TRANSAMERICA ADVISORS LIFE INSURANCE CO OF NEW YORK – 10-K – Management’s Narrative Analysis of Results of Operations
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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
The statements contained in this Report that are not historical facts are forward-looking statements as defined in the US Private Securities Litigation Reform Act of 1995. The following are words that identify such forward-looking statements: aim, believe, estimate, target, intend, may, expect, anticipate, predict, project, counting on, plan, continue, want, forecast, should, would, is confident, will, and similar expressions as they relate to our Company. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Such risks and uncertainties include but are not limited to the following: • Changes in general economic conditions;
• Changes in the performance of financial markets, including emerging markets,
such as with regard to:
¡ The frequency and severity of defaults by issuers in our fixed income investment portfolios; and
¡ The effects of corporate bankruptcies and/or accounting restatements on the financial markets and the resulting decline in the value of equity and debt securities we hold;
• The frequency and severity of insured loss events;
• Changes affecting mortality, morbidity, persistence and other factors that
may impact the profitability of our insurance products;
• Changes affecting interest rate levels and continuing low or rapidly changing
interest rate levels; • Increasing levels of competition;
• Changes in laws and regulations, particularly those affecting our operations,
the products we sell, and the attractiveness of certain products to our customers;
• Regulatory changes relating to the insurance industry in the jurisdictions in
which we operate;
• Lowering of one or more of the financial strength ratings and the adverse
impact such action may have on the premium writings, policy retention,
profitability and liquidity; • Acts of God, acts of terrorism, acts of war and pandemics; • Changes in the policies of central banks and/or governments;
• Litigation or regulatory actions that could require us to pay significant
damages or change the way we do business;
• Customer responsiveness to both new products and distribution channels;
• Competitive, legal, regulatory or tax changes that affect the distribution
cost of or demand for our products;
• The impact of product withdrawals, restructurings and other unusual items;
and
• Our failure to achieve anticipated levels of earnings or operational
efficiencies as well as other cost saving initiatives.
We undertake no obligation to publicly update or revise any forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which merely reflect Company expectations at the time of the writing. Actual results
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may differ materially from expectations conveyed in forward-looking statements due to changes caused by various risks and uncertainties. The reader should, however, consult any further disclosures TALICNY 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 OverviewTransamerica Advisors Life Insurance Company of New York ("TALICNY", "Registrant", the "Company", "we", "our", or "us") is a wholly owned subsidiary ofAEGON 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 inNew York . TALICNY conducts its business primarily in the annuity markets and to a lesser extent in the life insurance markets of the financial services industry. The Company offered the following guaranteed benefits within its variable annuity product suite: guaranteed minimum death benefits ("GMDB"), guaranteed minimum income benefits ("GMIB") and guaranteed minimum withdrawal benefits ("GMWB").
The Company's gross earnings are principally derived from two sources:
• the charges imposed on variable annuity and variable life insurance contracts, and
• the net earnings from investment of fixed rate life insurance and annuity
contract owner deposits less interest credited to contract owners, commonly
known as interest spread.
The costs associated with acquiring contract owner deposits (deferred policy acquisition costs) are amortized over the period in which the Company anticipates holding those funds, as noted in the Critical Accounting Policies and Estimates section below. Insurance expenses and taxes reported in the Statements of Income are net of amounts deferred. In addition, the Company incurs expenses associated with the maintenance of in force contracts.
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. See Note 1 to the Financial Statements for additional information regarding accounting policies.Valuation of
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. 9
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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 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. AtDecember 31, 2012 and 2011, approximately$2.0 million (or 2%) and$1.8 million (or 1%), respectively, of the Company's fixed maturity and equity securities portfolio consisted of private placement securities. Changes in the fair value of fixed maturity and equity securities deemed AFS are reported as a component of accumulated other comprehensive income (loss), net of taxes on the Balance Sheets and are not reflected in the Statements of Income until a sale transaction occurs or when credit-related declines in estimated fair value are deemed other-than-temporary. Changes in fair value of fixed maturity securities deemed trading are reported as a component of net investment income.
