||||||
Below investment grade |
82.5 | 72.8 | 85.4 | 73.0 | ||||||||||||
Total fixed maturity securities |
$ | 1,632.7 | $ | 1,686.2 | $ | 1,359.3 | $ | 1,345.3 | ||||||||
Investment grade |
95 | % | 96 | % | 94 | % | 95 | % | ||||||||
Below investment grade |
5 | % | 4 | % | 6 | % | 5 | % |
The Company defines investment grade securities as unsecured debt obligations that have a
rating equivalent to S&Ps BBB- or higher (or similar rating agency). At June 30, 2010 and December
31, 2009 approximately $41.6 million (or 2%) and $38.9 million (or 3%), respectively, of fixed
maturity securities were rated BBB-, which is the lowest investment grade rating given by Standard
and Poors. Below investment grade securities are speculative and are subject to significantly
greater risks related to the creditworthiness of the issuers and the liquidity of the market for
such securities. The Company closely monitors such investments.
Unrealized gains (losses) incurred during the first half of 2010 and 2009 were primarily due to
price fluctuations resulting from changes in interest rates and credit spreads. As the Company
does not have the intent to sell and the Company is not more likely than not required to sell these
securities prior to the anticipated recovery of the amortized cost, the Company did not consider
these securities to be other-than-temporarily impaired.
Details underlying securities in a continuous gross unrealized loss and OTTI position for
investment grade securities were as follows:
June 30, 2010 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
(dollars in millions) | Value | Cost/Cost | OTTI (1) | |||||||||
Investment Grade Securities |
||||||||||||
Less than or equal to six months |
||||||||||||
Corporate bonds |
||||||||||||
Financial services |
$ | 35.8 | $ | 36.6 | $ | (0.8 | ) | |||||
Industrial |
51.7 | 56.2 | (4.5 | ) | ||||||||
Utility |
4.1 | 4.3 | (0.2 | ) | ||||||||
Asset-backed securities |
||||||||||||
Housing related |
3.3 | 3.4 | (0.1 | ) | ||||||||
Credit cards |
3.8 | 3.8 | | |||||||||
Autos |
0.8 | 0.8 | | |||||||||
Commercial mortgage-backed securities non agency backed |
4.4 | 4.8 | (0.4 | ) | ||||||||
Residential mortgage-backed securities agency backed |
1.1 | 1.1 | | |||||||||
Total fixed maturity and equity securities |
$ | 105.0 | $ | 111.0 | $ | (6.0 | ) | |||||
37
June 30, 2010 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
(dollars in millions) | Value | Cost/Cost | OTTI (1) | |||||||||
Investment Grade Securities (continued) |
||||||||||||
Greater than six months but less than or equal to one year |
||||||||||||
Corporate bonds utility |
$ | 0.5 | $ | 0.5 | $ | | ||||||
Total fixed maturity and equity securities |
0.5 | 0.5 | | |||||||||
Greater than one year |
||||||||||||
Corporate bonds |
||||||||||||
Financial services |
29.4 | 33.3 | (3.9 | ) | ||||||||
Utility |
5.7 | 5.8 | (0.1 | ) | ||||||||
Asset-backed securities housing related |
9.1 | 9.4 | (0.3 | ) | ||||||||
Commercial mortgage-backed securities non agency backed |
22.5 | 29.0 | (6.5 | ) | ||||||||
Government and government agencies United States |
31.9 | 33.4 | (1.5 | ) | ||||||||
Equity securities |
||||||||||||
Banking securities |
2.3 | 2.6 | (0.3 | ) | ||||||||
Industrial securities |
5.2 | 5.8 | (0.6 | ) | ||||||||
Total fixed maturity and equity securities |
106.1 | 119.3 | (13.2 | ) | ||||||||
Total of all investment grade securities |
||||||||||||
Corporate bonds |
||||||||||||
Financial services |
65.2 | 69.9 | (4.7 | ) | ||||||||
Industrial |
51.7 | 56.2 | (4.5 | ) | ||||||||
Utility |
10.3 | 10.6 | (0.3 | ) | ||||||||
Asset-backed securities |
||||||||||||
Housing related |
12.4 | 12.8 | (0.4 | ) | ||||||||
Credit cards |
3.8 | 3.8 | | |||||||||
Autos |
0.8 | 0.8 | | |||||||||
Commercial mortgage-backed securities non agency backed |
26.9 | 33.8 | (6.9 | ) | ||||||||
Residential mortgage-backed securities agency backed |
1.1 | 1.1 | | |||||||||
Government and government agencies United States |
31.9 | 33.4 | (1.5 | ) | ||||||||
Equity securities |
||||||||||||
Banking securities |
2.3 | 2.6 | (0.3 | ) | ||||||||
Industrial securities |
5.2 | 5.8 | (0.6 | ) | ||||||||
Total fixed maturity and equity securities |
$ | 211.6 | $ | 230.8 | $ | (19.2 | ) | |||||
Total number of securities in a continuous unrealized loss position |
44 |
38
December 31, 2009 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
(dollars in millions) | Value | Cost/Cost | OTTI (1) | |||||||||
Investment Grade Securities |
||||||||||||
Less than or equal to six months |
||||||||||||
Corporate bonds |
||||||||||||
Financial services |
$ | 10.5 | $ | 10.6 | $ | (0.1 | ) | |||||
Industrial |
144.4 | 146.3 | (1.9 | ) | ||||||||
Utility |
12.3 | 12.4 | (0.1 | ) | ||||||||
Asset-backed securities housing related |
3.7 | 3.8 | (0.1 | ) | ||||||||
Commercial mortgage-backed securities non agency backed |
11.8 | 12.1 | (0.3 | ) | ||||||||
Residential mortgage-backed securities agency backed |
19.9 | 20.0 | (0.1 | ) | ||||||||
Government and government agencies |
||||||||||||
United States |
26.0 | 26.2 | (0.2 | ) | ||||||||
Foreign |
1.3 | 1.4 | (0.1 | ) | ||||||||
Total fixed maturity and equity securities |
229.9 | 232.8 | (2.9 | ) | ||||||||
Greater than six months but less than or equal to one year |
||||||||||||
Corporate bonds |
||||||||||||
Industrial |
4.4 | 4.9 | (0.5 | ) | ||||||||
Utility |
0.7 | 0.7 | | |||||||||
Asset-backed securities housing related |
12.9 | 14.5 | (1.6 | ) | ||||||||
Commercial mortgage-backed securities non agency backed |
5.0 | 5.8 | (0.8 | ) | ||||||||
Government and government agencies United States |
83.7 | 89.3 | (5.6 | ) | ||||||||
Total fixed maturity and equity securities |
106.7 | 115.2 | (8.5 | ) | ||||||||
Greater than one year |
||||||||||||
Corporate bonds |
||||||||||||
Financial services |
57.6 | 62.4 | (4.8 | ) | ||||||||
Industrial |
12.5 | 12.6 | (0.1 | ) | ||||||||
Utility |
5.6 | 6.0 | (0.4 | ) | ||||||||
Asset-backed securities housing related |
10.5 | 11.5 | (1.0 | ) | ||||||||
Commercial mortgage-backed securities non agency backed |
50.8 | 65.3 | (14.5 | ) | ||||||||
Residential mortgage-backed securities non agency backed |
3.1 | 5.9 | (2.8 | ) | ||||||||
Municipals tax exempt |
0.8 | 0.9 | (0.1 | ) | ||||||||
Equity securities |
||||||||||||
Banking securities |
2.3 | 2.7 | (0.4 | ) | ||||||||
Industrial securities |
5.1 | 5.8 | (0.7 | ) | ||||||||
Total fixed maturity and equity securities |
$ | 148.3 | $ | 173.1 | $ | (24.8 | ) | |||||
39
December 31, 2009 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
(dollars in millions) | Value | Cost/Cost | OTTI (1) | |||||||||
Investment Grade Securities (continued) |
||||||||||||
Total of all investment grade securities |
||||||||||||
Corporate bonds |
||||||||||||
Financial services |
$ | 68.2 | $ | 73.0 | $ | (4.8 | ) | |||||
Industrial |
161.3 | 163.8 | (2.5 | ) | ||||||||
Utility |
18.6 | 19.1 | (0.5 | ) | ||||||||
Asset-backed securities housing related |
27.1 | 29.8 | (2.7 | ) | ||||||||
Commercial mortgage-backed securities non agency backed |
67.6 | 83.2 | (15.6 | ) | ||||||||
Residential mortgage-backed securities |
||||||||||||
Agency backed |
19.9 | 20.0 | (0.1 | ) | ||||||||
Non agency backed |
3.1 | 5.9 | (2.8 | ) | ||||||||
Municipals tax exempt |
0.8 | 0.9 | (0.1 | ) | ||||||||
Government and government agencies |
||||||||||||
United States |
109.6 | 115.5 | (5.9 | ) | ||||||||
Foreign |
1.3 | 1.4 | (0.1 | ) | ||||||||
Equity securities |
||||||||||||
Banking securities |
2.3 | 2.7 | (0.4 | ) | ||||||||
Industrial securities |
5.1 | 5.8 | (0.7 | ) | ||||||||
Total fixed maturity and equity securities |
$ | 484.9 | $ | 521.1 | $ | (36.2 | ) | |||||
Total number of securities in a continuous unrealized loss position |
102 |
(1) | Subsequent unrealized gains/losses on OTTI securities are included in OCI-OTTI. |
Details underlying securities in a continuous gross unrealized loss and OTTI position for
below investment grade securities were as follows:
June 30, 2010 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
(dollars in millions) | Value | Cost/Cost | OTTI (1) | |||||||||
Below Investment Grade Securities |
||||||||||||
Less than or equal to six months |
||||||||||||
Corporate bonds industrial |
$ | 2.9 | $ | 3.0 | $ | (0.1 | ) | |||||
Residential mortgage-backed securities non agency backed |
3.2 | 4.6 | (1.4 | ) | ||||||||
Total fixed maturity and equity securities |
6.1 | 7.6 | (1.5 | ) | ||||||||
Greater than six months but less than or equal to one year |
||||||||||||
Corporate bonds industrial |
1.8 | 2.0 | (0.2 | ) | ||||||||
Total fixed maturity and equity securities |
$ | 1.8 | $ | 2.0 | $ | (0.2 | ) | |||||
40
June 30, 2010 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
(dollars in millions) | Value | Cost/Cost | OTTI (1) | |||||||||
Below Investment Grade Securities (continued) |
||||||||||||
Greater than one year |
||||||||||||
Corporate bonds |
||||||||||||
Industrial |
$ | 1.6 | $ | 1.6 | $ | | ||||||
Utility |
1.1 | 1.3 | (0.2 | ) | ||||||||
Asset-backed securities housing related |
13.5 | 20.6 | (7.1 | ) | ||||||||
Residential mortgage-backed securities non agency backed |
16.3 | 19.5 | (3.2 | ) | ||||||||
Equity securities banking securities |
4.8 | 6.6 | (1.8 | ) | ||||||||
Total fixed maturity and equity securities |
37.3 | 49.6 | (12.3 | ) | ||||||||
Total of all below investment grade securities |
||||||||||||
Corporate bonds |
||||||||||||
Industrial |
6.3 | 6.6 | (0.3 | ) | ||||||||
Utility |
1.1 | 1.3 | (0.2 | ) | ||||||||
Asset-backed securities housing related |
13.5 | 20.6 | (7.1 | ) | ||||||||
Residential mortgage-backed securities non agency backed |
19.5 | 24.1 | (4.6 | ) | ||||||||
Equity securities banking securities |
4.8 | 6.6 | (1.8 | ) | ||||||||
Total fixed maturity and equity securities |
$ | 45.2 | $ | 59.2 | $ | (14.0 | ) | |||||
Total number of securities in a continuous unrealized loss position |
19 |
December 31, 2009 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
(dollars in millions) | Value | Cost/Cost | OTTI (1) | |||||||||
Below Investment Grade Securities |
||||||||||||
Less than or equal to six months |
||||||||||||
Corporate bonds industrial |
$ | 1.9 | $ | 2.1 | $ | (0.2 | ) | |||||
Government and government agencies foreign |
2.2 | 2.2 | | |||||||||
Total fixed maturity and equity securities |
4.1 | 4.3 | (0.2 | ) | ||||||||
Greater than six months but less than or equal to one year |
||||||||||||
Corporate bonds industrial |
1.1 | 1.2 | (0.1 | ) | ||||||||
Total fixed maturity and equity securities |
$ | 1.1 | $ | 1.2 | $ | (0.1 | ) | |||||
41
December 31, 2009 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
(dollars in millions) | Value | Cost | OTTI (1) | |||||||||
Below Investment Grade Securities (continued) |
||||||||||||
Greater than one year |
||||||||||||
Corporate bonds |
||||||||||||
Industrial |
$ | 4.8 | $ | 5.4 | $ | (0.6 | ) | |||||
Utility |
1.1 | 1.2 | (0.1 | ) | ||||||||
Asset-backed securities housing related |
12.5 | 21.3 | (8.8 | ) | ||||||||
Residential mortgage-backed securities non agency backed |
16.7 | 21.4 | (4.7 | ) | ||||||||
Equity securities banking securities |
4.1 | 6.6 | (2.5 | ) | ||||||||
Total fixed maturity and equity securities |
39.2 | 55.9 | (16.7 | ) | ||||||||
Total of all below investment grade securities |
||||||||||||
Corporate bonds |
||||||||||||
Industrial |
7.8 | 8.7 | (0.9 | ) | ||||||||
Utility |
1.1 | 1.2 | (0.1 | ) | ||||||||
Asset-backed securities housing related |
12.5 | 21.3 | (8.8 | ) | ||||||||
Residential mortgage-backed securities non agency backed |
16.7 | 21.4 | (4.7 | ) | ||||||||
Government and government agencies foreign |
2.2 | 2.2 | | |||||||||
Equity securities banking securities |
4.1 | 6.6 | (2.5 | ) | ||||||||
Total fixed maturity and equity securities |
$ | 44.4 | $ | 61.4 | $ | (17.0 | ) | |||||
Total number of securities in a continuous unrealized loss position |
17 |
(1) | Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI. |
Gross unrealized losses and OTTI on available-for-sale below investment grade securities
represented 42% and 32% of total gross unrealized losses and OTTI on all available-for-sale
securities at June 30, 2010 and December 31, 2009, respectively. Generally, below investment
grade securities are more likely than investment grade securities to develop credit concerns. The
ratios of estimated fair value to amortized cost reflected in the table below were not necessarily
indicative of the market value to amortized cost relationships for the securities throughout the
entire time that the securities have been in an unrealized loss position nor are they necessarily
indicative of these ratios subsequent to June 30, 2010.
Details underlying available-for-sale securities below investment grade and in an unrealized loss
and OTTI position were as follows:
June 30, 2010 | ||||||||||||||
Ratio of | Gross | |||||||||||||
Amortized Cost | Estimated | Unrealized | ||||||||||||
to Estimated | Fair | Amortized | Losses and | |||||||||||
(dollars in millions) | Fair Value | Value | Cost/Cost | OTTI (1) | ||||||||||
Less than or equal to six months |
||||||||||||||
70% to 100% | $ | 6.2 | $ | 7.6 | $ | (1.4 | ) | |||||||
6.2 | 7.6 | (1.4 | ) | |||||||||||
Greater than six months but less than or equal to one year |
||||||||||||||
70% to 100% | 1.8 | 2.0 | (0.2 | ) | ||||||||||
1.8 | 2.0 | (0.2 | ) | |||||||||||
Greater than one year |
||||||||||||||
70% to 100% | 20.4 | 24.1 | (3.7 | ) | ||||||||||
40% to 70% | 16.8 | 25.5 | (8.7 | ) | ||||||||||
37.2 | 49.6 | (12.4 | ) | |||||||||||
Total |
$ | 45.2 | $ | 59.2 | $ | (14.0 | ) | |||||||
42
December 31, 2009 | ||||||||||||||
Ratio of | Gross | |||||||||||||
Amortized Cost | Estimated | Unrealized | ||||||||||||
to Estimated | Fair | Amortized | Losses and | |||||||||||
(dollars in millions) | Fair Value | Value | Cost/Cost | OTTI (1) | ||||||||||
Less than or equal to six months |
||||||||||||||
70% to 100% | $ | 4.1 | $ | 4.3 | $ | (0.2 | ) | |||||||
4.1 | 4.3 | (0.2 | ) | |||||||||||
Greater than six months but less than or equal to one year |
||||||||||||||
70% to 100% | 1.1 | 1.2 | (0.1 | ) | ||||||||||
1.1 | 1.2 | (0.1 | ) | |||||||||||
Greater than one year |
||||||||||||||
70% to 100% | 23.9 | 29.8 | (5.9 | ) | ||||||||||
40% to 70% | 15.3 | 26.1 | (10.8 | ) | ||||||||||
39.2 | 55.9 | (16.7 | ) | |||||||||||
Total |
$ | 44.4 | $ | 61.4 | $ | (17.0 | ) | |||||||
(1) | Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI. |
The majority of assets depressed over 20% as well as over 40% and greater than one year are
primarily related to subprime ABS housing related, CMBS and RMBS. As there has been no impact to
expected future cash flows, the Company does not consider the underlying investments to be impaired
at June 30, 2010.
Subprime Mortgage Investments
Subprime mortgages are loans to homebuyers who have weak or impaired credit histories. Through
2008, the market for these loans has expanded rapidly. During that time, however, lending
practices and credit assessment standards grew steadily weaker. As a result, the market is
experiencing a sharp increase in the number of loan defaults. Investors in subprime mortgage
assets include not only mortgage lenders, but also brokers, hedge funds, and insurance companies.
The Company does not currently invest in or originate whole loan residential mortgages. The
Company categorizes ABS issued by a securitization trust as having subprime mortgage exposure when
the average credit score of the underlying mortgage borrowers in a securitization trust is below
660 at issuance. The Company also categorizes ABS issued by a securitization trust with second
lien mortgages as subprime mortgage exposure, even though a significant percentage of second lien
mortgage borrowers may not necessarily have credit scores below 660 at issuance.
