This discussion reviews our financial condition and results of operations, including our liquidity and capital resources, for the periods covered by the audited statutory-basis financial statements included in this report. Historical information is presented and discussed and, where appropriate, factors that may affect future financial performance are also identified and discussed. Certain statements included in this section may be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995.
The majority of the services required for our business operations are provided by TIAA and certain of its direct and indirect wholly-owned subsidiaries pursuant to various service, investment management, administrative, selling and distribution agreements. Under these agreements, we reimburse TIAA (and TIAA reimburses its applicable subsidiaries) for certain costs associated with providing these services. We believe that such services are efficiently performed in this manner to meet our operational needs and that we, thereby, minimize duplication of costs among TIAA and its subsidiaries. We do not currently have any employees.
For 2008, we recognized a net loss of $61.5 million compared to net income of $10.1 million for 2007. Our operations were negatively affected by a $5.3 million decrease in our net investment income, resulting from declining interest rates and a slightly reduced level of invested assets. In addition, we recognized approximately $73.0 million of net realized losses during 2008, primarily due to other-than-temporary impairments within our investment portfolio. At December 31, 2008, total assets were approximately $2,917.6 million, and statutory capital and surplus was approximately $280.3 million.
We provide financial services through the production, sale, distribution and administration of individual annuities, life insurance and funding agreements. We operate three business segments, each distinguished by broad product categories and each having a strategic focus. Our segments are Individual Annuities, Life Insurance and Funding Agreements. Premiums and deposits by segment for 2008, 2007 and 2006 are set forth in the following table (in millions):
* The deposits that we receive on funding agreements are recorded as liabilities and are not treated as premiums or as revenue under statutory accounting principles. These liabilities are included in Reserves for Life and Health, Annuities and Deposit-type Contracts.
Individual Annuities. We market a variety of individual after-tax annuity products. We distribute our annuity products through non-commissioned agents appointed by us. Those agents selling variable annuities and/or modified guaranteed annuities are also registered representatives of our affiliated broker-dealers. We offer both flexible premium deferred annuities and single premium immediate annuities.
Our variable annuities offer contract owners the opportunity to invest in various investment subaccounts of the separate accounts, based on the contract owners’ investment allocation decisions, while some of the variable annuities also offer a fixed account option through our general account, which guarantees principal and a minimum interest rate. The separate accounts that support our variable annuities are registered with the SEC as unit investment trusts, and their assets are invested in corresponding portfolios of the TIAA-CREF Life Funds or in other, non-proprietary funds. Our variable annuities do not offer any living benefit riders. We are, therefore, not exposed to the liabilities associated with these riders. The reserve for Guaranteed Minimum Death Benefit (“GMDB”) business is calculated on a seriatim basis in accordance with Actuarial Guideline 34, Variable Annuity Minimum Guaranteed Death Benefit Reserves and New York State Regulation 151, as described in Note 15 to the “Statutory-Basis Financial Statements,” included herein.
Premiums, which include internal tax-free exchanges, were lower for 2008 than 2007 primarily because the dollar value of internal tax-free exchanges decreased significantly from the prior year. With a more competitive portfolio rate on one of our variable annuity products with fixed account options, the incentive to move accumulations from this product to another variable annuity without fixed account options was no longer as advantageous. Excluding internal tax-free exchanges, premiums for 2008 were $16.8 million, or 17.1%, higher than 2007.
The liability for our funding agreement business increased by $44.3 million, or 5.5%, from $809.0 million as of December 31, 2007, to $853.3 million as of December 31, 2008. This increase was primarily driven by deposits of $172.7 million and investments earnings of $29.3 million exceeding withdrawals of $157.7 million during 2008. The withdrawals continued to be impacted by the run-off of the funding agreements associated with three states which terminated their contracts for new deposits.
The various trends that could impact our future results of operations and financial condition include, but are not limited to, general economic conditions, including the interest rate environment and equity market returns, changes in those general economic conditions and changes in life expectancy trends, which could impact our Individual Annuity and Life Insurance businesses. Our future business results could also be affected by the following uncertainties:
Substantial regulation of the insurance and annuity industry may adversely affect our business.
A downgrade in TIAA’s ratings from the nationally recognized rating agencies could materially and adversely affect many aspects of our business.
Our ability to maintain our competitive cost structure is dependent upon us generating a sufficient level of new sales and achieving our projected persistency of existing business.
Interest rate fluctuations and market volatility may affect sales of our products and the profitability of our businesses.
We could be forced to sell investments at a loss to pay contract benefits, cover contract owner withdrawals, or fund maturities.
Our reinsurers could fail to meet assumed obligations, significantly increase their reinsurance rates, or be subject to adverse developments that could adversely affect our business, our operating results or our organizational reputation.
Our computer systems (or those of our service providers) may fail or their security may be compromised, which could damage our business and adversely affect our financial condition and results of operations.
accounting policies under different conditions could produce results that are significantly different. Additionally, actual amounts may differ from our estimates. A discussion of the statutory-basis of presentation and the business factors that affect our critical accounting policies is presented below.
Because of the types of products that we issue from our general account, we primarily invest in fixed income investments; our general account investment portfolio primarily consists of bonds, preferred stocks, mortgage loans secured by commercial real estate, cash, cash equivalents, short-term investments and other long-term investments. In accordance with NAIC SAP, the majority of our invested assets are carried at amortized cost and, therefore, our investment balances do not generally reflect the investments’ current fair values. At December 31, 2008, $2,130.8 million of the general account’s invested assets was invested in bonds; approximately $43.9 million was invested in preferred stock; approximately $80.8 million was invested in mortgage loans; and the remaining investments were held in cash, cash equivalents, short-term investments and other long-term investments. Our overall general account portfolio quality was very high at December 31, 2008, with approximately 98.1% of our total invested assets classified as investment grade and approximately 1.9% of our portfolio classified as below investment grade.
Our preferred stock portfolio consists primarily of high quality publicly-traded and non-publicly traded corporate securities that meet the definition of a preferred stock investment or are hybrid securities, as defined by the NAIC.
The NAIC Securities Valuation Office (“SVO”) rates investment credit risk of bonds and preferred stocks based upon the issuer’s credit quality. NAIC ratings designations range from 1 through 6. An NAIC designation of 1 denotes obligations of the highest quality in which credit risk is at its lowest and the issuer’s credit profile is stable; an NAIC designation of 6 is assigned to obligations that are in, or near, default. Classes 1 and 2 are considered to be investment grade and Classes 3 through 6 are non-investment grade. The vast majority of our bond and preferred stock portfolios, including our privately-placed securities, are investment grade.
(c) Whether the issuer is current on contractually-obligated interest and principal payments.
(f) The potential for impairments in an industry sector or sub-sector.
Asset Valuation Reserve. The Asset Valuation Reserve (“AVR”), which covers all invested asset classes, is a reserve required by NAIC SAP to provide for potential future credit and equity losses related to our investment portfolio. Reserve components of the AVR are maintained for each of our asset classes. Realized and unrealized credit and equity capital gains and losses, net of capital gains taxes, are credited to or charged against the related components of the AVR. Statutory formulae determine the required reserve components, and the formulae are primarily based on NAIC-determined factors applied to asset classes. Insurance companies may also establish additional reserves for any AVR component, at management’s discretion; however, the ultimate balance cannot exceed the statutory maximum reserve for that component. We did not make any voluntary contributions to the AVR in 2008, 2007 or 2006. The net change in the AVR is reported as a change in surplus in our Statutory-Basis Statements of Changes in Capital and Surplus; the net realized capital gains and losses that are credited to or charged against the AVR are also a component of our Statutory-Basis Statements of Operations.
Interest Maintenance Reserve. The Interest Maintenance Reserve (“IMR”) is a formulaic reserve required by NAIC SAP, which accumulates realized interest rate-related capital gains and losses, as defined by NAIC SAP, on sales of fixed income investments. Such capital gains and losses are recognized as a reserve liability and are amortized out of the IMR, under the grouped method of amortization, as an adjustment to our net investment income over the remaining lives of the assets sold.
Separate Account Assets and Liabilities. Separate accounts are established in conformity with insurance laws, and the separate account assets are carried at fair value and are segregated from our general account. Separate accounts are maintained for the benefit of separate account holders. Seed money investments that remain in the separate accounts, which are included in separate account assets in the accompanying statutory-basis balance sheets, are stated at fair value. Separate account liabilities are equal to separate account assets, net of any general account seed money investments.
Income Taxes. We file a consolidated federal income tax return with our parent, TIAA, and its affiliates. The consolidated group has entered into a tax-sharing agreement that follows the current reimbursement method, whereby members of the group will generally be reimbursed for their losses on a pro-rata basis by other members of the group to the extent that they have taxable income, subject to the limitations imposed under the IRC.
The consolidated group is subject to the domestic federal statutory rate of 35%. Our effective federal tax rates for the periods presented differ from the statutory rate based on adjustments from statutory to tax basis reporting. Refer to Note 13 to the “Statutory-Basis Financial Statements,” included herein, for additional information.
Year Ended December 31, 2008, Compared to Year Ended December 31, 2007
The individual components of net investment income are presented in the table below (in millions, except percentages):
Year Ended December 31, 2007, Compared to Year Ended December 31, 2006
The following table sets forth our statutory-basis statements of operations for the periods indicated (in millions, except percentages):
Premium Income. Total premiums and other considerations totaled $171.0 million for 2007 compared to $138.6 million for 2006 resulting in an increase of $32.4 million, or 23.4%.
Life insurance premiums increased $7.0 million in 2007 compared to 2006. The $7.0 million increase was primarily due to our introduction of a new variable universal life product in 2007.
Net Investment Income. Net investment income totaled $128.5 million for the year ended December 31, 2007, compared to $141.2 million for the year ended December 31, 2006, resulting in a decrease of $12.7 million, or 9.0%. Investment income declined on our bond and mortgage loan portfolios, only partially offset by an increase in income earned on preferred stocks and on cash, cash equivalents and short-term investments. The decline in net investment income in 2007 was primarily due to a decline in average invested assets, which decreased from approximately $2.7 billion as of December 31, 2006 to approximately $2.5 billion as of December 2007. The decline in average invested assets was primarily caused by continued withdrawals from one of our fixed annuity products.
Net Transfers to Separate Accounts. Net transfers to separate accounts of $97.5 million for 2007, compared to $66.2 million for 2006, resulted in an increase of $31.3 million, primarily due to $32.0 million in increased premium activity from one of our variable annuity products.
The following table sets forth our statutory-basis statements of admitted assets, liabilities and capital and surplus (in millions, except percentages):
The table below sets forth the NAIC Securities Valuation Office (“SVO”) credit quality ratings for our bond portfolio (in millions, except percentages):
Mortgages. Mortgages decreased $6.3 million, or 7.2%, to $80.8 million at December 31, 2008, from $87.1 million at December 31, 2007. There were no new acquisitions or impairments in the mortgage loan portfolio during 2008. The decrease was primarily the result of the maturity of one mortgage during the second quarter of 2008, of $4.8 million, and scheduled principal payments of $1.5 million.
The following table sets forth our mortgage loan portfolio by property type (in millions):
The following table sets forth our mortgage loan portfolio by geographic location (in millions):
Cash, Cash Equivalents and Short-Term Investments. These investments totaled $105.0 million as of December 31, 2008, compared to $61.6 million as of December 31, 2007, an increase of $43.4 million, or 70.5%. The increase in cash, cash equivalents and short-term investments was driven by a combination of higher maturities of securities and restrained investment activity. During the fourth quarter of 2008, we made the tactical decision to maintain increased liquidity in response to extremely high market volatility and to mitigate the potential for increased and/or unexpected liquidations/redemptions.
Total Liabilities. Total liabilities of $2,637.3 million as of December 31, 2008, compared to $2,783.3 million as of December 31, 2007, resulted in a decrease of $146.0 million, or 5.2%. This decrease was due to a decline in separate account liabilities of $200.7 million offset by an increase in general account liabilities of $54.7 million. The decline in separate account liabilities resulted primarily from negative performance in the equity markets during 2008. The increase in general account liabilities was primarily caused by an increase in reserves on individual annuity and individual life contracts.
Policy and Contract Reserves. Policy and contract reserves of $2,125.1 million as of December 31, 2008, compared to $2,043.7 million as of December 31, 2007, increased $81.4 million, primarily due to increases in policyholder reserves of $36.7 million and deposit-type contract liabilities of $44.6 million. The $36.7 million increase in policyholder reserves was driven by interest credited on reserves partially offset by policyholder benefit payments exceeding net premiums. The $44.6 million increase in deposit-type liabilities was driven by deposits and investment earnings exceeding redemptions during 2008.
We have a financial support agreement with TIAA, and, under this agreement, TIAA will provide financial support so that we will have the greater of (a) capital and surplus of $250.0 million, (b) the amount of capital and surplus necessary to maintain our capital and surplus at a level not less than 150% of the NAIC Risk Based Capital model or (c) such other amount as necessary to maintain our financial strength rating at least the same as TIAA’s rating at all times. This agreement is not an evidence of indebtedness or an obligation or liability of TIAA and does not provide any contract owner with recourse to TIAA. On March 17, 2009, TIAA made a $70 million capital contribution to us in accordance with the financial support agreement.
Our total adjusted capital declined by $61.2 million from $342.4 million at December 31, 2007, to $281.2 million at December 31, 2008. The decrease was primarily due to other-than-temporary impairment write-downs on our bond and preferred stock portfolios, which contributed to our net loss of $61.5 million.
Our financial strength (i.e., claims-paying ability) ratings are AAA (Extremely Strong) from Standard and Poor’s, A++ (Superior) from A.M. Best Company, AAA (Exceptionally Strong) from Fitch Ratings and Aaa (Excellent) from Moody’s Investors Service. Each rating agency independently assigns a rating based on its own independent review and takes into account a variety of factors, which are subject to change, in making its decision. Accordingly, there can be no assurance of the ratings that will be afforded to us in the future. These ratings do not apply to the unit investment trust separate accounts because the underlying assets have been allocated to specific separate account liabilities and generally are not available to fund the needs of our general account.
