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EXCEL - IDEA: XBRL DOCUMENT - TRANSAMERICA ADVISORS LIFE INSURANCE CoFinancial_Report.xls
EX-32.1 - EXHIBIT 32.1 - TRANSAMERICA ADVISORS LIFE INSURANCE Cod331145dex321.htm
EX-31.2 - EXHIBIT 31.2 - TRANSAMERICA ADVISORS LIFE INSURANCE Cod331145dex312.htm
EX-31.1 - EXHIBIT 31.1 - TRANSAMERICA ADVISORS LIFE INSURANCE Cod331145dex311.htm
EX-32.2 - EXHIBIT 32.2 - TRANSAMERICA ADVISORS LIFE INSURANCE Cod331145dex322.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012

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

33-58303; 333-33863; 333-34192; 333-133223; 333-133225; 333-177282

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(Exact name of Registrant as specified in its charter)

 

ARKANSAS   91-1325756

(State or other jurisdiction

of incorporation or organization)

 

(IRS Employer

Identification No.)

4333 Edgewood Road, NE

Cedar Rapids, Iowa

52499-0001

(Address of Principal Executive Offices)

(800) 346-3677

(Registrant telephone number including area code)

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

Yes þ No ¨

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

Yes 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 250,000

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

 

 

 


PART 1. Financial Information

Item 1. Financial Statements

TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

BALANCE SHEETS

 

(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 - $1,747,958; 2011 - $1,688,276)

    $ 1,894,983        $ 1,842,081   

Fixed maturity trading securities

    2,813        2,521   

Equity available-for-sale securities, at estimated fair value (cost: 2012 - $36,145;
2011 - $36,145)

    34,116        31,040   

Limited partnerships

    7,504        8,119   

Mortgage loans on real estate

    54,918        55,667   

Policy loans

    782,062        792,602   
 

 

 

   

 

 

 

Total investments

    2,776,396        2,732,030   
 

 

 

   

 

 

 

Cash and cash equivalents

    287,491        328,844   

Accrued investment income

    38,183        37,986   

Deferred policy acquisition costs

    40,581        45,039   

Deferred sales inducements

    9,025        10,355   

Value of business acquired

    304,457        309,559   

Goodwill

    2,800        2,800   

Federal income taxes - deferred

    66,388        -       

Reinsurance receivables - net

    3,908        2,439   

Receivable for investments sold - net

    -            1,089   

Other assets

    42,108        38,606   

Separate Accounts assets

    7,417,388        7,007,468   
 

 

 

   

 

 

 

Total Assets

    $   10,988,725        $   10,516,215   
 

 

 

   

 

 

 

 

 

 

 

See Notes to Financial Statements

 

1


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

BALANCE SHEETS - Continued

 

 

(dollars in thousands, except share data)

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

LIABILITIES AND STOCKHOLDER’S EQUITY

      

Liabilities

      

Policyholder liabilities and accruals

      

Policyholder account balances

       $ 1,422,920        $ 1,453,395   

Future policy benefits

       413,498        475,875   

Claims and claims settlement expenses

       51,271        45,504   
    

 

 

   

 

 

 

Total policyholder liabilities and accruals

       1,887,689        1,974,774   
    

 

 

   

 

 

 

Payables for collateral under securities loaned and reverse repurchase agreements

       265,106        243,982   

Derivative liabilities

       1,306        1,341   

Federal income taxes - current

       4,578        2,450   

Federal income taxes - deferred

       -            7,879   

Affiliated payables - net

       11,439        8,036   

Payable for investments purchased - net

       1,531        -       

Other liabilities

       4,291        7,382   

Separate Accounts liabilities

       7,417,388        7,007,468   
    

 

 

   

 

 

 

Total Liabilities

       9,593,328        9,253,312   
    

 

 

   

 

 

 

Stockholder’s Equity

      

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

       2,500        2,500   

Additional paid-in capital

       1,366,636        1,366,636   

Accumulated other comprehensive income, net of taxes

       70,724        75,229   

Retained deficit

       (44,463     (181,462
    

 

 

   

 

 

 

Total Stockholder’s Equity

       1,395,397        1,262,903   
    

 

 

   

 

 

 

Total Liabilities and Stockholder’s Equity

       $   10,988,725        $ 10,516,215   
    

 

 

   

 

 

 

 

 

 

 

 

See Notes to Financial Statements

 

2


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

STATEMENTS OF INCOME

 

       Three Months  Ended
March 31,
 

(dollars in thousands)

     2012     2011  
       (unaudited)  

Revenues

      

Policy charge revenue

       $ 48,170        $   51,682   

Net investment income

       27,908        32,585   

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

       (59     (72
    

 

 

   

 

 

 

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

       (59     (72

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

       (19,824     (5,693
    

 

 

   

 

 

 

Net realized investment losses

       (19,883     (5,765
    

 

 

   

 

 

 

Total Revenues

       56,195        78,502   
    

 

 

   

 

 

 

Benefits and Expenses

      

Interest credited to policyholder liabilities

       17,245        18,651   

Policy benefits (net of reinsurance recoveries: 2012 - $3,272; 2011 - $6,420)

       (49,944     6,309   

Reinsurance premium ceded

       2,807        3,170   

Amortization of deferred policy acquisition costs

       4,534        1,820   

Amortization of value of business acquired

       1,760        4,946   

Insurance expenses and taxes

       12,453        15,721   
    

 

 

   

 

 

 

Total Benefits and Expenses

       (11,145     50,617   
    

 

 

   

 

 

 

Income Before Taxes

       67,340        27,885   
    

 

 

   

 

 

 

Federal Income Tax Expense (Benefit)

      

Current

       2,128        124   

Deferred

       (71,787     1,703   
    

 

 

   

 

 

 

Federal Income Tax Expense (Benefit)

       (69,659     1,827   
    

 

 

   

 

 

 

Net Income

       $   136,999        $   26,058   
    

 

 

   

 

 

 

 

 

 

 

See Notes to Financial Statements

 

3


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

STATEMENTS OF COMPREHENSIVE INCOME

 

       Three Months Ended
March 31,
 

(dollars in thousands)

     2012     2011  
       (unaudited)  

Net Income

       $   136,999        $   26,058   
    

 

 

   

 

 

 

Other Comprehensive Income (Loss)

      

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

      

Net unrealized holding gains (losses) arising during the period

       417        (2,336

Reclassification adjustment for gains included in net income

       (1,631     (2,013
    

 

 

   

 

 

 
       (1,214     (4,349
    

 

 

   

 

 

 

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

       (2,549     (729

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

       59        72   
    

 

 

   

 

 

 
       (2,490     (657
    

 

 

   

 

 

 

Adjustments

      

Policyholder liabilities

       -            638   

Value of business acquired

       (3,283     2,514   

Deferred federal income taxes

       2,482        737   
    

 

 

   

 

 

 
       (801     3,889   
    

 

 

   

 

 

 

Total other comprehensive loss, net of taxes

       (4,505     (1,117
    

 

 

   

 

 

 

Comprehensive Income

       $ 132,494        $   24,941   
    

 

 

   

 

 

 

 

 

 

 

 

 

See Notes to Financial Statements

 

4


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

STATEMENTS OF STOCKHOLDER’S EQUITY

 

December 31, December 31,

(dollars in thousands)

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

Common Stock

       $ 2,500        $ 2,500   

Additional Paid-in Capital

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

Accumulated Other Comprehensive Income (Loss)

      

Balance at beginning of period

       $ 75,229        $ 27,487   

Total other comprehensive income (loss), net of taxes

       (4,505     47,742   
    

 

 

   

 

 

 

Balance at end of period

       $ 70,724        $ 75,229   
    

 

 

   

 

 

 

Retained Earnings (Deficit)

      

Balance at beginning of period

       $ (181,462     $ (200,121

Net income

       136,999        18,659   
    

 

 

   

 

 

 

Balance at end of period

       $ (44,463     $ (181,462
    

 

 

   

 

 

 

Total Stockholder’s Equity

       $ 1,395,397        $ 1,262,903   
    

 

 

   

 

 

 

 

 

 

 

 

See Notes to Financial Statements

 

5


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(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

       $ 136,999        $ 26,058   

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

      

Change in deferred policy acquisition costs

       4,458        1,649   

Change in deferred sales inducements

       1,331        399   

Change in value of business acquired

       1,760        4,946   

Change in benefit reserves

       (68,120     (11,722

Change in federal income tax accruals

       (69,659     1,677   

Change in claims and claims settlement expenses

       5,767        6,114   

Change in other operating assets and liabilities, net

       (2,234     2,484   

Amortization of investments

       313        207   

Limited partnership asset distributions

       -            (464

Interest credited to policyholder liabilities

       17,245        18,651   

Net change in fixed maturity trading securities

       (292     (1,185

Net realized investment losses

       19,883        5,765   
    

 

 

   

 

 

 

Net cash and cash equivalents provided by operating activities

       47,451        54,579   
    

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

      

Sales of available-for-sale securities and mortgage loans

       81,173        62,197   

Maturities of available-for-sale securities and mortgage loans

       45,463        32,572   

Purchases of available-for-sale securities

       (184,406     (156,466

Sales of trading securities

       -            12,443   

Sales of limited partnerships

       620        987   

Change in affiliated short-term note receivable

       -            (50,000

Change in payable for collateral under securities loaned and reverse repurchase agreements

       21,124        103,978   

Changes in derivative asset

       -            (7

Change in derivative liability

       (35     894   

Policy loans on insurance contracts, net

       10,540        13,457   

Net settlement on futures contracts

       (21,302     (7,116

Other

       (5     (908
    

 

 

   

 

 

 

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

       $ (46,828     $   12,031   
    

 

 

   

 

 

 

 

 

 

See Notes to Financial Statements

 

6


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

STATEMENTS OF CASH FLOWS - Continued

 

 

    Three Months Ended
March 31,
 

(dollars in thousands)

  2012     2011  
    (unaudited)  

CASH FLOWS FROM FINANCING ACTIVITIES

   

Policyholder deposits

    $ 8,506        $ 7,935   

Policyholder withdrawals

    (50,482     (55,162
 

 

 

   

 

 

 

Net cash and cash equivalents used in financing activities

    (41,976     (47,227
 

 

 

   

 

 

 

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

    (41,353     19,383   

Cash and cash equivalents, beginning of year

    328,844        308,614   
 

 

 

   

 

 

 

Cash and cash equivalents, end of period

    $    287,491        $    327,997   
 

 

 

   

 

 

 

(1) Included in net increase (decrease) in cash and cash equivalents is interest received (2012 - $ 0; 2011 - $ 1); interest paid (2012 - $ 1; 2011 - $ 5); and Federal income taxes paid (2012 - $ 0; 2011 - $ 150).

 

 

 

 

 

See Notes to Financial Statements

 

7


TRANSAMERICA ADVISORS LIFE INSURANCE COMPANY

(A WHOLLY OWNED SUBSIDIARY OF AEGON USA, LLC)

NOTES TO FINANCIAL STATEMENTS (unaudited)

(Dollars in Thousands)

 

 

Note 1. Summary of Significant Accounting Policies

 

Basis of Presentation

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

For a complete discussion of the Company’s 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.

Reverse Repurchase Agreements

The Company enters into dollar roll repurchase agreement transactions whereby the Company takes delivery of mortgage-backed securities (“MBS”) pools and sells them to a counterparty along with an agreement to repurchase substantially the same pools at some point in the future, typically one month forward. These transactions are accounted for as collateralized borrowings and the repurchase agreement liability is included in the Balance Sheet in payables for collateral under securities loaned and reverse repurchase agreements.

Revenue Recognition

The Company sells a fixed contingent annuity (also sometimes referred to as a contingent deferred annuity (“CDA”)), which includes a stand-alone living benefit (“SALB”). Revenues for CDAs consist of fees assessed based on a percentage of the participants, covered asset pool, which are assets that are not internally managed by the Company. Fees on CDAs are recognized as they are assessed or earned.

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.

 

8


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 modifies the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. An insurance entity may only capitalize incremental direct costs of contract acquisition, the portion of employees’ compensation directly related to time spent performing specified acquisition activities for a contract that has actually been acquired, other costs related directly to specified activities that would not have been incurred had the acquisition contract transaction not occurred, and advertising costs that meet capitalization criteria in other GAAP guidance. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company 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 860, Transfers and Servicing

In April 2011, the FASB issued ASU 2011-03, Reconsideration of Effective Control for Repurchase Agreements, which modifies the criteria for determining whether a repurchase transaction should be accounted for as a secured borrowing or as a sale. The amendments in this ASU remove from the assessment of effective control 1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee, and 2) the collateral maintenance implementation guidance related to that criterion. The guidance is effective for the first interim or annual period beginning 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.

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.

 

9


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.

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.

ASC 310, Receivables

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

 

10


 

Note 2. Fair Value of Financial Instruments

 

Fair Value Measurements

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

Fair Value Hierarchy

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

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

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

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

 

  a)

Quoted prices for similar assets or liabilities in active markets

  b)

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

  c)

Inputs other than quoted market prices that are observable

  d)

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

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

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

 

11


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

    $ -            $ 1,212,984      $ -            $ 1,212,984   

Asset-backed securities

    -            99,598        5,390        104,988   

Commercial mortgage-backed securities

    -            115,849        -            115,849   

Residential mortgage-backed securities

    -            106,688        1,161        107,849   

Municipals

    -            1,213        -            1,213   

Government and government agencies

       

United States

    341,653        -            -            341,653   

Foreign

    3,791        6,656        -            10,447   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity AFS securities (a)

    345,444        1,542,988        6,551        1,894,983   

Fixed maturity trading securities (a) - corporate securities

    -            2,813        -            2,813   

Equity securities (a)

       

Banking securities

    -            27,866        -            27,866   

Other financial services securities

    -            458        -            458   

Industrial securities

    -            5,792        -            5,792   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities (a)

    -            34,116        -            34,116   

Cash equivalents (b)

    -            296,197        -            296,197   

Limited partnerships (c)

    -            -            7,504        7,504   

Separate Accounts assets (d)

    7,417,388        -            -            7,417,388   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    $   7,762,832        $   1,876,114      $   14,055        $   9,653,001   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

       

Future policy benefits (embedded derivatives only) (e)

    $ -            $ -            $ (6,665     $ (6,665

Derivative liabilities (f)

    -            1,306        -            1,306   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    $ -            $ 1,306        $ (6,665     $ (5,359
 

 

 

   

 

 

   

 

 

   

 

 

 

 

12


     December 31, 2011  

 

   Level 1     Level 2     Level 3     Total  

Assets

        

Fixed maturity AFS securities (a)

        

Corporate securities

     $ -            $ 1,164,173        $ -            $ 1,164,173   

Asset-backed securities

     -            96,783        9,365        106,148   

Commercial mortgage-backed securities

     -            119,050        -            119,050   

Residential mortgage-backed securities

     -            82,770        1,449        84,219   

Municipals

     -            1,210        -            1,210   

Government and government agencies

        

United States

     356,960        -            -            356,960   

Foreign

     3,779        6,542        -            10,321   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity AFS securities (a)

     360,739        1,470,528        10,814        1,842,081   

Fixed maturity trading securities (a) - corporate securities

     -            2,521        -            2,521   

Equity securities (a)

        

Banking securities

     -            24,993        -            24,993   

Other financial services securities

     -            394        -            394   

Industrial securities

     -            5,653        -            5,653   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities (a)

     -            31,040        -            31,040   

Cash equivalents (b)

     -            336,130        -            336,130   

Limited partnerships (c)

     -            -            8,119        8,119   

Separate Accounts assets (d)

     7,007,468        -            -            7,007,468   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

     $   7,368,207        $   1,840,219        $   18,933        $   9,227,359   
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

        

Future policy benefits (embedded derivatives only) (e)

     $ -            $ -            $ 14,120        $ 14,120   

Derivative liabilities (f)

     -            1,341        -            1,341   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     $ -            $ 1,341        $ 14,120        $ 15,461   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 and internal models. These internal models primarily use projected cash flows discounted using relevant risk spreads and market interest rate curves. At March 31, 2012 and December 31, 2011, less than 0.5% of fixed maturity AFS securities were valued using internal models.

(b)

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

(c)

The Company has an investment in a limited partnership for which the fair value was derived from management’s review of the underlying financial statements that were prepared on a GAAP basis.

