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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012

COMMISSION FILE NUMBERS 33-34562; 33-60288; 333-48983; 333-133224

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY OF NEW YORK

(Exact name of Registrant as specified in its charter)

 

NEW YORK   16-1020455
(State or other jurisdiction
of incorporation or organization)
  (IRS Employer
Identification No.)

440 Mamaroneck Avenue

Harrison, NY 10528

(Address of Principal Executive Offices)

1-800-333-6524

(Registrant’s telephone number including area code)

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

Yes þ No ¨

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

Yes þ No ¨

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

 

Large accelerated filer ¨

  

Accelerated filer ¨

   Non-accelerated filer þ   

Smaller reporting company ¨

      (Do not check if a smaller reporting company)   

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

Yes ¨ No þ

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE

PRECEDING FIVE YEARS:

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

Yes ¨ No ¨

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

COMMON 220,000

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

 

 

 


PART 1. Financial Information

Item 1. Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY OF NEW YORK

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

BALANCE SHEETS

 

(dollars in thousands, except share data)

   March 31,
2012
    December 31,
2011
 
     (unaudited)     (audited)  

ASSETS

    

Investments

    

Fixed maturity available-for-sale securities, at estimated fair value (amortized cost: 2012 - $131,153; 2011 - $137,690)

     $ 144,313        $ 149,707   

Fixed maturity trading securities

     154        138   

Equity available-for-sale securities, at estimated fair value (cost: 2012 - $1,228; 2011 - $1,228)

     1,277        1,131   

Policy loans

     53,256        53,433   
  

 

 

   

 

 

 

Total investments

     199,000        204,409   
  

 

 

   

 

 

 

Cash and cash equivalents

     18,893        10,120   

Accrued investment income

     2,701        3,018   

Deferred policy acquisition costs

     391        466   

Deferred sales inducements

     143        170   

Value of business acquired

     27,130        27,563   

Goodwill

     500        500   

Federal income taxes - current

     832        1,014   

Reinsurance receivables - net

     31        -       

Receivable for investments sold - net

     11        41   

Other assets

     3,713        3,389   

Separate Accounts assets

     566,013        541,690   
  

 

 

   

 

 

 

Total Assets

     $ 819,358        $ 792,380   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDER’S EQUITY

    

Liabilities

    

Policyholder liabilities and accruals

    

Policyholder account balances

     $ 104,684        $ 105,163   

Future policy benefits

     18,343        19,066   

Claims and claims settlement expenses

     2,856        5,184   
  

 

 

   

 

 

 

Total policyholder liabilities and accruals

     125,883        129,413   
  

 

 

   

 

 

 

Federal income taxes - deferred

     5,363        3,995   

Affiliated payables - net

     626        3   

Reinsurance payables - net

     -            31   

Other liabilities

     1,642        1,053   

Separate Accounts liabilities

     566,013        541,690   
  

 

 

   

 

 

 

Total Liabilities

     699,527        676,185   
  

 

 

   

 

 

 

Stockholder’s Equity

    

Common stock ($10 par value; 220,000 shares authorized, issued and outstanding)

     2,200        2,200   

Additional paid-in capital

     128,638        128,638   

Accumulated other comprehensive income, net of taxes

     8,188        7,347   

Retained deficit

     (19,195     (21,990
  

 

 

   

 

 

 

Total Stockholder’s Equity

     119,831        116,195   
  

 

 

   

 

 

 

Total Liabilities and Stockholder’s Equity

     $          819,358        $          792,380   
  

 

 

   

 

 

 

 

 

See Notes to Financial Statements

 

1


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY OF NEW YORK

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

STATEMENTS OF INCOME

 

      Three Months Ended
March 31,
 

(dollars in thousands)

   2012     2011  
     (unaudited)  

Revenues

    

Policy charge revenue

     $ 3,486        $ 3,611   

Net investment income

     2,428        2,574   

Net realized investment losses

    

Other-than-temporary impairment losses on securities

     -            -       

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

     -            -       

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

     -            -       
  

 

 

   

 

 

 

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

     -            -       

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

     (848     (186
  

 

 

   

 

 

 

Net realized investment losses

     (848     (186
  

 

 

   

 

 

 

Total Revenues

     5,066        5,999   
  

 

 

   

 

 

 

Benefits and Expenses

    

Interest credited to policyholder liabilities

     1,219        1,220   

Policy benefits (net of reinsurance recoveries: 2012 - $78; 2011 - $128)

     (1,660     610   

Reinsurance premium ceded

     81        104   

Amortization (accretion) of deferred policy acquisition costs

     75        (44

Amortization of value of business acquired

     520        642   

Insurance expenses and taxes

     951        1,204   
  

 

 

   

 

 

 

Total Benefits and Expenses

     1,186        3,736   
  

 

 

   

 

 

 

Income Before Taxes

     3,880        2,263   
  

 

 

   

 

 

 

Federal Income Tax Expense

    

Current

     181        37   

Deferred

     904        488   
  

 

 

   

 

 

 

Federal Income Tax Expense

     1,085        525   
  

 

 

   

 

 

 

Net Income

     $ 2,795        $ 1,738   
  

 

 

   

 

 

 

 

 

 

See Notes to Financial Statements

 

2


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY OF NEW YORK

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

STATEMENTS OF COMPREHENSIVE INCOME

 

      Three Months Ended
March 31,
 

(dollars in thousands)

   2012     2011  
     (unaudited)  

Net Income

     $     2,795        $   1,738   
  

 

 

   

 

 

 

Other Comprehensive Income (Loss)

    

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

    

Net unrealized holding gains (losses) arising during the period

     1,328        (181

Reclassification adjustment for (gains) losses included in net income

     21        (94
  

 

 

   

 

 

 
     1,349        (275
  

 

 

   

 

 

 

Net unrealized other-than-temporary impairments on securities

    

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

     -            -       

Change in previously recognized unrealized other-than-temporary impairments

     (60     1   

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

     -            -       
  

 

 

   

 

 

 
     (60     1   

Adjustments

    

Policyholder liabilities

     (72     19   

Value of business acquired

     87        107   

Deferred federal income taxes

     (463     37   
  

 

 

   

 

 

 
     (448     163   
  

 

 

   

 

 

 

Total other comprehensive income (loss), net of taxes

     841        (111
  

 

 

   

 

 

 

Comprehensive Income

     $ 3,636        $   1,627   
  

 

 

   

 

 

 

 

 

 

See Notes to Financial Statements

 

3


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY OF NEW YORK

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

STATEMENTS OF STOCKHOLDER’S EQUITY

 

(dollars in thousands)

   March 31,
2012
    December 31,
2011
 
         (unaudited)     (audited)  

Common Stock

       $ 2,200        $ 2,200   

Additional Paid-in Capital

       $ 128,638        $ 128,638   

Accumulated Other Comprehensive Income

    

Balance at beginning of period

       $ 7,347        $ 5,549   

Total other comprehensive income, net of taxes

     841        1,798   
    

 

 

   

 

 

 

Balance at end of period

       $ 8,188        $ 7,347   
    

 

 

   

 

 

 

Retained Earnings (Deficit)

      

Balance at beginning of period

       $ (21,990 )      $ (3,225

Net income

       2,795        6,235   

Cash dividend paid to AEGON USA, LLC

     -            (25,000
    

 

 

   

 

 

 

Balance at end of period

       $ (19,195 )      $ (21,990
    

 

 

   

 

 

 

Total Stockholder’s Equity

       $                119,831        $ 116,195   
    

 

 

   

 

 

 

 

 

 

 

 

See Notes to Financial Statements

 

4


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY OF NEW YORK

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

STATEMENTS OF CASH FLOWS

 

     Three Months Ended
March 31,
 

(dollars in thousands)

   2012     2011  
     (unaudited)  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

     $ 2,795        $ 1,738   

Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:

    

Change in deferred policy acquisition costs

     75        (44

Change in deferred sales inducements

     27        (16

Change in value of business acquired

     520        642   

Change in benefit reserves

     (1,625     456   

Change in federal income tax accruals

     1,086        526   

Change in claims and claims settlement expenses

     (2,328     436   

Change in other operating assets and liabilities, net

     1,171        1,057   

Amortization of investments

     48        31   

Interest credited to policyholder liabilities

     1,219        1,220   

Net change in fixed maturity trading securities

     (16     (44

Net realized investment losses

     848        186   
  

 

 

   

 

 

 

Net cash and cash equivalents provided by operating activities

     3,820        6,188   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Sales of available-for-sale securities

     2,731        1,862   

Maturities of available-for-sale securities

     6,672        1,190   

Purchases of available-for-sale securities

     (2,979     (1,148

Sales of fixed maturity trading securities

     -          1,147   

Net settlements on futures contracts

     (782     (273

Policy loans on insurance contracts, net

     177        214   
  

 

 

   

 

 

 

Net cash and cash equivalents provided by investing activities

     5,819        2,992   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Policyholder deposits

     56        160   

Policyholder withdrawals

     (922     (4,115
  

 

 

   

 

 

 

Net cash and cash equivalents used in financing activities

     (866     (3,955
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     8,773        5,225   

Cash and cash equivalents, beginning of year

     10,120        28,617   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

     $     18,893        $     33,842   
  

 

 

   

 

 

 

 

 

 

See Notes to Financial Statements

 

5


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY OF NEW YORK

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

NOTES TO FINANCIAL STATEMENTS (unaudited)

(Dollars in Thousands)

 

 

Note 1. Summary of Significant Accounting Policies

 

Basis of Presentation

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

For a complete discussion of the Company’s 2011 Financial Statements and accounting policies, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

The interim Financial Statements for the three months are unaudited; however in the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair statement of the Financial Statements have been included. These unaudited Financial Statements should be read in conjunction with the audited Financial Statements included in the 2011 Annual Report on Form 10-K. The nature of the Company’s business is such that results of any interim period are not necessarily indicative of results for a full year.

Basis of Reporting

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

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

Accounting Estimates and Assumptions

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

Subsequent Events

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

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

Recent Accounting Guidance

Current Adoption of Recent Accounting Guidance

Accounting Standards Codification (“ASC”) 944, Financial Services—Insurance

In October 2010, the Financial Accounting Standards Board (“FASB”) issued (Accounting Standards Update (“ASU”) 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts which modified the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. An insurance entity may only capitalize incremental direct costs of contract acquisition, the portion of employees’ compensation directly related to time spent performing specified acquisition activities for a contract that has actually been acquired, other costs related directly to

 

6


specified activities that would not have been incurred had the acquisition contract transaction not occurred, and advertising costs that meet capitalization criteria in other GAAP guidance. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted the guidance prospectively on January 1, 2012. The only acquisition costs being capitalized in 2012 and 2011 were renewal commissions; therefore there was no change to the current practice of deferring costs. As a result, the adoption did not impact the Company’s results of operations and financial position.

ASC 820, Fair Value Measurements and Disclosures

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, which amends current guidance to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). Some of the amendments represent clarifications of existing requirements. Other amendments change a particular principle or requirement for measuring fair value or disclosing information about fair value measurements. The guidance is effective for interim and annual periods beginning after December 15, 2011. The Company adopted the guidance on January 1, 2012. The adoption affected disclosures but did not impact the Company’s results of operations and financial position.

ASC 220, Comprehensive Income

 

   

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which requires an entity to report components of comprehensive income in either a single, continuous statement of comprehensive income or two separate but consecutive statements. Under the two statement approach, the first statement would include components of net income and the second statement would include components of other comprehensive income (“OCI”).

Regardless of format, an entity is required to present items that are reclassified from OCI to net income in both net income and OCI. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted the guidance on January 1, 2012. The adoption affected disclosures but did not impact the Company’s results of operations and financial position.

 

   

In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This guidance defers the portion of ASU 2011-05 that requires an entity to present reclassification adjustments and the effect of those reclassification adjustments on the face of the financial statements where net income is presented, by component of net income, and on the face of the financial statements where OCI is presented, by component of OCI. The deferral is effective at the same time as ASU 2011-05, for fiscal years, and interim periods within those years, beginning after December 15, 2011.

ASC 350, Intangibles—Goodwill and Other

In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, which gives entities the option of performing a qualitative assessment to determine whether it is necessary to perform the two-step goodwill impairment test. If, after assessing qualitative factors, a company determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the company does not need to perform further testing. If it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the company would have to perform the two step goodwill impairment test. The option is unconditional so it may be skipped in any reporting period and an entity may resume performing the qualitative assessment in any subsequent period. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning on or after December 15, 2011. The Company adopted the guidance on January 1, 2012. The adoption did not impact the Company’s results of operations and financial position.

Accounting Guidance Adopted in 2011

ASC 820, Fair Value Measurements and Disclosures

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

 

7


ASC 944, Financial Services—Insurance

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

ASC 350, Intangibles—Goodwill and Other

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

Future Adoption of Accounting Guidance

ASC 210, Balance Sheet

In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities, which enhances disclosures about financial instruments and derivative instruments that are either offset on the statement of financial position or subject to an enforceable master netting arrangement or similar agreement. Entities are required to provide both net and gross information for these assets and liabilities in order to enhance comparability between those entities that prepare their financial statements on the basis of GAAP and those entities that prepare their financial statements on the basis of IFRS. The guidance is effective for annual reporting periods, and interim periods within those years, beginning on or after January 1, 2013. The disclosures required by this guidance should be applied retrospectively for all comparative periods presented. The Company will adopt the guidance on January 1, 2013, which affects disclosures and therefore will not impact the Company’s results of operations and financial position.

 

 

Note 2. Fair Value of Financial Instruments

 

Fair Value Measurements

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

Fair Value Hierarchy

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

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

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

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

 

  a)

Quoted prices for similar assets or liabilities in active markets

  b)

Quoted prices for identical or similar assets or liabilities in non-active markets

  c)

Inputs other than quoted market prices that are observable

  d)

Inputs that are derived principally from or corroborated by observable market data through correlation or other means

 

8


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

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

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

 

    March 31, 2012  

 

  Level 1     Level 2     Level 3     Total  

Assets

       

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

       

Corporate securities

    $ -            $ 103,791        $ -            $ 103,791   

Asset-backed securities

    -            3,118        -            3,118   

Commercial mortgage-backed securities

    -            25,087        -            25,087   

Residential mortgage-backed securities

    -            5,328        -            5,328   

Government and government agencies

       

United States

    3,243        -            -            3,243   

Foreign

    2,616        1,130        -            3,746   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity AFS securities (a)

    5,859        138,454        -            144,313   

Fixed maturity trading securities - corporate securities (a)

    -            154        -            154   

Equity securities - banking securities (a)

    -            1,277        -            1,277   

Cash equivalents (b)

    -            20,393        -            20,393   

Separate Accounts assets (c)

    566,013        -            -            566,013   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    $         571,872        $         160,278      $             -            $         732,150   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

       

Future policy benefits (embedded derivatives only) (d)

    $ -            $ -            $ (6,292     $ (6,292
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    $ -            $ -            $ (6,292     $ (6,292
 

 

 

   

 

 

   

 

 

   

 

 

 

 

9


    December 31, 2011  

 

  Level 1     Level 2     Level 3     Total  

Assets

       

Fixed maturity AFS securities (a)

       

Corporate securities

    $ -            $ 108,402        $ -            $ 108,402   

Asset-backed securities

    -            3,467        -            3,467   

Commercial mortgage-backed securities

    -            25,501        -            25,501   

Residential mortgage-backed securities

    -            4,120        1,098        5,218   

Government and government agencies

       

United States

    3,370        -            -            3,370   

Foreign

    2,711        1,038        -            3,749   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity AFS securities (a)

    6,081        142,528        1,098        149,707   

Fixed maturity trading securities - corporate securities (a)

    -            138        -            138   

Equity securities - banking securities (a)

    -            1,131        -            1,131   

Cash equivalents (b)

    -            10,603        -            10,603   

Separate Accounts assets (c)

    541,690        -            -            541,690   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    $         547,771        $         154,400        $         1,098        $         703,269   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

       

Future policy benefits (embedded derivatives only) (d)

    $ -            $ -            $ (6,356     $ (6,356
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    $ -            $ -            $ (6,356     $ (6,356
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

Securities are classified as Level 1 if the fair value is determined by observable inputs that reflect quoted prices for identical assets in active markets that the Company has the ability to access at the measurement date. Level 1 securities primarily include highly liquid U.S. Treasury and U.S. government agency securities. Securities are classified as Level 2 if the fair value is determined by observable inputs, other than quoted prices included in Level 1, for the asset or prices for similar assets. Securities are classified as Level 3 if the valuations are derived from techniques in which one or more of the significant inputs are unobservable. Level 3 consists principally of fixed maturity securities whose fair value is estimated based on non-binding broker quotes.

(b)

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

(c)

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

(d)

The Company issued contracts containing guaranteed minimum withdrawal benefit riders (“GMWB”) and obtained reinsurance on guaranteed minimum income benefit riders (“GMIB reinsurance”). GMWB and GMIB reinsurance are treated as embedded derivatives and are required to be reported separately from the host variable annuity contract. The fair value of these guarantees is calculated as the present value of future expected payments to policyholders less the present value of assessed rider fees attributable to the guarantees. Given the complexity and long-term nature of these guarantees, their fair values are determined using stochastic techniques under a variety of market return, discount rates and actuarial assumptions. Since many of the assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability included in future policy benefits has been reflected within Level 3 of the fair value hierarchy.

During 2012 and 2011, there were no transfers between Level 1 and 2, respectively.

 

10


The following table provides a summary of the change in fair value of the Company’s Level 3 assets at March 31, 2012 and December 31, 2011:

 

Fixed maturity AFS securities

  March 31,
2012
    December 31,
2011
 

Balance at beginning of period (a)

    $             1,098        $             -       

Change in unrealized gains (b)

    -            28   

Purchases

    -            2,162   

Sales

    -            (1,092

Transfers out of Level 3

    (1,098     -       
 

 

 

   

 

 

 

Balance at end of period (a)

    $ -            $ 1,098   
 

 

 

   

 

 

 

 

(a)

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

(b)

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

The decrease in Level 3 fixed maturity AFS securities at March 31, 2012 was due to the availability of market observable data (Level 2). The increase in Level 3 fixed maturity AFS securities at December 31, 2011 was primarily due to a security whose fair value was based on a non binding quote.

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

The expected returns are based on risk-free rates, such as the current London Inter-Bank Offered Rate (“LIBOR”) forward curve. The credit spread, which is the most significant unobservable input, is set by using the credit default swap (“CDS”) spreads of a reference portfolio of life insurance companies, adjusted to reflect the subordination of senior debt holders at the holding company level to the position of policyholders at the operating company level (who have priority in payments to other creditors). The credit spread was 105 basis points (“bps”) at March 31, 2012 and 135 bps at December 31, 2011.

For equity volatility, the Company uses a term structure assumption with market-based implied volatility inputs for the first five years and a long-term forward rate assumption of 25% thereafter. The volume of observable option trading from which volatilities are derived generally declines as the contracts’ term increases, therefore, the volatility curve grades from implied volatilities for five years to the ultimate rate. The resulting volatility assumption in year 20 for the Standard & Poor’s 500 Composite Price Index (“S&P”) (expressed as a spot rate) was 24.6% at March 31, 2012 and 25.7% at December 31, 2011. Correlations of market returns across underlying indices are based on historical market returns and their inter-relationships over a number of years preceding the valuation date. Assumptions regarding policyholder behavior, such as lapses, included in the models are derived in the same way as the assumptions used to measure insurance liabilities. These assumptions are reviewed at each valuation date and updated based on historical experience and observable market data as required.

 

11


The following table provides a summary of the changes in fair value of the Company’s Level 3 liabilities (assets) at March 31, 2012 and December 31, 2011:

 

     March 31, 2012     December 31, 2011  
      GMWB     GMIB
Reinsurance
    GMWB      GMIB
Reinsurance
 

Balance at beginning of period (b)

     $ 2,776        $ (9,133     $ 529         $ (5,502

Changes in interest rates (a)

     (505     320        1,397             (2,628

Changes in equity markets (a)

     (643     981                     808         (936

Other (a)

     (71     (17     42         (66
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at end of period (b)

     $               1,557        $ (7,849     $ 2,776         $ (9,132
  

 

 

   

 

 

   

 

 

    

 

 

 

 

(a)

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

(b)

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

During the three months ended March 31, 2012, the change in GMWB and GMIB reinsurance reserves was primarily driven by an increase in the risk neutral rates and higher equity market performance. During 2011, the change in GMWB and GMIB reinsurance reserves was primarily driven by the reduction in risk neutral rates and lower equity market performance.

The following table provides a summary of the quantitative inputs and assumptions of the Company’s Level 3 liabilities at March 31, 2012:

 

Description

   March 31,
2012
Estimated
Fair Value
   

Valuation Techniques

  

Unobservable Inputs

   Range
(Weighted Average)

Liabilities

          

Future policy benefits (embedded derivatives) - GMWB

     $ 1,557     

Discounted cash flow

  

Own credit risk

   85 bps to 125 bps
       

Long-term volatility

   25%

Future policy benefits (embedded derivatives) - GMIB reinsurance

     (7,849  

Discounted cash flow

  

Own credit risk

   85 bps to 125 bps
  

 

 

         
       

Long-term volatility

   25%

Total liabilities

     $ (6,292        
  

 

 

         

The following table provides the estimated fair value of the Company’s assets not carried at fair value on the Balance Sheets at March 31, 2012 and December 31, 2011:

 

$XXXXX.XX $XXXXX.XX $XXXXX.XX $XXXXX.XX
     March 31, 2012  

 

   Level 1      Level 2      Level 3      Total  

Assets

           

Policy loans (a)

     $ -             $ 53,256         $ -             $ 53,256   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $ -             $ 53,256         $ -             $ 53,256   
  

 

 

    

 

 

    

 

 

    

 

 

 
$XXXXX.XX $XXXXX.XX $XXXXX.XX $XXXXX.XX
     December 31, 2011  

 

   Level 1      Level 2      Level 3      Total  

Assets

           

Policy loans (a)

     $ -             $ 53,433         $ -             $ 53,433   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     $ -             $ 53,433         $ -             $ 53,433   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

Policy loans are stated at unpaid principal balance. Fair value is estimated as equal to the book value of the loan.

 

12


 

Note 3. Investments

 

Fixed Maturity and Equity Securities

The amortized cost/cost and estimated fair value of investments in fixed maturity and equity AFS securities at March 31, 2012 and December 31, 2011 were:

 

00000000 00000000 00000000 00000000
    March 31, 2012  
    Amortized
Cost/Cost
    Gross Unrealized     Estimated
Fair Value
 

 

    Gains     Losses/
OTTI (1)
   

Fixed maturity AFS securities

       

Corporate securities

    $ 94,488        $ 9,486        $ (183     $ 103,791   

Asset-backed securities

    3,086        38        (6     3,118   

Commercial mortgage-backed securities

    22,207        2,880        -             25,087   

Residential mortgage-backed securities

    5,223        203        (98     5,328   

Government and government agencies

       

United States

    2,968        275        -            3,243   

Foreign

    3,181        588        (23     3,746   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity AFS securities

    $ 131,153        $ 13,470        $ (310     $ 144,313   
 

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities - banking securities

    $ 1,228        $ 57        $ (8     $ 1,277   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    $        1,228        $        57        $        (8     $        1,277   
 

 

 

   

 

 

   

 

 

   

 

 

 
    December 31, 2011  
    Amortized
Cost/Cost
    Gross Unrealized     Estimated
Fair Value
 

 

    Gains     Losses/
OTTI (1)
   

Fixed maturity AFS securities

       

Corporate securities

    $ 99,892        $ 9,247        $ (737     $ 108,402   

Asset-backed securities

    3,423        50        (6     3,467   

Commercial mortgage-backed securities

    22,967        2,534        -            25,501   

Residential mortgage-backed securities

    5,252        125        (159     5,218   

Government and government agencies

       

United States

    2,972        398        -            3,370   

Foreign

    3,184        666        (101     3,749   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity AFS securities

    $ 137,690        $ 13,020        $ (1,003     $ 149,707   
 

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities - banking securities

    $ 1,228        $ -            $ (97     $ 1,131   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    $ 1,228        $ -            $ (97     $ 1,131   
 

 

 

   

 

 

   

 

 

   

 

 

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

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

 

13


The amortized cost and estimated fair value of fixed maturity AFS securities by investment grade at March 31, 2012 and December 31, 2011 were:

 

    March 31, 2012     December 31, 2011  
      Amortized 
Cost
     Estimated 
Fair

Value
     Amortized 
Cost
     Estimated 
Fair

Value
 

Investment grade

    $ 127,281        $ 140,269        $ 133,857        $ 145,732   

Below investment grade

    3,872        4,044        3,833        3,975   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity AFS securities

    $        131,153        $        144,313        $        137,690        $        149,707   
 

 

 

   

 

 

   

 

 

   

 

 

 

The Company defines investment grade securities as unsecured debt obligations that have a rating equivalent to S&P BBB- or higher (or similar rating agency). At March 31, 2012 and December 31, 2011, the estimated fair value of fixed maturity securities rated BBB- were $2,323 and $4,098, respectively, which is the lowest investment grade rating given by S&P.

The amortized cost and estimated fair value of fixed maturity AFS securities at March 31, 2012 and December 31, 2011 by contractual maturities were:

 

    March 31, 2012     December 31, 2011  
      Amortized 
Cost
     Estimated 
Fair

Value
     Amortized 
Cost
     Estimated 
Fair

Value
 

Fixed maturity AFS securities

       

Due in one year or less

    $ 1,456        $ 1,486        $ 6,188        $ 6,261   

Due after one year through five years

    33,425        36,390        33,286        35,906   

Due after five years through ten years

    56,063        61,778        56,878        62,056   

Due after ten years

    9,693        11,126        9,696        11,298   
 

 

 

   

 

 

   

 

 

   

 

 

 
    100,637        110,780        106,048        115,521   

Mortgage-backed securities and other asset-backed securities

    30,516        33,533        31,642        34,186   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity AFS securities

    $        131,153        $        144,313        $        137,690        $        149,707   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

For the three months ended March 31, 2012 and 2011, there was $3 and $22, respectively, of investment income on fixed maturity trading securities and $16 and $19, respectively, of income recognized from the change in the fair value on fixed maturity trading securities recorded in net investment income in the Statements of Income. The Company also recognized gains of $25 during the periods ended March 31, 2011, on the conversion of a fixed maturity trading security to preferred stock.

Unrealized Gains (Losses) on Fixed Maturity and Equity Securities

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

 

14


The estimated fair value and gross unrealized losses and OTTI of fixed maturity and equity AFS securities aggregated by length of time that individual securities have been in a continuous unrealized loss position at March 31, 2012 and December 31, 2011 were as follows:

 

    March 31, 2012  

 

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

Less than or equal to six months

     

Fixed maturity AFS securities

     

Corporate securities

    $ 3,647        $ 3,755        $ (108

Residential mortgage-backed securities

    7        7        -     
 

 

 

   

 

 

   

 

 

 

Total fixed maturity and equity securities

    3,654        3,762        (108
 

 

 

   

 

 

   

 

 

 

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

     

Fixed maturity AFS securities

     

Corporate securities

    742        786        (44

Asset-backed securities

    1,562        1,568        (6
 

 

 

   

 

 

   

 

 

 

Total fixed maturity and equity securities

    2,304        2,354        (50
 

 

 

   

 

 

   

 

 

 

Greater than one year

     

Fixed maturity AFS securities

     

Corporate securities

    1,469        1,500        (31

Residential mortgage-backed securities

    683        781        (98

Government and government agencies - foreign

    439        462        (23

Equity securities - banking securities

    72        80        (8
 

 

 

   

 

 

   

 

 

 

Total fixed maturity and equity securities

    2,663        2,823        (160
 

 

 

   

 

 

   

 

 

 

Total fixed maturity and equity securities

    $     8,621        $     8,939        $ (318
 

 

 

   

 

 

   

 

 

 
    December 31, 2011  

 

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

Less than or equal to six months

     

Fixed maturity AFS securities - corporate securities

    $ 3,635        $ 3,978        $ (343

Equity securities - banking securities

    1,068        1,148        (80
 

 

 

   

 

 

   

 

 

 

Total fixed maturity and equity securities

    4,703        5,126        (423
 

 

 

   

 

 

   

 

 

 

Greater than one year

     

Fixed maturity AFS securities

     

Corporate securities

    3,890        4,284        (394

Asset-backed securities

    1,649        1,655        (6

Residential mortgage-backed securities

    667        826        (159

Government and government agencies - foreign

    360        461        (101

Equity securities - banking securities

    63        80        (17
 

 

 

   

 

 

   

 

 

 

Total fixed maturity and equity securities

    6,629        7,306        (677
 

 

 

   

 

 

   

 

 

 

Total fixed maturity and equity securities

    $ 11,332        $ 12,432        $ (1,100
 

 

 

   

 

 

   

 

 

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

The total number of securities in an unrealized loss position was 17 and 18 at March 31, 2012 and December 31, 2011, respectively.

 

15


At March 31, 2012, there were no securities whose fair value had declined below amortized cost by greater than 20%. At December 31, 2011 the estimated fair value, gross unrealized losses, OTTI and number of securities where the fair value had declined below amortized cost by greater than 20% were as follows:

 

    December 31, 2011  

 

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

Decline > 20%

     

Greater than one year

  $     423      $ (119     2   
 

 

 

   

 

 

   

 

 

 

Total

  $     423      $ (119     2   
 

 

 

   

 

 

   

 

 

 

 

(1)

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

Unrealized gains (losses) incurred during the three months ended March 31, 2012 and 2011 were primarily due to price fluctuations resulting from changes in interest rates and credit spreads. If the Company has the intent to sell or it is more likely than not that the Company will be required to sell these securities prior to the anticipated recovery of the amortized cost, securities are written down to fair value. If cash flow models indicate a credit event will impact future cash flows, the security is impaired to discounted cash flows. As the remaining unrealized losses in the portfolio relate to holdings where the Company expects to receive full principal and interest, the Company does not consider the underlying investments to be impaired.

The components of net unrealized gain (loss) and OTTI included in accumulated other comprehensive income, net of taxes, at March 31, 2012 and December 31, 2011 were as follows:

 

December 31, December 31,

 

   March 31,
2012
    December 31,
2011
 

Assets

    

Fixed maturity securities

   $     13,160      $ 12,017   

Equity securities

     49        (97

Value of business acquired

     (445     (532
  

 

 

   

 

 

 
     12,764        11,388   
  

 

 

   

 

 

 

Liabilities

    

Policyholder account balances

     (72     -     

Federal income taxes - deferred

     (4,504     (4,042
  

 

 

   

 

 

 
     (4,576     (4,042
  

 

 

   

 

 

 

Stockholder’s equity

    

Accumulated other comprehensive income, net of taxes

   $       8,188      $ 7,347   
  

 

 

   

 

 

 

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

Derivatives

The Company uses derivatives to manage the capital market risk associated with the GMWB. The derivatives, which are S&P futures contracts, are used to hedge the equity risk associated with these types of variable guaranteed products, in particular the claim and/or revenue risks of the liability portfolio. The Company will not seek hedge accounting on these hedges because, in most cases, the derivatives’ change in value will create a natural offset in the Statements of Income with the change in reserves. Net settlements on the futures occur daily. At March 31, 2012, the Company had 20 outstanding short futures contracts with a notional value of $7,016. At December 31, 2011, the Company had 20 outstanding short futures contracts with a notional value of $6,263.

 

16


Realized Investment Gains (Losses)

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

 

December 31, December 31,
    Three Months Ended
March  31,
 

 

        2012                 2011        

Proceeds

    $ 2,731        $ 1,862   

Gross realized investment gains

    150        109   

Gross realized investment losses

    (216     -       

Proceeds on AFS securities sold at a realized loss

    1,783        -       

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

 

December 31, December 31,
    Three Months Ended
March 31,
 

 

        2012                 2011        

Fixed maturity securities

    $ (66     $ 109   

Derivatives - futures

    (782     (273

Associated amortization of value of business acquired

    -            (22
 

 

 

   

 

 

 

Net realized investment losses

    $ (848     $ (186
 

 

 

   

 

 

 

OTTI

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

The following table sets forth the amount of credit loss impairments on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized in OCI, and the corresponding changes in such amounts at March 31, 2012 and December 31, 2011:

 

December 31, December 31,

 

  March 31,
       2012      
    December 31,
       2011      
 

Balance at beginning of period

    $ 36        $ 25   

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

    -            22   

Accretion of credit loss impairments previously recognized

    -            (11
 

 

 

   

 

 

 

Balance at end of period

    $ 36        $     36   
 

 

 

   

 

 

 

For the three months ended March 31, 2012 and 2011, the Company did not record any OTTI in the Statements of Income.

 

 

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

 

VOBA

VOBA reflects the estimated fair value of in force contracts acquired and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the life insurance and annuity contracts in force at the acquisition date. VOBA is based on actuarially determined projections, for each block of business, of future policy and contract

 

17


charges, premiums, mortality, Separate Account performance, surrenders, operating expenses, investment returns and other factors. Actual experience on the purchased business may vary from these projections. If estimated gross profits or premiums differ from expectations, the amortization of VOBA is adjusted to reflect actual experience. The long-term growth rate assumption for the amortization of VOBA, DAC and DSI was 9% at March 31, 2012 and 2011, respectively.

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

 

XXXXXXXX XXXXXXXX
    Three Months Ended
March 31,
 

 

  2012     2011  

Amortization expense

    $ (2,038     $ (976

Unlocking

    1,518        334   

Adjustment related to realized gains on investments

         -            (22

Adjustment related to unrealized losses and OTTI on investments

    87        108   
 

 

 

   

 

 

 

Change in VOBA carrying amount

    $ (433     $ (556
 

 

 

   

 

 

 

During the three months ended March 31, 2012, continued favorable equity market performance resulted in higher amortization and more favorable unlocking as compared to 2011.

DAC and DSI

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

 

XXXXXXXX XXXXXXXX
    Three Months Ended
March  31,
 

DAC

  2012     2011  

Accretion (amortization) expense

    $ (125     $ 100   

Unlocking

    50        (56
 

 

 

   

 

 

 

Change in DAC carrying amount

    $ (75     $ 44   
 

 

 

   

 

 

 
    Three Months Ended
March 31,
 

DSI

  2012     2011  

Accretion (amortization) expense

    $ (45     $ 37   

Unlocking

    18        (21
 

 

 

   

 

 

 

Change in DSI carrying amount

    $ (27     $ 16   
 

 

 

   

 

 

 

During the three months ended March 31, 2012, continued favorable equity market performance resulted in amortization and favorable unlocking as compared to 2011.

 

 

Note 5. Variable Contracts Containing Guaranteed Benefits

 

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

 

18


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

 

    Three Months Ended
March 31,
 

GMDB

  2012     2011  

Guaranteed benefits incurred

    $ 479        $ 449   

Guaranteed benefits paid

    236        (148

Unlocking

    (1,223     (300
 

 

 

   

 

 

 

Change in GMDB

    $ (508     $ 1   
 

 

 

   

 

 

 
    Three Months Ended
March 31,
 

GMIB

  2012     2011  

Guaranteed benefits incurred

    $ 289        $ 170   

Unlocking

    (1,459     (303
 

 

 

   

 

 

 

Change in GMIB

    $ (1,170     $ (133
 

 

 

   

 

 

 

During the three months ended March 31, 2012, continued favorable equity market performance resulted in a decrease in estimated future benefits causing more favorable unlocking as compared to the same period in 2011.

The variable annuity GMDB liability at March 31, 2012 and December 31, 2011 was $368 and $876, respectively. The variable annuity GMIB liability at March 31, 2012 and December 31, 2011 was $3,609 and $4,779, respectively.

The Company has issued variable life contracts in which the Company contractually guarantees to the contract owner a GMDB. In general, contracts containing GMDB provisions provide a death benefit equal to the amount specified in the contract regardless of the level of the contract’s account value. For the three months ended March 31, 2012 and 2011 an insignificant amount of variable life guaranteed benefits were recorded as policy benefits in the Statements of Income as incurred or paid.

 

 

Note 6. Federal Income Taxes

 

The effective tax rate was 28% and 23% for the three months ended March 31, 2012 and 2011, respectively. Differences between the effective rate and the U.S. statutory rate of 35% principally were the result of Separate Accounts dividends-received deduction (“DRD”).

At March 31, 2012 and December 31, 2011, the Company did not have a tax valuation allowance for deferred tax assets. A tax valuation allowance was not deemed necessary as management determined that it is more likely than not that the deferred tax assets will be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on generation of future taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, projected taxable income, and tax-planning strategies in making the assessment.

The Company has analyzed all material tax positions under the guidance of ASC 740, Income Taxes, related to the accounting for uncertainty in income tax, and determined there were tax benefits of $229 (gross $654) that should not be recognized at March 31, 2012 and December 31, 2011, respectively, which primarily relates to uncertainty regarding the sustainability of certain deductions taken on the 2010, 2009 and 2008 U.S. Federal income tax return. To the extent these unrecognized tax benefits are ultimately recognized, they will impact the effective tax rate in a future period. It is not anticipated that the total amounts of unrecognized tax benefits will significantly increase within twelve months of the reporting date.

 

19


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

 

December 31, December 31,

 

  March 31,
2012
    December 31,
2011
 

Balance at beginning of period

    $ 229      $ 403   

Reductions for tax positions of prior years

    -            (174
 

 

 

   

 

 

 

Balance at end of period

    $ 229      $ 229   
 

 

 

   

 

 

 

At March 31, 2012 and December 31, 2011, the Company had an operating loss carryforward for federal income tax purposes of $7,981 (net of the ASC 740 reduction of $654) and $17,461 (net of the ASC 740 reduction of $654), respectively, with a carryforward period of fifteen years that expire at various dates up to 2027. The Company has a foreign tax credit carryforward at March 31, 2012 and December 31, 2011 of $460 and $443, respectively, with a carryforward period of ten years that will expire at various dates up to 2022. Also, the Company has an Alternative Minimum Tax tax credit carryforward for federal income tax purposes of $379 and $198 at March 31, 2012 and December 31, 2011, respectively, with an indefinite carryforward period.

The Company classifies interest and penalties related to income taxes as interest expense and penalty expense, respectively. The Company has not incurred or recognized any penalties or interest expense in its financial statements at March 31, 2012 and December 31, 2011, respectively.

The Company files a separate federal income tax return for the years 2008 through 2012. Beginning in 2013 and assuming no changes in ownership, the Company will join the affiliated consolidated tax group. A tax return has been filed for 2010, 2009 and 2008, but no examination; by the Internal Revenue Service has commenced. An extension of time to file the 2011 tax return has been filed.

 

 

Note 7. Stockholder’s Equity and Statutory Accounting Principles

 

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

The Company’s statutory net income for the three months ended March 31, 2012 and 2011 was $17,064 and $4,279, respectively. Statutory capital and surplus at March 31, 2012 and December 31, 2011 was $74,428 and $58,111, respectively.

During the first three months of 2012 and 2011, the Company did not pay any dividends to AUSA or receive any capital contributions from AUSA.

 

 

Note 8. Reinsurance

 

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

Indemnity reinsurance agreements do not relieve the Company from its obligations to contract owners. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company regularly evaluates the financial condition of its reinsurers so as to minimize its exposure to significant losses from reinsurer insolvencies. At March 31, 2012 and December 31, 2011, reinsurance receivables (payables) were $31 and ($31), respectively. The Company has a reinsurance reserve of $35 and $43 at March 31, 2012 and December 31, 2011, respectively.

In addition, the Company seeks to limit its exposure to guaranteed benefit features contained in certain variable annuity contracts. Specifically, the Company reinsures certain GMIB and GMDB provisions to the extent reinsurance capacity is available in the marketplace. At March 31, 2012, 55% and 7% of the account value for variable annuity contracts containing GMIB and GMDB provisions, respectively, were reinsured. At December 31, 2011, 56% and 7% of the account value for variable annuity contracts containing GMIB and GMDB provisions, respectively, were reinsured.

 

20


 

Note 9. Related Party Transactions

 

At March 31, 2012 the Company had the following related party agreements in effect:

The Company is party to a common cost allocation service agreement between AUSA companies in which various affiliated companies may perform specified administrative functions in connection with the operation of the Company, in consideration of reimbursement of actual costs of services rendered. During the three months ended March 31, 2012 and 2011, the Company incurred $169 and $141, respectively, in expenses under this agreement. Charges attributable to this agreement are included in insurance expenses and taxes, net of amounts capitalized.

AEGON USA Investment Management, LLC acts as a discretionary investment manager under an investment management agreement with the Company. During the three months ended March 31, 2012 and 2011, the Company incurred $36 and $52, respectively, in expenses under this agreement. Charges attributable to this agreement are included in net investment income.

Transamerica Capital, Inc. provides underwriting and distribution services for the Company under an underwriting agreement. During the three months ended March 31, 2012 and 2011, the Company incurred $539 and $731, respectively, in expenses under this agreement. Charges attributable to this agreement are included in insurance expenses and taxes, net of amounts capitalized.

Transamerica Asset Management, Inc. acts as the investment advisor for certain related party funds in the Company’s Separate Accounts under multiple service agreements. During the three months ended March 31, 2012 and 2011, the Company incurred $4 and $4, respectively, in expenses under this agreement.

The Company has a participation agreement with Transamerica Series Trust to offer certain funds in the Company’s Separate Accounts. Transamerica Capital, Inc. acts as the distributor for said related party funds. The Company has also entered into a distribution and shareholder services agreement for certain of the said funds. During the three months ended March 31, 2012 and 2011, the Company received $19 and $20, respectively, under this agreement, respectively. Revenue attributable to this agreement is included in policy charge revenue.

The Company has a service agreement with Western Reserve Life Assurance Co. of Ohio (“WRL”) whereby WRL will perform specified administrative functions in connection with the operation of the Company except to the extent that the services are performed for the Company by another party. During the three months ended March 31, 2012 and 2011, the Company incurred $154 and $176, respectively, in expenses under this agreement.

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

 

 

Note 10. Segment Information

 

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

 

21


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

 

      Annuity       Life
Insurance
        Total      

Three months ended March 31, 2012

                 

Net revenues (a)

  $     2,469      $     1,378      $     3,847   

Amortization (accretion) of VOBA

    627        (107     520   

Policy benefits (net of reinsurance recoveries)

    (1,739     79        (1,660

Federal income tax expense

    752        333        1,085   

Net income

    1,908        887        2,795   

Three months ended March 31, 2011

                 

Net revenues (a)

  $     3,078      $     1,701      $     4,779   

Amortization of VOBA

    343        299        642   

Policy benefits (net of reinsurance recoveries)

    457        153        610   

Federal income tax expense

    246        279        525   

Net income

    1,012        726        1,738   

 

(a)

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

 

22


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

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

Forward Looking Statements

Certain statements in this report may be considered forward-looking, including those about management expectations, strategic objectives, growth opportunities, business prospects, anticipated financial results and other similar matters. These forward-looking statements represent only management’s beliefs regarding future performance, which is inherently uncertain. There are a variety of factors, many of which are beyond the Company’s control, which affect its operations, performance, business strategy and results and could cause its actual results and experience to differ materially from the expectations and objectives expressed in any forward-looking statements. These factors include, but are not limited to, actions and initiatives taken by current and potential competitors, general economic conditions, the effects of current, pending and future legislation, regulation and regulatory actions, and the other risks and uncertainties detailed in this report. See Risk Factors in the 2011 Annual Report on Form 10-K. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the dates on which they are made. The Company does not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the dates they are made. The reader should, however, consult further disclosures the Company may make in future filings of its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

 

 

Business

 

Overview

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

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

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

 

   

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

 

   

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

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

 

 

Deposits

 

Total direct deposits (including internal exchanges) were $0.1 million and $0.2 million for the three months ended March 31, 2012 and 2011, respectively. Internal exchanges during the three months ended March 31, 2012 and 2011 were less than $0.1 million, respectively.

 

 

Financial Condition

 

At March 31, 2012, the Company’s assets were $819.4 million or $27.0 million higher than the $792.4 million in assets at December 31, 2011. Assets excluding Separate Accounts assets increased $2.7 million. Separate Accounts assets, which represent 69% of total assets, increased $24.3 million to $566.0 million.

 

23


Changes in Separate Accounts assets were as follows:

 

     Three Months Ended
March  31,
 

(dollars in millions)

   2012     2011  

Investment performance

     $ 47.3        $ 26.8   

Deposits

     0.1        0.2   

Policy fees and charges

     (2.9     (3.2

Surrenders, benefits and withdrawals

     (20.2     (20.9
  

 

 

   

 

 

 

Net change

     $ 24.3        $ 2.9   
  

 

 

   

 

 

 

During the first three months of 2012 and 2011, the Company did not have any fixed contract owner deposits, respectively. During the first three months of 2012 and 2011, fixed contract owner withdrawals were $0.6 million and $2.6 million, respectively.

 

 

Environment

 

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

Equity Market Performance

The investment performance of the underlying U.S. equity-based mutual funds supporting the Company’s variable products do not replicate the returns of any specific U.S. equity market index. However, investment performance will generally increase or decrease with corresponding increases or decreases of the overall U.S. equity market. There are several standard indices published on a daily basis that measure performance of selected components of the U.S. equity market. Examples include the Dow Jones Industrial Average (“Dow”), the NASDAQ Composite Index (“NASDAQ”) and the Standard & Poor’s 500 Composite Stock Price Index (“S&P”). The Dow, NASDAQ and S&P ended March 31, 2012 with increases of 8%, 19% and 12%, respectively, from December 31, 2011.

Changes in the U.S. equity market directly affect the values of the underlying U.S. equity-based mutual funds supporting Separate Accounts assets and, accordingly, the values of variable contract owner account balances. Approximately 71% of Separate Accounts assets were invested in equity-based mutual funds at March 31, 2012. Since asset-based fees collected on in force variable contracts represent a significant source of revenue, the Company’s financial condition will be impacted by fluctuations in investment performance of equity-based Separate Accounts assets. During the three months ended March 31, 2012, average variable account balances decreased $71.4 million (or 11%) to $560.5 million as compared to the same period in 2011.

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

Medium Term Interest Rates, Corporate Credit and Credit Spreads

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

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

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

 

24


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

 

     Three Months Ended
March  31,
 

  

       2012              2011      

Average medium term interest rate yield (a)

     0.52%          1.11%        

Increase in medium term interest rates (in basis points)

     12              14        

Credit spreads (in basis points) (b)

     199              147        

Contracting of credit spreads (in basis points)

     (86)             (28)       

Increase on market valuations (in millions)

     

Available-for-sale (“AFS”) investment securities

     $        1.3              $        (0.3)       

Interest-sensitive policyholder liabilities

     (0.1)             0.0        
  

 

 

    

 

 

 

Net change on market valuations

     $        1.2              $        (0.3)       
  

 

 

    

 

 

 

 

(a)

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

(b)

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

 

 

Critical Accounting Policies and Estimates

 

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

The Company’s critical accounting policies and estimates are discussed below. For a full description of these and other accounting policies see Note 1 of the 2011 Annual Report on Form 10-K.

Valuation of Fixed Maturity and Equity Securities

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

To understand the valuation methodologies used by third-party pricing services, the Company reviews and monitors their applicable methodology documents. Any changes to their methodologies are noted and reviewed for reasonableness. In addition, the Company performs in-depth reviews of prices received from third-party pricing services on a sample basis. The objective for such reviews is to demonstrate that the Company can corroborate detailed information such as assumptions, inputs and methodologies used in pricing individual securities against documented pricing methodologies. Only third-party pricing services and brokers with a substantial presence in the market and with appropriate experience and expertise are used.

Each month, the Company performs an analysis of the information obtained from third-party services and brokers to ensure that the information is reasonable and produces a reasonable estimate of fair value. The Company considers both qualitative and quantitative factors as part of this analysis, including but not limited to, recent transactional activity for similar fixed maturities, review of pricing statistics and trends, and consideration of recent relevant market events. Other controls and procedures over pricing received from indices, third-party pricing services, or brokers include validation checks such as exception reports which highlight significant price changes, stale prices or un-priced securities. Additionally, during 2011, the Company began performing back testing on a sample basis. Back testing involves selecting a sample of securities trades and comparing the prices in those transactions to prices used for financial reporting. Significant variances between the price used for financial reporting and the transaction price are investigated to explain the cause of the difference.

 

25


The Company’s portfolio of private placement securities is valued using a matrix pricing methodology. The pricing methodology is obtained from a third party service and indicates current spreads for securities based on weighted average life, credit rating and industry sector. Monthly the Company reviews the matrix to ensure the spreads are reasonable by comparing them to observed spreads for similar securities traded in the market. In order to account for the illiquid nature of these securities, illiquidity premiums are included in the valuation and are determined based upon the pricing of recent transactions in the private placement market as well as comparing the value of the privately offered security to a similar public security. The impact of the illiquidity premium to the overall valuation is less than 1% of the value. At March 31, 2012 and December 31 2011, approximately $2.0 million (or 1%) and $1.8 million (or 1%), respectively, of the Company’s fixed maturity and equity securities portfolio consisted of private placement securities.

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

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

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

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

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

For the three months ended March 31, 2012 and 2011, the Company did not record an OTTI in income.

Derivative Instruments

Derivatives are financial instruments in which the value changes in response to an underlying variable, that require little or no net initial investment and are settled at a future date. The Company has entered into exchange traded derivatives, such as futures, and variance swaps to hedge the costs of the volatility of the S&P. All derivatives recognized on the Balance Sheets are carried at fair value. All changes in fair value are recognized in the Statements of Income. The fair value for exchange traded derivatives, such as futures, are calculated net of the interest accrued to date and is based on quoted market prices. Net settlements on the futures occur daily. At March 31, 2012, the Company had 20 outstanding short futures contracts with a notional amount of $7.0 million. At December 31, 2011, the Company had 20 outstanding short futures contracts with a notional amount of $6.3 million.

 

26


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

VOBA

VOBA represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the insurance and annuity contracts in force at the acquisition date. VOBA is based on actuarially determined projections, for each block of business, of future policy and contract charges, premiums, mortality, policyholder behavior, Separate Account performance, operating expenses, investment returns, and other factors. Actual experience on the purchased business may vary from these projections. Revisions in estimates result in changes to the amounts expensed in the reporting period in which the revisions are made and could result in the impairment of the asset and a charge to income if estimated future gross profits are less than the unamortized balance. At March 31, 2012 and December 31, 2011, the Company’s VOBA asset was $27.1 million and $27.6 million, respectively. For the three months ended March 31, 2012 and 2011, the favorable impact to pre-tax net income related to VOBA unlocking was $1.5 million and $0.3 million, respectively. See Note 4 to the Financial Statements for a further discussion.

DAC

The costs of acquiring business, principally commissions, certain expenses related to policy issuance, and certain variable sales expenses that relate to and vary with the production of new and renewal business are deferred and amortized based on the estimated future gross profits for a group of contracts. DAC are subject to recoverability testing at the time of policy issuance and loss recognition testing at the end of each reporting period. At March 31, 2012 and December 31, 2011, variable annuities accounted for the Company’s entire DAC asset of $0.4 million and $0.5 million, respectively.

DAC for variable annuities is amortized with interest over the anticipated lives of the insurance contracts in relation to the present values of estimated future gross profits from asset-based fees, guaranteed benefit rider fees, contract fees, and surrender charges, less a provision for guaranteed death and living benefit expenses, policy maintenance expenses, and non-capitalized commissions. Future gross profit estimates are subject to periodic evaluation with necessary revisions applied against amortization to date. The impact of revisions and assumptions to estimates on cumulative amortization is recorded as a charge or benefit to current operations, commonly referred to as “unlocking”. Changes in assumptions can have a significant impact on the amount of DAC reported and the related amortization patterns. In general, increases in the estimated Separate Accounts return and decreases in surrender or mortality assumptions increase the expected future profitability of the underlying business and may lower the rate of DAC amortization. Conversely, decreases in the estimated Separate Accounts returns and increases in surrender or mortality assumptions reduce the expected future profitability of the underlying business and may increase the rate of DAC amortization. For the three months ended March 31, 2012 and 2011, there was relatively no impact to pre-tax income related to DAC unlocking. See Note 4 to the Financial Statements for a further discussion.

DSI

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

The expense and the subsequent capitalization and amortization are recorded as a component of policy benefits in the Statements of Income. At March 31, 2012 and December 31, 2011, variable annuities accounted for the Company’s entire DSI asset of $0.1 million and $0.2 million, respectively. See Note 4 to the Financial Statements for a further discussion.

The long-term growth rate assumption for the amortization of VOBA, DAC and DSI was 9% at March 31, 2012 and 2011, respectively.

Policyholder Account Balances

The Company’s liability for policyholder account balances represents the contract value that has accrued to the benefit of policyholders as of the Balance Sheet date. The liability is generally equal to the accumulated account deposits plus interest credited less policyholders’ withdrawals and other charges assessed against the account balance. Policyholder account balances at March 31, 2012 and December 31, 2011 were $104.7 million and $105.2 million, respectively.

 

27


Future Policy Benefits

Future policy benefits are actuarially determined liabilities, which are calculated to meet future obligations and are generally payable over an extended period of time. Principal assumptions used in the establishment of liabilities for future policy benefits are mortality, surrender rates, policy expenses, equity returns, interest rates, and inflation. These estimates and assumptions are influenced by historical experience, current developments and anticipated market trends. At March 31, 2012 and December 31, 2011, future policy benefits were $18.3 million and $19.1 million, respectively.

Included within future policy benefits are liabilities for GMDB and GMIB provisions contained in the variable products that the Company issued. At March 31, 2012 and December 31, 2011, GMDB and GMIB liabilities included within future policy benefits were as follows:

 

December 31, December 31,

(dollars in millions)

  March 31,
2012
    December 31,
2011
 

GMDB liability

  $ 0.4      $ 0.9   

GMIB liability

    3.6        4.8   

The Company regularly evaluates the assumptions used to establish these liabilities, as well as actual experience and adjusts GMDB and GMIB liabilities with a related charge or credit to earnings (“unlocking”), if actual experience or evidence suggests that the assumptions should be revised. For the three months ended March 31, 2012 and 2011, the favorable impact to pre-tax income related to GMDB and GMIB unlocking was $2.7 million and $0.6 million, respectively.

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

At March 31, 2012 and December 31, 2011, GMWB liability and GMIB reinsurance asset included within future policy benefits were as follows:

 

December 31, December 31,

(dollars in millions)

  March 31,
2012
    December 31,
2011
 

GMWB liability

  $ 1.6      $ 2.8   

GMIB reinsurance asset

    (7.8     (9.1

Federal Income Taxes

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

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

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

 

28


Recent Accounting Guidance

The following outlines the adoption of recent accounting guidance in 2012. See Note 1 to the Financial Statements for a further discussion.

 

   

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

 

   

ASC 820, Fair Value Measurements and Disclosures – ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS – amends current guidance to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”) – adopted January 1, 2012.

 

   

ASC 220, Comprehensive Income

 

   

ASU 2011-05, Presentation of Comprehensive Income – requires an entity to report components of comprehensive income in either a single continuous statement of comprehensive income or two separate but consecutive statements – adopted January 1, 2012.

 

   

ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 – defers the amendments in ASU 2011-05 that relate to presentation of reclassifications out of accumulated other comprehensive income – adopted January 1, 2012.

 

   

ASC 350, Intangibles—Goodwill and Other – ASU 2011-08, Testing Goodwill for Impairment – gives entities the option of performing a qualitative assessment to determine whether it is necessary to perform the two-step goodwill impairment test – adopted January 1, 2012.

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

 

   

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

 

   

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

 

   

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

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

 

   

ASC 210, Balance Sheet – ASU 2011-11, Disclosures about Offsetting Assets and Liabilities – enhances disclosures about financial instruments and derivative instruments that are either offset on the statement of financial position or subject to an enforceable master netting arrangement – will be adopted January 1, 2013.

 

 

Investments

 

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

 

29


Fixed Maturity and Equity Securities

The amortized cost/cost and estimated fair value of investments in fixed maturity and equity AFS securities at March 31, 2012 and December 31, 2011 were:

 

     March 31, 2012  
            

 

Gross Unrealized

     Estimated
Fair
Value
     % of
Estimated
Fair
Value
 

(dollars in millions)

   Amortized
Cost/Cost
     Gains      Losses/
OTTI (1)
       

Fixed maturity AFS securities

              

Corporate securities

              

Financial services

     $ 23.2         $ 1.4         $ (0.2)         $ 24.4          17%    

Industrial

     67.6         7.7         -             75.3         52        

Utility

     3.7         0.4         -             4.1         3        

Asset-backed securities

              

Housing related

     1.6         -             -             1.6         1        

Credit cards

     0.3         -             -             0.3         -        

Autos

     1.2         -             -             1.2         1        

Commercial mortgage-backed securities - non agency backed

     22.2         2.9         -             25.1         17        

Residential mortgage-backed securities

              

Agency backed

     4.4         0.2         -             4.6         3        

Non agency backed

     0.8         -             (0.1)         0.7         -        

Government and government agencies

              

United States

     2.9         0.3         -             3.2         2        

Foreign

     3.2         0.6         -             3.8         3        
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity AFS securities

     131.1         13.5         (0.3)         144.3         99        

Equity securities - banking securities

     1.2         0.1         -             1.3         1        
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1.2         0.1         -             1.3         1        
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     $  132.3         $  13.6         $  (0.3)         $  145.6          100 %    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2011  
     Amortized
Cost/Cost
    

 

Gross Unrealized

     Estimated
Fair
Value
     % of
Estimated
Fair
Value
 

(dollars in millions)

      Gains      Losses/
OTTI (1)
       

Fixed maturity AFS securities

              

Corporate securities

              

Financial services

     $  21.2         $ 1.1         $ (0.5)         $ 21.8          15 %   

Industrial

     73.0         7.7         (0.1)         80.6         54        

Utility

     5.7         0.4         (0.1)         6.0         4        

Asset-backed securities

              

Housing related

     1.6         -             -             1.6         1        

Credit cards

     0.3         -             -             0.3         -        

Autos

     1.5         -             -             1.5         1        

Commercial mortgage-backed securities - non agency backed

     23.0         2.5         -             25.5         17        

Residential mortgage-backed securities

              

Agency backed

     4.4         0.1         -             4.5         3        

Non agency backed

     0.8         0.1         (0.2)         0.7         -        

Government and government agencies

              

United States

     3.0         0.4         -             3.4         2        

Foreign

     3.2         0.7         (0.1)         3.8         2        
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity AFS securities

     137.7         13.0         (1.0)         149.7         99        

Equity securities - banking securities

     1.2         -             (0.1)         1.1         1        
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1.2         -             (0.1)         1.1         1        
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     $   138.9         $  13.0         $  (1.1)         $  150.8          100 %    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

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

 

29


The Company regularly monitors industry sectors and individual debt securities for evidence of impairment. This evidence may include one or more of the following: 1) deteriorating market to book ratio, 2) increasing industry risk factors, 3) deteriorating financial condition of the issuer, 4) covenant violations, 5) high probability of bankruptcy of the issuer, 6) nationally recognized credit rating agency downgrades, and/or 7) intent and ability to hold to recovery. Additionally, for structured securities (asset-backed securities (“ABS”), residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”)), cash flow trends and underlying levels of collateral are monitored. A security is impaired if there is objective evidence that a loss event has occurred after the initial recognition of the asset that has a negative impact on the estimated future cash flows. A specific security is considered to be impaired when it is determined that it is probable that not all amounts due (both principal and interest) will be collected as scheduled. For debt securities, an OTTI must be recognized in earnings when an entity either a) has the intent to sell the debt security or b) more likely than not will be required to sell the debt security before its anticipated recovery. If the Company meets either of these criteria, the OTTI is recognized in earnings in an amount equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For debt securities in unrealized loss positions that do not meet these criteria, the Company must analyze its ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. The Company has evaluated the near-term prospects of the issuers in relation to the severity and duration of the unrealized loss, and unless otherwise noted, does not consider these investments to be impaired at March 31, 2012.

Six issuers represent more than 5% of the total unrealized loss position, comprised of four corporate non-convertible securities, one government security and one RMBS holding. The Company owns four investment grade corporate non-convertible securities with unrealized losses totaling $0.2 million. The Company’s government security has an unrealized loss of less than $0.1 million, was issued in Venezuela and is rated below investment grade. The Company’s RMBS unrealized loss is $0.1 million and relates to a securitized portfolio of prime 2005 hybrid mortgages that contain fixed income positions where our holding is rated below investment grade and was previously impaired to discounted cash flows.

At March 31, 2012 and December 31, 2011, approximately $4.7 million (or 15%) and $4.6 million (or 15%), respectively, of RMBS and CMBS holdings were fully collateralized by the Government National Mortgage Association, the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation. RMBS and CMBS securities are structured to allow the investor to determine, within certain limits, the amount of interest rate risk, prepayment risk and default risk that the investor is willing to accept. It is this level of risk that determines the degree to which the yields on RMBS and CMBS will exceed the yields that can be obtained from corporate securities with similar credit ratings.

Unrealized gains (losses) incurred during the three months ended March 31, 2012 and 2011, respectively, were primarily due to price fluctuations resulting from changes in interest rates and credit spreads. If the Company has the intent to sell or it is more likely than not that the Company will be required to sell these securities prior to the anticipated recovery of the amortized cost, securities are written down to fair value. If cash flow models indicate a credit event will impact future cash flows, the security is impaired to discounted cash flows. As the remaining unrealized losses in the portfolio relate to holdings where the Company expects to receive full principal and interest, the Company does not consider the underlying investments to be impaired.

 

31


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

 

     March 31, 2012  

(dollars in millions)

       Estimated    
Fair

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

Investment grade AFS securities

                    

Less than or equal to six months

        

Corporate securities - financial services

     $ 3.6         $ 3.7         $ (0.1
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     3.6         3.7         (0.1
  

 

 

    

 

 

    

 

 

 

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

        

Corporate securities - financial services

     0.7         0.8         (0.1

Asset-backed securities - housing related

     1.6         1.6         -       

Total fixed maturity and equity securities

     2.3         2.4         (0.1

Greater than one year

        

Corporate securities - financial services

     1.5         1.5         -       

Total fixed maturity and equity securities

     1.5         1.5         -       

Total of all investment grade AFS securities

        

Corporate securities - financial services

     5.8         6.0         (0.2

Asset-backed securities - housing related

     1.6         1.6         -       
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     $ 7.4         $ 7.6         $ (0.2
  

 

 

    

 

 

    

 

 

 
Total number of securities in a continuous unrealized loss position         14   

 

32


     December 31, 2011  

(dollars in millions)

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

Investment grade AFS securities

                    

Less than or equal to six months

        

Corporate securities

        

Financial services

     $ 2.7         $ 3.0         $ (0.3

Industrial

     0.9         1.0         (0.1

Equity securities - banking securities

     1.0         1.1         (0.1
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     4.6         5.1         (0.5
  

 

 

    

 

 

    

 

 

 

Greater than one year

        

Corporate bonds

        

Financial services

     2.1         2.3         (0.2

Utility

     1.8         1.9         (0.1

Asset-backed securities - housing related

     1.6         1.6         -       
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     5.5         5.8         (0.3
  

 

 

    

 

 

    

 

 

 

Total of all investment grade AFS securities

        

Corporate securities

        

