Attached files
file | filename |
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EX-23.1 - EX-23.1 - METLIFE INC | y84740exv23w1.htm |
EX-99.3 - EX-99.3 - METLIFE INC | y84740exv99w3.htm |
EX-99.1 - EX-99.1 - METLIFE INC | y84740exv99w1.htm |
8-K - FORM 8-K - METLIFE INC | y84740e8vk.htm |
Exhibit
99.2
Table of
Contents
American
Life Insurance Company and the Transferred Subsidiaries
Index to
the Condensed Combined Financial Statements
Page | ||||
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 |
F-1
Table of Contents
American
Life Insurance Company and the Transferred
Subsidiaries
(In millions)
May 31, |
November 30, |
|||||||
2010 | 2009 | |||||||
Assets:
|
||||||||
Investments:
|
||||||||
Fixed maturity securities:
|
||||||||
Bonds available for sale, at fair value (amortized cost:
2010 $70,769; 2009 $71,552)
|
$ | 71,555 | $ | 71,469 | ||||
Bonds held for trading, at fair value
|
7,255 | 8,226 | ||||||
Equity securities:
|
||||||||
Equity securities available for sale, at fair value (cost:
2010 $573; 2009 $400)
|
614 | 510 | ||||||
Equity securities held for trading, at fair value
|
5,299 | 5,729 | ||||||
Mortgage and other loans receivable, net of allowances
(2010 $56; 2009 $57)
|
1,133 | 1,230 | ||||||
Policy loans
|
1,459 | 1,555 | ||||||
Short-term investments (portion measured at fair value:
2010 $1,456; 2009 $2,689)
|
5,397 | 6,869 | ||||||
Other invested assets (portion measured at fair value:
2010 $561; 2009 $698)
|
1,987 | 2,246 | ||||||
Total investments
|
94,699 | 97,834 | ||||||
Cash
|
742 | 546 | ||||||
Accrued investment income
|
996 | 984 | ||||||
Premiums due and other insurance balances receivable, net of
allowances
|
1,198 | 1,123 | ||||||
Deferred policy acquisition costs
|
10,438 | 10,988 | ||||||
Other assets
|
1,324 | 1,271 | ||||||
Separate account assets
|
244 | 297 | ||||||
Total assets
|
$ | 109,641 | $ | 113,043 | ||||
Liabilities:
|
||||||||
Policyholder Funds:
|
||||||||
Future policy benefits for life and accident and health
insurance contracts
|
$ | 24,712 | $ | 25,986 | ||||
Policyholder contract deposits (portion measured at fair value:
2010 $1,606; 2009 $1,792)
|
62,447 | 65,222 | ||||||
Other policyholder funds
|
4,317 | 3,972 | ||||||
Total policyholder liabilities
|
91,476 | 95,180 | ||||||
Current and deferred federal and foreign income taxes
|
1,340 | 1,153 | ||||||
Long-term debt
|
1,092 | 1,112 | ||||||
Other liabilities (portion measured at fair value:
2010 $87; 2009 $11)
|
2,031 | 2,316 | ||||||
Separate account liabilities
|
244 | 297 | ||||||
Total liabilities
|
96,183 | 100,058 | ||||||
Commitments, contingencies and guarantees (see Note 7)
|
| | ||||||
Redeemable non-controlling interest in partially owned
consolidated subsidiaries
|
129 | 164 | ||||||
Controlling shareholders equity:
|
||||||||
Shareholders net investment
|
12,211 | 11,566 | ||||||
Accumulated other comprehensive income
|
972 | 1,105 | ||||||
Total controlling shareholders equity
|
13,183 | 12,671 | ||||||
Non-controlling interest
|
146 | 150 | ||||||
Total equity
|
13,329 | 12,821 | ||||||
Total liabilities and equity
|
$ | 109,641 | $ | 113,043 | ||||
(See
Note 9 for details of related party balances)
See accompanying notes to these
Condensed Combined Financial Statements
F-2
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
(In millions)
For the Six |
||||||||
Months Ended |
||||||||
May 31, | ||||||||
2010 | 2009 | |||||||
Revenues:
|
||||||||
Premium income and other considerations
|
$ | 5,042 | $ | 4,822 | ||||
Net investment income
|
2,117 | 2,192 | ||||||
Net realized capital losses:
|
||||||||
Other-than-temporary
impairments on available for sale securities, net
|
(274 | ) | (274 | ) | ||||
Portion of
other-than-temporary
impairments on available for sale fixed maturity securities
recognized in Accumulated other comprehensive income
|
(4 | ) | (6 | ) | ||||
Net
other-than-temporary
impairments on available for sale fixed maturity securities
recognized in net income
|
(278 | ) | (280 | ) | ||||
Other realized capital gains (losses)
|
148 | (430 | ) | |||||
Total net realized capital losses
|
(130 | ) | (710 | ) | ||||
Other income
|
4 | 4 | ||||||
Total revenues
|
$ | 7,033 | $ | 6,308 | ||||
Benefits, claims and expenses:
|
||||||||
Policyholder benefits and claims incurred
|
4,006 | 4,034 | ||||||
Policy acquisition and other expenses
|
1,927 | 1,988 | ||||||
Interest expense
|
25 | 4 | ||||||
Total benefits, claims and expenses
|
$ | 5,958 | 6,026 | |||||
Income from operations before income tax expense
|
1,075 | 282 | ||||||
Income tax expense
|
381 | 74 | ||||||
Net income
|
694 | 208 | ||||||
Less: Net income attributable to non-controlling interest
|
22 | 14 | ||||||
Net income attributable to controlling shareholders
interest
|
$ | 672 | $ | 194 | ||||
(See
Note 9 for details of income and expenses from related
parties.)
See accompanying notes to these
Condensed Combined Financial Statements.
F-3
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
(In millions)
Accumulated Other Comprehensive |
||||||||||||||||||||||||||||
Income (Loss) | ||||||||||||||||||||||||||||
Net |
Foreign |
Defined |
Total |
|||||||||||||||||||||||||
Unrealized |
Currency |
Benefit |
Controlling |
|||||||||||||||||||||||||
Shareholders |
Investment |
Translation |
Plans |
Shareholders |
Non-Controlling |
Total |
||||||||||||||||||||||
Net Investment | Gains (Losses) | Adjustments | Adjustment | Equity | Interest | Equity | ||||||||||||||||||||||
Balance at December 1, 2009
|
$ | 11,566 | $ | (205 | ) | $ | 1,421 | $ | (111 | ) | $ | 12,671 | $ | 150 | $ | 12,821 | ||||||||||||
Dividends paid
|
| | | | | (7 | ) | (7 | ) | |||||||||||||||||||
Other changes, net of income tax
|
(27 | ) | | | | (27 | ) | (7 | ) | (34 | ) | |||||||||||||||||
Comprehensive income:
|
||||||||||||||||||||||||||||
Net income*
|
672 | | | | 672 | 19 | 691 | |||||||||||||||||||||
Other comprehensive income (loss):
|
||||||||||||||||||||||||||||
Unrealized investment gains (losses), net of related offsets and
income tax
|
| 554 | | | 554 | (9 | ) | 545 | ||||||||||||||||||||
Foreign currency translation adjustments, net of income tax
|
| | (689 | ) | | (689 | ) | | (689 | ) | ||||||||||||||||||
Defined benefit plans adjustment, net of income tax
|
| | | 2 | 2 | | 2 | |||||||||||||||||||||
Other comprehensive loss
|
(133 | ) | (9 | ) | (142 | ) | ||||||||||||||||||||||
Comprehensive income
|
539 | 10 | 549 | |||||||||||||||||||||||||
Balance at May 31, 2010
|
$ | 12,211 | $ | 349 | $ | 732 | $ | (109 | ) | $ | 13,183 | $ | 146 | $ | 13,329 | |||||||||||||
* | Net income presented excludes losses of redeemable non-controlling interests of $3 million. |
See accompanying notes to these
Condensed Combined Financial Statements.
F-4
Table of Contents
American
Life Insurance Company and the Transferred
Subsidiaries
(In millions)
For the Six Months |
||||||||
Ended May 31 | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities:
|
||||||||
Net cash provided by operating activities
|
$ | 1,449 | $ | 726 | ||||
Cash flows from investing activities:
|
||||||||
Proceeds from (payments for):
|
||||||||
Sales of fixed maturity securities available for sale
|
3,099 | 1,387 | ||||||
Maturities of fixed maturity securities available for sale
|
1,502 | 1,662 | ||||||
Sales of equity securities available for sale
|
178 | 107 | ||||||
Sales of trading securities
|
1,144 | 1,419 | ||||||
Sales or distributions of other invested assets
|
220 | 152 | ||||||
Payments received on mortgage and other loans receivable
|
260 | 532 | ||||||
Purchases of fixed maturity securities available for sale
|
(7,085 | ) | (7,252 | ) | ||||
Purchases of equity securities available for sale
|
(380 | ) | (82 | ) | ||||
Purchases of trading securities
|
(873 | ) | (765 | ) | ||||
Purchases of other invested assets
|
(147 | ) | (154 | ) | ||||
Other trading activities, net
|
260 | 59 | ||||||
Mortgage and other loans receivable issued
|
(269 | ) | (261 | ) | ||||
Change in securities lending invested collateral
|
274 | 1,327 | ||||||
Net additions to real estate, fixed assets, and other assets
|
(61 | ) | (35 | ) | ||||
Net change in short-term investments
|
732 | 1,874 | ||||||
Net change in derivative assets and liabilities
|
131 | 19 | ||||||
Net cash used in investing activities
|
(1,015 | ) | (11 | ) | ||||
Cash flows from financing activities:
|
||||||||
Proceeds from (payments for):
|
||||||||
Policyholder contract deposits
|
4,410 | 6,093 | ||||||
Policyholder contract withdrawals
|
(4,322 | ) | (9,270 | ) | ||||
Issuance of long term debt
|
5 | 300 | ||||||
Repayments on long term debt
|
(33 | ) | | |||||
Change in securities lending payable
|
(248 | ) | (1,280 | ) | ||||
Disbursements to noncontrolling interest
|
(7 | ) | (5 | ) | ||||
Cash dividends paid to controlling shareholder
|
| (190 | ) | |||||
Other, net
|
| 3 | ||||||
Net cash used in financing activities
|
(195 | ) | (4,349 | ) | ||||
Effect of exchange rate changes on cash
|
(43 | ) | 27 | |||||
Change in cash
|
196 | (3,607 | ) | |||||
Cash at beginning of period
|
546 | 4,210 | ||||||
Cash at end of period
|
$ | 742 | $ | 603 | ||||
Supplementary disclosure of cash flow information:
|
||||||||
Non-cash financing activities:
|
||||||||
Amounts credited to policyholder accounts included in financing
activities
|
$ | 1,332 | $ | 3,641 | ||||
Non-cash settlement of securities lending payable
|
| 111 |
See accompanying notes to these
Condensed Combined Financial Statements.
F-5
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Index of Notes to the Condensed Combined Financial Statements (Unaudited)
Index of Notes to the Condensed Combined Financial Statements (Unaudited)
F-6
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements (Unaudited)
1. | Description of Business and Basis of Presentation |
These condensed combined financial statements comprise the
financial position and operating results of the managed
insurance businesses of American Life Insurance Company
(ALICO) and Delaware American Life Insurance Company
(DELAM), along with their consolidated subsidiaries
(hereinafter referred to as the Company or
American Life Insurance Company and the Transferred
Subsidiaries). The fiscal second quarter of ALICO ends May
31 and the fiscal second quarter of DELAM ends June 30. For
purposes of these condensed combined financial statements and
accompanying notes, all financial data as of and for the six
months ended May 31, includes the financial position and
operating results of DELAM as of and for the six months ending
June 30. The effects to these condensed combined financial
statements and accompanying notes by including DELAM using the
six months ended June 30 are not material. Unless otherwise
indicated, all references in these condensed combined financial
statements and accompanying notes represent the Companys
financial position as of May 31, 2010 and November 30,
2009, and its results of operations for the six months ended
May 31, 2010 and 2009.
The condensed combined financial statements also include certain
international life insurance businesses that have been managed
by the Company but were previously legally owned by American
International Group, Inc. (AIG or the
Parent) or other AIG subsidiaries. These
combinations have been accounted for as reorganizations of
entities under common control and all prior financial statements
presented have been adjusted so as to reflect the Companys
financial position and results of operations as if the purchased
and contributed businesses were always a part of the Company.
Consolidated subsidiaries include those entities in which the
Company has a controlling financial interest, either through a
majority voting interest or as the primary beneficiary of a
variable interest entity. (See Note 5 for further
information on the Companys consolidated variable interest
entities.)
Effective November 30, 2009, in connection with an AIG
restructuring plan, AIG contributed all of the outstanding
common shares of ALICO to a special purpose vehicle, ALICO
Holdings, LLC (ALICO Holdings) in exchange for all
common and preferred membership interests in ALICO Holdings.
Additionally, AIG transferred the preferred membership interests
in ALICO Holdings to the Federal Reserve Bank of New York
(FRBNY) in satisfaction of $9.0 billion in
outstanding obligations to the FRBNYs credit facility
provided to AIG. AIG holds all outstanding common interests of
ALICO Holdings.
On March 7, 2010, AIG and ALICO Holdings entered into a
definitive agreement for the sale of the Company to MetLife,
Inc. (MetLife) for approximately $15.5 billion, including
$6.8 billion in cash and the remainder in equity securities
of MetLife, subject to closing adjustments. The cash portion of
the proceeds from this sale will be used to reduce the
liquidation preference of the preferred membership interests
held by the FRBNY in the special purpose vehicle ALICO Holdings.
The transaction is expected to close in 2010 and is subject to
certain regulatory approvals and other customary closing
conditions.
Prior to closing, AIG is required to complete certain
transactions that affect the Company as described below.
| Settle all related party long term debt obligations between the Company and AIG and its affiliates. | |
| Settle all uncollateralized derivative positions between the Company and AIG Financial Products. | |
| Settle certain intercompany balance receivable and payable positions between the Company and AIG and its affiliates. | |
| Terminate certain reinsurance agreements. | |
| Terminate the foreign exchange indemnity agreement between ALICO and AIG. | |
| Sell the Companys interest in certain affiliated investments if instructed to do so by MetLife. |
Managements current view is that the aforementioned
transactions, considered as a whole, are not expected to have a
material impact on the financial condition of the Company.
F-7
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
These condensed combined financial statements do not include all
disclosures required by accounting principles generally accepted
in the United States of America (GAAP) for complete combined
financial statements and should be read in conjunction with the
combined financial statements and the related notes as of and
for the year ended November 30, 2009. Accordingly, certain
information and footnote disclosures normally included in
financial statements prepared in accordance with GAAP have been
condensed or omitted. The results of operations for the interim
periods should not be considered indicative of the results to be
expected for the full year. In the opinion of Management, these
condensed combined financial statements contain the normal
recurring adjustments necessary for fair statement of the
results presented herein. All significant intercompany accounts
and transactions have been eliminated.
The Company has evaluated transactions for consideration as
subsequent events through July 29, 2010. No subsequent
events have occurred.
2. | Summary of Significant Accounting Policies |
Use of
Estimates
The preparation of financial statements in conformity with GAAP
requires Management to make estimates and assumptions that
affect the reported amounts of certain assets and liabilities,
the disclosure of contingent assets and liabilities at the date
of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods.
The Company considers its most critical accounting estimates to
be those with respect to items considered by Management in:
| estimating future policy benefits for life and accident and health insurance contracts, | |
| determining estimated gross profits for investment-oriented products, | |
| assessing the recoverability of deferred policy acquisition costs (DAC), | |
| evaluating other-than-temporary impairments in the valuation of investments, | |
| estimating the fair value measurements of certain assets and liabilities, and | |
| estimating income taxes, including the recoverability of deferred income tax assets. |
These accounting estimates require the use of assumptions about
matters, some of which are highly uncertain at the time of
estimation. To the extent actual experience differs from the
assumptions used, the Companys consolidated financial
condition, results of operations and cash flows could be
materially affected.
Adoption
of Recent Accounting Standards:
The Company adopted the following accounting standards during
the six month period ended May 31, 2010:
Accounting
for Transfers of Financial Assets
In June 2009, the FASB issued an accounting standard addressing
transfer of financial assets that removes the concept of a
qualifying special-purpose entity (QSPE) from the FASB
Accounting Standards Codification and removes the exception from
applying the consolidation rules to QSPEs. The new standard is
effective for the Companys interim and annual periods
beginning December 1, 2009. The Company adopted the
standard in the six month interim period ending May 31,
2010. The adoption of the accounting standard did not have a
material effect on the Companys combined financial
condition, results of operations, or cash flows.
Consolidation
of Variable Interest Entities
In June 2009, the FASB issued an accounting standard that amends
the rules addressing consolidation of variable interest entities
with an approach focused on identifying which enterprise has the
power to direct the
F-8
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
activities of a variable interest entity that most significantly
affect the entitys economic performance and has
(1) the obligation to absorb losses of the entity or
(2) the right to receive benefits from the entity. The new
standard also requires enhanced financial reporting by
enterprises involved with variable-interest entities. The new
standard became effective for all of the Companys interim
and annual periods beginning December 1, 2009. In February
2010, the FASB issued an update to the aforementioned accounting
standard that defers the revised consolidation rules for
variable interest entities with attributes of, or similar to, an
investment company or money market fund. The primary effect of
this deferral for ALICO is that the Company will continue to
apply the consolidation rules in effect before the amended
guidance discussed above for its interests in eligible entities,
such as certain mutual funds. The adoption of the accounting
standard did not have a material effect on the Companys
combined financial condition, results of operations, or cash
flows. (See Note 5, Variable Interest Entities.)
Improving
Disclosures about Fair Value Measurements
In January 2010, the FASB issued an accounting standard that
amends the requirements for fair value measurement disclosures.
This standard requires additional fair value measurement
disclosures including the amount of and reasons for transfers in
and out of Level 1 and Level 2 fair value
measurements. It also changes the requirement to disclose
purchases, sales, issuances, and settlements in the
reconciliation of recurring Level 3 fair value measurements
to a gross basis rather than a net basis. In addition, the
standard clarifies that the level of disaggregation required for
existing fair value disclosures should be provided for each
class of assets and liabilities. Also, disclosures about inputs
and valuation techniques, as well as changes to those inputs and
valuation techniques from previous periods, should be disclosed
for Level 2 and Level 3 fair value measurements on an
interim and annual basis. The new standard became effective for
all of the Companys interim and annual periods beginning
after December 15, 2009, except for the disclosures about
purchases, sales, issuances, and settlements in the roll forward
of activity in the recurring Level 3 fair value
measurements, which are effective for fiscal years beginning
after December 15, 2010, and interim periods within those
fiscal years. The adoption of the accounting standard did not
have a material effect on the Companys combined financial
condition, results of operations, or cash flows, but did result
in additional disclosure in Footnote 3 of the Condensed Combined
Financial Statements.
3. | Fair Value Measurements |
Fair
Value Measurements on a Recurring Basis
The Company measures at fair value on a recurring basis,
financial instruments in its trading and available for sale
securities portfolios, derivative assets and liabilities,
securities lending invested collateral, non-traded equity
investments, certain private limited partnerships, certain hedge
funds included in Other invested assets, certain Short-term
investments, separate and variable account assets and certain
Policyholder contract deposits. The fair value of a financial
instrument is the amount that the Company believes would be
received at a sale of an asset or paid to transfer a liability
in an orderly transaction between willing, able and
knowledgeable market participants at the measurement date.
The degree of judgment used in measuring the fair value of
financial instruments generally correlates with the level of
pricing observability. Financial instruments with quoted prices
in active markets generally have more pricing observability and
thus require less judgment in measuring fair value. Conversely,
financial instruments traded in
other-than-active
markets or that do not have quoted prices have less
observability and are measured at fair value using valuation
models or other pricing techniques that require more judgment.
An active market is one in which transactions for the particular
asset or liability being valued occurs with sufficient frequency
and volume to provide pricing information on an ongoing basis.
An
other-than-active
market is one in which there are few transactions, prices are
not current, price quotations vary substantially either over
time or among market makers, or in which little information is
released publicly for the particular asset or liability being
valued. Pricing observability is affected by a number of
factors, including the type of financial instrument, whether the
financial instrument is new to the market and not yet
established, characteristics specific to the transaction and
overall general market conditions.
F-9
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
Fair
Value Hierarchy
Assets and liabilities recorded at fair value in the condensed
Combined Balance Sheet are measured and classified in a
hierarchy for disclosure purposes consisting of three
levels based on the observability of inputs
available in the marketplace as discussed below:
| Level 1: Fair value measurements that are quoted prices (unadjusted) in active markets that the Company has the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets. The Company does not adjust the quoted price for such instruments. Assets and liabilities measured at fair value on a recurring basis and classified as Level 1 include actively traded listed common stocks and derivative contracts, separate account assets and most mutual funds. | |
| Level 2: Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Assets and liabilities measured at fair value on a recurring basis and classified as Level 2 generally include certain government and agency securities, most investment-grade and high-yield corporate bonds, certain residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS) and collateralized debt obligations/asset backed securities (CDO/ABS), certain listed equities, state, municipal and provincial obligations, hybrid securities, mutual fund and certain derivative contracts. | |
| Level 3: Fair value measurements based on valuation techniques that use significant inputs that are unobservable. These measurements include circumstances in which there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Companys assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment. In making the assessment, the Company considers factors specific to the asset or liability. Assets and liabilities measured at fair value on a recurring basis and classified as Level 3 include certain RMBS, CMBS and CDO/ABS, corporate debt, certain government and agency securities, certain derivative contracts, policyholder contract deposits carried at fair value, certain mutual fund, private equity and real estate fund investments, and direct private equity investments. The Companys non-financial instrument assets that are measured at fair value on a non-recurring basis generally are classified as Level 3. |
Valuation
Methodologies
The following is a description of the valuation inputs and
methodologies used for instruments carried at fair value on a
recurring basis:
Incorporation
of Credit Risk in Fair Value Measurements
A key component to the fair value measurement is the
incorporation of nonperformance risk, including credit risk. The
credit risk of the counterparty is incorporated into the
calculation of the credit risk adjustment for fair value
measurements in an asset position. Fair values for fixed
maturity securities based on observable market prices for
identical or similar instruments implicitly incorporate
counterparty credit risk. The Companys own credit risk is
incorporated into the calculation of the credit risk adjustment
for fair value measurements in a liability position. The Company
also uses the assumptions that a market participant would use in
pricing the asset or liability. This includes a market
participants assumptions about the risk of default and how
that risk will be valued.
Generally, the current credit exposure of the Companys
derivative contracts is limited to the net positive estimated
fair value of derivative contracts at the reporting date after
taking into consideration the existence of netting agreements
and any collateral received. The Company manages its credit risk
related to
over-the-counter
derivatives by entering into transactions with creditworthy
counterparties.
F-10
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
Fixed
Maturity Securities Trading and Available for
Sale
The Company maximizes the use of observable inputs and minimizes
the use of unobservable inputs when measuring fair value.
Whenever available, the Company obtains quoted prices in active
markets for identical assets at the balance sheet date to
measure at fair value fixed maturity securities in its trading
and available for sale portfolios. Market price data generally
is obtained from dealer markets.
The Company estimates the fair value of fixed maturity
securities not traded in active markets by referring to traded
securities with similar attributes, using dealer quotations, a
matrix pricing methodology, discounted cash flow analyses
and/or
internal valuation models. This methodology considers such
factors as the issuers industry, the securitys
rating and tenor, its coupon rate, its position in the capital
structure of the issuer, yield curves, credit curves, prepayment
rates and other relevant factors. For certain fixed maturity
instruments (for example, private placements) that are not
traded in active markets or that are subject to transfer
restrictions, valuations are adjusted to reflect illiquidity
and/or
non-transferability, and such adjustments generally are based on
available market evidence. In the absence of such evidence,
Managements best estimate is used.
Equity
Securities Traded in Active Markets Trading and
Available for Sale
The Company maximizes the use of observable inputs and minimizes
the use of unobservable inputs when measuring fair value.
Whenever available, the Company obtains quoted prices in active
markets for identical assets at the balance sheet date to
measure at fair value marketable equity securities in its
trading and available for sale portfolios. Market price data
generally is obtained from exchange or dealer markets.
Hedge
Funds, Private Equity Funds and Other Investment
Partnerships Other Invested Assets
The Company initially estimates the fair value of investments in
certain hedge funds, private equity funds and other investment
partnerships by reference to the transaction price.
Subsequently, the Company generally obtains the fair value of
these investments from net asset value information provided by
the general partner or manager of the investments, the financial
statements of which are generally audited annually. The Company
considers observable market data and performs diligence
procedures in validating the appropriateness of using the net
asset value as a fair value measurement.
Separate
Account Assets
Separate account assets are composed primarily of registered and
unregistered open-end mutual funds that generally trade daily
and are measured at fair value in the manner discussed above for
equity securities traded in active markets.
Freestanding
Derivatives
Derivative assets and liabilities can be exchange-traded or
traded
over-the-counter
(OTC). The Company generally values exchange-traded derivatives
using quoted prices in active markets for identical derivatives
at the balance sheet date.
OTC derivatives are valued using market transactions and other
market evidence whenever possible, including market-based inputs
to models, model calibration to market clearing transactions,
broker or dealer quotations or alternative pricing sources with
reasonable levels of price transparency. When models are used,
the selection of a particular model to value an OTC derivative
depends on the contractual terms of, and specific risks inherent
in the instrument, as well as the availability of pricing
information in the market. The Company generally uses similar
models to value similar instruments. Valuation models require a
variety of inputs, including contractual terms, market prices
and rates, yield curves, credit curves, measures of volatility,
prepayment rates and correlations of such inputs. For OTC
derivatives that trade in liquid markets, such as generic
forwards, swaps and options, model inputs can generally be
corroborated by observable market data by correlation or other
means, and model selection does not involve significant
Management judgment.
F-11
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
Certain OTC derivatives trade in less liquid markets with
limited pricing information, and the determination of fair value
for these derivatives is inherently more difficult. When the
Company does not have corroborating market evidence to support
significant model inputs and cannot verify the model to market
transactions, the transaction price is initially used as the
best estimate of fair value. Accordingly, when a pricing model
is used to value such an instrument, the model is adjusted so
the model value at inception equals the transaction price.
Subsequent to initial recognition, the Company updates valuation
inputs when corroborated by evidence such as similar market
transactions, third party pricing services
and/or
broker or dealer quotations, or other empirical market data.
When appropriate, valuations are adjusted for various factors
such as liquidity, bid/offer spreads and credit considerations.
Such adjustments are generally based on available market
evidence. In the absence of such evidence, Managements
best estimate is used.
Embedded
Derivatives
The Company purchases and issues financial instruments and
products that contain embedded derivative instruments. When it
is determined that (1) the embedded derivative possesses
economic characteristics that are not clearly and closely
related to the economic characteristics of the host contract,
and (2) a separate instrument with the same terms would
qualify as a derivative instrument, the embedded derivative is
bifurcated from the host for measurement purposes. The embedded
derivative, which is reported with the host instrument in the
Combined Balance Sheets, is carried at fair value with changes
in fair value reported in Net realized capital gains and losses
or Policyholder benefits and claims incurred, as appropriate.
Policyholder
Contract Deposits
Policyholder contract deposits accounted for at fair value are
measured using an earnings approach by taking into consideration
the following factors:
| current policyholder account values and related surrender charges; | |
| the present value of estimated future cash inflows (policy fees) and outflows (benefits and maintenance expenses) associated with the product using risk neutral valuations, incorporating expectations about policyholder behavior, market returns and other factors; and | |
| a risk margin that market participants would require for a market return and the uncertainty inherent in the model inputs. |
The change in fair value of these policyholder contract
deposits, including any premiums or fees collected, is recorded
as Policyholder benefits and claims incurred in the Condensed
Combined Statements of Income. Policy fees and premiums
collected are not recorded separately as revenue.
F-12
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
Assets
and Liabilities Measured at Fair Value on a Recurring
Basis
The following tables present information about assets and
liabilities measured at fair value on a recurring basis and
indicates the level of the fair value measurement based on the
levels of the inputs used as of May 31, 2010 and
November 30, 2009:
Counterparty |
Cash |
|||||||||||||||||||||||
As of May 31, 2010 | Level 1 | Level 2 | Level 3 | Netting (a) | Collateral (b) | Total | ||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Assets:
|
||||||||||||||||||||||||
Bonds available for sale:
|
||||||||||||||||||||||||
U.S. government and government sponsored entities
|
$ | 22 | $ | 2,306 | $ | | $ | | $ | | $ | 2,328 | ||||||||||||
Obligations of states, municipalities and political subdivisions
|
| 1,990 | 3 | | | 1,993 | ||||||||||||||||||
Non-U.S.
governments
|
9 | 20,540 | 784 | | | 21,333 | ||||||||||||||||||
Corporate debt
|
| 38,638 | 52 | | | 38,690 | ||||||||||||||||||
Mortgage-backed, asset-backed and collateralized:
|
||||||||||||||||||||||||
RMBS
|
| 1,038 | 63 | | | 1,101 | ||||||||||||||||||
CMBS
|
| 3,943 | 1,807 | | | 5,750 | ||||||||||||||||||
CDO/ABS
|
| 69 | 291 | | | 360 | ||||||||||||||||||
Total mortgage-backed, asset-backed and collateralized
|
| 5,050 | 2,161 | | | 7,211 | ||||||||||||||||||
Total bonds available for sale
|
31 | 68,524 | 3,000 | | | 71,555 | ||||||||||||||||||
Bonds held for trading:
|
||||||||||||||||||||||||
U.S. government and government sponsored entities
|
| 288 | | | | 288 | ||||||||||||||||||
Obligations of states, municipalities and political subdivisions
|
| 2,718 | | | | 2,718 | ||||||||||||||||||
Non-U.S.
governments
|
| 81 | | | | 81 | ||||||||||||||||||
Corporate debt
|
| 3,162 | | | | 3,162 | ||||||||||||||||||
Mortgage-backed, asset-backed and collateralized:
|
||||||||||||||||||||||||
RMBS
|
| 747 | 19 | | | 766 | ||||||||||||||||||
CMBS
|
| 109 | 101 | | | 210 | ||||||||||||||||||
CDO/ABS
|
| 8 | 22 | | | 30 | ||||||||||||||||||
Total mortgage-backed, asset-backed and collateralized
|
| 864 | 142 | | | 1,006 | ||||||||||||||||||
Total bonds held for trading
|
| 7,113 | 142 | | | 7,255 | ||||||||||||||||||
Equity securities available for sale:
|
||||||||||||||||||||||||
Common stocks
|
119 | 6 | | | | 125 | ||||||||||||||||||
Preferred stocks
|
| 42 | | | | 42 | ||||||||||||||||||
Mutual funds
|
404 | 43 | | | | 447 | ||||||||||||||||||
Total equity securities available for sale
|
523 | 91 | | | | 614 | ||||||||||||||||||
Equity securities held for trading:
|
||||||||||||||||||||||||
Common stocks
|
2,660 | | | | | 2.660 | ||||||||||||||||||
Mutual funds
|
2,464 | 158 | 17 | | | 2,639 | ||||||||||||||||||
Total equity securities held for trading
|
5,124 | 158 | 17 | | | 5,299 | ||||||||||||||||||
Other invested assets
|
73 | 294 | 300 | (65 | ) | (42 | ) | 560 | ||||||||||||||||
Short-term investments
|
2 | 1,454 | | | | 1,456 | ||||||||||||||||||
Separate account assets
|
98 | 145 | 1 | | | 244 | ||||||||||||||||||
Total assets
|
$ | 5,851 | $ | 77,779 | $ | 3,460 | $ | (65 | ) | $ | (42 | ) | $ | 86,983 | ||||||||||
Liabilities:
|
||||||||||||||||||||||||
Policyholder contract deposits
|
$ | | $ | | $ | 1,606 | $ | | $ | | $ | 1,606 | ||||||||||||
Other liabilities
|
3 | 62 | 8 | (65 | ) | 79 | 87 | |||||||||||||||||
Total liabilities
|
$ | 3 | $ | 62 | $ | 1,614 | $ | (65 | ) | $ | 79 | $ | 1,693 | |||||||||||
(a) | Represents netting of derivative exposures covered by a qualifying master netting agreement. | |
(b) | Represents offset for cash collateral posted (received). |
F-13
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
Counterparty |
Cash |
|||||||||||||||||||||||
As of November 30, 2009 | Level 1 | Level 2 | Level 3 | Netting(a) | Collateral (b) | Total | ||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Assets:
|
||||||||||||||||||||||||
Bonds available for sale:
|
||||||||||||||||||||||||
U.S. government and government sponsored entities
|
$ | | $ | 1,342 | $ | | $ | | $ | | $ | 1,342 | ||||||||||||
Obligations of states, municipalities and political subdivisions
|
| 1,880 | | | | 1,880 | ||||||||||||||||||
Non-U.S.
governments
|
| 20,145 | 740 | | | 20,885 | ||||||||||||||||||
Corporate debt
|
| 40,454 | 33 | | | 40,487 | ||||||||||||||||||
Mortgage-backed, asset-backed and collateralized:
|
||||||||||||||||||||||||
RMBS
|
| 1,034 | 34 | | | 1,068 | ||||||||||||||||||
CMBS
|
| 4,193 | 1,255 | | | 5,448 | ||||||||||||||||||
CDO/ABS
|
| 84 | 275 | | | 359 | ||||||||||||||||||
Total mortgage-backed, asset-backed and collateralized
|
| 5,311 | 1,564 | | | 6,875 | ||||||||||||||||||
Total bonds available for sale
|
| 69,132 | 2,337 | | | 71,469 | ||||||||||||||||||
Bonds held for trading:
|
||||||||||||||||||||||||
U.S. government and government sponsored entities
|
| 144 | 16 | | | 160 | ||||||||||||||||||
Obligations of states, municipalities and political subdivisions
|
| 3,117 | 6 | | | 3,123 | ||||||||||||||||||
Non-U.S.
governments
|
| 81 | | | | 81 | ||||||||||||||||||
Corporate debt
|
| 3,745 | 2 | | | 3,747 | ||||||||||||||||||
Mortgage-backed, asset-backed and collateralized:
|
||||||||||||||||||||||||
RMBS
|
| 884 | | | | 884 | ||||||||||||||||||
CMBS
|
| 124 | 98 | | | 222 | ||||||||||||||||||
CDO/ABS
|
| 9 | | | | 9 | ||||||||||||||||||
Total mortgage-backed, asset-backed and collateralized
|
| 1,017 | 98 | | | 1,115 | ||||||||||||||||||
Total bonds held for trading
|
| 8,104 | 122 | | | 8,226 | ||||||||||||||||||
Equity securities available for sale:
|
||||||||||||||||||||||||
Common stocks
|
196 | 5 | | | | 201 | ||||||||||||||||||
Preferred stocks
|
| 45 | | | | 45 | ||||||||||||||||||
Mutual funds
|
245 | 19 | | | | 264 | ||||||||||||||||||
Total equity securities available for sale
|
441 | 69 | | | | 510 | ||||||||||||||||||
Equity securities held for trading:
|
||||||||||||||||||||||||
Common stocks
|
3,087 | | | | | 3,087 | ||||||||||||||||||
Mutual funds
|
2,562 | 73 | 7 | | | 2,642 | ||||||||||||||||||
Total equity securities held for trading
|
5,649 | 73 | 7 | | | 5,729 | ||||||||||||||||||
Other invested assets
|
89 | 438 | 335 | (64 | ) | (100 | ) | 698 | ||||||||||||||||
Short-term investments
|
178 | 2,511 | | | | 2,689 | ||||||||||||||||||
Separate account assets
|
85 | 211 | 1 | | | 297 | ||||||||||||||||||
Total assets
|
$ | 6,442 | $ | 80,538 | $ | 2,802 | $ | (64 | ) | $ | (100 | ) | $ | 89,618 | ||||||||||
Liabilities:
|
||||||||||||||||||||||||
Policyholder contract deposits
|
$ | | $ | | $ | 1,792 | $ | | $ | | $ | 1,792 | ||||||||||||
Other liabilities
|
1 | 56 | 10 | (64 | ) | 8 | 11 | |||||||||||||||||
Total liabilities
|
$ | 1 | $ | 56 | $ | 1,802 | $ | (64 | ) | $ | 8 | $ | 1,803 | |||||||||||
(a) | Represents netting of derivative exposures covered by a qualifying master netting agreement. | |
(b) | Represents offset for cash collateral posted (received). |
F-14
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
Changes
in Level 3 recurring fair value
measurements
The following tables present the changes for the six months
ended May 31, 2010 and 2009 in Level 3 assets and
liabilities measured at fair value on a recurring basis, and the
realized and unrealized gains (losses) recorded in income during
those periods related to the Level 3 assets and liabilities
that remained as of May 31, 2010 and 2009:
Net |
Changes in |
|||||||||||||||||||||||||||
Realized |
Realized and |
|||||||||||||||||||||||||||
and |
Unrealized |
|||||||||||||||||||||||||||
Unrealized |
Gains |
|||||||||||||||||||||||||||
Gains |
Accumulated |
Purchases, |
(Losses) on |
|||||||||||||||||||||||||
Balance |
(Losses) |
Other |
Sales and |
Balance |
Instruments |
|||||||||||||||||||||||
Beginning of |
Included in |
Comprehensive |
Issuances, and |
End of |
Held at |
|||||||||||||||||||||||
For the Six Months Ended May 31, 2010 | Period | Income (a) | Income | Settlements-Net | Transfers (b) | Period | Period End | |||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Assets:
|
||||||||||||||||||||||||||||
Bonds available for sale:
|
||||||||||||||||||||||||||||
U.S. government and government sponsored entities
|
$ | | $ | | $ | | $ | 3 | $ | | $ | 3 | $ | | ||||||||||||||
Non-U.S.
governments
|
740 | | (62 | ) | 48 | 58 | 784 | | ||||||||||||||||||||
Corporate debt
|
33 | | (2 | ) | | 21 | 52 | | ||||||||||||||||||||
Mortgage-backed, asset-backed and collateralized:
|
||||||||||||||||||||||||||||
RMBS
|
34 | (4 | ) | 3 | (1 | ) | 31 | 63 | | |||||||||||||||||||
CMBS
|
1,255 | (143 | ) | 265 | (16 | ) | 446 | 1,807 | | |||||||||||||||||||
CDO/ABS
|
275 | 2 | 27 | (11 | ) | (2 | ) | 291 | | |||||||||||||||||||
Total mortgage-backed, asset-backed and collateralized:
|
1,564 | (145 | ) | 295 | (28 | ) | 475 | 2,161 | | |||||||||||||||||||
Total bonds available for sale
|
2,337 | (145 | ) | 231 | 23 | 554 | 3,000 | | ||||||||||||||||||||
Bonds held for trading
|
||||||||||||||||||||||||||||
U.S. government and government sponsored entities
|
16 | | | (16 | ) | | | | ||||||||||||||||||||
Obligations of states, municipalities and political subdivisions
|
6 | (1 | ) | | (5 | ) | | | | |||||||||||||||||||
Corporate debt
|
2 | | | | (2 | ) | | | ||||||||||||||||||||
Mortgage-backed, asset-backed and collateralized:
|
||||||||||||||||||||||||||||
RMBS
|
| | | | 19 | 19 | 1 | |||||||||||||||||||||
CMBS
|
98 | 8 | | (5 | ) | | 101 | 20 | ||||||||||||||||||||
CDO/ABS
|
| 5 | | 17 | | 22 | 5 | |||||||||||||||||||||
Total mortgage-backed, asset- backed and collateralized
|
98 | 13 | | 12 | 19 | 142 | 26 | |||||||||||||||||||||
Total bonds held for trading
|
122 | 12 | | (9 | ) | 17 | 142 | 26 | ||||||||||||||||||||
Equity securities held for trading:
|
||||||||||||||||||||||||||||
Mutual funds
|
7 | (1 | ) | | | 11 | 17 | | ||||||||||||||||||||
Total equity securities held for trading
|
7 | (1 | ) | | | 11 | 17 | | ||||||||||||||||||||
Other invested assets
|
335 | (58 | ) | 4 | 2 | 17 | 300 | | ||||||||||||||||||||
Separate account assets
|
1 | | | | | 1 | | |||||||||||||||||||||
Total assets
|
$ | 2,802 | $ | (192 | ) | $ | 235 | $ | 16 | $ | 599 | $ | 3,460 | $ | 26 | |||||||||||||
Liabilities:
|
||||||||||||||||||||||||||||
Policyholder contract deposits
|
$ | 1,792 | $ | (92 | ) | $ | (82 | ) | $ | (12 | ) | $ | | $ | 1,606 | $ | (59 | ) | ||||||||||
Other liabilities
|
10 | (1 | ) | (1 | ) | | | 8 | (1 | ) | ||||||||||||||||||
Total liabilities
|
$ | 1,802 | $ | (93 | ) | $ | (83 | ) | $ | (12 | ) | $ | | $ | 1,614 | $ | (60 | ) | ||||||||||
F-15
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
Net |
Changes in |
|||||||||||||||||||||||||||
Realized |
Realized and |
|||||||||||||||||||||||||||
and |
Unrealized |
|||||||||||||||||||||||||||
Unrealized |
Gains |
|||||||||||||||||||||||||||
Gains |
Accumulated |
Purchases, |
(Losses) on |
|||||||||||||||||||||||||
Balance |
(Losses) |
Other |
Sales and |
Balance |
Instruments |
|||||||||||||||||||||||
Beginning of |
Included in |
Comprehensive |
Issuances, and |
End of |
Held at |
|||||||||||||||||||||||
For the Six Months Ended May 31, 2009 | Period | Income (a) | Income | Settlements-Net | Transfers (b) | Period | Period End | |||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Assets:
|
||||||||||||||||||||||||||||
Total bonds available for sale
|
$ | 1,105 | $ | 197 | $ | (186 | ) | $ | 45 | $ | 430 | $ | 1,591 | $ | | |||||||||||||
Bonds held for trading
|
17 | (8 | ) | | | 5 | 14 | (8 | ) | |||||||||||||||||||
Equity securities held for trading
|
2 | | | | 14 | 16 | | |||||||||||||||||||||
Other invested assets
|
270 | (61 | ) | 4 | 10 | 8 | 231 | | ||||||||||||||||||||
Separate account assets
|
1 | | | | (1 | ) | | | ||||||||||||||||||||
Total assets
|
$ | 1,395 | $ | 128 | $ | (182 | ) | $ | 55 | $ | 456 | $ | 1,852 | $ | (8 | ) | ||||||||||||
Liabilities:
|
||||||||||||||||||||||||||||
Policyholder contract deposits
|
$ | 1,554 | $ | (66 | ) | $ | 183 | $ | (7 | ) | $ | (3 | ) | $ | 1,661 | $ | (20 | ) | ||||||||||
Other liabilities
|
21 | 3 | (9 | ) | | | 15 | (8 | ) | |||||||||||||||||||
Total liabilities
|
$ | 1,575 | $ | (63 | ) | $ | 174 | $ | (7 | ) | $ | (3 | ) | $ | 1,676 | $ | (28 | ) | ||||||||||
(a) | Net realized and unrealized gains and losses related to Level 3 items shown above are reported in the Condensed Combined Statements of Income primarily as follows: |
Major Category of Assets/Liabilities | Condensed Combined Statements of Income Line Items | |||
Bonds available for sale
|
| Net realized capital losses | ||
Bonds held for trading
|
| Net investment income | ||
Other invested assets
|
| Net realized capital losses | ||
Policyholder contract deposits
|
| Policyholder benefits and claims incurred | ||
| Net realized capital losses | |||
Other liabilities
|
| Net realized capital losses |
(b) | Transfers are comprised of gross transfers into Level 3 assets of $678 million and $468 million and gross transfers out of Level 3 assets of $79 million and $12 million for the six months ended May 31, 2010 and 2009, respectively. The Companys policy is to record transfers of assets and liabilities into or out of Level 3 at their fair values as of the end of each reporting period, consistent with the date of the determination of fair value. As a result, the Net realized and unrealized gains (losses) included in Income or Other comprehensive income and as shown in the table above exclude $29 million and $9 million of net gains related to assets and liabilities transferred into Level 3 during the six months ended May 31, 2010 and 2009, respectively, and exclude $2 million of net gains and $2 million of net losses related to assets and liabilities transferred out of Level 3 during the six months ended May 31, 2010 and 2009, respectively. |
Both observable and unobservable inputs may be used to determine
the fair values of positions classified in Level 3 in the
tables above. As a result, the unrealized gains (losses) on
instruments held as of May 31, 2010 and 2009, may include
changes in fair value that were attributable to both observable
(e.g. changes in market interest rates) and unobservable inputs
(e.g. changes in unobservable long-dated volatilities).
