The selected financial data provided in the following sections should be considered in conjunction with “TIAA-CREF Life Insurance Company’s Statutory-Basis Financial Statements” and related Notes, included herein. The selected financial data provided in the following sections has been derived from the applicable audited statutory-basis financial statements as of and for the periods presented (in millions).
Life Insurance. We distribute and sell term life insurance, universal life insurance and variable universal life insurance products through non-commissioned agents appointed by us. Those agents selling variable insurance products are also registered representatives of our affiliated broker-dealers. Our primary marketing efforts for term life insurance products involve direct mail and an Internet web site which is designed to direct potential policyholders to a call center staffed by licensed agents. Our universal life and variable universal life insurance products are also sold through non-commissioned agents. Assets associated with variable universal life insurance policies are held in various investment subaccounts of a separate account, based on policyholders’ investment allocation decisions. That separate account is registered with the SEC as a unit investment trust, and its assets are invested in the corresponding portfolios of the TIAA-CREF Life Funds or in other, non-proprietary funds.
We may be exposed to risks in the future that we have not yet identified or that we do not currently consider to be material risks.
The selection and management of our general account investment portfolio reflect the asset/liability analyses that we perform for our various business segments and the specific products that they issue. Our investment objective is to earn the highest-possible rates of return within reasonable risk parameters while ensuring a prudently diversified portfolio. As a result of the kinds of investments that we make, our investment portfolio is primarily exposed to credit risk and interest rate risk. To manage our risks, our Board of Directors establishes investment limits that are followed in constructing our investment portfolio; some of these limits identify maximum investment amounts by individual investment and by issuer, based on the credit quality of the issuers. We also utilize a risk management department that is independent of the investment management function to monitor the risk exposures that are represented in our investment portfolio. We utilize a formal investment impairment review process, and it is performed for the entire portfolio at least once each quarter. The investment impairment review process is co-led by the finance and valuation departments, which are also both independent of the investment management function.
Non-Admitted Assets. This is an accounting category that exists under SAP but does not have a corollary under GAAP. For statutory-basis financial statements, non-admitted assets are excluded in determining the reported admitted asset amounts. The determination of non-admitted assets requires little, if any, management judgment. Certain investment balances and corresponding investment income due and accrued may be designated as non-admitted assets in accordance with New York SAP, based on delinquencies, defaults and other statutory criteria. Our largest non-admitted asset is our deferred federal income tax asset, which is calculated under a structured formula in accordance with New York SAP. All changes in non-admitted assets are charged or credited directly to surplus and have no impact on our results of operations.
The $79.9 million year-over-year decline in surrenders of individual annuity products was primarily driven by reduced surrender activity of $106.7 million on one of our variable annuity products with fixed account options. During 2008, the portfolio rate on this variable annuity product became more competitive as interest rates became more competitive relative to other market returns, resulting in a decrease in customer outflows. Partially offsetting the reduced surrenders on this variable annuity product was an increase in surrenders of $26.8 million on our variable annuity products without fixed account options due to the volatile equity market conditions and the recent economic slowdown.
Preferred Stock. As of December 31, 2008, the preferred stock portfolio balance of $43.9 million declined $18.9 million, or 30.1%, from the December 31, 2007 balance of $62.8 million. As of December 31, 2008, preferred stocks represented approximately 1.9% of our invested asset portfolio. As of December 31, 2008, approximately 99.3% of the portfolio was classified as investment grade, approximately 53.8% of the portfolio was comprised of publicly traded securities and approximately 50.1% of portfolio balance was comprised of foreign securities. We had no emerging market securities in the portfolio at December 31, 2008. During 2008, write-downs on preferred stock resulting from impairments that are considered to be other-than-temporary were $15.8 million.
Investments in bonds considered to be “available for sale” are carried at fair value rather than amortized cost;
Based upon the Company’s current evaluation of these securities in accordance with its impairment policy, the cause of the decline is primarily attributable to increased market yields caused principally by an extensive widening of credit spreads at December 31, 2008 resulting from diminished market liquidity as opposed to a long-term deterioration in credit quality. The Company currently intends and has the ability to hold the fixed maturity and equity securities with unrealized losses for a period of time sufficient for them to recover and the Company has concluded that these securities are not other-than temporarily impaired.
The Company uses a third party proprietary system in determining the market value of its loan-backed and structured securities. In 2008, in accordance with SSAP 43, the Company changed from the retrospective to the prospective method due to negative yields and early adopted SSAP 98 in the fourth quarter on securities totaling $2,517 thousand carrying value. The change resulted in an additional $12,378 thousand of realized losses being recognized at December 31, 2008.
Separate account assets carried on a recurring basis in Level 2 consist principally of corporate bonds. Preferred stocks in Level 2 are those carried on a lower of cost or market basis where daily trade prices are not available for identical securities.
Bonds: The fair values for publicly traded long-term bond investments were determined using prices provided by third party pricing services. For privately placed long-term bond investments without a readily ascertainable market value, such values were determined with the assistance of an independent pricing service utilizing a discounted cash flow methodology based on coupon rates, maturity provisions and credit assumptions.
Preferred Stocks: The fair values of preferred stocks were determined using prices provided by third party pricing or valuations from the NAIC.
Annuity’s (“IVA”) Guaranteed Minimum Death Benefit (“GMDB”) provisions. The reserve for the GMDB is calculated on a seriatim basis in accordance with Actuarial Guideline 34, Variable Annuity Minimum Guaranteed Death Benefit Reserves and New York State Regulation 151 and was approximately $2,949 thousand and $771 thousand at December 31, 2008 and 2007 respectively.