e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2011
OR
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-11848
REINSURANCE GROUP OF AMERICA, INCORPORATED
(Exact name of Registrant as specified in its charter)
|
|
|
MISSOURI
(State or other jurisdiction
of incorporation or organization)
|
|
43-1627032
(IRS employer
identification number) |
1370 Timberlake Manor Parkway
Chesterfield, Missouri 63017
(Address of principal executive offices)
(636) 736-7000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
|
|
|
|
|
|
|
Large accelerated filer þ
|
|
Accelerated filer o
|
|
Non-accelerated filer o
(Do not check if a smaller reporting company)
|
|
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of July 29, 2011, 74,093,504 shares of the registrants common stock were outstanding.
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
2
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(Dollars in thousands, except share data) |
|
Assets |
|
|
|
|
|
|
|
|
Fixed maturity securities: |
|
|
|
|
|
|
|
|
Available-for-sale at fair value (amortized cost of $14,041,347 and
$13,345,022 at June 30, 2011 and December 31, 2010, respectively) |
|
$ |
15,153,807 |
|
|
$ |
14,304,597 |
|
Mortgage loans on real estate (net of allowances of $7,692 and $6,239
at June 30, 2011 and December 31, 2010, respectively) |
|
|
908,048 |
|
|
|
885,811 |
|
Policy loans |
|
|
1,229,663 |
|
|
|
1,228,418 |
|
Funds withheld at interest |
|
|
5,671,844 |
|
|
|
5,421,952 |
|
Short-term investments |
|
|
125,618 |
|
|
|
118,387 |
|
Other invested assets |
|
|
799,341 |
|
|
|
707,403 |
|
|
|
|
|
|
|
|
Total investments |
|
|
23,888,321 |
|
|
|
22,666,568 |
|
Cash and cash equivalents |
|
|
710,973 |
|
|
|
463,661 |
|
Accrued investment income |
|
|
160,436 |
|
|
|
127,874 |
|
Premiums receivable and other reinsurance balances |
|
|
1,045,131 |
|
|
|
1,037,679 |
|
Reinsurance ceded receivables |
|
|
781,006 |
|
|
|
769,699 |
|
Deferred policy acquisition costs |
|
|
3,733,686 |
|
|
|
3,726,443 |
|
Other assets |
|
|
339,724 |
|
|
|
289,984 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
30,659,277 |
|
|
$ |
29,081,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Future policy benefits |
|
$ |
9,642,814 |
|
|
$ |
9,274,789 |
|
Interest-sensitive contract liabilities |
|
|
8,100,608 |
|
|
|
7,774,481 |
|
Other policy claims and benefits |
|
|
2,774,031 |
|
|
|
2,597,941 |
|
Other reinsurance balances |
|
|
159,340 |
|
|
|
133,590 |
|
Deferred income taxes |
|
|
1,421,480 |
|
|
|
1,396,747 |
|
Other liabilities |
|
|
784,291 |
|
|
|
637,923 |
|
Short-term debt |
|
|
199,993 |
|
|
|
199,985 |
|
Long-term debt |
|
|
1,414,406 |
|
|
|
1,016,425 |
|
Collateral finance facility |
|
|
837,789 |
|
|
|
850,039 |
|
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely junior subordinated debentures of the Company |
|
|
|
|
|
|
159,421 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
25,334,752 |
|
|
|
24,041,341 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingent liabilities (See Note 8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity: |
|
|
|
|
|
|
|
|
Preferred stock (par value $.01 per share; 10,000,000 shares authorized; no
shares issued or outstanding) |
|
|
|
|
|
|
|
|
Common stock (par value $.01 per share; 140,000,000 shares authorized;
shares issued: 79,137,758 and 73,363,523 at June 30, 2011 and December 31, 2010, respectively) |
|
|
791 |
|
|
|
734 |
|
Warrants |
|
|
|
|
|
|
66,912 |
|
Additional paid-in-capital |
|
|
1,713,893 |
|
|
|
1,478,398 |
|
Retained earnings |
|
|
2,856,009 |
|
|
|
2,587,403 |
|
Treasury stock, at cost; 5,062,014 and 328 shares at
June 30, 2011 and December 31, 2010, respectively |
|
|
(310,856 |
) |
|
|
(295 |
) |
Accumulated other comprehensive income |
|
|
1,064,688 |
|
|
|
907,415 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
5,324,525 |
|
|
|
5,040,567 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
30,659,277 |
|
|
$ |
29,081,908 |
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements (unaudited).
3
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
|
|
|
|
|
|
(Dollars in thousands, except per share data) |
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
1,788,676 |
|
|
$ |
1,582,017 |
|
|
$ |
3,524,806 |
|
|
$ |
3,210,481 |
|
Investment income, net of related expenses |
|
|
337,436 |
|
|
|
291,671 |
|
|
|
708,476 |
|
|
|
595,929 |
|
Investment related gains (losses), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments on fixed maturity securities |
|
|
(5,582 |
) |
|
|
(3,489 |
) |
|
|
(7,138 |
) |
|
|
(10,919 |
) |
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income |
|
|
292 |
|
|
|
(139 |
) |
|
|
292 |
|
|
|
2,205 |
|
Other investment related gains (losses), net |
|
|
32,678 |
|
|
|
26,620 |
|
|
|
157,854 |
|
|
|
162,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment related gains (losses), net |
|
|
27,388 |
|
|
|
22,992 |
|
|
|
151,008 |
|
|
|
154,177 |
|
Other revenues |
|
|
50,477 |
|
|
|
35,197 |
|
|
|
102,122 |
|
|
|
71,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
2,203,977 |
|
|
|
1,931,877 |
|
|
|
4,486,412 |
|
|
|
4,032,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits |
|
|
1,520,013 |
|
|
|
1,307,239 |
|
|
|
2,989,462 |
|
|
|
2,682,419 |
|
Interest credited |
|
|
96,196 |
|
|
|
79,169 |
|
|
|
202,259 |
|
|
|
136,103 |
|
Policy acquisition costs and other insurance expenses |
|
|
261,282 |
|
|
|
237,149 |
|
|
|
592,435 |
|
|
|
603,451 |
|
Other operating expenses |
|
|
97,161 |
|
|
|
83,147 |
|
|
|
203,311 |
|
|
|
174,346 |
|
Interest expense |
|
|
25,818 |
|
|
|
25,141 |
|
|
|
50,387 |
|
|
|
40,590 |
|
Collateral finance facility expense |
|
|
3,101 |
|
|
|
1,960 |
|
|
|
6,303 |
|
|
|
3,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
2,003,571 |
|
|
|
1,733,805 |
|
|
|
4,044,157 |
|
|
|
3,640,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
200,406 |
|
|
|
198,072 |
|
|
|
442,255 |
|
|
|
391,387 |
|
Provision for income taxes |
|
|
67,518 |
|
|
|
71,053 |
|
|
|
148,551 |
|
|
|
141,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
132,888 |
|
|
$ |
127,019 |
|
|
$ |
293,704 |
|
|
$ |
249,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
1.80 |
|
|
$ |
1.74 |
|
|
$ |
3.99 |
|
|
$ |
3.41 |
|
Diluted earnings per share |
|
$ |
1.78 |
|
|
$ |
1.70 |
|
|
$ |
3.96 |
|
|
$ |
3.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per share |
|
$ |
0.12 |
|
|
$ |
0.12 |
|
|
$ |
0.24 |
|
|
$ |
0.24 |
|
See accompanying notes to condensed consolidated financial statements (unaudited).
4
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
|
(Dollars in thousands) |
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
293,704 |
|
|
$ |
249,458 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
(31,378 |
) |
|
|
(38,770 |
) |
Premiums receivable and other reinsurance balances |
|
|
66,922 |
|
|
|
(118,265 |
) |
Deferred policy acquisition costs |
|
|
33,008 |
|
|
|
37,995 |
|
Reinsurance ceded receivable balances |
|
|
(11,307 |
) |
|
|
(5,351 |
) |
Future
policy benefits, other policy claims and benefits, and other reinsurance balances |
|
|
332,611 |
|
|
|
1,176,366 |
|
Deferred income taxes |
|
|
(34,698 |
) |
|
|
105,285 |
|
Other assets and other liabilities, net |
|
|
41,262 |
|
|
|
(190,883 |
) |
Amortization of net investment premiums, discounts and other |
|
|
(67,755 |
) |
|
|
(64,779 |
) |
Investment related gains, net |
|
|
(151,008 |
) |
|
|
(154,177 |
) |
Excess tax benefits from share-based payment arrangement |
|
|
(2,690 |
) |
|
|
(782 |
) |
Other, net |
|
|
69,143 |
|
|
|
39,116 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
537,814 |
|
|
|
1,035,213 |
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
Sales of fixed maturity securities available-for-sale |
|
|
1,791,826 |
|
|
|
1,490,869 |
|
Maturities of fixed maturity securities available-for-sale |
|
|
164,043 |
|
|
|
72,758 |
|
Purchases of fixed maturity securities available-for-sale |
|
|
(2,341,291 |
) |
|
|
(2,372,035 |
) |
Cash invested in mortgage loans |
|
|
(44,679 |
) |
|
|
(61,676 |
) |
Cash invested in policy loans |
|
|
(8,928 |
) |
|
|
(38,864 |
) |
Cash invested in funds withheld at interest |
|
|
(10,563 |
) |
|
|
(74,093 |
) |
Principal payments on mortgage loans on real estate |
|
|
19,283 |
|
|
|
12,500 |
|
Principal payments on policy loans |
|
|
7,683 |
|
|
|
2,412 |
|
Change in short-term investments and other invested assets |
|
|
(74,600 |
) |
|
|
91,175 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(497,226 |
) |
|
|
(876,954 |
) |
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
Dividends to stockholders |
|
|
(17,703 |
) |
|
|
(17,561 |
) |
Repurchase of collateral finance facility securities |
|
|
(7,586 |
) |
|
|
|
|
Net proceeds from long-term debt issuance |
|
|
394,410 |
|
|
|
|
|
Proceeds from redemption and remarketing of trust preferred securities |
|
|
154,588 |
|
|
|
|
|
Maturity of trust preferred securities |
|
|
(159,455 |
) |
|
|
|
|
Purchases of treasury stock |
|
|
(340,220 |
) |
|
|
(718 |
) |
Excess tax benefits from share-based payment arrangement |
|
|
2,690 |
|
|
|
782 |
|
Exercise of stock options, net |
|
|
15,605 |
|
|
|
8,008 |
|
Change in cash collateral for derivative positions |
|
|
8,010 |
|
|
|
72,894 |
|
Deposits on universal life and
other investment type policies and contracts |
|
|
288,424 |
|
|
|
81,214 |
|
Withdrawals on universal life and
other investment type policies and contracts |
|
|
(147,774 |
) |
|
|
(251,990 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
190,989 |
|
|
|
(107,371 |
) |
Effect of exchange rate changes on cash |
|
|
15,735 |
|
|
|
(5,159 |
) |
|
|
|
|
|
|
|
Change in cash and cash equivalents |
|
|
247,312 |
|
|
|
45,729 |
|
Cash and cash equivalents, beginning of period |
|
|
463,661 |
|
|
|
512,027 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
710,973 |
|
|
$ |
557,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplementary information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
47,054 |
|
|
$ |
48,353 |
|
Cash paid for income taxes, net of refunds |
|
$ |
105,107 |
|
|
$ |
32,981 |
|
See accompanying notes to condensed consolidated financial statements (unaudited).
5
REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Basis of Presentation
Reinsurance Group of America, Incorporated (RGA) is an insurance holding company that was formed
on December 31, 1992. The accompanying unaudited condensed consolidated financial statements of
RGA and its subsidiaries (collectively, the Company) have been prepared in conformity with
accounting principles generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial statements. In the
opinion of management, all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included. Results for the three and six months ended
June 30, 2011 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2011. There were no subsequent events that would require disclosure or
adjustments to the accompanying condensed consolidated financial statements through the date the
financial statements were issued. These unaudited condensed consolidated financial statements
include the accounts of RGA and its subsidiaries and should be read in conjunction with the
consolidated financial statements and notes thereto included in the Companys 2010 Annual Report on
Form 10-K (2010 Annual Report) filed with the Securities and Exchange Commission on February 28,
2011.
The Company has reclassified the presentation of certain prior-period information to conform to the
current presentation. Such reclassifications include separately disclosing the deposits and the
withdrawals on universal life and other investment type policies and contracts in the condensed
consolidated statements of cash flows. All intercompany accounts and transactions have been
eliminated.
2. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share on net
income (in thousands, except per share information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (numerator for basic and diluted calculations) |
|
$ |
132,888 |
|
|
$ |
127,019 |
|
|
$ |
293,704 |
|
|
$ |
249,458 |
|
Shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average outstanding shares (denominator for
basic calculation) |
|
|
73,971 |
|
|
|
73,141 |
|
|
|
73,593 |
|
|
|
73,094 |
|
Equivalent shares from outstanding stock options(1) |
|
|
559 |
|
|
|
1,580 |
|
|
|
591 |
|
|
|
1,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted calculation |
|
|
74,530 |
|
|
|
74,721 |
|
|
|
74,184 |
|
|
|
74,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.80 |
|
|
$ |
1.74 |
|
|
$ |
3.99 |
|
|
$ |
3.41 |
|
Diluted |
|
$ |
1.78 |
|
|
$ |
1.70 |
|
|
$ |
3.96 |
|
|
$ |
3.34 |
|
|
|
|
(1) |
|
Year-to-date amounts are weighted average of the individual quarterly amounts. |
The calculation of common equivalent shares does not include the impact of options having a
strike or conversion price that exceeds the average stock price for the earnings period, as the
result would be antidilutive. The calculation of common equivalent shares also excludes the impact
of outstanding performance contingent shares, as the conditions necessary for their issuance have
not been satisfied as of the end of the reporting period. For the three months ended June 30,
2011, no stock options and approximately 0.8 million performance contingent shares were excluded
from the calculation. For the three months ended June 30, 2010, approximately 0.7 million stock
options and approximately 0.7 million performance contingent shares were excluded from the
calculation.
6
3. Comprehensive Income
The following table presents the components of the Companys comprehensive income (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net income |
|
$ |
132,888 |
|
|
$ |
127,019 |
|
|
$ |
293,704 |
|
|
$ |
249,458 |
|
Other comprehensive income (loss), net of income tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized investment gains, net of reclassification
adjustment for gains included in net income |
|
|
151,582 |
|
|
|
217,369 |
|
|
|
115,764 |
|
|
|
367,341 |
|
Reclassification adjustment for other-than-temporary
impairments |
|
|
(190 |
) |
|
|
91 |
|
|
|
(190 |
) |
|
|
(1,433 |
) |
Currency translation adjustments |
|
|
14,140 |
|
|
|
(63,564 |
) |
|
|
41,127 |
|
|
|
(36,893 |
) |
Unrealized pension and postretirement benefit adjustment |
|
|
358 |
|
|
|
58 |
|
|
|
572 |
|
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
298,778 |
|
|
$ |
280,973 |
|
|
$ |
450,977 |
|
|
$ |
578,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The balance of and changes in each component of accumulated other comprehensive income (loss) for the six months ended June 30, 2011 are
as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss), Net of Income Tax |
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
Currency |
|
|
Unrealized |
|
|
Pension and |
|
|
|
|
|
|
Translation |
|
|
Appreciation |
|
|
Postretirement |
|
|
|
|
|
|
Adjustments |
|
|
of Securities |
|
|
Benefits |
|
|
Total |
|
Balance, December 31, 2010 |
|
$ |
270,526 |
|
|
$ |
651,449 |
|
|
$ |
(14,560 |
) |
|
$ |
907,415 |
|
Change in component during the period |
|
|
41,127 |
|
|
|
115,574 |
|
|
|
572 |
|
|
|
157,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2011 |
|
$ |
311,653 |
|
|
$ |
767,023 |
|
|
$ |
(13,988 |
) |
|
$ |
1,064,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Investments
The Company had total cash and invested assets of $24.6 billion and $23.1 billion at June 30, 2011
and December 31, 2010, respectively, as illustrated below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Fixed maturity securities, available-for-sale |
|
$ |
15,153,807 |
|
|
$ |
14,304,597 |
|
Mortgage loans on real estate |
|
|
908,048 |
|
|
|
885,811 |
|
Policy loans |
|
|
1,229,663 |
|
|
|
1,228,418 |
|
Funds withheld at interest |
|
|
5,671,844 |
|
|
|
5,421,952 |
|
Short-term investments |
|
|
125,618 |
|
|
|
118,387 |
|
Other invested assets |
|
|
799,341 |
|
|
|
707,403 |
|
Cash and cash equivalents |
|
|
710,973 |
|
|
|
463,661 |
|
|
|
|
|
|
|
|
Total cash and invested assets |
|
$ |
24,599,294 |
|
|
$ |
23,130,229 |
|
|
|
|
|
|
|
|
All investments held by the Company are monitored for conformance to the qualitative and
quantitative limits prescribed by the applicable jurisdictions insurance laws and regulations. In
addition, the operating companies boards of directors periodically review their respective
investment portfolios. The Companys investment strategy is to maintain a predominantly
investment-grade, fixed maturity securities portfolio, which will provide adequate liquidity for
expected reinsurance obligations and maximize total return through prudent asset management. The
Companys asset/liability duration matching differs between operating segments. Based on Canadian
reserve requirements, the Canadian liabilities are matched with long-duration Canadian assets. The
duration of the Canadian portfolio exceeds twenty years. The average duration for all portfolios,
when consolidated, ranges between eight and ten years.
The Company participates in a securities borrowing program whereby securities, which are not
reflected on the Companys condensed consolidated balance sheets, are borrowed from a third party.
The Company is required to maintain a minimum of 100% of the market value of the borrowed
securities as collateral. The Company had borrowed securities with an amortized cost of $150.0
million and a market value of $150.7 million as of June 30, 2011. The borrowed securities are used
to provide collateral under an affiliated reinsurance transaction. There were no securities
borrowed as of December 31, 2010.
7
Investment Income, Net of Related Expenses
Major categories of investment income, net of related expenses consist of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Fixed maturity securities available-for-sale |
|
$ |
191,030 |
|
|
$ |
175,638 |
|
|
$ |
375,591 |
|
|
$ |
353,130 |
|
Mortgage loans on real estate |
|
|
13,593 |
|
|
|
11,954 |
|
|
|
27,328 |
|
|
|
24,160 |
|
Policy loans |
|
|
16,724 |
|
|
|
18,037 |
|
|
|
33,095 |
|
|
|
37,879 |
|
Funds withheld at interest |
|
|
111,700 |
|
|
|
84,392 |
|
|
|
264,760 |
|
|
|
175,573 |
|
Short-term investments |
|
|
883 |
|
|
|
1,130 |
|
|
|
1,808 |
|
|
|
2,378 |
|
Other invested assets |
|
|
10,512 |
|
|
|
6,256 |
|
|
|
20,210 |
|
|
|
14,767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment revenue |
|
|
344,442 |
|
|
|
297,407 |
|
|
|
722,792 |
|
|
|
607,887 |
|
Investment expense |
|
|
(7,006 |
) |
|
|
(5,736 |
) |
|
|
(14,316 |
) |
|
|
(11,958 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
$ |
337,436 |
|
|
$ |
291,671 |
|
|
$ |
708,476 |
|
|
$ |
595,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Related Gains (Losses), Net
Investment related gains (losses), net consist of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Fixed maturity and equity securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairment losses on fixed maturities |
|
$ |
(5,582 |
) |
|
$ |
(3,489 |
) |
|
$ |
(7,138 |
) |
|
$ |
(10,919 |
) |
Portion of loss recognized in accumulated other
comprehensive income (before taxes) |
|
|
292 |
|
|
|
(139 |
) |
|
|
292 |
|
|
|
2,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other-than-temporary impairment losses on fixed
maturities recognized in earnings |
|
|
(5,290 |
) |
|
|
(3,628 |
) |
|
|
(6,846 |
) |
|
|
(8,714 |
) |
Impairment losses on equity securities |
|
|
(3,680 |
) |
|
|
(10 |
) |
|
|
(3,680 |
) |
|
|
(32 |
) |
Gain on investment activity |
|
|
28,208 |
|
|
|
19,363 |
|
|
|
57,584 |
|
|
|
35,462 |
|
Loss on investment activity |
|
|
(6,653 |
) |
|
|
(5,662 |
) |
|
|
(13,567 |
) |
|
|
(14,194 |
) |
Other impairment losses and change in mortgage loan provision |
|
|
(3,186 |
) |
|
|
(1,165 |
) |
|
|
(2,610 |
) |
|
|
(2,395 |
) |
Derivatives and other, net |
|
|
17,989 |
|
|
|
14,094 |
|
|
|
120,127 |
|
|
|
144,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gains |
|
$ |
27,388 |
|
|
$ |
22,992 |
|
|
$ |
151,008 |
|
|
$ |
154,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net other-than-temporary impairment losses on fixed maturity securities recognized in
earnings of $5.3 million and $6.8 million in the second quarter and first six months of 2011,
respectively, are primarily due to a decline in value of structured securities with exposure to
mortgages and corporate bankruptcies. The impairment losses on equity securities of $3.7 million
in the second quarter and first six months of 2011 are primarily due to the financial condition of
European financial institutions. The decrease in derivative gains for the first six months is
primarily due to a decrease in the fair value of free-standing derivatives.
During the three months ended June 30, 2011 and 2010, the Company sold fixed maturity securities
and equity securities with fair values of $135.0 million and $159.2 million at gross losses of $6.7
million and $5.7 million, respectively, or at 95.3% and 96.6% of amortized cost, respectively.
During the six months ended June 30, 2011 and 2010, the Company sold fixed maturity securities and
equity securities with fair values of $331.6 million and $399.3 million at gross losses of $13.6
million and $14.2 million, respectively, or at 96.1% and 96.6% of amortized cost, respectively.
The Company generally does not engage in short-term buying and selling of securities.
Other-Than-Temporary Impairments
The Company identifies fixed maturity and equity securities that could potentially have credit
impairments that are other-than-temporary by monitoring market events that could impact issuers
credit ratings, business climates, management changes, litigation, government actions and other
similar factors. The Company also monitors late payments, pricing levels, rating agency actions,
key financial ratios, financial statements, revenue forecasts and cash flow projections as
indicators of credit issues.
The Company reviews all securities to determine whether an other-than-temporary decline in value
exists and whether losses should be recognized. The Company considers relevant facts and
circumstances in evaluating whether a credit or interest rate-related impairment of a security is
other-than-temporary. Relevant facts and circumstances considered include: (1) the
8
extent and
length of time the fair value has been below cost; (2) the reasons for the decline in fair value;
(3) the issuers financial position and
access to capital and (4) for fixed maturity securities, the Companys intent to sell a security or
whether it is more likely than not it will be required to sell the security before the recovery of
its amortized cost which, in some cases, may extend to maturity and for equity securities, its
ability and intent to hold the security for a period of time that allows for the recovery in value.
To the extent the Company determines that a security is deemed to be other-than-temporarily
impaired, an impairment loss is recognized.
Impairment losses on equity securities are recognized in net income. Recognition of impairment
losses on fixed maturity securities is dependent on the facts and circumstances related to a
specific security. If the Company intends to sell a security or it is more likely than not that it
would be required to sell a security before the recovery of its amortized cost, it recognizes an
other-than-temporary impairment in net income for the difference between amortized cost and fair
value. If the Company does not expect to recover the amortized cost basis, it does not plan to
sell the security and if it is not more likely than not that it would be required to sell a
security before the recovery of its amortized cost, the recognition of the other-than-temporary
impairment is bifurcated. The Company recognizes the credit loss portion in net income and the
non-credit loss portion in accumulated other comprehensive income (AOCI).
The Company estimates the amount of the credit loss component of a fixed maturity security
impairment as the difference between amortized cost and the present value of the expected cash
flows of the security. The present value is determined using the best estimate cash flows
discounted at the effective interest rate implicit to the security at the date of purchase or the
current yield to accrete an asset-backed or floating-rate security. The techniques and assumptions
for establishing the best estimate cash flows vary depending on the type of security. The
asset-backed securities cash flow estimates are based on security-specific facts and circumstances
that may include collateral characteristics, expectations of delinquency and default rates, loss
severity and prepayment speeds and structural support, including subordination and guarantees. The
corporate fixed maturity security cash flow estimates are derived from scenario-based outcomes of
expected corporate restructurings or the disposition of assets using security specific facts and
circumstances including timing, security interests and loss severity.
In periods after an other-than-temporary impairment loss is recognized on a fixed maturity
security, the Company will report the impaired security as if it had been purchased on the date it
was impaired and will continue to estimate the present value of the estimated cash flows of the
security. Accordingly, the discount (or reduced premium) based on the new cost basis is accreted
into net investment income over the remaining term of the fixed maturity security in a prospective
manner based on the amount and timing of estimated future cash flows.
The following tables set forth the amount of credit loss impairments on fixed maturity securities
held by the Company as of the dates indicated, for which a portion of the other-than-temporary
impairment (OTTI) loss was recognized in AOCI, and the corresponding changes in such amounts
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
Balance, beginning of period |
|
$ |
47,949 |
|
|
$ |
51,578 |
|
Initial impairments credit loss OTTI recognized on securities not previously impaired |
|
|
1,473 |
|
|
|
1,152 |
|
Additional impairments credit loss OTTI recognized on securities previously impaired |
|
|
3,780 |
|
|
|
3,303 |
|
Credit loss impairments previously recognized on securities which were sold during the period |
|
|
(718 |
) |
|
|
(2,685 |
) |
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
52,484 |
|
|
$ |
53,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
Balance, beginning of period |
|
$ |
47,291 |
|
|
$ |
47,905 |
|
Initial impairments credit loss OTTI recognized on securities not previously impaired |
|
|
1,473 |
|
|
|
2,724 |
|
Additional impairments credit loss OTTI recognized on securities previously impaired |
|
|
4,438 |
|
|
|
5,404 |
|
Credit loss impairments previously recognized on securities which were sold during the period |
|
|
(718 |
) |
|
|
(2,685 |
) |
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
52,484 |
|
|
$ |
53,348 |
|
|
|
|
|
|
|
|
Fixed Maturity and Equity Securities Available-for-Sale
The following tables provide information relating to investments in fixed maturity securities and
equity securities by sector as of June 30, 2011 and December 31, 2010 (dollars in thousands):
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
temporary |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
% of |
|
|
impairments |
|
June 30, 2011: |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Total |
|
|
in AOCI |
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
$ |
7,307,996 |
|
|
$ |
470,307 |
|
|
$ |
81,235 |
|
|
$ |
7,697,068 |
|
|
|
50.8 |
% |
|
$ |
|
|
Canadian and Canadian provincial
governments |
|
|
2,533,410 |
|
|
|
677,586 |
|
|
|
2,840 |
|
|
|
3,208,156 |
|
|
|
21.2 |
|
|
|
|
|
Residential mortgage-backed securities |
|
|
1,320,758 |
|
|
|
59,345 |
|
|
|
14,319 |
|
|
|
1,365,784 |
|
|
|
9.0 |
|
|
|
(258 |
) |
Asset-backed securities |
|
|
415,637 |
|
|
|
12,925 |
|
|
|
51,642 |
|
|
|
376,920 |
|
|
|
2.5 |
|
|
|
(6,258 |
) |
Commercial mortgage-backed securities |
|
|
1,333,832 |
|
|
|
92,380 |
|
|
|
67,107 |
|
|
|
1,359,105 |
|
|
|
9.0 |
|
|
|
(8,375 |
) |
U.S. government and agencies |
|
|
191,048 |
|
|
|
10,832 |
|
|
|
602 |
|
|
|
201,278 |
|
|
|
1.3 |
|
|
|
|
|
State and political subdivisions |
|
|
192,368 |
|
|
|
11,057 |
|
|
|
5,061 |
|
|
|
198,364 |
|
|
|
1.3 |
|
|
|
|
|
Other foreign government securities |
|
|
746,298 |
|
|
|
8,557 |
|
|
|
7,723 |
|
|
|
747,132 |
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
$ |
14,041,347 |
|
|
$ |
1,342,989 |
|
|
$ |
230,529 |
|
|
$ |
15,153,807 |
|
|
|
100.0 |
% |
|
$ |
(14,891 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable preferred stock |
|
$ |
104,444 |
|
|
$ |
5,337 |
|
|
$ |
2,263 |
|
|
$ |
107,518 |
|
|
|
75.6 |
% |
|
|
|
|
Other equity securities |
|
|
34,237 |
|
|
|
1,498 |
|
|
|
1,027 |
|
|
|
34,708 |
|
|
|
24.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
$ |
138,681 |
|
|
$ |
6,835 |
|
|
$ |
3,290 |
|
|
$ |
142,226 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
temporary |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
% of |
|
|
impairments |
|
December 31, 2010: |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Total |
|
|
in AOCI |
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
$ |
6,826,937 |
|
|
$ |
436,384 |
|
|
$ |
107,816 |
|
|
$ |
7,155,505 |
|
|
|
50.0 |
% |
|
$ |
|
|
Canadian and Canadian provincial
governments |
|
|
2,354,418 |
|
|
|
672,951 |
|
|
|
3,886 |
|
|
|
3,023,483 |
|
|
|
21.1 |
|
|
|
|
|
Residential mortgage-backed securities |
|
|
1,443,892 |
|
|
|
55,765 |
|
|
|
26,580 |
|
|
|
1,473,077 |
|
|
|
10.3 |
|
|
|
(1,650 |
) |
Asset-backed securities |
|
|
440,752 |
|
|
|
12,001 |
|
|
|
61,544 |
|
|
|
391,209 |
|
|
|
2.7 |
|
|
|
(4,963 |
) |
Commercial mortgage-backed securities |
|
|
1,353,279 |
|
|
|
81,839 |
|
|
|
97,265 |
|
|
|
1,337,853 |
|
|
|
9.4 |
|
|
|
(10,010 |
) |
U.S. government and agencies |
|
|
199,129 |
|
|
|
7,795 |
|
|
|
708 |
|
|
|
206,216 |
|
|
|
1.4 |
|
|
|
|
|
State and political subdivisions |
|
|
170,479 |
|
|
|
2,098 |
|
|
|
8,117 |
|
|
|
164,460 |
|
|
|
1.2 |
|
|
|
|
|
Other foreign government securities |
|
|
556,136 |
|
|
|
4,304 |
|
|
|
7,646 |
|
|
|
552,794 |
|
|
|
3.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
$ |
13,345,022 |
|
|
$ |
1,273,137 |
|
|
$ |
313,562 |
|
|
$ |
14,304,597 |
|
|
|
100.0 |
% |
|
$ |
(16,623 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable preferred stock |
|
$ |
100,718 |
|
|
$ |
4,130 |
|
|
$ |
5,298 |
|
|
$ |
99,550 |
|
|
|
71.0 |
% |
|
|
|
|
Other equity securities |
|
|
34,832 |
|
|
|
6,100 |
|
|
|
271 |
|
|
|
40,661 |
|
|
|
29.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
$ |
135,550 |
|
|
$ |
10,230 |
|
|
$ |
5,569 |
|
|
$ |
140,211 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tables above exclude fixed maturity securities posted by the Company as collateral to
counterparties with an amortized cost of $57.9 million and $46.9 million, and an estimated fair
value of $60.3 million and $48.2 million, as of June 30, 2011 and December 31, 2010 respectively,
which are included in other invested assets in the consolidated balance sheets.
As of June 30, 2011, the Company held securities with a fair value of $1,005.2 million that were
issued by the Canadian province of Ontario and $898.6 million in one entity that were guaranteed by
the Canadian province of Quebec, both of which exceeded 10% of consolidated stockholders equity.
As of December 31, 2010, the Company held securities with a fair value of $959.5 million that were
issued by the Canadian province of Ontario and $871.6 million in one entity that were guaranteed by
the Canadian province of Quebec, both of which exceeded 10% of consolidated stockholders equity.
The amortized cost and estimated fair value of fixed maturity securities available-for-sale at June
30, 2011 are shown by contractual maturity in the table below. Actual maturities can differ from
contractual maturities because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties. At June 30, 2011, the contractual maturities of investments
in fixed maturity securities were as follows (dollars in thousands):
10
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
Available-for-sale: |
|
|
|
|
|
|
|
|
Due in one year or less |
|
$ |
195,747 |
|
|
$ |
200,924 |
|
Due after one year through five years |
|
|
2,245,281 |
|
|
|
2,323,086 |
|
Due after five year through ten years |
|
|
3,637,689 |
|
|
|
3,888,290 |
|
Due after ten years |
|
|
4,892,402 |
|
|
|
5,639,698 |
|
Asset and mortgage-backed securities |
|
|
3,070,228 |
|
|
|
3,101,809 |
|
|
|
|
|
|
|
|
Total |
|
$ |
14,041,347 |
|
|
$ |
15,153,807 |
|
|
|
|
|
|
|
|
The table below includes major industry types and weighted average credit ratings of the
Companys corporate fixed maturity holdings as of June 30, 2011 and December 31, 2010 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Average Credit |
|
June 30, 2011: |
|
Amortized Cost |
|
|
Fair Value |
|
|
% of Total |
|
|
Ratings |
|
Finance |
|
$ |
2,827,556 |
|
|
$ |
2,907,045 |
|
|
|
37.8 |
% |
|
|
A |
|
Industrial |
|
|
3,366,149 |
|
|
|
3,604,280 |
|
|
|
46.8 |
|
|
BBB+ |
Utility |
|
|
1,105,801 |
|
|
|
1,176,889 |
|
|
|
15.3 |
|
|
BBB+ |
Other |
|
|
8,490 |
|
|
|
8,854 |
|
|
|
0.1 |
|
|
AA |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,307,996 |
|
|
$ |
7,697,068 |
|
|
|
100.0 |
% |
|
|
A- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Average Credit |
|
December 31, 2010: |
|
Amortized Cost |
|
|
Fair Value |
|
|
% of Total |
|
|
Ratings |
|
Finance |
|
$ |
2,782,936 |
|
|
$ |
2,833,022 |
|
|
|
39.6 |
% |
|
|
A |
|
Industrial |
|
|
3,121,326 |
|
|
|
3,341,104 |
|
|
|
46.7 |
|
|
BBB+ |
Utility |
|
|
908,737 |
|
|
|
967,017 |
|
|
|
13.5 |
|
|
BBB+ |
Other |
|
|
13,938 |
|
|
|
14,362 |
|
|
|
0.2 |
|
|
AA+ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,826,937 |
|
|
$ |
7,155,505 |
|
|
|
100.0 |
% |
|
|
A- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the total gross unrealized losses for fixed maturity and equity
securities as of June 30, 2011 and December 31, 2010, respectively, where the estimated fair value
had declined and remained below amortized cost by the indicated amount (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Number of |
|
|
Unrealized |
|
|
|
|
|
|
Number of |
|
|
Unrealized |
|
|
|
|
|
|
Securities |
|
|
Losses |
|
|
% of Total |
|
|
Securities |
|
|
Losses |
|
|
% of Total |
|
Less than 20% |
|
|
890 |
|
|
$ |
123,789 |
|
|
|
52.9 |
% |
|
|
908 |
|
|
$ |
146,404 |
|
|
|
45.9 |
% |
20% or more for less than six months |
|
|
15 |
|
|
|
7,965 |
|
|
|
3.4 |
|
|
|
14 |
|
|
|
18,114 |
|
|
|
5.7 |
|
20% or more for six months or greater |
|
|
56 |
|
|
|
102,065 |
|
|
|
43.7 |
|
|
|
106 |
|
|
|
154,613 |
|
|
|
48.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
961 |
|
|
$ |
233,819 |
|
|
|
100.0 |
% |
|
|
1,028 |
|
|
$ |
319,131 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011 and December 31, 2010, respectively, 70.7% and 66.1% of these gross
unrealized losses were associated with investment grade securities. The unrealized losses on these
securities decreased as credit spreads continued to tighten across all sectors. While credit
spreads tightened, treasury rates rose slightly to moderate the credit spread gains during the
quarter.
The Companys determination of whether a decline in value is other-than-temporary includes analysis
of the underlying credit and the extent and duration of a decline in value. The Companys credit
analysis of an investment includes determining whether the issuer is current on its contractual
payments, evaluating whether it is probable that the Company will be able to collect all amounts
due according to the contractual terms of the security and analyzing the overall ability of the
Company to recover the amortized cost of the investment. The Company continues to consider
valuation declines as a potential indicator of credit deterioration. The Company believes that due
to fluctuating market conditions and an extended period of economic uncertainty, the extent and
duration of a decline in value have become less indicative of when there has been credit
deterioration with respect to an issuer.
The following tables present the estimated fair values and gross unrealized losses, including
other-than-temporary impairment losses reported in AOCI, for fixed maturity securities and equity
securities that have estimated fair values below amortized cost as of June 30, 2011 and December
31, 2010, respectively (dollars in thousands). These investments are presented by class and grade
of security, as well as the length of time the related market value has remained below amortized
cost.
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or greater |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
June 30, 2011: |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
Investment grade securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
$ |
1,051,097 |
|
|
$ |
22,729 |
|
|
$ |
322,201 |
|
|
$ |
50,525 |
|
|
$ |
1,373,298 |
|
|
$ |
73,254 |
|
Canadian and Canadian provincial
governments |
|
|
132,591 |
|
|
|
2,840 |
|
|
|
|
|
|
|
|
|
|
|
132,591 |
|
|
|
2,840 |
|
Residential mortgage-backed securities |
|
|
122,968 |
|
|
|
1,979 |
|
|
|
56,186 |
|
|
|
10,083 |
|
|
|
179,154 |
|
|
|
12,062 |
|
Asset-backed securities |
|
|
40,152 |
|
|
|
874 |
|
|
|
100,050 |
|
|
|
29,877 |
|
|
|
140,202 |
|
|
|
30,751 |
|
Commercial mortgage-backed securities |
|
|
154,382 |
|
|
|
8,007 |
|
|
|
68,039 |
|
|
|
21,881 |
|
|
|
222,421 |
|
|
|
29,888 |
|
U.S. government and agencies |
|
|
14,288 |
|
|
|
602 |
|
|
|
|
|
|
|
|
|
|
|
14,288 |
|
|
|
602 |
|
State and political subdivisions |
|
|
19,834 |
|
|
|
985 |
|
|
|
32,473 |
|
|
|
4,076 |
|
|
|
52,307 |
|
|
|
5,061 |
|
Other foreign government securities |
|
|
161,417 |
|
|
|
3,945 |
|
|
|
39,267 |
|
|
|
3,778 |
|
|
|
200,684 |
|
|
|
7,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade securities |
|
|
1,696,729 |
|
|
|
41,961 |
|
|
|
618,216 |
|
|
|
120,220 |
|
|
|
2,314,945 |
|
|
|
162,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment grade securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
|
120,371 |
|
|
|
2,918 |
|
|
|
65,818 |
|
|
|
5,063 |
|
|
|
186,189 |
|
|
|
7,981 |
|
Residential mortgage-backed securities |
|
|
5,075 |
|
|
|
931 |
|
|
|
11,169 |
|
|
|
1,326 |
|
|
|
16,244 |
|
|
|
2,257 |
|
Asset-backed securities |
|
|
2,852 |
|
|
|
424 |
|
|
|
26,391 |
|
|
|
20,467 |
|
|
|
29,243 |
|
|
|
20,891 |
|
Commercial mortgage-backed securities |
|
|
22,876 |
|
|
|
1,492 |
|
|
|
80,145 |
|
|
|
35,727 |
|
|
|
103,021 |
|
|
|
37,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-investment grade securities |
|
|
151,174 |
|
|
|
5,765 |
|
|
|
183,523 |
|
|
|
62,583 |
|
|
|
334,697 |
|
|
|
68,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
$ |
1,847,903 |
|
|
$ |
47,726 |
|
|
$ |
801,739 |
|
|
$ |
182,803 |
|
|
$ |
2,649,642 |
|
|
$ |
230,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable preferred stock |
|
$ |
2,291 |
|
|
$ |
4 |
|
|
$ |
21,100 |
|
|
$ |
2,259 |
|
|
$ |
23,391 |
|
|
$ |
2,263 |
|
Other equity securities |
|
|
3,551 |
|
|
|
391 |
|
|
|
5,887 |
|
|
|
636 |
|
|
|
9,438 |
|
|
|
1,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
$ |
5,842 |
|
|
$ |
395 |
|
|
$ |
26,987 |
|
|
$ |
2,895 |
|
|
$ |
32,829 |
|
|
$ |
3,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of securities in an
unrealized loss position |
|
|
550 |
|
|
|
|
|
|
|
411 |
|
|
|
|
|
|
|
961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or greater |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
December 31, 2010: |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
Investment grade securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
$ |
1,170,016 |
|
|
$ |
34,097 |
|
|
$ |
368,128 |
|
|
$ |
61,945 |
|
|
$ |
1,538,144 |
|
|
$ |
96,042 |
|
Canadian and Canadian provincial
governments |
|
|
118,585 |
|
|
|
3,886 |
|
|
|
|
|
|
|
|
|
|
|
118,585 |
|
|
|
3,886 |
|
Residential mortgage-backed securities |
|
|
195,406 |
|
|
|
4,986 |
|
|
|
105,601 |
|
|
|
13,607 |
|
|
|
301,007 |
|
|
|
18,593 |
|
Asset-backed securities |
|
|
23,065 |
|
|
|
570 |
|
|
|
131,172 |
|
|
|
38,451 |
|
|
|
154,237 |
|
|
|
39,021 |
|
Commercial mortgage-backed securities |
|
|
132,526 |
|
|
|
4,143 |
|
|
|
109,158 |
|
|
|
29,059 |
|
|
|
241,684 |
|
|
|
33,202 |
|
U.S. government and agencies |
|
|
11,839 |
|
|
|
708 |
|
|
|
|
|
|
|
|
|
|
|
11,839 |
|
|
|
708 |
|
State and political subdivisions |
|
|
68,229 |
|
|
|
2,890 |
|
|
|
31,426 |
|
|
|
5,227 |
|
|
|
99,655 |
|
|
|
8,117 |
|
Other foreign government securities |
|
|
322,363 |
|
|
|
3,142 |
|
|
|
43,796 |
|
|
|
4,504 |
|
|
|
366,159 |
|
|
|
7,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade securities |
|
|
2,042,029 |
|
|
|
54,422 |
|
|
|
789,281 |
|
|
|
152,793 |
|
|
|
2,831,310 |
|
|
|
207,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment grade securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
|
58,420 |
|
|
|
1,832 |
|
|
|
91,205 |
|
|
|
9,942 |
|
|
|
149,625 |
|
|
|
11,774 |
|
Residential mortgage-backed securities |
|
|
1,162 |
|
|
|
605 |
|
|
|
38,206 |
|
|
|
7,382 |
|
|
|
39,368 |
|
|
|
7,987 |
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
23,356 |
|
|
|
22,523 |
|
|
|
23,356 |
|
|
|
22,523 |
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
89,170 |
|
|
|
64,063 |
|
|
|
89,170 |
|
|
|
64,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-investment grade securities |
|
|
59,582 |
|
|
|
2,437 |
|
|
|
241,937 |
|
|
|
103,910 |
|
|
|
301,519 |
|
|
|
106,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
$ |
2,101,611 |
|
|
$ |
56,859 |
|
|
$ |
1,031,218 |
|
|
$ |
256,703 |
|
|
$ |
3,132,829 |
|
|
$ |
313,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable preferred stock |
|
$ |
15,987 |
|
|
$ |
834 |
|
|
$ |
28,549 |
|
|
$ |
4,464 |
|
|
$ |
44,536 |
|
|
$ |
5,298 |
|
Other equity securities |
|
|
6,877 |
|
|
|
271 |
|
|
|
318 |
|
|
|
|
|
|
|
7,195 |
|
|
|
271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
$ |
22,864 |
|
|
$ |
1,105 |
|
|
$ |
28,867 |
|
|
$ |
4,464 |
|
|
$ |
51,731 |
|
|
$ |
5,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of securities in an
unrealized loss position |
|
|
520 |
|
|
|
|
|
|
|
508 |
|
|
|
|
|
|
|
1,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011, the Company does not intend to sell these fixed maturity securities and
does not believe it is more likely than not that it will be required to sell these fixed maturity
securities before the recovery of the fair value up to the current amortized cost of the
investment, which may be maturity. However, unforeseen facts and circumstances may cause the
12
Company to sell fixed maturity securities in the ordinary course of managing its portfolio to meet
certain diversification, credit quality, asset-liability management and liquidity guidelines.
As of June 30, 2011, the Company has the ability and intent to hold the equity securities until the
recovery of the fair value up to the current cost of the investment. However, unforeseen facts and
circumstances may cause the Company to sell equity securities in the ordinary course of managing
its portfolio to meet certain diversification, credit quality and liquidity guidelines.
Mortgage Loans
Mortgage loans represented approximately 3.7% and 3.8% of the Companys cash and invested assets as
of June 30, 2011 and December 31, 2010, respectively. The Company makes mortgage loans on income
producing properties, such as apartments, retail and office buildings, light warehouses and light
industrial facilities. Loan-to-value ratios at the time of loan approval are 75% or less. The
Company acquired $37.8 million of mortgage loans during the six months ended June 30, 2011.
The Company holds commercial mortgages and has established an internal credit risk grading process
for these loans. The internal risk rating model is used to estimate the probability of default and
the likelihood of loss upon default. The rating scale ranges from high investment grade to in
or near default with high investment grade being the highest quality and least likely to default
and lose principal. Likewise, a rating of in or near default indicates the lowest quality and the
most likely to default or lose principal. All loans are assigned a rating at origination and
ratings are updated at least annually. Lower rated loans appear on the Companys watch list and
are re-evaluated more frequently. The debt service coverage ratio and the loan to value ratio are
the most heavily weighted factors in determining the loan rating. Other factors involved in
determining the final rating are loan amortization, tenant rollover, location and market stability,
and borrowers financial condition and experience. Information regarding the Companys credit
quality indicators for its recorded investment in mortgage loans gross of valuation allowances as
of June 30, 2011 and December 31, 2010 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Internal credit risk grade: |
|
|
|
|
|
|
|
|
High investment grade |
|
$ |
193,151 |
|
|
$ |
205,127 |
|
Investment grade |
|
|
535,654 |
|
|
|
585,818 |
|
Average |
|
|
94,357 |
|
|
|
38,152 |
|
Watch list |
|
|
75,259 |
|
|
|
44,208 |
|
In or near default |
|
|
17,319 |
|
|
|
18,745 |
|
|
|
|
|
|
|
|
Total |
|
$ |
915,740 |
|
|
$ |
892,050 |
|
|
|
|
|
|
|
|
The age analysis of the Companys past due recorded investment in mortgage loans gross
of valuation allowances as of June 30, 2011 and December 31, 2010 are as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
31-60 days past due |
|
$ |
|
|
|
$ |
|
|
61-90 days past due |
|
|
4,298 |
|
|
|
|
|
Greater than 90 days |
|
|
13,021 |
|
|
|
15,555 |
|
|
|
|
|
|
|
|
Total past due |
|
|
17,319 |
|
|
|
15,555 |
|
Current |
|
|
898,421 |
|
|
|
876,495 |
|
|
|
|
|
|
|
|
Total |
|
$ |
915,740 |
|
|
$ |
892,050 |
|
|
|
|
|
|
|
|
13
The following table presents the recorded investment in mortgage loans, by method of evaluation of credit loss, and the
related valuation allowances, by type of credit loss, at (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Mortgage loans: |
|
|
|
|
|
|
|
|
Evaluated individually for credit losses |
|
$ |
35,919 |
|
|
$ |
35,646 |
|
Evaluated collectively for credit losses |
|
|
879,821 |
|
|
|
856,404 |
|
|
|
|
|
|
|
|
Mortgage loans, gross of valuation allowances |
|
|
915,740 |
|
|
|
892,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowances: |
|
|
|
|
|
|
|
|
Specific for credit losses |
|
|
4,594 |
|
|
|
6,239 |
|
Non-specifically identified credit losses |
|
|
3,098 |
|
|
|
|
|
|
|
|
|
|
|
|
Total valuation allowances |
|
|
7,692 |
|
|
|
6,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans, net of valuation allowances |
|
$ |
908,048 |
|
|
$ |
885,811 |
|
|
|
|
|
|
|
|
Non-specific valuation allowances are established for mortgage loans based on an internal
credit quality rating where a property-specific or market-specific risk has not been identified,
but for which the Company expects to incur a credit loss. These evaluations are based upon several
loan portfolio segment-specific factors, including the Companys experience for loan losses,
defaults and loss severity, loss expectations for loans with similar risk characteristics and
industry statistics. These evaluations are revised as conditions change and new information
becomes available.
Information regarding the Companys loan valuation allowances for mortgage loans as of June 30,
2011 and 2010 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Balance, beginning of period |
|
$ |
5,664 |
|
|
$ |
7,014 |
|
|
$ |
6,239 |
|
|
$ |
5,784 |
|
Charge-offs |
|
|
(1,157 |
) |
|
|
|
|
|
|
(1,157 |
) |
|
|
|
|
Recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision |
|
|
3,185 |
|
|
|
1,165 |
|
|
|
2,610 |
|
|
|
2,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
7,692 |
|
|
$ |
8,179 |
|
|
$ |
7,692 |
|
|
$ |
8,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information regarding the portion of the Companys mortgage loans that were impaired as of
June 30, 2011 and December 31, 2010 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Impaired loans with valuation allowances |
|
$ |
29,080 |
|
|
$ |
18,745 |
|
Impaired loans without valuation allowances |
|
|
6,839 |
|
|
|
16,901 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
35,919 |
|
|
|
35,646 |
|
Less: Valuation allowances on impaired loans |
|
|
4,594 |
|
|
|
6,239 |
|
|
|
|
|
|
|
|
Impaired loans |
|
$ |
31,325 |
|
|
$ |
29,407 |
|
|
|
|
|
|
|
|
The Companys average investment per impaired loan with valuation allowances was $3.6 million
and $6.7 million as of June 30, 2011 and 2010, respectively. The Companys average investment per
impaired loan without valuation allowances was $2.3 million and $3.1 million as of June 30, 2011
and 2010, respectively. Interest income on impaired loans with valuation allowances was $0.2
million and $0.5 million for the three and six months ended June 30, 2011, respectively. Interest
income on impaired loans with valuation allowances was not material for the three and six months
ended June 30, 2010. Interest income on impaired loans without valuation allowances was $0.1
million for the three and six months ended June 30, 2011, respectively. Interest income on
impaired loans without valuation allowances was $0.1 million and $0.3 million for the three and six
months ended June 30, 2010, respectively. The Company did not acquire any impaired mortgage loans
during the six months ended June 30, 2011. The Company had $13.0 million and $15.6 million of
mortgage loans, gross of valuation allowances, that were on nonaccrual status at June 30, 2011 and
December 31, 2010, respectively.
14
5. Derivative Instruments
The following table presents the notional amounts and fair value of derivative instruments as of
June 30, 2011 and December 31, 2010 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
Notional |
|
|
Carrying Value/Fair Value |
|
|
Notional |
|
|
Carrying Value/Fair Value |
|
|
|
Amount |
|
|
Assets |
|
|
Liabilities |
|
|
Amount |
|
|
Assets |
|
|
Liabilities |
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps(1)
|
|
$ |
2,623,012 |
|
|
$ |
37,001 |
|
|
$ |
29,041 |
|
|
$ |
2,302,853 |
|
|
$ |
20,042 |
|
|
$ |
17,132 |
|
Financial futures(1)
|
|
|
174,096 |
|
|
|
|
|
|
|
|
|
|
|
210,295 |
|
|
|
|
|
|
|
|
|
Foreign currency forwards(1)
|
|
|
39,700 |
|
|
|
5,706 |
|
|
|
|
|
|
|
39,700 |
|
|
|
5,924 |
|
|
|
|
|
Consumer Price index (CPI) swaps(1)
|
|
|
126,091 |
|
|
|
1,667 |
|
|
|
|
|
|
|
120,340 |
|
|
|
1,491 |
|
|
|
|
|
Credit default swaps(1)
|
|
|
612,500 |
|
|
|
2,210 |
|
|
|
4,201 |
|
|
|
392,500 |
|
|
|
2,429 |
|
|
|
131 |
|
Equity options(1)
|
|
|
253,803 |
|
|
|
44,326 |
|
|
|
|
|
|
|
33,041 |
|
|
|
5,043 |
|
|
|
|
|
Embedded derivatives in: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modified coinsurance or funds withheld arrangements(2)
|
|
|
|
|
|
|
|
|
|
|
173,160 |
|
|
|
|
|
|
|
|
|
|
|
274,220 |
|
Indexed annuity products(3)
|
|
|
|
|
|
|
86,029 |
|
|
|
758,431 |
|
|
|
|
|
|
|
75,431 |
|
|
|
668,951 |
|
Variable annuity products(3)
|
|
|
|
|
|
|
|
|
|
|
45,741 |
|
|
|
|
|
|
|
|
|
|
|
52,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-hedging derivatives
|
|
|
3,829,202 |
|
|
|
176,939 |
|
|
|
1,010,574 |
|
|
|
3,098,729 |
|
|
|
110,360 |
|
|
|
1,012,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps(1)
|
|
|
21,783 |
|
|
|
|
|
|
|
1,984 |
|
|
|
21,783 |
|
|
|
|
|
|
|
1,718 |
|
Foreign currency swaps(1)
|
|
|
615,323 |
|
|
|
|
|
|
|
66,425 |
|
|
|
615,323 |
|
|
|
|
|
|
|
45,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hedging derivatives
|
|
|
637,106 |
|
|
|
|
|
|
|
68,409 |
|
|
|
637,106 |
|
|
|
|
|
|
|
47,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
$ |
4,466,308 |
|
|
$ |
176,939 |
|
|
$ |
1,078,983 |
|
|
$ |
3,735,835 |
|
|
$ |
110,360 |
|
|
$ |
1,060,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Carried on the Companys condensed consolidated balance
sheets in other invested assets or other liabilities, at fair value.
|
|
(2) |
|
Embedded liability is included on the condensed consolidated
balance sheets with the host contract in funds withheld at interest,
at fair value. |
|
(3) |
|
Embedded liability is included on the condensed consolidated balance sheets with the host contract in interest-sensitive contract liabilities, at fair value. Embedded asset is included on the condensed consolidated
balance sheets in reinsurance ceded receivables. |
Accounting for Derivative Instruments and Hedging Activities
The Company does not enter into derivative instruments for speculative purposes. As discussed
below under Non-qualifying Derivatives and Derivatives for Purposes Other Than Hedging, the
Company uses various derivative instruments for risk management purposes that either do not qualify
or have not been qualified for hedge accounting treatment, including derivatives used to
economically hedge changes in the fair value of liabilities associated with the reinsurance of
variable annuities with guaranteed living benefits. As of June 30, 2011 and December 31, 2010, the
Company held interest rate swaps that were designated and qualified as fair value hedges of
interest rate risk. As of June 30, 2011 and December 31, 2010, the Company held foreign currency
swaps that were designated and qualified as fair value hedges of a portion of its net investment in
its foreign operations. As of June 30, 2011 and December 31, 2010, the Company also had derivative
instruments that were not designated as hedging instruments. See Note 2 Summary of Significant
Accounting Policies of the Companys 2010 annual report on Form 10-K for a detailed discussion of
the accounting treatment for derivative instruments, including embedded derivatives. Derivative
instruments are carried at fair value and generally require an insignificant amount of cash at
inception of the contracts.
Fair Value Hedges
The Company designates and accounts for certain interest rate swaps that convert fixed rate
investments to floating rate investments as fair value hedges when they meet the requirements of
the general accounting principles for Derivatives and Hedging. The gain or loss on the hedged item
attributable to the hedged benchmark interest rate and the offsetting gain or loss on the related
interest rate swaps, both recognized in investment related gains/losses, for the three and six
months ended June 30, 2011 and 2010 were (dollars in thousands):
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ineffectiveness |
|
|
|
|
|
Gains (Losses) |
|
|
Gains (Losses) |
|
|
Recognized in |
|
Type of Fair |
|
|
|
Recognized for |
|
|
Recognized for |
|
|
Investment Related |
|
Value Hedge |
|
Hedged Item |
|
Derivatives |
|
|
Hedged Items |
|
|
Gains (Losses) |
|
For the three months ended June 30, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
Fixed rate fixed maturities |
|
$ |
(489 |
) |
|
$ |
694 |
|
|
$ |
205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
Fixed rate fixed maturities |
|
$ |
(877 |
) |
|
$ |
1,046 |
|
|
$ |
169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2011: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
Fixed rate fixed maturities |
|
$ |
(266 |
) |
|
$ |
596 |
|
|
$ |
330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
Fixed rate fixed maturities |
|
$ |
(1,200 |
) |
|
$ |
1,500 |
|
|
$ |
300 |
|
All components of each derivatives gain or loss were included in the assessment of hedge
effectiveness. There were no instances in which the Company discontinued fair value hedge
accounting due to a hedged firm commitment no longer qualifying as a fair value hedge.
Hedges of Net Investments in Foreign Operations
The Company uses foreign currency swaps to hedge a portion of its net investment in certain foreign
operations against adverse movements in exchange rates. Ineffectiveness on the foreign currency
swap is based upon the change in forward rates. The following table illustrates the Companys net
investments in foreign operations (NIFO) hedges for the three and six months ended June 30, 2011
and 2010 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Gains (Losses) Deferred in AOCI |
|
|
|
For the three months ended |
|
|
For the six months ended |
|
Type of NIFO Hedge (1) (2) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Foreign currency swaps |
|
$ |
(9,916 |
) |
|
$ |
16,846 |
|
|
$ |
(25,020 |
) |
|
$ |
8,766 |
|
|
|
|
|
(1) |
|
There were no sales or substantial liquidations of net investments in foreign operations that would have required the
reclassification of gains or losses from accumulated other comprehensive income (loss) into investment income during the periods
presented. |
|
(2) |
|
There was no ineffectiveness recognized for the Companys hedges of net investments in foreign operations. |
The cumulative foreign currency translation loss recorded in AOCI related to the Companys
NIFO hedges was $25.8 million and $0.8 million at June 30, 2011 and December 31, 2010,
respectively. If a foreign operation was sold or substantially liquidated, the amounts in AOCI
would be reclassified to the consolidated statements of income. A pro rata portion would be
reclassified upon partial sale of a foreign operation.
Non-qualifying Derivatives and Derivatives for Purposes Other Than Hedging
The Company uses various other derivative instruments for risk management purposes that either do
not qualify or have not been qualified for hedge accounting treatment, including derivatives used
to economically hedge changes in the fair value of liabilities associated with the reinsurance of
variable annuities with guaranteed living benefits. The gain or loss related to the change in fair
value for these derivative instruments is recognized in investment related gains (losses), in the
consolidated statements of income, except where otherwise noted. For the three months ended June
30, 2011 and 2010, the Company recognized investment related gains of $28.5 million and $117.6
million, respectively, and $2.6 million and $118.0 million for the six months ended June 30, 2011
and 2010, respectively, related to derivatives (not including embedded derivatives) that do not
qualify or have not been qualified for hedge accounting.
Interest Rate Swaps
Interest rate swaps are used by the Company primarily to reduce market risks from changes in
interest rates and to alter interest rate exposure arising from mismatches between assets and
liabilities (duration mismatches). With an interest rate swap, the Company agrees with another
party to exchange, at specified intervals, the difference between fixed-rate and floating-rate
interest amounts tied to an agreed-upon notional principal amount. These transactions are executed
pursuant to master agreements that provide for a single net payment or individual gross payments at
each due date.
Financial Futures
Exchange-traded equity futures are used primarily to economically hedge liabilities embedded in
certain variable annuity products. With exchange-traded equity futures transactions, the Company
agrees to purchase or sell a specified number of contracts, the value of which is determined by the
relevant stock indices, and to post variation margin on a daily basis in an
16
amount equal to the difference between the daily estimated fair values of those contracts. The
Company enters into exchange-traded equity futures with regulated futures commission merchants that
are members of the exchange.
Foreign Currency Swaps
Foreign currency swaps are used by the Company to reduce the risk from fluctuations in foreign
currency exchange rates associated with its assets and liabilities denominated in foreign
currencies. With a foreign currency swap transaction, the Company agrees with another party to
exchange, at specified intervals, the difference between one currency and another at a forward
exchange rate calculated by reference to an agreed upon principal amount. The principal amount of
each currency is exchanged at the inception and termination of the currency swap by each party. The
Company may also use foreign currency swaps to economically hedge the foreign currency risk
associated with certain of its net investments in foreign operations.
Foreign Currency Forwards
Foreign currency forwards are used by the Company to reduce the risk from fluctuations in foreign
currency exchange rates associated with its assets and liabilities denominated in foreign
currencies. With a foreign currency forward transaction, the Company agrees with another party to
deliver a specified amount of an identified currency at a specified future date. The price is
agreed upon at the time of the contract and payment for such a contract is made in a different
currency at the specified future date.
CPI Swaps
CPI swaps are used by the Company primarily to economically hedge liabilities embedded in certain
insurance products where value is directly affected by changes in a designated benchmark consumer
price index. With a CPI swap transaction, the Company agrees with another party to exchange the
actual amount of inflation realized over a specified period of time for a fixed amount of inflation
determined at inception. These transactions are executed pursuant to master agreements that
provide for a single net payment or individual gross payments to be made by the counterparty at
each due date. Most of these swaps will require a single payment to be made by one counterparty at
the maturity date of the swap.
Credit Default Swaps
The Company invests in credit default swaps to diversify its credit risk exposure in certain
portfolios. These credit default swaps are over-the-counter instruments in which the Company
receives payments at specified intervals to insure credit risk on a portfolio of U.S.
investment-grade securities. Generally, if a credit event, as defined by the contract, occurs, the
contract will require the swap to be settled gross by the delivery of par quantities or value of
the referenced investment securities equal to the specified swap notional amount in exchange for
the payment of cash amounts by the Company equal to the par value of the investment security
surrendered.
The Company also purchases credit default swaps to reduce its risk against a drop in bond prices
due to credit concerns of certain bond issuers. If a credit event, as defined by the contract,
occurs, the Company is able to put the bond back to the counterparty at par.
Credit default swaps are also used by the Company to synthetically replicate investment risks and
returns which are not readily available in the investments markets. These transactions are a
combination of a derivative and an investment instrument such as a U.S. corporate security.
Equity Options
Equity index options are used by the Company primarily to hedge minimum guarantees embedded in
certain variable annuity products. To hedge against adverse changes in equity indices volatility,
the Company enters into contracts to sell the equity index options within a limited time at a
contracted price. The contracts are net settled in cash based on differentials in the indices at
the time of exercise and the strike price.
Embedded Derivatives
The Company has certain embedded derivatives which are required to be separated from their host
contracts and reported as derivatives. Host contracts include reinsurance treaties structured on a
modified coinsurance or funds withheld basis. Additionally, the Company reinsures equity-indexed
annuity and variable annuity contracts with benefits that are considered embedded derivatives,
including guaranteed minimum withdrawal benefits, guaranteed minimum accumulation benefits, and
guaranteed minimum income benefits. The related gains (losses) for the three and six months ended
June 30, 2011 and 2010 are reflected in the following table (dollars in thousands):
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Embedded
derivatives in modified coinsurance or funds withheld arrangements
and variable annuity contracts included in investment related gains (losses) |
|
$ |
(15,335 |
) |
|
$ |
(108,422 |
) |
|
$ |
107,854 |
|
|
$ |
21,383 |
|
After the associated amortization of DAC and taxes, the related amounts included in net income |
|
|
(3,626 |
) |
|
|
(7,172 |
) |
|
|
24,358 |
|
|
|
13,407 |
|
Amounts
related to embedded derivatives in equity-indexed annuities included in benefits and expenses |
|
|
(32,077 |
) |
|
|
(14,950 |
) |
|
|
(73,348 |
) |
|
|
(3,222 |
) |
After the
associated amortization of DAC and taxes, the related amounts included in net income |
|
|
(13,192 |
) |
|
|
(3,952 |
) |
|
|
(49,842 |
) |
|
|
(5,184 |
) |
Non-hedging Derivatives
A summary of the effect of non-hedging derivatives, including embedded derivatives, on the Companys income statement for the three and six months ended June 30,
2011 and 2010 is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) for the Three Months Ended |
|
|
|
|
|
|
|
June 30, |
|
Type of Non-hedging Derivative |
|
Income Statement Location of Gain (Loss) |
|
2011 |
|
|
2010 |
|
Interest rate swaps |
|
Investment related gains (losses), net |
|
$ |
25,343 |
|
|
$ |
87,115 |
|
Financial futures |
|
Investment related gains (losses), net |
|
|
(2,873 |
) |
|
|
32,823 |
|
Foreign currency forwards |
|
Investment related gains (losses), net |
|
|
595 |
|
|
|
1,447 |
|
CPI swaps |
|
Investment related gains (losses), net |
|
|
503 |
|
|
|
108 |
|
Credit default swaps |
|
Investment related gains (losses), net |
|
|
988 |
|
|
|
(4,060 |
) |
Equity options |
|
Investment related gains (losses), net |
|
|
3,919 |
|
|
|
127 |
|
Embedded derivatives in: |
|
|
|
|
|
|
|
|
|
|
|
|
Modified
coinsurance or funds withheld arrangements |
|
Investment related gains (losses), net |
|
|
10,525 |
|
|
|
32,512 |
|
Indexed annuity products |
|
Policy acquisition costs and other
insurance expenses |
|
|
4,026 |
|
|
|
2,596 |
|
Indexed annuity products |
|
Interest credited |
|
|
(36,101 |
) |
|
|
(17,546 |
) |
Variable annuity products |
|
Investment related gains (losses), net |
|
|
(25,860 |
) |
|
|
(140,934 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total non-hedging derivatives |
|
|
|
|
|
$ |
(18,935 |
) |
|
$ |
(5,812 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) for the Six Months Ended |
|
|
|
|
|
|
|
June 30, |
|
Type of Non-hedging Derivative |
|
Income Statement Location of Gain (Loss) |
|
2011 |
|
|
2010 |
|
Interest rate swaps |
|
Investment related gains (losses), net |
|
$ |
14,613 |
|
|
$ |
98,455 |
|
Financial futures |
|
Investment related gains (losses), net |
|
|
(14,296 |
) |
|
|
21,077 |
|
Foreign currency forwards |
|
Investment related gains (losses), net |
|
|
(260 |
) |
|
|
618 |
|
CPI swaps |
|
Investment related gains (losses), net |
|
|
1,315 |
|
|
|
1,032 |
|
Credit default swaps |
|
Investment related gains (losses), net |
|
|
1,880 |
|
|
|
(3,284 |
) |
Equity options |
|
Investment related gains (losses), net |
|
|
(650 |
) |
|
|
127 |
|
Embedded derivatives in: |
|
|
|
|
|
|
|
|
|
|
|
|
Modified
coinsurance or funds withheld arrangements |
|
Investment related gains (losses), net |
|
|
101,060 |
|
|
|
155,147 |
|
Indexed annuity products |
|
Policy acquisition costs and other
insurance expenses |
|
|
12,119 |
|
|
|
1,161 |
|
Indexed annuity products |
|
Interest credited |
|
|
(85,466 |
) |
|
|
(4,383 |
) |
Variable annuity products |
|
Investment related gains (losses), net |
|
|
6,794 |
|
|
|
(133,763 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total non-hedging derivatives |
|
|
|
|
|
$ |
37,109 |
|
|
$ |
136,187 |
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk
The Company manages its credit risk related to over-the-counter derivatives by entering into
transactions with creditworthy counterparties, maintaining collateral arrangements and through the
use of master agreements that provide for a single net payment to be made by one counterparty to
another at each due date and upon termination. As exchange-traded futures are affected through
regulated exchanges, and positions are marked to market on a daily basis, the Company has minimal
exposure to credit-related losses in the event of nonperformance by counterparties.
The Company enters into various collateral arrangements, which require both the posting and
accepting of collateral in connection with its derivative instruments. Collateral agreements
contain attachment thresholds that may vary depending on the posting partys ratings.
Additionally, a decline in the Companys or the counterpartys credit ratings to specified levels
could result in potential settlement of the derivative positions under the Companys agreements
with its counterparties. The Company also has exchange-traded futures, which require the
maintenance of a margin account.
The Companys credit exposure related to derivative contracts is generally limited to the fair
value at the reporting date plus or minus any collateral posted or held by the Company.
Information regarding the Companys credit exposure related to its
18
over-the-counter derivative contracts and margin account for exchange-traded futures at June 30,
2011 and December 31, 2010 are reflected in the following table (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Estimated fair value of derivatives in net asset (liability) position |
|
$ |
(10,741 |
) |
|
$ |
(29,801 |
) |
Securities pledged to counterparties as collateral(1) |
|
|
60,337 |
|
|
|
48,223 |
|
Cash pledged from counterparties as collateral(2) |
|
|
(18,310 |
) |
|
|
(10,300 |
) |
Securities pledged from counterparties as collateral(3) |
|
|
(30,253 |
) |
|
|
(1,781 |
) |
|
|
|
|
|
|
|
Net credit exposure |
|
$ |
1,033 |
|
|
$ |
6,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margin account related to exchange-traded futures(2) |
|
$ |
11,379 |
|
|
$ |
16,285 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of U.S. Treasury securities, included in other invested assets. |
|
(2) |
|
Included in cash and cash equivalents |
|
(3) |
|
Consists of U.S. Treasury securities. |
6. Fair Value of Financial Instruments
Fair values of financial instruments have been determined by using available market information and
the valuation techniques described below. Considerable judgment is often required in interpreting
market data to develop estimates of fair value. Accordingly, the estimates presented herein may
not necessarily be indicative of amounts that could be realized in a current market exchange. The
use of different assumptions or valuation techniques may have a material effect on the estimated
fair value amounts. The following table presents the carrying amounts and estimated fair values of
the Companys financial instruments at June 30, 2011 and December 31, 2010 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
|
|
Estimated Fair |
|
|
|
|
|
|
Estimated Fair |
|
|
|
Carrying Value |
|
|
Value |
|
|
Carrying Value |
|
|
Value |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities |
|
$ |
15,153,807 |
|
|
$ |
15,153,807 |
|
|
$ |
14,304,597 |
|
|
$ |
14,304,597 |
|
Mortgage loans on real estate |
|
|
908,048 |
|
|
|
971,212 |
|
|
|
885,811 |
|
|
|
933,513 |
|
Policy loans |
|
|
1,229,663 |
|
|
|
1,229,663 |
|
|
|
1,228,418 |
|
|
|
1,228,418 |
|
Funds withheld at interest |
|
|
5,671,844 |
|
|
|
6,053,869 |
|
|
|
5,421,952 |
|
|
|
5,838,064 |
|
Short-term investments |
|
|
125,618 |
|
|
|
125,618 |
|
|
|
118,387 |
|
|
|
118,387 |
|
Other invested assets |
|
|
759,750 |
|
|
|
764,347 |
|
|
|
683,307 |
|
|
|
681,242 |
|
Cash and cash equivalents |
|
|
710,973 |
|
|
|
710,973 |
|
|
|
463,661 |
|
|
|
463,661 |
|
Accrued investment income |
|
|
160,436 |
|
|
|
160,436 |
|
|
|
127,874 |
|
|
|
127,874 |
|
Reinsurance ceded receivables |
|
|
88,473 |
|
|
|
43,045 |
|
|
|
95,557 |
|
|
|
91,893 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-sensitive contract liabilities |
|
$ |
6,163,476 |
|
|
$ |
5,893,885 |
|
|
$ |
5,856,945 |
|
|
$ |
5,866,088 |
|
Long-term and short-term debt |
|
|
1,614,399 |
|
|
|
1,668,873 |
|
|
|
1,216,410 |
|
|
|
1,226,517 |
|
Collateral finance facility |
|
|
837,789 |
|
|
|
527,499 |
|
|
|
850,039 |
|
|
|
514,250 |
|
Company-obligated mandatorily redeemable preferred securities |
|
|
|
|
|
|
|
|
|
|
159,421 |
|
|
|
221,341 |
|
Publicly traded fixed maturity securities are valued based upon quoted market prices or
estimates from independent pricing services, independent broker quotes and pricing matrices.
Private placement fixed maturity securities are valued based on the credit quality and duration of
marketable securities deemed comparable by the Companys investment advisor, which may be of
another issuer. The Company utilizes information from third parties, such as pricing services
and brokers, to assist in determining fair values for certain assets and liabilities; however,
management is ultimately responsible for all fair values presented in the Companys financial
statements. The fair value of mortgage loans on real estate is estimated using discounted cash
flows. Policy loans typically carry an interest rate that is adjusted annually based on a market
index and therefore carrying value approximates fair value. The carrying value of funds withheld
at interest approximates fair value except where the funds withheld are specifically identified in
the agreement. When funds withheld are specifically identified in the agreement, the fair value is
based on the fair value of the underlying assets which are held by the ceding company. The
carrying values of cash and cash equivalents and short-term investments approximate fair values due
to the short-term maturities of these instruments. Common and preferred equity investments and
derivative financial instruments included in other invested assets are reflected at fair value on
the condensed consolidated balance sheets based primarily on quoted market prices. Limited
partnership interests included in other invested assets consist of those investments accounted for
19
using the cost method. The remaining carrying value recognized in the condensed consolidated
balance sheets represents investments in limited partnership interests accounted for using the
equity method, which do not meet the definition of financial instruments for which fair value is
required to be disclosed. The fair value of limited partnerships is based on net asset values.
The carrying value for accrued investment income approximates fair value.
The carrying and fair values of interest-sensitive contract liabilities reflected in the table
above exclude contracts with significant mortality risk. The fair value of the Companys
interest-sensitive contract liabilities and related reinsurance ceded receivables is based on the
cash surrender value of the liabilities, adjusted for recapture fees. The fair value of the
Companys long-term debt is estimated based on either quoted market prices or quoted market prices
for the debt of corporations with similar credit quality. The fair values of the Companys
collateral finance facility and company-obligated mandatorily redeemable preferred securities are
estimated using discounted cash flows. See Note 14 Financing Activities and Stock
Transactions, for information regarding the Companys company-obligated mandatorily redeemable
preferred securities.
General accounting principles for Fair Value Measurements and Disclosures define fair value as the
exchange price that would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. In accordance with these principles,
valuation techniques utilized by management for invested assets and embedded derivatives reported
at fair value are generally categorized into three types:
Market Approach. Market approach valuation techniques use prices and other relevant information
from market transactions involving identical or comparable assets or liabilities. Valuation
techniques consistent with the market approach include comparables and matrix pricing. Comparables
use market multiples, which might lie in ranges with a different multiple for each comparable. The
selection of where within the range the appropriate multiple falls requires judgment, considering
both quantitative and qualitative factors specific to the measurement. Matrix pricing is a
mathematical technique used principally to value certain securities without relying exclusively on
quoted prices for the specific securities but comparing the securities to benchmark or comparable
securities.
Income Approach. Income approach valuation techniques convert future amounts, such as cash flows
or earnings, to a single discounted amount. These techniques rely on current expectations of
future amounts. Examples of income approach valuation techniques include present value techniques,
option-pricing models and binomial or lattice models that incorporate present value techniques.
Cost Approach. Cost approach valuation techniques are based upon the amount that, at present,
would be required to replace the service capacity of an asset, or the current replacement cost.
That is, from the perspective of a market participant (seller), the price that would be received
for the asset is determined based on the cost to a market participant (buyer) to acquire or
construct a substitute asset of comparable utility.
The three approaches described above are consistent with generally accepted valuation techniques.
While all three approaches are not applicable to all assets or liabilities reported at fair value,
where appropriate and possible, one or more valuation techniques may be used. The selection of the
valuation technique(s) to apply considers the definition of an exit price and the nature of the
asset or liability being valued and significant expertise and judgment is required. The Company
performs regular analysis and review of the various techniques utilized in determining fair value
to ensure that the valuation approaches utilized are appropriate and consistently applied, and that
the various assumptions are reasonable. The Company also utilizes information from third parties,
such as pricing services and brokers, to assist in determining fair values for certain assets and
liabilities; however, management is ultimately responsible for all fair values presented in the
Companys financial statements. The Company performs analysis and review of the information and
prices received from third parties to ensure that the prices represent a reasonable estimate of the
fair value. This process involves quantitative and qualitative analysis and is overseen by the
Companys investment and accounting personnel. Examples of procedures performed include, but are
not limited to, initial and ongoing review of third party pricing services and techniques, review
of pricing trends and monitoring of recent trade information. In addition, the Company utilizes
both internal and external cash flow models to analyze the reasonableness of fair values utilizing
credit spread and other market assumptions, where appropriate. As a result of the analysis, if the
Company determines there is a more appropriate fair value based upon the available market data, the
price received from the third party is adjusted accordingly.
For invested assets reported at fair value, the Company utilizes when available, fair values based
on quoted prices in active markets that are regularly and readily obtainable. Generally, these are
very liquid investments and the valuation does not require management judgment. When quoted prices
in active markets are not available, fair value is based on the market valuation techniques
described above, primarily a combination of the market approach, including matrix pricing and the
income approach. For corporate and government securities, the assumptions and inputs used by
management in applying these techniques include, but are not limited to: using standard market
observable inputs which are derived from, or corroborated by, market observable data including
market yield curve, duration, call provisions, observable prices and spreads for similar publicly
traded or privately traded issues the incorporate the credit quality and industry sector of the
20
issuer. For structured securities that include residential mortgage-backed securities, commercial
mortgage-backed securities and asset-backed securities, valuation is based primarily on matrix
pricing or other similar techniques using standard market inputs including spreads for actively
traded securities, spreads off benchmark yields, expected prepayment speeds and volumes, current
and forecasted loss severity, rating, weighted average coupon, weighted average maturity, average
delinquency rates, geographic region, debt-service coverage ratios and issuance-specific
information including, but not limited to: collateral type, payment terms of the underlying assets,
payment priority within the tranche, structure of the security, deal performance and vintage of
loans.
When observable inputs are not available, the market standard valuation techniques for determining
the estimated fair value of certain types of securities that trade infrequently, and therefore have
little or no price transparency, rely on inputs that are significant to the estimated fair value
that are not observable in the market or cannot be derived principally from or corroborated by
observable market data. These unobservable inputs can be based in large part on management
judgment or estimation, and cannot be supported by reference to market activity. Even though
unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and
are believed to be consistent with what other market participants would use when pricing such
securities.
The use of different techniques, assumptions and inputs may have a material effect on the estimated
fair values of the Companys securities holdings.
For the quarters ended June 30, 2011 and 2010, the application of market standard valuation
techniques applied to similar assets and liabilities has been consistent.
General accounting principles for Fair Value Measurements and Disclosures also establish a fair
value hierarchy which requires an entity to maximize the use of observable inputs and minimize the
use of unobservable inputs when measuring fair value. The standard describes three levels of
inputs that may be used to measure fair value:
|
|
|
Level 1 |
|
Quoted prices in active markets for identical assets or liabilities.
The Companys Level 1 assets and liabilities include investment securities and
derivative contracts that are traded in exchange markets.
|
|
Level 2 |
|
Observable inputs other than Level 1 prices such as quoted prices for
similar assets or liabilities; quoted prices in markets that are not active; or
market standard valuation techniques and assumptions with significant inputs
that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities. Such observable
inputs include benchmarking prices for similar assets in active, liquid
markets, quoted prices in markets that are not active and observable yields and
spreads in the market. The Companys Level 2 assets and liabilities include
investment securities with quoted prices that are traded less frequently than
exchange-traded instruments and derivative contracts whose values are
determined using market standard valuation techniques. This category primarily
includes corporate securities, Canadian and Canadian provincial government
securities, and residential and commercial mortgage-backed securities, among
others. Level 2 valuations are generally obtained from third party pricing
services for identical or comparable assets or liabilities or through the use
of valuation methodologies using observable market inputs. Prices from
services are validated through analytical reviews and assessment of current
market activity. |
|
Level 3 |
|
Unobservable inputs that are supported by little or
no market activity and that are significant to the
fair value of the related assets or liabilities.
Level 3 assets and liabilities include financial
instruments whose value is determined using market
standard valuation techniques described above. When
observable inputs are not available, the market
standard techniques for determining the estimated
fair value of certain securities that trade
infrequently, and therefore have little transparency,
rely on inputs that are significant to the estimated
fair value and that are not observable in the market
or cannot be derived principally from or corroborated
by observable market data. These unobservable inputs
can be based in large part on management judgment or
estimation and cannot be supported by reference to
market activity. Even though unobservable, management
believes these inputs are based on assumptions deemed
appropriate given the circumstances and consistent
with what other market participants would use when
pricing similar assets and liabilities. For the
Companys invested assets, this category generally
includes corporate securities (primarily private
placements), asset-backed securities (including those
with exposure to subprime mortgages), and to a lesser
extent, certain residential and commercial
mortgage-backed securities, among others. Prices are
determined using valuation methodologies such as
discounted cash flow models and other similar
techniques. Non-binding broker quotes, which are
utilized when pricing service information is not available, are reviewed for reasonableness based on
the Companys understanding of the market, and are generally considered Level 3. Under
certain circumstances, based on its observations of transactions in active markets, the
Company may conclude the prices received from independent third party pricing services or
brokers are not reasonable or reflective of market activity. In those instances, the
Company would apply internally developed valuation techniques to the related assets or
liabilities. Additionally, the Companys embedded derivatives, all of which are associated
with |
21
reinsurance treaties, are classified in Level 3 since their values include significant
unobservable inputs associated with actuarial assumptions regarding policyholder behavior.
When inputs used to measure fair value fall within different levels of the hierarchy, the level
within which the fair value measurement is categorized is based on the lowest priority level input
that is significant to the fair value measurement in its entirety. For example, a Level 3 fair
value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level
3). Therefore, gains and losses for such assets and liabilities categorized within Level 3 may
include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and
unobservable inputs (Level 3). Assets and liabilities measured at fair value on a recurring basis
as of June 30, 2011 and December 31, 2010 are summarized below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using: |
|
June 30, 2011: |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
$ |
7,697,068 |
|
|
$ |
13,558 |
|
|
$ |
6,705,950 |
|
|
$ |
977,560 |
|
Canadian and Canadian provincial governments |
|
|
3,208,156 |
|
|
|
|
|
|
|
3,208,156 |
|
|
|
|
|
Residential mortgage-backed securities |
|
|
1,365,784 |
|
|
|
|
|
|
|
1,262,354 |
|
|
|
103,430 |
|
Asset-backed securities |
|
|
376,920 |
|
|
|
|
|
|
|
188,147 |
|
|
|
188,773 |
|
Commercial mortgage-backed securities |
|
|
1,359,105 |
|
|
|
|
|
|
|
1,208,340 |
|
|
|
150,765 |
|
U.S. government and agencies securities |
|
|
201,278 |
|
|
|
186,346 |
|
|
|
14,932 |
|
|
|
|
|
State and political subdivision securities |
|
|
198,364 |
|
|
|
6,942 |
|
|
|
168,490 |
|
|
|
22,932 |
|
Other foreign government securities |
|
|
747,132 |
|
|
|
199,614 |
|
|
|
543,444 |
|
|
|
4,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities available-for-sale |
|
|
15,153,807 |
|
|
|
406,460 |
|
|
|
13,299,813 |
|
|
|
1,447,534 |
|
Funds withheld at interest embedded derivatives |
|
|
(173,160 |
) |
|
|
|
|
|
|
|
|
|
|
(173,160 |
) |
Cash equivalents |
|
|
313,675 |
|
|
|
313,675 |
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
35,845 |
|
|
|
29,297 |
|
|
|
6,548 |
|
|
|
|
|
Other invested assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable preferred stock |
|
|
107,518 |
|
|
|
87,181 |
|
|
|
20,337 |
|
|
|
|
|
Other equity securities |
|
|
34,708 |
|
|
|
4,787 |
|
|
|
18,920 |
|
|
|
11,001 |
|
Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
7,960 |
|
|
|
|
|
|
|
7,960 |
|
|
|
|
|
Foreign currency forwards |
|
|
5,706 |
|
|
|
|
|
|
|
5,706 |
|
|
|
|
|
CPI swaps |
|
|
1,667 |
|
|
|
|
|
|
|
1,667 |
|
|
|
|
|
Credit default swaps |
|
|
(1,157 |
) |
|
|
|
|
|
|
(1,157 |
) |
|
|
|
|
Equity options |
|
|
44,326 |
|
|
|
|
|
|
|
44,326 |
|
|
|
|
|
Collateral |
|
|
60,337 |
|
|
|
60,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other invested assets |
|
|
261,065 |
|
|
|
152,305 |
|
|
|
97,759 |
|
|
|
11,001 |
|
Reinsurance ceded receivable embedded derivatives |
|
|
86,029 |
|
|
|
|
|
|
|
|
|
|
|
86,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
15,677,261 |
|
|
$ |
901,737 |
|
|
$ |
13,404,120 |
|
|
$ |
1,371,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities embedded derivatives |
|
$ |
804,171 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
804,171 |
|
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
1,984 |
|
|
|
|
|
|
|
1,984 |
|
|
|
|
|
Credit default swaps |
|
|
834 |
|
|
|
|
|
|
|
834 |
|
|
|
|
|
Foreign currency swaps |
|
|
66,425 |
|
|
|
|
|
|
|
66,425 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities |
|
|
69,243 |
|
|
|
|
|
|
|
69,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
873,414 |
|
|
$ |
|
|
|
$ |
69,243 |
|
|
$ |
804,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using: |
|
December 31, 2010: |
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
$ |
7,155,505 |
|
|
$ |
16,182 |
|
|
$ |
6,266,987 |
|
|
$ |
872,336 |
|
Canadian and Canadian provincial governments |
|
|
3,023,483 |
|
|
|
|
|
|
|
3,023,483 |
|
|
|
|
|
Residential mortgage-backed securities |
|
|
1,473,077 |
|
|
|
|
|
|
|
1,289,786 |
|
|
|
183,291 |
|
Asset-backed securities |
|
|
391,209 |
|
|
|
|
|
|
|
162,651 |
|
|
|
228,558 |
|
Commercial mortgage-backed securities |
|
|
1,337,853 |
|
|
|
|
|
|
|
1,190,297 |
|
|
|
147,556 |
|
U.S. government and agencies securities |
|
|
206,216 |
|
|
|
166,861 |
|
|
|
39,355 |
|
|
|
|
|
State and political subdivision securities |
|
|
164,460 |
|
|
|
6,865 |
|
|
|
150,612 |
|
|
|
6,983 |
|
Other foreign government securities |
|
|
552,794 |
|
|
|
4,037 |
|
|
|
542,178 |
|
|
|
6,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities available-for-sale |
|
|
14,304,597 |
|
|
|
193,945 |
|
|
|
12,665,349 |
|
|
|
1,445,303 |
|
Funds withheld at interest embedded derivatives |
|
|
(274,220 |
) |
|
|
|
|
|
|
|
|
|
|
(274,220 |
) |
Cash equivalents(1) |
|
|
253,746 |
|
|
|
253,746 |
|
|
|
|
|
|
|
|
|
Short-term investments |
|
|
7,310 |
|
|
|
5,257 |
|
|
|
2,053 |
|
|
|
|
|
Other invested assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable preferred stock |
|
|
99,550 |
|
|
|
72,393 |
|
|
|
26,737 |
|
|
|
420 |
|
Other equity securities |
|
|
40,661 |
|
|
|
5,126 |
|
|
|
19,119 |
|
|
|
16,416 |
|
Derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
20,042 |
|
|
|
|
|
|
|
20,042 |
|
|
|
|
|
Foreign currency forwards |
|
|
5,924 |
|
|
|
|
|
|
|
5,924 |
|
|
|
|
|
CPI swaps |
|
|
1,491 |
|
|
|
|
|
|
|
1,491 |
|
|
|
|
|
Credit default swaps |
|
|
2,429 |
|
|
|
|
|
|
|
2,429 |
|
|
|
|
|
Equity options |
|
|
5,043 |
|
|
|
|
|
|
|
5,043 |
|
|
|
|
|
Collateral |
|
|
48,223 |
|
|
|
48,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other invested assets |
|
|
223,363 |
|
|
|
125,742 |
|
|
|
80,785 |
|
|
|
16,836 |
|
Reinsurance ceded receivable embedded derivatives |
|
|
75,431 |
|
|
|
|
|
|
|
|
|
|
|
75,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
14,590,227 |
|
|
$ |
578,690 |
|
|
$ |
12,748,187 |
|
|
$ |
1,263,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest sensitive contract liabilities embedded derivatives |
|
$ |
721,485 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
721,485 |
|
Other liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives: (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps |
|
|
18,850 |
|
|
|
|
|
|
|
18,850 |
|
|
|
|
|
Credit default swaps |
|
|
131 |
|
|
|
|
|
|
|
131 |
|
|
|
|
|
Foreign currency swaps |
|
|
45,749 |
|
|
|
|
|
|
|
45,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other liabilities |
|
|
64,730 |
|
|
|
|
|
|
|
64,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
786,215 |
|
|
$ |
|
|
|
$ |
64,730 |
|
|
$ |
721,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Beginning in the second quarter of 2011, the fair value information for certain cash equivalents was included. Information as of December 31, 2010 was recast to reflect this change. |
|
(2) |
|
Balances have been adjusted due to typographical errors in the 2010 Annual Report. |
Fixed Maturity Securities The fair values of the Companys public fixed maturity
securities, which include corporate and structured securities, are generally based on prices
obtained from independent pricing services. Prices from pricing services are sourced from multiple
vendors, and a vendor hierarchy is maintained by asset type based on historical pricing experience
and vendor expertise. The Company generally receives prices from multiple pricing services for each
security, but ultimately uses the price from the pricing service highest in the vendor hierarchy
based on the respective asset type. To validate reasonability, prices are periodically reviewed by
internal asset managers through comparison with directly observed recent market trades and internal
estimates of current fair value, developed using market observable inputs and economic indicators.
Consistent with the fair value hierarchy described above, securities with validated quotes from
pricing services are generally reflected within Level 2, as they are primarily based on observable
pricing for similar assets and/or other market observable inputs. If the pricing information
received from third party pricing services is not reflective of market activity or other inputs
observable in the market, the Company may challenge the price through a formal process with the
pricing service.
If the Company ultimately concludes that pricing information received from the independent pricing
service is not reflective of market activity, non-binding broker quotes are used, if available. If
the Company concludes the values from both pricing services and brokers are not reflective of
market activity, it may override the information from the pricing service or broker with an
internally developed valuation, however this occurs infrequently. Internally developed valuations
or non-binding broker quotes are also used to determine fair value in circumstances where vendor
pricing is not available. These estimates may use significant unobservable inputs, which reflect
the Companys assumptions about the inputs market participants would use in pricing the asset.
Circumstances where observable market data are not available may include events such as
23
market illiquidity and credit events related to the security. Pricing service overrides, internally
developed valuations and non-binding broker quotes are generally based on significant unobservable
inputs and are often reflected as Level 3 in the valuation hierarchy.
The fair values of private placement securities are primarily determined using a discounted cash
flow model. In certain cases these models primarily use observable inputs with a discount rate
based upon the average of spread surveys collected from private market intermediaries who are
active in both primary and secondary transactions, taking into account, among other factors, the
credit quality and industry sector of the issuer and the reduced liquidity associated with private
placements. Generally, these securities have been reflected within Level 2. For certain private
fixed maturities, the discounted cash flow model may also incorporate significant unobservable
inputs, which reflect the Companys own assumptions about the inputs market participants would use
in pricing the security. To the extent management determines that such unobservable inputs are not
significant to the price of a security, a Level 2 classification is made. Otherwise, a Level 3
classification is used.
Embedded Derivatives For embedded derivative liabilities associated with the underlying products
in reinsurance treaties, primarily equity-indexed and variable annuity treaties, the Company
utilizes a market standard technique, which includes an estimate of future equity option purchases
and an adjustment for the Companys own credit risk that takes into consideration the Companys
financial strength rating, also commonly referred to as a claims paying rating. The capital market
inputs to the model, such as equity indexes, equity volatility, interest rates and the Companys
credit adjustment, are generally observable. However, the valuation models also use inputs
requiring certain actuarial assumptions such as future interest margins, policyholder behavior,
including future equity participation rates, and explicit risk margins related to non-capital
market inputs, that are generally not observable and may require use of significant management
judgment. Changes in interest rates, equity indices, equity volatility, the Companys own credit
risk, and actuarial assumptions regarding policyholder behavior may result in significant
fluctuations in the value of embedded derivatives liabilities associated with equity-indexed
annuity reinsurance treaties.
The fair value of embedded derivatives associated with funds withheld reinsurance treaties is
determined based upon a total return swap technique with reference to the fair value of the
investments held by the ceding company that support the Companys funds withheld at interest asset.
The fair value of the underlying assets is generally based on market observable inputs using
industry standard valuation techniques. However, the valuation also requires certain significant
inputs based on actuarial assumptions, which are generally not observable and accordingly, the
valuation is considered Level 3 in the fair value hierarchy.
Cash Equivalents and Short-Term Investments Cash equivalents and short-term investments include
money market instruments, commercial paper and other highly liquid debt instruments. Money market
instruments are generally valued using unadjusted quoted prices in active markets that are
accessible for identical assets and are primarily classified as Level 1. The fair value of certain
other short-term investments, such as floating rate notes and bonds with original maturities less
then twelve months, are based upon other market observable data and are typically classified as
Level 2. Various time deposits carried as cash equivalents or short-term investments are not
measured at estimated fair value and therefore are excluded from the tables presented.
Equity Securities Equity securities consist principally of preferred stock of publicly and
privately traded companies. The fair values of most publicly traded equity securities are based on
quoted market prices in active markets for identical assets and are classified within Level 1 in
the fair value hierarchy. Estimated fair values for most privately traded equity securities are
determined using valuation models that require a substantial level of judgment. In determining the
fair value of certain privately traded equity securities the models may also use unobservable
inputs, which reflect the Companys assumptions about the inputs market participants would use in
pricing. Most privately traded equity securities are classified within Level 3. The fair values of
preferred equity securities are based on prices obtained from independent pricing services and
these securities are generally classified within Level 2 in the fair value hierarchy. The fair
value of other equity securities, included in Level 2, represent the Companys common stock
investment in the Federal Home Loan Bank of Des Moines.
Derivative Assets and Derivative Liabilities Level 1 measurement includes assets and liabilities
comprised of exchange-traded derivatives. Valuation is based on unadjusted quoted prices in active
markets that are readily and regularly available. Level 2 measurement includes all types of
derivative instruments utilized by the Company with the exception of exchange-traded derivatives.
These derivatives are principally valued using an income approach. Valuations of interest rate
contracts, non-option-based, are based on present value techniques, which utilize significant
inputs that may include the swap yield curve, LIBOR basis curves, and repurchase rates. Valuations
of foreign currency contracts, non-option-based, are based on present value techniques, which
utilize significant inputs that may include the swap yield curve, LIBOR basis curves, currency spot
rates, and cross currency basis curves. Valuations of credit contracts, non-option-based, are
based on present value techniques, which utilize significant inputs that may include the swap yield
curve, credit curves, and recovery rates. Valuations of equity market contracts, non-option-based,
are based on present value techniques, which utilize significant inputs that may include the swap
yield curve, spot equity index levels, and dividend yield curves. Valuations of equity market
contracts, option-based, are based on option pricing models, which utilize significant inputs that
may include the swap
24
yield curve, spot equity index levels, dividend yield curves, and equity volatility. The Company
does not currently have derivatives included in Level 3 measurement.
As of June 30, 2011 and December 31, 2010, respectively, the Company classified approximately 9.6%
and 10.1% of its fixed maturity securities in the Level 3 category. These securities primarily
consist of private placement corporate securities with an inactive trading market. Additionally,
the Company has included asset-backed securities with sub-prime exposure and mortgage-backed
securities with below investment grade ratings in the Level 3 category due to market uncertainty
associated with these securities and the Companys utilization of information.
The tables below provide a summary of the changes in fair value of Level 3 assets and liabilities
for the three and six months ended June 30, 2011, as well as the portion of gains or losses
included in income for the three and six months ended June 30, 2011 attributable to unrealized
gains or losses related to those assets and liabilities still held at June 30, 2011 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities - available-for-sale |
|
|
|
|
|
|
|
Residential |
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
mortgage- |
|
|
|
|
|
|
mortgage- |
|
|
|
Corporate |
|
|
backed |
|
|
Asset-backed |
|
|
backed |
|
For the three months ended June 30, 2011: |
|
securities |
|
|
securities |
|
|
securities |
|
|
securities |
|
Fair value, beginning of period |
|
$ |
940,470 |
|
|
$ |
138,568 |
|
|
$ |
202,246 |
|
|
$ |
203,394 |
|
Total gains/losses (realized/unrealized) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
|
75 |
|
|
|
233 |
|
|
|
322 |
|
|
|
611 |
|
Investment related gains (losses), net |
|
|
321 |
|
|
|
(45 |
) |
|
|
(3,671 |
) |
|
|
(2,242 |
) |
Claims & other policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs and other insurance expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in other comprehensive income |
|
|
9,228 |
|
|
|
(2,910 |
) |
|
|
3,182 |
|
|
|
(5,825 |
) |
Purchases(1) |
|
|
97,606 |
|
|
|
5,329 |
|
|
|
25,007 |
|
|
|
5,069 |
|
Sales(1) |
|
|
(19,563 |
) |
|
|
(6,635 |
) |
|
|
(3,998 |
) |
|
|
|
|
Settlements(1) |
|
|
(25,050 |
) |
|
|
(4,205 |
) |
|
|
(8,693 |
) |
|
|
(3,080 |
) |
Transfers into Level 3(2) |
|
|
26,268 |
|
|
|
|
|
|
|
10,175 |
|
|
|
11,665 |
|
Transfers out of Level 3(2) |
|
|
(51,795 |
) |
|
|
(26,905 |
) |
|
|
(35,797 |
) |
|
|
(58,827 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, end of period |
|
$ |
977,560 |
|
|
$ |
103,430 |
|
|
$ |
188,773 |
|
|
$ |
150,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains and losses recorded in earnings for the period relating to those Level 3
assets and liabilities that were still held at the
end of the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
$ |
56 |
|
|
$ |
216 |
|
|
$ |
331 |
|
|
$ |
601 |
|
Investment related gains (losses), net |
|
|
|
|
|
|
(44 |
) |
|
|
(2,998 |
) |
|
|
(2,254 |
) |
Claims & other policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs and other insurance expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities |
|
|
|
|
|
|
available-for-sale |
|
|
|
|
|
|
State |
|
|
|
|
|
|
Funds withheld |
|
|
|
and political |
|
|
Other foreign |
|
|
at interest- |
|
|
|
subdivision |
|
|
government |
|
|
embedded |
|
For the three months ended June 30, 2011 (continued): |
|
securities |
|
|
securities |
|
|
derivative |
|
Fair value, beginning of period |
|
$ |
45,081 |
|
|
$ |
6,495 |
|
|
$ |
(183,685 |
) |
Total gains/losses (realized/unrealized) |
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings, net: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
|
2 |
|
|
|
|
|
|
|
|
|
Investment related gains (losses), net |
|
|
(3 |
) |
|
|
|
|
|
|
10,525 |
|
Claims & other policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs and other insurance expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Included in other comprehensive income |
|
|
939 |
|
|
|
110 |
|
|
|
|
|
Purchases(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Sales(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Settlements(1) |
|
|
(22 |
) |
|
|
|
|
|
|
|
|
Transfers into Level 3(2) |
|
|
14,260 |
|
|
|
|
|
|
|
|
|
Transfers out of Level 3(2) |
|
|
(37,325 |
) |
|
|
(2,531 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, end of period |
|
$ |
22,932 |
|
|
$ |
4,074 |
|
|
$ |
(173,160 |
) |
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities |
|
|
|
|
|
|
available-for-sale |
|
|
|
|
|
|
State |
|
|
|
|
|
|
Funds withheld |
|
|
|
and political |
|
|
Other foreign |
|
|
at interest- |
|
|
|
subdivision |
|
|
government |
|
|
embedded |
|
For the three months ended June 30, 2011 (continued): |
|
securities |
|
|
securities |
|
|
derivative |
|
Unrealized gains and losses recorded in earnings for the period relating to those
Level 3 assets and liabilities that were still held at the
end of the period |
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings, net: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
$ |
2 |
|
|
$ |
|
|
|
$ |
|
|
Investment related gains (losses), net |
|
|
|
|
|
|
|
|
|
|
10,525 |
|
Claims & other policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs and other insurance expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other invested |
|
|
|
|
|
|
Reinsurance |
|
|
Interest sensitive |
|
|
|
assets- non- |
|
|
Other invested |
|
|
ceded receivable- |
|
|
contract liabilities |
|
|
|
redeemable |
|
|
assets- other |
|
|
embedded |
|
|
embedded |
|
For the three months ended June 30, 2011 (continued): |
|
preferred stock |
|
|
equity securities |
|
|
derivative |
|
|
derivative |
|
Fair value, beginning of period |
|
$ |
420 |
|
|
$ |
14,134 |
|
|
$ |
82,482 |
|
|
$ |
(739,017 |
) |
Total gains/losses (realized/unrealized) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment related gains (losses), net |
|
|
|
|
|
|
3,504 |
|
|
|
|
|
|
|
(25,860 |
) |
Claims & other policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(603 |
) |
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,267 |
) |
Policy acquisition costs and other insurance expenses |
|
|
|
|
|
|
|
|
|
|
4,473 |
|
|
|
|
|
Included in other comprehensive income |
|
|
|
|
|
|
(2,704 |
) |
|
|
|
|
|
|
|
|
Purchases(1) |
|
|
|
|
|
|
|
|
|
|
1,831 |
|
|
|
(21,302 |
) |
Sales(1) |
|
|
(420 |
) |
|
|
(3,933 |
) |
|
|
|
|
|
|
|
|
Settlements(1) |
|
|
|
|
|
|
|
|
|
|
(2,757 |
) |
|
|
18,878 |
|
Transfers into Level 3(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers out of Level 3(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, end of period |
|
$ |
|
|
|
$ |
11,001 |
|
|
$ |
86,029 |
|
|
$ |
(804,171 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the
end of the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Investment related gains (losses), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,861 |
) |
Claims & other policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,370 |
) |
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,145 |
) |
Policy acquisition costs and other insurance expenses |
|
|
|
|
|
|
|
|
|
|
10,645 |
|
|
|
|
|
|
|
|
(1) |
|
The amount reported within purchases, sales and settlements is the purchase price (for purchases) and the sales/settlement proceeds (for sales and settlements) based upon the actual date purchased or sold/settled. Items purchased
and sold/settled in the same period are excluded from the rollforward. The Company had no issuances during the period. |
|
(2) |
|
The Companys policy is to recognize transfers into and out of levels within the fair value hierarchy at the beginning of the quarter in which the actual event or change in circumstances that caused the transfer occurs. Transfers
into Level 3 are due to a lack of observable market data for these securities or, in accordance with company policy, when the ratings of certain asset classes fall below investment grade. Transfers out of Level 3 are due to an
increase in observable market data or when the underlying inputs are evaluated and determined to be market observable. Transfers between Level 1 and Level 2 were not significant. |
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities - available-for-sale |
|
|
|
|
|
|
|
Residential |
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
mortgage- |
|
|
|
|
|
|
mortgage- |
|
|
|
Corporate |
|
|
backed |
|
|
Asset-backed |
|
|
backed |
|
For the six months ended June 30, 2011: |
|
securities |
|
|
securities |
|
|
securities |
|
|
securities |
|
Fair value, beginning of period |
|
$ |
872,336 |
|
|
$ |
183,291 |
|
|
$ |
228,558 |
|
|
$ |
147,556 |
|
Total gains/losses (realized/unrealized) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
|
162 |
|
|
|
493 |
|
|
|
904 |
|
|
|
1,169 |
|
Investment related gains (losses), net |
|
|
741 |
|
|
|
(401 |
) |
|
|
(2,827 |
) |
|
|
(2,732 |
) |
Claims & other policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs and other insurance expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in other comprehensive income |
|
|
9,454 |
|
|
|
4,484 |
|
|
|
7,413 |
|
|
|
27,316 |
|
Purchases(1) |
|
|
197,807 |
|
|
|
5,782 |
|
|
|
29,880 |
|
|
|
7,683 |
|
Sales(1) |
|
|
(21,232 |
) |
|
|
(20,701 |
) |
|
|
(22,298 |
) |
|
|
|
|
Settlements(1) |
|
|
(75,730 |
) |
|
|
(12,365 |
) |
|
|
(16,841 |
) |
|
|
(3,410 |
) |
Transfers into Level 3(2) |
|
|
60,679 |
|
|
|
5,001 |
|
|
|
21,501 |
|
|
|
66,854 |
|
Transfers out of Level 3(2) |
|
|
(66,657 |
) |
|
|
(62,154 |
) |
|
|
(57,517 |
) |
|
|
(93,671 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, end of period |
|
$ |
977,560 |
|
|
$ |
103,430 |
|
|
$ |
188,773 |
|
|
$ |
150,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at
the end of the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
$ |
130 |
|
|
$ |
474 |
|
|
$ |
838 |
|
|
$ |
1,155 |
|
Investment related gains (losses), net |
|
|
(514 |
) |
|
|
(44 |
) |
|
|
(3,551 |
) |
|
|
(2,743 |
) |
Claims & other policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs and other insurance expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities - |
|
|
|
|
|
|
available-for-sale |
|
|
|
|
|
|
State |
|
|
|
|
|
|
Funds withheld |
|
|
|
and political |
|
|
Other foreign |
|
|
at interest- |
|
|
|
subdivision |
|
|
government |
|
|
embedded |
|
For the six months ended June 30, 2011 (continued): |
|
securities |
|
|
securities |
|
|
derivative |
|
Fair value, beginning of period |
|
$ |
6,983 |
|
|
$ |
6,579 |
|
|
$ |
(274,220 |
) |
Total gains/losses (realized/unrealized) |
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings, net: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
|
370 |
|
|
|
1 |
|
|
|
|
|
Investment related gains (losses), net |
|
|
(8 |
) |
|
|
|
|
|
|
101,060 |
|
Claims & other policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs and other insurance expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Included in other comprehensive income |
|
|
3,615 |
|
|
|
4 |
|
|
|
|
|
Purchases(1) |
|
|
871 |
|
|
|
|
|
|
|
|
|
Sales(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Settlements(1) |
|
|
(43 |
) |
|
|
|
|
|
|
|
|
Transfers into Level 3(2) |
|
|
48,469 |
|
|
|
21 |
|
|
|
|
|
Transfers out of Level 3(2) |
|
|
(37,325 |
) |
|
|
(2,531 |
) |
|
|
|
|
Fair value, end of period |
|
$ |
22,932 |
|
|
$ |
4,074 |
|
|
$ |
(173,160 |
) |
Unrealized gains and losses recorded in earnings for the period relating to those Level 3
assets and liabilities that were still held at the
end of the period |
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings, net: |
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
$ |
370 |
|
|
$ |
(36 |
) |
|
$ |
|
|
Investment related gains (losses), net |
|
|
|
|
|
|
|
|
|
|
101,060 |
|
Claims & other policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs and other insurance expenses |
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other invested |
|
|
|
|
|
|
Reinsurance |
|
|
Interest sensitive |
|
|
|
assets- non- |
|
|
Other invested |
|
|
ceded receivable- |
|
|
contract liabilities |
|
|
|
redeemable |
|
|
assets- other |
|
|
embedded |
|
|
embedded |
|
For the six months ended June 30, 2011 (continued): |
|
preferred stock |
|
|
equity securities |
|
|
derivative |
|
|
derivative |
|
Fair value, beginning of period |
|
$ |
420 |
|
|
$ |
16,416 |
|
|
$ |
75,431 |
|
|
$ |
(721,485 |
) |
Total gains/losses (realized/unrealized) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment related gains (losses), net |
|
|
|
|
|
|
3,504 |
|
|
|
|
|
|
|
6,794 |
|
Claims & other policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
317 |
|
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(86,116 |
) |
Policy acquisition costs and other insurance expenses |
|
|
|
|
|
|
|
|
|
|
12,312 |
|
|
|
|
|
Included in other comprehensive income |
|
|
|
|
|
|
(4,987 |
) |
|
|
|
|
|
|
|
|
Purchases(1) |
|
|
|
|
|
|
|
|
|
|
4,264 |
|
|
|
(41,220 |
) |
Sales(1) |
|
|
(420 |
) |
|
|
(3,932 |
) |
|
|
|
|
|
|
|
|
Settlements(1) |
|
|
|
|
|
|
|
|
|
|
(5,978 |
) |
|
|
37,539 |
|
Transfers into Level 3(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers out of Level 3(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, end of period |
|
$ |
|
|
|
$ |
11,001 |
|
|
$ |
86,029 |
|
|
$ |
(804,171 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains and losses recorded in earnings for the period relating to those Level 3
assets and liabilities that were still held at the
end of the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Investment related gains (losses), net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,794 |
|
Claims & other policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16 |
) |
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(123,655 |
) |
Policy acquisition costs and other insurance expenses |
|
|
|
|
|
|
|
|
|
|
18,485 |
|
|
|
|
|
|
|
|
(1) |
|
The amount reported within purchases, sales and settlements is the purchase price (for purchases) and the sales/settlement proceeds (for sales and settlements) based upon the
actual date purchased or sold/settled. Items purchased and sold/settled in the same period are excluded from the rollforward. The Company had no issuances during the period. |
|
(2) |
|
The Companys policy is to recognize transfers into and out of levels within the fair value hierarchy at the beginning of the quarter in which the actual event or change in
circumstances that caused the transfer occurs. Transfers into Level 3 are due to a lack of observable market data for these securities or, in accordance with company policy,
when the ratings of certain asset classes fall below investment grade. Transfers out of Level 3 are due to an increase in observable market data or when the underlying inputs
are evaluated and determined to be market observable. Transfers between Level 1 and Level 2 were not significant. |
The tables below provide a summary of the changes in fair value of Level 3 assets and
liabilities for the three and six months ended June 30, 2010, as well as the portion of gains or
losses included in income for the three and six months ended June 30, 2010 attributable to
unrealized gains or losses related to those assets and liabilities still held at June 30, 2010
(dollars in thousands):
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities - available-for-sale |
|
|
|
|
|
|
|
Residential |
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
mortgage- |
|
|
|
|
|
|
mortgage- |
|
|
|
Corporate |
|
|
backed |
|
|
Asset-backed |
|
|
backed |
|
For the three months ended June 30, 2010: |
|
securities |
|
|
securities |
|
|
securities |
|
|
securities |
|
Fair value, beginning of period |
|
$ |
829,277 |
|
|
$ |
210,615 |
|
|
$ |
206,220 |
|
|
$ |
117,709 |
|
Total gains/losses (realized/unrealized) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
|
176 |
|
|
|
505 |
|
|
|
997 |
|
|
|
1,117 |
|
Investment related gains (losses), net |
|
|
(2,040 |
) |
|
|
(4,137 |
) |
|
|
(40 |
) |
|
|
(3,799 |
) |
Claims & other policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs and other insurance expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in other comprehensive income |
|
|
12,588 |
|
|
|
14,005 |
|
|
|
8,838 |
|
|
|
11,218 |
|
Purchases, sales and settlements(1) |
|
|
43,467 |
|
|
|
(26,010 |
) |
|
|
(5,907 |
) |
|
|
(135 |
) |
Transfers into Level 3(2) |
|
|
38,822 |
|
|
|
25,075 |
|
|
|
19,325 |
|
|
|
34,380 |
|
Transfers out of Level 3(2) |
|
|
(33,321 |
) |
|
|
(7,272 |
) |
|
|
|
|
|
|
(9,784 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, end of period |
|
$ |
888,969 |
|
|
$ |
212,781 |
|
|
$ |
229,433 |
|
|
$ |
150,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the
end of the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
$ |
138 |
|
|
$ |
496 |
|
|
$ |
997 |
|
|
$ |
1,117 |
|
Investment related gains (losses), net |
|
|
|
|
|
|
(1,650 |
) |
|
|
(452 |
) |
|
|
(1,525 |
) |
Claims & other policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs and other insurance expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities - |
|
|
|
|
|
|
|
|
|
available-for-sale |
|
|
|
|
|
|
|
|
|
State |
|
|
|
|
|
|
Funds withheld |
|
|
|
|
|
|
and political |
|
|
Other foreign |
|
|
at interest- |
|
|
|
|
|
|
subdivision |
|
|
government |
|
|
embedded |
|
|
Short-term |
|
For the three months ended June 30, 2010 (continued): |
|
securities |
|
|
securities |
|
|
derivative |
|
|
investments |
|
Fair value, beginning of period |
|
$ |
11,486 |
|
|
$ |
2,174 |
|
|
$ |
(311,859 |
) |
|
$ |
|
|
Total gains/losses (realized/unrealized) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
|
12 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
Investment related gains (losses), net |
|
|
(4 |
) |
|
|
(12 |
) |
|
|
32,511 |
|
|
|
|
|
Claims & other policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs and other insurance expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in other comprehensive income |
|
|
(778 |
) |
|
|
36 |
|
|
|
|
|
|
|
(1 |
) |
Purchases, sales and settlements(1) |
|
|
(20 |
) |
|
|
4,104 |
|
|
|
|
|
|
|
1,267 |
|
Transfers into Level 3(2) |
|
|
1,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers out of Level 3(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, end of period |
|
$ |
12,516 |
|
|
$ |
6,303 |
|
|
$ |
(279,348 |
) |
|
$ |
1,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the
end of the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
$ |
12 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
|
|
Investment related gains (losses), net |
|
|
|
|
|
|
|
|
|
|
32,512 |
|
|
|
|
|
Claims & other policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs and other insurance expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other invested |
|
|
|
|
|
|
Reinsurance |
|
|
Interest sensitive |
|
|
|
assets- non- |
|
|
Other invested |
|
|
ceded receivable- |
|
|
contract liabilities |
|
|
|
redeemable |
|
|
assets- other |
|
|
embedded |
|
|
embedded |
|
For the three months ended June 30, 2010 (continued): |
|
preferred stock |
|
|
equity securities |
|
|
derivative |
|
|
derivative |
|
Fair value, beginning of period |
|
$ |
4,098 |
|
|
$ |
12,836 |
|
|
$ |
67,911 |
|
|
$ |
(594,532 |
) |
Total gains/losses (realized/unrealized) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment related gains (losses), net |
|
|
550 |
|
|
|
|
|
|
|
|
|
|
|
(140,934 |
) |
Claims & other policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(570 |
) |
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,137 |
) |
Policy acquisition costs and other insurance expenses |
|
|
|
|
|
|
|
|
|
|
2,690 |
|
|
|
|
|
Included in other comprehensive income |
|
|
(22 |
) |
|
|
3,564 |
|
|
|
|
|
|
|
|
|
Purchases, sales and settlements(1) |
|
|
(3,000 |
) |
|
|
|
|
|
|
(447 |
) |
|
|
(6,431 |
) |
Transfers into Level 3(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers out of Level 3(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, end of period |
|
$ |
1,626 |
|
|
$ |
16,400 |
|
|
$ |
70,154 |
|
|
$ |
(759,604 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the
end of the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Investment related gains (losses), net |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
(140,934 |
) |
Claims & other policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(731 |
) |
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,020 |
) |
Policy acquisition costs and other insurance expenses |
|
|
|
|
|
|
|
|
|
|
4,246 |
|
|
|
|
|
|
|
|
(1) |
|
The amount reported within purchases, sales and settlements is the purchase price (for purchases) and the sales/settlement proceeds (for sales and
settlements) based upon the actual date purchased or sold/settled. Items purchased and sold/settled in the same period are excluded from the rollforward.
The Company had no issuances during the period. |
|
(2) |
|
The Companys policy is to recognize transfers into and out of levels within the fair value hierarchy at the beginning of the quarter in which the actual
event or change in circumstances that caused the transfer occurs. Transfers into Level 3 are due to a lack of observable market data for these securities
or, in accordance with company policy, when the ratings of certain asset classes fall below investment grade. Transfers out of Level 3 are due to an
increase in observable market data or when the underlying inputs are evaluated and determined to be market observable. Transfers between Level 1 and Level 2
were not significant. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities - available-for-sale |
|
|
|
|
|
|
|
Residential |
|
|
|
|
|
|
Commercial |
|
|
|
|
|
|
|
mortgage- |
|
|
|
|
|
|
mortgage- |
|
|
|
Corporate |
|
|
backed |
|
|
Asset-backed |
|
|
backed |
|
For the six months ended June 30, 2010: |
|
securities |
|
|
securities |
|
|
securities |
|
|
securities |
|
Fair value, beginning of period |
|
$ |
1,036,891 |
|
|
$ |
144,457 |
|
|
$ |
262,767 |
|
|
$ |
329,560 |
|
Total gains/losses (realized/unrealized) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
|
397 |
|
|
|
906 |
|
|
|
1,533 |
|
|
|
1,777 |
|
Investment related gains (losses), net |
|
|
(150 |
) |
|
|
(5,708 |
) |
|
|
(512 |
) |
|
|
(3,993 |
) |
Claims & other policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs and other insurance expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in other comprehensive income |
|
|
29,765 |
|
|
|
14,526 |
|
|
|
19,275 |
|
|
|
10,274 |
|
Purchases, sales and settlements(1) |
|
|
37,215 |
|
|
|
(7,449 |
) |
|
|
(13,921 |
) |
|
|
4,229 |
|
Transfers into Level 3(2) |
|
|
66,135 |
|
|
|
73,503 |
|
|
|
29,275 |
|
|
|
44,320 |
|
Transfers out of Level 3(2) |
|
|
(281,284 |
) |
|
|
(7,454 |
) |
|
|
(68,984 |
) |
|
|
(235,461 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, end of period |
|
$ |
888,969 |
|
|
$ |
212,781 |
|
|
$ |
229,433 |
|
|
$ |
150,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at
the end of the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
$ |
293 |
|
|
$ |
838 |
|
|
$ |
1,522 |
|
|
$ |
1,759 |
|
Investment related gains (losses), net |
|
|
(585 |
) |
|
|
(3,685 |
) |
|
|
(452 |
) |
|
|
(3,992 |
) |
Claims & other policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs and other insurance expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities - |
|
|
|
|
|
|
|
|
|
available-for-sale |
|
|
|
|
|
|
|
|
|
State |
|
|
|
|
|
|
Funds withheld |
|
|
|
|
|
|
and political |
|
|
Other foreign |
|
|
at interest- |
|
|
|
|
|
|
subdivision |
|
|
government |
|
|
embedded |
|
|
Short-term |
|
For the six months ended June 30, 2010 (continued): |
|
securities |
|
|
securities |
|
|
derivative |
|
|
investments |
|
Fair value, beginning of period |
|
$ |
12,080 |
|
|
$ |
17,303 |
|
|
$ |
(434,494 |
) |
|
$ |
443 |
|
Total gains/losses (realized/unrealized) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
|
23 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
Investment related gains (losses), net |
|
|
(7 |
) |
|
|
(11 |
) |
|
|
155,146 |
|
|
|
|
|
Claims & other policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs and other insurance expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in other comprehensive income |
|
|
500 |
|
|
|
30 |
|
|
|
|
|
|
|
(1 |
) |
Purchases, sales and settlements(1) |
|
|
(40 |
) |
|
|
1,258 |
|
|
|
|
|
|
|
997 |
|
Transfers into Level 3(2) |
|
|
1,820 |
|
|
|
2,178 |
|
|
|
|
|
|
|
(173 |
) |
Transfers out of Level 3(2) |
|
|
(1,860 |
) |
|
|
(14,456 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, end of period |
|
$ |
12,516 |
|
|
$ |
6,303 |
|
|
$ |
(279,348 |
) |
|
$ |
1,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the
end of the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
$ |
23 |
|
|
$ |
1 |
|
|
$ |
|
|
|
$ |
|
|
Investment related gains (losses), net |
|
|
|
|
|
|
|
|
|
|
155,147 |
|
|
|
|
|
Claims & other policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs and other insurance expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other invested |
|
|
|
|
|
|
Reinsurance |
|
|
Interest sensitive |
|
|
|
assets- non- |
|
|
Other invested |
|
|
ceded receivable- |
|
|
contract liabilities |
|
|
|
redeemable |
|
|
assets- other |
|
|
embedded |
|
|
embedded |
|
For the six months ended June 30, 2010 (continued): |
|
preferred stock |
|
|
equity securities |
|
|
derivative |
|
|
derivative |
|
Fair value, beginning of period |
|
$ |
6,775 |
|
|
$ |
10,436 |
|
|
$ |
68,873 |
|
|
$ |
(608,654 |
) |
Total gains/losses (realized/unrealized) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment related gains (losses), net |
|
|
550 |
|
|
|
|
|
|
|
|
|
|
|
(133,763 |
) |
Claims & other policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(114 |
) |
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,949 |
) |
Policy acquisition costs and other insurance expenses |
|
|
|
|
|
|
|
|
|
|
1,557 |
|
|
|
|
|
Included in other comprehensive income |
|
|
(141 |
) |
|
|
5,339 |
|
|
|
|
|
|
|
|
|
Purchases, sales and settlements(1) |
|
|
(5,146 |
) |
|
|
625 |
|
|
|
(276 |
) |
|
|
(12,124 |
) |
Transfers into Level 3(2) |
|
|
(412 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Transfers out of Level 3(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, end of period |
|
$ |
1,626 |
|
|
$ |
16,400 |
|
|
$ |
70,154 |
|
|
$ |
(759,604 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the
end of the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income, net of related expenses |
|
$ |
(1 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Investment related gains (losses), net |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
(133,763 |
) |
Claims & other policy benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(750 |
) |
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,330 |
) |
Policy acquisition costs and other insurance expenses |
|
|
|
|
|
|
|
|
|
|
4,904 |
|
|
|
|
|
|
|
|
(1) |
|
The amount reported within purchases, sales and settlements is the purchase price (for purchases) and the sales/settlement proceeds (for sales and
settlements) based upon the actual date purchased or sold/settled. Items purchased and sold/settled in the same period are excluded from the rollforward.
The Company had no issuances during the period. |
|
(2) |
|
The Companys policy is to recognize transfers into and out of levels within the fair value hierarchy at the beginning of the quarter in which the actual
event or change in circumstances that caused the transfer occurs. Transfers into Level 3 are due to a lack of observable market data for these securities
or, in accordance with company policy, when the ratings of certain asset classes fall below investment grade. Transfers out of Level 3 are due to an
increase in observable market data or when the underlying inputs are evaluated and determined to be market observable. Transfers between Level 1 and Level 2
were not significant. |
31
Nonrecurring
Fair Value Measurements Certain assets and liabilities are measured at fair
value on a nonrecurring basis. Nonrecurring fair value adjustments on certain foreclosed
commercial mortgage loans resulted in $1.2 million of gains being recorded for the six months ended
June 30, 2011. The carrying value of these foreclosed mortgage loans as of June 30, 2011 was $4.6
million, based on the fair value of the underlying real estate collateral. In addition,
nonrecurring fair value adjustments on impaired commercial mortgage loans resulted in $0.7 million
of net losses being recorded for the second quarter and first six months of 2011. The carrying
value of these impaired mortgage loans as of June 30, 2011 was $24.5 million. There were no
material assets and liabilities measured at fair value on a nonrecurring basis as of December 31,
2010.
7. Segment Information
The accounting policies of the segments are the same as those described in the Summary of
Significant Accounting Policies in Note 2 of the consolidated financial statements accompanying the
2010 Annual Report. The Company measures segment performance primarily based on profit or loss
from operations before income taxes. There are no intersegment reinsurance transactions and the
Company does not have any material long-lived assets. Investment income is allocated to the
segments based upon average assets and related capital levels deemed appropriate to support the
segment business volumes. The Company allocates capital to its segments based on an internally developed economic capital
model, the purpose of which is to measure the risk in the business and to provide a basis upon
which capital is deployed. The economic capital model considers the unique and specific nature of
the risks inherent in the Companys businesses. As a result of the economic capital allocation
process, a portion of investment income and investment related gains and losses are credited to the
segments based on the level of allocated capital. In addition, the segments are charged for excess
capital utilized above the allocated economic capital basis. This charge is included in policy
acquisition costs and other insurance expenses. Information related to total revenues, income
before income taxes, and total assets of the Company for each reportable segment are summarized
below (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
Total revenues: |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
U.S. |
|
$ |
1,254,057 |
|
|
$ |
1,187,111 |
|
|
$ |
2,606,197 |
|
|
$ |
2,473,702 |
|
Canada |
|
|
263,067 |
|
|
|
221,256 |
|
|
|
528,576 |
|
|
|
474,027 |
|
Europe & South Africa |
|
|
295,694 |
|
|
|
219,743 |
|
|
|
576,016 |
|
|
|
446,524 |
|
Asia Pacific |
|
|
346,120 |
|
|
|
282,181 |
|
|
|
685,325 |
|
|
|
592,037 |
|
Corporate and Other |
|
|
45,039 |
|
|
|
21,586 |
|
|
|
90,298 |
|
|
|
45,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,203,977 |
|
|
$ |
1,931,877 |
|
|
$ |
4,486,412 |
|
|
$ |
4,032,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
Income before income taxes: |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
U.S. |
|
$ |
116,171 |
|
|
$ |
120,775 |
|
|
$ |
267,068 |
|
|
$ |
252,347 |
|
Canada |
|
|
43,992 |
|
|
|
33,748 |
|
|
|
74,663 |
|
|
|
52,721 |
|
Europe & South Africa |
|
|
16,241 |
|
|
|
22,326 |
|
|
|
42,560 |
|
|
|
32,983 |
|
Asia Pacific |
|
|
7,914 |
|
|
|
23,761 |
|
|
|
33,242 |
|
|
|
50,206 |
|
Corporate and Other |
|
|
16,088 |
|
|
|
(2,538 |
) |
|
|
24,722 |
|
|
|
3,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
200,406 |
|
|
$ |
198,072 |
|
|
$ |
442,255 |
|
|
$ |
391,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets: |
|
June 30, 2011 |
|
|
December 31, 2010 |
|
U.S. |
|
$ |
17,612,924 |
|
|
$ |
17,470,744 |
|
Canada |
|
|
3,682,535 |
|
|
|
3,441,915 |
|
Europe & South Africa |
|
|
1,795,122 |
|
|
|
1,584,007 |
|
Asia Pacific |
|
|
2,921,825 |
|
|
|
2,440,316 |
|
Corporate and Other |
|
|
4,646,871 |
|
|
|
4,144,926 |
|
|
|
|
|
|
|
|
Total |
|
$ |
30,659,277 |
|
|
$ |
29,081,908 |
|
|
|
|
|
|
|
|
8. Commitments and Contingent Liabilities
At June 30, 2011, the Companys commitments to fund investments were $181.0 million in limited
partnerships, $3.0 million in commercial mortgage loans and $14.8 million in private placement
investments. At December 31, 2010, the Companys commitments to fund investments were $147.2 million in limited partnerships,
$6.7 million in commercial mortgage loans
32
and $7.5 million in private placement investments. The Company anticipates that the majority
of its current commitments will be invested over the next five years; however, these commitments
could become due any time at the request of the counterparties. Investments in limited
partnerships and private placements are carried at cost or accounted for using the equity method
and included in other invested assets in the condensed consolidated balance sheets.
The Company is subject to litigation in the normal course of its business. The Company currently
has no material litigation. A legal reserve is established when the Company is notified of an
arbitration demand or litigation or is notified that an arbitration demand or litigation is
imminent, it is probable that the Company will incur a loss as a result and the amount of the
probable loss is reasonably capable of being estimated.
The Company has obtained bank letters of credit in favor of various affiliated and unaffiliated
insurance companies from which the Company assumes business. These letters of credit represent
guarantees of performance under the reinsurance agreements and allow ceding companies to take
statutory reserve credits. Certain of these letters of credit contain financial covenant
restrictions. At June 30, 2011 and December 31, 2010, there were approximately $16.4 million and
$16.0 million, respectively, of undrawn outstanding bank letters of credit in favor of third
parties. Additionally, the Company utilizes letters of credit to secure reserve credits when it
retrocedes business to its subsidiaries, including Parkway Reinsurance Company, Timberlake
Financial, L.L.C., RGA Americas Reinsurance Company, Ltd., RGA Reinsurance Company (Barbados) Ltd.
and RGA Atlantic Reinsurance Company, Ltd. The Company cedes business to its affiliates to help
reduce the amount of regulatory capital required in certain jurisdictions, such as the U.S. and the
United Kingdom. The capital required to support the business in the affiliates reflects more
realistic expectations than the original jurisdiction of the business, where capital requirements
are often considered to be quite conservative. As of June 30, 2011 and December 31, 2010, $465.0
million and $518.4 million, respectively, in undrawn letters of credit from various banks were
outstanding, backing reinsurance between various subsidiaries of the Company. The banks providing
letters of credit to the Company are included on the National Association of Insurance
Commissioners (NAIC) list of approved banks.
The Company maintains a syndicated revolving credit facility with an overall capacity of $750.0
million, which is scheduled to mature in September 2012. The Company may borrow cash and obtain
letters of credit in multiple currencies under this facility. As of June 30, 2011, the Company had
$213.6 million in issued, but undrawn, letters of credit under this facility, which is included in
the total above. Applicable letter of credit fees and fees payable for the credit facility depend
upon the Companys senior unsecured long-term debt rating. The Company also maintains a $200.0
million letter of credit facility which is scheduled to mature in September 2019. This letter of
credit is fully utilized and will be amortized to zero by 2019. As of June 30, 2011, the Company
had $200.0 million in issued, but undrawn, letters of credit under this facility, which is included
in the total above. Letter of credit fees for this facility are fixed for the term of the
facility. On May 13, 2011, the Company entered into a five-year, $120.0 million letter of credit
facility agreement. As of June 30, 2011, the Company had no issued letters of credit under this
new facility. Letter of credit fees for this facility are fixed for the term of the facility.
Fees associated with the Companys other letters of credit are not fixed for periods in excess of
one year and are based on the Companys ratings and the general availability of these instruments
in the marketplace.
RGA has issued guarantees to third parties on behalf of its subsidiaries for the payment of amounts
due under certain reinsurance treaties, securities borrowing arrangements and office lease
obligations, whereby, if a subsidiary fails to meet an obligation, RGA or one of its other
subsidiaries will make a payment to fulfill the obligation. In limited circumstances, treaty
guarantees are granted to ceding companies in order to provide them additional security,
particularly in cases where RGAs subsidiary is relatively new, unrated, or not of a significant
size, relative to the ceding company. Liabilities supported by the treaty guarantees, before
consideration for any legally offsetting amounts due from the guaranteed party, totaled $710.6
million and $600.8 million as of June 30, 2011 and December 31, 2010, respectively, and are
reflected on the Companys condensed consolidated balance sheets in future policy benefits. As of
June 30, 2011 and December 31, 2010, the Companys exposure related to treaty guarantees, net of
assets held in trust, was $466.5 million and $352.0 million, respectively. Potential guaranteed
amounts of future payments will vary depending on production levels and underwriting results.
Guarantees related to borrowed securities provide additional security to third parties should a
subsidiary fail to make principal and/or interest payments when due. As of June 30, 2011, RGAs
exposure related to borrowed securities guarantees was $150.7 million.
Manor Reinsurance, Ltd. (Manor Re), a subsidiary of RGA, has obtained $300.0 million of
collateral financing through 2020 from an international bank which enables Manor Re to deposit
assets in trust to support statutory reserve credits for an affiliated reinsurance transaction.
The bank has recourse to RGA should Manor Re fail to make payments or otherwise not perform its
obligations under this financing.
In addition, the Company indemnifies its directors and officers as provided in its charters and
by-laws. Since this indemnity generally is not subject to limitation with respect to duration or
amount, the Company does not believe that it is possible to determine the maximum potential amount
due under this indemnity in the future.
33
9. Income Tax
As of June 30, 2011 and 2010, respectively, the Companys total amount of unrecognized tax benefits
was $194.0 million and $180.4 million and the total amount of unrecognized tax benefits that would
affect the effective tax rate, if recognized, was $24.8 million and $19.3 million. A
reconciliation of the beginning and ending amount of unrecognized tax benefits for the six months
ended June 30, 2011 and 2010 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Total Unrecognized |
|
|
|
Tax Benefits |
|
|
|
2011 |
|
|
2010 |
|
Balance, beginning of year |
|
$ |
182,354 |
|
|
$ |
221,040 |
|
Additions for tax positions of prior years |
|
|
9,684 |
|
|
|
|
|
Reductions for tax positions of prior years |
|
|
|
|
|
|
(42,628 |
) |
Additions for tax positions of current year |
|
|
1,969 |
|
|
|
1,973 |
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
194,007 |
|
|
$ |
180,385 |
|
|
|
|
|
|
|
|
The Companys accrual for uncertain tax positions that are timing in nature and have no impact
on the Companys effective tax rate increased by approximately $8.2 million during the first six
months of 2011 and decreased by $42.6 million during the first six months of 2010. The Company
also increased its uncertain tax positions that would impact the effective tax rate by
approximately $3.5 million and $2.0 million during the first six months of 2011 and 2010,
respectively.
10. Employee Benefit Plans
The components of net periodic benefit costs for the three and six months ended June 30, 2011 and
2010 were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Net periodic pension benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
1,597 |
|
|
$ |
1,406 |
|
|
$ |
3,012 |
|
|
$ |
2,492 |
|
Interest cost |
|
|
1,052 |
|
|
|
810 |
|
|
|
1,942 |
|
|
|
1,723 |
|
Expected return on plan assets |
|
|
(825 |
) |
|
|
(803 |
) |
|
|
(1,469 |
) |
|
|
(1,289 |
) |
Amortization of prior service cost |
|
|
94 |
|
|
|
8 |
|
|
|
101 |
|
|
|
15 |
|
Amortization of prior actuarial gain |
|
|
314 |
|
|
|
(64 |
) |
|
|
502 |
|
|
|
375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,232 |
|
|
$ |
1,357 |
|
|
$ |
4,088 |
|
|
$ |
3,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic other benefits cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
212 |
|
|
$ |
149 |
|
|
$ |
424 |
|
|
$ |
298 |
|
Interest cost |
|
|
221 |
|
|
|
168 |
|
|
|
441 |
|
|
|
337 |
|
Expected return on plan assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior actuarial gain |
|
|
59 |
|
|
|
5 |
|
|
|
118 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
492 |
|
|
$ |
322 |
|
|
$ |
983 |
|
|
$ |
645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company made pension contributions in the amount of $3.0 million in the second quarter of
2011 and expects to make total pension contributions of $4.6 million in 2011.
11. Equity Based Compensation
Equity compensation expense was $4.3 million and $3.3 million in the second quarter of 2011 and
2010, respectively, and $12.1 million and $9.9 million in the first six months of 2011 and 2010,
respectively. In the first quarter of 2011, the Company granted 0.5 million stock options at a
weighted average strike price of $59.74 per share and 0.2 million performance contingent units to
employees. Also in the first quarter of 2011, non-employee directors were granted a total of
14,200 shares of common stock. As of June 30, 2011, 1.4 million share options at a weighted
average strike price of $43.29 per share were vested and exercisable with a remaining weighted
average exercise period of 4.3 years. As of June 30, 2011, the total compensation cost of
non-vested awards not yet recognized in the financial statements was $31.0 million. It is
estimated that these costs will vest over a weighted average period of 2.4 years.
34
12. Retrocession Arrangements and Reinsurance Ceded Receivables
The Company generally reports retrocession activity on a gross basis. Amounts paid or deemed to
have been paid for reinsurance are reflected in reinsurance ceded receivables. The cost of
reinsurance related to long-duration contracts is recognized over the terms of the reinsured
policies on a basis consistent with the reporting of those policies. In the normal course of
business, the Company seeks to limit its exposure to loss on any single insured and to recover a
portion of benefits paid by ceding reinsurance to other insurance enterprises or reinsurers under
excess coverage, quota share and coinsurance contracts.
Certain retrocessions are arranged through the Companys retrocession pools for amounts in excess
of the Companys retention limit. As of June 30, 2011 and December 31, 2010, all rated retrocession
pool participants followed by the A.M. Best Company were rated A- (excellent) or better. The
Company verifies retrocession pool participants ratings on a quarterly basis. For a majority of
the retrocessionaires that were not rated, security in the form of letters of credit or trust
assets has been given as additional security in favor of RGA Reinsurance Company (RGA
Reinsurance). In addition, the Company performs annual financial reviews of its retrocessionaires
to evaluate financial stability and performance. In addition to its third party retrocessionaires,
various RGA reinsurance subsidiaries retrocede amounts in excess of their retention to RGA
Reinsurance, RGA Reinsurance Company (Barbados) Ltd., RGA Americas Reinsurance, Ltd., Manor
Reinsurance, Ltd., RGA Worldwide Reinsurance Company, Ltd., or RGA Atlantic Reinsurance Company,
Ltd.
As of June 30, 2011 and December 31, 2010, the Company had claims recoverable from
retrocessionaires of $165.9 million and $162.4 million, respectively, which is included in
reinsurance ceded receivables, in the condensed consolidated balance sheets. The Company considers
outstanding claims recoverable in excess of 90 days to be past due. There was $12.4 million and
$16.0 million of past due claims recoverable as of June 30, 2011 and December 31, 2010,
respectively. Based on the Companys annual financial reviews, the Company has not established a
valuation allowance for claims recoverable from retrocessionaires. The Company has never
experienced a material default in connection with retrocession arrangements, nor has it experienced
any difficulty in collecting claims recoverable from retrocessionaires; however, no assurance can
be given as to the future performance of such retrocessionaires or as to recoverability of any such
claims.
13. Repurchase of Collateral Finance Facility Notes
During the first quarter of 2011, the Company repurchased $12.7 million face amount of its Series A
Floating Rate Insured Notes issued by RGAs subsidiary, Timberlake Financial, L.L.C., for $7.6
million, which was the market value at the date of the purchase. The notes were purchased by RGA
Reinsurance, also a subsidiary of RGA. As a result, the Company recorded a pre-tax gain of $5.0
million, after fees, in other revenues at that time.
14. Financing Activities and Stock Transactions
In anticipation of the redemption and remarketing of the Companys trust preferred securities
discussed below, the Company purchased 3.0 million shares of its outstanding common stock from
MetLife, Inc. on February 15, 2011, at a price of $61.14 per share, reflecting the closing price of
the Companys common stock on February 14, 2011. The purchased common shares are held as treasury
stock.
On March 4, 2011, RGA completed the remarketing of approximately 4.5 million trust preferred
securities with an aggregate accreted value of approximately $158.2 million that were initially
issued as a component of its Trust Preferred Income Equity Redeemable Securities (PIERS Units).
When issued, each PIERS Unit initially consisted of (1) a preferred security issued by RGA Capital
Trust I, a financing subsidiary of RGA, with an annual distribution rate of 5.75 percent and stated
maturity of March 18, 2051, and (2) a warrant to purchase at any time prior to December 15, 2050,
1.2508 shares of RGA common stock. Approximately 4.4 million of the warrants were exercised on
March 4, 2011, at a price of $35.44 per warrant, resulting in the issuance of approximately 5.5
million shares, with cash paid in lieu of fractional shares. The warrant exercise price was paid
to RGA. Remaining warrants were redeemed in cash at their redemption amount of $14.56 per warrant.
As a result of the remarketing, the remarketed preferred securities had a fixed accreted value of
$35.44 per security with a fixed annual distribution rate of 2.375% and were repaid on June 5,
2011, the revised maturity date. The proceeds from the remarketing were paid directly to the
selling holders, unless holders timely elected to exercise their warrants in lieu of mandatory
redemption, in which case the proceeds were applied on behalf of such selling holders to satisfy in
full the exercise price of the warrants. Preferred securities of holders who timely elected to opt
out of the remarketing were adjusted to match the terms of the remarketed preferred securities. In
the first quarter of 2011, RGA recorded a $4.4 million pre-tax loss, included in other operating
expenses, related to the recognition of the unamortized issuance costs of the original preferred
securities.
On March 7, 2011, RGA entered into an accelerated share repurchase (ASR) agreement with a
financial counterparty. Under the ASR agreement, RGA purchased 2.5 million shares of its
outstanding common stock at an initial price of $59.76 per share and an aggregate price of
approximately $149.4 million. The purchase price was funded from cash on hand. The
35
counterparty completed its purchases during the second quarter of 2011 and as a result, RGA was
required to pay $4.3 million to the counterparty for the final settlement which resulted in a final
price of $61.47 per share on the repurchased common stock. The common shares repurchased have been
placed into treasury to be used for general corporate purposes.
RGAs share purchase transactions described above are intended to offset share dilution associated
with the issuance of approximately 5.5 million common shares from the exercise of warrants as
discussed above.
On May 27, 2011, RGA issued 5.00% Senior Notes due June 1, 2021 with a face amount of $400.0
million. These senior notes have been registered with the Securities and Exchange Commission. The
net proceeds from the offering were approximately $394.4 million and will be used to fund the
payment of RGAs $200.0 million senior notes that will mature in December 2011 and for general
corporate purposes. Capitalized issue costs were approximately $3.4 million.
15. New Accounting Standards
Changes to the general accounting principles are established by the Financial Accounting Standards
Board (FASB) in the form of accounting standards updates to the FASB Accounting Standards
Codification. Accounting standards updates not listed below were assessed and determined to be
either not applicable or are expected to have minimal impact on the Companys consolidated
financial statements.
Consolidation and Business Combinations
In December 2010, the FASB amended the general accounting principles for Business Combinations as
it relates to the disclosure of supplementary pro forma information for business combinations. The
amendment requires the disclosure of pro forma information for business combinations that occurred
in the current reporting period. The disclosures include pro forma revenue and earnings of the
combined entity for the current reporting period as though the acquisition date for all business
combinations that occurred during the year had been as of the beginning of the annual reporting
period. This amendment also explains that if comparative financial statements are presented, the
pro forma revenue and earnings of the combined entity for the comparable prior reporting period
should be reported as though the acquisition date for all business combinations that occurred
during the current year had been as of the beginning of the comparable prior annual reporting
period. The amendment is effective for interim and annual reporting periods beginning on or after
December 15, 2010. The adoption of this amendment did not have an impact on the Companys
condensed consolidated financial statements.
In February 2010, the FASB amended the general accounting principles for Consolidation as it
relates to the assessment of a variable interest entity for potential consolidation. The amendment
defers the effective date of the Consolidation amendment made in June 2009 for certain variable
interest entities. This update also clarifies how a related partys interest should be considered
when evaluating variable interests. The amendment is effective for interim and annual reporting
periods beginning after January 31, 2010. The adoption of this amendment did not have an impact on
the Companys condensed consolidated financial statements.
In January 2010, the FASB amended the general accounting principles for Consolidation as it relates
to decreases in ownership of a subsidiary. This amendment clarifies the scope of the decrease in
ownership provisions. This amendment also requires additional disclosures about the deconsolidation
of a subsidiary or derecognition of a group of assets. The amendment is effective for interim and
annual reporting periods beginning after December 15, 2009. The adoption of this amendment did not
have an impact on the Companys condensed consolidated financial statements.
In June 2009, the FASB amended the general accounting principles for Consolidation as it relates to
the assessment of a variable interest entity for potential consolidation. This amendment also
requires additional disclosures to provide transparent information regarding the involvement in a
variable interest entity. The amendment is effective for interim and annual reporting periods
beginning after November 15, 2009. The adoption of this amendment did not have a material impact on
the Companys condensed consolidated financial statements.
Investments
In April 2011, the FASB amended the general accounting principles for Receivables as it relates to
a creditors determination of whether a restructuring is a troubled debt restructuring. This
amendment clarifies the guidance related to the creditors evaluation of whether it has granted a
concession and whether the debtor is experiencing financial difficulties. It also clarifies that
the creditor is precluded from using the effective interest rate test when evaluating whether a
restructuring constitutes a troubled debt restructuring. The amendment is effective for interim and
annual reporting periods beginning on or after June 15, 2011, and is to be applied retrospectively
to restructurings occurring on or after the beginning of the annual period of
36
adoption. The adoption of this amendment is not expected to have a material impact on the Companys
condensed consolidated financial statements.
In July 2010, the FASB amended the general accounting principles for Receivables as it relates to
the disclosures about the credit quality of financing receivables and the allowance for credit
losses. This amendment requires additional disclosures that provide a greater level of
disaggregated information about the credit quality of financing receivables and the allowance for
credit losses. It also requires the disclosure of credit quality indicators, past due information,
and modifications of financing receivables. The amendment is effective for interim and annual
reporting periods ending on or after December 15, 2010, except for disclosures about activity that
occurs during the reporting period. Those disclosures are effective for interim and annual
reporting periods beginning after December 15, 2010. The Company adopted this amendment and the
required disclosures are provided in Note 4 Investments and in Note 12 Retrocession
Arrangements and Reinsurance Ceded Receivables.
Transfers and Servicing
In April 2011, the FASB amended the general accounting principles for Transfers and Servicing as it
relates to the reconsideration of effective control for repurchase agreements. This amendment
removes from the assessment of effective control the criterion requiring the transferor to have the
ability to repurchase or redeem the financial assets and also removes the collateral maintenance
implementation guidance related to that criterion. The amendment is effective for interim and
annual periods beginning after December 15, 2011. The Company is currently evaluating the impact of
this amendment on its condensed consolidated financial statements.
In June 2009, the FASB amended the general accounting principles for Transfers and Servicing as it
relates to the transfers of financial assets. This amendment also requires additional disclosures
to address concerns regarding the transparency of transfers of financial assets. The amendment is
effective for interim and annual reporting periods beginning after November 15, 2009. The adoption
of this amendment did not have a material impact on the Companys condensed consolidated financial
statements.
Derivatives and Hedging
In March 2010, the FASB amended the general accounting principles for Derivatives and Hedging as it
relates to embedded derivatives. This amendment clarifies the scope exception for embedded credit
derivative features related to the transfer of credit risk in the form of subordination of a
financial instrument to another. The amendment is effective for financial statements issued for
interim and annual reporting periods beginning after June 15, 2010. The adoption of this amendment
did not have a material impact on the Companys condensed consolidated financial statements.
Fair Value Measurements and Disclosures
In May 2011, the FASB amended the general accounting principles for Fair Value Measurements and
Disclosures as it relates to the measurement and disclosure requirements about fair value
measurements. This amendment clarifies the FASBs intent about the application of existing fair
value measurement requirements. It also changes particular principles and requirements for
measuring fair value and for disclosing information about fair value measurements. The amendment is
effective for interim and annual periods beginning after December 15, 2011. The Company is
currently evaluating the impact of this amendment on its condensed consolidated financial
statements.
In January 2010, the FASB amended the general accounting principles for Fair Value Measurements and
Disclosures as it relates to the disclosures about fair value measurements. This amendment requires
new disclosures about the transfers in and out of Level 1 and 2 measurements and also enhances
disclosures about the activity within the Level 3 measurements. It also clarifies the required
level of disaggregation and the disclosures regarding valuation techniques and inputs to fair value
measurements. The amendment is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the enhanced Level 3 disclosures. Those disclosures are effective for
interim and annual reporting periods beginning after December 15, 2010. The Company adopted this
amendment and the required disclosures are provided in Note 6 Fair Value of Financial
Instruments.
Deferred Policy Acquisition Costs
In October 2010, the FASB amended the general accounting principles for Financial Services
Insurance as it relates to accounting for costs associated with acquiring or renewing insurance
contracts. This amendment clarifies that only those costs that result directly from and are
essential to the contract transaction and that would not have been incurred had the contract
transaction not occurred can be capitalized. It also defines acquisitions costs as costs that are
related directly to the
37
successful acquisitions of new or renewal insurance contracts. The amendment is effective for
interim and annual reporting periods beginning after December 15, 2011. The Company is currently
evaluating the impact of this amendment on its condensed consolidated financial statements.
Compensation
In April 2010, the FASB amended the general accounting principles for Compensation as it relates to
stock compensation. This amendment clarifies that an employee share-based payment award with an
exercise price denominated in the currency of a market in which a substantial portion of the
entitys equity securities trades should not be considered to contain a condition that is not a
market, performance, or service condition. Therefore, such an award should not be classified as a
liability if it otherwise qualifies as equity. The amendment is effective for interim and annual
reporting periods after December 15, 2010. The adoption of this amendment did not have an impact
on the Companys condensed consolidated financial statements.
Debt
In October 2009, the FASB amended the general accounting principles for Debt as it relates to the
accounting for own-share lending arrangements entered into in contemplation of a convertible debt
issuance or other financing. This amendment provides accounting and disclosure guidance for
own-share lending arrangements issued in contemplation of convertible debt issuance. The amendment
is effective for interim and annual reporting periods beginning after December 15, 2009. The
adoption of this amendment did not have an impact on the Companys condensed consolidated financial
statements.
Equity
In January 2010, the FASB amended the general accounting principles for Equity as it relates to
distributions to shareholders with components of stock and cash. This amendment clarifies that the
stock portion of a distribution to shareholders, which allows them to elect to receive cash or
stock with a limitation on the total amount of cash that shareholders can receive, is considered a
share issuance that is reflected in earnings per share prospectively and is not a stock dividend.
The amendment is effective for interim and annual reporting periods beginning after December 15,
2009. The adoption of this amendment did not have an impact on the Companys condensed consolidated
financial statements.
Comprehensive Income
In June 2011, the FASB amended the general accounting principles for Comprehensive Income as it
relates to the presentation of comprehensive income. This amendment requires entities to present
the total of comprehensive income, the components of net income, and the components of other
comprehensive income in either a continuous statement of comprehensive income or in two separate
but consecutive statements. The amendment does not change the items that must be reported in other
comprehensive income. The amendment is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2011. The Company is currently evaluating the impact of this
amendment on its condensed consolidated financial statements.
38
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking and Cautionary Statements
This report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 including, among others, statements relating to projections of the
strategies, earnings, revenues, income or loss, ratios, future financial performance, and growth
potential of the Company. The words intend, expect, project, estimate, predict,
anticipate, should, believe, and other similar expressions also are intended to identify
forward-looking statements. Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events and actual results,
performance, and achievements could differ materially from those set forth in, contemplated by, or
underlying the forward-looking statements.
Numerous important factors could cause actual results and events to differ materially from those
expressed or implied by forward-looking statements including, without limitation, (1) adverse
capital and credit market conditions and their impact on the Companys liquidity, access to capital
and cost of capital, (2) the impairment of other financial institutions and its effect on the
Companys business, (3) requirements to post collateral or make payments due to declines in market
value of assets subject to the Companys collateral arrangements, (4) the fact that the
determination of allowances and impairments taken on the Companys investments is highly
subjective, (5) adverse changes in mortality, morbidity, lapsation or claims experience, (6)
changes in the Companys financial strength and credit ratings and the effect of such changes on
the Companys future results of operations and financial condition, (7) inadequate risk analysis
and underwriting, (8) general economic conditions or a prolonged economic downturn affecting the
demand for insurance and reinsurance in the Companys current and planned markets, (9) the
availability and cost of collateral necessary for regulatory reserves and capital, (10) market or
economic conditions that adversely affect the value of the Companys investment securities or
result in the impairment of all or a portion of the value of certain of the Companys investment
securities, that in turn could affect regulatory capital, (11) market or economic conditions that
adversely affect the Companys ability to make timely sales of investment securities, (12) risks
inherent in the Companys risk management and investment strategy, including changes in investment
portfolio yields due to interest rate or credit quality changes, (13) fluctuations in U.S. or
foreign currency exchange rates, interest rates, or securities and real estate markets, (14)
adverse litigation or arbitration results, (15) the adequacy of reserves, resources and accurate
information relating to settlements, awards and terminated and discontinued lines of business, (16)
the stability of and actions by governments and economies in the markets in which the Company
operates, including ongoing uncertainties regarding the amount of United States sovereign debt and
the credit ratings thereof, (17) competitive factors and competitors responses to the Companys
initiatives, (18) the success of the Companys clients, (19) successful execution of the Companys
entry into new markets, (20) successful development and introduction of new products and
distribution opportunities, (21) the Companys ability to successfully integrate and operate
reinsurance business that the Company acquires, (22) action by regulators who have authority over
the Companys reinsurance operations in the jurisdictions in which it operates, (23) the Companys
dependence on third parties, including those insurance companies and reinsurers to which the
Company cedes some reinsurance, third-party investment managers and others, (24) the threat of
natural disasters, catastrophes, terrorist attacks, epidemics or pandemics anywhere in the world
where the Company or its clients do business, (25) changes in laws, regulations, and accounting
standards applicable to the Company, its subsidiaries, or its business, (26) the effect of the
Companys status as an insurance holding company and regulatory restrictions on its ability to pay
principal of and interest on its debt obligations, and (27) other risks and uncertainties described
in this document and in the Companys other filings with the Securities and Exchange Commission
(SEC).
Forward-looking statements should be evaluated together with the many risks and uncertainties that
affect the Companys business, including those mentioned in this document and the cautionary
statements described in the periodic reports the Company files with the SEC. These forward-looking
statements speak only as of the date on which they are made. The Company does not undertake any
obligations to update these forward-looking statements, even though the Companys situation may
change in the future. The Company qualifies all of its forward-looking statements by these
cautionary statements. For a discussion of these risks and uncertainties that could cause actual
results to differ materially from those contained in the forward-looking statements, you are
advised to see Item 1A Risk Factors in the 2010 Annual Report.
Overview
RGA, an insurance holding company that was formed on December 31, 1992, is primarily engaged in the
life reinsurance business, which involves reinsuring life insurance policies that are often in
force for the remaining lifetime of the underlying individuals insured, with premiums earned
typically over a period of 10 to 30 years. Each year, however, a portion of the business under
existing treaties terminates due to, among other things, lapses or surrenders of underlying
policies, deaths of policyholders, and the exercise of recapture options by ceding companies.
The Company derives revenues primarily from renewal premiums from existing reinsurance treaties,
new business premiums from existing or new reinsurance treaties, income earned on invested assets,
and fees earned from financial reinsurance
39
transactions. The Company believes that industry trends have not changed materially from those
discussed in its 2010 Annual Report.
The Companys long-term profitability primarily depends on the volume and amount of claims incurred
and its ability to adequately price the risks it assumes. While claims are reasonably predictable
over a period of years, claims become less predictable over shorter periods and are subject to
significant fluctuation from quarter to quarter and year to year. The maximum amount of individual
life coverage the Company retains per life varies by market and can be up to $8.0 million. In
certain limited situations, due to the acquisition of in force blocks of business, the Company has
retained more than $8.0 million per individual life. Claims in excess of these retention amounts
are retroceded to retrocessionaires; however, the Company remains fully liable to the ceding
company for the entire amount of risk it assumes. The Company believes its sources of liquidity
are sufficient to cover potential claims payments on both a short-term and long-term basis.
The Company has five geographic-based or function-based operational segments, each of which is a
distinct reportable segment: U.S., Canada, Europe & South Africa, Asia Pacific and Corporate and
Other. The U.S. operations provide traditional life, long-term care, group life and health
reinsurance, annuity and financial reinsurance products. The Canada operations provide insurers
with reinsurance of traditional life products as well as creditor reinsurance, group life and
health reinsurance, non-guaranteed critical illness products and longevity reinsurance. Europe &
South Africa operations include traditional life reinsurance and critical illness business from
Europe & South Africa, in addition to other markets the Company is developing. Asia Pacific
operations provide primarily traditional and group life reinsurance, critical illness and, to a
lesser extent, financial reinsurance. Corporate and Other includes results from, among others, RGA
Technology Partners, Inc. (RTP), a wholly-owned subsidiary that develops and markets technology
solutions for the insurance industry and the investment income and expense associated with the
Companys collateral finance facility.
The Company allocates capital to its segments based on an internally developed economic capital
model, the purpose of which is to measure the risk in the business and provide a basis upon which
capital is allocated. The economic capital model considers the unique and specific nature of the
risks inherent in the Companys businesses. As a result of the economic capital allocation
process, a portion of investment income and investment related gains and losses are credited to the
segments based on the level of allocated capital. In addition, the segments are charged for excess
capital utilized above the allocated economic capital basis. This charge is included in policy
acquisition costs and other insurance expenses.
Results of Operations
Consolidated
Consolidated income before income taxes increased $2.3 million, or 1.2%, and $50.9 million, or
13.0%, for the three and six months ended June 30, 2011, as compared to the same periods in 2010.
The increase in income before income taxes for the second quarter and first six months of 2011 was
primarily due to increased net premiums and investment income in all segments partially offset by
higher claims experience, primarily in the Asia Pacific segment. Also contributing to the
favorable results for the second quarter and first six months of 2011 was a favorable change in the
value of embedded derivatives within the U.S. segment due to the impact of tightening credit
spreads in the U.S. debt markets, as compared to the same periods in 2010. Foreign currency
fluctuations relative to the prior year favorably affected income before income taxes by
approximately $6.2 million and $11.3 million for the second quarter and first six months of 2011,
respectively, as compared to the same periods in 2010.
The Company recognizes in consolidated income, changes in the value of embedded derivatives on
modified coinsurance (Modco) or funds withheld treaties, equity-indexed annuity treaties (EIAs)
and variable annuity products. The change in the value of embedded derivatives related to
reinsurance treaties written on a Modco or funds withheld basis are subject to the general
accounting principles for Derivatives and Hedging related to embedded derivatives. The unrealized
gains and losses associated with these embedded derivatives, after adjustment for deferred
acquisition costs, decreased income before income taxes by $1.3 million and $9.8 million in the
second quarter and first six months of 2011, respectively, as compared to the same periods in 2010.
Changes in risk free rates used in the fair value estimates of embedded derivatives associated
with EIAs affect the amount of unrealized gains and losses the Company recognizes. The unrealized
gains and losses associated with EIAs, after adjustment for deferred acquisition costs and
retrocession, decreased income before income taxes by $2.5 million and increased income before
income taxes by $0.6 million in the second quarter and first six months of 2011, respectively, as
compared to the same periods in 2010. The change in the Companys liability for variable annuities
associated with guaranteed minimum living benefits affects the amount of unrealized gains and
losses the Company recognizes. The unrealized gains and losses associated with guaranteed minimum
living benefits, after adjustment for deferred acquisition costs, increased income before income
taxes by $6.7 million and $26.6 million in the second quarter and first six months of 2011,
respectively, as compared to the same periods in 2010.
The combined changes in these three types of embedded derivatives, after adjustment for deferred
acquisition costs and retrocession, resulted in an increase of approximately $2.9 million and
approximately $17.5 million in consolidated income before income taxes in the second quarter and
first six months of 2011, respectively, as compared to the same periods in
40
2010. These fluctuations do not affect current cash flows, crediting rates or spread performance
on the underlying treaties. Therefore, management believes it is helpful to distinguish between
the effects of changes in these embedded derivatives, net of related hedging activity, and the
primary factors that drive profitability of the underlying treaties, namely investment income, fee
income, and interest credited.
Consolidated net premiums increased $206.7 million, or 13.1%, and $314.3 million, or 9.8%, for the
three and six months ended June 30, 2011, as compared to the same periods in 2010, primarily due to
growth in life reinsurance and foreign currency fluctuations. Foreign currency fluctuations
favorably affected net premiums by approximately $77.3 million and $119.8 million for the three and
six months ended June 30, 2011, as compared to the same periods in 2010. Consolidated assumed
insurance in force increased to $2,658.8 billion as of June 30, 2011 from $2,367.3 billion as of
June 30, 2010 due to new business production. The Company added new business production, measured
by face amount of insurance in force, of $95.0 billion and $90.4 billion during the second quarter
of 2011 and 2010, respectively, and $183.2 billion and $169.2 billion during the first six months
of 2011 and 2010, respectively. Management believes industry consolidation and the established
practice of reinsuring mortality risks should continue to provide opportunities for growth, albeit
at rates less than historically experienced in some markets.
Consolidated investment income, net of related expenses, increased $45.8 million, or 15.7%, and
$112.5 million, or 18.9%, for the three and six months ended June 30, 2011, as compared to the same
periods in 2010. The increase in the second quarter was primarily due to a larger average invested
asset base offset by a lower effective investment portfolio yield and a $19.9 million increase from
market value changes related to the Companys funds withheld at interest investment associated with
the reinsurance of certain EIAs, which are substantially offset by a corresponding change in
interest credited to policyholder account balances resulting in an insignificant effect on net
income. The increase in the first six months was primarily due to an $88.6 million increase from
market value changes related to the Companys funds withheld at interest investment associated with
the reinsurance of certain EIAs, which are substantially offset by a corresponding change in
interest credited to policyholder account balances resulting in an insignificant effect on net
income. In addition, increased investment income from a larger average invested asset base was
partially offset by a lower invested asset yield. Average invested assets at amortized cost for
the six months ended June 30, 2011 totaled $17.0 billion, a 12.2% increase over the same period in
2010. The average yield earned on investments, excluding funds withheld, decreased to 5.35% for
the second quarter of 2011 from 5.51% for the second quarter of 2010. The average yield earned on
investments, excluding funds withheld, decreased to 5.35% for the first six months of 2011 from
5.67% for the first six months of 2010. The average yield will vary from quarter to quarter and
year to year depending on a number of variables, including the prevailing interest rate and credit
spread environment, changes in the mix of the underlying investments and cash balances, and the
timing of dividends and distributions on certain investments.
Total investment related gains (losses), net reflect a favorable change of $4.4 million and an
unfavorable change of $3.2 million, for the three and six months ended June 30, 2011, as compared
to the same periods in 2010. The favorable change for the second quarter was primarily due to
favorable changes in the embedded derivatives related to guaranteed minimum living benefits of
$115.1 million and an increase in gains from the sale of investment securities, largely offset by a
decrease in net hedging gains related to the liabilities associated with guaranteed minimum living
benefits of $96.9 million and unfavorable changes in the embedded derivatives related to
reinsurance treaties written on a Modco or funds withheld basis of $22.0 million. The unfavorable
change for the first six months is primarily due to a decrease in net hedging gains related to the
liabilities associated with guaranteed minimum living benefits of $119.1 million and unfavorable
changes in the value of embedded derivatives associated with reinsurance treaties written on a
Modco or funds withheld basis of $54.1 million, largely offset by favorable changes in the embedded
derivatives related to guaranteed minimum living benefits of $140.6 million and an increase in
gains from the sale of investment securities. See Note 4 Investments and Note 5
Derivative Instruments in the Notes to Condensed Consolidated Financial Statements for additional
information on investment related gains (losses), net and derivatives. Investment income and
investment related gains and losses are allocated to the operating segments based upon average
assets and related capital levels deemed appropriate to support segment operations.
The effective tax rate on a consolidated basis was 33.7% and 35.9% for the second quarter of 2011
and 2010, respectively, and 33.6% and 36.3% for the first six months of 2011 and 2010,
respectively. The second quarter and first six months of 2011 effective tax rates were lower than
the U.S. statutory rate of 35% primarily as a result of income in non-U.S. jurisdictions with lower
tax rates than the U.S. The second quarter and first six months of 2010 effective tax rates were
affected by additional tax provision accruals of approximately $5.0 million and $9.9 million,
respectively, related to extender provisions that the U.S. Congress did not pass until the fourth
quarter of 2010, at which time the Company reversed this accrual.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America, or U.S. GAAP, requires the application of accounting policies that
often involve a significant degree of judgment. Management, on an ongoing basis, reviews estimates
and assumptions used in the preparation of financial statements. If
41
management determines that modifications in assumptions and estimates are appropriate given current
facts and circumstances, results of operations and financial position as reported in the condensed
consolidated financial statements could change significantly.
Management believes the critical accounting policies relating to the following areas are most
dependent on the application of estimates and assumptions:
|
|
|
Deferred acquisition costs; |
|
|
|
|
Liabilities for future policy benefits and other policy liabilities; |
|
|
|
|
Valuation of fixed maturity securities; |
|
|
|
|
Valuation of embedded derivatives; |
|
|
|
|
Income taxes; and |
|
|
|
|
Arbitration and litigation reserves. |
A discussion of each of the critical accounting policies may be found in the Companys 2010 Annual
Report under Managements Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies.
Further discussion and analysis of the results for 2011 compared to 2010 are presented by segment.
U.S. Operations
U.S. operations consist of two major sub-segments: Traditional and Non-Traditional. The
Traditional sub-segment primarily specializes in individual mortality-risk reinsurance and to a
lesser extent, group, health and long-term care reinsurance. The Non-Traditional sub-segment
consists of Asset-Intensive and Financial Reinsurance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2011 |
|
|
|
|
|
Non-Traditional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
Total |
|
(dollars in thousands) |
|
Traditional |
|
|
Asset-Intensive |
|
|
Reinsurance |
|
|
U.S. |
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
973,837 |
|
|
$ |
3,459 |
|
|
$ |
|
|
|
$ |
977,296 |
|
Investment income, net of related expenses |
|
|
124,564 |
|
|
|
105,129 |
|
|
|
62 |
|
|
|
229,755 |
|
Investment related gains (losses), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments on fixed maturity securities |
|
|
(6,275 |
) |
|
|
101 |
|
|
|
(26 |
) |
|
|
(6,200 |
) |
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income |
|
|
2,307 |
|
|
|
(252 |
) |
|
|
10 |
|
|
|
2,065 |
|
Other investment related gains (losses), net |
|
|
4,173 |
|
|
|
13,477 |
|
|
|
23 |
|
|
|
17,673 |
|
|
|
|
Total investment related gains (losses), net |
|
|
205 |
|
|
|
13,326 |
|
|
|
7 |
|
|
|
13,538 |
|
Other revenues |
|
|
738 |
|
|
|
23,536 |
|
|
|
9,194 |
|
|
|
33,468 |
|
|
|
|
Total revenues |
|
|
1,099,344 |
|
|
|
145,450 |
|
|
|
9,263 |
|
|
|
1,254,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits |
|
|
839,173 |
|
|
|
4,264 |
|
|
|
|
|
|
|
843,437 |
|
Interest credited |
|
|
14,967 |
|
|
|
80,614 |
|
|
|
|
|
|
|
95,581 |
|
Policy acquisition costs and other insurance expenses (income) |
|
|
132,172 |
|
|
|
43,201 |
|
|
|
797 |
|
|
|
176,170 |
|
Other operating expenses |
|
|
19,486 |
|
|
|
1,743 |
|
|
|
1,469 |
|
|
|
22,698 |
|
|
|
|
Total benefits and expenses |
|
|
1,005,798 |
|
|
|
129,822 |
|
|
|
2,266 |
|
|
|
1,137,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
93,546 |
|
|
$ |
15,628 |
|
|
$ |
6,997 |
|
|
$ |
116,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2010 |
|
|
|
|
|
Non-Traditional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
Total |
|
(dollars in thousands) |
|
Traditional |
|
|
Asset-Intensive |
|
|
Reinsurance |
|
|
U.S. |
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
933,162 |
|
|
$ |
3,128 |
|
|
$ |
|
|
|
$ |
936,290 |
|
Investment income (loss), net of related expenses |
|
|
120,782 |
|
|
|
82,961 |
|
|
|
107 |
|
|
|
203,850 |
|
Investment related gains (losses), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments on fixed maturity securities |
|
|
(930 |
) |
|
|
(16 |
) |
|
|
|
|
|
|
(946 |
) |
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income |
|
|
620 |
|
|
|
(59 |
) |
|
|
|
|
|
|
561 |
|
Other investment related gains (losses), net |
|
|
3,031 |
|
|
|
16,381 |
|
|
|
(10 |
) |
|
|
19,402 |
|
|
|
|
Total investment related gains (losses), net |
|
|
2,721 |
|
|
|
16,306 |
|
|
|
(10 |
) |
|
|
19,017 |
|
Other revenues |
|
|
190 |
|
|
|
21,944 |
|
|
|
5,820 |
|
|
|
27,954 |
|
|
|
|
Total revenues |
|
|
1,056,855 |
|
|
|
124,339 |
|
|
|
5,917 |
|
|
|
1,187,111 |
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2010 (continued) |
|
|
|
|
|
Non-Traditional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
Total |
|
(dollars in thousands) |
|
Traditional |
|
|
Asset-Intensive |
|
|
Reinsurance |
|
|
U.S. |
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits |
|
|
788,956 |
|
|
|
2,850 |
|
|
|
|
|
|
|
791,806 |
|
Interest credited |
|
|
16,312 |
|
|
|
62,858 |
|
|
|
|
|
|
|
79,170 |
|
Policy acquisition costs and other insurance expenses |
|
|
134,470 |
|
|
|
38,656 |
|
|
|
580 |
|
|
|
173,706 |
|
Other operating expenses |
|
|
18,303 |
|
|
|
2,414 |
|
|
|
937 |
|
|
|
21,654 |
|
|
|
|
Total benefits and expenses |
|
|
958,041 |
|
|
|
106,778 |
|
|
|
1,517 |
|
|
|
1,066,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
98,814 |
|
|
$ |
17,561 |
|
|
$ |
4,400 |
|
|
$ |
120,775 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the six months ended June 30, 2011 |
|
|
|
|
|
Non-Traditional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
Total |
|
(dollars in thousands) |
|
Traditional |
|
|
Asset-Intensive |
|
|
Reinsurance |
|
|
U.S. |
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
1,908,890 |
|
|
$ |
6,784 |
|
|
$ |
|
|
|
$ |
1,915,674 |
|
Investment income, net of related expenses |
|
|
244,345 |
|
|
|
252,502 |
|
|
|
(135 |
) |
|
|
496,712 |
|
Investment related gains (losses), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments on fixed maturity securities |
|
|
(6,275 |
) |
|
|
(451 |
) |
|
|
(26 |
) |
|
|
(6,752 |
) |
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income |
|
|
2,307 |
|
|
|
(252 |
) |
|
|
10 |
|
|
|
2,065 |
|
Other investment related gains (losses), net |
|
|
13,048 |
|
|
|
118,498 |
|
|
|
(12 |
) |
|
|
131,534 |
|
|
|
|
Total investment related gains (losses), net |
|
|
9,080 |
|
|
|
117,795 |
|
|
|
(28 |
) |
|
|
126,847 |
|
Other revenues |
|
|
1,231 |
|
|
|
47,537 |
|
|
|
18,196 |
|
|
|
66,964 |
|
|
|
|
Total revenues |
|
|
2,163,546 |
|
|
|
424,618 |
|
|
|
18,033 |
|
|
|
2,606,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits |
|
|
1,661,580 |
|
|
|
7,080 |
|
|
|
|
|
|
|
1,668,660 |
|
Interest credited |
|
|
29,551 |
|
|
|
172,093 |
|
|
|
|
|
|
|
201,644 |
|
Policy acquisition costs and other insurance expenses |
|
|
259,634 |
|
|
|
159,542 |
|
|
|
1,650 |
|
|
|
420,826 |
|
Other operating expenses |
|
|
40,836 |
|
|
|
3,897 |
|
|
|
3,266 |
|
|
|
47,999 |
|
|
|
|
Total benefits and expenses |
|
|
1,991,601 |
|
|
|
342,612 |
|
|
|
4,916 |
|
|
|
2,339,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
171,945 |
|
|
$ |
82,006 |
|
|
$ |
13,117 |
|
|
$ |
267,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the six months ended June 30, 2010 |
|
|
|
|
|
Non-Traditional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
Total |
|
(dollars in thousands) |
|
Traditional |
|
|
Asset-Intensive |
|
|
Reinsurance |
|
|
U.S. |
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
1,836,123 |
|
|
$ |
15,005 |
|
|
$ |
|
|
|
$ |
1,851,128 |
|
Investment income (loss), net of related expenses |
|
|
234,243 |
|
|
|
179,328 |
|
|
|
56 |
|
|
|
413,627 |
|
Investment related gains (losses), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary
impairments on fixed maturity securities |
|
|
(930 |
) |
|
|
(45 |
) |
|
|
|
|
|
|
(975 |
) |
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income |
|
|
620 |
|
|
|
(565 |
) |
|
|
|
|
|
|
55 |
|
Other investment related gains (losses), net |
|
|
5,879 |
|
|
|
149,512 |
|
|
|
(19 |
) |
|
|
155,372 |
|
|
|
|
Total investment related gains (losses), net |
|
|
5,569 |
|
|
|
148,902 |
|
|
|
(19 |
) |
|
|
154,452 |
|
Other revenues |
|
|
788 |
|
|
|
42,837 |
|
|
|
10,870 |
|
|
|
54,495 |
|
|
|
|
Total revenues |
|
|
2,076,723 |
|
|
|
386,072 |
|
|
|
10,907 |
|
|
|
2,473,702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits |
|
|
1,578,731 |
|
|
|
12,460 |
|
|
|
|
|
|
|
1,591,191 |
|
Interest credited |
|
|
32,948 |
|
|
|
103,142 |
|
|
|
|
|
|
|
136,090 |
|
Policy acquisition costs and other insurance expenses |
|
|
263,243 |
|
|
|
182,744 |
|
|
|
1,106 |
|
|
|
447,093 |
|
Other operating expenses |
|
|
39,162 |
|
|
|
5,603 |
|
|
|
2,216 |
|
|
|
46,981 |
|
|
|
|
Total benefits and expenses |
|
|
1,914,084 |
|
|
|
303,949 |
|
|
|
3,322 |
|
|
|
2,221,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
162,639 |
|
|
$ |
82,123 |
|
|
$ |
7,585 |
|
|
$ |
252,347 |
|
|
|
|
43
Income before income taxes for the U.S. operations segment decreased by $4.6 million, or 3.8%,
and increased $14.7 million, or 5.8%, for the three and six months ended June 30, 2011, as compared
to the same periods in 2010. The decrease in income before income taxes in the second quarter can
primarily be attributed to an overall decrease in investment related gains and increases in related
policy acquisition costs somewhat offset by increases in investment spreads earned on
asset-intensive business and an increase in financial reinsurance fees. The increase in income the
first six months of 2011 can primarily be attributed to increases in investment income and gains
from the sale of investment securities, included in investment related gains. These increases were
partially offset by the unfavorable impact of changes in credit spreads on the fair value of
embedded derivatives associated with treaties written on a Modco or funds withheld basis, which
unfavorably affected both the second quarter and the first six months of income as compared to the
same periods in 2010. Decreases or increases in credit spreads result in an increase or decrease
in value of the embedded derivative, and therefore, an increase or decrease in investment related
gains or losses, respectively.
Traditional Reinsurance
The U.S. Traditional sub-segment provides individual life reinsurance, and to a lesser extent,
group, health and long-term care reinsurance, to domestic clients for a variety of life products
through yearly renewable term, coinsurance and modified coinsurance agreements. These reinsurance
arrangements may involve either facultative or automatic agreements. This sub-segment added new
business production, measured by face amount of insurance in force, of $24.3 billion and $44.1
billion during the second quarters, and $55.6 billion and $84.7 billion during the first six months
of 2011 and 2010, respectively. Management believes industry consolidation and the established
practice of reinsuring mortality risks should continue to provide opportunities for growth, albeit
at rates less than historically experienced.
Income before income taxes for the U.S. Traditional sub-segment decreased by $5.3 million and
increased by $9.3 million for the three and six months ended June 30, 2011, as compared to the same
periods in 2010. The decrease in the second quarter can be primarily attributed to increases in
claims and other policy benefits. The increase in income for the first six months was primarily
due to increases in investment income, net of related expenses and increases in net investment
related gains. Investment income, net of related expenses, increased by $3.8 million and $10.1
million in the second quarter and first six months of 2011, respectively. Net investment related
gains decreased by $2.5 million and increased by $3.5 million in the second quarter and first six
months of 2011, respectively.
Net premiums for the U.S. Traditional sub-segment increased $40.7 million, or 4.4%, and $72.8
million, or 4.0% for the three and six months ended June 30, 2011, as compared to the same periods
in 2010. These increases in net premiums were driven by the growth in individual life business in
force and health and group related coverages. At June 30, 2011, total face amount of individual
life insurance for the U.S. Traditional sub-segment was $1,337.5 million compared to $1,328.9
million at June 30, 2010.
Net investment income increased $3.8 million, or 3.1%, and $10.1 million, or 4.3%, for the three
and six months ended June 30, 2011, as compared to the same periods in 2010, primarily due to
growth in the invested asset base of 5.8%. Investment related gains decreased $2.5 million and
increased $3.5 million for the three and six months ended June 30, 2011, as compared to the same
periods in 2010. Investment income and investment related gains and losses are allocated to the
various operating segments based on average assets and related capital levels deemed appropriate to
support segment operations. Investment performance varies with the composition of investments and
the relative allocation of capital to the operating segments.
Claims and other policy benefits as a percentage of net premiums (loss ratios) were 86.2% and
84.5% for the second quarter of 2011 and 2010, respectively, and 87.0% and 86.0% for the six months
ended June 30, 2011 and 2010, respectively. The increase in the percentages for both the second
quarter and first six months was primarily due to normal volatility in mortality business and
higher than expected group disability claims. Although reasonably predictable over a period of
years, death claims can be volatile over short-term periods.
Interest credited expense decreased $1.3 million, or 8.2%, and $3.4 million, or 10.3%, for the
three and six months ended June 30, 2011, as compared to the same periods in 2010. The decreases
were driven primarily by a treaty with a decrease in the overall credited loan rate to 4.8% in 2011
compared to 5.6% in 2010. Interest credited in this sub-segment relates to amounts credited on
cash value products which also have a significant mortality component.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 13.6%
and 14.4% for the second quarter of 2011 and 2010, respectively, and 13.6% and 14.3% for the six
months ended June 30, 2011 and 2010, respectively. Overall, while these ratios are expected to
remain in a predictable range, they may fluctuate from period to period due to varying allowance
levels within coinsurance-type arrangements. In addition, the amortization pattern of previously
capitalized amounts, which are subject to the form of the reinsurance agreement and the underlying
insurance policies, may vary. Also, the mix of first year coinsurance business versus yearly
renewable term business can cause the percentage to fluctuate from period to period.
44
Other operating expenses increased $1.2 million, or 6.5%, and $1.7 million, or 4.3%, for the three
and six months ended June 30, 2011, as compared to the same periods in 2010. Other operating
expenses as a percentage of net premiums were 2.0% and 2.0% for the second quarter of 2011 and
2010, respectively, and 2.1% and 2.1% for the six months ended June 30, 2011 and 2010,
respectively.
Asset-Intensive Reinsurance
The U.S. Asset-Intensive sub-segment assumes primarily investment risk within underlying annuities
and corporate-owned life insurance policies. Most of these agreements are coinsurance, coinsurance
with funds withheld or Modco whereby the Company recognizes profits or losses primarily from the
spread between the investment income earned and the interest credited on the underlying deposit
liabilities.
Impact of certain derivatives:
Income for the asset-intensive business tends to be volatile due to changes in the fair value of
certain derivatives, including embedded derivatives associated with reinsurance treaties structured
on a Modco basis or funds withheld basis, as well as embedded derivatives associated with the
Companys reinsurance of equity-indexed annuities and variable annuities with guaranteed minimum
benefit riders. The following table summarizes the asset-intensive results and quantifies the
impact of these embedded derivatives for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the six months ended |
|
(dollars in thousands) |
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
145,450 |
|
|
$ |
124,339 |
|
|
$ |
424,618 |
|
|
$ |
386,072 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivatives Modco/Funds withheld treaties |
|
|
10,525 |
|
|
|
32,512 |
|
|
|
101,060 |
|
|
|
155,147 |
|
Guaranteed minimum benefit riders and related free standing derivatives |
|
|
1,341 |
|
|
|
(16,828 |
) |
|
|
13,962 |
|
|
|
(7,451 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues before certain derivatives |
|
|
133,584 |
|
|
|
108,655 |
|
|
|
309,596 |
|
|
|
238,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
129,822 |
|
|
|
106,778 |
|
|
|
342,612 |
|
|
|
303,949 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivatives Modco/Funds withheld treaties |
|
|
4,698 |
|
|
|
25,391 |
|
|
|
65,720 |
|
|
|
110,057 |
|
Guaranteed minimum benefit riders and related free standing derivatives |
|
|
832 |
|
|
|
(10,831 |
) |
|
|
8,955 |
|
|
|
(6,151 |
) |
Equity-indexed annuities |
|
|
7,155 |
|
|
|
4,616 |
|
|
|
(1,537 |
) |
|
|
(932 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses before certain derivatives |
|
|
117,137 |
|
|
|
87,602 |
|
|
|
269,474 |
|
|
|
200,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
15,628 |
|
|
|
17,561 |
|
|
|
82,006 |
|
|
|
82,123 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivatives Modco/Funds withheld treaties |
|
|
5,827 |
|
|
|
7,121 |
|
|
|
35,340 |
|
|
|
45,090 |
|
Guaranteed minimum benefit riders and related free standing derivatives |
|
|
509 |
|
|
|
(5,997 |
) |
|
|
5,007 |
|
|
|
(1,300 |
) |
Equity-indexed annuities |
|
|
(7,155 |
) |
|
|
(4,616 |
) |
|
|
1,537 |
|
|
|
932 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and certain derivatives |
|
|
16,447 |
|
|
|
21,053 |
|
|
|
40,122 |
|
|
|
37,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded Derivatives Modco/Funds Withheld Treaties- Represents the change in the fair value
of embedded derivatives on funds withheld at interest associated with treaties written on a
modified coinsurance or funds withheld basis, allowing for deferred acquisition expenses. Changes
in the fair value of the embedded derivative are driven by changes in investment credit spreads,
including the Companys own credit spread. Generally, an increase in investment credit spreads,
ignoring changes in the Companys own credit spread, will have a negative impact on the fair value
of the embedded derivative (decrease in income).
In the second quarter of 2011, the change in fair value of the embedded derivative increased
revenues by $10.5 million and related deferred acquisition expenses increased benefits and expenses
by $4.7 million, for a positive pre-tax income impact of $5.8 million, primarily due to a decrease
in investment credit spreads. During the second quarter of 2010, the change in fair value of the
embedded derivative increased revenues by $32.5 million and related deferred acquisition expenses
increased benefits and expenses by $25.4 million, for a positive pre-tax income impact of $7.1
million, primarily due to a decrease in investment credit spreads. In the first six months of
2011, the change in fair value of the embedded derivative increased revenues by $101.1 million and
related deferred acquisition expenses increased benefits and expenses by $65.7 million, for a
positive pre-tax income impact of $35.3 million, primarily due to a decrease in investment credit
spreads. During the first six
45
months of 2010, the change in fair value of the embedded derivative increased revenues by $155.1
million and related deferred acquisition expenses increased benefits and expenses by $110.1
million, for a positive pre-tax income impact of $45.1 million, primarily due to a decrease in
investment credit spreads.
Guaranteed Minimum Benefit Riders- Represents the impact related to guaranteed minimum benefits
associated with the Companys reinsurance of variable annuities. The fair value changes of the
guaranteed minimum benefits along with the changes in fair value of the free standing derivatives,
financial futures and equity options, purchased by the Company to hedge the liability are reflected
in revenues, while the related impact on deferred acquisition expenses is reflected in benefits and
expenses. In the second quarter of 2011, the change in the fair value of the guaranteed minimum
benefits, after allowing for changes in the associated free standing derivatives, increased
revenues by $1.3 million and related deferred acquisition expenses increased benefits and expenses
by $0.8 million for a positive pre-tax income impact of $0.5 million. In the second quarter of
2010, the change in the fair value of the guaranteed minimum benefits after allowing for changes in
the associated free-standing derivatives decreased revenues by $16.8 million and related deferred
acquisition expenses increased benefits and expenses by $10.8 million for a negative pre-tax income
impact of $6.0 million. In the first six months of 2011, the change in the fair value of the
guaranteed minimum benefits, after allowing for changes in the associated free standing
derivatives, increased revenues by $14.0 million and related deferred acquisition expenses reduced
benefits and expenses by $9.0 million for a positive pre-tax income impact of $5.0 million. In the
first six months of 2010, the change in the fair value of the guaranteed minimum benefits after
allowing for changes in the associated hedge instruments decreased revenues by $7.5 million and
related deferred acquisition expenses increased benefits and expenses by $6.2 million for a
negative pre-tax income impact of $1.3 million.
Equity-Indexed Annuities- Represents the impact of changes in the risk-free rate on the calculation
of the fair value of embedded derivative liabilities associated with EIAs, after adjustments for
related deferred acquisition expenses and retrocession. In the second quarter of 2011 and 2010,
benefits and expenses increased $7.2 million and $4.6 million, respectively. In the first six
months of 2011 and 2010, benefits and expenses decreased $1.5 million and decreased $0.9 million,
respectively.
The changes in derivatives discussed above do not affect current cash flows, crediting rates or
spread performance on the underlying treaties. Fluctuations occur period to period primarily due
to changing investment conditions including, but not limited to, interest rate movements (including
risk-free rates and credit spreads), implied volatility and equity market performance, all of which
are factors in the calculations of fair value. Therefore, management believes it is helpful to
distinguish between the effects of changes in these derivatives, net of related hedging activity,
and the primary factors that drive profitability of the underlying treaties, namely investment
income, fee income (included in other revenues), and interest credited.
Discussion and analysis before certain derivatives:
Income before income taxes and certain derivatives decreased by $4.6 million and increased by $2.7
million for the three and six months ended June 30, 2011, as compared to the same periods in 2010.
The decrease in income for the second quarter is primarily attributed to higher policy acquisition
and other insurance expenses and an increase in interest credited offset by an increase in
investment income and realized capital gains offset in part by an increase in higher policy
acquisition and other insurance expenses and an increase in interest credited, as compared to the
same period in 2010. The increase in income for the first six months was primarily due to general
improvement in the broader U.S. financial markets and related favorable impacts on the underlying
annuity account values.
Revenue before certain derivatives increased by $24.9 million and $71.2 million for the three and
six months ended June 30, 2011, as compared to the same periods in 2010. These variances were
driven by changes in investment income related to equity options held in a funds withheld portfolio
associated with equity-indexed annuity treaties. Increases in investment income related to equity
options were mostly offset by corresponding increases in interest credited expense.
Benefits and expenses before certain derivatives increased by $29.5 million and $68.5 million for
the three and six months ended June 30, 2011, as compared to the same periods in 2010, primarily
due to a change in the interest credited expense related to equity option income on funds withheld
equity-indexed annuity treaties. These changes were mostly offset by corresponding changes in
investment income.
The average invested asset base supporting this sub-segment increased to $5.9 billion in the second
quarter of 2011 from $5.6 billion in the second quarter of 2010. The growth in the asset base was
driven primarily by new business written on existing equity-indexed treaties. As of June 30, 2011,
$4.2 billion of the invested assets were funds withheld at interest, of which 95.0% is associated
with one client.
Financial Reinsurance
U.S. Financial Reinsurance sub-segment income consists primarily of net fees earned on financial
reinsurance transactions. The majority of the financial reinsurance risks are retroceded to other
insurance companies or brokered business in which the
46
Company does not participate in the assumption of risk. The fees earned from financial reinsurance
contracts and brokered business are reflected in other revenues, and the fees paid to
retrocessionaires are reflected in policy acquisition costs and other insurance expenses.
Income before income taxes increased $2.6 million, or 59.0%, and $5.5 million, or 72.9% for the
three and six months ended June 30, 2011, as compared to the same periods in 2010. The increases
in the second quarter and first six months of 2011 were primarily related to new business generated
in the second half of 2010 and the first quarter of 2011. At June 30, 2011 and 2010, the amount of
reinsurance provided, as measured by pre-tax statutory surplus, was $1.9 billion and $1.1 billion,
respectively. These pre-tax statutory surplus amounts include all business assumed or brokered by
the Company in the U.S. Fees earned from this business can vary significantly depending on the
size of the transactions and the timing of their completion and, therefore, can fluctuate from
period to period.
Canada Operations
The Company conducts reinsurance business in Canada through RGA Life Reinsurance Company of Canada
(RGA Canada), a wholly-owned subsidiary. RGA Canada assists clients with capital management
activity and mortality and morbidity risk management, and is primarily engaged in traditional
individual life reinsurance, as well as creditor, group life and health, critical illness, and
longevity reinsurance. Creditor insurance covers the outstanding balance on personal, mortgage or
commercial loans in the event of death, disability or critical illness and is generally shorter in
duration than traditional life insurance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
(dollars in thousands) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
209,717 |
|
|
$ |
177,079 |
|
|
$ |
424,745 |
|
|
$ |
385,729 |
|
Investment income, net of related expenses |
|
|
45,052 |
|
|
|
42,206 |
|
|
|
89,953 |
|
|
|
82,434 |
|
Investment related gains (losses), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments on fixed maturity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investment related gains (losses), net |
|
|
3,318 |
|
|
|
1,730 |
|
|
|
8,876 |
|
|
|
5,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment related gains (losses), net |
|
|
3,318 |
|
|
|
1,730 |
|
|
|
8,876 |
|
|
|
5,580 |
|
Other revenues |
|
|
4,980 |
|
|
|
241 |
|
|
|
5,002 |
|
|
|
284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
263,067 |
|
|
|
221,256 |
|
|
|
528,576 |
|
|
|
474,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits |
|
|
165,860 |
|
|
|
145,250 |
|
|
|
344,915 |
|
|
|
317,766 |
|
Interest credited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy acquisition costs and other insurance expenses |
|
|
44,422 |
|
|
|
35,264 |
|
|
|
91,511 |
|
|
|
89,705 |
|
Other operating expenses |
|
|
8,793 |
|
|
|
6,994 |
|
|
|
17,487 |
|
|
|
13,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
219,075 |
|
|
|
187,508 |
|
|
|
453,913 |
|
|
|
421,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
43,992 |
|
|
$ |
33,748 |
|
|
$ |
74,663 |
|
|
$ |
52,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes increased $10.2 million, or 30.4%, and $21.9 million, or 41.6%, for
the three and six months ended June 30, 2011, as compared to the same periods in 2010. The
increase in income in the second quarter and first six months of 2011 is primarily due to income of
$4.5 million from the recapture of a previously assumed block of individual life business, an
increase in net investment related gains of $1.6 million and $3.3 million, respectively, and
improved traditional individual life mortality experience compared to prior year. Favorable
Canadian dollar exchange fluctuations contributed to an increase in income before income taxes of
approximately $3.2 million and $3.7 million in the second quarter and first six months of 2011,
respectively.
Net premiums increased $32.6 million, or 18.4%, and $39.0 million, or 10.1%, for the three and six
months ended June 30, 2011, as compared to the same periods in 2010. Favorable Canadian dollar
exchange fluctuations contributed to an increase in net premiums of approximately $12.4 million and
$23.7 million in the second quarter and first six months of 2011, respectively, as compared to the
same periods in 2010. In addition to an increase in premiums from new and existing individual life
treaties, longevity reinsurance contributed $4.9 million and $9.8 million, excluding the impact of
foreign exchange, to the increases in the second quarter and first six months of 2011,
respectively. Creditor premiums increased by $3.9 million and decreased by $23.9 million in the
second quarter and first six months of 2011, respectively. Premium levels
47
can be significantly influenced by currency fluctuations, large transactions, mix of business and
reporting practices of ceding companies and therefore may fluctuate from period to period.
Net investment income increased $2.8 million, or 6.7%, and $7.5 million, or 9.1%, for the three and
six months ended June 30, 2011, as compared to the same periods in 2010. Favorable Canadian dollar
exchange fluctuations contributed to an increase in net investment income of approximately $2.8
million and $3.9 million in the second quarter and first six months of 2011 compared to 2010.
Investment income and investment related gains and losses are allocated to the segments based upon
average assets and related capital levels deemed appropriate to support segment operations.
Investment performance varies with the composition of investments and the relative allocation of
capital to the operating segments. The increase in investment income, excluding the impact of
foreign exchange, was mainly the result of a 6.2% increase in the allocated asset base partially
offset by a lower investment yield.
Other revenues increased by $4.7 million for both the three and six months ended June 30, 2011, as
compared to the same periods in 2010. These increases were primarily due to $4.9 million fee earned
from the recapture of a previously assumed block of individual life business.
Loss ratios for this segment were 79.1% and 82.0% for the second quarter of 2011 and 2010,
respectively, and 81.2% and 82.4% for the six months ended June 30, 2011 and 2010, respectively.
Historically, the loss ratio had increased primarily as the result of several large permanent level
premium in force blocks assumed in 1997 and 1998. These are mature blocks of permanent level
premium business in which mortality as a percentage of net premiums were expected to be higher than
historical ratios. The nature of permanent level premium policies requires the Company to set up
actuarial liabilities and invest the amounts received in excess of early-year mortality costs to
fund claims in the later years when premiums, by design, continue to be level as compared to
expected increasing mortality or claim costs. Excluding creditor business, claims and other policy
benefits, as a percentage of net premiums and investment income for this segment were 70.1% and
71.0% in the second quarter of 2011 and 2010, respectively, and 73.3% and 76.2% for the six months
ended June 30, 2011 and 2010, respectively, a reflection of improved mortality experience in the
current year periods. The decrease in the loss ratios for the second quarter and first six months
of 2011, compared to 2010, were due to improved traditional individual life mortality experience.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 21.2%
and 19.9% for the second quarter of 2011 and 2010, respectively, and 21.5% and 23.3% for the six
months ended June 30, 2011 and 2010, respectively. Excluding foreign exchange and creditor
business, policy acquisition costs and other insurance expenses as a percentage of net premiums
were 12.5% and 11.6% for the second quarter of 2011 and 2010, respectively, and 12.0% and 11.6% for
the six months ended June 30, 2011 and 2010, respectively. Overall, while these ratios are
expected to remain in a predictable range, they may fluctuate from period to period due to varying
allowance levels and product mix. In addition, the amortization pattern of previously capitalized
amounts, which are subject to the form of the reinsurance agreement and the underlying insurance
policies, may vary.
Other operating expenses increased by $1.8 million, or 25.7%, and $3.7 million, or 26.4%, for the
three and six months ended June 30, 2011, as compared to the same periods in 2010. Canadian dollar
exchange fluctuations contributed approximately $0.4 million and $0.8 million to the increase in
operating expenses in the second quarter and first six months of 2011, respectively. Other
operating expenses as a percentage of net premiums were 4.2% and 3.9% for the second quarter of
2011 and 2010, respectively, and 4.1% and 3.6% for the six months ended June 30, 2011 and 2010,
respectively.
Europe & South Africa Operations
The Europe & South Africa segment includes operations in the United Kingdom (UK), South Africa,
France, Germany, India, Italy, Mexico, the Netherlands, Poland, Spain and the Middle East. The
segment provides reinsurance for a variety of life products through yearly renewable term and
coinsurance agreements, critical illness coverage and longevity risk related to payout annuities.
Reinsurance agreements may be either facultative or automatic agreements covering individual and
group risks.
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
(dollars in thousands) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
283,019 |
|
|
$ |
209,919 |
|
|
$ |
552,139 |
|
|
$ |
427,571 |
|
Investment income, net of related expenses |
|
|
10,174 |
|
|
|
8,369 |
|
|
|
20,028 |
|
|
|
16,201 |
|
Investment related gains (losses), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments on fixed maturity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investment related gains (losses), net |
|
|
756 |
|
|
|
1,347 |
|
|
|
1,049 |
|
|
|
1,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment related gains (losses), net |
|
|
756 |
|
|
|
1,347 |
|
|
|
1,049 |
|
|
|
1,806 |
|
Other revenues |
|
|
1,745 |
|
|
|
108 |
|
|
|
2,800 |
|
|
|
946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
295,694 |
|
|
|
219,743 |
|
|
|
576,016 |
|
|
|
446,524 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits |
|
|
242,973 |
|
|
|
165,827 |
|
|
|
459,905 |
|
|
|
345,843 |
|
Policy acquisition costs and other insurance expenses |
|
|
9,953 |
|
|
|
10,273 |
|
|
|
22,012 |
|
|
|
23,671 |
|
Other operating expenses |
|
|
26,527 |
|
|
|
21,317 |
|
|
|
51,539 |
|
|
|
44,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
279,453 |
|
|
|
197,417 |
|
|
|
533,456 |
|
|
|
413,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
16,241 |
|
|
$ |
22,326 |
|
|
$ |
42,560 |
|
|
$ |
32,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes decreased $6.1 million, or 27.3% and increased $9.6 million, or
29.0%, for the three and six months ended June 30, 2011, as compared to the same periods in 2010.
The decrease in income before income taxes for the second quarter was primarily due to unfavorable
claims experience over the prior period in the UK. The increase in income before income taxes for
the first six months was primarily due to an increase in net premiums and favorable claims
experience in South Africa and Continental Europe offset by unfavorable claims experience in the
UK. Favorable foreign currency exchange fluctuations contributed to an increase to income before
income taxes totaling approximately $1.7 million and $2.0 million for the second quarter and first
six months of 2011, respectively.
Net premiums increased $73.1 million, or 34.8%, and $124.6 million, or 29.1%, for the three and six
months ended June 30, 2011, as compared to the same periods in 2010. Net premiums increased as a
result of new business from both new and existing treaties including an increase associated with
reinsurance of longevity risk in the UK of $18.5 million and $32.7 million for the second quarter
and first six months of 2011, respectively. During 2011, there were favorable foreign currency
exchange fluctuations, particularly with the British pound, the euro and the South African rand
strengthening against the U.S. dollar when compared to the same periods in 2010, which increased
net premiums by approximately $24.7 million and $31.2 million in the second quarter and first six
months of 2011, respectively, as compared to the same periods in 2010.
A portion of the net premiums for the segment, in each period presented, relates to reinsurance of
critical illness coverage, primarily in the UK. This coverage provides a benefit in the event of
the diagnosis of a pre-defined critical illness. Net premiums earned from this coverage totaled
$63.3 million and $52.8 million in the second quarter of 2011 and 2010, respectively, and $123.6
million and $108.6 million for the six months ended June 30, 2011 and 2010, respectively. Premium
levels can be significantly influenced by currency fluctuations, large transactions and reporting
practices of ceding companies and therefore can fluctuate from period to period.
Net investment income increased $1.8 million, or 21.6%, and $3.8 million, or 23.6%, for the three
and six months ended June 30, 2011, as compared to the same periods in 2010. These increases were
primarily due to growth of 37.3% in the invested asset base partially offset by a lower investment
yield. Investment income and investment related gains and losses are allocated to the various
operating segments based on average assets and related capital levels deemed appropriate to support
segment operations.
Loss ratios were 85.9% and 79.0% for the second quarter of 2011 and 2010, respectively, and 83.3%
and 80.9% for the six months ended June 30, 2011 and 2010, respectively. The increases in the loss
ratios for the second quarter and first six months of 2011 were due to unfavorable claims
experience, primarily in the UK. Although reasonably predictable over a period of years, death
claims can be volatile over shorter periods. Management views recent experience as normal
short-term volatility that is inherent in the business.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 3.5% and
4.9% for the second quarter of 2011 and 2010, respectively, and 4.0% and 5.5% for the six months
ended June 30, 2011 and 2010, respectively. The decrease in 2011 policy acquisition costs and
other insurance expenses is related to a decrease in the amortization of deferred acquisition costs
affected by the mix of business, primarily in the UK. These percentages fluctuate due to timing of
49
client company reporting, variations in the mixture of business being reinsured and the relative
maturity of the business. In addition, as the segment grows, renewal premiums, which have lower
allowances than first-year premiums, represent a greater percentage of the total net premiums.
Other operating expenses increased $5.2 million, or 24.4%, and $7.5 million, or 17.1%, for the
three and six months ended June 30, 2011, as compared to the same periods in 2010. Other operating
expenses as a percentage of net premiums totaled 9.4% and 10.2% for the second quarter of 2011 and
2010, respectively, and 9.3% and 10.3% for the six months ended June 30, 2011 and 2010,
respectively. The 2011 decrease in other operating expenses as a percentage of net premiums
compared to the same periods in 2010 is due to the sustained growth in net premiums for the
segment.
Asia Pacific Operations
The Asia Pacific segment includes operations in Australia, Hong Kong, Japan, Malaysia, Singapore,
New Zealand, South Korea, Taiwan and mainland China. The principal types of reinsurance include
life, critical illness, disability income, superannuation, and financial reinsurance.
Superannuation is the Australian government mandated compulsory retirement savings program.
Superannuation funds accumulate retirement funds for employees, and in addition, offer life and
disability insurance coverage. Reinsurance agreements may be facultative or automatic agreements
covering individual and group risks.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
For the three months ended |
|
|
For the six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
316,356 |
|
|
$ |
256,878 |
|
|
$ |
627,873 |
|
|
$ |
542,696 |
|
Investment income, net of related expenses |
|
|
21,402 |
|
|
|
17,249 |
|
|
|
41,036 |
|
|
|
34,513 |
|
Investment related gains (losses), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments on fixed maturity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investment related gains (losses), net |
|
|
1,079 |
|
|
|
1,926 |
|
|
|
641 |
|
|
|
2,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment related gains (losses), net |
|
|
1,079 |
|
|
|
1,926 |
|
|
|
641 |
|
|
|
2,513 |
|
Other revenues |
|
|
7,283 |
|
|
|
6,128 |
|
|
|
15,775 |
|
|
|
12,315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
346,120 |
|
|
|
282,181 |
|
|
|
685,325 |
|
|
|
592,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits |
|
|
267,362 |
|
|
|
204,494 |
|
|
|
515,292 |
|
|
|
427,590 |
|
Interest credited |
|
|
615 |
|
|
|
|
|
|
|
615 |
|
|
|
|
|
Policy acquisition costs and other insurance expenses |
|
|
44,140 |
|
|
|
31,661 |
|
|
|
84,960 |
|
|
|
69,591 |
|
Other operating expenses |
|
|
26,089 |
|
|
|
22,265 |
|
|
|
51,216 |
|
|
|
44,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
338,206 |
|
|
|
258,420 |
|
|
|
652,083 |
|
|
|
541,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
7,914 |
|
|
$ |
23,761 |
|
|
$ |
33,242 |
|
|
$ |
50,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes decreased $15.8 million, or 66.7%, and $17.0 million, or 33.8%, for
the three and six months ended June 30, 2011, as compared to the same periods in 2010. The
decrease in income before income taxes for the second quarter is primarily due to unfavorable
individual life claims in Australia. The decrease in income for the first six months was also
affected by $6.5 million in estimated net losses from the Japan and New Zealand earthquakes and
lower than expected premiums in Australia, offset by favorable results throughout the remainder of
the segment. Additionally, foreign currency exchange fluctuations resulted in increases to income
before income taxes totaling approximately $0.7 million and $2.2 million for the second quarter and
first six months of 2011, respectively.
Net premiums increased $59.5 million, or 23.2%, and $85.2 million, or 15.7%, for the three and six
months ended June 30, 2011, as compared to the same periods in 2010. Premiums in the second
quarter and first six months of 2011 increased throughout the segment primarily due to local
currencies strengthening against the U.S. dollar. The overall effect of changes in Asia Pacific
segment currencies was an increase in net premiums of approximately $40.2 million and $65.0 million
for the second quarter and first six months of 2011, respectively, as compared to the same periods
in 2010.
A portion of net premiums relates to reinsurance of critical illness coverage. This coverage
provides a benefit in the event of the diagnosis of a pre-defined critical illness. Reinsurance of
critical illness in the Asia Pacific operations is offered primarily in South Korea, Australia and
Hong Kong. Net premiums earned from this coverage totaled $41.0 million and $48.5 million in the
second quarter of 2011 and 2010, respectively and $86.6 million and $87.9 million for the first six
months of 2011 and 2010, respectively. Premium levels can be significantly influenced by currency
fluctuations, large transactions and reporting practices of ceding companies and can fluctuate from
period to period.
50
Net investment income increased $4.2 million, or 24.1%, and $6.5 million, or 18.9%, for the three
and six months ended June 30, 2011, as compared to the same periods in 2010. These increases were
primarily due to growth in assets related to asset-intensive treaties. Also contributing to the
increases were favorable changes in foreign currency exchange fluctuations of $2.2 million and $2.7
million in the second quarter and first six months of 2011, respectively. Investment income and
investment related gains and losses are allocated to the various operating segments based on
average assets and related capital levels deemed appropriate to support segment operations.
Investment performance varies with the composition of investments and the relative allocation of
capital to the operating segments.
Other revenues increased $1.2 million, or 18.8%, and $3.5 million, or 28.1%, for the three and six
months ended June 30, 2011, as compared to the same periods in 2010. The primary source of other
revenues is fees from financial reinsurance treaties in Japan. The increase in other revenues for
the second quarter and first six months is primarily due to a new financial reinsurance treaty
entered into in 2011. At June 30, 2011 and 2010, the amount of reinsurance assumed from client
companies, as measured by pre-tax statutory surplus, was $199.6 million and $392.5 million,
respectively. The decrease in pre-tax statutory surplus was due to the termination of a treaty in
2011. Fees earned from this business can vary significantly depending on the size of the
transactions and the timing of their completion and, therefore, can fluctuate from period to
period.
Loss ratios for this segment were 84.5% and 79.6% for the second quarter of 2011 and 2010,
respectively, and 82.1% and 78.8% for the six months ended June 30, 2011 and 2010, respectively.
The increases in the loss ratios for the second quarter and first six months of 2011, compared to
2010, were due to the excess individual life claims in Australia and the estimated losses from the
Japan and New Zealand earthquakes mentioned above. Although reasonably predictable over a period
of years, death claims can be volatile over shorter periods. Management views recent experience as
normal short-term volatility that is inherent in the business. Loss ratios will fluctuate due to
timing of client company reporting, variations in the mixture of business and the relative maturity
of the business.
Interest credited expense increased $0.6 million for the second quarter and first six months of
2011, as compared to the same periods in 2010. The increase is due to contractual interest related
to a new asset-intensive treaty in Japan.
Policy acquisition costs and other insurance expenses as a percentage of net premiums were 14.0%
and 12.3% for the second quarter of 2011 and 2010, respectively, and 13.5% and 12.8% for the six
months ended June 30, 2011 and 2010, respectively. The ratio of policy acquisition costs and other
insurance expenses as a percentage of net premiums should generally decline as the business
matures; however, the percentage does fluctuate periodically due to timing of client company
reporting and variations in the mixture of business.
Other operating expenses increased $3.8 million, or 17.2%, and $6.6 million, or 14.7%, for the
three and six months ended June 30, 2011, as compared to the same periods in 2010. Foreign
currency exchange fluctuations contributed approximately $1.6 million and $2.6 million to the
increase in operating expenses in the second quarter and first six months of 2011, respectively.
Other operating expenses as a percentage of net premiums totaled 8.2% and 8.7% for the second
quarter of 2011 and 2010, respectively, and 8.2% and 8.2% for the six months ended June 30, 2011
and 2010, respectively. The timing of premium flows and the level of costs associated with the
entrance into and development of new markets in the growing Asia Pacific segment may cause other
operating expenses as a percentage of net premiums to fluctuate over time.
Corporate and Other
Corporate and Other revenues include investment income and investment related gains and losses from
unallocated invested assets. Corporate expenses consist of the offset to capital charges allocated
to the operating segments within the policy acquisition costs and other insurance expenses line
item, unallocated overhead and executive costs, and interest expense related to debt and trust
preferred securities. Additionally, Corporate and Other includes results from, among others, RTP,
a wholly-owned subsidiary that develops and markets technology solutions for the insurance industry
and the investment income and expense associated with the Companys collateral finance facility.
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
(dollars in thousands) |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums |
|
$ |
2,288 |
|
|
$ |
1,851 |
|
|
$ |
4,375 |
|
|
$ |
3,357 |
|
Investment income, net of related expenses |
|
|
31,053 |
|
|
|
19,997 |
|
|
|
60,747 |
|
|
|
49,154 |
|
Investment related gains (losses), net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments on fixed maturity securities |
|
|
618 |
|
|
|
(2,543 |
) |
|
|
(386 |
) |
|
|
(9,944 |
) |
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income |
|
|
(1,773 |
) |
|
|
(700 |
) |
|
|
(1,773 |
) |
|
|
2,150 |
|
Other investment related gains (losses), net |
|
|
9,852 |
|
|
|
2,215 |
|
|
|
15,754 |
|
|
|
(2,380 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment related gains (losses), net |
|
|
8,697 |
|
|
|
(1,028 |
) |
|
|
13,595 |
|
|
|
(10,174 |
) |
Other revenues |
|
|
3,001 |
|
|
|
766 |
|
|
|
11,581 |
|
|
|
3,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
45,039 |
|
|
|
21,586 |
|
|
|
90,298 |
|
|
|
45,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and other policy benefits |
|
|
381 |
|
|
|
(138 |
) |
|
|
690 |
|
|
|
29 |
|
Interest credited |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
13 |
|
Policy acquisition costs and other insurance expenses (income) |
|
|
(13,403 |
) |
|
|
(13,755 |
) |
|
|
(26,874 |
) |
|
|
(26,609 |
) |
Other operating expenses |
|
|
13,054 |
|
|
|
10,917 |
|
|
|
35,070 |
|
|
|
24,853 |
|
Interest expense |
|
|
25,818 |
|
|
|
25,141 |
|
|
|
50,387 |
|
|
|
40,590 |
|
Collateral finance facility expense |
|
|
3,101 |
|
|
|
1,960 |
|
|
|
6,303 |
|
|
|
3,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses |
|
|
28,951 |
|
|
|
24,124 |
|
|
|
65,576 |
|
|
|
42,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
16,088 |
|
|
$ |
(2,538 |
) |
|
$ |
24,722 |
|
|
$ |
3,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes increased $18.6 million and $21.6 million for the three and six
months ended June 30, 2011, as compared to the same periods in 2010. The increase for the second
quarter was primarily due to an $11.1 million increase in investment income and a $9.7 million
improvement in investment related gains (losses). The increase for the first six months is
primarily due to a $23.8 million improvement in investment related gains (losses) and an $11.6
million increase in investment income partially offset by a $10.2 million increase in other
operating expenses and a $9.8 million increase in interest expense. Also reflected in income
before income taxes for the first six months is a gain on repurchase of collateral finance facility
securities of $5.0 million and a loss on the redemption and remarketing associated with Preferred
Income Equity Redeemable Securities (PIERS) of $4.4 million.
Total revenues increased $23.5 million, or 108.6%, and increased $44.5 million, or 97.3%, for the
three and six months ended June 30, 2011, as compared to the same periods in 2010. The increase
for the second quarter was primarily due to an $11.1 million increase in investment income
primarily due to distributions from limited partnerships and growth in the invested asset base, and
a $9.7 million improvement in investment related gains (losses) which reflects an increase in gains
from the sale of investment securities. The increase for the first six months was largely due to a
$23.8 million improvement in investment related gains (losses) which reflects an increase in gains
from the sale of investment securities and lower investment impairments, and an $11.6 million
increase in investment income primarily due to distributions from limited partnerships and growth
in the invested asset base. In addition, the aforementioned gain on repurchase of collateral
finance facility securities of $5.0 million is included in other revenue for the first six months
of 2011.
Total benefits and expenses increased $4.8 million, or 20.0%, and $22.9 million, or 53.8%, for the
three and six months ended June 30, 2011, as compared to the same periods in 2010. The increase
for the second quarter was primarily due to a $2.1 million increase in other operating expenses
related to employee compensation and a $1.1 million increase in collateral finance facility expense
related to a collateral financing arrangement with an international bank entered into in the fourth
quarter of 2010. The increase for the first six months was primarily due to an increase in
interest expense related to higher interest provisions for income taxes related to uncertain tax
positions of $9.6 million. Also contributing to the increase in benefits and expenses for the
first six months was the aforementioned loss on the redemption and remarketing associated with
PIERS of $4.4 million which is included in other operating expenses. This loss reflects the
recognition of the unamortized issuance costs of the original preferred securities.
52
Liquidity and Capital Resources
Current Market Environment
The U.S. and global financial markets continue to improve since the financial crisis in 2008 and
2009. However, the slow recovery of the U.S. economy, uncertainty regarding the amount of U.S.
sovereign debt and credit ratings thereof, and financial distress of certain European countries
continue to create volatility and uncertainty in the global financial markets.
Results of operations in the first six months of 2011 and 2010 reflect favorable changes in the
value of embedded derivatives as credit spreads have tightened during both periods. Gross
unrealized losses in the Companys fixed maturity and equity securities available-for-sale have
improved from $386.7 million at June 30, 2010 to $233.8 million at June 30, 2011. Likewise, gross
unrealized gains have improved from $1,082.1 million at June 30, 2010 to $1,349.8 million at June
30, 2011.
The Company continues to be in a position to hold its investment securities until recovery,
provided it remains comfortable with the credit of the issuer. The Company does not rely on
short-term funding or commercial paper, and therefore, to date, it has experienced no liquidity
pressure, nor does it anticipate such pressure in the foreseeable future. The Company has
selectively reduced its exposure to distressed security issuers through security sales. Although
management believes the Companys current capital base is adequate to support its business at
current operating levels, it continues to monitor new business opportunities and any associated new
capital needs that could arise from the changing financial landscape.
The Holding Company
RGA is a holding company whose primary uses of liquidity include, but are not limited to, the
immediate capital needs of its operating companies, dividends paid to shareholders and interest
payments on indebtedness. The primary sources of RGAs liquidity include proceeds from capital
raising efforts, interest income on undeployed corporate investments, interest income received on
surplus notes with two operating subsidiaries, and dividends from operating subsidiaries. As the
Company continues its expansion efforts, RGA will continue to be dependent on these sources of
liquidity.
The Company believes that it has sufficient liquidity for the next 12 months to fund its cash needs
under various scenarios that include the potential risk of early recapture of reinsurance treaties
and higher than expected death claims. Historically, the Company has generated positive net cash
flows from operations. However, in the event of significant unanticipated cash requirements beyond
normal liquidity, the Company has multiple liquidity alternatives available based on market
conditions and the amount and timing of the liquidity need. These options include borrowings under
committed credit facilities, secured borrowings, the ability to issue long-term debt, preferred
securities or common equity and, if necessary, the sale of invested assets subject to market
conditions.
In anticipation of the redemption and remarketing of RGAs trust preferred securities discussed
below, RGA purchased 3.0 million shares of its outstanding common stock from MetLife, Inc. on
February 15, 2011, at a price of $61.14 per share, reflecting the closing price of the Companys
common stock on February 14, 2011. The purchased common shares are held as treasury stock.
On March 7, 2011, RGA entered into an accelerated share repurchase (ASR) agreement with a
financial counterparty. Under the ASR agreement, RGA purchased 2.5 million shares of its
outstanding common stock at an initial price of $59.76 per share and an aggregate price of
approximately $149.4 million. The purchase price was funded from cash on hand. The counterparty
completed its purchases during the second quarter of 2011 and as a result, RGA was required to pay
$4.3 million to the counterparty for the final settlement which resulted in a final price of $61.47
per share on the repurchased common stock. The common shares repurchased have been placed into
treasury to be used for general corporate purposes.
The Companys share purchase transactions described above are intended to offset share dilution
associated with the issuance of approximately 5.5 million common shares from the exercise of
warrants as discussed below in Debt and Preferred Securities.
In July 2011, the quarterly dividend was increased to $0.18 per share from $0.12 per share. All
future payments of dividends are at the discretion of RGAs board of directors and will depend on
the Companys earnings, capital requirements, insurance regulatory conditions, operating
conditions, and other such factors as the board of directors may deem relevant. The amount of
dividends that RGA can pay will depend in part on the operations of its reinsurance subsidiaries.
Cash Flows
The Companys net cash flows provided by operating activities for the six months ended June 30,
2011 and 2010 were $537.8 million and $1,035.2 million, respectively. Cash flows from operating
activities are affected by the timing of premiums received, claims paid, and working capital
changes. The $497.4 million net decrease in operating cash flows during the six months of 2011
compared to the same period in 2010 was primarily a result of cash outflows related to claims,
acquisition costs, income taxes and other operating expenses increasing more than cash inflows
related to premiums and investment income. Cash from premiums and investment income increased
$446.2 million and $119.9 million, respectively, but was more offset by higher cash outlays of
$1,063.5 million for the current six month period. The Company believes the
53
short-term cash requirements of its business operations will be sufficiently met by the positive
cash flows generated. Additionally, the Company believes it maintains a high quality fixed
maturity portfolio that can be sold, if necessary, to meet the Companys short- and long-term
obligations.
Net cash used in investing activities for the six months ended June 30, 2011 and 2010 was $497.2
million and $877.0 million, respectively. The sales and purchases of fixed maturity securities are
related to the management of the Companys investment portfolios and the investment of excess cash
generated by operating and financing activities.
Net cash provided by (used in) financing activities for the six months ended June 30, 2011 and 2010
was $191.0 million and $(107.4) million, respectively. The increase in cash provided by financing
activities is primarily due to $394.4 million in net proceeds from the issuance of $400 million in
Senior Notes in May 2011, as discussed below, and increased deposits of $207.2 million and reduced
withdrawals of $104.2 million, under investment-type contracts largely offset by increased
purchases of treasury stock of $339.5 million. Also reflected in the net cash provided by (used
in) financing activities are the proceeds from the redemption and remarketing of trust preferred
securities which provided cash of $154.6 million slightly more than offset by cash used due to the
maturity of trust preferred securities of $159.5 million as discussed below.
Debt and Preferred Securities
As of June 30, 2011 and December 31, 2010, the Company had $1,614.4 million and $1,216.4 million,
respectively, in outstanding borrowings under its debt agreements and was in compliance with all
covenants under those agreements.
The Company maintains a syndicated revolving credit facility with an overall capacity of $750.0
million that expires in September 2012. The Company may borrow cash and may obtain letters of
credit in multiple currencies under this facility. As of June 30, 2011, the Company had no cash
borrowings outstanding and $213.6 million in issued, but undrawn, letters of credit under this
facility. As of June 30, 2011, the average interest rate on long-term and short-term debt
outstanding was 6.04%.
On May 27, 2011, RGA issued 5.00% Senior Notes due June 1, 2021 with a face amount of $400.0
million. These senior notes have been registered with the Securities and Exchange Commission. The
net proceeds from the offering were approximately $394.4 million and will be used to fund the
payment of the RGAs $200.0 million senior notes that will mature in December 2011 and for general
corporate purposes. Capitalized issue costs were approximately $3.4 million.
On March 4, 2011, RGA completed the remarketing of approximately 4.5 million trust preferred
securities with an aggregate accreted value of approximately $158.2 million that were initially
issued as a component of its Trust Preferred Income Equity Redeemable Securities (PIERS Units).
When issued, each PIERS Unit initially consisted of (1) a preferred security issued by RGA Capital
Trust I, a financing subsidiary of RGA, with an annual distribution rate of 5.75 percent and stated
maturity of March 18, 2051, and (2) a warrant to purchase at any time prior to December 15, 2050,
1.2508 shares of RGA common stock. Approximately 4.4 million of the warrants were exercised on
March 4, 2011, at a price of $35.44 per warrant, resulting in the issuance of approximately 5.5
million shares, with cash paid in lieu of fractional shares. The warrant exercise price was paid
to RGA. Remaining warrants were redeemed in cash at their redemption amount of $14.56 per warrant.
As a result of the remarketing, the remarketed preferred securities had a fixed accreted value of
$35.44 per security with a fixed annual distribution rate of 2.375% and were repaid on June 5,
2011, the revised maturity date. The proceeds from the remarketing were paid directly to the
selling holders, unless holders timely elected to exercise their warrants in lieu of mandatory
redemption, in which case the proceeds were applied on behalf of such selling holders to satisfy in
full the exercise price of the warrants. Preferred securities of holders who timely elected to opt
out of the remarketing were adjusted to match the terms of the remarketed preferred securities. In
the first quarter of 2011, RGA recorded a $4.4 million pre-tax loss, included in other operating
expenses, related to the recognition of the unamortized issuance costs of the original preferred
securities.
Based on the historic cash flows and the current financial results of the Company, management
believes RGAs cash flows will be sufficient to enable RGA to meet its obligations for at least the
next 12 months.
Collateral Finance Facility
In June 2006, RGAs subsidiary, Timberlake Financial, L.L.C. (Timberlake Financial), issued
$850.0 million of Series A Floating Rate Insured Notes due June 2036 in a private placement. The
notes were issued to fund the collateral requirements for statutory reserves required by the U.S.
Valuation of Life Policies Model Regulation (commonly referred to as Regulation XXX) on specified
term life insurance policies reinsured by RGA Reinsurance Company (RGA Reinsurance). Proceeds
from the notes, along with a $112.8 million direct investment by the Company, were deposited into a
series of trust accounts that collateralize the notes and are not available to satisfy the general
obligations of the Company. Interest on the notes accrues at an annual rate of 1-month LIBOR plus
a base rate margin, payable monthly. The payment of interest and principal on the notes is insured
by a monoline insurance company through a financial guaranty insurance policy. The notes represent
senior, secured indebtedness of Timberlake Financial without legal recourse to RGA or its other
subsidiaries. Timberlake Financial will rely primarily upon the receipt of interest and principal
payments on a surplus note and dividend payments
54
from its wholly-owned subsidiary, Timberlake Reinsurance Company II (Timberlake Re), a South
Carolina captive insurance company, to make payments of interest and principal on the notes. The
ability of Timberlake Re to make interest and principal payments on the surplus note and dividend
payments to Timberlake Financial is contingent upon South Carolina regulatory approval, the return
on Timberlake Res investment assets and the performance of specified term life insurance policies
with guaranteed level premiums retroceded by RGAs subsidiary, RGA Reinsurance, to Timberlake Re.
During the first quarter of 2011, the Company repurchased $12.7 million face amount of the
Timberlake Financial notes for $7.6 million, which was the market value at the date of the
purchase. The notes were purchased by RGA Reinsurance Company. As a result, the Company recorded
a pre-tax gain of $5.0 million, after fees, in other revenues in the first quarter of 2011.
Asset / Liability Management
The Company actively manages its cash and invested assets using an approach that is intended to
balance quality, diversification, asset/liability matching, liquidity and investment return. The
goals of the investment process are to optimize after-tax, risk-adjusted investment income and
after-tax, risk-adjusted total return while managing the assets and liabilities on a cash flow and
duration basis.
The Company has established target asset portfolios for each major insurance product, which
represent the investment strategies intended to profitably fund its liabilities within acceptable
risk parameters. These strategies include objectives and limits for effective duration, yield
curve sensitivity and convexity, liquidity, asset sector concentration and credit quality.
The Companys liquidity position (cash and cash equivalents and short-term investments) was $836.6
million and $582.0 million at June 30, 2011 and December 31, 2010, respectively. Liquidity needs
are determined from valuation analyses conducted by operational units and are driven by product
portfolios. Periodic evaluations of demand liabilities and short-term liquid assets are designed
to adjust specific portfolios, as well as their durations and maturities, in response to
anticipated liquidity needs.
The Company periodically sells investment securities under agreements to repurchase the same
securities. These arrangements are used for purposes of short-term financing. There were no
securities subject to these agreements outstanding at June 30, 2011 or December 31, 2010. The book
value of securities subject to these agreements, if any, are included in fixed maturity securities
while the repurchase obligations would be reported in other liabilities in the condensed
consolidated statement of financial position. The Company also occasionally enters into
arrangements to purchase securities under agreements to resell the same securities. Amounts
outstanding, if any, are reported in cash and cash equivalents. These agreements are primarily
used as yield enhancement alternatives to other cash equivalent investments. There were no amounts
outstanding at June 30, 2011 or December 31, 2010. The Company participates in a securities
borrowing program whereby securities, which are not reflected on the Companys condensed
consolidated balance sheets, are borrowed from a third party. The Company is required to maintain
a minimum of 100% of the market value of the borrowed securities as collateral. The Company had
borrowed securities with an amortized cost of $150.0 million and a market value of $150.7 million
as of June 30, 2011. The borrowed securities are used to provide collateral under an affiliated
reinsurance transaction. There were no securities borrowed as of December 31, 2010.
RGA Reinsurance is a member of the Federal Home Loan Bank of Des Moines (FHLB) and holds $18.9
million of common stock in the FHLB, which is included in other invested assets on the Companys
condensed consolidated balance sheets. RGA Reinsurance occasionally enters into traditional
funding agreements with the FHLB and had no outstanding traditional funding agreements with the
FHLB at June 30, 2011 and December 31, 2010. The Companys average outstanding balance of
traditional funding agreements was $80.9 million and $46.8 million during the second quarter and
first six months of 2011, respectively. The Companys average outstanding balance of traditional
funding agreements during the second quarter and first six months of 2010 was not material.
Interest on traditional funding agreements with the FHLB is reflected in interest expense on the
Companys condensed consolidated statements of income.
In addition, RGA Reinsurance has also entered into funding agreements with the FHLB under
guaranteed investment contracts whereby RGA Reinsurance has issued the funding agreements in
exchange for cash and for which the FHLB has been granted a blanket lien on RGA Reinsurances
commercial and residential mortgage-backed securities and commercial mortgage loans used to
collateralize RGA Reinsurances obligations under the funding agreements. RGA Reinsurance
maintains control over these pledged assets, and may use, commingle, encumber or dispose of any
portion of the collateral as long as there is no event of default and the remaining qualified
collateral is sufficient to satisfy the collateral maintenance level. The funding agreements and
the related security agreements represented by this blanket lien provide that upon any event of
default by RGA Reinsurance, the FHLBs recovery is limited to the amount of RGA Reinsurances
liability under the outstanding funding agreements. The amount of the Companys liability for the
funding agreements with the FHLB under guaranteed investment contracts was $199.3 million at both
June 30, 2011 and December 31, 2010, which is included in interest sensitive contract liabilities.
The advances on these agreements are collateralized primarily by commercial and residential
mortgage-backed securities and commercial mortgage loans.
55
Investments
The Company had total cash and invested assets of $24.6 billion and $23.1 billion at June 30, 2011
and December 31, 2010, respectively, as illustrated below (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Fixed maturity securities, available-for-sale |
|
$ |
15,153,807 |
|
|
$ |
14,304,597 |
|
Mortgage loans on real estate |
|
|
908,048 |
|
|
|
885,811 |
|
Policy loans |
|
|
1,229,663 |
|
|
|
1,228,418 |
|
Funds withheld at interest |
|
|
5,671,844 |
|
|
|
5,421,952 |
|
Short-term investments |
|
|
125,618 |
|
|
|
118,387 |
|
Other invested assets |
|
|
799,341 |
|
|
|
707,403 |
|
Cash and cash equivalents |
|
|
710,973 |
|
|
|
463,661 |
|
|
|
|
|
|
|
|
Total cash and invested assets |
|
$ |
24,599,294 |
|
|
$ |
23,130,229 |
|
|
|
|
|
|
|
|
The following table presents consolidated average invested assets at amortized cost, net
investment income and investment yield, excluding funds withheld. Funds withheld assets are
primarily associated with the reinsurance of annuity contracts on which the Company earns a spread.
Fluctuations in the yield on funds withheld assets are substantially offset by a corresponding
adjustment to the interest credited on the liabilities (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
|
|
|
|
Six months ended June 30, |
|
|
2011 |
|
|
2010 |
|
|
Increase/ (Decrease) |
|
2011 |
|
|
2010 |
|
|
Increase/ (Decrease) |
Average invested assets at amortized cost |
|
$ |
17,446,168 |
|
|
$ |
15,432,369 |
|
|
|
13.0 |
% |
|
$ |
16,992,394 |
|
|
$ |
15,141,511 |
|
|
|
12.2 |
% |
|
Net investment income |
|
|
228,728 |
|
|
|
208,303 |
|
|
|
9.8 |
% |
|
|
448,636 |
|
|
|
423,598 |
|
|
|
5.9 |
% |
|
Investment yield (ratio of net investment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income to average invested assets) |
|
|
5.35 |
% |
|
|
5.51 |
% |
|
(16) bps |
|
|
5.35 |
% |
|
|
5.67 |
% |
|
(32) bps |
Investment yield decreased for the three months ended June 30, 2011 due primarily to slightly
lower yields on several asset classes including fixed maturity securities, mortgage loans and
policy loans. The lower yields are due primarily to a lower interest rate environment which
decreases the yield on new investment purchases. All investments held by RGA and its subsidiaries
are monitored for conformance to the qualitative and quantitative limits prescribed by the
applicable jurisdictions insurance laws and regulations. In addition, the operating companies
boards of directors periodically review their respective investment portfolios. The Companys
investment strategy is to maintain a predominantly investment-grade, fixed maturity portfolio, to
provide adequate liquidity for expected reinsurance obligations, and to maximize total return
through prudent asset management. The Companys asset/liability duration matching differs between
operating segments. Based on Canadian reserve requirements, the Canadian liabilities are matched
with long-duration Canadian assets. The duration of the Canadian portfolio exceeds twenty years.
The average duration for all portfolios, when consolidated, ranges between eight and ten years.
See Note 4 Investments in the Notes to Consolidated Financial Statements of the 2010 Annual
Report for additional information regarding the Companys investments.
Fixed Maturity and Equity Securities Available-for-Sale
The following tables provide information relating to investments in fixed maturity securities and
equity securities by sector as of June 30, 2011 and December 31, 2010 (dollars in thousands):
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
temporary |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
% of |
|
|
impairments |
|
June 30, 2011: |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Total |
|
|
in AOCI |
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
$ |
7,307,996 |
|
|
$ |
470,307 |
|
|
$ |
81,235 |
|
|
$ |
7,697,068 |
|
|
|
50.8 |
% |
|
$ |
|
|
Canadian and
Canadian provincial governments |
|
|
2,533,410 |
|
|
|
677,586 |
|
|
|
2,840 |
|
|
|
3,208,156 |
|
|
|
21.2 |
|
|
|
|
|
Residential mortgage-backed securities |
|
|
1,320,758 |
|
|
|
59,345 |
|
|
|
14,319 |
|
|
|
1,365,784 |
|
|
|
9.0 |
|
|
|
(258 |
) |
Asset-backed securities |
|
|
415,637 |
|
|
|
12,925 |
|
|
|
51,642 |
|
|
|
376,920 |
|
|
|
2.5 |
|
|
|
(6,258 |
) |
Commercial mortgage-backed securities |
|
|
1,333,832 |
|
|
|
92,380 |
|
|
|
67,107 |
|
|
|
1,359,105 |
|
|
|
9.0 |
|
|
|
(8,375 |
) |
U.S. government and agencies |
|
|
191,048 |
|
|
|
10,832 |
|
|
|
602 |
|
|
|
201,278 |
|
|
|
1.3 |
|
|
|
|
|
State and political subdivisions |
|
|
192,368 |
|
|
|
11,057 |
|
|
|
5,061 |
|
|
|
198,364 |
|
|
|
1.3 |
|
|
|
|
|
Other foreign government securities |
|
|
746,298 |
|
|
|
8,557 |
|
|
|
7,723 |
|
|
|
747,132 |
|
|
|
4.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
$ |
14,041,347 |
|
|
$ |
1,342,989 |
|
|
$ |
230,529 |
|
|
$ |
15,153,807 |
|
|
|
100.0 |
% |
|
$ |
(14,891 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable preferred stock |
|
$ |
104,444 |
|
|
$ |
5,337 |
|
|
$ |
2,263 |
|
|
$ |
107,518 |
|
|
|
75.6 |
% |
|
|
|
|
Other equity securities |
|
|
34,237 |
|
|
|
1,498 |
|
|
|
1,027 |
|
|
|
34,708 |
|
|
|
24.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
$ |
138,681 |
|
|
$ |
6,835 |
|
|
$ |
3,290 |
|
|
$ |
142,226 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other-than- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
temporary |
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
% of |
|
|
impairments |
|
December
31, 2010: |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
|
Total |
|
|
in AOCI |
|
Available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
$ |
6,826,937 |
|
|
$ |
436,384 |
|
|
$ |
107,816 |
|
|
$ |
7,155,505 |
|
|
|
50.0 |
% |
|
$ |
|
|
Canadian and Canadian provincial governments |
|
|
2,354,418 |
|
|
|
672,951 |
|
|
|
3,886 |
|
|
|
3,023,483 |
|
|
|
21.1 |
|
|
|
|
|
Residential mortgage-backed securities |
|
|
1,443,892 |
|
|
|
55,765 |
|
|
|
26,580 |
|
|
|
1,473,077 |
|
|
|
10.3 |
|
|
|
(1,650 |
) |
Asset-backed securities |
|
|
440,752 |
|
|
|
12,001 |
|
|
|
61,544 |
|
|
|
391,209 |
|
|
|
2.7 |
|
|
|
(4,963 |
) |
Commercial mortgage-backed securities |
|
|
1,353,279 |
|
|
|
81,839 |
|
|
|
97,265 |
|
|
|
1,337,853 |
|
|
|
9.4 |
|
|
|
(10,010 |
) |
U.S. government and agencies |
|
|
199,129 |
|
|
|
7,795 |
|
|
|
708 |
|
|
|
206,216 |
|
|
|
1.4 |
|
|
|
|
|
State and political subdivisions |
|
|
170,479 |
|
|
|
2,098 |
|
|
|
8,117 |
|
|
|
164,460 |
|
|
|
1.2 |
|
|
|
|
|
Other foreign government securities |
|
|
556,136 |
|
|
|
4,304 |
|
|
|
7,646 |
|
|
|
552,794 |
|
|
|
3.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
$ |
13,345,022 |
|
|
$ |
1,273,137 |
|
|
$ |
313,562 |
|
|
$ |
14,304,597 |
|
|
|
100.0% |
|
|
$ |
(16,623 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable preferred stock |
|
$ |
100,718 |
|
|
$ |
4,130 |
|
|
$ |
5,298 |
|
|
$ |
99,550 |
|
|
|
71.0 |
% |
|
|
|
|
|
Other equity securities |
|
|
34,832 |
|
|
|
6,100 |
|
|
|
271 |
|
|
|
40,661 |
|
|
|
29.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
$ |
135,550 |
|
|
$ |
10,230 |
|
|
$ |
5,569 |
|
|
$ |
140,211 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tables above exclude fixed maturity securities posted by the Company as collateral to
counterparties with an amortized cost of $57.9 million and $46.9 million, and an estimated fair
value of $60.3 million and $48.2 million, as of June 30, 2011 and December 31, 2010 respectively,
which are included in other invested assets in the consolidated balance sheets.
The Companys fixed maturity securities are invested primarily in corporate bonds, mortgage- and
asset-backed securities, and U.S. and Canadian government securities. As of June 30, 2011 and
December 31, 2010, approximately 94.9% and 95.0%, respectively, of the Companys consolidated
investment portfolio of fixed maturity securities were investment grade.
Important factors in the selection of investments include diversification, quality, yield, total
rate of return potential and call protection. The relative importance of these factors is
determined by market conditions and the underlying product or portfolio characteristics. Cash
equivalents are primarily invested in high-grade money market instruments. The largest asset class
in which fixed maturity securities were invested was corporate securities, which represented
approximately 50.8% of total fixed maturity securities as of June 30, 2011, compared to 50.0% at
December 31, 2010. The tables below show the major industry types and weighted average credit
ratings, which comprise the corporate fixed maturity holdings at (dollars in thousands):
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
Average Credit |
June 30, 2011: |
|
Amortized Cost |
|
Fair Value |
|
% of Total |
|
Ratings |
Finance
|
|
$ |
2,827,556 |
|
|
$ |
2,907,045 |
|
|
|
37.8 |
% |
|
A |
Industrial
|
|
|
3,366,149 |
|
|
|
3,604,280 |
|
|
|
46.8 |
|
|
BBB+ |
Utility
|
|
|
1,105,801 |
|
|
|
1,176,889 |
|
|
|
15.3 |
|
|
BBB+ |
Other
|
|
|
8,490 |
|
|
|
8,854 |
|
|
|
0.1 |
|
|
AA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
7,307,996 |
|
|
$ |
7,697,068 |
|
|
|
100.0 |
% |
|
A- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Average Credit |
|
December 31, 2010: |
|
Amortized Cost |
|
|
Fair Value |
|
|
% of Total |
|
|
Ratings |
|
Finance |
|
$ |
2,782,936 |
|
|
$ |
2,833,022 |
|
|
|
39.6 |
% |
|
|
A |
|
Industrial |
|
|
3,121,326 |
|
|
|
3,341,104 |
|
|
|
46.7 |
|
|
BBB+ |
Utility |
|
|
908,737 |
|
|
|
967,017 |
|
|
|
13.5 |
|
|
BBB+ |
Other |
|
|
13,938 |
|
|
|
14,362 |
|
|
|
0.2 |
|
|
AA+ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,826,937 |
|
|
$ |
7,155,505 |
|
|
|
100.0 |
% |
|
|
A- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The National Association of Insurance Commissioners (NAIC) assigns securities quality
ratings and uniform valuations called NAIC Designations which are used by insurers when preparing
their statutory filings. The NAIC assigns designations to publicly traded as well as privately
placed securities. The designations assigned by the NAIC range from class 1 to class 6, with
designations in classes 1 and 2 generally considered investment grade (BBB or higher rating agency
designation). NAIC designations in classes 3 through 6 are generally considered below investment
grade (BB or lower rating agency designation).
The quality of the Companys available-for-sale fixed maturity securities portfolio, as measured at
fair value and by the percentage of fixed maturity securities invested in various ratings
categories, relative to the entire available-for-sale fixed maturity security portfolio, at June
30, 2011 and December 31, 2010 was as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
NAIC Designation |
|
Rating Agency Designation |
|
|
Amortized Cost |
|
|
Fair Value |
|
|
% of Total |
|
|
Amortized Cost |
|
|
Fair Value |
|
|
% of Total |
|
1 |
|
AAA/AA/A |
|
$ |
10,105,472 |
|
|
$ |
11,051,943 |
|
|
|
72.9 |
% |
|
$ |
9,697,515 |
|
|
$ |
10,556,941 |
|
|
|
73.8 |
% |
2 |
|
BBB |
|
|
3,129,518 |
|
|
|
3,330,600 |
|
|
|
22.0 |
|
|
|
2,860,603 |
|
|
|
3,035,593 |
|
|
|
21.2 |
|
3 |
|
BB |
|
|
464,363 |
|
|
|
466,393 |
|
|
|
3.1 |
|
|
|
460,675 |
|
|
|
450,368 |
|
|
|
3.2 |
|
4 |
|
B |
|
|
|
248,242 |
|
|
|
229,591 |
|
|
|
1.5 |
|
|
|
239,604 |
|
|
|
191,287 |
|
|
|
1.3 |
|
5 |
|
CCC and lower |
|
|
65,181 |
|
|
|
49,540 |
|
|
|
0.3 |
|
|
|
63,859 |
|
|
|
47,493 |
|
|
|
0.3 |
|
6 |
|
In or near default |
|
|
28,571 |
|
|
|
25,740 |
|
|
|
0.2 |
|
|
|
22,766 |
|
|
|
22,915 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
14,041,347 |
|
|
$ |
15,153,807 |
|
|
|
100.0 |
% |
|
$ |
13,345,022 |
|
|
$ |
14,304,597 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys fixed maturity portfolio includes structured securities. The following table shows the types of structured securities
the Company held at June 30, 2011 and December 31, 2010 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
Amortized Cost |
|
|
Fair Value |
|
|
Amortized Cost |
|
|
Fair Value |
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
$ |
637,806 |
|
|
$ |
674,599 |
|
|
$ |
636,931 |
|
|
$ |
668,405 |
|
Non-agency |
|
|
682,952 |
|
|
|
691,185 |
|
|
|
806,961 |
|
|
|
804,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total residential mortgage-backed securities |
|
|
1,320,758 |
|
|
|
1,365,784 |
|
|
|
1,443,892 |
|
|
|
1,473,077 |
|
Commercial mortgage-backed securities |
|
|
1,333,832 |
|
|
|
1,359,105 |
|
|
|
1,353,279 |
|
|
|
1,337,853 |
|
Asset-backed securities |
|
|
415,637 |
|
|
|
376,920 |
|
|
|
440,752 |
|
|
|
391,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,070,227 |
|
|
$ |
3,101,809 |
|
|
$ |
3,237,923 |
|
|
$ |
3,202,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The residential mortgage-backed securities include agency-issued pass-through securities and
collateralized mortgage obligations. A majority of the agency-issued pass-through securities are
guaranteed or otherwise supported by the Federal Home Loan Mortgage Corporation, Federal National
Mortgage Association, or the Government National Mortgage Association. As of June 30, 2011 and
December 31, 2010, the weighted average credit rating was AA+. The principal risks inherent in
holding mortgage-backed securities are prepayment and extension risks, which will affect the timing
of when cash will be received and are dependent on the level of mortgage interest rates.
Prepayment risk is the unexpected increase in principal payments, primarily as a result of owner
refinancing. Extension risk relates to the unexpected slowdown in principal payments. In
addition, mortgage-backed securities face default risk should the borrower be unable to pay the
contractual interest or principal on their obligation. The Company monitors its mortgage-backed
securities to mitigate exposure to the cash flow uncertainties associated with these risks.
58
As of June 30, 2011 and December 31, 2010, the Company had exposure to commercial mortgage-backed
securities with amortized costs totaling $1,795.7 million and $1,834.6 million, and estimated fair
values of $1,837.7 million and $1,818.2 million, respectively. Those amounts include exposure to
commercial mortgage-backed securities held directly in the Companys investment portfolios within
fixed maturity securities, as well as securities held by ceding companies that support the
Companys funds withheld at interest investment. The securities are generally highly rated with
weighted average S&P credit ratings of approximately AA and AA- at June 30, 2011 and December
31, 2010, respectively. Approximately 53.8% and 54.5%, based on estimated fair value, were
classified in the AAA category at June 30, 2011 and December 31, 2010, respectively. The Company
recorded $2.3 million and $2.7 million of other-than-temporary impairments in its direct
investments in commercial mortgage-backed securities for the second quarter and first six months
ended June 30, 2011, respectively. The Company recorded $1.5 million and $4.0 million of
other-than-temporary impairments in its direct investments in commercial mortgage-backed securities
for the second quarter and first six months of 2010, respectively. The following tables summarize
the securities by rating and underwriting year at June 30, 2011 and December 31, 2010 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011: |
|
AAA |
|
|
AA |
|
|
A |
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
Underwriting Year |
|
Amortized Cost |
|
|
Fair Value |
|
|
Amortized Cost |
|
|
Fair Value |
|
|
Amortized Cost |
|
|
Fair Value |
|
2005 & Prior |
|
$ |
261,578 |
|
|
$ |
281,404 |
|
|
$ |
48,917 |
|
|
$ |
52,177 |
|
|
$ |
59,298 |
|
|
$ |
62,983 |
|
2006 |
|
|
302,883 |
|
|
|
321,585 |
|
|
|
46,533 |
|
|
|
50,996 |
|
|
|
55,485 |
|
|
|
57,272 |
|
2007 |
|
|
221,105 |
|
|
|
236,901 |
|
|
|
27,042 |
|
|
|
22,430 |
|
|
|
128,898 |
|
|
|
132,294 |
|
2008 |
|
|
29,708 |
|
|
|
33,278 |
|
|
|
37,262 |
|
|
|
40,801 |
|
|
|
7,495 |
|
|
|
8,172 |
|
2009 |
|
|
7,994 |
|
|
|
7,965 |
|
|
|
4,369 |
|
|
|
4,967 |
|
|
|
6,941 |
|
|
|
10,263 |
|
2010 |
|
|
84,071 |
|
|
|
83,867 |
|
|
|
|
|
|
|
|
|
|
|
19,395 |
|
|
|
19,895 |
|
2011 |
|
|
24,771 |
|
|
|
24,274 |
|
|
|
|
|
|
|
|
|
|
|
5,200 |
|
|
|
5,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
932,110 |
|
|
$ |
989,274 |
|
|
$ |
164,123 |
|
|
$ |
171,371 |
|
|
$ |
282,712 |
|
|
$ |
296,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BBB |
|
|
Below Investment Grade |
|
|
Total |
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
Underwriting Year |
|
Amortized Cost |
|
|
Fair Value |
|
|
Amortized Cost |
|
|
Fair Value |
|
|
Amortized Cost |
|
|
Fair Value |
|
2005 & Prior |
|
$ |
31,869 |
|
|
$ |
32,523 |
|
|
$ |
52,189 |
|
|
$ |
42,408 |
|
|
$ |
453,851 |
|
|
$ |
471,495 |
|
2006 |
|
|
27,650 |
|
|
|
26,920 |
|
|
|
55,305 |
|
|
|
49,596 |
|
|
|
487,856 |
|
|
|
506,369 |
|
2007 |
|
|
102,175 |
|
|
|
110,038 |
|
|
|
123,087 |
|
|
|
99,055 |
|
|
|
602,307 |
|
|
|
600,718 |
|
2008 |
|
|
|
|
|
|
|
|
|
|
24,503 |
|
|
|
20,308 |
|
|
|
98,968 |
|
|
|
102,559 |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,304 |
|
|
|
23,195 |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,466 |
|
|
|
103,762 |
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,971 |
|
|
|
29,578 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
161,694 |
|
|
$ |
169,481 |
|
|
$ |
255,084 |
|
|
$ |
211,367 |
|
|
$ |
1,795,723 |
|
|
$ |
1,837,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010: |
|
AAA |
|
|
AA |
|
|
A |
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
Underwriting Year |
|
Amortized Cost |
|
|
Fair Value |
|
|
Amortized Cost |
|
|
Fair Value |
|
|
Amortized Cost |
|
|
Fair Value |
|
2005 & Prior |
|
$ |
261,763 |
|
|
$ |
282,522 |
|
|
$ |
81,795 |
|
|
$ |
85,675 |
|
|
$ |
63,234 |
|
|
$ |
63,491 |
|
2006 |
|
|
314,043 |
|
|
|
328,422 |
|
|
|
46,372 |
|
|
|
50,217 |
|
|
|
48,851 |
|
|
|
49,949 |
|
2007 |
|
|
255,589 |
|
|
|
270,731 |
|
|
|
29,493 |
|
|
|
23,512 |
|
|
|
92,910 |
|
|
|
96,790 |
|
2008 |
|
|
29,547 |
|
|
|
33,115 |
|
|
|
37,291 |
|
|
|
39,657 |
|
|
|
7,495 |
|
|
|
7,886 |
|
2009 |
|
|
8,020 |
|
|
|
7,877 |
|
|
|
3,088 |
|
|
|
3,505 |
|
|
|
6,834 |
|
|
|
9,675 |
|
2010 |
|
|
69,580 |
|
|
|
68,879 |
|
|
|
5,193 |
|
|
|
4,800 |
|
|
|
10,970 |
|
|
|
10,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
938,542 |
|
|
$ |
991,546 |
|
|
$ |
203,232 |
|
|
$ |
207,366 |
|
|
$ |
230,294 |
|
|
$ |
238,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BBB |
|
|
Below Investment Grade |
|
|
Total |
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
Underwriting Year |
|
Amortized Cost |
|
|
Fair Value |
|
|
Amortized Cost |
|
|
Fair Value |
|
|
Amortized Cost |
|
|
Fair Value |
|
2005 & Prior |
|
$ |
67,341 |
|
|
$ |
66,392 |
|
|
$ |
56,882 |
|
|
$ |
44,770 |
|
|
$ |
531,015 |
|
|
$ |
542,850 |
|
2006 |
|
|
32,651 |
|
|
|
31,646 |
|
|
|
56,636 |
|
|
|
39,127 |
|
|
|
498,553 |
|
|
|
499,361 |
|
2007 |
|
|
99,796 |
|
|
|
105,962 |
|
|
|
125,123 |
|
|
|
77,459 |
|
|
|
602,911 |
|
|
|
574,454 |
|
2008 |
|
|
|
|
|
|
|
|
|
|
24,085 |
|
|
|
15,234 |
|
|
|
98,418 |
|
|
|
95,892 |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,942 |
|
|
|
21,057 |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,743 |
|
|
|
84,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
199,788 |
|
|
$ |
204,000 |
|
|
$ |
262,726 |
|
|
$ |
176,590 |
|
|
$ |
1,834,582 |
|
|
$ |
1,818,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-backed securities include credit card and automobile receivables, subprime securities,
home equity loans, manufactured housing bonds and collateralized debt obligations. The Companys
asset-backed securities are diversified by issuer and contain both floating and fixed rate
securities and had a weighted average credit rating of AA- at June 30, 2011 and AA at December
31, 2010. The Company owns floating rate securities that represent approximately 16.3% and 17.6%
of the total fixed maturity securities at June 30, 2011 and December 31, 2010, respectively. These
investments have a higher degree of income variability than the other fixed income holdings in the
portfolio due to the floating rate nature of the interest
59
payments. The Company holds these investments to match specific floating rate liabilities
primarily reflected in the condensed consolidated balance sheets as collateral finance facility.
In addition to the risks associated with floating rate securities, principal risks in holding
asset-backed securities are structural, credit and capital market risks. Structural risks include
the securities priority in the issuers capital structure, the adequacy of and ability to realize
proceeds from collateral, and the potential for prepayments. Credit risks include consumer or
corporate credits such as credit card holders, equipment lessees, and corporate obligors. Capital
market risks include general level of interest rates and the liquidity for these securities in the
marketplace.
As of June 30, 2011 and December 31, 2010, the Company held investments in securities with subprime
mortgage exposure with amortized costs totaling $157.8 million and $155.3 million, and estimated
fair values of $119.7 million and $115.8 million, respectively. Those amounts include exposure to
subprime mortgages through securities held directly in the Companys investment portfolios within
asset-backed securities, as well as securities backing the Companys funds withheld at interest
investment. The weighted average S&P credit ratings on these securities was approximately BB at
June 30, 2011 and BBB- at December 31, 2010. Historically, these securities have been highly
rated; however, in recent years have been downgraded by rating agencies. Additionally, the Company
has largely avoided directly investing in securities originated since the second half of 2005,
which management believes was a period of lessened underwriting quality. While ratings and vintage
year are important factors to consider, the tranche seniority and evaluation of forecasted future
losses within a tranche is critical to the valuation of these types of securities. The Company
recorded $0.2 million and $0.7 million in other-than-temporary impairments in its subprime
portfolio during the second quarter and first six months of 2011, respectively. The Company
recorded $0.5 million in other-than-temporary impairments in its subprime portfolio during the
second quarter and first six months of 2010. The following tables summarize the securities by
rating and underwriting year at June 30, 2011 and December 31, 2010 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011: |
|
AAA |
|
|
AA |
|
|
A |
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
Underwriting Year |
|
Amortized Cost |
|
|
Fair Value |
|
|
Amortized Cost |
|
|
Fair Value |
|
|
Amortized Cost |
|
|
Fair Value |
|
2005 & Prior |
|
$ |
7,286 |
|
|
$ |
6,597 |
|
|
$ |
23,530 |
|
|
$ |
22,165 |
|
|
$ |
9,867 |
|
|
$ |
9,123 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
2,295 |
|
|
|
2,211 |
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 - 2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,286 |
|
|
$ |
6,597 |
|
|
$ |
25,825 |
|
|
$ |
24,376 |
|
|
$ |
9,867 |
|
|
$ |
9,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BBB |
|
|
Below Investment Grade |
|
|
Total |
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
Underwriting Year |
|
Amortized Cost |
|
|
Fair Value |
|
|
Amortized Cost |
|
|
Fair Value |
|
|
Amortized Cost |
|
|
Fair Value |
|
2005 & Prior |
|
$ |
15,769 |
|
|
$ |
13,853 |
|
|
$ |
85,314 |
|
|
$ |
52,531 |
|
|
$ |
141,766 |
|
|
$ |
104,269 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
2,136 |
|
|
|
3,195 |
|
|
|
4,431 |
|
|
|
5,406 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
4,691 |
|
|
|
3,058 |
|
|
|
4,691 |
|
|
|
3,058 |
|
2008 - 2011 |
|
|
6,942 |
|
|
|
6,942 |
|
|
|
|
|
|
|
|
|
|
|
6,942 |
|
|
|
6,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
22,711 |
|
|
$ |
20,795 |
|
|
$ |
92,141 |
|
|
$ |
58,784 |
|
|
$ |
157,830 |
|
|
$ |
119,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010: |
|
AAA |
|
|
AA |
|
|
A |
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
Underwriting Year |
|
Amortized Cost |
|
|
Fair Value |
|
|
Amortized Cost |
|
|
Fair Value |
|
|
Amortized Cost |
|
|
Fair Value |
|
2005 & Prior |
|
$ |
13,343 |
|
|
$ |
12,079 |
|
|
$ |
29,809 |
|
|
$ |
27,746 |
|
|
$ |
10,504 |
|
|
$ |
9,573 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 - 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
13,343 |
|
|
$ |
12,079 |
|
|
$ |
29,809 |
|
|
$ |
27,746 |
|
|
$ |
10,504 |
|
|
$ |
9,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BBB |
|
|
Below Investment Grade |
|
|
Total |
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
Underwriting Year |
|
Amortized Cost |
|
|
Fair Value |
|
|
Amortized Cost |
|
|
Fair Value |
|
|
Amortized Cost |
|
|
Fair Value |
|
2005 & Prior |
|
$ |
22,608 |
|
|
$ |
19,213 |
|
|
$ |
71,582 |
|
|
$ |
41,308 |
|
|
$ |
147,846 |
|
|
$ |
109,919 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
2,152 |
|
|
|
2,508 |
|
|
|
2,152 |
|
|
|
2,508 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
5,279 |
|
|
|
3,329 |
|
|
|
5,279 |
|
|
|
3,329 |
|
2008 - 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
22,608 |
|
|
$ |
19,213 |
|
|
$ |
79,013 |
|
|
$ |
47,145 |
|
|
$ |
155,277 |
|
|
$ |
115,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alternative residential mortgage loans (Alt-A) are a classification of mortgage loans where
the risk profile of the borrower falls between prime and sub-prime. At June 30, 2011 and December
31, 2010, the Companys Alt-A residential mortgage-backed securities had an amortized cost of
$132.3 million and $145.4 million, respectively, with an unrealized loss of $1.8 million and $2.8
million, respectively. As of June 30, 2011 and December 31, 2010, 38.0% and 54.7%, respectively,
of the
60
Alt-A securities were rated AA or better. This amount includes securities directly held by the
Company and securities backing the Companys funds withheld at interest investment. The Company
did not record any other-than-temporary impairments in its Alt-A portfolio in the first six months
of 2011. The Company recorded $1.2 million and $1.7 million of other-than-temporary impairments in
the second quarter and first six months ended June 30, 2010, respectively, in its Alt-A portfolio
due primarily to the increased likelihood that some or all of the remaining scheduled principal and
interest payments on select securities will not be received.
At June 30, 2011 and December 31, 2010, the Companys fixed maturity and funds withheld portfolios
included approximately $605.5 million and $640.7 million, respectively, in estimated fair value, of
securities that are insured by various financial guarantors, or less than five percent of
consolidated investments. The securities are diversified between state and political subdivision
bonds and asset-backed securities with well diversified collateral pools. The Company held
investment-grade securities issued by financial guarantors totaling $4.3 million and $8.3 million
in amortized cost at June 30, 2011 and December 31, 2010, respectively.
The Company does not invest in the common equity securities of Fannie Mae and Freddie Mac, both
government sponsored entities; however, as of June 30, 2011 and December 31, 2010, the Company held
in its general portfolio $56.7 million and $60.1 million, amortized cost in direct exposure in the
form of senior unsecured agency and preferred securities. Additionally, as of June 30, 2011 and
December 31, 2010, the portfolios held by the Companys ceding companies that support its funds
withheld asset contain approximately $486.2 million and $461.4 million, respectively, in amortized
cost of unsecured agency bond holdings and no equity exposure. As of June 30, 2011 and December
31, 2010, indirect exposure in the form of secured, structured mortgaged securities issued by
Fannie Mae and Freddie Mac totaled approximately $762.0 million and $859.2 million, respectively,
in amortized cost across the Companys general and funds withheld portfolios. Including the funds
withheld portfolios, the Companys direct holdings in the form of preferred securities had a total
amortized cost of $0.7 million at June 30, 2011 and December 31, 2010, respectively.
The Company monitors its fixed maturity securities and equity securities to determine impairments
in value and evaluates factors such as financial condition of the issuer, payment performance, the
length of time and the extent to which the market value has been below amortized cost, compliance
with covenants, general market conditions and industry sector, current intent and ability to hold
securities and various other subjective factors. Based on managements judgment, securities
determined to have an other-than-temporary impairment in value are written down to fair value. The
Company recorded $9.0 million and $10.5 million in other-than-temporary impairments in its fixed
maturity and equity securities, including $5.3 million and $6.3 million of other-than-temporary
impairment losses on Subprime / Alt-A / Other structured securities, in the second quarter and
first six months of 2011, respectively, primarily due to a decline in value of structured
securities with exposure to mortgages. The impairment losses on equity securities of $3.7 million
in the second quarter and first six months of 2011 are primarily due to the financial condition of
European financial institutions. The Company recorded $3.6 million and $8.7 million in
other-than-temporary impairments in its fixed maturity and equity securities, including $3.6
million and $8.1 million of other-than-temporary impairment losses on Subprime / Alt-A / Other
structured securities, in the second quarter and first six months of 2010, respectively, primarily
due to a decline in value of structured securities with exposure to mortgages. The table below
summarizes other-than-temporary impairments, net of non-credit adjustments, for the second quarter
and first six months of 2011 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
Asset Class |
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Subprime / Alt-A / Other structured securities |
|
$ |
5,290 |
|
|
$ |
3,628 |
|
|
$ |
6,332 |
|
|
$ |
8,129 |
|
Corporate / Other fixed maturity securities |
|
|
|
|
|
|
|
|
|
|
514 |
|
|
|
585 |
|
Equity securities |
|
|
3,680 |
|
|
|
10 |
|
|
|
3,680 |
|
|
|
32 |
|
Other impairments, including change in mortgage
loan provision |
|
|
3,186 |
|
|
|
1,165 |
|
|
|
2,610 |
|
|
|
2,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
12,156 |
|
|
$ |
4,803 |
|
|
$ |
13,136 |
|
|
$ |
11,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended June 30, 2011 and 2010, the Company sold fixed maturity
securities and equity securities with fair values of $135.0 million and $159.2 million at gross
losses of $6.7 million and $5.7 million, respectively, or at 95.3% and 96.6% of amortized cost,
respectively. During the six months ended June 30, 2011 and 2010, the Company sold fixed maturity
securities and equity securities with fair values of $331.6 million and $399.3 million at gross
losses of $13.6 million and $14.2 million, respectively, or at 96.1% and 96.6% of amortized cost,
respectively. The Company generally does not engage in short-term buying and selling of
securities.
At June 30, 2011 and December 31, 2010, the Company had $233.8 million and $319.1 million,
respectively, of gross unrealized losses related to its fixed maturity and equity securities. The
distribution of the gross unrealized losses related to these securities is shown below:
61
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
Sector: |
|
|
|
|
|
|
|
|
Corporate securities |
|
|
36 |
% |
|
|
36 |
% |
Canadian and Canada provincial governments |
|
|
1 |
|
|
|
1 |
|
Residential mortgage-backed securities |
|
|
6 |
|
|
|
8 |
|
Asset-backed securities |
|
|
22 |
|
|
|
19 |
|
Commercial mortgage-backed securities |
|
|
29 |
|
|
|
31 |
|
State and political subdivisions |
|
|
2 |
|
|
|
3 |
|
Other foreign government securities |
|
|
4 |
|
|
|
2 |
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry: |
|
|
|
|
|
|
|
|
Finance |
|
|
25 |
% |
|
|
25 |
% |
Asset-backed |
|
|
22 |
|
|
|
19 |
|
Industrial |
|
|
8 |
|
|
|
8 |
|
Mortgage-backed |
|
|
35 |
|
|
|
39 |
|
Government |
|
|
7 |
|
|
|
6 |
|
Utility |
|
|
3 |
|
|
|
3 |
|
|
|
|
|
|
|
|
Total |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
The following table presents total gross unrealized losses for fixed maturity and equity
securities as of June 30, 2011 and December 31, 2010, respectively, where the estimated fair value
had declined and remained below amortized cost by the indicated amount (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Number of |
|
|
Unrealized |
|
|
|
|
|
|
Number of |
|
|
Unrealized |
|
|
|
|
|
|
Securities |
|
|
Losses |
|
|
% of Total |
|
|
Securities |
|
|
Losses |
|
|
% of Total |
|
Less than 20% |
|
|
890 |
|
|
$ |
123,789 |
|
|
|
52.9 |
% |
|
|
908 |
|
|
$ |
146,404 |
|
|
|
45.9 |
% |
20% or more for less than six months |
|
|
15 |
|
|
|
7,965 |
|
|
|
3.4 |
|
|
|
14 |
|
|
|
18,114 |
|
|
|
5.7 |
|
20% or more for six months or greater |
|
|
56 |
|
|
|
102,065 |
|
|
|
43.7 |
|
|
|
106 |
|
|
|
154,613 |
|
|
|
48.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
961 |
|
|
$ |
233,819 |
|
|
|
100.0 |
% |
|
|
1,028 |
|
|
$ |
319,131 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011 and December 31, 2010, respectively, 70.7% and 66.1% of these gross
unrealized losses were associated with investment grade securities. The unrealized losses on these
securities decreased as credit spreads continued to tighten across all sectors. While credit
spreads tightened, treasury rates rose slightly to moderate the credit spread gains during the
quarter.
The Companys determination of whether a decline in value is other-than-temporary includes analysis
of the underlying credit and the extent and duration of a decline in value. The Companys credit
analysis of an investment includes determining whether the issuer is current on its contractual
payments, evaluating whether it is probable that the Company will be able to collect all amounts
due according to the contractual terms of the security and analyzing the overall ability of the
Company to recover the amortized cost of the investment. The Company continues to consider
valuation declines as a potential indicator of credit deterioration. The Company believes that due
to fluctuating market conditions and an extended period of economic uncertainty, the extent and
duration of a decline in value have become less indicative of when there has been credit
deterioration with respect to an issuer.
The following tables present the estimated fair values and gross unrealized losses, including
other-than-temporary impairment losses reported in AOCI, for fixed maturity securities and equity
securities that have estimated fair values below amortized cost as of June 30, 2011 and December
31, 2010, respectively (dollars in thousands). These investments are presented by class and grade
of security, as well as the length of time the related market value has remained below amortized
cost.
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or greater |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
June 30, 2011: |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
Investment grade securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
$ |
1,051,097 |
|
|
$ |
22,729 |
|
|
$ |
322,201 |
|
|
$ |
50,525 |
|
|
$ |
1,373,298 |
|
|
$ |
73,254 |
|
Canadian and Canadian provincial
governments |
|
|
132,591 |
|
|
|
2,840 |
|
|
|
|
|
|
|
|
|
|
|
132,591 |
|
|
|
2,840 |
|
Residential mortgage-backed securities |
|
|
122,968 |
|
|
|
1,979 |
|
|
|
56,186 |
|
|
|
10,083 |
|
|
|
179,154 |
|
|
|
12,062 |
|
Asset-backed securities |
|
|
40,152 |
|
|
|
874 |
|
|
|
100,050 |
|
|
|
29,877 |
|
|
|
140,202 |
|
|
|
30,751 |
|
Commercial mortgage-backed securities |
|
|
154,382 |
|
|
|
8,007 |
|
|
|
68,039 |
|
|
|
21,881 |
|
|
|
222,421 |
|
|
|
29,888 |
|
U.S. government and agencies |
|
|
14,288 |
|
|
|
602 |
|
|
|
|
|
|
|
|
|
|
|
14,288 |
|
|
|
602 |
|
State and political subdivisions |
|
|
19,834 |
|
|
|
985 |
|
|
|
32,473 |
|
|
|
4,076 |
|
|
|
52,307 |
|
|
|
5,061 |
|
Other foreign government securities |
|
|
161,417 |
|
|
|
3,945 |
|
|
|
39,267 |
|
|
|
3,778 |
|
|
|
200,684 |
|
|
|
7,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade securities |
|
|
1,696,729 |
|
|
|
41,961 |
|
|
|
618,216 |
|
|
|
120,220 |
|
|
|
2,314,945 |
|
|
|
162,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment grade securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
|
120,371 |
|
|
|
2,918 |
|
|
|
65,818 |
|
|
|
5,063 |
|
|
|
186,189 |
|
|
|
7,981 |
|
Residential mortgage-backed securities |
|
|
5,075 |
|
|
|
931 |
|
|
|
11,169 |
|
|
|
1,326 |
|
|
|
16,244 |
|
|
|
2,257 |
|
Asset-backed securities |
|
|
2,852 |
|
|
|
424 |
|
|
|
26,391 |
|
|
|
20,467 |
|
|
|
29,243 |
|
|
|
20,891 |
|
Commercial mortgage-backed securities |
|
|
22,876 |
|
|
|
1,492 |
|
|
|
80,145 |
|
|
|
35,727 |
|
|
|
103,021 |
|
|
|
37,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-investment grade securities |
|
|
151,174 |
|
|
|
5,765 |
|
|
|
183,523 |
|
|
|
62,583 |
|
|
|
334,697 |
|
|
|
68,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
$ |
1,847,903 |
|
|
$ |
47,726 |
|
|
$ |
801,739 |
|
|
$ |
182,803 |
|
|
$ |
2,649,642 |
|
|
$ |
230,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable preferred stock |
|
$ |
2,291 |
|
|
$ |
4 |
|
|
$ |
21,100 |
|
|
$ |
2,259 |
|
|
$ |
23,391 |
|
|
$ |
2,263 |
|
Other equity securities |
|
|
3,551 |
|
|
|
391 |
|
|
|
5,887 |
|
|
|
636 |
|
|
|
9,438 |
|
|
|
1,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
$ |
5,842 |
|
|
$ |
395 |
|
|
$ |
26,987 |
|
|
$ |
2,895 |
|
|
$ |
32,829 |
|
|
$ |
3,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of securities in an
unrealized loss position |
|
|
550 |
|
|
|
|
|
|
|
411 |
|
|
|
|
|
|
|
961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or greater |
|
|
Total |
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
December 31, 2010: |
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
Investment grade securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
$ |
1,170,016 |
|
|
$ |
34,097 |
|
|
$ |
368,128 |
|
|
$ |
61,945 |
|
|
$ |
1,538,144 |
|
|
$ |
96,042 |
|
Canadian and Canadian provincial
governments |
|
|
118,585 |
|
|
|
3,886 |
|
|
|
|
|
|
|
|
|
|
|
118,585 |
|
|
|
3,886 |
|
Residential mortgage-backed securities |
|
|
195,406 |
|
|
|
4,986 |
|
|
|
105,601 |
|
|
|
13,607 |
|
|
|
301,007 |
|
|
|
18,593 |
|
Asset-backed securities |
|
|
23,065 |
|
|
|
570 |
|
|
|
131,172 |
|
|
|
38,451 |
|
|
|
154,237 |
|
|
|
39,021 |
|
Commercial mortgage-backed securities |
|
|
132,526 |
|
|
|
4,143 |
|
|
|
109,158 |
|
|
|
29,059 |
|
|
|
241,684 |
|
|
|
33,202 |
|
U.S. government and agencies |
|
|
11,839 |
|
|
|
708 |
|
|
|
|
|
|
|
|
|
|
|
11,839 |
|
|
|
708 |
|
State and political subdivisions |
|
|
68,229 |
|
|
|
2,890 |
|
|
|
31,426 |
|
|
|
5,227 |
|
|
|
99,655 |
|
|
|
8,117 |
|
Other foreign government securities |
|
|
322,363 |
|
|
|
3,142 |
|
|
|
43,796 |
|
|
|
4,504 |
|
|
|
366,159 |
|
|
|
7,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment grade securities |
|
|
2,042,029 |
|
|
|
54,422 |
|
|
|
789,281 |
|
|
|
152,793 |
|
|
|
2,831,310 |
|
|
|
207,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-investment grade securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate securities |
|
|
58,420 |
|
|
|
1,832 |
|
|
|
91,205 |
|
|
|
9,942 |
|
|
|
149,625 |
|
|
|
11,774 |
|
Residential mortgage-backed securities |
|
|
1,162 |
|
|
|
605 |
|
|
|
38,206 |
|
|
|
7,382 |
|
|
|
39,368 |
|
|
|
7,987 |
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
23,356 |
|
|
|
22,523 |
|
|
|
23,356 |
|
|
|
22,523 |
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
89,170 |
|
|
|
64,063 |
|
|
|
89,170 |
|
|
|
64,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-investment grade securities |
|
|
59,582 |
|
|
|
2,437 |
|
|
|
241,937 |
|
|
|
103,910 |
|
|
|
301,519 |
|
|
|
106,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturity securities |
|
$ |
2,101,611 |
|
|
$ |
56,859 |
|
|
$ |
1,031,218 |
|
|
$ |
256,703 |
|
|
$ |
3,132,829 |
|
|
$ |
313,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable preferred stock |
|
$ |
15,987 |
|
|
$ |
834 |
|
|
$ |
28,549 |
|
|
$ |
4,464 |
|
|
$ |
44,536 |
|
|
$ |
5,298 |
|
Other equity securities |
|
|
6,877 |
|
|
|
271 |
|
|
|
318 |
|
|
|
|
|
|
|
7,195 |
|
|
|
271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities |
|
$ |
22,864 |
|
|
$ |
1,105 |
|
|
$ |
28,867 |
|
|
$ |
4,464 |
|
|
$ |
51,731 |
|
|
$ |
5,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of securities in an
unrealized loss position |
|
|
520 |
|
|
|
|
|
|
|
508 |
|
|
|
|
|
|
|
1,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2011, the Company does not intend to sell these fixed maturity securities and
does not believe it is more likely than not that it will be required to sell these fixed maturity
securities before the recovery of the fair value up to the current amortized cost of the
investment, which may be maturity. However, unforeseen facts and circumstances may cause the
Company to sell fixed maturity securities in the ordinary course of managing its portfolio to meet
diversification, credit quality, asset-liability management and liquidity guidelines.
63
As of June 30, 2011, the Company has the ability and intent to hold the equity securities until the
recovery of the fair value up to the current cost of the investment. However, unforeseen facts and
circumstances may cause the Company to sell equity securities in the ordinary course of managing
its portfolio to meet diversification, credit quality and liquidity guidelines.
As of June 30, 2011 and December 31, 2010, respectively, the Company classified approximately 9.6%
and 10.1% of its fixed maturity securities in the Level 3 category (refer to Note 6 Fair Value
of Financial Instruments in the Notes to Condensed Consolidated Financial Statements for
additional information). These securities primarily consist of private placement corporate
securities with an inactive trading market, commercial mortgage-backed securities, residential
mortgage-backed securities and asset-backed securities with subprime exposure in the Level 3
category due to the current market uncertainty associated with these securities and the Companys
utilization of information from third parties.
Mortgage Loans on Real Estate
Mortgage loans represented approximately 3.7% and 3.8% of the Companys cash and invested assets as
of June 30, 2011 and December 31, 2010, respectively. The Companys mortgage loan portfolio
consists principally of investments in U.S.-based commercial offices, light industrial properties
and retail locations. The mortgage loan portfolio is diversified by geographic region and property
type.
Valuation allowances on mortgage loans are established based upon losses expected by management to
be realized in connection with future dispositions or settlement of mortgage loans, including
foreclosures. The valuation allowances are established after management considers, among other
things, the value of underlying collateral and payment capabilities of debtors. Any subsequent
adjustments to the valuation allowances will be treated as investment gains or losses. Information
regarding the Companys credit quality indicators for the recorded investment in mortgage loans
gross of valuation allowances as of June 30, 2011 and 2010 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
Balance, beginning of period |
|
$ |
5,664 |
|
|
$ |
7,014 |
|
|
$ |
6,239 |
|
|
$ |
5,784 |
|
Charge-offs |
|
|
(1,157 |
) |
|
|
|
|
|
|
(1,157 |
) |
|
|
|
|
Recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision |
|
|
3,185 |
|
|
|
1,165 |
|
|
|
2,610 |
|
|
|
2,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
7,692 |
|
|
$ |
8,179 |
|
|
$ |
7,692 |
|
|
$ |
8,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information regarding the portion of the Companys mortgage loans that were impaired as of
June 30, 2011 and December 31, 2010 is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Impaired loans with valuation allowances |
|
$ |
29,080 |
|
|
$ |
18,745 |
|
Impaired loans without valuation allowances |
|
|
6,839 |
|
|
|
16,901 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
35,919 |
|
|
|
35,646 |
|
Less: Valuation allowances on impaired loans |
|
|
4,594 |
|
|
|
6,239 |
|
|
|
|
|
|
|
|
Impaired loans |
|
$ |
31,325 |
|
|
$ |
29,407 |
|
|
|
|
|
|
|
|
The Companys average investment per impaired loan with valuation allowances was $3.6 million
and $6.7 million as of June 30, 2011 and 2010, respectively. The Companys average investment per
impaired loan without valuation allowances was $2.3 million and $3.1 million as of June 30, 2011
and 2010, respectively. Interest income on impaired loans with valuation allowances was $0.2
million and $0.5 million for the three and six months ended June 30, 2011, respectively. Interest
income on impaired loans with valuation allowances was not material for the three and six months
ended June 30, 2010. Interest income on impaired loans without valuation allowances was $0.1
million for the three and six months ended June 30, 2011, respectively. Interest income on
impaired loans without valuation allowances was $0.1 million and $0.3 million for the three and six
months ended June 30, 2010, respectively. The Company did not acquire any impaired mortgage loans
during the six months ended June 30, 2011. The Company had $13.0 million and $15.6 million of
mortgage loans, gross of valuation allowances, that were on nonaccrual status at June 30, 2011 and
December 31, 2010, respectively.
Policy Loans
Policy loans comprised approximately 5.0% and 5.3% of the Companys cash and invested assets as of
June 30, 2011 and December 31, 2010, respectively, substantially all of which are associated with
one client. These policy loans present no credit risk because the amount of the loan cannot exceed
the obligation due the ceding company upon the death of the insured or surrender of the underlying
policy. The provisions of the treaties in force and the underlying policies determine the policy
loan interest rates. Because policy loans represent premature distributions of policy liabilities,
they have the effect of
64
reducing future disintermediation risk. In addition, the Company earns a spread between the
interest rate earned on policy loans and the interest rate credited to corresponding liabilities.
Funds Withheld at Interest
Funds withheld at interest comprised approximately 23.1% and 23.4% of the Companys cash and
invested assets as of June 30, 2011 and December 31, 2010, respectively. For agreements written on
a modified coinsurance basis and certain agreements written on a coinsurance basis, assets equal to
the net statutory reserves are withheld and legally owned and managed by the ceding company, and
are reflected as funds withheld at interest on the Companys condensed consolidated balance sheet.
In the event of a ceding companys insolvency, the Company would need to assert a claim on the
assets supporting its reserve liabilities. However, the risk of loss to the Company is mitigated
by its ability to offset amounts it owes the ceding company for claims or allowances with amounts
owed to the Company from the ceding company. Interest accrues to these assets at rates defined by
the treaty terms. Additionally, under certain treaties the Company is subject to the investment
performance on the withheld assets, although it does not directly control them. These assets are
primarily fixed maturity investment securities and pose risks similar to the fixed maturity
securities the Company owns. The underlying portfolios also include options related to
equity-indexed annuity products. The market value changes associated with these investments have
caused some volatility in reported investment income. This is largely offset by a corresponding
change in interest credited, with minimal impact on income before taxes. To mitigate risk, the
Company helps set the investment guidelines followed by the ceding company and monitors compliance.
Ceding companies with funds withheld at interest had an average rating of A at June 30, 2011 and
December 31, 2010. Certain ceding companies maintain segregated portfolios for the benefit of the
Company.
Other Invested Assets
Other invested assets represented approximately 3.2% and 3.1% of the Companys cash and invested
assets as of June 30, 2011 and December 31, 2010, respectively. Other invested assets include
equity securities, non-redeemable preferred stocks, limited partnership interests, structured loans
and derivative contracts. Carrying values of these assets as of June 30, 2011 and December 31,
2010 are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2011 |
|
|
December 31, 2010 |
|
Equity securities |
|
$ |
34,708 |
|
|
$ |
40,661 |
|
Non-redeemable preferred stock |
|
|
107,518 |
|
|
|
99,550 |
|
Limited partnerships |
|
|
232,843 |
|
|
|
214,105 |
|
Structured loans |
|
|
274,180 |
|
|
|
229,583 |
|
Derivatives |
|
|
58,502 |
|
|
|
34,929 |
|
Other |
|
|
91,590 |
|
|
|
88,575 |
|
|
|
|
|
|
|
|
Total other invested assets |
|
$ |
799,341 |
|
|
$ |
707,403 |
|
|
|
|
|
|
|
|
The Company recorded $3.7 million of other-than-temporary impairments on equity securities in
the second quarter and first six months of 2011. The Company did not record any
other-than-temporary impairments on other invested assets in the first six months of 2010. The
Company may be exposed to credit-related losses in the event of non-performance by counterparties
to derivative financial instruments. Generally, the credit exposure of the Companys derivative
contracts is limited to the fair value at the reporting date plus or minus any collateral posted or
held by the Company. The Company had credit exposure related to its derivative contracts,
excluding futures, of $1.0 million and $6.3 million at June 30, 2011 and December 31, 2010,
respectively.
Contractual Obligations
From December 31, 2010 to June 30, 2011, the Companys obligation related to its Fixed Rate Trust
Preferred Securities, including interest, was reduced by $745.7 million due to the remarketing and
subsequent maturity of the securities in 2011. See Note 14 Financing Activities and Stock
Transactions in the Notes to Condensed Consolidated Financial Statements for additional
information on the Fixed Rate Trust Preferred Securities. The Companys obligation for long-term
debt, including interest, increased by $591.2 million since December 31, 2010 related to the May
2011 issuance of senior notes as previously discussed. There were no other material changes in the
Companys contractual obligations from those reported in the 2010 Annual Report.
Enterprise Risk Management
RGA maintains an Enterprise Risk Management (ERM) program, which is responsible for consistently
identifying, assessing, mitigating, monitoring, and reporting material risks facing the enterprise.
This includes development and implementation of mitigation strategies to reduce exposures to these
risks to acceptable levels. Risk management is an integral part of the Companys culture and is
interwoven in day to day activities. It includes guidelines, risk appetites, risk
65
limits, and other controls in areas such as pricing, underwriting, currency, administration,
investments, asset liability management, counterparty exposure, financing, regulatory change,
business continuity planning, human resources, liquidity, sovereign risks and information
technology development.
The Chief Risk Officer (CRO), aided by Business Unit Chief Risk Officers and Risk Management
Officers, is responsible for ensuring, on an ongoing basis, that objectives of the ERM framework
are met; this includes ensuring proper risk controls are in place, that risks are effectively
identified and managed, and that key risks to which the firm is exposed are disclosed to
appropriate stakeholders. For each Business Unit and key risk, a Risk Management Officer is
assigned. In addition to this network of Risk Management Officers, the Company also has risk
focused committees such as the Business Continuity Management Steering Committee, Consolidated
Investment Committee, and the Asset and Liability Management Committee. These committees are
comprised of various risk experts and have overlapping membership, enabling consistent and holistic
management of risks. These committees report directly or indirectly to the Risk Management
Steering Committee. The Risk Management Steering Committee, which includes senior management
executives, including the Chief Executive Officer, the Chief Financial Officer and the CRO, is the
primary source of risk management of the Company.
The Risk Management Steering Committee, through the CRO, reports regularly to the Finance,
Investments, and Risk Management (FIRM) Committee, a committee of the Board of Directors
responsible for overseeing the management of RGAs ERM programs and policies. The Board has other
committees, such as the Audit Committee, whose responsibilities include aspects of risk management.
The CRO reports to the CEO and has a direct access to the Board of the company through the FIRM
Committee.
Specific risk assessments and descriptions can be found below and in Item 1A Risk Factors the
2010 Annual Report.
Mortality Risk Management
In the event that mortality or morbidity experience develops in excess of expectations, some
reinsurance treaties allow for increases to future premium rates. Other treaties include
experience refund provisions, which may also help reduce the Companys mortality risk. In the
normal course of business, the Company seeks to limit its exposure to loss on any single insured
and to recover a portion of claims paid by ceding reinsurance to other insurance enterprises or
retrocessionaires under excess coverage and coinsurance contracts. In individual life markets, the
Company retains a maximum of $8.0 million of coverage per individual life. In certain limited
situations, due to the acquisition of in force blocks of business, the Company has retained more
than $8.0 million per individual life. In total, the Company has identified 14 such cases of
over-retained lives, for a total amount of $36.6 million over the Companys normal retention limit.
These amounts include six cases with $20.5 million of exposure related to second to die policies
with coverages split between multiple insureds. The largest amount in excess of the Companys
retention on any one life is $11.4 million. The Company enters into agreements with other
reinsurers to mitigate the residual risk related to the over-retained policies. Additionally, due
to some lower face amount reinsurance coverages provided by the Company in addition to individual
life, such as group life, disability and health, under certain circumstances, the Company could
potentially incur claims totaling more than $8.0 million per individual life.
The Company maintains a catastrophe insurance program (Program) that renews on September 7th of
each year. The current Program began September 7, 2010, and covers events involving 10 or more
insured deaths from a single occurrence. The Company retains the first $25 million in claims, the
Program covers the next $75 million in claims, and the Company retains all claims in excess of $100
million. The Program covers reinsurance programs worldwide and includes losses due to acts of
terrorism, including terrorism losses due to nuclear, chemical and/or biological events. The
Program also includes losses from earthquakes occurring in California, but excludes, among other
things, losses from pandemics. The Program is insured by 16 insurance companies and Lloyds
Syndicates, with only one single entity providing more than $10 million of coverage.
Insurance Counterparty Risk
In the normal course of business, the Company seeks to limit its exposure to reinsurance contracts
by ceding a portion of the reinsurance to other insurance companies or reinsurers. Should a
counterparty not be able to fulfill its obligation to the Company under a reinsurance agreement,
the impact could be material to the Companys financial condition and results of operations. In
addition, certain reinsurance structures can lead to counterparty risk to the Companys clients.
Generally, RGAs insurance subsidiaries retrocede amounts in excess of their retention to RGA
Reinsurance, Parkway Reinsurance Company, RGA Reinsurance Company (Barbados) Ltd., RGA Americas
Reinsurance Company, Ltd., RGA Worldwide Reinsurance Company, Ltd. or RGA Atlantic Reinsurance
Company, Ltd. External retrocessions are arranged through the Companys retrocession pools for
amounts in excess of its retention. As of June 30, 2011, all retrocession pool members in this
excess retention pool reviewed by the A.M. Best Company were rated A-, the fourth highest rating
out of fifteen possible ratings, or better. For a majority of the retrocessionaires that were not
rated, letters of credit or trust assets
66
have been given as additional security in favor of RGA Reinsurance. In addition, the Company
performs annual financial and in force reviews of its retrocessionaires to evaluate financial
stability and performance.
The Company has never experienced a material default in connection with retrocession arrangements,
nor has it experienced any material difficulty in collecting claims recoverable from
retrocessionaires; however, no assurance can be given as to the future performance of such
retrocessionaires or as to the recoverability of any such claims.
The Company relies upon its clients to provide timely, accurate information. The Company may
experience volatility in its earnings as a result of erroneous or untimely reporting from its
clients. The Company works closely with its clients and monitors this risk in an effort to
minimize its exposure.
Market Risk
Market risk is the risk of loss that may occur when fluctuation in interest and currency exchange
rates and equity and commodity prices change the value of a financial instrument. Both derivative
and non-derivative financial instruments have market risk so the Companys risk management extends
beyond derivatives to encompass all financial instruments held that are sensitive to market risk.
The Company is primarily exposed to interest rate risk and foreign currency risk.
Interest Rate Risk:
This risk arises from many of the Companys primary activities, as the Company invests substantial
funds in interest-sensitive assets and also has certain interest-sensitive contract liabilities.
The Company manages interest rate risk and credit risk to maximize the return on the Companys
capital effectively and to preserve the value created by its business operations. As such, certain
management monitoring processes are designed to minimize the effect of sudden and/or sustained
changes in interest rates on fair value, cash flows, and net interest income.
Foreign Currency Risk:
The Company is subject to foreign currency translation, transaction, and net income exposure. The
Company manages its exposure to currency principally by matching invested assets with the
underlying reinsurance liabilities to the extent possible. The Company has in place net investment
hedges for a portion of its investments in its Canada and Australia operations. Translation
differences resulting from translating foreign subsidiary balances to U.S. dollars are reflected in
stockholders equity on the condensed consolidated balance sheets. The Company generally does not
hedge the foreign currency exposure of its subsidiaries transacting business in currencies other
than their functional currency (transaction exposure). The majority of the Companys foreign
currency transactions are denominated in Canadian dollars, British pounds, Australian dollars,
Japanese yen, Korean won, Euros and the South African rand.
Market Risk Associated with Annuities with Guaranteed Minimum Benefits:
The Company reinsures variable annuities including those with guaranteed minimum death benefits
(GMDB), guaranteed minimum income benefits (GMIB), guaranteed minimum accumulation benefits
(GMAB) and guaranteed minimum withdrawal benefits (GMWB). Strong equity markets, increases in
interest rates and decreases in volatility will generally decrease the fair value of the
liabilities underlying the benefits. Conversely, a decrease in the equity markets along with a
decrease in interest rates and an increase in volatility will generally result in an increase in
the fair value of the liabilities underlying the benefits, which has the effect of increasing
reserves and lowering earnings. The Company maintains a customized dynamic hedging program that is
designed to mitigate the risks associated with income volatility around the change in reserves on
guaranteed benefits. However, the hedge positions may not fully offset the changes in the carrying
value of the guarantees due to, among other things, time lags, high levels of volatility in the
equity and derivative markets, extreme swings in interest rates, unexpected contract holder
behavior, and divergence between the performance of the underlying funds and hedging indices.
These factors, individually or collectively, may have a material adverse effect on the Companys
net income, financial condition or liquidity. The table below provides a summary of variable
annuity account values and the fair value of the guaranteed benefits as of June 30, 2011 and
December 31, 2010.
|
|
|
|
|
|
|
|
|
(dollars in millions) |
|
June 30, 2011 |
|
|
December 31, 2010 |
|
No guarantee minimum benefits |
|
$ |
1,114.1 |
|
|
$ |
1,156.3 |
|
GMDB only |
|
|
88.7 |
|
|
|
89.9 |
|
GMIB only |
|
|
6.3 |
|
|
|
6.3 |
|
GMAB only |
|
|
62.7 |
|
|
|
64.2 |
|
GMWB only |
|
|
1,751.1 |
|
|
|
1,735.3 |
|
GMDB / WB |
|
|
492.8 |
|
|
|
491.6 |
|
Other |
|
|
34.8 |
|
|
|
35.7 |
|
|
|
|
|
|
|
|
Total variable annuity account values |
|
$ |
3,550.5 |
|
|
$ |
3,579.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
of liabilities associated with living benefit riders |
|
$ |
45.7 |
|
|
$ |
52.5 |
|
67
There has been no significant change in the Companys quantitative or qualitative aspects of market risk
during the quarter ended June 30, 2011 from that disclosed in the 2010 Annual Report.
New Accounting Standards
Changes to the general accounting principles are established by the Financial Accounting Standards
Board (FASB) in the form of accounting standards updates to the FASB Accounting Standards
Codification. Accounting standards updates not listed below were assessed and determined to be
either not applicable or are expected to have minimal impact on the Companys consolidated
financial statements.
Consolidation and Business Combinations
In December 2010, the FASB amended the general accounting principles for Business Combinations as
it relates to the disclosure of supplementary pro forma information for business combinations. The
amendment requires the disclosure of pro forma information for business combinations that occurred
in the current reporting period. The disclosures include pro forma revenue and earnings of the
combined entity for the current reporting period as though the acquisition date for all business
combinations that occurred during the year had been as of the beginning of the annual reporting
period. This amendment also explains that if comparative financial statements are presented, the
pro forma revenue and earnings of the combined entity for the comparable prior reporting period
should be reported as though the acquisition date for all business combinations that occurred
during the current year had been as of the beginning of the comparable prior annual reporting
period. The amendment is effective for interim and annual reporting periods beginning on or after
December 15, 2010. The adoption of this amendment did not have an impact on the Companys
condensed consolidated financial statements.
In February 2010, the FASB amended the general accounting principles for Consolidation as it
relates to the assessment of a variable interest entity for potential consolidation. The amendment
defers the effective date of the Consolidation amendment made in June 2009 for certain variable
interest entities. This update also clarifies how a related partys interest should be considered
when evaluating variable interests. The amendment is effective for interim and annual reporting
periods beginning after January 31, 2010. The adoption of this amendment did not have an impact on
the Companys condensed consolidated financial statements.
In January 2010, the FASB amended the general accounting principles for Consolidation as it relates
to decreases in ownership of a subsidiary. This amendment clarifies the scope of the decrease in
ownership provisions. This amendment also requires additional disclosures about the deconsolidation
of a subsidiary or derecognition of a group of assets. The amendment is effective for interim and
annual reporting periods beginning after December 15, 2009. The adoption of this amendment did not
have an impact on the Companys condensed consolidated financial statements.
In June 2009, the FASB amended the general accounting principles for Consolidation as it relates to
the assessment of a variable interest entity for potential consolidation. This amendment also
requires additional disclosures to provide transparent information regarding the involvement in a
variable interest entity. The amendment is effective for interim and annual reporting periods
beginning after November 15, 2009. The adoption of this amendment did not have a material impact on
the Companys condensed consolidated financial statements.
Investments
In April 2011, the FASB amended the general accounting principles for Receivables as it relates to
a creditors determination of whether a restructuring is a troubled debt restructuring. This
amendment clarifies the guidance related to the creditors evaluation of whether it has granted a
concession and whether the debtor is experiencing financial difficulties. It also clarifies that
the creditor is precluded from using the effective interest rate test when evaluating whether a
restructuring constitutes a troubled debt restructuring. The amendment is effective for interim and
annual reporting periods beginning on or after June 15, 2011, and is to be applied retrospectively
to restructurings occurring on or after the beginning of the annual period of adoption. The
adoption of this amendment is not expected to have a material impact on the Companys condensed
consolidated financial statements.
In July 2010, the FASB amended the general accounting principles for Receivables as it relates to
the disclosures about the credit quality of financing receivables and the allowance for credit
losses. This amendment requires additional disclosures that provide a greater level of
disaggregated information about the credit quality of financing receivables and the allowance for
credit losses. It also requires the disclosure of credit quality indicators, past due information,
and modifications of financing receivables. The amendment is effective for interim and annual
reporting periods ending on or after December 15, 2010, except for disclosures about activity that
occurs during the reporting period. Those disclosures are effective for interim and annual
reporting periods beginning after December 15, 2010. The Company adopted this amendment and the
required disclosures are provided in Note 4 Investments and in Note 12 Retrocession
Arrangements and Reinsurance Ceded Receivables in the Notes to Condensed Consolidated Financial
Statements.
68
Transfers and Servicing
In April 2011, the FASB amended the general accounting principles for Transfers and Servicing as it
relates to the reconsideration of effective control for repurchase agreements. This amendment
removes from the assessment of effective control the criterion requiring the transferor to have the
ability to repurchase or redeem the financial assets and also removes the collateral maintenance
implementation guidance related to that criterion. The amendment is effective for interim and
annual periods beginning after December 15, 2011. The Company is currently evaluating the impact of
this amendment on its condensed consolidated financial statements.
In June 2009, the FASB amended the general accounting principles for Transfers and Servicing as it
relates to the transfers of financial assets. This amendment also requires additional disclosures
to address concerns regarding the transparency of transfers of financial assets. The amendment is
effective for interim and annual reporting periods beginning after November 15, 2009. The adoption
of this amendment did not have a material impact on the Companys condensed consolidated financial
statements.
Derivatives and Hedging
In March 2010, the FASB amended the general accounting principles for Derivatives and Hedging as it
relates to embedded derivatives. This amendment clarifies the scope exception for embedded credit
derivative features related to the transfer of credit risk in the form of subordination of a
financial instrument to another. The amendment is effective for financial statements issued for
interim and annual reporting periods beginning after June 15, 2010. The adoption of this amendment
did not have a material impact on the Companys condensed consolidated financial statements.
Fair Value Measurements and Disclosures
In May 2011, the FASB amended the general accounting principles for Fair Value Measurements and
Disclosures as it relates to the measurement and disclosure requirements about fair value
measurements. This amendment clarifies the FASBs intent about the application of existing fair
value measurement requirements. It also changes particular principles and requirements for
measuring fair value and for disclosing information about fair value measurements. The amendment is
effective for interim and annual periods beginning after December 15, 2011. The Company is
currently evaluating the impact of this amendment on its condensed consolidated financial
statements.
In January 2010, the FASB amended the general accounting principles for Fair Value Measurements and
Disclosures as it relates to the disclosures about fair value measurements. This amendment requires
new disclosures about the transfers in and out of Level 1 and 2 measurements and also enhances
disclosures about the activity within the Level 3 measurements. It also clarifies the required
level of disaggregation and the disclosures regarding valuation techniques and inputs to fair value
measurements. The amendment is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the enhanced Level 3 disclosures. Those disclosures are effective for
interim and annual reporting periods beginning after December 15, 2010. The Company adopted this
amendment and the required disclosures are provided in Note 6 Fair Value of Financial
Instruments in the Notes to Condensed Consolidated Financial Statements.
Deferred Policy Acquisition Costs
In October 2010, the FASB amended the general accounting principles for Financial Services
Insurance as it relates to accounting for costs associated with acquiring or renewing insurance
contracts. This amendment clarifies that only those costs that result directly from and are
essential to the contract transaction and that would not have been incurred had the contract
transaction not occurred can be capitalized. It also defines acquisitions costs as costs that are
related directly to the successful acquisitions of new or renewal insurance contracts. The
amendment is effective for interim and annual reporting periods beginning after December 15, 2011.
The Company is currently evaluating the impact of this amendment on its condensed consolidated
financial statements.
Compensation
In April 2010, the FASB amended the general accounting principles for Compensation as it relates to
stock compensation. This amendment clarifies that an employee share-based payment award with an
exercise price denominated in the currency of a market in which a substantial portion of the
entitys equity securities trades should not be considered to contain a condition that is not a
market, performance, or service condition. Therefore, such an award should not be classified as a
liability if it otherwise qualifies as equity. The amendment is effective for interim and annual
reporting periods beginning after December 15, 2010. The adoption of this amendment did not have
an impact on the Companys condensed consolidated financial statements.
69
Debt
In October 2009, the FASB amended the general accounting principles for Debt as it relates to the
accounting for own-share lending arrangements entered into in contemplation of a convertible debt
issuance or other financing. This amendment provides accounting and disclosure guidance for
own-share lending arrangements issued in contemplation of convertible debt issuance. The amendment
is effective for interim and annual reporting periods beginning after December 15, 2009. The
adoption of this amendment did not have an impact on the Companys condensed consolidated financial
statements.
Equity
In January 2010, the FASB amended the general accounting principles for Equity as it relates to
distributions to shareholders with components of stock and cash. This amendment clarifies that the
stock portion of a distribution to shareholders, which allows them to elect to receive cash or
stock with a limitation on the total amount of cash that shareholders can receive, is considered a
share issuance that is reflected in earnings per share prospectively and is not a stock dividend.
The amendment is effective for interim and annual reporting periods beginning after December 15,
2009. The adoption of this amendment did not have an impact on the Companys condensed consolidated
financial statements.
Comprehensive Income
In June 2011, the FASB amended the general accounting principles for Comprehensive Income as it
relates to the presentation of comprehensive income. This amendment requires entities to present
the total of comprehensive income, the components of net income, and the components of other
comprehensive income in either a continuous statement of comprehensive income or in two separate
but consecutive statements. The amendment does not change the items that must be reported in other
comprehensive income. The amendment is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2011. The Company is currently evaluating the impact of this
amendment on its condensed consolidated financial statements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 2 Managements Discussion and Analysis of Financial Condition and Results of
Operations Market Risk which is included herein.
ITEM 4. Controls and Procedures
The Chief Executive Officer and the Chief Financial Officer have evaluated the effectiveness of the
design and operation of the Companys disclosure controls and procedures as defined in Exchange Act
Rule 13a-15(e) as of the end of the period covered by this report. Based on that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that these disclosure controls
and procedures were effective.
There was no change in the Companys internal control over financial reporting as defined in
Exchange Act Rule 13a-15(f) during the quarter ended June 30, 2011, that has materially affected,
or is reasonably likely to materially affect, the Companys internal control over financial
reporting.
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company is subject to litigation in the normal course of its business. The Company currently
has no material litigation. A legal reserve is established when the Company is notified of an
arbitration demand or litigation or is notified that an arbitration demand or litigation is
imminent, it is probable that the Company will incur a loss as a result and the amount of the
probable loss is reasonably capable of being estimated.
ITEM 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in the Companys
2010 Annual Report.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Under a board of directors approved plan, the Company may purchase at its discretion up to $50
million of its common stock on the open market. The Company has approximately $43.4 million
remaining under the approved program with no shares
70
purchased since 2002. The Company generally uses treasury shares to support the future exercise of
options granted under its stock option plans.
ITEM 6. Exhibits
See index to exhibits.
71
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
Reinsurance Group of America, Incorporated
|
|
August 4, 2011 |
By: |
/s/ A. Greig Woodring |
|
|
|
A. Greig Woodring |
|
|
|
President & Chief Executive Officer
(Principal Executive Officer) |
|
|
|
|
|
August 4, 2011 |
By: |
/s/ Jack B. Lay |
|
|
|
Jack B. Lay |
|
|
|
Senior Executive Vice President &
Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
72
INDEX TO EXHIBITS
|
|
|
Exhibit |
|
|
Number |
|
Description |
3.1
|
|
Amended and Restated Articles of Incorporation, incorporated by reference to Exhibit 3.1 of
Current Report on Form 8-K filed November 25, 2008. |
|
|
|
3.2
|
|
Amended and Restated Bylaws, incorporated by reference to Exhibit 3.2 of Current Report on
Form 8-K filed November 25, 2008. |
|
|
|
4.1
|
|
Fourth Supplemental Senior Indenture, dated as of May 27, 2011, between the Company and The
Bank of New York Mellon Trust Company, N.A., as successor trustee to The Bank of New York,
incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K filed May 31, 2011. |
|
|
|
4.2
|
|
Form of 5.000% Senior Note due June 1, 2021, incorporated by reference to Exhibit 4.3 to
Current Report on Form 8-K filed May 31, 2011. |
|
|
|
10.1
|
|
RGA Flexible Stock Plan as amended and restated effective July 1, 1998, and as further
amended by Amendment on March 16, 2000, Second Amendment on May 28, 2003, Third Amendment on
May 26, 2004, Fourth Amendment on May 23, 2007, Fifth Amendment on May 21, 2008, Sixth
Amendment on May 8, 2011, and Seventh Amendment on May 18, 2011, incorporated by reference to
Exhibit 4.2 to Current Report on Form 8-K filed May 18, 2011. |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
101
|
|
Attached as Exhibit 101 to this report are the following documents formatted in XBRL
(Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at
December 31, 2010 and June 30, 2011, (ii) Condensed Consolidated Statements of Income for the
three and six months ended June 30, 2010 and 2011, (iii) Condensed Consolidated Statements of
Cash Flows for the six months ended June 30, 2010 and 2011, and (iv) Notes to Condensed
Consolidated Financial Statements for the six months ended June 30, 2011. In accordance with
Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to Quarterly Report
on Form 10-Q shall not be deemed to be filed for purposes of Section 18 of the Exchange Act,
and shall not be deemed filed or part of any registration statement or prospectus for
purposes of Section 11 or 12 under the Securities Act or the Exchange Act, or otherwise
subject to liability under those sections, except as shall be expressly set forth by specific
reference in such filing. |
|
|
|
101.INS
|
|
XBRL Instance Document |
|
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document |
73