Other-Than-Temporary Impairment ("OTTI") Losses on Investments
The Company regularly reviews each investment in its fixed maturity and equity AFS securities portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. Management makes this determination through a series of discussions with the Company's portfolio managers and credit analysts, and information obtained from external sources (i.e; company announcements, ratings agency announcements, or news wire services). For fixed maturity AFS securities, the Company also considers whether it is more likely than not that it will not be required to sell the debt security before its anticipated recovery. The factors that may give rise to a potential OTTI include, but are not limited to, i) certain credit-related events such as default of principal or interest payments by the issuer, ii) bankruptcy of issuer, iii) certain security restructurings, and iv) fair market value less than cost or amortized cost for an extended period of time. In the absence of a readily ascertainable market value, the estimated fair value on these securities represents management's best estimate and is based on comparable securities and other assumptions as appropriate. Management bases this determination on the most recent information available. For equity securities, once management determines a decline in the value of an AFS security is other-than-temporary, the cost basis of the equity security is reduced to its fair value, with a corresponding charge to earnings. For fixed maturity AFS securities, an OTTI must be recognized in earnings when an entity either a) has the intent to sell the debt security or b) more likely than not will be required to sell the debt security before its anticipated recovery. If the Company meets either of these criteria, the OTTI is recognized in earnings in an amount equal to the entire difference between the security's amortized cost basis and its fair value at the balance sheet date. For fixed maturity AFS securities in unrealized loss positions that do not meet these criteria, the Company must analyze its ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. The net present value is calculated by discounting the Company's best estimate of projected future cash flows. If the net present value is less than the amortized cost of the investment, an OTTI is recorded. The OTTI is separated into two pieces: an amount representing the credit loss, where the present value of cash flows expected to be collected is less than the amortized cost basis of the security, and an amount related to all other factors (referred to as the non credit portion). The credit loss is recognized in earnings and the non credit loss is recognized in other comprehensive income ("OCI"), net of applicable taxes and value of business acquired. Management records subsequent changes in the estimated fair value (positive and negative) of fixed maturity AFS securities for which non credit OTTI was previously recognized in OCI in OCI-OTTI. For the years ended December 31, 2012 , 2011 and 2010, the Company recorded an OTTI in income, with no value of business acquired amortization, of less than $0.1 million , less than $0.1 million , and less than $0.1 million , respectively. 10
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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. All derivatives recognized on the Balance Sheets are carried at fair value. All changes in fair value are recognized in the Statements of Income. The fair value for exchange traded derivatives, such as futures, are calculated net of the interest accrued to date and is based on quoted market prices. Net settlements on the futures occur daily. AtDecember 31, 2012 , the Company had 10 outstanding short futures contracts with a notional amount of$3.6 million . AtDecember 31, 2011 , the Company had 20 outstanding short futures contracts with a notional amount of$6.3 million . 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 million and$0.7 million as ofDecember 31, 2012 and 2011, respectively.
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. AtDecember 31, 2012 and 2011, the Company's VOBA asset was$25.2 million and$27.6 million , respectively. For the years endedDecember 31, 2012 , 2011 and 2010, the favorable (unfavorable) impact to pre-tax net income related to VOBA unlocking was$0.2 million ,($0.7) million and$0.6 million , respectively. There were no impairment charges in 2012, 2011 and 2010. 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. AtDecember 31, 2012 and 2011, variable annuities accounted for the Company's entire DAC asset of$0.3 million and$0.5 million , respectively. DAC for variable annuities is amortized with interest over the anticipated lives of the insurance contracts in relation to the present values of estimated future gross profits from asset-based fees, guaranteed benefit rider fees, contract fees, and surrender charges, less a provision for guaranteed death and living benefit expenses, policy maintenance expenses, and non-capitalized commissions. Future gross profit estimates are subject to periodic evaluation with necessary revisions applied against amortization to date. The impact of revisions and assumptions to estimates on cumulative amortization is recorded as a charge or benefit to current operations, commonly referred to as "unlocking". Changes in assumptions can have a significant impact on the amount of DAC reported and the related amortization patterns. In general, increases in the estimated Separate Accounts return and decreases in surrender or mortality assumptions increase the expected future profitability of the underlying business and may lower the rate of DAC amortization. Conversely, decreases in the estimated Separate Accounts returns and increases in surrender or mortality assumptions reduce the expected future profitability of the underlying business and may increase the rate of DAC amortization. For the years endedDecember 31, 2012 and 2011, the favorable (unfavorable) impact to pre-tax net income related to DAC unlocking was$0.1 million and less than($0.1) million , respectively. For the year endedDecember 31, 2010 , 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. 11
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The expense and the subsequent capitalization and amortization are recorded as a component of policy benefits in the Statements of Income. AtDecember 31, 2012 and 2011, variable annuities accounted for the Company's entire DSI asset of$0.1 million and$0.2 million , respectively. See Note 4 to the Financial Statements for a further discussion.
The long-term and short-term growth rate assumption for the amortization of VOBA, DAC and DSI was 9% at
Goodwill
Goodwill is the excess of the purchase price over the estimated fair value of net assets acquired. Goodwill and intangible assets with indefinite lives are not amortized, but are subject to impairment tests conducted at least annually. Impairment testing is to be performed using the fair value approach, which requires the use of estimates and judgment, at the "reporting unit" level. A reporting unit represents the operating segment which is the level at which the financial information is prepared and regularly reviewed by management. The entire asset amount has been allocated to annuities. Goodwill is reviewed for indications of value impairment, with consideration given to financial performance and other relevant factors. In addition, certain events including a significant adverse change in legal factors or the business climate, an adverse action or assessment by a regulator, or unanticipated competition would cause the Company to review the carrying amounts of goodwill for impairment. When considered impaired, the carrying amounts are written down to fair value based primarily on discounted cash flows. The Company performed the annual test of goodwill atDecember 31, 2012 , 2011 and 2010 and determined there was no impairment of goodwill.
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 atDecember 31, 2012 and 2011 were$104.1 million and$105.2 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. AtDecember 31, 2012 and 2011, future policy benefits were$16.5 million and$19.1 million , respectively.
Included within future policy benefits are liabilities for GMDB and GMIB provisions contained in the variable products that the Company issued. At
December 31, (dollars in millions) 2012 2011 GMDB liability $ 1.5 $ 0.9 GMIB liability 3.7 4.8 The Company regularly evaluates the assumptions used to establish these liabilities, as well as actual experience and adjusts GMDB and GMIB liabilities with a related charge or credit to earnings ("unlocking"), if actual experience or evidence suggests that the assumptions should be revised. For the years ended December 31, 2012 , 2011 and 2010, the favorable (unfavorable) impact to pre-tax income related to GMDB and GMIB unlocking was $2.8 million , ($2.4) million and $2.3 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. 12
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At
December 31, (dollars in millions) 2012 2011 GMWB liability $ 1.1 $ 2.8 GMIB reinsurance asset (8.9) (9.1) Federal Income Taxes The Company uses the asset and liability method in providing income taxes on all transactions that have been recognized in the financial statements. The asset and liability method requires that deferred taxes be adjusted to reflect the tax rates at which future taxable amounts will be settled or realized. The Company provides for federal income taxes based on amounts it believes it will ultimately owe. Inherent in the provision for federal income taxes are estimates regarding the realization of certain tax deductions and credits. Specific estimates include the realization of dividend-received deductions ("DRD") and foreign tax credits ("FTC"). A portion of the Company's investment income related to Separate Accounts business qualifies for the DRD and FTC. Information necessary to calculate these tax adjustments is typically not available until the following year. However, within the current year's provision, management makes estimates regarding the future tax deductibility of these items. These estimates are primarily based on recent historic experience. See Note 6 to the Financial Statements for a further discussion. At December 31, 2012 and 2011, the Company did not have a tax valuation allowance for deferred tax assets. A tax valuation allowance was not deemed necessary as management determined that it is more likely than not that the deferred tax assets will be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on generation of future taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, projected taxable income, and tax-planning strategies in making the assessment.
The Company 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
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 - adoptedJanuary 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
- adoptedJanuary 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
• 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 - adoptedJanuary 1, 2012 . 13
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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 - adoptedJanuary 1, 2011 .
• ASC 944,
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
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 adoptedJanuary 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 - will be
adoptedJanuary 1, 2013 . Deposits Total direct deposits (including internal exchanges) were$0.3 million ,$0.9 million and$1.0 million for the years endedDecember 31, 2012 , 2011 and 2010, respectively. The decrease in deposits was primarily due to the Company ceasing to issue new variable annuity and market value adjusted annuity products in 2009. Internal exchanges during 2012, 2011 and 2010 were$0.1 million $0.2 million and$0.4 million , respectively. Financial Condition AtDecember 31, 2012 , the Company's assets were$784.8 million or$7.6 million lower than the$792.4 million in assets atDecember 31, 2011 . Assets excluding Separate Accounts assets decreased$7.7 million . Separate Accounts assets, which represent 67% of total assets, decreased$15.3 million (or 2.8%) to$526.4 million . Changes in Separate Accounts assets were as follows: December 31, 2012 2011 Investment performance $ 59.6 $ (5.1 ) Deposits 0.3 0.9 Policy fees and charges (11.3 ) (12.3 ) Surrenders, benefits and withdrawals (63.9 ) (77.8 ) Net change $ (15.3 ) $ (94.3 ) There were no fixed contract owner deposits in 2012, 2011 and 2010. During 2012, 2011 and 2010, fixed contract owner withdrawals were$4.7 million ,$6.7 million , and$8.1 million , respectively. 14
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Table of Contents Investments The Company maintains a general account investment portfolio comprised primarily of investment grade fixed maturity securities, policy loans, and cash and cash equivalents. The following schedule identifies the Company's general account invested assets by type atDecember 31 : 2012 2011 Fixed maturity AFS securities Investment grade 63 % 68 % Below investment grade 3 2
Total fixed maturity AFS securities 66 70
Policy loans 24 25 Cash and cash equivalents 10 5 100 % 100 %
The amortized cost/cost and estimated fair value of investments in fixed maturity and equity AFS securities at
December 31, 2012 Gross Unrealized % of Amortized Losses/ Estimated Estimated (dollars in millions) Cost/Cost Gains OTTI (1) Fair Value Fair Value Fixed maturity AFS securities Corporate securities Financial services $ 26.0 $ 2.4 $ - $ 28.4 19 % 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 $ 132.0 $ 16.4 $ - $ 148.4 100 % 15
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Table of Contents December 31, 2011 Gross Unrealized % of Amortized Losses/ Estimated Estimated (dollars in millions) Cost/Cost Gains OTTI (1) Fair Value Fair Value Fixed maturity AFS securities Corporate securities Financial services $ 21.2 $ 1.1 $ (0.5) $ 21.8 15 % Industrial 73.0 7.7 (0.1) 80.6 54 Utility 5.7 0.4 (0.1) 6.0 4 Asset-backed securities Housing related 1.6 - - 1.6 1 Credit cards 0.3 - - 0.3 - Autos 1.5 - - 1.5 1 Commercial mortgage-backed securities - non agency backed 23.0 2.5 - 25.5 17 Residential mortgage-backed securities Agency backed 4.4 0.1 - 4.5 3 Non agency backed 0.8 0.1 (0.2) 0.7 - Government and government agencies United States 3.0 0.4 - 3.4 2 Foreign 3.2 0.7 (0.1) 3.8 2 Total fixed maturity AFS securities 137.7 13.0 (1.0) 149.7 99 Equity securities - banking securities 1.2 - (0.1) 1.1 1 Total equity securities 1.2 - (0.1) 1.1 1
Total fixed maturity and equity securities $ 138.9
100 %
(1) Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI.
The Company 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 December 31, 2012 .
As of
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The amortized cost and estimated fair value of fixed maturity AFS securities at
December 31, 2012 December 31, 2011 Estimated Estimated Amortized Fair Amortized Fair (dollars in millions) Cost Value Cost Value AAA $ 23.9 $ 27.0 $ 29.1 $ 32.0 AA 16.5 18.6 18.1 19.1 A 58.4 66.5 60.2 66.9 BBB 26.0 28.4 26.5 27.7 Below investment grade 5.9 6.4 3.8 4.0 Total fixed maturity AFS securities $ 130.7 $ 146.9 $ 137.7 $ 149.7 Investment grade 95% 96% 97% 97% Below investment grade 5% 4% 3% 3% The Company defines investment grade securities as unsecured debt obligations that have a rating equivalent to S&P's BBB- or higher (or similar rating agency). AtDecember 31, 2012 and 2011, approximately$2.4 million (or 2%) and$4.1 million (or 3%), respectively, of fixed maturity securities were rated BBB-, which is the lowest investment grade rating given by S&P. Below investment grade securities are speculative and are subject to significantly greater risks related to the creditworthiness of the issuers and the liquidity of the market for such securities. The Company closely monitors such investments. Unrealized gains (losses) incurred during the years ended 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 investment grade AFS securities were as follows:
December 31, 2012 Gross Estimated Unrealized Fair Amortized Losses and (dollars in millions) Value Cost/Cost OTTI (1) Investment grade AFS securities Less than or equal to six months Corporate securities - industrial $ 0.6 $ 0.6 $ - Asset-backed securities - housing related 1.0 1.0 - Total fixed maturity and equity securities 1.6 1.6 - Greater than six months but less than or equal to one year Corporate securities - financial services 0.2 0.2 - Total fixed maturity and equity securities $ 0.2 $ 0.2 $ - 17
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Table of Contents December 31, 2012 Gross Estimated Unrealized Fair Amortized Losses and (dollars in millions) Value Cost/Cost OTTI (1) Investment grade AFS securities (continued) Greater than one year Corporate securities - financial services $ 0.8 $ 0.8 $ - Asset-backed securities - housing related 0.7 0.7 - Total fixed maturity and equity securities 1.5 1.5 - Total of all investment grade AFS securities Corporate securities Financial services 1.0 1.0 - Industrial 0.6 0.6 - Asset-backed securities - housing related 1.7 1.7 - Total fixed maturity and equity securities $ 3.3 $ 3.3 $ -
Total number of securities in a continuous unrealized loss position
10 December 31, 2011 Gross Estimated Unrealized Fair Amortized Losses and (dollars in millions) Value Cost/Cost OTTI (1) Investment grade AFS securities Less than or equal to six months Corporate securities Financial services $ 2.7 $ 3.0 $ (0.3 ) Industrial 0.9 1.0 (0.1 ) Equity securities - banking securities 1.0 1.1 (0.1 ) Total fixed maturity and equity securities 4.6 5.1 (0.5 ) Greater than one year Corporate securities Financial services 2.1 2.3 (0.2 ) Utility 1.8 1.9 (0.1 ) Asset-backed securities - housing related 1.6 1.6 - Total fixed maturity and equity securities 5.5 5.8 (0.3 ) Total of all investment grade AFS securities Corporate securities Financial services 4.8 5.3 (0.5 ) Industrial 0.9 1.0 (0.1 ) Utility 1.8 1.9 (0.1 ) Asset-backed securities - housing related 1.6 1.6 - Equity securities - banking securities 1.0 1.1 (0.1 ) Total fixed maturity and equity securities $ 10.1 $ 10.9 $ (0.8 )
Total number of securities in a continuous unrealized loss position
15
(1) Subsequent unrealized gains/losses on OTTI securities are included in OCI-OTTI.
18
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Details underlying securities in a continuous gross unrealized loss and OTTI position for below investment grade AFS securities were as follows:
December 31, 2012 Gross Estimated Unrealized Fair Amortized Losses and (dollars in millions) Value Cost/Cost OTTI (1) Below investment grade AFS securities Less than or equal to six months Asset-back securities - housing related $ 0.9 $ 0.9 $ - Total fixed maturity and equity securities 0.9 0.9 - Greater than one year Residential mortgage-backed securities - non agency backed 0.4 0.4 - Equity securities - other financial services 0.1 0.1 - Total fixed maturity and equity securities 0.5 0.5 - Total of all below investment grade AFS securities Asset-back securities - housing related 0.9 0.9 - Residential mortgage-backed securities - non agency backed 0.4 0.4 - Equity securities - other financial services 0.1 0.1 - Total fixed maturity and equity securities $ 1.4 $ 1.4 $ -
Total number of securities in a continuous unrealized loss position
3 December 31, 2011 Gross Estimated Unrealized Fair Amortized Losses and (dollars in millions) Value Cost/Cost OTTI (1) Below investment grade AFS securities Greater than one year Residential mortgage-backed securities - non agency backed $ 0.7 $ 0.9 $ (0.2 ) Government and government agencies - foreign 0.4 0.5 (0.1 ) Equity securities - banking securities 0.1 0.1 - Total fixed maturity and equity securities $ 1.2 $ 1.5 $ (0.3 )
Total number of securities in a continuous unrealized loss position 3
(1) Subsequent unrealized gains (losses) on OTTI securities are included in OCI-OTTI.
There were no significant unrealized losses atDecember 31, 2012 . Gross unrealized losses and OTTI on below investment grade AFS securities represented 25% of total gross unrealized losses and OTTI on all AFS securities atDecember 31, 2011 . Generally, below investment grade securities are more likely than investment grade securities to develop credit concerns. The ratios of estimated fair value to amortized cost reflected in the table below were not necessarily indicative of the market value to amortized cost relationships for the securities throughout the entire time that the securities have been in an unrealized loss position nor are they necessarily indicative of these ratios subsequent toDecember 31, 2012 . 19
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There were no assets depressed over 20% atDecember 31, 2012 . Details underlying AFS securities below investment grade and in an unrealized loss and OTTI position were as follows: December 31, 2012 Ratio of Gross Estimated Fair Estimated Unrealized Value to Fair Amortized Losses and (dollars in millions) Amortized Cost Value Cost/Cost OTTI (1)
Less than or equal to six months 70% to 100% $ 0.9
$ 0.9 $ - 0.9 0.9 - Greater than one year 70% to 100% 0.5 0.5 - 0.5 0.5 - Total $ 1.4 $ 1.4 $ - December 31, 2011 Ratio of Gross Estimated Fair Estimated Unrealized Value to Fair Amortized Losses and (dollars in millions) Amortized Cost Value Cost/Cost OTTI (1) Greater than one year 70% to 100% $ 1.2 $ 1.5 $ (0.3 ) Total $ 1.2 $ 1.5 $ (0.3 ) During 2012, 2011 and 2010, there was less than$0.1 million , less than$0.1 million , and$0.1 million , respectively, of investment income on fixed maturity trading securities recorded in net investment income in the Statements of Income. During 2012, 2011, and 2010 there was less than$0.1 million , less than($0.1) million , and less than($0.1) million , respectively, of income (losses) recognized from the change in the fair value on fixed maturity trading securities recorded in net investment income in the Statements of Income. The Company recognized gains (losses) of less than($0.1) million and less than$0.1 million during the years ended 2012 and 2011, respectively, on the conversion of fixed maturity trading securities to preferred stock. There were no conversions of fixed maturity trading securities to preferred stock in 2010.
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. 20
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The following tables provide the ABS subprime mortgage exposure by rating and estimated fair value by vintage at
December 31, 2012 Net Estimated Unrealized Amortized Fair Gains (Losses) (dollars in millions) Cost Value and OTTI First lien - fixed AAA $ 1.7 $ 1.7 $ - Below BBB 2.5 2.5 - Total $ 4.2 $ 4.2 $ - 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 The estimated fair value and amortized cost of the subprime mortgage investments atDecember 31, 2011 was$1.6 million , consisting entirely in first lien - fixed rate, AAA quality and vintages prior to 2004.
OTTI
The Company's impairment losses were less than$0.1 million , less than$0.1 million , and less than$0.1 million for the years endedDecember 31, 2012 , 2011 and 2010, respectively, with no associated VOBA amortization. The 2012, 2011, and 2010 impairment losses were principally the result of the Company impairing its holding of a 2005 vintage RMBS due to adverse changes in cash flows. 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 S&P. The Dow, NASDAQ and S&P ended 2012 with increases of 7%, 16% and 13%, respectively, from 2011. The Dow, NASDAQ and S&P ended 2011 with increases (decreases) of 6%, (2%) and less than (0.1%), respectively, from 2010. 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 67% of Separate Accounts assets were invested in equity-based mutual funds at December 31, 2012 . Since asset-based fees collected on in force variable contracts represent a significant source of revenue, the Company's financial condition will be impacted by fluctuations in investment performance of equity-based Separate Accounts assets. During 2012, average variable account balances decreased $66.3 million (or 10.9%) to $540.3 million as compared to the same period in 2011. Fluctuations in the U.S. equity market also directly impact the Company's exposure to guaranteed benefit provisions contained in the variable contracts it manufactures. Minimal or negative investment performance generally results in greater exposure to guarantee provisions. Prolonged periods of minimal or negative investment performance will result in greater guaranteed benefit costs as compared to assumptions. If the Company determines that it needs to increase its estimated long term cost of guaranteed benefits, it will result in establishing greater guaranteed benefit liabilities as compared to current practice. 21
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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 an 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:
2012 2011 2010 Average medium term interest rate yield (a) 0.37% 0.40% 0.97% Increase in medium term interest rates (in basis points) (3 ) (57 ) (46 ) Credit spreads (in basis points) (b) 124 285 175 Expanding (contracting) of credit spreads (in basis points) (161 ) 110 (25 ) Increase (decrease) on market valuations: (in millions) Available-for-sale investment securities $ 4.5 $ 3.6 $ 5.4 Interest-sensitive policyholder liabilities (0.6 ) (0.4 ) 0.1 Net change on market valuations $ 3.9 $ 3.2 $ 5.5
(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.
AtDecember 31, 2012 and 2011, the Company had 932 and 994 life insurance and annuity contracts inforce with interest rate guarantees, respectively. The estimated average rate of interest credited on behalf of contract owners was 3.8% and 4.1% during 2012 and 2011, respectively. Total invested assets supporting these liabilities with interest rate guarantees had an estimated average effective yield of 3.9% and 4.3% during 2012 and 2011, respectively.
Liquidity and Capital Resources
Liquidity
The Company's liquidity requirements include the payment of sales commissions and other underwriting expenses and the funding of its contractual obligations for the life insurance and annuity contracts it has in force. The Company has developed and utilizes a cash flow projection system and regularly performs asset/liability duration matching in the management of its asset and liability portfolios. The Company anticipates funding its cash requirements utilizing cash from operations, normal investment maturities and anticipated calls and repayments, consistent with prior years. AtDecember 31, 2012 and 2011, the Company's assets included$185.1 million and$174.1 million , respectively, of cash, short-term investments and investment grade publicly traded AFS securities that could be liquidated if funds were required.
Capital Resources
During 2012 and 2011, the Company did not receive a capital contribution fromAUSA . In 2012, the Company did not pay a cash dividend toAUSA . In 2011, the Company paid a cash dividend of$25.0 million toAUSA .
In order to continue to issue annuity products, the Company must meet or exceed the statutory capital and surplus requirements of the insurance departments of the states in which it conducts business. Statutory accounting principles differ from GAAP in two major 22
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respects. First, under statutory accounting principles, the acquisition costs of new business are charged to expense, while under GAAP they are amortized over a period of time. Second, under statutory accounting principles, the required additions to statutory reserves are calculated under different rules than under GAAP. TheNational Association of Insurance Commissioners utilizes the RBC adequacy monitoring system. The RBC calculates the amount of adjusted capital that a life insurance company should have based upon that company's risk profile. AtDecember 31, 2012 and 2011, based on the RBC formula, the Company's total adjusted capital levels were well in excess of the minimum amount of capital required to avoid regulatory action.
Ratings
Ratings are an important factor in establishing the competitive position in the insurance and financial services marketplace. Rating agencies rate insurance companies based on financial strength and the ability to pay claims, factors more relevant to contract holders than investors.
The financial strength rating scales of S&P,
• S&P - AAA to R •A.M. Best - A++ to S • Fitch - AAA to C
On
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.
Commitments and Contingencies
The following table summarizes the Company's policyholders' obligations atDecember 31, 2012 : Less One To Four To More Than One Three Five Than Five (dollars in millions) Year Years Years Years Total General accounts (a) $ 14.3 $ 26.1 $ 23.0 $ 100.1 $ 163.5 Separate Accounts (a) 74.1 127.0 110.0 415.5 726.6 $ 88.4 $ 153.1 $ 133.0 $ 515.6 $ 890.1
(a) The policyholder liabilities include benefit and claim liabilities of which a
significant portion represents policies and contracts that do not have a
stated contractual maturity. The projected cash benefit payments in the table
above are based on management's best estimates of the expected gross benefits
and expenses, partially offset by the expected gross premiums, fees and
charges relating to the existing business in force. Estimated cash benefit
payments are based on mortality and lapse assumptions comparable with the
Company's historical experience, modified for recently observed trends.
Actual payment obligations may differ if experience varies from these
assumptions. The cash benefit payments are presented on an undiscounted basis
and are before deduction of tax and before reinsurance. The liability amounts
in the Company's Financial Statements reflect the discounting for interest as
well as adjustments for the timing of other factors as described above. As a
result, the sum of the cash benefit payments shown for all years in the table
above exceeds the corresponding policyholder liability amounts. 23
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The Company has utilized public information to estimate the future assessments it will incur as a result of life insurance company insolvencies. AtDecember 31, 2012 and 2011, the Company's estimated liability for future guaranty fund assessments was less than$0.1 million and$0.3 million , respectively. In addition, the Company has a receivable for future premium tax deductions of less than$0.1 million and$0.1 million atDecember 31, 2012 and 2011, 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
The Company's gross earnings are principally derived from two sources:
• the charges imposed on variable annuity and variable life insurance
contracts, and
• the net earnings from investment of fixed rate life insurance and annuity
contract owner deposits less interest credited to contract owners, commonly
known as interest spread
The costs associated with acquiring contract owner deposits (DAC) are amortized based on the estimated gross profits for a group of contracts, as noted in the Critical Accounting Policies section above. 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.
2012 compared to 2011
For the years endedDecember 31, 2012 and 2011, the Company recorded net income of$7.2 million and$6.2 million , respectively. The increase in income during 2012 as compared to 2011 was primarily due to lower policy benefits, partially offset by net realized losses in 2012 compared to net realized gains in 2011. Policy charge revenue decreased$1.1 million (or 7.9%) to$12.9 million during 2012, as compared to$14.0 million in 2011. The following table provides the changes in policy charge revenue by type for each respective period: (dollars in millions) 2012 2011
Change
Asset-based policy charge revenue $ 7.9 $ 8.5 $ (0.6 ) (a) Guaranteed benefit based policy charge revenue 1.1 1.2 (0.1 ) Non-asset based policy charge revenue 3.9 4.3 (0.4 ) Total policy charge revenue $ 12.9 $ 14.0 $ (1.1 )
(a) The decrease in asset-based policy charge revenue for 2012 was principally
due to a decrease in average variable account balances.
Net realized investment gains decreased
(dollars in millions) 2012 2011 Change Interest related gains $ (0.1 ) $ 1.1 $ (1.2 ) (a) Equity related losses (0.9 ) (0.5 ) (0.4 ) (b)
Total net realized investment gains $ (1.0 )
(a) The decrease in interest related gains in 2012 as compared to 2011 is
primarily a result of higher fixed maturity securities sales in 2011.
(b) The change in equity related losses principally relates to the increase in
net losses on futures contracts during 2012 as compared to 2011. Short futures contracts fluctuate relative to the volatility in the S&P. 24
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Policy benefits decreased
(dollars in millions) 2012 2011 Change Annuity benefit unlocking $ (2.8 ) $ 2.4 $ (5.2 ) (a) Annuity benefit expense 0.9 0.5 0.4 Life insurance mortality expense 1.6 1.7 (0.1 ) Total policy benefits $ (0.3 ) $ 4.6 $ (4.9 )
(a) See the Critical Accounting Policies and Estimates section above for further
discussion of annuity benefit unlocking.
Amortization of VOBA was$2.3 and$1.6 million for the year endedDecember 31, 2012 and 2011, respectively. Included in amortization was favorable (unfavorable) unlocking of$0.2 million and($0.7) million for the years endedDecember 31, 2012 and 2011, respectively. 2012 was impacted by favorable equity markets and higher gross profits as compared to 2011. Insurance expenses and taxes decreased$0.6 million in 2012 as compared to 2011. The following table provides the changes in insurance expenses and taxes for each respective period: (dollars in millions) 2012 2011 Change Commissions $ 2.3 $ 2.7 $ (0.4 ) General insurance expense 1.5 1.7 (0.2 ) Taxes, licenses, and fees 0.1 0.1 -
Total insurance expenses and taxes
2011 compared to 2010
For the years endedDecember 31, 2011 and 2010, the Company recorded net income of$6.2 million and$12.1 million , respectively. The decline in income during 2011 as compared to 2010 was primarily due to higher policy benefits and a higher effective tax rate. Policy charge revenue decreased$0.6 million (or 4.1%) to$14.0 million during 2011, as compared to$14.6 million in 2010. The following table provides the changes in policy charge revenue by type for each respective period: (dollars in millions) 2011 2010 Change Asset-based policy charge revenue $ 8.5 $ 9.0 $ (0.5 ) (a) Guaranteed benefit based policy charge revenue 1.2 1.1
0.1
Non-asset based policy charge revenue 4.3 4.5 (0.2 ) Total policy charge revenue $ 14.0 $ 14.6 $ (0.6 )
(a) Asset-based policy charge revenue for 2011 was negatively impacted by the
decline in average variable account balances.
Net realized investment gains decreased$0.3 million to$0.6 million during 2011 as compared to$0.9 million in 2010. The following table provides the changes in net realized investment gains (losses) by type: (dollars in millions) 2011 2010 Change Interest related gains $ 1.1 $ 1.7 $ (0.6 ) (a) Equity related losses (0.5 ) (0.8 ) 0.3 Total net realized investment gains $ 0.6 $ 0.9
$ (0.3 )
Write-downs for OTTI included in net realized investment gains (losses) $ - $ - $ -
(a) The decrease in interest related gains in 2011 as compared to 2010 is
primarily due to a decrease in gains on sales of fixed maturity securities in
2011. 25
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Policy benefits increased
(dollars in millions) 2011 2010 Change Annuity benefit unlocking $ 2.4 $ (2.4 ) $ 4.8 (a) Annuity benefit expense 0.5 1.9 (1.4 ) (b) Life insurance mortality expense 1.7 2.3 (0.6 ) (c) Total policy benefits $ 4.6 $ 1.8 $ 2.8
(a) See the Critical Accounting Policies and Estimates section above for further
discussion of annuity benefit unlocking.
(b) The decrease in annuity benefit expense in 2011 as compared to 2010 was
primarily driven by a reduction in risk neutral rates and lower equity market
performance which favorably impacted the GMIB Reinsurance reserves.
(c) Life insurance mortality expense decreased in 2011 as compared to 2010
primarily due to 2010 claims with a high net amount at risk.
Amortization of VOBA was$1.6 million for the year endedDecember 31, 2011 , which included unfavorable unlocking of$0.7 million . Amortization of VOBA was$1.2 million for the year endedDecember 31, 2010 , which included favorable unlocking of$0.6 million . 2011 was impacted by unfavorable equity markets and long-term interest rate assumption changes during the third quarter resulting in lower amortization expense and unfavorable unlocking as compared to 2010. Insurance expenses and taxes decreased$0.7 million in 2011 as compared to 2010. The following table provides the changes in insurance expenses and taxes for each respective period: (dollars in millions) 2011 2010 Change Commissions $ 2.7 $ 2.8 $ (0.1 ) General insurance expense 1.7 2.4 (0.7 ) (a) Taxes, licenses, and fees 0.1 - 0.1
Total insurance expenses and taxes
(a) The decline in general insurance expenses is primarily due to lower
transition and system conversion related expenses in 2011 as compared to
2010. Segment Information The Company's operating results are categorized into two business segments:Annuity and Life Insurance . The Company's Annuity segment consists of variable annuity and interest-sensitive annuity contracts. The Company's Life Insurance segment consists of variable life insurance and interest-sensitive life insurance contracts. The accounting policies of the business segments are the same as those described in the summary of significant accounting policies. All revenue and expense transactions are recorded at the contract level and accumulated at the business segment level for review by management. 26
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Select financial information by segment for the years endedDecember 31 is as follows: Life (dollars in millions) Annuity Insurance Total 2012 Net revenues (a) $ 11.0 $ 5.4 $ 16.4 Amortization of VOBA 1.7 0.6 2.3 Policy benefits (net of reinsurance recoveries) (1.9 ) 1.6 (0.3 ) Income tax expense (benefit) 2.1 0.7 2.8 Net income 5.5 1.7 7.2 2011 Net revenues (a) $ 13.2 $ 5.7 $ 18.8 Amortization (accretion) of VOBA (0.5 ) 2.1 1.6 Policy benefits (net of reinsurance recoveries) 2.8 1.7 4.6 Income tax expense (benefit) 1.6 (0.1 ) 1.5 Net income 5.2 1.0 6.2 2010 Net revenues (a) $ 14.1 $ 5.7 $ 19.9 Amortization of VOBA 0.6 0.6 1.2 Policy benefits (net of reinsurance recoveries) (0.5 ) 2.3 1.8 Income tax expense (benefit) (1.1 ) (0.1 ) (1.2 ) Net income 10.6 1.5 12.1
(a) Management considers interest credited to policyholder liabilities in
evaluating net revenues.
The Company is not dependent upon any single customer, and no single customer accounted for more than 10% of its revenues during 2012, 2011 or 2010.
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PROTECTIVE LIFE INSURANCE CO – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations
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