Non-segment expense, net consists primarily of open block realized/unrealized gains and losses, derivative related market value adjustments, litigation following class certification, restructuring costs, non-insurance operations, interest expense, early extinguishment of debt, income taxes, discontinued operations and cumulative effect of change in accounting.
Operating segment income increased for the protection products segment in 2005 compared to 2004 primarily due to the growth in the indexed life business and higher open block margins. Operating segment income increased for the protection products segment in 2004 compared to 2003 primarily as a result of increased open block margins and lower operating expenses. The growth in assets under management and a continued improvement in product margins from our indexed annuities increased accumulation products segment earnings in 2005 and 2004 compared to the respective prior years. The increased operating segment income in 2005 and 2004 for the protection products and accumulation products segments was partially reduced by higher other operations’ losses resulting primarily from lower net investment income and additional holding company expenses.
We have two operating segments: Protection Products and Accumulation Products. We use the same accounting policies and procedures to measure operating segment income as we use to measure consolidated income from operations with the exception of the elimination of certain items which management believes are not necessarily indicative of overall operating trends. These items are as follows:
Amortization of deferred policy acquisition costs (DAC) and value of business acquired (VOBA) related to the unrealized and realized gains and losses on the open block investments and the derivative adjustments.
Our protection products segment reflects the operating results primarily from our interest-sensitive whole life, term life, universal life and indexed life insurance policies. These products are marketed on a national basis
Sales, Premiums and Product Charges. Sales are a key driver of our business as they are a leading indicator of future revenue trends to emerge in segment operating income. As shown in the Sales Activity by Product table presented in “Item 1. Business - Protection Products Segment,” direct first year annualized premiums decreased 5% in 2005 compared to 2004 and increased 5% in 2004 compared to 2003. The decrease in 2005 sales resulted from lower interest-sensitive whole life product sales due to our withdrawal from certain tax-advantaged markets and lower universal life product sales due to pricing changes associated with products launched in January 2005. These lower sales were partially offset by higher indexed life product sales as consumer demand for such indexed products continued to increase. The indexed life product allows the policyowner to elect an interest crediting strategy for a portion of the account value whereby interest is credited based in part on increases in the applicable indices, primarily the S&P 500 Index, excluding dividends. The interest credited is subject to a participation rate and an annual cap. Sales of indexed life products were $94.1 million in 2005 as compared to $74.6 million in 2004 and $51.6 million in 2003. We are the leading writer of indexed life products in the United States. The increase in 2004 sales resulted from higher indexed life product sales partially offset by decreased traditional and universal life insurance product sales. This change in sales mix reflects continued customer demand for indexed products and the uncertainty in government tax policy and regulation.
We recognize premiums on traditional life insurance policies as revenues when the premiums are due. Amounts received as payments for universal life and indexed life insurance policies are not recorded as premium revenue, but are instead recorded as a policyowner liability. Revenues from the universal life and indexed life policies consist of charges for the cost of insurance, policy administration and policy surrender and are shown as product charges. All revenue is reported net of reinsurance ceded.
Insurance premium revenue in 2005 and 2004 was lower than the respective prior years primarily due to lower sales of traditional products and a decline in closed block in force business. Product charge revenue in 2005 and 2004 was higher than the respective prior years primarily due to the growth in the indexed life block of business.
Amortization of DAC and VOBA. The amortization of DAC and VOBA are expense items which increased in 2005 and 2004 as compared to the respective prior years. DAC and VOBA are generally amortized in proportion to policy gross margins which increased in both years, resulting in higher amortization expense.
Dividends to Policyowners. In addition to basic policyowner dividends, dividend expense includes increases or decreases to the closed block policyowner dividend obligation liability carried on the consolidated balance sheet. The actual results of the closed block are adjusted to equal the expected earnings based on the actuarial calculation at the time of formation of the closed block (which we refer to as the closed block glide path). The adjustment to have the closed block operating results equal the closed block glide path is made to dividend expense. If the actual results for the period exceed the closed block glide path, increased dividend expense is recorded as a policyowner dividend obligation to reduce the actual closed block results. For actual results less than the closed block glide path, dividend expense is reduced to increase the actual closed block results. As a result of this accounting treatment, operating earnings from the closed block only include the predetermined closed block glide path.
Dividend expense increased for 2005 compared to 2004 due to increased closed block earnings, resulting from favorable closed block surrender activity and lower closed block basic policyowner dividends. Dividend expense decreased for 2004 compared to 2003 primarily due to reduced closed block earnings, resulting from lower closed block revenues and net investment income as the closed block in force business continues to decline.
Outlook. We expect to continue to develop and sell indexed life products to meet the increasing consumer demand which we expect will favorably impact our product margins. We also expect to realize operating efficiencies as we continue to centralize our administrative functions.
Pre-tax operating income from our accumulation products operations increased 12% in 2005 and 25% in 2004 compared to the respective prior years. The 2005 increase was primarily due to higher assets under management. A decline in product spreads partially offset the increase in earnings from asset growth. The 2004 increase was primarily due to higher assets under management and improved product spreads. The 2004 increase was partially offset by lower contributions from IMO operations. The drivers of profitability in our accumulation products business are deposits, persistency, product spread, expenses and IMO operations.
We placed fixed rate funding agreements totaling $26.2 million in 2005 and $85.0 million in 2004. Funding agreements are insurance contracts for which we receive deposit funds and for which we agree to repay the deposit and a contractual return for the duration of the contract. Total funding agreements outstanding as of December 31, 2005 amounted to $986.2 million compared to $960.0 million outstanding at December 31, 2004.
The deposits we receive on accumulation products are not recorded as revenue but instead as a policyowner liability. Surrender charges collected on accumulation products are recorded as revenue and shown as a product charge. Product charges increased in 2005 and 2004 as compared to the respective prior years due to the growth in the business.
The product spread decreased twelve basis points to 211 basis points in 2005 compared to 2004 and increased 25 basis points to 223 basis points in 2004 compared to 2003. Liability crediting rates on traditional annuities were increased in 2005 following the decreases in 2003 and 2004 which were necessary to correspond with the decline in investment yields caused by lower rates on new and reinvested funds. As described in the Traditional Annuity Products and Indexed Annuities sections presented in “Item 1. Business - Accumulation Products Segment,” the annuity products have various differentials between the credited rate and minimum guarantee rate, including some which have no differential, and as such cannot be lowered. Additionally, some traditional annuities have multi-year interest rate guarantees for which the credited rate cannot be decreased until the end of the multi-year period. Due to these limitations on the ability to lower interest crediting rates and the potential for credit defaults and lower reinvestment rates on investments, we could experience spread compression in future periods.
We also earn a spread on our funding agreements. Funding agreement income less associated interest expense totaled $6.2 million in 2005, $6.8 million in 2004, and $11.1 million in 2003. The 2004 decrease was due to the termination of a $250 million funding agreement during the fourth quarter of 2003.
Underwriting, Acquisition and Other Expenses. Underwriting, acquisition and other expenses are a key driver of our business as they represent costs of our operations. Expenses in 2005 increased compared to 2004 due primarily to increased costs associated with administering the larger volume of business in force and higher legal and regulatory costs. Expenses in 2004 decreased compared to 2003 due primarily to continued process improvements to enhance operating efficiencies and lower fees associated with a declining block of annuity business processed by a third party administrator.
Amortization of DAC and VOBA. The amortization of DAC and VOBA are expense items which decreased in 2005 and increased in 2004 as compared to the respective prior years. DAC and VOBA are generally amortized in proportion to policy gross margins which have increased each year. In addition, during the third quarter of 2004, projected persistency and future margin items for DAC and VOBA amortization were updated with current estimates which resulted in additional amortization expense on our traditional fixed annuity products in 2004. This 2004 increase was partially offset by decreased amortization resulting from updated current estimates of margins for indexed annuity products. As a result, DAC and VOBA amortization was lower in 2005 compared to 2004. Amortization expense increased in 2004 compared to 2003 as a result of higher product margins and the updated projected margins in 2004.
IMO Operations. IMO operations are a key driver of our business as the earnings from the IMOs can be a significant component of the accumulation products segment operating income. IMOs have contractual arrangements to promote our insurance products in their networks of agents and brokers. Additionally, they also contract with third party insurance companies. We own four such IMOs. The income from IMO operations primarily represents annuity commissions received by our IMOs from those third party insurance companies. Net IMO operations increased $1.1 million in 2005 compared to 2004 primarily due to lower operating expenses in 2005 as 2004 included higher litigation costs. Net IMO operating income decreased $6.2 million in 2004 compared to 2003 due to changes in distribution strategies and higher operating expenses, including litigation costs in 2004.
Outlook. We anticipate increased product sales from our owned and proprietary distribution organizations but decreased product sales from other distribution channels as we manage our sales in this current low interest rate environment. We also expect to continue to position the company to meet increasing consumer demand for indexed annuity products and to actively manage surrenders. We will continue to manage our spreads as we strive for our desired profitability in this economic environment.
Unrealized gains (losses) on open block options and trading investments will also fluctuate from period to period depending on prevailing interest rates, the economic environment and credit events. We also have trading securities that back our total return strategy traditional annuity products. The market value adjustment on the trading securities resulted in an unrealized loss of $16.0 million in 2005, an unrealized gain of $8.5 million in 2004 and an unrealized gain of $26.8 million in 2003. In addition, we use options to hedge our indexed products. In accounting for derivatives, we adjust our options to market value, which, due to the economic environment and stock market conditions, resulted in an unrealized gain of $7.1 million in 2005, an unrealized gain of $48.0 million in 2004 and an unrealized gain of $62.9 million in 2003.
Most of the unrealized gains and losses on the options and trading securities are offset by similar adjustments to the option portion of the indexed product reserves and to the total return strategy annuity reserves. The reserve adjustments are reflected in policyowner benefits expense in the consolidated statements of income as the change in option value of indexed products and market value adjustments on total return strategy annuities. The total adjustment to policyowner benefits amounted to reduced expense of $10.5 million in 2005 and additional expense of $35.7 million in 2004 and $65.7 million in 2003.
DAC and VOBA amortization is adjusted for realized and unrealized gains and losses and derivative related market value adjustments. As a result of the fluctuating gains and losses and derivative adjustments between periods, amortization expense decreased $6.3 million in 2005 and $7.2 million in 2004 as compared to the respective prior years.
Reinsurance Adjustments. Reinsurance related adjustments in 2003 consisted of the release of an $8.2 million liability in conjunction with the settlement and amendment of a reinsurance arrangement and a $4.3 million true-up of pre-2003 reinsurance settlements under a reinsurance arrangement between ILIC’s open block and closed block.
Litigation Following Class Certification, Net. A charge was taken in 2005 amounting to $9.4 million, net of insurance recoveries, in connection with pending litigation and results primarily from the estimated cost of a proposed California settlement in Cheves v. American Investors Life Insurance Company, Family First Advanced Planning et al.
The restructuring charges expensed in 2003 included pre-tax severance and termination benefits of $3.0 million related to the termination of approximately ten positions and for severance accrual adjustments and other pre-tax costs of $20.3 million primarily related to the impairment loss on the Indianapolis office building, expenses associated with the merger of IL Annuity into ILIC, and systems conversion costs. Charges for all restructuring activities were completed in 2003.
The accrual reductions were for the release of provisions originally established for potential tax adjustments related to open Internal Revenue Service exam years ranging from 1997 through 2003 which were settled or eliminated during 2005 and 2004. The accrual was reduced $19.9 million in 2005 primarily related to the settlement of the tax treatment of a leveraged lease investment and the determination of taxable income of some partnership investments. The accrual was reduced $16.7 million in 2004 primarily related to the settlement of the deductibility of interest expense and the tax treatment of partial redemptions of adjustable conversion rate equity securities, the tax treatment of corporate owned life insurance, the deductibility of demutualization costs and acquisition costs, and the tax treatment of derivative costs and gains and losses. The accrual estimate was also revised downward in 2004 as negotiations progressed on the leveraged lease investment. Additionally, there was an approximate $3.7 million accrual reduction in 2004 for the overpayment of tax in prior years for which a refund is expected.
The effective income tax rate excluding the accrual reductions, the valuation allowance reduction, and the additional tax on the joint venture sale was 33.5% and 33.2% for 2005 and 2004, respectively. The effective income tax rate for 2003 varied from the prevailing corporate rate primarily due to tax exempt income.
As a holding company, AmerUs Group Co.’s cash flows from operations consist of dividends from subsidiaries, if declared and paid, interest from income on loans and advances to subsidiaries (including a surplus note
We have a $200 million revolving credit facility (which we refer to as the Revolving Credit Agreement) with a syndicate of lenders. In June 2005, we used our Revolving Credit Agreement to retire a portion of the $125 million senior notes payable. The borrowings were repaid from proceeds of our $300 million debt offering in August 2005. As of December 31, 2005, there was no outstanding loan balance under the facility and we were in compliance with all covenants. The Revolving Credit Agreement provides for typical events of default and covenants with respect to the conduct of business and requires the maintenance of various financial levels and ratios. Among other covenants, we (a) cannot have a leverage ratio greater than 0.35:1.0, (b) cannot have an interest coverage ratio less than 2.50:1.0, (c) are prohibited from paying cash dividends on common stock in excess of an amount equal to 3% of consolidated net worth as of the last day of the preceding fiscal year, (d) must cause our insurance subsidiaries to maintain certain levels of risk-based capital, and (e) are prohibited from incurring additional indebtedness for borrowed money in excess of certain limits typical for such lines of credit. We closely monitor all of these covenants to ensure continued compliance.
In September 2005, holders of our $185.0 million aggregate original principal amount of OCEANs exercised their conversion rights which resulted in our issuance of 1.7 million shares of common stock and a cash payment of $203 million, including a $12.7 million prepayment premium. The prepayment premium and a write-off of $6.4 million of remaining unamortized debt issuance costs have been reported as early extinguishment of debt expense in the consolidated statement of income.
We have $143.8 million of PRIDES outstanding at December 31, 2005. The PRIDES initially consist of a $25 senior note and a contract requiring the holder to purchase our common stock. The note has a minimum term of 4.75 years, which we may extend in certain circumstances. In addition, we entered into a remarketing agreement which requires us to remarket the notes in 2006. Under the purchase contract, holders of each contract are required to purchase our common stock on the settlement date of August 16, 2006, based on a specified settlement rate, which will vary according to the applicable market value of the common stock at the settlement date. The value of the common stock to be issued upon settlement of each purchase contract will not exceed $25, the stated value of the PRIDES, unless the applicable market value of the common stock (which is measured by the common stock price over a 20-day trading day period) increases to more than $33.80 per share. If the market price of our common stock was assumed to be $60 per share at the settlement date, we would issue approximately 4.8 million shares.
combination of our internal sources and dividends from insurance subsidiaries. We purchased 2.5 million shares in the third quarter of 2005 under the current purchase plan and we purchased 0.5 million shares in the first six months of 2005 under prior purchase plans. The program included purchases of shares under two accelerated share repurchase programs. The accelerated share repurchase programs allowed the Company to purchase the shares immediately, with the counterparty purchasing the shares in the open market. Except with the approval of the counterparty, the terms of the accelerated share repurchase agreement do not allow us to purchase additional shares until February 2006. As of December 31, 2005, 3.5 million shares remain available for repurchase under the purchase program.
Management believes that the current level of cash and available-for-sale, held-for-trading and short-term securities, combined with expected net cash inflows from operations, maturities of fixed maturity investments, principal payments on mortgage-backed securities and sales of its insurance products, will be adequate to meet the anticipated short-term cash obligations of the insurance subsidiaries.
account assets in the financial statements. The funding agreements may not be cancelled by the holders unless there is a default under the agreement, but the insurance subsidiaries may terminate the agreement at any time.
The insurance subsidiaries may also obtain liquidity through sales of investments. The investment portfolio as of December 31, 2005, had a carrying value of $20.0 billion, including closed block investments.
We may also enter into securities borrowing arrangements from time to time whereby we borrow securities from other institutions and pay a fee. Securities borrowed amounted to $138.2 million at both December 31, 2005, and 2004, and are included in accrued expenses and other liabilities in the consolidated balance sheet.
We are contingently liable for the portion of the policies reinsured under existing reinsurance agreements in the event the reinsurance companies are unable to pay their portion of any reinsured claim. Management believes that any liability from this contingency is unlikely. However, to limit the possibility of such losses, we evaluate the financial condition of reinsurers and monitor concentration of credit risk.
Our contractual obligations primarily consist of amounts owed for policy reserves and policyowner funds, notes payable, operating lease commitments, interest payable and securities lending and borrowing obligations. A summary of obligations are as follows for each of the five years ending December 31, 2005:
Securities in our portfolio with a carrying value of approximately $1,940 million and $1,820 million at December 31, 2005 and 2004, respectively, do not have readily determinable market prices. Valuation techniques vary by security type and availability of market data. Fair values for securities which do not have a readily available market price are determined by: 1) a matrix process that uses a current market spread added to an applicable treasury rate to discount expected future cash flows applicable to the coupon rate, credit quality, industry sector and term of the investment; 2) independent third party sources or recent transactions in similar securities, or 3) internally prepared valuations incorporating standard valuation techniques. Certain market conditions that could impact the valuation of securities include credit ratings, business climate, economic environment, industry trends, and regulatory and legal risks/events, among others. All such investments are classified as available-for-sale. Our ability to liquidate our positions in these securities will be impacted to a significant degree by the lack of an actively traded market, and we may not be able to dispose of these investments in a timely manner. Although we believe our estimates reasonably reflect the fair value of those securities, our key assumptions about the risk-free interest rates,
The use of derivative instruments exposes the Company to credit and market risk. If the counterparty fails to perform, the credit risk is equal to the extent of the fair value gain in the derivative. The Company minimizes the credit or payment risk in derivative instruments by entering into transactions with high quality counterparties that are regularly monitored. The Company also maintains a policy of requiring that all derivative contracts be governed by an International Swaps and Derivatives Association (“ISDA”) Master Agreement. Market risk is the adverse effect that a change in interest rates, implied volatility rates, or a change in certain equity indexes or instruments has on the value of a financial instrument. The Company manages the market risk by establishing and monitoring limits as to the types and degree of risk that may be undertaken. Derivative instruments are monitored by the Company’s Investment and Risk Management Committee of the Board of Directors as part of its oversight of derivative activities. The committee is responsible for implementing various hedging strategies that are developed through its analysis of financial simulation models and other internal and industry sources. The resulting hedging strategies are then incorporated into the Company’s overall risk management strategies.
Because the EGMs are only an estimate of the profits we expect to recognize from these policies, the EGMs are adjusted annually for any changes in the remaining expected future gross margins. When EGMs are adjusted, we also adjust the amortization of the DAC and deferred sales inducements to maintain a constant percentage of amortization over the entire life of the policies.
Our diversified portfolio of investments includes public and private fixed maturity securities and commercial mortgage loans. Our objective is to maintain a high-quality, diversified fixed maturity securities portfolio that produces a yield and total investment return that supports the various product line liabilities and our earnings goals.
The following table summarizes invested assets by asset category as of December 31, 2005 and 2004:
The fixed maturity securities portfolio consists primarily of investment grade corporate fixed maturity securities, high-quality mortgage-backed securities (MBS) and United States government and agency obligations. As of December 31, 2005, fixed maturity securities were $18,142.2 million, or 90.5% of the carrying value of invested assets with public and private fixed maturity securities constituting $15,559.2 million, or 77.7%, and $2,583.0 million, or 12.8%, respectively, of total fixed maturity securities, respectively.
The following table summarizes the composition of the fixed maturity securities by category as of December 31, 2005 and 2004:
The following table summarizes fixed maturity securities by remaining maturity as of December 31, 2005:
The portfolio of investment grade fixed maturity securities is diversified by number and type of issuers. As of December 31, 2005, investment grade fixed maturity securities included the securities of 919 issuers, with 2,654 different issues of securities. No non-government/agency issuer represents more than 0.5% of investment grade fixed maturity securities.
Below-investment grade fixed maturity securities as of December 31, 2005, included the securities of 337 issuers representing 6.9% of total invested assets, with the largest being a $24.8 million investment.
As of December 31, 2005, 83.6% of total invested assets were investment grade fixed maturity securities. The following table sets forth the credit quality, by NAIC designation and Standard & Poor’s rating equivalents, of fixed maturity securities as of December 31, 2005:
The following table summarizes fixed maturity securities by Standard & Poor’s or equivalent rating, including unrealized losses, at December 31, 2005:
The notional principal amounts of derivatives, which represent the extent of our involvement in such contracts but not the risk of loss, at December 31, 2005, amounted to $5,807.0 million. The interest rate swaps had a carrying value of a net payable position of $0.7 million at December 31, 2005. The credit default swaps had a carrying value of a net receivable position of $0.1 million at December 31, 2005. The carrying value of options amounted to $185.7 million at December 31, 2005. The total carrying value of other derivatives amounted to $3.4 million at December 31, 2005. For each of these derivatives, the carrying value is equal to fair value as of December 31, 2005. The derivatives are reflected as other investments on the consolidated financial statements. The net amount payable or receivable from interest rate and credit default swaps is accrued as an adjustment to interest income.
As of December 31, 2005, there were no loans in the loan portfolio classified as delinquent or in foreclosure. As of the same date, there were three loans classified as restructured totaling $2.6 million. During 2005, we had no foreclosures.
As previously discussed in Liquidity and Capital Resources, we participate in securities lending and securities borrowing arrangements.
We held $483.4 million of policy loans on individual insurance products as of December 31, 2005. Policy loans are permitted to the extent of a policy’s contractual limits and are fully collateralized by policy cash values. As of December 31, 2005, we held equity securities of $78.0 million of which the largest holding was Federal Home Loan Bank common stock totaling $64.8 million.
We hold investments in indexed debt instruments (IDIs) in which the principal is initially partially defeased by an obligation of a third party financial institution (institution) collateralized by U.S. Treasuries which will accrete to 50% of the original principal amount of the IDIs at maturity. The balance of the principal amount due at maturity is subject to a dynamic defeasance mechanism, which should provide a return of the initial investment. The instruments issued by the institutions are linked to the performance of a hedge fund or fund of funds. The annual income on these investments will be equal to the quarterly distribution of the hedge fund or fund of funds plus the change in the present value of anticipated distributions to be received at maturity and will be included in net investment income. Over the life of the IDIs, the income will be a function of the cumulative performance of the linked hedge fund or fund of funds and the return on any defeased portion of the investment. The quarterly distribution paid, if any, reduces the amount of future participation in the performance of the linked hedge fund or fund of funds. At maturity, the Company will take delivery of the referenced hedge fund interests and cash or
U.S. Treasuries equal to the portion of the instruments that have been defeased, the total of which should equal or exceed the instruments’ principal amount. The investment purpose of these instruments is to enable the Company to obtain the return as if they had invested in hedge funds or fund of funds with dynamic principal protection. The instruments as of December 31, 2005 carried an A rating or better by Fitch. The carrying value of IDIs was $568.9 million and $564.7 million at December 31, 2005 and 2004, respectively.
Our evaluation of OTTI’s for fixed income securities follows a three-step process: 1) screen and identify; 2) assess and document; 3) recommend and approve. In identifying potential OTTI’s, we screen for all securities that have a fair value less than 80% of amortized cost. In addition, we monitor securities for general credit issues that have been identified and included on a watch list which may result in the potential impairment list including other securities that have a fair value at or greater than 80% of amortized cost. For asset backed securities, an impairment loss is established if the fair value of the security is less than amortized cost and there is an adverse change in estimated cash flows from the cash flows previously projected.
Company description, industry characteristics and trends, company-to-industry profile, quality of management, etc.
If the determination is that the security is OTTI, it is written down to fair value. The write-down is reviewed and approved by senior management. The difference between amortized cost and fair value is charged to net income.
The following tables present unrealized losses for fixed maturity securities at December 31, 2005 and 2004 by investment category and industry sector:
The following table provides a summary of unrealized losses for fixed maturity securities which identifies the length of time the securities have continually been in an unrealized loss position as of December 31, 2005 and 2004:
In addition to the above listing, at December 31, 2005 and 2004, securities with a market value of $400.1 million and $482.0 million and unrealized loss position of $13.2 million and $9.0 million, respectively, were principal protected. These securities included underlying holdings that provided for a return of principal through maturity of zero coupon bonds from a highly rated issuer or a principal guarantee from a highly rated
The following table presents, for securities sold during 2004 and 2003, the amount of material losses exceeding $3 million recorded and the fair value at the sales date. There were no individual material losses exceeding $3 million for securities sold during 2005.
The decision to sell certain securities within the overall context of our portfolio management strategies can result in losses as previously shown. This may include required exposure reductions due to internal credit limits, capital reserve objectives, asset allocation decisions and hedging activities. However, no decisions have been made as of December 31, 2005, which result in material losses.
Interest rate changes may have temporary effects on the sale and profitability of the protection products and accumulation products offered. For example, if interest rates rise, competing investments (such as annuities or life insurance products offered by competitors, certificates of deposit, mutual funds, and similar instruments) may become more attractive to potential purchasers of our products until we increase the interest rate credited to owners of our protection products and accumulation products. In contrast, as interest rates fall, we attempt to adjust credited rates to compensate for the corresponding decline in reinvestment rates. We monitor interest rates and sell annuities
and life insurance policies that permit flexibility to make interest rate changes as part of the management of interest spreads. However, the profitability of our products is based upon persistency, mortality and expenses, as well as interest rate spreads.
In November 2005, the FASB issued proposed EITF 03-1-a, “Implementation Guidance for the Application of Paragraph 16 of EITF Issue 03-1,” (EITF 03-1-a) but changed the title to FSP 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” (FSP FAS 115-1). The guidance in FSP 115-1 nullifies the accounting and measurement provisions of EITF 03-1, references existing OTTI guidance and supersedes EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairments upon the Planned Sale
In June 2005, the FASB issued SFAS 154 (SFAS 154), “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements”. SFAS 154 requires retrospective application to prior periods’ financial statements for all voluntary changes in accounting principle, unless impracticable. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 31, 2005. SFAS 154 will have no immediate impact on our consolidated financial statements, though it will impact our presentation of future voluntary accounting changes or errors, if any occur.