The following tables provide the ABS subprime mortgage exposure by rating and estimated fair value
by vintage at June 30, 2010 and December 31 2009:
June 30, 2010 | ||||||||||||
Net | ||||||||||||
Estimated | Unrealized | |||||||||||
Amortized | Fair | Gains (Losses) | ||||||||||
(dollars in millions) | Cost | Value | and OTTI | |||||||||
First lien fixed |
||||||||||||
AAA |
$ | 23.3 | $ | 23.1 | $ | (0.2 | ) | |||||
Below BBB |
20.6 | 13.5 | (7.1 | ) | ||||||||
Second lien (a) |
||||||||||||
Below BBB |
5.4 | 6.1 | 0.7 | |||||||||
Total |
$ | 49.3 | $ | 42.7 | $ | (6.6 | ) | |||||
43
December 31, 2009 | ||||||||||||
Net | ||||||||||||
Estimated | Unrealized | |||||||||||
Amortized | Fair | Gains (Losses) | ||||||||||
(dollars in millions) | Cost | Value | and OTTI | |||||||||
First lien fixed |
||||||||||||
AAA |
$ | 25.7 | $ | 23.8 | $ | (1.9 | ) | |||||
Below BBB |
21.3 | 12.5 | (8.8 | ) | ||||||||
Second lien (a) |
||||||||||||
Below BBB |
5.6 | 6.0 | 0.4 | |||||||||
Total |
$ | 52.6 | $ | 42.3 | $ | (10.3 | ) | |||||
June 30, 2010 | ||||||||||||||||||||
Estimated Fair Value by Vintage | ||||||||||||||||||||
(dollars in millions) | 2004&Prior | 2005 | 2006 | 2007 | Total | |||||||||||||||
First lien fixed |
||||||||||||||||||||
AAA |
$ | 17.0 | $ | 6.1 | $ | | $ | | $ | 23.1 | ||||||||||
Below BBB |
| | 3.2 | 10.3 | 13.5 | |||||||||||||||
Second lien (a) |
||||||||||||||||||||
Below BBB |
| | 6.1 | | 6.1 | |||||||||||||||
Total |
$ | 17.0 | $ | 6.1 | $ | 9.3 | $ | 10.3 | $ | 42.7 | ||||||||||
December 31, 2009 | ||||||||||||||||||||
Estimated Fair Value by Vintage | ||||||||||||||||||||
(dollars in millions) | 2004&Prior | 2005 | 2006 | 2007 | Total | |||||||||||||||
First lien fixed |
||||||||||||||||||||
AAA |
$ | 17.5 | $ | 6.3 | $ | | $ | | $ | 23.8 | ||||||||||
Below BBB |
| | 2.9 | 9.6 | 12.5 | |||||||||||||||
Second lien (a) |
||||||||||||||||||||
Below BBB |
| | 6.0 | | 6.0 | |||||||||||||||
Total |
$ | 17.5 | $ | 6.3 | $ | 8.9 | $ | 9.6 | $ | 42.3 | ||||||||||
(a) | Second lien collateral primarily composed of loans to prime and Alt A borrowers. |
OTTI
For the three and six months ended June 30, 2010, the Companys impairment losses were $0.9 million
and $1.3 million, respectively, net of VOBA amortization. The impairment losses were principally
the result of the Company impairing its holding of a 2005 vintage RMBS security for $0.7 million in
the second quarter due to an adverse change in cash flows. A corporate bond for $0.4 million due
to the intent to sell or being more likely than not required to sell during the second quarter.
During the first quarter 2010, the Company impaired its holding of a 2007 vintage subprime mortgage
ABS for $0.4 million. For the three and six months ended June 30, 2009, the
Companys impairment losses were $1.1 million and $5.2 million, respectively, net of VOBA
amortization. The Company impaired its holding in Lear Corp to discounted cash flows in the first
six months of 2009 for $1.1 million. Eighteen unique issuers accounted for the remaining gross
impairment of $7.4 million. During the second quarter 2009, the Company adopted revised guidance
related to OTTI recognition. The effect of this adoption resulted in a $12.6 million adjustment to
retained earnings and amortized cost for fixed maturity securities and cost for equity securities
for the non credit related portion of previously recorded impairments on securities still in
inventory upon adoption. Of this, $3.5 million related to non credit impairments previously
recorded in income during the first quarter of 2009.
Mortgage Loans on Real Estate
The fair value for mortgage loans on real estate is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with similar credit
ratings and/or similar remaining maturities. The estimated fair value of the mortgage loans on
commercial real estate at June 30, 2010 and December 31, 2009 was $69.1 million and $67.7 million,
respectively.
44
All mortgage loans that are impaired have an established allowance for loss. Changing economic
conditions impact our valuation of mortgage loans. Changing vacancies and rents are incorporated
into the discounted cash flow analysis that the Company performs for monitored loans and may
contribute to the establishment of (or an increase or decrease in) an allowance for losses. In
addition, the Company continues to monitor the entire commercial mortgage loan portfolio to
identify risk. Areas of emphasis are properties that have deteriorating credits or have
experienced debt coverage reduction. Where warranted, the Company has established or increased
loss reserves based upon this analysis. There were no impaired mortgage loans at June 30, 2010
and December 31, 2009. At June 30, 2010 and December 31, 2009, there were no commercial mortgage
loans that were two or more payments delinquent. See Note 3 to the Financial Statements for
further discussion.
Liquidity and Capital Resources
Liquidity
The Companys liquidity requirements include the payment of sales commissions and other
underwriting expenses and the funding of its contractual obligations for the life insurance and
annuity contracts it has in force. The Company has developed and utilizes a cash flow projection
system and regularly performs asset/liability duration matching in the management of its asset and
liability portfolios. The Company anticipates funding its cash requirements utilizing cash from
operations, normal investment maturities and anticipated calls and repayments, consistent with
prior years. As of June 30, 2010 and December 31, 2009, the Companys assets included $1.9 billion
and $1.8 billion, respectively, of cash, short-term investments and investment grade publicly
traded available-for-sale securities that could be liquidated if funds were required.
Capital Resources
During the first half of 2010 and 2009, the Company did not receive a capital contribution from
AUSA nor did the Company pay a dividend to AUSA.
Ratings
Ratings are an important factor in establishing the competitive position in the insurance and
financial services marketplace. Rating agencies rate insurance companies based on financial
strength and the ability to pay claims, factors more relevant to contract holders than investors.
The insurer financial strength rating scales of S&P, A.M. Best, and Fitch Ratings (Fitch) are
characterized as follows:
| S&P AAA to R | ||
| A.M. Best A++ to S | ||
| Fitch AAA to C |
On June 29, 2010, A.M. Best upgraded the Companys insurance financial strength rating from A to
A+. The rating outlook remains stable.
On July 9, 2010, the Company, as the result of its decision to cease issuing variable annuity and
market value adjusted annuity products in 2009, withdrew its rating with Moodys Investors
Service.
On July 26, 2010, Fitch downgraded the Companys insurance financial strength rating from AA to
AA-. The rating outlook is stable.
The following table summarizes the Companys ratings as of August 12, 2010:
S&P |
AA- | (4th out of 21) | ||
A.M. Best |
A+ | (2nd out of 16) | ||
Fitch |
AA- | (4th out of 19) |
A downgrade of our financial strength rating could affect our competitive position in the
insurance industry and make it more difficult for us to market our products, as potential customers
may select companies with higher financial strength ratings. These ratings are not a
recommendation to buy or hold any of the Companys securities and they may be revised or revoked at
any time at the sole discretion of the rating organization.
45
Commitments and Contingencies
The following table summarizes the Companys policyholders obligations as of June 30, 2010:
Less | One To | Four To | More | |||||||||||||||||
Than One | Three | Five | Than Five | |||||||||||||||||
(dollars in millions) | Year | Years | Years | Years | Total | |||||||||||||||
General accounts (a) |
$ | 202.5 | $ | 358.1 | $ | 300.6 | $ | 1,426.7 | $ | 2,287.9 | ||||||||||
Separate Accounts (a) |
990.7 | 1,743.2 | 1,390.3 | 4,763.6 | 8,887.8 | |||||||||||||||
$ | 1,193.2 | $ | 2,101.3 | $ | 1,690.9 | $ | 6,190.3 | $ | 11,175.7 | |||||||||||
(a) | The policyholder liabilities include benefit and claim liabilities of which a significant portion represents policies and contracts that do not have a stated contractual maturity. The projected cash benefit payments in the table above are based on managements best estimates of the expected gross benefits and expenses, partially offset by the expected gross premiums, fees and charges relating to the existing business in force. Estimated cash benefit payments are based on mortality and lapse assumptions comparable with the Companys historical experience, modified for recently observed trends. Actual payment obligations may differ if experience varies from these assumptions. The cash benefit payments are presented on an undiscounted basis and are before deduction of tax and before reinsurance. The liability amounts in the Companys financial statements reflect the discounting for interest as well as adjustments for the timing of other factors as described above. As a result, the sum of the cash benefit payments shown for all years in the table above exceeds the corresponding policyholder liability amounts. |
The Company has utilized public information to estimate the future assessments it will incur as a
result of life insurance company insolvencies. At June 30, 2010 and December 31, 2009, the
Companys estimated liability for future guaranty fund assessments was $5.1 million and $5.0
million, respectively, with an offsetting receivable for future premium tax deductions of $3.9
million and $4.0 million, respectively. The Company regularly monitors public information
regarding insurer insolvencies and adjusts its estimated liability as appropriate.
In the normal course of business, the Company is subject to various claims and assessments.
Management believes the settlement of these matters would not have a material effect on the
financial position, results of operations or cash flows of the Company.
Results of Operations
For the three months ended June 30, 2010 and 2009, the Company recorded net income of $7.1 million
and $37.7 million, respectively. The decrease in income during the three months ended 2010 as
compared to 2009 was primarily due to an increase in policy benefits in 2010 and the change in the
tax valuation allowance partially offset by net realized investment gains in 2010 as compared to
losses in 2009, accretion of DAC and VOBA in 2010 as compared to amortization in 2009 and a
decrease in insurance expenses and taxes.
For the six months ended June 30, 2010 and 2009, the Company recorded net income (loss) of $29.2
million and $(200.1) million, respectively. The increase in income during the first half of 2010
as compared to 2009 was primarily due to the 2009 impairment of VOBA, the 2009 tax valuation
allowance, net realized investment gains in 2010 as compared to losses in 2009, accretion of DAC
and VOBA in 2010 as compared to amortization in 2009 and a decrease in insurance expenses and taxes
partially offset by an increase in policy benefits in 2010.
Policy charge revenue increased $3.4 million (or 7%) to $51.5 million during the three months ended
June 30, 2010, as compared to the same period in 2009. Policy charge revenue increased $7.7
million (or 8%) to $104.2 million during the six months ended June 30, 2010, as compared to the
same period in 2009.
46
The following table provides the changes in policy charge revenue by type for each respective
period:
Three Months | Six Months | |||||||
(dollars in millions) | 2010 vs. 2009 | 2010 vs. 2009 | ||||||
Asset-based policy charge revenue |
$ | 2.6 | $ | 7.7 | (a) | |||
Guaranteed benefit based policy charge revenue |
0.6 | 0.7 | ||||||
Non-asset based policy charge revenue |
0.2 | (0.7 | ) | |||||
Total policy charge revenue |
$ | 3.4 | $ | 7.7 | ||||
(a) | Asset-based policy charge revenue was positively impacted by the increase in average variable account balances during late 2009 and early 2010. |
Net realized investment gains (losses) increased $49.6 million to $14.7 million during the three
months ended June 30, 2010, as compared to the same period in 2009. Net realized investment gains
(losses) increased $23.5 million to $5.9 million during the six months ended June 30, 2010, as
compared to the same period in 2009. The following table provides the changes in net realized
investment gains (losses) by type:
Three Months | Six Months | |||||||
(dollars in millions) | 2010 vs. 2009 | 2010 vs. 2009 | ||||||
Credit related gains (losses) |
$ | 0.3 | $ | 4.1 | (a) | |||
Interest related gains (losses) |
1.2 | 6.1 | (a) | |||||
Equity related gains (losses) |
48.1 | 17.9 | (b) | |||||
Associated amortization of VOBA |
| (4.6 | ) | |||||
Total net realized investment gains (losses) |
$ | 49.6 | $ | 23.5 | ||||
Write-downs for OTTI included in net realized
investment gains (losses) |
$ | (0.1 | ) | $ | 7.0 | (a) |
(a) | The change in credit and interest related gains (losses) as compared to 2009 are primarily due to the change in accounting principle for OTTI impairments in 2009. See the Critical Accounting Policies and Estimates section above for further discussion on OTTI recognition. | |
(b) | The change in equity related gains (losses) principally relates to net gains on futures contracts during 2010 as compared to net losses on futures contracts in 2009. |
Policy benefits increased $118.7 million and $67.1 million, respectively during the three and six
months ended June 30, 2010 as compared to the same period in 2009. The following table provides
the changes in policy benefits by type:
Three Months | Six Months | |||||||
(dollars in millions) | 2010 vs. 2009 | 2010 vs. 2009 | ||||||
Annuity benefit unlocking |
$ | 38.0 | $ | (22.0) | (a) | |||
Annuity benefit expense |
84.1 | 91.9 | (b) | |||||
Amortization of deferred sales inducements |
(3.4 | ) | (5.9 | ) | ||||
Life insurance mortality expense |
| 3.1 | (c) | |||||
Total policy benefits |
$ | 118.7 | $ | 67.1 | ||||
(a) | See the Critical Accounting Policies and Estimates section above for further discussion of annuity benefit unlocking. | |
(b) | The increase in annuity benefit expense was primarily driven by the unfavorable equity market movement which resulted in higher guaranteed benefits. | |
(c) | Life insurance mortality expenses increased in 2010 primarily due to an increase in claims with a high net amount at risk. |
Reinsurance premiums ceded decreased less than $0.1 million and increased $2.1 million,
respectively, during the three and six months ended June 30, 2010 as compared to the same period in
2009 principally due to refined calculations related to a system
47
conversion. Effective second
quarter of 2008, the Company began to recapture the majority of its reinsurance, which is expected
to be finalized in 2010.
