STATEMENT OF ADDITIONAL INFORMATION
TRANSAMERICA VARIABLE ANNUITY O-SHARE
Issued through
Transamerica Life Insurance Company
Separate Account B (EST. 1/19/1990)
4333 Edgewood Road NE
Cedar Rapids, Iowa 52499-0001
(800)525-6205
www.transamericaannuities.com
Transamerica Financial Life Insurance Company
Separate Account BNY (EST. 9/27/1994)
4333 Edgewood Road NE
Cedar Rapids, Iowa 52499-0001
(800)525-6205
www.transamericaannuities.com
This Statement of Additional Information expands upon subjects discussed in the current prospectus for the
Transamerica Variable Annuity O-Share variable annuity offered by Transamerica Life Insurance Company and
Transamerica Financial Life Insurance Company (“us,” “we”, “our” or “Company”). You may obtain a copy of the current
prospectus, dated October 3, 2013, by calling (800) 525-6205, or write us at the addresses listed above. The prospectus
sets forth information that a prospective investor should know before investing in a policy. Terms used in the current
prospectus for the policy are incorporated in this Statement of Additional Information.
This Statement of Additional Information (SAI) is not a prospectus and should be read only in conjunction with
the prospectuses for the policy and the underlying fund portfolios.
Dated: October 3, 2013
TABLE OF CONTENTS
GLOSSARY OF TERMS _______________________________________________________________________
3
THE POLICY — GENERAL PROVISIONS________________________________________________________
6
Owner _________________________________________________________________________________
6
Entire Contract __________________________________________________________________________
6
Misstatement of Age or Sex _________________________________________________________________
7
Reallocation of Annuity Units After the Annuity Commencement Date _______________________________
7
Order of Operations ______________________________________________________________________
7
Annuity Payment Options __________________________________________________________________
8
Death Benefit ___________________________________________________________________________
9
Death of Owner__________________________________________________________________________
9
Assignment _____________________________________________________________________________
9
Evidence of Survival_______________________________________________________________________ 10
Non-Participating ________________________________________________________________________ 10
Amendments ____________________________________________________________________________ 10
Employee and Agent Purchases ______________________________________________________________ 10
INVESTMENT EXPERIENCE__________________________________________________________________ 10
Accumulation Units_______________________________________________________________________ 10
Annuity Unit Value and Annuity Payment Rates _________________________________________________ 12
PERFORMANCE ____________________________________________________________________________ 14
HISTORICAL PERFORMANCE DATA ___________________________________________________________ 15
Money Market Yields______________________________________________________________________ 15
Total Returns ____________________________________________________________________________ 16
Other Performance Data ___________________________________________________________________ 16
Adjusted Historical Performance Data _________________________________________________________ 17
PUBLISHED RATINGS _______________________________________________________________________ 17
STATE REGULATION OF US__________________________________________________________________ 17
ADMINISTRATION _________________________________________________________________________ 18
RECORDS AND REPORTS ____________________________________________________________________ 18
DISTRIBUTION OF THE POLICIES ____________________________________________________________ 18
VOTING RIGHTS ___________________________________________________________________________ 19
OTHER PRODUCTS _________________________________________________________________________ 19
CUSTODY OF ASSETS _______________________________________________________________________ 19
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ______________________________________ 20
OTHER INFORMATION _____________________________________________________________________ 20
FINANCIAL STATEMENTS ___________________________________________________________________ 20
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GLOSSARY OF TERMS
Accumulation Unit — An accounting unit of measure used in calculating the policy value in the separate account before
the annuity commencement date.
Adjusted Policy Value — The policy value increased or decreased by any excess interest adjustment.
Administrative Office — Transamerica Life Insurance Company and Transamerica Financial Life Insurance Company,
Attention: Customer Care Group, 4333 Edgewood Road NE, Cedar Rapids, IA 52499-0001, (800)525-6205.
Annuitant — The person on whose life any annuity payments involving life contingencies will be based.
Annuity Commencement Date — The date upon which annuity payments are to commence. This date may not be
later than the last day of the policy month following the month after the annuitant attains age 99 (earlier if required by
state law). In no event can this date be earlier than the third policy anniversary. The annuity commencement date may
have to be earlier for qualified policies and may be earlier if required by state law.
Annuity Payment Option — A method of receiving a stream of annuity payments selected by the owner.
Annuity Unit — An accounting unit of measure used in the calculation of the amount of the second and each
subsequent variable annuity payment.
Assumed Investment Return or AIR — The annual effective rate shown in the contract specifications section of the
contract that is used in the calculation of each variable annuity payment.
Beneficiary — The person who has the right to the death benefit as set forth in the policy.
Cash Value — The adjusted policy value less any applicable surrender charge. If you are surrendering your policy,
annuitizing your policy or receiving a death benefit, you will receive the state minimum required cash value if greater
than your cash value.
Code — The Internal Revenue Code of 1986, as amended.
Enrollment Form — A written application, order form, or any other information received electronically or otherwise
upon which the policy is issued and/or is reflected on the data or specifications page.
Excess Interest Adjustment — A positive or negative adjustment to amounts surrendered (both partial or full surrenders
and transfers) or applied to annuity payment options from the fixed account guaranteed period options prior to the end
of the guaranteed period. The adjustment reflects changes in the interest rates declared by us since the date any payment
was received by, or an amount was transferred to, the guaranteed period option. The excess interest adjustment can either
decrease or increase the amount to be received by the owner upon full surrender or commencement of annuity payments,
depending upon whether there has been an increase or decrease in interest rates, respectively. The excess interest
adjustment does not apply to policies issued in New York by Transamerica Financial Life Insurance Company.
Excess Partial Surrender — The portion of a partial surrender (surrender) that exceeds the free amount.
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Fixed Account — One or more investment choices under the policy that are part of our general assets and are not in the
separate account.
Guaranteed Lifetime Withdrawal Benefit — Any optional benefit under the policy that provides a guaranteed
minimum withdrawal benefit, including Retirement Income MaxSM Rider or the Retirement Income ChoiceSM 1.6
Rider.
Guaranteed Period Options — The various guaranteed interest rate periods of the fixed account which we may offer
and into which premium payments may be paid or amounts transferred when available.
Market Day — A day when the New York Stock Exchange is open for business.
Nonqualified Policy — A policy other than a qualified policy.
Owner (You, Your) — The person who may exercise all rights and privileges under the policy.
Policy Date — The date shown on the policy data page attached to the policy and the date on which the policy becomes
effective.
Policy Value — On or before the annuity commencement date, the policy value is equal to the owner’s:
• premium payments; minus
• gross withdrawals (withdrawals plus the surrender charge on the portion of the requested withdrawal that is subject
to the surrender charge plus or minus any excess interest adjustment); plus
• interest credited in the fixed account; plus
• accumulated gains in the separate account; minus
• accumulated losses in the separate account; minus
• service charges, rider fees, premium taxes, transfer fees, and other charges, if any.
Policy Year — A policy year begins on the policy date and on each anniversary thereof.
Premium Payment — An amount paid to us by the owner or on the owner’s behalf as consideration for the benefits
provided by the policy.
Qualified Policy — A policy issued in connection with retirement plans that qualify for special federal income tax
treatment under the Code.
Separate Account — Separate Account VA B and Separate Account VA BNY, separate accounts established and
registered as unit investment trusts under the Investment Company Act of 1940, as amended (the “1940 Act”), to which
premium payments under the policies may be allocated.
Separate Account Value — The portion of the policy value that is invested in the separate account.
Service Charge — An annual charge on each policy anniversary (and a charge at the time of surrender during any policy
year) for policy maintenance and related administrative expenses.
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Subaccount — A subdivision within the separate account, the assets of which are invested in a specified underlying fund
portfolio.
Surrender Charge — A percentage of each premium payment that depends upon the length of time from the date of
each premium payment. The surrender charge is assessed on full or partial surrenders from the policy. A surrender charge
may also be referred to as a “contingent deferred sales charge” or a “contingent deferred sales load.”
Surrender Charge Free Amount — The amount that can be withdrawn each policy year without incurring any
surrender charges.
Valuation Period — The period of time from one determination of accumulation unit values and annuity unit values to
the next subsequent determination of those values. Such determination shall be made generally at the close of business on
each market day.
Variable Annuity Payments — Payments made pursuant to an annuity payment option which fluctuate as to dollar
amount or payment term in relation to the investment performance of the specified subaccounts within the separate
account.
Written Notice — Written notice, signed by the owner, that gives us the information we require and is received in good
order at the Administrative Office. For some transactions, we may accept an electronic notice such as telephone
instructions. Such electronic notice must meet the requirements for good order that we establish for such notices.
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In order to supplement the description in the prospectus, the following provides additional information about us and the
policy, which may be of interest to a prospective purchaser.
THE POLICY — GENERAL PROVISIONS
Owner
The policy shall belong to the owner upon issuance of the policy after completion of an enrollment form and delivery of
the initial premium payment. While the annuitant is living, the owner may: (1) assign the policy; (2) surrender the
policy; (3) amend or modify the policy with our consent; (4) receive annuity payments or name a payee to receive the
payments; and (5) exercise, receive and enjoy every other right and benefit contained in the policy. The exercise of these
rights may be subject to the consent of any assignee or irrevocable beneficiary; and of your spouse in a community or
marital property state.
Unless we have been notified of a community or marital property interest in the policy, we will rely on our good faith
belief that no such interest exists and will assume no responsibility for inquiry.
Note carefully. If the owner predeceases the annuitant and no joint owner, primary beneficiary, or contingent beneficiary
is alive or in existence on the date of death, the owner’s estate will become the new owner. If no probate estate is opened
because the owner has precluded the opening of a probate estate by means of a trust or other instrument, that trust may
not exercise ownership rights to the policy. It may be necessary to open a probate estate in order to exercise ownership
rights to the policy.
The owner may change the ownership of the policy in a written notice. When this change takes effect, all rights of
ownership in the policy will pass to the new owner. A change of ownership may have tax consequences.
When there is a change of owner, the change will not be effective until it is recorded in our records. Once recorded, it
will take effect as of the date the owner signs the written notice, subject to any payment we have made or action we have
taken before recording the change. Changing the owner does not change the designation of the beneficiary or the
annuitant.
If ownership is transferred to a new owner (except to the owner’s spouse) because the owner dies before the annuitant,
then (a) the cash value generally must be distributed to the new owner within five years of the owner’s death, or (b)
annuity payments must be made for a period certain or for the new owner’s lifetime so long as any period certain does
not exceed that new owner’s life expectancy, if the first payment begins within one year of your death.
Entire Contract
The entire contract consists of the policy and any application, endorsements and riders. If any portion of the policy or
rider attached thereto shall be found to be invalid, unenforceable or illegal, the remainder shall not in any way be affected
or impaired thereby, but shall have the same force and effect as if the invalid, unenforceable or illegal portion had not
been inserted.
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Misstatement of Age or Sex
If the age or sex of the annuitant or owner has been misstated, we will change the annuity benefit payable to that which
the premium payments would have purchased for the correct age or sex. The dollar amount of any underpayment made
by us shall be paid in full with the next payment due such person or the beneficiary. The dollar amount of any
overpayment made by us due to any misstatement shall be deducted from payments subsequently accruing to such
person or beneficiary. Any underpayment or overpayment will include interest as specified in your policy, from the date
of the wrong payment to the date of the adjustment. The age of the annuitant or owner may be established at any time
by the submission of proof satisfactory to us.
Reallocation of Annuity Units After the Annuity Commencement Date
After the annuity commencement date, you may reallocate the value of a designated number of annuity units of a
subaccount then credited to a policy into an equal value of annuity units of one or more other subaccounts or the fixed
account. The reallocation shall be based on the relative value of the annuity units of the account(s) or subaccount(s) at
the end of the market day on the next payment date. The minimum amount which may be reallocated is the lesser of (1)
$10 of monthly income or (2) the entire monthly income of the annuity units in the account or subaccount from which
the transfer is being made. If the monthly income of the annuity units remaining in an account or subaccount after a
reallocation is less than $10, we reserve the right to include the value of those annuity units as part of the transfer. The
request must be in writing to our administrative office. There is no charge assessed in connection with such reallocation.
A reallocation of annuity units may be made up to four times in any given policy year.
After the annuity commencement date, no transfers may be made from the fixed account to the separate account.
Order of Operations
For purposes of calculating surrender charges, withdrawals will be considered withdrawn in the following order:
(1) Amounts that are less than or equal to the greater of the surrender charge free amount or any applicable required
minimum distribution:
(a) The oldest remaining premium payment with no remaining premium based charge is the first premium
payment considered to be withdrawn and will reduce the remaining premium payment. If the amount
withdrawn exceeds this, the next oldest remaining premium payment with no remaining premium based charge
is considered to be withdrawn, and so on until all remaining premium payments with no remaining premium
based charge have been withdrawn.
(b) When the premium based charge free premium payments are equal to zero, the 10% free amount and any
applicable required minimum distribution remaining will be withdrawn from the policy value, however, will
not be considered premium payments withdrawn and will not reduce any remaining premium payments.
(2) Amounts that exceed the greater of the surrender charge free amount or any applicable required minimum
distribution:
(a) The oldest remaining premium payment with a remaining premium based charge is the first premium payment
considered to be withdrawn and will reduce the remaining premium payment. If the amount withdrawn
exceeds this, the next oldest remaining premium payment with a remaining premium based charge is considered
to be withdrawn, and so on until all remaining premium payments with a remaining premium based charge
have been withdrawn.
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Annuity Payment Options
During the lifetime of the annuitant and before the annuity commencement date, the owner may choose an annuity
payment option or change the election, but notice of any election or change of election must be received by us in good
order at least thirty (30) days before the annuity commencement date (elections less than 30 days require prior approval).
If no election is made before the annuity commencement date, annuity payments will be made under (1) life income
with level (fixed) payments for 10 years certain, using the existing policy value of the fixed account, or (2) life income
with variable payments for 10 years certain using the existing policy value of the separate account, or (3) a combination
of (1) and (2). The default options may be restricted with respect to qualified policies.
The person who elects an annuity payment option can also name one or more successor payees to receive any unpaid,
guaranteed amount at the death of a payee. Naming these payees cancels any prior choice of a successor payee.
A payee who did not elect the annuity payment option does not have the right to advance or assign payments, take the
payments in one sum, or make any other change. However, the payee may be given the right to do one or more of these
things if the person who elects the option tells us in writing and we agree.
Adjusted Age. For the Life Income and Joint and Survivor annuity payment options, the adjusted age is the annuitant’s
actual age nearest birthday, on the annuity commencement date, adjusted as described in your policy. This adjustment
assumes an increase in life expectancy, and therefore it results in lower payments than without such an adjustment.
Variable Payment Options. The dollar amount of the first variable annuity payment will be determined in accordance
with the annuity payment rates set forth in the applicable table contained in the policy. For annuity payments the tables
are based on a 3% effective annual AIR and the “2000 Table” (male, female and unisex if required by law), using an
assumed annuity commencement date of 2005 (static projection to this point) with dynamic projection using scale G
from that point (100% of G for male, 50% of G for females). The dollar amount of additional variable annuity
payments will vary based on the investment performance of the subaccount(s) of the separate account selected by the
annuitant or beneficiary. For certain qualified policies the use of unisex mortality tables may be required.
Determination of the First Variable Payment. The amount of the first variable payment depends upon the sex (if
consideration of sex is allowed under state law) and adjusted age of the annuitant.
Determination of Additional Variable Payments. All variable annuity payments other than the first are calculated using
annuity units which are credited to the policy. The number of annuity units to be credited in respect of a particular
subaccount is determined by dividing that portion of the first variable annuity payment attributable to that subaccount
by the annuity unit value of that subaccount on the annuity commencement date. The number of annuity units of each
particular subaccount credited to the policy then remains fixed, assuming no transfers to or from that subaccount occur.
The dollar value of variable annuity units in the chosen subaccount will increase or decrease reflecting the investment
experience of the chosen subaccount. The dollar amount of each variable annuity payment after the first may increase,
decrease or remain constant. This amount is equal to the sum of the amounts determined by multiplying the number of
annuity units of each particular subaccount credited to the policy by the annuity unit value for the particular subaccount
on the date the payment is made.
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Death Benefit
Due proof of death of the annuitant is proof that the annuitant died prior to the commencement of annuity payments. A
certified copy of a death certificate, a certified copy of a decree of a court of competent jurisdiction as to the finding of
death, a written statement by the attending physician, or any other proof satisfactory to us will constitute due proof of
death.
Upon receipt in good order of this proof and an election of a method of settlement and return of the policy, the death
benefit generally will be paid within seven days, or as soon thereafter as we have sufficient information about the
beneficiary(ies) to make the payment. The beneficiary may receive the amount payable in a lump sum cash benefit, or,
subject to any limitation under any state or federal law, rule, or regulation, under one of the annuity payment options
described above, unless a settlement agreement is effective at the death of the owner preventing such election.
If an owner is not an annuitant, and dies prior to the annuity commencement date, the new owner may surrender the
policy at any time for the amount of the cash value. If the new owner is not the deceased owner’s spouse, however, (1)
the cash value must be distributed within five years after the date of the deceased owner’s death, or (2) payments under
an annuity payment option must begin no later than one year after the deceased owner’s death and must be made for the
new owner’s lifetime or for a period certain (so long as the period certain does not exceed the new owner’s life
expectancy). If the sole new owner is the deceased owner’s surviving spouse, such spouse may elect to continue the policy
as the new owner instead of receiving the death benefit.
Beneficiary. The beneficiary designation in the enrollment form will remain in effect until changed. The owner may
change the designated beneficiary by sending us written notice. The beneficiary’s consent to such change is not required
unless the beneficiary was irrevocably designated or law requires consent. If an irrevocable beneficiary dies, the owner
may then designate a new beneficiary. The change will take effect as of the date the owner signs the written notice,
whether or not the owner is living when we receive the notice. We will not be liable for any payment made before the
written notice is received. If more than one beneficiary is designated, and the owner fails to specify their interests, they
will share equally. If upon the death of the annuitant there is a surviving owner(s), the surviving owner(s) automatically
takes the place of any beneficiary designation.
Death of Owner
Federal tax law requires that if any owner (including any joint owner who has become a current owner) dies before the
annuity commencement date, then the entire value of the policy must generally be distributed within five years of the
date of death of such owner. Certain rules apply where (1) the spouse of the deceased owner is the sole beneficiary, (2)
the owner is not a natural person and the primary annuitant dies or is changed, or (3) any owner dies after the annuity
commencement date. See the TAX INFORMATION section in the prospectus for more information about these rules.
Other rules may apply to qualified policies.
Assignment
During the lifetime of the annuitant you may assign any rights or benefits provided by the policy if your policy is a
nonqualified policy. An assignment will not be binding on us until a copy has been filed at our administrative office.
Your rights and benefits and those of the beneficiary are subject to the rights of the assignee. We assume no responsibility
for the validity or effect of any assignment. Any claim made under an assignment shall be subject to proof of interest and
the extent of the assignment. An assignment may have tax consequences.
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Unless you so direct by filing written notice with us, no beneficiary may assign any payments under the policy before
they are due. To the extent permitted by law, no payments will be subject to the claims of any beneficiary’s creditors.
Ownership under qualified policies is restricted to comply with the Code.
Evidence of Survival
We reserve the right to require satisfactory evidence that a person is alive if a payment is based on that person being alive.
No payment will be made until we receive such evidence.
Non-Participating
The policy will not share in our surplus earnings; no dividends will be paid.
Amendments
No change in the policy is valid unless made in writing by us and approved by one of our officers. No registered
representative has authority to change or waive any provision of the policy.
We reserve the right to amend the policies to meet the requirements of the Code, regulations or published rulings. You
can refuse such a change by giving written notice, but a refusal may result in adverse tax consequences.
Employee and Agent Purchases
The policy may be acquired by an employee or registered representative of any broker/dealer authorized to sell the policy
or their immediate family, or by an officer, director, trustee or bona-fide full-time employee of ours or our affiliated
companies or their immediate family. In such a case, we may, at our sole discretion, credit an amount equal to a
percentage of each premium payment to the policy due to lower acquisition costs we experience on those purchases. We
may offer certain employer sponsored savings plans, reduced fees and charges including, but not limited to, the annual
service charge, the surrender charges, the mortality and expense risk fee and the administrative charge for certain sales
under circumstances which may result in savings of certain costs and expenses. In addition, there may be other
circumstances of which we are not presently aware which could result in reduced sales or distribution expenses. Credits to
the policy or reductions in these fees and charges will not be unfairly discriminatory against any owner.
INVESTMENT EXPERIENCE
A “net investment factor” is used to determine the value of accumulation units and annuity units, and to determine
annuity payment rates.
Accumulation Units
Allocations of a premium payment directed to a subaccount are credited in the form of accumulation units. Each
subaccount has a distinct accumulation unit value. The number of units credited is determined by dividing the premium
payment or amount transferred to the subaccount by the accumulation unit value of the subaccount as of the end of the
valuation period during which the allocation is made. For each subaccount, the accumulation unit value for a given
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market day is based on the net asset value of a share of the corresponding portfolio of the underlying fund portfolios less
any applicable charges or fees. The investment performance of the portfolio, expenses, and deductions of certain charges
affect the value of an accumulation unit.
Upon allocation to the selected subaccount, premium payments are converted into accumulation units of the
subaccount. The number of accumulation units to be credited is determined by dividing the dollar amount allocated to
each subaccount by the value of an accumulation unit for that subaccount as next determined after the premium
payment is received at the Administrative Office or, in the case of the initial premium payment, when the enrollment
form is completed, whichever is later. The value of an accumulation unit for each subaccount was arbitrarily established
at $10 at the inception of each subaccount. Thereafter, the value of an accumulation unit is determined as of the close of
trading on each day the New York Stock Exchange is open for business.
An index (the “net investment factor”) which measures the investment performance of a subaccount during a valuation
period, is used to determine the value of an accumulation unit for the next subsequent valuation period. The net
investment factor may be greater or less than or equal to one; therefore, the value of an accumulation unit may increase,
decrease, or remain the same from one valuation period to the next. You bear this investment risk. The net investment
performance of a subaccount and deduction of certain charges affect the accumulation unit value.
The net investment factor for any subaccount for any valuation period is determined by dividing (a) by (b) and
subtracting (c) from the result, where:
(a) is the net result of:
(1) the net asset value per share of the shares held in the subaccount determined at the end of the current valuation
period, plus
(2) the per share amount of any dividend or capital gain distribution made with respect to the shares held in the
subaccount if the ex-dividend date occurs during the current valuation period, plus or minus
(3) a per share credit or charge for any taxes determined by the Company to have resulted during the valuation
period from the investment operations of the subaccount;
(b) is the net asset value per share of the shares held in the subaccount determined as of the end of the immediately
preceding valuation period; and
(c) is an amount representing the separate account charge and any optional benefit fees, if applicable.
Illustration of Separate Account Accumulation Unit Value Calculations
Formula and Illustration for Determining the Net Investment Factor
Net Investment Factor =
(A + B - C) - E
D
Where:
A= The net asset value of an underlying fund portfolio share at of the end of the current valuation period.
Assume A = $11.57
B= The per share amount of any dividend or capital gains distribution since the end of the immediately preceding
valuation period.
Assume B = 0
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C= The per share charge or credit for any taxes reserved for at the end of the current valuation period.
Assume C = 0
D= The net asset value of an underlying fund portfolio share at of the end of the immediately preceding valuation
period.
Assume D = $11.40
E= The daily deduction for the mortality and expense risk fee and the administrative charge, and any optional benefit
fees, if applicable. Assume E total 1.50% on an annual basis; On a daily basis, this equals 0.000041096.
Then, the net investment factor =
(11.57 + 0 – 0) - 0.000041096 = Z = 1.014871185
(11.40)
Formula and Illustration for Determining Accumulation Unit Value
Accumulation Unit Value = A * B
Where:
A= The accumulation unit value for the immediately preceding valuation period.
Assume = $X
B= The net investment factor for the current valuation period.
Assume = Y
Then, the accumulation unit value = $X * Y = $Z
Annuity Unit Value and Annuity Payment Rates
The amount of variable annuity payments will vary with annuity unit values. Annuity unit values rise if the net
investment performance of the subaccount exceeds the assumed investment return of 3% annually. Conversely, annuity
unit values fall if the net investment performance of the subaccount is less than the annual assumed investment return.
The value of a variable annuity unit in each subaccount was established at $10 on the date operations began for that
subaccount. The value of a variable annuity unit on any subsequent business day is equal to (a) multiplied by (b)
multiplied by (c), where:
(a) is the variable annuity unit value for the subaccount on the immediately preceding market day;
(b) is the net investment factor for that subaccount for the valuation period; and
(c) is the assumed investment return adjustment factor for the valuation period.
The assumed investment return adjustment factor for the valuation period is the product of discount factors of
.99986634 per day to recognize the 3% effective annual AIR. The valuation period is the period from the close of the
immediately preceding market day to the close of the current market day.
The net investment factor for the policy used to calculate the value of a variable annuity unit in each subaccount for the
valuation period is determined by dividing (i) by (ii) and subtracting (iii) from the result, where:
(i) is the result of:
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(1) the net asset value of a fund share held in that subaccount determined at the end of the current valuation
period; plus
(2) the per share amount of any dividend or capital gain distributions made by the fund for shares held in that
subaccount if the ex-dividend date occurs during the valuation period; plus or minus
(3) a per share charge or credit for any taxes reserved for, which we determine to have resulted from the
investment operations of the subaccount.
(ii) is the net asset value of a fund share held in that subaccount determined as of the end of the immediately
preceding valuation period.
(iii) is a factor representing the mortality and expense risk fee and administrative charge. This factor is equal, on an
annual basis, to 1.25% of the daily net asset value of shares held in that subaccount.
The dollar amount of subsequent variable annuity payments will depend upon changes in applicable annuity unit values.
The annuity payment rates generally vary according to the annuity option elected and the gender and adjusted age of the
annuitant at the annuity commencement date. The policy contains a table for determining the adjusted age of the
annuitant.
Illustration of Calculations for Annuity Unit
Value and Variable Annuity Payments
Formula and Illustration for Determining Annuity Unit Value
Annuity Unit Value = A * B * C
Where:
A= Annuity unit value for the immediately preceding valuation period.
Assume = $X
B= Net investment factor for the valuation period for which the annuity value is being calculated.
Assume = Y
C= A factor to neutralize the annual assumed investment return of 3% built into the Annuity Tables used.
Assume = Z
Then, the annuity unit value is:
$X * Y * Z = $Q
Formula and Illustration for Determining Amount of
First Monthly Variable Annuity Payment
First monthly variable annuity payment =
A*B
$1,000
Where:
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A= The adjusted policy value as of the annuity commencement date.
Assume = $X
B= The annuity purchase rate per $1,000 of adjusted policy value based upon the option selected, the sex and adjusted
age of the annuitant according to the tables contained in the policy.
Assume = $Y
Then, the first monthly variable annuity payment =
$X * $Y = $Z
1,000
Formula and Illustration for Determining the Number of Annuity Units
Represented by Each Monthly Variable Annuity Payment
Number of annuity units =
A
B
Where:
A= The dollar amount of the first monthly variable annuity payment.
Assume = $X
B= The annuity unit value for the valuation date on which the first monthly payment is due.
Assume = $Y
Then, the number of annuity units =
$X = Z
$Y
PERFORMANCE
We periodically advertise performance of the various subaccounts. Performance figures might not reflect charges for
options, riders, or endorsements. We may disclose at least three different kinds of non-standard performance. First, we
may calculate performance by determining the percentage change in the value of an accumulation unit by dividing the
increase (decrease) for that unit by the value of the accumulation unit at the beginning of the period. This performance
number reflects the deduction of the mortality and expense risk fees and administrative charges. It does not reflect the
deduction of any applicable premium taxes, surrender charges, or fees for any optional riders or endorsements. Any such
deduction would reduce the percentage increase or make greater any percentage decrease.
Second, advertisements may also include total return figures, which reflect the deduction of the mortality and expense
risk fees and administrative charges. These figures may also include or exclude surrender charges. These figures may also
reflect any applicable premium enhancement.
Third, for certain investment portfolios, performance may be shown for the period commencing from the inception date
of the investment portfolio (i.e., before commencement of subaccount operations). These figures should not be
interpreted to reflect actual historical performance of the subaccounts.
14
Not all types of performance data presented reflect all of the fees and charges that may be deducted (such as fees for
optional benefits); performance figures would be lower if these charges were included.
HISTORICAL PERFORMANCE DATA
Money Market Yields
We may from time to time disclose the current annualized yield of the money market subaccount, which invests in the
corresponding money market portfolio, for a 7-day period in a manner which does not take into consideration any
realized or unrealized gains or losses on shares of the corresponding money market portfolio or on its portfolio securities.
This current annualized yield is computed by determining the net change (exclusive of realized gains and losses on the
sale of securities and unrealized appreciation and depreciation and income other than investment income) at the end of
the 7-day period in the value of a hypothetical account having a balance of 1 unit of the money market subaccount at the
beginning of the 7-day period, dividing such net change in account value by the value of the account at the beginning of
the period to determine the base period return, and annualizing this quotient on a 365-day basis. The net change in
account value reflects (i) net income from the portfolio attributable to the hypothetical account; and (ii) charges and
deductions imposed under a policy that are attributable to the hypothetical account. The charges and deductions include
the per unit charges for the hypothetical account for (i) the administrative charges and (ii) the mortality and expense risk
fee. Current yield will be calculated according to the following formula:
Current Yield = ((NCS * ES)/UV) * (365/7)
Where:
NCS = The net change in the value of the portfolio (exclusive of realized gains and losses on the sale of securities and
unrealized appreciation and depreciation and income other than investment income) for the 7-day period
attributable to a hypothetical account having a balance of 1 subaccount unit.
ES = Per unit expenses of the subaccount for the 7-day period.
UV = The unit value on the first day of the 7-day period.
Because of the charges and deductions imposed under a policy, the yield for the money market subaccount will be lower
than the yield for the corresponding money market portfolio. The yield calculations do not reflect the effect of any
premium taxes. The yield calculations also do not reflect surrender charges that may be applicable to a particular policy.
Surrender charges range from 9% to 0% (depending on which share class you select) of the amount of premium
payments surrendered based on the number of years since the premium payment was made. Surrender charges are based
on the number of years since the date the premium payment was made, not the policy issue date.
We may also disclose the effective yield of the money market subaccount for the same 7-day period, determined on a
compounded basis. The effective yield is calculated by compounding the base period return according to the following
formula:
Effective Yield = (1 + ((NCS - ES)/UV))365/7 - 1
15
Where:
NCS = The net change in the value of the portfolio (exclusive of realized gains and losses on the sale of securities and
unrealized appreciation and depreciation and income other than investment income) for the 7-day period
attributable to a hypothetical account having a balance of one subaccount unit.
ES = Per unit expenses of the subaccount for the 7-day period.
UV = The unit value on the first day of the 7-day period.
The yield on amounts held in the money market subaccount normally will fluctuate on a daily basis. Therefore, the
disclosed yield for any given past period is not an indication or representation of future yields or rates of return. The
money market subaccount’s actual yield is affected by changes in interest rates on money market securities, average
portfolio maturity of the corresponding money market portfolio, the types and quality of portfolio securities held by the
corresponding money market portfolio and its operating expenses.
Total Returns
We may from time to time also advertise or disclose total returns for one or more of the subaccounts for various periods
of time. One of the periods of time will include the period measured from the date the subaccount commenced
operations. When a subaccount has been in operation for 1, 5 and 10 years, respectively, the total return for these periods
will be provided. Total returns for other periods of time may from time to time also be disclosed. Total returns represent
the average annual compounded rates of return that would equate an initial investment of $1,000 to the redemption
value of that investment as of the last day of each of the periods. The ending date for each period for which total return
quotations are provided will be for the most recent month end practicable, considering the type and media of the
communication and will be stated in the communication.
Total returns will be calculated using subaccount unit values which we calculate on each market day based on the
performance of the separate account’s underlying fund portfolio and the deductions for the mortality and expense risk
fee and the administrative charges. Total return calculations will reflect the effect of surrender charges that may be
applicable to a particular period. The total return will then be calculated according to the following formula:
P (1 + T)N = ERV
Where:
T
= The average annual total return net of subaccount recurring charges.
ERV = The ending redeemable value of the hypothetical account at the end of the period.
P
N
= A hypothetical initial payment of $1,000.
= The number of years in the period.
Other Performance Data
We may from time to time also disclose average annual total returns in a non-standard format in conjunction with the
standard format described above.
We may from time to time also disclose cumulative total returns in conjunction with the standard format described
above. The cumulative returns will be calculated using the following formula except that the surrender charge percentage
will be assumed to be 0%:
16
CTR = (ERV / P)-1
Where:
CTR = The cumulative total return net of subaccount recurring charges for the period.
ERV = The ending redeemable value of the hypothetical investment at the end of the period.
P
= A hypothetical initial payment of $1,000.
All non-standard performance data will only be advertised if the standard performance data is also disclosed.
Adjusted Historical Performance Data
From time to time, sales literature or advertisements may quote average annual total returns for periods prior to the date
a particular subaccount commenced operations. Such performance information for the subaccounts will be calculated
based on the performance of the various portfolios and the assumption that the subaccounts were in existence for the
same periods as those indicated for the portfolios, with the level of policy charges that are currently in effect.
PUBLISHED RATINGS
We may from time to time publish in advertisements, sales literature and reports to owners, the ratings and other
information assigned to us by one or more independent rating organizations such as A.M. Best Company, Standard &
Poor’s Insurance Ratings Services, Moody’s Investors Service and Fitch Financial Ratings. The purpose of the ratings is to
reflect our financial strength. The ratings should not be considered as bearing on the investment performance of assets
held in the separate account or of the safety or riskiness of an investment in the separate account. Each year the A.M.
Best Company reviews the financial status of thousands of insurers, culminating in the assignment of Best’s Ratings.
These ratings reflect their current opinion of the relative financial strength and operating performance of an insurance
company in comparison to the norms of the life/health insurance industry. In addition, these ratings may be referred to
in advertisements or sales literature or in reports to owners. These ratings are opinions of an operating insurance
company’s financial capacity to meet the obligations of its insurance policies in accordance with their terms.
STATE REGULATION OF US
We are subject to the laws of jurisdiction governing insurance companies and to regulation by the jurisdiction
Department of Insurance. An annual statement in a prescribed form is filed with the Department of Insurance each year
covering our operations for the preceding year and our financial condition as of the end of such year. Regulation by the
Department of Insurance includes periodic examination to determine our contract liabilities and reserves so that the
Department may determine the items are correct. Our books and accounts are subject to review by the Department of
Insurance at all times, and a full examination of our operations are conducted periodically by the National Association of
Insurance Commissioners. In addition, we are subject to regulation under the insurance laws of other jurisdictions in
which it may operate.
17
ADMINISTRATION
We perform administrative services for the policies. These services include issuance of the policies, maintenance of
records concerning the policies, and certain valuation services.
RECORDS AND REPORTS
We will maintain all records and accounts relating to the separate account. As presently required by the 1940 Act, as
amended, and regulations promulgated thereunder, we will mail to all owners at their last known address of record, at
least annually, reports containing such information as may be required under that Act or by any other applicable law or
regulation. Owners will also receive confirmation of each financial transaction and any other reports required by law or
regulation. However, for certain routine transactions (for example, regular monthly premiums deducted from your
checking account, or regular annuity payments we send to you) you may only receive quarterly confirmations.
DISTRIBUTION OF THE POLICIES
We have entered into a principal underwriting agreement with our affiliate, Transamerica Capital, Inc. (“TCI”), for the
distribution and sale of the policies. We may reimburse TCI for certain expenses it incurs in order to pay for the
distribution of the policies (e.g., commissions payable to selling firms selling the Policies, as described below.)
TCI’s home office is located at 4600 S. Syracuse St. Suite 1100 Denver, Colorado 80237-2719. TCI is an indirect,
wholly owned subsidiary of Aegon USA. TCI is registered as a broker-dealer with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, and is a member of Financial Industry Regulatory Authority
(“FINRA”). TCI is not a member of the Securities Investor Protection Corporation.
We currently offer the policies on a continuous basis. We anticipate continuing to offer the policies, but reserve the right
to discontinue the offering. The policies are offered to the public through sales representatives of broker-dealers (“selling
firms”) that have entered into selling agreements with us and with TCI. TCI compensates these selling firms for their
services. Sales representatives with these selling firms are appointed as our insurance agents.
We and our affiliates provide paid-in capital to TCI and pay for TCI’s operating and other expenses, including overhead,
legal and accounting fees. We also pay TCI and “override” payment based on the pricing of the product which becomes
part of TCI’s assets. As of December 31, 2012, no amount was paid to TCI in connection with all policies sold through
the product because the product had not commenced operations.
We and/or TCI or another affiliate may pay certain selling firms additional cash amounts for: (1) “preferred product”
treatment of the policies in their marketing programs, which may include marketing services and increased access to their
sales representatives; (2) sales promotions relating to the policies; (3) costs associated with sales conferences and
educational seminars for their sales representatives; and (4) other sales expenses of the selling firms. We and/or TCI may
make bonus payments to certain selling firms based on aggregate sales or persistency standards. These additional
payments are not offered to all selling firms, and the terms of any particular agreement governing the payments may vary
among selling firms.
18
VOTING RIGHTS
To the extent required by law, we will vote the underlying fund portfolios’ shares held by the separate account at regular
and special shareholder meetings of the underlying fund portfolios in accordance with instructions received from persons
having voting interests in the portfolios, although none of the underlying fund portfolios hold regular annual shareholder
meetings. If, however, the 1940 Act or any regulation thereunder should be amended or if the present interpretation
thereof should change, and as a result the Company determines that it is permitted to vote the underlying fund portfolios
shares in its own right, it may elect to do so.
Before the annuity commencement date, you hold the voting interest in the selected portfolios. The number of votes that
you have the right to instruct will be calculated separately for each subaccount. The number of votes that you have the
right to instruct for a particular subaccount will be determined by dividing your policy value in the subaccount by the
net asset value per share of the corresponding portfolio in which the subaccount invests. Fractional shares will be
counted.
After the annuity commencement date, the owner has the voting interest, and the number of votes decreases as annuity
payments are made and as the reserves for the policy decrease. The person’s number of votes will be determined by
dividing the reserve for the policy allocated to the applicable subaccount by the net asset value per share of the
corresponding portfolio. Fractional shares will be counted.
The number of votes that you or the person receiving income payments has the right to instruct will be determined as of
the date established by the underlying fund portfolio for determining shareholders eligible to vote at the meeting of the
underlying fund portfolio. We will solicit voting instructions by sending you, or other persons entitled to vote, requests
for instructions prior to that meeting in accordance with procedures established by the underlying fund portfolio.
Portfolio shares as to which no timely instructions are received, and shares held by us in which you, or other persons
entitled to vote have no beneficial interest, will be voted in proportion to the voting instructions that are received with
respect to all policies participating in the same subaccount.
Each person having a voting interest in a subaccount will receive proxy material, reports, and other materials relating to
the appropriate portfolio.
OTHER PRODUCTS
We make other variable annuity policies available that may also be funded through the separate account. These variable
annuity policies may have different features, such as different investment choices or charges.
CUSTODY OF ASSETS
We hold assets of each of the subaccounts. The assets of each of the subaccounts are segregated and held separate and
apart from the assets of the other subaccounts and from our general account assets. We maintain records of all purchases
and redemptions of shares of the underlying fund portfolios held by each of the subaccounts. Additional protection for
the assets of the separate account is afforded by our fidelity bond, presently in the amount of $5,000,000, covering the
acts of our officers and employees.
19
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Our statutory-basis financial statements and schedules at December 31, 2012 and 2011, and for each of the three years
in the period ended December 31, 2012, appearing herein, have been audited by Ernst & Young LLP, Suite 3000, 801
Grand Avenue, Des Moines, Iowa 50309, Independent Registered Public Accounting Firm, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon their report given on their authority as experts in
accounting and auditing. There are no financial statements for the subaccounts because they had not commenced
operations as of December 31, 2012.
OTHER INFORMATION
A registration statement has been filed with the SEC, under the Securities Act of 1933 as amended, with respect to the
policies discussed in this SAI. Not all of the information set forth in the registration statement and the amendments and
exhibits thereto has been included in the prospectus or this SAI. Statements contained in the prospectus and this SAI
concerning the content of the policies and other legal instruments are intended to be summaries. For a complete
statement of the terms of these documents, reference should be made to the instruments filed with the SEC.
FINANCIAL STATEMENTS
The values of your interest in the separate account will be affected solely by the investment results of the selected
subaccount(s). Our statutory-basis financial statements and schedules, which are included in this SAI, should be
considered only as bearing on our ability to meet our obligations under the policies. They should not be considered as
bearing on the investment performance of the assets held in the separate account.
20
FINANCIAL STATEMENTS
BASIS
AND
SCHEDULES – STATUTORY
Transamerica Life Insurance Company
Years Ended December 31, 2012, 2011 and 2010
Transamerica Life Insurance Company
Financial Statements and Schedules – Statutory Basis
Years Ended December 31, 2012, 2011 and 2010
Contents
Report of Independent Registered Public Accounting Firm ................................................1
Audited Financial Statements
Balance Sheets – Statutory Basis .........................................................................................3
Statements of Operations – Statutory Basis .........................................................................5
Statements of Changes in Capital and Surplus – Statutory Basis ........................................7
Statements of Cash Flow – Statutory Basis .......................................................................10
Notes to Financial Statements – Statutory Basis ...............................................................12
Statutory-Basis Financial Statement Schedules
Summary of Investments – Other Than Investments in Related Parties .........................117
Supplementary Insurance Information .............................................................................118
Reinsurance ......................................................................................................................119
TLIC 2012 SEC
Ernst & Young LLP
Suite 3000
801 Grand Avenue
Des Moines, IA 50309-2767
Tel: +1 515 243 2727
Fax: +1 515 362 7200
www.ey.com
Report of Independent Registered Public Accounting Firm
The Board of Directors
Transamerica Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of Transamerica Life
Insurance Company (the Company) as of December 31, 2012 and 2011, and the related statutorybasis statements of operations, changes in capital and surplus, and cash flow for each of the three
years in the period ended December 31, 2012. Our audits also included the statutory-basis
financial statement schedules required by Regulation S-X, Article 7. These financial statements
and schedules are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the Company’s internal control over
financial reporting. Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the financial statements have been prepared in
conformity with accounting practices prescribed or permitted by the Insurance Division,
Department of Commerce, of the State of Iowa, which practices differ from U.S. generally
accepted accounting principles. The variances between such practices and U.S. generally
accepted accounting principles are described in Note 1. The effects on the accompanying
financial statements of these variances are not reasonably determinable but are presumed to be
material.
In our opinion, because of the effects of the matter described in the preceding paragraph, the
statutory-basis financial statements referred to above do not present fairly, in conformity with
U.S. generally accepted accounting principles, the financial position of Transamerica Life
Insurance Company at December 31, 2012 and 2011, or the results of its operations or its cash
flows for each of the three years in the period ended December 31, 2012.
1304-1059200
A member firm of Ernst & Young Global Limited
However, in our opinion, the statutory-basis financial statements referred to above present fairly,
in all material respects, the financial position of Transamerica Life Insurance Company at
December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2012, in conformity with accounting practices
prescribed or permitted by the Insurance Division, Department of Commerce, of the State of
Iowa. Also, in our opinion, the related financial statement schedules, when considered in relation
to the basic statutory-basis financial statements taken as a whole, present fairly in all material
respects the information set forth therein.
As discussed in Note 1 to the financial statements, in response to new accounting standards in
2012, the Company changed its method of accounting for deferred income taxes.
ey
April 3, 2013
1304-1059200
Transamerica Life Insurance Company
Balance Sheets – Statutory Basis
(Dollars in Thousands, Except per Share Amounts)
December 31
2012
Admitted assets
Cash and invested assets:
Cash, cash equivalents and short-term investments
Bonds:
Affiliated entities
Unaffiliated
Preferred stocks:
Affiliated entities
Unaffiliated
Common stocks:
Affiliated entities (cost: 2012 - $961,200;
2011 - $921,343)
Unaffiliated (cost: 2012 - $167,843;
2011 - $198,433)
Mortgage loans on real estate
Real estate, at cost less accumulated depreciation
(2012 - $41,312; 2011 - $51,050)
Home office properties
Investment properties
Properties held for sale
Policy loans
Receivables for securities
Securities lending reinvested collateral assets
Derivatives
Collateral balance
Other invested assets
Total cash and invested assets
Accrued investment income
Cash surrender value of life insurance policies
Premiums deferred and uncollected
Current federal income tax recoverable
Net deferred income tax asset
Reinsurance receivable
Receivable from parent, subsidiaries and affiliates
Accounts receivable
General agents pension fund
Reinsurance deposit receivable
Amounts incurred under modified coinsurance agreement
Goodwill
Other assets
Separate account assets
Total admitted assets
$
$
4,386,102
2011
$
3,116,452
40,426
36,681,566
62,919
39,722,288
7,162
111,471
7,162
138,596
1,440,426
1,429,294
218,026
5,756,749
229,973
6,830,030
70,864
8,090
4,100
708,794
4,475
2,160,218
557,584
6,213
2,290,392
54,452,658
68,830
20,514
6,405
727,684
3,593
3,520,304
248,484
6,213
2,460,085
58,598,826
465,779
316,533
125,291
–
652,973
158,536
51,246
290,758
44,732
167,223
35,403
27,968
23,928
48,684,223
105,497,251
475,813
309,919
131,183
120,549
716,608
230,426
154,163
191,268
42,282
156,620
46,520
35,736
34,909
41,473,473
102,718,295
$
TLIC 2012 SEC
3
December 31
2012
Liabilities and capital and surplus
Liabilities:
Aggregate reserves for policies and contracts:
Life
Annuity
Accident and health
Policy and contract claim reserves:
Life
Accident and health
Liability for deposit-type contracts
Other policyholders’ funds
Federal income taxes payable
Municipal reverse repurchase agreements
Remittances and items not allocated
Case level liability
Payable for derivative cash collateral
Asset valuation reserve
Interest maintenance reserve
Funds held under reinsurance treaties
Reinsurance in unauthorized reinsurers
Commissions and expense allowances payable on
reinsurance assumed
Payable to parent, subsidiaries and affiliates
Payable for securities
Payable for securities lending
Borrowed money
Transfers from separate accounts due or accrued (including
$(915,131) and $(743,562) accrued for expense
allowances recognized in reserves, net of reinsurance
allowances at December 31, 2012 and 2011, respectively)
Amounts withheld or retained
Derivatives
Bank owned life insurance surrender payable
Other liabilities
Separate account liabilities
Total liabilities
Capital and surplus:
Common stock, $10 per share par value, 1,000,000
shares authorized, 676,190 issued and outstanding at
December 31, 2012 and 2011
Preferred stock, Series A, $10 per share par value,
42,500 shares authorized and issued (total liquidation
value - $58,000) at December 31, 2012 and 2011;
Series B, $10 per share par value, 250,000 shares authorized,
117,154 shares issued and 117,154 shares outstanding
(total liquidation value -$1,171,540) at
December 31, 2012 and 2011
Treasury stock, Series A Preferred, $10 per share par value,
42,500 shares as of December 31, 2012 and 2011
Aggregate write-ins for other than special surplus funds
Surplus notes
Paid-in surplus
Unassigned surplus
Total capital and surplus
Total liabilities and capital and surplus
$
2011
14,844,093
15,866,274
3,678,436
$
238,728
169,217
5,187,660
21,289
6,704
89,724
445,323
3,696
971,392
915,880
840,245
5,940,038
513
220,281
176,338
5,995,687
19,333
–
88,828
358,297
4,981
1,094,942
879,479
854,620
7,837,637
9,600
46,585
7,245
10,364
2,160,218
85,516
62,277
243,112
12,030
3,520,304
–
(2,496,726)
157,590
357,183
1,610,622
260,341
48,608,538
100,026,688
$
14,826,292
16,637,184
3,507,297
(726,356)
149,180
107,235
–
311,966
41,406,109
97,596,653
6,762
6,762
1,597
1,597
(58,000)
–
150,000
3,346,065
2,024,139
5,470,563
105,497,251 $
(58,000)
432,568
150,000
3,326,311
1,262,404
5,121,642
102,718,295
See accompanying notes.
TLIC 2012 SEC
4
Transamerica Life Insurance Company
Statements of Operations – Statutory Basis
(Dollars in Thousands)
2012
Revenues:
Premiums and other considerations, net of reinsurance:
Life
Annuity
Accident and health
Net investment income
Amortization of interest maintenance reserve
Commissions and expense allowances on reinsurance
ceded
Income from fees associated with investment management,
administration and contract guarantees
for separate accounts
Reserve adjustment on reinsurance ceded
IMR adjustment due to reinsurance
Consideration received on reinsurance recapture and
novations
Income from administrative service agreement with affilate
Other income
$
1,147,190
9,948,086
711,538
2,729,527
31,284
$
$
$
494,516
(159,096)
307,904
603,433
(2,160,914)
63,262
Insurance expenses:
Commissions
General insurance expenses
Taxes, licenses and fees
Net transfers to separate accounts
Change in case level liability
Consideration paid on reinsurance transactions
Reinsurance transaction - modco reserve adjustment on
reinsurance assumed
Other expenses
337,360
8,845,105
681,591
2,615,858
71,742
2010
1,523,920
6,931,132
710,067
2,919,171
3,906
(1,597,611)
504,373
Benefits and expenses:
Benefits paid or provided for:
Life benefits
Accident and health benefits
Annuity benefits
Surrender benefits
Other benefits
Increase (decrease) in aggregate reserves for policies
and contracts:
Life
Annuity
Accident and health
Total benefits and expenses
Gain (loss) from operations before dividends to policyholders,
federal income tax benefit and net realized capital gains
(losses) on investments
Year Ended December 31
2011
892,482
380,170
(351,287)
–
43,455
74,457
72,054
13,767,745
–
60,237
85,154
11,742,760
–
51,177
85,480
13,146,218
940,593
494,903
1,067,932
5,930,279
195,827
993,834
473,566
1,082,923
5,703,634
199,349
1,133,801
496,368
1,084,962
5,970,842
215,848
18,775
(770,871)
150,798
8,028,236
(201,230)
(1,353,277)
88,562
6,987,361
51,172
(1,017,181)
100,880
8,036,692
1,094,907
660,695
89,428
3,033,966
(1,284)
–
1,132,581
687,102
83,034
5,167,168
(2,434)
352,463
1,440,391
764,037
72,666
1,901,530
(5,821)
–
(205,194)
46,754
4,719,272
12,747,508
(218,566)
602,274
7,803,622
14,790,983
(262,273)
984,633
4,895,163
12,931,855
1,020,237
$
(3,048,223) $
214,363
TLIC 2012 SEC
5
Transamerica Life Insurance Company
Statements of Operations – Statutory Basis (continued)
(Dollars in Thousands)
2012
Dividends to policyholders
Gain (loss) from operations before federal income tax benefit
and net realized capital gains (losses) on investments
Federal income tax benefit
Gain (loss) from operations before net realized capital
gains (losses) on investments
Net realized capital gains (losses) on investments (net of related
federal income taxes and amounts transferred to/from
interest maintenance reserve)
Net income (loss)
$
$
Year Ended December 31
2011
8,651
$
9,496
2010
$
10,074
1,011,586
(162,504)
(3,057,719)
(174,917)
204,289
(270,228)
1,174,090
(2,882,802)
474,517
423,536
(2,459,266) $
(56,838)
417,679
(382,526)
791,564 $
See accompanying notes.
TLIC 2012 SEC
6
Transamerica Life Insurance Company
Statements of Changes in Capital and Surplus – Statutory Basis
(Dollars in Thousands)
Common
Stock
Balance at January 1, 2010
$
6,762
Preferred
Stock
$
1,597
Treasury
Stock
$
Aggregate
Write-ins
for Other
than Special
Surplus Funds
(58,000) $
295,260
Surplus
Notes
$
Paid-in
Surplus
150,000
$
Unassigned
Surplus
3,113,948
$
1,517,258
Total
Capital and
Surplus
$ 5,026,825
Cumulative effect of change in accounting
principle
–
–
–
–
–
–
6,403
6,403
Net income
–
–
–
–
–
–
417,679
417,679
–
–
–
–
–
–
153,857
153,857
Change in net unrealized capital gains/losses,
net of tax
Change in net unrealized foreign exchange capital
–
–
–
–
–
–
Change in net deferred income tax asset
gains/losses, net of tax
–
–
–
–
–
–
(207,877)
7,912
(207,877)
7,912
Change in other nonadmitted assets
–
–
–
–
–
–
109,110
109,110
–
–
–
–
–
–
4,914
4,914
Change in provision for reinsurance in
unauthorized companies
Change in reserve on account of change in
–
–
–
–
–
–
Change in asset valuation reserve
valuation basis
–
–
–
–
–
–
(27,316)
119
(27,316)
119
Change in surplus in separate accounts
–
–
–
–
–
–
10,366
10,366
Long-term incentive compensation
–
–
–
–
–
3,205
–
Change in surplus as a result of reinsurance
–
–
–
–
–
–
3,205
(64,348)
(64,348)
Increase in admitted deferred tax asset pursuant
pursuant to SSAP No. 10R
Dividends to stockholders
–
–
–
259,663
–
–
–
–
–
–
–
–
–
259,663
(1,400,000)
(1,400,000)
Change in deferred premium due to valuation
adjustment
Balance at December 31, 2010
–
$
6,762
–
$
1,597
–
$
(58,000) $
–
554,923
–
$
150,000
–
$
3,117,153
(2,388)
$
525,689
(2,388)
$ 4,298,124
TLIC 2012 SEC
7
Transamerica Life Insurance Company
Statements of Changes in Capital and Surplus – Statutory Basis (continued)
(Dollars in Thousands)
Aggregate
Write-ins
for Other
Balance at December 31, 2010
Total
Common
Preferred
Treasury
than Special
Surplus
Paid-in
Unassigned
Capital and
Stock
Stock
Stock
Surplus Funds
Notes
Surplus
Surplus
Surplus
$
Net loss
6,762
$
1,597
$
(58,000) $
554,923
$
150,000
$
3,117,153
–
–
–
–
–
–
–
–
–
–
–
–
$
525,689
(2,459,266)
$ 4,298,124
(2,459,266)
Change in net unrealized capital gains/losses,
net of tax
583,550
583,550
Change in net unrealized foreign exchange capital
–
–
–
–
–
–
Change in net deferred income tax asset
gains/losses, net of tax
–
–
–
–
–
–
Change in other nonadmitted assets
–
–
–
–
–
–
(6,120)
(6,120)
136,907
136,907
(2,392)
(2,392)
Change in provision for reinsurance in
–
–
–
–
–
–
(2,546)
(2,546)
Change in asset valuation reserve
unauthorized companies
–
–
–
–
–
–
16,524
16,524
Change in surplus in separate accounts
–
–
–
–
–
–
Change in surplus as a result of reinsurance
Change in admitted deferred tax asset pursuant
–
–
–
–
–
–
pursuant to SSAP No. 10R
(2,863)
(2,863)
2,474,106
2,474,106
–
–
–
–
–
–
(122,355)
Capital contribution
–
–
–
–
–
200,000
–
200,000
Dissolution of NEF Investment Company
–
–
–
–
–
–
Long-term incentive compensation
–
–
–
–
–
9,158
Balance at December 31, 2011
$
6,762
$
1,597
$
(58,000) $
(122,355)
432,568
$
150,000
$
3,326,311
(1,185)
$
(1,185)
–
9,158
1,262,404
$ 5,121,642
TLIC 2012 SEC
8
Transamerica Life Insurance Company
Statements of Changes in Capital and Surplus – Statutory Basis (continued)
(Dollars in Thousands)
Aggregate
Write-ins
for Other
Balance at December 31, 2011
Total
Common
Preferred
Treasury
than Special
Surplus
Paid-in
Unassigned
Capital and
Stock
Stock
Stock
Surplus Funds
Notes
Surplus
Surplus
Surplus
$
Net income
6,762
$
1,597
$
(58,000) $
432,568
$
150,000
$
3,326,311
$
1,262,404
$
5,121,642
–
–
–
–
–
–
791,564
791,564
–
–
–
–
–
–
2
2
Change in net unrealized capital gains/losses,
net of tax
Change in net unrealized foreign exchange capital
gains/losses, net of tax
–
–
–
–
–
–
Change in net deferred income tax asset
–
–
–
–
–
–
(105,935)
9,563
(105,935)
9,563
Change in other nonadmitted assets
–
–
–
–
–
–
49,645
49,645
–
–
–
–
–
–
9,087
9,087
–
–
–
–
–
–
–
–
–
–
–
–
Change in provision for reinsurance in
unauthorized companies
Change in reserve on account of change in
valuation basis
Change in asset valuation reserve
973
973
(36,401)
(36,401)
Change in surplus in separate accounts
–
–
–
–
–
–
8,197
8,197
Change in surplus as a result of reinsurance
–
–
–
–
–
–
(34,731)
(34,731)
Dividends to stockholders
–
–
–
–
–
–
(300,000)
(300,000)
Correction of error - IMR adjustment
–
–
–
–
–
–
(8,889)
(8,889)
Correction of error - claim waiver adjustment
–
–
–
–
–
–
(20,341)
(20,341)
–
–
–
–
–
–
(33,567)
(33,567)
–
–
–
–
–
432,568
–
–
–
–
–
19,754
–
19,754
Correction of error - reinsurance IMR gain
deferral
Change in admitted deferred tax asset pursuant
to SSAP No. 101
Long-term incentive compensation
Balance at December 31, 2012
$
6,762
$
1,597
$
(58,000) $
(432,568)
–
–
$
150,000
$
3,346,065
$
2,024,139
$
5,470,563
See accompanying notes.
TLIC 2012 SEC
9
Transamerica Life Insurance Company
Statements of Cash Flow – Statutory Basis
(Dollars in Thousands)
2012
Operating activities
Premiums collected, net of reinsurance
Net investment income received
Miscellaneous income (expense)
Benefit and loss related payments
Net transfers to separate accounts
Commissions, expenses paid and
aggregate write-ins for deductions
Dividends paid to policyholders
Federal and foreign income taxes
recovered (paid)
Net cash used in operating activities
$
Year Ended December 31
2011
2010
11,814,188 $ 9,977,873 $ 9,222,197
2,807,544
2,985,106
2,671,763
1,162,966
569,910
(976,256)
(9,577,187)
(9,022,576)
(8,664,812)
(4,563,220)
(1,709,930)
(4,796,312)
(278,351)
(9,263)
(332,606)
(9,884)
(2,756,812)
(10,559)
188,989
(50,054)
92,471
(442,043)
(113,355)
(836,019)
Investing activities
Proceeds from investments sold, matured
or repaid:
Bonds
Common stocks
Preferred stocks
Mortgage loans
Real estate and properties held for sale
Other invested assets
Receivable for securities
Securities lending reinvested collateral assets
Miscellaneous proceeds
Total investment proceeds
10,121,509
52,538
59,805
1,468,644
19,355
486,960
24,450
1,360,086
27,906
13,621,253
16,891,112
168,476
63,880
1,466,463
26,978
528,027
13,693
436,576
321,467
19,916,672
24,609,623
167,903
143,250
1,270,379
1,316
693,425
(66,950)
–
112,803
26,931,749
Costs of investments acquired:
Bonds
Common stocks
Preferred stocks
Mortgage loans
Real estate and properties held for sale
Other invested assets
Securities lending reinvested collateral assets
Miscellaneous applications
Total cost of investments acquired
Net decrease in policy loans
Net cost of investments acquired
Net cash provided by (used in) investing activities
(6,763,489)
(59,779)
(25,851)
(373,806)
(2,894)
(251,237)
–
(509,843)
(7,986,899)
18,890
(7,968,009)
5,653,244
(9,541,749)
(292,401)
(60,610)
(191,262)
(1,343)
(382,939)
–
(2,145)
(10,472,449)
18,994
(10,453,455)
9,463,217
(23,107,917)
(96,764)
(112,885)
(38,062)
(350)
(480,709)
(3,956,880)
(227,105)
(28,020,672)
13,279
(28,007,393)
(1,075,644)
TLIC 2012 SEC
10
Transamerica Life Insurance Company
Statements of Cash Flow – Statutory Basis (continued)
(Dollars in Thousands)
Year Ended December 31
2012
2011
2010
Financing and miscellaneous activities
Net withdrawals on deposit-type contract
funds and other liabilities without life or
disability contingencies
Borrowed funds
Funds held under reinsurance treaties
with unauthorized reinsurers
Dividends paid to stockholders
Capital contribution received
Receivable from parent, subsidiaries and
affiliates
Payable to parent, subsidiaries and affiliates
Payable for securities lending
Other cash provided (used)
Net cash used in financing and
miscellaneous activities
$
Net increase (decrease) in cash, cash
equivalents and short-term investments
Cash, cash equivalents and short-term
investments:
Beginning of year
End of year
$
(825,256) $ (1,726,008) $ (1,839,672)
–
–
85,269
(2,057,558)
(300,000)
–
(5,531,199)
–
200,000
(892,010)
(1,400,000)
–
102,917
(235,867)
(1,360,086)
257,041
94,676
(233,864)
(436,576)
155,168
(61,088)
206,555
3,956,880
(398,230)
(4,333,540)
(7,477,803)
(427,565)
1,269,650
1,543,371
3,116,452
4,386,102 $
1,573,081
3,116,452 $
(2,339,228)
3,912,309
1,573,081
See accompanying notes.
TLIC 2012 SEC
11
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis
(Dollars in Thousands, Except per Share amounts)
December 31, 2012
1. Organization and Summary of Significant Accounting Policies
Transamerica Life Insurance Company (the Company) is a stock life insurance company owned
by Transamerica Corporation (74.01% of preferred shares), Aegon USA, LLC (25.99% of
preferred shares) and Transamerica International Holdings, Inc. (100% of common shares).
Nature of Business
The Company sells individual non-participating whole life, endowment and term contracts,
structured settlements, pension products and reinsurance, as well as a broad line of single fixed
and flexible premium annuity products, guaranteed interest contracts and funding agreements. In
addition, the Company offers group life, universal life, credit life, and individual and specialty
health coverages. The Company is licensed in 49 states and the District of Columbia, Guam,
Puerto Rico and US Virgin Islands. Sales of the Company’s products are primarily through a
network of agents, brokers and financial institutions.
Basis of Presentation
The preparation of financial statements of insurance companies requires management to make
estimates and assumptions that affect amounts reported in the financial statements and
accompanying notes. Such estimates and assumptions could change in the future as more
information becomes known, which could impact the amounts reported and disclosed herein.
The accompanying financial statements have been prepared in conformity with accounting
practices prescribed or permitted by the Insurance Division, Department of Commerce, of the
State of Iowa, which practices differ from accounting principles generally accepted in the United
States (GAAP). The more significant variances from GAAP are:
Investments: Investments in bonds and mandatory redeemable preferred stocks are reported at
amortized cost or fair value based on their National Association of Insurance Commissioners
(NAIC) rating; for GAAP, such fixed maturity investments would be designated at purchase as
held-to-maturity, trading or available-for-sale. Held-to-maturity fixed investments would be
reported at amortized cost, and the remaining fixed maturity investments would be reported at
fair value with unrealized holding gains and losses reported in earnings for those designated as
trading and as a separate component of other comprehensive income (OCI) for those
designated as available-for-sale. Fair value for GAAP is based on indexes, third party pricing
services, brokers, external fund managers and internal models. For statutory reporting, the
NAIC allows insurance companies to report the fair value determined by the Securities
TLIC 2012 SEC
12
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Valuation Office of the NAIC (SVO) or determine the fair value by using a permitted valuation
method.
All single class and multi-class mortgage-backed/asset-backed securities (e.g., CMOs) are
adjusted for the effects of changes in prepayment assumptions on the related accretion of
discount or amortization of premium of such securities using either the retrospective or
prospective methods. If the fair value of the mortgage-backed/asset-backed security is less than
amortized cost, an entity shall assess whether the impairment is other-than-temporary. An
other-than-temporary impairment is considered to have occurred if the fair value of the
mortgage-backed/asset-backed security is less than its amortized cost basis and the entity
intends to sell the security or the entity does not have the intent and ability to hold the security
for a period of time sufficient to recover the amortized cost basis. An other-than-temporary
impairment is also considered to have occurred if the discounted estimated future cash flows
are less than the amortized cost basis of the security.
If it is determined an other-than-temporary impairment has occurred as a result of the cash flow
analysis, the security is written down to the discounted estimated future cash flows. If an
other-than-temporary impairment has occurred due to intent to sell or lack of intent and ability
to hold, the security is written down to fair value.
For GAAP, all securities, purchased or retained, that represent beneficial interests in
securitized assets (e.g., CMO, CBO, CDO, CLO, MBS and ABS securities), other than high
credit quality securities, are adjusted using the prospective method when there is a change in
estimated future cash flows. If high credit quality securities are adjusted, the retrospective
method is used. If it is determined that a decline in fair value is other-than-temporary and the
entity intends to sell the security or more likely than not will be required to sell the security
before recovery of its amortized cost basis less any current period credit loss, the other-thantemporary impairment should be recognized in earnings equal to the entire difference between
the amortized cost basis and its fair value at the impairment date. If the entity does not intend
to sell the security and it is not more likely than not that the entity will be required to sell the
security before recovery, the other-than-temporary impairment should be separated into a) the
amount representing the credit loss, which is recognized in earnings, and b) the amount related
to all other factors, which is recognized in OCI, net of applicable taxes.
Derivative instruments used in hedging transactions that meet the criteria of an effective hedge
are valued and reported in a manner that is consistent with the hedged asset or liability.
Embedded derivatives are not accounted for separately from the host contract. Derivative
instruments used in hedging transactions that do not meet or no longer meet the criteria of an
effective hedge are accounted for at fair value, and the changes in the fair value are recorded in
unassigned surplus as unrealized gains and losses. Under GAAP, the effective and ineffective
portions of a single hedge are accounted for separately, and the change in fair value for cash
TLIC 2012 SEC
13
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
flow hedges is credited or charged directly to a separate component of OCI rather than to
income as required for fair value hedges, and an embedded derivative within a contract that is
not clearly and closely related to the economic characteristics and risk of the host contract is
accounted for separately from the host contract and valued and reported at fair value.
Derivative instruments are also used in replication transactions. In these transactions, the
derivative is valued in a manner consistent with the cash investment and replicated asset. For
GAAP, the derivative is reported at fair value, with the changes in fair value reported in
income.
Investments in real estate are reported net of related obligations rather than on a gross basis as
for GAAP. Real estate owned and occupied by the Company is included in investments rather
than reported as an operating asset as under GAAP, and investment income and operating
expenses for statutory reporting include rent for the Company’s occupancy of those properties.
Changes between depreciated cost and admitted amounts are credited or charged directly to
unassigned surplus rather than to income as would be required under GAAP.
Valuation allowances are established for mortgage loans, if necessary, based on the difference
between the net value of the collateral, determined as the fair value of the collateral less
estimated costs to obtain and sell, and the recorded investment in the mortgage loan. Under
GAAP, such allowances are based on the present value of expected future cash flows
discounted at the loan’s effective interest rate or, if foreclosure is probable, on the estimated
fair value of the collateral.
The initial valuation allowance and subsequent changes in the allowance for mortgage loans
are charged or credited directly to unassigned surplus as part of the change in asset valuation
reserve (AVR), rather than being included as a component of earnings as would be required
under GAAP.
Valuation Reserves: Under a formula prescribed by the NAIC, the Company defers the portion
of realized capital gains and losses on sales of fixed income investments, principally bonds and
mortgage loans, attributable to changes in the general level of interest rates and amortizes those
deferrals over the remaining period to maturity of the bond or mortgage loan based on
groupings of individual securities sold in five year bands. That net deferral is reported as the
interest maintenance reserve (IMR) in the accompanying balance sheets. Realized capital gains
and losses are reported in income net of federal income tax and transfers to the IMR. Under
GAAP, realized capital gains and losses are reported in the statement of operations on a pre-tax
basis in the period that the assets giving rise to the gains or losses are sold.
TLIC 2012 SEC
14
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
The AVR provides a valuation allowance for invested assets. The AVR is determined by an
NAIC prescribed formula with changes reflected directly in unassigned surplus; AVR is not
recognized for GAAP.
Subsidiaries: The accounts and operations of the Company’s subsidiaries are not consolidated
with the accounts and operations of the Company as would be required under GAAP.
Policy Acquisition Costs: The costs of acquiring and renewing business are expensed when
incurred. Under GAAP, incremental costs directly related to the successful acquisition of
traditional life insurance and certain long-duration accident and health insurance, to the extent
recoverable from future policy revenues, would be deferred and amortized over the premiumpaying period of the related policies using assumptions consistent with those used in
computing policy benefit reserves; for universal life insurance and investment products, to the
extent recoverable from future gross profits, deferred policy acquisition costs are amortized
generally in proportion to the present value of expected gross profits from surrender charges
and investment, mortality and expense margins.
Separate Accounts with Guarantees: Some of the Company’s separate accounts provide
policyholders with a guaranteed return. In accordance with the guarantees provided, if the
investment proceeds are insufficient to cover the rate of return guaranteed for the product, the
policyholder proceeds will be remitted by the general account. These separate accounts are
included in the general account for GAAP due to the nature of the guaranteed return.
Nonadmitted Assets: Certain assets designated as “nonadmitted”, primarily net deferred tax
assets and other assets not specifically identified as an admitted asset within the NAIC
Accounting Practices and Procedures Manual (NAIC SAP), are excluded from the
accompanying balance sheets and are charged directly to unassigned surplus. Under GAAP,
such assets are included in the balance sheet to the extent that they are not impaired.
