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EX-31.2 - EXHIBIT 31.2 - TRANSAMERICA ADVISORS LIFE INSURANCE Codex312.htm
EX-32.1 - EXHIBIT 32.1 - TRANSAMERICA ADVISORS LIFE INSURANCE Codex321.htm
EX-32.2 - EXHIBIT 32.2 - TRANSAMERICA ADVISORS LIFE INSURANCE Codex322.htm
EX-31.1 - EXHIBIT 31.1 - TRANSAMERICA ADVISORS LIFE INSURANCE Codex311.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011

COMMISSION FILE NUMBERS 33-26322; 33-46827; 33-52254; 33-60290;

33-58303; 333-33863; 333-34192; 333-133223; 333-133225

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(Exact name of Registrant as specified in its charter)

 

ARKANSAS   91-1325756

(State or other jurisdiction

of incorporation or organization)

 

(IRS Employer

Identification No.)

4333 Edgewood Road, NE

Cedar Rapids, Iowa

52499-0001

(Address of Principal Executive Offices)

(800) 346-3677

(Registrant telephone number including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨

  

Accelerated filer ¨

   Non-accelerated filer þ    Smaller reporting company ¨
      (Do not check if a smaller reporting company)   

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No þ

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS

DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes ¨ No ¨

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

COMMON 250,000

REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.

 

 

 


PART 1. Financial Information

Item 1. Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

BALANCE SHEETS

 

000000000000 000000000000

(dollars in thousands, except share data)

         March 31,      
2011
     December 31,
2010
 
     (unaudited)      (audited)  

ASSETS

     

Investments

     

Fixed maturity available-for-sale securities, at estimated fair value (amortized cost: 2011 - $1,619,407; 2010 - $1,565,004)

     $ 1,677,131           $ 1,628,394     

Fixed maturity trading securities

     11,880           23,138     

Equity available-for-sale securities, at estimated fair value
(cost: 2011 - $27,644; 2010 - $15,202)

     26,092           12,990     

Limited partnerships

     10,071           9,687     

Mortgage loans on real estate

     59,550           62,890     

Policy loans

     814,181           827,638     

Derivative assets

     7           -         
                 

Total investments

     2,598,912           2,564,737     
                 

Cash and cash equivalents

     327,997           308,614     

Accrued investment income

     38,781           38,121     

Deferred policy acquisition costs

     29,788           31,437     

Deferred sales inducements

     6,871           7,270     

Value of business acquired

     331,954           335,051     

Goodwill

     2,800           2,800     

Federal income taxes - deferred

     3,500           4,467     

Reinsurance receivables - net

     4,645           4,158     

Affiliated short-term note receivable

     50,000           -         

Receivable for investments sold - net

     2,045           371     

Other assets

     33,675           31,635     

Separate Accounts assets

     8,224,939           8,163,032     
                 

Total Assets

     $     11,655,907           $     11,491,693     
                 

 

 

 

 

See Notes to Financial Statements

 

1


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

BALANCE SHEETS - Continued

 

00000000000000 00000000000000

(dollars in thousands, except share data)

        March 31,      
2011
    December 31,
2010
 
    (unaudited)     (audited)  

LIABILITIES AND STOCKHOLDER’S EQUITY

   

Liabilities

   

Policyholder liabilities and accruals

   

Policyholder account balances

    $ 1,510,472          $ 1,551,317     

Future policy benefits

    362,495          362,587     

Claims and claims settlement expenses

    39,791          33,677     
               

Total policyholder liabilities and accruals

    1,912,758          1,947,581     
               

Other policyholder funds

    4,211          3,380     

Payables for collateral under securities loaned

    264,341          160,363     

Derivative liabilities

    1,247          353     

Federal income taxes - current

    4,080          4,106     

Affiliated payables - net

    15,296          11,199     

Other liabilities

    7,592          5,177     

Separate Accounts liabilities

    8,224,939          8,163,032     
               

Total Liabilities

    10,434,464          10,295,191     
               

Stockholder’s Equity

   

Common stock ($10 par value; authorized 1,000,000 shares;
issued and outstanding: 250,000 shares)

    2,500          2,500     

Additional paid-in capital

    1,366,636          1,366,636     

Accumulated other comprehensive income, net of taxes

    26,370          27,487     

Retained deficit

    (174,063)         (200,121)    
               

Total Stockholder’s Equity

    1,221,443          1,196,502     
               

Total Liabilities and Stockholder’s Equity

    $ 11,655,907          $ 11,491,693     
               

 

 

 

 

 

 

See Notes to Financial Statements

2


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

STATEMENTS OF INCOME

 

         Three Months Ended    
March 31,
 

(dollars in thousands)

  2011     2010  
    (unaudited)  

Revenues

   

Policy charge revenue

    $ 51,682        $ 52,692   

Net investment income

    32,585        31,247   

Net realized investment losses

   

Other-than-temporary impairment losses on securities

    -            -       

Portion of other-than-temporary impairment losses recognized in other
comprehensive income

    -            -       

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

    (72     (423
               

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

    (72     (423

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

    (5,693     (8,440
               

Net realized investment losses

    (5,765     (8,863
               

Total Revenues

    78,502        75,076   
               

Benefits and Expenses

   

Interest credited to policyholder liabilities

    18,651        19,877   

Policy benefits (net of reinsurance recoveries: 2011 - $6,420; 2010 - $11,080)

    6,309        17,200   

Reinsurance premium ceded

    3,170        4,707   

Amortization (accretion) of deferred policy acquisition costs

    1,820        (4,226

Amortization (accretion) of value of business acquired

    4,946        (2,475

Insurance expenses and taxes

    15,721        17,833   
               

Total Benefits and Expenses

    50,617        52,916   
               

Income Before Taxes

    27,885        22,160   
               

Federal Income Tax Expense (Benefit)

   

Current

    124        578   

Deferred

    1,703        (578
               

Federal Income Tax Expense (Benefit)

    1,827        -       
               

Net Income

    $ 26,058        $ 22,160   
               

 

 

 

 

See Notes to Financial Statements

 

3


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

STATEMENTS OF COMPREHENSIVE INCOME

 

    Three Months Ended
March  31,
 

(dollars in thousands)

          2011                     2010          
    (unaudited)  

Net Income

    $ 26,058        $ 22,160   
               

Other Comprehensive Income (Loss)

   

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

   

Net unrealized holding gains (losses) arising during the period

    (2,336     26,510   

Reclassification adjustment for gains included in net income

    (2,013 )       (1,113
               
    (4,349 )       25,397   
               

Net unrealized other-than-temporary impairments on securities

   

Net unrealized other-than-temporary impairment losses arising during the period

    -            -       

Change in previously recognized unrealized other-than-temporary impairments

    (729     843   

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

    72        423   
               
    (657     1,266   
               

Adjustments

   

Policyholder liabilities

    638        (1,261

Value of business acquired

    2,514        (8,009

Deferred federal income taxes

    737        (6,175
               
    3,889        (15,445
               

Total other comprehensive income (loss), net of taxes

    (1,117     11,218   
               

Comprehensive Income

    $ 24,941        $ 33,378   
               

 

 

 

 

See Notes to Financial Statements

 

4


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

STATEMENTS OF STOCKHOLDER’S EQUITY

 

0000000000000000 0000000000000000

(dollars in thousands)

       March 31, 2011         December 31, 2010  
     (unaudited)     (audited)  

Common Stock

     $ 2,500        $ 2,500   

Additional Paid-in Capital

     $ 1,366,636        $ 1,366,636   

Accumulated Other Comprehensive Income (Loss)

    

Balance at beginning of period

     $ 27,487        $ (10,104

Total other comprehensive income (loss), net of taxes

     (1,117     37,591   
                

Balance at end of period

     $ 26,370        $ 27,487   
                

Retained Earnings (Deficit)

    

Balance at beginning of period

     $ (200,121     $ (337,983

Net income

     26,058        137,862   
                

Balance at end of period

     $ (174,063     $ (200,121
                

Total Stockholder’s Equity

     $ 1,221,443        $ 1,196,502   
                

 

 

 

 

 

See Notes to Financial Statements

 

5


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

STATEMENTS OF CASH FLOWS

 

000000000000 000000000000
     Three Months Ended
March 31,
 

(dollars in thousands)

   2011     2010  
     (unaudited)  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 26,058      $ 22,160   

Adjustment to reconcile net income to net cash and cash equivalents provided by operating activities

    

Changes in:

    

Deferred policy acquisition costs

     1,649        (4,500

Deferred sales inducements

     399        (1,013

Value of business acquired

     4,946        (2,475

Benefit reserves

     (11,722     (1,546

Federal income tax accruals

     1,677        (2,900

Claims and claims settlement expenses

     6,114        10,925   

Other policyholder funds

     831        (3,162

Other operating assets and liabilities, net

     1,653        19,585   

Amortization (accretion) of investments

     207        (8

Limited partnership asset distributions

     (464     -       

Interest credited to policyholder liabilities

     18,651        19,877   

Net change in fixed maturity trading securities

     (1,185     -       

Net realized investment losses

     5,765        8,863   
                

Net cash and cash equivalents provided by operating activities

     54,579        65,806   
                

CASH FLOWS FROM INVESTING ACTIVITIES

    

Sales of available-for-sale securities and mortgage loans

     62,197        90,113   

Maturities of available-for-sale securities and mortgage loans

     32,572        62,116   

Purchases of available-for-sale securities

     (156,466     (425,125

Sales of trading securities

     12,443        -       

Sales of limited partnerships

     987        -       

Change in affiliated short-term note receivable

     (50,000     -       

Change in payable for collateral under securities loaned

     103,978        47,914   

Changes in derivative asset

     (7     -       

Changes in derivative liability

     894        -       

Policy loans on insurance contracts, net

     13,457        11,712   

Net settlement on futures contracts

     (7,116     (9,384

Other

     (908     (1,188
                

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

   $ 12,031      $ (223,842
                

 

 

 

See Notes to Financial Statements

 

6


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

STATEMENTS OF CASH FLOWS - Continued

 

000000000 000000000
     Three Months
Ended March 31,
 

(dollars in thousands)

   2011     2010  
     (unaudited)  

CASH FLOWS FROM FINANCING ACTIVITIES

    

Policyholder deposits

   $ 7,935      $ 11,564   

Policyholder withdrawals

     (55,162     (61,118
                

Net cash and cash equivalents used in financing activities

     (47,227     (49,554
                

Net increase (decrease) in cash and cash equivalents (1)

     19,383        (207,590

Cash and cash equivalents, beginning of year

     308,614        428,848   
                

Cash and cash equivalents, end of period

   $ 327,997      $ 221,258   
                

(1) Included in net increase (decrease) in cash and cash equivalents is interest received (2011 - $1; 2010 - $36); interest paid (2011 - $5; 2010 - $8); and Federal income taxes paid (2011 - $150; 2010 - $2,900).

 

 

 

 

 

 

See Notes to Financial Statements

 

7


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

NOTES TO FINANCIAL STATEMENTS (unaudited)

(Dollars in Thousands)

 

 

Note 1. Summary of Significant Accounting Policies

 

Basis of Presentation

Transamerica Advisors Life Insurance Company (“TALIC” or the “Company”) is a wholly owned subsidiary of AEGON USA, LLC (“AUSA”). AUSA is an indirect wholly owned subsidiary of AEGON N.V., a limited liability share company organized under Dutch law.

For a complete discussion of the Company’s 2010 Financial Statements and accounting policies, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

The interim Financial Statements for the three months are unaudited; however in the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair statement of the Financial Statements have been included. These unaudited Financial Statements should be read in conjunction with the audited Financial Statements included in the 2010 Annual Report on Form 10-K. The nature of the Company’s business is such that results of any interim period are not necessarily indicative of results for a full year.

Basis of Reporting

The accompanying financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). The Company also submits financial statements to insurance industry regulatory authorities, which are prepared on the basis of statutory accounting principles (“SAP”). The significant accounting policies and related judgments underlying the Company’s financial statements are summarized below.

Certain reclassifications and format changes have been made to prior period financial statements, where appropriate, to conform to the current period presentation. These reclassifications have no effect on net income or stockholder’s equity of the prior periods.

Accounting Estimates and Assumptions

The preparation of financial statements requires management to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities. Those estimates are inherently subject to change and actual results could differ from those estimates. Included among the material (or potentially material) reported amounts and disclosures that require extensive use of estimates are: fair value of certain invested assets, asset valuation allowances, deferred policy acquisition costs, deferred sales inducements, value of business acquired, goodwill, policyholder liabilities, income taxes, and potential effects of unresolved litigated matters.

Subsequent Events

The financial statements are adjusted to reflect events that occurred between the balance sheet date and the date when the financial statements are issued, provided they give evidence of conditions that existed at the balance sheet date.

Events that are indicative of conditions that arose after the balance sheet date are disclosed, but do not result in an adjustment of the financial statements themselves.

Recent Accounting Guidance

Current Adoption of Recent Accounting Guidance

Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures

On January 1, 2011, the Company adopted guidance (Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair Value Measurements) requiring separate presentation of information about purchases, sales, issuances, and settlements in the Level 3 reconciliation for fair value measurements using significant unobservable inputs. The adoption affected disclosures but did not impact the Company’s results of operations or financial position.

 

8


ASC 944, Financial Services—Insurance

On January 1, 2011, the Company adopted guidance (ASU 2010-15, How Investments Held Through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments) clarifying that an insurance entity should not consider any separate account interest held for the benefit of policyholders in an investment to be the insurer’s interests and should not combine those interests with its general account interest in the same investment when assessing the investment for consolidation. The adoption did not have a material impact on the Company’s results of operations and financial position.

ASC 350, Intangibles—Goodwill and Other

On January 1, 2011, the Company adopted guidance (ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts), which requires entities with a zero or negative carrying value to assess, considering qualitative factors, whether it is more likely than not that a goodwill impairment exists. If an entity concludes that it is more likely than not that a goodwill impairment exists, the entity must perform step 2 of the goodwill impairment test. The adoption did not have a material impact on the Company’s results of operations and financial position.

ASC 310, Receivables

On April 1, 2011, the Company early adopted guidance retrospectively to January 1, 2011, (ASU 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring), which provides clarification to help creditors in determining whether a creditor has granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring. Additionally, the Company is now required to provide the previously deferred qualitative and quantitative disclosures about troubled debt restructurings in accordance with ASU 2010-20, including how financing receivables were modified and the financial effects of the modifications. The adoption did not have a material impact on the Company’s results of operations and financial position.

Accounting Guidance Adopted in 2010

ASC 310, Receivables

The Company adopted guidance (ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses) which requires new and expanded financial statement disclosures for the period ended December 31, 2010. An entity is required to provide qualitative and quantitative disclosures about the allowance for credit losses, credit quality, impaired loans, modifications, and nonaccrual and past due financing receivables. In addition, the disclosures must be disaggregated by portfolio segment or class of financing receivable based on how a company develops its allowance for credit losses and how it manages its credit exposure. The adoption required updates to the Company’s financial statement disclosures, but did not impact the Company’s results of operations or financial position. In January 2011, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that deferred the disclosures relating to troubled debt restructuring.

ASC 820, Fair Value Measurements and Disclosures

The Company adopted guidance (ASU 2010-06, Improving Disclosures about Fair Value Measurements) which included new disclosures and clarifications of existing disclosures about fair value measurements for the period ended March 31, 2010. The guidance requires disclosure of significant transfers in and out of Levels 1 and 2 of the fair value hierarchy and reasons for the transfers. Additionally, the ASU clarifies the level of disaggregation for fair value disclosures, requiring disclosures for each class of assets and liabilities. The guidance clarified that a reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The adoption required updates to the Company’s financial statement disclosures, but did not impact the Company’s results of operations or financial position.

 

9


Future Adoption of Accounting Guidance

ASC 944, Financial Services—Insurance

In October 2010, the FASB issued ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. This guidance modifies the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. An insurance entity may only capitalize incremental direct costs of contract acquisition, the portion of employees’ compensation directly related to time spent performing specified acquisition activities for a contract that has actually been acquired, other costs related directly to specified activities that would not have been incurred had the acquisition contract transaction not occurred, and advertising costs that meet capitalization criteria in other GAAP guidance. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company will adopt the guidance on January 1, 2012 and is currently evaluating its impact on the Company’s results of operations and financial position.

 

 

Note 2. Fair Value of Financial Instruments

 

Fair Value Measurements

ASC 820 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.

Fair Value Hierarchy

The Company has categorized its financial instruments into a three level hierarchy which is based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.

Assets and liabilities recorded at fair value on the Balance Sheets are categorized as follows:

Level 1. Unadjusted quoted prices for identical assets or liabilities in an active market.

Level 2. Quoted prices in markets that are not active or inputs that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 inputs include the following:

 

  a) Quoted prices for similar assets or liabilities in active markets
  b) Quoted prices for identical or similar assets or liabilities in non-active markets
  c) Inputs other than quoted market prices that are observable
  d) Inputs that are derived principally from or corroborated by observable market data through correlation or other means

Level 3. Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. They reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.

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

 

10


The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis:

 

    March 31, 2011  
            Level 1                     Level 2                     Level 3                     Total          

Assets

       

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

       

Corporate securities

    $ -              $ 1,129,700          $ -              $ 1,129,700     

Asset-backed securities

    -              93,601          10,960          104,561     

Commercial mortgage-backed securities

    -              139,157          -              139,157     

Residential mortgage-backed securities

    -              92,487          2,519          95,006     

Municipals

    -              1,269          -              1,269     

Government and government agencies

       

United States

    197,730          -              -              197,730     

Foreign

    3,617          6,091          -              9,708     
                               

Total fixed maturity AFS securities (a)

    201,347          1,462,305          13,479          1,677,131     

Fixed maturity trading securities (a) -
corporate securities

    -              11,880          -              11,880     

Equity securities (a)

       

Banking securities

    -              20,055          -              20,055     

Other financial services securities

    -              512          -              512     

Industrial securities

    -              5,525          -              5,525     
                               

Total equity securities (a)

    -              26,092          -              26,092     

Cash equivalents (b)

    -              339,178          -              339,178     

Derivative assets (f)

    -              7          -              7     

Limited partnerships (c)

    -              -              10,000          10,000     

Separate Accounts assets (d)

    8,224,939          -              -              8,224,939     
                               

Total assets

  $ 8,426,286          $ 1,839,462          $ 23,479          $ 10,289,227     
                               

Liabilities

       

Future policy benefits (embedded derivatives only) (e)

    $ -              $ -              $ (25,786)         $ (25,786)    

Derivative liabilities (f)

    -              1,247          -              1,247     
                               

Total liabilities

    $ -              $ 1,247          $ (25,786)         $ (24,539)    
                               

 

11


0000000000 0000000000 0000000000 0000000000
    December 31, 2010  
            Level 1                      Level 2                      Level 3                      Total          

Assets

       

Fixed maturity AFS securities (a)

       

Corporate securities

    $ -              $ 1,120,976          $ -              $ 1,120,976     

Asset-backed securities

    -              91,209          11,244          102,453     

Commercial mortgage-backed securities

    -              139,330          504          139,834     

Residential mortgage-backed securities

    -              101,262          2,886          104,148     

Municipals

    -              1,475          -              1,475     

Government and government agencies

       

United States

    149,652          -              -              149,652     

Foreign

    3,699          6,157          -              9,856     
                               

Total fixed maturity AFS securities (a)

    153,351          1,460,409          14,634          1,628,394     

Fixed maturity trading securities (a) - corporate securities

    -              23,138          -              23,138     

Equity securities (a)

       

Banking securities

    -              7,054          -              7,054     

Other financial services securities

    -              520          -              520     

Industrial securities

    -              5,416          -              5,416     
                               

Total equity securities (a)

    -              12,990          -              12,990     

Cash equivalents (b)

    -              317,321          -              317,321     

Limited partnerships (c)

    -              -              9,415          9,415     

Separate Accounts assets (d)

    8,163,032          -              -              8,163,032     
                               

Total assets

    $ 8,316,383          $ 1,813,858          $ 24,049          $ 10,154,290     
                               

Liabilities

       

Future policy benefits (embedded derivatives only) (e)

    $ -              $ -              $ (25,416)         $ (25,416)    

Derivative liabilities (f)

    -              353          -              353     
                               

Total liabilities

    $ -              $ 353          $ (25,416)         $ (25,063)    
                               

 

(a)

Securities are classified as Level 1 if the fair value is determined by observable inputs that reflect quoted prices for identical assets in active markets that the Company has the ability to access at the measurement date. Level 1 securities primarily include highly liquid U.S. Treasury and U.S. Government Agency securities. Securities are classified as Level 2 if the fair value is determined by observable inputs, other than quoted prices included in Level 1, for the asset or prices for similar assets. Level 2 securities include fixed maturity securities and preferred stock for which the Company utilized pricing services and corroborated broker quotes. Securities are classified as Level 3 if the valuations are derived from techniques in which one or more of the significant inputs are unobservable. Level 3 consists principally of fixed maturity securities whose fair value is estimated based on non-binding broker quotes and internal models. These models primarily use projected cash flows discounted using relevant risk spreads and market interest rate curves. Additionally, these models provide value to the monoline insurer whereas third party pricing vendors or brokers do not place value on the monoline insurer. At March 31, 2011, less than 0.5% of fixed maturity AFS securities were valued using internal models.

(b)

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

(c)

The Company has an investment in a limited partnership for which the fair value was derived from management’s review of the underlying financial statements that were prepared on a GAAP basis. The remaining limited partnership is carried at cost and is not included in the abovementioned table.

(d)

Separate Accounts assets are carried at the net asset value provided by the fund managers.

(e)

The Company issued contracts containing guaranteed minimum withdrawal benefits riders (“GMWB”) and obtained reinsurance on guaranteed minimum income benefit riders (“GMIB reinsurance”). GMWB and GMIB reinsurance are treated as embedded derivatives and are required to be reported separately from the host variable annuity contract. The fair value of these guarantees is calculated as the present value of future expected payments to policyholders less the present value of assessed rider fees attributable to the guarantees. Given the complexity and long-term nature of these guarantees, their fair values are determined using stochastic techniques under a variety of market return, discount

 

12


 

rates and actuarial assumptions. Since many of the assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability included in future policy benefits has been reflected within Level 3 of the fair value hierarchy.

(f)

Derivative assets and liabilities are classified as Level 1 if the fair value is determined by observable inputs that reflect quoted prices for identical assets in active markets that the Company has the ability to access at the measurement date. Derivatives are classified as Level 2 if the fair value is determined by observable inputs, other than quoted prices included in Level 1, for the identical asset or prices for similar assets. Derivatives are classified as Level 3 if the valuations are derived from techniques in which one or more of the significant inputs are unobservable. Level 2 derivatives include variance swaps for which the Company utilized readily accessible quoted index levels and broker quotes. The fair value for the variance swaps is calculated as the difference between the estimated volatility of the underlying S&P index at maturity to the actual volatility of the underlying S&P index at initiation (i.e. strike) multiplied by the notional value of the swap.

During 2011, there were no transfers between Level 1 and 2, respectively.

The following table provides a summary of the change in fair value of the Company’s Level 3 assets at March 31, 2011 and December 31, 2010:

 

    March 31, 2011     December 31, 2010  
    Limited
Partnership
    Fixed
Maturity AFS
Securities
    Limited
Partnership
    Fixed
Maturity AFS
Securities
 

Balance at beginning of period (a)

  $ 9,415      $ 14,634      $ 7,604      $ 37,041   

Change in unrealized gains (losses) (b)

    -            463        -            4,125   

Purchases

    -            -            -            27,941   

Sales

    (786     (1,130     (712     (3,781

Transfers into Level 3

    -            4        -            3,256   

Transfers out of Level 3

    -            (504     -            (54,058

Changes in valuation (c)

    907        12        2,137        110   

Net realized investment gains (losses) (d)

    464        -            386        -       
                               

Balance at end of period (a)

  $ 10,000      $ 13,479      $ 9,415      $ 14,634   
                               

 

(a)

Recorded as a component of limited partnerships and fixed maturity AFS securities in the Balance Sheets.

(b)

Recorded as a component of other comprehensive income (loss).

(c)

Recorded as a component of net investment income in the Statements of Income.

(d)

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

In certain circumstances, the Company will obtain non-binding broker quotes from brokers to assist in the determination of fair value. If those quotes can be corroborated by other market observable data, the investments will be classified as Level 2 investments. If not, the investments are classified as Level 3 due to the unobservable nature of the brokers’ valuation processes. The decrease in Level 3 fixed maturity AFS securities at March 31, 2011 was primarily due to sales and availability of market observable data (Level 2). At December 31, 2010, the decrease was also due to an increase in market activity.

The Company’s Level 3 liabilities (assets) consist of provisions for GMWB and GMIB reinsurance. The fair value of these guarantees is calculated as the present value of future expected payments to policyholders less the present value of assessed rider fees attributable to the guarantees. Given the complexity and long-term nature of these guarantees which are unlike instruments available in financial markets, their fair values are determined using stochastic techniques under a variety of market return scenarios. A variety of factors are considered, including expected market rates of return, equity and interest rate volatility, credit spread, correlations of market returns, discount rates and actuarial assumptions.

 

13


The expected returns are based on risk-free rates, such as the current London Inter-Bank Offered Rate (“LIBOR”) forward curve. The credit spread is set by using the credit default swap (“CDS”) spreads of a reference portfolio of life insurance companies, adjusted to reflect the subordination of senior debt holders at the holding company level to the position of policyholders at the operating company level (who have priority in payments to other creditors).

For equity volatility, the Company uses a term structure assumption with market-based implied volatility inputs for the first five years and a long-term forward rate assumption of 25% thereafter. The volume of observable option trading from which volatilities are derived generally declines as the contracts’ term increases, therefore, the volatility curve grades from implied volatilities for five years to the ultimate rate. The resulting volatility assumption in year 20 for the S&P 500 index (expressed as a spot rate) was 24.4% at March 31, 2011 and 24.8% at December 31, 2010. Correlations of market returns across underlying indices are based on historical market returns and their inter-relationships over a number of years preceding the valuation date. Assumptions regarding policyholder behavior, such as lapses, included in the models are derived in the same way as the assumptions used to measure insurance liabilities. These assumptions are reviewed at each valuation date and updated based on historical experience and observable market data as required.

The following table provides a summary of the changes in fair value of the Company’s Level 3 liabilities (assets) at March 31, 2011 and December 31, 2010:

 

    March 31, 2011     December 31, 2010  
    GMWB     GMIB
Reinsurance
    GMWB     GMIB
Reinsurance
 

Balance at beginning of period (b)

    $ 31,001          $ (56,417)         $ 45,987          $ (58,746)    

Changes in interest rates (a)

    (7,877)         5,354                  20,355          (8,533)    

Changes in equity markets (a)

    (1,553)                     3,706          (10,022)                 4,653     

Other (a)

    -              -              (25,319)         6,209     
                               

Balance at end of period (b)

    $             21,571          $ (47,357)         $ 31,001          $ (56,417)    
                               

 

(a)

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

(b)

Recorded as a component of future policy benefits in the Balance Sheets.

During the three months ended March 31, 2011, the decrease in the GMWB and GMIB reinsurance was primarily driven by increase in risk neutral rates and favorable equity market performance. During 2010, the decrease in the GMWB and GMIB reinsurance was principally driven by the improved equity markets and updated policyholder behavior assumptions offset by a decline in risk neutral rates.

 

14


 

Note 3. Investments

 

Fixed Maturity and Equity Securities

The amortized cost/cost and estimated fair value of investments in fixed maturity and equity AFS securities at March 31, 2011 and December 31, 2010 were:

 

     March 31, 2011  
            Gross Unrealized      Estimated  
           Amortized      
Cost/Cost
             Gains                      Losses/        
OTTI (1)
                 Fair             
Value
 

Fixed maturity AFS securities

           

Corporate securities

     $ 1,082,617           $ 51,280           $ (4,197)          $ 1,129,700     

Asset-backed securities

     104,114           7,294           (6,847)          104,561     

Commercial mortgage-backed securities

     130,268           8,928           (39)          139,157     

Residential mortgage-backed securities

     95,825           2,668           (3,487)          95,006     

Municipals

     1,262           8           (1)          1,269     

Government and government agencies

           

United States

     196,360           3,396           (2,026)          197,730     

Foreign

     8,961           747           -               9,708     
                                   

Total fixed maturity AFS securities

     $ 1,619,407           $ 74,321           $ (16,597)          $ 1,677,131     
                                   

Equity securities - preferred stocks

           

Banking securities

     $ 21,688           $ 242           $ (1,875)          $ 20,055     

Other financial services securities

     165           347           -               512     

Industrial securities

     5,791           -               (266)          5,525     
                                   

Total equity securities

     $ 27,644           $ 589           $ (2,141)          $ 26,092     
                                   
     December 31, 2010  
            Gross Unrealized      Estimated  
     Amortized
Cost/Cost
     Gains      Losses/
OTTI (1)
     Fair
Value
 

Fixed maturity AFS securities

           

Corporate securities

     $ 1,069,082           $ 55,530           $ (3,638)          $ 1,120,974     

Asset-backed securities

     102,964           7,062           (7,572)          102,454     

Commercial mortgage-backed securities

     131,362           8,501           (29)          139,834     

Residential mortgage-backed securities

     104,486           3,145           (3,483)          104,149     

Municipals

     1,462           13           -               1,475     

Government and government agencies

           

United States

     146,585           4,771           (1,704)          149,652     

Foreign

     9,063           794           -               9,856     
                                   

Total fixed maturity AFS securities

     $ 1,565,004           $ 79,816           $ (16,426)          $ 1,628,394     
                                   

Equity securities - preferred stocks

           

Banking securities

     $ 9,246           $ -               $ (2,192)          $ 7,054     

Other financial services securities

     165           355           -               520     

Industrial securities

     5,791           -               (375)          5,416     
                                   

Total equity securities

     $ 15,202           $ 355           $ (2,567)          $ 12,990     
                                   

(1) Subsequent unrealized gains (losses) on other-than-temporary impairments (“OTTI”) securities are included in Other Comprehension Income (“OCI”)-OTTI.

Excluding investments in U.S. government and government agencies, the Company is not exposed to any significant concentration of credit risk in its fixed maturity securities portfolio.

 

15


The amortized cost and estimated fair value of fixed maturity AFS securities by investment grade at March 31, 2011 and December 31, 2010 were:

 

     March 31, 2011      December 31, 2010  
     Amortized
Cost
     Estimated
Fair
Value
     Amortized
Cost
     Estimated
Fair
Value
 

Investment grade

     $         1,546,022           $         1,610,202           $         1,484,533           $         1,555,503     

Below investment grade

     73,385           66,929           80,471           72,891     
                                   

Total fixed maturity AFS securities

     $ 1,619,407           $ 1,677,131           $ 1,565,004           $ 1,628,394     
                                   

The Company defines investment grade securities as unsecured debt obligations that have a rating equivalent to Standard & Poor’s (“S&P”) BBB- or higher (or similar rating agency). At March 31, 2011 and December 31, 2010 the estimated fair value of fixed maturity securities rated BBB- were $72,710 and $55,760, respectively, which is the lowest investment grade rating given by S&P.

The amortized cost and estimated fair value of fixed maturity AFS securities at March 31, 2011 and December 31, 2010 by contractual maturities were:

 

     March 31, 2011      December 31, 2010  
     Amortized
Cost
     Estimated
Fair
Value
     Amortized
Cost
     Estimated
Fair
Value
 

Fixed maturity AFS securities

           

Due in one year or less

     $ 8,956           $ 8,983           $ 8,271           $ 8,350     

Due after one year through five years

     241,629           255,215           250,194           263,865     

Due after five years through ten years

     807,698           837,657           823,396           858,024     

Due after ten years

     230,916           236,552           144,331           151,718     
                                   
     1,289,199           1,338,407           1,226,192           1,281,957     

Mortgage-backed securities and other asset-backed securities

     330,208           338,724           338,812           346,437     
                                   

Total fixed maturity AFS securities

     $         1,619,407           $         1,677,131           $         1,565,004           $         1,628,394     
                                   

In the preceding table fixed maturity securities not due at a single maturity date, have been included in the year of final maturity. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

For the three months ended March 31, 2011 there was $421 of investment income on fixed maturity trading securities and $906 of income recognized from the change in the fair value on fixed maturity trading securities recorded in net investment income in the Statements of Income. The Company also recognized gains of $271 during the three months ended March 31, 2011 on the conversion of a fixed maturity trading security to preferred stock.

Unrealized Gains (Losses) on Fixed Maturity and Equity Securities

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

 

16


The estimated fair value and gross unrealized losses and OTTI of fixed maturity and equity AFS securities aggregated by length of time that individual securities have been in a continuous unrealized loss position at March 31, 2011 and December 31, 2010 were as follows:

 

000000000000 000000000000 000000000000
     March 31, 2011  
             Estimated        
Fair
Value
            Amortized        
Cost/Cost
    Gross
         Unrealized        
Losses and
OTTI (1)
 

Less than or equal to six months

      

Fixed maturity AFS securities

      

Corporate securities

     $ 99,456          $ 103,263          $ (3,807)    

Asset-backed securities

     5,065          5,065          -         

Commercial mortgage-backed securities

     5,341          5,380          (39)    

Residential mortgage-backed securities

     6,226          6,516          (290)    

Municipals

     925          926          (1)    

Government and government agencies - United States

     3,505          3,566          (61)    

Equity securities - banking securities

     2,610          2,616          (6)    
                        

Total fixed maturity and equity securities

     123,128          127,332          (4,204)    
                        

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

      

Fixed maturity AFS securities

      

Corporate securities

     5,220          5,364          (144)    

Asset-backed securities

     2,746          2,804          (58)    

Residential mortgage-backed securities

     2,572          2,907          (335)    
                        

Total fixed maturity and equity securities

     10,538          11,075          (537)    
                        

Greater than one year

      

Fixed maturity AFS securities

      

Corporate securities

     7,118          7,363          (245)    

Asset-backed securities

     12,829          19,618          (6,789)    

Residential mortgage-backed securities

     15,037          17,900          (2,863)    

Government and government agencies - United States

     30,470          32,435          (1,965)    

Equity securities

      

Banking securities

     4,762          6,631          (1,869)    

Industrial securities

     5,525          5,791          (266)    
                        

Total fixed maturity and equity securities

     75,741          89,738          (13,997)    
                        

Total fixed maturity and equity securities

     $ 209,407          $ 228,145          $ (18,738)    
                        

 

17


0000000000 0000000000 0000000000
     December 31, 2010  
             Estimated        
Fair
Value
             Amortized        
Cost/Cost
     Gross
         Unrealized        
Losses and
OTTI (1)
 

Less than or equal to six months

        

Fixed maturity AFS securities

        

Corporate securities

     $ 69,662           $ 72,628           $ (2,966)    

Asset-backed securities

     10,276           10,297           (21)    

Commercial mortgage-backed securities

     1,022           1,051           (29)    

Residential mortgage-backed securities

     9,371           10,074           (703)    

Government and government agencies - United States

     644           656           (12)    

Equity securities - banking securities

     2,558           2,616           (58)    
                          

Total fixed maturity and equity securities

     93,533           97,322           (3,789)    
                          

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

        

Fixed maturity AFS securities - corporate securities

     5,205           5,366           (161)    
                          

Total fixed maturity and equity securities

     5,205           5,366           (161)    
                          

Greater than one year

        

Fixed maturity AFS securities

        

Corporate securities

     11,553           12,064           (511)    

Asset-backed securities

     15,001           22,552           (7,551)    

Residential mortgage-backed securities

     15,499           18,279           (2,780)    

Government and government agencies - United States

     30,846           32,538           (1,692)    

Equity securities

        

Banking securities

     4,497           6,631           (2,134)    

Industrial securities

     5,416           5,791           (375)    
                          

Total fixed maturity and equity securities

     82,812           97,855           (15,043)    
                          

Total fixed maturity and equity securities

     $ 181,550           $ 200,543           $ (18,993)    
                          

 

(1)

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

The total number of securities in an unrealized loss position was 95 and 74 at March 31, 2011 and December 31, 2010, respectively.

The estimated fair value, gross unrealized losses, OTTI and number of securities where the fair value had declined below amortized cost by greater than 20% and greater than 40% at March 31, 2011 and December 31, 2010 were as follows:

 

0000000000 0000000000 0000000000
     March 31, 2011  
         Estimated    
Fair
Value
     Gross
Unrealized
  Losses/OTTI (1)  
         Number of    
Securities
 

Decline > 20%

        

Less than or equal to six months

     $ 1           $ (0)          1     

Greater than one year

     16,039           (8,414)          5     
                          

Total

     $ 16,040           $ (8,414)          6     
                          

Decline > 40%

        

Greater than one year

     $ 1,589           $ (1,147)          1     
                          

Total

     $ 1,589           $ (1,147)          1     
                          

 

18


0000000000 0000000000 0000000000
     December 31, 2010  
       Estimated  
Fair

Value
     Gross
Unrealized 
   Losses/OTTI (1) 
         Number of    
  Securities  
 

Decline > 20%

        

Less than or equal to six months

     $ 995           $ (314)          1     

Greater than one year

     15,849           (9,467)          6     
                          

Total

     $ 16,844           $ (9,781)          7     
                          

Decline > 40%

        

Greater than one year

     $ 4,284           $ (2,969)          2     
                          

Total

     $ 4,284           $ (2,969)          2     
                          

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

Unrealized gains (losses) incurred during the three months ended March 31, 2011 and 2010 were primarily due to price fluctuations resulting from changes in interest rates and credit spreads. As the Company does not have the intent to sell and it is not more likely than not that the Company will be required to sell these securities prior to the anticipated recovery of the amortized cost, the Company did not consider these securities to be other-than-temporarily impaired.

The components of net unrealized gains (losses) and OTTI included in accumulated other comprehensive income, net of taxes, at March 31, 2011 and December 31, 2010 was as follows:

 

     March 31,
2011
    December 31,
2010
 

Assets

    

Fixed maturity securities

   $ 57,724      $ 63,390   

Equity securities

     (1,552     (2,212

Value of business acquired

     (17,315     (19,829
                
     38,857        41,349   
                

Liabilities

    

Policyholder account balances

     2,025        1,387   

Federal income taxes - deferred

     (14,512     (15,249
                
     (12,487     (13,862
                

Stockholder’s equity

    

Accumulated other comprehensive income, net of taxes

   $ 26,370      $ 27,487   
                

The Company records certain adjustments to policyholder account balances in conjunction with the unrealized holding gains or losses on investments classified as available-for-sale. The Company adjusts a portion of these liabilities as if the unrealized holding gains or losses had actually been realized, with corresponding credits or charges reported in accumulated other comprehensive loss, net of taxes.

Mortgage Loans on Real Estate

Mortgage loans on real estate consist entirely of mortgages on commercial real estate. Prepayment premiums are collected when borrowers elect to prepay their debt prior to the stated maturity. There were no prepayment premiums during the three months ended March 31, 2011 and 2010.

The fair value for mortgage loans on real estate is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and/or similar remaining maturities. The estimated fair value of the mortgages on commercial real estate at March 31, 2011 and December 31, 2010 was $63,237 and $66,713, respectively.

Loans are considered impaired when it is probable that based upon current information and events, the Company will be unable to collect all amounts due under the contractual terms of the loan agreement. A valuation allowance is established when a loan is impaired for the excess carrying value of the loan over its estimated collateral value. In addition to the valuation allowance for specific loans, a general reserve is estimated based on a percent of the outstanding loan balance. The general reserve at March 31, 2011 and December 31, 2010 was $31 and $33, respectively. The change in the reserve is reflected in net realized investment

 

19


gains (losses), excluding OTTI on securities in the Statements of Income. There were no impaired mortgage loans at March 31, 2011. There was one impaired mortgage loan at December 31, 2010, with a specific reserve of $633 with an unpaid principal balance of $3,275. As this loan was impaired at December 31, 2010, there was no interest income recorded subsequent to the impairment. The impaired mortgage loan was sold during 2011 resulting in a recovery of $163. The change in the credit loss allowances on mortgage loans by type of property at March 31, 2011 and December 31, 2010 was as follows:

 

Commercial

           March 31,           
2011
            December 31,    
2010
 

Beginning balance

   $ 666      $ 41   

Charge offs

     (633     (889

Provision

    

 

(3

 

 

   

 

1,514

 

  

 

                

Ending balance

   $ 31      $ 666   
                

The commercial mortgages are geographically diversified throughout the United States with the largest concentrations in Pennsylvania, New Hampshire, Virginia, Ohio, California and Washington which account for approximately 75% of mortgage loans at March 31, 2011.

The credit quality of mortgage loans by type of property at March 31, 2011 and December 31, 2010 was as follows:

 

Commercial

           March 31,           
2011
            December 31,    
2010
 

AAA - AA

   $ 28,051      $ 24,709   

A

     19,565        26,026   

BBB

     11,965        12,188   
                

Total mortgage loans on real estate

     59,581        62,923   

General reserve

     (31     (33
                

Total mortgage loans on real estate, net

   $ 59,550      $ 62,890   
                

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

Policy Loans

Policy loans on insurance contracts are stated at unpaid principal balances. The Company estimates the fair value of policy loans as equal to the book value of the loans. The estimated fair value of the policy loans at March 31, 2011 and December 31, 2010 was $814,181 and $827,638, respectively. Policy loans are fully collateralized by the account value of the associated insurance contracts, and the spread between the policy loan interest rate and the interest rate credited to the account value held as collateral is fixed.

Securities Lending

The Company loans securities under securities lending agreements. The amortized cost of securities out on loan at March 31, 2011 and December 31, 2010 was $250,943 and $150,463, respectively. The estimated fair value of securities out on loan at March 31, 2011 and December 31, 2010 was $256,779 and $156,440, respectively.

Derivatives

The Company uses derivatives to manage the capital market risk associated with the GMWB. The derivatives, which are S&P 500 Composite Stock Price Index futures contracts, are used to hedge the equity risk associated with these types of variable guaranteed products, in particular the claim and/or revenue risks of the liability portfolio. The Company will not seek hedge accounting on these hedges because, in most cases, the derivatives’ change in value will create a natural offset in the Statements of Income with the change in reserves. Net settlements on the futures occur daily. The Company also entered into variance swaps during 2010 to hedge the costs of the volatility of the S&P market. At March 31, 2011, the Company had 330 outstanding short futures contracts with a notional value of $108,983. At March 31, 2011, the Company had two variance swaps with a notional value of $5 and a net

 

20


fair value of ($1,240). The Company recognized $1,492 of realized losses from the change in fair value of the variance swaps in net investment income in the Statements of Income during the three months ended March 31, 2011. At December 31, 2010, the Company had 360 outstanding short futures contracts with a notional value of $112,770. At December 31, 2010, the Company had two variance swaps with a notional value of $7 and a net fair value of ($353). The Company recognized $353 of losses from the change in fair value of the variance swaps in net investment income in the Statements of Income during 2010.

Realized Investment Gains (Losses)

The Company considers fair value at the date of sale to be equal to proceeds received. Proceeds and gross realized investment gains (losses) from the sale of AFS securities for the three months ended March 31 were as follows:

 

     Three Months Ended
March  31,
 
     2011      2010  

Proceeds

     $         59,397           $         90,113     

 

Gross realized investment gains

     1,932           2,371     

 

Gross realized investment losses

     (26)          (163)    

Proceeds on the sale of AFS securities sold at a realized loss

     1,026           23,122     

Net realized investment gains (losses) for the three months ended March 31 were as follows:

 

     Three Months Ended
March  31,
 
     2011      2010  

Fixed maturity AFS securities

     $ 1,834           $ 1,786     

Equity securities

     18           -         

Mortgages

     164           (5)    

Derivatives - futures

     (7,116)          (9,384)    

Adjustment related to value of business acquired

     (665)          (1,260)    
                 

Net realized investment gains (losses)

     $             (5,765)          $             (8,863)    
                 

OTTI

If management determines that a decline in the value of an AFS equity security is other-than-temporary, the cost basis is adjusted to estimated fair value and the decline in value is recorded as a net realized investment loss. For debt securities, the manner in which an OTTI is recorded depends on whether management intends to sell a security or it is more likely than not that it will be required to sell a security in an unrealized loss position before its anticipated recovery. If management intends to sell or more likely than not will be required to sell the debt security before recovery, the OTTI is recognized in earnings for the difference between amortized cost and fair value. If these criteria are not met, the OTTI is bifurcated into two pieces: a credit loss is recognized in earnings at an amount equal to the difference between the amortized cost of the debt security and the present value of the security’s anticipated cash flows, and a non credit loss is recognized in OCI for any difference between the fair value and the net present value of the debt security at the impairment measurement date.

 

21


The following table sets forth the amount of credit loss impairments on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized in OCI, and the corresponding changes in such amounts at March 31, 2011 and December 31, 2010:

 

December 31, December 31,
     March 31,
2011
    December 31,
2010
 

Balance at beginning of period

     $ 2,014        $ 1,445   

Credit loss impairment recognized in the current period on
securities not previously impaired

     -            996   

Additional credit loss impairments recognized in the current period on
securities previously impaired through other comprehensive income

     72        423   

Accretion of credit loss impairments previously recognized

     (340     (850
                

Balance at end of period

     $ 1,746        $ 2,014   
                

The components of OTTI reflected in the Statements of Income for the three months ended March 31 was as follows:

 

00000000000000 00000000000000 00000000000000
    Three Months Ended March 31, 2011  
    OTTI
Losses on
    Securities    
    Net
    OTTI  Losses    
Recognized
in OCI
    Net OTTI
Losses
    Recognized    
in Income
 

Gross OTTI losses

    $ 72          $ -                $ 72     

Value of business acquired amortization

    -              -                -         
                       

Net OTTI losses

    $ 72          $ -                $ 72     
                       
    Three Months Ended March 31, 2010  
    OTTI
    Losses on    
Securities
    Net
  OTTI Losses  
Recognized
in OCI
    Net OTTI
Losses
    Recognized    
in Income
 

Gross OTTI losses

    $ 423          $ -              $ 423     

Value of business acquired amortization

    -              -              -         
                       

Net OTTI losses

    $ 423          $ -              $ 423     
                       

For the three months ended March 31, 2011 and 2010, the Company’s impairment losses recognized in the Statements of Income were $72 and $423, respectively, with no associated value of business acquired amortization. For the three months ended March 31, 2011, the Company impaired its holding of a previously OCI impaired subprime mortgage asset-backed security due to an adverse change in cash flows. For the three months ended March 31, 2010, the Company impaired its holding of a previously OCI impaired 2007 vintage subprime mortgage asset-backed security for $423 due to an adverse change in cash flows.

 

 

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

(“DSI”)

 

VOBA

VOBA reflects the estimated fair value of in force contracts acquired and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the life insurance and annuity contracts in force at the acquisition date. VOBA is based on actuarially determined projections, for each block of business, of future policy and contract charges, premiums, mortality, Separate Accounts performance, surrenders, operating expenses, investment returns and other factors. Actual experience on the purchased business may vary from these projections. If estimated gross profits or premiums differ from expectations, the amortization of VOBA is adjusted to reflect actual experience.

 

22


The short-term equity growth rate and the long-term growth rate for the amortization of VOBA, DAC and DSI were as follows:

 

    March 31,
2011
    December 31,
2010
    March 31,
2010
 

Gross short-term equity growth rate for five years

    9.00  %        9.00  %        6.75  %   

Gross long-term growth rate

    9.00  %        9.00  %        9.00  %   

The change in carrying amount of VOBA for the three months ended March 31 was as follows:

 

     Three Months Ended
March  31,
 
             2011                     2010          

Amortization expense

     $ (7,573)       $ (4,465)    

Unlocking

     2,627          6,940     

Adjustment related to realized gains on investments

     (665)         (1,260)    

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

     2,514          (8,009)    
                

Change in VOBA carrying amount

     $ (3,097)       $ (6,794)    
                

During the three months ended March 31, 2011, continued favorable equity market performance resulted in higher projected gross profits resulting in an increase in amortization and favorable unlocking. During the three months ended March 31, 2010, increased annuity gross profits, partially offset by increased life claims, resulted in amortization expense. The amortization expense was offset by positive unlocking which was generated by improved equity markets, thereby resulting in net accretion expense.

DAC and DSI

The change in the carrying amount of DAC and DSI for the three months ended March 31 was as follows:

 

     Three Months Ended
March 31,
 

DAC

           2011                     2010          

Capitalization

     $ 171          $ 274     

Accretion (amortization) expense

     (1,444)         4,261     

Unlocking

     (376)         (35)    
                

Change in DAC carrying amount

     $ (1,649)         $ 4,500     
                
     Three Months Ended  
     March 31,  

DSI

           2011                     2010          

Capitalization

     $ 14          $ 5     

Accretion (amortization) expense

     (334)         1,003     

Unlocking

     (79)         5     
                

Change in DSI carrying amount

     $ (399)         $ 1,013     
                

During the three months ended March 31, 2011, DAC and DSI amortization was impacted by continued favorable equity market performance partially offset by higher than expected hedge costs. During the three months ended March 31, 2010, negative cash flows from derivative losses decreased current gross profits resulted in DAC and DSI accretion.

 

 

Note 5. Variable Contracts Containing Guaranteed Benefits

 

The Company records liabilities for contracts containing guaranteed minimum death benefits (“GMDB”) and guaranteed minimum income benefits (“GMIB”) as a component of future policy benefits in the Balance Sheets and changes in the liabilities are included as a component of policy benefits in the Statements of Income.

 

23


The components of the changes in the variable annuity GMDB and GMIB liabilities for the three months ended March 31 were as follows:

 

     Three Months Ended
March 31,
 

GMDB

           2011                     2010          

Guaranteed benefits incurred

   $ 8,406        $ 9,478     

Guaranteed benefits paid

     (8,546)         (9,896)    

Unlocking

     (9,212)         (4,256)    
                

Total

   $ (9,352)       $ (4,674)    
                
     Three Months Ended
March 31,
 

GMIB

           2011                     2010          

Guaranteed benefits incurred

   $ 2,905        $ 4,638     

Unlocking

     (4,889)         (1,596)    
                

Total

   $ (1,984)       $ 3,042     
                

During the three months ended March 31, 2011, continued favorable equity market performance resulted in a decrease in estimated future benefits causing more favorable unlocking as compared to the same period in 2010.

The variable annuity GMDB liability at March 31, 2011 and December 31, 2010 was $105,176 and $114,528, respectively. The variable annuity GMIB liability at March 31, 2011 and December 31, 2010 was $30,007 and $31,991, respectively.

The Company has issued variable life contracts in which the Company contractually guarantees to the contract owner a GMDB. In general, contracts containing GMDB provisions provide a death benefit equal to the amount specified in the contract regardless of the level of the contract’s account value. For the three months ended March 31, 2011 and 2010, an insignificant amount of variable life guaranteed benefits were recorded as policy benefits in the Statements of Income as incurred or paid.

 

 

Note 6. Federal Income Taxes

 

The effective tax rate was 7% and 0% for the three months ended March 31, 2011 and 2010, respectively. Differences between the effective rate and the U.S. statutory rate of 35% principally were the result of Separate Accounts dividends-received deduction (“DRD”) and the valuation allowance on net operating loss carryforward.

The valuation allowance for deferred tax assets at March 31, 2011 and December 31, 2010 was $87,287 and $92,950, respectively. The valuation allowance is related to a net operating loss carryforward and other deferred tax assets that, in the judgment of management, are not more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on generation of future taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, projected taxable income, and tax-planning strategies in making the assessment.

The Company has analyzed all material tax positions under the guidance of ASC 740, Income Taxes, related to the accounting for uncertainty in income tax, and determined there were tax benefits of $4,299 (gross $12,283), that should not be recognized at March 31, 2011 and December 31, 2010, respectively, which primarily relate to uncertainty regarding the sustainability of certain deductions taken on the 2009 and 2008 U.S. Federal income tax returns. To the extent these unrecognized tax benefits are ultimately recognized, they will not impact the effective tax rate in a future period. It is not anticipated that the total amounts of unrecognized tax benefits will significantly increase within twelve months of the reporting date.

 

24


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

 

December 31, December 31,
    March 31,
2011
    December 31,
2010
 

Unrecognized tax benefits, opening balance

    $ 4,299          $ 3,623     

Additions for tax positions of prior years

    -              676     
               

Unrecognized tax benefits, ending balance

    $ 4,299          $ 4,299     
               

At March 31, 2011 and December 31, 2010, the Company had an operating loss carryforward for federal income tax purposes of $288,216 (net of the ASC 740 reduction of $12,283) and $290,009 (net of the ASC 740 reduction of $12,283), respectively, with a carryforward period of fifteen years that expire at various dates up to 2023. In addition, at March 31, 2011 and December 31, 2010, the Company also has a capital loss carryforward for federal income tax purposes of $1,031 and $3,597, respectively, with a carryforward period of five years that will expire at various dates up to 2014. At March 31, 2011 and December 31, 2010, the Company had a foreign tax credit carryforward of $4,654 and $4,645, respectively, with a carryforward period of ten years that will expire at various dates up to 2021. Also, the Company has an Alternative Minimum Tax tax credit carryforward for federal income tax purposes of $2,642 and $2,518 at March 31, 2011 and December 31, 2010, respectively, with an indefinite carryforward period.

The Company classifies interest and penalties related to income taxes as interest expense and penalty expense, respectively. The Company hasn’t incurred or recognized any penalties in its financial statements at March 31, 2011 and December 31, 2010, respectively. The Company recognized interest expense of $1 and ($119) at March 31, 2011 and December 31, 2010, respectively. The accrued interest expense related to federal income tax was released during 2010 based on the expectation that the net operating loss will offset any taxable income generated by the uncertain tax position for the Company in future tax periods.

The Company files a separate federal income tax return for the years 2008 through 2012. Beginning in 2013 and assuming no changes in ownership, the Company will join the affiliated consolidated tax group. A tax return has been filed for 2009 and 2008, but no examination by the Internal Revenue Service has commenced.

 

 

Note 7. Stockholder’s Equity and Statutory Accounting Principles

 

The Company’s statutory financial statements are presented on the basis of accounting practices prescribed or permitted by the Insurance Department of the State of Arkansas. The State of Arkansas has adopted the National Association of Insurance Commissioners’ (“NAIC”) statutory accounting principles as the basis of its statutory accounting principles.

The Company’s statutory net income for the three months ended March 31, 2011 and 2010 was $43,249 and $51,565, respectively. Statutory capital and surplus at March 31, 2011 and December 31, 2010 was $875,095 and $813,142, respectively.

During the first quarter 2011 and 2010, the Company did not pay any dividends to AUSA or receive any capital contributions from AUSA.

 

 

Note 8. Reinsurance

 

In the normal course of business, the Company seeks to limit its exposure to loss on any single insured life and to recover a portion of benefits paid by ceding mortality risk to other insurance enterprises or reinsurers under indemnity reinsurance agreements, primarily quota share coverage and coinsurance agreements. The maximum amount of mortality risk retained by the Company is approximately $1,000 on single and joint life policies.

Indemnity reinsurance agreements do not relieve the Company from its obligations to contract owners. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company regularly evaluates the financial condition of its reinsurers so as to minimize its exposure to significant losses from reinsurer insolvencies. At March 31, 2011 and December 31, 2010, reinsurance receivables were $4,645 and $4,158 respectively. At March 31, 2011 and December 31, 2010, the reinsurance reserve was $780, respectively.

The Company is party to an indemnity reinsurance agreement with an unaffiliated insurer whereby the Company coinsures, on a modified coinsurance basis, 50% of the unaffiliated insurer’s variable annuity contracts sold from January 1, 1997 to June 30, 2001.

 

25


In addition, the Company seeks to limit its exposure to guaranteed benefit features contained in certain variable annuity contracts. Specifically, the Company reinsures certain GMIB and GMDB provisions to the extent reinsurance capacity is available in the marketplace. At March 31, 2011, 43% and 6% of the account value for variable annuity contracts containing GMIB and GMDB provisions, respectively, were reinsured. At December 31, 2010, 44% and 6% of the account value for variable annuity contracts containing GMIB and GMDB provisions, respectively, were reinsured.

 

 

Note 9. Related Party Transactions

 

At March 31, 2011, the Company had the following related party agreements in effect:

The Company is party to a common cost allocation service agreement between AUSA companies in which various affiliated companies may perform specified administrative functions in connection with the operation of the Company, in consideration of reimbursement of actual costs of services rendered. During the three months ended March 31, 2011 and 2010, the Company incurred $2,191 and $5,764, respectively, in expenses under this agreement. Charges attributable to this agreement are included in insurance expenses and taxes, net of amounts capitalized.

The Company is party to intercompany short-term note receivable arrangements with its parent and affiliates at various times during the year. On March 30, 2011, the Company entered into an intercompany short-term note receivable of $50,000 with an interest rate of 0.25% that is due March 30, 2012. On April 29, 2010, the Company entered into an intercompany short-term note receivable of $40,000 with an interest rate of 0.21% that was paid off in December 2010. On June 29, 2009, the Company entered into an intercompany short-term note receivable of $40,000 with an interest rate of 0.30% that was paid off in April 2010. During the three months ended March 31, 2011 and 2010, the Company accrued and/or received less than $1 and $73 of interest, respectively. Interest related to these arrangements is included in net investment income.

AEGON USA Realty Advisors, LLC acts as the manager and administrator for the Company’s mortgage loans on real estate under an administrative and advisory agreement with the Company. Charges attributable to this agreement are included in net investment income. During the three months ended March 31, 2011 and 2010, the Company incurred $34 and $38, respectively, under this agreement. There were no mortgage loan origination fees during the three months ended March 31, 2011 and 2010, respectively. Mortgage loan origination fees are amortized into net investment income over the life of the mortgage loans.

AEGON USA Investment Management, LLC acts as a discretionary investment manager under an investment management agreement with the Company. During the three months ended March 31, 2011 and 2010, the Company incurred $549 and $416, respectively, in expenses under this agreement. Charges attributable to this agreement are included in net investment income.

Transamerica Capital, Inc. provides underwriting and distribution services for the Company under an underwriting agreement. During the three months ended March 31, 2011 and 2010, the Company incurred $11,594 and $9,312, respectively, in expenses under this agreement. Charges attributable to this agreement are included in insurance expenses and taxes, net of amounts capitalized.

Transamerica Asset Management, Inc. acts as the investment advisor for certain related party funds in the Company’s Separate Accounts under multiple service agreements. During the three months ended March 31, 2011, the Company incurred $107 in expenses under this agreement. During the three months ended March 31, 2010, the Company did not incur any expenses under this agreement.

The Company has a participation agreement with Transamerica Series Trust to offer certain funds in the Company’s Separate Accounts. Transamerica Capital, Inc. acts as the distributor for said related party funds. The Company has entered into a distribution and shareholder services agreement for certain of the said funds. During the three months ended March 31, 2011 and 2010, the Company received $469 and $46, respectively, in revenue under this agreement. Revenue attributable to this agreement is included in policy charge revenue.

The Company has a reinsurance agreement with Transamerica Life Insurance Company. During the three months ended March 31, 2011 and 2010, the Company incurred $6 and $10, respectively, in reinsurance premium ceded expense under this agreement and there were no reinsurance recoveries on death claims incurred.

The Company is party to the purchasing and selling of investments between various affiliated companies. The investments are purchased and sold at fair value and are included in fixed maturity AFS securities and mortgage loans on real estate in the Balance Sheets. During the three months ended March 31, 2011, the Company sold $2,800 of mortgage loans on real estate to affiliated companies. During the three months ended March 31, 2010, the Company sold $48,177 of fixed maturity AFS securities to affiliated companies.

 

26


While management believes that the service agreements referenced above are calculated on a reasonable basis, they may not necessarily be indicative of the costs that would have been incurred with an unrelated third party. Affiliated agreements generally contain reciprocal indemnity provisions pertaining to each party’s representations and contractual obligations thereunder.

 

 

Note 10. Segment Information

 

In reporting to management, the Company’s operating results are categorized into two business segments: Annuity and Life Insurance. The Company’s Annuity segment consists of variable annuities and interest-sensitive annuities. The Company’s Life Insurance segment consists of variable life insurance products and interest-sensitive life insurance products. The accounting policies of the business segments are the same as those for the Company’s financial statements included herein. All revenue and expense transactions are recorded at the product level and accumulated at the business segment level for review by management.

The following tables summarize each business segment’s contribution to select Statements of Income information for the three months ended:

 

000000000000 000000000000 000000000000
         Annuity          Life
    Insurance    
         Total      

March 31, 2011

                    

Net revenues (a)

   $ 39,911         $ 19,940         $ 59,851     

Amortization (accretion) of VOBA

     6,472           (1,526)          4,946     

Policy benefits (net of reinsurance recoveries)

     (2,761)          9,070           6,309     

Federal income tax expense (benefit)

     (266)          2,093           1,827     

Net income

     19,386           6,672           26,058     

March 31, 2010

                    

Net revenues (a)

   $ 35,657         $ 19,542         $ 55,199     

Amortization (accretion) of VOBA

     1,851           (4,326)          (2,475)    

Policy benefits (net of reinsurance recoveries)

     6,135           11,065           17,200     

Federal income tax expense (benefit)

     (931)          931           -         

Net income

     15,633           6,527           22,160     

 

(a)

Net revenues include total revenues net of interest credited to policyholder liabilities.

 

27


Item 2. Management’s Narrative Analysis of Results of Operations

This Management’s Narrative Analysis of Results of Operations should be read in conjunction with the Financial Statements and Notes to Financial Statements included herein.

Forward Looking Statements

Certain statements in this report may be considered forward-looking, including those about management expectations, strategic objectives, growth opportunities, business prospects, anticipated financial results and other similar matters. These forward-looking statements represent only management’s beliefs regarding future performance, which is inherently uncertain. There are a variety of factors, many of which are beyond the Company’s control, which affect its operations, performance, business strategy and results and could cause its actual results and experience to differ materially from the expectations and objectives expressed in any forward-looking statements. These factors include, but are not limited to, actions and initiatives taken by current and potential competitors, general economic conditions, the effects of current, pending and future legislation, regulation and regulatory actions, and the other risks and uncertainties detailed in this report. See Risk Factors in the 2010 Annual Report on Form 10-K. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the dates on which they are made. The Company does not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the dates they are made. The reader should, however, consult further disclosures the Company may make in future filings of its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

 

 

Business

 

Overview

Transamerica Advisors Life Insurance Company (“TALIC”, “Registrant”, the “Company”, “we”, “our”, or “us”) is a wholly owned subsidiary of AEGON USA, LLC (“AUSA”). AUSA is an indirect wholly owned subsidiary of AEGON N.V., a limited liability share company organized under Dutch law. The Company is domiciled in Arkansas.

TALIC conducts its business primarily in the annuity markets and to a lesser extent in the life insurance markets of the financial services industry. The Company offered the following guaranteed benefits within its variable annuity product suite: guaranteed minimum death benefits (“GMDB”), guaranteed minimum income benefits (“GMIB”) and guaranteed minimum withdrawal benefits (“GMWB”).

The Company’s gross earnings are principally derived from two sources:

 

   

the charges imposed on variable annuity and variable life insurance contracts, and

 

   

the net earnings from investment of fixed rate life insurance and annuity contract owner deposits less interest credited to contract owners, commonly known as interest spread.

The costs associated with acquiring contract owner deposits (deferred policy acquisition costs) are amortized over the period in which the Company anticipates holding those funds, as noted in the Critical Accounting Policies and Estimates section below. Insurance expenses and taxes reported in the Statements of Income are net of amounts deferred. In addition, the Company incurs expenses associated with the maintenance of in force contracts.

 

 

Deposits

 

Total direct deposits (including internal exchanges) were $9.6 million and $12.5 million for the three months ended March 31, 2011 and 2010, respectively. Deposits are currently limited to additions to existing policies which will result in fluctuations period over period. Internal exchanges during the three months ended March 31, 2011 and 2010 were $1.7 million and $0.9 million, respectively.

 

 

Financial Condition

 

At March 31, 2011, the Company’s assets were $11.7 billion or $164.2 million higher than the $11.5 billion in assets at December 31, 2010. Assets excluding Separate Accounts assets increased $102.3 million. Separate Accounts assets, which represent 71% of total assets, increased $61.9 million to $8.2 billion.

 

28


Changes in Separate Accounts assets were as follows:

 

(dollars in millions)

  Three
Months Ended
       March 31, 2011      
 

Investment performance

    $ 340.1     

Deposits

    9.3     

Policy fees and charges

    (45.5)    

Surrenders, benefits and withdrawals

    (242.0)    
       

Net change

    $ 61.9     
       

During the first three months of 2011 and 2010, fixed contract owner deposits were $0.1 million and $0.1 million, respectively, and fixed contract owner withdrawals were $30.4 million and $32.1 million, respectively.

 

 

Environment

 

The Company’s financial position and/or results of operations are primarily impacted by the following economic factors: equity market performance, fluctuations in medium term interest rates, and the corporate credit environment via credit quality and fluctuations in credit spreads. The following discusses the impact of each economic factor.

Equity Market Performance

The investment performance of the underlying U.S. equity-based mutual funds supporting the Company’s variable products do not replicate the returns of any specific U.S. equity market index. However, investment performance will generally increase or decrease with corresponding increases or decreases of the overall U.S. equity market. There are several standard indices published on a daily basis that measure performance of selected components of the U.S. equity market. Examples include the Dow Jones Industrial Average (“Dow”), the NASDAQ Composite Index (“NASDAQ”) and the Standard & Poor’s 500 Composite Stock Price Index (“S&P”). The Dow, NASDAQ and S&P ended March 31, 2011 with increases of 6%, 5% and 5%, respectively, from December 31, 2010.

Changes in the U.S. equity market directly affect the values of the underlying U.S. equity-based mutual funds supporting Separate Accounts assets and, accordingly, the values of variable contract owner account balances. Approximately 78% of Separate Accounts assets were invested in equity-based mutual funds at March 31, 2011. Since asset-based fees collected on in force variable contracts represent a significant source of revenue, the Company’s financial condition will be impacted by fluctuations in investment performance of equity-based Separate Accounts assets.

During the three months ended March 31, 2011, average variable account balances decreased $0.1 billion (or 1%) to $8.1 billion as compared to the same period in 2010. The decrease in average variable account balances contributed $0.4 million to the decrease in asset-based policy charge revenue during the three months ended March 31, 2011 as compared to the same period in 2010.

Fluctuations in the U.S. equity market also directly impact the Company’s exposure to guaranteed benefit provisions contained in the variable contracts it manufactures. Minimal or negative investment performance generally results in greater exposure to guarantee provisions. Prolonged periods of minimal or negative investment performance will result in greater guaranteed benefit costs as compared to assumptions. If the Company determines that it needs to increase its estimated long term cost of guaranteed benefits, it will result in establishing greater guaranteed benefit liabilities as compared to current practice.

Medium Term Interest Rates, Corporate Credit and Credit Spreads

Changes in interest rates affect the value of investments, primarily fixed maturity securities and preferred equity securities, as well as interest-sensitive liabilities. Changes in interest rates have an inverse relationship to the value of investments and interest-sensitive liabilities. Also, since the Company has certain fixed products that contain guaranteed minimum crediting rates, decreases in interest rates can decrease the amount of interest spread earned.

Changes in the corporate credit environment directly impact the value of the Company’s investments, primarily fixed maturity securities. The Company primarily invests in investment-grade corporate debt to support its fixed rate product liabilities.

Credit spreads represent the credit risk premiums required by market participants for a given credit quality, i.e. the additional yield that a debt instrument issued by a AA-rated entity must produce over a risk-free alternative (e.g., U.S. Treasury instruments). Changes in credit spreads have an inverse relationship to the value of interest sensitive investments.

 

29


The impact of changes in medium term interest rates, corporate credit and credit spreads on market valuations were as follows:

 

    Three Months Ended
March  31,
 
        2011             2010      

Average medium term interest rate yield (a)

    1.11%        1.15%   

Increase (decrease) in medium term interest rates (in basis points)

    14        (28

Credit spreads (in basis points) (b)

    147        160   

Contracting of credit spreads (in basis points)

    (28     (40

Increase (decrease) on market valuations (in millions)

   

Available-for-sale investment securities

  $ (5.0   $ 26.7   

Interest-sensitive policyholder liabilities

    0.6        (1.3
               

Net change on market valuations

  $ (4.4   $ 25.4   
               

 

(a)

The Company defines medium term interest rates as the average interest rate on U.S. Treasury securities with terms of one to five years.

(b)

The Company defines credit spreads according to the Merrill Lynch U.S. Corporate Bond Index for BBB-A Rated bonds with three to five year maturities.

 

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the reported amounts of revenues and expenses. Estimates, by their nature, are based on judgment and available information. Therefore, actual results could differ and could have a material impact on the financial statements, and it is possible that such changes could occur in the near term.

The Company’s critical accounting policies and estimates are discussed below. For a full description of these and other accounting policies see Note 1 of the 2010 Annual Report on Form 10-K.

Valuation of Fixed Maturity and Equity Securities

The Company’s investments consist of fixed maturity and equity securities that are classified as available-for-sale (“AFS”) which are reported at estimated fair value. In addition, the Company holds fixed maturity securities which contain a conversion to equity feature, which is considered an embedded derivative. These fixed maturity securities have been classified as trading and are reported at estimated fair value. The fair values of fixed maturity and equity securities are determined by management after taking into consideration several sources of data. The Company’s valuation policy dictates that publicly available prices are initially sought from several third party pricing services. In the event that pricing is not available from these services, those securities are submitted to brokers to obtain quotes. Lastly, securities are priced using internal cash flow modeling techniques. These valuation methodologies commonly use reported trades, bids, offers, issuer spreads, benchmark yields, estimated prepayment speeds, and/or estimated cash flows.

Each month, the Company performs an analysis of the information obtained from third party services and brokers to ensure that the information is reasonable and produces a reasonable estimate of fair value. The Company considers both qualitative and quantitative factors as part of this analysis, including but not limited to, recent transactional activity for similar fixed maturities, review of pricing statistics and trends, and consideration of recent relevant market events.

The Company’s portfolio of private placement securities is valued using a matrix pricing methodology. The pricing methodology is obtained from a third party service and indicates current spreads for securities based on weighted average life, credit rating and industry sector. Monthly the Company reviews the matrix to ensure the spreads are reasonable by comparing them to observed spreads for similar securities traded in the market. In order to account for the illiquid nature of these securities, illiquidity premiums are included in the valuation and are determined based upon the pricing of recent transactions in the private placement market as well as comparing the value of the privately offered security to a similar public security. The impact of the illiquidity premium to the overall valuation is less than 1% of the value.

 

30


At March 31, 2011 and December 31, 2010, approximately $187.8 million (or 11%) and $184.5 million (or 11%), respectively, of the Company’s fixed maturity and equity securities portfolio consisted of non-publicly traded securities. Since significant judgment is required for the valuation of non-publicly traded securities, the estimated fair value of these securities may differ from amounts realized upon an immediate sale.

Changes in the fair value of fixed maturity and equity securities deemed AFS are reported as a component of accumulated other comprehensive income (loss), net of taxes on the Balance Sheets and are not reflected in the Statements of Income until a sale transaction occurs or when credit-related declines in estimated fair value are deemed other-than-temporary. Changes in fair value of fixed maturity securities deemed trading are reported as a component of net investment income.

Other-Than-Temporary Impairment (“OTTI”) Losses on Investments

The Company regularly reviews each investment in its fixed maturity and equity AFS securities portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. Management makes this determination through a series of discussions with the Company’s portfolio managers and credit analysts, and information obtained from external sources (i.e. company announcements, ratings agency announcements, or news wire services). For fixed maturity AFS securities, the Company also considers whether it is more likely than not that it will not be required to sell the debt security before its anticipated recovery. The factors that may give rise to a potential OTTI include, but are not limited to, i) certain credit-related events such as default of principal or interest payments by the issuer, ii) bankruptcy of issuer, iii) certain security restructurings, and iv) fair market value less than cost or amortized cost for an extended period of time. In the absence of a readily ascertainable market value, the estimated fair value on these securities represents management’s best estimate and is based on comparable securities and other assumptions as appropriate. Management bases this determination on the most recent information available.

For equity securities, once management determines a decline in the value of an AFS security is other-than-temporary, the cost basis of the equity security is reduced to its fair value, with a corresponding charge to earnings.

For fixed maturity AFS securities, an OTTI must be recognized in earnings when an entity either: a) has the intent to sell the debt security or b) more likely than not will be required to sell the debt security before its anticipated recovery. If the Company meets either of these criteria, the OTTI is recognized in earnings in an amount equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For fixed maturity AFS securities in unrealized loss positions that do not meet these criteria, the Company must analyze its ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows. If the net present value is less than the amortized cost of the investment, an OTTI is recorded. The OTTI is separated into two pieces: an amount representing the credit loss, where the present value of cash flows expected to be collected is less than the amortized cost basis of the security, and an amount related to all other factors (referred to as the non credit portion). The credit loss is recognized in earnings and the non credit loss is recognized in other comprehensive income (“OCI”), net of applicable taxes and value of business acquired. Management records subsequent changes in the estimated fair value (positive and negative) of fixed maturity AFS securities for which non credit OTTI was previously recognized in OCI in OCI-OTTI.

For the three months ended March 31, 2011 and 2010, the Company recorded an OTTI in income of $0.1 million and $0.4 million, respectively, with no associated value of business acquired amortization.

Mortgage Loans on Real Estate

Mortgage loans on real estate are carried at unpaid principal balances adjusted for amortization of premiums and accretion of discounts and are net of valuation allowances and general reserves. The fair value for mortgage loans on real estate is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and/or similar remaining maturities. Interest income is accrued on the principal balance of the loan based on the loan’s contractual interest rate. Premiums and discounts are amortized using the effective yield method over the life of the loan. Interest income and amortization of premiums and discounts are reported in net investment income along with mortgage loan fees, which are recorded as they are incurred.

Loans are considered impaired when it is probable that based upon current information and events, the Company will be unable to collect all amounts due under the contractual terms of the loan agreement. When the Company determines that a loan is impaired, a valuation allowance is established for the excess carrying value of the loan over its estimated collateral value. Changing economic conditions impact our valuation of mortgage loans. Changing vacancies and rents are incorporated into the discounted cash flow analysis that the Company performs for monitored loans and may contribute to the establishment of (or an increase or decrease in) an allowance for losses. In addition, the Company continues to monitor the entire commercial mortgage loan portfolio to identify risk. Areas of emphasis are properties that have deteriorating credits or have experienced debt coverage

 

31


reduction. Where warranted, the Company has established or increased loss reserves based upon this analysis. The Company does not accrue interest on loans ninety days past due. The Company also establishes a general reserve based on a percentage of the outstanding loan balance.

At March 31, 2011 and December 31, 2010, there was $59.6 million and $62.9 million, respectively, in mortgage loans on real estate recorded on the Balance Sheet. The estimated fair value of the mortgage loans on commercial real estate at March 31, 2011 and December 31, 2010 was $63.2 million and $66.7 million, respectively. There were no impaired mortgage loans at March 31, 2011. A valuation allowance of $0.6 million was established for an impaired mortgage loan during 2010 which was then sold during 2011 resulting in a recovery of $0.2 million. In addition, during the fourth quarter 2010, a mortgage loan was impaired for $0.6 million and then sold. The general reserve at March 31, 2011 and December 31, 2010 was less than $0.1 million, respectively. The change in the valuation allowance and the general reserve is reflected in net realized investment gains (losses), excluding OTTI losses on securities in the Statements of Income. At March 31, 2011 and December 31, 2010, there were no commercial mortgage loans that were two or more payments delinquent. See Note 3 to the Financial Statements for further discussion.

Derivative Instruments

Derivatives are financial instruments in which the value changes in response to an underlying variable, that require little or no net initial investment and are settled at a future date. The Company has entered into exchange traded derivatives, such as futures, and variance swaps to hedge the costs of the volatility of the S&P market. Variance swaps are used in the asset/liability management process to mitigate the gamma risk created when the Company has issued minimum guarantee insurance contracts linked to an index. These variance swaps are similar to volatility options where the underlying index provides for the market value movements. All derivatives recognized on the Balance Sheets are carried at fair value with changes in fair value recognized in the Statements of Income. The fair value for exchange traded derivatives, such as futures, are calculated net of the interest accrued to date and is based on quoted market prices. Net settlements on the futures occur daily. The fair value of variance swaps is calculated as the difference between the estimated volatility of the underlying S&P index at maturity to the actual volatility of the underlying S&P index at initiation (i.e. strike) multiplied by the notional value of the swap. At termination the final fair value is recorded as a realized investment gain (loss) in the Statements of Income. Variance swaps do not accrue interest, and typically, no cash is exchanged at initiation.

At March 31, 2011, the Company had 330 outstanding short futures contracts with a notional amount of $109.0 million. At March 31, 2011, the Company had variance swaps with a notional value of $5.0 thousand and a net fair value of $(1.2) million. The Company recognized $1.5 million of losses from the change in fair value of the variance swaps in net investment income in the Statements of Income during the three months ended March 31, 2011. At December 31, 2010, the Company had 360 outstanding short futures contracts with a notional value of $112,770. At December 31, 2010, the Company had two variance swaps with a notional value of $7 and a net fair value of $(0.4) million. The Company recognized $0.4 million of losses from the change in fair value of the variance swaps in net investment income in the Statements of Income during 2010.

Securities Lending

Financial assets that are lent to a third party or that are transferred subject to a repurchase agreement at a fixed price are not derecognized as the Company retains substantially all the risks and rewards of asset ownership. The lent securities are included in fixed maturity AFS securities in the Balance Sheets. A liability is recognized for cash collateral received, required initially at 102%, on which interest is accrued. If the fair value of the collateral is at any time less than 102% of the fair value of the loaned securities, the counterparty is mandated to deliver additional collateral, the fair value of which, together with the collateral already held in connection with the lending transaction, is at least equal to 102% of the fair value of the loaned securities. At March 31, 2011 and December 31, 2010, the payable for collateral under securities loaned was $264.3 million and $160.4 million, respectively.

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

VOBA

VOBA represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the insurance and annuity contracts in force at the acquisition date. VOBA is based on actuarially determined projections, for each block of business, of future policy and contract charges, premiums, mortality, policyholder behavior, Separate Account performance, operating expenses, investment returns, and other factors. Actual experience on the purchased business may vary from these projections. Revisions in estimates result in changes to the amounts expensed in the reporting period in which the revisions are made and could result in the impairment of the asset and a charge to income if estimated future gross profits are less than the unamortized balance. At March 31, 2011 and December 31, 2010, the Company’s VOBA asset was $332.0 million and

 

32


$335.1 million, respectively. For the three months ended March 31, 2011 and 2010, the favorable impact to pre-tax income related to VOBA unlocking was $2.6 million and $6.9 million, respectively. See Note 4 to the Financial Statements for a further discussion.

DAC

The costs of acquiring business, principally commissions, certain expenses related to policy issuance, and certain variable sales expenses that relate to and vary with the production of new and renewal business, are deferred and amortized based on the estimated future gross profits for a group of contracts. DAC are subject to recoverability testing at the time of policy issuance and loss recognition testing at the end of each reporting period. At March 31, 2011 and December 31, 2010, variable annuities accounted for the Company’s entire DAC asset of $29.8 million and $31.4 million, respectively.

DAC for variable annuities is amortized with interest over the anticipated lives of the insurance contracts in relation to the present values of estimated future gross profits from asset-based fees, guaranteed benefit rider fees, contract fees, and surrender charges, less a provision for guaranteed death and living benefit expenses, policy maintenance expenses, and non-capitalized commissions. Future gross profit estimates are subject to periodic evaluation with necessary revisions applied against amortization to date. The impact of revisions and assumptions to estimates on cumulative amortization is recorded as a charge or credit to current operations, commonly referred to as “unlocking”. Changes in assumptions can have a significant impact on the amount of DAC reported and the related amortization patterns. In general, increases in the estimated Separate Accounts return and decreases in surrender or mortality assumptions increase the expected future profitability of the underlying business and may lower the rate of DAC amortization. Conversely, decreases in the estimated Separate Accounts returns and increases in surrender or mortality assumptions reduce the expected future profitability of the underlying business and may increase the rate of DAC amortization. For the three months ended March 31, 2011 and 2010, there was an unfavorable impact to pre-tax income related to DAC unlocking of $0.4 million and less than $0.1 million, respectively. See Note 4 to the Financial Statements for a further discussion.

DSI

The Company offers a sales inducement whereby the contract owner receives a bonus which increases the initial account balance by an amount equal to a specified percentage of the contract owner’s deposit. This amount may be subject to recapture under certain circumstances. Consistent with DAC, sales inducements for variable annuity contracts are deferred and amortized based on the estimated future gross profits for each group of contracts. These future gross profit estimates are subject to periodic evaluation by the Company, with necessary revisions applied against amortization to date. The impact of these revisions on cumulative amortization is recorded as a charge or credit to current operations, commonly referred to as “unlocking”. It is reasonably possible that estimates of future gross profits could be reduced in the future, resulting in a material reduction in the carrying amount of the deferred sales inducement asset.

The expense and the subsequent capitalization and amortization (accretion) are recorded as a component of policy benefits in the Statements of Income. At March 31, 2011 and December 31, 2010, variable annuities accounted for the Company’s entire DSI asset of $6.9 million and $7.3 million, respectively. See Note 4 to the Financial Statements for a further discussion.

The short-term equity growth rate and the long-term growth rate for the amortization of VOBA, DAC and DSI were as follows:

 

December 31, 2010 December 31, 2010 December 31, 2010
     March 31,
2011
    December 31,
2010
    March 31,
2010
 

Gross short-term equity growth rate for five years

    9.00  %        9.00  %        6.75  %   

Gross long-term growth rate

    9.00  %        9.00  %        9.00  %   

Policyholder Account Balances

The Company’s liability for policyholder account balances represents the contract value that has accrued to the benefit of policyholders at the Balance Sheet date. The liability is generally equal to the accumulated account deposits plus interest credited less policyholders’ withdrawals and other charges assessed against the account balance. Policyholder account balances at March 31, 2011 and December 31, 2010 were $1.5 billion and $1.6 billion, respectively.

Future Policy Benefits

Future policy benefits are actuarially determined liabilities, which are calculated to meet future obligations and are generally payable over an extended period of time. Principal assumptions used in the establishment of liabilities for future policy benefits are mortality, surrender rates, policy expenses, equity returns, interest rates, and inflation. These estimates and assumptions are influenced by historical experience, current developments and anticipated market trends. At March 31, 2011 and December 31, 2010, future policy benefits were $362.5 million and $362.6 million, respectively.

 

33


Included within future policy benefits are liabilities for GMDB and GMIB provisions contained in the variable products that the Company issues. At March 31, 2011 and December 31, 2010, GMDB and GMIB liabilities included within future policy benefits were as follows:

 

(dollars in millions)

      March 31,    
2011
    December 31,
2010
 

GMDB liability

   $ 105.2         $ 114.5     

GMIB liability

    30.0          32.0     

The Company regularly evaluates the assumptions used to establish these liabilities, as well as actual experience and adjusts GMDB and GMIB liabilities with a related charge or credit to earnings (“unlocking”), if actual experience or evidence suggests that the assumptions should be revised. For the three months ended March 31, 2011 and 2010, the favorable impact to pre-tax income related to GMDB and GMIB unlocking was $14.1 million and $5.9 million, respectively.

Future policy benefits also include liabilities, which can be either positive or negative, for contracts containing GMWB provisions and for the reinsurance of GMIB provisions (“GMIB reinsurance”) for variable annuities based on the fair value of the underlying benefit. GMWB and GMIB reinsurance are treated as embedded derivatives and are required to be reported separately from the host variable annuity contract. The fair value of these guarantees are calculated as the present value of future expected payments to policyholders less the present value of assessed rider fees attributable to the guarantees. Given the complexity and long-term nature of these guarantees, which are unlike instruments available in financial markets, their fair values are determined using stochastic techniques under a variety of market return scenarios. A variety of factors are considered, including expected market rates of return, equity and interest rate volatility, credit spread, correlations of market returns, discount rates and actuarial assumptions.

At March 31, 2011 and December 31, 2010, GMWB liability and GMIB reinsurance asset included within future policy benefits were as follows:

 

(dollars in millions)

      March 31,    
2011
    December 31,
2010
 

GMWB liability

  $ 21.6        $ 31.0     

GMIB reinsurance asset

    (47.4)         (56.4)    

Federal Income Taxes

The Company uses the asset and liability method in providing income taxes on all transactions that have been recognized in the financial statements. The asset and liability method requires that deferred taxes be adjusted to reflect the tax rates at which future taxable amounts will be settled or realized. The Company provides for federal income taxes based on amounts it believes it will ultimately owe. Inherent in the provision for federal income taxes are estimates regarding the realization of certain tax deductions and credits.

Specific estimates include the realization of dividend-received deductions (“DRD”) and foreign tax credits (“FTC”). A portion of the Company’s investment income related to Separate Accounts business qualifies for the DRD and FTC. Information necessary to calculate these tax adjustments is typically not available until the following year. However, within the current year’s provision, management makes estimates regarding the future tax deductibility of these items. These estimates are primarily based on recent historic experience. See Note 6 to the Financial Statements for a further discussion.

The valuation allowance for deferred tax assets at March 31, 2011 and December 31, 2010 was $87.3 million and $93.0 million, respectively. The valuation allowance is related to a net operating loss carryforward and other deferred tax assets that, in the judgment of management, is not more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on generation of further taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, projected taxable income, and tax-planning strategies in making the assessment.

The Company files a return in the U.S. federal tax jurisdiction and various state tax jurisdictions.

 

34


Recent Accounting Guidance

The following outlines the adoption of recent accounting guidance in 2011. See Note 1 to the Financial Statements for a further discussion.

 

   

Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosure - Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair Value Measurement – requires separate presentation of information about purchases, sales, issuances, and settlements in the Level 3 reconciliation for fair value measurements using significant unobservable inputs – adopted January 1, 2011.

 

   

ASC 944, Financial Services—Insurance – ASU 2010-15, How Investments Held Through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments – clarifies that an insurance entity should not consider any separate account interest held for the benefit of policyholders in an investment to be the insurer’s interest and should not combine those interests with its general account interest in the same investment when assessing the investment for consolidation – adopted January 1, 2011.

 

   

ASC 350, Intangibles—Goodwill and Other – ASU 2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts – requires entities with a zero or negative carrying value to perform step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists – adopted January 1, 2011.

 

   

ASC 310, Receivables – ASU 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring – clarifies when a loan modification or restructuring is considered a troubled debt restructuring – adopted April 1, 2011, applied retrospectively to January 1, 2011.

The following outlines the adoption of accounting guidance in 2010. See Note 1 to the Financial Statements for a further discussion.

 

   

ASC 820, Fair Value Measurements and Disclosure, ASU 2010-06, Improving Disclosures about Fair Value Measurements – guidance on new disclosures and clarifications of existing disclosures about fair value measurements adopted January 1, 2010.

 

   

ASC 310, Receivables, ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses) – guidance requires new and expanded disclosures about the allowance for credit losses, credit quality, impaired loans, modifications, and nonaccrual and past due financing receivables – adopted December 31, 2010. In January 2011, the disclosures relating to troubled debt restructurings were deferred by the Financial Accounting Standards Board (“FASB”).

In addition, the following is accounting guidance that will be adopted in the future. See Note 1 to the Financial Statements for a further discussion.

 

   

ASC 944, Financial Services—Insurance – ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts – modifies the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts – will be adopted January 1, 2012.

 

 

Investments

 

The Company maintains a conservative general account investment portfolio comprised primarily of investment grade fixed maturity securities, policy loans, cash and cash equivalents and mortgage loans on real estate.

 

35


Fixed Maturity and Equity Securities

The amortized cost/cost and estimated fair value of investments in fixed maturity and equity AFS securities at March 31, 2011 and December 31, 2010 were:

 

     March 31, 2011  
            Gross Unrealized             % of
Estimated
Fair

Value
 

(dollars in millions)

   Amortized
Cost/Cost
     Gains      Losses/
OTTI (1)
     Estimated
Fair
Value
    

Fixed maturity AFS securities

              

Corporate bonds

              

Financial services

     $ 273.9           $ 12.9           $ (0.3)          $ 286.5            17%   

Industrial

     704.1           31.6           (3.4)          732.3           43       

Utility

     104.6           6.8           (0.5)          110.9           7       

Asset-backed securities

              

Housing related

     47.8           2.1           (6.8)          43.1           3       

Credit cards

     44.3           4.7           -              49.0           3       

Structured settlements

     4.5           0.2           -              4.7           -        

Autos

     5.0           0.3           -              5.3           -        

Student loan

     2.0           -              -              2.0           -        

Timeshare

     0.5           -              -              0.5           -        

Commercial mortgage-backed securities - non agency backed

     130.2           8.9           -              139.1           8       

Residential mortgage-backed securities

              

Agency backed

     75.1           2.7           (0.3)          77.5           5       

Non agency backed

     20.7           -              (3.2)          17.5           1       

Municipals - tax exempt

     1.3           -              -              1.3           -        

Government and government agencies

              

United States

     196.4           3.4           (2.1)          197.7           12       

Foreign

     9.0           0.7           -              9.7           -        
                                            

Total fixed maturity AFS securities

     1,619.4           74.3           (16.6)          1,677.1           99       
                                            

Equity securities

              

Banking securities

     21.6           0.3           (1.8)          20.1           1       

Other financial services securities

     0.2           0.3           -              0.5           -        

Industrial securities

     5.8           -              (0.3)          5.5           -        
                                            

Total equity securities

     27.6           0.6           (2.1)          26.1           1       
                                            

Total fixed maturity and equity securities

     $     1,647.0           $     74.9           $     (18.7)          $     1,703.2            100%    
                                            

 

36


    December 31, 2010  
          Gross Unrealized           % of  

(dollars in millions)

  Amortized
Cost/Cost
    Gains     Losses/
OTTI (1)
    Estimated
Fair
Value
    Estimated
Fair
Value
 

Fixed maturity AFS securities

         

Corporate bonds

         

Financial services

    $ 266.9          $ 12.7        $ (0.4)         $ 279.2           17%   

Industrial

    698.7          35.1          (2.7)         731.1          45       

Utility

    103.4          7.7          (0.5)         110.6          7       

Asset-backed securities

         

Housing related

    49.8          1.7          (7.6)         43.9          3       

Credit cards

    40.0          4.8          -             44.8          3       

Structured settlements

    4.6          0.3          -             4.9          -        

Autos

    5.0          0.3          -             5.3          -        

Student loan

    3.0          -             -             3.0          -        

Timeshare

    0.6          -             -             0.6          -        

Commercial mortgage-backed securities - non agency backed

    131.3          8.5          -             139.8          9       

Residential mortgage-backed securities

         

Agency backed

    82.9          3.1          (0.2)         85.8          5       

Non agency backed

    21.6          -             (3.3)         18.3          1       

Municipals - tax exempt

    1.5          -             -             1.5          -        

Government and government agencies

         

United States

    146.6          4.8          (1.7)         149.7          9       

Foreign

    9.1          0.8          -             9.9          1       
                                       

Total fixed maturity AFS securities

    1,565.0          79.8          (16.4)         1,628.4          100       
                                       

Equity securities

         

Banking securities

    9.2          -             (2.2)         7.0          -        

Other financial services securities

    0.2          0.4          -             0.6          -        

Industrial securities

    5.8          -             (0.4)         5.4          -        
                                       

Total equity securities

    15.2          0.4          (2.6)         13.0          -        
                                       

Total fixed maturity and equity securities

    $     1,580.2          $     80.2          $         (19.0)         $         1,641.4             100 %    
                                       

 

(1)

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

The Company regularly monitors industry sectors and individual debt securities for evidence of impairment. This evidence may include one or more of the following: 1) deteriorating market to book ratio, 2) increasing industry risk factors, 3) deteriorating financial condition of the issuer, 4) covenant violations, 5) high probability of bankruptcy of the issuer, 6) nationally recognized credit rating agency downgrades, and/or 7) intent and ability to hold to recovery. Additionally, for structured securities (asset-backed securities (“ABS”), residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”)), cash flow trends and underlying levels of collateral are monitored. A security is impaired if there is objective evidence that a loss event has occurred after the initial recognition of the asset that has a negative impact on the estimated future cash flows. A specific security is considered to be impaired when it is determined that it is probable that not all amounts due (both principal and interest) will be collected as scheduled. For debt securities, an OTTI must be recognized in earnings when an entity either a) has the intent to sell the debt security or b) more likely than not will be required to sell the debt security before its anticipated recovery. If the Company meets either of these criteria, the OTTI is recognized in earnings in an amount equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For debt securities in unrealized loss positions that do not meet these criteria, the Company must analyze its ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. The Company has evaluated the near-term prospects of the issuers in relation to the severity and duration of the unrealized loss, and unless otherwise noted, does not consider these investments to be impaired at March 31, 2011.

Seven issuers represent more than 5% of the total unrealized loss position, comprised of four subprime ABS housing holdings, one corporate bond, one U.S. Treasury bond and one RMBS holding. The Company has one investment grade corporate non-convertible security, issued by AT&T Inc. with an unrealized loss of $1.7 million. The Company’s unrealized loss on U.S. government securities is $2.1 million. The Company’s ABS - subprime housing unrealized loss is $4.3 million on holdings that have been impaired to discounted cash flows and $2.5 million on holdings that have never been impaired. The Company’s

 

37


subprime ABS consist of four below investment grade deals whereby the collateral is comprised of 2006-2007 fixed rate, first lien subprime mortgages. The Company’s RMBS unrealized loss is $2.2 million and relates to a securitized portfolio of prime hybrid mortgages that contain fixed income positions where our holding is rated below investment grade and was previously impaired to discounted cash flows.

At March 31, 2011 and December 31, 2010, approximately $77.5 million (or 33%) and $85.8 million (or 35%), respectively, of RMBS and CMBS holdings were fully collateralized by the Government National Mortgage Association, the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation. RMBS and CMBS securities are structured to allow the investor to determine, within certain limits, the amount of interest rate risk, prepayment risk and default risk that the investor is willing to accept. It is this level of risk that determines the degree to which the yields on RMBS and CMBS will exceed the yields that can be obtained from corporate securities with similar credit ratings.

Unrealized gains (losses) incurred during the three months of 2011 and 2010 were primarily due to price fluctuations resulting from changes in interest rates and credit spreads. As the Company does not have the intent to sell and it is not more likely than not that the Company will be required to sell these securities prior to the anticipated recovery of the amortized cost, the Company did not consider these securities to be other-than-temporarily impaired.

Details underlying securities in a continuous gross unrealized loss and OTTI position for investment grade AFS securities were as follows:

 

    March 31, 2011  

(dollars in millions)

  Estimated
Fair
Value
    Amortized
Cost/Cost
    Gross
Unrealized
Losses and
OTTI (1)
 

Investment grade AFS securities

                 

Less than or equal to six months

     

Corporate bonds

     

Financial services

    $ 22.8          $ 23.0          $ (0.2)    

Industrial

    58.6          61.5          (2.9)    

Utility

    17.1          17.4          (0.3)    

Asset-backed securities - credit cards

    5.1          5.1          -        

Commercial mortgage-backed securities - non agency backed

    5.3          5.3          -        

Residential mortgage-backed securities - agency backed

    6.2          6.5          (0.3)    

Municipals - tax exempt

    0.9          0.9          -        

Government and government agencies - United States

    3.5          3.6          (0.1)    

Equity securities - banking securities

    2.6          2.6          -        
                       

Total fixed maturity and equity securities

    122.1          125.9          (3.8)    
                       

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

     

Corporate bonds - utility

    0.2          0.2          -        

Asset-backed securities - housing related

    2.7          2.7          -        

Residential mortgage-backed securities - agency backed

    0.1          0.1          -        
                       

Total fixed maturity and equity securities

    $           3.0          $           3.0          $           -        
                       

 

38


     March 31, 2011  

(dollars in millions)

   Estimated
Fair
Value
     Amortized
Cost
     Gross
Unrealized
Losses and
OTTI (1)
 

Investment grade AFS securities (continued)

                    

Greater than one year

        

Corporate bonds

        

Financial services

     $ 3.9           $ 4.0           $ (0.1)    

Utility

     2.8           2.9           (0.1)    

Government and government agencies - United States

     30.5           32.5           (2.0)    

Equity securities - industrial securities

     5.5           5.8           (0.3)    
                          

Total fixed maturity and equity securities

     42.7           45.2           (2.5)    
                          

Total of all investment grade AFS securities

        

Corporate bonds

        

Financial services

     26.7           27.0           (0.3)    

Industrial

     58.6           61.5           (2.9)    

Utility

     20.1           20.5           (0.4)    

Asset-backed securities

        

Housing related

     2.7           2.7           -        

Credit cards

     5.1           5.1           -        

Commercial mortgage-backed securities - non agency backed

     5.3           5.3           -        

Residential mortgage-backed securities - agency backed

     6.3           6.6           (0.3)    

Municipals - tax exempt

     0.9           0.9           -        

Government and government agencies - United States

     34.0           36.1           (2.1)    

Equity securities

        

Banking securities

     2.6           2.6           -        

Industrial securities

     5.5           5.8           (0.3)    
                          

Total fixed maturity and equity securities

     $ 167.8           $ 174.1           $ (6.3)    
                          

Total number of securities in a continuous unrealized loss position

           82    
     December 31, 2010  

(dollars in millions)

   Estimated
Fair
Value
     Amortized
Cost/Cost
     Gross
Unrealized
Losses and
OTTI (1)
 

Investment grade AFS securities

                    

Less than or equal to six months

        

Corporate bonds

        

Financial services

     $ 4.4           $ 4.5           $ (0.1)    

Industrial

     53.9           56.1           (2.2)    

Utility

     6.7           7.0           (0.3)    

Asset-backed securities

        

Housing related

     2.8           2.8           -        

Credit cards

     7.5           7.5           -        

Commercial mortgage-backed securities - non agency backed

     1.0           1.0           -        

Residential mortgage-backed securities - agency backed

     6.5           6.7           (0.2)    

Government and government agencies - United States

     0.7           0.7           -        

Equity securities - banking securities

     2.5           2.6           (0.1)    
                          

Total fixed maturity and equity securities

     $         86.0           $         88.9           $         (2.9)    
                          

 

39


     December 31, 2010  

(dollars in millions)

   Estimated
Fair
Value
     Amortized
Cost
     Gross
Unrealized
Losses and
OTTI (1)
 

Investment grade AFS securities (continued)

      

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

        

Corporate bonds - utility

     $ 0.2           $ 0.2           $ -        
                          

Total fixed maturity and equity securities

     0.2           0.2           -        
                          

Greater than one year

        

Corporate bonds

        

Financial services

     8.4           8.7           (0.3)    

Utility

     2.9           2.9           -        

Asset-backed securities - housing related

     2.5           2.5           -        

Government and government agencies - United States

     30.8           32.5           (1.7)    

Equity securities - industrial securities

     5.4           5.8           (0.4)    
                          

Total fixed maturity and equity securities

     50.0           52.4           (2.4)    
                          

Total of all investment grade AFS securities

        

Corporate bonds

        

Financial services

     12.8           13.2           (0.4)    

Industrial

     53.9           56.1           (2.2)    

Utility

     9.8           10.1           (0.3)    

Asset-backed securities

        

Housing related

     5.3           5.3           -        

Credit cards

     7.5           7.5           -        

Commercial mortgage-backed securities - non agency backed

     1.0           1.0           -        

Residential mortgage-backed securities - agency backed

     6.5           6.7           (0.2)    

Government and government agencies - United States

     31.5           33.2           (1.7)    

Equity securities

        

Banking securities

     2.5           2.6           (0.1)    

Industrial securities

     5.4           5.8           (0.4)    
                          

Total fixed maturity and equity securities

     $         136.2           $         141.5           $         (5.3)    
                          

Total number of securities in a continuous unrealized loss position

  

     58   

 

(1)

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

Details underlying securities in a continuous gross unrealized loss and OTTI position for below investment grade AFS securities were as follows:

 

     March 31, 2011  

(dollars in millions)

   Estimated
Fair

Value
     Amortized
Cost/Cost
     Gross
Unrealized
Losses and
OTTI (1)
 

Below investment grade AFS securities

      

Less than or equal to six months

        

Corporate bonds - industrial

     $ 1.0           $ 1.4           $ (0.4)    
                          

Total fixed maturity and equity securities

     1.0           1.4           (0.4)    
                          

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

        

Corporate bonds - industrial

     5.0           5.1           (0.1)    

Residential mortgage-backed securities - non agency backed

     2.5           2.8           (0.3)    
                          

Total fixed maturity and equity securities

     $         7.5           $         7.9           $         (0.4)    
                          

 

40


     March 31, 2011  

(dollars in millions)

   Estimated
Fair
Value
     Amortized
Cost/Cost
     Gross
Unrealized
Losses and
OTTI (1)
 

Below investment grade AFS securities (continued)

                    

Greater than one year

        

Corporate bonds - utility

     $ 0.4           $ 0.5           $ (0.1)    

Asset-backed securities - housing related

     12.8           19.6           (6.8)    

Residential mortgage-backed securities - non agency backed

     15.0           17.9           (2.9)    

Equity securities - banking securities

     4.8           6.6           (1.8)    
                          

Total fixed maturity and equity securities

     33.0           44.6           (11.6)    
                          

Total of all below investment grade AFS securities

        

Corporate bonds

        

Industrial

     6.0           6.5           (0.5)    

Utility

     0.4           0.5           (0.1)    

Asset-backed securities - housing related

     12.8           19.6           (6.8)    

Residential mortgage-backed securities - non agency backed

     17.5           20.7           (3.2)    

Equity securities - banking securities

     4.8           6.6           (1.8)    
                          

Total fixed maturity and equity securities

     $ 41.5           $ 53.9           $ (12.4)    
                          

Total number of securities in a continuous unrealized loss position

  

     13   
     December 31, 2010  

(dollars in millions)

   Estimated
Fair
Value
     Amortized
Cost/Cost
     Gross
Unrealized
Losses and
OTTI (1)
 

Below investment grade AFS securities

                    

Less than or equal to six months

        

Corporate bonds - industrial

     $ 4.7           $ 5.1           $ (0.4)    

Residential mortgage-backed securities - non agency backed

     2.8           3.3           (0.5)    
                          

Total fixed maturity and equity securities

     7.5           8.4           (0.9)    
                          

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

        

Corporate bonds - industrial

     5.0           5.2           (0.2)    
                          

Total fixed maturity and equity securities

     5.0           5.2           (0.2)    
                          

Greater than one year

        

Corporate bonds - utility

     0.3           0.5           (0.2)    

Asset-backed securities - housing related

     12.5           20.0           (7.5)    

Residential mortgage-backed securities - non agency backed

     15.5           18.3           (2.8)    

Equity securities - banking securities

     4.5           6.6           (2.1)    
                          

Total fixed maturity and equity securities

     $         32.8           $         45.4           $         (12.6)    
                          

 

41


     December 31, 2010  

(dollars in millions)

   Estimated
Fair
Value
     Amortized
Cost
     Gross
Unrealized
Losses and
OTTI (1)
 

Below investment grade AFS securities (continued)

                    

Total of all below investment grade AFS securities

        

Corporate bonds

        

Industrial

     $ 9.7           $ 10.3           $ (0.6)    

Utility

     0.3           0.5           (0.2)    

Asset-backed securities - housing related

     12.5           20.0           (7.5)    

Residential mortgage-backed securities - non agency backed

     18.3           21.6           (3.3)    

Equity securities - banking securities

     4.5           6.6           (2.1)    
                          

Total fixed maturity and equity securities

     $         45.3           $         59.0           $         (13.7)    
                          

Total number of securities in a continuous unrealized loss position

  

     16   

 

(1)

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

Gross unrealized losses and OTTI on below investment grade AFS securities represented 66% and 71% of total gross unrealized losses and OTTI on all AFS securities at March 31, 2011 and December 31, 2010, respectively. Generally, below investment grade securities are more likely than investment grade securities to develop credit concerns. The ratios of estimated fair value to amortized cost reflected in the table below were not necessarily indicative of the market value to amortized cost relationships for the securities throughout the entire time that the securities have been in an unrealized loss position nor are they necessarily indicative of these ratios subsequent to March 31, 2011.

Details underlying AFS securities below investment grade and in an unrealized loss and OTTI position were as follows:

 

          March 31, 2011  

(dollars in millions)

   Ratio of
Amortized Cost  to
Estimated
Fair
Value
   Estimated
Fair
Value
     Amortized
Cost/Cost
     Gross
Unrealized
Losses and
OTTI (1)
 

Less than or equal to six months

   70% to 100%      $ 1.0           $ 1.4           $ (0.4)    
                             
        1.0           1.4           (0.4)    
                             

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

   70% to 100%      7.5           7.9           (0.4)    
                             
        7.5           7.9           (0.4)    
                             

Greater than one year

           
   70% to 100%      20.4           24.9           (4.6)    
   40% to 70%      12.6           19.7           (7.0)    
                             
        33.0           44.6           (11.6)    
                             

Total

        $         41.5           $         53.9           $         (12.4)    
                             

 

42


            December 31, 2010  

(dollars in millions)

   Ratio of
Amortized Cost to
Estimated

Fair
Value
     Estimated
Fair Value
     Amortized
Cost/Cost
     Gross
Unrealized
Losses and
OTTI (1)
 

Less than or equal to six months

     70% to 100%       $             7.6         $             8.4         $             (0.8)    
                             
        7.6           8.4           (0.8)    
                             

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

     70% to 100%         5.0           5.2           (0.2)    
                             
        5.0           5.2           (0.2)    
                             

Greater than one year

           
     70% to 100%         17.3           20.5           (3.2)    
     40% to 70%         15.5           24.8           (9.3)    
                             
        32.8           45.3           (12.5)    
                             

Total

      $             45.4         $             58.9         $             (13.5)    
                             

 

(1)

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

The assets depressed over 20% as well as over 40% and greater than one year are primarily related to ABS backed by subprime mortgages. As there has been no impact to expected future cash flows, the Company does not consider the underlying investments to be impaired at March 31, 2011.

The amortized cost and estimated fair value of fixed maturity AFS securities at March 31, 2011 and December 31, 2010 by rating agency equivalent were:

 

     March 31, 2011      December 31, 2010  

(dollars in millions)

   Amortized
Cost
     Estimated
Fair

Value
     Amortized
Cost
     Estimated
Fair

Value
 

AAA

   $         441.7         $         454.4         $         400.5         $         415.5     

AA

     185.2           193.1           190.0           199.2     

A

     621.1           643.7           619.6           646.0     

BBB

     298.0           319.0           274.4           294.8     

Below investment grade

     73.4           66.9           80.5           72.9     
                                   

Total fixed maturity AFS securities

   $         1,619.4         $         1,677.1         $         1,565.0         $         1,628.4     
                                   

Investment grade

     95%         96%         95%         96%   

Below investment grade

     5%         4%         5%         4%   

The Company defines investment grade securities as unsecured debt obligations that have a rating equivalent to S&P’s BBB- or higher (or similar rating agency). At March 31, 2011 and December 31, 2010, approximately $72.7 million (or 4%) and $55.8 million (or 3%), respectively, of fixed maturity securities were rated BBB-, which is the lowest investment grade rating given by S&P. Below investment grade securities are speculative and are subject to significantly greater risks related to the creditworthiness of the issuers and the liquidity of the market for such securities. The Company closely monitors such investments.

For the three months ended March 31, 2011, there was $0.4 million, of investment income on fixed maturity trading securities and $0.9 million of income recognized from the change in the fair value on fixed maturity trading securities recorded in net investment income in the Statements of Income. The Company also recognized gains of $0.3 million for the three months ended March 31, 2011 on the conversion of a fixed maturity trading security to preferred stock.

 

43


Subprime Mortgage Investments

Subprime mortgages are loans to homebuyers who have weak or impaired credit histories. Through 2008, the market for these loans had expanded rapidly. During that time, however, lending practices and credit assessment standards grew steadily weaker. As a result, the market experienced a sharp increase in the number of loan defaults. Investors in subprime mortgage assets include not only mortgage lenders, but also brokers, hedge funds, and insurance companies. The Company does not currently invest in or originate whole loan residential mortgages. The Company categorizes ABS issued by a securitization trust as having subprime mortgage exposure when the average credit score of the underlying mortgage borrowers in a securitization trust is below 660 at issuance. The Company also categorizes ABS issued by a securitization trust with second lien mortgages as subprime mortgage exposure, even though a significant percentage of second lien mortgage borrowers may not necessarily have credit scores below 660 at issuance.

The following tables provide the ABS subprime mortgage exposure by rating and estimated fair value by vintage at March 31, 2011 and December 31, 2010:

 

    March 31, 2011  

(dollars in millions)

  Amortized
Cost
    Estimated
Fair
Value
    Net
Unrealized
Gains (Losses)
and OTTI
 

First lien - fixed

     

AAA

    $ 19.5          $ 19.8          $ 0.3     

Below BBB

    19.6          12.8          (6.8)    

Second lien (a)

     

Below BBB

    4.6          6.3          1.7     
                       

Total

    $         43.7          $         38.9          $         (4.8)    
                       
    December 31, 2010  

(dollars in millions)

  Amortized
Cost
    Estimated
Fair
Value
    Net
Unrealized
Gains (Losses)
and OTTI
 

First lien - fixed

     

AAA

    $ 20.6          $ 20.9          $ 0.3     

Below BBB

    20.0          12.5          (7.5)    

Second lien (a)

     

Below BBB

    5.1          6.4          1.3     
                       

Total

    $ 45.7          $ 39.8          $ (5.9)    
                       

 

    March 31, 2011  
    Estimated Fair Value by Vintage  

(dollars in millions)

  2004&Prior     2005     2006     2007     Total  

First lien - fixed

         

AAA

    $         14.3          $ 5.4          $ -              $ -              $ 19.8     

Below BBB

    -              3.4          9.4          -              12.8     

Second lien (a)

         

Below BBB

    -              6.3          -              -              6.3     
                                       

Total

    $ 14.3          $         15.1          $         9.4          $         -                $         38.9     
                                       

 

44


    December 31, 2010  
    Estimated Fair Value by Vintage  

(dollars in millions)

  2004&Prior     2005     2006     2007     Total  

First lien - fixed

         

AAA

    $         15.4          $         5.5          $         -              $         -              $         20.9     

Below BBB

    -              -              3.4          9.1          12.5     

Second lien (a)

         

Below BBB

    -              -              6.4          -              6.4     
                                       

Total

    $ 15.4          $ 5.5          $ 9.7          $ 9.1          $ 39.8     
                                       

(a) Second lien collateral primarily composed of loans to prime and Alt A borrowers.

OTTI

The Company’s impairment losses were $0.1 million and $0.4 million for the three months ended March 31, 2011 and 2010, respectively, with no associated VOBA amortization. For the three months ended March 31, 2011, the Company impaired its holding of a previously OCI impaired subprime mortgage asset-backed security due to an adverse change in cash flows. For the three months ended March 31, 2010, the Company impaired its holding of a previously OCI impaired ABS subprime mortgage due to an adverse changes in cash flows.

 

 

Liquidity and Capital Resources

 

Liquidity

The Company’s liquidity requirements include the payment of sales commissions and other underwriting expenses and the funding of its contractual obligations for the life insurance and annuity contracts it has in force. The Company has developed and utilizes a cash flow projection system and regularly performs asset/liability duration matching in the management of its asset and liability portfolios. The Company anticipates funding its cash requirements utilizing cash from operations, normal investment maturities and anticipated calls and repayments, consistent with prior years. At March 31, 2011 and December 31, 2010, the Company’s assets included $2.0 billion and $1.9 billion, respectively, of cash, short-term investments and investment grade publicly traded AFS securities that could be liquidated if funds were required.

Capital Resources

During the first three months of 2011 and 2010, the Company did not receive a capital contribution from AUSA nor did the Company pay a dividend to AUSA.

Ratings

Ratings are an important factor in establishing the competitive position in the insurance and financial services marketplace. Rating agencies rate insurance companies based on financial strength and the ability to pay claims, factors more relevant to contract holders than investors.

The insurer financial strength rating scales of S&P, A.M. Best, and Fitch Ratings (“Fitch”) are characterized as follows:

 

   

  S&P – AAA to R

   

  A.M. Best – A++ to S

   

  Fitch – AAA to C

The following table summarizes the Company’s ratings at May 12, 2011:

 

S&P

  

AA-

  

(4th out of 21)

A.M. Best

  

A +

  

(2nd out of 16)

Fitch

  

AA-

  

(4th out of 19)

A downgrade of our financial strength rating could affect our competitive position in the insurance industry as customers may select companies with higher financial strength ratings. These ratings are not a recommendation to buy or hold any of the Company’s securities and they may be revised or revoked at any time at the sole discretion of the rating organization.

 

45


 

Commitments and Contingencies

 

The following table summarizes the Company’s policyholders’ obligations at March 31, 2011:

 

(dollars in millions)

  Less Than One
Year
    One To Three
Years
    Four To Five
Years
    More Than Five
Years
    Total  

General accounts (a)

    $ 208.1          $ 379.5          $ 338.8          $ 2,145.5          $ 3,071.9     

Separate Accounts (a)

    1,097.7          1,982.4          1,751.8          6,454.6          11,286.5     
                                       
    $         1,305.8          $         2,361.9          $         2,090.6          $         8,600.1          $         14,358.4     
                                       

 

(a)

The policyholder liabilities include benefit and claim liabilities of which a significant portion represents policies and contracts that do not have a stated contractual maturity. The projected cash benefit payments in the table above are based on management’s best estimates of the expected gross benefits and expenses, partially offset by the expected gross premiums, fees and charges relating to the existing business in force. Estimated cash benefit payments are based on mortality and lapse assumptions comparable with the Company’s historical experience, modified for recently observed trends. Actual payment obligations may differ if experience varies from these assumptions. The cash benefit payments are presented on an undiscounted basis and are before deduction of tax and before reinsurance. The liability amounts in the Company’s financial statements reflect the discounting for interest as well as adjustments for the timing of other factors as described above. As a result, the sum of the cash benefit payments shown for all years in the table above exceeds the corresponding policyholder liability amounts.

The Company has utilized public information to estimate the future assessments it will incur as a result of life insurance company insolvencies. At March 31, 2011 and December 31, 2010, the Company’s estimated liability for future guaranty fund assessments was $5.1 million and $5.1 million, respectively, with an offsetting receivable for future premium tax deductions of $4.0 million and $4.0 million, respectively. The Company regularly monitors public information regarding insurer insolvencies and adjusts its estimated liability as appropriate.

In the normal course of business, the Company is subject to various claims and assessments. Management believes the settlement of these matters would not have a material effect on the financial position, results of operations or cash flows of the Company.

 

 

Results of Operations

 

For the three months ended March 31, 2011 and 2010, the Company recorded net income of $26.1 million and $22.2 million, respectively. The increase in income during 2011 was primarily due to lower policy benefits and a decrease in net realized investment losses partially offset by DAC and VOBA amortization in 2011 as compared to accretion in 2010 and income tax expense in 2011.

Policy charge revenue decreased $1.0 million during the three months ended March 31, 2011, as compared to the same period in 2010. The following table provides the changes in policy charge revenue by type for each respective period:

 

     Three Months Ended
March 31,
              

(dollars in millions)

   2011      2010      Change        

Asset-based policy charge revenue

     $ 31.0         $ 31.4         $ (0.4     (a)   

Guaranteed benefit based policy charge revenue

     6.7         6.8         (0.1  

Non-asset based policy charge revenue

     14.0         14.5         (0.5     (b)   
                            

Total policy charge revenue

     $         51.7         $         52.7         $ (1.0  
                            

 

(a)

Asset-based policy charge revenue for 2011 was negatively impacted by the decrease in average variable account balances as compared to the same period in 2010.

(b)

The decrease in non-asset based policy charge revenue is primarily due to the run-off of the life business as well as less paid up additions.

 

46


Net realized investment losses decreased $3.1 million to $5.8 million during the three months ended March 31, 2011 as compared to the same period in 2010. The following table provides the changes in net realized investment gains (losses) by type:

 

     Three Months Ended
March  31,
       

(dollars in millions)

   2011     2010     Change  

Credit related losses

    $ (0.1    $ (0.4    $ 0.3     (a) 

Interest related gains

     2.1        2.2        (0.1

Equity related losses

     (7.1     (9.4     2.3     (b) 

Associated amortization of VOBA

     (0.7     (1.3     0.6   
                        

Total net realized investment losses

    $ (5.8    $ (8.9    $ 3.1   
                        

Write-downs for OTTI included in net realized investment losses

    $ (0.1    $ (0.4    $ 0.3     (a) 

 

(a)

The change in credit related losses as compared to 2010 is due to the decrease in OTTI impairments.

(b)

The change in equity related losses principally relates to the lower net losses on futures contracts during 2011 as compared to 2010. Short future contracts fluctuate inversely to the volatility in the S&P 500 index.

Policy benefits decreased $10.9 million during the three months ended March 31, 2011 as compared to the same period in 2010. The following table provides the changes in policy benefits by type:

 

     Three Months Ended
March  31,
       

(dollars in millions)

   2011     2010     Change  

Annuity benefit unlocking

    $ (14.1    $ (5.9   $ (8.2 )    (a) 

Annuity benefit expense

     10.9        13.0        (2.1

Amortization (accretion) of deferred sales inducements

     0.4        (1.0     1.4   

Life insurance mortality expense

     9.1        11.1        (2.0
                        

Total policy benefits

    $ 6.3       $ 17.2       $ (10.9
                        

 

(a)

See the Critical Accounting Policies and Estimates section above for further discussion of annuity benefit unlocking.

Reinsurance premiums ceded decreased $1.5 million during the three months ended March 31, 2011 as compared to the same period in 2010 principally due to refined calculations related to the 2010 system conversion.

Amortization (accretion) of DAC was $1.8 million and ($4.2) million for the three months ended March 31, 2011 and 2010, respectively. During the three months ended March 31, 2011 and 2010, there was an unfavorable impact to pre-tax income related to DAC unlocking of $0.4 million and less than $0.1 million, respectively. During the three months ended March 31, 2011, DAC amortization was impacted by continued favorable equity market performance partially offset by higher than expected hedge costs. During the three months ended March 31, 2010, negative cash flows from derivative losses on the annuity business decreased current gross profits resulting in decreased amortization.

Amortization of VOBA was $4.9 million for the three months ended March 31, 2011, which included favorable unlocking of $2.6 million. Accretion of VOBA was $2.5 million for the three months ended March 31, 2010, which included favorable unlocking of $6.9 million. During the three months ended March 31, 2011, continued favorable equity market performance resulted in higher projected gross profits resulting in an increase in amortization and favorable unlocking. During the three months ended March 31, 2010, increased annuity gross profits, partially offset by increase life claims, resulted in amortization expense. The amortization expense was offset by positive unlocking which was generated by improved equity markets, thereby resulting in net accretion expense.

 

47


Insurance expenses and taxes decreased $2.1 million in the three months ended March 31, 2011 as compared to the same period in 2010. The following table provides the changes in insurance expenses and taxes for each respective period:

 

    Three Months Ended
March  31,
       

(dollars in millions)

  2011     2010     Change  

Commissions

    $ 12.5      $ 10.0        $ 2.5      (a) 

General insurance expenses

    2.8        7.5        (4.7 )    (b) 

Taxes, licenses, and fees

    0.4        0.3        0.1   
                       

Total insurance expenses and taxes

    $ 15.7        $ 17.8        $ (2.1
                       

 

(a)

The increase in commissions is primarily due to an increased trail commissions resulting from the 2010 system conversion.

(b)

The decrease in general insurance expenses is primarily due to 2010 transition and system conversion related expenses.

 

 

Segment Information

 

The products that comprise the Annuity and Life Insurance segments generally possess similar economic characteristics. As such, the financial condition and results of operations of each business segment are generally consistent with the Company’s consolidated financial condition and results of operations presented herein.

ITEM 4. Controls and Procedures

The Company’s Disclosure Committee assists with the monitoring and evaluation of its disclosure controls and procedures. The Company’s President, Chief Financial Officer and Disclosure Committee have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Report. Based on that evaluation, the Company’s President and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective.

In addition, no change in the Company’s internal control over financial reporting (as defined in Rule 15d-15(f) under the Securities Exchange Act of 1934, as amended) occurred during the first fiscal quarter of 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

48


PART II Other Information

Item 1. Legal Proceedings.

Nothing to report.

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part 1. “Item 1A. Risk Factors” in the Annual Report on Form 10-K for the year ended December 31, 2010, which could materially affect the Company’s business, financial condition or future results. The risks described in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition, and/or operating results.

Item 5. Other Information.

(a) Nothing to report.

(b) Nothing to report.

 

49


Item 6. Exhibits.

 

 

2.1  

Merrill Lynch Life Insurance Company Board of Directors Resolution in Connection with the Merger between Merrill Lynch Life Insurance Company and Tandem Insurance Group, Inc. (Incorporated by reference to Exhibit 2.1, filed September 5, 1991, as part of Post-Effective Amendment No. 4 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

2.2  

Plan and Agreement of Merger between Merrill Lynch Life Insurance Company and Tandem Insurance Group, Inc. (Incorporated by reference to Exhibit 2.1a, filed September 5, 1991, as part of Post-Effective Amendment No. 4 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

3.1  

Articles of Amendment, Restatement and Redomestication of the Articles of Incorporation of Merrill Lynch Life Insurance Company. (Incorporated by reference to Exhibit 6(a) to Post-Effective Amendment No. 10 to Merrill Lynch Life Variable Annuity Separate Account A’s registration statement on Form N-4, File No. 33-43773, filed December 10, 1996.)

3.2  

Articles of Amendment of the Articles of Incorporation of Merrill Lynch Life Insurance Company. (Incorporated by reference to Exhibit 3.2 to the Quarterly Report on Form 10-Q of Transamerica Advisors Life Insurance Company, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, 333-34192, 333-133223, and 333-133225, filed on August 12, 2010.)

3.3  

Amended By-Laws of Transamerica Advisors Life Insurance Company. (Incorporated by reference to Exhibit 3.3 to the Quarterly Report on Form 10-Q of Transamerica Advisors Life Insurance Company, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, 333-34192, 333-133223, and 333-133225, filed on August 12, 2010.)

4.1  

Group Modified Guaranteed Annuity Contract, ML-AY-361. (Incorporated by reference to Exhibit 4.1, filed February 23, 1989, as part of Pre-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.2  

Individual Certificate, ML-AY-362. (Incorporated by reference to Exhibit 4.2, filed February 23, 1989, as part of Pre-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.2a  

Individual Certificate, ML-AY-362 KS. (Incorporated by reference to Exhibit 4.2a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.2b  

Individual Certificate, ML-AY-378. (Incorporated by reference to Exhibit 4.2b, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.2c  

Modified Guaranteed Annuity Contract. (Incorporated by reference to Exhibit 4(a), filed August 18, 1997, as part of the Registrant’s registration statement on Form S-3, File No. 333-33863.)


4.3

 

Individual Tax-Sheltered Annuity Certificate, ML-AY-372. (Incorporated by reference to Exhibit 4.3, filed February 23, 1989, as part of Pre-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.3a

 

Individual Tax-Sheltered Annuity Certificate, ML-AY-372 KS. (Incorporated by reference to Exhibit 4.3a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.4

 

Qualified Retirement Plan Certificate, ML-AY-373. (Incorporated by reference to Exhibit 4.4 to the Registrant’s registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.)

4.4a

 

Qualified Retirement Plan Certificate, ML-AY-373 KS. (Incorporated by reference to Exhibit 4.4a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.5

 

Individual Retirement Annuity Certificate, ML-AY-374. (Incorporated by reference to Exhibit 4.5 to the Registrant’s registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.)

4.5a

 

Individual Retirement Annuity Certificate, ML-AY-374 KS. (Incorporated by reference to Exhibit 4.5a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.5b

 

Individual Retirement Annuity Certificate, ML-AY-375 KS. (Incorporated by reference to Exhibit 4.5b, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.5c

 

Individual Retirement Annuity Certificate, ML-AY-379. (Incorporated by reference to Exhibit 4.5c, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.6

 

Individual Retirement Account Certificate, ML-AY-375. (Incorporated by reference to Exhibit 4.6, filed February 23, 1989, as part of Pre-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.6a

 

Individual Retirement Account Certificate, ML-AY-380. (Incorporated by reference to Exhibit 4.6a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.7

 

Section 457 Deferred Compensation Plan Certificate, ML-AY-376. (Incorporated by reference to Exhibit 4.7 to the Registrant’s registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.)

4.7a

 

Section 457 Deferred Compensation Plan Certificate, ML-AY-376 KS. (Incorporated by reference to Exhibit 4.7a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.8

 

Tax-Sheltered Annuity Endorsement, ML-AY-366. (Incorporated by reference to Exhibit 4.8 to the Registrant’s registration statement on Form S-1, File No. 33- 26322, filed January 3, 1989.)

4.8a

 

Tax-Sheltered Annuity Endorsement, ML-AY-366 190. (Incorporated by reference to Exhibit 4.8a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.8b

 

Tax-Sheltered Annuity Endorsement, ML-AY-366 1096. (Incorporated by reference to Exhibit 4(h)(3), filed March 27, 1997, as part of Post-Effective Amendment No. 2 to the Registrant’s registration statement on Form S-1, File No. 33-58303.)

4.9

 

Qualified Retirement Plan Endorsement, ML-AY-364. (Incorporated by reference to Exhibit 4.9 to the Registrant’s registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.)

4.10

 

Individual Retirement Annuity Endorsement, ML-AY-368. (Incorporated by reference to Exhibit 4.10 to the Registrant’s registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.)

4.10a

 

Individual Retirement Annuity Endorsement, ML-AY-368 190. (Incorporated by reference to Exhibit 4.10a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

4.10b

 

Individual Retirement Annuity Endorsement, ML009. (Incorporated by reference to Exhibit 4(j)(3) to Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-60290, filed March 31, 1994.)

4.10c

 

Individual Retirement Annuity Endorsement. (Incorporated by reference to Exhibit 4(b) to Pre-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-3, File No. 333-33863, filed October 31, 1997.)

4.11

 

Individual Retirement Account Endorsement, ML-AY-365. (Incorporated by reference to Exhibit 4.11 to the Registrant’s registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.)


  4.11a

 

Individual Retirement Account Endorsement, ML- AY-365 190. (Incorporated by reference to Exhibit 4.11a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

  4.12

 

Section 457 Deferred Compensation Plan Endorsement, ML-AY-367. (Incorporated by reference to Exhibit 4.12 to the Registrant’s registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.)

  4.12a

 

Section 457 Deferred Compensation Plan Endorsement, ML-AY-367 190. (Incorporated by reference to Exhibit 4.12a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

  4.13

 

Qualified Plan Endorsement, ML-AY-369. (Incorporated by reference to Exhibit 4.13 to the Registrant’s registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.)

  4.13a

 

Qualified Plan Endorsement, ML-AY-448. (Incorporated by reference to Exhibit 4.13a, filed March 9, 1990, as part of Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

  4.13b

 

Qualified Plan Endorsement. (Incorporated by reference to Exhibit 4(c), filed October 31, 1997, as part of Pre-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-3, File No. 333-33863.)

  4.14

 

Application for Group Modified Guaranteed Annuity Contract. (Incorporated by reference to Exhibit 4.14 to the Registrant’s registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.)

  4.15

 

Annuity Application for Individual Certificate Under Modified Guaranteed Annuity Contract. (Incorporated by reference to Exhibit 4.15 to the Registrant’s registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.)

  4.15a

 

Application for Modified Guaranteed Annuity Contract. (Incorporated by reference to Exhibit 4(d), filed August 18, 1997, as part of the Registrant’s registration statement on Form S-3, File No. 333-33863.)

  4.16

 

Form of Company Name Change Endorsement. (Incorporated by reference to Exhibit 4.16, filed September 5, 1991, as part of Post-Effective Amendment No. 4 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

  4.17

 

Group Modified Guaranteed Annuity Contract, ML-AY-361/94. (Incorporated by reference to Exhibit 4(a)(2), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-60290.)

  4.18

 

Individual Certificate, ML-AY-362/94. (Incorporated by reference to Exhibit 4(b)(4), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-60290.)

  4.19

 

Individual Tax-Sheltered Annuity Certificate, ML-AY-372/94. (Incorporated by reference to Exhibit 4(c)(3), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-60290.)

  4.20

 

Qualified Retirement Plan Certificate, ML-AY-373/94. (Incorporated by reference to Exhibit 4(d)(3), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-60290.)

  4.21

 

Individual Retirement Annuity Certificate, ML-AY-374/94. (Incorporated by reference to Exhibit 4(e)(5), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-60290.)

  4.22

 

Individual Retirement Account Certificate, ML-AY-375/94. (Incorporated by reference to Exhibit 4(f)(3), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-60290.)

  4.23

 

Section 457 Deferred Compensation Plan Certificate, ML-AY-376/94. (Incorporated by reference to Exhibit 4(g)(3), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-60290.)

  4.24

 

Qualified Plan Endorsement, ML-AY-448/94. (Incorporated by reference to Exhibit 4(m)(3), filed December 7, 1994, as part of Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-60290.)

10.1

 

Management Services Agreement between Family Life Insurance Company and Merrill Lynch Life Insurance Company. (Incorporated by reference to Exhibit 10.1 to the Registrant’s registration statement on Form S-1, File No. 33-26322, filed January 3, 1989.)

10.2

 

General Agency Agreement between Merrill Lynch Life Insurance Company and Merrill Lynch Life Agency, Inc. (Incorporated by reference to Exhibit 10.2, filed February 23, 1989, as part of Pre-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

10.3

 

Service Agreement among Merrill Lynch Insurance Group, Inc., Family Life Insurance Company and Merrill Lynch Life Insurance Company. (Incorporated by reference to Exhibit 10.3, filed March 13, 1991, as part of Post-Effective Amendment No. 2 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

10.3a

 

Amendment to Service Agreement among Merrill Lynch Insurance Group, Inc., Family Life Insurance Company and Merrill Lynch Life Insurance Company. (Incorporated by reference to Exhibit 10(c)(2) to Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-60290, filed March 31, 1994.)


10.4

 

Indemnity Reinsurance Agreement between Merrill Lynch Life Insurance Company and Family Life Insurance Company. (Incorporated by reference to Exhibit 10.4, filed March 13, 1991, as part of Post-Effective Amendment No. 2 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

10.5

 

Assumption Reinsurance Agreement between Merrill Lynch Life Insurance Company, Tandem Insurance Group, Inc. and Royal Tandem Life Insurance Company and Family Life Insurance Company. (Incorporated by reference to Exhibit 10.6, filed April 24, 1991, as part of Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

10.6

 

Amended General Agency Agreement between Merrill Lynch Life Insurance Company and Merrill Lynch Life Agency, Inc. (Incorporated by reference to Exhibit 10(g) to the Registrant’s registration statement on Form S-1, File No. 33-46827, filed March 30, 1992.)

10.7

 

Indemnity Agreement between Merrill Lynch Life Insurance Company and Merrill Lynch Life Agency, Inc. (Incorporated by reference to Exhibit 10(h) to the Registrant’s registration statement on Form S-1, File No. 33-46827, filed March 30, 1992.)

10.8

 

Management Agreement between Merrill Lynch Life Insurance Company and Merrill Lynch Asset Management, Inc. (Incorporated by reference to Exhibit 10(i) to the Registrant’s registration statement on Form S-1, File No. 33-46827, filed March 30, 1992.)

10.9

 

Amendment No. 1 to Indemnity Reinsurance Agreement between Family Life Insurance Company and Merrill Lynch Life Insurance Company. (Incorporated by reference to Exhibit 10.5, filed April 24, 1991, as part of Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-26322.)

10.10

 

Insurance Administrative Services Agreement between Merrill Lynch Life Insurance Company and Liberty Insurance Services Corporation. (Incorporated by reference to Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, filed March 30, 2005.)

10.11

 

Master Distribution Agreement between Merrill Lynch Insurance Group, Inc., Merrill Lynch & Co., Inc., and AEGON USA, Inc. (Incorporated by reference to Exhibit 10.2 to Merrill Lynch Life Insurance Company’s Current Report on Form 8-K, File No. 33-26322, filed January 4, 2008.)

10.12

 

Wholesaling Agreement between Merrill Lynch Life Insurance Company, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Transamerica Capital. (Incorporated by Reference to the Annual Report on Form 10-K of Merrill Lynch Life Insurance Company, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, filed March 27, 2008.)

10.13

 

Selling Agreement between Merrill Lynch Life Insurance Company, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Merrill Lynch Life Agency, Inc. (Incorporated by Reference to the Annual Report on Form 10-K of Merrill Lynch Life Insurance Company, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, filed March 27, 2008.)

10.14

 

Purchase Agreement between Merrill Lynch Insurance Group, Inc., Merrill Lynch & Co., Inc., and AEGON USA, Inc. (Incorporated by reference to Exhibit 10.1 to Merrill Lynch Life Insurance Company’s Current Report on Form 8-K, File No. 33-26322, filed August 17, 2007.)

10.15

 

First Amendment to Purchase Agreement between Merrill Lynch Insurance Group, Inc., Merrill Lynch & Co., Inc., and AEGON USA, Inc. (Incorporated by reference to Exhibit 10.1 to Merrill Lynch Life Insurance Company’s Current Report on Form 8-K, File No. 33-26322, filed January 4, 2008.)

10.16

 

Principal Underwriting Agreement between Transamerica Capital, Inc. and Merrill Lynch Life Insurance Company. (Incorporated by reference to the Annual Report on Form 10-K of Merrill Lynch Life Insurance Company, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, 333-133223, 333-133225, filed on March 26, 2009.)

10.17

 

Amended and Restated Principal Underwriting Agreement between Transamerica Capital, Inc. and Transamerica Advisors Life Insurance Company. (Incorporated by reference to the Annual Report on Form 10-K of Transamerica Advisors Life Insurance Company, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, 333-34192, 333-133223, and 333-133225, filed March 25, 2011.)

10.18

 

Investment Management Services Agreement among Transamerica Asset Management, Inc., Transamerica Advisors Life Insurance Company and Transamerica Advisors Life Insurance Company of New York. (Incorporated by reference to the Annual Report on Form 10-K of Transamerica Advisors Life Insurance Company, File Nos. 33-26322, 33-46827, 33-52254, 33-60290, 33-58303, 333-33863, 333-34192, 333-133223, and 333-133225, filed March 25, 2011.)

31.1

 

Certification by the Chief Executive Officer pursuant to Rule 15d-14(a).

31.2

 

Certification by the Chief Financial Officer pursuant to Rule 15d-14(a).

32.1

 

Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

 

Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Transamerica Advisors Life Insurance

Company

/s/ Eric J. Martin

Eric J. Martin

Vice President, Treasurer,

Chief Financial Officer, and Controller

Date: May 12, 2011


EXHIBIT INDEX

 

 

31.1

  

Certification by the Chief Executive Officer pursuant to Rule 15d-14(a).

31.2

  

Certification by the Chief Financial Officer pursuant to Rule 15d-14(a).

32.1

  

Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

  

Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.