The Companys policy is to transfer assets and liabilities
into Level 3 when a significant input cannot be
corroborated with market observable data. This may include:
circumstances in which market activity has dramatically
decreased and transparency to underlying inputs cannot be
observed, current prices are not available and substantial price
variances in quotations among market participants exist.
In certain cases, the inputs used to measure the fair value may
fall into different levels of the fair value hierarchy. In such
cases, the level in the fair value hierarchy within which the
fair value measurement in its entirety
F-16
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
falls is determined based on the lowest level input that is
significant to the fair value measurement. The Companys
assessment of the significance of a particular input to the fair
value measurement in its entirety requires judgment. In making
the assessment, factors specific to the asset or liability are
considered.
During the six months ended May 31, 2010, the Company
transferred into Level 3 approximately $678 million of
assets, consisting of certain ABS, CMBS, RMBS and non-US
government bonds as well as private placement corporate debt. A
majority of the transfers into Level 3 related to
investments in CMBS and was due to a decrease in market
transparency and downward credit migration in these securities.
Assets are transferred out of Level 3 when circumstances
change such that significant inputs can be corroborated with
market observable data. This may be due to a significant
increase in market activity for the asset, a specific event, one
or more significant input(s) becoming observable, or when a
long-term interest rate significant to a valuation becomes
short-term and thus observable. During the six months ended
May 31, 2010, approximately $79 million of assets were
transferred out of Level 3. These transfers out of
Level 3 were primarily related to investments in certain
ABS and RMBS and investments in private placement corporate
debt. Transfers out of Level 3 for ABS and RMBS investments
were primarily due to increased usage of pricing from valuation
service providers that were reflective of market activity, where
previously an internally adjusted price had been used. Transfers
out of Level 3 for private placement corporate debt were
primarily the result of using observable pricing information or
a third party pricing quote that appropriately reflects the fair
value of those securities, without the need for adjustment based
on the Companys own assumptions regarding the
characteristics of a specific security or the current liquidity
in the market.
Transfers
of Level 1 and Level 2 Assets and
Liabilities
During the six months ended May 31, 2010, investments with
fair values of $1 billion and $88 million were
transferred out of Level 1 and into Level 2 and out of
Level 2 and into Level 1, respectively. These
transfers in the aggregate represent less than one percent of
total assets and 14 percent of total equity at May 31,
2010.
Investments
in certain entities carried at fair value using net asset value
per share
The following table includes information related to investments
in certain other invested assets, including private equity
funds, hedge funds and other alternative investments that
calculate net asset value per share (or its equivalent). For
these investments, which are measured at fair value on a
recurring or non-recurring basis at May 31, 2010 and
November 30, 2009, the net asset value per share is used as
a practical expedient for fair value as of:
May 31, 2010 | November 30, 2009 | |||||||||||||||
Fair Value Using |
Unfunded |
Fair Value Using |
Unfunded |
|||||||||||||
Net Asset Value | Commitments | Net Asset Value | Commitments | |||||||||||||
(In millions) | ||||||||||||||||
Investment Category
|
||||||||||||||||
Private Equity Funds
|
||||||||||||||||
Venture Capital (a)
|
$ | 7 | $ | 3 | $ | 11 | $ | 4 | ||||||||
Total Private Equity Funds
|
7 | 3 | 11 | 4 | ||||||||||||
Global Real Estate Funds (b)
|
7 | 12 | 8 | 14 | ||||||||||||
Total
|
$ | 14 | $ | 15 | $ | 19 | $ | 18 | ||||||||
(a) | Includes investments in funds which invest in early-stage, high-potential, and growth companies in the interest of generating a return through an eventual realization event such as an initial public offering or sale of the company. | |
(b) | Includes investments in funds which invest in domestic and foreign commercial real estate. |
F-17
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
Private equity fund investments included above are not
redeemable during the lives of the funds, and have expected
remaining lives that extend in some cases to 10 years.
Seven percent of such funds have expected remaining lives of
less than three years, and 93 percent have expected
remaining lives between seven and 10 years. Expected lives
are based upon legal maturity, which can be extended at the
general managers discretion, typically in one year
increments.
Global real estate fund investments included above are not
redeemable during the lives of the funds, and have expected
remaining lives that extend from three to seven years.
Fair
Value Measurements on a Non-Recurring Basis
The fair value of certain assets are measured on a non-recurring
basis, generally quarterly, annually, or when events or changes
in circumstances indicate that the carrying amount of the assets
may not be recoverable. These assets include cost and
equity-method investments, collateral securing foreclosed loans
and real estate and other fixed assets and goodwill. A variety
of techniques are used to measure the fair value of these assets
when appropriate, as described below:
| Cost and Equity Method Investments: When it is determined that the carrying value of these assets may not be recoverable, the assets are recorded at fair value with the loss recognized in earnings. In such cases, the fair values of these assets are measured using the techniques discussed in Valuation Methodologies above for Other invested assets. | |
| Collateral Securing Foreclosed Loans and Real Estate and Other Fixed Assets: When collateral is collected in connection with foreclosed loans, the estimate of fair value is generally based on the price that would be received in a current transaction to sell the asset by itself, by reference to observable transactions for similar assets. | |
| Goodwill: Goodwill is tested annually for impairment or more frequently whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. When it is determined that goodwill may be impaired, techniques are used including market-based earnings multiples of peer companies, discounted expected future cash flows, appraisals, or, in the case of reporting units being considered for sale, third-party indications of fair value of the reporting unit, if available, to determine the amount of any impairment. | |
| Long-Lived Assets: Long-lived assets are tested for impairment whenever events or changes in circumstances indicate the carrying amount of a long-lived asset may not be recoverable. The fair values of long-lived assets are measured based on an in-use premise that considers the same factors used to estimate the fair value of its real estate and other fixed assets under an in-use premise. |
Fair
Value Option
The Company elected to apply the fair value option to certain
single premium variable life products in Japan classified within
policyholder contract deposits in the Condensed Combined Balance
Sheets. For the six months ended May 31, 2010 and 2009, the
Company recorded a gain of $151 million and
$66 million, respectively, in Policyholder benefit and
claims incurred. The Company elected the fair value option for
these liabilities to more closely align its accounting with the
economics of its transactions at the time of election. The fair
value option election allowed the Company to better match the
inherent market risks associated with this business in an
efficient and effective manner through the use of derivative
instruments entered into with AIG. During the six months ended
May 31, 2010, the Company unwound all the affiliated
derivatives described above, in conjunction with AIGs
restructuring and divestiture plans and currently has no
specific plan to manage the inherent market risks of this
business through the use of derivative instruments.
F-18
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
Fair
Value Information about Financial Instruments Not Measured at
Fair Value
Information regarding the estimation of fair value for financial
instruments not carried at fair value (excluding insurance
contracts and lease contracts) is discussed below:
| Mortgage and other loans receivable: Fair values of loans on real estate and collateral loans were estimated for disclosure purposes using discounted cash flow calculations based upon discount rates that Management believes market participants would use in determining the price they would pay for such assets. For certain loans, current incremental lending rates for similar type loans are used as the discount rate, as it is believed that this rate approximates the rates market participants would use. | |
| Policy loans: The fair values of policy loans were not estimated as the Company believes it would have to expend excessive costs for the benefits derived and such loans are fully collateralized. | |
| Cash, short-term investments, other assets and other liabilities: The carrying values of these assets and liabilities approximate fair values because of the relatively short period of time between origination and expected realization. | |
| Policyholder contract deposits associated with investment-type contracts: Fair values for Policyholder contract deposits associated with investment-type contracts not accounted for at fair value were estimated for disclosure purposes using discounted cash flow calculations based upon interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. Where no similar contracts are being offered, the discount rate is the appropriate tenor swap rates (if available) or current risk-free interest rates consistent with the currency in which the cash flows are denominated. | |
| Long-term debt: Fair values of these obligations were determined for disclosure purposes by reference to quoted market prices, where available and appropriate, or discounted cash flow calculations based upon current market-observable implicit-credit-spread rates for similar types of borrowings with maturities consistent with those remaining for the debt being valued. |
The following table presents the carrying value and estimated
fair value of financial instruments as of:
May 31, 2010 | November 30, 2009 | |||||||||||||||
Carrying |
Fair |
Carrying |
Fair |
|||||||||||||
Value | Value | Value | Value | |||||||||||||
(In millions) | ||||||||||||||||
Assets:
|
||||||||||||||||
Fixed maturities
|
$ | 78,810 | $ | 78,810 | $ | 79,695 | $ | 79,695 | ||||||||
Equity securities
|
5,913 | 5,913 | 6,239 | 6,239 | ||||||||||||
Mortgage and other loans receivable
|
2,592 | 2,531 | 2,548 | 2,552 | ||||||||||||
Other invested assets
|
1,285 | 1,285 | 1,501 | 1,501 | ||||||||||||
Short-term investments
|
5,397 | 5,397 | 6,869 | 6,869 | ||||||||||||
Cash
|
742 | 742 | 546 | 546 | ||||||||||||
Other assets
|
154 | 154 | 105 | 105 | ||||||||||||
Liabilities:
|
||||||||||||||||
Policyholder contract deposits associated with investment-type
contracts
|
$ | 47,272 | $ | 47,566 | $ | 50,330 | $ | 50,092 | ||||||||
Other liabilities
|
318 | 318 | 75 | 75 | ||||||||||||
Long-term debt
|
1,092 | 1,096 | 1,112 | 1,158 |
F-19
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
4. | Investments |
(a) Securities
Available for Sale
The following table presents the amortized cost or cost and
fair value of available for sale securities:
Other-than- |
||||||||||||||||||||
Amortized |
Gross |
Gross |
Temporary |
|||||||||||||||||
Cost or |
Unrealized |
Unrealized |
Fair |
Impairments in |
||||||||||||||||
As of May 31, 2010 | Cost | Gains | Losses (a) | Value | AOCI (b) | |||||||||||||||
(In millions) | ||||||||||||||||||||
Bonds available for sale:
|
||||||||||||||||||||
U.S. government and government sponsored entities
|
$ | 2,226 | $ | 103 | $ | 1 | $ | 2,328 | $ | | ||||||||||
Obligations of states, municipalities, and political subdivisions
|
1,933 | 84 | 24 | 1,993 | | |||||||||||||||
Non-U.S.
