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EX-32.2 - EX-32.2 - TRANSAMERICA ADVISORS LIFE INSURANCE Cod188999dex322.htm
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EX-31.2 - EX-31.2 - TRANSAMERICA ADVISORS LIFE INSURANCE Cod188999dex312.htm
EX-31.1 - EX-31.1 - TRANSAMERICA ADVISORS LIFE INSURANCE Cod188999dex311.htm

 

 

UNITED STATES

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016

COMMISSION FILE NUMBERS 33-26322

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(Exact name of Registrant as specified in its charter)

 

ARKANSAS   91-1325756

(State or other jurisdiction

of incorporation or organization)

 

(IRS Employer

Identification No.)

4333 Edgewood Road, NE

Cedar Rapids, Iowa

52499-0001

(Address of Principal Executive Offices)

(800) 346-3677

(Registrant telephone number including area code)

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 ¨

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 þ No ¨

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 ¨    Accelerated filer ¨    Non-accelerated filer þ    Smaller reporting company ¨
      (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 ¨ No þ

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS

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 ¨ No ¨

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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.

 

 

 


FINAL

PART 1. Financial Information

Item 1. Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF TRANSAMERICA CORPORATION)

BALANCE SHEETS

 

(dollars in thousands, except share data)

   September 30,
2016
     December 31,
2015
 
     (unaudited)         

ASSETS

     

Investments

     

Fixed maturity available-for-sale securities, at estimated fair value
(amortized cost: 2016 - $1,471,852; 2015 - $1,570,693)

     $ 1,654,387         $ 1,665,337   

Equity available-for-sale securities, at estimated fair value
(cost: 2016 - $31,264; 2015 - $33,777)

     33,351         34,667   

Limited partnerships

     70,020         63,489   

Mortgage loans on real estate

     103,563         92,914   

Policy loans

     635,819         661,466   

Derivative assets

     968         10,893   
  

 

 

    

 

 

 

Total investments

     2,498,108         2,528,766   
  

 

 

    

 

 

 

Cash and cash equivalents

     400,687         236,482   

Accrued investment income

     32,615         34,481   

Deferred policy acquisition costs

     35,096         37,500   

Deferred sales inducements

     7,971         8,517   

Value of business acquired

     216,823         259,493   

Goodwill

     2,800         2,800   

Income tax asset

     1,512         1,512   

Reinsurance receivables

     2,000         68   

Affiliated receivable - net

     14,380         -       

Affiliated short-term note receivable

     -             25,000   

Receivable for investments sold - net

     -             777   

Other assets

     26,584         28,448   

Recoverable of ceded Guaranteed Minimum Income Benefits embedded derivatives, at fair value

     64,903         61,426   

Separate Accounts assets

     5,725,666         5,940,665   
  

 

 

    

 

 

 

Total Assets

     $     9,029,145         $     9,165,935   
  

 

 

    

 

 

 

 

 

 

 

 

See Notes to Financial Statements

 

1


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF TRANSAMERICA CORPORATION)

BALANCE SHEETS - Continued

 

(dollars in thousands, except share data)

         September 30,
2016
           December 31,
2015
 
           (unaudited)               

LIABILITIES AND STOCKHOLDER’S EQUITY

         

Liabilities

         

Policyholder liabilities and accruals

         

Policyholder account balances

       $     1,107,905           $ 1,154,871   

Future policy benefits

       519,412           518,911   

Claims and claims settlement expenses

       31,408           32,410   
    

 

 

      

 

 

 

Total policyholder liabilities and accruals

       1,658,725           1,706,192   
    

 

 

      

 

 

 

Payables for collateral under securities loaned,
reverse repurchase agreements and derivatives

       326,606           194,537   

Checks not yet presented for payment

       14,254           9,918   

Derivative liabilities

       7,095           13,075   

Income tax liability

       2,086           2,086   

Affiliated payables - net

       -               2,875   

Reinsurance payables

       206           -       

Payable for investments purchased - net

       2,145           -       

Other liabilities

       8,259           5,086   

Separate Accounts liabilities

       5,725,666           5,940,665   
    

 

 

      

 

 

 

Total Liabilities

       7,745,042           7,874,434   
    

 

 

      

 

 

 

Stockholder’s 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

       1,508,395           1,514,157   

Accumulated other comprehensive income, net of taxes

       127,849           56,591   

Retained deficit

       (354,641        (281,747
    

 

 

      

 

 

 

Total Stockholder’s Equity

       1,284,103           1,291,501   
    

 

 

      

 

 

 

Total Liabilities and Stockholder’s Equity

     $ 9,029,145         $ 9,165,935   
    

 

 

      

 

 

 

 

 

 

 

 

 

 

See Notes to Financial Statements

 

2


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF TRANSAMERICA CORPORATION)

STATEMENTS OF INCOME

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

(dollars in thousands)

   2016     2015     2016     2015  
     (unaudited)     (unaudited)  

Revenues

        

Policy charge revenue

     $     38,242        $ 40,629        $     113,141        $     126,090   

Net investment income

     29,224        25,707        83,290        83,650   

Net realized investment gains (losses)

        

Other-than-temporary impairment losses on securities

     -            -            (4,563     (1,764

Portion of other-than-temporary impairments previously recognized in other comprehensive income (loss)

     -            (7     (121     (109
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairment losses on securities recognized in income

     -            (7     (4,684     (1,873

Net realized investment gains, excluding other- than-temporary impairment losses on securities

     1,690        2,179        6,297        3,042   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized investment gains

     1,690        2,172        1,613        1,169   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net derivative gains (losses)

     (34,133     37,232        (37,427     3,019   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

     35,023            105,740        160,617        213,928   
  

 

 

   

 

 

   

 

 

   

 

 

 

Benefits and Expenses

        

Interest credited to policyholder liabilities

     13,637        14,444        41,620        40,736   

Policy benefits (net of reinsurance recoveries:
2016 - $2,310; $3,517 ; 2015 - $159; $1,615)

     (5,767     71,390        59,146        109,221   

Amortization (accretion) of deferred policy acquisition costs

     1,995        (2,208     2,437        1,630   

Amortization of value of business acquired

     14,018        7,293        27,009        18,926   

Insurance expenses and taxes

     8,131        11,495        28,299        34,391   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Benefits and Expenses

     32,014        102,414        158,511        204,904   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Taxes

     3,009        3,326        2,106        9,024   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Tax Expense (Benefit)

     -            -            -            -       
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

   $ 3,009      $ 3,326      $ 2,106      $ 9,024   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

 

 

See Notes to Financial Statements

 

3


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF TRANSAMERICA CORPORATION)

STATEMENTS OF COMPREHENSIVE INCOME

 

       Three Months Ended September 30,         Nine Months Ended September 30,    

(dollars in thousands)

     2016       2015       2016       2015  
     (unaudited)     (unaudited)  

Net Income

     $     3,009      $ 3,326      $ 2,106      $ 9,024   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (Loss), net of taxes

        

Net unrealized gains (losses) on available-for-sale securities

        

Net unrealized holding gains (losses) arising during the period

     (796     3,449        88,613        (39,233

Reclassification adjustment for (gains) losses included in net income

     1,775        (981     43        139   
  

 

 

   

 

 

   

 

 

   

 

 

 
     979        2,468        88,656        (39,094
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains (losses) on cash flow hedges

        

Net unrealized gains (losses) on cash flow hedges arising during the period

     (3,101     4,505        (2,961     5,231   

Reclassification adjustment for losses included in net income

     305        447        621        273   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (2,796     4,952        (2,340     5,504   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized other-than-temporary impairments on securities

        

Change in previously recognized unrealized other-than-temporary impairments

     1,064        (353     309        (324

Reclassification adjustment for other-than-temporary impairments included in net income

     -            7        121        109   
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,064        (346     430        (215
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjustments

        

Value of business acquired

     (3,072     599        (15,488     6,318   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of taxes

     (3,825     7,673        71,258        (27,487
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income (Loss)

     $ (816   $ 10,999        $     73,364      $ (18,463
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

 

See Notes to Financial Statements

 

4


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF TRANSAMERICA CORPORATION)

STATEMENTS OF STOCKHOLDER’S EQUITY

 

(dollars in thousands)

   Nine Months Ended
September 30,

               2016               
    Twelve Months Ended
December 31,

               2015                
 
     (unaudited)        

Common Stock

     $ 2,500        $ 2,500   

Additional Paid-in Capital

    

Balance at beginning of period

     $ 1,514,157        $ 1,545,665   

Capital contributions from AEGON USA, LLC

     -            68,492   

Return of capital to Transamerica Corporation /AEGON USA, LLC

     (5,762     (100,000
  

 

 

   

 

 

 

Balance at end of period

     $     1,508,395        $     1,514,157   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income

    

Balance at beginning of period

     $ 56,591        $ 109,242   

Total other comprehensive income (loss), net of taxes

     71,258        (52,651
  

 

 

   

 

 

 

Balance at end of period

     $ 127,849        $ 56,591   
  

 

 

   

 

 

 

Retained Deficit

    

Balance at beginning of period

     $ (281,747     $ (295,405

Net income

     2,106        13,658   

Cash dividend paid to Transamerica Corporation

     (75,000     -       
  

 

 

   

 

 

 

Balance at end of period

     $ (354,641     $ (281,747
  

 

 

   

 

 

 

Total Stockholder’s Equity

     $ 1,284,103        $ 1,291,501   
  

 

 

   

 

 

 

 

 

 

 

See Notes to Financial Statements

 

5


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF TRANSAMERICA CORPORATION)

STATEMENTS OF CASH FLOWS

 

     Nine Months Ended
September 30,
 

(dollars in thousands)

   2016     2015  
     (unaudited)  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

     $ 2,106        $ 9,024   

Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:

    

Change in deferred policy acquisition costs

     2,404        1,486   

Change in deferred sales inducements

     546        352   

Change in value of business acquired

     27,009        18,926   

Change in benefit reserves, net of change in ceded reinsurance recoverable

     3,879        61,131   

Change in income tax accruals

     -            9   

Change in claims and claims settlement expenses

     (1,002     (1,388

Change in other operating assets and liabilities - net

     (17,045     4,053   

Change in checks not yet presented for payment

     4,336        (8,422

Amortization of investments

     (685     2,053   

Interest credited to policyholder liabilities

     41,620        40,736   

Net derivative (gains) losses

     37,427        (3,019

Net realized investment (gains)

     (1,613     (1,169

Change in unrealized losses related to limited partnerships

     1,053        -       
  

 

 

   

 

 

 

Net cash and cash equivalents provided by operating activities

     100,035            123,772   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Sales of available-for-sale securities and mortgage loans

     313,995        139,047   

Maturities of available-for-sale securities and mortgage loans

     218,467        277,976   

Purchases of available-for-sale securities and mortgage loans

     (437,145     (371,497

Sales of limited partnerships

     3,788        252   

Purchases of limited partnerships

     (11,372     -       

Change in affiliated short-term note receivable

     25,000        (25,000

Cash received in connection with derivatives

     20,177        48,683   

Cash paid in connection with derivatives

     (59,300     (112,364

Policy loans on insurance contracts - net

     25,647        19,467   

Net settlement on futures contracts

     2,978        1,658   

Other

     -            715   
  

 

 

   

 

 

 

Net cash and cash equivalents provided by/(used in) investing activities

     $      102,235        $ (21,063)   
  

 

 

   

 

 

 

 

 

 

See Notes to Financial Statements

 

 

6


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF TRANSAMERICA CORPORATION)

STATEMENTS OF CASH FLOWS - Continued

 

     Nine Months Ended
September 30,
 

(dollars in thousands)

   2016     2015  
     (unaudited)  

CASH FLOWS FROM FINANCING ACTIVITIES

    

Policyholder deposits

     $ 9,042        $ 19,617   

Policyholder withdrawals

     (104,484     (110,216

Capital contributions from AEGON USA, LLC

     -            11,666   

Cash dividend paid to Transamerica Corporation

     (75,000     -       

Return of capital to Transamerica Corporation (a)

     (12     -       

Change in payables for collateral under securities loaned, reverse repurchase agreements and derivatives

     132,389        (16,887
  

 

 

   

 

 

 

Net cash and cash equivalents used in financing activities

     (38,065     (95,820
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     164,205        6,889   

Cash and cash equivalents, beginning of year

     236,482        235,034   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

     $     400,687        $     241,923   
  

 

 

   

 

 

 

 

(a) Not included in return of capital to Transamerica Corporation is the amount payable to Transamerica Corporation in connection with the tax allocation agreement of $5,750. The amount payable is presented on the Balance Sheets within the affiliated payables - net line item.

 

 

 

 

See Notes to Financial Statements

 

 

7


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF TRANSAMERICA CORPORATION)

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 Transamerica Corporation which is an indirect wholly owned subsidiary of AEGON N.V., a limited liability share company organized under Dutch law. The Company was formerly a wholly owned subsidiary of AEGON USA, LLC (“AUSA”) which merged into Transamerica Corporation effective December 31, 2015. AEGON N.V. and its subsidiaries and joint ventures have life insurance and pension operations in over twenty countries in Europe, the Americas, and Asia and are also active in savings and investment operations, accident and health insurance, and general insurance and have limited banking operations in a number of these countries.

The accompanying Financial Statements have been prepared in conformity with United States 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 interim Financial Statements are unaudited; all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the Financial Statements have been included. These unaudited Financial Statements should be read in conjunction with the audited Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. For a complete discussion of the Company’s 2015 Financial Statements and accounting policies, refer to the Company’s Annual Report on Form 10-K. The nature of the Company’s business is such that results of any interim period are not necessarily indicative of results for a full year.

The Company is a life insurance company that conducts its business primarily in the annuity markets and to a lesser extent in the life insurance markets of the financial services industry. The Company is domiciled in the State of Arkansas and is currently licensed to sell insurance and annuities in forty-nine states, the District of Columbia, the U.S. Virgin Islands and Guam. Currently, the Company is not issuing new life insurance, variable annuity and market value adjusted annuity products. In 2012, the Company began selling a fixed contingent annuity (also sometimes referred to as a contingent deferred annuity (“CDA”)) that includes a stand-alone living benefit (“SALB”). A SALB is essentially a guaranteed lifetime withdrawal benefit which exists independently and is applied to mutual funds and exchange traded funds. As of November 22, 2015, the Company no longer issues CDAs to new investors. Existing certificate owners of CDAs may continue to make subsequent contributions, as permitted by the terms of their CDA contracts.

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. No subsequent events have been identified that require adjustments to the Financial Statements.

 

8


Current Accounting Guidance

Accounting Standards Update (“ASU”) 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)

In May 2015, the Financial Accounting Standard Board (“FASB”) issued ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The amendments in this Update remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value (“NAV”) per share as a practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the NAV per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The amendments are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. A reporting entity should apply the amendments retrospectively to all periods presented. The Company adopted the standard on January 1, 2016. The amendments have been applied retrospectively to all periods presented. Adoption of this ASU did not have a material impact on the Company’s Financial Statements. See Note 2 for disclosure impacts.

Future Accounting Guidance

ASU 2016-15, Statement of Cash Flow (Topic 230): Classification of Certain Cash Receipts and Cash Payments

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flow (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments in this Update provide guidance on the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, and they should be applied using a retrospective transition method to each period presented unless impracticable. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact that adoption of this Update will have on its Financial Statements.

ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The following are the main provisions. The amendments in this Update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. Although credit losses on available-for-sale debt securities are measured in a manner similar to current GAAP, the amendments in this Update require that credit losses be presented as an allowance rather than as a write-down. The amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early application of this Update is permitted only as of fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. An entity will apply the amendments in this Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). The Company is currently evaluating the impact that adoption of this Update will have on its Financial Statements.

 

9


ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instrument

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The amendments in this Update clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. That is, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. An entity is required to assess the embedded call (put) options solely in accordance with the existing four-step decision sequence, which are whether (1) the payoff is adjusted based on changes in an index, (2) the payoff is indexed to an underlying other than interest rates or credit risk, (3) the debt involves a substantial premium or discount, and (4) the call (put) option is contingently exercisable. The amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. An entity should apply the amendments in this Update on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year for which the amendments are effective. The Company is currently evaluating the impact that adoption of this Update will have on its Financial Statements.

ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The amendments in this Update clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require de-designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. That is, the reporting entity must still consider whether there is a change in the counterparty’s creditworthiness in determining whether the hedging relationship continues to qualify for hedge accounting. The amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. An entity has an option to apply the amendments in this Update on either a prospective basis or a modified retrospective basis. The Company is currently evaluating the impact that adoption of this Update will have on its Financial Statements.

ASU 2014-09, Revenue from Contracts with Customers (Topic 606)

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this Update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance unless the contracts are within the scope of other standards (for example, financial instruments, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance establishes a five-step process to achieve this core principle. An entity may use either of two transition methods: retrospective to each prior reporting period presented with certain practical expedients, or retrospective with the cumulative effect of initial application recognized at the date of initial application subject to certain additional disclosures. The Company has not yet selected a transition method. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies the implementation guidance on principal versus agent considerations in Topic 606. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies the following two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance. In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, which provides clarifying guidance in a few narrow areas and adds some practical expedients to the guidance. In August 2015, the FASB issued ASU 2015-14, Deferral of the Effective Date, which defers the effective date by one year. As a result, these Updates will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application of these Updates is permitted only as of fiscal years beginning after December 15, 2016. The Company is currently evaluating the impact that adoption of these Updates will have on its Financial Statements.

ASU 2016-01, Financial Instruments - Overall

In January 2016, FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. For the Company, the amendments in this guidance are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. With certain exceptions, early adoption is not permitted. The amendments in this guidance are to be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, except for those related to equity securities without readily determinable fair values (including disclosure requirements) which are to be applied prospectively to equity investments that exist as of the date of adoption of the Update. The Company is currently evaluating the impact that adoption of these Updates will have on its Financial Statements and disclosures.

 

10


 

Note 2. Fair Value of Financial Instruments

 

Fair Value Measurements

ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a three-level 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 the three-level hierarchy 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 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 management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.

The Company recognizes transfers between levels at the beginning of the quarter.

