The Company issues annuity contracts, GICs, and certain funding agreements that contain derivative instruments that are embedded in the contract. Upon issuing the contract, the embedded derivative is separated from the host contract (annuity or GIC) and is carried at fair value.
Total revenues were $1,460.5 million and $1,628.5 million for the twelve-month periods ended December 31, 2007 and 2006, respectively. Changes in the components of total revenues are discussed below:
Interest credited - to policyholders was $629.8 million and $633.4 million for the twelve-month periods ended December 31, 2007 and 2006, respectively. The decrease of $3.6 million was the result of a decrease in average policyholder balances which decreased interest credited by $26.2 million, offset by a higher average interest credited rate which increased interest credited by $22.6 million.
Partnership capital securities early redemption payment - was the penalty paid to the Capital Trust, an affiliate, in connection with the early redemption of $600 million of partnership capital securities. The early redemption payment was $25.6 million for the year ended December 31, 2007.
As of December 31, 2007, the remaining securities in an unrealized loss position have losses of less than $4.0 million and were subject to the same quantitative and qualitative credit analysis as the aforementioned securities. The Company expects these investments to continue to perform in accordance with their original contractual terms and the company has the intent and ability to hold these investments until recovery of the fair value up to the cost of these securities, which may be maturity.
Premiums for traditional individual life products are considered earned revenue when due. Premiums related to group life, group stop loss, group dental and group disability insurance are recognized as earned revenue pro-rata over the contract period. The unexpired portion of these premiums is recorded as unearned premiums. Revenue from universal life-type products and investment-related products includes charges for the cost of insurance (mortality), initiation and administration of the policy and surrender charges. Revenue is recognized when the charges are assessed except that any portion of an assessment that relates to services to be provided in future years is deferred and recognized over the period during which the services are provided.
The Company has an administrative services agreement with SLC - U.S. Ops Holdings, under which the Company provides administrative and investor services with respect to certain open-end management investment companies for which an affiliate, Massachusetts Financial Services Company (“MFS”), serves as the investment adviser, and which are offered to certain of the Company’s separate accounts established in connection with the variable annuity contracts issued by the Company. Amounts received under this agreement amounted to approximately $22.3 million, $22.6 million and $23.4 million for the years ended December 31, 2007, 2006 and 2005, respectively.
Effective September 27, 2007, the Company dissolved the General Partner. The General Partner was the sole general partner in the Partnership and, as a result, the Partnership had been consolidated with the results of the Company. The Partnership was organized to purchase subordinated debentures issued by the Parent and to issue partnership capital securities to an affiliated business trust, the Capital Trust. The Partnership was cancelled effective September 27, 2007.
The Company paid $15.9 million, $14.9 million and $16.4 million for the years ended December 31, 2007, 2006 and 2005, respectively, in investment management services fees to SCA.
The following table provides the number of securities with gross unrealized losses, which were deemed to be temporarily impaired, at December 31, 2006 (not in thousands):
The Company has agreements with SLOC and several unrelated companies, which provide for reinsurance of portions of the net-amount-at-risk under certain individual variable universal life, individual private placement variable universal life, bank owned life insurance (“BOLI”), and corporate owned life insurance (“COLI”) policies. These amounts are reinsured on either a monthly renewable or a yearly renewable term basis. Fee income was reduced by $21.6 million, $37.8 million and $33.3 million for the years ended December 31, 2007, 2006 and 2005, respectively, to account for these agreements.
Due to the over funded status of the retirement plan and the agent’s pension plan, the Company will not be making contributions to those plans in 2008. The Company will be making a contribution of $1.3 million to the UBF plan in 2008.
As a result of the implementation of FIN 48, the Company recognized a decrease of $5.2 million in the liability for UTBs and related net interest, which was accounted for as an increase to its January 1, 2007 balance of retained earnings. The liability for UTBs related to permanent and temporary tax adjustments, exclusive of interest, was $63.0 million and $54.1 million at December 31, 2007 and January 1, 2007, respectively. Of the $63.0 million, $6.4 million represents the amount of UTBs that, if recognized, would favorably affect the Company’s effective income tax rate in future periods, exclusive of any related interest. In addition, consistent with the provisions of FIN 48, the Company reclassified $56.6 million of income taxes from deferred tax liabilities to accrued expenses and taxes at December 31, 2007.
The liability for guarantees is re-evaluated regularly, and adjustments are made to the liability balance through a charge or credit to policyholder benefits.
The changes in VOBA and customer renewals acquired for the years ended December 31 were as follows:
The Company has four noncancelable sublease agreements that expire on March 31, 2008. As of December 31, 2007, the minimum future lease payments under the sublease agreements was $0.3 million.
The following is a tabulation of the unaudited quarterly results of operations (in 000’s):