The valuation allowance for deferred tax assets at December 31, 2009 was $3.7 million. There was no valuation allowance at December 31, 2008. The valuation allowance is related to a net operating loss carryforward and other deferred tax assets that, in the judgment of management, is not more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on generation of further taxable income during the periods in which those temporary differences are deductible. Management considers the scheduled reversal of deferred tax liabilities, projected taxable income, and tax-planning strategies in making the assessment.
The Company adopted guidance, as of the period ended December 31, 2009, which clarified that when a quoted price in an active market for an identical liability is not available, an entity should measure fair value using an approach that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs (ASU 2009-05, Measuring Liabilities at Fair Value).
The decrease in variable annuity deposits during 2009 and 2008 was primarily due to volatile equity markets as well as the Company discontinuing the sale of variable annuity products in 2009. All other deposits include deposits on discontinued modified guaranteed annuities and immediate annuities as well as renewal deposits on existing life insurance and fixed annuity contracts. There were no internal exchanges during 2009. Internal exchanges during 2008 and 2007 were $0.8 million and $4.2 million, respectively.
MLLICNY’s $0.3 million of gross unrealized losses within the financial services sector has an estimated fair value of $3.8 million. The majority of the unrealized loss in the financial services sector relates to the banking sub-sector which has $0.3 million of gross unrealized losses on securities with an estimated fair value of $2.3 million. Companies within MLLICNY’s financial services sector are generally 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 within the sector has been significantly reduced following unprecedented liquidity and capital support from major governments over the last year.
All RMBS securities of the Company are monitored and reviewed on a monthly basis with detailed modeling completed on the portfolio quarterly. Model output is generated under base and several stress-case scenarios. RMBS asset specialists utilize widely recognized industry modeling software to perform a loan-by-loan, bottom-up approach to modeling. Models incorporate external loan-level analytics to identify the riskiest securities. The results from the models are then closely analyzed by the asset specialist to determine whether or not a principal or interest loss is expected to occur. Positions are impaired to the net present value of projected future cash flows where loss events have taken place or are projected to take place that would affect future cash flows.
Gross unrealized losses and OTTI on available-for-sale below investment grade securities represented 21% and 14% of total gross unrealized losses and OTTI on all available-for-sale securities at December 31, 2009 and 2008, 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, 2009.
Details underlying available-for-sale securities below investment grade and in an unrealized loss and OTTI position were as follows:
Subprime mortgages are loans to homebuyers who have weak or impaired credit histories. In recent years, the market for these loans has expanded rapidly. During that time, however, lending practices and credit assessment standards grew steadily weaker. As a result, the market is now experiencing a sharp increase in the number of loan defaults. Investors in subprime mortgage assets include not only mortgage lenders, but also brokers, hedge funds, and insurance companies. The Company does not currently invest in or originate whole loan residential mortgages. The Company categorizes ABS issued by a securitization trust as having subprime mortgage exposure when the average credit score of the underlying mortgage borrowers in a securitization trust is below 660 at issuance. The Company also categorizes ABS issued by a securitization trust with second lien mortgages as subprime mortgage exposure, even though a significant percentage of second lien mortgage borrowers may not necessarily have credit scores below 660 at issuance. The estimated fair value of the subprime mortgage investments at December 31, 2009 and 2008 was $2.2 million and $2.8 million, respectively, entirely in first lien - fixed rate, AAA quality and vintages prior to 2004.