 

11


The following tables present the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis at September 30, 2016 and December 31, 2015:

 

                                                                       
     September 30, 2016  

 

   Level 1      Level 2      Level 3      Total  

Assets

           

Fixed maturity available-for-sale (“AFS”) securities (a)

           

Corporate securities

     $ -             $ 972,770         $ -             $ 972,770   

Asset-backed securities

     -             53,854         6,792         60,646   

Commercial mortgage-backed securities

     -             77,380         -             77,380   

Residential mortgage-backed securities

     -             144,586         -             144,586   

Municipals

     -             807         -             807   

Government and government agencies

     -             -             -          

United States

     384,932         -             -             384,932   

Foreign

     1,509         11,757         -             13,266   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity AFS securities

     $     386,441         $ 1,261,154         $       6,792         $     1,654,387   

Equity AFS securities (a)

           

Banking securities

     $ -             $ 27,468         $ -             $ 27,468   

Industrial securities

     -             5,883         -             5,883   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity AFS securities

     $ -             $ 33,351         $ -             $ 33,351   

Cash equivalents (b)

     -             399,228         -             399,228   

Derivative assets (c)

     -             968         -             968   

Fair value recoverable of ceded GMIB embedded derivatives (d)

     -             -             64,903         64,903   

Investments measured at net asset value (“NAV”) (e)

     -             -             -             5,795,686   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $ 386,441         $ 1,694,701         $ 71,695         $ 7,948,523   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Future policy benefits (embedded derivatives only) (d)

     $ -             $ -             $ 77,840         $ 77,840   

Derivative liabilities (c)

     -             7,095         -             7,095   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     $ -             $ 7,095         $ 77,840         $ 84,935   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2015  

 

   Level 1      Level 2      Level 3      Total  

Assets

           

Fixed maturity AFS securities (a)

           

Corporate securities

     $ -             $ 1,016,792         $ -             $ 1,016,792   

Asset-backed securities

     -             115,988         6,666         122,654   

Commercial mortgage-backed securities

     -             71,683         -             71,683   

Residential mortgage-backed securities

     -             59,265         -             59,265   

Municipals

     -             807         -             807   

Government and government agencies

           

United States

     386,288         -             -             386,288   

Foreign

     1,499         6,349         -             7,848   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity AFS securities

     $ 387,787         $ 1,270,884         $ 6,666         $ 1,665,337   

Equity AFS securities (a)

           

Banking securities

     $ -             $ 28,673         $ -             $ 28,673   

Industrial securities

     -             5,994         -             5,994   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity AFS securities

     $ -             $ 34,667         $ -             $ 34,667   

Cash equivalents (b)

     -             234,500         -             234,500   

Derivative assets (c)

     -             10,893         -             10,893   

Fair value recoverable of ceded GMIB embedded derivatives (d)

     -             -             61,426         61,426   

Investments measured at NAV (e)

     -             -             -             6,004,154   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $ 387,787         $ 1,550,944         $ 68,092         $ 8,010,977   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Future policy benefits (embedded derivatives only) (d)

     $ -             $ -             $ 61,129         $ 61,129   

Derivative liabilities (c)

     -             13,075         -             13,075   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     $ -             $ 13,075         $ 61,129         $ 74,204   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

12


(a)

The fair values of debt securities are determined by management after taking into consideration several sources of data. When available, the Company uses quoted market prices in active markets to determine the fair value of its debt securities. The Company’s valuation policy utilizes a pricing hierarchy which dictates that publicly available prices are initially sought from indices and third party pricing services. In the event that pricing is not available from these sources, those securities are submitted to brokers to obtain quotes. The majority of brokers’ quotes are non-binding. As part of the pricing process, the Company assesses the appropriateness of each quote (i.e., as to whether the quote is based on observable market transactions or not) to determine the most appropriate estimate of fair value. Lastly, securities are priced using internal cash flow modeling techniques. These valuation methodologies commonly use the following inputs: reported trades, bids, offers, issuer spreads, benchmark yields, estimated prepayment speeds, and/or estimated cash flows.

Third-party pricing services and brokers will often determine prices using recently reported trades for identical or similar securities. The third-party pricing services and brokers make adjustments for the elapsed time from the trade date to the balance sheet date to take into account available market information. Lacking recently reported trades, third-party pricing services and brokers will use modeling techniques to determine a security price where expected future cash flows are developed based on the performance of the underlying collateral and discounted using an estimated market rate.

Periodically, the Company performs an analysis of the inputs obtained from third-party pricing services and brokers to ensure that the inputs are reasonable and produce a reasonable estimate of fair value. The Company’s asset specialists and investment valuation specialists consider both qualitative and quantitative factors as part of this analysis. Several examples of analytical procedures performed include, but are not limited to, recent transactional activity for similar debt securities, review of pricing statistics and trends and consideration of recent relevant market events. Other controls and procedures over pricing received from indices, third-party pricing services, or brokers include validation checks such as exception reports that highlight significant price changes, stale prices or un-priced securities.

Following is additional discussion of the valuation methodologies for certain types of debt securities:

Corporate securities - Valuations of corporate securities are monitored and reviewed on a monthly basis. The pricing hierarchy is dependent on the possibility of corroboration of market prices when available. If no market prices are available, valuations are determined by a discounted cash flow methodology using an internally calculated yield. The yield is comprised of a credit spread over a given benchmark.

Residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and asset backed securities (“ABS”) - Valuations of RMBS, CMBS and ABS are monitored and reviewed on a monthly basis. Valuations are based on a pricing hierarchy and depending on the asset type, the pricing hierarchy consists of a waterfall that starts with making use of market prices from indices and follows with making use of third-party pricing services or brokers. The pricing hierarchy is dependent on the possibilities of corroboration of the market prices. If no market prices are available, the Company uses either internal models or another available pricing source to determine fair value. Significant inputs included in the internal models are generally determined based on relative value analyses, which incorporate comparisons to instruments with similar collateral and risk profiles. Market standard models may be used to model the specific collateral composition and cash flow structure of each transaction. The most significant unobservable input is the illiquidity premium, which is embedded in the discount rate.

Government and government agencies - When available, the Company uses quoted market prices in active markets to determine the fair value of its government and government agencies’ investments. When the Company cannot make use of quoted market prices, market prices from indices or quotes from third-party pricing services or brokers are used.

Equity securities – Valuations of equity securities are monitored and reviewed on a monthly basis. When available, the Company uses quoted market prices in active markets to determine the fair value of its equity investments. When the Company cannot make use of quoted market prices, quotes from a third party vendor, broker, or custodian are used.

 

(b)

Cash equivalents are primarily valued at amortized cost, which approximates fair value. Operating cash is not included in the above table.

 

13


(c)

Level 2 derivatives include interest rate swaps, inflation swaps, variance swaps, total return swaps, and credit default swaps for which the Company utilized readily accessible quoted index levels and broker quotes. The fair value of interest rate swaps is calculated based on the change in the underlying floating rate curve measured using the London Inter-Bank Offered Rate (“LIBOR”) at the reporting date, as compared to the fixed leg of the swap. The fair value for inflation swaps is calculated as the difference between the consumer price index (or related readily accessible quoted inflation index level) at the reporting date and the last reset date, multiplied by the notional value of the swap. The fair value for the variance swaps is calculated as the difference between the estimated volatility of the underlying Standard and Poor’s 500 Composite Stock Price Index (“S&P”) at maturity and the actual volatility of the underlying S&P index at initiation (i.e., strike) multiplied by the notional value of the swap. Total return swaps are valued based on the change in the underlying equity index as of the last reset date. Credit default swaps are valued using a discounted cash flow model where future premium payments and protection payments are corrected for the probability of default, which is modeled using an arbitrage free credit spread model.

(d)

The Company issued contracts containing guaranteed minimum withdrawal benefit riders (“GMWB”) and obtained guaranteed minimum income benefits (“GMIB”) reinsurance. GMWB and GMIB reinsurance are treated as embedded derivatives and are required to be reported separately from the host contract. In addition, the Company issues SALB contracts which are required to be reported at fair value. The fair value of these guarantees is calculated as the present value of future expected payments to policyholders less the present value of assessed 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 rate and actuarial assumptions. Since two 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.

(e)

Amounts are comprised of certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient and have not been classified in the fair value hierarchy in accordance with Subtopic 820-10. These investments do not have any lockup periods.

 

Investment:

Limited Partnerships

   September 30, 2016
Fair Value
     September 30, 2016
Unfunded Commitments
     Redemption
Frequency
     Redemption
Notice Period
 

Limited Partnership - Private Equity

     $ 1,627         $ -             None         None   

Limited Partnership - Hedge Funds

     68,393         4         Quarterly         60-65 days   
  

 

 

    

 

 

       
     $ 70,020         $ 4         

Separate Accounts

     5,725,666         -             None         None   
  

 

 

    

 

 

       

Investments measured at NAV

     $ 5,795,686         $ 4         
  

 

 

    

 

 

       

For the nine months ended September 30, 2016 and twelve months ended December 31, 2015, there were no transfers between Level 1 and 2, respectively.

The following table provides a summary of the change in fair value of the Company’s Level 3 fixed maturity AFS securities at September 30, 2016 and December 31, 2015:

 

         Nine Months Ended    
September 30, 2016
        Twelve Months Ended    
December 31, 2015
 

Balance at beginning of period (a)

     $ 6,666        $ 8,474   

Change in unrealized gains (losses) (b)

     76        (376

Purchases

     -            1,999   

Sales

     (276     (126

Transfers into Level 3

     2,113        2,049   

Transfers out of Level 3

     (1,954     (5,354

Net realized investment gains (c)

     167        -       
  

 

 

   

 

 

 

Balance at end of period (a)

     $ 6,792        $ 6,666   
  

 

 

   

 

 

 

 

(a)

Recorded as a component of fixed maturity AFS securities on the Balance Sheets.

(b)

Recorded as a component of other comprehensive income (loss) in net unrealized holding gains (losses) on AFS securities arising during the period.

(c)

Recorded as a component of net realized investment gains (losses) for fixed maturity in the Statements of Income.

 

14


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. Level 3 fixed maturity securities at September 30, 2016 remained fairly consistent with the December 31, 2015 balance as a result of the transfer during the first quarter of 2016 from Level 3 to Level 2 and the retransfer during the second quarter of 2016 from Level 2 to Level 3 of two ABS due to the availability of market observable data (Level 2) during the first quarter of 2016 and the unavailability of market observable data (Level 2) during the second quarter of 2016. One ABS that was transferred from Level 2 to Level 3 during the third quarter of 2016, however, was then sold in the same time period, which contributed to the minimal movement in total during the third quarter.

The Company’s Level 3 liabilities (assets) consist of provisions for GMWB, SALB and GMIB reinsurance. The fair value of these guarantees is calculated as the present value of future expected payments to policyholders less the present value of assessed 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. For GMWB and SALB, an increase (decrease) in credit spread in isolation would result in a lower (higher) fair value liability measurement and an increase (decrease) in volatility in isolation would result in a higher (lower) fair value liability measurement. Changes in the Company’s credit spread and volatility assumptions have an inverse effect on the GMIB reinsurance assets.

The expected market rates of returns are based on risk-free rates, such as the current LIBOR forward curve. The credit spread, which is a significant unobservable input, 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). The credit spread was 50 basis points (“bps”) and 40 bps at September 30, 2016 and December 31, 2015, respectively.

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%-30% 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 (expressed as a spot rate) was 24.1% and 24.2% at September 30, 2016 and December 31, 2015, respectively. 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.

The following table provides a summary of the changes in fair value of the Company’s Level 3 liabilities (assets) at September 30, 2016 and December 31, 2015:

 

     Nine Months Ended
September 30, 2016
     Twelve Months Ended
December 31, 2015
 

 

   GMWB     GMIB
Reinsurance
    SALB      GMWB     GMIB
Reinsurance
    SALB  

Balance at beginning of period (a)

     $     60,618        $ (61,426     $   511         $     60,702        $ (60,573     $   504   

Changes in interest rates (b)

     17,243        (11,056     -             (1,890     979        -       

Changes in equity markets (b)

     (4,495     9,142        -             9,182        (1,976     7   

Other (b)

     3,963        (1,563     -             (7,376     144        -       
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance at end of period (a)

     $ 77,329        $ (64,903     $ 511         $ 60,618        $ (61,426     $ 511   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

(a)

GMWB and SALB are recorded as a component of future policy benefits on the Balance Sheets and GMIB reinsurance is recorded as recoverable of ceded GMIB embedded derivatives, at fair value on the Balance Sheets.

(b)

Recorded as a component of policy benefits in the Statements of Income.

 

15


For the nine months ended September 30, 2016, the change in the fair value of the GMWB and GMIB reinsurance guarantees was primarily driven by changes in interest rates and equity market performance. The fair value of the GMWB and GMIB reinsurance guarantees increased due to a decrease in interest rates by 74 basis points during the nine-month period ended September 30, 2016. Favorable equity returns during the three-month period ended September 30, 2016, partially offset the year-to-date increase in fair value reinsurance guarantees due to the decrease in interest rates.

The following table provides a summary of the quantitative inputs and assumptions of the Company’s Level 3 assets and liabilities at September 30, 2016 and December 31, 2015:

 

Description

   September 30,
2016
Estimated
Fair Value
     Valuation
Techniques
    Unobservable Inputs     Range
(Weighted  Average)
 

Assets

         

Fixed maturity securities

         

Asset-backed securities

     $ 6,792         Broker        See comment below (a)        See comment below (a)   
  

 

 

        

Total fixed maturity securities

     6,792          

Future policy benefits (embedded derivatives) - GMIB Reinsurance

     64,903         Discounted cash flows        Own credit risk        50   
          Long-term volatility        25-30%   
  

 

 

        

Total assets

     $ 71,695          
  

 

 

        

Liabilities

         

Future policy benefits (embedded derivatives) - GMWB

     $ 77,329         Discounted cash flows        Own credit risk        50   
          Long-term volatility        25-30%   

Future policy benefits - SALB

     511         See comment below (b)        See comment below (b)        See comment below (b)   
  

 

 

        

Total liabilities

     $ 77,840          
  

 

 

        

Description

   December 31,
2015
Estimated
Fair Value
     Valuation
Techniques
    Unobservable Inputs     Range
(Weighted  Average)
 

Assets

         

Fixed maturity securities

         

Asset-backed securities

     $ 6,666         Broker        See comment below (a)        See comment below (a)   
  

 

 

        

Total fixed maturity securities

     6,666          

Future policy benefits (embedded derivatives) - GMIB Reinsurance

     61,426         Discounted cash flows        Own credit risk        40 bps   
          Long-term volatility        25%   
  

 

 

        

Total assets

     $     68,092          
  

 

 

        

Liabilities

         

Future policy benefits (embedded derivatives) - GMWB

     $ 60,618         Discounted cash flows        Own credit risk        40 bps   
          Long-term volatility        25%   

Future policy benefits - SALB

     511         See comment below (b)        See comment below (b)        See comment below (b)   
  

 

 

        

Total liabilities

     $ 61,129          
  

 

 

        

 

(a)

The Company has obtained non-binding broker quotes which cannot be corroborated by market observable data, to assist in determining the fair values of the Level 3 ABS. The Company does not receive the unobservable inputs used by the broker but performs annual reviews to approve the use of brokers and obtains an asset specialist’s review of the broker’s price.

(b)

The SALB is a relatively new product with fewer than 150 policies. Due to the small size of this block, the liability was established based on the fees.

 

16


The following table provides the estimated fair value of the Company’s assets not carried at fair value on the Balance Sheets at September 30, 2016 and December 31, 2015:

 

     September 30, 2016  

 

   Level 1      Level 2      Level 3      Total  

Assets

           

Mortgage loans on real estate (a)

     $ -             $ -             $ 108,089         $ 108,089   

Policy loans (b)

     -             635,819         -             635,819   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $ -             $ 635,819         $ 108,089         $ 743,908   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2015  

 

   Level 1      Level 2      Level 3      Total  

Assets

           

Mortgage loans on real estate (a)

     $ -             $ -             $ 92,923         $ 92,923   

Policy loans (b)

     -             661,466         -             661,466   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $          -             $   661,466         $   92,923         $   754,389   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) The fair value of 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.
(b) Policy loans are stated at unpaid principal balance. The book value of policy loans approximates their fair value.

 

 

Note 3. Investments

 

Fixed Maturity and Equity Securities

The amortized cost/cost, gross unrealized gains and losses, estimated fair values and impairments reflected in other comprehensive income (“OCI”) of investments in fixed maturity and equity AFS securities at September 30, 2016 and December 31, 2015 were:

 

     September 30, 2016  
            Gross Unrealized     Estimated       

 

   Amortized
Cost/Cost
     Gains      Losses     Fair
Value
     OTTI
in AOCI (a)
 

Fixed maturity AFS securities

             

Corporate securities

   $ 891,366       $ 83,906       $ (2,502   $ 972,770       $ -       

Asset-backed securities

     57,840         3,106         (300    
60,646
  
     -       

Commercial mortgage-backed securities

     73,008         4,381         (9    
77,380
  
     -       

Residential mortgage-backed securities

     142,010         2,843         (267     144,586         -       

Municipals

     910         -             (103     807         -       

Government and government agencies

             

United States

     295,205         89,727         -            384,932         -       

Foreign

     11,513         1,753         -            13,266         -       
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturity AFS securities

   $     1,471,852       $     185,716       $     (3,181)      $     1,654,387       $ -       
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Equity AFS securities

             

Banking securities

   $ 25,473       $ 2,094       $ (99   $ 27,468       $ -       

Industrial securities

     5,791         92         -            5,883         -       
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total equity AFS securities

   $ 31,264       $ 2,186       $ (99   $ 33,351       $ -       
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

17


     December 31, 2015  
            Gross Unrealized     Estimated         

 

   Amortized
Cost/Cost
     Gains      Losses     Fair
Value
     OTTI
in AOCI (a)
 

Fixed maturity AFS securities

             

Corporate securities

     $ 977,900         $ 57,648         $ (18,756     $ 1,016,792         $ -       

Asset-backed securities

     118,993         4,140         (479     122,654         (42

Commercial mortgage-backed securities

     70,083         1,904         (304     71,683         -       

Residential mortgage-backed securities

     56,527         2,819         (81     59,265         -       

Municipals

     913         -             (106     807         -       

Government and government agencies

             

United States

     339,686         46,634         (32     386,288         -       

Foreign

     6,591         1,257         -            7,848             -       
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturity AFS securities

     $   1,570,693         $   114,402         $   (19,758)        $ 1,665,337         $ (42
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Equity AFS securities

             

Banking securities

     $ 27,986         $ 1,769         $ (1,082     $ 28,673         $ -       

Industrial securities

     5,791         203         -            5,994         -       
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total equity AFS securities

     $ 33,777         $ 1,972         $ (1,082     $ 34,667         $ -       
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

(a) Represents other-than-temporary impairments (“OTTI”) in Accumulated Other Comprehensive Income (“AOCI”), which were not included in earnings. Amount excludes $2,863 and $2,515 of unrealized gains at September 30, 2016 and December 31, 2015, respectively.

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 AFS securities by investment grade at September 30, 2016 and December 31, 2015 were:

 

    September 30, 2016     December 31, 2015  

 

  Amortized
Cost
    Estimated
Fair
Value
    Amortized
Cost
    Estimated
Fair
Value
 

Investment grade

    $ 1,386,052        $ 1,563,924        $ 1,467,677        $ 1,565,053   

Below investment grade

    85,800        90,463        103,016        100,284   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity AFS securities

    $   1,471,852        $   1,654,387        $   1,570,693        $   1,665,337   
 

 

 

   

 

 

   

 

 

   

 

 

 

At September 30, 2016 and December 31, 2015, the estimated fair value of fixed maturity securities rated BBB-, which is the lowest investment grade rating given by rating agencies, was $74,128 and $79,958, respectively. 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.

 

18


The amortized cost and estimated fair value of fixed maturity AFS securities at September 30, 2016 and December 31, 2015 by contractual maturities were:

 

    September 30, 2016     December 31, 2015  

 

  Amortized
Cost
    Estimated
Fair
Value
    Amortized
Cost
    Estimated
Fair
Value
 

Fixed maturity AFS securities

       

Due in one year or less

    $ 63,219        $ 63,954        $ 64,114        $ 65,086   

Due after one year through five years

    540,248        582,815        564,707        599,965   

Due after five years through ten years

    106,248        115,113        230,858        230,815   

Due after ten years

    489,279        609,894        465,410        515,868   
 

 

 

   

 

 

   

 

 

   

 

 

 
    1,198,994        1,371,776        1,325,089        1,411,734   

Mortgage-backed securities and other asset-backed securities

    272,858        282,611        245,604        253,603   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity AFS securities

    $   1,471,852        $   1,654,387        $   1,570,693        $   1,665,337   
 

 

 

   

 

 

   

 

 

   

 

 

 

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.

 

19


Unrealized Losses on Fixed Maturity and Equity Securities

The Company’s investments in fixed maturity and equity securities classified as AFS are carried at estimated fair value with unrealized gains and losses included in stockholder’s equity as a component of AOCI, net of taxes.

The estimated fair value and gross unrealized losses and OTTI related to fixed maturity and equity AFS securities aggregated by length of time that individual securities have been in a continuous unrealized loss position at September 30, 2016 and December 31, 2015 were as follows:

 

     September 30, 2016  

 

   Estimated
Fair
Value
     Amortized
Cost/Cost
     Gross
Unrealized
Losses and
OTTI (a)
 

Less than or equal to six months

        

Fixed maturity AFS securities

        

Corporate securities

     $ 10,825         $ 10,949         $ (124

Asset-backed securities

     9,988         10,083         (95

Commercial mortgage-backed securities

     2,602         2,611         (9

Residential mortgage-backed securities

     27,215         27,234         (19
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity AFS securities

     $ 50,630         $ 50,877         $ (247
  

 

 

    

 

 

    

 

 

 

Greater than six months but less than or equal to one year

        

Fixed maturity AFS securities

        

Corporate securities

     $ 6,834         $ 7,347         $ (513

Asset-backed securities

     6,700         6,887         (187

Residential mortgage-backed securities

     8,863         9,110         (247
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity AFS securities

     $ 22,397         $ 23,344         $ (947
  

 

 

    

 

 

    

 

 

 

Greater than one year

        

Fixed maturity AFS securities

        

Corporate securities

     $ 17,410         $ 19,275         $ (1,865

Asset-backed securities

     2,310         2,328         (18

Residential mortgage-backed securities

     20         21         (1

Municipals

     807         910         (103

Equity AFS securities - banking securities

     1,698         1,797         (99
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity AFS securities

     $ 22,245         $ 24,331         $ (2,086
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity AFS securities

     $         95,272         $         98,552         $         (3,280)   
  

 

 

    

 

 

    

 

 

 

 

20


     December 31, 2015  

 

   Estimated
Fair
Value
     Amortized
Cost/Cost
     Gross
Unrealized
Losses and
OTTI (a)
 

Less than or equal to six months

        

Fixed maturity AFS securities

        

Corporate securities

     $ 130,718         $ 139,846         $ (9,128

Asset-backed securities

     59,051         59,312         (261

Commercial mortgage-backed securities

     17,185         17,450         (265

Residential mortgage-backed securities

     3,896         3,966         (70

Government and government agencies - United States

     18,484         18,516         (32
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity AFS securities

     $ 229,334         $ 239,090         $ (9,756
  

 

 

    

 

 

    

 

 

 

Greater than six months but less than or equal to one year

        

Fixed maturity AFS securities

        

Corporate securities

     $ 27,872         $ 30,597         $ (2,725

Asset-backed securities

     455         463         (8

Commercial mortgage-backed securities

     988         1,028         (40

Residential mortgage-backed securities

     1,020         1,030         (10
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity AFS securities

     $ 30,335         $ 33,118         $ (2,783
  

 

 

    

 

 

    

 

 

 

Greater than one year

        

Fixed maturity AFS securities

        

Corporate securities

     $ 8,628         15,531         $ (6,903

Asset-backed securities

     4,788         4,999         (211

Residential mortgage-backed securities

     39         40         (1

Municipals

     808         912         (104

Equity AFS securities - banking securities

     9,214         10,296         (1,082
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity AFS securities

     $ 23,477         $ 31,778         $ (8,301
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity AFS securities

     $         283,146         $         303,986         $         (20,840)   
  

 

 

    

 

 

    

 

 

 

 

(a) Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI.

The total number of securities in an unrealized loss position was 46 and 133 at September 30, 2016 and December 31, 2015, respectively.

The fair value, gross unrealized losses, the portion of OTTI recognized in OCI and number of securities with fair value declining below amortized cost by greater than 20% and 40% (continuous unrealized loss position) were as follows at September 30, 2016 and December 31, 2015:

 

     September 30, 2016      December 31, 2015  

 

   Estimated
Fair
Value
     Gross
Unrealized
Losses/OTTI (a)
    Number  of
Securities
     Estimated
Fair
Value
     Gross
Unrealized
Losses/OTTI (a)
    Number  of
Securities
 

Decline > 20%

               

Less than or equal to six months

     $ -             $ -            -             $ 6,182         $ (1,904     2   

Greater than six months but less
than or equal to one year

     -             -            -             1,468         (532     1   

Greater than one year

     -             -            -             3,722         (1,616     2   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

     $ -             $ -            -             $ 11,372         $ (4,052     5   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Decline > 40%

               

Less than or equal to six months

     $ -             $ -            -             $ 2,950         $ (2,047     1   

Greater than one year

     1,148         (841     1         2,407         (5,232     3   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total

     $   1,148         $   (841     1         $   5,357         $   (7,279     4   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

21


Unrealized gains (losses) incurred during 2016 and 2015 were primarily due to price fluctuations resulting from changes in interest rates and credit spreads. If the Company has the intent to sell or it is more likely than not that the Company will be required to sell these securities prior to the anticipated recovery of the amortized cost, securities are written down to fair value. If cash flow models indicate a credit event will impact future cash flows, the security is impaired to discounted cash flows. For fixed maturity AFS securities, the Company does not intend to sell them, nor is it more likely than not that the Company will be required to sell them before the recovery of its amortized cost basis, and the Company expects to recover the entire cost basis of the debt securities. In making the other-than-temporary impairment assessment, the Company also considered all available information relevant to the collectability of the security, including information about past events, current conditions, and reasonable and supportable forecasts, when developing the estimate of cash flows expected to be collected. Therefore, the Company determined that these fixed maturity AFS securities were not other-than-temporarily impaired.

The components of net unrealized gains (losses) and OTTI included in AOCI, net of taxes, at September 30, 2016 and December 31, 2015 were as follows:

 

 

   September 30,
2016
    December 31,
2015
 

Assets

    

Fixed maturity AFS securities

     $       182,535        $       94,644   

Equity AFS securities

     2,086        890   

Cash flow hedges

     1,862        4,202   

Value of business acquired

     (37,301     (21,812
  

 

 

   

 

 

 
     $ 149,182        $ 77,924   
  

 

 

   

 

 

 

Liabilities

    

Income taxes - deferred

     $ (21,333     $ (21,333
  

 

 

   

 

 

 
     $ (21,333     $ (21,333
  

 

 

   

 

 

 

Stockholder’s equity

    

Accumulated other comprehensive income, net of taxes

     $ 127,849        $ 56,591   
  

 

 

   

 

 

 

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 collected during the nine months ended September 30, 2016. There were $335 of prepayment premiums collected for the twelve months ended December 31, 2015. Prepayment premiums are included in net realized investment gains (losses), excluding OTTI on securities in the Statements of Income.