A significant portion of our general account investments consist of investment grade publicly-traded bonds, which can be readily converted to cash. We carefully review our liquidity position on an ongoing basis.
The following table illustrates our cash flows provided by or used in operating, investing and financing activities for the following periods (in millions, except percentages):
Net cash used by investments increased $143.9 million to net cash used of $52.2 million for 2008 from net cash provided of $91.7 million for 2007. The increase in cash used by investments primarily resulted from net increases in purchases of investments of $154.6 million and net miscellaneous applications of $1.3 million partially offset by a net increase in proceeds from long-term investments sold, matured or repaid of $12.0 million. The decrease from 2006 to 2007 was primarily due to increases in acquisitions of preferred stock and mortgage loans.
The level of inflation during the periods covered by the statutory-basis financial statements included in this prospectus has not had a significant impact on our revenues, expenses, or net income (loss).
As of December 31, 2008, we do not have any current or future contractual obligations related to long-term debt, capital leases, operating leases or purchase obligations. The table below sets forth our estimated future contractual obligations as of December 31, 2008 related to contract owner, policyholder and funding agreement obligations (in millions):
The estimated due dates for our estimated contractual obligations are based on various assumptions, including mortality and lapse assumptions of the individual annuity and life insurance lines of business, using historical experience, which we use for asset/liability modeling. These estimated obligations begin with our actual general account balance sheet values and include interest expected to be credited during the remaining estimated periods; due to the significance of the assumptions used, the amounts presented could materially differ from actual future results. (Separate account liabilities are legally separated from the general account, and are expected to be fully funded by the separate account assets.) Cash flows from the general account’s investments are anticipated to fully fund the general account’s obligations.
The NAIC promulgates Statutory Accounting Principles primarily through the issuance of Statements of Statutory Accounting Principles (SSAPs). See “Application of Accounting Pronouncements” in Note 2 of the audited statutory-basis financial statements included in Part II, Item 8 of this report and Risk Factors included in Part I, Item 1A of this report.
We have audited the accompanying statutory-basis statements of admitted assets, liabilities and capital and surplus of TIAA-CREF Life Insurance Company (the “Company”) as of December 31, 2008 and 2007, and the related statutory-basis statements of operations, of changes in capital and surplus, and of cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
As described in Note 2 to the financial statements, the Company prepared these financial statements using accounting practices prescribed or permitted by the Insurance Department of the State of New York, which practices differ from accounting principles generally accepted in the United States of America. The effects on the financial statements of the variances between the statutory basis of accounting and accounting principles generally accepted in the United States of America, although not reasonably determinable, are presumed to be material.
In our opinion, because of the effects of the matter discussed in the preceding paragraph, the financial statements referred to above do not present fairly, in conformity with accounting principles generally accepted in the United States of America, the financial position of the Company as of December 31, 2008 and 2007, or the results of its operations or its cash flows for each of the three years in the period ended December 31, 2008.
The Company issues non-qualified annuity contracts with fixed and variable components, fixed and variable universal life contracts, funding agreements, term insurance and single premium immediate annuities.
The Company’s statutory-basis financial statements have been prepared on the basis of statutory accounting principles prescribed or permitted by the New York State Insurance Department (the “Department”); a comprehensive basis of accounting that differs from accounting principles generally accepted in the United States (“GAAP”). The Department requires insurance companies domiciled in the State of New York to prepare their statutory basis financial statements in accordance with the National Association of Insurance Commissioners (“NAIC”) Accounting Practices and Procedures Manual (“NAIC SAP”), subject to any deviation prescribed or permitted by the Department (“New York SAP”).
Accounting Principles Generally Accepted in the United States: The Financial Accounting Standards Board (“FASB”) requires that financial statements that are intended to be in conformity with GAAP follow all applicable authoritative accounting pronouncements. As a result, the Company cannot refer to financial statements prepared in accordance with NAIC SAP and New York SAP as having been prepared in accordance with GAAP. The differences between GAAP and NAIC SAP would have a material effect on the Company’s financial statements and the primary differences can be summarized, as follows.
The asset valuation reserve (“AVR”) is eliminated as a reserve and the credit-related realized gains and losses are reported in the statement of income on a pretax basis as incurred;
Dividends on insurance policies and annuity contracts are accrued as the related earnings emerge from operations rather than being accrued in the year when they are declared;
Certain assets designated as “non-admitted assets” are included in the GAAP balance sheet rather than excluded from assets in the statutory balance sheet;
State taxes are included in the computation of deferred taxes. A deferred tax asset is recorded for the amount of gross deferred tax asset expected to be realized in future years, and a valuation allowance is established for deferred tax assets not realizable, rather than not being included in the deferred income taxes;
Derivatives are generally valued at fair value rather than being accounted for in a manner consistent with the hedged item, even when the derivatives qualify for hedge accounting;
Application of Accounting Pronouncements: For reporting periods beginning on or after January 1, 2009, SSAP 98, Treatment of Cash Flows When Quantifying Changes in Valuation and Impairments, an Amendment of SSAP No. 43-Loan-backed and Structured Securities establishes statutory accounting principles for impairment analysis and subsequent valuation of loan-backed and structured securities. The change resulting from the adoption of this statement shall be accounted for prospectively. No cumulative effect adjustments or application of the new guidance to prior events or periods are required, similar to a change in accounting estimate. The Company elected to early adopt SSAP 98 which resulted in an additional $12,378 thousand of realized losses being recognized at December 31, 2008.
For reporting periods ending on or after December 31, 2007, SSAP No. 97, Investment in Subsidiary, Controlled, and Affiliated Entities, A Replacement of SSAP No. 88, was implemented. The statement establishes statutory accounting principles for investments in subsidiaries, controlled and affiliated entities. SSAP 97 clarified the bases that a company could use to value its equity investment in its investment subsidiaries. SSAP 97 did not have an impact on the Company’s statutory financial statements.
For reporting periods ending December 31, 2007 and thereafter, SSAP No. 96, Settlement Requirements for Intercompany Transactions, An Amendment to SSAP No. 25, became effective. This statement established a statutory aging threshold for admission of loans and advances to related parties outstanding as of the reporting date. The statement requires transactions between related parties to be in the form of a written agreement and must provide for timely settlement of amounts owed, with a specific due date. SSAP 96 did not have an impact on the Company’s statutory financial statements.
For reporting periods beginning after January 1, 2007, SSAP No. 95, Exchanges of Nonmonetary Assets, A Replacement of SSAP No. 28 - Nonmonetary Transactions, was implemented. This statement established statutory accounting principles for nonmonetary transactions and requires that exchanges of nonmonetary assets shall generally be based on the fair value of the assets (or services) involved. The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset is the fair value of the asset surrendered to obtain it, and a gain or loss should be recognized on the exchange. SSAP 95 did not have a significant impact on the Company’s statutory financial statements.
Investments: Publicly traded securities are accounted for as of the date the investments are purchased or sold (trade date). Other investments are recorded on the settlement date. Realized capital gains and losses on investment transactions are accounted for under the specific identification method. A realized loss is recorded when an impairment is considered to be other-than-temporary. An impairment in an investment is considered to have occurred if an event or change in circumstance indicates that the carrying value of the asset may not be recoverable or the receipt of contractual payments of principal and interest may not occur when scheduled. When an impairment has been determined to have occurred, the investment is written down to fair value and a realized loss is recorded. Management considers available evidence to evaluate the potential impairment of its investments.
Cash Equivalents: Cash equivalents are short-term, highly liquid investments with original maturities of three months or less at date of purchase, are stated at amortized cost.
Loan-Backed Securities and Structured Securities: Included within bonds are loan-backed securities. Loan-backed securities and structured securities not in default, are stated at amortized cost. The retrospective approach is used to determine the carrying amount of loan-backed and structured securities. Estimated future cash flows and expected repayment periods are used in calculating amortization for loan-backed and structured securities. The prospective approach is used to determine the carrying amount of interest only securities, securities for which an other than temporary impairment has been recognized, or securities whose expected future cash flows are lower than the expected cash flows estimated at the time of the acquisition. Loan-backed securities and structured securities held for sale are stated at the lower of amortized cost or fair value. Loan-backed securities and structured securities in default are valued at the lower of amortized cost or fair value. Prepayment assumptions for loaned-backed securities and structured securities are obtained from external data services or internal estimates.
Limited Partnerships and Limited Liability Companies: Investments in limited partnerships and limited liability companies are carried at the Company’s percentage of the underlying GAAP equity of the respective entity’s audited financial statements. An unrealized loss is deemed to be other-than-temporary when there is limited ability to recover the loss. A realized loss is recorded for other-than-temporary impairments.
Policy and Contract Reserves: Policy and contract reserves are determined in accordance with standard valuation methods approved by the Department and are computed in accordance with standard actuarial formulae. The reserves established utilize assumptions for interest (at rates ranging from 4.00% to 6.75% and averaging approximately 4.53%), mortality and other risks insured. Such reserves are designed to be sufficient for all contractual benefits guaranteed under policy and contract provisions.
Reserves for deposit-type funds, which do not contain any life contingencies, are equal to deposits received and interest credited to the benefit of contract holders, less withdrawals that represent a return to the contract holders.
The amortized cost and estimated fair values, and the unrealized gains and losses of long-term bonds and preferred stocks at December 31, 2008 and 2007, are shown below (in thousands):
Impairment Review Process: All securities are subjected to the Company’s process for identifying other-than-temporary impairments. The quarterly impairment identification process utilizes, but is not limited to, a screening process based on declines in fair value. The Company writes down securities that it deems to have an other-than-temporary impairment in value in the period the securities are deemed to be impaired, based on management’s case-by-case evaluation of the decline in fair value and prospects for recovery. Management considers a wide range of factors in the impairment evaluation process, including, but not limited to, the following: (a) the extent to which and the length of time the fair value has been below amortized cost; (b) the financial condition and near-term prospects of the issuer; (c) whether the debtor is current on contractually obligated interest and principal payments; (d) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value or repayment; (e) information obtained from regulators and rating agencies; (f) the potential for impairments in an entire industry sector or sub-sector; and (g) the potential for impairments in certain economically-depressed geographic locations. Where an impairment is considered to be other-than-temporary, the Company recognizes a write-down as an investment loss and adjusts the cost basis of the security accordingly. The Company does not change the revised cost basis for subsequent recoveries in value. Once an impairment write-down has been recorded, the Company continues to review the impaired security for appropriate valuation on an ongoing basis.
Unrealized Losses on Bonds and Preferred Stocks: The gross unrealized losses and estimated fair values for securities, by the length of time that individual securities had been in a continuous unrealized loss position for 2008 and 2007 are shown in the table below (in thousands):
For 2008, the categories of securities where the estimated fair value declined and remained below cost for twelve months or greater were concentrated in commercial mortgage-backed securities (46%), asset-backed securities (19%), finance (13%), manufacturing (5%), public utilities (5%), transportation (3%), oil & gas (3%), mining (2%), services (2%) and other securities (2%). The preceding percentages were calculated as a percentage of the gross unrealized loss. The Company holds 26 bonds and 3 preferred stocks where the gross unrealized loss was greater than $1 million at December 31, 2008. These 29 investments represented 69% or $94.5 million in the aggregate of the total unrealized loss of $136.4 million.
For 2007, the categories of securities where the estimated fair value declined and remained below cost for less than twelve months were concentrated in finance (37%), commercial mortgage-backed securities (33%), asset-backed securities (10%), manufacturing (5%), mortgage-backed securities (4%), transportation (4%), public utilities (2%), oil & gas (2%) and other securities (3%). The preceding percentages were calculated as a percentage of the gross unrealized loss. The Company holds 3 bonds where the gross unrealized loss was greater than $1 million at December 31, 2007. These investments represented 18% or $3.9 million in the aggregate of the total unrealized loss of $22.3 million.
For 2007, the categories of securities where the estimated fair value declined and remained below cost for twelve months or greater were concentrated in commercial mortgage-backed securities (24%), finance (24%), mortgage- backed securities (13%), asset-backed securities (12%), public utilities (8%), manufacturing (5%), oil & gas (4%), services (3%), communication (2%), mining (2%), transportation (2%) and other securities (1%). The preceding percentages were calculated as a percentage of the gross unrealized loss. The Company holds 2 bonds where the gross unrealized loss was greater than $1 million at December 31, 2007. These investments represented 12% or $2.4 million in the aggregate of the total unrealized loss of $19.4 million.
Scheduled Maturities of Bonds: The statutory carrying values and estimated fair values of long-term bond investments at December 31, 2008, by contractual maturity, are shown below (in thousands):
Included in the preceding table are NAIC 6 and 6Z long-term bond investments totaling approximately $24,259 thousand of which $4,813 thousand are categorized as one year or less, $12,331 thousand are categorized as due after one year through five years, $4,363 thousand are categorized as due after ten years and $1,751 thousand are categorized as residential mortgage-backed securities and $1,001 thousand are categorized as asset-backed securities.
The Company acquired bonds and stocks through exchanges aggregating $24,463 thousand and $ 0 during the year ended December 31, 2008 and 2007, respectively. When exchanging securities, the Company generally accounts for assets at their fair value or at the book value if lower unless the exchange was as a result of restricted securities under SEC rule 144A exchanged for unrestricted securities, which are accounted for at book value.
For the years ended December 31, 2008 and 2007, the carrying amount of bonds and stocks denominated in foreign currency was $ 0 and $9,395 thousand, respectively.
Debt securities amounting to approximately $8,674 thousand and $8,754 thousand at December 31, 2008 and 2007, respectively, were on deposit with governmental authorities or trustees, as required by law.
At December 31, 2008, 25.5% of the mortgage portfolio was invested in Ohio in the North Central region and approximately 23.2% of the mortgage portfolio was invested in District of Columbia in the South Atlantic region. At December 31, 2007, 23.7% of the mortgage portfolio was invested in Ohio in the North Central region and approximately 21.9% of the mortgage portfolio was invested in District of Columbia in the South Atlantic region.
Scheduled Mortgage Maturities: At December 31, 2008, the contractual maturity schedule of mortgages is shown below (in thousands):
The Company has no mortgages denominated in foreign currency for the years ended December 31, 2008 and 2007.
The Company does not underwrite nor does it hold sub-prime mortgages in the commercial mortgage portfolio and does not have any material indirect exposure from sub-prime lenders who are tenants in buildings that are secured by commercial mortgages.
The Company is a direct wholly-owned insurance subsidiary of TIAA, an insurance company domiciled in the State of New York. TIAA-CREF Life Insurance Agency (“Agency”) is the sole operating subsidiary of TIAA-CREF Life. The Company has no investments in subsidiary, controlled and affiliated entities that exceed 10% of its admitted assets. To conform to the NAIC Annual Statement presentation, the Agency carrying values of $1,077 thousand and $1,046 thousand for December 31, 2008 and 2007, respectively, are reported as other invested assets. The carrying value of Agency was not impaired for the years ended December 31, 2008 or 2007. During 2008 and 2007, there was no net amount due from insurance subsidiaries and affiliates.
Net Investment Income: The components of net investment income were as follows (in thousands):
Reflected in the table above as realized capital losses are write-downs of bonds resulting from impairments that are considered to be other-than-temporary that were $48,451 thousand, $7,643 thousand and $1,324 thousand at December 31, 2008, 2007 and 2006, respectively. Write-downs of preferred stocks resulting from impairments that are considered to be other-than-temporary were $15,778 thousand, $650 thousand and $ 0 at December 31,
Included in the Company’s financial statements are certain financial instruments carried at fair value. Other financial instruments are periodically measured at fair value, such as when impaired, or, for certain bonds and preferred stock when carried at the lower of cost or market.
The Company’s financial assets and liabilities carried at fair value have been classified, for disclosure purposes, based on a hierarchy defined by SFAS 157, Fair Value Measurements. The hierarchy gives the highest ranking to fair values determined using unadjusted quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest ranking to fair values determined using methodologies and models with unobservable inputs (Level 3). An asset’s or a liability’s classification is based on the lowest level input that is significant to its measurement. For example, a Level 3 fair value measurement may include inputs that are both observable (Levels 1 and 2) and unobservable (Level 3). The levels of the fair value hierarchy are as follows:
Level 3-Certain inputs are unobservable (supported by little or no market activity) and significant to the fair value measurement. Unobservable inputs reflect the Company’s best estimate of what hypothetical market participants would use to determine a transaction price for the asset or liability at the reporting date.
Financial assets and liabilities measured at fair value on a recurring basis:
If an independent pricing service is unable to provide the fair value for a security due to insufficient market information, such as for a private placement transaction, the Company will determine the fair value internally using a matrix pricing model. This model estimates fair value using discounted cash flows at a market yield considering the appropriate treasury rate plus a spread. The spread is derived by reference to similar securities, and may be adjusted based on specific characteristics of the security, including inputs that are not readily observable in the market. The Company assesses the significance of unobservable inputs for each security priced internally and classifies that security in Level 2 only if the unobservable inputs are insignificant.
A bond classified as Level 3 on a non-recurring basis consists of a floating rate corporate bond which was priced manually using unobservable inputs.
The aggregate carrying value and estimated fair value of publicly traded and privately placed bonds at December 31 were as follows (in thousands):
Mortgages: The fair values of mortgages were generally determined by discounted cash flow methodology based on coupon rates, maturity provisions and credit assumptions.
Cash, Cash Equivalents, Short-Term Investments and Contract Loans: The carrying values were considered reasonable estimates of fair value.
Derivative Financial Instruments: The fair value of interest rate cap contracts and credit default swap contracts are estimated by external parties and are reviewed internally for reasonableness based on anticipated interest rates, estimated future cash flows, and anticipated credit market conditions. The fair value of foreign currency swap and forward contracts and interest rate swap contracts are estimated internally based on estimated future cash flows, anticipated foreign exchange relationships and anticipated interest rates and such values are reviewed for reasonableness with estimates provided by the Company’s counter-parties.
a cash flow hedge to manage currency risks on investments denominated in foreign currencies. This type of derivative instrument is traded over-the-counter, and the Company is exposed to both market and counter party risk. The changes in the carrying value of foreign currency exchange rates are recognized as unrealized gains or losses. Derivative instruments used in hedging transactions that do not meet or no longer meet the accounting criteria of an effective hedge are accounted for at fair value according to accounting guidance. Net realized losses on foreign currency swap positions for the year ended December 31, 2008 were $3.1 million.
The Company provides mortality and expense guarantees to VA-1 and VLI-1, for which it is compensated. The Company also guarantees that expense charges to VLI-1 participants will never rise above the maximum amount stipulated in the contract.
Information regarding separate accounts of the Company for the years ended December 31 is as follows (in thousands):
The following is a reconciliation of transfers to or (from) the Company to the Separate Accounts (in thousands):
The majority of services for the operation of the Company are provided at cost by TIAA pursuant to a Service Agreement. Expense reimbursement payments under the Service Agreement are made quarterly by TIAA-CREF Life to TIAA based on TIAA’s costs for providing such services. The Company also reimburses TIAA, at cost, on a quarterly basis for certain investment management services, according to the terms of an Investment Management Agreement.
The Company has a financial support agreement with TIAA. Under this agreement, TIAA will provide support so that TIAA-CREF Life will have the greater of (a) capital and surplus of $250 million, (b) the amount of capital and surplus necessary to maintain the Company’s capital and surplus at a level not less than 150% of the NAIC Risk Based Capital model or (c) such other amount as necessary to maintain TIAA-CREF Life’s financial strength rating at least the same as TIAA’s rating at all times. This agreement is not an evidence of indebtedness or an obligation or liability of TIAA and does not provide any creditor of TIAA-CREF Life with recourse to TIAA. The total capital stock owned by and net paid-in-capital received from TIAA is $290 million.
The Company maintains a $100 million unsecured 364-day revolving line of credit with TIAA. As of December 31, 2008, $30 million of this facility was maintained on a committed basis for which the Company paid a commitment fee of 3 basis points on the undrawn committed amount. During 2008, there were 17 draw downs totaling $41 million which were repaid by December 31, 2008. As of December 31, 2008 outstanding principal plus accrued interest was $ 0.
The Company subcontracts administrative services for VA-1 and VLI-1 to TIAA pursuant to an Amended and Restated Service Agreement. Teachers Personal Investor Services, a subsidiary of TIAA-CREF Enterprises, Inc. (“Enterprises”) and TIAA-CREF Individual & Institutional Services, LLC (“Services”), a subsidiary of TIAA, are authorized to distribute contracts for VA-1, VLI-1 and IHA.
The components of TIAA-CREF Life’s net deferred tax asset are as follows (in thousands):
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows (in thousands):
As of December 31, 2008 and 2007, the Company had no net operating loss carry forward for tax purposes.
Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 (“FIN 48”). Fin 48 establishes a minimum threshold for financial statement recognition of the benefits of positions taken in tax returns, and requires certain expanded disclosures. FIN 48 is effective for fiscal years beginning after December 15, 2006, and is to be applied to all open years as of the effective date. Management has evaluated the Company’s tax position under the principles of FIN 48, and does not have to record any uncertain tax benefits as of December 31, 2008 or 2007.
Personal Annuity Select (“PAS”), a deferred annuity, and Funding Agreements (“FA”) represent 93% of the total General Account reserves in the Company. The general account reserves for these products are established using Commissioners Annuity Reserve Valuation Method (“CARVM”) in accordance with the Standard Valuation Law, NY Regulation 151, Actuarial Guideline 33 and Actuarial Guideline 34. In addition, a reserve is maintained in the general account for the PAS’s, the Lifetime Variable Select’s (“LVS”) and the Intelligent Variable
For the product, Lifetime Fixed V, base reserves are calculated in accordance with the CARVM as the greatest present values, at the date of valuation, of all future benefits provided for by the contract on any day of each respective contract year. Reserves are based on the Annuity 2000 Table and interest rates on an issue year basis, varying by benefit type.
For Ordinary Life Insurance (including term plans, universal life and variable universal life), reserves for all policies are calculated in accordance with New York State Insurance Regulation 147 using the 1980 CSO Table or 2001 CSO Table and interest rates of 4.5% and 4.0%. Term conversion reserves are based on TIAA term conversion mortality experience and interest at 4.0%.
Liabilities for incurred but not reported life insurance claims and disability waiver of premium claims are based on historical experience and are set equal to a percentage of paid claims. Reserves for amounts not yet due for incurred but not reported disability waiver of premium claims are a percentage of the total Active Lives Disability Waiver of Premium Reserve.
For retained assets, an accumulation account issued from the proceeds of annuity and life insurance policies, reserves are held equal to the current account balances.
The Tabular Interest has been determined by formula as prescribed by the NAIC. The Tabular Less Actual Reserve Released has been determined by formula as prescribed by the NAIC. The Tabular Cost has been determined by formula as described in the instructions prescribed by the NAIC. For Immediate Annuities not involving life contingencies and Supplementary Contracts not involving life contingencies, for each valuation rate of interest, the tabular interest has been calculated as the product of the valuation rate times the mean liability for the year. For all other funds not involving life contingencies, tabular interest has been calculated as the total interest credited to such funds.
It is the opinion of management that any liabilities which might arise from litigation, state guaranty fund assessments, and other matters, over and above amounts already provided for in the financial statements, are not considered material in relation to the Company’s financial position or the results of its operations.
On March 17, 2009 the Company’s parent, TIAA, made a $70 million capital contribution in accordance with the financial support agreement. See Note 12