A substantial but gradually declining amount of our Life and Annuity segment earnings derive from the closed block, which consists primarily of participating life insurance policies sold prior to our demutualization and initial public offering in 2001. We do not expect the net income contribution from the closed block to deviate materially from its actuarially projected path, subject to the maintenance of a positive policyholder dividend obligation. See Note 4 to our consolidated financial statements under Item 8 “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for more information on the closed block.
This average credit spread is recalculated every quarter therefore the fair value will change with the passage of time even in the absence of any other changes that would affect the valuation. For example, the December 31, 2010 fair value of $13.9 million would increase to $15.6 million if the chosen spread were decreased by 50 basis points. If the chosen spread were increased by 50 basis points the fair value would decrease to $12.3 million. The impact of the CSA at December 31, 2010 and 2009 was a reduction of $19.9 million and $18.5 million in the reserves associated with these riders, respectively.
Deferred tax assets and/or liabilities are determined by multiplying the differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances on deferred tax assets are estimated based on our assessment of the realizability of such amounts.
consideration of available tax planning strategies and actions that could be implemented, if necessary; and
Policy benefits decreased $91.3 million to $1,188.6 million for the year ended December 31, 2010 from $1,279.9 million for the year ended December 31, 2009. Unlocking adjustments of $7.7 million and $18.7 million in 2010 and 2009, respectively, decreased overall death benefit and other insurance benefit reserves. Excluding the impact of unlocking, policyholder benefits decreased primarily as a result of the decrease in policyholder dividend obligations in the closed block as a result of the change in the 2011 dividend scale and improved mortality for universal life.
The table below shows the interest rate sensitivity of our general account derivatives measured in terms of fair value, excluding derivative liabilities embedded in products. These exposures will change as our insurance liabilities are created and discharged and as a result of ongoing portfolio and risk management activities.
Certain annuity products sold by our Life Companies contain GMDBs. The GMDB feature provides annuity contract owners with a guarantee that the benefit received at death will be no less than a prescribed amount. This minimum amount is based on the net deposits paid into the contract, the net deposits accumulated at a specified rate, the highest historical account value on a contract anniversary or, if a contract has more than one of these features, the greatest of these values. To the extent that the GMDB is higher than the current account value at the time of death, the Company incurs a cost. This typically results in an increase in annuity policy benefits in periods of declining financial markets and in periods of stable financial markets following a decline. As of December 31, 2010 and 2009, the difference between the GMDB and the current account value (net amount at risk) for all existing contracts was $116.7 million and $292.9 million, respectively. This was our exposure to loss had all contract owners died on either December 31, 2010 or 2009. See Note 11 to our consolidated financial statements under “Item 8: Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for more information.
We sponsor defined benefit pension plans for our employees. For GAAP accounting purposes, we assumed an 8.5% long-term rate of return on plan assets in the most recent valuations, performed as of December 31, 2010. To the extent there are deviations in actual returns, there will be changes in our projected expense and funding requirements. As of December 31, 2010, the projected benefit obligation for our funded and unfunded defined benefit plans was in excess of plan assets by $139.8 million and $133.3 million, respectively. We made contributions totaling $25.7 million to the pension plans during 2010. We made contributions totaling $3.6 million to the pension plans during 2009. Over the next 12 months, we expect to make contributions of approximately $16.4 million, of which approximately $3.5 million will be made in the first quarter of 2011.
Most of our RMBS portfolio is highly rated. At December 31, 2010, 84.4% of the total residential portfolio was rated AAA or AA. We have $168.3 million of sub-prime exposure, $254.3 million of Alt-A exposure and $505.9 million of prime exposure, which combined amount to 6.5% of our general account. The majority of our sub-prime, Alt-A and prime exposure is investment grade, with 48.7% being AAA rated and another 20.8% in AA securities. We have employed a disciplined approach in the analysis and monitoring of our mortgage-backed securities. Our approach involves a monthly review of each security. Underlying mortgage data is obtained from the security’s trustee and analyzed for performance trends. A security-specific stress analysis is performed using the most recent trustee information. This analysis forms the basis for our determination of whether the security will pay in accordance with the contractual cash flows. RMBS impairments during the year ended December 31, 2010 totaled $15.8 million. These impairments consist of $4.3 million from prime, $9.9 million from Alt-A and $1.6 million from sub-prime.
Credit Losses Recognized in Earnings on Debt Securities for which a Portion
Investing activities produced a cash outflow primarily as a result of capital contributions and advances to subsidiaries. This was partially offset by proceeds from debt security redemptions as well as proceeds received for the sale of PFG.
We believe that the existing and expected sources of liquidity for our Life Companies are adequate to meet both current and anticipated needs.
Rating agencies assign Phoenix Life financial strength ratings and assign the holding company debt ratings based in each case on their opinions of the relevant company’s ability to meet its financial obligations. Rating downgrades may result in lower sales, higher surrenders and increased or decreased interest costs in connection with future borrowings.
On February 8, 2011, A.M. Best Company, Inc. affirmed our financial strength rating of B+ and our senior debt rating of bb-. They changed their outlook on all ratings from negative to stable. On January 13, 2010, A.M. Best Company, Inc. downgraded our financial strength rating from B++ to B+ and downgraded our senior debt rating from bb+ to bb-. They maintained their negative outlook on all ratings. On March 10, 2009, A.M. Best Company, Inc. downgraded our financial strength rating to B++ from A and downgraded our senior debt rating to bb+ from bbb.
We also have a postretirement benefit plan, which is unfunded and had projected benefit obligations of $(58.8) million and $(61.6) million as of December 31, 2010 and 2009, respectively.