See Item 1.2, Business of the Company and Note 2 to the accompanying consolidated financial statements for a discussion of the Company’s discontinued operations.
Mortgage loans, which comprise 6.2% of the Company’s investments at December 31, 2007, are carried at their unpaid principal balances, net of allowances for credit losses. The determination of the calculation and the adequacy of the mortgage loan allowance and mortgage impairments are subjective. Our periodic evaluation and assessment of the adequacy of the allowance for losses and the need for mortgage impairments is based on known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of the underlying collateral, composition of the loan portfolio, current economic conditions, loss experience and other relevant factors. In determining the ultimate adequacy of the allowance for mortgage loans, greater consideration is given to the individual mortgage characteristics and related collateral.
Deposits to investment-type contracts increased by $207 million, or 19.9%, to $1,248 million, during the year ended December 31, 2007 from$ 1,041 in 2006. This increase is primarily attributable to higher sales and additional deposits from the MetLife 401(k) acquisition, partially offset by the absence of investment-type contract activity associated with the terminated CLAC reinsurance agreement.
Withdrawals from investment-type contracts increased by $434 million, or 31.2%, to $1,826 million during the year ended December 31, 2006, from $1,392 in 2005. This increase is primarily attributable to increased transfers from general account investment options to separate account investment and unaffiliated retail investment options and from increased policy maturities.
Fee income increased by $27 million, or 64.3%, to $69 million during the year ended December 31, 2007 from $42 million in 2006. The increase is due to higher participant account values primarily due to increased sales of the BOLI separate account product and individual annuity separate account product. Variable asset-based fees fluctuate with changes in participant account balances. Participant account balances change due to cash flow and unrealized market gains and losses associated with changes in the United States equities market.
Deposits for separate accounts increased by $236 million, or 137.2%, to $408 million, during the year ended December 31, 2007 when compared to 2006. The increase is primarily due to increased sales of the BOLI separate account product.
The Company recognizes that the financial services marketplace is very dynamic and continues to change. By continued reinvestment in the Company’s infrastructure through technology enhancements and through service and product offerings, the Company plans to continue to grow the business in 2008.
Retirement participant accounts, including third-party administration and institutional accounts, at December 31, 2006 of 3,520 thousand increased by 3.1% from 3,414 thousand at December 31, 2006. Higher sales and organic growth on existing plans and new institutional recordkeeping clients contributed to the increase.
The following is a summary of certain financial data of the Retirement Services segment for the years ended December 31, 2006 and 2005.
Net investment income increased by $27 million, or 9.7%, to $304 million during the year ended December 31, 2006 from $277 million in 2005. This increase is primarily due to increased invested assets from the MetLife acquisition.
Total policyholder benefits and operating expenses increased by $46 million, or 10.9%, to $469 million during the year ended December 31, 2006 when compared to 2005. This increase is primarily due to the MetLife acquisition.
Deposits for investment-type contracts decreased by $343 million, or 32.3%, during the year ended December 31, 2006 when compared to 2005. This decrease is primarily attributable to the purchase during 2005 of $363 million of the Company’s guaranteed interest annuity contracts by an affiliate, Maxim Series Fund, Inc. as compared to the purchase of $68 million during 2006.
The distribution of the Company’s fixed maturity portfolio by credit rating at December 31, 2007 and 2006 is summarized as follows:
See Note 6 to the accompanying consolidated financial statements for a further discussion of mortgage loans.
5 Undistributed earnings on participating business - The timing of the payment of the liability for undistributed earnings on participating business is unknown by its nature and subject to significant long-term uncertainty. As such, the obligation related to this liability is presented in the table above in the more than five year category in the amount of the liability presented in the Company’s consolidated balance sheet.
measurement date provision of SFAS No. 158 will have on its consolidated financial position and results of operations.
Participating fund account - The policies in which the policyholder shares in the Company’s participating earnings through policyholder dividends that reflect the difference between the assumptions used in the premium charged and the actual experience. The amount of dividends to be paid is determined annually by the Board of Directors.
As described more fully in Note 4, the Company adopted FIN No. 48, “Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109”(“FIN 48”) effective January 1, 2007. Among other things, under FIN 48, the Company determines whether it is more-likely-than-not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the consolidated financial statements.
The estimated fair values and carrying amounts of reinsurance receivables at December 31, 2006 include a reduction of $58,569 representing the estimated fair value of the embedded derivative associated with the Company’s reinsurance receivable under its coinsurance with funds withheld agreement with the United States branch of CLAC (See Note 5). Valuation of the derivative is based upon the estimated fair value of the segregated pool of assets from which the Company derives its return on the reinsurance receivable.
The following table summarizes activity in deferred acquisition costs and value of business acquired for the years ended December 31, 2007, 2006 and 2005:
The balances of and changes in goodwill, all of which is within the Retirement Services segment, for the years ended December 31, 2006 and 2007 are as follows:
The following table presents the assumptions used in determining benefit obligations of the Defined Benefit Pension Plan and the Post Retirement Medical Plan for the years ended December 31, 2007, 2006 and 2005:
The following table presents the Company’s target allocation for invested Defined Benefit Pension Plan assets at December 31, 2008: