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, 2010
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 001-11339
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
x
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 July 30,
2010: 85,662,493
Table of Contents
PROTECTIVE
LIFE CORPORATION
QUARTERLY
REPORT ON FORM 10-Q
FOR
QUARTERLY PERIOD ENDED JUNE 30, 2010
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,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(Dollars In Thousands, Except Per Share Amounts)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Premiums and policy fees
|
|
$
|
679,241
|
|
$
|
679,989
|
|
$
|
1,308,013
|
|
$
|
1,339,141
|
|
Reinsurance ceded
|
|
(379,729
|
)
|
(394,225
|
)
|
(685,558
|
)
|
(752,524
|
)
|
Net of reinsurance ceded
|
|
299,512
|
|
285,764
|
|
622,455
|
|
586,617
|
|
Net investment income
|
|
422,500
|
|
431,144
|
|
834,497
|
|
852,829
|
|
Realized investment gains (losses):
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
(119,888
|
)
|
(97,991
|
)
|
(142,960
|
)
|
(5,558
|
)
|
All other investments
|
|
67,704
|
|
167,799
|
|
115,603
|
|
125,956
|
|
Other-than-temporary impairment losses
|
|
(36,683
|
)
|
(48,877
|
)
|
(58,539
|
)
|
(166,191
|
)
|
Portion of loss recognized in other comprehensive income
(before taxes)
|
|
19,885
|
|
7,906
|
|
29,872
|
|
35,394
|
|
Net impairment losses recognized in earnings
|
|
(16,798
|
)
|
(40,971
|
)
|
(28,667
|
)
|
(130,797
|
)
|
Other income
|
|
59,072
|
|
39,586
|
|
102,944
|
|
78,249
|
|
Total revenues
|
|
712,102
|
|
785,331
|
|
1,503,872
|
|
1,507,296
|
|
Benefits and expenses
|
|
|
|
|
|
|
|
|
|
Benefits and settlement expenses, net of
reinsurance ceded: (three months: 2010 - $359,766; 2009 - $371,234 six
months: 2010 - $662,467; 2009 - $705,928)
|
|
525,371
|
|
478,148
|
|
1,032,666
|
|
982,507
|
|
Amortization of deferred policy acquisition costs
and value of business acquired
|
|
23,086
|
|
89,949
|
|
104,375
|
|
203,597
|
|
Other operating expenses, net of reinsurance
ceded: (three months: 2010 - $50,657; 2009 - $51,963 six months: 2010 -
$94,081; 2009 - $107,028)
|
|
99,185
|
|
77,016
|
|
201,095
|
|
148,818
|
|
Total benefits and expenses
|
|
647,642
|
|
645,113
|
|
1,338,136
|
|
1,334,922
|
|
Income before income tax
|
|
64,460
|
|
140,218
|
|
165,736
|
|
172,374
|
|
Income tax expense
|
|
23,216
|
|
49,461
|
|
54,786
|
|
59,482
|
|
Net income
|
|
41,244
|
|
90,757
|
|
110,950
|
|
112,892
|
|
Less: Net income (loss) attributable to
noncontrolling interests
|
|
(127
|
)
|
|
|
(200
|
)
|
|
|
Net income available to PLCs
common shareowners
(1)
|
|
$
|
41,371
|
|
$
|
90,757
|
|
$
|
111,150
|
|
$
|
112,892
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to PLCs common shareowners -
basic
|
|
$
|
0.48
|
|
$
|
1.17
|
|
$
|
1.28
|
|
$
|
1.52
|
|
Net income available to PLCs common shareowners -
diluted
|
|
$
|
0.47
|
|
$
|
1.16
|
|
$
|
1.27
|
|
$
|
1.51
|
|
Cash dividends paid per share
|
|
$
|
0.14
|
|
$
|
0.12
|
|
$
|
0.26
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding - basic
|
|
86,562,379
|
|
77,893,480
|
|
86,531,461
|
|
74,391,481
|
|
Average shares outstanding - diluted
|
|
87,666,035
|
|
78,528,511
|
|
87,609,027
|
|
74,980,036
|
|
(1)
Protective Life
Corporation (PLC)
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,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollars In Thousands)
|
|
Assets
|
|
|
|
|
|
Fixed maturities, at fair value (amortized cost:
2010 - $23,181,206; 2009 - $23,228,317)
|
|
$
|
23,687,528
|
|
$
|
22,830,427
|
|
Equity securities, at fair value (cost: 2010 -
$324,815; 2009 - $280,615)
|
|
308,951
|
|
275,497
|
|
Mortgage loans (2010 includes: $969,210 related to
securitizations)
|
|
4,905,276
|
|
3,877,087
|
|
Investment real estate, net of accumulated
depreciation (2010 - $980; 2009 - $803)
|
|
22,431
|
|
25,188
|
|
Policy loans
|
|
775,105
|
|
794,276
|
|
Other long-term investments
|
|
182,075
|
|
204,754
|
|
Short-term investments
|
|
972,804
|
|
1,049,609
|
|
Total investments
|
|
30,854,170
|
|
29,056,838
|
|
Cash
|
|
156,524
|
|
205,325
|
|
Accrued investment income
|
|
303,916
|
|
285,350
|
|
Accounts and premiums receivable, net of allowance
for uncollectible amounts (2010 - $4,735; 2009 - $5,170)
|
|
38,817
|
|
56,216
|
|
Reinsurance receivables
|
|
5,553,385
|
|
5,333,401
|
|
Deferred policy acquisition costs and value of
business acquired
|
|
3,671,153
|
|
3,663,350
|
|
Goodwill
|
|
116,307
|
|
117,856
|
|
Property and equipment, net of accumulated
depreciation (2010 - $127,253; 2009 - $123,709)
|
|
37,831
|
|
37,037
|
|
Other assets
|
|
188,862
|
|
176,303
|
|
Income tax receivable
|
|
43,609
|
|
115,447
|
|
Assets related to separate accounts
|
|
|
|
|
|
Variable annuity
|
|
3,307,239
|
|
2,948,457
|
|
Variable universal life
|
|
304,423
|
|
316,007
|
|
Total Assets
|
|
$
|
44,576,236
|
|
$
|
42,311,587
|
|
Liabilities
|
|
|
|
|
|
Policy liabilities and accruals
|
|
$
|
18,938,066
|
|
$
|
18,548,267
|
|
Stable value product account balances
|
|
3,487,963
|
|
3,581,150
|
|
Annuity account balances
|
|
10,309,546
|
|
9,911,040
|
|
Other policyholders funds
|
|
551,860
|
|
515,078
|
|
Other liabilities
|
|
1,059,034
|
|
715,110
|
|
Mortgage loan backed certificates
|
|
85,873
|
|
|
|
Deferred income taxes
|
|
891,177
|
|
553,062
|
|
Non-recourse funding obligations
|
|
556,600
|
|
575,000
|
|
Long-term debt
|
|
1,474,852
|
|
1,644,852
|
|
Subordinated debt securities
|
|
524,743
|
|
524,743
|
|
Liabilities related to separate accounts
|
|
|
|
|
|
Variable annuity
|
|
3,307,239
|
|
2,948,457
|
|
Variable universal life
|
|
304,423
|
|
316,007
|
|
Total liabilities
|
|
41,491,376
|
|
39,832,766
|
|
Commitments and contingencies -
Note 7
|
|
|
|
|
|
Shareowners equity
|
|
|
|
|
|
Preferred Stock; $1 par value, shares authorized:
4,000,000; Issued: None
|
|
|
|
|
|
Common Stock, $.50 par value, shares authorized:
2010 and 2009 - 160,000,000; shares issued: 2010 and 2009 - 88,776,960
|
|
44,388
|
|
44,388
|
|
Additional paid-in-capital
|
|
581,646
|
|
576,887
|
|
Treasury stock, at cost (2010 - 3,114,769 shares;
2009 - 3,196,157 shares)
|
|
(25,745
|
)
|
(25,929
|
)
|
Unallocated stock in Employee Stock Ownership Plan
(2010 and 2009 - 0 shares)
|
|
|
|
|
|
Retained earnings
|
|
2,307,820
|
|
2,204,644
|
|
Accumulated other comprehensive income (loss):
|
|
|
|
|
|
Net unrealized gains (losses) on investments, net
of income tax: (2010 -$157,137; 2009 - $(121,737))
|
|
291,826
|
|
(225,648
|
)
|
Net unrealized (losses) gains relating to
other-than-temporary impaired investments for which a portion has been
recognized in earnings, net of income tax: (2010 - $(27,159); 2009 -
$(16,704))
|
|
(50,437
|
)
|
(31,021
|
)
|
Accumulated loss - derivatives, net of income tax:
(2010 - $(10,194); 2009 - $(10,182))
|
|
(18,931
|
)
|
(18,327
|
)
|
Postretirement benefits liability adjustment, net
of income tax: (2010 -$(24,214); 2009 - $(24,862))
|
|
(44,968
|
)
|
(46,173
|
)
|
Total Protective Life Corporations shareowners
equity
|
|
3,085,599
|
|
2,478,821
|
|
Noncontrolling interest
|
|
(739
|
)
|
|
|
Total equity
|
|
3,084,860
|
|
2,478,821
|
|
Total liabilities and
shareowners equity
|
|
$
|
44,576,236
|
|
$
|
42,311,587
|
|
See Notes to Consolidated
Condensed Financial Statements
4
Table of Contents
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS
OF SHAREOWNERS EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Accumulated Other
Comprehensive Income (Loss)
|
|
Total
Protective
|
|
|
|
|
|
|
|
Common
Stock
|
|
Additional
Paid-In-
Capital
|
|
Treasury
Stock
|
|
Retained
Earnings
|
|
Net Unrealized
Gains / (Losses)
on Investments
|
|
Accumulated
Gain / (Loss)
Derivatives
|
|
Minimum
Pension
Liability
Adjustments
|
|
Life
Corporations
shareowners
equity
|
|
Non
controlling
Interest
|
|
Total
Equity
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
|
Balance,
December 31, 2009
|
|
$
|
44,388
|
|
$
|
576,887
|
|
$
|
(25,929
|
)
|
$
|
2,204,644
|
|
$
|
(256,669
|
)
|
$
|
(18,327
|
)
|
$
|
(46,173
|
)
|
$
|
2,478,821
|
|
$
|
|
|
$
|
2,478,821
|
|
Net
income for the three months ended March 31, 2010
|
|
|
|
|
|
|
|
69,779
|
|
|
|
|
|
|
|
69,779
|
|
(73
|
)
|
69,706
|
|
Change
in net unrealized gains/losses on investments (net of income tax - $142,481)
|
|
|
|
|
|
|
|
|
|
263,959
|
|
|
|
|
|
263,959
|
|
|
|
263,959
|
|
Reclassification
adjustment for investment amounts included in net income (net of income tax -
$1,725)
|
|
|
|
|
|
|
|
|
|
3,418
|
|
|
|
|
|
3,418
|
|
|
|
3,418
|
|
Change
in net unrealized gains/losses relating to other-than-temporary impaired
investments for which a portion has been recognized in earnings (net of
income tax $(3,495))
|
|
|
|
|
|
|
|
|
|
(6,492
|
)
|
|
|
|
|
(6,492
|
)
|
|
|
(6,492
|
)
|
Change
in accumulated gain (loss) derivatives (net of income tax - $3,423)
|
|
|
|
|
|
|
|
|
|
|
|
5,718
|
|
|
|
5,718
|
|
|
|
5,718
|
|
Reclassification
adjustment for derivative amounts included in net income (net of income tax -
$(974))
|
|
|
|
|
|
|
|
|
|
|
|
(1,752
|
)
|
|
|
(1,752
|
)
|
|
|
(1,752
|
)
|
Change
in minimum pension liability adjustment (net of income tax - $324)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
602
|
|
602
|
|
|
|
602
|
|
Comprehensive
income for the three months ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
335,232
|
|
(73
|
)
|
335,159
|
|
Cash
dividends ($0.120 per share)
|
|
|
|
|
|
|
|
(10,270
|
)
|
|
|
|
|
|
|
(10,270
|
)
|
|
|
(10,270
|
)
|
Cumulative
effect adjustments
|
|
|
|
|
|
|
|
14,290
|
|
|
|
|
|
|
|
14,290
|
|
|
|
14,290
|
|
Noncontrolling
interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(418
|
)
|
(418
|
)
|
Stock-based
compensation
|
|
|
|
3,028
|
|
(68
|
)
|
|
|
|
|
|
|
|
|
2,960
|
|
|
|
2,960
|
|
Balance,
March 31, 2010
|
|
$
|
44,388
|
|
$
|
579,915
|
|
$
|
(25,997
|
)
|
$
|
2,278,443
|
|
$
|
4,216
|
|
$
|
(14,361
|
)
|
$
|
(45,571
|
)
|
$
|
2,821,033
|
|
$
|
(491
|
)
|
$
|
2,820,542
|
|
Net
income for the three months ended June 30, 2010
|
|
|
|
|
|
|
|
41,371
|
|
|
|
|
|
|
|
41,371
|
|
(127
|
)
|
41,244
|
|
Change
in net unrealized gains/losses on investments (net of income tax - $130,774)
|
|
|
|
|
|
|
|
|
|
242,856
|
|
|
|
|
|
242,856
|
|
|
|
242,856
|
|
Reclassification
adjustment for investment amounts included in net income (net of income tax -
$3,894)
|
|
|
|
|
|
|
|
|
|
7,241
|
|
|
|
|
|
7,241
|
|
|
|
7,241
|
|
Change
in net unrealized gains/losses relating to other-than-temporary impaired
investments for which a portion has been recognized in earnings (net of
income tax $(6,960))
|
|
|
|
|
|
|
|
|
|
(12,924
|
)
|
|
|
|
|
(12,924
|
)
|
|
|
(12,924
|
)
|
Change
in accumulated gain (loss) derivatives (net of income tax - $(3,229))
|
|
|
|
|
|
|
|
|
|
|
|
(5,952
|
)
|
|
|
(5,952
|
)
|
|
|
(5,952
|
)
|
Reclassification
adjustment for derivative amounts included in net income (net of income tax -
$768)
|
|
|
|
|
|
|
|
|
|
|
|
1,382
|
|
|
|
1,382
|
|
|
|
1,382
|
|
Change
in minimum pension liability adjustment (net of income tax - $325)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
603
|
|
603
|
|
|
|
603
|
|
Comprehensive
income for the three months ended June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
274,577
|
|
(127
|
)
|
274,450
|
|
Cash
dividends ($0.14 per share)
|
|
|
|
|
|
|
|
(11,994
|
)
|
|
|
|
|
|
|
(11,994
|
)
|
|
|
(11,994
|
)
|
Cumulative
effect adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(121
|
)
|
(121
|
)
|
Stock-based
compensation
|
|
|
|
1,731
|
|
252
|
|
|
|
|
|
|
|
|
|
1,983
|
|
|
|
1,983
|
|
Balance,
June 30, 2010
|
|
$
|
44,388
|
|
$
|
581,646
|
|
$
|
(25,745
|
)
|
$
|
2,307,820
|
|
$
|
241,389
|
|
$
|
(18,931
|
)
|
$
|
(44,968
|
)
|
$
|
3,085,599
|
|
$
|
(739
|
)
|
$
|
3,084,860
|
|
See Notes to Consolidated
Condensed Financial Statements
5
Table of Contents
PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS
OF CASH FLOWS
(Unaudited)
|
|
For The
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollars In Thousands)
|
|
Cash flows from operating
activities
|
|
|
|
|
|
Net income
|
|
$
|
110,950
|
|
$
|
112,892
|
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
|
|
|
|
|
Realized investment losses (gains)
|
|
56,024
|
|
10,399
|
|
Amortization of deferred policy acquisition costs
and value of business acquired
|
|
104,375
|
|
203,597
|
|
Capitalization of deferred policy acquisition
costs
|
|
(247,533
|
)
|
(180,269
|
)
|
Depreciation expense
|
|
4,604
|
|
3,322
|
|
Deferred income tax
|
|
27,558
|
|
2,342
|
|
Accrued income tax
|
|
71,090
|
|
3,437
|
|
Interest credited to universal life and investment
products
|
|
494,693
|
|
505,417
|
|
Policy fees assessed on universal life and
investment products
|
|
(299,620
|
)
|
(295,140
|
)
|
Change in reinsurance receivables
|
|
(219,984
|
)
|
(54,572
|
)
|
Change in accrued investment income and other
receivables
|
|
(6,052
|
)
|
(18,375
|
)
|
Change in policy liabilities and other
policyholders funds of traditional life and health products
|
|
238,548
|
|
111,564
|
|
Trading securities:
|
|
|
|
|
|
Maturities and principal reductions of investments
|
|
175,017
|
|
320,705
|
|
Sale of investments
|
|
319,383
|
|
429,179
|
|
Cost of investments acquired
|
|
(468,303
|
)
|
(426,631
|
)
|
Other net change in trading securities
|
|
(33,950
|
)
|
(150,378
|
)
|
Change in other liabilities
|
|
191,882
|
|
86,944
|
|
Other, net
|
|
39,597
|
|
(60,023
|
)
|
Net cash provided by operating
activities
|
|
558,279
|
|
604,410
|
|
Cash flows from investing
activities
|
|
|
|
|
|
Maturities and principal reductions of investments,
available-for-sale
|
|
889,299
|
|
1,320,521
|
|
Sale of investments, available-for-sale
|
|
1,979,372
|
|
582,088
|
|
Cost of investments acquired, available-for-sale
|
|
(3,627,942
|
)
|
(1,324,348
|
)
|
Mortgage loans:
|
|
|
|
|
|
New borrowings
|
|
(154,251
|
)
|
(140,420
|
)
|
Repayments
|
|
150,574
|
|
141,673
|
|
Change in investment real estate, net
|
|
1,969
|
|
(3,361
|
)
|
Change in policy loans, net
|
|
19,171
|
|
18,080
|
|
Change in other long-term investments, net
|
|
(29,548
|
)
|
17,030
|
|
Change in short-term investments, net
|
|
85,775
|
|
(605,064
|
)
|
Purchase of property and equipment
|
|
(5,171
|
)
|
(2,515
|
)
|
Net cash (used in) provided by
investing activities
|
|
(690,752
|
)
|
3,684
|
|
Cash flows from financing
activities
|
|
|
|
|
|
Borrowings under line of credit arrangements and
long-term debt
|
|
90,000
|
|
197,000
|
|
Principal payments on line of credit arrangement
and long-term debt
|
|
(260,000
|
)
|
(122,000
|
)
|
Issuance (repayment) of non-recourse funding
obligations
|
|
(18,400
|
)
|
|
|
Dividends to shareowners
|
|
(22,264
|
)
|
(16,799
|
)
|
Issuance of common stock
|
|
|
|
132,763
|
|
Investments product deposits and change in
universal life deposits
|
|
1,827,781
|
|
1,377,341
|
|
Investment product withdrawals
|
|
(1,529,502
|
)
|
(2,100,158
|
)
|
Other financing activities, net
|
|
(3,943
|
)
|
(19,059
|
)
|
Net cash provided by (used in)
financing activities
|
|
83,672
|
|
(550,912
|
)
|
Change in cash
|
|
(48,801
|
)
|
57,182
|
|
Cash at beginning of period
|
|
205,325
|
|
149,358
|
|
Cash at end of period
|
|
$
|
156,524
|
|
$
|
206,540
|
|
See Notes to Consolidated
Condensed Financial Statements
6
Table of Contents
PROTECTIVE LIFE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1.
BASIS OF PRESENTATION
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 (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 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 months period ended June 30, 2010, are not necessarily indicative
of the results that may be expected for the year ending December 31, 2010.
The year-end consolidated condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required by 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, 2009.
The
operating results of companies in the insurance industry have historically been
subject to significant fluctuations due to changing competition, economic
conditions, interest rates, investment performance, insurance ratings, claims,
persistency, and other factors.
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.
Entities
Included
The
consolidated condensed financial statements include the accounts of Protective
Life Corporation and subsidiaries and its affiliate companies in which the
Company holds a majority voting or economic interest. Intercompany balances and
transactions have been eliminated.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Pronouncements Recently Adopted
Accounting Standard Update (ASU
or Update) No. 2010-06 Fair Value Measurements and Disclosures
Improving Disclosures about Fair Value Measurements
.
In January of 2010, Financial Accounting Standards Board (FASB)
issued ASU No. 2010-06 Fair Value Measurements and Disclosures Improving
Disclosures about Fair Value Measurements. This Update provides
amendments to Subtopic 820-10 that requires the following new disclosures. 1) A
reporting entity should disclose separately the amounts of significant
transfers in and out of Level 1 and Level 2 fair value measurements and
describe the reasons for the transfers. 2) In the reconciliation for fair value
measurements using significant unobservable inputs (Level 3), a reporting
entity should present separately information about purchases, sales, issuances,
and settlements (that is, on a gross basis rather than as one net number).
This Update provides
amendments to Subtopic 820-10 that clarifies existing disclosures. 1) A
reporting entity should provide fair value measurement disclosures for each
class of assets and liabilities. 2) A reporting entity should provide
disclosures about the valuation techniques and inputs used to measure fair
value for both recurring and nonrecurring fair value measurements. Those
disclosures are required for fair value measurements that fall in either Level
2 or Level 3. This Update also includes conforming amendments to the guidance
on employers disclosures about postretirement benefit plan assets (Subtopic
715-20). The conforming amendments to Subtopic 715-20 change the terminology
from
major categories
of assets to
classes
of assets and provide a cross reference to the
guidance in Subtopic 820-10 on how to determine appropriate classes to present
fair value disclosures. This Update is effective for interim and annual
reporting periods beginning after December 15, 2009, which became
7
Table of Contents
effective for the Company
for the period ending March 31, 2010, except for the disclosures about
purchases, sales, issuances, and settlements in the roll forward of activity in
Level 3 fair value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010, and for interim periods within
those fiscal years. This Update did not have a material impact on the Companys
consolidated results of operations or financial position.
ASU No. 2009-16 Transfers
and Servicing Accounting for Transfers of Financial Assets
. In December of
2009, FASB issued ASU No. 2009-16 Transfers and Services Accounting
for Transfers of Financial Assets. The amendments in this Update incorporate
FASB Statement No. 166,
Accounting for
Transfers of Financial Assets an amendment of SFAS No. 140
into
the Accounting Standards Codification (ASC). That Statement was issued by the
Board on June 12, 2009. This Update enhances the information that a
reporting entity provides in its financial reports about a transfer of
financial assets; the effects of a transfer on its financial position,
financial performance, and cash flows; and a continuing interest in transferred
financial assets. This Update also eliminates the concept of a qualifying
special-purpose entity (QSPE), changes the requirements for de-recognition of
financial assets, and calls upon sellers of the assets to make additional
disclosures. This Update is effective for interim or annual reporting periods
beginning after November 15, 2009. This guidance was effective for the
Company on January 1, 2010. As of January 1, 2010, the Company held
interests in two previous transfers of financial assets to QSPEs, the 2007
Commercial Mortgage Securitization and the 1996 1999 Commercial Mortgage
Securitization. As part of adoption of this guidance the Company reviewed these
entities as part of our consolidation analysis of variable interest entities (VIEs).
The conclusion of the review was that the former QSPEs should be consolidated
by the Company. Please refer to Note 4,
Variable Interest Entities
for more information. The Company has not transferred any financial assets
since the adoption of this standard. The Company will apply this guidance
to all future transfers of financial assets.
ASU No. 2009-17
Consolidations Improvements to Financial Reporting by Enterprises Involved
with Variable Interest Entities
.
In
December of 2009, FASB issued ASU No. 2009-17 Consolidations
Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities. The amendments to this Update incorporate FASB Statement No. 167,
Amendments to FASB Interpretation No. 46(R)
(SFAS
No. 167)
into the ASC. SFAS
No. 167 was issued by the Board on June 12, 2009. This Statement
applies to all investments in VIEs beginning for the Company on January 1,
2010. This analysis will include QSPEs used for securitizations as SFAS No. 166
eliminated the concept of a QSPE which subjects former QSPEs to the provisions
of FIN 46(R) as amended by this statement. Based on our review of our December 31,
2009 information, the impact of adoption of ASU No. 2009-17 (SFAS No. 167)
resulted in the consolidation of two securitization trusts, the 2007 Commercial
Mortgage Securitization and the 1996 1999 Commercial Mortgage Securitization.
Please refer to Note 4,
Variable Interest Entities
for more information regarding the consolidation of these two
trusts.
Accounting Pronouncements Not Yet
Adopted
ASU No. 2010-15 Financial
ServicesInsurance How Investments Held through Separate Accounts Affect an
Insurers Consolidation Analysis of Those Investments
.
The amendments
in this Update clarify that an insurance entity should not consider any
separate account interests held for the benefit of policy holders in an
investment to be the insurers interests. The entity should not combine
general account and separate account interests in the same investment when
assessing the investment for consolidation. Additionally, the amendments do not
require an insurer to consolidate an investment in which a separate account holds
a controlling financial interest if the investment is not or would not be
consolidated in the standalone financial statements of the separate
account. The amendments in this Update also provide guidance on how an
insurer should consolidate an investment fund in situations in which the
insurer concludes that consolidation is required. This Update is effective
for fiscal years beginning after December 15, 2010. For the Company
this Update will be effective January 1, 2011. The Company is
currently evaluating the impact of this Update.
ASU No. 2010-20 Receivables
Disclosures about the Credit Quality of Financing Receivables and the
Allowance for Credit Losses
.
The objective of this Update
is to require disclosures that facilitate financial statement users in
evaluating the nature of credit risk inherent in the portfolio of financing
receivables (loans); how that risk is analyzed and assessed in arriving at the
allowance for credit losses; and any changes and the reasons for those changes
to the allowance for credit losses. The Update requires several new
disclosures regarding the reserve for credit losses and other disclosures
related to the credit quality of the Companys mortgage loan
portfolio. These new disclosure requirements will be effective for reporting
periods ending on or after December 15, 2010. For the Company this
will be December 31, 2010. This standard does not change current
accounting for Financing Receivables and Loans, but only requires additional
disclosures. The Company is evaluating the impact this Update will have on
the footnotes to the financial statements.
8
Table of
Contents
Significant
Accounting Policies
For a full description of
significant accounting policies, see Note 2 of Notes to Consolidated Financial
Statements included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2009. There were no significant changes to the
Companys accounting policies during the six months ended June 30, 2010,
except as noted above.
3
.
INVESTMENT OPERATIONS
Net
realized investment gains (losses) for all other investments are summarized as
follows:
|
|
For The
Three Months Ended
June 30, 2010
|
|
For The
Six Months Ended
June 30, 2010
|
|
|
|
(Dollars In Thousands)
|
|
Fixed maturities
|
|
$
|
5,650
|
|
$
|
12,376
|
|
Equity securities
|
|
13
|
|
13
|
|
Impairments on fixed maturity securities
|
|
(16,798
|
)
|
(28,667
|
)
|
Modco trading portfolio
|
|
63,967
|
|
108,060
|
|
Mortgage loans and other investments
|
|
(1,926
|
)
|
(4,846
|
)
|
|
|
$
|
50,906
|
|
$
|
86,936
|
|
For
the three and six months ended June 30, 2010, gross realized gains on
investments available-for-sale (fixed maturities, equity securities, and
short-term investments) were $35.1 million and $43.4 million and gross realized
losses were $46.2 million and $59.5 million, including $16.7 million and $28.5
million of impairment losses, respectively. The $16.7 million and $28.5 million
exclude $0.1 million and $0.2 million of impairment losses in the trading
portfolio for the three and six months ended June 30, 2010, respectively.
For
the three and six months ended June 30, 2010, the Company sold securities
in an unrealized gain position with a fair value (proceeds) of $802.6 million
and $1.8 billion, respectively. The gains realized on the sale of these
securities were $35.1 million and $43.4 million, respectively.
For
the three and six months ended June 30, 2010, the Company sold securities
in an unrealized loss position with a fair value (proceeds) of $131.5 million
and $234.2 million, respectively. The loss realized on the sale of these
securities was $29.5 million and $31.0 million, respectively. The $31.0 million
loss recognized on available-for-sale securities for the six months ended June 30,
2010, includes $12.2 million of loss on the sale of certain oil industry
holdings. The Company made the decision to exit these holdings pursuant to new
circumstances surrounding the oil spill in the Gulf of Mexico. In addition, a
$3.8 million loss was recognized on the sale of securities in which the issuer
was a European financial institution. Also included in the $31.0 million loss
is a $10.4 million loss due to the exchange of certain holdings as the issuer
exited bankruptcy proceedings.
9
Table of Contents
The
amortized cost and estimated fair value of the Companys investments classified
as available-for-sale as of June 30, 2010, are as follows:
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
|
|
(Dollars In Thousands)
|
|
2010
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
Bonds
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
$
|
3,256,885
|
|
$
|
52,304
|
|
$
|
(278,768
|
)
|
$
|
3,030,421
|
|
Commercial mortgage-backed securities
|
|
168,902
|
|
6,972
|
|
(403
|
)
|
175,471
|
|
Other asset-backed securities
|
|
951,209
|
|
2,275
|
|
(75,633
|
)
|
877,851
|
|
U.S. government-related securities
|
|
1,296,885
|
|
44,287
|
|
(227
|
)
|
1,340,945
|
|
Other government-related securities
|
|
202,044
|
|
5,431
|
|
(120
|
)
|
207,355
|
|
States, municipals, and political subdivisions
|
|
644,118
|
|
33,223
|
|
(1,626
|
)
|
675,715
|
|
Corporate bonds
|
|
13,606,892
|
|
975,099
|
|
(256,492
|
)
|
14,325,499
|
|
|
|
20,126,935
|
|
1,119,591
|
|
(613,269
|
)
|
20,633,257
|
|
Equity securities
|
|
314,325
|
|
4,062
|
|
(19,926
|
)
|
298,461
|
|
Short-term investments
|
|
842,287
|
|
|
|
|
|
842,287
|
|
|
|
$
|
21,283,547
|
|
$
|
1,123,653
|
|
$
|
(633,195
|
)
|
$
|
21,774,005
|
|
As
of June 30, 2010, the Company had an additional $3.1 billion of fixed
maturities, $10.5 million of equity securities, and $130.5 million of
short-term investments classified as trading securities.
The
amortized cost and fair value of available-for-sale fixed maturities as of June 30,
2010, by expected maturity, are shown below. Expected maturities of securities
without a single maturity date are allocated based on estimated rates of
prepayment that may differ from actual rates of prepayment.
|
|
Amortized
|
|
Fair
|
|
|
|
Cost
|
|
Value
|
|
|
|
(Dollars In Thousands)
|
|
Due in one year or less
|
|
$
|
619,408
|
|
$
|
629,649
|
|
Due after one year through five years
|
|
4,026,952
|
|
4,063,345
|
|
Due after five years through ten years
|
|
5,318,466
|
|
5,594,050
|
|
Due after ten years
|
|
10,162,109
|
|
10,346,213
|
|
|
|
$
|
20,126,935
|
|
$
|
20,633,257
|
|
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) an assessment of the
Companys intent to sell the security (including a more likely than not
assessment of whether the Company will be required to sell the security) before
recovering the securitys amortized cost, 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, and in some cases, an analysis regarding the Companys expectations
for recovery of the securitys entire amortized cost basis through the receipt
of future cash flows is performed. 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 expected future cash flows and the fair
value of the securities is recognized in other comprehensive income (loss) as a
non-credit portion of the recognized other-than-temporary impairment. When
calculating the post impairment cost for residential mortgage-backed
securities, commercial mortgage-backed securities, and other asset-backed
securities, the Company considers all known market data related to cash flows
to estimate future cash flows. When calculating the post
10
Table of Contents
impairment cost for
corporate debt securities, the Company considers all contractual cash flows to
estimate expected future cash flows. To calculate the post impairment cost, the
expected 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, 2010, the Company recorded
other-than-temporary impairments of investments of $36.7 million and $58.5
million, respectively. Of the $36.7 million of impairments for the three months
ended June 30, 2010, $16.8 million was recorded in earnings and $19.9
million was recorded in other comprehensive income (loss). Of the $58.5 million
of impairments for the six months ended June 30, 2010, $28.7 million was
recorded in earnings and $29.8 million was recorded in other comprehensive
income (loss). For the three and six months ended June 30, 2010, there
were no other-than-temporary impairments related to equity securities. For the
three and six months ended June 30, 2010, there were $36.7 million and
$58.5 million of other-than-temporary impairments related to debt securities,
respectively.
For
the three months ended June 30, 2010, 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 $36.7
million, with $16.8 million of credit losses recognized on debt securities in
earnings and $19.9 million of non-credit losses recorded in other comprehensive
income (loss). During the same 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, 2010, 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 $58.5
million, with $28.7 million of credit losses recognized on debt securities in
earnings and $29.8 million of non-credit losses recorded in other comprehensive
income (loss). During the same 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.
The
following chart is a rollforward of credit losses 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,
|
|
For The
Six Months Ended
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(Dollars In Thousands)
|
|
Beginning balance
|
|
$
|
33,366
|
|
$
|
40,014
|
|
$
|
25,076
|
|
$
|
|
|
Additions for newly impaired securities
|
|
12,894
|
|
15,404
|
|
19,450
|
|
55,418
|
|
Additions for previously impaired securities
|
|
17
|
|
7,136
|
|
1,751
|
|
7,136
|
|
Reductions for previously impaired securities due
to a change in expected cash flows
|
|
|
|
(15,826
|
)
|
|
|
(15,826
|
)
|
Reductions for previously impaired securities that
were sold in the current period
|
|
(14,701
|
)
|
|
|
(14,701
|
)
|
|
|
Ending balance
|
|
$
|
31,576
|
|
$
|
46,728
|
|
$
|
31,576
|
|
$
|
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, 2010:
|
|
Less
Than 12 Months
|
|
12
Months or More
|
|
Total
|
|
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
Fair
|
|
Unrealized
|
|
|
|
Value
|
|
Loss
|
|
Value
|
|
Loss
|
|
Value
|
|
Loss
|
|
|
|
(Dollars
In Thousands)
|
|
Residential
mortgage-backed securities
|
|
$
|
182,046
|
|
$
|
(12,448
|
)
|
$
|
1,835,502
|
|
$
|
(266,320
|
)
|
$
|
2,017,548
|
|
$
|
(278,768
|
)
|
Commercial
mortgage-backed securities
|
|
|
|
|
|
6,604
|
|
(403
|
)
|
6,604
|
|
(403
|
)
|
Other
asset-backed securities
|
|
448,886
|
|
(41,945
|
)
|
241,180
|
|
(33,688
|
)
|
690,066
|
|
(75,633
|
)
|
U.S.
government-related securities
|
|
46,105
|
|
(227
|
)
|
|
|
|
|
46,105
|
|
(227
|
)
|
Other
government-related securities
|
|
69,407
|
|
(103
|
)
|
19,983
|
|
(17
|
)
|
89,390
|
|
(120
|
)
|
States,
municipals, and political subdivisions
|
|
95,739
|
|
(1,615
|
)
|
483
|
|
(11
|
)
|
96,222
|
|
(1,626
|
)
|
Corporate
bonds
|
|
1,034,587
|
|
(38,978
|
)
|
1,655,541
|
|
(217,514
|
)
|
2,690,128
|
|
(256,492
|
)
|
Equities
|
|
52,083
|
|
(11,888
|
)
|
48,512
|
|
(8,038
|
)
|
100,595
|
|
(19,926
|
)
|
|
|
$
|
1,928,853
|
|
$
|
(107,204
|
)
|
$
|
3,807,805
|
|
$
|
(525,991
|
)
|
$
|
5,736,658
|
|
$
|
(633,195
|
)
|
The
residential mortgage-backed securities (RMBS) have a gross unrealized loss
greater than twelve months of $266.3 million as of June 30, 2010. These
losses relate to a widening in spreads and defaults as a result of continued
weakness in the residential housing market. Factors such as the credit
enhancement within the deal structure, the average life of the securities, and
the performance of the underlying collateral support the recoverability of the
investments.
The
corporate bonds category has gross unrealized losses greater than twelve months
of $217.5 million as of June 30, 2010. 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 these 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, 2010, the Company had securities in its available-for-sale
portfolio, which were rated below investment grade of $3.0 billion and had an
amortized cost of $3.3 billion. In addition, included in the Companys trading
portfolio, the Company held $355.9 million of securities which were rated below
investment grade. Approximately $486.2 million of the below investment grade
securities 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, 2010
|
|
June 30, 2010
|
|
|
|
(Dollars In Thousands)
|
|
Fixed maturities
|
|
$
|
289,673
|
|
$
|
587,738
|
|
Equity securities
|
|
(10,706
|
)
|
(6,986
|
)
|
|
|
|
|
|
|
|
|
4.
VARIABLE
INTEREST ENTITIES
In June of 2009, the FASB amended the
guidance related to VIEs which was later codified in the ASC through ASU No. 2009-17.
Among other accounting and disclosure requirements, this guidance replaces the
quantitative-based risks and rewards calculation for determining which
enterprise has a controlling financial interest in a VIE with an approach
focused on identifying which enterprise has the power to direct the activities
of a VIE that most significantly impact its economics and the obligation to
absorb losses of the entity or the right to receive benefits from the entity
that could potentially be significant to the VIE. Additionally, the FASB
amended the guidance related to accounting for transfers of financial assets which
was later codified in the ASC through ASU No. 2009-16.
This
guidance, among other requirements, removed the concept of a QSPE used for the
securitization
12
Table of Contents
of financial assets. Previously, QSPEs were
excluded from the guidance related to VIEs. Upon adoption of ASU No. 2009-17
and ASU No. 2009-16 on January 1, 2010, the Company will no longer
exclude QSPEs from the analysis of VIEs.
As part of adopting these updates, the Company
updated its process for evaluating VIEs. The Companys analysis consists of a
review of entities in which the Company has an ownership interest that is less
than 100% (excluding debt and equity securities held as trading and
available-for-sale), as well as entities with which the Company has significant
contracts or other relationships that could possibly be considered variable
interests. The Company reviews the characteristics of each of these applicable
entities and compares those characteristics to the criteria of a VIE set forth
in Topic 810 of the FASB ASC. If the entity is determined to be a VIE, the
Company then performs a detailed review of all significant contracts and
relationships (individually an interest, collectively interests) with the
entity to determine whether the interest would be considered a variable
interest under the guidance. The Company then performs a qualitative review of
all variable interests with the entity and determines whether the Company: 1)
has the power to direct the activities of the VIE that most significantly
impact the VIEs economic performance and 2) the obligation to absorb losses of
the VIE that could potentially be significant to the VIE or the right to
receive benefits from the entity that could potentially be significant to the
VIE.
Based on this analysis the Company had
interests in two former QSPEs that were determined to be VIEs as of January 1,
2010. These two VIEs were trusts used to facilitate commercial mortgage loan
securitizations. The determining factor was that the trusts had negligible or
no equity at risk. The Companys variable interests in the trusts are created
by the contract to service the mortgage loans held by the trusts as well as the
retained beneficial interests in certain of these securities issued by the
trusts. The activities that most significantly impact the economics of the
trusts are predominantly related to the servicing of the mortgage loans, such
as timely collection of principal and interest, direction of foreclosure
proceedings, and management and sale of foreclosed real estate owned by the
trusts. The Company is the servicer responsible for these activities and has
the sole power to appoint such servicer through its beneficial interests in the
securities. These criteria give the Company the power to direct the activities
of the trusts that most significantly impact the trusts economic performance.
Additionally, the Company is obligated, as an owner of the securities issued by
the trusts, to absorb its share of losses on the securities. The Companys
share of losses could potentially be significant to the trusts. Based on the
fact that the Company has the power to direct the activities that most
significantly impact the economics of the trusts and the obligation to absorb
losses that could potentially be significant, it was determined that the
Company is the primary beneficiary of the trusts, thus resulting in
consolidation.
The assets of the trusts consist entirely of
commercial mortgage loans and accrued interest, which are restricted and can
only be used to satisfy the obligations of the trusts. The obligations of the
trusts consist of commercial mortgage-backed certificates. The assets and
obligations of the trusts are equal and thus, the trusts have no equity
interest. The certificates are direct obligations of the trusts and are not
guaranteed by the Company. The Company has no other obligations to the trusts
other than those that are customary for a servicer of mortgage loans. Over the life of the trusts, the Company has
not provided and will not provide any financial or other support to the trusts
other than customary actions taken by a servicer of mortgage loans.
13
Table of Contents
The following adjustments to the
Companys consolidated condensed balance sheet were made as of January 1,
2010:
Adjustments
to the Consolidated Condensed Balance Sheets
|
|
As of
|
|
|
|
January 1, 2010
|
|
|
|
(Dollars In Thousands)
|
|
Assets
|
|
|
|
Fixed maturities:
|
|
|
|
Commercial mortgage-backed securities at fair
value (amortized cost - $873,196)
|
|
$
|
(844,535
|
)
(1)
|
Mortgage loans - securitized (net of loan loss
reserve of $1.1 million)
|
|
1,018,000
|
(2)
|
Total investments
|
|
173,465
|
|
Accrued investment income
|
|
361
|
(2)
|
Total Assets
|
|
$
|
173,826
|
|
Liabilities
|
|
|
|
Deferred income taxes
|
|
$
|
17,744
|
(3)
|
Mortgage loan backed certificates
|
|
124,580
|
(2)
|
Other liabilities
|
|
(1,400
|
)
(4)
|
Total liabilities
|
|
140,924
|
|
Shareowners equity
|
|
|
|
Retained earnings
|
|
14,290
|
(2)
|
Accumulated other comprehensive income (loss)
|
|
18,612
|
(5)
|
Total shareowners equity
|
|
32,902
|
|
Total liabilities and
shareowners equity
|
|
$
|
173,826
|
|
(1)
|
The noncash portion for
the consolidated condensed statements of cash flows for the three months
ended March 31, 2010, was $873.2 million.
|
(2)
|
The noncash portion for
the consolidated condensed statements of cash flows for the three months
ended March 31, 2010, is the amount presented.
|
(3)
|
The noncash portion for
the consolidated condensed statements of cash flows for the three months
ended March 31, 2010, was $7.7 million.
|
(4)
|
The other liabilities
did not have an effect on the consolidated condensed statements of cash flows
for the three months ended March 31, 2010.
|
(5)
|
The accumulated other comprehensive income (loss)
did not have an effect on the consolidated condensed statements of cash flows
for the three months ended March 31, 2010.
|
|
|
The adjustments
had a net zero impact to the consolidated condensed statements of cash flows.
|
The reduction in fixed maturity commercial
mortgage-backed securities (CMBS) represents the beneficial interests held by
the Company that have been removed due to the consolidation of the trusts. This
amount is reflected in fixed maturities on the consolidated condensed balance
sheet.
The increase in mortgage loans represents the
mortgage loans held by the trusts that have been consolidated. This balance is
net of a loan loss reserve of $1.1 million.
The increase in accrued investment income is
the result of accruing interest on the entire pool of mortgage loans.
The increase in deferred income taxes is a
result of a change in temporary tax differences arising from the adjustments to
shareowners equity.
The mortgage loan backed certificates
liability represents the commercial mortgage-backed securities issued by the
trusts and held by third parties.
The decrease in other liabilities is a
decrease in amounts payable to the trusts of approximately $1.4 million. Upon
consolidation of the trusts as of January 1, 2010, the Company adjusted
retained earnings to reflect after tax interest income not recognized in prior
periods due to the securitization of the commercial mortgage loans. If the
Company had held the mortgage loans as opposed to the retained beneficial
interest securities, the Companys retained earnings would have been $14.3
million higher over the life of the securities.
The
adjustment to accumulated other comprehensive income (loss) was a result of
different accounting basis for mortgage loans and the CMBS. As of December 31,
2009, the retained beneficial interest securities were
14
Table of Contents
carried
at fair value in the balance sheet and had an after tax unrealized loss in
accumulated other comprehensive income (loss) of $18.6 million. Upon
consolidation of the trusts on January 1, 2010, the Company consolidated
the mortgage loans held by the trusts which are carried at amortized cost less
any related loan loss reserve. The retained beneficial interest securities as
well as the associated unrealized loss were eliminated in consolidation.
5.
GOODWILL
During
the six months ended June 30, 2010, the Company decreased its goodwill
balance by approximately $1.5 million. The decrease was due to adjustments in
the Acquisitions segment related to tax benefits realized during 2010 on the
portion of tax goodwill in excess of GAAP basis goodwill. As of June 30,
2010, the Company had an aggregate goodwill balance of $116.3 million.
Accounting
for goodwill requires an estimate of the future profitability of the associated
lines of business to assess the recoverability of the capitalized acquisition
goodwill. The Company evaluates the carrying value of goodwill at the segment
(or reporting unit) level 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 compared 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 (which includes a discounted cash flows analysis) 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. The Companys material goodwill balances are attributable to its
operating segments (which are considered to be reporting units). The cash flows
used to determine the fair value of the Companys reporting units are dependent
on a number of significant assumptions. The Companys estimates are subject to
change given the inherent uncertainty in predicting future results and cash
flows, which are impacted by such things as policyholder behavior, competitor
pricing, capital limitations, new product introductions, and specific industry
and market conditions. Additionally, the discount rate used is based on the
Companys judgment of the appropriate rate for each reporting unit based on the
relative risk associated with the projected cash flows. As of December 31,
2009, the Company performed its annual evaluation of goodwill and determined
that no adjustment to impair goodwill was necessary.
The Company also considers
its market capitalization in assessing the reasonableness of the fair values
estimated for its reporting units in connection with its goodwill impairment
testing. In considering the Companys June 30, 2010 common equity price,
which was lower than its book value per share, the Company noted there are
several factors that would result in its market capitalization being lower than
the fair value of its reporting units that are tested for goodwill impairment.
Such factors that would not be reflected in the valuation of the Companys
reporting units with goodwill include, but are not limited to: a potential
concern about future earnings growth; negative market sentiment, different
valuation methodologies that resulted in low valuation, and increased risk
premium for holding investments in mortgage-backed securities and commercial
mortgage loans. Deterioration of or adverse market conditions for certain
businesses may have a significant impact on the fair value of the Companys
reporting units. As previously noted, the fair value of the Companys operating
segments support the goodwill balance as of June 30, 2010. In the Companys
view, the decline in market capitalization does not invalidate the Companys
fair value assessment related to the recoverability of goodwill in its
reporting units, and did not result in a triggering or impairment event.
15
Table of Contents
6
.
DEBT AND OTHER OBLIGATIONS
Non-recourse
funding obligations outstanding as of June 30, 2010, on a consolidated
basis, are shown in the following table:
|
|
|
|
|
|
Year-to-Date
|
|
|
|
|
|
|
|
Weighted-Avg
|
|
Issuer
|
|
Balance
|
|
Maturity Year
|
|
Interest Rate
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
|
Golden Gate II Captive Insurance Company
|
|
$
|
556,600
|
|
2052
|
|
1.47
|
%
|
|
|
|
|
|
|
|
|
|
During
the three months ended June 30, 2010, the Company repurchased $18.4
million of non-recourse funding obligations and recognized a $9.5 million gain
on the repurchase of these obligations.
Golden
Gate II Captive Insurance Company (Golden Gate II), a special
purpose financial captive insurance company wholly owned by PLICO, had $575
million of outstanding non-recourse funding obligations as of June 30,
2010. Of this amount, $556.6 million were owned by external parties and
$18.4 million were owned by an affiliate.
Under
a revolving line of credit arrangement, the Company has the ability to borrow
on an unsecured basis up to an aggregate principal amount of $500 million (the Credit
Facility). There was an outstanding balance of $115.0 million at an interest rate
of LIBOR plus 0.40% under the Credit Facility as of June 30, 2010. As
discussed in more detail in Item 2,
Managements Discussion
and Analysis of Financial Condition and Results of Operations
, Capital
Resources, in the second quarter of 2010, the Company repaid $180.0 million of
the outstanding balance of the credit facility that was previously used to
purchase non-recourse funding obligations issued by an indirect, wholly owned
special purpose financial captive insurance company.
7.
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 governance documents. See
Item 1, Note 16,
Subsequent Events
,
for information regarding the Companys contingent liability with respect to
indemnification of its directors.
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, 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.
16
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,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(Dollars In Thousands)
|
|
Net income
|
|
$
|
41,244
|
|
$
|
90,757
|
|
$
|
110,950
|
|
$
|
112,892
|
|
Change in net unrealized gains (losses) on
investments, net of income tax: (three months: 2010 - $130,774; 2009 -
$337,533 six months: 2010 - $273,255; 2009 $313,087)
|
|
242,856
|
|
610,113
|
|
506,815
|
|
566,408
|
|
Change in net unrealized gains (losses) relating
to other-than-temporary impaired investments for which a portion has been
recognized in earnings, net of income tax: (three months: 2010 - $(6,960);
2009 - $(2,767) six months: 2010 - $(10,455); 2009 $(12,388))
|
|
(12,924
|
)
|
(5,139
|
)
|
(19,416
|
)
|
(23,006
|
)
|
Change in accumulated (loss) gain - derivatives,
net of income tax: (three months: 2010 - $(3,229); 2009 - $2,463 six months:
2010 - $(194); 2009 - $10,321)
|
|
(5,952
|
)
|
4,186
|
|
(234
|
)
|
18,578
|
|
Minimum pension liability adjustment, net of
income tax: (three months: 2010 - $325; 2009 - $178 six months: 2010 - $649;
2009 - $355)
|
|
603
|
|
331
|
|
1,205
|
|
660
|
|
Reclassification adjustment for investment amounts
included in net income, net of income tax: (three months: 2010 - $3,894; 2009
- $9,674 six months: 2010 - $5,619; 2009 - $39,523)
|
|
7,241
|
|
17,730
|
|
10,659
|
|
72,153
|
|
Reclassification adjustment for derivative amounts
included in net income, net of income tax: (three months: 2010 $768; 2009 - $565
six months: 2010 $(206); 2009 - $302)
|
|
1,382
|
|
1,264
|
|
(370
|
)
|
544
|
|
Comprehensive income (loss)
|
|
274,450
|
|
719,242
|
|
609,609
|
|
748,229
|
|
Comprehensive income (loss) attributable to
noncontrolling interests
|
|
127
|
|
|
|
200
|
|
|
|
Comprehensive income (loss) attributable to
Protective Life Corporation
|
|
$
|
274,577
|
|
$
|
719,242
|
|
$
|
609,809
|
|
$
|
748,229
|
|
9.
STOCK-BASED COMPENSATION
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 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. There were no performance share awards issued
during the six months ended June 30, 2010 or 2009.
Stock
appreciation right (SARs) have been 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 is as
follows:
|
|
Weighted-Average
|
|
|
|
|
|
Base Price per share
|
|
No. of SARs
|
|
Balance as of December 31, 2009
|
|
$
|
22.28
|
|
2,469,202
|
|
SARs granted
|
|
18.34
|
|
344,400
|
|
SARs exercised / forfeited / expired
|
|
21.24
|
|
(454,071
|
)
|
Balance as of June 30, 2010
|
|
$
|
21.90
|
|
2,359,531
|
|
The
SARs issued for the six months ended June 30, 2010, had estimated fair
values at grant date of $3.3 million. These fair values were estimated
using a Black-Scholes option pricing model. The assumptions used in this
pricing model varied depending on the vesting period of awards. Assumptions
used in the model for the 2010
17
Table of Contents
SARs
granted (the simplified method under the ASC Compensation-Stock Compensation
Topic was used for the 2010 awards) were as follows: an expected volatility of
69.4%, a risk-free interest rate of 2.6%, a dividend rate of 2.4%, a zero
percent forfeiture rate, and an expected exercise date of 2016. 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 360,450 restricted stock units for the six months ended June 30,
2010. These awards had a total fair
value at grant date of $6.6 million. Approximately half of these restricted
stock units vest in 2013, and the remainder vest in 2014.
10.
EMPLOYEE BENEFIT PLANS
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,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(Dollars In Thousands)
|
|
Service cost benefits earned during the period
|
|
$
|
2,068
|
|
$
|
1,889
|
|
$
|
4,136
|
|
$
|
3,778
|
|
Interest cost on projected benefit obligation
|
|
2,357
|
|
2,395
|
|
4,714
|
|
4,790
|
|
Expected return on plan assets
|
|
(2,312
|
)
|
(2,531
|
)
|
(4,624
|
)
|
(5,062
|
)
|
Amortization of prior service cost
|
|
(98
|
)
|
(98
|
)
|
(196
|
)
|
(196
|
)
|
Amortization of actuarial losses
|
|
1,026
|
|
568
|
|
2,052
|
|
1,136
|
|
Total benefit cost
|
|
$
|
3,041
|
|
$
|
2,223
|
|
$
|
6,082
|
|
$
|
4,446
|
|
During
the six months ended June 30, 2010, the Company did not make a
contribution to its defined benefit pension plan. However, during July of
2010, the Company contributed $0.2 million to the defined benefit pension plan.
The Company will continue to make contributions in future periods as necessary
to at least satisfy minimum funding requirements.
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 six months ended June 30, 2010, was immaterial to the Companys
financial statements.
18
Table of Contents
11.
EARNINGS
PER SHARE
Basic
earnings per share is computed by dividing net income available to PLCs common
shareowners 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
available to PLCs common shareowners 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.
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,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(Dollars In Thousands, Except Per Share Amounts)
|
|
Calculation of basic earnings per
share:
|
|
|
|
|
|
|
|
|
|
Net income available to PLCs common shareowners
|
|
$
|
41,371
|
|
$
|
90,757
|
|
$
|
111,150
|
|
$
|
112,892
|
|
|
|
|
|
|
|
|
|
|
|
Average shares issued and outstanding
|
|
85,634,202
|
|
76,980,175
|
|
85,610,825
|
|
73,480,155
|
|
Issuable under various deferred compensation plans
|
|
928,177
|
|
913,305
|
|
920,636
|
|
911,326
|
|
Weighted shares outstanding - Basic
|
|
86,562,379
|
|
77,893,480
|
|
86,531,461
|
|
74,391,481
|
|
|
|
|
|
|
|
|
|
|
|
Per share:
|
|
|
|
|
|
|
|
|
|
Net income available to PLCs common shareowners -
basic
|
|
$
|
0.48
|
|
$
|
1.17
|
|
$
|
1.28
|
|
$
|
1.52
|
|
|
|
|
|
|
|
|
|
|
|
Calculation of diluted earnings
per share:
|
|
|
|
|
|
|
|
|
|
Net income available to PLCs common shareowners
|
|
$
|
41,371
|
|
$
|
90,757
|
|
$
|
111,150
|
|
$
|
112,892
|
|
|
|
|
|
|
|
|
|
|
|
Weighted shares outstanding - Basic
|
|
86,562,379
|
|
77,893,480
|
|
86,531,461
|
|
74,391,481
|
|
Stock appreciation rights (SARs)
(1)
|
|
471,503
|
|
330,356
|
|
465,304
|
|
274,829
|
|
Issuable under various other stock-based
compensation plans
|
|
138,173
|
|
100,973
|
|
146,599
|
|
149,766
|
|
Restricted stock units
|
|
493,980
|
|
203,702
|
|
465,663
|
|
163,960
|
|
Weighted shares outstanding - Diluted
|
|
87,666,035
|
|
78,528,511
|
|
87,609,027
|
|
74,980,036
|
|
|
|
|
|
|
|
|
|
|
|
Per share:
|
|
|
|
|
|
|
|
|
|
Net income available to PLCs common shareowners -
diluted
|
|
$
|
0.47
|
|
$
|
1.16
|
|
$
|
1.27
|
|
$
|
1.51
|
|
(1)
Excludes 1,475,645 and 1,554,373 as of June 30,
2010 and 2009, respectively, that are antidilutive. In the event the average
market price exceeds the issue 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 outstanding for applicable periods.
12.
INCOME
TAXES
During the three months
ended June 30, 2010, earnings were impacted unfavorably by $0.2 million
due to the accrual of interest on unrecognized tax benefits. During the six
months ended June 30, 2010, earnings were impacted favorably by $2.3
million due to the release of unrecognized income tax benefits relating to
tax-basis policy liabilities as well as the closing of the statue of limitation
for the 2005 tax year. This release was prompted by the Internal Revenue
Services recent technical guidance confirming the Companys historical
calculations. 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.
The
Company has computed its effective income tax rate for the three and six months
ended June 30, 2010, based upon its estimate of its annual 2010 income.
For the three and six months ended June 30, 2009, due to the
unpredictability at that time of future investment losses and certain elements
of operating income, the Company was not able to reasonably estimate an expected
annual effective tax rate. Instead, the Company computed an effective income
tax rate based upon year-to-date reported income. The effective tax rate for
the three and six months ended June 30, 2010, was 36.0% and 33.1%,
respectively, and 35.3% and 34.5% for three and six months ended June 30,
2009, respectively.
19
Table of Contents
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, 2010.
13. 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 FASB guidance referenced in the Fair Value
Measurements and Disclosures Topic 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
from the FASB guidance that is referenced in the Fair Value Measurements and
Disclosures Topic 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.
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
The
following table presents the Companys hierarchy for its assets and liabilities
measured at fair value on a recurring basis as of June 30, 2010:
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
(Dollars In Thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities - available-for-sale
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
$
|
|
|
$
|
3,030,400
|
|
$
|
21
|
|
$
|
3,030,421
|
|
Commercial mortgage-backed securities
|
|
|
|
135,519
|
|
39,952
|
|
175,471
|
|
Other asset-backed securities
|
|
|
|
280,560
|
|
597,291
|
|
877,851
|
|
U.S. government-related securities
|
|
1,024,017
|
|
301,779
|
|
15,149
|
|
1,340,945
|
|
States, municipals, and political subdivisions
|
|
|
|
675,633
|
|
82
|
|
675,715
|
|
Other government-related securities
|
|
14,987
|
|
192,368
|
|
|
|
207,355
|
|
Corporate bonds
|
|
100
|
|
14,217,023
|
|
108,376
|
|
14,325,499
|
|
Total fixed maturity securities - available-for-sale
|
|
1,039,104
|
|
18,833,282
|
|
760,871
|
|
20,633,257
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities - trading
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
|
|
480,943
|
|
|
|
480,943
|
|
Commercial mortgage-backed securities
|
|
|
|
121,559
|
|
|
|
121,559
|
|
Other asset-backed securities
|
|
|
|
12,616
|
|
61,137
|
|
73,753
|
|
U.S. government-related securities
|
|
455,716
|
|
23,954
|
|
3,562
|
|
483,232
|
|
States, municipals, and political subdivisions
|
|
|
|
108,134
|
|
|
|
108,134
|
|
Other government-related securities
|
|
|
|
161,494
|
|
|
|
161,494
|
|
Corporate bonds
|
|
|
|
1,625,113
|
|
43
|
|
1,625,156
|
|
Total fixed maturity securities - trading
|
|
455,716
|
|
2,533,813
|
|
64,742
|
|
3,054,271
|
|
Total fixed maturity securities
|
|
1,494,820
|
|
21,367,095
|
|
825,613
|
|
23,687,528
|
|
Equity securities
|
|
217,718
|
|
18,096
|
|
73,137
|
|
308,951
|
|
Other long-term investments
(1)
|
|
919
|
|
2,534
|
|
9,531
|
|
12,984
|
|
Short-term investments
|
|
953,107
|
|
19,697
|
|
|
|
972,804
|
|
Total investments
|
|
2,666,564
|
|
21,407,422
|
|
908,281
|
|
24,982,267
|
|
Cash
|
|
156,524
|
|
|
|
|
|
156,524
|
|
Other assets
|
|
5,071
|
|
|
|
|
|
5,071
|
|
Assets related to separate acccounts
|
|
|
|
|
|
|
|
|
|
Variable annuity
|
|
3,307,239
|
|
|
|
|
|
3,307,239
|
|
Variable universal life
|
|
304,423
|
|
|
|
|
|
304,423
|
|
Total assets measured at fair value on a recurring
basis
|
|
$
|
6,439,821
|
|
$
|
21,407,422
|
|
$
|
908,281
|
|
$
|
28,755,524
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Annuity account balances
(2)
|
|
$
|
|
|
$
|
|
|
$
|
149,440
|
|
$
|
149,440
|
|
Other liabilities
(1)
|
|
|
|
44,842
|
|
233,197
|
|
278,039
|
|
Total liabilities measured at fair value on a
recurring basis
|
|
$
|
|
|
$
|
44,842
|
|
$
|
382,637
|
|
$
|
427,479
|
|
(1)
Includes
certain freestanding and embedded derivatives.
(2)
Represents liabilities related to equity
indexed annuities.
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 December 31, 2009:
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
(Dollars In Thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities - available-for-sale
|
|
|
|
|
|
|
|
|
|
Residential mortgage-backed securities
|
|
$
|
|
|
$
|
3,370,688
|
|
$
|
23
|
|
$
|
3,370,711
|
|
Commercial mortgage-backed securitites
|
|
|
|
143,486
|
|
844,535
|
|
988,021
|
|
Other asset-backed securities
|
|
|
|
360,797
|
|
693,930
|
|
1,054,727
|
|
U.S. government-related securities
|
|
444,302
|
|
30,198
|
|
15,102
|
|
489,602
|
|
States, municipals, and political subdivisions
|
|
|
|
350,632
|
|
86
|
|
350,718
|
|
Other government-related securities
|
|
16,992
|
|
389,379
|
|
|
|
406,371
|
|
Corporate bonds
|
|
200
|
|
13,127,347
|
|
86,328
|
|
13,213,875
|
|
Total fixed maturity securities -
available-for-sale
|
|
461,494
|
|
17,772,527
|
|
1,640,004
|
|
19,874,025
|
|
Fixed maturity securities - trading
|
|
277,108
|
|
2,574,205
|
|
105,089
|
|
2,956,402
|
|
Total fixed maturity securities
|
|
738,602
|
|
20,346,732
|
|
1,745,093
|
|
22,830,427
|
|
Equity securities
|
|
204,697
|
|
92
|
|
70,708
|
|
275,497
|
|
Other long-term investments
(1)
|
|
|
|
22,926
|
|
16,525
|
|
39,451
|
|
Short-term investments
|
|
983,123
|
|
66,486
|
|
|
|
1,049,609
|
|
Total investments
|
|
1,926,422
|
|
20,436,236
|
|
1,832,326
|
|
24,194,984
|
|
Cash
|
|
205,325
|
|
|
|
|
|
205,325
|
|
Other assets
|
|
4,977
|
|
|
|
|
|
4,977
|
|
Assets related to separate acccounts
|
|
|
|
|
|
|
|
|
|
Variable annuity
|
|
2,948,457
|
|
|
|
|
|
2,948,457
|
|
Variable universal life
|
|
316,007
|
|
|
|
|
|
316,007
|
|
Total assets measured at fair value on a recurring
basis
|
|
$
|
5,401,188
|
|
$
|
20,436,236
|
|
$
|
1,832,326
|
|
$
|
27,669,750
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Annuity account balances
(2)
|
|
$
|
|
|
$
|
|
|
$
|
149,893
|
|
$
|
149,893
|
|
Other liabilities
(1)
|
|
|
|
43,045
|
|
105,838
|
|
148,883
|
|
Total liabilities measured at fair value on a recurring
basis
|
|
$
|
|
|
$
|
43,045
|
|
$
|
255,731
|
|
$
|
298,776
|
|
(1)
Includes
certain freestanding and embedded derivatives.
(2)
Represents liabilities related to equity
indexed annuities.
Determination of fair values
The
valuation methodologies used to determine the fair values of assets and
liabilities 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 as listed in the above table.
22
Table of Contents
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 non-binding broker quotations,
which are considered to have no significant unobservable inputs. When using
non-binding independent broker quotations, the Company 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, 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. The Company did not adjust any
quotes or prices received from brokers during the six months ended June 30,
2010.
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 fair value hierarchy level
based upon trading activity and the observability of market inputs that is in
accordance with the Fair Value Measurements and Disclosures Topic of the ASC.
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.
Asset-Backed
Securities
This
category mainly consists of residential mortgage-backed securities, commercial
mortgage-backed securities, and other asset-backed securities (collectively
referred to as asset-backed securities ABS). As of June 30, 2010, the
Company held $4.1 billion of ABS classified as Level 2. These securities are
priced from information from a third party pricing service and independent broker
quotes. The third party pricing services and brokers mainly value securities
using both a market and income approach to valuation. As part of this valuation
process they consider the following characteristics of the item being measured
to be relevant inputs: 1) weighted-average coupon rate, 2) weighted-average
years to maturity, 3) types of underlying assets, 4) weighted-average coupon
rate of the underlying assets, 5) weighted-average years to maturity of the
underlying assets, 6) seniority level of the tranches owned, and 7) credit
ratings of the securities.
After
reviewing these characteristics of the ABS, the third party pricing service and
brokers use certain inputs to determine the value of the security. For ABS
classified as Level 2, the valuation would consist of predominantly market
observable inputs such as, but not limited to: 1) monthly principal and
interest payments on
23
Table of Contents
the underlying assets, 2)
average life of the security, 3) prepayment speeds, 4) credit spreads, 5)
treasury and swap yield curves, and 6) discount margin.
As
of June 30, 2010, the Company held $698.4 million of Level 3 ABS, which included
$61.1 million of other asset-backed securities classified as trading. These
securities are predominantly auction rate securities (ARS) whose underlying
collateral is at least 97% guaranteed by the Federal Family Education Loan
Program (FFELP). The model uses the discount margin and projected average
life of comparable actively traded FFELP student loan-backed floating-rate
asset-backed securities, along with a discount related to the current
illiquidity of the ARS. These comparable securities are selected based on their
underlying assets (i.e. FFELP-backed student loans) and vintage. As a result of
the ARS market collapse during 2008, the Company prices its ARS using an
internally developed model which utilizes a market based approach to valuation.
As part of the valuation process the Company reviews the following
characteristics of the ARS in determining the relevant inputs: 1)
weighted-average coupon rate, 2) weighted-average years to maturity, 3) types
of underlying assets, 4) weighted-average coupon rate of the underlying assets,
5) weighted-average years to maturity of the underlying assets, 6) seniority
level of the tranches owned, and 7) credit ratings of the securities.
Available-for-sale
ABSs classified as Level 3 had, but were not limited to, the following inputs:
Investment
grade credit rating
|
|
100.0%
|
Weighted-average
yield
|
|
1.1%
|
Amortized
cost
|
|
$692.7
million
|
Weighted-average
life
|
|
3.22
years
|
Corporate bonds, U.S. Government-related securities, and Other
government related securities
As
of June 30, 2010, the Company classified approximately $17.3 billion of
corporate bonds, U.S. government-related securities, and other
government-related securities as Level 2. The fair value of the Level 2 bonds
and securities is predominantly priced by broker quotes and a third party
pricing service. The Company has reviewed the valuation techniques of the
brokers and third party pricing service and has determined that such techniques
used Level 2 market observable inputs. The following characteristics of the
bonds and securities are considered to be the primary relevant inputs to the
valuation: 1) weighted-average coupon rate, 2) weighted-average years to
maturity, 3) seniority, and 4) credit ratings.
The
brokers and third party pricing service utilizes a valuation model that
consists of a hybrid income and market approach to valuation. The pricing model
utilizes the following inputs: 1) principal and interest payments, 2) treasury
yield curve, 3) credit spreads from new issue and secondary trading markets, 4)
dealer quotes with adjustments for issues with early redemption features, 5)
liquidity premiums present on private placements, and 6) discount margins from
dealers in the new issue market.
As
of June 30, 2010, the Company classified approximately $127.2 million of
bonds and securities as Level 3 valuations. The fair value of the Level 3 bonds
and securities are derived from an internal pricing model that utilizes a
hybrid market/income approach to valuation. The Company reviews the following characteristics
of the bonds and securities to determine the relevant inputs to use in the
pricing model: 1) coupon rate, 2) years to maturity, 3) seniority, 4) embedded
options, 5) trading volume, and 6) credit ratings.
Level
3 bonds and securities primarily represent investments in illiquid bonds for
which no price is readily available. To determine a price, the Company uses a
discounted cash flow model with both observable and unobservable inputs. These
inputs are entered into an industry standard pricing model to determine the
final price of the security. These inputs include: 1) principal and interest
payments, 2) coupon, 3) sector and issuer level spreads, 4) underlying
collateral, 5) credit ratings, 6) maturity, 7) embedded options, 8) recent new
issuance, 9) comparative bond analysis, and 10) an illiquidity premium.
24
Table of Contents
Bonds
and securities classified as Level 3 had, but were not limited to, the
following weighted-average inputs:
Investment
grade credit rating
|
|
91.6%
|
Weighted-average
yield
|
|
4.9%
|
Weighted-average
coupon
|
|
6.2%
|
Amortized
cost
|
|
$119.3
million
|
Weighted-average
stated maturity
|
|
6.5
years
|
Equities
As
of June 30, 2010, the Company held approximately $91.2 million of equity
securities classified as Level 2 and Level 3. These equity securities consist
primarily of Federal Home Loan Bank stock. The Company believes that the cost
of these investments approximates fair value.
Other long-term investments and Other liabilities
Other
long-term investments and other liabilities consist entirely of free standing
and embedded derivative instruments. Refer to Note 14,
Derivative
Financial Instruments
for additional information related to
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, 2010, 54.3% 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.
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.
The
guaranteed minimum withdrawal benefit (GMWB) embedded derivative is carried
at fair value in other assets and other liabilities on the Companys
consolidated condensed balance sheet. The changes in fair value are
recorded in earnings as Realized investment gains (losses) Derivative
financial instruments, refer to Note
14
Derivative Financial Instruments
for more information related to GMWB embedded derivative gains and
losses. The fair value of the GMWB embedded derivative is derived through
the income method of valuation using a valuation model that projects future
cash flows using 1,000 risk neutral equity scenarios and policyholder behavior
assumptions. The risk neutral scenarios are generated using the current
swap curve and projected equity volatilities and correlations. The
projected equity volatilities are based on a blend of historical volatility and
near-term equity market implied volatilities. The equity correlations are
based on historical price observations. For policyholder behavior
assumptions, we use our expected lapse and utilization assumptions and update
these assumptions for our actual experience, as necessary. The Company assumes
mortality of 65% of the National Association of Insurance Commissioners 1994
Variable Annuity GMDB Mortality Table. The present value of the cash flows
is found using the discount rate curve, which is London Interbank Offered Rate
(LIBOR) plus a credit spread (to represent the Companys non-performance
risk). As a result of using significant unobservable inputs, the GMWB
embedded derivative is categorized as Level 3. These assumptions are
reviewed on a quarterly basis.
25
Table of Contents
The
Company has ceded certain blocks of policies under modified coinsurance agreements
in which the investment results of the underlying portfolios are passed
directly to the reinsurers. As a result, these agreements are deemed to contain
embedded derivatives that must be reported at fair value. Changes in fair value
of the embedded derivatives are reported in earnings. The investments
supporting these agreements are designated as trading securities; therefore
changes in fair value are reported in earnings. The fair value of the embedded
derivatives represents the unrealized gain or loss on the block of business in
relation to the unrealized gain or loss of the trading securities. As a result,
changes in fair value of the embedded derivatives reported in earnings are
largely offset by the changes in fair value of the investments.
Annuity account balances
The
equity indexed annuity (EIA) model calculates the present value of future
benefit cash flows less the projected future profits to quantify the net
liability that is held as a reserve. This calculation is done on a stochastic
basis using 1,000 risk neutral equity scenarios. The cash flows are
discounted using LIBOR plus a credit spread. Best estimate assumptions are
used for partial withdrawals, lapses, expenses and asset earned rate with a
risk margin applied to each. These assumptions are reviewed annually as a
part of the formal unlocking process.
Included
in the chart below, are current key assumptions which include risk margins for
the Company. These assumptions are reviewed for reasonableness on a
quarterly basis.
Asset
Earned Rate
|
|
6.10%
|
Admin
Expense per Policy
|
|
$95
|
Partial
Withdrawal Rate (for ages less than 70)
|
|
1.65%
|
Partial
Withdrawal Rate (for ages 70 and greater)
|
|
4.40%
|
Mortality
|
|
65%
of 94 MGDB table
|
Lapse
|
|
2%
to 50% depending on the surrender charge period
|
Return
on Assets
|
|
1.5%
to 1.85% depending on the guarantee period
|
The
discount rate for the equity indexed annuities is based on an upward sloping
rate curve which is updated each quarter. The discount rates for June 30,
2010, ranged from a one month rate of 1.54%, a 5 year rate of 3.78%, and a 30
year rate of 5.42%.
Separate Accounts
Separate
account assets are invested in open-ended mutual funds and are included in
Level 1.
26
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, 2010, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage-backed securities
|
|
$
|
22
|
|
$
|
|
|
$
|
|
|
$
|
(1
|
)
|
$
|
|
|
$
|
21
|
|
$
|
|
|
Commercial
mortgage-backed securities
|
|
|
|
|
|
|
|
39,952
|
|
|
|
39,952
|
|
|
|
Other
asset-backed securities
|
|
599,116
|
|
|
|
(1,759
|
)
|
(66
|
)
|
|
|
597,291
|
|
|
|
U.S.
government-related securities
|
|
15,151
|
|
|
|
(6
|
)
|
4
|
|
|
|
15,149
|
|
|
|
States,
municipals, and political subdivisions
|
|
86
|
|
|
|
|
|
(4
|
)
|
|
|
82
|
|
|
|
Other
government-related securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
|
95,367
|
|
|
|
(2,615
|
)
|
15,624
|
|
|
|
108,376
|
|
|
|
Total
fixed maturity securities - available-for-sale
|
|
709,742
|
|
|
|
(4,380
|
)
|
55,509
|
|
|
|
760,871
|
|
|
|
Fixed
maturity securities - trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage-backed securities
|
|
3,563
|
|
(28
|
)
|
|
|
(3,535
|
)
|
|
|
|
|
|
|
Commercial
mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
asset-backed securities
|
|
48,450
|
|
(1,451
|
)
|
|
|
14,138
|
|
|
|
61,137
|
|
(1,451
|
)
|
U.S.
government-related securities
|
|
3,310
|
|
254
|
|
|
|
(2
|
)
|
|
|
3,562
|
|
253
|
|
States,
municipals and political subdivisions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
government-related securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
|
26,971
|
|
404
|
|
|
|
(199
|
)
|
(27,133
|
)
|
43
|
|
(1
|
)
|
Total
fixed maturity securities - trading
|
|
82,294
|
|
(821
|
)
|
|
|
10,402
|
|
(27,133
|
)
|
64,742
|
|
(1,199
|
)
|
Total
fixed maturity securities
|
|
792,036
|
|
(821
|
)
|
(4,380
|
)
|
65,911
|
|
(27,133
|
)
|
825,613
|
|
(1,199
|
)
|
Equity
securities
|
|
71,397
|
|
4
|
|
|
|
1,736
|
|
|
|
73,137
|
|
|
|
Other
long-term investments
(1)
|
|
16,962
|
|
(7,431
|
)
|
|
|
|
|
|
|
9,531
|
|
(7,431
|
)
|
Short-term
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investments
|
|
880,395
|
|
(8,248
|
)
|
(4,380
|
)
|
67,647
|
|
(27,133
|
)
|
908,281
|
|
(8,630
|
)
|
Total
assets measured at fair value on a recurring basis
|
|
$
|
880,395
|
|
$
|
(8,248
|
)
|
$
|
(4,380
|
)
|
$
|
67,647
|
|
$
|
(27,133
|
)
|
$
|
908,281
|
|
$
|
(8,630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity
account balances
(2)
|
|
$
|
150,630
|
|
$
|
(738
|
)
|
$
|
|
|
$
|
1,928
|
|
$
|
|
|
$
|
149,440
|
|
$
|
|
|
Other
liabilities
(1)
|
|
128,235
|
|
(104,962
|
)
|
|
|
|
|
|
|
233,197
|
|
(104,962
|
)
|
Total
liabilities measured at fair value on a recurring basis
|
|
$
|
278,865
|
|
$
|
(105,700
|
)
|
$
|
|
|
$
|
1,928
|
|
$
|
|
|
$
|
382,637
|
|
$
|
(104,962
|
)
|
(1)
Represents certain freestanding and embedded
derivatives.
(2)
Represents liabilities related to equity
indexed annuities.
For
the three months ended June 30, 2010, no securities were transferred into
Level 3.
For
the three months ended June 30, 2010, $27.1 million of securities were
transferred out of Level 3. This amount was transferred entirely to Level 2.
These transfers resulted from securities that were previously valued using an
internal model that utilized significant unobservable inputs but were valued by
independent pricing services or brokers, utilizing no significant unobservable
inputs, as of June 30, 2010.
For
the three months ended June 30, 2010, there were no transfers between
Level 1 and 2.
27
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, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage-backed securities
|
|
$
|
32
|
|
$
|
|
|
$
|
|
|
$
|
(2
|
)
|
$
|
|
|
$
|
30
|
|
$
|
|
|
Commercial
mortgage-backed securities
|
|
851,721
|
|
|
|
(24,517
|
)
|
(9,619
|
)
|
|
|
817,585
|
|
|
|
Other
asset-backed securities
|
|
705,397
|
|
|
|
19,011
|
|
(222
|
)
|
|
|
724,186
|
|
|
|
U.S.
government-related securities
|
|
24,792
|
|
|
|
(559
|
)
|
5
|
|
(9,178
|
)
|
15,060
|
|
|
|
States,
municipals, and political subdivisions
|
|
93
|
|
|
|
|
|
(4
|
)
|
|
|
89
|
|
|
|
Other
government-related securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
|
69,388
|
|
(153
|
)
|
(1,255
|
)
|
1,537
|
|
|
|
69,517
|
|
|
|
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.
28
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, 2010, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage-backed securities
|
|
$
|
23
|
|
$
|
4
|
|
$
|
|
|
$
|
(6
|
)
|
$
|
|
|
$
|
21
|
|
$
|
|
|
Commercial
mortgage-backed securities
|
|
844,535
|
|
|
|
38,281
|
|
(842,864
|
)
(3)
|
|
|
39,952
|
|
|
|
Other
asset-backed securities
|
|
693,930
|
|
5,868
|
|
(3,696
|
)
|
(89,473
|
)
|
(9,338
|
)
|
597,291
|
|
|
|
U.S.
government-related securities
|
|
15,102
|
|
|
|
40
|
|
7
|
|
|
|
15,149
|
|
|
|
States,
municipals, and political subdivisions
|
|
86
|
|
|
|
|
|
(4
|
)
|
|
|
82
|
|
|
|
Other
government-related securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
|
86,328
|
|
|
|
3,166
|
|
18,732
|
|
150
|
|
108,376
|
|
|
|
Total
fixed maturity securities - available-for-sale
|
|
1,640,004
|
|
5,872
|
|
37,791
|
|
(913,608
|
)
|
(9,188
|
)
|
760,871
|
|
|
|
Fixed
maturity securities - trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage-backed securities
|
|
7,244
|
|
(1
|
)
|
|
|
(3,855
|
)
|
(3,388
|
)
|
|
|
|
|
Commercial
mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
asset-backed securities
|
|
47,509
|
|
(755
|
)
|
|
|
14,383
|
|
|
|
61,137
|
|
(985
|
)
|
U.S.
government-related securities
|
|
3,310
|
|
255
|
|
|
|
(3
|
)
|
|
|
3,562
|
|
255
|
|
States,
municipals and political subdivisions
|
|
4,994
|
|
77
|
|
|
|
|
|
(5,071
|
)
|
|
|
|
|
Other
government-related securities
|
|
41,965
|
|
1,058
|
|
|
|
(47
|
)
|
(42,976
|
)
|
|
|
|
|
Corporate
bonds
|
|
67
|
|
322
|
|
|
|
26,787
|
|
(27,133
|
)
|
43
|
|
(1
|
)
|
Total
fixed maturity securities - trading
|
|
105,089
|
|
956
|
|
|
|
37,265
|
|
(78,568
|
)
|
64,742
|
|
(731
|
)
|
Total
fixed maturity securities
|
|
1,745,093
|
|
6,828
|
|
37,791
|
|
(876,343
|
)
|
(87,756
|
)
|
825,613
|
|
(731
|
)
|
Equity
securities
|
|
70,708
|
|
4
|
|
|
|
2,425
|
|
|
|
73,137
|
|
|
|
Other
long-term investments
(1)
|
|
16,525
|
|
(6,994
|
)
|
|
|
|
|
|
|
9,531
|
|
(6,994
|
)
|
Short-term
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
investments
|
|
1,832,326
|
|
(162
|
)
|
37,791
|
|
(873,918
|
)
|
(87,756
|
)
|
908,281
|
|
(7,725
|
)
|
Total
assets measured at fair value on a recurring basis
|
|
$
|
1,832,326
|
|
$
|
(162
|
)
|
$
|
37,791
|
|
$
|
(873,918
|
)
|
$
|
(87,756
|
)
|
$
|
908,281
|
|
$
|
(7,725
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity
account balances
(2)
|
|
$
|
149,893
|
|
$
|
(2,841
|
)
|
$
|
|
|
$
|
3,294
|
|
$
|
|
|
$
|
149,440
|
|
$
|
|
|
Other
liabilities
(1)
|
|
105,838
|
|
(127,359
|
)
|
|
|
|
|
|
|
233,197
|
|
(127,359
|
)
|
Total
liabilities measured at fair value on a recurring basis
|
|
$
|
255,731
|
|
$
|
(130,200
|
)
|
$
|
|
|
$
|
3,294
|
|
$
|
|
|
$
|
382,637
|
|
$
|
(127,359
|
)
|
(1)
Represents certain freestanding and embedded
derivatives.
(2)
Represents liabilities related to equity
indexed annuities.
(3)
Represents mortgage loan held by the trusts
that have been consolidated upon the adoption of ASU No. 2009-17. See Note
4,
Variable Interest Entities
.
For
the six months ended June 30, 2010, $0.2 million of securities were
transferred into Level 3. This amount was transferred entirely from Level 2.
These transfers resulted from securities that were priced by independent
pricing services or brokers in previous quarters, using no significant
unobservable inputs, but were priced internally using significant unobservable
inputs where market observable inputs were no longer available as of June 30,
2010.
For
the six months ended June 30, 2010, $87.9 million of securities were
transferred out of Level 3. This amount was transferred entirely to Level 2.
These transfers resulted from securities that were previously valued using an
internal model that utilized significant unobservable inputs but were valued by
independent pricing services or brokers, utilizing no significant unobservable
inputs, as of June 30, 2010.
For
the six months ended June 30, 2010, there were no transfers between Level
1 and 2.
29
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
mortgage-backed securities
|
|
$
|
34
|
|
$
|
|
|
$
|
|
|
$
|
(4
|
)
|
$
|
|
|
$
|
30
|
|
$
|
|
|
Commercial
mortgage-backed securities
|
|
855,817
|
|
|
|
(22,438
|
)
|
(15,794
|
)
|
|
|
817,585
|
|
|
|
Other
asset-backed securities
|
|
682,710
|
|
(31
|
)
|
41,972
|
|
(465
|
)
|
|
|
724,186
|
|
|
|
U.S.
government-related securities
|
|
10,072
|
|
|
|
(701
|
)
|
14,867
|
|
(9,178
|
)
|
15,060
|
|
|
|
States,
municipals, and political subdivisions
|
|
93
|
|
|
|
|
|
(4
|
)
|
|
|
89
|
|
|
|
Other
government-related securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
|
78,770
|
|
(49
|
)
|
(176
|
)
|
(30,473
|
)
|
21,445
|
|
69,517
|
|
|
|
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.
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.
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.
30
Table of
Contents
Estimated Fair Value of Financial Instruments
The
carrying amounts and estimated fair values of the Companys financial
instruments as of the periods shown below are as follows:
|
|
As of
|
|
|
|
June 30, 2010
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
|
Carrying
|
|
|
|
|
|
Amounts
|
|
Fair Values
|
|
Amounts
|
|
Fair Values
|
|
|
|
(Dollars In Thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Mortgage loans on real estate
|
|
$
|
4,905,276
|
|
$
|
5,470,846
|
|
$
|
3,883,414
|
|
$
|
4,130,285
|
|
Policy loans
|
|
775,105
|
|
775,105
|
|
794,276
|
|
794,276
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Stable value product account balances
|
|
$
|
3,487,963
|
|
$
|
3,686,950
|
|
$
|
3,581,150
|
|
$
|
3,758,422
|
|
Annuity account balances
|
|
10,309,546
|
|
10,207,819
|
|
9,911,040
|
|
9,655,208
|
|
Mortgage loan backed certificates
|
|
85,873
|
|
88,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
Bank borrowings
|
|
$
|
115,000
|
|
$
|
115,000
|
|
$
|
285,000
|
|
$
|
285,000
|
|
Senior and Medium-Term Notes
|
|
1,359,852
|
|
1,430,931
|
|
1,359,852
|
|
1,331,855
|
|
Subordinated debt securities
|
|
524,743
|
|
489,345
|
|
524,743
|
|
453,523
|
|
Non-recourse funding obligations
|
|
556,600
|
|
354,429
|
|
575,000
|
|
408,727
|
|
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
balances
The Company estimates the
fair value of stable value product account balances and annuity account
balances using models based on discounted expected 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.
31
Table of Contents
Non-recourse funding obligations
As
of June 30, 2010, the Company estimated the fair value of its non-recourse
funding obligations using internal discounted cash flow models. The discount
rates used in the model were based on a current market yield for similar
financial instruments.
14. 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. Outstanding credit default swaps relate to the Investment Grade
Series 9 Index and have terms to December 2017. 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 $25.0 million. As of June 30, 2010, the fair value of
the credit derivatives was a liability of $3.0 million. As of June 30,
2010, the Company had collateral of $3.3 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 no additional payments.
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
$25.0 million notional of credit default swaps is not indicative of the
economic value of the investment.
The Company records its
derivative instruments in the consolidated condensed balance sheet in other
long-term investments and other liabilities in accordance with GAAP, which
requires that all derivative instruments be recognized in the balance sheet at
fair value. The accounting for GAAP 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
32
Table of Contents
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 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. As of June 30, 2010, the Company did not hold any
positions in these swaps. For the six months ended June 30, 2009, the
Company recognized pre-tax losses of $0.1 million representing the change in
value of these derivatives and related net settlements.
·
The Company uses interest
rate futures to mitigate interest rate risk. There were no outstanding
positions as of June 30, 2010. For the three and six months ended June 30,
2009, the Company recognized pre-tax gains of $4.6 million and $6.9 million,
respectively, as a result of changes in value of these futures positions.
·
The Company uses certain
interest rate swaps to mitigate interest rate risk related to floating rate
exposures. The Company recognized pre-tax losses of $6.4 million and $8.8
million for the three and six months ended June 30, 2010 and pre-tax gains
of $22.2 million and $36.4 million on interest rate swaps for the three and six
months ended June 30, 2009, respectively.
·
The Company
uses other swaps and options to manage risk related to other exposures. The
Company recognized pre-tax gains that were immaterial for the three months
ended June 30, 2010, and pre-tax gains of $0.8 million for the six months
ended June 30, 2010. The Company recognized pre-tax gains of $2.2 million
for the three and six months ended June 30, 2009, respectively, for the
change in fair value of these derivatives.
·
The Company is involved in
various modified coinsurance and funds withheld arrangements which contain
embedded derivatives that must be reported at fair value. Changes in fair value
are recorded in current period earnings. The investment portfolios that support
the related modified coinsurance reserves and funds withheld arrangements had
mark-to-market changes which substantially offset the gains or losses on these
embedded derivatives.
·
The Company markets certain
variable annuity products with a GMWB rider. The GMWB component is considered
an embedded derivative, not considered to be clearly and closely related to the
host contract. The Company recognized pre-tax losses of $49.3 million and $40.2
million for the three and six months ended June 30, 2010 and pre-tax gains
of $12.5 million and $32.3 million for three and six months ended June 30,
2009, related to these embedded derivatives, respectively.
·
The Company entered into credit default swaps and various other
derivative positions to enhance the return on its investment portfolio. The
Company reported net pre-tax losses of $1.1 million and $0.6 million for the
three and six months ended June 30, 2010 and pre-tax gains of $6.9 million
and $2.6
33
Table of Contents
million
for the three and six months ended June 30, 2009, related to credit
default swaps, respectively, from the change in swaps fair value and premium
income.
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, 2010
|
|
As of December 31, 2009
|
|
|
|
Notional
|
|
Fair
|
|
Notional
|
|
Fair
|
|
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
|
|
(Dollars In Thousands)
|
|
Other long-term investments
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments:
(1)
|
|
|
|
|
|
|
|
|
|
Interest rate
|
|
$
|
25,000
|
|
$
|
2,234
|
|
$
|
75,000
|
|
$
|
16,174
|
|
Embedded derivative - Modco reinsurance treaties
|
|
29,630
|
|
1,802
|
|
1,883,109
|
|
5,907
|
|
Embedded derivative - GMWB
|
|
485,442
|
|
7,687
|
|
429,562
|
|
10,579
|
|
Other
|
|
14,291
|
|
1,261
|
|
66,250
|
|
6,791
|
|
|
|
$
|
554,363
|
|
$
|
12,984
|
|
$
|
2,453,921
|
|
$
|
39,451
|
|
Other liabilities
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Inflation
|
|
$
|
293,379
|
|
$
|
21,414
|
|
$
|
343,526
|
|
$
|
19,141
|
|
Interest rate
|
|
175,000
|
|
9,985
|
|
175,000
|
|
11,965
|
|
Derivatives not designated as hedging instruments:
(1)
|
|
|
|
|
|
|
|
|
|
Credit default swaps
|
|
25,000
|
|
2,967
|
|
25,000
|
|
2,172
|
|
Interest rate
|
|
110,000
|
|
10,475
|
|
110,000
|
|
7,011
|
|
Embedded derivative - Modco reinsurance treaties
|
|
2,895,101
|
|
171,391
|
|
1,077,376
|
|
81,339
|
|
Embedded derivative GMWB
|
|
1,286,425
|
|
61,734
|
|
660,090
|
|
24,423
|
|
Other
|
|
5,916
|
|
73
|
|
12,703
|
|
2,832
|
|
|
|
$
|
4,790,821
|
|
$
|
278,039
|
|
$
|
2,403,695
|
|
$
|
148,883
|
|
(1)
Additional
information on derivatives not designated as hedging instruments is referenced
under the ASC Derivatives and Hedging Topic.
Gain (Loss) on Derivatives in Cash Flow Hedging Relationship
|
|
For The Three Months Ended June 30, 2010
|
|
For The Six Months Ended June 30, 2010
|
|
|
|
Realized
|
|
Benefits and
|
|
Other
|
|
Realized
|
|
Benefits and
|
|
Other
|
|
|
|
investment
|
|
settlement
|
|
comprehensive
|
|
investment
|
|
settlement
|
|
comprehensive
|
|
|
|
gains (losses)
|
|
expenses
|
|
income (loss)
|
|
gains (losses)
|
|
expenses
|
|
income (loss)
|
|
|
|
(Dollars In Thousands)
|
|
Gain (loss) recognized in other
comprehensive income (loss)
(effective portion):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
|
|
$
|
|
|
$
|
|
|
$
|
(858
|
)
|
$
|
|
|
$
|
|
|
$
|
(2,116
|
)
|
Inflation
|
|
|
|
|
|
(9,314
|
)
|
|
|
|
|
(3,892
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) reclassified from
accumulated other comprehensive income (loss) into income
(effective
portion):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
|
|
$
|
|
|
$
|
(1,982
|
)
|
$
|
|
|
$
|
|
|
$
|
(3,973
|
)
|
$
|
|
|
Inflation
|
|
|
|
(463
|
)
|
|
|
|
|
(1,084
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in income
(ineffective
portion):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inflation
|
|
$
|
(696
|
)
|
$
|
|
|
$
|
|
|
$
|
(336
|
)
|
$
|
|
|
$
|
|
|
34
Table of Contents
Gain (Loss) on Derivatives in Cash Flow Hedging
Relationship
|
|
For The Three Months Ended June 30, 2009
|
|
For The Six Months Ended June 30, 2009
|
|
|
|
Realized
|
|
Benefits and
|
|
Other
|
|
Realized
|
|
Benefits and
|
|
Other
|
|
|
|
investment
|
|
settlement
|
|
comprehensive
|
|
investment
|
|
settlement
|
|
comprehensive
|
|
|
|
gains (losses)
|
|
expenses
|
|
income (loss)
|
|
gains (losses)
|
|
expenses
|
|
income (loss)
|
|
|
|
(Dollars In Thousands)
|
|
Gain (loss) recognized in other
comprehensive income (loss)
(effective portion):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
|
|
$
|
|
|
$
|
|
|
$
|
(8,810
|
)
|
$
|
|
|
$
|
|
|
$
|
3,864
|
|
Inflation
|
|
|
|
|
|
24,038
|
|
|
|
|
|
25,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) reclassified from
accumulated other comprehensive income (loss) 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 $7.0 million out of accumulated other comprehensive income (loss)
into earnings during the next twelve months.
Realized investment gains (losses) - derivative
financial instruments
(1)
|
|
For The
|
|
For The
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
|
Interest rate risk:
|
|
|
|
|
|
|
|
|
|
Interest rate futures
|
|
$
|
|
|
$
|
4,593
|
|
$
|
|
|
$
|
6,889
|
|
Interest rate swaps
|
|
(6,382
|
)
|
22,169
|
|
(8,774
|
)
|
36,359
|
|
Credit risk
|
|
(1,142
|
)
|
6,887
|
|
(637
|
)
|
2,551
|
|
Embedded derivative - Modco reinsurance treaties
|
|
(63,063
|
)
|
(146,420
|
)
|
(94,157
|
)
|
(85,788
|
)
|
Embedded derivative - GMWB
|
|
(49,326
|
)
|
12,636
|
|
(40,202
|
)
|
32,381
|
|
Other
|
|
25
|
|
2,144
|
|
810
|
|
2,050
|
|
|
|
$
|
(119,888
|
)
|
$
|
(97,991
|
)
|
$
|
(142,960
|
)
|
$
|
(5,558
|
)
|
(1)
Additional
information on derivatives not designated as hedging instruments is referenced
under the ASC Derivatives Hedging Topic.
Realized investment gains (losses) - all other
investments
|
|
For The
|
|
For The
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
income Modco trading portfolio
(1)
|
|
$
|
63,967
|
|
$
|
154,786
|
|
$
|
108,060
|
|
$
|
108,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The Company elected to include the use
of alternate disclosures for trading activities.
35
Table of
Contents
15.
OPERATING
SEGMENTS
The
Company has several operating 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, as prescribed in the ASC Segment Reporting Topic, 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, 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 Acquisitions 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 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 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),
expenses not attributable to the segments above (including 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 or runoff lines
of business, 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 available to PLCs common shareowners and assets. Segment operating
income (loss) is income before income tax excluding net realized investment
gains and losses (net of the related amortization of deferred acquisition costs
(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 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.
During
the first quarter of 2010, the Company recorded a $7.8 million decrease in
reserves related to the final settlement in the runoff Lenders Indemnity line
of business.
36
Table of
Contents
There
were no significant intersegment transactions during the six months ended June 30,
2010 and 2009.
The
following tables summarize financial information for the Companys segments:
|
|
For The
|
|
For The
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(Dollars In Thousands)
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Life Marketing
|
|
$
|
298,128
|
|
$
|
267,194
|
|
$
|
607,132
|
|
$
|
549,045
|
|
Acquisitions
|
|
177,579
|
|
201,518
|
|
376,296
|
|
400,752
|
|
Annuities
|
|
85,475
|
|
134,485
|
|
226,055
|
|
264,430
|
|
Stable Value Products
|
|
37,273
|
|
57,490
|
|
85,229
|
|
124,054
|
|
Asset Protection
|
|
67,769
|
|
68,148
|
|
134,200
|
|
135,003
|
|
Corporate and Other
|
|
45,878
|
|
56,496
|
|
74,960
|
|
34,012
|
|
Total revenues
|
|
$
|
712,102
|
|
$
|
785,331
|
|
$
|
1,503,872
|
|
$
|
1,507,296
|
|
Segment Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
Life Marketing
|
|
$
|
35,755
|
|
$
|
37,179
|
|
$
|
76,433
|
|
$
|
79,689
|
|
Acquisitions
|
|
30,190
|
|
35,041
|
|
61,559
|
|
68,662
|
|
Annuities
|
|
605
|
|
21,495
|
|
18,792
|
|
20,920
|
|
Stable Value Products
|
|
10,979
|
|
16,976
|
|
22,006
|
|
37,183
|
|
Asset Protection
|
|
6,616
|
|
4,656
|
|
19,683
|
|
10,936
|
|
Corporate and Other
|
|
377
|
|
9,648
|
|
(15,755
|
)
|
401
|
|
Total segment operating income
|
|
84,522
|
|
124,995
|
|
182,718
|
|
217,791
|
|
Realized investment (losses) gains - investments
(1)(3)
|
|
50,578
|
|
127,770
|
|
86,394
|
|
(3,977
|
)
|
Realized investment (losses) gains - derivatives
(2)
|
|
(70,513
|
)
|
(112,547
|
)
|
(103,176
|
)
|
(41,440
|
)
|
Income tax expense
|
|
(23,216
|
)
|
(49,461
|
)
|
(54,786
|
)
|
(59,482
|
)
|
Net income available to PLCs common shareowners
|
|
$
|
41,371
|
|
$
|
90,757
|
|
$
|
111,150
|
|
$
|
112,892
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Realized
investment (losses) gains - investments
|
|
$
|
50,906
|
|
$
|
126,828
|
|
$
|
86,936
|
|
$
|
(4,841
|
)
|
Less: related amortization of DAC/VOBA
|
|
328
|
|
(942
|
)
|
542
|
|
(864
|
)
|
|
|
$
|
50,578
|
|
$
|
127,770
|
|
$
|
86,394
|
|
$
|
(3,977
|
)
|
|
|
|
|
|
|
|
|
|
|
(2)
Realized
investment gains (losses) - derivatives
|
|
$
|
(119,888
|
)
|
$
|
(97,991
|
)
|
$
|
(142,960
|
)
|
$
|
(5,558
|
)
|
Less: settlements on certain interest rate swaps
|
|
42
|
|
1,163
|
|
84
|
|
3,401
|
|
Less: derivative activity related to certain
annuities
|
|
(49,417
|
)
|
13,393
|
|
(39,868
|
)
|
32,481
|
|
|
|
$
|
(70,513
|
)
|
$
|
(112,547
|
)
|
$
|
(103,176
|
)
|
$
|
(41,440
|
)
|
(3)
Includes
other-than-temporary impairments of $16.8 million and $28.7 million for the
three and six months ended June 30, 2010, repsectively, and $41.0 million
and $130.8 million for the three and six months ended June 30, 2009,
respectively.
37
Table of
Contents
|
|
Operating Segment Assets
|
|
|
|
As of June 30, 2010
|
|
|
|
(Dollars In Thousands)
|
|
|
|
Life
|
|
|
|
|
|
Stable Value
|
|
|
|
Marketing
|
|
Acquisitions
|
|
Annuities
|
|
Products
|
|
Investments and other assets
|
|
$
|
9,224,655
|
|
$
|
9,097,376
|
|
$
|
11,086,864
|
|
$
|
3,477,711
|
|
Deferred policy acquisition costs and value of
business acquired
|
|
2,340,699
|
|
803,487
|
|
425,049
|
|
10,252
|
|
Goodwill
|
|
10,192
|
|
43,362
|
|
|
|
|
|
Total assets
|
|
$
|
11,575,546
|
|
$
|
9,944,225
|
|
$
|
11,511,913
|
|
$
|
3,487,963
|
|
|
|
Asset
|
|
Corporate
|
|
|
|
Total
|
|
|
|
Protection
|
|
and Other
|
|
Adjustments
|
|
Consolidated
|
|
Investments and other assets
|
|
$
|
704,043
|
|
$
|
7,173,071
|
|
$
|
25,056
|
|
$
|
40,788,776
|
|
Deferred policy acquisition costs and value of
business acquired
|
|
87,790
|
|
3,876
|
|
|
|
3,671,153
|
|
Goodwill
|
|
62,670
|
|
83
|
|
|
|
116,307
|
|
Total assets
|
|
$
|
854,503
|
|
$
|
7,177,030
|
|
$
|
25,056
|
|
$
|
44,576,236
|
|
|
|
Operating Segment Assets
|
|
|
|
As of December 31, 2009
|
|
|
|
(Dollars In Thousands)
|
|
|
|
Life
|
|
|
|
|
|
Stable Value
|
|
|
|
Marketing
|
|
Acquisitions
|
|
Annuities
|
|
Products
|
|
Investments and other assets
|
|
$
|
8,753,212
|
|
$
|
9,136,474
|
|
$
|
9,977,456
|
|
$
|
3,569,038
|
|
Deferred policy acquisition costs and value of
business acquired
|
|
2,277,256
|
|
839,829
|
|
430,704
|
|
12,112
|
|
Goodwill
|
|
10,192
|
|
44,911
|
|
|
|
|
|
Total assets
|
|
$
|
11,040,660
|
|
$
|
10,021,214
|
|
$
|
10,408,160
|
|
$
|
3,581,150
|
|
|
|
Asset
|
|
Corporate
|
|
|
|
Total
|
|
|
|
Protection
|
|
and Other
|
|
Adjustments
|
|
Consolidated
|
|
Investments and other assets
|
|
$
|
742,456
|
|
$
|
6,325,373
|
|
$
|
26,372
|
|
$
|
38,530,381
|
|
Deferred policy acquisition costs and value of
business acquired
|
|
97,499
|
|
5,950
|
|
|
|
3,663,350
|
|
Goodwill
|
|
62,670
|
|
83
|
|
|
|
117,856
|
|
Total assets
|
|
$
|
902,625
|
|
$
|
6,331,406
|
|
$
|
26,372
|
|
$
|
42,311,587
|
|
16.
SUBSEQUENT EVENTS
On August 2, 2010, the
Company provided each of its current directors an indemnity agreement that
provides, among other things and subject to certain limitations, a contractual
right to indemnification to the fullest extent permissible under the law and to
indemnification in accordance with the Companys governance documents in effect
on August 2, 2010, or any other governance provision in effect thereafter
during the directors term, provided however that no modification or amendment
to any governance document of the Company shall in any way adversely affect the
directors rights under the indemnity agreement. Also on August 2,
2010, prior indemnification agreements obligating the Company to obtain a $20
million letter of credit for the benefit of directors under certain change of
control events were terminated.
The Company has evaluated
the effects of events subsequent to June 30, 2010, and through the date we
filed our consolidated condensed financial statements with the United States
Securities and Exchange Commission. All accounting and disclosure requirements
related to subsequent events are included in our consolidated condensed
financial statements.
38
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, 2009, 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,
2009.
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, the Company, we, us,
or our refers to the consolidated group of Protective Life Corporation and
our subsidiaries.
We
have several operating 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 as
prescribed in the Accounting Standards Codification (ASC) Segment Reporting
Topic, 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.
·
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 that were sold to
39
Table of
Contents
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 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 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), expenses not attributable to the segments above (including
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 or runoff lines of business, various investment-related
transactions, and the operations of several small subsidiaries.
EXECUTIVE
SUMMARY
We delivered solid financial
results in the first half of 2010. Excluding fair value items, our operating
segments (excluding Corporate and Other) produced results that were in line
with or exceeded our expectations. While we were impacted by negative fair
value items in the second quarter of 2010, mortality continued a favorable
trend in both the first and second quarters and we were able to take advantage
of depressed market valuations and repurchased portions of our outstanding
non-recourse funding obligations at a significant discount. In addition, we
continued our strategy of growth in the Annuities segment and are encouraged by
the results of moving our life sales product mix to a universal life product
focus.
As we look to the remainder
of the year, we recognize that we will be challenged to find opportunities to
invest our excess liquidity at desired yield levels. However, we remain focused
on this goal and others, including introducing innovative, differentiated
products to our markets, optimizing capital deployment, managing crediting
rates and growing our distribution networks.
Significant
financial information related to each of our segments is included in Results
of Operations.
40
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 and man-made
catastrophes, pandemics, malicious acts, terrorist acts, or climate change
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;
·
our strategies for mitigating risks arising
from our day-to-day operations may prove ineffective and adversely affect our
results of operations and financial condition;
Financial environment
·
interest rate fluctuations could negatively
affect our interest earnings and 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;
·
our financial condition or results of
operations could be adversely impacted if our assumptions regarding the fair
value and future performance of our investments differ from actual experience;
·
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 from time to time and is sensitive to a
number of factors outside of our control;
·
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;
41
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
·
we operate in a mature, highly competitive
industry, which could limit our ability to gain or maintain our position in the
industry and negatively affect profitability;
·
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 Reports on Forms 10-K.
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 condensed
financial statements. For a complete listing of our critical accounting
policies, refer to our Annual Report on Form 10-K for the year ended
December 31, 2009.
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 deferred acquisitions costs (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 usually attributable to the normal,
recurring operations of our business. However, segment operating income (loss)
should not be viewed as a substitute for accounting principles generally
accepted in the United States of America (GAAP) net income available to
PLCs common shareowners. In addition, our segment operating income (loss)
measures may not be comparable to similarly titled measures reported by other
companies.
42
Table of Contents
The following table presents a summary of results and reconciles
segment operating income (loss) to consolidated net income available to PLCs
common shareowners:
|
|
For The
|
|
|
|
For The
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
|
|
(Dollars In Thousands)
|
|
|
|
Segment Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Marketing
|
|
$
|
35,755
|
|
$
|
37,179
|
|
(3.8
|
)%
|
$
|
76,433
|
|
$
|
79,689
|
|
(4.1
|
)%
|
Acquisitions
|
|
30,190
|
|
35,041
|
|
(13.8
|
)
|
61,559
|
|
68,662
|
|
(10.3
|
)
|
Annuities
|
|
605
|
|
21,495
|
|
(97.2
|
)
|
18,792
|
|
20,920
|
|
(10.2
|
)
|
Stable Value Products
|
|
10,979
|
|
16,976
|
|
(35.3
|
)
|
22,006
|
|
37,183
|
|
(40.8
|
)
|
Asset Protection
|
|
6,616
|
|
4,656
|
|
42.1
|
|
19,683
|
|
10,936
|
|
80.0
|
|
Corporate and Other
|
|
377
|
|
9,648
|
|
(96.1
|
)
|
(15,755
|
)
|
401
|
|
n/m
|
|
Total segment operating income
|
|
84,522
|
|
124,995
|
|
(32.4
|
)
|
182,718
|
|
217,791
|
|
(16.1
|
)
|
Realized investment gains (losses) - investments
(1)(3)
|
|
50,578
|
|
127,770
|
|
|
|
86,394
|
|
(3,977
|
)
|
|
|
Realized investment gains (losses) - derivatives
(2)
|
|
(70,513
|
)
|
(112,547
|
)
|
|
|
(103,176
|
)
|
(41,440
|
)
|
|
|
Income tax expense
|
|
(23,216
|
)
|
(49,461
|
)
|
|
|
(54,786
|
)
|
(59,482
|
)
|
|
|
Net income available to PLCs common shareowners
|
|
$
|
41,371
|
|
$
|
90,757
|
|
(54.4
|
)
|
$
|
111,150
|
|
$
|
112,892
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Realized
investment gains (losses) - investments
(3)
|
|
$
|
50,906
|
|
$
|
126,828
|
|
|
|
$
|
86,936
|
|
$
|
(4,841
|
)
|
|
|
Less: related amortization of DAC/VOBA
|
|
328
|
|
(942
|
)
|
|
|
542
|
|
(864
|
)
|
|
|
|
|
$
|
50,578
|
|
$
|
127,770
|
|
|
|
$
|
86,394
|
|
$
|
(3,977
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Realized
investment gains (losses) - derivatives
|
|
$
|
(119,888
|
)
|
$
|
(97,991
|
)
|
|
|
$
|
(142,960
|
)
|
$
|
(5,558
|
)
|
|
|
Less: settlements on certain interest rate swaps
|
|
42
|
|
1,163
|
|
|
|
84
|
|
3,401
|
|
|
|
Less: derivative activity related to certain
annuities
|
|
(49,417
|
)
|
13,393
|
|
|
|
(39,868
|
)
|
32,481
|
|
|
|
|
|
$
|
(70,513
|
)
|
$
|
(112,547
|
)
|
|
|
$
|
(103,176
|
)
|
$
|
(41,440
|
)
|
|
|
(3)
Includes other-than-temporary impairments of
$16.8 million and $28.7 million for the three and six months ended
June 30, 2010, respectively, and $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, 2010 as
compared to The Three Months Ended June 30, 2009
Net
income available to PLCs common shareowners for the three months ended June 30,
2010, included a $40.5 million, or 32.4%, decrease in segment operating
income. The decrease was primarily related to a $1.4 million decrease in the
Life Marketing segment, a $4.9 million decrease in the Acquisitions segment, a
$20.9 million decrease in operating income in the Annuities segment, a $6.0
million decrease in the Stable Value Products segment, and a $9.3 million
decrease in the Corporate and Other segment. These decreases were partially
offset by an increase of $2.0 million in operating income in the Asset
Protection segment. Changes in fair value related to the Corporate and Other
trading portfolio and the Annuities segment decreased operating earnings by
$19.1 million in the three months ended June 30, 2010, and fair value
changes represented $48.7 million of the overall decrease in segment operating
income compared to the same quarter last year.
We
experienced net realized losses of $69.0 million for the three months ended June 30,
2010, as compared to net realized gains of $28.8 million for the three months
ended June 30, 2009. The losses realized for the three months ended June 30,
2010, were primarily caused by $49.3 million of losses related to guaranteed
minimum withdrawal benefits (GMWB) embedded derivative valuation changes and
$16.8 million of other-than-temporary impairment credit-related losses and
mark-to-market losses of $6.4 million on interest rate swaps. Offsetting these
losses were $0.9 million of gains related to the net activity related to the
modified coinsurance portfolio and derivative activity and $5.7 million of
gains related to investment securities sale activity.
·
Life Marketing segment operating income was $35.8
million for the three months ended June 30, 2010, representing a decrease
of $1.4 million, or 3.8%, from the three months ended June 30, 2009. The
decrease was primarily due to lower allocated investment income net of interest
expense on the traditional line of business and higher operating expenses.
·
Acquisitions segment operating income was $30.2
million for the three months ended June 30, 2010, a decrease of $4.9
million, or 13.8%, as compared to the three months ended June 30, 2009,
primarily due to the expected runoff of the blocks of business.
·
Annuities segment operating income was $0.6 million
for the three months ended June 30, 2010, as compared to $21.5 million for
the three months ended June 30, 2009, a decrease of $20.9 million. This
change included an unfavorable $20.9 million variance related to fair value
changes, made up of a $0.4
43
Table of Contents
million favorable change
related to the equity indexed annuity (EIA) product and a $21.3 million
unfavorable change related to embedded derivatives associated with the variable
annuity (VA) GMWB rider, caused primarily by changes in equity markets and
lower interest rates. A $2.9 million increase in earnings was related to wider
spreads and average account value growth in fixed and variable annuities.
·
Stable Value Products segment operating income was
$11.0 million and decreased $6.0 million, or 35.3%, for the three months
ended June 30, 2010, as compared to the three months ended June 30,
2009. The decrease in operating earnings resulted from a decline in average
account values and lower operating spreads. In addition, no income was
generated from the early retirement of funding agreements backing medium-term
notes for the three months ended June 30, 2010, compared with $0.3 million
for the three months ended June 30, 2009. The operating spread decreased
31 basis points to 126 basis points for the three months ended June 30,
2010, as compared to an operating spread of 157 basis points during the three
months ended June 30, 2009.
·
Asset Protection segment operating income was
$6.6 million, representing an increase of $2.0 million for the three months
ended June 30, 2010, as compared to the three months ended June 30,
2009. The second quarter 2010 income was comprised solely of $6.6 million of
income from core operations. Credit insurance earnings decreased $0.4 million
as compared to the prior year, primarily due to lower investment income.
Service contract earnings increased $1.1 million, or 30.3%, as compared to the
prior year, primarily due to higher volume partially offset by higher loss
ratios and higher expenses in certain product lines. Earnings from other
products increased $1.2 million for the three months ended June 30, 2010,
as compared to the prior year due to favorable loss experience in the GAP
product line.
·
Corporate and Other segment operating income was
$0.4 million for the three months ended June 30, 2010, as compared to
income of $9.6 million for the three months ended June 30, 2009. This
variance was primarily due to negative mark-to-market adjustments during the
second quarter of 2010 on a portfolio of securities designated for trading. The
trading portfolio accounted for a negative variance of $27.8 million, compared
to the prior years quarter. Partially offsetting this was a $9.5 million
pre-tax gain on the repurchase of non-recourse funding obligations and growth
in other investment income.
For The Six Months
Ended June 30, 2010 as compared to The Six Months Ended June 30, 2009
Net
income available to PLCs common shareowners for the six months ended June 30,
2010, included a $35.1 million, or 16.1%, decrease in segment operating
income. The decrease was primarily related to a $3.3 million decrease in
operating income in the Life Marketing segment, a $7.1 million decrease in the
Acquisitions segment, a $2.1 million decrease in the Annuities segment, a $15.2
million decrease in the Stable Value Products segment, and a $16.2 million
decrease in the Corporate and Other segment. These decreases were partially
offset by an increase of $8.7 million in operating income in the Asset
Protection segment. Changes in fair value related to the Corporate and Other
trading portfolio and the Annuities segment decreased operating earnings by
$7.5 million in the six months ended June 30, 2010.
We
experienced net realized losses of $56.0 million for the six months ended June 30,
2010, as compared to net realized losses of $10.4 million for the six months
ended June 30, 2009. The losses realized for the six months ended June 30,
2010, were primarily caused by $40.2 million of losses related to guaranteed
minimum withdrawal benefits (GMWB) embedded derivative valuation changes and
$28.7 million of other-than-temporary impairment credit-related losses and
mark-to-market losses of $8.8 million on interest rate swaps. Offsetting these
losses were $13.9 million of gains related to the net activity related to the
modified coinsurance portfolio and derivative activity and $12.4 million of
gains related to investment securities sale activity.
·
Life Marketing segment operating income was
$76.4 million for the six months ended June 30, 2010, representing a
decrease of $3.3 million, or 4.1%, from the six months ended June 30,
2009. The decrease was primarily due to lower allocated investment income on
the traditional line of business, net of interest expense, and higher operating
expenses, partially offset by more favorable mortality results.
·
Acquisitions segment operating income was
$61.6 million for the six months ended June 30, 2010, a decrease of $7.1
million, or 10.3%, as compared to the six months ended June 30, 2009,
primarily due to the expected runoff of the blocks of business.
44
Table of Contents
·
Annuities segment operating income was $18.8 million
for the six months ended June 30, 2010, as compared to $20.9 million for
the six months ended June 30, 2009, a decrease of $2.1 million. This
change included an unfavorable $28.3 million variance related to fair value
changes, of which $1.8 million was related to the EIA product and $26.5 million
was related to embedded derivatives associated with the VA GMWB rider, caused
primarily by changes in equity markets and lower interest rates. The remaining
$26.2 million variance in operating income was primarily driven by a $19.3
million unlocking charge recorded within the VA line during the six months
ended June 30, 2009. Other items accounted for the remainder of the
variance, including a $6.4 million increase in earnings related to wider
spreads and average account value growth in fixed and variable annuities.
·
Stable Value Products segment operating income was
$22.0 million and decreased $15.2 million, or 40.8%, for the six months
ended June 30, 2010, as compared to the six months ended June 30,
2009. The decrease in operating earnings resulted from a decline in average
account values and lower operating spreads. In addition, no income was
generated from the early retirement of funding agreements backing medium-term
notes for the six months ended June 30, 2010, compared with $1.9 million
for the six months ended June 30, 2009. The operating spread decreased 35
basis points to 126 basis points for the six months ended June 30, 2010,
as compared to an operating spread of 161 basis points during the six months
ended June 30, 2009.
·
Asset Protection segment operating income was
$19.7 million, representing an increase of $8.7 million for the six months
ended June 30, 2010, as compared to the six months ended June 30,
2009. Income for the six months ended June 30, 2010, was comprised of
$12.1 million of income from core operations and $7.6 million of income from
runoff lines. Credit insurance earnings decreased $1.9 million as compared to
the prior year, primarily due to unfavorable loss experience and lower
investment income. Service contract earnings increased $0.6 million, or 7.3%,
as compared to the prior year. Earnings from other products, including runoff
lines, increased $10.0 million for the six months ended June 30, 2010 as
compared to the prior year. The increase resulted primarily from a $7.8 million
excess reserve release in the first quarter of 2010 related to the final
settlement in the runoff Lenders Indemnity line of business. Favorable loss
experience in the GAP product line also contributed to the increase.
·
Corporate and Other segment operating loss
was $15.8 million for the six months ended June 30, 2010, as compared
to income of $0.4 million for the six months ended June 30, 2009. This
variance was primarily due to a negative variance related to mark-to-market
adjustments on a portfolio of securities designated for trading. The trading
portfolio accounted for a negative variance of $27.1 million compared to the
prior year. Partially offsetting this was a $9.5 million pre-tax gain on the
repurchase of non-recourse funding obligations and growth in other investment
income.
45
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,
|
|
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums and policy fees
|
|
$
|
407,900
|
|
$
|
397,195
|
|
2.7
|
%
|
$
|
781,290
|
|
$
|
772,853
|
|
1.1
|
%
|
Reinsurance ceded
|
|
(227,543
|
)
|
(241,002
|
)
|
(5.6
|
)
|
(404,295
|
)
|
(448,166
|
)
|
(9.8
|
)
|
Net premiums and policy fees
|
|
180,357
|
|
156,193
|
|
15.5
|
|
376,995
|
|
324,687
|
|
16.1
|
|
Net investment income
|
|
94,763
|
|
90,833
|
|
4.3
|
|
185,907
|
|
184,360
|
|
0.8
|
|
Other income
|
|
23,008
|
|
20,168
|
|
14.1
|
|
44,230
|
|
39,998
|
|
10.6
|
|
Total operating revenues
|
|
298,128
|
|
267,194
|
|
11.6
|
|
607,132
|
|
549,045
|
|
10.6
|
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and settlement expenses
|
|
217,032
|
|
189,101
|
|
14.8
|
|
437,588
|
|
384,511
|
|
13.8
|
|
Amortization of deferred policy acquisition costs
|
|
30,892
|
|
33,404
|
|
(7.5
|
)
|
64,970
|
|
69,132
|
|
(6.0
|
)
|
Other operating expenses
|
|
14,449
|
|
7,510
|
|
92.4
|
|
28,141
|
|
15,713
|
|
79.1
|
|
Total benefits and expenses
|
|
262,373
|
|
230,015
|
|
14.1
|
|
530,699
|
|
469,356
|
|
13.1
|
|
INCOME BEFORE INCOME TAX
|
|
35,755
|
|
37,179
|
|
(3.8
|
)
|
76,433
|
|
79,689
|
|
(4.1
|
)
|
OPERATING INCOME
|
|
$
|
35,755
|
|
$
|
37,179
|
|
(3.8
|
)
|
$
|
76,433
|
|
$
|
79,689
|
|
(4.1
|
)
|
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,
|
|
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
Sales By Product
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
|
|
$
|
17,627
|
|
$
|
26,102
|
|
(32.5
|
)%
|
$
|
38,391
|
|
$
|
49,253
|
|
(22.1
|
)%
|
Universal life
|
|
23,951
|
|
12,796
|
|
87.2
|
|
45,218
|
|
25,615
|
|
76.5
|
|
Variable universal life
|
|
1,334
|
|
854
|
|
56.2
|
|
2,270
|
|
1,496
|
|
51.7
|
|
|
|
$
|
42,912
|
|
$
|
39,752
|
|
7.9
|
|
$
|
85,879
|
|
$
|
76,364
|
|
12.5
|
|
Sales By Distribution Channel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brokerage general agents
|
|
$
|
26,654
|
|
$
|
25,783
|
|
3.4
|
|
$
|
53,005
|
|
$
|
47,247
|
|
12.2
|
|
Independent agents
|
|
6,254
|
|
7,084
|
|
(11.7
|
)
|
12,945
|
|
14,364
|
|
(9.9
|
)
|
Stockbrokers / banks
|
|
8,031
|
|
6,509
|
|
23.4
|
|
17,002
|
|
13,682
|
|
24.3
|
|
BOLI / other
|
|
1,973
|
|
376
|
|
n/m
|
|
2,927
|
|
1,071
|
|
n/m
|
|
|
|
$
|
42,912
|
|
$
|
39,752
|
|
7.9
|
|
$
|
85,879
|
|
$
|
76,364
|
|
12.5
|
|
Average Life Insurance In-force
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
|
|
$
|
497,366,086
|
|
$
|
487,972,776
|
|
1.9
|
|
$
|
497,143,901
|
|
$
|
485,862,761
|
|
2.3
|
|
Universal life
|
|
54,125,544
|
|
53,163,035
|
|
1.8
|
|
53,884,068
|
|
53,067,391
|
|
1.5
|
|
|
|
$
|
551,491,630
|
|
$
|
541,135,811
|
|
1.9
|
|
$
|
551,027,969
|
|
$
|
538,930,152
|
|
2.2
|
|
Average Account Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal life
|
|
$
|
5,515,913
|
|
$
|
5,354,527
|
|
3.0
|
|
$
|
5,465,071
|
|
$
|
5,353,024
|
|
2.1
|
|
Variable universal life
|
|
319,278
|
|
242,168
|
|
31.8
|
|
317,522
|
|
244,311
|
|
30.0
|
|
|
|
$
|
5,835,191
|
|
$
|
5,596,695
|
|
4.3
|
|
$
|
5,782,593
|
|
$
|
5,597,335
|
|
3.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional Life Mortality
Experience
(2)
|
|
$
|
8,152
|
|
$
|
8,356
|
|
|
|
$
|
21,201
|
|
$
|
8,902
|
|
|
|
Universal Life Mortality
Experience
(2)
|
|
$
|
1,521
|
|
$
|
1,504
|
|
|
|
$
|
2,957
|
|
$
|
2,991
|
|
|
|
(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.
46
Table of
Contents
Operating expenses detail
Other
operating expenses for the segment were as follows:
|
|
For The
|
|
|
|
For The
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Six Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
Insurance Companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First year commissions
|
|
$
|
51,844
|
|
$
|
44,801
|
|
15.7
|
%
|
$
|
103,501
|
|
$
|
87,177
|
|
18.7
|
%
|
Renewal commissions
|
|
9,142
|
|
9,211
|
|
(0.7
|
)
|
17,756
|
|
18,298
|
|
(3.0
|
)
|
First year ceding allowances
|
|
(2,390
|
)
|
(5,093
|
)
|
(53.1
|
)
|
(4,478
|
)
|
(9,402
|
)
|
(52.4
|
)
|
Renewal ceding allowances
|
|
(48,356
|
)
|
(57,026
|
)
|
(15.2
|
)
|
(94,226
|
)
|
(108,070
|
)
|
(12.8
|
)
|
General & administrative
|
|
41,694
|
|
38,335
|
|
8.8
|
|
81,599
|
|
74,957
|
|
8.9
|
|
Taxes, licenses, and fees
|
|
8,536
|
|
7,451
|
|
14.6
|
|
16,519
|
|
14,752
|
|
12.0
|
|
Other operating expenses incurred
|
|
60,470
|
|
37,679
|
|
60.5
|
|
120,671
|
|
77,712
|
|
55.3
|
|
Less: commissions, allowances & expenses capitalized
|
|
(68,171
|
)
|
(50,461
|
)
|
35.1
|
|
(135,584
|
)
|
(101,970
|
)
|
33.0
|
|
Other insurance company operating expenses
|
|
(7,701
|
)
|
(12,782
|
)
|
(39.8
|
)
|
(14,913
|
)
|
(24,258
|
)
|
(38.5
|
)
|
Marketing Companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
17,314
|
|
14,978
|
|
15.6
|
|
33,212
|
|
29,663
|
|
12.0
|
|
Other operating expenses
|
|
4,836
|
|
5,314
|
|
(9.0
|
)
|
9,842
|
|
10,308
|
|
(4.5
|
)
|
Other marketing company operating expenses
|
|
22,150
|
|
20,292
|
|
9.2
|
|
43,054
|
|
39,971
|
|
7.7
|
|
Other operating expenses
|
|
$
|
14,449
|
|
$
|
7,510
|
|
92.4
|
|
$
|
28,141
|
|
$
|
15,713
|
|
79.1
|
|
For The Three Months Ended June 30, 2010 as compared to The Three
Months Ended June 30, 2009
Segment operating income
Operating
income was $35.8 million for the three months ended June 30, 2010,
representing a decrease of $1.4 million, or 3.8%, from the three months ended June 30,
2009. The decrease was primarily due to lower allocated investment income net
of interest expense on the traditional line of business and higher operating
expenses.
Operating revenues
Total
revenues for the three months ended June 30, 2010, increased $30.9
million, or 11.6%, as compared to the three months ended June 30, 2009.
This increase was the result of higher premiums and policy fees in the segments
traditional and universal life lines, higher investment income in the universal
life product line due to increases in net in-force reserves and higher sales in
the segments marketing companies and was partially offset by lower investment
income on the Companys traditional and BOLI product lines.
Net premiums and policy fees
Net
premiums and policy fees increased by $24.2 million, or 15.5%, for the three
months ended June 30, 2010, as compared to the three months ended June 30,
2009, primarily due to an increase in retention levels on certain traditional
life products and continued growth in universal life in-force business. Our
maximum retention level for newly issued traditional life and universal life
products is generally $2,000,000.
Net investment income
Net
investment income in the segment increased $3.9 million, or 4.3%, for the three
months ended June 30, 2010, as compared to the three months ended June 30,
2009. Increased retained traditional and universal life reserves led to
increased investment income in the second quarter of 2010 compared to the
second quarter of 2009. Decreases in BOLI fund value led to lower BOLI
investment income in the same period. In addition, the impact of our
traditional and universal life capital markets programs on investment income
allocated to the segment caused a reduction of $0.2 million between the second
quarter of 2009 and the second quarter of 2010.
47
Table of
Contents
Other income
Other
income increased $2.8 million, or 14.1%, for the three months ended June 30,
2010, as compared to the three months ended June 30, 2009. The increase
relates primarily to higher sales levels in the segments marketing companies.
Benefits and settlement expenses
Benefits
and settlement expenses increased by $27.9 million, or 14.8%, for the three
months ended June 30, 2010, as compared to the three months ended June 30,
2009, 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, 2010, was favorable by
$9.7 million and was approximately $0.2 million less favorable than the
estimated mortality impact on earnings for the three months ended June 30,
2009.
Amortization of DAC
DAC
amortization decreased $2.5 million, or 7.5%, for the three months ended June 30,
2010, as compared to the three months ended June 30, 2009. The decrease
primarily relates to more favorable unlocking on UL and BOLI business partially
offset by growth in retained life insurance in-force as compared to 2009.
Other operating expenses
Other
operating expenses increased $6.9 million, or 92.4%, for the three months ended
June 30, 2010, as compared to the three months ended June 30, 2009.
This increase reflects higher marketing company expenses associated with higher
broker dealer sales, higher general administrative expenses, a reduction in
reinsurance allowances, and interest expense of $2.9 million associated with
Golden Gate III Vermont Captive Insurance Company (Golden Gate III), a newly
formed, wholly owned subsidiary of PLICO.
Sales
Sales
for the segment increased $3.2 million, or 7.9%, for the three months ended June 30,
2010, as compared to the three months ended June 30, 2009, as increased
universal life sales more than offset lower traditional sales. Lower sales
levels of traditional products were primarily the result of pricing changes
implemented on certain of our products resulting in less competitive product
positioning and greater focus on the universal life product line. Universal
life sales increased $11.2 million, or 87.2%, for the three months ended June 30,
2010, as compared to the three months ended June 30, 2009, primarily due
to our increased focus on the product line.
For The Six Months Ended June 30, 2010 as compared to The Six
Months Ended June 30, 2009
Segment operating income
Operating
income was $76.4 million for the six months ended June 30, 2010,
representing a decrease of $3.3 million, or 4.1%, from the six months ended June 30,
2009. The decrease was primarily due to lower allocated investment income on
the traditional line of business net of interest expense, and higher operating
expenses, partially offset by more favorable mortality results.
Operating revenues
Total
revenues for the six months ended June 30, 2010, increased $58.1 million,
or 10.6%, as compared to the six months ended June 30, 2009. This increase
was the result of higher premiums and policy fees in the segments traditional
and universal life lines and higher investment income in the universal life
product line due to increases in net in-force reserves and was partially offset
by lower sales in the segments marketing companies and lower investment income
on the Companys traditional and BOLI product lines.
48
Table of
Contents
Net premiums and policy fees
Net
premiums and policy fees increased by $52.3 million, or 16.1%, for the six
months ended June 30, 2010, as compared to the six months ended June 30,
2009, primarily due to an increase in retention levels on certain traditional
life products and continued growth in universal life in-force business. Our
maximum retention level for newly issued traditional life and universal life
products is generally $2,000,000.
Net investment income
Net
investment income in the segment increased $1.5 million, or 0.8%, for the six
months ended June 30, 2010, as compared to the six months ended June 30,
2009. Increased retained universal life reserves led to increased investment
income for the six months ended June 30, 2010 compared to the six months
ended June 30, 2009. Decreases in BOLI fund value led to lower BOLI
investment income in the same period. Traditional life statutory reserving
methodology changes have reduced our statutory reserves, thus reducing the
investment income allocated to the segment in the first quarter of 2010
compared to the first quarter of 2009. Growth in retained traditional reserves
between the second quarter of 2009 and the second quarter of 2010, caused
higher allocated investment income which partially offset the first quarter
decrease. In addition, the impact of our traditional and universal life capital
markets programs on investment income allocated to the segment caused a
reduction of $5.3 million between 2009 and 2010.
Other income
Other
income increased $4.2 million, or 10.6%, for the six months ended June 30,
2010, as compared to the six months ended June 30, 2009. The increase
relates primarily to higher sales in marketing companies, fees on variable
universal life funds, and interest on modified coinsurance transactions.
Benefits and settlement expenses
Benefits
and settlement expenses increased by $53.1 million, or 13.8%, for the six
months ended June 30, 2010, as compared to the six months ended June 30,
2009, 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, partially
offset by more favorable mortality. The estimated mortality impact to earnings
related to traditional and universal life products, for the six months ended June 30,
2010, was favorable by $24.2 million and was approximately $12.3 million
more favorable than the estimated mortality impact on earnings for the six
months ended June 30, 2009.
Amortization of DAC
DAC
amortization decreased $4.2 million, or 6.0%, for the six months ended June 30,
2010, as compared to the six months ended June 30, 2009. The decrease
primarily relates to more favorable unlocking on universal life and BOLI
business partially offset by growth in retained life insurance in-force as
compared to 2009.
Other operating expenses
Other
operating expenses increased $12.4 million, or 79.1%, for the six months ended June 30,
2010, as compared to the six months ended June 30, 2009. This increase
reflects higher marketing company expenses associated with higher broker dealer
sales, higher general administrative expenses, a reduction in reinsurance
allowances, and interest expense of $2.9 million associated with Golden Gate
III.
Sales
Sales
for the segment increased $9.5 million, or 12.5%, for the six months ended June 30,
2010, as compared to the six months ended June 30, 2009, as increased
universal life sales more than offset lower traditional sales. Lower sales
levels of traditional products were primarily the result of pricing changes
implemented on certain of our products resulting in a less competitive product
positioning and greater focus on the universal life product line. Universal
life sales increased $19.6 million, or 76.5%, for the six months ended June 30,
2010, as compared to the six months ended June 30, 2009, primarily due to
our increased focus on the product line.
49
Table of Contents
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 universal life-type, limited-payment
long duration, and investment contracts 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 DAC amortization on these lines of business. Deferred reinsurance
allowances on level term business as required by the ASC Financial
Services-Insurance Topic are recorded as ceded DAC, which is amortized over
estimated ceded premiums of the policies in force. Thus, deferred reinsurance
allowances on policies as required under the Financial Services-Insurance Topic
may impact DAC amortization.
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,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(Dollars In Thousands)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
Reinsurance ceded
|
|
$
|
(227,543
|
)
|
$
|
(241,002
|
)
|
$
|
(404,295
|
)
|
$
|
(448,166
|
)
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
Benefit and settlement expenses
|
|
(244,737
|
)
|
(250,250
|
)
|
(438,742
|
)
|
(468,889
|
)
|
Amortization of deferred policy acquisition costs
|
|
(12,117
|
)
|
(16,829
|
)
|
(19,981
|
)
|
(29,221
|
)
|
Other operating expenses
(1)
|
|
(35,661
|
)
|
(36,804
|
)
|
(66,956
|
)
|
(69,015
|
)
|
Total benefits and expenses
|
|
(292,515
|
)
|
(303,883
|
)
|
(525,679
|
)
|
(567,125
|
)
|
|
|
|
|
|
|
|
|
|
|
NET IMPACT OF REINSURANCE
(2)
|
|
$
|
64,972
|
|
$
|
62,881
|
|
$
|
121,384
|
|
$
|
118,959
|
|
|
|
|
|
|
|
|
|
|
|
Allowances received
|
|
$
|
(50,746
|
)
|
$
|
(62,119
|
)
|
$
|
(98,704
|
)
|
$
|
(117,472
|
)
|
Less: Amount deferred
|
|
15,085
|
|
25,315
|
|
31,748
|
|
48,457
|
|
Allowances recognized
(ceded other operating expenses)
(1)
|
|
$
|
(35,661
|
)
|
$
|
(36,804
|
)
|
$
|
(66,956
|
)
|
$
|
(69,015
|
)
|
(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. The Company estimates that the impact of foregone investment
income would reduce the net impact of reinsurance by 90% 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 90% to 130%. The
Life Marketing segments reinsurance programs do not materially impact the other
income line of our income statement.
50
Table of Contents
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 the ASC Financial Services-Insurance
Topic.
For The Three Months Ended June 30, 2010 as
compared to The Three Months Ended June 30, 2009
The
decrease in ceded premiums above for the three months ended June 30, 2010,
as compared to the three months ended June 30, 2009, was caused primarily
by lower ceded traditional life premiums and policy fees of $9.1 million.
Ceded
benefits and settlement expenses were lower for the three months ended June 30,
2010, as compared to the three months ended June 30, 2009, due to lower
increases in ceded reserves and decreased ceded claims. Traditional ceded
benefits decreased $13.3 million for the three months ended June 30, 2010,
as compared to the three months ended June 30, 2009, due to a lower
increase in ceded reserves and lower ceded death benefits. Universal life ceded
benefits increased $7.8 million for the three months ended June 30, 2010,
as compared to the three months ended June 30, 2009, primarily due to
higher ceded claims. Ceded universal life claims were $7.2 million higher for
the three months ended June 30, 2010, as compared to the three months
ended June 30, 2009.
Ceded
amortization of deferred policy acquisitions costs decreased for the three
months ended June 30, 2010, as compared to the three months ended June 30,
2009, primarily due to the differences in unlocking between the two periods.
Total
allowances received for the three months ended June 30, 2010, decreased
from the three months ended June 30, 2009, due to the change in our
traditional life reinsurance strategy, resulting in an increase in our
retention level.
For The Six Months Ended June 30, 2010 as compared to The Six
Months Ended June 30, 2009
The
decrease in ceded premiums above for the six months ended June 30, 2010,
as compared to the six months ended June 30, 2009, was caused primarily by
lower ceded traditional life premiums and policy fees of $37.8 million.
Ceded
benefits and settlement expenses were lower for the six months ended June 30,
2010, as compared to the six months ended June 30, 2009, due to lower
increases in ceded reserves and decreased ceded claims. Traditional ceded
benefits decreased $42.2 million for the six months ended June 30, 2010,
as compared to the six months ended June 30, 2009, due to a lower increase
in ceded reserves and lower ceded death benefits. Universal life ceded benefits
increased $13.0 million for the six months ended June 30, 2010, as
compared to the six months ended June 30, 2009, as higher ceded claims
were partially offset by a lower change in ceded reserves. Ceded universal life
claims were $18.4 million higher for the six months ended June 30, 2010,
as compared to the six months ended June 30, 2009.
Ceded
amortization of deferred policy acquisitions costs decreased for the six months
ended June 30, 2010, as compared to the six months ended June 30,
2009, primarily due to the differences in unlocking between the two periods.
Total allowances received for the six months ended June 30,
2010, decreased from the six months ended June 30, 2009, due to the change
in our traditional life reinsurance strategy, resulting in an increase in our
retention level.
51
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,
|
|
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums and policy fees
|
|
$
|
178,389
|
|
$
|
184,484
|
|
(3.3
|
)%
|
$
|
339,110
|
|
$
|
363,160
|
|
(6.6
|
)%
|
Reinsurance ceded
|
|
(117,492
|
)
|
(115,482
|
)
|
1.7
|
|
(210,626
|
)
|
(225,089
|
)
|
(6.4
|
)
|
Net premiums and policy fees
|
|
60,897
|
|
69,002
|
|
(11.7
|
)
|
128,484
|
|
138,071
|
|
(6.9
|
)
|
Net investment income
|
|
116,748
|
|
119,515
|
|
(2.3
|
)
|
232,149
|
|
243,056
|
|
(4.5
|
)
|
Other income
|
|
1,375
|
|
1,592
|
|
(13.6
|
)
|
2,648
|
|
2,995
|
|
(11.6
|
)
|
Total operating revenues
|
|
179,020
|
|
190,109
|
|
(5.8
|
)
|
363,281
|
|
384,122
|
|
(5.4
|
)
|
Realized gains (losses) - investments
|
|
61,152
|
|
157,871
|
|
|
|
105,671
|
|
105,408
|
|
|
|
Realized gains (losses) - derivatives
|
|
(62,593
|
)
|
(146,462
|
)
|
|
|
(92,656
|
)
|
(88,778
|
)
|
|
|
Total revenues
|
|
177,579
|
|
201,518
|
|
|
|
376,296
|
|
400,752
|
|
|
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and settlement expenses
|
|
127,554
|
|
135,773
|
|
(6.1
|
)
|
261,028
|
|
274,504
|
|
(4.9
|
)
|
Amortization of deferred policy acquisition costs
and value of business acquired
|
|
15,868
|
|
14,832
|
|
7.0
|
|
29,063
|
|
32,395
|
|
(10.3
|
)
|
Other operating expenses
|
|
5,408
|
|
4,463
|
|
21.2
|
|
11,631
|
|
8,561
|
|
35.9
|
|
Operating benefits and expenses
|
|
148,830
|
|
155,068
|
|
(4.0
|
)
|
301,722
|
|
315,460
|
|
(4.4
|
)
|
Amortization of DAC / VOBA related to realized
gains (losses) - investments
|
|
(266
|
)
|
(272
|
)
|
|
|
(123
|
)
|
(94
|
)
|
|
|
Total benefits and expenses
|
|
148,564
|
|
154,796
|
|
(4.0
|
)
|
301,599
|
|
315,366
|
|
(4.4
|
)
|
INCOME BEFORE INCOME TAX
|
|
29,015
|
|
46,722
|
|
(37.9
|
)
|
74,697
|
|
85,386
|
|
(12.5
|
)
|
Less: realized gains (losses)
|
|
(1,441
|
)
|
11,409
|
|
|
|
13,015
|
|
16,630
|
|
|
|
Less: related amortization of DAC/VOBA
|
|
266
|
|
272
|
|
|
|
123
|
|
94
|
|
|
|
OPERATING INCOME
|
|
$
|
30,190
|
|
$
|
35,041
|
|
(13.8
|
)
|
$
|
61,559
|
|
$
|
68,662
|
|
(10.3
|
)
|
52
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,
|
|
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
Average Life Insurance In-Force
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional
|
|
$
|
186,269,289
|
|
$
|
199,231,953
|
|
(6.5
|
)%
|
$
|
187,785,103
|
|
$
|
200,921,328
|
|
(6.5
|
)%
|
Universal life
|
|
26,952,745
|
|
28,486,526
|
|
(5.4
|
)
|
27,138,749
|
|
28,722,377
|
|
(5.5
|
)
|
|
|
$
|
213,222,034
|
|
$
|
227,718,479
|
|
(6.4
|
)
|
$
|
214,923,852
|
|
$
|
229,643,705
|
|
(6.4
|
)
|
Average Account Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Universal life
|
|
$
|
2,709,681
|
|
$
|
2,834,573
|
|
(4.4
|
)
|
$
|
2,732,403
|
|
$
|
2,849,613
|
|
(4.1
|
)
|
Fixed annuity
(2)
|
|
3,386,070
|
|
3,617,480
|
(4)
|
(6.4
|
)
|
3,405,837
|
|
3,690,322
|
(4)
|
(7.7
|
)
|
Variable annuity
|
|
134,278
|
|
124,441
|
|
7.9
|
|
136,984
|
|
125,048
|
|
9.5
|
|
|
|
$
|
6,230,029
|
|
$
|
6,576,494
|
|
(5.3
|
)
|
$
|
6,275,224
|
|
$
|
6,664,983
|
|
(5.8
|
)
|
Interest Spread - UL &
Fixed Annuities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income yield
(3)
|
|
6.01
|
%
|
5.89
|
%
|
|
|
5.95
|
%
|
5.96
|
%
|
|
|
Interest credited to policyholders
|
|
4.10
|
|
4.17
|
|
|
|
4.19
|
|
4.16
|
|
|
|
Interest spread
|
|
1.91
|
%
|
1.72
|
%
|
|
|
1.76
|
%
|
1.80
|
%
|
|
|
(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)
Includes available-for-sale
and trading portfolios. Available-for-sale portfolio yields were 6.34% for the three and six months ended June 30,
2010 compared to 6.30% and 6.34%, respectively, for the three and six months
ended June 30, 2009.
(4)
Certain changes in
methodology were made in the current year. Prior years have been adjusted to
make amounts comparable to current year.
For The Three Months Ended June 30, 2010 as compared to The Three
Months Ended June 30, 2009
Segment operating income
Operating
income was $30.2 million for the three months ended June 30, 2010, a
decrease of $4.9 million, or 13.8%, as compared to the three months ended June 30,
2009, primarily due to the expected runoff of the blocks of business.
Operating Revenues
Net
premiums and policy fees decreased $8.1 million, or 11.7%, for the three months
ended June 30, 2010, as compared to the three months ended June 30,
2009, primarily due to runoff of the in-force business. Net investment income
decreased $2.8 million, or 2.3%, for the three months ended June 30, 2010,
as compared to the three months ended June 30, 2009, due to runoff of the
segments in-force business, resulting in a reduction of invested assets and
lower investment income.
Benefits and expenses
Total
benefits and expenses decreased $6.2 million, or 4.0%, for the three months
ended June 30, 2010, as compared to the three months ended June 30,
2009. The decrease related primarily to the expected runoff of the in-force
business and fluctuations in mortality.
For The Six Months Ended June 30, 2010 as compared to The Six
Months Ended June 30, 2009
Segment operating income
Operating
income was $61.6 million for the six months ended June 30, 2010, a
decrease of $7.1 million, or 10.3%, as compared to the six months ended June 30,
2009, primarily due to the expected runoff of the blocks of business.
Operating Revenues
Net
premiums and policy fees decreased $9.6 million, or 6.9%, for the six months
ended June 30, 2010, as compared to the six months ended June 30,
2009, primarily due to runoff of the in-force business. Net investment income
decreased $10.9 million, or 4.5%, for the six months ended June 30, 2010,
as compared to the six months
53
Table of Contents
ended
June 30, 2009, due to runoff of the segments in-force business, resulting
in a reduction of invested assets and lower investment income.
Benefits and expenses
Total
benefits and expenses decreased $13.8 million, or 4.4%, for the six months
ended June 30, 2010, as compared to the six months ended June 30,
2009. The decrease related primarily to the expected runoff of the in-force
business and fluctuations in mortality.
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,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(Dollars In Thousands)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
Reinsurance ceded
|
|
$
|
(117,492
|
)
|
$
|
(115,482
|
)
|
$
|
(210,626
|
)
|
$
|
(225,089
|
)
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
Benefit and settlement expenses
|
|
(93,901
|
)
|
(97,107
|
)
|
(178,970
|
)
|
(189,329
|
)
|
Amortization of deferred policy acquisition costs
|
|
(2,231
|
)
|
(3,496
|
)
|
(7,653
|
)
|
(9,277
|
)
|
Other operating expenses
|
|
(15,110
|
)
|
(15,747
|
)
|
(27,895
|
)
|
(30,706
|
)
|
Total benefits and expenses
|
|
(111,242
|
)
|
(116,350
|
)
|
(214,518
|
)
|
(229,312
|
)
|
|
|
|
|
|
|
|
|
|
|
NET IMPACT OF REINSURANCE
(1)
|
|
$
|
(6,250
|
)
|
$
|
868
|
|
$
|
3,892
|
|
$
|
4,223
|
|
(1)
Assumes no investment income on reinsurance.
Foregone investment income would substantially reduce the favorable impact of
reinsurance.
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, 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 condensed financial
statements.
The
net impact of reinsurance was less favorable by $7.1 million for the three
months ended June 30, 2010, as compared to the three months ended June 30,
2009, due to increases in ceded premiums and decreases in benefits,
amortization of deferred acquisition costs, and expenses.
The
net impact of reinsurance decreased $0.3 million for the six months ended June 30,
2010, as compared to the six months ended June 30, 2009, as decreases in
ceded premiums more than offset decreases in benefits, amortization of deferred
acquisition costs, and expenses.
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,
|
|
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums and policy fees
|
|
$
|
9,800
|
|
$
|
7,406
|
|
32.3
|
%
|
$
|
18,575
|
|
$
|
18,391
|
|
1.0
|
%
|
Reinsurance ceded
|
|
(38
|
)
|
(42
|
)
|
(9.5
|
)
|
(75
|
)
|
(84
|
)
|
(10.7
|
)
|
Net premiums and policy fees
|
|
9,762
|
|
7,364
|
|
32.6
|
|
18,500
|
|
18,307
|
|
1.1
|
|
Net investment income
|
|
118,719
|
|
108,588
|
|
9.3
|
|
234,916
|
|
211,570
|
|
11.0
|
|
Realized gains (losses) - derivatives
|
|
(49,417
|
)
|
13,393
|
|
n/m
|
|
(39,868
|
)
|
32,481
|
|
n/m
|
|
Other income
|
|
6,935
|
|
4,215
|
|
64.5
|
|
12,929
|
|
7,595
|
|
70.2
|
|
Total operating revenues
|
|
85,999
|
|
133,560
|
|
(35.6
|
)
|
226,477
|
|
269,953
|
|
(16.1
|
)
|
Realized gains (losses) - investments
|
|
(524
|
)
|
925
|
|
|
|
(422
|
)
|
(5,523
|
)
|
|
|
Total revenues
|
|
85,475
|
|
134,485
|
|
(36.4
|
)
|
226,055
|
|
264,430
|
|
(14.5
|
)
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and settlement expenses
|
|
114,534
|
|
78,759
|
|
45.4
|
|
208,775
|
|
164,567
|
|
26.9
|
|
Amortization of deferred policy acquisition costs
and value of business acquired
|
|
(38,143
|
)
|
26,568
|
|
n/m
|
|
(18,543
|
)
|
71,753
|
|
n/m
|
|
Other operating expenses
|
|
9,003
|
|
6,068
|
|
48.4
|
|
17,453
|
|
12,043
|
|
44.9
|
|
Operating benefits and expenses
|
|
85,394
|
|
111,395
|
|
(23.3
|
)
|
207,685
|
|
248,363
|
|
(16.4
|
)
|
Amortization of DAC / VOBA related to realized
gains (losses) - investments
|
|
594
|
|
|
|
|
|
665
|
|
(100
|
)
|
|
|
Total benefits and expenses
|
|
85,988
|
|
111,395
|
|
(22.8
|
)
|
208,350
|
|
248,263
|
|
(16.1
|
)
|
INCOME (LOSS) BEFORE INCOME TAX
|
|
(513
|
)
|
23,090
|
|
n/m
|
|
17,705
|
|
16,167
|
|
9.5
|
|
Less: realized gains (losses)
|
|
(524
|
)
|
925
|
|
|
|
(422
|
)
|
(5,523
|
)
|
|
|
Less: related amortization of DAC
|
|
(594
|
)
|
670
|
|
|
|
(665
|
)
|
770
|
|
|
|
OPERATING INCOME
|
|
$
|
605
|
|
$
|
21,495
|
|
(97.2
|
)
|
$
|
18,792
|
|
$
|
20,920
|
|
(10.2
|
)
|
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,
|
|
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed annuity
|
|
$
|
325,299
|
|
$
|
432,373
|
|
(24.8
|
)%
|
$
|
543,328
|
|
$
|
730,053
|
|
(25.6
|
)%
|
Variable annuity
|
|
412,789
|
|
177,306
|
|
n/m
|
|
762,725
|
|
316,362
|
|
n/m
|
|
|
|
$
|
738,088
|
|
$
|
609,679
|
|
21.1
|
|
$
|
1,306,053
|
|
$
|
1,046,415
|
|
24.8
|
|
Average Account Values
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed annuity
(1)
|
|
$
|
7,820,272
|
|
$
|
6,945,161
|
|
12.6
|
|
$
|
7,710,618
|
|
$
|
6,814,015
|
|
13.2
|
|
Variable annuity
|
|
3,212,315
|
|
1,999,967
|
|
60.6
|
|
3,061,036
|
|
1,882,160
|
|
62.6
|
|
|
|
$
|
11,032,587
|
|
$
|
8,945,128
|
|
23.3
|
|
$
|
10,771,654
|
|
$
|
8,696,175
|
|
23.9
|
|
Interest Spread - Fixed Annuities
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income yield
|
|
6.06
|
%
|
6.23
|
%
|
|
|
6.09
|
%
|
6.18
|
%
|
|
|
Interest credited to policyholders
|
|
4.61
|
|
4.82
|
|
|
|
4.62
|
|
4.87
|
|
|
|
Interest spread
|
|
1.45
|
%
|
1.41
|
%
|
|
|
1.47
|
%
|
1.31
|
%
|
|
|
|
|
As of June 30,
|
|
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
GMDB - Net amount at risk
(3)
|
|
$
|
482,349
|
|
$
|
681,368
|
|
(29.2
|
)%
|
GMDB Reserves
|
|
|
|
|
|
n/m
|
|
GMWB Reserves
|
|
54,047
|
|
1,067
|
|
n/m
|
|
Account value subject to GMWB
rider
|
|
1,679,153
|
|
629,576
|
|
n/m
|
|
S&P 500® Index
|
|
1,031
|
|
919
|
|
12.2
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2010 as compared to The Three
Months Ended June 30, 2009
Segment operating income
Segment
operating income was $0.6 million for the three months ended June 30, 2010,
as compared to $21.5 million for the three months ended June 30, 2009, a
decrease of $20.9 million. This change included an unfavorable $20.9 million
variance related to fair value changes, made up of a $0.4 million favorable
change related to the EIA product and a $21.3 million unfavorable change
related to embedded derivatives associated with the VA GMWB rider caused primarily
by changes in equity markets and lower interest rates. A $2.9 million increase
in earnings was related to wider spreads and average account value growth in
fixed and variable annuities.
Operating revenues
Segment
operating revenues decreased $47.6 million, or 35.6%, for the three months
ended June 30, 2010, as compared to the three months ended June 30,
2009, primarily due to unfavorable fair value changes on the embedded
derivatives associated with the VA GMWB rider and economic hedges associated
with the EIA product. These losses were partially offset by an increase in net
investment income, policy fees, and other income. Average fixed account
balances grew 12.6% for the three months ended June 30, 2010, resulting in
higher investment income.
Benefits and settlement expenses
Benefits
and settlement expenses increased $35.8 million, or 45.4%, for the three months
ended June 30, 2010, as compared to the three months ended June 30,
2009. This increase was primarily the result of higher credited interest,
higher unearned premium reserve amortization, and fluctuations in death benefit
reserves on the VA line. Partially offsetting this increase was a favorable
change of $4.1 million in the fair value component of the EIA reserve and lower
bonus interest amortization.
56
Table of Contents
Amortization of DAC
The
decrease in DAC amortization for the three months ended June 30, 2010, as
compared to the three months ended June 30, 2009, was primarily due to
fair value changes on the VA GMWB rider. Fair value changes on the VA GMWB
rider caused a decrease in amortization of $52.7 million. Favorable DAC
unlocking of $0.9 million was recorded by the segment during the three months
ended June 30, 2010, as compared to favorable unlocking of $0.6 million
during the three months ended June 30, 2009.
Sales
Total
sales increased $128.4 million, or 21.1%, for the three months ended June 30,
2010, as compared to the three months ended June 30, 2009. Sales of fixed
annuities decreased $107.1 million, or 24.8%, for the three months ended June 30,
2010, as compared to the three months ended June 30, 2009. The decrease in
fixed annuity sales was driven by reduced sales in the market value adjusted (MVA)
annuity, single premium deferred annuity (SPDA) line, and immediate annuity
lines and was primarily attributable to a lower interest rate environment. MVA
sales decreased $100.1 million, or 66.7%, for the three months ended June 30,
2010, as compared to the three months ended June 30, 2009. Sales of
variable annuities increased $235.5 million for the three months ended June 30,
2010, as compared to the three months ended June 30, 2009, primarily due
to better competitive position and more focus on the VA line of business.
For The Six Months Ended June 30, 2010 as compared to The Six
Months Ended June 30, 2009
Segment operating income
Segment
operating income was $18.8 million for the six months ended June 30, 2010,
as compared to $20.9 million for the six months ended June 30, 2009, a
decrease of $2.1 million. This change included an unfavorable $28.3 million
variance related to fair value changes, of which $1.8 million was related to
the EIA product and $26.5 million was related to embedded derivatives
associated with the VA GMWB rider caused primarily by changes in equity markets
and lower interest rates. The remaining $26.2 million variance in operating
income was primarily driven by a $19.3 million unlocking charge recorded within
the VA line during the six months ended June 30, 2009. Other items
accounted for the remainder of the variance, including a $6.4 million increase
in earnings related to wider spreads and average account value growth in fixed
and variable annuities.
Operating revenues
Segment
operating revenues decreased $43.5 million, or 16.1%, for the six months ended
June 30, 2010, as compared to the six months ended June 30, 2009,
primarily due to unfavorable fair value changes on the embedded derivatives
associated with the VA GMWB rider and economic hedges associated with the EIA
product. These losses were partially offset by increases in net investment
income, policy fees, and other income. Average fixed account balances grew
13.2% for the six months ended June 30, 2010, resulting in higher
investment income.
Benefits and settlement expenses
Benefits
and settlement expenses increased $44.2 million, or 26.9%, for the six months
ended June 30, 2010, as compared to the six months ended June 30,
2009. This increase was primarily the result of higher credited interest and
higher unearned premium reserve amortization. Offsetting this increase was a
favorable variance of $2.7 million in EIA fair value changes and a favorable
change of $4.9 million in VA death benefit payments for the six months ended June 30,
2010, as compared to the six months ended June 30, 2009.
Amortization of DAC
The
decrease in DAC amortization for the six months ended June 30, 2010, as
compared to the six months ended June 30, 2009, was primarily due to fair
value changes on the VA GMWB rider, and a $10.8 million unlocking charge in the
VA line during the six months ended June 30, 2009. Fair value changes on
the VA GMWB rider caused a decrease in amortization of $60.9 million. Favorable
DAC unlocking of $1.6 million was recorded by the segment during the six months
ended June 30, 2010.
57
Table of Contents
Sales
Total
sales increased $259.6 million, or 24.8%, for the six months ended June 30,
2010, as compared to the six months ended June 30, 2009. Sales of fixed
annuities decreased $186.7 million, or 25.6%, for the six months ended June 30,
2010, as compared to the six months ended June 30, 2009. The decrease in
fixed annuity sales was driven by reduced sales in the MVA and immediate
annuity lines and was primarily attributable to a lower interest rate
environment. MVA sales decreased $192.7 million, or 72.0%, for the six months
ended June 30, 2010, as compared to the six months ended June 30,
2009. SPDA sales increased by $30.1 million, or 7.3%, for the six months ended June 30,
2010, as compared to the six months ended June 30, 2009, primarily due to
expansion of our distribution channels. Sales of variable annuities increased
$446.4 million for the six months ended June 30, 2010, as compared to the
six months ended June 30, 2009, primarily due to better competitive
positioning and more focus on the VA line of business.
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,
|
|
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
45,724
|
|
$
|
57,550
|
|
(20.5
|
)%
|
$
|
92,144
|
|
$
|
120,726
|
|
(23.7
|
)%
|
Other income
|
|
|
|
340
|
|
(100.0
|
)
|
|
|
1,866
|
|
(100.0
|
)
|
Realized gains (losses)
|
|
(8,451
|
)
|
(400
|
)
|
n/m
|
|
(6,915
|
)
|
1,462
|
|
n/m
|
|
Total revenues
|
|
37,273
|
|
57,490
|
|
(35.2
|
)
|
85,229
|
|
124,054
|
|
(31.3
|
)
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and settlement expenses
|
|
32,972
|
|
39,206
|
|
(15.9
|
)
|
66,703
|
|
81,791
|
|
(18.4
|
)
|
Amortization of deferred policy acquisition costs
|
|
882
|
|
844
|
|
4.5
|
|
1,861
|
|
1,771
|
|
5.1
|
|
Other operating expenses
|
|
891
|
|
864
|
|
3.1
|
|
1,574
|
|
1,847
|
|
(14.8
|
)
|
Total benefits and expenses
|
|
34,745
|
|
40,914
|
|
(15.1
|
)
|
70,138
|
|
85,409
|
|
(17.9
|
)
|
INCOME BEFORE INCOME TAX
|
|
2,528
|
|
16,576
|
|
(84.7
|
)
|
15,091
|
|
38,645
|
|
(60.9
|
)
|
Less: realized gains (losses)
|
|
(8,451
|
)
|
(400
|
)
|
|
|
(6,915
|
)
|
1,462
|
|
|
|
OPERATING INCOME
|
|
$
|
10,979
|
|
$
|
16,976
|
|
(35.3
|
)
|
$
|
22,006
|
|
$
|
37,183
|
|
(40.8
|
)
|
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,
|
|
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GIC
|
|
$
|
6,500
|
|
$
|
|
|
n/m
|
%
|
$
|
7,500
|
|
$
|
|
|
n/m
|
%
|
GFA - Direct Institutional
|
|
250,000
|
|
|
|
n/m
|
|
400,000
|
|
|
|
n/m
|
|
GFA - Registered Notes - Institutional
|
|
|
|
|
|
n/m
|
|
|
|
|
|
n/m
|
|
GFA - Registered Notes - Retail
|
|
|
|
|
|
n/m
|
|
|
|
|
|
n/m
|
|
|
|
$
|
256,500
|
|
$
|
|
|
n/m
|
|
$
|
407,500
|
|
$
|
|
|
n/m
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Account Values
|
|
$
|
3,497,115
|
|
$
|
4,224,897
|
|
(17.2
|
)
|
$
|
3,496,283
|
|
$
|
4,373,484
|
|
(20.1
|
)
|
Ending Account Values
|
|
$
|
3,488,175
|
|
$
|
4,138,437
|
|
(15.7
|
)
|
$
|
3,488,175
|
|
$
|
4,138,437
|
|
(15.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Spread
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income yield
|
|
5.23
|
%
|
5.45
|
%
|
|
|
5.27
|
%
|
5.52
|
%
|
|
|
Interest credited
|
|
3.77
|
|
3.71
|
|
|
|
3.81
|
|
3.74
|
|
|
|
Operating expenses
|
|
0.20
|
|
0.17
|
|
|
|
0.20
|
|
0.17
|
|
|
|
Operating spread
|
|
1.26
|
%
|
1.57
|
%
(1)
|
|
|
1.26
|
%
|
1.61
|
%
(1)
|
|
|
(1)
Excludes
one-time funding agreement retirement gains.
59
Table of Contents
For The Three Months Ended June 30, 2010 as compared to The Three
Months Ended June 30, 2009
Segment operating income
Operating
income was $11.0 million and decreased $6.0 million, or 35.3%, for the
three months ended June 30, 2010, as compared to the three months ended June 30,
2009. The decrease in operating earnings resulted from a decline in average
account values and lower operating spreads. In addition, no income was
generated from the early retirement of funding agreements backing medium-term
notes for the three months ended June 30, 2010, compared with $0.3 million
for the three months ended June 30, 2009. The operating spread decreased 31
basis points to 126 basis points for the three months ended June 30, 2010,
as compared to an operating spread of 157 basis points during the three months
ended June 30, 2009.
Sales
During
the first quarter of 2010, we chose to re-enter the stable value market. Total
sales were $256.5 million for the three months ended June 30, 2010.
For The Six Months Ended June 30, 2010 as compared to The Six
Months Ended June 30, 2009
Segment operating income
Operating
income was $22.0 million and decreased $15.2 million, or 40.8%, for the
six months ended June 30, 2010, as compared to the six months ended June 30,
2009. The decrease in operating earnings resulted from a decline in average
account values and lower operating spreads. In addition, no income was generated
from the early retirement of funding agreements backing medium-term notes for
the six months ended June 30, 2010, compared with $1.9 million for the six
months ended June 30, 2009. The operating spread decreased 35 basis points
to 126 basis points for the six months ended June 30, 2010, as compared to
an operating spread of 161 basis points during the six months ended June 30,
2009.
Sales
During
the first quarter of 2010, we chose to re-enter the stable value market. Total
sales were $407.5 million for the six months ended June 30, 2010.
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,
|
|
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums and policy fees
|
|
$
|
76,984
|
|
$
|
84,240
|
|
(8.6
|
)%
|
$
|
156,499
|
|
$
|
171,175
|
|
(8.6
|
)%
|
Reinsurance ceded
|
|
(34,654
|
)
|
(37,698
|
)
|
(8.1
|
)
|
(70,560
|
)
|
(79,183
|
)
|
(10.9
|
)
|
Net premiums and policy fees
|
|
42,330
|
|
46,542
|
|
(9.0
|
)
|
85,939
|
|
91,992
|
|
(6.6
|
)
|
Net investment income
|
|
7,316
|
|
8,407
|
|
(13.0
|
)
|
14,813
|
|
17,339
|
|
(14.6
|
)
|
Other income
|
|
18,123
|
|
13,199
|
|
37.3
|
|
33,448
|
|
25,672
|
|
30.3
|
|
Total operating revenues
|
|
67,769
|
|
68,148
|
|
(0.6
|
)
|
134,200
|
|
135,003
|
|
(0.6
|
)
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and settlement expenses
|
|
26,836
|
|
29,363
|
|
(8.6
|
)
|
45,592
|
|
63,473
|
|
(28.2
|
)
|
Amortization of deferred policy acquisition costs
|
|
12,807
|
|
14,104
|
|
(9.2
|
)
|
25,582
|
|
27,787
|
|
(7.9
|
)
|
Other operating expenses
|
|
21,627
|
|
20,025
|
|
8.0
|
|
43,534
|
|
32,807
|
|
32.7
|
|
Total benefits and expenses
|
|
61,270
|
|
63,492
|
|
(3.5
|
)
|
114,708
|
|
124,067
|
|
(7.5
|
)
|
INCOME BEFORE INCOME TAX
|
|
6,499
|
|
4,656
|
|
39.6
|
|
19,492
|
|
10,936
|
|
78.2
|
|
Less: noncontrolling interests
|
|
(117
|
)
|
|
|
n/m
|
|
(191
|
)
|
|
|
n/m
|
|
OPERATING INCOME
|
|
$
|
6,616
|
|
$
|
4,656
|
|
42.1
|
|
$
|
19,683
|
|
$
|
10,936
|
|
80.0
|
|
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,
|
|
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit insurance
|
|
$
|
9,693
|
|
$
|
8,721
|
|
11.1
|
%
|
$
|
17,385
|
|
$
|
17,204
|
|
1.1
|
%
|
Service contracts
|
|
65,353
|
|
56,368
|
|
15.9
|
|
117,892
|
|
104,434
|
|
12.9
|
|
Other products
|
|
13,363
|
|
11,091
|
|
20.5
|
|
24,822
|
|
22,882
|
|
8.5
|
|
|
|
$
|
88,409
|
|
$
|
76,180
|
|
16.1
|
|
$
|
160,099
|
|
$
|
144,520
|
|
10.8
|
|
Loss Ratios
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit insurance
|
|
29.2
|
%
|
32.7
|
%
|
|
|
36.7
|
%
|
32.4
|
%
|
|
|
Service contracts
|
|
87.4
|
|
80.1
|
|
|
|
82.9
|
|
77.4
|
|
|
|
Other products
|
|
24.6
|
|
43.9
|
|
|
|
(6.1
|
)
|
69.6
|
|
|
|
(1)
Incurred claims
as a percentage of earned premiums
For The Three Months Ended June 30, 2010 as compared to The Three
Months Ended June 30, 2009
Segment operating income
Operating
income was $6.6 million, representing an increase of $2.0 million for the three
months ended June 30, 2010, as compared to the three months ended June 30,
2009. The second quarter 2010 income was comprised solely of $6.6 million of
income from core operations. Credit insurance earnings decreased
$0.4 million as compared to the prior year, primarily due to lower
investment income. Service contract earnings increased $1.1 million, or 30.3%,
as compared to the prior year, primarily due to higher volume partially offset
by higher loss ratios and higher expenses in certain product lines. Earnings
from other products increased $1.2 million for the three months ended June 30,
2010 as compared to the prior year due to favorable loss experience in the GAP
product line.
61
Table of
Contents
Net premiums and policy fees
Net
premiums and policy fees decreased $4.2 million, or 9.0%, for the three months
ended June 30, 2010, as compared to the three months ended June 30,
2009. Credit insurance premiums decreased $0.8 million, or 13.0%, due to the
impact of decreasing sales over the past several years and the related impact
on earned premiums. Service contract premiums decreased $0.8 million, or 2.9%.
Within the other product lines, net premiums decreased $2.6 million, or 19.1%,
as compared to the prior year due to a decrease in the GAP product line as a
result of decreasing sales over the past several years and the related impact
on earned premiums.
Other income
Other
income increased $4.9 million, or 37.3%, for the three months ended June 30,
2010, as compared to the three months ended June 30, 2009, primarily due
to the impact of taking over the administration of a block of service contract
business in the fourth quarter of 2009 and an increase in sales in 2010.
Benefits and settlement expenses
Benefits
and settlement expenses decreased $2.5 million, or 8.6%, for the three months
ended June 30, 2010, as compared to the three months ended June 30,
2009. Credit insurance claims for the three months ended June 30, 2010, as
compared to the prior year, decreased $0.5 million, or 22.3%, due to improved
loss ratios. Service contract claims increased $1.2 million, or 5.9%, due to
higher loss ratios in some product lines. Other products claims decreased $3.3
million, or 54.7%, for the three months ended June 30, 2010, as compared
to the three months ended June 30, 2009. Improved loss ratios in the GAP
product line contributed to the decrease.
Amortization of DAC and Other operating expenses
Amortization
of DAC was $1.3 million, or 9.2%, lower for the three months ended June 30,
2010, as compared to the three months ended June 30, 2009, primarily due
to lower earned premiums in the GAP product line. Other operating expenses
increased $1.6 million, or 8.0%, for the three months ended June 30, 2010,
primarily due to higher retrospective commissions resulting from lower loss
ratios in the GAP product line.
Sales
Total
segment sales increased $12.2 million, or 16.1%, for the three months ended June 30,
2010, as compared to the three months ended June 30, 2009. Credit
insurance sales increased $1.0 million, or 11.1%. Service contract sales
increased $9.0 million, or 15.9%, as compared to the prior year. Sales from
other products increased $2.3 million, or 20.5%. Increases in all the lines are
primarily attributable to the improvement in auto sales over the prior year.
For The Six Months Ended June 30, 2010 as compared to The Six
Months Ended June 30, 2009
Segment operating income
Operating
income was $19.7 million, representing an increase of $8.7 million for the six
months ended June 30, 2010, as compared to the six months ended June 30,
2009. Income for the six months ended June 30, 2010, was comprised of
$12.1 million of income from core operations and $7.6 million of income from
runoff lines. Credit insurance earnings decreased $1.9 million as compared
to the prior year, primarily due to unfavorable loss experience and lower
investment income. Service contract earnings increased $0.6 million, or 7.3%,
as compared to the prior year. Earnings from other products, including runoff
lines, increased $10.0 million for the six months ended June 30, 2010 as
compared to the prior year. The increase resulted primarily from a $7.8 million
excess reserve release in the first quarter of 2010 related to the final
settlement in the runoff Lenders Indemnity line of business. Favorable loss
experience in the GAP product line also contributed to the increase.
62
Table of
Contents
Net premiums and policy fees
Net
premiums and policy fees decreased $6.1 million, or 6.6%, for the six months
ended June 30, 2010, as compared to the six months ended June 30,
2009. Credit insurance premiums decreased $1.6 million, or 12.9%, due to the
impact of decreasing sales over the past several years and the related impact
on earned premiums. Service contract premiums decreased $1.0 million, or 1.9%.
Within the other product lines, net premiums decreased $3.4 million, or 12.9%,
as compared to the prior year mainly due to a decrease in the GAP product line
as a result of decreasing sales over the past several years and the related
impact on earned premiums and the discontinuation of the inventory protection
product (IPP) product line.
Other income
Other
income increased $7.8 million, or 30.3%, for the six months ended June 30,
2010, as compared to the six months ended June 30, 2009, primarily due to
the impact of taking over the administration of a block of service contract
business in the fourth quarter of 2009 and an increase in sales in 2010.
Benefits and settlement expenses
Benefits
and settlement expenses decreased $17.9 million, or 28.2%, for the six months
ended June 30, 2010, as compared to the six months ended June 30,
2009. Service contract claims increased $2.1 million, or 5.0%, due to higher
loss ratios in some product lines. Other products claims decreased $19.9
million for the six months ended June 30, 2010, as compared to the six
months ended June 30, 2009. The decrease included a $7.8 million decrease
in reserves related to the final settlement in the runoff Lenders Indemnity
line of business. In addition, the first quarter of 2009 included a $6.3
million increase in the runoff Lenders indemnity product lines loss reserve
related to the commutation of a reinsurance agreement which was offset by a
reduction in other expenses. Improved loss ratios in the GAP product line also
contributed to the decrease.
Amortization of DAC and Other operating expenses
Amortization
of DAC was $2.2 million, or 7.9%, lower for the six months ended June 30,
2010, as compared to the six months ended June 30, 2009, primarily due to
lower earned premiums in the GAP product line. Other operating expenses
increased $10.7 million, or 32.7%, for the six months ended June 30, 2010,
due to 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. Higher commission expense resulting from an increase in sales and
higher retrospective commissions resulting from lower loss ratios in certain
service product lines also contributed to the increase.
Sales
Total
segment sales increased $15.6 million, or 10.8%, for the six months ended June 30,
2010, as compared to the six months ended June 30, 2009. Credit insurance
sales increased $0.2 million, or 1.1%. Service contract sales increased $13.4
million, or 12.9%, as compared to the prior year. Sales in other products
increased $2.0 million, or 8.5% primarily in the GAP product line. Increases in
all the lines are primarily attributable to the improvement in auto sales over
the prior year.
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,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
(Dollars In Thousands)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
Reinsurance ceded
|
|
$
|
(34,654
|
)
|
$
|
(37,698
|
)
|
$
|
(70,560
|
)
|
$
|
(79,183
|
)
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
Benefit and settlement expenses
|
|
(19,207
|
)
|
(21,689
|
)
|
(38,482
|
)
|
(43,067
|
)
|
Amortization of deferred policy acquisition costs
|
|
(2,734
|
)
|
(4,887
|
)
|
(6,318
|
)
|
(10,381
|
)
|
Other operating expenses
|
|
(763
|
)
|
(680
|
)
|
(1,697
|
)
|
(9,164
|
)
|
Total benefits and expenses
|
|
(22,704
|
)
|
(27,256
|
)
|
(46,497
|
)
|
(62,612
|
)
|
|
|
|
|
|
|
|
|
|
|
NET IMPACT OF REINSURANCE
(1)
|
|
$
|
(11,950
|
)
|
$
|
(10,442
|
)
|
$
|
(24,063
|
)
|
$
|
(16,571
|
)
|
(1)
Assumes no investment income on reinsurance.
Foregone investment income would substantially reduce the favorable impact of
reinsurance.
For The Three Months Ended June 30, 2010 as compared to The Three
Months Ended June 30, 2009
Reinsurance
premiums ceded decreased $3.0 million, or 8.1%, for the three months ended June 30,
2010, as compared to the three months ended June 30, 2009. The decrease
was primarily due to a decline in ceded dealer credit insurance premiums and
GAP premiums due to lower auto sales in prior years. 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 $2.5 million, or 11.4%, for the three
months ended June 30, 2010, as compared to the three months ended June 30,
2009. The decrease was primarily due to lower losses in the service contract
and GAP lines.
Amortization
of DAC ceded decreased $2.2 million, or 44.1%, for the three months ended June 30,
2010, as compared to the three months ended June 30, 2009, primarily as
the result of the decreases in the ceded dealer credit and GAP product lines.
Other operating expenses ceded increased $0.1 million, 12.2%, for the three
months ended June 30, 2010, as compared to the three months ended June 30,
2009. Increases in the dealer credit line were mostly offset by decreases in
the service contract line.
Net
investment income has no direct impact on reinsurance cost. However, 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
business we cede. The net investment income impact to us and the assuming
companies has not been quantified as it is not reflected in our consolidated
condensed financial statements.
For The Six Months Ended June 30, 2010 as compared to The Six
Months Ended June 30, 2009
Reinsurance
premiums ceded decreased $8.6 million, or 10.9%, for the six months ended June 30,
2010, as compared to the six months ended June 30, 2009. The decrease was
primarily due to a decline in ceded dealer credit insurance premiums and GAP
premiums due to lower auto sales in prior years. 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 $4.6 million, or 10.6%, for the six
months ended June 30, 2010, as compared to the six months ended June 30,
2009. The decrease was primarily due to lower losses in the service contract
and GAP lines.
64
Table of Contents
Amortization
of DAC ceded decreased $4.1 million, or 39.1%, for the six months ended June 30,
2010, as compared to the six months ended June 30, 2009, primarily as the
result of the decreases in the ceded dealer credit and GAP product lines. Other
operating expenses ceded decreased $7.5 million, or 81.5%, for the six months
ended June 30, 2010, as compared to the six months ended June 30,
2009. The fluctuation was primarily attributable to $6.3 million bad debt
recovery in the runoff Lenders Indemnity product line as a result of the
commutation of a reinsurance agreement in the first quarter of 2009 and the
overall decline in auto sales in prior years.
Net
investment income has no direct impact on reinsurance cost. However, 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
business we cede. The net investment income impact to us and the assuming
companies has not been quantified as it is not reflected in our consolidated
condensed financial statements.
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,
|
|
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
REVENUES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums and policy fees
|
|
$
|
6,168
|
|
$
|
6,664
|
|
(7.4
|
)%
|
$
|
12,539
|
|
$
|
13,562
|
|
(7.5
|
)%
|
Reinsurance ceded
|
|
(2
|
)
|
(1
|
)
|
100.0
|
|
(2
|
)
|
(2
|
)
|
0.0
|
|
Net premiums and policy fees
|
|
6,166
|
|
6,663
|
|
(7.5
|
)
|
12,537
|
|
13,560
|
|
(7.5
|
)
|
Net investment income
|
|
39,230
|
|
46,251
|
|
(15.2
|
)
|
74,568
|
|
75,778
|
|
(1.6
|
)
|
Realized gains (losses) - derivatives
|
|
42
|
|
1,163
|
|
|
|
84
|
|
3,401
|
|
|
|
Other income
|
|
9,631
|
|
72
|
|
n/m
|
|
9,689
|
|
123
|
|
n/m
|
|
Total operating revenues
|
|
55,069
|
|
54,149
|
|
1.7
|
|
96,878
|
|
92,862
|
|
4.3
|
|
Realized gains (losses) - investments
|
|
(1,967
|
)
|
(31,322
|
)
|
|
|
(11,734
|
)
|
(105,235
|
)
|
|
|
Realized gains (losses) - derivatives
|
|
(7,224
|
)
|
33,669
|
|
|
|
(10,184
|
)
|
46,385
|
|
|
|
Total revenues
|
|
45,878
|
|
56,496
|
|
(18.8
|
)
|
74,960
|
|
34,012
|
|
n/m
|
|
BENEFITS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and settlement expenses
|
|
6,443
|
|
5,946
|
|
8.4
|
|
12,980
|
|
13,661
|
|
(5.0
|
)
|
Amortization of deferred policy acquisition costs
|
|
452
|
|
469
|
|
(3.6
|
)
|
900
|
|
953
|
|
(5.6
|
)
|
Other operating expenses
|
|
47,807
|
|
38,086
|
|
25.5
|
|
98,762
|
|
77,847
|
|
26.9
|
|
Total benefits and expenses
|
|
54,702
|
|
44,501
|
|
22.9
|
|
112,642
|
|
92,461
|
|
21.8
|
|
INCOME (LOSS) BEFORE INCOME TAX
|
|
(8,824
|
)
|
11,995
|
|
n/m
|
|
(37,682
|
)
|
(58,449
|
)
|
(35.5
|
)
|
Less: realized gains (losses) - investments
|
|
(1,967
|
)
|
(31,322
|
)
|
|
|
(11,734
|
)
|
(105,235
|
)
|
|
|
Less: realized gains (losses) - derivatives
|
|
(7,224
|
)
|
33,669
|
|
|
|
(10,184
|
)
|
46,385
|
|
|
|
Less: noncontrolling interests
|
|
(10
|
)
|
|
|
n/m
|
|
(9
|
)
|
|
|
n/m
|
|
OPERATING INCOME (LOSS)
|
|
$
|
377
|
|
$
|
9,648
|
|
(96.1
|
)
|
$
|
(15,755
|
)
|
$
|
401
|
|
n/m
|
|
For The Three Months Ended June 30, 2010 as compared to The Three
Months Ended June 30, 2009
Segment operating income (loss)
Corporate
and Other segment operating income was $0.4 million for the three months
ended June 30, 2010, as compared to income of $9.6 million for the three
months ended June 30, 2009. This variance was primarily due to negative
mark-to-market adjustments during the second quarter of 2010 on a portfolio of
securities designated for trading. The trading portfolio accounted for a
negative variance of $27.8 million. Partially offsetting this was a $9.5
million pre-tax gain on the repurchase of non-recourse funding obligations and
growth in other investment income.
Operating revenues
Net
investment income for the segment decreased $7.0 million, or 15.2%, for the
three months ended June 30, 2010, as compared to the three months ended June 30,
2009. The decrease in net investment income was primarily the result of a
negative variance related to the trading portfolio of $27.8 million compared to
the prior year quarter. Offsetting this was growth in other investment income.
Other income increased $9.6 million for the three months ended June 30,
2010, as compared to the three months ended June 30, 2009, as a result of
a $9.5 million pre-tax gain on the repurchase of non-recourse funding
obligations.
Benefits and expenses
Benefits
and expenses increased $10.2 million, or 22.9%, for the three months ended
June 30, 2010, as compared to the three months ended June 30, 2009,
primarily due to an increase in interest expense of $8.3 million, as well as an
increase in policy benefits on non-core lines of business.
66
Table of Contents
For The Six Months Ended June 30, 2010 as compared to The Six
Months Ended June 30, 2009
Segment operating income (loss)
Corporate
and Other segment operating loss was $15.8 million for the six months
ended June 30, 2010, as compared to income of $0.4 million for the six
months ended June 30, 2009. This variance was primarily due to a negative
variance related to mark-to-market adjustments on a portfolio of securities
designated for trading. The trading portfolio accounted for a negative variance
of $27.1 million compared to the prior year. Partially offsetting this was a
$9.5 million pre-tax gain on the repurchase of non-recourse funding obligations
and growth in other investment income.
Operating revenues
Net
investment income for the segment decreased $1.2 million, or 1.6%, for the six
months ended June 30, 2010, as compared to the six months ended June 30,
2009, and net premiums and policy fees decreased $1.0 million, or 7.5%.
The decrease in net investment income was primarily the result of a negative
variance related to the trading portfolio of $27.1 million, offset by growth in
other investment income.
Benefits and expenses
Benefits
and expenses increased $20.2 million, or 21.8%, for the six months ended June 30,
2010, as compared to the six months ended June 30, 2009, primarily due to
an increase in interest expense of $20.1 million.
67
Table of Contents
CONSOLIDATED
INVESTMENTS
Certain reclassifications have been made in the
previously reported financial statements and accompanying tables to make the
prior year amounts comparable to those of the current year. Such
reclassifications had no effect on previously reported net income, shareowners
equity, or the totals reflected in the accompanying tables.
Portfolio Description
As
of June 30, 2010, our investment portfolio was approximately $30.9
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, 2010
|
|
December 31, 2009
|
|
|
|
(Dollars In Thousands)
|
|
Publicly issued bonds (amortized cost: 2010 -
$18,968,333; 2009 - $18,376,802)
|
|
$
|
19,404,693
|
|
62.9
|
%
|
$
|
18,100,141
|
|
62.3
|
%
|
Privately issued bonds (amortized cost: 2010 -
$4,212,873; 2009 - $4,851,515)
|
|
4,282,835
|
|
13.9
|
|
4,730,286
|
|
16.3
|
|
Fixed maturities
|
|
23,687,528
|
|
76.8
|
|
22,830,427
|
|
78.6
|
|
Equity securities (cost: 2010 - $324,815; 2009 -
$280,615)
|
|
308,951
|
|
1.0
|
|
275,497
|
|
0.9
|
|
Mortgage loans
|
|
4,905,276
|
|
15.9
|
|
3,877,087
|
|
13.3
|
|
Investment real estate
|
|
22,431
|
|
0.0
|
|
25,188
|
|
0.1
|
|
Policy loans
|
|
775,105
|
|
2.5
|
|
794,276
|
|
2.7
|
|
Other long-term investments
|
|
182,075
|
|
0.6
|
|
204,754
|
|
0.7
|
|
Short-term investments
|
|
972,804
|
|
3.2
|
|
1,049,609
|
|
3.7
|
|
Total investments
|
|
$
|
30,854,170
|
|
100.0
|
%
|
$
|
29,056,838
|
|
100.0
|
%
|
Included in the preceding table are $3.1 billion and
$2.9 billion of fixed maturities and $130.5 million and $250.8 million of
short-term investments classified as trading securities as of June 30,
2010 and December 31, 2009, respectively. The trading portfolio includes
invested assets of $2.9 billion and $2.7 billion as of June 30, 2010 and December 31,
2009, 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, 2010, our fixed maturity investment holdings were
approximately $23.7 billion. The approximate percentage distribution of our
fixed maturity investments by quality rating is as follows:
|
|
As of
|
|
Rating
|
|
June 30, 2010
|
|
December 31, 2009
|
|
AAA
|
|
14.7
|
%
|
19.9
|
%
|
AA
|
|
4.6
|
|
4.9
|
|
A
|
|
21.6
|
|
18.7
|
|
BBB
|
|
45.1
|
|
42.9
|
|
Below investment grade
|
|
14.0
|
|
13.6
|
|
|
|
100.0
|
%
|
100.0
|
%
|
The increase in BBB securities reflected in the
table above is primarily a result of negative ratings migration on securities
owned by the Company and security purchases. During the six months ended June 30,
2010 and the year ended December 31, 2009, we did not actively purchase
securities below the BBB level.
We do not have material exposure to financial
guarantee insurance companies with respect to our investment portfolio. As of June 30,
2010, based upon amortized cost, $74.2 million of our securities were
guaranteed either directly or indirectly by third parties out of a total of
$23.0 billion fixed maturity securities held by us (0.3% of total fixed
maturity securities).
68
Table of Contents
Declines in fair value for our available-for-sale
portfolio, 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 any applicable 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 (RMBS).
The
distribution of our fixed maturity investments by type is as follows:
|
|
As
of
|
|
Type
|
|
June 30,
2010
|
|
December 31,
2009
|
|
|
|
(Dollars
In Millions)
|
|
Residential mortgage-backed securities
|
|
$
|
3,511.4
|
|
$
|
3,917.5
|
|
Commercial mortgage-backed securities
|
|
297.0
|
|
1,124.3
|
|
Other asset-backed securities
|
|
951.6
|
|
1,120.8
|
|
U.S. government-related securities
|
|
1,824.2
|
|
811.3
|
|
Other government-related securities
|
|
368.8
|
|
608.5
|
|
States, municipals and political subdivisions
|
|
783.8
|
|
400.2
|
|
Corporate bonds
|
|
15,950.7
|
|
14,847.8
|
|
Total fixed income portfolio
|
|
$
|
23,687.5
|
|
$
|
22,830.4
|
|
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
$20.6 billion or 87.1% of our fixed maturities as available-for-sale as of June 30,
2010. These securities are carried at fair value on our consolidated condensed
balance sheets.
Trading
securities are carried at fair value and changes in fair value are recorded on
the income statement as they occur. Our trading portfolio accounts for
$3.1 billion, or 12.9%, of our fixed maturities as of June 30, 2010.
Of this balance, fixed maturities with a market value of $2.9 billion and
short-term investments with a market value of $130.5 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. Partially offsetting these amounts are corresponding changes in
the fair value of the embedded derivative associated with the underlying
reinsurance arrangement. The total Modco trading portfolio fixed maturities by
rating is as follows:
|
|
As
of
|
|
Rating
|
|
June 30,
2010
|
|
December 31,
2009
|
|
|
|
(Dollars
In Thousands)
|
|
AAA
|
|
$
|
725,325
|
|
$
|
834,733
|
|
AA
|
|
133,712
|
|
73,210
|
|
A
|
|
759,756
|
|
544,135
|
|
BBB
|
|
978,207
|
|
950,252
|
|
Below investment grade
|
|
275,842
|
|
281,487
|
|
Total Modco trading fixed maturities
|
|
$
|
2,872,842
|
|
$
|
2,683,817
|
|
A
portion of our bond portfolio is invested in RMBS, commercial mortgage-backed
securities (CMBS), and other asset-backed securities. These holdings as of June 30,
2010, were approximately $4.8 billion. Mortgage-backed securities (MBS) 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 RMBS portfolio by type and rating as of June 30,
2010. As of June 30, 2010, these holdings were approximately $3.5 billion.
Sequential securities receive payments in order until each class is paid off.
Planned amortization class securities (PACs) pay down according to a
schedule. Pass through securities receive principal as principal of the
underlying mortgages is received.
|
|
Percentage of
|
|
|
|
Residential
|
|
|
|
Mortgage-Backed
|
|
Type
|
|
Securities
|
|
Sequential
|
|
64.1
|
%
|
PAC
|
|
16.3
|
|
Pass Through
|
|
3.5
|
|
Other
|
|
16.1
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
Percentage
of
|
|
|
|
Residential
|
|
|
|
Mortgage-Backed
|
|
Rating
|
|
Securities
|
|
AAA
|
|
33.8
|
%
|
AA
|
|
5.4
|
|
A
|
|
0.7
|
|
BBB
|
|
7.6
|
|
Below investment grade
|
|
52.5
|
|
|
|
100.0
|
%
|
70
Table of
Contents
As
of June 30, 2010, we held $413.4 million, or 1.3% of invested assets, of
securities supported by collateral classified as Alt-A. As of December 31,
2009, we held securities with a market value of $466.6 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, 2010:
|
|
Percentage of
|
|
|
|
Alt-A
|
|
Rating
|
|
Securities
|
|
AAA
|
|
1.5
|
%
|
A
|
|
1.0
|
|
BBB
|
|
0.1
|
|
Below investment grade
|
|
97.4
|
|
|
|
100.0
|
%
|
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, 2010:
Alt-A
Collateralized Holdings
|
|
Estimated Fair Value of Security by Year of Security
Origination
|
|
|
|
2006 and
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
Prior
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Total
|
|
|
|
(Dollars
In Millions)
|
|
AAA
|
|
$
|
6.0
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
6.0
|
|
A
|
|
4.3
|
|
|
|
|
|
|
|
|
|
4.3
|
|
BBB
|
|
0.5
|
|
|
|
|
|
|
|
|
|
0.5
|
|
Below investment grade
|
|
232.3
|
|
170.3
|
|
|
|
|
|
|
|
402.6
|
|
Total mortgage-backed securities collateralized by
Alt-A mortgage loans
|
|
$
|
243.1
|
|
$
|
170.3
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
413.4
|
|
|
|
Estimated Unrealized Gain (Loss) of Security by Year
of Security
Origination
|
|
|
|
2006 and
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
Prior
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Total
|
|
|
|
(Dollars In Millions)
|
|
AAA
|
|
$
|
(0.2
|
)
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
(0.2
|
)
|
A
|
|
0.7
|
|
|
|
|
|
|
|
|
|
0.7
|
|
BBB
|
|
0.1
|
|
|
|
|
|
|
|
|
|
0.1
|
|
Below investment grade
|
|
(47.6
|
)
|
(24.6
|
)
|
|
|
|
|
|
|
(72.2
|
)
|
Total mortgage-backed securities collateralized by
Alt-A mortgage loans
|
|
$
|
(47.0
|
)
|
$
|
(24.6
|
)
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
(71.6
|
)
|
71
Table of Contents
The
following table includes the percentage of our collateral classified as
sub-prime grouped by rating category as of June 30, 2010:
|
|
Percentage
of
|
|
|
|
Sub-prime
|
|
Rating
|
|
Securities
|
|
AAA
|
|
0.5
|
%
|
AA
|
|
0.2
|
|
A
|
|
5.8
|
|
BBB
|
|
6.3
|
|
Below investment grade
|
|
87.2
|
|
|
|
100.0
|
%
|
As
of June 30, 2010, we had RMBS with a total fair value of $37.3 million, or
0.1%, of total invested assets, that were supported by collateral classified as
sub-prime. As of December 31, 2009, we held securities with a fair value
of $35.2 million that were 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, 2010:
Sub-prime
Collateralized Holdings
|
|
Estimated Fair Value of Security by Year of Security
Origination
|
|
|
|
2006 and
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
Prior
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Total
|
|
|
|
(Dollars In Millions)
|
|
AAA
|
|
$
|
0.2
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
0.2
|
|
AA
|
|
0.1
|
|
|
|
|
|
|
|
|
|
0.1
|
|
A
|
|
2.2
|
|
|
|
|
|
|
|
|
|
2.2
|
|
BBB
|
|
2.3
|
|
|
|
|
|
|
|
|
|
2.3
|
|
Below investment grade
|
|
17.9
|
|
14.6
|
|
|
|
|
|
|
|
32.5
|
|
Total mortgage-backed securities collateralized by
sub-prime mortgage loans
|
|
$
|
22.7
|
|
$
|
14.6
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
37.3
|
|
|
|
Estimated
Unrealized Gain (Loss) of Security by Year of Security
Origination
|
|
|
|
2006 and
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
Prior
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Total
|
|
|
|
(Dollars In Millions)
|
|
AAA
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
AA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
(0.3
|
)
|
BBB
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
(0.6
|
)
|
Below investment grade
|
|
(6.9
|
)
|
(20.2
|
)
|
|
|
|
|
|
|
(27.1
|
)
|
Total mortgage-backed securities collateralized by
sub-prime mortgage loans
|
|
$
|
(7.8
|
)
|
$
|
(20.2
|
)
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
(28.0
|
)
|
72
Table of Contents
The following table includes the percentage of our collateral
classified as prime, grouped by rating category, as of June 30, 2010:
|
|
Percentage
of
|
|
|
|
Prime
|
|
Rating
|
|
Securities
|
|
AAA
|
|
38.5
|
%
|
AA
|
|
6.2
|
|
A
|
|
0.6
|
|
BBB
|
|
8.7
|
|
Below
investment grade
|
|
46.0
|
|
|
|
100.0
|
%
|
As of June 30, 2010, we had RMBS collateralized by prime mortgage
loans (including agency mortgages) with a total fair value of $3.1 billion, or
9.9%, of total invested assets. As of December 31, 2009, we held
securities with a fair value of $3.4 billion of RMBS 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, 2010:
Prime
Collateralized Holdings
|
|
Estimated Fair Value of Security by Year of Security
Origination
|
|
|
|
2006 and
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
Prior
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Total
|
|
|
|
(Dollars In Millions)
|
|
AAA
|
|
$
|
1,170.8
|
|
$
|
8.2
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
1,179.0
|
|
AA
|
|
190.3
|
|
|
|
|
|
|
|
|
|
190.3
|
|
A
|
|
11.2
|
|
6.2
|
|
|
|
|
|
|
|
17.4
|
|
BBB
|
|
265.1
|
|
|
|
|
|
|
|
|
|
265.1
|
|
Below investment grade
|
|
1,146.6
|
|
262.2
|
|
|
|
|
|
|
|
1,408.8
|
|
Total mortgage-backed securities collateralized by
prime mortgage loans
|
|
$
|
2,784.0
|
|
$
|
276.6
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
3,060.6
|
|
|
|
Estimated Unrealized Gain (Loss) of Security by Year
of Security Origination
|
|
|
|
2006 and
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
Prior
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Total
|
|
|
|
(Dollars In Millions)
|
|
AAA
|
|
$
|
58.1
|
|
$
|
0.5
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
58.6
|
|
AA
|
|
(3.4
|
)
|
|
|
|
|
|
|
|
|
(3.4
|
)
|
A
|
|
0.4
|
|
0.2
|
|
|
|
|
|
|
|
0.6
|
|
BBB
|
|
(16.8
|
)
|
|
|
|
|
|
|
|
|
(16.8
|
)
|
Below investment grade
|
|
(132.3
|
)
|
(40.7
|
)
|
|
|
|
|
|
|
(173.0
|
)
|
Total mortgage-backed securities collateralized by
prime mortgage loans
|
|
$
|
(94.0
|
)
|
$
|
(40.0
|
)
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
(134.0
|
)
|
73
Table of
Contents
Commercial mortgage-backed securities
- Our CMBS
portfolio consists of commercial mortgage-backed securities issued in
securitization transactions. As of June 30, 2010, the CMBS holdings were
approximately $297.0 million.
The following table includes the percentages of our CMBS holdings
grouped by rating category as of June 30, 2010:
|
|
Percentage
of
|
|
|
|
Commercial
|
|
|
|
Mortgage-Backed
|
|
Rating
|
|
Securities
|
|
AAA
|
|
97.8
|
%
|
BBB
|
|
2.2
|
|
Below
investment grade
|
|
0.0
|
|
|
|
100.0
|
%
|
The following tables
categorize the estimated fair value and unrealized gain/(loss) of our CMBS as
of June 30, 2010:
Commercial
Mortgage-Backed Securities
|
|
Estimated Fair Value of Security by Year of Security
Origination
|
|
|
|
2006 and
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
Prior
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Total
|
|
|
|
(Dollars In Millions)
|
|
AAA
|
|
$
|
203.2
|
|
$
|
|
|
$
|
47.3
|
|
$
|
|
|
$
|
39.9
|
|
$
|
290.4
|
|
BBB
|
|
6.6
|
|
|
|
|
|
|
|
|
|
6.6
|
|
Total commercial mortgage-backed securities
|
|
$
|
209.8
|
|
$
|
|
|
$
|
47.3
|
|
$
|
|
|
$
|
39.9
|
|
$
|
297.0
|
|
|
|
Estimated Unrealized Gain (Loss) of Security by Year
of Security Origination
|
|
|
|
2006 and
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
Prior
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Total
|
|
|
|
(Dollars In Millions)
|
|
AAA
|
|
$
|
9.0
|
|
$
|
|
|
$
|
3.1
|
|
$
|
|
|
$
|
|
|
$
|
12.1
|
|
BBB
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
(0.4
|
)
|
Total commercial mortgage-backed securities
|
|
$
|
8.6
|
|
$
|
|
|
$
|
3.1
|
|
$
|
|
|
$
|
|
|
$
|
11.7
|
|
74
Table of Contents
Other asset-backed securities
Other
asset-backed securities pay down based on cash flows received from the
underlying pool of assets, such as receivables on auto loans, student loans,
credit cards, etc. As of June 30, 2010, these holdings were
approximately $951.6 million. The following table includes the percentages of
our other asset-backed securities holdings grouped by rating category as of June 30,
2010:
|
|
Percentage
of
|
|
|
|
Other
Asset-Backed
|
|
Rating
|
|
Securities
|
|
AAA
|
|
93.8
|
%
|
AA
|
|
3.3
|
|
A
|
|
0.7
|
|
BBB
|
|
1.1
|
|
Below
investment grade
|
|
1.1
|
|
|
|
100.0
|
%
|
The following tables include categorize the
estimated fair value and unrealized gain/(loss) of our other asset-backed
securities as of June 30, 2010:
Other Asset-Backed
Securities
|
|
Estimated Fair Value of Security by Year of Security
Origination
|
|
|
|
2006 and
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
Prior
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Total
|
|
|
|
(Dollars In Millions)
|
|
AAA
|
|
$
|
651.4
|
|
$
|
180.5
|
|
$
|
35.8
|
|
$
|
|
|
$
|
24.9
|
|
$
|
892.6
|
|
AA
|
|
31.3
|
|
|
|
|
|
|
|
|
|
31.3
|
|
A
|
|
6.5
|
|
|
|
|
|
|
|
|
|
6.5
|
|
BBB
|
|
6.3
|
|
3.9
|
|
|
|
|
|
|
|
10.2
|
|
Below investment grade
|
|
0.6
|
|
10.4
|
|
|
|
|
|
|
|
11.0
|
|
Total asset-backed securities
|
|
$
|
696.1
|
|
$
|
194.8
|
|
$
|
35.8
|
|
$
|
|
|
$
|
24.9
|
|
$
|
951.6
|
|
|
|
Estimated Unrealized Gain (Loss) of Security by Year
of Security Origination
|
|
|
|
2006 and
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
Prior
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Total
|
|
|
|
(Dollars In Millions)
|
|
AAA
|
|
$
|
(38.8
|
)
|
$
|
(21.5
|
)
|
$
|
0.3
|
|
$
|
|
|
$
|
(0.1
|
)
|
$
|
(60.1
|
)
|
AA
|
|
2.7
|
|
|
|
|
|
|
|
|
|
2.7
|
|
A
|
|
0.3
|
|
|
|
|
|
|
|
|
|
0.3
|
|
BBB
|
|
(1.2
|
)
|
|
|
|
|
|
|
|
|
(1.2
|
)
|
Below investment grade
|
|
(0.2
|
)
|
(11.9
|
)
|
|
|
|
|
|
|
(12.1
|
)
|
Total asset-backed securities
|
|
$
|
(37.2
|
)
|
$
|
(33.4
|
)
|
$
|
0.3
|
|
$
|
|
|
$
|
(0.1
|
)
|
$
|
(70.4
|
)
|
75
Table of Contents
We obtained ratings of our fixed maturities from
Moodys Investors Service, Inc. (Moodys), Standard & Poors
Corporation (S&P) and/or Fitch Ratings (Fitch). If a bond is
not rated by Moodys, S&P, or Fitch, we use ratings from the National
Association of Insurance Commissioners (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,
2010 over 99.0% of our bonds were rated by Moodys, S&P, Fitch, and/or the
NAIC.
The
industry segment composition of our fixed maturity securities is presented in
the following table:
|
|
As of
|
|
% Fair
|
|
As of
|
|
% Fair
|
|
|
|
June 30, 2010
|
|
Value
|
|
December 31, 2009
|
|
Value
|
|
|
|
(Dollars In Thousands)
|
|
Banking
|
|
$
|
2,025,267
|
|
8.5
|
%
|
$
|
1,955,544
|
|
8.5
|
%
|
Other finance
|
|
84,045
|
|
0.4
|
|
82,694
|
|
0.4
|
|
Electric
|
|
3,033,867
|
|
12.8
|
|
2,650,003
|
|
11.6
|
|
Natural gas
|
|
2,001,527
|
|
8.4
|
|
1,789,164
|
|
7.8
|
|
Insurance
|
|
1,592,863
|
|
6.7
|
|
1,529,248
|
|
6.7
|
|
Energy
|
|
1,326,041
|
|
5.6
|
|
1,369,370
|
|
6.0
|
|
Communications
|
|
1,173,633
|
|
5.0
|
|
1,079,497
|
|
4.7
|
|
Basic industrial
|
|
934,516
|
|
3.9
|
|
936,575
|
|
4.1
|
|
Consumer noncyclical
|
|
1,044,318
|
|
4.4
|
|
958,688
|
|
4.2
|
|
Consumer cyclical
|
|
446,605
|
|
1.9
|
|
491,594
|
|
2.1
|
|
Finance companies
|
|
236,381
|
|
1.0
|
|
231,312
|
|
1.0
|
|
Capital goods
|
|
646,916
|
|
2.7
|
|
532,778
|
|
2.3
|
|
Transportation
|
|
472,915
|
|
2.0
|
|
426,860
|
|
1.9
|
|
Other industrial
|
|
127,067
|
|
0.5
|
|
91,237
|
|
0.4
|
|
Brokerage
|
|
446,830
|
|
1.9
|
|
375,650
|
|
1.6
|
|
Technology
|
|
285,041
|
|
1.2
|
|
289,029
|
|
1.3
|
|
Real estate
|
|
46,371
|
|
0.2
|
|
53,517
|
|
0.2
|
|
Other utility
|
|
26,453
|
|
0.1
|
|
5,049
|
|
0.0
|
|
Commercial mortgage-backed securities
|
|
297,024
|
|
1.3
|
|
1,124,325
|
|
4.9
|
|
Other asset-backed securities
|
|
951,604
|
|
4.0
|
|
1,120,761
|
|
4.8
|
|
Residential mortgage-backed non-agency securities
|
|
2,650,257
|
|
11.2
|
|
3,000,142
|
|
13.1
|
|
Residential mortgage-backed agency securities
|
|
861,096
|
|
3.6
|
|
917,312
|
|
4.0
|
|
U.S. government-related securities
|
|
1,824,176
|
|
7.7
|
|
811,323
|
|
3.5
|
|
Other government-related securities
|
|
368,856
|
|
1.6
|
|
608,530
|
|
2.7
|
|
States, municipals, and political divisions
|
|
783,859
|
|
3.4
|
|
400,225
|
|
2.2
|
|
Total
|
|
$
|
23,687,528
|
|
100.0
|
%
|
$
|
22,830,427
|
|
100.0
|
%
|
Our
investments in debt and equity securities are reported at fair value, and
investments in mortgage loans are reported at amortized cost. As of June 30,
2010, our fixed maturity investments (bonds and redeemable preferred stocks)
had a market value of $23.7 billion, which was 3.0% above amortized cost of
$23.0 billion. 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. 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, 2010, our mortgage loan holdings were approximately $4.9
billion. We 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, in our view, on a conservative and 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, 2010
and 2009, our allowance for mortgage loan credit losses was $6.6 million and
$2.1 million, respectively. While our mortgage loans do not have quoted
market values, as of June 30, 2010, we estimated the fair value of our
mortgage loans to be $5.5 billion (using discounted cash flows from the next
call date), which was 11.5% greater than the amortized cost, less any related
loan loss reserve.
At
the time of origination, our mortgage lending criteria targets that the
loan-to-value ratio on each mortgage is 75% or less. 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, 2010,
approximately $877.6 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, 2010, delinquent mortgage loans, foreclosed properties, and
restructured loans pursuant to a pooling and servicing agreement were less than
0.3% of invested assets. We do not expect these investments to adversely affect
our liquidity or ability to maintain proper matching of assets and liabilities.
Our mortgage loan portfolio consists of two categories of loans: 1) those not
subject to a pooling and servicing agreement and 2) those previously a part of
variable interest entity securitizations and thus subject to a contractual
pooling and servicing agreement. The loans subject to a pooling and servicing
agreement have been included on our consolidated condensed balance sheet (balance
sheet) beginning in the first quarter of 2010 in accordance with ASU 2009-17.
For loans not subject to a pooling and servicing agreement, as of June 30,
2010, $29.9 million of the mortgage loan portfolio was nonperforming. In
addition, as of June 30, 2010, $35.7 million of the mortgage loan
portfolio that is subject to a pooling and servicing agreement was being
restructured under the terms and conditions of the pooling and service agreement.
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. For loans subject to a pooling and
servicing agreement, there are certain additional restrictions and/or requirements
related to workout proceedings, and as such, these loans may have different
attributes and/or circumstances affecting the status of delinquency or
categorization of those in nonperforming status.
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, 2010, securities with a market value of $94.7
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
77
Table of Contents
return
the collateral. As of June 30, 2010, the fair value of the collateral
related to this program was $93.8 million and we have an obligation to return
$97.1 million of collateral to the securities borrowers.
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, 2010:
|
|
|
|
Percent of
|
|
S&P or Equivalent Designation
|
|
Market Value
|
|
Market Value
|
|
|
|
(Dollars
In Thousands)
|
|
|
|
AAA
|
|
$
|
2,740,581
|
|
13.3
|
%
|
AA
|
|
960,389
|
|
4.7
|
|
A
|
|
4,351,938
|
|
21.1
|
|
BBB
|
|
9,628,109
|
|
46.7
|
|
Investment grade
|
|
17,681,017
|
|
85.8
|
|
BB
|
|
1,173,785
|
|
5.7
|
|
B
|
|
725,471
|
|
3.5
|
|
CCC or lower
|
|
1,052,984
|
|
5.0
|
|
Below investment grade
|
|
2,952,240
|
|
14.2
|
|
Total
|
|
$
|
20,633,257
|
|
100.0
|
%
|
Not
included in the table above are $2.7 billion of investment grade and
$355.9 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,
2010:
Creditor
|
|
Market Value
|
|
|
|
(Dollars In Millions)
|
|
Federal Home Loan Mortgage Corporation
|
|
$
|
177.1
|
|
Wells Fargo & Company
|
|
162.9
|
|
Bershire Hathaway Inc.
|
|
155.8
|
|
Verizon Communications Inc.
|
|
147.9
|
|
Bank of America Corp.
|
|
143.4
|
|
AT&T Corporation
|
|
139.4
|
|
PNC Financial Services Group
|
|
124.9
|
|
Nextera Energy Inc.
|
|
119.1
|
|
Enterprise Products Partners
|
|
118.9
|
|
JP Morgan Chase & Co.
|
|
118.3
|
|
|
|
|
|
|
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. Since 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 RMBS, CMBS, and other asset-backed securities
(collectively referred to as asset-backed securities ABS), GAAP 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 expected 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
78
Table of Contents
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 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.
In April of 2009, the FASB issued guidance to
amend the other-than-temporary impairment guidance in 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 guidance 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 guidance also requires increased and more frequent disclosures
regarding measurement techniques, credit losses, and an aging of securities
with unrealized losses. We elected to early adopt the guidance in the first
quarter of 2009. For the three and six months ended June 30, 2010, we
recorded total other-than-temporary impairments of approximately $36.7 million
and $58.5 million, respectively, with $19.9 million and $29.8 million,
respectively, of this amount recorded in other comprehensive income (loss).
Securities
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) an assessment of the Companys
intent to sell the security (including a more likely than not assessment of
whether the Company will be required to sell the security) before recovering
the securitys amortized cost, 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, along
with an analysis regarding the Companys expectations for recovery of the
securitys entire amortized cost basis through the receipt of future cash
flows. Based on our analysis, for the six months ended June 30, 2010, we
concluded that approximately $28.6 million of investment securities in an
unrealized loss position was other-than-temporarily impaired, due to
credit-related factors, resulting in a charge to earnings. Additionally, we
recognized $29.8 million of non-credit losses in other comprehensive income for
the securities where an other-than-temporary impairment was recorded for the
three and six months ended June 30, 2010.
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 minimal 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,
|
|
|
|
|
|
2010
|
|
2009
|
|
Change
|
|
2010
|
|
2009
|
|
Change
|
|
|
|
(Dollars In Thousands)
|
|
Fixed maturity gains - sales
|
|
$
|
35,130
|
|
$
|
4,970
|
|
$
|
30,160
|
|
$
|
43,362
|
|
$
|
10,549
|
|
$
|
32,813
|
|
Fixed maturity losses - sales
|
|
(29,480
|
)
|
(905
|
)
|
(28,575
|
)
|
(30,986
|
)
|
(931
|
)
|
(30,055
|
)
|
Equity gains - sales
|
|
13
|
|
9,503
|
|
(9,490
|
)
|
13
|
|
9,503
|
|
(9,490
|
)
|
Impairments on fixed maturity securities
|
|
(16,798
|
)
|
(40,848
|
)
|
24,050
|
|
(28,667
|
)
|
(111,234
|
)
|
82,567
|
|
Impairments on equity securities
|
|
|
|
(123
|
)
|
123
|
|
|
|
(19,563
|
)
|
19,563
|
|
Modco trading portfolio
|
|
63,967
|
|
154,785
|
|
(90,818
|
)
|
108,060
|
|
108,907
|
|
(847
|
)
|
Other
|
|
(1,926
|
)
|
(554
|
)
|
(1,372
|
)
|
(4,846
|
)
|
(2,072
|
)
|
(2,774
|
)
|
Total realized gains (losses) - investments
|
|
$
|
50,906
|
|
$
|
126,828
|
|
$
|
(75,922
|
)
|
$
|
86,936
|
|
$
|
(4,841
|
)
|
$
|
91,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives related to interest rate futures
|
|
$
|
|
|
$
|
4,593
|
|
$
|
(4,593
|
)
|
$
|
|
|
$
|
6,889
|
|
$
|
(6,889
|
)
|
Embedded derivatives related to reinsurance
|
|
(63,063
|
)
|
(146,420
|
)
|
83,357
|
|
(94,157
|
)
|
(85,788
|
)
|
(8,369
|
)
|
Derivatives related to corporate debt
|
|
|
|
|
|
|
|
|
|
(125
|
)
|
125
|
|
Other interest rate swaps
|
|
(6,382
|
)
|
22,169
|
|
(28,551
|
)
|
(8,774
|
)
|
36,359
|
|
(45,133
|
)
|
Credit default swaps
|
|
(1,142
|
)
|
6,887
|
|
(8,029
|
)
|
(637
|
)
|
2,551
|
|
(3,188
|
)
|
GMWB embedded derivatives
|
|
(49,326
|
)
|
12,542
|
|
(61,868
|
)
|
(40,202
|
)
|
32,343
|
|
(72,545
|
)
|
Other derivatives
|
|
25
|
|
2,238
|
|
(2,213
|
)
|
810
|
|
2,213
|
|
(1,403
|
)
|
Total realized gains (losses) - derivatives
|
|
$
|
(119,888
|
)
|
$
|
(97,991
|
)
|
$
|
(21,897
|
)
|
$
|
(142,960
|
)
|
$
|
(5,558
|
)
|
$
|
(137,402
|
)
|
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 three and six months ended June 30, 2010,
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,
2010, we recognized pre-tax other-than-temporary impairments of $16.8 million
and $28.7 million, respectively, due to credit-related factors, resulting in a
charge to earnings. Additionally, we recognized $19.9 million and $29.8
million, respectively, of non-credit losses in other comprehensive income
(loss) for the securities where an other-than-temporary impairment was
recorded. Other-than-temporary impairments totaled $41.0 million and $130.8
million for the three and six months ended June 30, 2009, 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. These other-than-temporary impairments, net of
Modco recoveries, are presented in the chart below:
|
|
For The
|
|
For The
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
June 30, 2010
|
|
June 30, 2010
|
|
|
|
(Dollars In Millions)
|
|
Alt-A MBS
|
|
$
|
12.1
|
|
$
|
21.4
|
|
Other MBS
|
|
2.9
|
|
4.0
|
|
Corporate bonds
|
|
1.2
|
|
2.6
|
|
Sub-prime bonds
|
|
0.6
|
|
0.7
|
|
Total
|
|
$
|
16.8
|
|
$
|
28.7
|
|
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, 2010, we sold
securities in an unrealized loss position with a fair value of
$234.2 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
|
|
$
|
158,109
|
|
67.5
|
%
|
$
|
(14,306
|
)
|
46.2
|
%
|
>90 days but <= 180 days
|
|
22,350
|
|
9.5
|
|
(2,273
|
)
|
7.3
|
|
>180 days but <= 270 days
|
|
3,050
|
|
1.3
|
|
(38
|
)
|
0.1
|
|
>270 days but <= 1 year
|
|
233
|
|
0.1
|
|
(10
|
)
|
0.0
|
|
>1 year
|
|
50,472
|
|
21.6
|
|
(14,359
|
)
|
46.4
|
|
Total
|
|
$
|
234,214
|
|
100.0
|
%
|
$
|
(30,986
|
)
|
100.0
|
%
|
For the three and six months ended June 30, 2010, the Company sold
securities in an unrealized loss position with a fair value (proceeds) of
$131.5 million and $234.2 million, respectively. The loss realized on the sale
of these securities was $29.5 million and $31.0 million, respectively. The
$31.0 million loss recognized on available-for-sale securities for the six
months ended June 30, 2010, includes $12.2 million of loss on the sale of
certain oil industry holdings. The Company made the decision to exit these
holdings pursuant to new circumstances surrounding the oil spill in the Gulf of
Mexico. In addition, a $3.8 million loss was recognized on the sale of
securities in which the issuer was a European financial institution. Also
included in the $31.0 million loss is a $10.4 million loss due to the exchange
of certain holdings as the issuer exited bankruptcy proceedings.
For the six months ended June 30, 2010, we sold securities in an
unrealized gain position with a fair value of $1.8 billion. The gain realized
on the sale of these securities was $43.4 million.
The $4.8 million of other realized losses recognized for the six months
ended June 30, 2010, consists of the change in the mortgage loan loss
reserves of $3.7 million, real estate losses of $0.8 million, and other losses
of $0.3 million.
For
the three and six months ended June 30, 2010, net gains of $64.0 million
and $108.1 million, respectively, 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 $4.9 million and $18.2 million, respectively, 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
use interest rate futures to mitigate interest rate risk. There were no
outstanding positions for the six months ended June 30, 2010.
We
also have in place various modified coinsurance and funds withheld arrangements
that contain embedded derivatives. The $63.1 million and $94.2 million of
pre-tax losses on these embedded derivatives for the three and six months ended
June 30, 2010, respectively, was the result of spread tightening. For the
three and six months ended June 30, 2010, the investment portfolios that
support the related modified coinsurance reserves and funds withheld
arrangements had mark-to-market gains that substantially 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. As
of June 30, 2010, we did not hold any positions in these swaps.
We
use certain interest rate swaps to mitigate the price volatility of assets.
These positions resulted in net pre-tax losses of $6.4 million and $8.8 million
for the three and six months ended June 30, 2010, respectively. The net
losses were primarily the result of $5.3 million and $6.9 million in
mark-to-market losses during the period.
81
Table of Contents
We
reported net pre-tax losses of $1.1 million and $0.6 million related to
credit default swaps for the three and six months ended June 30, 2010,
respectively. The net pre-tax losses for the three and six months ended June 30,
2010, were primarily the result of $1.2 million and $0.8 million, respectively,
of mark-to-market gains during the period.
The
GMWB rider embedded derivatives on certain variable deferred annuities had net
unrealized losses of $49.3 million and $40.2 million for the three and six
months ended June 30, 2010.
We also use various swaps and options to mitigate risk related to other
exposures. These contracts generated net gains which were immaterial for the
three months ended June 30, 2010, and net pre-tax gains of $0.8 million
for the six months ended June 30, 2010.
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, 2010, 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 the expected cash to be collected and the
intent, likelihood, and/or ability 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, 2010, we had an overall net
unrealized gain of $490.5 million, prior to tax and DAC offsets, as compared to
a $403.0 million loss as of December 31, 2009.
Credit
and RMBS markets have experienced volatility across numerous asset classes over
the past two years, 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 ratings, 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 other 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 the level of our net unrealized investment losses through
declines in market values over the past two years.
For
fixed maturity and equity securities held that are in an unrealized loss
position as of June 30, 2010, the estimated market value, amortized cost,
unrealized loss, and total time period that the security has been in an
unrealized loss position are presented in the table below:
|
|
Estimated
|
|
% Market
|
|
Amortized
|
|
% Amortized
|
|
Unrealized
|
|
% Unrealized
|
|
|
|
Market Value
|
|
Value
|
|
Cost
|
|
Cost
|
|
Loss
|
|
Loss
|
|
|
|
(Dollars In Thousands)
|
|
<= 90 days
|
|
$
|
1,393,462
|
|
24.3
|
%
|
$
|
1,460,371
|
|
22.9
|
%
|
$
|
(66,909
|
)
|
10.6
|
%
|
>90 days but <= 180 days
|
|
411,403
|
|
7.2
|
|
445,252
|
|
7.0
|
|
(33,849
|
)
|
5.3
|
|
>180 days but <= 270 days
|
|
67,686
|
|
1.2
|
|
68,732
|
|
1.1
|
|
(1,046
|
)
|
0.2
|
|
>270 days but <= 1 year
|
|
56,303
|
|
1.0
|
|
61,703
|
|
1.0
|
|
(5,400
|
)
|
0.9
|
|
>1 year but <= 2 years
|
|
329,471
|
|
5.7
|
|
370,060
|
|
5.8
|
|
(40,589
|
)
|
6.4
|
|
>2 years but <= 3 years
|
|
2,405,601
|
|
41.9
|
|
2,734,324
|
|
42.9
|
|
(328,723
|
)
|
51.9
|
|
>3 years but <= 4 years
|
|
635,619
|
|
11.1
|
|
738,436
|
|
11.6
|
|
(102,817
|
)
|
16.2
|
|
>4 years but <= 5 years
|
|
383,922
|
|
6.7
|
|
431,353
|
|
6.8
|
|
(47,431
|
)
|
7.5
|
|
>5 years
|
|
53,191
|
|
0.9
|
|
59,622
|
|
0.9
|
|
(6,431
|
)
|
1.0
|
|
Total
|
|
$
|
5,736,658
|
|
100.0
|
%
|
$
|
6,369,853
|
|
100.0
|
%
|
$
|
(633,195
|
)
|
100.0
|
%
|
The
majority of the unrealized loss as of June 30, 2010, for both investment
grade and below investment grade securities, is attributable to a widening in
credit and mortgage spreads for certain securities. The negative impact of
spread levels for certain securities was partially offset by lower treasury
yield levels and their associated
82
Table of Contents
positive
effect on security prices. Spread levels have improved since December 31,
2009. However, certain types of securities, including tranches of RMBS and ABS
continue to be priced at a level which has caused the unrealized losses noted
above. We believe spread levels on
these RMBS and ABS are largely due to the continued effects of the economic
recession and the economic and market uncertainties regarding future
performance of the underlying mortgage loans and/or assets. For further
discussion concerning our other-than-temporary impairment review process, see
the Risk Management and Impairment Review section on page 78.
As
of June 30, 2010, the Barclays Investment Grade Index was priced at 184
bps versus a 10 year average of 172 bps. Similarly, the Barclays High Yield
Index was priced at 743 bps versus a 10 year average of 668 bps. As of June 30,
2010, the five, ten, and thirty-year U.S. Treasury obligations were trading at
levels of 1.775%, 2.933%, and 3.889%, as compared to 10 year averages of
3.505%, 4.182%, and 4.756%, respectively.
As
of June 30, 2010, 32.7% 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, 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, 2010, there were estimated gross unrealized losses of $78.0
million and $26.3 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, 2010, 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, 2010, we recorded $16.8 million
and $28.7 million, respectively, of pre-tax other-than-temporary impairments
related to estimated credit losses. 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.
83
Table of Contents
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, 2010, is presented in the following
table:
|
|
Estimated
|
|
% Market
|
|
Amortized
|
|
% Amortized
|
|
Unrealized
|
|
% Unrealized
|
|
|
|
Market Value
|
|
Value
|
|
Cost
|
|
Cost
|
|
Loss
|
|
Loss
|
|
|
|
(Dollars In Thousands)
|
|
Banking
|
|
$
|
948,517
|
|
16.5
|
%
|
$
|
1,046,222
|
|
16.4
|
%
|
$
|
(97,705
|
)
|
15.4
|
%
|
Other finance
|
|
3,874
|
|
0.1
|
|
3,958
|
|
0.1
|
|
(84
|
)
|
0.0
|
|
Electric
|
|
185,343
|
|
3.2
|
|
206,054
|
|
3.2
|
|
(20,711
|
)
|
3.3
|
|
Natural gas
|
|
263,274
|
|
4.6
|
|
282,012
|
|
4.4
|
|
(18,738
|
)
|
3.0
|
|
Insurance
|
|
615,261
|
|
10.7
|
|
677,927
|
|
10.6
|
|
(62,666
|
)
|
9.9
|
|
Energy
|
|
46,771
|
|
0.8
|
|
48,709
|
|
0.8
|
|
(1,938
|
)
|
0.3
|
|
Communications
|
|
83,603
|
|
1.5
|
|
96,830
|
|
1.5
|
|
(13,227
|
)
|
2.1
|
|
Basic industrial
|
|
122,018
|
|
2.1
|
|
132,018
|
|
2.1
|
|
(10,000
|
)
|
1.6
|
|
Consumer noncyclical
|
|
36,226
|
|
0.6
|
|
37,315
|
|
0.6
|
|
(1,089
|
)
|
0.2
|
|
Consumer cyclical
|
|
137,490
|
|
2.4
|
|
150,899
|
|
2.4
|
|
(13,409
|
)
|
2.1
|
|
Finance companies
|
|
125,417
|
|
2.2
|
|
138,346
|
|
2.2
|
|
(12,929
|
)
|
2.0
|
|
Capital goods
|
|
38,545
|
|
0.7
|
|
45,134
|
|
0.7
|
|
(6,589
|
)
|
1.0
|
|
Transportation
|
|
61,686
|
|
1.1
|
|
62,829
|
|
1.0
|
|
(1,143
|
)
|
0.2
|
|
Other industrial
|
|
19,681
|
|
0.3
|
|
20,449
|
|
0.3
|
|
(768
|
)
|
0.1
|
|
Brokerage
|
|
50,285
|
|
0.9
|
|
57,824
|
|
0.9
|
|
(7,539
|
)
|
1.2
|
|
Technology
|
|
51,908
|
|
0.9
|
|
57,552
|
|
0.9
|
|
(5,644
|
)
|
0.9
|
|
Real estate
|
|
369
|
|
0.0
|
|
490
|
|
0.0
|
|
(121
|
)
|
0.0
|
|
Other utility
|
|
21
|
|
0.0
|
|
44
|
|
0.0
|
|
(23
|
)
|
0.0
|
|
Commercial mortgage-backed securities
|
|
6,604
|
|
0.1
|
|
7,007
|
|
0.1
|
|
(403
|
)
|
0.1
|
|
Other asset-backed securities
|
|
690,066
|
|
12.0
|
|
765,699
|
|
12.0
|
|
(75,633
|
)
|
11.9
|
|
Residential mortgage-backed non-agency securities
|
|
2,017,479
|
|
35.2
|
|
2,296,246
|
|
36.0
|
|
(278,767
|
)
|
44.0
|
|
Residential mortgage-backed agency securities
|
|
69
|
|
0.0
|
|
70
|
|
0.0
|
|
(1
|
)
|
0.0
|
|
U.S. government-related securities
|
|
46,539
|
|
0.8
|
|
48,861
|
|
0.8
|
|
(2,322
|
)
|
0.4
|
|
Other government-related securities
|
|
89,390
|
|
1.6
|
|
89,510
|
|
1.4
|
|
(120
|
)
|
0.0
|
|
States, municipals, and political divisions
|
|
96,222
|
|
1.7
|
|
97,848
|
|
1.6
|
|
(1,626
|
)
|
0.3
|
|
Total
|
|
$
|
5,736,658
|
|
100.0
|
%
|
$
|
6,369,853
|
|
100.0
|
%
|
$
|
(633,195
|
)
|
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, 2010
|
|
December 31, 2009
|
|
|
|
|
|
|
|
Banking
|
|
15.4
|
%
|
14.0
|
%
|
Other finance
|
|
0.0
|
|
0.0
|
|
Electric
|
|
3.3
|
|
3.9
|
|
Natural gas
|
|
3.0
|
|
2.0
|
|
Insurance
|
|
9.9
|
|
8.2
|
|
Energy
|
|
0.3
|
|
0.4
|
|
Communications
|
|
2.1
|
|
1.9
|
|
Basic industrial
|
|
1.6
|
|
1.6
|
|
Consumer noncyclical
|
|
0.2
|
|
0.8
|
|
Consumer cyclical
|
|
2.1
|
|
1.7
|
|
Finance companies
|
|
2.0
|
|
1.7
|
|
Capital goods
|
|
1.0
|
|
1.2
|
|
Transportation
|
|
0.2
|
|
0.8
|
|
Other industrial
|
|
0.1
|
|
0.4
|
|
Brokerage
|
|
1.2
|
|
1.6
|
|
Technology
|
|
0.9
|
|
0.4
|
|
Real estate
|
|
0.0
|
|
0.1
|
|
Other utility
|
|
0.0
|
|
0.0
|
|
Commercial mortgage-backed securities
|
|
0.1
|
|
8.8
|
|
Other asset-backed securities
|
|
11.9
|
|
8.3
|
|
Residential mortgage-backed non-agency securities
|
|
44.0
|
|
40.7
|
|
Residential mortgage-backed agency securities
|
|
0.0
|
|
0.3
|
|
U.S. government-related securities
|
|
0.4
|
|
0.4
|
|
Other government-related securities
|
|
0.0
|
|
0.1
|
|
States, municipals, and political divisions
|
|
0.3
|
|
0.7
|
|
Total
|
|
100.0
|
%
|
100.0
|
%
|
The
range of maturity dates for securities in an unrealized loss position as of June 30,
2010, varies, with 25.8% maturing in less than 5 years, 13.5% maturing between
5 and 10 years, and 60.7% maturing after 10 years. The following table shows
the credit rating of securities in an unrealized loss position as of June 30,
2010:
S&P or Equivalent
|
|
Estimated
|
|
% Market
|
|
Amortized
|
|
% Amortized
|
|
Unrealized
|
|
% Unrealized
|
|
Designation
|
|
Market Value
|
|
Value
|
|
Cost
|
|
Cost
|
|
Loss
|
|
Loss
|
|
|
|
(Dollars In Thousands)
|
|
AAA/AA/A
|
|
$
|
1,750,561
|
|
30.5
|
%
|
$
|
1,851,083
|
|
29.1
|
%
|
$
|
(100,522
|
)
|
15.9
|
%
|
BBB
|
|
1,389,119
|
|
24.2
|
|
1,495,460
|
|
23.5
|
|
(106,341
|
)
|
16.8
|
|
Investment grade
|
|
3,139,680
|
|
54.7
|
|
3,346,543
|
|
52.6
|
|
(206,863
|
)
|
32.7
|
|
BB
|
|
906,976
|
|
15.8
|
|
986,744
|
|
15.5
|
|
(79,768
|
)
|
12.6
|
|
B
|
|
653,960
|
|
11.4
|
|
759,292
|
|
11.9
|
|
(105,332
|
)
|
16.6
|
|
CCC or lower
|
|
1,036,042
|
|
18.1
|
|
1,277,274
|
|
20.0
|
|
(241,232
|
)
|
38.1
|
|
Below investment grade
|
|
2,596,978
|
|
45.3
|
|
3,023,310
|
|
47.4
|
|
(426,332
|
)
|
67.3
|
|
Total
|
|
$
|
5,736,658
|
|
100.0
|
%
|
$
|
6,369,853
|
|
100.0
|
%
|
$
|
(633,195
|
)
|
100.0
|
%
|
As
of June 30, 2010, we held 287 positions of below investment grade
securities totaling $2.6 billion that were in an unrealized loss position.
Total unrealized losses related to below investment grade securities were
$426.3 million, of which $385.4 million had been in an unrealized loss position
for more than twelve months. Below investment grade securities in an unrealized
loss position were 8.4% of invested assets. As of June 30, 2010,
securities in an unrealized loss position that were rated as below investment
grade represented 45.3% of the total market value and 67.3% 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 $526.0 million. A widening of credit spreads is estimated to account for
unrealized losses of $902.3 million, with changes in treasury rates offsetting
this loss by an estimated $376.3 million.
85
Table of Contents
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, 2010, were super senior or senior bonds in the
capital structure. Our non-agency portfolio has a weighted-average life of 2.83
years.
The following table includes the fair 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, 2010:
|
|
Fair
|
|
% Fair
|
|
Amortized
|
|
% Amortized
|
|
Unrealized
|
|
% Unrealized
|
|
|
|
Value
|
|
Value
|
|
Cost
|
|
Cost
|
|
Loss
|
|
Loss
|
|
|
|
(Dollars In Thousands)
|
|
<= 90 days
|
|
$
|
464,748
|
|
17.9
|
%
|
$
|
499,207
|
|
16.5
|
%
|
$
|
(34,459
|
)
|
8.1
|
%
|
>90 days but <= 180 days
|
|
9,288
|
|
0.4
|
|
10,248
|
|
0.3
|
|
(960
|
)
|
0.2
|
|
>180 days but <= 270 days
|
|
28,712
|
|
1.1
|
|
29,097
|
|
1.0
|
|
(385
|
)
|
0.1
|
|
>270 days but <= 1 year
|
|
20,807
|
|
0.8
|
|
25,961
|
|
0.9
|
|
(5,154
|
)
|
1.2
|
|
>1 year but <= 2 years
|
|
221,901
|
|
8.5
|
|
258,215
|
|
8.5
|
|
(36,314
|
)
|
8.5
|
|
>2 years but <= 3 years
|
|
1,478,807
|
|
56.9
|
|
1,745,521
|
|
57.7
|
|
(266,714
|
)
|
62.6
|
|
>3 years but <= 4 years
|
|
191,681
|
|
7.4
|
|
241,128
|
|
8.0
|
|
(49,447
|
)
|
11.6
|
|
>4 years but <= 5 years
|
|
146,362
|
|
5.6
|
|
174,221
|
|
5.8
|
|
(27,859
|
)
|
6.5
|
|
>5 years
|
|
34,672
|
|
1.4
|
|
39,712
|
|
1.3
|
|
(5,040
|
)
|
1.2
|
|
Total
|
|
$
|
2,596,978
|
|
100.0
|
%
|
$
|
3,023,310
|
|
100.0
|
%
|
$
|
(426,332
|
)
|
100.0
|
%
|
LIQUIDITY AND CAPITAL RESOURCES
We
are currently carrying an elevated level of cash and short-term liquid assets.
Our ability to find acceptable long-term investments has been negatively
impacted by spread movements, lack of supply, and overall market yields.
We remain focused on investing such holdings at acceptable yield levels,
while maintaining compliance with our established investment guidelines.
Carrying
an elevated level of cash and short-term liquid assets, while significantly
reducing our liquidity risk, negatively impacts our earnings results as the
yield on such assets is much lower than the yields on longer-dated, higher risk
assets.
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 the event of significant
unanticipated cash requirements beyond our normal liquidity requirements, we
have additional sources of liquidity available depending on market conditions
and the amount and timing of the liquidity need. These additional sources of
liquidity include cash flows from operations, the sale of liquid assets,
accessing our credit facility, and other sources described herein.
Our decision to sell
investment assets could be impacted by accounting rules, including
rules relating to the likelihood of a requirement to sell securities
before recovery of our cost basis. Under stressful market and economic
conditions, liquidity may broadly deteriorate which could negatively impact our
ability to sell investment assets. If we require on short notice significant
amounts of cash in excess of normal 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 flows 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, 2010, we had no outstanding balance related to such borrowings.
During the six months ended June
86
Table of Contents
30, 2010, we had a maximum balance
outstanding of $300.0 million related to these programs. The average daily
balance was $92.8 million, during the six months ended June 30, 2010.
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 an aggregate principal amount of $500 million (the Credit
Facility). 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 $115.0 million at an interest rate of LIBOR plus 0.40% under the Credit
Facility as of June 30, 2010. As discussed in more detail in Capital
Resources below, in the second quarter of 2010, we repaid $180.0 million of
the outstanding balance of the credit facility that was previously 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
not aware of any non-compliance with the financial debt covenants of the Credit
Facility as of June 30, 2010.
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.
We
are a member of the Federal Home Loan Bank (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. Our borrowing capacity is determined
by the following factors: 1) total advance capacity is limited to the
lower of 50% of total assets or 100% of mortgage-related assets of Protective
Life Insurance Company, our largest insurance subsidiary, 2) ownership of
appropriate capital and activity stock to support continued membership in the
FHLB and current and future advances, and 3) the availability of adequate
eligible mortgage or treasury/agency collateral to back current and future
advances.
We
held $60.7 million of common stock as of June 30, 2010, 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, 2010, we had $901.0 million of
funding agreement-related advances and accrued interest outstanding under the
FHLB program.
As
of June 30, 2010, we reported approximately $597.3 million (fair value) of
Auction Rate Securities (ARS) in non-Modco portfolios. All of these ARS were
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 in non-Modco
portfolios as of June 30, 2010, 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, we believe 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.
87
Table of Contents
We use an internal valuation model to determine the
fair value of our student loan-backed auction rate securities held in non-Modco
portfolios. The model uses the discount margin and projected average life of a
comparable actively-traded FFELP student loan-backed floating-rate asset-backed
security, along with a discount related to the current illiquidity of the
auction rate securities. This comparable security is selected based on its
underlying assets (i.e. FFELP-backed student loans) and vintage.
The auction rate securities held in non-Modco portfolios
are classified as a Level 3 valuation. An unrealized loss of $60.1 million was
recorded as of June 30, 2010, 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 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,
2010, our total cash, cash equivalents, and invested assets were $31.0 billion.
The life insurance subsidiaries were committed as of June 30, 2010, to
fund mortgage loans in the amount of $216.0 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. Our subsidiaries held approximately
$1.1 billion in cash and short-term investments as of June 30, 2010,
and we held an immaterial amount in cash and short-term investments available
for general corporate purposes.
88
Table of Contents
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,
|
|
|
|
2010
|
|
2009
|
|
|
|
(Dollars In Thousands)
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
558,279
|
|
$
|
604,410
|
|
Net cash (used in) provided by investing
activities
|
|
(690,752
|
)
|
3,684
|
|
Net cash provided by (used in) financing
activities
|
|
83,672
|
|
(550,912
|
)
|
Total
|
|
$
|
(48,801
|
)
|
$
|
57,182
|
|
For The Six Months Ended June 30, 2010 as
compared to The Six Months Ended June 30, 2009
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 (used in) provided by
investing activities
-
Changes
in cash from investing activities primarily related to the activity in our
investment portfolio
.
The change in
net cash (used in) provided by investing activities was primarily due to an
increase in net purchases of fixed maturity securities, partially offset by an
increase of sales of fixed maturity securities. We have been challenged to find
opportunities to invest our excess liquidity at desired yield levels. However,
as opportunities arise to invest our more liquid holdings in long-term
investments, purchase activity can be expected to increase.
Net cash provided by (used in) 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 for six months ended June 30,
2010 as compared to the six months ended June 30, 2009, was primarily the
result of investment product and universal life net withdrawal activity, which
was approximately $1.0 billion higher than activity in the six months ended June 30,
2010. Offsetting this was the issuance
of common stock that occurred during in the six months ended June 30,
2009.
Capital
Resources
To
give us flexibility in connection with future acquisitions and other funding needs,
we have debt securities, preferred and common stock, and additional preferred
securities of special purpose finance subsidiaries registered under the
Securities Act of 1933 on a delayed (or shelf) basis.
As
of June 30, 2010, 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. Pursuant to an amendment, this calculation excludes the $800.0 million
of senior notes we issued in 2009. As of June 30, 2010, there was a $115.0
million outstanding balance under the Credit Facility at an interest rate of
LIBOR plus 0.40%. During the second quarter of 2010, Golden Gate Captive
Insurance Company (Golden Gate), a South Carolina special purpose financial
captive and wholly owned subsidiary of PLICO, redeemed $180 million of its Series B
Surplus Notes from us. We used the proceeds of this redemption to repay $180
million of the outstanding balance of our Credit Facility. We hold the entire
$800.0 million outstanding balance of Golden Gate Surplus Notes.
89
Table of
Contents
Golden
Gate II Captive Insurance Company (Golden Gate II), a special
purpose financial captive insurance company wholly owned by PLICO, had $575
million of outstanding non-recourse funding obligations as of June 30,
2010. Of this amount, $556.6 million was held by external parties and
$18.4 million was held by an affiliate. 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.
These
non-recourse funding obligations are direct financial obligations of Golden
Gate II and are not guaranteed by us or PLICO. These non-recourse obligations
are represented by surplus notes that were issued to fund a portion of the
statutory reserves required by Regulation XXX. Under the terms of the
surplus notes, the holders of the surplus notes cannot require repayment from
us or any of our subsidiaries, other than Golden Gate II, the direct
issuers of the surplus notes, although we have agreed to indemnify Golden
Gate II for certain costs and obligations (which obligations do not
include payment of principal and interest on the surplus notes). In addition,
we have entered into certain support agreements with Golden Gate II obligating
us to make capital contributions or provide support related to certain of
Golden Gate IIs expenses and in certain circumstances, to collateralize
certain of our obligations to Golden Gate II.
During
the quarter, PLICO formed a new wholly owned subsidiary, Golden Gate III, which
entered into a Reimbursement Agreement with UBS AG, Stamford Branch, as issuing
lender. Under the Reimbursement Agreement, UBS issued a Letter of Credit (LOC)
in the initial amount of $505 million to a trust for the benefit of our
indirect wholly owned subsidiary, West Coast Life Insurance Company (WCL).
Subject to certain conditions, the amount of the LOC will be periodically
increased up to a maximum of $610 million in 2013. The term of the LOC is
expected to be eight years, subject to certain conditions including capital
contributions made to Golden Gate III by PLICO or one of its affiliates. The
LOC was issued to support certain obligations of Golden Gate III from WCL under
an indemnity reinsurance agreement effective April 1, 2010. These policies
were originally ceded by WCL to Golden Gate and were recaptured by WCL and
ceded to Golden Gate III concurrent with this transaction. The estimated
average annual expense of the LOC under GAAP is approximately $11 million,
after tax.
Pursuant
to the terms of the Reimbursement Agreement, in the event amounts are drawn
under the LOC by the trustee on behalf of WCL, Golden Gate III will be
obligated, subject to certain conditions, to reimburse UBS for the amount of
any draw and any interest thereon. The Reimbursement Agreement is non-recourse
to us, PLICO and WCL. Pursuant to the terms of a letter agreement, we have
agreed to guarantee the payment of fees to UBS under the Reimbursement
Agreement. Pursuant to the Reimbursement Agreement, Golden Gate III has
collateralized its obligations to UBS by granting UBS a security interest in
its assets.
On
May 10, 2010, our Board of Directors extended our previously authorized
$100 million share repurchase program. The current authorization extends
through May 9, 2013. We have not repurchased any of our common stock under
the existing and/or recently approved share repurchase program during the six
months ended June 30, 2010. 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 law. Generally speaking, other states in which a
company does business defer to the interpretation of the domiciliary state with
respect to NAIC rules, unless inconsistent with the other states regulations.
Statutory accounting rules are different from 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. In general, dividends up to
specified levels are considered ordinary and may be paid thirty days after
written notice to the insurance commissioner of the state of domicile unless such
commissioner objects to the dividend prior to the expiration of such period.
Dividends in larger amounts are considered extraordinary and are
90
Table of Contents
subject
to affirmative prior approval by such commissioner. The maximum amount that would qualify as
ordinary dividends to us from our insurance subsidiaries in 2010 is estimated
to be $704.8 million.
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.
A
companys risk-based statutory surplus is calculated by applying factors and
performing calculations relating to various asset, premium, claim, expense, and
reserve items. Regulators can then measure the adequacy of a companys
statutory surplus by comparing it to the RBC. Under RBC requirements,
regulatory compliance is determined by the ratio of a companys total adjusted
capital, as defined by the insurance regulators, to its company action level of
RBC (known as the RBC ratio), also as defined by insurance regulators.
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. For the three and six months ended June 30, 2010, we ceded
premiums to third party reinsurers amounting to $379.7 million and $685.6
million, respectively. In addition, we had receivables from reinsurers
amounting to $5.6 billion as of June 30, 2010. We review reinsurance
receivable amounts for collectability and establish bad debt reserves if deemed
appropriate.
During
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 additional capital
contributions. On January 5, 2009, the Department issued an order of
supervision (the Order of Supervision) against SRUS, in accordance with
Delaware law, 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. On April 3, 2009, the Department issued
an Extended and Amended Order of Supervision against SRUS which, among other
things, clarified that payments made by SRUS to its ceding insurers in
satisfaction of claims or other obligations are not subject to the Departments
approval, but that any amendments to its reinsurance agreements must be
disclosed to and approved by the Department. SRUS continues to promptly pay
claims and satisfy its other obligations to our insurance subsidiaries. We
cannot predict what these or other 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 both our GAAP and statutory
financial condition and results of operations. As of June 30, 2010, we had
approximately $198.8 million of GAAP recoverables from SRUS, and $532.9 million
of ceded statutory reserves related to SRUS.
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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
credit markets and other 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, 2010:
|
|
|
|
|
|
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-
|
|
BBB+
|
|
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.
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 are
designed to 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, 2010, we had policy liabilities and accruals of
approximately $18.9 billion. Our interest-sensitive life insurance policies
have a weighted-average minimum credited interest rate of approximately 3.70%.
Contractual Obligations
The
table below sets forth future maturities of debt, non-recourse funding
obligations, subordinated debt securities, stable value products, operating
lease obligations, other property lease obligations, mortgage loan commitments,
and policyholder 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, will also 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.
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As
of June 30, 2010, we carried a $21.5 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)
|
|
$
|
2,741,164
|
|
$
|
91,992
|
|
$
|
556,409
|
|
$
|
304,650
|
|
$
|
1,788,113
|
|
Non-recourse funding obligations
(2)
|
|
909,640
|
|
7,905
|
|
15,810
|
|
15,810
|
|
870,115
|
|
Subordinated debt securities
(3)
|
|
1,846,729
|
|
37,147
|
|
74,294
|
|
74,294
|
|
1,660,994
|
|
Stable value products
(4)
|
|
3,951,722
|
|
1,293,474
|
|
1,259,176
|
|
755,304
|
|
643,768
|
|
Operating leases
(5)
|
|
31,459
|
|
7,050
|
|
11,120
|
|
8,808
|
|
4,481
|
|
Home office lease
(6)
|
|
77,756
|
|
782
|
|
1,568
|
|
75,406
|
|
|
|
Mortgage loan commitments
|
|
216,007
|
|
216,007
|
|
|
|
|
|
|
|
Policyholder obligations
(7)
|
|
24,484,818
|
|
2,341,628
|
|
3,428,345
|
|
3,096,533
|
|
15,618,312
|
|
Total
(8)
|
|
$
|
34,259,295
|
|
$
|
3,995,985
|
|
$
|
5,346,722
|
|
$
|
4,330,805
|
|
$
|
20,585,783
|
|
(1)
|
Long-term
debt includes all principal amounts owed on note agreements and expected
interest payments due over the term of the 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. Additionally, the payments due by the periods
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 Contents
FAIR
VALUE OF FINANCIAL INSTRUMENTS
On
January 1, 2008, we adopted FASB guidance on fair value measurements and
disclosures. This guidance defines fair value for GAAP and establishes a
framework for measuring fair value as well as 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 in this document is defined
in accordance with GAAP. 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
Note 13,
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,
2010, $898.8 million of available-for-sale and trading account assets,
excluding other long-term investments, 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, 2010, the
Level 3 fair values of derivative assets and liabilities determined by these
quantitative models were $9.5 million and $233.2 million, respectively.
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, 2010, the Level 3 fair value of these liabilities
was $149.4 million.
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.
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Table of Contents
Of
our $908.3 million of total assets (measured at fair value on a recurring
basis) classified as Level 3 assets, $698.4 million were ABS. Of this amount,
$621.8 million were student loan related ABS, $36.6 million were non-student
loan related ABS, and $40.0 million were commercial mortgage-backed
securitizations. The years of issuance of the ABS are as follows:
Year of Issuance
|
|
Amount
|
|
|
|
(In Millions)
|
|
|
|
|
|
2002
|
|
$
|
311
|
|
2003
|
|
109
|
|
2004
|
|
114
|
|
2005
|
|
16
|
|
2006
|
|
26
|
|
2007
|
|
82
|
|
2010
|
|
40
|
|
Total
|
|
$
|
698
|
|
The ABS was rated as follows: $626.4 million were
AAA rated, $25.6 million were AA rated, and $46.4 million were A rated. 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 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 between us and our counterparties. We minimize the credit risk in
derivative instruments by entering into transactions with high quality
counterparties, (A-rated or higher at the time we enter into the contract) and
we typically maintain collateral support agreements with those counterparties.
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. Outstanding credit default swaps related to the Investment Grade Series 9
Index and have
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Table of Contents
terms
to December 2017. 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 $25.0 million. As of June 30, 2010, the
fair value of the credit derivatives was a liability of $3.0 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 $25.0 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,
2010, we had outstanding mortgage loan commitments of $216.0 million at an
average rate of 6.34%.
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 2,
Summary of Significant Accounting Policies
,
to the consolidated condensed financial statements for information regarding
recently issued accounting standards.
RECENT DEVELOPMENTS
In 2009, the NAIC approved regulatory changes that
impacted our insurance subsidiaries and their competitors. The NAIC also
approved changes to the measurements used to determine the amount of deferred
tax assets (DTAs) an insurance company may claim as admitted assets on its
statutory financial statements. These changes had the effect of increasing the
amount of DTAs an insurance company was permitted to claim as an admitted asset
for purposes of insurance company statutory financial statements filed for
calendar year 2009 and is expected to have the same effect in 2010. In
addition, the NAIC adopted a temporary modification to the Mortgage Experience
Adjustment Factor (MEAF) for calendar year 2009 that reduced the factors
volatility. However, the NAIC is currently considering further changes to
the MEAF for 2010 that, if approved, will have the effect of increasing the
amount of capital that the Company must hold for its commercial mortgages.
The
NAIC is also considering various initiatives to change and modernize its
financial and solvency regulations. It is considering changing to a
principles-based reserving method for life insurance and annuity reserves,
changes to the accounting and risk-based capital regulations, changes to the
governance practices of insurers, and other items. Some of these proposed
changes would require the approval of state legislatures. We cannot provide any
assurance as to what impact these proposed changes, if they occur, will have on
our reserve and capital requirements.
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Table of Contents
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.
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 our 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, 2010,
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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Table of Contents
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
known trends and uncertainties. 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, 2009, which could materially affect the
Companys business, financial condition, or future results of operations.
The Company is exposed to the risks of
natural and man-made catastrophes, pandemics, malicious acts, terrorist acts
and climate change, which could adversely affect the Companys operations and
results.
While
the Company has obtained insurance, implemented risk management and contingency
plans, and taken preventive measures and other precautions, no predictions of
specific scenarios can be made nor can assurance be given that there are not
scenarios that could have an adverse effect on the Company. A natural or
man-made catastrophe, pandemic, malicious act, terrorist act, or climate
change, could adversely affect the mortality, morbidity, or other experience of
the Company or its reinsurers and have a significant negative impact on the
Company. In addition, claims arising from the occurrence of such events or
conditions could have a material adverse effect on the Companys financial
condition and results of operations. Such events or conditions could also have
an adverse effect on lapses and surrenders of existing policies, as well as
sales of new policies.
In
addition, such events or conditions could result in a decrease or halt in
economic activity in large geographic areas, adversely affecting the marketing
or administration of the Companys business within such geographic areas and/or
the general economic climate, which in turn could have an adverse affect on the
Company. Such events or conditions could also result in additional regulation
or restrictions on the Company in the conduct of its business. The possible
macroeconomic effects of such events or conditions could also adversely affect
the Companys asset portfolio, as well as many other variables.
The Companys strategies for mitigating risks arising from its
day-to-day operations may prove ineffective resulting in a material adverse
effect on its results of operations and financial condition.
The
Companys performance is highly dependent on its ability to manage risks that
arise from a large number of its day-to-day business activities, including
underwriting, claims processing, policy administration and servicing, execution
of its investment strategy, financial and tax reporting and other activities,
many of which are very complex. The Company also may rely on third parties for
such activities. The Company seeks to monitor and control its exposure to risks
arising out of or related to these activities through a variety of internal
controls, management review processes, and other mechanisms. However, the
occurrence of unforeseen or un-contemplated risks, or the occurrence of risks
of a greater magnitude than expected, including those arising from a failure in
processes, procedures or systems implemented by the Company or a failure on the
part of employees or third parties upon which the Company relies in this
regard, may have a material adverse effect on the Companys financial condition
or 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. In addition, some state insurance
departments may enact rules or regulations with extra-territorial
application, effectively extending their jurisdiction to areas such as
permitted insurance company investments that are normally the province of an
insurance companys domiciliary state regulator. 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
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Table of Contents
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.
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 or accounting 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 or accounting issue may change
over time to the Companys detriment, or that changes to the overall legal or
market 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.
Some
of the NAIC pronouncements, particularly as they affect accounting issues, take
effect automatically in the various states without affirmative action by the
states. Statutes, regulations, and interpretations may be applied with
retroactive impact, particularly in areas such as accounting and reserve
requirements. 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 (AG38), 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 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 continues to
work 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. 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. On March 23,
2010, President Obama signed the Patient Protection and Affordable Care Act of
2010 (the Healthcare Act) into law. The Healthcare Act makes sweeping
changes to the regulation of health insurance, imposing various conditions and
requirements on the Company. The Healthcare Act may affect the benefit
plans the Company sponsors for employees or retirees and their dependents, the
Companys expense to provide such benefits, the tax liabilities of the Company
in connection with the provision of such benefits, the deductibility of certain
compensation, and the Companys ability to attract or retain employees. In
addition, the Company may be subject to regulations, guidance or determinations
emanating from the various regulatory authorities authorized under the
Healthcare Act. The Company cannot predict the effect that the
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Healthcare Act, or any regulatory
pronouncement made thereunder, will have on its results of operations or
financial condition.
On
July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection
Act (the Reform Act) was signed into law. The Reform Act makes sweeping
changes to the regulation of financial services entities, products and markets.
Certain provisions of the Reform Act are or may become applicable to the
Company, its competitors or those entities with which the Company does
business, 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, changes to the regulation of reinsurance, the imposition of
additional regulation over credit rating agencies, and the imposition of
concentration limits on financial institutions that restrict the amount of
credit that may be extended to a single person or entity. The Reform Act also
creates the Consumer Financial Protection Bureau (CFPB), an independent
division of the Department of Treasury with jurisdiction over credit, savings,
payment, and other consumer financial products and services, other than
investment products already regulated by the United States Securities and
Exchange Commission (the SEC) or the U.S. Commodity Futures Trading
Commission. Certain of the Companys subsidiaries sell products that could be
regulated by the CFPB. Numerous
provisions of the Reform Act require the adoption of implementing rules and/or
regulations. In addition, the Reform Act
mandates multiple studies, which could result in additional legislation or
regulation applicable to the insurance industry, the Company, its competitors
or the entities with which the Company does business. Legislative or regulatory
requirements imposed by or promulgated in connection with the Reform Act may
place the Company at a competitive disadvantage relative to its competition or
other financial services entities, change the competitive landscape of the
financial services sector and/or the insurance industry, make it more expensive
for the Company to conduct its business or have a material adverse effect on
the overall business climate as well as the Companys 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. In
addition, the Company may be subject to regulation by governments of the
countries in which it currently, or may in the future, do business, as well as
regulation by the U.S. Government with respect to its operations in foreign
countries, such as the Foreign Corrupt Practices Act.
Certain
policies, contracts, and annuities offered by the Companys subsidiaries are
subject to regulation under the federal securities laws administered by the
SEC. 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 to laws and/or regulations
affecting participants in the financial services sector and/or insurance
industry, including the Company and its competitors or those entities with
which it does business, may take, or what effect, if any, such changes may
have.
A ratings downgrade or other negative
action by a ratings organization could adversely affect the Company.
Various
Nationally Recognized Statistical Rating Organizations (rating organizations)
review the financial performance and condition of insurers, including the
Companys insurance subsidiaries, and publish their financial strength ratings
as indicators of an insurers ability to meet policyholder and contract holder
obligations. While ratings are not a recommendation to buy the Companys
securities, these ratings are important to maintaining public confidence in the
Companys products, its ability to market its products, and its competitive
position. A downgrade or other negative action by a ratings organization with
respect to the financial strength ratings of the Companys insurance
subsidiaries could adversely affect the Company in many ways, including the
following: reducing new sales of insurance and investment products; adversely
affecting relationships with distributors and sales agents; increasing the
number or amount of policy surrenders and withdrawals of funds; requiring a
reduction in prices for the Companys insurance products and services in order
to remain competitive; and adversely affecting
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the
Companys ability to obtain reinsurance at a reasonable price, on reasonable
terms or at all. A downgrade of sufficient magnitude could result in the
Company, its insurance subsidiaries, or both being required to collateralize
reserves, balances or obligations under reinsurance, funding, swap, and
securitization agreements. A downgrade of sufficient magnitude could also
result in the termination of funding and swap agreements.
Rating organizations also publish
credit ratings for 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 to the Companys overall ability to access certain types of
liquidity. Downgrades of the Companys credit ratings, or an announced
potential downgrade, could have a material adverse affect on the Companys
financial conditions and results of operations in many ways, including the
following: limiting the Companys access to capital markets; increasing the
cost of debt; impairing its ability to raise capital to refinance maturing debt
obligations; limiting its capacity to support growth of its insurance
subsidiaries; requiring it to pay higher amounts in connection with certain
existing or future financing arrangements or transactions; and making it more
difficult to maintain or improve the current financial strength ratings of its
insurance subsidiaries. A downgrade of sufficient magnitude, in combination
with other factors, could require the Company to post collateral pursuant to
certain contractual obligations.
Rating
organizations assign ratings based upon several factors. While most of the
factors relate to the rated company, some of the factors relate to the views of
the rating organization, general economic conditions, and circumstances outside
the rated companys control. In addition, rating organizations use various
models and formulas to assess the strength of a rated company, and from time to
time rating organizations have, in their discretion, altered the models.
Changes to the models could impact the rating organizations judgment of the
rating to be assigned to the rated company. The Company cannot predict what
actions the rating organizations may take, or what actions the Company may take
in response to the actions of the rating organizations, which could adversely
affect the Company.
Item 2. Unregistered Sales of
Equity Securities and Use of Proceeds
During
the quarter ended June 30, 2010, 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 10, 2010, the Companys Board of Directors extended the Companys
previously authorized $100 million share repurchase program. The current
authorization extends through May 9, 2013. 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 six months ended June 30,
2010. The remaining capacity, expressed in aggregate value of shares, which may
be repurchased under the existing program, is approximately $82.9 million.
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Item 6. Exhibits
Exhibit 10(a)
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-
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Reimbursement
Agreement dated as of April 23, 2010 between Golden Gate III Vermont Captive
Insurance Company and UBS AG, Stamford Branch.*
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Exhibit 10(b)
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-
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Guarantee
Agreement dated as of April 23, 2010 between Protective Life Corporation
and UBS AG, Stamford Branch.
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Exhibit 10(c)
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Form of
Protective Life Corporation Director Indemnity Agreement
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Exhibit 31(a)
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-
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Certification
Pursuant to §302 of the Sarbanes Oxley Act of 2002.
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Exhibit 31(b)
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-
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Certification
Pursuant to §302 of the Sarbanes Oxley Act of 2002.
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Exhibit 32(a)
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-
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Certification
Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes
Oxley Act of 2002.
|
|
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Exhibit 32(b)
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-
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Certification
Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes
Oxley Act of 2002.
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Exhibit 101
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-
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Financial
statements from the quarterly report on Form 10-Q of Protective Life Corporation
for the quarter ended June 30, 2010, filed on August 5, 2010,
formatted in XBRL: (i) the Consolidated Condensed Statements of Income,
(ii) the Consolidated Condensed Balance Sheets, (iii) the
Consolidated Condensed Statements of Shareowners Equity, (iv) the
Consolidated Condensed Statement of Cash Flows, and (v) the Notes to
Consolidated Condensed Financial Statements tagged as blocks of text
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|
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*
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Certain
portions of this Exhibit have been omitted pursuant to a request for
confidential treatment. The non-public information has been filed separately
with the Securities and Exchange Commission pursuant to Rule 24b-2 under
the Securities Exchange Act of 1934, as amended.
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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.
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PROTECTIVE LIFE CORPORATION
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Date:
August 5, 2010
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By:
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/s/
Steven G. Walker
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Steven G. Walker
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Senior
Vice President, Controller
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and
Chief Accounting Officer
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103
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