Financial services

     4.8         5.3         (0.5

Industrial

     0.9         1.0         (0.1

Utility

     1.8         1.9         (0.1

Asset-backed securities - housing related

     1.6         1.6         -       

Equity securities - banking securities

     1.0         1.1         (0.1
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     $ 10.1         $ 10.9         $ (0.8
  

 

 

    

 

 

    

 

 

 
Total number of securities in a continuous unrealized loss position            15   

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

       

  

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

 

     March 31, 2012  

(dollars in millions)

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

Below investment grade AFS securities

                    

Greater than one year

        

Residential mortgage-backed securities - non agency backed

     $ 0.7         $ 0.8         $ (0.1

Government and government agencies - foreign

     0.4         0.4         -       

Equity securities - banking securities

     0.1         0.1         -       
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     $         1.2         $         1.3         $ (0.1
  

 

 

    

 

 

    

 

 

 
Total number of securities in a continuous unrealized loss position            3   

 

33


     December 31, 2011  

(dollars in millions)

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

Below investment grade AFS securities

                    

Greater than one year

        

Residential mortgage-backed securities - non agency backed

     $ 0.7         $ 0.9         $ (0.2

Government and government agencies - foreign

     0.4         0.5         (0.1

Equity securities - banking securities

     0.1         0.1         -       
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     $ 1.2         $ 1.5         $ (0.3
  

 

 

    

 

 

    

 

 

 
Total number of securities in a continuous unrealized loss position            3   

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

       

     

Gross unrealized losses and OTTI on below investment grade AFS securities represented 40% and 25% of total gross unrealized losses and OTTI on all AFS securities at March 31, 2012 and December 31, 2011, respectively. Generally, below investment grade securities are more likely than investment grade securities to develop credit concerns. The ratios of estimated fair value to amortized cost reflected in the table below were not necessarily indicative of the market value to amortized cost relationships for the securities throughout the entire time that the securities have been in an unrealized loss position nor are they necessarily indicative of these ratios subsequent to March 31, 2012.

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

 

    

 

  March 31, 2012  

(dollars in millions)

   Ratio of
Amortized Cost to
Estimated
Fair
Value
      Estimated    
Fair

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

Greater than one year

   70% to 100%     $ 1.2         $ 1.3         $ (0.1
    

 

 

    

 

 

    

 

 

 

Total

       $ 1.2         $ 1.3         $ (0.1
    

 

 

    

 

 

    

 

 

 

 

    

 

  December 31, 2011  

(dollars in millions)

   Ratio of
Amortized Cost to
Estimated
Fair
Value
      Estimated    
Fair

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

Greater than one year

   70% to 100%     $ 1.2         $ 1.5         $ (0.3
    

 

 

    

 

 

    

 

 

 

Total

       $ 1.2         $ 1.5         $ (0.3
    

 

 

    

 

 

    

 

 

 

 

(1)

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

There were no assets depressed over 20% at March 31, 2012. There were two assets, an emerging market government and a regional U.S. banking institution, depressed over 20% and greater than one year at December 31, 2011. The drop in price was primarily due to increased illiquidity in the markets in general due to the European debt crisis.

 

34


The amortized cost and estimated fair value of fixed maturity AFS securities at March 31, 2012 and December 31, 2011 by rating agency equivalent were:

 

    March 31, 2012     December 31, 2011  

(dollars in millions)

    Amortized  
Cost
      Estimated  
Fair

Value
      Amortized  
Cost
      Estimated  
Fair

Value
 

AAA

  $ 28.0      $ 31.1      $ 29.1      $ 32.0   

AA

    16.6        17.8        18.1        19.1   

A

    63.4        70.6        60.2        66.9   

BBB

    19.2        20.8        26.5        27.7   

Below investment grade

    3.9        4.0        3.8        4.0   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity AFS securities

  $ 131.1      $ 144.3      $ 137.7      $ 149.7   
 

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

    97%        97%        97%        97%   

Below investment grade

    3%        3%        3%        3%   

The Company defines investment grade securities as unsecured debt obligations that have a rating equivalent to S&P’s BBB- or higher (or similar rating agency). At March 31, 2012 and December 31, 2011 approximately $2.3 million (or 3%) and $4.1 million (or 3%), respectively, of fixed maturity securities were rated BBB-, which is the lowest investment grade rating given by S&P. Below investment grade securities are speculative and are subject to significantly greater risks related to the creditworthiness of the issuers and the liquidity of the market for such securities. The Company closely monitors such investments.

For the three months ended March 31, 2012 and 2011, there was less than $0.1 million, respectively, of investment income and less than $0.1 million, respectively, of income recognized from the change in the fair value on fixed maturity trading securities recorded in net investment income in the Statements of Income. The Company recognized gains of less than $0.1 million during the period ended March 31, 2011, on the conversion of fixed maturity trading securities to preferred stock.

Subprime Mortgage Investments

Subprime mortgages are loans to homebuyers who have weak or impaired credit histories. Through 2008, the market for these loans had expanded rapidly. During that time, however, lending practices and credit assessment standards grew steadily weaker. As a result, the market is now experiencing a sharp increase in the number of loan defaults. Investors in subprime mortgage assets include not only mortgage lenders, but also brokers, hedge funds, and insurance companies. The Company does not currently invest in or originate whole loan residential mortgages. The Company categorizes ABS issued by a securitization trust as having subprime mortgage exposure when the average credit score of the underlying mortgage borrowers in a securitization trust is below 660 at issuance. The Company also categorizes ABS issued by a securitization trust with second lien mortgages as subprime mortgage exposure, even though a significant percentage of second lien mortgage borrowers may not necessarily have credit scores below 660 at issuance. The estimated fair value of the subprime mortgage investments at March 31, 2012 and December 31, 2011 was $1.6 million and $1.6 million, respectively, entirely in first lien-fixed rate, AAA quality and vintages prior to 2004.

OTTI

The Company had no impairment losses for the three months ended March 31, 2012 and 2011, respectively.

 

 

Liquidity and Capital Resources

 

Liquidity

The Company’s liquidity requirements include the payment of sales commissions and other underwriting expenses and the funding of its contractual obligations for the life insurance and annuity contracts it has in force. The Company has developed and utilizes a cash flow projection system and regularly performs asset/liability duration matching in the management of its asset and liability portfolios. The Company anticipates funding its cash requirements utilizing cash from operations, normal investment maturities and anticipated calls and repayments, consistent with prior years. At March 31, 2012 and December 31, 2011, the Company’s assets included $177.9 million and $174.1 million, respectively, of cash, short-term investments and investment grade publicly traded AFS securities that could be liquidated if funds were required.

Capital Resources

During the first three months of 2012 and 2011, the Company did not receive a capital contribution from AUSA nor did the Company pay a dividend to AUSA.

 

35


Ratings

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

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

 

   

  S&P – AAA to R

   

  A.M. Best – A++ to S

   

  Fitch – AAA to C

The following table summarizes the Company’s ratings at May 11, 2012:

 

S&P

   AA-    (4th out of 21)

A.M. Best

   A+    (2nd out of 16)

Fitch

   AA-    (4th out of 19)

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

 

 

Commitments and Contingencies

 

The following table summarizes the Company’s policyholders’ obligations at March 31, 2012:

 

(dollars in millions)                    

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

General accounts (a)

     $ 14.8         $ 26.8         $ 23.2         $ 97.9         $ 162.7   

Separate Accounts (a)

     75.5         131.5         118.5         458.9         784.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     $         90.3         $         158.3         $         141.7         $         556.8         $         947.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

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

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

 

 

Results of Operations

 

For the three months ended March 31, 2012 and 2011, the Company recorded net income of $2.8 million and $1.7 million, respectively. The increase in income during 2012 as compared to 2011 was primarily due to a lower policy benefits partially offset by an increase in net realized investment losses.

 

36


Policy charge revenue decreased $0.1 million during the three months ended March 31, 2012 as compared to the same period in 2011. The following table provides the changes in policy charge revenue by type for each respective period:

 

XXXXXXXX XXXXXXXX XXXXXXXX
     Three Months Ended
March  31,
       

(dollars in millions)

   2012     2011     Change  

Asset-based policy charge revenue

   $ 2.2      $ 2.2      $ -       

Guaranteed benefit based policy charge revenue

     0.3        0.3        -       

Non-asset based policy charge revenue

     1.0        1.1        (0.1
  

 

 

   

 

 

   

 

 

 

Total policy charge revenue

   $ 3.5      $ 3.6      $ (0.1 )             
  

 

 

   

 

 

   

 

 

 

Net realized investment gains (losses) decreased $0.7 million during the three months ended March 31, 2012 as compared to the same period in 2011. The following table provides the changes in net realized investment gains (losses) by type:

 

XXXXXXXX XXXXXXXX XXXXXXXX
     Three Months Ended
March  31,
       

(dollars in millions)

   2012     2011     Change  

Interest related gains

   $ (0.1    $ 0.1       $ (0.2

Equity related losses

     (0.8     (0.3     (0.5 )    (a)     
  

 

 

   

 

 

   

 

 

 

Total net realized investment gains (losses)

   $ (0.9    $ (0.2    $ (0.7
  

 

 

   

 

 

   

 

 

 

Write-downs for OTTI included in net realized investment gains (losses)

   $ -           $ -           $ -       

 

(a)

The change in equity related losses principally relates to the increase in net losses on futures contracts during 2012 as compared to 2011. Short futures contracts fluctuate relative to the volatility in the S&P.

Policy benefits decreased $2.3 million during the three months ended March 31, 2012 as compared to the same period in 2011. The following table provides the changes in policy benefits by type:

 

,XXXXXXX ,XXXXXXX ,XXXXXXX
     Three Months Ended
March  31,
       

(dollars in millions)

       2012             2011         Change  

Annuity benefit unlocking

    $ (2.7    $ (0.6    $ (2.1 )    (a)     

Annuity benefit expense

     0.9        1.0        (0.1

Life insurance mortality expense

     0.1        0.2        (0.1
  

 

 

   

 

 

   

 

 

 

Total policy benefits

    $ (1.7 )     $ 0.6       $ (2.3
  

 

 

   

 

 

   

 

 

 

 

(a)

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

Amortization of VOBA was $0.5 million for the three months ended March 31, 2012, which included favorable unlocking of $1.5 million. Amortization of VOBA was $0.6 million for the three months ended March 31, 2011, which included favorable unlocking of $0.3 million. During the three months ended March 31, 2012, continued favorable equity market performance resulted in higher amortization and more favorable unlocking as compared to 2011.

Amortization (accretion) of DAC was $0.1 million and ($0.1) million for the three months ended March 31, 2012 and 2011, respectively. During the three months ended March 31, 2012 and 2011, there was an favorable (unfavorable) impact to pre-tax income related to DAC unlocking of $0.1 million and ($0.1) million, respectively. During the three months ended March 31, 2012, continued favorable equity market performance resulted in amortization and favorable unlocking as compared to 2011 which was impacted by higher hedge costs.

 

37


Insurance expenses and taxes decreased $0.3 million in the three months ended March 31, 2012 as compared to the same period in 2011. The following table provides the changes in insurance expenses and taxes for each respective period:

 

     Three Months Ended
March 31
        

(dollars in millions)

   2012      2011          Change      

Commissions

    $             0.6        $             0.8        $ (0.2 )    (a)     

General insurance expenses

     0.3         0.4         (0.1
  

 

 

    

 

 

    

 

 

 

Total insurance expenses and taxes

    $ 0.9        $ 1.2        $ (0.3
  

 

 

    

 

 

    

 

 

 

 

(a)

The decrease in commissions is primarily due to higher 2011 trail commissions resulting from a system conversion.

 

 

Segment Information

 

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

ITEM 4. Controls and Procedures

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

In addition, no change in the Company’s internal control over financial reporting (as defined in Rule 15d-15(f) under the Securities Exchange Act of 1934, as amended) occurred during the first fiscal quarter of 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

38


PART II Other Information

Item 1. Legal Proceedings.

Nothing to report.

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part 1, “Item 1A. Risk Factors” in the Annual Report on Form 10-K for the year ended December 31, 2011. The risks described in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition, and/or operating results.

Item 2. Unregistered Sales of Equity Securities and use of Proceeds.

Not applicable.

Item 3. Defaults upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information.

(a) Nothing to report.

(b) Nothing to report.

 

39


Item 6. Exhibits.

 

  3.1   

Certificate of Amendment of the Charter of ML Life Insurance Company of New York. (Incorporated by reference to Exhibit 6(a)(ii) to Post-Effective Amendment No. 10 to ML of New York Variable Annuity Account A’s registration statement on Form N-4, File No. 33-43654, filed December 9, 1996.)

  3.2   

Certificate of Amendment of the Charter of ML Life Insurance Company of New York. (Incorporated by reference to Exhibit 3.2 to the Quarterly Report on Form 10-Q of Transamerica Advisors Life Insurance Company of New York, File Nos. 33-34562, 33-60288, 333-48983, abd 333-133224, filed on August 12, 2010.)

  3.3   

By-Laws of Transamerica Advisors Life Insurance Company of New York. (Incorporated by reference to Exhibit 3.3 to the Quarterly Report on Form 10-Q of Transamerica Advisors Life Insurance Company of New York, File Nos. 33-34562, 33-60288, 333-48983, abd 333-133224, filed on August 12, 2010.)

  4.1   

Modified Guaranteed Annuity Contract. (Incorporated by reference to Exhibit 4(a) to Pre-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-34562, filed October 16, 1990.)

  4.2   

Modified Guaranteed Annuity Contract Application. (Incorporated by reference to Exhibit 4(b) to Pre-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-34562, filed October 16, 1990.)

  4.3   

Qualified Retirement Plan Endorsement. (Incorporated by reference to Exhibit 4(c) to Pre-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-34562, filed October 16, 1990.)

  4.4   

IRA Endorsement. (Incorporated by reference to Exhibit 4(d) to Pre-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-34562, filed October 16, 1990.)

  4.5   

Company Name Change Endorsement. (Incorporated by reference to Exhibit 4(e) to Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-34562, filed March 30, 1992.)

  4.6   

IRA Endorsement, MLNY009 (Incorporated by reference to Exhibit 4(d)(2) to Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-60288, filed March 31, 1994).

  4.7   

Modified Guaranteed Annuity Contract MLNY-AY-991/94. (Incorporated by reference to Exhibit 4(a)(2) to Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-60288, filed December 7, 1994).

  4.8   

Qualified Retirement Plan Endorsement MLNY-AYQ-991/94. (Incorporation by reference to Exhibit 4(c)(2) to Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-60288, filed December 7, 1994).

10.1   

General Agency Agreement between Royal Tandem Life Insurance Company and Merrill Lynch Life Agency Inc. (Incorporated by reference to Exhibit 10(a) to Pre-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-34562, filed October 16, 1990.)

10.2   

Investment Management Agreement by and between Royal Tandem Life Insurance Company and Equitable Capital Management Corporation. (Incorporated by reference to Exhibit 10(b) to Pre-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-34562, filed October 16, 1990.)

10.3   

Shareholders’ Agreement by and among The Equitable Life Assurance Society of the United States and Merrill Lynch & Co., Inc. and Tandem Financial Group, Inc. (Incorporated by reference to Exhibit 10(c) to Pre-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-34562, filed October 16, 1990.)

10.4   

Service Agreement by and between Royal Tandem Life Insurance Company and Tandem Financial Group, Inc. (Incorporated by reference to Exhibit 10(d) to Pre-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-34562, filed October 16, 1990.)

10.5    Service Agreement by and between Tandem Financial Group, Inc. and Merrill Lynch & Co., Inc. (Incorporated by reference to Exhibit 10(e) to Pre-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-34562, filed October 16, 1990.)


10.6   

Form of Investment Management Agreement by and between Royal Tandem Life Insurance Company and Merrill Lynch Asset Management, Inc. (Incorporated by reference to Exhibit 10(f) to Post-Effective Amendment No. 1 to the Registrant’s registration statement on Form S-1, File No. 33-34562, filed March 7, 1991.)

10.7   

Assumption Reinsurance Agreement between Merrill Lynch Life Insurance Company, Tandem Insurance Group, Inc. and Royal Tandem Life Insurance Company and Family Life Insurance Company. (Incorporated by reference to Exhibit 10(g) to Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-34562, filed March 30, 1992.)

10.8   

Indemnity Agreement between ML Life Insurance Company of New York and Merrill Lynch Life Agency, Inc. (Incorporated by reference to Exhibit 10(h) to Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-34562, filed March 30, 1992.)

10.9   

Amended General Agency Agreement between ML Life Insurance Company of New York and Merrill Lynch Life Agency, Inc. (Incorporated by reference to Exhibit 10(i) to Post-Effective Amendment No. 3 to the Registrant’s registration statement on Form S-1, File No. 33-34562, filed March 30, 1992.)

10.10   

Amended Management Agreement between ML Life Insurance Company of New York and Merrill Lynch Asset Management, Inc. (Incorporated by reference to Exhibit 10(j) to the Registrant’s registration statement on Form S-1, File No. 33-60288, filed March 30, 1993.)

10.11   

Mortgage Loan Servicing Agreement between ML Life Insurance Company of New York and Merrill Lynch & Co., Inc. (Incorporated by reference to Exhibit 10(k) to Post-Effective Amendment No. 4 to the Registrant’s registration statement on Form S-1, File No. 33-60288, filed March 29, 1995.)

10.12   

Master Distribution Agreement between Merrill Lynch Insurance Group, Inc., Merrill Lynch & Co., Inc., and AEGON USA, Inc. (Incorporated by reference to Exhibit 10.2 to ML Life Insurance Company of New York’s Current Report on Form 8-K, File No. 33-34562, filed January 4, 2008.)

10.13   

Non-Affiliated Broker-Dealer Wholesaling Agreement between ML Life Insurance Company of New York, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Transamerica Capital, Inc. (Incorporated by Reference to the Annual Report on Form 10-K of ML Life Insurance Company of New York, File Nos. 33-34562, 33-60288, 333-48983, and 333-133224, Filed March 27, 2008.)

10.14   

Selling Agreement between ML Life Insurance Company of New York, Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Merrill Lynch Life Agency, Inc. (Incorporated by Reference to the Annual Report on Form 10-K of ML Life Insurance Company of New York, File Nos. 33-34562, 33-60288, 333-48983, and 333-133224, Filed March 27, 2008.)

10.15   

Purchase Agreement between Merrill Lynch Insurance Group, Inc., Merrill Lynch & Co., Inc., and AEGON USA, Inc. (Incorporated by reference to Exhibit 10.1 to ML Life Insurance Company of New York’s Current Report on Form 8-K, File No. 33-34562, filed August 17, 2007.)

10.16   

First Amendment to Purchase Agreement between Merrill Lynch Insurance Group, Inc., Merrill Lynch & Co., Inc., and AEGON USA, Inc. (Incorporated by reference to Exhibit 10.1 to ML Life Insurance Company of New York’s Current Report on Form 8-K, File No. 33-34562, filed January 4, 2008.)

10.17   

Principal Underwriting Agreement between Transamerica Capital, Inc. and ML Life Insurance Company of New York. (Incorporated by reference to the Annual Report on Form 10-K of ML Life Insurance Company of New York, File Nos. 33-34562, 33-60288, 333-48983, 333-133224, filed on March 26, 2009.)

10.18   

Amended and Restated Principal Underwriting Agreement between Transamerica Capital, Inc. and Transamerica Advisors Life Insurance Company of New York. (Incorporated by reference to the Annual Report on Form 10-K of Transamerica Advisors Life Insurance Company of New York, File Nos. 33-34562, 33-60288, 333-48983, 333-133224, filed March 25, 2011.)

10.19   

Investment Management Services Agreement among Transamerica Asset Management, Inc., Transamerica Advisors Life Insurance Company and Transamerica Advisors Life Insurance Company of New York. (Incorporated by reference to the Annual Report on Form 10-K of Transamerica Advisors Life Insurance Company of New York, File Nos. 33-34562, 33-60288, 333-48983, 333-133224, filed March 25, 2011.)

31.1   

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

31.2   

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

32.1   

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

32.2   

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

101.INS    XBRL Instance Document, is filed herewith.
101.SCH    XBRL Taxonomy Extension Schema, is filed herewith.
101.CAL    XBRL Taxonomy Extension Calculation Linkbase, is filed herewith.
101.DEF    XBRL Taxonomy Definition Linkbase, is filed herewith.
101.LAB    XBRL Taxonomy Extension Label Linkbase, is filed herewith.
101.PRE    XBRL Taxonomy Extension Presentation Linkbase, is filed herewith.


SIGNATURES

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

 

Transamerica Advisors Life Insurance

Company of New York

/s/ Eric J. Martin

Eric J. Martin

Chief Financial Officer,

Vice President, Treasurer and Controller

Date: May 11, 2012

 

42


EXHIBIT INDEX

 

31.1    Certification by the Chief Executive Officer pursuant to Rule 15d-14(a).
31.2    Certification by the Chief Financial Officer pursuant to Rule 15d-14(a).
32.1    Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document.
101.SCH    XBRL Taxonomy Extension Schema.
101.CAL    XBRL Taxonomy Extension Calculation Linkbase.
101.DEF    XBRL Taxonomy Definition Linkbase.
101.LAB    XBRL Taxonomy Extension Label Linkbase.
101.PRE    XBRL Taxonomy Extension Presentation Linkbase.