CONDITION
AND RESULTS OF OPERATIONS
The
following Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) relates to Protective Life Corporation
and its subsidiaries (“the Company”) and should be read in conjunction with
our consolidated condensed financial statements included under Part I,
Item 1,
Financial Statements (Unaudited)
, of this Quarterly
Report on Form 10-Q and our audited consolidated financial statements for
the year ended December 31, 2006 included in our Annual Report on
Form 10-K. This MD&A contains detailed information that will
assist in understanding our consolidated condensed financial statements and
the
Company’s results and financial condition.
FORWARD-LOOKING
STATEMENTS – CAUTIONARY LANGUAGE
This
report reviews the Company’s financial condition and results of operations
including its liquidity and capital resources. Historical information
is presented and discussed and where appropriate, factors that may affect future
financial performance are also identified and discussed. Certain
statements made in this report include “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements include any statement that may
predict, forecast, indicate or imply future results, performance or achievements
instead of historical facts and may contain words like “believe,” “expect,”
“estimate,” “project,” “budget,” “forecast,” “anticipate,” “plan,” “will,”
“shall,” “may,” and other words, phrases, or expressions with similar
meaning. Forward-looking statements involve risks and uncertainties,
which may cause actual results to differ materially from the results contained
in the forward-looking statements, and the Company cannot give assurances that
such statements will prove to be correct. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking
statements as a prediction of actual results.
For
a
more complete understanding of the Company’s business and its current period
results, please read the following Management’s Discussion and Analysis of
Financial Condition and Results of Operations in conjunction with the Company’s
latest Annual Report on Form 10-K and other filings with the United States
Securities and Exchange Commission (the “SEC”).
OVERVIEW
The Company
is a holding company whose subsidiaries provide financial services through
the
production, distribution, and administration of insurance and investment
products. Founded in 1907, Protective Life Insurance Company is the
Company's largest operating subsidiary.
The
Company operates several business segments each having a strategic
focus. An operating segment is generally distinguished by products
and/or channels of distribution. The Company's operating segments are
Life Marketing, Acquisitions, Annuities, Stable Value Products, and Asset
Protection. The Company has an additional segment referred to as
Corporate and Other which consists of net investment income on unallocated
capital, interest on debt, earnings from various investment-related
transactions, and the operations of several non-strategic lines of
business. The Company periodically evaluates its operating segments
in light of the segment reporting requirements prescribed by the Financial
Accounting Standards Board (“FASB”) Statement of Financial Accounting
Standards (“SFAS”) No. 131,
Disclosures
about Segments of
an Enterprise and Related Information
, and makes adjustments to its segment
reporting as needed.
KNOWN
TRENDS AND UNCERTAINTIES
The
factors which could affect the Company's future results include, but are not
limited to, general economic conditions and the following known trends and
uncertainties: we are exposed to the risks of natural disasters, pandemics,
malicious and terrorist acts that could adversely affect our operations; we
operate in a mature, highly competitive industry, which could limit our ability
to gain or maintain our position in the industry and negatively affect
profitability; a ratings downgrade could adversely affect our ability to
compete; our policy claims fluctuate from period to period resulting in earnings
volatility; our results may be negatively affected should actual experience
differ from management's assumptions and estimates; the use of reinsurance
introduces variability in our statements of income; we could be forced to sell
investments at a loss to cover policyholder withdrawals; interest rate
fluctuations could negatively affect our spread income or otherwise impact
our
business; equity market volatility could negatively impact our business;
insurance companies are highly regulated and subject to numerous legal
restrictions and regulations; changes to tax law or interpretations of existing
tax law could adversely affect the Company and its ability to compete with
non-insurance products or reduce the demand for certain insurance products;
financial services companies are frequently the targets of litigation, including
class action litigation, which could result in substantial judgments; publicly
held companies in general and the financial services industry in particular
are
sometimes the target of law enforcement investigations and the focus of
increased regulatory scrutiny; our ability to maintain competitive unit costs
is
dependent upon the level of new sales and persistency of existing business;
our
investments are subject to market and credit risks; we may not realize our
anticipated financial results from our acquisitions strategy; we may not be
able
to achieve the expected results from our recent acquisition; we are dependent
on
the performance of others; our reinsurers could fail to meet assumed
obligations, increase rates or be subject to adverse developments that could
affect us; computer viruses or network security breaches could affect our data
processing systems or those of our business partners and could damage our
business and adversely affect our financial condition and results of operations;
our ability to grow depends in large part upon the continued availability of
capital; new accounting rules or changes to existing accounting rules could
negatively impact us; our risk management policies and procedures may leave
us
exposed to unidentified or unanticipated risk, which could negatively affect
our
business or result in losses; and credit market volatility or the inability
to
access capital markets could adversely impact the Company’s financial condition
or results from operations. Please refer to Exhibit 99 about
these factors that could affect future results.
The
Company’s results may fluctuate from period to period due to fluctuations in
mortality, persistency, claims, expenses, interest rates, and other
factors. Therefore, it is management's opinion that quarterly
operating results for an insurance company are not necessarily indicative of
results to be achieved in future periods, and that a review of operating results
over a longer period is necessary to assess an insurance company's
performance.
RESULTS
OF OPERATIONS
In
the
following discussion, segment operating income is defined as income before
income tax, excluding net realized investment gains and losses (net of the
related amortization of deferred policy acquisition costs (“DAC”) and value
of businesses acquired (“VOBA”) and participating income from real estate
ventures). Periodic settlements of derivatives associated with
corporate debt and certain investments and annuity products are included in
realized gains and losses but are considered part of segment operating income
because the derivatives are used to mitigate risk in items affecting segment
operating income. Management believes that segment operating income
provides relevant and useful information to investors, as it represents the
basis on which the performance of the Company’s business is internally
assessed. Although the items excluded from segment operating income
may be significant components in understanding and assessing the Company’s
overall financial performance, management believes that segment operating income
enhances an investor’s understanding of the Company’s results of operations by
highlighting the income (loss) attributable to the normal, recurring operations
of the Company’s business. However, segment operating income should
not be viewed as a substitute for accounting principles generally accepted
in
the United States of America (“U.S. GAAP”) net income. In
addition, the Company’s segment operating income measures may not be comparable
to similarly titled measures reported by other companies.
The
following table presents a summary of results and reconciles segment operating
income to consolidated net income:
|
|
Three
Months Ended
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
September
30
|
|
|
|
|
|
September
30
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(Dollars
In Thousands)
|
|
|
(Dollars
In Thousands)
|
|
Segment
Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
Marketing
|
|
$
|
39,974
|
|
|
$
|
40,270
|
|
|
|
(0.7
|
)%
|
|
$
|
143,088
|
|
|
$
|
132,276
|
|
|
|
8.2
|
%
|
Acquisitions
|
|
|
30,375
|
|
|
|
32,060
|
|
|
|
(5.3
|
)
|
|
|
93,438
|
|
|
|
70,924
|
|
|
|
31.7
|
|
Annuities
|
|
|
6,436
|
|
|
|
5,351
|
|
|
|
20.3
|
|
|
|
18,711
|
|
|
|
16,242
|
|
|
|
15.2
|
|
Stable
Value Products
|
|
|
13,107
|
|
|
|
10,429
|
|
|
|
25.7
|
|
|
|
37,648
|
|
|
|
34,573
|
|
|
|
8.9
|
|
Asset
Protection
|
|
|
9,905
|
|
|
|
(14,401
|
)
|
|
|
168.8
|
|
|
|
31,511
|
|
|
|
3,241
|
|
|
|
872.3
|
|
Corporate
and Other
|
|
|
2,342
|
|
|
|
(3,929
|
)
|
|
|
159.6
|
|
|
|
2,819
|
|
|
|
14,582
|
|
|
|
(80.7
|
)
|
Total
segment operating income (loss)
|
|
|
102,139
|
|
|
|
69,780
|
|
|
|
46.4
|
|
|
|
327,215
|
|
|
|
271,838
|
|
|
|
20.4
|
|
Realized
investment gains (losses) - investments
(1)
|
|
|
43,070
|
|
|
|
72,266
|
|
|
|
|
|
|
|
(19,128
|
)
|
|
|
77,039
|
|
|
|
|
|
Realized
investment gains (losses) -derivatives
(2)
|
|
|
(37,792
|
)
|
|
|
(54,148
|
)
|
|
|
|
|
|
|
34,099
|
|
|
|
(47,636
|
)
|
|
|
|
|
Income
tax expense
|
|
|
(34,425
|
)
|
|
|
(30,597
|
)
|
|
|
|
|
|
|
(113,506
|
)
|
|
|
(104,862
|
)
|
|
|
|
|
Net
income
|
|
$
|
72,992
|
|
|
$
|
57,301
|
|
|
|
27.4
|
|
|
$
|
228,680
|
|
|
$
|
196,379
|
|
|
|
16.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Realized
investment gains (losses) - investments
|
|
$
|
43,114
|
|
|
$
|
78,645
|
|
|
|
|
|
|
$
|
(10,201
|
)
|
|
$
|
98,461
|
|
|
|
|
|
Less
participating income from real estate ventures
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
6,857
|
|
|
|
13,494
|
|
|
|
|
|
Less
related amortization of DAC
|
|
|
44
|
|
|
|
6,379
|
|
|
|
|
|
|
|
2,070
|
|
|
|
7,928
|
|
|
|
|
|
|
|
$
|
43,070
|
|
|
$
|
72,266
|
|
|
|
|
|
|
$
|
(19,128
|
)
|
|
$
|
77,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Realized
investment gains (losses) - derivatives
|
|
$
|
(37,467
|
)
|
|
$
|
(55,302
|
)
|
|
|
|
|
|
$
|
36,523
|
|
|
$
|
(46,764
|
)
|
|
|
|
|
Less
settlements on certain interest rate swaps
|
|
|
132
|
|
|
|
654
|
|
|
|
|
|
|
|
626
|
|
|
|
2,659
|
|
|
|
|
|
Less
derivative gains/(losses) related to certain annuities
|
|
|
193
|
|
|
|
(1,808
|
)
|
|
|
|
|
|
|
1,798
|
|
|
|
(1,787
|
)
|
|
|
|
|
|
|
$
|
(37,792
|
)
|
|
$
|
(54,148
|
)
|
|
|
|
|
|
$
|
34,099
|
|
|
$
|
(47,636
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the first nine months of 2007 reflects a 20.4% increase in segment
operating income compared to the same period of 2006. The three
largest items contributing to this increase include a $15.7 million gain
before taxes on the sale of the Life Marketing segment’s direct marketing
subsidiary, a $22.5 million increase in operating earnings in the
Acquisitions segment resulting primarily from the prior year acquisition of
the
Chase Insurance Group, and a $27.1 million bad debt charge that occurred
during 2006 in the Asset Protection segment. These favorable items
were partially offset by a year-to-date decline in operating earnings for the
Corporate & Other segment of $11.8 million resulting primarily from
higher interest expense. Net realized investment gains were
$15.0 million for the first nine months of 2007 compared to
$29.4 million for the same period of 2006, a decrease of
$14.4 million.
Life
Marketing segment operating income was $40.0 million and
$143.1 million for the current quarter and year-to-date, respectively,
representing a quarterly decrease of 0.7% and a year-to-date increase of 8.2%
over the same periods of the prior year. The year-to-date increase
was primarily due to a $15.7 million gain before taxes on the sale of the
segment’s direct marketing subsidiary, offset by the impact of securitizing a
large block of universal life policies which results in less investment income
being allocated to the segment.
The
decrease in the Acquisitions segment’s operating income for the current quarter
is due primarily to unfavorable mortality, while the year-to-date increase
is
due to the acquisition of the Chase Insurance Group completed in the third
quarter of 2006. This acquisition contributed $40.0 million to
the Acquisition segment’s operating income for the first nine months of 2007,
compared to $12.9 million in the first nine months of 2006.
Favorable results in the market value adjusted annuity line, partially offset
by
unfavorable mortality results in the single premium immediate annuity line,
resulted in a 20.3% and 15.2% increase in operating income for the Annuities
segment, respectively for the third quarter and first nine months of
2007. A general improvement in the equity markets and increasing
account balances contributed to the increase in operating earnings during the
first nine months of 2007 for the segment.
Declines
in average account values offset by increases in operating spreads resulted
in
increases in operating income of 25.7% and 8.9% for the third quarter and first
nine months of 2007, respectively, in the Stable Value Products segment compared
to the same periods of 2006.
The
Asset
Protection segment’s operating income increases of 168.8% and 872.3% for the
third quarter and first nine months of 2007, respectively, were primarily the
result of bad debt charges of $26.0 million in the third quarter of 2006
and $27.1 million in the first nine months of 2006. These
charges related to the Lenders Indemnity product line the Company is no longer
marketing. Favorable results from the service contract line are also
contributing to the increase in operating earnings and are partially offset
by
unfavorable results from other product lines.
The
declines in operating income for the Corporate and Other segment are primarily
the result of increases in operating expenses and higher interest expense
resulting from increased borrowings, partially offset by higher net investment
income. The increase in interest expense is primarily due to the
issuance of $200 million of subordinated debt securities to finance the
Chase Insurance Group acquisition in the third quarter of 2006 and the issuance
of non-recourse funding obligations to fund statutory reserves required by
the
Valuation of Life Insurance Policies Model Regulation (“Regulation XXX”)
and Actuarial Guideline 38 (commonly known as “AXXX”).
RESULTS
BY BUSINESS SEGMENT
In
the
following segment discussions, various statistics and other key data the Company
uses to evaluate its segments are presented. Sales statistics are
used by the Company to measure the relative progress in its marketing efforts,
but may or may not have an immediate impact on reported segment operating
income. Sales data for traditional life insurance are based on
annualized premiums, while universal life sales are based on annualized planned
(target) premiums plus 6% of amounts received in excess of target
premiums. Sales of annuities are measured based on the amount of
deposits received. Stable value contract sales are measured at the
time that the funding commitment is made based on the amount of deposit to
be
received. Sales within the Asset Protection segment are generally
based on the amount of single premium and fees received.
Sales
and
life insurance in-force amounts are derived from the Company’s various sales
tracking and administrative systems, and are not derived from the Company’s
financial reporting systems or financial statements. Mortality
variances are derived from actual claims compared to expected
claims. These variances do not represent the net impact to earnings
due to the interplay of reserves and DAC amortization.
Life
Marketing
The
Life
Marketing segment markets level premium term
insurance (“traditional life”), universal life (“UL”), variable
universal life, and bank owned life insurance (“BOLI”) products on a
national basis primarily through networks of independent insurance agents and
brokers, stockbrokers, and independent marketing
organizations. Segment results were as follows:
|
|
Three
Months Ended
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
September
30
|
|
|
|
September
30
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
premiums and policy fees
|
|
$
|
360,450
|
|
|
$
|
327,355
|
|
|
|
10.1
|
%
|
|
$
|
1,067,759
|
|
|
$
|
978,215
|
|
|
|
9.2
|
%
|
Reinsurance
ceded
|
|
|
(203,285
|
)
|
|
|
(206,269
|
)
|
|
|
(1.4
|
)
|
|
|
(650,601
|
)
|
|
|
(652,048
|
)
|
|
|
(0.2
|
)
|
Net
premiums and policy fees
|
|
|
157,165
|
|
|
|
121,086
|
|
|
|
29.8
|
|
|
|
417,158
|
|
|
|
326,167
|
|
|
|
27.9
|
|
Net
investment income
|
|
|
79,437
|
|
|
|
80,444
|
|
|
|
(1.3
|
)
|
|
|
242,831
|
|
|
|
228,771
|
|
|
|
6.1
|
|
Other
income
|
|
|
27,514
|
|
|
|
32,278
|
|
|
|
(14.8
|
)
|
|
|
109,871
|
|
|
|
94,352
|
|
|
|
16.4
|
|
Total
operating revenues
|
|
|
264,116
|
|
|
|
233,808
|
|
|
|
13.0
|
|
|
|
769,860
|
|
|
|
649,290
|
|
|
|
18.6
|
|
BENEFITS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and settlement expenses
|
|
|
182,010
|
|
|
|
147,213
|
|
|
|
23.6
|
|
|
|
483,486
|
|
|
|
405,544
|
|
|
|
19.2
|
|
Amortization
of deferred policy acquisition costs
|
|
|
27,807
|
|
|
|
21,689
|
|
|
|
28.2
|
|
|
|
82,069
|
|
|
|
42,791
|
|
|
|
91.8
|
|
Other
operating expenses
|
|
|
14,325
|
|
|
|
24,636
|
|
|
|
(41.9
|
)
|
|
|
61,217
|
|
|
|
68,679
|
|
|
|
(10.9
|
)
|
Total
benefits and expenses
|
|
|
224,142
|
|
|
|
193,538
|
|
|
|
15.8
|
|
|
|
626,772
|
|
|
|
517,014
|
|
|
|
21.2
|
|
OPERATING
INCOME
|
|
|
39,974
|
|
|
|
40,270
|
|
|
|
(0.7
|
)
|
|
|
143,088
|
|
|
|
132,276
|
|
|
|
8.2
|
|
INCOME
BEFORE INCOME TAX
|
|
$
|
39,974
|
|
|
$
|
40,270
|
|
|
|
(0.7
|
)
|
|
$
|
143,088
|
|
|
$
|
132,276
|
|
|
|
8.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes key data for the Life Marketing segment:
|
|
Three
Months Ended
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
September
30
|
|
|
|
|
September
30
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
Sales
By Product
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
|
|
$
|
36,326
|
|
|
$
|
39,552
|
|
|
|
(8.2
|
)%
|
|
$
|
113,773
|
|
|
$
|
112,761
|
|
|
|
0.9
|
%
|
Universal
life
|
|
|
24,761
|
|
|
|
13,028
|
|
|
|
90.1
|
|
|
|
57,473
|
|
|
|
60,625
|
|
|
|
(5.2
|
)
|
Variable
universal life
|
|
|
1,826
|
|
|
|
1,697
|
|
|
|
7.6
|
|
|
|
5,835
|
|
|
|
4,610
|
|
|
|
26.6
|
|
|
|
$
|
62,913
|
|
|
$
|
54,277
|
|
|
|
15.9
|
|
|
$
|
177,081
|
|
|
$
|
177,996
|
|
|
|
(0.5
|
)
|
Sales
By Distribution Channel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokerage
general agents
|
|
$
|
35,919
|
|
|
$
|
33,733
|
|
|
|
6.5
|
|
|
$
|
107,008
|
|
|
$
|
104,556
|
|
|
|
2.3
|
|
Independent
agents
|
|
|
11,461
|
|
|
|
7,814
|
|
|
|
46.7
|
|
|
|
30,418
|
|
|
|
30,830
|
|
|
|
(1.3
|
)
|
Stockbrokers
/ banks
|
|
|
9,651
|
|
|
|
7,116
|
|
|
|
35.6
|
|
|
|
27,596
|
|
|
|
28,765
|
|
|
|
(4.1
|
)
|
BOLI
/ other
|
|
|
5,882
|
|
|
|
5,614
|
|
|
|
4.8
|
|
|
|
12,059
|
|
|
|
13,845
|
|
|
|
(12.9
|
)
|
|
|
$
|
62,913
|
|
|
$
|
54,277
|
|
|
|
15.9
|
|
|
$
|
177,081
|
|
|
$
|
177,996
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Life Insurance In-force
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
|
|
$
|
441,839,831
|
|
|
$
|
386,005,768
|
|
|
|
14.5
|
|
|
$
|
425,693,626
|
|
|
$
|
374,636,645
|
|
|
|
13.6
|
|
Universal
life
|
|
|
53,841,008
|
|
|
|
50,801,493
|
|
|
|
6.0
|
|
|
|
52,466,246
|
|
|
|
50,032,713
|
|
|
|
4.9
|
|
|
|
$
|
495,680,839
|
|
|
$
|
436,807,261
|
|
|
|
13.5
|
|
|
$
|
478,159,872
|
|
|
$
|
424,669,358
|
|
|
|
12.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Account Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life
|
|
$
|
5,053,316
|
|
|
$
|
4,812,312
|
|
|
|
5.0
|
|
|
$
|
4,957,023
|
|
|
$
|
4,716,066
|
|
|
|
5.1
|
|
Variable
universal life
|
|
|
349,300
|
|
|
|
280,608
|
|
|
|
24.5
|
|
|
|
331,608
|
|
|
|
270,519
|
|
|
|
22.6
|
|
|
|
$
|
5,402,616
|
|
|
$
|
5,092,920
|
|
|
|
6.1
|
|
|
$
|
5,288,631
|
|
|
$
|
4,986,585
|
|
|
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortality
Experience
(2)
|
|
$
|
6,923
|
|
|
$
|
5,950
|
|
|
|
|
|
|
$
|
15,874
|
|
|
$
|
5,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Amounts are
not adjusted for reinsurance ceded.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Represents
a favorable (unfavorable) variance as compared to pricing
assumptions. Excludes results related to Chase Insurance Group which
was acquired in the third quarter of 2006.
|
|
During
2005, the Company reduced its reliance on reinsurance (see additional comments
below) and entered into a securitization structure to fund the additional
statutory reserves required as a result of these changes in the Company’s
reinsurance arrangements. The securitization structure results in a
reduction of current taxes and a corresponding increase in deferred taxes as
compared to the previous result obtained in using traditional
reinsurance. The benefit of reduced current taxes is attributed to
the applicable life products and is an important component of the profitability
of these products. In addition to the fluctuations in premiums and
benefits and settlement expenses discussed below, earnings emerge more slowly
under a securitization structure relative to the previous reinsurance structure
utilized by the Company.
Operating
income declined 0.7% and increased 8.2% from the third quarter and first nine
months of 2006, respectively. The third quarter decline is primarily
due to lower earnings from the Company’s marketing subsidiaries. The
year-to-date increase is primarily the result of a gain recognized during the
first quarter of 2007 on the sale of the segment’s direct marketing subsidiary
combined with favorable mortality results, and offset by $14 million of
favorable unlocking that occurred in the second quarter of 2006. In addition,
the segment has experienced an unfavorable impact during 2007 through the impact
of securitizing a large block of universal life policies which results in less
investment income being allocated to the segment.
Excluding
the $15.7 million gain on the sale of a subsidiary which is included in
other income, total revenues for the first nine months of 2007 increased 16.2%
compared to the same period of 2006. These increases are the result of growth
of
life insurance in-force and average account values, and are partially offset
by
higher overall benefits and expenses (23.6% and 19.2% higher for the third
quarter and first nine months of 2007, respectively, as compared to the same
periods of 2006).
Net
premiums and policy fees grew by 29.8% in the current quarter and by 27.9%
year-to-date due in part to the growth in both traditional and universal life
insurance in-force achieved over the last several quarters combined with an
increase in retention levels on certain traditional life
products. Beginning in the third quarter of 2005, the Company reduced
its reliance on reinsurance by changing from coinsurance to yearly renewable
term reinsurance agreements and increased the maximum amount retained on any
one
life from $500,000 to $1,000,000 on certain of its newly written traditional
life products (products written during the third quarter of 2005 and
later.) In addition to increasing net premiums, this change results
in higher benefits and settlement expenses, and causes greater variability
in
financial results due to fluctuations in mortality results. The
Company’s maximum retention level for newly issued universal life products is
generally $750,000 or $1,000,000.
Net
investment income in the segment decreased 1.3% for the quarter and increased
6.1% year-to-date. The third quarter decrease is the result of
securitizing a large block of universal life (AXXX) policies which results
in less investment income being allocated to the segment. The
year-to-date increase reflects the growth of the segment assets caused primarily
by the increase in universal life (AXXX) reserves.
Other
income decreased 14.8% for the quarter and increased 16.4% for the first nine
months of 2007, respectively, compared to the same periods in
2006. The third quarter decrease is primarily caused by lower sales
resulting from the de-emphasis of one and sales of two other direct marketing
subsidiaries in 2007, offset somewhat by higher volume of a broker-dealer
subsidiary resulting in increased fees related to variable annuity managed
accounts and higher investment advisory fees. The year-to-date
increase relates primarily to a $15.7 million gain recognized on the sale
of the segment’s direct marketing subsidiary.
Benefits
and settlement expenses were 23.6% and 19.2% higher than the third quarter
and
first nine months of 2006, respectively, due to growth in life insurance
in-force, increased retention levels on certain newly written traditional life
products and higher credited interest on UL products resulting from increases
in
account values, partially offset year-to-date by favorable fluctuations in
mortality experience. The gross mortality variance (actual results
compared to pricing) for the third quarter and first nine months of 2007 was
$1.0 million and $10.0 million more favorable, respectively, than the
same periods of 2006. The estimated mortality impact on earnings for
the third quarter and first nine months of 2007 was a favorable
$4.0 million and a favorable $11.0 million, respectively, which was
approximately $0.5 million and $9.2 million more favorable,
respectively, than estimated mortality impact on earnings for the same periods
of 2006.
The
increase in DAC amortization for the third quarter and first nine months of
2007
compared to the prior year was primarily due to growth in the block of business
and the related impact of a reduced reliance on reinsurance. In addition, during
the second quarter of 2006, an evaluation of DAC, including a review of the
underlying assumptions of future mortality, expenses, lapses, premium
persistency, investment yields, and interest spreads was performed by the
Company on its West Coast Life UL product during the second quarter of
2006. As a result of this review, assumptions were updated based on
actual experience and/or expectations for the future. This change in
assumptions, and resulting adjustment to DAC, referred to as “unlocking”,
resulted in a favorable adjustment of approximately $14.0 million,
contributing to the year-to-date increase.
Other
operating expenses for the segment were as follows. Certain reclassifications
have been made in the previously reported amounts to make the prior period
amounts comparable to those of the current period. Such
reclassifications had no effect on previously reported total operating
expenses.
|
|
Three
Months Ended
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
September
30
|
|
|
|
|
September
30
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
Insurance
Companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
year commissions
|
|
$
|
69,863
|
|
|
$
|
56,048
|
|
|
|
24.6
|
%
|
|
$
|
198,715
|
|
|
$
|
191,596
|
|
|
|
3.7
|
%
|
Renewal
commissions
|
|
|
8,988
|
|
|
|
9,722
|
|
|
|
(7.5
|
)
|
|
|
27,092
|
|
|
|
27,052
|
|
|
|
0.1
|
|
First
year ceding allowances
|
|
|
(4,731
|
)
|
|
|
(7,133
|
)
|
|
|
(33.7
|
)
|
|
|
(13,575
|
)
|
|
|
(32,847
|
)
|
|
|
(58.7
|
)
|
Renewal
ceding allowances
|
|
|
(54,497
|
)
|
|
|
(53,156
|
)
|
|
|
2.5
|
|
|
|
(167,092
|
)
|
|
|
(154,571
|
)
|
|
|
8.1
|
|
General
& administrative
|
|
|
43,670
|
|
|
|
42,441
|
|
|
|
2.9
|
|
|
|
136,527
|
|
|
|
127,463
|
|
|
|
7.1
|
|
Taxes,
licenses and fees
|
|
|
8,493
|
|
|
|
6,850
|
|
|
|
24.0
|
|
|
|
24,666
|
|
|
|
21,027
|
|
|
|
17.3
|
|
Other
operating expenses incurred
|
|
|
71,786
|
|
|
|
54,772
|
|
|
|
31.1
|
|
|
|
206,333
|
|
|
|
179,720
|
|
|
|
14.8
|
|
Less
commissions, allowances & expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
capitalized
|
|
|
(83,007
|
)
|
|
|
(65,374
|
)
|
|
|
27.0
|
|
|
|
(235,161
|
)
|
|
|
(209,964
|
)
|
|
|
12.0
|
|
Other
operating expenses
|
|
|
(11,221
|
)
|
|
|
(10,602
|
)
|
|
|
5.8
|
|
|
|
(28,828
|
)
|
|
|
(30,244
|
)
|
|
|
(4.7
|
)
|
Marketing
Companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
|
19,066
|
|
|
|
22,301
|
|
|
|
(14.5
|
)
|
|
|
65,176
|
|
|
|
60,369
|
|
|
|
8.0
|
|
Other
operating expenses
|
|
|
6,480
|
|
|
|
12,937
|
|
|
|
(49.9
|
)
|
|
|
24,869
|
|
|
|
38,554
|
|
|
|
(35.5
|
)
|
Other
operating expenses
|
|
|
25,546
|
|
|
|
35,238
|
|
|
|
(27.5
|
)
|
|
|
90,045
|
|
|
|
98,923
|
|
|
|
(9.0
|
)
|
Other
operating expenses
|
|
$
|
14,325
|
|
|
$
|
24,636
|
|
|
|
(41.9
|
)
|
|
$
|
61,217
|
|
|
$
|
68,679
|
|
|
|
(10.9
|
)
|
The Company utilizes reinsurance for most of its products, with the terms of
the
reinsurance agreed upon before products are made available for
sale. The Company determines its pricing, and analyzes its financial
performance, on a net of reinsurance basis with the objective of achieving
an
attractive return on investment for its shareholders. Generally, on
policies utilizing traditional reinsurance, the Company’s profits emerge as
a level percentage of premiums for SFAS No. 60,
Accounting and
Reporting by Insurance Enterprises
, products and as a level percentage of
estimated gross profits for SFAS No. 97,
Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and for Realized
Gains
and Losses from the Sale of Investments”
products. Under both
SFAS 60 and 97, the amount of earnings and investment will vary with the
utilization of reinsurance. In addition, the utilization of
reinsurance can cause fluctuations in individual income and expense line items
from year to year. Consideration of all components of the segment’s
income statement, including amortization of DAC, is required to assess the
impact of reinsurance on segment operating income.
Reinsurance allowances represent the amount the reinsurer is willing to pay
for
reimbursement of acquisition and other costs incurred by the direct writer
of
the business. The amount and timing of these allowances are
negotiated by the Company and each reinsurer. The Company receives
allowances according to the prescribed schedules in the reinsurance contracts,
which may or may not bear a relationship to actual operating expenses incurred
by the Company. First year commissions paid by the Company may be
higher than first year allowances paid by the reinsurer, and reinsurance
allowances may be higher in later years than renewal commissions paid by the
Company. However, the pattern of reinsurance allowances does not
impact the pattern of earnings from year to year. While the
recognition of reinsurance allowances is consistent with U.S. GAAP,
non-deferred allowances often exceed the segment’s non-deferred direct costs,
causing net other operating expenses to be negative. However,
consistent with SFAS 60 and SFAS 97, fluctuations in non-deferred
allowances tend to be offset by changes in DAC amortization with the resulting
profits generally emerging as a level percentage of premiums for SFAS 60
products and as a level percentage of estimated gross profits for SFAS 97
products.
Reinsurance
allowances tend to be highest in the first year of a policy and subsequently
decline. Ultimate reinsurance allowances are defined as the level of
allowances at the end of a policy’s term. The Company's practice is
to defer as a component of DAC, reinsurance allowances in excess of the ultimate
allowance. This practice is consistent with the Company's practice of
deferring direct commissions.
The
following table summarizes reinsurance allowances for each period presented,
including the portion deferred as a part of DAC and the portion recognized
immediately as a reduction of other operating expenses. As the
non-deferred portion of reinsurance allowances reduce operating expenses in
the
period received, these amounts represent a net increase to operating income
during that period. The amounts capitalized and earned are quantified
below:
|
|
Three
Months Ended
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
September
30
|
|
|
|
|
September
30
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
Allowances
received
|
|
$
|
59,228
|
|
|
$
|
60,289
|
|
|
|
(1.8
|
)%
|
|
$
|
180,667
|
|
|
$
|
187,418
|
|
|
|
(3.6
|
)%
|
Less
amount deferred
|
|
|
(25,617
|
)
|
|
|
(28,151
|
)
|
|
|
(9.0
|
)
|
|
|
(80,428
|
)
|
|
|
(89,816
|
)
|
|
|
(10.5
|
)
|
Allowances
recognized (reduction in other operating expenses)
|
|
$
|
33,611
|
|
|
$
|
32,138
|
|
|
|
4.6
|
|
|
$
|
100,239
|
|
|
$
|
97,602
|
|
|
|
2.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-deferred
reinsurance allowances of $33.6 million and $32.1 million were
recognized in the third quarters of 2007 and 2006, respectively, resulting
in
reductions in operating expenses by these amounts in the same
periods. Non-deferred reinsurance allowances increased 4.6% and 2.7%
in the third quarter and first nine months of 2007 compared to the same periods
of 2006, primarily as the result of increases in the Company’s life insurance
in-force.
Reinsurance
allowances do not affect the methodology used to amortize DAC or the period
over
which such DAC is amortized. However, they do affect the amounts
recognized as DAC amortization. DAC on SFAS 97 products is
amortized based on the estimated gross profits of the policies in
force. Reinsurance allowances are considered in the determination of
estimated gross profits, and therefore impact SFAS 97 DAC
amortization. Deferred reinsurance allowances on SFAS 60
policies are recorded as ceded DAC, which is amortized over estimated ceded
premiums of the policies in force. Thus, deferred reinsurance
allowances on SFAS 60 policies impact SFAS 60 DAC
amortization.
The
amounts of ceded premium paid by the Company and allowances reimbursed by the
reinsurer are reflected in the table below:
|
|
Three
Months Ended
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
September
30
|
|
|
|
|
September
30
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
Ceded
premiums
|
|
$
|
203,285
|
|
|
$
|
206,269
|
|
|
|
(1.4
|
)%
|
|
$
|
650,601
|
|
|
$
|
652,048
|
|
|
|
(0.2
|
)%
|
Allowances
received
|
|
|
59,228
|
|
|
|
60,289
|
|
|
|
(1.8
|
)
|
|
|
180,667
|
|
|
|
187,418
|
|
|
|
(3.6
|
)
|
Net
ceded premiums
|
|
$
|
144,057
|
|
|
$
|
145,980
|
|
|
|
(1.3
|
)
|
|
$
|
469,934
|
|
|
$
|
464,630
|
|
|
|
1.1
|
|
The
net
ceded premium decreased 1.3% and increased 1.1% in the third quarter and first
nine months of 2007, respectively, compared to the same periods of the prior
year, primarily due to decreases in allowances received. The
Company’s move during 2005 to reduce its reliance on reinsurance by entering
into a securitization structure to fund certain statutory reserves will
ultimately result in a reduction in both ceded premiums and reinsurance
allowances received. As reinsurance allowances tend to be highest in
the first year of a policy and subsequently decline, for a period of time,
the
decrease in allowances received will outpace the decrease in ceded premiums,
resulting in an increase in net ceded premiums.
Claim
liabilities and policy benefits are calculated consistently for all policies
in
accordance with U.S. GAAP, regardless of whether or not the policy is
reinsured. Once the claim liabilities and policy benefits for the
underlying policies are estimated, the amounts recoverable from the reinsurers
are estimated based on a number of factors including the terms of the
reinsurance contracts, historical payment patterns of reinsurance partners,
and
the financial strength and credit worthiness of its reinsurance
partners. Liabilities for unpaid reinsurance claims are produced from
claims and reinsurance system records, which contain the relevant terms of
the
individual reinsurance contracts. The Company monitors claims due
from reinsurers to ensure that balances are settled on a timely
basis. Incurred but not reported (“IBNR”) claims are reviewed by
the Company’s actuarial staff to ensure that appropriate amounts are
ceded. Ceded policy reserves are calculated by various administrative
systems based on the nature of the specific reinsurance transactions and terms
of the contracts.
Other
operating expenses decreased in both the third quarter and first nine months
of
2007 compared to the prior year. These decreases relate to the impact
of the de-emphasis of one and sales of two other direct marketing subsidiaries
during 2007. The impact of these events contributed a
$9.7 million decrease during the third quarter and an $8.9 million
increase for the first nine months of 2007, respectively, compared to the same
periods in the prior year.
As
noted
above, the Company has reduced its reliance on reinsurance for newly written
traditional life products by moving towards a securitization structure under
which profitability is not expected to emerge immediately after the business
is
written. In addition, older, more profitable traditional life
policies continue to run off in the ordinary course. These two
factors combined with financing costs in connection with the securitization
structure and the Company’s pricing actions to remain competitive in the market
are expected to put pressure on the profitability of this segment. The Company
analyzes and monitors the credit worthiness of each of its reinsurance partners
to ensure collectability and minimize collection issues.
The
methodology for accounting for the impact of reinsurance on the Life Marketing
segment is determined by whether the specific products are subject to
SFAS 60 or SFAS 97. The Company’s traditional insurance
products (term insurance) are subject to SFAS 60 and the recognition
of the impact of reinsurance costs on the Company’s financial statements reflect
the requirements of that pronouncement. Ceded premiums are treated as
an offset to direct premium and policy fee revenue and are recognized when
due
to the assuming company. Ceded claims are treated as an offset to
direct benefits and settlement expenses and are recognized when the claim is
incurred on a direct basis. Ceded policy reserve changes are also treated as
an
offset to benefits and settlement expenses and are recognized during the
applicable financial reporting period. Expense allowances paid by the
assuming companies are treated as an offset to other operating expenses. Since
reinsurance treaties typically provide for allowance percentages that decrease
over time, allowances in excess of the “ultimate” or final level allowance are
capitalized. Amortization of capitalized reinsurance expense
allowances is treated as an offset to direct amortization of deferred policy
acquisition costs. Amortization of deferred expense allowances is
calculated as a level percentage of expected premiums in all durations given
expected future lapses and mortality and accretion due to
interest. Assumptions related to future lapses, mortality and
interest are based on the initial pricing of the products.
The
Company’s universal life, variable universal life and BOLI products are subject
to SFAS 97 and the recognition of the impact of reinsurance costs on the
Company’s financial statements reflect the requirements of that
pronouncement. Ceded premiums on SFAS 97 products reduce
premiums and policy fees recognized by the Company. Ceded claims are
treated as an offset to direct benefits and settlement expenses and are
recognized when the claim is incurred on a direct basis. Ceded policy reserve
changes are also treated as an offset to benefits and settlement expenses and
are recognized at the end of the applicable valuation
period. Commission and expense allowances paid by the assuming
companies are treated as an offset to other operating expenses. Since
reinsurance treaties typically provide for allowance percentages that decrease
over time, allowances in excess of the “ultimate” or final level allowance are
capitalized. Amortization of capitalized reinsurance expense
allowances are amortized based on future expected gross profits according to
SFAS 97. Unlike with SFAS 60 products, assumptions for
SFAS 97 regarding mortality, lapses and interest are continuously reviewed
and may be periodically changed. These changes will result in
“unlocking” which change the balance in the ceded deferred amortization cost and
can affect the amortization of deferred acquisition cost. Ceded unearned revenue
liabilities are also amortized based on expected gross
profits. Assumptions for SFAS 97 products are based on the best
current estimate of expected mortality, lapses and interest. The
Company complies with AICPA Statement of Position 03-1 which impacts the
timing of direct and ceded earnings on certain blocks of the Company’s
SFAS 97 business.
The
following income statement lines are affected by reinsurance cost:
Premiums
and policy fees (“reinsurance ceded” on the Company’s financial
statements)
·
|
These
amounts represent consideration paid to the assuming company for
accepting
the ceding company’s risks. Ceded premiums and policy fees
increase reinsurance cost.
|
Benefits
and settlement expenses
·
|
This
includes incurred claim amounts ceded and changes in policy reserves
required to support future ceded claims. Ceded benefits and
settlement expenses decrease reinsurance
cost.
|
Amortization
of deferred policy acquisition cost
·
|
This
line reflects the amortization of reinsurance allowances in excess
of
ultimate according to the respective methodologies discussed in the
Methodology and Assumptions section
above.
|
Other
expenses
·
|
This
line includes reinsurance allowances paid by assuming companies to
the
Company less capitalization of allowances in excess of
ultimate.
|
The
Life
Marketing segment’s reinsurance programs do not materially impact the other
income line of the Company’s income statement.
Reinsurance
impacted the Life Marketing segment line items as shown in the following
table:
Life
Marketing Segment
|
Line
Item Impact of Reinsurance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30
|
|
September
30
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars
in Thousands)
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance
ceded
|
|
$
|
(203,285
|
)
|
|
$
|
(206,269
|
)
|
|
$
|
(650,601
|
)
|
|
$
|
(652,048
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BENEFITS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
and settlement expenses
|
|
|
(244,465
|
)
|
|
|
(223,557
|
)
|
|
|
(703,608
|
)
|
|
|
(690,590
|
)
|
Amortization
of deferred policy acquisition costs
|
|
|
(19,845
|
)
|
|
|
(5,204
|
)
|
|
|
(44,456
|
)
|
|
|
(29,612
|
)
|
Other
operating expenses
|
|
|
(33,612
|
)
|
|
|
(32,138
|
)
|
|
|
(100,239
|
)
|
|
|
(97,602
|
)
|
The
table
above does reflect the impact of reinsurance on the Company’s net investment
income. By ceding business to the assuming companies, the Company
forgoes investment income on the reserves ceded. Conversely, the
assuming companies will receive investment income on the reserves assumed which
will increase the assuming companies’ profitability on business assumed from the
Company. The net investment income impact to the Company and the
assuming companies has not been quantified.
Sales
for
the segment increased 15.9% in the third quarter of 2007 versus 2006, primarily
due to an increase of $11.7 million in UL sales and an increase of
$0.1 million in variable universal life sales. This increase in
UL sales is primarily related to re-pricing of the Company’s universal life
products in late 2006 and 2007. Traditional life sales decreased 8.2% in the
third quarter of 2007 compared to the prior year. There has been
intense competition in the market for these products. The Company
continually reviews its product features and pricing in an effort to evaluate
its competitive position. Sales of BOLI business have decreased
year-to-date in 2007 compared to the prior year. BOLI sales can vary
widely between periods as the segment responds to opportunities for these
products only when required returns can be achieved.
Acquisitions
The
Acquisitions segment focuses on acquiring, converting, and servicing policies
acquired from other companies. The segment's primary focus is on life
insurance policies sold to individuals. Segment results were as
follows:
|
|
Three
Months Ended
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
September
30
|
|
|
|
|
|
September
30
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars
In Thousands)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
premiums and policy fees
|
|
$
|
198,381
|
|
|
$
|
188,491
|
|
|
|
5.2
|
%
|
|
$
|
607,327
|
|
|
$
|
314,680
|
|
|
|
93.0
|
%
|
Reinsurance
ceded
|
|
|
(122,347
|
)
|
|
|
(112,636
|
)
|
|
|
8.6
|
|
|
|
(377,959
|
)
|
|
|
(145,895
|
)
|
|
|
159.1
|
|
Net
premiums and policy fees
|
|
|
76,034
|
|
|
|
75,855
|
|
|
|
0.2
|
|
|
|
229,368
|
|
|
|
168,785
|
|
|
|
35.9
|
|
Net
investment income
|
|
|
143,342
|
|
|
|
152,834
|
|
|
|
(6.2
|
)
|
|
|
437,591
|
|
|
|
260,950
|
|
|
|
67.7
|
|
Other
income
|
|
|
2,405
|
|
|
|
4,774
|
|
|
|
(49.6
|
)
|
|
|
7,178
|
|
|
|
5,684
|
|
|
|
26.3
|
|
Total
operating revenues
|
|
|
221,781
|
|
|
|
233,463
|
|
|
|
(5.0
|
)
|
|
|
674,137
|
|
|
|
435,419
|
|
|
|
54.8
|
|
Realized
gains (losses) - investments
|
|
|
38,431
|
|
|
|
74,628
|
|
|
|
|
|
|
|
(22,852
|
)
|
|
|
74,628
|
|
|
|
|
|
Realized
gains (losses) - derivatives
|
|
|
(38,782
|
)
|
|
|
(58,544
|
)
|
|
|
|
|
|
|
29,297
|
|
|
|
(58,544
|
)
|
|
|
|
|
Total
revenues
|
|
|
221,430
|
|
|
|
249,547
|
|
|
|
|
|
|
|
680,582
|
|
|
|
451,503
|
|
|
|
|
|
BENEFITS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and settlement expenses
|
|
|
162,460
|
|
|
|
178,946
|
|
|
|
(9.2
|
)
|
|
|
482,648
|
|
|
|
313,384
|
|
|
|
54.0
|
|
Amortization
of deferred policy acquisition cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
value of businesses acquired
|
|
|
18,174
|
|
|
|
9,956
|
|
|
|
82.5
|
|
|
|
57,322
|
|
|
|
23,100
|
|
|
|
148.1
|
|
Other
operating expenses
|
|
|
10,772
|
|
|
|
12,501
|
|
|
|
(13.8
|
)
|
|
|
40,729
|
|
|
|
28,011
|
|
|
|
45.4
|
|
Operating
benefits and expenses
|
|
|
191,406
|
|
|
|
201,403
|
|
|
|
(5.0
|
)
|
|
|
580,699
|
|
|
|
364,495
|
|
|
|
59.3
|
|
Amortization
of DAC / VOBA related to realized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains
(losses) - investments
|
|
|
261
|
|
|
|
5,186
|
|
|
|
|
|
|
|
1,644
|
|
|
|
5,186
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
191,667
|
|
|
|
206,589
|
|
|
|
|
|
|
|
582,343
|
|
|
|
369,681
|
|
|
|
|
|
INCOME
BEFORE INCOME TAX
|
|
|
29,763
|
|
|
|
42,958
|
|
|
|
(30.7
|
)
|
|
|
98,239
|
|
|
|
81,822
|
|
|
|
20.1
|
|
Less
realized gains (losses)
|
|
|
(351
|
)
|
|
|
16,084
|
|
|
|
|
|
|
|
6,445
|
|
|
|
16,084
|
|
|
|
|
|
Less
related amortization of DAC
|
|
|
(261
|
)
|
|
|
(5,186
|
)
|
|
|
|
|
|
|
(1,644
|
)
|
|
|
(5,186
|
)
|
|
|
|
|
OPERATING
INCOME
|
|
$
|
30,375
|
|
|
$
|
32,060
|
|
|
|
(5.3
|
)
|
|
$
|
93,438
|
|
|
$
|
70,924
|
|
|
|
31.7
|
|
The
following table summarizes key data for the Acquisitions segment:
|
|
Three
Months Ended
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
September
30
|
|
|
|
|
September
30
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
Average
Life Insurance In-Force
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
|
|
$
|
222,737,352
|
|
|
$
|
236,087,652
|
|
|
|
(5.7
|
)%
|
|
$
|
226,590,005
|
|
|
$
|
236,302,640
|
|
|
|
(4.1
|
)%
|
Universal
life
|
|
|
31,727,526
|
|
|
|
33,520,117
|
|
|
|
(5.3
|
)
|
|
|
32,026,221
|
|
|
|
33,781,836
|
|
|
|
(5.2
|
)
|
|
|
$
|
254,464,878
|
|
|
$
|
269,607,769
|
|
|
|
(5.6
|
)
|
|
$
|
258,616,226
|
|
|
$
|
270,084,476
|
|
|
|
(4.2
|
)
|
Average
Account Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life
|
|
$
|
3,019,429
|
|
|
$
|
3,238,068
|
|
|
|
(6.8
|
)
|
|
$
|
3,042,683
|
|
|
$
|
3,246,655
|
|
|
|
(6.3
|
)
|
Fixed
annuity
(2)
|
|
|
4,853,211
|
|
|
|
5,336,070
|
|
|
|
(9.0
|
)
|
|
|
5,016,594
|
|
|
|
5,631,845
|
|
|
|
(10.9
|
)
|
Variable
annuity
|
|
|
205,556
|
|
|
|
199,120
|
|
|
|
3.2
|
|
|
|
173,704
|
|
|
|
174,614
|
|
|
|
(0.5
|
)
|
|
|
$
|
8,078,196
|
|
|
$
|
8,773,258
|
|
|
|
(7.9
|
)
|
|
$
|
8,232,981
|
|
|
$
|
9,053,114
|
|
|
|
(9.1
|
)
|
Interest
Spread - UL & Fixed Annuities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income yield
|
|
|
6.23
|
%
|
|
|
6.33
|
%
|
|
|
|
|
|
|
6.25
|
%
|
|
|
6.33
|
%
|
|
|
|
Interest
credited to policyholders
|
|
|
4.11
|
|
|
|
4.10
|
|
|
|
|
|
|
|
4.10
|
|
|
|
4.10
|
|
|
|
|
|
Interest
spread
|
|
|
2.12
|
%
|
|
|
2.23
|
%
|
|
|
|
|
|
|
2.15
|
%
|
|
|
2.23
|
%
|
|
|
|
Mortality
Experience
(3)
|
|
$
|
2,833
|
|
|
$
|
2,636
|
|
|
|
|
|
|
$
|
5,193
|
|
|
$
|
5,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Amounts are
not adjusted for reinsurance ceded.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Includes
general account balances held within variable annuity
products.
|
|
|
|
|
|
|
|
|
|
(3)
Represents
a favorable variance as compared to pricing assumptions. Excludes
results related to Chase Insurance Group which was acquired in
the third
quarter of 2006.
|
|
In
the
ordinary course of business, the Acquisitions segment regularly considers
acquisitions of blocks of policies or smaller insurance
companies. The level of the segment’s acquisition activity is
predicated upon many factors, including available capital, operating capacity,
and market dynamics. Policies acquired through the Acquisition
segment are typically “closed” blocks of business (no new policies are being
marketed). Therefore, earnings and account values are expected to
decline as the result of lapses, deaths, and other terminations of coverage
unless new acquisitions are made. The Company completed its
acquisition of the Chase Insurance Group during the third quarter of
2006. This acquisition drove increases in revenues, expenses, and
earnings of the segment for the first nine months of 2007, compared to the
prior
year period.
Net
premiums and policy fees increased 35.9% for the first nine months of 2007,
compared to the same period of the prior year as a result of the Chase Insurance
Group acquisition which contributed $94.5 million to net
premiums and policy fees during the first nine months of 2007. The
6.2% decrease in net investment income in the third quarter of 2007 compared
to
same period in 2006 is due to a decrease in invested assets. Investment income
increased 67.7% for the first nine months of 2007 compared to the same period
in
2006 as a result of the Chase Insurance group acquisition which contributed
$281.7 million of investment income during 2007, compared to
$99.3 million during 2006.
Benefits
and settlement expenses decreased 9.2% and increased 54.0% for the third quarter
and first nine months of 2007, respectively, compared to the same periods of
the
prior year. The decrease in the third quarter amount reflects runoff
of the blocks of business, primarily related to the block acquired in the 2006
Chase Insurance Group acquisition. The increase in year-to-date
benefits and settlement expenses related to the Chase Insurance Group
acquisition which contributed $287.7 million to benefits and settlement
expenses during the first nine months of 2007, compared to $114.8 million
in the same period of the prior year. The Chase Insurance Group
acquisition resulted in $8.1 million and $39.9 million, respectively
of additional VOBA amortization for the third quarter and first nine months
of
2007, driving the increases in this line item. Other operating expenses
decreased 13.8% for the third quarter of 2007, compared to the same period
of
the prior year as the Company has been able to realize expense efficiencies
in
the integration of the Chase Insurance Group block of business. Other
operating expenses for the first nine months of 2007 increased 45.4% related
to
the Chase Insurance Group acquisition, which contributed $16.3 million of
expenses during 2007, compared to $5.1 million in the first nine months of
2006. The segment continues to review credited rates on UL and
annuity business for all blocks of business to minimize the impact of lower
earned rates on interest spreads.
Annuities
The
Annuities segment manufactures, sells, and supports fixed and variable annuity
products. These products are primarily sold through broker-dealers,
but are also sold through financial institutions and independent agents and
brokers. Segment results were as follows:
|
|
Three
Months Ended
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
September
30
|
|
|
|
|
September
30
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(Dollars
In Thousands)
|
|
|
(Dollars
In Thousands)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
premiums and policy fees
|
|
$
|
8,481
|
|
|
$
|
7,794
|
|
|
|
8.8
|
%
|
|
$
|
25,376
|
|
|
$
|
23,938
|
|
|
|
6.0
|
%
|
Reinsurance
ceded
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
Net
premiums and policy fees
|
|
|
8,481
|
|
|
|
7,794
|
|
|
|
8.8
|
|
|
|
25,376
|
|
|
|
23,938
|
|
|
|
6.0
|
|
Net
investment income
|
|
|
69,313
|
|
|
|
56,475
|
|
|
|
22.7
|
|
|
|
195,064
|
|
|
|
164,834
|
|
|
|
18.3
|
|
Realized
gains (losses) - derivatives
|
|
|
193
|
|
|
|
(1,808
|
)
|
|
|
|
|
|
|
1,798
|
|
|
|
(1,787
|
)
|
|
|
|
|
Other
income
|
|
|
2,769
|
|
|
|
2,469
|
|
|
|
12.2
|
|
|
|
8,279
|
|
|
|
7,711
|
|
|
|
7.4
|
|
Total
operating revenues
|
|
|
80,756
|
|
|
|
64,930
|
|
|
|
24.4
|
|
|
|
230,517
|
|
|
|
194,696
|
|
|
|
18.4
|
|
Realized
gains (losses) - investments
|
|
|
(266
|
)
|
|
|
3,412
|
|
|
|
|
|
|
|
1,451
|
|
|
|
4,920
|
|
|
|
|
|
Total
revenues
|
|
|
80,490
|
|
|
|
68,342
|
|
|
|
|
|
|
|
231,968
|
|
|
|
199,616
|
|
|
|
|
|
BENEFITS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and settlement expenses
|
|
|
62,731
|
|
|
|
48,233
|
|
|
|
30.1
|
|
|
|
174,781
|
|
|
|
142,429
|
|
|
|
22.7
|
|
Amortization
of deferred policy acquisition cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
value of businesses acquired
|
|
|
5,239
|
|
|
|
6,585
|
|
|
|
(20.4
|
)
|
|
|
19,633
|
|
|
|
17,545
|
|
|
|
11.9
|
|
Other
operating expenses
|
|
|
6,350
|
|
|
|
4,761
|
|
|
|
33.4
|
|
|
|
17,392
|
|
|
|
18,480
|
|
|
|
(5.9
|
)
|
Operating
benefits and expenses
|
|
|
74,320
|
|
|
|
59,579
|
|
|
|
24.7
|
|
|
|
211,806
|
|
|
|
178,454
|
|
|
|
18.7
|
|
Amortization
of DAC / VOBA related to realized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains
(losses) - investments
|
|
|
(217
|
)
|
|
|
1,193
|
|
|
|
|
|
|
|
426
|
|
|
|
2,742
|
|
|
|
|
|
Total
benefits and expenses
|
|
|
74,103
|
|
|
|
60,772
|
|
|
|
|
|
|
|
212,232
|
|
|
|
181,196
|
|
|
|
|
|
INCOME
BEFORE INCOME TAX
|
|
|
6,387
|
|
|
|
7,570
|
|
|
|
(15.6
|
)
|
|
|
19,736
|
|
|
|
18,420
|
|
|
|
7.1
|
|
Less
realized gains (losses)
|
|
|
(266
|
)
|
|
|
3,412
|
|
|
|
|
|
|
|
1,451
|
|
|
|
4,920
|
|
|
|
|
|
Less
related amortization of DAC
|
|
|
217
|
|
|
|
(1,193
|
)
|
|
|
|
|
|
|
(426
|
)
|
|
|
(2,742
|
)
|
|
|
|
|
OPERATING
INCOME
|
|
$
|
6,436
|
|
|
$
|
5,351
|
|
|
|
20.3
|
|
|
$
|
18,711
|
|
|
$
|
16,242
|
|
|
|
15.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes key data for the Annuities segment:
|
|
Three
Months Ended
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
September
30
|
|
|
|
|
September
30
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
annuity
|
|
$
|
363,694
|
|
|
$
|
339,950
|
|
|
|
7.0
|
%
|
|
$
|
905,440
|
|
|
$
|
568,619
|
|
|
|
59.2
|
%
|
Variable
annuity
|
|
|
147,275
|
|
|
|
76,299
|
|
|
|
93.0
|
|
|
|
349,520
|
|
|
|
231,236
|
|
|
|
51.2
|
|
|
|
$
|
510,969
|
|
|
$
|
416,249
|
|
|
|
22.8
|
|
|
$
|
1,254,960
|
|
|
$
|
799,855
|
|
|
|
56.9
|
|
Average
Account Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
annuity
(1)
|
|
$
|
4,566,357
|
|
|
$
|
3,649,162
|
|
|
|
25.1
|
|
|
$
|
4,283,865
|
|
|
$
|
3,493,415
|
|
|
|
22.6
|
|
Variable
annuity
|
|
|
2,674,634
|
|
|
|
2,365,238
|
|
|
|
13.1
|
|
|
|
2,653,235
|
|
|
|
2,365,541
|
|
|
|
12.2
|
|
|
|
$
|
7,240,991
|
|
|
$
|
6,014,400
|
|
|
|
20.4
|
|
|
$
|
6,937,100
|
|
|
$
|
5,858,956
|
|
|
|
18.4
|
|
Interest
Spread - Fixed Annuities
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income yield
|
|
|
6.01
|
%
|
|
|
6.17
|
%
|
|
|
|
|
|
|
5.99
|
%
|
|
|
6.19
|
%
|
|
|
|
|
Interest
credited to policyholders
|
|
|
5.39
|
|
|
|
5.28
|
|
|
|
|
|
|
|
5.38
|
|
|
|
5.34
|
|
|
|
|
|
Interest
spread
|
|
|
0.62
|
%
|
|
|
0.89
|
%
|
|
|
|
|
|
|
0.61
|
%
|
|
|
0.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMDB
- Net amount at risk
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
82,865
|
|
|
$
|
111,187
|
|
|
|
(25.5
|
)%
|
GMDB
- Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,176
|
|
|
|
2,920
|
|
|
|
(25.5
|
)
|
S&P
500® Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,527
|
|
|
|
1,336
|
|
|
|
14.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes
general account balances held within variable annuity
products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Interest
spread on average general account values.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
Guaranteed
death benefits in excess of contract holder account
balance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
operating income increased approximately $1.1 million, or 20.3%, for the
third quarter of 2007 compared to the same period of 2006, while year-to-date
operating income increased $2.5 million, or 15.2%. The
year-to-date improvement is primarily due to favorable results in the market
value adjusted annuity line and the equity indexed annuity
line. Offsetting the favorable results is a decrease in operating
income in the single premium immediate annuity line, resulting from unfavorable
mortality results and a tightening of spreads. Operating income was
also favorably impacted for the first nine months of 2007 compared to the same
period of the prior year by increasing account values.
Segment
operating revenues increased 24.4% and 18.4% in the third quarter and first
nine
months of 2007 compared to the same periods of 2006 primarily due to increases
in net investment income. Average account balances grew 20.4% and
18.4% for the third quarter and first nine months of 2007, respectively,
resulting in higher investment income. The additional income
resulting from the larger account balances was partially reduced in 2007 by
a
year-to-date 24 basis point decline in interest spreads. The
segment continually monitors and adjusts credited rates as appropriate in an
effort to maintain or improve its interest spread.
Operating
benefits and expenses increased 24.7% and 18.7% for the third quarter and first
nine months of 2007, respectively, compared to the same periods of the prior
year. These increases are primarily the result of higher credited
interest and unfavorable mortality fluctuations. In the third quarter, these
increases were partially offset by reductions in DAC amortization, while the
year-to-date increases were offset by a reduction in operating
expenses. Increases in credited interest are the result of an
increase in average account values. Mortality was unfavorable by
$2.6 million for the third quarter of 2007, compared to unfavorable
mortality of $1.5 million for the same period of 2006, an unfavorable
change of $1.1 million. Year-to-date, mortality was unfavorable
by $7.6 million compared to unfavorable mortality of $4.8 million for
2006, an unfavorable change of $2.8 million. These unfavorable
mortality variances primarily relate to the nonrecurring sales of
$122 million of single premium immediate annuities on 28 lives sold in
the fourth quarter of 2004 in a structured transaction. Because this
block of annuities is large relative to the total amount of annuities in-force,
volatility in mortality results are expected.
The
decrease in DAC amortization for the third quarter of 2007 compared to 2006
is
primarily the result of fluctuations in the Equity Indexed Annuity line due
to the impact of using a fair value calculation on this block of business in
2007. The increase in DAC amortization for the first nine months of 2007
compared to 2006 is primarily the result of DAC unlocking in various
lines. The Company periodically reviews and updates as appropriate
its key assumptions including future mortality, expenses, lapses, premium
persistency, investment yields and interest spreads. Changes to these
assumptions result in adjustments which increase or decrease DAC
amortization. The periodic review and updating of assumptions is
referred to as “unlocking.” During the first nine months of 2007, DAC
amortization for the Annuities segment was reduced $4.4 million due to
favorable DAC unlocking in the market value adjusted annuity
line. Favorable DAC unlocking of $2.9 million was recorded by
the segment during the first nine months of 2006.
Total
sales were 22.8% and 56.9% higher for the third quarter and the first nine
months of 2007, respectively, compared to the same periods of the prior year.
The continuation of new annuity sales through the former Chase distribution
system, contributed $314.5 million in fixed annuity sales in the first nine
months of 2007. Sales of variable annuities increased 93.0% for the
third quarter of 2007 compared to the third quarter of 2006. The
Company launched a new living benefit guaranteed minimum withdrawal benefit
rider in its variable annuity product during May 2007, contributing to this
growth. Additionally, sales of fixed annuities increased 7.0% for the third
quarter of 2007, compared to the third quarter of 2006. A general
improvement in the equity markets has reduced the net amount at risk with
respect to guaranteed minimum death benefits by 25.5% at September 30, 2007
compared to the same period in the prior year.
Stable
Value Products
The
Stable Value Products segment sells guaranteed funding agreements
(“GFA”) to special purpose entities that in turn issue notes or
certificates in smaller, transferable denominations. The segment also
markets fixed and floating rate funding agreements directly to the trustees
of
municipal bond proceeds, institutional investors, bank trust departments, and
money market funds. Additionally, the segment markets guaranteed
investment contracts (“GICs”) to 401(k) and other qualified retirement
savings plans. Segment results were as follows:
|
|
Three
Months Ended
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
September
30
|
|
|
|
|
|
September
30
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(Dollars
In Thousands)
|
|
|
(Dollars
In Thousands)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income
|
|
$
|
73,501
|
|
|
$
|
80,734
|
|
|
|
(9.0
|
)%
|
|
$
|
224,080
|
|
|
$
|
245,317
|
|
|
|
(8.7
|
)%
|
Realized
gains (losses)
|
|
|
(333
|
)
|
|
|
4,521
|
|
|
|
(107.4
|
)
|
|
|
509
|
|
|
|
377
|
|
|
|
35.0
|
|
Total
revenues
|
|
|
73,168
|
|
|
|
85,255
|
|
|
|
|
|
|
|
224,589
|
|
|
|
245,694
|
|
|
|
|
|
BENEFITS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and settlement expenses
|
|
|
58,340
|
|
|
|
68,154
|
|
|
|
(14.4
|
)
|
|
|
180,156
|
|
|
|
204,032
|
|
|
|
(11.7
|
)
|
Amortization
of deferred policy acquisition cost
|
|
|
985
|
|
|
|
1,064
|
|
|
|
(7.4
|
)
|
|
|
3,140
|
|
|
|
3,429
|
|
|
|
(8.4
|
)
|
Other
operating expenses
|
|
|
1,069
|
|
|
|
1,087
|
|
|
|
(1.7
|
)
|
|
|
3,136
|
|
|
|
3,283
|
|
|
|
(4.5
|
)
|
Total
benefits and expenses
|
|
|
60,394
|
|
|
|
70,305
|
|
|
|
(14.1
|
)
|
|
|
186,432
|
|
|
|
210,744
|
|
|
|
(11.5
|
)
|
INCOME
BEFORE INCOME TAX
|
|
|
12,774
|
|
|
|
14,950
|
|
|
|
(14.6
|
)
|
|
|
38,157
|
|
|
|
34,950
|
|
|
|
9.2
|
|
Less
realized gains (losses)
|
|
|
(333
|
)
|
|
|
4,521
|
|
|
|
|
|
|
|
509
|
|
|
|
377
|
|
|
|
|
|
OPERATING
INCOME
|
|
$
|
13,107
|
|
|
$
|
10,429
|
|
|
|
25.7
|
|
|
$
|
37,648
|
|
|
$
|
34,573
|
|
|
|
8.9
|
|
The
following table summarizes key data for the Stable Value Products
segment:
|
|
Three
Months Ended
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
September
30
|
|
|
|
|
September
30
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GIC
|
|
$
|
54,500
|
|
|
$
|
107,500
|
|
|
|
(49.3
|
)%
|
|
$
|
132,000
|
|
|
$
|
265,100
|
|
|
|
(50.2
|
)%
|
GFA-Registered
Notes - Institutional
|
|
|
475,000
|
|
|
|
0
|
|
|
|
|
|
|
|
525,000
|
|
|
|
0
|
|
|
|
|
|
GFA-Registered
Notes - Retail
|
|
|
42,735
|
|
|
|
54,743
|
|
|
|
(21.9
|
)
|
|
|
65,870
|
|
|
|
108,662
|
|
|
|
(39.4
|
)
|
|
|
$
|
572,235
|
|
|
$
|
162,243
|
|
|
|
252.7
|
|
|
$
|
722,870
|
|
|
$
|
373,762
|
|
|
|
93.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Account Values
|
|
$
|
4,826,108
|
|
|
$
|
5,662,236
|
|
|
|
|
|
|
$
|
5,021,185
|
|
|
$
|
5,829,589
|
|
|
|
|
|
Operating
Spread
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income yield
|
|
|
6.10
|
%
|
|
|
5.83
|
%
|
|
|
|
|
|
|
6.01
|
%
|
|
|
5.73
|
%
|
|
|
|
|
Interest
credited
|
|
|
4.84
|
|
|
|
4.93
|
|
|
|
|
|
|
|
4.83
|
|
|
|
4.76
|
|
|
|
|
|
Operating
expenses
|
|
|
0.17
|
|
|
|
0.15
|
|
|
|
|
|
|
|
0.17
|
|
|
|
0.16
|
|
|
|
|
|
Operating
spread
|
|
|
1.09
|
%
|
|
|
0.75
|
%
|
|
|
|
|
|
|
1.01
|
%
|
|
|
0.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income increased 25.7% and 8.9% for the third quarter and first nine months
of
2007, respectively compared to the same periods of 2006. Decreases in
operating earnings resulting from declines in average account values were more
than offset by higher operating spreads. Operating spreads increased
34 basis points for the third quarter and 20 basis points for the
first nine months due to the scheduled maturity of several, large high-coupon
contracts and an improvement in portfolio asset yields. The segment
continually reviews its investment portfolio for opportunities to increase
the
net investment income yield in an effort to maintain or increase interest
spread. Operating spread for the remainder of 2007 is expected to
exceed the spread achieved for the same period of the prior year. In
general, operating earnings for this segment are expected to stabilize as the
Company continues to access the institutional funding agreement-backed note
market.
Total
sales increased 252.7% for the third quarter of 2007 and 93.4% for the first
nine months of 2007 compared to the same period of 2006 as a result of the
timing of note sales. The Company reentered the institutional funding
agreement-backed note market during the second quarter of 2007 and recorded
sales of $475 million during the third quarter of 2007. Fluctuations
in sales in the stable value product lines are expected from quarter to quarter
as a result of changing market conditions and the Company's evaluation of
whether or not to issue additional contracts.
Asset
Protection
The
Asset
Protection segment primarily markets extended service contracts and credit
life
and disability insurance to protect consumers’ investments in automobiles,
watercraft, and recreational vehicles. In addition, the segment
markets a guaranteed asset protection (“GAP”) product and an inventory
protection product (“IPP”).
Segment
results were as follows:
|
|
Three
Months Ended
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
September
30
|
|
|
|
|
September
30
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
premiums and policy fees
|
|
$
|
101,189
|
|
|
$
|
104,564
|
|
|
|
(3.2
|
)%
|
|
$
|
298,594
|
|
|
$
|
305,457
|
|
|
|
(2.2
|
)%
|
Reinsurance
ceded
|
|
|
(43,244
|
)
|
|
|
(52,775
|
)
|
|
|
(18.1
|
)
|
|
|
(134,071
|
)
|
|
|
(162,165
|
)
|
|
|
(17.3
|
)
|
Net
premiums and policy fees
|
|
|
57,945
|
|
|
|
51,789
|
|
|
|
11.9
|
|
|
|
164,523
|
|
|
|
143,292
|
|
|
|
14.8
|
|
Net
investment income
|
|
|
10,188
|
|
|
|
8,649
|
|
|
|
17.8
|
|
|
|
28,867
|
|
|
|
24,533
|
|
|
|
17.7
|
|
Other
income
|
|
|
19,330
|
|
|
|
20,597
|
|
|
|
(6.2
|
)
|
|
|
56,314
|
|
|
|
48,662
|
|
|
|
15.7
|
|
Total
operating revenues
|
|
|
87,463
|
|
|
|
81,035
|
|
|
|
7.9
|
|
|
|
249,704
|
|
|
|
216,487
|
|
|
|
15.3
|
|
BENEFITS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and settlement expenses
|
|
|
30,779
|
|
|
|
26,137
|
|
|
|
17.8
|
|
|
|
82,707
|
|
|
|
71,216
|
|
|
|
16.1
|
|
Amortization
of deferred policy acquisition cost
|
|
|
21,291
|
|
|
|
20,713
|
|
|
|
2.8
|
|
|
|
63,458
|
|
|
|
53,954
|
|
|
|
17.6
|
|
Other
operating expenses
|
|
|
25,488
|
|
|
|
48,586
|
|
|
|
(47.5
|
)
|
|
|
72,028
|
|
|
|
88,076
|
|
|
|
(18.2
|
)
|
Total
benefits and expenses
|
|
|
77,558
|
|
|
|
95,436
|
|
|
|
(18.7
|
)
|
|
|
218,193
|
|
|
|
213,246
|
|
|
|
2.3
|
|
INCOME
BEFORE INCOME TAX
|
|
|
9,905
|
|
|
|
(14,401
|
)
|
|
|
168.8
|
|
|
|
31,511
|
|
|
|
3,241
|
|
|
|
872.3
|
|
OPERATING
INCOME (LOSS)
|
|
$
|
9,905
|
|
|
$
|
(14,401
|
)
|
|
|
168.8
|
|
|
$
|
31,511
|
|
|
$
|
3,241
|
|
|
|
872.3
|
|
The
following table summarizes key data for the Asset Protection
segment:
|
|
Three
Months Ended
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
September
30
|
|
|
|
|
September
30
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
insurance
|
|
$
|
27,686
|
|
|
$
|
41,488
|
|
|
|
(33.3
|
)%
|
|
$
|
87,347
|
|
|
$
|
113,287
|
|
|
|
(22.9
|
)%
|
Service
contracts
|
|
|
90,954
|
|
|
|
79,183
|
|
|
|
14.9
|
|
|
|
250,410
|
|
|
|
206,247
|
|
|
|
21.4
|
|
Other
products
|
|
|
28,175
|
|
|
|
35,792
|
|
|
|
(21.3
|
)
|
|
|
102,001
|
|
|
|
75,613
|
|
|
|
34.9
|
|
|
|
$
|
146,815
|
|
|
$
|
156,463
|
|
|
|
(6.2
|
)
|
|
$
|
439,758
|
|
|
$
|
395,147
|
|
|
|
11.3
|
|
Loss
Ratios
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
insurance
|
|
|
24.5
|
%
|
|
|
34.7
|
%
|
|
|
|
|
|
|
29.9
|
%
|
|
|
34.0
|
%
|
|
|
|
|
Service
contracts
|
|
|
71.6
|
|
|
|
67.7
|
|
|
|
|
|
|
|
67.9
|
|
|
|
66.5
|
|
|
|
|
|
Other
products
|
|
|
37.1
|
|
|
|
24.2
|
|
|
|
|
|
|
|
33.2
|
|
|
|
29.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Incurred
claims as a percentage of earned premiums.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income increased 168.8% and 872.3% during the third quarter and first nine
months of 2007, respectively, compared to the same periods of 2006 primarily
related to bad debt charges of $26.0 million and $27.1 million,
respectively that occurred during the 2006 periods. These charges
were incurred on a line of business that the Company is no longer
marketing.
Earnings
from core product lines decreased $1.9 million and increased
$1.7 million, respectively, for the third quarter and first nine months of
2007 compared to the prior year. Within the segment’s core product lines,
service contract earnings improved $1.5 million for the quarter and
$7.0 million year-to-date. The Western General acquisition
completed during the third quarter of 2006, contributed $0.1 million and
$1.9 million, respectively, to the quarterly and year-to-date increases in
the service contract line. The service contract line was also
favorably impacted for the third quarter and year-to-date by higher volume
and
improved loss ratios in marine service contracts. Credit insurance
earnings increased $0.4 million and $0.3 million, respectively, for
the third quarter and first nine months of 2007, while earnings from other
products declined $3.7 million and $5.6 million for the same periods.
The decline in other products related primarily to higher losses for the
guaranteed asset protection product and a decline in volume related to the
inventory protection product.
Net
premiums and policy fees increased for both the current quarter and
year-to-date, as compared to 2006, due to increases in the service contract
and
other lines. Net premiums increased $4.9 million and
$13.9 million for the current quarter and year-to-date, respectively, in
the service contract line primarily as a result of the Western General
acquisition. Within the other product lines, net premiums increased
$1.4 million and $8.5 million for the third quarter and first nine
months of 2007, respectively, compared to the same periods of the prior year,
primarily due to increases in the GAP product line. The year-to-date
increase in net premiums was partially offset by declines in the credit
insurance line, the IPP line and lines the segment is no longer
marketing. The declines in these lines are expected to continue as
the business-in-force continues to decline.
Other
income decreased 6.2% for the third quarter and increased 15.7% year-to-date
from the same periods of the prior year. The year-to-date increase is
primarily due to increases in administrative fees on service contracts and
GAP
products resulting from the increased volume of contracts sold in these product
lines. The Western General acquisition contributed to the
year-to-date increase, adding $7.0 million to other income for the first
nine months of 2007.
Benefits
and settlement expenses increased 17.8% and 16.1% from the third quarter and
first nine months of 2006, respectively, as a result of higher expenses in
the
service contract line primarily due to the Western General
acquisition. Western General accounted for a $2.3 million third
quarter increase and an $8.9 million year-to-date increase in the service
contract line. Benefits and settlement expenses also increased
$5.2 million in the other product lines for the first nine months of 2007
compared to the same period of 2006, reflecting the growth in business in these
lines over the past several quarters. These increases were partially
offset by declines in credit insurance of $1.6 million and
$2.1 million, respectively for the third quarter and for the first nine
months of 2007, reflecting the decrease in net premiums in these lines as
discussed above. Benefits and settlement expenses have also been
favorably impacted by the continuing improvement in loss ratios.
Amortization
of DAC is $0.6 million and $9.5 million higher for the current quarter
and first nine months of 2007, respectively, compared to the same periods of
2006, reflecting the increase in earned premiums in the GAP line. The
decreases for both periods in other operating expenses are primarily due to
bad
debt charges of $26.0 million and $27.1 million, respectively that
occurred during the 2006 periods. These charges related to the bankruptcy filing
of CENTRIX Financial LLC (“CENTRIX”) and were based on the Company’s
assessment of the inability of CENTRIX and an affiliated reinsurer to meet
their
obligations as a part of the Lenders Indemnity product line. Offsetting the
impact of these charges is higher commissions on service contracts and GAP
due
to increased volume, higher retrospective commissions resulting from
improvements in loss ratios, and the Western General acquisition, which
contributed $1.9 million and $7.2 million of operating expense to the
current period and first nine months of 2007, respectively.
Total
segment sales decreased 6.2% and increased 11.3% for the third quarter and
first
nine months of 2007, respectively, compared to the same period of
2006. Service contract sales continue to improve, exceeding the prior
year by 14.9% and 21.4%, respectively for the third quarter and the first nine
months of 2007. The decline in credit insurance sales is due to a
significant decrease in sales through financial institutions. The
bulk of these sales are derived from a third party administrator relationship
which is in runoff. We therefore expect these sales to continue to
decline during 2007 compared to 2006 amounts. Other product sales in
the third quarter of 2007 decreased significantly compared to the same period
in
2006, due to the IPP and GAP lines. Other product sales for the first nine
months of 2007 compared to the same period in 2006 increased significantly
related to the GAP line.
Corporate
and Other
The
Company has an additional segment referred to as Corporate and
Other. The Corporate and Other segment primarily consists of net
investment income and expenses not attributable to the segments above (including
net investment income on unallocated capital and interest on
debt). This segment also includes earnings from several non-strategic
lines of business (primarily cancer insurance, residual value insurance, surety
insurance, and group annuities), various investment-related transactions, and
the operations of several small subsidiaries.
The
following table summarizes results for this segment:
|
|
Three
Months Ended
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
September
30
|
|
|
|
|
September
30
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(Dollars
In Thousands)
|
|
|
(Dollars
In Thousands)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
premiums and policy fees
|
|
$
|
7,999
|
|
|
$
|
9,253
|
|
|
|
(13.6
|
)%
|
|
$
|
25,626
|
|
|
$
|
29,072
|
|
|
|
(11.9
|
)%
|
Reinsurance
ceded
|
|
|
(2
|
)
|
|
|
(8
|
)
|
|
|
(75.0
|
)
|
|
|
(10
|
)
|
|
|
(19
|
)
|
|
|
(47.4
|
)
|
Net
premiums and policy fees
|
|
|
7,997
|
|
|
|
9,245
|
|
|
|
(13.5
|
)
|
|
|
25,616
|
|
|
|
29,053
|
|
|
|
(11.8
|
)
|
Net
investment income
|
|
|
53,011
|
|
|
|
31,610
|
|
|
|
67.7
|
|
|
|
126,477
|
|
|
|
86,140
|
|
|
|
46.8
|
|
Realized
gains (losses) - investments
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
6,857
|
|
|
|
13,494
|
|
|
|
(49.2
|
)
|
Realized
gains (losses) - derivatives
|
|
|
132
|
|
|
|
654
|
|
|
|
(79.8
|
)
|
|
|
626
|
|
|
|
2,659
|
|
|
|
(76.5
|
)
|
Other
income
|
|
|
(144
|
)
|
|
|
2,237
|
|
|
|
(106.4
|
)
|
|
|
1,476
|
|
|
|
8,081
|
|
|
|
(81.7
|
)
|
Total
operating revenues
|
|
|
60,996
|
|
|
|
43,746
|
|
|
|
39.4
|
|
|
|
161,052
|
|
|
|
139,427
|
|
|
|
15.5
|
|
Realized
gains (losses) - investments
|
|
|
5,134
|
|
|
|
(3,929
|
)
|
|
|
|
|
|
|
7,852
|
|
|
|
5,439
|
|
|
|
|
|
Realized
gains (losses) - derivatives
|
|
|
1,138
|
|
|
|
4,409
|
|
|
|
|
|
|
|
784
|
|
|
|
10,511
|
|
|
|
|
|
Total
revenues
|
|
|
67,268
|
|
|
|
44,226
|
|
|
|
52.1
|
|
|
|
169,688
|
|
|
|
155,377
|
|
|
|
9.2
|
|
BENEFITS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and settlement expenses
|
|
|
8,585
|
|
|
|
20,265
|
|
|
|
(57.6
|
)
|
|
|
27,861
|
|
|
|
37,888
|
|
|
|
(26.5
|
)
|
Amortization
of deferred policy acquisition cost
|
|
|
323
|
|
|
|
813
|
|
|
|
(60.3
|
)
|
|
|
587
|
|
|
|
2,636
|
|
|
|
(77.7
|
)
|
Other
operating expenses
|
|
|
49,746
|
|
|
|
26,597
|
|
|
|
87.0
|
|
|
|
129,785
|
|
|
|
84,321
|
|
|
|
53.9
|
|
Total
benefits and expenses
|
|
|
58,654
|
|
|
|
47,675
|
|
|
|
23.0
|
|
|
|
158,233
|
|
|
|
124,845
|
|
|
|
26.7
|
|
INCOME
BEFORE INCOME TAX
|
|
|
8,614
|
|
|
|
(3,449
|
)
|
|
|
349.8
|
|
|
|
11,455
|
|
|
|
30,532
|
|
|
|
(62.5
|
)
|
Less
realized gains (losses)-investments
|
|
|
5,134
|
|
|
|
(3,929
|
)
|
|
|
|
|
|
|
7,852
|
|
|
|
5,439
|
|
|
|
|
|
Less
realized gains (losses)-derivatives
|
|
|
1,138
|
|
|
|
4,409
|
|
|
|
|
|
|
|
784
|
|
|
|
10,511
|
|
|
|
|
|
OPERATING
INCOME
|
|
$
|
2,342
|
|
|
$
|
(3,929
|
)
|
|
|
159.6
|
|
|
$
|
2,819
|
|
|
$
|
14,582
|
|
|
|
(80.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income increased $6.3 million and decreased $11.8 million for the
third quarter and first nine months of 2007, respectively, compared to the
same
periods of the prior year. The third quarter increase is primarily
due a $9.0 million charge recorded in the third quarter of 2006 to
strengthen reserves related to the discontinued Residual Value line. The
year-to-date decrease is primarily the result of higher interest
expenses.
Operating
revenues for the Corporate and Other segment are primarily comprised of net
investment income on unallocated capital and net premiums and policy fees
related to several non-strategic lines of business. Net investment
income for the Corporate and Other segment increased $21.4 million and
$40.4 million for the third quarter and first nine months of 2007,
respectively, compared to 2006, while net premiums and policy fees declined
$1.2 million and $3.4 million, respectively, for these same
periods. The declines in net premiums and policy fees are the
expected result of the runoff of business in the non-strategic lines of business
which are no longer being marketed by the Company. The increases in
net investment income are primarily the result of increases in unallocated
capital and investment income from proceeds of non-recourse funding obligations
compared to the prior year.
Benefits
and settlement expenses decreased 57.6% and 26.5%, respectively, compared to
the
same periods of 2006. These decreases are primarily a result of a
$9.0 million reserve strengthening recorded in the third quarter of
2006.
Other
operating expenses increased 87.0% and 53.9% for the third quarter and first
nine months of 2007, respectively, compared to the same periods of
2006. These increases are primarily due to increases in interest
expense of $16.6 million and $37.2 million for the third quarter and
first nine months of 2007, respectively, compared to 2006. The higher
interest expense is primarily the result of additional issuances of non-recourse
funding obligations. For additional information regarding these obligations,
refer to Note 2. In addition, increases in annual incentives of
$3.7 million and $5.4 million for the third quarter and first nine
months of 2007, respectively, have contributed to this increase.
Realized
Gains and Losses
The
following table sets forth realized investment gains and losses for the periods
shown. Certain reclassifications have been made in the previously reported
amounts to make the prior period amounts comparable to those of the current
period. Such reclassifications had no effect on previously reported
net income or share-owners' equity.
|
|
Three
Months Ended
|
|
|
|
|
|
Nine
Months Ended
|
|
|
|
|
|
|
September
30
|
|
|
|
|
September
30
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(Dollars
In Thousands)
|
|
|
(Dollars
In Thousands)
|
|
Fixed
maturity gains - sales
|
|
$
|
4,398
|
|
|
$
|
16,995
|
|
|
$
|
(12,597
|
)
|
|
$
|
8,261
|
|
|
$
|
40,258
|
|
|
$
|
(31,997
|
)
|
Fixed
maturity losses - sales
|
|
|
(549
|
)
|
|
|
(4,564
|
)
|
|
|
4,015
|
|
|
|
(5,355
|
)
|
|
|
(25,816
|
)
|
|
|
20,461
|
|
Equity
gains - sales
|
|
|
0
|
|
|
|
14
|
|
|
|
(14
|
)
|
|
|
5,911
|
|
|
|
249
|
|
|
|
5,662
|
|
Equity
losses - sales
|
|
|
(12
|
)
|
|
|
0
|
|
|
|
(12
|
)
|
|
|
(12
|
)
|
|
|
(7
|
)
|
|
|
(5
|
)
|
Impairments
on fixed maturity securities
|
|
|
0
|
|
|
|
(5,689
|
)
|
|
|
5,689
|
|
|
|
(48
|
)
|
|
|
(5,689
|
)
|
|
|
5,641
|
|
Impairments
on equity securities
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Mark
to market - Modco trading portfolios
|
|
|
42,080
|
|
|
|
69,670
|
|
|
|
(27,590
|
)
|
|
|
(23,189
|
)
|
|
|
69,670
|
|
|
|
(92,859
|
)
|
Other
|
|
|
(2,803
|
)
|
|
|
2,219
|
|
|
|
(5,022
|
)
|
|
|
4,231
|
|
|
|
19,796
|
|
|
|
(15,565
|
)
|
Total
realized gains (losses) - investments
|
|
$
|
43,114
|
|
|
$
|
78,645
|
|
|
$
|
(35,531
|
)
|
|
$
|
(10,201
|
)
|
|
$
|
98,461
|
|
|
$
|
(108,662
|
)
|
Foreign
currency swaps
|
|
$
|
1,723
|
|
|
$
|
(175
|
)
|
|
$
|
1,898
|
|
|
$
|
6,695
|
|
|
$
|
2,386
|
|
|
$
|
4,309
|
|
Foreign
currency adjustments on stable value contracts
|
|
|
(1,750
|
)
|
|
|
230
|
|
|
|
(1,980
|
)
|
|
|
(2,559
|
)
|
|
|
(2,113
|
)
|
|
|
(446
|
)
|
Derivatives
related to mortgage loan commitments
|
|
|
0
|
|
|
|
(2,128
|
)
|
|
|
2,128
|
|
|
|
0
|
|
|
|
17,570
|
|
|
|
(17,570
|
)
|
Embedded
derivatives related to reinsurance
|
|
|
(38,144
|
)
|
|
|
(58,240
|
)
|
|
|
20,096
|
|
|
|
32,265
|
|
|
|
(57,631
|
)
|
|
|
89,896
|
|
Derivatives
related to corporate debt
|
|
|
6,392
|
|
|
|
9,784
|
|
|
|
(3,392
|
)
|
|
|
(1,098
|
)
|
|
|
(1,251
|
)
|
|
|
153
|
|
Other
derivatives
|
|
|
(5,688
|
)
|
|
|
(4,773
|
)
|
|
|
(915
|
)
|
|
|
1,220
|
|
|
|
(5,725
|
)
|
|
|
6,945
|
|
Total
realized (losses) gains - derivatives
|
|
$
|
(37,467
|
)
|
|
$
|
(55,302
|
)
|
|
$
|
17,835
|
|
|
$
|
36,523
|
|
|
$
|
(46,764
|
)
|
|
$
|
83,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
gains and losses on investments reflect portfolio management activities designed
to maintain proper matching of assets and liabilities and to enhance long-term
investment portfolio performance. The change in net realized
investment gains for the current quarter, excluding impairments, reflects the
normal operation of the Company’s asset/liability program within the context of
the changing interest rate environment. Impairments for the first
nine months of 2007 totaled $0.1 million, compared to $5.7 million for
the same period of 2006. The $4.2 million of other realized
gains recognized in the first nine months of 2007 include gains of
$6.6 million related to real estate investments, gains of $0.4 million
related to short-term investments, a $2.9 million increase in the Company’s
allowance for mortgage loan credit losses, and other losses totaling
$0.1 million. At September 30, 2007, year-to-date net
mark-to-market losses of $23.2 million to the Company’s modified
coinsurance (“modco”) trading portfolios associated with the Chase
Insurance Group acquisition are also included in realized gains and
losses. Additional details on the Company’s investment performance
and evaluation are provided in the “Consolidated Investments” section
below.
Realized
investment gains and losses related to derivatives represent changes in the
fair
value of derivative financial instruments and gains (losses) on derivative
contracts closed during the period. The Company has entered into
foreign currency swaps to mitigate the risk of changes in the value of principal
and interest payments to be made on certain of its foreign currency denominated
stable value contracts. The Company recorded an immaterial loss and
net realized gains of $4.1 million from these securities during the third
quarter and first nine months of 2007, respectively. These gains were
the result of swap and contract maturities and differences in the related
foreign currency spot and forward rates used to value the stable value contracts
and foreign currency swaps. The Company has taken short positions in
U.S. Treasury futures to mitigate interest rate risk related to the
Company’s mortgage loan commitments. There was no activity in futures
during the first nine months of 2007.
The
Company is also involved in various modified coinsurance and funds withheld
arrangements that, in accordance with DIG B36 (“Embedded Derivatives:
Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit
Risk Exposures That Are Unrelated or Only Partially Related to the
Creditworthiness of the Obligor under Those Instruments”), contain embedded
derivatives. The losses on these embedded derivatives were due to
decreasing interest rates during the third quarter. For the third
quarter, the investment portfolios that support the related modified coinsurance
reserves and funds withheld had mark-to-market gains that substantially offset
the losses on these embedded derivatives.
The
Company uses interest rate swaps to mitigate interest rate risk related to
certain Senior Notes, Medium-Term Notes, and subordinated debt
securities. These positions resulted in gains of $6.4 and losses
of $1.1 million respectively, during the third quarter and first nine
months of 2007. The Company also uses various swaps, options, and
swaptions to mitigate risk related to other interest rate exposures of the
Company. The company realized losses of $13.1 million and
$6.6 million on swaptions for the third quarter and first nine months of
2007, respectively. Equity call options generated gains of
$0.1 million and $1.4 million for the third quarter and first nine
months of 2007, respectively. Credit default swaps incurred gains of
$7.4 million and $6.7 million during the third quarter and first nine
months of 2007, respectively. Embedded derivatives associated with
the GMWB (Guaranteed Minimum Withdrawal Benefit) rider on the variable
deferred annuity had realized gains of $0.1 million and $0.4 million
for the third quarter and first nine months of 2007, respectively.
CONSOLIDATED
INVESTMENTS
Portfolio
Description
The
Company's investment portfolio consists primarily of fixed maturity securities
(bonds and redeemable preferred stocks) and commercial mortgage
loans. Within its fixed maturity securities, the Company maintains
portfolios classified as “available for sale” and “trading”. The
Company generally purchases its investments with the intent to hold to maturity
by purchasing investments that match future cash flow needs. However,
the Company may sell any of its investments to maintain proper matching of
assets and liabilities. Accordingly, the Company has classified
$18.3 billion or 82.0% of its fixed maturities as “available for
sale”. These securities are carried at fair value on the Company’s
Consolidated Balance Sheets. Changes in fair value, net of related
DAC and VOBA, are charged or credited directly to share-owners’
equity. Changes in fair value that are other than temporary are
recorded as realized losses in the Consolidated Statements of
Income.
The
Company’s trading portfolio, which accounts for $4.0 billion or 18.0% of
the Company’s fixed maturities, consists of two major
categories. First, the Company consolidates a special-purpose entity,
in accordance with FASB Interpretation (“FIN”) No. 46,
Consolidation of Variable Interest Entities
, whose investments are
managed by the Company. At September 30, 2007, fixed maturities
with a market value of $407.9 million and short-term investments with a
market value of $6.2 million were classified as “trading” securities
related to this special-purpose entity. Additionally, at
September 30, 2007 the Company holds fixed maturities with a market value
of $3.6 billion and short-term investments with a market value of
$86.6 million, which were added as part of the Chase Insurance Group
acquisition. Investment results for these portfolios, including gains
and losses from sales, are passed to the reinsurers through the contractual
terms of the reinsurance arrangements. Trading securities are carried
at fair value and changes in fair value are recorded in net income as they
occur. Offsetting these amounts are corresponding changes in the fair
value of the embedded derivative liability associated with the underlying
reinsurance arrangement.
The
Company’s investments in debt and equity securities are reported at market
value, and investments in mortgage loans are reported at amortized
cost. At September 30, 2007, the Company’s fixed maturity
investments (bonds and redeemable preferred stocks) had a market value of
$22.3 billion, which is 0.4% below amortized cost of
$22.4 billion. The Company had $4.2 billion in mortgage
loans at September 30, 2007. While the Company’s mortgage
loans do not have quoted market values, at September 30, 2007, the
Company estimates the market value of its mortgage loans to be $4.3 billion
(using discounted cash flows from the next call date), which is 2.9% greater
than the amortized cost. Most of the Company’s mortgage loans have
significant prepayment fees. These assets are invested for terms
approximately corresponding to anticipated future benefit
payments. Thus, market fluctuations are not expected to adversely
affect liquidity.
The
following table shows the reported values of the Company's invested
assets.
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
|
|
(Dollars
In Thousands)
|
Publicly-issued
bonds
|
|
$
|
19,426,355
|
|
|
|
67.7
|
%
|
|
$
|
19,226,461
|
|
|
|
68.8
|
%
|
Privately
issued bonds
|
|
|
2,852,341
|
|
|
|
10.0
|
|
|
|
2,140,718
|
|
|
|
7.7
|
|
Redeemable
preferred stock
|
|
|
81
|
|
|
|
0.0
|
|
|
|
84
|
|
|
|
0.0
|
|
Fixed
maturities
|
|
|
22,278,777
|
|
|
|
77.7
|
|
|
|
21,367,263
|
|
|
|
76.5
|
|
Equity
securities
|
|
|
73,237
|
|
|
|
0.3
|
|
|
|
128,695
|
|
|
|
0.5
|
|
Mortgage
loans
|
|
|
4,193,776
|
|
|
|
14.6
|
|
|
|
3,880,028
|
|
|
|
13.9
|
|
Investment
real estate
|
|
|
9,735
|
|
|
|
0.0
|
|
|
|
38,918
|
|
|
|
0.1
|
|
Policy
loans
|
|
|
816,958
|
|
|
|
2.9
|
|
|
|
839,502
|
|
|
|
3.0
|
|
Other
long-term investments
|
|
|
183,667
|
|
|
|
0.7
|
|
|
|
310,225
|
|
|
|
1.1
|
|
Short-term
investments
|
|
|
1,105,393
|
|
|
|
3.9
|
|
|
|
1,381,073
|
|
|
|
4.9
|
|
Total
invesments
|
|
$
|
28,661,543
|
|
|
|
100.0
|
%
|
|
$
|
27,945,704
|
|
|
|
100.0
|
%
|
Included
in the preceding table are $4.0 billion and $3.9 billion of fixed
maturities and $92.8 million and $311.1 million of short-term
investments classified by the Company as trading securities at
September 30, 2007 and December 31, 2006, respectively.
Market
values for private, non-traded securities are determined as follows: 1) the
Company obtains estimates from independent pricing services or 2) the
Company estimates market value based upon a comparison to quoted issues of
the
same issuer or issues of other issuers with similar terms and risk
characteristics. The market value of private, non-traded securities
was $2.9 billion at September 30, 2007, representing 10.0% of the
Company’s total invested assets.
The
Company participates in securities lending, primarily as an investment yield
enhancement, whereby securities that are held as investments are loaned to
third
parties for short periods of time. The Company requires collateral of
102% of the market value of the loaned securities to be separately
maintained. The loaned securities’ market value is monitored on a
daily basis, with additional collateral obtained as necessary. At
September 30, 2007, securities with a market value of $376.9 million
were loaned under these agreements. As collateral for the loaned
securities, the Company receives short-term investments, which are recorded
in
“short-term investments” with a corresponding liability recorded in “other
liabilities” to account for the Company’s obligation to return the
collateral.
The
Company reviews its positions on a monthly basis for possible credit concerns
and feels comfortable with the current exposure, their credit enhancement,
and
delinquency experience. At September 30, 2007, the Company had a
total of approximately $85.8 million invested in securities that are
supported by collateral classified as sub-prime. This represents
approximately 0.3% of the Company’s total invested
assets. $83.9 million, or approximately 98%, of these securities
have been rated as AAA. In addition, at September 30, 2007, the Company had
a total of approximately $278.6 million invested in securities backed by
Alt-A residential mortgage loans, which represents less than 1% of invested
assets.
Risk
Management and Impairment Review
The
Company monitors the overall credit quality of the Company’s portfolio within
general guidelines. The following table shows the Company's available
for sale fixed maturities by credit rating at September 30,
2007.
|
|
|
|
|
Percent
of
|
S&P
or Equivalent Designation
|
Market
Value
|
|
|
Market
Value
|
|
|
(Dollars
In Thousands)
|
|
AAA
|
|
$ 7,586,031
|
|
|
41.5
|
%
|
AA
|
|
1,692,643
|
|
|
9.3
|
|
A
|
|
3,269,981
|
|
|
17.9
|
|
BBB
|
|
5,066,971
|
|
|
27.7
|
|
Investment
grade
|
|
17,615,626
|
|
|
96.4
|
|
BB
|
|
535,872
|
|
|
2.9
|
|
B
|
|
103,405
|
|
|
0.6
|
|
CCC
or lower
|
|
14,138
|
|
|
0.1
|
|
In
or near default
|
|
86
|
|
|
0.0
|
|
Below
investment grade
|
|
653,501
|
|
|
3.6
|
|
Redeemable
preferred stock
|
|
81
|
|
|
0.0
|
|
Total
|
|
$ 18,269,208
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
Not
included in the table above are $4.0 billion of investment grade and
$43.2 million of less than investment grade fixed maturities classified by
the Company as trading securities.
Limiting
bond exposure to any creditor group is another way the Company manages credit
risk. The following table summarizes the Company's ten largest fixed
maturity exposures to an individual creditor group as of September 30,
2007.
Creditor
|
|
Market
Value
|
|
|
|
(Dollars
in Millions)
|
AT&T
|
|
$
|
180.5
|
|
American
International Group
|
|
|
134.4
|
|
Citigroup
|
|
|
132.9
|
|
General
Electric
|
|
|
129.0
|
|
Wachovia
|
|
|
126.1
|
|
Conocophillips
|
|
|
124.7
|
|
Bank
of America
|
|
|
124.0
|
|
Comcast
|
|
|
116.7
|
|
Goldman
Sachs
|
|
|
115.2
|
|
Lehman
Brothers Holdings
|
|
|
114.2
|
|
The
Company’s management considers a number of factors when determining the
impairment status of individual securities. These include the
economic condition of various industry segments and geographic locations and
other areas of identified risks. Although it is possible for the
impairment of one investment to affect other investments, the Company engages
in
ongoing risk management to safeguard against and limit any further risk to
its
investment portfolio. Special attention is given to correlated risks
within specific industries, related parties and business markets.
The
Company generally considers a number of factors in determining whether the
impairment is other than temporary. These include, but are not
limited to: 1) actions taken by rating agencies, 2) default by the
issuer, 3) the significance of the decline, 4) the intent and ability
of the Company to hold the investment until recovery, 5) the time period
during which the decline has occurred, 6) an economic analysis of the
issuer’s industry, and 7) the financial strength, liquidity, and
recoverability of the issuer. Management performs a
security-by-security review each quarter in evaluating the need for any other
than temporary impairment. Although no set formula is used in this
process, the investment performance, collateral position, and continued
viability of the issuer are significant measures considered.
The
Company generally considers a number of factors relating to the issuer in
determining the financial strength, liquidity, and recoverability of an
issuer. These include but are not limited to: available collateral,
assets that might be available to repay debt, operating cash flows, financial
ratios, access to capital markets, quality of management, market position,
exposure to litigation or product warranties, and the effect of general economic
conditions on the issuer. Once management has determined that a
particular investment has suffered an other than temporary impairment, the
asset
is written down to its estimated fair value.
There
are
certain risks and uncertainties associated with determining whether declines
in
market values are other than temporary. These include significant
changes in general economic conditions and business markets, trends in certain
industry segments, interest rate fluctuations, rating agency actions, changes
in
significant accounting estimates and assumptions, commission of fraud, and
legislative actions. The Company continuously monitors these factors
as they relate to the investment portfolio in determining the status of each
investment. Provided below are additional facts concerning the
potential effect upon the Company’s earnings should circumstances lead
management to conclude that some of the current declines in market value are
other than temporary.
Unrealized
Gains and Losses – Available for Sale Securities
The
information presented below relates to investments at a certain point in time
and is not necessarily indicative of the status of the portfolio at any time
after September 30, 2007, the balance sheet date. Information
about unrealized gains and losses is subject to rapidly changing conditions,
including volatility of financial markets and changes in interest
rates. As indicated above, the Company’s management considers a
number of factors in determining if an unrealized loss is other than temporary,
including its ability and intent to hold the security until
recovery. Furthermore, since the timing of recognizing realized gains
and losses is largely based on management’s decisions as to the timing and
selection of investments to be sold, the tables and information provided below
should be considered within the context of the overall unrealized
gain (loss) position of the portfolio. At September 30,
2007, the Company had an overall pretax net unrealized loss of
$80.2 million.
For
traded and private fixed maturity and equity securities held by the Company
that
are in an unrealized loss position at September 30, 2007, the estimated
market value, amortized cost, unrealized loss and total time period that the
security has been in an unrealized loss position are presented in the table
below.
|
|
Estimated
|
|
|
%
Market
|
|
|
Amortized
|
|
|
%
Amortized
|
|
|
Unrealized
|
|
|
%
Unrealized
|
|
|
|
Market
Value
|
|
|
Value
|
|
|
Cost
|
|
|
Cost
|
|
|
Loss
|
|
|
Loss
|
|
|
|
(Dollars
In Thousands)
|
<=
90 days
|
|
$
|
1,577,915
|
|
|
|
16.1
|
%
|
|
$
|
1,603,892
|
|
|
|
15.8
|
%
|
|
$
|
(25,977
|
)
|
|
|
7.7
|
%
|
>90
days but <= 180 days
|
|
|
2,443,776
|
|
|
|
24.9
|
|
|
|
2,512,746
|
|
|
|
24.7
|
|
|
|
(68,970
|
)
|
|
|
20.3
|
|
>180
days but <= 270 days
|
|
|
982,012
|
|
|
|
10.0
|
|
|
|
1,030,705
|
|
|
|
10.2
|
|
|
|
(48,693
|
)
|
|
|
14.4
|
|
>270
days but <= 1 year
|
|
|
135,220
|
|
|
|
1.4
|
|
|
|
141,813
|
|
|
|
1.4
|
|
|
|
(6,593
|
)
|
|
|
1.9
|
|
>1
year but <= 2 years
|
|
|
1,785,965
|
|
|
|
18.2
|
|
|
|
1,847,946
|
|
|
|
18.2
|
|
|
|
(61,981
|
)
|
|
|
18.3
|
|
>2
years but <= 3 years
|
|
|
2,665,327
|
|
|
|
27.1
|
|
|
|
2,768,167
|
|
|
|
27.2
|
|
|
|
(102,840
|
)
|
|
|
30.3
|
|
>3
years but <= 4 years
|
|
|
132,975
|
|
|
|
1.3
|
|
|
|
144,530
|
|
|
|
1.4
|
|
|
|
(11,555
|
)
|
|
|
3.4
|
|
>4
years but <= 5 years
|
|
|
81,615
|
|
|
|
0.8
|
|
|
|
86,638
|
|
|
|
0.9
|
|
|
|
(5,023
|
)
|
|
|
1.5
|
|
>5
years
|
|
|
16,891
|
|
|
|
0.2
|
|
|
|
24,368
|
|
|
|
0.2
|
|
|
|
(7,477
|
)
|
|
|
2.2
|
|
Total
|
|
$
|
9,821,696
|
|
|
|
100.0
|
%
|
|
$
|
10,160,805
|
|
|
|
100.0
|
%
|
|
$
|
(339,109
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
unrealized losses as of September 30, 2007, primarily relate to the rising
interest rate environment experienced during 2006 and the first half of
2007. Also contributing to the unrealized losses at
September 30, 2007 was an increase in credit spreads over Treasury
rates. As of September 30, 2007, securities with a market value
of $48.3 million and $12.9 million of unrealized losses were issued in
Company-sponsored commercial mortgage loan securitizations, including
$6.1 million of unrealized losses greater than five years. The
Company does not consider these unrealized positions to be other than temporary
because the underlying mortgage loans continue to perform consistently with
the
Company’s original expectations.
The
Company has no material concentrations of issuers or guarantors of fixed
maturity securities. The industry segment composition of all
securities in an unrealized loss position held by the Company at
September 30, 2007, is presented in the following table.
|
|
Estimated
|
|
|
%
Market
|
|
|
Amortized
|
|
|
%
Amortized
|
|
|
Unrealized
|
|
|
%
Unrealized
|
|
|
|
Market
Value
|
|
|
Value
|
|
|
Cost
|
|
|
Cost
|
|
|
Loss
|
|
|
Loss
|
|
|
|
(Dollars
In Thousands)
|
Agency
Mortgages
|
|
$
|
1,721,297
|
|
|
|
17.5
|
%
|
|
$
|
1,771,154
|
|
|
|
17.4
|
%
|
|
$
|
(49,857
|
)
|
|
|
14.7
|
%
|
Banking
|
|
|
998,205
|
|
|
|
10.2
|
|
|
|
1,041,034
|
|
|
|
10.2
|
|
|
|
(42,829
|
)
|
|
|
12.6
|
|
Basic
Industrial
|
|
|
305,413
|
|
|
|
3.1
|
|
|
|
323,835
|
|
|
|
3.2
|
|
|
|
(18,422
|
)
|
|
|
5.4
|
|
Brokerage
|
|
|
330,674
|
|
|
|
3.4
|
|
|
|
341,914
|
|
|
|
3.4
|
|
|
|
(11,240
|
)
|
|
|
3.3
|
|
Canadian
Govt Agencies
|
|
|
11,036
|
|
|
|
0.1
|
|
|
|
11,045
|
|
|
|
0.1
|
|
|
|
(9
|
)
|
|
|
0.0
|
|
Capital
Goods
|
|
|
90,276
|
|
|
|
0.9
|
|
|
|
93,853
|
|
|
|
0.9
|
|
|
|
(3,577
|
)
|
|
|
1.1
|
|
Communications
|
|
|
274,272
|
|
|
|
2.8
|
|
|
|
296,235
|
|
|
|
2.9
|
|
|
|
(21,963
|
)
|
|
|
6.5
|
|
Consumer
Cyclical
|
|
|
238,100
|
|
|
|
2.4
|
|
|
|
263,276
|
|
|
|
2.6
|
|
|
|
(25,176
|
)
|
|
|
7.4
|
|
Consumer
Noncyclical
|
|
|
223,081
|
|
|
|
2.3
|
|
|
|
231,448
|
|
|
|
2.3
|
|
|
|
(8,367
|
)
|
|
|
2.5
|
|
Electric
|
|
|
844,565
|
|
|
|
8.6
|
|
|
|
883,677
|
|
|
|
8.7
|
|
|
|
(39,112
|
)
|
|
|
11.5
|
|
Energy
|
|
|
202,549
|
|
|
|
2.1
|
|
|
|
208,765
|
|
|
|
2.1
|
|
|
|
(6,216
|
)
|
|
|
1.8
|
|
Finance
Companies
|
|
|
253,576
|
|
|
|
2.6
|
|
|
|
264,966
|
|
|
|
2.6
|
|
|
|
(11,390
|
)
|
|
|
3.4
|
|
Insurance
|
|
|
521,856
|
|
|
|
5.3
|
|
|
|
537,400
|
|
|
|
5.3
|
|
|
|
(15,544
|
)
|
|
|
4.6
|
|
Municipal
Agencies
|
|
|
2,126
|
|
|
|
0.0
|
|
|
|
2,144
|
|
|
|
0.0
|
|
|
|
(18
|
)
|
|
|
0.0
|
|
Natural
Gas
|
|
|
501,758
|
|
|
|
5.1
|
|
|
|
525,445
|
|
|
|
5.2
|
|
|
|
(23,687
|
)
|
|
|
7.0
|
|
Non-Agency
Mortgages
|
|
|
2,353,064
|
|
|
|
24.0
|
|
|
|
2,377,761
|
|
|
|
23.4
|
|
|
|
(24,697
|
)
|
|
|
7.3
|
|
Other
Finance
|
|
|
582,605
|
|
|
|
5.9
|
|
|
|
607,640
|
|
|
|
6.0
|
|
|
|
(25,035
|
)
|
|
|
7.4
|
|
Other
Industrial
|
|
|
66,760
|
|
|
|
0.7
|
|
|
|
68,959
|
|
|
|
0.7
|
|
|
|
(2,199
|
)
|
|
|
0.6
|
|
Other
Utility
|
|
|
14,266
|
|
|
|
0.1
|
|
|
|
15,044
|
|
|
|
0.1
|
|
|
|
(778
|
)
|
|
|
0.2
|
|
Real
Estate
|
|
|
2,559
|
|
|
|
0.0
|
|
|
|
2,600
|
|
|
|
0.0
|
|
|
|
(41
|
)
|
|
|
0.0
|
|
Technology
|
|
|
67,256
|
|
|
|
0.7
|
|
|
|
69,344
|
|
|
|
0.7
|
|
|
|
(2,088
|
)
|
|
|
0.6
|
|
Transportation
|
|
|
187,095
|
|
|
|
1.9
|
|
|
|
193,676
|
|
|
|
1.9
|
|
|
|
(6,581
|
)
|
|
|
2.0
|
|
U.S.
Government
|
|
|
23,548
|
|
|
|
0.2
|
|
|
|
23,801
|
|
|
|
0.2
|
|
|
|
(253
|
)
|
|
|
0.1
|
|
U.S.
Govt Agencies
|
|
|
5,759
|
|
|
|
0.1
|
|
|
|
5,789
|
|
|
|
0.1
|
|
|
|
(30
|
)
|
|
|
0.0
|
|
Total
|
|
$
|
9,821,696
|
|
|
|
100.0
|
%
|
|
$
|
10,160,805
|
|
|
|
100.0
|
%
|
|
$
|
(339,109
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
range
of maturity dates for securities in an unrealized loss position at
September 30, 2007 varies, with 11.2% maturing in less than 5 years,
25.1% maturing between 5 and 10 years, and 63.7% maturing after
10 years. The following table shows the credit rating of
securities in an unrealized loss position at September 30,
2007.
S&P
or Equivalent
|
|
Estimated
|
|
|
%
Market
|
|
|
Amortized
|
|
|
%
Amortized
|
|
|
Unrealized
|
|
|
%
Unrealized
|
|
Designation
|
|
Market
Value
|
|
|
Value
|
|
|
Cost
|
|
|
Cost
|
|
|
Loss
|
|
|
Loss
|
|
|
|
(Dollars
In Thousands)
|
AAA/AA/A
|
|
$
|
6,934,083
|
|
|
|
70.6
|
%
|
|
$
|
7,103,602
|
|
|
|
69.9
|
%
|
|
$
|
(169,519
|
)
|
|
|
50.0
|
%
|
BBB
|
|
|
2,515,166
|
|
|
|
25.6
|
|
|
|
2,634,050
|
|
|
|
25.9
|
|
|
|
(118,884
|
)
|
|
|
35.0
|
|
Investment
grade
|
|
|
9,449,249
|
|
|
|
96.2
|
|
|
|
9,737,652
|
|
|
|
95.8
|
|
|
|
(288,403
|
)
|
|
|
85.0
|
|
BB
|
|
|
287,509
|
|
|
|
2.9
|
|
|
|
321,629
|
|
|
|
3.2
|
|
|
|
(34,120
|
)
|
|
|
10.1
|
|
B
|
|
|
70,798
|
|
|
|
0.7
|
|
|
|
83,345
|
|
|
|
0.8
|
|
|
|
(12,547
|
)
|
|
|
3.7
|
|
CCC
or lower
|
|
|
14,140
|
|
|
|
0.2
|
|
|
|
18,179
|
|
|
|
0.2
|
|
|
|
(4,039
|
)
|
|
|
1.2
|
|
Below
investment grade
|
|
|
372,447
|
|
|
|
3.8
|
|
|
|
423,153
|
|
|
|
4.2
|
|
|
|
(50,706
|
)
|
|
|
15.0
|
|
Total
|
|
$
|
9,821,696
|
|
|
|
100.0
|
%
|
|
$
|
10,160,805
|
|
|
|
100.0
|
%
|
|
$
|
(339,109
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
September 30, 2007, securities in an unrealized loss position that were
rated as below investment grade represented 3.8% of the total market value
and
15.0% of the total unrealized loss. Unrealized losses related to
below investment grade securities that had been in an unrealized loss position
for more than twelve months were $37.2 million. Securities in an
unrealized loss position rated less than investment grade were 1.3% of invested
assets. The Company generally purchases its investments with the
intent to hold to maturity. The Company does not expect these
investments to adversely affect its liquidity or ability to maintain proper
matching of assets and liabilities.
The
following table shows the estimated market value, amortized cost, unrealized
loss and total time period that the security has been in an unrealized loss
position for all below investment grade securities.
|
|
Estimated
|
|
|
%
Market
|
|
|
Amortized
|
|
|
%
Amortized
|
|
|
Unrealized
|
|
|
%
Unrealized
|
|
|
|
Market
Value
|
|
|
Value
|
|
|
Cost
|
|
|
Cost
|
|
|
Loss
|
|
|
Loss
|
|
|
|
(Dollars
In Thousands)
|
<=
90 days
|
|
$
|
97,385
|
|
|
|
26.1
|
%
|
|
$
|
99,847
|
|
|
|
23.6
|
%
|
|
$
|
(2,462
|
)
|
|
|
4.9
|
%
|
>90
days but <= 180 days
|
|
|
87,109
|
|
|
|
23.5
|
|
|
|
96,861
|
|
|
|
22.9
|
|
|
|
(9,752
|
)
|
|
|
19.2
|
|
>180
days but <= 270 days
|
|
|
8,415
|
|
|
|
2.3
|
|
|
|
9,664
|
|
|
|
2.3
|
|
|
|
(1,249
|
)
|
|
|
2.5
|
|
>270
days but <= 1 year
|
|
|
385
|
|
|
|
0.1
|
|
|
|
444
|
|
|
|
0.1
|
|
|
|
(59
|
)
|
|
|
0.1
|
|
>1
year but <= 2 years
|
|
|
44,573
|
|
|
|
12.0
|
|
|
|
53,817
|
|
|
|
12.7
|
|
|
|
(9,244
|
)
|
|
|
18.2
|
|
>2
years but <= 3 years
|
|
|
85,397
|
|
|
|
22.9
|
|
|
|
98,245
|
|
|
|
23.2
|
|
|
|
(12,848
|
)
|
|
|
25.3
|
|
>3
years but <= 4 years
|
|
|
33,626
|
|
|
|
9.0
|
|
|
|
41,869
|
|
|
|
9.9
|
|
|
|
(8,243
|
)
|
|
|
16.3
|
|
>4
years but <= 5 years
|
|
|
134
|
|
|
|
0.0
|
|
|
|
168
|
|
|
|
0.0
|
|
|
|
(34
|
)
|
|
|
0.1
|
|
>5
years
|
|
|
15,423
|
|
|
|
4.1
|
|
|
|
22,238
|
|
|
|
5.3
|
|
|
|
(6,815
|
)
|
|
|
13.4
|
|
Total
|
|
$
|
372,447
|
|
|
|
100.0
|
%
|
|
$
|
423,153
|
|
|
|
100.0
|
%
|
|
$
|
(50,706
|
)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
September 30, 2007, below investment grade securities with a market value
of $18.9 million and $7.1 million of unrealized losses were issued in
Company-sponsored commercial mortgage loan securitizations, including securities
in an unrealized loss position greater than 5 years with a market value of
$13.7 million and $6.2 million of unrealized losses. The
Company does not consider these unrealized positions to be other than temporary
because the underlying mortgage loans continue to perform consistently with
the
Company’s original expectations.
Realized
Losses
Realized
losses are comprised of both write-downs for other than temporary impairments
and actual sales of investments. For the first nine months of 2007,
the Company recorded pretax other than temporary impairments in its investments
of $0.1 million, compared to $5.7 million for the same period of
2006.
As
previously discussed, the Company’s management considers several factors when
determining other than temporary impairments. Although the Company
generally intends to hold securities until maturity, the Company may change
its
position as a result of a change in circumstances. Any such decision
is consistent with the Company’s classification of all but a specific portion of
its investment portfolio as available for sale. During the nine
months ended September 30, 2007, the Company sold securities in an
unrealized loss position with a market value of $1.05 billion resulting in
a realized loss of $5.2 million. The Company also engaged in
taxable exchanges resulting in a loss of $0.2 million during the first nine
months of 2007. The securities were sold as a result of normal
portfolio rebalancing activity and tax planning. For such securities,
the proceeds, realized loss, and total time period that the security had been
in
an unrealized loss position are presented in the table below.
|
|
Proceeds
|
|
|
%
Proceeds
|
|
|
Realized
Loss
|
|
|
%
Realized Loss
|
|
|
|
(Dollars
In Thousands)
|
<=
90 days
|
|
$
|
962,787
|
|
|
|
91.3
|
%
|
|
$
|
(3,358
|
)
|
|
|
64.6
|
%
|
>90
days but <= 180 days
|
|
|
11,377
|
|
|
|
1.1
|
|
|
|
(110
|
)
|
|
|
2.1
|
|
>180
days but <= 270 days
|
|
|
598
|
|
|
|
0.1
|
|
|
|
(2
|
)
|
|
|
0.1
|
|
>270
days but <= 1 year
|
|
|
0
|
|
|
|
0.0
|
|
|
|
0
|
|
|
|
0.0
|
|
>1
year
|
|
|
79,980
|
|
|
|
7.5
|
|
|
|
(1,725
|
)
|
|
|
33.2
|
|
Total
|
|
$
|
1,054,742
|
|
|
|
100.0
|
%
|
|
$
|
(5,195
|
)
|
|
|
100.0
|
%
|
Mortgage
Loans
The
Company records mortgage loans net of an allowance for credit
losses. This allowance is calculated through analysis of specific
loans that are believed to be at a higher risk of becoming impaired in the
near
future. At September 30, 2007 and December 31, 2006, the
Company's allowance for mortgage loan credit losses was $3.4 million and
$0.5 million, respectively.
For several years the Company has offered a type of commercial mortgage loan
under which the Company will permit a slightly higher loan-to-value ratio in
exchange for a participating interest in the cash flows from the underlying
real
estate. As of September 30, 2007, approximately
$585.0 million of the Company’s mortgage loans have this participation
feature.
As
of
September 30, 2007, delinquent mortgage loans and foreclosed properties
were approximately 0.1% of invested assets. The Company does not
expect these investments to adversely affect its liquidity or ability to
maintain proper matching of assets and liabilities.
LIABILITIES
Many
of
the Company's products contain surrender charges and other features that reward
persistency and penalize the early withdrawal of funds. Certain
stable value and annuity contracts have market-value adjustments that protect
the Company against investment losses if interest rates are higher at the time
of surrender than at the time of issue.
At
September 30, 2007, the Company had policy liabilities and accruals of
approximately $17.0 billion. The Company's interest-sensitive
life insurance policies have a weighted average minimum credited interest rate
of approximately 3.73%.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
The
Company meets its liquidity requirements primarily through positive cash flows
from its operating subsidiaries. Primary sources of cash from the
operating subsidiaries are premiums, deposits for policyholder accounts,
investment sales and maturities, and investment income. Primary uses
of cash for the operating subsidiaries include benefit payments, withdrawals
from policyholder accounts, investment purchases, policy acquisition costs,
and
other operating expenses.
While
the
Company generally anticipates that the cash flows of its subsidiaries will
be
sufficient to meet their investment commitments and operating cash needs, the
Company recognizes that investment commitments scheduled to be funded may,
from
time to time, exceed the funds then available. Therefore, the Company
has established repurchase agreement programs for certain of its insurance
subsidiaries to provide liquidity when needed. The Company expects
that the rate received on its investments will equal or exceed its borrowing
rate. At September 30, 2007, the Company established a liability
of $144.2 million related to these borrowings. Additionally, the
Company may, from time to time, sell short-duration stable value products to
complement its cash management practices. The Company may also use
securitization transactions involving its commercial mortgage loans to increase
liquidity for the operating subsidiaries.
The
Company’s positive cash flows from operations are used to fund an investment
portfolio that provides for future benefit payments. The Company
employs a formal asset/liability program to manage the cash flows of its
investment portfolio relative to its long-term benefit obligations.
The
life
insurance subsidiaries were committed at September 30, 2007, to fund
mortgage loans in the amount of $928.4 million. The Company's
subsidiaries held approximately $1.27 billion in cash and short-term
investments at September 30, 2007. Protective Life
Corporation had an additional $8.4 million in cash and short-term
investments available for general corporate purposes.
Protective
Life Corporation’s primary sources of cash are dividends from its operating
subsidiaries; revenues from investment, data processing, legal, and management
services rendered to subsidiaries; investment income; and external
financing. These sources of cash support the general corporate needs
of the holding company including its common stock dividends and debt
service. The states in which the Company’s insurance subsidiaries are
domiciled impose certain restrictions on the insurance subsidiaries’ ability to
pay dividends to Protective Life Corporation. These restrictions are
generally based in part on the prior year’s statutory income and
surplus. Generally, these restrictions pose no short-term liquidity
concerns for Protective Life Corporation. The Company plans to retain
substantial portions of the earnings of its insurance subsidiaries in those
companies primarily to support their future growth.
Capital
Resources
To
give
the Company flexibility in connection with future acquisitions and other funding
needs, the Company has registered debt securities, preferred and common stock,
and stock purchase contracts of Protective Life Corporation, and additional
preferred securities of special purpose finance subsidiaries under the
Securities Act of 1933 on a delayed (or shelf) basis.
Golden Gate Captive Insurance Company (“Golden Gate”), a special
purpose financial captive insurance company wholly owned by Protective Life
Insurance Company (“Protective Life”), the Company's largest operating
subsidiary, has $600 million of non-recourse funding obligations
outstanding at September 30, 2007, the maximum amount available under a
surplus notes facility established with certain purchasers. These
non-recourse funding obligations bear a floating rate of interest and mature
in
2037. As the block of business grows and ages, unless additional
funding mechanisms are put into place, reserving increases will reduce the
Company’s available statutory capital and surplus.
Golden Gate II Captive Insurance Company (“Golden Gate II”), a
special purpose financial captive insurance company wholly owned by Protective
Life Insurance Company (“Protective Life”), the Company's largest
operating subsidiary, has $575 million of non-recourse funding obligations
outstanding at September 30, 2007. These non-recourse funding
obligations mature in 2052. The Company does not anticipate having to
pursue additional funding related to this block of business, however the Company
has the approval to issue an additional $100 million of obligations if
necessary.
In
May 2004, the Company’s Board of Directors authorized a $100 million
share repurchase program, available through May 2, 2007. On
May 7, 2007, the Board re-authorized this program through May 6,
2010. There has been no activity under this program, and future
activity will be dependent upon many factors, including capital levels, rating
agency expectations, and the relative attractiveness of alternative uses for
capital.
A
life
insurance company’s statutory capital is computed according to rules prescribed
by the National Association of Insurance Commissioners (“NAIC”), as
modified by state law. Generally speaking, other states in which a
company does business defer to the interpretation of the domiciliary state
with
respect to NAIC rules, unless inconsistent with the other state's
law. Statutory accounting rules are different from U.S. GAAP and
are intended to reflect a more conservative view by, for example, requiring
immediate expensing of policy acquisition costs. The NAIC’s
risk-based capital requirements require insurance companies to calculate and
report information under a risk-based capital formula. The
achievement of long-term growth will require growth in the statutory capital
of
the Company’s insurance subsidiaries. The subsidiaries may secure
additional statutory capital through various sources, such as retained statutory
earnings or equity contributions by the Company.
The
Company and its insurance subsidiaries cede material amounts of insurance and
transfer related assets to other insurance companies through
reinsurance. However, notwithstanding the transfer of related assets,
the Company remains liable with respect to ceded insurance should any reinsurer
fail to meet the obligations that such reinsurer assumed. The Company
evaluates the financial condition of its reinsurers and monitors the
concentration of credit risk arising from them. During the first nine
months of 2007, the Company ceded premiums to third-party reinsurers amounting
to $1.2 billion. In addition, the Company had receivables from reinsurers
amounting to $4.9 billion as of September 30, 2007. None of the
reinsurance receivable amounts have been deemed to be uncollectible at
December 31, 2006.
In
2005,
the Company implemented a reinsurance program through the use of a special
purpose captive insurance company wholly owned by Protective Life Insurance
Company (“Protective Life”), the Company's largest operating
subsidiary. Under this arrangement, the wholly-owned consolidated
subsidiaries, Golden Gate Captive Insurance Company (“Golden Gate”) and
Golden Gate II Captive Insurance Company (“Golden Gate II”), serve as
reinsurers, and the consolidated financial statements of the Company reflects
a
liability consisting of the full reserve amount attributable to the reinsured
business. As of September 30, 2007, an aggregate amount of
approximately $403.6 million of life insurance reserves were ceded from
Protective Life to these captive companies. These reserves are
eliminated in the Company’s consolidated financial statements.
In
connection with the reinsurance program discussed above, Golden Gate and Golden
Gate II have $600 million and $575 million, respectively, of
non-recourse funding obligations outstanding at September 30,
2007. These notes are described in more detail in Note 2,
Non-Recourse Funding Obligations
.
Contractual
Obligations
The
table
below sets forth future maturities of debt, non-recourse funding obligations,
subordinated debt securities, stable value products, notes payable, operating
lease obligations, other property lease obligations, mortgage loan commitments,
liabilities related to variable interest entities, policyholder obligations,
and
defined benefit pension obligations.
As
a
result of the adoption of FIN No. 48,
Accounting for
Uncertainty in Income Taxes-an Interpretation of FASB
Statement
109
, the Company recorded a
$29.8 million liability for uncertain tax positions, including interest on
unrecognized tax benefits. These amounts are not included in the
long-term contractual obligations table because of the difficulty in making
reasonably reliable estimates of the occurrence or timing of cash settlements
with the respective taxing authorities (see Note 1,
Basis of
Presentation and Summary of Significant Accounting Policies
, to the
Consolidated Condensed Financial Statements for additional
discussion).
|
|
Payments
due by period
|
|
|
|
|
Less
than
|
|
|
|
|
|
More
than
|
|
|
Total
|
|
1
year
|
|
1-3
years
|
|
3-5
years
|
|
5
years
|
|
|
(Dollars
In Thousands)
|
Long-term
debt
(a)
|
|
$ 605,901
|
|
$ 22,899
|
|
$ 114,012
|
|
$ 46,589
|
|
$ 422,401
|
Non-recourse
funding obligations
(b)
|
|
3,960,300
|
|
75,900
|
|
151,800
|
|
151,800
|
|
3,580,800
|
Subordinated
debt securities
(c)
|
|
1,947,675
|
|
37,147
|
|
74,294
|
|
74,294
|
|
1,761,940
|
Stable
value products
(d)
|
|
6,018,621
|
|
1,250,862
|
|
2,198,675
|
|
1,358,796
|
|
1,210,288
|
Operating
leases
(e)
|
|
34,648
|
|
6,755
|
|
11,882
|
|
8,167
|
|
7,844
|
Home
office lease
(f)
|
|
103,306
|
|
4,535
|
|
9,057
|
|
9,045
|
|
80,669
|
Mortgage
loan commitments
|
|
928,413
|
|
928,413
|
|
|
|
|
|
|
Liabilities
related to variable interest entities
(g)
|
463,585
|
|
21,195
|
|
442,390
|
|
|
|
|
Policyholder
obligations
(h)
|
|
20,119,868
|
|
1,476,503
|
|
2,383,869
|
|
2,775,524
|
|
13,483,972
|
Defined
benefit pension obligations
(i)
|
|
1,232
|
|
1,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Long-term
debt includes all principal amounts owed on note agreements, and
includes
expected interest payments due over the term of the
notes.
|
(b)
Non-recourse funding obligations include all pincipal amounts owed
on note
agreements, and include expected interest payments due over the
term of
the notes.
|
|
|
(c)
Subordinated debt securities includes all principal amounts owed
to
non-consolidated special purpose finance subsidiaries of the Company,
and
includes interest payments due over the term of the
obligations.
|
(d)
Anticipated
stable value products cash flows, including interest.
|
|
|
|
|
|
|
|
|
|
(e)
Includes
all lease payments required under operating lease
agreements
|
|
|
|
|
|
|
|
|
(f)
The lease
payments shown assume the Company exercises its option to purchase
the
building at the end of the lease term.
|
|
|
|
|
(g)
Liabilities
related to variable interest entities are not legal obligations
of the
Company, but will be repaid with cash flows generated by the variable
interest entities. The amounts represent scheduled principal
and expected interest payments.
|
(h)
Estimated
contractual policyholder obligations are based on mortality, morbidity
and
lapse assumptions comparable to the Company's historical experience,
modified for recent observed trends. These obligations are
based on current balance sheet values and include expected interest
credited, but do not incorporate an expectation of future market
growth,
or future deposits. Due to the significance of the assumptions
used, the amounts presented could materially differ from actual
results. As separate account obligations are legally insulated
from general account obligations, the separate account obligations
will be
fully funded by cash flows from separate account assets. The
Company expects to fully fund the general account obligations from
cash
flows from generally account investments.
|
(i)
Estimated
2007 contributions to the Company's defined benefit pension plan
and
unfunded excess benefit plan approximate the projected expense
to be
recognized in 2007. Due to the significance of the assumptions
used, this amount could differ from actual results. No estimate
has been made of amounts to be contributed to these plans in years
subsequent to 2007.
|
MARKET
RISK EXPOSURES AND OFF-BALANCE SHEET ARRANGEMENTS
The
Company’s financial position and earnings are subject to various market risks
including changes in interest rates, changes in the yield curve, changes in
spreads between risk-adjusted and risk-free interest rates, changes in foreign
currency rates, changes in used vehicle prices, and equity price
risks. The Company analyzes and manages the risks arising from market
exposures of financial instruments, as well as other risks, through an
integrated asset/liability management process. The Company’s
asset/liability management programs and procedures involve the monitoring of
asset and liability durations for various product lines; cash flow testing
under
various interest rate scenarios; and the continuous rebalancing of assets and
liabilities with respect to yield, risk, and cash flow
characteristics. These programs also incorporate the use of
derivative financial instruments primarily to reduce the Company’s exposure to
interest rate risk, inflation risk, currency exchange risk, and equity market
risk.
The
primary focus of the Company’s asset/liability program is the management of
interest rate risk within the insurance operations. This includes
monitoring the duration of both investments and insurance liabilities to
maintain an appropriate balance between risk and profitability for each product
category and for the Company as a whole. It is the Company’s policy
to generally maintain asset and liability durations within one-half year of
one
another, although, from time to time, a broader interval may be
allowed.
Derivative
instruments that are currently used as part of the Company’s interest rate risk
management strategy include interest rate swaps, interest rate futures, interest
rate options and interest rate swaptions. The Company’s inflation
risk management strategy involves the use of swaps that require the Company
to
pay a fixed rate and receive a floating rate that is based on changes in the
Consumer Price Index. The Company uses foreign currency swaps to
manage its exposure to changes in the value of foreign currency denominated
stable value contracts. The Company also uses S&P 500
®
options
to mitigate
its exposure to the value of equity indexed annuity contracts.
The
Company has sold credit derivatives to enhance the return on our investment
portfolio. The credit default swaps create credit exposure similar to an
investment in publicly-issued fixed maturity cash investments.
Derivative
instruments expose the Company to credit and market risk and could result in
material changes from quarter-to-quarter. The Company minimizes its
credit risk by entering into transactions with highly rated
counterparties. The Company manages the market risk associated with
interest rate and foreign exchange contracts by establishing and monitoring
limits as to the types and degrees of risk that may be
undertaken. The Company monitors its use of derivatives in connection
with its overall asset/liability management programs and
procedures.
In
the
ordinary course of its commercial mortgage lending operations, the Company
will
commit to provide a mortgage loan before the property to be mortgaged has been
built or acquired. The mortgage loan commitment is a contractual
obligation to fund a mortgage loan when called upon by the
borrower. The commitment is not recognized in the Company's financial
statements until the commitment is actually funded. The mortgage loan
commitment contains terms, including the rate of interest, which may be
different than prevailing interest rates. At September 30, 2007,
the Company had outstanding mortgage loan commitments of $928.4 million at
an average rate of 6.15%.
The Company believes its asset/liability management programs and procedures
and
certain product features provide protection for the Company against the effects
of changes in interest rates under various scenarios. Additionally,
the Company believes its asset/liability management programs and procedures
provide sufficient liquidity to enable it to fulfill its obligation to pay
benefits under its various insurance and deposit contracts. However,
the Company’s asset/liability management programs and procedures incorporate
assumptions about the relationship between short-term and long-term interest
rates (i.e., the slope of the yield curve), relationships between
risk-adjusted and risk-free interest rates, market liquidity and other factors,
and the effectiveness of the Company’s asset/liability management programs and
procedures may be negatively affected whenever actual results differ from those
assumptions.
RECENTLY
ISSUED ACCOUNTING STANDARDS
See Note 1,
Basis of Presentation and Summary of Significant Accounting
Policies
, to the Consolidated Condensed Financial Statements for
information regarding recently issued accounting standards.
RECENT
DEVELOPMENTS
A
proposal to amend Actuarial Guideline 38 (promulgated by the NAIC and part
of the codification of statutory accounting principles) was approved by the
NAIC, with an effective date of July 1, 2005. Actuarial
Guideline 38, also known as AXXX, sets forth the reserve requirements for
universal life insurance with secondary guarantees (“ULSG”). The
changes to Actuarial Guideline 38 increase the reserve levels required for
many ULSG products, with an issue date of July 1, 2005 and later, and
potentially make those products more expensive and less competitive as compared
to other products including term and whole life products. To the
extent that the additional reserves are generally considered to be economically
redundant, capital market or other solutions may emerge to reduce the impact
of
the amendment. See Note 2,
Non-Recourse Funding
Obligations
to the Consolidated Condensed Financial Statements for
information regarding a recent capital market transaction designed to fund
statutory reserves required by AXXX. The NAIC is continuing to study
this issue and has issued additional changes to AG38 and Regulation XXX,
which will have the effect of modestly decreasing the reserves required for
term
and universal life policies that are issued on January 1, 2007, and
later. In addition, accounting and actuarial groups within the NAIC
have studied whether to change the accounting standards that relate to certain
reinsurance credits, and whether, if changes are made, they are to be applied
retrospectively, prospectively only, or in a phased-in manner; a requirement
to
reduce the reserve credit on ceded business, if applied retroactively, would
have a negative impact on the statutory capital of the Company. The
NAIC is also currently working to reform state regulation in various areas,
including comprehensive reforms relating to life insurance
reserves.
The
ability of the Company to implement capital market solutions designed to fund
excess statutory reserves on both the term and universal life blocks of business
is dependent upon factors such as the ratings of the Company, the size of the
blocks of business affected, the mortality experience of the Company, the credit
market and other factors. The Company cannot predict the continued
availability of such solutions to the Company or the form that the market may
dictate. To the extent that such capital market solutions are not
available, the Company’s financial position could be adversely affected through
impacts including, but not limited to, higher borrowing costs, surplus strain,
lower sales capacity and possible reduced earnings expectations. Management
continues to monitor options related to these capital market
solutions.
During
2006, the NAIC made the determination that certain securities previously
classified as “preferred securities” had both debt and equity characteristics
and because of this, required unique reporting treatment. Under a
short-term solution, NAIC guidance mandates that certain of these securities
(meeting established criteria) may have to carry a lower rating for asset
valuation reserve and risk based capital calculations. As a result,
certain securities will receive a lower rating classification for asset
valuation reserve and risk based capital calculations. The Company’s
insurance subsidiaries currently invest in these securities. As of
September 30, 2007, the Company (including both insurance and non-insurance
subsidiaries) holds approximately $886 million (statutory carrying value)
in securities that meet the aforementioned “notch-down” criteria, depending on
evaluation of the underlying characteristics of the securities. This
reporting change is expected to have an immaterial effect on the insurance
subsidiaries’ capital and surplus position, but will increase the capital
required to hold these assets. A working group of the NAIC made up of
accounting, actuarial and investment parties continue to investigate so as
to
determine what the appropriate long-term capital treatment should be for these
securities. The Company cannot predict what impact a change in this
guidance may have.
During
2006, the NAIC’s Reinsurance Task Force adopted a proposal suggesting broad
changes to the United States reinsurance market, with the stated intent to
establish a regulatory system that distinguishes financially strong reinsurers
from weak reinsurers, without relying exclusively on their state or country
of
domicile, with collateral to be determined as appropriate. The task
force recommended that regulation of reinsurance procedures be amended to focus
on broad based risk and credit criteria and not solely on U.S. licensure
status. Evaluation of this proposal will be taken under consideration
by the NAIC’s Financial Condition (E) Committee, the Reinsurance Task
Force’s parent committee, as one of its charges during 2007. The
Company cannot provide any assurance as to what impact such changes to the
United States reinsurance industry will have on the availability, cost, or
collateral restrictions associated with ongoing or future reinsurance
transactions.
The
NAIC
is currently in the process of reviewing amendment(s) to the Unfair Trade
Practices Act regarding the use of travel in insurance
underwriting. The most recent amendment states that the denial of
life insurance based upon an individual’s past lawful travel experiences or
future lawful travel plans, is prohibited unless such action is the result
of
the application of sound underwriting and actuarial principles related to actual
or reasonably anticipated loss experience. The Company cannot predict
what form the final proposal may take and therefore cannot predict what impact,
if any, such changes would have to the Company.
The
financial services industry has become the focus of increased scrutiny by
regulatory and law enforcement authorities relating to allegations of improper
special payments, price-fixing, bid-rigging, and other alleged misconduct,
including payments made by insurers and other financial service providers to
brokers and the practices surrounding the placement of insurance business and
sales of other financial products, as well as practices related to finite
reinsurance. Some publicly held companies have been the subject of
enforcement or other actions relating to corporate governance and the integrity
of financial statements, most recently relating to the issuance of stock
options. Such publicity may generate inquiries to or litigation
against publicly held companies and/or financial service providers, even those
who do not engage in the business lines or practices currently at
issue. It is impossible to predict the outcome of these
investigations or proceedings, whether they will expand into other areas not
yet
contemplated, whether they will result in changes in insurance regulation,
whether activities currently thought to be lawful will be characterized as
unlawful, or the impact, if any, of this increased regulatory and law
enforcement scrutiny of the financial services industry on the
Company. As some inquiries appear to encompass a large segment of the
financial services industry, it would not be unusual for large numbers of
companies in the financial services industry to receive subpoenas, requests
for
information from regulatory authorities, or other inquiries relating to these
and similar matters. From time to time, the Company receives
subpoenas, requests, or other inquiries and responds to them in the ordinary
course of business.
The
California Department of Insurance has promulgated proposed regulations that
would characterize some life insurance agents as brokers and impose certain
obligations on those agents that may conflict with the interests of insurance
carriers or require the agent to, among other things, advise the client with
respect to the best available insurer. The Company cannot predict the
outcome of this regulatory proposal or whether any other state will propose
or
adopt similar actions.
In
connection with the Company’s discontinued Lender’s Indemnity product, the
Company has discovered facts and circumstances that support allegations by
the
Company against third parties (including policyholders and the administrator
of
the associated loan program), and the Company has instituted litigation to
establish the rights and liabilities of various parties; the Company has
received at least one claim seeking to assert liability against the Company
for
policies for which premiums were not received by the Company and a purported
class action claim attacking the claims payment process, and these matters
are
addressed by the pending litigation matters. In addition, the Company
is defending an arbitration claim by the reinsurer of this Lender’s Indemnity
product. The reinsurer asserts that it is entitled to a return of
most of the Lender’s Indemnity claims that were paid on behalf of the Company by
the administrator, claiming that the claims were not properly payable under
the
terms of the policies. The reinsurer was under common ownership with
the program administrator, and the Company is vigorously defending this
arbitration. Although the Company cannot predict the outcome of any
litigation or arbitration, the Company does not believe that the outcome of
these matters will have a material impact on the financial condition or results
of operations of the Company.