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EXCEL - IDEA: XBRL DOCUMENT - Symetra Financial CORP | Financial_Report.xls |
EX-31.2 - EX-31.2 - Symetra Financial CORP | v59626exv31w2.htm |
EX-32.1 - EX-32.1 - Symetra Financial CORP | v59626exv32w1.htm |
EX-10.1 - EX-10.1 - Symetra Financial CORP | v59626exv10w1.htm |
EX-31.1 - EX-31.1 - Symetra Financial CORP | v59626exv31w1.htm |
EX-32.2 - EX-32.2 - Symetra Financial CORP | v59626exv32w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 001-33808
SYMETRA FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 20-0978027 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
777 108th Avenue NE, Suite 1200
Bellevue, Washington 98004
(Address of principal executive offices, including zip code)
(425) 256-8000
(Registrants telephone number, including area code)
Bellevue, Washington 98004
(Address of principal executive offices, including zip code)
(425) 256-8000
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of August 5, 2011, the Registrant had 118,538,606 common voting shares outstanding, with a
par value of $0.01 per share.
TABLE OF CONTENTS
2
Table of Contents
Unless the context otherwise requires, references in this quarterly report on Form 10-Q to
we, our, us and the Company are to Symetra Financial Corporation together with its
subsidiaries. References to Symetra refer to Symetra Financial Corporation on a stand-alone,
non-consolidated basis.
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including Managements Discussion and Analysis of
Financial Condition and Results of Operations, contains statements, which constitute
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. All statements, other than statements of
current or historical facts included or referenced in this report that address activities, events
or developments that we expect or anticipate will or may occur in the future, are forward-looking
statements. The words will, believe, intend, plan, expect, anticipate, project,
estimate, predict, potential and similar expressions also are intended to identify
forward-looking statements. These forward-looking statements include, among others, statements with
respect to Symetra Financial Corporations:
| estimates or projections of revenues, net income, net income per share, adjusted operating income, adjusted operating income per share, market share or other financial forecasts; | ||
| trends in operations, financial performance and financial condition; | ||
| financial and operating targets or plans; and | ||
| business and growth strategy. |
These statements are based on certain assumptions and analyses made by the Company in light of
its experience and perception of historical trends, current conditions and expected future
developments, as well as other factors believed to be appropriate under the circumstances. Whether
actual results and developments will conform to the Companys expectations and predictions is
subject to a number of risks, uncertainties and contingencies that could cause actual results to
differ materially from expectations, including, among others:
| general economic, market or business conditions, including further economic downturns or other adverse conditions in the global and domestic capital and credit markets; | ||
| the availability of capital and financing; | ||
| potential investment losses; | ||
| the effects of fluctuations in interest rates and a prolonged low interest rate environment; | ||
| recorded reserves for future policy benefits and claims subsequently proving to be inadequate or inaccurate; | ||
| deviations from assumptions used in setting prices for insurance and annuity products; | ||
| continued viability of certain products under various economic and other conditions; | ||
| market pricing and competitive trends related to insurance products and services; | ||
| changes in amortization of deferred policy acquisition costs or deferred sales inducements; | ||
| financial strength or credit ratings downgrades; | ||
| the continued availability and cost of reinsurance coverage; | ||
| changes in laws or regulations, or their interpretation, including those that could increase the Companys business costs and required capital levels; | ||
| the ability of subsidiaries to pay dividends to Symetra; | ||
| the ability of the new executive leadership team to successfully implement business strategies; | ||
| the effects of implementation of the Patient Protection and Affordable Care Act (PPACA); | ||
| the effects of implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd Frank Act); and |
3
Table of Contents
| the risks that are described in Part II, Item 1A Risk Factors in this report; and Part I, Item 1A Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2010. |
Consequently, all of the forward-looking statements made in this report are qualified by these
cautionary statements, and there can be no assurance that the actual results or developments
anticipated by us will be realized or, even if substantially realized, that they will have the
expected consequences to, or effects on, the Company or its business or operations. We assume no
obligation to update publicly any such forward-looking statements, whether as a result of new
information, future events or otherwise.
4
Table of Contents
PART I Financial Information
Item 1. | Financial Statements |
CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share data)
(In millions, except share and per share data)
As of | As of | |||||||
June 30, 2011 | December 31, 2010 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Investments: |
||||||||
Available-for-sale securities: |
||||||||
Fixed maturities, at fair value (amortized cost: $20,982.1 and $20,416.5, respectively) |
$ | 22,146.5 | $ | 21,281.8 | ||||
Marketable equity securities, at fair value (cost: $52.8 and $52.8, respectively) |
51.2 | 45.1 | ||||||
Trading securities: |
||||||||
Marketable equity securities, at fair value (cost: $355.6 and $168.0, respectively) |
380.9 | 189.3 | ||||||
Mortgage loans, net |
2,085.0 | 1,713.0 | ||||||
Policy loans |
69.6 | 71.5 | ||||||
Investments in limited partnerships (includes $30.4 and $36.5 measured at fair value,
respectively) |
193.8 | 186.9 | ||||||
Other invested assets |
14.5 | 12.6 | ||||||
Total investments |
24,941.5 | 23,500.2 | ||||||
Cash and cash equivalents |
87.4 | 274.6 | ||||||
Accrued investment income |
268.1 | 257.6 | ||||||
Accounts receivable and other receivables |
97.5 | 65.6 | ||||||
Reinsurance recoverables |
288.8 | 280.8 | ||||||
Deferred policy acquisition costs |
238.5 | 250.0 | ||||||
Goodwill |
29.4 | 28.4 | ||||||
Current income taxes recoverable |
4.4 | 3.0 | ||||||
Other assets |
99.9 | 95.0 | ||||||
Separate account assets |
887.3 | 881.7 | ||||||
Total assets |
$ | 26,942.8 | $ | 25,636.9 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Funds held under deposit contracts |
$ | 21,909.0 | $ | 20,953.3 | ||||
Future policy benefits |
399.6 | 398.4 | ||||||
Policy and contract claims |
126.4 | 116.6 | ||||||
Unearned premiums |
12.6 | 12.2 | ||||||
Other policyholders funds |
109.5 | 111.0 | ||||||
Notes payable |
449.1 | 449.0 | ||||||
Deferred income tax liabilities, net |
192.2 | 99.0 | ||||||
Other liabilities |
209.8 | 235.1 | ||||||
Separate account liabilities |
887.3 | 881.7 | ||||||
Total liabilities |
24,295.5 | 23,256.3 | ||||||
Commitments and contingencies (Note 10) |
||||||||
Preferred stock, $0.01 par value; 10,000,000 shares authorized; none issued |
| | ||||||
Common stock, $0.01 par value; 750,000,000 shares authorized; 118,570,964 issued and
outstanding as of June 30, 2011; 118,216,470 issued and 118,215,701 outstanding as of
December 31, 2010 |
1.2 | 1.2 | ||||||
Additional paid-in capital |
1,452.3 | 1,450.2 | ||||||
Retained earnings |
595.9 | 496.7 | ||||||
Accumulated other comprehensive income, net of taxes |
597.9 | 432.5 | ||||||
Total stockholders equity |
2,647.3 | 2,380.6 | ||||||
Total liabilities and stockholders equity |
$ | 26,942.8 | $ | 25,636.9 | ||||
See accompanying notes.
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Table of Contents
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
(Unaudited)
(In millions, except per share data)
(Unaudited)
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues: |
||||||||||||||||
Premiums |
$ | 119.4 | $ | 115.5 | $ | 240.3 | $ | 234.5 | ||||||||
Net investment income |
312.2 | 297.1 | 622.2 | 584.0 | ||||||||||||
Policy fees, contract charges, and other |
45.9 | 41.8 | 90.6 | 82.3 | ||||||||||||
Net realized investment gains (losses): |
||||||||||||||||
Total other-than-temporary impairment losses on securities |
(3.1 | ) | (2.7 | ) | (4.0 | ) | (20.6 | ) | ||||||||
Less: portion of losses recognized in other comprehensive income |
0.3 | 1.2 | 0.3 | 9.4 | ||||||||||||
Net impairment losses recognized in earnings |
(2.8 | ) | (1.5 | ) | (3.7 | ) | (11.2 | ) | ||||||||
Other net realized investment gains (losses) |
16.9 | (8.5 | ) | 33.4 | 8.0 | |||||||||||
Total net realized investment gains (losses) |
14.1 | (10.0 | ) | 29.7 | (3.2 | ) | ||||||||||
Total revenues |
491.6 | 444.4 | 982.8 | 897.6 | ||||||||||||
Benefits and expenses: |
||||||||||||||||
Policyholder benefits and claims |
83.7 | 83.3 | 176.0 | 169.5 | ||||||||||||
Interest credited |
225.1 | 221.5 | 453.4 | 440.0 | ||||||||||||
Other underwriting and operating expenses |
70.5 | 64.2 | 136.5 | 123.8 | ||||||||||||
Interest expense |
8.0 | 7.9 | 16.0 | 15.9 | ||||||||||||
Amortization of deferred policy acquisition costs |
20.0 | 17.0 | 40.1 | 32.4 | ||||||||||||
Total benefits and expenses |
407.3 | 393.9 | 822.0 | 781.6 | ||||||||||||
Income from operations before income taxes |
84.3 | 50.5 | 160.8 | 116.0 | ||||||||||||
Provision (benefit) for income taxes: |
||||||||||||||||
Current |
31.1 | 17.4 | 42.3 | 27.3 | ||||||||||||
Deferred |
(6.2 | ) | (2.7 | ) | 4.2 | 6.6 | ||||||||||
Total provision for income taxes |
24.9 | 14.7 | 46.5 | 33.9 | ||||||||||||
Net income |
$ | 59.4 | $ | 35.8 | $ | 114.3 | $ | 82.1 | ||||||||
Net income per common share: |
||||||||||||||||
Basic |
$ | 0.43 | $ | 0.26 | $ | 0.83 | $ | 0.61 | ||||||||
Diluted |
$ | 0.43 | $ | 0.26 | $ | 0.83 | $ | 0.61 | ||||||||
Weighted-average number of common shares outstanding: |
||||||||||||||||
Basic |
137.523 | 137.019 | 137.408 | 134.035 | ||||||||||||
Diluted |
137.532 | 137.038 | 137.417 | 134.056 | ||||||||||||
Cash dividends declared per common share |
$ | 0.06 | $ | 0.05 | $ | 0.11 | $ | 0.05 |
See accompanying notes.
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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(In millions)
(Unaudited)
(In millions)
(Unaudited)
Accumulated | ||||||||||||||||||||||||
Additional | Treasury | Other | Total | |||||||||||||||||||||
Common | Paid-in | Retained | Stock, | Comprehensive | Stockholders | |||||||||||||||||||
Stock | Capital | Earnings | at Cost | Income (Loss) | Equity | |||||||||||||||||||
Balances as of January 1, 2010 |
$ | 0.9 | $ | 1,165.7 | $ | 316.4 | $ | | $ | (49.7 | ) | $ | 1,433.3 | |||||||||||
Common stock issued (net of issuance costs of $20.6) |
0.3 | 282.2 | | | | 282.5 | ||||||||||||||||||
Comprehensive income, net of taxes: |
||||||||||||||||||||||||
Net income |
| | 82.1 | | | 82.1 | ||||||||||||||||||
Other comprehensive income (net of taxes: $296.5) |
| | | | 550.8 | 550.8 | ||||||||||||||||||
Total comprehensive income, net of taxes |
632.9 | |||||||||||||||||||||||
Stock-based compensation |
| 1.6 | | (0.6 | ) | | 1.0 | |||||||||||||||||
Dividends declared |
| | (6.9 | ) | | | (6.9 | ) | ||||||||||||||||
Balances as of June 30, 2010 |
$ | 1.2 | $ | 1,449.5 | $ | 391.6 | $ | (0.6 | ) | $ | 501.1 | $ | 2,342.8 | |||||||||||
Balances as of January 1, 2011 |
$ | 1.2 | $ | 1,450.2 | $ | 496.7 | $ | | $ | 432.5 | $ | 2,380.6 | ||||||||||||
Comprehensive income, net of taxes: |
||||||||||||||||||||||||
Net income |
| | 114.3 | | | 114.3 | ||||||||||||||||||
Other comprehensive income (net of taxes: $89.0) |
| | | | 165.4 | 165.4 | ||||||||||||||||||
Total comprehensive income, net of taxes |
279.7 | |||||||||||||||||||||||
Stock-based compensation |
| 2.1 | | | | 2.1 | ||||||||||||||||||
Dividends declared |
| | (15.1 | ) | | | (15.1 | ) | ||||||||||||||||
Balances as of June 30, 2011 |
$ | 1.2 | $ | 1,452.3 | $ | 595.9 | $ | | $ | 597.9 | $ | 2,647.3 | ||||||||||||
See accompanying notes.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
(In millions)
(Unaudited)
For the Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 114.3 | $ | 82.1 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Net realized investment (gains) losses |
(29.7 | ) | 3.2 | |||||
Accretion and amortization of invested assets, net |
23.3 | 18.9 | ||||||
Accrued interest on fixed maturities |
(15.0 | ) | (21.5 | ) | ||||
Amortization and depreciation |
12.8 | 11.5 | ||||||
Deferred income tax provision |
4.2 | 6.6 | ||||||
Interest credited on deposit contracts |
453.4 | 440.0 | ||||||
Mortality and expense charges and administrative fees |
(53.8 | ) | (51.2 | ) | ||||
Changes in: |
||||||||
Accrued investment income |
(10.5 | ) | (14.4 | ) | ||||
Deferred policy acquisition costs, net |
(24.0 | ) | (35.1 | ) | ||||
Other receivables |
(8.3 | ) | 2.8 | |||||
Future policy benefits |
1.2 | 2.1 | ||||||
Policy and contract claims |
9.8 | (4.9 | ) | |||||
Current income taxes |
(1.4 | ) | 22.3 | |||||
Other assets and liabilities |
(25.8 | ) | (27.0 | ) | ||||
Other, net |
0.8 | 1.4 | ||||||
Total adjustments |
337.0 | 354.7 | ||||||
Net cash provided by operating activities |
451.3 | 436.8 | ||||||
Cash flows from investing activities |
||||||||
Purchases of: |
||||||||
Fixed maturities and marketable equity securities |
(2,535.0 | ) | (2,397.7 | ) | ||||
Other invested assets and investments in limited partnerships |
(16.1 | ) | (23.4 | ) | ||||
Issuances of mortgage loans |
(425.7 | ) | (179.6 | ) | ||||
Issuances of policy loans |
(6.5 | ) | (8.6 | ) | ||||
Maturities, calls, paydowns, and other |
950.8 | 892.7 | ||||||
Sales of: |
||||||||
Fixed maturities and marketable equity securities |
803.1 | 441.7 | ||||||
Other invested assets and investments in limited partnerships |
12.1 | 6.3 | ||||||
Repayments of mortgage loans |
52.1 | 37.5 | ||||||
Repayments of policy loans |
8.0 | 9.7 | ||||||
Other, net |
1.2 | (1.8 | ) | |||||
Net cash used in investing activities |
(1,156.0 | ) | (1,223.2 | ) | ||||
Cash flows from financing activities |
||||||||
Policyholder account balances: |
||||||||
Deposits |
1,261.8 | 1,215.9 | ||||||
Withdrawals |
(724.4 | ) | (621.2 | ) | ||||
Proceeds from issuance of common stock |
| 282.5 | ||||||
Cash dividends paid on common stock |
(15.1 | ) | (6.9 | ) | ||||
Acquisition of treasury stock |
| (0.6 | ) | |||||
Other, net |
(4.8 | ) | (18.4 | ) | ||||
Net cash provided by financing activities |
517.5 | 851.3 | ||||||
Net increase (decrease) in cash and cash equivalents |
(187.2 | ) | 64.9 | |||||
Cash and cash equivalents at beginning of period |
274.6 | 257.8 | ||||||
Cash and cash equivalents at end of period |
$ | 87.4 | $ | 322.7 | ||||
Supplemental disclosures of cash flow information |
||||||||
Non-cash transactions during the period: |
||||||||
Investments in limited partnerships and capital obligations incurred |
$ | 13.5 | $ | 20.2 | ||||
Bond exchanges |
69.8 | 72.7 |
See accompanying notes.
8
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
1. Description of Business
Symetra Financial Corporation is a Delaware corporation that, through its subsidiaries, offers
group and individual insurance products and retirement products, including annuities, marketed
through benefits consultants, financial institutions and independent agents and advisors in all
states and the District of Columbia. The Companys principal products include medical stop-loss
insurance, fixed and variable deferred annuities, single premium immediate annuities and individual
life insurance.
2. Summary of Significant Accounting Policies
Basis of Presentation and Use of Estimates
The accompanying interim financial statements include, on a consolidated basis, the accounts
of Symetra Financial Corporation and its subsidiaries, which are collectively referred to as
Symetra Financial or the Company. All significant intercompany transactions and balances have
been eliminated.
The interim consolidated financial statements have been prepared in conformity with U.S.
generally accepted accounting principles (GAAP), including the rules and regulations of the
Securities and Exchange Commission (SEC), for interim reporting. The preparation of financial
statements in conformity with GAAP requires the Company to make estimates and assumptions that may
affect the amounts reported in the interim consolidated financial statements and accompanying
notes. These interim consolidated financial statements are unaudited but in managements opinion
include all adjustments, consisting of normal recurring adjustments and accruals, necessary for a
fair presentation.
These interim consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and accompanying notes included in the Companys Annual Report on
Form 10-K for the year ended December 31, 2010, filed with the SEC. The consolidated balance sheet
as of December 31, 2010 was derived from audited consolidated financial statements as of that date,
but certain information and footnotes required by GAAP for complete financial statements have been
excluded from this interim report. Operating results for the three and six months ended June 30,
2011 are not necessarily indicative of the results that may be expected for the twelve months ended
December 31, 2011.
During the first quarter of 2010, the Company revised its estimate for bonus interest reserves
on one of its universal life products. This bonus interest is not earned by the contract holder if
the policys credited rate is equal to the guaranteed minimum. Due to the negative impact the low
interest rate environment has had on investment yields, the credited interest rate was adjusted
downward to the guaranteed minimum rate over a period of 12 months, beginning in first quarter
2010. As a result, for the six months ended June 30, 2010, income from operations before income
taxes was $7.4 higher than it would have been without this adjustment. The impact on net income
for the same period was $4.8, or $0.03 per share of common stock.
Adoption of New Accounting Pronouncements
ASU 2010-06, Improving Disclosures about Fair Value Measurement
In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2010-06, Fair Value Measurements and Disclosures (Topic 820) Improving Disclosures
about Fair Value Measurement. The guidance in this ASU requires additional disclosures about an
entitys fair value measurements, including information about inputs to Level 2 measurements, gross
transfers into and out of Levels 1 and 2, and information about activity for Level 3 measurements
on a gross basis. It also clarifies the level of disaggregation required for existing fair value
disclosures. The Company adopted this guidance on January 1, 2010, except for the provisions
regarding activity for Level 3 measurements presented on a gross basis, which was adopted on
January 1, 2011, as provided for in the guidance. See Note 6 for the Companys disclosures related
to fair value measurements.
ASU 2010-15, How Investments Held through Separate Accounts Affect an Insurers Consolidation Analysis of Those Investments |
In April 2010, the FASB issued ASU 2010-15, Financial Services Insurance (Topic 944) How
Investments Held through Separate Accounts Affect an Insurers Consolidation Analysis of Those
Investments. This guidance clarifies that an insurer should only consider its ownership interests
held within its general account when determining if it holds a controlling interest, thus excluding
9
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
interests held in a separate account from the analysis. It does not change the guidance for
consolidating investments when the general account holds a controlling interest. The Company
adopted this guidance on January 1, 2011, which did not change the Companys current practice of
excluding ownership interests held in its separate account from its consolidation analysis.
ASU 2011-02, A Creditors Determination of Whether a Restructuring is a Troubled Debt
Restructuring
In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310) A Creditors
Determination of Whether a Restructuring is a Troubled Debt Restructuring. This guidance eliminates
diversity in practice by clarifying the criteria for whether a troubled debt restructuring has
occurred when a creditor modifies a financing receivable for a borrower. The Company elected to
early adopt this guidance, effective April 1, 2011, with retrospective application to January 1,
2011. Upon adoption of ASU 2011-02, the additional disclosures required by the guidance in ASU
2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit
Losses were also adopted by the Company. The adoption of this guidance did not have a material
impact on the financial statements.
Accounting Pronouncements Not Yet Adopted
ASU 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts
In October 2010, the FASB issued ASU 2010-26, Financial Services Insurance (Topic 944)
Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. This guidance
limits the amount of deferrable acquisition costs to those incremental costs directly related to
the successful acquisition of an insurance contract and clarifies which costs are included in that
definition. The guidance is effective for fiscal years beginning after December 15, 2011.
Retrospective application, as well as early adoption, are permitted, but not required. The Company
expects to retrospectively adopt this guidance on January 1, 2012, and is in the process of
evaluating the potential impact to the financial statements.
ASU 2011-05, Presentation of Comprehensive Income
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220) Presentation of
Comprehensive Income. This standard eliminates the current option to report other comprehensive
income (OCI) and its components in the statement of changes in equity, but will not change the
components of net income or OCI, or the calculation of earnings per share (EPS). The guidance is
effective for fiscal years beginning after December 15, 2011. Retrospective application is
required upon adoption. Early adoption is permitted, but not required. The Company expects to
retrospectively adopt this guidance on January 1, 2012. The adoption of this guidance will result
in a change in the presentation of other comprehensive income, but will not have a material impact
on the financial statements.
3. Earnings Per Share
Basic earnings per share represents the amount of earnings for the period available to each
share of common stock outstanding during the reporting period. Diluted earnings per share
represents the earnings available to each share of common stock outstanding during the reporting
period, adjusted for the potential issuance of dilutive common stock.
The Companys outstanding warrants and certain restricted stock granted to employees are
included in weighted-average common shares outstanding for the purposes of computing basic and
diluted earnings per share, using the two-class method. These are considered participating or
potential common stock securities because the terms of the agreements entitle the holders to
receive any dividends declared concurrently with the holders of outstanding shares of common stock,
on a one-to-one basis. Non-participating restricted stock is included in diluted earnings per share
based on the application of the treasury stock method.
For the three and six months ended June 30, 2011, 2.950 stock options were excluded from the
computation of diluted earnings per share, based on the application of the treasury stock method,
because they were antidilutive. For the three and six months ended June 30, 2010, 1.750 stock
options were excluded from the computation of diluted earnings per share.
10
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
The following table presents information relating to the Companys calculations of basic and
diluted earnings per share:
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Numerator: |
||||||||||||||||
Net income, as reported |
$ | 59.4 | $ | 35.8 | $ | 114.3 | $ | 82.1 | ||||||||
Denominator: |
||||||||||||||||
Weighted-average common shares outstanding basic |
137.523 | 137.019 | 137.408 | 134.035 | ||||||||||||
Add: dilutive effect of restricted stock |
0.009 | 0.019 | 0.009 | 0.021 | ||||||||||||
Weighted-average common shares outstanding diluted |
137.532 | 137.038 | 137.417 | 134.056 | ||||||||||||
Net income per common share: |
||||||||||||||||
Basic |
$ | 0.43 | $ | 0.26 | $ | 0.83 | $ | 0.61 | ||||||||
Diluted |
$ | 0.43 | $ | 0.26 | $ | 0.83 | $ | 0.61 |
4. Investments
The following tables summarize the Companys available-for-sale fixed maturities and
marketable equity securities. The other-than-temporary impairments (OTTI) in accumulated other
comprehensive income (AOCI) represent the amount of cumulative non-credit OTTI losses transferred
to, or recorded in, AOCI for securities that also had a credit-related impairment.
Cost or | Gross | Gross | ||||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | OTTI in | ||||||||||||||||
Cost | Gains | Losses | Value | AOCI | ||||||||||||||||
As of June 30, 2011 |
||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||
U.S. government and agencies |
$ | 40.0 | $ | 3.1 | $ | | $ | 43.1 | $ | (0.1 | ) | |||||||||
State and political subdivisions |
521.1 | 10.6 | (8.1 | ) | 523.6 | (0.2 | ) | |||||||||||||
Corporate securities |
14,674.0 | 998.1 | (127.9 | ) | 15,544.2 | (18.3 | ) | |||||||||||||
Residential mortgage-backed securities |
3,495.2 | 158.3 | (22.1 | ) | 3,631.4 | (38.3 | ) | |||||||||||||
Commercial mortgage-backed securities |
1,702.0 | 123.9 | (9.0 | ) | 1,816.9 | (3.1 | ) | |||||||||||||
Other debt obligations |
549.8 | 40.6 | (3.1 | ) | 587.3 | (4.5 | ) | |||||||||||||
Total fixed maturities |
20,982.1 | 1,334.6 | (170.2 | ) | 22,146.5 | (64.5 | ) | |||||||||||||
Marketable equity securities, available-for-sale |
52.8 | 0.3 | (1.9 | ) | 51.2 | | ||||||||||||||
Total |
$ | 21,034.9 | $ | 1,334.9 | $ | (172.1 | ) | $ | 22,197.7 | $ | (64.5 | ) | ||||||||
Cost or | Gross | Gross | ||||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | OTTI in | ||||||||||||||||
Cost | Gains | Losses | Value | AOCI | ||||||||||||||||
As of December 31, 2010 |
||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||
U.S. government and agencies |
$ | 30.3 | $ | 2.8 | $ | | $ | 33.1 | $ | (0.1 | ) | |||||||||
State and political subdivisions |
462.9 | 5.3 | (15.4 | ) | 452.8 | (0.2 | ) | |||||||||||||
Corporate securities |
13,891.7 | 855.3 | (205.6 | ) | 14,541.4 | (26.2 | ) | |||||||||||||
Residential mortgage-backed securities |
3,707.2 | 148.9 | (54.5 | ) | 3,801.6 | (40.0 | ) | |||||||||||||
Commercial mortgage-backed securities |
1,782.2 | 115.2 | (10.1 | ) | 1,887.3 | (3.3 | ) | |||||||||||||
Other debt obligations |
542.2 | 35.8 | (12.4 | ) | 565.6 | (6.4 | ) | |||||||||||||
Total fixed maturities |
20,416.5 | 1,163.3 | (298.0 | ) | 21,281.8 | (76.2 | ) | |||||||||||||
Marketable equity securities, available-for-sale |
52.8 | 0.1 | (7.8 | ) | 45.1 | | ||||||||||||||
Total |
$ | 20,469.3 | $ | 1,163.4 | $ | (305.8 | ) | $ | 21,326.9 | $ | (76.2 | ) | ||||||||
11
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
The following tables summarize gross unrealized losses and fair values of the Companys
available-for-sale investments. For fixed maturities, gross unrealized losses include the portion
of OTTI recorded in AOCI. The tables are aggregated by investment category and present separately
those securities that have been in a continuous unrealized loss position for less than twelve
months and for twelve months or more.
Less Than 12 Months | 12 Months or More | |||||||||||||||||||||||
Gross | Gross | |||||||||||||||||||||||
Fair | Unrealized | # of | Fair | Unrealized | # of | |||||||||||||||||||
Value | Losses | Securities | Value | Losses | Securities | |||||||||||||||||||
As of June 30, 2011 |
||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
State and political subdivisions |
$ | 83.2 | $ | (0.7 | ) | 15 | $ | 127.1 | $ | (7.4 | ) | 19 | ||||||||||||
Corporate securities |
1,812.0 | (43.5 | ) | 223 | 700.9 | (84.4 | ) | 74 | ||||||||||||||||
Residential mortgage-backed securities |
485.3 | (8.8 | ) | 39 | 179.6 | (13.3 | ) | 26 | ||||||||||||||||
Commercial mortgage-backed securities |
138.5 | (2.3 | ) | 17 | 59.0 | (6.7 | ) | 17 | ||||||||||||||||
Other debt obligations |
67.4 | (0.7 | ) | 5 | 70.8 | (2.4 | ) | 8 | ||||||||||||||||
Total fixed maturities |
$ | 2,586.4 | $ | (56.0 | ) | 299 | $ | 1,137.4 | $ | (114.2 | ) | 144 | ||||||||||||
Marketable equity securities,
available-for-sale |
20.1 | (0.3 | ) | 1 | 29.5 | (1.6 | ) | 2 | ||||||||||||||||
Total |
$ | 2,606.5 | $ | (56.3 | ) | 300 | $ | 1,166.9 | $ | (115.8 | ) | 146 | ||||||||||||
Less Than 12 Months | 12 Months or More | |||||||||||||||||||||||
Gross | Gross | |||||||||||||||||||||||
Fair | Unrealized | # of | Fair | Unrealized | # of | |||||||||||||||||||
Value | Losses | Securities | Value | Losses | Securities | |||||||||||||||||||
As of December 31, 2010 |
||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
State and political subdivisions |
$ | 139.1 | $ | (3.3 | ) | 19 | $ | 146.9 | $ | (12.1 | ) | 24 | ||||||||||||
Corporate securities |
2,191.5 | (92.2 | ) | 203 | 897.7 | (113.4 | ) | 105 | ||||||||||||||||
Residential mortgage-backed securities |
525.8 | (18.6 | ) | 37 | 273.1 | (35.9 | ) | 42 | ||||||||||||||||
Commercial mortgage-backed securities |
160.5 | (2.9 | ) | 26 | 63.2 | (7.2 | ) | 17 | ||||||||||||||||
Other debt obligations |
41.4 | (0.8 | ) | 7 | 94.9 | (11.6 | ) | 10 | ||||||||||||||||
Total fixed maturities |
$ | 3,058.3 | $ | (117.8 | ) | 292 | $ | 1,475.8 | $ | (180.2 | ) | 198 | ||||||||||||
Marketable equity securities,
available-for-sale |
19.9 | (0.7 | ) | 2 | 24.1 | (7.1 | ) | 3 | ||||||||||||||||
Total |
$ | 3,078.2 | $ | (118.5 | ) | 294 | $ | 1,499.9 | $ | (187.3 | ) | 201 | ||||||||||||
Based on National Association of Insurance Commissioners (NAIC) ratings, as of June 30,
2011 and December 31, 2010, the Company held below-investment-grade fixed maturities with fair
values of $1,481.3 and $1,257.5, respectively, and amortized costs of $1,510.0 and $1,321.2,
respectively. These holdings amounted to 6.7% and 5.9% of the Companys investments in fixed
maturities at fair value as of June 30, 2011 and December 31, 2010, respectively.
The following table summarizes the amortized cost and fair value of fixed maturities as of
June 30, 2011, by contractual years to maturity. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without
prepayment penalties.
Amortized | Fair | |||||||
Cost | Value | |||||||
One year or less |
$ | 484.6 | $ | 493.7 | ||||
Over one year through five years |
3,252.9 | 3,482.9 | ||||||
Over five years through ten years |
6,630.9 | 7,076.2 | ||||||
Over ten years |
4,909.1 | 5,108.0 | ||||||
Residential mortgage-backed securities |
3,495.2 | 3,631.4 | ||||||
Commercial mortgage-backed securities |
1,702.0 | 1,816.9 | ||||||
Other asset-backed securities |
507.4 | 537.4 | ||||||
Total fixed maturities |
$ | 20,982.1 | $ | 22,146.5 | ||||
12
Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
The following table summarizes the Companys net investment income:
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Fixed maturities |
$ | 283.1 | $ | 280.4 | $ | 569.8 | $ | 551.4 | ||||||||
Marketable equity securities, available-for-sale |
1.1 | 1.1 | 1.7 | 1.7 | ||||||||||||
Marketable equity securities, trading |
2.2 | 0.8 | 3.1 | 1.5 | ||||||||||||
Mortgage loans |
31.3 | 20.9 | 59.2 | 39.7 | ||||||||||||
Policy loans |
1.0 | 1.1 | 2.0 | 2.2 | ||||||||||||
Investments in limited partnerships |
(1.3 | ) | (2.6 | ) | (3.9 | ) | (3.8 | ) | ||||||||
Other |
1.4 | 0.7 | 2.7 | 1.8 | ||||||||||||
Total investment income |
318.8 | 302.4 | 634.6 | 594.5 | ||||||||||||
Investment expenses |
(6.6 | ) | (5.3 | ) | (12.4 | ) | (10.5 | ) | ||||||||
Net investment income |
$ | 312.2 | $ | 297.1 | $ | 622.2 | $ | 584.0 | ||||||||
The following table summarizes the Companys net realized investment gains (losses):
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Fixed maturities: |
||||||||||||||||
Gross gains on sales |
$ | 29.7 | $ | 7.0 | $ | 32.4 | $ | 17.4 | ||||||||
Gross losses on sales |
(1.5 | ) | (0.2 | ) | (7.6 | ) | (1.3 | ) | ||||||||
Other-than-temporary impairments |
(2.8 | ) | (1.5 | ) | (3.7 | ) | (11.2 | ) | ||||||||
Other(1) |
(2.2 | ) | (0.1 | ) | 6.0 | 2.2 | ||||||||||
Total fixed maturities |
23.2 | 5.2 | 27.1 | 7.1 | ||||||||||||
Marketable equity securities, trading(2) |
(7.7 | ) | (8.8 | ) | 4.5 | (1.2 | ) | |||||||||
Other invested assets |
(0.7 | ) | (4.8 | ) | (0.2 | ) | (6.2 | ) | ||||||||
Deferred policy acquisition costs adjustment |
(0.7 | ) | (1.6 | ) | (1.7 | ) | (2.9 | ) | ||||||||
Net realized investment gains (losses) |
$ | 14.1 | $ | (10.0 | ) | $ | 29.7 | $ | (3.2 | ) | ||||||
(1) | This includes net gains on calls and redemptions and changes in the fair value of the Companys convertible securities held as of period end totaling $(3.0), $(2.9), $(1.3) and $(0.6) for the three and six months ended June 30, 2011 and 2010, respectively. | |
(2) | This includes changes in fair value of trading securities held as of period end, totaling $(7.3), $(7.4), $3.2 and $(2.7) of net gains (losses) for the three and six months ended June 30, 2011 and 2010, respectively. |
Other-Than-Temporary Impairments
The Companys review of investment securities for OTTI includes both quantitative and
qualitative criteria. Quantitative criteria include the length of time and amount that each
security is in an unrealized loss position (i.e., is underwater) and for fixed maturities, whether
expected future cash flows indicate that a credit loss exists.
While all securities are monitored for impairment, the Companys experience indicates that
securities for which the cost or amortized cost exceeds fair value by less than 20% do not
represent a significant risk of impairment and, often, fair values recover over time as the factors
that caused the declines improve. If the estimated fair value has declined and remained below cost
or amortized cost by 20% or more for at least six months, the Company further analyzes the decrease
in fair value to determine whether it is an other-than-temporary decline. To make this
determination for each security the Company considers, among other factors:
| Extent and duration of the decline in fair value below cost or amortized cost; | ||
| The financial condition and near-term prospects of the issuer of the security, including any specific events that may affect its operations, earnings potential or compliance with terms and covenants of the security; | ||
| Changes in the financial condition of the securitys underlying collateral; | ||
| Any downgrades of the security by a rating agency; |
13
Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
| Any reduction or elimination of dividends or non-payment of scheduled interest payments; | ||
| Other indications that a credit loss has occurred; and | ||
| For fixed maturities, the Companys intent to sell or whether it is more likely than not the Company will be required to sell the fixed maturity prior to recovery of its amortized cost, considering any regulatory developments and the Companys liquidity needs. |
For fixed maturities, if the Company determines that the present value of the cash flows
expected to be collected is less than the amortized cost of the security (i.e., a credit loss
exists), the Company concludes that an OTTI has occurred. In order to determine the amount of the
credit loss, the Company calculates the recovery value by discounting the current expectations of
future cash flows it expects to recover. The discount rate is the effective interest rate implicit
in the underlying fixed maturity. The effective interest rate is the original effective yield for
corporate securities, or current effective yield for mortgage-backed securities.
Determination of OTTI on Corporate Securities
To determine the recovery value, credit loss or intent to sell for a corporate security, the
Company performs an analysis related to the underlying issuer including, but not limited to, the
following:
| Expected cash flows of the issuer; | ||
| Fundamentals of the industry in which the issuer operates; | ||
| Fundamentals of the issuer to determine what the Company would recover if the issuer were to file for bankruptcy, compared to the price at which the market is trading; | ||
| Earnings multiples for an issuers industry or sector of the industry, divided by the outstanding debt to determine an expected recovery value of the security in the case of a liquidation; | ||
| Expectations regarding defaults and recovery rates; | ||
| Changes to the rating of the security by a rating agency; and | ||
| Additional market information. |
Determination of OTTI on Structured Securities
To determine the recovery value, credit loss or intent to sell for a structured security,
including residential mortgage-, commercial mortgage- and other asset-backed securities, the
Company performs an analysis related to the underlying issuer including, but not limited to, the
following:
| Discounted cash flow analysis based on the future cash flows the Company expects to recover; | ||
| Level of creditworthiness; | ||
| Delinquency ratios and loan-to-value ratios; | ||
| Average cumulative collateral loss, vintage year and level of subordination; | ||
| Susceptibility to fair value fluctuations due to changes in the interest rate environment; | ||
| Susceptibility to variability of prepayments; and | ||
| Susceptibility to reinvestment risk. |
14
Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
The following table presents the severity and duration of the gross unrealized losses on the
Companys underwater available-for-sale securities, after the recognition of OTTI:
As of June 30, 2011 | As of December 31, 2010 | |||||||||||||||
Gross | Gross | |||||||||||||||
Fair | Unrealized | Fair | Unrealized | |||||||||||||
Value | Losses | Value | Losses | |||||||||||||
Fixed maturities |
||||||||||||||||
Underwater by 20% or more: |
||||||||||||||||
Less than 6 consecutive months |
$ | 43.2 | $ | (11.9 | ) | $ | 69.1 | $ | (23.7 | ) | ||||||
6 consecutive months or more |
36.2 | (12.2 | ) | 93.9 | (36.2 | ) | ||||||||||
Total underwater by 20% or more |
79.4 | (24.1 | ) | 163.0 | (59.9 | ) | ||||||||||
All other underwater fixed maturities |
3,644.4 | (146.1 | ) | 4,371.1 | (238.1 | ) | ||||||||||
Total underwater fixed maturities |
$ | 3,723.8 | $ | (170.2 | ) | $ | 4,534.1 | $ | (298.0 | ) | ||||||
Marketable equity securities, available-for-sale |
||||||||||||||||
Underwater by 20% or more: |
||||||||||||||||
Less than 6 consecutive months |
$ | | $ | | $ | | $ | | ||||||||
6 consecutive months or more |
| | 1.7 | (4.4 | ) | |||||||||||
Total underwater by 20% or more |
| | 1.7 | (4.4 | ) | |||||||||||
All other underwater marketable equity securities, available-for-sale |
49.6 | (1.9 | ) | 42.3 | (3.4 | ) | ||||||||||
Total underwater marketable equity securities, available-for-sale |
$ | 49.6 | $ | (1.9 | ) | $ | 44.0 | $ | (7.8 | ) | ||||||
The Company reviewed its available-for-sale investments with unrealized losses as of June
30, 2011 in accordance with its impairment policy and determined, after the recognition of
other-than-temporary impairments, that the remaining declines in fair value were temporary. The
Company did not intend to sell its underwater fixed maturities and it was not more likely than not
that the Company will be required to sell the fixed maturities before recovery of amortized cost.
This conclusion is supported by the Companys spread analysis, cash flow modeling and expected
continuation of contractually required principal and interest payments.
As of June 30, 2011, the Company did not intend to sell its underwater available-for-sale
marketable equity securities, primarily consisting of non-redeemable preferred stocks. Based on its
analysis of these securities, including an evaluation of the near term prospects of the issuers, it
had the intent and ability to hold them until recovery. Therefore, the Company concluded that the
declines in fair value of these securities were temporary.
Changes in the amount of credit-related OTTI recognized in net income where the portion
related to other factors was recognized in other comprehensive income were as follows:
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Balance, beginning of period |
$ | 52.2 | $ | 69.5 | $ | 68.0 | $ | 69.6 | ||||||||
Increases recognized in the current period: |
||||||||||||||||
For which an OTTI was not previously recognized |
0.2 | 0.5 | 0.6 | 6.5 | ||||||||||||
For which an OTTI was previously recognized |
| 0.9 | | 2.4 | ||||||||||||
Decreases attributable to: |
||||||||||||||||
Securities sold or paid down during the period |
(2.1 | ) | (2.4 | ) | (18.3 | ) | (10.0 | ) | ||||||||
Balance, end of period |
$ | 50.3 | $ | 68.5 | $ | 50.3 | $ | 68.5 | ||||||||
5. Mortgage Loans
The Company originates and manages a portfolio of mortgage loans which are secured by
first-mortgage liens on income-producing commercial real estate, primarily in the retail,
industrial and office building sectors. All loans are underwritten consistently using standards
based on loan-to-value (LTV) ratios and debt-service coverage ratios (DSCR) as well as detailed
market, property and borrower analyses. The Companys mortgage loan portfolio is considered a
single portfolio segment and class of financing receivable, which is consistent with how the
Company assesses and monitors the risk and performance of the portfolio. A large majority of these
15
Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
loans have personal guarantees and all loans are inspected and evaluated annually. The
Companys mortgage loan portfolio is diversified by geographic region, loan size and scheduled
maturities. As of June 30, 2011, 32.3% of our commercial mortgage loans were located in California,
14.0% were located in Washington and 10.0% were located in Texas. Individual loans generally do not
exceed $10.0.
Allowance for Mortgage Loans
The allowance for losses on mortgage loans provides for the risk of credit loss inherent in
the lending process. The allowance includes a portfolio reserve for probable incurred but not
specifically identified losses and, as needed, specific reserves for non-performing loans. The
allowance for losses on mortgage loans is evaluated as of each reporting period and adjustments are
recorded when appropriate. To assist in its evaluation of the allowance for loan losses the Company
utilizes the following credit quality indicators to categorize its loans as lower, medium or higher
risk:
| Lower Risk Loans Loans with an LTV ratio of less than 65%, and a DSCR of greater than 1.50. | ||
| Medium Risk Loans Loans that have an LTV ratio of less than 65% but a DSCR below 1.50, or loans with an LTV ratio between 65% and 80%, and a DSCR of greater than 1.50. | ||
| Higher Risk Loans All loans with an LTV ratio greater than 80%, or loans which have an LTV ratio between 65% and 80%, and a DSCR of less than 1.50. |
The following table sets forth the Companys mortgage loans by risk category:
As of June 30, 2011 | As of December 31, 2010 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Value | % of Total | Value | % of Total | |||||||||||||
Lower Risk |
$ | 1,135.2 | 54.2 | % | $ | 917.5 | 53.3 | % | ||||||||
Medium Risk |
470.3 | 22.5 | 430.4 | 25.0 | ||||||||||||
Higher Risk |
487.3 | 23.3 | 372.3 | 21.7 | ||||||||||||
Credit quality indicator total |
2,092.8 | 100.0 | % | 1,720.2 | 100.0 | % | ||||||||||
Other (1) |
(7.8 | ) | (7.2 | ) | ||||||||||||
Total |
$ | 2,085.0 | $ | 1,713.0 | ||||||||||||
(1) | Other includes the allowance for loan losses, deferred fees and costs, and a 2004 purchase accounting adjustment. |
In developing its portfolio reserve for incurred but not specifically identified losses,
the Company evaluates loans by risk category as well as its past loan experience, commercial real
estate market conditions, and third party data for expected losses on loans with similar LTV ratios
and DSCRs. For existing loans, the Companys LTV ratios and DSCRs are updated each year between
June 1 and August 31.
The following table summarizes the Companys allowance for mortgage loan losses, which
includes portfolio and specific reserves:
For the Three Months | For the Six Months Ended | |||||||||||||||
Ended June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Allowance at beginning of period |
$ | 7.1 | $ | 8.3 | $ | 7.1 | $ | 8.2 | ||||||||
Provision for loans not specifically identified |
| 0.6 | | 0.7 | ||||||||||||
Write-off for foreclosed property |
| (2.2 | ) | | (2.2 | ) | ||||||||||
Allowance at end of period |
$ | 7.1 | $ | 6.7 | $ | 7.1 | $ | 6.7 | ||||||||
Specific reserves are established for non-performing loans, which are those loans that
are more than 90 days past due on payment or for which the Company considers it probable that
amounts due according to the terms of the loan agreement will not be collected. As of June 30, 2011
and December 31, 2010, no loans were considered non-performing or were specifically evaluated and
identified as impaired.
16
Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
6. Fair Value of Financial Instruments
The Company determines the fair value of its financial instruments based on the fair value
hierarchy, which requires an entity to maximize its use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. The Company has categorized its financial
instruments, based on the priority of the inputs to the valuation technique, into the three-level
hierarchy, which 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). The level within
which a fair value measurement falls is determined based on the lowest-level input that is
significant to the fair value measurement. The Companys financial assets recorded at fair value on
the consolidated balance sheets are categorized as follows:
| Level 1 Unadjusted quoted prices in active markets for identical instruments. This level primarily consists of exchange-traded marketable equity securities and actively traded mutual fund investments. |
| Level 2 Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable. This level includes those financial instruments that are valued using industry-standard pricing methodologies, models or other valuation methodologies. All significant inputs are observable, derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the market place. Financial instruments in this category primarily include certain corporate fixed maturities, government or agency securities and certain mortgage-backed securities. |
| Level 3 Instruments whose significant value drivers are unobservable. This comprises financial instruments for which fair value is estimated based on industry-standard pricing methodologies and internally developed models utilizing significant inputs not based on or corroborated by readily available market information. In limited circumstances, this category may also utilize non-binding broker quotes. This category primarily consists of certain less liquid fixed maturities, including certain corporate private placement securities, and investments in private equity funds. |
The following tables present the financial assets accounted for at fair value on a recurring
basis, classified by the valuation hierarchy described above. The Company has no financial
liabilities accounted for at fair value on a recurring basis.
As of June 30, 2011 | ||||||||||||||||||||
Level 3 | ||||||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | Percent | ||||||||||||||||
Types of Investments |
||||||||||||||||||||
Fixed maturities, available-for-sale: |
||||||||||||||||||||
U.S. government and agencies |
$ | 43.1 | $ | | $ | 43.1 | $ | | | |||||||||||
State and political subdivisions |
523.6 | | 523.6 | | | |||||||||||||||
Corporate securities |
15,544.2 | | 14,817.3 | 726.9 | 3.1 | % | ||||||||||||||
Residential mortgage-backed securities |
3,631.4 | | 3,631.4 | | | |||||||||||||||
Commercial mortgage-backed securities |
1,816.9 | | 1,800.1 | 16.8 | 0.1 | |||||||||||||||
Other debt obligations |
587.3 | | 435.6 | 151.7 | 0.6 | |||||||||||||||
Total fixed maturities, available-for-sale |
22,146.5 | | 21,251.1 | 895.4 | 3.8 | |||||||||||||||
Marketable equity securities, available-for-sale |
51.2 | 46.2 | | 5.0 | | |||||||||||||||
Marketable equity securities, trading |
380.9 | 371.5 | | 9.4 | 0.1 | |||||||||||||||
Investments in limited partnerships(1) |
30.4 | | | 30.4 | 0.1 | |||||||||||||||
Other invested assets |
8.7 | 2.7 | | 6.0 | | |||||||||||||||
Total investments carried at fair value |
22,617.7 | 420.4 | 21,251.1 | 946.2 | 4.0 | |||||||||||||||
Separate account assets |
887.3 | 887.3 | | | | |||||||||||||||
Total |
$ | 23,505.0 | $ | 1,307.7 | $ | 21,251.1 | $ | 946.2 | 4.0 | % | ||||||||||
(1) | Includes investments in private equity funds. |
17
Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
As of December 31, 2010 | ||||||||||||||||||||
Level 3 | ||||||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | Percent | ||||||||||||||||
Types of Investments |
||||||||||||||||||||
Fixed maturities, available-for-sale: |
||||||||||||||||||||
U.S. government and agencies |
$ | 33.1 | $ | | $ | 33.1 | $ | | | |||||||||||
State and political subdivisions |
452.8 | | 452.8 | | | |||||||||||||||
Corporate securities |
14,541.4 | | 13,786.8 | 754.6 | 3.3 | % | ||||||||||||||
Residential mortgage-backed securities |
3,801.6 | | 3,801.6 | | | |||||||||||||||
Commercial mortgage-backed securities |
1,887.3 | | 1,868.2 | 19.1 | 0.1 | |||||||||||||||
Other debt obligations |
565.6 | | 412.4 | 153.2 | 0.7 | |||||||||||||||
Total fixed maturities, available-for-sale |
21,281.8 | | 20,354.9 | 926.9 | 4.1 | |||||||||||||||
Marketable equity securities, available-for-sale |
45.1 | 43.3 | | 1.8 | | |||||||||||||||
Marketable equity securities, trading |
189.3 | 188.7 | | 0.6 | | |||||||||||||||
Investments in limited partnerships(1) |
36.5 | | | 36.5 | 0.2 | |||||||||||||||
Other invested assets |
6.4 | 2.6 | | 3.8 | | |||||||||||||||
Total investments carried at fair value |
21,559.1 | 234.6 | 20,354.9 | 969.6 | 4.3 | |||||||||||||||
Separate account assets |
881.7 | 881.7 | | | | |||||||||||||||
Total |
$ | 22,440.8 | $ | 1,116.3 | $ | 20,354.9 | $ | 969.6 | 4.3 | % | ||||||||||
(1) | Includes investments in private equity funds. |
Fixed Maturities
The vast majority of the Companys fixed maturities have been classified as Level 2
measurements. To make this assessment, the Company determines whether the market for a security is
active and if significant pricing inputs are observable. The Company predominantly utilizes third
party independent pricing services to assist management in determining the fair value of its fixed
maturity securities. As of June 30, 2011 and December 31, 2010, respectively, pricing services
provided prices for 96.0% and 95.6% of the Companys fixed maturities.
The pricing services provide prices where observable inputs are available. The Companys
pricing services utilize evaluated pricing models that vary by asset class. If sufficient
objectively verifiable information about a securitys valuation is not available, the pricing
services will not provide a valuation for the security.
The Company performs an analysis on the prices received from the pricing services to ensure
they represent a reasonable estimate of fair value and to gain assurance on the overall
reasonableness and consistent application of input assumptions, valuation methodologies and
compliance with accounting standards for fair value determination. This analysis is performed
through evaluation of pricing methodologies and inputs, analytical reviews of certain prices
between reporting periods, and back-testing of selected sales activity to determine whether there
were significant differences between the market price used to value the security prior to sale and
the actual sales price. Based upon this analysis, the Company has not adjusted prices obtained from
the pricing services, and multiple prices for these securities are not obtained.
In situations where the Company is unable to obtain sufficient market-observable information
to estimate the fair value of a security, the securitys fair value is determined using internal
pricing models. These models typically utilize significant, unobservable market inputs or inputs
that are difficult to corroborate with observable market data, and the resulting value is
considered a Level 3 measurement. This is generally the case for private placement securities and
other securities the pricing services are unable to price.
As of June 30, 2011 and December 31, 2010, the Company had $869.7, or 3.9%, and $892.9, or
4.2%, respectively, of its fixed maturities invested in private placement securities. The valuation
of certain private placement securities requires significant judgment by management due to the
absence of quoted market prices, the inherent lack of liquidity and the long-term nature of such
assets. The use of significant unobservable inputs in determining the fair value of the Companys
investments in private placement securities resulted in the classification of $796.0, or 91.5%, and
$815.4, or 91.3%, as Level 3 measurements as of June 30, 2011 and December 31, 2010, respectively.
18
Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
Corporate Securities
As of June 30, 2011 and December 31, 2010, the fair value of the Companys corporate
securities classified as Level 2 measurements was $14,817.3 and $13,786.8, respectively. The
following table presents additional information about the composition of the Level 2 corporate
securities:
As of June 30, 2011 | As of December 31, 2010 | |||||||||||||||||||||||
Amount | % of Total | # of Securities | Amount | % of Total | # of Securities | |||||||||||||||||||
Significant Security Sectors: |
||||||||||||||||||||||||
Industrials |
$ | 2,696.3 | 18.2 | % | 212 | $ | 2,444.7 | 17.7 | % | 225 | ||||||||||||||
Consumer staples |
2,420.4 | 16.3 | 157 | 2,118.0 | 15.4 | 157 | ||||||||||||||||||
Financials |
1,924.7 | 13.0 | 231 | 1,862.1 | 13.5 | 260 | ||||||||||||||||||
Utilities |
1,771.7 | 12.0 | 175 | 1,738.2 | 12.6 | 194 | ||||||||||||||||||
Weighted-average coupon rate |
6.18 | % | 6.27 | % | ||||||||||||||||||||
Weighted-average remaining years to
contractual maturity |
11.8 | 12.2 |
Corporate securities classified as Level 2 measurements are priced by independent pricing
services utilizing evaluated pricing models. The significant inputs for security evaluations
include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets,
benchmark securities, bids, offers and other reference data, including market research
publications. Because many corporate securities do not trade on a daily basis, evaluated pricing
applications apply available information through processes such as benchmark curves, benchmarking
of like securities, sector groupings and matrix pricing to prepare evaluations.
As of June 30, 2011, 94.4% of corporate securities classified as Level 3 were privately placed
securities. These securities were issued by entities primarily in the industrial sector, 21.6%, the
financial sector, 20.9%, and the consumer discretionary sector, 14.5%.
As of December 31, 2010, 94.7% of corporate securities classified as Level 3 were privately
placed securities. These securities were issued by entities primarily in the industrial sector,
21.6%, the financial sector, 21.2%, and the consumer discretionary sector, 15.9%.
The valuation of these privately placed Level 3 corporate securities requires significant
judgment due to the absence of quoted market prices, the inherent lack of liquidity and the
duration of such assets. The fair values of these securities were determined using a discounted
cash flow approach. The discount rate was based on the current Treasury curve, adjusted for credit
and liquidity factors. The credit factor adjustment, which is based on credit spreads to the
Treasury curve for similar securities, varies for each security based on its quality and industry
or sector. The illiquidity adjustment is estimated based on illiquidity spreads observed in
transactions involving similar securities. As of June 30, 2011 and December 31, 2010 the range of
illiquidity adjustments varied from 0 to 50 basis points.
The following table presents additional information about the quality of the Level 3 privately
placed corporate securities:
As of June 30, 2011 | As of December 31, 2010 | |||||||||||||||||||
Fair Value | % of Total | Fair Value | % of Total | |||||||||||||||||
NAIC Rating: | Comparable Standard & Poors rating: |
|||||||||||||||||||
1 | AAA, AA, A |
$ | 89.3 | 13.0 | % | $ | 118.6 | 16.6 | % | |||||||||||
2 | BBB |
487.4 | 71.0 | 497.5 | 69.6 | |||||||||||||||
3 - 6 | BB & below |
109.8 | 16.0 | 98.7 | 13.8 | |||||||||||||||
Total |
$ | 686.5 | 100.0 | % | $ | 714.8 | 100.0 | % |
19
Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
Residential Mortgage-backed Securities
As of June 30, 2011 and December 31, 2010, the fair value of the Companys residential
mortgage-backed securities (RMBS) classified as Level 2 measurements was $3,631.4 and $3,801.6,
respectively. These securities were primarily fixed-rate, with a weighted-average coupon rate of
4.98% and 5.13% as of June 30, 2011 and December 31, 2010, respectively. Agency securities
comprised 88.8% and 88.4% of the Companys Level 2 RMBS as of June 30, 2011 and December 31, 2010,
respectively.
The following table presents additional information about the composition of the Level 2
non-agency RMBS securities:
As of June 30, 2011 | As of December 31, 2010 | |||||||||||||||
Fair Value | % of Total | Fair Value | % of Total | |||||||||||||
Standard & Poors equivalent rating: |
||||||||||||||||
AAA |
$ | 146.9 | 36.1 | % | $ | 166.6 | 37.8 | % | ||||||||
AA through BBB |
87.2 | 21.4 | 89.0 | 20.2 | ||||||||||||
BB & below |
173.1 | 42.5 | 185.4 | 42.0 | ||||||||||||
Total non-agency RMBS |
$ | 407.2 | 100.0 | % | $ | 441.0 | 100.0 | % | ||||||||
Non-agency RMBS with super senior subordination |
$ | 244.0 | 59.9 | % | $ | 259.2 | 58.8 | % |
As of June 30, 2011 and December 31, 2010, the Companys non-agency Level 2 RMBS had a
weighted-average credit enhancement of 9.5% and 9.8%, respectively. As of June 30, 2011 and
December 31, 2010, $166.8 and $181.8, or 41.0% and 41.2%, respectively, of the Companys non-agency
Level 2 RMBS had an origination or vintage year of 2004 and prior.
Level 2 RMBS securities are priced by independent pricing services that utilize evaluated
pricing models. The significant inputs for security evaluations include benchmark yields, reported
trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers
and other reference data, including market research publications. Because many RMBS do not trade on
a daily basis, evaluated pricing applications apply available information through processes such as
benchmark curves, benchmarking of like securities, sector groupings and matrix pricing to prepare
evaluations. In addition, the pricing services use models and processes to develop prepayment and
interest rate scenarios. The pricing services monitor market indicators, industry and economic
events, and their models take into account market convention.
Commercial Mortgage-backed Securities
As of June 30, 2011 and December 31, 2010, the fair value of the Companys commercial
mortgage-backed securities (CMBS) classified as Level 2 measurements was $1,800.1 and $1,868.2,
respectively. These were primarily non-agency securities, which comprised 73.2% and 68.3% of Level
2 CMBS as of June 30, 2011 and December 31, 2010, respectively. The non-agency CMBS had an
estimated weighted-average credit enhancement of 28.6% and 28.5% as of June 30, 2011 and December
31, 2010, respectively, and 94.5% and 94.3% were in the most senior tranche as of June 30, 2011
and December 31, 2010, respectively.
The Companys Level 2 CMBS had a weighted-average coupon rate of 5.37% and 5.50% as of June
30, 2011 and December 31, 2010, respectively. As of June 30, 2011 and December 31, 2010, 18.2% of
the underlying collateral for these securities was located in New York for both periods, 13.2% and
13.3% was located in California, and 7.3% and 7.1% was located in Texas. The underlying collateral
primarily consisted of retail shopping centers, comprising 33.7% as of both periods, and office
buildings comprising 30.6% and 30.5%, respectively, of these securities as of June 30, 2011 and
December 31, 2010.
Level 2 CMBS securities are priced by independent pricing services that utilize evaluated
pricing models. The significant inputs for security evaluations include benchmark yields, reported
trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids,
offers, new issues, monthly payment information and other reference data, including market research
publications. Because many CMBS do not trade on a daily basis, evaluated pricing applications apply
available information through processes, such as benchmark curves, benchmarking of like securities,
sector groupings and matrix pricing to prepare evaluations.
Marketable Equity Securities
Marketable equity securities are investments in common stock, real estate investment trusts
(REITs) and certain nonredeemable preferred stocks, which primarily consist of investments in
publicly traded companies and actively traded mutual fund
20
Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
investments. The fair values of the Companys marketable equity securities are primarily based
on quoted market prices in active markets for identical assets, which are classified as Level 1
measurements.
Investments in Limited Partnerships
Investments in limited partnerships recorded at fair value are investments in private equity
funds. The Company utilizes the fair value option for these investments, regardless of ownership
percentage, to standardize the related accounting and reporting.
The fair value for the Companys investments in private equity funds is based upon the
Companys proportionate interest in the underlying partnership or funds net asset value (NAV),
which approximates fair value. The Company is generally unable to liquidate these investments
during the term of the partnership or fund, which range from five to twelve years. As such, the
Company classifies these securities as Level 3 measurements.
Separate Accounts
Separate account assets are primarily invested in mutual funds with published NAVs, which are
classified as Level 1 measurements.
Rollforward of Financial Instruments Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level 3) |
The following tables present additional information about assets measured at fair value on a
recurring basis and for which significant unobservable inputs (Level 3) were utilized to determine
fair value for the three and six months ended June 30, 2011:
Unrealized Gain (Loss) | ||||||||||||||||||||||||||||||||||||
Transfers | Included in: | |||||||||||||||||||||||||||||||||||
Balance as | In and/or | Other | Realized | Balance as of | ||||||||||||||||||||||||||||||||
of April 1, | (Out) of | Net | Comprehensive | Gains | June 30, | |||||||||||||||||||||||||||||||
2011 | Purchases | Sales | Level 3(1) | Other(2) | Income(3) | Income | (Losses)(3) | 2011 | ||||||||||||||||||||||||||||
Types of Investments: |
||||||||||||||||||||||||||||||||||||
Corporate securities |
$ | 769.4 | $ | 2.2 | $ | (1.3 | ) | $ | (28.4 | ) | $ | (21.5 | ) | $ | | $ | 6.3 | $ | 0.2 | $ | 726.9 | |||||||||||||||
Commercial mortgage backed securities |
17.7 | | | | (1.1 | ) | | 0.2 | | 16.8 | ||||||||||||||||||||||||||
Other debt obligations |
150.4 | | | | (0.5 | ) | | 1.8 | | 151.7 | ||||||||||||||||||||||||||
Total fixed maturities, available-for-sale |
937.5 | 2.2 | (1.3 | ) | (28.4 | ) | (23.1 | ) | | 8.3 | 0.2 | 895.4 | ||||||||||||||||||||||||
Marketable equity securities,
available-for-sale |
1.8 | | | | | | 3.2 | | 5.0 | |||||||||||||||||||||||||||
Marketable equity securities, trading |
0.7 | 7.9 | | | | 0.8 | | | 9.4 | |||||||||||||||||||||||||||
Investments in limited partnerships |
34.9 | 2.3 | | | (8.5 | ) | 0.5 | | 1.2 | 30.4 | ||||||||||||||||||||||||||
Other invested assets |
4.4 | 1.5 | | | | (0.4 | ) | 0.5 | | 6.0 | ||||||||||||||||||||||||||
Total Level 3 |
$ | 979.3 | $ | 13.9 | $ | (1.3 | ) | $ | (28.4 | ) | $ | (31.6 | ) | $ | 0.9 | $ | 12.0 | $ | 1.4 | $ | 946.2 | |||||||||||||||
Unrealized Gain (Loss) | ||||||||||||||||||||||||||||||||||||
Transfers | Included in: | |||||||||||||||||||||||||||||||||||
Balance as | In and/or | Other | Realized | Balance as of | ||||||||||||||||||||||||||||||||
of January 1, | (Out) of | Net | Comprehensive | Gains | June 30, | |||||||||||||||||||||||||||||||
2011 | Purchases | Sales | Level 3(1) | Other(2) | Income(3) | Income | (Losses)(3) | 2011 | ||||||||||||||||||||||||||||
Types of Investments: |
||||||||||||||||||||||||||||||||||||
Corporate securities |
$ | 754.6 | $ | 3.2 | $ | (9.8 | ) | $ | (4.5 | ) | $ | (24.0 | ) | $ | | $ | 11.1 | $ | (3.7 | ) | $ | 726.9 | ||||||||||||||
Commercial mortgage backed securities |
19.1 | | | | (2.5 | ) | | 0.2 | | 16.8 | ||||||||||||||||||||||||||
Other debt obligations |
153.2 | 9.0 | (10.8 | ) | | (1.3 | ) | | 3.3 | (1.7 | ) | 151.7 | ||||||||||||||||||||||||
Total fixed maturities, available-for-sale |
926.9 | 12.2 | (20.6 | ) | (4.5 | ) | (27.8 | ) | | 14.6 | (5.4 | ) | 895.4 | |||||||||||||||||||||||
Marketable equity securities, available-for-sale |
1.8 | | | | | | 3.2 | | 5.0 | |||||||||||||||||||||||||||
Marketable equity securities, trading |
0.6 | 7.9 | | | | 0.9 | | | 9.4 | |||||||||||||||||||||||||||
Investments in limited partnerships |
36.5 | 2.4 | | | (12.3 | ) | 1.8 | | 2.0 | 30.4 | ||||||||||||||||||||||||||
Other invested assets |
3.8 | 1.5 | | | | 0.2 | 0.5 | | 6.0 | |||||||||||||||||||||||||||
Total Level 3 |
$ | 969.6 | $ | 24.0 | $ | (20.6 | ) | $ | (4.5 | ) | $ | (40.1 | ) | $ | 2.9 | $ | 18.3 | $ | (3.4 | ) | $ | 946.2 | ||||||||||||||
(1) | Transfers into and/or out of Level 3 are reported at the value as of the beginning of the period in which the transfer occurs. Gross transfers into Level 3 were $0.9 and $0.0 for the three and six months ended June 30, 2011, respectively. Gross transfers out of Level 3 were $29.3 and $4.5 for the three and six months ended June 30, 2011, respectively. | |
(2) | Other is comprised of transactions such as pay downs, calls, amortization and redemptions. | |
(3) | Realized and unrealized gains and losses for investments in limited partnerships are included in net investment income. |
21
Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
The following tables present additional information about assets measured at fair value
on a recurring basis and for which the Company has utilized significant unobservable inputs (Level
3) to determine fair value for the three and six months ended June 30, 2010:
Unrealized Gain (Loss) | ||||||||||||||||||||||||||||||||||||
Transfers | Included in: | |||||||||||||||||||||||||||||||||||
Balance as | In and/or | Other | Realized | Balance as of | ||||||||||||||||||||||||||||||||
of April 1, | (Out) of | Net | Comprehensive | Gains | June 30, | |||||||||||||||||||||||||||||||
2010 | Purchases | Sales | Level 3(1) | Other(2) | Income(3) | Income | (Losses)(3) | 2010 | ||||||||||||||||||||||||||||
Types of Investments: |
||||||||||||||||||||||||||||||||||||
State and political subdivisions |
$ | 7.4 | $ | | $ | | $ | | $ | | $ | | $ | 0.2 | $ | | $ | 7.6 | ||||||||||||||||||
Corporate securities |
862.6 | 15.7 | | 4.5 | (35.7 | ) | | 12.8 | 2.3 | 862.2 | ||||||||||||||||||||||||||
Residential mortgage-backed securities |
260.8 | 17.4 | | (202.6 | ) | 0.7 | | 0.8 | | 77.1 | ||||||||||||||||||||||||||
Commercial mortgage backed securities |
23.1 | 10.1 | | (1.3 | ) | (1.0 | ) | | 0.7 | | 31.6 | |||||||||||||||||||||||||
Other debt obligations |
55.0 | | | 0.2 | (0.4 | ) | | 1.8 | (0.1 | ) | 56.5 | |||||||||||||||||||||||||
Total fixed maturities, available-for-sale |
1,208.9 | 43.2 | | (199.2 | ) | (36.4 | ) | | 16.3 | 2.2 | 1,035.0 | |||||||||||||||||||||||||
Marketable equity securities,
available-for-sale |
1.8 | | | | | | | | 1.8 | |||||||||||||||||||||||||||
Marketable equity securities, trading |
0.5 | | | | 0.1 | 0.1 | | | 0.7 | |||||||||||||||||||||||||||
Investments in limited partnerships |
25.2 | 8.6 | (1.4 | ) | | 0.1 | (1.1 | ) | | 0.7 | 32.1 | |||||||||||||||||||||||||
Other invested assets |
3.8 | | | | | (1.3 | ) | | | 2.5 | ||||||||||||||||||||||||||
Total Level 3 |
$ | 1,240.2 | $ | 51.8 | $ | (1.4 | ) | $ | (199.2 | ) | $ | (36.2 | ) | $ | (2.3 | ) | $ | 16.3 | $ | 2.9 | $ | 1,072.1 | ||||||||||||||
Unrealized Gain (Loss) | ||||||||||||||||||||||||||||||||||||
Transfers | Included in: | |||||||||||||||||||||||||||||||||||
Balance as | In and/or | Other | Realized | Balance as of | ||||||||||||||||||||||||||||||||
of January 1, | (Out) of | Net | Comprehensive | Gains | June 30, | |||||||||||||||||||||||||||||||
2010 | Purchases | Sales | Level 3(1) | Other(2) | Income(3) | Income | (Losses)(3) | 2010 | ||||||||||||||||||||||||||||
Types of Investments: |
||||||||||||||||||||||||||||||||||||
State and political subdivisions |
$ | 7.2 | $ | | $ | | $ | | $ | | $ | | $ | 0.4 | $ | | $ | 7.6 | ||||||||||||||||||
Corporate securities |
847.1 | 31.7 | (17.3 | ) | 12.8 | (37.6 | ) | | 24.9 | 0.6 | 862.2 | |||||||||||||||||||||||||
Residential mortgage-backed securities |
250.5 | 17.4 | | (194.6 | ) | 1.4 | | 2.4 | | 77.1 | ||||||||||||||||||||||||||
Commercial mortgage backed securities |
24.0 | 10.1 | | (1.3 | ) | (2.8 | ) | | 1.6 | | 31.6 | |||||||||||||||||||||||||
Other debt obligations |
54.7 | | | | (1.3 | ) | | 3.2 | (0.1 | ) | 56.5 | |||||||||||||||||||||||||
Total fixed maturities, available-for-sale |
1,183.5 | 59.2 | (17.3 | ) | (183.1 | ) | (40.3 | ) | | 32.5 | 0.5 | 1,035.0 | ||||||||||||||||||||||||
Marketable equity securities, available-for-sale |
1.8 | | | | | | | | 1.8 | |||||||||||||||||||||||||||
Marketable equity securities, trading |
0.3 | | | | 0.3 | 0.1 | | | 0.7 | |||||||||||||||||||||||||||
Investments in limited partnerships |
24.7 | 9.2 | (2.4 | ) | | | (0.2 | ) | | 0.8 | 32.1 | |||||||||||||||||||||||||
Other invested assets |
4.6 | | (0.3 | ) | | (0.8 | ) | (1.1 | ) | | 0.1 | 2.5 | ||||||||||||||||||||||||
Total Level 3 |
$ | 1,214.9 | $ | 68.4 | $ | (20.0 | ) | $ | (183.1 | ) | $ | (40.8 | ) | $ | (1.2 | ) | $ | 32.5 | $ | 1.4 | $ | 1,072.1 | ||||||||||||||
(1) | Transfers into and/or out of Level 3 are reported at the value as of the beginning of the period in which the transfer occurs. Gross transfers into Level 3 were $4.7 and $14.9 for the three and six months ended June 30, 2010, respectively. Gross transfers out of Level 3 were $203.9 and $198.0 for the three and six ended June 30, 2010, respectively, as public market information on certain of the Companys RMBS securities became available and third party independent pricing services began to provide process. Such securities are now classified as Level 2. | |
(2) | Other is comprised of transactions such as pay downs, calls, amortization, and redemptions. | |
(3) | Realized and unrealized gains and losses for investments in limited partnerships are included in net investment income. |
22
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CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
The following table summarizes the carrying or reported values and corresponding fair
values of financial instruments subject to fair value disclosure requirements:
As of June 30, 2011 | As of December 31, 2010 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
Financial assets: |
||||||||||||||||
Fixed maturities |
$ | 22,146.5 | $ | 22,146.5 | $ | 21,281.8 | $ | 21,281.8 | ||||||||
Marketable equity securities, available-for-sale |
51.2 | 51.2 | 45.1 | 45.1 | ||||||||||||
Marketable equity securities, trading |
380.9 | 380.9 | 189.3 | 189.3 | ||||||||||||
Mortgage loans |
2,085.0 | 2,173.1 | 1,713.0 | 1,772.2 | ||||||||||||
Investments in limited partnerships: |
||||||||||||||||
Private equity funds |
30.4 | 30.4 | 36.5 | 36.5 | ||||||||||||
Tax credit investments |
163.4 | 163.3 | 150.4 | 152.6 | ||||||||||||
Other invested assets |
14.5 | 14.5 | 12.6 | 12.6 | ||||||||||||
Cash and cash equivalents |
87.4 | 87.4 | 274.6 | 274.6 | ||||||||||||
Separate account assets |
887.3 | 887.3 | 881.7 | 881.7 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Funds held under deposit contracts: |
||||||||||||||||
Deferred annuities |
9,678.4 | 9,525.8 | 8,795.8 | 8,694.2 | ||||||||||||
Immediate annuities |
6,642.9 | 7,195.0 | 6,670.4 | 7,188.9 | ||||||||||||
Notes payable: |
||||||||||||||||
Capital Efficient Notes (CENts) |
149.8 | 151.8 | 149.8 | 140.9 | ||||||||||||
Senior notes |
299.3 | 316.6 | 299.2 | 301.6 |
Other Financial Instruments
Cash and cash equivalents consist of demand bank deposits and short-term highly liquid
investments with original maturities of three months or less at the time of purchase. Cash
equivalents are reported at cost, which approximates fair value, and were $78.5 and $261.0 as of
June 30, 2011 and December 31, 2010, respectively. Cash equivalents of $75.7 and $257.9 were held
in a single highly rated overnight money market fund as of June 30, 2011 and December 31, 2010,
respectively.
The fair values of the Companys mortgage loans were measured by discounting the projected
future cash flows using the current rate at which the loans would be made to borrowers with similar
credit ratings and for the same maturities.
Investments in limited partnerships associated with tax credit investments are carried at
amortized cost. Fair value was estimated based on the discounted cash flows over the remaining life
of the tax credits. The discount rate used was the original internal rate of return for each
investment.
The Company estimates the fair values of funds held under deposit contracts related to
investment-type contracts using an income approach, based on the present value of the discounted
cash flows. Cash flows were projected using best estimates for lapses, mortality and expenses, and
discounted at a risk-free rate plus a nonperformance risk spread. The carrying value of this
balance excludes $5,587.7 and $5,487.1 of liabilities related to insurance contracts as of June 30,
2011 and December 31, 2010, respectively.
The fair values of the Companys notes payable were based on nonbinding quotes provided by
third-parties. The fair value measurement assumes that liabilities were transferred to a market
participant of equal credit standing and without consideration for any optional redemption
features.
23
Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
7. Deferred Policy Acquisition Costs and Deferred Sales Inducements
The following table provides a reconciliation of the beginning and ending balance for deferred
policy acquisition costs (DAC):
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Unamortized balance at beginning of period |
$ | 403.6 | $ | 339.8 | $ | 387.4 | $ | 325.7 | ||||||||
Deferral of acquisition costs |
28.4 | 39.2 | 65.4 | 69.7 | ||||||||||||
Adjustments related to investment gains |
(0.6 | ) | (1.2 | ) | (1.3 | ) | (2.2 | ) | ||||||||
Amortization |
(20.0 | ) | (17.0 | ) | (40.1 | ) | (32.4 | ) | ||||||||
Unamortized balance at end of period |
411.4 | 360.8 | 411.4 | 360.8 | ||||||||||||
Accumulated effect of net unrealized investment gains |
(172.9 | ) | (161.8 | ) | (172.9 | ) | (161.8 | ) | ||||||||
Balance at end of period |
$ | 238.5 | $ | 199.0 | $ | 238.5 | $ | 199.0 | ||||||||
The following table provides a reconciliation of the beginning and ending balance for
deferred sales inducements, which are included in other assets on the consolidated balance sheets:
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Unamortized balance at beginning of period |
$ | 116.4 | $ | 76.7 | $ | 105.8 | $ | 67.6 | ||||||||
Capitalizations |
18.1 | 14.7 | 35.2 | 28.0 | ||||||||||||
Adjustments related to investment gains |
(0.2 | ) | (0.4 | ) | (0.5 | ) | (0.7 | ) | ||||||||
Amortization |
(7.4 | ) | (4.4 | ) | (13.6 | ) | (8.3 | ) | ||||||||
Unamortized balance at end of period |
126.9 | 86.6 | 126.9 | 86.6 | ||||||||||||
Accumulated effect of net unrealized investment gains |
(62.3 | ) | (46.0 | ) | (62.3 | ) | (46.0 | ) | ||||||||
Balance at end of period |
$ | 64.6 | $ | 40.6 | $ | 64.6 | $ | 40.6 | ||||||||
24
Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
8. Stockholders Equity
The components of comprehensive income are as follows:
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net income |
$ | 59.4 | $ | 35.8 | $ | 114.3 | $ | 82.1 | ||||||||
Other comprehensive income, net of taxes: |
||||||||||||||||
Changes in unrealized gains and losses on available-for-sale securities(1) |
203.7 | 380.0 | 213.2 | 624.9 | ||||||||||||
Reclassification adjustment for net realized investment (gains) losses
included in net income(2) |
(10.0 | ) | 2.4 | (20.4 | ) | (3.7 | ) | |||||||||
Adjustment for deferred policy acquisition costs and deferred sales
inducements valuation allowance(3) |
(30.8 | ) | (42.8 | ) | (35.0 | ) | (74.2 | ) | ||||||||
Other-than-temporary-impairments on fixed maturities not related
to credit losses(4) |
1.0 | 2.0 | 7.6 | 3.8 | ||||||||||||
Other comprehensive income, net of taxes |
163.9 | 341.6 | 165.4 | 550.8 | ||||||||||||
Total comprehensive income |
$ | 223.3 | $ | 377.4 | $ | 279.7 | $ | 632.9 | ||||||||
(1) | Net of taxes of $109.7, $204.5, $114.8 and $336.4 for the three and six months ended June 30, 2011 and 2010, respectively. | |
(2) | Net of taxes of $(5.5), $1.3, $(11.1) and $(2.0) for the three and six months ended June 30, 2011 and 2010, respectively. For the three and six months ended June 30, 2011, $1.2 (net of taxes of $0.6) and $7.8 (net of taxes of $4.2), respectively, of the reclassification adjustment is related to losses previously classified as OTTI not related to credit losses. For the three and six months ended June 30, 2010, $2.8 (net of taxes of $1.4) and $9.9 (net of taxes of $5.3), respectively, of the reclassification adjustment is related to losses previously classified as OTTI not related to credit losses. | |
(3) | Net of taxes of $(16.5), $(23.0), $(18.8) and $(39.9) for the three and six months ended June 30, 2011 and 2010, respectively. | |
(4) | Net of taxes of $0.5, $1.0, $4.1 and $2.0 for the three and six months ended June 30, 2011 and 2010, respectively. |
The following table provides a reconciliation of changes in outstanding shares of common
stock:
Common Shares | ||||
Balance as of January 1, 2010 |
92.729 | |||
Common stock, issued in initial public offering |
25.260 | |||
Restricted stock issued, net |
0.243 | |||
Employee stock purchase plan shares issued |
0.033 | |||
Treasury stock acquired(1) |
(0.001 | ) | ||
Treasury stock retired(2) |
(0.048 | ) | ||
Balance as of December 31, 2010 |
118.216 | |||
Balance as of January 1, 2011 |
118.216 | |||
Restricted stock issued, net |
0.302 | |||
Employee stock purchase plan shares issued |
0.053 | |||
Balance as of June 30, 2011 |
118.571 | |||
(1) | Represents shares repurchased to satisfy employee income tax withholding pursuant to the Companys Equity Plan. | |
(2) | Represents shares repurchased and subsequently retired pursuant to the Companys Equity Plan. |
25
Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
9. Stock-Based Compensation
The following table summarizes the Companys restricted stock activity for the six months
ended June 30, 2011:
Weighted- | ||||||||
Number of | Average Fair | |||||||
Shares | Value | |||||||
Outstanding as of January 1, 2011 |
0.192 | $ | 12.61 | |||||
Shares granted |
0.306 | 13.80 | ||||||
Shares vested |
(0.002 | ) | 12.48 | |||||
Shares forfeited |
(0.004 | ) | 12.89 | |||||
Outstanding as of June 30, 2011 |
0.492 | $ | 13.15 | |||||
10. Commitments and Contingencies
Litigation
Because of the nature of its business, the Company is subject to legal actions filed or
threatened in the ordinary course of its business operations. The Company does not expect that any
such litigation, pending or threatened, as of June 30, 2011, will have a material adverse effect on
its consolidated financial condition, future operating results or liquidity.
