|Edgar Online, Inc.|
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 2012 Annual Report on Form 10-K. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the dates on which they are made. The Company does not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the dates they are made. The reader should, however, consult further disclosures the Company may make in future filings of its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Business Overview
Transamerica Advisors Life Insurance Company of New York("TALICNY", "Registrant", the "Company", "we", "our", or "us") is a wholly owned subsidiary of AEGON USA, LLC("AUSA"). AUSAis an indirect wholly owned subsidiary of AEGON N.V., a limited liability share company organized under Dutch law. The Company is domiciled in New York. TALICNY conducts its business primarily in the annuity markets and to a lesser extent in the life insurance markets of the financial services industry. The Company offered the following guaranteed benefits within its variable annuity product suite: guaranteed minimum death benefits ("GMDB"), guaranteed minimum income benefits ("GMIB") and guaranteed minimum withdrawal benefits ("GMWB"). The Company makes available, free of charge, annual reports on Form 10-K, quarterly reports on 10-Q, and current reports on Form 8-K. This information is available through the About US - Financial Strength section of the Transamericawebsite at www.Transamerica.com. These reports are available through the website as soon as reasonably practicable after the Registrant electronically files such material with, or furnishes it to, the Securities and Exchange Commission.
The Company's gross earnings are principally derived from two sources:
• the charges imposed on variable annuity and variable life insurance
• the net earnings from investment of fixed rate life insurance and annuity
contract owner deposits less interest credited to contract owners,
commonly known as interest spread.
The costs associated with acquiring contract owner deposits (deferred policy acquisition costs) are amortized over the period in which the Company anticipates holding those funds, as noted in the Critical Accounting Policies and Estimates section below. Insurance expenses and taxes reported in the Statements of Income are net of amounts deferred. In addition, the Company incurs expenses associated with the maintenance of in force contracts. Deposits Total direct deposits (including internal exchanges) were
$0.1 millionand $0.1 millionfor the three months ended March 31, 2013and 2012, respectively. There were no internal exchanges during the three months ended March 31, 2013. Internal exchanges during the three months ended March 31, 2012were less than $0.1 million. 25
Financial Condition At
March 31, 2013, the Company's assets were $794.1 millionor $9.3 millionhigher than the $784.8 millionin assets at December 31, 2012. Assets excluding Separate Accounts assets decreased $1.2 millionduring the first quarter of 2013. Separate Accounts assets, which represent 68% of total assets, increased $10.5 millionto $536.9 million.
Changes in Separate Accounts assets were as follows:
Three Months Ended March 31, (dollars in millions) 2013 2012 Investment performance
$ 22.0 $ 47.3Deposits 8.4 0.1 Policy fees and charges (2.7 ) (2.9 )
Surrenders, benefits and withdrawals (17.2 ) (20.2 )
$ 10.5 $ 24.3During the first three months of 2013 and 2012, the Company did not have any fixed contract owner deposits and fixed contract owner withdrawals were $2.2 millionand $0.6 million, respectively. Business Environment The Company's financial position and/or results of operations are primarily impacted by the following economic factors: equity market performance, fluctuations in medium term interest rates, and the corporate credit environment via credit quality and fluctuations in credit spreads. The following discusses the impact of each economic factor.
Equity Market Performance
The investment performance of the underlying U.S. equity-based mutual funds supporting the Company's variable products do not replicate the returns of any specific U.S. equity market index. However, investment performance will generally increase or decrease with corresponding increases or decreases of the overall U.S. equity market. There are several standard indices published on a daily basis that measure performance of selected components of the U.S. equity market. Examples include the Dow Jones Industrial Average ("Dow"), the NASDAQ Composite Index ("NASDAQ") and the Standard & Poor's 500 Composite Stock Price Index ("S&P"). The Dow, NASDAQ and S&P ended
March 31, 2013with increases of 11%, 8% and 10%, respectively, from December 31, 2012. 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 69% of Separate Accounts assets were invested in equity-based mutual funds at March 31, 2013. Since asset-based fees collected on in force variable contracts represent a significant source of revenue, the Company's financial condition will be impacted by fluctuations in investment performance of equity-based Separate Accounts assets. During the three months ended March 31, 2013, average variable account balances decreased $24.0 million(or 4.3%) to $536.5 millionas compared to the same period in 2012. Fluctuations in the U.S. equity market also directly impact the Company's exposure to guaranteed benefit provisions contained in the variable contracts it manufactures. Minimal or negative investment performance generally results in greater exposure to guarantee provisions. Prolonged periods of minimal or negative investment performance will result in greater guaranteed benefit costs as compared to assumptions. If the Company determines that it needs to increase its estimated long term cost of guaranteed benefits, it will result in establishing greater guaranteed benefit liabilities as compared to current practice.
Medium Term Interest Rates, Corporate Credit and Credit Spreads
Changes in interest rates affect the value of investments, primarily fixed maturity securities and preferred equity securities, as well as interest-sensitive liabilities. Changes in interest rates have an inverse relationship to the value of investments and interest-sensitive liabilities. Also, since the Company has certain fixed products that contain guaranteed minimum crediting rates, decreases in interest rates can decrease the amount of interest spread earned. Changes in the corporate credit environment directly impact the value of the Company's investments, primarily fixed maturity securities. The Company primarily invests in investment-grade corporate debt to support its fixed rate product liabilities. Credit spreads represent the credit risk premiums required by market participants for a given credit quality, i.e. the additional yield that a debt instrument issued by a AA-rated entity must produce over a risk-free alternative (e.g., U.S. Treasury instruments). Changes in credit spreads have an inverse relationship to the value of interest sensitive investments. 26
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, 2013 2012 Average medium term interest rate yield (a) 0.39% 0.52% Increase (decrease) in medium term interest rates (in basis points) (2 ) 12 Credit spreads (in basis points) (b) 115 199 Contracting of credit spreads (in basis points)
(9 ) (86 )
Increase (decrease) on market valuations (in millions) Available-for-sale ("AFS") investment securities
$ (1.3 ) $ 1.3Interest-sensitive policyholder liabilities
(0.2 ) (0.1 )
Net change on market valuations
$ (1.5 ) $ 1.2
(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 2012 Annual Report on Form 10-K.
The Company's investments consist principally of fixed maturity and equity securities that are classified as available-for-sale ("AFS") which are reported at estimated fair value. In addition, the Company held 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. During 2012, the last of these securities converted so the Company no longer holds any of these securities as of
December 31, 2012. 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. If broker quotes are not available, then securities are priced using internal cash flow modeling techniques. These valuation methodologies commonly use reported trades, bids, offers, issuer spreads, benchmark yields, estimated prepayment speeds, and/or estimated cash flows. To understand the valuation methodologies used by third-party pricing services, the Company reviews and monitors their applicable methodology documents. Any changes to their methodologies are noted and reviewed for reasonableness. In addition, the Company performs in-depth reviews of prices received from third-party pricing services on a sample basis. The objective for such reviews is to demonstrate that the Company can corroborate detailed information such as assumptions, inputs and methodologies used in pricing individual securities against documented pricing methodologies. Only third-party pricing services and brokers with a substantial presence in the market and with appropriate experience and expertise are used. Each month, the Company performs an analysis of the information obtained from third-party services and brokers to ensure that the information is reasonable and produces a reasonable estimate of fair value. The Company considers both qualitative and quantitative factors as part of this analysis, including but not limited to, recent transactional activity for similar fixed maturities, review of pricing statistics and trends, and consideration of recent relevant market events. Other controls and procedures over pricing received from indices, third-party pricing services, or brokers include validation checks such as exception reports which highlight significant price changes, stale prices or un-priced securities. In addition, the Company performs back testing on a 27 -------------------------------------------------------------------------------- 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, 2013and December 31, 2012, approximately $2.2 million(or 2%) and $2.0 million(or 2%), 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
Derivative Instruments Derivatives are financial instruments in which the value changes in response to an underlying variable, that require little or no net initial investment and are settled at a future date. The Company has entered into exchange traded derivatives, such as futures contracts, to hedge the costs of the volatility of the S&P. All derivatives recognized on the Balance Sheets are carried at fair value. All changes in fair value are recognized in the Statements of Income. The fair value for exchange traded derivatives, such as 28 -------------------------------------------------------------------------------- futures, are calculated net of the interest accrued to date and is based on quoted market prices. Net settlements on the futures occur daily. At
March 31, 2013, the Company had 90 outstanding short futures contracts with a notional amount of $32.6 million. At December 31, 2012, the Company had 10 outstanding short futures contracts with a notional amount of $3.6 million. Realized losses on settlement of these futures were $0.4 millionand $0.8 millionfor the three months ended March 31, 2013and 2012, respectively. These losses have been recorded in net derivative losses in the Statements of Income. In addition, in order to trade futures, the Company is required to post collateral to an exchange (sometimes referred to as margin). The fair value of collateral posted in relation to the futures margin was $0.3 millionand $0.3 millionas of March 31, 2013and December 31, 2012, respectively.
Value of Business Acquired ("VOBA"), Deferred Policy Acquisition Costs ("DAC"), and Deferred Sales Inducements ("DSI")
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, 2013and December 31, 2012, the Company's VOBA asset was $24.8 millionand $25.2 million, respectively. For the three months ended March 31, 2013and 2012, the favorable (unfavorable) impact to pre-tax net income related to VOBA unlocking was less than $0.1 millionand less than ($0.1) million, respectively. See Note 4 to the Financial Statements for a further discussion.
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, 2013and December 31, 2012, variable annuities accounted for the Company's entire DAC asset of $0.4 millionand $0.3 million, respectively. DAC for variable annuities is amortized with interest over the anticipated lives of the insurance contracts in relation to the present values of estimated future gross profits from asset-based fees, guaranteed benefit rider fees, contract fees, and surrender charges, less a provision for guaranteed death and living benefit expenses, policy maintenance expenses, and non-capitalized commissions. Future gross profit estimates are subject to periodic evaluation with necessary revisions applied against amortization to date. The impact of revisions and assumptions to estimates on cumulative amortization is recorded as a charge or benefit to current operations, commonly referred to as "unlocking". Changes in assumptions can have a significant impact on the amount of DAC reported and the related amortization patterns. In general, increases in the estimated Separate Accounts return and decreases in surrender or mortality assumptions increase the expected future profitability of the underlying business and may lower the rate of DAC amortization. Conversely, decreases in the estimated Separate Accounts returns and increases in surrender or mortality assumptions reduce the expected future profitability of the underlying business and may increase the rate of DAC amortization. At March 31, 2013and 2012, there was relatively no impact to pre-tax income related to DAC unlocking. See Note 4 to the Financial Statements for a further discussion. DSI The Company offers a sales inducement whereby the contract owner receives a bonus which increases the initial account balance by an amount equal to a specified percentage of the contract owner's deposit. This amount may be subject to recapture under certain circumstances. Consistent with DAC, sales inducements for variable annuity contracts are deferred and amortized based on the estimated future gross profits for each group of contracts. These future gross profit estimates are subject to periodic evaluation by the Company, with necessary revisions applied against amortization to date. The impact of these revisions on cumulative amortization is recorded as a charge or credit to current operations, commonly referred to as "unlocking". It is reasonably possible that estimates of future gross profits could be reduced in the future, resulting in a material reduction in the carrying amount of the deferred sales inducement asset. The expense and the subsequent capitalization and amortization are recorded as a component of policy benefits in the Statements of Income. At March 31, 2013and December 31, 2012, variable annuities accounted for the Company's entire DSI asset of $0.1 millionand $0.1 million, respectively. See Note 4 to the Financial Statements for a further discussion. 29
The long-term growth rate assumption for the amortization of VOBA, DAC and DSI was 9% at both
Policyholder Account Balances
The Company's liability for policyholder account balances represents the contract value that has accrued to the benefit of policyholders as of the Balance Sheet date. The liability is generally equal to the accumulated account deposits plus interest credited less policyholders' withdrawals and other charges assessed against the account balance. Policyholder account balances at
March 31, 2013and December 31, 2012were $100.6 millionand $104.1 million, 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, 2013and December 31, 2012, future policy benefits were $17.0 millionand $16.5 million, respectively.
Included within future policy benefits are liabilities for GMDB and GMIB provisions contained in the variable products that the Company issued. At
March 31, December 31, (dollars in millions) 2013 2012 GMDB liability
$ 1.2$ 1.5 GMIB liability 3.2 3.7 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, 2013and 2012, the favorable impact to pre-tax income related to GMDB and GMIB unlocking was $1.4 millionand $2.7 million, respectively. Future policy benefits also include liabilities, which can be either positive or negative, for contracts containing GMWB provisions and for the reinsurance of GMIB provisions ("GMIB reinsurance") for variable annuities based on the fair value of the underlying benefit. GMWB and GMIB reinsurance are treated as embedded derivatives and are required to be reported separately from the host variable annuity contract. The fair value of these guarantees are calculated as the present value of future expected payments to policyholders less the present value of assessed rider fees attributable to the guarantees. Given the complexity and long-term nature of these guarantees which are unlike instruments available in financial markets, their fair values are determined using stochastic techniques under a variety of market return scenarios. A variety of factors are considered, including expected market rates of return, equity and interest rate volatility, credit spread, correlations of market returns, discount rates and actuarial assumptions.
March 31, December 31, (dollars in millions) 2013 2012 GMWB liability
$ 0.7$ 1.1 GMIB reinsurance asset (7.9 ) (8.9 ) 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 income taxes based on amounts it believes it will ultimately owe. Inherent in the provision for income taxes are estimates regarding the realization of certain tax deductions and credits. Specific estimates include the realization of dividend-received deductions ("DRD") and foreign tax credits ("FTC"). A portion of the Company's investment income related to Separate Accounts business qualifies for the DRD and FTC. Information necessary to calculate these tax adjustments is typically not available until the following year. However, within the current year's provision, management makes estimates regarding the future tax deductibility of these items. These estimates are primarily based on recent historic experience. See Note 6 to the Financial Statements for a further discussion.
The Company files a return in the U.S. federal tax jurisdiction and various state tax jurisdictions.
Recent Accounting Guidance
The following outlines the adoption of recent accounting guidance in 2013. See Note 1 to the Financial Statements for a further discussion.
• Accounting Standards Codification ("ASC") 210, Balance Sheet - Accounting
Standards Update ("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
January 1, 2013.
• ASC 220, Comprehensive Income - ASU 2013-02, Reporting of Amounts
Reclassified Out of Accumulated Other Comprehensive Income, requires an
entity to provide information about significant items reclassified out of
accumulated other comprehensive income ("AOCI") by component - adopted
The following outlines the adoption of recent accounting guidance in 2012. See Note 1 to the Financial Statements for a further discussion.
• ASC 944,
Associated with Acquiring or Renewing Insurance Contracts - modifies the
definition of the types of costs incurred by insurance entities that can
be capitalized in the acquisition of new and renewal contracts - adopted
January 1, 2012.
• ASC 820, Fair Value Measurements and Disclosures - ASU 2011-04, Amendments
to Achieve Common Fair Value Measurement and Disclosure Requirements in
U.S. GAAP and IFRS - amends current guidance to achieve common fair value
measurement and disclosure requirements in U.S. GAAP and International
Financial Reporting Standards ("IFRS") - adopted
January 1, 2012. • ASC 220, Comprehensive Income • ASU 2011-05, Presentation of Comprehensive Income - requires an entity to report components of comprehensive income in either a single continuous statement of comprehensive income or two separate but consecutive statements - adopted January 1, 2012. • ASU 2011-12, Deferral of the Effective Date for
Amendments to the
Presentation of Reclassifications of Items Out of
Comprehensive Income in Accounting Standards Update No.
defers the amendments in ASU 2011-05 that relate to
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. Investments The Company maintains a general account investment portfolio comprised primarily of investment grade fixed maturity securities, policy loans, and cash and cash equivalents. 31
The amortized cost/cost and estimated fair value of investments in fixed maturity and equity AFS securities at
March 31, 2013and December 31, 2012were: March 31, 2013 % of Gross Unrealized Estimated Estimated Amortized Losses/ Fair Fair (dollars in millions) Cost/Cost Gains OTTI (1) Value Value Fixed maturity AFS securities Corporate securities Financial services $ 25.4 $ 2.5$ - $ 27.918% Industrial 72.8 8.1 - 80.9 51 Utility 3.4 0.5 - 3.9 2 Asset-backed securities Housing related 4.1 - - 4.1 3 Other 0.7 - - 0.7 - Commercial mortgage-backed securities - non agency backed 20.8 2.4 - 23.2 15 Residential mortgage-backed securities Agency backed 4.4 0.4 - 4.8 3 Non agency backed 0.7 - - 0.7 - Government and government agencies United States 5.8 0.4 - 6.2 4 Foreign 3.6 0.7 - 4.3 3 Total fixed maturity AFS securities 141.7 15.0 - 156.7 99 Equity securities - banking securities 1.4 0.2 - 1.6 1 Total equity securities 1.4 0.2 - 1.6 1 Total fixed maturity and equity securities $ 143.1 $ 15.2$ - $ 158.3100% December 31, 2012 % of Gross Unrealized Estimated Estimated Amortized Losses/ Fair Fair (dollars in millions) Cost/Cost Gains OTTI (1) Value Value Fixed maturity AFS securities Corporate securities Financial services $ 26.0 $ 2.4$ - $ 28.419% Industrial 66.7 8.9 - 75.6 51 Utility 3.4 0.5 - 3.9 3 Asset-backed securities Housing related 4.2 - - 4.2 3 Commercial mortgage-backed securities - non agency backed 19.1 2.8 - 21.9 15 Residential mortgage-backed securities Agency backed 4.4 0.4 - 4.8 3 Non agency backed 0.7 - - 0.7 - Government and government agencies United States 3.0 0.4 - 3.4 2 Foreign 3.2 0.8 - 4.0 3 Total fixed maturity AFS securities 130.7 16.2 - 146.9 99 Equity securities - banking securities 1.3 0.2 - 1.5 1 Total equity securities 1.3 0.2 - 1.5 1
Total fixed maturity and equity securities
(1) Subsequent unrealized gains (losses) on OTTI securities are included in
-------------------------------------------------------------------------------- The Company regularly monitors industry sectors and individual debt securities for evidence of impairment. This evidence may include one or more of the following: 1) deteriorating market to book ratio, 2) increasing industry risk factors, 3) deteriorating financial condition of the issuer, 4) covenant violations, 5) high probability of bankruptcy of the issuer, 6) nationally recognized credit rating agency downgrades, and/or 7) intent and ability to hold to recovery. Additionally, for structured securities (asset-backed securities ("ABS"), residential mortgage-backed securities ("RMBS"), commercial mortgage-backed securities ("CMBS")), cash flow trends and underlying levels of collateral are monitored. A security is impaired if there is objective evidence that a loss event has occurred after the initial recognition of the asset that has a negative impact on the estimated future cash flows. A specific security is considered to be impaired when it is determined that it is probable that not all amounts due (both principal and interest) will be collected as scheduled. For debt securities, an OTTI must be recognized in earnings when an entity either a) has the intent to sell the debt security or b) more likely than not will be required to sell the debt security before its anticipated recovery. If the Company meets either of these criteria, the OTTI is recognized in earnings in an amount equal to the entire difference between the security's amortized cost basis and its fair value at the balance sheet date. For debt securities in unrealized loss positions that do not meet these criteria, the Company must analyze its ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. The Company has evaluated the near-term prospects of the issuers in relation to the severity and duration of the unrealized loss, and unless otherwise noted, does not consider these investments to be impaired at
March 31, 2013. Seven issuers represent more than 5% of the total unrealized loss position, comprised of two corporate non-convertible bonds, one subprime asset-backed securities ("ABS") housing holding, and four emerging markets holdings. The Company owns two investment grade corporate non-convertible securities with unrealized losses totaling less than $0.1 million. The Company's ABS unrealized loss is less than $0.1 millionand relates to an investment grade 2004 fixed rate first lien subprime mortgage. The company owns four investment grade emerging markets holdings with unrealized losses totaling less than $0.1 million. At March 31, 2013and December 31, 2012, approximately $4.8 million(or 16%) and $4.8 million(or 18%), 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 2013 and 2012, 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.
There were no sectors with unrealized losses greater than
The amortized cost and estimated fair value of fixed maturity AFS securities at
March 31, 2013 December 31, 2012 Amortized Estimated Amortized Estimated (dollars in millions) Cost Fair Value Cost Fair Value AAA
$ 22.5 $ 24.9 $ 21.0 $ 23.6AA 22.2 24.7 19.4 22.0 A 59.3 66.6 58.4 66.5 BBB 27.9 30.2 26.0 28.4 Below investment grade 9.8 10.3 5.9 6.4 Total fixed maturity AFS securities $ 141.7 $ 156.7 $ 130.7 $ 146.9Investment grade 93% 93% 95% 96% Below investment grade 7% 7% 5% 4% The Company defines investment grade securities as unsecured debt obligations that have a rating equivalent to S&P's BBB- or higher (or similar rating agency). At March 31, 2013and December 31, 2012approximately $3.5 million(or 2%) and $2.4 million33
-------------------------------------------------------------------------------- (or 2%), respectively, of fixed maturity securities were rated BBB-, which is the lowest investment grade rating given by S&P. Below investment grade securities are speculative and are subject to significantly greater risks related to the creditworthiness of the issuers and the liquidity of the market for such securities. The Company closely monitors such investments. The Company did not hold any trading securities during the three months ended
March 31, 2013. For the three months ended March 31, 2012, there was investment income of less than $0.1 millionon fixed maturity trading securities and less than $0.1 millionrecognized from the change in the fair value on fixed maturity trading securities recorded in net investment income in the Statements of Income.
Subprime Mortgage Investments
Subprime mortgages are loans to homebuyers who have weak or impaired credit histories. Through 2008, the market for these loans had expanded rapidly. During that time, however, lending practices and credit assessment standards grew steadily weaker. As a result, the market experienced a sharp increase in the number of loan defaults. Investors in subprime mortgage assets include not only mortgage lenders, but also brokers, hedge funds, and insurance companies. The Company does not currently invest in or originate whole loan residential mortgages. The Company categorizes ABS issued by a securitization trust as having subprime mortgage exposure when the average credit score of the underlying mortgage borrowers in a securitization trust is below 660 at issuance. The Company also categorizes ABS issued by a securitization trust with second lien mortgages as subprime mortgage exposure, even though a significant percentage of second lien mortgage borrowers may not necessarily have credit scores below 660 at issuance.
The following tables provide the ABS subprime mortgage exposure by rating and estimated fair value by vintage at
March 31, 2013 Gross Amortized Estimated Fair Unrealized (dollars in millions) Cost Value Loss and OTTI First lien - fixed AAA
$ 1.7$ 1.7 $ - Below BBB 2.4 2.4 - Total $ 4.1$ 4.1 $ - December 31, 2012 Gross Amortized Estimated Fair Unrealized (dollars in millions) Cost Value Loss and OTTI First lien - fixed AAA $ 1.7$ 1.7 $ - Below BBB 2.5 2.5 - Total $ 4.2$ 4.2 $ - March 31, 2013 Estimated Fair Value by Vintage (dollars in millions) 2004&Prior 2005 Total First lien - fixed AAA $ 1.7$ - $ 1.7 Below BBB 0.9 1.5 2.4 Total $ 2.6$ 1.5 $ 4.1 34
December 31, 2012 Estimated Fair Value by Vintage (dollars in millions) 2004&Prior 2005 Total First lien - fixed AAA $ 1.7 $ - $ 1.7 Below BBB 0.9 1.6 2.5 Total $ 2.6 $ 1.6 $ 4.2 OTTI
For the three months ended
Liquidity and Capital Resources
The Company's liquidity requirements include the payment of sales commissions and other underwriting expenses and the funding of its contractual obligations for the life insurance and annuity contracts it has in force. The Company has developed and utilizes a cash flow projection system and regularly performs asset/liability duration matching in the management of its asset and liability portfolios. The Company anticipates funding its cash requirements utilizing cash from operations, normal investment maturities and anticipated calls and repayments, consistent with prior years. At
March 31, 2013and December 31, 2012, the Company's assets included $186.6 millionand $185.1 million, respectively, of cash, short-term investments and investment grade publicly traded AFS securities that could be liquidated if funds were required.
During the first three months of 2013 and 2012, the Company did not receive a capital contribution from
Ratings are an important factor in establishing the competitive position in the insurance and financial services marketplace. Rating agencies rate insurance companies based on financial strength and the ability to pay claims, factors more relevant to contract holders than investors.
The financial strength rating scales of S&P,
• S&P - AAA to R •
A.M. Best- A++ to S • Fitch - AAA to C
The following table summarizes the Company's ratings at
S&P AA- (4th out of 21) A.M. Best A+ (2nd out of 16) Fitch AA- (4th out of 19) A downgrade of our financial strength rating could affect our competitive position in the insurance industry as customers may select companies with higher financial strength ratings. These ratings are not a recommendation to buy or hold any of the Company's securities and they may be revised or revoked at any time at the sole discretion of the rating organization. 35 --------------------------------------------------------------------------------
Commitments and Contingencies
The following table summarizes the Company's policyholders' obligations at
Less Than One One To Three Four To Five More Than Five (dollars in millions) Year Years Years Years Total
General accounts (a) $ 13.8 $ 25.4 $ 22.0 $
96.1 $ 157.3 Separate Accounts (a) 76.7 131.5 113.1 415.7 737.0 $ 90.5
$ 156.9 $ 135.1$ 511.8 $ 894.3
(a) The policyholder liabilities include benefit and claim liabilities of which a
significant portion represents policies and contracts that do not have a
stated contractual maturity. The projected cash benefit payments in the table
above are based on management's best estimates of the expected gross benefits
and expenses, partially offset by the expected gross premiums, fees and
charges relating to the existing business in force. Estimated cash benefit
payments are based on mortality and lapse assumptions comparable with the
Company's historical experience, modified for recently observed trends.
Actual payment obligations may differ if experience varies from these
assumptions. The cash benefit payments are presented on an undiscounted basis
and are before deduction of tax and before reinsurance. The liability amounts
in the Company's Financial Statements reflect the discounting for interest as
well as adjustments for the timing of other factors as described above. As a
result, the sum of the cash benefit payments shown for all years in the table
above exceeds the corresponding policyholder liability amounts.
The Company has utilized public information to estimate the future assessments it will incur as a result of life insurance company insolvencies. At
March 31, 2013and December 31, 2012, the Company's estimated liability for future guaranty fund assessments was $0.3 millionand $0.3 million, respectively. In addition, the Company has a receivable for future premium tax deductions of less than $0.1 millionand less than $0.1 millionat March 31, 2013and December 31, 2012, respectively. The Company regularly monitors public information regarding insurer insolvencies and adjusts its estimated liability as appropriate. In the normal course of business, the Company is subject to various claims and assessments. Management believes the settlement of these matters would not have a material effect on the financial position, results of operations or cash flows of the Company. Results of Operations For the three months ended March 31, 2013and 2012, the Company recorded net income of $1.8 millionand $2.8 million, respectively. The decrease in income during the three months ended 2013 as compared to 2012 was primarily due to decreased policy charge revenue driven by lower Separate Account balances and a smaller release of reserves in 2013. Policy charge revenue decreased $0.5 millionduring the three months ended March 31, 2013as compared to the same period in 2012. The following table provides the changes in policy charge revenue by type for each respective period: Three Months Ended March 31, (dollars in millions) 2013 2012 Change Asset-based policy charge revenue $ 1.9 $ 2.2 $ (0.3 )(a ) Guaranteed benefit based policy charge revenue 0.2 0.3 (0.1 ) Non-asset based policy charge revenue 0.9 1.0 (0.1 ) Total policy charge revenue $ 3.0 $ 3.5 $ (0.5 )
(a) The decrease in asset-based policy charge revenue for 2013 was principally
due to a decrease in average variable account balances.
During the three months ended
March 31, 2013, the decrease of $0.4 millionin net derivative losses relates to the decrease in net losses on futures contracts during 2013 as compared to 2012. Short futures contracts fluctuate relative to the volatility in the S&P. 36
-------------------------------------------------------------------------------- Policy benefits increased
$1.8 millionduring the three months ended March 31, 2013as compared to the same period in 2012. The following table provides the changes in policy benefits by type: Three Months Ended March 31, (dollars in millions) 2013 2012 Change Annuity benefit unlocking $ (1.4 ) $ (2.7 ) $ 1.3(a ) Annuity benefit expense 1.1 0.9 0.2 Life insurance mortality expense 0.4 0.1 0.3 Total policy benefits $ 0.1 $ (1.7 ) $ 1.8
(a) See the Critical Accounting Policies and Estimates section above for further
discussion of annuity benefit unlocking.
Amortization of VOBA was
$0.6 millionfor the three months ended March 31, 2013, which included favorable unlocking of less than $0.1 million. Amortization of VOBA was $0.5 millionfor the three months ended March 31, 2012, which included unfavorable unlocking of less than $0.1 million. Insurance expenses and taxes remained the same during the three months ended March 31, 2013as compared to the same period in 2012. The following table provides the changes in insurance expenses and taxes for each respective period: Three Months Ended March 31, (dollars in millions) 2013 2012 Change Commissions $ 0.5 $ 0.6 $ (0.1 )General insurance expenses 0.4 0.3 0.1
Total insurance expenses and taxes
Segment Information The products that comprise the
Annuity and Life Insurancesegments generally possess similar economic characteristics. As such, the financial condition and results of operations of each business segment are generally consistent with the Company's consolidated financial condition and results of operations presented herein.