The Corporation owns, and the Insurance Company leases and is the sole occupant of, two adjacent office buildings located at 69 Lydecker Street and 10 North Broadway in Nyack, New York. These buildings contain an aggregate of approximately 45,000 square feet of usable office space.
Management believes that the Corporation’s present facilities are adequate for its anticipated needs.
The Insurance Company is engaged in the sale of insurance products with three primary lines of business: individual annuities, individual life insurance, and group accident and health. Revenues are derived primarily from premiums received from the sale of annuity contracts, life and accident and health products, and gains (or losses) from our investment portfolio.
Profitability in the Insurance Company’s individual annuities, individual life insurance and group accident and health depends largely on the size of its inforce book of business, the adequacy of product pricing and underwriting discipline, and the efficiency of its claim and expense management.
Unless specifically stated otherwise, all references to 2009, 2008 and 2007 refer to our fiscal years ended, or the dates, as the context requires, December 31, 2009, December 31, 2008 and December 31, 2007, 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.
The following table summarizes the Insurance Company's investment results for the periods indicated, as determined in accordance with GAAP.
Net investment income is net of investment expenses and excludes capital gains and losses and provision for income taxes.
Net investment income divided by average cash and total invested assets (including accrued investment income) minus net investment income.
The Insurance Company derives a predominant portion of its total revenues from investment income. The Insurance Company manages most of its investments internally. All investments made on behalf of the Insurance Company are governed by the Statement of Investment Policy established and approved by the Finance and Investment Committee and the Board of Directors of the Insurance Company and the Corporation and by qualitative and quantitative limits prescribed by applicable insurance laws and regulations. The Finance and Investment Committee meets regularly to set and review investment policy and to approve current investment plans. The actions of the Finance and Investment Committees are subject to review and approval by the Board of Directors of the Insurance Company and Corporation. The Insurance Company's Statement of Investment Policy must comply with NYSID regulations and the regulations of other applicable regulatory bodies.
As of December 31, 2009, 8.1% of the Company’s invested assets (approximately $293.1 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 contracts 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 2009, the Company was been able to satisfy all of its cash needs, except for the Company’s retirement of the Senior Notes, without any portfolio sales from the fixed income portfolio.
The following table presents the amortized cost and gross unrealized losses for fixed maturities and common stock where the estimated fair value had declined and remained below amortized cost at December 31, 2009:
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, 2009.
The 2009 net unrealized loss was $481,750 on a fair value of $1,841,000 on the U.S. Treasuries.
The predominant investment category for the Company’s investments is the “Corporate Bond” Category (including Public Utilities and Taxable Municipal Bonds), which totaled $2.6 billion at December 31, 2009. Municipal bonds had a greater-than-12-month loss of $3.0 million on a fair value of $8.8 million. Approximately $2.1 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 2008. The bonds are current on principal and interest payments from the cash flow provided by the garage and are rated “NAIC 2” (investment-grade) by the SVO Office of the NAIC.
At the time of the B+ rating, publications of A.M. Best indicated that the “B+” rating was assigned to those companies that, in A.M. Best's opinion, have achieved a very good overall performance when compared to the norms of the insurance industry and that generally have demonstrated a good ability to meet their respective policyholder and other contractual obligations over a long period of time. The B+ rating is within A.M Best’s “Secure” classification, along with A++, A+, A, A-, and B++ ratings.
In February 2009, the Company repaid its corporate debt in full. The senior notes had been rated by Standard and Poor’s (S&P) and Moody’s at the time of repayment at B+ (positive) and B1 (positive), respectively. In consideration of this repayment the Company decided that it was no longer necessary to retain the rating services and ongoing credit surveillance by S&P and Moody’s. Due to the repayment of the corporate debt, Fitch Ratings also withdrew its evaluation of the Company. The Company will maintain the Financial Strength Rating services of A.M. Best & Company.
Total annuity considerations and life insurance premiums increased to approximately $55.6 million in 2009 from approximately $46.8 million in 2008, an increase of approximately 18.6% and increased from approximately $40.4 million in 2007 to $46.8 million in 2008, an increase of approximately 15.9%. Life insurance premiums were $16.1 million, $16.2 million and $15.6 million in 2009, 2008 and 2007 respectively. Annuity considerations increased to approximately $39.4 million in 2009 from approximately $30.7 million in 2008, an increase of approximately $8.7 million, and increased from approximately $24.8 million in 2007 to $30.7 million in 2008, an increase of approximately $5.9 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 $185.9 million, $143.2 million and $136.5 million in 2009, 2008 and 2007, respectively.
Net investment income totaled $184.3 million in 2009, as compared to $261.7 million in 2008 and $294.9 million in 2007. This represents a 29.6% decrease comparing 2009 to 2008 and an 11.2% decrease comparing 2008 to 2007. The decrease in 2009 was largely due to the following: 1) losses on our limited partnership portfolio and 2) lower returns on the short-term commercial paper portfolio.
General Expenses and Taxes, Commissions, Costs Related to Consent Revocation Solicitation
For the reasons discussed above, income (loss) before income taxes amounted to approximately $(3.1 million) in 2009, as compared to approximately $16.9 million in 2008 and approximately $96.7 million in 2007.
For the reasons discussed above, the Corporation had net income of approximately $2.2 million in 2009, as compared to $18.6 million in 2008 and $63.7 million in 2007.
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 (after tax, 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 $24.8 million, $35.7 million and $32 million in dividends to the Corporation in fiscal 2009, 2008 and 2007, respectively. In 2010, the Insurance Company would be permitted to pay a stockholder dividend of $23 million to the Corporation without prior regulatory clearance. On a going forward basis, there can be no assurance that the Insurance Company will have sufficient statutory earnings 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 2009, including the payment of dividends, and anticipates being able to meet those needs in 2010 and the foreseeable future.
Additional restrictions by the NYSID on dividends that could be up streamed from the Insurance Company.
Raising capital under the current financial environment will be challenging and expensive. Several options are available including, but not limited to, the following;
Under GAAP, net cash provided by the Corporation’s operating activities was approximately $12.0 million, $15.6 million and $21.1 million in 2009, 2008 and 2007, respectively. Net cash provided by the Corporation's investing activities (principally reflecting investments purchased, called, redeemed or sold) was approximately $55.0 million, $187.9 million and $416.4 million in 2009, 2008 and 2007, respectively.
For purposes of the Corporation's consolidated statements of cash flows, financing activities relate primarily to sales and surrenders of the Insurance Company's annuity and universal life insurance products. The payment of dividends by the Corporation to its stockholders is also considered to be a financing activity. Net cash used in the Company's financing activities amounted to approximately $62.1 million, $203.3 million and $453.7 million in 2009, 2008 and 2007, respectively. These fluctuations primarily are attributable to changes in policyholder account balances as a result of surrenders, sales and interest earned by the policyholders. The repayment of the Corporate debt was also a primarily use of cash in 2009 and 2008.
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 56.3%, 56.4% and 56.8% of the Insurance Company's deferred annuity contracts in force (measured by reserves) as of December 31, 2009, 2008, and 2007 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, 2009, 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 $156.2 million. Conversely, a hypothetical instantaneous decrease in interest rates of 100 basis points would produce a gain in fair value of our fixed maturity assets of approximately $172.1 million.
The Company has established International Swaps and Derivatives Association “ISDA” Credit Support Agreements with six counterparties. 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. and the Company currently has one contract which expires in June 2010. The Company has determined that the Payor Swaptions represent a "non-qualified hedge". The market value of the Payor Swaption as of December 31, 2009 was $389,970. 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". 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 2009 was a loss of $116,670. The Company has determined that the average fair value for the 2009 year was $1,544,642.
See Note 1, Item N, “Notes to the Consolidated Financial Statements” for a full description of the new accounting pronouncements including the respective dates of adoption and the effects on the results of operations and financial condition.
To determine the recovery period of a fixed maturity security, we consider the facts and circumstances surrounding the underlying issuer including, but not limited to, the following:
For all fixed maturities securities evaluated for OTTI, we consider the timing and amount of the cash flows. When evaluating whether our collateralized mortgage obligations (“CMOs”) are other-than-temporarily impaired, we also examine the characteristics of the underlying collateral, such as delinquency, loss severities and default rates, the quality of the underlying borrower, the type of collateral in the pool, the vintage year of the collateral, subordination levels within the structure of the collateral pool, the quality of any credit guarantors, the susceptibility to variability of prepayments, our intent to sell the security and whether it is more likely than not we will be required to sell the security before the recovery of its amortized cost basis. In assessing corporate fixed maturities securities for OTTI, we evaluate the ability of the issuer to meet its debt obligations and the value of the company or specific collateral securing the debt position including the fundamentals of the issuer to determine what we would recover if they were to file bankruptcy versus the price at which the market is trading; fundamentals of the industry in which the issuer operates; expectations regarding defaults and recovery rates; and changes to the rating of the security by a rating agency.
To demonstrate the sensitivity of our net DAC balance ($76.8 million as of December 31, 2009) 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 policies and contracts where the reserve is reported as the account balance ($2,445.0 million), a change in expected experience would have no effect on the reserve.