Attached files
file | filename |
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EX-32.2 - EX-32.2 - TRANSAMERICA ADVISORS LIFE INSURANCE Co | w76136exv32w2.htm |
EX-32.1 - EX-32.1 - TRANSAMERICA ADVISORS LIFE INSURANCE Co | w76136exv32w1.htm |
EX-31.2 - EX-31.2 - TRANSAMERICA ADVISORS LIFE INSURANCE Co | w76136exv31w2.htm |
EX-31.1 - EX-31.1 - TRANSAMERICA ADVISORS LIFE INSURANCE Co | w76136exv31w1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009
COMMISSION FILE NUMBERS 33-26322; 33-46827; 33-52254; 33-60290;
33-58303; 333-33863; 333-34192; 333-133223; 333-133225
33-58303; 333-33863; 333-34192; 333-133223; 333-133225
MERRILL LYNCH LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
ARKANSAS | 91-1325756 | |
(State or other jurisdiction | (IRS Employer | |
of incorporation or organization) | Identification No.) |
4333 Edgewood Road, NE
Cedar Rapids, Iowa
52499-0001
(Address of Principal Executive Offices)
Cedar Rapids, Iowa
52499-0001
(Address of Principal Executive Offices)
(800) 346-3677
(Registrant telephone number including area code)
(Registrant telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,
if any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to
submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes o No þ
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:
DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes o No o
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date.
COMMON 250,000
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
PART 1. Financial Information
Item 1. | Financial Statements |
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
BALANCE SHEETS
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
BALANCE SHEETS
September 30, | December 31, | |||||||
(dollars in thousands, except share data) | 2009 | 2008 | ||||||
(unaudited) | (audited) | |||||||
ASSETS |
||||||||
Investments |
||||||||
Fixed maturity available-for-sale securities, at estimated fair value
(amortized cost: 2009 - $1,326,327; 2008 - $1,510,368) |
$ | 1,307,545 | $ | 1,372,016 | ||||
Equity available-for-sale securities, at estimated fair value
(cost: 2009 - $15,280; 2008 - $21,699) |
11,484 | 13,506 | ||||||
Limited partnerships |
12,965 | 15,260 | ||||||
Mortgage loans on real estate |
71,566 | 77,062 | ||||||
Policy loans |
876,308 | 913,882 | ||||||
Total investments |
2,279,868 | 2,391,726 | ||||||
Cash and cash equivalents |
471,098 | 428,904 | ||||||
Accrued investment income |
38,256 | 38,816 | ||||||
Deferred policy acquisition costs |
31,923 | 24,271 | ||||||
Deferred sales inducements |
7,537 | 7,232 | ||||||
Value of business acquired |
395,697 | 581,090 | ||||||
Goodwill |
2,800 | 2,800 | ||||||
Federal income taxes current |
| 5,400 | ||||||
Federal income taxes deferred |
22,420 | 117,043 | ||||||
Reinsurance receivables |
25,668 | 14,219 | ||||||
Affiliated receivable net |
| 1,124 | ||||||
Affiliated short term note receivable |
60,000 | | ||||||
Other assets |
33,742 | 44,062 | ||||||
Separate Accounts assets |
8,246,831 | 7,457,096 | ||||||
Total Assets |
$ | 11,615,840 | $ | 11,113,783 | ||||
See Notes to Financial Statements
1
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
BALANCE SHEETS Continued
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
BALANCE SHEETS Continued
September 30, | December 31, | |||||||
(dollars in thousands, except share data) | 2009 | 2008 | ||||||
(unaudited) | (audited) | |||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Liabilities |
||||||||
Policyholder liabilities and accruals |
||||||||
Policyholder account balances |
$ | 1,649,654 | $ | 1,751,265 | ||||
Future policy benefits |
465,092 | 499,278 | ||||||
Claims and claims settlement expenses |
31,275 | 38,883 | ||||||
2,146,021 | 2,289,426 | |||||||
Other policyholder funds |
4,982 | 2,006 | ||||||
Payable for collateral under securities loaned |
150,417 | 182,451 | ||||||
Federal income taxes current |
5,654 | | ||||||
Affiliated payables net |
10,167 | | ||||||
Payable for investments purchased net |
2,980 | 2,753 | ||||||
Other liabilities |
16,019 | 14,432 | ||||||
Separate Accounts liabilities |
8,246,831 | 7,457,096 | ||||||
Total Liabilities |
10,583,071 | 9,948,164 | ||||||
Stockholders Equity |
||||||||
Common stock ($10 par value; authorized 1,000,000 shares;
issued and outstanding: 250,000 shares) |
2,500 | 2,500 | ||||||
Additional paid-in capital |
1,366,636 | 1,366,636 | ||||||
Accumulated other comprehensive loss, net of taxes |
(11,610 | ) | (65,178 | ) | ||||
Retained deficit |
(324,757 | ) | (138,339 | ) | ||||
Total Stockholders Equity |
1,032,769 | 1,165,619 | ||||||
Total Liabilities and Stockholders Equity |
$ | 11,615,840 | $ | 11,113,783 | ||||
See Notes to Financial Statements
2
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF INCOME
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF INCOME
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(dollars in thousands) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
(unaudited) | ||||||||||||||||
Revenues |
||||||||||||||||
Policy charge revenue |
$ | 51,864 | $ | 60,228 | $ | 148,363 | $ | 189,316 | ||||||||
Net investment income |
30,715 | 35,368 | 94,646 | 100,899 | ||||||||||||
Net realized investment gains (losses) |
||||||||||||||||
Total other-than-temporary impairment losses
on securities |
(7,401 | ) | (2,313 | ) | (12,645 | ) | (3,314 | ) | ||||||||
Portion of losses recognized in other
comprehensive income |
3,432 | | 3,446 | | ||||||||||||
Net other-than-temporary impairment losses
on securities recognized in income |
(3,969 | ) | (2,313 | ) | (9,199 | ) | (3,314 | ) | ||||||||
Realized investment gains (losses), excluding
other-than-temporary impairment losses
on securities |
(25,632 | ) | 5,941 | (37,987 | ) | 12,409 | ||||||||||
Net realized investment gains (losses) |
(29,601 | ) | 3,628 | (47,186 | ) | 9,095 | ||||||||||
Total Revenues |
52,978 | 99,224 | 195,823 | 299,310 | ||||||||||||
Benefits and Expenses |
||||||||||||||||
Interest credited to policyholder liabilities |
19,327 | 22,369 | 60,110 | 68,038 | ||||||||||||
Policy benefits (net of reinsurance recoveries: |
||||||||||||||||
2009 - $1,068 and $3,202; 2008 - $3,765 and $12,278) |
7,840 | 33,731 | 50,165 | 64,097 | ||||||||||||
Reinsurance premium ceded |
2,860 | 5,405 | 8,301 | 18,421 | ||||||||||||
Amortization (accretion) of deferred policy acquisition costs |
(6,315 | ) | (264 | ) | 4,622 | (475 | ) | |||||||||
Amortization (accretion) and impairment of value of
business acquired |
(4,475 | ) | (5,155 | ) | 136,278 | 28,204 | ||||||||||
Amortization of other intangibles |
| 445 | | 2,831 | ||||||||||||
Insurance expenses and taxes |
19,720 | 17,849 | 56,650 | 54,545 | ||||||||||||
Total Benefits and Expenses |
38,957 | 74,380 | 316,126 | 235,661 | ||||||||||||
Income (Loss) Before Taxes |
14,021 | 24,844 | (120,303 | ) | 63,649 | |||||||||||
Federal Income Tax Expense (Benefit) |
||||||||||||||||
Current |
5,654 | | 5,654 | | ||||||||||||
Deferred |
(1,894 | ) | 7,011 | 63,918 | 17,244 | |||||||||||
Federal Income Tax Expense (Benefit) |
3,760 | 7,011 | 69,572 | 17,244 | ||||||||||||
Net Income (Loss) |
$ | 10,261 | $ | 17,833 | $ | (189,875 | ) | $ | 46,405 | |||||||
See Notes to Financial Statements
3
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF COMPREHENSIVE INCOME
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(dollars in thousands) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
(unaudited) | ||||||||||||||||
Net Income (Loss) |
$ | 10,261 | $ | 17,833 | $ | (189,875 | ) | $ | 46,405 | |||||||
Other Comprehensive Income (Loss) |
||||||||||||||||
Net unrealized gains (losses) on available-for-sale
securities |
||||||||||||||||
Cumulative effect of adoption of other-than-
temporary impairment guidance (ASC 320) |
| | (3,300 | ) | | |||||||||||
Net unrealized holding gains (losses) arising
during the period |
65,410 | (61,158 | ) | 109,314 | (86,457 | ) | ||||||||||
Reclassification adjustment for losses included
in net income |
14,673 | 2,778 | 21,384 | | ||||||||||||
80,083 | (58,380 | ) | 127,398 | (86,457 | ) | |||||||||||
Net unrealized other-than-temporary impairment
gains (losses) on securities |
||||||||||||||||
Cumulative effect of adoption of other-than-
temporary impairment guidance (ASC 320) |
| | (157 | ) | | |||||||||||
Net unrealized other-than-temporary impairment
losses arising during the period |
(3,432 | ) | | (3,169 | ) | | ||||||||||
Reclassification adjustment for other-than-temporary
impairment (gains) losses included in net income |
(106 | ) | | (106 | ) | | ||||||||||
(3,538 | ) | | (3,432 | ) | | |||||||||||
Adjustments |
||||||||||||||||
Policyholder liabilities |
(541 | ) | 2,103 | 5,011 | 6,121 | |||||||||||
Deferred policy acquisition costs |
| 659 | (1,480 | ) | 847 | |||||||||||
Value of business acquired |
(24,664 | ) | 27,372 | (45,085 | ) | 40,754 | ||||||||||
Deferred federal income taxes |
(17,969 | ) | 12,706 | (28,844 | ) | 10,490 | ||||||||||
(43,174 | ) | 42,840 | (70,398 | ) | 58,212 | |||||||||||
Total other comprehensive income (loss), net of taxes |
33,371 | (15,540 | ) | 53,568 | (28,245 | ) | ||||||||||
Comprehensive Income (Loss) |
$ | 43,632 | $ | 2,293 | $ | (136,307 | ) | $ | 18,160 | |||||||
See Notes to Financial Statements
4
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF STOCKHOLDERS EQUITY
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF STOCKHOLDERS EQUITY
Nine Months Ended | ||||||||
September 30, | ||||||||
(dollars in thousands) | 2009 | 2008 | ||||||
(unaudited) | ||||||||
Common Stock |
$ | 2,500 | $ | 2,500 | ||||
Additional Paid-in Capital |
$ | 1,366,636 | $ | 1,116,636 | ||||
Accumulated Other Comprehensive Income (Loss) |
||||||||
Balance at beginning of period |
$ | (65,178 | ) | $ | | |||
Total other comprehensive income (loss), net of taxes |
57,025 | (28,245 | ) | |||||
Cumulative effect of adoption of other-than-temporary
impairment guidance (ASC 320) |
(3,457 | ) | | |||||
Balance at end of period |
$ | (11,610 | ) | $ | (28,245 | ) | ||
Retained Earnings (Deficit) |
||||||||
Balance at beginning of period |
$ | (138,339 | ) | $ | | |||
Net income (loss) |
(189,875 | ) | 46,405 | |||||
Cumulative effect of adoption of other-than-temporary
impairment guidance (ASC 320) |
3,457 | | ||||||
Balance at end of period |
$ | (324,757 | ) | $ | 46,405 | |||
Total Stockholders Equity |
$ | 1,032,769 | $ | 1,137,296 | ||||
See Notes to Financial Statements
5
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF CASH FLOWS
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF CASH FLOWS
Nine Months Ended | ||||||||
September 30, | ||||||||
(dollars in thousands) | 2009 | 2008 | ||||||
(unaudited) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income (loss) |
$ | (189,875 | ) | $ | 46,405 | |||
Adjustment
to reconcile net income (loss) to net cash and cash equivalents provided by operating activities: |
||||||||
Changes in: |
||||||||
Deferred policy acquisition costs |
(9,133 | ) | (16,909 | ) | ||||
Deferred sales inducements |
(305 | ) | (6,809 | ) | ||||
Value of business acquired |
136,278 | 25,598 | ||||||
Other intangibles |
| 2,831 | ||||||
Benefit reserves |
(11,712 | ) | 24,802 | |||||
Federal income tax accruals |
74,972 | 17,960 | ||||||
Claims and claims settlement expenses |
(7,608 | ) | (924 | ) | ||||
Other policyholder funds |
2,976 | (972 | ) | |||||
Other operating assets and liabilities, net |
12,537 | (10,946 | ) | |||||
Accretion of investments |
(4,101 | ) | (1,751 | ) | ||||
Limited partnership asset distributions |
| (273 | ) | |||||
Interest credited to policyholder liabilities |
60,110 | 68,038 | ||||||
Net realized investment (gains) losses |
47,186 | (9,095 | ) | |||||
Net cash and cash equivalents provided by operating activities |
111,325 | 137,955 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Sales of available-for-sale securities and mortgage loans |
320,071 | 572,973 | ||||||
Maturities of available-for-sale securities and mortgage loans |
117,609 | 240,593 | ||||||
Purchases of available-for-sale securities and mortgage loans |
(239,646 | ) | (914,420 | ) | ||||
Sales of limited partnerships |
1,496 | 420 | ||||||
Increase in affiliated short term note receivable |
(60,000 | ) | (29,300 | ) | ||||
Change in payable for collateral under securities loaned |
(32,034 | ) | 222,726 | |||||
Policy loans on insurance contracts, net |
37,574 | 26,817 | ||||||
Net settlement on futures contracts |
(37,025 | ) | 14,271 | |||||
Other |
2,009 | 1,615 | ||||||
Net cash and cash equivalents provided by investing activities |
110,054 | 135,695 | ||||||
Policyholder deposits |
262,361 | 326,270 | ||||||
Policyholder withdrawals |
(441,546 | ) | (521,847 | ) | ||||
Net cash and cash equivalents used in financing activities |
(179,185 | ) | (195,577 | ) | ||||
Net increase in cash and cash equivalents (1) |
42,194 | 78,073 | ||||||
Cash and cash equivalents, beginning of year |
428,904 | 158,633 | ||||||
Cash and cash equivalents, end of period |
$ | 471,098 | $ | 236,706 | ||||
(1) | Included in net increase in cash and cash equivalents is interest received (2009 $34; 2008 $990); interest paid (2009 $23; 2008 $0); Federal income taxes paid (2009 $0; 2008 - $5,400); and Federal income taxes received (2009 $5,400; 2008 $6,115) |
See Notes to Financial Statements
6
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
NOTES TO FINANCIAL STATEMENTS (unaudited)
(Dollars in Thousands)
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
NOTES TO FINANCIAL STATEMENTS (unaudited)
(Dollars in Thousands)
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
Merrill Lynch Life Insurance Company (MLLIC or the Company) is a wholly owned subsidiary of
AEGON USA, LLC (AUSA). AUSA is an indirect wholly owned subsidiary of AEGON N.V., a limited
liability share company organized under Dutch law. Prior to September 30, 2009, the Company sold
non-participating annuity products, including variable annuities, modified guaranteed annuities and
immediate annuities. The Company is domiciled in the State of Arkansas.
For a complete discussion of the Companys 2008 Financial Statements and accounting policies, refer
to the Companys Annual Report on Form 10-K for the year ended December 31, 2008.
The interim Financial Statements for the three and nine month periods are unaudited; however in the
opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a
fair statement of the Financial Statements have been included. These unaudited Financial
Statements should be read in conjunction with the audited Financial Statements included in the 2008
Annual Report on Form 10-K. The nature of the Companys business is such that results of any
interim period are not necessarily indicative of results for a full year.
Basis of Reporting
The accompanying financial statements have been prepared in conformity with U.S. generally accepted
accounting principles (GAAP). The Company also submits financial statements to insurance
industry regulatory authorities, which are prepared on the basis of statutory accounting principles
(SAP). The significant accounting policies and related judgments underlying the Companys
financial statements are summarized below.
Certain reclassifications and format changes have been made to prior period financial statements,
where appropriate, to conform to the current period presentation. These reclassifications have no
effect on net income or stockholders equity of the prior years.
Accounting Estimates and Assumptions
The preparation of financial statements requires management to make estimates and assumptions
affecting the reported amounts of assets, liabilities, revenues and expenses and the disclosures
of contingent assets and liabilities. Those estimates are inherently subject to change and actual
results could differ from those estimates. Included among the material (or potentially material)
reported amounts and disclosures that require extensive use of estimates are: fair value of
certain invested assets, asset valuation allowances, deferred policy acquisition costs, deferred
sales inducements, value of business acquired, goodwill, other intangibles, policyholder
liabilities, income taxes, and potential effects of unresolved litigated matters.
Investments
Other-than-temporary impairments (OTTI)
If management determines that a decline in the value of an available-for-sale security is
other-than-temporary, an impairment loss is recognized. Management makes this determination
through a series of discussions with the Companys portfolio managers and credit analysts, and
information obtained from external sources (i.e. company announcements, ratings agency
announcements, or news wire services). For equity securities, the Company also considers the
ability and intent to hold the investments for a period of time sufficient for a forecasted market
price recovery up to or beyond the amortized cost of the investment. The factors that may give rise
to a potential OTTI include, but are not limited to, i) certain credit-related events such as
default of principal or interest payments by the issuer, ii) bankruptcy of issuer, iii) certain
security restructurings, and iv) fair market value less than cost or amortized cost for an extended
period of time. In the absence of a readily ascertainable market value, the estimated fair value
on these securities represents managements best estimate and is based on comparable securities and
other assumptions as appropriate. Management bases this determination on the most recent
information available.
During the second quarter 2009, the Company adopted new Financial Accounting Standards Board
(FASB) guidance for the recognition and presentation of OTTI. The recognition provisions apply
only to debt securities classified as available-for-sale and held-to-maturity, while the
presentation and disclosure requirements apply to both debt and equity securities.
For equity securities, once management determines a decline in the value of an available-for-sale
security is other-than-temporary, the cost basis of the equity security is reduced to its fair
value, with a corresponding charge to earnings.
7
For debt securities, an OTTI must be recognized in earnings when an entity either a) has the intent
to sell the debt security or b) more likely than not will be required to sell the debt security
before its anticipated recovery. If the Company meets either of these criteria, the OTTI is
recognized in earnings in an amount equal to the entire difference between the securitys amortized
cost basis and its fair value at the balance sheet date. For debt securities in unrealized loss
positions that do not meet these criteria, the Company must analyze its ability to recover the
amortized cost by comparing the net present value of projected future cash flows with the amortized
cost of the security. The net present value is calculated by discounting the Companys best
estimate of projected future cash flows. If the net present value is less than the amortized cost
of the investment, an OTTI is recorded. The OTTI is separated into two pieces: an amount
representing the credit loss, where the present value of cash flows expected to be collected is
less than the amortized cost basis of the security, and an amount related to all other factors
(referred to as the non credit portion). The credit loss is recognized in earnings and the non
credit loss is recognized in other comprehensive income (OCI), net of applicable taxes, value of
business acquired, deferred acquisition costs and deferred sales inducements. Management records
subsequent changes in the estimated fair value (positive and negative) of available-for-sale debt
securities for which non credit OTTI was previously recognized in OCI in OCI-OTTI.
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 (November 12, 2009), provided they give
evidence of conditions that existed at the balance sheet date.
Events that are indicative of conditions that arose after the balance sheet date are disclosed, but
do not result in an adjustment of the financial statements themselves.
Recent Accounting Guidance
Current Adoption of Recent Accounting Guidance
On July 1, 2009, the FASB Accounting Standards CodificationTM (Codification) was
launched as the single source of authoritative nongovernmental GAAP. Accounting guidance
promulgated by the FASB is communicated through an Accounting Standards Update (ASU). An ASU
provides the reason for the update and details the amendments to the Codification. Guidance in the
Codification is organized by Topic, each representing a collection of related guidance (e.g.,
Financial ServicesInsurance). Topics are further subdivided into Subtopics (e.g., Insurance
Activities), and Sections (e.g., Recognition, Measurement, or Disclosure).
Accounting Standards Codification (ASC) 105, Generally Accepted Accounting Principles
The Company adopted guidance that establishes the Codification as the source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental entities as of the period ended September
30, 2009. All guidance contained in the Codification carries an equal level of authority. The
adoption required updates to the Companys financial statement disclosures, but did not have a
material impact on the Companys results of operations or financial position. This guidance was
formerly known as Statement of Financial Accounting Standards (SFAS) No. 168, The FASB Accounting
Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles, a
replacement of FASB Statement No. 162.
ASC 320, Investments Debt and Equity Securities
The Company adopted guidance that makes OTTI guidance for debt securities more operational and
improves the presentation and disclosure of OTTI on debt and equity securities in the financial
statements as of the period ended June 30, 2009. The guidance requires an entity to evaluate
whether an impairment is other-than-temporary if the value of a debt security is less than its
amortized cost basis at the balance sheet date. An OTTI is considered to have occurred if an
entity: a) intends to sell the debt security, b) more likely than not will be required to sell the
security before recovery of its amortized cost basis, or c) does not expect to recover the entire
amortized cost basis of the security (that is, a credit loss exists), even if it does not intend to
sell the security. In determining whether a credit loss exists, an entity should use its best
estimate of the present value of cash flows expected to be collected from the debt security. The
guidance provides a list of factors to be considered when estimating whether a credit loss exists
and the period over which the debt security is expected to recover. If an entity intends to sell
the security or more likely than not will be required to sell the security before recovery of its
amortized cost basis less any current period credit loss, the OTTI should be recognized in earnings
equal to the entire difference between the amortized cost basis and its fair value at the balance
sheet date. If an entity does not intend to sell the security and it is not more likely than not
that the entity will be required to sell the security before recovery, the OTTI should be separated
into a) the amount representing the credit loss, which is recognized in earnings, and b) the amount
related to all other factors, which is recognized in OCI, net of applicable taxes. A
cumulative effect adjustment is required to the opening balance of retained earnings (net of
related tax effects) in the period of adoption with a corresponding adjustment to accumulated OCI
to reclassify the non credit component of previously recognized
8
OTTI on debt securities held at
that date, provided the entity does not intend to sell the security and it is not more likely than
not that the entity will be required to sell the security before recovery of its amortized cost.
Only the credit portion of OTTI will be accreted into income. The adoption resulted in a net
increase to retained earnings and decrease to accumulated other comprehensive income (loss) of
$3,457. See Note 3 to the Financial Statements for additional disclosures. This guidance was
formerly known as FASB Staff Position (FSP) No. FAS 115-2 and FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments.
ASC 820, Fair Value Measurements and Disclosures
| The Company adopted guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased as well as guidance on identifying circumstances that indicate a transaction is not orderly as of the period ended June 30, 2009. The guidance provides a list of factors that an entity should consider when determining whether there has been a significant decrease in the volume and level of activity for an asset or liability when compared to normal market activity for that asset or liability. The guidance also requires interim disclosures of the inputs and valuation techniques used to measure fair value and disclosure of any changes to those inputs and valuation techniques during the period. The adoption did not have a material impact on the Companys financial statements. This guidance was formerly known as FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. Upon adoption, this guidance superseded previous guidance formerly known as FSP No. FAS 157-3, Determining the Fair Value of a Financial Asset in a Market That Is Not Active. |
| The Company adopted guidance requiring disclosures about fair value of financial instruments in interim reporting periods as well as annual periods as of the period ended June 30, 2009. The guidance requires an entity to disclose the methods and significant assumptions used to estimate fair value of financial instruments and to describe changes, if any, to those methods and assumptions during the period. The adoption affected disclosures but did not impact the Companys results of operations or financial position. This guidance was formerly known as FSP No. FAS 107-1 and Accounting Principles Board Opinion No. 28-1, Interim Disclosures about Fair Value of Financial Instruments. |
| On January 1, 2008, the Company adopted guidance providing a fair value option election that allows companies to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities, with changes in fair value recognized in earnings as they occur. The guidance permits the fair value option election on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The adoption did not have a material impact on the Companys financial statements. See Note 3 to the Financial Statements for additional disclosures. This guidance was formerly known as SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. |
| On January 1, 2008, the Company adopted guidance that defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. The adoption did not have a material impact on the Companys financial statements. See Note 3 to the Financial Statements for additional disclosures. This guidance was formerly known as SFAS No. 157, Fair Value Measurements. |
ASC 855, Subsequent Events
The Company adopted guidance that establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements are issued or are
available to be issued as of the period ended June 30, 2009. The guidance requires the disclosure
of the date through which an entity has evaluated subsequent events and whether that date
represents the date the financial statements were issued or were available to be issued. The
adoption did not impact the Companys results of operations or financial position. This guidance
was formerly known as SFAS No. 165, Subsequent Events.
ASC 325-40, InvestmentsOther; Beneficial Interests in Securitized Financial Assets
The Company adopted guidance that amends impairment and related interest income measurement
guidance to achieve more consistent determination of whether an OTTI has occurred for debt
securities classified as available-for-sale or held-to-maturity as of the period ended December 31,
2008. The guidance permits the use of reasonable management judgment about the probability that the
company will be able to collect all amounts due while previous guidance required the use of market
participant assumptions which could not be overcome by management judgment. The guidance also
retains and emphasizes the objective of an OTTI assessment and the related disclosure requirements
included in guidance on debt and equity securities in ASC 320. The adoption had no material impact
on the Companys financial statements. This guidance was formerly known as FSP No. EITF 99-20-1,
Amendments to the Impairment and Interest Income Measurement Guidance of EITF Issue No. 99-20.
9
ASC 815, Derivatives and Hedging
| On January 1, 2009, the Company adopted guidance that amends and expands the disclosure requirements related to derivative instruments and hedging activities to provide users of financial statements with an enhanced understanding of (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for, and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows. The adoption did not impact the Companys results of operations or financial position. This guidance was formerly known as SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133. |
| The Company adopted guidance requiring disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments as of the period ended December 31, 2008. The amendments also require additional disclosure about the current status of the payment/performance risk of a guarantee. The adoption did not have a material impact on the Companys financial statements. This guidance was formerly known as FSP No. FAS 133-1 and FASB Interpretation No. 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161. |
ASC 805, Business Combinations
On January 1, 2009, the Company adopted guidance that establishes the principles and requirements
for how the acquirer in a business combination: (a) measures and recognizes the identifiable assets
acquired, liabilities assumed, and any noncontrolling interests in the acquired entity, (b)
measures and recognizes positive goodwill acquired or a gain from bargain purchase (negative
goodwill), and (c) determines the disclosure information that is decision-useful to users of
financial statements in evaluating the nature and financial effects of the business combination.
The adoption did not have a material impact on the results of operation or financial position. This
guidance was formerly known as SFAS No. 141 (revised 2007), Business Combinations.
ASC 350, IntangiblesGoodwill and Other
On January 1, 2009, the Company adopted guidance that amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset. The guidance requires entities estimating the useful life of a recognized
intangible asset to consider their historical experience in renewing or extending similar
arrangements or, in the absence of historical experience, to consider assumptions that market
participants would use about renewal or extension as adjusted for entity-specific factors. The
adoption did not impact the Companys results of operations or financial position. This guidance
was formerly known as FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets.
Future Adoption of Recent Accounting Guidance
ASC 820, Fair Value Measurements and Disclosures
In August 2009, the FASB issued ASU 2009-05, Measuring Liabilities at Fair Value, which clarifies
guidance that when a quoted price in an active market for an identical liability is not available,
an entity should measure fair value using one of the following approaches that maximizes the use of
relevant observable inputs and minimizes the use of unobservable inputs: a) a valuation technique
that uses the quoted price of the identical liability when traded as a asset; b) a valuation
technique that uses quoted prices for similar liabilities or similar liabilities when traded as
assets; or c) another valuation technique that is consistent with fair value measurement guidance
(e.g., income approach or a market approach). The ASU clarifies that an entity should not make a
separate adjustment for restrictions on the transfer of a liability in estimating the liabilitys
fair value. The ASU also specifies that when measuring the fair value of a liability using the
price of the liability when traded as an asset, the price should be adjusted for factors specific
to the asset that are not applicable to the fair value measurement of the liability. The guidance
is effective for the first reporting period (interim and annual) beginning after issuance. The
Company will adopt the guidance as of the period ending December 31, 2009 and does not expect the
adoption to have a material impact on the results of operation or financial position.
In September 2009, the FASB issued ASU 2009-12, Investments in Certain Entities That Calculate Net
Asset Value per Share (or Its Equivalent), which provides guidance on measuring the fair value of
certain alternative investments (i.e., investments in hedge funds, private equity funds, venture
capital funds, offshore fund vehicles, funds of funds, and real estate funds). The ASU applies to
investments in entities where the fair value of the instrument is not readily determinable and the
investment is in an entity that has all of the attributes of an investment company (as specified in
ASC 946-10-15-2). If an investment is in scope, the ASU permits, as a practical expedient, a
reporting entity to use the investments net asset value (NAV) to estimate its fair value,
provided that the NAV is calculated as of the reporting entitys measurement date. The ASU
prohibits the use of the NAV in estimating fair value when it is probable that an entity will sell
the investment (or a portion thereof) at a price other than NAV. The ASU also requires enhanced
disclosures by major category of investments about the nature and risks of investments within its
10
scope. The guidance is effective for the first reporting period (interim and annual) ending after
December 15, 2009. The Company will adopt the guidance as of the period ending December 31, 2009
and does not expect the adoption to have a material impact on the results of operation or financial
position.
Note 2. Fair Value of Financial Instruments
Fair Value Measurements
ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair
value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure
requirements for fair value measurements.
Fair Value Hierarchy
The Company has categorized its financial instruments into a three level hierarchy which is based
on the priority of the inputs to the valuation technique. The fair value hierarchy gives the
highest priority to quoted prices in active markets for identical assets or liabilities (Level 1)
and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value
fall within different levels of the hierarchy, the category level is based on the lowest priority
level input that is significant to the fair value measurement of the instrument.
Assets and liabilities recorded at fair value on the Balance Sheets are categorized as follows:
Level 1. Unadjusted quoted prices for identical assets or liabilities in an active market. |
Level 2. Quoted prices in markets that are not active or inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following: |
a) | Quoted prices for similar assets or liabilities in active markets | ||
b) | Quoted prices for identical or similar assets or liabilities in non-active markets | ||
c) | Inputs other than quoted market prices that are observable | ||
d) | Inputs that are derived principally from or corroborated by observable market data through correlation or other means |
Level 3. Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. They reflect managements own assumptions about the assumptions a market participant would use in pricing the asset or liability. |
The following table presents the Companys hierarchy for its assets and liabilities measured at
fair value on a recurring basis at
September 30, 2009:
September 30, 2009:
September 30, 2009 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets |
||||||||||||||||
Fixed maturity securities (a) |
$ | 235,174 | $ | 1,019,835 | $ | 52,536 | $ | 1,307,545 | ||||||||
Equity securities (a) |
| 11,484 | | 11,484 | ||||||||||||
Cash equivalents (b) |
| 471,505 | | 471,505 | ||||||||||||
Limited partnerships (c) |
| | 7,886 | 7,886 | ||||||||||||
Separate Accounts assets (d) |
8,246,831 | | | 8,246,831 | ||||||||||||
Total assets |
$ | 8,482,005 | $ | 1,502,824 | $ | 60,422 | $ | 10,045,251 | ||||||||
Liabilities |
||||||||||||||||
Future policy benefits (embedded derivatives only) (e) |
$ | | $ | | $ | 1,618 | $ | 1,618 | ||||||||
Total liabilities |
$ | | $ | | $ | 1,618 | $ | 1,618 | ||||||||
11
(a) | Securities are classified as Level 1 if the fair value is determined by observable inputs that reflect quoted prices for identical assets in active markets that the Company has the ability to access at the measurement date. Level 1 securities include highly liquid U.S. Treasury and U.S. Government Agency securities. Securities are classified as Level 2 if the fair value is determined by observable inputs, other than quoted prices included in Level 1, for the asset or prices for similar assets. Level 2 securities include fixed maturity securities and preferred stock for which the Company utilized pricing services and corroborated broker quotes. Securities are classified as Level 3 if the valuations are derived from techniques in which one or more of the significant inputs are unobservable. Level 3 consists principally of fixed maturity securities whose fair value is estimated based on non-binding broker quotes and internal models. | |
(b) | Cash equivalents are primarily valued at amortized cost, which approximates fair value. Operating cash is not included in the abovementioned table. | |
(c) | The Company has an investment in a limited partnership for which the fair value was derived from managements review of the underlying financial statements that were prepared on a GAAP basis. The remaining limited partnership is carried at cost and is not included in the abovementioned table. At December 31, 2008, a third partnership existed which was carried at cost ($0), but operations ceased on January 1, 2009. | |
(d) | Separate Accounts assets are carried at the net asset value provided by the fund managers. | |
(e) | The Company issued contracts containing guaranteed minimum withdrawal benefits riders (GMWB) and obtained reinsurance on guaranteed minimum income benefit riders (GMIB reinsurance). GMWB and GMIB reinsurance are treated as embedded derivatives and are required to be reported separately from the host variable annuity contract. The fair value of the GMWB and GMIB reinsurance obligations are calculated based on actuarial and capital market assumptions related to the projected cash flows, including benefits and related contract charges, over the anticipated life of the related contracts. The cash flow estimates are produced by using stochastic techniques under a variety of market return scenarios and other best estimate assumptions. |
The Companys Level 3 assets consist principally of a limited partnership and securities whose fair
value is estimated based on non-binding broker quotes. The following table provides a summary of
the change in fair value of the Companys Level 3 assets at September 30, 2009:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2009 | September 30, 2009 | |||||||||||||||
Limited | Fixed | Limited | Fixed | |||||||||||||
Partnerships | Maturity | Partnerships | Maturity | |||||||||||||
Balance at beginning of period (c) |
$ | 6,674 | $ | 120,263 | $ | 9,895 | $ | 112,200 | ||||||||
Total change in unrealized gains (losses) (a) |
| 8,754 | | 9,395 | ||||||||||||
Purchases (sales) net |
| 5,886 | | (13,891 | ) | |||||||||||
Transfers out of Level 3 net |
| (80,748 | ) | | (55,704 | ) | ||||||||||
Changes in valuation (b) |
1,212 | (1,619 | ) | (2,009 | ) | 536 | ||||||||||
Balance at end of period (c) |
$ | 7,886 | $ | 52,536 | $ | 7,886 | $ | 52,536 | ||||||||
(a) | Recorded as a component of other comprehensive income (loss). | |
(b) | Recorded as a component of net investment income in the Statements of Income. | |
(c) | Recorded as a component of limited partnerships and fixed maturity available-for-sale securities in the Balance Sheets. |
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. During
the three months and nine months ended September 30, 2009, the net transfers from Level 3
principally related to the increase in market activity leading to an increase in vendor priced
securities (Level 2).
12
The Companys Level 3 liabilities (assets) consist of provisions for GMWB and GMIB reinsurance.
The following table provides a summary of the changes in fair value of the Companys Level 3
liabilities (assets) at September 30, 2009:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2009 | September 30, 2009 | |||||||||||||||
GMIB | GMIB | |||||||||||||||
GMWB | Reinsurance | GMWB | Reinsurance | |||||||||||||
Balance at beginning of period (b) |
$ | 59,625 | $ | (68,757 | ) | $ | 114,457 | $ | (79,134 | ) | ||||||
Changes in valuation (a) |
6,619 | 4,131 | (48,213 | ) | 14,508 | |||||||||||
Balance at end of period (b) |
$ | 66,244 | $ | (64,626 | ) | $ | 66,244 | $ | (64,626 | ) | ||||||
(a) | Recorded as a component of policy benefits in the Statements of Income. | |
(b) | Recorded as a component of future policy benefits in the Balance Sheets. |
During the first nine months of 2009, the change in valuation is principally being driven by the
favorable equity markets.
Note 3. Investments
Fixed Maturity and Equity Securities
The Company adopted revised guidance for the recognition and presentation of OTTI as of the period
ended June 30, 2009. The prior requirement for management to assert that it has the intent and
ability to hold an impaired debt security until recovery was replaced with the requirement that
management assert if it either has the intent to sell the debt security or if it is more likely
than not the entity will be required to sell the debt security before recovery of its amortized
cost basis.
As permitted by the guidance, the Company recorded an increase of $3,457 to the opening balance of
retained earnings with a corresponding decrease to accumulated OCI on the Statement of
Stockholders Equity to reclassify the non credit portion of previously other-than-temporarily
impaired available-for-sale securities held as of April 1, 2009. The following summarizes the
components for this cumulative effect adjustment:
Net | ||||||||||||
Unrealized | Unrealized | Total | ||||||||||
OTTI | Loss on | Cumulative | ||||||||||
on Available- | Available- | Effect | ||||||||||
For-Sale | For-Sale | Adjustment | ||||||||||
Securities | Securities | in OCI | ||||||||||
Increase in amortized cost of available-for-sale securities |
$ | 241 | $ | 12,335 | $ | 12,576 | ||||||
Change in deferred acquisition costs, deferred sales
inducements, and value of business acquired |
| (7,257 | ) | (7,257 | ) | |||||||
Income tax |
(84 | ) | (1,778 | ) | (1,862 | ) | ||||||
Net cumulative effect adjustment |
$ | 157 | $ | 3,300 | $ | 3,457 | ||||||
The cumulative effect adjustment was calculated for all available-for-sale securities held as
of April 1, 2009, for which an OTTI was previously recognized, but as of April 1, 2009, the Company
did not intend to sell the security and it was not more likely than not that the Company would be
required to sell the security before recovery of its amortized cost, by comparing the present value
of cash flows expected to be received as of April 1, 2009, to the amortized cost basis of the
available-for-sale securities. The discount rate used to calculate the present value of the cash
flows expected to be collected was the rate for each respective available-for-sale security in
effect before recognizing any OTTI. In addition, because the carrying amounts of deferred
acquisition costs (DAC), deferred sales inducements (DSI) and value of business acquired
(VOBA) are adjusted for the effects of realized and unrealized gains and losses on
available-for-sale securities, the Company recognized a true-up to the DAC, DSI and VOBA balances
for this cumulative effect adjustment.
13
The following table summarizes the increase to the amortized cost of the available-for-sale
securities as of April 1, 2009, resulting from the recognition of the cumulative effect adjustment:
Fixed maturity securities |
||||
Corporate securities |
$ | 8,583 | ||
Government and government agencies United States |
2,367 | |||
Total fixed maturity securities |
10,950 | |||
Equity securities preferred stocks banking securities |
1,626 | |||
Total |
$ | 12,576 | ||
The amortized cost and estimated fair value of investments in fixed maturity and equity
securities at September 30, 2009 and
December 31, 2008 were:
December 31, 2008 were:
September 30, 2009 | ||||||||||||||||||||
Estimated | ||||||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||||||
Cost | Gains | Losses | OTTI (1) | Value | ||||||||||||||||
Fixed maturity securities |
||||||||||||||||||||
Corporate securities |
$ | 646,219 | $ | 23,020 | $ | (12,191 | ) | $ | | $ | 657,048 | |||||||||
Asset-backed securities |
124,719 | 4,275 | (12,205 | ) | (3,432 | ) | 113,357 | |||||||||||||
Commercial mortgage-backed securities |
169,409 | 2,013 | (16,648 | ) | | 154,774 | ||||||||||||||
Residential mortgage-backed securities |
128,080 | 3,818 | (8,166 | ) | | 123,732 | ||||||||||||||
Municipals |
1,553 | 8 | (23 | ) | | 1,538 | ||||||||||||||
Government and government agencies |
||||||||||||||||||||
United States |
234,812 | 4,815 | (4,453 | ) | | 235,174 | ||||||||||||||
Foreign |
21,535 | 408 | (21 | ) | | 21,922 | ||||||||||||||
Total fixed maturity securities |
$ | 1,326,327 | $ | 38,357 | $ | (53,707 | ) | $ | (3,432 | ) | $ | 1,307,545 | ||||||||
Equity securities preferred stocks |
||||||||||||||||||||
Banking securities |
$ | 9,246 | $ | | $ | (3,162 | ) | $ | | $ | 6,084 | |||||||||
Other financial services securities |
243 | 155 | | | 398 | |||||||||||||||
Other securities |
5,791 | | (789 | ) | | 5,002 | ||||||||||||||
Total equity securities |
$ | 15,280 | $ | 155 | $ | (3,951 | ) | $ | | $ | 11,484 | |||||||||
(1) | Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI. |
December 31, 2008 | ||||||||||||||||||||
Estimated | ||||||||||||||||||||
Amortized | Gross Unrealized | Fair | ||||||||||||||||||
Cost | Gains | Losses | OTTI | Value | ||||||||||||||||
Fixed maturity securities |
||||||||||||||||||||
Corporate securities |
$ | 805,324 | $ | 4,559 | $ | (76,742 | ) | $ | | $ | 733,141 | |||||||||
Asset-backed securities |
157,735 | 1,421 | (32,838 | ) | | 126,318 | ||||||||||||||
Commercial mortgage-backed securities |
158,907 | | (39,530 | ) | | 119,377 | ||||||||||||||
Residential mortgage-backed securities |
140,621 | 1,875 | (14,238 | ) | | 128,258 | ||||||||||||||
Municipals |
1,635 | 4 | (94 | ) | | 1,545 | ||||||||||||||
Government and government agencies |
||||||||||||||||||||
United States |
229,878 | 17,387 | (11 | ) | | 247,254 | ||||||||||||||
Foreign |
16,268 | 213 | (358 | ) | | 16,123 | ||||||||||||||
Total fixed maturity securities |
$ | 1,510,368 | $ | 25,459 | $ | (163,811 | ) | $ | | $ | 1,372,016 | |||||||||
Equity securities preferred stocks |
||||||||||||||||||||
Banking securities |
$ | 8,551 | $ | | $ | (2,600 | ) | $ | | $ | 5,951 | |||||||||
Other financial services securities |
1,568 | | (434 | ) | | 1,134 | ||||||||||||||
Other securities |
11,580 | | (5,159 | ) | | 6,421 | ||||||||||||||
Total equity securities |
$ | 21,699 | $ | | $ | (8,193 | ) | $ | | $ | 13,506 | |||||||||
14
Excluding investments in U.S. Government and agencies, the Company is not exposed to any
significant concentration of credit risk in its fixed maturity securities portfolio.
The amortized cost and estimated fair value of fixed maturity securities by investment grade at
September 30, 2009 and December 31, 2008 were:
September 30, 2009 | December 31, 2008 | |||||||||||||||
Estimated | Estimated | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
Investment grade |
$ | 1,250,264 | $ | 1,243,900 | $ | 1,432,232 | $ | 1,316,909 | ||||||||
Below investment grade |
76,063 | 63,645 | 78,136 | 55,107 | ||||||||||||
Total fixed maturity securities |
$ | 1,326,327 | $ | 1,307,545 | $ | 1,510,368 | $ | 1,372,016 | ||||||||
At September 30, 2009 and December 31, 2008 the estimated fair value of fixed maturity
securities rated BBB- were $44,490 and $39,860, respectively, which is the lowest investment grade
rating given by Standard & Poors (S&P).
The amortized cost and estimated fair value of fixed maturity securities at September 30, 2009 and
December 31, 2008 by expected maturity were:
September 30, 2009 | December 31, 2008 | |||||||||||||||
Estimated | Estimated | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
Fixed maturity securities |
||||||||||||||||
Due in one year or less |
$ | 90,743 | $ | 91,022 | $ | 129,284 | $ | 128,424 | ||||||||
Due after one year through five years |
327,074 | 332,921 | 450,331 | 432,032 | ||||||||||||
Due after five years through ten years |
332,874 | 336,838 | 285,150 | 265,360 | ||||||||||||
Due after ten years |
153,428 | 154,901 | 188,340 | 172,247 | ||||||||||||
904,119 | 915,682 | 1,053,105 | 998,063 | |||||||||||||
Mortgage-backed securities and other asset-backed securities |
422,208 | 391,863 | 457,263 | 373,953 | ||||||||||||
Total fixed maturity securities |
$ | 1,326,327 | $ | 1,307,545 | $ | 1,510,368 | $ | 1,372,016 | ||||||||
In the preceding table fixed maturity securities not due at a single maturity date have been
included in the year of final maturity. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or without call or
prepayment penalties.
Unrealized Gains (Losses) on Fixed Maturity and Equity Securities
The Companys investments in fixed maturity and equity securities are classified as
available-for-sale and are carried at estimated fair value. Unrealized gains and losses on
available-for-sale securities are included in stockholders equity as a component of accumulated
other comprehensive income (loss), net of taxes.
The estimated fair value and gross unrealized losses and unrealized OTTI of fixed maturity and
equity securities aggregated by length of time that individual securities have been in a continuous
unrealized loss position, at September 30, 2009 and December 31, 2008 were as follows:
September 30, 2009 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
Value | Cost | OTTI (1) | ||||||||||
Less than or equal to 90 days |
||||||||||||
Fixed maturities |
||||||||||||
Corporate securities |
$ | 34,622 | $ | 35,171 | $ | (549 | ) | |||||
Government and government agencies foreign |
3,602 | 3,623 | (21 | ) | ||||||||
Total fixed maturity and equity securities |
$ | 38,224 | $ | 38,794 | $ | (570 | ) | |||||
15
September 30, 2009 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
(continued) | Value | Cost | OTTI (1) | |||||||||
Greater than 90 days but less than or equal to 180 days |
||||||||||||
Fixed maturities |
||||||||||||
Corporate securities |
$ | 860 | $ | 870 | $ | (10 | ) | |||||
Government and government agencies United States |
1,591 | 1,609 | (18 | ) | ||||||||
Total fixed maturity and equity securities |
2,451 | 2,479 | (28 | ) | ||||||||
Greater than 180 days but less than or equal to 270 days |
||||||||||||
Fixed maturities |
||||||||||||
Corporate securities |
8,145 | 9,327 | (1,182 | ) | ||||||||
Asset-backed securities |
13,396 | 15,069 | (1,673 | ) | ||||||||
Commercial mortgage-backed securities |
6,048 | 6,377 | (329 | ) | ||||||||
Residential mortgage-backed securities |
32 | 32 | | |||||||||
Government and government agencies United States |
84,902 | 89,337 | (4,435 | ) | ||||||||
Total fixed maturity and equity securities |
112,523 | 120,142 | (7,619 | ) | ||||||||
Greater than 270 days but less than or equal to one year |
||||||||||||
Fixed maturities |
||||||||||||
Corporate securities |
12,120 | 13,342 | (1,222 | ) | ||||||||
Asset-backed securities |
5,502 | 8,933 | (3,431 | ) | ||||||||
Commercial mortgage-backed securities |
20,243 | 26,475 | (6,232 | ) | ||||||||
Residential mortgage-backed securities |
12 | 13 | (1 | ) | ||||||||
Equity securities banking securities |
1,199 | 1,796 | (597 | ) | ||||||||
Total fixed maturity and equity securities |
39,076 | 50,559 | (11,483 | ) | ||||||||
Greater than one year |
||||||||||||
Fixed maturities |
||||||||||||
Corporate securities |
100,581 | 109,809 | (9,228 | ) | ||||||||
Asset-backed securities |
21,806 | 32,339 | (10,533 | ) | ||||||||
Commercial mortgage-backed securities |
53,379 | 63,466 | (10,087 | ) | ||||||||
Residential mortgage-backed securities |
20,740 | 28,905 | (8,165 | ) | ||||||||
Municipals |
907 | 930 | (23 | ) | ||||||||
Equity securities |
||||||||||||
Banking securities |
4,885 | 7,450 | (2,565 | ) | ||||||||
Other securities |
5,002 | 5,791 | (789 | ) | ||||||||
Total fixed maturity and equity securities |
207,300 | 248,690 | (41,390 | ) | ||||||||
Total fixed maturity and equity securities |
$ | 399,574 | $ | 460,664 | $ | (61,090 | ) | |||||
(1) | Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI. |
December 31, 2008 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
Value | Cost | OTTI | ||||||||||
Less than or equal to 90 days |
||||||||||||
Fixed maturities |
||||||||||||
Corporate securities |
$ | 142,809 | $ | 154,722 | $ | (11,913 | ) | |||||
Asset-backed securities |
20,892 | 26,770 | (5,878 | ) | ||||||||
Commercial mortgage-backed securities |
58,320 | 73,645 | (15,325 | ) | ||||||||
Residential mortgage-backed securities |
7,494 | 8,110 | (616 | ) | ||||||||
Government and government agencies United States |
55,105 | 55,116 | (11 | ) | ||||||||
Equity securities banking securities |
2,702 | 3,716 | (1,014 | ) | ||||||||
Total fixed maturity and equity securities |
$ | 287,322 | $ | 322,079 | $ | (34,757 | ) | |||||
16
December 31, 2008 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
(continued) | Value | Cost | OTTI | |||||||||
Greater than 90 days but less than or equal to 180 days |
||||||||||||
Fixed maturities |
||||||||||||
Corporate securities |
$ | 90,382 | $ | 107,681 | $ | (17,299 | ) | |||||
Asset-backed securities |
55,495 | 73,875 | (18,380 | ) | ||||||||
Commercial mortgage-backed securities |
40,729 | 49,392 | (8,663 | ) | ||||||||
Residential mortgage-backed securities |
3 | 4 | (1 | ) | ||||||||
Government and government agencies foreign |
4,182 | 4,540 | (358 | ) | ||||||||
Equity securities banking securities |
3,248 | 4,834 | (1,586 | ) | ||||||||
Total fixed maturity and equity securities |
194,039 | 240,326 | (46,287 | ) | ||||||||
Greater than 180 days but less than or equal to 270 days |
||||||||||||
Fixed maturities |
||||||||||||
Corporate securities |
241,028 | 268,972 | (27,944 | ) | ||||||||
Asset-backed securities |
18,329 | 24,052 | (5,723 | ) | ||||||||
Residential mortgage-backed securities |
19,312 | 32,932 | (13,620 | ) | ||||||||
Total fixed maturity and equity securities |
278,669 | 325,956 | (47,287 | ) | ||||||||
Greater than 270 days but less than or equal to one year |
||||||||||||
Fixed maturities |
||||||||||||
Corporate securities |
56,022 | 75,608 | (19,586 | ) | ||||||||
Asset-backed securities |
6,941 | 9,798 | (2,857 | ) | ||||||||
Commercial mortgage-backed securities |
20,329 | 35,871 | (15,542 | ) | ||||||||
Residential mortgage-backed securities |
11 | 12 | (1 | ) | ||||||||
Municipals |
838 | 932 | (94 | ) | ||||||||
Equity securities |
||||||||||||
Other financial services securities |
1,134 | 1,568 | (434 | ) | ||||||||
Other securities |
6,422 | 11,581 | (5,159 | ) | ||||||||
Total fixed maturity and equity securities |
91,697 | 135,370 | (43,673 | ) | ||||||||
Total fixed maturity and equity securities |
$ | 851,727 | $ | 1,023,731 | $ | (172,004 | ) | |||||
The total number of securities in an unrealized loss position was 107 and 330 at September 30,
2009 and December 31, 2008, respectively.
The estimated fair value, gross unrealized losses, OTTI and number of securities where the fair
value had declined below amortized cost by greater than 20% and greater than 40% at September 30,
2009 and December 31, 2008 were as follows:
September 30, 2009 | ||||||||||||||||
Estimated | Gross | |||||||||||||||
Fair | Unrealized | Number of | ||||||||||||||
Value | Losses | OTTI | Securities | |||||||||||||
Decline > 20% |
||||||||||||||||
Greater than 180 days but less than or equal to 270 days |
$ | 4,547 | $ | (1,525 | ) | $ | | 2 | ||||||||
Greater than 270 days but less than or equal to one year |
18,150 | (7,214 | ) | (3,432 | ) | 6 | ||||||||||
Greater than one year |
60,440 | (30,524 | ) | | 13 | |||||||||||
Total |
$ | 83,137 | $ | (39,263 | ) | $ | (3,432 | ) | 21 | |||||||
Decline > 40% |
||||||||||||||||
Greater than 270 days but less than or equal to one year |
$ | 4,400 | $ | (3,832 | ) | $ | | 1 | ||||||||
Greater than one year |
19,717 | (16,506 | ) | | 7 | |||||||||||
Total |
$ | 24,117 | $ | (20,338 | ) | $ | | 8 | ||||||||
17
December 31, 2008 | ||||||||||||||||
Estimated | Gross | |||||||||||||||
Fair | Unrealized | Number of | ||||||||||||||
Value | Losses | OTTI | Securities | |||||||||||||
Decline > 20% |
||||||||||||||||
Less than or equal to 90 days |
$ | 51,245 | $ | (25,145 | ) | $ | | 20 | ||||||||
Greater than 90 days but less than or equal to 180 days |
39,965 | (30,238 | ) | | 23 | |||||||||||
Greater than 180 days but less than or equal to 270 days |
43,697 | (28,498 | ) | | 16 | |||||||||||
Greater than 270 days but less than or equal to one year |
45,479 | (34,743 | ) | | 19 | |||||||||||
Total |
$ | 180,386 | $ | (118,624 | ) | $ | | 78 | ||||||||
Decline > 40% |
||||||||||||||||
Less than or equal to 90 days |
$ | 12,845 | $ | (13,065 | ) | $ | | 6 | ||||||||
Greater than 90 days but less than or equal to 180 days |
17,079 | (22,307 | ) | | 13 | |||||||||||
Greater than 180 days but less than or equal to 270 days |
13,497 | (14,849 | ) | | 6 | |||||||||||
Greater than 270 days but less than or equal to one year |
22,185 | (23,925 | ) | | 10 | |||||||||||
Total |
$ | 65,606 | $ | (74,146 | ) | $ | | 35 | ||||||||
Unrealized losses incurred during 2009 and 2008 were primarily due to price fluctuations
resulting from changes in interest rates and credit spreads. The Company has the ability and
intent to hold the investments for a period of time sufficient for a forecasted market price
recovery up to or beyond the amortized cost of the investment.
The components of net unrealized loss and OTTI included in accumulated other comprehensive loss,
net of taxes were as follows:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Assets |
||||||||
Fixed maturity securities |
$ | (18,782 | ) | $ | (138,352 | ) | ||
Equity securities |
(3,796 | ) | (8,193 | ) | ||||
Deferred policy acquisitions costs |
1 | 1,481 | ||||||
Value of business acquired |
353 | 45,438 | ||||||
(22,224 | ) | (99,626 | ) | |||||
Liabilities |
||||||||
Policyholder account balances |
4,363 | (647 | ) | |||||
Federal income taxes deferred |
6,251 | 35,095 | ||||||
10,614 | 34,448 | |||||||
Stockholders equity |
||||||||
Accumulated other comprehensive loss, net of taxes |
$ | (11,610 | ) | $ | (65,178 | ) | ||
The Company records certain adjustments to policyholder account balances in conjunction with
the unrealized holding gains or losses on investments classified as available-for-sale. The Company
adjusts a portion of these liabilities as if the unrealized holding gains or losses had actually
been realized, with corresponding credits or charges reported in accumulated other comprehensive
loss, net of taxes.
Mortgage Loans on Real Estate
Mortgage loans on real estate consist entirely of mortgages on commercial real estate. Prepayment
premiums are collected when borrowers elect to prepay their debt prior to the stated maturity.
There were no prepayment premiums for the three and nine month periods ended September 30, 2009 and
September 30, 2008.
The fair value for mortgage loans on real estate is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with similar credit
ratings and/or similar remaining maturities. The estimated fair value of the mortgages on
commercial real estate at September 30, 2009 and December 31, 2008 was $67,872 and $70,771,
respectively.
Loans are considered impaired when it is probable that based upon current information and events,
the Company will be unable to collect all amounts due under the contractual terms of the loan
agreement. A valuation allowance is established when a loan is impaired for the excess carrying
value of the loan over its estimated value. The valuation allowance at September 30, 2009 and
December 31, 2008 was $34 and $49, respectively.
18
The commercial mortgages are geographically diversified throughout the United States with the
largest concentrations in California, New Hampshire, Pennsylvania, Virginia, Ohio, and Washington
which account for approximately 80% of mortgage loans as of September 30, 2009.
Policy Loans
Policy loans on insurance contracts are stated at unpaid principal balances. The Company estimates
the fair value of policy loans as equal to the book value of the loans. The estimated fair value
of the policy loans at September 30, 2009 and December 31, 2008 was $876,308 and $913,882. Policy
loans are fully collateralized by the account value of the associated insurance contracts, and the
spread between the policy loan interest rate and the interest rate credited to the account value
held as collateral is fixed.
Securities Lending
The Company loans securities under securities lending agreements. The amortized cost of securities
out on loan at September 30, 2009 and December 31, 2008 was $149,590 and $166,427, respectively.
The estimated fair value of securities out on loan at September 30, 2009 and December 31, 2008 was
$147,118 and $173,991, respectively.
Derivatives
The Company uses derivatives to manage the capital market risk associated with the GMWB. The
derivatives, which are S&P 500 Composite Stock Price Index futures contracts, are used to hedge the
equity risk associated with these types of variable guaranteed products, in particular the claim
and/or revenue risks of the liability portfolio. The Company will not seek hedge accounting on
these hedges because, in most cases, the derivatives change in value will create a natural offset
in the Statements of Income with the change in reserves. Net settlements on the futures occur
daily. As of September 30, 2009, the Company had 620 outstanding short futures contracts with a
notional value of $163,200. As of December 31, 2008, the Company had 990 outstanding short futures
contracts with a notional value of $222,775.
Realized Investment Gains (Losses)
The Company considers fair value at the date of sale to be equal to proceeds received. Proceeds
and gross realized investment gains (losses) from the sale of available-for-sale securities for the
three and nine month periods ended September 30 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Proceeds |
$ | 61,670 | $ | 152,532 | $ | 317,061 | $ | 572,973 | ||||||||
Gross realized investment gains |
1,796 | 1,054 | 4,457 | 4,070 | ||||||||||||
Gross realized investment losses |
(1,741 | ) | (1,967 | ) | (5,498 | ) | (5,578 | ) | ||||||||
Proceeds on available-for-sale securities
sold at a realized loss |
40,445 | 75,452 | 106,754 | 259,485 |
Net realized investment gains (losses) for the three and nine month periods ended September 30
were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Fixed maturity securities |
$ | (1,775 | ) | $ | (5,622 | ) | $ | (10,462 | ) | $ | (7,488 | ) | ||||
Equity securities |
(2,681 | ) | (516 | ) | (3,611 | ) | (234 | ) | ||||||||
Limited partnerships |
739 | | 1,210 | | ||||||||||||
Mortgages |
(530 | ) | (59 | ) | (524 | ) | (59 | ) | ||||||||
Derivatives |
(25,397 | ) | 7,219 | (37,026 | ) | 14,270 | ||||||||||
Adjustment related to VOBA |
43 | 2,606 | 3,227 | 2,606 | ||||||||||||
Net realized investment gains (losses) |
$ | (29,601 | ) | $ | 3,628 | $ | (47,186 | ) | $ | 9,095 | ||||||
19
OTTI
If management determines that a decline in the value of an available-for-sale equity security is
other-than-temporary, the cost basis is adjusted to estimated fair value and the decline in value
is recorded as a net realized investment loss. For debt securities, the manner in which an OTTI is
recorded depends on whether management intends to sell a security or it is more likely than not
that it will be required to sell a security in an unrealized loss position before its anticipated
recovery. If management intends to sell or more likely than not will be required to sell the debt
security before recovery, the OTTI is recognized in earnings for the difference between amortized
cost and fair value. If these criteria are not met, the OTTI is bifurcated into two pieces: a
credit loss is recognized in earnings at an amount equal to the difference between the amortized
cost of the debt security and its net present value, and a non credit loss is recognized in OCI for
any difference between the fair value and the net present value of the debt security at the
impairment measurement date.
The following tables sets forth the amount of credit loss impairments on fixed maturity securities
held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized
in OCI, and the corresponding changes in such amounts:
Balance, December 31, 2008 |
$ | | ||
Credit losses remaining in retained earnings related to adoption of revised
guidance on OTTI (ASC 320) |
239 | |||
Credit loss impairments previously recognized on securities which matured,
paid down, prepaid or were sold during the period |
(1,291 | ) | ||
Credit loss impairment recognized in the current period on securities not
previously impaired |
1,424 | |||
Accretion of credit loss impairments previously recognized |
(6 | ) | ||
Accretion of credit loss impairments previously recognized due to an increase
in cash flows expected to be collected |
(4 | ) | ||
Accretion previously recognized on securities which matured, paid down,
prepaid or were sold during the period |
10 | |||
Balance, September 30, 2009 |
$ | 372 | ||
The components of OTTI reflected in the Statements of Income for the three and nine month
periods ended September 30, 2009 were as follows:
Three Months Ended September 30, 2009 | ||||||||||||
Total | Portion of | Net OTTI | ||||||||||
OTTI | OTTI Losses | Losses | ||||||||||
Losses on | Recognized | Recognized | ||||||||||
Securities | in OCI | in Income | ||||||||||
Gross OTTI losses |
$ | 7,934 | $ | 3,432 | $ | 4,502 | ||||||
DAC, DSI and VOBA |
(533 | ) | | (533 | ) | |||||||
Net OTTI Losses |
$ | 7,401 | $ | 3,432 | $ | 3,969 | ||||||
Nine Months Ended September 30, 2009 | ||||||||||||
Total | Portion of | Net OTTI | ||||||||||
OTTI | OTTI Losses | Losses | ||||||||||
Losses on | Recognized | Recognized | ||||||||||
Securities | in OCI | in Income | ||||||||||
Gross OTTI losses |
$ | 16,466 | $ | 3,446 | $ | 13,020 | ||||||
DAC, DSI and VOBA |
(3,821 | ) | | (3,821 | ) | |||||||
Net OTTI Losses |
$ | 12,645 | $ | 3,446 | $ | 9,199 | ||||||
For the three and nine months ended September 30, 2009, the Company recorded gross OTTI of
$4,502 and $13,020, respectively. The Company adopted revised guidance on the recognition and
presentation of OTTI as of June 30, 2009. The gross cumulative effect of this adoption was a
$12,576 adjustment to retained earnings and amortized cost for fixed maturity securities and cost
basis for equity securities for the non credit related portion of previously recorded impairments
on securities still in inventory at April 1, 2009. Of this, $3,495 related to non credit
impairments previously recorded in income during the first quarter of 2009. For the three and nine
month periods ended September 30, 2008, the Company recorded $2,312 and $3,314, respectively of
realized investment loss on securities deemed to have incurred other-than-temporary declines in
fair value, net of VOBA amortization.
20
Note 4. VOBA and Other Intangibles
VOBA reflects the estimated fair value of in force contracts acquired and represents the portion of
the purchase price that is allocated to the value of the right to receive future cash flows from
the life insurance and annuity contracts in force at the acquisition date. VOBA is based on
actuarially determined projections, for each block of business, of future policy and contract
charges, premiums, mortality, Separate Account performance, surrenders, operating expenses,
investment returns and other factors. Actual experience on the purchased business may vary from
these projections. If estimated gross profits or premiums differ from expectations, the
amortization of VOBA is adjusted to reflect actual experience. In addition, the Company utilizes
the reversion to the mean assumption, a common industry practice, in its determination of the
amortization of VOBA. At September 30, 2009 the reversion to the mean assumption was 8% gross
short-term equity growth rate for five years and thereafter a 9% gross long-term growth rate, while
at December 31, 2008, the reversion to the mean assumption was 15% gross short-term equity growth
rate for five years and thereafter a 9% gross long-term growth rate.
The change in the carrying amount of VOBA for the three and nine month periods ended September 30
was as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
VOBA | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Purchase price adjustment |
$ | | $ | | $ | | $ | 4,844 | ||||||||
Accretion (amortization) expense |
(3,776 | ) | 4,635 | 5,698 | (30,715 | ) | ||||||||||
Unlocking |
8,251 | 521 | (78,082 | ) | 2,511 | |||||||||||
Impairment charge |
| | (63,894 | ) | | |||||||||||
Adjustment related to realized losses on investments |
43 | 2,606 | 3,227 | 2,606 | ||||||||||||
Adjustment related to unrealized (gains) losses and OTTI
on investments |
(24,664 | ) | 27,372 | (52,342 | ) | 40,754 | ||||||||||
Change in VOBA carrying amount |
$ | (20,146 | ) | $ | 35,134 | $ | (185,393 | ) | $ | 20,000 | ||||||
During the three months ended September 30, 2009, improved equity markets resulted in
guaranteed benefit reserve releases resulting in favorable unlocking. During the nine months ended
September 30, 2009, the Company experienced unfavorable unlocking in the first quarter from the
increased future benefit costs, which reduced the value of the future gross profits. In addition,
an impairment charge was taken in the first quarter as estimated future gross profits were less
than the unamortized balance.
During the three months ended September 30, 2008, the Company experienced lower than expected gross
profits as a result of market losses which reduced amortization expense and unlocking.
At December 31, 2008, an impairment charge was taken for the entire unamortized other intangibles
balance which included the distribution agreement, the trade name and the non-compete agreement
acquired at the acquisition date. Amortization expense for the three months and nine months ended
September 30, 2008 was $445 and $2,831, respectively.
Note 5. DAC and DSI
The Company utilizes the reversion to the mean assumption, a common industry practice, in its
determination of the amortization of DAC. At September 30, 2009 the reversion to the mean
assumption was 8% gross short-term equity growth rate for five years and thereafter a 9% gross
long-term growth rate, while at December 31, 2008, the reversion to the mean assumption was 15%
gross short-term equity growth rate for five years and thereafter a 9% gross long-term growth rate.
21
The change in the carrying amount of DAC and DSI for the three and nine month periods ended
September 30 was as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
DAC | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Capitalization |
$ | 4,815 | $ | 5,423 | $ | 13,754 | $ | 19,041 | ||||||||
Accretion (amortization) expense |
6,203 | 3,899 | (4,361 | ) | 6,736 | |||||||||||
Unlocking |
112 | (3,635 | ) | (261 | ) | (6,261 | ) | |||||||||
Adjustment
related to unrealized (gains) losses and OTTI
on investments |
| 659 | (1,480 | ) | 847 | |||||||||||
Change in DAC carrying amount |
$ | 11,130 | $ | 6,346 | $ | 7,652 | $ | 20,363 | ||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
DSI | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Capitalization |
$ | 485 | $ | 957 | $ | 1,356 | $ | 6,621 | ||||||||
Accretion (amortization) expense |
1,583 | 1,611 | (1,642 | ) | 1,997 | |||||||||||
Unlocking |
145 | (1,512 | ) | 591 | (1,809 | ) | ||||||||||
Change in DSI carrying amount |
$ | 2,213 | $ | 1,056 | $ | 305 | $ | 6,809 | ||||||||
During the three months ended September 30, 2009, improved equity markets resulted in
guaranteed benefit reserve releases resulting in accretion expense. During the nine months ended
September 30, 2009, the Company experienced lower than expected gross profits impacting
amortization. During the first nine months of 2008, the Company experienced lower than expected
gross profits as a result of market losses which reduced amortization expense and unlocking.
Note 6. Variable Contracts Containing Guaranteed Benefits
The Company records liabilities for contracts containing guaranteed minimum death benefits (GMDB)
and guaranteed minimum income benefits (GMIB) as a component of future policy benefits in the
Balance Sheets and changes in the liabilities are included as a component of policy benefits in the
Statements of Income.
The components of the changes in the variable annuity GMDB and GMIB liability for the three and
nine month periods ended September 30, 2009 and 2008 were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
GMDB | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Purchase price adjustment |
$ | | $ | | $ | | $ | (7,887 | ) | |||||||
Guaranteed benefits incurred |
11,904 | 5,288 | 31,942 | 16,866 | ||||||||||||
Guaranteed benefits paid |
(10,212 | ) | (7,696 | ) | (42,278 | ) | (17,577 | ) | ||||||||
Unlocking |
(19,989 | ) | 8,136 | 18,551 | 9,794 | |||||||||||
Total |
$ | (18,297 | ) | $ | 5,728 | $ | 8,215 | $ | 1,196 | |||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
GMIB | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Guaranteed benefits incurred |
$ | 5,268 | $ | 1,062 | $ | 12,993 | $ | 6,106 | ||||||||
Unlocking |
(4,997 | ) | (940 | ) | 1,662 | (3,923 | ) | |||||||||
Total |
$ | 271 | $ | 122 | $ | 14,655 | $ | 2,183 | ||||||||
22
During the three months ended September 30, 2009, market increases caused favorable unlocking
as a result of declining estimates of future benefit amounts as compared to June 30, 2009. During
the nine months ended September 30, 2009, market declines in the first quarter caused unfavorable
unlocking as a result of increasing estimates of future benefit amounts as compared to December 31,
2008.
The unlocking for GMDB during the first nine months of 2008 reflects the increase in expected
future claims due to the market losses. Guaranteed benefits paid during the first nine months of
2008 reflect increased exposure amounts as a result of decreased account values.
The unlocking for GMIB during the first nine months of 2008 reflects the decrease in gross revenues
and the resulting increase in expected future claims due to market losses.
The variable annuity GMDB liability at September 30, 2009 and December 31, 2008 was $154,104 and
$145,889, respectively. The variable annuity GMIB liability at September 30, 2009 and December 31,
2008 was $33,190 and $18,535, respectively.
The Company has issued variable life contracts in which the Company contractually guarantees to the
contract owner a GMDB. The Company records liabilities for variable life contracts containing GMDB
provisions as a component of future policy benefits and changes in the liabilities are included as
a component of policy benefits in the Statements of Income. As of September 30, 2009 and 2008, no
material variable life guaranteed benefits were incurred or paid.
Note 7. Federal Income Taxes
The effective tax rate was (58%) and 27% for the nine months ended September 30, 2009 and 2008,
respectively. Differences between the effective rate and the U.S. statutory rate of 35% during the
first half of 2009 primarily were the result of Separate Accounts dividends-received deduction
(DRD), foreign tax credits (FTC), and valuation allowance on net operating loss carryforward
and other deferred tax assets.
The valuation allowance for deferred tax assets as of September 30, 2009 and June 30, 2009 was
$123,530 and $115,414, respectively. There was no valuation allowance at December 31, 2008. The
valuation allowance is related to a net operating loss carryover and other deferred tax assets
that, in the judgment of management, are not more likely than not to be realized.
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 that there were no tax
benefits that should not be recognized as of December 31, 2008. Additions as of September 30, 2009
are based on tax positions related to the prior year of $3,623, which primarily relates to
uncertainty regarding the sustainability of certain deductions taken on the 2008 U.S. Federal
income tax return. There were no additions based on tax positions related to the current year. To
the extent these unrecognized tax benefits are ultimately recognized, they will not 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.
At September 30, 2009 and December 31, 2008, the Company had a net operating loss carryforward for
federal income tax purposes of $80,809 (net of the ASC 740 reduction of $3,623) and $110,104,
respectively, with a carryforward period of fifteen years that expire at various dates up to 2024.
In addition, at September 30, 2009, the Company also has a capital loss carryforward for federal
income tax purposes of $3,294 with a carryforward period of five years that will expire at various
dates up to 2014. At September 30, 2009, the Company had a foreign tax credit carryforward of
$5,607 with a carryforward period of ten years that will expire at various dates up to 2019. The
Company also at September 30, 2009 had an Alternative Minimum Tax tax credit carryforward for
federal income tax purposes of $2,031 with an indefinite carryforward period.
The Company classifies interest and penalties related to income taxes as interest expense and
penalty expense, respectively. The Company has recognized no material penalties in its financial
statements as of September 30, 2009 and December 31, 2008. The Company has recognized interest
expense of $86 as of September 30, 2009. The Company did not recognize interest expense as of
December 31, 2008.
The Company will file a separate federal income tax return for the years 2008 through 2012.
Beginning in 2013 and assuming no changes in ownership, the Company will join the affiliated
consolidated tax group.
23
Note 8. Stockholders Equity and Statutory Accounting Practices
The Companys statutory financial statements are presented on the basis of accounting practices
prescribed or permitted by the Insurance Department of the State of Arkansas. The State of
Arkansas has adopted the National Association of Insurance Commissioners statutory accounting
practices as the basis of its statutory accounting practices.
The Companys statutory net income for the nine months ended September 30, 2009 and 2008 was
$191,159 and $13,865, respectively. Statutory capital and surplus at September 30, 2009 and
December 31, 2008 was $517,079 and $356,135, respectively.
During the first nine months of 2009 and 2008, the Company did not pay any dividends to AUSA or
receive any capital contributions from AUSA.
Note 9. Reinsurance
In the normal course of business, the Company seeks to limit its exposure to loss on any single
insured life and to recover a portion of benefits paid by ceding mortality risk to other insurance
enterprises or reinsurers under indemnity reinsurance agreements, primarily quota share coverage
and coinsurance agreements. The maximum amount of mortality risk retained by the Company is
approximately $1,000 on single and joint life policies. Effective second quarter of 2008, the
Company began to recapture the majority of its life reinsurance, which is expected to be finalized
in the first half of 2010.
Indemnity reinsurance agreements do not relieve the Company from its obligations to contract
owners. Failure of reinsurers to honor their obligations could result in losses to the Company.
The Company regularly evaluates the financial condition of its reinsurers so as to minimize its
exposure to significant losses from reinsurer insolvencies. At September 30, 2009 and December 31,
2008, reinsurance receivables were $25,668 and $14,219, respectively, which represents reinsurance
recoverables primarily from Swiss Re, Lincoln National Life Insurance Company, Reinsurance Group of
America (RGA), Employers Reassurance Corporation (ERAC), and Munich American Reassurance
Company.
The Company is party to an indemnity reinsurance agreement with an unaffiliated insurer whereby the
Company coinsures, on a modified coinsurance basis, 50% of the unaffiliated insurers variable
annuity contracts sold from January 1, 1997 to June 30, 2001.
In addition, the Company seeks to limit its exposure to guaranteed benefit features contained in
certain variable annuity contracts. Specifically, the Company reinsures certain GMIB and GMDB
provisions to the extent reinsurance capacity is available in the marketplace. As of September 30,
2009, 46% and 12% of the account value for variable annuity contracts containing GMIB and GMDB
provisions, respectively, were reinsured. As of December 31, 2008, 49% and 5% of the account value
for variable annuity contracts containing GMIB and GMDB provisions, respectively, were reinsured.
Note 10. Related Party Transactions
As of September 30, 2009, the Company had the following related party agreements in effect:
The Company is party to a common cost allocation service agreement between AUSA companies in which
various affiliated companies may perform specified administrative functions in connection with the
operation of the Company, in consideration of reimbursement of actual costs of services rendered.
During the three and nine month periods ended September 30, 2009, the Company incurred $1,055 and
$12,008, respectively, in expenses under this agreement. During the three and nine month periods
ended September 30, 2008, the Company incurred $1,771 and $4,053, respectively, in expenses under
this agreement. Charges attributable to this agreement are included in insurance expenses and
taxes, net of amounts capitalized.
The Company is party to intercompany short-term note receivable arrangements with its parent and
affiliates. On June 29, 2009, the Company had an intercompany short-term note receivable of
$40,000 with an interest rate of 0.30% that is due June 29, 2010. On September 29, 2009 the Company
also had an intercompany short-term note receivable of $20,000 with an interest rate of 0.25% that
is due September 29, 2010. During the three and nine month periods ended September 30, 2009, the
Company accrued and/or received $31 and $65, respectively, of interest. During the three and nine
month period ended September 30, 2008, the Company was party to an intercompany short-term note
receivable which was initiated during the second quarter 2008 and partially repaid during the third
quarter 2008. In addition, the Company was party to two separate intercompany short-term note
receivables with the parent which were outstanding at the end of the third quarter 2008, both with
interest rates of 2.57%. During
24
the three and nine month periods ended September 30, 2008, the Company accrued and/or received $147
and $1,137, respectively, of interest. Interest related to these arrangements is included in net
investment income.
AEGON USA Realty Advisors, Inc. acts as the manager and administrator for the Companys mortgage
loans on real estate under an administrative and advisory agreement with the Company. Charges
attributable to this agreement are included in net investment income. During the three and nine
month periods ended September 30, 2009, the Company incurred $41 and $123, respectively, under this
agreement. There were no mortgage loan origination fees for the three and nine month periods ended
September 30, 2009. During the three and nine month periods ended September 30, 2008, the Company
incurred $27 and $27, respectively, in expenses under this agreement. In addition, there were
mortgage loan origination fees of $25 at September 30, 2008 which was capitalized. Mortgage loan
origination fees are amortized into net investment income over the life of the mortgage loans.
AEGON USA Investment Management, LLC acts as a discretionary investment manager under an investment
management agreement with the Company. During the three and nine month periods ended September 30,
2009, the Company incurred $540 and $1,684, respectively, in expenses under this agreement. During
the three and nine month periods ended September 30, 2008, the Company incurred $518 and $1,541,
respectively, in expenses under this agreement. Charges attributable to this agreement are
included in net investment income.
Transamerica Capital, Inc. provides wholesaling distribution services for the Company under a
distribution agreement. During the three and nine month periods ended September 30, 2009, the
Company incurred $1,350 and $3,760, respectively in expenses under this agreement. During the
three and nine month periods ended September 30, 2008, the Company incurred $1,689 and $5,611,
respectively, in expenses under this agreement. Charges attributable to this agreement are
included in insurance expenses and taxes, net of amounts capitalized.
Transamerica Capital, Inc. provides underwriting services for the Company under an underwriting
agreement. During the three and nine month periods ended September 30, 2009, the Company incurred
$14,883 and $37,912, respectively, in expenses under this agreement. During the three and nine
month periods ended September 30, 2008, the Company incurred $13,167 and $19,374, respectively, in
expenses under this agreement. Charges attributable to this agreement are included in insurance
expenses and taxes, net of amounts capitalized.
Transamerica Asset Management, Inc. acts as the investment advisor for certain related party funds
in the Companys Separate Accounts under an administrative services agreement. Revenue
attributable to this agreement is included in policy charge revenue. During the three and nine
month periods ended September 30, 2009, the Company did not receive any revenue under this
agreement. During the three and nine month periods ended September 30, 2008, the Company did not
receive any revenue under this agreement.
The Company has a participation agreement with Transamerica Series Trust to offer certain funds in
the Companys Separate Accounts. Transamerica Capital, Inc. acts as the distributor for said
related party funds. The Company has entered into a distribution and shareholder services
agreement for certain of the said funds. Revenue attributable to this agreement is included in
policy charge revenue. During the three and nine month periods ended September 30, 2009, the
Company received $3 and $4, respectively, in revenue under this agreement. During the three and
nine month periods ended September 30, 2008, the Company did not receive any revenue under this
agreement.
The Company has a reinsurance agreement with Transamerica Life Insurance Company. During the three
and nine month periods ended September 30, 2009, the Company incurred $59 and $209, respectively in
reinsurance premium ceded expense under this agreement and there were no reinsurance recoveries on
death claims incurred. During the three and nine month periods ended September 30, 2008, the
Company incurred $64 and $193, respectively in reinsurance premium ceded expense under this
agreement and there were no reinsurance recoveries on death claims incurred.
The Company is party to the purchasing and selling of investments between various affiliated
companies. The investments are purchased and sold at fair value and are included in fixed maturity
available-for-sale securities and mortgage loans on real estate in the Balance Sheets. During the
three and nine month periods ended September 30, 2009, there were no purchases of fixed maturity
available-for-sale securities or mortgage loans on real estate. During the nine month period ended
September 30, 2009, the Company sold $78,525 of fixed maturity available-for-sale securities.
During the three month period ended September 30, 2009, there were no sales of fixed maturity
available-for-sale securities. During the three and nine month periods ended September 30, 2009,
the Company sold $2,961 and $2,961, respectively, of mortgage loans on real estate. During the
three and nine month periods ended September 30, 2008, the Company purchased $0 and $204,892,
respectively, of fixed maturity available-for-sale securities. During the three and nine month
periods ended September 30, 2008, the Company purchased $68,794 and $68,794,
25
respectively, of mortgage loans on real estate. During the three and nine month period ended
September 30, 2008, the Company sold $34,959 and $34,959, respectively, of fixed maturity
available-for-sale securities.
While management believes that the service agreements referenced above are calculated on a
reasonable basis, they may not necessarily be indicative of the costs that would have been incurred
with an unrelated third party. Affiliated agreements generally contain reciprocal indemnity
provisions pertaining to each partys representations and contractual obligations thereunder.
Note 11. Segment Information
In reporting to management, the Companys operating results are categorized into two business
segments: Annuity and Life Insurance. The Companys Annuity segment consists of variable annuities
and interest-sensitive annuities. The Companys Life Insurance segment consists of variable life
insurance products and interest-sensitive life insurance products. The accounting policies of the
business segments are the same as those for the Companys financial statements included herein. All
revenue and expense transactions are recorded at the product level and accumulated at the business
segment level for review by management.
The following tables summarize each business segments contribution to net revenues and net income
(loss):
Three Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Net revenues (a) |
||||||||
Annuity |
$ | 12,597 | $ | 51,378 | ||||
Life Insurance |
21,054 | 25,477 | ||||||
Net revenues (a) |
$ | 33,651 | $ | 76,855 | ||||
Net income |
||||||||
Annuity |
$ | 6,513 | $ | 11,735 | ||||
Life Insurance |
3,748 | 6,098 | ||||||
Net income |
$ | 10,261 | $ | 17,833 | ||||
Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Net revenues (a) |
||||||||
Annuity |
$ | 69,689 | $ | 155,788 | ||||
Life Insurance |
66,024 | 75,484 | ||||||
Net revenues (a) |
$ | 135,713 | $ | 231,272 | ||||
Net income (loss) |
||||||||
Annuity |
$ | (162,461 | ) | $ | 29,797 | |||
Life Insurance |
(27,414 | ) | 16,608 | |||||
Net income (loss) |
$ | (189,875 | ) | $ | 46,405 | |||
(a) | Net revenues include total revenues net of interest credited to policyholder liabilities. |
26
Item 2. | Managements Narrative Analysis of Results of Operations |
This Managements Narrative Analysis of Results of Operations should be read in conjunction with
the Financial Statements and Notes to Financial Statements included herein.
Forward Looking Statements
Certain statements in this report may be considered forward-looking, including those about
management expectations, strategic objectives, growth opportunities, business prospects,
anticipated financial results and other similar matters. These forward-looking statements
represent only managements beliefs regarding future performance, which is inherently uncertain.
There are a variety of factors, many of which are beyond the Companys control, which affect its
operations, performance, business strategy and results and could cause its actual results and
experience to differ materially from the expectations and objectives expressed in any
forward-looking statements. These factors include, but are not limited to, actions and initiatives
taken by current and potential competitors, general economic conditions, the effects of current,
pending and future legislation, regulation and regulatory actions, and the other risks and
uncertainties detailed in this report. See Risk Factors in the 2008 Annual Report on Form 10-K.
Accordingly, readers are cautioned not to place undue reliance on forward-looking statements, which
speak only as of the dates on which they are made. The Company does not undertake to update
forward-looking statements to reflect the impact of circumstances or events that arise after the
dates they are made. The reader should, however, consult further disclosures the Company may make
in future filings of its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current
Reports on Form 8-K.
Business Overview
Merrill Lynch Life Insurance Company (MLLIC or the Company) is a wholly owned subsidiary of
AEGON USA, LLC (AUSA). AUSA is an indirect wholly owned subsidiary of AEGON N.V., a limited
liability share company organized under Dutch law. The Company is domiciled in the State of
Arkansas.
MLLIC conducts its business primarily in the annuity markets and to a lesser extent in the life
insurance markets of the financial services industry. As of September 30, 2009, the Company, in
addition to no longer issuing life insurance products, is no longer issuing variable annuity
products. The Company offered the following guaranteed benefits within its variable annuity
product suite: guaranteed minimum death benefits (GMDB), guaranteed minimum income benefits
(GMIB) and guaranteed minimum withdrawal benefits (GMWB).
The Companys gross earnings are principally derived from two sources:
| the charges imposed on variable annuity and variable life insurance contracts, and |
| the net earnings from investment of fixed rate life insurance and annuity contract owner deposits less interest credited to contract owners, commonly known as interest spread. |
The costs associated with acquiring contract owner deposits (deferred policy acquisition costs) are
amortized over the period in which the Company anticipates holding those funds, as noted in the
Critical Accounting Policies and Estimates section below. Insurance expenses and taxes reported in
the Statements of Income are net of amounts deferred. In addition, the Company incurs expenses
associated with the maintenance of in force contracts.
Business Environment
The Companys financial position and/or results of operations are primarily impacted by the
following economic factors: equity market performance, fluctuations in medium term interest rates,
and the corporate credit environment via credit quality and fluctuations in credit spreads. The
following discusses the impact of each economic factor.
Equity Market Performance
The investment performance of the underlying U.S. equity-based mutual funds supporting the
Companys variable products do not replicate the returns of any specific U.S. equity market index.
However, investment performance will generally increase or decrease with corresponding increases
or decreases of the overall U.S. equity market. There are several standard indices published on a
daily basis that measure performance of selected components of the U.S. equity market. Examples
include the Dow Jones Industrial Average (Dow), the NASDAQ Composite Index (NASDAQ) and the
Standard & Poors 500 Composite Stock Price Index (S&P). The Dow, NASDAQ and S&P ended
September 30, 2009 with increases of 15%, 16% and 15%, respectively from June 30, 2009 and
increases of 11%, 35% and 17%, respectively from December 31, 2008.
27
Changes in the U.S. equity market directly affect the values of the underlying U.S. equity-based
mutual funds supporting Separate Accounts assets and, accordingly, the values of variable contract
owner account balances. Approximately 74% of Separate Accounts assets were invested in
equity-based mutual funds at September 30, 2009. Since asset-based fees collected on in force
variable contracts represent a significant source of revenue, the Companys financial condition
will be impacted by fluctuations in investment performance of equity-based Separate Accounts
assets.
During the nine months ended September 30, 2009, average variable account balances decreased $2.8
billion (or 27%) to $7.4 billion as compared to the same period in 2008. The decrease in average
variable account balances contributed $6.4 million and $31.8 million to the decrease in asset-based
policy charge revenue during the three and nine months ended September 30, 2009, respectively, as
compared to the same period in 2008.
Fluctuations in the U.S. equity market also directly impact the Companys exposure to guaranteed
benefit provisions contained in the variable contracts it manufactures. Minimal or negative
investment performance generally results in greater exposure to guarantee provisions. Prolonged
periods of minimal or negative investment performance will result in greater guaranteed benefit
costs as compared to assumptions. If the Company determines that it needs to increase its
estimated long term cost of guaranteed benefits, it will result in establishing greater guaranteed
benefit liabilities as compared to current practice.
Medium Term Interest Rates, Corporate Credit and Credit Spreads
Changes in interest rates affect the value of investments, primarily fixed maturity securities and
preferred equity securities, as well as interest-sensitive liabilities. Changes in interest rates
have an inverse relationship to the value of investments and interest-sensitive liabilities. Also,
since the Company has certain fixed products that contain guaranteed minimum crediting rates,
decreases in interest rates can decrease the amount of interest spread earned.
Changes in the corporate credit environment directly impact the value of the Companys investments,
primarily fixed maturity securities. The Company primarily invests in investment-grade corporate
debt to support its fixed rate product liabilities.
Credit spreads represent the credit risk premiums required by market participants for a given
credit quality, i.e. the additional yield that a debt instrument issued by a AA-rated entity must
produce over a risk-free alternative (e.g., U.S. Treasury instruments). Changes in credit spreads
have an inverse relationship to the value of interest sensitive investments.
The impact of changes in medium term interest rates, corporate credit and credit spreads on market
valuations were as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Average medium term interest rate yield (a) |
1.22 | % | 2.25 | % | 1.22 | % | 2.25 | % | ||||||||
Increase
(decrease) in medium term interest rates (in basis points) |
(18 | ) | (53 | ) | 33 | (113 | ) | |||||||||
Credit spreads (in basis points) (b) |
241 | 516 | 241 | 516 | ||||||||||||
Expanding (contracting) of credit spreads (in basis points) |
(107 | ) | 206 | (494 | ) | 286 | ||||||||||
Increase (decrease) on market valuations (in millions) |
||||||||||||||||
Available-for-sale investment securities |
$ | 76.5 | $ | (58.4 | ) | $ | 124.0 | $ | (86.5 | ) | ||||||
Interest-sensitive policyholder liabilities |
(0.5 | ) | 2.1 | 5.0 | 6.1 | |||||||||||
Net increase (decrease) on market valuations |
$ | 76.0 | $ | (56.3 | ) | $ | 129.0 | $ | (80.4 | ) | ||||||
(a) | The Company defines medium term interest rates as the average interest rate on U.S. Treasury securities with terms of one to five years. | |
(b) | The Company defines credit spreads according to the Merrill Lynch U.S. Corporate Bond Index for BBB-A Rated bonds with three to five year maturities. |
28
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities, and the reported amounts of revenues and expenses. Estimates, by their nature,
are based on judgment and available information. Therefore, actual results could differ and could
have a material impact on the financial statements, and it is possible that such changes could
occur in the near term.
The Companys critical accounting policies and estimates are discussed below. For a full
description of these and other accounting policies see Note 1 of the 2008 Annual Report on Form
10-K.
Valuation of Fixed Maturity and Equity Securities
The Companys investments in fixed maturity and equity securities are classified as
available-for-sale and reported at estimated fair value. The fair values of fixed maturity and
equity securities are determined by management after taking into consideration several sources of
data. The Companys valuation policy dictates that publicly available prices are initially sought
from several third party pricing services. In the event that pricing is not available from these
services, those securities are submitted to brokers to obtain quotes. Lastly, securities are
priced using internal cash flow modeling techniques. These valuation methodologies commonly use
reported trades, bids, offers, issuer spreads, benchmark yields, estimated prepayment speeds,
and/or estimated cash flows.
Each month, the Company performs an analysis of the information obtained from third party services
and brokers to ensure that the information is reasonable and produces a reasonable estimate of
fair value. The Company considers both qualitative and quantitative factors as part of this
analysis, including but not limited to, recent transactional activity for similar fixed
maturities, review of pricing statistics and trends, and consideration of recent relevant market
events.
The Companys portfolio of private placement securities is valued using a matrix pricing
methodology. The pricing methodology is obtained from a third party service and indicates current
spreads for securities based on weighted average life, credit rating and industry sector. Monthly
the Company reviews the matrix to ensure the spreads are reasonable by comparing them to observed
spreads for similar securities traded in the market. In order to account for the illiquid nature
of these securities, illiquidity premiums are included in the valuation and are determined based
upon the pricing of recent transactions in the private placement market as well as comparing the
value of the privately offered security to a similar public security. The impact of the
illiquidity premium to the overall valuation is immaterial (less than 1% of the value).
At September 30, 2009 and December 31, 2008, approximately, $167.0 million (or 13%) and, $166.1
million (or 12%), respectively, of the Companys fixed maturity and equity securities portfolio
consisted of non-publicly traded securities. Since significant judgment is required for the
valuation of non-publicly traded securities, the estimated fair value of these securities may
differ from amounts realized upon an immediate sale.
Changes in the fair value of fixed maturity and equity securities are reported as a component of
accumulated other comprehensive income (loss), net of taxes on the Balance Sheets and are not
reflected in the Statements of Income until a sale transaction occurs or when credit-related
declines in estimated fair value are deemed other-than-temporary.
Securities Lending
Financial assets that are lent to a third party or that are transferred subject to a repurchase
agreement at a fixed price are not derecognized as the Company retains substantially all the risks
and rewards of asset ownership. The lent securities are included in fixed maturity
available-for-sale securities in the Balance Sheets. A liability is recognized for cash
collateral received, required initially at 102%, on which interest is accrued. At September 30,
2009 and December 31, 2008, the payable for collateral under securities loaned was $150.4 million
and $182.5 million, respectively.
Derivative Instruments
Derivatives are financial instruments in which the value changes in response to an underlying
variable, that require little or no net initial investment and are settled at a future date. All
derivatives recognized on the Balance Sheets are carried at fair value. All changes in fair value
are recognized in the Income Statements. The fair value for exchange traded derivatives, such as
futures, are calculated net of the interest accrued to date and is based on quoted market prices.
Net settlements on the futures occur daily. As of September 30, 2009, the Company had 620
outstanding short futures contracts with a notional amount of $163.2 million. As of December 31,
2008, the Company had 990 outstanding short futures contracts with a notional amount of $222.8
million.
29
Mortgage Loans on Real Estate
Mortgage loans on real estate are carried at unpaid principal balances adjusted for amortization of
premiums and accretion of discounts and are net of valuation allowances. The fair value for
mortgage loans on real estate is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit ratings and/or similar
remaining maturities. Interest income is accrued on the principal balance of the loan based on the
loans contractual interest rate. Premiums and discounts are amortized using the effective yield
method over the life of the loan. Interest income and amortization of premiums and discounts are
reported in net investment income along with mortgage loan fees, which are recorded as they are
incurred. Loans are considered impaired when it is probable that based upon current information
and events, the Company will be unable to collect all amounts due under the contractual terms of
the loan agreement. When the Company determines that a loan is impaired, a valuation allowance is
established for the excess carrying value of the loan over its estimated value. The Company does
not accrue interest on impaired loans and loans 90 days past due. At September 30, 2009 and
December 31, 2008, there was $71.6 million and $77.1 million, respectively in mortgage loans on
real estate recorded on the Balance Sheet. The valuation allowance at September 30, 2009 was
deminimus.
Other-Than-Temporary Impairment (OTTI) Losses on Investments
The Company regularly reviews each investment in its fixed maturity and equity securities portfolio
to evaluate the necessity of recording impairment losses for other-than-temporary declines in the
fair value of investments. Management makes this determination through a series of discussions with
the Companys portfolio managers and credit analysts, and information obtained from external
sources (i.e. company announcements, ratings agency announcements, or news wire services). For
equity securities, the Company also considers the ability and intent to hold the investments for a
period of time sufficient for a forecasted market price recovery up to or beyond the amortized cost
of the investment. The factors that may give rise to a potential OTTI include, but are not limited
to, i) certain credit-related events such as default of principal or interest payments by the
issuer, ii) bankruptcy of issuer, iii) certain security restructurings, and iv) fair market value
less than cost or amortized cost for an extended period of time. In the absence of a readily
ascertainable market value, the estimated fair value on these securities represents managements
best estimate and is based on comparable securities and other assumptions as appropriate.
Management bases this determination on the most recent information available.
To the extent the Company determines that a security is deemed to be other-than-temporarily
impaired, an impairment loss is recognized. During the second quarter 2009, the Company adopted new
FASB guidance for the recognition and presentation of OTTI. The recognition provisions apply only
to debt securities classified as available-for-sale and held-to-maturity, while the presentation
and disclosure requirements apply to both debt and equity securities.
For equity securities, once management determines a decline in the value of an available-for-sale
security is other-than-temporary, the cost basis of the equity security is reduced to its fair
value, with a corresponding charge to earnings.
For debt securities, an OTTI must be recognized in earnings when an entity either a) has the intent
to sell the debt security or b) more likely than not will be required to sell the debt security
before its anticipated recovery. If the Company meets either of these criteria, the OTTI is
recognized in earnings in an amount equal to the entire difference between the securitys amortized
cost basis and its fair value at the balance sheet date. For debt securities in unrealized loss
positions that do not meet these criteria, the Company must analyze its ability to recover the
amortized cost by comparing the net present value of projected future cash flows with the amortized
cost of the security. The net present value is calculated by discounting the Companys best
estimate of projected future cash flows. If the net present value is less than the amortized cost
of the investment, an OTTI is recorded. The OTTI is separated into two pieces: an amount
representing the credit loss, where the present value of cash flows expected to be collected is
less than the amortized cost basis of the security, and an amount related to all other factors
(referred to as the non credit portion). The credit loss is recognized in earnings and the non
credit loss is recognized in other comprehensive income (OCI), net of applicable taxes, value of
business acquired, deferred acquisition costs and deferred sales inducements. Management records
subsequent changes in the estimated fair value (positive and negative) of available-for-sale debt
securities for which non credit OTTI was previously recognized in OCI in OCI-OTTI.
For the three month periods ended September 30, 2009 and 2008, the Company recorded an OTTI in
income, net of value of business acquired amortization, of $3.9 million and $2.3 million,
respectively. For the nine month periods ended September 30, 2009 and 2008, the Company recorded an
OTTI in income, net of value of business acquired amortization, of $9.2 million and $3.3 million,
respectively.
Deferred Policy Acquisition Costs (DAC)
The costs of acquiring business, principally commissions, certain expenses related to policy
issuance, and certain variable sales expenses that relate to and vary with the production of new
and renewal business, are deferred and amortized based on the estimated future gross profits for a
group of contracts. DAC are subject to recoverability testing at the time of policy issuance and
loss recognition testing at the end of each reporting period. At September 30, 2009 and December
31, 2008, variable annuities accounted for the Companys entire DAC asset of $31.9 million and
$24.3 million, respectively.
30
DAC for variable annuities is amortized with interest over the anticipated lives of the insurance
contracts in relation to the present values of estimated future gross profits from asset-based
fees, guaranteed benefit rider fees, contract fees, and surrender charges, less a provision for
guaranteed death and living benefit expenses, policy maintenance expenses, and non-capitalized
commissions.
The most significant assumptions involved in the estimation of future gross profits are future net
Separate Accounts performance, surrender rates, mortality rates and reinsurance costs. For variable
annuities, the Company generally establishes a long-term rate of net Separate Accounts growth. If
returns over a determined historical period differ from the long-term assumption, returns for
future determined periods are calculated so that the long-term assumption is achieved. The result
is that the long-term rate is assumed to be realized over a specified period. However, the
long-term rate may be adjusted if expectations change. This method for projecting market returns
is known as reversion to the mean, a standard industry practice. At September 30, 2009, the
reversion to the mean assumption was 8% gross short-term equity growth rate for five years and
thereafter a 9% gross long-term growth rate, while at December 31, 2008, the reversion to the mean
assumption was 15% gross short-term equity growth rate for five years and thereafter a 9% gross
long-term growth rate. Surrender and mortality rates for all variable contracts are based on
historical experience and a projection of future experience.
Future gross profit estimates are subject to periodic evaluation with necessary revisions applied
against amortization to date. The impact of revisions and assumptions to estimates on cumulative
amortization is recorded as a charge or benefit to current operations, commonly referred to as
unlocking. Changes in assumptions can have a significant impact on the amount of DAC reported
and the related amortization patterns. In general, increases in the estimated Separate Accounts
return and decreases in surrender or mortality assumptions increase the expected future
profitability of the underlying business and may lower the rate of DAC amortization. Conversely,
decreases in the estimated Separate Accounts returns and increases in surrender or mortality
assumptions reduce the expected future profitability of the underlying business and may increase
the rate of DAC amortization. For the three and nine month periods ended September 30, 2009, there
was an favorable (unfavorable) impact to pre-tax income related to DAC unlocking of $0.1 million
and ($0.3) million, respectively. For the three and nine month periods ended September 30, 2008,
there was an unfavorable impact to pre-tax income related to DAC unlocking of $3.6 million and $6.3
million, respectively. See Note 5 to the Financial Statements for a further discussion.
Deferred Sales Inducements (DSI)
The Company offers a sales inducement whereby the contract owner receives a bonus which increases
the initial account balance by an amount equal to a specified percentage of the contract owners
deposit. This amount may be subject to recapture under certain circumstances. Consistent with DAC,
sales inducements for variable annuity contracts are deferred and amortized based on the estimated
future gross profits for each group of contracts. These future gross profit estimates are subject
to periodic evaluation by the Company, with necessary revisions applied against amortization to
date. The impact of these revisions on cumulative amortization is recorded as a charge or credit to
current operations, commonly referred to as unlocking. It is reasonably possible that estimates
of future gross profits could be reduced in the future, resulting in a material reduction in the
carrying amount of the deferred sales inducement asset.
The expense and the subsequent capitalization and amortization are recorded as a component of
policy benefits in the Statements of Income. At September 30, 2009 and December 31, 2008, variable
annuities accounted for the Companys entire DSI asset of $7.5 million and $7.2 million,
respectively. See Note 5 to the Financial Statements for a further discussion.
Value of Business Acquired (VOBA)
VOBA represents the portion of the purchase price that is allocated to the value of the right to
receive future cash flows from the insurance and annuity contracts in force at the acquisition
date. VOBA is based on actuarially determined projections, for each block of business, of future
policy and contract charges, premiums, mortality, policyholder behavior, Separate Account
performance, operating expenses, investment returns, and other factors. Actual experience on the
purchased business may vary from these projections. Revisions in estimates result in changes to
the amounts expensed in the reporting period in which the revisions are made and could result in
the impairment of the asset and a charge to income if estimated future gross profits are less than
the unamortized balance. In addition, MLLIC utilizes the reversion to the mean assumption, a
common industry practice, in its determination of the amortization of VOBA. This practice assumes
that the expectations for long-term appreciation in equity markets is not changed by minor
short-term market fluctuations, but that it does change when large interim deviations have
occurred. At September 30, 2009, the reversion to the mean assumption was 8% gross short-term
equity growth rate for five years and thereafter a 9% gross long-term growth rate, while at
December 31, 2008, the reversion to the mean assumption was 15% gross short-term equity growth rate
for five years and thereafter a 9% gross long-term growth rate. At September 30, 2009 and December
31, 2008, the Companys VOBA asset was $395.7 million and $581.1 million, respectively. For the
three and nine month periods ended September 30, 2009, the favorable (unfavorable) impact to
pre-tax income related to VOBA unlocking was $8.3 million and ($78.1) million, respectively. For
the three and nine month periods ended September 30, 2008, the favorable
31
impact to pre-tax income related to VOBA unlocking was $0.5 million and $2.5 million, respectively.
In addition, for the three month period ended September 30, 2009, there was no impairment charge.
For the nine month period ended September 30, 2009, there was an impairment charge of $63.9
million. See Note 4 to the Financial Statements for a further discussion.
Policyholder Account Balances
The Companys liability for policyholder account balances represents the contract value that has
accrued to the benefit of policyholders as of the Balance Sheet date. The liability is generally
equal to the accumulated account deposits plus interest credited less policyholders withdrawals
and other charges assessed against the account balance. Policyholder account balances at September
30, 2009 and December 31, 2008 were $1.6 billion and $1.8 billion, respectively.
Future Policy Benefits
Future policy benefits are actuarially determined liabilities, which are calculated to meet future
obligations and are generally payable over an extended period of time. Principal assumptions used
in the establishment of liabilities for future policy benefits are mortality, surrender rates,
policy expenses, equity returns, interest rates, and inflation. These estimates and assumptions
are influenced by historical experience, current developments and anticipated market trends. At
September 30, 2009 and December 31, 2008, future policy benefits were $465.1 million and $499.3
million, respectively.
Included within future policy benefits are liabilities for GMDB and GMIB provisions contained in
the variable products that the Company issues. At September 30, 2009 and December 31, 2008, GMDB
and GMIB liabilities included within future policy benefits were as follows:
September 30, | December 31, | |||||||
(dollars in millions) | 2009 | 2008 | ||||||
GMDB liability |
$ | 154.1 | $ | 145.9 | ||||
GMIB liability |
33.2 | 18.5 |
The Company regularly evaluates the assumptions used to establish these liabilities, as well
as actual experience and adjusts GMDB and GMIB liabilities with a related charge or credit to
earnings (unlocking), if actual experience or evidence suggests that the assumptions should be
revised. For the nine month periods ended September 30, 2009 and 2008, the unfavorable
impact to pre-tax income related to GMDB and GMIB unlocking was $20.2 million and $5.9 million,
respectively. For the three month periods ended September 30, 2009 and 2008, the favorable
(unfavorable) impact to pre-tax income related to GMDB and GMIB unlocking was $25.0 million and
($7.2) million, respectively.
Future policy benefits also include liabilities, which can be either positive or negative, for
contracts containing GMWB provisions and for the reinsurance of GMIB provisions (GMIB
reinsurance) for variable annuities based on the fair value of the underlying benefit. The GMWB
provision is treated as an embedded derivative and is required to be reported separately from the
host variable annuity contract. The fair value of the GMWB obligation is calculated based on
actuarial and capital market assumptions related to the projected cash flows, including benefits
and related contract charges, over the anticipated life of the related contracts. The cash flow
estimates are produced using stochastic techniques under a variety of market return scenarios and
other best estimate assumptions. In general, the GMIB reinsurance liability (asset) represents the
present value of future reinsurance deposits net of reinsurance recoverables less a provision for
required profit.
At September 30, 2009 and December 31, 2008, GMWB liability and GMIB reinsurance asset included
within future policy benefits were as follows:
September 30, | December 31, | |||||||
(dollars in millions) | 2009 | 2008 | ||||||
GMWB liability |
$ | 66.2 | $ | 114.5 | ||||
GMIB reinsurance asset |
(64.6 | ) | (79.1 | ) |
Federal Income Taxes
The Company uses the asset and liability method in providing income taxes on all transactions that
have been recognized in the financial statements. The asset and liability method requires that
deferred taxes be adjusted to reflect the tax rates at which future
taxable amounts will be settled or realized. The Company provides for federal income taxes based on
amounts it believes it will ultimately owe. Inherent in the provision for federal income taxes are
estimates regarding the realization of certain tax deductions and credits.
32
Specific estimates include the realization of dividend-received deductions (DRD) and foreign tax
credits (FTC). A portion of the Companys investment income related to Separate Accounts
business qualifies for the DRD and FTC. Information necessary to calculate these tax adjustments is
typically not available until the following year. However, within the current years provision,
management makes estimates regarding the future tax deductibility of these items. These estimates
are primarily based on recent historic experience.
The valuation allowance for deferred tax assets as of September 30, 2009 and June 30, 2009 was
$123.5 million and $115.4 million, respectively. There was no valuation allowance at December 31,
2008. The valuation allowance is related to a net operating loss carryforward and other deferred
tax assets that, in the judgment of management, is not more likely than not to be realized. In
assessing the realizability of deferred tax assets, management considers whether it is more likely
than not that all or some of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets depends on generation of further taxable income during the
periods in which those temporary differences are deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected taxable income, and tax-planning strategies in
making the assessment.
The Company files a return in the U.S. federal tax jurisdiction and various state tax
jurisdictions.
Recent Accounting Guidance
On July 1, 2009, the FASB Accounting Standards CodificationTM (Codification) was
launched as the single source of authoritative nongovernmental U.S. generally accepted accounting
principles (GAAP). Accounting guidance promulgated by the FASB is communicated through an
Accounting Standards Update (ASU). An ASU provides the reason for the update and details the
amendments to the Codification. Guidance in the Codification is organized by Topic, each
representing a collection of related guidance (e.g., Financial ServicesInsurance). Topics are
further subdivided into Subtopics (e.g., Insurance Activities), and Sections (e.g., Recognition,
Measurement, or Disclosure).
The following outlines the adoption of recent accounting guidance. See Note 1 to the Financial
Statements for a further discussion.
Accounting Standards Codification (ASC) 105, Generally Accepted Accounting Principles
The Company adopted guidance that establishes the Codification as the source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental entities as of the period ended September
30, 2009. This guidance was formerly known as Statement of Financial Accounting Standards (SFAS)
No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally
Accepted Accounting Principles, a replacement of FASB Statement No. 162.
ASC 320, InvestmentsDebt and Equity Securities
The Company adopted revised guidance for the recognition and presentation of OTTI as of the period
ended June 30, 2009. This guidance was formerly known as FASB Staff Position (FSP) No. FAS 115-2 and FAS 124-2,
Recognition and Presentation of Other-Than-Temporary Impairments.
ASC 820, Fair Value Measurements and Disclosures
| The Company adopted guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased as well as guidance on identifying circumstances that indicate a transaction is not orderly as of the period ended June 30, 2009. This guidance was formerly known as FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly and supersedes guidance formerly known as FSP No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. |
| The Company adopted guidance requiring disclosures about fair value of financial instruments in interim reporting periods as well as annual periods as of the period ended June 30, 2009. This guidance was formerly known as FSP No. FAS 107-1 and Accounting Principles Board Opinion No. 28-1, Interim Disclosures about Fair Value of Financial Instruments. |
| On January 1, 2008, the Company adopted guidance providing a fair value option election that allows companies to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities, with changes in fair value recognized in earnings as they occur. This guidance was formerly known as SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. |
33
| On January 1, 2008, the Company adopted guidance that defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. This guidance was formerly known as SFAS No. 157, Fair Value Measurements. |
ASC 855, Subsequent Events
The Company adopted guidance that establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial statements are issued or are
available to be issued as of the period ended June 30, 2009. This guidance was formerly known as
SFAS No. 165, Subsequent Events.
ASC 325-40, InvestmentsOther; Beneficial Interests in Securitized Financial Assets
The Company adopted guidance that amends impairment and related interest income measurement
guidance to permit the use of reasonable management judgment about the probability that the company
will be able to collect all amounts due as of the period ended December 31, 2008. This guidance was
formerly known as FSP No. EITF 99-20-1, Amendments to the Impairment and Interest Income
Measurement Guidance of EITF Issue No. 99-20.
ASC 815, Derivatives and Hedging
| On January 1, 2009, the Company adopted guidance that amends and expands the disclosure requirements related to derivative instruments and hedging activities. This guidance was formerly known as SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133. |
| The Company adopted guidance requiring disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments as of the period ended December 31, 2008. This guidance was formerly known as FSP No. FAS 133-1 and FASB Interpretation No. 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161. |
ASC 805, Business Combinations
On January 1, 2009, the Company prospectively adopted guidance that provides requirements for the
accounting and reporting of transactions that represent business combinations to be accounted for
under the acquisition method. This guidance was formerly known as SFAS No. 141 (revised 2007),
Business Combinations.
ASC 350, IntangiblesGoodwill and Other
On January 1, 2009, the Company adopted guidance that amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset. This guidance was formerly known as FSP No. FAS 142-3, Determination of the
Useful Life of Intangible Assets.
In addition, the following is recent accounting guidance that will be adopted in the future. See
Note 1 to the Financial Statements for a further discussion.
ASC 820, Fair Value Measurements and Disclosures
In August 2009, the FASB issued ASU 2009-05, Measuring Liabilities at Fair Value. The ASU clarifies
that when a quoted price in an active market for an identical liability is not available, an entity
should measure fair value using an approach that maximizes the use of relevant observable inputs
and minimizes the use of unobservable inputs. The Company will adopt the guidance as of the period
ending
December 31, 2009.
December 31, 2009.
In September 2009, the FASB issued ASU 2009-12, Investments in Certain Entities That Calculate Net
Asset Value per Share (or Its Equivalent). The ASU provides guidance on measuring the fair value
of certain alternative investments (i.e., investments in hedge funds, private equity funds, venture
capital funds, offshore fund vehicles, funds of funds, and real estate funds). The ASU applies to
investments in entities where the fair value of the instrument is not readily determinable and the
investment is in an entity that has all of the attributes of an investment company (as specified in
ASC 946-10-15-2). The Company will adopt the guidance as of the period ending December 31, 2009.
34
New Business
MLLICs marketing emphasis, prior to September 30, 2009, had been on the sale of variable annuity
products. These products were designed to address the retirement planning needs of Merrill Lynch &
Co., Inc.s (ML&Co.) clients. Each variable annuity product was designed to provide tax-deferred
retirement savings with the opportunity for diversified investing in a wide selection of underlying
mutual fund portfolios.
Total direct deposits decreased $9.3 million and $108.3 million during the three and nine month
periods ended September 30, 2009 as compared to the same periods in 2008, respectively. Total
direct deposits (including internal exchanges) were as follows:
Third Quarter | Year To Date | Quarter | Year to Date | |||||||||||||
2009 | 2009 | 2009 vs. 2008 | 2009 vs. 2008 | |||||||||||||
(dollars in millions) | % Change | |||||||||||||||
Variable annuity deposits |
$ | 98.9 | $ | 263.7 | (9 | )% | (29 | )% | ||||||||
All other deposits |
2.8 | 9.6 | 5 | 10 | ||||||||||||
Total direct deposits |
$ | 101.7 | $ | 273.3 | (8 | )% | (28 | )% | ||||||||
The decrease in variable annuity deposits in the first nine months of 2009 was primarily due
to the continuing volatile equity markets as well as the Companys decision to discontinue selling
variable annuity products. All other deposits include deposits on modified guaranteed annuities
and immediate annuities as well as renewal deposits on existing life insurance and fixed annuity
contracts that are no longer manufactured. Internal exchanges during the three month periods
ended September 30, 2009 and 2008 were $4.1 million and $9.0 million, respectively. Internal
exchanges during the nine month periods ended September 30, 2009 and 2008 were $10.4 million and
$56.1 million, respectively.
Financial Condition
At September 30, 2009, the Companys assets were $11.6 billion or $502.0 million higher than the
$11.1 billion in assets at December 31, 2008. Assets excluding Separate Accounts assets decreased
$287.7 million. Separate Accounts assets, which represent 71% of total assets, increased $789.7
million (or 10%) to $8.2 billion. Changes in Separate Accounts assets for the quarter were as
follows:
Nine | |||||
Months Ended | |||||
(dollars in millions) | September 30, 2009 | ||||
Investment performance |
$ | 1,221.2 | |||
Deposits |
270.9 | ||||
Policy fees and charges |
(128.7 | ) | |||
Surrenders, benefits and withdrawals |
(573.7 | ) | |||
Net change |
$ | 789.7 | |||
During the first nine months of 2009, fixed contract owner deposits were $11.0 million and
fixed contract owner withdrawals were $324.8 million.
Investments
The Company maintains a conservative general account investment portfolio comprised primarily of
investment grade fixed maturity securities, policy loans, cash and cash equivalents and mortgage
loans on real estate.
Fixed Maturities and Equity Securities
The Company adopted revised guidance for the recognition and presentation of OTTI effective as of
June 30, 2009. The prior requirement for management to assert that it has the intent and ability to
hold an impaired debt security until recovery was replaced with the requirement that management
assert if it either has the intent to sell the debt security or if it is more likely than not the
entity will be required to sell the debt security before recovery of its amortized cost basis.
As permitted by the guidance, the Company recorded an increase of $3.5 million to the opening
balance of retained earnings with a corresponding decrease to accumulated OCI on the Statement of
Stockholders Equity to reclassify the non credit portion of
35
previously other-than-temporarily
impaired available-for-sale securities held as of April 1, 2009. The following summarizes the
components for this cumulative effect adjustment:
Net | ||||||||||||
Unrealized | Unrealized | Total | ||||||||||
OTTI | Loss on | Cumulative | ||||||||||
on Available- | Available- | Effect | ||||||||||
For-Sale | For-Sale | Adjustment | ||||||||||
(dollars in millions) | Securities | Securities | in OCI | |||||||||
Increase in amortized cost of available-for-sale securities |
$ | 0.3 | $ | 12.3 | $ | 12.6 | ||||||
Change in DAC, DSI and VOBA |
| (7.2 | ) | (7.2 | ) | |||||||
Income tax |
(0.1 | ) | (1.8 | ) | (1.9 | ) | ||||||
Net cumulative effect adjustment |
$ | 0.2 | $ | 3.3 | $ | 3.5 | ||||||
The cumulative effect adjustment was calculated for all available-for-sale securities held as
of April 1, 2009, for which an OTTI was previously recognized, but as of April 1, 2009, the Company
did not intend to sell the security and it was not more likely than not that the Company would be
required to sell the security before recovery of its amortized cost, by comparing the present value
of cash flows expected to be received as of April 1, 2009, to the amortized cost basis of the
available-for-sale securities. The discount rate used to calculate the present value of the cash
flows expected to be collected was the rate for each respective available-for-sale security in
effect before recognizing any OTTI. In addition, because the carrying amounts of DAC, DSI VOBA are
adjusted for the effects of realized and unrealized gains and losses on available-for-sale
securities, the Company recognized a true-up to the DAC, DSI and VOBA balances for this cumulative
effect adjustment.
The amortized cost and estimated fair value of investments in fixed maturity and equity securities
at September 30, 2009 and
December 31, 2008 were:
December 31, 2008 were:
September 30, 2009 | ||||||||||||||||||||||||
% of | ||||||||||||||||||||||||
Amortized | Gross Unrealized | Estimated | Estimated | |||||||||||||||||||||
(dollars in millions) | Cost | Gains | Losses | OTTI (1) | Fair Value | Fair Value | ||||||||||||||||||
Fixed maturity securities |
||||||||||||||||||||||||
Corporate bonds |
||||||||||||||||||||||||
Financial services |
$ | 217.7 | $ | 3.9 | $ | (8.6 | ) | $ | | $ | 213.0 | 16 | % | |||||||||||
Industrial |
335.9 | 14.8 | (2.6 | ) | | 348.1 | 26 | |||||||||||||||||
Utility |
92.6 | 4.3 | (1.0 | ) | | 95.9 | 7 | |||||||||||||||||
Asset-backed securities |
||||||||||||||||||||||||
Housing related |
60.2 | 0.1 | (12.2 | ) | (3.4 | ) | 44.7 | 3 | ||||||||||||||||
Credit cards |
38.1 | 3.6 | | | 41.7 | 3 | ||||||||||||||||||
Autos |
14.6 | 0.4 | | | 15.0 | 1 | ||||||||||||||||||
Equipment lease |
2.5 | | | | 2.5 | | ||||||||||||||||||
Student loan |
8.5 | | | | 8.5 | 1 | ||||||||||||||||||
Timeshare |
0.9 | 0.1 | | | 1.0 | | ||||||||||||||||||
Commercial
mortgage-backed securities non agency backed |
169.4 | 2.0 | (16.6 | ) | | 154.8 | 12 | |||||||||||||||||
Residential mortgage-backed securities |
||||||||||||||||||||||||
Agency backed |
99.1 | 3.8 | | | 102.9 | 8 | ||||||||||||||||||
Non agency backed |
29.0 | | (8.2 | ) | | 20.8 | 2 | |||||||||||||||||
Municipals tax exempt |
1.5 | | | | 1.5 | | ||||||||||||||||||
Government and government agencies |
||||||||||||||||||||||||
United States |
234.8 | 4.9 | (4.5 | ) | | 235.2 | 18 | |||||||||||||||||
Foreign |
21.5 | 0.4 | | | 21.9 | 2 | ||||||||||||||||||
Total fixed maturity securities |
1,326.3 | 38.3 | (53.7 | ) | (3.4 | ) | 1,307.5 | 99 | ||||||||||||||||
Equity securities |
||||||||||||||||||||||||
Banking securities |
9.3 | | (3.2 | ) | | 6.1 | 1 | |||||||||||||||||
Other financial services securities |
0.2 | 0.2 | | | 0.4 | | ||||||||||||||||||
Other securities |
5.8 | | (0.8 | ) | | 5.0 | | |||||||||||||||||
Total equity securities |
15.3 | 0.2 | (4.0 | ) | | 11.5 | 1 | |||||||||||||||||
Total fixed maturity and equity securities |
$ | 1,341.6 | $ | 38.5 | $ | (57.7 | ) | $ | (3.4 | ) | $ | 1,319.0 | 100 | % | ||||||||||
(1) | Subsequent unrealized gains/losses on OTTI securities are included in OCI-OTTI. |
36
December 31, 2008 | ||||||||||||||||||||||||
% of | ||||||||||||||||||||||||
Amortized | Gross Unrealized | Estimated | Estimated | |||||||||||||||||||||
Cost | Gains | Losses | OTTI | Fair Value | Fair Value | |||||||||||||||||||
Fixed maturity securities |
||||||||||||||||||||||||
Corporate bonds |
||||||||||||||||||||||||
Financial services |
$ | 271.5 | $ | 0.4 | $ | (34.5 | ) | $ | | $ | 237.4 | 16 | % | |||||||||||
Industrial |
393.4 | 3.7 | (29.4 | ) | | 367.7 | 27 | |||||||||||||||||
Utility |
140.4 | 0.4 | (12.8 | ) | | 128.0 | 9 | |||||||||||||||||
Asset-backed securities |
||||||||||||||||||||||||
Housing related |
66.4 | 1.3 | (13.1 | ) | | 54.6 | 4 | |||||||||||||||||
Credit cards |
42.2 | | (16.0 | ) | | 26.2 | 2 | |||||||||||||||||
Autos |
23.7 | | (2.6 | ) | | 21.1 | 2 | |||||||||||||||||
Equipment lease |
4.8 | | (0.4 | ) | | 4.4 | | |||||||||||||||||
Student loan |
10.7 | | (0.3 | ) | | 10.4 | 1 | |||||||||||||||||
Timeshare |
9.9 | 0.1 | (0.5 | ) | | 9.5 | 1 | |||||||||||||||||
Commercial
mortgage-backed securities non agency backed |
158.9 | | (39.5 | ) | | 119.4 | 9 | |||||||||||||||||
Residential mortgage-backed securities |
||||||||||||||||||||||||
Agency backed |
107.6 | 1.9 | (0.6 | ) | | 108.9 | 8 | |||||||||||||||||
Non agency backed |
33.1 | | (13.6 | ) | | 19.5 | 1 | |||||||||||||||||
Municipals tax exempt |
1.6 | | (0.1 | ) | | 1.5 | | |||||||||||||||||
Government and government agencies |
||||||||||||||||||||||||
United States |
229.9 | 17.4 | | | 247.3 | 18 | ||||||||||||||||||
Foreign |
16.3 | 0.2 | (0.4 | ) | | 16.1 | 1 | |||||||||||||||||
Total fixed maturity securities |
1,510.4 | 25.4 | (163.8 | ) | | 1,372.0 | 99 | |||||||||||||||||
Equity securities |
||||||||||||||||||||||||
Banking securities |
8.6 | | (2.6 | ) | | 6.0 | 0 | |||||||||||||||||
Other financial services securities |
1.5 | | (0.4 | ) | | 1.1 | 0 | |||||||||||||||||
Other securities |
11.6 | | (5.2 | ) | | 6.4 | 1 | |||||||||||||||||
Total equity securities |
21.7 | | (8.2 | ) | | 13.5 | 1 | |||||||||||||||||
Total fixed maturity and equity securities |
$ | 1,532.1 | $ | 25.4 | $ | (172.0 | ) | $ | | $ | 1,385.5 | 100 | % | |||||||||||
MLLIC regularly monitors industry sectors and individual debt securities for evidence of
impairment. This evidence may include one or more of the following: 1) deteriorating market to book
ratio, 2) increasing industry risk factors, 3) deteriorating financial condition of the issuer, 4)
covenant violations, 5) high probability of bankruptcy of the issuer, 6) nationally recognized
credit rating agency downgrades, and/or 7) intent and ability to hold to recovery. Additionally,
for asset-backed securities, cash flow trends and underlying levels of collateral are monitored. A
security is impaired if there is objective evidence that a loss event has occurred after the
initial recognition of the asset that has a negative impact on the estimated future cash flows. A
specific security is considered to be impaired when it is determined that it is probable that not
all amounts due (both principal and interest) will be collected as scheduled. The Company has
evaluated the near-term prospects of the issuers in relation to the severity and duration of the
unrealized loss, and unless otherwise noted, does not consider these investments to be impaired as
of September 30, 2009. Six issuers represent more than 5% of the total unrealized loss position,
which is comprised of two commercial mortgage-backed securities (CMBS) holdings, two subprime
asset-backed securities (ABS) housing related, one US Treasury bond and one residential
mortgage-backed security (RMBS). The Companys largest single issuer unrealized loss is $4.5
million and relates to US Treasuries. The Companys CMBS unrealized loss is $6.8 million and
relates to Citigroup Commercial Mortgage Tranche 2004-C1 and Morgan Stanley Capital I 2005-HQ6.
These are CMBS that contain fixed income positions where the Companys holdings are all rated
investment grade. The Companys ABS housing related unrealized loss is $6.9 million and relates
to GMAC Mortgage Corp Ln Tranche 2006-HE2 and Lehman XS Tranche 2007-9. GMAC Mortgage Corp Ln
Tranche 2006-HE2 is a closed end second lien subprime security that is rated investment grade.
Lehman XS Tranche 2007-9 is a fixed rate first lien subprime security that is rated below
investment grade. Due to an adverse change in cash flows, Lehman XS Tranche 2007-9 was impaired to
discounted cash flows as of September 30, 2009. The Companys RMBS unrealized loss is $3.6 million
and relates to
GSR Mortgage Loan Tranche 2005-AR5. This is a securitized portfolio of RMBS that contains fixed
income positions where the Companys holding is rated below investment grade.
At September 30, 2009 and December 31, 2008, approximately $102.9 million (or 37%) and $108.9
million (or 44%), respectively, of RMBS and CMBS holdings were fully collateralized by the
Government National Mortgage Association, the Federal National Mortgage Association or the Federal
Home Loan Mortgage Corporation. RMBS are securitizations of underlying pools of non-commercial
mortgages on real estate. The underlying residential mortgages have varying credit ratings and are
pooled together and sold in tranches. The Companys RMBS includes collateralized mortgage
obligations (CMOs), government
37
sponsored enterprise (GSE) guaranteed passthroughs, whole loan
passthroughs, and negative amortization mortgage-backed securities (MBS). RMBS and CMBS
securities are structured to allow the investor to determine, within certain limits, the amount of
interest rate risk, prepayment risk and default risk that the investor is willing to accept. It
is this level of risk that determines the degree to which the yields on RMBS and CMBS will exceed
the yields that can be obtained from corporate securities with similar credit ratings.
The following tables summarize the Companys CMBS exposure by rating and vintage at September 30,
2009 and December 31, 2008:
September 30, 2009 | ||||||||||||
Net | ||||||||||||
Estimated | Unrealized | |||||||||||
Amortized | Fair | Gains (Losses) | ||||||||||
(dollars in millions) | Cost | Value | and OTTI | |||||||||
AAA Senior |
$ | 122.9 | $ | 123.1 | $ | 0.2 | ||||||
AAA Mezzanine |
10.6 | 8.3 | (2.3 | ) | ||||||||
AAA Junior |
11.2 | 7.4 | (3.8 | ) | ||||||||
AA |
13.8 | 8.5 | (5.3 | ) | ||||||||
A |
10.9 | 7.5 | (3.4 | ) | ||||||||
Total |
$ | 169.4 | $ | 154.8 | $ | (14.6 | ) | |||||
December 31, 2008 | ||||||||||||
Net | ||||||||||||
Estimated | Unrealized | |||||||||||
Amortized | Fair | Gains (Losses) | ||||||||||
(dollars in millions) | Cost | Value | and OTTI | |||||||||
AAA Senior |
$ | 112.8 | $ | 95.7 | $ | (17.1 | ) | |||||
AAA Mezzanine |
16.9 | 8.8 | (8.1 | ) | ||||||||
AAA Junior |
11.1 | 4.7 | (6.4 | ) | ||||||||
AA |
13.6 | 7.6 | (6.0 | ) | ||||||||
A |
4.5 | 2.6 | (1.9 | ) | ||||||||
Total |
$ | 158.9 | $ | 119.4 | $ | (39.5 | ) | |||||
September 30, 2009 | ||||||||||||||||||||||||
Estimated Fair Value by Vintage | ||||||||||||||||||||||||
(dollars in millions) | 2005&Prior | 2006 | 2007 | 2008 | 2009 | Total | ||||||||||||||||||
AAA Senior (a) |
$ | 42.9 | $ | 60.8 | $ | 19.4 | $ | | $ | | $ | 123.1 | ||||||||||||
AAA Mezzanine |
| 4.7 | 3.6 | | | 8.3 | ||||||||||||||||||
AAA Junior |
5.9 | 1.5 | | | | 7.4 | ||||||||||||||||||
AA |
8.5 | | | | | 8.5 | ||||||||||||||||||
A |
2.8 | 4.7 | | | | 7.5 | ||||||||||||||||||
Total |
$ | 60.1 | $ | 71.7 | $ | 23.0 | $ | | $ | | $ | 154.8 | ||||||||||||
December 31, 2008 | ||||||||||||||||||||||||
Estimated Fair Value by Vintage | ||||||||||||||||||||||||
(dollars in millions) | 2004&Prior | 2005 | 2006 | 2007 | 2008 | Total | ||||||||||||||||||
AAA Senior (a) |
$ | 32.8 | $ | | $ | 45.3 | $ | 17.6 | $ | | $ | 95.7 | ||||||||||||
AAA Mezzanine |
| | 6.5 | 2.3 | | 8.8 | ||||||||||||||||||
AAA Junior |
| 3.7 | 1.0 | | | 4.7 | ||||||||||||||||||
AA |
7.6 | | | | | 7.6 | ||||||||||||||||||
A |
2.6 | | | | | 2.6 | ||||||||||||||||||
Total |
$ | 43.0 | $ | 3.7 | $ | 52.8 | $ | 19.9 | $ | | $ | 119.4 | ||||||||||||
(a) | All 2004 & Prior AAAs are classified as AAA Senior. This was prior to the market convention of Credit Enhanced tiering within AAAs, which started in 2005. |
38
The amortized cost and estimated fair value of fixed maturity securities at September 30, 2009 and
December 31, 2008 by rating agency equivalent were:
September 30, 2009 | December 31, 2008 | |||||||||||||||
Estimated | Estimated | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
(dollars in millions) | Cost | Value | Cost | Value | ||||||||||||
AAA
|
$ | 557.0 | $ | 548.6 | $ | 634.5 | $ | 599.5 | ||||||||
AA
|
118.1 | 115.6 | 105.9 | 96.7 | ||||||||||||
A
|
292.6 | 294.7 | 344.4 | 323.2 | ||||||||||||
BBB
|
282.5 | 285.0 | 347.5 | 297.5 | ||||||||||||
Below investment grade
|
76.1 | 63.6 | 78.1 | 55.1 | ||||||||||||
Total fixed maturity securities
|
$ | 1,326.3 | $ | 1,307.5 | $ | 1,510.4 | $ | 1,372.0 | ||||||||
Investment grade
|
94 | % | 95 | % | 95 | % | 96 | % | ||||||||
Below investment grade
|
6 | % | 5 | % | 5 | % | 4 | % |
The Company defines investment grade securities as unsecured debt obligations that have a
rating equivalent to S&Ps BBB- or higher (or similar rating agency). At September 30, 2009 and
December 31, 2008, approximately $44.5 million (or 3%) and $39.9 million (or 3%), respectively, of
fixed maturity securities were rated BBB-, which is the lowest investment grade rating given by
S&P. Below investment grade securities are speculative and are subject to significantly greater
risks related to the creditworthiness of the issuers and the liquidity of the market for such
securities. The Company closely monitors such investments.
Unrealized losses incurred during the three month period ended September 30, 2009 were primarily
due to price fluctuations resulting from changes in interest rates and credit spreads. The Company
has the ability and intent to hold the investments for a period of time sufficient for a forecasted
market price recovery up to or beyond the amortized cost of the investment.
Details underlying securities in a continuous gross unrealized loss and OTTI position for
investment grade securities were as follows:
September 30, 2009 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
(dollars in millions) | Value | Cost | OTTI (1) | |||||||||
Investment Grade Securities |
||||||||||||
Less than or equal to 90 days |
||||||||||||
Corporate bonds |
||||||||||||
Financial services |
$ | 8.9 | $ | 9.1 | $ | (0.2 | ) | |||||
Industrial |
23.7 | 23.8 | (0.1 | ) | ||||||||
Government and government agencies foreign |
1.4 | 1.4 | | |||||||||
Total fixed maturity and equity securities |
34.0 | 34.3 | (0.3 | ) | ||||||||
Greater than 90 days but less than or equal to 180 days |
||||||||||||
Corporate bonds utility |
0.9 | 0.9 | | |||||||||
Government and government agencies United States |
1.6 | 1.6 | | |||||||||
Total fixed maturity and equity securities |
$ | 2.5 | $ | 2.5 | $ | | ||||||
39
September 30, 2009 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
(dollars in millions) | Value | Cost | OTTI (1) | |||||||||
Investment Grade Securities (continued) |
||||||||||||
Greater than 180 days but less than or equal to 270 days |
||||||||||||
Corporate bonds |
||||||||||||
Financial services |
$ | 2.3 | $ | 2.5 | $ | (0.2 | ) | |||||
Industrial |
4.4 | 4.9 | (0.5 | ) | ||||||||
Asset-backed securities housing related |
13.4 | 15.1 | (1.7 | ) | ||||||||
Commercial
mortgage-backed securities non agency backed |
6.1 | 6.4 | (0.3 | ) | ||||||||
Government and government agencies United States |
84.9 | 89.3 | (4.4 | ) | ||||||||
Total fixed maturity and equity securities |
111.1 | 118.2 | (7.1 | ) | ||||||||
Greater than 270 days but less than or equal to one year |
||||||||||||
Corporate bonds financial services |
10.3 | 10.9 | (0.6 | ) | ||||||||
Commercial
mortgage-backed securities non agency backed |
20.2 | 26.5 | (6.3 | ) | ||||||||
Total fixed maturity and equity securities |
30.5 | 37.4 | (6.9 | ) | ||||||||
Greater than one year |
||||||||||||
Corporate bonds |
||||||||||||
Financial services |
65.0 | 72.7 | (7.7 | ) | ||||||||
Industrial |
14.0 | 14.2 | (0.2 | ) | ||||||||
Utility |
5.2 | 6.0 | (0.8 | ) | ||||||||
Asset-backed securities housing related |
19.3 | 27.4 | (8.1 | ) | ||||||||
Commercial
mortgage-backed securities non agency backed |
53.4 | 63.5 | (10.1 | ) | ||||||||
Residential
mortgage-backed securities non agency backed |
3.9 | 6.5 | (2.6 | ) | ||||||||
Municipals tax exempt |
0.9 | 0.9 | | |||||||||
Equity securities |
||||||||||||
Banking securities |
2.2 | 2.6 | (0.4 | ) | ||||||||
Other securities |
5.0 | 5.8 | (0.8 | ) | ||||||||
Total fixed maturity and equity securities |
$ | 168.9 | $ | 199.6 | $ | (30.7 | ) | |||||
40
September 30, 2009 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
(dollars in millions) | Value | Cost | OTTI (1) | |||||||||
Investment Grade Securities (continued) |
||||||||||||
Total of all investment grade securities |
||||||||||||
Corporate bonds |
||||||||||||
Financial services |
$ | 86.5 | $ | 95.2 | $ | (8.7 | ) | |||||
Industrial |
42.1 | 42.9 | (0.8 | ) | ||||||||
Utility |
6.1 | 6.9 | (0.8 | ) | ||||||||
Asset-backed securities housing related |
32.7 | 42.5 | (9.8 | ) | ||||||||
Commercial
mortgage-backed securities non agency backed |
79.7 | 96.4 | (16.7 | ) | ||||||||
Residential
mortgage-backed securities non agency backed |
3.9 | 6.5 | (2.6 | ) | ||||||||
Municipals tax exempt |
0.9 | 0.9 | | |||||||||
Government and government agencies |
||||||||||||
United States |
86.5 | 90.9 | (4.4 | ) | ||||||||
Foreign |
1.4 | 1.4 | | |||||||||
Equity securities |
||||||||||||
Banking securities |
2.2 | 2.6 | (0.4 | ) | ||||||||
Other securities |
5.0 | 5.8 | (0.8 | ) | ||||||||
Total fixed maturity and equity securities |
$ | 347.0 | $ | 392.0 | $ | (45.0 | ) | |||||
Total number of securities in a continuous unrealized loss position |
81 |
(1) | Subsequent unrealized gains/losses on OTTI securities are included in OCI-OTTI. |
December 31, 2008 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
(dollars in millions) | Value | Cost | OTTI | |||||||||
Investment Grade Securities |
||||||||||||
Less than or equal to 90 days |
||||||||||||
Corporate bonds |
||||||||||||
Financial services |
$ | 35.5 | $ | 39.0 | $ | (3.5 | ) | |||||
Industrial |
49.2 | 51.4 | (2.2 | ) | ||||||||
Utility |
43.4 | 45.5 | (2.1 | ) | ||||||||
Asset-backed securities |
||||||||||||
Housing related |
3.0 | 4.4 | (1.4 | ) | ||||||||
Credit cards |
7.2 | 7.5 | (0.3 | ) | ||||||||
Autos |
0.4 | 0.4 | | |||||||||
Student loan |
5.2 | 5.3 | (0.1 | ) | ||||||||
Commercial mortgage-backed securities non agency backed |
58.3 | 73.6 | (15.3 | ) | ||||||||
Residential mortgage-backed securities agency backed |
7.5 | 8.1 | (0.6 | ) | ||||||||
Government and government agencies United States |
55.1 | 55.1 | | |||||||||
Equity securities banking securities |
2.7 | 3.7 | (1.0 | ) | ||||||||
Total fixed maturity and equity securities |
$ | 267.5 | $ | 294.0 | $ | (26.5 | ) | |||||
41
December 31, 2008 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
(dollars in millions) | Value | Cost | OTTI | |||||||||
Investment Grade Securities (continued) |
||||||||||||
Greater than 90 days but less than or equal to 180 days |
||||||||||||
Corporate bonds |
||||||||||||
Financial services |
$ | 35.3 | $ | 37.2 | $ | (1.9 | ) | |||||
Industrial |
29.9 | 33.2 | (3.3 | ) | ||||||||
Utility |
7.8 | 10.9 | (3.1 | ) | ||||||||
Asset-backed securities |
||||||||||||
Housing related |
19.3 | 20.4 | (1.1 | ) | ||||||||
Credit cards |
10.2 | 24.7 | (14.5 | ) | ||||||||
Autos |
13.2 | 15.0 | (1.8 | ) | ||||||||
Student loan |
5.2 | 5.3 | (0.1 | ) | ||||||||
Equipment lease |
4.4 | 4.8 | (0.4 | ) | ||||||||
Timeshare |
3.3 | 3.8 | (0.5 | ) | ||||||||
Commercial mortgage-backed securities non agency backed |
40.7 | 49.4 | (8.7 | ) | ||||||||
Government and government agencies foreign |
2.7 | 2.8 | (0.1 | ) | ||||||||
Equity securities banking securities |
3.2 | 4.8 | (1.6 | ) | ||||||||
Total fixed maturity and equity securities |
175.2 | 212.3 | (37.1 | ) | ||||||||
Greater than 180 days but less than or equal to 270 days |
||||||||||||
Corporate bonds |
||||||||||||
Financial services |
92.2 | 103.8 | (11.6 | ) | ||||||||
Industrial |
107.3 | 116.5 | (9.2 | ) | ||||||||
Utility |
33.7 | 37.4 | (3.7 | ) | ||||||||
Asset-backed securities |
||||||||||||
Housing related |
6.2 | 10.6 | (4.4 | ) | ||||||||
Credit cards |
4.6 | 5.1 | (0.5 | ) | ||||||||
Autos |
7.5 | 8.4 | (0.9 | ) | ||||||||
Residential mortgage-backed securities non-agency backed |
19.3 | 32.9 | (13.6 | ) | ||||||||
Total fixed maturity and equity securities |
270.8 | 314.7 | (43.9 | ) | ||||||||
Greater than 270 days but less than or equal to one year |
||||||||||||
Corporate bonds |
||||||||||||
Financial services |
34.7 | 49.7 | (15.0 | ) | ||||||||
Industrial |
4.5 | 5.3 | (0.8 | ) | ||||||||
Utility |
14.7 | 16.2 | (1.5 | ) | ||||||||
Asset-backed securities |
||||||||||||
Housing related |
2.7 | 4.8 | (2.1 | ) | ||||||||
Credit cards |
4.3 | 5.0 | (0.7 | ) | ||||||||
Commercial mortgage-backed securities non agency backed |
20.3 | 35.9 | (15.6 | ) | ||||||||
Municipals tax exempt |
0.8 | 0.9 | (0.1 | ) | ||||||||
Equity securities other securities |
6.4 | 11.6 | (5.2 | ) | ||||||||
Total fixed maturity and equity securities |
$ | 88.4 | $ | 129.4 | $ | (41.0 | ) | |||||
42
December 31, 2008 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
(dollars in millions) | Value | Cost | OTTI | |||||||||
Investment Grade Securities (continued) |
||||||||||||
Total of all investment grade securities |
||||||||||||
Corporate bonds |
||||||||||||
Financial services |
$ | 197.7 | $ | 229.7 | $ | (32.0 | ) | |||||
Industrial |
190.9 | 206.4 | (15.5 | ) | ||||||||
Utility |
99.5 | 110.0 | (10.5 | ) | ||||||||
Asset-backed securities |
||||||||||||
Housing related |
31.2 | 40.2 | (9.0 | ) | ||||||||
Credit cards |
26.2 | 42.2 | (16.0 | ) | ||||||||
Autos |
21.1 | 23.7 | (2.6 | ) | ||||||||
Student loan |
10.4 | 10.7 | (0.3 | ) | ||||||||
Equipment lease |
4.4 | 4.8 | (0.4 | ) | ||||||||
Timeshare |
3.3 | 3.8 | (0.5 | ) | ||||||||
Commercial mortgage-backed securities non agency backed |
119.4 | 158.9 | (39.5 | ) | ||||||||
Residential mortgage-backed securities |
||||||||||||
Agency backed |
7.5 | 8.1 | (0.6 | ) | ||||||||
Non agency backed |
19.3 | 32.9 | (13.6 | ) | ||||||||
Municipals tax exempt |
0.8 | 0.9 | (0.1 | ) | ||||||||
Government and government agencies |
||||||||||||
United States |
55.1 | 55.1 | | |||||||||
Foreign |
2.7 | 2.8 | (0.1 | ) | ||||||||
Equity securities |
||||||||||||
Banking securities |
6.0 | 8.6 | (2.6 | ) | ||||||||
Other securities |
6.4 | 11.6 | (5.2 | ) | ||||||||
Total fixed maturity and equity securities |
$ | 801.9 | $ | 950.4 | $ | (148.5 | ) | |||||
Total number of securities in a continuous unrealized loss position |
283 |
Details underlying securities in a continuous gross unrealized loss position for below
investment grade securities were as follows:
September 30, 2009 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
(dollars in millions) | Value | Cost | OTTI (1) | |||||||||
Below Investment Grade Securities |
||||||||||||
Less than or equal to 90 days |
||||||||||||
Corporate bonds industrial |
$ | 2.0 | $ | 2.3 | $ | (0.3 | ) | |||||
Government and government agencies foreign |
2.2 | 2.2 | | |||||||||
Total fixed maturity and equity securities |
4.2 | 4.5 | (0.3 | ) | ||||||||
Greater than 180 days but less than or equal to 270 days |
||||||||||||
Corporate bonds industrial |
1.4 | 1.9 | (0.5 | ) | ||||||||
Total fixed maturity and equity securities |
$ | 1.4 | $ | 1.9 | $ | (0.5 | ) | |||||
43
September 30, 2009 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
(dollars in millions) | Value | Cost | OTTI (1) | |||||||||
Below Investment Grade Securities (continued) |
||||||||||||
Greater than 270 days but less than or equal to one year |
||||||||||||
Corporate bonds |
||||||||||||
Industrial |
$ | 1.4 | $ | 2.0 | $ | (0.6 | ) | |||||
Utility |
0.5 | 0.5 | | |||||||||
Asset-backed securities housing related |
5.5 | 8.9 | (3.4 | ) | ||||||||
Equity securities banking securities |
1.2 | 1.8 | (0.6 | ) | ||||||||
Total fixed maturity and equity securities |
8.6 | 13.2 | (4.6 | ) | ||||||||
Greater than one year |
||||||||||||
Corporate bonds |
||||||||||||
Industrial |
9.3 | 9.7 | (0.4 | ) | ||||||||
Utility |
7.1 | 7.3 | (0.2 | ) | ||||||||
Asset-backed securities housing related |
2.5 | 4.9 | (2.4 | ) | ||||||||
Residential
mortgage-backed securities non agency backed |
16.9 | 22.4 | (5.5 | ) | ||||||||
Equity securities banking securities |
2.6 | 4.8 | (2.2 | ) | ||||||||
Total fixed maturity and equity securities |
38.4 | 49.1 | (10.7 | ) | ||||||||
Total of all below investment grade securities |
||||||||||||
Corporate bonds |
||||||||||||
Industrial |
14.1 | 15.9 | (1.8 | ) | ||||||||
Utility |
7.6 | 7.8 | (0.2 | ) | ||||||||
Asset-backed securities housing related |
8.0 | 13.8 | (5.8 | ) | ||||||||
Residential
mortgage-backed securities non agency backed |
16.9 | 22.4 | (5.5 | ) | ||||||||
Government and government agencies foreign |
2.2 | 2.2 | | |||||||||
Equity securities banking securities |
3.8 | 6.6 | (2.8 | ) | ||||||||
Total fixed maturity and equity securities |
$ | 52.6 | $ | 68.7 | $ | (16.1 | ) | |||||
Total number of securities in a continuous unrealized loss position |
26 |
(1) | Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI. |
December 31, 2008 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
(dollars in millions) | Value | Cost | OTTI | |||||||||
Below Investment Grade Securities |
||||||||||||
Less than or equal to 90 days |
||||||||||||
Corporate bonds |
||||||||||||
Industrial |
$ | 14.3 | $ | 18.2 | $ | (3.9 | ) | |||||
Utility |
0.3 | 0.5 | (0.2 | ) | ||||||||
Asset-backed securities housing related |
5.1 | 9.2 | (4.1 | ) | ||||||||
Total fixed maturity and equity securities |
$ | 19.7 | $ | 27.9 | $ | (8.2 | ) | |||||
44
December 31, 2008 | ||||||||||||
Gross | ||||||||||||
Estimated | Unrealized | |||||||||||
Fair | Amortized | Losses and | ||||||||||
(dollars in millions) | Value | Cost | OTTI | |||||||||
Below Investment Grade Securities (continued) |
||||||||||||
Greater than 90 days but less than or equal to 180 days |
||||||||||||
Corporate bonds |
||||||||||||
Financial services |
$ | 3.7 | $ | 5.7 | $ | (2.0 | ) | |||||
Industrial |
13.8 | 20.6 | (6.8 | ) | ||||||||
Government and government agencies foreign |
1.5 | 1.7 | (0.2 | ) | ||||||||
Total fixed maturity and equity securities |
19.0 | 28.0 | (9.0 | ) | ||||||||
Greater than 180 days but less than or equal to 270 days |
||||||||||||
Corporate bonds |
||||||||||||
Industrial |
2.8 | 4.1 | (1.3 | ) | ||||||||
Utility |
5.1 | 7.3 | (2.2 | ) | ||||||||
Total fixed maturity and equity securities |
7.9 | 11.4 | (3.5 | ) | ||||||||
Greater than 270 days but less than or equal to one year |
||||||||||||
Corporate bonds |
||||||||||||
Financial services |
1.0 | 1.5 | (0.5 | ) | ||||||||
Industrial |
1.1 | 2.9 | (1.8 | ) | ||||||||
Equity securities other financial services securities |
1.1 | 1.6 | (0.5 | ) | ||||||||
Total fixed maturity and equity securities |
3.2 | 6.0 | (2.8 | ) | ||||||||
Total of all below investment grade securities |
||||||||||||
Corporate bonds |
||||||||||||
Financial services |
4.7 | 7.2 | (2.5 | ) | ||||||||
Industrial |
32.0 | 45.8 | (13.8 | ) | ||||||||
Utility |
5.4 | 7.8 | (2.4 | ) | ||||||||
Asset-backed securities housing related |
5.1 | 9.2 | (4.1 | ) | ||||||||
Government and government agencies foreign |
1.5 | 1.7 | (0.2 | ) | ||||||||
Equity securities other financial services securities |
1.1 | 1.6 | (0.5 | ) | ||||||||
Total fixed maturity and equity securities |
$ | 49.8 | $ | 73.3 | $ | (23.5 | ) | |||||
Total number of securities in a continuous unrealized loss position |
47 |
Gross unrealized losses and OTTI on available-for-sale below investment grade securities
represented 26% and 14% of total gross unrealized losses and OTTI on all available-for-sale
securities at September 30, 2009 and December 31, 2008, respectively. Generally, below investment
grade securities are more likely than investment grade securities to develop credit concerns. The
ratios of estimated fair value to amortized cost reflected in the table below were not necessarily
indicative of the market value to
amortized cost relationships for the securities throughout the entire time that the securities
have been in an unrealized loss position nor are they necessarily indicative of these ratios
subsequent to September 30, 2009.
45
Details underlying available-for-sale securities below investment grade and in an unrealized loss
and OTTI position were as follows:
September 30, 2009 | ||||||||||||||||
Ratio of | Gross | |||||||||||||||
Amortized Cost | Estimated | Unrealized | ||||||||||||||
to Estimated | Fair | Amortized | Losses and | |||||||||||||
(dollars in millions) | Fair Value | Value | Cost | OTTI | ||||||||||||
Less than or equal to 90 days |
||||||||||||||||
70% to 100% | $ | 4.2 | $ | 4.5 | $ | (0.3 | ) | |||||||||
4.2 | 4.5 | (0.3 | ) | |||||||||||||
Greater than 180 days but less than or equal to 270 days |
||||||||||||||||
70% to 100% | 1.4 | 1.9 | (0.5 | ) | ||||||||||||
1.4 | 1.9 | (0.5 | ) | |||||||||||||
Greater than 270 days but less than or equal to one year |
||||||||||||||||
70% to 100% | 1.9 | 2.5 | (0.6 | ) | ||||||||||||
40% to 70% | 6.7 | 10.7 | (4.0 | ) | ||||||||||||
8.6 | 13.2 | (4.6 | ) | |||||||||||||
Greater than one year |
||||||||||||||||
70% to 100% | 30.6 | 34.7 | (4.1 | ) | ||||||||||||
40% to 70% | 7.8 | 14.4 | (6.6 | ) | ||||||||||||
38.4 | 49.1 | (10.7 | ) | |||||||||||||
Total |
$ | 52.6 | $ | 68.7 | $ | (16.1 | ) | |||||||||
December 31, 2008 | ||||||||||||||||
Ratio of | Gross | |||||||||||||||
Amortized Cost | Estimated | Unrealized | ||||||||||||||
to Estimated | Fair | Amortized | Losses and | |||||||||||||
(dollars in millions) | Fair Value | Value | Cost | OTTI | ||||||||||||
Less than or equal to 90 days |
||||||||||||||||
70% to 100% | $ | 12.3 | $ | 13.7 | $ | (1.4 | ) | |||||||||
40% to 70% | 6.7 | 12.3 | (5.6 | ) | ||||||||||||
Below 40% | 0.7 | 1.9 | (1.2 | ) | ||||||||||||
19.7 | 27.9 | (8.2 | ) | |||||||||||||
Greater than 90 days but less than or equal to 180 days |
||||||||||||||||
70% to 100% | 10.2 | 11.9 | (1.7 | ) | ||||||||||||
40% to 70% | 8.0 | 13.8 | (5.8 | ) | ||||||||||||
Below 40% | 0.8 | 2.3 | (1.5 | ) | ||||||||||||
19.0 | 28.0 | (9.0 | ) | |||||||||||||
Greater than 180 days but less than or equal to 270 days |
||||||||||||||||
70% to 100% | 3.4 | 4.3 | (0.9 | ) | ||||||||||||
40% to 70% | 4.3 | 6.4 | (2.1 | ) | ||||||||||||
Below 40% | 0.2 | 0.7 | (0.5 | ) | ||||||||||||
7.9 | 11.4 | (3.5 | ) | |||||||||||||
Greater than 270 days but less than or equal to one year |
||||||||||||||||
70% to 100% | 1.9 | 2.6 | (0.7 | ) | ||||||||||||
40% to 70% | 1.0 | 1.5 | (0.5 | ) | ||||||||||||
Below 40% | 0.3 | 1.9 | (1.6 | ) | ||||||||||||
3.2 | 6.0 | (2.8 | ) | |||||||||||||
Total |
$ | 49.8 | $ | 73.5 | $ | (23.5 | ) | |||||||||
46
The majority of assets depressed over 20% as well as over 40% and greater than one year are
primarily related to subprime ABS housing related, CMBS and RMBS. As there has been no impact
to expected future cash flows, the Company does not consider the underlying investments to be
impaired as of September 30, 2009.
Subprime Mortgage Investments
Subprime mortgages are loans to homebuyers who have weak or impaired credit histories. In recent
years, the market for these loans has expanded rapidly. During that time, however, lending
practices and credit assessment standards grew steadily weaker. As a result, the market is now
experiencing a sharp increase in the number of loan defaults. Investors in subprime mortgage
assets include not only mortgage lenders, but also brokers, hedge funds, and insurance companies.
The Company does not currently invest in or originate whole loan residential mortgages. The
Company categorizes ABS issued by a securitization trust as having subprime mortgage exposure when
the average credit score of the underlying mortgage borrowers in a securitization trust is below
660 at issuance. The Company also categorizes ABS issued by a securitization trust with second
lien mortgages as subprime mortgage exposure, even though a significant percentage of second lien
mortgage borrowers may not necessarily have credit scores below 660 at issuance.
The following tables provide the subprime mortgage exposure by rating and estimated fair value by
vintage at September 30, 2009 and December 31, 2008:
September 30, 2009 | ||||||||||||
Net | ||||||||||||
Estimated | Unrealized | |||||||||||
Amortized | Fair | Losses and | ||||||||||
(dollars in millions) | Cost | Value | OTTI | |||||||||
First lien fixed |
||||||||||||
AAA |
$ | 34.2 | $ | 29.0 | $ | (5.2 | ) | |||||
Below BBB |
13.9 | 8.1 | (5.8 | ) | ||||||||
Second lien (a) |
||||||||||||
AAA |
0.2 | 0.2 | | |||||||||
BBB |
7.7 | 4.3 | (3.4 | ) | ||||||||
Total |
$ | 56.0 | $ | 41.6 | $ | (14.4 | ) | |||||
December 31, 2008 | ||||||||||||
Net | ||||||||||||
Estimated | Unrealized | |||||||||||
Amortized | Fair | Losses and | ||||||||||
(dollars in millions) | Cost | Value | OTTI | |||||||||
First lien fixed |
||||||||||||
AAA |
$ | 41.3 | $ | 38.1 | $ | (3.2 | ) | |||||
AA |
4.9 | 2.1 | (2.8 | ) | ||||||||
Below BBB |
9.2 | 5.1 | (4.1 | ) | ||||||||
Second lien (a) |
||||||||||||
AAA |
1.2 | 1.2 | | |||||||||
BBB |
5.5 | 5.2 | (0.3 | ) | ||||||||
Total |
$ | 62.1 | $ | 51.7 | $ | (10.4 | ) | |||||
(a) | Second lien collateral primarily composed of loans to prime and Alt A borrowers. |
47
September 30, 2009 | ||||||||||||||||||||||||
Estimated Fair Value by Vintage | ||||||||||||||||||||||||
(dollars in millions) | 2005&Prior | 2006 | 2007 | 2008 | 2009 | Total | ||||||||||||||||||
First lien fixed |
||||||||||||||||||||||||
AAA |
$ | 25.4 | $ | 2.4 | $ | 1.3 | $ | | $ | | $ | 29.1 | ||||||||||||
Below BBB |
| | 8.0 | | | 8.0 | ||||||||||||||||||
Second lien (a) |
||||||||||||||||||||||||
AAA |
0.2 | | | | | 0.2 | ||||||||||||||||||
BBB |
| 4.3 | | | | 4.3 | ||||||||||||||||||
Total |
$ | 25.6 | $ | 6.7 | $ | 9.3 | $ | | $ | | $ | 41.6 | ||||||||||||
December 31, 2008 | ||||||||||||||||||||||||
Estimated Fair Value by Vintage | ||||||||||||||||||||||||
(dollars in millions) | 2004&Prior | 2005 | 2006 | 2007 | 2008 | Total | ||||||||||||||||||
First lien fixed |
||||||||||||||||||||||||
AAA |
$ | 26.3 | $ | 7.6 | $ | 2.7 | $ | 1.5 | $ | | $ | 38.1 | ||||||||||||
AA |
| | | 2.1 | | 2.1 | ||||||||||||||||||
Below BBB |
| | | 5.1 | | 5.1 | ||||||||||||||||||
Second lien (a) |
||||||||||||||||||||||||
AAA |
| 1.2 | | | | 1.2 | ||||||||||||||||||
BBB |
| | 5.2 | | | 5.2 | ||||||||||||||||||
Total |
$ | 26.3 | $ | 8.8 | $ | 7.9 | $ | 8.7 | $ | | $ | 51.7 | ||||||||||||
(a) | Second lien collateral primarily composed of loans to prime and Alt A borrowers. |
OTTI
The Companys impairment losses were $9.2 million and $3.3 million for the nine month periods
ended September 30, 2009 and 2008, respectively, net of VOBA amortization. The Companys
impairment losses were $3.9 million and $2.3 million for the three month periods ended September
30, 2009 and 2008, respectively, net of VOBA amortization. The Company impaired its holding of a
subprime mortgage ABS for $0.4 million, a preferred stock in CIT Group Inc. for $1.5 million and
an Upper Tier 2 Capital Security for $2.5 million during the third quarter of 2009. The Company
impaired its holding in Lear Corp to discounted cash flows in the second quarter of 2009 for $1.1
million as a restructuring or bankruptcy filing was probable. Eighteen unique issuers accounted
for the remaining gross impairment of $7.5 million.
The Company adopted revised guidance on the recognition and presentation of OTTI as of June 30,
2009. The gross cumulative effect of this adoption was a $12.6 million adjustment to retained
earnings and amortized cost for fixed maturity securities and cost for equity securities for the
non credit related portion of previously recorded impairments on securities still in inventory at
April 1, 2009. Of this, $3.5 million related to non credit impairments previously recorded in
income during the first quarter of 2009.
Mortgage Loans on Real Estate
The fair value for mortgage loans on real estate is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with similar credit
ratings and/or similar remaining maturities. The estimated fair value of the mortgage loans on
commercial real estate at September 30, 2009 and December 31, 2008 was $67.9 million and $70.8
million, respectively.
All mortgage loans that are impaired have an established allowance for loss. Changing economic
conditions impact our valuation of mortgage loans. Changing vacancies and rents are incorporated
into the discounted cash flow analysis that the Company perform for monitored loans and may
contribute to the establishment of (or an increase or decrease in) an allowance for losses. In
addition, the Company continues to monitor the entire commercial mortgage loan portfolio to
identify risk. Areas of emphasis are
properties that have deteriorating credits or have experienced debt coverage reduction. Where
warranted, the Company has established or increased loss reserves based upon this analysis. There
were no impaired mortgage loans at September 30, 2009 and December 31, 2008. At September 30,
2009 and December 31, 2008, there were no commercial mortgage loans that were two or more payments
delinquent. See Note 3 to the Financial Statements for further discussion.
48
Liquidity and Capital Resources
Liquidity
MLLICs liquidity requirements include the payment of sales commissions and other underwriting
expenses and the funding of its contractual obligations for the life insurance and annuity
contracts it has in force. MLLIC has developed and utilizes a cash flow projection system and
regularly performs asset/liability duration matching in the management of its asset and liability
portfolios. MLLIC anticipates funding its cash requirements utilizing cash from operations, normal
investment maturities and anticipated calls and repayments, consistent with prior years. As of
September 30, 2009 and December 31, 2008, MLLICs assets included $1.8 billion and $1.7 billion,
respectively, of cash, short-term investments and investment grade publicly traded
available-for-sale securities that could be liquidated if funds were required.
Capital Resources
During the first nine months of 2009 and 2008, the Company did not pay any cash dividends to AUSA
or receive any capital contributions from AUSA.
Ratings
Ratings are an important factor in establishing the competitive position in the insurance and
financial services marketplace. Rating agencies rate insurance companies based on financial
strength and the ability to pay claims, factors more relevant to contract holders than investors.
The insurer financial strength rating scales of S&P, A.M. Best, Moodys Investors Service
(Moodys), and Fitch Ratings (Fitch) are characterized as follows:
| S&P AAA to R | ||
| A.M. Best A++ to S | ||
| Moodys Aaa to C | ||
| Fitch AAA to C |
The following table summarizes the Companys ratings as of November 12, 2009:
S&P
|
AA- | (4th out of 21) | ||
A.M. Best
|
A | (3rd out of 16) | ||
Moodys
|
A1 | (5th out of 21) | ||
Fitch
|
AA | (3rd out of 19) |
A downgrade of our financial strength rating could affect our competitive position in the
insurance industry and make it more difficult for us to market our products, as potential customers
may select companies with higher financial strength ratings. These ratings are not a
recommendation to buy or hold any of the Companys securities and they may be revised or revoked at
any time at the sole discretion of the rating organization.
Commitments and Contingencies
The following table summarizes the Companys policyholders obligations as of September 30, 2009:
Less | One To | Four To | More | |||||||||||||||||
Than One | Three | Five | Than Five | |||||||||||||||||
(dollars in millions) (a) | Year | Years | Years | Years | Total | |||||||||||||||
General accounts |
$ | 144.5 | $ | 268.4 | $ | 238.4 | $ | 1,240.8 | $ | 1,892.1 | ||||||||||
Separate Accounts |
940.1 | 1,848.4 | 1,529.2 | 6,331.1 | 10,648.8 | |||||||||||||||
$ | 1,084.6 | $ | 2,116.8 | $ | 1,767.6 | $ | 7,571.9 | $ | 12,540.9 | |||||||||||
49
(a) | The policyholder liabilities include benefit and claim liabilities of which a significant portion represents policies and contracts that do not have a stated contractual maturity. The projected cash benefit payments in the table above are based on managements best estimates of the expected gross benefits and expenses, partially offset by the expected gross premiums, fees and charges relating to the existing business in force. Estimated cash benefit payments are based on mortality and lapse assumptions comparable with the Companys historical experience, modified for recently observed trends. Actual payment obligations may differ if experience varies from these assumptions. The cash benefit payments are presented on an undiscounted basis and are before deduction of tax and before reinsurance. The liability amounts in the Companys financial statements reflect the discounting for interest as well as adjustments for the timing of other factors as described above. As a result, the sum of the cash benefit payments shown for all years in the table above exceeds the corresponding policyholder liability amounts. |
The Company has utilized public information to estimate the future assessments it will incur as a
result of life insurance company insolvencies. At September 30, 2009 and December 31, 2008, the
Companys estimated liability for future guaranty fund assessments was $5.0 million and $5.7
million, respectively. The Company regularly monitors public information regarding insurer
insolvencies and adjusts its estimated liability as appropriate.
In the normal course of business, the Company is subject to various claims and assessments.
Management believes the settlement of these matters would not have a material effect on the
financial position, results of operations or cash flows of the Company.
Results of Operations
For the three month periods ended September 30, 2009 and 2008, MLLIC recorded net income of $10.3
million and $17.8 million, respectively. The decrease in earnings during the three month period
ended September 30, 2009 as compared to the same period in 2008 was primarily a result of 2009 net
realized investment losses and a decline in policy charge revenue partially offset by a decrease in
policy benefits related to guarantees.
For the nine month periods ended September 30, 2009 and 2008, MLLIC recorded net income (loss) of
($189.9) million and $46.4 million, respectively. The decline in earnings during the nine month
period ended September 30, 2009 as compared to the same period in 2008 was primarily a result of a
decline in policy charge revenue, 2009 net realized investment losses, the 2009 VOBA impairment,
and the 2009 tax valuation allowance on deferred tax assets.
Policy charge revenue decreased $8.4 million (or 14%) and decreased $41.0 million (or 22%),
respectively, during the three and nine month periods ended September 30, 2009, as compared to the
same periods in 2008. The following table provides the changes in policy charge revenue by type
for each respective period:
Three Months | Nine Months | |||||||
(dollars in millions) | 2009 vs. 2008 | 2009 vs. 2008 | ||||||
Asset-based policy charge revenue |
$ | (6.4 | ) | $ | (31.8 | ) (a) | ||
Guaranteed benefit based policy charge revenue |
1.2 | 2.0 | ||||||
Non-asset based policy charge revenue |
(3.2 | ) | (11.2 | ) (b) | ||||
$ | (8.4 | ) | $ | (41.0 | ) | |||
(a) | Asset-based policy charge revenue was negatively impacted by the decrease in average variable account balances during 2009 as compared to 2008. | |
(b) | The decrease in non-asset based policy charges is primarily due to the run-off of the life business as well as less paid up additions in the first quarter 2009 as a result of poor equity market performance in 2008. |
50
Net realized investment gains (losses) decreased $33.2 million and $56.3 million, respectively,
during the current three and nine month periods ended September 30, 2009, as compared to the same
periods in 2008. The following table provides the changes in net realized investment gains
(losses) by type:
Three Months | Nine Months | |||||||
(dollars in millions) | 2009 vs. 2008 | 2009 vs. 2008 | ||||||
Credit related gains (losses) |
$ | (0.8 | ) | $ | (6.1 | ) (a) | ||
Interest related gains (losses) |
4.4 | 2.6 | (b) | |||||
Equity related gains (losses) |
(34.2 | ) | (53.4 | ) (c) | ||||
Associated amortization of VOBA |
(2.6 | ) | 0.6 | |||||
$ | (33.2 | ) | $ | (56.3 | ) | |||
Write-downs for OTTI included in net realized investment gains (losses) |
$ | 0.8 | $ | (6.7 | ) |
(a) | The increase in credit related losses during the current three months of 2009 as compared to 2008 is due to the Companys intent to sell securities. The increase in credit related losses during the nine months of 2009 as compared to 2008 were primarily due to additional impairments on securities that were impaired during the fourth quarter 2008 as a result of deterioration in the estimated fair value of the securities as well as impairments taken on securities for which the Company participated in exchanges/tender offers on those securities during 2009. | |
(b) | The increase in interest related losses during 2009 was primarily due to the change in impairments. | |
(c) | The change in equity related gains (losses) principally relates to increases in net losses on futures contracts in the first half of 2009 as compared to net gains on futures contracts in 2008. |
Policy benefits decreased $25.9 million and $13.9 million, respectively, during the current three
and nine month periods ended September 30, 2009 as compared to the same periods in 2008. The
following table provides the changes in policy benefits by type:
Three Months | Nine Months | |||||||
(dollars in millions) | 2009 vs. 2008 | 2009 vs. 2008 | ||||||
Annuity benefit unlocking |
$ | (32.3 | ) | $ | 14.2 | (a) | ||
Annuity benefit expense |
8.8 | (28.3 | ) (b) | |||||
Amortization of deferred sales inducements |
(1.6 | ) | 1.2 | |||||
Life insurance mortality expense |
(0.8 | ) | (1.0 | ) | ||||
$ | (25.9 | ) | $ | (13.9 | ) | |||
(a) | See the Critical Accounting Policies and Estimates section above for further discussion of annuity benefit unlocking. | |
(b) | The decrease in annuity benefit expense was primarily driven by the change in reserve for the embedded derivatives as compared to the same period in 2008. This was primarily a result of the positive equity markets relative to the same period in 2008. |
Reinsurance premiums ceded decreased $2.5 million and $10.1 million during the three and nine month
periods ended September 30, 2009 as compared to the same periods in 2008. Effective second quarter
of 2008, the Company began to recapture the majority of its reinsurance resulting in the decreased
reinsurance premiums.
Amortization (accretion) of deferred policy acquisition costs was ($6.3) million and ($0.3) million
during the current three month periods ended September 30, 2009 and 2008, respectively.
Amortization (accretion) of deferred policy acquisition costs was $4.6 million and ($0.5) million
during the current nine month periods ended September 30, 2009 and 2008, respectively. For the
three and nine month periods ended September 30, 2009, there was an favorable (unfavorable) impact
to pre-tax income related to DAC unlocking of $0.1 million and ($0.3) million, respectively. For
the three and nine month periods ended September 30, 2008, there
was an unfavorable impact to pre-tax income related to DAC unlocking of $3.6 million and $6.3
million, respectively. During the three months ended September 30, 2009, improved equity markets
resulted in guaranteed benefit reserve releases resulting in accretion expense. During the nine
months ended September 30, 2009, the Company experienced lower than expected gross profits
impacting amortization. During the first nine months of 2008, the Company experienced lower than
expected gross profits as a result of market losses which reduced amortization expense and
unlocking.
51
Amortization (accretion) and impairment of VOBA was ($4.5) million and $136.3 million for the three
and nine month periods ended September 30, 2009, respectively. Amortization (accretion) of VOBA
was ($5.2) million and $28.2 million for the three and nine month periods ended September 30, 2008,
respectively. For the three month period ended September 30, 2009, there was no impairment charge.
During the first quarter 2009, there was an impairment charge of $63.9 million. In addition, for
the three and nine month periods ended September 30, 2009, there was favorable (unfavorable)
unlocking of $8.3 million and ($78.1) million, respectively. For the three and nine month periods
ended September 30, 2008, there was favorable unlocking of $0.5 million and $2.5 million,
respectively. There were no impairment charges for the three and nine month periods ended
September 30, 2008.
At December 31, 2008, an impairment charge was taken for the entire unamortized other intangibles
balance which included the distribution agreement, the trade name and the non-compete agreement
acquired at the acquisition date. Amortization expense for the three and nine month periods ended
September 30, 2008 was $0.4 million and $2.8 million, respectively.
Insurance expenses and taxes increased $1.9 million (or 10%) and $2.1 million (or 4%) in the
current three and nine month periods ended September 30, 2009 as compared to the same periods in
2008. The following table provides the changes in insurance expenses and taxes for each respective
period:
Three Months | Nine Months | |||||||
(dollars in millions) | 2009 vs. 2008 | 2009 vs. 2008 | ||||||
Commissions |
$ | 0.8 | $ | (4.9 | ) (a) | |||
General insurance expense |
1.0 | 7.2 | (b) | |||||
Taxes, licenses, and fees |
0.1 | (0.2 | ) | |||||
$ | 1.9 | $ | 2.1 | |||||
(a) | The decrease in commissions is primarily due to a decline in the trail commissions paid as a result of decreased average variable account balances in 2009 compared to 2008. | |
(b) | The increase in general insurance expenses is primarily due to increased transition and system conversion related expenses. |
Segment Information
The products that comprise the Annuity and Life Insurance segments generally possess similar
economic characteristics. As such, the financial condition and results of operations of each
business segment are generally consistent with the Companys consolidated financial condition and
results of operations presented herein.
ITEM 4. | Controls and Procedures |
The Companys Disclosure Committee assists with the monitoring and evaluation of its disclosure
controls and procedures. The Companys President, Chief Financial Officer and Disclosure Committee
have evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in
Rule 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by
this Report. Based on that evaluation, the Companys President and Chief Financial Officer have
concluded that the Companys disclosure controls and procedures are effective.
In addition, no change in the Companys internal control over financial reporting (as defined in
Rule 15d-15(f) under the Securities Exchange Act of 1934) occurred during the third fiscal quarter
of 2009 that has materially affected, or is reasonably likely to materially affect, the Companys
internal control over financial reporting.
52
PART II Other Information
Item 1. | Legal Proceedings. |
Nothing to report.
Item 1A. | Risk Factors. |
In addition to the other information set forth in this report, you should carefully consider the
factors discussed in Part 1. Item 1A. Risk Factors in the Annual Report on Form 10-K for the year
ended December 31, 2008, which could materially affect the Companys business, financial condition
or future results. The risks described in the Companys Annual Report on Form 10-K are not the
only risks facing the Company. Additional risks and uncertainties not currently known to the
Company or that the Company currently deems to be immaterial also may materially adversely affect
the Companys business, financial condition, and/or operating results.
Item 5. | Other Information. |
(a) Nothing to report.
(b) Nothing to report.
53
Item 6. Exhibits.
2.1 | Merrill Lynch Life Insurance Company Board of Directors Resolution in Connection with the Merger between Merrill Lynch Life Insurance Company and Tandem Insurance Group, Inc. (Incorporated by reference to Exhibit 2.1, filed September 5, 1991, as part of Post-Effective Amendment No. 4 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
2.2 | Plan and Agreement of Merger between Merrill Lynch Life Insurance Company and Tandem Insurance Group, Inc. (Incorporated by reference to Exhibit 2.1a, filed September 5, 1991, as part of Post-Effective Amendment No. 4 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
3.1 | Articles of Amendment, Restatement and Redomestication of the Articles of Incorporation of Merrill Lynch Life Insurance Company. (Incorporated by reference to Exhibit 6(a) to Post-Effective Amendment No. 10 to Merrill Lynch Life Variable Annuity Separate Account As registration statement on Form N-4, File No. 33-43773, filed December 10, 1996.) | ||
3.2 | Amended and Restated By-Laws of Merrill Lynch Life Insurance Company. (Incorporated by reference to Exhibit 6(b) to Post-Effective Amendment No. 10 to Merrill Lynch Life Variable Annuity Separate Account As registration statement on Form N-4, File No. 33-43773, filed December 10, 1996.) | ||
4.1 | Group Modified Guaranteed Annuity Contract, ML-AY-361. (Incorporated by reference to Exhibit 4.1, filed February 23, 1989, as part of Pre-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.2 | Individual Certificate, ML-AY-362. (Incorporated by reference to Exhibit 4.2, filed February 23, 1989, as part of Pre-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.2a | Individual Certificate, ML-AY-362 KS. (Incorporated by reference to Exhibit 4.2a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.2b | Individual Certificate, ML-AY-378. (Incorporated by reference to Exhibit 4.2b, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.2c | Modified Guaranteed Annuity Contract. (Incorporated by reference to Exhibit 4(a), filed August 18, 1997, as part of the Registrants registration statement on Form S-3, File No. 333-33863.) |
4.3 | Individual Tax-Sheltered Annuity Certificate, ML-AY-372. (Incorporated by reference to Exhibit 4.3, filed February 23, 1989, as part of Pre-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.3a | Individual Tax-Sheltered Annuity Certificate, ML-AY-372 KS. (Incorporated by reference to Exhibit 4.3a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.4 | Qualified Retirement Plan Certificate, ML-AY-373. (Incorporated by reference to Exhibit 4.4 to the Registrants registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.) | ||
4.4a | Qualified Retirement Plan Certificate, ML-AY-373 KS. (Incorporated by reference to Exhibit 4.4a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.5 | Individual Retirement Annuity Certificate, ML-AY-374. (Incorporated by reference to Exhibit 4.5 to the Registrants registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.) | ||
4.5a | Individual Retirement Annuity Certificate, ML-AY-374 KS. (Incorporated by reference to Exhibit 4.5a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.5b | Individual Retirement Annuity Certificate, ML-AY-375 KS. (Incorporated by reference to Exhibit 4.5b, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.5c | Individual Retirement Annuity Certificate, ML-AY-379. (Incorporated by reference to Exhibit 4.5c, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.6 | Individual Retirement Account Certificate, ML-AY-375. (Incorporated by reference to Exhibit 4.6, filed February 23, 1989, as part of Pre-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.6a | Individual Retirement Account Certificate, ML-AY-380. (Incorporated by reference to Exhibit 4.6a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.7 | Section 457 Deferred Compensation Plan Certificate, ML-AY-376. (Incorporated by reference to Exhibit 4.7 to the Registrants registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.) | ||
4.7a | Section 457 Deferred Compensation Plan Certificate, ML-AY-376 KS. (Incorporated by reference to Exhibit 4.7a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.8 | Tax-Sheltered Annuity Endorsement, ML-AY-366. (Incorporated by reference to Exhibit 4.8 to the Registrants registration statement on Form S-1, File No. 33- 26322, filed January 3, 1989.) | ||
4.8a | Tax-Sheltered Annuity Endorsement, ML-AY-366 190. (Incorporated by reference to Exhibit 4.8a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.8b | Tax-Sheltered Annuity Endorsement, ML-AY-366 1096. (Incorporated by reference to Exhibit 4(h)(3), filed March 27, 1997, as part of Post-Effective Amendment No. 2 to the Registrants registration statement on Form S-1, File No. 33-58303.) | ||
4.9 | Qualified Retirement Plan Endorsement, ML-AY-364. (Incorporated by reference to Exhibit 4.9 to the Registrants registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.) | ||
4.10 | Individual Retirement Annuity Endorsement, ML-AY-368. (Incorporated by reference to Exhibit 4.10 to the Registrants registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.) | ||
4.10a | Individual Retirement Annuity Endorsement, ML-AY-368 190. (Incorporated by reference to Exhibit 4.10a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.10b | Individual Retirement Annuity Endorsement, ML009. (Incorporated by reference to Exhibit 4(j)(3) to Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-60290, filed March 31, 1994.) | ||
4.10c | Individual Retirement Annuity Endorsement. (Incorporated by reference to Exhibit 4(b) to Pre-Effective Amendment No. 1 to the Registrants registration statement on Form S-3, File No. 333-33863, filed October 31, 1997.) | ||
4.11 | Individual Retirement Account Endorsement, ML-AY-365. (Incorporated by reference to Exhibit 4.11 to the Registrants registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.) |
4.11a | Individual Retirement Account Endorsement, ML- AY-365 190. (Incorporated by reference to Exhibit 4.11a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.12 | Section 457 Deferred Compensation Plan Endorsement, ML-AY-367. (Incorporated by reference to Exhibit 4.12 to the Registrants registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.) | ||
4.12a | Section 457 Deferred Compensation Plan Endorsement, ML-AY-367 190. (Incorporated by reference to Exhibit 4.12a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.13 | Qualified Plan Endorsement, ML-AY-369. (Incorporated by reference to Exhibit 4.13 to the Registrants registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.) | ||
4.13a | Qualified Plan Endorsement, ML-AY-448. (Incorporated by reference to Exhibit 4.13a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.13b | Qualified Plan Endorsement. (Incorporated by reference to Exhibit 4(c), filed October 31, 1997, as part of Pre-Effective Amendment No. 1 to the Registrants registration statement on Form S-3, File No. 333-33863.) | ||
4.14 | Application for Group Modified Guaranteed Annuity Contract. (Incorporated by reference to Exhibit 4.14 to the Registrants registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.) | ||
4.15 | Annuity Application for Individual Certificate Under Modified Guaranteed Annuity Contract. (Incorporated by reference to Exhibit 4.15 to the Registrants registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.) | ||
4.15a | Application for Modified Guaranteed Annuity Contract. (Incorporated by reference to Exhibit 4(d), filed August 18, 1997, as part of the Registrants registration statement on Form S-3, File No. 333-33863.) | ||
4.16 | Form of Company Name Change Endorsement. (Incorporated by reference to Exhibit 4.16, filed September 5, 1991, as part of Post-Effective Amendment No. 4 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
4.17 | Group Modified Guaranteed Annuity Contract, ML-AY-361/94. (Incorporated by reference to Exhibit 4(a)(2), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrants registration statement on Form S-1, File No. 33-60290.) | ||
4.18 | Individual Certificate, ML-AY-362/94. (Incorporated by reference to Exhibit 4(b)(4), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrants registration statement on Form S-1, File No. 33-60290.) | ||
4.19 | Individual Tax-Sheltered Annuity Certificate, ML-AY-372/94. (Incorporated by reference to Exhibit 4(c)(3), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrants registration statement on Form S-1, File No. 33-60290.) | ||
4.20 | Qualified Retirement Plan Certificate, ML-AY-373/94. (Incorporated by reference to Exhibit 4(d)(3), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrants registration statement on Form S-1, File No. 33-60290.) | ||
4.21 | Individual Retirement Annuity Certificate, ML-AY-374/94. (Incorporated by reference to Exhibit 4(e)(5), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrants registration statement on Form S-1, File No. 33-60290.) | ||
4.22 | Individual Retirement Account Certificate, ML-AY-375/94. (Incorporated by reference to Exhibit 4(f)(3), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrants registration statement on Form S-1, File No. 33-60290.) | ||
4.23 | Section 457 Deferred Compensation Plan Certificate, ML-AY-376/94. (Incorporated by reference to Exhibit 4(g)(3), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrants registration statement on Form S-1, File No. 33-60290.) | ||
4.24 | Qualified Plan Endorsement, ML-AY-448/94. (Incorporated by reference to Exhibit 4(m)(3), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrants registration statement on Form S-1, File No. 33-60290.) | ||
10.1 | Management Services Agreement between Family Life Insurance Company and Merrill Lynch Life Insurance Company. (Incorporated by reference to Exhibit 10.1 to the Registrants registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.) | ||
10.2 | General Agency Agreement between Merrill Lynch Life Insurance Company and Merrill Lynch Life Agency, Inc. (Incorporated by reference to Exhibit 10.2, filed February 23, 1989, as part of Pre-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
10.3 | Service Agreement among Merrill Lynch Insurance Group, Inc., Family Life Insurance Company and Merrill Lynch Life Insurance Company. (Incorporated by reference to Exhibit 10.3, filed March 13, 1991, as part of Post-Effective Amendment No. 2 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
10.3a | Amendment to Service Agreement among Merrill Lynch Insurance Group, Inc., Family Life Insurance Company and Merrill Lynch Life Insurance Company. (Incorporated by reference to Exhibit 10(c)(2) to Post-Effective Amendment No. 1 to the Registrants registration statement on Form S-1, File No. 33-60290, filed March 31, 1994.) |
10.4 | Indemnity Reinsurance Agreement between Merrill Lynch Life Insurance Company and Family Life Insurance Company. (Incorporated by reference to Exhibit 10.4, filed March 13, 1991, as part of Post-Effective Amendment No. 2 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
10.5 | Assumption Reinsurance Agreement between Merrill Lynch Life Insurance Company, Tandem Insurance Group, Inc. and Royal Tandem Life Insurance Company and Family Life Insurance Company. (Incorporated by reference to Exhibit 10.6, filed April 24, 1991, as part of Post-Effective Amendment No. 3 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
10.6 | Amended General Agency Agreement between Merrill Lynch Life Insurance Company and Merrill Lynch Life Agency, Inc. (Incorporated by reference to Exhibit 10(g) to the Registrants registration statement on Form S-1, File No. 33-46827, filed March 30, 1992.) | ||
10.7 | Indemnity Agreement between Merrill Lynch Life Insurance Company and Merrill Lynch Life Agency, Inc. (Incorporated by reference to Exhibit 10(h) to the Registrants registration statement on Form S-1, File No. 33-46827, filed March 30, 1992.) | ||
10.8 | Management Agreement between Merrill Lynch Life Insurance Company and Merrill Lynch Asset Management, Inc. (Incorporated by reference to Exhibit 10(i) to the Registrants registration statement on Form S-1, File No. 33-46827, filed March 30, 1992.) | ||
10.9 | Amendment No. 1 to Indemnity Reinsurance Agreement between Family Life Insurance Company and Merrill Lynch Life Insurance Company. (Incorporated by reference to Exhibit 10.5, filed April 24, 1991, as part of Post-Effective Amendment No. 3 to the Registrants registration statement on Form S-1, File No. 33-26322.) | ||
10.10 | Insurance Administrative Services Agreement between Merrill Lynch Life Insurance Company and Liberty Insurance Services Corporation. (Incorporated by reference to Exhibit 10.10 to the Registrants Annual Report on Form 10-K, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, filed March 30, 2005.) | ||
10.11 | Wholesaling Agreement between Merrill Lynch Life Insurance Company, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Transamerica Capital. (Incorporated by Reference to the Annual Report on Form 10-K of Merrill Lynch Life Insurance Company, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, filed March 27, 2008.) | ||
10.12 | Selling Agreement between Merrill Lynch Life Insurance Company, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Merrill Lynch Life Agency, Inc. (Incorporated by Reference to the Annual Report on Form 10-K of Merrill Lynch Life Insurance Company, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, filed March 27, 2008.) | ||
10.13 | Keep Well Agreement between AEGON USA, Inc. and Merrill Lynch Life Insurance Company. (Incorporated by Reference to the Annual Report on Form 10-K of Merrill Lynch Life Insurance Company, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, filed March 27, 2008.) | ||
10.14 | Master Distribution Agreement between Merrill Lynch Insurance Group, Inc., Merrill Lynch & Co., Inc., and AEGON USA, Inc. (Incorporated by reference to Exhibit 10.2 to Merrill Lynch Life Insurance Companys Current Report on Form 8-K, File No. 33-26322, filed January 4, 2008.) | ||
10.15 | Purchase Agreement between Merrill Lynch Insurance Group, Inc., Merrill Lynch & Co., Inc., and AEGON USA, Inc. (Incorporated by reference to Exhibit 10.1 to Merrill Lynch Life Insurance Companys Current Report on Form 8-K, File No. 33-26322, filed August 17, 2007.) | ||
10.16 | First Amendment to Purchase Agreement between Merrill Lynch Insurance Group, Inc., Merrill Lynch & Co., Inc., and AEGON USA, Inc. (Incorporated by reference to Exhibit 10.1 to Merrill Lynch Life Insurance Companys Current Report on Form 8-K, File No. 33-26322, filed January 4, 2008.) | ||
10.17 | Principal Underwriting Agreement between Transamerica Capital, Inc. and Merrill Lynch Life Insurance Company. (Incorporated by reference to the Annual Report on Form 10-K of Merrill Lynch Life Insurance Company, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, 333-133223, 333-133225, filed on March 26, 2009.) | ||
31.1 | Certification by the Chief Executive Officer pursuant to Rule 15d-14(a). | ||
31.2 | Certification by the Chief Financial Officer pursuant to Rule 15d-14(a). | ||
32.1 | Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32.2 | Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERRILL LYNCH LIFE INSURANCE COMPANY |
||||
/s/ James D. Purvis | ||||
James D. Purvis | ||||
Vice President, Treasurer, and Chief Financial Officer |
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Date:
November 12, 2009
EXHIBIT INDEX
31.1 | Certification by the Chief Executive Officer pursuant to Rule 15d-14(a). | |
31.2 | Certification by the Chief Financial Officer pursuant to Rule 15d-14(a). | |
32.1 | Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |