These estimates and assumptions are influenced by historical experience, current developments and anticipated market trends. At December 31, 2009 and 2008, future policy benefits were $18.5 million and $19.9 million, respectively.
The amortized cost and estimated fair value of investments in fixed maturity and equity securities at December 31, 2009 and 2008 were:
The Company defines investment grade securities as unsecured debt obligations that have a rating equivalent to S&P’s BBB- or higher (or similar rating agency). At December 31, 2009 approximately $3.7 million (or 3%) of fixed maturity securities were rated BBB-, which is the lowest investment grade rating given by Standard and Poor’s. This compares to $2.6 million (or 2%) of BBB- rated fixed maturity securities at December 31, 2008. Below investment grade securities are speculative and are subject to significantly greater risks related to the creditworthiness of the issuers and the liquidity of the market for such securities. The Company closely monitors such investments.
The majority of assets depressed over 20% and greater than one year at December 31, 2009 are primarily related to RMBS. As there has been no impact to expected future cash flows, the Company does not consider the underlying investments to be impaired as of December 31, 2009.
The Company’s liquidity requirements include the payment of sales commissions and other underwriting expenses and the funding of its contractual obligations for the life insurance and annuity contracts it has in force. The Company has developed and utilizes a cash flow projection system and regularly performs asset/liability duration matching in the management of its asset and liability portfolios. The Company anticipates funding its cash requirements utilizing cash from operations, normal investment maturities and anticipated calls and repayments, consistent with prior years. As of December 31, 2009 and 2008, The Company’s assets included $158.5 million and $140.4 million, respectively, of cash, short-term investments and investment grade publicly traded available-for-sale securities that could be liquidated if funds were required.
The increase in annuity benefit expense was primarily driven by the change in reserve for the embedded derivatives as compared to the same period in 2008. This was primarily a result of the positive equity markets relative to the same period in 2008.
Amortization and impairment of VOBA was $10.8 million and $9.0 million for 2009 and 2008, respectively. During 2009 and 2008, there was an impairment charge of $7.2 million and $4.3 million, respectively, as estimated future gross profits were less than the unamortized balance. In addition, for 2009 and 2008, there was unfavorable unlocking of $0.5 million and $2.5 million, respectively.
The increase in general insurance expenses is primarily due to increased transition and system conversion related expenses.
Amortization of VOBA was $9.0 million for 2008, which included $2.5 million of unfavorable unlocking. In addition, there was an impairment charge of $4.3 million as estimated future gross profits were less than the unamortized balance. There was no VOBA amortization in 2007.
MLLICNY is not dependent upon any single customer, and no single customer accounted for more than 10% of its revenues during 2009, 2008, or 2007.
Equity market exposure is also present in insurance contracts for account of policyholders where funds are invested in equities such as variable annuities and life insurance. Although most of the risk remains with the policyholder, lower investment returns can reduce the asset management fee earned by MLLICNY on the asset balance in these products. In addition, some of this business has minimum guarantees.
The Company’s earnings depend significantly upon the extent to which actual claims experience is consistent with the assumptions used in setting the prices for products and establishing the technical liabilities and liabilities for claims. To the extent that actual claims experience is less favorable than the underlying assumptions used in establishing such liabilities, income would be reduced. Furthermore, if these higher claims were part of a permanent trend, MLLICNY may be required to increase liabilities, which could reduce income. In addition, certain acquisition costs related to the sale of new policies and the purchase of policies already in force have been recorded as assets on the balance sheet and are being amortized into income over time. If the assumptions relating to the future profitability of these policies (such as future claims, investment income and expenses) are not realized, the amortization of these costs could be accelerated and may even require write offs due to unrecoverability. This could have a materially adverse effect on MLLICNY’s business, results of operations and financial condition.