|Edgar Online, Inc.|
This discussion contains forward-looking statements that involve risk and uncertainties. Our actual results may differ materially from those discussed in, or implied by, any of the forward-looking statements as a result of various factors, including but not limited to those listed under "Forward-Looking Statements." You should read the following discussion in conjunction with Item 1 - "Condensed Financial Statements" included in this Form 10-Q, our Annual Report for the year ended
December 31, 2011, filed with the SECon February 29, 2012("2011 10-K"), as well as our current reports on Form 8-K and other publicly available information. Our fiscal year ends on December 31of each calendar year. Management considers certain non-GAAP financial measures, including adjusted operating income, adjusted operating income per common share, pre-tax adjusted operating income, adjusted book value, adjusted book value, as converted, adjusted book value per common share, adjusted book value per common share, as converted, average adjusted book value, and operating return on average equity (ROAE) to be useful to investors in evaluating our financial performance and condition. These measures have been reconciled to their most comparable GAAP financial measures. For a definition and further discussion of these non-GAAP measures, see Item 7 - "Management's Discussion and Analysis of Financial Condition - Use of non-GAAP Financial Measures" in our 2011 10-K. Historical financial information has been restated to reflect the retrospective adoption of a new accounting standard for deferred acquisition costs on January 1, 2012. See Note 2 to the accompanying unaudited interim condensed consolidated financial statements for discussion of adoption of new accounting pronouncements.
All dollar and share amounts, except per share data, are in millions unless otherwise stated.
We are a financial services company in the life insurance industry providing employee benefits, annuities and life insurance through a national network of benefits consultants, financial institutions and independent agents and advisers. Our operations date back to 1957 and many of our distribution relationships have been in place for decades.
We manage our business through three divisions composed of four business segments:
• Benefits. We offer medical stop-loss insurance, limited benefit medical
plans, group life insurance, accidental death and dismemberment insurance
and disability income insurance mainly to employer groups of 50 to 5,000
individuals. In addition to our insurance products, we offer managing
general underwriter (MGU) and leave administration services.
• Deferred Annuities. We offer fixed and variable deferred annuities to
consumers who want to accumulate tax-deferred assets for retirement.
• Income Annuities. We offer single premium income annuities (SPIAs) to
customers seeking a reliable source of retirement income or to protect
against outliving their assets during retirement, and structured
settlement annuities to fund third party personal injury settlements. In
addition, we offer funding services options to existing structured
settlement clients. Individual Life Division
• Individual Life. We offer an array of insurance products such as term and
universal life insurance (UL), including single premium life insurance
(SPL), bank-owned life insurance (BOLI) and corporate-owned life insurance
In addition, we have our Other segment, which consists primarily of investment income on unallocated surplus, unallocated corporate expenses, interest expense on debt, earnings related to our limited partnership interests, the results of small, non-insurance businesses that are managed outside of our divisions, such as our broker-dealer, and inter-segment elimination entries. 31
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See Note 11 to the accompanying unaudited interim condensed consolidated financial statements for the financial results of our segments.
The third quarter of 2012 offered modest U.S. economic growth, despite continued headwinds including European instability and weakness, and U.S. political uncertainty. The political uncertainty in the U.S. is exacerbated by the possibility of a "fiscal cliff" in early 2013, when automatic spending cuts and tax increases are set to take effect unless a deficit reduction plan is implemented. In addition, interest rates continue to be suppressed to historically low levels by the Federal Reserve to support a stronger economic recovery. Recently, in
September 2012, the Federal Reserve announced plans to purchase additional agency mortgage-backed securities at a rate of $40 billionper month, which will continue to place downward pressure on interest rates. We expect interest rates to remain low for the next two years, which combined with tighter credit spreads will create continued pressure for our interest-sensitive asset-based businesses, impacting sales of and margins on these products, including fixed annuities, SPIAs, universal life insurance and BOLI. To mitigate the risk of unfavorable consequences in this environment, such as spread compression on our in-force business, we remain proactive in our investment and product strategies, interest-crediting strategies and overall asset-liability management practices. To manage our asset yield in this environment, we have been and plan to continue increasing our investments in commercial mortgage loans we underwrite. While interest rates on recently written loans have decreased consistent with the overall level of interest rates, they continue to be an attractive investment opportunity. Further, we made additional progress on our investment strategy of selling lower yielding, higher premium agency RMBS where the prepayment characteristics of these securities had deteriorated. During the nine months ended September 30, 2012, we sold $365.3of these assets. In doing so, we were able to produce realized gains while reducing our future reinvestment risk. We remain proactive in managing our prepayment and reinvestment risk and may seek similar transactions in the fourth quarter of 2012. Looking forward, we continue the pursuit of other investment strategies to help us retain our interest margins in the current low interest rate environment. To manage our way through this uncertain environment and grow profitably, we will continue to focus on the strategies outlined in Item 1 - "Business - Our Strategies" in the 2011 10-K. Our 2012 focus is to continue executing on our Grow & Diversify initiatives, while at the same time remaining focused on our core businesses and maintaining our financial strength ratings. We believe we have adequate levels of capital to support our current business and to fund organic and transactional growth. Opportunities for organic growth of our business and for strategic transactions have arisen as major players in the life insurance industry have exited or announced plans to exit the life and annuities marketplace. However, the success of these and other strategies may be affected by the factors discussed in Item 1A - "Risk Factors" and other factors as discussed herein.
Critical Accounting Policies and Estimates