Table of
Contents
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
x
|
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
|
|
|
For the
quarterly period ended June 30, 2009
|
|
or
|
|
o
|
Transition
Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934
|
For the transition period from
to
Commission File Number 00
1-11339
Protective Life Corporation
(Exact name of registrant as specified in its
charter)
Delaware
|
|
95-2492236
|
(State or other jurisdiction of incorporation or organization)
|
|
(IRS Employer Identification Number)
|
2801
Highway 280 South
Birmingham,
Alabama 35223
(Address of principal executive offices and
zip code)
(205)
268-1000
(Registrants telephone number, including area
code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months
(or for such shorter period
that the registrant was required to file such reports),
and (2) has
been subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post
such files). Yes
o
No
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer, or a smaller reporting company. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer
x
|
|
Accelerated Filer
o
|
|
|
|
Non-accelerated filer
o
|
|
Smaller Reporting Company
o
|
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes
o
No
x
Number of shares of Common
Stock, $0.50 Par Value, outstanding as of August 4, 2009: 85,579,724
Table of
Contents
PROTECTIVE LIFE
CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTERLY PERIOD ENDED
JUNE 30, 2009
TABLE OF CONTENTS
2
Table of Contents
PROTECTIVE LIFE CORPORATION
CONSOLIDATED
CONDENSED STATEMENTS OF INCOME
(Unaudited)
|
|
For The
|
|
For The
|
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(Dollars
In Thousands, Except Per Share Amounts)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Premiums
and policy fees
|
|
$
|
679,989
|
|
$
|
678,873
|
|
$
|
1,339,141
|
|
$
|
1,341,277
|
|
Reinsurance
ceded
|
|
(394,225
|
)
|
(423,774
|
)
|
(752,524
|
)
|
(794,846
|
)
|
Net
of reinsurance ceded
|
|
285,764
|
|
255,099
|
|
586,617
|
|
546,431
|
|
Net
investment income
|
|
431,144
|
|
438,941
|
|
852,829
|
|
847,406
|
|
Realized
investment gains (losses):
|
|
|
|
|
|
|
|
|
|
Derivative
financial instruments
|
|
(97,991
|
)
|
65,087
|
|
(5,558
|
)
|
63,430
|
|
All
other investments
|
|
167,799
|
|
(32,425
|
)
|
125,956
|
|
(60,470
|
)
|
Other-than-temporary
impairment losses
|
|
(48,877
|
)
|
(79,986
|
)
|
(166,191
|
)
|
(79,986
|
)
|
Portion
of loss recognized in other comprehensive income (before taxes)
|
|
7,906
|
|
|
|
35,394
|
|
|
|
Net
impairment losses recognized in earnings
|
|
(40,971
|
)
|
(79,986
|
)
|
(130,797
|
)
|
(79,986
|
)
|
Other
income
|
|
39,586
|
|
47,983
|
|
78,249
|
|
93,492
|
|
Total
revenues
|
|
785,331
|
|
694,699
|
|
1,507,296
|
|
1,410,303
|
|
Benefits and expenses
|
|
|
|
|
|
|
|
|
|
Benefits
and settlement expenses, net of reinsurance ceded:
|
|
|
|
|
|
|
|
|
|
(three
months: 2009 - $371,234; 2008 - $403,096)
|
|
478,148
|
|
470,344
|
|
982,507
|
|
965,020
|
|
six
months: 2009 - $705,928; 2008 - $774,829)
|
|
|
|
|
|
|
|
|
|
Amortization
of deferred policy acquisition costs and value of business acquired
|
|
89,949
|
|
71,450
|
|
203,597
|
|
139,820
|
|
Other
operating expenses, net of reinsurance ceded:
|
|
|
|
|
|
|
|
|
|
(three
months: 2009 - $51,963; 2008 - $56,290)
|
|
77,016
|
|
95,426
|
|
148,818
|
|
194,395
|
|
six
months: 2009 - $107,028; 2008 - $108,668)
|
|
|
|
|
|
|
|
|
|
Total
benefits and expenses
|
|
645,113
|
|
637,220
|
|
1,334,922
|
|
1,299,235
|
|
Income before income tax
|
|
140,218
|
|
57,479
|
|
172,374
|
|
111,068
|
|
Income
tax expense
|
|
49,461
|
|
19,295
|
|
59,482
|
|
37,002
|
|
Net income
|
|
$
|
90,757
|
|
$
|
38,184
|
|
$
|
112,892
|
|
$
|
74,066
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share - basic
|
|
$
|
1.17
|
|
$
|
0.54
|
|
$
|
1.52
|
|
$
|
1.04
|
|
Net
income per share - diluted
|
|
$
|
1.16
|
|
$
|
0.53
|
|
$
|
1.51
|
|
$
|
1.04
|
|
Cash
dividends paid per share
|
|
$
|
0.12
|
|
$
|
0.235
|
|
$
|
0.24
|
|
$
|
0.46
|
|
|
|
|
|
|
|
|
|
|
|
Average
share outstanding - basic
|
|
77,893,480
|
|
71,116,961
|
|
74,391,481
|
|
71,098,832
|
|
Average
share outstanding - diluted
|
|
78,528,511
|
|
71,442,599
|
|
74,980,036
|
|
71,448,211
|
|
See Notes to Consolidated Condensed Financial
Statements
3
Table of
Contents
PROTECTIVE LIFE CORPORATION
CONSOLIDATED
CONDENSED BALANCE SHEETS
(Unaudited)
|
|
As of
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Dollars
In Thousands)
|
|
Assets
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
Fixed
maturities, at fair market value (amortized cost: 2009 - $22,354,072; 2008 -
$23,091,708)
|
|
$
|
20,561,840
|
|
$
|
20,098,980
|
|
Equity
securities, at fair market value (cost: 2009 - $293,996; 2008 - $358,159)
|
|
269,108
|
|
302,132
|
|
Mortgage
loans
|
|
3,846,417
|
|
3,848,288
|
|
Investment
real estate, net of accumulated depreciation (2009 - $536; 2008 - $453)
|
|
17,427
|
|
14,810
|
|
Policy
loans
|
|
792,853
|
|
810,933
|
|
Other
long-term investments
|
|
346,037
|
|
432,137
|
|
Short-term
investments
|
|
1,841,149
|
|
1,059,506
|
|
Total
investments
|
|
27,674,831
|
|
26,566,786
|
|
Cash
|
|
206,540
|
|
149,358
|
|
Accrued
investment income
|
|
270,698
|
|
287,543
|
|
Accounts
and premiums receivable, net of allowance for uncollectible amounts (2009 -
$5,184; 2008 - $5,177)
|
|
90,237
|
|
55,017
|
|
Reinsurance
receivables
|
|
5,309,360
|
|
5,254,788
|
|
Deferred
policy acquisition costs and value of business acquired
|
|
3,900,088
|
|
4,200,321
|
|
Goodwill
|
|
119,405
|
|
120,954
|
|
Property
and equipment, net of accumulated depreciation (2009 - $120,153; 2008 -
$117,948)
|
|
38,401
|
|
39,707
|
|
Other
assets
|
|
196,235
|
|
174,035
|
|
Income
tax receivable
|
|
69,004
|
|
73,457
|
|
Deferred
income tax
|
|
|
|
380,069
|
|
Assets
related to separate accounts
|
|
|
|
|
|
Variable
annuity
|
|
2,257,859
|
|
2,027,470
|
|
Variable
universal life
|
|
259,511
|
|
242,944
|
|
Total assets
|
|
$
|
40,392,169
|
|
$
|
39,572,449
|
|
Liabilities
|
|
|
|
|
|
Policy
liabilities and accruals
|
|
$
|
18,390,838
|
|
$
|
18,260,379
|
|
Stable
value product account balances
|
|
4,138,131
|
|
4,960,405
|
|
Annuity
account balances
|
|
9,596,476
|
|
9,357,427
|
|
Other
policyholders funds
|
|
473,105
|
|
421,313
|
|
Other
liabilities
|
|
922,242
|
|
926,821
|
|
Deferred
income taxes
|
|
36,037
|
|
|
|
Non-recourse
funding obligations
|
|
1,375,000
|
|
1,375,000
|
|
Long-term
debt
|
|
789,852
|
|
714,852
|
|
Subordinated
debt securities
|
|
524,743
|
|
524,743
|
|
Liabilities
related to separate accounts
|
|
|
|
|
|
Variable
annuity
|
|
2,257,859
|
|
2,027,470
|
|
Variable
universal life
|
|
259,511
|
|
242,944
|
|
Total
liabilities
|
|
38,763,794
|
|
38,811,354
|
|
Commitments and contingencies - Note 4
|
|
|
|
|
|
Shareowners equity
|
|
|
|
|
|
Preferred
Stock; $1 par value, shares authorized: 4,000,000; Issued: None
|
|
|
|
|
|
Common
Stock, $0.50 par value, shares authorized: 2009 and 2008 - 160,000,000 shares
issued: 2009 - 88,776,960; 2008 - 73,251,960
|
|
44,388
|
|
36,626
|
|
Additional
paid-in-capital
|
|
575,064
|
|
448,481
|
|
Treasury
stock, at cost (2009 - 3,198,053 shares; 2008 - 3,346,153 shares)
|
|
(25,945
|
)
|
(26,978
|
)
|
Unallocated
stock in Employee Stock Ownership Plan (2009 - 0 shares ; 2008 - 128,995
shares)
|
|
|
|
(474
|
)
|
Retained
earnings
|
|
2,066,587
|
|
1,970,496
|
|
Accumulated
other comprehensive income (loss):
|
|
|
|
|
|
Net
unrealized (losses) on investments, net of income tax: (2009 - $(510,910);
2008 - $(863,520))
|
|
(936,467
|
)
|
(1,575,028
|
)
|
Net
unrealized (losses) gains relating to other-than-temporary impaired
investments for which a portion has been recognized in earnings, net of
income tax: (2009 - $(12,388); 2008 - $0)
|
|
(23,006
|
)
|
|
|
Accumulated
(loss) - hedging, net of income tax: (2009 - $(15,356); 2008 - $(25,980))
|
|
(27,640
|
)
|
(46,762
|
)
|
Postretirement
benefits liability adjustment, net of income tax: (2009 - $(24,019); 2008 -
$(24,374))
|
|
(44,606
|
)
|
(45,266
|
)
|
Total
shareowners equity
|
|
1,628,375
|
|
761,095
|
|
Total liabilities and shareowners equity
|
|
$
|
40,392,169
|
|
$
|
39,572,449
|
|
See Notes to Consolidated Condensed Financial
Statements
4
Table of
Contents
PROTECTIVE LIFE CORPORATION
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For The
|
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Dollars
In Thousands)
|
|
Cash flows from operating activities
|
|
|
|
|
|
Net
income
|
|
$
|
112,892
|
|
$
|
74,066
|
|
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Realized
investment losses
|
|
10,399
|
|
77,026
|
|
Amortization
of deferred policy acquisition costs and value of business acquired
|
|
203,597
|
|
139,820
|
|
Capitalization
of deferred policy acquisition costs
|
|
(180,269
|
)
|
(190,145
|
)
|
Depreciation
expense
|
|
3,322
|
|
5,487
|
|
Deferred
income tax
|
|
2,342
|
|
48,949
|
|
Accrued
income tax
|
|
3,437
|
|
44,969
|
|
Interest
credited to universal life and investment products
|
|
505,417
|
|
510,718
|
|
Policy
fees assessed on universal life and investment products
|
|
(295,140
|
)
|
(276,200
|
)
|
Change
in reinsurance receivables
|
|
(54,572
|
)
|
(113,989
|
)
|
Change
in accrued investment income and other receivables
|
|
(18,375
|
)
|
(54,414
|
)
|
Change
in policy liabilities and other policyholders funds of traditional life and
health products
|
|
111,564
|
|
219,571
|
|
Trading
securities:
|
|
|
|
|
|
Maturities
and principal reductions of investments
|
|
320,705
|
|
285,594
|
|
Sale
of investments
|
|
429,179
|
|
615,725
|
|
Cost
of investments acquired
|
|
(426,631
|
)
|
(736,632
|
)
|
Other
net change in trading securities
|
|
(150,378
|
)
|
(105
|
)
|
Change
in other liabilities
|
|
86,944
|
|
287,026
|
|
Other,
net
|
|
(60,023
|
)
|
(84,930
|
)
|
Net cash provided by operating activities
|
|
604,410
|
|
852,536
|
|
Cash flows from investing activities
|
|
|
|
|
|
Investments
available-for-sale:
|
|
|
|
|
|
Maturities
and principal reductions of investments
|
|
1,320,521
|
|
1,028,935
|
|
Sales
of investments
|
|
582,088
|
|
1,665,517
|
|
Cost
of investments acquired
|
|
(1,324,348
|
)
|
(4,766,802
|
)
|
Mortgage
loans:
|
|
|
|
|
|
New
borrowings
|
|
(140,420
|
)
|
(443,432
|
)
|
Repayments
|
|
141,673
|
|
204,337
|
|
Change
in investment real estate, net
|
|
(3,361
|
)
|
181
|
|
Change
in policy loans, net
|
|
18,080
|
|
13,175
|
|
Change
in other long-term investments, net
|
|
17,030
|
|
10,747
|
|
Change
in short-term investments, net
|
|
(605,064
|
)
|
325,263
|
|
Purchases
of property and equipment
|
|
(2,515
|
)
|
(3,685
|
)
|
Sales
of property and equipment
|
|
|
|
787
|
|
Net cash provided by (used in) investing activities
|
|
3,684
|
|
(1,964,977
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
Borrowings
under line of credit arrangements and long-term debt
|
|
197,000
|
|
|
|
Principal
payments on line of credit arrangements and long-term debt
|
|
(122,000
|
)
|
|
|
Net
proceeds from securities sold under repurchase agreements
|
|
|
|
360,000
|
|
Dividends
to shareowners
|
|
(16,799
|
)
|
(32,196
|
)
|
Issuance
of common stock
|
|
132,763
|
|
|
|
Investments
product deposits and change in universal life deposits
|
|
1,377,341
|
|
2,730,191
|
|
Investment
product withdrawals
|
|
(2,100,158
|
)
|
(1,939,231
|
)
|
Other
financing activities, net
|
|
(19,059
|
)
|
(45,108
|
)
|
Net cash (used in) provided by financing activities
|
|
(550,912
|
)
|
1,073,656
|
|
Change in cash
|
|
57,182
|
|
(38,785
|
)
|
Cash at beginning of period
|
|
149,358
|
|
146,152
|
|
Cash at end of period
|
|
$
|
206,540
|
|
$
|
107,367
|
|
See Notes to Consolidated Condensed Financial
Statements
5
Table
of Contents
PROTECTIVE
LIFE CORPORATION
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of
Presentation
The
accompanying unaudited consolidated condensed financial statements of
Protective Life Corporation and subsidiaries (the Company) have
been prepared in accordance with accounting principles generally accepted in
the United States of America (U.S. GAAP) for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the disclosures
required by U.S. GAAP for complete financial statements. In the opinion of
management, the accompanying financial statements reflect all adjustments
(consisting only of normal recurring items) necessary for a fair statement of
the results for the interim periods presented. Operating results for the three
and six month periods ended June 30, 2009, are not necessarily indicative
of the results that may be expected for the year ending December 31, 2009.
The year-end consolidated condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required by
U.S. GAAP. For further information, refer to the consolidated financial
statements and notes thereto included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2008.
Accounting
Pronouncements Recently Adopted
Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) No. 141(R),
Business Combinations
(SFAS No. 141(R))
.
In December of
2007, the FASB issued SFAS No. 141(R). This Statement is a revision to the
original Statement and continues the movement toward a greater use of fair
values in financial reporting. It changes how business acquisitions are
accounted for and will impact financial statements at the acquisition date and
in subsequent periods. Further, certain of the changes will introduce more
volatility into earnings and thus may impact a companys acquisition strategy.
SFAS No. 141(R) will also impact the annual goodwill impairment test
associated with acquisitions that close both before and after the effective
date of this Statement. This Statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. The
adoption of this Statement did not have an impact to the Companys consolidated
results of operations or financial position.
The Company will apply this Statement to all future business
combinations.
FASB
Statement No. 160,
Noncontrolling Interests
in Consolidated Financial Statements
(SFAS No. 160)
. In December of 2007, the FASB
issued SFAS No. 160. This Statement applies to all entities that prepare
consolidated financial statements, except not-for-profit organizations, but
will affect only those entities that have an outstanding non-controlling
interest in one or more subsidiaries or that deconsolidate a subsidiary. This
Statement is effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008 (that is, January 1,
2009, for entities with calendar year-ends). The adoption of this Statement did
not have an impact on the Companys consolidated results of operations or
financial position.
FASB Statement No. 161,
Disclosures
about Derivative Instruments and Hedging Activities
(SFAS No. 161)
. In March of 2008, the FASB issued
SFAS No. 161. This Statement requires enhanced disclosures about how and
why an entity uses derivative instruments, how derivative instruments and
related hedged items are accounted for under FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities
(SFAS No. 133). This Statement is effective for fiscal years and interim
periods beginning after November 15, 2008. This Statement does not require
any changes to current accounting. The Company adopted this Statement on January 1,
2009.
FASB Staff Position (FSP) FAS No. 140-3,
Accounting for Transfers of Financial Assets and Repurchase Financing
Transactions (FSP FAS No. 140-3)
.
In February of 2008, the FASB issued FSP FAS No. 140-3
to provide guidance on accounting for a transfer of a financial asset and a
repurchase financing, which is not directly addressed by FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities
(SFAS No. 140).
This FSP is effective for fiscal years beginning after November 15, 2008,
and interim periods within those fiscal years. The FSP became effective for the
Company on January 1, 2009. The Company will apply this FSP to all future
transfers of financial assets and repurchase financing transactions.
6
Table of Contents
FSP FAS No. 142-3, Determination
of the Useful Life of Intangible Assets
(FSP FAS No. 142-3)
.
In April of
2008, the FASB issued FSP FAS No. 142-3 to improve consistency between the
useful life of a recognized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangible Assets
(SFAS
No. 142) and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141(R) and other guidance under
U.S. GAAP. This FSP is effective for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. The FSP became effective
for the Company on January 1, 2009. The adoption of this FSP did not have
a significant impact on the Companys consolidated results of operations or
financial position.
FASB
Statement No. 162,
The Hierarchy of Generally
Accepted Accounting Principles
(SFAS No. 162)
. In May of 2008, the FASB issued
SFAS No. 162. This Statement identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP)
in the United States (the GAAP hierarchy). This Statement became effective on
November 17, 2008. The adoption of this Statement did not have an impact
on the Companys consolidated results of operations or financial position.
FASB Statement No. 163,
Accounting
for Financial Guarantee Insurance Contracts
(SFAS No. 163)
.
In May of 2008, the FASB issued SFAS No. 163. This Statement
requires that an insurance enterprise recognize a claim liability prior to an
event of default (insured event) when there is evidence that credit
deterioration has occurred in an insured financial obligation. This Statement also clarifies how FASB
Statement No. 60,
Accounting and Reporting
by Insurance Enterprises
(SFAS No. 60) applies to financial
guarantee insurance contracts, including the recognition and measurement to be
used to account for premium revenue and claim liabilities. It also requires
expanded disclosures about financial guarantee insurance contracts. This
Statement does not apply to financial guarantee insurance contracts that would
be within the scope of SFAS No. 133. This Statement is effective for
fiscal years and interim periods beginning after December 15, 2008. The
standard became effective for the Company on January 1, 2009. The adoption of this Statement did not have
an impact on the Companys consolidated results of operations or financial
position.
FSP Emerging Issues Task Force (EITF) Issue No. 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions
Are Participating Securities (FSP EITF Issue No. 03-6-1)
.
In June of
2008, the FASB issued FSP EITF Issue No. 03-6-1. This FSP addresses
whether instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included
in the earnings allocation in computing earnings per share (EPS) under the
two-class method described in paragraphs 60 and 61 of FASB Statement No. 128,
Earnings per Share
. The FSP became effective for financial
statements issued for fiscal years and interim periods beginning January 1,
2009. All prior period EPS data presented has been adjusted retrospectively to
conform to the provisions of this FSP. The adoption of this FSP did not have an
impact on the Companys consolidated results of operations or financial
position.
FSP FAS No. 157-4, Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability
Have Significantly Decreased and Identifying Transactions That Are Not Orderly
(FSP FAS No. 157-4).
In April of 2009, the FASB issued FSP FAS No. 157-4 to provide
additional guidance for estimating fair value in accordance with FASB Statement
No. 157,
Fair Value Measurements
(SFAS No. 157),
when the volume and level of activity for the asset or liability have
significantly decreased. This FSP also includes guidance on identifying
circumstances that indicate a transaction is not orderly. This FSP is effective
for interim and annual reporting periods ending after June 15, 2009, and
shall be applied prospectively. Early adoption is permitted for periods ending
after March 15, 2009. The Company elected to early adopt the FSP in the first
quarter of 2009. Early adoption of the FSP did not have a significant impact on
the Companys consolidated results of operations or financial position.
FSP FAS No. 115-2 and FAS No. 124-2,
Recognition and Presentation of Other-Than-Temporary Impairments
(FSP FAS No. 115-2 and FAS No. 124-2).
In April of
2009, the FASB issued FSP FAS No. 115-2 and FAS No. 124-2 to amend
the other-than-temporary impairment guidance in U.S. GAAP for debt securities
to make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments of debt and equity securities in
the financial statements. This FSP addresses the timing of impairment
recognition and provides greater clarity to investors about the credit and
noncredit components of impaired debt securities that are not expected to be
sold. Impairments will continue to be measured at fair value with credit losses
recognized in earnings and non-credit losses recognized in other comprehensive
income. This FSP also requires increased and timelier disclosures regarding
measurement techniques, credit losses, and an aging of securities with
unrealized losses. This FSP is effective for interim and annual reporting
periods ending after June 15, 2009, with
7
Table of Contents
early adoption permitted for periods ending after March 15,
2009. The Company elected to early adopt the FSP in the first quarter of 2009,
and recorded total other-than-temporary impairments during the three months
ended March 31, 2009, of approximately $117.3 million with $27.5 million
of this amount recorded in other comprehensive income. The impact of recording
a portion of the other-than-temporary impairments in other comprehensive income
resulted in an increase in net income of $17.9 million or $0.25 per share for
the three months ended March 31, 2009. The adoption of the FSP did not
require a cumulative effect adjustment to retained earnings at January 1,
2009, since all other-than-temporary impairments recorded by the Company in
prior periods were credit related losses.
FSP FAS No. 107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments
(FSP
FAS No. 107-1 and APB 28-1).
In April of 2009, the
FASB issued FSP FAS No. 107-1 and APB 28-1 to address concerns for more
transparent and timely information in financial reporting by requiring
quarterly disclosures about fair value of financial instruments. The guidance
relates to fair value disclosures for financial instruments that are not
currently reflected on the balance sheet at fair value. The FSP requires
qualitative and quantitative information about fair value estimates for all
financial instruments not measured at fair value. This FSP became effective for
interim and annual reporting periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009. The
Company adopted the FSP in the second quarter of 2009. The adoption of this FSP
did not have an impact on the Companys consolidated results of operations or
financial position.
FASB Statement No. 165,
Subsequent
Events
(SFAS No. 165).
In May of 2009, the FASB issued SFAS No. 165.
This Statement establishes general standards of accounting for and disclosures
of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. In addition, the Statement
provides guidance on the circumstances that require entities to recognize
events or transactions that occur after the balance sheet date and the types of
disclosures that need to be made about them. This Statement is effective for
interim or annual reporting periods ending after June 15, 2009. The
standard became effective for the Company on June 30, 2009. The adoption of this Statement did not have
an impact on the Companys consolidated results of operations or financial
position.
Accounting
Pronouncements Not Yet Adopted
FASB Statement No. 132(R)-1,
Employers Disclosures about Postretirement Benefit Plan Assets
(SFAS No. 132(R)-1)
. In December of 2008, the FASB issued SFAS No. 132(R)-1.
This Statement does not require any changes to current accounting. It requires
additional disclosures related to Postretirement Benefit Plan Assets. This
Statement will provide users of financial statements with an understanding of:
1) how investment allocation decisions are made, including the factors that are
pertinent to an understanding of investment policies and strategies, 2) the
major categories of plan assets, 3) the inputs and valuation techniques used to
measure the fair value of plan assets, 4) the effect of fair value measurements
using significant unobservable inputs (Level 3) on changes in plan assets for
the period, and 5) significant concentrations of risk within plan assets. The
disclosure requirements will be effective for the Company for the period ending
December 31, 2009. The Company does not expect this Statement to have an
impact on its consolidated results of operations or financial position.
FASB Statement No. 166,
Accounting
for Transfers of Financial Assets
(SFAS No. 166).
In June of 2009, the FASB issued
SFAS No. 166. This Statement is a revision to SFAS No. 140 and will
require entities to provide additional information about sales of securitized
financial assets and similar transactions, particularly if the seller retains
some risk exposure to the assets. This
Statement also eliminates the concept of a qualifying special-purpose entity,
changes the requirements for the derecognition of financial assets, and calls
upon sellers of the assets to make additional disclosures about them. This Statement is effective for interim or
annual reporting periods ending after November 15, 2009. The standard will
become effective for the Company on January 1, 2010. The Company is currently evaluating the
impact this Statement will have on its consolidated results of operations and
financial position.
FASB Statement No. 167,
Amendments to FASB Interpretation No. 46(R)
(SFAS
No. 167).
In June of 2009, the FASB issued SFAS No. 167.
This Statement amends FASB Interpretation No. 46(R),
Consolidation
of Variable Interest
Entities
(FIN No. 46(R)),
by altering how a company determines when an entity that is insufficiently
capitalized or not controlled through voting should be consolidated. A company has to determine whether or not it
should provide consolidated reporting of an entity based upon the entitys
purpose and design and the parent companys ability to direct the entitys
actions. This Statement is effective for
interim or annual reporting periods ending after November 15, 2009. The
standard will become effective for the Company on January 1, 2010. The Company is currently evaluating the
impact
this Statement will have on its consolidated results
of operations and financial position.
8
Table of Contents
FASB Statement No. 168,
The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles
(SFAS No. 168).
In June of
2009, the FASB issued SFAS No. 168. This Statement replaces SFAS No. 162,
and authorizes the Codification as the new source for authoritative U.S. GAAP
and ends the practice of FASB issuing standards in the familiar forms. Instead, the board will publish Accounting
Standards Updates that will provide background information about the amended
guidance along with a basis for conclusions regarding the change. This Statement is effective for reporting
periods ending after September 15, 2009. The standard will become
effective for the Company on July 1, 2009. This
Statement will not have an impact on the Companys
consolidated results of operations and financial position.
Significant
Accounting Policies
For a full description of significant accounting
policies, see Note 2 of Notes to Consolidated Financial Statements included in
the Companys 2008 Form 10-K Annual Report.
There were no significant
changes to the Companys accounting policies during the six months ended June 30,
2009, other than those related to credit losses and the adoption of FSP FAS No. 115-2
and FAS No. 124-2 as discussed in Note 2,
Investment
Operations
, and the following:
Guaranteed minimum withdrawal
benefits
- We establish liabilities for guaranteed minimum
withdrawal benefits (GMWB) on our variable annuity products. The GMWB is
valued in accordance with SFAS No. 133 which utilizes the valuation
technique prescribed by SFAS No. 157, which requires the liability to be
marked-to-market using current implied volatilities for the equity indices. The
methods used to estimate the liabilities employ assumptions about mortality,
lapses, policyholder behavior, equity market returns, interest rates, the
Companys nonperformance risk measure and market volatility. We assume
mortality of 65% of the National Association of Insurance Commissioners 1994
Variable Annuity Guaranteed Minimum Death Benefit (GMDB) Mortality Table.
Differences between the actual experience and the assumptions used result in
variances in profit and could result in losses.
In the first quarter of 2009, the assumption for long term volatility
used for projection purposes was updated to reflect recent market conditions.
The liability calculation was changed to reflect a rate increase for all GMWB
policyholders.
Reclassifications
Certain reclassifications have been made in the
previously reported financial statements and accompanying notes to make the
prior year amounts comparable to those of the current year. Such reclassifications had no effect on
previously reported net income or shareowners equity.
2
.
INVESTMENT OPERATIONS
Net realized investment gains (losses) for all other
investments are summarized as follows:
|
|
For The
|
|
For The
|
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2009
|
|
|
|
(Dollars
In Thousands)
|
|
Fixed
maturities
|
|
$
|
4,065
|
|
$
|
9,618
|
|
Equity
securities
|
|
9,503
|
|
9,503
|
|
Impairments
|
|
(40,971
|
)
|
(130,797
|
)
|
Mark-to-market
Modco trading portfolio
|
|
154,785
|
|
108,907
|
|
Mortgage
loans and other investments
|
|
(554
|
)
|
(2,072
|
)
|
|
|
$
|
126,828
|
|
$
|
(4,841
|
)
|
For the three and six months ended June 30,
2009, gross gains on investments available-for-sale (fixed maturities, equity
securities, and short-term investments) were $14.5 million and $20.1 million,
respectively.
9
Table of
Contents
The
amortized cost and estimated market value of the Companys investments
classified as available-for-sale as of June 30, 2009, are as follows:
|
|
|
|
Gross
|
|
Gross
|
|
Estimated
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
Losses
|
|
Market Value
|
|
|
|
(Dollars
In Thousands)
|
|
2009
|
|
|
|
|
|
|
|
|
|
Fixed
maturities:
|
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
|
|
|
|
|
|
|
Residental
mortgage-backed securities
|
|
$
|
4,275,345
|
|
$
|
25,863
|
|
$
|
(629,429
|
)
|
$
|
3,671,779
|
|
Commercial
mortgage-backed securities
|
|
1,062,018
|
|
51,992
|
|
(148,474
|
)
|
965,536
|
|
Asset-backed
securities
|
|
1,141,470
|
|
1,159
|
|
(42,075
|
)
|
1,100,554
|
|
United
States Government and authorities
|
|
124,657
|
|
1,839
|
|
(1,470
|
)
|
125,026
|
|
States,
municipalities, and political subdivisions
|
|
124,755
|
|
7,343
|
|
(94
|
)
|
132,004
|
|
Convertibles
and bonds with warrants
|
|
88
|
|
|
|
(63
|
)
|
25
|
|
All
other corporate bonds
|
|
12,550,714
|
|
190,257
|
|
(1,249,044
|
)
|
11,491,927
|
|
Redeemable
preferred stocks
|
|
36
|
|
|
|
(36
|
)
|
|
|
|
|
19,279,083
|
|
278,453
|
|
(2,070,685
|
)
|
17,486,851
|
|
Equity
securities
|
|
291,651
|
|
3,019
|
|
(27,907
|
)
|
266,763
|
|
Short-term
investments
|
|
1,597,836
|
|
|
|
|
|
1,597,836
|
|
|
|
$
|
21,168,570
|
|
$
|
281,472
|
|
$
|
(2,098,592
|
)
|
$
|
19,351,450
|
|
As
of June 30, 2009, the Company had an additional $3.1 billion of fixed
maturities, $2.3 million of equity securities, and $243.3 million of short-term
investments classified as trading securities.
The
amortized cost and estimated market value of available-for-sale fixed
maturities as of June 30, 2009, by expected maturity, are shown below.
Expected maturities are derived from estimated rates of prepayment that may
differ from actual rates of prepayment.
|
|
Estimated
|
|
Estimated
|
|
|
|
Amortized
|
|
Fair
Market
|
|
|
|
Cost
|
|
Value
|
|
|
|
(Dollars
In Thousands)
|
|
Due
in one year or less
|
|
$
|
1,453,038
|
|
$
|
1,405,620
|
|
Due
after one year through five years
|
|
6,521,720
|
|
5,902,892
|
|
Due
after five years through ten years
|
|
3,379,474
|
|
3,199,741
|
|
Due
after ten years
|
|
7,924,850
|
|
6,978,598
|
|
|
|
$
|
19,279,082
|
|
$
|
17,486,851
|
|
10
Table of Contents
Each quarter the Company
reviews investments with unrealized losses and tests for other-than-temporary
impairments. The Company analyzes various factors to determine if any specific
other-than-temporary asset impairments exist. 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 Companys intent
and ability to hold the investment until recovery, 5) the time period
during which the decline has occurred, 6) an economic analysis of the
issuers 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 impairments. Although
no set formula is used in this process, the investment performance, collateral
position, and continued viability of the issuer are significant measures
considered. Once a determination has been made that a specific
other-than-temporary impairment exists, the securitys basis is adjusted and an
other-than-temporary impairment is recognized. Equity securities that are
other-than temporarily impaired are written down to fair value with a realized
loss recognized in earnings. Other-than-temporary impairments to debt
securities that the Company does not intend to sell and does not expect to be
required to sell before recovering the securitys amortized cost are written
down to discounted expected future cash flows (post impairment cost) and
credit losses are recorded in earnings. The difference between the securities
discounted estimated future cash flows and the fair value of the securities is
recognized in other comprehensive income as a non-credit loss. When calculating
the post impairment cost for residential mortgage-backed securities, commercial
mortgage-backed securities, and asset-backed securities, the Company considers
all known market data related to cash flows to estimate future cash flows. When
calculating the post impairment cost for corporate debt securities, the Company
considers all contractual cash flows to estimate future cash flows. To
calculate the post impairment cost, the estimated future cash flows are
discounted at the original purchase yield. Debt securities that the Company intends
to sell or expects to be required to sell before recovery are written down to
fair value with the change recognized in earnings.
During
the three and six months ended June 30, 2009, the Company recorded
other-than-temporary impairments of investments of $48.9 million and $166.2
million, respectively. Of the $48.9 million of impairments for the three months
ended June 30, 2009, $41.0 million was recorded in earnings and $7.9
million was recorded in other comprehensive income (loss). Of the $166.2 million
of impairments for the six months ended June 30, 2009, $130.8 million was
recorded in earnings and $35.4 million was recorded in other comprehensive
income (loss). For the three months ended June 30, 2009, there were no
other-than-temporary impairments related to equity securities and
other-than-temporary impairments of
$19.4 million for the six months ended June 30, 2009 for securities
related to equity securities. For the three and six months ended June 30,
2009, there were $48.9 million and $146.8 million of other-than-temporary
impairments related to debt securities, respectively.
For
the three months ended June 30, 2009, other-than-temporary impairments
related to debt securities that the Company does not intend to sell and does
not expect to be required to sell prior to recovering amortized cost were $30.4
million, of which $22.5 million of credit losses were recognized in earnings,
and $7.9 million of non-credit losses were recorded in other comprehensive
income (loss). During this period, there were no other-than-temporary
impairments related to debt securities that the Company intends to sell or
expects to be required to sell.
For
the six months ended June 30, 2009, other-than-temporary impairments
related to debt securities that the Company does not intend to sell and does
not expect to be required to sell prior to recovering amortized cost were
$116.4 million, with $81.0 million of credit losses recorded on debt securities
in earnings, and $35.4 million of non-credit losses recorded in other comprehensive
income (loss). During the same period, other-than-temporary impairments related
to debt securities that the Company intends to sell or expects to be required
to sell were $30.4 million and were recorded in earnings.
The
following chart is a rollforward of credit losses for the three and six months
ended June 30, 2009, on debt securities held by the Company for which a
portion of an other-than-temporary impairment was recognized in other
comprehensive income (loss):
|
|
For The
Three Months Ended
June 30, 2009
|
|
For The
Six Months Ended
June 30, 2009
|
|
|
|
(Dollars
In Thousands)
|
|
Beginning
balance
|
|
$
|
40,014
|
|
$
|
|
|
Additions
for newly impaired securities
|
|
15,404
|
|
55,418
|
|
Additions
for previously impaired securities
|
|
7,136
|
|
7,136
|
|
Reductions
for previously impaired securities due to a change in expected cash flows
|
|
(15,826
|
)
|
(15,826
|
)
|
Ending
balance
|
|
$
|
46,728
|
|
$
|
46,728
|
|
11
Table of
Contents
The
following table includes the Companys investments gross unrealized losses and
fair value that are not deemed to be other-than-temporarily impaired,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position as of June 30, 2009:
|
|
Less
Than 12 Months
|
|
12
Months or More
|
|
Total
|
|
|
|
Market
|
|
Unrealized
|
|
Market
|
|
Unrealized
|
|
Market
|
|
Unrealized
|
|
|
|
Value
|
|
Loss
|
|
Value
|
|
Loss
|
|
Value
|
|
Loss
|
|
|
|
(Dollars
In Thousands)
|
|
Residential
mortgage-backed securities
|
|
$
|
458,958
|
|
$
|
(54,754
|
)
|
$
|
2,532,472
|
|
$
|
(574,676
|
)
|
$
|
2,991,430
|
|
$
|
(629,430
|
)
|
Commercial
mortgage-backed securities
|
|
63,659
|
|
(43,609
|
)
|
421,550
|
|
(104,865
|
)
|
485,209
|
|
(148,474
|
)
|
Asset-backed
securities
|
|
148,864
|
|
(1,890
|
)
|
917,811
|
|
(40,184
|
)
|
1,066,675
|
|
(42,074
|
)
|
US
government
|
|
17,239
|
|
(1,470
|
)
|
|
|
|
|
17,239
|
|
(1,470
|
)
|
States,
municipalities, etc.
|
|
|
|
|
|
916
|
|
(94
|
)
|
916
|
|
(94
|
)
|
Convertibles
bonds
|
|
|
|
|
|
25
|
|
(63
|
)
|
25
|
|
(63
|
)
|
Other
corporate bonds
|
|
2,017,267
|
|
(198,399
|
)
|
5,022,747
|
|
(1,050,645
|
)
|
7,040,014
|
|
(1,249,044
|
)
|
Redeemable
preferred
|
|
|
|
|
|
|
|
(36
|
)
|
|
|
(36
|
)
|
Equities
|
|
64,761
|
|
(6,772
|
)
|
102,554
|
|
(21,135
|
)
|
167,315
|
|
(27,907
|
)
|
|
|
$
|
2,770,748
|
|
$
|
(306,894
|
)
|
$
|
8,998,075
|
|
$
|
(1,791,698
|
)
|
$
|
11,768,823
|
|
$
|
(2,098,592
|
)
|
For
commercial mortgage-backed securities in an unrealized loss position for
greater than 12 months, $98.9 million of the total $104.9 million unrealized
loss relates to securities issued in Company-sponsored commercial loan
securitizations. These losses relate primarily to market illiquidity as opposed
to underlying credit concerns. Factors such as credit enhancements within the
deal structures and the underlying collateral performance and characteristics
support the recoverability of the investments. The other corporate bonds
category has gross unrealized losses greater than 12 months of $1.1 billion as
of June 30, 2009. These losses relate primarily to fluctuations in credit
spreads. The aggregate decline in market value of these securities was deemed
temporary due to positive factors supporting the recoverability of the
respective investments. Positive factors considered include credit ratings, the
financial health of the issuer, the continued access of the issuer to capital
markets, and other pertinent information including the Companys ability and
intent to hold these securities to recovery. The Company does not consider
these unrealized loss positions to be other-than-temporary, based on the
factors discussed and because the Company has the ability and intent to hold
equity investments until the fair values recover, and does not intend to sell
or expect to be required to sell the securities before recovering the Companys
amortized cost of debt securities.
As
of June 30, 2009, the Company had bonds which were rated below investment
grade of $2.3 billion and had an amortized cost of $3.2 billion. Not included
in these below investment grade bonds as of June 30, 2009, were $337.3
million of securities in the Companys trading securities portfolio. As of June 30,
2009, approximately $27.8 million of the bonds rated below investment grade
were securities issued in Company-sponsored commercial mortgage loan
securitizations. Approximately $588.0 million of the below investment grade
bonds were not publicly traded.
The
change in unrealized gains (losses), net of income tax, on fixed maturity and
equity securities, classified as available-for-sale is summarized as follows:
|
|
For The
|
|
For The
|
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2009
|
|
|
|
(Dollars
In Thousands)
|
|
Fixed
maturities
|
|
$
|
804,612
|
|
$
|
780,346
|
|
Equity
securities
|
|
27,477
|
|
20,217
|
|
|
|
$
|
832,089
|
|
$
|
800,563
|
|
12
Table of Contents
3.
NON-RECOURSE
FUNDING OBLIGATIONS
Non-recourse
funding obligations outstanding as of June 30, 2009, on a consolidated
basis, listed by issuer, are reflected in the following table:
|
|
|
|
|
|
Year-to-Date
|
|
|
|
|
|
|
|
Weighted-Avg
|
|
Issuer
|
|
Balance
|
|
Maturity
Year
|
|
Interest
Rate
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
|
Golden
Gate Captive Insurance Company
|
|
$
|
800,000
|
|
2037
|
|
3.50
|
%
|
Golden
Gate II Captive Insurance Company
|
|
575,000
|
|
2052
|
|
1.65
|
%
|
Total
|
|
$
|
1,375,000
|
|
|
|
|
|
4.
COMMITMENTS
AND CONTINGENCIES
The Company is
contingently liable to obtain a $20 million letter of credit under
indemnity agreements with directors. Such agreements provide insurance
protection in excess of the directors and officers liability insurance
in-force at the time up to $20 million.
Should certain events occur constituting a change in control, the
Company must obtain the letter of credit upon which directors may draw for
defense or settlement of any claim relating to performance of their duties as
directors. The Company has similar agreements with certain of its officers
providing up to $10 million in indemnification that are not secured by the
obligation to obtain a letter of credit. These obligations are in addition to
the customary obligation to indemnify officers and directors contained in the
Companys bylaws.
Under insurance guaranty
fund laws, in most states insurance companies doing business therein can be
assessed up to prescribed limits for policyholder losses incurred by insolvent
companies. The Company does not believe such assessments will be materially
different from amounts already provided for in the financial statements. Most of these laws do provide, however, that
an assessment may be excused or deferred if it would threaten an insurers own
financial strength.
A number of civil jury
verdicts have been returned against insurers, broker dealers and other
providers of financial services involving sales, refund or claims practices, alleged
agent misconduct, failure to properly supervise representatives, relationships
with agents or persons with whom the insurer does business, and other
matters. Often these lawsuits have
resulted in the award of substantial judgments that are disproportionate to the
actual damages, including material amounts of punitive and non-economic
compensatory damages. In some states,
juries, judges, and arbitrators have substantial discretion in awarding
punitive non-economic compensatory damages which creates the potential for
unpredictable material adverse judgments or awards in any given lawsuit or
arbitration. Arbitration awards are subject to very limited appellate
review. In addition, in some class
action and other lawsuits, companies have made material settlement payments.
The Company, like other financial service companies, in the ordinary course of
business, is involved in such litigation and arbitration. The occurrence of such litigation and
arbitration may become more frequent and/or severe when general economic
conditions have deteriorated. Although the Company cannot predict the outcome
of any such litigation or arbitration, the Company does not believe that any
such outcome will have a material impact on its financial condition or results
of the operations.
5.
STOCK-BASED COMPENSATION
Performance shares
awarded during the six months ended June 30, 2009 and 2008, and the
estimated fair value of the awards at grant date are as follows:
Year
|
|
Performance
|
|
Estimated
|
|
Awarded
|
|
Shares
|
|
Fair
Value
|
|
(Dollars In Thousands)
|
|
2009
|
|
|
|
$
|
|
|
2008
|
|
75,900
|
|
$
|
2,900
|
|
The criteria for payment
of performance awards is based primarily upon a comparison of the Companys
average return on average equity over a four-year period (earlier upon the
death, disability, or retirement of the executive, or in certain circumstances,
upon a change in control of the Company) to that of a comparison group of
13
Table of Contents
publicly held life and multi-line insurance companies. For the 2008
awards, if the Companys results are below the 25th percentile of the
comparison group, no portion of the award is earned. For the 2005-2007 awards,
if the Companys results are below the 40th percentile of the comparison group,
no portion of the award is earned. If the Companys results are at or above the
90th percentile, the award maximum is earned. Awards are paid in shares of
the Companys Common Stock. As noted in
the table above, no awards were granted in the first six months of 2009.
Between 1996 and 2009,
stock appreciation rights (SARs) were granted to certain officers of the
Company to provide long-term incentive compensation based solely on the performance
of the Companys Common Stock. The SARs are exercisable either five years after
the date of grants or in three or four equal annual installments beginning one
year after the date of grant (earlier upon the death, disability, or retirement
of the officer, or in certain circumstances, of a change in control of the
Company) and expire after ten years or upon termination of employment. The SARs
activity as well as weighted-average base price for the six months ended June 30,
2009, is as follows:
|
|
Weighted-Average
|
|
|
|
|
|
Base
Price per share
|
|
No. of
SARs
|
|
Balance
as of December 31, 2008
|
|
$
|
33.33
|
|
1,559,573
|
|
SARs
granted
|
|
3.50
|
|
910,829
|
|
SARs
exercised / forfeited
|
|
39.53
|
|
(5,200
|
)
|
Balance
as of June 30, 2009
|
|
$
|
22.30
|
|
2,465,202
|
|
The SARs issued during
the six months ended June 30, 2009, had an estimated fair value at grant
date of $0.9 million. The fair value was estimated using a Black-Scholes option
pricing model. Assumptions used in the model for the SARs granted (the
simplified method under SEC Staff Accounting Bulletin No. 107,
Share-Based Payment (
SAB No. 107)was used for these
awards) were as follows: expected
volatility of 68.5%, risk-free interest rate of 2.7%, a dividend rate of 10.3%,
a 0% forfeiture rate, and the expected exercise date was 2015. The Company will
pay an amount in stock equal to the difference between the specified base price
of the Companys Common Stock and the market value at the exercise date for
each SAR.
Additionally,
the Company
issued
572,200
restricted stock units at a fair value of $3.50 per unit during the six
months ended June 30, 2009. These
awards have a total fair value of $2.0 million. Approximately half of these restricted stock
units vest in 2012 and the remainder vest in 2013.
6.
DEFINED BENEFIT PENSION
PLAN AND UNFUNDED EXCESS BENEFITS PLAN
Components of the net
periodic benefit cost of the Companys defined benefit pension plan and
unfunded excess benefits plan are as follows:
|
|
For The
|
|
For The
|
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(Dollars
In Thousands)
|
|
Service
cost Benefits earned during the period
|
|
$
|
1,889
|
|
$
|
2,131
|
|
$
|
3,778
|
|
$
|
5,038
|
|
Interest
cost on projected benefit obligation
|
|
2,395
|
|
2,290
|
|
4,790
|
|
5,415
|
|
Expected
return on plan assets
|
|
(2,531
|
)
|
(2,542
|
)
|
(5,062
|
)
|
(6,011
|
)
|
Amortization
of prior service cost
|
|
(98
|
)
|
49
|
|
(196
|
)
|
115
|
|
Amortization
of actuarial losses
|
|
568
|
|
739
|
|
1,136
|
|
1,748
|
|
Net
periodic benefit cost
|
|
$
|
2,223
|
|
$
|
2,667
|
|
$
|
4,446
|
|
$
|
6,305
|
|
During April of
2009, the Company contributed $2.0 million to the defined benefit pension plan.
The Company has not yet determined the aggregate amount that it will contribute
to its defined benefit pension plan during the remainder of 2009.
In addition to pension
benefits, the Company provides life insurance benefits to eligible retirees and
limited healthcare benefits to eligible retirees who are not yet eligible for
Medicare. For a closed group of retirees over age 65, the Company provides
a prescription drug benefit. The cost of
these plans for the three and six months ended June 30, 2009 and 2008, was
immaterial to the Companys financial statements.
14
Table of Contents
7.
EARNINGS PER SHARE
Basic earnings
per share is
computed by dividing net income by the weighted-average number of common shares
outstanding
during
the period,
including shares issuable under various deferred compensation plans. Diluted earnings
per share is computed by dividing net income by the weighted-average
number of common shares and dilutive potential common shares outstanding during
the period, assuming the shares were not anti-dilutive, including shares
issuable under various stock-based compensation plans and stock purchase
contracts.
During the second quarter
of 2009, the Company issued 15.5 million shares of common stock through a
public offering. This offering generated approximately $132.8 million of net
proceeds to the Company.
A reconciliation of the
numerators and denominators of the basic and diluted earnings per share is
presented below:
|
|
For The
|
|
For The
|
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(Dollars In Thousands, Except
Per Share Amounts)
|
|
Calculation of basic earnings per share:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
90,757
|
|
$
|
38,184
|
|
$
|
112,892
|
|
$
|
74,066
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares issued and outstanding
|
|
76,980,175
|
|
70,113,046
|
|
73,480,155
|
|
70,106,690
|
|
Issuable
under various deferred compensation plans
|
|
913,305
|
|
1,003,915
|
|
911,326
|
|
992,142
|
|
Weighted
shares outstanding - Basic
|
|
77,893,480
|
|
71,116,961
|
|
74,391,481
|
|
71,098,832
|
|
|
|
|
|
|
|
|
|
|
|
Per
share:
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
1.17
|
|
$
|
0.54
|
|
$
|
1.52
|
|
$
|
1.04
|
|
|
|
|
|
|
|
|
|
|
|
Calculation
of diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
90,757
|
|
$
|
38,184
|
|
$
|
112,892
|
|
$
|
74,066
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
shares outstanding - Basic
|
|
77,893,480
|
|
71,116,961
|
|
74,391,481
|
|
71,098,832
|
|
Stock
appreciation rights (SARs)
(a)
|
|
330,356
|
|
198,789
|
|
274,829
|
|
188,704
|
|
Issuable
under various other stock-based compensation plans
|
|
304,675
|
|
126,849
|
|
313,726
|
|
160,675
|
|
Weighted
shares outstanding - Diluted
|
|
78,528,511
|
|
71,442,599
|
|
74,980,036
|
|
71,448,211
|
|
|
|
|
|
|
|
|
|
|
|
Per
share:
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
1.16
|
|
$
|
0.53
|
|
$
|
1.51
|
|
$
|
1.04
|
|
(a)
Excludes 1,554,373 and 680,920 SARs as
of June 30, 2009 and 2008, respectively, that are antidilutive. In the event the average market price exceeds
the base price of the SARs, such rights would be dilutive to the Companys
earnings per share and will be included in the Companys calculation of the
diluted average shares oustanding for applicable periods.
15
Table of Contents
8.
COMPREHENSIVE INCOME (LOSS)
The
following table sets forth the Companys comprehensive income (loss) for the
periods presented below:
|
|
For The
|
|
For The
|
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(Dollars
In Thousands)
|
|
Net
income
|
|
$
|
90,757
|
|
$
|
38,184
|
|
$
|
112,892
|
|
$
|
74,066
|
|
Change
in net unrealized (losses) gains on investments, net of income
|
|
|
|
|
|
|
|
|
|
tax:(three
months: 2009 - $337,533; 2008 - $(90,822)
|
|
|
|
|
|
|
|
|
|
six
months: 2009 - $313,087; 2008 - $(246,404))
|
|
610,113
|
|
(167,889
|
)
|
566,408
|
|
(450,670
|
)
|
Change
in net unrealized (losses) gains relating to other-than-temporary
|
|
|
|
|
|
|
|
|
|
impaired
investments for which a portion has been recognized in earnings, net of
income tax: (three months: 2009 - $(2,767); 2008 - $0
|
|
|
|
|
|
|
|
|
|
six
months: 2009 - $(12,388); 2008 - $0)
|
|
(5,139
|
)
|
|
|
(23,006
|
)
|
|
|
Change
in accumulated gain (loss)-hedging, net of income tax:
|
|
|
|
|
|
|
|
|
|
(three
months: 2009 - $2,463; 2008 - $9,363
|
|
|
|
|
|
|
|
|
|
six
months: 2009 - $10,321; 2008 - $3,418)
|
|
4,186
|
|
17,468
|
|
18,578
|
|
6,760
|
|
Minimum
pension liability adjustment, net of income tax:
|
|
|
|
|
|
|
|
|
|
(three
months: 2009 - $178; 2008 - $160
|
|
|
|
|
|
|
|
|
|
six
months: 2009 - $355; 2008 - $316)
|
|
331
|
|
317
|
|
660
|
|
633
|
|
Reclassification
adjustment for investment amounts included in net income, net of income tax:
|
|
|
|
|
|
|
|
|
|
(three
months: 2009 - $9,674; 2008 - $23,440
|
|
|
|
|
|
|
|
|
|
six
months: 2009 - $39,523; 2008 - $20,409)
|
|
17,730
|
|
43,093
|
|
72,153
|
|
37,583
|
|
Reclassification
adjustment for hedging amounts included in net income, net of income tax:
|
|
|
|
|
|
|
|
|
|
(three
months: 2009 - $565; 2008 - $601
|
|
|
|
|
|
|
|
|
|
six
months: 2009 - $302; 2008 - $338)
|
|
1,264
|
|
737
|
|
544
|
|
1
|
|
Comprehensive
income (loss)
|
|
$
|
719,242
|
|
$
|
(68,090
|
)
|
$
|
748,229
|
|
$
|
(331,627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
OPERATING
SEGMENTS
The Company operates
several business segments each having a strategic focus. An operating segment is distinguished by
products, channels of distribution, and/or other strategic distinctions. The Company periodically evaluates its
operating segments in light of the segment reporting requirements prescribed by
FASB
Statement No.
131,
Disclosures about Segments of an Enterprise
and Related Information
, and makes adjustments to its segment
reporting as needed. A brief description
of each segment follows.
·
The Life Marketing segment markets level premium term
insurance (traditional), 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.
·
The Acquisitions segment focuses on acquiring,
converting, and servicing policies acquired from other companies. The segments
primary focus is on life insurance policies and annuity products that were sold
to individuals. In the ordinary course of business, the Acquisitions segment
regularly considers acquisitions of blocks of policies or insurance companies.
The level of the segments acquisition activity is predicated upon many
factors, including available capital, operating capacity, and market dynamics.
Policies acquired through the Acquisition segment are 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 Annuities segment markets and supports fixed and
variable annuity products. These products are primarily sold through
broker-dealers, financial institutions and independent agents and brokers.
·
The Stable Value Products segment sells guaranteed
funding agreements (GFAs) 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
16
Table of Contents
markets guaranteed investment contracts (GICs) to
401(k) and other qualified retirement savings plans.
·
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.
·
The Corporate and Other segment primarily consists of
net investment income, including the impact of carrying excess liquidity, and
expenses not attributable to the segments above (including net investment
income on 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 Company uses the same
accounting policies and procedures to measure segment operating income (loss)
and assets as it uses to measure consolidated net income and assets. Segment
operating income (loss) is income (loss) before income tax excluding net
realized investment gains and losses (net of the related amortization of
deferred policy acquisition costs (DAC)/value of business acquired (VOBA)
and participating income from real estate ventures), and the cumulative effect
of change in accounting principle. 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 operating
income because the derivatives are used to mitigate risk in items affecting
consolidated and segment operating income (loss). Segment operating income
(loss) represents the basis on which the performance of the Companys business
is internally assessed by management. Premiums and policy fees, other income,
benefits and settlement expenses, and amortization of DAC/VOBA are attributed
directly to each operating segment. Net investment income is allocated based on
directly related assets required for transacting the business of that segment.
Realized investment gains (losses) and other operating expenses are allocated
to the segments in a manner that most appropriately reflects the operations of
that segment. Investments and other assets are allocated based on statutory
policy liabilities, while DAC/VOBA and goodwill are shown in the segments to
which they are attributable.
There were no significant
intersegment transactions.
17
Table of
Contents
The following tables
summarize financial information for the Companys segments. Asset adjustments represent the inclusion of
assets related to discontinued operations:
|
|
For The
|
|
For The
|
|
|
|
Three
Months Ended
|
|
Six Months
Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(Dollars
In Thousands)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Life
Marketing
|
|
$
|
267,194
|
|
$
|
235,067
|
|
$
|
549,045
|
|
$
|
495,986
|
|
Acquisitions
|
|
201,518
|
|
200,942
|
|
400,752
|
|
406,577
|
|
Annuities
|
|
134,485
|
|
95,956
|
|
264,430
|
|
178,216
|
|
Stable
Value Products
|
|
57,490
|
|
79,570
|
|
124,054
|
|
163,364
|
|
Asset
Protection
|
|
68,148
|
|
75,343
|
|
135,003
|
|
148,276
|
|
Corporate
and Other
|
|
56,496
|
|
7,821
|
|
34,012
|
|
17,884
|
|
Total
revenues
|
|
$
|
785,331
|
|
$
|
694,699
|
|
$
|
1,507,296
|
|
$
|
1,410,303
|
|
Segment Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
Life
Marketing
|
|
$
|
37,179
|
|
$
|
38,127
|
|
$
|
79,689
|
|
$
|
84,576
|
|
Acquisitions
|
|
35,041
|
|
34,514
|
|
68,662
|
|
68,090
|
|
Annuities
|
|
21,495
|
|
9,487
|
|
20,920
|
|
11,976
|
|
Stable
Value Products
|
|
16,976
|
|
17,545
|
|
37,183
|
|
33,761
|
|
Asset
Protection
|
|
4,656
|
|
6,664
|
|
10,936
|
|
16,516
|
|
Corporate
and Other
|
|
9,648
|
|
(2,093
|
)
|
401
|
|
(32,066
|
)
|
Total
segment operating income
|
|
124,995
|
|
104,244
|
|
217,791
|
|
182,853
|
|
Realized
investment gains (losses) - investments
(1)
|
|
127,770
|
|
(111,916
|
)
|
(3,977
|
)
|
(141,035
|
)
|
Realized
investment gains (losses) - derivatives
(2)
|
|
(112,547
|
)
|
65,151
|
|
(41,440
|
)
|
69,250
|
|
Income
tax expense
|
|
(49,461
|
)
|
(19,295
|
)
|
(59,482
|
)
|
(37,002
|
)
|
Net
income
|
|
$
|
90,757
|
|
$
|
38,184
|
|
$
|
112,892
|
|
$
|
74,066
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Realized
investment gains (losses) - investments
|
|
$
|
126,828
|
|
$
|
(112,411
|
)
|
$
|
(4,841
|
)
|
$
|
(140,456
|
)
|
Less:
related amortization of DAC
|
|
(942
|
)
|
(495
|
)
|
(864
|
)
|
579
|
|
|
|
$
|
127,770
|
|
$
|
(111,916
|
)
|
$
|
(3,977
|
)
|
$
|
(141,035
|
)
|
|
|
|
|
|
|
|
|
|
|
(2)
Realized
investment gains (losses) - derivatives
|
|
$
|
(97,991
|
)
|
$
|
65,087
|
|
$
|
(5,558
|
)
|
$
|
63,430
|
|
Less:
settlements on certain interest rate swaps
|
|
1,163
|
|
1,786
|
|
3,401
|
|
2,270
|
|
Less:
derivative activity related to certain annuities
|
|
13,393
|
|
(1,850
|
)
|
32,481
|
|
(8,090
|
)
|
|
|
$
|
(112,547
|
)
|
$
|
65,151
|
|
$
|
(41,440
|
)
|
$
|
69,250
|
|
18
Table of Contents
|
|
Operating
Segment Assets
|
|
|
|
As of
June 30, 2009
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
Life
|
|
|
|
|
|
Stable
Value
|
|
|
|
Marketing
|
|
Acquisitions
|
|
Annuities
|
|
Products
|
|
Investments
and other assets
|
|
$
|
8,242,634
|
|
$
|
9,216,491
|
|
$
|
8,477,597
|
|
$
|
4,124,319
|
|
Deferred
policy acquisition costs and value of business acquired
|
|
2,414,449
|
|
907,568
|
|
456,927
|
|
13,812
|
|
Goodwill
|
|
10,192
|
|
46,460
|
|
|
|
|
|
Total
assets
|
|
$
|
10,667,275
|
|
$
|
10,170,519
|
|
$
|
8,934,524
|
|
$
|
4,138,131
|
|
|
|
Asset
|
|
Corporate
|
|
|
|
Total
|
|
|
|
Protection
|
|
and Other
|
|
Adjustments
|
|
Consolidated
|
|
Investments
and other assets
|
|
$
|
790,132
|
|
$
|
5,495,565
|
|
$
|
25,938
|
|
$
|
36,372,676
|
|
Deferred
policy acquisition costs and value of business acquired
|
|
102,918
|
|
4,414
|
|
|
|
3,900,088
|
|
Goodwill
|
|
62,670
|
|
83
|
|
|
|
119,405
|
|
Total
assets
|
|
$
|
955,720
|
|
$
|
5,500,062
|
|
$
|
25,938
|
|
$
|
40,392,169
|
|
|
|
Operating Segment Assets
|
|
|
|
As of December 31, 2008
|
|
|
|
(Dollars In Thousands)
|
|
|
|
Life
|
|
|
|
|
|
Stable Value
|
|
|
|
Marketing
|
|
Acquisitions
|
|
Annuities
|
|
Products
|
|
Investments
and other assets
|
|
$
|
7,874,075
|
|
$
|
9,572,548
|
|
$
|
7,530,551
|
|
$
|
4,944,830
|
|
Deferred
policy acquisition costs and value of business acquired
|
|
2,580,806
|
|
956,436
|
|
528,310
|
|
15,575
|
|
Goodwill
|
|
10,192
|
|
48,009
|
|
|
|
|
|
Total
assets
|
|
$
|
10,465,073
|
|
$
|
10,576,993
|
|
$
|
8,058,861
|
|
$
|
4,960,405
|
|
|
|
Asset
|
|
Corporate
|
|
|
|
Total
|
|
|
|
Protection
|
|
and Other
|
|
Adjustments
|
|
Consolidated
|
|
Investments
and other assets
|
|
$
|
878,280
|
|
$
|
4,424,754
|
|
$
|
26,136
|
|
$
|
35,251,174
|
|
Deferred
policy acquisition costs and value of business acquired
|
|
114,615
|
|
4,579
|
|
|
|
4,200,321
|
|
Goodwill
|
|
62,670
|
|
83
|
|
|
|
120,954
|
|
Total
assets
|
|
$
|
1,055,565
|
|
$
|
4,429,416
|
|
$
|
26,136
|
|
$
|
39,572,449
|
|
10.
GOODWILL
During the six months ended
June 30, 2009, the Company decreased its goodwill balance by approximately
$1.5 million. The decrease was due to an adjustment in the Acquisitions segment
related to tax benefits realized during the first six months of 2009 on the
portion of tax goodwill in excess of GAAP basis goodwill. As of June 30,
2009, the Company had an aggregate goodwill balance of $119.4 million.
Accounting for goodwill
requires an estimate of the future profitability of the associated lines of
business. Goodwill is tested for
impairment at least annually. The Company evaluates the carrying value of
goodwill at least annually and between annual evaluations if events occur or
circumstances change that would more likely than not reduce the fair value of
the reporting unit below its carrying amount. Such circumstances could include,
but are not limited to: (1) a significant adverse change in legal factors
or in business climate, (2) unanticipated competition, or (3) an
adverse action or assessment by a regulator. When evaluating whether goodwill
is impaired, the Company compares its estimate of the fair value of the
reporting unit to which the goodwill is assigned to the reporting units
carrying amount, including goodwill. The Company utilizes a fair value
measurement (discounted cash flow analysis) based on the applied guidance from
SFAS No. 157 to assess the carrying value of the reporting units in
consideration of the recoverability of the goodwill balance assigned to each
reporting unit as of the measurement date. As of December 31, 2008, the
Company evaluated its goodwill and determined that the fair value had not
decreased below the carrying value and no adjustment to impair goodwill was
necessary in accordance with SFAS No. 142.
19
Table of
Contents
In
addition, in light of the decrease in the Companys market capitalization (market
cap) during the second half of 2008 and continuing into 2009, the Company reviewed
the underlying factors causing the market cap decrease to determine if the
market cap fluctuation would be indicative of an additional factor to consider
in its goodwill impairment testing, as such a decline in the market cap or
market value of an entitys securities may or may not be indicative of a
triggering event which could require the Company to perform an interim or
event-driven impairment analysis.
The Companys material goodwill balances are
attributable to its business segments. As previously noted, the Companys
operating segments discounted cash flows supported the goodwill balance as of December 31,
2008. In the Companys view, the reduction in market cap is primarily
attributable to illiquidity of credit markets and capital markets, concern
related to its investment portfolios unrealized loss positions, impairments
recognized during 2008, and an overall fear of the capital levels and potential
economic impacts to financial services companies. We believe that these
concerns arose primarily from the other-than-temporary impairments of
investments recorded in the Corporate and Other segment during 2008. The
Company monitors the aggregate fair value of its reporting units as a
comparison to its overall market capitalization. The Company believes the
factors that led to the decline in market cap primarily impacted it at a
corporate level, and largely within the Corporate and Other segment, which does
not carry a material balance of goodwill, as opposed to impacting the
prescribed and inherent fair values of the Companys other operating segments
and reporting units. As a result, in the
Companys view, the decrease in its market cap does not invalidate the Companys
discounted cash flow results.
11.
FAIR VALUE OF FINANCIAL
INSTRUMENTS
Effective January 1, 2008, the Company
determined the fair value of its financial instruments based on the fair value
hierarchy established in SFAS No. 157 which requires an entity to maximize
the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. In the first quarter of 2009, the Company adopted the
provisions of SFAS No. 157 for non-financial assets and liabilities (such
as property and equipment, goodwill, and other intangible assets) that are
required to be measured at fair value on a periodic basis. The effect on the
Companys periodic fair value measurements for non-financial assets and
liabilities was not material.
In
compliance with SFAS No. 157, the Company has categorized its financial
instruments, based on the priority of the inputs to the valuation technique,
into a three level hierarchy. The fair value hierarchy gives the highest
priority to quoted prices in active markets for identical assets or liabilities
(Level 1) and the lowest priority to unobservable inputs (Level 3). If the
inputs used to measure fair value fall within different levels of the
hierarchy, the category level is based on the lowest priority level input that
is significant to the fair value measurement of the instrument.
Financial
assets and liabilities recorded at fair value on the Consolidated Condensed
Balance Sheets are categorized as follows:
·
Level 1:
Unadjusted quoted prices for identical
assets or liabilities in an active market.
·
Level 2:
Quoted prices in markets that are not
active or significant inputs that are observable either directly or indirectly.
Level 2 inputs include the following:
a)
Quoted prices for similar assets or
liabilities in active markets
b)
Quoted prices for identical or similar
assets or liabilities in non-active markets
c)
Inputs other than quoted market prices
that are observable
d)
Inputs that are derived principally from
or corroborated by observable market data through correlation or other means.
·
Level 3:
Prices or valuation techniques that
require inputs that are both unobservable and significant to the overall fair
value measurement. They reflect managements own assumptions about the
assumptions a market participant would use in pricing the asset or liability.
20
Table of Contents
As a result of the adoption of SFAS No. 157, the
Company recognized the following adjustment to opening retained earnings for
its Equity Indexed Annuities that were previously accounted for under FASB
Statement No. 155,
Accounting for Certain
Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and
140
(SFAS No. 155):
|
|
Carrying
|
|
Carrying
|
|
|
|
|
|
Value
|
|
Value
|
|
Transition
|
|
|
|
Prior
to
|
|
After
|
|
Adjustment
to
|
|
|
|
Adoption
|
|
Adoption
|
|
Retained
Earnings
|
|
|
|
January 1,
2008
|
|
January 1,
2008
|
|
Gain
(Loss)
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
|
|
|
|
|
Equity-indexed
annuity reserves, net
|
|
$
|
145,912
|
|
$
|
143,634
|
|
$
|
2,278
|
|
Pre-tax
cumulative effect of adoption of SFAS No. 157
|
|
|
|
|
|
2,278
|
|
Change
in deferred income taxes
|
|
|
|
|
|
(808
|
)
|
Cumulative
effect of adoption of SFAS No. 157
|
|
|
|
|
|
$
|
1,470
|
|
|
|
|
|
|
|
|
|
|
|
|
In
addition, the Company recognized a transition adjustment for the embedded
derivative liability related to annuities with guaranteed minimum withdrawal
benefits. The impact of this adjustment, net of DAC amortization, reduced
income before income taxes by $0.4 million during the first quarter of 2008.
21
Table of Contents
The following table presents the Companys hierarchy
for its assets and liabilities measured at fair value on a recurring basis as
of June 30, 2009:
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
(Dollars
In Thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities - available-for-sale
|
|
|
|
|
|
|
|
|
|
Asset-backed
securities
|
|
$
|
|
|
$
|
376,369
|
|
$
|
724,186
|
|
$
|
1,100,555
|
|
Commerical
mortgage-backed securities
|
|
|
|
147,950
|
|
817,585
|
|
965,535
|
|
Residental
mortgage-backed securities
|
|
|
|
3,671,748
|
|
30
|
|
3,671,778
|
|
US
government and authorities
|
|
107,839
|
|
17,188
|
|
|
|
125,027
|
|
State,
municipalities and political subdivisions
|
|
|
|
131,915
|
|
89
|
|
132,004
|
|
Public
utilities
|
|
|
|
|
|
|
|
|
|
All
other corporate bonds
|
|
|
|
11,407,350
|
|
84,577
|
|
11,491,927
|
|
Redeemable
preferred stocks
|
|
|
|
|
|
|
|
|
|
Convertible
bonds with warrants
|
|
|
|
25
|
|
|
|
25
|
|
Total
fixed maturity securities - available-for-sale
|
|
107,839
|
|
15,752,545
|
|
1,626,467
|
|
17,486,851
|
|
Fixed
maturity securities - trading
|
|
240,654
|
|
2,747,980
|
|
86,355
|
|
3,074,989
|
|
Total
fixed maturity securities
|
|
348,493
|
|
18,500,525
|
|
1,712,822
|
|
20,561,840
|
|
Equity
securities
|
|
185,552
|
|
14,172
|
|
69,384
|
|
269,108
|
|
Other
long-term investments
(1)
|
|
21
|
|
26,186
|
|
156,386
|
|
182,593
|
|
Short-term
investments
|
|
1,772,250
|
|
68,235
|
|
664
|
|
1,841,149
|
|
Total
investments
|
|
2,306,316
|
|
18,609,118
|
|
1,939,256
|
|
22,854,690
|
|
Cash
|
|
206,540
|
|
|
|
|
|
206,540
|
|
Other
assets
|
|
4,063
|
|
|
|
|
|
4,063
|
|
Assets
related to separate acccounts
|
|
|
|
|
|
|
|
|
|
Variable
annuity
|
|
2,257,859
|
|
|
|
|
|
2,257,859
|
|
Variable
universal life
|
|
259,511
|
|
|
|
|
|
259,511
|
|
Total
assets measured at fair value on a recurring basis
|
|
$
|
5,034,289
|
|
$
|
18,609,118
|
|
$
|
1,939,256
|
|
$
|
25,582,663
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Annuity
account balances
(2)
|
|
$
|
|
|
$
|
|
|
$
|
152,427
|
|
$
|
152,427
|
|
Other
liabilities
(1)
|
|
|
|
65,799
|
|
66,131
|
|
131,930
|
|
Total
liabilities measured at fair value on a recurring basis
|
|
$
|
|
|
$
|
65,799
|
|
$
|
218,558
|
|
$
|
284,357
|
|
(1)
Includes
certain freestanding and embedded derivatives.
(2)
Represents liabilities related to equity indexed annuities.
22
Table of Contents
The following table presents the Companys hierarchy
for its assets and liabilities measured at fair value on a recurring basis as
of December 31, 2008:
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
(Dollars
In Thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Fixed
maturity securities - available-for-sale
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
and asset-backed securities
(3)
|
|
$
|
|
|
$
|
4,693,445
|
|
$
|
1,538,561
|
|
$
|
6,232,006
|
|
US
government and authorities
|
|
55,672
|
|
17,151
|
|
|
|
72,823
|
|
State,
municipalities and political subdivisions
|
|
|
|
29,879
|
|
93
|
|
29,972
|
|
Public
utilities
|
|
|
|
1,667,414
|
|
|
|
1,667,414
|
|
All
other corporate bonds
|
|
|
|
8,771,411
|
|
88,806
|
|
8,860,217
|
|
Redeemable
preferred stocks
|
|
|
|
|
|
36
|
|
36
|
|
Convertible
bonds with warrants
|
|
|
|
19
|
|
|
|
19
|
|
Total
fixed maturity securities - available-for-sale
|
|
55,672
|
|
15,179,319
|
|
1,627,496
|
|
16,862,487
|
|
Fixed
maturity securities - trading
|
|
375,025
|
|
2,828,823
|
|
32,645
|
|
3,236,493
|
|
Total
fixed maturity securities
|
|
430,697
|
|
18,008,142
|
|
1,660,141
|
|
20,098,980
|
|
Equity
securities
|
|
214,413
|
|
11,309
|
|
76,410
|
|
302,132
|
|
Other
long-term investments
(1)
|
|
48
|
|
5,901
|
|
256,973
|
|
262,922
|
|
Short-term
investments
|
|
985,950
|
|
72,395
|
|
1,161
|
|
1,059,506
|
|
Total
investments
|
|
1,631,108
|
|
18,097,747
|
|
1,994,685
|
|
21,723,540
|
|
Cash
|
|
149,358
|
|
|
|
|
|
149,358
|
|
Other
assets
|
|
3,985
|
|
|
|
|
|
3,985
|
|
Assets
related to separate acccounts
|
|
|
|
|
|
|
|
|
|
Variable
annuity
|
|
2,027,470
|
|
|
|
|
|
2,027,470
|
|
Variable
universal life
|
|
242,944
|
|
|
|
|
|
242,944
|
|
Total
assets measured at fair value on a recurring basis
|
|
$
|
4,054,865
|
|
$
|
18,097,747
|
|
$
|
1,994,685
|
|
$
|
24,147,297
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Annuity
account balances
(2)
|
|
$
|
|
|
$
|
|
|
$
|
152,762
|
|
$
|
152,762
|
|
Other
liabilities
(1)
|
|
3,179
|
|
123,006
|
|
113,311
|
|
239,496
|
|
Total
liabilities measured at fair value on a recurring basis
|
|
$
|
3,179
|
|
$
|
123,006
|
|
$
|
266,073
|
|
$
|
392,258
|
|
(1)
Includes
certain freestanding and embedded derivatives.
(2)
Represents liabilities related to equity indexed annuities.
(3)
Includes
asset-backed securities, commercial mortgage-backed securities, and residental
mortgage-backed securities.
Determination of fair values
The
valuation methodologies used to determine the fair values of assets and
liabilities under the guidance within SFAS No. 157 reflect market
participant assumptions and are based on the application of the fair value
hierarchy that prioritizes observable market inputs over unobservable inputs.
The Company determines the fair values of certain financial assets and
financial liabilities based on quoted market prices, where available. The
Company also determines certain fair values based on future cash flows
discounted at the appropriate current market rate. Fair values reflect
adjustments for counterparty credit quality, the Companys credit standing,
liquidity and, where appropriate, risk margins on unobservable parameters. The
following is a discussion of the methodologies used to determine fair values
for the financial instruments within the scope of SFAS No. 157, as listed
in the above table.
23
Table of Contents
Fixed Maturity, Short-Term, and
Equity Securities
The
fair value of fixed maturity, short-term, and equity securities is determined
by management after considering one of three primary sources of information:
third party pricing services, non-binding independent broker quotations, or
pricing matrices. Security pricing is applied using a waterfall approach
whereby publicly available prices are first sought from third party pricing
services, the remaining unpriced securities are submitted to independent
brokers for non-binding prices, or lastly, securities are priced using a
pricing matrix. Typical inputs used by these three pricing methods include, but
are not limited to, benchmark yields, reported trades, broker/dealer quotes,
issuer spreads, two-sided markets, benchmark securities, bids, offers and
reference data including market research publications. Third party pricing
services price over 90% of the Companys fixed maturity securities. Based on the
typical trading volumes and the lack of quoted market prices for fixed
maturities, third party pricing services derive the majority of security prices
from observable market inputs such as recent reported trades for identical or
similar securities making adjustments through the reporting date based upon
available market observable information outlined above. If there are no recent
reported trades, the third party pricing services and brokers may use matrix or
model processes to develop a security price where future cash flow expectations
are developed based upon collateral performance and discounted at an estimated
market rate. Certain securities are priced via independent broker quotations,
which are considered to have no significant unobservable inputs. When using
non-binding independent broker quotations, the Company generally obtains one
quote per security, typically from the broker from which we purchased the
security. A pricing matrix is used to price securities for which the Company is
unable to obtain or effectively rely on either a price from a third party
pricing service or an independent broker quotation.
The
pricing matrix used by the Company begins with current spread levels to
determine the market price for the security. The credit spreads, assigned by
brokers, incorporate the issuers credit rating, liquidity discounts,
weighted-average of contracted cash flows, and risk premium, if warranted, due
to the issuers industry and the securitys time to maturity. The Company uses
credit ratings provided by nationally recognized rating agencies.
For
securities that are priced via non-binding independent broker quotations, the
Company assesses whether prices received from independent brokers represent a
reasonable estimate of fair value through an analysis using internal and
external cash flow models developed based on spreads and, when available,
market indices. The Company uses a market-based cash flow analysis to validate
the reasonableness of prices received from independent brokers. These analytics,
which are updated daily, incorporate various metrics (yield curves, credit
spreads, prepayment rates, etc.) to determine the valuation of such holdings.
As a result of this analysis, if the Company determines there is a more
appropriate fair value based upon the analytics, the price received from the
independent broker is adjusted accordingly.
In
accordance with SFAS No. 157, the Company has analyzed the third party
pricing services valuation methodologies and related inputs, and has also
evaluated the various types of securities in its investment portfolio to
determine an appropriate SFAS No. 157 fair value hierarchy level based
upon trading activity and the observability of market inputs. Based on this
evaluation and investment class analysis, each price was classified into
Level 1, 2 or 3. Most prices provided by third party pricing services are
classified into Level 2 because the significant inputs used in pricing the
securities are market observable and the observable inputs are corroborated by
the Company. Since the matrix pricing of certain debt securities includes
significant non-observable inputs, they are classified as Level 3.
Derivatives
Derivative
instruments are valued using exchange prices, independent broker quotations or
pricing valuation models, which utilize market data inputs. Excluding embedded
derivatives, as of June 30, 2009, 63.2% of derivatives based upon notional
values were priced using exchange prices or independent broker quotations. The
remaining derivatives were priced by pricing valuation models, which
predominantly utilize observable market data inputs. Inputs used to value
derivatives include, but are not limited to, interest swap rates, credit
spreads, interest and equity volatility, equity index levels and treasury rates.
The Company performs monthly analysis on derivative valuations that includes
both quantitative and qualitative analysis.
Derivative
instruments classified as Level 1 include futures and certain options,
which are traded on active exchange markets.
24
Table of Contents
Derivative
instruments classified as Level 2 primarily include interest rate,
inflation, currency exchange and credit default swaps. These derivative
valuations are determined using independent broker quotations, which are
corroborated with observable market inputs.
Derivative
instruments classified as Level 3 were total return swaps and embedded
derivatives and include at least one non-observable significant input. A
derivative instrument containing Level 1 and Level 2 inputs will be
classified as a Level 3 financial instrument in its entirety if it has at
least one significant Level 3 input.
The
Company utilizes derivative instruments to manage the risk associated with
certain assets and liabilities. However, the derivative instruments may not be
classified within the same fair value hierarchy level as the associated assets
and liabilities. Therefore, the changes in fair value on derivatives reported
in Level 3 may not reflect the offsetting impact of the changes in fair
value of the associated assets and liabilities.
GMWB Embedded Derivative
The
GMWB embedded derivative is marked-to-market using current implied volatilities
for the equity indices. The methods used to estimate the liabilities employ
significant unobservable inputs, such as lapses, policyholder behavior, equity
market returns, interest rates, the Companys nonperformance risk measure, and
market volatility. The Company assumes mortality of 65% of the National
Association of Insurance Commissioners 1994 Variable Annuity GMDB Mortality
Table. As a result, the GMWB embedded derivative is categorized as
Level 3.
Separate Accounts
Separate
account assets are invested in open-ended mutual funds and are included in
Level 1.
The following table
presents a reconciliation of the beginning and ending balances for fair value
measurements for the three months ended June 30, 2009, for which the
Company has used significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in
|
|
|
|
|
|
Total
Realized and Unrealized
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
Gains
(losses)
|
|
|
|
|
|
|
|
Related
to
|
|
|
|
|
|
|
|
Included
in
|
|
Purchases,
|
|
|
|
|
|
Instruments
|
|
|
|
|
|
|
|
Other
|
|
Issuances,
and
|
|
Transfers
in
|
|
|
|
Still
Held at
|
|
|
|
Beginning
|
|
Included
in
|
|
Comprehensive
|
|
Settlements
|
|
and/or
out of
|
|
Ending
|
|
the
Reporting
|
|
|
|
Balance
|
|
Earnings
|
|
Income
|
|
(net)
|
|
Level 3
|
|
Balance
|
|
Date
|
|
|
|
(Dollars In Thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity
securities - available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
$
|
705,397
|
|
$
|
|
|
$
|
19,011
|
|
$
|
(222
|
)
|
$
|
|
|
$
|
724,186
|
|
$
|
|
|
Commercial
mortgage-backed securities
|
|
851,721
|
|
|
|
(24,517
|
)
|
(9,619
|
)
|
|
|
817,585
|
|
|
|
Residential
mortgage-backed securities
|
|
32
|
|
|
|
|
|
(2
|
)
|
|
|
30
|
|
|
|
State, municipalities
and political subdivisions
|
|
93
|
|
|
|
|
|
(4
|
)
|
|
|
89
|
|
|
|
All other corporate
bonds
|
|
94,180
|
|
(153
|
)
|
(1,814
|
)
|
1,542
|
|
(9,178
|
)
|
84,577
|
|
|
|
Total fixed maturity
securities - available-for-sale
|
|
1,651,423
|
|
(153
|
)
|
(7,320
|
)
|
(8,305
|
)
|
(9,178
|
)
|
1,626,467
|
|
|
|
Fixed maturity
securities - trading
|
|
39,008
|
|
3,044
|
|
|
|
44,281
|
|
22
|
|
86,355
|
|
3,016
|
|
Total fixed maturity
securities
|
|
1,690,431
|
|
2,891
|
|
(7,320
|
)
|
35,976
|
|
(9,156
|
)
|
1,712,822
|
|
3,016
|
|
Equity securities
|
|
69,083
|
|
|
|
335
|
|
(34
|
)
|
|
|
69,384
|
|
|
|
Other long-term
investments
(1)
|
|
278,916
|
|
(122,530
|
)
|
|
|
|
|
|
|
156,386
|
|
(122,530
|
)
|
Short-term investments
|
|
837
|
|
|
|
(70
|
)
|
|
|
(103
|
)
|
664
|
|
|
|
Total investments
|
|
2,039,267
|
|
(119,639
|
)
|
(7,055
|
)
|
35,942
|
|
(9,259
|
)
|
1,939,256
|
|
(119,514
|
)
|
Total assets measured at
fair value on a recurring basis
|
|
$
|
2,039,267
|
|
$
|
(119,639
|
)
|
$
|
(7,055
|
)
|
$
|
35,942
|
|
$
|
(9,259
|
)
|
$
|
1,939,256
|
|
$
|
(119,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity account balances
(2)
|
|
$
|
152,826
|
|
$
|
(2,214
|
)
|
$
|
|
|
$
|
2,613
|
|
$
|
|
|
$
|
152,427
|
|
$
|
|
|
Other liabilities
(1)
|
|
54,877
|
|
(11,254
|
)
|
|
|
|
|
|
|
66,131
|
|
(11,254
|
)
|
Total liabilities
measured at fair value on a recurring basis
|
|
$
|
207,703
|
|
$
|
(13,468
|
)
|
$
|
|
|
$
|
2,613
|
|
$
|
|
|
$
|
218,558
|
|
$
|
(11,254
|
)
|
(1)
Represents certain freestanding
and embedded derivatives
(2)
Represents liabilities related to
equity indexed annuities
25
Table of Contents
The
following table presents a reconciliation of the beginning and ending balances
for fair value measurements for the three months ended June 30, 2008, for
which the Company has used significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in
|
|
|
|
|
|
Total
Realized and Unrealized
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
Gains
(losses)
|
|
|
|
|
|
|
|
Related
to
|
|
|
|
|
|
|
|
Included
in
|
|
Purchases,
|
|
|
|
|
|
Instruments
|
|
|
|
|
|
|
|
Other
|
|
Issuances,
and
|
|
Transfers
in
|
|
|
|
Still Held
at
|
|
|
|
Beginning
|
|
Included
in
|
|
Comprehensive
|
|
Settlements
|
|
and/or
out of
|
|
Ending
|
|
the
Reporting
|
|
|
|
Balance
|
|
Earnings
|
|
Income
|
|
(net)
|
|
Level 3
|
|
Balance
|
|
Date
|
|
|
|
(Dollars In Thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity
securities - available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
(3)
|
|
$
|
2,142,256
|
|
$
|
|
|
$
|
35,301
|
|
$
|
(47,895
|
)
|
$
|
(11,934
|
)
|
$
|
2,117,728
|
|
$
|
|
|
State, municipalities
and political subdivisions
|
|
9,294
|
|
|
|
(266
|
)
|
(3
|
)
|
|
|
9,025
|
|
|
|
Public utilities
|
|
176,532
|
|
|
|
(4,798
|
)
|
18,430
|
|
|
|
190,164
|
|
|
|
All other corporate
bonds
|
|
2,318,786
|
|
|
|
(57,623
|
)
|
164,054
|
|
1,990
|
|
2,427,207
|
|
|
|
Redeemable preferred
stocks
|
|
36
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
Convertible bonds with
warrants
|
|
37
|
|
|
|
1
|
|
1
|
|
|
|
39
|
|
|
|
Total fixed maturity
securities - available-for-sale
|
|
4,646,941
|
|
|
|
(27,385
|
)
|
134,587
|
|
(9,944
|
)
|
4,744,199
|
|
|
|
Fixed maturity
securities - trading
|
|
728,719
|
|
(13,572
|
)
|
|
|
(26,999
|
)
|
(111,724
|
)
|
576,424
|
|
(12,040
|
)
|
Total fixed maturity
securities
|
|
5,375,660
|
|
(13,572
|
)
|
(27,385
|
)
|
107,588
|
|
(121,668
|
)
|
5,320,623
|
|
(12,040
|
)
|
Equity securities
|
|
18,046
|
|
|
|
1
|
|
51,541
|
|
(22
|
)
|
69,566
|
|
|
|
Other long-term
investments
(1)
|
|
8,460
|
|
35,962
|
|
|
|
|
|
|
|
44,422
|
|
35,962
|
|
Short-term investments
|
|
46,323
|
|
|
|
|
|
|
|
(605
|
)
|
45,718
|
|
|
|
Total investments
|
|
5,448,489
|
|
22,390
|
|
(27,384
|
)
|
159,129
|
|
(122,295
|
)
|
5,480,329
|
|
23,922
|
|
Total assets measured at
fair value on a recurring basis
|
|
$
|
5,448,489
|
|
$
|
22,390
|
|
$
|
(27,384
|
)
|
$
|
159,129
|
|
$
|
(122,295
|
)
|
$
|
5,480,329
|
|
$
|
23,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity account balances
(2)
|
|
$
|
146,017
|
|
$
|
1,557
|
|
$
|
|
|
$
|
(2,119
|
)
|
$
|
|
|
$
|
146,579
|
|
$
|
1,557
|
|
Other liabilities
(1)
|
|
18,091
|
|
11,632
|
|
|
|
|
|
|
|
6,459
|
|
11,632
|
|
Total liabilities
measured at fair value on a recurring basis
|
|
$
|
164,108
|
|
$
|
13,189
|
|
$
|
|
|
$
|
(2,119
|
)
|
$
|
|
|
$
|
153,038
|
|
$
|
13,189
|
|
(1)
Represents certain freestanding and embedded derivatives
(2)
Represents liabilities related to equity indexed annuities
(3)
Includes
asset-backed securities, commercial mortgage-backed securities, and residental
mortgage-backed securities.
26
Table of
Contents
The
following table presents a reconciliation of the beginning and ending balances
for fair value measurements for the six months ended June 30, 2009, for
which the Company has used significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in
|
|
|
|
|
|
Total
Realized and Unrealized
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
Gains
(losses)
|
|
|
|
|
|
|
|
Related
to
|
|
|
|
|
|
|
|
Included
in
|
|
Purchases,
|
|
|
|
|
|
Instruments
|
|
|
|
|
|
|
|
Other
|
|
Issuances,
and
|
|
Transfers
in
|
|
|
|
Still Held
at
|
|
|
|
Beginning
|
|
Included
in
|
|
Comprehensive
|
|
Settlements
|
|
and/or
out of
|
|
Ending
|
|
the
Reporting
|
|
|
|
Balance
|
|
Earnings
|
|
Income
|
|
(net)
|
|
Level 3
|
|
Balance
|
|
Date
|
|
|
|
(Dollars In Thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity
securities - available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities
|
|
$
|
682,710
|
|
$
|
(31
|
)
|
$
|
41,972
|
|
$
|
(465
|
)
|
$
|
|
|
$
|
724,186
|
|
$
|
|
|
Commercial
mortgage-backed securities
|
|
855,817
|
|
|
|
(22,438
|
)
|
(15,794
|
)
|
|
|
817,585
|
|
|
|
Residential
mortgage-backed securities
|
|
34
|
|
|
|
|
|
(4
|
)
|
|
|
30
|
|
|
|
State, municipalities
and political subdivisions
|
|
93
|
|
|
|
|
|
(4
|
)
|
|
|
89
|
|
|
|
All other corporate
bonds
|
|
88,842
|
|
(49
|
)
|
(877
|
)
|
(15,606
|
)
|
12,267
|
|
84,577
|
|
|
|
Total fixed maturity
securities - available-for-sale
|
|
1,627,496
|
|
(80
|
)
|
18,657
|
|
(31,873
|
)
|
12,267
|
|
1,626,467
|
|
|
|
Fixed maturity
securities - trading
|
|
32,645
|
|
3,537
|
|
|
|
75,493
|
|
(25,320
|
)
|
86,355
|
|
3,104
|
|
Total fixed maturity
securities
|
|
1,660,141
|
|
3,457
|
|
18,657
|
|
43,620
|
|
(13,053
|
)
|
1,712,822
|
|
3,104
|
|
Equity securities
|
|
76,411
|
|
|
|
566
|
|
(7,593
|
)
|
|
|
69,384
|
|
|
|
Other long-term
investments
(1)
|
|
256,973
|
|
(100,587
|
)
|
|
|
|
|
|
|
156,386
|
|
(100,587
|
)
|
Short-term investments
|
|
1,161
|
|
|
|
(286
|
)
|
|
|
(211
|
)
|
664
|
|
|
|
Total investments
|
|
1,994,686
|
|
(97,130
|
)
|
18,937
|
|
36,027
|
|
(13,264
|
)
|
1,939,256
|
|
(97,483
|
)
|
Total assets measured at
fair value on a recurring basis
|
|
$
|
1,994,686
|
|
$
|
(97,130
|
)
|
$
|
18,937
|
|
$
|
36,027
|
|
$
|
(13,264
|
)
|
$
|
1,939,256
|
|
$
|
(97,483
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity account balances
(2)
|
|
$
|
152,762
|
|
$
|
(1,268
|
)
|
$
|
|
|
$
|
1,603
|
|
$
|
|
|
$
|
152,427
|
|
$
|
|
|
Other liabilities
(1)
|
|
113,311
|
|
47,180
|
|
|
|
|
|
|
|
66,131
|
|
47,180
|
|
Total liabilities
measured at fair value on a recurring basis
|
|
$
|
266,073
|
|
$
|
45,912
|
|
$
|
|
|
$
|
1,603
|
|
$
|
|
|
$
|
218,558
|
|
$
|
47,180
|
|
(1)
Represents certain freestanding and embedded derivatives
(2)
Represents liabilities related to equity indexed annuities
27
Table of
Contents
The
following table presents a reconciliation of the beginning and ending balances
for fair value measurements for the six months ended June 30, 2008, for
which the Company has used significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included
in
|
|
|
|
|
|
Total
Realized and Unrealized
|
|
|
|
|
|
|
|
Earnings
|
|
|
|
|
|
Gains
(losses)
|
|
|
|
|
|
|
|
Related
to
|
|
|
|
|
|
|
|
Included
in
|
|
Purchases,
|
|
|
|
|
|
Instruments
|
|
|
|
|
|
|
|
Other
|
|
Issuances,
and
|
|
Transfers
in
|
|
|
|
Still Held
at
|
|
|
|
Beginning
|
|
Included
in
|
|
Comprehensive
|
|
Settlements
|
|
and/or
out of
|
|
Ending
|
|
the
Reporting
|
|
|
|
Balance
|
|
Earnings
|
|
Income
|
|
(net)
|
|
Level 3
|
|
Balance
|
|
Date
|
|
|
|
(Dollars In Thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity
securities - available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed
securities
(3)
|
|
$
|
1,290,299
|
|
$
|
|
|
$
|
(153,696
|
)
|
$
|
849,739
|
|
$
|
131,386
|
|
$
|
2,117,728
|
|
$
|
|
|
State, municipalities
and political subdivisions
|
|
9,126
|
|
|
|
(98
|
)
|
(3
|
)
|
|
|
9,025
|
|
|
|
Public utilities
|
|
176,473
|
|
|
|
(4,588
|
)
|
18,279
|
|
|
|
190,164
|
|
|
|
All other corporate
bonds
|
|
2,248,703
|
|
|
|
(101,303
|
)
|
277,817
|
|
1,990
|
|
2,427,207
|
|
|
|
Redeemable preferred
stocks
|
|
36
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
Convertible bonds with
warrants
|
|
227
|
|
|
|
(46
|
)
|
(142
|
)
|
|
|
39
|
|
|
|
Total fixed maturity
securities - available-for-sale
|
|
3,724,864
|
|
|
|
(259,731
|
)
|
1,145,690
|
|
133,376
|
|
4,744,199
|
|
|
|
Fixed maturity
securities - trading
|
|
874,380
|
|
(25,490
|
)
|
|
|
(163,598
|
)
|
(108,868
|
)
|
576,424
|
|
(23,902
|
)
|
Total fixed maturity
securities
|
|
4,599,244
|
|
(25,490
|
)
|
(259,731
|
)
|
982,092
|
|
24,508
|
|
5,320,623
|
|
(23,902
|
)
|
Equity securities
|
|
18,135
|
|
|
|
(88
|
)
|
51,540
|
|
(21
|
)
|
69,566
|
|
|
|
Other long-term
investments
(1)
|
|
2,951
|
|
41,471
|
|
|
|
|
|
|
|
44,422
|
|
41,471
|
|
Short-term investments
|
|
66,327
|
|
|
|
|
|
|
|
(20,609
|
)
|
45,718
|
|
|
|
Total investments
|
|
4,686,657
|
|
15,981
|
|
(259,819
|
)
|
1,033,632
|
|
3,878
|
|
5,480,329
|
|
17,569
|
|
Total assets measured at
fair value on a recurring basis
|
|
$
|
4,686,657
|
|
$
|
15,981
|
|
$
|
(259,819
|
)
|
$
|
1,033,632
|
|
$
|
3,878
|
|
$
|
5,480,329
|
|
$
|
17,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity account balances
(2)
|
|
$
|
143,634
|
|
$
|
(169
|
)
|
$
|
|
|
$
|
(2,776
|
)
|
$
|
|
|
$
|
146,579
|
|
$
|
(169
|
)
|
Other liabilities
(1)
|
|
39,168
|
|
32,709
|
|
|
|
|
|
|
|
6,459
|
|
32,709
|
|
Total liabilities
measured at fair value on a recurring basis
|
|
$
|
182,802
|
|
$
|
32,540
|
|
$
|
|
|
$
|
(2,776
|
)
|
$
|
|
|
$
|
153,038
|
|
$
|
32,540
|
|
(1)
Represents certain freestanding
and embedded derivatives
(2)
Represents liabilities related to
equity indexed annuities
(3)
Includes asset-backed securities,
commercial mortgage-backed securities, and residental mortgage-backed
securities.
Total
realized and unrealized gains (losses) on Level 3 assets and liabilities are
primarily reported in either realized investment gains (losses) within the
Consolidated Condensed Statements of Income or other comprehensive income
(loss) within shareowners equity based on the appropriate accounting treatment
for the item.
Purchases, sales,
issuances and settlements, net, represent the activity that occurred during the
period that results in a change of the asset or liability but does not
represent changes in fair value for the instruments held at the beginning of
the period. Such activity primarily relates to purchases and sales of fixed
maturity securities, and issuances and settlements of equity indexed annuities
accounted for under SFAS No. 155.
The
Company reviews the fair value hierarchy classifications each reporting period.
Changes in the observability of the valuation attributes may result in a
reclassification of certain financial assets or liabilities. Such
reclassifications are reported as transfers in and out of Level 3 at the
beginning fair value for the reporting period in which the changes occur. The
asset transfers in the table(s) above primarily related to positions moved
from Level 3 to Level 2 as the Company determined that certain inputs were
observable.
The
amount of total gains (losses) for assets and liabilities still held as of the
reporting date primarily represents changes in fair value of trading securities
and certain derivatives that exist as of the reporting date, and the change in
fair value of equity indexed annuities accounted for under SFAS No. 155.
For the three and six months ended June 30, 2009,
there were no material transfers into or out of Level 3.
28
Table of Contents
Estimated Fair Value of Financial
Instruments
The
Company determines the carrying amounts and estimated fair value of our
financial instruments in compliance with FASB Statement No. 107,
Disclosures about Fair Value of Financial Instruments
(SFAS
No. 107) and SFAS No. 157.
The carrying amounts and estimated fair values of our financial instruments
as of the periods shown below are as follows:
Total Realized and Unrealized
|
|
As of
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
Carrying
|
|
|
|
Carrying
|
|
|
|
|
|
Amounts
|
|
Fair
Values
|
|
Amounts
|
|
Fair
Values
|
|
|
|
(Dollars
In Thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Mortgage
loans on real estate
|
|
$
|
3,846,417
|
|
$
|
4,143,305
|
|
$
|
3,848,288
|
|
$
|
4,571,259
|
|
Policy
loans
|
|
792,853
|
|
792,853
|
|
810,933
|
|
810,933
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Stable
value product account balances
|
|
$
|
4,138,131
|
|
$
|
4,320,100
|
|
$
|
4,960,405
|
|
$
|
5,104,268
|
|
Annuity
account balances
|
|
9,596,476
|
|
9,237,684
|
|
9,357,427
|
|
8,976,336
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
|
|
|
|
|
|
|
Bank
borrowings
|
|
$
|
230,000
|
|
$
|
230,000
|
|
$
|
155,000
|
|
$
|
155,000
|
|
Senior
and Medium-Term Notes
|
|
559,852
|
|
515,540
|
|
559,852
|
|
452,382
|
|
Subordinated
debt securities
|
|
524,743
|
|
391,503
|
|
524,743
|
|
285,103
|
|
Non-recourse
funding obligations
|
|
1,375,000
|
|
1,015,547
|
|
1,375,000
|
|
713,742
|
|
Except
as noted below, fair values were estimated using quoted market prices.
Fair Value Measurements
Mortgage loans on real estate
The
Company estimates the fair value of mortgage loans using an internally
developed model. This model includes inputs derived by the Company based on
assumed discount rates relative to the Companys current mortgage loan lending
rate and an expected cash flow analysis based on a review of the mortgage loan
terms. The model also contains the Companys determined representative risk
adjustment assumptions related to nonperformance and liquidity risks.
Policy loans
The
Company believes the fair value of policy loans approximates book value. Policy
loans are funds provided to policy holders in return for a claim on the account
value of the policy. The funds provided are limited to a certain percent of the
account balance. The nature of policy loans is to have low default risk as the
loans are fully collateralized by the value of the policy. The majority of
policy loans do not have a stated maturity and the balances and accrued
interest are repaid with proceeds from the policy account balance. Due to the
collateralized nature of policy loans and unpredictable timing of repayments,
the Company believes the fair value of policy loans approximates carrying
value.
Stable value product and Annuity
account balance
As
of June 30, 2009, the Company estimated the fair value of stable value
product account balances and annuity account balances using models based on
discounted estimated cash flows. The discount rates used in the models were
based on a current market rate for similar financial instruments.
Bank borrowings
The
Company believes the fair value of its bank borrowings approximates carrying
value. These borrowings that are outstanding under the Companys credit
facility, are discussed further in Item 2,
Managements Discussion
and Analysis of Financial Condition and Results of Operations
,
Liquidity and Capital Resources.
29
Table of Contents
Non-recourse funding obligations
As of June 30, 2009,
the Company estimated the fair value of its non-recourse funding obligations
using internal discounted cash flow models. Given current market conditions,
the fair value of the Companys non-recourse funding obligations differs
significantly from book value. The discount rates used in the models was based
on a current market yield for similar financial instruments. Due to the large
spread between the required market yield and the current interest rate the fair
value is significantly less than the carrying amount.
The Company has changed the valuation methodology
for annuity account balances and non-recourse debt obligations from the prior
year to comply with the guidance set forth in SFAS No. 157.
12. INCOME
TAXES
There
have been no material changes to the balance of unrecognized income tax
benefits which impacted earnings during the three and six months ended June 30,
2009. The Company does not expect to have any material adjustments, within the
next twelve months, to its balance of unrecognized income tax benefits in any
of the tax jurisdictions in which it conducts its business operations.
In general, Accounting Principles Board Opinion No. 28,
Interim Financial Reporting
, requires
that a company compute its interim period effective income tax rate based upon
its expectation of what such rate will be at year-end. An exception is made
when such a rate cannot be reasonably estimated as of the current interim
period. Accordingly, it is then appropriate to compute an effective income tax
rate based upon year-to-date reported net income. Due to the investment losses
reported by the Company in the first half of 2009, and the unpredictability of
additional losses and certain elements of operating income in the remaining
half of 2009, the Company is unable to reasonably estimate its annual income.
Based on this fact and the related accounting guidance, the Company has
therefore computed its effective income tax rate for the six months ended June 30,
2009, based upon its reported net income for the period.
Based on the Companys current assessment of future
taxable income, including available tax planning opportunities, the Company
anticipates that it is more likely than not that it will generate sufficient
taxable income to realize its deferred tax assets, and therefore the Company
did not record a valuation allowance against its material deferred tax assets
as of June 30, 2009.
13. DERIVATIVE FINANCIAL INSTRUMENTS
The Company utilizes a risk management strategy that incorporates the
use of derivative financial instruments to reduce exposure to interest rate
risk, inflation risk, currency exchange risk, and equity market risk. These
strategies are developed through the asset/liability committees analysis of
data from financial simulation models and other internal and industry sources
and are then incorporated into the Companys risk management program.
Derivative
instruments expose the Company to credit and market risk and could result in
material changes from period to period. 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 strategies.
Derivative
instruments that are used as part of the Companys interest rate risk
management strategy include interest rate swaps, interest rate futures,
interest rate options, and interest rate swaptions. The Companys inflation
risk management strategy involves the use of swaps that requires the Company to
pay a fixed rate and receive a floating rate that is based on changes in the
Consumer Price Index (CPI). The Company uses foreign currency swaps to manage
its exposure to changes in the value of foreign currency denominated stable
value contracts. No foreign currency swaps remain outstanding. 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 default protection on liquid traded indices to enhance
the return on its investment portfolio. These credit default swaps create credit
exposure similar to an investment in publicly issued fixed maturity cash
investments. The credit default swaps relate to the High Yield Series 8
Index and the Investment Grade Series 9 Index and have terms to June 2014
and December 2017, respectively. Defaults within the High Yield
30
Table of Contents
Series 8 Index that
exceeded the 25% attachment point would require the Company to perform under
the credit default swaps, up to the 35% exhaustion point. Defaults within the
Investment Grade Series 9 Index that exceeded the 10% attachment point
would require the Company to perform under the credit default swaps, up to the
15% exhaustion point. The maximum potential amount of future payments
(undiscounted) that the Company could be required to make under the credit
derivatives is $45.0 million. As of June 30, 2009, the fair value of
the credit derivatives was a liability of $9.8 million. As of June 30,
2009, the Company had collateral of $9.3 million posted with the counterparties
to credit default swaps. The collateral is counterparty specific and is not
tied to any one contract. If the credit default swaps needed to be settled
immediately, the Company would need to post an additional payment of $0.5
million.
As
a result of the ongoing disruption in the credit markets, the fair value of
these derivatives has fluctuated in response to changing market conditions. The
Company believes that the unrealized loss recorded on the $45.0 million
notional of credit default swaps is not indicative of the economic value of the
investment.
SFAS
No. 133 requires that all derivative instruments be recognized in the
balance sheet at fair value. The Company records its derivative instruments on
the balance sheet in other long-term investments and other liabilities. The
accounting for changes in fair value of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship
and further, on the type of hedging relationship. For those derivative
instruments that are designated and qualify as hedging instruments, a company
must designate the hedging instrument, based upon the exposure being hedged, as
a fair value hedge, cash flow hedge or a hedge related to foreign currency
exposure. For derivatives that are designated and qualify as cash flow hedges,
the effective portion of the gain or loss realized on the derivative instrument
is reported as a component of other comprehensive income and reclassified into
earnings in the same period during which the hedged transaction impacts
earnings. The remaining gain or loss on these derivatives is recognized as
ineffectiveness in current earnings during the period of the change. For
derivatives that are designated and qualify as fair value hedges, the gain or
loss on the derivative instrument as well as the offsetting loss or gain on the
hedged item attributable to the hedged risk are recognized in current earnings
during the period of change in fair values. Effectiveness of the Companys
hedge relationships is assessed on a quarterly basis. The Company accounts for
changes in fair values of derivatives that are not part of a qualifying hedge
relationship through earnings in the period of change. Changes in the fair
value of derivatives that are recognized in current earnings are reported in realized
investment gains (losses) - derivative financial instruments.
Cash-Flow Hedges
·
During 2004 and
2005, in connection with the issuance of inflation adjusted funding agreements,
the Company entered into swaps to convert the floating CPI-linked interest rate
on the contracts to a fixed rate. The Company paid a fixed rate on the swap and
received a floating rate equal to the CPI change paid on the funding
agreements.
·
During 2006,
the Company entered into swaps to convert CMT (Constant Maturity Treasury)
based floating rate interest payments on funding agreements to fixed rate
interest payments.
·
During 2006 and
2007, the Company entered into interest rate swaps to convert LIBOR based
floating rate interest payments on funding agreements to fixed rate interest
payments.
Other Derivatives
The
Company also uses various other derivative instruments for risk management
purposes that either do not qualify for hedge accounting treatment or have not
currently been designated by the Company for hedge accounting treatment.
Changes in the fair value of these derivatives are recognized in earnings
during the period of change.
·
The Company
uses interest rate swaps to convert the fixed interest rate payments on certain
of its debt obligations to a floating rate. Interest is exchanged periodically
on the notional value, with the Company receiving the fixed rate and paying
various LIBOR-based rates.
·
The Company
uses certain foreign currency swaps, which are not designated as cash flow
hedges, to mitigate its exposure to changes in currency rates.
31
Table of Contents
·
The Company
also uses short positions in interest rate futures to mitigate the interest
rate risk associated with its mortgage loan commitments.
·
The Company
uses certain interest rate swaps to mitigate interest rate risk related to
floating rate exposures.
·
The Company
uses other swaps, options, and swaptions to manage the interest rate risk in
its mortgage-backed security portfolio.
·
The Company is
involved in various modified coinsurance and funds withheld arrangements which,
in accordance with Derivatives Implementation Group (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 that must report changes in fair value through current
period earnings. The investment portfolios that support the related modified
coinsurance reserves and funds withheld arrangements had mark-to-market changes
which offset the gains or losses on these embedded derivatives.
·
The Company
utilizes S&P 500
®
options to mitigate the risk
associated with equity indexed annuity contracts.
·
The Company markets
certain variable annuity products with a GMWB rider. Under SFAS No. 133,
the GMWB component is considered an embedded derivative, not considered to be
clearly and closely related to the host contract.
·
The Company
entered into credit default swaps and various other derivative positions to
enhance the return on its investment portfolio.
32
Table of
Contents
The tables below present
information about the nature and accounting treatment of the Companys primary
derivative financial instruments and the location in and effect on the
consolidated condensed financial statements for the periods presented below:
|
|
As of
June 30, 2009
|
|
|
|
Notional
|
|
Fair
|
|
|
|
Amount
|
|
Value
|
|
|
|
(Dollars
In Thousands)
|
|
Other
long-term investments
|
|
|
|
|
|
Derivatives
not designated as SFAS No. 133 hedging instruments:
|
|
|
|
|
|
Interest
rate
|
|
$
|
125,000
|
|
$
|
21,601
|
|
Embedded
derivative - Modco reinsurance treaties
|
|
2,001,505
|
|
148,073
|
|
Embedded
derivative - GMWB
|
|
354,358
|
|
8,305
|
|
Embedded
derivative - GMAB
|
|
1,170
|
|
9
|
|
Other
|
|
99,259
|
|
4,605
|
|
|
|
$
|
2,581,292
|
|
$
|
182,593
|
|
Other
liabilities
|
|
|
|
|
|
Cash
flow hedges:
|
|
|
|
|
|
Inflation
|
|
$
|
343,526
|
|
$
|
32,702
|
|
Interest
rate
|
|
175,000
|
|
13,610
|
|
Derivatives
not designated as SFAS No. 133 hedging instruments:
|
|
|
|
|
|
Credit
default swaps
|
|
45,000
|
|
9,790
|
|
Interest
rate
|
|
110,000
|
|
7,417
|
|
Embedded
derivative - Modco reinsurance treaties
|
|
1,043,889
|
|
56,594
|
|
Embedded
derivative GMWB
|
|
320,287
|
|
9,373
|
|
Embedded
derivative GMAB
|
|
6,598
|
|
164
|
|
Other
|
|
35,064
|
|
2,280
|
|
|
|
$
|
2,079,364
|
|
$
|
131,930
|
|
Gain (Loss) on Derivatives in Cash Flow Hedging Relationships
|
|
For The
Three Months Ended
|
|
For The
Six Months Ended
|
|
|
|
June 30,
2009
|
|
June 30,
2009
|
|
|
|
Realized
|
|
Benefits and
|
|
Other
|
|
Realized
|
|
Benefits and
|
|
Other
|
|
|
|
investment
|
|
settlement
|
|
comprehensive
|
|
investment
|
|
settlement
|
|
comprehensive
|
|
|
|
gains (losses)
|
|
expenses
|
|
income
|
|
gains (losses)
|
|
expenses
|
|
income
|
|
|
|
(Dollars In Thousands)
|
|
Gain
(loss) recognized in other comprehensive income
(effective portion):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
|
|
$
|
|
|
$
|
|
|
$
|
(8,810
|
)
|
$
|
|
|
$
|
|
|
$
|
3,864
|
|
Inflation
|
|
|
|
|
|
24,038
|
|
|
|
|
|
25,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) reclassified from accumulated other comprehensive income into income
(effective portion):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
|
|
$
|
|
|
$
|
(1,781
|
)
|
$
|
|
|
$
|
|
|
$
|
(3,897
|
)
|
$
|
|
|
Inflation
|
|
|
|
(2,623
|
)
|
|
|
|
|
(4,469
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
(loss) recognized in income
(ineffective portion):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inflation
|
|
$
|
247
|
|
$
|
|
|
$
|
|
|
$
|
954
|
|
$
|
|
|
$
|
|
|
Based on the expected
cash flows of the underlying hedged items, the Company expects to reclassify
$1.8 million out of accumulated other comprehensive income into earnings during
the next twelve months.
33
Table
of Contents
Gain (Loss) on Derivatives Not Designated as SFAS No. 133
Hedging Instruments
Realized investment gains (losses) - derivative financial
instruments
|
|
For The
|
|
For The
|
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June 30,
2009
|
|
June 30,
2009
|
|
|
|
(Dollars
In Thousands)
|
|
Interest
rate risk
|
|
|
|
|
|
Mortgage
loan commitments
|
|
$
|
4,593
|
|
$
|
6,889
|
|
Interest
rate swaps
|
|
22,169
|
|
36,359
|
|
Credit
risk
|
|
6,887
|
|
2,551
|
|
Embedded
derivative - Modco reinsurance treaties
|
|
(146,420
|
)
|
(85,788
|
)
|
Embedded
derivative - GMWB and GMAB
|
|
12,636
|
|
32,381
|
|
Other
|
|
2,144
|
|
2,050
|
|
|
|
$
|
(97,991
|
)
|
$
|
(5,558
|
)
|
Realized investment gains (losses) - all other investments
|
|
For The
|
|
For The
|
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June 30,
2009
|
|
June 30,
2009
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
|
|
|
|
Fixed
income Modco trading portfolio
(1)
|
|
$
|
154,786
|
|
$
|
108,908
|
|
|
|
|
|
|
|
|
|
(1)
The
Company elected to include the use of alternate disclosures for trading
activities.
14. SUBSEQUENT EVENTS
The
Company has evaluated events subsequent to June 30, 2009, and through the
consolidated condensed financial statement issuance date of August 7,
2009. The Company has not evaluated subsequent events after that date for
presentation in these consolidated condensed financial statements.
34
Table of
Contents
Item 2. Managements
Discussion and Analysis of Financial Condition and Results of Operations
The following Managements Discussion and Analysis
of Financial Condition and Results of Operations (MD&A) 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,
2008, included in our Annual Report on Form 10-K.
For
a more complete understanding of our business and current period results,
please read the following MD&A in conjunction with our latest Annual Report
on Form 10-K and other filings with the United States Securities and
Exchange Commission (the SEC).
Certain
reclassifications have been made in the previously reported financial
statements and accompanying notes to make the prior period amounts comparable
to those of the current period. Such reclassifications had no effect on
previously reported net income or shareowners equity.
FORWARD-LOOKING
STATEMENTS CAUTIONARY LANGUAGE
This report reviews our
financial condition and results of operations including our 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 we 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. We undertake
no obligation to publicly update any forward-looking statements, whether as a
result of new information, future developments or otherwise. For more
information about the risks, uncertainties and other factors that could affect
our future results, please see Part I, Item II,
Risks and
Uncertainties
and Part II, Item 1A,
Risk Factors
,
of this report, as well as Part I, Item 1A,
Risk Factors
,
of our Annual Report on Form 10-K for the fiscal year ended December 31,
2008.
OVERVIEW
Our business
We are a holding company
headquartered in Birmingham, Alabama, with subsidiaries that provide financial
services through the production, distribution, and administration of insurance
and investment products. Founded in
1907, Protective Life Insurance Company (PLICO) is our largest operating
subsidiary. Unless the context otherwise requires, Company, we, us, or our
refers to the consolidated group of Protective Life Corporation and our
subsidiaries.
We operate several
business segments, each having a strategic focus. An operating segment is
distinguished by products, channels of distribution, and/or other strategic
distinctions. We periodically evaluate our 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 make adjustments to our segment reporting as needed.
Our operating segments
are Life Marketing, Acquisitions, Annuities, Stable Value Products, Asset
Protection, and Corporate and Other.
·
Life Marketing
-
We market level premium term insurance (traditional),
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.
35
Table of
Contents
·
Acquisitions
- We focus on acquiring, converting, and
servicing policies acquired from other companies. The segments primary focus
is on life insurance policies and annuity products sold to individuals.
In the ordinary
course of business, the Acquisitions segment regularly considers acquisitions of
blocks of policies or insurance companies. The level of the segments
acquisition activity is predicated upon many factors, including available
capital, operating capacity, and market dynamics. Policies acquired through the
Acquisition segment are 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.
·
Annuities
- We market and support fixed and
variable annuity products. These products are primarily sold through
broker
-dealers, financial institutions and
independent agents and brokers.
·
Stable Value Products
- We sell guaranteed funding
agreement (GFAs) 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.
·
Asset Protection
- We primarily market 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.
·
Corporate and Other
- This segment primarily consists of net
investment income, including the impact of carrying excess liquidity, and
expenses not attributable to the segments above (including net investment
income on capital and interest on debt) and a trading portfolio that was
previously part of a variable interest entity. 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.
EXECUTIVE SUMMARY
Our core operating
fundamentals contributed to our continued success in the second quarter and
attributed to a positive net income of $112.9 million and solid operating
income in our business segments for the six months ended June 30, 2009. In
addition, we continue to focus on initiatives designed to weather the current
economic climate such as shifting our focus to products that are less capital
intensive, implementing pricing initiatives, maintaining a strong distribution
network, and reducing sales with less attractive spread levels. In addition, d
uring the second quarter of 2009, we issued
15.5 million shares of common stock through a public offering. This offering
generated approximately $132.8 million of net proceeds to the Company.
During the six months ended June 30,
2009, our pre-tax operating earnings increased $34.9 million compared to the
six months ended June 30, 2008, primarily as a result of $67.9 million of
favorable mark-to-market change recorded on our trading portfolio, equity
indexed annuity product line and embedded derivatives compared to the prior
years quarter, partially offset by $19.2 million of unfavorable unlocking in
our variable annuity product line and reduced yields as we continue to hold a
large balance of cash and short-term investments to maintain ample liquidity.
36
Table of
Contents
The following table
reflects a reconciliation of after-tax operating income to net income for the
periods presented:
|
|
For the
|
|
For the
|
|
|
|
|
|
Six
Months Ended
|
|
Six
Months Ended
|
|
|
|
(Dollars In Thousands; net of
income tax)
|
|
June 30,
2009
|
|
June 30,
2008
|
|
Variance
|
|
After-tax Operating Income
|
|
$
|
142,413
|
|
$
|
120,726
|
|
$
|
21,687
|
|
Realized
investment gains (losses) and related amortization
|
|
|
|
|
|
|
|
Investments
|
|
(2,585
|
)
|
(91,673
|
)
|
89,088
|
|
Derivatives
|
|
(26,936
|
)
|
45,013
|
|
(71,949
|
)
|
Net Income
|
|
$
|
112,892
|
|
$
|
74,066
|
|
$
|
38,826
|
|
For more information
regarding our realized investment and derivative gains (losses), refer to the Realized
Gains and Losses discussion on page 80.
During the second quarter of 2009, we experienced
improvement in our net unrealized loss position. At June 30, 2009, our net
unrealized loss position was $1.8 billion, prior to tax and deferred
acquisition costs (DAC) offsets and $1.0 billion, after tax and DAC offsets.
While we do not believe that this level of losses will be realized, we cannot
be certain when or what percentage of the positions will recover. Until a
material amount of these positions recover in value, our GAAP equity balance
will continue to be depressed.
The effective tax rate
for the six months ended June 30, 2009, was approximately 34.5% compared
to a rate of 33.3% for the same period in the prior year. The effective tax
rate for the first six months of 2009, was higher than the comparable period a
year ago due to current economic conditions which have caused a reduction in
favorable tax deductions.
Significant
financial information related to each of our segments is included in Results
of Operations.
37
Table of Contents
RISKS AND UNCERTAINTIES
The
factors which could affect our future results include, but are not limited to,
general economic conditions and the following risks and uncertainties:
General
·
exposure to the risks of natural disasters,
pandemics, malicious and terrorist acts that could adversely affect our
operations and results;
·
computer viruses, network security breaches,
disasters or other unanticipated events 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;
·
actual experience may differ from managements
assumptions and estimates and negatively affect our results;
·
we may not realize our anticipated financial
results from our acquisitions strategy;
·
we are dependent on the performance of
others;
·
our risk management policies and procedures
could leave us exposed to unidentified or unanticipated risk, which could
negatively affect our business or result in losses;
Financial environment
·
interest rate fluctuations could negatively
affect our spread income or otherwise impact our business;
·
our investments are subject to market,
credit, legal, and regulatory risks, which could be heightened during periods
of extreme volatility or disruption in the financial and credit markets;
·
equity market volatility could negatively
impact our business;
·
credit market volatility or disruption could
adversely impact our financial condition or results from operations;
·
our ability to grow depends in large part
upon the continued availability of capital;
·
we could be adversely affected by a ratings
downgrade or other negative action by a ratings organization;
·
a loss of policyholder confidence in our
insurance subsidiaries could lead to higher than expected levels of
policyholder surrenders and withdrawal of funds;
·
we could be forced to sell investments at a
loss to cover policyholder withdrawals;
·
disruption of the capital and credit markets
could negatively affect our ability to meet our liquidity and financing needs;
·
difficult conditions in the economy generally
could adversely affect our business and results from operations;
·
continued deterioration of general economic
conditions could result in a severe and extended economic recession, which
could materially adversely affect our business and results from operations;
·
there can be no assurance that the actions of
the United States Government or other governmental and regulatory bodies for
the purpose of stabilizing the financial markets will achieve their intended
effect;
·
we may be required to establish a valuation
allowance against our deferred tax assets, which could materially adversely
affect our results of operations, financial condition, and capital position;
·
we could be adversely affected by an
inability to access our credit facility;
·
results that differ from expectations or
assumptions could adversely impact our investment valuation, financial
condition or our results of operations;
·
the amount of statutory capital we have and
must hold to maintain our financial strength and credit ratings and meet other
requirements can vary significantly and is sensitive to a number of factors;
·
we are a holding company and depend on the
ability of our subsidiaries to transfer funds to us to meet our obligations and
pay dividends;
38
Table of Contents
Industry
·
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 our 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;
·
new accounting rules, changes to existing
accounting rules, or the grant of permitted accounting practices to competitors
could negatively impact us;
·
reinsurance introduces variability in our
statements of income;
·
our reinsurers could fail to meet assumed
obligations, increase rates or be subject to adverse developments that could
affect us;
·
policy claims fluctuate from period to period
resulting in earnings volatility;
Competition
·
operating in a mature, highly competitive
industry could limit our ability to gain or maintain our position in the
industry and negatively affect profitability;
·
our ability to maintain competitive unit
costs is dependent upon the level of new sales and persistency of existing
business;
·
a ratings downgrade could adversely affect
our ability to compete; and
·
we may not be able to protect our
intellectual property and could also be subject to infringement claims.
For
more information about the risks, uncertainties, and other factors that could
affect our future results, please see Part II, Item 1A of this report and our
Annual and Quarterly Reports on Forms 10K and 10Q.
CRITICAL ACCOUNTING POLICIES
Our
accounting policies inherently require the use of judgments relating to a
variety of assumptions and estimates, in particular expectations of current and
future mortality, morbidity, persistency, expenses, and interest rates. Because
of the inherent uncertainty when using the assumptions and estimates, the
effect of certain accounting policies under different conditions or assumptions
could be materially different from those reported in the consolidated financial
statements. A discussion of various critical accounting policies that have
changed since filing our Form 10-K for the year ended December 31,
2008, is presented below. For a more complete listing of our critical
accounting policies, refer to our Annual Report on Form 10-K for the year
ended December 31, 2008.
There
were no significant changes to our accounting policies during the three months
ended June 30, 2009, other than those related to credit losses and the
adoption of FSP FAS No. 115-2 and FAS No. 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments, as discussed in Note 2,
Investment Operations,
and the following:
Guaranteed minimum withdrawal benefits -
We establish liabilities for guaranteed
minimum withdrawal benefits (GMWB) on our variable annuity products. The GMWB
is valued in accordance with FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging
Activities
(SFAS No. 133) which utilizes the valuation
technique prescribed by FASB Statement No. 157,
Fair Value Measurements
(SFAS No. 157), which
requires the liability to be marked-to-market using current implied
volatilities for the equity indices. The methods used to estimate the
liabilities employ assumptions about mortality, lapses, policyholder behavior,
equity market returns, interest rates, our nonperformance risk measure and
market volatility. We assume mortality of 65% of the National Association of
Insurance Commissioners 1994 Variable Annuity Guaranteed Minimum Death Benefit
(GMDB) Mortality Table. Differences between the actual experience and the
assumptions used result in variances in profit and could result in losses. In
the first quarter of 2009, the assumption for long term volatility used for
projection purposes was updated to reflect recent market conditions. The liability
calculation was also changed to reflect a rate increase for all GMWB
policyholders.
39
Table of
Contents
RESULTS
OF OPERATIONS
In the following
discussion, segment operating income (loss) is defined as income before income
tax excluding net realized investment gains and losses (net of the related DAC
and value of business acquired (VOBA) and participating income from real
estate ventures), and the cumulative effect of change in accounting principle.
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 (loss) because the derivatives
are used to mitigate risk in items affecting segment operating income (loss).
Management believes that segment operating income (loss) provides relevant and
useful information to investors, as it represents the basis on which the
performance of our business is internally assessed. Although the items excluded
from segment operating income (loss) may be significant components in
understanding and assessing our overall financial performance, management believes
that segment operating income (loss) enhances an investors understanding of
our results of operations by highlighting the income (loss) attributable to the
normal, recurring operations of our business. However, segment operating income
should not be viewed as a substitute for accounting principles generally
accepted in the United States (U.S. GAAP) net income. In addition, our
segment operating income (loss) 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 (loss) to
consolidated net income:
|
|
For The
|
|
|
|
For The
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
Segment
Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Marketing
|
|
$
|
37,179
|
|
$
|
38,127
|
|
(2.5
|
)%
|
$
|
79,689
|
|
$
|
84,576
|
|
(5.8
|
)%
|
Acquisitions
|
|
35,041
|
|
34,514
|
|
1.5
|
|
68,662
|
|
68,090
|
|
0.8
|
|
Annuities
|
|
21,495
|
|
9,487
|
|
n/m
|
|
20,920
|
|
11,976
|
|
74.7
|
|
Stable Value Products
|
|
16,976
|
|
17,545
|
|
(3.2
|
)
|
37,183
|
|
33,761
|
|
10.1
|
|
Asset Protection
|
|
4,656
|
|
6,664
|
|
(30.1
|
)
|
10,936
|
|
16,516
|
|
(33.8
|
)
|
Corporate and Other
|
|
9,648
|
|
(2,093
|
)
|
n/m
|
|
401
|
|
(32,066
|
)
|
n/m
|
|
Total segment operating
income
|
|
124,995
|
|
104,244
|
|
19.9
|
|
217,791
|
|
182,853
|
|
19.1
|
|
Realized investment
gains (losses) - investments
(1)(3)
|
|
127,770
|
|
(111,916
|
)
|
|
|
(3,977
|
)
|
(141,035
|
)
|
|
|
Realized investment
gains (losses) - derivatives
(2)
|
|
(112,547
|
)
|
65,151
|
|
|
|
(41,440
|
)
|
69,250
|
|
|
|
Income tax benefit
(expense)
|
|
(49,461
|
)
|
(19,295
|
)
|
|
|
(59,482
|
)
|
(37,002
|
)
|
|
|
Net income
|
|
$
|
90,757
|
|
$
|
38,184
|
|
n/m
|
|
$
|
112,892
|
|
$
|
74,066
|
|
52.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Realized investment gains (losses)
- investments
(3)
|
|
$
|
126,828
|
|
$
|
(112,411
|
)
|
|
|
$
|
(4,841
|
)
|
$
|
(140,456
|
)
|
|
|
Less: related amortization
of DAC
|
|
(942
|
)
|
(495
|
)
|
|
|
(864
|
)
|
579
|
|
|
|
|
|
$
|
127,770
|
|
$
|
(111,916
|
)
|
|
|
$
|
(3,977
|
)
|
$
|
(141,035
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Realized investment gains (losses)
- derivatives
|
|
$
|
(97,991
|
)
|
$
|
65,087
|
|
|
|
$
|
(5,558
|
)
|
$
|
63,430
|
|
|
|
Less: settlements on
certain interest rate swaps
|
|
1,163
|
|
1,786
|
|
|
|
3,401
|
|
2,270
|
|
|
|
Less: derivative
activity related to certain annuities
|
|
13,393
|
|
(1,850
|
)
|
|
|
32,481
|
|
(8,090
|
)
|
|
|
|
|
$
|
(112,547
|
)
|
$
|
65,151
|
|
|
|
$
|
(41,440
|
)
|
$
|
69,250
|
|
|
|
(3)
Includes
other-than-temporary impairments of $41.0 million and $130.8 million for the
three and six months ended June 30, 2009, respectively.
For
The Three Months Ended June 30, 2009 compared to The Three Months Ended June 30,
2008
Net income for the three
months ended June 30, 2009, included a $20.8 million, or 19.9%,
increase in segment operating income. The increase was primarily related to an
$11.7 million increase in operating income in the Corporate and Other segment,
a $12.0 million improvement in operating earnings in the Annuities segment, and
a $0.5 million increase in the Acquisitions segment. These increases were partially offset by a
$2.0 million decrease in the Asset Protection segment, a $0.9 million decrease
in the Life Marketing segment and a $0.6 million decrease in the Stable Value
segment. Changes in fair value related
to the Corporate and Other trading portfolio and the Annuities segment
increased operating earnings by $29.6 million for the three months ended June 30,
2009.
40
Table of
Contents
We
experienced net realized gains of $28.8 million for the three months ended June 30,
2009, compared to net realized losses of $47.3 million for the same period of
2008. The gains realized for the three months ended June 30, 2009, were
partially offset by $41.0 million of credit related other-than-temporary
impairment charges related to Alt-A, prime residential mortgage-backed, and
other corporate securities.
·
Life Marketing segment operating income was
$37.2
million for the
three months ended June 30, 2009, representing a decrease of $0.9 million,
or 2.5%, from the three months ended June 30, 2008. The decrease was
primarily due to lower allocated investment income on the traditional line of
business, increased benefits expenses, and higher operating expenses. These reductions to income were partially
offset by more favorable mortality than expected.
·
Acquisitions segment operating income was
$35.0 million
for the
three months ended June 30, 2009, an increase of $0.5 million, or 1.5%,
compared to the three months ended June 30, 2008, primarily due to lower
operating expenses and improved mortality results on the non-Chase business,
partially offset by expected runoff of the blocks of business.
·
Annuities segment operating income was $21.5 million
for the three months ended June 30, 2009, representing an increase of
$12.0 million over the three months ended June 30, 2008. This change
included a $5.3 million variance related to positive fair value changes, of
which $1.7 million of negative fair value changes related to the equity indexed
annuity product (EIA) and $7.0 million of positive changes related to
embedded derivatives associated with the variable annuity GMWB rider. The variable annuity GMDB reserves had a
favorable variance of $2.8 million versus the prior years quarter. The segment experienced wider spreads and the
continued growth of the single premium deferred annuity (SPDA) and market
value adjusted (MVA) lines, which accounted for a $3.4 million and $1.0
million increase in earnings, respectively.
·
Stable Value Products segment operating
income was $17.0 million and
decreased $0.6
million, or 3.2%, for the three months ended June 30,
2009, compared to the three months ended June 30, 2008. The decrease in
operating earnings resulted from a decline in average account values, partially
offset by higher operating spreads. In
addition, $0.3 million in other income was generated from the early retirement
of funding agreements backing medium-term notes during the second quarter of
2009. The operating spread increased 23 basis points to 157 basis points during
the three months ended June 30, 2009, compared to an operating spread of
134 basis points during the three months ended June 30, 2008.
·
Asset Protection segment o
perating income was $4.7 million,
representing a decrease of $2.0 million, or 30.1%, for the three months ended June 30,
2009, compared to the three months ended June 30, 2008. Earnings from core
product lines decreased $2.9 million, or 38.4%, for the three months ended June 30,
2009, compared to the three months ended June 30, 2008. Within the segments core product lines,
service contract earnings declined $4.6 million, or 55.3%, compared to the same
period in the prior year, primarily as a result of weak auto and marine sales
and higher loss ratios in certain product lines.
Credit insurance earnings
increased $0.5 million compared to the prior year as a result of lower
expenses. Earnings from other products
increased $2.1 million compared to the same period in the prior year primarily
due to non-recurring litigation costs of $1.0 million that occurred in the
second quarter of 2008.
·
Corporate and Other segment operating
income was $9.6 million, an improvement
of $11.7 million for the three months ended June 30, 2009, compared
to the three months ended June 30, 2008, primarily due to positive
mark-to-market adjustments of $22.6 million on a $328.2 million portfolio of
securities designated for trading, representing an $18.3 million more favorable
impact than for the three months ended June 30, 2008. This increase was partially offset by reduced
yields on a large balance of cash and short-term investments.
41
Table
of Contents
For
The Six Months Ended June 30, 2009 compared to The Six Months Ended June 30,
2008
Net income for the six
months ended June 30, 2009, included a $34.9 million, or 19.1%,
increase in segment operating income. The increase was primarily related to a
$32.5 million increase in operating income in the Corporate and Other segment,
an $8.9 million improvement in operating earnings in the Annuities segment, a
$3.4 million increase in the Stable Value segment, and a $0.6 million
improvement in the Acquisitions segment.
These increases were partially offset by a $4.9 million decrease in the
Life Marketing segment and a $5.6 million decrease in the Asset Protection
segment. Changes in fair value related
to the Corporate and Other trading portfolio and the Annuities segment
increased operating earnings by $47.9 million in the six months ended June 30,
2009.
We
experienced net realized losses of $10.4 million for the six months ended June 30,
2009, compared to $77.0 million for the same period of 2008. The losses
realized for the six months ended June 30, 2009, included $130.8 million
of credit related other-than-temporary impairment charges related to
AbitibiBowater bonds, Citigroup preferred stock holdings, an IdeaArc bank loan,
Alt-A mortgage-backed securities, prime residential mortgage-backed securities
and other corporate securities. These losses were partially offset by realized
gains on portfolio activity and derivatives.
·
Life Marketing segment operating income was
$79.7 million for the six months ended June 30, 2009, representing a
decrease of $4.9 million, or 5.8%, from the six months ended June 30,
2008. The decrease was primarily due to lower allocated investment income on
the traditional line of business, increased benefits expenses, and higher
operating expenses. These reductions to
income were partially offset by more favorable mortality than expected.
·
Acquisitions
segment operating income was $68.7 million
for the six months ended June 30, 2009, an
increase of $0.6 million, or 0.8%, compared to the six months ended June 30,
2008, primarily due to lower operating expenses and improved mortality results
on the non-Chase business, partially offset by expected runoff of the blocks of
business.
·
Annuities segment operating income was $20.9 million
for the six months ended June 30, 2009, compared to the six months ended June 30,
2008, an increase of $8.9 million. This
change included a favorable $22.5 million variance related to fair value changes,
of which $4.2 million related to the EIA product and $18.3 million related to
embedded derivatives associated with the variable annuity GMWB rider. Offsetting this favorable change, an
unfavorable DAC unlocking in the variable annuity line of business reduced
earnings by $19.2 million in the first quarter of 2009. In addition,
unfavorable mortality in the segments single premium immediate annuity (SPIA)
block reduced earnings in the six months ended June 30, 2009, by $13.2
million, a $2.0 million unfavorable variance compared to the six months ended June 30,
2008. These decreases were partially offset by wider spreads and the continued
growth of the SPDA and MVA lines, which accounted for a $4.8 million and $2.7
million increase in earnings, respectively.
·
Stable Value Products segment operating
income was $37.2 million and
increased $3.4
million, or 10.1%, for the six months ended June 30,
2009, compared to the six months ended June 30, 2008. The increase in
operating earnings resulted from a higher operating spread due to lower
liability costs, and was partially offset by a decline in average account
values. In addition, $1.9 million in other income was generated from the early
retirement of funding agreements backing medium-term notes during the six months
ended June 30, 2009. The operating spread increased 31 basis points to 161
basis points during the six months ended June 30, 2009, compared to an
operating spread of 130 basis points during the six months ended June 30,
2008.
·
Asset Protection segment operating income
was $10.9 million, representing a
decrease of $5.6 million, or 33.8%, for the six months ended June 30,
2009, compared to the six months ended June 30, 2008. Earnings from core
product lines decreased $6.5 million, or 36.9%, for the six months ended June 30,
2009, compared to the six months ended June 30, 2008. Within the segments
core product lines, service contract earnings declined $7.5 million, or 46.3%,
compared to the same period in the prior year, primarily due to weak auto and
marine sales and higher loss ratios in certain product lines.
Credit
insurance earnings decreased $0.2 million, or 14.6%, compared to the prior
year. Earnings from other products increased $2.1 million compared to the same
period in the prior year primarily due to the non-recurring litigation costs of
$1.0 million that occurred in the second quarter of 2008.
42
Table of
Contents
·
Corporate and Other segment operating
income increased $32.5 million for the six months ended June 30,
2009, compared to the six months ended June 30, 2008, primarily due to
positive mark-to-market adjustments of $29.4 million on the trading portfolio,
representing a $45.4 million more favorable impact than for the six months
ended June 30, 2008. This increase
was partially offset by reduced yields on a large balance of cash and
short-term investments.
43
Table of
Contents
Life Marketing
Segment
results of operations
Segment results were as
follows:
|
|
For The
|
|
|
|
For The
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
|
|
(Dollars
In Thousands)
|
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
premiums and policy fees
|
|
$
|
397,195
|
|
$
|
377,807
|
|
5.1
|
%
|
$
|
772,853
|
|
$
|
736,590
|
|
4.9
|
%
|
Reinsurance
ceded
|
|
(241,002
|
)
|
(255,739
|
)
|
(5.8
|
)
|
(448,166
|
)
|
(463,604
|
)
|
(3.3
|
)
|
Net
premiums and policy fees
|
|
156,193
|
|
122,068
|
|
28.0
|
|
324,687
|
|
272,986
|
|
18.9
|
|
Net
investment income
|
|
90,833
|
|
86,989
|
|
4.4
|
|
184,360
|
|
171,945
|
|
7.2
|
|
Other
income
|
|
20,168
|
|
26,010
|
|
(22.5
|
)
|
39,998
|
|
51,055
|
|
(21.7
|
)
|
Total
operating revenues
|
|
267,194
|
|
235,067
|
|
13.7
|
|
549,045
|
|
495,986
|
|
10.7
|
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and settlement expenses
|
|
189,101
|
|
161,861
|
|
16.8
|
|
384,511
|
|
339,639
|
|
13.2
|
|
Amortization
of deferred policy acquisition costs
|
|
33,404
|
|
27,234
|
|
22.7
|
|
69,132
|
|
54,157
|
|
27.7
|
|
Other
operating expenses
|
|
7,510
|
|
7,845
|
|
(4.3
|
)
|
15,713
|
|
17,614
|
|
(10.8
|
)
|
Total
benefits and expenses
|
|
230,015
|
|
196,940
|
|
16.8
|
|
469,356
|
|
411,410
|
|
14.1
|
|
OPERATING INCOME
|
|
37,179
|
|
38,127
|
|
(2.5
|
)
|
79,689
|
|
84,576
|
|
(5.8
|
)
|
INCOME BEFORE INCOME TAX
|
|
$
|
37,179
|
|
$
|
38,127
|
|
(2.5
|
)
|
$
|
79,689
|
|
$
|
84,576
|
|
(5.8
|
)
|
44
Table of
Contents
The following table
summarizes key data for the Life Marketing segment:
|
|
For The
|
|
|
|
For The
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
Sales
By Product
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
|
|
$
|
26,102
|
|
$
|
26,881
|
|
(2.9
|
)%
|
$
|
49,253
|
|
$
|
53,889
|
|
(8.6
|
)%
|
Universal life
|
|
12,796
|
|
12,581
|
|
1.7
|
|
25,615
|
|
27,244
|
|
(6.0
|
)
|
Variable universal life
|
|
854
|
|
1,679
|
|
(49.1
|
)
|
1,496
|
|
3,283
|
|
(54.4
|
)
|
|
|
$
|
39,752
|
|
$
|
41,141
|
|
(3.4
|
)
|
$
|
76,364
|
|
$
|
84,416
|
|
(9.5
|
)
|
Sales
By Distribution Channel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokerage general agents
|
|
$
|
25,783
|
|
$
|
23,545
|
|
9.5
|
|
$
|
47,247
|
|
$
|
47,941
|
|
(1.4
|
)
|
Independent agents
|
|
7,084
|
|
9,331
|
|
(24.1
|
)
|
14,364
|
|
18,183
|
|
(21.0
|
)
|
Stockbrokers / banks
|
|
6,509
|
|
7,307
|
|
(10.9
|
)
|
13,682
|
|
15,754
|
|
(13.2
|
)
|
BOLI / other
|
|
376
|
|
958
|
|
(60.8
|
)
|
1,071
|
|
2,538
|
|
(57.8
|
)
|
|
|
$
|
39,752
|
|
$
|
41,141
|
|
(3.4
|
)
|
$
|
76,364
|
|
$
|
84,416
|
|
(9.5
|
)
|
Average
Life Insurance In-force
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
|
|
$
|
487,972,776
|
|
$
|
472,364,865
|
|
3.3
|
|
$
|
485,862,761
|
|
$
|
468,422,436
|
|
3.7
|
|
Universal life
|
|
53,163,035
|
|
52,515,937
|
|
1.2
|
|
53,067,391
|
|
52,735,093
|
|
0.6
|
|
|
|
$
|
541,135,811
|
|
$
|
524,880,802
|
|
3.1
|
|
$
|
538,930,152
|
|
$
|
521,157,529
|
|
3.4
|
|
Average
Account Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal life
|
|
$
|
5,354,527
|
|
$
|
5,253,016
|
|
1.9
|
|
$
|
5,353,024
|
|
$
|
3,137,075
|
|
70.6
|
|
Variable universal life
|
|
242,168
|
|
325,049
|
|
(25.5
|
)
|
244,311
|
|
333,633
|
|
(26.8
|
)
|
|
|
$
|
5,596,695
|
|
$
|
5,578,065
|
|
0.3
|
|
$
|
5,597,335
|
|
$
|
3,470,708
|
|
61.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
Life Mortality Experience
(2)
|
|
$
|
8,356
|
|
$
|
(1,291
|
)
|
|
|
$
|
8,902
|
|
$
|
919
|
|
|
|
Universal
Life Mortality Experience
(2)
|
|
$
|
1,504
|
|
$
|
531
|
|
|
|
$
|
2,991
|
|
$
|
763
|
|
|
|
(1)
|
Amounts are not adjusted
for reinsurance ceded.
|
(2)
|
Represents
the estimated pre-tax earnings impact resulting from mortality variances. We
periodically review and update as appropriate our key assumptions in
calculating mortality. Changes to these assumptions result in adjustments,
which may increase or decrease previously reported mortality amounts.
|
Operating
expenses detail
O
ther operating expenses for the segment were as follows:
|
|
For The
|
|
|
|
For The
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
Insurance
Companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First year commissions
|
|
$
|
44,801
|
|
$
|
49,739
|
|
(9.9
|
)%
|
$
|
87,177
|
|
$
|
103,251
|
|
(15.6
|
)%
|
Renewal commissions
|
|
9,211
|
|
9,414
|
|
(2.2
|
)
|
18,298
|
|
18,565
|
|
(1.4
|
)
|
First year ceding
allowances
|
|
(5,093
|
)
|
(5,047
|
)
|
0.9
|
|
(9,402
|
)
|
(10,576
|
)
|
(11.1
|
)
|
Renewal ceding
allowances
|
|
(57,026
|
)
|
(59,302
|
)
|
(3.8
|
)
|
(108,070
|
)
|
(113,436
|
)
|
(4.7
|
)
|
General &
administrative
|
|
38,335
|
|
40,897
|
|
(6.3
|
)
|
74,957
|
|
81,430
|
|
(7.9
|
)
|
Taxes, licenses, and
fees
|
|
7,451
|
|
7,669
|
|
(2.8
|
)
|
14,752
|
|
14,732
|
|
0.1
|
|
Other operating expenses
incurred
|
|
37,679
|
|
43,370
|
|
(13.1
|
)
|
77,712
|
|
93,966
|
|
(17.3
|
)
|
Less: commissions,
allowances & expenses capitalized
|
|
(50,461
|
)
|
(59,363
|
)
|
(15.0
|
)
|
(101,970
|
)
|
(124,230
|
)
|
(17.9
|
)
|
Other insurance company
operating expenses
|
|
(12,782
|
)
|
(15,993
|
)
|
(20.1
|
)
|
(24,258
|
)
|
(30,264
|
)
|
(19.8
|
)
|
Marketing
Companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
14,978
|
|
19,754
|
|
(24.2
|
)
|
29,663
|
|
39,762
|
|
(25.4
|
)
|
Other operating expenses
|
|
5,314
|
|
4,084
|
|
30.1
|
|
10,308
|
|
8,116
|
|
27.0
|
|
Other marketing company
operating expenses
|
|
20,292
|
|
23,838
|
|
(14.9
|
)
|
39,971
|
|
47,878
|
|
(16.5
|
)
|
Other
operating expenses
|
|
$
|
7,510
|
|
$
|
7,845
|
|
(4.3
|
)
|
$
|
15,713
|
|
$
|
17,614
|
|
(10.8
|
)
|
45
Table of Contents
For
The Three Months Ended June 30, 2009 compared to The Three Months Ended June 30,
2008
Segment operating income
Operating income was
$37.2 million for the three months ended June 30, 2009, representing a
decrease of $0.9 million, or 2.5%, from the three months ended June 30,
2008. The decrease was primarily due to
lower allocated investment income on the traditional line of business,
increased benefits expenses, and higher operating expenses. These reductions to income were partially
offset by more favorable mortality than expected.
Operating
revenues
Total revenues for the
three months ended June 30, 2009, increased $32.1 million, or 13.7%,
compared to the three months ended June 30, 2008. This increase was the
result of higher premiums and policy fees in the segments traditional line and
higher investment income due to increases in net in-force reserves, and was
partially offset by lower other income due to lower sales in the segments
marketing companies.
Net premiums
and policy fees
Net premiums and policy
fees increased by $34.1 million, or 28.0%, for the three months ended June 30,
2009, compared to the three months ended June 30, 2008, primarily due to
an increase in retention levels on certain traditional life products. Beginning
in the third quarter of 2005, we reduced our 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 our 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. Our maximum retention level for newly issued universal life
products is generally $1,000,000. During 2008, we increased our retention limit
to $2,000,000 on certain of our traditional and universal life products.
Net investment income
Net investment income in
the segment increased $3.8 million, or 4.4%, for the three months ended June 30,
2009, compared to the three months ended June 30, 2008. The increase
reflects the growth related to universal life liabilities.
Other
income
Other income decreased
$5.8 million, or 22.5%, for the three months ended June 30, 2009,
compared to the three months ended June 30, 2008. The decrease relates
primarily to lower broker-dealer revenues compared to 2008 levels due to less
favorable market conditions.
Benefits
and settlement expenses
Benefits and settlement
expenses increased by $27.2 million, or 16.8%, for the three months ended June 30,
2009, compared to the three months ended June 30, 2008, due to growth in
retained 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. The estimated mortality impact to
earnings, related to traditional and universal life products, for the three
months ended June 30, 2009, was favorable by $9.9 million, and was
approximately $10.6 million more favorable than the estimated mortality
impact on earnings for the three months ended June 30, 2008.
Amortization
of DAC
DAC amortization
increased $6.2 million, or 22.7%, for the three months ended June 30,
2009, compared to the three months ended June 30, 2008. The increase
primarily relates to growth in retained life insurance in-force compared to
2008. We periodically review and update as appropriate our key assumptions on
FASB Statement No. 97,
Accounting and Reporting
by Insurance Enterprises for Certain Long-Duration Contracts and for Realized
Gains and Losses from the Sale of Investments
(SFAS No. 97)
products, including future mortality, expenses, lapses, premium persistency,
investment yields and interest spreads. Changes to these assumptions result in
46
Table of Contents
adjustments which
increase or decrease DAC amortization. The periodic review and updating of
assumptions is referred to as unlocking.
Other
operating expenses
Other operating expenses
decreased $0.3 million, or 4.3%, for the three months ended June 30, 2009
compared to the three months ended June 30, 2008. This decrease reflects
lower marketing company expenses associated with lower broker dealer sales,
partly offset by higher expenses in the insurance companies due to lower
renewal ceding allowances.
Sales
Sales for the segment
decreased $1.4 million, or 3.4%, for the three months ended June 30, 2009,
compared to the three months ended June 30, 2008. Lower sales levels of
traditional products were primarily the result of pricing changes implemented
on certain of our products and less favorable market conditions. Universal life
sales increased $0.2 million, or 1.7%, for the three months ended June 30,
2009, compared to the three months ended June 30, 2008, primarily due to
an increased emphasis on the product line.
In addition, variable universal life sales were subject to unfavorable
market conditions and were $0.8 million lower for the three months ended June 30,
2009, compared to the three months ended June 30, 2008
.
For
The Six Months Ended June 30, 2009 compared to The Six Months Ended June 30,
2008
Segment operating income
Operating income was
$79.7 million for the six months ended June 30, 2009, representing a
decrease of $4.9 million, or 5.8%, from the six months ended June 30,
2008. The decrease was primarily due to lower allocated investment income on
the traditional line of business, increased benefits expenses, and higher
operating expenses. These reductions to
income were partially offset by more favorable mortality than expected.
Operating
revenues
Total revenues for the
six months ended June 30, 2009, increased $53.1 million, or 10.7%,
compared to the six months ended June 30, 2008. This increase was the
result of higher premiums and policy fees in the segments traditional line and
higher investment income due to increases in net in-force reserves, and was
partially offset by lower other income due to lower sales in the segments
marketing companies.
Net
premiums and policy fees
Net premiums and policy
fees increased by $51.7 million, or 18.9%, for the six months ended June 30,
2009, compared to the six months ended June 30, 2008, primarily due to an
increase in retention levels on certain traditional life products and growth in
traditional and universal life in-force.
Net investment income
Net investment income in
the segment increased $12.4 million, or 7.2%, for the six months ended June 30,
2009, compared to the six months ended June 30, 2008. The increase
reflects the growth related to universal life liabilities.
Other
income
Other income decreased
$11.1 million, or 21.7%, for the six months ended June 30, 2009,
compared to the six months ended June 30, 2008. The decrease relates
primarily to lower broker-dealer revenues compared to 2008 levels due to less
favorable market conditions.
47
Table of Contents
Benefits
and settlement expenses
Benefits and settlement expenses increased by $44.9
million, or 13.2%, for the six months ended June 30, 2009, compared to the
six months ended June 30, 2008, due to growth in retained 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. The estimated mortality impact to earnings, related to
traditional and universal life products, for the six months ended June 30,
2009, was favorable by $11.9 million, and was approximately $10.2 million
more favorable than the estimated mortality impact on earnings for the six
months ended June 30, 2008.
Amortization
of DAC
DAC amortization
increased $15.0 million, or 27.7%, for the six months ended June 30, 2009,
compared to the six months ended June 30, 2008. The increase primarily
relates to growth in retained life insurance in-force compared to 2008.
Other
operating expenses
Other operating expenses
decreased $1.9 million, or 10.8%, for the six months ended June 30, 2009,
compared to the six months ended June 30, 2008. This decrease reflects
lower marketing company expenses associated with lower broker dealer sales,
partly offset by higher expenses in the insurance companies due to lower renewal
ceding allowances in the current quarter.
Sales
Sales for the segment
decreased $8.1 million, or 9.5%, for the six months ended June 30, 2009,
compared to the six months ended June 30, 2008, due to a decline in sales
across product lines. Lower sales levels of traditional products were primarily
the result of pricing changes implemented on certain of our products and less
favorable market conditions. Universal life sales declined $1.6 million, or
6.0%, for the six months ended June 30, 2009, compared to the six months
ended June 30, 2008, primarily due to competitive pressures in all
channels and less favorable market conditions. In addition, variable universal
life sales were subject to unfavorable market conditions and were $1.8 million
lower for the six months ended June 30, 2009, compared to the six months
ended June 30, 2008
.
Reinsurance
Currently, the Life
Marketing segment reinsures significant amounts of its life insurance in-force.
Pursuant to the underlying reinsurance contracts, reinsurers pay allowances to
the segment as a percentage of both first year and renewal premiums.
Reinsurance allowances represent the amount the reinsurer is willing to pay for
reimbursement of acquisition costs incurred by the direct writer of the
business. A portion of reinsurance allowances received is deferred as part of
DAC and a portion is recognized immediately as a reduction of other operating
expenses. As the non-deferred portion of allowances reduces operating expenses
in the period received, these amounts represent a net increase to operating
income during that period.
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 No. 97 business 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 No. 97 DAC amortization. Deferred reinsurance allowances on
FASB Statement No. 60,
Accounting and Reporting
by Insurance Enterprises
(SFAS No. 60) business are recorded
as ceded DAC, which is amortized over estimated ceded premiums of the policies
in force. Thus, deferred reinsurance allowances on SFAS No. 60
policies impact SFAS No. 60 DAC amortization.
48
Table of Contents
Impact of reinsurance
Reinsurance
impacted the Life Marketing
segment line items as shown in the following table:
Life Marketing Segment
Line Item Impact of Reinsurance
|
|
For The
|
|
For The
|
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(Dollars
In Thousands)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
Reinsurance
ceded
|
|
$
|
(241,002
|
)
|
$
|
(255,739
|
)
|
$
|
(448,166
|
)
|
$
|
(463,604
|
)
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
Benefit
and settlement expenses
|
|
(250,250
|
)
|
(283,811
|
)
|
(468,889
|
)
|
(524,754
|
)
|
Amortization
of deferred policy acquisition costs
|
|
(16,829
|
)
|
(11,720
|
)
|
(29,221
|
)
|
(20,098
|
)
|
Other
operating expenses
(1)
|
|
(36,804
|
)
|
(37,223
|
)
|
(69,015
|
)
|
(70,870
|
)
|
Total
benefits and expenses
|
|
(303,883
|
)
|
(332,754
|
)
|
(567,125
|
)
|
(615,722
|
)
|
|
|
|
|
|
|
|
|
|
|
NET IMPACT OF REINSURANCE
(2)
|
|
$
|
62,881
|
|
$
|
77,015
|
|
$
|
118,959
|
|
$
|
152,118
|
|
|
|
|
|
|
|
|
|
|
|
Allowances
received
|
|
$
|
(62,119
|
)
|
$
|
(64,349
|
)
|
$
|
(117,472
|
)
|
$
|
(124,012
|
)
|
Less:
Amount deferred
|
|
25,315
|
|
27,126
|
|
48,457
|
|
53,142
|
|
Allowances
recognized (ceded other operating expenses)
(1)
|
|
$
|
(36,804
|
)
|
$
|
(37,223
|
)
|
$
|
(69,015
|
)
|
$
|
(70,870
|
)
|
(1)
|
Other operating expenses
ceded per the income statement are equal to reinsurance allowances recognized
after capitalization.
|
|
|
(2)
|
Assumes no investment
income on reinsurance. Foregone investment income would substantially reduce
the favorable impact of reinsurance. We estimate that the impact of
foregone investment income would reduce the net impact of reinsurance by
80% to 130%.
|
The
table above does not reflect the impact of reinsurance on our net investment
income. By ceding business to the assuming companies, we forgo 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 the business we cede. The net investment income
impact to us and the assuming companies has not been quantified. The impact of
including foregone investment income would be to substantially reduce the
favorable net impact of reinsurance reflected above. We estimate that the
impact of foregone investment income would be to reduce the net impact of
reinsurance presented in the table above by 80% to 130%. The Life Marketing
segments reinsurance programs do not materially impact the other income line
of our income statement.
As
shown above, reinsurance had a favorable impact on the Life Marketing segments
operating income for the periods presented above. The impact of reinsurance is
largely due to our quota share coinsurance program in place prior to mid-2005.
Under that program, generally 90% of the segments traditional new business was
ceded to reinsurers. Since mid-2005, a much smaller percentage of overall term
business was ceded due to our change in reinsurance strategy on traditional
business discussed previously. As a result of that change, the relative impact
of reinsurance on the Life Marketing segments overall results is expected to
decrease over time. While the significance of reinsurance is expected to
decline over time, the overall impact of reinsurance for a given period may
fluctuate due to variations in mortality and unlocking of balances under SFAS No. 97.
49
Table of Contents
For The Three Months Ended June 30,
2009 compared to The Three Months Ended June 30, 2008
Premiums and policy fees ceded had been rising over a
number of years with increases in our in-force blocks of traditional and
universal life business. Beginning in mid-2005, we changed our reinsurance
approach in our traditional life product lines. Instead of generally ceding 90%
of new business issued before that date, we began purchasing yearly renewable
term on risks in excess of $1 million (now increased to $2 million). This had
the effect of reducing reinsurance on new policies issued. The decrease in
ceded premiums above for the three months ended June 30, 2009, compared to
the three months ended June 30, 2008, was caused primarily by lower ceded
traditional life premiums and policy fees of $12.5 million.
Ceded benefits and
settlement expenses were lower for the three months ended June 30, 2009,
compared to the three months ended June 30, 2008, due to lower increases
in ceded reserves and decreased ceded claims. Traditional ceded benefits
decreased $26.9 million for the three months ended June 30, 2009, compared
to the three months ended June 30, 2008, due to a smaller increase in
ceded reserves and lower ceded death benefits. Universal life ceded benefits
decreased $5.7 million for the three months ended June 30, 2009, compared
to the three months ended June 30, 2008 as changes in ceded reserves
offset higher ceded claims. Ceded universal life claims were $5.6 million
higher for the three months ended June 30, 2009, compared to the three
months ended June 30, 2008. Ceded benefits and settlement expenses will
fluctuate over time, largely as a function of the segments overall variations
in death benefits incurred.
Ceded amortization of
deferred policy acquisitions costs increased for the three months ended June 30,
2009, compared to the same period in 2008, primarily due to differences in
unlocking between the two periods.
Ceded other operating
expenses are based on allowances received from reinsurers. Total allowances
received for the three months ended June 30, 2009, decreased slightly from
the three months ended June 30, 2008 due to decreases associated with
lower sales in the universal life line and decreases associated with the change
in our term life reinsurance strategy. Term allowances have decreased since
mid-2005 as new YRT reinsurance replaces the 90% coinsured business.
For The Six Months Ended June 30,
2009 compared to The Six Months Ended June 30, 2008
The decrease in ceded premiums above for the six months
ended June 30, 2009, compared to the six months ended June 30, 2008,
was caused primarily by lower ceded traditional life premiums and policy fees
of $15.7 million.
Ceded benefits and
settlement expenses were lower for the six months ended June 30, 2009,
compared to the six months ended June 30, 2008, due to lower increases in
ceded reserves and decreased ceded claims. Traditional ceded benefits decreased
$35.0 million for the six months ended June 30, 2009, compared to the six
months ended June 30, 2008, as a smaller increase in ceded reserves more
than offset slightly higher ceded death benefits. Universal life ceded benefits
decreased $22.0 million for the six months ended June 30, 2009, compared
to the six months ended June 30, 2008 due to lower ceded claims and a
lower change in ceded reserves. Ceded universal life claims were $13.7 million
lower for the six months ended June 30, 2009, compared to the six months
ended June 30, 2008.
Ceded amortization of
deferred policy acquisitions costs increased for the six months ended June 30,
2009, compared to the same period in 2008, primarily due to the differences in
unlocking between the two periods.
Total allowances received
for the six months ended June 30, 2009, decreased slightly from the six
months ended June 30, 2008 due to decreases associated with lower sales in
the universal life line and decreases associated with the change in our term
life reinsurance strategy.
50
Table of Contents
Acquisitions
Segment
results of operations
Segment
results
were
as follows:
|
|
For The
|
|
|
|
For The
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums and
policy fees
|
|
$
|
184,484
|
|
$
|
193,516
|
|
(4.7
|
)%
|
$
|
363,160
|
|
$
|
385,008
|
|
(5.7
|
)%
|
Reinsurance ceded
|
|
(115,482
|
)
|
(125,079
|
)
|
(7.7
|
)
|
(225,089
|
)
|
(240,842
|
)
|
(6.5
|
)
|
Net premiums and policy
fees
|
|
69,002
|
|
68,437
|
|
0.8
|
|
138,071
|
|
144,166
|
|
(4.2
|
)
|
Net investment income
|
|
119,515
|
|
134,482
|
|
(11.1
|
)
|
243,056
|
|
270,695
|
|
(10.2
|
)
|
Other income
|
|
1,592
|
|
1,847
|
|
(13.8
|
)
|
2,995
|
|
3,268
|
|
(8.4
|
)
|
Total operating revenues
|
|
190,109
|
|
204,766
|
|
(7.2
|
)
|
384,122
|
|
418,129
|
|
(8.1
|
)
|
Realized gains (losses)
- investments
|
|
157,871
|
|
(50,323
|
)
|
|
|
105,408
|
|
(86,641
|
)
|
|
|
Realized gains (losses)
- derivatives
|
|
(146,462
|
)
|
46,499
|
|
|
|
(88,778
|
)
|
75,089
|
|
|
|
Total revenues
|
|
201,518
|
|
200,942
|
|
|
|
400,752
|
|
406,577
|
|
|
|
BENEFITS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and settlement
expenses
|
|
135,773
|
|
142,801
|
|
(4.9
|
)
|
274,504
|
|
297,221
|
|
(7.6
|
)
|
Amortization of deferred
policy acquisition costs and value of business acquired
|
|
14,832
|
|
20,512
|
|
(27.7
|
)
|
32,395
|
|
39,014
|
|
(17.0
|
)
|
Other operating expenses
|
|
4,463
|
|
6,939
|
|
(35.7
|
)
|
8,561
|
|
13,804
|
|
(38.0
|
)
|
Operating benefits and
expenses
|
|
155,068
|
|
170,252
|
|
(8.9
|
)
|
315,460
|
|
350,039
|
|
(9.9
|
)
|
Amortization of DAC /
VOBA related to realized gains (losses) - investments
|
|
(272
|
)
|
(535
|
)
|
|
|
(94
|
)
|
559
|
|
|
|
Total benefits and
expenses
|
|
154,796
|
|
169,717
|
|
(8.8
|
)
|
315,366
|
|
350,598
|
|
(10.0
|
)
|
INCOME
BEFORE INCOME TAX
|
|
46,722
|
|
31,225
|
|
49.6
|
|
85,386
|
|
55,979
|
|
52.5
|
|
Less: realized gains
(losses)
|
|
11,409
|
|
(3,824
|
)
|
|
|
16,630
|
|
(11,552
|
)
|
|
|
Less: related amortization
of DAC
|
|
272
|
|
535
|
|
|
|
94
|
|
(559
|
)
|
|
|
OPERATING
INCOME
|
|
$
|
35,041
|
|
$
|
34,514
|
|
1.5
|
|
$
|
68,662
|
|
$
|
68,090
|
|
0.8
|
|
51
Table of
Contents
The following table
summarizes key data for the Acquisitions segment:
|
|
For The
|
|
|
|
For The
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
|
|
(Dollars
In Thousands)
|
|
Average Life Insurance In-Force
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
|
|
$
|
199,231,953
|
|
$
|
213,300,425
|
|
(6.6
|
)%
|
$
|
200,921,328
|
|
$
|
214,263,619
|
|
(6.2
|
)%
|
Universal
life
|
|
28,486,526
|
|
30,360,961
|
|
(6.2
|
)
|
28,722,377
|
|
30,597,436
|
|
(6.1
|
)
|
|
|
$
|
227,718,479
|
|
$
|
243,661,386
|
|
(6.5
|
)
|
$
|
229,643,705
|
|
$
|
244,861,055
|
|
(6.2
|
)
|
Average Account Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal
life
|
|
$
|
2,834,573
|
|
$
|
2,958,583
|
|
(4.2
|
)
|
$
|
2,849,613
|
|
$
|
2,967,501
|
|
(4.0
|
)
|
Fixed
annuity
(2)
|
|
3,777,481
|
|
4,516,192
|
|
(16.4
|
)
|
3,853,348
|
|
4,603,164
|
|
(16.3
|
)
|
Variable
annuity
|
|
124,441
|
|
181,698
|
|
(31.5
|
)
|
125,048
|
|
187,941
|
|
(33.5
|
)
|
|
|
$
|
6,736,495
|
|
$
|
7,656,473
|
|
(12.0
|
)
|
$
|
6,828,009
|
|
$
|
7,758,606
|
|
(12.0
|
)
|
Interest Spread - UL & Fixed Annuities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
yield
(4)
|
|
5.89
|
%
|
6.06
|
%
|
|
|
5.96
|
%
|
6.03
|
%
|
|
|
Interest
credited to policyholders
|
|
4.17
|
|
4.14
|
|
|
|
4.16
|
|
4.11
|
|
|
|
Interest
spread
|
|
1.72
|
%
|
1.92
|
%
|
|
|
1.80
|
%
|
1.92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortality Experience
(3)
|
|
$
|
2,642
|
|
$
|
1,394
|
|
|
|
$
|
4,278
|
|
$
|
1,246
|
|
|
|
(1)
Amounts
are not adjusted for reinsurance ceded.
|
(2)
Includes
general account balances held within variable annuity products and is net of
coinsurance ceded.
|
(3)
Represents
the estimated pre-tax earnings impact resulting from mortality variance to
pricing. Excludes results related to the Chase Insurance Group, which was
acquired in the third quarter of 2006.
|
(4)
Includes
available-for-sale and trading portfolios. Available-for-sale portfolio
yields were 6.30% and 6.34%, respectively, for the three and six months ended
June 30, 2009 compared to 6.33% and 6.31%, respectively, for the same
periods ended June 30, 2008.
|
For
The Three Months Ended June 30, 2009 compared to The Three Months Ended June 30,
2008
Segment
operating income
Operating income was
$35.0 million for the three months ended June 30, 2009, an increase of
$0.5 million, or 1.5%, compared to the three months ended June 30, 2008,
primarily due to lower operating expenses and improved mortality results on the
non-Chase business, partially offset by expected runoff of the blocks of
business.
Revenues
Net premiums and policy
fees increased $0.6 million, or 0.8%, for the three months ended June 30,
2009, compared to the three months ended June 30, 2008, as adjustments
reducing ceded premiums in the Chase traditional line more than offset the
runoff of the in-force business. Net investment income decreased $15.0 million,
or 11.1%, for the three months ended June 30, 2009, compared to the three
months ended June 30, 2008, primarily due to a decline in annuity account
values in the Chase Insurance Group block, resulting in a reduction of invested
assets and lower investment income.
Benefits
and expenses
Total benefits and
expenses decreased $14.9 million, or 8.8%, for the three months ended June 30,
2009, compared to the three months ended June 30, 2008. The decrease
related primarily to the expected runoff of the in-force business (particularly
the Chase Insurance Group), fluctuations in mortality, and lower operating
expenses.
For
The Six Months Ended June 30, 2009 compared to The Six Months Ended June 30,
2008
Segment
operating income
Operating income was
$68.7 million for the six months ended June 30, 2009, an increase of $0.6
million, or 0.8%, compared to the six months ended June 30, 2008,
primarily due to lower operating expenses and improved mortality results on the
non-Chase business, partially offset by expected runoff of the blocks of
business.
52
Table of
Contents
Revenues
Net premiums and policy
fees decreased $6.1 million, or 4.2%, for the six months ended June 30,
2009, compared to the six months ended June 30, 2008, primarily due to the
runoff of the in-force business. Net investment income decreased $27.6 million,
or 10.2%, for the six months ended June 30, 2009, compared to the six
months ended June 30, 2008, primarily due to a decline in annuity account
values in the Chase Insurance Group block, resulting in a reduction of invested
assets and lower investment income.
Benefits
and expenses
Total benefits and
expenses decreased $35.2 million, or 10.0%, for the six months ended June 30,
2009, compared to the six months ended June 30, 2008. The decrease related
primarily to the expected runoff of the in-force business (particularly the
Chase Insurance Group), fluctuations in mortality, and lower operating
expenses.
Reinsurance
The Acquisitions segment
currently reinsures portions of both its life and annuity in-force. The cost of
reinsurance to the segment is reflected in the chart shown below.
Impact of reinsurance
Reinsurance
impacted the Acquisitions
segment line items as shown in the following table:
Acquisitions Segment
Line Item Impact of Reinsurance
|
|
For The
|
|
For The
|
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(Dollars
In Thousands)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
Reinsurance
ceded
|
|
$
|
(115,482
|
)
|
$
|
(125,079
|
)
|
$
|
(225,089
|
)
|
$
|
(240,842
|
)
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
Benefit
and settlement expenses
|
|
(97,107
|
)
|
(95,249
|
)
|
(189,329
|
)
|
(204,513
|
)
|
Amortization
of deferred policy acquisition costs
|
|
(3,496
|
)
|
(8,330
|
)
|
(9,277
|
)
|
(15,914
|
)
|
Other
operating expenses
|
|
(15,747
|
)
|
(17,471
|
)
|
(30,706
|
)
|
(34,865
|
)
|
Total
benefits and expenses
|
|
(116,350
|
)
|
(121,050
|
)
|
(229,312
|
)
|
(255,292
|
)
|
|
|
|
|
|
|
|
|
|
|
NET IMPACT OF REINSURANCE
|
|
$
|
868
|
|
$
|
(4,029
|
)
|
$
|
4,223
|
|
$
|
14,450
|
|
The segments reinsurance
programs do not materially impact the other income line of the income statement.
In addition, net investment income generally has no direct impact on
reinsurance cost. However, it should be noted that by ceding business to the
assuming companies, we forgo investment income on the reserves ceded to the
assuming companies. 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. For business ceded under
modified coinsurance arrangements, the amount of investment income attributable
to the assuming company is included as part of the overall change in policy
reserves and, as such, is reflected in benefit and settlement expenses. The net
investment income impact to us and the assuming companies has not been quantified
as it is not fully reflected in our consolidated financial statements.
The net impact of
reinsurance improved $4.9 million for the three months ended June 30,
2009, compared to the three months ended June 30, 2008, as a result of
adjustments to ceded premiums, fluctuations in ceded claim volume, amortization
of deferred acquisition costs related to the claim fluctuations, and expenses
ceded to reinsurers involved with the Chase Insurance Group acquisition. Adjustments reducing ceded premiums in the Chase
traditional line favorably impacted the segment by $2.6 million in the second
quarter of 2009.
53
Table of
Contents
The net impact of
reinsurance decreased $10.2 million, or 70.8%, for the six months ended June 30,
2009, compared to the six months ended June 30, 2008, as a result of
fluctuations in ceded claim volume, amortization of deferred acquisition costs
related to the claim fluctuations, and expenses ceded to reinsurers involved
with the Chase Insurance Group acquisition.
54
Table of
Contents
Annuities
Segment
results of operations
Segment results were as
follows:
|
|
For The
|
|
|
|
For The
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
|
|
(Dollars
In Thousands)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
premiums and policy fees
|
|
$
|
7,406
|
|
$
|
8,449
|
|
(12.3
|
)%
|
$
|
18,391
|
|
$
|
16,640
|
|
10.5
|
%
|
Reinsurance
ceded
|
|
(42
|
)
|
|
|
n/m
|
|
(84
|
)
|
|
|
n/m
|
|
Net
premiums and policy fees
|
|
7,364
|
|
8,449
|
|
(12.8
|
)
|
18,307
|
|
16,640
|
|
10.0
|
|
Net
investment income
|
|
108,588
|
|
85,007
|
|
27.7
|
|
211,570
|
|
162,293
|
|
30.4
|
|
Realized
gains (losses) - derivatives
|
|
13,393
|
|
(1,850
|
)
|
n/m
|
|
32,481
|
|
(8,090
|
)
|
n/m
|
|
Other
income
|
|
4,215
|
|
3,255
|
|
29.5
|
|
7,595
|
|
6,258
|
|
21.4
|
|
Total
operating revenues
|
|
133,560
|
|
94,861
|
|
40.8
|
|
269,953
|
|
177,101
|
|
52.4
|
|
Realized
gains (losses) - investments
|
|
925
|
|
1,095
|
|
|
|
(5,523
|
)
|
1,115
|
|
|
|
Total
revenues
|
|
134,485
|
|
95,956
|
|
40.2
|
|
264,430
|
|
178,216
|
|
48.4
|
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and settlement expenses
|
|
78,759
|
|
71,842
|
|
9.6
|
|
164,567
|
|
139,258
|
|
18.2
|
|
Amortization
of deferred policy acquisition costs and value of business acquired
|
|
26,568
|
|
7,199
|
|
n/m
|
|
71,753
|
|
13,120
|
|
n/m
|
|
Other
operating expenses
|
|
6,068
|
|
6,333
|
|
(4.2
|
)
|
12,043
|
|
12,747
|
|
(5.5
|
)
|
Operating
benefits and expenses
|
|
111,395
|
|
85,374
|
|
30.5
|
|
248,363
|
|
165,125
|
|
50.4
|
|
Amortization
of DAC / VOBA related to realized gains (losses) - investments
|
|
|
|
40
|
|
|
|
(100
|
)
|
20
|
|
|
|
Total
benefits and expenses
|
|
111,395
|
|
85,414
|
|
30.4
|
|
248,263
|
|
165,145
|
|
50.3
|
|
INCOME BEFORE INCOME TAX
|
|
23,090
|
|
10,542
|
|
n/m
|
|
16,167
|
|
13,071
|
|
n/m
|
|
Less:
realized gains (losses)
|
|
925
|
|
1,095
|
|
|
|
(5,523
|
)
|
1,115
|
|
|
|
Less:
related amortization of DAC
|
|
670
|
|
(40
|
)
|
|
|
770
|
|
(20
|
)
|
|
|
OPERATING INCOME
|
|
$
|
21,495
|
|
$
|
9,487
|
|
n/m
|
|
$
|
20,920
|
|
$
|
11,976
|
|
n/m
|
|
55
Table of
Contents
The following table
summarizes key data for the Annuities segment:
|
|
For The
|
|
|
|
For The
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
|
|
(Dollars
In Thousands)
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
annuity
|
|
$
|
432,373
|
|
$
|
436,788
|
|
(1.0
|
)%
|
$
|
730,053
|
|
$
|
956,036
|
|
(23.6
|
)%
|
Variable
annuity
|
|
177,306
|
|
115,448
|
|
53.6
|
|
316,362
|
|
208,240
|
|
51.9
|
|
|
|
$
|
609,679
|
|
$
|
552,236
|
|
10.4
|
|
$
|
1,046,415
|
|
$
|
1,164,276
|
|
(10.1
|
)
|
Average Account Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
annuity
(1)
|
|
$
|
6,945,161
|
|
$
|
5,485,382
|
|
26.6
|
|
$
|
6,814,015
|
|
$
|
5,274,717
|
|
29.2
|
|
Variable
annuity
|
|
1,999,967
|
|
2,582,909
|
|
(22.6
|
)
|
1,882,160
|
|
2,574,947
|
|
(26.9
|
)
|
|
|
$
|
8,945,128
|
|
$
|
8,068,291
|
|
10.9
|
|
$
|
8,696,175
|
|
$
|
7,849,664
|
|
10.8
|
|
Interest Spread - Fixed Annuities
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
investment income yield
|
|
6.23
|
%
|
6.14
|
%
|
|
|
6.18
|
%
|
6.10
|
%
|
|
|
Interest
credited to policyholders
|
|
4.82
|
|
5.03
|
|
|
|
4.87
|
|
5.00
|
|
|
|
Interest
spread
|
|
1.41
|
%
|
1.11
|
%
|
|
|
1.31
|
%
|
1.10
|
%
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
GMDB - Net amount at risk
(3)
|
|
|
|
|
|
$
|
681,368
|
|
$
|
275,062
|
|
n/m
|
%
|
GMDB Reserves
|
|
|
|
|
|
|
|
|
|
n/m
|
|
GMWB Reserves
|
|
|
|
|
|
1,067
|
|
3,912
|
|
(72.7
|
)
|
Account value subject to GMWB rider
|
|
|
|
|
|
629,576
|
|
212,627
|
|
n/m
|
|
S&P 500® Index
|
|
|
|
|
|
919
|
|
1,280
|
|
(28.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
For
The Three Months Ended June 30, 2009 compared to The Three Months Ended June 30,
2008
Segment operating income
Annuities segment
operating income was $21.5 million for the three months ended June 30,
2009, representing an increase of $12.0 million over the three months ended June 30,
2008. This change included a $5.3 million variance related to positive fair
value changes, of which $1.7 million of negative fair value changes related to
the equity indexed annuity product and $7.0 million of positive changes related
to embedded derivatives associated with the variable annuity GMWB rider. The variable annuity GMDB reserves had a
favorable variance of $2.8 million versus the prior years quarter. The segment experienced wider spreads and the
continued growth of the SPDA and MVA lines, which accounted for a $3.4 million
and $1.0 million increase in earnings, respectively.
Operating revenues
Segment operating
revenues increased $38.7 million, or 40.8%, for the three months ended June 30,
2009, compared to the three months ended June 30, 2008, primarily due to
an increase in net investment income, gains on derivatives, and the positive
fair value changes on the variable annuity line mentioned above. Average
account balances grew 10.9% for the three months ended June 30, 2009,
resulting in higher investment income. The segment continually monitors and
adjusts credited rates as appropriate in an effort to maintain and/or improve
its interest spread
.
Benefits and settlement expenses
Operating benefits and expenses increased $26.0
million, or 30.5%, for the three months ended June 30, 2009, compared to
the three months ended June 30, 2008. This increase was primarily the
result of higher credited interest, negative fair value changes associated with
the equity indexed annuity product, and increased variable annuity death
benefit payments.
56
Table of
Contents
Amortization of DAC
The increase in DAC
amortization (not related to realized capital gains and losses) for the three
months ended June 30, 2009, compared to the three months ended June 30,
2008, was primarily due to fair value gains and increased spreads. We
periodically review and update as appropriate our 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.
DAC amortization for the Annuities segment increased by $19.4 million
primarily due to positive fair value changes in the variable annuity line
.
Sales
Total sales increased
$57.4 million, or 10.4%, for the three months ended June 30, 2009,
compared to the three months ended June 30, 2008. Sales of variable
annuities increased $61.9 million, or 53.6%, for the three months ended June 30,
2009, compared to the three months ended June 30, 2008, primarily due to
dislocation of some core competitors and improved sales management efforts.
Sales of fixed annuities decreased $4.4 million, or 1.0%, for the three months
ended June 30, 2009, compared to the three months ended June 30,
2008. The decrease was driven by reduced
sales in EIA, MVA, and immediate annuity lines and was primarily attributable
to a lower interest rate environment. SPDA sales increased $78.9 million, or
42.5% for the three months ended June 30, 2009, compared to the three
months ended June 30, 2008, primarily due to access to additional
distribution channels.
For
The Six Months Ended June 30, 2009 compared to The Six Months Ended June 30,
2008
Segment operating income
Annuities segment operating
income was $20.9 million for the six months ended June 30, 2009, compared
to the six months ended June 30, 2008, an increase of $8.9 million. This change included a favorable $22.5
million variance related to fair value changes, of which $4.2 million related
to the equity indexed annuity product and $18.3 million related to embedded
derivatives associated with the variable annuity GMWB rider. Offsetting this favorable change, an
unfavorable DAC unlocking in the variable annuity line of business reduced
earnings by $19.2 million in the first quarter of 2009. In addition,
unfavorable mortality in the segments SPIA block reduced earnings in the six
months ended June 30, 2009, by $13.2 million, a $2.0 million unfavorable
variance compared to the six months ended June 30, 2008. These decreases
were partially offset by wider spreads and the continued growth of the SPDA and
MVA lines, which accounted for a $4.8 million and $2.7 million increase in
earnings, respectively.
Operating revenues
Segment operating
revenues increased $92.9 million, or 52.4%, for the six months ended June 30,
2009, compared to the six months ended June 30, 2008, primarily due to an
increase in net investment income, policy fee revenue, gains on derivatives,
and the positive fair value changes on the variable annuity line mentioned
above. Average account balances grew 10.8% for the six months ended June 30,
2009, resulting in higher investment income.
Benefits and settlement
expenses
Operating benefits and expenses increased $83.2 million,
or 50.4%, for the six months ended June 30, 2009, compared to the six
months ended June 30, 2008. This increase was primarily the result of
higher credited interest and increased variable annuity death benefit payments.
Amortization
of DAC
The increase in DAC
amortization (not related to realized capital gains and losses) for the six
months ended June 30, 2009, compared to the six months ended June 30,
2008, was primarily due to fair value gains and unlocking on the variable
annuity line and increased policy fee revenue on the MVA line.
57
Table of Contents
Sales
Total sales decreased $117.9 million, or 10.1%,
for the six months ended June 30, 2009, compared to the six months ended June 30,
2008. Sales of fixed annuities decreased $226.0 million, or 23.6%, for the
six months ended June 30, 2009, compared to the six months ended June 30,
2008. The decrease in fixed annuity sales was driven by reduced sales in the
EIA, MVA, and immediate annuity lines and was primarily attributable to a lower
interest rate environment. Immediate annuity sales decreased $223.5 million, or
83.6%, for the six months ended June 30, 2009, compared to the six months
ended June 30, 2008, due to certain one-time institutional sales that
occurred in the first quarter of 2008. SPDA sales increased by $148.0 million,
or 55.4%, for the six months ended June 30, 2009, compared to the six
months ended June 30, 2008, primarily due to access to additional
distribution channels. Sales of variable
annuities increased $108.1 million, or 51.9%, for the six months ended June 30,
2009, compared to the six months ended June 30, 2008, primarily due to
dislocation of some core competitors and improved sales management efforts
.
58
Table of Contents
Stable
Value Products
Segment results of operations
Segment results were as
follows:
|
|
For The
|
|
|
|
For The
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
57,550
|
|
$
|
77,747
|
|
(26.0
|
)%
|
$
|
120,726
|
|
$
|
156,108
|
|
(22.7
|
)%
|
Other income
|
|
340
|
|
|
|
n/m
|
|
1,866
|
|
|
|
n/m
|
|
Realized gains (losses)
|
|
(400
|
)
|
1,823
|
|
n/m
|
|
1,462
|
|
7,256
|
|
n/m
|
|
Total revenues
|
|
57,490
|
|
79,570
|
|
(27.7
|
)
|
124,054
|
|
163,364
|
|
(24.1
|
)
|
BENEFITS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and settlement
expenses
|
|
39,206
|
|
57,485
|
|
(31.8
|
)
|
81,791
|
|
117,414
|
|
(30.3
|
)
|
Amortization of deferred
policy acquisition costs
|
|
844
|
|
1,095
|
|
(22.9
|
)
|
1,771
|
|
2,162
|
|
(18.1
|
)
|
Other operating expenses
|
|
864
|
|
1,622
|
|
(46.7
|
)
|
1,847
|
|
2,771
|
|
(33.3
|
)
|
Total benefits and expenses
|
|
40,914
|
|
60,202
|
|
(32.0
|
)
|
85,409
|
|
122,347
|
|
(30.2
|
)
|
INCOME
BEFORE INCOME TAX
|
|
16,576
|
|
19,368
|
|
n/m
|
|
38,645
|
|
41,017
|
|
(5.8
|
)
|
Less: realized gains
(losses)
|
|
(400
|
)
|
1,823
|
|
|
|
1,462
|
|
7,256
|
|
|
|
OPERATING
INCOME
|
|
$
|
16,976
|
|
$
|
17,545
|
|
(3.2
|
)
|
$
|
37,183
|
|
$
|
33,761
|
|
10.1
|
|
The following table
summarizes key data for the Stable Value Products segment:
|
|
For The
|
|
|
|
For The
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GIC
|
|
$
|
|
|
$
|
11,113
|
|
n/m
|
%
|
$
|
|
|
$
|
85,345
|
|
n/m
|
%
|
GFA - Direct Institutional
|
|
|
|
425,000
|
|
n/m
|
|
|
|
425,000
|
|
n/m
|
|
GFA - Registered Notes -
Institutional
|
|
|
|
|
|
n/m
|
|
|
|
450,000
|
|
n/m
|
|
GFA - Registered Notes -
Retail
|
|
|
|
151,725
|
|
n/m
|
|
|
|
265,129
|
|
n/m
|
|
|
|
$
|
|
|
$
|
587,838
|
|
n/m
|
|
$
|
|
|
$
|
1,225,474
|
|
n/m
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Account Values
|
|
$
|
4,224,897
|
|
$
|
5,139,017
|
|
(17.8
|
)
|
$
|
4,373,484
|
|
$
|
5,139,290
|
|
(14.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Spread
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income yield
|
|
5.45
|
%
|
5.94
|
%
|
|
|
5.52
|
%
|
6.02
|
%
|
|
|
Interest credited
|
|
3.71
|
|
4.39
|
|
|
|
3.74
|
|
4.53
|
|
|
|
Operating expenses
|
|
0.17
|
|
0.21
|
|
|
|
0.17
|
|
0.19
|
|
|
|
Operating spread
|
|
1.57
|
%
(1)
|
1.34
|
%
|
|
|
1.61
|
%
(1)
|
1.30
|
%
|
|
|
(1)
Excludes
one-time funding agreement retirement gains.
For The Three Months Ended June 30, 2009 compared to The Three
Months Ended June 30, 2008
Segment
operating income
Operating income was $17.0 million and decreased $0.6
million,
or 3.2%, for the three months ended June 30, 2009, compared to the three
months ended June 30, 2008. The decrease in operating earnings resulted
from a decline in average account values, partially offset by higher operating
spreads. In addition, $0.3 million in
other income was generated from the early retirement of funding agreements
backing medium-term notes in the second quarter of 2009. The operating spread
increased 23 basis points to 157 basis points during the three months ended June 30,
2009, compared to an operating spread of 134 basis points during the three
months ended June 30, 2008.
There were no sales for
the three months ended June 30, 2009, compared to $587.8 million for the
three months ended June 30, 2008.
59
Table of Contents
For The Six Months Ended June 30, 2009 compared to The Six Months
Ended June 30, 2008
Segment
operating income
Operating income was $37.2 million and increased $3.4
million,
or 10.1%, for the six months ended June 30, 2009, compared to the six
months ended June 30, 2008. The increase in operating earnings resulted
from a higher operating spread due to lower liability costs, and was partially
offset by a decline in average account values. In addition, $1.9 million in
other income was generated from the early retirement of funding agreements
backing medium-term notes during the first six months of 2009. The operating
spread increased 31 basis points to 161 basis points during the six months
ended June 30, 2009, compared to an operating spread of 130 basis points
during the six months ended June 30, 2008.
There were no sales for
the six months ended June 30, 2009, compared to $1.2 billion for the six
months ended June 30, 2008.
60
Table of Contents
Asset Protection
Segment results of operations
Segment results were as
follows:
|
|
For The
|
|
|
|
For The
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums and policy
fees
|
|
$
|
84,240
|
|
$
|
91,110
|
|
(7.5
|
)%
|
$
|
171,175
|
|
$
|
186,445
|
|
(8.2
|
)%
|
Reinsurance ceded
|
|
(37,698
|
)
|
(42,954
|
)
|
(12.2
|
)
|
(79,183
|
)
|
(90,397
|
)
|
(12.4
|
)
|
Net premiums and policy
fees
|
|
46,542
|
|
48,156
|
|
(3.4
|
)
|
91,992
|
|
96,048
|
|
(4.2
|
)
|
Net investment income
|
|
8,407
|
|
9,808
|
|
(14.3
|
)
|
17,339
|
|
19,713
|
|
(12.0
|
)
|
Other income
|
|
13,199
|
|
17,379
|
|
(24.1
|
)
|
25,672
|
|
32,515
|
|
(21.0
|
)
|
Total operating revenues
|
|
68,148
|
|
75,343
|
|
(9.5
|
)
|
135,003
|
|
148,276
|
|
(9.0
|
)
|
BENEFITS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and settlement
expenses
|
|
29,363
|
|
27,662
|
|
6.1
|
|
63,473
|
|
52,428
|
|
21.1
|
|
Amortization of deferred
policy acquisition costs
|
|
14,104
|
|
15,341
|
|
(8.1
|
)
|
27,787
|
|
29,673
|
|
(6.4
|
)
|
Other operating expenses
|
|
20,025
|
|
25,676
|
|
(22.0
|
)
|
32,807
|
|
49,659
|
|
(33.9
|
)
|
Total benefits and expenses
|
|
63,492
|
|
68,679
|
|
(7.6
|
)
|
124,067
|
|
131,760
|
|
(5.8
|
)
|
INCOME
BEFORE INCOME TAX
|
|
4,656
|
|
6,664
|
|
(30.1
|
)
|
10,936
|
|
16,516
|
|
(33.8
|
)
|
OPERATING
INCOME
|
|
$
|
4,656
|
|
$
|
6,664
|
|
(30.1
|
)
|
$
|
10,936
|
|
$
|
16,516
|
|
(33.8
|
)
|
The following table
summarizes key data for the Asset Protection segment:
|
|
For The
|
|
|
|
For The
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit insurance
|
|
$
|
8,721
|
|
$
|
18,381
|
|
(52.6
|
)%
|
$
|
17,204
|
|
$
|
41,171
|
|
(58.2
|
)%
|
Service contracts
|
|
56,368
|
|
82,199
|
|
(31.4
|
)
|
104,444
|
|
153,862
|
|
(32.1
|
)
|
Other products
|
|
11,091
|
|
19,055
|
|
(41.8
|
)
|
22,872
|
|
35,317
|
|
(35.2
|
)
|
|
|
$
|
76,180
|
|
$
|
119,635
|
|
(36.3
|
)
|
$
|
144,520
|
|
$
|
230,350
|
|
(37.3
|
)
|
Loss
Ratios
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit insurance
|
|
32.7
|
%
|
37.1
|
%
|
|
|
32.4
|
%
|
36.5
|
%
|
|
|
Service contracts
|
|
80.1
|
|
71.0
|
|
|
|
77.4
|
|
68.0
|
|
|
|
Other products
|
|
43.9
|
|
39.4
|
|
|
|
69.6
|
|
36.1
|
|
|
|
(1)
Incurred
claims as a percentage of earned premiums
For The Three Months Ended June 30, 2009 compared to The Three
Months Ended June 30, 2008
Segment
operating income
Operating income was $4.7 million, representing a
decrease of $2.0 million, or 30.1%, for the three months ended June 30,
2009, compared to the three months ended June 30, 2008. Earnings from core
product lines decreased $2.9 million, or 38.4%, for the three months ended June 30,
2009, compared to the three months ended June 30, 2008. Within the segments core product lines,
service contract earnings declined $4.6 million, or 55.3%, compared to the same
period in the prior year, primarily as a result of weak auto and marine sales
and higher loss ratios in certain product lines.
Credit insurance earnings
increased $0.5 million compared to the prior year as a result
61
Table of Contents
of lower expenses. Earnings from other products increased $2.1
million compared to the same period in the prior year primarily due to
non-recurring litigation costs of $1.0 million that occurred in the second
quarter of 2008.
Net
premiums
and
policy fees
Net premiums and policy fees decreased $1.6 million,
or 3.4%, for the three months ended June 30, 2009, compared to the three
months ended June 30, 2008. Credit insurance premiums decreased $0.8
million, or 11.3%, due to lower auto sales. Net premiums in the service
contract line decreased $1.5 million, or 5.3%, for the three months ended June 30,
2009, compared to the three months ended June 30, 2008, also resulting
from weak auto sales. Within the other product lines, net premiums increased
$0.7 million, or 5.0%, compared to the prior year due to an increase in the GAP
product line related to growth of in-force contracts.
Other
income
Other income decreased $4.2 million, or 24.1%, for the
three months ended June 30, 2009, compared to the three months ended June 30,
2008, primarily due to a decline in service contract volume.
Benefits
and settlement expenses
Benefits and settlement expenses increased $1.7
million, or 6.1%, for the three months ended June 30, 2009, compared to
the three months ended June 30, 2008. Credit insurance claims for the
three months ended June 30, 2009, compared to the prior year, decreased
$0.6 million, or 21.9%, due to lower volume and improved loss ratios. Service
contract claims increased $1.4 million, or 7.0%, due to higher loss ratios in
some product lines. Other products claims increased $0.9 million, or 17.1%.
Amortization
of DAC and Other operating expenses
Amortization of DAC was $1.2 million, or 8.1%, lower
for the three months ended June 30, 2009, compared to the three months
ended June 30, 2008, primarily due to lower premiums in the credit
insurance lines. Other operating expenses decreased $5.7 million, or 22.0%, for
the three months ended June 30, 2009, due to lower commission expense
resulting from a decline in sales and lower retrospective commissions resulting
from higher loss ratios.
Sales
Total segment sales decreased $43.5 million, or 36.3%,
for the three months ended June 30, 2009, compared to the three months
ended June 30, 2008. The decreases in credit insurance and service
contract sales were primarily due to declines in auto and marine sales. The
decline in the other products line was primarily the result of lower GAP sales,
also due to the overall decline in auto sales
.
For The Six Months Ended June 30, 2009 compared to The Six Months
Ended June 30, 2008
Segment
operating income
Operating income was $10.9 million, representing a decrease
of $5.6 million, or 33.8%, for the six months ended June 30, 2009,
compared to the six months ended June 30, 2008. Earnings from core product
lines decreased $6.5 million, or 36.9%, for the six months ended June 30,
2009, compared to the six months ended June 30, 2008. Within the segments
core product lines, service contract earnings declined $7.5 million, or 46.3%,
compared to the same period in the prior year, primarily due to weak auto and
marine sales and higher loss ratios in certain product lines.
Credit
insurance earnings decreased $0.2 million, or 14.6%, compared to the prior
year. Earnings from other products increased $2.1 million compared to the same
period in the prior year primarily due to non-recurring litigation costs of
$1.0 million that occurred in the second quarter of 2008.
62
Table of Contents
Net
premiums
and
policy fees
Net premiums and policy fees decreased $4.1 million,
or 4.2%, for the six months ended June 30, 2009, compared to the six
months ended June 30, 2008. Credit insurance premiums decreased $2.3
million, or 15.5%, due to lower auto sales. Net premiums in the service
contract line decreased $2.6 million, or 4.7%, for the six months ended June 30,
2009, compared to the six months ended June 30, 2008, also resulting from
weak auto sales. Within the other product lines, net premiums increased $0.9
million, or 3.4%, compared to the prior year due to an increase in the GAP
product line
.
Other
income
Other income decreased $6.8 million, or 21.0%, for the
six months ended June 30, 2009, compared to the six months ended June 30,
2008, primarily due to a decline in service contract volume.
Benefits
and settlement expenses
Benefits and settlement expenses increased $11.0
million, or 21.1%, for the six months ended June 30, 2009, compared to the
six months ended June 30, 2008. Credit insurance claims for the six months
ended June 30, 2009, compared to the prior year decreased $1.4 million, or
25.0%, due to lower volume and improved loss ratios. Service contract claims
increased $3.2 million, or 8.5%, due to higher loss ratios in some product
lines. Other products claims increased $9.2 million, which was primarily due to
a $6.3 million increase in the runoff Lenders Indemnity product lines loss
reserve related to the commutation of a reinsurance agreement in the first
quarter of 2009, which was offset by a reduction in other expenses, and higher
loss ratios in the GAP product line
.
Amortization
of DAC and Other operating
expenses
Amortization of DAC was $1.9 million, or 6.4%, lower
for the six months ended June 30, 2009, compared to the six months ended June 30,
2008, mainly due to lower premiums in the credit insurance and service contract
lines. Other operating expenses decreased $16.9 million, or 33.9%, for the six
months ended June 30, 2009, due to lower commission expense resulting from
the decline in sales, lower retrospective commissions resulting from higher
loss ratios, and a $6.3 million bad debt recovery in the runoff Lenders
Indemnity product line due to the commutation of a reinsurance agreement in the
first quarter of 2009, which was offset by an increase in benefits and
settlement expenses.
Sales
Total segment sales decreased $85.8 million, or 37.3%,
for the six months ended June 30, 2009, compared to the six months ended June 30,
2008. The decreases in credit insurance and service contract sales were
primarily due to declines in auto and marine sales. The decline in the other
products line was primarily the result of lower GAP sales, also due to the
overall decline in auto sales
.
Reinsurance
The majority of the Asset Protection segments
reinsurance activity relates to the cession of single premium credit life and
credit accident and health insurance, credit property, vehicle service
contracts and guaranteed asset protection insurance to producer affiliated
reinsurance companies (PARCs). These arrangements are coinsurance contracts
ceding the business on a first dollar quota share basis at levels ranging from
50% to 100% to limit our exposure and allow the PARCs to share in the
underwriting income of the product. Reinsurance contracts do not relieve us
from our obligations to our policyholders.
63
Table of Contents
Reinsurance
impacted the Asset
Protection segment line items as shown in the following table:
Asset Protection Segment
Line Item Impact of Reinsurance
|
|
For The
|
|
For The
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
(Dollars In Thousands)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
Reinsurance ceded
|
|
$
|
(37,698
|
)
|
$
|
(42,954
|
)
|
$
|
(79,183
|
)
|
$
|
(90,397
|
)
|
BENEFITS
AND EXPENSES
|
|
|
|
|
|
|
|
|
|
Benefit and settlement
expenses
|
|
(21,689
|
)
|
(22,580
|
)
|
(43,067
|
)
|
(43,325
|
)
|
Amortization of deferred
policy acquisition costs
|
|
(4,887
|
)
|
(6,393
|
)
|
(10,381
|
)
|
(16,245
|
)
|
Other operating expenses
|
|
(680
|
)
|
(1,572
|
)
|
(9,164
|
)
|
(3,328
|
)
|
Total benefits and expenses
|
|
(27,256
|
)
|
(30,545
|
)
|
(62,612
|
)
|
(62,898
|
)
|
|
|
|
|
|
|
|
|
|
|
NET IMPACT
OF REINSURANCE
|
|
$
|
(10,442
|
)
|
$
|
(12,409
|
)
|
$
|
(16,571
|
)
|
$
|
(27,499
|
)
|
For The Three Months Ended June 30, 2009 compared to The Three
Months Ended June 30, 2008
Reinsurance premiums ceded decreased $5.3 million, or
12.2%, for the three months ended June 30, 2009, compared to the three
months ended June 30, 2008. The decrease was primarily due to a decline in
credit insurance premiums due to lower auto sales and the discontinuation of
marketing credit insurance products through financial institutions in 2005, a
majority of which was ceded to PARCs. Ceded unearned premium reserves and
claim reserves with PARCs are generally secured by trust accounts, letters of
credit or on a funds withheld basis.
Benefits and settlement expenses ceded decreased $0.9
million, or 3.9%, for the three months ended June 30, 2009, compared to
the three months ended June 30, 2008. The decrease was primarily due to
lower losses in the credit line, partially offset by increases in losses ceded
in the service contract line and the Lenders Indemnity program in runoff.
Amortization of DAC ceded decreased $1.5 million for
the three months ended June 30, 2009, compared to the three months ended June 30,
2008, primarily as the result of the decreases in the credit insurance
products. Other operating expenses ceded
decreased $0.9 million for the three months ended June 30, 2009, compared
to the three months ended June 30, 2008. The fluctuation was primarily
attributable to the decline in the dealer credit insurance line.
Net investment income has no direct impact on
reinsurance cost. However, it should be noted that by ceding business to the
assuming companies, we forgo investment income on the reserves ceded to the
assuming companies. Conversely, the assuming companies will receive investment
income on the reserves assumed which will increase the assuming companies
profitability on business. The net investment income impact to us and the
assuming companies has not been quantified as it is not reflected in our
consolidated financial statements.
For The Six Months Ended June 30, 2009 compared to The Six Months
Ended June 30, 2008
Reinsurance premiums ceded decreased $11.2 million, or
12.4%, for the six months ended June 30, 2009, compared to the six months
ended June 30, 2008. The decrease was primarily due to the discontinuation
of marketing credit insurance products through financial institutions in 2005,
a majority of which was ceded to PARCs, and the decline in dealer credit
insurance, partially offset by increases in ceded premiums in the service
contract and GAP lines.
Benefits and settlement expenses ceded decreased $0.3
million, or 0.6%, for the six months ended June 30, 2009, compared to the
six months ended June 30, 2008. The decrease was primarily due to
decreases in the credit line, offset by increases in losses ceded in the
service contract line and Lenders indemnity program in runoff.
64
Table of Contents
Amortization of DAC ceded decreased $5.9 million for
the six months ended June 30, 2009, compared to the six months ended June 30,
2008, primarily as the result of the decreases in the credit insurance
products. Other operating expenses ceded
increased $5.8 million for the six months ended June 30, 2009, compared to
the six months ended June 30, 2008. The fluctuation was primarily
attributable to the commutation of the reinsurance agreement related to the
Lenders Indemnity program, which is in runoff.
65
Table of
Contents
Corporate and Other
Segment
results of operations
Segment results were as
follows:
|
|
For The
|
|
|
|
For The
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
|
|
(Dollars
In Thousands)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
premiums and policy fees
|
|
$
|
6,664
|
|
$
|
7,991
|
|
(16.6
|
)%
|
$
|
13,562
|
|
$
|
16,594
|
|
(18.3
|
)%
|
Reinsurance
ceded
|
|
(1
|
)
|
(2
|
)
|
(50.0
|
)
|
(2
|
)
|
(3
|
)
|
(33.3
|
)
|
Net
premiums and policy fees
|
|
6,663
|
|
7,989
|
|
(16.6
|
)
|
13,560
|
|
16,591
|
|
(18.3
|
)
|
Net
investment income
|
|
46,251
|
|
44,908
|
|
3.0
|
|
75,778
|
|
66,652
|
|
13.7
|
|
Realized
gains (losses) - derivatives
|
|
1,163
|
|
1,786
|
|
|
|
3,401
|
|
2,270
|
|
|
|
Other
income
|
|
72
|
|
(508
|
)
|
n/m
|
|
123
|
|
396
|
|
(68.9
|
)
|
Total
operating revenues
|
|
54,149
|
|
54,175
|
|
(0.0
|
)
|
92,862
|
|
85,909
|
|
8.1
|
|
Realized
gains (losses) - investments
|
|
(31,322
|
)
|
(64,652
|
)
|
|
|
(105,235
|
)
|
(61,612
|
)
|
|
|
Realized
gains (losses) - derivatives
|
|
33,669
|
|
18,298
|
|
|
|
46,385
|
|
(6,413
|
)
|
|
|
Total
revenues
|
|
56,496
|
|
7,821
|
|
n/m
|
|
34,012
|
|
17,884
|
|
n/m
|
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits
and settlement expenses
|
|
5,946
|
|
8,693
|
|
(31.6
|
)
|
13,661
|
|
19,060
|
|
(28.3
|
)
|
Amortization
of deferred policy
acquisition
costs
|
|
469
|
|
564
|
|
(16.8
|
)
|
953
|
|
1,115
|
|
(14.5
|
)
|
Other
operating expenses
|
|
38,086
|
|
47,011
|
|
(19.0
|
)
|
77,847
|
|
97,800
|
|
(20.4
|
)
|
Total
benefits and expenses
|
|
44,501
|
|
56,268
|
|
(20.9
|
)
|
92,461
|
|
117,975
|
|
(21.6
|
)
|
INCOME (LOSS) BEFORE INCOME TAX
|
|
11,995
|
|
(48,447
|
)
|
n/m
|
|
(58,449
|
)
|
(100,091
|
)
|
(41.6
|
)
|
Less:
realized gains (losses) - investments
|
|
(31,322
|
)
|
(64,652
|
)
|
|
|
(105,235
|
)
|
(61,612
|
)
|
|
|
Less:
realized gains (losses) - derivatives
|
|
33,669
|
|
18,298
|
|
|
|
46,385
|
|
(6,413
|
)
|
|
|
OPERATING INCOME (LOSS)
|
|
$
|
9,648
|
|
$
|
(2,093
|
)
|
n/m
|
|
$
|
401
|
|
$
|
(32,066
|
)
|
n/m
|
|
For
The Three Months Ended June 30, 2009 compared to The Three Months Ended June 30,
2008
Segment
operating income (loss)
Corporate and Other
segment operating income was $9.6 million, an improvement of $11.7 million
for the three months ended June 30, 2009, compared to the three months
ended June 30, 2008, primarily due to positive mark-to-market adjustments
of $22.6 million on a $328.2 million portfolio of securities designated for
trading, representing an $18.3 million more favorable impact than for the three
months ended June 30, 2008. This
increase was partially offset by reduced yields on a large balance of cash and
short-term investments.
Operating revenues
Operating revenues for
the Corporate and Other segment are primarily comprised of net investment income
on capital and net premiums and policy fees related to several non-strategic
lines of business. Net investment income for the segment increased $1.3
million, or 3.0%, for the three months ended June 30, 2009, compared to
the three months ended June 30, 2008, and net premiums and policy fees
declined $1.3 million, or 16.6%.
The increase in net investment income was primarily the result of
mark-to-market changes on the trading portfolio, partially offset by a reduction
in yields on a large balance of cash and short-term investments.
Benefits and expenses
Benefits and expenses
decreased $11.8 million, or 20.9%, for the three months ended June 30,
2009, compared to the three months ended June 30, 2008, primarily due to a
reduction of interest expense on non-recourse funding obligations, a reduction
in operating expenses and a reduction in policy benefits on non-core lines of
business.
66
Table of Contents
For
The Six Months Ended June 30, 2009 compared to The Six Months Ended June 30,
2008
Segment
operating income (loss)
Corporate and Other
segment operating income increased $32.5 million for the six months ended June 30,
2009, compared to the six months ended June 30, 2008, primarily due to
positive mark-to-market adjustments of $29.4 million on the trading portfolio,
representing a $45.4 million more favorable impact than for the six months
ended June 30, 2008. This increase
was partially offset by reduced yields on a large balance of cash and
short-term investments.
Operating revenues
Net investment income for
the segment increased $9.1 million, or 13.7%, for the six months ended June 30,
2009, compared to the six months ended June 30, 2008, and net premiums and
policy fees declined $3.0 million, or 18.3%. The increase in net investment income was
primarily the result of mark-to-market changes on the trading portfolio,
partially offset by a reduction in yields on a large balance of cash and
short-term investments.
Benefits and expenses
Benefits and expenses
decreased $25.5 million, or 21.6%, for the six months ended June 30,
2009, compared to the six months ended June 30, 2008, primarily due to a
reduction of interest expense on non-recourse funding obligations, a reduction
of operating expenses and a reduction in policy benefits on non-core lines of
business.
67
Table of Contents
CONSOLIDATED INVESTMENTS
Portfolio
Description
As
of June 30, 2009, our investment portfolio was approximately $27.7
billion.
The types of
assets in which we may invest are influenced by various state laws which
prescribe qualified investment assets. Within the parameters of these laws, we
invest in assets giving consideration to such factors as liquidity and capital
needs, investment quality, investment return, matching of assets and
liabilities, and the overall composition of the investment portfolio by asset
type and credit exposure.
The
following table includes the reported values of our invested assets:
|
|
As of
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Dollars
In Thousands)
|
|
Publicly-issued
bonds (amortized cost: 2009 - $18,065,579; 2008 - $18,880,847)
|
|
$
|
16,735,332
|
|
60.5
|
%
|
$
|
16,554,695
|
|
62.3
|
%
|
Privately
issued bonds (amortized cost: 2009 - $4,288,457; 2008 - $4,210,825)
|
|
3,826,508
|
|
13.8
|
|
3,544,285
|
|
13.3
|
|
Redeemable
preferred stock (amortized cost: 2009 - $36; 2008 - $36)
|
|
|
|
0.0
|
|
|
|
0.0
|
|
Fixed
maturities
|
|
20,561,840
|
|
74.3
|
|
20,098,980
|
|
75.6
|
|
Equity
securities (cost: 2009 - $293,996; 2008 - $358,159)
|
|
269,108
|
|
1.0
|
|
302,132
|
|
1.1
|
|
Mortgage
loans
|
|
3,846,417
|
|
13.9
|
|
3,848,288
|
|
14.5
|
|
Investment
real estate
|
|
17,427
|
|
0.1
|
|
14,810
|
|
0.1
|
|
Policy
loans
|
|
792,853
|
|
2.9
|
|
810,933
|
|
3.1
|
|
Other
long-term investments
|
|
346,037
|
|
1.2
|
|
432,137
|
|
1.6
|
|
Short-term
investments
|
|
1,841,149
|
|
6.6
|
|
1,059,506
|
|
4.0
|
|
Total
investments
|
|
$
|
27,674,831
|
|
100.0
|
%
|
$
|
26,566,786
|
|
100.0
|
%
|
Included
in the preceding table are $3.1 billion and $3.2 billion of fixed
maturities and $243.3 million and $80.4 million of short-term investments
classified as trading securities as of June 30, 2009 and December 31,
2008, respectively. The trading portfolio includes invested assets of $2.7
billion and $2.9 billion as of June 30, 2009 and December 31, 2008,
respectively, held pursuant to Modco arrangements under which the economic
risks and benefits of the investments are passed to third-party reinsurers.
Fixed
Maturity Investments
As of June 30,
2009, our fixed maturity investment holdings were approximately $20.6 billion.
We do not have material exposure to financial guarantee insurance companies
with respect to our investment portfolio. As of June 30, 2009, based upon
amortized cost, $146.2 million of our securities, were guaranteed either
directly or indirectly by third parties out of a total of $20.6 billion fixed
maturity securities held by us (0.7% of total fixed maturity securities). The
approximate percentage distribution of our fixed maturity investments by
quality rating is as follows:
|
|
As of
|
|
|
|
June 30,
|
|
December 31,
|
|
Rating
|
|
2009
|
|
2008
|
|
AAA
|
|
24.2
|
%
|
35.2
|
%
|
AA
|
|
6.7
|
|
6.6
|
|
A
|
|
20.2
|
|
19.8
|
|
BBB
|
|
36.0
|
|
33.0
|
|
Below
investment grade
|
|
12.9
|
|
5.4
|
|
|
|
100.0
|
%
|
100.0
|
%
|
Declines
in fair value, net of related DAC and VOBA, are charged or credited directly to
shareowners equity. Declines in fair value that are other-than-temporary are
recorded as realized losses in the Consolidated Condensed Statements of Income,
net of the non-credit component of the loss, which is recorded as an adjustment
to other comprehensive income. The increase in BBB and below investment grade
assets, as shown in the preceding table, is primarily a result of ratings
downgrades related to our corporate credit and residential mortgage-backed
securities holdings.
68
Table of Contents
The distribution of our fixed maturity investments
by type is as follows:
|
|
As of
|
|
|
|
June 30,
|
|
December 31,
|
|
Type
|
|
2009
|
|
2008
|
|
|
|
(Dollars
In Millions)
|
|
Corporate
Bonds
|
|
$
|
13,374.3
|
|
$
|
12,306.3
|
|
Residential
Mortgage-Backed Securities
|
|
4,340.1
|
|
4,960.2
|
|
Commercial
Mortgage-Backed Securities
|
|
1,109.3
|
|
1,184.9
|
|
Asset-Backed
Securities
|
|
1,151.8
|
|
1,132.7
|
|
US
Govt Bonds
|
|
429.7
|
|
484.9
|
|
States,
Municipals and Political Subdivisions
|
|
156.6
|
|
30.0
|
|
Total
Fixed Income Portfolio
|
|
$
|
20,561.8
|
|
$
|
20,099.0
|
|
Our
portfolio consists primarily of fixed maturity securities (bonds and redeemable
preferred stocks) and commercial mortgage loans. Within our fixed maturity
securities, we maintain portfolios classified as available-for-sale and trading.
We purchase our investments with the intent to hold to maturity by purchasing
investments that match future cash flow needs. However, we may sell any of our
investments to maintain proper matching of assets and liabilities. Accordingly,
we classified $17.5 billion or 85.1% of our fixed maturities as available-for-sale
as of June 30, 2009. These securities are carried at fair value on our
Consolidated Condensed Balance Sheets.
Our trading portfolio
accounts for $3.1 billion, or 14.9%, of our fixed maturities as of June 30,
2009. Of this balance, fixed maturities with a market value of $2.7 billion and
short-term investments with a market value of $243.3 million were added as
part of the Chase Insurance Group acquisition.
Investment results for the Chase Insurance Group 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 on the income statement as they
occur. Partially offsetting these amounts
are corresponding changes in the fair value of the embedded derivative
liability associated with the underlying reinsurance arrangement. The total
Modco trading portfolio fixed maturities by rating is as follows:
|
|
As of
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Dollars
In Thousands)
|
|
AAA
|
|
$
|
878,391
|
|
$
|
1,357,132
|
|
AA
|
|
164,648
|
|
147,305
|
|
A
|
|
600,479
|
|
591,482
|
|
BBB
|
|
822,752
|
|
743,529
|
|
Below
investment grade
|
|
280,485
|
|
55,607
|
|
Total
Modco trading fixed maturities
|
|
$
|
2,746,755
|
|
$
|
2,895,055
|
|
A portion of our bond
portfolio is invested in residential mortgage-backed securities, commercial
mortgage-backed securities, and asset-backed securities. These holdings as of June 30, 2009, were
approximately $6.6 billion. Mortgage-backed securities are constructed from
pools of mortgages and may have cash flow volatility as a result of changes in
the rate at which prepayments of principal occur with respect to the underlying
loans. Excluding limitations on access
to lending and other extraordinary economic conditions, prepayments of
principal on the underlying loans can be expected to accelerate with decreases
in market interest rates and diminish with increases in interest rates. In addition, we have entered into derivative
contracts at times to partially offset the volatility in the market value of
these securities.
69
Table of Contents
Residential mortgage-backed
securities -
The
tables below include a breakdown of our residential mortgage-backed securities
portfolio by type and rating as of June 30, 2009. As of June 30, 2009, these holdings were
approximately $4.3 billion. Planned amortization class securities (PACs)
pay down according to a schedule.
Sequentials receive payments in order until each class is paid off. Pass through securities receive principal as
principal of the underlying mortgages is received.
|
|
Percentage of
|
|
|
|
Residential
|
|
|
|
Mortgage-Backed
|
|
Type
|
|
Securities
|
|
Sequential
|
|
67.4
|
%
|
PAC
|
|
15.1
|
|
Pass
Through
|
|
4.0
|
|
Other
|
|
13.5
|
|
|
|
100.0
|
%
|
|
|
Percentage of
|
|
|
|
Residential
|
|
|
|
Mortgage-Backed
|
|
Rating
|
|
Securities
|
|
AAA
|
|
45.8
|
%
|
AA
|
|
4.1
|
|
A
|
|
7.0
|
|
BBB
|
|
10.8
|
|
Below
investment grade
|
|
32.3
|
|
|
|
100.0
|
%
|
As of June 30, 2009,
we held $465.9 million, or 1.7% of invested assets, of securities supported by
collateral classified as Alt-A. As of December 31,
2008, we held securities with a market value of $543.5 million of securities
supported by collateral classified as Alt-A.
The following table includes the percentage
of our collateral classified as Alt-A grouped by rating category as of June 30,
2009
:
|
|
Percentage of
|
|
|
|
Alt-A
|
|
Rating
|
|
Securities
|
|
AAA
|
|
5.2
|
%
|
A
|
|
2.7
|
|
BBB
|
|
7.3
|
|
Below
investment grade
|
|
84.8
|
|
|
|
100.0
|
%
|
70
Table of Contents
The following tables categorize the estimated fair
value and unrealized gain/(loss) of our mortgage-backed securities
collateralized by Alt-A mortgage loans by rating as of June 30, 2009:
Alt-A Collateralized Holdings
Estimated
Fair Value of Security by Year of Security Origination
|
|
2005 and
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
Prior
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
Total
|
|
|
|
(Dollars In Millions)
|
|
AAA
|
|
$
|
24.0
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
24.0
|
|
A
|
|
12.7
|
|
|
|
|
|
|
|
|
|
12.7
|
|
BBB
|
|
34.0
|
|
|
|
|
|
|
|
|
|
34.0
|
|
Below
investment grade
|
|
5.5
|
|
236.9
|
|
152.8
|
|
|
|
|
|
395.2
|
|
Total
mortgage-backed securities collateralized by Alt-A mortgage loans
|
|
$
|
76.2
|
|
$
|
236.9
|
|
$
|
152.8
|
|
$
|
|
|
$
|
|
|
$
|
465.9
|
|
Estimated Unrealized Gain (Loss) of Security by Year of
Security Origination
|
|
2005
and
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
Prior
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
Total
|
|
|
|
(Dollars
In Millions)
|
|
AAA
|
|
$
|
(4.5
|
)
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
(4.5
|
)
|
A
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
(2.1
|
)
|
BBB
|
|
(4.9
|
)
|
|
|
|
|
|
|
|
|
(4.9
|
)
|
Below
investment grade
|
|
(2.7
|
)
|
(82.7
|
)
|
(53.9
|
)
|
|
|
|
|
(139.3
|
)
|
Total
mortgage-backed securities collateralized by Alt-A mortgage loans
|
|
$
|
(14.2
|
)
|
$
|
(82.7
|
)
|
$
|
(53.9
|
)
|
$
|
|
|
$
|
|
|
$
|
(150.8
|
)
|
71
Table of Contents
As of June 30, 2009,
we had residential mortgage-backed securities with a total fair market value of
$32.2 million, or 0.1% of total invested assets, that were supported by
collateral classified as sub-prime. As of December 31, 2008, we held
securities with a fair market value of $46.6 million of securities supported by
collateral classified as sub-prime. The following tables categorize the
estimated fair value and unrealized gain (loss) of our mortgage-backed
securities collateralized by sub-prime mortgage loans by rating as of June 30,
2009:
Sub-prime Collateralized Holdings
Estimated Fair
Value of Security by Year of Security Origination
|
|
2005
and
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
Prior
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
Total
|
|
|
|
(Dollars In Millions)
|
|
AAA
|
|
$
|
3.1
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
3.1
|
|
AA
|
|
0.8
|
|
1.4
|
|
|
|
|
|
|
|
2.2
|
|
BBB
|
|
0.1
|
|
4.4
|
|
|
|
|
|
|
|
4.5
|
|
Below
investment grade
|
|
1.2
|
|
11.4
|
|
9.8
|
|
|
|
|
|
22.4
|
|
Total
mortgage-backed securities collateralized by sub-prime mortgage loans
|
|
$
|
5.2
|
|
$
|
17.2
|
|
$
|
9.8
|
|
$
|
|
|
$
|
|
|
$
|
32.2
|
|
Estimated Unrealized Gain (Loss) of Security by Year of
Security Origination
|
|
2005
and
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
Prior
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
Total
|
|
|
|
(Dollars
In Millions)
|
|
AAA
|
|
$
|
(1.1
|
)
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
(1.1
|
)
|
AA
|
|
(0.7
|
)
|
(0.3
|
)
|
|
|
|
|
|
|
(1.0
|
)
|
BBB
|
|
(0.1
|
)
|
(2.5
|
)
|
|
|
|
|
|
|
(2.6
|
)
|
Below
investment grade
|
|
(1.5
|
)
|
(8.7
|
)
|
(24.8
|
)
|
|
|
|
|
(35.0
|
)
|
Total
mortgage-backed securities collateralized by sub-prime mortgage loans
|
|
$
|
(3.4
|
)
|
$
|
(11.5
|
)
|
$
|
(24.8
|
)
|
$
|
|
|
$
|
|
|
$
|
(39.7
|
)
|
72
Table of Contents
As of June 30, 2009,
we had residential mortgage-backed securities collateralized by prime mortgage
loans (including agency mortgages) with a total fair market value of $3.8
billion, or 13.9% of total invested assets. As of December 31, 2008, we
held securities with a fair market value of $4.4 billion of residential
mortgage-backed securities collateralized by prime mortgage loans (including
agency mortgages). The following tables categorize the estimated fair value and
unrealized gain (loss) of our mortgage-backed securities collateralized by
prime mortgage loans (including agency mortgages) by rating as of June 30,
2009:
Prime Collateralized Holdings
Estimated Fair Value of Security by Year of Security
Origination
|
|
2005 and
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
Prior
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
Total
|
|
|
|
(Dollars In Millions)
|
|
AAA
|
|
$
|
1,680.4
|
|
$
|
256.2
|
|
$
|
22.6
|
|
$
|
3.6
|
|
$
|
|
|
$
|
1,962.8
|
|
AA
|
|
105.4
|
|
40.5
|
|
30.9
|
|
|
|
|
|
176.8
|
|
A
|
|
194.6
|
|
67.1
|
|
27.9
|
|
|
|
|
|
289.6
|
|
BBB
|
|
288.2
|
|
103.7
|
|
37.3
|
|
|
|
|
|
429.2
|
|
Below investment grade
|
|
158.3
|
|
566.4
|
|
258.8
|
|
|
|
|
|
983.5
|
|
Total mortgage-backed
securities collateralized by prime mortgage loans
|
|
$
|
2,426.9
|
|
$
|
1,033.9
|
|
$
|
377.5
|
|
$
|
3.6
|
|
$
|
|
|
$
|
3,841.9
|
|
Estimated Unrealized Gain (Loss) of Security by Year of
Security Origination
|
|
2005 and
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
Prior
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
Total
|
|
|
|
(Dollars In Millions)
|
|
AAA
|
|
$
|
(5.6
|
)
|
$
|
(7.9
|
)
|
$
|
(0.7
|
)
|
$
|
0.1
|
|
$
|
|
|
$
|
(14.1
|
)
|
AA
|
|
(46.6
|
)
|
(4.1
|
)
|
(1.5
|
)
|
|
|
|
|
(52.2
|
)
|
A
|
|
(20.7
|
)
|
(3.3
|
)
|
(5.4
|
)
|
|
|
|
|
(29.4
|
)
|
BBB
|
|
(67.3
|
)
|
(18.6
|
)
|
(7.0
|
)
|
|
|
|
|
(92.9
|
)
|
Below investment grade
|
|
(20.0
|
)
|
(186.9
|
)
|
(80.7
|
)
|
|
|
|
|
(287.6
|
)
|
Total mortgage-backed
securities collateralized by prime mortgage loans
|
|
$
|
(160.2
|
)
|
$
|
(220.8
|
)
|
$
|
(95.3
|
)
|
$
|
0.1
|
|
$
|
|
|
$
|
(476.2
|
)
|
Commercial
mortgage-backed securities
- Our commercial mortgage-backed security (CMBS)
portfolio consists of commercial mortgage-backed securities issued in
securitization transactions. Portions of
the CMBS are sponsored by us, in which we securitized portions of our mortgage
loan portfolio. As of June 30, 2009, the CMBS holdings were approximately
$1.1 billion. Of this amount, $817.6
million related to retained beneficial interests of commercial mortgage loan
securitizations we completed. The following table includes the percentages of
our CMBS holdings grouped by rating category as of June 30, 2009:
|
|
Percentage
of
|
|
|
|
Commercial
|
|
|
|
Mortgage-Backed
|
|
Rating
|
|
Securities
|
|
AAA
|
|
85.8
|
%
|
AA
|
|
6.2
|
|
A
|
|
4.7
|
|
BBB
|
|
0.8
|
|
Below investment grade
|
|
2.5
|
|
|
|
100.0
|
%
|
73
Table of Contents
The following tables include external commercial
mortgage-backed securities as of June 30, 2009:
External Commercial Mortgage-Backed Securities
Estimated Fair Value of Security by Year of Security
Origination
|
|
2005 and
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
Prior
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
Total
|
|
|
|
(Dollars In Millions)
|
|
AAA
|
|
$
|
233.5
|
|
$
|
12.9
|
|
$
|
|
|
$
|
39.9
|
|
$
|
|
|
$
|
286.3
|
|
BBB
|
|
5.4
|
|
|
|
|
|
|
|
|
|
5.4
|
|
Total external commercial mortgage-backed
securities
|
|
$
|
238.9
|
|
$
|
12.9
|
|
$
|
|
|
$
|
39.9
|
|
$
|
|
|
$
|
291.7
|
|
Estimated Unrealized Gain (Loss) of Security by Year of
Security Origination
|
|
2005 and
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
Prior
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
Total
|
|
|
|
(Dollars In Millions)
|
|
AAA
|
|
$
|
1.3
|
|
$
|
(0.8
|
)
|
$
|
|
|
$
|
|
|
$
|
(4.3
|
)
|
$
|
(3.8
|
)
|
BBB
|
|
(1.6
|
)
|
|
|
|
|
|
|
|
|
(1.6
|
)
|
Total external commercial mortgage-backed
securities
|
|
$
|
(0.3
|
)
|
$
|
(0.8
|
)
|
$
|
|
|
$
|
|
|
$
|
(4.3
|
)
|
$
|
(5.4
|
)
|
Asset-backed
securities
Asset-backed
securities (ABS) pay down based on cash flow received from the underlying
pool of assets, such as receivables on auto loans, student loans, credit cards,
etc. As of June 30, 2009, these holdings were approximately $1.2 billion.
The following table includes the percentages of our ABS holdings grouped by
rating category as of June 30, 2009:
|
|
Percentage
of
|
|
|
|
Asset-Backed
|
|
Rating
|
|
Securities
|
|
AAA
|
|
95.6
|
%
|
AA
|
|
1.4
|
|
A
|
|
0.2
|
|
BBB
|
|
2.3
|
|
Below investment grade
|
|
0.5
|
|
|
|
100.0
|
%
|
74
Table of Contents
The
following tables include our asset-backed securities as of June 30, 2009:
Asset-Backed Securities
Estimated Fair Value of Security by Year of Security
Origination
|
|
2005 and
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
Prior
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
Total
|
|
|
|
(Dollars In Millions)
|
|
AAA
|
|
$
|
683.4
|
|
$
|
40.8
|
|
$
|
326.9
|
|
$
|
49.9
|
|
$
|
|
|
$
|
1,101.0
|
|
AA
|
|
16.6
|
|
|
|
|
|
|
|
|
|
16.6
|
|
A
|
|
1.8
|
|
|
|
|
|
|
|
|
|
1.8
|
|
BBB
|
|
2.9
|
|
5.1
|
|
18.3
|
|
|
|
|
|
26.3
|
|
Below investment grade
|
|
|
|
1.0
|
|
5.1
|
|
|
|
|
|
6.1
|
|
Total asset-backed
securities
|
|
$
|
704.7
|
|
$
|
46.9
|
|
$
|
350.3
|
|
$
|
49.9
|
|
$
|
|
|
$
|
1,151.8
|
|
Estimated Unrealized Gain (Loss) of Security by Year of
Security Origination
|
|
2005 and
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
Prior
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
Total
|
|
|
|
(Dollars In Millions)
|
|
AAA
|
|
$
|
(17.9
|
)
|
$
|
0.8
|
|
$
|
(17.4
|
)
|
$
|
(0.1
|
)
|
$
|
|
|
$
|
(34.6
|
)
|
AA
|
|
0.5
|
|
|
|
|
|
|
|
|
|
0.5
|
|
BBB
|
|
(0.3
|
)
|
(1.9
|
)
|
(0.2
|
)
|
|
|
|
|
(2.4
|
)
|
Below investment grade
|
|
|
|
(0.3
|
)
|
(1.9
|
)
|
|
|
|
|
(2.2
|
)
|
Total asset-backed
securities
|
|
$
|
(17.7
|
)
|
$
|
(1.4
|
)
|
$
|
(19.5
|
)
|
$
|
(0.1
|
)
|
$
|
|
|
$
|
(38.7
|
)
|
We obtained ratings of
our fixed maturities from Moodys Investors Service, Inc. (Moodys),
Standard & Poors Corporation (S&P) and Fitch
Ratings (Fitch). If a bond is not rated by Moodys, S&P, or Fitch,
we use ratings from the NAIC, or we rate the bond based upon a comparison of
the unrated issue to rated issues of the same issuer or rated issues of other
issuers with similar risk characteristics. As of June 30, 2009, over 99.0%
of our bonds were rated by Moodys, S&P, Fitch, and/or the NAIC.
75
Table of Contents
The industry segment composition of our fixed maturity
securities is presented in the following table:
|
|
As of
|
|
% Market
|
|
As of
|
|
% Market
|
|
|
|
June 30, 2009
|
|
Value
|
|
December 31, 2008
|
|
Value
|
|
|
|
(Dollars In Thousands)
|
|
Non-Agency Mortgages
|
|
$
|
3,810,368
|
|
18.5
|
%
|
$
|
4,313,994
|
|
21.5
|
%
|
Banking
|
|
2,165,399
|
|
10.5
|
|
2,175,197
|
|
10.8
|
|
Other Finance
|
|
2,185,698
|
|
10.6
|
|
2,297,420
|
|
11.4
|
|
Electric
|
|
2,191,035
|
|
10.7
|
|
2,060,367
|
|
10.3
|
|
Agency Mortgages
|
|
1,124,615
|
|
5.5
|
|
1,120,446
|
|
5.6
|
|
Natural Gas
|
|
1,460,524
|
|
7.1
|
|
1,318,538
|
|
6.6
|
|
Insurance
|
|
995,935
|
|
4.8
|
|
862,639
|
|
4.3
|
|
Energy
|
|
1,222,781
|
|
6.0
|
|
1,033,064
|
|
5.1
|
|
Communications
|
|
941,800
|
|
4.6
|
|
878,837
|
|
4.4
|
|
Basic Industrial
|
|
727,944
|
|
3.5
|
|
635,213
|
|
3.2
|
|
Consumer Noncyclical
|
|
781,647
|
|
3.8
|
|
695,816
|
|
3.5
|
|
Consumer Cyclical
|
|
481,456
|
|
2.3
|
|
445,229
|
|
2.2
|
|
Finance Companies
|
|
467,707
|
|
2.3
|
|
438,767
|
|
2.2
|
|
Capital Goods
|
|
388,161
|
|
1.9
|
|
339,279
|
|
1.7
|
|
Transportation
|
|
424,719
|
|
2.1
|
|
417,876
|
|
2.1
|
|
U.S. Govt Agencies
|
|
188,880
|
|
0.9
|
|
234,104
|
|
1.2
|
|
Other Industrial
|
|
152,478
|
|
0.7
|
|
189,256
|
|
0.9
|
|
U.S. Government
|
|
156,472
|
|
0.8
|
|
265,126
|
|
1.3
|
|
Brokerage
|
|
251,584
|
|
1.2
|
|
118,758
|
|
0.6
|
|
Technology
|
|
168,521
|
|
0.8
|
|
113,471
|
|
0.6
|
|
Real Estate
|
|
30,824
|
|
0.2
|
|
34,673
|
|
0.2
|
|
Canadian Governments
|
|
74,962
|
|
0.4
|
|
46,723
|
|
0.2
|
|
Other Utility
|
|
21,047
|
|
0.1
|
|
20,637
|
|
0.1
|
|
Other Government Agencies
|
|
5,090
|
|
0.0
|
|
22,707
|
|
0.0
|
|
Municipal Agencies
|
|
139,345
|
|
0.7
|
|
17,871
|
|
0.0
|
|
Foreign Governments
|
|
2,848
|
|
0.0
|
|
2,972
|
|
0.0
|
|
Total
|
|
$
|
20,561,840
|
|
100.0
|
%
|
$
|
20,098,980
|
|
100.0
|
%
|
Our investments in debt and equity securities are reported
at market value, and investments in mortgage loans are reported at amortized
cost. As of June 30, 2009, our
fixed maturity investments (bonds and redeemable preferred stocks) had a market
value of $20.6 billion, which was 8.4% below amortized cost of
$22.4 billion. These assets are invested for terms approximately
corresponding to anticipated future benefit payments. Thus, market fluctuations
are not expected to adversely affect liquidity.
We had $3.8 billion in mortgage loans as of June 30,
2009. While our mortgage loans do not have quoted market values, as of June 30,
2009, we estimated the market value of our mortgage loans to be $4.1 billion
(using discounted cash flows from the next call date), which was 7.9% greater
than the amortized cost. Most of our 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.
Market values for private, non-traded securities are
determined as follows: 1) we obtain estimates from independent pricing
services and 2) we estimate market value based upon a comparison to quoted
issues of the same issuer or issues of other issuers with similar terms and
risk characteristics. We analyze the independent pricing services valuation
methodologies and related inputs, including an assessment of the observability
of market inputs. For retained beneficial interests in our sponsored commercial
mortgage loan securitizations as of June 30, 2009, we used an internally
developed model that includes discount rates based on our current mortgage loan
lending rate and expected cash flows based on a review of the commercial
mortgage loans underlying the securities.
Upon obtaining this information related to market value, management
makes a determination as to the appropriate valuation amount.
76
Table of Contents
Mortgage Loans
We invest a portion of
our investment portfolio in commercial mortgage loans. As of June 30, 2009, our mortgage loan
holdings were approximately $3.8 billion. We do not lend on what we consider to
be speculative properties and have specialized in making loans on either
credit-oriented commercial properties or credit-anchored strip shopping centers
and apartments. Our underwriting procedures relative to our commercial loan
portfolio are based on a conservative, disciplined approach. We concentrate on
a small number of commercial real estate asset types associated with the
necessities of life (retail, multi-family, professional office buildings, and
warehouses). We believe these asset types tend to weather economic downturns better
than other commercial asset classes in which we have chosen not to participate.
We believe this disciplined approach has helped to maintain a relatively low
delinquency and foreclosure rate throughout our history.
We record mortgage loans
net of an allowance for credit losses. This allowance is calculated through
analysis of specific loans that have indicators of potential impairment based
on current information and events. As of
June 30, 2009 and 2008, our allowance for mortgage loan credit losses was
$2.1 million and $0.5 million, respectively.
Our mortgage lending
criteria targets that the loan-to-value ratio on each mortgage be at or less
than 75% at the time of origination. We target projected rental payments from
credit anchors (i.e., excluding rental payments from smaller local
tenants) of 70% of the propertys projected operating expenses and debt
service. We also offer a commercial loan product under which we will permit a
loan-to-value ratio of up to 85% in exchange for a participating interest in
the cash flows from the underlying real estate. As of June 30, 2009,
approximately $770.6 million of our mortgage loans had this participation
feature. Exceptions to these loan-to-value measures may be made if we believe
the mortgage has an acceptable risk profile.
Many of our mortgage
loans have call or interest rate reset provisions between 3 and
10 years. However, if interest rates were to significantly increase, we
may be unable to call the loans or increase the interest rates on our existing
mortgage loans commensurate with the significantly increased market rates.
As of June 30, 2009,
delinquent mortgage loans and foreclosed properties were less than 0.1% of
invested assets. We do not expect these
investments to adversely affect our liquidity or ability to maintain proper
matching of assets and liabilities. As of June 30, 2009, $15.5 million, or
0.4%, of the mortgage loan portfolio was nonperforming. It is our policy to cease to carry accrued
interest on loans that are over 90 days delinquent. For loans less than 90 days delinquent,
interest is accrued unless it is determined that the accrued interest is not
collectible. If a loan becomes over 90 days delinquent, it is our general
policy to initiate foreclosure proceedings unless a workout arrangement to
bring the loan current is in place.
Between 1996 and 1999, we
securitized $1.4 billion of our mortgage loans. We sold the senior
tranches while retaining the subordinate tranches. We continue to service the
securitized mortgage loans. During 2007,
we securitized an additional $1.0 billion of our mortgage loans. We sold the
highest rated tranche for approximately $218.3 million, while retaining the
remaining tranches. We continue to service the securitized mortgage loans. As of June 30, 2009, we had investments
related to retained beneficial interests of mortgage loan securitizations of
$817.6 million.
Securities Lending
We participate 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. We require initial 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. As of June 30, 2009, securities with a market
value of $158.9 million were loaned under this program. As collateral for the loaned securities, we
receive short-term investments, which are recorded in short-term investments
with a corresponding liability recorded in other liabilities to account for
our obligation to return the collateral. As of June 30, 2009, the fair
market value of the collateral related to this program was $156.0 million and
we have an obligation to return $162.5 million of collateral to the securities
borrowers.
77
Table of Contents
Risk Management and Impairment Review
We monitor the overall credit quality of our portfolio
within established guidelines. The
following table includes our available-for-sale fixed maturities by credit
rating as of June 30, 2009:
|
|
|
|
Percent of
|
|
S&P or Equivalent Designation
|
|
Market Value
|
|
Market Value
|
|
|
|
(Dollars In Thousands)
|
|
|
|
AAA
|
|
$
|
4,041,580
|
|
23.1
|
%
|
AA
|
|
1,180,052
|
|
6.7
|
|
A
|
|
3,479,071
|
|
19.9
|
|
BBB
|
|
6,463,368
|
|
37.0
|
|
Investment grade
|
|
15,164,071
|
|
86.7
|
|
BB
|
|
1,011,178
|
|
5.8
|
|
B
|
|
713,238
|
|
4.1
|
|
CCC or lower
|
|
598,364
|
|
3.4
|
|
Below investment grade
|
|
2,322,780
|
|
13.3
|
|
Total
|
|
$
|
17,486,851
|
|
100.0
|
%
|
Not included in the table
above are $2.7 billion of investment grade and $337.3 million of below
investment grade fixed maturities classified as trading securities.
Limiting bond exposure to
any creditor group is another way we manage credit risk. The following table
includes securities held in our Modco portfolio and summarizes our ten largest
fixed maturity exposures to an individual creditor group as of June 30,
2009:
Creditor
|
|
Market Value
|
|
|
|
(Dollars In Millions)
|
|
Wells Fargo &
Company
|
|
$
|
219.2
|
|
Bank of America Corp
|
|
182.4
|
|
Verizon Communications
|
|
173.3
|
|
AT&T Corp
|
|
143.7
|
|
Toyota Motor Credit
|
|
135.3
|
|
JP Morgan Chase &
Co.
|
|
128.1
|
|
PNC Financial Services
|
|
126.9
|
|
Metlife Inc.
|
|
121.4
|
|
Prudential Financial Inc.
|
|
117.7
|
|
Berkshire Hathaway
|
|
111.7
|
|
|
|
|
|
|
Determining whether a
decline in the current fair value of invested assets is an other-than-temporary
decline in value is both objective and subjective, and can involve a variety of
assumptions and estimates, particularly for investments that are not actively
traded in established markets.
We review our positions on a monthly basis for
possible credit concerns and review our current exposure, credit enhancement,
and delinquency experience.
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, we engage in ongoing risk
management to safeguard against and limit any further risk to our investment
portfolio. Special attention is given to correlative risks within specific
industries, related parties, and business markets.
For certain securitized
financial assets with contractual cash flows, including ABS, Emerging Issues
Task Force (EITF) Issue No. 99-20, Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets (EITF
Issue No. 99-20) requires us to periodically update our best estimate of
cash flows over the life of the security.
If the fair value of a securitized financial asset is less than its cost
or amortized cost and there has been a decrease in the present value of the
estimated cash flows since the last revised estimate, considering both timing
and amount, an other-than-temporary impairment charge is recognized. Estimating
future cash flows is a quantitative and qualitative process that incorporates
information received from third party sources along with certain internal
assumptions and judgments regarding the future performance of the underlying
collateral. Projections of expected
future cash flows
78
Table of Contents
may change based upon new information regarding the performance of the
underlying collateral. In addition, we
consider our intent and ability to retain a temporarily depressed security
until recovery.
On October 10, 2008, the FASB issued FASB Staff
Position (FSP) FAS No. 157-3, Determining the Fair Value of a Financial
Asset When the Market for That Asset is Not Active, (FSP FAS No. 157-3),
to clarify the application of SFAS No. 157 in a market that is not active
and provides an example to illustrate key considerations in determining the
fair value of a financial asset when the market for that financial asset is not
active. It also reaffirms the notion of fair value as an exit price as of the
measurement date. FSP FAS No. 157-3 was effective upon issuance, including
prior periods for which the financial statements have not been issued. Based on
the guidance in FSP FAS No. 157-3, we utilized internal models that
incorporated assumptions of delinquency rates, prepayment assumptions,
liquidity, and other market based assumptions to determine the fair value of
retained beneficial interests of our sponsored commercial mortgage loan
securitizations and auction rate securities for which there was no active
market as of June 30, 2009.
In
April of 2009, the FASB issued FSP FAS No. 115-2 and FAS No. 124-2
to amend the other-than-temporary impairment guidance in U.S. GAAP for debt
securities to make the guidance more operational and to improve the
presentation and disclosure of other-than-temporary impairments of debt and
equity securities in the financial statements.
This FSP addresses the timing of impairment recognition and provides
greater clarity to investors about the credit and noncredit components of
impaired debt securities that are not expected to be sold. Impairments will
continue to be measured at fair value with credit losses recognized in earnings
and non-credit losses recognized in other comprehensive income. This FSP also
requires increased and timelier disclosures regarding measurement techniques,
credit losses, and an aging of securities with unrealized losses. This FSP is
effective for interim and annual reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009. We elected to early adopt the FSP
and recorded total other-than-temporary impairments during the three months
ended March 31, 2009, of approximately $117.3 million with $27.5 million
of this amount recorded in other comprehensive income. During the three and six months ended June 30,
2009, we recorded total other-than-temporary impairments of approximately $48.9
million and $166.2 million, respectively, with $7.9 million and $35.4 million
of these amounts recorded in other comprehensive income, respectively.
Securities not subject to EITF Issue No. 99-20
that are in an unrealized loss position are reviewed at least quarterly to
determine if an other-than-temporary impairment is present based on certain
quantitative and qualitative factors. We consider 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 to hold the investment until recovery, 5) the time period during
which the decline has occurred, 6) an economic analysis of the issuers
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 impairments. Although no set
formula is used in this process, the investment performance, collateral
position, and continued viability of the issuer are significant measures
considered. Based on our analysis, for
the three and six months ended June 30, 2009, we concluded that
approximately $41.0 million and $130.8 million, respectively, of investment
securities in an unrealized loss position were other-than-temporarily impaired,
resulting in a charge to net realized investment losses.
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. We
continuously monitor these factors as they relate to the investment portfolio
in determining the status of each investment.
We have deposits with
certain financial institutions which exceed federally insured limits. We have
reviewed the creditworthiness of these financial institutions and believe there
is minimum risk of a material loss.
79
Table of Contents
Realized
Gains and Losses
The following table sets
forth realized investment gains and losses for the periods shown:
|
|
For The
|
|
|
|
For The
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
|
2009
|
|
2008
|
|
Change
|
|
2009
|
|
2008
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
Fixed
maturity gains - sales
|
|
$
|
4,970
|
|
$
|
12,952
|
|
$
|
(7,982
|
)
|
$
|
10,549
|
|
$
|
22,014
|
|
$
|
(11,465
|
)
|
Fixed
maturity losses - sales
|
|
(905
|
)
|
(181
|
)
|
(724
|
)
|
(931
|
)
|
(702
|
)
|
(229
|
)
|
Equity
gains - sales
|
|
9,503
|
|
60
|
|
9,443
|
|
9,503
|
|
60
|
|
9,443
|
|
Impairments
on fixed maturity securities
|
|
(40,848
|
)
|
(79,986
|
)
|
39,138
|
|
(111,234
|
)
|
(79,986
|
)
|
(31,248
|
)
|
Impairments
on equity securities
|
|
(123
|
)
|
|
|
(123
|
)
|
(19,563
|
)
|
|
|
(19,563
|
)
|
Modco
trading portfolio trading activity
|
|
154,785
|
|
(50,527
|
)
|
205,312
|
|
108,907
|
|
(86,523
|
)
|
195,430
|
|
Other
|
|
(554
|
)
|
5,271
|
|
(5,825
|
)
|
(2,072
|
)
|
4,681
|
|
(6,753
|
)
|
Total
realized gains (losses) - investments
|
|
$
|
126,828
|
|
$
|
(112,411
|
)
|
$
|
239,239
|
|
$
|
(4,841
|
)
|
$
|
(140,456
|
)
|
$
|
135,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency swaps
|
|
$
|
|
|
$
|
(309
|
)
|
$
|
309
|
|
$
|
|
|
$
|
2,862
|
|
$
|
(2,862
|
)
|
Foreign
currency adjustments on stable value contracts
|
|
|
|
143
|
|
(143
|
)
|
|
|
(2,864
|
)
|
2,864
|
|
Derivatives
related to mortgage loan commitments
|
|
4,593
|
|
8,700
|
|
(4,107
|
)
|
6,889
|
|
(4,893
|
)
|
11,782
|
|
Embedded
derivatives related to reinsurance
|
|
(146,420
|
)
|
48,201
|
|
(194,621
|
)
|
(85,788
|
)
|
77,566
|
|
(163,354
|
)
|
Derivatives
related to corporate debt
|
|
|
|
(2,764
|
)
|
2,764
|
|
(125
|
)
|
3,729
|
|
(3,854
|
)
|
Other
interest rate swaps
|
|
22,169
|
|
|
|
22,169
|
|
36,359
|
|
|
|
36,359
|
|
Credit
default swaps
|
|
6,887
|
|
13,148
|
|
(6,261
|
)
|
2,551
|
|
(2,002
|
)
|
4,553
|
|
GMWB
embedded derivatives
|
|
12,542
|
|
(594
|
)
|
13,136
|
|
32,343
|
|
(3,373
|
)
|
35,716
|
|
Other
derivatives
|
|
2,238
|
|
(1,438
|
)
|
3,676
|
|
2,213
|
|
(7,595
|
)
|
9,808
|
|
Total
realized gains (losses) - derivatives
|
|
$
|
(97,991
|
)
|
$
|
65,087
|
|
$
|
(163,078
|
)
|
$
|
(5,558
|
)
|
$
|
63,430
|
|
$
|
(68,988
|
)
|
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
(losses), excluding impairments, Modco trading portfolio activity, and related
embedded derivatives related to corporate debt, during the six months ended June 30,
2009, primarily reflects the normal operation of our asset/liability program
within the context of the changing interest rate and spread environment.
Realized losses are comprised of both write-downs on
other-than-temporary impairments and actual sales of investments. For the three and six months ended June 30,
2009, we recognized pre-tax other-than-temporary impairments of $41.0 million
and $130.8 million, respectively, in our investments compared to $80.0 million
for both the three and six months ended June 30, 2008. These
other-than-temporary impairments resulted from our analysis of circumstances
and our belief that credit events, loss severity, changes in credit
enhancement, and/or other adverse conditions of the respective issuers have
caused, or will lead to, a deficiency in the contractual cash flows related to
these investments. These other-than-temporary impairments, net of Modco
recoveries, are presented in the chart below:
Pre-Tax
Impairments
(Net of
Modco)
|
|
For The
|
|
For The
|
|
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
June 30,
2009
|
|
June 30,
2009
|
|
|
|
(Dollars
In Millions)
|
|
AbitibiBowater
Bonds
|
|
$
|
|
|
$
|
30.4
|
|
Citigroup
PFD
|
|
|
|
19.4
|
|
Alt-A
Bonds
|
|
28.1
|
|
46.7
|
|
IdeaArc
Bank Loan
|
|
|
|
17.9
|
|
Other
MBS
|
|
8.9
|
|
12.4
|
|
Other
Corporate
|
|
4.0
|
|
4.0
|
|
Total
|
|
$
|
41.0
|
|
$
|
130.8
|
|
80
Table of Contents
As previously discussed, management considers several
factors when determining other-than-temporary impairments. Although we purchase securities with the
intent to hold securities until maturity, we may change our position as a
result of a change in circumstances. Any
such decision is consistent with our classification of all but a specific
portion of our investment portfolio as available-for-sale. For the six months
ended June 30, 2009, we sold securities in an unrealized loss position
with a market value of $119.2 million. 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
|
|
$
|
4,733
|
|
4.0
|
%
|
$
|
(26
|
)
|
2.9
|
%
|
>90
days but <= 180 days
|
|
5,455
|
|
4.6
|
|
|
|
|
|
>180
days but <= 270 days
|
|
175
|
|
0.1
|
|
(106
|
)
|
11.7
|
|
>270
days but <= 1 year
|
|
10,725
|
|
9.0
|
|
(74
|
)
|
8.2
|
|
>1
year
|
|
98,099
|
|
82.3
|
|
(699
|
)
|
77.2
|
|
Total
|
|
$
|
119,187
|
|
100.0
|
%
|
$
|
(905
|
)
|
100.0
|
%
|
The $2.1 million of other realized losses
recognized for the six months ended June 30, 2009, includes mortgage loan
losses of $2.4 million, other losses of $0.1 million, and other gains of $0.4
million. As of June 30, 2009, net gains of $108.9 million primarily
related to mark-to-market changes on our Modco trading portfolios associated
with the Chase Insurance Group acquisition were also included in realized gains
and losses. Of this amount, approximately $13.0 million of gains were realized
through the sale of certain securities, which will be reimbursed to our
reinsurance partners over time through the reinsurance settlement process for
this block of business. Additional details on our investment performance and
evaluation are provided in the sections 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.
We have taken short
positions in U.S. Treasury futures to mitigate interest rate risk related
to our mortgage loan commitments. The net gains for the three and six months
ended June 30, 2009, were the result of gains related to closed positions
of $1.6 million and $3.7 million, respectively, and mark-to-market gains of
$3.0 million and $3.2 million, respectively.
As of June 30, 2009, we did not hold any positions in U.S. Treasury
futures.
We also have in place
various modified coinsurance and funds withheld arrangements that, in
accordance with Derivatives Implementation Group (DIG) B36 (Embedded
Derivatives: Modified Coinsurance Arrangements and Debt Instruments That
Incorporated Credit Risk Exposures That Are Unrelated or Only Partially Related
to the Creditworthiness of the Obligor under Those Instruments), contain
embedded derivatives. The $146.4 million
and $85.8 million of losses on these embedded derivatives for the three and six
months ended June 30, 2009, respectively, were the result of spread
tightening. During the three and six months ended June 30, 2009, the
investment portfolios that support the related modified coinsurance reserves
and funds withheld arrangements had mark-to-market gains that offset the losses
on these embedded derivatives.
We use certain interest
rate swaps to mitigate interest rate risk related to certain Senior Notes,
Medium-Term Notes, and subordinated debt securities. These positions resulted
in net losses of $0.1 million for the six months ended June 30, 2009. There were no gains or losses for the three
months ended June 30, 2009. As of June 30,
2009, we did not hold any positions in these swaps.
We use other interest
rate swaps to mitigate the price volatility of assets. We realized net gains of
$22.2 million and $36.4 million on interest rate swaps for the three and six
months ended June 30, 2009, respectively. These net gains were primarily
the result of $24.7 million and $39.1 million in mark-to-market gains for the
three and six months ended June 30, 2009, respectively.
We reported net gains of $6.9 million
and $2.6 million related to credit default swaps for the three and six months
ended June 30, 2009, respectively.
The net gains for the three months ended June 30, 2009, were the
result of $10.7 million of mark-to-market gains, $4.1 million of losses related
to closed positions and $0.3 million in premium income. The net gains for the
six months ended June 30, 2009, were the result of $9.6 million of
mark-to-market gains, $7.6 million of losses related to closed positions and
$0.6 million in premium income.
81
Table of Contents
The GMWB rider embedded
derivatives on certain variable deferred annuities had net realized gains of
$12.5 million and $32.3 million for the three and six months ended June 30,
2009, respectively.
We also use various swaps and
options to mitigate risk related to other exposures. Equity call options
generated gains of $1.9 million and $1.2 million for the three and six
months ended June 30, 2009, respectively.
CPI swaps produced gains of $0.2 million and $1.0 million for the three
and six months ended June 30, 2009, respectively. GMAB embedded
derivatives had gains for the three and six months ended June 30, 2009,
that were immaterial to our financial statements.
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 June 30, 2009, 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. Management considers a number of factors in
determining if an unrealized loss is other-than-temporary, including our
ability and intent to hold the security until recovery. Consistent with our
long-standing practice, we do not utilize a bright line test to determine
other-than-temporary impairments. On a quarterly basis, we perform an analysis
on every security with an unrealized loss to determine if an
other-than-temporary impairment has occurred. This analysis includes reviewing
several metrics including collateral, expected cash flows, ratings, and
liquidity. Furthermore, since the timing of recognizing realized gains and
losses is largely based on managements 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. As of June 30,
2009, we had an overall pre-tax net unrealized loss of $1.8 billion.
Credit markets have experienced reduced liquidity,
higher volatility and widening credit spreads across numerous asset classes
over the past several quarters, primarily as a result of marketplace
uncertainty arising from the failure or near failure of a number of large
financial service companies resulting in intervention by the United States
Federal Government, downgrades in rating, interest rate changes, higher
defaults in sub-prime and Alt-A residential mortgage loans and a weakening of
the overall economy. In connection with
this uncertainty, we believe investors have departed from many investments in
asset-backed securities, including those associated with sub-prime and Alt-A
residential mortgage loans, as well as types of debt investments with fewer
lender protections or those with reduced transparency and/or complex features
which may hinder investor understanding. We believe these factors have
contributed to an increase in our net unrealized investment losses through
declines in market values. We expect to experience continued volatility in
connection with the valuation of our fixed maturity investments.
For fixed maturity and equity securities held that are
in an unrealized loss position as of June 30, 2009, 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
|
|
$
|
431,386
|
|
3.7
|
%
|
$
|
441,388
|
|
3.2
|
%
|
$
|
(10,002
|
)
|
0.5
|
%
|
>90
days but <= 180 days
|
|
543,092
|
|
4.6
|
|
610,926
|
|
4.4
|
|
(67,834
|
)
|
3.2
|
|
>180
days but <= 270 days
|
|
591,664
|
|
5.0
|
|
685,004
|
|
4.9
|
|
(93,340
|
)
|
4.4
|
|
>270
days but <= 1 year
|
|
1,204,605
|
|
10.2
|
|
1,340,324
|
|
9.7
|
|
(135,719
|
)
|
6.5
|
|
>1
year but <= 2 years
|
|
6,884,553
|
|
58.5
|
|
8,128,234
|
|
58.6
|
|
(1,243,681
|
)
|
59.3
|
|
>2
years but <= 3 years
|
|
1,078,257
|
|
9.2
|
|
1,390,485
|
|
10.0
|
|
(312,228
|
)
|
14.9
|
|
>3
years but <= 4 years
|
|
809,334
|
|
6.9
|
|
1,011,626
|
|
7.3
|
|
(202,292
|
)
|
9.6
|
|
>4
years but <= 5 years
|
|
139,465
|
|
1.2
|
|
153,713
|
|
1.1
|
|
(14,248
|
)
|
0.7
|
|
>5
years
|
|
86,467
|
|
0.7
|
|
105,715
|
|
0.8
|
|
(19,248
|
)
|
0.9
|
|
Total
|
|
$
|
11,768,823
|
|
100.0
|
%
|
$
|
13,867,415
|
|
100.0
|
%
|
$
|
(2,098,592
|
)
|
100.0
|
%
|
82
Table of Contents
The majority of the unrealized loss as of June 30,
2009, for both investment grade and below investment grade securities, is
attributable to a widening in credit and mortgage spreads. As of June 30,
2009, the Barclays Investment Grade Index was priced at 275 bps versus a 10
year average of 158 bps. Similarly, the Barclays High Yield Index was priced at
945 bps versus a 10 year average of 601 bps. The considerable amount of spread
widening was more than enough to offset lower treasury yield levels and their
associated positive effect on the security prices. As of June 30, 2009,
the five, ten, and thirty-year U.S. Treasury obligations were trading at levels
of 2.56%, 3.53%, and 4.32%, compared to 10 year averages of 4.06%, 4.56%, and
5.05%, respectively. In addition, as of June 30, 2009, 57.7% of the
unrealized loss was associated with securities that were rated investment
grade.
We have examined the
performance of the underlying collateral and cash flows and expect that our
investments will continue to perform in accordance with their contractual
terms. Factors such as credit enhancements within the deal structures and the
underlying collateral performance/characteristics support the recoverability of
the investments. Based on the factors discussed and because we have the ability
and intent to hold these investments until maturity or until the fair values of
the investments have recovered, we do not consider these unrealized loss
positions to be other-than-temporary.
However, from time to time, we may sell securities in the ordinary
course of managing our portfolio to meet diversification, credit quality, yield
enhancement, asset-liability management and liquidity requirements.
Expectations that investments in mortgage-backed and
asset-backed securities will continue to perform in accordance with their
contractual terms are based on assumptions a market participant would use in
determining the current fair value. It is reasonably possible that the
underlying collateral of these investments will perform worse than current
market expectations and that such event may lead to adverse changes in the cash
flows on our holdings of these types of securities. This could lead to
potential future write-downs within our portfolio of mortgage-backed and
asset-backed securities. Expectations that our investments in corporate
securities and/or debt obligations will continue to perform in accordance with
their contractual terms are based on evidence gathered through our normal
credit surveillance process. Although we do not anticipate such events, it is
reasonably possible that issuers of our investments in corporate securities
will perform worse than current expectations. Such events may lead us to
recognize potential future write-downs within our portfolio of corporate
securities. It is also possible that such unanticipated events would lead
us to dispose of those certain holdings and recognize the effects of any market
movements in our financial statements.
As of June 30, 2009,
there were estimated gross unrealized losses of $150.8 million and $39.7
million, related to our mortgage-backed securities collateralized by Alt-A
mortgage loans and sub-prime mortgage loans, respectively. Gross unrealized losses in our securities
collateralized by sub-prime and Alt-A residential mortgage loans as of June 30,
2009, were primarily the result of continued widening spreads, representing
marketplace uncertainty arising from higher defaults in sub-prime and Alt-A
residential mortgage loans and rating agency downgrades of securities
collateralized by sub-prime and Alt-A residential mortgage loans. For the three and six months ended June 30,
2009, we recorded $41.0 million and $130.8 million of pre-tax
other-than-temporary impairments, respectively. These other-than-temporary
impairments resulted from our analysis of circumstances and our belief that
credit events, loss severity, changes in credit enhancement, and/or other
adverse conditions of the respective issuers have caused, or will lead to, a
deficiency in the contractual cash flows related to these investments. Excluding the securities on which
other-than-temporary impairments were recorded, we expect these investments to
continue to perform in accordance with their original contractual terms. We
have the ability and intent to hold these investments until maturity or until
the fair values of the investments have recovered, which may be at
maturity. Additionally, we do not expect
these investments to adversely affect our liquidity or ability to maintain proper
matching of assets and liabilities.
As of June 30, 2009,
securities with a market value of $401.7 million and unrealized losses of
$141.9 million were issued in commercial mortgage loan securitizations
that we sponsored, with no unrealized losses greater than five years. We do not
consider these unrealized positions to be other-than-temporary because the
underlying mortgage loans continue to perform consistently with our original
expectations. Our underwriting procedures relative to our commercial loan
portfolio are based on a conservative, disciplined approach. We concentrate our underwriting expertise on
a small number of commercial real estate asset types associated with the
necessities of life (retail, multi-family, professional office buildings, and
warehouses). We believe these asset types tend to weather economic downturns
better than other commercial asset classes that we have chosen to avoid. We
believe this disciplined approach has helped to maintain a relatively low
delinquency and foreclosure rate throughout our history.
83
Table of
Contents
In assessing whether or
not these unrealized positions should be considered other-than-temporary, we
review the underlying cash flows, as well as the associated values of the real
estate collateral for those loans included in our commercial mortgage loan
securitizations.
We have no material concentrations of issuers or
guarantors of fixed maturity securities.
The industry segment composition of all securities in an unrealized loss
position held as of June 30, 2009, is presented in the following table:
|
|
Estimated
|
|
% Market
|
|
Amortized
|
|
% Amortized
|
|
Unrealized
|
|
% Unrealized
|
|
|
|
Market Value
|
|
Value
|
|
Cost
|
|
Cost
|
|
Loss
|
|
Loss
|
|
|
|
(Dollars In Thousands)
|
|
Agency
Mortgages
|
|
$
|
146,457
|
|
1.2
|
%
|
$
|
146,799
|
|
1.1
|
%
|
$
|
(342
|
)
|
0.0
|
%
|
Banking
|
|
1,538,163
|
|
13.1
|
|
1,886,081
|
|
13.6
|
|
(347,918
|
)
|
16.6
|
|
Basic
Industrial
|
|
485,518
|
|
4.1
|
|
570,813
|
|
4.1
|
|
(85,295
|
)
|
4.1
|
|
Brokerage
|
|
182,871
|
|
1.6
|
|
211,767
|
|
1.5
|
|
(28,896
|
)
|
1.4
|
|
Capital
Goods
|
|
260,294
|
|
2.2
|
|
307,256
|
|
2.2
|
|
(46,962
|
)
|
2.2
|
|
Communications
|
|
379,218
|
|
3.2
|
|
445,528
|
|
3.2
|
|
(66,310
|
)
|
3.1
|
|
Consumer
Cyclical
|
|
267,076
|
|
2.3
|
|
329,827
|
|
2.4
|
|
(62,751
|
)
|
3.0
|
|
Consumer
Noncyclical
|
|
347,896
|
|
3.0
|
|
375,096
|
|
2.7
|
|
(27,200
|
)
|
1.3
|
|
Electric
|
|
908,411
|
|
7.7
|
|
1,021,918
|
|
7.4
|
|
(113,507
|
)
|
5.4
|
|
Energy
|
|
455,128
|
|
3.9
|
|
490,350
|
|
3.5
|
|
(35,222
|
)
|
1.7
|
|
Finance
Companies
|
|
276,357
|
|
2.3
|
|
333,279
|
|
2.4
|
|
(56,922
|
)
|
2.7
|
|
Insurance
|
|
793,340
|
|
6.7
|
|
1,019,898
|
|
7.4
|
|
(226,558
|
)
|
10.8
|
|
Municipal
Agencies
|
|
426
|
|
0.0
|
|
493
|
|
0.0
|
|
(67
|
)
|
0.0
|
|
Natural
Gas
|
|
672,248
|
|
5.7
|
|
740,164
|
|
5.3
|
|
(67,916
|
)
|
3.2
|
|
Non-Agency
Mortgages
|
|
2,996,312
|
|
25.5
|
|
3,656,603
|
|
26.4
|
|
(660,291
|
)
|
31.5
|
|
Other
Finance
|
|
1,548,202
|
|
13.2
|
|
1,749,505
|
|
12.6
|
|
(201,303
|
)
|
9.6
|
|
Other
Industrial
|
|
82,617
|
|
0.7
|
|
98,699
|
|
0.7
|
|
(16,082
|
)
|
0.8
|
|
Other
Utility
|
|
21,069
|
|
0.2
|
|
24,044
|
|
0.2
|
|
(2,975
|
)
|
0.1
|
|
Real
Estate
|
|
13,763
|
|
0.1
|
|
15,133
|
|
0.1
|
|
(1,370
|
)
|
0.1
|
|
Technology
|
|
82,860
|
|
0.7
|
|
93,124
|
|
0.7
|
|
(10,264
|
)
|
0.5
|
|
Transportation
|
|
178,365
|
|
1.5
|
|
202,734
|
|
1.5
|
|
(24,369
|
)
|
1.1
|
|
Canadian
Government Agencies
|
|
47,077
|
|
0.4
|
|
48,651
|
|
0.3
|
|
(1,574
|
)
|
0.1
|
|
U.S.
Govt Agencies
|
|
85,155
|
|
0.7
|
|
99,653
|
|
0.7
|
|
(14,498
|
)
|
0.7
|
|
Total
|
|
$
|
11,768,823
|
|
100.0
|
%
|
$
|
13,867,415
|
|
100.0
|
%
|
$
|
(2,098,592
|
)
|
100.0
|
%
|
84
Table
of Contents
The percentage of our
unrealized loss positions, segregated by industry segment, is presented in the
following table:
|
|
As of
|
|
|
|
June 30,
2009
|
|
December 31,
2008
|
|
|
|
|
|
|
|
Agency
Mortgages
|
|
0.0
|
%
|
0.1
|
%
|
Banking
|
|
16.6
|
|
14.5
|
|
Basic
Industrial
|
|
4.1
|
|
6.0
|
|
Brokerage
|
|
1.4
|
|
0.8
|
|
Capital
Goods
|
|
2.2
|
|
2.4
|
|
Communications
|
|
3.1
|
|
4.1
|
|
Consumer
Cyclical
|
|
3.0
|
|
4.3
|
|
Consumer
Noncyclical
|
|
1.3
|
|
1.8
|
|
Electric
|
|
5.4
|
|
6.9
|
|
Energy
|
|
1.7
|
|
3.5
|
|
Finance
Companies
|
|
2.7
|
|
2.3
|
|
Insurance
|
|
10.8
|
|
9.5
|
|
Municipal
Agencies
|
|
0.0
|
|
0.0
|
|
Natural
Gas
|
|
3.2
|
|
6.3
|
|
Non-Agency
Mortgages
|
|
31.5
|
|
25.5
|
|
Other
Finance
|
|
9.6
|
|
8.2
|
|
Other
Industrial
|
|
0.8
|
|
0.8
|
|
Other
Utility
|
|
0.1
|
|
0.1
|
|
Real
Estate
|
|
0.1
|
|
0.2
|
|
Technology
|
|
0.5
|
|
0.8
|
|
Transportation
|
|
1.1
|
|
1.3
|
|
Canadian
Government Agencies
|
|
0.1
|
|
0.0
|
|
U.S.
Govt Agencies
|
|
0.7
|
|
0.6
|
|
Total
|
|
100.0
|
%
|
100.0
|
%
|
The range of maturity dates for securities in an
unrealized loss position as of June 30, 2009, varies, with 42.9% maturing
in less than 5 years, 14.3% maturing between 5 and 10 years, and 42.8% maturing
after 10 years. The following table shows the credit rating of securities in an
unrealized loss position as of June 30, 2009:
S&P or Equivalent
|
|
Estimated
|
|
% Market
|
|
Amortized
|
|
% Amortized
|
|
Unrealized
|
|
% Unrealized
|
|
Designation
|
|
Market Value
|
|
Value
|
|
Cost
|
|
Cost
|
|
Loss
|
|
Loss
|
|
|
|
(Dollars In Thousands)
|
|
AAA/AA/A
|
|
$
|
5,356,430
|
|
45.5
|
%
|
$
|
5,946,119
|
|
42.9
|
%
|
$
|
(589,689
|
)
|
28.1
|
%
|
BBB
|
|
4,138,768
|
|
35.2
|
|
4,759,088
|
|
34.3
|
|
(620,320
|
)
|
29.6
|
|
Investment
grade
|
|
9,495,198
|
|
80.7
|
|
10,705,207
|
|
77.2
|
|
(1,210,009
|
)
|
57.7
|
|
BB
|
|
998,251
|
|
8.5
|
|
1,264,418
|
|
9.1
|
|
(266,167
|
)
|
12.7
|
|
B
|
|
709,495
|
|
6.0
|
|
1,009,787
|
|
7.3
|
|
(300,292
|
)
|
14.3
|
|
CCC
or lower
|
|
565,879
|
|
4.8
|
|
888,003
|
|
6.4
|
|
(322,124
|
)
|
15.3
|
|
Below
investment grade
|
|
2,273,625
|
|
19.3
|
|
3,162,208
|
|
22.8
|
|
(888,583
|
)
|
42.3
|
|
Total
|
|
$
|
11,768,823
|
|
100.0
|
%
|
$
|
13,867,415
|
|
100.0
|
%
|
$
|
(2,098,592
|
)
|
100.0
|
%
|
As of June 30, 2009, we held $2.3 billion of
below investment grade securities in an unrealized loss position. Total unrealized losses related to below
investment grade securities were $888.6 million, of which $776.5 million had
been in an unrealized loss position for more than twelve months. Below investment
grade securities in an unrealized loss position were 8.2% of invested assets.
As of June 30, 2009, securities in an unrealized loss position that were
rated as below investment grade represented 19.3% of the total market value and
42.3% of the total unrealized loss. We have the ability and intent to hold
these securities to maturity. After a review of each security and its expected
cash flows, we believe the decline in market value to be temporary. Total
unrealized losses for all securities in an unrealized loss position for more
than twelve months were $1.8 billion. A widening of credit spreads is estimated
to account for unrealized losses of $2.6 billion, with changes in treasury
rates offsetting this loss by an estimated $850 million.
In addition, market disruptions in the RMBS market
negatively affected the market values of our non-agency RMBS securities. The
majority of our RMBS holdings as of June 30, 2009, were super senior or
senior bonds in the capital structure. Our non-agency portfolio has a weighted
average life of 1.95 years.
We primarily purchase our investments with the intent
to hold to maturity. We do not expect these investments in unrealized loss
positions to adversely affect our liquidity or ability to maintain proper
matching of assets and liabilities.
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The following table
includes 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 as of June 30, 2009:
|
|
Estimated
|
|
% Market
|
|
Amortized
|
|
% Amortized
|
|
Unrealized
|
|
% Unrealized
|
|
|
|
Market Value
|
|
Value
|
|
Cost
|
|
Cost
|
|
Loss
|
|
Loss
|
|
|
|
(Dollars In Thousands)
|
|
<=
90 days
|
|
$
|
29,777
|
|
1.3
|
%
|
$
|
35,014
|
|
1.1
|
%
|
$
|
(5,237
|
)
|
0.6
|
%
|
>90
days but <= 180 days
|
|
56,442
|
|
2.5
|
|
93,129
|
|
2.9
|
|
(36,687
|
)
|
4.1
|
|
>180
days but <= 270 days
|
|
212,627
|
|
9.4
|
|
262,338
|
|
8.3
|
|
(49,711
|
)
|
5.6
|
|
>270
days but <= 1 year
|
|
63,364
|
|
2.8
|
|
83,844
|
|
2.7
|
|
(20,480
|
)
|
2.3
|
|
>1
year but <= 2 years
|
|
1,562,838
|
|
68.7
|
|
2,119,951
|
|
67.0
|
|
(557,113
|
)
|
62.7
|
|
>2
years but <= 3 years
|
|
178,188
|
|
7.8
|
|
288,519
|
|
9.1
|
|
(110,331
|
)
|
12.4
|
|
>3
years but <= 4 years
|
|
148,348
|
|
6.5
|
|
239,608
|
|
7.6
|
|
(91,260
|
)
|
10.3
|
|
>4
years but <= 5 years
|
|
18,323
|
|
0.8
|
|
27,265
|
|
0.9
|
|
(8,942
|
)
|
1.0
|
|
>5
years
|
|
3,718
|
|
0.2
|
|
12,540
|
|
0.4
|
|
(8,822
|
)
|
1.0
|
|
Total
|
|
$
|
2,273,625
|
|
100.0
|
%
|
$
|
3,162,208
|
|
100.0
|
%
|
$
|
(888,583
|
)
|
100.0
|
%
|
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity
refers to a companys ability to generate adequate amounts of cash to meet its
needs. We meet our liquidity requirements primarily through positive cash flows
from our 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. We believe that we have sufficient liquidity to fund our cash needs
under normal operating scenarios.
In light of the events noted
above and uncertain capital and credit market conditions, we have strategically
positioned ourselves to have ample liquidity to meet our projected outflows
from currently available sources. We have maintained a high balance of
short-term investments; we have $270.0 million available capacity on our
existing credit facility; we have access to the Federal Home Loan Bank (FHLB)
for short-term borrowing; we have remained very selective regarding
mortgage loan
commitments; we have
eliminated purchases of below investment grade assets; and we have discontinued
the active pursuit of repurchasing shares of our common stock under our share
repurchase program.
In the
event of additional future significant unanticipated cash requirements beyond
normal liquidity, we have multiple alternatives available based on market
conditions and the amount and timing of the liquidity need. These options include
cash flows from operations, the sale of liquid assets, various credit
facilities, and other sources described herein.
Our
ability to sell investment assets could be limited by accounting rules,
including rules relating to the intent and ability to hold securities in
an unrealized loss position until the market value of those securities
recovers. Under stressful market and economic conditions, liquidity broadly
deteriorates, which could negatively impact our ability to sell investment
assets. If we require significant amounts of cash on short notice in excess of
normal cash
86
Table of Contents
requirements, we
may have difficulty selling investment assets in a timely manner, be forced to
sell them for less than we otherwise would have been able to realize, or both.
While we anticipate that
the cash flow of our operating subsidiaries will be sufficient to meet our
investment commitments and operating cash needs in a normal credit market
environment, we recognize that investment commitments scheduled to be funded
may, from time to time, exceed the funds then available. Therefore, we have established repurchase
agreement programs for certain of our insurance subsidiaries to provide
liquidity when needed. We expect that
the rate received on our investments will equal or exceed our borrowing
rate. As of June 30, 2009, we had
no outstanding balance related to such borrowings. Additionally, we may, from
time to time, sell short-duration stable value products to complement our cash
management practices. Depending on
market conditions, we may also use securitization transactions involving our
commercial mortgage loans to increase liquidity for the operating subsidiaries
.
Credit
Facility
Under a revolving line of
credit arrangement, we have the ability to borrow on an unsecured basis up to a
maximum principal amount of $500 million (the Credit Facility). This replaced
our previously existing $200 million revolving line of credit. We have the right in certain circumstances to
request that the commitment under the Credit Facility be increased up to a
maximum principal amount of $600 million. Balances outstanding under the Credit
Facility accrue interest at a rate equal to (i) either the prime rate or
the London Interbank Offered Rate (LIBOR), plus (ii) a spread based on the
ratings of our senior unsecured long-term debt. The Credit Agreement provides
that we are liable for the full amount of any obligations for borrowings or
letters of credit, including those of PLICO, under the Credit Facility. The
maturity date on the Credit Facility is April 16, 2013. There was an
outstanding balance of $230.0 million at an interest rate of LIBOR plus 0.40%
under the Credit Facility as of June 30, 2009. Of this amount, $180.0
million was used to purchase non-recourse funding obligations issued by an
indirect, wholly owned special-purpose financial captive insurance company. For
additional information related to special purpose financial captives, see Capital
Resources. We were in compliance with all financial debt covenants of the
Credit Facility as of June 30, 2009.
Sources
and Use of Cash
Our primary sources of
funding are dividends from our operating subsidiaries; revenues from
investment, data processing, legal, and management services rendered to
subsidiaries; investment income; and external financing. These sources of cash
support our general corporate needs including our common stock dividends and
debt service. The states in which our insurance subsidiaries are domiciled
impose certain restrictions on the insurance subsidiaries ability to pay us
dividends. These restrictions are based
in part on the prior years statutory income and surplus. Generally, these
restrictions pose no short-term liquidity concerns. We plan to retain
substantial portions of the earnings of our insurance subsidiaries in those
companies primarily to support their future growth.
During the second quarter
of 2008, we joined the FHLB of Cincinnati. FHLB advances provide an attractive
funding source for short-term borrowing and for the sale of funding
agreements. Membership in the FHLB
requires that we purchase FHLB capital stock based on a minimum requirement and
a percentage of the dollar amount of advances outstanding. We held $58.2
million of common stock as of June 30, 2009, which is included in equity
securities. In addition, our obligations under the advances must be
collateralized. We maintain control over any such pledged assets, including the
right of substitution. As of June 30, 2009, we had $875.9 million of
funding agreement-related advances and accrued interest outstanding under the
FHLB program.
As of June 30, 2009,
we reported approximately $720.3 million (fair value) of Auction Rate
Securities (ARSs), which were all rated AAA. While the auction rate market
has experienced liquidity constraints, we believe that based on our current
liquidity position and our operating cash flows, any lack of liquidity in the
ARS market will not have a material impact on our liquidity, financial
condition, or cash flows.
All
of the auction rate securities held by us as of June 30, 2009, were
student loan-backed auction rate securities, for which the underlying
collateral is at least 97% guaranteed by the Federal Family Education Loan
Program (FFELP). As there is no current active market for these auction rate
securities, the best available source for current valuation information is from
actively-traded asset-backed securities with comparable underlying assets (i.e.
FFELP-backed student loans) and vintage.
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Table of
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We
use a discounted cash flow model to determine the fair value of our student
loan-backed auction rate securities. The discounted cash flow model uses the
discount margin and projected average life of a comparable actively-traded
FFELP student loan-backed floating-rate asset-backed security. This comparable
security is selected based on its underlying assets (i.e. FFELP-backed student
loans) and vintage.
The
auction rate securities are classified as a Level 3 valuation under SFAS No. 157.
An unrealized loss of $67.8 million was recorded as of December 31, 2008,
and an unrealized loss of $26.0 million was recorded as of June 30, 2009,
and we have not recorded any other-than-temporary impairment because of the
underlying collateral for each of the auction rate securities is at least 97%
guaranteed by the FFELP and there are subordinate tranches within each of these
auction rate security issuances that would support the senior tranches in the
event of default. In the event of a complete and total default by all
underlying student loans, the principal shortfall, in excess of the 97% FFELP
guarantee, would be absorbed by the subordinate tranches. Our non-performance
exposure is to the FFELP guarantee, not the underlying student loans. At this
time, we have no reason to believe that the U.S. Department of Education would
not honor the FFELP guarantee, if it were necessary. In addition, we have the
ability and intent to hold these securities until their values recover or
maturity. Therefore, we believe that no other-than-temporary impairment has
been experienced.
The liquidity
requirements of our regulated insurance subsidiaries primarily relate to the
liabilities associated with their various insurance and investment products,
operating expenses, and income taxes. Liabilities arising from insurance and
investment products include the payment of policyholder benefits, as well as
cash payments in connection with policy surrenders and withdrawals, policy
loans and obligations to redeem funding agreements.
Our insurance
subsidiaries have used cash flows from operations and investment activities as
a primary source to fund their liquidity requirements. Our insurance
subsidiaries primary cash inflows from operating activities are derived from
premiums, annuity deposits, stable value contract deposits, and insurance and
investment product fees and other income, including cost of insurance and
surrender charges, contract underwriting fees, and intercompany dividends or
distributions. The principal cash inflows
from investment activities result from repayments of principal, investment
income and, as necessary, sales of invested assets.
Our insurance
subsidiaries maintain investment strategies intended to provide adequate funds
to pay benefits and expected surrenders, withdrawals, loans and redemption
obligations without forced sales of investments. In addition, our insurance
subsidiaries hold highly liquid, high-quality short-term investment securities
and other liquid investment grade fixed maturity securities to fund our
expected operating expenses, surrenders, and withdrawals. As of June 30,
2009, our total cash, cash equivalents and invested assets were $27.9 billion.
The life insurance subsidiaries were committed as of June 30, 2009, to
fund mortgage loans in the amount of $259.6 million.
Our positive cash flows
from operations are used to fund an investment portfolio that provides for
future benefit payments. We employ a
formal asset/liability program to manage the cash flows of our investment
portfolio relative to our long-term benefit obligations.
In response to the
volatility and disruption in the credit markets, we have maintained a high
balance of cash and short-term investments to provide liquidity for cash
outflows projected for the coming months. Our subsidiaries held approximately
$2.0 billion in cash and short-term investments as of June 30, 2009,
and we held an additional $11.2 million in cash and short-term investments
available for general corporate purposes.
88
Table of
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The following chart includes the cash flows provided
by or used in operating, investing, and financing activities for the following
periods
:
|
|
For The
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
(Dollars In Thousands)
|
|
Net
cash provided by operating activities
|
|
$
|
604,410
|
|
$
|
852,536
|
|
Net
cash provided by (used in) investing activities
|
|
3,684
|
|
(1,964,977
|
)
|
Net
cash (used in) provided by financing activities
|
|
(550,912
|
)
|
1,073,656
|
|
Total
|
|
$
|
57,182
|
|
$
|
(38,785
|
)
|
For the Six Months Ended June 30,
2009 compared to The Six Months Ended June 30, 2008
Net cash provided by operating activities
-
Cash flows
from operating activities are affected by the timing of premiums received, fees
received, investment income, and expenses paid. Principal sources of cash
include sales of our products and services. As an insurance business, we
typically generate positive cash flows from operating activities, as premiums
and deposits collected from our insurance and investment products exceed
benefits paid and redemptions, and we invest the excess. Accordingly, in
analyzing our cash flows we focus on the change in the amount of cash available
and used in investing activities.
Net cash
provided by (used in) investing activities
-
The variance
in net cash provided by (used in) investing activities for the six months ended
June 30, 2009, compared to June 30, 2008, was the result of activity
related to our investment portfolio.
The increase
in net cash provided by investing activities was primarily due to a reduction
in net purchases of fixed maturity and equity securities. We reduced the level
of cash available for investing activities in order to significantly increase
cash and cash equivalents to strengthen our capital position in response to
recent economic conditions.
Net cash
(used in) provided by financing activities
-
Changes in
cash from financing activities primarily relate to the issuance and repayment
of borrowings, dividends to our stockholders and other capital transactions, as
well as the issuance of, and redemptions and benefit payments on, investment
contracts. The variance in net cash (used in) provided by financing activities
for the six months ended June 30, 2009, compared to June 30, 2008,
was primarily the result of a decrease in net investment product deposits and
an increase in investment product withdrawals.
Capital
Resources
To give us flexibility in
connection with future acquisitions and other funding needs, we have registered
debt securities, preferred and common stock, and stock purchase contracts, and
additional preferred securities of special purpose finance subsidiaries under
the Securities Act of 1933 on a delayed (or shelf) basis.
As of June 30, 2009, our capital structure
consisted of Medium-Term Notes, Senior Notes, Subordinated Debentures, and
shareowners equity. We also have a $500 million revolving line of credit
(the Credit Facility), under which we could borrow funds with balances due April 16,
2013. The line of credit arrangement contains, among other provisions,
requirements for maintaining certain financial ratios and restrictions on the
indebtedness that we and our subsidiaries can incur. Additionally, the line of credit arrangement
precludes us, on a consolidated basis, from incurring debt in excess of 40% of
our total capital. There was a $230.0
million outstanding balance as of June 30, 2009, under the Credit Facility
at an interest rate of LIBOR plus 0.40%.
Of this amount, $180.0 million was utilized to purchase non-recourse
funding obligations issued by Golden Gate Captive Insurance Company (Golden
Gate) an indirect wholly owned special-purpose financial captive insurance
company. As the need arises and in light
of the current credit market environment, we may utilize the Credit Facility to
purchase additional non-recourse funding obligations from this indirect wholly
owned special-purpose financial captive insurance company in future quarters.
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Table of Contents
Through June 30,
2009, Golden Gate, which is wholly owned by PLICO, our largest operating
subsidiary, has issued $180.0 million in aggregate principal amount of floating
rate surplus notes, series B, due August 15, 2037 (the Series B
Notes) to us under its surplus notes facility (the Facility) through which
Golden Gate currently has the authority to issue floating rate surplus notes up
to $1 billion of aggregate principal amount. The $180.0 million of Series B
Notes is eliminated at the consolidated level. As of June 30, 2009, the
outstanding balance under the Facility was an aggregate principal amount of
$980.0 million, consisting of $180.0 million in aggregate principal amount of Series B
Notes and $800.0 million in aggregate principal amount of floating rate surplus
notes previously issued under the Facility (the Series A Notes and
together with the Series B Notes, the Notes). The Notes are direct
financial obligations of Golden Gate and are not guaranteed by us or PLICO. The
Notes were issued in order to provide financing for a portion of the statutory
reserves associated with a block of life insurance policies. As the block of
business ages, unless additional funding mechanisms are put into place,
reserving increases will reduce our available statutory capital and surplus.
The Series B Notes accrue interest at the rate of LIBOR plus 40 basis
points. We have experienced higher borrowing costs associated with the Series A
Surplus Notes. The current rate on the Series A Notes is LIBOR plus 325
basis points; the maximum rate we could be required to pay is LIBOR plus 425
basis points.
Golden Gate II
Captive Insurance Company (Golden Gate II), a special-purpose
financial captive insurance company wholly owned by PLICO, had
$575.0 million of non-recourse funding obligations outstanding as of June 30,
2009. These non-recourse funding
obligations mature in 2052. We do not
anticipate having to pursue additional funding related to this block of
business; however, we have contingent approval to issue an additional
$100 million of obligations if necessary. $275 million of this amount is
currently accruing interest at a rate of LIBOR plus 30 basis points. We have
experienced higher proportional borrowing costs associated with $300 million of
our non-recourse funding obligations supporting the business reinsured to
Golden Gate II. These higher costs are the result of a higher spread component
interest costs associated with the illiquidity of the current market for
auction rate securities, as well as a rating downgrade of our guarantor by
certain rating agencies. The current rate associated with these obligations is
LIBOR plus 200 basis points, which is the maximum rate we can be required to
pay under these obligations.
On May
7,
2007, our Board of Directors extended our
previously authorized $100 million share repurchase program. The current authorization extends through May 6,
2010. In light of recent credit market
disruption, extraordinary events and developments affecting financial markets,
and a specific focus on capital preservation and liquidity, we do not intend to
purchase shares of our common stock under the existing share repurchase program
in the near term. Future activity will be dependent upon many factors,
including capital levels, liquidity needs, rating agency expectations, and the
relative attractiveness of alternative uses for capital.
A life insurance companys
statutory capital is computed according to rules prescribed by NAIC, as
modified by state regulation. 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 states regulations.
Statutory accounting rules are different from U.S. GAAP and are
intended to reflect a more conservative view, for example, requiring immediate
expensing of policy acquisition costs. The NAICs 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 our insurance subsidiaries. The
subsidiaries may secure additional statutory capital through various sources,
such as retained statutory earnings or our equity contributions.
State insurance
regulators and the NAIC have adopted risk-based capital (RBC) requirements
for life insurance companies to evaluate the adequacy of statutory capital and
surplus in relation to investment and insurance risks. The requirements provide
a means of measuring the minimum amount of statutory surplus appropriate for an
insurance company to support its overall business operations based on its size
and risk profile.
During the second quarter
of 2009,
PLICO
completed the re-tranching and re-rating, based on current assumptions, of
certain of its residential mortgage-backed securities with an amortized cost of
approximately $1.4 billion. As PLICO retained one hundred percent of the
beneficial interests, there was no impact on our consolidated financial
statements or consolidated financial statement disclosures. Because the ratings affect the amount of
capital required to be held in support of these securities, it is expected that
the re-ratings based on current assumptions will positively impact the
calculation of PLICOs statutory risk based capital.
90
Table of
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We cede material amounts
of insurance and transfer related assets to other insurance companies through
reinsurance. However, notwithstanding
the transfer of related assets, we remain liable with respect to ceded
insurance should any reinsurer fail to meet the obligations that such reinsurer
assumed. We evaluate the financial condition of our reinsurers and monitor the
associated concentration of credit risk. During the three and six months ended June 30,
2009, we ceded premiums to third-party reinsurers amounting to $394.2 million
and $752.5 million, respectively. In addition, we had receivables from
reinsurers amounting to $5.3 billion as of June 30, 2009. We review reinsurance receivable amounts for
collectability and establish bad debt reserves if deemed appropriate.
During the third quarter
of 2008, Scottish Re US (SRUS) received a statutory accounting permitted
practice from the Delaware Department of Insurance (the Department) that in
light of decreases in the fair value of the securities in SRUSs qualifying
reserve credit trust accounts on business ceded to certain securitization
companies, relieved SRUS of the need to receive an additional $104 million in
capital contributions. On January 5, 2009, the Department issued an order
of supervision (the Order of Supervision) against SRUS, in accordance with 18
Del. C. §5942, which, among other things, requires the Departments consent to
any transaction outside the ordinary course of business, and which, in large
part, formalized certain reporting and processes already informally in place
between SRUS and the Department. We cannot predict what changes in the status
of SRUSs financial condition may have on our ability to take reserve credit
for the business ceded to SRUS. If we
were unable to take reserve credit for the business ceded to SRUS, it could
have a material adverse impact on our financial condition and results of
operation. As of June 30, 2009, we had approximately $184.8 million of
GAAP recoverables from SRUS. In addition, we had $498.2 million of ceded
statutory reserves related to SRUS.
During the second quarter of 2009, we issued 15.5
million shares of common stock through a public offering. This offering
generated approximately $132.8 million of net proceeds.
Ratings
Various Nationally Recognized Statistical Rating
Organizations (rating organizations) review the financial performance and
condition of insurers, including our insurance subsidiaries, and publish their
financial strength ratings as indicators of an insurers ability to meet
policyholder and contract holder obligations. These ratings are important to
maintaining public confidence in an insurers products, its ability to market
its products and its competitive position.
Rating organizations also publish credit ratings for the issuers of debt
securities, including the Company. Credit ratings are indicators of a debt
issuers ability to meet the terms of debt obligations in a timely manner. These ratings are important in the debt
issuers overall ability to access certain types of liquidity. Ratings are not recommendations to buy our
securities. The following table summarizes the ratings of our significant
member companies from the major independent rating organizations as of June 30,
2009:
|
|
|
|
|
|
Standard &
|
|
|
|
Ratings
|
|
A.M.
Best
|
|
Fitch
|
|
Poors
|
|
Moodys
|
|
|
|
|
|
|
|
|
|
|
|
Insurance
companies financial strength ratings:
|
|
|
|
|
|
|
|
|
|
Protective
Life Insurance Company
|
|
A+
|
|
A+
|
|
AA-
|
|
A2
|
|
West
Coast Life Insurance Company
|
|
A+
|
|
A+
|
|
AA-
|
|
A2
|
|
Protective
Life and Annuity Insurance Company
|
|
A+
|
|
A+
|
|
AA-
|
|
|
|
Lyndon
Property Insurance Company
|
|
A-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
ratings:
|
|
|
|
|
|
|
|
|
|
Issuer
Credit/Default Rating - Protective Life Corporation
|
|
a-
|
|
A-
|
|
A-
|
|
|
|
Senior
Debt Rating - Protective Life Corporation
|
|
|
|
BBB+
|
|
|
|
Baa2
|
|
Issuer
Credit/Default Rating - Protective Life Ins. Co.
|
|
aa-
|
|
|
|
AA-
|
|
|
|
Our ratings are subject to review and change by the
rating organizations at any time and without notice. A downgrade or other negative action by a
ratings organization with respect to the financial strength ratings of our
insurance subsidiaries could adversely affect sales, relationships with
distributors, the level of policy surrenders and withdrawals, competitive
position in the marketplace, and the cost or availability of reinsurance. A downgrade or other negative action by a
ratings organization with respect to our credit rating could limit our access
to capital markets, increase the cost of issuing debt, and a downgrade of
sufficient magnitude, combined with other negative factors, could require us to
post collateral.
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Table of Contents
LIABILITIES
Many of our products
contain surrender charges and other features that are designed to reward
persistency and penalize the early withdrawal of funds. Certain stable value
and annuity contracts have market-value adjustments that protect us against
investment losses if interest rates are higher at the time of surrender than at
the time of issue.
As of June 30, 2009,
we had policy liabilities and accruals of approximately $18.4 billion. Our
interest-sensitive life insurance policies have a weighted-average minimum
credited interest rate of approximately 3.75%.
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Table of Contents
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, policyholder obligations, and defined
benefit pension obligations.
We enter into various
obligations to third parties in the ordinary course of our operations. However,
we do not believe that our cash flow requirements can be assessed based upon an
analysis of these obligations. The most significant factor affecting our future
cash flows is our ability to earn and collect cash from our customers. Future
cash outflows, whether they are contractual obligations or not, also will vary
based upon our future needs. Although some outflows are fixed, others depend on
future events. Examples of fixed obligations include our obligations to pay
principal and interest on fixed-rate borrowings. Examples of obligations that
will vary include obligations to pay interest on variable-rate borrowings and
insurance liabilities that depend on future interest rates, market performance,
or surrender provisions. Many of our
obligations are linked to cash-generating contracts. In addition, our
operations involve significant expenditures that are not based upon
commitments. These include expenditures
for income taxes and payroll.
As of June 30, 2009, in accordance with FASB
Interpretation No. 48,
Accounting for Uncertainty
in Income Tax-an Interpretation of FASB Statement 109
, we carried a
$29.7 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.
|
|
|
|
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
(1)
|
|
$
|
958,557
|
|
$
|
29,797
|
|
$
|
68,772
|
|
$
|
523,950
|
|
$
|
336,038
|
|
Non-recourse
funding obligations
(2)
|
|
2,512,823
|
|
36,267
|
|
72,534
|
|
72,534
|
|
2,331,488
|
|
Subordinated
debt securities
(3)
|
|
1,882,668
|
|
37,147
|
|
74,294
|
|
74,294
|
|
1,696,933
|
|
Stable
value products
(4)
|
|
4,710,112
|
|
1,109,503
|
|
1,790,861
|
|
994,001
|
|
815,747
|
|
Operating
leases
(5)
|
|
30,278
|
|
7,041
|
|
10,856
|
|
7,641
|
|
4,740
|
|
Home
office lease
(6)
|
|
79,389
|
|
977
|
|
1,941
|
|
76,471
|
|
|
|
Mortgage
loan commitments
|
|
259,636
|
|
259,636
|
|
|
|
|
|
|
|
Policyholder
obligations
(7)
|
|
22,583,678
|
|
1,727,270
|
|
3,327,550
|
|
2,731,593
|
|
14,797,265
|
|
Total
(8)
|
|
$
|
33,017,141
|
|
$
|
3,207,638
|
|
$
|
5,346,808
|
|
$
|
4,480,484
|
|
$
|
19,982,211
|
|
(1)
Long-term debt includes all
principal amounts owed on note agreements and expected interest payments due
over the term of notes.
(2)
Non-recourse funding
obligations include all principal amounts owed on note agreements and expected
interest payments due over the term of the notes.
(3)
Subordinated debt securities
includes all principal amounts owed to our non-consolidated special purpose
finance subsidiaries and interest payments due over the term of the
obligations.
(4)
Anticipated stable value
products cash flows including interest.
(5)
Includes all lease payments
required under operating lease agreements.
(6)
The lease payments shown
assume we exercise our option to purchase the building at the end of the lease
term, as if we decided to exercise that option. Additionally, the payments due
by period above were computed based on the terms of the renegotiated lease agreement,
which was entered in January 2007.
(7)
Estimated contractual
policyholder obligations are based on mortality, morbidity, and lapse
assumptions comparable to our historical experience, modified for recent
observed trends. These obligations are based on current balance sheet values
and include expected interest crediting, 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
variable separate account obligations are legally insulated from general
account obligations, the variable separate account obligations will be fully
funded by cash flows from variable separate account assets. We expect to fully
fund the general account obligations from cash flows from general account
investments.
(8)
This total does not take into
account estimated payments related to our qualified or unfunded excess benefit
plans in future periods.
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Table of
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FAIR VALUE OF FINANCIAL
INSTRUMENTS
On January 1, 2008,
we adopted SFAS No. 157. This
standard defines fair value, establishes a framework for measuring fair value,
establishes a fair value hierarchy based on the quality of inputs used to
measure fair value and enhances disclosure requirements for fair value
measurements. The term fair value as
used in this document is defined in accordance with SFAS No. 157. The
cumulative effect of adopting this standard resulted in an increase to January 1,
2008 retained earnings of $1.5 million and a decrease in income before income
taxes of $0.4 million for the three months ended June 30, 2008. The standard describes three levels of inputs
that may be used to measure fair value.
For more information, see Note 1
, Basis of Presentation
and
Summary of Significant
Accounting Policies
and Note
11,
Fair Value of Financial Instruments.
Available-for-sale
securities and trading account securities are recorded at fair value, which is
primarily based on actively-traded markets where prices are based on either
direct market quotes or observed transactions. Liquidity is a significant
factor in the determination of the fair value for these securities. Market price quotes may not be readily
available for some positions, or for some positions within a market sector
where trading activity has slowed significantly or ceased. These situations are
generally triggered by the markets perception of credit uncertainty regarding
a single company or a specific market sector. In these instances, fair value is
determined based on limited available market information and other factors,
principally from reviewing the issuers financial position, changes in credit
ratings, and cash flows on the investments.
As of June 30, 2009, $1.7 billion of available-for-sale and trading
account assets were classified as level 3 fair value assets.
The
fair values of derivative assets and liabilities include adjustments for market
liquidity, counterparty credit quality and other deal specific factors, where
appropriate. The fair values of derivative assets and liabilities traded in the
over-the-counter market are determined using quantitative models that require
the use of multiple market inputs including interest rates, prices and indices
to generate continuous yield or pricing curves and volatility factors, which
are used to value the position. The predominance of market inputs are actively
quoted and can be validated through external sources. Estimation risk is
greater for derivative asset and liability positions that are either
option-based or have longer maturity dates where observable market inputs are
less readily available or are unobservable, in which case quantitative based
extrapolations of rate, price or index scenarios are used in determining fair
values. As of June 30, 2009, the level 3 fair values of derivative assets
and liabilities determined by these quantitative models were $156.4 million and
$66.1 million. These amounts reflect the full fair value of the derivatives as
defined in accordance with SFAS No. 157 and do not isolate the discrete
value associated with the specific subjective valuation variable.
The
liabilities of certain of our annuity account balances are calculated at fair
value using actuarial valuation models. These models use various observable and
unobservable inputs including projected future cash flows, policyholder
behavior, our credit rating and other market conditions. As of June 30, 2009, the level 3 fair
value of these liabilities was $152.4 million. This amount reflects the full
fair value of the liabilities as defined in accordance with SFAS No. 157
and does not isolate the discrete value associated with the specific subjective
valuation variable.
For securities that are
priced via non-binding independent broker quotations, we assess whether prices
received from independent brokers represent a reasonable estimate of fair value
through an analysis using internal and external cash flow models developed
based on spreads and, when available, market indices. We use a market-based
cash flow analysis to validate the reasonableness prices received from
independent brokers. These analytics, which are updated daily, incorporate
various metrics (yield curves, credit spreads, prepayment rates, etc.) to
determine the valuation of such holdings. As a result of this analysis, if we
determine there is a more appropriate fair value based upon the analytics, the
price received from the independent broker is adjusted accordingly.
During 2008, we changed
certain assumptions used in our methodology for determining the fair value for
retained beneficial interests in CMBS holdings related to our sponsored
commercial mortgage loan securitizations.
Prior to the third quarter, we used external broker valuations to
determine the fair value of these positions. These valuations were based on the
cash flows of the commercial mortgages underlying the notes, as well as
observable market spread assumptions for investments with similar coupons
and/or characteristics based on the fair value hierarchy criteria, and
non-observable assumptions and factors utilizing general market information
available as of the valuation date. As
of June 30, 2009, we still believe that little or no secondary market
existed for CMBS holdings similar to those in our portfolio, and additionally,
certain of the tranches within our holdings fell below the collapse provision
levels in the underlying security agreements.
Therefore, the relevant observable inputs from
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Table of
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CMBS sales activity could
not be obtained for what we considered a supportable or appropriate calculation
of fair value based on our previous methodology.
As a result of the
factors noted and in accordance with the clarifying guidance issued in FSP FAS No. 157-3,
during 2008, we determined the fair value of these CMBS holdings using a
combination of external broker valuations and an internally developed model.
This model includes inputs based on assumed discount rates relative to our
current mortgage loan lending rate and an expected cash flow analysis based on
a review of the commercial mortgage loans underlying the notes. The model also
contains our determined representative risk adjustment assumptions related to
nonperformance and liquidity risks. The retained interest in the securitized
mortgage loans may be subject to prepayment and interest rate risks. Changes in
these assumptions during the third quarter of 2008 resulted in an increase of
approximately $173.0 million to the fair value of our retained beneficial
interests in CMBS holdings related to our sponsored commercial mortgage loan
securitizations. We believe that this valuation approach provides a more
accurate calculation of the fair value of these securities under the fair value
hierarchy guidance and the current inactive market conditions.
Of our $1.9 billion of
assets classified as Level 3 assets, $1.6 billion were asset-backed securities.
Of this amount, $727.7 million were student loan related asset-backed
securities, $29.1 million were non-student loan related asset-backed
securities, $817.6 million were commercial mortgage-backed securitizations, and
$3.2 million were other mortgage-backed securities. The years of issuance of
the asset-backed securities are as follows:
Year of Issuance
|
|
Amount
|
|
|
|
(In
Millions)
|
|
|
|
|
|
1997
|
|
$
|
134
|
|
2002
|
|
301
|
|
2003
|
|
199
|
|
2004
|
|
119
|
|
2005
|
|
12
|
|
2006
|
|
31
|
|
2007
|
|
782
|
|
Total
|
|
$
|
1,578
|
|
The asset-backed securities
were rated as follows: $1.4 billion were AAA rated, $78.2 million were AA
rated, $54.7 million were A rated, $4.2 million were BBB rated, and $28.2
million were below investment grade. We do not expect any downgrade in the
ratings of the securities related to student loans since the underlying
collateral of the student loan asset-backed securities is guaranteed by the
U.S. Department of Education.
MARKET
RISK EXPOSURES AND OFF-BALANCE SHEET ARRANGEMENTS
Our 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 and issuer defaults. We
analyze and manage the risks arising from market exposures of
financial
instruments, as well as other risks,
through an integrated asset/liability management process. Our 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 our exposure to interest
rate risk, inflation risk, currency exchange risk, and equity market risk.
The primary focus of our
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 us as a whole. It is our policy to maintain asset and
liability durations within one-half year of one another, although, from time to
time, a broader interval may be allowed.
We
are exposed to credit risk within our investment portfolio and through
derivative counterparties. Credit risk
relates to the uncertainty of an obligors continued ability to make timely
payments in accordance with the contractual terms of the instrument or
contract. We manage credit risk through established investment policies which
attempt to address quality of obligors and counterparties, credit concentration
limits, diversification
95
Table of Contents
requirements
and acceptable risk levels under expected and stressed scenarios. Derivative counterparty credit risk is
measured as the amount owed to us based upon current market conditions and
potential payment obligations to the counterparties. We minimize the credit
risk in derivative instruments by entering into transactions with high quality
counterparties rated AA or higher at the time we enter into the contract.
Derivative
instruments
that are used as part of our interest
rate risk management strategy include interest rate swaps, interest rate
futures, interest rate options and
interest rate swaptions
.
Our inflation risk management strategy involves the use of swaps that
require us to pay a fixed rate and receive a floating rate that is based on
changes in the Consumer Price Index
(CPI).
We use foreign currency swaps to manage our exposure to changes in the
value of foreign currency denominated stable value contracts. No foreign
currency swaps remain outstanding. We also use S&P 500
®
options to
mitigate our exposure to the value of equity indexed annuity contracts.
We have sold credit
default protection on liquid traded indices to enhance the return on our
investment portfolio. These credit
default swaps create credit exposure similar to an investment in publicly-issued
fixed maturity cash investments. The
credit default swaps relate to the High Yield Series 8 Index and the
Investment Grade Series 9 Index and have terms to June 2014 and December 2017,
respectively. Defaults within the High
Yield Series 8 Index that exceeded the 25% attachment point would require
us to perform under the credit default swaps, up to the 35% exhaustion
point. Defaults within the Investment
Grade Series 9 Index that exceeded the 10% attachment point would require
us to perform under the credit default swaps, up to the 15% exhaustion
point. The maximum potential amount of
future payments (undiscounted) that we could be required to make under the
credit derivatives is $45.0 million. As
of June 30, 2009, the fair value of the credit derivatives was a liability
of $9.8 million.
As a result of the
ongoing disruption in the credit markets, the fair value of these derivatives
is expected to fluctuate in response to changing market conditions. We believe
that the unrealized loss recorded on the $45.0 million notional of credit
default swaps is not indicative of the economic value of the investment. We
expect the unrealized loss to reverse over the remaining life of the credit
default swap portfolio.
Derivative
instruments expose us to credit and market risk and could result in material
changes from quarter-to-quarter. We minimize our credit risk by entering into
transactions with highly rated counterparties.
We manage 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.
We monitor our use of derivatives in connection with our overall
asset/liability management programs and procedures.
In the ordinary course of
our commercial mortgage lending operations, we 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 our 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. As of June 30,
2009, we had outstanding mortgage loan commitments of $259.6 million at an
average rate of 6.41%.
We believe our
asset/liability management programs and procedures and certain product features
provide protection against the effects of changes in interest rates under
various scenarios. Additionally, we believe our asset/liability
management
programs and procedures provide
sufficient liquidity to enable us to fulfill our obligation to pay benefits
under our various insurance and deposit contracts. However, our 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, spread movements and other factors, and the effectiveness of our
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
,
t
o the Consolidated Condensed Financial Statements for information
regarding recently issued accounting standards.
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Table of
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RECENT
DEVELOPMENTS
During 2006, the NAICs
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
reinsurance regulatory modernization Framework was taken under consideration by
the NAICs Financial Condition (E) Committee, the Reinsurance Task Forces
parent committee, as one of its charges. In December 2008, the NAIC
adopted the Framework. The NAIC has drafted a proposal to implement changes in
the Framework; the proposal is currently under consideration by interested
parties. We 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.
In 2008, the NAIC adopted
amendment(s) to the model Unfair Trade Practices Act regarding the use of
travel in insurance underwriting. The amendment states that the denial of life
insurance based upon an individuals past lawful travel experiences or future
lawful travel plans, is prohibited unless (i) the risk of loss for
individuals traveling to a specified destination at a specified time is
reasonably anticipated to be greater than if the individuals did not travel to
that destination at that time, and (ii) the risk of traveling to a
specific destination is based on sound actuarial principles and actual or
reasonably anticipated experience. We cannot predict at this time what impact,
if any, such changes would have on us
.
On
November 11, 2008, the American Council of Life Insurers (ACLI)
submitted to the NAIC a proposal to implement capital and surplus relief for
life insurers. The ACLIs proposal contained nine elements, which were
subsequently assigned to four of the NAICs technical committees. Of the nine
elements proposed by the ACLI, the technical committees rejected three,
approved three, and indicated that the remaining three would be acceptable
given certain amendments. In January 2009, the NAIC Executive Committee
voted not to approve any of the elements of the ACLI proposal. The NAIC
continues to study certain of the capital and surplus proposals. However,
numerous life insurers have received various permitted accounting practices
from their domiciliary state insurance departments that effectively implement
certain of the elements. PLICO received a permitted accounting practice related
to the calculation of deficiency reserves from its domiciliary state regulator
in Tennessee. As of June 30, 2009, the permitted accounting practice had
an impact of reducing PLICO statutory reserves by approximately $56.5
million. In addition, pursuant to a
regulation change regarding the calculation of deficiency reserves by its
domiciliary state regulator in Nebraska, West Coast Life Insurance Company, a
wholly-owned subsidiary of PLICO, received a benefit to its statutory capital
of approximately $63.6 million.
In addition to the
capital and surplus proposals, the NAIC continues to study other proposals from
regulators and industry that could materially affect our financial condition.
These include, but are not limited to, proposals relating to the accounting
treatment for re-rating securitized RMBS, the accounting treatment for impaired
loan-backed and structured securities, the calculation of the mortgage
experience adjustment factor, and the ratings of and risk-based capital
calculation for RMBS. We cannot forecast the outcome of the NAICs
consideration of these proposals, nor can we predict what effect such
proposals, if adopted, will have on us.
Accounting and actuarial
groups within the NAIC are also studying 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 our statutory
capital. The NAIC is also currently working to reform state regulation in
various areas, including comprehensive reforms relating to life insurance
reserves.
IMPACT OF
INFLATION
Inflation increases the
need for life insurance. Many
policyholders who once had adequate insurance programs may increase their life
insurance coverage to provide the same relative financial benefit and
protection. Higher interest rates may
result in higher sales of certain of our investment products.
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Table of Contents
The higher interest
rates
that have traditionally accompanied
inflation could also affect our operations.
Policy loans increase as policy loan interest rates become relatively
more attractive. As interest rates
increase, disintermediation of stable value and annuity account balances and
individual life policy cash values may increase. The market value of our fixed-rate, long-term
investments may decrease, we may be unable to implement fully the interest rate
reset and call provisions of its mortgage loans, and our ability to make
attractive mortgage loans, including participating mortgage loans, may
decrease
.
In addition, participating mortgage loan income may decrease. The difference between the interest rate
earned on investments and the interest rate credited to life insurance and
investment products may also be adversely affected by rising interest rates.
Item 3.
Quantitative and Qualitative
Disclosures about Market Risk
See
Part I, Item 2,
Managements Discussion
and Analysis of Financial Condition and Results of Operations
, Executive
Summary and Liquidity and Capital Resources, and Part II, Item 1A,
Risk Factors
of this Report for market risk disclosures in
light of the current difficult conditions in the financial and credit markets,
and the economy generally.
Item 4.
Controls and Procedures
(a)
Disclosure
controls and procedures
In order to ensure that
the information the Company must disclose in its filings with the Securities
and Exchange Commission is recorded, processed, summarized and reported on a
timely basis, the Companys management, with the participation of its Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the design and operation of its disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d- 15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)). Based on
their evaluation as of the end of the period covered by this Form 10-Q,
the Companys Chief Executive Officer and Chief Financial Officer have
concluded that the Companys disclosure controls and procedures were
effective. It should be noted that any
system of controls, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control systems objectives will
be met. Further, the design of any
control system is based in part upon certain judgments, including the costs and
benefits of controls and the likelihood of future events. Because of these and other inherent limitations
of control systems, no evaluation of controls can provide absolute assurance
that all control issues, if any, within the Company have been detected
.
(b)
Changes
in internal control over financial reporting
There have been no changes in the Companys internal
control over financial reporting during the period ended June 30, 2009,
that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting. The Companys internal controls exist within
a dynamic environment and the Company continually strives to improve its
internal controls and procedures to enhance the quality of its financial
reporting.
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PART II
Item 1A.
Risk Factors and Cautionary Factors that may Affect Future Results
The operating results of
companies in the insurance industry have historically been subject to
significant fluctuations. The factors which could affect the Companys future
results include, but are not limited to, general economic conditions and the
known trends and uncertainties which are discussed more fully below. In
addition to other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A,
Risk Factors
and Cautionary Factors that may Affect Future Results
in the Companys
Annual Report on Form 10-K for the year ended December 31, 2008,
which could materially affect the Companys business, financial condition, or
future results of operations.
Insurance companies are highly
regulated and subject to numerous legal restrictions and regulations.
The Company
and its subsidiaries are subject to government regulation in each of the states
in which they conduct business. Such regulation is vested in state agencies
having broad administrative and in some instances discretionary power dealing
with many aspects of the Companys business, which may include, among other things,
premium rates and increases thereto, underwriting practices, reserve
requirements, marketing practices, advertising, privacy, policy forms,
reinsurance reserve requirements, acquisitions, mergers, and capital adequacy,
and is concerned primarily with the protection of policyholders and other
customers rather than shareowners. At any given time, a number of financial
and/or market conduct examinations of the Companys subsidiaries may be
ongoing. From time to time, regulators raise issues during examinations or
audits of the Companys subsidiaries that could, if determined adversely, have
a material impact on the Company. The Companys insurance subsidiaries are
required to obtain state regulatory approval for rate increases for certain
health insurance products, and the Companys profits may be adversely affected
if the requested rate increases are not approved in full by regulators in a
timely fashion.
Under
insurance guaranty fund laws, in most states insurance companies doing business
therein can be assessed up to prescribed limits for policyholder losses
incurred by insolvent companies. The Company cannot predict the amount or
timing of any future assessments.
The purchase
of life insurance products is limited by state insurable interest laws, which
in most jurisdictions require that the purchaser of life insurance name a
beneficiary that has some interest in the sustained life of the insured. To
some extent, the insurable interest laws present a barrier to the life
settlement, or stranger-owned industry, in which a financial entity acquires
an interest in life insurance proceeds, and efforts have been made in some
states to liberalize the insurable interest laws. To the extent these laws are
relaxed, the Companys lapse assumptions may prove to be incorrect.
The Company
cannot predict whether or when regulatory actions may be taken that could
adversely affect the Company or its operations. Interpretations of regulations
by regulators may change and statutes, regulations and interpretations may be applied
with retroactive impact, particularly in areas such as accounting or reserve
requirements.
Although the
Company and its subsidiaries are subject to state regulation, in many instances
the state regulatory models emanate from the National Association of Insurance
Commissioners (NAIC). State insurance regulators and the NAIC regularly
re-examine existing laws and regulations applicable to insurance companies and
their products. Changes in these laws and regulations, or in interpretations
thereof, are often made for the benefit of the consumer and at the expense of
the insurer and, thus, could have a material adverse effect on the Companys
financial condition and results of operations. The Company is also subject to
the risk that compliance with any particular regulators interpretation of a
legal issue may not result in compliance with another regulators
interpretation of the same issue, particularly when compliance is judged in
hindsight. There is an additional risk that any particular regulators
interpretation of a legal issue may change over time to the Companys
detriment, or that changes to the overall legal environment, even absent any
change of interpretation by a particular regulator, may cause the Company to
change its views regarding the actions it needs to take from a legal risk
management perspective, which could necessitate changes to the Companys
practices that may, in some cases, limit its ability to grow and improve
profitability.
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Table of Contents
Some of the
NAIC pronouncements, particularly as they affect accounting issues, take effect
automatically in the various states without affirmative action by the states.
Also, regulatory actions with prospective impact can potentially have a
significant impact on currently sold products. As an example of both
retroactive and prospective impacts, in late 2005, the NAIC approved an
amendment to Actuarial Guideline 38, commonly known as AXXX, which
interprets the reserve requirements for universal life insurance with secondary
guarantees. This amendment retroactively increased the reserve requirements for
universal life insurance with secondary guarantee products issued after July 1,
2005. This change to Actuarial Guideline 38 (AG38) also affected the
profitability of universal life products sold after the adoption date. The NAIC
is continuing to study reserving methodology and has issued additional changes
to AXXX and Regulation XXX, which have had the effect of modestly
decreasing the reserves required for certain traditional and universal life
policies that were 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 if
changes were made, whether they should be applied retrospectively,
prospectively only, or in a phased-in manner. A requirement to reduce the
reserve credits 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.
At the
federal level, bills are routinely introduced in both chambers of the United
States Congress which could affect life insurers. In the past, Congress has
considered legislation that would impact insurance companies in numerous ways,
such as providing for an optional federal charter, pre-empting state law in
certain respects to the regulation of reinsurance, and other matters. The
Company cannot predict whether or in what form reforms will be enacted and, if
so, whether the enacted reforms will positively or negatively affect the
Company or whether any effects will be material.
Additionally,
on June 17, 2009, the Obama Administration released a set of proposed
regulatory reforms with respect to financial services entities. As part of a larger effort to strengthen the
regulation of the financial services market, the proposal outlines certain
reforms applicable to the insurance industry. Although no legislation has been
enacted or regulations promulgated with respect to the proposal, there is currently
legislation pending before Congress which would require changes to law or
regulation applicable to the Company, including but not limited to: the
establishment of federal regulatory authority over derivatives, the
establishment of consolidated federal regulation and resolution authority over
systemically important financial services firms, changes to the regulation of
broker dealers and investment advisors, and the imposition of additional
regulation over credit rating agencies. Any additional legislation or
regulatory requirements applicable to the Company in connection with the
proposal may make it more expensive for the Company to conduct its business and
subject the Company to an additional layer of regulatory oversight. Such
actions by Congress could have a material adverse effect on the Companys
financial condition and results of operations.
The proposal
also calls for the creation of a Consumer Financial Protection Agency (CFPA)
with jurisdiction over credit, savings, payment and other consumer financial
products and services, other than investment products already regulated by the
SEC or the U.S. Commodity Futures Trading Commission. Certain of the Companys
subsidiaries sell products that may be regulated by the CFPA. Any such
regulation by the CFPA could make it more difficult or costly for the Companys
subsidiaries to sell certain products and have a material adverse effect on its
financial condition and results of operations.
The Companys
subsidiaries may also be subject to regulation by the United States Department
of Labor when providing a variety of products and services to employee benefit
plans governed by the Employee Retirement Income Security Act (ERISA). Severe
penalties are imposed for breach of duties under ERISA.
Certain
policies, contracts, and annuities offered by the Companys subsidiaries are
subject to regulation under the federal securities laws administered by the
Securities and Exchange Commission. The federal securities laws contain
regulatory restrictions and criminal, administrative, and private remedial
provisions.
Other types
of regulation that could affect the Company and its subsidiaries include
insurance company investment laws and regulations, state statutory accounting
practices, anti-trust laws, minimum solvency requirements, state securities
laws, federal privacy laws, insurable interest laws, federal anti-money
laundering and anti-terrorism laws, and because the Company owns and operates
real property, state, federal, and local environmental laws. The Company cannot
predict what form any future changes in these or other areas of regulation
affecting the insurance industry might take or what effect, if any, such
proposals might have on the Company if enacted into law.
100
Table of Contents
The Company Operates as a
Holding Company and Depends on the Ability of Its Subsidiaries to Transfer
Funds to It to Meet Its Obligations and Pay Dividends.
The Company
operates as a holding company for its insurance and other subsidiaries and does
not have any significant operations of its own.
The Companys primary sources of funding are dividends from its
operating subsidiaries; revenues from investment, data processing, legal, and
management services rendered to subsidiaries; investment income; and external
financing. These funding sources support
the Companys general corporate needs including its common stock dividends and
debt service. If the funding the Company
receives from its subsidiaries is insufficient for it to fund its debt service
and other holding company obligations, it may be required to raise funds
through the incurrence of debt, the issuance of additional equity or the sale of
assets.
The states in
which the Companys insurance subsidiaries are domiciled impose certain
restrictions on the insurance subsidiaries ability to pay dividends and make
other payments to the Company. State
insurance regulators may prohibit the payment of dividends or other payments to
the Company by its insurance subsidiaries if they determine that the payments
could be adverse to the policyholders or contract holders of the insurance
subsidiaries.
The amount of
statutory capital that the Company has and the amount of statutory capital that
it must hold to maintain its financial strength and credit ratings and meet
other requirements can vary significantly from time to time and is sensitive to
a number of factors outside of the Companys control.
The Company primarily
conducts business through licensed insurance company subsidiaries. Insurance regulators have established
regulations that provide minimum capitalization requirements based on
risk-based capital (RBC) formulas for life and property and casualty
companies. The RBC formula for life insurance companies establishes capital
requirements relating to insurance, business, asset and interest rate risks,
including equity, interest rate and expense recovery risks associated with
variable annuities and group annuities that contain death benefits or certain
living benefits.
In
any particular year, statutory surplus amounts and RBC ratios may increase or
decrease depending on a variety of factors the amount of statutory income or
losses generated by the Companys insurance subsidiaries (which itself is
sensitive to equity market and credit market conditions), the amount of
additional capital its insurance subsidiaries must hold to support business
growth, changes in the Companys reserve requirements, the Companys ability to
secure capital market solutions to provide reserve relief, changes in equity
market levels, the value of certain fixed-income and equity securities in its
investment portfolio, the credit ratings of investments held in its portfolio,
the value of certain derivative instruments, changes in interest rates and
foreign currency exchange rates, credit market volatility, changes in consumer
behavior, as well as changes to the NAIC RBC formula. Most of these factors are
outside of the Companys control. The Companys financial strength and credit
ratings are significantly influenced by the statutory surplus amounts and RBC
ratios of its insurance company subsidiaries. Rating agencies may implement
changes to their internal models that have the effect of increasing or
decreasing the amount of statutory capital the Company must hold in order to
maintain its current ratings. In addition, rating agencies may downgrade the
investments held in the Companys portfolio, which could result in a reduction
of the Companys capital and surplus and/or its RBC ratio.
Rating agencies may base
downgrade decisions on the possibility or probability of some loss in a
security. When this methodology is
applied to certain types of securities, such as RMBSs, the effect of the RBC
calculation may be to require RBC with respect to those securities at levels
greater than the probable loss on the securities. In addition, in extreme scenarios of equity
market declines, the amount of additional statutory reserves the Company is
required to hold for its variable product guarantees may increase at a rate
greater than the rate of change of the markets. Increases in reserves could
result in a reduction to the Companys capital, surplus and/or RBC ratio. Also,
in environments where there is not a correlative relationship between interest
rates and spreads, the Companys market value adjusted annuity product can have
a material adverse effect on the Companys statutory surplus position.
101
Table of
Contents
Item 2.
Unregistered
Sales of Equity Securities and Use of Proceeds
During
the quarter ended June 30, 2009, the Company issued no securities in
transactions which were not registered under the Securities Act of 1933, as
amended (the Act).
Issuer Purchases of Equity Securities
On
May 7, 2007, the Companys Board of Directors extended the Companys
previously authorized $100 million share repurchase program. The Company
announced on February 12, 2008, that it had commenced execution of this
repurchase plan. The current
authorization extends through May 6, 2010. Future activity will be
dependent upon many factors, including capital levels, rating agency
expectations, and the relative attractiveness of alternative uses for capital.
There were no shares repurchased during the three months ended June 30,
2009. The approximate value of shares that may yet be purchased under the
program is $82.9 million.
Item 4.
Submission of Matters to a Vote of Security Holders
The
Annual Meeting of Shareowners of Protective Life Corporation (the Company)
was held on May 4, 2009. Shares
entitled to vote at the Annual Meeting totaled 69,972,618 of which 64,735,451
shares were represented.
At the
Annual Meeting the following directors were elected. The number of shares cast for and authorized
withheld for each nominee is shown below:
|
|
Number
of
|
|
Number
of
|
|
|
|
Shares
|
|
Shares
|
|
Name of
Director
|
|
Voted
For
|
|
Withheld
|
|
James
S. M. French
|
|
62,584,307
|
|
2,151,145
|
|
Thomas
L. Hamby
|
|
62,610,685
|
|
2,124,767
|
|
John
D. Johns
|
|
57,256,889
|
|
7,478,563
|
|
Vanessa
Leonard
|
|
62,613,081
|
|
2,122,372
|
|
Charles
D. McCrary
|
|
58,185,042
|
|
6,550,410
|
|
John
J. McMahon, Jr.
|
|
52,873,772
|
|
11,861,681
|
|
Malcolm
Portera
|
|
62,595,771
|
|
2,139,681
|
|
C.
Dowd Ritter
|
|
59,619,659
|
|
5,115,794
|
|
William
A. Terry
|
|
62,400,770
|
|
2,334,683
|
|
W.
Michael Warren, Jr.
|
|
62,625,795
|
|
2,109,658
|
|
Vanessa
Wilson
|
|
62,577,523
|
|
2,157,930
|
|
Shareowners approved a proposal to ratify the appointment by the Board
of Directors of the Company of PricewaterhouseCoopers LLP as the independent
public accountants for the Company and its subsidiaries for 2009. Shares voting for this proposal were 60,737,348;
shares voting against were 3,909,407, and shares abstaining were 88,696.
102
Table
of Contents
Item 6.
Exhibits
Exhibit 31(a)
|
-
|
Certification Pursuant to §302 of the Sarbanes Oxley
Act of 2002.
|
|
|
|
Exhibit 31(b)
|
-
|
Certification Pursuant to §302 of the Sarbanes Oxley
Act of 2002.
|
|
|
|
Exhibit 32(a)
|
-
|
Certification Pursuant to 18 U.S.C. §1350, as
Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
|
|
|
|
Exhibit 32(b)
|
-
|
Certification Pursuant to 18 U.S.C. §1350, as
Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
|
103
Table
of Contents
SIGNATURE
Pursuant
to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
PROTECTIVE LIFE
CORPORATION
|
|
|
|
|
Date:
August 7, 2009
|
/s/ Steven G. Walker
|
|
|
|
Steven G. Walker
|
|
Senior Vice President,
Controller
|
|
and Chief Accounting
Officer
|
|
|
|
104
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