|Edgar Online, Inc.|
The following Management's Discussion and Analysis ("MD&A") is intended to help the reader understand the financial condition as of
In this report, in addition to providing consolidated revenues and net income (loss), we also provide segment operating revenues and income (loss) from operations because we believe they are meaningful measures of revenues and the profitability of our operating segments. Financial information that follows is presented in conformity with accounting principles generally accepted in
Operating revenues and income (loss) from operations are the financial performance measures we use to evaluate and assess the results of our segments. Accordingly, we define and report operating revenues and income (loss) from operations by segment in Note 13. Our management believes that operating revenues and income (loss) from operations explain the results of our ongoing businesses in a manner that allows for a better understanding of the underlying trends in our current businesses because the excluded items are unpredictable and not necessarily indicative of current operating fundamentals or future performance of the business segments, and, in many instances, decisions regarding these items do not necessarily relate to the operations of the individual segments. In addition, we believe that our definitions of operating revenues and income (loss) from operations will provide investors with a more valuable measure of our performance because it better reveals trends in our business.
Certain reclassifications have been made to prior periods' financial information.
FORWARD-LOOKING STATEMENTS - CAUTIONARY LANGUAGE
Certain statements made in this report and in other written or oral statements made by us or on our behalf are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"). A forward-looking statement is a statement that is not a historical fact and, without limitation, includes any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain words like: "believe," "anticipate," "expect," "estimate," "project," "will," "shall" and other words or phrases with similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, trends in our businesses, prospective services or products, future performance or financial results and the outcome of contingencies, such as legal proceedings. We claim the protection afforded by the safe harbor for forward-looking statements provided by the PSLRA.
Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from the results contained in the forward-looking statements. Risks and uncertainties that may cause actual results to vary materially, some of which are described within the forward-looking statements, include, among others:
· Deterioration in general economic and business conditions that may affect
account values, investment results, guaranteed benefit liabilities, premium levels, claims experience and the level of pension benefit costs, funding and investment results;
· Adverse global capital and credit market conditions could affect our ability
to raise capital, if necessary, and may cause us to realize impairments on investments and certain intangible assets, including goodwill and the valuation allowance against deferred tax assets, which may reduce future earnings and/or affect our financial condition and ability to raise additional capital or refinance existing debt as it matures;
· Because of our holding company structure, the inability of our subsidiaries to
pay dividends to the holding company in sufficient amounts could harm the
holding company's ability to meet its obligations;
· Legislative, regulatory or tax changes, both domestic and foreign, that affect
the cost of, or demand for, our subsidiaries' products, the required amount of reserves and/or surplus, or otherwise affect our ability to conduct business, including changes to statutory reserve requirements related to secondary guarantee universal life and annuities; regulations regarding captive reinsurance arrangements; restrictions on revenue sharing and 12b-1 payments; and the potential for U.S. federal tax reform;
· Declines in or sustained low interest rates causing a reduction in investment
income, the interest margins of our businesses, estimated gross profits ("EGPs") and demand for our products; 40
· Uncertainty about the effect of rules and regulations to be promulgated under
the Dodd-Frank Wall Street Reform and Consumer Protection Act on us and the
economy and the financial services sector in particular;
· The initiation of legal or regulatory proceedings against us, and the outcome
of any legal or regulatory proceedings, such as: adverse actions related to present or past business practices common in businesses in which we compete; adverse decisions in significant actions including, but not limited to, actions brought by federal and state authorities and class action cases; new decisions that result in changes in law; and unexpected trial court rulings;
· A decline in the equity markets causing a reduction in the sales of our
subsidiaries' products, a reduction of asset-based fees that our subsidiaries charge on various investment and insurance products, an acceleration of the net amortization of deferred acquisition costs ("DAC"), value of business acquired ("VOBA"), deferred sales inducements ("DSI") and deferred front-end loads ("DFEL") and an increase in liabilities related to guaranteed benefit features of our subsidiaries' variable annuity products;
· Ineffectiveness of our risk management policies and procedures, including
various hedging strategies used to offset the effect of changes in the value of liabilities due to changes in the level and volatility of the equity markets and interest rates;
· A deviation in actual experience regarding future persistency, mortality,
morbidity, interest rates or equity market returns from the assumptions used in pricing our subsidiaries' products, in establishing related insurance reserves and in the net amortization of DAC, VOBA, DSI and DFEL, which may reduce future earnings;
· Changes in GAAP, including convergence with International Financial Reporting
Standards ("IFRS"), that may result in unanticipated changes to our net
· Lowering of one or more of our debt ratings issued by nationally recognized
statistical rating organizations and the adverse effect such action may have
on our ability to raise capital and on our liquidity and financial condition;
· Lowering of one or more of the insurer financial strength ratings of our
insurance subsidiaries and the adverse effect such action may have on the premium writings, policy retention, profitability of our insurance subsidiaries and liquidity;
· Significant credit, accounting, fraud, corporate governance or other issues
that may adversely affect the value of certain investments in our portfolios, as well as counterparties to which we are exposed to credit risk, requiring that we realize losses on investments;
· Inability to protect our intellectual property rights or claims of
infringement of the intellectual property rights of others;
· Interruption in telecommunication, information technology or other operational
systems or failure to safeguard the confidentiality or privacy of sensitive
data on such systems;
· The effect of acquisitions and divestitures, restructurings, product
withdrawals and other unusual items;
· The adequacy and collectability of reinsurance that we have purchased;
· Acts of terrorism, a pandemic, war or other man-made and natural catastrophes
that may adversely affect our businesses and the cost and availability of
· Competitive conditions, including pricing pressures, new product offerings and
the emergence of new competitors, that may affect the level of premiums and
fees that our subsidiaries can charge for their products;
· The unknown effect on our subsidiaries' businesses resulting from changes in
the demographics of their client base, as aging baby-boomers move from the
asset-accumulation stage to the asset-distribution stage of life; and
· Loss of key management, financial planners or wholesalers.
The risks included here are not exhaustive. Our annual report on Form 10-K, current reports on Form 8-K and other documents filed with the
Further, it is not possible to assess the effect of all risk factors on our businesses or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. In addition, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances that occur after the date of this report.
INTRODUCTION Executive Summary
We are a holding company that operates multiple insurance and retirement businesses through subsidiary companies. Through our business segments, we sell a wide range of wealth protection, accumulation and retirement income products and solutions. These products include fixed and indexed annuities, variable annuities, universal life insurance ("UL"), variable universal life insurance ("VUL"), linked-benefit universal life, term life insurance, employer-sponsored retirement plans and services, and group life, disability and dental.
We provide products and services and report results through our Annuities, Retirement Plan Services, Life Insurance and Group Protection segments. We also have Other Operations. These segments and Other Operations are described in "Part I - Item 1. Business" of our 2012 Form 10-K.
For information on how we derive our revenues, see the discussion in results of operations by segment below.
Our current market conditions, significant operational matters, industry trends, issues and outlook are described in "Introduction - Executive Summary" of our 2012 Form 10-K.
For factors that could cause actual results to differ materially from those set forth in this section, see "Forward-Looking Statements - Cautionary Language" above and "Part I - Item 1A. Risk Factors" in our 2012 Form 10-K.
Critical Accounting Policies and Estimates
The MD&A included in our 2012 Form 10-K contains a detailed discussion of our critical accounting policies and estimates. The following information updates the "Critical Accounting Policies and Estimates" provided in our 2012 Form 10-K and, accordingly, should be read in conjunction with the "Critical Accounting Policies and Estimates" discussed in our 2012 Form 10-K.
DAC, VOBA, DSI and DFEL
Reversion to the Mean ("RTM")
As equity markets do not move in a systematic manner, we reset the baseline of account values from which EGPs are projected, which we refer to as our RTM process, as discussed in our 2012 Form 10-K.
Our long-term variable fund growth rate assumption, which is used in the determination of DAC, VOBA, DSI and DFEL amortization for the variable component of our variable annuity and VUL products, is an immediate drop of approximately 14% followed by growth going forward of 8% to 9% depending on the block of business and reflecting differences in contract holder fund allocations between fixed income and equity-type investments. If we were to have unlocked our RTM assumption in the corridor as of
Investments Investment Valuation
The following summarizes our available-for-sale ("AFS") and trading securities and derivative investments carried at fair value by pricing source and fair value hierarchy level (in millions) as of
Quoted Prices in Active Markets for Significant Significant Identical Observable Unobservable Assets Inputs Inputs Total (Level 1) (Level 2) (Level 3) Fair Value Priced by third party pricing services
$ 635 $ 72,113$ - $ 72,748Priced by independent broker quotations - - 3,039 3,039 Priced by matrices - 11,404 - 11,404 Priced by other methods (1) - - 1,172 1,172 Total $ 635 $ 83,517 $ 4,211 $ 88,363Percent of total 1 % 94 % 5 % 100 %
(1) Represents primarily securities for which pricing models were used to
compute fair value.
For more information about the valuation of our financial instruments carried at fair value, see "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Introduction - Critical Accounting Policies and Estimates - Investments - Investment Valuation" in our 2012 Form 10-K and Note 12 herein.
Our accounting policies for derivatives and the potential effect on interest spreads in a falling rate environment are discussed in Note 5 of this report and "Part II - Item 7A. Quantitative and Qualitative Disclosures About Market Risk" in our 2012 Form 10-K.
Guaranteed Living Benefits ("GLB")
Within our individual annuity business, approximately 71% of our variable annuity account values contained GLB features as of
For information on our variable annuity hedge program performance, see our discussion in "Realized Gain (Loss) and Benefit Ratio Unlocking - Variable Annuity Net Derivatives Results" below.
Acquisitions and Dispositions
The loss from discontinued operations for the three months ended
For information about acquisitions and divestitures, see "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Acquisitions and Dispositions" and Note 3 in our 2012 Form 10-K.