(d)

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

(e)

The Company issued contracts containing guaranteed minimum withdrawal 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 contract. In addition, the Company issues CDA contracts which include a SALB and are required to be reported at fair value. The fair value of these guarantees is calculated as the present value of future expected payments to policyholders less the present value of assessed 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

 

13


 

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

(f)

Derivative liabilities are classified as Level 1 if the fair value is determined by observable inputs that reflect quoted prices for identical assets in active markets that the Company has the ability to access at the measurement date. Derivatives are classified as Level 2 if the fair value is determined by observable inputs, other than quoted prices included in Level 1, for the identical asset or prices for similar assets. Derivatives are classified as Level 3 if the valuations are derived from techniques in which one or more of the significant inputs are unobservable. Level 2 derivatives include variance swaps for which the Company utilized readily accessible quoted index levels and broker quotes. The fair value for the variance swaps is calculated as the difference between the estimated volatility of the underlying Standard & Poor’s 500 Composite Price Index (“S&P”) at maturity to the actual volatility of the underlying S&P index at initiation (i.e., strike) multiplied by the notional value of the swap.

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

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

 

    March 31, 2012     December 31, 2011  

 

  Limited
Partnership
    Fixed
Maturity AFS
Securities
    Limited
Partnership
    Fixed
Maturity AFS
Securities
 

Balance at beginning of period (a)

    $ 8,119        $ 10,814        $ 9,415        $ 14,634   

Change in unrealized gains (b)

    -            581        -            840   

Sales

    (620     (4,848     (2,663     (4,191

Transfers into Level 3

    -            -            -            4   

Transfers out of Level 3

    -            -            -            (508

Changes in valuation (c)

    5        4        215        35   

Net realized investment gains (d)

    -            -            1,152        -       
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period (a)

    $ 7,504        $ 6,551        $ 8,119        $ 10,814   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)

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

(b)

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

(c)

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

(d)

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

The decrease in Level 3 fixed maturity AFS securities at March 31, 2012 and December 31, 2011 was primarily due to sales.

The Company’s Level 3 liabilities (assets) consist of provisions for GMWB, SALB 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 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 and SALB, 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”) and 135 bps at March 31, 2012 and December 31, 2011, respectively.

 

14


For equity volatility, the Company uses a term structure assumption with market-based implied volatility inputs for the first five years and a long-term forward rate assumption of 25% thereafter. The volume of observable option trading from which volatilities are derived generally declines as the contracts’ term increases, therefore, the volatility curve grades from implied volatilities for five years to the ultimate rate. The resulting volatility assumption in year 20 for the S&P 500 index (expressed as a spot rate) was 24.6% 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.

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)

     $ 108,637        $ (94,517     $ 31,001         $ (56,417

Changes in interest rates (a)

     (18,572     3,742                55,032         (27,361

Changes in equity markets (a)

     (15,741     10,290        20,561         (9,759

Other (a)

     (330     (174     2,043         (980
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at end of period (b)

     $             73,994        $         (80,659     $ 108,637         $         (94,517
  

 

 

   

 

 

   

 

 

    

 

 

 

 

(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 the GMWB and GMIB reinsurance reserves was primarily driven by an increase in risk neutral rates and improved equity market performance. The SALB reserve was less than $1 due to low sales volume in the first quarter 2012. 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 Level 3 assets at March 31, 2012 consist of residential mortgage-backed (“RMBS”) and asset-backed securities (“ABS”) that are valued using a discounted cash flow approach. This approach utilizes assumptions that are typically developed based upon assumptions observed for similar securities, to the extent possible, with reviews performed on any significant changes in measurements from one period to the next. The primary unobservable assumptions used in the fair value measurement of these securities are prepayment rates, probability of default, and loss severity in the event of default. Increases (decreases) in any of those inputs would result in a lower (higher) fair value measurement. Typically, changes in the assumptions used for the probability of default and loss severity move in the same direction, while changes in the assumption used for prepayment rates would move in the opposite direction.

 

15


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

 

Description

   March 31,
2012
Estimated
Fair Value
   

Valuation Techniques

  

Unobservable Inputs

   Range
(Weighted Average)

Assets

          

Structured securities

          

Asset-backed securities

     $ 5,390           

Residential mortgage-backed securities

     1,161           
  

 

 

         

Total structured securities

     6,551     

Discounted cash flows

  

Constant prepayment rate

   1% - 5% (3.8%)
       

Probability of default

   5% - 17% (8.5%)
       

Loss severity

   60% - 103% (90.5%)

Limited partnership

     7,504     

Not applicable (1)

  

Not applicable (1)

   Not applicable (1)
  

 

 

         

Total assets

     $ 14,055           
  

 

 

         

Liabilities

          

Future policy benefits (embedded derivatives) - GMWB

     73,995     

Discounted cash flow

  

Own credit risk

   85 bps to 125 bps
       

Long-term volatility

   25%

Future policy benefits (embedded derivatives) - GMIB reinsurance

     (80,660  

Discounted cash flow

  

Own credit risk

   85 bps to 125 bps
       

Long-term volatility

   25%
  

 

 

         

Total liabilities

     $ (6,665        
  

 

 

         

 

(1)

The Company has an investment in a limited partnership for which the fair value is derived from management’s review of the underlying financial statements that were prepared on a GAAP basis. Management does not make any adjustments to the valuation from the underlying financials statements. As a result, inputs are not developed by management to determine the fair value measurement for this investment.

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

 

    March 31, 2012  

 

  Level 1     Level 2     Level 3     Total  

Assets

       

Mortgage loans on real estate (a)

    $          -            $ -            $ 60,676        $ 60,676   

Policy loans (b)

    -            782,062        -            782,062   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    $ -            $   782,062        $   60,676        $   842,738   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

    December 31, 2011  

 

  Level 1     Level 2     Level 3     Total  

Assets

       

Mortgage loans on real estate (a)

    $          -            $ -            $ 61,833        $ 61,833   

Policy loans (b)

    -            792,602        -            792,602   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

    $   -            $   792,602        $   61,833        $   854,435   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) The fair value of mortgage loans on real estate is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and/or similar remaining maturities.
(b) Policy loans are stated at unpaid principal balance. Fair value is estimated as equal to the book value of the loan.

 

16


 

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:

 

       March 31, 2012  
             Gross Unrealized     Estimated  

 

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

Fixed maturity AFS securities

          

Corporate securities

       $ 1,113,274        $ 101,694        $ (1,984     $ 1,212,984   

Asset-backed securities

       105,263        5,679        (5,954     104,988   

Commercial mortgage-backed securities

       104,844        11,005        —          115,849   

Residential mortgage-backed securities

       105,882        4,512        (2,545     107,849   

Municipals

       1,123        90        —          1,213   

Government and government agencies

          

United States

       308,691        32,962        —          341,653   

Foreign

       8,881        1,566        —          10,447   
    

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity AFS securities

       $   1,747,958        $   157,508        $   (10,483     $   1,894,983   
    

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

          

Banking securities

       $ 30,189        $ 622      $ (2,945     $ 27,866   

Other financial services securities

       165        293        —          458   

Industrial securities

       5,791        1        —          5,792   
    

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

       $ 36,145        $ 916        $ (2,945     $ 34,116   
    

 

 

   

 

 

   

 

 

   

 

 

 
       December 31, 2011  
             Gross Unrealized     Estimated  

 

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

Fixed maturity AFS securities

          

Corporate securities

       $ 1,068,904        $ 99,060        $ (3,791     $ 1,164,173   

Asset-backed securities

       107,373        5,944        (7,169     106,148   

Commercial mortgage-backed securities

       109,318        9,913        (181     119,050   

Residential mortgage-backed securities

       83,576        4,108        (3,465     84,219   

Municipals

       1,124        86        —          1,210   

Government and government agencies

          

United States

       309,063        47,897        —          356,960   

Foreign

       8,918        1,403        —          10,321   
    

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity AFS securities

       $   1,688,276        $   168,411        $ (14,606     $   1,842,081   
    

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

          

Banking securities

       $ 30,189        $ —          $ (5,196     $ 24,993   

Other financial services securities

       165        229        —          394   

Industrial securities

       5,791        —          (138     5,653   
    

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

       $ 36,145        $ 229        $ (5,334     $ 31,040   
    

 

 

   

 

 

   

 

 

   

 

 

 

(1) Subsequent unrealized gains (losses) on other-than-temporary impairments (“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.