Accretion of DAC was $9.1 million and $13.4 million for the three and six months ended June 30,
2010, respectively, which included unfavorable unlocking of $0.7 million and $0.7 million,
respectively. Amortization of DAC was $5.6 million and $10.9 million for the three and six months
ended June 30, 2009, respectively, which included unfavorable unlocking of $0.5 million and $0.4
million, respectively. During the three and six months ended June 30, 2010, unfavorable equity
market movements in the second quarter of 2010 resulted in negative future gross profits which
resulted in accretion and negative unlocking. During the first half of 2009, the Company
experienced lower than expected gross profits for amortization as a result of increases in reserves
for guaranteed benefits.
Accretion of VOBA was $8.8 million and $11.2 million for the three and six months ended June
30, 2010, respectively, which included unfavorable unlocking of $8.5 million and $1.6 million,
respectively. Amortization of VOBA was $24.5 million and $140.8 million for the three and six
months ended June 30, 2009, respectively, which included unfavorable unlocking of $1.1 million and
$86.3 million, respectively. In addition, an impairment charge of $63.9 was taken in the first quarter 2009.
Unfavorable equity market movement in the second quarter of 2010 resulted in negative future gross
profits which caused unfavorable unlocking and accretion expense for the three and six months ended
June 30, 2010. The six months ended June 30, 2009 were impacted by the negative economic outlook,
principally during the first quarter 2009, which resulted in unfavorable unlocking.
Insurance expenses and taxes decreased $4.7 million and $4.6 million in the three and six months
ended June 30, 2010, respectively, as compared to the same period in 2009. The following table provides the
changes in insurance expenses and taxes for each respective period:
Three Months | Six Months | |||||||
(dollars in millions) | 2010 vs. 2009 | 2010 vs. 2009 | ||||||
Commissions |
$ | 1.1 | $ | 3.1 | (a) | |||
General insurance expenses |
(6.3 | ) | (8.3 | ) (b) | ||||
Taxes, licenses, and fees |
0.5 | 0.6 | ||||||
Total insurance expenses and taxes |
$ | (4.7 | ) | $ | (4.6 | ) | ||
(a) | The increase in commissions is primarily due to an increase in the trail commissions paid as a result of increased average variable account balances in 2010 as compared to 2009. | |
(b) | The decrease in general insurance expenses is primarily due to lower system and transition related costs in 2010. |
Segment Information
The products that comprise the Annuity and Life Insurance segments generally possess similar
economic characteristics. As such, the financial condition and results of operations of each
business segment are generally consistent with the Companys consolidated financial condition and
results of operations presented herein.
ITEM 4. Controls and Procedures
The Companys Disclosure Committee assists with the monitoring and evaluation of its disclosure
controls and procedures. The Companys President, Chief Financial Officer and Disclosure Committee
have evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in
Rule 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by
this Report. Based on that evaluation, the Companys President and Chief Financial Officer have
concluded that the Companys disclosure controls and procedures are effective.
In addition, no change in the Companys internal control over financial reporting (as defined in
Rule 15d-15(f) under the Securities Exchange Act of 1934) occurred during the second fiscal quarter
of 2010 that has materially affected, or is reasonably likely to materially affect, the Companys
internal control over financial reporting.
48
PART II Other Information
Item 1. Legal Proceedings.
Nothing to report.
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you should carefully consider the
factors discussed in Part 1. Item 1A. Risk Factors in the Annual Report on Form 10-K for the year
ended December 31, 2009, which could materially affect the Companys business, financial condition
or future results. The risks described in the Companys Annual Report on Form 10-K are not the
only risks facing the Company. Additional risks and uncertainties not currently known to the
Company or that the Company currently deems to be immaterial also may materially adversely affect
the Companys business, financial condition, and/or operating results.
Item 5. Other Information.
(a) Nothing to report.
(b) Nothing to report.
49
Item 6. Exhibits.
