(xi) general economic and business conditions which are less favorable than expected;
Following is management’s discussion and analysis of financial condition and results of operations of the Company for the three years ended December 31, 2009. This discussion should be read in conjunction with the audited consolidated financial statements and related notes beginning on page of this report.
Pricing services, broker quotes and internal valuations are also considered in valuing securities when the volume and level of activity for such assets have significantly decreased (e.g., when the markets for those securities are considered inactive).
Management has established tax reserves for uncertain tax positions, including permanent and temporary differences. These reserves are reviewed regularly and are adjusted as events occur that management believes impact its liability for additional taxes, such as lapsing of applicable statutes of limitations; conclusion of tax audits or substantial agreement on the deductibility/nondeductibility of uncertain items; additional exposure based on current calculations; identification of new issues; release of administrative guidance; or rendering of a court decision affecting a particular tax issue. Management believes its tax reserves reasonably provide for potential assessments that may result from Internal Revenue Service (IRS) examinations and other tax-related matters for all open tax years.
Other-than-temporary impairment losses increased primarily due to a $1.03 billion increase in impairment charges due to challenging conditions in the credit markets.
Higher amortization of DAC primarily was due to the DAC unlock in the second quarter of 2007, which lowered amortization of DAC by $208.9 million in 2007. In addition, the DAC unlocks in 2008 increased amortization of DAC by $429.1 million in 2008. However, the Company modified the features of its L.inc product within this segment during the second quarter of 2007. This modification required the Company to extinguish existing DAC and other balances related to L.inc, resulting in a $124.0 million increase in amortization of DAC and increased annuity benefits of $11.0 million in 2007. Additionally, lower gross profits in 2008 and a lower rate of DAC amortization due to the impact of 2007 unlocking lowered amortization of DAC by $110.5 million and $30.9 million, respectively, to further offset the increases noted above.
Benefits and claims increased primarily due to higher exposure on GMDB contracts due to unfavorable market conditions which increased benefits and claims by $134.3 million.
The decrease in asset fees primarily was driven by lower average separate account values driven by unfavorable market performance which decreased asset fees by $74.4 million. However, the average variable asset fee rate increased to 1.45% from 1.42% in 2007 as new business with living benefit riders and corresponding higher fee rates influenced the overall average rate, increasing asset fees by $12.5 million.
Pre-tax operating earnings declined primarily due to lower assets fee and other income and higher amortization of VOBA and other intangible assets, partially offset by higher interest spread income.
Includes losses of $500.7 million and $26.7 million on embedded derivatives associated with living benefit contracts for the years ended December 31, 2008 and 2007, respectively.
Contractual provisions exist that could increase those obligations presented. The process for determining future interest crediting rates as described in note 7 above was used to develop the estimates of payments due by period.