Selected consolidated financial data for the Corporation are presented below for each of the five years in the period ended December 31, 2008. This data should be read in conjunction with the Corporation’s Consolidated Financial Statements and notes thereto and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.
As described under “Ratings” and “Regulation,” the Corporation’s business is substantially affected by capital ratios and their impact on its ratings. Consequently, the Insurance Company’s management established a policy of reducing the level of sales increases until capital and surplus ratios are further improved. Sales are also being made with a greater selectivity based on increased profit level requirements for new business. The Insurance Company has determined that the level of competition in the sale of traditional and universal life insurance products has made it very difficult for smaller insurance companies, such as the Insurance Company, to participate in this business in a profitable way. Accordingly, the Insurance Company has determined that, under the current market conditions, it will not participate in the sale of traditional and universal life policies.
Unless specifically stated otherwise, all references to 2008, 2007 and 2006 refer to our fiscal years ended, or the dates, as the context requires, December 31, 2008, December 31, 2007 and December 31, 2006, respectively.
Market Conditions: The Corporation, like all companies, is affected by the general state of financial markets and economic conditions in the U.S. and elsewhere. The pressures related to the current recessionary environment coupled with the distortion of the capital markets have resulted in one of the most difficult business environments in years and the ability to obtain desired returns on the investment portfolio without exposing the Corporation to excess risk has never been more challenging. This, in turn, has had an impact on our willingness to expand sales of our single premium annuity products.
Interest Rate Risk: The Insurance Company’s principal products are deferred annuities, which are interest rate sensitive instruments. In an interest rate environment of falling or stable rates the Insurance Company’s annuity holders are less likely to seek to surrender their annuities prior to maturity to seek alternative, higher-yielding investments. However, in an environment of moderately or significantly increasing rates, such surrenders should be expected to increase. As of December 31, 2008, the existence of surrender fees on approximately 43.6% of the Insurance Company’s outstanding deferred annuities acts as a deterrent against surrenders. However, if interest rates climb sufficiently, such fees may not have a significant deterrent effect. Moreover, the surrender fees are only in effect, primarily for up to the first 7 years of each annuity policy and, therefore, disappear over time (see table below). In the event of a substantial increase in surrenders during a short period of time, the Insurance Company may have to sell off longer-term assets to pay current surrender liabilities. The Insurance Company continually develops strategies to address the match between the timing of its assets and liabilities. To that end, in 2006, 2007 and 2008, a significant number of policies came off surrender charge and a significant portion of this business did surrender. This can be seen in the surrender ratio in the table on page 3. The company anticipated this and maintained a significant level of cash equivalents to fund surrenders avoiding the need to sell long-term assets at a loss. The Company believes that the heavy surrender activity is now largely behind us. Additionally, management has increased the incentive for agents to retain this business with the Company by paying full first year compensation on internal rollovers. Beginning in 2008, and continuing into future years, a significantly smaller amount of business will be coming off surrender charge - as shown in the table below and consequently we expect a continuation of the markedly lower surrender ratio seen in prior years.
Persistency is the rate at which insurance policies remain in force, expressed as a percentage of the number of policies remaining in force over the previous year. Policyholders can either surrender policies or cause their policies to lapse by failing to pay premiums.
The Insurance Company¢s principal investments are in fixed maturities, all of which are exposed to at least one of three primary sources of investment risk: credit, interest rate and market valuation. The financial statement risks are those associated with the recognition of impairments and income, as well as the determination of fair values. Management evaluates whether other than temporary impairments have occurred on a case-by-case basis. Inherent in management¢s evaluation of each security are assumptions and estimates about the operations of the issuer and its future earnings potential. Considerations used by the Insurance Company in the other than temporary impairment evaluation process include, but are not limited to: (i) the length of time and the extent to which the market value has been below amortized cost; (ii) the potential for impairments of securities when the issuer is experiencing significant financial difficulties; (iii) the potential for impairments in an entire industry sector or sub-sector; (iv) the potential for impairments in certain economically depressed geographic locations; (v) the potential for impairments of securities where the issuer, series of issuers or industry has a catastrophic type of loss or has exhausted natural resources; (vi) in situations where it is determined that an impairment is attributable to changes in market interest rates, the Corporation’s ability and intent to hold impaired securities until recovery of fair value at or above cost; and (vii) other subjective factors, including concentrations and information obtained from regulators and rating agencies. In addition, the earnings on certain investments are dependent upon market conditions, which could result in prepayments and changes in amounts to be earned due to changing interest rates or equity markets. The determination of fair values in the absence of quoted market values is based on valuation methodologies, securities the Insurance Company deems to be comparable and assumptions deemed appropriate given the circumstances. There can be no assurance that the assumptions relied upon by the Insurance Company will yield accurate assessments of the fair value of these investments. As such, the Insurance Company reassesses its assumptions regularly.
As of December 31, 2008, 10.1% of the Company’s invested assets (approximately $342.2 million) consisted of short-term commercial paper with maturities of less than 45 days. This commercial paper consisted of direct obligations of various corporations rated a minimum of A1 by Standard and Poor’s and P1 by Moody’s. As part of its Asset-Liability management strategy, the Insurance Company has kept elevated levels of cash investments since 2005, anticipating the potential surrender of annuity policies with expiring surrender charges. This cash has been available to meet actual surrenders and any other cash needs. By having the liquidity afforded by these cash investments during 2008, the Company was been able to satisfy all of its cash needs without any portfolio sales from the fixed income portfolio.
The following table presents the total gross unrealized losses for fixed maturities where the estimated fair value had declined and remained below amortized cost by December 31, 2008.
Total unrealized losses increased from $73 million at December 31, 2007 to $355.9 million at December 31, 2008. This increase in the unrealized losses resulted from the significant increase in corporate bond spreads caused by the unprecedented financial crisis and the economic recession that accelerated after the Lehman Brothers bankruptcy in September 2008. According to the Merrill Lynch corporate spread indices, 10-year, BBB-rated industrial spreads widened by 457 basis points, BBB-rated financial spreads widened by 877 basis points and BBB-rated utility spreads widened by 329 basis points in 2008. Spreads widened across the maturity spectrum and severely impacted financial bonds, particularly A-rated and BBB-rated bank and insurance company bonds. Presidential carefully examines each issue where the market value has fallen below 70% of book value to determine if the bonds are not-other-than-temporarily impaired. Consistent with the Company’s OTTI (Other than Temporarily Impaired) Policy as discussed above, the Company will recognize a write-down of book value to current market value, if warranted.
U.S. Treasury Obligations and Direct Obligations of U.S. Agencies: The 2008 net unrealized loss was $3,841,000 on a fair value of $27,780,000. Approximately $1.7 million of this loss represented a bond position in the Westchester County NY Industrial Development Agency (IDA), Series 2003. This position is secured by a pledge of the rental payments from a 9-story parking garage to the Westchester County IDA. There is also additional security provided by a leasehold mortgage on this property and a one-year debt service reserve fund. This bond had also been wrapped by bond insurance provided by ACA, a bond insurer that went bankrupt at the end of 2007. The bonds are current on principal and interest payments from the cash flow provided by the garage and are rated “2 “(investment-grade) by the SVO Office of the NAIC.
Preferred Stocks: The preferred stock category, which totaled $72.4 million, at December 31, 2008, consists of bank, financial company, telecommunications, REIT and electric utility preferreds. This represents a decrease in value from $112.0 million at December 31, 2007. Unrealized losses totaled $40.7 million at December 31, 2008, reflecting an increase from a $16.2 million loss at December 31, 2007. The 5 largest loss positions, each having an NAIC 2 (investment-grade) rating, consist of the following positions: Royal Bank of Scotland ($6.8 million); Centaur Funding Corp. ($5.4 million); National Westminster Bank ($5.1 million); Duke Realty Corp. ($2.1 million), and Telephone and Data Systems ($1.6 million). The Royal Bank of Scotland and National Westminster Bank preferreds are both obligations of the Royal Bank of Scotland Group, which has been affected by the banking crisis in the United Kingdom. Centaur Funding (backed by Airtouch Class D and E Preferred Stock) and Telephone and Data Systems are telecommunications preferreds that have been affected by the decline in the common stock of the 2 parent companies (Airtouch and Telephone and Data Systems). The Duke Realty Corp. preferred has been affected by the credit crunch and fears anticipating a severe downturn in the commercial real estate markets in the U.S., particularly in the Midwest (Cincinnati and Indianapolis) and Southeast (Atlanta and Central Florida).
The Insurance Company prepares its statutory financial statements in accordance with accounting practices prescribed by the New York State Insurance Department. Prescribed SAP include state laws, regulations and general administrative rules, as well as a variety of publications from the NAIC. Accounting principles used to prepare statutory financial statements differ from financial statements prepared on the basis of GAAP. (See Item 1, Business, Insurance Regulation, Statutory Reporting Practices)
A reconciliation of the Insurance Company’s net income (loss) as filed with regulatory authorities to net income reported in the accompanying financial statements for the years ended December 31, 2008, 2007 and 2006, is set forth in the following table:
Ratings are an important factor in establishing the competitive position in the insurance and financial services marketplace. There can be no assurance that the Corporation’s or the Insurance Company’s ratings will continue for any given period of time or that they will not be changed. In the event the ratings are downgraded, the level of revenues or the persistency of the Insurance Company’s business may be adversely impacted.
In April 2008, Standard & Poor’s Ratings Services raised its counterparty credit rating on the Corporation to ‘B+’ from ‘B’. An obligation rated ‘B’ is more vulnerable to nonpayment than obligations rated ‘BB’, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment of the obligation. At the same time it raised its counterparty credit and financial strength ratings on the Insurance Company to ‘BB+’ from ‘BB’ with a positive outlook. An insurer rated ‘BB’ has marginal financial security characteristics. Positive attributes exist, but adverse business conditions could lead to insufficient ability to meet financial commitments.
In June 2008, Fitch Ratings affirmed the Insurance Company’s Aq rating, “Strong,” - possessing strong capacity to meet policyholder and contract obligations based solely on the Company’s stand-alone financial statement characteristics. Fitch Ratings found that risk factors are moderate, and the impact of any adverse business and economic factors is expected to be small.
Total annuity considerations and life insurance premiums increased to approximately $46.8 million in 2008 from approximately $40.4 million in 2007, an increase of approximately 13.7% and decreased from approximately $41.4 million in 2006 to $40.4 million in 2007, a decrease of approximately 2.4%. Life insurance premiums were $16.2 million, $15.6 million and $13.8 million in 2008, 2007 and 2006 respectively. Annuity considerations increased to approximately $30.7 million in 2008 from approximately $24.8 million in 2007, an increase of approximately $5.9 million, and decreased from approximately $27.6 million in 2006 to $24.8 million in 2007, a decrease of approximately $2.8 million. These amounts do not include consideration from the sales of deferred annuities or immediate annuities without life contingencies. Under GAAP, such sales are reported as additions to policyholder account balances. Consideration from such sales was approximately $143.2 million, $136.5 million and $163.6 million in 2008, 2007 and 2006, respectively. In 2008, sales of immediate annuities increased by approximately $5.3 million due to a more focused marketing campaign during the year. We also received upgrades from Standard and Poors and Moody’s, each with positive outlooks, during the year. These ratings play a significant part in annuity sales. In 2007, several factors attributed to the decrease of annuity premium considerations. The continued repressive interest environment beginning in 2002 has been persistent causing annuity carriers to credit relatively lower and unattractive rates of interest.
Universal life and investment type policy fee income remained relatively stable at approximately $2.7 million and $2.6 in fiscal years 2008 and 2007, and decreased from approximately $2.9 million in fiscal year 2006. Policy fee income consists principally of amounts assessed during the period against policyholders' account balances for mortality charges and surrender charges.
Net investment income totaled $261.7 million in 2008, as compared to $294.9 million in 2007 and $316.4 million in 2006. This represents an 11.2% decrease comparing 2008 to 2007 and a 6.8% decrease comparing 2007 to 2006. Invested assets, at amortized cost, for 2008, 2007 and 2006 totaled $3.4 billion, $4.0 billion and $4.2 billion, respectively. This decrease in invested assets was primarily caused by unrealized losses in the underlying investments as well as an increase in policy surrenders in the Insurance Company’s annuity business which exceeded the level of new annuity sales for the respective periods. Reduced income resulted from a decrease in invested assets, as well as, the income reduction attributable to portfolio rebalancing activities in 2006 and 2005, which involved the sale of higher yielding long-term assets and the reinvestment into lower yielding short-term investments. The Insurance Company's ratios of net investment income to average cash and invested assets, at amortized cost, for the years ended December 31, 2008, 2007 and 2006 were approximately 7.14%, 7.44% and 7.43%, respectively. Income from limited partnership investments amounted to approximately $49.1 million, $52.9 million and $47.0 million in 2008, 2007 and 2006, respectively. The changes in the amounts are largely reflective of the inherent volatility of income in the Company’s limited partnership portfolio. (See Item 7, Management’s Discussion and Analysis, Asset/Liability Management). Without taking into account the Corporation’s returns on its limited partnership investments in those years, the respective ratios would have been 6.17%, 6.43% and 6.64% for the years ended December 31, 2008, 2007 and 2006. For additional information, please refer to “Note 2 of the Notes to Consolidated Financial Statements.”
Net realized investment (losses)/gains (pre-tax) amounted to $(47.9 million) in fiscal 2008, as compared to $24.8 million in fiscal 2007 and $(3.6 million) in fiscal 2006. The decrease in 2008 was primarily attributable to losses on fixed maturities. Losses on common stocks and recorded losses on the Insurance Company’s investment in unhedged Payor Swaptions also contributed to the decrease. Due to accounting rules governing derivative instruments, fluctuations in market value are realized in the income statement, even if the investments continued to be held by the Company. The values of the payor swaptions were $0.5 million, $7.0 million and $9.8 million for the years ended 2008, 2007 and 2006, respectively. Net realized investment (losses)/gains for years ended December 31, 2008, 2007 and 2006 include realized investment losses of approximately $43.6 million, $52 thousand, and $4.5 million, respectively, attributable to writedowns of certain securities contained in the Company's investment portfolio that were deemed by management to be other than temporarily impaired. For a discussion of the procedure by which such determinations were made, see “Investments” above. Realized investment gains (losses) also resulted from sales of certain equities and convertible securities and calls and sales of fixed maturity investments in the Company’s investment portfolio.
The Insurance Company’s average credited rate for reserves and account balances for the years ended December 31, 2008, 2007 and 2006 was less than the Company’s ratio of net investment income to mean assets (based on book value) for the same period as noted above under “Net Investment Income”. Although management does not currently expect material declines in the spread between the Company's average credited rate for reserves and account balances and the Company's ratio of net investment income to book value mean assets (the "Spread"), there can be no assurance that the Spread will not decline in future periods or that such decline will not have a material adverse effect on the Company's financial condition and results of operations. Depending, in part, upon competitive factors affecting the industry in general and the Company, in particular, the Company may, from time to time, change the average credited rates on certain of its products. There can be no assurance that the Company will be able to reduce such rates or that any such reductions will widen the Spread. The actual Spread, excluding capital gains, for the for the 12 months ended December 31, 2008, 2007 and 2006 was 1.89%, 2.13% and 2.01%, respectively. In comparing year-end 2008 to year-end 2007, the decrease was primarily due to a decrease in the earned rated partially offset by a decrease in the crediting rate. From 2006 to 2007, the increase was primarily due to a reduction in the crediting rate.
The change in the net DAC for 2008 resulted in a charge of approximately $6.1 million, as compared to a charge of approximately $12.3 million and a charge of approximately $9.0 million for 2007 and 2006, respectively. Changes in DAC consist of three elements: deferred costs associated with product sales, amortization of the DAC on deferred annuity business and amortization of the DAC on the remainder of the Company’s business. Deferred costs consisted of credits of $8.3 million, $11.3 million and $12.1 million for 2008, 2007 and 2006 respectively. Amortization of the DAC on deferred annuity business consisted of charges of $9.0 million, $17.9 million and $15.9 million in 2008, 2007 and 2006 respectively. Amortization of the DAC on the remainder of the Company’s business consisted of charges of $5.4 million in 2008, $5.8 million in 2007 and $5.2 million in 2006.
The Insurance Company is subject to various regulatory restrictions on the maximum amount of payments, including loans or cash advances that it may make to the Corporation without obtaining prior regulatory approval. Under the New York Insurance Law, the Insurance Company is permitted without prior insurance regulatory clearance to pay a stockholder dividend to the Corporation as long as the aggregate amount of all such dividends in any calendar year does not exceed the lesser of (i) 10% of its statutory surplus as of the immediately preceding calendar year or (ii) its statutory net gain from operations for the immediately preceding calendar year (excluding realized capital gains and losses). The Insurance Company will only be permitted to pay a stockholder dividend to the Corporation in excess of that amount if it files notice of its intention to declare such a dividend and the amount thereof with the Superintendent and the Superintendent does not disapprove the distribution. The Insurance Company paid $35.7 million, $32 million and $20 million in dividends to the Corporation in fiscal 2008, 2007 and 2006, respectively. On a going forward basis, there can be no assurance that the Insurance Company will have statutory earnings to support payment of dividends to the Corporation in an amount sufficient to fund its cash requirements and pay cash dividends or that the Superintendent will not disapprove any dividends that the Insurance Company must submit for the Superintendent’s consideration.
The Corporation was able to meet all its liquidity needs in 2008, including the payment of dividends, and anticipates being able to meet those needs in 2009 and the foreseeable future.
Net cash provided by the Corporation’s operating activities was approximately $15.6 million, $21.1 million and $77.4 million in 2008, 2007 and 2006, respectively. Net cash provided by the Corporation's investing activities (principally reflecting investments purchased, called, redeemed or sold) was approximately $187.9 million, $416.4 million and $236.6 million in 2008, 2007 and 2006, respectively.
The indenture governing the Senior Notes contains covenants relating to limitations on liens and sale or issuance of capital stock of the Corporation. In the event the Corporation violated such covenants, we would have been obligated to offer to repurchase the entire outstanding principal amount of such notes. As of December 31, 2008, we believe that we are in compliance with all of the covenants.
In order to maintain consistency in our portfolio, our deferred annuity products incorporate surrender charges to discourage surrenders or withdrawals. Annuitants may not terminate or withdraw funds from their annuity contracts for a significant initial period (generally seven years) without incurring penalties in the form of surrender charges. These surrender charges generally range from 1% to 7% of the investment. Approximately 56.4%, 56.8% and 46.9% of the Insurance Company's deferred annuity contracts in force (measured by reserves) as of December 31, 2008, 2007, and 2006 were surrenderable without charge.
The market value of our fixed maturity portfolio changes as interest rates change. In general, rate decreases cause asset prices to rise, while rate increases cause asset prices to fall. Based on market values and prevailing interest rates as of December 31, 2008, a hypothetical instantaneous increase in interest rates of 100 basis points would produce a loss in fair value of our fixed maturity assets of approximately $134.6 million.
As the second element of the asset liability management strategy commencing in 2005, the Company hedged against the risks posed by a rapid and sustained rise in interest rates by entering into a form of derivative transaction known as a Payor Swaption. The effect of this transaction would be to lessen the negative impact on the Insurance Company of a significant increase in interest rates. With Payor Swaptions, the Company should be able to maintain more competitive crediting rates to policyholders when interest rates rise.
The Company has established International Swaps and Derivatives Association “ISDA” Credit Support Agreements with the two counterparties against the 2 Swaptions currently held by Presidential Life. The counterparties are major money center banks that carry credit ratings equal to or higher than Aa3 by Moody's and A+ by S&P. The ISDA Credit Support Agreement requires counterparties to post collateral in the event that the bank credit rating falls below A3 by Moody’s and A- by S&P. These contracts expire in July 2009 and June 2010 at varying strike rates based on the 10-year swap rate. The Company has determined that the Payor Swaptions represent a "non-qualified hedge" and has adopted accounting procedures consistent with the provisions of FAS 133. The aggregate market value of the Payor Swaptions as of December 31, 2008 was $506,640. A variety of factors affect the value of the Payor Swaptions. These include overall Treasury interest rate levels, SWAP spreads, overall market volatility and the length of time remaining before the expiration of a Payor Swaption. These investments are classified on the balance sheet as "Derivative Instruments". Under FAS 133, the value of the Payor Swaptions is recognized at "fair value" (market value), with any resulting change in fair value reflected in the statement of income as a realized loss or gain. The change in market value during 2008 was a loss of $6,498,557. The Company has determined that the average fair value for the 2008 year was $4,557,347.
(2) The difference between the recorded liability of $3,152.4 million, and the total payment obligation amount of $4,675.7 million, is $1,523.3 million and is comprised of (i) future interest to be credited; (ii) the effect of mortality discount for those payments that are life contingent; and (iii) the impact of surrender charges on those contracts that have such charges.
Of the total payment of $4,675.7 million, $3,014.7 million, or 64.5%, is from the Company’s deferred annuity, life, and accident and health business. Determining the timing of these payments involves significant uncertainties, including mortality, morbidity, persistency, investment returns, and the timing of policyholder surrender. Notwithstanding these uncertainties, the table reflects an estimate of the timing of such payments.
On February 17th, 2009, the Corporation retired the remaining $66.5 million of its 7 7/8%, $100 million Senior Note. This was financed through the sale of short-term commercial paper, fixed maturities and an upstream dividend payment from the Insurance Company in January 2009 in the amount of $16 million.
The Company uses the equity method of accounting for investments in limited partnership interests in which it has more than a minor equity interest, or more than a minor influence over the joint ventures and partnership’s operations, but does not have a controlling interest and is not the primary beneficiary. The Company routinely evaluates its limited partnership investments for impairments. The Company considers financial and other information provided by the investee and other known information and inherent risks in the underlying investments in determining whether an impairment has occurred. When an other-than-temporary impairment is deemed to have occurred, the Company records a realized capital loss within net investment income to record the investment at its fair value. Investment income from limited partnerships is recorded based on the Company’s share of earnings reported in the partnership’s most recent audited financial statements and income distributed by the partnerships. Management considers the quarterly financial information received from the limited partnerships to be unreliable or insufficient to record investment income, other than from distributions, on a quarterly basis. Management estimates the classification of cash distributions received between investment income and return of capital based on correspondence from the respective partnerships. The Company adjusts its estimate of investment income recorded during the year to the actual realized gains and other income reported in the limited partnerships’ most recent annual audited financial statements, which are generally received in the second quarter of the subsequent year. As a result, there may be up to a one year reporting lag for recording investment income that is not distributed during the year, which may result in significant adjustments. The Company records its share of net unrealized gains and losses (net of taxes) from the audited financial statements of the limited partnerships. As a result, there may be up to a one year reporting lag for reporting unrealized gains and losses, which may result in significant adjustments to other comprehensive income in 2008. Because it is not practicable to obtain an independent valuation for each limited partnership interest, for purposes of disclosure the market value of a limited partnership interest is estimated at book value based on the most recent available audited financial statements. Due to the significant unobservable inputs in these valuations, the Company includes the total fair value estimate for all of these investments in the amount disclosed in level 3. The failure of the Insurance Company to receive the return of a material portion of its capital investments in limited partnerships, or to achieve historic levels of return on such investments, could have a material adverse effect on the Corporation's financial condition and results of operations.
To demonstrate the sensitivity of our net DAC balance ($122.3 million as of December 31, 2008) relative to our future spreads and expenses, the information below indicates how much the net DAC balance would have changed if the future spread assumption decreased by 30% and if the future expense assumption increased by 30%. We believe that any variation in our expense or spread estimate is likely to fall within these ranges.
For those annuities and supplementary contracts with life contingencies that comprise a portion of future policy benefits ($668 million of reserves), an increase in mortality experience of 1% per year for individual contracts would increase the present value of future benefits by approximately $29 million. We believe that any variation of our mortality estimates is likely to fall within this range.
For traditional life insurance business ($42 million of reserves), establishing reserves requires the use of many assumptions. Due to the number of independent variables inherent in the calculation of these reserves, and because this business is not material to the overall Company results, it is not practical to perform a quantitative analysis on the impact of changes in underlying assumptions. However, the Insurance Company historically has not experienced significant adverse deviations from its assumptions and believes that its assumptions are realistic and produce reserves that are fairly stated in accordance with GAAP.
Income taxes are recorded in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). In accordance with SFAS No. 109, for all years presented we use the asset and liability method to record deferred income taxes. Accordingly, deferred income tax assets and liabilities are recognized that reflect the net tax effect of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, using enacted tax rates. Such temporary differences are primarily due to tax basis of reserves for future policy benefits, deferred acquisition costs, and net operating loss carry forwards. A valuation allowance is applied to deferred tax assets if it is more likely than not that all, or some portion, of the benefits related to the deferred tax assets will not be realized.