(2) Total stockholder’s equity was adjusted as of January 1, 2008 as discussed in Note 1 to the accompanying consolidated financial statements and has not been revised as of December 31, 2007 or December 31, 2006 in this table.
· The decline in fair value is attributable to specific adverse conditions affecting a particular instrument, its issuer, an industry or geographic area.
The Company’s consolidated net income increased by $78 million, or 62%, to $203 million for the year ended December 31, 2010 when compared to 2009. The increase is primarily related to a $61 million increase in fee income, an improvement in net interest margins, a $35 million decrease in net realized and unrealized investment losses, net of policyholder related amounts, a $17 million release of future policyholder benefits in the Individual Markets segment and a $8 million increase in earnings of the reinsurance business of the Other segment. These are partially offset by $64 million higher general insurance expenses primarily in the Retirement Services segment.
The following is a summary of certain financial data of the Individual Markets segment for the years ended December 31, 2010 and 2009:
The Company holds fixed maturity investments guaranteed by monoline insurers. Monoline insurers provide guarantees on debt for issuers, often in the form of credit wraps, which enhance the credit of the issuer. Monoline insurers guarantee the timely repayment of bond principal and interest when a bond issuer defaults and generally provide credit enhancement for certain securities. During 2009, the Financial Guaranty Insurance Company (“FGIC”), a monoline insurer, was ordered to suspend all claims payments by the New York Insurance Department. During the first quarter of 2010, Ambac Financial Group, Inc. (“Ambac”), a monoline insurer, was ordered to suspend claims payments on residential mortgage-backed securities by the State of Wisconsin Insurance Department. On January 25, 2011, a Plan of Rehabilitation supported by Ambac’s regulator was approved by a Wisconsin state court judge.
All cash collateral received from the securities lending program, repurchase agreements and dollar repurchase agreement practices is invested in U.S. Government or U.S. Government Agency securities. Some cash collateral may be invested in short-term repurchase agreements which are also collateralized by U.S. Government or U.S. Government Agency securities. In addition, the securities lending agent indemnifies the Company against borrower risk, meaning that the lending agent agrees contractually to replace securities not returned due to a borrower default. As of December 31, 2010 and 2009, the Company had $51 million and $37 million, respectively, of securities out on loan, $657 million and $418 million, respectively, in short-term repurchase agreements and $937 million and $491 million, respectively, in dollar repurchase agreements, all of which are fully collateralized as described above. The Company does not enter into these types of transactions for liquidity purposes, but rather for yield enhancement on its investment portfolio.
See Note 6 to the accompanying consolidated financial statements for a further discussion of impaired investments.
Derivative financial instruments - All derivatives, regardless of hedge accounting treatment, are recorded on the consolidated balance sheets in other assets and other liabilities at fair value. Accounting for the ongoing changes in the fair value of a derivative depends upon the intended use of the derivative and its designation as determined when the derivative contract is entered into. If the derivative is designated as a fair value hedge, the changes in its fair value and of the fair value of the hedged item attributable to the hedged risk are recognized in earnings in net investment income. If the derivative is designated as a cash flow hedge, the effective portions of the changes in the fair value of the derivative are recorded in accumulated other comprehensive income (loss) in the Company’s consolidated balance sheets and are recognized in the consolidated income statements when the hedged item affects earnings. Changes in the fair value of derivatives not qualifying for hedge accounting and the over effective portion of cash flow hedges are recognized in net investment income in the period of the change. Investment gains and losses generally result from the termination of derivative contracts prior to expiration. Certain derivatives in a net asset position have cash pledged as collateral to the Company in accordance with the collateral support
Bank overdrafts - The Company’s cash management system provides for the reimbursement of all major bank disbursement accounts on a daily basis. Checks issued but not yet presented to banks for payment can result in overdraft balances for accounting purposes and are included in other liabilities in the accompanying consolidated balance sheets. At December 31, 2010 and 2009, these liabilities were $32,572 and $28,674, respectively.
Participating life and annuity policy benefit liabilities are $6,544,238 and $6,354,261 at December 31, 2010 and 2009, respectively. Participating business approximates 9% of the Company’s individual life insurance in-force at December 31, 2010 and 2009 and 13%, 19% and 24% of individual life insurance premium income for the years ended December 31, 2010, 2009 and 2008, respectively. The policyholder’s share of net income on participating policies is excluded from stockholder’s equity and recorded as undistributed earnings on participating business in the consolidated balance sheet.