We undertake no obligation to publicly update or revise any forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which merely reflect Company expectations at the time of the writing. Actual results may differ materially from expectations conveyed in forward-looking statements due to changes caused by various risks and uncertainties. The reader should, however, consult any further disclosures TALICNY may make in future filings of its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K.
TALICNY conducts its business primarily in the annuity markets and to a lesser extent in the life insurance markets of the financial services industry. Currently, the Company, is not issuing new life insurance products, variable annuity and market value adjusted annuity products. The Company offered the following guaranteed benefits within its variable annuity product suite: guaranteed minimum death benefits (“GMDB”), guaranteed minimum income benefits (“GMIB”) and guaranteed minimum withdrawal benefits (“GMWB”).
The Company’s portfolio of private placement securities is valued using a matrix pricing methodology. The pricing methodology is obtained from a third party service and indicates current spreads for securities based on weighted average life, credit rating and industry sector. Monthly the Company reviews the matrix to ensure the spreads are reasonable by comparing them to observed spreads for similar securities traded in the market. In order to account for the illiquid nature of these securities, illiquidity
Derivatives are financial instruments in which the value changes in response to an underlying variable, that require little or no net initial investment and are settled at a future date. The Company has entered into exchange traded derivatives, such as futures, and variance swaps to hedge the costs of the volatility of the Standard & Poor’s (“S&P”) market. All derivatives recognized on the Balance Sheets are carried at fair value. All changes in fair value are recognized in the Statements of Income. The fair value for exchange traded derivatives, such as futures, are calculated net of the interest accrued to date and is based on quoted market prices. Net settlements on the futures occur daily. At December 31, 2011 and 2010, the Company had 20 outstanding short futures contracts, respectively, with a notional amount of $6.3 million, respectively.
The expense and the subsequent capitalization and amortization are recorded as a component of policy benefits in the Statements of Income. At December 31, 2011 and 2010, variable annuities accounted for the Company’s entire DSI asset of $0.2 million and $0.1 million, respectively. See Note 4 to the Financial Statements for a further discussion.
The Company’s liability for policyholder account balances represents the contract value that has accrued to the benefit of policyholders as of the Balance Sheet date. The liability is generally equal to the accumulated account deposits plus interest credited less policyholders’ withdrawals and other charges assessed against the account balance. Policyholder account balances at December 31, 2011 and 2010 were $105.2 million and $115.1 million, respectively.
Included within future policy benefits are liabilities for GMDB and GMIB provisions contained in the variable products that the Company issued. At December 31, 2011 and 2010, GMDB and GMIB liabilities included within future policy benefits were as follows:
At December 31, 2011 and 2010, the Company did not have a tax valuation allowance for deferred tax assets. A tax valuation allowance was not deemed necessary as management determined that it is more likely than not that the deferred tax assets will be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on generation of future taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, projected taxable income, and tax-planning strategies in making the assessment.
ASU 2011-05, Presentation of Comprehensive Income - requires an entity to report components of comprehensive income in either a single continuous statement of comprehensive income or two separate but consecutive statements - will be adopted January 1, 2012.
ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 - defers the amendments in ASU 2011-05 that relate to presentation of reclassifications out of accumulated other comprehensive income.
ASC 350, Intangibles-Goodwill and Other - ASU 2011-08, Testing Goodwill for Impairment - gives entities the option of performing a qualitative assessment to determine whether it is necessary to perform the two-step goodwill impairment test - will be adopted January 1, 2012.
There were no fixed contract owner deposits in 2011, 2010 and 2009. During 2011, 2010 and 2009, fixed contract owner withdrawals were $6.7 million, $8.1 million and $8.2 million, respectively.
The amortized cost/cost and estimated fair value of investments in fixed maturity and equity AFS securities at December 31, 2011 and 2010 were:
The overall exposure to the banking sub-sector in the Company’s portfolio is of high quality. The unrealized losses in the banking sub-sector primarily reflect the size of our holdings, low floating rate coupons on some securities, and credit spread
widening in the sector due to the European debt crisis as well as residual impact from the U.S. financial crisis. As a whole, the sub-sector remained volatile in 2011 as financial bail-outs in Greece, Ireland, and Portugal led to fears that Italy and Spain may require similar International bail-outs. European banks hold a significant amount of government debt on their balance sheets. Subordinated securities, specifically, have become a target for liability management exercises by some European banks as they attempt to raise core Tier 1 ratios to 9% by June 2012 as required by the European Banking Authority. Deeply subordinated securities became more volatile following successful attempts by the European Commission to impose “burden sharing” on the subordinated securities of those banks receiving significant state-aid as a result of the 2008 financial crisis. Furthermore, proposed legislation in the U.S. and Europe could give governments wide discretion to impose “burden sharing” on both senior and subordinated bondholders in order to quickly stabilize or wind-up troubled banks. While these measures have made existing subordinated securities more volatile in the near-term, new, more stringent global legislation on bank capital and liquidity requirements is intended to reduce overall risk in the sector going forward. Furthermore, central banks appear committed to providing liquidity to the market and, as a result, asset write-downs and credit losses have diminished substantially in all but the most troubled countries.
The Company evaluated the near-term prospects of the issuers in relation to the severity and duration of the unrealized loss and does not consider those investments to be impaired at December 31, 2011. There are no individual issuers rated below investment grade in this sub-sector which have an unrealized loss position greater than $0.2 million.
Unrealized gains (losses) incurred during the years ended of 2011 and 2010, respectively, were primarily due to price fluctuations resulting from changes in interest rates and credit spreads. If the Company has the intent to sell or it is more likely than not that the Company will be required to sell these securities prior to the anticipated recovery of the amortized cost, securities are written down to fair value. If cash flow models indicate a credit event will impact future cash flows, the security is impaired to discounted cash flows. As the remaining unrealized losses in the portfolio relate to holdings where the Company expects to receive full principal and interest, the Company does not consider the underlying investments to be impaired.
There were two assets, an emerging market government and a regional U.S. banking institution, depressed over 20% and greater than one year at December 31, 2011. The drop in price was primarily due to increased illiquidity in the markets in general due to the European debt crisis.
The Company’s impairment losses were less than $0.1 million, $0.1 million and $0.9 million for the years ended December 31, 2011, 2010 and 2009, respectively, with no associated VOBA amortization. The 2011 and 2010 impairment losses were principally the result of the Company impairing its holding of a 2005 vintage RMBS due to adverse changes in cash flows. The Company impaired its holding of a preferred stock in CIT Group, Inc. for $0.2 million during the third quarter 2009. In the first quarter 2009, the Company impaired its holdings in Harrah’s Entertainment Inc. (“Harrah’s”) to fair value for $0.3 million.
The Company adopted revised guidance for the recognition and presentation of OTTI effective at June 30, 2009. As permitted by the guidance, the Company recorded an increase of $0.1 million to the opening balance of retained earnings with a corresponding decrease to accumulated OCI on the Statement of Stockholder’s Equity to reclassify the non credit portion of previously other-than-temporarily impaired AFS securities held at April 1, 2009.
The Company has utilized public information to estimate the future assessments it will incur as a result of life insurance company insolvencies. At December 31, 2011, the Company’s estimated liability for future guaranty fund assessments was $0.3 million. At December 31, 2010, the Company did not have a liability for future guaranty fund assessments. In addition, the Company has a receivable for future premium tax deductions of $0.1 million at December 31, 2011. At December 31, 2010, the Company did not have a receivable for future premium tax deductions. The Company regularly monitors public information regarding insurer insolvencies and adjusts its estimated liability as appropriate.
In the normal course of business, the Company is subject to various claims and assessments. Management believes the settlement of these matters would not have a material effect on the financial position, results of operations or cash flows of the Company.
(a) Asset-based policy charge revenue for 2011 was negatively impacted by the decline in average variable account balances.
Insurance expenses and taxes decreased $0.7 million as compared to 2010. The following table provides the changes in insurance expenses and taxes for each respective period:
For the years ended December 31, 2010 and 2009, the Company recorded net income (loss) of $12.1 million and ($6.2) million, respectively. The increase in income during 2010 as compared to 2009 was primarily due to the 2009 VOBA impairment, net realized investment gains in 2010 compared to losses in 2009, the change in the valuation allowance on deferred tax assets, and a decline in policy benefits.
(a) The change in credit related losses as compared to 2009 is primarily due to a decrease in OTTI impairments along with the change in accounting principle for OTTI impairments in 2009. See Note 3 to the Financial Statements for further discussion.
(a) The decrease in general insurance expenses is primarily due to lower transition and system conversion related expenses in 2010 as compared to 2009.
The Company is not dependent upon any single customer, and no single customer accounted for more than 10% of its revenues during 2011, 2010 or 2009.