 

17


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

     $ 1,681,524         $ 1,832,694         $ 1,622,322         $ 1,783,734   

Below investment grade

     66,434         62,289         65,954         58,347   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity AFS securities

     $   1,747,958         $   1,894,983         $   1,688,276         $   1,842,081   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 $65,195 and $61,750 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

     $ 65,390         $ 66,981         $ 44,125         $ 44,653   

Due after one year through five years

     236,487         251,111         243,351         256,758   

Due after five years through ten years

     904,751         978,664         876,074         949,419   

Due after ten years

     225,341         269,541         224,459         281,834   
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,431,969         1,566,297         1,388,009         1,532,663   

Mortgage-backed securities and other asset-backed securities

     315,989         328,686         300,267         309,417   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity AFS securities

     $   1,747,958         $   1,894,983         $   1,688,276         $   1,842,081   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 $60 and $421, respectively, of investment income on fixed maturity trading securities and $292 and $914, 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 $271 during the three months ended March 31, 2011, on the conversion of a fixed maturity trading security to preferred stock.

Unrealized Gains (Losses) on Fixed Maturity and Equity Securities

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

 

18


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:

 

00000000,() 00000000,() 00000000,()
     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

     $ 43,990         $ 44,675         $ (685

Asset-backed securities

     15,563         15,563         -       

Residential mortgage-backed securities

     25,743         25,957         (214
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     85,296         86,195         (899
  

 

 

    

 

 

    

 

 

 

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

        

Fixed maturity AFS securities

        

Corporate securities

     14,635         15,621         (986

Asset-backed securities

     13,979         14,276         (297

Residential mortgage-backed securities

     57         59         (2

Equity securities - banking securities

     10,223         11,116         (893
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     38,894         41,072         (2,178
  

 

 

    

 

 

    

 

 

 

Greater than one year

        

Fixed maturity AFS securities

        

Corporate securities

     7,650         7,963         (313

Asset-backed securities

     12,338         17,995         (5,657

Residential mortgage-backed securities

     14,670         16,999         (2,329

Equity securities - banking securities

     4,578         6,630         (2,054
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     39,236         49,587         (10,353
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     $ 163,426         $ 176,854         $ (13,430
  

 

 

    

 

 

    

 

 

 
     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

     $ 47,771         $ 51,014         $ (3,243

Asset-backed securities

     33,112         33,399         (287

Commercial mortgage-backed securities

     8,312         8,493         (181

Residential mortgage-backed securities

     102         105         (3

Equity securities

        

Banking securities

     13,648         15,058         (1,410

Industrial securities

     5,653         5,791         (138
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     $     108,598       $     113,860         $     (5,262
  

 

 

    

 

 

    

 

 

 

 

19


    December 31, 2011  

(continued)

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

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

     

Equity securities - banking securities

    $ 6,973        $ 8,500        $ (1,527
 

 

 

   

 

 

   

 

 

 

Total fixed maturity and equity securities

    6,973        8,500        (1,527
 

 

 

   

 

 

   

 

 

 

Greater than one year

     

Fixed maturity AFS securities

     

Corporate securities

    11,545        12,093        (548

Asset-backed securities

    11,284        18,166        (6,882

Residential mortgage-backed securities

    14,576        18,038        (3,462

Equity securities - banking securities

    4,372        6,631        (2,259
 

 

 

   

 

 

   

 

 

 

Total fixed maturity and equity securities

    41,777        54,928        (13,151
 

 

 

   

 

 

   

 

 

 

Total fixed maturity and equity securities

    $         157,348        $         177,288        $         (19,940
 

 

 

   

 

 

   

 

 

 

 

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

The total number of securities in an unrealized loss position was 67 and 68 at March 31, 2012 and December 31, 2011, respectively.

The estimated fair value, gross unrealized losses, OTTI and number of securities where the fair value had declined below amortized cost by greater than 20% and greater than 40% at March 31, 2012 and December 31, 2011 were as follows:

 

$00,000 $00,000 $00,000
    March 31, 2012  

 

  Estimated
Fair

Value
    Gross
Unrealized
Losses/

OTTI  (1)
    Number of
Securities
 

Decline > 20%

     

Greater than one year

    $ 8,180        $ (3,656                       2   
 

 

 

   

 

 

   

 

 

 

Total

    $     8,180        $               (3,656     2   
 

 

 

   

 

 

   

 

 

 

Decline > 40%

     

Greater than one year

    $ 3,630        $ (2,802     2   
 

 

 

   

 

 

   

 

 

 

Total

    $           3,630        $ (2,802     2   
 

 

 

   

 

 

   

 

 

 
    December 31, 2011  

 

  Estimated
Fair

Value
    Gross
Unrealized
Losses/

OTTI  (1)
    Number of
Securities
 

Decline > 20%

     

Less than or equal to six months

    $         2,381        $         (635                           2   

Greater than one year

    25,483        (11,929     7   
 

 

 

   

 

 

   

 

 

 

Total

    $ 27,864        $ (12,564     9   
 

 

 

   

 

 

   

 

 

 

Decline > 40%

     

Greater than one year

    $ 3,544        $ (3,039     2   
 

 

 

   

 

 

   

 

 

 

Total

    $ 3,544        $ (3,039     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, 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

 

20


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

 

000000000 000000000

 

  March 31,
2012
    December 31,
2011
 

Assets

   

Fixed maturity securities

    $     147,025        $   153,805   

Equity securities

    (2,028     (5,105

Value of business acquired

    (35,347     (32,064
 

 

 

   

 

 

 
    109,650        116,636   
 

 

 

   

 

 

 

Liabilities

   

Federal income taxes - deferred

    (38,926     (41,407
 

 

 

   

 

 

 
    (38,926     (41,407
 

 

 

   

 

 

 

Stockholder’s equity

   

Accumulated other comprehensive income, net of taxes

    $ 70,724        $ 75,229   
 

 

 

   

 

 

 

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

Mortgage Loans on Real Estate

Mortgage loans on real estate consist entirely of mortgages on commercial real estate. Prepayment premiums are collected when borrowers elect to prepay their debt prior to the stated maturity. There were no prepayment premiums during the three months ended March 31, 2012 and 2011.

Loans are considered impaired when it is probable that based upon current information and events, the Company will be unable to collect all amounts due under the contractual terms of the loan agreement. A valuation allowance is established when a loan is impaired for the excess carrying value of the loan over its estimated collateral value. In addition to the valuation allowance for specific loans, a general reserve is estimated based on a percent of the outstanding loan balance. The general reserve at March 31, 2012 and December 31, 2011 was $28, respectively. The change in the reserve is reflected in net realized investment gains (losses), excluding OTTI on securities in the Statements of Income. There were no impaired mortgage loans at March 31, 2012 and December 31, 2011. The change in the credit loss allowances on mortgage loans by type of property for the years ended December 31 was as follows:

 

Commercial

  March 31,
2012
    December 31,
2011
 

Balance at beginning of period

    $                28        $         666   

Charge offs

    -            (633

Provision

    -            (5
 

 

 

   

 

 

 

Balance at end of period

    $ 28        $ 28   
 

 

 

   

 

 

 

The commercial mortgages are geographically diversified throughout the United States with the largest concentrations in Pennsylvania, New Hampshire, Virginia, Ohio, and California which account for approximately 76% of mortgage loans at March 31, 2012.

 

21


The credit quality of mortgage loans by type of property at March 31, 2012 and December 31, 2011 was as follows:

 

Commercial

  March 31,
2012
    December 31,
2011
 

AAA - AA

    $         21,669        $         21,949   

A

    17,303        22,471   

BBB

    15,974        11,275   
 

 

 

   

 

 

 

Total mortgage loans on real estate

    54,946        55,695   

Less: general reserve

    (28     (28
 

 

 

   

 

 

 

Total mortgage loans on real estate, net

    $ 54,918        $ 55,667   
 

 

 

   

 

 

 

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

Securities Lending

Financial assets that are lent to a third party or that are transferred subject to a repurchase agreement at a fixed price are not derecognized as the Company retains substantially all the risks and rewards of asset ownership. The lent securities are included in fixed maturity AFS securities in the Balance Sheets. A liability is recognized for cash collateral received, required initially at 102%, on which interest is accrued. If the fair value of the collateral is at any time less than 102% of the fair value of the loaned securities, the counterparty is mandated to deliver additional collateral, the fair value of which, together with the collateral already held in connection with the lending transaction, is at least equal to 102% of the fair value of the loaned securities. At March 31, 2012 and December 31, 2011, the payable for collateral under securities loaned was $239,122 and $243,982, respectively. The amortized cost of securities out on loan at March 31, 2012 and December 31, 2011 was $215,557 and $205,909, respectively. The estimated fair value of securities out on loan at March 31, 2012 and December 31, 2011 was $232,788 and $239,207, respectively.

Reverse Repurchase Agreements

The Company enters into dollar roll repurchase agreement transactions. At March 31, 2012, the payable for collateral under securities loaned was $25,984. The amortized cost of the reverse repurchase agreements at March 31, 2012 was $25,912. The estimated fair value of the securities that were pledged was $25,700 at March 31, 2012. There were no reverse repurchase agreements at December 31, 2011.

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. The Company also entered into variance swaps to hedge the costs of the volatility of the S&P market. At March 31, 2012, the Company had 430 outstanding short futures contracts with a notional value of $150,844. At March 31, 2012, the Company had variance swaps with a notional value of $7 and a net fair value of ($1,306). The Company recognized $35 and ($1,492) of realized gain (losses) from the change in fair value of the variance swaps in net investment income in the Statements of Income during the three months ended March 31, 2012 and 2011, respectively. At December 31, 2011, the Company had 630 outstanding short futures contracts with a notional value of $197,285. At December 31, 2011, the Company had variance swaps with a notional value of $5 and a net fair value of ($1,341).

The Company can also receive collateral related to derivative transactions that it enters into. The credit support agreement contains a fair value threshold of $1,000 over which collateral needs to be pledged by the Company or its counterparty. At March 31, 2012 and December 31, 2011, there was no cash collateral pledged or received on derivative transactions in accordance with the credit support agreement due to market value swings on variance swaps.

 

22


Realized Investment Gains (Losses)

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

 

     Three Months Ended
March 31,
 

 

   2012     2011  

Proceeds

     $     81,173        $     59,397   

Gross realized investment gains

     1,551        1,932   

Gross realized investment losses

     -            (26

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

     -            1,026   
Net realized investment gains (losses) for the three months ended March 31 were as follows:   
     Three Months Ended
March 31,
 

 

   2012     2011  

Fixed maturity AFS securities

     $         1,477        $         1,834   

Equity securities

     -            18   

Mortgages

     -            164   

Derivatives - futures

     (21,302     (7,116

Adjustment related to value of business acquired

     (58     (665
  

 

 

   

 

 

 

Net realized investment losses

     $ (19,883     $ (5,765
  

 

 

   

 

 

 

OTTI

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

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:

 

 

  March 31,
2012
    December 31,
2011
 

Balance at beginning of period

  $         2,229      $         2,014   

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

    -            27   

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

    59        1,004   

Accretion of credit loss impairments previously recognized

    (279     (816
 

 

 

   

 

 

 

Balance at end of period

  $ 2,009      $ 2,229   
 

 

 

   

 

 

 

 

23


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

 

     Three Months Ended March 31, 2012  

 

   OTTI
Losses on
Securities
     Net
OTTI Losses
Recognized
in OCI
     Net
OTTI Losses
Recognized
in Income
 

Gross OTTI losses

   $ 59       $ -           $ 59   

Value of business acquired amortization

     -             -                    
  

 

 

    

 

 

    

 

 

 

Net OTTI losses

   $ 59       $ -           $ 59   
  

 

 

    

 

 

    

 

 

 

 

     Three Months Ended March 31, 2011  

 

   OTTI
Losses on
Securities
     Net
OTTI Losses
Recognized
in OCI
     Net
OTTI Losses
Recognized
in Income
 

Gross OTTI losses

   $ 72       $ -           $ 72   

Value of business acquired amortization

     -             -             -       
  

 

 

    

 

 

    

 

 

 

Net OTTI losses

   $ 72       $ -           $ 72   
  

 

 

    

 

 

    

 

 

 

For the three months ended March 31, 2012, the Company impaired its holding of a previously OCI impaired 2007 vintage subprime mortgage asset-backed security due to an adverse change in cash flows. For the three months ended March 31, 2011, the Company impaired its holding of a previously OCI impaired subprime mortgage asset-backed security due to an adverse change in cash flows.

 

 

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

 

VOBA

VOBA reflects the estimated fair value of in force contracts acquired and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the life insurance and annuity contracts in force at the acquisition date. VOBA is based on actuarially determined projections, for each block of business, of future policy and contract charges, premiums, mortality, Separate Accounts performance, surrenders, operating expenses, investment returns and other factors. Actual experience on the purchased business may vary from these projections. If estimated gross profits or premiums differ from expectations, the amortization of VOBA is adjusted to reflect actual experience. The long-term equity growth rate assumption for the amortization of VOBA, DAC and DSI was 9% at March 31, 2012 and 2011, respectively.

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

 

     Three Months Ended
March 31,
 

 

         2012                 2011        

Amortization expense

     $ (19,534     $ (7,573

Unlocking

     17,773        2,627   

Adjustment related to realized gains on investments

     (58     (665

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

     (3,283     2,514   
  

 

 

   

 

 

 

Change in VOBA carrying amount

     $ (5,102     $ (3,097
  

 

 

   

 

 

 

During the three months ended March 31, 2012, favorable equity market performance resulted in higher projected gross profits resulting in an increase in amortization and favorable unlocking as compared to the same period in 2011.

 

24


DAC and DSI

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

 

    Three Months Ended
March 31,
 

DAC

        2012                 2011        

Capitalization

    $ 76        $ 171   

Amortization expense

    (6,386     (1,444

Unlocking

    1,852        (376
 

 

 

   

 

 

 

Change in DAC carrying amount

    $ (4,458     $ (1,649
 

 

 

   

 

 

 

 

    Three Months Ended
March 31,
 

DSI

        2012                 2011        

Capitalization

    $ 4        $       14   

Amortization expense

    (1,756     (334

Unlocking

    422        (79
 

 

 

   

 

 

 

Change in DSI carrying amount

    $ (1,330     $ (399
 

 

 

   

 

 

 

During the three months ended March 31, 2012, favorable equity market performance resulted in higher projected gross profits resulting in an increase in amortization and favorable unlocking as compared to the same period in 2011.

 

 

Note 5. Variable Contracts Containing Guaranteed Benefits

 

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

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

    $ 8,831        $ 8,406   

Guaranteed benefits paid

    (4,064     (8,546

Unlocking

    (32,047     (9,212
 

 

 

   

 

 

 

Total

    $ (27,280     $ (9,352
 

 

 

   

 

 

 
    Three Months Ended
March 31,
 

GMIB

  2012     2011  

Guaranteed benefits incurred

    $ 4,294        $ 2,905   

Unlocking

    (24,225     (4,889
 

 

 

   

 

 

 

Total

    $ (19,931     $ (1,984
 

 

 

   

 

 

 

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 $117,100 and $144,380 respectively. The variable annuity GMIB liability at March 31, 2012 and December 31, 2011 was $58,743 and $78,674, 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.

 

25


 

Note 6. Federal Income Taxes

 

The effective tax rate was not meaningful and 7% 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”) and the valuation allowance on net operating loss carryforward.

At March 31, 2012, the Company did not have a tax valuation allowance for deferred tax assets. The valuation allowance for deferred tax assets at December 31, 2011 was $90,402. At March 31, 2012, management has determined that deferred tax assets on the net operating loss carryforward and other assets are more likely than not to be realized. At December 31, 2011 the valuation allowance was related to deferred tax assets on a net operating loss carryforward and other assets that, in the judgment of management, were not more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on generation of future taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, projected taxable income, and tax-planning strategies in making the assessment.

The Company has analyzed all material tax positions under the guidance of ASC 740, Income Taxes, related to the accounting for uncertainty in income tax, and determined there were tax benefits of $2,522 (gross $7,205), that should not be recognized at March 31, 2012 and December 31, 2011, respectively, which primarily relate to uncertainty regarding the sustainability of certain deductions taken on the 2010, 2009 and 2008 U.S. Federal income tax returns. To the extent these unrecognized tax benefits are ultimately recognized, they will not impact the effective tax rate in a future period. It is not anticipated that the total amounts of unrecognized tax benefits will significantly increase within twelve months of the reporting date.

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

 

 

  March 31,
2012
    December 31,
2011
 

Balance at beginning of period

    $ 2,522        $ 4,299   

Reductions for tax positions of prior years

    -            (1,777
 

 

 

   

 

 

 

Balance at end of period

    $ 2,522        $ 2,522   
 

 

 

   

 

 

 

At March 31, 2012 and December 31, 2011, the Company had an operating loss carryforward for federal income tax purposes of $388,949 (net of the ASC 740 reduction of $7,205) and $518,325 (net of the ASC 740 reduction of $7,205), respectively, with a carryforward period of fifteen years that expire at various dates up to 2027. At March 31, 2012 the Company had a capital loss carryforward of $1,159 for federal income tax purposes. At December 31, 2011, the Company did not have a capital loss carryforward for federal income tax purposes. At March 31, 2012 and December 31, 2011, the Company had a foreign tax credit carryforward of $6,174 and $5,956, 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 $4,616 and $2,488, 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 did not incur or recognize any penalties in its financial statements at March 31, 2012. The Company incurred and recognized $5 in penalties in its financial statements at December 31, 2011. The Company recognized interest expense of $8 and $30 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.

 

 

Note 7. Stockholder’s Equity and Statutory Accounting Principles

 

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

The Company’s statutory net income for the three months ended March 31, 2012 and 2011 was $236,597 and $43,249, respectively. Statutory capital and surplus at March 31, 2012 and December 31, 2011 was $715,317 and $438,047, respectively.

 

26


During the first quarter 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, net reinsurance receivables were $3,908 and $2,439, respectively. The Company has a reinsurance reserve of $308 and $383 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, 40% and 6% of the account value for variable annuity contracts containing GMIB and GMDB provisions, respectively, were reinsured. At December 31, 2011, 41% and 6% of the account value for variable annuity contracts containing GMIB and GMDB provisions, respectively, were reinsured.

 

 

Note 9. Related Party Transactions

 

At March 31, 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 $2,873 and $2,191, respectively, in expenses under this agreement. Charges attributable to this agreement are included in insurance expenses and taxes, net of amounts capitalized.

The Company is party to intercompany short-term note receivable arrangements with its parent and affiliates at various times during the year. On March 30, 2011, the Company entered into an intercompany short-term note receivable of $50,000 with an interest rate of 0.25% that was paid off in December 2011. During the three months ended March 31, 2012, the Company did not accrue and/or receive any interest. During the three months ended March 31, 2011, the Company accrued and/or received $1 of interest. Interest related to these arrangements is included in net investment income.

AEGON USA Realty Advisors, LLC acts as the manager and administrator for the Company’s mortgage loans on real estate under an administrative and advisory agreement with the Company. Charges attributable to this agreement are included in net investment income. During the three months ended March 31, 2012 and 2011, the Company incurred $22 and $34, respectively, under this agreement. There were no mortgage loan origination fees during the three months ended March 31, 2012 and 2011, respectively. Mortgage loan origination fees are amortized into net investment income over the life of the mortgage loans.

AEGON USA Investment Management, LLC acts as a discretionary investment manager under an investment management agreement with the Company. During the three months ended March 31, 2012 and 2011, the Company incurred $428 and $549, 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 $8,284 and $11,594, 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 $102 and $107, respectively, in expenses under this agreement.

 

27


The Company has a participation agreement with Transamerica Series Trust to offer certain funds in the Company’s Separate Accounts. Transamerica Capital, Inc. acts as the distributor for said related party funds. The Company has entered into a distribution and shareholder services agreement for certain of the said funds. During the three months ended March 31, 2012 and 2011, the Company received $447 and $469, respectively, in revenue under this agreement. Revenue attributable to this agreement is included in policy charge revenue.

The Company has a reinsurance agreement with Transamerica Life Insurance Company. During the three months ended March 31, 2012 and 2011, the Company incurred $18 and $6, respectively, in reinsurance premium ceded expense under this agreement and there were no reinsurance recoveries on death claims incurred.

The Company is party to the purchasing and selling of investments between various affiliated companies. The investments are purchased and sold at fair value and are included in fixed maturity AFS securities and mortgage loans on real estate in the Balance Sheets. During the three months ended March 31, 2012, the Company purchased $9,714 of fixed maturity AFS securities from affiliated companies. During the three months ended March 31, 2011, the Company sold $2,800 of mortgage loans on real estate to affiliated companies.

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

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

 

    Annuity     Life
Insurance
    Total  
       

Three months ended March 31, 2012

     

Net revenues (a)

  $ 19,599      $ 19,351      $ 38,950   

Amortization (accretion) of VOBA

    4,946        (3,186     1,760   

Policy benefits (net of reinsurance recoveries)

    (61,290     11,346        (49,944

Federal income tax benefit

    (66,236     (3,423     (69,659

Net income

    125,292        11,707        136,999   

Three months ended March 31, 2011

                 

Net revenues (a)

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

Amortization (accretion) of VOBA

    6,472        (1,526     4,946   

Policy benefits (net of reinsurance recoveries)

    (2,761     9,070        6,309   

Federal income tax expense (benefit)

    (266     2,093        1,827   

Net income

    19,386        6,672        26,058   

 

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

 

28


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

TALIC conducts its business primarily in the annuity markets and to a lesser extent in the life insurance markets of the financial services industry.

The Company offered the following guaranteed benefits within its variable annuity product suite: guaranteed minimum death benefits (“GMDB”), guaranteed minimum income benefits (“GMIB”) and guaranteed minimum withdrawal benefits (“GMWB”). In addition, the Company sells a fixed contingent annuity (also sometimes referred to as a contingent deferred annuity (“CDA”)), which includes a stand-alone living benefit (“SALB”).

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

 

   

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

 

   

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

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

 

 

Deposits

 

Total direct deposits (including internal exchanges) were $9.7 million and $9.6 million for the three months ended March 31, 2012 and 2011, respectively. Deposits are currently limited to additions to existing policies which will result in fluctuations period over period. Internal exchanges during the three months ended March 31, 2012 and 2011 were $1.2 million and $1.7 million, respectively.

 

29


 

Financial Condition

 

At March 31, 2012, the Company’s assets were $11.0 billion or $472.5 million higher than the $10.5 billion in assets at December 31, 2011. Assets excluding Separate Accounts assets increased $62.6 million. Separate Accounts assets, which represent 67% of total assets, increased $409.9 million to $7.4 billion. Changes in Separate Accounts assets were as follows:

 

     Three
Months Ended
March 31,
 

(dollars in millions)

   2012     2011  

Investment performance

     $ 635.4      $ 339.9   

Deposits

     9.6        9.5   

Policy fees and charges

     (41.8     (45.5

Surrenders, benefits and withdrawals

     (193.3     (242.0
  

 

 

   

 

 

 

Net change

     $ 409.9      $ 61.9   
  

 

 

   

 

 

 

During the first three months of 2012 and 2011, fixed contract owner deposits were $0.1 million and $0.1 million, respectively, and fixed contract owner withdrawals were $28.6 million and $30.4 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 Price Index (“S&P”). The Dow, NASDAQ and S&P ended March 31, 2011 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 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 $0.8 billion (or 10%) to $7.3 billion 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 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.

 

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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.

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 (decrease) on market valuations (in millions)

    

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

     $ (3.7     $ (5.0

Interest-sensitive policyholder liabilities

     —          0.6   
  

 

 

   

 

 

 

Net change on market valuations

     $ (3.7     $ (4.4
  

 

 

   

 

 

 

 

(a)

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

(b)

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

 

 

Critical Accounting Policies and Estimates

 

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

The Company’s critical accounting policies and estimates are discussed below. For a full description of these and other accounting policies see Note 1 of the 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,

 

31


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.

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 $56.4 million (or 3%) and $56.7 million (or 3%), 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 recorded an OTTI in income of $0.1 million, respectively, with no associated value of business acquired amortization.

Mortgage Loans on Real Estate

Mortgage loans on real estate are carried at unpaid principal balances adjusted for amortization of premiums and accretion of discounts and are net of valuation allowances and generic reserves. The fair value for mortgage loans on real estate is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit

 

32


ratings and/or similar remaining maturities. Interest income is accrued on the principal balance of the loan based on the loan’s contractual interest rate. Premiums and discounts are amortized using the effective yield method over the life of the loan. Interest income and amortization of premiums and discounts are reported in net investment income along with mortgage loan fees, which are recorded as they are incurred.

Loans are considered impaired when it is probable that based upon current information and events, the Company will be unable to collect all amounts due under the contractual terms of the loan agreement. When the Company determines that a loan is impaired, a valuation allowance is established for the excess carrying value of the loan over its estimated collateral value. Changing economic conditions impact the valuation of mortgage loans. Changing vacancies and rents are incorporated into the discounted cash flow analysis that the Company performs for monitored loans and may contribute to the establishment of (or an increase or decrease in) an allowance for losses. In addition, the Company continues to monitor the entire commercial mortgage loan portfolio to identify risk. Areas of emphasis are properties that have deteriorating credits or have experienced debt coverage reduction. Where warranted, the Company has established or increased loss reserves based upon this analysis. The Company does not accrue interest on loans ninety days past due. The Company also establishes a generic reserve which is calculated by applying a percentage, based on risk rating and maturity, to the outstanding loan balance.

At March 31, 2012 and December 31, 2011, there was $54.9 million and $55.7 million, respectively, in mortgage loans on real estate recorded on the Balance Sheets. The estimated fair value of the mortgage loans on real estate at March 31, 2012 and December 31, 2011 was $60.7 million and $61.8 million, respectively. There were no impaired mortgage loans at March 31, 2012. The general reserve at March 31, 2012 and December 31, 2011 was less than $0.1 million. The change in the valuation allowance and the general reserve is reflected in net realized investment gains (losses), excluding OTTI losses on securities in the Statements of Income. At March 31, 2012 and December 31, 2011, there were no mortgage loans that were two or more payments delinquent. See Note 3 to the Financial Statements for further discussion.

Derivative Instruments

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

At March 31, 2012, the Company had 430 outstanding short futures contracts with a notional amount of $150.8 million. At March 31, 2012, the Company had variance swaps with a notional value of $7.0 thousand and a net fair value of ($1.3) million. The Company recognized less than $0.1 million and ($1.5) million of gains (losses) from the change in fair value of the variance swaps in net investment income in the Statements of Income during the three months ended March 31, 2012 and 2011, respectively. At December 31, 2011, the Company had 630 outstanding short futures contracts with a notional value of $197.3 million. At December 31, 2011, the Company had two variance swaps with a notional value of $5.0 thousand and a net fair value of ($1.3) million.

The Company can also receive collateral related to derivative transactions that it enters into. The credit support agreement contains a fair value threshold of $1.0 million over which collateral needs to be pledged by the Company or its counterparty. At March 31, 2012 and December 31, 2011, the Company did not pledge or receive collateral on derivative transactions.

Securities Lending

Financial assets that are lent to a third party or that are transferred subject to a repurchase agreement at a fixed price are not derecognized as the Company retains substantially all the risks and rewards of asset ownership. The lent securities are included in fixed maturity AFS securities in the Balance Sheets. A liability is recognized for cash collateral received, required initially at 102%, on which interest is accrued. If the fair value of the collateral is at any time less than 102% of the fair value of the loaned securities, the counterparty is mandated to deliver additional collateral, the fair value of which, together with the collateral already held in connection with the lending transaction, is at least equal to 102% of the fair value of the loaned securities. At March 31, 2012 and December 31, 2011, the payable for collateral under securities loaned was $239.1 million and $244.0 million, respectively.

 

33


Reverse Repurchase Agreements

The Company enters into dollar roll repurchase agreement transactions whereby the Company takes delivery of mortgage-backed securities (“MBS”) pools and sells them to a counterparty along with an agreement to repurchase substantially the same pools at some point in the future, typically one month forward. These transactions are accounted for as collateralized borrowings and the repurchase agreement liability is included in the Balance Sheet in payables for collateral under securities loaned and reverse repurchase agreements. At March 31, 2012, the payable for collateral under securities loaned was $26.0 million. At March 31, 2012, the amortized cost of the reverse repurchase agreements was $25.9 million. The estimated fair value of the securities that were pledged to the counterparty to support the initial dollar roll was $25.7 million at March 31, 2012. There were no reverse repurchase agreements at December 31, 2011.

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 $304.5 million and $309.6 million, respectively. For the three months ended March 31, 2012 and 2011, the favorable impact to pre-tax income related to VOBA unlocking was $17.8 million and $2.6 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 $40.6 million and $45.0 million, respectively.

DAC for variable annuities is amortized with interest over the anticipated lives of the insurance contracts in relation to the present values of estimated future gross profits from asset-based fees, guaranteed benefit rider fees, contract fees, and surrender charges, less a provision for guaranteed death and living benefit expenses, policy maintenance expenses, and non-capitalized commissions. Future gross profit estimates are subject to periodic evaluation with necessary revisions applied against amortization to date. The impact of revisions and assumptions to estimates on cumulative amortization is recorded as a charge or credit to current operations, commonly referred to as “unlocking”. Changes in assumptions can have a significant impact on the amount of DAC reported and the related amortization patterns. In general, increases in the estimated Separate Accounts return and decreases in surrender or mortality assumptions increase the expected future profitability of the underlying business and may lower the rate of DAC amortization. Conversely, decreases in the estimated Separate Accounts returns and increases in surrender or mortality assumptions reduce the expected future profitability of the underlying business and may increase the rate of DAC amortization. For the three months ended March 31, 2012 and 2011, there was a favorable (unfavorable) impact to pre-tax income related to DAC unlocking of $1.9 million and ($0.4) million, respectively. See Note 4 to the Financial Statements for a further discussion.

DSI

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

The expense and the subsequent capitalization and amortization (accretion) are recorded as a component of policy benefits in the Statements of Income. At March 31, 2012 and December 31, 2011, variable annuities accounted for the Company’s entire DSI asset of $9.0 million and $10.4 million, respectively. For the three months ended March 31, 2012 and 2011, there was an favorable (unfavorable) impact to pre-tax income related to DSI unlocking of $0.4 million and ($0.1) million, respectively. See Note 4 to the Financial Statements for a further discussion.

 

34


The long-term equity 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 at the Balance Sheet date. The liability is generally equal to the accumulated account deposits plus interest credited less policyholders’ withdrawals and other charges assessed against the account balance. Policyholder account balances at March 31, 2012 and December 31, 2011 were $1.4 billion and $1.5 billion, respectively.

Future Policy Benefits

Future policy benefits are actuarially determined liabilities, which are calculated to meet future obligations and are generally payable over an extended period of time. Principal assumptions used in the establishment of liabilities for future policy benefits are mortality, surrender rates, policy expenses, equity returns, interest rates, and inflation. These estimates and assumptions are influenced by historical experience, current developments and anticipated market trends. At March 31, 2012 and December 31, 2011, future policy benefits were $413.5 million and $475.9 million, respectively.

Included within future policy benefits are liabilities for GMDB and GMIB provisions contained in the variable products that the Company issues. 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

     $ 117.1         $ 144.4   

GMIB liability

     58.7         78.7   

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 $56.3 million and $14.1 million, respectively.

Future policy benefits also include liabilities, which can be either positive or negative, for contracts containing GMWB and SALB provisions and for the reinsurance of GMIB provisions (“GMIB reinsurance”) for contracts 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 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 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

     $ 74.0        $ 108.6   

GMIB reinsurance asset

     (80.7     (94.5

At March 31, 2012, the future policy benefits related to SALB were less than $0.1 million.

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.

 

35


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.

At March 31, 2012, the Company did not have a tax valuation allowance for deferred tax assets. The valuation allowance for deferred tax assets at December 31, 2011 was $90.4 million. At March 31, 2012, management has determined that deferred tax assets on the net operating loss carryforward and other assets are more likely than not to be realized. At December 31, 2011 the valuation allowance was related to deferred tax assets on a net operating loss carryforward and other assets that, in the judgment of management, were not more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on generation of future taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, projected taxable income, and tax-planning strategies in making the assessment.

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

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 860, Transfers and Servicing – ASU 2011-03, Reconsideration of Effective Control for Repurchase Agreements – modifies the criteria for determining when a repurchase transaction should be accounted for as a secured borrowing or as a sale – 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.

 

36


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.

 

   

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

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, cash and cash equivalents and mortgage loans on real estate.

 

37


Fixed Maturity and Equity Securities

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

 

         March 31, 2012  
                             %  of
Estimated
Fair
Value
 
                 Gross Unrealized     Estimated
Fair
Value
    

(dollars in millions)

       Amortized
Cost/Cost
     Gains      Losses/
OTTI (1)
      

Fixed maturity AFS securities

               

Corporate securities

               

Financial services

       $ 315.6         $ 20.3         $ (0.7     $ 335.2         17%   

Industrial

       706.9         70.7         (1.3     776.3         41      

Utility

       90.8         10.7         -            101.5         5      

Asset-backed securities

               

Housing related

       41.5         2.7         (6.0     38.2         2      

Credit cards

       38.6         2.8         -            41.4         2      

Autos

       24.9         0.1         -            25.0         1      

Timeshare

       0.3         0.1         -            0.4         -      

Commercial mortgage-backed securities - non agency backed

       104.8         11.0         -            115.8         6      

Residential mortgage-backed securities

               

Agency backed

       88.9         4.4         (0.2     93.1         5      

Non agency backed

       17.0         -             (2.3     14.7         1      

Municipals - tax exempt

       1.1         0.1         -            1.2         -      

Government and government agencies

               

United States

       308.7         33.0         -            341.7         18      

Foreign

       8.9         1.6         -            10.5         1      
    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturity AFS securities

       1,748.0         157.5         (10.5     1,895.0         99      

Equity securities

               

Banking securities

       30.2         0.6         (3.0     27.8         1      

Other financial services securities

       0.2         0.3         -            0.5         -      

Industrial securities

       5.8         -             -            5.8         -      
    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total equity securities

       36.2         0.9         (3.0     34.1         1      
    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturity and equity securities

       $     1,784.2         $   158.4         $ (13.5     $   1,929.1         100%   
    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

38


         December 31, 2011  
                Gross Unrealized     Estimated     

% of

Estimated

 

(dollars in millions)

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

Fixed maturity AFS securities

               

Corporate securities

               

Financial services

       $ 284.4         $ 14.4         $ (1.9     $ 296.9         16%   

Industrial

       693.7         72.4         (1.8     764.3         40      

Utility

       90.8         12.2         -           103.0         6      

Asset-backed securities

               

Housing related

       43.2         2.0         (7.2     38.0         2      

Credit cards

       47.8         3.6         -           51.4         3      

Structured settlements

       4.1         0.3         -           4.4         -       

Autos

       11.9         0.1         -           12.0         1      

Timeshare

       0.4         -           -           0.4         -       

Commercial mortgage-backed securities - non agency backed

       109.3         9.9         (0.2     119.0         6      

Residential mortgage-backed securities

               

Agency backed

       65.6         4.1         -           69.7         4      

Non agency backed

       18.0         -           (3.5     14.5         1      

Municipals - tax exempt

       1.1         0.1         -           1.2         -       

Government and government agencies

               

United States

       309.1         47.9         -           357.0         19      

Foreign

       8.9         1.4         -           10.3         1      
    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturity AFS securities

       1,688.3         168.4         (14.6     1,842.1         99      

Equity securities

               

Banking securities

       30.2         -           (5.2     25.0         1      

Other financial services securities

       0.2         0.2         -           0.4         -       

Industrial securities

       5.8         -           (0.1     5.7         -       
    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total equity securities

       36.2         0.2         (5.3     31.1         1      
    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total fixed maturity and equity securities

       $ 1,724.5         $ 168.6         $ (19.9     $ 1,873.2         100%   
    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

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

The Company regularly monitors industry sectors and individual debt securities for evidence of impairment. This evidence may include one or more of the following: 1) deteriorating market to book ratio, 2) increasing industry risk factors, 3) deteriorating financial condition of the issuer, 4) covenant violations of the issuer, 5) high probability of bankruptcy of the issuer, 6) nationally recognized credit rating agency downgrades, and/or 7) intent or requirement to sell before a debt security’s anticipated 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 subprime ABS housing related holdings, one corporate security and one RMBS holding. The Company owns one investment grade corporate non-convertible security, issued by a U.S. banking institution with an unrealized loss of $0.1 million. The Company’s subprime ABS housing related unrealized loss is $6.9 million on holdings that have been impaired to discounted cash flows. The Company’s subprime ABS

 

39


consist of four below investment grade deals whereby the collateral is comprised of 2006-2007 fixed rate, first lien subprime mortgages. The Company’s RMBS unrealized loss is $2.8 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 $93.2 million (or 42%) and $69.7 million (or 34%), 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 first three months of 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.

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

     $ 24.1         $ 24.5         $ (0.4

Industrial

     15.7         15.9         (0.2

Asset-backed securities

        

Credit cards

     9.2         9.2         -       

Autos

     6.3         6.3         -       

Residential mortgage-backed securities - agency backed

     25.8         26.0         (0.2
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     81.1         81.9         (0.8
  

 

 

    

 

 

    

 

 

 

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

        

Corporate securities

        

Financial services

     4.4         4.7         (0.3

Industrial

     8.1         8.5         (0.4

Asset-backed securities - housing related

     14.1         14.3         (0.2

Residential mortgage-backed securities - agency backed

     0.1         0.1         -       

Equity securities - banking securities

     10.2         11.1         (0.9
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     36.9         38.7         (1.8
  

 

 

    

 

 

    

 

 

 

Greater than one year

        

Corporate securities - utility

     2.6         2.6         -       
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     $ 2.6         $ 2.6         $ -       
  

 

 

    

 

 

    

 

 

 

 

40


     March 31, 2012  

(dollars in millions)

  

    Estimated    
Fair

Value

    

Amortized
Cost/Cost

    

Gross
Unrealized
Losses and
OTTI (1)

 

Investment grade AFS securities (continued)

                    

Total of all investment grade AFS securities

        

Corporate securities

        

Financial services

     $ 28.5         $ 29.2         $ (0.7

Industrial

     23.8         24.4         (0.6

Utility

     2.6         2.6         -       

Asset-backed securities

        

Housing related

     14.1         14.3         (0.2

Credit cards

     9.2         9.2         -       

Autos

     6.3         6.3         -       

Residential mortgage-backed securities - agency backed

     25.8         26.0         (0.2

Equity securities - banking securities

     10.2         11.1         (0.9
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     $ 120.5         $ 123.1         $ (2.6
  

 

 

    

 

 

    

 

 

 

Total number of securities in a continuous unrealized loss position

  

        50   
      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

     $ 33.2         $ 35.1         $ (1.9

Industrial

     11.7         12.6         (0.9

Asset-backed securities

        

Housing related

     14.5         14.8         (0.3

Credit cards

     14.0         14.0         -       

Autos

     4.6         4.6         -       

Commercial mortgage-backed securities - non agency backed

     8.3         8.5         (0.2

Residential mortgage-backed securities - non agency backed

     0.1         0.1         -       

Equity securities

        

Banking securities

     13.6         15.1         (1.5

Industrial securities

     5.7         5.8         (0.1
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     105.7         110.6         (4.9
  

 

 

    

 

 

    

 

 

 

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

        

Equity securities - banking securities

     7.0         8.5         (1.5
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     7.0         8.5         (1.5
  

 

 

    

 

 

    

 

 

 

Greater than one year

        

Corporate securities

        

Financial services

     4.0         4.0         -       

Industrial

     0.1         0.1         -       

Utility

     2.6         2.6         -       
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     $ 6.7         $ 6.7         $ -       
  

 

 

    

 

 

    

 

 

 

 

41


     December 31, 2011  

(dollars in millions)

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

Investment grade AFS securities (continued)

                    

Total of all investment grade AFS securities

        

Corporate securities

        

Financial services

     $ 37.2         $ 39.1         $ (1.9

Industrial

     11.8         12.7         (0.9

Utility

     2.6         2.6         -       

Asset-backed securities

        

Housing related

     14.5         14.8         (0.3

Credit cards

     14.0         14.0         -       

Autos

     4.6         4.6         -       

Commercial mortgage-backed securities - non agency backed

     8.3         8.5         (0.2

Residential mortgage-backed securities - non agency backed

     0.1         0.1         -       

Equity securities

        

Banking securities

     20.6         23.6         (3.0

Industrial securities

     5.7         5.8         (0.1
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     $ 119.4         $ 125.8         $ (6.4
  

 

 

    

 

 

    

 

 

 

Total number of securities in a continuous unrealized loss position

  

        53   

 

(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

                    

Less than or equal to six months

        

Corporate securities - industrial

     $ 4.2         $ 4.3         $ (0.1
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     4.2         4.3         (0.1
  

 

 

    

 

 

    

 

 

 

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

        

Corporate bonds - industrial

     2.1         2.4         (0.3
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     2.1         2.4         (0.3
  

 

 

    

 

 

    

 

 

 

Greater than one year

        

Corporate securities - industrial

     5.1         5.4         (0.3

Asset-backed securities - housing related

     12.3         18.1         (5.8

Residential mortgage-backed securities - non agency backed

     14.6         17.0         (2.4

Equity securities - banking securities

     4.6         6.5         (1.9
  

 

 

    

 

 

    

 

 

 

Total fixed maturity and equity securities

     $ 36.6         $ 47.0         $ (10.4
  

 

 

    

 

 

    

 

 

 

 

42


      March 31, 2012  

(dollars in millions)

     Estimated  
Fair

Value
       Amortized  
  Cost/Cost  
     Gross
  Unrealized  
  Loss