2.1 | Merrill Lynch Life Insurance Company Board of Directors Resolution in Connection with the Merger between Merrill Lynch Life Insurance Company and Tandem Insurance Group, Inc. (Incorporated by reference to Exhibit 2.1, filed September 5, 1991, as part of Post-Effective Amendment No. 4 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
2.2 | Plan and Agreement of Merger between Merrill Lynch Life Insurance Company and Tandem Insurance Group, Inc. (Incorporated by reference to Exhibit 2.1a, filed September 5, 1991, as part of Post-Effective Amendment No. 4 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
3.1 | Articles of Amendment, Restatement and Redomestication of the Articles of Incorporation of Merrill Lynch Life Insurance Company. (Incorporated by reference to Exhibit 6(a) to Post-Effective Amendment No. 10 to Merrill Lynch Life Variable Annuity Separate Account As registration statement on Form N-4, File No. 33-43773, filed December 10, 1996.) | ||
3.2 | Articles of Amendment of the Articles of Incorporation of Merrill Lynch Life Insurance Company. | ||
3.3 | Amended By-Laws of Transamerica Advisors Life Insurance Company. | ||
4.1 | Group Modified Guaranteed Annuity Contract, ML-AY-361. (Incorporated by reference to Exhibit 4.1, filed February 23, 1989, as part of Pre-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.2 | Individual Certificate, ML-AY-362. (Incorporated by reference to Exhibit 4.2, filed February 23, 1989, as part of Pre-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.2a | Individual Certificate, ML-AY-362 KS. (Incorporated by reference to Exhibit 4.2a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.2b | Individual Certificate, ML-AY-378. (Incorporated by reference to Exhibit 4.2b, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.2c | Modified Guaranteed Annuity Contract. (Incorporated by reference to Exhibit 4(a), filed August 18, 1997, as part of the Registrants registration statement on Form S-3, File No. 333-33863.) |
4.3 | Individual Tax-Sheltered Annuity Certificate, ML-AY-372. (Incorporated by reference to Exhibit 4.3, filed February 23, 1989, as part of Pre-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.3a | Individual Tax-Sheltered Annuity Certificate, ML-AY-372 KS. (Incorporated by reference to Exhibit 4.3a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.4 | Qualified Retirement Plan Certificate, ML-AY-373. (Incorporated by reference to Exhibit 4.4 to the Registrants registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.) | ||
4.4a | Qualified Retirement Plan Certificate, ML-AY-373 KS. (Incorporated by reference to Exhibit 4.4a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.5 | Individual Retirement Annuity Certificate, ML-AY-374. (Incorporated by reference to Exhibit 4.5 to the Registrants registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.) | ||
4.5a | Individual Retirement Annuity Certificate, ML-AY-374 KS. (Incorporated by reference to Exhibit 4.5a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.5b | Individual Retirement Annuity Certificate, ML-AY-375 KS. (Incorporated by reference to Exhibit 4.5b, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.5c | Individual Retirement Annuity Certificate, ML-AY-379. (Incorporated by reference to Exhibit 4.5c, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.6 | Individual Retirement Account Certificate, ML-AY-375. (Incorporated by reference to Exhibit 4.6, filed February 23, 1989, as part of Pre-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.6a | Individual Retirement Account Certificate, ML-AY-380. (Incorporated by reference to Exhibit 4.6a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.7 | Section 457 Deferred Compensation Plan Certificate, ML-AY-376. (Incorporated by reference to Exhibit 4.7 to the Registrants registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.) | ||
4.7a | Section 457 Deferred Compensation Plan Certificate, ML-AY-376 KS. (Incorporated by reference to Exhibit 4.7a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.8 | Tax-Sheltered Annuity Endorsement, ML-AY-366. (Incorporated by reference to Exhibit 4.8 to the Registrants registration statement on Form S-1, File No. 33- 26322, filed January 3, 1989.) | ||
4.8a | Tax-Sheltered Annuity Endorsement, ML-AY-366 190. (Incorporated by reference to Exhibit 4.8a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.8b | Tax-Sheltered Annuity Endorsement, ML-AY-366 1096. (Incorporated by reference to Exhibit 4(h)(3), filed March 27, 1997, as part of Post-Effective Amendment No. 2 to the Registrants registration statement on Form S-1, File No. 33-58303.) | ||
4.9 | Qualified Retirement Plan Endorsement, ML-AY-364. (Incorporated by reference to Exhibit 4.9 to the Registrants registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.) | ||
4.10 | Individual Retirement Annuity Endorsement, ML-AY-368. (Incorporated by reference to Exhibit 4.10 to the Registrants registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.) | ||
4.10a | Individual Retirement Annuity Endorsement, ML-AY-368 190. (Incorporated by reference to Exhibit 4.10a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.10b | Individual Retirement Annuity Endorsement, ML009. (Incorporated by reference to Exhibit 4(j)(3) to Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-60290, filed March 31, 1994.) | ||
4.10c | Individual Retirement Annuity Endorsement. (Incorporated by reference to Exhibit 4(b) to Pre-Effective Amendment No. 1 to the Registrants registration statement on Form S-3, File No. 333-33863, filed October 31, 1997.) | ||
4.11 | Individual Retirement Account Endorsement, ML-AY-365. (Incorporated by reference to Exhibit 4.11 to the Registrants registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.) |
4.11a | Individual Retirement Account Endorsement, ML- AY-365 190. (Incorporated by reference to Exhibit 4.11a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.12 | Section 457 Deferred Compensation Plan Endorsement, ML-AY-367. (Incorporated by reference to Exhibit 4.12 to the Registrants registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.) | ||
4.12a | Section 457 Deferred Compensation Plan Endorsement, ML-AY-367 190. (Incorporated by reference to Exhibit 4.12a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.13 | Qualified Plan Endorsement, ML-AY-369. (Incorporated by reference to Exhibit 4.13 to the Registrants registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.) | ||
4.13a | Qualified Plan Endorsement, ML-AY-448. (Incorporated by reference to Exhibit 4.13a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.13b | Qualified Plan Endorsement. (Incorporated by reference to Exhibit 4(c), filed October 31, 1997, as part of Pre-Effective Amendment No. 1 to the Registrants registration statement on Form S-3, File No. 333-33863.) | ||
4.14 | Application for Group Modified Guaranteed Annuity Contract. (Incorporated by reference to Exhibit 4.14 to the Registrants registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.) | ||
4.15 | Annuity Application for Individual Certificate Under Modified Guaranteed Annuity Contract. (Incorporated by reference to Exhibit 4.15 to the Registrants registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.) | ||
4.15a | Application for Modified Guaranteed Annuity Contract. (Incorporated by reference to Exhibit 4(d), filed August 18, 1997, as part of the Registrants registration statement on Form S-3, File No. 333-33863.) | ||
4.16 | Form of Company Name Change Endorsement. (Incorporated by reference to Exhibit 4.16, filed September 5, 1991, as part of Post-Effective Amendment No. 4 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.17 | Group Modified Guaranteed Annuity Contract, ML-AY-361/94. (Incorporated by reference to Exhibit 4(a)(2), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrants registration statement on Form S-1, File No. 33-60290.) | ||
4.18 | Individual Certificate, ML-AY-362/94. (Incorporated by reference to Exhibit 4(b)(4), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrants registration statement on Form S-1, File No. 33-60290.) | ||
4.19 | Individual Tax-Sheltered Annuity Certificate, ML-AY-372/94. (Incorporated by reference to Exhibit 4(c)(3), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrants registration statement on Form S-1, File No. 33-60290.) | ||
4.20 | Qualified Retirement Plan Certificate, ML-AY-373/94. (Incorporated by reference to Exhibit 4(d)(3), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrants registration statement on Form S-1, File No. 33-60290.) | ||
4.21 | Individual Retirement Annuity Certificate, ML-AY-374/94. (Incorporated by reference to Exhibit 4(e)(5), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrants registration statement on Form S-1, File No. 33-60290.) | ||
4.22 | Individual Retirement Account Certificate, ML-AY-375/94. (Incorporated by reference to Exhibit 4(f)(3), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrants registration statement on Form S-1, File No. 33-60290.) | ||
4.23 | Section 457 Deferred Compensation Plan Certificate, ML-AY-376/94. (Incorporated by reference to Exhibit 4(g)(3), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrants registration statement on Form S-1, File No. 33-60290.) | ||
4.24 | Qualified Plan Endorsement, ML-AY-448/94. (Incorporated by reference to Exhibit 4(m)(3), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrants registration statement on Form S-1, File No. 33-60290.) | ||
10.1 | Management Services Agreement between Family Life Insurance Company and Merrill Lynch Life Insurance Company. (Incorporated by reference to Exhibit 10.1 to the Registrants registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.) | ||
10.2 | General Agency Agreement between Merrill Lynch Life Insurance Company and Merrill Lynch Life Agency, Inc. (Incorporated by reference to Exhibit 10.2, filed February 23, 1989, as part of Pre-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
10.3 | Service Agreement among Merrill Lynch Insurance Group, Inc., Family Life Insurance Company and Merrill Lynch Life Insurance Company. (Incorporated by reference to Exhibit 10.3, filed March 13, 1991, as part of Post-Effective Amendment No. 2 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
10.3a | Amendment to Service Agreement among Merrill Lynch Insurance Group, Inc., Family Life Insurance Company and Merrill Lynch Life Insurance Company. (Incorporated by reference to Exhibit 10(c)(2) to Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-60290, filed March 31, 1994.) |
10.4 | Indemnity Reinsurance Agreement between Merrill Lynch Life Insurance Company and Family Life Insurance Company. (Incorporated by reference to Exhibit 10.4, filed March 13, 1991, as part of Post-Effective Amendment No. 2 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
10.5 | Assumption Reinsurance Agreement between Merrill Lynch Life Insurance Company, Tandem Insurance Group, Inc. and Royal Tandem Life Insurance Company and Family Life Insurance Company. (Incorporated by reference to Exhibit 10.6, filed April 24, 1991, as part of Post-Effective Amendment No. 3 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
10.6 | Amended General Agency Agreement between Merrill Lynch Life Insurance Company and Merrill Lynch Life Agency, Inc. (Incorporated by reference to Exhibit 10(g) to the Registrants registration statement on Form S-1, File No. 33-46827, filed March 30, 1992.) | ||
10.7 | Indemnity Agreement between Merrill Lynch Life Insurance Company and Merrill Lynch Life Agency, Inc. (Incorporated by reference to Exhibit 10(h) to the Registrants registration statement on Form S-1, File No. 33-46827, filed March 30, 1992.) | ||
10.8 | Management Agreement between Merrill Lynch Life Insurance Company and Merrill Lynch Asset Management, Inc. (Incorporated by reference to Exhibit 10(i) to the Registrants registration statement on Form S-1, File No. 33-46827, filed March 30, 1992.) | ||
10.9 | Amendment No. 1 to Indemnity Reinsurance Agreement between Family Life Insurance Company and Merrill Lynch Life Insurance Company. (Incorporated by reference to Exhibit 10.5, filed April 24, 1991, as part of Post-Effective Amendment No. 3 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
10.10 | Insurance Administrative Services Agreement between Merrill Lynch Life Insurance Company and Liberty Insurance Services Corporation. (Incorporated by reference to Exhibit 10.10 to the Registrants Annual Report on Form 10-K, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, filed March 30, 2005.) | ||
10.11 | Wholesaling Agreement between Merrill Lynch Life Insurance Company, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Transamerica Capital. (Incorporated by Reference to the Annual Report on Form 10-K of Merrill Lynch Life Insurance Company, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, filed March 27, 2008.) | ||
10.12 | Selling Agreement between Merrill Lynch Life Insurance Company, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Merrill Lynch Life Agency, Inc. (Incorporated by Reference to the Annual Report on Form 10-K of Merrill Lynch Life Insurance Company, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, filed March 27, 2008.) | ||
10.13 | Keep Well Agreement between AEGON USA, Inc. and Merrill Lynch Life Insurance Company. (Incorporated by Reference to the Annual Report on Form 10-K of Merrill Lynch Life Insurance Company, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, filed March 27, 2008.) | ||
10.14 | Master Distribution Agreement between Merrill Lynch Insurance Group, Inc., Merrill Lynch & Co., Inc., and AEGON USA, Inc. (Incorporated by reference to Exhibit 10.2 to Merrill Lynch Life Insurance Companys Current Report on Form 8-K, File No. 33-26322, filed January 4, 2008.) | ||
10.15 | Purchase Agreement between Merrill Lynch Insurance Group, Inc., Merrill Lynch & Co., Inc., and AEGON USA, Inc. (Incorporated by reference to Exhibit 10.1 to Merrill Lynch Life Insurance Companys Current Report on Form 8-K, File No. 33-26322, filed August 17, 2007.) | ||
10.16 | First Amendment to Purchase Agreement between Merrill Lynch Insurance Group, Inc., Merrill Lynch & Co., Inc., and AEGON USA, Inc. (Incorporated by reference to Exhibit 10.1 to Merrill Lynch Life Insurance Companys Current Report on Form 8-K, File No. 33-26322, filed January 4, 2008.) | ||
10.17 | Principal Underwriting Agreement between Transamerica Capital, Inc. and Merrill Lynch Life Insurance Company. (Incorporated by reference to the Annual Report on Form 10-K of Merrill Lynch Life Insurance Company, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, 333-133223, 333-133225, filed on March 26, 2009.) | ||
31.1 | Certification by the Chief Executive Officer pursuant to Rule 15d-14(a). | ||
31.2 | Certification by the Chief Financial Officer pursuant to Rule 15d-14(a). | ||
32.1 | Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32.2 | Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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.
TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY |
||||
/s/ Eric J. Martin | ||||
Eric J. Martin | ||||
Vice President, Treasurer, Chief Financial Officer, and Controller |
||||
Date:
August 12, 2010
EXHIBIT INDEX
3.2 | Articles of Amendment of the Articles of Incorporation of Merrill Lynch Life Insurance Company. | |
3.3 | Amended By-Laws of Transamerica Advisors Life Insurance Company. | |
31.1 | Certification by the Chief Executive Officer pursuant to Rule 15d-14(a). | |
31.2 | Certification by the Chief Financial Officer pursuant to Rule 15d-14(a). | |
32.1 | Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |