UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 2009
Commission File Nos. 33-26322;
33-46827; 33-52254; 33-60290; 33-58303; 333-33863; 333-34192; 333-133223;
333-133225
MERRILL LYNCH LIFE INSURANCE COMPANY
(Exact name of Registrant as specified in its charter)
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Arkansas |
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91-1325756 |
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(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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4333 Edgewood
Road, NE
Cedar Rapids, Iowa 52499-0001 |
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(Address of Principal Executive Offices) |
(800) 346-3677 |
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(Registrants telephone no. including area code) |
Securities registered pursuant to Section 12(b) or 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ] Yes [X] No
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. [ ] Yes [X] No
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. [X] Yes __ No
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files). [ ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
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.
o large accelerated filer
o accelerated filer
þ
non-accelerated filer
o
smaller reporting company
Indicated
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act). [ ] Yes [X] No
State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average
bid and asked price of such common equity, as of the last business day of the registrants most recently completed second
fiscal quarter: Not applicable.
Indicate the number of shares outstanding of each of the registrants
classes of common stock, as of the latest practicable date.
Common 250,000
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND
(b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
PART I
Item 1. Business
Merrill Lynch Life Insurance Company (MLLIC, Registrant, the Company, we, our, or us)
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. AEGON N.V.
and its subsidiaries and joint ventures have life insurance and pension operations in over twenty
countries in Europe, the Americas, and Asia and are also active in savings and investment
operations, accident and health insurance, general insurance and limited banking operations in a
number of these countries.
On December 28, 2007 (the acquisition date), MLLIC and its affiliate, ML Life Insurance Company
of New York (MLLICNY) were acquired by AUSA for $1.12 billion and $0.13 billion, respectively,
for a total price for both entities of $1.25 billion. Prior to the acquisition date, MLLIC was a
wholly owned subsidiary of Merrill Lynch Insurance Group, Inc. (MLIG), which is an indirect
wholly owned subsidiary of Merrill Lynch & Co., Inc. (ML&Co.).
The Registrant is a life insurance company, who conducts its business primarily in the annuity
markets and to a lesser extent in the life insurance markets of the financial services industry.
The Registrant was incorporated under the laws of the State of Washington on January 27, 1986 and
redomesticated to the State of Arkansas on August 31, 1991. The Registrant is currently subject to
primary regulation by the Arkansas Insurance Department.
The Registrant is currently licensed in 49 states, the District of Columbia, the Virgin Islands,
and Guam. During 2009, life insurance and/or annuity sales were made in all states the Registrant
was licensed in, with the largest concentration in Texas, 11%, Illinois, 11%, California, 9%,
Florida, 8%, and Michigan, 6%, as measured by total contract owner deposits. During 2009, the
Company, in addition to no longer issuing life insurance products, is no longer issuing variable
annuity and market value adjusted annuity products.
Information pertaining to contract owner deposits, contract owner account balances, and capital
contributions can be found in the Registrants Financial Statements which are contained herein.
The Registrant makes available, free of charge, annual reports on Form 10-K, quarterly reports on
Form 10-Q, and current reports on Form 8-K. This information is available through Our Insurance
Companies section of the AUSA website at www.aegonins.com. These reports are available through the
website as soon as reasonably practicable after the Registrant electronically files such material
with, or furnishes it to, the Securities and Exchange Commission.
Item 1A. Risk Factors
Risk Factors that Could Affect Merrill Lynch Life Insurance Company
In the course of conducting its business operations, MLLIC could be exposed to a variety of risks
that are inherent to the insurance industry. A summary of some of the significant risks that could
affect MLLICs financial condition and results of operations is included below. Some of these risks
are managed in accordance with established risk management policies and procedures. Other factors
besides those discussed below or elsewhere in this Annual Report also could adversely affect our
business and operations, and the following risk factors should not be considered a complete list of
potential risks that may affect the Company.
Economic Environment
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity
needs and cost of capital, as well as our access to capital
Since mid 2007, the capital and credit markets have been experiencing extreme volatility and
disruption. Beginning in the second half of 2008, the volatility and disruption reached
unprecedented levels and the markets have exerted downward pressure on availability of liquidity
and credit capacity for certain issuers. Although market conditions have begun to improve in
recent months, our results of operations, financial condition, cash flows and statutory capital
position could be materially affected by continued disruptions in the capital and credit markets.
We maintain a level of cash and securities which, combined with expected cash inflows from
investments and operations, is believed adequate to meet anticipated short-term and long-term
benefit obligations. However, withdrawal and surrender levels may differ from anticipated levels
for a variety of reasons, such as changes in economic conditions. In addition, disruptions,
uncertainty, or volatility in the capital and credit markets may limit our access to capital
required to operate our business. Such market conditions may limit our ability to satisfy
statutory capital requirements, fund redemption requests, and generate fee income and market
related revenue to meet liquidity needs. As such, we may be forced to utilize available internal
resources or
bear an unattractive cost of capital, which could decrease our profitability and significantly
reduce our financial flexibility and liquidity.
1
Our operating environment remains challenging in light of uncertainty about the timing and strength
of an economic recovery and the impact of governmental budgetary and regulatory initiatives. The
steps we have taken to realign our business and strengthen our capital position may not be adequate
to mitigate the financial and other risks associated with our operating environment, particularly
if economic conditions deteriorate from their current levels or regulatory requirements change
significantly, and we may be required to or we may seek to raise additional capital or take other
strategic or financial actions which could materially affect our results of operations, financial
condition and liquidity
Persistent volatility in financial markets and uncertainty about the timing and strength of a
recovery in the U.S. economy adversely affected our business and results in 2009. Recently,
concerns over the availability and cost of credit, the U.S. mortgage market, a declining U.S. real
estate market, inflation, energy costs and geopolitical issues have contributed to the increased
volatility and diminished expectations for the economy and the markets going forward. These
factors, combined with volatile oil prices, declining business and consumer confidence and
increased unemployment, have precipitated a recession. In addition, the fixed income markets have
experienced a period of extreme volatility which has negatively impacted market liquidity
conditions. Initially, the concerns on the part of market participants were focused on the
subprime segment of the mortgage-backed securities market. However, these concerns have expanded
to include a broad range of mortgage- and asset-backed and other fixed income securities, including
those rated investment grade and a wide range of financial institutions and markets, asset classes
and sectors. As a result, the market for fixed income instruments has experienced decreased
liquidity, increased price volatility, credit downgrade events, and increased probability of
default. Securities that are less liquid are more difficult to value and may be hard to dispose
of. Although market conditions have begun to improve in recent months, these events and the
continuing market upheavals have had and may continue to have a material effect on the value of our
investment portfolio. In the event of extreme prolonged market events, such as the global credit
crisis, we could incur significant losses. Even in the absence of a market downturn, we are
exposed to substantial risk of loss due to market volatility.
We are exposed to significant financial and capital markets risks including changes in interest
rates, credit spreads, equity prices, market volatility, performance of the economy, in general,
the performance of the specific obligors included in our portfolio and other factors outside our
control. Our exposure to interest rate risk relates primarily to the market price and cash flow
variability associated with changes in interest rates. A rise in interest rates will increase the
net unrealized loss position of our investment portfolio and sustained increases in interest rates
may result in policyholders surrendering their contracts which may require us to liquidate assets
in an unrealized loss position. Conversely, due to the long-term nature of some of our liabilities,
sustained declines in interest rates may subject us to reinvestment risk.
The exposure to credit spreads primarily relates to market price variability and reinvestment risk
associated with changes in credit spreads. If issuer credit spreads widen or increase significantly
over an extended period of time, it would likely result in additional other-than-temporary
impairments. Credit spread tightening will reduce net investment income associated with new
purchases of fixed maturities. Credit spread tightening may also cause an increase in the reported
value of certain liabilities that are valued using a discount rate that reflects our own credit
spread. In addition, market volatility may make it difficult to value certain of our securities if
trading becomes less frequent. As such, valuations may include assumptions or estimates that may
have significant period-to-period changes from market volatility, which could have a material
effect on our results of operations or financial condition. Continuing challenges include
continued weakness in the residential and commercial real estate market and increased mortgage
delinquencies, investor anxiety over the U.S. economy, and rating agency downgrades of various
structured products and financial issuers. If significant, continued volatility, changes in
interest rates, changes in credit spreads and defaults, a lack of pricing transparency, market
liquidity, and declines in equity prices could continue to have a material effect on our results of
operations, financial condition or cash flows through realized losses, impairments, and changes in
unrealized positions.
The exposure to equity risks relates to the potential for lower earnings associated with our
equity-based Separate Accounts, where fee income is earned based upon account values. The decline
in equity markets over the last two years has significantly reduced the account values and related
fee income during that period. In addition, certain of our products offer guaranteed benefits
which increase our potential benefit exposure and statutory capital exposure should equity markets
decline. Due to declines in equity markets, our liability for these guaranteed benefits has
significantly increased and our statutory capital position has decreased. Further sustained
declines in equity markets may result in the need to devote significant additional capital to
support these products.
Regulatory developments relating to the recent financial crisis may also significantly affect our
operations in ways that we cannot predict. U.S. governmental or regulatory authorities, including
the Securities and Exchange Commission, the New York Stock Exchange or the Financial Industry
Regulatory Authority (FINRA), are considering enhanced or new regulatory requirements intended to
prevent future crises or otherwise stabilize the institutions under their supervision. New
regulations will likely affect critical matters, including capital requirements, and published
proposals by insurance regulatory authorities that could reduce the pressure on our capital
position may not be adopted or may be adopted in a form that does not afford as much capital relief
as
anticipated. If we fail to manage the impact of these developments effectively, our results of
operations and financial condition could be materially affected.
2
Competitive Environment
Competitive factors may adversely affect financial results
Our competitors have applied for, and in some cases obtained, business method patents on such
things as investment techniques, computerized methods of contract administration, and strategies to
avoid or reduce taxes among others. Competition with such companies may materially affect our
results of operations.
Regulatory and Legislative Risks
The insurance industry is heavily regulated and changes in regulation may adversely affect our
results of operations
The insurance industry is subject to comprehensive state regulation and supervision. We are also
impacted by federal legislation and administrative policies in areas such as financial services
regulations and federal taxation. The primary purpose of state regulation of the insurance
business is to protect policyholders. The laws of the various states establish insurance
departments with broad powers to regulate such matters as: licensing companies to transact
business, admitting statutory assets, regulating unfair trade and claims practices, establishing
statutory reserve requirements and solvency standards, restricting various transactions between
affiliates and regulating the types, amounts and valuation of investments. State insurance
regulators, federal regulators and the National Association of Insurance Commissioners (NAIC)
continually reexamine existing laws and regulations, and may impose changes in the future.
State insurance guaranty associations have the right to assess insurance companies doing business
in their state for funds to help pay the obligations of insolvent insurance companies to
policyholders and claimants. As the amount and timing of an assessment is beyond our control, the
liabilities established for these potential assessments may not be adequate.
Federal legislation and administrative policies in areas such as financial services regulation and
federal taxation can adversely affect our results of operations. New interpretations of existing
laws and the passage of new legislation may increase our claims exposure on policies we have issued
previously, thus having an adverse effect on financial results.
Potential changes in federal or state tax laws, including changes impacting the availability of the
Separate Accounts dividend received deduction, may adversely affect our business, results of
operations, and financial condition
Changes in federal and state tax laws could make certain products the Company has sold less
attractive to consumers. For example, enacted reductions in the federal income tax that individual
investors are required to pay on dividends and capital gains on stocks and mutual funds provide an
incentive for some customers and potential customers to shift assets into mutual funds, and away
from variable annuity products. These enacted tax rate reductions may impact the relative
attractiveness of annuities as compared to stocks and mutual funds. In addition, the Company
benefits from certain tax benefits, such as dividends received deductions and tax credits.
Due in large part to the recent financial crisis that has affected many governments, there is an
increasing risk that federal and/or state tax legislation could be enacted that would result in
higher taxes on insurance companies and/or their policyholders. Although the specific form of any
such potential legislation is uncertain, it may include lessening or eliminating some or all of the
tax advantages currently benefiting the Company or its policyholders. This could occur in the
context of deficit reduction or other tax reforms. The effects of any such changes could result in
lapses of policies currently held and/or the incurrence of higher corporate taxes which could have
a material adverse effect on financial condition and results of operations.
Market Risk
Changes in equity markets and other factors may significantly affect our financial results
The fee revenue that is earned on equity-based Separate Accounts assets is based upon account
values. As strong equity markets result in higher account values, strong equity markets positively
affect our results of operations through increased policy charge revenue and decreased benefit
exposure. Conversely, a weakening of the equity markets results in lower fee income and may have a
material adverse effect on our results of operations and capital resources.
In the absence of a mean reversion adjustment to future cash flows the increased fee revenue
resulting from strong equity markets increases the expected gross profits (EGPs) from variable
insurance products as do lower-than-expected lapses, mortality rates, and expenses. As a result,
the higher EGPs may result in lower amortized costs related to deferred acquisition costs (DAC),
deferred sales inducements (DSI), and value of business acquired (VOBA). However, the mean
reversion process will generally minimize changes in the rate of DAC, DSI and VOBA amortization as
future market growth rates are adjusted to
counter the current period market returns, subject to a floor and cap return.
3
Correspondingly, a
decrease in the equity markets as well as increases in lapses, mortality rates, and expenses
depending upon their significance, may result in higher net amortized costs associated with DAC,
DSI, and VOBA and may have a material adverse effect on our results of operations and capital
resources. The mean reversion process will generally minimize changes in the rate of DAC, DSI and
VOBA amortization as future market growth rates are adjusted to counter the current period market
returns, subject to a floor and a cap return. For more information on DAC, DSI, and VOBA
amortization, see Item 6Managements Narrative Analysis of Results of OperationsCritical
Accounting Policies below.
Changes
in equity markets and interest rates affects the profitability of our products with
guaranteed benefits, therefore, such changes may have a material adverse effect on our financial
results
The valuation of liabilities related to the guaranteed minimum death benefits (GMDB) and
guaranteed minimum income benefits (GMIB) for variable annuities is tied to the difference
between the value of the underlying accounts and the guaranteed death or income benefit, calculated
using a benefit ratio approach. The GMDB and GMIB liability valuations take into account the
present value of total expected GMDB and GMIB payments and the present value of total expected
assessments over the life of the contract and claims and assessments to date. Both the level of
expected GMDB and GMIB payments and expected total assessments used in calculating the benefit
ratio are affected by the equity markets. Accordingly, a decrease in the equity markets will
increase the net amount at risk under the GMDB and the GMIB benefits we offer as part of our
variable annuity products, which has the effect of increasing the value of GMDB and GMIB
liabilities we must record.
The value of liabilities related to the guaranteed minimum withdrawal benefits (GMWB) for
variable annuities are based on the fair value of the underlying benefit. The liabilities related
to GMWB benefits valued at fair value are impacted by changes in equity markets, volatility and
interest rates. Accordingly, strong equity markets and increases in interest rates will generally
decrease the value of GMWB liabilities. Conversely, a decrease in the equity markets, along with a
decrease in interest rates, will result in an increase in the value of GMWB liabilities we must
record.
The value of contra liabilities related to the reinsurance of guaranteed minimum income benefits
(GMIB reinsurance) for variable annuities is based on the fair value of the underlying benefit.
The contra liabilities related to the GMIB reinsurance benefits valued at fair value are affected
by changes in equity markets, volatility and interest rates. Accordingly, strong equity markets and
increases in interest rates will generally decrease the value of the GMIB reinsurance contra
liability. Conversely, a decrease in the equity markets, along with a decrease in interest rates,
will generally result in an increase in the GMIB reinsurance contra liabilities we must record.
Changes in the values of guaranteed benefits would result in a charge to earnings in the quarter in
which the liabilities are increased or decreased.
A customized dynamic hedge program is maintained to mitigate the risks associated with income
volatility around the change in reserves on guaranteed withdrawal benefits. However, the hedge
positions may not be effective to exactly offset the changes in the carrying value of the
guarantees due to, among other things, the time lag between changes in their values and
corresponding changes in the hedge positions, high levels of volatility in the equity markets and
derivatives, extreme swings in interest rates, contract holder behavior that is different than
expected, and divergence between the performing of the underlying funds and hedging indices.
Credit Risk
Defaults in our bonds, private placements and mortgage loan portfolios may adversely affect
profitability and shareholders equity
For general account products, we typically bear the risk for investment performance (return of
principal and interest). We are exposed to credit risk on our fixed income portfolio (e.g. bonds,
mortgages, private placements). Some issuers have defaulted on their financial obligations for
various reasons, including bankruptcy, lack of liquidity, downturns in the economy, downturns in
the real estate values, operational failure, and fraud. Any event reducing the value of the fixed
income portfolio other than on a temporary basis could have a material adverse effect on our
business, results of operations, and financial condition.
Interest Rate Risk
Changes in market interest rates may adversely affect our financial results
The profitability of our fixed life and annuity products depends in part on interest rate spreads,
therefore, interest rate fluctuations could negatively affect our financial results. Some of our
fixed products have interest rate guarantees that expose us to the risk that changes in interest
rates will reduce our spread or the difference between the amounts that we are required to pay
under the contracts and the amounts we are able to earn on our general account investments intended
to support our obligations under the contracts. Declines in our spread or instances where the
returns on our general account investments are not enough to support the interest rate guarantees
on these products could have a material adverse effect on our financial results.
4
In periods of increasing interest rates, we may not be able to replace the assets in our general
account with higher yielding assets needed to fund the higher crediting rates. We therefore may
have to accept a lower spread and thus lower profitability or face a decline in sales and greater
loss of existing contracts and related assets. In periods of declining interest rates, we have to
reinvest the cash we receive as interest or return of principal on our investments in lower
yielding instruments then available. Moreover, borrowers may prepay fixed income securities in our
general account in order to borrow at lower market rates, which exacerbates this risk. As we are
entitled to reset the interest rates on our fixed rate annuities only at limited, pre-established
intervals, and since many of our policies have guaranteed minimum interest or crediting rates, our
spreads could decrease and potentially become negative.
Increases in interest rates may cause increased surrenders and withdrawals of insurance products.
In periods of increasing interest rates, policy loans and surrenders and withdrawals of life
insurance policies and annuity contracts may increase as policyholders seek products with perceived
higher returns. This process may lead to cash outflows of our existing block of business. These
outflows may require investment assets to be sold at a time when the prices of those assets are
lower because of the increase in market interest rates, which may result in realized investment
losses. A sudden demand among policyholders to change product types or withdraw funds could lead
us to sell assets at a loss to meet funding demands.
Liquidity Risk
Business and financial results may be adversely affected by an inability to sell assets to meet
maturing obligations
We could be exposed to liquidity risk, which is the risk that we cannot quickly convert invested
assets to cash without incurring significant losses. Our liquidity may be impaired due to
circumstances that we may be unable to control, such as general market disruptions or an
operational problem. Our ability to sell assets may also be impaired if other market participants
are seeking to sell similar assets at the same time. The inability to sell assets to meet maturing
obligations, a negative change in its credit ratings, or regulatory capital restrictions, may have
an adverse effect on financial results.
Our participation in a securities lending program subjects us to potential liquidity and other
risks
We participate in a securities lending program whereby fixed income securities are loaned by our
agent bank to third parties, primarily major brokerage firms and commercial banks. The borrowers
of our securities provide us with collateral, typically in cash, which we separately maintain. We
invest such cash collateral in other securities, primarily in commercial paper and money market or
other short-term funds.
Almost all securities on loan under the program can be returned to us by the borrower at any time.
Returns of loaned securities would require us to return the cash collateral associated with such
loaned securities. In addition, in some cases, the maturity of the securities held as invested
collateral (e.g. securities that we have purchased with cash received from third parties) may
exceed the term of the related securities on loan and/or the market value of these securities may
fall below the amount of cash we are obligated to return to the borrower of our loaned securities.
If we are required to return significant amounts of cash collateral on short notice and we are
forced to sell securities to meet the return obligation, we may have difficulty selling such
collateral that is invested in securities in a timely manner, be forced to sell securities in a
volatile or illiquid market for less than we otherwise would have been able to realize under normal
market conditions, or both. In addition, under stressful capital market and economic conditions,
such as those conditions we have experienced recently, liquidity broadly deteriorates, which may
further restrict our ability to sell securities.
Underwriting Risk
Differences between actual claims experience and underwriting and reserving assumptions may require
liabilities to be increased, which may have a material adverse effect on our financial results
Our earnings depend upon the extent to which actual claims experience is consistent with the
assumptions used in setting the prices for products and establishing the technical provisions and
liabilities for claims. To the extent that actual claims experience is less favorable than the
underlying assumptions used in establishing such liabilities, earnings would be reduced.
Furthermore, if these higher claims were part of a trend, we may be required to increase our
liabilities, which may also reduce income. In addition, certain acquisition costs related to the
sale of new policies and the purchase of policies already in force have been recorded as assets on
the balance sheet and are being amortized into earnings over time. If the assumptions relating to
the future profitability of these policies (such as future claims, investment income, and expenses)
are not realized, the amortization of these costs may be accelerated and may require write-offs due
to unrecoverability. This may have a material adverse effect on our financial results.
5
Other Risks
Environmental liability exposure from our commercial mortgage loan portfolio may adversely affect
our results of operations and financial condition
Liability under environmental protection laws resulting from our commercial mortgage loan portfolio
may adversely affect our results of operation. Under the laws of several states, contamination of
a property may give rise to a lien on the property to secure recovery of the costs of cleanup. In
some states, this kind of lien has priority over the lien of an existing mortgage against the
property, which would impair our ability to foreclose on the property should the related loan be in
default. In addition, we may be liable for costs of addressing releases or threatened releases of
hazardous substances that require remedy at a property securing a mortgage loan held by us, which
could have an adverse effect on our results of operations and financial condition.
A pandemic, terrorist attack or other catastrophic event may adversely affect our results of
operations and liquidity
Our mortality experience may be adversely impacted by a catastrophic event. In addition, a severe
catastrophic event may cause significant volatility in global financial markets, disruptions to
commerce, and reduced economic activity. The resulting macroeconomic conditions may adversely
affect our cash flows as well as the value and liquidity of our invested assets. We may also
experience operational disruptions if our employees are unable or unwilling to come to work due to
a pandemic or other catastrophe.
A computer system failure or security breach may disrupt our business, damage our reputation and
adversely affect our results of operations, financial condition and cash flows
We use computer systems to store, retrieve, evaluate and utilize customer and company data and
information. Our business is highly dependent on our ability to access these systems to perform
necessary business functions such as providing customer support, administering variable products,
making changes to existing policies, filing and paying claims, managing our investment portfolios,
and producing financial statements. While we have policies, procedures, automation and backup
plans designed to prevent or limit the effect of failure, our computer systems may be vulnerable to
disruptions or breaches as a result of natural disasters, man-made disasters, criminal activity,
pandemics, or other events beyond our control. The failure of our computer systems for any reason
could disrupt our operations, result in loss of customer business and may adversely affect our
profitability.
We retain confidential information on our computer systems, including customer information and
proprietary business information. Any compromise of the security of our computer systems that
results in the disclosure of personally identifiable customer information could damage our
reputation, expose us to litigation, increase regulatory scrutiny and require us to incur
significant technical, legal, and other expenses.
Litigation and regulatory investigations may adversely affect our business, results of operations,
and financial condition
In recent years, the insurance industry has increasingly been the subject of litigation,
investigation, and regulatory activity by various governmental and enforcement authorities
concerning common industry practices such as the disclosure of contingent commissions and
suitability of sales. We cannot predict at this time the effect this current trend towards
litigation and investigation will have on the insurance industry or to our business. Lawsuits,
including class actions and regulatory actions, may be difficult to assess or quantify, may seek
recovery of very large and/or indeterminate amounts, including punitive and treble damages, and
their existence and magnitude may remain unknown for substantial periods of time. A substantial
legal liability or significant regulatory action could have a material adverse effect on our
business, results of operations, and financial condition.
The Companys election to discontinue new sales at the present time creates a risk that the growth
of future revenues may be limited and uncertain. Growth in revenues would thus be dependent on the
market performance of the assets underlying the policies and the policy and rider fees received on a potentially declining number of policies in force
The current economic environment has presented significant challenges to the Companys ability to
issue existing products at competitive returns. Further, new products designed to combat the
volatile economic environment may not be able to be administered on existing company administrative
systems. The Companys election to discontinue new sales at the present time means that future
growth in revenues may be limited. The uncertainty of the performance of the securities markets
would also mean that where the Companys revenues are dependent on fees or charges based on market
value of investments underlying the policies, the Companys revenues would also be uncertain.
Further, as policyholders surrender their policies and the number of policies in force is reduced,
and as policyholders die or otherwise withdraw value from their policies, the revenues that the
Company receives for policy and rider administration, and for mortality and expense risks will
likely decline over time. However, there remain a significant number of annuity and life insurance
policies in force that will continue to be serviced and are expected to continue to generate
revenues for the foreseeable future.
6
Global climate changes may have an adverse effect on our results of operations and financial
condition
Atmospheric concentrations of carbon dioxide and other greenhouse gases have increased dramatically
since the industrial revolution, resulting in a gradual increase in global average temperatures and
an increase in the frequency and severity of natural disasters. These trends are expected to
continue in the future and have the potential to impact nearly all sectors of the economy to
varying degrees. Our initial research indicates that climate change does not pose an imminent or
significant threat to our operations or business, but we will continue to monitor new developments
in the future.
Climate change may impact asset prices as well as general economic conditions. Governmental
policies to slow climate change may have an adverse effect on investment sectors such as utilities,
transportation and manufacturing. Changes in asset prices may impact the value of our fixed income
and commercial mortgage loan investments. We manage our investment risks by maintaining a
well-diversified portfolio, both geographically and by sector. We also monitor our investments on
an ongoing basis, allowing us to adjust our exposure to sectors and/or geographical areas that face
severe risks due to climate change.
Item 1B. Unresolved Staff Comments
Not Applicable.
Item 2. Properties
The Registrants home office is located in Little Rock, Arkansas. Personnel performing services for
the Registrant operate in AUSA office space in Cedar Rapids, Iowa and St. Petersburg, Florida. An
allocable share of the cost of each of the above mentioned premises was paid by the Registrant
through the common cost allocation service agreement.
In addition, personnel performing services for the Registrant occupy office space in Jacksonville,
Florida, which is owned by ML&Co. An allocable share of the cost of each of the above mentioned
premises was paid by the Registrant through the transition services agreement between AUSA and
ML&Co.
Prior to the acquisition date, the services were pursuant to the Registrants Management Services
agreement with MLIG. An allocable share of the cost of each of the above mentioned premises was
paid by the Registrant through the service agreement with MLIG.
Item 3. Legal Proceedings
There is no material pending litigation to which the Registrant is a party or of which any of its
property is the subject and there are no legal proceedings contemplated by any governmental
authorities against the Registrant of which it has any knowledge.
7
PART II
Item 4. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
|
(a) |
|
The Registrant is a wholly owned subsidiary of AUSA. There is no public trading market
for the Registrants common stock. |
During 2009 and 2008, the Registrant did not pay any dividends to AUSA. The Registrant did not
receive a capital contribution from AUSA in 2009, but received a capital contribution from AUSA of
$250.0 million in 2008. No other cash or stock dividends have been declared on Registrants common
stock at any time during the two most recent fiscal years. Under laws applicable to insurance
companies domiciled in the State of Arkansas, the Registrants ability to pay extraordinary
dividends on its common stock is restricted. See Note 9 to the Registrants Financial Statements.
|
(b) |
|
Not applicable. |
|
|
(c) |
|
Not applicable. |
Item 5. Selected Financial Data
Information called for by this item is omitted pursuant to General Instruction I. of Form 10-K.
Item 6. 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
The statements contained in this Report that are not historical facts are forward-looking
statements as defined in the US Private Securities Litigation Reform Act of 1995. The following
are words that identify such forward-looking statements: believe, estimate, target, intend, may,
expect, anticipate, predict, project, counting on, plan, continue, want, forecast, should, would,
is confident, will, and similar expressions as they relate to our Company. These statements are
not guarantees of future performance and involve risks, uncertainties and assumptions that are
difficult to predict. Such risks and uncertainties include but are not limited to the following:
|
|
|
Changes in general economic conditions; |
|
|
|
|
Changes in the performance of financial markets, including emerging markets, such as with regard to: |
|
o |
|
The frequency and severity of defaults by issuers in our fixed income investment portfolios; and |
|
|
o |
|
The effects of corporate bankruptcies and/or accounting restatements on
the financial markets and the resulting decline in the value of equity and debt
securities we hold; |
|
|
|
The frequency and severity of insured loss events; |
|
|
|
|
Changes affecting mortality and other factors that may impact the profitability of our
insurance products; |
|
|
|
|
Changes affecting interest rate levels and continuing low or rapidly changing interest
rate levels; |
|
|
|
|
Increasing levels of competition; |
|
|
|
|
Changes in laws and regulations, particularly those affecting our operations, the
products we sell, and the attractiveness of certain products to our customers; |
|
|
|
|
Regulatory changes relating to the insurance industry in the jurisdictions in which we
operate; |
|
|
|
|
Lowering of one or more of the financial strength ratings and the adverse impact such
action may have on the premium writings, policy retention, profitability and liquidity; |
|
|
|
|
Acts of God, acts of terrorism, acts of war and pandemics; |
|
|
|
|
Changes in the policies of central banks and/or governments; |
|
|
|
|
Litigation or regulatory actions that could require us to pay significant damages or
change the way we do business; |
|
|
|
|
Customer responsiveness to both new products and distribution channels; |
|
|
|
|
Competitive, legal, regulatory or tax changes that affect the distribution cost of or
demand for our products; and |
|
|
|
|
Our failure to achieve anticipated levels of earnings or operational efficiencies as
well as other cost saving initiatives. |
We undertake no obligation to publicly update or revise any forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements, which merely reflect
Company expectations at the time of the writing. Actual results may differ materially from
expectations conveyed in forward-looking statements due to changes caused by various
risks and uncertainties. The reader should, however, consult any further disclosures MLLIC 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.
8
Business Overview
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 and
market value adjusted annuity products. The Company offered the following guaranteed benefits
within its variable annuity product suite: guaranteed minimum death benefits (GMDB), guaranteed
minimum income benefits (GMIB) and guaranteed minimum withdrawal benefits (GMWB).
Acquisition
On December 28, 2007, the Company and its affiliate, MLLICNY, were acquired by AUSA. The
acquisition was accounted for by AUSA using the purchase method of accounting, which required the
assets and liabilities of MLLIC to be identified and measured at their estimated fair values as of
the acquisition date.
The Company made refinements during 2008 to the initial estimated fair values as additional
information became available. The following adjustments as of December 31, 2008 were made to the
initial purchase price allocation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Price Allocation |
|
|
December 31, |
|
|
|
|
|
December 31, |
(dollars in millions) |
|
2007 |
|
Adjustments |
|
2008 (a) |
Value of business acquired, gross |
|
$ |
575.0 |
|
|
$ |
(6.8 |
) |
|
$ |
568.2 |
|
Goodwill |
|
|
156.9 |
|
|
|
(14.8 |
) |
|
|
142.1 |
|
Other intangibles |
|
|
74.9 |
|
|
|
5.0 |
|
|
|
79.9 |
|
Federal income taxes current |
|
|
6.6 |
|
|
|
(0.5 |
) |
|
|
6.1 |
|
Federal income taxes deferred |
|
|
2.0 |
|
|
|
(2.0 |
) |
|
|
|
|
Reinsurance receivables |
|
|
5.4 |
|
|
|
3.1 |
|
|
|
8.5 |
|
Other assets |
|
|
40.7 |
|
|
|
(1.5 |
) |
|
|
39.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder account balances |
|
|
1,900.8 |
|
|
|
3.6 |
|
|
|
1,904.4 |
|
Future policy benefits |
|
|
396.7 |
|
|
|
(23.0 |
) |
|
|
373.7 |
|
Federal income taxes deferred |
|
|
|
|
|
|
6.0 |
|
|
|
6.0 |
|
Other liabilities |
|
|
10.9 |
|
|
|
(4.0 |
) |
|
|
6.9 |
|
|
|
|
(a) |
|
This reflects the December 31, 2008 balance before adjustments for unrealized
gains (losses) on investments, amortization and/or impairments. |
In addition, the purchase method of accounting applied by AUSA to the acquired assets and
liabilities associated with the Company has been pushed down to the financial statements of the
Company, thereby establishing a new basis of accounting. As a result, the Company follows AUSAs
accounting policies subsequent to the acquisition date. This new basis of accounting is referred
to as the successor basis, while the historical basis of accounting is referred to as the
predecessor basis. In general, all 2009 and 2008 amounts are representative of the successor
basis of accounting while the Statements of Income, Stockholders Equity, Comprehensive Income, and
Cash Flows amounts for 2007 are representative of the predecessor basis of accounting. Financial
statements included herein for periods prior and subsequent to the acquisition date are labeled
Predecessor and Successor, respectively.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles
(GAAP) requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and the reported amounts of revenues and expenses. Estimates, by their
nature, are based on judgment and available information. Therefore, actual results could differ
and could have a material impact on the financial statements, and it is possible that such changes
could occur in the near term.
9
The Companys critical accounting policies and estimates are discussed below. See Note 1 to the
Financial Statements for additional information regarding accounting policies.
Valuation of Fixed Maturity and Equity Securities
The Companys investments in fixed maturity and equity securities are classified as
available-for-sale and reported at estimated fair value. The fair values of fixed maturity and
equity securities are determined by management after taking into consideration several sources of
data. The Companys valuation policy dictates that publicly available prices are initially sought
from several third party pricing services. In the event that pricing is not available from these
services, those securities are submitted to brokers to obtain quotes. Lastly, securities are
priced using internal cash flow modeling techniques. These valuation methodologies commonly use
reported trades, bids, offers, issuer spreads, benchmark yields, estimated prepayment speeds,
and/or estimated cash flows.
Each month, the Company performs an analysis of the information obtained from third party services
and brokers to ensure that the information is reasonable and produces a reasonable estimate of
fair value. The Company considers both qualitative and quantitative factors as part of this
analysis, including but not limited to, recent transactional activity for similar fixed
maturities, review of pricing statistics and trends, and consideration of recent relevant market
events.
The Companys portfolio of private placement securities is valued using a matrix pricing
methodology. The pricing methodology is obtained from a third party service and indicates current
spreads for securities based on weighted average life, credit rating and industry sector. Monthly
the Company reviews the matrix to ensure the spreads are reasonable by comparing them to observed
spreads for similar securities traded in the market. In order to account for the illiquid nature
of these securities, illiquidity premiums are included in the valuation and are determined based
upon the pricing of recent transactions in the private placement market as well as comparing the
value of the privately offered security to a similar public security. The impact of the
illiquidity premium to the overall valuation is less than 1% of the value.
At December 31, 2009 and 2008, approximately, $161.4 million (or 12%) 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 December 31,
2009 and 2008, the payable for collateral under securities loaned was $149.1 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 Statements of Income. The fair value for exchange traded derivatives, such as
futures, are calculated net of the interest accrued to date and is based on quoted market prices.
Net settlements on the futures occur daily. As of December 31, 2009, the Company had 570
outstanding short futures contracts with a notional amount of $158.3 million. As of December 31,
2008, the Company had 990 outstanding short futures contracts with a notional amount of $222.8
million.
Mortgage Loans on Real Estate
Mortgage loans on real estate are carried at unpaid principal balances adjusted for amortization of
premiums and accretion of discounts and are net of valuation allowances. The fair value for
mortgage loans on real estate is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit ratings and/or similar
remaining maturities. Interest income is accrued on the principal balance of the loan based on the
loans contractual interest rate. Premiums and discounts are amortized using the effective yield
method over the life of the loan. Interest income and amortization of premiums and discounts are
reported in net investment income along with mortgage loan fees, which are recorded as they are
incurred. Loans are considered impaired when it is probable that based upon current information
and events, the
Company will be unable to collect all amounts due under the contractual terms of
the loan agreement.
10
When the Company determines that a loan is impaired, a valuation allowance is
established for the excess carrying value of the loan over its estimated value. The Company does
not accrue interest on impaired loans and loans ninety days past due. The company also establishes a
valuation allowance based on a percentage of the outstanding loan balance. At December 31, 2009
and 2008, there was $70.9 million and $77.1 million, respectively, in mortgage loans on real estate
recorded on the Balance Sheet. The valuation allowance at December 31, 2009 was less than $0.1
million. The valuation allowance at December 31, 2008 was $0.1 million.
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
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.
For debt securities, an OTTI must be recognized in earnings when an entity either: a) has the
intent to sell the debt security or b) more likely than not will be required to sell the debt
security before its anticipated recovery. If the Company meets either of these criteria, the OTTI
is recognized in earnings in an amount equal to the entire difference between the securitys
amortized cost basis and its fair value at the balance sheet date. For debt securities in
unrealized loss positions that do not meet these criteria, the Company must analyze its ability to
recover the amortized cost by comparing the net present value of projected future cash flows with
the amortized cost of the security. The net present value is calculated by discounting the
Companys best estimate of projected future cash flows. If the net present value is less than the
amortized cost of the investment, an OTTI is recorded. The OTTI is separated into two pieces: an
amount representing the credit loss, where the present value of cash flows expected to be collected
is less than the amortized cost basis of the security, and an amount related to all other factors
(referred to as the non credit portion). The credit loss is recognized in earnings and the non
credit loss is recognized in other comprehensive income (OCI), net of applicable taxes and value
of business acquired. Management records subsequent changes in the estimated fair value (positive
and negative) of available-for-sale debt securities for which non credit OTTI was previously
recognized in OCI in OCI-OTTI.
For the years ended December 31, 2009 and 2008, the Company recorded an OTTI in income, net of
value of business acquired amortization, of $9.9 million and $8.3 million, respectively. The
Company did not experience any realized investment losses due to other-than-temporary declines in
fair value for the year ended December 31, 2007.
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 December 31, 2009 and 2008,
variable annuities accounted for the Companys entire DAC asset of $26.7 million and $24.3 million,
respectively.
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.
11
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 December 31, 2009, the reversion to the mean assumption was 7.25%
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 credit to current operations, commonly referred to as
unlocking. Changes in assumptions can have a significant impact on the amount of DAC reported
and the related amortization patterns. In general, increases in the estimated Separate Accounts
return and decreases in surrender or mortality assumptions increase the expected future
profitability of the underlying business and may lower the rate of DAC amortization. Conversely,
decreases in the estimated Separate Accounts returns and increases in surrender or mortality
assumptions reduce the expected future profitability of the underlying business and may increase
the rate of DAC amortization. For the years ended December 31, 2009, 2008 and 2007, there was a
favorable (unfavorable) impact to pre-tax income related to DAC unlocking of ($2.6) million, ($7.3)
million, and $26.5 million, respectively. See Note 6 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 December 31, 2009 and 2008, variable annuities
accounted for the Companys entire DSI asset of $6.3 million and $7.2 million, respectively. See
Note 6 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 December 31, 2009, the reversion to the mean assumption was 7.25% 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 December 31, 2009 and 2008, the
Companys VOBA asset was $374.7 million and $581.1 million, respectively. For the years ended
December 31, 2009 and 2008, the unfavorable impact to pre-tax income related to VOBA unlocking was
$79.4 million and $40.4 million, respectively. For the years ended December 31, 2009 and 2008,
there was an impairment charge of $63.9 million and $28.0 million, respectively. See Note 5 to
the Financial Statements for a further discussion.
Other Intangibles
Other intangible assets acquired at the acquisition date are a distribution agreement, a tradename
and a non-compete agreement. At December 31, 2008, the Company made a business decision to
commence selling similar products on affiliate companies through the ML&Co. distribution channel
instead of continuing to sell new variable annuities on the Company.
12
As a result of this decision,
an impairment charge was taken for the entire unamortized other intangible balance of $76.1 million
at December 31, 2008. Prior to December 31, 2008, the tradename and the non-compete agreements
were amortized on a straight-line basis over their useful life of five years. The distribution
intangible was amortized over the expected economic benefit period and at a pace
consistent with the expected future gross profit streams generated from the distribution agreement,
which was thirty years. The entire asset amount had been allocated to annuities. See Note 5 to
the Financial Statements for further discussion.
Goodwill
Goodwill is the excess of the purchase price over the estimated fair value of net assets acquired.
Goodwill and intangible assets with indefinite lives are not amortized, but are subject to
impairment tests conducted at least annually. Impairment testing is to be performed using the fair
value approach, which requires the use of estimates and judgment, at the reporting unit level. A
reporting unit represents the operating segment which is the level at which the financial
information is prepared and regularly reviewed by management. The entire asset amount has been
allocated to annuities. Goodwill is reviewed for indications of value impairment, with
consideration given to financial performance and other relevant factors. In addition, certain
events including a significant adverse change in legal factors or the business climate, an adverse
action or assessment by a regulator, or unanticipated competition would cause the Company to review
the carrying amounts of goodwill for impairment. When considered impaired, the carrying amounts
are written down to fair value based primarily on discounted cash flows. At December 31, 2008, the
Company made a business decision to commence selling similar products on affiliate companies
through the ML&Co. distribution channel instead of continuing to sell new variable annuities on
MLLIC. As a result of this decision, an impairment charge was taken for the majority of the
goodwill balance ($139.3 million) at December 31, 2008. The remaining amount of $2.8 million at
December 31, 2009 and 2008 relates to the Companys state licenses. See Note 5 to the Financial
Statements for 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 December
31, 2009 and 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
December 31, 2009 and 2008, future policy benefits were $439.6 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 December 31, 2009 and 2008, GMDB and GMIB
liabilities included within future policy benefits were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
(dollars in millions) |
|
2009 |
|
2008 |
GMDB liability |
|
$ |
145.5 |
|
|
$ |
145.9 |
|
GMIB liability |
|
|
39.2 |
|
|
|
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 years ended December 31, 2009, 2008 and 2007, the favorable (unfavorable) impact
to pre-tax income related to GMDB and GMIB unlocking was ($10.4) million, ($95.8) million, and
$22.0 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. GMWB and
GMIB reinsurance are treated as embedded derivatives and are required to be reported separately
from the host variable annuity contract. The fair value of these guarantees are calculated as the
present value of future expected payments to policyholders less the present value of assessed rider
fees attributable to the guarantees. Given the complexity and long-term nature of these
guarantees, which are unlike instruments available in financial markets, their fair values are
determined using stochastic techniques under a variety of market return scenarios. A variety of
factors are considered, including expected market rates of return, equity and interest rate
volatility, credit spread, correlations of market returns, discount rates and actuarial
assumptions.
13
At December 31, 2009 and 2008, GMWB liability and GMIB reinsurance asset included within future
policy benefits were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
(dollars in millions) |
|
2009 |
|
2008 |
GMWB liability
|
|
$ |
46.0 |
|
|
$ |
114.5 |
|
GMIB reinsurance asset
|
|
|
(58.7 |
) |
|
|
(79.1 |
) |
Unearned Policy Charge Revenue (UPCR) Liability for Variable Life Insurance
MLLICs variable universal life insurance product includes a premium load that is higher in early
policy years than in later years. The excess of the initial load over the ultimate load is accreted
into revenue over time in the same manner that DAC is amortized. In addition, the unearned policy
charge revenue liability is subject to the same periodic reassessment as DAC. At December 31,
2007, the UPCR liability was zero as a result of the push down accounting at the acquisition date.
For the year ended December 31, 2007, the unfavorable impact on pre-tax income related to UPCR
unlocking was $4.8 million. See Note 6 to the Financial Statements for a further discussion.
Federal Income Taxes
The Company uses the asset and liability method in providing income taxes on all transactions that
have been recognized in the financial statements. The asset and liability method requires that
deferred taxes be adjusted to reflect the tax rates at which future taxable amounts will be settled
or realized. The Company provides for federal income taxes based on amounts it believes it will
ultimately owe. Inherent in the provision for federal income taxes are estimates regarding the
realization of certain tax deductions and credits.
Specific estimates include the realization of dividend-received deductions (DRD) and foreign tax
credits (FTC). A portion of the Companys investment income related to Separate Accounts
business qualifies for the DRD and FTC. Information necessary to calculate these tax adjustments is
typically not available until the following year. However, within the current years provision,
management makes estimates regarding the future tax deductibility of these items. These estimates
are primarily based on recent historic experience. See Note 8 to the Financial Statements for a
further discussion.
The valuation allowance for deferred tax assets at December 31, 2009 was $145.5 million. 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. As a result of the Companys election for federal income tax purposes of Internal
Revenue Code Section 338, the predecessor is responsible for uncertain tax positions that existed
prior to the acquisition date.
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).
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.
14
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 on measuring the fair value of certain alternative
investments (i.e., investments in hedge funds, private equity funds, venture capital funds,
offshore fund vehicles, funds of funds, and real estate funds) as of the period ended
December 31, 2009 (ASU 2009-12, Investments in Certain Entities That Calculate Net Asset
Value per Share (or Its Equivalent)). |
|
|
|
|
The Company adopted guidance, as of the period ended December 31, 2009, which
clarified that when a quoted price in an active market for an identical liability is not
available, an entity should measure fair value using an approach that maximizes the use of
relevant observable inputs and minimizes the use of unobservable inputs (ASU 2009-05,
Measuring Liabilities at Fair Value). |
|
|
|
|
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. |
|
|
|
|
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. In addition, the Company adopted
revisions to this guidance for the period ending December 31, 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. |
15
|
|
|
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 January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements,
which includes new disclosures and clarifications of existing disclosures about fair value
measurements. The guidance is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2009 except for disclosures about purchases, sales, issuances,
and settlements in the Level 3 roll forward, which are effective for fiscal years beginning after
December 15, 2010. The Company will adopt the guidance on January 1, 2010 and 2011, as appropriate.
New Business
The Companys 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 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 $152.3 million during 2009 as compared to 2008. Total direct
deposits (including internal exchanges) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
(dollars in millions) |
|
2009 |
|
|
2008 |
|
|
|
2007 |
|
Variable annuity deposits |
|
$ |
282.8 |
|
|
$ |
435.0 |
|
|
|
$ |
752.0 |
|
All other deposits |
|
|
12.5 |
|
|
|
12.6 |
|
|
|
|
21.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total direct deposits |
|
$ |
295.3 |
|
|
$ |
447.6 |
|
|
|
$ |
773.0 |
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in variable annuity deposits during 2009 and 2008 was primarily due to volatile
equity markets as well as the Company discontinuing the sale of variable annuity
products in 2009. All other deposits include deposits on
discontinued modified
guaranteed annuities and immediate annuities as well as renewal deposits on existing life insurance
and fixed annuity contracts. Internal exchanges during 2009, 2008 and 2007 were $10.4 million,
$58.2 million and $140.2 million, respectively.
Surrenders
Policy and contract surrenders decreased $306.8 million (or 30%) to $722.9 million during 2009 as
compared to 2008. Policy and contract surrenders decreased $489.3 million (or 32%) to $1,029.7
million during 2008 as compared to 2007. The decrease is primarily due to the decline in the
equity markets in late 2008 and early 2009.
16
Financial Condition
At December 31, 2009, the Companys assets were $11.6 billion or $499.2 million higher than the
$11.1 billion in assets at December 31, 2008. Assets excluding Separate Accounts assets decreased
$357.5 million. Separate Accounts assets, which represent 72% of total assets, increased $856.7
million (or 11%) to $8.3 billion. Changes in Separate Accounts assets were as follows:
|
|
|
|
|
(dollars in millions) |
|
2009 |
|
Investment performance |
|
$ |
1,543.1 |
|
Deposits |
|
|
292.4 |
|
Policy fees and charges |
|
|
(183.1 |
) |
Surrenders, benefits and withdrawals |
|
|
(795.7 |
) |
|
|
|
|
|
|
|
|
|
Net change |
|
$ |
856.7 |
|
|
|
|
|
During 2009, 2008 and 2007, fixed contract owner deposits were $1.9 million, $0.2 million and
$0.4 million, respectively. During 2009, 2008 and 2007, fixed contract owner withdrawals were
$162.0 million, $189.2 million and $166.5 million, respectively.
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.
The following schedule identifies MLLICs general account invested assets by type at December 31:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
Fixed maturity securities |
|
|
|
|
|
|
|
|
Investment grade fixed maturity securities |
|
|
46 |
% |
|
|
47 |
% |
Below investment grade fixed maturity securities |
|
|
3 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
|
49 |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
16 |
|
|
|
15 |
|
Mortgage loans |
|
|
3 |
|
|
|
3 |
|
Limited partnerships |
|
|
|
|
|
|
1 |
|
Policy loans |
|
|
32 |
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
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 previously other-than-temporarily
impaired available-for-sale securities held as of April 1, 2009.
17
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 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 amount of VOBA is adjusted
for the effects of realized and unrealized gains and losses on available-for-sale securities, the
Company recognized a true-up to the VOBA balances for this cumulative effect adjustment.
The amortized cost and estimated fair value of investments in fixed maturity and equity securities
at December 31, 2009 and 2008 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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 |
|
$ |
198.5 |
|
|
$ |
5.1 |
|
|
$ |
(4.8 |
) |
|
$ |
|
|
|
$ |
198.8 |
|
|
|
15 |
% |
Industrial |
|
|
421.3 |
|
|
|
14.5 |
|
|
|
(3.3 |
) |
|
|
(0.1 |
) |
|
|
432.4 |
|
|
|
32 |
|
Utility |
|
|
98.9 |
|
|
|
4.2 |
|
|
|
(0.6 |
) |
|
|
|
|
|
|
102.5 |
|
|
|
8 |
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housing related |
|
|
56.8 |
|
|
|
0.3 |
|
|
|
(8.2 |
) |
|
|
(3.4 |
) |
|
|
45.5 |
|
|
|
3 |
|
Credit cards |
|
|
40.8 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
44.9 |
|
|
|
3 |
|
Autos |
|
|
11.2 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
11.6 |
|
|
|
1 |
|
Equipment lease |
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.8 |
|
|
|
|
|
Student loan |
|
|
7.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.0 |
|
|
|
1 |
|
Timeshare |
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.8 |
|
|
|
|
|
Commercial mortgage-backed securities
non agency backed |
|
|
165.9 |
|
|
|
1.8 |
|
|
|
(15.5 |
) |
|
|
|
|
|
|
152.2 |
|
|
|
11 |
|
Residential mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
95.1 |
|
|
|
3.4 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
98.4 |
|
|
|
7 |
|
Non agency backed |
|
|
27.3 |
|
|
|
|
|
|
|
(6.4 |
) |
|
|
(1.1 |
) |
|
|
19.8 |
|
|
|
1 |
|
Municipals tax exempt |
|
|
1.6 |
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
1.5 |
|
|
|
|
|
Government and government agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
|
220.3 |
|
|
|
1.4 |
|
|
|
(5.9 |
) |
|
|
|
|
|
|
215.8 |
|
|
|
16 |
|
Foreign |
|
|
12.0 |
|
|
|
0.4 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
12.3 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
|
1,359.3 |
|
|
|
35.6 |
|
|
|
(45.0 |
) |
|
|
(4.6 |
) |
|
|
1,345.3 |
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking securities |
|
|
9.2 |
|
|
|
|
|
|
|
(2.9 |
) |
|
|
|
|
|
|
6.3 |
|
|
|
1 |
|
Other financial services securities |
|
|
0.2 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
Other securities |
|
|
5.8 |
|
|
|
|
|
|
|
(0.7 |
) |
|
|
|
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
|
15.2 |
|
|
|
0.2 |
|
|
|
(3.6 |
) |
|
|
|
|
|
|
11.8 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity and equity securities |
|
$ |
1,374.5 |
|
|
$ |
35.8 |
|
|
$ |
(48.6 |
) |
|
$ |
(4.6 |
) |
|
$ |
1,357.1 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI. |
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
Other financial services securities |
|
|
1.5 |
|
|
|
|
|
|
|
(0.4 |
) |
|
|
|
|
|
|
1.1 |
|
|
|
|
|
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 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company regularly monitors industry sectors and individual debt securities for evidence of
impairment. This evidence may include one or more of the following: 1) deteriorating market to book
ratio, 2) increasing industry risk factors, 3) deteriorating financial condition of the issuer, 4)
covenant violations, 5) high probability of bankruptcy of the issuer, 6) nationally recognized
credit rating agency downgrades, and/or 7) intent and ability to hold to recovery. Additionally,
for asset-backed securities (ABS), cash flow trends and underlying levels of collateral are
monitored. A security is impaired if there is objective evidence that a loss event has occurred
after the initial recognition of the asset that has a negative impact on the estimated future cash
flows. A specific security is considered to be impaired when it is determined that it is probable
that not all amounts due (both principal and interest) will be collected as scheduled. For debt
securities, an OTTI must be recognized in earnings when an entity either a) has the intent to sell
the debt security or b) more likely than not will be required to sell the debt security before its
anticipated recovery. If the Company meets either of these criteria, the OTTI is recognized in
earnings in an amount equal to the entire difference between the securitys amortized cost basis
and its fair value at the balance sheet date. For debt securities in unrealized loss positions that
do not meet these criteria, the Company must analyze its ability to recover the amortized cost by
comparing the net present value of projected future cash flows with the amortized cost of the
security. The Company has evaluated the near-term prospects of the issuers in relation to the
severity and duration of the unrealized loss, and unless otherwise noted, does not consider these
investments to be impaired as of December 31, 2009.
Five issuers represent more than 5% of the total unrealized loss position, which is comprised of
one commercial mortgage-backed security (CMBS) holding, one ABS subprime mortgage, one Treasury
bond and two residential mortgage-backed securities (RMBS). The Companys largest single issuer
unrealized loss is $5.9 million and relates to US Treasuries. The Companys CMBS unrealized loss is
$3.8 million and relates to Citigroup Commercial Mortgage Tranche 2004-C1. This is a CMBS that
contains fixed income positions where our holding is rated investment grade. The Companys ABS
subprime mortgage unrealized loss is $3.4 million and relates to Lehman XS Tranche 2007-9, which is
a first lien-fixed rate subprime mortgage 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
December 31, 2009. The Companys RMBS unrealized loss is $6.4 million and relates to GSR Mortgage
Loan Tranche 2005-AR5 and SASCO 2008-03. GSR Mortgage Loan Tranche 2005-AR5 and SASCO 2008-03 are
securitized portfolios of RMBS that contain fixed income positions where our holdings are rated
below investment grade and investment grade, respectively.
19
Financial Services Sector
MLLICs $4.8 million of gross unrealized losses within the financial services sector has an estimated fair
value of $68.2 million. The majority of the unrealized loss in
the financial services sector relates to the
banking sub-sector which has $4.8 million of gross unrealized losses on securities with an
estimated fair value of $62.0 million. Companies within
MLLICs financial services sector are generally high
in credit quality and, as a whole, represent a large portion of the corporate debt market. The
extreme stress on the capital base of banks within the sector has been significantly reduced
following unprecedented liquidity and capital support from major governments over the last year.
Fundamentals remain somewhat weakened by the global recession and some companies remain dependent
on government support. However, funding concerns have largely abated as capital markets have
reopened and investor confidence is returning to the sector. In addition, the sector has raised a
significant amount of capital, creating a large buffer to help absorb rising credit losses.
Following the unprecedented global market turmoil, regulators are likely to strengthen capital
requirements for the sector as a whole as well as implement additional regulatory controls and
oversight. All of the securities in an unrealized loss position are rated investment grade.
Banking
The overall exposure to the banking sub-sector in the Companys portfolio is of high quality.
The unrealized losses in the banking sub-sector primarily reflect low floating rate coupons on
some securities, and credit spread widening due to economic weakness and market concerns that
deeply subordinated securities will not be supported by the government. Government initiatives
put into place during 2008 and 2009 have been largely successful in reopening the funding
markets though lending remains cautious in some sectors of the economy. Many banks have
benefited from both direct assistance (government capital injections, asset relief plans and
government guarantees on debt) and indirect assistance (various government liquidity measures,
including short-term funding facilities). Included in the Companys banking exposure are hybrid
securities, which typically have an original maturity of more than thirty years, may be
perpetual and were designed to receive enhanced equity credit from rating agencies. In
addition, they have other features that may not be consistent across issues such as a cumulative
or non-cumulative coupon, capital replacement language and an alternative payment mechanism.
The Companys exposure to hybrid securities in an unrealized loss is all rated investment grade
and there is little risk of payment interruption. The Company evaluated the near-term prospects
of the issuers in relation to the severity and duration of the unrealized loss and does not
consider those investments to be impaired as of December 31, 2009.
There are no individual issuers rated below investment grade in this sub-sector which have an
unrealized loss position greater than $2.5 million.
Industrial Sector
MLLICs
$3.4 million of gross unrealized losses and OTTI within the Industrial sector has an estimated fair value of
$169.1 million. The majority of the unrealized loss in the Industrial sector relates to the
following sub-sectors: Basic Industries and Capital Goods, Consumer Cyclical, Communications,
Energy and Transportation. The Basic Industries and Capital Goods sector has of $0.8 million of
gross unrealized losses with a fair value of $20.1 million. The Consumer Cyclical sub-sector has
of $0.3 million of gross unrealized losses with a fair value of $28.4 million. The Communications
sub-sector has of $0.5 million of gross unrealized losses with a fair value of $26.9 million. The
Energy sub-sector has of $0.7 million of gross unrealized losses with a fair value of $65.4
million. The Transportation sub-sector has of $0.6 million of gross unrealized losses with a fair
value of $7.8 million.
Basic Industries and Capital Goods
The unrealized loss in the Basic Industries and Capital Goods sector is primarily related to
aerospace and defense companies. Business aircraft is currently in the midst of a severe
cyclical downturn. The industry is seeing a significant decline in demand for new aircraft, as
well as significant delays and renegotiations on previously ordered aircraft. Orders are being
deferred by large customers. To combat falling sales, the industry has undertaken various cost
reduction efforts. Commercial aircraft demand has been in a cyclical decline as well, however,
not to the same degree as business aircraft. Commercial airline traffic trends have stabilized
and are expected to follow global economic trends. The Company evaluated the near-term
prospects of the issuers in relation to the severity and duration of the unrealized loss and
does not consider those investments to be impaired as of December 31, 2009.
There are no individual issuers rated below investment grade in the basic industries and capital
goods sector which have unrealized loss positions greater than $2.5 million.
Consumer Cyclical
The Consumer Cyclical sector has been negatively impacted by the combination of global economic
weakness, weak consumer confidence, tight credit standards and high unemployment. The most
significant sub-sector from an unrealized loss perspective is gaming.
20
Fundamentals in the gaming industry remain weak due to increased debt and related interest costs
due to leveraged buyout activity and a material reduction in discretionary consumer spending. A
deteriorating homebuilding environment and a material drop-off in consumer confidence, coupled
with concerns over unemployment resulted in declining demand. Recent supply additions have come
at a very difficult time and have added to the supply/demand imbalance. Discounted rooms have
been offered to entice demand, which will have a negative effect on margins.
Where issuers are not projected to pay principal and interest in full, securities were impaired
to the net present value of projected future cash flows. The Company evaluated the near-term
prospects of the issuers in relation to the severity and duration of the remaining unrealized
loss and does not consider those investments to be impaired as of December 31, 2009.
There are no individual issuers rated below investment grade in the consumer cyclical sector
which have unrealized loss positions greater than $2.5 million.
Energy
The Energy sector includes several sub-sectors. The most significant sub-sector from an
unrealized loss perspective is integrated energy (companies that are active in both
exploration/production and refining).
Over the past year, the fundamental picture for integrated companies has improved with commodity
prices positively impacting cash flow generation. These are mostly very large, geographically
diverse names with multi-billion dollars in liquidity and are not highly leveraged. As such they
are able to absorb commodity volatility better than the smaller exploration and production
companies. The Company evaluated the near-term prospects of the issuers in relation to the
severity and duration of the remaining unrealized loss and does not consider those investments
to be impaired as of December 31, 2009.
There are no individual issuers rated below investment grade in the energy sector which have
unrealized loss positions greater than $2.5 million.
Communications
The Communications sector can be further divided into the media non-cable, wireless and
wirelines sub-sectors. The majority of weakness to date has been within the media non-cable
category. All media companies, but especially newspaper and directory companies have been
suffering from a tepid advertising environment related to the weak economy. This has made it
difficult for companies to offset declining revenues with sufficient cost cutting initiatives,
leading to significantly lower profits. Historically, this space has been a focus for activist
shareholders and private equity firms, forcing management to respond by increasing financial
leverage, performing consolidations or divesting assets. The net effect of this was a weaker
credit profile for many companies just as the market started to slow down. The Company evaluated
the near-term prospects of the issuers in relation to the severity and duration of the
unrealized loss and does not consider those investments to be impaired as of December 31, 2009.
There are no individual issuers rated below investment grade in the communications sector which
have unrealized loss positions greater than $2.5 million.
Transportation
The Transportation sector includes transportation services companies and airlines.
Transportation services is a diversified sub-sector including issuers ranging from rental car
companies to rail car manufacturers. These companies have all been impacted by the economic
slowdown in varying degrees. Rental car companies have experienced weakness in end market
demand, especially within the corporate travel segment. A weak used car market rebounded
dramatically during 2009 and the capital markets have opened back up for the more leveraged
names in the sub-sector. Parcel delivery companies have also experienced weak demand for their
services, which has pressured pricing. Balance sheets generally remain strong and the recent
strength in industrial production should help fundamentals for this sector.
Airline fundamentals continue to be pressured as business travel demand remains soft. Airlines
have resorted to cutting capacity and fares to keep their aircraft full, which has resulted in
high load factors, but much weaker yields. This has translated into significant pressure on the
top-line. Liquidity concerns have abated for the foreseeable future given the sizable amounts
of cash that have been raised across the sector via the capital markets. Concerns over input
costs have increased as jet fuel costs have risen to 52 week highs.
The Company evaluated the near-term prospects of the issuers in relation to the severity and
duration of the unrealized loss and does not consider those investments to be impaired as of
December 31, 2009.
21
There are no individual issuers rated below investment grade in the transportation sector which
have unrealized loss positions greater than $2.5 million.
Asset-Backed Securities Housing Related
ABS Housing Related securities are secured by pools of residential mortgage loans primarily those
which are categorized as subprime. The unrealized loss and OTTI is primarily due to decreased liquidity and
increased credit spreads in the market combined with significant increases in expected losses on
loans within the underlying pools. Expected losses within the underlying pools are generally higher
than original expectations, primarily in certain later-vintage adjustable rate mortgage loan pools,
which has led to some rating downgrades in these securities. While most of the Companys ABS
housing related positions are secured by pools of subprime residential mortgages, the Company has
exposure to one ABS collateralized by manufactured housing loans. The market value of this security
is $3.3 million with an amortized cost balance of $4.1 million. The security has a vintage of 2001.
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.
All ABS housing related securities are monitored and reviewed on a monthly basis with detailed cash
flow models using the current collateral pool and capital structure on the portfolio quarterly.
Model output is generated under base and several stress-case scenarios. ABS housing asset
specialists utilize widely recognized industry modeling software to perform a loan-by-loan,
bottom-up approach to modeling. The ABS housing models incorporate external estimates on property
valuations, borrower characteristics, propensity of a borrower to default or prepay and the overall
security structure. Defaults were estimated by identifying the loans that are in various
delinquency buckets and defaulting a certain percentage of them over the near-term and long-term.
Recent payment history, a percentage of on-going delinquency rates and a constant prepayment rate
are also incorporated into the model. Once the entire pool is modeled, the results are closely
analyzed by the asset specialist to determine whether or not our particular tranche or holding is
at risk for payment interruption. Holdings are impaired to the net present value of projected
future cash flows where loss events have taken place or are projected to take place that would
affect future cash flows on our particular tranche. Securities expected to have future cash flow
interruptions within the Companys ABS subprime mortgage portfolio have been impaired to the net
present value of projected future cash flows and remaining positions are not considered impaired as
of December 31, 2009.
There is one individual issuer rated below investment grade in the ABS housing sector which has an
unrealized loss position greater than $2.5 million, Lehman XS TR 2007-09. The market value of this
security is $5.4 million with an unrealized loss of $3.4 million, with the position being first
lien senior CCC rated. For this holding, the collateral pool has experienced higher than
expected delinquencies and losses, and the unrealized loss is further exacerbated by the impact of
declining home values on borrowers using affordability products. The credit spread widening is
further impacting the unrealized losses due to illiquidity as well as increased extension risk due
to slower than expected prepayments. Cash flow models did not indicate full recovery of principal
and interest for the Companys particular holding above and it was impaired to the net present
value of projected future cash flows as of December 31, 2009.
Where holdings are not projected to pay principal and interest in full, securities were impaired to
the net present value of projected future cash flows. As the remaining unrealized losses in the
ABS-housing related portfolio relate to holdings where the Company expects to receive full
principal and interest, the Company does not consider the underlying investments to be impaired as
of December 31, 2009.
There are no other individual issuers rated below investment grade in this sector which have an
unrealized loss position greater than $2.5 million.
Commercial Mortgage-Backed Securities
CMBS are securitizations of underlying pools of mortgages on commercial real estate. The underlying
mortgages have varying risk characteristics and are pooled together and sold in different rated
tranches. The Companys CMBS includes conduit and single borrower securities, with the majority of
these positions being AAA-senior rated securities.
22
The following tables summarize the Companys CMBS exposure by rating and vintage at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
Estimated |
|
|
Unrealized |
|
|
|
Amortized |
|
|
Fair |
|
|
Gains (Losses) |
|
(dollars in millions) |
|
Cost |
|
|
Value |
|
|
and OTTI |
|
AAA Senior |
|
$ |
114.3 |
|
|
$ |
114.5 |
|
|
$ |
0.2 |
|
AAA Mezzanine |
|
|
5.6 |
|
|
|
4.1 |
|
|
|
(1.5 |
) |
AAA Junior |
|
|
11.3 |
|
|
|
8.8 |
|
|
|
(2.5 |
) |
AA |
|
|
18.7 |
|
|
|
13.5 |
|
|
|
(5.2 |
) |
A |
|
|
15.9 |
|
|
|
11.3 |
|
|
|
(4.6 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
165.8 |
|
|
$ |
152.2 |
|
|
$ |
(13.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
Estimated Fair Value by Vintage |
|
(dollars in millions) |
|
2005&Prior |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
Total |
|
AAA Senior (a) |
|
$ |
39.6 |
|
|
$ |
56.9 |
|
|
$ |
17.9 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
114.4 |
|
AAA Mezzanine |
|
|
|
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.1 |
|
AAA Junior |
|
|
6.9 |
|
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.9 |
|
AA |
|
|
8.7 |
|
|
|
4.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.5 |
|
A |
|
|
2.8 |
|
|
|
4.8 |
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
11.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
58.0 |
|
|
$ |
72.6 |
|
|
$ |
21.6 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
152.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. |
All CMBS securities of the Company are monitored and modeled under base and several stress-case
scenarios by asset specialists. For conduit securities a widely recognized industry modeling
software is used to perform a loan-by-loan, bottom-up approach. For non-conduit securities, a CMBS
asset specialist works closely with AEGON USA Realty Advisors real estate valuation group to
determine underlying asset valuation and risk. Both methodologies incorporate external estimates on
the property market, capital markets, property cash flows, and loan structure. Results are then
closely analyzed by the asset specialist to determine whether or not a principal or interest loss
is expected to occur. If cash flow models indicate a credit event will impact future cash flows,
the security is impaired to the net present value of projected future cash flows.
23
The gross unrealized loss on CMBS is $15.5 million. Over the past 18 months, the commercial real
estate market has continued to soften. As property fundamentals deteriorate, CMBS loan
delinquencies have been climbing at the same time. The introduction of the 20% and 30% credit
enhanced classes within the 2005-2008 vintage deals provide some offset to these negative
fundamentals. While the CMBS sector is beginning to show signs of improvement, the lending market
remains limited as lenders have become more conservative with underwriting standards, property
transactions have diminished greatly, and higher mortgage spreads have curtailed borrowing. A lack
of liquidity in the market combined with a broad re-pricing of risk has led to increased credit
spreads across the credit classes. As the unrealized losses in the CMBS portfolio relate to holdings where
the Company expects to receive full principal and interest, the Company does not consider the
underlying investments to be impaired as of December 31, 2009.
There are no individual issuers rated below investment grade in this sector which have an
unrealized loss position greater than $2.5 million.
Residential Mortgage-Backed Securities
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 government sponsored enterprise (GSE) guaranteed
passthroughs, whole loan passthroughs and negative amortization mortgage-backed securities.
All RMBS securities of the Company are monitored and reviewed on a monthly basis with detailed
modeling completed on the portfolio quarterly. Model output is generated under base and several
stress-case scenarios. RMBS asset specialists utilize widely recognized industry modeling software
to perform a loan-by-loan, bottom-up approach to modeling. Models incorporate external loan-level
analytics to identify the riskiest securities. The results from the models are then closely
analyzed by the asset specialist to determine whether or not a principal or interest loss is
expected to occur. Positions are impaired to the net present value of projected cash flows where
loss events have taken place or are projected to take place that would affect future cash flows.
The unrealized loss and OTTI on RMBS is $7.6 million, of which, $3.6 million is attributed to the B rated
generic shelf name, GSR MTGE LN TR 2005-AR5 (GSR). The Companys amortized cost in GSR is $17.1
million and the deal contains its own unique pool of collateral and represents a separate and
distinct trust. The combination of low floating-rate reset margins, slow prepayment speeds, severe
illiquidity in the market for near-prime securities, and the unprecedented level of
mortgage-related credit spread widening have pushed the overall market value as a percent of
amortized cost on all RMBS bonds in an unrealized loss position to 84%.
Where holdings are not projected to pay principal and interest in full, securities were impaired to
the net present value of projected future cash flows. As the remaining unrealized losses in the
RMBS portfolio relate to holdings where the Company expects to receive full principal and interest,
the Company does not consider the underlying investments to be impaired as of December 31, 2009.
There are no other individual issuers rated below investment grade in the RMBS sector which have
unrealized loss positions greater than $2.5 million.
Negative Amortization Mortgage Exposure
Negative amortization mortgages (also known as option ARMs) are loans whereby the payment made
by the borrower is less than the accrued interest due and the difference is added to the loan
balance. When the accrued balance of the loan reaches the negative amortization limit
(typically 110% to 125% of the original loan amount), the loan recalibrates to a fully
amortizing level and a new minimum payment amount is determined. The homeowners new minimum
payment amount can be dramatically higher than the original minimum payment amount. The timing
of when these loans reach their negative amortization cap will vary, and is a function of the
accrual rate on each loan, the minimum payment rate on each loan and the negative amortization
limit itself. Typically, these loans are estimated to reach their negative amortization limit
between 3 and 5 years from the date of origination. The Companys exposure to negative
amortization mortgages ($3.1 million) is all AAA rated, with all of these positions being
super-senior AAA rated securities.
At December 31, 2009 and 2008, approximately $98.4 million (or 36%) 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 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.
24
Government and Government Agencies
Government and government agencies exposure relates to government issued securities including
Canadian government bonds and US Treasury bonds. The issuer identified as having the largest
unrealized loss in the available-for-sale portfolio was US Treasuries. US Treasury interest rates
rose significantly during 2009. Government fiscal and monetary policy has stabilized credit
conditions across much of the world, and, as a result, the quality premium for US Treasury bonds
has diminished. In addition, generally more optimistic economic sentiment and some concerns about
potential future inflationary pressures have put pressure on US Treasuries. As a result, prices for
US Treasury and Agency securities fell during 2009. The Company evaluated the near-term prospects
of the issuer in relation to the severity and duration of the unrealized loss and does not consider
the position to be impaired as of December 31, 2009.
There are no individual issuers rated below investment grade in this sector which have an
unrealized loss position greater than $2.5 million.
The amortized cost and estimated fair value of fixed maturity securities by rating agency
equivalent were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
(dollars in millions) |
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
AAA |
|
$ |
509.8 |
|
|
$ |
501.1 |
|
|
$ |
634.5 |
|
|
$ |
599.5 |
|
AA |
|
|
142.9 |
|
|
|
140.1 |
|
|
|
105.9 |
|
|
|
96.7 |
|
A |
|
|
353.7 |
|
|
|
353.4 |
|
|
|
344.4 |
|
|
|
323.2 |
|
BBB |
|
|
267.5 |
|
|
|
277.7 |
|
|
|
347.5 |
|
|
|
297.5 |
|
Below investment grade |
|
|
85.4 |
|
|
|
73.0 |
|
|
|
78.1 |
|
|
|
55.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
$ |
1,359.3 |
|
|
$ |
1,345.3 |
|
|
$ |
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 December 31, 2009
approximately $38.9 million (or 3%) of fixed maturity securities were rated BBB-, which is the
lowest investment grade rating given by Standard and Poors. This compares to $39.9 million (or
3%) of fixed maturity securities at December 31, 2008. Below investment grade securities are
speculative and are subject to significantly greater risks related to the creditworthiness of the
issuers and the liquidity of the market for such securities. The Company closely monitors such
investments.
Unrealized gains (losses) incurred during 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.
25
Details underlying securities in a continuous gross unrealized loss and OTTI position for
investment grade securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
Estimated |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair |
|
|
Amortized |
|
|
Losses and |
|
(dollars in millions) |
|
Value |
|
|
Cost |
|
|
OTTI ( 1) |
|
Investment Grade Securities |
|
|
|
|
|
|
|
|
|
|
|
|
Less than or equal to six months |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
$ |
10.5 |
|
|
$ |
10.6 |
|
|
$ |
(0.1 |
) |
Industrial |
|
|
144.4 |
|
|
|
146.3 |
|
|
|
(1.9 |
) |
Utility |
|
|
12.3 |
|
|
|
12.4 |
|
|
|
(0.1 |
) |
Asset-backed securities housing related |
|
|
3.7 |
|
|
|
3.8 |
|
|
|
(0.1 |
) |
Commercial mortgage-backed securities non agency backed |
|
|
11.8 |
|
|
|
12.1 |
|
|
|
(0.3 |
) |
Residential mortgage-backed securities agency backed |
|
|
19.9 |
|
|
|
20.0 |
|
|
|
(0.1 |
) |
Government and government agencies |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
|
26.0 |
|
|
|
26.2 |
|
|
|
(0.2 |
) |
Foreign |
|
|
1.3 |
|
|
|
1.4 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
Total fixed maturity and equity securities |
|
|
229.9 |
|
|
|
232.8 |
|
|
|
(2.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than six months but less than or equal to one year |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
Industrial |
|
|
4.4 |
|
|
|
4.9 |
|
|
|
(0.5 |
) |
Utility |
|
|
0.7 |
|
|
|
0.7 |
|
|
|
|
|
Asset-backed securities housing related |
|
|
12.9 |
|
|
|
14.5 |
|
|
|
(1.6 |
) |
Commercial mortgage-backed securities non agency backed |
|
|
5.0 |
|
|
|
5.8 |
|
|
|
(0.8 |
) |
Government and government agencies United States |
|
|
83.7 |
|
|
|
89.3 |
|
|
|
(5.6 |
) |
|
|
|
|
|
|
|
|
|
|
Total fixed maturity and equity securities |
|
|
106.7 |
|
|
|
115.2 |
|
|
|
(8.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than one year |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
|
57.6 |
|
|
|
62.4 |
|
|
|
(4.8 |
) |
Industrial |
|
|
12.5 |
|
|
|
12.6 |
|
|
|
(0.1 |
) |
Utility |
|
|
5.6 |
|
|
|
6.0 |
|
|
|
(0.4 |
) |
Asset-backed securities housing related |
|
|
10.5 |
|
|
|
11.5 |
|
|
|
(1.0 |
) |
Commercial mortgage-backed securities non agency backed |
|
|
50.8 |
|
|
|
65.3 |
|
|
|
(14.5 |
) |
Residential mortgage-backed securities non agency backed |
|
|
3.1 |
|
|
|
5.9 |
|
|
|
(2.8 |
) |
Municipals tax exempt |
|
|
0.8 |
|
|
|
0.9 |
|
|
|
(0.1 |
) |
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
Banking securities |
|
|
2.3 |
|
|
|
2.7 |
|
|
|
(0.4 |
) |
Other securities |
|
|
5.1 |
|
|
|
5.8 |
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
Total fixed maturity and equity securities |
|
$ |
148.3 |
|
|
$ |
173.1 |
|
|
$ |
(24.8 |
) |
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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 |
|
$ |
68.2 |
|
|
$ |
73.0 |
|
|
$ |
(4.8 |
) |
Industrial |
|
|
161.3 |
|
|
|
163.8 |
|
|
|
(2.5 |
) |
Utility |
|
|
18.6 |
|
|
|
19.1 |
|
|
|
(0.5 |
) |
Asset-backed securities housing related |
|
|
27.1 |
|
|
|
29.8 |
|
|
|
(2.7 |
) |
Commercial mortgage-backed securities non agency backed |
|
|
67.6 |
|
|
|
83.2 |
|
|
|
(15.6 |
) |
Residential mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
Agency backed |
|
|
19.9 |
|
|
|
20.0 |
|
|
|
(0.1 |
) |
Non agency backed |
|
|
3.1 |
|
|
|
5.9 |
|
|
|
(2.8 |
) |
Municipals tax exempt |
|
|
0.8 |
|
|
|
0.9 |
|
|
|
(0.1 |
) |
Government and government agencies |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
|
109.6 |
|
|
|
115.5 |
|
|
|
(5.9 |
) |
Foreign |
|
|
1.3 |
|
|
|
1.4 |
|
|
|
(0.1 |
) |
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
Banking securities |
|
|
2.3 |
|
|
|
2.7 |
|
|
|
(0.4 |
) |
Other securities |
|
|
5.1 |
|
|
|
5.8 |
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
Total fixed maturity and equity securities |
|
$ |
484.9 |
|
|
$ |
521.1 |
|
|
$ |
(36.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of securities in a continuous unrealized loss position |
|
|
|
|
|
|
|
|
|
|
102 |
|
|
|
|
(1) |
|
Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
Estimated |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair |
|
|
Amortized |
|
|
Losses and |
|
(dollars in millions) |
|
Value |
|
|
Cost |
|
|
OTTI |
|
Investment Grade Securities |
|
|
|
|
|
|
|
|
|
|
|
|
Less than or equal to six months |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
$ |
70.8 |
|
|
$ |
76.2 |
|
|
$ |
(5.4 |
) |
Industrial |
|
|
79.1 |
|
|
|
84.6 |
|
|
|
(5.5 |
) |
Utility |
|
|
51.2 |
|
|
|
56.4 |
|
|
|
(5.2 |
) |
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
Housing related |
|
|
22.3 |
|
|
|
24.8 |
|
|
|
(2.5 |
) |
Credit cards |
|
|
17.4 |
|
|
|
32.2 |
|
|
|
(14.8 |
) |
Autos |
|
|
13.6 |
|
|
|
15.4 |
|
|
|
(1.8 |
) |
Student loan |
|
|
10.4 |
|
|
|
10.6 |
|
|
|
(0.2 |
) |
Equipment lease |
|
|
4.4 |
|
|
|
4.8 |
|
|
|
(0.4 |
) |
Timeshare |
|
|
3.3 |
|
|
|
3.8 |
|
|
|
(0.5 |
) |
Commercial mortgage-backed securities non agency backed |
|
|
99.0 |
|
|
|
123.0 |
|
|
|
(24.0 |
) |
Residential mortgage-backed securities agency backed |
|
|
7.5 |
|
|
|
8.1 |
|
|
|
(0.6 |
) |
Government and government agencies |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
|
55.1 |
|
|
|
55.1 |
|
|
|
|
|
Foreign |
|
|
2.7 |
|
|
|
2.8 |
|
|
|
(0.1 |
) |
Equity securities banking securities |
|
|
5.9 |
|
|
|
8.5 |
|
|
|
(2.6 |
) |
|
|
|
|
|
|
|
|
|
|
Total fixed maturity and equity securities |
|
$ |
442.7 |
|
|
$ |
506.3 |
|
|
$ |
(63.6 |
) |
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
Estimated |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair |
|
|
Amortized |
|
|
Losses and |
|
(dollars in millions) |
|
Value |
|
|
Cost |
|
|
OTTI |
|
Investment Grade Securities (continued) |
|
|
|
|
|
|
|
|
|
|
|
|
Greater than six months but less than or equal to one year |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
$ |
126.9 |
|
|
$ |
153.5 |
|
|
$ |
(26.6 |
) |
Industrial |
|
|
111.8 |
|
|
|
121.8 |
|
|
|
(10.0 |
) |
Utility |
|
|
48.4 |
|
|
|
53.6 |
|
|
|
(5.2 |
) |
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
Housing related |
|
|
8.9 |
|
|
|
15.4 |
|
|
|
(6.5 |
) |
Credit cards |
|
|
8.9 |
|
|
|
10.1 |
|
|
|
(1.2 |
) |
Autos |
|
|
7.5 |
|
|
|
8.4 |
|
|
|
(0.9 |
) |
Commercial mortgage-backed securities non agency backed |
|
|
20.3 |
|
|
|
35.9 |
|
|
|
(15.6 |
) |
Residential mortgage-backed securities non agency backed |
|
|
19.3 |
|
|
|
32.9 |
|
|
|
(13.6 |
) |
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 |
|
|
359.2 |
|
|
|
444.1 |
|
|
|
(84.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
28
Details underlying securities in a continuous gross unrealized loss and OTTI position for below
investment grade securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
Estimated |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair |
|
|
Amortized |
|
|
Losses and |
|
(dollars in millions) |
|
Value |
|
|
Cost |
|
|
OTTI ( 1) |
|
Below Investment Grade Securities |
|
|
|
|
|
|
|
|
|
|
|
|
Less than or equal to six months |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds industrial |
|
$ |
1.9 |
|
|
$ |
2.1 |
|
|
$ |
(0.2 |
) |
Government and government agencies foreign |
|
|
2.2 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity and equity securities |
|
|
4.1 |
|
|
|
4.3 |
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than six months but less than or equal to one year |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds industrial |
|
|
1.1 |
|
|
|
1.2 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
Total fixed maturity and equity securities |
|
|
1.1 |
|
|
|
1.2 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than one year |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
Industrial |
|
|
4.8 |
|
|
|
5.4 |
|
|
|
(0.6 |
) |
Utility |
|
|
1.1 |
|
|
|
1.2 |
|
|
|
(0.1 |
) |
Asset-backed securities housing related |
|
|
12.5 |
|
|
|
21.3 |
|
|
|
(8.8 |
) |
Residential mortgage-backed securities non agency backed |
|
|
16.7 |
|
|
|
21.4 |
|
|
|
(4.7 |
) |
Equity securities banking securities |
|
|
4.1 |
|
|
|
6.6 |
|
|
|
(2.5 |
) |
|
|
|
|
|
|
|
|
|
|
Total fixed maturity and equity securities |
|
|
39.2 |
|
|
|
55.9 |
|
|
|
(16.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total of all below investment grade securities |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
Industrial |
|
|
7.8 |
|
|
|
8.7 |
|
|
|
(0.9 |
) |
Utility |
|
|
1.1 |
|
|
|
1.2 |
|
|
|
(0.1 |
) |
Asset-backed securities housing related |
|
|
12.5 |
|
|
|
21.3 |
|
|
|
(8.8 |
) |
Residential mortgage-backed securities non agency backed |
|
|
16.7 |
|
|
|
21.4 |
|
|
|
(4.7 |
) |
Government and government agencies foreign |
|
|
2.2 |
|
|
|
2.2 |
|
|
|
|
|
Equity securities banking securities |
|
|
4.1 |
|
|
|
6.6 |
|
|
|
(2.5 |
) |
|
|
|
|
|
|
|
|
|
|
Total fixed maturity and equity securities |
|
$ |
44.4 |
|
|
$ |
61.4 |
|
|
$ |
(17.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of securities in a continuous unrealized loss position |
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
|
(1) |
|
Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI. |
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 six months |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
$ |
3.7 |
|
|
$ |
5.7 |
|
|
$ |
(2.0 |
) |
Industrial |
|
|
28.1 |
|
|
|
38.8 |
|
|
|
(10.7 |
) |
Utility |
|
|
0.3 |
|
|
|
0.5 |
|
|
|
(0.2 |
) |
Asset-backed securities housing related |
|
|
5.1 |
|
|
|
9.2 |
|
|
|
(4.1 |
) |
Government and government agencies foreign |
|
|
1.5 |
|
|
|
1.7 |
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
Total fixed maturity and equity securities |
|
|
38.7 |
|
|
|
55.9 |
|
|
|
(17.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
Greater than six months but less than or equal to one year |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
|
|
Financial services |
|
|
1.0 |
|
|
|
1.5 |
|
|
|
(0.5 |
) |
Industrial |
|
|
3.9 |
|
|
|
7.0 |
|
|
|
(3.1 |
) |
Utility |
|
|
5.1 |
|
|
|
7.3 |
|
|
|
(2.2 |
) |
Equity securities other financial services securities |
|
|
1.1 |
|
|
|
1.6 |
|
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
Total fixed maturity and equity securities |
|
|
11.1 |
|
|
|
17.4 |
|
|
|
(6.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 32% and 14% of total gross unrealized losses and OTTI on all available-for-sale
securities at December 31, 2009 and 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 December 31, 2009.
30
Details underlying available-for-sale securities below investment grade and in an unrealized loss
and OTTI position were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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 six months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70% to 100% |
|
$ |
4.1 |
|
|
$ |
4.3 |
|
|
$ |
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.1 |
|
|
|
4.3 |
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than six months but less than or equal to one year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70% to 100% |
|
|
1.1 |
|
|
|
1.2 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.1 |
|
|
|
1.2 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than one year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70% to 100% |
|
|
23.9 |
|
|
|
29.8 |
|
|
|
(5.9 |
) |
|
|
40% to 70% |
|
|
15.3 |
|
|
|
26.1 |
|
|
|
(10.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39.2 |
|
|
|
55.9 |
|
|
|
(16.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
44.4 |
|
|
$ |
61.4 |
|
|
$ |
(17.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 six months |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70% to 100% |
|
$ |
22.5 |
|
|
$ |
25.6 |
|
|
$ |
(3.1 |
) |
|
|
40% to 70% |
|
|
14.7 |
|
|
|
26.1 |
|
|
|
(11.4 |
) |
|
|
Below 40% |
|
|
1.5 |
|
|
|
4.2 |
|
|
|
(2.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38.7 |
|
|
|
55.9 |
|
|
|
(17.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than six months but less than or equal to one year |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70% to 100% |
|
|
5.3 |
|
|
|
6.9 |
|
|
|
(1.6 |
) |
|
|
40% to 70% |
|
|
5.3 |
|
|
|
7.9 |
|
|
|
(2.6 |
) |
|
|
Below 40% |
|
|
0.5 |
|
|
|
2.6 |
|
|
|
(2.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.1 |
|
|
|
17.4 |
|
|
|
(6.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
49.8 |
|
|
$ |
73.3 |
|
|
$ |
(23.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The majority of assets depressed over 20% as well as over 40% and greater than one year are
primarily related to ABS subprime mortgages, 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 December 31, 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
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.
31
The following tables provide the ABS subprime mortgage exposure by rating and estimated fair value
by vintage at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
Estimated |
|
|
Unrealized |
|
|
|
Amortized |
|
|
Fair |
|
|
Gains (Losses) |
|
(dollars in millions) |
|
Cost |
|
|
Value |
|
|
and OTTI |
|
First lien fixed |
|
|
|
|
|
|
|
|
|
|
|
|
AAA |
|
$ |
25.7 |
|
|
$ |
23.8 |
|
|
$ |
(1.9 |
) |
Below BBB |
|
|
21.3 |
|
|
|
12.5 |
|
|
|
(8.8 |
) |
Second lien (a) |
|
|
|
|
|
|
|
|
|
|
|
|
Below BBB |
|
|
5.6 |
|
|
|
6.0 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
52.6 |
|
|
$ |
42.3 |
|
|
$ |
(10.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
Estimated |
|
|
Unrealized |
|
|
|
Amortized |
|
|
Fair |
|
|
Gains (Losses) |
|
(dollars in millions) |
|
Cost |
|
|
Value |
|
|
and 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. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
Estimated Fair Value by Vintage |
|
(dollars in millions) |
|
2005&Prior |
|
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
Total |
|
First lien fixed |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA |
|
$ |
23.8 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
23.8 |
|
Below BBB |
|
|
|
|
|
|
2.9 |
|
|
|
9.6 |
|
|
|
|
|
|
|
|
|
|
|
12.5 |
|
Second lien (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below BBB |
|
|
|
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
23.8 |
|
|
$ |
8.9 |
|
|
$ |
9.6 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
42.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $9.9 million and $8.3 million for the years ended December 31,
2009 and 2008, respectively, net of VOBA amortization. The Company did not have any impairment
losses for the year ended December 31, 2007. During 2009, the Company impaired its holdings of
CIT Group, Inc. and Lear Corporation for $1.6 million and $1.1 million, respectively, due to
bankruptcy filings of the issuers. Additionally, the Company recorded a $2.0 million gross
impairment on an upper tier 2 capital security of Lloyds Banking Group due to the intent to sell
the security during the year.
32
Twenty-two unique issuers accounted for the remaining gross impairment losses of $9.5 million with
no single issuer accounting for more than $1.0 million. During 2008, the Company impaired its
holdings of FBG Finance and State Street Capital for $1.9 million and $1.0 million, respectively,
due to a lack of intent to hold these issuers. Additionally, the Company recorded a $2.2 million
gross impairment on Lehman Brothers Holdings due to a bankruptcy filing of the issuer. Forty-seven
unique issuers accounted for the remaining gross impairment losses of $9.1 million with no single
issuer accounting for more than $1.0 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 following summarizes key information on mortgage loans on real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2009 |
|
2008 |
(dollars in millions) |
|
Amount |
|
|
% |
|
Amount |
|
|
% |
Property Type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office |
|
$ |
39.3 |
|
|
|
56 |
% |
|
$ |
40.8 |
|
|
|
53 |
% |
Industrial |
|
|
16.4 |
|
|
|
23 |
|
|
|
16.8 |
|
|
|
22 |
|
Retail |
|
|
11.5 |
|
|
|
16 |
|
|
|
12.2 |
|
|
|
16 |
|
Apartment |
|
|
3.7 |
|
|
|
5 |
|
|
|
3.8 |
|
|
|
5 |
|
Agricultural |
|
|
|
|
|
|
|
|
|
|
3.5 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
70.9 |
|
|
|
100 |
% |
|
$ |
77.1 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Region: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Middle Atlantic |
|
$ |
16.3 |
|
|
|
23 |
% |
|
$ |
16.4 |
|
|
|
21 |
% |
Pacific |
|
|
15.0 |
|
|
|
21 |
|
|
|
18.9 |
|
|
|
25 |
|
South Atlantic |
|
|
13.1 |
|
|
|
18 |
|
|
|
13.8 |
|
|
|
18 |
|
New England |
|
|
13.0 |
|
|
|
18 |
|
|
|
13.8 |
|
|
|
18 |
|
East North Central |
|
|
6.5 |
|
|
|
9 |
|
|
|
7.1 |
|
|
|
9 |
|
West North Central |
|
|
3.7 |
|
|
|
5 |
|
|
|
3.7 |
|
|
|
5 |
|
Mountain |
|
|
3.3 |
|
|
|
5 |
|
|
|
3.4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
70.9 |
|
|
|
100 |
% |
|
$ |
77.1 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State Exposure: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pennsylvania |
|
$ |
13.2 |
|
|
|
19 |
% |
|
$ |
13.2 |
|
|
|
17 |
% |
New Hampshire |
|
|
13.0 |
|
|
|
19 |
|
|
|
13.8 |
|
|
|
18 |
|
California |
|
|
10.0 |
|
|
|
14 |
|
|
|
13.7 |
|
|
|
18 |
|
Virginia |
|
|
9.3 |
|
|
|
13 |
|
|
|
10.0 |
|
|
|
13 |
|
Ohio |
|
|
6.5 |
|
|
|
9 |
|
|
|
7.1 |
|
|
|
9 |
|
Washington |
|
|
5.0 |
|
|
|
7 |
|
|
|
5.1 |
|
|
|
7 |
|
Delaware |
|
|
3.8 |
|
|
|
5 |
|
|
|
3.8 |
|
|
|
5 |
|
South Dakota |
|
|
3.7 |
|
|
|
5 |
|
|
|
3.8 |
|
|
|
5 |
|
Arizona |
|
|
3.3 |
|
|
|
5 |
|
|
|
3.4 |
|
|
|
4 |
|
New Jersey |
|
|
3.1 |
|
|
|
4 |
|
|
|
3.2 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
70.9 |
|
|
|
100 |
% |
|
$ |
77.1 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2009 and 2008 was $67.7 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 performs for monitored loans and may
contribute to the establishment of (or an increase or decrease in) an allowance for losses. In
addition, the Company continues to monitor the entire commercial mortgage loan portfolio to
identify risk.
33
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 December 31, 2009 and 2008. At December
31, 2009 and 2008, there were no commercial mortgage loans that were two or more payments
delinquent. See Note 4 to the Financial Statements for further discussion.
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 2009
with increases of 19%, 44% and 23%, respectively, from 2008. The Dow, NASDAQ and S&P ended 2008
with decreases of 34%, 41% and 38%, respectively, from 2007.
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 75% of Separate Accounts assets were invested in
equity-based mutual funds at December 31, 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 2009, average variable account balances decreased $1.9 billion (or 20%) to $7.6 billion as
compared to the same period in 2008. The decrease in average variable account balances contributed
$28.5 million to the decrease in asset-based policy charge revenue during 2009 as compared to 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.
34
The impact of changes in medium term interest rates, corporate credit and credit spreads on market
valuations were as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Average medium term interest rate yield (a) |
|
|
1.43 |
% |
|
|
0.89 |
% |
Increase (decrease) in medium term interest rates (in basis points) |
|
|
54 |
|
|
|
(249 |
) |
Credit spreads (in basis points) (b) |
|
|
200 |
|
|
|
735 |
|
Expanding (contracting) of credit spreads (in basis points) |
|
|
(535 |
) |
|
|
505 |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) on market valuations: (in millions) |
|
|
|
|
|
|
|
|
Available-for-sale investment securities |
|
$ |
129.2 |
|
|
$ |
(146.5 |
) |
Interest-sensitive policyholder liabilities |
|
|
3.7 |
|
|
|
(0.6 |
) |
|
|
|
|
|
|
|
Net change on market valuations |
|
$ |
132.9 |
|
|
$ |
(147.1 |
) |
|
|
|
|
|
|
|
|
|
|
(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. |
At December 31, 2009 and 2008, MLLIC had 15,498 and 17,284 life insurance and annuity contracts
inforce with interest rate guarantees, respectively. The estimated average rate of interest
credited on behalf of contract owners was 3.49% and 4.08% during 2009 and 2008, respectively.
Total invested assets supporting these liabilities with interest rate guarantees had an estimated
average effective yield of 2.49% and 5.65% during 2009 and 2008, respectively. In 2009 the number
of life insurance and annuity contracts inforce with interest rate guarantees decreased 1,786 (or
10%) as compared to 2008.
Liquidity and Capital Resources
Liquidity
The Companys liquidity requirements include the payment of sales commissions and other
underwriting expenses and the funding of its contractual obligations for the life insurance and
annuity contracts it has in force. The Company has developed and utilizes a cash flow projection
system and regularly performs asset/liability duration matching in the management of its asset and
liability portfolios. The Company anticipates funding its cash requirements utilizing cash from
operations, normal investment maturities and anticipated calls and repayments, consistent with
prior years. As of December 31, 2009 and 2008, The Companys 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 2009, the Company did not pay any cash dividends to AUSA or receive any capital
contributions from AUSA. During 2008, the Company received a $250.0 million capital contribution
from AUSA.
The Company and AUSA are parties to a keepwell agreement which, subject to its terms,
commits AUSA to maintain MLLIC at a minimum net worth.
Statutory Principles and Risk-Based Capital (RBC)
In order to continue to issue annuity products, the Company must meet or exceed the statutory
capital and surplus requirements of the insurance departments of the states in which it conducts
business. Statutory accounting principles differ from GAAP in two major respects. First, under
statutory accounting principles, the acquisition costs of new business are charged to expense, while
under GAAP they are amortized over a period of time. Second, under statutory accounting principles,
the required additions to statutory reserves are calculated under different rules than under GAAP.
The National Association of Insurance Commissioners utilizes the RBC adequacy monitoring system.
The RBC calculates the amount of adjusted capital that a life insurance company should have based
upon that companys risk profile. As of December 31, 2009 and 2008, based on the RBC formula, the
Companys total adjusted capital levels were above the minimum amount of capital required to avoid
regulatory action.
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.
35
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 |
On March 31, 2009, S&P downgraded the Companys insurance financial strength rating from AA to
AA-. The ratings outlook is negative.
On April 23, 2009, A.M. Best downgraded the Companys insurance financial strength rating from A+
to A. The ratings outlook remains stable.
The following table summarizes the Companys ratings as of March 25, 2010:
|
|
|
|
|
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 December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less |
|
|
One To |
|
|
Four To |
|
|
More |
|
|
|
|
|
|
Than One |
|
|
Three |
|
|
Five |
|
|
Than Five |
|
|
|
|
(dollars in millions) (a) |
|
Year |
|
|
Years |
|
|
Years |
|
|
Years |
|
|
Total |
|
General accounts |
|
$ |
151.5 |
|
|
$ |
269.5 |
|
|
$ |
228.7 |
|
|
$ |
1,279.2 |
|
|
$ |
1,928.9 |
|
Separate Accounts |
|
|
1,087.3 |
|
|
|
2,013.7 |
|
|
|
1,549.5 |
|
|
|
5,413.2 |
|
|
|
10,063.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,238.8 |
|
|
$ |
2,283.2 |
|
|
$ |
1,778.2 |
|
|
$ |
6,692.4 |
|
|
$ |
11,992.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 December 31, 2009 and 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.
36
Results of Operations
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 (DAC) are amortized over the period in
which the Company anticipates holding those funds, as noted in the Critical Accounting Policies
section above. 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.
2009 compared to 2008
For the years ended December 31, 2009 and 2008, MLLIC recorded a net loss of $203.1 million and
$138.3 million, respectively. The decrease in income during 2009 as compared to 2008 was primarily
due to the 2009 valuation allowance on deferred tax assets, increased VOBA amortization and
impairments, and the 2009 net realized investment losses partially offset by the 2008 goodwill and
other intangibles impairment charge and lower policy benefit expenses.
Policy charge revenue decreased $36.8 million (or 15%) to $203.9 million during 2009, as
compared to $240.7 million in 2008. The following table provides the changes in policy charge
revenue by type for each respective period:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
2009 |
|
|
2008 |
|
|
Change |
|
Asset-based policy charge revenue |
|
$ |
116.9 |
|
|
$ |
145.4 |
|
|
$ |
(28.5 |
)(a) |
Guaranteed benefit based policy charge revenue |
|
|
28.2 |
|
|
|
23.8 |
|
|
|
4.4 |
|
Non-asset based policy charge revenue |
|
|
58.8 |
|
|
|
71.5 |
|
|
|
(12.7 |
)(b) |
|
|
|
|
|
|
|
|
|
|
Total policy charge revenue |
|
$ |
203.9 |
|
|
$ |
240.7 |
|
|
$ |
(36.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Asset-based policy charge revenue was negatively impacted by the decrease in average
variable account balances during late 2008 and early 2009. |
|
(b) |
|
The decrease in non-asset based policy charge revenue 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. |
37
Net realized investment gains (losses) decreased $86.0 million to ($58.3) million during 2009 as
compared to $27.7 million in 2008. The following table provides the changes in net realized
investment gains (losses) by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
2009 |
|
|
2008 |
|
|
Change |
|
Credit related gains (losses) |
|
$ |
(9.4 |
) |
|
$ |
(3.8 |
) |
|
$ |
(5.6 |
)(a) |
Interest related gains (losses) |
|
|
(1.7 |
) |
|
|
(11.0 |
) |
|
|
9.3 |
(b) |
Equity related gains (losses) |
|
|
(50.3 |
) |
|
|
37.4 |
|
|
|
(87.7 |
)(c) |
Associated amortization of VOBA |
|
|
3.1 |
|
|
|
5.1 |
|
|
|
(2.0 |
) |
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains (losses) |
|
$ |
(58.3 |
) |
|
$ |
27.7 |
|
|
$ |
(86.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-downs for OTTI included in net realized
gains (losses) on investments |
|
$ |
(14.2 |
) |
|
$ |
(14.2 |
) |
|
$ |
|
|
|
|
|
(a) |
|
The increase in credit related losses as compared to 2008 was primarily due to
losses on securities whereby the Company had the intent to sell as of the balance sheet
date, as well as securities of issuers that had filed for bankruptcy during the year. |
|
(b) |
|
The decrease in interest related losses during 2009 was primarily due to impairments
taken in 2008. |
|
(c) |
|
The change in equity related gains (losses) principally relates to increases in net
losses on futures contracts during 2009 as compared to net gains on futures contracts in
2008. |
Policy benefits decreased $139.5 million during 2009 as compared to 2008. The following table
provides the changes in policy benefits by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
2009 |
|
|
2008 |
|
|
Change |
|
Annuity benefit unlocking |
|
$ |
10.4 |
|
|
$ |
95.8 |
|
|
$ |
(85.4 |
)(a) |
Annuity benefit expense |
|
|
9.1 |
|
|
|
66.2 |
|
|
|
(57.1 |
)(b) |
Amortization of deferred sales inducements |
|
|
2.5 |
|
|
|
(0.3 |
) |
|
|
2.8 |
(c) |
Life insurance mortality expense |
|
|
29.1 |
|
|
|
28.9 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
Total policy benefits |
|
$ |
51.1 |
|
|
$ |
190.6 |
|
|
$ |
(139.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
|
(c) |
|
The increase in amortization of deferred sales inducements is principally due to
increasing gross profits resulting from improved equity markets. |
38
Reinsurance premiums ceded decreased $15.5 million during 2009 as compared to 2008. Effective
second quarter of 2008, the Company began to recapture the majority of its reinsurance resulting in
the decreased reinsurance premiums, which is expected to be finalized in the first half of 2010.
Amortization (accretion) of DAC was $10.6 million and ($0.7) million for 2009 and 2008,
respectively. For 2009 and 2008, there was an unfavorable impact to pre-tax income
related to DAC unlocking of $2.6 million and $7.4 million, respectively. Equity market
improvements in 2009 caused higher amortization expense as a result of increasing gross profits.
During 2008, the Company experienced lower than expected gross profits as a result of market losses
which reduced amortization expense and unlocking.
Amortization and impairment of VOBA was $155.5 million and $37.7 million for 2009 and
2008, respectively. During 2009 and 2008, there was an impairment charge of $63.9 million and
$28.0 million, respectively as estimated future gross profits were less than the unamortized
balance. In addition, for 2009 and 2008, there was unfavorable unlocking of $79.4 million and
$40.5 million, respectively. During 2009, the unfavorable unlocking was primarily driven by equity
market volatility and revisions to policyholder behavior assumptions.
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 2008 was $3.8 million. Impairment
charges were recorded in the fourth quarter of 2008 for other intangibles and goodwill of $76.1
million and $139.3 million, respectively.
Insurance expenses and taxes increased $6.9 million (or 10%) in 2009 as compared to 2008. The
following table provides the changes in insurance expenses and taxes for each respective period:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
2009 |
|
|
2008 |
|
|
Change |
|
Commissions |
|
$ |
38.2 |
|
|
$ |
42.5 |
|
|
$ |
(4.3 |
)(a) |
General insurance expense |
|
|
36.7 |
|
|
|
25.1 |
|
|
|
11.6 |
(b) |
Taxes, licenses, and fees |
|
|
0.7 |
|
|
|
1.1 |
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
Total insurance expenses and taxes |
|
$ |
75.6 |
|
|
$ |
68.7 |
|
|
$ |
6.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The decrease in commissions is primarily due to the Company no longer issuing variable annuity products during the latter part of 2009, as well as a decline in trail
commissions as a result of decreased average variable account balances in 2009 as
compared to 2008. |
|
(b) |
|
The increase in general insurance expenses is primarily due to increased transition
and system conversion related expenses. |
2008 compared to 2007
MLLIC recorded a net income (loss) of ($138.3) million and $110.5 for 2008 and 2007, respectively.
Policy charge revenue decreased $26.9 million (or 10%) to $240.7 million during 2008 as compared to
$267.6 million in 2007. The following table provides the changes in policy charge revenue by type
for each respective period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|
|
|
(dollars in millions) |
|
2008 |
|
|
|
2007 |
|
|
Change |
|
Asset-based policy charge revenue |
|
$ |
145.4 |
|
|
|
$ |
174.5 |
|
|
$ |
(29.1 |
)(a) |
Guaranteed benefit based policy charge revenue |
|
|
23.8 |
|
|
|
|
20.0 |
|
|
|
3.8 |
(b) |
Non-asset based policy charge revenue |
|
|
71.5 |
|
|
|
|
77.9 |
|
|
|
(6.4 |
)(c) |
UPCR unlocking |
|
|
|
|
|
|
|
(4.8 |
) |
|
|
4.8 |
(d) |
|
|
|
|
|
|
|
|
|
|
|
Total policy charge revenue |
|
$ |
240.7 |
|
|
|
$ |
267.6 |
|
|
$ |
(26.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Asset-based policy charge revenue was negatively impacted by the decrease in
average variable account balances during 2008 as compared to 2007. |
|
(b) |
|
The increase in guaranteed benefit based policy charge revenue during 2008 was due
to the increase in inforce variable annuity contracts containing guaranteed benefit
riders. |
39
|
|
|
(c) |
|
The decrease in non-asset based policy charge revenue was primarily due to
unfavorable UPCR amortization in 2007 resulting from high mortality. The UPCR balance
was zero as of December 31, 2007 as a result of push down accounting at the acquisition
date. |
|
(d) |
|
See the Critical Accounting Policies section above for a further discussion of UPCR
unlocking. |
Net realized investment gains increased $25.6 million to $27.7 million during 2008 as compared to
$2.1 million in 2007. The following table provides the changes in net realized investment gains by
type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|
|
|
(dollars in millions) |
|
2008 |
|
|
|
2007 |
|
|
Change |
|
Credit related gains (losses) |
|
$ |
(3.8 |
) |
|
|
$ |
2.0 |
|
|
$ |
(5.8 |
)(a) |
Interest related gains (losses) |
|
|
(11.0 |
) |
|
|
|
0.1 |
|
|
|
(11.1 |
)(b) |
Equity related gains |
|
|
37.4 |
|
|
|
|
|
|
|
|
37.4 |
(c) |
Associated amortization of VOBA |
|
|
5.1 |
|
|
|
|
|
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized investment gains |
|
$ |
27.7 |
|
|
|
$ |
2.1 |
|
|
$ |
25.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-downs for OTTI included in net realized
gains (losses) on investments |
|
$ |
(14.2 |
) |
|
|
$ |
|
|
|
$ |
(14.2 |
)(b) |
|
|
|
(a) |
|
The increase in credit related losses during 2008 were primarily due to one large
credit impairment in third quarter 2008 compared to a large credit gain during the
second quarter 2007. |
|
(b) |
|
The decrease in interest related gains during 2008 were primarily due to the
recording of OTT impairments in 2008. |
|
(c) |
|
The increase in equity related gains principally relates to net gains on futures
contracts in 2008 as there were no futures contracts in 2007. |
Policy benefits increased $148.3 million during 2008, as compared to 2007. The following table
provides the changes in policy benefits by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|
|
|
(dollars in millions) |
|
2008 |
|
|
|
2007 |
|
|
Change |
|
Annuity benefit unlocking |
|
$ |
95.8 |
|
|
|
$ |
(22.0 |
) |
|
$ |
117.8 |
(a) |
Annuity benefit expense |
|
|
66.2 |
|
|
|
|
35.0 |
|
|
|
31.2 |
(b) |
Amortization of deferred sales inducements |
|
|
(0.3 |
) |
|
|
|
2.3 |
|
|
|
(2.6 |
)(c) |
Life insurance mortality expense |
|
|
28.9 |
|
|
|
|
27.0 |
|
|
|
1.9 |
(d) |
|
|
|
|
|
|
|
|
|
|
|
Total policy benefits |
|
$ |
190.6 |
|
|
|
$ |
42.3 |
|
|
$ |
148.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
See the Critical Accounting Policies and Estimates section above for further
discussion of variable benefit unlocking. |
|
(b) |
|
The increase in annuity benefit expense was primarily due to the increase in
guaranteed minimum benefit amounts due to increased market volatility. |
|
(c) |
|
During the year 2008, the Company experienced lower than expected gross profits as a
result of market losses which reduced amortization expense and unlocking. |
|
(d) |
|
The increase in life insurance mortality expense during 2008 was due to fewer claims
on policies that had a higher net amount at risk. |
Reinsurance premiums ceded decreased $5.5 million during 2008 as compared to 2007. Effective
second quarter of 2008, the Company began to recapture the majority of its reinsurance resulting in
the decreased reinsurance premiums.
Negative amortization of DAC was $0.7 million in 2008. Included in the amortization for 2008 was
$7.4 million of unfavorable DAC unlocking. During 2008, the Company experienced lower than
expected gross profits as a result of market losses which reduced amortization expense and
unlocking. The DAC balance was zero as of December 31, 2007 as a result of push down accounting at
the acquisition date. Amortization of deferred policy acquisition costs was $22.1 million for
2007.
Amortization of VOBA was $37.7 million for 2008, which included $40.5 million of unfavorable
unlocking. In addition, 2008 includes an impairment charge of $28.0 million as estimated future gross
profits were less than the unamortized balance. There was no VOBA amortization in 2007.
40
Amortization of other intangibles was $3.8 million in 2008. There was no amortization of other
intangibles in 2007. Impairment charges were recorded in the fourth quarter of 2008 for other
intangibles and goodwill of $76.1 million and $139.3 million, respectively.
Insurance expenses and taxes increased $8.9 million (or 15%) in 2008 as compared to 2007. The
following table provides the changes in insurance expenses and taxes for each respective period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|
|
|
(dollars in millions) |
|
2008 |
|
|
|
2007 |
|
|
Change |
|
Commissions |
|
$ |
42.5 |
|
|
|
$ |
34.5 |
|
|
$ |
8.0 |
(a) |
General insurance expense |
|
|
25.1 |
|
|
|
|
23.4 |
|
|
|
1.7 |
(b) |
Taxes, licenses, and fees |
|
|
1.1 |
|
|
|
|
1.9 |
|
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total insurance expenses and taxes |
|
$ |
68.7 |
|
|
|
$ |
59.8 |
|
|
$ |
8.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
The increase in commissions is primarily due to commission expense paid to
Transamerica Capital, Inc., a related party during 2008. |
|
(b) |
|
The increase in general insurance expenses is primarily due to increased
system-related expenses. |
Segment Information
MLLICs operating results are categorized into two business segments: Annuity and Life Insurance.
MLLICs Annuity segment consists of variable annuity and interest-sensitive annuity contracts.
MLLICs Life Insurance segment consists of variable life insurance and interest-sensitive life
insurance contracts. The accounting policies of the business segments are the same as those
described in the summary of significant accounting policies. All revenue and expense transactions
are recorded at the contract level and accumulated at the business segment level for review by
management. The Other category, presented in the following segment financial information,
represents net revenues and income on invested assets that do not support life or annuity
policyholder liabilities. Subsequent to the acquisition date, management no longer considers
Other a category for segment reporting purposes. It is impracticable to restate the prior period
segment information as well as disclosing the information under both the old basis and the new
basis of reporting. Therefore, the predecessor information is shown under the old basis, three
segments Annuity, Life Insurance and Other, while the successor information is shown under the
new basis, two segments Annuity and Life Insurance.
Select financial information by segment for the years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
2009 (dollars in millions) |
|
Annuity |
|
Life |
|
Total |
Net revenues (a) |
|
$ |
101.4 |
|
|
$ |
87.6 |
|
|
$ |
189.0 |
|
Net income (loss) |
|
|
(175.0 |
) |
|
|
(28.1 |
) |
|
|
(203.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
2008 (dollars in millions) |
|
Annuity |
|
Life |
|
Total |
Net revenues (a)
|
|
$ |
215.9 |
|
|
$ |
96.2 |
|
|
$ |
312.1 |
|
Net income (loss)
|
|
|
(158.6 |
) |
|
|
20.1 |
|
|
|
(138.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
2007 (dollars in millions) |
|
Annuity |
|
Life |
|
Other |
|
Total |
Net revenues (a) |
|
$ |
200.3 |
|
|
$ |
97.4 |
|
|
$ |
14.4 |
|
|
$ |
312.1 |
|
Net income |
|
|
72.2 |
|
|
|
28.9 |
|
|
|
9.4 |
|
|
|
110.5 |
|
|
|
|
(a) |
|
Management considers interest credited to policyholder liabilities in evaluating net
revenues. |
MLLIC is not dependent upon any single customer, and no single customer accounted for more than
10% of its revenues during 2009, 2008, or 2007.
41
Item 6A. Quantitative and Qualitative Disclosures about Market Risk
Market Risk
As an insurance company, MLLIC is in the risk business and as a result is exposed to a variety of
risks. A description of our risk management and control systems is given below on the basis of
significant identified risks for us. Our largest exposures are to changes in the financial markets
(e.g. interest rate, credit and equity market risks) that affect the value of the investments,
liabilities from products that we sold, deferred expenses, and value of business acquired.
Results of MLLICs sensitivity analyses are presented to show the estimated sensitivity of net
income to various scenarios. For each type of market risk, the analysis shows how net income would
have been affected by changes in the relevant risk variables that were reasonably possible at the
reporting date. For each sensitivity test, the impact of a reasonably possible change in a single
factor (or shock) is shown. The analysis considers the interdependency between interest rates and
lapse behavior for products sold where there is clear evidence of dynamic lapse behavior.
Management action is taken into account to the extent that it is part of MLLICs regular policies
and procedures. However, incidental management actions that would require a change in policies and
procedures are not considered.
Each sensitivity analysis reflects the extent to which the shock tested would affect managements
critical accounting estimates and judgment in applying MLLICs accounting policies (See Note 1 of
the Financial Statements for a description of the critical accounting estimates and judgments).
The shock may affect the measurement of assets and liabilities based on assumptions that are not
observable in the market as well as market consistent assumptions. For example, a shock in
interest rates may lead to changes in the amortization schedule of deferred policy acquisition
costs or to increased impairment losses on equity investments. Although managements short-term
assumption may change if there is a reasonable change in a risk factor, long-term assumptions will
generally not be revised unless there is evidence that the movement is permanent. This fact is
reflected in the sensitivity analyses provided below.
The sensitivities do not reflect what the net income for the period would have been if risk
variables had been different because the analysis is based on the exposures in existence at the
reporting date rather than on those that actually occurred during the year. Nor are the results of
the sensitivities intended to be an accurate prediction of MLLICs future income. The analysis
does not consider all methods available to management to respond to changes in the financial
environment, such as changing investment portfolio allocations or adjusting crediting rates.
Furthermore, the results of the analyses cannot be extrapolated for wider variations since effects
do not tend to be linear. No risk management process can clearly predict future results.
Interest Rate Risk
Interest rate risk arises from the possibility that changes in interest rates will affect the
value of investments, primarily fixed maturity securities and preferred equity securities.
Changes in interest rates have an inverse relationship to the value of investments. MLLIC manages
interest rate risk as part of its asset/liability management strategy. For each portfolio,
management monitors the expected changes in assets and liabilities, as produced by MLLICs model,
resulting from various interest rate scenarios. Based on these results, management closely
matches the duration of insurance liabilities to the duration of assets supporting those
liabilities.
The table below shows the interest rates at the end of the last five years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
3-Month US LIBOR |
|
|
0.25 |
% |
|
|
1.43 |
% |
|
|
4.70 |
% |
|
|
5.36 |
% |
|
|
4.54 |
% |
10-Year US Treasury |
|
|
3.83 |
% |
|
|
2.22 |
% |
|
|
4.03 |
% |
|
|
4.70 |
% |
|
|
4.39 |
% |
The sensitivity analysis in the table below shows an estimate of the effect of a parallel
shift in the yield curve on net income and equity. Increases in interest rates have a negative
effect on GAAP equity and net income in the current year because it results in unrealized losses on
investments that are carried at fair value. The offsetting economic gain on the insurance
contracts is however, not fully reflected in the sensitivities because many of these liabilities
are not measured at fair value. Over time, the short-term reduction in net income due to rising
interest rates would be offset by higher net income in later years, all else being equal.
42
|
|
|
|
|
|
|
|
|
|
|
Estimated Approximate Effects on: |
Change in Interest Rates: (dollars in millions) |
|
Net Income |
|
Equity |
2009 |
|
|
|
|
|
|
|
|
Shift Up of 100 Basis Points |
|
$ |
(5.2 |
) |
|
$ |
(37.9 |
) |
Shift Down of 100 Basis Points |
|
$ |
4.3 |
|
|
$ |
32.6 |
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
Shift Up of 100 Basis Points |
|
$ |
(11.0 |
) |
|
$ |
(29.3 |
) |
Shift Down of 100 Basis Points |
|
$ |
(1.9 |
) |
|
$ |
17.9 |
|
The sensitivity analysis above reflects the assets and liabilities held at year-end. This
does not necessarily reflect the risk exposure during the year as significant events do not
necessarily occur on January 1. The selection of a 100 basis point immediate, parallel increase
or decrease in interest rates is a hypothetical rate scenario used to demonstrate potential risk.
While a 100 basis point immediate, parallel increase does not represent the Companys view of
future market changes, it is a near term reasonably possible hypothetical change that illustrates
the potential impact of such events. While the income and equity impacts provide a presentation
of interest rate sensitivity, they are based on the portfolio exposures at a point in time and may
not be representative of future market results. These exposures will change as a result of
ongoing portfolio transactions in response to managements assessment of changing market
conditions and available investment opportunities.
Credit Risk
Credit risk represents the loss that MLLIC would incur if an issuer fails to perform its
contractual obligations and the value of the security held has been impaired or is deemed
worthless. MLLIC manages its credit risk by setting investment policy guidelines that assure
diversification with respect to investment, issuer, geographic location and credit quality.
Management regularly monitors compliance of each investment portfolios status with the investment
policy guidelines, including timely updates of credit-related securities.
Equity Market Risk
Fluctuations in the equity markets have affected MLLICs profitability, capital position and sales
of equity related products in the past and may continue to do so. Exposure to equity markets
exists in both assets and liabilities. Asset exposure exists through direct equity investment,
where MLLIC bears all or most of the volatility in returns and investment performance risk. Equity
market exposure is also present in insurance contracts for account of policyholders where funds are
invested in equities such as variable annuities and life insurance. Although most of the risk
remains with the policyholder, lower investment returns can reduce the asset management fee earned
by MLLIC on the asset balance in these products. In addition, some of this business has minimum
guarantees.
The table that follows set forth the closing levels of certain major indices at the end of the
last five years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
S&P 500 |
|
|
1,115 |
|
|
|
903 |
|
|
|
1,468 |
|
|
|
1,418 |
|
|
|
1,248 |
|
NASDAQ |
|
|
2,269 |
|
|
|
1,577 |
|
|
|
2,652 |
|
|
|
2,415 |
|
|
|
2,205 |
|
DOW |
|
|
10,428 |
|
|
|
8,776 |
|
|
|
13,265 |
|
|
|
12,463 |
|
|
|
10,718 |
|
The sensitivity analysis of net income to change in equity prices is presented in the table
below. The sensitivity of net income to changes in equity markets reflects changes in the market
value of MLLICs portfolio, changes in DAC amortization and the strengthening of the guaranteed
minimum benefits, where applicable. The results of equity sensitivity tests are non-linear. The
main reason for this is due to equity options sold to clients that are embedded in some of these
products and the more severe scenarios could cause accelerated DAC amortization and guaranteed
minimum benefits provisioning, while moderate scenarios may not.
43
|
|
|
|
|
|
|
|
|
|
|
Estimated Approximate Effect |
|
|
on Net Income |
Immediate Change of: (dollars in millions) |
|
2009 |
|
2008 |
Equity Increase of 10% |
|
$ |
2.7 |
|
|
$ |
2.2 |
|
Equity Increase of 20% |
|
$ |
6.9 |
|
|
$ |
4.4 |
|
|
|
|
|
|
|
|
|
|
Equity Decrease of 10% |
|
$ |
(0.7 |
) |
|
$ |
(34.5 |
) |
Equity Decrease of 20% |
|
$ |
(1.9 |
) |
|
$ |
(78.2 |
) |
The selection of a 10% and 20% change in the equity markets should not be construed as a
prediction of future market events, but rather as an illustration of the potential impact of such
an event. The Companys exposure can change as a result of changes in the Companys mix of
business.
Liquidity Risk
Liquidity risk is inherent in much of MLLIC businesses. Each asset purchased and liability sold
has liquidity characteristics that are unique. Some liabilities are surrenderable while some
assets, such as private placements, mortgages loans and limited partnerships have low liquidity.
If MLLIC requires significant amounts of cash on short notice in excess of normal cash
requirements, MLLIC may have difficulty selling these investments at attractive prices, in a timely
manner or both.
Underwriting Risk
The Companys earnings depend significantly upon the extent to which actual claims experience is
consistent with the assumptions used in setting the prices for products and establishing the
technical liabilities and liabilities for claims. To the extent that actual claims experience is
less favorable than the underlying assumptions used in establishing such liabilities, income would
be reduced. Furthermore, if these higher claims were part of a permanent trend, MLLIC may be
required to increase liabilities, which could reduce income. In addition, certain acquisition costs
related to the sale of new policies and the purchase of policies already in force have been
recorded as assets on the balance sheet and are being amortized into income over time. If the
assumptions relating to the future profitability of these policies (such as future claims,
investment income and expenses) are not realized, the amortization of these costs could be
accelerated and may even require write offs due to unrecoverability. This could have a materially
adverse effect on MLLICs business, results of operations and financial condition.
Sources of underwriting risk include policy lapses and policy claims such as mortality and
expenses. In general, MLLIC is at risk if policy lapses increase as sometimes MLLIC is unable to
fully recover up front expenses in selling a product despite the presence of commission recoveries
or surrender charges and fees. Within variable annuity contracts with certain guarantee benefits,
MLLIC is at risk if policy lapses decrease, as more contracts would remain in force until
guaranteed payments are made. For mortality risk, MLLIC sells certain types of policies that are at
risk if mortality increases, such as term life insurance or guaranteed minimum death benefits, and
sells certain types of policies that are at risk if mortality decreases (longevity risk) such as
certain annuity products. MLLIC is also at risk if expenses are higher than assumed by management.
MLLIC monitors and manages its underwriting risk by underwriting risk type. Attribution analysis is
performed on earnings and reserve movements in order to understand the source of any material
variation in actual results from what was expected. MLLICs units also perform experience studies
for underwriting risk assumptions, comparing MLLICs experience to industry experience as well as
combining MLLICs experience and industry experience based on the depth of the history of each
source to MLLICs underwriting assumptions. MLLIC also has the ability to reduce expense levels
over time, thus mitigating unfavorable expense variation.
Sensitivity analysis of net income to various underwriting risks is shown in the table that
follows. The sensitivities represent an increase or decrease of mortality rates over 2009.
Increases in mortality rates lead to an increase in the level of benefits and claims on most
business. The impact on net income of sales transactions of investments required to meet the higher
cash outflow from lapses or deaths are reflected in the sensitivities.
44
|
|
|
|
|
|
|
|
|
|
|
Estimated Approximate Effect |
|
|
on Net Income |
Immediate Change of: (dollars in millions) |
|
2009 |
|
2008 |
20% Increase in Lapse Rates |
|
$ |
0.2 |
|
|
$ |
(9.2 |
) |
20% Decrease in Lapse Rates |
|
$ |
0.2 |
|
|
$ |
2.8 |
|
|
|
|
|
|
|
|
|
|
10% Increase in Mortality Rates |
|
$ |
(3.6 |
) |
|
$ |
(21.7 |
) |
10% Decrease in Mortality Rates |
|
$ |
4.0 |
|
|
$ |
14.5 |
|
A shock in mortality rates will generally not lead to a change in the assumptions underlying
the measurement of the insurance liabilities as management will recognize that the shock is
temporary. Life insurers are also exposed to longevity risk.
Item 7. Financial Statements and Supplementary Data
The financials statements of Registrant are set forth in Part IV hereof and are incorporated herein
by reference.
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
No information is required to be disclosed under this item.
Item 8A(T). Controls and Procedures
a) Evaluation of disclosure controls and procedures
The term disclosure controls and procedures (defined in the Securities Exchange Act of 1934 Rule
13a-15(e)) generally refers to the controls and other procedures of a company that are designed to
ensure that information required to be disclosed by a company in the reports that it files or
submits under the Securities Exchange Act of 1934 (the Exchange Act) is recorded, processed,
summarized and reported within required time periods. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be
disclosed by MLLIC in the reports that it files or submits under the Exchange Act is accumulated
and communicated to MLLICs management, including MLLICs principal executive and financial
officers, as appropriate to allow timely decisions regarding required disclosure. MLLICs
management, with the participation of the President and Chief Financial Officer, have evaluated the
effectiveness of the MLLICs disclosure controls and procedures as of the end of the period covered
by this annual report (the Evaluation Date). Based on that evaluation, MLLICs President and
Chief Financial Officer have concluded that, as of the Evaluation Date, such disclosure controls
and procedures were effective.
b) Changes in internal control over financial reporting
The term internal control over financial reporting (defined in Exchange Act Rule 13a-15(f))
generally refers to the process of a company that is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles.
MLLICs management, with the participation of the President and Chief Financial Officer, is
responsible for establishing and maintaining an adequate system of internal control over financial
reporting. MLLICs management, with the participation of the President and Chief Financial
Officer, has conducted an evaluation of the effectiveness of MLLICs internal control over
financial reporting as of December 31, 2009 based on the criteria related to internal control over
financial reporting described in Internal Control Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, MLLICs
management concluded that the internal control over financial reporting was effective as of
December 31, 2009.
This annual report does not include an attestation report of MLLICs registered public accounting
firm regarding internal control over financial reporting. Managements report was not subject to
attestation by the MLLICs registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit MLLIC to provide only managements report in this
annual report.
45
During the fiscal quarter ended December 31, 2009, there have been no changes in MLLICs internal
control over financial reporting that have materially affected, or are reasonably likely to
materially affect, MLLICs internal control over financial reporting.
Item 8B. Other Information
No information is required to be disclosed under this item.
46
PART III
Information
called for by items 9 through 12 of this part is omitted pursuant to General
instruction I. of form 10-K.
Item 13. Principal Account Fees and Services
Fees Paid to the Registrants Independent Auditor
As of December 28, 2007, Ernst & Young LLP (E&Y) is MLLICs independent registered public
accountant. Services provided to MLLIC by E&Y were the audit of MLLICs Financial Statements for
the 2009, 2008 and 2007 fiscal year periods. Prior to E&Y becoming the independent registered
public accounting firm, Deloitte & Touche LLP (D&T) was the independent registered public
accounting firm of record, a change that was precipitated by the acquisition of MLLIC by AUSA,
effective December 28, 2007. These changes were disclosed to the SEC on Form 8-K dated January 3,
2008.
The aggregate fees for professional services by E&Y in 2009 and 2008 for these accounting services
were:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
Audit (a) |
|
$ |
977,000 |
|
|
$ |
1,200,000 |
|
|
|
|
(a) |
|
Audit fees consist of fees for the annual financial statement audit (including required
quarterly reviews) and other procedures required to be performed by the independent auditor
to be able to form an opinion on MLLICs financial statements. These other procedures
include information systems and procedural reviews and testing performed in order to
understand and place reliance on the systems of internal control, and consultations
relating the audit or quarterly review. They also include fees billed for other audit
services, which are those services that only the external auditor reasonably can provide,
and include statutory audits, comfort letters, services associated with SEC registration
statements, periodic reports and other documents filed with the SEC. |
Audit Committee Pre-approval Policies and Procedures
MLLICs Audit Committee is responsible, among other matters, for the oversight of the external
auditor. Consistent with SEC rules regarding auditor independence, the Audit Committee has adopted
a policy regarding pre-approval of audit and permissible non-audit services provided by our
independent auditors (the Pre-approval Policy).
Under the Pre-approval Policy, proposed services either:
(i) |
|
may be pre-approved by the Audit Committee without consideration of specific case-by-case
services (general pre-approval); or |
(ii) |
|
require the specific pre-approval of the Audit Committee (specific pre-approval).
Appendices to the Pre-approval Policy (that are adopted each year) set out the audit,
audit-related, tax, and other services that have received the general pre-approval of the
Audit Committee. All other audit, audit-related, tax and other services must receive specific
pre-approval from the Audit Committee. |
During 2009, all services provided to MLLIC by E&Y were pre-approved by the Audit Committee in
accordance with the Pre-approval policy.
47
PART IV
Item 14. Exhibits and Financial Statement Schedules
|
(a) |
|
Financial Statements and Exhibits |
|
(1) |
|
The following financial statements of the Registrant
are filed as part of this report |
|
a. |
|
Independent Registered Public Accounting Firm Report dated
March 25, 2010 (Ernst & Young LLP). |
|
|
b. |
|
Balance Sheets at December 31, 2009 and
2008. |
|
|
c. |
|
Statements of Income for the Years
Ended December 31, 2009, 2008 and 2007. |
|
|
d. |
|
Statements of Comprehensive Income for
the Years Ended December 31, 2009, 2008 and 2007. |
|
|
e. |
|
Statements of Stockholders Equity for
the Years Ended December 31, 2009, 2008 and 2007. |
|
|
f. |
|
Statements of Cash Flows for the Years
Ended December 31, 2009, 2008 and 2007. |
|
|
g. |
|
Notes to Financial Statements for the
Years Ended December 31, 2009, 2008 and 2007. |
|
(2) |
|
Not applicable. |
|
|
(3) |
|
The following exhibits are filed as part of this
report: |
48
|
|
|
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- |
49
|
|
|
|
|
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.) |
50
|
|
|
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.) |
51
|
|
|
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, |
52
|
|
|
|
|
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.) |
53
|
|
|
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.) |
54
|
|
|
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.) |
55
|
|
|
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 |
|
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 Registrants Current Report on Form 8-K, File No. 33-26322, filed
January 4, 2008.)
|
|
|
|
10.12 |
|
Wholesaling Agreement between Merrill Lynch Life Insurance Company,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, and
Transamerica Capital. (Incorporated by reference to Exhibit 10.12 to the Registrants Annual Report on Form 10-K, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, 333-133223, and 333-133225, filed March 27, 2008.)
|
|
|
|
10.13 |
|
Selling Agreement between Merrill Lynch Life Insurance Company,
Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Merrill
Lynch Life Agency, Inc. (Incorporated by reference to Exhibit 10.13 to the Registrants Annual Report on Form 10-K, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, 333-133223, and 333-133225, filed March 27, 2008.)
|
|
|
|
10.14 |
|
Keep Well Agreement between
AEGON USA, Inc. and Merrill Lynch Life Insurance Company. (Incorporated by reference to Exhibit 10.14 to the Registrants Annual Report on Form 10-K, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, 333-133223, and 333-133225, filed March 27, 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 Registrants 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 Registrants 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 Exhibit 10.17 to the Registrants Annual Report on Form
10-K, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, 333-133223,
and 333-133225, filed March 26, 2009.)
|
|
|
|
24.1 |
|
Powers of Attorney for Lon K. Olejniczak, Robert R. Frederick, John T. Mallett, Ronald L. Ziegler and Eric J. Martin. (Incorporated by reference to Exhibit 24.1 to the Registrants Annual Report on Form 10-K, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, 333-133223, and 333-133225, filed March 27, 2008.)
|
24.2 |
|
Power of
Attorney for James D. Purvis is filed herewith.
|
31.1 |
|
Certification by the Chief
Executive Officer of the Registrant pursuant to Rule 15d-14(a), is filed
herewith.
|
31.2 |
|
Certification by the Chief
Financial Officer of the Registrant pursuant to Rule 15d-14(a), is filed
herewith.
|
32.1 |
|
Certification by the Chief
Executive Officer of the Registrant pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
is filed herewith.
|
32.2 |
|
Certification by the Chief
Financial Officer of the Registrant pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
is filed herewith. |
56
Management Report on Internal Control over Financial Reporting
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial
reporting for MLLIC to provide reasonable assurance regarding the reliability of our financial
reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. Internal control over financial reporting includes those
policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that our receipts and
expenditures are being made only in accordance with authorizations of our management and directors;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Projections of any evaluation of internal control over financial reporting
effectiveness to future periods are subject to risks. Over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of compliance with policies or
procedures.
Management assessed our internal control over financial reporting as of December 31, 2009, the end
of our fiscal year. Management based its assessment on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Managements assessment included evaluation of such elements as the design and
operating effectiveness of key financial reporting controls, process documentation, accounting
policies, and our overall control environment.
Based on the assessment, management has concluded that our internal control over financial
reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
reporting purposes in accordance with generally accepted accounting principles.
57
INDEX TO FINANCIAL STATEMENTS
Independent Registered Public Accounting Firm Report
Balance Sheets at December 31, 2009 and 2008
Statements of Income for the Years Ended December 31, 2009, 2008 and 2007
Statements of Comprehensive Income for the Years Ended December 31, 2009, 2008 and 2007
Statements of Stockholders Equity for the Years Ended December 31, 2009, 2008 and 2007
Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007
Notes to Financial Statements for the Years Ended December 31, 2009, 2008 and 2007
58
Report of Independent Registered Public Accounting Firm
The Board of Directors
Merrill Lynch Life Insurance Company
We have audited the accompanying balance sheets of Merrill Lynch Life Insurance Company as of
December 31, 2009 and 2008, and the related statements of income, comprehensive income,
stockholders equity, and cash flows for the years then ended. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. We
were not engaged to perform an audit of the Companys internal control over financial reporting.
Our audits included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Merrill Lynch Life Insurance Company at December 31, 2009 and
2008, and the results of its operations and its cash flows for the years then ended, in conformity
with U.S. generally accepted accounting principles.
As discussed in Note 1 to the financial statements, in response to new accounting standards, the
Company changed its method of accounting for other-than-temporary impairments effective April 1,
2009.
/s/ Ernst & Young LLP
Des Moines, Iowa
March 25, 2010
59
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
December 31, |
|
(dollars in thousands, except share data) |
|
2009 |
|
|
2008 |
|
ASSETS |
|
|
|
|
|
|
|
|
Investments |
|
|
|
|
|
|
|
|
Fixed maturity available-for-sale securities, at estimated fair value |
|
|
|
|
|
|
|
|
(amortized cost: 2009 $1,359,281; 2008 $1,510,368) |
|
$ |
1,345,291 |
|
|
$ |
1,372,016 |
|
Equity available-for-sale securities, at estimated fair value |
|
|
|
|
|
|
|
|
(cost: 2009 $15,202; 2008 $21,699) |
|
|
11,805 |
|
|
|
13,506 |
|
Limited partnerships |
|
|
12,620 |
|
|
|
15,260 |
|
Mortgage loans on real estate |
|
|
70,854 |
|
|
|
77,062 |
|
Policy loans |
|
|
867,361 |
|
|
|
913,882 |
|
|
|
|
|
|
|
|
Total investments |
|
|
2,307,931 |
|
|
|
2,391,726 |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
428,848 |
|
|
|
428,904 |
|
Accrued investment income |
|
|
34,237 |
|
|
|
38,816 |
|
Deferred policy acquisition costs |
|
|
26,730 |
|
|
|
24,271 |
|
Deferred sales inducements |
|
|
6,296 |
|
|
|
7,232 |
|
Value of business acquired |
|
|
374,737 |
|
|
|
581,090 |
|
Goodwill |
|
|
2,800 |
|
|
|
2,800 |
|
Federal income taxes current |
|
|
|
|
|
|
5,400 |
|
Federal income taxes deferred |
|
|
890 |
|
|
|
117,043 |
|
Reinsurance receivables |
|
|
35,806 |
|
|
|
14,219 |
|
Affiliated receivable net |
|
|
|
|
|
|
1,124 |
|
Affiliated short term note receivable |
|
|
40,000 |
|
|
|
|
|
Receivable for investments sold net |
|
|
2,009 |
|
|
|
|
|
Other assets |
|
|
38,835 |
|
|
|
44,062 |
|
Separate Accounts assets |
|
|
8,313,833 |
|
|
|
7,457,096 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
11,612,952 |
|
|
$ |
11,113,783 |
|
|
|
|
|
|
|
|
See Notes to Financial Statements
60
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
BALANCE SHEETS Continued
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
December 31, |
|
(dollars in thousands, except share data) |
|
2009 |
|
|
2008 |
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Policyholder liabilities and accruals |
|
|
|
|
|
|
|
|
Policyholder account balances |
|
$ |
1,626,415 |
|
|
$ |
1,751,265 |
|
Future policy benefits |
|
|
439,634 |
|
|
|
499,278 |
|
Claims and claims settlement expenses |
|
|
32,846 |
|
|
|
38,883 |
|
|
|
|
|
|
|
|
|
|
|
2,098,895 |
|
|
|
2,289,426 |
|
|
|
|
|
|
|
|
Other policyholder funds |
|
|
10,346 |
|
|
|
2,006 |
|
Payable for collateral under securities loaned |
|
|
149,050 |
|
|
|
182,451 |
|
Federal income taxes current |
|
|
4,191 |
|
|
|
|
|
Affiliated payables net |
|
|
7,129 |
|
|
|
|
|
Payable for investments purchased net |
|
|
|
|
|
|
2,753 |
|
Other liabilities |
|
|
8,459 |
|
|
|
14,432 |
|
Separate Accounts liabilities |
|
|
8,313,833 |
|
|
|
7,457,096 |
|
|
|
|
|
|
|
|
Total Liabilities |
|
|
10,591,903 |
|
|
|
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 |
|
|
(10,104 |
) |
|
|
(65,178 |
) |
Retained deficit |
|
|
(337,983 |
) |
|
|
(138,339 |
) |
|
|
|
|
|
|
|
Total Stockholders Equity |
|
|
1,021,049 |
|
|
|
1,165,619 |
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Equity |
|
$ |
11,612,952 |
|
|
$ |
11,113,783 |
|
|
|
|
|
|
|
|
See Notes to Financial Statements
61
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
Successor |
|
|
|
Predecessor |
|
(dollars in thousands) |
|
2009 |
|
|
2008 |
|
|
|
2007 |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy charge revenue |
|
$ |
203,926 |
|
|
$ |
240,667 |
|
|
|
$ |
267,586 |
|
Net investment income |
|
|
122,937 |
|
|
|
135,158 |
|
|
|
|
136,416 |
|
Net realized investment gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment losses on securities |
|
|
(14,605 |
) |
|
|
(8,329 |
) |
|
|
|
|
|
Portion of losses recognized in other comprehensive income |
|
|
4,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other-than-temporary impairment losses on
securities recognized in income |
|
|
(9,852 |
) |
|
|
(8,329 |
) |
|
|
|
|
|
Realized investment gains (losses), excluding
other-than-temporary impairment losses on
securities |
|
|
(48,433 |
) |
|
|
36,050 |
|
|
|
|
2,055 |
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses) |
|
|
(58,285 |
) |
|
|
27,721 |
|
|
|
|
2,055 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
|
268,578 |
|
|
|
403,546 |
|
|
|
|
406,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited to policyholder liabilities |
|
|
79,555 |
|
|
|
91,447 |
|
|
|
|
93,978 |
|
Policy benefits (net of reinsurance recoveries: |
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 $3,810; 2008 $16,492; 2007 $15,311) |
|
|
51,104 |
|
|
|
190,578 |
|
|
|
|
42,286 |
|
Reinsurance premium ceded |
|
|
7,253 |
|
|
|
22,789 |
|
|
|
|
28,292 |
|
Amortization (accretion) of deferred policy acquisition costs |
|
|
10,605 |
|
|
|
(695 |
) |
|
|
|
22,064 |
|
Amortization and impairment of value of business acquired |
|
|
155,521 |
|
|
|
37,671 |
|
|
|
|
|
|
Amortization of other intangibles |
|
|
|
|
|
|
3,774 |
|
|
|
|
|
|
Impairment charges |
|
|
|
|
|
|
215,462 |
|
|
|
|
|
|
Insurance expenses and taxes |
|
|
75,713 |
|
|
|
68,778 |
|
|
|
|
59,846 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Benefits and Expenses |
|
|
379,751 |
|
|
|
629,804 |
|
|
|
|
246,466 |
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Taxes |
|
|
(111,173 |
) |
|
|
(226,258 |
) |
|
|
|
159,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Income Tax Expense (Benefit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
7,292 |
|
|
|
|
|
|
|
|
37,982 |
|
Deferred |
|
|
84,636 |
|
|
|
(87,919 |
) |
|
|
|
11,090 |
|
|
|
|
|
|
|
|
|
|
|
|
Federal Income Tax Expense (Benefit) |
|
|
91,928 |
|
|
|
(87,919 |
) |
|
|
|
49,072 |
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) |
|
$ |
(203,101 |
) |
|
$ |
(138,339 |
) |
|
|
$ |
110,519 |
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements
62
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
Successor |
|
|
|
Predecessor |
|
(dollars in thousands) |
|
2009 |
|
|
2008 |
|
|
|
2007 |
|
Net Income (Loss) |
|
$ |
(203,101 |
) |
|
$ |
(138,339 |
) |
|
|
$ |
110,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on available-for-sale securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized holding gains (losses) arising during the period |
|
|
113,729 |
|
|
|
(146,545 |
) |
|
|
|
4,072 |
|
Reclassification adjustment for losses included in net income |
|
|
23,338 |
|
|
|
|
|
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137,067 |
|
|
|
(146,545 |
) |
|
|
|
4,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized other-than-temporary impairment gains
(losses) on securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized other-than-temporary impairment losses
arising during the period |
|
|
(4,347 |
) |
|
|
|
|
|
|
|
|
|
Reclassification adjustment for other-than-temporary
impairment gains included in net income |
|
|
(106 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,453 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder liabilities |
|
|
3,710 |
|
|
|
(647 |
) |
|
|
|
(4,795 |
) |
Deferred policy acquisition costs |
|
|
(1,481 |
) |
|
|
1,481 |
|
|
|
|
|
|
Value of business acquired |
|
|
(46,657 |
) |
|
|
45,438 |
|
|
|
|
|
|
Deferred federal income taxes |
|
|
(29,655 |
) |
|
|
35,095 |
|
|
|
|
233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(74,083 |
) |
|
|
81,367 |
|
|
|
|
(4,562 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss), net of taxes |
|
|
58,531 |
|
|
|
(65,178 |
) |
|
|
|
(434 |
) |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income (Loss) |
|
$ |
(144,570 |
) |
|
$ |
(203,517 |
) |
|
|
$ |
110,085 |
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements
63
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
Successor |
|
|
|
Predecessor |
|
(dollars in thousands) |
|
2009 |
|
|
2008 |
|
|
|
2007 |
|
Common Stock |
|
$ |
2,500 |
|
|
$ |
2,500 |
|
|
|
$ |
2,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Paid-in Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
1,366,636 |
|
|
$ |
1,116,636 |
|
|
|
$ |
397,324 |
|
Capital contribution from AEGON USA, LLC |
|
|
|
|
|
|
250,000 |
|
|
|
|
|
|
Effect of
push down accounting of AEGON USA, LLCs purchase price on Merrill Lynch Life Insurance
Companys net assets acquired |
|
|
|
|
|
|
|
|
|
|
|
719,312 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
1,366,636 |
|
|
$ |
1,366,636 |
|
|
|
$ |
1,116,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
(65,178 |
) |
|
$ |
|
|
|
|
$ |
(10,233 |
) |
Total other comprehensive income (loss), net of taxes |
|
|
58,531 |
|
|
|
(65,178 |
) |
|
|
|
(434 |
) |
Cumulative effect of adoption of other-than-temporary
impairment guidance (ASC 320) |
|
|
(3,457 |
) |
|
|
|
|
|
|
|
|
|
Effect of
push down accounting of AEGON USA, LLCs purchase price on Merrill Lynch Life Insurance
Companys net assets acquired |
|
|
|
|
|
|
|
|
|
|
|
10,667 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
(10,104 |
) |
|
$ |
(65,178 |
) |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings (Deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year |
|
$ |
(138,339 |
) |
|
$ |
|
|
|
|
$ |
279,445 |
|
Net income (loss) |
|
|
(203,101 |
) |
|
|
(138,339 |
) |
|
|
|
110,519 |
|
Cumulative effect of adoption of other-than-temporary
impairment guidance
(ASC 320) |
|
|
3,457 |
|
|
|
|
|
|
|
|
|
|
Cash dividend paid to Merrill Lynch Insurance Group, Inc. |
|
|
|
|
|
|
|
|
|
|
|
(193,731 |
) |
Effect of
push down accounting of AEGON USA, LLCs purchase price on Merrill Lynch Life Insurance
Companys net assets acquired |
|
|
|
|
|
|
|
|
|
|
|
(196,233 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
(337,983 |
) |
|
$ |
(138,339 |
) |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Stockholders Equity |
|
$ |
1,021,049 |
|
|
$ |
1,165,619 |
|
|
|
$ |
1,119,136 |
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements
64
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
Successor |
|
|
|
Predecessor |
|
(dollars in thousands) |
|
2009 |
|
|
2008 |
|
|
|
2007 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(203,101 |
) |
|
$ |
(138,339 |
) |
|
|
$ |
110,519 |
|
Adjustment to reconcile net income (loss) to net cash and cash
equivalents provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred policy acquisition costs |
|
|
(3,940 |
) |
|
|
(22,790 |
) |
|
|
|
(9,142 |
) |
Deferred sales inducements |
|
|
936 |
|
|
|
(7,232 |
) |
|
|
|
(12,000 |
) |
Unearned policy charge revenue |
|
|
|
|
|
|
|
|
|
|
|
2,232 |
|
Value of business acquired |
|
|
155,521 |
|
|
|
37,670 |
|
|
|
|
|
|
Other intangibles |
|
|
|
|
|
|
3,774 |
|
|
|
|
|
|
Benefit reserves |
|
|
(29,116 |
) |
|
|
132,629 |
|
|
|
|
(4,034 |
) |
Federal income tax accruals |
|
|
94,228 |
|
|
|
(87,203 |
) |
|
|
|
11,090 |
|
Claims and claims settlement expenses |
|
|
(6,037 |
) |
|
|
(3,522 |
) |
|
|
|
(21 |
) |
Other policyholder funds |
|
|
8,340 |
|
|
|
(2,697 |
) |
|
|
|
(2,270 |
) |
Other operating assets and liabilities, net |
|
|
(14,259 |
) |
|
|
(1,979 |
) |
|
|
|
(16,349 |
) |
Amortization (accretion) of investments |
|
|
(2,697 |
) |
|
|
(2,228 |
) |
|
|
|
3,008 |
|
Limited partnership asset distributions |
|
|
(411 |
) |
|
|
(858 |
) |
|
|
|
(610 |
) |
Impairment charges |
|
|
|
|
|
|
215,462 |
|
|
|
|
|
|
Interest credited to policyholder liabilities |
|
|
79,555 |
|
|
|
91,447 |
|
|
|
|
93,978 |
|
Net realized investment (gains) losses |
|
|
58,285 |
|
|
|
(27,721 |
) |
|
|
|
(2,055 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash and cash equivalents provided by operating activities |
|
|
137,304 |
|
|
|
186,413 |
|
|
|
|
174,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of available-for-sale securities and mortgage loans |
|
|
354,643 |
|
|
|
598,127 |
|
|
|
|
262,046 |
|
Maturities of available-for-sale securities and mortgage loans |
|
|
173,439 |
|
|
|
295,409 |
|
|
|
|
295,271 |
|
Purchases of available-for-sale securities and mortgage loans |
|
|
(363,846 |
) |
|
|
(1,066,743 |
) |
|
|
|
(376,215 |
) |
Sales of limited partnerships |
|
|
2,660 |
|
|
|
1,148 |
|
|
|
|
860 |
|
Increase in affiliated short term note receivable |
|
|
(40,000 |
) |
|
|
|
|
|
|
|
|
|
Change in payable for collateral under securities loaned |
|
|
(33,401 |
) |
|
|
182,451 |
|
|
|
|
|
|
Policy loans on insurance contracts, net |
|
|
46,521 |
|
|
|
34,743 |
|
|
|
|
20,249 |
|
Net settlement on futures contracts |
|
|
(48,105 |
) |
|
|
37,803 |
|
|
|
|
|
|
Other |
|
|
1,957 |
|
|
|
3,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash and cash equivalents provided by investing activities |
|
$ |
93,868 |
|
|
$ |
86,173 |
|
|
|
$ |
202,211 |
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements
65
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
STATEMENTS OF CASH FLOWS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, |
|
|
|
Successor |
|
|
|
Predecessor |
|
(dollars in thousands) |
|
2009 |
|
|
2008 |
|
|
|
2007 |
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder deposits |
|
$ |
284,846 |
|
|
$ |
389,370 |
|
|
|
$ |
632,846 |
|
Policyholder withdrawals |
|
|
(516,074 |
) |
|
|
(641,685 |
) |
|
|
|
(887,625 |
) |
Capital contribution from AEGON USA, LLC |
|
|
|
|
|
|
250,000 |
|
|
|
|
|
|
Cash dividend paid to Merrill Lynch Insurance Group, Inc. |
|
|
|
|
|
|
|
|
|
|
|
(193,731 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash and cash equivalents used in financing activities |
|
|
(231,228 |
) |
|
|
(2,315 |
) |
|
|
|
(448,510 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents (1) |
|
|
(56 |
) |
|
|
270,271 |
|
|
|
|
(71,953 |
) |
Cash and cash equivalents, beginning of year |
|
|
428,904 |
|
|
|
158,633 |
|
|
|
|
230,586 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
428,848 |
|
|
$ |
428,904 |
|
|
|
$ |
158,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in net increase (decrease)
in cash and cash equivalents is interest received
(2009 $65; 2008 $1,137; 2007 $0); interest paid (2009 $28; 2008 $196; 2007 $501);
Federal income taxes paid (2009 $3,100; 2008 $5,400; 2007 $60,918); and Federal income
taxes received (2009 $5,400; 2008 $6,115; 2007 $0) |
See Notes to Financial Statements
66
MERRILL LYNCH LIFE INSURANCE COMPANY
(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)
NOTES TO FINANCIAL STATEMENTS
(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. AEGON N.V. and its subsidiaries and joint
ventures have life insurance and pension operations in over twenty countries in Europe, the
Americas, and Asia and are also active in savings and investment operations, accident and health
insurance, general insurance and limited banking operations in a number of these countries.
On December 28, 2007 (the acquisition date), MLLIC and its affiliate, ML Life Insurance Company
of New York (MLLICNY) were acquired by AUSA for $1.12 billion and $0.13 billion, respectively,
for a total price for both entities of $1.25 billion. Prior to the acquisition date, MLLIC was a
wholly owned subsidiary of Merrill Lynch Insurance Group, Inc. (MLIG), which was an indirect
wholly owned subsidiary of Merrill Lynch & Co., Inc. (ML&Co.).
The Company is a life insurance company, who conducts its business primarily in the annuity markets
and to a lesser extent in the life insurance markets of the financial services industry. The
Company is domiciled in the State of Arkansas and is currently licensed to sell insurance and
annuities in forty-nine states, the District of Columbia, the U.S. Virgin Islands and Guam. During
2009, the Company, in addition to no longer issuing life insurance products, is no longer issuing
variable annuity and market value adjusted annuity products.
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.
On December 28, 2007, AUSA completed the acquisition of MLLIC and its affiliate MLLICNY. In
accordance with GAAP guidance, the acquisition was accounted for by AUSA using the purchase method
of accounting, which requires the assets and liabilities of the Company to be identified and
measured at their estimated fair values as of the acquisition date. The estimated fair values are
subject to adjustment of the initial allocation for a one-year period as more information relative
to the fair values as of the acquisition date becomes available. See Note 2 for additional
information on the adjustments to the initial purchase price allocation.
In addition, as required by the guidance, the purchase method of accounting applied by AUSA to the
acquired assets and liabilities associated with the Company has been pushed down to the financial
statements of the Company, thereby establishing a new basis of accounting. As a result, the
Company follows AUSAs accounting policies subsequent to the acquisition date. This new basis of
accounting is referred to as the successor basis, while the historical basis of accounting is
referred to as the predecessor basis. In general, all 2009 and 2008 amounts are representative
of the successor basis of accounting while the Statements of Income, Stockholders Equity,
Comprehensive Income, and Cash Flows amounts for 2007 are representative of the predecessor basis
of accounting. Financial statements included herein for periods prior and subsequent to the
acquisition date are labeled Predecessor and Successor, respectively.
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.
67
Investments
Fixed maturity and equity securities
The Companys investments in fixed maturity and equity securities are classified as
available-for-sale and reported at estimated fair value. The fair values of fixed maturity and
equity securities are determined by management after taking into consideration several sources of
data. The Companys valuation policy dictates that publicly available prices are initially sought
from several third party pricing services. In the event that pricing is not available from these
services, those securities are submitted to brokers to obtain quotes. Lastly, securities are
priced using internal cash flow modeling techniques. These valuation methodologies commonly use
reported trades, bids, offers, issuer spreads, benchmark yields, estimated prepayment speeds,
and/or estimated cash flows.
Each month, the Company performs an analysis of the information obtained from third party services
and brokers to ensure that the information is reasonable and produces a reasonable estimate of
fair value. The Company considers both qualitative and quantitative factors as part of this
analysis, including but not limited to, recent transactional activity for similar fixed
maturities, review of pricing statistics and trends, and consideration of recent relevant market
events.
The Companys portfolio of private placement securities is valued using a matrix pricing
methodology. The pricing methodology is obtained from a third party service and indicates current
spreads for securities based on weighted average life, credit rating and industry sector.
Monthly, the Company reviews the matrix to ensure the spreads are reasonable by comparing them to
observed spreads for similar securities traded in the market. In order to account for the
illiquid nature of these securities, illiquidity premiums are included in the valuation and are
determined based upon the pricing of recent transactions in the private placement market, as well
as comparing the value of the privately offered security to a similar public security. The impact
of the illiquidity premium to the overall valuation is less than 1% of the value.
For fixed maturity securities, premiums are amortized to the earlier of the call or maturity date,
discounts are accreted to the maturity date, and interest income is accrued daily. For equity
securities, dividends are recognized on the ex-dividend date. Investment transactions are recorded
on the trade date. Subsequent to December 28, 2007, realized gains and losses on the sale or
maturity of investments are determined on the first-in, first-out (FIFO) basis. Prior to
December 28, 2007, realized gains and losses on the sale or maturity of investments were determined
on the basis of specific identification.
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.
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.
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).
68
The credit loss is recognized in earnings and the non credit loss is recognized in other
comprehensive income (OCI), net of applicable taxes and value of business acquired. Management
records subsequent changes in the estimated fair value (positive and negative) of
available-for-sale debt securities for which non credit OTTI was previously recognized in OCI in
OCI-OTTI.
Limited partnerships
At December 31, 2009, the Company had investments in two limited partnerships that are not publicly
traded. One of the partnerships is carried at estimated fair value which is derived from
managements review of the underlying financial statements that were prepared on a GAAP basis. The
remaining partnership is carried at cost. At December 31, 2008, a third partnership existed which
was carried at cost, but operations ceased on January 1, 2009.
Mortgage Loans on Real Estate
Mortgage loans on real estate are carried at unpaid principal balances adjusted for amortization of
premiums and accretion of discounts and are net of valuation allowances. The fair value for
mortgage loans on real estate is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit ratings and/or similar
remaining maturities. Interest income is accrued on the principal balance of the loan based on the
loans contractual interest rate. Premiums and discounts are amortized using the effective yield
method over the life of the loan. Interest income and amortization of premiums and discounts are
reported in net investment income along with mortgage loan fees, which are recorded as they are
incurred. Loans are considered impaired when it is probable that based upon current information
and events, the Company will be unable to collect all amounts due under the contractual terms of
the loan agreement. When the Company determines that a loan is impaired, a valuation allowance is
established for the excess carrying value of the loan over its estimated value. The Company does
not accrue interest on impaired loans and loans ninety days past due. The Company also establishes
a valuation allowance based on a percentage of the outstanding loan balance.
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. 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.
Derivative Instruments
Derivatives are financial instruments in which the value changes in response to an underlying
variable, that require little or no net initial investment and are settled at a future date. All
derivatives recognized on the Balance Sheets are carried at fair value. All changes in fair value
are recognized in the Statements of Income. The fair value for exchange traded derivatives, such as
futures, is calculated net of the interest accrued to date and is based on quoted market prices.
Net settlements on the futures occur daily.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and on deposit and short-term investments with
original maturities of three months or less. Cash and cash equivalents are primarily valued at
amortized cost, which approximates fair value.
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.
Deferred Policy Acquisition Costs (DAC)
Policy acquisition costs for variable annuities and variable life insurance 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 DAC.
Policy acquisition costs are principally commissions and a portion of certain other expenses
relating to policy acquisition, underwriting and issuance that are primarily related to and vary
with the production of new business. Insurance expenses and taxes reported in the Statements of
Income are net of amounts deferred. Policy acquisition costs can also arise from the acquisition or
reinsurance of existing inforce policies from other insurers. These costs include ceding
commissions and professional fees related to the reinsurance assumed. The deferred costs are
amortized in proportion to the estimated future gross profits over the anticipated life of the
acquired insurance contracts utilizing an interest methodology.
69
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 December 31, 2009, the
reversion to the mean assumption was 7.25% gross short-term equity growth rate for five years and
thereafter a 9% gross long-term growth rate. 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. Additionally, the Company may modify the rate of net Separate Accounts
growth over the short term to reflect near-term expectations of the economy and financial market
performance in which Separate Accounts assets are invested. 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 credit to current operations, commonly referred to as
unlocking. Changes in assumptions can have a significant impact on the amount of DAC reported
and the related amortization patterns. In general, increases in the estimated Separate Accounts
return and decreases in surrender or mortality assumptions increase the expected future
profitability of the underlying business and may lower the rate of DAC amortization. Conversely,
decreases in the estimated Separate Accounts returns and increases in surrender or mortality
assumptions reduce the expected future profitability of the underlying business and may increase
the rate of DAC amortization.
At December 31, 2009 and 2008, variable annuities accounted for the Companys entire DAC asset.
See Note 6 to the Financial Statements for 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 December 31, 2009 and 2008, variable annuities
accounted for the Companys entire DSI asset. See Note 6 to the Financial Statements for 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 inforce at the acquisition date.
VOBA is based on actuarially determined projections, by each block of business, of future policy
and contract charges, premiums, mortality, policyholder behavior, Separate Accounts 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, the Company 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 December 31,
2009, the reversion to the mean assumption was 7.25% gross short-term equity growth rate for five
years and thereafter a 9% gross long-term growth rate. 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. See Note 5 to the Financial Statements for further discussion.
Other Intangibles
Other intangible assets acquired at the acquisition date are a distribution agreement, a tradename
and a non-compete agreement. At December 31, 2008, the Company made a business decision to
commence selling similar products on affiliate companies through the ML&Co. distribution channel
instead of continuing to sell new variable annuities on the Company.
70
As a result of this decision, an impairment charge was taken for the entire unamortized other
intangible balance at December 31, 2008. Prior to December 31, 2008, the tradename and the
non-compete agreements were amortized on a straight-line basis over their useful life of five
years. The distribution intangible was amortized over the expected economic benefit period and at
a pace consistent with the expected future gross profit streams generated from the distribution
agreement, which was thirty years. The entire asset amount had been allocated to annuities. See
Note 5 to the Financial Statements for further discussion.
Goodwill
Goodwill is the excess of the purchase price over the estimated fair value of net assets acquired.
Goodwill and intangible assets with indefinite lives are not amortized, but are subject to
impairment tests conducted at least annually. Impairment testing is to be performed using the fair
value approach, which requires the use of estimates and judgment, at the reporting unit level. A
reporting unit represents the operating segment which is the level at which the financial
information is prepared and regularly reviewed by management. The entire asset amount has been
allocated to annuities. Goodwill is reviewed for indications of value impairment, with
consideration given to financial performance and other relevant factors. In addition, certain
events including a significant adverse change in legal factors or the business climate, an adverse
action or assessment by a regulator, or unanticipated competition would cause the Company to review
the carrying amounts of goodwill for impairment. At December 31, 2008, the Company made a
business decision to commence selling similar products on affiliate companies through the ML&Co.
distribution channel instead of continuing to sell new variable annuities on the Company. As a
result of this decision, an impairment charge was taken for the majority of the goodwill balance except for
the amount related to the Companys state licenses at December 31, 2008. See Note 5 to the
Financial Statements for further discussion.
Separate Accounts
The Companys Separate Accounts consist of variable annuities and variable life insurance
contracts, of which the assets and liabilities are legally segregated and reported as separate
captions in the Balance Sheets. Separate Accounts are established in conformity with Arkansas
State Insurance Law and are generally not chargeable with liabilities that arise from any other
business of the Company. Separate Accounts assets may be subject to claims of the Company only to
the extent the value of such assets exceeds Separate Accounts liabilities. The assets of the
Separate Accounts are carried at the daily net asset value of the mutual funds in which they
invest.
Absent any contract provision wherein the Company guarantees either a minimum return or account
value upon death or annuitization, the net investment income and net realized and unrealized gains
and losses attributable to Separate Accounts assets supporting variable annuities and variable life
contracts accrue directly to the contract owner and are not reported as revenue in the Statements
of Income. Mortality, guaranteed benefit fees, policy administration, maintenance, and withdrawal
charges associated with Separate Accounts products are included in policy charge revenue in the
Statements of Income.
Policyholder Account Balances
The Companys liability for policyholder account balances represents the contract value that has
accrued to the benefit of the policyholder as of the Balance Sheet dates. The liability is
generally equal to the accumulated account deposits plus interest credited less policyholders
withdrawals and other charges assessed against the account balance. Interest-crediting rates for
the Companys fixed rate products are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
Interest-sensitive life products |
|
|
4.00 |
% |
|
|
|
|
|
|
4.85 |
% |
|
|
4.00 |
% |
|
|
|
|
|
|
4.85 |
% |
Interest-sensitive deferred annuities |
|
|
0.40 |
% |
|
|
|
|
|
|
6.80 |
% |
|
|
0.05 |
% |
|
|
|
|
|
|
6.80 |
% |
These rates may be changed at the option of the Company after initial guaranteed rates expire,
unless contracts are subject to minimum interest rate guarantees.
71
Future Policy Benefits
The Companys liability for future policy benefits consists of liabilities for immediate annuities
and liabilities for certain guaranteed benefits contained in the variable insurance products the
Company manufactures. Liabilities for immediate annuities are equal to the present value of
estimated future payments to or on behalf of policyholders, where the timing and amount of payment
generally depends on policyholder mortality. Liabilities for guaranteed benefits for variable
annuity and life insurance contracts are discussed in more detail in Note 7 of the Financial
Statements. Interest rates used in establishing such liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
Interest rates used for liabilities |
|
|
2.55 |
% |
|
|
|
|
|
|
5.75 |
% |
|
|
2.55 |
% |
|
|
|
|
|
|
5.75 |
% |
Revenue Recognition
Revenues for variable annuity contracts consist of policy charges for i) mortality and expense
risks, ii) certain guaranteed benefits selected by the contract owner, iii) administration fees,
iv) annual contract maintenance charges, and v) withdrawal charges assessed on contracts
surrendered during the withdrawal charge period. Revenues for variable annuity contracts are
recognized when policy charges are assessed or earned.
Revenues for variable life insurance contracts consist of policy charges for i) mortality and
expense risks, ii) cost of insurance fees, iii) amortization of front-end and deferred sales
charges, and iv) withdrawal charges assessed on contracts surrendered during the withdrawal charge
period. Revenues for variable life insurance contracts are recognized when policy charges are
assessed or earned.
Revenues for interest-sensitive annuity contracts (market value adjusted annuities, immediate
annuities, and single premium deferred annuities) and interest-sensitive life insurance contracts
(single premium whole life insurance) consist of i) investment income, ii) gains (losses) on the
sale of invested assets, and iii) withdrawal charges assessed on contracts surrendered during the
withdrawal charge period. Revenues for interest-sensitive annuity and life insurance contracts are
recognized when investment income and investment sales are earned while revenues for contract
charges are recognized when assessed or earned.
Claims and Claims Settlement Expenses
Liabilities for claims and claims settlement expenses equal the death benefit (plus accrued
interest) for claims that have been reported to the Company but have not settled and an estimate,
based upon prior experience, for unreported claims.
Unearned Policy Charge Revenue (UPCR)
Certain variable life insurance products contain policy charges that are assessed at policy
issuance. These policy charges are deferred and accreted into policy charge revenue based on the
estimated future gross profits for each group of contracts, consistent with the amortization of
DAC. The impact of any revisions on cumulative accretion is recorded as a charge or credit to
current operations, commonly referred to as unlocking. The Company records a liability equal to
the unaccreted balance of these policy charges on the Balance Sheets. The accretion of the UPCR is
recorded as a component of policy charge revenue in the Statements of Income. As of December 31,
2007, the UPCR balance was zero as a result of push down accounting at the acquisition date.
Federal Income Taxes
The Company provides for income taxes on all transactions that have been recognized in the
financial statements in accordance with GAAP guidance. Accordingly, deferred taxes are adjusted to
reflect the tax rates at which future taxable amounts will likely be settled or realized. The
effects of tax rate changes on future deferred tax liabilities and deferred tax assets, as well as
other changes in income tax laws, are recognized in net income (loss) in the year during which such
changes are enacted.
For federal income tax purposes, an election under Internal Revenue Code Section 338 was made by
AUSA in connection with the purchase of the Company. As a result of this election, the income tax
bases in the acquired assets and liabilities were adjusted as of the acquisition date resulting in
a change to the related deferred income taxes.
Subsequent to acquisition, the Company files a separate federal income tax return for the years
2008 through 2012. Beginning in 2013 and assuming no changes in ownership, the Company will join
the affiliated consolidated tax group. The results of operations of the Company through December
28, 2007 were included in the consolidated federal income tax return of ML&Co. The Company had
entered into a tax-sharing agreement with ML&Co. whereby the Company calculated its current tax
provision based on its operations and periodically remitted its current federal income tax
liability to ML&Co. The tax-sharing agreement with ML&Co. was terminated on December 28, 2007.
The Company has not entered into a new tax sharing agreement.
72
The Company is subject to taxes on premiums and is exempt from state income taxes in most states.
Subsequent Events
The financial statements are adjusted to reflect events that occurred between the balance sheet
date and the date when the financial statements are issued, provided they give evidence of
conditions that existed at the balance sheet date.
Events that are indicative of conditions that arose after the balance sheet date are disclosed, but
do not result in an adjustment of the financial statements themselves.
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 and VOBA effects) in the period of adoption with a corresponding adjustment to
accumulated OCI to reclassify the non credit component of previously recognized 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 4 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 on measuring the fair value of certain alternative
investments (i.e., investments in hedge funds, private equity funds, venture capital funds,
offshore fund vehicles, funds of funds, and real estate funds) as of the period ended
December 31, 2009 (ASU 2009-12, Investments in Certain Entities That Calculate Net Asset
Value per Share (or Its Equivalent)). |
73
|
|
|
The guidance 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, it 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 guidance 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 guidance also requires enhanced disclosures
by major category of investments about the nature and risks of investments within its
scope. The adoption did not have a material impact on the Companys financial statements. |
|
|
|
|
The Company adopted guidance, as of the period ended December 31, 2009, which clarified
that when a quoted price in an active market for an identical liability is not available,
an entity should measure fair value using one of the following approaches that maximizes
the use of relevant observable inputs and minimizes the use of unobservable inputs: a) a
valuation technique that uses the quoted price of the identical liability when traded as 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) (ASU
2009-05, Measuring Liabilities at Fair Value). The guidance also 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 guidance 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 adoption did not have a material impact on the
Companys financial statements. |
|
|
|
|
The Company adopted guidance for estimating fair value when the volume and
level of activity for an asset or liability have significantly decreased as well as
guidance on identifying circumstances that indicate a transaction is not orderly as of the
period ended June 30, 2009. The guidance provides a list of factors that an entity should
consider when determining whether there has been a significant decrease in the volume and
level of activity for an asset or liability when compared to normal market activity for
that asset or liability. The guidance also requires interim disclosures of the inputs and
valuation techniques used to measure fair value and disclosure of any changes to those
inputs and valuation techniques during the period. The adoption did not have a material
impact on the Companys financial statements. 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 required 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.
74
In February 2010, the FASB issued revisions to the subsequent events guidance to eliminate the
requirement for entities that file or furnish financial statements to the SEC to disclose the date
through which subsequent events have been evaluated. However, the amended guidance retains the
requirement that such an entity must evaluate subsequent events through the date on which the
financial statements are issued. The amendments were effective upon issuance and the adoption did
not impact the Companys results of operations or financial position.
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.
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.
75
Future Adoption of Recent Accounting Guidance
ASC 820, Fair Value Measurements and Disclosures
In January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements,
which includes new disclosures and clarifications of existing disclosures about fair value
measurements. The guidance requires disclosure of significant transfers in and out of Levels 1 and
2 of the fair value hierarchy and reasons for the transfers. Additionally, the ASU clarifies the
level of disaggregation for fair value disclosures, requiring disclosures for each class of assets
and liabilities. The guidance clarifies that a reporting entity should provide disclosures about
the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring
fair value measurements that fall in either Level 2 or Level 3. The guidance is effective for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2009. The
Company will adopt the guidance on January 1, 2010, which affects disclosures and therefore will
not impact the Companys results of operations or financial position.
The ASU also requires separate presentation of information about purchases, sales, issuances, and
settlements in the Level 3 reconciliation for fair value measurements using significant
unobservable inputs. This disclosure requirement is effective for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2010. The Company will adopt the guidance
on January 1, 2011, which affects disclosures and therefore will not impact the Companys results
of operations or financial position.
Note 2. 2008 Initial Purchase Price Allocation Adjustments
On December 28, 2007, the Company and its affiliate, MLLICNY, were acquired by AUSA for $1.12
billion and $0.13 billion, respectively, for a total price for both entities of $1.25 billion. The
allocation of the purchase price to the entities was based on their relative value. Since the
actual results between the period December 28, 2007 and December 31, 2007 were not material, the
Company utilized December 31, 2007 as the acquisition date.
In addition, on December 28, 2007, ML&Co. and AUSA entered into a transition services agreement
whereby ML&Co. is to provide certain outsourced third-party services required for the normal
operations of the business and other services necessary for the migration to AUSAs infrastructure.
The purchase price was initially allocated to the assets acquired and liabilities assumed using
managements best estimate of their fair value as of the acquisition date. The Company made
refinements during 2008 to the initial estimated fair values as additional information became
available.
The following adjustments as of December 31, 2008 were made to the initial purchase price
allocation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Price Allocation |
|
|
December 31, |
|
|
|
|
|
December 31, |
|
|
2007 |
|
Adjustments |
|
2008 (a) |
Value of business acquired, gross |
|
$ |
574,950 |
|
|
$ |
(6,759 |
) |
|
$ |
568,191 |
|
Goodwill |
|
|
156,880 |
|
|
|
(14,779 |
) |
|
|
142,101 |
|
Other intangibles |
|
|
74,930 |
|
|
|
5,005 |
|
|
|
79,935 |
|
Federal income taxes current |
|
|
6,641 |
|
|
|
(525 |
) |
|
|
6,116 |
|
Federal income taxes deferred |
|
|
2,031 |
|
|
|
(2,031 |
) |
|
|
|
|
Reinsurance receivables |
|
|
5,440 |
|
|
|
3,056 |
|
|
|
8,496 |
|
Other assets |
|
|
40,741 |
|
|
|
(1,490 |
) |
|
|
39,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder account balances |
|
|
1,900,837 |
|
|
|
3,556 |
|
|
|
1,904,393 |
|
Future policy benefits |
|
|
396,760 |
|
|
|
(23,014 |
) |
|
|
373,746 |
|
Federal income taxes deferred |
|
|
|
|
|
|
5,971 |
|
|
|
5,971 |
|
Other liabilities |
|
|
10,954 |
|
|
|
(4,036 |
) |
|
|
6,918 |
|
|
|
|
(a) |
|
This reflects the December 31, 2008 balance before adjustments for unrealized gains
(losses) on investments, amortization and/or impairments. |
VOBA reflects the estimated fair value of inforce 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 inforce at the acquisition date.
76
VOBA is based on actuarially determined projections, by 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.
During the 4th quarter 2008, the Company made a business decision to commence selling
similar products on affiliate companies through the ML&Co. distribution channel instead of
continuing to sell new variable annuities on the Company. As a result of this decision, an
impairment charge was taken for the entire unamortized other intangible balance and the majority of the
goodwill balance except for the amount related to the Companys state licenses at December 31,
2008.
For purposes of calculating the VOBA and other intangible assets relating to the acquisition,
management considered the Companys weighted average cost of capital, as well as the weighted
average cost of capital required by market participants. A discount rate of 9% and 11% were used
for VOBA for the life and annuity segments, respectively. A discount rate of 12% was used to
value the distribution agreement, the trade name and the non-compete agreement intangible assets.
See Note 5 to the Financial Statements for further discussion on VOBA, Other Intangibles and
Goodwill.
Note 3. 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.
77
The following table presents the Companys hierarchy for its assets and liabilities measured at
fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities (a) |
|
$ |
215,827 |
|
|
$ |
1,092,423 |
|
|
$ |
37,041 |
|
|
$ |
1,345,291 |
|
Equity securities (a) |
|
|
|
|
|
|
11,805 |
|
|
|
|
|
|
|
11,805 |
|
Cash equivalents (b) |
|
|
|
|
|
|
433,875 |
|
|
|
|
|
|
|
433,875 |
|
Limited partnerships (c) |
|
|
|
|
|
|
|
|
|
|
7,604 |
|
|
|
7,604 |
|
Separate Accounts assets (d) |
|
|
8,313,833 |
|
|
|
|
|
|
|
|
|
|
|
8,313,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
8,529,660 |
|
|
$ |
1,538,103 |
|
|
$ |
44,645 |
|
|
$ |
10,112,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(embedded derivatives only) (e) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(12,759 |
) |
|
$ |
(12,759 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
(12,759 |
) |
|
$ |
(12,759 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities (a) |
|
$ |
247,254 |
|
|
$ |
1,012,562 |
|
|
$ |
112,200 |
|
|
$ |
1,372,016 |
|
Equity securities (a) |
|
|
|
|
|
|
13,506 |
|
|
|
|
|
|
|
13,506 |
|
Cash equivalents (b) |
|
|
|
|
|
|
441,943 |
|
|
|
|
|
|
|
441,943 |
|
Limited partnerships (c) |
|
|
|
|
|
|
|
|
|
|
9,895 |
|
|
|
9,895 |
|
Separate Accounts assets (d) |
|
|
7,457,096 |
|
|
|
|
|
|
|
|
|
|
|
7,457,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
7,704,350 |
|
|
$ |
1,468,011 |
|
|
$ |
122,095 |
|
|
$ |
9,294,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(embedded derivatives only) (e) |
|
$ |
|
|
|
$ |
|
|
|
$ |
35,323 |
|
|
$ |
35,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
35,323 |
|
|
$ |
35,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Securities are classified as Level 1 if the fair value is determined by observable
inputs that reflect quoted prices for identical assets in active markets that the
Company has the ability to access at the measurement date. Level 1 securities include
highly liquid U.S. Treasury and U.S. Government Agency securities. Securities are
classified as Level 2 if the fair value is determined by observable inputs, other than
quoted prices included in Level 1, for the asset or prices for similar assets. Level 2
securities include fixed maturity securities and preferred stock for which the Company
utilized pricing services and corroborated broker quotes. Securities are classified as
Level 3 if the valuations are derived from techniques in which one or more of the
significant inputs are unobservable. Level 3 consists principally of fixed maturity
securities whose fair value is estimated based on non-binding broker quotes. |
|
(b) |
|
Cash equivalents are primarily valued at amortized cost, which approximates fair
value. Operating cash is not included in the abovementioned table. |
|
(c) |
|
The Company has an investment in a limited partnership for which the fair value was
derived from managements review of the underlying financial statements that were
prepared on a GAAP basis. The remaining limited partnership is carried at cost and is
not included in the abovementioned table. 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 these guarantees are calculated as the present value of future expected
payments to policyholders less the present value of assessed rider fees attributable to
the guarantees. Given the complexity and long-term nature of these guarantees, their
fair values are determined using stochastic techniques under a variety of market return,
discount rates and actuarial assumptions. Since many of the assumptions are
unobservable and are considered to be significant inputs to the liability valuation, the
liability included in future policy benefits has been reflected within Level 3 of the
fair value hierarchy. |
78
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 December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
Limited |
|
|
Fixed |
|
|
Limited |
|
|
Fixed |
|
|
|
Partnership |
|
|
Maturity |
|
|
Partnership |
|
|
Maturity |
|
Balance at beginning of year (a) |
|
$ |
9,895 |
|
|
$ |
112,200 |
|
|
$ |
13,420 |
|
|
$ |
18,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses) (b) |
|
|
|
|
|
|
9,805 |
|
|
|
|
|
|
|
(26,004 |
) |
Purchases |
|
|
|
|
|
|
20,021 |
|
|
|
|
|
|
|
70,621 |
|
Sales |
|
|
(334 |
) |
|
|
(32,458 |
) |
|
|
(1,148 |
) |
|
|
(32,332 |
) |
Transfers into Level 3 |
|
|
|
|
|
|
27,473 |
|
|
|
|
|
|
|
95,741 |
|
Transfers out of Level 3 |
|
|
|
|
|
|
(100,605 |
) |
|
|
|
|
|
|
(15,012 |
) |
Changes in valuation (c) |
|
|
(1,957 |
) |
|
|
605 |
|
|
|
(3,235 |
) |
|
|
603 |
|
Net realized investment gains (losses) (d) |
|
|
|
|
|
|
|
|
|
|
858 |
|
|
|
(192 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year (a) |
|
$ |
7,604 |
|
|
$ |
37,041 |
|
|
$ |
9,895 |
|
|
$ |
112,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Recorded as a component of limited partnerships and fixed maturity
available-for-sale securities in the Balance Sheets. |
|
(b) |
|
Recorded as a component of other comprehensive income (loss). |
|
(c) |
|
Recorded as a component of net investment income in the Statements of Income. |
|
(d) |
|
Recorded as a component of net realized investment gains (losses) for fixed
maturity and net investment income for limited partnerships in the Statements of
Income. |
In certain circumstances, the Company will obtain non-binding broker quotes from brokers to assist
in the determination of fair value. If those quotes can be corroborated by other market observable
data, the investments will be classified as Level 2 investments. If not, the investments are
classified as Level 3 due to the unobservable nature of the brokers valuation processes. The
decrease in Level 3 securities from 2008 to 2009 is primarily due to securities being vendor priced
(Level 2) at December 31, 2009 and an increase in market activity.
The Companys Level 3 liabilities (assets) consist of provisions for GMWB and GMIB reinsurance. The
fair value of these guarantees are calculated as the present value of future expected payments to
policyholders less the present value of assessed rider fees attributable to the guarantees. Given
the complexity and long-term nature of these guarantees which are unlike instruments available in
financial markets, their fair values are determined using stochastic techniques under a variety of
market return scenarios. A variety of factors are considered, including expected market rates of
return, equity and interest rate volatility, credit spread, correlations of market returns,
discount rates and actuarial assumptions.
The expected returns are based on risk-free rates, such as the current London Inter-Bank Offered
Rate (LIBOR) forward curve. The credit spread is set by using the credit default swap (CDS)
spreads of a reference portfolio of life insurance companies, adjusted to reflect the subordination
of senior debt holders at the holding company level to the position of policyholders at the
operating company level (who have priority in payments to other creditors).
For equity volatility, the Company uses a term structure with market based implied volatility
inputs for the first five years. Correlations of market returns across underlying indices are
based on actual observed market returns and their inter-relationships over a number of years
preceding the valuation date. The volume of observable option trading from which volatilities are
implied diminishes markedly after five years; and therefore, the Company uses a volatility curve
which grades from actual implied volatilities for five years to a long-term forward rate
assumptions of 25% in 2009 and 2008. The December 31, 2009 volatility assumption for the S&P 500
index in year 20 is approximately 25.3% expressed at spot rate. Assumptions on policyholder
behavior, such as lapses, included in the models are derived in the same way as the assumptions
used to measure insurance liabilities. These assumptions are reviewed at each valuation date and
updated based on historical experience and observable market data.
79
The following table provides a summary of the changes in fair value of the Companys Level 3
liabilities (assets) at December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
GMIB |
|
|
|
|
|
|
GMIB |
|
|
|
GMWB |
|
|
Reinsurance |
|
|
GMWB |
|
|
Reinsurance |
|
Balance at beginning of period (b) |
|
$ |
114,457 |
|
|
$ |
(79,134 |
) |
|
$ |
13,865 |
|
|
$ |
744 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase price adjustment |
|
|
|
|
|
|
|
|
|
|
(2,243 |
) |
|
|
(12,884 |
) |
Changes in valuation (a) |
|
|
(68,470 |
) |
|
|
20,388 |
|
|
|
102,835 |
|
|
|
(66,994 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period (b) |
|
$ |
45,987 |
|
|
$ |
(58,746 |
) |
|
$ |
114,457 |
|
|
$ |
(79,134 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 2009 and 2008, the change in valuation is principally being driven by the volatile equity
market environment.
Note 4. 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 VOBA |
|
|
|
|
|
|
(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 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 VOBA balances for this cumulative effect adjustment.
80
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 December 31, 2009 and 2008 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
Amortized |
|
|
Gross Unrealized |
|
|
|
|
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
OTTI (1) |
|
|
Value |
|
Fixed maturity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
$ |
718,740 |
|
|
$ |
23,767 |
|
|
$ |
(8,807 |
) |
|
$ |
(101 |
) |
|
$ |
733,599 |
|
Asset-backed securities |
|
|
118,400 |
|
|
|
4,830 |
|
|
|
(8,164 |
) |
|
|
(3,375 |
) |
|
|
111,691 |
|
Commercial mortgage-backed securities |
|
|
165,844 |
|
|
|
1,819 |
|
|
|
(15,490 |
) |
|
|
|
|
|
|
152,173 |
|
Residential mortgage-backed securities |
|
|
122,400 |
|
|
|
3,400 |
|
|
|
(6,496 |
) |
|
|
(1,134 |
) |
|
|
118,170 |
|
Municipals |
|
|
1,551 |
|
|
|
7 |
|
|
|
(70 |
) |
|
|
|
|
|
|
1,488 |
|
Government and government agencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
|
220,313 |
|
|
|
1,427 |
|
|
|
(5,912 |
) |
|
|
|
|
|
|
215,828 |
|
Foreign |
|
|
12,033 |
|
|
|
369 |
|
|
|
(60 |
) |
|
|
|
|
|
|
12,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
$ |
1,359,281 |
|
|
$ |
35,619 |
|
|
$ |
(44,999 |
) |
|
$ |
(4,610 |
) |
|
$ |
1,345,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities preferred stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking securities |
|
$ |
9,246 |
|
|
$ |
|
|
|
$ |
(2,885 |
) |
|
$ |
|
|
|
$ |
6,361 |
|
Other financial services securities |
|
|
165 |
|
|
|
198 |
|
|
|
|
|
|
|
|
|
|
|
363 |
|
Other securities |
|
|
5,791 |
|
|
|
|
|
|
|
(710 |
) |
|
|
|
|
|
|
5,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
$ |
15,202 |
|
|
$ |
198 |
|
|
$ |
(3,595 |
) |
|
$ |
|
|
|
$ |
11,805 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI. |
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
December 31, 2009 and 2008 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
Investment grade |
|
$ |
1,273,913 |
|
|
$ |
1,272,291 |
|
|
$ |
1,432,232 |
|
|
$ |
1,316,909 |
|
Below investment grade |
|
|
85,368 |
|
|
|
73,000 |
|
|
|
78,136 |
|
|
|
55,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
$ |
1,359,281 |
|
|
$ |
1,345,291 |
|
|
$ |
1,510,368 |
|
|
$ |
1,372,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2009 and 2008 the estimated fair value of fixed maturity securities rated BBB-
were $38,945 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 December 31, 2009 and
2008 by expected maturity were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
Fixed maturity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
107,985 |
|
|
$ |
108,234 |
|
|
$ |
129,284 |
|
|
$ |
128,424 |
|
Due after one year through five years |
|
|
265,145 |
|
|
|
273,128 |
|
|
|
450,331 |
|
|
|
432,032 |
|
Due after five years through ten years |
|
|
421,437 |
|
|
|
423,225 |
|
|
|
285,150 |
|
|
|
265,360 |
|
Due after ten years |
|
|
158,070 |
|
|
|
158,670 |
|
|
|
188,340 |
|
|
|
172,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
952,637 |
|
|
|
963,257 |
|
|
|
1,053,105 |
|
|
|
998,063 |
|
Mortgage-backed securities and other asset-backed securities |
|
|
406,644 |
|
|
|
382,034 |
|
|
|
457,263 |
|
|
|
373,953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
$ |
1,359,281 |
|
|
$ |
1,345,291 |
|
|
$ |
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.
82
The Company had investment securities with an estimated fair value of $23,819 and $24,910 that were
deposited with insurance regulatory authorities at December 31, 2009 and 2008, respectively.
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 December 31, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
Estimated |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair |
|
|
Amortized |
|
|
Losses and |
|
|
|
Value |
|
|
Cost |
|
|
OTTI (1) |
|
Less than or equal to six months |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
$ |
169,107 |
|
|
$ |
171,407 |
|
|
$ |
(2,300 |
) |
Asset-backed securities |
|
|
3,690 |
|
|
|
3,767 |
|
|
|
(77 |
) |
Commercial mortgage-backed securities |
|
|
11,798 |
|
|
|
12,094 |
|
|
|
(296 |
) |
Residential mortgage-backed securities |
|
|
19,885 |
|
|
|
20,021 |
|
|
|
(136 |
) |
Government and government agencies |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
|
25,969 |
|
|
|
26,201 |
|
|
|
(232 |
) |
Foreign |
|
|
3,563 |
|
|
|
3,623 |
|
|
|
(60 |
) |
|
|
|
|
|
|
|
|
|
|
Total fixed maturity and equity securities |
|
|
234,012 |
|
|
|
237,113 |
|
|
|
(3,101 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than six months but less than or equal to one year |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
|
6,173 |
|
|
|
6,813 |
|
|
|
(640 |
) |
Asset-backed securities |
|
|
12,892 |
|
|
|
14,470 |
|
|
|
(1,578 |
) |
Commercial mortgage-backed securities |
|
|
5,046 |
|
|
|
5,770 |
|
|
|
(724 |
) |
Residential mortgage-backed securities |
|
|
4 |
|
|
|
4 |
|
|
|
|
|
Government and government agencies United States |
|
|
83,657 |
|
|
|
89,337 |
|
|
|
(5,680 |
) |
|
|
|
|
|
|
|
|
|
|
Total fixed maturity and equity securities |
|
|
107,772 |
|
|
|
116,394 |
|
|
|
(8,622 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than one year |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
|
81,631 |
|
|
|
87,599 |
|
|
|
(5,968 |
) |
Asset-backed securities |
|
|
22,950 |
|
|
|
32,834 |
|
|
|
(9,884 |
) |
Commercial mortgage-backed securities |
|
|
50,799 |
|
|
|
65,269 |
|
|
|
(14,470 |
) |
Residential mortgage-backed securities |
|
|
19,805 |
|
|
|
27,299 |
|
|
|
(7,494 |
) |
Municipals |
|
|
860 |
|
|
|
930 |
|
|
|
(70 |
) |
Equity securities |
|
|
|
|
|
|
|
|
|
|
|
|
Banking securities |
|
|
6,361 |
|
|
|
9,246 |
|
|
|
(2,885 |
) |
Other securities |
|
|
5,081 |
|
|
|
5,791 |
|
|
|
(710 |
) |
|
|
|
|
|
|
|
|
|
|
Total fixed maturity and equity securities |
|
|
187,487 |
|
|
|
228,968 |
|
|
|
(41,481 |
) |
|
|
|
|
|
|
|
|
|
|
Total fixed maturity and equity securities |
|
$ |
529,271 |
|
|
$ |
582,475 |
|
|
$ |
(53,204 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI. |
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
Estimated |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair |
|
|
Amortized |
|
|
Losses and |
|
|
|
Value |
|
|
Cost |
|
|
OTTI |
|
Less than or equal to six months |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
$ |
233,191 |
|
|
$ |
262,403 |
|
|
$ |
(29,212 |
) |
Asset-backed securities |
|
|
76,387 |
|
|
|
100,645 |
|
|
|
(24,258 |
) |
Commercial mortgage-backed securities |
|
|
99,049 |
|
|
|
123,037 |
|
|
|
(23,988 |
) |
Residential mortgage-backed securities |
|
|
7,497 |
|
|
|
8,114 |
|
|
|
(617 |
) |
Government and government agencies United States |
|
|
59,287 |
|
|
|
59,656 |
|
|
|
(369 |
) |
Equity securities banking securities |
|
|
5,950 |
|
|
|
8,550 |
|
|
|
(2,600 |
) |
|
|
|
|
|
|
|
|
|
|
Total fixed maturity and equity securities |
|
|
481,361 |
|
|
|
562,405 |
|
|
|
(81,044 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than six months but less than or equal to one year |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
|
297,050 |
|
|
|
344,580 |
|
|
|
(47,530 |
) |
Asset-backed securities |
|
|
25,270 |
|
|
|
33,850 |
|
|
|
(8,580 |
) |
Commercial mortgage-backed securities |
|
|
20,329 |
|
|
|
35,871 |
|
|
|
(15,542 |
) |
Residential mortgage-backed securities |
|
|
19,323 |
|
|
|
32,944 |
|
|
|
(13,621 |
) |
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 |
|
|
370,366 |
|
|
|
461,326 |
|
|
|
(90,960 |
) |
|
|
|
|
|
|
|
|
|
|
Total fixed maturity and equity securities |
|
$ |
851,727 |
|
|
$ |
1,023,731 |
|
|
$ |
(172,004 |
) |
|
|
|
|
|
|
|
|
|
|
The total number of securities in an unrealized loss position was 119 and 330 at December 31,
2009 and 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 December 31,
2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Estimated |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
Unrealized |
|
|
|
|
|
|
Number of |
|
|
|
Value |
|
|
Losses |
|
|
OTTI |
|
|
Securities |
|
Decline > 20% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than one year |
|
$ |
68,806 |
|
|
$ |
(28,168 |
) |
|
$ |
(4,509 |
) |
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
68,806 |
|
|
$ |
(28,168 |
) |
|
$ |
(4,509 |
) |
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decline > 40% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than one year |
|
$ |
12,943 |
|
|
$ |
(10,989 |
) |
|
$ |
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,943 |
|
|
$ |
(10,989 |
) |
|
$ |
|
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Estimated |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Fair |
|
|
Unrealized |
|
|
|
|
|
|
Number of |
|
|
|
Value |
|
|
Losses |
|
|
OTTI |
|
|
Securities |
|
Decline > 20% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than or equal to six months |
|
$ |
91,210 |
|
|
$ |
(55,383 |
) |
|
$ |
|
|
|
|
43 |
|
Greater than six months but less than or equal to one year |
|
|
89,176 |
|
|
|
(63,241 |
) |
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
180,386 |
|
|
$ |
(118,624 |
) |
|
$ |
|
|
|
|
78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decline > 40% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than or equal to six months |
|
$ |
29,924 |
|
|
$ |
(35,372 |
) |
|
$ |
|
|
|
|
19 |
|
Greater than six months but less than or equal to one year |
|
|
35,682 |
|
|
|
(38,774 |
) |
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
65,606 |
|
|
$ |
(74,146 |
) |
|
$ |
|
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
Unrealized gains (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:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Assets |
|
|
|
|
|
|
|
|
Fixed maturity securities |
|
$ |
(13,990 |
) |
|
$ |
(138,352 |
) |
Equity securities |
|
|
(3,397 |
) |
|
|
(8,193 |
) |
Deferred policy acquisitions costs |
|
|
|
|
|
|
1,481 |
|
Value of business acquired |
|
|
(1,219 |
) |
|
|
45,438 |
|
|
|
|
|
|
|
|
|
|
|
(18,606 |
) |
|
|
(99,626 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Policyholder account balances |
|
|
3,062 |
|
|
|
(647 |
) |
Federal income taxes deferred |
|
|
5,440 |
|
|
|
35,095 |
|
|
|
|
|
|
|
|
|
|
|
8,502 |
|
|
|
34,448 |
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss, net of taxes |
|
$ |
(10,104 |
) |
|
$ |
(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 years ended December 31, 2009 and 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 December 31, 2009 and 2008 was $67,707 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. In addition to the valuation allowance for specific
loans, an allowance is estimated based on a percent of the outstanding loan balance. The valuation
allowance at December 31, 2009 and 2008 was $41 and $49, respectively.
The commercial mortgages are geographically diversified throughout the United States with the
largest concentrations in Pennsylvania, New Hampshire, California, Virginia, Ohio, and Washington
which account for approximately 80% of mortgage loans as of December 31, 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 December 31, 2009 and 2008 was $867,361 and $913,882, respectively. Policy
loans are fully collateralized by the account value of the associated insurance contracts, and the
spread between the policy loan interest rate and the interest rate credited to the account value
held as collateral is fixed.
Securities Lending
The Company loans securities under securities lending agreements. The amortized cost of securities
out on loan at December 31, 2009 and 2008 was $149,374 and $166,427, respectively. The estimated
fair value of securities out on loan at December 31, 2009 and 2008 was $145,209 and $173,991,
respectively.
85
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 December 31, 2009, the Company had 570 outstanding short futures contracts with a
notional value of $158,275. As of December 31, 2008, the Company had 990 outstanding short futures
contracts with a notional value of $222,775.
Net Investment Income
Net investment income by source for the years ended December 31 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|
|
2009 |
|
|
2008 |
|
|
|
2007 |
|
Fixed maturity securities |
|
$ |
72,710 |
|
|
$ |
81,569 |
|
|
|
$ |
72,597 |
|
Policy loans on insurance contracts |
|
|
46,156 |
|
|
|
48,742 |
|
|
|
|
49,497 |
|
Cash and cash equivalents |
|
|
2,816 |
|
|
|
7,848 |
|
|
|
|
9,976 |
|
Equity securities |
|
|
1,409 |
|
|
|
2,038 |
|
|
|
|
3,593 |
|
Limited partnerships |
|
|
(1,545 |
) |
|
|
(2,376 |
) |
|
|
|
3,223 |
|
Mortgage loans on real estate |
|
|
4,706 |
|
|
|
2,424 |
|
|
|
|
|
|
Other |
|
|
889 |
|
|
|
1,103 |
|
|
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross investment income |
|
|
127,141 |
|
|
|
141,348 |
|
|
|
|
138,999 |
|
Less: investment expenses |
|
|
(4,204 |
) |
|
|
(6,190 |
) |
|
|
|
(2,583 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
122,937 |
|
|
$ |
135,158 |
|
|
|
$ |
136,416 |
|
|
|
|
|
|
|
|
|
|
|
|
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
years ended December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
Predecessor |
|
|
2009 |
|
2008 |
|
|
2007 |
Proceeds |
|
$ |
351,633 |
|
|
$ |
598,127 |
|
|
|
$ |
262,046 |
|
Gross realized investment gains |
|
|
5,392 |
|
|
|
4,853 |
|
|
|
|
4,119 |
|
Gross realized investment losses |
|
|
(5,507 |
) |
|
|
(5,861 |
) |
|
|
|
(2,064 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds on available-for-sale securities sold at a realized loss |
|
|
103,332 |
|
|
|
268,351 |
|
|
|
|
152,277 |
|
Net realized investment gains (losses) for the years ended December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|
|
2009 |
|
|
2008 |
|
|
|
2007 |
|
Fixed maturity securities |
|
$ |
(10,605 |
) |
|
$ |
(14,751 |
) |
|
|
$ |
1,727 |
|
Equity securities |
|
|
(3,692 |
) |
|
|
(414 |
) |
|
|
|
328 |
|
Limited partnerships |
|
|
1,567 |
|
|
|
|
|
|
|
|
|
|
Mortgage loans on real estate |
|
|
(531 |
) |
|
|
(49 |
) |
|
|
|
|
|
Derivatives |
|
|
(48,105 |
) |
|
|
37,803 |
|
|
|
|
|
|
Adjustment related to VOBA |
|
|
3,081 |
|
|
|
5,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment gains (losses) |
|
$ |
(58,285 |
) |
|
$ |
27,721 |
|
|
|
$ |
2,055 |
|
|
|
|
|
|
|
|
|
|
|
|
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.
86
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 |
|
|
2,479 |
|
Additional credit loss impairments recognized in the current period on
securities previously impaired |
|
|
18 |
|
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, December 31, 2009 |
|
$ |
1,445 |
|
|
|
|
|
The components of OTTI reflected in the Statements of Income for the year ended was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Total |
|
|
Portion of |
|
|
Net OTTI |
|
|
|
OTTI |
|
|
OTTI Losses |
|
|
Losses |
|
|
|
Losses on |
|
|
Recognized |
|
|
Recognized |
|
|
|
Securities |
|
|
in OCI |
|
|
in Income |
|
Gross OTTI losses |
|
$ |
18,929 |
|
|
$ |
4,753 |
|
|
$ |
14,176 |
|
DAC, DSI and VOBA |
|
|
(4,324 |
) |
|
|
|
|
|
|
(4,324 |
) |
|
|
|
|
|
|
|
|
|
|
Net OTTI Losses |
|
$ |
14,605 |
|
|
$ |
4,753 |
|
|
$ |
9,852 |
|
|
|
|
|
|
|
|
|
|
|
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 year ended December 31, 2008, the Company recorded gross
impairments of $14,208 and associated VOBA amortization of $5,879. For the year ended December
31, 2007, the Company did not any record any OTTI.
Note 5. VOBA, Other Intangibles and Goodwill
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 December 31, 2009, the reversion to the mean assumption was 7.25% 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.
87
The carrying amount of VOBA for the years ended December 31 was as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Balance at beginning of year |
|
$ |
581,090 |
|
|
$ |
574,950 |
|
|
|
|
|
|
|
|
|
|
Purchase price adjustment |
|
|
|
|
|
|
(6,759 |
) |
Accretion (amortization) expense |
|
|
(12,272 |
) |
|
|
30,778 |
|
Unlocking |
|
|
(79,355 |
) |
|
|
(40,476 |
) |
Impairment charge |
|
|
(63,894 |
) |
|
|
(27,973 |
) |
Adjustment related to realized losses on investments and OTTI |
|
|
3,081 |
|
|
|
5,132 |
|
Adjustment related to unrealized (gains) losses and OTTI on investments |
|
|
(53,914 |
) |
|
|
45,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
374,737 |
|
|
$ |
581,090 |
|
|
|
|
|
|
|
|
During 2009, the Company experienced increased gross profits as a result of market
improvements which increased amortization expense. Also during 2009, unlocking was primarily
driven by the volatile equity market environment and revisions to policyholder behavior
assumptions. During 2008, the Company experienced lower than expected gross profits as a result of
market losses which reduced amortization expense and unlocking. In addition, in the first quarter
2009 and fourth quarter 2008, the Company recorded an impairment charge as estimated future gross
profits were less than the unamortized balance.
The estimated future amortization of VOBA from 2010 to 2014 is as follows:
|
|
|
|
|
2010 |
|
$ |
27,691 |
|
2011 |
|
$ |
29,469 |
|
2012 |
|
$ |
31,525 |
|
2013 |
|
$ |
34,153 |
|
2014 |
|
$ |
36,754 |
|
Other intangibles include the estimated fair values of the distribution agreement, the trade name
and the non-compete agreement acquired at the acquisition date. The Company reviews other
intangible assets when certain events or circumstances exist, while goodwill is reviewed for
impairment on an annual basis and on an interim basis when certain events or circumstances exist.
However during the 4th quarter 2008, the Company made a business decision to commence
selling similar products on affiliate companies through the ML&Co. distribution channel instead of
continuing to sell new variable annuities on MLLIC. As a result of this decision, an impairment
charge was taken for the entire unamortized other intangible balance ($76,161) and the majority of
the goodwill balance ($139,301) except for the amount related to the Companys state licenses at
December 31, 2008.
Note 6. DAC, DSI and UPCR
The Company utilizes the reversion to the mean assumption, a common industry practice, in its
determination of the amortization of DAC. At December 31, 2009, the reversion to the mean
assumption was 7.25% 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.
88
The carrying amount of DAC and DSI for the years ended December 31 was as follows:
|
|
|
|
|
|
|
|
|
|
|
DAC |
|
|
DSI |
|
Balance, January 1, 2008 |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Capitalization |
|
|
22,095 |
|
|
|
6,975 |
|
Accretion |
|
|
8,038 |
|
|
|
2,444 |
|
Unlocking |
|
|
(7,343 |
) |
|
|
(2,187 |
) |
Adjustment related to unrealized losses and OTTI on investments |
|
|
1,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
|
24,271 |
|
|
|
7,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization |
|
|
14,545 |
|
|
|
1,521 |
|
Amortization |
|
|
(7,973 |
) |
|
|
(2,495 |
) |
Unlocking |
|
|
(2,632 |
) |
|
|
38 |
|
Adjustment related to unrealized gains and OTTI on investments |
|
|
(1,481 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
$ |
26,730 |
|
|
$ |
6,296 |
|
|
|
|
|
|
|
|
Equity market improvements in 2009 as compared to 2008 caused higher amortization expense as a
result of increasing gross profits. During 2008, the Company experienced lower than expected gross
profits as a result of market losses which reduced amortization expense and unlocking.
As of December 31, 2007, the UPCR balance was zero as a result of push down accounting at the
acquisition date. The components of accretion (amortization) of UPCR for the year ended December
31, 2007 was as follows:
|
|
|
|
|
|
|
Predecessor |
|
|
|
2007 |
|
Accretion |
|
$ |
2,874 |
|
Unlocking |
|
|
(4,815 |
) |
|
|
|
|
|
|
|
|
|
Total amortization of UPCR |
|
$ |
(1,941 |
) |
|
|
|
|
During 2007, the Company revised its mortality assumptions and historical claims relating to
its variable universal life insurance product resulting in unfavorable unlocking.
Note 7. Variable Contracts Containing Guaranteed Benefits
Variable Annuity Contracts Containing Guaranteed Benefits
Prior to September 30, 2009, the Company issued variable annuity contracts in which the Company may
have contractually guaranteed to the contract owner a guaranteed minimum death benefit (GMDB)
and/or an optional guaranteed living benefit provision. The living benefit provisions offered by
the Company included a guaranteed minimum income benefit (GMIB) and a guaranteed minimum
withdrawal benefit (GMWB). Information regarding the general characteristics of each guaranteed
benefit type is provided below:
|
|
|
In general, contracts containing GMDB provisions provide a death benefit equal to the
greater of the GMDB or the contract value. Depending on the type of contract, the GMDB may
equal: i) contract deposits accumulated at a specified interest rate, ii) the contract
value on specified contract anniversaries, iii) return of contract deposits, or iv) some
combination of these benefits. Each benefit type is reduced for contract withdrawals. |
|
|
|
In general, contracts containing GMIB provisions provide the option to receive a
guaranteed future income stream upon annuitization. There is a waiting period of ten years
that must elapse before the GMIB provision can be exercised. |
|
|
|
Contracts containing GMWB provisions provide the contract owner the ability to withdraw
minimum annual payments regardless of the impact of market performance on the contract
owners account value. In general, withdrawal percentages are based on the contract
owners age at the time of the first withdrawal. |
89
The Company had the following variable annuity contracts containing guaranteed benefits at
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
GMDB |
|
GMIB |
|
GMWB |
Net amount at risk (a) |
|
$ |
1,415,524 |
|
|
$ |
7,024 |
|
|
$ |
150,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average attained age of contract owners |
|
|
71 |
|
|
|
61 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average period remaining until expected annuitization |
|
|
n/a |
|
|
3.9 yrs |
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount at risk (a) |
|
$ |
2,631,834 |
|
|
$ |
93,436 |
|
|
$ |
274,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average attained age of contract owners |
|
|
68 |
|
|
|
61 |
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average period remaining until expected annuitization |
|
|
n/a |
|
|
6.0 yrs |
|
|
n/a |
|
|
|
|
(a) |
|
Net amount at risk for GMDB is defined as the current GMDB in excess of the
contract owners account balance at the Balance Sheet date. Net amount at risk for
GMIB is defined as the present value of the minimum guaranteed annuity payments
available to the contract owner in excess of the contract owners account balance at
the Balance Sheet date. Net amount at risk for GMWB is defined as the present value of
the minimum guaranteed withdrawals available to the contract owner in excess of the
contract owners account balance at the Balance Sheet date. |
The Company records liabilities for contracts containing GMDB and GMIB provisions as a component of
future policy benefits in the Balance Sheets. Changes in these guaranteed benefit liabilities are
included as a component of policy benefits in the Statement of Income. The GMDB and GMIB
liabilities are determined by projecting future expected guaranteed benefits under multiple
scenarios for returns on Separate Accounts assets. The Company uses estimates for mortality and
policyholder behavior assumptions based on actual and projected experience for each contract type.
These estimates are consistent with the estimates used in the calculation of DAC. The Company
regularly evaluates the estimates used and adjusts the GMDB and/or GMIB liability balances with a
related charge or credit to earnings (unlocking), if actual experience or evidence suggests that
earlier assumptions should be revised.
The changes in the variable annuity GMDB and GMIB liabilities for the years ended December 31 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
GMDB |
|
|
GMIB |
|
Balance, January 1, 2008 |
|
$ |
74,641 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Purchase price adjustment |
|
|
(7,887 |
) |
|
|
|
|
Guaranteed benefits incurred |
|
|
22,420 |
|
|
|
7,939 |
|
Guaranteed benefits paid |
|
|
(28,447 |
) |
|
|
|
|
Unlocking |
|
|
85,162 |
|
|
|
10,596 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
|
145,889 |
|
|
|
18,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed benefits incurred |
|
|
43,197 |
|
|
|
18,781 |
|
Guaranteed benefits paid |
|
|
(52,139 |
) |
|
|
|
|
Unlocking |
|
|
8,586 |
|
|
|
1,853 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
$ |
145,533 |
|
|
$ |
39,169 |
|
|
|
|
|
|
|
|
During 2009, the small decline in the GMDB liability was primarily due to equity market
improvements partially offset by revisions to policyholder behavior assumptions. During 2009, the
increase in the GMIB liability was primarily due to revisions to policyholder behavior assumptions
partially offset by the favorable impact of improved equity markets in the latter half of 2009.
The substantial increase in the GMDB and GMIB liabilities in 2008 was primarily due to significant
market declines during the latter half of 2008.
90
At December 31, contract owners account balances by mutual fund class by guaranteed benefit
provisions were comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money |
|
|
|
|
|
|
|
|
|
Equity |
|
|
Bond |
|
|
Balanced |
|
|
Market |
|
|
Other |
|
|
Total |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMDB Only |
|
$ |
1,786,028 |
|
|
$ |
768,644 |
|
|
$ |
571,784 |
|
|
$ |
238,924 |
|
|
$ |
4,824 |
|
|
$ |
3,370,204 |
|
GMDB and GMIB |
|
|
1,183,035 |
|
|
|
354,188 |
|
|
|
404,155 |
|
|
|
58,510 |
|
|
|
14,107 |
|
|
|
2,013,995 |
|
GMDB and GMWB |
|
|
425,882 |
|
|
|
78,613 |
|
|
|
188,216 |
|
|
|
4,312 |
|
|
|
7,698 |
|
|
|
704,721 |
|
GMWB only |
|
|
165,990 |
|
|
|
29,866 |
|
|
|
75,097 |
|
|
|
1,809 |
|
|
|
2,995 |
|
|
|
275,757 |
|
GMIB only |
|
|
97,595 |
|
|
|
14,463 |
|
|
|
44,919 |
|
|
|
1,866 |
|
|
|
2,452 |
|
|
|
161,295 |
|
No guaranteed benefit |
|
|
16,518 |
|
|
|
4,357 |
|
|
|
15,703 |
|
|
|
2,264 |
|
|
|
1,150 |
|
|
|
39,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,675,048 |
|
|
$ |
1,250,131 |
|
|
$ |
1,299,874 |
|
|
$ |
307,685 |
|
|
$ |
33,226 |
|
|
$ |
6,565,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMDB Only |
|
$ |
1,712,586 |
|
|
$ |
764,563 |
|
|
$ |
532,448 |
|
|
$ |
223,531 |
|
|
$ |
3,388 |
|
|
$ |
3,236,516 |
|
GMDB and GMIB |
|
|
880,425 |
|
|
|
348,784 |
|
|
|
338,704 |
|
|
|
77,037 |
|
|
|
9,316 |
|
|
|
1,654,266 |
|
GMDB and GMWB |
|
|
260,347 |
|
|
|
73,349 |
|
|
|
154,400 |
|
|
|
4,362 |
|
|
|
6,455 |
|
|
|
498,913 |
|
GMWB only |
|
|
104,486 |
|
|
|
29,037 |
|
|
|
62,796 |
|
|
|
2,796 |
|
|
|
2,416 |
|
|
|
201,531 |
|
GMIB only |
|
|
64,495 |
|
|
|
13,808 |
|
|
|
33,159 |
|
|
|
1,667 |
|
|
|
1,520 |
|
|
|
114,649 |
|
No guaranteed benefit |
|
|
14,678 |
|
|
|
4,664 |
|
|
|
12,583 |
|
|
|
2,504 |
|
|
|
366 |
|
|
|
34,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,037,017 |
|
|
$ |
1,234,205 |
|
|
$ |
1,134,090 |
|
|
$ |
311,897 |
|
|
$ |
23,461 |
|
|
$ |
5,740,670 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Life Contracts Containing Guaranteed Benefits
The Company has issued variable life contracts in which the Company contractually guarantees to the
contract owner a GMDB. In general, contracts containing GMDB provisions provide a death benefit
equal to the amount specified in the contract regardless of the level of the contracts account
value.
At December 31, contract owners account balances by mutual fund class for contracts containing
GMDB provisions were distributed as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Balanced |
|
$ |
733,429 |
|
|
$ |
537,761 |
|
Equity |
|
|
562,073 |
|
|
|
757,526 |
|
Bond |
|
|
228,272 |
|
|
|
128,794 |
|
Money Market |
|
|
224,095 |
|
|
|
292,345 |
|
|
|
|
|
|
|
|
Total |
|
$ |
1,747,869 |
|
|
$ |
1,716,426 |
|
|
|
|
|
|
|
|
Note 8. Federal Income Taxes
The following is a reconciliation of the provision for income taxes based on income (loss) before
federal income taxes, computed using the federal statutory rate versus the reported provision for
income taxes for the years ended December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
|
Predecessor |
|
|
|
2009 |
|
|
2008 |
|
|
|
2007 |
|
Provisions for income taxes computed
at Federal statutory rate (35%) |
|
$ |
(38,911 |
) |
|
$ |
(79,190 |
) |
|
|
$ |
55,857 |
|
Increase (decrease) in income taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend received deduction |
|
|
(8,890 |
) |
|
|
(7,420 |
) |
|
|
|
(4,783 |
) |
Tax credits |
|
|
(1,386 |
) |
|
|
(884 |
) |
|
|
|
(2,002 |
) |
Tax goodwill amortization |
|
|
|
|
|
|
(431 |
) |
|
|
|
|
|
Valuation allowance on deferred tax assets |
|
|
145,504 |
|
|
|
|
|
|
|
|
|
|
Provision to return adjustment |
|
|
(7,955 |
) |
|
|
|
|
|
|
|
|
|
Uncertain tax positions |
|
|
3,623 |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
(57 |
) |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax provision |
|
$ |
91,928 |
|
|
$ |
(87,919 |
) |
|
|
$ |
49,072 |
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
-83 |
% |
|
|
39 |
% |
|
|
|
31 |
% |
91
The Company provides for deferred income taxes resulting from temporary differences that arise
from recording certain transactions in different years for income tax reporting purposes than for
financial reporting purposes.
Deferred tax assets and liabilities at December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Deferred tax assets |
|
|
|
|
|
|
|
|
DAC |
|
$ |
113,381 |
|
|
$ |
125,732 |
|
Net operating and capital loss carry forward |
|
|
68,655 |
|
|
|
110,255 |
|
Intangible assets |
|
|
64,582 |
|
|
|
67,556 |
|
Investment adjustments |
|
|
11,144 |
|
|
|
49,527 |
|
Policyholder account balances |
|
|
20,525 |
|
|
|
|
|
Tax VOBA |
|
|
81 |
|
|
|
88 |
|
Liability for guaranty fund assessments |
|
|
1,741 |
|
|
|
679 |
|
Tax credits |
|
|
9,479 |
|
|
|
|
|
Other |
|
|
(477 |
) |
|
|
1,939 |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
|
289,111 |
|
|
|
355,776 |
|
Valuation allowance |
|
|
(145,504 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
143,607 |
|
|
|
355,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
Book VOBA |
|
|
131,158 |
|
|
|
203,382 |
|
DAC |
|
|
11,559 |
|
|
|
11,026 |
|
Policyholder account balance |
|
|
|
|
|
|
24,325 |
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
142,717 |
|
|
|
238,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net deferred tax asset |
|
$ |
890 |
|
|
$ |
117,043 |
|
|
|
|
|
|
|
|
The valuation allowance for deferred tax assets at December 31, 2009 was $145,504. 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 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 December 31, 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 December 31, 2009 and 2008, the Company had an operating loss carryforward for federal income
tax purposes of $176,009 (net of the ASC 740 reduction of $10,351) and $314,582, respectively, with
a carryforward period of fifteen years that expire at various dates up to 2024. In addition, at
December 31, 2009, the Company also has a capital loss carryforward for federal income tax purposes
of $9,796 with a carryforward period of five years that will expire at various dates up to 2014.
At December 31, 2009, the Company had a foreign tax credit carryforward of $5,810 with a
carryforward period of ten years that will expire at various dates up to 2019. Also at December 31,
2009, the Company had an Alternative Minimum Tax tax credit carryforward for federal income tax
purposes of $3,668 with an indefinite carryforward period.
The Company classifies interest and penalties related to income taxes as interest expense and
penalty expense, respectively. The Company did not recognize penalty expense in its financial
statements as of December 31, 2009 and 2008. The Company recognized interest expense of $119 as of
December 31, 2009. The Company did not recognize interest expense as of December 31, 2008.
92
The Company files a separate federal income tax return for the years 2008 through 2012. Beginning
in 2013 and assuming no changes in ownership, the Company will join the affiliated consolidated tax
group. A tax return has been filed for 2008, but no examination by the Internal Revenue Service
has yet commenced.
Note 9. Stockholders Equity and Statutory Accounting Principles
The Companys statutory financial statements are presented on the basis of accounting practices
prescribed or permitted by the Insurance Department of the State of Arkansas. The State of
Arkansas has adopted the National Association of Insurance Commissioners (NAIC) statutory accounting
principles as the basis of its statutory accounting principles.
The Companys statutory net income (loss) for the years ended December 31, 2009, 2008 and 2007 was
$225,287, ($259,862), and $108,791, respectively.
Statutory capital and surplus at December 31, 2009 and 2008 was $599,014 and $356,135,
respectively. At December 31, 2009 and 2008, approximately $282,663 and $35,593, respectively, of
stockholders equity was available for dividend distribution that would not require approval by the
Arkansas Insurance Department. During 2009, the Company did not receive any capital contributions
from AUSA. During 2008, the Company received $250,000 of capital contributions from AUSA. During
2009 and 2008, the Company did not pay any dividends to AUSA.
The NAIC utilizes the Risk Based Capital (RBC) adequacy monitoring system. The RBC calculates the
amount of adjusted capital that a life insurance company should hold based upon that companys risk
profile. As of December 31, 2009 and 2008, based on the RBC formula, the Companys total adjusted
capital level was above the minimum amount of capital required to avoid regulatory action.
Note 10. 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 December 31, 2009 and 2008,
reinsurance receivables were $35,806 and $14,219 respectively, of which the majority ($29,682 and
$10,026, respectively) related to the recapture of life reinsurance and refined calculations in
conjunction with system conversions. At December 31, 2009 and 2008, these reinsurance receivables
were primarily from Swiss Re, Lincoln National Life Insurance Company, Reinsurance Group of America
(RGA), Employers Reassurance Corporation (ERAC), and Munich American Reassurance Company. As
of December 31, 2009, the Company held collateral under reinsurance agreements in the form of
letters of credit and funds withheld totaling $399 that can be drawn upon for delinquent
reinsurance receivables.
At December 31, 2009, the Company had the following life insurance inforce:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage |
|
|
|
|
|
|
Ceded to |
|
Assumed |
|
|
|
|
|
of amount |
|
|
Gross |
|
other |
|
from other |
|
Net |
|
assumed to |
|
|
amount |
|
companies |
|
companies |
|
amount |
|
net |
Life insurance inforce |
|
$ |
7,255,580 |
|
|
$ |
2,002,598 |
|
|
$ |
626 |
|
|
$ |
5,253,608 |
|
|
|
0.01 |
% |
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 December 31,
2009, 45% 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.
93
Note 11. Related Party Transactions
As of December 31, 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 2009 and 2008, the Company incurred $24,844 and $5,221, respectively, in expenses under this
agreement. Charges attributable to this agreement are included in insurance expenses and taxes,
net of amounts capitalized.
The Company is party to intercompany short-term note receivable arrangements with its parent and
affiliates at various times during the year. On 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 was due September 29, 2010, but was paid in full on December 31,
2009. At December 31, 2008, the Company was not party to any outstanding intercompany short-term
note receivable. During 2009 and 2008, the Company accrued and/or received $108 and $1,669
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 2009 and 2008, the
Company incurred $163 and $70, respectively, under this agreement. There were no mortgage loan
origination fees during 2009. Mortgage loan origination fees of $25 were capitalized and included
on the Balance Sheet under mortgage loans on real estate during 2008. 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 2009 and 2008, the Company incurred $2,207 and
$2,029, 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 2009 and 2008, the Company incurred $4,002 and $6,498,
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 2009 and 2008, the Company incurred $47,569 and $29,734, 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 2009, the Company did
not receive revenue under this agreement. During 2008, the Company received $25 in 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 2009 and 2008, the Company received $44 and $8, respectively, in
revenue under this agreement.
The Company has a reinsurance agreement with Transamerica Life Insurance Company. During 2009 and
2008, the Company incurred $268 and $257, 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
2009, there were no purchases of investments from affiliated companies. During 2009, the Company
sold $78,525 and $2,961 of fixed maturity available-for-sale securities and mortgage loans on real
estate, respectively to affiliates. During 2008, the Company purchased $204,892 and $68,794 of
fixed maturities available-for-sale securities and mortgage loans on real estate, respectively,
from affiliates. During 2008, the Company sold $34,959 of fixed maturities available-for-sale
securities to an affiliated company.
94
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.
Prior to December 28, 2007, the Company had the following affiliated agreements in effect:
The Company and Merrill Lynch Insurance Group, Inc. (MLIG) were parties to a service agreement
whereby MLIG agreed to provide certain accounting, data processing, legal, actuarial, management,
advertising and other services to the Company. Expenses incurred by MLIG in relation to this
service agreement were reimbursed by the Company on an allocated cost basis. Charges allocated to
the Company by MLIG pursuant to the agreement were $27,017 for 2007. Charges attributable to this
agreement were included in insurance expenses and taxes, except for investment related expenses,
which were included in net investment income. The Company was allocated interest expense on its
accounts payable to MLIG that approximates the daily federal funds rate. Total intercompany
interest incurred was $501 for 2007. Intercompany interest was included in net investment income.
The Company had a general agency agreement with Merrill Lynch Life Agency Inc. (MLLA) whereby
registered representatives of Merrill Lynch, Pierce, Fenner & Smith, Incorporated, who are the
Companys licensed insurance agents, solicit applications for contracts to be issued by the
Company. MLLA was paid commissions for the contracts sold by such agents. Commissions paid to MLLA
were $61,916 for 2007. Certain commissions were capitalized as DAC and were being amortized in
accordance with the accounting policy discussed in Note 6. Charges attributable to this agreement
were included in insurance expenses and taxes, net of amounts capitalized.
MLIG had entered into agreements with i) Roszel Advisors, LLC (Roszel), a subsidiary of MLIG,
with respect to administrative services for the MLIG Variable Insurance Trust (the Trust) and ii)
the former Merrill Lynch Investment Managers, L.P. (MLIM), now BlackRock, Inc, with respect to
administrative services for the Merrill Lynch Series Fund, Inc., Merrill Lynch Variable Series
Funds, Inc. and Mercury Variable Trust, (collectively, the Funds). Certain Separate Accounts of
the Company may invest in the various mutual fund portfolios of the Trust and the Funds in
connection with the variable life insurance and annuity contracts the Company had inforce. Under
these agreements, Roszel and MLIM pay MLIG an amount equal to a percentage of the assets invested
in the Trust and the Funds through the Separate Accounts. Revenue attributable to these agreements
is included in policy charge revenue. The Company received from MLIG its allocable share of such
compensation from Roszel in the amount of $2,560 during 2007.
Note 12. Commitments and Contingencies
State insurance laws generally require that all life insurers who are licensed to transact business
within a state become members of the states life insurance guaranty association. These
associations have been established for the protection of contract owners from loss (within
specified limits) as a result of the insolvency of an insurer. At the time an insolvency occurs,
the guaranty association assesses the remaining members of the association an amount sufficient to
satisfy the insolvent insurers contract owner obligations (within specified limits). The Company
has utilized public information to estimate what future assessments it will incur as a result of
insolvencies. At December 31, 2009 and 2008, the Companys estimated liability for future guaranty
fund assessments was $4,974 and $5,704, respectively. If future insolvencies occur, the Companys
estimated liability may not be sufficient to fund these insolvencies and the estimated liability
may need to be adjusted. The Company regularly monitors public information regarding insurer
insolvencies and adjusts its estimated liability appropriately.
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.
Note 13. 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.
95
The Other category, presented in the following segment
financial information, represents net revenues and net earnings on invested assets that do not
support annuity or life insurance contract owner liabilities. Subsequent to the acquisition,
management no longer considers Other a category for segment reporting purposes. It is impracticable to
restate the prior period segment information as well as disclosing the information under both the
old basis and the new basis of reporting. Therefore, the predecessor information is shown under the
old basis, three segments annuity, life insurance and other, while the successor information is
shown under the new basis, two segments annuity and life insurance.
The following tables summarize each business segments contribution to select Statements of Income
categories for the years ended December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
2009 |
|
|
|
|
|
|
Life |
|
|
|
|
Annuity |
|
Insurance |
|
Total |
Net revenues (a) |
|
$ |
101,449 |
|
|
$ |
87,574 |
|
|
$ |
189,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy benefits (net of reinsurance) |
|
|
22,043 |
|
|
|
29,061 |
|
|
|
51,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax expense |
|
|
34,469 |
|
|
|
57,459 |
|
|
|
91,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(174,999 |
) |
|
|
(28,102 |
) |
|
|
(203,101 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor |
|
|
2008 |
|
|
|
|
|
|
Life |
|
|
|
|
Annuity |
|
Insurance |
|
Total |
Net revenues (a) |
|
$ |
215,885 |
|
|
$ |
96,214 |
|
|
$ |
312,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy benefits (net of reinsurance) |
|
|
161,650 |
|
|
|
28,928 |
|
|
|
190,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax expense (benefit) |
|
|
(94,215 |
) |
|
|
6,296 |
|
|
|
(87,919 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(158,462 |
) |
|
|
20,123 |
|
|
|
(138,339 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor |
|
|
2007 |
|
|
|
|
|
|
Life |
|
|
|
|
|
|
Annuity |
|
Insurance |
|
Other |
|
Total |
Net revenues (a) |
|
$ |
200,295 |
|
|
$ |
97,351 |
|
|
$ |
14,433 |
|
|
$ |
312,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy benefits (net of reinsurance) |
|
|
15,291 |
|
|
|
26,995 |
|
|
|
|
|
|
|
42,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax expense |
|
|
30,380 |
|
|
|
13,640 |
|
|
|
5,052 |
|
|
|
49,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
72,244 |
|
|
|
28,894 |
|
|
|
9,381 |
|
|
|
110,519 |
|
|
|
|
(a) |
|
Net revenues include total revenues net of interest credited to policyholder
liabilities. |
96
The following tables represent select Balance Sheet information at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Total |
|
|
Policyholder |
|
|
|
Assets |
|
|
Liabilities |
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
Annuity |
|
$ |
7,836,365 |
|
|
$ |
641,030 |
|
Life Insurance |
|
|
3,776,587 |
|
|
|
1,457,865 |
|
|
|
|
|
|
|
|
Total |
|
$ |
11,612,952 |
|
|
$ |
2,098,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
Annuity |
|
$ |
7,338,124 |
|
|
$ |
742,423 |
|
Life Insurance |
|
|
3,775,659 |
|
|
|
1,547,003 |
|
|
|
|
|
|
|
|
Total |
|
$ |
11,113,783 |
|
|
$ |
2,289,426 |
|
|
|
|
|
|
|
|
97
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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 |
|
|
|
(Registrant) |
|
|
|
|
|
Date:
March 25, 2010 |
|
By:
|
|
* |
|
|
|
|
|
|
|
|
|
James D. Purvis |
|
|
|
|
Vice President,
Treasurer, and Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
|
|
|
|
|
Signatures |
|
Title |
|
Date |
|
|
|
Director and President
|
|
March 25, 2010 |
Lon
J. Olejniczak |
|
|
|
|
|
|
|
|
|
|
|
Director and Senior Vice
President
|
|
March 25, 2010 |
Robert
R. Frederick |
|
|
|
|
|
|
|
|
|
|
|
Director and Vice President
|
|
March 25, 2010 |
John T. Mallett |
|
|
|
|
|
|
|
|
|
|
|
Director and Senior Vice President
|
|
March 25, 2010 |
Ronald
L. Ziegler |
|
|
|
|
|
|
|
|
|
|
|
Vice President,
Treasurer, and Chief Financial Officer
|
|
March 25, 2010 |
James
D. Purvis
|
|
|
|
|
|
|
|
|
|
|
|
Vice President and Corporate
Controller
|
|
March 25, 2010 |
Eric
J. Martin |
|
|
|
|
|
|
|
|
|
|
|
Vice President and Assistant
Secretary
|
|
March 25, 2010 |
Darin D. Smith |
|
|
|
|
*By: Darin D. Smith - Attorney-in-Fact
pursuant to Powers of Attorney.
98
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT
TO SECTION 12 OF THE ACT.
|
No annual report covering the Registrants last fiscal year or
proxy material has been or will be sent to Registrants security
holder. |
99
EXHIBIT INDEX
|
|
|
|
|
Exhibit No. |
|
Description |
|
Location |
|
|
|
|
|
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. |
E-1
|
|
|
|
|
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. |
E-2
|
|
|
|
|
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. |
E-3
|
|
|
|
|
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. |
E-4
|
|
|
|
|
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, ML-009
|
|
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
|
|
Incorporated by reference to Exhibit |
|
|
Endorsement, ML-AY-365 190
|
|
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
|
|
Incorporated by reference to Exhibit |
|
|
Endorsement, ML-AY-367 190
|
|
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. |
E-5
|
|
|
|
|
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 Guarantee Annuity Contract
|
|
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 Contract
|
|
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. |
E-6
|
|
|
|
|
4.19 |
|
Individual Tax-Sheltered Annuity
Certificate
|
|
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
|
|
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
|
|
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
|
|
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
|
|
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
|
|
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. |
E-7
|
|
|
|
|
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, 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, 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. |
E-8
|
|
|
|
|
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 |
|
Master Distribution Agreement between Merrill Lynch
Insurance Group, Inc., Merrill Lynch & Co., Inc., and AEGON USA, Inc.
|
|
Incorporated by reference to Exhibit 10.1 to Registrants Current Report on
Form 8-K, File No. 33-26322, filed January 4, 2008. |
10.12 |
|
Wholesaling Agreement between Merrill Lynch Life
Insurance Company, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Transamerica Capital
|
|
Incorporated by reference to Exhibit 10.12 to the Registrants Annual Report on Form 10-K, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, 333-133223, and 333-133225, filed March 27, 2008.
|
10.13 |
|
Selling Agreement between Merrill Lynch Life Insurance Company, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Merrill Lynch Life Agency, Inc.
|
|
Incorporated by reference to Exhibit 10.13 to the Registrants Annual Report on Form 10-K, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, 333-133223, and 333-133225, filed March 27, 2008.
|
10.14 |
|
Keep Well Agreement between AEGON USA, Inc. and Merrill Lynch Life Insurance Company
|
|
Incorporated by reference to Exhibit 10.14 to the Registrants Annual Report on Form 10-K, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, 333-133223, and 333-133225, filed March 27, 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 Registrants 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 Registrants Current Report on
Form 8-K, File No. 33-26322, filed January 4, 2008. |
|
|
|
10.17 |
|
Principal Underwriting Agreement between Transamerica
Capital, Inc. and Merill Lynch Life Insurance Company.
|
|
Incorporated by reference to Exhibit 10.17 to the Registrants Annual Report on Form
10-K, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, 333-133223, and 333-133225, filed March 26, 2009. |
| | | | |
24.1 |
|
Powers of Attorney for Lon K. Olejniczak, Robert R. Frederick, John T. Mallett, Ronald L. Ziegler and Eric J. Martin. |
|
Incorporated by reference to Exhibit 24.1 to the Registrants Annual Report on Form 10-K, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, 333-133223, and 333-133225, filed March 27, 2008.
|
24.2 |
|
Power of Attorney
for James D. Purvis |
|
Exhibit 24.2
|
E-9
|
|
|
|
|
31.1 |
|
Certification by the Chief
Executive Officer of the Registrant pursuant to Rule 15d-14(a).
|
|
Exhibit 31.1
|
31.2 |
|
Certification by the Chief
Financial Officer of the Registrant pursuant to Rule 15d-14(a).
|
|
Exhibit 31.2
|
32.1 |
|
Certification by the Chief
Executive Officer of the Registrant pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
Exhibit 32.1
|
32.2 |
|
Certification by the Chief
Financial Officer of the Registrant pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
Exhibit 32.2
|
E-10
EXHIBIT INDEX
24.2 |
|
Power of Attorney for James D. Purvis. |
|
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. |