The fair values of mortgage loans on real estate are 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 September 30, 2016 and December 31, 2015 was $108,089 and $92,923, 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 determined to be impaired for the excess carrying value of the loan over its estimated collateral value. There were no impaired mortgage loans at September 30, 2016 and December 31, 2015. For the portion of the mortgage loan portfolio without specific reserves, a generic reserve is established. The generic reserve was $66 at September 30, 2016 and $78 at December 31, 2015. The change in the reserve is reflected in net realized investment gains (losses), excluding OTTI on securities in the Statements of Income.

 

22


The change in the credit loss allowances on commercial mortgage loans at September 30, 2016 and December 31, 2015 was as follows:

 

     Nine Months Ended     Twelve Months Ended  

Commercial

   September 30,
2016
    December 31,
2015
 

Balance at beginning of period

     $           78        $           36   

Provision

     (12     42   
  

 

 

   

 

 

 

Balance at end of period

     $ 66        $ 78   
  

 

 

   

 

 

 

The commercial mortgages are geographically diversified throughout the United States with the largest concentrations in California, New Hampshire, Pennsylvania, Virginia, Washington, Minnesota, Oregon, Texas, Florida, Georgia and Missouri, which account for approximately 85% of mortgage loans at September 30, 2016.

The credit quality of commercial mortgage loans at September 30, 2016 and December 31, 2015 was as follows:

 

Commercial

   September 30,
2016
    December 31,
2015
 

AAA - AA

     $ 42,944        $ 31,835   

A

     45,679        49,084   

BBB

     15,006        9,090   

BBB - BB

     -            2,983   
  

 

 

   

 

 

 

Total mortgage loans on real estate

     $ 103,629        $ 92,992   

Less: reserves

     (66     (78
  

 

 

   

 

 

 

Total mortgage loans on real estate, net

     $           103,563        $           92,914   
  

 

 

   

 

 

 

The credit quality of the commercial mortgage loans was determined based on an internal credit rating model which assigns a letter rating to each mortgage loan in the portfolio as an indicator of the quality of the mortgage loan. The internal credit rating model was designed based on a rating agency methodology, then modified for credit risk associated with the Company’s mortgage lending process, taking into account such factors as projected future cash flows, net operating income, and collateral value. The model produces a rating score and an associated letter rating that is intended to align with S&P ratings as closely as possible. Information supporting the risk rating process is updated at least annually. While mortgage loans with a lower rating carry a higher risk of loss, adequate reserves for loan losses have been established to cover those risks.

Securities Lending

The following table provides a summary of the securities under securities lending agreements at September 30, 2016 and December 31, 2015:

 

 

   September 30,
2016
     December 31,
2015
 

Payables for collateral under securities loaned

     $           213,905         $ 194,537   

Amortized cost of securities out on loan

     159,250         162,698   

Estimated fair value of securities out on loan

     206,986         188,689   

Reverse Repurchase Agreements

The following table provides a summary of the securities under reverse repurchase agreements at September 30, 2016 and December 31, 2015:

 

 

   September 30,
2016
     December 31,
2015
 

Payable for reverse repurchase agreements

     $ 111,053         $ -       

Amortized cost of securities pledged

     109,709         -       

Estimated fair value of securities pledged

     110,962         -       

 

23


Collateral Maturities of Reverse Repurchase Agreements and Securities Lending Transactions

The following tables provide a summary of collateral maturities of reverse repurchase agreements and securities lending transactions at September 30, 2016 and December 31, 2015:

 

     September 30, 2016  
     Overnight  and
Continuous
     Up to 30 days      Total  

Reverse repurchase agreements

        

Residential mortgage-backed securities

     $ -             $ 110,962         $ 110,962   
  

 

 

    

 

 

    

 

 

 

Total

     -             110,962         110,962   

Securities lending transactions

        

U.S. Treasury and agency securities

     $ 170,278         $ -             $ 170,278   

Corporate securities

     36,706         -             36,706   

Equity securities - banking

     2         -             2   
  

 

 

    

 

 

    

 

 

 

Total

     $ 206,986         $ -             $ 206,986   
  

 

 

    

 

 

    

 

 

 

Total Borrowings

     $ 206,986         $ 110,962         $ 317,948   
  

 

 

    

 

 

    

 

 

 

Gross amount of recognized liabilities for reverse repurchase agreements and securities lending on the Balance Sheets

   

     $         324,958   
  

 

 

 
     December 31, 2015  
     Overnight  and
Continuous
     Up to 30 days      Total  

Securities lending transactions

        

U.S. Treasury and agency securities

     $ 155,586         $ -             $ 155,586   

Corporate securities

     19,786         -             19,786   

Equity securities- banking

     13,317         -             13,317   
  

 

 

    

 

 

    

 

 

 

Total Borrowings

     $ 188,689         $ -             $ 188,689   
  

 

 

    

 

 

    

 

 

 

Gross amount of recognized liabilities for securities lending on the Balance Sheets

  

     $ 194,537   
  

 

 

 

 

24


Derivatives and Hedge Accounting

The following table presents the notional and fair value of non-qualifying hedging instruments and cash flow hedges at September 30, 2016 and December 31, 2015:

 

     Notional      Fair Value  
     September 30,      December 31,      September 30,      December 31,  

Derivative Type

   2016      2015      2016      2015  

Non-qualifying hedges

           

Short futures

     $ 33,486         $ 47,221         $ -              $ -       

Long futures

     74,291         51,573         -              -       

Interest rate swaps

     251,000         192,000         10,767          (2,228

Variance swaps

     385         675         (1,623)         (1,525

Total return swaps

     728,761         1,315,900         (5,645)         (1,429

Options

     12,952         587,046         14          11,055   

Credit default swaps

     210,000         210,000         1,763          65   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-qualifying hedges

     $ 1,310,875         $ 2,404,415         $ 5,276          $ 5,938   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash flow hedges

           

Interest rate swaps

     $ 49,883         $ 49,884         $ 325          $ 3,285   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cash flow hedges

     $ 49,883         $ 49,884         $ 325          $ 3,285   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative Total

     $     1,360,758         $     2,454,299         $     5,601         $     9,223   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the net derivative gains (losses) recognized in the Statements of Income:

 

     Net Derivative Gains (Losses)
Recognized In Income
 
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

Derivative Type

   2016      2015      2016      2015  

Short futures

     $ (977)         $ 3,016          $ (3,436)         $ 1,658    

Long futures

     (577)         -             6,414          -       

Variance swaps

     (1,093)         863          (2,763)         (1,352)   

Total return swaps

     (32,494)         18,535          (49,533)         (15,892)   

Options

     (538)         16,627          (3,773)         19,083    

Interest rate swaps

     (772)                 12,999            

Credit default swaps

     2,318          (1,810)         2,665          (482)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     $         (34,133)         $     37,232          $         (37,427)         $         3,019    
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the maximum potential amount of future payments, credit rating, and maturity dates for the credit default swaps at both September 30, 2016 and December 31, 2015:

 

     Maximum Potential
Amount of
Future Payments
    

Credit Rating

  

Maturity Date Range

Derivative Type

  

 

Credit default swaps

        

Corporate debt

     $ 120,000       A    June 2017 - December 2020

Sovereign debt

     90,000       AA-A    June 2017 - March 2020
  

 

 

       

Credit default swaps total

     $ 210,000         
  

 

 

       

 

25


The following tables present the components of the gains or losses on derivatives that qualify as cash flow hedges:

 

     Gains (Losses) Recognized  in
OCI on Derivatives (Effective Portion)
    Gains (Losses) Recognized  in
OCI on Derivatives (Effective Portion)
 
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

 

   2016     2015     2016     2015  

Interest rate swaps

     $ (2,796     $ 4,952        $ (2,340     $ 5,504   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     $ (2,796     $ 4,952        $ (2,340     $ 5,504   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Net Realized Gains (Losses) Recognized in
Income on Derivatives  (Ineffective Portion)
    Net Realized Gains (Losses) Recognized in
Income on Derivatives (Ineffective Portion)
 
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

 

   2016     2015     2016     2015  

Interest rate swaps

     $ 1        $ 1        $ 4        $ 4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     $ 1        $ 1        $ 4        $ 4   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Gains (Losses) Reclassified from
AOCI into Net Investment  Income

(Effective Portion)
    Gains (Losses) Reclassified from
AOCI into Net Investment Income (Effective Portion)
 
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

 

   2016     2015     2016     2015  

Interest rate swaps

     $ (305     $ (447     $ (621     $ (273
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     $ (305     $ (447     $ (621     $ (273
  

 

 

   

 

 

   

 

 

   

 

 

 

All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.

At September 30, 2016, the before-tax deferred net gains (losses) on derivatives recorded in AOCI that are expected to be reclassified to the Statements of Income during the next twelve months are ($828). This expectation is based on the anticipated interest payments on the hedged investments in Treasury Inflation Protected Securities (“TIPS”) that will occur over the next twelve months, at which time the Company will recognize the deferred gains (losses) as an adjustment to interest income over the term of the investment cash flows.

The Company receives or pledges collateral related to derivative transactions. The credit support agreement contains a fair value threshold of $1,000 over which collateral needs to be pledged by the Company or its counterparty. At September 30, 2016 and December 31, 2015 the Company has pledged securities in the amount of $8,850 and $16,439, respectively, to counterparties. At September 30, 2016 and December 31, 2015, the Company received cash collateral from counterparties in the amount of $13,374 and $11,405, respectively.

In addition, in order to trade futures, the Company is required to post collateral to an exchange (sometimes referred to as margin). The fair value of collateral posted in relation to the futures margin was $6,189 and $4,136 at September 30, 2016 and December 31, 2015, respectively.

 

26


Offsetting of Financial Instruments

The Company has derivative instruments that are subject to master netting agreements. These agreements include provisions to setoff positions with the same counterparties in the event of default by one of the parties.

The following tables present the offsetting of derivative assets and liabilities at September 30, 2016 and December 31, 2015:

 

    September 30, 2016      December 31, 2015  

Derivatives Subject to a Master Netting Arrangement or a Similar Right to Offset

  Assets      Liabilities      Assets      Liabilities  

Gross estimated fair value of derivatives:

          

OTC - Bilateral

    $ 5,671         $ 10,837         $ 37,985         $ 26,534   

OTC - Cleared

    12,854         2,087         140         2,368   
 

 

 

    

 

 

    

 

 

    

 

 

 

Total gross estimated fair value of derivatives

    18,525         12,924         38,125         28,902   

Amounts offset on the balance sheets

          

Gross estimated fair value of derivatives: (1)

          

OTC - Bilateral

    (3,742      (3,742      (15,687      (15,687

OTC - Cleared

    (2,087      (2,087      (140      (140

Cash collateral: (2), (3)

          

OTC - Bilateral

    (961      -             (11,405      -       

OTC - Cleared

    (10,767      -             -             -       
 

 

 

    

 

 

    

 

 

    

 

 

 

Estimated fair value of derivatives presented on the balance sheets

    968         7,095         10,893         13,075   

Gross amounts not offset on the balance sheets:

          

Securities collateral: (4)

          

OTC - Bilateral

    -             (6,173      (8,158      (10,847
 

 

 

    

 

 

    

 

 

    

 

 

 

Net amount after application of master netting agreements and collateral

    $ 968         $ 922         $ 2,735         $ 2,228   
 

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Estimated fair value of derivatives is limited to the amount that is subject to set-off.

(2)

The amount of cash collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreements. Cash collateral received for over-the-counter “OTC”-Bilateral and OTC-Cleared derivatives is included in cash and cash equivalents, short-term investments, or in fixed maturity securities, and the obligation to return it, beyond what is being setoff, is included in payables for collateral under securities loaned, reverse repurchase agreements and derivatives. At September 30, 2016 and December 31, 2015, the Company received excess cash collateral of $1,647 and $0, respectively.

(3)

The receivable for the return of cash collateral provided to the counterparty, beyond what is being setoff, is included in other assets. The amount reported in the table above does not include initial margin on Exchange-Traded and OTC-Cleared derivatives. At September 30, 2016 and December 31, 2015, the Company had no excess cash collateral provided to counterparties that would be subject to the foregoing limitation.

(4)

Securities collateral received or pledged by the Company is held in separate custodial accounts and is not recorded on the Balance Sheet. The amount of securities collateral offset in the table above is limited to the net estimated fair value of derivatives after application of netting agreements and cash collateral. At September 30, 2016 and December 31, 2015, the Company received excess securities collateral with an estimated fair value of $0 and $1,102, respectively, for its OTC-bilateral derivatives, which are not included in the table above due to the foregoing limitation. At September 30, 2016 and December 31, 2015, the Company provided excess securities collateral with an estimated fair value of $2,677 and $5,592, respectively, for its OTC-Bilateral derivatives, which are not included in the table above due to the foregoing limitation. At September 30, 2016 and December 31, 2015, the Company also provided securities initial margin with an estimated fair value of $11,930 and $9,251, respectively, for its OTC-Cleared derivatives, which are not included in the table above.

There were no other financial assets or financial liabilities at September 30, 2016 and December 31, 2015 that were subject to offsetting.

 

27


Net Investment Income

Net investment income by source for the three and nine months ended September 30 was as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

Net investment income

   2016     2015     2016     2015  

Fixed maturity AFS securities

     $ 17,098        $ 17,577        $ 51,326        $ 53,502   

Equity AFS securities

     418        469        1,421        1,499   

Limited partnerships

     1,574        (2,272     (1,057     (715

Mortgage loans on real estate

     1,330        1,038        3,798        2,898   

Policy loans on insurance contracts

     8,555        8,946        25,545        26,556   

Derivatives

     1,547        954        5,316        2,784   

Cash and cash equivalents

     647        140        1,662        448   

Other

     18        103        233        117   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross investment income

     31,187        26,955        88,244        87,089   

Less investment expenses

     (1,963     (1,248     (4,954     (3,439
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

     $       29,224        $       25,707        $       83,290        $       83,650   
  

 

 

   

 

 

   

 

 

   

 

 

 

Realized Investment Gains (Losses)

The Company considers fair value at the date of sale to be equal to the proceeds received. Proceeds and gross realized investment gains (losses) from the sale of AFS securities for the three and nine months ended September 30 were as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

 

   2016     2015     2016     2015  

Proceeds

     $       111,616        $       46,395        $       311,047        $       138,614   

Gross realized investment gains

     3,417        2,604        8,360        5,556   

Gross realized investment losses

     (1,096     (153     (1,373     (2,304

Proceeds on AFS securities sold at a realized loss

     24,478        4,181        49,223        31,876   

Net realized investment gains for the three and nine months ended September 30 were as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 

 

   2016     2015     2016     2015  

Fixed maturity AFS securities

     $ 1,946        $ 2,444        $ 1,193        $ 1,204   

Equity AFS securities

     376        -            583        175   

Mortgages

     9        (74     12        (67

Adjustment related to value of business acquired

     (641     (198     (175     (143
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized investment gains

     $       1,690        $       2,172        $       1,613        $       1,169   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

28


OTTI

The following table sets forth the amount of credit loss impairments on fixed maturity securities held by the Company at the dates indicated, for which a portion of the OTTI loss was recognized in OCI, and the corresponding changes in such amounts at September 30, 2016 and December 31, 2015:

 

 

   September 30,
2016
    December 31,
2015
 

Balance at beginning of period

     $ (935     $ (185

Additional credit loss impairments recognized in the current period on securities previously impaired through OCI

     121        109   

Accretion of credit loss impairments previously recognized

     (988     (859
  

 

 

   

 

 

 

Balance at end of period

     $     (1,802     $     (935
  

 

 

   

 

 

 

The components of OTTI reflected in the Statements of Income for the three and nine months ended September 30 were as follows:

 

     Three Months Ended September 30, 2016      Nine Months Ended September 30, 2016  

 

   OTTI
Losses on
Securities
     Net
OTTI Losses
  Recognized  
in OCI
     Net
OTTI Losses
  Recognized  
in Income
     OTTI
Losses on
Securities
    Net
OTTI Losses
  Recognized  
in OCI
     Net
  OTTI Losses   
Recognized
in Income
 

Gross OTTI losses

     $ -             $ -             $ -             $ 5,213        $ -             $ 5,213   

Value of business acquired amortization

     -             -             -             (529     -             (529
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Net OTTI losses

     $ -             $ -             $ -             $ 4,684        $ -             $ 4,684   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 
     Three Months Ended September 30, 2015      Nine Months Ended September 30, 2015  

 

   OTTI
Losses on
Securities
     Net
OTTI Losses
Recognized
in OCI
     Net
OTTI Losses
Recognized
in Income
     OTTI
Losses on
Securities
    Net
OTTI Losses
Recognized
in OCI
     Net
OTTI Losses
Recognized in
Income
 

Gross OTTI losses

     $ 7         $ -             $ 7         $ 1,873        $ -             $ 1,873   

Value of business acquired amortization

     -             -             -             -            -             -       
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Net OTTI losses

     $ 7         $ -             $ 7         $ 1,873        $ -             $ 1,873   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

29


 

Note 4. Value of Business Acquired (“VOBA”), Deferred Acquisition Costs (“DAC”), and Deferred Sales Inducements (“DSI”)

 

For a complete discussion of the Company’s VOBA, DAC and DSI accounting policies, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

VOBA

The change in the carrying amount of VOBA for the three and nine months ended September 30 was as follows:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  

 

         2016                 2015                 2016                 2015        

Amortization expense

     $ (1,131     $ (7,270     $ (14,103     $ (18,819

Unlocking

     (12,887     (23     (12,904     (107

Adjustment related to realized (gains) losses on investments

     (641     (197     (175     (141

Adjustment related to unrealized (gains) losses and OTTI on investments

     (3,072     599        (15,488     6,318   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in VOBA carrying amount

     $ (17,731     $ (6,891     $ (42,670     $ (12,749
  

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended September 30, 2016, the decrease in VOBA was primarily driven by the favorable unlocking adjustment due to increased mortality assumptions and adjustments relating to unrealized gains due to the low interest rate environment. For the nine months ended September 30, 2016, the decrease in VOBA was primarily driven by the third quarter favorable unlocking adjustment, amortization due to positive gross profits and adjustments relating to unrealized gains due to the low interest rate environment.

DAC

The change in the carrying amount of DAC for the three and nine months ended September 30 was as follows:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  

DAC

         2016                 2015                 2016                 2015        

Capitalization

     $ 14        $ 70        $ 34        $ 144   

Accretion (amortization) expense

     (3,548     3,509        (3,964     (278

Unlocking

     1,552        (1,301     1,526        (1,352
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in DAC carrying amount

     $     (1,982     $     2,278        $   (2,404     $   (1,486
  

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended September 30, 2016, DAC decreased as a result of increased amortization that was driven by high Separate Accounts performance and hedge gains, offset by beginning of period unlocking for assumption updates and model changes. For the nine months ended September 30, 2016, DAC decreased as a result of third quarter earnings that were driven by high Separate Account performance and hedge gains, offset by beginning of period unlocking for assumption updates and model changes.

 

30


DSI

The change in the carrying amount of DSI for the three and nine months ended September 30 was as follows:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  

DSI

         2016                 2015                 2016                 2015        

Capitalization

     $ 4        $ 8        $ 7        $ 13   

Accretion (amortization) expense

     (806     799        (900     (58

Unlocking

     353        (295     347        (307
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in DSI carrying amount

     $ (449 )      $ 512        $ (546 )      $ (352
  

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended September 30, 2016, DSI decreased as a result of increased amortization that was driven by high Separate Accounts performance and hedge gains, partially offset by beginning of period unlocking for assumption updates and model changes. For the nine months ended September 30, 2016, DSI decreased as a result of third quarter earnings that were driven by high Separate Account performance and hedge gains, partially offset by beginning of period unlocking for assumption updates and model changes.

 

 

Note 5. Variable Contracts Containing Guaranteed Benefits

 

The Company records liabilities for contracts containing a GMDB and GMIB as a component of future policy benefits on 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 changes in the GMDB and GMIB liabilities for the three and nine months ended September 30 were as follows:

 

     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  

GMDB

         2016                 2015                 2016                 2015        

Guaranteed benefits incurred

     $ 6,429        $ 6,467        $ 19,295        $ 19,551   

Guaranteed benefits paid

     (3,060     (6,832     (16,357     (19,617

Unlocking

     (22,768     32,957        (17,928     32,232   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     $ (19,399     $ 32,592        $ (14,990     $ 32,166   
  

 

 

   

 

 

   

 

 

   

 

 

 
     Three Months Ended     Nine Months Ended  
     September 30,     September 30,  

GMIB

         2016                 2015                 2016                 2015        

Guaranteed benefits incurred

     $ 3,648        $ 2,701        $ 10,413        $ 8,363   

Guaranteed benefits paid

     (300     (346     (1,706     (682

Unlocking

     (8,195     25,507        (3,015     22,192   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

     $ (4,847     $ 27,862        $ 5,692        $ 29,873   
  

 

 

   

 

 

   

 

 

   

 

 

 

For the three months ended September 30, 2016, the decrease in GMDB liabilities was driven by unlocking adjustments for assumption updates and model changes, higher equity returns and higher bond and money market returns. For the nine months ended September 30, 2016, the decrease in GMDB liabilities was driven by unlocking adjustments for assumption updates and model changes, higher equity returns, and a decrease in interest rates. For the three months ended September 30, 2016, the decrease in GMIB liabilities was driven by higher equity returns offset by unlocking adjustments for assumption updates and model changes. For the nine months ended September 30, 2016, the increase in GMIB liabilities was driven by the expected increase in reserves and a decrease in interest rates.

The Company has not incurred or paid any benefits related to the GMWB product.

 

31


 

Note 6. Income Taxes

 

The effective tax rate was not meaningful for the nine months ended either September 30, 2016, or 2015. Differences between the effective rate and the U.S. statutory rate of 35% principally were the result of the Separate Accounts dividends-received deduction (“DRD”) and the valuation allowance on net operating loss (“NOL”) carryforwards.

The Company provides for deferred income taxes resulting from temporary differences that arise from recording certain transactions in different years for income tax reporting purposes than for financial reporting purposes. 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.

The income tax expense (benefit) for each of the three and nine months ended September 30, 2016 and 2015 was $0.

The income tax asset (liability) consists of the following at September 30, 2016 and December 31, 2015:

 

 

       September 30,    
2016
                   December 31,    
2015
 

Current federal income tax liability

     $ (179 )         $ (179

Current state income tax liability

     (287        (287

Deferred federal income tax liability

     (1,620        (1,620

Deferred state income tax assets

     1,512           1,512   
  

 

 

      

 

 

 

Net income tax liability

     $ (574        $ (574
  

 

 

      

 

 

 

At September 30, 2016 and December 31, 2015, the Company had a tax valuation allowance for deferred tax assets of $111,869 and $130,946, respectively (this includes losses that are anticipated to be used in the consolidated group to reflect the income statement impact of the losses that wouldn’t be used if filing separately). 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 future 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 $3,556 (gross $10,162) and $3,404 (gross $9,727), respectively, that should not be recognized at September 30, 2016 and December 31, 2015, which primarily relate to uncertainty regarding the sustainability of certain deductions taken on the 2008-2015 U.S. Federal income tax returns. To the extent these unrecognized tax benefits are ultimately recognized, they will impact the effective tax rate in a future period. It is not anticipated that the total amounts of unrecognized tax benefits will significantly increase within twelve months of the reporting date.

 

32


The components of the change in the unrecognized tax benefits were as follows:

 

 

   September 30,
2016
     December 31,
2015
 

Balance at beginning of period

     $ 3,404         $ 3,041   

Additions for tax positions of prior years

     152         363   

Additions for tax positions of current year

     -             293   

Reductions for tax positions of current year

     -             (293
  

 

 

    

 

 

 

Balance at end of period

     $ 3,556         $ 3,404   
  

 

 

    

 

 

 

At September 30, 2016 and December 31, 2015, the Company had a net operating loss carry forward for federal income tax purposes of $612,061 (net of the ASC 740 reduction of $10,162) and $577,762 (net of the ASC 740 reduction of $9,727), respectively, with a carry forward period of fifteen years that expires at various dates between 2023 and 2031. At both September 30, 2016 and December 31, 2015, the Company had a capital loss carry forward of $84 for federal income tax purposes with a carry forward period of five years that will expire in 2018. At September 30, 2016 and December 31, 2015, the Company had a foreign tax credit carry forward of $9,573 and $8,869, respectively, with a carry forward period of ten years that will expire at various dates up to 2026. Also, the Company has an Alternative Minimum Tax credit carry forward for federal income tax purposes of $4,216 at both September 30, 2016 and December 31, 2015, with an indefinite carry forward period.

The Company classifies interest and penalties related to income taxes as interest expense and penalty expense, respectively. The Company did not recognize any penalties in its Financial Statements at September 30, 2016 or December 31, 2015. The Company recognized interest expense of $107 and $86 at September 30, 2016 and December 31, 2015, respectively.

The Company records taxes on a separate company basis. Effective January 1, 2013 for federal income tax purposes the Company joined in a consolidated income tax return filing with its direct parent, Transamerica Corporation, and other affiliated companies. The method of allocation between the companies is subject to a written tax allocation agreement. Under the terms of the agreement, taxes are payable to or receivable from Transamerica Corporation in amounts that would result had the Company filed a separate tax return with taxing authorities. Any tax differences between the Company’s separately calculated provision and cash flows attributable to benefits from consolidation have been recognized as capital contributions from Transamerica Corporation. At September 30, 2016 and December 31, 2015, the Company recognized capital contributions from (distributions to) Transamerica Corporation and contributions from AUSA in connection with the tax allocation agreement in the amount of ($5,750) and $68,492, respectively. Intercompany income tax balances are settled within thirty days of payment to or filing with the Internal Revenue Service.

The Company filed a separate federal income tax return for the years 2008 through 2012. The Company was part of the consolidated tax return for 2013 and 2014. An examination by the Internal Revenue Service is in progress for the years 2011 through 2013. The Company believes that there are adequate defenses against or sufficient provisions established related to any open or contested tax positions. A consolidated tax return has been filed for 2015.

 

33


 

Note 7. Accumulated Other Comprehensive Income

 

The changes in AOCI by component for the three and nine months ended September 30 were as follows:

 

    Three Months Ended
September 30, 2016
 

 

  Unrealized Holding
Gains (Losses) on
AFS Securities
    Unrealized Holding
Gains (Losses) on
Cash Flow Hedges
    OCI Adjustments for
Policy holder liabilities,
VOBA, and Deferred  Tax
    Total (a)  

Beginning balance

    $ 182,576        $ 4,658        $ (55,560     $ 131,674   

OCI before reclassifications

    268