In addition during 2009 and 2008, personnel performing services for the Registrant occupied office space in Jacksonville, Florida, which was owned by ML&Co. An allocable share of the cost of the above mentioned premise was paid by the Registrant through a transition services agreement between AUSA and ML&Co.
At December 31 2010 and 2009, approximately $22.1 million (or 15%) and $9.2 million (or 8%), respectively, of the Company’s fixed maturity and equity securities portfolio consisted of non-publicly traded securities. Since significant judgment is required for the valuation of non-publicly traded securities, the estimated fair value of these securities may differ from amounts realized upon an immediate sale.
The Company regularly reviews each investment in its fixed maturity and equity securities portfolio to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. Management makes this determination through a series of discussions with the Company’s portfolio managers and credit analysts, and information obtained from external sources (i.e. company announcements, ratings agency announcements, or news wire services). For AFS fixed maturity securities, the Company also considers whether it is more likely than not that it will not be required to sell the debt security before its anticipated recovery. The factors that may give rise to a potential OTTI include, but are not limited to, i) certain credit-related events such as default of principal or interest payments by the issuer, ii) bankruptcy of issuer, iii) certain security restructurings, and iv) fair market value less than cost or amortized cost for an extended period of time. In the absence of a readily ascertainable market value, the estimated fair value on these securities represents management’s best estimate and is based on comparable securities and other assumptions as appropriate. Management bases this determination on the most recent information available.
Derivatives are financial instruments in which the value changes in response to an underlying variable, that require little or no net initial investment and are settled at a future date. All derivatives recognized on the Balance Sheets are carried at fair value. All changes in fair value are recognized in the Statements of Income. The fair value for exchange traded derivatives, such as futures, are calculated net of the interest accrued to date and is based on quoted market prices. Net settlements on the futures occur daily. At December 31, 2010, the Company had 20 outstanding short futures contracts with a notional amount of $6.3 million. At December 31, 2009, the Company had 20 outstanding short futures contracts with a notional amount of $5.6 million.
Other intangible assets were comprised of a distribution agreement, a trade name and a non-compete agreement. At December 31, 2008, the Company made a business decision to commence selling similar products on affiliate companies through the ML&Co distribution channel instead of continuing to sell new variable annuities on the Company. As a result of this decision, an impairment charge was taken for the entire unamortized other intangible balance at December 31, 2008. Prior to December 31, 2008, the trade name and the non-compete agreements were amortized on a straight-line basis over their useful life of five years. The distribution intangible was amortized over the expected economic benefit period and at a pace consistent with the expected future gross profit streams generated from the distribution agreement, which was thirty years. The entire asset amount had been allocated to annuities. See Note 4 to the Financial Statements for further discussion.
The Company’s liability for policyholder account balances represents the contract value that has accrued to the benefit of policyholders as of the Balance Sheet date. The liability is generally equal to the accumulated account deposits plus interest credited less policyholders’ withdrawals and other charges assessed against the account balance. Policyholder account balances at December 31, 2010 and 2009 were $115.1 million and $125.3 million, respectively.
Future policy benefits are actuarially determined liabilities, which are calculated to meet future obligations and are generally payable over an extended period of time. Principal assumptions used in the establishment of liabilities for future policy benefits are mortality, surrender rates, policy expenses, equity returns, interest rates, and inflation. These estimates and assumptions are influenced by historical experience, current developments and anticipated market trends. At December 31, 2010 and 2009, future policy benefits were $17.4 million and $18.5 million, respectively.
ASC 320, Investments-Debt and Equity Securities - guidance that makes OTTI guidance for debt securities more operational and improves the presentation and disclosure of OTTI on debt and equity securities in the financial statements. The revised guidance resulted in a net increase to retained earnings and decrease to accumulated other comprehensive income (loss) of $0.1 million at time of adoption - adopted June 30, 2009.
ASU 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) - guidance on measuring the fair value of certain alternative investments (i.e., investments in hedge funds, private equity funds, venture capital funds, offshore fund vehicles, funds of funds, and real estate funds) - adopted December 31, 2009.
Guidance required an entity to disclose the methods and significant assumptions used to estimate fair value of financial instruments and to describe changes, if any, to those methods and assumptions during the period - adopted June 30, 2009.
In addition, the following is accounting guidance that will be adopted in the future. See Note 1 to the Financial Statements for a further discussion.
ASC 820, Fair Value Measurements and Disclosure, ASU 2010-06, Improving Disclosures about Fair Value Measurement - requires separate presentation of information about purchases, sales, issuances, and settlements in the Level 3 reconciliation for fair value measurements using significant unobservable inputs - will be adopted January 1, 2011.
At December 31, 2010, the Company’s assets were $908.0 million or $1.8 million lower than the $909.8 million in assets at December 31, 2009. Assets excluding Separate Accounts assets increased $6.3 million. Separate Accounts assets, which represent 70% of total assets, decreased $8.1 million (or 1%) to $636.0 million.
There were no fixed contract owner deposits in 2010, 2009, and 2008. During 2010, 2009, and 2008, fixed contract owner withdrawals were $8.1 million, $8.2 million, and $9.4 million, respectively.
The amortized cost/cost and estimated fair value of investments in fixed maturity and equity AFS securities at December 31, 2010 and 2009 were:
Seven issuers represent more than 5% of the total unrealized loss position, comprised of four corporate non-convertible bonds, two government securities and one RMBS holding. The Company owns four investment grade corporate non-convertible securities with unrealized losses totaling $0.4 million. The Company’s government bonds have unrealized losses of $0.2 million, were issued in the United States and Venezuela and are rated investment grade and below rated below investment grade, respectively. The Company’s RMBS unrealized loss is $0.1 million and relates to a securitized portfolio of prime hybrid mortgages that contain fixed income positions where our holding is rated below investment grade and was previously impaired to discounted cash flows.
The Company’s $0.2 million of gross unrealized losses within the financial services sector has an estimated fair value of $3.6 million. All of the unrealized loss in the financial services sector relates to the banking sub-sector. Companies within TALNY’s financial services sector are high in credit quality and, as a whole, represent a large portion of the corporate debt market. The extreme stress on the capital base of banks and other financial institutions within the sector was significantly reduced due to unprecedented liquidity and capital support from major governments in 2008 and 2009. In addition, United States and European central banks intervened again in 2010 to ensure market liquidity following heightened European government debt concerns stemming from economic and fiscal pressures in several European countries.
Where holdings were not projected to pay principal and interest in full, securities were impaired to the net present value of projected future cash flows. As the remaining unrealized losses in the RMBS portfolio relate to holdings where the Company expects to receive full principal and interest, the Company does not consider the underlying investments to be impaired at December 31, 2010.
The Company defines investment grade securities as unsecured debt obligations that have a rating equivalent to S&P’s BBB- or higher (or similar rating agency). At December 31, 2010 and 2009 approximately $11.2 million (or 8%) and $3.7 million (or 3%), respectively, of fixed maturity securities were rated BBB-, which is the lowest investment grade rating given by Standard and Poor’s. Below investment grade securities are speculative and are subject to significantly greater risks related to the creditworthiness of the issuers and the liquidity of the market for such securities. The Company closely monitors such investments.
Unrealized gains (losses) incurred during the years ended December 31, 2010 and 2009, respectively, were primarily due to price fluctuations resulting from changes in interest rates and credit spreads. As the Company does not have the intent to sell and it is not more likely than not that the Company will be required to sell these securities prior to the anticipated recovery of the amortized cost, the Company did not consider these securities to be other-than-temporarily impaired.
Details underlying securities in a continuous gross unrealized loss and OTTI position for investment grade AFS securities were as follows:
Gross unrealized losses and OTTI on below investment grade AFS securities represented 33% and 21% of total gross unrealized losses and OTTI on all AFS securities at December 31, 2010 and 2009, respectively. Generally below investment grade securities are more likely than investment grade securities to develop credit concerns. The ratios of estimated fair value to amortized cost reflected in the table below were not necessarily indicative of the market value to amortized cost relationships for the securities throughout the entire time that the securities have been in an unrealized loss position nor are they necessarily indicative of these ratios subsequent to December 31, 2010.
There were no assets depressed over 20% and greater than one year at December 31, 2010. As there has been no impact to expected future cash flows, the Company does not consider the underlying investments to be impaired as of December 31, 2010.
Changes in the U.S. equity market directly affect the values of the underlying U.S. equity-based mutual funds supporting Separate Accounts assets and, accordingly, the values of variable contract owner account balances. Approximately 75% of Separate Accounts assets were invested in equity-based mutual funds at December 31, 2010. Since asset-based fees collected on in force variable contracts represent a significant source of revenue, the Company’s financial condition will be impacted by fluctuations in investment performance of equity-based Separate Accounts assets.
During 2010, average variable account balances increased $20.8 million (or 3%) to $621.8 million as compared to the same period in 2009. The change in average variable account balances contributed $0.2 million to the increase in asset-based policy charge revenue during 2010 as compared to the same period in 2009.
Changes in the corporate credit environment directly impact the value of the Company’s investments, primarily fixed maturity securities. The Company primarily invests in investment-grade corporate debt to support its fixed rate product liabilities.
Policy charge revenue decreased $0.2 million (or 1%) to $14.6 million during 2010, as compared to $14.8 million in 2009. The following table provides the changes in policy charge revenue by type for each respective period:
Net realized investment gains (losses) increased $3.8 million to $0.9 million during 2010 as compared to ($2.9) million in 2009. The following table provides the changes in net realized investment gains (losses) by type:
(b) The increase in interest related gains was principally due to the credit spread movement tightening in 2010.
Policy benefits decreased $1.5 million during 2010 as compared to 2009. The following table provides the changes in policy benefits by type:
Reinsurance premiums ceded increased $0.3 million during 2010 as compared to 2009 principally due to refined calculations related to a system conversion. At December 31, 2010, the Company has recaptured the majority of its life reinsurance which had started in second quarter of 2008.
Insurance expenses and taxes decreased $0.8 million as compared to 2009. The following table provides the changes in insurance expenses and taxes for each respective period:
For the years ended December 31, 2009 and 2008, the Company recorded a net loss of ($6.2) million and ($2.2) million, respectively. The decrease in income during 2009 as compared to 2008 was primarily due to the 2009 net realized investment losses, increased VOBA amortization and impairments, and the 2009 valuation allowance on deferred tax assets partially offset by the 2008 goodwill and other intangibles impairment charge.
(a) Asset-based policy charge revenue was negatively impacted by the decrease in average variable account balances during late 2008 and early 2009.
(b) The decrease in non-asset based policy charge revenue was primarily due to the run-off of the life business as well as less paid up additions during 2009 as a result of poor equity market performance in 2008.
Net realized investment gains (losses) decreased $3.7 million to ($2.9) million during 2009 as compared to $0.8 million in 2008. The following table provides the changes in net realized investment gains (losses) by type:
(a) The increase in commissions is primarily related to an increase in trail commissions in 2009.
(b) The increase in general insurance expenses is primarily due to increased transition and system conversion related expenses.
(a) Management considers interest credited to policyholder liabilities in evaluating net revenues.
The Company is not dependent upon any single customer, and no single customer accounted for more than 10% of its revenues during 2010, 2009, or 2008.