Other Commitments
As of June 30, 2011 and December 31, 2010, unfunded mortgage loan commitments were $60.4 and
$39.2, respectively. As of June 30, 2011, the Company had no other material new or changes to
commitments or contingencies since December 31, 2010.
26
Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
11. Segment Information
The following tables present selected financial information by segment and reconcile segment
pre-tax adjusted operating income (loss) to amounts reported in the consolidated statements of
income.
For the Three Months Ended June 30, 2011 | ||||||||||||||||||||||||
Deferred | Income | |||||||||||||||||||||||
Group | Annuities | Annuities | Life | Other | Total | |||||||||||||||||||
Operating revenues: |
||||||||||||||||||||||||
Premiums |
$ | 109.8 | $ | | $ | | $ | 9.6 | $ | | $ | 119.4 | ||||||||||||
Net investment income |
4.4 | 128.2 | 102.3 | 71.1 | 6.2 | 312.2 | ||||||||||||||||||
Policy fees, contract charges, and other |
3.7 | 5.5 | 0.4 | 30.9 | 5.4 | 45.9 | ||||||||||||||||||
Net investment losses on fixed index
annuity (FIA) options |
| (0.6 | ) | | | | (0.6 | ) | ||||||||||||||||
Total operating revenues |
117.9 | 133.1 | 102.7 | 111.6 | 11.6 | 476.9 | ||||||||||||||||||
Benefits and expenses: |
||||||||||||||||||||||||
Policyholder benefits and claims |
68.5 | | | 15.2 | | 83.7 | ||||||||||||||||||
Interest credited |
| 79.9 | 83.6 | 62.2 | (0.6 | ) | 225.1 | |||||||||||||||||
Other underwriting and operating expenses |
28.3 | 14.2 | 5.9 | 15.5 | 6.6 | 70.5 | ||||||||||||||||||
Interest expense |
| | | | 8.0 | 8.0 | ||||||||||||||||||
Amortization of DAC |
2.1 | 16.0 | 0.6 | 1.3 | | 20.0 | ||||||||||||||||||
Total benefits and expenses |
98.9 | 110.1 | 90.1 | 94.2 | 14.0 | 407.3 | ||||||||||||||||||
Segment pre-tax adjusted operating income
(loss) |
$ | 19.0 | $ | 23.0 | $ | 12.6 | $ | 17.4 | $ | (2.4 | ) | $ | 69.6 | |||||||||||
Operating revenues |
$ | 117.9 | $ | 133.1 | $ | 102.7 | $ | 111.6 | $ | 11.6 | $ | 476.9 | ||||||||||||
Add: Net realized investment gains
(losses), excluding FIA options |
| 0.1 | 13.0 | 1.7 | (0.1 | ) | 14.7 | |||||||||||||||||
Total revenues |
117.9 | 133.2 | 115.7 | 113.3 | 11.5 | 491.6 | ||||||||||||||||||
Total benefits and expenses |
98.9 | 110.1 | 90.1 | 94.2 | 14.0 | 407.3 | ||||||||||||||||||
Income (loss) before income taxes |
$ | 19.0 | $ | 23.1 | $ | 25.6 | $ | 19.1 | $ | (2.5 | ) | $ | 84.3 | |||||||||||
For the Three Months Ended June 30, 2010 | ||||||||||||||||||||||||
Deferred | Income | |||||||||||||||||||||||
Group | Annuities | Annuities | Life | Other | Total | |||||||||||||||||||
Operating revenues: |
||||||||||||||||||||||||
Premiums |
$ | 105.8 | $ | | $ | | $ | 9.7 | $ | | $ | 115.5 | ||||||||||||
Net investment income |
4.8 | 115.3 | 104.7 | 68.3 | 4.0 | 297.1 | ||||||||||||||||||
Policy fees,
contract charges, and other |
3.0 | 4.8 | 0.2 | 29.8 | 4.0 | 41.8 | ||||||||||||||||||
Net investment losses on FIA options |
| (1.3 | ) | | | | (1.3 | ) | ||||||||||||||||
Total operating revenues |
113.6 | 118.8 | 104.9 | 107.8 | 8.0 | 453.1 | ||||||||||||||||||
Benefits and expenses: |
||||||||||||||||||||||||
Policyholder benefits and claims |
67.4 | 0.6 | | 15.3 | | 83.3 | ||||||||||||||||||
Interest credited |
| 70.4 | 92.9 | 59.1 | (0.9 | ) | 221.5 | |||||||||||||||||
Other underwriting and operating expenses |
26.0 | 13.6 | 5.2 | 13.4 | 6.0 | 64.2 | ||||||||||||||||||
Interest expense |
| | | | 7.9 | 7.9 | ||||||||||||||||||
Amortization of DAC |
2.0 | 13.6 | 0.4 | 1.0 | | 17.0 | ||||||||||||||||||
Total benefits and expenses |
95.4 | 98.2 | 98.5 | 88.8 | 13.0 | 393.9 | ||||||||||||||||||
Segment pre-tax adjusted operating income
(loss) |
$ | 18.2 | $ | 20.6 | $ | 6.4 | $ | 19.0 | $ | (5.0 | ) | $ | 59.2 | |||||||||||
Operating revenues |
$ | 113.6 | $ | 118.8 | $ | 104.9 | $ | 107.8 | $ | 8.0 | $ | 453.1 | ||||||||||||
Add: Net realized investment gains
(losses), excluding FIA options |
| 2.6 | (13.8 | ) | 2.4 | 0.1 | (8.7 | ) | ||||||||||||||||
Total revenues |
113.6 | 121.4 | 91.1 | 110.2 | 8.1 | 444.4 | ||||||||||||||||||
Total benefits and expenses |
95.4 | 98.2 | 98.5 | 88.8 | 13.0 | 393.9 | ||||||||||||||||||
Income (loss) before income taxes |
$ | 18.2 | $ | 23.2 | $ | (7.4 | ) | $ | 21.4 | $ | (4.9 | ) | $ | 50.5 | ||||||||||
27
Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
For the Six Months Ended June 30, 2011 | ||||||||||||||||||||||||
Deferred | Income | |||||||||||||||||||||||
Group | Annuities | Annuities | Life | Other | Total | |||||||||||||||||||
Operating revenues: |
||||||||||||||||||||||||
Premiums |
$ | 219.8 | $ | | $ | | $ | 20.5 | $ | | $ | 240.3 | ||||||||||||
Net investment income |
8.6 | 251.3 | 207.3 | 142.3 | 12.7 | 622.2 | ||||||||||||||||||
Policy fees, contract charges, and other |
7.0 | 10.6 | 0.6 | 61.6 | 10.8 | 90.6 | ||||||||||||||||||
Net investment losses on FIA options |
| (0.1 | ) | | | | (0.1 | ) | ||||||||||||||||
Total operating revenues |
235.4 | 261.8 | 207.9 | 224.4 | 23.5 | 953.0 | ||||||||||||||||||
Benefits and expenses: |
||||||||||||||||||||||||
Policyholder benefits and claims |
142.8 | (0.1 | ) | | 33.3 | | 176.0 | |||||||||||||||||
Interest credited |
| 157.5 | 173.3 | 123.9 | (1.3 | ) | 453.4 | |||||||||||||||||
Other underwriting and operating expenses |
55.6 | 26.6 | 11.8 | 29.9 | 12.6 | 136.5 | ||||||||||||||||||
Interest expense |
| | | | 16.0 | 16.0 | ||||||||||||||||||
Amortization of DAC |
4.2 | 31.6 | 1.3 | 3.0 | | 40.1 | ||||||||||||||||||
Total benefits and expenses |
202.6 | 215.6 | 186.4 | 190.1 | 27.3 | 822.0 | ||||||||||||||||||
Segment pre-tax adjusted operating income
(loss) |
$ | 32.8 | $ | 46.2 | $ | 21.5 | $ | 34.3 | $ | (3.8 | ) | $ | 131.0 | |||||||||||
Operating revenues |
$ | 235.4 | $ | 261.8 | $ | 207.9 | $ | 224.4 | $ | 23.5 | $ | 953.0 | ||||||||||||
Add: Net realized investment gains,
excluding FIA options |
| 3.0 | 22.9 | 2.1 | 1.8 | 29.8 | ||||||||||||||||||
Total revenues |
235.4 | 264.8 | 230.8 | 226.5 | 25.3 | 982.8 | ||||||||||||||||||
Total benefits and expenses |
202.6 | 215.6 | 186.4 | 190.1 | 27.3 | 822.0 | ||||||||||||||||||
Income before income taxes |
$ | 32.8 | $ | 49.2 | $ | 44.4 | $ | 36.4 | $ | (2.0 | ) | $ | 160.8 | |||||||||||
As of June 30, 2011: |
||||||||||||||||||||||||
Total assets |
$ | 192.8 | $ | 11,215.7 | $ | 7,037.6 | $ | 6,146.1 | $ | 2,350.6 | $ | 26,942.8 |
For the Six Months Ended June 30, 2010 | ||||||||||||||||||||||||
Deferred | Income | |||||||||||||||||||||||
Group | Annuities | Annuities | Life | Other | Total | |||||||||||||||||||
Operating revenues: |
||||||||||||||||||||||||
Premiums |
$ | 214.6 | $ | | $ | | $ | 19.9 | $ | | $ | 234.5 | ||||||||||||
Net investment income |
9.4 | 223.1 | 208.7 | 134.4 | 8.4 | 584.0 | ||||||||||||||||||
Policy fees, contract charges, and other |
5.9 | 9.6 | 0.4 | 58.9 | 7.5 | 82.3 | ||||||||||||||||||
Net investment losses on FIA options |
| (1.2 | ) | | | | (1.2 | ) | ||||||||||||||||
Total operating revenues |
229.9 | 231.5 | 209.1 | 213.2 | 15.9 | 899.6 | ||||||||||||||||||
Benefits and expenses: |
||||||||||||||||||||||||
Policyholder benefits and claims |
142.4 | 0.7 | | 26.4 | | 169.5 | ||||||||||||||||||
Interest credited |
| 138.9 | 184.9 | 117.6 | (1.4 | ) | 440.0 | |||||||||||||||||
Other underwriting and operating expenses |
49.7 | 27.2 | 10.5 | 26.1 | 10.3 | 123.8 | ||||||||||||||||||
Interest expense |
| | | | 15.9 | 15.9 | ||||||||||||||||||
Amortization of DAC |
3.9 | 26.8 | 0.9 | 0.8 | | 32.4 | ||||||||||||||||||
Total benefits and expenses |
196.0 | 193.6 | 196.3 | 170.9 | 24.8 | 781.6 | ||||||||||||||||||
Segment pre-tax adjusted operating income
(loss) |
$ | 33.9 | $ | 37.9 | $ | 12.8 | $ | 42.3 | $ | (8.9 | ) | $ | 118.0 | |||||||||||
Operating revenues |
$ | 229.9 | $ | 231.5 | $ | 209.1 | $ | 213.2 | $ | 15.9 | $ | 899.6 | ||||||||||||
Add: Net realized investment gains
(losses), excluding FIA options |
(0.2 | ) | 5.6 | (9.1 | ) | 2.6 | (0.9 | ) | (2.0 | ) | ||||||||||||||
Total revenues |
229.7 | 237.1 | 200.0 | 215.8 | 15.0 | 897.6 | ||||||||||||||||||
Total benefits and expenses |
196.0 | 193.6 | 196.3 | 170.9 | 24.8 | 781.6 | ||||||||||||||||||
Income (loss) before income taxes |
$ | 33.7 | $ | 43.5 | $ | 3.7 | $ | 44.9 | $ | (9.8 | ) | $ | 116.0 | |||||||||||
As of June 30, 2010: |
||||||||||||||||||||||||
Total assets |
$ | 249.6 | $ | 9,480.9 | $ | 6,951.9 | $ | 5,430.2 | $ | 2,236.6 | $ | 24,349.2 |
28
Table of Contents
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
(All amounts in millions, except per share data, unless otherwise stated)
(Unaudited)
12. Subsequent Events
On July 1, 2011, the Company acquired the renewal rights for medical stop-loss insurance
policies issued by American United Life Insurance Company (AUL) through its R.E. Moulton, Inc.
(REM) underwriting affiliate for $26.0. In addition, the Company entered into an indemnity
reinsurance agreement for these policies effective July 1, 2011 and received the value of the net
insurance liabilities of $33.8.
On August 10, 2011, the Company declared a dividend of $0.06 per common share, or
approximately $8.3 in total, to shareholders and warrant holders of record as of August 24, 2011.
The dividend will be paid on or about September 7, 2011.
29
Table of Contents
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This discussion contains forward-looking statements that involve risk and uncertainties. Our
actual results may differ materially from those discussed in, or implied by, any of the
forward-looking statements as a result of various factors, including but not limited to those
listed under Forward-Looking Statements. You should read the following discussion in conjunction
with the unaudited interim consolidated financial statements and accompanying condensed notes
included in Item 1 Financial Statements included in this Form 10-Q, our Annual Report for the
year ended December 31, 2010, filed with the SEC on March 16, 2011 (2010 10-K), as well as our
current reports on Form 8-K and other publicly available information. Our fiscal year ends on
December 31 of each calendar year.
Management considers certain non-GAAP financial measures, including adjusted operating income,
adjusted operating income per common share, adjusted book value, adjusted book value, as converted,
adjusted book value per common share, adjusted book value per common share, as converted, average
adjusted book value, and operating return on average equity (ROAE) to be useful to investors in
evaluating our financial performance and condition. These measures have been reconciled to their
most comparable GAAP financial measures. For a definition and further discussion of these non-GAAP
measures, see Item 7 Managements Discussion and Analysis of Financial Condition Use of
non-GAAP Financial Measures in our 2010 10-K.
All amounts, except per share data, are in millions unless otherwise stated.
Overview
We are a financial services company in the life insurance industry focused on profitable
growth in selected group health, retirement, life insurance and employee benefits markets. Our
operations date back to 1957 and many of our agency and distribution relationships have been in
place for decades.
Our Operations
We manage our business through three divisions composed of four operating segments and one
non-operating segment:
Group Division
| Group. We offer medical stop-loss insurance, limited benefit medical plans, group life insurance, accidental death and dismemberment insurance and disability income insurance mainly to employer groups of 50 to 5,000 individuals. In addition to our insurance products, we offer managing general underwriting, or MGU, services. |
Retirement Division
| Deferred Annuities. We offer fixed and variable deferred annuities to consumers who want to accumulate tax-deferred assets for retirement. | ||
| Income Annuities. We offer single premium immediate annuities, or SPIAs, to customers seeking a reliable source of retirement income or to protect against outliving their assets during retirement, and structured settlement annuities to fund third party personal injury settlements. In addition, we offer funding services options to existing structured settlement clients. |
Life Division
| Life. We offer a wide array of individual products such as term and universal life insurance, including single premium life insurance as well as bank-owned life insurance, or BOLI. |
Other
| Other. This segment consists of unallocated corporate income, composed primarily of investment income on unallocated surplus, unallocated corporate expenses, interest expense on debt, earnings related to our limited partnership interests, the results of small, non-insurance businesses that are managed outside of our divisions, and inter-segment elimination entries. |
See Note 11 to the accompanying unaudited interim consolidated financial statements for
the financial results of our segments.
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Current Outlook
We continue to focus on strategies to grow and diversify our business. During the second
quarter of 2011, we launched our new fixed indexed annuity product, updated our single premium life
product and hired key leadership to support our business initiatives. On July 1, 2011, we grew our
Group division business by acquiring the renewal rights for a block of medical stop-loss insurance
policies representing approximately $120 in premium. During the second half of 2011, we plan to
launch a new universal life product, continue our group life business development activity and
evaluate other products and opportunities to grow and diversify. As we focus on these and other
efforts, the current economic uncertainty may impact
our ability to effectively deploy capital.
The
pace of the economic recovery continues to be slow with ongoing concerns over the United States
deficit, European sovereign debt, unemployment and the threat of a double-dip recession.
Interest rates are at the recent historic low levels seen in the latter half of 2010. Low
interest rates and tight credit spreads continue to be a challenge for our asset-based businesses.
To mitigate the risk of unfavorable consequences in this environment, such as spread compression or
instances where our returns on investments are not enough to support the interest rate guarantees
on the inforce business, we remain proactive in our investment and product strategies, interest
crediting strategies and overall asset-liability management practices.
However, our business and results of operations could be
affected by recent economic events.
On August 5, 2011,
Standard & Poors (S&P) downgraded the sovereign credit
rating of the U.S. government, from AAA to AA+,
and on August 8, 2011 took follow-on rating action on various
sectors. In particular, S&P also downgraded the credit
ratings of Fannie Mae and Freddie Mac and other agencies and lenders linked to long-term U.S. debt. Concerns
exist that other credit-rating agency downgrades are possible. As a result, the equity markets are increasingly
volatile and interest rates remain low. The recent downgrade and any potential subsequent downgrades of the U.S.
credit rating could have a material adverse effect on U.S. and global economic conditions.
In
addition, the lack of supply of investments with attractive risk-return profiles and yields continues to
be a challenge. To improve our asset yield in this environment, we have been and plan to continue
increasing our investments in commercial mortgage loans we underwrite. While interest rates on
recently written loans have decreased, they continue to be an attractive investment opportunity
relative to other investments. In addition, we manage our cash levels through temporary investments
in U.S. Treasury securities until more permanent investments with attractive risk-return profiles
can be acquired.
As of August 11, 2011, our holdings of U.S. Treasury securities to
manage cash are minimal at less than $10.0.
To navigate our way through this uncertain environment and provide profitable growth and
long-term return on stockholders equity expansion to our shareholders, we continue to focus on the
strategies outlined in our 2010 10-K. Our focus in 2011 continues to be on executing our strategic
growth initiatives. We expect to organically deploy some of our excess capital as we grow through
sales of new, existing and refreshed products. In addition to organic growth, we continue to look
for acquisition opportunities that fit our strategies and help us drive improved earnings.
However, the success of these and other strategies may be affected by the factors discussed in Item
1A Risk Factors and other factors as discussed herein.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to adopt
accounting policies and make estimates and assumptions that affect amounts reported in the
unaudited interim consolidated financial statements. The following accounting policies are those we
consider to be particularly critical to understanding our financial statements because their
application places the most significant demands on our ability to judge the effect of inherently
uncertain matters on our financial results:
| The evaluation of OTTI of investments; | ||
| The valuation of investments at fair value; | ||
| The balance, recoverability and amortization of deferred policy acquisition costs; and | ||
| The liabilities for future policy benefits and policy and contract claims. |
In applying the Companys accounting policies, management makes subjective and complex
judgments that frequently require estimates about matters that are inherently uncertain. Many of
these policies, estimates and related judgments are common in the insurance and financial services
industries; others are specific to the Companys businesses and operations. For all of these
policies, we caution that future events rarely develop exactly as forecast, and our best estimates
may require adjustment.
There have been no material changes to the above critical accounting estimates, which are
described in Item 7 Managements Discussion and Analysis of Financial Condition and Results of
Operations Critical Accounting Policies and Estimates and Note 2 of the notes to the audited
financial statements included in the 2010 10-K.
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New Accounting Standards
For a discussion of recently adopted and not yet adopted accounting pronouncements, see Note 2
in the accompanying unaudited interim consolidated financial statements.
Sources of Revenues and Expenses
Our primary sources of revenues from our insurance operations are premiums and net investment
income. Our primary sources of expenses from our insurance operations are policyholder benefits and
claims, interest credited to policyholder reserves and account balances, and general business and
operating expenses, net of DAC. We allocate shared service operating expenses to each segment using
multiple factors, including employee headcount, allocated investments, account values and time
study results. We also generate net realized investment gains (losses) on sales or impairment of
our investments and changes in fair value on our equity trading portfolio.
Each of our four operating segments maintains its own portfolio of invested assets, which are
managed in accordance with specific guidelines. The net investment income and realized investment
gains (losses) are reported in the segment in which they occur. We also allocate surplus net
investment income to each segment using a risk-based capital formula. The unallocated portion of
net investment income is reported in the Other segment.
Revenues
Premiums
Premiums consist primarily of premiums from our medical stop-loss and individual term and
whole life insurance products.
Net investment income
Net investment income represents the income earned on our investments, net of investment
expenses, including gains or losses from changes in the fair value of our investments in private
equity fund limited partnerships. Further, we account for our investments in limited partnerships
that operate affordable housing projects and state tax credit funds under the equity method and
record them at amortized cost, with the amortization recorded as a decrease to net investment
income with an offsetting benefit to our income tax expense.
Policy fees, contract charges and other
Policy fees, contract charges and other includes cost of insurance (COI) charges on our
universal life insurance and BOLI policies, mortality expense, surrender and other administrative
charges to policyholders, revenues from our non-insurance businesses, and reinsurance allowance
fees.
Net realized investment gains (losses)
Net realized investment gains (losses) mainly consists of realized gains (losses) from sales
of our investments, realized losses from investment impairments and changes in fair value on our
trading portfolio and FIA options.
Benefits and Expenses
Policyholder benefits and claims
Policyholder benefits and claims consist of benefits paid and reserve activity on medical
stop-loss and individual life and BOLI products.
Interest credited
Interest credited represents interest credited to policyholder reserves and contract holder
general account balances, the impact of mortality and funding services activity within our Income
Annuities segment, and the amortization of deferred sales inducement assets.
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Other underwriting and operating expenses
Other underwriting and operating expenses represent non-deferrable costs related to the
acquisition and ongoing maintenance of insurance and investment contracts, including certain
non-deferrable commissions, policy issuance expenses and other business operating costs.
Interest expense
Interest expense primarily includes interest on corporate debt, the impact of interest rate
hedging activities on the debt and amortization of debt issuance costs.
Amortization of deferred policy acquisition costs
We defer as assets certain commissions, distribution costs and other underwriting costs, that
vary with, and are primarily related to, the production of new and renewal business. Amortization
of previously capitalized DAC is recorded as an expense.
Use of non-GAAP Financial Measures
Certain tables and related disclosures in this report include non-GAAP financial measures. We
believe these measures provide useful information to investors in evaluating our financial
performance or condition. The non-GAAP financial measures discussed below are not a substitute for
their most directly comparable GAAP measures. The adjustments made to derive these non-GAAP
measures are important to understanding our overall results of operations and financial position
and, if evaluated without proper context, these non-GAAP measures possess material limitations.
For a full discussion of each non-GAAP measure, see Item 7 Managements Discussion and
Analysis of Financial Condition and Results of Operations Use of non-GAAP Financial Measures in
our 2010 10-K.
As of | As of | |||||||
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Total stockholders equity |
$ | 2,647.3 | $ | 2,380.6 | ||||
Less: AOCI |
597.9 | 432.5 | ||||||
Adjusted book value* |
2,049.4 | 1,948.1 | ||||||
Add: Assumed proceeds from exercise of warrants |
218.1 | 218.1 | ||||||
Adjusted book value, as converted* |
$ | 2,267.5 | $ | 2,166.2 | ||||
Book value per common share (1) |
$ | 19.25 | $ | 17.35 | ||||
Adjusted book value per common share (2)* |
$ | 17.28 | $ | 16.48 | ||||
Adjusted book value per common share, as converted (3)* |
$ | 16.49 | $ | 15.79 | ||||
For the Twelve Months Ended | ||||||||
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Return on stockholders equity, or ROE |
9.3 | % | 9.3 | % | ||||
Net income (4) |
$ | 233.1 | $ | 200.9 | ||||
Average stockholders equity (5) |
2,502.6 | 2,167.9 | ||||||
Operating return on average equity, or ROAE* |
9.6 | % | 9.8 | % | ||||
Adjusted operating income (6)* |
$ | 186.7 | $ | 175.2 | ||||
Average adjusted book value (7)* |
1,945.6 | 1,795.4 |
* | Represents a non-GAAP measure. | |
(1) | Book value per common share is calculated as stockholders equity divided by diluted common shares outstanding totaling 137.547 and 137.192 as of June 30, 2011 and December 31, 2010, respectively. |
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(2) | Adjusted book value per common share is calculated as adjusted book value divided by outstanding common shares totaling 118.571 and 118.216 as of June 30, 2011 and December 31, 2010, respectively. | |
(3) | Adjusted book value per common share, as converted is calculated as adjusted book value plus the assumed proceeds from exercise of warrants, divided by outstanding common shares and shares subject to outstanding warrants totaling 137.547 and 137.192 as of June 30, 2011 and December 31, 2010, respectively. | |
(4) | Net income for the most recent twelve months is used in the calculation of ROE. For the twelve months ended June 30, 2011, this consisted of quarterly net income of $59.4, $54.9, $62.2 and $56.6. | |
(5) | Ending stockholders equity balances for the most recent five quarters are used in the calculation of ROE. As of June 30, 2011, stockholders equity for the most recent five quarters was $2,647.3, $2,431.0, $2,380.6, $2,711.3, and $2.342.8. As of December 31, 2010, stockholders equity for the most recent five quarters was $2,380.6, $2,711.3, $2,342.8, $1,971.7, and $1,433.3. | |
(6) | Adjusted operating income for the most recent twelve months is used in the calculation of operating ROAE. For the twelve months ended June 30, 2011, this consisted of quarterly adjusted operating income of $49.8, $45.1, $48.0, and $43.8. Adjusted operating income consists of net income, less after-tax net realized gains, plus after-tax net realized and unrealized investment gains on our FIA options. For the twelve months ended June 30, 2011, this consisted of net quarterly reconciling amounts of $9.6, $9.8, $14.2, and $12.8. For the twelve months ended December 31, 2010, this consisted of adjusted operating income of $175.2, and a net reconciling amount of $25.7. | |
(7) | Ending adjusted book values for the most recent five quarters are used in the calculation of operating ROAE. Adjusted book value consists of stockholders equity, less AOCI. As of June 30, 2011, adjusted book value for the most recent five quarters was $2,049.4, $1,997.0, $1,948.1, $1,891.9, and $1,841.7. AOCI, for the most recent five quarters was $597.9, $434.0, $432.5, $819.4, and $501.1. As of December 31, 2010, adjusted book value of the most recent five quarters was $1,948.1, $1,891.9, $1,841.7, $1,812.2, and $1,483.0. AOCI, for the most recent five quarters was $432.5, $819.4, $501.1, $159.5, and $(49.7). |
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Results of Operations
The following discussion should be read in conjunction with our unaudited interim consolidated
financial statements and the related condensed notes.
Total Company
Set forth below is a summary of our consolidated financial results. The variances noted in the
total company and segment tables should be interpreted as increases or (decreases), respectively.
Three Months Ended | QTD | Six Months Ended | YTD | |||||||||||||||||||||
June 30, | Variance (%) | June 30, | Variance (%) | |||||||||||||||||||||
2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||||||||
Revenues: |
||||||||||||||||||||||||
Premiums |
$ | 119.4 | $ | 115.5 | 3.4 | % | $ | 240.3 | $ | 234.5 | 2.5 | % | ||||||||||||
Net investment income |
312.2 | 297.1 | 5.1 | 622.2 | 584.0 | 6.5 | ||||||||||||||||||
Policy fees, contract charges, and other |
45.9 | 41.8 | 9.8 | 90.6 | 82.3 | 10.1 | ||||||||||||||||||
Net realized investment gains: |
||||||||||||||||||||||||
Net impairment losses recognized in earnings |
(2.8 | ) | (1.5 | ) | (86.7 | ) | (3.7 | ) | (11.2 | ) | 67.0 | |||||||||||||
Other net realized investment gains (losses) |
16.9 | (8.5 | ) | * | 33.4 | 8.0 | * | |||||||||||||||||
Total net realized investment gains (losses) |
14.1 | (10.0 | ) | * | 29.7 | (3.2 | ) | * | ||||||||||||||||
Total revenues |
491.6 | 444.4 | 10.6 | 982.8 | 897.6 | 9.5 | ||||||||||||||||||
Benefits and expenses: |
||||||||||||||||||||||||
Policyholder benefits and claims |
83.7 | 83.3 | 0.5 | 176.0 | 169.5 | 3.8 | ||||||||||||||||||
Interest credited |
225.1 | 221.5 | 1.6 | 453.4 | 440.0 | 3.0 | ||||||||||||||||||
Other underwriting and operating expenses |
70.5 | 64.2 | 9.8 | 136.5 | 123.8 | 10.3 | ||||||||||||||||||
Interest expense |
8.0 | 7.9 | 1.3 | 16.0 | 15.9 | 0.6 | ||||||||||||||||||
Amortization of deferred policy acquisition
costs |
20.0 | 17.0 | 17.6 | 40.1 | 32.4 | 23.8 | ||||||||||||||||||
Total benefits and expenses |
407.3 | 393.9 | 3.4 | 822.0 | 781.6 | 5.2 | ||||||||||||||||||
Income from operations before income taxes |
84.3 | 50.5 | 66.9 | 160.8 | 116.0 | 38.6 | ||||||||||||||||||
Provision for (benefit from) income taxes: |
||||||||||||||||||||||||
Current |
31.1 | 17.4 | 78.7 | 42.3 | 27.3 | 54.9 | ||||||||||||||||||
Deferred |
(6.2 | ) | (2.7 | ) | | 4.2 | 6.6 | (36.4 | ) | |||||||||||||||
Total provision for income taxes |
24.9 | 14.7 | 69.4 | 46.5 | 33.9 | 37.2 | ||||||||||||||||||
Net income |
$ | 59.4 | $ | 35.8 | 65.9 | % | $ | 114.3 | $ | 82.1 | 39.2 | % | ||||||||||||
Net income per common share(1): |
||||||||||||||||||||||||
Basic |
$ | 0.43 | $ | 0.26 | 65.4 | % | $ | 0.83 | $ | 0.61 | 36.1 | % | ||||||||||||
Diluted |
$ | 0.43 | $ | 0.26 | 65.4 | $ | 0.83 | $ | 0.61 | 36.1 | ||||||||||||||
Weighted-average common shares outstanding: |
||||||||||||||||||||||||
Basic |
137.523 | 137.019 | 0.4 | 137.408 | 134.035 | 2.5 | ||||||||||||||||||
Diluted |
137.532 | 137.038 | 0.4 | 137.417 | 134.056 | 2.5 | ||||||||||||||||||
Non-GAAP Financial Measures: |
||||||||||||||||||||||||
Adjusted operating income |
$ | 49.8 | $ | 41.5 | 20.0 | % | $ | 94.9 | $ | 83.4 | 13.8 | % | ||||||||||||
Adjusted operating income per common share: |
||||||||||||||||||||||||
Basic |
$ | 0.36 | $ | 0.30 | 20.0 | % | $ | 0.69 | $ | 0.62 | 11.3 | % | ||||||||||||
Diluted |
$ | 0.36 | $ | 0.30 | 20.0 | $ | 0.69 | $ | 0.62 | 11.3 | ||||||||||||||
Reconciliation to net income: |
||||||||||||||||||||||||
Net income |
$ | 59.4 | $ | 35.8 | 65.9 | $ | 114.3 | $ | 82.1 | 39.2 | ||||||||||||||
Less: Net realized investment gains (losses)
(net of
taxes of $4.9, $(3.4), $10.4 and $(1.1)) |
9.2 | (6.6 | ) | * | 19.3 | (2.1 | ) | * | ||||||||||||||||
Add: Net investment losses on FIA options (net
of
taxes of $(0.2), $(0.4), $(0.0) and $(0.4)) |
(0.4 | ) | (0.9 | ) | 55.6 | (0.1 | ) | (0.8 | ) | 87.5 | ||||||||||||||
Adjusted operating income |
$ | 49.8 | $ | 41.5 | 20.0 | % | $ | 94.9 | $ | 83.4 | 13.8 | % | ||||||||||||
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* | Represents percentage variances that are not meaningful or are explained through the discussion of other variances. | |
(1) | Basic and diluted net income per common share includes all participating securities, such as warrants and unvested restricted shares, based on the application of the two-class method. Diluted net income per common share also includes the dilutive impact of non-participating securities, to the extent dilutive, such as stock options and shares estimated to be issued under the employee stock purchase plan, based on application of the treasury stock method. Antidilutive awards were excluded from the computation of diluted net income per share. |
Three Months Ended June 30, 2011 Compared to the Three Months Ended June 30, 2010
Summary of Results
Net income increased $23.6 on increases in adjusted operating income and net realized
investment gains compared to net realized investment losses in the prior period. Adjusted operating income increased $8.3, due to increased segment pre-tax
adjusted operating income in our Group, Deferred Annuities, and Income Annuities segments,
partially offset by decreased pre-tax adjusted operating income in our Life segment.
Net realized investment gains (losses) increased $24.1, to a $14.1 gain from a $(10.0) loss,
driven by higher net gains on sales of mortgage-backed securities. For further discussion of our
investment results and portfolio, including a discussion of our impairment losses, refer to
Investments below.
The provision for income taxes increased $10.2 primarily due to higher income from operations
before income taxes and increased net realized investment gains (losses) during the three months
ended June 30, 2011 compared to the same period in 2010. Our effective tax rate, which was
essentially flat, was 29.5% and 29.1% for the three months ended June 30, 2011 and 2010,
respectively.
Further discussion of adjusted operating income drivers:
Our Group segments profitability increased due to an improved stop-loss loss ratio, the
result of a focus on pricing during our 2010 and 2011 policy year renewals. Overall, the Group
loss ratio decreased to 62.4%, from 63.8%. This was partially offset by increased other
underwriting and operating expenses.
Our Deferred Annuities segments interest margin increased $3.4 as our fixed account values
grew $1.6 billion. The increase in fixed account values also drove an offsetting $2.4 increase in
DAC amortization. During the second quarter of 2011, we deployed more cash on average, as we held
lower daily average cash balances over the prior period. This was partially offset by a lower
interest spread on decreased investment yields, due to the low interest rate environment and
higher investment income from corporate actions in the three months ended June 30, 2010.
Our Income Annuities segments mortality experience improved $6.7, driving an overall
improvement of $6.2 in the segments pre-tax adjusted operating income.
Our Life segments profitability decreased primarily due to lower BOLI return on assets (ROA)
and an increase in other underwriting and operating expenses. These decreases were partially offset
by a $1.4 improvement in individual claims.
Six Months Ended June 30, 2011 Compared to the Six Months Ended June 30, 2010
Summary of Results
Net income increased $32.2 on an increase in adjusted operating income and net realized
investment gains in 2011, versus losses in 2010. Adjusted operating income increased $11.5, due to
increased pre-tax adjusted operating income in our Deferred Annuities and Income Annuities segments
and decreased pre-tax adjusted operating loss in our Other segment, partially offset by decreased
pre-tax adjusted operating income in our Group and Life segments.
Net realized investment gains (losses) increased $32.9, to a $29.7 gain from a $(3.2) loss.
Net gains on sales of fixed maturities increased $8.7, and impairments improved $7.5 due to fewer
credit impairments in 2011. Additionally, our equity trading portfolio increased $5.7, to gains of
$4.5 compared to losses of $(1.2) in 2010, as the S&P 500 Index increased 0.1% in 2011, compared to
a decrease of (7.6)% in 2010. For further discussion of our investment results and portfolio,
including a discussion of our impairment charges, refer to Investments below.
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The provision for income taxes increased $12.6 primarily due to higher income from operations
before income taxes and increased net realized investment gains (losses) during the six months
ended June 30, 2011 compared to the same period in 2010. Our effective tax rate, which was
essentially flat, was 28.9% and 29.2% for the six months ended June 30, 2011 and 2010,
respectively.
Further discussion of adjusted operating income drivers described above:
Our Group segments profitability decreased due to higher other underwriting and operating
expenses. This was partially offset by an improved loss ratio, which decreased to 65.0% from 66.4%
due to a focus on pricing discipline in our 2010 and 2011 policy year renewals. Fee income from a
larger block of in-force business at our managing general underwriter drove a $1.1 increase in
policy fees, contract charges and other.
Our Deferred Annuities segments investment margin increased $9.6 on an increase in our fixed
account values of $1.6 billion. The increase in fixed account values also drove an offsetting $4.8
increase in DAC amortization.
Our Income Annuities segment experienced a $7.5 improvement in mortality experience, with
gains of $5.6 in 2011 compared to losses of $(1.9) in 2010.
Our Life segments profitability decreased primarily due to a $7.4 reserve release in first
quarter 2010 related to one of our UL products, which reduced benefits and expenses. In addition,
there was an increase in other underwriting and operating expenses.
Our Other segments loss decreased primarily due to increased net investment income from an
overall increase in average invested assets and yields.
Division Operating Results
The results of operations and selected operating metrics for our five segments (Group,
Deferred Annuities, Income Annuities, Life and Other) for the three and six months ended June 30,
2011 and 2010 are set forth in the following respective sections.
Group
The following table sets forth the results of operations relating to our Group segment:
Three Months Ended | QTD | Six Months Ended | YTD | |||||||||||||||||||||
June 30, | Variance (%) | June 30, | Variance (%) | |||||||||||||||||||||
2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||||||||
Operating revenues: |
||||||||||||||||||||||||
Premiums |
$ | 109.8 | $ | 105.8 | 3.8 | % | $ | 219.8 | $ | 214.6 | 2.4 | % | ||||||||||||
Net investment income |
4.4 | 4.8 | (8.3 | ) | 8.6 | 9.4 | (8.5 | ) | ||||||||||||||||
Policy fees, contract charges, and other |
3.7 | 3.0 | 23.3 | 7.0 | 5.9 | 18.6 | ||||||||||||||||||
Total operating revenues |
117.9 | 113.6 | 3.8 | 235.4 | 229.9 | 2.4 | ||||||||||||||||||
Benefits and expenses: |
||||||||||||||||||||||||
Policyholder benefits and claims |
68.5 | 67.4 | 1.6 | 142.8 | 142.4 | 0.3 | ||||||||||||||||||
Other underwriting and operating expenses |
28.3 | 26.0 | 8.8 | 55.6 | 49.7 | 11.9 | ||||||||||||||||||
Amortization of deferred policy
acquisition costs |
2.1 | 2.0 | 5.0 | 4.2 | 3.9 | 7.7 | ||||||||||||||||||
Total benefits and expenses |
98.9 | 95.4 | 3.7 | 202.6 | 196.0 | 3.4 | ||||||||||||||||||
Segment pre-tax adjusted operating income |
$ | 19.0 | $ | 18.2 | 4.4 | % | $ | 32.8 | $ | 33.9 | (3.2 | )% | ||||||||||||
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The following table sets forth selected historical operating metrics relating to our
Group segment as of, or for the three and six months ended:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Group loss ratio(1) |
62.4 | % | 63.8 | % | 65.0 | % | 66.4 | % | ||||||||
Expense ratio(2) |
26.9 | 25.4 | 26.4 | 24.3 | ||||||||||||
Combined ratio(3) |
89.3 | 89.2 | 91.4 | 90.7 | ||||||||||||
Medical stop-loss ratio(4) |
63.6 | 65.4 | 66.5 | 67.8 | ||||||||||||
Total sales(5) |
$ | 23.4 | $ | 20.6 | $ | 72.1 | $ | 62.0 |
(1) | Group loss ratio represents policyholder benefits and claims incurred divided by premiums earned. | |
(2) | Expense ratio is equal to other underwriting and operating expenses of our insurance operations and amortization of DAC divided by premiums earned. | |
(3) | Combined ratio is equal to the sum of the loss ratio and the expense ratio. | |
(4) | Medical stop-loss loss ratio represents medical stop-loss policyholder benefits and incurred claims divided by medical stop-loss premiums earned. | |
(5) | Total sales represents annualized first-year premiums net of first year policy lapses. |
Three Months Ended June 30, 2011 Compared to the Three Months Ended June 30, 2010
Summary of Results
Segment pre-tax adjusted operating income increased $0.8, primarily the result of growth in
premium and an improved loss ratio. For the three months ended June 30, 2011, the loss ratio
improved to 62.4%, compared to 63.8% for the same period in 2010, which was driven by a focus on
pricing discipline during our 2010
and 2011 policy year renewals. This was partially offset by increased other underwriting and
operating expenses.
In addition to the drivers discussed above, we consider the following information regarding
operating revenues and benefits and expenses useful in understanding our results.
Operating Revenues
Premiums increased $4.0 as a result of new sales outpacing terminations for our medical
stop-loss and limited benefit medical products. Policy fees, contract charges, and other increased
$0.7 primarily due to higher revenue from our managing general underwriting services on a larger
block of business.
Benefits and Expenses
The increase in benefits and expenses
was primarily driven by increased other underwriting and operating expenses, primarily
increased employee-related expenses, and expenses of $0.5 related to the expansion of our group
life and disability operations.
Six Months Ended June 30, 2011 Compared to the Six Months Ended June 30, 2010
Summary of Results
Segment pre-tax adjusted operating income decreased $1.1, primarily the result of higher
underwriting and operating expenses. This was partially offset by an improved loss ratio. For the
first half of 2011, the loss ratio was 65.0%, down from 66.4% for the same period in 2010, driven
by a focus on pricing discipline during our 2010 and 2011 policy year renewals.
In addition to the drivers discussed above, we consider the following information regarding
operating revenues and benefits and expenses useful in understanding our results.
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Operating Revenues
Premiums increased $5.2 as a result of new sales outpacing terminations for our limited
benefit medical and medical stop-loss products. Policy fees, contract charges, and other increased
$1.1 primarily due to higher revenue from our managing general underwriting services on a larger
block of business.
Benefits and Expenses
The increase in benefits and expenses was primarily driven by increased other underwriting and
operating expenses, including higher employee-related expenses, expenses related to the expansion
of our group life and disability operations, and increased commissions.
Deferred Annuities
The following table sets forth the results of operations relating to our Deferred Annuities
segment:
Three Months Ended | QTD | Six Months Ended | YTD | |||||||||||||||||||||
June 30, | Variance (%) | June 30, | Variance (%) | |||||||||||||||||||||
2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||||||||
Operating revenues: |
||||||||||||||||||||||||
Net investment income |
$ | 128.2 | $ | 115.3 | 11.2 | % | $ | 251.3 | $ | 223.1 | 12.6 | % | ||||||||||||
Policy fees, contract charges, and other |
5.5 | 4.8 | 14.6 | 10.6 | 9.6 | 10.4 | ||||||||||||||||||
Net investment losses on FIA options |
(0.6 | ) | (1.3 | ) | 53.8 | (0.1 | ) | (1.2 | ) | 91.7 | ||||||||||||||
Total operating revenues |
133.1 | 118.8 | 12.0 | 261.8 | 231.5 | 13.1 | ||||||||||||||||||
Benefits and expenses: |
||||||||||||||||||||||||
Policyholder benefits and claims |
| 0.6 | * | (0.1 | ) | 0.7 | * | |||||||||||||||||
Interest credited |
79.9 | 70.4 | 13.5 | 157.5 | 138.9 | 13.4 | ||||||||||||||||||
Other underwriting and operating expenses |
14.2 | 13.6 | 4.4 | 26.6 | 27.2 | (2.2 | ) | |||||||||||||||||
Amortization of deferred policy
acquisition costs |
16.0 | 13.6 | 17.6 | 31.6 | 26.8 | 17.9 | ||||||||||||||||||
Total benefits and expenses |
110.1 | 98.2 | 12.1 | 215.6 | 193.6 | 11.4 | ||||||||||||||||||
Segment pre-tax adjusted operating income |
$ | 23.0 | $ | 20.6 | 11.7 | % | $ | 46.2 | $ | 37.9 | 21.9 | % | ||||||||||||
* | Represents percentage variances that are not meaningful or are explained through the discussion of other variances. |
The following table sets forth selected historical operating metrics relating to our
Deferred Annuities segment as of, or for the three and six months ended:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Account values Fixed annuities |
$ | 10,127.3 | $ | 8,574.0 | ||||||||||||
Account values Variable annuities |
796.9 | 682.3 | ||||||||||||||
Interest spread on average account values(1) |
1.81 | % | 1.97 | % | 1.83 | % | 1.91 | % | ||||||||
Total sales(2) |
$ | 446.5 | $ | 623.9 | $ | 1,064.9 | $ | 1,001.4 |
(1) | Interest spread is the difference between net investment yield earned and the credited interest rate to policyholders. The investment yield is the approximate yield on invested assets in the general account attributed to the segment. The credited interest rate is the approximate rate credited on policyholder fixed account values within the segment. Interest credited is subject to contractual terms, including minimum guarantees. | |
(2) | Total sales represent deposits for new policies net of first year policy lapses and/or surrenders. |
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Three Months Ended June 30, 2011 Compared to the Three Months Ended June 30, 2010
Summary of Results
Segment pre-tax adjusted operating income increased $2.4, primarily driven by a $1.6 billion
increase in fixed account values. Increased fixed account values contributed to a $3.4 increase in
the investment margin (net investment income less interest credited), partially offset by a $2.4
increase in DAC amortization. The interest spread on average account value decreased due to a
decline in overall investment yields, and lower targeted spreads on more capital efficient product
sales in 2010 and 2011. Additionally, the 2010 interest spread included an estimated 11 basis
points of investment income related to corporate bond prepayment actions. This was partially offset
by the more effective deployment of cash resulting in lower cash balances. In addition, second
quarter 2011 surrender charges and variable fees increased $0.7 due to higher account values.
In addition to the drivers discussed above, we consider the following information regarding
operating revenues and benefits and expenses useful in understanding our results.
Operating Revenues
Net investment income increased $12.9, driven by a $1.6 billion increase in average invested
assets from increased fixed annuities account values. During the second quarter of 2010, growth of
net investment income was limited as strong sales of fixed deferred annuities during a tight credit
market resulted in us carrying higher levels of cash; however, during the second quarter of 2011,
our average daily cash balances decreased.
Benefits and Expenses
Interest credited increased $9.5, primarily due to a $1.6 billion increase in fixed annuities
account values. The higher account values also led to a $2.4 increase in DAC amortization.
Six Months Ended June 30, 2011 Compared to the Six Months Ended June 30, 2010
Summary of Results
Segment pre-tax adjusted operating income increased $8.3, primarily driven by a $1.6 billion
increase in fixed account values. Increased fixed account values contributed to a $9.6 increase in
the investment margin, partially offset by a $4.8 increase in DAC amortization. The interest spread
on average account value decreased due to lower overall investment yields and lower targeted
spreads on more capital efficient product sales in 2010 and 2011. The interest spread for the six
months ended June 30, 2010 included an estimated 7 basis points of investment income related to
corporate actions, including bond prepayments. This was partially offset by the more effective
deployment of cash resulting in lower cash balances. In addition, variable fees and surrender
charges increased $1.0 due to higher account values.
In addition to the drivers discussed above, we consider the following information regarding
operating revenues and benefits and expenses useful in understanding our results.
Operating Revenues
Net investment income increased $28.2, driven by a $1.6 billion increase in average invested
assets from increased fixed annuities account values. During the first half of 2010, growth of net
investment income was limited as strong sales of fixed deferred annuities during a tight credit
market resulted in us carrying higher levels of cash. During the six months ended June 30, 2011,
while slightly higher than expected, our average daily cash balances decreased compared to the same
period in the prior year.
Benefits and Expenses
Interest credited increased $18.6, primarily due to a $1.6 billion increase in fixed annuities
account values. The higher account values also led to a $4.8 increase in DAC amortization.
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Income Annuities
The following table sets forth the results of operations relating to our Income Annuities
segment:
Three Months Ended | QTD | Six Months Ended | YTD | |||||||||||||||||||||
June 30, | Variance (%) | June 30, | Variance (%) | |||||||||||||||||||||
2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||||||||
Operating revenues: |
||||||||||||||||||||||||
Net investment income |
$ | 102.3 | $ | 104.7 | (2.3) | % | $ | 207.3 | $ | 208.7 | (0.7) | % | ||||||||||||
Policy fees, contract charges, and other |
0.4 | 0.2 | 100.0 | 0.6 | 0.4 | 50.0 | ||||||||||||||||||
Total operating revenues |
102.7 | 104.9 | (2.1 | ) | 207.9 | 209.1 | (0.6 | ) | ||||||||||||||||
Benefits and expenses: |
||||||||||||||||||||||||
Interest credited |
83.6 | 92.9 | (10.0 | ) | 173.3 | 184.9 | (6.3 | ) | ||||||||||||||||
Other underwriting and operating expenses |
5.9 | 5.2 | 13.5 | 11.8 | 10.5 | 12.4 | ||||||||||||||||||
Amortization of deferred policy
acquisition costs |
0.6 | 0.4 | 50.0 | 1.3 | 0.9 | 44.4 | ||||||||||||||||||
Total benefits and expenses |
90.1 | 98.5 | (8.5 | ) | 186.4 | 196.3 | (5.0 | ) | ||||||||||||||||
Segment pre-tax adjusted operating income |
$ | 12.6 | $ | 6.4 | 96.9 | % | $ | 21.5 | $ | 12.8 | 68.0 | % | ||||||||||||
The following table sets forth selected historical operating metrics relating to our
Income Annuities segment as of, or for the three and six months ended:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Reserves(1) |
$ | 6,646.6 | $ | 6,716.8 | ||||||||||||
Interest spread on reserves(2) |
0.48 | % | 0.49 | % | 0.55 | % | 0.45 | % | ||||||||
Base interest spread on reserves(3) |
0.52 | 0.50 | 0.51 | 0.46 | ||||||||||||
MBS prepayment speed adjustment(4) |
$ | (0.7 | ) | $ | (0.1 | ) | $ | 1.1 | $ | (0.3 | ) | |||||
Mortality gains (losses)(5) |
4.9 | (1.8 | ) | 5.6 | (1.9 | ) | ||||||||||
Total sales(6) |
38.7 | 67.8 | 103.2 | 134.1 |
(1) | Reserves represent the present value of future income annuity benefits and assumed expenses, discounted by the assumed interest rate. This metric represents the amount of our in-force book of business. | |
(2) | Interest spread is the difference between net investment yield earned and the credited interest rate on policyholder reserves. The investment yield is the approximate yield on invested assets, excluding equities, in the general account attributed to the segment. The credited interest rate is the approximate rate credited on policyholder reserves and excludes the gains and losses from funding services and mortality. | |
(3) | Base interest spread on reserves is interest spread on reserves excluding MBS prepayment speed adjustment. | |
(4) | Prepayment speed adjustment on mortgage-backed securities is the impact to net investment income due to the change in prepayment speeds on the underlying collateral of mortgage-backed securities. | |
(5) | Mortality gains (losses) represent the difference between actual and expected reserves released on our life contingent annuities. | |
(6) | Sales represent deposits for new policies net of first year policy lapses and/or surrenders. |
Three Months Ended June 30, 2011 Compared to the Three Months Ended June 30, 2010
Summary of Results
Segment pre-tax adjusted operating income increased $6.2 primarily due to a $6.7 improvement
in mortality experience.
In addition to the driver discussed above, we consider the following information regarding
operating revenues and benefits and expenses useful in understanding our results.
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Operating Revenues
Net investment income decreased $2.4 due to declines in both average invested assets and
yields. Yields decreased primarily due to unfavorable changes in prepayment speeds on
mortgage-backed securities and an increase in the impact of uninvested cash.
Benefits and Expenses
Interest credited decreased $9.3 million due to favorable changes in mortality experience,
increased funding services and lower reserves. We experienced mortality gains of $4.9 in the second
quarter of 2011, compared to losses of $1.8 in the second quarter of 2010. The gains from the
second quarter of 2011 are the highest quarterly gains we have experienced since 2004.
Six Months Ended June 30, 2011 Compared to the Six Months Ended June 30, 2010
Summary of Results
Segment pre-tax adjusted operating income increased $8.7, primarily due to a $7.5 improvement
in mortality experience.
In addition to the driver discussed above, we consider the following information regarding
operating revenues and benefits and expenses useful in understanding our results.
Operating Revenues
Net investment income decreased $1.4 primarily due to lower average invested assets. This was
partially offset by an improvement in yields, driven by our commercial mortgage loan investment
strategy and a $1.4 increase in prepayment speed adjustments on mortgage-backed securities.
Benefits and Expenses
Interest credited decreased $11.6 due to lower reserves, favorable mortality experience and
increased funding services. We experienced mortality gains of $5.6 for the six months ended June
30, 2011, compared to losses of $1.9 for the same period in 2010.
Life
The following table sets forth the results of operations relating to our Life segment:
Three Months Ended | QTD | Six Months Ended | YTD | |||||||||||||||||||||
June 30, | Variance (%) | June 30, | Variance (%) | |||||||||||||||||||||
2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||||||||
Operating revenues: |
||||||||||||||||||||||||
Premiums |
$ | 9.6 | $ | 9.7 | (1.0) | % | $ | 20.5 | $ | 19.9 | 3.0 | % | ||||||||||||
Net investment income |
71.1 | 68.3 | 4.1 | 142.3 | 134.4 | 5.9 | ||||||||||||||||||
Policy fees, contract charges, and other |
30.9 | 29.8 | 3.7 | 61.6 | 58.9 | 4.6 | ||||||||||||||||||
Total operating revenues |
111.6 | 107.8 | 3.5 | 224.4 | 213.2 | 5.3 | ||||||||||||||||||
Benefits and expenses: |
||||||||||||||||||||||||
Policyholder benefits and claims |
15.2 | 15.3 | (0.7 | ) | 33.3 | 26.4 | 26.1 | |||||||||||||||||
Interest credited |
62.2 | 59.1 | 5.2 | 123.9 | 117.6 | 5.4 | ||||||||||||||||||
Other underwriting and operating expenses |
15.5 | 13.4 | 15.7 | 29.9 | 26.1 | 14.6 | ||||||||||||||||||
Amortization of deferred policy acquisition
costs |
1.3 | 1.0 | 30.0 | 3.0 | 0.8 | * | ||||||||||||||||||
Total benefits and expenses |
94.2 | 88.8 | 6.1 | 190.1 | 170.9 | 11.2 | ||||||||||||||||||
Segment pre-tax adjusted operating income |
$ | 17.4 | $ | 19.0 | (8.4) | % | $ | 34.3 | $ | 42.3 | (18.9) | % | ||||||||||||
* | Represents percentage variances that are not meaningful or are explained through the discussion of other variances. |
42
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The following table sets forth selected historical operating metrics relating to our Life
segment as of, or for the three and six months ended:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Individual insurance: |
||||||||||||||||
Individual insurance in force(1) |
$ | 37,439.7 | $ | 38,502.3 | ||||||||||||
Individual claims(2) |
12.1 | 13.5 | $ | 27.8 | $ | 27.4 | ||||||||||
Annualized mortality rate(3) |
0.13 | % | 0.14 | % | 0.15 | % | 0.14 | % | ||||||||
UL account value(4) |
$ | 635.5 | $ | 588.9 | ||||||||||||
UL interest spread(5) |
1.24 | % | 1.59 | % | 1.42 | % | 1.47 | % | ||||||||
Individual sales(6) |
$ | 2.9 | $ | 2.4 | $ | 5.3 | $ | 5.2 | ||||||||
BOLI: |
||||||||||||||||
BOLI insurance in force(1) |
$ | 12,681.6 | $ | 11,410.0 | ||||||||||||
BOLI account value(4) |
4,442.0 | 3,886.0 | ||||||||||||||
BOLI ROA(7) |
0.98 | % | 1.28 | % | 1.07 | % | 1.17 | % | ||||||||
BOLI sales(8) |
$ | | $ | | $ | | $ | 2.7 |
(1) | Insurance in force represents dollar face amounts of policies without adjustment for reinsurance. | |
(2) | Individual claims represents incurred claims, net of reinsurance, on our term and universal life policies. | |
(3) | Annualized mortality rate is defined as annualized individual claims divided by individual insurance in force. | |
(4) | UL account value and BOLI account value represent our liabilities to our policyholders. | |
(5) | UL interest spread is the difference between net investment yield earned and the credited interest rate to policyholders. The investment yield is the approximate yield on invested assets in the general account attributed to the UL policies. The credited interest rate is the approximate rate credited on UL policyholder fixed account values. Interest credited to UL policyholders account values is subject to contractual terms, including minimum guarantees. Interest credited tends to move gradually over time to reflect actions by management to respond to competitive pressures and profit targets. The credited rate to policyholders for the six months ended June 30, 2010 was adjusted to exclude a bonus interest reserve release. Without this adjustment, the UL interest spread would have been 3.49%. | |
(6) | Individual sales represents annualized first year premiums for recurring premium products, and 10% of new single premium deposits net of first year policy lapses and/or surrenders. | |
(7) | BOLI ROA is a measure of the gross margin on our BOLI book of business. This metric is calculated as the difference between our BOLI revenue earnings rate and our BOLI policy benefits rate. The revenue earnings rate is calculated as revenues divided by average invested assets. The policy benefits rate is calculated as total policy benefits divided by average account value. The policy benefits used in this metric do not include expenses. | |
(8) | BOLI sales represent 10% of new BOLI total deposits. |
Three Months Ended June 30, 2011 Compared to the Three Months Ended June 30, 2010
Summary of Results
Segment pre-tax adjusted operating income decreased $1.6 primarily due to lower BOLI ROA
related to increased BOLI claims and lower yields, and an increase in other underwriting and
operating expenses driven by higher employee-related expenses. This was partially offset by a $1.4
decrease in individual claims.
In addition to the drivers discussed above, we consider the following information regarding
operating revenues and benefits and expenses useful in understanding our results.
Operating Revenues
Net investment income increased $2.8 due to an increase in average invested assets, primarily
related to BOLI account values which grew from sales in the past 12 months. This was partially
offset by a decline in yields, which decreased to 5.00% from 5.43%, driven by lower yields on asset
purchases over the past 12 months, from corporate actions of $1.3 in the second quarter 2010, and a
decrease of $0.7 in prepayment speed adjustments.
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Benefits and Expenses
Interest credited increased $3.1 driven by increased BOLI account values due to strong BOLI
sales during the second half of 2010. Claims decreased $0.2 as lower individual claims were
partially offset by higher BOLI claims.
Six Months Ended June 30, 2011 Compared to the Six Months Ended June 30, 2010
Summary of Results
Segment pre-tax adjusted operating income decreased $8.0 primarily due to a $7.4 reserve
release in the first quarter of 2010 causing a reduction in benefits and expenses, discussed in
detail below. In addition, benefits and expenses increased due to higher employee-related
expenses.
In addition to the drivers discussed above, we consider the following information regarding
operating revenues and benefits and expenses useful in understanding our results.
Operating Revenues
Net investment income increased $7.9 due to an increase in average invested assets, primarily
related to BOLI account values which grew from sales in the past 12 months. This was partially
offset by a decline in yields, driven by lower yields on investment purchases over the past 12
months.
Benefits and Expenses
Benefits and expenses increased $19.2 partially due to a bonus reserve decrease in 2010 which
reduced total benefits and expenses by $7.4. This bonus reserve decrease, which included related
impacts on DAC amortization, was driven by a decrease in the interest rates on a UL product to the
guaranteed minimum rate.
Excluding the effects of the bonus reserve decrease, interest credited and policyholder
benefits and claims increased $7.2 related to increased BOLI account value. In addition, other
underwriting and operating expenses increased $3.8 due to increased employee-related expenses and a
decrease in the amount of acquisition costs deferred.
Other
The following table sets forth the results of operations relating to our Other segment:
Three Months Ended | QTD | Six Months Ended | YTD | |||||||||||||||||||||
June 30, | Variance (%) | June 30, | Variance (%) | |||||||||||||||||||||
2011 | 2010 | 2011 vs. 2010 | 2011 | 2010 | 2011 vs. 2010 | |||||||||||||||||||
Operating revenues: |
||||||||||||||||||||||||
Net investment income |
$ | 6.2 | $ | 4.0 | 55.0 | % | $ | 12.7 | $ | 8.4 | 51.2 | % | ||||||||||||
Policy fees, contract charges, and other |
5.4 | 4.0 | 35.0 | 10.8 | 7.5 | 44.0 | ||||||||||||||||||
Total operating revenues |
11.6 | 8.0 | 45.0 | 23.5 | 15.9 | 47.8 | ||||||||||||||||||
Benefits and expenses: |
||||||||||||||||||||||||
Interest credited |
(0.6 | ) | (0.9 | ) | 33.3 | (1.3 | ) | (1.4 | ) | 7.1 | ||||||||||||||
Other underwriting and operating expenses |
6.6 | 6.0 | 10.0 | 12.6 | 10.3 | 22.3 | ||||||||||||||||||
Interest expense |
8.0 | 7.9 | 1.3 | 16.0 | 15.9 | 0.6 | ||||||||||||||||||
Total benefits and expenses |
14.0 | 13.0 | 7.7 | 27.3 | 24.8 | 10.1 | ||||||||||||||||||
Segment pre-tax adjusted operating loss |
$ | (2.4 | ) | $ | (5.0 | ) | 52.0 | % | $ | (3.8 | ) | $ | (8.9 | ) | 57.3 | % | ||||||||
Three Months Ended June 30, 2011 Compared to the Three Months Ended June 30, 2010
Summary of Results
Our Other segments pre-tax adjusted operating loss of $2.4 for the second quarter of 2011
improved, compared with a loss of $5.0 for the same period in 2010. The $2.6 improvement was due
primarily to an increase in net investment income of $2.2, driven
44
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by higher average invested assets and an increase in investment yields, primarily from private
equity investment income which offset overall decreased yields on other investments. Additionally,
policy fees, contract charges, and other increased $1.4 due to higher non-affiliate broker dealer
concession revenue and advisory fees, which were partially offset by a $1.0 increase in related
commissions.
Six Months Ended June 30, 2011 Compared to the Six Months Ended June 30, 2010
Summary of Results
Our Other segments pre-tax adjusted operating loss of $3.8 for the six months ended June 30,
2011 improved, compared with a loss of $8.9 for the same period in 2010. The $5.1 improvement was
due primarily to an increase in net investment income of $4.3, driven by higher average invested
assets and an increase in overall investment yields in this segment. Additionally, policy fees,
contract charges, and other increased $3.3 due to higher non-affiliate broker dealer concession
revenue and advisory fees, which were partially offset by a $2.5 increase in related commissions.
Investments
Our investment portfolio is structured with the objective of supporting the expected cash
flows of our liabilities and producing stable returns over the long term. The composition of our
portfolio reflects our asset management philosophy of protecting principal and receiving
appropriate reward for risk. Our investment portfolio mix as of June 30, 2011 consisted in large
part of high quality fixed maturities and commercial mortgage loans we originated, as well as a
smaller allocation of high yield fixed maturities, marketable equity securities, investments in
limited partnerships (primarily tax credit investments and private equity funds) and other
investments. We believe that prudent levels of investments in marketable equity securities within
our investment portfolio offer enhanced long term, after-tax total returns to support a portion of
our longest duration liabilities.
The following table presents the composition of our investment portfolio:
As of June 30, 2011 | As of December 31, 2010 | |||||||||||||||
Amount | % of Total | Amount | % of Total | |||||||||||||
Types of Investments |
||||||||||||||||
Fixed maturities, available-for-sale: |
||||||||||||||||
Public |
$ | 21,276.8 | 85.3 | % | $ | 20,388.9 | 86.8 | % | ||||||||
Private |
869.7 | 3.5 | 892.9 | 3.8 | ||||||||||||
Marketable equity securities, available-for-sale(1) |
51.2 | 0.2 | 45.1 | 0.2 | ||||||||||||
Marketable equity securities, trading(2) |
380.9 | 1.5 | 189.3 | 0.8 | ||||||||||||
Mortgage loans, net |
2,085.0 | 8.4 | 1,713.0 | 7.3 | ||||||||||||
Policy loans |
69.6 | 0.3 | 71.5 | 0.3 | ||||||||||||
Investments in limited partnerships(3): |
||||||||||||||||
Private equity funds |
30.4 | 0.1 | 36.5 | 0.1 | ||||||||||||
Tax credit investments |
163.4 | 0.6 | 150.4 | 0.6 | ||||||||||||
Other invested assets |
14.5 | 0.1 | 12.6 | 0.1 | ||||||||||||
Total |
$ | 24,941.5 | 100.0 | % | $ | 23,500.2 | 100.0 | % | ||||||||
(1) | Amount primarily represents non-redeemable preferred stock. | |
(2) | Amount represents investments in common stock, including real estate investment trusts (REITs). | |
(3) | Investments in private equity funds are carried at fair value, while our limited partnership interests related to tax credit investments are carried at amortized cost. |
The increase in invested assets during the first six months of 2011 is primarily due to
portfolio growth generated by sales of fixed deferred annuities.
45
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Investment Returns
Net Investment Income
Return on invested assets is an important element of our financial results. The following
table sets forth the income yield and net investment income, excluding realized investment gains
(losses) for each major investment category:
For the Three Months Ended | For the Three Months Ended | |||||||||||||||
June 30, 2011 | June 30, 2010 | |||||||||||||||
Yield(1) | Amount | Yield(1) | Amount | |||||||||||||
Types of Investments |
||||||||||||||||
Fixed maturities, available-for-sale |
5.42 | % | $ | 283.1 | 5.79 | % | $ | 280.4 | ||||||||
Marketable equity securities, available-for-sale |
8.46 | 1.1 | 8.46 | 1.1 | ||||||||||||
Marketable equity securities, trading |
2.91 | 2.2 | 2.05 | 0.8 | ||||||||||||
Mortgage loans, net |
6.36 | 31.3 | 6.47 | 20.9 | ||||||||||||
Policy loans |
5.84 | 1.0 | 5.94 | 1.1 | ||||||||||||
Investments in limited partnerships: |
||||||||||||||||
Private equity funds |
22.84 | 1.7 | (4.74 | ) | (0.4 | ) | ||||||||||
Tax credit investments(2) |
(5.92 | ) | (3.0 | ) | (6.62 | ) | (2.2 | ) | ||||||||
Other income producing assets(3) |
1.70 | 1.4 | 0.70 | 0.7 | ||||||||||||
Gross investment income before investment expenses |
5.35 | 318.8 | 5.62 | 302.4 | ||||||||||||
Investment expenses |
(0.11 | ) | (6.6 | ) | (0.10 | ) | (5.3 | ) | ||||||||
Net investment income |
5.24 | % | $ | 312.2 | 5.52 | % | $ | 297.1 | ||||||||
(1) | Yields are determined based on monthly averages calculated using beginning and end-of-period balances. Yields are based on carrying values except for fixed maturities and equity securities, and private equity funds. Yields for fixed maturities and private equity funds are based on amortized cost. Yields for equity securities are based on cost. | |
(2) | The negative yield from tax credit investments is offset by U.S. federal income tax benefits. The resulting overall impact to net income was $2.2 and $1.3 for the three months ended June 30, 2011 and 2010, respectively. | |
(3) | Other income producing assets includes other invested assets, short-term investments and cash and cash equivalents. |
For the three months ended June 30, 2011, net investment income increased 5.1% compared
to the same period in 2010, driven by an increase in invested assets on strong sales of our fixed
deferred annuities in 2010 and in the six months ended June 30, 2011. The income increase driven by
growth in invested assets was partially offset by a decrease in the total net investment yield,
which decreased to 5.24% in 2011 from 5.52% in 2010. The reduction in yields is the effect of the
low interest rate environment in 2010 and 2011 as overall yields on fixed maturity purchases in
2011 were 116 basis points lower than the average yield on existing investments. To improve our
overall yields we continued to increase our underwriting of commercial mortgage loans.
Additionally, the second quarter of 2010 included 7 basis points of yield related to corporate
action activity, such as make-whole and consent fees on early calls of fixed maturities.
For the three months ended June 30, 2011, and 2010 the Company had average daily cash and cash
equivalent balances of $236.4 and $301.2, respectively. The decrease in average daily cash balances
improved yields by 3 basis points, and is primarily attributable to a slight improvement in the
credit markets; our ability to acquire high quality, higher yielding investments; and the
implementation of our strategy to invest in U.S. Treasury securities on a short-term basis until
appropriate investments can be purchased. During the three months ended June 30, 2010, our higher
cash balances were the result of cash received from sales of our products and our IPO proceeds
during a tight credit market.
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The following table sets forth the income yield and net investment income, excluding realized
investment gains (losses) for each major investment category:
For the Six Months Ended | For the Six Months Ended | |||||||||||||||
June 30, 2011 | June 30, 2010 | |||||||||||||||
Yield(1) | Amount | Yield(1) | Amount | |||||||||||||
Types of Investments |
||||||||||||||||
Fixed maturities, available-for-sale |
5.49 | % | $ | 569.8 | 5.77 | % | $ | 551.4 | ||||||||
Marketable equity securities, available-for-sale |
6.45 | 1.7 | 6.44 | 1.7 | ||||||||||||
Marketable equity securities, trading |
2.53 | 3.1 | 1.86 | 1.5 | ||||||||||||
Mortgage loans, net |
6.29 | 59.2 | 6.31 | 39.7 | ||||||||||||
Policy loans |
5.78 | 2.0 | 5.96 | 2.2 | ||||||||||||
Private equity and hedge funds |
14.85 | 2.4 | 3.55 | 0.5 | ||||||||||||
Affordable housing(2) |
(6.30 | ) | (6.3 | ) | (6.84 | ) | (4.3 | ) | ||||||||
Other income producing assets(3) |
1.65 | 2.7 | 0.82 | 1.8 | ||||||||||||
Gross investment income before investment expenses |
5.39 | 634.6 | 5.60 | 594.5 | ||||||||||||
Investment expenses |
(0.11 | ) | (12.4 | ) | (0.10 | ) | (10.5 | ) | ||||||||
Net investment income |
5.28 | % | $ | 622.2 | 5.50 | % | $ | 584.0 | ||||||||
(1) | Yields are determined based on monthly averages calculated using beginning and end-of-period balances. Yields are based on carrying values except for fixed maturities and equity securities, and private equity funds. Yields for fixed maturities and private equity funds are based on amortized cost. Yields for equity securities are based on cost. | |
(2) | The negative yield from affordable housing investments is offset by U.S. federal income tax benefits. The resulting impact to net income was $4.3 and $2.8 for the six months ended June 30, 2011 and 2010, respectively. | |
(3) | Other income producing assets includes other invested assets, short-term investments and cash and cash equivalents. |
For the six months ended June 30, 2011, net investment income increased 6.5% compared to
the same period in 2010, driven by an increase in invested assets on strong sales of our fixed
deferred annuities in 2010 and 2011. These were partially offset by a decrease in net investment
yields, which decreased to 5.28% in 2011 from 5.50% in 2010. The reduction in yields is the effect
of the low interest rate environment we have experienced lower yields on purchases and
reinvestment of fixed maturities. To help improve our overall yields, we continued our
underwriting of commercial mortgage loans.
For the six months ended June 30, 2011 and 2010, the Company had average daily cash balances
of $240.2 and $334.6, respectively. The decrease in average daily cash balances is attributable to
higher investments in U.S. Treasury securities, as well as our ability to acquire high quality,
higher yielding investments due to an improvement in the credit markets.
Net Realized Investment Gains (Losses)
In the second quarter 2011, our portfolio produced net realized gains of $14.1, as compared to
net realized losses of $10.0 for the same period in 2010, primarily due to an increase in gains on
strategic sales of fixed maturities, primarily residential mortgage-backed securities which had
accelerating prepayment speeds.
For the six months ended June 30, 2011, our portfolio produced net realized gains of $29.7, as
compared to net realized losses of $3.2 for the same period in 2010. We experienced a $15.0
increase in gains on sales of fixed maturities, due to strategic sales of securities, in a net gain
position as noted above. Additionally, credit-related impairments declined by $8.3 and the
performance of our trading portfolio increased $5.7, due to improvements in the overall equity
markets.
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Table of Contents
The following table sets forth the detail of our net realized investment gains (losses) before
taxes:
For the Three Months Ended | For the Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Gross realized gains on sales of fixed maturities |
$ | 29.7 | $ | 7.0 | $ | 32.4 | $ | 17.4 | ||||||||
Gross realized losses on sales of fixed maturities |
(1.5 | ) | (0.2 | ) | (7.6 | ) | (1.3 | ) | ||||||||
Impairments: |
||||||||||||||||
Public fixed maturities(1) |
(0.2 | ) | (1.4 | ) | (0.6 | ) | (3.8 | ) | ||||||||
Private fixed maturities |
| | | (5.1 | ) | |||||||||||
Total credit-related |
(0.2 | ) | (1.4 | ) | (0.6 | ) | (8.9 | ) | ||||||||
Other |
(2.6 | ) | (0.1 | ) | (3.1 | ) | (2.3 | ) | ||||||||
Total impairments |
(2.8 | ) | (1.5 | ) | (3.7 | ) | (11.2 | ) | ||||||||
Net gains (losses) on trading securities |
(7.7 | ) | (8.8 | ) | 4.5 | (1.2 | ) | |||||||||
Other net investment gains (losses)(2): |
||||||||||||||||
Other gross gains |
2.7 | 4.6 | 12.7 | 8.4 | ||||||||||||
Other gross losses |
(6.3 | ) | (11.1 | ) | (8.6 | ) | (15.3 | ) | ||||||||
Net realized investment gains (losses) before taxes |
$ | 14.1 | $ | (10.0 | ) | $ | 29.7 | $ | (3.2 | ) | ||||||
(1) | Public fixed maturities includes publicly traded securities and highly marketable private placements for which there is an actively traded market. | |
(2) | This primarily consists of changes in fair value on derivatives instruments, gains (losses) on calls and redemptions, and the impact of net realized investment gains (losses) on DAC and deferred sales inducements. |
Impairments
Impairments for the three months ended June 30, 2011 and 2010 were $2.8 and $1.5,
respectively. This increase was primarily attributable to securities we intend to sell, partially
offset by reduced credit concerns as credit-related impairments decreased $1.2. Impairments for the
six months ended June 30, 2011 and 2010 were $3.7 and $11.2, respectively. This decrease was
largely due to improved economic conditions compared to 2010 and reduced credit concerns as
credit-related impairments decreased $8.3. For those issuers for which we recorded an impairment
during 2011, we had remaining holdings with an amortized cost of $105.5 and a fair value of $100.5
as of June 30, 2011. When evaluating a security for possible impairment, we consider several
factors, which are described in more detail in Note 4 to the accompanying unaudited interim
consolidated financial statements.
Fixed Maturity Securities
Fixed maturities represented approximately 89% and 91% of invested assets as of June 30, 2011
and December 31, 2010, respectively. As of June 30, 2011, publicly traded and privately placed
fixed maturities represented 96.1% and 3.9%, respectively, of our total fixed maturity portfolio at
fair value. We invest in privately placed fixed maturities to enhance the overall value of the
portfolio, increase diversification and obtain higher yields than can ordinarily be obtained with
comparable public market securities.
Fixed Maturity Securities Credit Quality
The Securities Valuation Office, or SVO, of the NAIC, evaluates the investments of insurers
for regulatory reporting purposes and assigns fixed maturities to one of the six categories called
NAIC Designations. NAIC designations of 1 or 2 include fixed maturities considered investment
grade, which generally include securities rated BBB- or higher by Standard & Poors. NAIC
designations of 3 through 6 are referred to as below investment grade, which generally include
securities rated BB+ or lower by Standard & Poors.
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The following table presents our fixed maturities by NAIC designation and S&P equivalent
credit ratings, as well as the percentage of total fixed maturities, based upon fair value that
each designation comprises:
As of June 30, 2011 | As of December 31, 2010 | |||||||||||||||||||||||||||
Amortized | Fair | % of Total | Amortized | Fair | % of Total | |||||||||||||||||||||||
Cost | Value | Fair Value | Cost | Value | Fair Value | |||||||||||||||||||||||
NAIC: | S&P Equivalent: |
|||||||||||||||||||||||||||
1 | AAA, AA, A |
$ | 12,646.4 | $ | 13,391.0 | 60.5 | % | $ | 12,453.2 | $ | 13,042.4 | 61.3 | % | |||||||||||||||
2 | BBB |
6,825.7 | 7,274.2 | 32.8 | 6,642.1 | 6,981.9 | 32.8 | |||||||||||||||||||||
Total investment grade |
19,472.1 | 20,665.2 | 93.3 | 19,095.3 | 20,024.3 | 94.1 | ||||||||||||||||||||||
3 | BB |
853.8 | 853.6 | 3.9 | 700.3 | 679.0 | 3.2 | |||||||||||||||||||||
4 | B |
494.8 | 480.3 | 2.2 | 420.6 | 393.8 | 1.8 | |||||||||||||||||||||
5 | CCC & lower |
153.9 | 139.4 | 0.6 | 178.4 | 164.8 | 0.8 | |||||||||||||||||||||
6 | In or near default |
7.5 | 8.0 | | 21.9 | 19.9 | 0.1 | |||||||||||||||||||||
Total below investment grade |
1,510.0 | 1,481.3 | 6.7 | 1,321.2 | 1,257.5 | 5.9 | ||||||||||||||||||||||
Total | $ | 20,982.1 | $ | 22,146.5 | 100.0 | % | $ | 20,416.5 | $ | 21,281.8 | 100.0 | % | ||||||||||||||||
As of June 30, 2011 and December 31, 2010, securities with an amortized cost of $802.3
and $847.3, and fair value of $859.1 and $891.9, respectively, had no rating from a nationally
recognized securities rating agency. We derived the equivalent S&P credit quality rating for these
securities based on the securities NAIC rating designation.
Below investment grade securities comprised 6.7% and 5.9% of our fixed maturities portfolio as
of June 30, 2011 and December 31, 2010, respectively. We held NAIC 5 and 6 designated securities
with gross unrealized losses of $19.0 as of June 30, 2011, of which $16.3, or 85.8%, related to
five issuers. These issuers are current on their contractual payments and our analysis supports the
recoverability of amortized cost.
Certain of our fixed maturities are supported by guarantees from monoline bond insurers. The
credit ratings of our fixed maturities set forth in the table above reflect, where applicable, the
guarantees provided by monoline bond insurers. As of June 30, 2011, fixed maturities with monoline
guarantees had an amortized cost of $533.2 and a fair value of $538.8, with gross unrealized losses
of $10.5. As of December 31, 2010, fixed maturities with monoline guarantees had an amortized cost
of $555.1 and a fair value of $547.5, with gross unrealized losses of $19.3. The majority of these
securities were municipal bonds. As of June 30, 2011, $510.4, or 94.7%, of the fair value of fixed
maturities supported by guarantees from monoline bond insurers had investment grade credit ratings
both when including and excluding the effect of the monoline insurance.
49
Table of Contents
Fixed Maturity Securities and Unrealized Gains and Losses by Security Sector
The following table sets forth the fair value of our fixed maturities by sector, as well as
the associated gross unrealized gains and losses and the percentage of total fixed maturities that
each sector comprises as of the dates indicated:
As of June 30, 2011 | ||||||||||||||||||||||||
Cost or | Gross | Gross | % of | |||||||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | Total Fair | OTTI | |||||||||||||||||||
Cost | Gains | Losses | Value | Value | in AOCI | |||||||||||||||||||
Security Sector |
||||||||||||||||||||||||
Corporate securities: |
||||||||||||||||||||||||
Consumer discretionary |
$ | 1,654.4 | $ | 94.6 | $ | (8.9 | ) | $ | 1,740.1 | 7.9 | % | $ | (0.5 | ) | ||||||||||
Consumer staples |
2,363.6 | 169.4 | (13.1 | ) | 2,519.9 | 11.4 | (1.4 | ) | ||||||||||||||||
Energy |
692.7 | 56.9 | (2.9 | ) | 746.7 | 3.4 | | |||||||||||||||||
Financials |
2,033.0 | 89.4 | (53.9 | ) | 2,068.5 | 9.3 | (0.7 | ) | ||||||||||||||||
Health care |
1,312.9 | 105.1 | (4.5 | ) | 1,413.5 | 6.4 | (1.8 | ) | ||||||||||||||||
Industrials |
2,653.3 | 203.3 | (10.2 | ) | 2,846.4 | 12.8 | (0.1 | ) | ||||||||||||||||
Information technology |
362.9 | 34.7 | (0.9 | ) | 396.7 | 1.8 | | |||||||||||||||||
Materials |
1,226.8 | 76.4 | (16.2 | ) | 1,287.0 | 5.8 | (12.9 | ) | ||||||||||||||||
Telecommunication services |
655.1 | 47.3 | (5.0 | ) | 697.4 | 3.1 | (0.8 | ) | ||||||||||||||||
Utilities |
1,719.3 | 121.0 | (12.3 | ) | 1,828.0 | 8.3 | (0.1 | ) | ||||||||||||||||
Total corporate securities |
14,674.0 | 998.1 | (127.9 | ) | 15,544.2 | 70.2 | (18.3 | ) | ||||||||||||||||
U.S. government and agencies |
40.0 | 3.1 | | 43.1 | 0.2 | (0.1 | ) | |||||||||||||||||
State and political subdivisions |
521.1 | 10.6 | (8.1 | ) | 523.6 | 2.4 | (0.2 | ) | ||||||||||||||||
Residential mortgage-backed securities: |
||||||||||||||||||||||||
Agency |
3,085.7 | 147.1 | (8.6 | ) | 3,224.2 | 14.6 | | |||||||||||||||||
Non-agency: |
||||||||||||||||||||||||
Prime |
309.3 | 8.3 | (10.4 | ) | 307.2 | 1.4 | (29.5 | ) | ||||||||||||||||
Alt-A |
100.2 | 2.9 | (3.1 | ) | 100.0 | 0.4 | (8.8 | ) | ||||||||||||||||
Total residential mortgage-backed
securities |
3,495.2 | 158.3 | (22.1 | ) | 3,631.4 | 16.4 | (38.3 | ) | ||||||||||||||||
Commercial mortgage-backed securities |
1,702.0 | 123.9 | (9.0 | ) | 1,816.9 | 8.2 | (3.1 | ) | ||||||||||||||||
Other debt obligations |
549.8 | 40.6 | (3.1 | ) | 587.3 | 2.6 | (4.5 | ) | ||||||||||||||||
Total |
$ | 20,982.1 | $ | 1,334.6 | $ | (170.2 | ) | $ | 22,146.5 | 100.0 | % | $ | (64.5 | ) | ||||||||||
During the six months ended June 30, 2011, we increased our investments in corporate
securities with cash generated from sales, primarily of fixed deferred annuities. We have mainly
purchased investment grade corporate securities, with a focus on obtaining appropriate yields and
duration to match our policyholder liabilities while retaining quality.
Our fixed maturities holdings are diversified by industry and issuer. The portfolio does not
have significant exposure to any single issuer. As of June 30, 2011 and December 31, 2010, the fair
value of our ten largest corporate securities holdings was $1,331.7 and $1,276.9, or 8.6% and 8.8%,
respectively. The fair value of our largest exposure to a single issuer of corporate securities was
$165.9, or 1.1%, as of June 30, 2011. All of the securities related to this issuer have an NAIC
rating of 2 or higher. As of December 31, 2010, the fair value of our largest exposure to a single
issuer of corporate securities was $140.4, or 1.0%, all of which had an NAIC rating of 2 or higher.
As of June 30, 2011, we had $1.2 in direct exposure to the sovereign and local debt of Portugal,
with no exposure to sovereign or local debt of Italy, Ireland, Greece or Spain.
50
Table of Contents
As of December 31, 2010 | ||||||||||||||||||||||||
Cost or | Gross | Gross | % of | |||||||||||||||||||||
Amortized | Unrealized | Unrealized | Fair | Total Fair | OTTI | |||||||||||||||||||
Cost | Gains | Losses | Value | Value | in AOCI | |||||||||||||||||||
Security Sector |
||||||||||||||||||||||||
Corporate securities: |
||||||||||||||||||||||||
Consumer discretionary |
$ | 1,526.6 | $ | 77.4 | $ | (15.0 | ) | $ | 1,589.0 | 7.4 | % | $ | (2.8 | ) | ||||||||||
Consumer staples |
2,085.3 | 145.9 | (15.1 | ) | 2,216.1 | 10.4 | (1.4 | ) | ||||||||||||||||
Energy |
675.5 | 49.1 | (4.3 | ) | 720.3 | 3.4 | | |||||||||||||||||
Financials |
2,028.9 | 68.7 | (83.9 | ) | 2,013.7 | 9.5 | (0.7 | ) | ||||||||||||||||
Health care |
1,218.9 | 99.6 | (6.2 | ) | 1,312.3 | 6.2 | (1.8 | ) | ||||||||||||||||
Industrials |
2,446.8 | 176.4 | (19.6 | ) | 2,603.6 | 12.2 | (5.8 | ) | ||||||||||||||||
Information technology |
450.9 | 40.2 | (1.7 | ) | 489.4 | 2.3 | | |||||||||||||||||
Materials |
1,176.7 | 64.8 | (30.6 | ) | 1,210.9 | 5.7 | (12.7 | ) | ||||||||||||||||
Telecommunication services |
569.3 | 32.6 | (10.1 | ) | 591.8 | 2.8 | (0.9 | ) | ||||||||||||||||
Utilities |
1,712.8 | 100.6 | (19.1 | ) | 1,794.3 | 8.4 | (0.1 | ) | ||||||||||||||||
Total corporate securities |
13,891.7 | 855.3 | (205.6 | ) | 14,541.4 | 68.3 | (26.2 | ) | ||||||||||||||||
U.S. government and agencies |
30.3 | 2.8 | | 33.1 | 0.2 | (0.1 | ) | |||||||||||||||||
State and political subdivisions |
462.9 | 5.3 | (15.4 | ) | 452.8 | 2.1 | (0.2 | ) | ||||||||||||||||
Residential mortgage-backed securities: |
||||||||||||||||||||||||
Agency |
3,239.9 | 139.3 | (18.6 | ) | 3,360.6 | 15.8 | | |||||||||||||||||
Non-agency: |
||||||||||||||||||||||||
Prime |
351.6 | 6.1 | (28.0 | ) | 329.7 | 1.5 | (31.3 | ) | ||||||||||||||||
Alt-A |
115.7 | 3.5 | (7.9 | ) | 111.3 | 0.5 | (8.7 | ) | ||||||||||||||||
Total residential mortgage-backed
securities |
3,707.2 | 148.9 | (54.5 | ) | 3,801.6 | 17.8 | (40.0 | ) | ||||||||||||||||
Commercial mortgage-backed securities |
1,782.2 | 115.2 | (10.1 | ) | 1,887.3 | 8.9 | (3.3 | ) | ||||||||||||||||
Other debt obligations |
542.2 | 35.8 | (12.4 | ) | 565.6 | 2.7 | (6.4 | ) | ||||||||||||||||
Total |
$ | 20,416.5 | $ | 1,163.3 | $ | (298.0 | ) | $ | 21,281.8 | 100.0 | % | $ | (76.2 | ) | ||||||||||
Fixed Maturity Securities by Contractual Maturity Date
As of June 30, 2011 and December 31, 2010, approximately 25% and 27%, respectively, of the
fair value of our fixed maturity portfolio was held in mortgaged-backed securities, and 23% and 24%
of our portfolio was due after ten years, which we consider to be longer duration assets. Fixed
maturities in these categories primarily back long duration reserves in our Income Annuities
segment, which can exceed a period of 30 years. As of June 30, 2011 and December 31, 2010,
approximately 76% and 75%, respectively, of the gross unrealized losses on our investment portfolio
related to these longer duration assets, which fluctuate more significantly with changes in
interest rates and credit spreads.
Mortgage-Backed Securities
As of June 30, 2011, our fixed maturity securities portfolio included $5.4 billion of
residential and commercial mortgage-backed securities at fair value. Approximately 69% of these
securities are agency securities and approximately 22% are AAA rated non-agency securities in the
most senior tranche of the structure type.
All of our RMBS and CMBS securities have prepayment options. Prepayments that vary in amount
or timing from our estimates cause fluctuations in our yields due to an acceleration or
deceleration of unamortized premium or discount associated with the securities in our portfolio.
Such adjustment is recorded in net investment income in our results of operations. These
adjustments, which relate primarily to RMBS, create volatility in our net investment income. Refer
to the RMBS section below for additional discussion.
Residential Mortgage-Backed Securities (RMBS)
We classify our investments in RMBS as agency, prime, Alt-A, and subprime. Agency RMBS are
guaranteed or otherwise supported by the Federal National Mortgage Association, the Federal Home
Loan Mortgage Corporation, or the Government National Mortgage Association. Prime RMBS are loans to
the most credit-worthy customers with high quality credit profiles. Alt-A RMBS
51
Table of Contents
have overall credit quality between prime and subprime, based on a review of their underlying
mortgage loans and factors such as credit scores and financial ratios.
The following table sets forth the fair value of the Companys investment in agency, prime,
and Alt-A RMBS and the percentage of total invested assets they represent:
As of June 30, 2011 | As of December 31, 2010 | |||||||||||||||
% of Total | % of Total | |||||||||||||||
Fair Value | Invested Assets | Fair Value | Invested Assets | |||||||||||||
Agency |
$ | 3,224.2 | 12.9 | % | $ | 3,360.6 | 14.3 | % | ||||||||
Non-agency: |
||||||||||||||||
Prime |
307.2 | 1.3 | 329.7 | 1.4 | ||||||||||||
Alt-A |
100.0 | 0.4 | 111.3 | 0.5 | ||||||||||||
Subtotal non-agency |
407.2 | 1.7 | 441.0 | 1.9 | ||||||||||||
Total |
$ | 3,631.4 | 14.6 | % | $ | 3,801.6 | 16.2 | % | ||||||||
The following table sets forth the total fair value, and amortized cost of our non-agency
RMBS by credit quality and year of origination (vintage). There were eight securities with a total
amortized cost and fair value of $86.7 and $81.1, respectively, that were rated below investment
grade by either Moodys, S&P or Fitch, while at least one other agency rated them investment grade.
As of June 30, 2011 | ||||||||||||||||||||||||||||
Highest Rating Agency Rating | ||||||||||||||||||||||||||||
Total as of | ||||||||||||||||||||||||||||
BB and | December 31, | |||||||||||||||||||||||||||
AAA | AA | A | BBB | Below | Total | 2010 | ||||||||||||||||||||||
Vintage: |
||||||||||||||||||||||||||||
2007 |
$ | | $ | | $ | | $ | | $ | 28.4 | $ | 28.4 | $ | 41.1 | ||||||||||||||
2006 |
| | | 3.1 | 105.8 | 108.9 | 127.9 | |||||||||||||||||||||
2005 |
| 9.1 | 6.2 | 55.2 | 39.2 | 109.7 | 115.2 | |||||||||||||||||||||
2004 and prior |
142.9 | 13.1 | 5.9 | | 0.6 | 162.5 | 183.1 | |||||||||||||||||||||
Total amortized cost |
$ | 142.9 | $ | 22.2 | $ | 12.1 | $ | 58.3 | $ | 174.0 | $ | 409.5 | $ | 467.3 | ||||||||||||||
Net unrealized gains (losses) |
4.0 | (1.6 | ) | 0.2 | (4.0 | ) | (0.9 | ) | (2.3 | ) | (26.3 | ) | ||||||||||||||||
Total fair value |
$ | 146.9 | $ | 20.6 | $ | 12.3 | $ | 54.3 | $ | 173.1 | $ | 407.2 | $ | 441.0 | ||||||||||||||
On a fair value basis as of June 30, 2011, our Alt-A portfolio was 86.9% fixed rate
collateral and 13.1% hybrid adjustable rate mortgages, or ARMs, with no exposure to option ARMs.
Generally, fixed rate mortgages have performed better with lower delinquencies and defaults on the
underlying collateral than both option ARMs and hybrid ARMs in the current economic environment. As
of June 30, 2011 and December 31, 2010, respectively, $62.7, or 62.7%, and $62.6, or 56.2%, of the
total Alt-A portfolio had an S&P equivalent credit rating of AAA.
As of June 30, 2011, our Alt-A, prime and total non-agency RMBS had an estimated
weighted-average credit enhancement of 13.1%, 8.4% and 9.5%, respectively. Credit enhancement
refers to the weighted-average percentage of the outstanding capital structure that is subordinate
in the priority of cash flows and absorbs losses first. We monitor delinquency rates associated
with these securities, and as of June 30, 2011, we believe that our credit enhancements are
sufficient to cover potential delinquencies.
As of June 30, 2011 and December 31, 2010, 59.9% and 58.8%, respectively, of the fair value of
our non-agency RMBS had super senior subordination. The super senior class has priority over all
principal and interest cash flows and will not experience any loss of principal until lower levels
are written down to zero. Therefore, the majority of our RMBS investments have less exposure to
defaults and delinquencies in the underlying collateral than if we held the more subordinated
classes.
As of June 30, 2011, our RMBS had gross unamortized premiums and discounts of $69.4 and $72.6,
respectively. Changes in prepayment speeds, which are based on prepayment activity of the
underlying mortgages, create volatility in our net investment income because they accelerate or
decelerate our amortization of the unamortized premiums and discounts. The impact to net investment
income is dependent both on whether the securities are at a discount or premium and whether the
prepayment speeds increase or decrease.
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In our RMBS portfolio, certain vintage years have overall higher interest rates than current
market rates. Certain collateralized mortgage obligations (CMOs) in our RMBS portfolio with a
vintage year of 2003 have caused the most volatility in our net investment income. We strategically
selected certain of these CMOs to sell during the second quarter of 2011 to reduce the volatility
in income related to prepayment speed adjustments.
Commercial Mortgage-Backed Securities (CMBS)
The following table sets forth the fair value of our investment in CMBS and the percentage of
total invested assets they represent:
As of June 30, 2011 | As of December 31, 2010 | |||||||||||||||
% of Total | % of Total | |||||||||||||||
Fair Value | Invested Assets | Fair Value | Invested Assets | |||||||||||||
Agency |
$ | 533.8 | 2.1 | % | $ | 607.4 | 2.6 | % | ||||||||
Non-Agency |
1,283.1 | 5.2 | 1,279.9 | 5.4 | ||||||||||||
Total |
$ | 1,816.9 | 7.3 | % | $ | 1,887.3 | 8.0 | % | ||||||||
The disruptions in the CMBS market spanning from 2009 through early 2010 were
attributable to weakness in commercial real estate market fundamentals and previously reduced
underwriting standards by some originators of commercial mortgage loans, particularly within the
more recent vintage years (2006 through 2008). This reduced market liquidity and availability of
capital, which led to the repricing of risk. As market conditions improve, prices of our CMBS have
largely recovered and are currently in a net unrealized gain position of $114.9, or 6.8% of
amortized cost, as of June 30, 2011. On an amortized cost basis, 97.4% of our entire CMBS portfolio
were rated AAA, 1.3% were rated AA or A, and 1.3% were rated B and
below as of June 30, 2011. These ratings do not reflect the
recent downgrade of agency securities by S&P from AAA to AA+ on August 8, 2011.
Our CMBS portfolio is highly concentrated in the most senior tranches, with 95.0% of our AAA-rated
securities in the most senior tranche with significant credit enhancement.
The following table sets forth the total fair value, and amortized cost of our non-agency CMBS
by credit quality and year of origination (vintage). There were 13 securities having a fair value
of $312.7 and an amortized cost of $285.9 that were rated A by S&P, while Moodys and/or Fitch
rated them AAA.
As of June 30, 2011 | ||||||||||||||||||||||||||||
Highest Rating Agency Rating | ||||||||||||||||||||||||||||
Total as of | ||||||||||||||||||||||||||||
BB and | December 31, | |||||||||||||||||||||||||||
AAA | AA | A | BBB | Below | Total | 2010 | ||||||||||||||||||||||
Vintage: |
||||||||||||||||||||||||||||
2011 |
$ | 39.7 | $ | | $ | | $ | | $ | | $ | 39.7 | $ | | ||||||||||||||
2008 |
51.1 | 18.5 | | | | 69.6 | 69.5 | |||||||||||||||||||||
2007 |
439.9 | | | | 1.3 | 441.2 | 444.4 | |||||||||||||||||||||
2006 |
157.9 | | | | 11.4 | 169.3 | 168.5 | |||||||||||||||||||||
2005 |
272.5 | | | | | 272.5 | 283.6 | |||||||||||||||||||||
2004 and prior |
177.9 | | 3.1 | | 9.2 | 190.2 | 224.8 | |||||||||||||||||||||
Total amortized cost |
$ | 1,139.0 | $ | 18.5 | $ | 3.1 | $ | | $ | 21.9 | $ | 1,182.5 | $ | 1,190.8 | ||||||||||||||
Net unrealized gains (losses) |
105.9 | (2.1 | ) | 0.1 | | (3.3 | ) | 100.6 | 89.1 | |||||||||||||||||||
Total fair value |
$ | 1,244.9 | $ | 16.4 | $ | 3.2 | $ | | $ | 18.6 | $ | 1,283.1 | $ | 1,279.9 | ||||||||||||||
U.S. CMBS have historically utilized a senior/subordinate credit structure to allocate
cash flows and losses. The structure was changed in late 2004 and was in transition into early
2005 when fully implemented to include super-senior, mezzanine and junior AAA tranches. This change
resulted in increasing the credit enhancement (subordination) on the most senior tranche
(super-senior) to 30%. The mezzanine AAAs were structured to typically have 20% credit enhancement
and the junior AAAs 14% credit enhancement. Credit enhancement refers to the weighted-average
percentage of outstanding capital structure that is subordinate in the priority of cash flows and
absorbs losses first. Credit enhancement does not include any equity interest or property value in
excess of outstanding debt. The super senior class has priority over the mezzanine and junior
classes to all principal and interest cash flows and will not experience any loss of principal
until both the entire mezzanine and junior tranches are written down to zero. Since 2010, new
issues
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of U.S. CMBS (referred to as CMBS 2.0) have simpler structures. The CMBS 2.0 AAA credit
enhancement averages approximately 17%, and the division of the AAA class into super-senior,
mezzanine, and junior tranches is no longer present.
The following tables set forth the amortized cost of our AAA non-agency CMBS by type and year
of origination (vintage):
As of June 30, 2011 | ||||||||||||||||||||||||||||
Total AAA | ||||||||||||||||||||||||||||
Super Senior | Other Structures | Securities at | ||||||||||||||||||||||||||
Super | Other | Other | Amortized | |||||||||||||||||||||||||
Senior | Mezzanine | Junior | Senior | Subordinate | Other | Cost | ||||||||||||||||||||||
Vintage: |
||||||||||||||||||||||||||||
2011 |
$ | | $ | | $ | | $ | 39.7 | $ | | $ | | $ | 39.7 | ||||||||||||||
2008 |
51.1 | | | | | | 51.1 | |||||||||||||||||||||
2007 |
439.9 | | | | | | 439.9 | |||||||||||||||||||||
2006 |
157.9 | | | | | | 157.9 | |||||||||||||||||||||
2005 |
133.9 | 28.8 | | 109.8 | | | 272.5 | |||||||||||||||||||||
2004 and prior |
| | | 149.6 | 28.3 | | 177.9 | |||||||||||||||||||||
Total |
$ | 782.8 | $ | 28.8 | $ | | $ | 299.1 | $ | 28.3 | $ | | $ | 1,139.0 | ||||||||||||||
As of December 31, 2010 | ||||||||||||||||||||||||||||
Total |
$ | 787.0 | $ | 30.6 | $ | | $ | 298.3 | $ | 28.9 | $ | | $ | 1,144.8 | ||||||||||||||
The weighted-average credit enhancement of our CMBS was 28.6% as of December 31, 2010.
Adjusted to remove defeased loans, which are loans whose cash flows have been replaced by U.S.
Treasury securities, the weighted-average credit enhancement of our CMBS as of June 30, 2011 was
30.0%. We believe this additional credit enhancement is significant in a deep real estate downturn
during which losses are expected to increase substantially.
Return on Equity-Like Investments
Prospector Partners, LLC, or Prospector, manages a portfolio of equity and equity-like
investments, including publicly traded common stock and convertible securities. We believe that
these equity and equity-like investments are suitable for funding certain long duration liabilities
in our Income Annuities segment, and on a limited basis in our surplus portfolio. As of June 30,
2011 and 2010, equity-like convertible securities made up $87.8 or 18.7%, and $65.8 or 31.8%,
respectively, of the portfolio. For the three and six months ended June 30, 2011 and 2010, our
convertible securities yielded gross returns of (2.4)%, (2.9)%, 0.3% and 2.4%, respectively.
The following table compares our total gross return on the equity component of our Prospector
portfolio to the benchmark S&P 500 Total Return Index for the three and six months ended June 30,
2011 and 2010.
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Common stock |
(2.4) | % | (5.5) | % | 4.1 | % | (0.4) | % | ||||||||
S&P 500 Total Return Index |
0.1 | (11.4 | ) | 6.0 | (6.6 | ) | ||||||||||
Difference |
(2.5) | % | 5.9 | % | (1.9) | % | 6.2 | % | ||||||||
During the second quarter of 2011, we implemented an investment strategy focused on real
estate-related investments primarily to back our longer duration liabilities in our Income
Annuities segment portfolio. As of June 30, 2011, we held $137.2 in publicly traded REITs related
to this strategy, the majority of which is managed by one of our subadvisors.
Mortgage Loans
Our mortgage loan department originates commercial mortgages and manages our existing
commercial mortgage loan portfolio. The commercial mortgage loan holdings are secured by
first-mortgage liens on income-producing commercial real estate, primarily in the retail,
industrial and office building sectors. All loans are underwritten consistently to our standards
based on loan-to-value (LTV) ratios and debt service coverage ratios (DSCR) based on income and
detailed market, property and borrower analysis
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using our long-term experience in commercial mortgage lending. A large majority of our loans
have personal guarantees and all loans greater than $1.0 are inspected annually. We diversify our
mortgage loans by geographic region, loan size and scheduled maturities. On our consolidated
balance sheets, mortgage loans are reported net of an allowance for losses, deferred loan
origination costs, unearned mortgage loan fees, and a purchase accounting adjustment; however, the
following tables are reported excluding these items.
The stress experienced in the U.S. financial markets and unfavorable credit market conditions
led to a decrease in overall liquidity and availability of capital in the commercial mortgage loan
market, which has led to greater opportunities for more selective loan originations, especially
those loans in our range of specialization, $2.0 to $5.0. We believe a disciplined increase in our
mortgage loan portfolio will help maintain the overall quality of our investment portfolio and
obtain appropriate yields to match our policyholder liabilities. We continue to prudently increase
our investments in mortgage loans primarily in our Income Annuities and Deferred Annuities segments
to improve our overall investment yields. This strategy has resulted in increased net investment
yields when compared to fixed maturity investments. We originated $425.7 of mortgage loans during
the six months ended June 30, 2011 and expect to continue strong originations for the remainder of
2011.
As of June 30, 2011 and December 31, 2010, 73.2% and 73.6%, respectively, of our mortgage
loans were under $5.0 and our average loan balance was $2.3 and $2.2, respectively. As of June 30,
2011 and December 31, 2010, our largest loan balance was $12.7 and $13.0, respectively.
Credit Quality
We use the LTV and DSCR ratios as our primary metrics to assess mortgage loan quality. The
following table sets forth the LTV ratios for our gross mortgage loan portfolio:
As of June 30, 2011 | As of December 31, 2010 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Value | % of Total | Value | % of Total | |||||||||||||
Loan-to-Value Ratio: |
||||||||||||||||
< or = 50% |
$ | 604.7 | 28.9 | % | $ | 596.2 | 34.7 | % | ||||||||
51% - 60% |
523.0 | 25.0 | 369.8 | 21.5 | ||||||||||||
61% - 70% |
621.2 | 29.7 | 463.7 | 26.9 | ||||||||||||
71% - 75% |
124.4 | 5.9 | 120.4 | 7.0 | ||||||||||||
76% - 80% |
65.3 | 3.1 | 46.3 | 2.7 | ||||||||||||
81% - 100% |
91.0 | 4.4 | 90.7 | 5.3 | ||||||||||||
> 100% |
63.3 | 3.0 | 33.1 | 1.9 | ||||||||||||
Total |
$ | 2,092.9 | 100.0 | % | $ | 1,720.2 | 100.0 | % | ||||||||
The LTV ratio compares the amount of the loan to the estimated fair value of the
underlying property collateralizing the loan. In the year of funding, LTV ratios are calculated
using independent appraisals performed by Member of the Appraisal Institute (MAI) designated
appraisers. Subsequent to the year of funding, LTV ratios are updated annually using internal
valuations based on property income and estimated market capitalization rates. Property income
estimates are typically updated between June 1 and August 31. Market capitalization rates are
updated during the first quarter based on geographic region, property type and economic climate.
LTV ratios greater than 100% indicate that the loan amount is greater than the collateral value. A
smaller LTV ratio generally indicates a higher quality loan.
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As of June 30, 2011 and December 31, 2010, the mortgage loan portfolio had weighted-average
LTV ratios of 58.6% and 57.0%, respectively. The increase in the LTV ratio is driven by higher LTV
ratios on originations of new mortgage loans and a reduction in the updated estimated fair values
of the underlying properties, which is the result of declines in property income compared to the
previous year. Estimated fair values of underlying properties on existing loans will continue to be
updated through August 2011. The weighted average LTV ratio was 59.1% and 55.2% for loans funded
during the six months ended June 30, 2011 and the year ended December 31, 2010, respectively. For
loans originated in the six months ended June 30, 2011, 19.1% had an LTV ratio of 50% or less, and
no loans had an LTV ratio of more than 75%. For loans originated in the year ended December 31,
2010, 31.7% had an LTV ratio of 50% or less, and no loans had an LTV ratio of more than 75%. The
following table sets forth the DSCR for our gross mortgage loan portfolio:
As of June 30, 2011 | As of December 31, 2010 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Value | % of Total | Value | % of Total | |||||||||||||
Debt Service Coverage Ratio: |
||||||||||||||||
> or = 1.60 |
$ | 1,103.9 | 52.7 | % | $ | 896.4 | 52.1 | % | ||||||||
1.40 - 1.59 |
414.5 | 19.8 | 327.1 | 19.0 | ||||||||||||
1.20 - 1.39 |
331.4 | 15.8 | 295.7 | 17.2 | ||||||||||||
1.00 - 1.19 |
127.5 | 6.1 | 117.7 | 6.8 | ||||||||||||
0.85 - 0.99 |
43.1 | 2.1 | 32.0 | 1.9 | ||||||||||||
< 0.85 |
72.5 | 3.5 | 51.3 | 3.0 | ||||||||||||
Total |
$ | 2,092.9 | 100.0 | % | $ | 1,720.2 | 100.0 | % | ||||||||
The DSCR compares the amount of rental income a property is generating to the amount of
the mortgage payments due on the property. DSCRs are calculated using the most current annual
operating history for the collateral. As of June 30, 2011 and December 31, 2010, the mortgage loan
portfolio had weighted-average DSCRs of 1.72 and 1.73, respectively. For loans originated during
the six months ended June 30, 2011 and the year ended December 31, 2010, 52.7% and 58.4%,
respectively, had a DSCR of 1.60 or more.
Composition of Mortgage Loans
The following table sets forth the gross carrying value of our investments in mortgage loans
by geographic region:
As of June 30, 2011 | As of December 31, 2010 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Value | % of Total | Value | % of Total | |||||||||||||
Region: |
||||||||||||||||
California |
$ | 676.8 | 32.3 | % | $ | 533.6 | 31.0 | % | ||||||||
Washington |
292.3 | 14.0 | 270.4 | 15.7 | ||||||||||||
Texas |
210.0 | 10.0 | 168.9 | 9.8 | ||||||||||||
Oregon |
106.2 | 5.1 | 95.6 | 5.6 | ||||||||||||
Florida |
72.1 | 3.4 | 54.9 | 3.2 | ||||||||||||
Other |
735.5 | 35.2 | 596.8 | 34.7 | ||||||||||||
Total |
$ | 2,092.9 | 100.0 | % | $ | 1,720.2 | 100.0 | % | ||||||||
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The following table sets forth the gross carrying value of our investments in mortgage
loans by property type:
As of June 30, 2011 | As of December 31, 2010 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Value | % of Total | Value | % of Total | |||||||||||||
Property Type: |
||||||||||||||||
Shopping centers and retail |
$ | 903.4 | 43.2 | % | $ | 735.7 | 42.8 | % | ||||||||
Office buildings |
559.1 | 26.7 | 460.8 | 26.8 | ||||||||||||
Industrial |
482.1 | 23.0 | 433.9 | 25.2 | ||||||||||||
Multi-family |
80.5 | 3.9 | 46.8 | 2.7 | ||||||||||||
Other |
67.8 | 3.2 | 43.0 | 2.5 | ||||||||||||
Total |
$ | 2,092.9 | 100.0 | % | $ | 1,720.2 | 100.0 | % | ||||||||
Maturity Date of Mortgage Loans
The following table sets forth our gross carrying value of our investments in mortgage loans
by contractual maturity date:
As of June 30, 2011 | As of December 31, 2010 | |||||||||||||||
Carrying | Carrying | |||||||||||||||
Value | % of Total | Value | % of Total | |||||||||||||
Years to Maturity: |
||||||||||||||||
Due in one year or less |
$ | 8.7 | 0.4 | % | $ | 6.3 | 0.4 | % | ||||||||
Due after one year through five years |
127.3 | 6.1 | 107.1 | 6.2 | ||||||||||||
Due after five years through ten years |
1,087.7 | 52.0 | 871.9 | 50.7 | ||||||||||||
Due after ten years |
869.2 | 41.5 | 734.9 | 42.7 | ||||||||||||
Total |
$ | 2,092.9 | 100.0 | % | $ | 1,720.2 | 100.0 | % | ||||||||
For more information and further discussion of our allowance of mortgage loans, see Note
5 to our unaudited interim consolidated financial statements.
Investments in Limited Partnerships Affordable Housing Investments
We invest in limited partnership interests related to tax credit investments, which are
typically 15-year investments that provide tax credits in years one through ten. As of June 30,
2011, we were invested in 18 limited partnership interests related to the federal affordable
housing projects and other various state tax credit funds. We account for these investments under
the equity method, and they are recorded at amortized cost in investments in limited partnerships,
with the present value of unfunded contributions recorded in other liabilities.
Although these investments decrease our net investment income over time on a pre-tax basis,
they provide us with significant tax benefits, which decrease our effective tax rate. The following
table sets forth the impact the amortization of our investments and related tax credits had on net
income:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Amortization related to affordable housing investments, net of taxes |
$ | (2.0 | ) | $ | (1.5 | ) | $ | (4.2 | ) | $ | (2.8 | ) | ||||
Affordable housing tax credits |
4.2 | 2.8 | 8.5 | 5.6 | ||||||||||||
Impact to net income |
$ | 2.2 | $ | 1.3 | $ | 4.3 | $ | 2.8 | ||||||||
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The following table provides the future estimated impact to net income:
Impact to Net | ||||
Income | ||||
Remainder of 2011 |
$ | 3.7 | ||
2012 |
13.2 | |||
2013 |
14.1 | |||
2014 and beyond |
47.2 | |||
Estimated impact to net income |
$ | 78.2 | ||
Liquidity and Capital Resources
Symetra conducts all of its operations through its operating subsidiaries, and our liquidity
requirements primarily have been and will continue to be met by funds from such subsidiaries.
Dividends from its subsidiaries are Symetras principal sources of cash to pay dividends and meet
its obligations, including payments of principal and interest on notes payable and tax obligations.
We had historically paid quarterly cash dividends on our common stock and warrants at a rate
of approximately $0.05 per share until the second quarter of 2011, when we paid a cash dividend of
$0.06 per share. We plan to continue to pay approximately $0.06 per share in future quarters. The
declaration and payment of future dividends to holders of our common stock will be at the
discretion of our board of directors. See Dividends below for further discussion.
Over the past few years, the global financial markets experienced unprecedented disruption,
adversely affecting the business environment in general, and financial services companies in
particular. In the last few months, the economic recovery slowed and
markets experienced increased volatility over concerns about a double-dip recession.
The
credit markets remain tight and we continue to
experience a low interest rate environment. In managing the challenging market conditions over the
past couple of years, we benefited from the diversification of our business and strong financial
fundamentals. We actively manage our liquidity in light of changing market, economic and business
conditions and we believe that our liquidity levels are more than adequate to cover our exposures,
as evidenced by the following:
| Sales for the six months ended June 30, 2011 were solid and exceeded levels for the same period in 2010. Sales on our deposit contracts (annuities and universal life policies) continue to generate strong cash inflows. | ||
| We continued to generate strong cash flows from operations, which grew by $14.5 to $451.3 for the six months ended June 30, 2011, from $436.8 for the six months ended June 30, 2010. | ||
| While certain policy lapses and surrenders occur in the normal course of business, these lapses and surrenders have not deviated materially from management expectations. | ||
| As of June 30, 2011, we had the ability to borrow, on an unsecured basis, up to a maximum principal amount of $200.0 under a revolving line of credit arrangement. | ||
| To support the sales of our products and maintain financial strength ratings, we target a risk-based capital level of at least 350% in our primary life insurance company, Symetra Life Insurance Company. As of June 30, 2011, Symetra Life Insurance Company had an estimated risk-based capital ratio of 466%. This capital level provides more than adequate capital levels for the growth of our business. |
Liquidity Requirements and Sources of Liquidity
The liquidity requirements of our insurance subsidiaries principally relate to the liabilities
associated with their various insurance and investment products, operating costs and expenses, the
payment of dividends to the holding company, and payment of income taxes. Liabilities arising from
insurance and investment products include the payment of benefits, as well as cash payments in
connection with policy and contract surrenders and withdrawals and policy loans. Historically,
Symetras insurance subsidiaries have used cash flows from operations, cash flows from invested
assets and sales of investment securities to fund their liquidity requirements.
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In managing the liquidity of our insurance operations, we also consider the risk of
policyholder and contract holder withdrawals of funds earlier than assumed when selecting assets to
support these contractual obligations. We use surrender charges and other contract provisions to
mitigate the extent, timing and profitability impact of withdrawals of funds by customers from
annuity contracts and deposit liabilities. The following table sets forth withdrawal
characteristics of our general account policyholder liabilities, composed of annuity reserves,
deposit liabilities and policy and contract claim liabilities, net of reinsurance recoverables:
As of June 30, 2011 | As of December 31, 2010 | |||||||||||||||
Amount | % of Total | Amount | % of Total | |||||||||||||
Illiquid Liabilities |
||||||||||||||||
Structured settlements & other SPIAs(1) |
$ | 6,642.5 | 29.9 | % | $ | 6,670.4 | 31.4 | % | ||||||||
Deferred
annuities with 5-year payout provision or MVA(2) |
371.3 | 1.7 | 377.1 | 1.8 | ||||||||||||
Traditional insurance (net of reinsurance)(3) |
185.1 | 0.8 | 185.6 | 0.9 | ||||||||||||
Group health & life (net of reinsurance)(3) |
101.4 | 0.5 | 95.9 | 0.4 | ||||||||||||
Total illiquid liabilities |
7,300.3 | 32.9 | 7,329.0 | 34.5 | ||||||||||||
Somewhat Liquid Liabilities |
||||||||||||||||
Bank-owned life insurance (BOLI)(4) |
4,522.7 | 20.4 | 4,444.0 | 20.9 | ||||||||||||
Deferred annuities with surrender charges of 5% or higher |
6,887.7 | 31.0 | 6,176.8 | 29.1 | ||||||||||||
Universal life with surrender charges of 5% or higher |
212.6 | 1.0 | 181.7 | 0.9 | ||||||||||||
Total somewhat liquid liabilities |
11,623.0 | 52.4 | 10,802.5 | 50.9 | ||||||||||||
Fully Liquid Liabilities |
||||||||||||||||
Deferred annuities with surrender charges of: |
||||||||||||||||
3% up to 5% |
538.2 | 2.4 | 462.6 | 2.2 | ||||||||||||
Less than 3% |
164.7 | 0.7 | 231.2 | 1.1 | ||||||||||||
No surrender charges(5) |
2,113.4 | 9.5 | 1,946.9 | 9.2 | ||||||||||||
Universal life with surrender charges less than 5% |
437.3 | 2.0 | 439.9 | 2.0 | ||||||||||||
Other(6) |
21.9 | 0.1 | 21.9 | 0.1 | ||||||||||||
Total fully liquid liabilities |
3,275.5 | 14.7 | 3,102.5 | 14.6 | ||||||||||||
Total(7) |
$ | 22,198.8 | 100.0 | % | $ | 21,234.0 | 100.0 | % | ||||||||
(1) | These contracts cannot be surrendered. The benefits are specified in the contracts as fixed amounts, primarily to be paid over the next several decades. | |
(2) | In a liquidity crisis situation, we could invoke the five-year payout provision so that the contract value with interest is paid out ratably over five years. | |
(3) | The surrender value on these contracts is generally zero. Represents incurred but not reported claim liabilities. | |
(4) | The biggest deterrent to surrender is the taxation on the gain within these contracts, which includes a 10% non-deductible penalty tax. Banks can exchange certain of these contracts with other carriers, tax-free. However, a significant portion of this business does not qualify for this tax-free treatment due to the employment status of the original covered employees and charges may be applicable. | |
(5) | Approximately half of this business has been with the Company for over a decade, contains lifetime minimum interest guarantees of 4.0% to 4.5%, and has been free of surrender charges for many years. This business has experienced high persistency given the high lifetime guarantees that have not been available in the market on new issues for many years. | |
(6) | Represents BOLI, traditional insurance, and Group health and life reported claim liabilities. | |
(7) | Represents the sum of funds held under deposit contracts, future policy benefits and policy and contract claims on the consolidated balance sheets, excluding other policyholder related liabilities and reinsurance recoverables of $236.2 and 234.3 as of June 30, 2011 and December 31, 2010, respectively. |
Liquid Assets
Symetras insurance subsidiaries maintain investment strategies intended to provide adequate
funds to pay benefits without forced sales of investments. Products having liabilities with longer
durations, such as certain life insurance policies and structured settlement annuities, are matched
with investments having similar estimated lives such as long-term fixed maturities, mortgage loans
and marketable equity securities. Shorter-term liabilities are matched with fixed maturities that
have short- and medium-terms. In addition, our insurance subsidiaries hold highly liquid, high
quality, shorter-term investment securities and other liquid investment-grade fixed maturities and
cash equivalents to fund anticipated operating expenses, surrenders and withdrawals.
We define liquid assets to include cash, cash equivalents, short-term investments, publicly
traded fixed maturities and public equity securities. As of June 30, 2011 and December 31, 2010,
our insurance subsidiaries had liquid assets of $21.7 billion and $20.8
billion, respectively, and Symetra had liquid assets of $103.8 and $89.7, respectively. The
portion of total company liquid assets
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comprised of cash and cash equivalents and short-term
investments was $90.1 and $277.1 as of June 30, 2011 and December 31, 2010, respectively. The
increase in our insurance subsidiaries liquid assets was primarily the result of sales of deferred
annuities during the first half of 2011.
We consider attributes of the various categories of liquid assets (for example, type of asset
and credit quality) in evaluating the adequacy of our insurance operations liquidity under a
variety of stress scenarios. We believe that the liquidity profile of our assets is sufficient to
satisfy liquidity requirements, including under foreseeable stress scenarios.
Given the size and liquidity profile of our investment portfolio, we believe that claim
experience varying from our projections does not constitute a significant liquidity risk. Our
asset/liability management process takes into account the expected maturity of investments and
expected claim payments as well as the specific nature and risk profile of the liabilities.
Historically, there has been limited variation between the expected maturities of our investments
and the payment of claims.
Capitalization
Our capital structure consists of notes payable and stockholders equity. The following table
summarizes our capital structure:
As of | As of | |||||||
June 30, 2011 | December 31, 2010 | |||||||
Notes payable |
$ | 449.1 | $ | 449.0 | ||||
Stockholders equity |
2,647.3 | 2,380.6 | ||||||
Total capital |
$ | 3,096.4 | $ | 2,829.6 | ||||
Our capitalization increased $266.8 as of June 30, 2011, as compared to December 31, 2010
due to an increase in stockholders equity from our net income of $114.3 and a $213.2 improvement
in the fair value of our available-for-sale securities. We believe our capital levels position us
well to capitalize on organic growth as well as pursue any potentially favorable acquisition
opportunities.
Dividends
We declared and paid quarterly dividends of $0.05 and $0.06 per common share, respectively,
during the first and second quarters of 2011, for a total payout of $15.1. On August 10, 2011, we
declared a quarterly dividend of $0.06 per common share to shareholders and warrant holders as of
August 24, 2011, for an approximate total of $8.3 to be paid on or about September 7, 2011.
Cash Flows
The following table sets forth a summary of our consolidated cash flows for the dates
indicated:
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Net cash flows provided by operating activities |
$ | 451.3 | $ | 436.8 | ||||
Net cash flows used in investing activities |
(1,156.0 | ) | (1,223.2 | ) | ||||
Net cash flows provided by financing activities |
517.5 | 851.3 |
Operating Activities
Cash flows from our operating activities are primarily driven by the amounts and timing of
cash received for premiums on our group medical stop-loss and term life insurance products, income
on our investments, including dividends and interest, as well as the amounts and timing of cash
disbursed for our payment of policyholder benefits and claims, underwriting and operating expenses
and income taxes.
Net cash provided by operating activities for the six months ended June 30, 2011 increased
$14.5 over the same period in 2010. This increase was primarily the result of increased net
investment income driven by an increase in average assets, partially offset by an increase in
income taxes paid in 2011, and an increase in group medical stop-loss paid claims.
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Investing Activities
Cash flows from our investing activities are primarily driven by the amounts and timing of
cash received from our sales of investments and from maturities and calls of fixed maturity
securities, as well as the amounts and timing of cash disbursed for purchases of investments and
funding of mortgage loan originations.
Net cash used in investing activities for the six months ended June 30, 2011 decreased $67.2
over the same period in 2010. This decrease was primarily the result of cash received from
prepayments, maturities and calls on fixed maturities as well as the sale of fixed maturities.
These decreases were partially offset by increased mortgage loan origination volume and
purchases of fixed maturities.
Financing Activities
Cash flows from our financing activities are primarily driven by the amounts and timing of
cash received from deposits into certain life insurance and annuity policies and proceeds from our
issuances of debt and common stock, as well as the amounts and timing of cash disbursed to fund
withdrawals from certain life insurance and annuity policies, and dividend distributions to our
stock and warrant holders.
Net cash provided by financing activities for the six months ended June 30, 2011 decreased
$333.8 over the same period in 2010. This was primarily due to net IPO proceeds of $282.5 million
received during the first quarter of 2010. The remaining decrease related to increased
policyholder withdrawals in the current period.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Market risk is the risk of change in the value of financial instruments as a result of
absolute or relative changes in interest rates, foreign currency exchange rates, or equity or
commodity prices. To varying degrees, the investment and trading activities supporting all of our
products and services generate market risks. There have been no material changes in our market risk
exposures from December 31, 2010, a description of which may be found in Part II, Item 7A
Quantitative and Qualitative Disclosures about Market Risk in our 2010 10-K. See Item 1A Risk
Factors of Part II in this report for a discussion of how changes to the operating and investing
markets may materially adversely affect our business and results of operations.
Item 4. | Controls and Procedures |
Disclosure Controls and Procedures
We carried out an evaluation required by the Securities Exchange Act of 1934 (the 1934 Act),
under the supervision and with the participation of our principal executive officer and principal
financial officer, of the effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rule 13a15(e) of the 1934 Act, as of June 30, 2011. Based on this
evaluation our principal executive officer and principal financial officer concluded that, as of
June 30, 2011, our disclosure controls and procedures were effective to provide reasonable
assurance that information required to be disclosed by us in the reports that we file or submit
under the 1934 Act is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms and to provide reasonable assurance that such information is
accumulated and communicated to our management, including our principal executive officer and
principal financial officer, as appropriate, to allow timely decisions regarding required
disclosures.
Limitations on Controls
Our disclosure controls and procedures are designed to provide reasonable assurance of
achieving their objectives as specified above. Management does not expect, however, that our
disclosure controls and procedures will prevent or detect all errors or fraud. Any control system,
no matter how well designed and operated, is based on certain assumptions and can provide only
reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of
controls can provide absolute assurance that misstatements due to error or fraud will not occur or
that all control issues and instances of fraud, if any, within the Company have been detected.
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Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during our most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
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PART II Other Information
Item 1. Legal Proceedings
Disclosure concerning material legal proceedings can be found in Item 1 Financial Statements,
Notes to Consolidated Financial Statements, Note 10, Commitments and Contingencies under the
caption Litigation, which is incorporated here by this reference.
Item 1A. Risk Factors
In addition to the other information set forth in this report, consideration should be given
to the factors discussed in Part I, Item 1A Risk Factors in our 2010 10-K. If any of those
factors were to occur, they could materially adversely affect our business, financial condition or
future results and could cause actual results to differ materially from those expressed in
forward-looking statements in this report. There have been no material changes to the risk factors
set forth in the above-referenced filing as of June 30, 2011.
Item 6. Exhibits
Exhibit | ||
Number | Description | |
10.1
|
Investment Management Agreement between White Mountains Advisors LLC and Symetra Financial Corporation, together with Symetra Life Insurance Company and certain other Affiliated Companies, dated as of June 1, 2011* | |
31.1
|
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended* | |
31.2
|
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended* | |
32.1
|
Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* | |
32.2
|
Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* | |
101
|
The following materials from Symetra Financial Corporations Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statement of Income, (iii) the Consolidated Statements of Changes in Stockholders Equity, (iv) the Consolidated Statement of Cash Flows and (v) the Notes to the Consolidated Financial Statements. |
* | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SYMETRA FINANCIAL CORPORATION |
||||
Date: August 11, 2011 | By: | /s/ Thomas M. Marra | ||
Name: | Thomas M. Marra | |||
Title: | President and Chief Executive Officer | |||
Date: August 11, 2011 | By: | /s/ Margaret A. Meister | ||
Name: | Margaret A. Meister | |||
Title: | Executive Vice President and Chief Financial Officer |
|||
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