governments
|
21,025 | 759 | 451 | 21,333 | | |||||||||||||||
Corporate debt
|
37,375 | 1,909 | 594 | 38,690 | 4 | |||||||||||||||
Mortgage-backed, asset-backed and collateralized:
|
||||||||||||||||||||
RMBS
|
1,159 | 50 | 108 | 1,101 | (4 | ) | ||||||||||||||
CMBS
|
6,656 | 110 | 1,016 | 5,750 | (34 | ) | ||||||||||||||
CDO/ABS
|
395 | 14 | 49 | 360 | 9 | |||||||||||||||
Total mortgage-backed, asset-backed and collateralized:
|
8,210 | 174 | 1,173 | 7,211 | (29 | ) | ||||||||||||||
Total bonds available for sale
|
70,769 | 3,029 | 2,243 | 71,555 | (25 | ) | ||||||||||||||
Equity securities available for sale:
|
||||||||||||||||||||
Common stocks
|
107 | 21 | 3 | 125 | | |||||||||||||||
Preferred stocks
|
42 | 1 | 1 | 42 | | |||||||||||||||
Mutual funds
|
424 | 40 | 17 | 447 | | |||||||||||||||
Total equity securities available for sale
|
573 | 62 | 21 | 614 | | |||||||||||||||
Total
|
$ | 71,342 | $ | 3,091 | $ | 2,264 | $ | 72,169 | $ | (25 | ) | |||||||||
(a) | As of May 31, 2010, the fair value of bonds available for sale held that were below investment grade or not rated totaled $3.1 billion. | |
(b) | Represents the amount of non-credit related losses recognized in Accumulated other comprehensive loss, which, starting on March 1, 2009, were not included in earnings. Amount includes unrealized gains and losses on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date. |
F-20
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
The following table presents the amortized cost or cost and
fair value of available for sale securities:
Other-Than- |
||||||||||||||||||||
Amortized |
Gross |
Gross |
Temporary |
|||||||||||||||||
Cost or |
Unrealized |
Unrealized |
Fair |
Impairments in |
||||||||||||||||
As of November 30, 2009 | Cost | Gains | Losses (a) | Value | AOCI (b) | |||||||||||||||
(In millions) | ||||||||||||||||||||
Bonds available for sale:
|
||||||||||||||||||||
U.S. government and government sponsored entities
|
$ | 1,272 | $ | 70 | $ | | $ | 1,342 | $ | | ||||||||||
Obligations of states, municipalities, and political subdivisions
|
1,833 | 69 | 22 | 1,880 | | |||||||||||||||
Non-U.S.
governments
|
20,500 | 682 | 296 | 20,886 | | |||||||||||||||
Corporate debt
|
39,398 | 2,046 | 957 | 40,487 | 6 | |||||||||||||||
Mortgage-backed, asset-backed and collateralized:
|
||||||||||||||||||||
RMBS
|
1,151 | 60 | 143 | 1,068 | (19 | ) | ||||||||||||||
CMBS
|
6,965 | 50 | 1,567 | 5,448 | (26 | ) | ||||||||||||||
CDO/ABS
|
433 | 9 | 84 | 358 | 6 | |||||||||||||||
Total mortgage-backed, asset-backed and collateralized:
|
8,549 | 119 | 1,794 | 6,874 | (39 | ) | ||||||||||||||
Total bonds available for sale
|
71,552 | 2,986 | 3,069 | 71,469 | (33 | ) | ||||||||||||||
Equity securities available for sale:
|
||||||||||||||||||||
Common stocks
|
100 | 107 | 6 | 201 | | |||||||||||||||
Preferred stocks
|
47 | 1 | 3 | 45 | | |||||||||||||||
Mutual funds
|
253 | 25 | 14 | 264 | | |||||||||||||||
Total equity securities available for sale
|
400 | 133 | 23 | 510 | | |||||||||||||||
Total
|
$ | 71,952 | $ | 3,119 | $ | 3,092 | $ | 71,979 | $ | (33 | ) | |||||||||
(a) | As of November 30, 2009, the fair value of bonds available for sale that were below investment grade or not rated totaled $1.7 billion. | |
(b) | Represents the amount of non-credit related losses recognized in Accumulated other comprehensive loss, which, starting on March 1, 2009, were not included in earnings. Amount includes unrealized gains and losses on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date. |
F-21
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
The following tables summarize the fair value and gross
unrealized losses on available for sale securities, aggregated
by major investment category and length of time that individual
securities have been in a continuous unrealized loss
position:
12 Months or Less | More than 12 Months | Total | ||||||||||||||||||||||
Fair |
Unrealized |
Fair |
Unrealized |
Fair |
Unrealized |
|||||||||||||||||||
As of May 31, 2010 | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Bonds available for sale:
|
||||||||||||||||||||||||
U.S. government and government sponsored entities
|
$ | 56 | $ | 1 | $ | | $ | | $ | 56 | $ | 1 | ||||||||||||
Obligations of states, municipalities, and political subdivisions
|
204 | 6 | 147 | 18 | 351 | 24 | ||||||||||||||||||
Non-U.S.
governments
|
2,381 | 206 | 1,445 | 245 | 3,826 | 451 | ||||||||||||||||||
Corporate debt
|
2,567 | 78 | 3,712 | 516 | 6,279 | 594 | ||||||||||||||||||
Mortgage-backed, asset-backed and collateralized:
|
||||||||||||||||||||||||
RMBS
|
132 | 9 | 295 | 99 | 427 | 108 | ||||||||||||||||||
CMBS
|
838 | 140 | 2,398 | 876 | 3,236 | 1,016 | ||||||||||||||||||
CDO/ABS
|
71 | 17 | 155 | 32 | 226 | 49 | ||||||||||||||||||
Total mortgage-backed, asset-backed and collateralized:
|
1,041 | 166 | 2,848 | 1,007 | 3,889 | 1,173 | ||||||||||||||||||
Total bonds available for sale
|
6,249 | 457 | 8,152 | 1,786 | 14,401 | 2,243 | ||||||||||||||||||
Equity securities available for sale:
|
||||||||||||||||||||||||
Common stocks
|
29 | 3 | | | 29 | 3 | ||||||||||||||||||
Preferred stocks
|
30 | 1 | | | 30 | 1 | ||||||||||||||||||
Mutual funds
|
153 | 17 | | | 153 | 17 | ||||||||||||||||||
Total equity securities available for sale
|
212 | 21 | | | 212 | 21 | ||||||||||||||||||
Total
|
$ | 6,461 | $ | 478 | $ | 8,152 | $ | 1,786 | $ | 14,613 | $ | 2,264 | ||||||||||||
F-22
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
12 Months or Less | More than 12 Months | Total | ||||||||||||||||||||||
Fair |
Unrealized |
Fair |
Unrealized |
Fair |
Unrealized |
|||||||||||||||||||
As of November 30, 2009 | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Bonds available for sale:
|
||||||||||||||||||||||||
Obligations of states, municipalities, and political subdivisions
|
$ | 97 | $ | 5 | $ | 124 | $ | 17 | $ | 221 | $ | 22 | ||||||||||||
Non-U.S.
governments
|
1,530 | 44 | 1,721 | 252 | 3,251 | 296 | ||||||||||||||||||
Corporate debt
|
1,801 | 89 | 5,681 | 868 | 7,482 | 957 | ||||||||||||||||||
Mortgage-backed, asset-backed and collateralized:
|
||||||||||||||||||||||||
RMBS
|
97 | 16 | 298 | 127 | 395 | 143 | ||||||||||||||||||
CMBS
|
1,882 | 682 | 1,918 | 885 | 3,800 | 1,567 | ||||||||||||||||||
CDO/ABS
|
83 | 20 | 149 | 64 | 232 | 84 | ||||||||||||||||||
Total mortgage-backed, asset-backed and collateralized:
|
2,062 | 718 | 2,365 | 1,076 | 4,427 | 1,794 | ||||||||||||||||||
Total bonds available for sale
|
5,490 | 856 | 9,891 | 2,213 | 15,381 | 3,069 | ||||||||||||||||||
Equity securities available for sale:
|
||||||||||||||||||||||||
Common stocks
|
36 | 6 | | | 36 | 6 | ||||||||||||||||||
Preferred stocks
|
33 | 3 | | | 33 | 3 | ||||||||||||||||||
Mutual funds
|
80 | 14 | | | 80 | 14 | ||||||||||||||||||
Total equity securities available for sale
|
149 | 23 | | | 149 | 23 | ||||||||||||||||||
Total
|
$ | 5,639 | $ | 879 | $ | 9,891 | $ | 2,213 | $ | 15,530 | $ | 3,092 | ||||||||||||
The Company reviews and evaluates the investment performance of
its portfolio. As of May 31, 2010, the Company held 3,210
and 54 of individual fixed maturity and equity securities,
respectively, which were in an unrealized loss position, of
which 1,730 individual securities were in a continuous
unrealized loss position for longer than twelve months. As of
November 30, 2009, the Company held 3,177 and 85 individual
fixed maturity and equity securities, respectively, which were
in an unrealized loss position, of which 1,949 individual
securities were in a continuous unrealized loss position for
longer than twelve months.
The Company did not recognize in earnings the unrealized losses
on these fixed maturity securities as of May 31, 2010 and
November 30, 2009, because Management neither intends to
sell the securities nor does it believe that it is more likely
than not that it will be required to sell these securities
before recovery of their amortized cost basis. Furthermore,
Management expects to recover the entire amortized cost basis of
these securities. In performing this evaluation, Management
considered the recovery periods for securities in previous
periods of broad market declines. For fixed maturity securities
with significant declines, Management performed fundamental
credit analysis on a
security-by-security
basis, which included consideration of credit enhancements,
expected defaults on underlying collateral, review of relevant
industry analyst reports and forecasts and other available
market data.
F-23
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
Contractual
Maturities
The following tables present the amortized cost and fair
value of fixed maturity securities available for sale by
contractual maturity:
Fixed Maturity |
||||||||||||||||
Securities in |
||||||||||||||||
Total Fixed Maturity |
an Unrealized |
|||||||||||||||
Securities | Loss Position | |||||||||||||||
Amortized |
Fair |
Amortized |
Fair |
|||||||||||||
As of May 31, 2010 | Cost | Value | Cost | Value | ||||||||||||
(In millions) | ||||||||||||||||
Due in one year or less
|
$ | 4,878 | $ | 4,996 | $ | 319 | $ | 305 | ||||||||
Due after one year through five years
|
21,156 | 21,754 | 4,050 | 3,618 | ||||||||||||
Due after five years through ten years
|
24,970 | 25,871 | 4,378 | 4,048 | ||||||||||||
Due after ten years
|
11,554 | 11,722 | 2,834 | 2,540 | ||||||||||||
Mortgage-backed, asset-backed and collateralized
|
8,211 | 7,212 | 5,063 | 3,890 | ||||||||||||
Total
|
$ | 70,769 | $ | 71,555 | $ | 16,644 | $ | 14,401 | ||||||||
Fixed Maturity |
||||||||||||||||
Securities in |
||||||||||||||||
Total Fixed Maturity |
an Unrealized |
|||||||||||||||
Securities | Loss Position | |||||||||||||||
Amortized |
Fair |
Amortized |
Fair |
|||||||||||||
As of November 30, 2009 | Cost | Value | Cost | Value | ||||||||||||
(In millions) | ||||||||||||||||
Due in one year or less
|
$ | 4,069 | $ | 4,169 | $ | 365 | $ | 343 | ||||||||
Due after one year through five years
|
22,866 | 23,345 | 3,998 | 3,405 | ||||||||||||
Due after five years through ten years
|
25,128 | 25,924 | 4,546 | 4,099 | ||||||||||||
Due after ten years
|
10,940 | 11,157 | 3,336 | 3,124 | ||||||||||||
Mortgage-backed, asset-backed and collateralized
|
8,549 | 6,874 | 6,204 | 4,410 | ||||||||||||
Total
|
$ | 71,552 | $ | 71,469 | $ | 18,449 | $ | 15,381 | ||||||||
Actual maturities may differ from contractual maturities because
certain borrowers have the right to call or prepay certain
obligations with or without call or prepayment penalties.
F-24
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
(b) | Net Investment Income |
The following table presents the components of Net investment
income:
For the Six |
||||||||
Months Ended |
||||||||
May 31, | ||||||||
2010 | 2009 | |||||||
(In millions) | ||||||||
Fixed maturities, including short-term investments (a)
|
$ | 1,651 | $ | 1,450 | ||||
Equity securities (a)
|
15 | 4 | ||||||
Interest on mortgage and other loans
|
62 | 65 | ||||||
Other invested assets (a)
|
||||||||
Partnerships
|
(27 | ) | (29 | ) | ||||
Hedge funds
|
17 | 19 | ||||||
Real estate
|
40 | 37 | ||||||
Other investments
|
34 | 40 | ||||||
Total investment income before policyholder investment income
|
1,792 | 1,586 | ||||||
Policyholder investment income and trading account gains, net of
fees (b)
|
385 | 659 | ||||||
Total investment income
|
2,177 | 2,245 | ||||||
Investment expenses
|
(60 | ) | (53 | ) | ||||
Net investment income
|
$ | 2,117 | $ | 2,192 | ||||
(a) | Amounts exclude net investment income from assets backing separate accounts that do not qualify for separate account reporting under GAAP. | |
(b) | Policyholder investment income represents investment income from assets backing separate accounts that do not qualify for separate account reporting under GAAP. |
Net unrealized gains included in the Condensed Combined
Statements of Income from investment securities classified as
trading securities for the six months ended May 31, 2010
and 2009 were $152 million and $1.6 billion,
respectively.
F-25
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
(c) | Net Realized Capital Losses and Increase (Decrease) in Unrealized Gains (Losses) |
The following table presents the components of Net realized
capital losses and the increase (decrease) in unrealized gains
(losses) of available for sale investments:
For the Six |
||||||||
Months Ended |
||||||||
May 31, | ||||||||
2010 | 2009 | |||||||
(In millions) | ||||||||
Net realized capital gains (losses):
|
||||||||
Sales of fixed maturity securities
|
$ | 16 | $ | (17 | ) | |||
Sales of equity securities
|
112 | 13 | ||||||
Sales of real estate and other assets
|
| 3 | ||||||
Other-than-temporary
impairments:
|
||||||||
Total
other-than-temporary
impairments on available for sale securities
|
(274 | ) | (274 | ) | ||||
Portion of
other-than-temporary
impairments on available for sale securities recognized in
Accumulated other comprehensive income
|
(4 | ) | (6 | ) | ||||
Net other-than temporary impairments on available for sale
securities recognized in net income
|
(278 | ) | (280 | ) | ||||
Other-than-temporary
impairments on all other investments
|
(4 | ) | (13 | ) | ||||
Foreign exchange transactions
|
112 | (335 | ) | |||||
Derivatives
|
(81 | ) | (67 | ) | ||||
Other
|
(7 | ) | (14 | ) | ||||
Total net realized capital losses
|
$ | (130 | ) | $ | (710 | ) | ||
Increase (decrease) in unrealized gains (losses):
|
||||||||
Fixed maturities
|
$ | 867 | $ | 2,014 | ||||
Equity securities
|
(66 | ) | 19 | |||||
Other investments
|
19 | (176 | ) | |||||
Increase in unrealized gains
|
$ | 820 | $ | 1,857 | ||||
The following table presents the gross realized gains and
gross realized losses from sales of available for sale
securities:
For the Six Months Ended May 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Gross |
Gross |
Gross |
Gross |
|||||||||||||
Realized |
Realized |
Realized |
Realized |
|||||||||||||
Gains | Losses | Gains | Losses | |||||||||||||
(In millions) | ||||||||||||||||
Fixed maturities
|
$ | 58 | $ | 22 | $ | 22 | $ | 28 | ||||||||
Equity securities
|
112 | | 14 | 1 | ||||||||||||
Total
|
$ | 170 | $ | 22 | $ | 36 | $ | 29 | ||||||||
For the six months ended May 31, 2010 and 2009, the
aggregate fair value of available for sale securities sold at a
loss was $787 million and $396 million, which resulted
in a net realized capital loss of $22 million and
$28 million, respectively. The average period of time that
securities sold at a loss were trading continuously at a price
below cost or amortized cost was approximately eight months, for
both the six months ended May 31, 2010, and 2009.
F-26
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
Evaluating
Investments for
Other-Than-Temporary
Impairments
On March 1, 2009, the Company adopted prospectively a new
accounting standard addressing the evaluation of fixed maturity
securities for
other-than-temporary
impairments. These requirements have significantly altered the
Companys policies and procedures for determining
impairment charges recognized through earnings. The new standard
requires a company to recognize the credit component (a credit
impairment) of an
other-than-temporary
impairment of a fixed maturity security in earnings and the
non-credit component in Accumulated other comprehensive income
(loss) when the company does not intend to sell the security and
it is more likely than not that the company will not be required
to sell the security prior to recovery. The new standard also
changes the threshold for determining when an
other-than-temporary
impairment has occurred on a fixed maturity security with
respect to intent and ability to hold the security until
recovery and requires additional disclosures. A credit
impairment, which is recognized in earnings when it occurs, is
the difference between the amortized cost of the fixed maturity
security and the estimated present value of cash flows expected
to be collected (recovery value), as determined by Management.
The difference between fair value and amortized cost that is not
related to a credit impairment is recognized as a separate
component of Accumulated other comprehensive income (loss). Both
credit impairments and impairments recognized as a result of
intent to sell are referred to as impairment
charges. The impairment model for equity securities was
not affected by the new standard.
Fixed
Maturity Securities
Impairment
Policy Effective March 1, 2009 and
Thereafter
If the Company intends to sell a fixed maturity security, or it
is more likely than not that the Company will be required to
sell a fixed maturity security before recovery of its amortized
cost basis and the fair value of the security is below amortized
cost, an
other-than-temporary
impairment has occurred and the amortized cost is written down
to current fair value with a corresponding charge to earnings.
For all other fixed maturity securities for which a credit
impairment has occurred, the amortized cost is written down to
the estimated recovery value using previous effective yields
with a corresponding charge to earnings. Changes in fair value
compared to recovery value, if any, are charged to unrealized
appreciation (depreciation) of fixed maturity investments on
which
other-than-temporary
credit impairments were taken (a component of Accumulated other
comprehensive income (loss)).
When assessing the intent to sell a fixed maturity security, or
if it is more likely than not that the Company will be required
to sell a fixed maturity security before recovery of its
amortized cost basis, Management evaluates relevant facts and
circumstances including, but not limited to, decisions to
reposition the investment portfolio, sale of securities to meet
cash flow needs and sales of securities to capitalize on
favorable pricing.
The Company considers severe price declines and the duration of
such price declines in its assessment of potential credit
impairments. Modeled outputs are also modified for certain
securities when it is determined that price declines are
indicative of factors not comprehended by the cash flow models.
In periods subsequent to the recognition of an
other-than-temporary
impairment charge for available for sale fixed maturity
securities that were not foreign exchange related, the Company
generally prospectively accretes into earnings the difference
between the new amortized cost and the expected undiscounted
recovery value over the remaining expected holding period of the
security.
F-27
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
The following tables present a roll forward of the credit
impairments recognized in earnings for available for sale fixed
maturity securities (a):
For the Six Months Ended May 31, 2010 | ||||
(In millions) | ||||
Balance at November 30, 2009
|
$ | 262 | ||
Increases due to:
|
||||
Credit impairments on new securities subject to impairment losses
|
74 | |||
Additional credit impairments on previously impaired securities
|
56 | |||
Reductions due to:
|
||||
Credit impaired securities fully disposed of for which there was
no prior intent or requirement to sell
|
(85 | ) | ||
Accretion on securities previously impaired due to credit(b)
|
3 | |||
Foreign exchange translation adjustments
|
(7 | ) | ||
Balance at May 31, 2010
|
$ | 303 | ||
For the Three Months Ended May 31, 2009 | ||||
(In millions) | ||||
Balance at March 1, 2009
|
$ | | ||
Increases due to:
|
||||
Credit losses remaining in accumulated deficit related to the
adoption of new
other-than-temporary
impairment standard
|
202 | |||
Credit impairments on new securities subject to impairment losses
|
2 | |||
Additional credit impairments on previously impaired securities
|
8 | |||
Reductions due to:
|
||||
Credit impaired securities fully disposed of for which there was
no prior intent or requirement to sell
|
| |||
Accretion on securities previously impaired due to credit (b)
|
| |||
Foreign exchange translation adjustments
|
4 | |||
Balance at May 31, 2009
|
$ | 216 | ||
(a) | Includes structured, corporate, municipal and sovereign fixed maturity securities. | |
(b) | Represents accretion recognized due to changes in cash flows expected to be collected over the remaining expected term of the credit impaired securities as well as the accretion due to the passage of time. |
In assessing whether a credit impairment has occurred for a
structured fixed maturity security, the Company performs
evaluations of expected future cash flows. Certain critical
assumptions are made with respect to the performance of the
securities.
When estimating future cash flows for a structured fixed
maturity security (e.g. RMBS, CMBS, CDO, ABS), Management
considers historical performance of the underlying assets and
available market information as well as bond-specific structural
considerations, such as credit enhancement and priority of
payment structure of the security. In addition, the process of
estimating future cash flows includes, but is not limited to,
the following critical inputs, which vary by asset class:
| current delinquency rates; | |
| expected default rates and timing of such defaults; | |
| loss severity and timing of any such recovery; |
F-28
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
| expected prepayment speeds; and | |
| ratings of securities underlying structured products. |
For corporate, municipal and sovereign fixed maturity securities
determined to be credit impaired, Management considers the fair
value as the recovery value when available information does not
indicate that another value is more relevant or reliable. When
Management identifies information that supports a recovery value
other than the fair value, the determination of a recovery value
considers scenarios specific to the issuer and the security, and
may be based upon estimates of outcomes of corporate
restructurings, political and macro economic factors, stability
and financial strength of the issuer, the value of any secondary
sources of repayment and the disposition of assets.
Impairment
Policy Prior to March 1, 2009
Fixed
Maturity Securities
Prior to March 1, 2009, the Company assessed its ability to
hold any fixed maturity available for sale security in an
unrealized loss position to its recovery at each balance sheet
date. The decision to sell any such fixed maturity security
classified as available for sale reflected the judgment of
Management that the security sold was unlikely to provide, on a
relative value basis, as attractive a return in the future as
alternative securities entailing comparable risks. With respect
to distressed securities, the sale decision reflected
Managements judgment that the risk-adjusted ultimate
recovery was less than the value achievable on sale. In that
period, fixed maturity securities were evaluated for
other-than-temporary
impairments with respect to valuation as well as credit. After a
fixed maturity security had been identified as
other-than-temporarily
impaired, the amount of such impairment was determined as the
difference between fair value and amortized cost and the entire
amount was recorded as a charge to earnings.
Equity
Securities
The impairment model for equity securities and other cost and
equity method investments was not affected by the adoption of
the new accounting standard related to
other-than-temporary
impairments in March of 2009. The Company continues to evaluate
its available for sale equity securities, equity method and cost
method investments for impairment by considering such securities
as candidates for
other-than-temporary
impairment if they meet any of the following criteria:
| The security has traded at a significant (25 percent or more) discount to cost for an extended period of time (nine consecutive months or longer); | |
| A discrete credit event has occurred resulting in (i) the issuer defaulting on a material outstanding obligation; (ii) the issuer seeking protection from creditors under the bankruptcy laws or any similar laws intended for court supervised reorganization of insolvent enterprises; or (iii) the issuer proposing a voluntary reorganization pursuant to which creditors are asked to exchange their claims for cash or securities having a fair value substantially lower than par value of their claims; | |
| The equity securities have been in an unrealized loss position for greater than twelve months, or | |
| Management has concluded that it may not realize a full recovery on its investment, regardless of the occurrence of one of the foregoing events. |
The determination that an equity security is
other-than-temporarily
impaired requires the judgment of Management and consideration
of the fundamental condition of the issuer, its near-term
prospects and all the relevant facts and circumstances. The
above criteria also consider circumstances of a rapid and severe
market valuation decline in which Management could not
reasonably assert that the impairment period would be temporary
(severity losses).
F-29
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
(d) | Other Invested Assets |
The following table summarizes Other invested assets as
of:
May 31, |
November 30, |
|||||||
2010 | 2009 | |||||||
(In millions) | ||||||||
Alternative funds (a)
|
$ | 657 | $ | 700 | ||||
Investment real estate (b)
|
702 | 746 | ||||||
All other investments
|
628 | 800 | ||||||
Other invested assets
|
$ | 1,987 | $ | 2,246 | ||||
(a) | Includes hedge funds, private equity funds and other investment partnerships. | |
(b) | Net of accumulated depreciation of $142 million and $141 million as of May 31, 2010 and November 30, 2009 respectively. |
5. | Variable Interest Entities |
The accounting standard related to the consolidation of variable
interest entities (VIEs) provides guidance for determining when
to consolidate certain entities in which equity investors do not
have the characteristics of a controlling financial interest or
do not have sufficient equity that is at risk to allow the
entity to finance its activities without additional subordinated
financial support.
The Company enters into various arrangements in the normal
course of business and is involved with VIEs as a passive
investor in debt securities (rated and unrated) and equity
interests issued by VIEs and as a joint venture partner in an
insurance operation.
The Company generally determines whether it is the primary
beneficiary or a significant interest holder based on a
qualitative assessment of the VIE. This includes a review of the
VIEs capital structure, contractual relationships and
terms, nature of the VIEs operations and purpose, nature
of the VIEs interests issued, and the Companys and
its related parties interests in the entity that either
create or absorb variability. Both the design of the VIE and the
related risks the entity was designed to expose the variable
interest holders to are evaluated in the determination of
consolidation. As of May 31, 2010 and November 30,
2009, there was no significant off-balance sheet exposure
associated with VIEs.
For VIEs with attributes consistent with that of an investment
company or a money market fund, the primary beneficiary is the
party or group of related parties that absorbs a majority of the
expected losses of the VIE, receives the majority of the
expected residual returns of the VIE, or both.
For all other VIEs, the primary beneficiary is the entity that
has both (1) the power to direct the activities of the VIE
that most significantly affect the entitys economic
performance and (2) the obligation to absorb losses or the
right to receive benefits that could be potentially significant
to the VIE.
The Company defines a variable interest as significant relative
to the materiality of its interest in the VIE. The Company
calculates its maximum exposure to loss to be (i) the
amount invested in the debt or equity of the VIE, (ii) the
notional amount of VIE assets or liabilities where the Company
has also provided credit protection to the VIE with the VIE as
the referenced obligation, and (iii) other commitments and
guarantees to the VIE. Other interest holders in VIEs in which
the Company is the primary beneficiary and owner generally have
recourse only to the assets and cash flows of the VIEs and do
not have recourse to the Company.
F-30
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
Balance
Sheet Classification
The Companys interest in the assets and liabilities of
consolidated and unconsolidated VIEs were classified on the
Condensed Combined Balance Sheets as follows as of:
May 31, 2010 | November 30, 2009 | |||||||||||||||
Consolidated |
Unconsolidated |
Consolidated |
Unconsolidated |
|||||||||||||
VIEs | VIEs (a) | VIEs | VIEs (b) | |||||||||||||
(In millions) | ||||||||||||||||
Assets:
|
||||||||||||||||
Investments
|
$ | 7,050 | $ | 1,857 | $ | 1,983 | $ | 2,123 | ||||||||
Other asset accounts
|
121 | | 106 | | ||||||||||||
Total
|
$ | 7,171 | $ | 1,857 | $ | 2,089 | $ | 2,123 | ||||||||
Liabilities:
|
||||||||||||||||
Policyholder liabilities
|
$ | 762 | $ | | $ | 712 | $ | | ||||||||
Other liabilities(c)
|
221 | | 166 | | ||||||||||||
Total
|
$ | 983 | $ | | $ | 878 | $ | | ||||||||
(a) | Total assets owned by unconsolidated VIEs as of May 31, 2010, consisted of $12.2 billion of Investments. | |
(b) | Total assets owned by unconsolidated VIEs as of November 30, 2009, consisted of $12.0 billion of Investments and $381 million of Other assets. | |
(c) | Other liabilities include noncontrolling interest of $110 million and $111 million as of May 31, 2010 and November 30, 2009. |
F-31
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
6. | Derivatives |
The Company uses derivatives and other financial instruments as
part of its financial risk management programs and as part of
its investment operations. Derivatives are financial
arrangements among two or more parties with returns linked to or
derived from some underlying equity, debt, commodity
or other asset, liability, or foreign exchange rate or other
index, or the occurrence of a specified payment event.
Derivative payments may be based on interest rates, exchange
rates, prices of certain securities, commodities, or financial
or commodity indices, or other variables. Derivatives, with the
exception of bifurcated embedded derivatives, are reflected at
fair value in the Condensed Combined Balance Sheets in
Other invested assets and Other
liabilities. None of the derivatives has been designated
as a hedge for accounting purposes. Bifurcated embedded
derivatives are recorded with the host contract on the Condensed
Combined Balance Sheets.
The following tables present the notional amounts and fair
values of derivative instruments:
May 31, 2010 | November 30, 2009 | |||||||||||||||||||||||||||||||
Derivative |
Derivative |
Derivative |
Derivative |
|||||||||||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||
Notional |
Fair |
Notional |
Fair |
Notional |
Fair |
Notional |
Fair |
|||||||||||||||||||||||||
Amount (a) | Value | Amount (a) | Value | Amount (a) | Value | Amount (a) | Value | |||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Interest rate contracts
|
$ | 536 | $ | 89 | $ | 331 | $ | 49 | $ | 703 | $ | 94 | $ | 1,336 | $ | 53 | ||||||||||||||||
Foreign exchange contracts
|
2,386 | 236 | 1,838 | 17 | 4,374 | 367 | 302 | 2 | ||||||||||||||||||||||||
Equity contracts
|
148 | | 71 | | 209 | 3 | 65 | 1 | ||||||||||||||||||||||||
Credit contracts
|
10 | | 18 | | 10 | | 63 | 3 | ||||||||||||||||||||||||
Other contracts (b)
|
98 | 1 | 3,384 | 109 | 85 | 3 | 4,420 | 203 | ||||||||||||||||||||||||
Subtotal
|
3,178 | 326 | 5,642 | 175 | 5,381 | 467 | 6,186 | 262 | ||||||||||||||||||||||||
Counterparty netting (c)
|
| (65 | ) | (65 | ) | | (64 | ) | | (64 | ) | |||||||||||||||||||||
Cash collateral (d)
|
| (42 | ) | 79 | | (100 | ) | | 8 | |||||||||||||||||||||||
Total
|
$ | 3,178 | $ | 219 | $ | 5,642 | $ | 189 | $ | 5,381 | $ | 303 | $ | 6,186 | $ | 206 | ||||||||||||||||
(a) | Notional amount represents a standard of measurement of the volume of derivatives business. Notional amount is not a quantification of market risk or credit risk and is not recorded on the Condensed Combined Balance Sheets. Notional amounts generally represent those amounts used to calculate contractual cash flows to be exchanged and are not paid or received, except for certain contracts such as currency swaps and certain credit contracts. | |
(b) | Includes $103 million and $186 million as of May 31, 2010 and November 30, 2009, respectively, of bifurcated embedded derivatives related to Guaranteed Minimum Accumulation Value (GMAV) benefit recorded in Policyholder contract deposits and $9 million of bifurcated embedded derivatives related to a reinsurance agreement that is recorded in Other liabilities as of November 30, 2009. | |
(c) | Represents netting of derivative exposures covered by a qualifying master netting agreement. | |
(d) | Represents offset for cash collateral posted (received). |
F-32
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
The following table presents the effect of the Companys
derivative instruments in the Condensed Combined Statements of
Income:
Gains (Losses) Recognized in Earnings * | ||||||||
For the |
||||||||
Six Months |
||||||||
Ended |
||||||||
May 31, | ||||||||
2010 | 2009 | |||||||
(In millions) | ||||||||
Interest rate contracts
|
$ | 40 | $ | 26 | ||||
Foreign exchange contracts
|
(36 | ) | (113 | ) | ||||
Equity contracts
|
(19 | ) | (11 | ) | ||||
Credit contracts
|
(3 | ) | 3 | |||||
Other contracts
|
90 | 54 | ||||||
Total
|
$ | 72 | $ | (41 | ) | |||
* | For the six months ended May 31, 2010 and 2009, the Company recognized losses of $81 million and $67 million in Net realized capital losses, respectively, and income of $153 million and $26 million in Policyholder benefits and claims incurred, respectively. |
7. | Commitments, Contingencies, and Guarantees |
In the normal course of business, various commitments and
contingent liabilities are entered into or apply to the Company
and certain of its subsidiaries. In addition, the Company
guarantees various obligations of certain subsidiaries.
Although the Company cannot currently quantify its ultimate
liability for unresolved litigation and investigation matters,
including those referred to below, it is possible that such
liability could have a material adverse effect on the
Companys financial condition or its results of operations
or combined cash flows for an individual reporting period.
(a) | Litigation and Investigations |
Litigation Arising from Operations The
Company and its subsidiaries, in common with the insurance and
financial services industries in general, is subject to
litigation, including claims for punitive damages in the normal
course of business. Litigation arising from claims settlement
activities is generally considered in the establishment of the
Companys liability for Policyholder Funds. However, the
potential for increasing jury awards and settlements makes it
difficult to assess the ultimate outcome of such litigation.
Argentina
Insurance Class Action Suits
ALICO Compania de Seguros, S.A, the Companys Argentine
subsidiary, along with several banks and credit companies
providing certain insurance policies have been named as
defendants in nine cases filed by various civil associations
between February 21, 2007 and September 14, 2009. The
suits allege that the Argentine subsidiarys credit life
insurance policy fees were excessive and therefore violated the
Argentine Consumers Protection Act. The plaintiffs in
these cases generally seek reimbursement of a portion of the
premiums charged for the last three years and in five instances,
annulment of the existing policies. No specific amounts have
been claimed. The cases are in various stages of litigation,
although none has yet been decided by a court of law. No
judgments have been awarded to any of the plaintiffs in these
cases and the damages to be paid, if any, cannot be reliably
estimated at this time.
F-33
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
United
Kingdom Enhanced Fund Complaints
The Companys United Kingdom branch suspended withdrawals
from its Enhanced Fund linked to its Premier Access Bond product
on September 15, 2008, and then announced closing of that
fund as of December 14, 2008, resulting in a number of
individual complaints to the United Kingdom Financial Ombudsman
Service (FOS), an independent body set up by statute
to informally review and settle complaints between consumers and
businesses. The Company has provided information to the UK
regulator, the Financial Services Authority (FSA)
regarding the fund and the branchs actions in closing it
and to the FOS with regard to the investor complaints. The FSA
is investigating matters in connection with the suspension and
closure of the fund and the solutions offered by the branch to
customers. No lawsuits have been filed to date against the
United Kingdom branch relating to the closure of the Enhanced
Fund.
Alico
Life International Ltds Italian Internal
Fund Suspensions
Certain policyholders of certain unit-linked funds offered by
the Italian branch of Alico Life International Ltd.
(ALIL), the Irish subsidiary of the Company, have
either commenced or threatened litigation against ALILs
Italian branch as a result of the suspension of withdrawals from
and diminution in value of those funds since late 2008, alleging
damages for misrepresentation, mis-selling, improper or
inadequate disclosures and other related claims. All of the
lawsuits are in early stages of litigation.
In March 2010, ALIL learned that the public prosecutor in Milan
has opened a formal investigation into the actions of employees
of ALIL, as well as employees of ALILs major distributor,
based on a policyholders complaint.
ALIL is cooperating with the Italian and Irish regulatory
authorities, which have jurisdiction in connection with this
matter, and is in discussions to address their concerns as well
as those of the affected policyholders. The ultimate resolution
of this matter could have a material adverse effect on the
Companys combined and consolidated results of operations
or cash flows for an individual reporting period.
(b) | Commitments |
In the normal course of business, the Company enters into
commitments to invest in limited partnerships, private equities
and mutual funds and to purchase and develop real estate. These
commitments totaled $135 million as of May 31, 2010,
$14 million of which were with affiliates. As of
November 30, 2009, commitments totaled $51 million, of
which $33 million were with affiliates. These commitments
are due over the next four years.
(c) | Contingencies |
Liability
for Future policy benefits
Although the Company regularly reviews the adequacy of the
established liability for Future policy benefits, there can be
no assurance that the ultimate liability for Future policy
benefits will not develop adversely and materially exceed the
current liability for Future policy benefits. Legal expenses
incurred in connection with any contingencies are expensed as
incurred.
Japan
Policyholder Protection Commission
Japan has established a Policyholder Protection Commission as a
contingency to protect policyholders against the insolvency of
life insurance companies in Japan through assessments to
companies licensed to provide life insurance. The recorded
liability associated with the Japan Policyholder Protection
Commission assessment was $19 million and $32 million
as of May 31, 2010 and November 30, 2009, respectively.
F-34
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
Potential
IRS Withholding Claim
U.S. Internal Revenue Service Ruling
No. 2004-75
(IRS Ruling) provides that in certain cases the
income portion of a distribution received by a resident of a
foreign country from life insurance and annuity contracts issued
by a foreign branch of a U.S. life insurance company is
U.S. source income to the foreign country investor or
policyholder. A U.S. life insurance company is required to
withhold 30 percent of the income portion distributed to
the foreign resident unless it falls under a permissible
exception. Certain insurance or investment products
those with a cash value, savings or investment
elements when sold by foreign branches of
ALICOs U.S. entity, are potentially encompassed by
the IRS Ruling.
ALICO has not withheld taxes on payments by ALICOs
branches for insurance or investment products sold to customers
that may be encompassed by the IRS Ruling, based on its position
that ALICO will not be subject to the IRS Ruling due to the
80/20 Rule. Under the 80/20 Rule,
U.S. companies with foreign source income in excess of
80 percent are not subject to U.S. tax withholding
obligations for payments they make which are classified as
interest.
On March 4, 2010, ALICO entered into a closing agreement
with the Commissioner of the IRS with respect to the
U.S. withholding tax issue arising from payments by foreign
branches of a life insurance company incorporated under
U.S. law. The closing agreement provides transitional
relief under Section 7805(b) of the Code to ALICO, such
that ALICOs foreign branches will not be required to
withhold U.S. income tax on the income portion of payments
made pursuant to ALICOs life insurance and annuity
contracts (Covered Payments) under IRS Revenue
Ruling
2004-75 for
any tax periods beginning on January 1, 2005 and ending on
December 31, 2013 (the Deferral Period). The
closing agreement provides that ALICO will submit a plan to the
IRS within 90 days after the close of its sale to MetLife
(See Note 1, Sale of ALICO to MetLife, Inc.),
indicating the steps ALICO will take (on a country by country
basis) to ensure that no substantial amount of
U.S. withholding tax will arise from Covered Payments made
by ALICOs foreign branches to foreign customers after the
Deferral Period. In addition, the closing agreement requires
that such plan be updated in quarterly filings with the IRS. The
closing agreement is final and binding upon ALICO and the IRS;
provided, however, that the agreement can be reopened in the
event of malfeasance, fraud or a misrepresentation of a material
fact, and is subject to change of law risk that occurs after the
effective date of the closing agreement (with certain
exceptions). In addition, the closing agreement provides that no
legislative amendment to the 80/20 rule in Section 861(a)
(1) (A) of the Code shall shorten the Deferral Period,
regardless of when such amendment is enacted. ALICO expects that
the plan it is required to deliver to the IRS may involve the
transfer of businesses from certain of the foreign branches of
ALICO to one or more existing or newly-formed foreign affiliates
of ALICO; however, ALICO has not completed this plan. Due to
both the timing of the creation of the plan and the uncertainty
related to the plan and its execution, no reasonable estimation
of the amount of expenses related to its creation and execution
can be made at this time. Additionally, no range of amounts is
estimable due to these uncertainties. As a result of the IRS
ruling, the Company released its contingency reserve of
$37 million in the first quarter of 2010.
There can be no assurance that ALICO will achieve the plan
presented to the IRS within the required time frame of
December 31, 2013 because of regulatory approvals and other
requirements. Failure to achieve the plan timely could have a
material adverse effect on the Companys future revenues or
expenses or both.
(d) | Guarantees |
The Company had guarantees outstanding of $44 million and
$47 million supporting real estate deposit returns and
future rental payments as of May 31, 2010 and
November 30, 2009, respectively. The majority of these
guarantees expire in time periods longer than five years.
Effective July 1, 2009, the Company transferred the
insurance business and the assets and liabilities held by its
Taiwan Branch to an affiliate, American International Assurance
Company (Bermuda) Ltd., (AIA (B)). These businesses
had been historically managed by AIA (B). As part of this
business transfer, the Company and AIA
F-35
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
(B) are jointly and severally liable for all debts of the
Taiwan Branch for a period of two years from the closing date,
i.e. until July 1, 2011. Should AIA (B) fail to meet
the debt and policy obligations related to this transferred
business, the Company is legally bound to meet those
obligations. The Company believes the probability of this
occurring to be remote since the assets associated with the
transferred business adequately fund the liability obligations
as determined by local regulations.
8. | Employee Compensation and Benefits Plans |
Share-based
Employee Compensation Plans
Alico employees participate in AIG employee
awards. In December 2009, AIG introduced new
compensation awards which were granted to the Companys
employees. For the six months May 31, 2010, the Company
recorded an expense and an obligation of $13 million
related to these new awards.
Liability
Awards
In December 2009, certain highly compensated employees were
granted various share-based grants, including restricted stock
units, linked to AIGs stock, but which require cash
settlement. Cash settled awards are recorded as a liability
until the final payout is made or the award is replaced with a
stock-settled award. At the end of each reporting period, any
unsettled award or unvested Restricted Stock Unit
(RSU) is re-measured based on the change in fair
value of one share of AIG Common Stock and the liability and
expense are adjusted accordingly.
Stock
Salary
Stock salary is determined as a dollar amount through the date
that salary is earned, accrues at the same time or times as the
salary would otherwise be paid in cash and vests immediately
upon grant. Certain ALICO executive officers received Stock
salary awards in fiscal first quarter 2010, which are settled on
either the first or third anniversary of the grant in accordance
with the terms of an employees award. These stock salary
grants, issued in December 2009, were awarded retroactively to
January 1, 2009, in the form of immediately vested RSUs,
and the number of units awarded was based on the value of AIG
common stock on the grant date. The RSUs will be settled in cash
based on the value of AIG common stock on the applicable
settlement date.
Long-Term
Performance Units (LTPUs)
In May, 2010, the stock salary program was replaced by LTPUs.
Under LTPU, certain ALICO executive officers will receive cash
payments to be determined by the value of certain AIG issued
hybrid securities as well as AIG common stocks. The value of one
LTPU was set at $1,000 on the grant date and will be remeasured
until settlement.
Troubled
Asset Relief Program (TARP) RSUs and Other
Long Term Incentive Plans
TARP RSUs were granted to ALICO employees on December 28,
2009 based on achievement of objective performance metrics and,
when vested and transferable, these RSUs will be settled in
25 percent installments in proportion to AIGs
reduction of its TARP obligations. These TARP RSUs vest on the
second anniversary of the grant and are subject to
transferability restrictions for an additional year after
vesting. As a result, TARP RSUs will be proportionally
cash-settled three years from the date of grant for vested
participants provided that AIG settles at least 25 percent
of its TARP obligation.
Additionally, certain employees were awarded a fixed number of
RSUs in March 2010, for which the Company started to
record an expense and an obligation during fiscal first quarter
2010. These RSUs will be subsequently cash-settled in
March 2013 based on the value of AIG Common Stock on the
settlement date.
F-36
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
Employee
Benefits
During the six months ended May 31, 2010 and 2009, ALICO
contributed $8 million and $15 million to its
non-U.S. ALICO
sponsored defined benefit pension plans, respectively, and paid
$13 million and $14 million in direct benefit payments
to participants, respectively. Alico expects to contribute
$10 million to its
non-U.S. ALICO
sponsored defined benefit pension plans and to pay
$16 million in direct benefit payments to participants
during the remainder of fiscal year 2010. These estimates are
subject to change since contribution decisions are affected by
various factors, including ALICOs liquidity, plan asset
dispositions, market performance, and managements
discretion.
9. | Related Party Transactions |
Investments
As of May 31, 2010, and November 30, 2009, the Company
has investments in related parties of $540 million and
$725 million, respectively, which is composed of the
following:
(a) | Bonds available for sale |
The Company has securities issued by another subsidiary of AIG,
Castle Trust, which securitizes third-party airplane leases.
This investment was recorded at fair value of $127 million
as of May 31, 2010, and $106 million as of
November 30, 2009, resulting in a cumulative unrealized
loss of $30 million and $82 million as of May 31,
2010 and 2009, respectively. Interest income of $4 million
and $5 million relating to this investment was recognized
for the six month periods ended May 31, 2010 and 2009,
respectively. The Company reported Accumulated other
comprehensive income of $30 million and $7 million for
the six months ended May 31, 2010 and 2009, respectively.
(b) | Common and preferred shares available for sale |
At November 30, 2009, the Company owned
3,169,589 shares (2.3 percent) of the common stock of
AIG. This investment was recorded at fair value of
$90 million as of November 30, 2009. On March 24,
2010, the Company sold all of its AIG common shares to its
parent, AIG, for $110 million or $34.70 per share, which
was based on the volume-weighted average price over a
ten-day
business period between March 10, 2010 and March 23,
2010, as quoted by Bloomberg L.P. The Company recognized a net
realized capital gain of $108 million on the sale for the
six months ended May 31, 2010. No dividends were paid on
these shares during the six months ended May 31, 2010 and
2009.
(c) | Mortgage and other loans receivable |
The Company has a loan receivable from AIG Funding Inc., which
has an interest rate of 1.65 percent and matures on
April 16, 2013. The balance of this loan is
$165 million as of May 31, 2010 and $174 million
as of November 30, 2009.
The Company entered into a loan receivable agreement denominated
in Polish zlotys with AIG Bank Polska S.A., a subsidiary of AIG.
The principal amount outstanding on the loan as of
November 30, 2009, was $23 million and was scheduled
to mature in 2014. Annual interest rate on the loan was
7.85 percent until November 28, 2009, after which
interest rate was reset and based on the one-year Warsaw
Interbank Offered Rate (WIBOR) plus
1.15 percent until final settlement. In the fiscal quarter
ended May 31, 2010, under an early payment provision, AIG
Bank Polska S.A made a full settlement of the loan balance.
The Company entered into an agreement with an affiliate, AIG
Kabushiki Kaisha on January 1, 2007, to loan its excess
cash to AIG Kabushiki Kaisha at short-term rates tied to the
one-week Tokyo Interbank Offered Rate (TIBOR) plus
0.25 percent. The principal amount was settled in full
during the fiscal quarter ending February 28, 2010. The
principal amount outstanding on the loan as of November 30,
2009 was $29 million.
F-37
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
The Company had a loan receivable of $6 million with AIG
Global Real Estate as of November 30, 2009. This loan was
an 18-month
loan with an interest rate of 3.50 percent. The loan was
settled in full during the fiscal quarter ending
February 28, 2010.
The Company had total loans receivable of $165 million as
of May 31, 2010 and $232 million as of
November 30, 2009, as listed above. Interest income on
these loans was $2 million for each of the six month
periods ended May 31, 2010 and 2009.
(d) | Other invested assets |
(i) | Derivative Transactions |
As part of its risk management program, the Company routinely
enters into interest rate and foreign currency swaps with AIGFP,
an entity that is controlled by AIG. As part of the closing
conditions associated with the definitive agreement to sell
ALICO to MetLife, ALICO has unwound and settled all remaining
uncollateralized interest rate swaps and foreign exchange swaps
with AIGFP in May 2010. The notional amounts and fair value of
these related-party transactions, including the AIG foreign
currency indemnification discussed below, are presented in the
following table for the periods ended May 31, 2010 and
November 30, 2009.
May 31, 2010 | November 30, 2009 | |||||||||||||||||||||||||||||||
Derivative |
Derivative |
Derivative |
Derivative |
|||||||||||||||||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||||||||||||||||||
Notional |
Fair |
Notional |
Fair |
Notional |
Fair |
Notional |
Fair |
|||||||||||||||||||||||||
Amount (a) | Value | Amount (a) | Value | Amount (a) | Value | Amount (a) | Value | |||||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||||||
Interest rate contracts
|
$ | 450 | $ | 82 | $ | 285 | $ | 46 | $ | 560 | $ | 83 | $ | 1,284 | $ | 49 | ||||||||||||||||
Foreign exchange contracts
|
1,159 | 212 | | | 1,220 | 263 | 2 | | ||||||||||||||||||||||||
Subtotal
|
1,609 | 294 | 285 | 46 | 1,780 | 346 | 1,286 | 49 | ||||||||||||||||||||||||
Counterparty netting (b)
|
| (46 | ) | | (46 | ) | | (49 | ) | | (49 | ) | ||||||||||||||||||||
Cash collateral (c)
|
| (36 | ) | | | | (34 | ) | | 2 | ||||||||||||||||||||||
Total
|
$ | 1,609 | $ | 212 | $ | 285 | $ | | $ | 1,780 | $ | 263 | $ | 1,286 | $ | 2 | ||||||||||||||||
(a) | Notional amount represents a standard of measurement of the volume of derivatives business of the Company. Notional amount is not a quantification of market risk or credit risk and is not recorded on the Combined Balance Sheet. Notional amounts generally represent those amounts used to calculate contractual cash flows to be exchanged and are not paid or received, except for certain contracts such as currency swaps and certain credit contracts. | |
(b) | Represents netting of derivative exposures covered by a qualifying master netting agreement. | |
(c) | Represents offset for cash collateral posted (received). |
The Company is a party to an Indemnity Agreement with AIG, under
which AIG indemnifies the Company against foreign currency
losses on approximately 105 billion Japanese yen
(approximately 1.2 billion U.S dollars as of May 31,
2010) resulting from unfavorable exchange rate movements
against the U.S. dollar. This arrangement serves as an
economic hedge against a portfolio of U.S. dollar
denominated fixed maturity investments held by ALICOs
Japan branch. However, it has not been designated as a hedge for
accounting purposes. The fair value of this arrangement, which
has been accounted for as a derivative instrument and is
included in Foreign exchange contracts in the table above, was
an asset of $212 million as of May 31, 2010 and
$263 million as of November 30, 2009. The income
recorded by the Company for this transaction is not taxable.
F-38
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
As a result of the related party derivative transactions, the
Company recorded the following gains (losses) for the six months
ended May 31, 2010 and 2009:
Gains (Losses) Recognized in Earnings | ||||||||
For the Six Months Ended May 31, | ||||||||
2010 | 2009 | |||||||
(In millions) | ||||||||
Interest rate contracts
|
$ | 84 | $ | 25 | ||||
Foreign exchange contracts
|
(51 | ) | (39 | ) | ||||
Total
|
$ | 33 | $ | (14 | ) | |||
(ii) | Other invested assets also include investments in partially owned companies and investments in affiliated hedge funds and partnerships under the equity method of accounting. |
Related
Party Security Lending
The Company participated in a security lending program managed
by an affiliate, AIG Global Security Lending. The lending
program was terminated and all positions were settled in March
2010 and as of May 31, 2010, there were no assets or
liabilities remaining in the program. The fair value of assets
in the security lending program as of November 30, 2009,
was $305 million and the fair value of assets received as
collateral was $244 million, excluding $69 million in
letters of credit received as collateral.
There were no fees paid or payable to affiliates in 2010 or 2009
for acting as an agent in securities lending transactions.
Related
Party Reinsurance Agreements
In the ordinary course of business, ALICO places reinsurance
with other insurance companies in order to limit the potential
for losses arising from large risks and to provide additional
capacity for future growth as part of its risk management
program. A number of these reinsurance agreements are with
affiliates.
In addition to the related party reinsurance agreement, in 2004,
ALICO entered into an agreement with RGA Reinsurance Company
(RGA), a third-party reinsurer company, to reinsure certain
Single Premium Deferred Annuity policies written in Japan.
Independent of ALICO entering into this agreement, AIG entered
into an agreement with RGA to provide investment performance
guarantees with respect to the return on funds withheld by ALICO
pursuant to the reinsurance treaty between ALICO and RGA. As of
March 31, 2010, the agreement was terminated as part of the
closing conditions associated with the definitive agreement to
sell ALICO to MetLife (See Note 1, Sale of ALICO to
MetLife Inc.).
Long-term
debt
The Companys long-term debt consists primarily of
borrowings from affiliates. The Companys balance of loans
and notes payable was approximately $1.0 billion as of
May 31, 2010 and November 30, 2009. The Company
recognized related party interest expense on borrowings of
$20 million and $3 million for the six months ended
May 31, 2010 and 2009, respectively.
General
Corporate Services and Costs
The Company receives a number of services from AIG. Amounts
expensed by the Company to AIG for these services and costs were
$10 million and $13 million for the six months ended
May 31, 2010 and 2009, respectively. Additional allocated
services and costs were not and will not be reimbursed by the
Company to AIG. These
F-39
Table of Contents
American
Life Insurance Company and the Transferred Subsidiaries
Notes to
Condensed Combined Financial Statements
(Unaudited) (Continued)
unreimbursed allocated costs were $38 million and
$36 million for the six months ended May 31, 2010 and
2009, respectively. The total cost of these reimbursed and
unreimbursed general corporate services and costs totaled
$48 million and $49 million for the six months ended
May 31, 2010 and 2009, respectively.
Related
Party Services and Cost-Sharing Agreements
In addition to the general corporate services provided by the
Parent, the Company has a number of various management, service
contracts and cost-sharing agreements with other AIG
subsidiaries. For the six months ended May 31, 2010 and
2009, the Company recognized net costs of $65 million and
$101 million, respectively, from affiliates for these
services, which are included mainly in Policy acquisition and
other expenses.
Payment
of Outstanding Balances Due from Corporate Services and Related
Party Services
The Company generally settles its payables to and receivables
from related parties in cash, although in some instances
agreements might provide for right of offset against other
related obligations. As of May 31, 2010, the Company had a
net receivable of $61 million and $60 million in Other
assets as of May 31, 2010 and November 30, 2009
respectively, from transactions resulting from general corporate
services and costs and related party services and cost-sharing
agreements.
10. | Income Taxes |
The Company generates substantially all of its income from
foreign branches and subsidiaries. Income generated by branch
operations is subject to tax currently in both the foreign and
U.S. jurisdictions. Income generated by subsidiary
operations is taxed currently in the foreign jurisdiction and
taxed in the U.S. either currently if it is considered
U.S. subpart F income or in later years when
the income is distributed to the U.S. The Company records a
deferred tax liability for U.S. income tax on undistributed
income of its foreign subsidiaries when it no longer plans to
permanently reinvest the income with the subsidiary.
Actual income tax expense from operations differs from the
statutory U.S. federal amount computed by applying the
federal income tax rate due to the following:
For the Six Months Ended |
||||||||||||||||
May 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
Tax | Rate | Tax | Rate | |||||||||||||
(In millions) | ||||||||||||||||
U.S. Federal income tax expense at statutory rate
|
$ | 376 | 35.0 | % | $ | 99 | 35.0 | % | ||||||||
Adjustments:
|
||||||||||||||||
Effect of foreign operations
|
(8 | ) | (0.7 | ) | (15 | ) | (5.3 | ) | ||||||||
Indemnity agreement
|
18 | 1.6 | 14 | 5.0 | ||||||||||||
Withholding tax
|
(12 | ) | (1.1 | ) | | | ||||||||||
IRS interest allocation
|
| | (28 | ) | (9.9 | ) | ||||||||||
Other
|
7 | 0.6 | 4 | 1.4 | ||||||||||||
Actual income tax expense
|
$ | 381 | 35.4 | % | $ | 74 | 26.2 | % | ||||||||
During the six month period ended May 31, 2010, the Company
revised its estimate of the tax effects related to the AIG
restructuring and increased the tax basis in its net assets. As
a result, the Company recorded an additional deferred tax asset
of $175 million, offset by a $137 million increase in
the valuation allowance. In addition, due to certain contractual
obligations associated with AIGs sale of ALICO to MetLife,
the Company also recorded an additional $90 million
valuation allowance. All of these adjustments were recorded
directly to Shareholders net investment. The net impact of
the adjustments was a $52 million decrease to
Shareholders net investment.
F-40