The Company monitors these factors continually as key business indicators. The discussion that follows in this Item 7 includes these indicators and presents information useful to an overall understanding of the Company’s business performance in 2011, incorporating required disclosures in accordance with the rules and regulations of the Securities and Exchange Commission.
Economic data has shown mixed signs of improvement and backsliding over the past several quarters generating uncertainty about the direction of the economy at least in the near term. While corporate earnings have pleasantly surprised and interest rates remain at historic lows, the specter of higher inflation continues to be concerning given the acceleration of commodity prices combined with fiscal policies that have greatly depreciated the U.S. dollar. It is also uncertain whether the financial stresses of various countries in the European community will be contained or disrupt the economic expansion in core Europe. One school of thought holds that there is a lagged effect of two years of global stimulative macroeconomic policies yet to occur. At the same time, the compromises to fix the U.S. budget deficit may not be substantial enough to avoid eventual calamity in some future year.
The financial duress in 2008 and 2009 did not have an adverse affect on our annuity line of business. Annuity sales in 2009 increased 106% over the levels attained in 2008. With the green shoots of recovery emerging in 2010, we witnessed annuity sales
The fixed income markets, our primary investment source, have experienced an improvement in fundamental credit quality on the heels of stronger liquidity, improving corporate profitability and modest economic growth. Credit downgrades of fixed income instruments by rating agencies were fairly prevalent during 2008 and 2009. However, credit default rates declined during 2010 and conditions during 2011 remained mostly similar to those in 2010. The Company experienced minimal impairment and degradation of quality in its fixed income holdings during the financial crisis and subsequent recovery. There is no certainty that future events may produce the same success in this regard.
The unprecedented low U. S. Treasury yields combined with tightening credit spreads (difference between bond yields and riskfree interest rates) on fixed maturity securities has produced new challenges in managing Company profitability given the resulting “compression” on interest spreads (difference between the yield on investments and the amounts required to credit on associated policy values). Industry analysts and observers generally agree that a sudden jump in interest rate levels would be harmful to life insurers with interest-sensitive products as it could provide an impetus for abnormal product surrenders and withdrawals at the same time fixed debt securities held by insurers declined in market value. The federal government's burgeoning deficit and initial “quantitative easing” initiatives served to put upward pressure on longer term interest rates. The more recent initiatives announced by the Federal Reserve, referred to as "Operation Twist", have targeted longer term yields in the hopes that lowering this end of the yield curve may prompt economic expansion particularly in the moribund housing sector. It is uncertain what direction and at what pace interest rate movements may occur in the future and what impact, if any, such movements would have on the Company’s business, results of operations, cash flows or financial condition.
Debt securities generated approximately 94.1% of total investment income, excluding derivative gains and losses, in 2011. The Company’s strategy is to invest substantially all of its cash flows in fixed debt securities consistent with its guidelines for credit quality, duration, and diversification. In the wake of two record years in annuity sales, the Company experienced substantial cash flow for investing in debt securities which caused the portfolio to grow from $6.2 billion at December 31, 2009 to $7.4 billion at December 31, 2010 and to nearly $8.2 billion at December 31, 2011. Despite the growth in the debt security portfolio, lower interest rate levels prevailed during 2011 and 2010, as evidenced by long-term U.S. Treasury rates, which combined with tightening spreads of corporate securities over U.S. Treasury rate levels resulted in lower yields on new investment purchases. The yield on debt security purchases to fund insurance operations declined to 4.18% in 2011 and 4.45% in 2010 from 5.92% in 2009.
Although there was more activity in mortgage loan lending in 2011 and 2010, the Company’s new mortgage loan activity has been relatively low by historical standards given the low level of rates and the higher level of risk associated with commercial properties in the current economic environment. Policy loan and other invested asset balances outstanding have remained relatively stable over the past few years.
Other revenues - Other revenues primarily pertain to the Company’s two nursing home operations in Reno, Nevada and San Marcos, Texas. Revenues associated with these operations were $21.8 million, $22.9 million and $15.7 million in 2011, 2010 and 2009, respectively. The San Marcos nursing home began operations during the middle of calendar year 2009 contributing to the revenue growth incurred from 2009 to 2010. Other revenues in 2011 also includes $2.9 million received as net settlement of a lawsuit in which the Company was plaintiff. Other revenues also includes $0.2 million and $1.5 million received during 2011 and 2010, respectively, in relation to investment security lawsuit settlements.
Gains and losses from index options are due to equity market conditions. Index options are intended to act as hedges to match the returns on the product’s underlying reference index and the rise or decline in the index relative to the index level at the time of the option purchase causes option values to likewise rise or decline. As income from index options fluctuates with the underlying index, the contract interest expense to policyholder accounts for the Company’s fixed-indexed products also fluctuates in a similar manner and direction. In 2011, the Company incurred unrealized losses on unexpired options in excess of the realized gains on expiring options thus resulting in an overall derivative loss for the period. In 2010 and 2009, the reference indices increased and the Company recorded an overall gain from index option with a corresponding increase in contract interest expenses.
Equity impairments represent mark-to-market write-downs on various equity holdings. Since the Company’s equity holdings are immaterial individually and in the aggregate, its administrative practice is to impair equity security holdings when market value declines are more than 50% below cost basis.
The mortgage loan valuation write-down in 2010 principally involves a New Orleans, Louisiana property whose value was negatively impacted by Hurricane Katrina. The write-down reflects an adjustment to a newly provided appraisal of the property. The mortgage loan valuation write-down in 2009 relates to a property located in Steubenville, Ohio. The Company accepted a deed in lieu of foreclosure on this property during 2010 and converted the loan to foreclosed real estate as of December 31, 2010. The real estate valuation write-down principally pertains to property located in Fort Smith, Arkansas. The Company had a letter of intent to sell the property at December 31, 2010 and adjusted the carrying value associated with the offer. The Company subsequently sold the property in January 2011.
Life and other policy benefits - Life and other policy benefits include death claims of $29.8 million, $32.9 million and $30.2 million for 2011, 2010 and 2009, respectively. While death claim amounts are subject to variation from period to period, the Company’s mortality experience has generally been consistent with or better than its product pricing assumptions. In January 2010, the country of Haiti, where the Company is licensed to sell its products, sustained a severe earthquake in its major city of Port-au-Prince. Death claims received by the Company as a result of this incident approximated $3.1 million after reinsurance and are included in life and other policy benefits for 2010.
During the year ended December 31, 2009, loss recognition testing was performed on certain products that were converted to the new reserving system leading to an unlocking of historical assumptions which resulted in an increase of $11.6 million in reserves and policy benefit expenses. Specifically, the Company unlocked assumptions for discount interest rates which accounted for $7.8 million of the increase as well as mortality assumptions which accounted for the remaining $3.8 million.
An unlocking adjustment was recorded in 2009 which resulted in an increase to amortization expense of $5.2 million. This unlocking adjustment was based upon changes to future mortality assumptions reflecting current experience studies and assumption changes regarding the level of future policy maintenance expenses. Mortality experience is monitored regularly and future mortality assumptions are unlocked when a continued trend in actual mortality experience deviates from current assumptions and is expected to continue. Although not a prediction of future impact, prior period mortality assumption unlocking experience of the Company has resulted in changes of the DPAC balance between $2.0 million and $(7.5) million in the period of the unlocking. Policy maintenance expenses are also reviewed regularly and future assumptions are unlocked when a continued trend in the actual policy maintenance expense deviates from the current assumptions. Although not a prediction of the impact of future changes in policy maintenance expense assumptions, similar unlocking of maintenance expense assumptions could result in DPAC balance changes between $1.5 million and $4.5 million.
Contract interest including equity-indexed products also encompasses the performance of the derivative component of the Company's equity-indexed products. As previously noted, the market performance of these derivative features resulted in net realized and unrealized loss of $33.3 million in 2011 and net realized and unrealized gains of $16.6 million and $45.3 million in 2010 and 2009, respectively.
In the fourth quarter of 2011, the Company evaluated its excess benefit reserve calculations for a closed block of two-tier annuity contracts using the computational tools available with the upgraded reserving system discussed above. Changes in estimates for the block of business were implemented extending the benefit period and changing annuitization assumptions. As a result of these estimate changes, the Company recorded an additional contract reserve liability of $19.2 million which is included in contract interest for the year ended December 31, 2011.
Contract interest in 2010 also includes $16.7 million of policy credits added in conjunction with the settlement of a class action lawsuit. See additional comments in “Other Operating Expenses” below.
Other operating expenses - The levels of operating expenses shown for the three years in the table above vary due to the accounting for a lawsuit in 2009 and 2010. As discussed in Item 3. Legal Proceedings, during 2009 the Company recorded additional operating expense of $22.4 million related to an accrual for pending legal matters involving a class action lawsuit. At the time of the accrual, the characteristics of an ultimate payout amount could not be determined. During 2010, the Company settled the lawsuit which defined the components of the settlement amount between policyholder benefits and operating expenses. This resulted in the Company decreasing operating expense by $16.7 million and reclassifying the amount as annuity contract interest. As the amount had been entirely accrued, there was no net effect on pretax earnings but it did produce a reduction in other operating expense in the 2010 results.
Other operating expenses consist of general administrative expenses, licenses and fees, commissions not subject to deferral, nursing home expenses and compensation costs. These are summarized in the table that follows.
Nursing home expenses include the Company's two facilities in Reno, Nevada and San Marcos, Texas. The increase in nursing home expense between 2009 and 2010 reflects the commencement of operations for the San Marcos facility during the second quarter of 2009.
Compensation expense includes share based compensation costs for the Company’s stock option plans related to outstanding vested and unvested stock options. As these costs vary in tandem with the Company's Class A common share price as a result of marking the stock options to fair value under the liability method of accounting, the related expense amount could be positive or negative in any given period. For the three years shown, share based compensation expense totaled $(2.6) million in 2011, $(0.1) million in 2010 and $1.6 million in 2009. The fluctuation in expense reflects the market price decline in the Company’s Class A common stock as of the reporting dates.
A summary of segment earnings from continuing operations for the years ended December 31, 2011, 2010 and 2009 is provided below. The segment earnings exclude realized gains and losses on investments, net of taxes.
As noted above, universal life insurance revenues include surrender charge fees assessed upon surrender of life insurance contracts. The higher level of universal life insurance revenues during 2009 is partially due to a higher level of surrender charge fees assessed. During the latter part of 2008, the Company’s internal checking and monitoring procedures detected potential instances of rebating in certain geographic markets and instituted commission caps and other preventive procedures to discourage this practice. Although not illegal in these markets, the practice of rebating is particularly prone to large face amount policies not renewing premium payments beyond the initial year of the policy. The level of 2009 surrender charge fee revenues reflects some of this activity. The level of life insurance volume lapsed at a rate in excess of 18% during 2009. However, this rate declined to 11.2% in 2010 and further to 7.1% in 2011.
The Company’s efforts over the past several years have been to attract new independent agents and to promote life products to improve domestic life sales. During 2011, the Company achieved some success in this regard with the number of new policies issued increasing 76% over the prior year, reversing a multi-year trend of declining activity. Sales the past two years have been substantially weighted toward single premium policies which do not have recurring premium payments.
The Company’s international life operations have been a significant factor in the Company’s overall earnings performance and represent a market niche where the Company believes it has a competitive advantage. A productive distribution force of independent broker agents and consultants has been developed given the Company’s longstanding reputation for supporting its international life products coupled with the instability of competing companies in international markets. In general, universal life revenues and operating earnings are anticipated to emerge with the amount of international life insurance in force. Over the past three years, the volume of insurance in force has grown from $16.2 billion at December 31, 2009 to $17.3 billion at December 31, 2010 and over $18.6 billion at December 31, 2011.
International universal life revenues also include surrender charges assessed upon surrender of contracts by policyholders. In the midst of the financial crisis the past few years, the Company’s international policyholders in particular exhibited concern regarding the developments in U.S. financial markets. This evidenced itself in the Company’s termination activity in its international life in force. During 2009, the Company incurred higher termination experience than is typical which resulted in recognition of increased surrender charge fee income. However, this level of termination activity has subsided over the past two years. The following table illustrates the Company’s international life termination experience over the past five years.
The Company’s most popular international products have been its fixed-indexed universal life products in which policyholders can elect to have the interest rate credited to their policy account values linked in part to the performance of the S&P 500 Index®. Included in the totals in the above table are collected related premiums of $98.1 million, $90.2 million and $81.9 million for the years ended 2011, 2010 and 2009, respectively, associated with these fixed-indexed products.
To support the index crediting rate feature on its fixed-indexed universal life products the Company purchases S&P 500 Index® call options. With the growth in the block of business of these policies, the period-to-period changes in fair values of the underlying options used to hedge this interest crediting feature have had an increasingly greater impact on net investment income and universal life contract interest. A detail of net investment income for international life insurance operations is provided below.
Life and policy benefits primarily consist of death claims on policies. The Company’s clientele for international products are wealthy individuals with access to U.S. dollars and quality medical care. Consequently, the amounts of coverage purchased tend to be larger amounts. In the year ended December 31, 2011, the average face amount of insurance purchased was approximately $364,000, an increase of approximately 6% over the previous year. Life and policy benefit expense for the international life segment reflects the larger policies purchased. In addition, the expense shown for 2010 includes death claims of approximately $3.1 million, after reinsurance, associated with the Haiti earthquake in January 2010.
Similar to domestic life results, the unlocking adjustment in 2011 came about as the Company reevaluated it assumptions concerning future investment portfolio yield rates and concluded that an unlocking of assumptions was required to incorporate the anticipated lowering of investment yields and its impact upon future investment spreads and profitability. In 2009, the Company recorded an unlocking adjustment of $2.5 million relative to changes in projected universal life per policy maintenance expenses and projected mortality assumptions that reduced the DPAC asset and increased amortization expense.
Fixed-indexed products are more attractive for consumers when interest rate levels remain low and equity markets produce positive returns. Since the Company does not offer variable products or mutual funds, fixed-indexed products provide an important alternative to the Company's existing fixed interest rate annuity products. Fixed-indexed annuity deposits as a percentage of total annuity deposits were 65%, 63% and 58% for the years ended December 31, 2011, 2010 and 2009, respectively. The recovery in equity markets that began during 2009 did not manifest itself in terms of increased fixed-indexed sales until the latter part of 2009.
Life and policy benefits for the annuity segment includes reserves established for contracts in a payout mode with or without life contingencies. The actuarial reserving systems that the Company implemented included this block of policies and they were converted to the new reserving system during 2009. As a part of this process historical assumptions pertaining to interest rates and mortality assumptions were “unlocked” for the block of policies resulting in an increase of $11.6 million in reserves and policy benefit expenses in 2009. As the Company’s block of annuity business grows more contracts convert to a payout status and reserves are established for those policies. Additionally, during the fourth quarter the Company added $19.2 million of reserves to a closed block of annuity business with higher minimum guaranteed interest rates as a result of extending the assumed benefit period beyond that previously used.
Consistent with the domestic and international life segments, the Company records true-up adjustments to DPAC balances each period to reflect current policy lapse or termination rates, expense levels and credited rates on policies as compared to anticipated experience as well as unlocking adjustments as necessary. The following table identifies the effects of unlocking and true-up adjustments on annuity DPAC balances recorded through amortization expense for 2009, 2010 and 2011.
The Company’s investment portfolio increased 11% to $8.6 billion at December 31, 2011 compared to $7.7 billion at December 31, 2010 due to positive cash flows from operating and financing activities. The primary driver of the increase was another strong annuity sales year. As in 2010, approximately $1.4 billion in annuity deposits were collected in 2011. Although lesser in scope, the increase in investments includes improved security fair market values (for debt securities categorized as "available for sale" and reported at fair value on the consolidated balance sheet) as a result of a decline in interest rates and, to a lesser extent, credit spread tightening. The unrealized gain position of the Company’s securities available for sale portfolio, which is reported at fair market value, increased from $168.5 million at December 31, 2010 to $202.3 million at December 31, 2011.
Derivatives, index options are call options purchased to hedge the interest crediting mechanism associated with the Company's fixed-index universal life and annuity policies. These options are reported on the balance sheet at fair value in accordance with GAAP. As previously discussed in the Results of Operations section of this Item 7, the unrealized loss position of options held at December 31, 2011 ($61.3 million) was approximately $39 million larger than that at December 31, 2010 ($22.2 million).
Substantially all of the Company’s investable cash flows are directed toward the purchase of debt securities. The Company’s investment policy calls for investing in debt securities that are investment grade, meet quality and yield objectives, and provide adequate liquidity for obligations to policyholders. Debt securities with intermediate maturities are targeted by the Company as they more closely match the intermediate nature of the Company’s policy liabilities and provide an appropriate strategy for managing cash flows. Debt securities purchased to fund insurance company operations are summarized below.
In addition to diversification, an important aspect of the Company's investment approach is managing the credit quality of its investments in debt securities. Thorough credit analysis is performed on potential corporate investments including examination of a company's credit and industry outlook, financial ratios and trends, and event risks. This emphasis is reflected in the high average credit rating of the Company's debt securities portfolio with 98.2% held in investment grade securities. In the table below, investments in debt securities are classified according to credit ratings by Standard and Poor's ("S&P®"), or other nationally recognized statistical rating organizations if securities were not rated by S&P®.
As a result of rating agencies reducing the sovereign credit rating of the United States from "AAA" to "AA" during 2011, U.S. debt securities held by the Company and shown in the AAA level at December 31, 2010 have been moved to the AA level in the amounts shown for December 31, 2011. National Western does not purchase below investment grade securities. The investments held in debt securities below investment grade are the result of subsequent downgrades of the securities. These holdings are further summarized below.
The Company's percentage of below investment grade securities compared to total invested assets at December 31, 2011 decreased from the year-end 2010 percentage primarily due to certain issues held being upgraded to investment grade levels during the year and purchases of new securities. The Company's holdings of below investment grade securities are relatively small and as a percentage of total invested assets low compared to industry averages.
However, the Company does have exposure to the debt of non-financial companies in these countries. The following table shows bond holdings at December 31, 2011 of non-financial companies that are domiciled in Portugal, Ireland, Italy, Greece or Spain held in the available for sale and held to maturity debt security portfolios.
As of April 1, 2009, the Company adopted the GAAP guidance on the recognition and accounting for other-than-temporary impairments due to credit loss versus non-credit loss. See Note 1, Summary of Significant Accounting Policies, and Note 3, Investments, in the accompanying consolidated financial statements for further discussion. Since adoption of this new guidance, the Company recognized $10.4 million of other-than-temporary impairments; of which $0.4 million was deemed credit related and recognized as realized investment losses in earnings, and $10.0 million was deemed a non-credit related impairment and recognized in other comprehensive income.
The Company requires a minimum specified yield on mortgage loan investments. The historically low interest rate environment of the past couple of years has resulted in fewer loan opportunities being available which met the Company's required rate of return. Consequently, new mortgage loan origination activity has been less significant in this time frame with $37.3 million and $68.5 million in total loans for the years 2011 and 2010, respectively.
The Company's direct investments in real estate are not a significant portion of its total investment portfolio as most of these investments were acquired through mortgage loan foreclosures. Due to bankruptcy filing in 2009, the Company foreclosed on one Circuit City related mortgage loan each during 2010 and 2009. The Company also participates in several real estate joint ventures and limited partnerships that invest primarily in income-producing retail properties. These investments have enhanced the Company's overall investment portfolio returns.
The Company does not consider its mortgage loans to be a separate portfolio segment. The Company considers its primary class to be property type and primarily uses loan-to-value as its credit risk quality indicator. All loans within the portfolio are analyzed quarterly in order to monitor the financial quality of these assets. Based on ongoing monitoring, mortgage loans with a likelihood of becoming delinquent are identified and placed on an internal “watch list”. Among the criteria that would indicate a potential problem are: major tenant vacancies or bankruptcies, late payments, and loan relief/restructuring requests. The mortgage loan portfolio is analyzed for the need for a valuation allowance on any loan that is on the internal watch list, in the process of foreclosure or that currently has a valuation allowance.
The Company recognized valuation losses of $0.6 million, $0.4 million and $1.4 million for the years ended December 31, 2011, 2010 and 2009, respectively. The principal mortgage loan balance requiring the valuation allowance was $7.0 million, $7.0 million and $9.2 million in 2011, 2010, and 2009, respectively. The amount of interest recorded while these loans were impaired was $0.3 million, $0.1 million and $0.3 million in 2011, 2010, and 2009, respectively. The impairments were based on information which indicated that the Company may not collect all amounts in accordance with the mortgage agreement. While the Company closely monitors its mortgage loan portfolio, future changes in economic conditions can result in impairments beyond those currently identified.
The following table represents the mortgage loan allowance for the years ended December 31, 2011 and 2010:
The contractual maturities of mortgage loan principal balances at December 31, 2011 and 2010 were as follows:
The fair value of derivative instruments presented in the Company’s consolidated financial statements totaling $30.8 million at December 31, 2011 and $80.3 million at December 31, 2010 pertain to notional policyholder account values of $1.95 billion and $1.46 billion at December 31, 2011 and 2010, respectively, electing interest credits based upon applicable market index performance.
Changes in interest rates typically have a sizable effect on the fair values of the Company's debt securities. During 2011, market interest rates of the ten-year U.S. Treasury bond decreased roughly 142 basis points from year end 2010. Liquidity in the corporate bond market during 2011 did not vary significantly from that in the previous year. As a result, the spread between corporate bonds and treasury securities remained relatively the same and did not influence the prices of the Company’s corporate bonds to further rise. However, the decrease in interest rate levels did insignificantly increase the unrealized gains by $191.5 million on a portfolio of approximately $8.3 billion at December 31, 2011. The Company would expect similar results in the future from a significant upward or downward movement in market rates. However, since the majority of the Company's debt securities are classified as held to maturity, which are recorded at amortized cost, changes in fair values have relatively small effects on the Company's financial results.
The following table profiles the Company’s insurance liabilities at December 31, 2011 for annuities, deposit-type contracts and supplementary contracts with life contingencies by surrender and discretionary withdrawal characteristics.
The Company's market risk liabilities, which include policy liabilities for annuity and supplemental contracts, are managed for interest rate risk through cash flow testing as previously described. As part of this cash flow testing, the Company has analyzed the potential impact on net earnings of a 100 basis point decrease and increases in increments of 100 basis points in the U.S. Treasury yield curve as of December 31, 2011. The potential impact on net earnings from these interest rate changes are summarized below.
The above described scenarios produce estimated changes in cash flows as well as cash flow reinvestment projections. Estimated cash flows in the Company's model assume cash flow reinvestments, which are representative of the Company's current investment strategy. Calls and prepayments include scheduled maturities and those expected to occur which would benefit the security issuers. Assumed policy surrenders consider differences and relationships between credited interest rates and market interest rates as well as surrender charges on individual policies. The impact to earnings also includes the expected effects on amortization of deferred policy acquisition costs. The model considers only annuity and supplemental contracts in force at December 31, 2011, and does not consider new product sales or the possible impact of interest rate changes on sales.
Liquidity requirements are met primarily by funds provided from operations. Premium deposits and annuity considerations, investment income, and investment maturities and prepayments are the primary sources of funds while investment purchases, policy benefits in the form of claims, and payments to policyholders and contract holders in connection with surrenders and withdrawals as well as operating expenses are the primary uses of funds. To ensure the Company will be able to pay future commitments, the funds received as premium payments and deposits are invested in high quality investments, primarily fixed income securities. Funds are invested with the intent that the income from investments, plus proceeds from maturities, will meet the ongoing cash flow needs of the Company. The approach of matching asset and liability durations and yields requires an appropriate mix of investments. Although the Company historically has not been put in the position of having to liquidate invested assets to provide cash flow, its investments consist primarily of marketable debt securities that could be readily converted to cash for liquidity needs. The Company may also borrow up to $40 million on its bank line of credit for short-term cash needs. There were no borrowings outstanding under the line of credit at December 31, 2011.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued new guidance to provide a single definition of fair value, a framework for measuring fair value, and required additional disclosure about the use of fair value to measure assets and liabilities. The Company adopted it for its reporting of financial assets and financial liabilities on January 1, 2008. The effective date for implementation to non financial assets and non financial liabilities was delayed by the FASB until the first reporting period after November 15, 2008. The Company adopted this portion of the guidance effective January 1, 2009. The adoption of fair value measurements did not have a material impact on the Company’s consolidated financial statements and results of operations.
In March 2008, the FASB issued new guidance to require companies with derivative instruments to disclose information about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This guidance became effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company adopted it on January 1, 2009 with no material impact on the consolidated financial statements. Please see Note 14, Fair Values of Financial Instruments, of the accompanying consolidated financial statements for additional information pertaining to this guidance.
In December 2008, the FASB issued new guidance which requires information to be disclosed on an annual basis pertaining to postretirement benefit plan assets. The Company would be required to separate plan assets into the three fair value hierarchy levels and provide a rollforward of the changes in fair value of plan assets classified as Level 3. The disclosures about plan assets are effective for fiscal years ending after December 15, 2009, but will have no effect on the Company’s consolidated financial condition and results of operations.
On May 28, 2009, the FASB issued new guidance establishing general standards of accounting for the disclosure of events that occur after the balance sheet date, but before the financial statements are issued or are available to be issued. It was effective for the Company as of June 30, 2009 and did not have a significant impact on the consolidated financial position or results of operations. See Note 18, Subsequent Events, of the accompanying consolidated financial statements for additional disclosures.
During October 2010, the FASB issued new guidance affecting insurance companies that incur costs in the acquisition of new and renewal insurance contracts. The guidance addresses the diversity in practice regarding the interpretation for which costs relating to the acquisition of new or renewal business qualifies for deferral. The new guidance specifies the acquisition costs which are capitalizable and those which must be expensed. The effective date is for interim and annual periods ending after December 15, 2011. The Company is currently evaluating the impact of this guidance on the consolidated financial statements. See Note 1, Summary of Significant Accounting Policies, of the accompanying consolidated financial statements for additional disclosures.
During January 2011, the FASB issued new guidance which defers the effective date of disclosures about troubled debt restructurings in Accounting Standards Update No. 2010-20. The new anticipated effective date is for interim and annual periods ending after June 15, 2011. The adoption of this guidance will not have a significant impact on the consolidated financial statements.
As a result of the implementation, during the second quarter of 2009, the Company recorded a net of tax opening balance adjustment that increased retained earnings in the amount of $0.5 million and increased accumulated other comprehensive loss in the amount of $0.5 million.