Transamerica Advisors Life Insurance Company of New York (“TALICNY”, “Registrant”, the “Company”, “we”, “our”, or “us”) is a wholly owned subsidiary of AEGON USA, LLC (“AUSA”). AUSA is an indirect wholly owned subsidiary of AEGON N.V., a limited liability share company organized under Dutch law. The Company is domiciled in New York.
TALICNY conducts its business primarily in the annuity markets and to a lesser extent in the life insurance markets of the financial services industry. The Company offered the following guaranteed benefits within its variable annuity product suite: guaranteed minimum death benefits (“GMDB”), guaranteed minimum income benefits (“GMIB”) and guaranteed minimum withdrawal benefits (“GMWB”).
During the year ended December 31, 2013, the Company did not incur any impairment losses. For the years ended December 31, 2012 and 2011, the Company recorded an OTTI in income, with no value of business acquired amortization, of less than $0.1 million.
At December 31, 2013, the Company had 10 outstanding short futures contracts with a notional value of $4.6 million. At December 31, 2012, the Company had 10 outstanding short futures contracts with a notional value of $3.6 million. Realized losses on settlement of these futures were ($1.1) million and ($0.9) million for the periods ended December 31, 2013 and 2012, respectively. These losses have been recorded in net derivative losses in the Statements of Income.
The costs of acquiring business, principally commissions, certain expenses related to policy issuance, and certain variable sales expenses that relate to and vary with the production of new and renewal business are deferred and amortized based on the estimated future gross profits for a group of contracts. DAC are subject to recoverability testing at the time of policy issuance and loss recognition testing at the end of each reporting period. At December 31, 2013 and 2012, variable annuities accounted for the Company’s entire DAC asset of $0.4 million and $0.3 million, respectively.
DAC for variable annuities is amortized with interest over the anticipated lives of the insurance contracts in relation to the present values of estimated future gross profits from asset-based fees, guaranteed benefit rider fees, contract fees, and surrender charges, less a provision for guaranteed death and living benefit expenses, policy maintenance expenses, and non-capitalized commissions. Future gross profit estimates are subject to periodic evaluation with necessary revisions applied against amortization to date. The impact of revisions and assumptions to estimates on cumulative amortization is recorded as a charge or credit to current operations, commonly referred to as “unlocking”. Changes in assumptions can have a significant impact on the amount of DAC reported and the related amortization patterns. In general, increases in the estimated Separate Accounts return and decreases in surrender or mortality assumptions increase the expected future profitability of the underlying business and may lower the rate of DAC amortization. Conversely, decreases in the estimated Separate Accounts returns and increases in surrender or mortality assumptions reduce the expected future profitability of the underlying business and may increase the rate of DAC amortization. For the years ended December 31, 2013, 2012 and 2011, the favorable (unfavorable) impact to pre-tax net income related to DAC unlocking was less than ($0.1) million, $0.1 million and less than ($0.1) million, respectively. See Note 4 to the Financial Statements for a further discussion.
The Company offers a sales inducement whereby the contract owner receives a bonus which increases the initial account balance by an amount equal to a specified percentage of the contract owner’s deposit. This amount may be subject to recapture under certain circumstances. Consistent with DAC, sales inducements for variable annuity contracts are deferred and amortized based on the estimated future gross profits for each group of contracts. These future gross profit estimates are subject to periodic evaluation by the Company, with necessary revisions applied against amortization to date. The impact of these revisions on cumulative amortization is recorded as a charge or credit to current operations, commonly referred to as “unlocking”. It is reasonably possible that estimates of future gross profits could be reduced in the future, resulting in a material reduction in the carrying amount of the DSI asset.
Goodwill is the excess of the purchase price over the estimated fair value of net assets acquired. Goodwill and intangible assets with indefinite lives are not amortized, but are subject to impairment tests conducted at least annually. Impairment testing is to be performed using the fair value approach, which requires the use of estimates and judgment, at the “reporting unit” level. A reporting unit represents the operating segment which is the level at which the financial information is prepared and regularly reviewed by management. The entire asset amount has been allocated to annuities. Goodwill is reviewed for indications of value impairment, with consideration given to financial performance and other relevant factors. In addition, certain events including a significant adverse change in legal factors or the business climate, an adverse action or assessment by a regulator, or unanticipated competition would cause the Company to review the carrying amounts of goodwill for impairment. When considered impaired, the carrying amounts are written down to fair value based primarily on discounted cash flows. The Company performed the annual test of goodwill at December 31, 2013, 2012 and 2011 and determined there was no impairment of goodwill.
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, 2013 and 2012 were $97.2 million and $104.1 million, respectively.
Included within future policy benefits are liabilities for GMDB and GMIB provisions contained in the variable products that the Company issues. At December 31, 2013 and 2012, GMDB and GMIB liabilities included within future policy benefits were as follows:
the present value of assessed rider fees attributable to the guarantees. Given the complexity and long-term nature of these guarantees which are unlike instruments available in financial markets, their fair values are determined using stochastic techniques under a variety of market return scenarios. A variety of factors are considered, including expected market rates of return, equity and interest rate volatility, credit spread, correlations of market returns, discount rates and actuarial assumptions.
The Company uses the asset and liability method in providing income taxes on all transactions that have been recognized in the financial statements. The asset and liability method requires that deferred taxes be adjusted to reflect the tax rates at which future taxable amounts will be settled or realized. The Company provides for income taxes based on amounts it believes it will ultimately owe. Inherent in the provision for income taxes are estimates regarding the realization of certain tax deductions and credits.
Five issuers represent more than 5% of the total unrealized loss position, comprised of two CMBS, two government and government agency issuers and one corporate - industrial sector issuer. The Company’s CMBS unrealized loss is less than $0.2 million, while the corporate - industrial issuer has $0.1 million of unrealized losses. The largest impact relates to the government and government agencies sector, which makes up $0.6 million of unrealized losses.
The Company’s $0.3 million of gross unrealized losses within the corporate - industrial sector has a fair value of $6.5 million. The industrial sector is further subdivided into various sub-sectors with a majority of its gross unrealized losses in the energy, basic industry and communications sub-sectors. The unrealized loss in these sub-sectors is primarily driven by interest rate increases during 2013.
CMBS are securitizations of underlying pools of mortgages on commercial real estate. The underlying mortgages have varying risk characteristics and are pooled together and sold in different rated tranches. The Company’s CMBS include conduit, large loan and single borrower. The Company’s $0.2 million of gross unrealized losses within the CMBS sector has a fair value of $3.6 million.
There are no individual issues rated below investment grade in the government and government agencies sector which have unrealized loss positions greater than $0.2 million.
The amortized cost and estimated fair value of fixed maturity AFS securities at December 31, 2013 and 2012 by rating agency equivalent were:
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, 2013 and 2012, approximately $3.9 million (or 3%) and $2.4 million (or 2%), respectively, of fixed maturity securities were rated BBB-, which is the lowest investment grade rating given by S&P. 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.
The Company’s liquidity requirements include the payment of sales commissions and other underwriting expenses and the funding of its contractual obligations for the life insurance and annuity contracts it has in force. The Company has developed and utilizes a cash flow projection system and regularly performs asset/liability duration matching in the management of its asset and liability portfolios. The Company anticipates funding its cash requirements utilizing cash from operations, normal investment maturities and anticipated calls and repayments, consistent with prior years. At December 31, 2013 and 2012, the Company’s assets included $188.7 million and $185.1 million, respectively, of cash, short-term investments and investment grade publicly traded AFS securities that could be liquidated if funds were required.
The Company has utilized public information to estimate the future assessments it will incur as a result of life insurance company insolvencies. At December 31, 2013 and 2012, the Company’s estimated liability for future guaranty fund assessments was $0.3 million and $0.3 million, respectively. The Company has a receivable for future premium tax deductions of $0.2 million and less than $0.1 million at December 31, 2013 and 2012, respectively. The Company regularly monitors public information regarding insurer insolvencies and adjusts its estimated liability as appropriate.
Policy benefits increased $5.0 million during 2013 as compared to 2012. The following table provides the changes in policy benefits by type:
(b) The increase in annuity benefit expense was a result of benefits paid exceeding the release of fair value reserves.
Insurance expenses and taxes decreased $0.1 million in 2013 as compared to 2012. The following table provides the changes in insurance expenses and taxes for each respective period:
Policy charge revenue decreased $1.1 million to $12.9 million during 2012, as compared to $14.0 million in 2011. The following table provides the changes in policy charge revenue by type for each respective period: