Transamerica Advisors Life Insurance Company (“TALIC”, the “Registrant”, the “Company”, “we”, “our”, or “us”) is a wholly owned subsidiary of Transamerica Corporation which is an indirect wholly owned subsidiary of AEGON N.V., a limited liability share company organized under Dutch law. The Company is domiciled in Arkansas.
To understand the valuation methodologies used by third-party pricing services, the Company reviews and monitors their applicable methodology documents. Any changes to their methodologies are noted and reviewed for reasonableness. In addition, the Company performs periodic in-depth reviews of prices received from third-party pricing services. The objective for such reviews is to demonstrate that the Company can corroborate detailed information such as assumptions, inputs and methodologies used in pricing individual securities against documented pricing methodologies. Only third-party pricing services and brokers with a substantial presence in the market and with appropriate experience and expertise are used.
For fixed maturity AFS securities, an OTTI must be recognized in earnings when an entity either: a) has the intent to sell the debt security or b) more likely than not will be required to sell the debt security before its anticipated recovery. If the Company meets either of these criteria, the OTTI is recognized in earnings in an amount equal to the entire difference between the security’s amortized cost basis and its fair value at the balance sheet date. For fixed maturity AFS securities in unrealized loss positions that do not meet these criteria, the Company must analyze its ability to recover the amortized cost by comparing the net present value of projected future cash flows with the amortized cost of the security. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows. If the net present value is less than the amortized cost of the investment, an OTTI is recorded. The OTTI is separated into two pieces: an amount representing the credit loss, where the present value of cash flows expected to be collected is less than the amortized cost basis of the security, and an amount related to all other factors
For the year ended December 31, 2015, the Company recorded an OTTI in income of $1.9 million, with no associated value of business acquired amortization. For the years ended December 31, 2014 and 2013, the Company recorded an OTTI in income of $0.1 million and $0.7 million, respectively, net of value of business acquired amortization.
The Company uses several types of derivatives to manage the capital market risk associated with the GMWB.
The Company uses variance swaps to hedge equity risk. During 2013, the Company also entered into total return swaps that are based on the S&P. The Company recognizes gains (losses) from the change in fair value of the variance swaps and total return swaps in net derivative gains (losses) in the Statements of Income.
During the fourth quarter of 2014, the Company began writing credit default swaps enabling the Company to change the risk profile of the assets in the portfolio by enhancing the overall yield. As a writer of credit default swaps, the Company actively monitors the underlying asset, being careful to note any events (default or similar credit event) that would require the Company to perform on the credit default swap. If such events would take place, the Company has recourse provisions from the proceeds of the bankruptcy settlement of the underlying entity or by the sale of the underlying bond. In the event the representative issuer defaults on its debt obligation referenced in the contract, a payment equal to the notional amount of the contract will be made by the Company and recognized in net derivative gains (losses) in the Statement of Income.
VOBA reflects the estimated fair value of in force contracts acquired and represents the portion of the purchase price that is allocated to the value of the right to receive future cash flows from the insurance and annuity contracts in force at the acquisition date. VOBA is based on actuarially determined projections, for each block of business, of future policy and contract charges, premiums, mortality, policyholder behavior, Separate Account performance, operating expenses, investment returns, and other factors. Actual experience on the purchased business may vary from these projections. If estimated gross profits or premiums differ from expectations, the amortization of VOBA is adjusted to reflect actual experience. The long-term growth rate assumption for the amortization of VOBA was 8% at December 31, 2015 and 2014. At December 31, 2015 and 2014, the Company’s VOBA asset was $259.5 million and $268.1 million, respectively. For the years ended December 31, 2015, 2014, and 2013, the favorable impact to pre-tax net income related to VOBA unlocking was $0.1 million, $6.6 million, and $12.7 million, respectively. There were no impairment charges in 2015, 2014, and 2013.
DAC for variable annuities is amortized with interest over the anticipated lives of the insurance contracts in relation to the present values of estimated future gross profits from asset-based fees, guaranteed benefit rider fees, contract fees, and surrender charges, less a provision for guaranteed death and living benefit expenses, policy maintenance expenses, and non-capitalized commissions. The long-term equity growth rate assumption for the amortization of DAC was 8% at December 31, 2015 and 2014. Future gross profit estimates are subject to periodic evaluation with necessary revisions applied against amortization to date. The impact of revisions and assumptions to estimates on cumulative amortization is recorded as a charge or credit to current operations, commonly referred to as “unlocking”. Changes in assumptions can have a significant impact on the amount of DAC reported and the related amortization patterns. In general, increases in the estimated Separate Accounts return and decreases in surrender or mortality assumptions increase the expected future profitability of the underlying business and may lower the rate of DAC amortization. Conversely, decreases in the estimated Separate Accounts returns and increases in surrender or mortality assumptions reduce the expected future profitability of the underlying business and may increase the rate of DAC amortization.
For the years ended December 31, 2015, 2014, and 2013, there was a favorable (unfavorable) impact to pre-tax net income related to DAC unlocking of ($1.5) million, $2.4 million, and ($2.2) million, respectively. See Note 4 to the Financial Statements for further discussion.
The expense and the subsequent capitalization and amortization (accretion) are recorded as a component of policy benefits in the statements of income. At December 31, 2015 and 2014, variable annuities accounted for the Company’s entire DSI asset of $8.5 million and $9.4 million, respectively. For the years ended December 31, 2015, 2014, and 2013, there was a favorable (unfavorable) impact to pre-tax income related to unlocking of ($0.3) million, $0.9 million, and ($0.3) million, respectively. See Note 4 to the Financial Statements for a further discussion.
At December 31, 2015 and 2014, GMDB and GMIB liabilities included within future policy benefits were as follows:
The Company regularly evaluates the assumptions used to establish these liabilities, as well as actual experience, and adjusts GMDB and GMIB liabilities with a related charge or credit to earnings (“unlocking”) if actual experience or evidence suggests that the assumptions should be revised. For the years ended December 31, 2015, 2014 and 2013, the favorable (unfavorable) impact to pre-tax income related to GMDB and GMIB unlocking was ($32.0) million, $16.7 million, and $35.9 million, respectively.
At December 31, 2015 and 2014, GMWB liability and GMIB reinsurance asset were as follows:
At December 31, 2015 and 2014, the future policy benefits for the SALB liability were $0.5 million.
At December 31, 2015, the Company’s assets were $9.2 billion or $1 billion less than the $10.2 billion in assets at December 31, 2014. Assets excluding Separate Accounts assets decreased $161.8 million. Separate Accounts assets, which represent 65% of total assets, decreased $830.7 million to $5.9 billion. Changes in Separate Accounts assets were as follows:
During 2015, 2014 and 2013, fixed contract owner deposits were $0.2 million. During 2015, 2014 and 2013, fixed contract owner withdrawals were $82.6 million, $71.8 million, and $92.1 million, respectively.
The amortized cost/cost and estimated fair value of investments in fixed maturity and equity securities at December 31, 2015 and 2014 were:
(a) Subsequent unrealized gains (losses ) on OTTI securities are included in OCI-OTTI.
Five issuers represent more than 5% of the total unrealized loss position, comprised of below investment grade corporate bonds with $8.7 million of unrealized losses.
The Company’s $17.3 million of gross unrealized losses within the industrial sector has a fair value of $119.4 million. The Industrial sector is further subdivided into various sub-sectors with a majority of its gross unrealized loss made up of issuers within the energy, basic industry and communications sub-sectors. Issuers within the energy sub-sector had total unrealized losses of $10.6 million, which relates to declining oil and natural gas prices during 2015. The basic industry sub-sector had total unrealized losses of $2.8 million, relating primarily to poor results within the metals and mining industry. Fundamentals have been negatively impacted by falling prices for base metals, ferrous metals, precious metals, iron ore and coal. The communications sub-sector had total unrealized losses of $1.6 million, as merger and acquisition speculation and activity created volatility throughout the year.
The amortized cost and estimated fair value of fixed maturity AFS securities at December 31, 2015 and 2014 by rating agency equivalent were:
The following table provides a summary of the securities under reverse repurchase agreements for the years ended at December 31:
The investment performances of the underlying U.S. equity-based mutual funds supporting the Company’s variable products do not replicate the returns of any specific U.S. equity market index. However, investment performance will generally increase or decrease with corresponding increases or decreases of the overall U.S. equity market. There are several standard indices published on a daily basis that measure performance of selected components of the U.S. equity market. Examples include the Dow Jones Industrial Average (“Dow”), the NASDAQ Composite Index (“NASDAQ”) and the S&P. The Dow, NASDAQ, and S&P ended 2015 with increases (decreases) of (2%), 6% and (1%), respectively, from 2014. The Dow, NASDAQ and S&P ended 2014 with increases of 8%, 13% and 11%, respectively, from 2013.
At December 31, 2015 and 2014, the Company had 9,379 and 10,197 life insurance and annuity contracts in force with interest rate guarantees, respectively. The estimated average rate of interest credited on behalf of contract owners was 3.36% and 3.37% during 2015 and 2014, respectively. Total invested assets supporting these liabilities with interest rate guarantees had an estimated average effective yield of 5.3% and 5.2% during 2015 and 2014, respectively.
During 2015, the Company received a capital contribution from AUSA of $68.5 million and the Company paid a $100.0 return of capital to AUSA. During 2014, the Company received a capital contribution from AUSA of $179.0 million and the Company paid a $100.0 million cash dividend to AUSA.
To maintain the ability to issue annuity products, the Company must meet or exceed the statutory capital and surplus requirements of the insurance departments of the states in which it conducts business. Statutory accounting principles differ from GAAP in multiple major respects. Under statutory accounting principles, the acquisition costs of new business are charged to expense, while under GAAP they are amortized over a period of time. Under statutory accounting principles, the required additions to statutory reserves are calculated under different rules than under GAAP. In addition, the valuation of investments and accounting for deferred taxes differs between the two bases of accounting.
The following table summarizes the Company’s obligations to policyholders at December 31, 2015:
The costs associated with acquiring contract owner deposits (DAC) are amortized based on the estimated gross profits for a group of contracts, as noted in the Critical Accounting Policies and Estimates section above. Insurance expenses and taxes reported in the Statements of Income are net of amounts deferred. In addition, the Company incurs expenses associated with the maintenance of in force contracts.
For the years ended December 31, 2015 and 2014, the Company recorded net income of $13.7 million and 33.5 million, respectively. The decrease in net earnings during 2015 as compared to 2014 was primarily due to higher policy benefits expense and increase in VOBA and DAC amortization. The increase in expenses was partially offset by lower derivative losses.
(b) The Company had a large notional amount of short positions in total return swaps in 2015, and the mixed performance in the S&P offset some of the losses. The total return swap losses in 2014 were the result of short exposure to the S&P which had an 11% increase during 2014.
Policy benefits increased $27.3 million to $105.2 during 2015 as compared to 2014. The following table provides the changes in policy benefits by type:
(b) The decrease in annuity benefit expense was primarily driven by a change in reserves in 2015 when compared to 2014, the decrease in expense was partially offset by a financial statement hedge mismatch between periods.
Policy charge revenue increased $0.9 million to $177.9 million during 2014, as compared to $177.0 million in 2013. The following table provides the changes in policy charge revenue by type for each respective period:
Net derivative losses decreased $183.8 million to ($76.1) million during 2014 as compared to ($259.9) million in 2013. The following table provides the changes in net derivative gains (losses) by type:
(d) During 2014 the Company entered into credit default swaps and the losses were driven by widening credit spreads at the time of sale.
Insurance expenses and taxes decreased $5.7 million in 2014 as compared to 2013. The following table provides the changes in insurance expenses and taxes for each respective period:
The Company is not dependent upon any single customer, and no single customer accounted for more than 10% of its revenues during 2015, 2014, or 2013.