Universal Life and Annuity Policies: Revenues for universal life and annuity policies with
mortality or morbidity risk (including annuities with purchase rate guarantees) consist of the
entire premium received. Benefits incurred represent surrenders and death benefits paid and
the change in policy reserves. Premiums received and benefits incurred for annuity policies
without mortality or morbidity risk and guaranteed interest in group annuity contracts are
recorded directly to a policy reserve account using deposit accounting, without recognizing
premium income or benefits expense. Interest on these policies is reflected in other benefits.
Under GAAP, for universal life policies, premiums received in excess of policy charges would
not be recognized as premium revenue and benefits would represent interest credited to the
account values and the excess of benefits paid over the policy account value. Under GAAP, for
all annuity policies without significant mortality risk, premiums received and benefits paid
would be recorded directly to the reserve liability.
TLIC 2012 SEC
15
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Benefit Reserves: Certain policy reserves are calculated based on statutorily required interest
and mortality assumptions rather than on estimated expected experience or actual account
balances as would be required under GAAP.
Reinsurance: Any reinsurance amounts deemed to be uncollectible have been written off
through a charge to operations. In addition, a liability for reinsurance balances would be
established for unsecured policy reserves ceded to reinsurers not authorized to assume such
business. Changes to the liability are credited or charged directly to unassigned surplus. Under
GAAP, an allowance for amounts deemed uncollectible would be established through a charge
to earnings.
Losses associated with an indemnity reinsurance transaction are reported within income when
incurred rather than being deferred and amortized over the remaining life of the underlying
reinsured contracts as would be required under GAAP.
Policy and contract liabilities ceded to reinsurers have been reported as reductions of the
related reserves rather than as assets as would be required under GAAP.
Commissions allowed by reinsurers on business ceded are reported as income when incurred
rather than being deferred and amortized with deferred policy acquisition costs as required
under GAAP.
Deferred Income Taxes: The Company computes deferred income taxes in accordance with
Statement of Statutory Accounting Principle (SSAP) No. 101, Income Taxes, A Replacement of
SSAP No. 10R and SSAP No. 10. Under SSAP No. 101, admitted adjusted deferred income tax
assets are limited to 1) the amount of federal income taxes paid in prior years that can be
recovered through loss carrybacks for existing temporary differences that reverse during a
timeframe corresponding with the Internal Revenue Service tax loss carryback provisions, not
to exceed three years, plus 2) the amount of adjusted gross deferred income tax assets expected
to be realized within three years limited to an amount that is no greater than 15% of current
period’s adjusted statutory capital and surplus, plus 3) the amount of remaining adjusted gross
deferred income tax assets that can be offset against existing gross deferred income tax
liabilities after considering the character (i.e., ordinary versus capital) and reversal patterns of
the deferred tax assets and liabilities. The remaining adjusted deferred income tax assets are
nonadmitted.
Deferred income taxes do not include amounts for state taxes. Under GAAP, state taxes are
included in the computation of deferred income taxes, a deferred income tax asset is recorded
for the amount of gross deferred income tax assets expected to be realized in
TLIC 2012 SEC
16
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
all future years, and a valuation allowance is established for deferred income tax assets not
realizable.
Goodwill: Goodwill is admitted subject to an aggregate limitation of ten percent of the capital
and surplus in the most recently filed annual statement excluding electronic data processing
equipment, operating system software, net deferred income tax assets and net positive
goodwill. Excess goodwill is nonadmitted. Goodwill is amortized over ten years. Under
GAAP, goodwill is measured as the excess of the consideration transferred plus the fair value
of any noncontrolling interest in the acquiree at the acquisition date as compared to the fair
values of the identifiable net assets acquired. Goodwill is not amortized but is assessed for
impairment on an annual basis, or more frequently if circumstances indicate that a possible
impairment has occurred.
Policyholder Dividends: Policyholder dividends are recognized when declared rather than over
the term of the related policies as would be required under GAAP.
Surplus Notes: Surplus notes are reported as surplus rather than as liabilities as would be
required under GAAP.
Statements of Cash Flow: Cash, cash equivalents and short-term investments in the statements
of cash flow represent cash balances and investments with initial maturities of one year or less.
Under GAAP, the corresponding caption of cash and cash equivalents includes cash balances
and investments with initial maturities of three months or less.
Securities Lending Assets and Liabilities: For securities lending programs, cash collateral
received which may be sold or repledged by the Company is reflected as a one-line entry on
the balance sheet (securities lending reinvested collateral assets) and a corresponding liability
is established to record the obligation to return the cash collateral. Collateral received which
may not be sold or repledged is not recorded on the Company’s balance sheet. Under GAAP,
the reinvested collateral is included within invested assets (i.e. it is not one-line reported).
The effects of the foregoing variances from GAAP on the accompanying statutory-basis financial
statements have not been determined by the Company, but are presumed to be material.
Other significant accounting policies are as follows:
Investments
Investments in bonds, except those to which the SVO has ascribed an NAIC designation of 6, are
reported at amortized cost using the interest method.
TLIC 2012 SEC
17
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Hybrid securities, as defined by the NAIC, are securities designed with characteristics of both
debt and equity and provide protection to the issuer’s senior note holders. These securities meet
the definition of a bond, in accordance with SSAP No. 26, Bonds, excluding Loan-backed and
Structured Securities and therefore, are reported at amortized cost or fair value based upon their
NAIC rating.
Single class and multi-class mortgage-backed/asset-backed securities are valued at amortized
cost using the interest method, including anticipated prepayments, except for those with an initial
NAIC designation of 6, which are valued at the lower of amortized cost or fair value.
Prepayment assumptions are obtained from dealer surveys or internal estimates and are based on
the current interest rate and economic environment. The retrospective adjustment method is used
to value all such securities, except principal-only and interest-only securities, which are valued
using the prospective method.
The Company closely monitors below investment grade holdings and those investment grade
issuers where the Company has concerns. The Company also regularly monitors industry sectors.
The Company considers relevant facts and circumstances in evaluating whether the impairment
is other-than-temporary including: (1) the probability of the Company collecting all amounts due
according to the contractual terms of the security in effect at the date of acquisition; (2) the
Company’s decision to sell a security prior to its maturity at an amount below its carrying
amount; and (3) the Company’s ability to hold a structured security for a period of time to allow
for recovery of the value to its carrying amount. Additionally, financial condition, near term
prospects of the issuer and nationally recognized credit rating changes are monitored. Nonstructured securities in unrealized loss positions that are considered other-than-temporary are
written down to fair value. Structured securities considered other-than-temporarily impaired are
written down to discounted estimated cash flows if the impairment is the result of cash flow
analysis. If the Company has an intent to sell or lack of ability to hold a structured security, it is
written down to fair value. For structured securities, cash flow trends and underlying levels of
collateral are monitored. The Company will record a charge to the statement of operations to the
extent that these securities are determined to be other-than-temporarily impaired.
Investments in both affiliated and unaffiliated preferred stocks in good standing are reported at
cost or amortized cost. Investments in preferred stocks not in good standing are reported at the
lower of cost or fair value, and the related net unrealized capital gains (losses) are reported in
unassigned surplus along with any adjustment for federal income taxes.
Common stocks of unaffiliated companies, which include shares of mutual funds, are reported at
fair value and the related net unrealized capital gains or losses are reported in unassigned surplus
along with any adjustment for federal income taxes.
TLIC 2012 SEC
18
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
If the Company determines that a decline in the fair value of a common stock or a preferred stock
is other-than-temporary, the Company writes it down to fair value as the new cost basis and the
amount of the write down is accounted for as a realized loss in the statement of operations. The
Company considers the following factors in determining whether a decline in value is other-thantemporary: (a) the financial condition and prospects of the issuer; (b) whether or not the
Company has made a decision to sell the investment; and (c) the length of time and extent to
which the value has been below cost.
Common stocks of affiliated insurance subsidiaries are reported based on underlying statutory
equity plus the admitted portion of goodwill. Common stocks of affiliated noninsurance
subsidiaries are reported based on underlying audited GAAP equity. The net change in the
subsidiaries’ equity is included in the change in net unrealized capital gains or losses, reported in
unassigned surplus along with any adjustment for federal income taxes.
The Company is restricted to trading Primus Guaranty, Ltd (Primus) a common stock holding,
due to its ownership interest, which would require special securities filings prior to executing any
purchase or sale transactions in regard to these securities. The Company’s interest in Primus
does not meet the definition of an affiliate, and is therefore accounted for as an unaffiliated
common stock investment. The carrying amount in Primus, which is carried at fair value, as of
December 31, 2012 and 2011 was $49,416 and $27,673, respectively.
Short-term investments include investments with remaining maturities of one year or less at the
time of acquisition and are principally stated at amortized cost.
Cash equivalents are short-term highly liquid investments with original maturities of three
months or less and are principally stated at amortized cost.
Mortgage loans are reported at unpaid principal balances, less an allowance for impairment. A
mortgage loan is considered to be impaired when it is probable that the Company will be unable
to collect all principal and interest amounts due according to the contractual terms of the
mortgage agreement. When management determines that the impairment is other-thantemporary, the mortgage loan is written down to realizable value and a realized loss is
recognized.
Land is reported at cost. Real estate occupied by the Company is reported at depreciated cost net
of encumbrances. Real estate held for the production of income is reported at depreciated cost
net of related obligations. Real estate that the Company classifies as held for sale is measured at
lower of carrying amount or fair value less cost to sell. Depreciation is calculated on a straightline basis over the estimated useful lives of the properties. The Company recognizes an
impairment loss if the Company determines that the carrying amount of the real estate is not
recoverable and exceeds its fair value. The Company deems that the carrying amount of the asset
TLIC 2012 SEC
19
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
is not recoverable if the carrying amount exceeds the sum of undiscounted cash flows expected
to result from the use and disposition. The impairment loss is measured as the amount by which
the asset’s carrying value exceeds its fair value.
Policy loans are reported at unpaid principal balances.
The Company has minority ownership interests in joint ventures and limited partnerships. The
Company carries these investments based on its interest in the underlying audited GAAP equity
of the investee. For a decline in the fair value of an investment in a joint venture or limited
partnership which is determined to be other-than-temporary, the Company writes it down to fair
value as the new cost basis and the amount of the write down is accounted for as a realized loss
in the statement of operations. The Company considers an impairment to have occurred if it is
probable that the Company will be unable to recover the carrying amount of the investment or if
there is evidence indicating inability of the investee to sustain earnings which would justify the
carrying amount of the investment.
Investments in Low Income Housing Tax Credit (LIHTC) properties are valued at amortized
cost. Tax credits are recognized in operations in the tax reporting year in which the tax credit is
utilized by the Company.
Other “admitted assets” are valued principally at cost, as required or permitted by Iowa
Insurance Laws.
Realized capital gains and losses are determined using the specific identification method and are
recorded net of related federal income taxes. Changes in admitted asset carrying amounts of
bonds, mortgage loans, common and preferred stocks are credited or charged directly to
unassigned surplus.
Interest income is recognized on an accrual basis. The Company does not accrue income on
bonds in default, mortgage loans on real estate in default and/or foreclosure or which are
delinquent more than twelve months, or real estate where rent is in arrears for more than three
months. Income is also not accrued when collection is uncertain. In addition, accrued interest is
excluded from investment income when payment exceeds 90 days past due. At December 31,
2012 and 2011, the Company excluded investment income due and accrued of $281 and $562,
respectively, with respect to such practices.
For dollar repurchase agreements, the Company receives cash collateral in an amount at least
equal to the fair value of the securities transferred by the Company in the transaction as of the
transaction date. Cash received as collateral will be invested as needed or used for general
corporate purposes of the Company.
TLIC 2012 SEC
20
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Derivative Instruments
Overview: The Company may use various derivative instruments (options, caps, floors, swaps,
foreign currency forwards and futures) to manage risks related to its ongoing business
operations. On the transaction date of the derivative instrument, the Company designates the
derivative as either (A) hedging (fair value, foreign currency fair value, cash flow, foreign
currency cash flow, forecasted transactions or net investment in a foreign operation), (B)
replication, (C) income generation or (D) held for other investment/risk management activities,
which do not qualify for hedge accounting under SSAP No. 86, Accounting for Derivative
Instruments and Hedging Activities.
Derivative instruments used in hedging relationships are accounted for on a basis that is
consistent with the hedged item (amortized cost or fair value). Derivative instruments used in
replication relationships are accounted for on a basis that is consistent with the cash instrument
and the replicated asset (amortized cost or fair value). Derivative instruments used in income
generation relationships are accounted for on a basis that is consistent with the associated
covered asset or underlying interest to which the derivative indicates (amortized cost or fair
value). Derivative instruments held for other investment/risk management activities receive fair
value accounting.
Derivative instruments are subject to market risk, which is the possibility that future changes in
market prices may make the instruments less valuable. The Company uses derivatives as hedges,
consequently, when the value of the derivative changes, the value of a corresponding hedged
asset or liability will move in the opposite direction. Market risk is a consideration when
changes in the value of the derivative and the hedged item do not completely offset (correlation
or basis risk) which is mitigated by active measuring and monitoring.
The Company is exposed to credit-related losses in the event of non-performance by
counterparties to financial instruments, but it does not expect any counterparties to fail to meet
their obligations given their high credit rating of 'A' or better. The credit exposure of interest rate
swaps and currency swaps is represented by the fair value of contracts, aggregated at a
counterparty level, with a positive fair value at the reporting date. The Company has entered into
collateral agreements with certain counterparties wherein the counterparty is required to post
assets on the Company's behalf. The posted amount is equal to the difference between the net
positive fair value of the contracts and an agreed upon threshold that is based on the credit rating
of the counterparty. Inversely, if the net fair value of all contracts with this counterparty is
negative, then the Company is required to post assets instead.
Instruments: Interest rate swaps are the primary derivative financial instruments used in the
overall asset/liability management process to modify the interest rate characteristics of the
underlying asset or liability. These interest rate swaps generally provide for the exchange of the
TLIC 2012 SEC
21
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
difference between fixed and floating rate amounts based on an underlying notional amount.
Typically, no cash is exchanged at the outset of the swap contract and a single net payment is
exchanged at each due date. Swaps that meet hedge accounting rules are carried in a manner
consistent with the hedged item, generally at amortized cost, on the financial statements. If the
swap is terminated prior to maturity, proceeds are exchanged equal to the fair value of the
contract. These gains and losses may be included in IMR or AVR if the underlying instrument
receives that treatment. Swaps not meeting hedge accounting rules are carried at fair value with
fair value adjustments recorded in unassigned surplus.
Interest rate basis swaps are used in the overall asset/liability management process to modify the
interest rate characteristics of the underlying liability to mitigate the basis risk of assets and
liabilities resetting on different indices. These interest rate swaps generally provide for the
exchange of the difference between a floating rate on one index to a floating rate of another
index, based upon an underlying notional amount. Typically, no cash is exchanged at the outset
of the swap contract and a single net payment is exchanged at each due date. Swaps meeting
hedge accounting rules are carried in a manner consistent with the hedged item, generally at
amortized cost, on the financial statements. If the swap is terminated prior to maturity, proceeds
are exchanged equal to the fair value of the contract. These gains and losses may be included in
IMR or AVR if the underlying instrument receives that treatment. Swaps not meeting hedge
accounting rules are carried at fair value with fair value adjustments recorded in unassigned
surplus.
Cross currency swaps are utilized to mitigate risks when the Company holds foreign
denominated assets or liabilities, therefore converting the asset or liability to a U.S. dollar (USD)
denominated security. These cross currency swap agreements involve the exchange of two
principal amounts in two different currencies at the prevailing currency rate at contract inception.
During the life of the swap, the counterparties exchange fixed or floating rate interest payments
in the swapped currencies. At maturity, the principal amounts are again swapped at a predetermined rate of exchange. Each asset or liability is hedged individually where the terms of the
swap must meet the terms of the hedged instrument. For swaps qualifying for hedge accounting,
the premium or discount is amortized into income over the life of the contract, and the foreign
currency translation adjustment is recorded as unrealized gain/loss in unassigned surplus. Swaps
not meeting hedge accounting rules are carried at fair value with fair value adjustments recorded
in unassigned surplus. If a swap is terminated prior to maturity, proceeds are exchanged equal to
the fair value of the contract. These gains and losses may be included in IMR or AVR if the
hedged instrument receives that treatment.
Total return swaps are used in the asset/liability management process to mitigate the risk created
when the company has issued minimum guarantee insurance contracts linked to an index. These
total return swaps generally provide for the exchange of the difference between fixed leg (tied to
an equity or interest rate index) and floating leg (tied to LIBOR) amounts based on an underlying
TLIC 2012 SEC
22
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
notional amount (also tied to the underlying index). Typically, no cash is exchanged at the outset
of the swap contract and a single net payment is exchanged each due date. Swaps that meet
hedge accounting rules are carried in a manner consistent with the hedged item, generally at
amortized cost, on the financial statements. If the swap is terminated prior to maturity, proceeds
are exchanged equal to the fair value of the contract. These gains and losses may be included in
IMR or AVR if the underlying instrument receives that treatment. Swaps not meeting hedge
accounting rules are carried at fair value with fair value adjustments recorded in unassigned
surplus.
Variance swaps are used in the asset/liability management process to mitigate the gamma risk
created when the Company has issued minimum guarantee insurance contracts linked to an
index. These variance swaps are similar to volatility options where the underlying index
provides for the market value movements. Variance swaps do not accrue interest. Typically, no
cash is exchanged at the outset of initiating the variance swap, and a single receipt or payment
occurs at the maturity or termination of the contract. The variance swaps that meet hedge
accounting rules are carried in a manner consistent with the hedged item, generally at amortized
cost, on the financial statements. If terminated prior to maturity, proceeds are exchanged equal
to the fair value of the contract. These gains and losses may be included in IMR or AVR if the
underlying instrument receives that treatment. Swaps not meeting hedge accounting rules are
carried at fair value with fair value adjustments recorded in unassigned surplus.
Futures contracts are used to hedge the liability risk associated when the Company issues
products providing the customer a return based on various global equity market indices. Futures
are marked to market on a daily basis whereby a cash payment is made or received by the
Company. These payments are recognized as realized gains or losses in the financial statements.
Collars are used in the asset/liability management process to mitigate the residual risk created
when the company has issued minimum guarantee insurance contracts linked to an index. These
collars are similar to options where the underlying index provides for the market value
movements. The collars do not accrue interest. Typically, no cash is exchanged at the onset, and
a single receipt or payment occurs at the maturity or termination of the contract. Collars that
meet hedge accounting rules are carried in a manner consistent with the hedged item, generally at
amortized cost, on the financial statements. If terminated prior to maturity, proceeds are
exchanged equal to the fair value of the contract. These gains and losses may be included in
IMR or AVR if the underlying instrument receives that treatment. Collars that do not meet
hedge accounting rules are carried at fair value with fair value adjustments recorded in
unassigned surplus.
Caps are used in the asset/liability management process to mitigate the interest rate risk created
due to a rapidly rising interest rate environment. The caps are similar to options where the
underlying interest rate index provides for the market value movements. The caps do not accrue
TLIC 2012 SEC
23
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
interest until the interest rate environment exceeds the caps strike rate. Cash is exchanged at the
onset, and a single receipt or payment occurs at the maturity or termination of the contract. Caps
that meet hedge accounting rules are carried in a manner consistent with the hedged item,
generally at amortized cost, on the financial statements. If terminated prior to maturity, proceeds
are exchanged equal to the fair value of the contract. These gains and losses may be included in
IMR or AVR if the underlying instrument receives that treatment. Caps that do not meet hedge
accounting rules are carried at fair value with fair value adjustments recorded in unassigned
surplus.
The Company may sell products with expected benefit payments extending beyond investment
assets currently available in the market. Because assets will have to be purchased in the future to
fund future liability cash flows, the Company is exposed to the risk of future investments made
at lower yields than what is assumed at the time of pricing. Forward-starting interest rate swaps
are utilized to lock-in the current forward rate. The accrual of income begins at the forward date,
rather than at the inception date. These forward-starting swaps meet hedge accounting rules and
are carried at cost in the financial statements. Gains and losses realized upon termination of the
forward-starting swap are deferred and used to adjust the basis of the asset purchased in the
hedged forecasted period. The basis adjustment is then amortized into income as a yield
adjustment to the asset over its life.
The Company issues fixed liabilities that have a guaranteed minimum crediting rate. The
Company uses receiver swaption, whereby the swaption is designed to generate cash flows to
offset lower yields on assets during a low interest rate environment. The Company pays a single
premium at the beginning of the contract that is amortized throughout the life of the swaption.
These swaptions are carried at fair value with fair value adjustments recorded in unassigned
surplus.
The Company invests in domestic corporate debt securities denominated in U.S. dollars. If the
issuers of these debt obligations fail to make timely payments, the value of the investment
declines materially. The Company manages credit default risk through the purchase of credit
default swaps. As the buyer of credit default protection, the Company will pay a premium to an
approved counterparty in exchange for a contingent payment should a defined credit event occur
with respect to the underlying reference entity or asset. Typically, the periodic premium or fee is
expressed in basis points per notional. Generally, the premium payment for default protection is
made periodically, although it may be paid as an up-front fee for short dated transactions. Should
a credit event occur, the Company may be required to deliver the reference asset to the
counterparty for par. Alternatively, settlement may be in cash. These credit default swaps are
carried on the balance sheet at amortized cost. Premium payments made by the Company are
recognized as investment expense. If the Company is unable to prove hedge effectiveness, the
credit default swaps not meeting hedge accounting rules are carried at fair value with fair value
adjustments recorded in unassigned surplus.
TLIC 2012 SEC
24
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
A replication transaction is a derivative transaction entered into in conjunction with a cash
instrument to reproduce the investment characteristics of an otherwise permissible investment.
The Company replicates investment grade corporate bonds or sovereign debt by combining a
highly rated security as a cash component with a credit default swap which, in effect, converts
the high quality asset into an investment grade corporate asset or a sovereign debt. The benefits
of using the swap market to replicate credit include possible enhanced relative values as well as
ease of executing larger transactions in a shortened time frame. Generally, a premium is
received by the Company on a periodic basis and recognized in investment income. In the event
the representative issuer defaults on its debt obligation referenced in the contract, a payment
equal to the notional amount of the contract will be made by the Company and recognized as a
capital loss.
The Company replicates hybrid fixed to floating treasuries by combining a U.S. Treasury cash
component with a forward starting swap which, in effect, converts a fixed U.S. Treasury into a
hybrid fixed to floating treasury. The purpose of these replications is to aid duration matching
between the treasuries and the supported liabilities. Generally these swaps are carried at
amortized cost with periodic interest payments beginning at a future date. Any early terminations
are recognized as capital gains or losses. The Company complies with the specific rules
established in AVR for replication transactions.
The Company previously entered into some credit default swaps linked to a collateralized debt
obligation (CDO) structure as a result of market events on a liquidity facility it had entered.
Under this transaction, the Company received a fee in exchange for providing credit protection if
the underlying CDO structure incurred losses greater than its supporting collateral. The fee was
recorded in investment income. These swaps were marked to fair value in the balance sheet and
the fair value adjustment was recorded in unassigned surplus. This derivative structure was
terminated in December 2012.
Separate Accounts
The majority of the separate accounts held by the Company, primarily for individual
policyholders as well as for group pension plans, do not have any minimum guarantees, and the
investment risks associated with fair value changes are borne by the policyholder. The assets in
the accounts, carried at estimated fair value, consist of underlying mutual fund shares, common
stocks, long-term bonds and short-term investments.
Certain other separate accounts held by the Company provide a minimum guaranteed return of
3% of the average investment balance to policyholders. The assets consist of long-term bonds
and short-term investments which are carried at amortized cost.
TLIC 2012 SEC
25
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Assets held in trust for purchases of variable universal life and annuity contracts and the
Company’s corresponding obligation to the contract owners are shown separately in the balance
sheets. The assets in the separate accounts are valued at fair value. Income and gains and losses
with respect to the assets in the separate accounts accrue to the benefit of the contract owners
and, accordingly, the operations of the separate accounts are not included in the accompanying
financial statements. The investment risks associated with fair value changes of the separate
accounts are borne entirely by the policyholders except in cases where minimum guarantees
exist. The Company received variable contract premiums of $9,341,436, $9,381,447 and
$6,368,599 in 2012, 2011 and 2010, respectively. In addition, the Company received $603,433,
$494,516 and $380,170 in 2012, 2011 and 2010, respectively, related to fees associated with
investment management, administration and contractual guarantees for separate accounts.
Aggregate Reserves for Policies and Contracts
Life, annuity and accident and health benefit reserves are developed by actuarial methods and are
determined based on published tables using statutorily specified interest rates and valuation
methods that will provide, in the aggregate, reserves that are greater than or equal to the
minimum or guaranteed cash value, or the amount required by law.
The Company waives deduction of deferred fractional premiums upon death of the insured and
returns any portion of the final premium for periods beyond the date of death.
The aggregate policy reserves for life insurance policies are based principally upon the 1941,
1958, 1980 and 2001 Commissioner’s Standard Ordinary Mortality and American Experience
Mortality Tables. The reserves are calculated using interest rates ranging from 2.00 to
6.00 percent and are computed principally on the Net Level Premium Valuation and the
Commissioner’s Reserve Valuation Methods. Reserves for universal life policies are based on
account balances adjusted for the Commissioner’s Reserve Valuation Method.
Additional premiums are charged or additional mortality charges are assessed for policies issued
on substandard lives according to underwriting classification. Generally, mean reserves are
determined by computing the regular mean reserve for the plan at the true age and holding, in
addition, one-half (1/2) of the extra premium charge for the year. For certain flexible premium
and fixed premium universal life insurance products, reserves are calculated utilizing the
Commissioner’s Reserve Valuation Method for universal life policies and recognizing any
substandard ratings.
Deferred annuity reserves are calculated according to the Commissioner’s Annuity Reserve
Valuation Method including excess interest reserves to cover situations where the future interest
guarantees plus the decrease in surrender charges are in excess of the maximum valuation rates
of interest. Reserves for immediate annuities and supplementary contracts with and without life
TLIC 2012 SEC
26
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
contingencies are equal to the present value of future payments assuming interest rates ranging
from 2.00 to 11.25 percent and mortality rates, where appropriate, from a variety of tables.
Annuity reserves also include guaranteed investment contracts (GICs) and funding agreements
classified as life-type contracts as defined in SSAP No. 50, Classifications and Definitions of
Insurance or Managed Care Contracts In Force. These liabilities have annuitization options at
guaranteed rates and consist of floating interest rate and fixed interest rate contracts. The contract
reserves are carried at the greater of the account balance or the value as determined for an
annuity with cash settlement options, on a change in fund basis, according to the Commissioner’s
Annuity Reserve Valuation Method.
Accident and health policy reserves are equal to the greater of the gross unearned premiums or
any required mid-terminal reserves plus net unearned premiums and the present value of
amounts not yet due on both reported and unreported claims.
Tabular interest, tabular less actual reserves released and tabular cost have been determined by
formula. Tabular interest on funds not involving life contingencies has also been determined
primarily by formula.
During 2012, the Company reported a decrease in reserves, net of reinsurance, on account of a
change in valuation basis of $1,381 due to changing from the 1980 CSO mortality table to the
minimum valuation standard of the 2001 CSO mortality table for a block of joint life universal
life with secondary guarantee policies. Partially offsetting this decrease was a $408 increase in
reserves on account of a change in valuation basis due to coding in the reserve valuation system
reserves which had been held constant since 2008 for paid-up additions on a block of
participating policies. The net decrease in reserves of $973 due to the changes in valuation
bases has been credited directly to unassigned surplus.
During 2010, the Company reported a decrease in reserves, net of reinsurance, on account of
changes in valuation bases of $3,642 due to continued conversion from the spreadsheet-based
balance roll forward method of valuation of single premium group annuity (SPGA) products to a
seriatim valuation. In addition, the Company continued to make enhancements to existing
valuation platforms and converted from client based reserves to in-house seriatim calculations
during 2010. These changes resulted in an increase in reserves of $3,523. The net change in
reserves of $119 due to the conversions has been credited directly to unassigned surplus. Related
to this change was a corresponding decrease in the deferred premium asset of $2,388. This
amount was also charged directly to unassigned surplus.
TLIC 2012 SEC
27
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Policy and Contract Claim Reserves
Claim reserves represent the estimated accrued liability for claims reported to the Company and
claims incurred but not yet reported through the balance sheet date. These reserves are estimated
using either individual case-basis valuations or statistical analysis techniques. These estimates
are subject to the effects of trends in claim severity and frequency. The estimates are continually
reviewed and adjusted as necessary as experience develops or new information becomes
available.
Liability for Deposit-Type Contracts
Deposit-type contracts do not incorporate risk from the death or disability of policyholders.
These types of contracts may include GICs, funding agreements and other annuity contracts.
Deposits and withdrawals on these contracts are recorded as a direct increase or decrease,
respectively, to the liability balance and are not reported as premiums, benefits or changes in
reserves in the statement of operations.
The Company issues certain funding agreements with well-defined class-based annuity purchase
rates defining either specific or maximum purchase rate guarantees. However, these funding
agreements are not issued to or for the benefit of an identifiable individual or group of
individuals. These contracts are classified as deposit-type contracts in accordance with SSAP
No. 50.
Municipal Reverse Repurchase Agreements
Municipal repurchase agreements are investment contracts issued to municipalities that pay
either a fixed or floating rate of interest on the guaranteed deposit balance. The floating interest
rate is based on a market index. The related liabilities are equal to the policyholder deposit and
accumulated interest on the contract.
These municipal repurchase agreements require a minimum of 95% of the fair value of the
securities transferred to be maintained as collateral.
Premiums and Annuity Considerations
Revenues for policies with mortality or morbidity risk (including annuities with purchase rate
guarantees) consist of the entire premium received and are recognized over the premium paying
periods of the related policies. Consideration received and benefits paid for annuity policies
without mortality or morbidity risk are recorded using deposit accounting and recorded directly
to an appropriate policy reserve account, without recognizing premium revenue.
TLIC 2012 SEC
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Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Claims and Claim Adjustment Expense
Liabilities for losses and loss/claim adjustment expenses for accident and health contracts are
estimated using statistical claim development models to develop best estimates of liabilities for
medical expense business and using tabular reserves employing mortality/morbidity tables and
discount rates meeting minimum regulatory requirements for other business.
Activity in the liability for unpaid claims and related processing costs net of reinsurance is
summarized as follows:
Unpaid Claims
Liability
Beginning
of Year
Year ended December 31, 2012
2012
2011 and prior
Active life reserve
Total accident and health
reserves
$
$
– $
943,279
943,279 $
2,740,356
Active life reserve
Total accident and health
reserves
523,543
51,495
575,038
Claims
Paid
$
$
166,571
335,510
502,081
3,683,635
Unpaid Claims
Liability
Beginning
of Year
Year ended December 31, 2011
2011
2010 and prior
Claims
Incurred
$
– $
948,808
948,808 $
2,680,895
$
3,629,703
Claims
Incurred
517,711 $
(15,043)
502,668 $
Claims
Paid
163,597
344,600
508,197
Unpaid Claims
Liability End
of Year
$
356,972
659,264
1,016,236
2,831,417
$
3,847,653
Unpaid Claims
Liability End
of Year
$
354,114
589,165
943,279
2,740,356
$
3,683,635
The Company’s unpaid claims reserve was increased (decreased) by $51,495 and $(15,043) for
the years ended December 31, 2012 and 2011, respectively, for health claims that occurred prior
to those balance sheet dates. The change in 2012 and 2011 resulted primarily from variances in
the estimated frequency of claims and claim severity.
TLIC 2012 SEC
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Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
The balance in the liability for unpaid accident and health claim adjustment expenses as of
December 31, 2012 and 2011 was $26,289 and $26,608, respectively. The Company incurred
$13,288 and paid $13,608 of claim adjustment expenses in the current year, of which $10,113 of
the paid amount was attributable to insured or covered events of prior years. The Company
incurred $10,918 and paid $9,557 of claim adjustment expenses during 2011, of which $6,748 of
the paid amount was attributable to insured or covered events of prior years. The Company did
not increase or decrease the provision for insured events of prior years during 2012 or 2011.
Reinsurance
Coinsurance premiums, commissions, expense reimbursements and reserves related to reinsured
business are accounted for on bases consistent with those used in accounting for the original
policies and the terms of the reinsurance contracts. Gains associated with reinsurance of in force
blocks of business are included in unassigned surplus and amortized into income as earnings
emerge on the reinsured block of business. Premiums ceded and recoverable losses have been
reported as a reduction of premium income and benefits, respectively. Policy liabilities and
accruals are reported in the accompanying financial statements net of reinsurance ceded.
Stock Option Plan, Long-Term Incentive Compensation and Stock Appreciation Rights
Plans
Certain management employees of the Company participate in a stock-based long-term incentive
compensation plan issued by the Company's indirect parent. In accordance with SSAP No. 13,
Stock Options and Stock Purchase Plans, the expense or benefit related to this plan for the
Company’s management employees has been charged to the Company, with an offsetting
amount credited to paid-in surplus. The Company recorded an accrued expense in the amount of
$19,754, $9,158 and $3,205 for the years ended December 31, 2012, 2011 and 2010,
respectively.
Recent Accounting Pronouncements
Effective December 31, 2012, the Company adopted non-substantive revisions to SSAP No. 86
to require disclosure of embedded credit derivatives within a financial instrument that expose the
holder to the possibility of making future payments, and adopted guidance from Accounting
Standards Update (ASU) 2010-11, Derivatives and Hedging – Scope Exception Related to
Embedded Credit Derivatives, to clarify that seller credit derivative disclosures do not apply to
embedded derivative features related to the transfer of credit risk that is only in the form of
subordination of one financial instrument to another. The adoption of these revisions had no
impact to the Company’s results of operations or financial position.
TLIC 2012 SEC
30
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Effective December 31, 2012, the Company adopted non-substantive revisions to SSAP No. 86
to move one aspect of the criteria for a hedged forecasted transaction and incorporate it as criteria
for a fair value hedge. The adoption of this revision had no impact to the Company’s results of
operations or financial position.
Effective December 31, 2012, the Company adopted non-substantive revisions to SSAP No. 27,
Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk, Financial
Instruments with Concentrations of Credit Risk and Disclosures about Fair Value of Financial
Instruments, which clarifies that embedded derivatives, which are not separately recognized as
derivatives under statutory accounting, are included in the disclosures of financial instruments
with off-balance-sheet risk. The adoption of this revision had no impact to the Company’s
results of operations or financial position.
Effective December 31, 2012, the Company adopted non-substantive revisions to SSAP No. 1,
Disclosures of Accounting Policies, Risks and Uncertainties and Other Disclosures. These
revisions require reference to the accounting policy and procedure footnote that describes
permitted or prescribed practices when an individual note is impacted by such practices. The
adoption of this requirement had no impact to the Company’s results of operation or financial
position, but did require additional disclosures. See Note 8 Policy and Contract Attributes for
further details.
Effective January 1, 2012, the Company adopted revisions to SSAP No. 100, Fair Value
Measurements (SSAP No. 100). These revisions require new disclosures of fair value hierarchy
and the method used to obtain the fair value measurement, a new footnote that summarizes
hierarchy levels by type of financial instrument and gross presentation of purchases, sales, issues
and settlements within the reconciliation for fair value measurements categorized within Level 3
of the hierarchy. The adoption of these revisions had no impact to the Company’s results of
operations or financial position, but did require additional disclosures. See Note 4 Fair Values of
Financial Instruments for further details.
Effective January 1, 2012, the Company began computing current and deferred income taxes in
accordance with SSAP No. 101. This statement established statutory accounting principles for
current and deferred federal and foreign income taxes and current state income taxes. The
adoption of this statement resulted in the transfer of $432,568 from Aggregate Write-Ins for
Other than Special Surplus Funds to Unassigned Funds and updates to the Company’s income
tax disclosures. See Note 7 Income Taxes for further details.
For the years ended December 31, 2011 and 2010, the Company adopted SSAP No. 10R, Income
Taxes – Revised, A Temporary Replacement of SSAP No. 10 (SSAP No. 10R). This statement
established statutory accounting principles for current and deferred federal and foreign income
taxes and current state income taxes. The SSAP temporarily superseded SSAP No. 10, Income
TLIC 2012 SEC
31
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Taxes. SSAP No. 10R allowed an entity to elect to admit additional deferred tax assets (DTAs)
utilizing a three year loss carryback provision, plus the lesser of a look-forward of three years on
gross DTAs expected to be realized or 15% of statutory capital and surplus if the entity’s riskbased capital is above the 250% risk-based capital level where an action level could occur as a
result of a trend test utilizing the old SSAP No. 10 provisions to calculate the DTA. Prior to the
adoption of SSAP No. 10R, the admitted DTA was calculated by taking into consideration a one
year loss carryback and look-forward on gross DTAs that can be expected to be realized and a
10% capital and surplus limit on the admitted amount of the DTA. The Company elected to
admit additional deferred tax assets pursuant to SSAP No. 10R and as a result, the cumulative
effect of the adoption of this standard was the difference between the calculation of the admitted
DTA per SSAP No.10R and the old SSAP No. 10 methodology at December 31, 2011 and 2010.
This change in accounting principle increased surplus by a net amount of $432,568 and
$554,923, respectively, at December 31, 2011 and 2010, which has been recorded within the
statements of changes in capital and surplus.
Effective December 31, 2011, the Company adopted SSAP No. 5R, Liabilities, Contingencies
and Impairments of Assets – Revised. The revisions require the Company to recognize a liability
equal to the greater of (a) the fair value of the guarantee at its inception, even if the likelihood of
payment under the guarantee is remote or (b) the contingent liability amount required to be
recognized if it is probable that a liability has been incurred at the financial statement date and
the amount of loss can reasonably be determined. While this guidance does not exclude
guarantees issued as intercompany transactions or between related parties from the initial
liability recognition requirement, there are a couple exceptions. Guarantees made to/or on behalf
of a wholly-owned subsidiary and related party guarantees that are considered “unlimited” (for
example, in response to a rating agency’s requirement to provide a commitment to support) are
exempt from the initial liability recognition. Additional disclosures are also required under this
new guidance for all guarantees, whether or not they meet the criteria for initial liability
recognition. The adoption of this new accounting principle had no material impact to the
Company’s results of operations or financial position, but did require additional disclosures
regarding these guarantees. See Note 13 on Commitments and Contingencies for further details.
Effective December 31, 2011, the Company adopted non-substantive revisions to SSAP No. 100
to incorporate the provisions of ASU 2010-06, Improving Disclosures about Fair Value
Measurements. This revision required a new disclosure for assets and liabilities for which fair
value is not measured and reported in the statement of financial position but is otherwise
disclosed. The adoption of these revisions had no impact to the Company’s results of operations
or financial position. See Note 4 for further details.
Effective December 31, 2011, the Company adopted non-substantive changes to SSAP No. 32,
Investments in Preferred Stock (including investments in preferred stock of subsidiary,
controlled, or affiliated entities). The amendment was made to clarify the definition of preferred
TLIC 2012 SEC
32
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
stock. Under the revised SSAP No. 32, a preferred stock is defined as any class or series of
shares the holders of which have any preference, either as to the payment of dividends or
distribution of assets on liquidation, over the holder of common stock [as defined in SSAP No.
30, Investments in Common Stock (excluding investments in common stock of subsidiary,
controlled, or affiliated entities)] issued by an entity. This revised definition had no impact to
the Company.
Effective January 1, 2011, the Company adopted SSAP No. 35R, Guaranty Fund and Other
Assessments – Revised. This statement modified the conditions required for recognizing a
liability for insurance-related assessments and required additional disclosures. See Note 13 for
disclosures related to guaranty fund assessments. The adoption of this accounting principle had
no financial impact to the Company.
Effective January 1, 2011, the Company adopted revisions to certain paragraphs of SSAP No.
43R, Loan-backed and Structured Securities to clarify the accounting for gains and losses
between AVR and IMR. The revisions clarify that an AVR/IMR bifurcation analysis should be
preformed when SSAP No. 43R securities are sold (not just as a result of impairment). These
changes were applied on a prospective basis and had no financial impact to the Company upon
adoption.
Effective January 1, 2011, the Company adopted revisions to SSAP No. 43R to clarify the
definitions of loan-backed and structured securities. The clarified guidance was applied
prospectively and had no financial impact to the Company upon adoption.
Effective December 31, 2010, the Company adopted modifications made to SSAP No. 91R,
Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.
The amendments resulted in cash collateral received from counterparties to derivatives contracts
also being reported on the Company’s balance sheet in the respective asset class in which the
cash was reinvested (short-term investments and bonds). A separate liability was established to
record the obligation to return the cash collateral (Payable for derivative cash collateral). These
balances were recorded on the Company’s balance sheet effective January 1, 2010 and resulted
in an increase to assets of $220,439, an increase to liabilities of $215,069 and a net increase to
surplus of $5,370. The net increase to surplus is comprised of $6,403 of accumulated earnings
offset by unrealized losses associated with securities that were reported at lower of cost or
market at the time of adoption of $1,033.
Effective January 1, 2013, the Company will adopt SSAP No. 92, Postretirement Benefits Other
Than Pensions, A Replacement of SSAP No. 14 and SSAP No. 102, Accounting for Pensions, A
Replacement of SSAP No. 89. This guidance impacts accounting for defined benefit pension
plans or other postretirement plans, along with related disclosures. SSAP No. 102 requires
recognition of the funded status of the plan based on the projected benefit obligation instead of
TLIC 2012 SEC
33
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
the accumulated benefit obligation as under SSAP No. 89. In addition, SSAP No. 92 and SSAP
No. 102 require consideration of non-vested participants. The adoption of these standards will
not impact the Company’s results of operations, financial position or disclosures as the Company
does not sponsor the pension plan and is not directly liable under the plan. See Note 11 for
further discussion of the Company’s pension plan and other postretirement plans as sponsored by
Aegon.
Effective January 1, 2013, the Company will adopt SSAP No. 103, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities which adopts with modifications
the guidance in ASU 2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of
Financial Assets and supersedes SSAP no. 91R, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. The impact of the adoption of this standard
is expected to be immaterial to the Company.
Effective January 1, 2013, the Company will adopt non-substantive revisions to SSAP No. 36,
Troubled Debt Restructuring. These revisions adopt guidance from ASU 2011-02, Receivables –
A Creditors’ Determination of Whether a Restructuring is a Troubled Debt Restructuring, which
clarifies what constitutes a troubled debt restructuring and adopts with modification troubled
debt restructuring disclosures for creditors from ASU 2010-20: Receivables (Topic 310),
Disclosures About the Credit Quality of Financing Receivables and the Allowance for Credit
Losses. The adoption of this revision is not expected to impact the financial position or results of
operations of the Company.
Effective December 31, 2013, the Company will adopt revisions to SSAP No. 35R, Guaranty
Fund and Other Assessments – Revised which incorporates subsequent event (Type II)
disclosures for entities subject to Section 9010 of the Patient Protection and Affordable Care Act
related to assessments payable. The adoption of this revision is not expected to impact the
financial position or results of operations of the Company as revisions relate to disclosures only.
Reclassifications
Certain reclassifications have been made to the 2011 and 2010 financial statements to conform to
the 2012 presentation.
During 2012, the Company changed the presentation of various reinsurance related balances. As
a result of these changes, $91,236 was reclassified from Remittances and items not allocated to
Other liabilities as of December 31, 2011. In addition, $807,484 and $237,399, respectively, was
reclassified between the Net transfers to separate accounts line and the Surrender benefits line in
the 2011 and 2010 Statements of Operations to conform to the 2012 presentation. Lastly,
Reinsurance transaction – modco reserve adjustment on reinsurance assumed was presented as a
separate line item in 2012. As a result of this change in presentation, $(218,566) and $(262,273),
TLIC 2012 SEC
34
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
respectively, was reclassed between the Other expenses line and the Reinsurance transaction –
modco reserve adjustment on reinsurance assumed line in the 2011 and 2010 Statements of
Operations to conform to the 2012 presentation.
2. Prescribed and Permitted Statutory Accounting Practices
The financial statements of the Company are presented on the basis of accounting principles
prescribed or permitted by the Insurance Division, Department of Commerce, of the State of
Iowa. The Insurance Division, Department of Commerce, of the State of Iowa recognizes only
statutory accounting practices prescribed or permitted by the State of Iowa for determining and
reporting the financial condition and results of operations of an insurance company, and for
determining its solvency under the Iowa Insurance Law.
The State of Iowa has adopted a prescribed practice that differs from that found in the NAIC
SAP related to the admission of a parental guarantee in the equity value calculation of TLIC
Riverwood Reinsurance, Inc. (TRRI), a wholly owned subsidiary of the Company. As prescribed
by Iowa Administrative Code 191-99.11(5), the Company is entitled to value its ownership in
TRRI at a value equal to the audited statutory surplus of TRRI, which includes the parental
guarantee provided by Aegon USA, LLC as an admissible asset, whereas SSAP No. 97 –
Investments in Subsidiary, Controlled and Affiliated Entities, A Replacement of SSAP No. 88
would not allow the admissibility of such an asset.
The NAIC SAP has been adopted as a component of prescribed or permitted practices by the
State of Iowa. The State of Iowa has adopted a prescribed accounting practice that differs from
that found in the NAIC SAP related to reserve credits and secondary guarantee reinsurance
treaties. As prescribed by Iowa Administrative Code 191-17.3(2), the Commissioner found that
the Company is entitled to take reserve credit for such a reinsurance contract in the amount equal
to the portion of total reserves attributable to the secondary guarantee, whereas this type of
reinsurance does not meet the specific requirements of SSAP No. 61, Life, Deposit-Type and
Accident and Health Reinsurance and Appendix A-791 of the NAIC SAP.
The Company, with the permission of the Commissioner of Insurance of the State of Iowa,
records the value of its wholly owned foreign life insurance subsidiary, Transamerica Life
(Bermuda), Ltd. (TLB), based upon audited statutory equity rather than audited foreign statutory
equity, utilizing adjustments as outlined in SSAP No. 97.
The State of Iowa has adopted a prescribed accounting practice that differs from that found in the
NAIC SAP related to the reported value of the assets supporting the Company’s guaranteed
separate accounts. As prescribed by Iowa Administrative Code 508A.1.4, the Commissioner
found that the Company is entitled to value the assets of the guaranteed separate account at
amortized cost, whereas the assets would be required to be reported at fair value under SSAP No.
TLIC 2012 SEC
35
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
56, Separate Accounts, of the NAIC SAP. There is no impact to the Company’s income or
surplus as a result of utilizing this prescribed practice.
A reconciliation of the Company’s net income and capital and surplus between NAIC SAP and
practices prescribed and permitted by the State of Iowa is shown below:
2012
Net income (loss), State of Iowa basis
$
State prescribed practice for
parental guarantee
State prescribed practice for secondary
guarantee reinsurance
State permitted practice for valuation of
wholly-owned foreign life subsidiary
Net income (loss), NAIC SAP
$
2011
791,564
2010
$ (2,459,266) $
417,679
–
–
–
–
–
–
–
791,564
–
$ (2,459,266) $
–
417,679
Statutory surplus, State of Iowa basis
$ 5,470,563 $ 5,121,642 $ 4,298,124
State prescribed practice for
parental guarantee
(675,044)
–
(724,720)
State prescribed practice for secondary
guarantee reinsurance
(3,149,987)
(2,926,627)
(3,364,455)
State permitted practice for valuation of
wholly-owned foreign life subsidiary
19,129
19,656
42,539
$
1,423,927
Statutory surplus, NAIC SAP
$ 1,315,740 $ 1,391,153
During 2011, the Company entered into a retrocession reinsurance contract and subsequent
novation agreements with respect to each of the unaffiliated retroceded reinsurance contracts.
The retrocession reinsurance contract transferred the Company’s liabilities to SCOR SE (SCOR),
a Societas Europaea organized under the laws of France, and subsequently facilitated the
ultimate novation of third party retrocession reinsurance contracts in support of the exiting of the
reinsurance operations. No additional net consideration was contemplated upon execution of the
novation agreements. Therefore, the Company had the same net retained risk of zero both prior
to and subsequent to the execution of the novations.
SSAP No. 61 defines novation agreements as one which extinguishes one entity’s liability and
moves it to another entity, which is applicable under this situation. The retrocession agreement
had all references to the Company removed and replaced with SCOR upon completion of the
novations. SSAP No. 61 does not specifically address novation and releases related to
retrocession agreements, however as both cedents and retrocessionaires in this situation are a
TLIC 2012 SEC
36
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
party to the agreement, the intent of the novation and release is consistent with the application
for direct cedents application of the standard. Thus, the Company reported the novation and
release similar to a novation, as outlined in paragraphs 53-56 of SSAP No. 61, with direct
adjustments to the balance sheet.
3. Accounting Changes and Correction of Errors
Effective December 16, 2011, the Company released an IMR liability associated with the block
of business ceded to an unaffiliated entity on a coinsurance basis. Since the portion of the block
of business ceded did not represent more than one percent of the Company’s general account
liabilities, the IMR liability should not have been released when the reinsurance transaction was
effected. The error resulted in an understatement of the IMR liability in the amount of $8,889.
This was corrected in 2012, and the Company reflected the impact of the correction as a change
in unassigned surplus within the statement of changes in capital and surplus.
Effective August 9, 2011, the Company released an IMR liability associated with a block of
business retroceded to an unaffiliated entity. The gain on the release of the IMR liability should
have been deferred through unassigned surplus but was instead included in the statements of
operations. The error resulted in an overstatement of net income in the amount of $33,567. This
was corrected in 2012, and the Company reflected the impact of the correction as a change in
unassigned surplus within the statement of changes in capital and surplus. The offsetting
adjustment is to the change in surplus as a result of reinsurance line within the statements of
operations. There was no net impact to surplus as a result of this correction.
During 2012, the Company discovered an error in the calculation of waiver of premium reserves
for long term care business due to the use of inaccurate premiums waived data. The error
resulted in an understatement of reserves of $20,341 as of December 31, 2011. This has been
reported as a correction of an error in the statement of changes in capital and surplus.
4. Fair Values of Financial Instruments
The fair value of a financial instrument is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement
date.
Determination of fair value
The fair values of financial instruments are determined by management after taking into
consideration several sources of data. When available, the Company uses quoted market prices
in active markets to determine the fair value of its investments. The Company’s valuation policy
utilizes a pricing hierarchy which dictates that publicly available prices are initially sought from
TLIC 2012 SEC
37
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
indices and third-party pricing services. In the event that pricing is not available from these
sources, those securities are submitted to brokers to obtain quotes. Lastly, securities are priced
using internal cash flow modeling techniques. These valuation methodologies commonly use
reported trades, bids, offers, issuer spreads, benchmark yields, estimated prepayment speeds,
and/or estimated cash flows.
To understand the valuation methodologies used by third-party pricing services, the Company
reviews and monitors their applicable methodology documents. Any changes to their
methodologies are noted and reviewed for reasonableness. In addition, the Company performs
in-depth reviews of prices received from third-party pricing services on a sample basis. The
objective for such reviews is to demonstrate that the Company can corroborate detailed
information such as assumptions, inputs and methodologies used in pricing individual securities
against documented pricing methodologies. Only third-party pricing services and brokers with a
substantial presence in the market and with appropriate experience and expertise are used.
Each month, the Company performs an analysis of the information obtained from indices, thirdparty services, and brokers to ensure that the information is reasonable and produces a
reasonable estimate of fair value. The Company considers both qualitative and quantitative
factors as part of this analysis, including but not limited to, recent transactional activity for
similar securities, review of pricing statistics and trends, and consideration of recent relevant
market events. Other controls and procedures over pricing received from indices, third-party
pricing services, or brokers include validation checks such as exception reports which highlight
significant price changes, stale prices or un-priced securities.
Fair value hierarchy
The Company's financial assets and liabilities carried at fair value are classified, for disclosure
purposes, based on a hierarchy defined by SSAP No. 100. The hierarchy gives the highest
ranking to fair values determined using unadjusted quoted prices in active markets for identical
assets and liabilities (Level 1), and the lowest ranking to fair values determined using
methodologies and models with unobservable inputs (Level 3). An asset’s or a liability’s
classification is based on the lowest level input that is significant to its measurement. For
example, a Level 3 fair value measurement may include inputs that are both observable (Levels 1
and 2) and unobservable (Level 3). The levels of the fair value hierarchy are as follows:
Level 1 -
Unadjusted quoted prices for identical assets or liabilities in active markets
accessible at the measurement date.
TLIC 2012 SEC
38
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Level 2 - Quoted prices in markets that are not active or inputs that are observable either
directly or indirectly for substantially the full term of the asset or liability. Level 2
inputs include the following:
a)
b)
c)
d)
Level 3 -
Quoted prices for similar assets or liabilities in active markets
Quoted prices for identical or similar assets or liabilities in non-active markets
Inputs other than quoted market prices that are observable
Inputs that are derived principally from or corroborated by observable market
data through correlation or other means
Prices or valuation techniques that require inputs that are both unobservable and
significant to the overall fair value measurement. They reflect the Company’s own
assumptions about the assumptions a market participant would use in pricing the
asset or liability.
The following methods and assumptions were used by the Company in estimating its fair value
disclosures for financial instruments:
Cash Equivalents and Short-Term Investments: The carrying amounts reported in the
accompanying balance sheets for these financial instruments approximate their fair values.
Cash is not included in the below tables.
Short-Term Notes Receivable from Affiliates: The carrying amounts reported in the
accompanying balance sheets for these financial instruments approximate their fair value.
Bonds and Stocks: The NAIC allows insurance companies to report the fair value determined
by the SVO or to determine the fair value by using a permitted valuation method. The fair
values of bonds and stocks are reported or determined using the following pricing sources:
indexes, third party pricing services, brokers, external fund managers and internal models.
Fair values for fixed maturity securities (including redeemable preferred stock) actively traded
are determined from third-party pricing services, which are determined as discussed above in
the description of level one and level two values within the fair value hierarchy. For fixed
maturity securities (including redeemable preferred stock) not actively traded, fair values are
estimated using values obtained from third-party pricing services, or are based on non-binding
broker quotes or internal models. In the case of private placements, fair values are estimated by
discounting the expected future cash flows using current market rates applicable to the coupon
rate, credit and maturity of the investments.
TLIC 2012 SEC
39
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Mortgage Loans on Real Estate: The fair values for mortgage loans on real estate are estimated
utilizing discounted cash flow analyses, using interest rates reflective of current market
conditions and the risk characteristics of the loans.
Other Invested Assets: The fair values for other invested assets, which include investments in
surplus notes issued by other insurance companies and fixed or variable rate investments with
underlying characteristics of bonds were determined primarily by using indexes, third party
pricing services and internal models.
Derivative Financial Instruments: The estimated fair values of interest rate caps and options
are based upon the latest quoted market price at the balance sheet date. The estimated fair
values of swaps, including interest rate and currency swaps, are based on pricing models or
formulas using current assumptions. The estimated fair values of credit default swaps are
based upon the pricing differential as of the balance sheet date for similar swap agreements.
Policy Loans: The fair value of policy loans is equal to the book value of the loan, which is
stated at unpaid principal balance.
Securities Lending Reinvested Collateral: The cash collateral from securities lending is
reinvested in various short-term and long-term debt instruments. The fair values of these
investments are determined using the methods described above under Cash, Cash Equivalents
and Short-Term Investments and Bonds and Stocks.
Receivable From/Payable to Parents, Subsidiaries and Affiliates: The carrying amount of
receivable from/payable to affiliates approximates their fair value.
Separate Account Assets and Annuity Liabilities: The fair value of separate account assets are
based on quoted market prices when available. When not available, they are valued in the same
manner as general account assets as further described in this note. The fair value of separate
account annuity liabilities is based on the account value for separate accounts business without
guarantees. For separate accounts with guarantees, fair value is based on discounted cash
flows.
Investment Contract Liabilities: Fair value for the Company's liabilities under investment
contracts, which include deferred annuities, GICs and funding agreements, are estimated using
discounted cash flow calculations. For those liabilities that are short in duration, carrying
amount approximates fair value.
Deposit-Type Contracts: The carrying amounts of deposit-type contracts reported in the
accompanying balance sheets approximate their fair values.
TLIC 2012 SEC
40
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Surplus Notes: Fair values for surplus notes are estimated using a discounted cash flow
analysis based on the Company’s current incremental borrowing rate for similar types of
borrowing arrangements.
The Company accounts for its investments in affiliated common stock using the equity method
of accounting; as such, they are not included in the following disclosures as they are not carried
at fair value on the balance sheets.
The Company accounts for derivatives that receive and pass hedge accounting in the same
manner as the underlying hedged instrument. If that instrument is held at amortized cost, then
the derivative is also held at amortized cost and therefore it is not included in the following
disclosures as it is not carried at fair value on the balance sheets.
Fair values for the Company’s insurance contracts other than investment-type contracts
(including separate account universal life liabilities) are not required to be disclosed. However,
the fair values of liabilities under all insurance contracts are taken into consideration in the
Company’s overall management of interest rate risk, such that the Company’s exposure to
changing interest rates is minimized through the matching of investment maturities with amounts
due under insurance contracts.
TLIC 2012 SEC
41
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
The following tables set forth a comparison of the estimated fair values and carrying amounts of
the Company’s financial instruments, including those not measured at fair value in the balance
sheets, as of December 31, 2012 and 2011, respectively:
December 31
2012
Estimated
Fair Value
Admitted assets
Cash equivalents and short-term
investments, other than affiliates
Short-term notes receivable from affiliates
Bonds
Preferred stocks, other than affiliates
Common stocks, other than affiliates
Mortgage loans on real estate
Other invested assets
Options
Interest rate swaps
Currency swaps
Credit default swaps
Policy loans
Securities lending reinvested collateral
Receivable from parent, subsidiaries
and affiliates
Separate account assets
Liabilities
Investment contract liabilities
Options
Interest rate swaps
Currency swaps
Credit default swaps
Payable to parent, subsidiaries
and affiliates
Separate account annuity liabilities
Surplus notes
$
3,899,465
411,200
40,790,267
111,258
218,026
6,343,771
172,494
205,942
1,667,275
64,632
24,874
708,794
2,159,184
Admitted Assets
$
3,899,465
411,200
36,721,992
111,471
218,026
5,756,749
157,176
205,942
298,750
40,080
12,812
708,794
2,160,218
(Level 1)
$
(Level 2)
–
–
4,064,778
–
68,173
–
–
–
–
–
–
–
–
$
3,899,465
411,200
35,427,671
101,853
257
–
159,145
205,942
1,648,192
64,632
24,874
708,794
2,159,184
(Level 3)
$
–
–
1,297,818
9,405
149,596
6,343,771
13,349
–
19,083
–
–
–
–
Not
Practicable
(Carrying
Value)
$
–
–
–
–
–
–
–
–
–
–
–
–
–
51,246
48,756,861
51,246
48,684,223
–
43,059,585
51,246
5,693,280
–
3,996
–
–
16,244,099
49,393
406,498
58,388
7,285
15,014,811
49,393
212,460
68,895
26,435
–
–
–
–
–
1,107,623
49,393
367,059
58,388
7,285
15,136,476
–
39,439
–
–
–
–
–
–
–
7,245
40,655,573
168,588
7,245
40,658,385
150,000
–
–
–
7,245
40,509,576
–
–
145,997
168,588
–
–
–
TLIC 2012 SEC
42
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
December 31
2011
Carrying
Estimated
Amount
Fair Value
Admitted assets
Cash equivalents and short-term
investments, other than affiliates
Short-term notes receivable from affiliates
Bonds
Preferred stocks, other than affiliates
Common stocks, other than affiliates
Mortgage loans on real estate
Other invested assets
Interest rate swaps
Currency swaps
Credit default swaps
Policy loans
Securities lending reinvested collateral
Receivable from parent, subsidiaries
and affiliates
Separate account assets
Liabilities
Investment contract liabilities
Interest rate swaps
Currency swaps
Credit default swaps
Payable to parent, subsidiaries
and affiliates
Separate account annuity liabilities
Surplus notes
$
2,427,211
185,100
39,785,207
138,596
229,973
6,830,030
159,011
233,642
8,239
6,603
727,684
3,520,304
$
2,427,211
185,100
41,910,771
149,539
229,973
7,364,129
165,273
1,950,058
59,431
5,389
727,684
3,517,849
154,163
41,473,473
154,163
41,473,473
16,415,861
46,960
40,536
19,739
17,090,179
456,325
75,759
27,931
243,112
33,308,199
150,000
243,112
33,311,319
153,819
TLIC 2012 SEC
43
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
The following tables provide information about the Company’s financial assets and liabilities
measured at fair value as of December 31, 2012 and 2011:
2012
Level 1
Assets:
Bonds
Industrial and miscellaneous
Hybrid securities
Total bonds
Common stock
Mutual funds
Industrial and miscellaneous
Total common stock
Short-term investments
Government
Industrial and miscellaneous
Mutual funds
Intercompany notes receivable
Sweep accounts
Total short-term investments
Derivative assets
Separate account assets
Total assets
Liabilities:
Derivative liabilities
Separate account liabilities
Total liabilities
$
Level 2
–
–
–
$
Level 3
103,093
4,287
107,380
250
67,923
68,173
69
188
257
–
–
–
–
–
–
–
43,036,673
$ 43,104,846
$
82,823
3,284,316
484,005
411,200
48,320
4,310,664
288,874
4,980,375
9,687,550
$
$
$
–
4,653
4,653
$
66,150
3,829
69,979
$
Total
8,147
–
8,147
$
–
149,596
149,596
$
$
$
–
–
–
–
–
–
(20,355)
807
138,195
–
–
–
111,240
4,287
115,527
319
217,707
218,026
$
$
$
82,823
3,284,316
484,005
411,200
48,320
4,310,664
268,519
48,017,855
52,930,591
66,150
8,482
74,632
TLIC 2012 SEC
44
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
2011
Level 1
Assets:
Bonds
Government
Industrial and miscellaneous
Hybrid securities
Total bonds
Preferred stock
Industrial and miscellaneous
Total preferred stock
Common stock
Mutual funds
Industrial and miscellaneous
Total common stock
$
Short-term investments
Government
Industrial and miscellaneous
Mutual funds
Intercompany notes receivable
Sweep accounts
–
–
–
–
$
Level 3
63
193,110
3,570
196,743
$
Total
–
32,248
–
32,248
$
63
225,358
3,570
228,991
–
–
13,486
13,486
1,236
1,236
14,722
14,722
357
51,646
52,003
68
334
402
–
177,568
177,568
425
229,548
229,973
–
–
–
–
–
33,156
1,736,611
615,179
185,100
42,256
–
–
–
–
–
33,156
1,736,611
615,179
185,100
42,256
–
2,612,302
–
2,612,302
–
170,617
2,153
172,770
35,108,598
$ 35,160,601
$
5,006,378
7,999,928
746,827
960,032
40,861,803
44,120,561
$
$
Total short-term investments
Derivative assets
Separate account assets
Total assets
Liabilities:
Derivative liabilities
Separate account liabilities
Total liabilities
Level 2
$
–
9,723
9,723
$
19,648
4,406
24,054
$
$
$
11,786
–
11,786
$
$
$
31,434
14,129
45,563
Bonds classified in Level 2 are valued using inputs from third party pricing services or broker
quotes. Level 3 measurements for bonds are primarily those valued using non-binding broker
quotes, which cannot be corroborated by other market observable data, or internal modeling
which utilize inputs that are not market observable.
Preferred stock in Level 3 is being internally calculated.
Common stock in Level 3 is comprised primarily of shares in the Federal Home Loan Bank
(FHLB) of Des Moines, which are valued at par as a proxy for fair value as a result of
restrictions that allow redemptions only by FHLB. In addition, the Company owns common
stock being carried at book value and some warrants that are valued using broker quotes.
TLIC 2012 SEC
45
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Short-term investments are classified as Level 2 as they are carried at amortized cost, which
approximates fair value.
Derivatives classified as Level 2 represent over-the-counter (OTC) contracts valued using
pricing models based on the net present value of estimated future cash flows, directly observed
prices from exchange-traded derivatives, other OTC trades or external pricing services. The
Level 3 derivative liability is a credit swap calculated by simulation using a series of marketconsistent inputs to model the dynamics of the swap. The inputs are taken from market
instruments to the extent that they exist.
Separate account assets are valued and classified in the same way as general account assets
(described above). For example, separate account assets in Level 3 are those valued using broker
quotes or internal modeling which utilize unobservable inputs.
TLIC 2012 SEC
46
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
During 2012 and 2011, there were no transfers between Level 1 and 2, respectively.
The following tables summarize the changes in assets and liabilities classified in Level 3 for
2012 and 2011:
Beginning
Balance at
January 1,
2012
Bonds
RMBS
Other
Preferred stock
Common stock
Derivatives
Separate account assets
Total
$
$
26,721 $
5,527
1,236
177,568
(9,633)
746,827
948,246 $
Purchases
Bonds
RMBS
Other
Preferred stock
Common stock
Derivatives
Separate account assets
Total
$
$
Transfers
in
(Level 3)
12,792
2,800
–
333
–
–
15,925
Transfers
out
(Level 3)
$
$
Issuances
– $
207
–
837
(32,793)
–
(31,749) $
–
966
–
–
–
–
966
20,573
2,242
–
470
–
8,196
31,481
Total Gains
and (Losses)
Included in
Net income (a)
$
$
Sales
$
$
–
–
1,236
26,042
–
9,994
37,272
24 $
(535)
–
(1,391)
–
(724,329)
(726,231) $
Settlements
$
$
Total Gains
and (Losses)
Included in
Surplus (b)
10,657
1,161
–
–
9,873
3,566
25,257
(6,115)
393
–
(1,239)
31,944
65
25,048
Ending Balance at
December 31, 2012
$
$
2,192
5,955
–
149,596
(20,355)
807
138,195
TLIC 2012 SEC
47
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Beginning
Balance at
January 1,
2011
Bonds
RMBS
Other
Preferred stock
Common stock
Derivatives
Separate account assets
Total
$
$
51,719 $
7,638
1,236
226,884
(4,600)
793,212
1,076,089 $
Purchases
Bonds
RMBS
Other
Preferred stock
Common stock
Derivatives
Separate account assets
Total
$
$
Transfers
in
(Level 3)
16,364 $
1
–
644
–
33,755
50,764 $
Issuances
– $
–
–
2,279
2,592
5,384
10,255 $
11,637 $
–
–
–
2,153
4,900
18,690 $
Transfers
out
(Level 3)
Total Gains
and (Losses)
Included in
Net income (a)
24,461 $
870
–
1,619
–
26,894
53,844 $
Sales
– $
–
–
50,069
2,569
7
52,645 $
Total Gains
and (Losses)
Included in
Surplus (b)
(4,042) $
(232)
–
(206)
–
(58,033)
(62,513) $
Settlements
28,253
1,365
–
–
–
4,952
34,570
3,757
355
–
(345)
(7,209)
(538)
(3,980)
Ending Balance at
December 31, 2011
$
$
26,721
5,527
1,236
177,568
(9,633)
746,827
948,246
(a) Recorded as a component of Net Realized Capital Gains/Losses on Investments in the
Statements of Operations
(b) Recorded as a component of Change in Net Unrealized Capital Gains/Losses in the
Statements of Changes in Capital and Surplus
The Company’s policy is to recognize transfers in and out of levels as of the beginning of the
reporting period.
Transfers in for bonds were the result of securities being valued using vendor inputs as of
December 31, 2011, subsequently changing to being valued using broker quotes during 2012. In
addition, transfers in for bonds were the result of securities being carried at amortized cost at
December 31, 2011 and 2010, subsequently changing to being carried at fair value during 2012
and 2011. Transfers in for bonds were also the result of securities being valued using vendor
inputs as of December 31, 2011, subsequently changing to being valued using internal models
during 2012. Also, transfers in for bonds were partly attributable to securities being valued using
third party vendor inputs at December 31, 2010, subsequently changing to being valued using
TLIC 2012 SEC
48
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
broker quotes which utilize unobservable inputs, thus causing the transfer into Level 3 during
2011.
Transfers out for bonds were partly attributable to securities being valued using broker quotes
which utilize unobservable inputs at December 31, 2011 and 2010, subsequently changing to
being valued using third party vendor inputs, thus causing the transfer out of Level 3 during 2012
and 2011, respectively. In addition, transfers out for bonds were attributed to securities being
carried at fair value at December 31, 2011 and 2010, subsequently changing to being carried at
amortized cost during 2012 and 2011, respectively. Also, transfers out for bonds were the result
of securities being valued using internal models at December 31, 2011, subsequently changing to
being valued using vendor inputs during 2012.
Transfers in for common stock were attributed to securities being valued using third party vendor
inputs at December 31, 2011, subsequently changing to being valued using broker quotes which
utilize unobservable inputs, thus causing the transfer in during 2012. In addition, there were
securities that were valued using broker quotes which utilize observable inputs, subsequently
changing to being valued using broker quotes which utilize unobservable inputs during 2012.
Additionally, transfers in for common stock were the result of securities being valued using
index pricing at December 31, 2010, subsequently being valued using unobservable inputs
during 2011.
Transfers out for common stock were attributed to securities being valued using a stale price at
December 31, 2011, subsequently changing to being valued using third party vendor inputs, thus
causing the transfer out of Level 3 during 2012. In addition, transfers out for common stock
were attributed to securities being valued using broker quotes at December 31, 2011,
subsequently changing to being valued using vendor inputs during 2012. Additionally, transfers
out for common stock were the result of securities being valued using unobservable inputs at
December 31, 2010, subsequently being valued using index pricing during 2011.
Transfers in for separate account bonds were attributable to securities being valued using third
party vendor inputs at December 31, 2010, subsequently changing to being valued using broker
quotes which utilize unobservable inputs during 2011.
Transfers out for separate account bonds were attributable to securities being valued using broker
quotes which utilize unobservable inputs at December 31, 2011 and 2010, subsequently changing
to being valued using third party vendor inputs, thus causing the transfer out of Level 3 during
2012 and 2011, respectively.
TLIC 2012 SEC
49
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
5. Investments
The carrying amounts and estimated fair value of investments in bonds and preferred stock are as
follows:
Carrying
Amount
December 31, 2012
Unaffiliated bonds:
United States Government and
agencies
State, municipal and other
government
Hybrid securities
Industrial and miscellaneous
Mortgage and other asset-backed
securities
$
Unaffiliated preferred stocks
$
2,980,978
$
Unaffiliated preferred stocks
$
Gross
Unrealized
Gains
$
778,329
$
Gross
Unrealized
Losses less
Than 12
Months
–
$
Estimated
Fair
Value
50
$
3,759,257
802,196
499,556
21,604,497
104,712
14,971
3,425,875
8,884
101,545
36,414
324
1,522
17,759
897,700
411,460
24,976,199
10,794,339
36,681,566
111,471
36,793,037
543,136
4,867,023
9,909
$ 4,876,932
633,313
780,156
8,786
788,942
4,087
23,742
1,336
25,078
10,700,075
40,744,691
111,258
40,855,949
Carrying
Amount
December 31, 2011
Unaffiliated bonds:
United States Government and
agencies
State, municipal and other
government
Hybrid securities
Industrial and miscellaneous
Mortgage and other asset-backed
securities
Gross
Unrealized
Losses 12
Months or
More
3,035,812
$
Gross
Unrealized
Losses 12
Months or
More
Gross
Unrealized
Gains
$
815,740
$
$
21
$
Gross
Unrealized
Losses less
Than 12
Months
$
Estimated
Fair
Value
82
$
3,851,449
631,483
498,708
22,834,539
38,206
3,619
2,481,536
15,565
130,821
94,765
9,534
11,266
94,052
644,590
360,240
25,127,258
12,721,746
39,722,288
138,596
39,860,884
372,752
3,711,853
23,703
$ 3,735,556
1,151,251
1,392,423
6,745
1,399,168
66,826
181,760
6,015
187,775
11,876,421
41,859,958
149,539
42,009,497
$
$
$
At December 31, 2012 and 2011, respectively, for bonds and preferred stocks that have been in a
continuous loss position for greater than or equal to twelve months, the Company held 430 and
593 securities with a carrying amount of $4,671,096 and $6,503,336 and an unrealized loss of
$788,942 and $1,399,168 with an average price of 83.1 and 78.5 (fair value/amortized cost). Of
TLIC 2012 SEC
50
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
this portfolio, 52.0% and 58.7% were investment grade with associated unrealized losses of
$289,823 and $544,964, respectively.
At December 31, 2012 and 2011, respectively, for bonds and preferred stocks that have been in a
continuous loss position for less than twelve months, the Company held 231 and 568 securities
with a carrying amount of $1,021,012 and $3,644,457 and an unrealized loss of $25,078 and
$187,775 with an average price of 97.5 and 94.9 (fair value/amortized cost). Of this portfolio,
85.2% and 84.8% were investment grade with associated unrealized losses of $17,955 and
$146,947, respectively.
At December 31, 2012 and 2011, respectively, for common stocks that have been in a continuous
loss position for greater than or equal to twelve months, the Company held 3 and 2 securities
with a cost of $10 and $2 and an unrealized loss of $9 and $1 with an average price of 7.2 and
50.6 (fair value/cost).
At December 31, 2012 and 2011, respectively, for common stocks that have been in a continuous
loss position for less than twelve months, the Company held 14 and 19 securities with a cost of
$12,588 and $2,748 and an unrealized loss of $263 and $429 with an average price of 97.9 and
84.4 (fair value/cost).
The estimated fair value of bonds, preferred stocks and common stocks with gross unrealized
losses at December 31, 2012 and 2011 is as follows:
Losses 12
Months or
More
Losses Less
Than 12
Months
Total
December 31, 2012
Unaffiliated bonds:
United States Government and agencies
State, municipal and other government
Hybrid securities
Industrial and miscellaneous
Mortgage and other asset-backed securities
$
Unaffiliated preferred stocks
Unaffiliated common stocks
$
–
63,124
213,598
440,974
3,139,452
3,857,148
25,005
1
3,882,154
$
$
33,517
6,233
4,892
711,538
232,431
988,611
7,324
12,325
1,008,260
$
$
33,517
69,357
218,490
1,152,512
3,371,883
4,845,759
32,329
12,326
4,890,414
TLIC 2012 SEC
51
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Losses 12
Months or
More
Losses Less
Than 12
Months
Total
December 31, 2011
Unaffiliated bonds:
United States Government and agencies
State, municipal and other government
Hybrid securities
Industrial and miscellaneous
Mortgage and other asset-backed securities
$
Unaffiliated preferred stocks
Unaffiliated common stocks
$
646
68,172
208,545
874,324
3,943,571
5,095,258
8,909
1
5,104,168
$
$
20,862
100,616
98,932
2,083,289
1,114,649
3,418,348
38,333
2,318
3,458,999
$
$
21,508
168,788
307,477
2,957,613
5,058,220
8,513,606
47,242
2,319
8,563,167
The carrying amount and estimated fair value of bonds at December 31, 2012, by contractual
maturity, are shown below. Expected maturities may differ from contractual maturities because
certain borrowers have the right to call or prepay obligations with or without call or prepayment
penalties.
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage and other asset-backed securities
Carrying
Amount
$
1,240,506
7,100,718
6,139,707
11,406,296
25,887,227
10,794,339
$ 36,681,566
Estimated
Fair
Value
$
1,262,341
7,770,622
6,896,709
14,114,944
30,044,616
10,700,075
$
40,744,691
For impairment policies related to non-structured and structured securities, refer to Note 1 under
Investments.
Banking
At December 31, 2012, the Company’s banking sector portfolio had investments in an unrealized
loss position which had a fair value of $576,329 and a carrying value of $748,907, resulting in a
gross unrealized loss of $172,578. The banking sub-sector in the Company’s portfolio is large,
diverse and of high quality. The unrealized losses in the banking sub-sector primarily reflect the
size of the Company’s holdings, low floating rate coupons on some securities and credit spread
TLIC 2012 SEC
52
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
widening in the sector due to the Sovereign debt crisis in Europe as well as residual impact from
both the U.S. financial crisis and concerns over the U.S. Fiscal Cliff.
As a whole, the sub-sector improved in the second half of 2012, following a volatile first half.
Decisive steps by European Union (EU) leaders and world central banks to stabilize the euro and
improve funding conditions calmed investor concerns that a euro breakup was imminent. Credit
spreads continue to reflect some uncertainty over new efforts by regulators to impose “burden
sharing” on creditors in order to quickly stabilize or wind up troubled banks. While these
measures have made securities more volatile in the near-term, new, more stringent global
legislation on bank capital and liquidity requirements is intended to reduce overall risk in the
sector going forward and decouple troubled banks from the Sovereign. Furthermore, central
banks appear committed to providing liquidity to the market, while asset write-downs and credit
losses have diminished substantially in all but the most troubled countries.
The value of the Company’s investments in deeply subordinated securities in the financial
services sector may be significantly impacted if issuers of certain securities with optional
deferral features exercise the option to defer coupon payments or are required to defer as a
condition of receiving government aid. The deeply subordinated securities issued by non-U.S.
Banks are broadly referred to as capital securities which can be categorized as Tier 1 or Upper
Tier 2. Capital securities categorized as “Tier 1” are typically perpetual with a non-cumulative
coupon that can be deferred under certain conditions. Capital securities categorized as “Upper
Tier 2” are generally perpetual with a cumulative coupon that is deferrable under certain
conditions. The deeply subordinated securities issued by U.S. Banks can be categorized as trust
preferred or hybrid. Capital securities categorized as trust preferred typically have an original
maturity of 30 years with call features after 10 years with a cumulative coupon that is deferrable
under certain conditions. Capital securities categorized as hybrid typically have an original
maturity of more than 30 years, may be perpetual and are generally subordinate to traditional
trust preferred securities. The Company evaluated the near-term prospects of the issuers in
relation to the severity and duration of the unrealized loss and does not consider those
investments to be impaired as of December 31, 2012.
Subprime Mortgages
At December 31, 2012, the Company’s asset-backed securities (ABS) subprime mortgages
portfolio had investments in an unrealized loss position which had a fair value of $593,142 and a
carrying value of $675,568, resulting in a gross unrealized loss of $82,426. The unrealized loss
in the sector is primarily a result of the housing downturn the United States has experienced
since 2007. Even with the stabilization over the past two years, fundamentals in ABS subprime
mortgages continue to be weak, which impacts the magnitude of the unrealized loss.
Delinquencies and severities in property liquidations remain at an elevated level, while
prepayments remain at historically low levels. Due to the weak fundamental situation, reduced
TLIC 2012 SEC
53
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
liquidity and the requirement for higher yields due to market uncertainty, credit spreads remain
elevated across the asset class.
The Company does not currently invest in or originate whole loan residential mortgages. The
Company categorizes ABS issued by a securitization trust as having subprime mortgage
exposure when the average credit score of the underlying mortgage borrowers in a securitization
trust is below 660 at issuance. The Company also categorizes ABS issued by a securitization
trust with second lien mortgages as subprime mortgage exposure, even though a significant
percentage of second lien mortgage borrowers may not necessarily have credit scores below 660
at issuance. The Company does not have any “direct” residential mortgages to subprime
borrowers outside of the ABS structures.
All ABS subprime mortgage securities are monitored and reviewed on a monthly basis. Detailed
cash flow models using the current collateral pool and capital structure on the portfolio are
updated and are reviewed quarterly. Model output is generated under base and stress-case
scenarios. The Company’s internal ABS-housing asset specialists utilize widely recognized
industry modeling software to perform a loan-by-loan, bottom-up approach to modeling. Key
assumptions used in the models are projected defaults, loss severities and prepayments. Each of
these key assumptions varies greatly based on the significantly diverse characteristics of the
current collateral pool for each security. Loan-to-value, loan size and borrower credit history are
some of the key characteristics used to determine the level of assumption that is utilized.
Defaults were estimated by identifying the loans that are in various delinquency buckets and
defaulting a certain percentage of them over the near-term and long-term. Assumed defaults on
delinquent loans are dependent on the specific security’s collateral attributes and historical
performance.
Loss severity assumptions were determined by observing historical rates from broader market
data and by adjusting those rates for vintage specific pool performance, collateral type, mortgage
insurance and estimated loan modifications. Prepayments were estimated by examining historical
averages of prepayment activity on the underlying collateral. Once the entire pool is modeled,
the results are closely analyzed by the Company’s internal asset specialist to determine whether
or not the particular tranche or holding is at risk for not collecting all contractual cash flows,
taking into account the seniority and other terms of the tranches held.
If cash flow models indicate a credit event will impact future cash flows and the Company does
not have the intent to sell the tranche or holding and does have the intent and ability to hold the
security, the security is impaired to discounted cash flows. As the remaining unrealized losses in
the ABS subprime mortgage portfolio relate to holdings where the Company expects to receive
full principal and interest, the Company does not consider the underlying investments to be
impaired as of December 31, 2012.
TLIC 2012 SEC
54
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Residential Mortgage-Backed Securities (RMBS) Sector
At December 31, 2012, the Company’s RMBS sector portfolio had investments in an unrealized
loss position which had a fair value of $1,461,372 and a carrying value of $1,821,161, resulting
in a gross unrealized loss of $359,789. RMBS are securitizations of underlying pools of
residential mortgages on real estate. The underlying residential mortgages have varying credit
ratings and are pooled together and sold in tranches. The Company’s RMBS includes prime
jumbo pass-throughs and collateralized mortgage obligations (CMOs), Alt-A RMBS, negative
amortization RMBS, government sponsored enterprise (GSE) guaranteed pass-throughs and
reverse mortgage RMBS. The unrealized loss in the sector is primarily a result of the housing
downturn the United States has experienced since 2007. Even with the stabilization over the past
two years, fundamentals in RMBS continue to be weak, which impacts the magnitude of the
unrealized loss. Delinquencies and severities in property liquidations remain at an elevated level,
while prepayments remain at historically low levels. Due to the weak fundamental situation,
reduced liquidity and the requirement for higher yields due to market uncertainty, credit spreads
remain elevated across the asset class.
All RMBS securities of the Company are monitored and reviewed on a monthly basis. Detailed
cash flow models using the current collateral pool and capital structure on the portfolio are
updated and reviewed quarterly. Model output is generated under base and stress-case scenarios.
The Company’s internal RMBS asset specialists utilize widely recognized industry modeling
software to perform a loan-by-loan, bottom-up approach to modeling. Key assumptions used in
the models are projected defaults, loss severities and prepayments. Each of these key
assumptions varies greatly based on the significantly diverse characteristics of the current
collateral pool for each security. Loan-to-value, loan size and borrower credit history are some of
the key characteristics used to determine the level of assumption that is utilized. Defaults were
estimated by identifying the loans that are in various delinquency buckets and defaulting a
certain percentage of them over the near-term and long-term. Assumed defaults on delinquent
loans are dependent on the specific security’s collateral attributes and historical performance.
Loss severity assumptions were determined by obtaining historical rates from broader market
data and by adjusting those rates for vintage, specific pool performance, collateral type,
mortgage insurance and estimated loan modifications. Prepayments were estimated by
examining historical averages of prepayment activity on the underlying collateral. Once the
entire pool is modeled, the results are closely analyzed by the Company’s internal asset
specialists to determine whether or not the particular tranche or holding is at risk for not
collecting all contractual cash flows, taking into account the seniority and other terms of the
tranches held.
If cash flow models indicate a credit event will impact future cash flows and the Company does
not have the intent to sell the tranche or holding and does have the intent and ability to hold the
TLIC 2012 SEC
55
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
security, the security is impaired to discounted cash flows. As the remaining unrealized losses in
the RMBS portfolio relate to holdings where the Company expects to receive full principal and
interest, the Company does not consider the underlying investments to be impaired as of
December 31, 2012.
There were no loan-backed securities with a recognized other-than-temporary impairment
(OTTI) due to intent to sell or lack of intent and ability to hold during the year ended December
31, 2012. The following tables provide the aggregate totals for loan-backed securities with a
recognized OTTI due to intent to sell or lack of intent and ability to hold, in which the security is
written down to fair value.
Amortized Cost
Basis Before OTTI
OTTI Recognized in Loss
Interest
Non-interest
Fair Value
Year Ended December 31, 2011
OTTI recognized 1st quarter:
Intent to sell
Total 1st quarter OTTI on loan-backed securities
$
OTTI recognized 3rd quarter:
Intent to sell
Total 3rd quarter OTTI on loan-backed securities
Aggregate total
4,977
4,977
$
160,578
160,578
$
165,555
660
660
$
5,973
5,973
$
Amortized Cost
Basis Before OTTI
6,633
–
–
$
–
–
$
–
4,317
4,317
154,605
154,605
$
158,922
OTTI Recognized in Loss
Interest
Non-interest Fair Value
Year Ended December 31, 2010
OTTI recognized 1st quarter:
Intent to sell
Total 1st quarter OTTI on loan-backed securities
$
OTTI recognized 2nd quarter:
Intent to sell
Inability or lack of intent to retain the investment in
the security for a period of time sufficient to
recover the amortized cost basis
Total 2nd quarter OTTI on loan-backed securities
Aggregate total
$
4,379
4,379
$
973
973
$
–
–
$
3,406
3,406
17,316
301
–
17,015
6
17,322
–
301
6
6
–
17,015
21,701
$
1,274
$
6
$
20,421
TLIC 2012 SEC
56
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
The following tables provide the aggregate totals for loan-backed securities with a recognized
OTTI due to the Company’s cash flow analysis, in which the security is written down to
estimated future cash flows discounted at the security’s effective yield.
Amortized Cost
Before Current
Amortized Cost
Period OTTI
Recognized OTTI After OTTI
Year ended December 31, 2012
1st quarter present value of cash
flows expected to be less than
the amortized cost basis
2nd quarter present value of cash
flows expected to be less than
the amortized cost basis
3rd quarter present value of cash
flows expected to be less than
the amortized cost basis
4th quarter present value of cash
flows expected to be less than
the amortized cost basis
Aggregate total
$
$
357,700
$
23,038
$
334,662
Fair Value
$
515,449
23,147
492,302
338,584
515,274
25,476
489,798
348,834
154,272
1,542,695
$
7,923
79,584
$
146,349
1,463,111
$
Amortized Cost
Before Current
Amortized Cost
Period OTTI
Recognized OTTI After OTTI
Year ended December 31, 2011
1st quarter present value of cash
flows expected to be less than
the amortized cost basis
2nd quarter present value of cash
flows expected to be less than
the amortized cost basis
3rd quarter present value of cash
flows expected to be less than
the amortized cost basis
4th quarter present value of cash
flows expected to be less than
the amortized cost basis
Aggregate total
$
$
210,662
350,420
$
11,851
$
338,569
96,789
994,869
Fair Value
$
224,716
483,217
23,151
460,066
303,615
483,427
12,763
470,664
287,099
583,778
1,900,842
$
29,379
77,144
$
554,399
1,823,698
$
398,138
1,213,568
TLIC 2012 SEC
57
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Amortized Cost
before Current
Amortized Cost
Period OTTI
Recognized OTTI After OTTI
Year ended December 31, 2010
1st quarter present value of cash
flows expected to be less than
the amortized cost basis
2nd quarter present value of cash
flows expected to be less than
the amortized cost basis
3rd quarter present value of cash
flows expected to be less than
the amortized cost basis
4th quarter present value of cash
flows expected to be less than
the amortized cost basis
Aggregate total
$
$
578,055
$
55,253
$
522,802
Fair Value
$
330,810
343,146
24,294
318,852
217,741
648,299
44,545
603,754
489,879
744,823
2,314,323
$
29,278
153,370
$
715,545
2,160,953
$
563,667
1,602,097
TLIC 2012 SEC
58
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
The following loan-backed and structured securities were held at December 31, 2012, for which
an OTTI had been previously recognized:
CUSIP
000759BP4
02146QAB9
02146QAC7
02146QAD5
059515AC0
05951VAV1
12668RAA6
126694YQ5
225470FJ7
24763LDE7
35729PPZ7
39539KAF0
525170CG9
525221HE0
550279BA0
65536PAA8
75116EAA0
75970JAJ5
75970QAH3
75971EAF3
761118AH1
761118RM2
761118VY1
12669F2J1
52524YAF0
75970QAD2
3622NAAC4
36185MAF9
48123HAA1
59020UUA1
000759BP4
02146QAC7
02146QAD5
05530PAA0
12668ACG8
12668RAA6
126694A32
12669GTS0
225470FJ7
225492AE7
35729PPC8
3622NAAE0
36244SAE8
41161MAC4
52522QAM4
61754HAB8
65536PAA8
74925FAA1
75970JAJ5
75970QAH3
75971EAF3
759950GY8
Amortized Cost Present Value of
Before Current Projected Cash
Recognized
Period OTTI
Flows
OTTI
$
528 $
462 $
66
60,611
56,967
3,644
40,173
38,252
1,921
33,942
30,247
3,695
6,517
6,438
79
41,630
38,925
2,705
23,002
21,254
1,748
13,723
12,191
1,532
3,832
3,699
133
709
704
5
13,403
13,125
278
4,306
4,288
18
79
77
2
2,317
450
1,867
21,022
19,197
1,825
1,183
1,163
20
9,762
8,567
1,195
4,264
4,213
51
5,411
5,378
33
5,208
5,185
23
1,585
1,572
13
2,457
2,162
295
15,858
15,626
232
5,774
4,810
964
10,522
10,233
289
5,352
5,234
118
728
667
61
21,978
21,941
37
1,527
1,418
109
297
217
80
453
445
8
37,571
36,623
948
29,299
28,344
955
1,201
1,001
200
14,148
13,355
793
20,628
20,291
337
34,876
32,248
2,628
29,271
20,769
8,502
3,591
3,484
107
16,507
16,428
79
445
371
74
50,312
49,814
498
593
587
6
43,057
42,415
642
81,369
80,241
1,128
1,777
1,762
15
1,151
1,093
58
10,781
10,722
59
4,115
4,084
31
5,278
5,245
33
5,098
5,079
19
9,467
9,320
147
Amortized Cost
After OTTI
$
462
56,967
38,252
30,247
6,438
38,925
21,254
12,191
3,699
704
13,125
4,288
77
450
19,197
1,163
8,567
4,213
5,378
5,185
1,572
2,162
15,626
4,810
10,233
5,234
667
21,941
1,418
217
445
36,623
28,344
1,001
13,355
20,291
32,248
20,769
3,484
16,428
371
49,814
587
42,415
80,241
1,762
1,093
10,722
4,084
5,245
5,079
9,320
Fair Value at
Time of OTTI
$
444
33,420
22,057
19,728
4,024
26,374
12,702
8,717
3,751
405
1,696
4,077
60
482
11,768
548
6,717
2,358
3,183
3,069
1,465
1,268
8,957
4,213
6,177
3,228
436
18,631
620
87
433
20,350
18,584
982
7,870
12,334
18,818
11,964
3,261
15,362
211
32,341
468
27,048
68,269
921
520
10,660
2,298
3,095
2,914
6,024
Quarter in
which
Impairment
Occurred
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
1Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
TLIC 2012 SEC
59
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
CUSIP
761118RM2
761118VY1
41161PKD4
05535DAM6
75970QAD2
3622NAAC4
41161XAC0
36185MAF9
59020UUA1
059523AV2
759950GZ5
02146QAB9
02146QAC7
02146QAD5
02148AAA4
02148GAD5
02149QAD2
026936AA2
059515AC0
126694A32
126694YJ1
23332UGM0
3622MAAF8
3622NAAE0
41161MAC4
52108HV84
65536PAA8
759676AJ8
759950GY8
83611MMM7
41161PKD4
3622NAAC4
12667GCH4
02149QAD2
059515AC0
126694A32
35729PPC8
35729PPZ7
46628SAJ2
52108HV84
52524YAA1
61915RCJ3
759676AJ8
75970JAJ5
75970QAH3
75971EAF3
86357UAA9
86357UBM2
86365EAA5
86365EAC1
86365KAA1
Amortized Cost Present Value of
Before Current Projected Cash
Recognized
Period OTTI
Flows
OTTI
$
2,108 $
2,077 $
31
14,969
14,525
444
2,267
2,251
16
290
–
290
5,115
4,894
221
646
624
22
66,572
62,665
3,907
20,698
20,550
148
206
40
166
591
482
109
1,000
474
526
54,011
53,056
955
36,007
34,823
1,184
27,191
26,877
314
35,516
35,162
354
1,500
1,442
58
26,041
25,370
671
138,711
126,429
12,282
5,975
5,891
84
31,156
30,693
463
26,410
24,161
2,249
9,058
8,619
439
33
–
33
47,914
43,590
4,324
41,081
40,299
782
3,000
2,136
864
1,061
1,029
32
5,976
5,841
135
9,123
9,042
81
7,497
7,459
38
2,168
2,109
59
602
549
53
5,244
5,221
23
24,467
23,966
501
5,691
5,592
99
29,181
28,800
381
353
339
14
13,075
12,126
949
6,769
6,499
270
2,102
1,837
265
2,827
2,514
313
19,356
19,181
175
5,724
5,531
193
3,887
3,813
74
5,041
4,995
46
4,967
4,908
59
3,219
2,832
387
564
494
70
1,648
1,443
205
695
609
86
568
498
70
Amortized Cost
After OTTI
$
2,077
14,525
2,251
–
4,894
624
62,665
20,550
40
482
474
53,056
34,823
26,877
35,162
1,442
25,370
126,429
5,891
30,693
24,161
8,619
–
43,590
40,299
2,136
1,029
5,841
9,042
7,459
2,109
549
5,221
23,966
5,592
28,800
339
12,126
6,499
1,837
2,514
19,181
5,531
3,813
4,995
4,908
2,832
494
1,443
609
498
Fair Value at
Time of OTTI
$
1,176
8,372
1,423
247
3,090
388
41,665
16,829
82
497
88
36,367
23,073
20,847
29,720
971
19,141
84,791
4,025
22,046
19,467
6,519
–
37,070
27,180
1,061
607
3,736
6,008
747
1,540
450
3,469
19,307
4,027
23,236
275
523
5,926
1,062
2,124
14,371
3,866
2,883
3,865
3,430
–
–
–
–
–
Quarter in
which
Impairment
Occurred
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
3Q 2012
3Q 2012
3Q 2012
3Q 2012
3Q 2012
3Q 2012
3Q 2012
3Q 2012
3Q 2012
3Q 2012
3Q 2012
3Q 2012
3Q 2012
3Q 2012
3Q 2012
3Q 2012
3Q 2012
3Q 2012
3Q 2012
3Q 2012
3Q 2012
3Q 2012
4Q 2012
4Q 2012
4Q 2012
4Q 2012
4Q 2012
4Q 2012
4Q 2012
4Q 2012
4Q 2012
4Q 2012
4Q 2012
4Q 2012
4Q 2012
4Q 2012
4Q 2012
4Q 2012
4Q 2012
4Q 2012
TLIC 2012 SEC
60
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
CUSIP
36298JAA1
75970QAD2
32113JAE5
32113JAD7
12667GCH4
759950GZ5
759950FJ2
000759BP4
02146QAB9
02146QAD5
05951VAV1
12667GXW8
12668WAC1
12669GTS0
14984WAA8
45661EAE4
525221GR2
525221HE0
70557RAB6
75970JAJ5
75971EAF3
76110G3H2
76110WPD2
761118VY1
81379EAD4
83611XAE4
86358EZU3
871928AX5
749248AG5
75970QAD2
045427AE1
12638DAA4
12640PAA3
126670ZN1
12668WAC1
126694A32
12669GTS0
225470T94
22942KCA6
3622NAAE0
36245CAC6
41161MAC4
46628SAJ2
52524MAW9
550279BA0
61754HAB8
65536PAA8
75970JAJ5
75970QAH3
75971EAF3
76110G3H2
761118RM2
Amortized Cost Present Value of
Before Current Projected Cash
Recognized
Period OTTI
Flows
OTTI
$
9,827 $
6,747 $
3,080
4,669
4,630
39
1,004
924
80
1,324
1,314
10
5,160
5,053
107
444
–
444
1,710
1,704
6
636
575
61
70,359
68,745
1,614
39,209
38,422
787
50,127
49,693
434
20,351
20,185
166
12,000
11,713
287
43,618
42,859
759
7,559
7,446
113
2,499
1,726
773
1,281
935
346
3,197
2,782
415
31,956
31,770
186
4,756
4,657
99
6,002
5,832
170
2,794
957
1,837
2,513
2,396
117
20,054
19,668
386
3,256
2,091
1,165
1,051
333
718
5,921
4,980
941
4,227
3,582
645
14,227
14,034
193
7,057
6,770
287
1,865
1,490
375
86,532
83,834
2,698
6,639
6,345
294
21,165
19,024
2,141
20,241
20,000
241
14,807
14,701
106
41,692
36,985
4,707
5,822
5,751
71
17,023
15,111
1,912
56,897
54,879
2,018
791
737
54
50,636
49,540
1,096
8,682
8,522
160
9,284
8,219
1,065
25,520
24,577
943
2,086
2,056
30
1,661
1,630
31
4,580
4,532
48
6,059
5,852
207
11,519
11,413
106
1,601
870
731
2,770
2,728
42
Amortized Cost
After OTTI
$
6,747
4,630
924
1,314
5,053
–
1,704
575
68,745
38,422
49,693
20,185
11,713
42,859
7,446
1,726
935
2,782
31,770
4,657
5,832
957
2,396
19,668
2,091
333
4,980
3,582
14,034
6,770
1,490
83,834
6,345
19,024
20,000
14,701
36,985
5,751
15,111
54,879
737
49,540
8,522
8,219
24,577
2,056
1,630
4,532
5,852
11,413
870
2,728
Fair Value at
Time of OTTI
$
3,553
3,624
250
406
3,589
66
404
596
38,728
23,134
36,948
17,916
6,354
23,303
6,053
1,584
823
4,994
22,910
3,022
3,548
1,715
2,421
10,670
338
280
2,029
3,582
12,482
4,870
893
74,622
6,562
4,055
10,222
8,458
19,529
5,035
12,886
33,811
220
30,482
5,898
4,938
15,391
1,317
915
2,831
3,694
6,260
889
1,567
Quarter in
which
Impairment
Occurred
4Q 2012
4Q 2012
4Q 2012
4Q 2012
4Q 2012
4Q 2012
4Q 2012
1Q 2011
1Q 2011
1Q 2011
1Q 2011
1Q 2011
1Q 2011
1Q 2011
1Q 2011
1Q 2011
1Q 2011
1Q 2011
1Q 2011
1Q 2011
1Q 2011
1Q 2011
1Q 2011
1Q 2011
1Q 2011
1Q 2011
1Q 2011
1Q 2011
1Q 2011
1Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
TLIC 2012 SEC
61
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
CUSIP
761118VY1
81379EAD4
83611XAE4
86358EZU3
93934FHC9
93936NBC6
749248AG5
75970QAD2
02146QAB9
02146QAD5
026936AA2
05948KV63
12638DAA4
12666UAC7
12668WAC1
126694A32
12669GTS0
14984WAA8
225470FJ7
225470U27
36244SAE8
45661EAE4
65536PAA8
75970JAJ5
75970QAH3
75971EAF3
761118RM2
761118VY1
81379EAD4
92922FZ27
93936NBC6
75970QAD2
17311QAA8
02146QAC7
05948KL31
059494AA2
12638DAA4
12640PAA3
12667G5G4
12668RAA6
12668WAC1
126694A32
12669GTS0
225470FJ7
225470YD9
32027LAG0
35729PPC8
3622NAAE0
41161MAC4
525170CG9
52522QAM4
65536PAA8
Amortized Cost Present Value of
Before Current Projected Cash
Recognized
Amortized Cost
Period OTTI
Flows
OTTI
After OTTI
$
18,605 $
17,970 $
635 $
17,970
1,740
1,414
326
1,414
329
118
211
118
4,946
4,370
576
4,370
34,880
33,497
1,383
33,497
863
407
456
407
17,308
17,277
31
17,277
6,672
6,218
454
6,218
66,595
63,475
3,120
63,475
36,649
35,735
914
35,735
154,988
149,463
5,525
149,463
11,652
11,491
161
11,491
54,787
56,934
(2,147)
56,934
18,561
18,558
3
18,558
11,129
11,075
54
11,075
9,401
9,090
311
9,090
35,892
34,078
1,814
34,078
6,939
6,757
182
6,757
4,294
4,257
37
4,257
4,713
4,667
46
4,667
672
669
3
669
1,621
1,190
431
1,190
1,265
1,232
33
1,232
4,448
4,387
61
4,387
5,736
5,668
68
5,668
5,552
5,473
79
5,473
2,637
2,568
69
2,568
17,391
17,101
290
17,101
1,743
669
1,074
669
20,331
20,154
177
20,154
323
97
226
97
6,107
5,878
229
5,878
23,608
21,769
1,839
21,769
33,428
32,478
950
32,478
14,784
14,778
6
14,778
32,494
31,969
525
31,969
55,461
53,176
2,285
53,176
6,122
5,942
180
5,942
15,321
14,995
326
14,995
24,029
23,537
492
23,537
10,903
10,666
237
10,666
37,195
36,657
538
36,657
33,195
31,654
1,541
31,654
4,254
3,968
286
3,968
44,143
41,031
3,112
41,031
57
1
56
1
629
478
151
478
54,725
53,750
975
53,750
47,897
45,318
2,579
45,318
87
84
3
84
92,552
86,587
5,965
86,587
1,209
1,196
13
1,196
Fair Value at
Time of OTTI
$
9,203
97
157
689
22,366
389
15,674
4,565
35,341
19,535
77,940
9,696
51,075
11,605
5,017
4,986
16,984
5,293
3,730
3,692
488
763
604
2,509
3,292
2,623
1,387
8,517
66
18,067
77
3,811
21,769
14,430
11,547
24,787
49,194
6,115
14,377
11,676
4,723
19,337
13,920
3,712
39,881
–
235
33,707
25,821
66
68,719
494
Quarter in
which
Impairment
Occurred
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
TLIC 2012 SEC
62
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
CUSIP
74925FAA1
75970QAH3
75971EAF3
761118AH1
81378KAC3
81379EAD4
83611XAE4
12669F2J1
75970QAD2
48123HAA1
000759BP4
02148AAA4
02148YAJ3
045427AE1
12640PAA3
126670ZN1
12667G5G4
126685DZ6
225470FJ7
225470YD9
22942KCA6
23245CAF7
32027LAG0
32028TAF4
35729PPZ7
361856EC7
3622MAAF8
38011AAC8
43710LAF1
45661EAE4
46628SAJ2
525170CG9
525221GR2
525221HE0
52524MAW9
52524YAA1
655374AA4
68400DAG9
70557RAB6
74925FAA1
76110WPD2
76110WQB5
761118RM2
761118VY1
81379EAD4
86357UAA9
86357UBM2
86358EZU3
86365EAA5
86365EAC1
86365KAA1
93935FAA9
Amortized Cost Present Value of
Before Current Projected Cash
Recognized
Period OTTI
Flows
OTTI
$
12,139 $
11,693 $
446
5,559
5,520
39
5,387
5,294
93
25,892
25,531
361
11,316
5,016
6,300
655
57
598
107
36
71
6,472
5,885
587
5,774
5,550
224
1,991
1,551
440
788
785
3
51,172
50,652
520
8,309
8,128
181
3,371
1,805
1,566
9,684
9,480
204
26,523
21,352
5,171
20,112
19,900
212
6,759
6,287
472
6,264
6,146
118
60,770
59,922
848
22,560
22,305
255
256
246
10
110
94
16
171
85
86
17,077
14,880
2,197
25,782
25,461
321
205
134
71
2,581
2,563
18
82
8
74
27,998
20,271
7,727
10,507
10,154
353
1,722
1,657
65
6,622
3,934
2,688
15,734
11,848
3,886
10,557
9,991
566
42,308
42,286
22
2,702
2,353
349
2,794
1,924
870
37,812
32,192
5,620
17,548
16,761
787
3,676
3,388
288
15,198
14,267
931
3,297
3,186
111
28,164
25,601
2,563
5,191
3,589
1,602
23,809
21,484
2,325
4,156
3,750
406
8,992
7,205
1,787
12,138
10,952
1,186
5,116
4,617
499
4,184
3,775
409
5,241
5,003
238
Amortized Cost
After OTTI
$
11,693
5,520
5,294
25,531
5,016
57
36
5,885
5,550
1,551
785
50,652
8,128
1,805
9,480
21,352
19,900
6,287
6,146
59,922
22,305
246
94
85
14,880
25,461
134
2,563
8
20,271
10,154
1,657
3,934
11,848
9,991
42,286
2,353
1,924
32,192
16,761
3,388
14,267
3,186
25,601
3,589
21,484
3,750
7,205
10,952
4,617
3,775
5,003
Fair Value at
Time of OTTI
$
11,226
3,160
2,461
24,066
6,463
44
18
3,699
3,679
580
625
33,152
6,809
610
8,902
3,899
17,911
5,438
5,130
37,312
16,542
586
57
100
248
16,478
52
2,023
34
9,966
6,420
1,404
1,875
4,671
3,594
33,282
1,117
106
18,685
15,542
2,855
12,048
1,587
11,604
99
16,973
3,020
2,672
8,530
3,718
2,989
2,472
Quarter in
which
Impairment
Occurred
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
TLIC 2012 SEC
63
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
CUSIP
000759BP4
02148AAA4
02148YAJ3
05948KL31
059494AA2
05953LAH2
12668VAF6
225470FJ7
225470U27
22942KCA6
32054YAD5
35729PPZ7
36244SAE8
525170CG9
525221HE0
52522QAM4
65536PAA8
761118RM2
86358EZU3
000759BP4
02148AAA4
02148YAJ3
05948KV63
059494AA2
05953LAH2
12638DAA4
12640PAA3
12667G5G4
126685DZ6
12669GTS0
225470FJ7
225470T94
225470YD9
225492AE7
22942KCA6
3622EEAA0
36244SAE8
38011AAC8
525170CG9
52519LAA6
525221HE0
65536PAA8
75970JAJ5
75970QAH3
761118AH1
761118VY1
92922FZ27
939336Q55
05535DAM6
05953YAG6
059515AC0
36245CAC6
Amortized Cost Present Value of
Before Current Projected Cash
Recognized
Period OTTI
Flows
OTTI
$
757 $
700 $
57
48,811
46,735
2,076
7,973
7,794
179
18,007
17,283
724
41,693
41,000
693
1,318
888
430
8,391
8,232
159
5,503
5,230
273
6,062
5,459
603
21,269
21,106
163
353
160
193
14,854
13,466
1,388
901
881
20
1,584
1,293
291
11,185
6,764
4,421
121,936
116,652
5,284
3,451
3,224
227
3,103
3,049
54
7,161
6,018
1,143
674
657
17
44,694
41,915
2,779
7,636
7,630
6
13,694
13,656
38
39,536
39,315
221
832
708
124
72,351
64,487
7,864
7,475
7,142
333
20,892
20,806
86
5,919
5,602
317
50,815
47,578
3,237
5,065
5,060
5
6,996
6,650
346
56,415
53,591
2,824
21,757
21,547
210
20,247
20,203
44
29,835
28,729
1,106
847
820
27
2,513
2,451
62
1,202
1,082
120
110,126
101,397
8,729
6,238
5,615
623
1,894
1,747
147
5,448
4,933
515
7,000
6,369
631
31,985
31,648
337
23,715
22,571
1,144
23,995
23,692
303
604
596
8
476
415
61
1,788
1,788
–
8,952
8,942
10
2,589
1,121
1,468
Amortized Cost
After OTTI
$
700
46,735
7,794
17,283
41,000
888
8,232
5,230
5,459
21,106
160
13,466
881
1,293
6,764
116,652
3,224
3,049
6,018
657
41,915
7,630
13,656
39,315
708
64,487
7,142
20,806
5,602
47,578
5,060
6,650
53,591
21,547
20,203
28,729
820
2,451
1,082
101,397
5,615
1,747
4,933
6,369
31,648
22,571
23,692
596
415
1,788
8,942
1,121
Fair Value at
Time of OTTI
$
589
33,688
6,567
11,108
31,082
319
4,535
4,981
4,457
15,188
104
920
508
1,635
5,228
83,155
2,937
1,563
1,603
572
35,127
5,659
12,859
30,326
304
58,004
7,293
20,536
4,887
25,003
5,188
5,183
39,237
18,885
15,799
27,151
542
1,914
1,185
87,934
4,141
1,641
2,733
3,783
26,663
11,123
21,808
279
318
1,619
5,480
257
Quarter in
which
Impairment
Occurred
2Q 2010
2Q 2010
2Q 2010
2Q 2010
2Q 2010
2Q 2010
2Q 2010
2Q 2010
2Q 2010
2Q 2010
2Q 2010
2Q 2010
2Q 2010
2Q 2010
2Q 2010
2Q 2010
2Q 2010
2Q 2010
2Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
4Q 2010
4Q 2010
4Q 2010
TLIC 2012 SEC
64
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
CUSIP
52524YAA1
61754HAB8
02148YAJ3
05530PAA0
059494AA2
059515AC0
05953LAH2
05953YAG6
12638DAA4
12667G5G4
12668RAA6
12669GTS0
14984WAA8
225470U27
225470YD9
22942KCA6
36245CAC6
36245RAA7
39539KAF0
41161MAC4
45661EAE4
52519LAA6
525221GR2
525221HE0
52522QAM4
52524YAA1
61754HAB8
74925FAA1
759676AJ8
75971EAF3
761118VY1
81379EAD4
863592AP6
863592AQ4
92922FZ27
939336Q55
02148AAA4
02148YAJ3
045427AE1
126670ZN1
12668VAF6
225470FJ7
Amortized Cost Present Value of
Before Current Projected Cash
Recognized
Period OTTI
Flows
OTTI
$
3,033 $
3,012 $
21
2,987
2,790
197
7,480
7,334
146
2,460
2,395
65
37,667
37,657
10
8,939
7,602
1,337
626
432
194
1,732
1,553
179
61,724
61,571
153
8,708
8,607
101
27,353
25,747
1,606
46,681
44,524
2,157
7,942
7,730
212
5,279
5,139
140
51,189
50,912
277
19,399
18,120
1,279
1,112
833
279
3,756
3,495
261
10,205
9,957
248
54,375
52,192
2,183
8,907
2,644
6,263
97,842
97,267
575
3,510
1,336
2,174
5,322
3,506
1,816
106,741
105,722
1,019
32,722
31,200
1,522
2,771
2,281
490
14,656
14,038
618
6,794
6,391
403
6,200
6,088
112
21,814
20,938
876
3,583
3,258
325
21,292
21,076
216
9,443
9,303
140
22,761
22,760
1
576
558
18
56,623
55,412
1,211
10,038
9,635
403
5,981
4,341
1,640
32,849
28,835
4,014
14,078
9,775
4,303
7,621
7,494
127
Amortized Cost
After OTTI
$
3,012
2,790
7,334
2,395
37,657
7,602
432
1,553
61,571
8,607
25,747
44,524
7,730
5,139
50,912
18,120
833
3,495
9,957
52,192
2,644
97,267
1,336
3,506
105,722
31,200
2,281
14,038
6,391
6,088
20,938
3,258
21,076
9,303
22,760
558
55,412
9,635
4,341
28,835
9,775
7,494
Fair Value at
Time of OTTI
$
2,837
1,467
5,783
2,046
30,418
5,504
273
1,575
56,681
8,394
16,167
24,463
6,113
4,314
37,621
14,757
258
2,677
8,804
33,461
2,517
84,903
1,054
3,634
81,409
30,754
1,448
13,792
4,825
3,542
11,309
348
19,735
8,654
20,920
302
27,639
5,095
388
2,148
3,695
4,321
Quarter in
which
Impairment
Occurred
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
TLIC 2012 SEC
65
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
CUSIP
225470T94
22942KCA6
32027LAG0
32028TAF4
35729PPC8
3622MAAF8
40430FAF9
43710LAF1
46628SAJ2
576435AT8
655374AA4
86358EZU3
939336Q55
02148AAA4
12668VAF6
225470FJ7
22942KCA6
23245CAF7
3622MAAF8
36244SAE8
43710LAF1
52524MAW9
68400DAG9
70557RAB6
86358EZU3
939336Q55
059494AA2
05951VAV1
05948KV63
126670ZN1
126685DZ6
23245CAF7
12667G5G4
02148AAA4
02148YAJ3
045427AE1
12640PAA3
225470FJ7
32027LAG0
32028TAF4
38011AAC8
361856EC7
3622MAAF8
43710LAF1
52524YAA1
52524MAW9
576435AT8
655374AA4
68400DAG9
761118VY1
86358EZU3
225470T94
Amortized Cost Present Value of
Before Current Projected Cash
Recognized
Period OTTI
Flows
OTTI
$
9,057 $
8,721 $
336
27,233
25,136
2,097
156
153
3
214
210
4
3,943
727
3,216
300
294
6
2,814
591
2,223
152
150
2
11,798
11,254
544
494
484
10
3,374
3,252
122
20,660
10,929
9,731
725
687
38
55,412
54,674
738
9,775
9,187
588
7,370
7,107
263
25,136
24,544
592
440
317
123
294
248
46
1,000
949
51
150
107
43
11,476
11,109
367
4,806
3,554
1,252
41,797
37,940
3,857
10,929
9,287
1,642
687
680
7
45,467
44,726
741
60,026
59,859
167
15,678
15,283
395
28,832
26,567
2,265
8,557
6,962
1,595
304
267
37
25,000
23,949
1,051
53,080
52,679
401
9,305
8,787
518
4,341
3,378
963
11,545
10,987
558
6,755
6,727
28
147
116
31
198
182
16
2,961
2,627
334
31,354
26,889
4,465
234
218
16
96
91
5
46,921
46,677
244
10,923
10,743
180
467
397
70
3,144
2,723
421
3,535
2,809
726
30,381
29,354
1,027
9,243
9,032
211
8,516
7,425
1,091
Amortized Cost
After OTTI
$
8,721
25,136
153
210
727
294
591
150
11,254
484
3,252
10,929
687
54,674
9,187
7,107
24,544
317
248
949
107
11,109
3,554
37,940
9,287
680
44,726
59,859
15,283
26,567
6,962
267
23,949
52,679
8,787
3,378
10,987
6,727
116
182
2,627
26,889
218
91
46,677
10,743
397
2,723
2,809
29,354
9,032
7,425
Fair Value at
Time of OTTI
$
4,335
14,065
55
167
169
73
93
94
4,475
303
1,663
3,505
255
30,484
4,470
4,748
14,572
90
48
481
113
3,902
193
20,360
1,747
260
30,478
34,196
11,397
3,802
5,593
214
21,479
32,386
6,122
517
9,882
4,955
46
125
1,992
14,755
55
80
35,812
4,023
284
1,573
180
12,445
222
5,324
Quarter in
which
Impairment
Occurred
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
TLIC 2012 SEC
66
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
CUSIP
225470U27
933637AJ9
Amortized Cost Present Value of
Before Current Projected Cash
Recognized
Period OTTI
Flows
OTTI
$
7,991 $
6,431 $
1,560
3,783
3,505
278
Amortized Cost
After OTTI
$
6,431
3,505
Fair Value at
Time of OTTI
$
4,577
2,574
Quarter in
which
Impairment
Occurred
4Q 2009
4Q 2009
The unrealized losses of loan-backed and structured securities where fair value is less than cost
or amortized cost for which an OTTI has not been recognized in earnings as of December 31,
2012 and 2011 is as follows:
Losses 12
Months or
More
Year ended December 31, 2012
The aggregate amount of unrealized losses
The aggregate related fair value of securities with unrealized losses
$
787,684 $
3,247,332
Losses 12
Months or
More
Year ended December 31, 2011
The aggregate amount of unrealized losses
The aggregate related fair value of securities with unrealized losses
Losses Less
Than 12
Months
$
4,100
245,722
Losses Less
Than 12
Months
1,414,929 $
4,176,581
67,845
1,125,357
Detail of net investment income (loss) is presented below:
2012
Income (loss):
Bonds
Preferred stocks
Common stocks
Mortgage loans on real estate
Real estate
Policy loans
Cash, cash equivalents and
short-term investments
Derivatives
Other invested assets
Other
Gross investment income
Less investment expenses
Net investment income
$
$
Year Ended December 31
2011
1,905,410
9,320
168,713
411,742
17,328
48,012
7,509
197,183
35,582
34,107
2,834,906
105,379
2,729,527
$
$
2,147,304
9,136
48,828
469,635
19,488
46,677
5,010
(29,303)
6,183
11,912
2,734,870
119,012
2,615,858
2010
$
$
2,476,783
10,296
36,266
534,467
20,816
50,210
11,008
(147,236)
50,078
14,525
3,057,213
138,042
2,919,171
TLIC 2012 SEC
67
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Proceeds from sales and other disposals (excluding maturities) of bonds and preferred stock and
related gross realized capital gains and losses were as follows:
Year Ended December 31
2011
2012
Proceeds
$
Gross realized gains
Gross realized losses
Net realized capital gains (losses)
$
$
9,180,982
292,804
(45,003)
247,801
2010
$ 16,303,347
$ 23,903,441
$
$ 1,624,135
(142,953)
$ 1,481,182
$
581,820
(85,014)
496,806
The Company had gross realized losses for the years ended December 31, 2012, 2011 and 2010
of $88,836, $127,005 and $192,541, respectively, which relate to losses recognized on otherthan-temporary declines in the fair values of bonds and preferred stocks.
Net realized capital gains (losses) on investments are summarized below:
Realized
Year Ended December 31
2012
2011
2010
Bonds
Preferred stocks
Common stocks
Mortgage loans on real estate
Real estate
Cash, cash equivalents and short-term investments
Derivatives
Other invested assets
Federal income tax effect
Transfer to interest maintenance reserve
Net realized capital gains (losses) on investments
$
$
158,547 $
418
(621)
13,802
7,190
9
(508,177)
112,293
(216,539)
(94,705)
(71,282)
(382,526) $
370,867 $
5,557
22,701
(2,171)
4,287
13
304,713
91,017
796,984
(185,043)
(188,405)
423,536 $
1,290,685
(75)
2,949
(18,451)
(235)
12
(160,155)
124,712
1,239,442
(450,184)
(846,096)
(56,838)
At December 31, 2012 and 2011, the Company had recorded investments in restructured
securities of $8,476 and $10,272, respectively. The capital gains (losses) taken as a direct result
of restructures in 2012, 2011 and 2010 were $167, $(4,361) and $16,745, respectively. The
Company often has impaired a security prior to the restructure date. These impairments are not
included in the calculation of restructure related losses and are accounted for as a realized loss,
reducing the cost basis of the security involved.
TLIC 2012 SEC
68
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
The changes in net unrealized capital gains and losses on investments, including the changes in
net unrealized foreign capital gains and losses, were as follows:
Change in Unrealized
Year Ended December 31
2012
2011
2010
Bonds
Preferred stocks
Common stocks
Affiliated entities
Mortgage loans on real estate
Derivatives
Other invested assets
Change in unrealized capital gains/losses, before taxes
Taxes on unrealized capital gains/losses
Change in unrealized capital gains/losses, net of tax
$
$
108,175 $
3,957
21,290
(25,164)
6,270
(98,933)
14,749
30,344
(20,779)
9,565 $
(143,599) $
(3,816)
(19,959)
461,477
(2,196)
239,967
103,189
635,063
(57,633)
577,430 $
(53,819)
(35)
22,057
70,914
1,826
113,051
25,289
179,283
(17,514)
161,769
During 2012, the Company issued mortgage loans with a maximum interest rate of 5.40% and a
minimum interest rate of 3.44% for commercial loans. The maximum percentage of any one
mortgage loan to the value of the underlying real estate originated during the year ending
December 31, 2012 at the time of origination was 75%. During 2011, the Company issued
mortgage loans with a maximum interest rate of 6.16% and a minimum interest rate of 4.01% for
commercial loans. The maximum percentage of any one mortgage loan to the value of the
underlying real estate originated during the year ending December 31, 2011 at the time of
origination was 70%. During 2012, the Company reduced the interest rate by 1% on two
outstanding mortgage loans with statement value of $13,326. During 2011, the Company did not
reduce interest rates on any outstanding mortgages. At December 31, 2012 and 2011, there were
no loans that were non-income producing for the previous 180 days. There was no accrued
interest related to these mortgage loans at December 31, 2012 or 2011. The Company has a
mortgage or deed of trust on the property thereby creating a lien which gives it the right to take
possession of the property (among other things) if the borrower fails to perform according to the
terms of the loan documents. The Company requires all mortgaged properties to carry fire
insurance equal to the value of the underlying property. At December 31, 2012 and 2011 there
were no taxes, assessments and other amounts advanced and not included in the mortgage loan
total.
At December 31, 2012 and 2011, respectively, the Company held $37,459 and $44,738 in
impaired loans with related allowance for credit losses of $2,124 and $8,394. There were no
impaired mortgage loans held without an allowance for credit losses as of December 31, 2012
TLIC 2012 SEC
69
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
and 2011, respectively. The average recorded investment in impaired loans during 2012 and
2011 was $41,959 and $53,714, respectively.
The following table provides a reconciliation of the beginning and ending balances for the
allowance for credit losses on mortgage loans:
Year Ended December 31
2012
2011
2010
Balance at beginning of period
Additions, net charged to operations
Recoveries in amounts previously charged off
Balance at end of period
$
$
8,394 $
500
(6,770)
2,124 $
6,198 $
6,599
(4,403)
8,394 $
8,024
16,645
(18,471)
6,198
The Company accrues interest income on impaired loans to the extent deemed collectible
(delinquent less than 91 days) and the loan continues to perform under its original or restructured
contractual terms. Interest income on nonperforming loans generally is recognized on a cash
basis. For the years ended December 31, 2012, 2011 and 2010, respectively, the Company
recognized $2,879, $3,701 and $8,500 of interest income on impaired loans. Interest income of
$2,971, $3,610 and $8,568, respectively, was recognized on a cash basis for the years ended
December 31, 2012, 2011 and 2010.
At December 31, 2012 and 2011, the Company held a mortgage loan loss reserve in the AVR of
$54,808 and $65,017, respectively.
The Company’s mortgage loan portfolio is diversified by geographic region and specific
collateral property type as follows:
Geographic Distribution
December 31
2012
2011
South Atlantic
Pacific
Middle Atlantic
Mountain
E. North Central
W. North Central
W. South Central
E. South Central
New England
25 %
22
15
15
9
6
5
2
1
25 %
23
15
14
10
6
3
2
2
Property Type Distribution
December 31
2012
2011
Office
Retail
Apartment
Industrial
Other
Agricultural
Medical
27 %
27
20
18
3
3
2
28 %
23
21
18
4
4
2
TLIC 2012 SEC
70
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
At December 31, 2012, 2011 and 2010, the Company had mortgage loans with a total net
admitted asset value of $2,176, $2,416 and $13,125, respectively, which had been restructured in
accordance with SSAP No. 36, Troubled Debt Restructuring. There were no realized losses
during the years ended December 31, 2012, 2011 and 2010 related to such restructurings. There
were no commitments to lend additional funds to debtors owing receivables at December 31,
2012, 2011 or 2010.
During 2012, the Company recorded an impairment of $97 for its investment in Yucaipa Equity
Partners, L.P. The impairment was taken because the decline in fair value of the fund was
deemed to be other than temporary and a recovery in value from the remaining underlying
investments in the fund is not anticipated. The write-down is included in net realized capital
gains (losses) within the statements of operations.
During 2011, the Company recorded an impairment of $5,770 for its investment in William Blair
Mezzanine Capital Fund III, L.P., an impairment of $8,799 for its investment in Harbour Group
Investments IV, L.P. and an impairment of $1,697 for its investment in e-Financial Ventures I,
L.P. The impairments were taken because the decline in fair value of the funds was deemed to
be other than temporary and a recovery in value from the remaining underlying investments in
the funds was not anticipated. These write-downs are included in net realized capital gains
(losses) within the statements of operations.
During 2010, the Company recorded an impairment of $3,276 for its investment in Stonington
Capital Appreciation 1994 Fund, L.P. and an impairment of $272 for its investment in Yield
Strategies Fund I, L.P. The impairments were taken because the decline in fair value of the
funds was deemed to be other than temporary and a recovery in value from the remaining
underlying investments in the funds was not anticipated. These write-downs are included in net
realized capital gains (losses) within the statements of operations.
At December 31, 2012, the Company had ownership interests in fifty LIHTC investments. The
remaining years of unexpired tax credits ranged from one to thirteen, and none of the properties
were subject to regulatory review. The length of time remaining for holding periods ranged from
one to seventeen years. The amount of contingent equity commitments expected to be paid
during the years 2013 to 2029 is $23,053. There were no impairment losses, write-downs or
reclassifications during the year related to any of these credits.
At December 31, 2011, the Company had ownership interests in sixty-five LIHTC investments.
The remaining years of unexpired tax credits ranged from one to eleven, and none of the
properties were subject to regulatory review. The length of time remaining for holding periods
ranged from one to sixteen years. The amount of contingent equity commitments expected to be
paid during the years 2012 to 2026 was $53,963. There were no impairment losses, write-downs
or reclassifications during 2011 related to any of these credits.
TLIC 2012 SEC
71
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
The following table provides the carrying value of state transferable tax credits gross of any
related tax liabilities and total unused transferable tax credits by state and in total as of December
31, 2012 and 2011:
December 31, 2012
Description of State Transferable and Nontransferable Tax Credits
Low-Income Housing Tax Credits
Total
State
MA
Carrying Value Unused Amount*
$
2,810 $
5,060
$
2,810 $
5,060
December 31, 2011
Description of State Transferable and Nontransferable Tax Credits
Low-Income Housing Tax Credits
Total
State
MA
Carrying Value Unused Amount
$
4,446 $
6,696
$
4,446 $
6,696
*The unused amount reflects credits that the Company deems will be realizable in the period
from 2013 to 2015.
The Company estimated the utilization of the remaining state transferable tax credits by
projecting a future tax liability based on projected premium, tax rates and tax credits and
comparing the projected future tax liability to the availability of remaining state transferable tax
credits. The Company had no impairment losses related to state transferable tax credits.
On December 31, 2010, the Company sold two real estate related limited liability company
interests (Transamerica Pyramid Properties, LLC and Transamerica Realty Properties, LLC) to
Monumental Life Insurance Company (MLIC), an affiliate, for a combined sale price of
$252,975. The sale price was based predominantly on the valuations of the properties within
each of the entities. This transaction resulted in a realized gain of $24,296.
Derivatives
The Company has entered into collateral agreements with certain counterparties wherein the
counterparty is required to post assets (cash or securities) on the Company's behalf in an amount
equal to the difference between the net positive fair value of the contracts and an agreed upon
threshold based on the credit rating of the counterparty. If the net fair value of all contracts with
this counterparty is negative, then the Company is required to post similar assets (cash or
securities).
TLIC 2012 SEC
72
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
At December 31, 2012 and 2011, the fair value of all derivative contracts, aggregated at a
counterparty level, with a positive fair value amounted to $1,962,723 and $2,014,879,
respectively.
At December 31, 2012 and 2011, the fair value of all derivative contracts, aggregated at a
counterparty level, with a negative fair value amounted to $521,564 and $560,015, respectively.
For the years ended December 31, 2012 and 2011, the Company has recorded $42,816 and
$142,076, respectively, for the component of derivative instruments utilized for hedging
purposes that did not qualify for hedge accounting. This has been recorded directly to
unassigned surplus as an unrealized gain.
The Company did not recognize any unrealized gains or losses during 2012 and 2011 that
represented the component of derivative instruments gain or loss that was excluded from the
assessment of hedge effectiveness.
The Company did not recognize any income from options contracts for the years ended
December 31, 2012, 2011 or 2010.
The maximum term over which the Company is hedging its exposure to the variability of future
cash flows is approximately 20 years for forecasted hedge transactions.
At December 31, 2012 and 2011, none of the Company’s cash flow hedges have been
discontinued as it was probable that the original forecasted transactions would occur by the end
of the originally specified time period documented at inception of the hedging relationship.
As of December 31, 2012 and 2011, the Company has accumulated deferred gains in the amount
of $66,410 and $78,051, respectively, related to the termination of swaps that were hedging
forecasted transactions. It is expected that these gains will be used as basis adjustments on future
asset purchases expected to transpire throughout 2026.
At December 31, 2012 and 2011, the Company had replicated assets with a fair value of
$3,571,947 and $2,965,038 and credit default and forward starting interest rate swaps with a fair
value of $(143,165) and $(195,744), respectively. For the years ended December 31, 2012 and
2011, the Company recognized $6,989 and $(408), respectively, in capital gains (losses) related
to replication transactions. For the year ended December 31, 2010, the Company did not
recognize any capital losses related to replication transactions.
TLIC 2012 SEC
73
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
As stated in Note 1, the Company replicates investment grade corporate bonds by writing credit
default swaps. As a writer of credit swaps, the Company actively monitors the underlying asset,
being careful to note any events (default or similar credit event) that would require the Company
to perform on the credit swap. If such events would take place, the Company has recourse
provisions from the proceeds of the bankruptcy settlement of the underlying entity or by the sale
of the underlying bond. As of December 31, 2012, credit default swaps, used in replicating
corporate bonds are as follows:
Deal, Receive (Pay), Underlying
4200,SWAP, USD 1 / (USD 0), :912810QK7
4201,SWAP, USD 1 / (USD 0), :912828JR2
4203,SWAP, USD 1 / (USD 0), :912810PX0
4208,SWAP, USD 1 / (USD 0), :912810QK7
4252,SWAP, USD 1 / (USD 0), :912803DJ9
4253,SWAP, USD 1 / (USD 0), :912803BM4
4254,SWAP, USD 1 / (USD 0), :912803DK6
4257,SWAP, USD 1 / (USD 0), :912803DK6
4261,SWAP, USD 1 / (USD 0), :912803CH4
4262,SWAP, USD 1 / (USD 0), :912803BJ1
4267,SWAP, USD 1 / (USD 0), :912803DJ9
4269,SWAP, USD 1 / (USD 0), :912803CH4
4272,SWAP, USD 1 / (USD 0), :912803DK6
4280,SWAP, USD 1 / (USD 0), :912803DJ9
4281,SWAP, USD 1 / (USD 0), :912803DM2
4299,SWAP, USD 1 / (USD 0), :US670346AE56
4311,SWAP, USD 1 / (USD 0), :US35671DAS45
4347,SWAP, USD 1 / (USD 0), :CDX IG 16
4479,SWAP, USD 1 / (USD 0), :US731011AN26
4480,SWAP, USD 1 / (USD 0), :US731011AN26
4481,SWAP, USD 1 / (USD 0), :US46513EY48
4482,SWAP, USD 1 / (USD 0), :XS0113419690
4483,SWAP, USD 1 / (USD 0), :XS0203685788
4484,SWAP, USD 1 / (USD 0), :US50064FAD69
4485,SWAP, USD 1 / (USD 0), :USY6826RAA06
4486,SWAP, USD 1 / (USD 0), :US712219AG90
4487,SWAP, USD 1 / (USD 0), :US168863AS74
4491,SWAP, USD 1 / (USD 0), :US731011AN26
4493,SWAP, USD 1 / (USD 0), :XS0113419690
4494,SWAP, USD 1 / (USD 0), :US50064FAD69
4500,SWAP, USD 0.25 / (USD 0), :XS0417728325
4502,SWAP, USD 1 / (USD 0), :XS0203685788
4504,SWAP, USD 1 / (USD 0), :XS0412694647
4505,SWAP, USD 1 / (USD 0), :US16886AS74
4506,SWAP, USD 1 / (USD 0), :JP1200551248
4507,SWAP, USD 1 / (USD 0), :XS0203685788
4508,SWAP, USD 1 / (USD 0), :XS0113419690
4509,SWAP, USD 1 / (USD 0), :US731011AN26
4510,SWAP, USD 1 / (USD 0), :US50064FAD69
4511,SWAP, USD 0.25 / (USD 0), :XS0417728325
4512,SWAP, USD 1 / (USD 0), :US168863AS74
4513,SWAP, USD 1 / (USD 0), :USY6826RAA06
4515,SWAP, USD 1 / (USD 0), :XS0412694647
4520,SWAP, USD 0.25 / (USD 0), :XS0417728325
4521,SWAP, USD 1 / (USD 0), :US731011AN26
4522,SWAP, USD 1 / (USD 0), :US50064FAD69
Maturity
Maximum Future
Date
Payout (Estimate)
12/20/2015 $
10,000
12/20/2015
10,000
12/20/2015
10,000
12/20/2015
20,000
12/20/2015
10,000
12/20/2015
20,000
12/20/2015
20,000
12/20/2015
20,000
12/20/2015
20,000
12/20/2015
20,000
12/20/2015
20,000
12/20/2015
20,000
12/20/2015
20,000
3/20/2016
10,000
3/20/2016
20,000
3/20/2016
10,000
6/20/2016
20,000
6/20/2016
20,000
3/20/2017
10,000
3/20/2017
10,000
3/20/2017
10,000
3/20/2017
10,000
3/20/2017
15,000
3/20/2017
10,000
3/20/2017
10,000
3/20/2017
10,000
3/20/2017
15,000
3/20/2017
15,000
3/20/2017
15,000
3/20/2017
5,000
3/20/2017
15,000
3/20/2017
15,000
3/20/2017
15,000
3/20/2017
10,000
3/20/2017
15,000
3/20/2017
10,000
3/20/2017
15,000
3/20/2017
10,000
3/20/2017
10,000
3/20/2017
10,000
3/20/2017
10,000
3/20/2017
5,000
3/20/2017
10,000
3/20/2017
20,000
3/20/2017
10,000
3/20/2017
10,000
Current Fair
Value
$
(19)
66
(5)
131
21
242
(38)
79
74
(38)
42
478
281
167
318
141
(11)
220
164
164
(43)
170
334
214
175
223
255
247
255
107
25
334
414
170
239
223
255
164
214
17
170
87
276
33
164
214
TLIC 2012 SEC
74
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
4523,SWAP, USD 1 / (USD 0), :XS0203685788
4524,SWAP, USD 1 / (USD 0), :JP1200551248
4525,SWAP, USD 1 / (USD 0), :XS0412694647
4527,SWAP, USD 0.25 / (USD 0), :US317873AY36
4529,SWAP, USD 1 / (USD 0), :SUS650162AP56
4530,SWAP, USD 1 / (USD 0), :USY6826RAA06
4563,SWAP, USD 1 / (USD 0), :US59156RAN89
4564,SWAP, USD 1 / (USD 0), :US475070AD04
4567,SWAP, USD 1 / (USD 0), :US026874AZ07
4570,SWAP, USD 1 / (USD 0), :US026874AZ07
4576,SWAP, USD 1 / (USD 0), :US141781AC86
4577,SWAP, USD 1 / (USD 0), :US141781AC86
4589,SWAP, USD 1 / (USD 0), :US42217KAL08
4599,SWAP, USD 1 / (USD 0), :CDX IG 18
4600,SWAP, USD 1 / (USD 0), :CDX IG 18
4603,SWAP, USD 1 / (USD 0), :CDX IG 18
4604,SWAP, USD 1 / (USD 0), :CDX IG 18
4622,SWAP, USD 1 / (USD 0), :CDX IG 18
4625,SWAP, USD 5 / (USD 0), :US345370BX76
4631,SWAP, USD 1 / (USD 0), :US105756AL40
4632,SWAP, USD 1 / (USD 0), :XS0114288789
4633,SWAP, USD 1 / (USD 0), :US715638AP79
4634,SWAP, USD 1 / (USD 0), :XS0203685788
4635,SWAP, USD 1 / (USD 0), :XS0412694647
4636,SWAP, USD 1 / (USD 0), :US731011AN26
4675,SWAP, USD 1 / (USD 0), :US105756AL40
4676,SWAP, USD 1 / (USD 0), :XS0114288789
4677,SWAP, USD 1 / (USD 0), :US455780AQ93
4678,SWAP, USD 1 / (USD 0), :US715638AP79
4680,SWAP, USD 0.25 / (USD 0), :XS0417728325
4684,SWAP, USD 1 / (USD 0), :US836205AJ33
4686,SWAP, USD 1 / (USD 0), :US88322LAA70
4709,SWAP, USD 1 / (USD 0), :JP1200551248
4710,SWAP, USD 1 / (USD 0), :XS0114288789
4711,SWAP, USD 0.25 / (USD 0), :XS0417728325
4720,SWAP, USD 1 / (USD 0), :XS0114288789
4721,SWAP, USD 1 / (USD 0), :US91086QAW87
4724,SWAP, USD 1 / (USD 0), :US836205AJ33
4725,SWAP, USD 1 / (USD 0), :US105756AL40
4766,SWAP, USD 1 / (USD 0), :12624KAD8
4767,SWAP, USD 1 / (USD 0), :46634GAB7
4768,SWAP, USD 1 / (USD 0), :92936CAJ8
4769,SWAP, USD 1 / (USD 0), :175305EEE1
4770,SWAP, USD 1 / (USD 0), :36248EAB1
4772,SWAP, USD 1 / (USD 0), :17305EDT9
4773,SWAP, USD 1 / (USD 0), :46636DAJ5
4774,SWAP, USD 1 / (USD 0), :36249KAC4
3/20/2017
3/20/2017
3/20/2017
3/20/2017
3/20/2017
3/20/2017
6/20/2017
6/20/2017
6/20/2017
6/20/2017
6/20/2017
6/20/2017
6/20/2017
6/20/2017
6/20/2017
6/20/2017
6/20/2017
6/20/2017
6/20/2017
6/20/2017
6/20/2017
6/20/2017
6/20/2017
6/20/2017
6/20/2017
9/20/2017
9/20/2017
9/20/2017
9/20/2017
9/20/2017
9/20/2017
9/20/2017
9/20/2017
9/20/2017
9/20/2017
9/20/2017
9/20/2017
9/20/2017
9/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
10,000
20,000
10,000
10,000
10,000
10,000
25,000
25,000
25,000
25,000
10,000
5,000
10,000
20,000
20,000
20,000
26,000
25,000
25,000
10,000
10,000
10,000
10,000
10,000
8,000
5,700
4,900
9,500
9,000
7,100
10,600
5,100
4,000
4,500
3,000
10,000
10,000
8,000
8,000
15,000
15,000
15,000
15,000
10,000
5,000
10,000
10,000
223
319
276
14
267
175
(512)
(715)
(183)
(183)
136
68
(23)
129
129
129
167
161
3,334
25
(67)
73
213
275
118
2
(50)
(77)
49
(8)
(168)
42
51
(46)
(3)
(101)
52
(127)
2
(28)
49
(202)
173
(134)
(61)
36
62
TLIC 2012 SEC
75
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
4775,SWAP, USD 1 / (USD 0), :17305EEE1
4790,SWAP, USD 1 / (USD 0), :617459AD4
4792,SWAP, USD 1 / (USD 0), :61761DAD4
4797,SWAP, USD 1 / (USD 0), :36248EAB1
4798,SWAP, USD 1 / (USD 0), :12624PAE5
4799,SWAP, USD 1 / (USD 0), :92936YAC5
4800,SWAP, USD 1 / (USD 0), :61761DAD4
4802,SWAP, USD 1 / (USD 0), :912803DK6
4804,SWAP, USD 1 / (USD 0), :912828QN3
4808,SWAP, USD 1 / (USD 0), :912828QN3
4809,SWAP, USD 1 / (USD 0), :912828QN3
4811,SWAP, USD 1 / (USD 0), :912810QV3
4812,SWAP, USD 1 / (USD 0), :912803DP5
4815,SWAP, USD 1 / (USD 0), :92930RBB7
4816,SWAP, USD 1 / (USD 0), :31359MEL3
4817,SWAP, USD 1 / (USD 0), :912810QH4
4818,SWAP, USD 1 / (USD 0), :912803DK6
4820,SWAP, USD 1 / (USD 0), :07401DAD3
4821,SWAP, USD 1 / (USD 0), :20176AB1
4822,SWAP, USD 5 / (USD 0), :912803DS9
4828,SWAP, USD 1 / (USD 0), :912803DS9
4829,SWAP, USD 1 / (USD 0), :912828QN3
4830,SWAP, USD 1 / (USD 0), :912828QN3
4832,SWAP, USD 1 / (USD 0), :912803DP5
4833,SWAP, USD 1 / (USD 0), :912803DM2
4834,SWAP, USD 1 / (USD 0), :912803DM2
4835,SWAP, USD 1 / (USD 0), :912803DM2
4836,SWAP, USD 1 / (USD 0), :BAE2Z99E1
4837,SWAP, USD 5 / (USD 0), :BRS0F7YG6
4846,SWAP, USD 1 / (USD 0), :31359MEL3
4856,SWAP, USD 1 / (USD 0), :12624QAR4
4860,SWAP, USD 1 / (USD 0), :912803DJ9
4861,SWAP, USD 1 / (USD 0), :912803BF9
4862,SWAP, USD 1 / (USD 0), :912803BJ1
4864,SWAP, USD 5 / (USD 0), :912803DM2
4875,SWAP, USD 1 / (USD 0), :94987MAB7
50953,SWAP, USD 5 / (USD 0), :912828PC8
50956,SWAP, USD 5 / (USD 0), :912828PC8
50961,SWAP, USD 5 / (USD 0), :912828PC8
50965,SWAP, USD 5 / (USD 0), :912828PC8
50966,SWAP, USD 5 / (USD 0), :912828PC8
50967,SWAP, USD 5 / (USD 0), :912828QN3
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2016
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
5,000
10,000
10,000
10,000
10,000
15,000
5,000
22,000
25,000
27,000
27,000
15,000
22,000
12,500
20,000
20,000
20,000
20,000
20,000
20,000
22,000
10,000
10,000
20,000
50,000
20,000
20,000
25,000
25,000
19,000
12,500
25,000
25,000
20,000
10,000
10,000
4,000
4,000
4,000
4,000
3,500
500
$
1,887,400 $
66
(535)
(535)
(351)
(195)
30
10
44
50
54
54
30
44
8
(26)
(141)
(390)
(514)
1
2,810
44
497
125
40
99
1
(527)
50
3,512
(37)
25
(32)
1
(141)
1,405
(97)
283
356
284
364
245
35
18,511
The Company had no written options for the year ended December 31, 2012. At December 31,
2011, the Company had written options with a fair value of $0 and average fair value for the year
of $(32) as these positions were sold during 2011. The Company had no realized gains or losses
for the year ended December 31, 2011 related to these options.
TLIC 2012 SEC
76
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
At December 31, 2012, the Company had credit default swaps linked to collateralized debt
obligations with a fair value of $0 and average fair value for the year of $(6,356). At December
31, 2011, the Company had credit default swaps linked to collateralized debt obligations with a
fair value of $(11,786) and average fair value for the year of $(10,682). The Company
recognized losses of $1,929 for the year ended December 31, 2012, while having no realized
gains or losses for the years ended December 31, 2011 related to these credit default swaps.
At December 31, 2012 and 2011, the Company’s outstanding financial instruments with on and
off balance sheet risks, shown in notional amounts, are summarized as follows:
Notional Amount
2012
2011
Interest rate and currency swaps:
Receive floating - pay floating
Receive fixed - pay floating
Receive floating - pay fixed
Receive fixed - pay fixed
$
1,538,065
12,433,324
4,490,128
1,403,729
$
1,592,865
12,082,972
4,052,254
732,548
The Company recognized net realized gains (losses) from futures contracts in the amount of
$(93,808), $147,183 and $(120,396) for the years ended December 31, 2012, 2011 and 2010,
respectively.
Open futures contracts at December 31, 2012 and 2011, were as follows:
Number of
Long/Short Contracts
Opening
Fair
Value
Contract Type
Year-End
Fair
Value
December 31, 2012
Short
Long
(1,167)
6,220
Number of
Long/Short Contracts
S&P 500 March 2013 Futures
US Ultra Bond March 2013 Futures
$
(414,806) $
1,030,465
Opening
Fair
Value
Contract Type
(414,314)
1,011,333
Year-End
Fair
Value
December 31, 2011
Short
Long
(2,073)
13,040
S&P 500 March 2012 Futures
US Ultra Bond March 2012 Futures
$
(639,474) $
2,055,916
(649,159)
2,085,177
TLIC 2012 SEC
77
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
At December 31, 2012 and 2011, investments with an aggregate carrying value of $39,774,342
and $38,140,830, respectively, were on deposit with regulatory authorities or were restrictively
held in bank custodial accounts for the benefit of such regulatory authorities, as required by
statute.
6. Reinsurance
Certain premiums and benefits are assumed from and ceded to other insurance companies under
various reinsurance agreements. The Company reinsures portions of the risk on certain insurance
policies which exceed its established limits, thereby providing a greater diversification of risk
and minimizing exposure on larger risks. The Company remains contingently liable with respect
to any insurance ceded, and this would become an actual liability in the event that the assuming
insurance company became unable to meet its obligation under the reinsurance treaty.
Premiums earned reflect the following reinsurance amounts:
Year Ended December 31
2012
2011
2010
Direct premiums
Reinsurance assumed - non affiliates
Reinsurance assumed - affiliates
Reinsurance ceded - non affiliates
Reinsurance ceded - affiliates
Net premiums earned
$ 13,426,938 $ 13,297,032 $ 10,763,441
1,710,756
1,652,588
1,751,054
222,283
427,231
185,147
(6,259,014)
(1,042,739)
(3,985,049)
892,999
(2,635,402)
428,724
$ 11,806,814 $ 9,864,056 $ 9,165,119
The Company received reinsurance recoveries in the amount of $3,542,504, $2,756,316 and
$2,580,994 during 2012, 2011 and 2010, respectively. At December 31, 2012 and 2011,
estimated amounts recoverable from reinsurers that have been deducted from policy and contract
claim reserves totaled $618,208 and $705,476, respectively. The aggregate reserves for policies
and contracts were reduced for reserve credits for reinsurance ceded at December 31, 2012 and
2011 of $37,141,980 and $40,233,402, respectively.
The net amount of the reduction in surplus at December 31, 2012 and 2011, if all reinsurance
agreements were cancelled, is $235,002 and $231,604, respectively.
TLIC 2012 SEC
78
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
During 2012, the Company recaptured various blocks of business that were previously reinsured
on various bases to two separate affiliates. The Company received recapture consideration of
$63,624, released the associated funds withheld liability of $1,516,317, recaptured life, annuity
and claim reserves of $1,628,072, recaptured other assets of $5,428 and released into income
from surplus a previously deferred unamortized gain from the original transaction in the amount
of $24,215, resulting in a pre-tax loss of $18,488, which has been included in the statement of
operations.
Subsequently, the Company ceded a portion of this recaptured business to two separate nonaffiliated entities. The Company paid a reinsurance premium of $1,508,278 and a ceding
commission of $41,149, released life, annuity and claim reserves of $1,510,206 and released an
after-tax IMR liability associated with the block of business in the amount of $90,462, resulting
in a net of tax gain on the transaction in the amount of $64,969 (IMR after-tax gain of $90,462,
less gross loss on reinsurance of $39,221, taxed at 35%), which has been credited directly to
unassigned surplus. This gain will be recognized in income as earnings emerge on the reinsured
block of business. During 2012, the Company amortized $3,261 of this deferred gain into
earnings on a net of tax basis with a corresponding charge to unassigned surplus.
During 2012, the Company recaptured certain treaties associated with the divestiture of the
Transamerica Reinsurance operations that were previously ceded to various non-affiliated
entities so they could perform the ultimate novation, for which no net consideration was
received. Life and claim reserves recaptured were $70,992 and other assets were recaptured of
$67,295, resulting in a pre-tax loss of $3,697, which has been included in the statement of
operations.
Subsequent to these recaptures, the Company novated certain unaffiliated treaties that were
previously ceded by the Company to various non-affiliated entities, in which consideration paid
was $30,509, life and claim reserves released were $153,224, other assets transferred were
$72,723 and a previously deferred unamortized gain resulting from the original cession of this
business of $19,068 ($12,394 net of tax) was released in to income, resulting in a pre-tax gain of
$69,060, which has been included in the statement of operations.
The Company novated third party assumed retrocession agreements that were previously
retroceded to a non-affiliate in which no net consideration was exchanged. Life and claim
reserves were exchanged in the amount of $129,464 and other assets were exchanged in the
amount of $10,748. As a result, there was no net financial impact from these transactions on a
pre-tax basis, as assumed and ceded reserves along with other assets exchanged were impacted
by equivalent amounts.
On April 26, 2011, Aegon N.V. announced the disposition of its life reinsurance operations,
Transamerica Reinsurance, to SCOR, which was effective August 9, 2011. The life reinsurance
TLIC 2012 SEC
79
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
business conducted by Transamerica Reinsurance was written through several of Aegon N.V.’s
U.S. and international affiliates, all of which remain Aegon N.V. affiliates following the closing,
except for Transamerica International Reinsurance Ireland, Limited (TIRI), an Irish reinsurance
company. As a result of this transaction, the Company entered into a series of recapture and
reinsurance agreements during the second, third and fourth quarters of 2011 which directly
resulted in a pre-tax loss of $3,337,294 which was included in the statement of operations, and a
net of tax gain of $2,694,506 which has been credited directly to unassigned surplus. These
amounts include current year amortization of previously deferred gains, as well as releases of
previously deferred gains from unassigned surplus into earnings. Additional information
surrounding these transactions is outlined below.
During the second quarter of 2011, the Company recaptured business that was previously
reinsured on various bases to affiliates. The Company paid recapture consideration of $320,103,
released the associated funds withheld liability of $13,808,943, recaptured reserves of
$15,167,234, recaptured other net assets of $26,634 and released a prior deferred gain related to
the initial transactions in the amount of $295,083, resulting in a pre-tax loss of $1,356,677,
which has been included the statement of operations. The Company amortized $10,044 prior to
the recaptures in 2011 and $4,978 in 2010 of the original gain into earnings on a net of tax basis
with a corresponding charge to unassigned surplus. Additionally, another affiliate recaptured
certain business that had been previously reinsured by the Company on a coinsurance basis. The
Company received recapture consideration of $14,200, released assets of $16,678 and released
reserves of $16,685, resulting in a pre-tax gain of $14,207, which has been included in the
statement of operations.
Subsequently, also effective during the second quarter of 2011, the Company ceded a portion of
the recaptured business above to an affiliate on a coinsurance and coinsurance funds withheld
bases. The Company received an initial ceding commission of $40,097, established a funds
withheld liability of $11,674,680, released reserves of $12,982,528, transferred other net assets
of $364,305 and released an after-tax IMR liability in the amount of $146,227, resulting in a net
of tax gain on the transactions in the amount of $785,593, which has been credited directly to
unassigned surplus. During 2012 and 2011, the Company amortized $30,393 and $27,742,
respectively, of this gain into earnings on a net of tax basis with a corresponding charge to
unassigned surplus. Also effective during the second quarter of 2011, the Company ceded a
portion of the recaptured business above to a non-affiliate on a coinsurance basis. The Company
paid an initial reinsurance premium of $1,486,693 and ceding commission of $21,270, released
reserves and other liabilities of $1,486,692 and released an after-tax IMR liability associated
with the block of business in the amount of $50,453, resulting in a net of tax gain on the
transaction in the amount of $36,627, which has been credited directly to unassigned surplus.
During 2012 and 2011, the Company amortized $5,140 and $1,888, respectively, of this gain into
earnings on a net of tax basis with a corresponding charge to unassigned surplus.
TLIC 2012 SEC
80
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
During the last half of 2011, the Company recaptured business that was associated with the
divestiture of the Transamerica Reinsurance operations which was previously retroceded on a
coinsurance basis to two affiliates. The Company received recapture consideration of $243,415,
recaptured reserves of $2,168,882, recaptured other assets of $72,124 and released a prior
deferred gain related to the initial transactions in the amount of $861,479, resulting in a pre-tax
loss of $991,864, which has been included in the statement of operations. The Company also
recaptured business from a non-affiliate in a similar transaction. The Company paid recapture
consideration of $734,171, recaptured reserves of $335,286 and recaptured other net assets of
$51,045, resulting in a pre-tax loss of $1,018,412, which has been included in the statement of
operations.
Subsequently, during the last half of 2011, the Company ceded business that was associated with
the divestiture of the Transamerica Reinsurance operations on a coinsurance basis to a nonaffiliate. The Company paid a reinsurance premium of $273,178, received an initial ceding
commission of $79,841, released reserves of $3,146,859, transferred other assets in the amount
of $76,768 and released an after-tax IMR liability associated with the block of business in the
amount of $33,567, resulting in a net of tax gain on the transaction of $1,903,457, which has
been credited directly to unassigned surplus. During 2012 and 2011, respectively, the Company
amortized $5,669 and $1,541 of the deferred gains related to the divestiture of the Transamerica
Reinsurance operations to a non-affiliate into earnings on a net of tax basis with a corresponding
charge to unassigned surplus.
During the last half of 2011, the Company recaptured the business that was associated with the
divestiture of the Transamerica Reinsurance operations from several Aegon N.V. affiliates. This
business was subsequently ceded to SCOR entities and in addition, retrocession reinsurance
treaties were executed. The Company assigned certain third party retrocession agreements to
SCOR entities as a component of the divestiture of the Transamerica Reinsurance operations and
the associated Master Retrocession Agreement. As a result, the unaffiliated retrocession
reinsurance treaties were assigned from the Company to a SCOR entity, resulting in this risk
being ceded to SCOR and subsequently to the unaffiliated third parties. The reserves and assets
associated with these assignments were $80,301, where the counterparty’s net reserves ceded
exchanged counterparties with no consideration exchanged, resulting in no net income or surplus
impact to the Company.
Effective September 30, 2011, the Company recaptured business previously coinsured to an
affiliate. The Company received recapture consideration of $180,000, recaptured reserves of
$1,681,459 and released into income a previously deferred unamortized gain resulting from the
original transaction in the amount of $710,014, resulting in a pre-tax loss of $791,445, which has
been included in the statement of operations. Prior to the recaptures in 2011, the Company
amortized $15,593 of the original gain into earnings on a net of tax basis with a corresponding
charge to unassigned surplus. Subsequently, the Company reinsured this business, along with
TLIC 2012 SEC
81
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
additional business, to a new affiliate on a coinsurance funds withheld basis. The Company
established a funds withheld liability of $165,918 and released reserves of $1,714,045, resulting
in a net of tax gain of $1,006,283, which has been credited directly to unassigned surplus.
During 2011, the Company amortized $146 into earnings on a net of tax basis with a
corresponding charge to unassigned surplus. The Company did not amortize any of this deferred
gain into earnings during 2012.
Effective December 31, 2011, the Company recaptured business that was previously reinsured on
a coinsurance funds withheld basis to a non-affiliate. The Company released the associated
funds withheld liability of $6,689 and recaptured reserves of $13,812, resulting in a pre-tax loss
of $7,123 which has been included in the statement of operations. Subsequently, the Company
ceded that business, as well as additional in force business written and assumed by the Company
and all new policies issued thereafter, on a coinsurance funds withheld basis to an affiliate. The
Company established a funds withheld liability of $19,899 and released reserves of $34,659,
resulting in a net of tax gain of $9,594, which has been credited directly to unassigned surplus.
During 2012, the Company amortized $5,240 into earnings on a net of tax basis with a
corresponding charge to unassigned surplus.
Effective December 1, 2011, the Company recaptured a portion of a block of business that was
previously reinsured on a coinsurance funds withheld basis to an affiliate. The Company
received recapture consideration of $5,885, released the associated funds withheld liability of
$2,518,729 and recaptured reserves of $2,511,973, resulting in a pre-tax gain of $12,641, which
has been included in the statement of operations. In addition, the Company released into income
a previously deferred unamortized gain resulting from the original transaction in the amount of
$37,311, which included the recapture of IMR gains in the amount of $46,156 on an after-tax
basis. Subsequently, on December 16, 2011, the Company ceded a portion of this business to a
non-affiliate on a coinsurance basis. The Company paid a ceding commission of $19,537,
transferred other assets in the amount of $2,497,844, released reserves of $2,497,844 and
released an after-tax IMR liability associated with the block of business in the amount of
$115,729, resulting in a net of tax gain in the amount of $103,030, which has been credited
directly to unassigned surplus. During 2012 and 2011, respectively, the Company amortized
$17,543 and $309 (net of tax) of this gain into earnings with a corresponding charge to
unassigned surplus.
Effective December 16, 2011, the Company reinsured medium term notes to a non-affiliate on a
coinsurance basis. The Company paid a ceding commission of $8,000, transferred other assets in
the amount of $600,594 and released reserves of the same amount, resulting in a pre-tax loss of
$8,000, which has been included in the statement of operations.
Effective December 31, 2010, the Company entered into a reinsurance agreement with an
affiliate to assume on a 100% quota share basis a block of variable universal life business on a
TLIC 2012 SEC
82
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
modified coinsurance basis. Reserves on the block were $1,013,110, with assets backing the
block comprised of $853,669 of separate account assets and $159,441 of general account assets.
The Company paid consideration of $193,000, resulting in a pre-tax loss of $193,000 which was
included in the statement of operations.
During 2010, the Company entered into assumption reinsurance agreements in which the
Company ceded group annuity and accident and health policies to an affiliate. Reserves of
$71,040 were ceded, net assets in the amount of $83,170 were transferred and $12,118
consideration was paid. This transaction resulted in a net pre-tax loss to the Company of
$24,248, which has been reflected in the statement of operations, as this transaction was deemed
economic.
During 2010, the Company entered into assumption reinsurance agreements in which the
Company assumed term life policies from an affiliate. Life and claim reserves of $56,845 and
$8,004, respectively, and other assets of $5,539 were assumed by the Company. The Company
received consideration of $5,897. This transaction resulted in a net pre-tax loss to the Company
of $53,413, which was reclassified to the balance sheet and presented as goodwill, as this
transaction was deemed economic. The goodwill was to be amortized into operations over the
period in which the Company benefits economically, not to exceed 10 years. Amortization of
goodwill for the year ended December 31, 2010 was $2,651. This business was a component of
the business that was moved as a result of the divestiture of the Transamerica Reinsurance
operations to SCOR, effective August 9, 2011. As a result, the goodwill associated with this
business was fully written off in 2011.
Effective December 31, 2008, the Company ceded certain term life business to an affiliate on a
funds withheld basis. Life and claim reserves of $505,004 and $6,874, respectively were released
and the Company established other reserves of $28,680. The net of tax gain of $314,079
resulting from this transaction was credited directly to unassigned surplus. During the first
quarter of 2010, the Company amortized $6,969, on a net of tax basis of this gain back into
earnings. Effective April 1, 2010, the Company recaptured these term life insurance policies
from the affiliate. Life and claim reserves of $484,646 and $3,108, respectively, were assumed
along with other net assets of $24,933, resulting in a pre-tax loss of $462,821 which was
recognized in the statement of operations. With the recapture of this business, the previously
deferred gain associated with the original July 1, 2009 cession to the affiliate was released into
the statement of operations in the amount of $454,900 ($295,685 after-tax).
Subsequent to the recapture and also effective April 1, 2010, the Company entered into an
indemnity reinsurance agreement to cede the same block of term life insurance policies to
another affiliate on a coinsurance basis. The Company released life and claim reserves of
$484,646 and $3,108, respectively, and other net assets of $24,933, resulting in a net of tax gain
of $300,833, which was deferred directly into unassigned surplus. During 2010, the Company
TLIC 2012 SEC
83
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
amortized $11,200 of this gain into earnings on a net of tax basis with a corresponding charge to
unassigned surplus. With the recapture of this business during 2011, the remaining unamortized
previously deferred gain associated with the original April 1, 2010 cession to the affiliate was
released into income from surplus in the amount of $289,633 on a net of tax basis.
The Company entered into an assumption reinsurance agreement with MLIC effective
September 30, 2008. The Company was the issuer of a series of corporate-owned life insurance
policies issued to LIICA. The assumption reinsurance transaction resulted in the Company
novating all liabilities arising under these policies to MLIC. The Company ceded reserves of
$138,025 and paid consideration of $125,828. The Company recorded a liability of $12,197
within the remittances line related to this transaction. The Company amortized $1,130, $1,073
and $1,019 of the liability in 2012, 2011 and 2010, respectively.
During 2012, 2011 and 2010, the Company amortized deferred gains from reinsurance
transactions occurring prior to 2010 of $28,528, $29,355 and $58,297, respectively, into earnings
on a net of tax basis with a corresponding charge to unassigned surplus.
TLB acquired the direct liability to the policyholder through a court order from the Hong Kong
Special Administrative Region Court, effective December 31, 2006, for most of the business
issued from Transamerica Occidental Life Insurance Company’s (TOLIC) branch in Hong Kong.
TOLIC merged in to the Company effective October 1, 2008. TLB also acquired the direct
liability to the policyholder through a court order from the High Court of the Republic of
Singapore, effective December 31, 2006 for all business issued from TOLIC’s branch in
Singapore. The novation of the contracts was approved by the Iowa Insurance Department and
all policyholder liabilities were transferred to TLB. All balances assumed by TLB were reflected
as direct adjustments to the balance sheet. As the transfer occurred between affiliated companies
no gain or loss was recognized, and the difference between the assets transferred and the
statutory liabilities assumed in the amount of $78,993 was recorded as goodwill and will be
amortized into operations over the life of the business, not to exceed ten years. Goodwill in the
amount of $7,767, $8,053 and $8,335 was amortized during 2012, 2011 and 2010, respectively,
related to this transaction. TLB is valued on a U.S. statutory basis and includes a deferred gain
liability of a similar amount to the goodwill reflected in the financials of the Company.
During 2001, TOLIC novated certain traditional life insurance contracts to TFLIC, an affiliate of
the Company, via an assumption reinsurance transaction. Under the terms of this agreement, a
significant portion of the future statutory-basis profits from the contracts assumed by TFLIC will
be passed through to the Company as an experience rated refund. TOLIC recorded a deferred
liability of $14,334 as a result of this transaction, which had been fully amortized at December
31, 2010. The accretion of the deferred liability was $1,433 for 2010.
TLIC 2012 SEC
84
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
The Company reports a reinsurance deposit receivable of $167,223 and $156,620 as of
December 31, 2012 and 2011, respectively. In 1996, TOLIC entered into a reinsurance
agreement with an unaffiliated company where, for a net consideration of $59,716, TOLIC ceded
certain portions of future obligations under single premium annuity contracts originally written
by the Company in 1993. Consistent with the requirements of SSAP No. 75, Reinsurance
Deposit Accounting, the Company reports the net consideration paid as a deposit. The amount
reported is the present value of the future payment streams discounted at the effective yield rate
determined at inception.
During 2012, 2011 and 2010, the Company obtained letters of credit of $790,269, $841,411 and
$804,032, respectively, for the benefit of affiliated and nonaffiliated companies that have
reinsured business to the Company where the ceding company’s state of domicile does not
recognize the Company as an authorized reinsurer.
TLIC 2012 SEC
85
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
7. Income Taxes
The net deferred income tax asset at December 31, 2012 and 2011 and the change from the prior
year are comprised of the following components:
Gross Deferred Tax Assets
Statutory Valuation Allowance Adjustment
Adjusted Gross Deferred Tax Assets
Deferred Tax Assets Nonadmitted
Subtotal (Net Deferred Tax Assets)
Deferred Tax Liabilities
Net Admitted Deferred Tax Assets
Gross Deferred Tax Assets
Statutory Valuation Allowance Adjustment
Adjusted Gross Deferred Tax Assets
Deferred Tax Assets Nonadmitted
Subtotal (Net Deferred Tax Assets)
Deferred Tax Liabilities
Net Admitted Deferred Tax Assets
Gross Deferred Tax Assets
Statutory Valuation Allowance Adjustment
Adjusted Gross Deferred Tax Assets
Deferred Tax Assets Nonadmitted
Subtotal (Net Deferred Tax Assets)
Deferred Tax Liabilities
Net Admitted Deferred Tax Assets
$
$
$
$
$
$
Ordinary
1,112,530
–
1,112,530
349,584
762,946
320,092
442,854
December 31, 2012
Capital
$
339,889 $
–
339,889
–
339,889
129,770
$
210,119 $
Total
1,452,419
–
1,452,419
349,584
1,102,835
449,862
652,973
Ordinary
1,195,054
–
1,195,054
412,663
782,391
329,726
452,665
December 31, 2011
Capital
$
426,364 $
–
426,364
–
426,364
162,421
$
263,943 $
Total
1,621,418
–
1,621,418
412,663
1,208,755
492,147
716,608
Ordinary
(82,524) $
–
(82,524)
(63,079)
(19,445)
(9,634)
(9,811) $
Change
Capital
(86,475) $
–
(86,475)
–
(86,475)
(32,651)
(53,824) $
Total
(168,999)
–
(168,999)
(63,079)
(105,920)
(42,285)
(63,635)
TLIC 2012 SEC
86
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
The main components of deferred income tax amounts are as follows:
Deferred Tax Assets:
Year Ended December 31
2012
2011
Ordinary:
Discounting of unpaid losses
Policyholder reserves
Investments
Deferred acquisition costs
Compensation and benefits accrual
Receivables - nonadmitted
Tax credit carry-forward
Assumption reinsurance
Corporate Provision
Other (including items <5% of
ordinary tax assets)
Subtotal
$
2,848
351,951
46,034
505,352
31,260
28,128
82,421
16,946
892
$
3,007
455,136
89,412
532,831
24,149
23,090
–
18,968
2,295
Change
$
(159)
(103,185)
(43,378)
(27,479)
7,111
5,038
82,421
(2,022)
(1,403)
46,698
1,112,530
46,166
1,195,054
532
(82,524)
Nonadmitted
Admitted ordinary deferred tax assets
349,584
762,946
412,663
782,391
(63,079)
(19,445)
Capital:
Investments
Subtotal
339,889
339,889
426,364
426,364
(86,475)
(86,475)
Admitted deferred tax assets
$
1,102,835
$
1,208,755
$
Year Ended December 31
2012
2011
Deferred Tax Liabilities:
Ordinary:
Investments
Excess capital to offset ordinary
§807(f) adjustment
Separate account adjustments
Other (including items <5% of total
ordinary tax liabilities)
Subtotal
Capital:
Investments
Excess capital to offset ordinary
Other (including items <5% of
total capital tax liabilities)
Subtotal
Deferred tax liabilities
Net deferred tax assets/liabilities
$
$
103,663
147,464
52,736
16,229
$
144,993
104,004
61,737
17,572
(105,920)
Change
$
(41,330)
43,460
(9,001)
(1,343)
–
320,092
1,420
329,726
(1,420)
(9,634)
277,234
(147,464)
265,968
(104,004)
11,266
(43,460)
–
129,770
449,862
652,973
457
162,421
492,147
716,608
(457)
(32,651)
(42,285)
(63,635)
$
$
TLIC 2012 SEC
87
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
As discussed in Note 1, for the year ended December 31, 2012 the Company admits deferred
income tax assets pursuant to SSAP No. 101. The amount of admitted adjusted gross deferred
income tax assets under each component of SSAP No. 101 is as follows:
Ordinary
Admission Calculation Components SSAP No. 101
2(a) Federal Income Taxes Paid in Prior Years
Recoverable Through Loss Carrybacks
2(b) Adjusted Gross Deferred Tax Assets Expected to
be Realized (Excluding The Amount of Deferred
Tax Assets From 2(a) above) After Application of
the Threshold Limitation (the Lesser of 2(b)1 and
2(b)2 below)
1. Adjusted Gross Deferred Tax Assets
Expected to be Realized Following the
Balance Sheet Date
2. Adjusted Gross Deferred Tax Assets
Allowed per Limitation Threshold
2(c) Adjusted Gross Deferred Tax Assets (Excluding
The Amount Of Deferred Tax Assets From 2(a)
and 2(b) above) Offset by Gross Deferred Tax
Liabilities
2(d) Deferred Tax Assets Admitted as the result of
application of SSAP No. 101, Total (2(a) + 2(b) + 2(c))
$
$
116,426
$
$
$
108,343
Total
$
224,769
326,428
101,776
428,204
326,428
101,776
428,204
XXX
XXX
717,641
320,092
129,770
449,862
762,946
Ordinary
Admission Calculation Components SSAP No. 101
2(a) Federal Income Taxes Paid in Prior Years
Recoverable Through Loss Carrybacks
2(b) Adjusted Gross Deferred Tax Assets Expected to
be Realized (Excluding The Amount of Deferred
Tax Assets From 2(a) above) After Application of
the Threshold Limitation (the Lesser of 2(b)1 and
2(b)2 below)
1. Adjusted Gross Deferred Tax Assets
Expected to be Realized Following the
Balance Sheet Date
2. Adjusted Gross Deferred Tax Assets
Allowed per Limitation Threshold
2(c) Adjusted Gross Deferred Tax Assets (Excluding
The Amount Of Deferred Tax Assets From 2(a)
and 2(b) above) Offset by Gross Deferred Tax
Liabilities
2(d) Deferred Tax Assets Admitted as the result of
application of SSAP No. 101, Total (2(a) + 2(b) + 2(c))
December 31, 2012
Capital
141,807
$
339,889
$
December 31, 2011*
Capital
$
154,653
1,102,835
Total
$
296,460
310,858
109,291
420,149
310,858
109,291
420,149
XXX
XXX
700,221
329,726
162,420
492,146
782,391
$
426,364
$
1,208,755
TLIC 2012 SEC
88
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Ordinary
Admission Calculation Components SSAP No. 101
2(a) Federal Income Taxes Paid in Prior Years
Recoverable Through Loss Carrybacks
2(b) Adjusted Gross Deferred Tax Assets Expected to
be Realized (Excluding The Amount of Deferred
Tax Assets From 2(a) above) After Application of
the Threshold Limitation (the Lesser of 2(b)1 and
2(b)2 below)
1. Adjusted Gross Deferred Tax Assets
Expected to be Realized Following the
Balance Sheet Date
2. Adjusted Gross Deferred Tax Assets
Allowed per Limitation Threshold
2(c) Adjusted Gross Deferred Tax Assets (Excluding
The Amount Of Deferred Tax Assets From 2(a)
and 2(b) above) Offset by Gross Deferred Tax
Liabilities
2(d) Deferred Tax Assets Admitted as the result of
application of SSAP No. 101, Total (2(a) + 2(b) + 2(c))
$
(25,381) $
(46,310) $
Total
(71,691)
15,570
(7,515)
8,055
15,570
(7,515)
8,055
XXX
17,420
XXX
(9,634)
$
Change
Capital
(19,445) $
(32,650)
(86,475) $
(42,284)
(105,920)
*As reported on the statutory balance sheet for the most recently filed statement with the
domiciliary state commissioner adjusted in accordance with SSAP No. 10R.
TLIC 2012 SEC
89
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
December 31
2012
2011
Ratio Percentage Used To Determine Recovery
Period and Threshold Limitation Amount
Amount of Adjusted Capital and Surplus Used To
Determine Recovery Period and Threshold
Limitation in 2(b)2 above
806%
895%
$
4,789,621
$
4,369,299
The impact of tax planning strategies at December 31, 2012 and 2011 was as follows:
December 31, 2012
Capital
Percent
Ordinary
Percent
Impact of Tax Planning Strategies:
Adjusted Gross DTAs
(% of Total Adjusted Gross DTAs)
Net Admitted Adjusted Gross DTAs
(% of Total Net Admitted Adjusted Gross DTAs)
0%
30%
7%
38%
48%
41%
December 31, 2011
Capital
Percent
Ordinary
Percent
Impact of Tax Planning Strategies:
Adjusted Gross DTAs
(% of Total Adjusted Gross DTAs)
Net Admitted Adjusted Gross DTAs
(% of Total Net Admitted Adjusted Gross DTAs)
Total Percent
0%
0%
0%
69%
41%
59%
Change
Capital
Percent
Ordinary
Percent
Impact of Tax Planning Strategies:
Adjusted Gross DTAs
(% of Total Adjusted Gross DTAs)
Net Admitted Adjusted Gross DTAs
(% of Total Net Admitted Adjusted Gross DTAs)
Total Percent
Total Percent
0%
30%
7%
-31%
7%
-18%
The Company’s tax planning strategies do not include the use of reinsurance-related tax planning
strategies.
TLIC 2012 SEC
90
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Current income taxes incurred consist of the following major components:
Year Ended December 31
2012
2011
Change
Current Income Tax
Federal
Foreign
Subtotal
Federal income tax on net capital gains
Federal and foreign income taxes incurred
Federal
Foreign
Subtotal
Federal income tax on net capital gains
Federal and foreign income taxes incurred
(161,806) $
(698)
(162,504)
94,705
(67,799) $
$
$
$
$
(174,039) $
(879)
(174,918)
185,043
10,125 $
Year Ended December 31
2011
2010
(174,039) $
(268,109) $
(879)
(2,119)
(174,918)
(270,228)
185,043
450,184
10,125 $
179,956 $
12,233
181
12,414
(90,338)
(77,924)
Change
94,070
1,240
95,310
(265,141)
(169,831)
The Company did not report a valuation allowance for deferred income tax assets as of
December 31, 2012 or 2011.
TLIC 2012 SEC
91
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
The Company’s current income tax incurred and change in deferred income tax differs from the
amount obtained by applying the federal statutory rate of 35% to income before tax as follows:
2012
Current income taxes incurred
$
Year Ended December 31
2011
(67,799) $
10,125
$
2010
179,956
(136,907)
126,689
$
(126,782) $
306,645
$
795,047 $
35.00%
(2,260,735) $
35.00%
$
278,266
$
(791,257) $
505,306
(36,188)
(58,619)
(27)
(34,101)
(14,483)
774
(4,103)
(13,629)
(4,268)
546
–
(51,467)
(31,014)
(62,184)
(276)
(133,408)
863,606
8,166
(15,569)
1,525
(3,786)
331
–
(26,684)
(27,413)
(57,815)
(90)
(1,513)
(22,522)
3,213
35,989
(5,730)
(3,741)
374
(81,188)
(57,775)
28,889
–
(55,618)
1,014
1,150
38,136 $
25,763
51,597
(11,653)
2,290
(4,229)
(126,782) $
32,281
–
(11,620)
2,402
(3,513)
306,645
105,935
Change in deferred income taxes
(without tax on unrealized gains and losses)
Total income tax reported
$
Income before taxes
Expected income tax expense (benefit) at 35%
statutory rate
38,136
1,443,732
35.00%
Increase (decrease) in actual tax reported resulting from:
Dividends received deduction
Tax credits
Tax-exempt income
Tax adjustment for IMR
Surplus adjustment for inforce ceded
Nondeductible expenses
Deferred tax benefit on other items in surplus
Provision to return
Life-owned life insurance
Dividends from certain foreign corporations
Statutory valuation allowance
Prior period adjustment
Pre-tax income of Single Member Liability
Companies (SMLLC's)
Transfer of basis
Intercompany dividends
Partnership permanent adjustment
Other
Total income tax reported
$
For federal income tax purposes, the Company joins in a consolidated income tax return filing
with its parent and other affiliated companies. The method of allocation between the companies
is subject to a written tax allocation agreement. Under the terms of the tax allocation agreement,
allocations are based on separate income tax return calculations. The Company is entitled to
recoup federal income taxes paid in the event the future losses and credits reduce the greater of
the Company's separately computed income tax liability or the consolidated group's income tax
TLIC 2012 SEC
92
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
liability in the year generated. The Company is also entitled to recoup federal income taxes paid
in the event the losses and credits reduce the greater of the Company's separately computed
income tax liability or the consolidated group's income tax liability in any carryback or
carryforward year when so applied. Intercompany income tax balances are settled within thirty
days of payment to or filing with the Internal Revenue Service. A tax return has not yet been
filed for 2012.
As of December 31, 2012, the Company had an $82,421 tax credit carryforward available for tax
purposes. As of December 31, 2011, the Company had no tax credit carryforwards. As of
December 31, 2012 and 2011, the Company had no operating loss or capital loss carryforwards
available for tax purposes.
The Company incurred income taxes of $24,337, $25,193 and $187,671 during 2012, 2011 and
2010, respectively, which will be available for recoupment in the event of future net losses.
The amount of tax contingencies calculated for the Company as of December 31, 2012 and 2011
is $1,448 and $1,178, respectively. The total amount of tax contingencies that, if recognized,
would affect the effective income tax rate is $1,448. The Company classifies interest and
penalties related to income taxes as income tax expense. The Company’s interest (benefit)
expense related to income taxes for the years ending December 31, 2012, 2011 and 2010 is
$1,102, ($3,883) and ($12,048), respectively. The total interest payable balance as of December
31, 2012 and 2011 is $95 and $1,197, respectively. The Company recorded no liability for
penalties. It is not anticipated that the total amounts of unrecognized tax benefits will
significantly increase within twelve months of the reporting date.
The Company’s federal income tax returns have been examined by the Internal Revenue Service
and closing agreements have been executed through 2004. The examination for the years 2005
through 2006 have been completed and resulted in tax return adjustments that are currently
undergoing final calculation at appeal. The examination for the years 2007 through 2008 has
been completed and resulted in tax return adjustments that are currently being appealed. An
examination is already in progress for the years 2009 and 2010. The Company believes that
there are adequate defenses against or sufficient provisions established related to any open or
contested tax positions.
8. Policy and Contract Attributes
Participating life insurance policies were issued by the Company which entitle policyholders to a
share in the earnings of the participating policies, provided that a dividend distribution, which is
determined annually based on mortality and persistency experience of the participating policies,
is authorized by the Company. Participating insurance constituted approximately 0.06% of
ordinary life insurance in force at December 31, 2012 and 2011.
TLIC 2012 SEC
93
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
For the years ended December 31, 2012, 2011 and 2010, premiums for life participating policies
were $16,028, $17,183 and $18,274, respectively. The Company accounts for its policyholder
dividends based on dividend scales and experience of the policies. The Company paid dividends
in the amount of $8,651, $9,496 and $10,074 to policyholders during 2012, 2011 and 2010,
respectively, and did not allocate any additional income to such policyholders.
A portion of the Company’s policy reserves and other policyholders’ funds (including separate
account liabilities) relates to liabilities established on a variety of the Company’s annuity and
deposit fund products. There may be certain restrictions placed upon the amount of funds that
can be withdrawn without penalty. The amount of reserves on these products, by withdrawal
characteristics, is summarized as follows:
General
Account
Subject to discretionary withdrawal
With fair value adjustment
At book value less surrender charge
of 5% or more
At fair value
Total with adjustment or at fair value
At book value without adjustment
(minimal or no charge or adjustment)
Not subject to discretionary withdrawal
provision
Total annuity reserves and deposit
liabilities
Less reinsurance ceded
Net annuity reserves and deposit
liabilities
$
1,613,239
December 31
2012
Separate
Separate
Account with Account NonGuarantees Guaranteed
$
–
$
–
Total
$
1,613,239
Percent
2%
570,607
83,912
2,267,758
–
–
–
–
40,472,788
40,472,788
570,607
40,556,700
42,740,546
1
51
54
21,018,430
83,567
–
21,101,997
27
15,474,341
65,241
36,789
15,576,371
19
38,760,529
17,304,424
148,808
–
40,509,577
–
79,418,914
17,304,424
148,808
$ 40,509,577
$ 62,114,490
$ 21,456,105
$
100 %
TLIC 2012 SEC
94
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
General
Account
Subject to discretionary withdrawal
With fair value adjustment
At book value less surrender charge
of 5% or more
At fair value
Total with adjustment or at fair value
At book value without adjustment
(minimal or no charge or adjustment)
Not subject to discretionary withdrawal
provision
Total annuity reserves and deposit
liabilities
Less reinsurance ceded
Net annuity reserves and deposit
liabilities
$
1,756,726
December 31
2011
Separate
Separate
Account with Account NonGuarantees Guaranteed
$
82,332
$
–
Total
$
1,839,058
Percent
2%
3,561,563
77,738
5,396,027
–
–
82,332
–
33,124,204
33,124,204
3,561,563
33,201,942
38,602,563
5
44
51
19,838,059
–
–
19,838,059
26
17,057,943
66,860
34,803
17,159,606
23
42,292,029
19,243,486
149,192
–
33,159,007
–
75,600,228
19,243,486
149,192
$ 33,159,007
$ 56,356,742
$ 23,048,543
$
100 %
Included in the liability for deposit-type contracts at December 31, 2012 and 2011 are $257,327
and $287,687, respectively, of funding agreements issued by an affiliate to special purpose
entities in conjunction with non-recourse medium-term note programs. Under these programs,
the proceeds from each note series issuance are used to purchase a funding agreement from an
affiliated Company which secures that particular series of notes. The funding agreement is
reinsured to the Company. In general, the payment terms of the note series match the payment
terms of the funding agreement that secures that series. Claims for principal and interest for these
funding agreements are afforded equal priority as other policyholders.
At December 31, 2012, the contractual maturities were as follows:
Year
2013
2014
2015
2016
2017
Thereafter
Amount
$
–
257,327
–
–
–
–
TLIC 2012 SEC
95
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
The Company’s liability for deposit-type contracts includes GIC’s and funding agreements
assumed from MLIC. The liabilities assumed are $1,659,668 and $1,721,235 at December 31,
2012 and 2011, respectively.
Certain separate and variable accounts held by the Company relate to individual variable life
insurance policies. The benefits provided on the policies are determined by the performance
and/or fair value of the investments held in the separate account. The net investment experience
of the separate account is credited directly to the policyholder and can be positive or negative.
The assets of these separate accounts are carried at fair value. The life insurance policies
typically provide a guaranteed minimum death benefit.
Certain separate accounts held by the Company represent funds which are administered for
pension plans. The assets consist primarily of fixed maturities and equity securities and are
carried at fair value. The Company provides a minimum guaranteed return to policyholders of
certain separate accounts. Certain other separate accounts do not have any minimum guarantees
and the investment risks associated with fair value changes are borne entirely by the
policyholder.
TLIC 2012 SEC
96
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Information regarding the separate accounts of the Company as of and for the years ended
December 31, 2012, 2011 and 2010 is as follows:
Nonindexed
Guarantee
Less Than or
Equal to 4%
Guaranteed
Indexed
Premiums, deposits and other
considerations for the year
ended December 31, 2012
Reserves for separate accounts
as of December 31, 2012 with
assets at:
Fair value
Amortized cost
Total as of December 31, 2012
Reserves for separate accounts by
withdrawal characteristics as of
December 31, 2012:
Subject to discretionary withdrawal
With fair value adjustment
At fair value
At book value without fair
value adjustment and with
current surrender charge of
less than 5%
Subtotal
Not subject to discretionary
withdrawal
Total separate account liabilities
at December 31, 2012
Nonindexed
Guarantee
Greater
Than 4%
Nonguaranteed
Separate
Accounts
Total
$
–
$
396
$
9,951
$
9,341,436
$
9,351,783
$
–
–
–
$
22,152
632,530
654,682
$
43,089
–
43,089
$
43,514,998
–
43,514,998
$
43,580,239
632,530
44,212,769
$
$
$
–
–
–
$
$
–
–
–
$
$
–
–
–
$
$
–
–
43,478,209
$
$
–
–
43,478,209
–
–
632,530
632,530
–
–
–
43,478,209
632,530
44,110,739
–
22,152
43,089
36,789
102,030
–
$
654,682
$
43,089
$
43,514,998
$
44,212,769
TLIC 2012 SEC
97
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Premiums, deposits and other
considerations for the year
ended December 31, 2011
Reserves for separate accounts
as of December 31, 2011 with
assets at:
Fair value
Amortized cost
Total as of December 31, 2011
Reserves for separate accounts by
withdrawal characteristics as of
December 31, 2011:
Subject to discretionary withdrawal
With fair value adjustment
At fair value
At book value without fair
value adjustment and with
current surrender charge of
less than 5%
Subtotal
Not subject to discretionary
withdrawal
Total separate account liabilities
at December 31, 2011
Guaranteed
Indexed
Nonindexed
Guarantee
Less Than or
Equal to 4%
$
–
$
226
$
9,994
$
9,381,447
$
9,391,667
$
–
–
–
$
20,144
610,951
631,095
$
46,716
–
46,716
$
38,480,821
–
38,480,821
$
38,547,681
610,951
39,158,632
–
–
–
$
–
82,332
–
$
–
–
–
$
–
–
38,446,018
$
$
$
$
$
Nonindexed
Guarantee
Greater
Than 4%
$
Nonguaranteed
Separate
Accounts
$
Total
$
–
82,332
38,446,018
–
–
528,619
610,951
–
–
–
38,446,018
528,619
39,056,969
–
20,144
46,716
34,803
101,663
–
$
631,095
$
46,716
$
38,480,821
$
39,158,632
TLIC 2012 SEC
98
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Premiums, deposits and other
considerations for the year
ended December 31, 2010
Reserves for separate accounts
as of December 31, 2010 with
assets at:
Fair value
Amortized cost
Total as of December 31, 2010
Reserves for separate accounts by
withdrawal characteristics as of
December 31, 2010:
Subject to discretionary withdrawal
With fair value adjustment
At fair value
At book value without fair
value adjustment and with
current surrender charge of
less than 5%
Subtotal
Not subject to discretionary
withdrawal
Total separate account liabilities
at December 31, 2010
Guaranteed
Indexed
Nonindexed
Guarantee
Less Than or
Equal to 4%
$
–
$
14,373
$
12,735
$
6,368,599
$
6,395,707
$
–
–
–
$
18,416
589,789
608,205
$
45,818
–
45,818
$
35,632,948
–
35,632,948
$
35,697,182
589,789
36,286,971
–
–
–
$
–
80,801
–
$
–
–
–
$
–
–
35,595,332
$
$
$
$
$
Nonindexed
Guarantee
Greater
Than 4%
$
Nonguaranteed
Separate
Accounts
$
Total
$
–
80,801
35,595,332
–
–
508,989
589,790
–
–
–
35,595,332
508,989
36,185,122
–
18,415
45,818
37,616
101,849
–
$
608,205
$
45,818
$
35,632,948
$
36,286,971
TLIC 2012 SEC
99
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
A reconciliation of the amounts transferred to and from the Company’s separate accounts is
presented below:
Year Ended December 31
2012
2011
2010
Transfer as reported in the summary of
operations of the separate accounts
statement:
Transfers to separate accounts
$ 9,341,436 $
Transfers from separate accounts
(7,125,237)
Net transfers to separate accounts
2,216,199
Miscellaneous reconciling adjustments
817,767
Net transfers as reported in the statements
of operations of the life, accident and health
annual statement
$ 3,033,966 $
9,383,003 $ 6,369,429
(4,988,224)
(4,622,672)
4,394,779
1,746,757
772,389
154,773
5,167,168 $ 1,901,530
The legal insulation of separate account assets prevents such assets from being generally
available to satisfy claims resulting from the general account. At December 31, 2012 and 2011,
the Company’s separate account statement included legally insulated assets of $48,683,536 and
$41,472,571, respectively. The assets legally insulated from general account claims at December
31, 2012 and 2011 are attributed to the following products:
Group annuities
Variable annuities
Fixed universal life
Variable universal life
Variable life
Modified separate accounts
Total separate account assets
2012
2011
$ 17,051,144 $ 13,431,208
21,175,176
25,509,279
593,065
610,585
6,019,780
5,232,516
158,187
171,104
108,908
95,155
$ 48,683,536 $ 41,472,571
Some separate account liabilities are guaranteed by the general account. In accordance with the
guarantees provided, if the investment proceeds are insufficient to cover the rate of return
guaranteed for the product, the policyholder proceeds will be remitted by the general account.
As of December 31, 2012 and 2011, the general account of the Company had a maximum
guarantee for separate account liabilities of $2,158,788 and $2,870,835, respectively. To
compensate the general account for the risk taken, the separate account paid risk charges of
$180,634, $124,027 and $107,662 to the general account in 2012, 2011 and 2010, respectively.
During the years ended December 31, 2012, 2011 and 2010, the general account of the Company
had paid $61,745, $28,556 and $76,405, respectively, toward separate account guarantees.
TLIC 2012 SEC
100
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
At December 31, 2012 and 2011, the Company reported guaranteed separate account assets at
amortized cost in the amount of $619,780 and $616,365, respectively, based upon the prescribed
practice granted by the State of Iowa as described in Note 2. These assets had a fair value of
$693,462 and $658,928 at December 31, 2012 and 2011, respectively, which would have
resulted in an unrealized gain of $73,682 and $42,563, respectively, had these assets been
reported at fair value.
The Company does not participate in securities lending transactions within the separate account.
For variable annuities with guaranteed living benefits and variable annuities with minimum
guaranteed death benefits the Company complies with Actuarial Guideline XLIII (AG 43),
which replaces Actuarial Guidelines 34 and 39. AG 43 specifies statutory reserve requirements
for variable annuity contracts with benefit guarantees (VACARVM) and without benefit
guarantees and related products. The AG 43 reserve calculation includes variable annuity
products issued after January 1, 1981. Examples of covered guaranteed benefits include
guaranteed minimum accumulation benefits, return of premium death benefits, guaranteed
minimum income benefits, guaranteed minimum withdrawal benefits and guaranteed payout
annuity floors. The aggregate reserve for contracts falling within the scope of AG 43 is equal to
the conditional tail expectation (CTE) Amount, but not less than the standard scenario amount
(SSA).
To determine the CTE Amount, the Company used 1,000 of the pre-packaged scenarios
developed by the American Academy of Actuaries (AAA) produced in October 2005 and
prudent estimate assumptions based on Company experience. The SSA was determined using the
assumptions and methodology prescribed in AG 43 for determining the SSA.
TLIC 2012 SEC
101
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
At December 31, 2012 and 2011, the Company had variable and separate account annuities with
minimum guaranteed benefits as follows:
Subjected
Account
Value
Amount of
Reserve Held
Reinsurance
Reserve
Credit
Benefit and Type of Risk
December 31, 2012
Minimum guaranteed death benefit
Minimum guaranteed income benefit
Guaranteed premium accumulation fund
Minimum guaranteed withdrawal benefit
$ 8,547,006 $ 531,351 $ 485,123
5,385,861
2,335,881
1,909,075
–
188,099
17,064
16,521,109
33,780
1,757
December 31, 2011
Minimum guaranteed death benefit
Minimum guaranteed income benefit
Guaranteed premium accumulation fund
Minimum guaranteed withdrawal benefit
$ 8,216,929 $ 699,903 $ 620,534
5,564,562
2,886,163
2,364,909
151,702
13,223
–
12,501,566
43,089
3,445
Reserves on the Company’s traditional life insurance products are computed using mean
reserving methodologies. These methodologies result in the establishment of assets for the
amount of the net valuation premiums that are anticipated to be received between the policy’s
paid-through date to the policy’s next anniversary date. At December 31, 2012 and 2011, the
gross premium and loading amounts related to these assets (which are reported as premiums
deferred and uncollected), are as follows:
Gross
December 31, 2012
Life and annuity:
Ordinary first-year business
Ordinary renewal business
Group life business
Credit life business
Reinsurance ceded
$
Accident and health
$
3,434 $
559,469
4,716
1,322
(458,956)
109,985
23,485
133,470 $
Loading
1,678 $
3,741
2,760
–
–
8,179
–
8,179 $
Net
1,756
555,728
1,956
1,322
(458,956)
101,806
23,485
125,291
TLIC 2012 SEC
102
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Gross
December 31, 2011
Life and annuity:
Ordinary first-year business
Ordinary renewal business
Group life business
Credit life business
Reinsurance ceded
$
Accident and health
$
5,227 $
586,196
17,545
1,175
(492,439)
117,704
20,711
138,415 $
Loading
244 $
4,737
2,251
–
–
7,232
–
7,232 $
Net
4,983
581,459
15,294
1,175
(492,439)
110,472
20,711
131,183
The Company anticipates investment income as a factor in the premium deficiency calculation,
in accordance with SSAP No. 54, Individual and Group Accident and Health Contracts. As of
December 31, 2012 and 2011, the Company had insurance in force aggregating $95,138,990 and
$119,164,169, respectively, in which the gross premiums are less than the net premiums required
by the valuation standards established by the Insurance Division, Department of Commerce, of
the State of Iowa. The Company established policy reserves of $676,461 and $817,479 to cover
these deficiencies as of December 31, 2012 and 2011, respectively.
For indeterminate premium products, a full schedule of current and anticipated premium rates is
developed at the point of issue. Premium rate adjustments are considered when anticipated
future experience foretells deviations from the original profit standards. The source of deviation
(mortality, persistency, expense, etc.) is an important consideration in the re-rating decision as
well as the potential effect of a rate change on the future experience of the existing block of
business.
9. Capital and Surplus
The Company is subject to limitations, imposed by the State of Iowa, on the payment of
dividends to its shareholders. Generally, dividends during any twelve-month period may not be
paid, without prior regulatory approval, in excess of the greater of (a) 10 percent of the
Company’s statutory surplus as of the preceding December 31, or (b) the Company’s statutory
gain from operations before net realized capital gains (losses) on investments for the preceding
year. Subject to the availability of unassigned surplus at the time of such dividend, the maximum
payment which may be made in 2013, without the prior approval of insurance regulatory
authorities, is $1,174,090.
TLIC 2012 SEC
103
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
The Company paid an ordinary common stock dividend of $159,410 to its common stock
shareholder, Transamerica International Holdings, Inc. on December 21, 2012. The Company
paid ordinary preferred stock dividends of $103,910 and $36,680 to its preferred stock
shareholders, Transamerica Corporation and Aegon USA, LLC, respectively, on December 21,
2012.
The Company received common stock dividends of $150,000 on October 9, 2012 and $5,000 on
June 1, 2012, from its subsidiaries, TLB and Garnet Assurance Corporation III, respectively.
The Company received a return of capital of $59 from its subsidiary, Life Investors Alliance, on
September 30, 2011. The Company made an initial capital contribution of $255,000 to its
subsidiary, TRRI, on September 27, 2011. This amount consisted of a $252,500 cash capital
contribution and $2,500 in consideration for TRRI’s stock.
The Company received a capital contribution of $200,000 from its parent company,
Transamerica International Holdings, Inc., on May 27, 2011.
The Company did not pay any dividends in 2011. The Company paid a common stock dividend
of $1,260,830 to its common stock shareholder, TIHI, on December 23, 2010. The Company
paid preferred stock dividends of $36,260 and $102,910 to its preferred stock shareholders,
Aegon and Transamerica, respectively, on December 23, 2010.
The Company received preferred and common stock dividends of $430 and $37,370,
respectively, from TFLIC on December 21, 2011.
Life and health insurance companies are subject to certain RBC requirements as specified by the
NAIC. Under those requirements, the amount of capital and surplus maintained by a life or
health insurance company is to be determined based on the various risk factors related to it. At
December 31, 2012, the Company meets the minimum RBC requirements.
On September 30, 2002, LIICA, which merged in to the Company effective October 2, 2008,
received $150,000 from Aegon in exchange for surplus notes. These notes are due 20 years from
the date of issuance at an interest rate of 6%, and are subordinate and junior in right of payment
to all obligations and liabilities of the Company. In the event of liquidation of the Company, the
holders of the issued and outstanding preferred stock shall be entitled to priority only with
respect to accumulated but unpaid dividends before the holder of the surplus notes and full
payment of the surplus notes shall be made before the holders of common stock become entitled
to any distribution of the remaining assets of the Company. The Company received approval
from the Insurance Division, Department of Commerce, of the State of Iowa prior to paying
quarterly interest payments.
TLIC 2012 SEC
104
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
Additional information related to the outstanding surplus notes at December 31, 2012 and 2011
is as follows:
For Year
Ending
2012
2011
Balance
Outstanding
$
$
Interest Paid
Current Year
150,000 $
150,000 $
Cumulative
Interest Paid
9,000 $
9,000 $
90,000
81,000
Accrued
Interest
$
$
2,250
2,250
10. Securities Lending
The Company participates in an agent-managed securities lending program. The Company
receives collateral equal to 102% of the fair value of the loaned domestic securities as of the
transaction date. If the fair value of the collateral is at any time less than 102% of the fair value
of the loaned securities, the counterparty is mandated to deliver additional collateral, the fair
value of which, together with the collateral already held in connection with the lending
transaction, is at least equal to 102% of the fair value of the loaned government or other domestic
securities. In the event the Company loans a foreign security and the denomination of the
currency of the collateral is other than the denomination of the currency of the loaned foreign
security, the Company receives and maintains collateral equal to 105% of the fair value of the
loaned security.
At December 31, 2012 and 2011, respectively, securities in the amount of $2,064,426 and
$3,425,216 were on loan under securities lending agreements as a part of this program. At
December 31, 2012, the collateral the Company received from securities lending activities was in
the form of cash and on open terms. This cash collateral is reinvested and is not available for
general corporate purposes. The reinvested cash collateral has a fair value of $2,159,184 and
$3,517,849 at December 31, 2012 and 2011, respectively.
TLIC 2012 SEC
105
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
The contractual maturities of the securities lending collateral positions are as follows:
Open
30 days or less
31 to 60 days
61 to 90 days
Greater than 90 days
Total
Securities received
Total collateral received
Fair Value
$
2,142,404
–
–
–
–
2,142,404
$
–
2,142,404
The Company receives primarily cash collateral in an amount in excess of the fair value of the
securities lent. The Company reinvests the cash collateral into higher yielding securities than the
securities which the Company has lent to other entities under the arrangement.
The maturity dates of the reinvested securities lending collateral are as follows:
Open
30 days or less
31 to 60 days
61 to 90 days
91 to 120 days
1 to 2 years
2 to 3 years
Total
Amortized Cost
$
191,636
820,819
762,167
257,173
97,568
17,117
13,738
2,160,218
Securities received
Total collateral reinvested
$
–
2,160,218
Fair Value
$
191,636
820,815
762,167
257,173
97,568
17,133
12,692
2,159,184
$
–
2,159,184
For securities lending, the Company’s sources of cash that it uses to return the cash collateral is
dependent upon the liquidity of the current market conditions. Under current conditions, the
Company has securities with a par value of $2,160,580 (fair value of $2,159,184) that are
currently tradable securities that could be sold and used to pay for the $2,142,404 in collateral
calls that could come due under a worst-case scenario.
TLIC 2012 SEC
106
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
11. Retirement and Compensation Plans
The Company’s employees participate in a qualified benefit pension plan sponsored by Aegon.
The Company has no legal obligation for the plan. The Company recognizes pension expense
equal to its allocation from Aegon. The pension expense is allocated among the participating
companies based on International Accounting Standards 19 (IAS 19), Accounting for Employee
Benefits, and based upon actuarial participant benefit calculations. The benefits are based on
years of service and the employee’s eligible annual compensation. Pension expenses were
$23,983, $20,647 and $18,324 for the years ended December 31, 2012, 2011 and 2010,
respectively. The plan is subject to the reporting and disclosure requirements of the Employee
Retirement Income Security Act of 1974.
The Company’s employees participate in a contributory defined contribution plan sponsored by
Aegon, which is qualified under Section 401(k) of the Internal Revenue Code. Employees of the
Company who customarily work at least 1,000 hours during each calendar year and meet the
other eligibility requirements are participants of the plan. Participants may elect to contribute up
to twenty-five percent of their salary to the plan. The Company will match an amount up to three
percent of the participant’s salary. Participants may direct all of their contributions and plan
balances to be invested in a variety of investment options. The plan is subject to the reporting
and disclosure requirements of the Employee Retirement Income Security Act of 1974. Expense
related to this plan was $11,501, $10,237 and $10,390 for the years ended December 31, 2012,
2011 and 2010, respectively.
Aegon sponsors supplemental retirement plans to provide the Company’s senior management
with benefits in excess of normal pension benefits. The Company has no legal obligation for the
plan. The plans are noncontributory and benefits are based on years of service and the
employee’s eligible annual compensation. The plans are unfunded and nonqualified under the
Internal Revenue Service Code. In addition, Aegon has established incentive deferred
compensation plans for certain key employees of the Company. The Company’s allocation of
expense for these plans for each of the years ended December 31, 2012, 2011 and 2010 was
negligible. Aegon also sponsors an employee stock option plan/stock appreciation rights for
employees of the Company and a stock purchase plan for its producers, with the participating
affiliated companies establishing their own eligibility criteria, producer contribution limits and
company matching formula. These plans have been funded as deemed appropriate by
management of Aegon and the Company.
In addition to pension benefits, the Company participates in plans sponsored by Aegon that
provide postretirement medical, dental and life insurance benefits to employees
meeting certain eligibility requirements. The Company has no legal obligation for the plan.
Portions of the medical and dental plans are contributory. The expenses of the postretirement
plans are allocated among the participating companies based on IAS 19 and based upon actuarial
TLIC 2012 SEC
107
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
participant benefit calculations. The Company expensed $7,018, $3,951 and $4,609 related to
these plans for the years ended December 31, 2012, 2011 and 2010, respectively.
12. Related Party Transactions
The Company shares certain officers, employees and general expenses with affiliated companies.
The Company is party to a common cost allocation service agreement between Aegon
companies, in which various affiliated companies may perform specified administrative
functions in connection with the operation of the Company, in consideration of reimbursement of
actual costs of services rendered. The Company is also party to two additional service
agreements with Transamerica Advisors Life Insurance Company of New York (TALICNY) and
TFLIC, in which the Company provides services, including accounting, data processing and
other professional services, in consideration of reimbursement of the actual costs of services
rendered. The Company is also a party to a Management and Administrative and Advisory
agreement with Aegon USA Realty Advisors, Inc. whereby the advisor serves as the
administrator and advisor for the Company’s mortgage loan operations. Aegon USA Investment
Management, LLC acts as a discretionary investment manager under an Investment Management
Agreement with the Company. The net amount received by the Company as a result of being a
party to these agreements was $209,527, $75,124 and $46,373 during 2012, 2011 and 2010,
respectively. Fees charged between affiliates approximate their cost. The Company has an
administration service agreement with Transamerica Asset Management, Inc. to provide
administrative services to the Aegon/Transamerica Series Trust. The Company received $74,457,
$60,237 and $51,177 for these services during 2012, 2011 and 2010, respectively.
Transamerica Capital, Inc. provides wholesaling distribution services for the Company under a
distribution agreement. The Company incurred expenses under this agreement of $70,768,
$79,375 and $67,790 for the years ended December 31, 2012, 2011 and 2010, respectively.
At December 31, 2012 and 2011, respectively, the Company reported a net amount of
receivables (payables) from (to) affiliates of $44,001 and $(88,949). Terms of settlement require
that these amounts be settled within 90 days. Receivables from and payables to affiliates bear
interest at the thirty-day commercial paper rate.
TLIC 2012 SEC
108
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
At December 31, 2012, the Company had short-term intercompany notes receivable of $411,200
as follows. In accordance with SSAP No. 25, Accounting for and Disclosures about
Transactions with Affiliates and Other Related Parties, these notes are reported as short-term
investments.
Receivable from
AEGON
AEGON
AEGON
AEGON
AEGON
AEGON
Amount
$
20,900
200,000
22,800
62,400
32,500
72,600
Due By
August 30, 2013
September 4, 2013
September 24, 2013
September 25, 2013
October 25, 2013
October 26, 2013
Interest Rate
0.12 %
0.12
0.12
0.12
0.12
0.12
At December 31, 2011, the Company had short-term intercompany notes receivable of $185,100
as follows. This note was repaid prior to its due date.
Receivable from
AEGON
Amount
$
185,100
Due By
December 28, 2012
Interest Rate
0.12 %
During 2012, 2011 and 2010, the Company paid net interest of $112, $252 and $142,
respectively, to affiliates.
During 1998, the Company issued life insurance policies to two affiliated companies, covering
the lives of certain employees of those affiliates. Aggregate reserves for policies and contracts
related to these policies are $152,524 and $148,230 at December 31, 2012 and 2011,
respectively.
In prior years, the Company purchased life insurance policies covering the lives of certain
employees of the Company from an affiliate. At December 31, 2012 and 2011, the cash
surrender value of these policies was $156,981 and $153,701, respectively.
13. Commitments and Contingencies
At December 31, 2012 and 2011, the Company has mortgage loan commitments of $29,562 and
$65,654, respectively. The Company has contingent commitments for $245,514 and $384,572 as
of December 31, 2012 and 2011, respectively, to provide additional funding for various joint
ventures, partnerships, and limited liability companies, which includes LIHTC commitments of
$23,053 and $53,963, respectively.
TLIC 2012 SEC
109
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
At December 31, 2012, the Company has private placement commitments outstanding of $9,979.
There were no private placement commitments outstanding as of December 31, 2011.
There were no securities being acquired on a “to be announced” (TBA) basis as of December 31,
2012. At December 31, 2011, the net amount of securities being acquired on a TBA basis was
$10,206.
The Company may pledge assets as collateral for derivative transactions. At December 31, 2012
and 2011, the Company has pledged invested assets with a carrying value of $68,410 and
$161,542, respectively, and fair value of $76,776 and $184,431, respectively, in conjunction with
these transactions.
Cash collateral received from derivative counterparties as well as the obligation to return the
collateral is recorded on the Company’s balance sheet. The amount of cash collateral posted as
of December 31, 2012 and 2011, respectively, was $971,255 and $1,094,873. In addition,
securities in the amount of $619,879 and $382,069 were also posted to the Company as of
December 31, 2012 and 2011, respectively, which were not included on the balance sheet of the
Company as the Company does not have the ability to sell or repledge the collateral.
The Company may pledge assets as collateral for transactions involving funding agreements. At
December 31, 2012 and 2011, the Company has pledged invested assets with a carrying amount
of $95,275 and $138,841, respectively, and fair value of $97,707 and $138,667, respectively, in
conjunction with these transactions.
The Company has provided back-stop guarantees for the performance of non-insurance affiliates
or subsidiaries that are involved in the guaranteed sale of investments in low-income housing tax
credit partnerships. The nature of the obligation is to provide third party investors with a
minimum guaranteed annual and cumulative return on their contributed capital which is based on
tax credits and tax losses generated from the low income housing tax credit partnerships.
Guarantee payments arise if low income housing tax credit partnerships experience unexpected
significant decreases in tax credits and tax losses or there are compliance issues with the
partnerships. A significant portion of the remaining term of the guarantees is between 13-21
years. The Company did not recognize a liability for the low income housing tax credit
guarantees due to the adoption of SSAP No. 5R at December 31, 2012 or 2011, as the maximum
potential amount of future payments the Company could be required to make is immaterial to the
Company’s financial results. In the event the Company is required to make a payment under this
guarantee, the payment would be reflected in the Company’s financial statements as a decrease
in net investment income. The maximum potential amount of future payments (undiscounted)
that the Company could be required to make under these guarantees was $245 and $309 at
December 31, 2012 and 2011, respectively. No payments are required as of December 31, 2012.
The current assessment of risk of making payments under these guarantees is remote.
TLIC 2012 SEC
110
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
The Company has guaranteed to the Monetary Authority of Singapore (MAS) that it will provide
adequate funds to make up for any liquidity shortfall in its wholly-owned foreign life insurance
subsidiary, TLB (Singapore Branch), and continue to meet, pay and settle all present and future
obligations of TLB. As of December 31, 2012, there is no payment or performance risk because
TLB has adequate liquidity as of this date.
The Company has guaranteed to the Hong Kong Insurance Authority that it will provide the
financial support to TLB for maintaining TLB’s solvency at all times so as to enable TLB to
promptly meet its obligations and liabilities. If at any time the value of TLB’s assets do not
exceed its liabilities by the prevailing acceptable level of solvency, the Company will increase
the paid up share capital of TLB or provide financial assistance to TLB to maintain the
acceptable level of solvency, defined as net assets at one hundred and fifty percent of the
required margin of solvency as stipulated under the Insurance Companies (Margin of Solvency)
Regulation. As of December 31, 2012, there is no payment or performance risk because TLB is
able to meet its obligations and has assets in excess of its liabilities by the prevailing level of
solvency as of this date.
The Company has guaranteed that TLB will (1) maintain tangible net worth of at least equal to
the greater of 165% of Standard & Poor’s (S&P) Risk-Based Capital and the minimum required
by regulatory authorities in all jurisdictions in which TLB operates, (2) have, at all times,
sufficient cash to pay all contractual obligations in a timely manner and (3) have a maximum
operating leverage ratio of 20 times. TLIC can terminate this agreement upon thirty days written
notice, but not until TLB attains a rating from S&P the same as without the support from this
agreement, or the entire book of TLB business is transferred provided that it is transferred to an
entity with a rating from S&P that is the same as or better than TLIC’s then current rating or AA,
whichever is lower. As of December 31, 2012, there is no payment or performance risk because
TLB has adequate tangible net worth, sufficient cash to meet its obligations and an operating
leverage ratio not in excess of 20 times as of this date.
The Company is not able to estimate the financial statement impact or the maximum potential
amount of future payments it could be required to make under these three guarantees as they are
considered to be unlimited under the provisions of SSAP No. 5R.
The Company has provided a guarantee to TLB’s (Singapore Branch) policyholders. If TLB
fails to pay a valid claim solely by reason of it becoming insolvent as defined by Bermuda law,
then the Company shall pay directly to the policy owner or named beneficiary the amount of the
valid claim. At December 31, 2012 and 2011, TLB holds related statutory-basis policy and
claim reserves of $384,529 and $267,940, respectively, which would be the maximum potential
amount of future payments the Company could be required to make under this guarantee. In the
event the Company is required to make a payment under this guarantee, the payment would be
TLIC 2012 SEC
111
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
reflected in the Company’s financial statements as an increase to incurred claims. As of
December 31, 2012, there is no payment or performance risk because TLB is not insolvent as of
this date.
The Company did not recognize a liability for any of the TLB guarantees due to the adoption of
SSAP No. 5R at December 31, 2012 or 2011, as a liability is not required for guarantees to or on
behalf of a wholly-owned subsidiary. Management monitors TLB’s financial condition, and
there are no indications that TLB will become insolvent. As such, management feels the risk of
payment under these guarantees on behalf of TLB is remote.
The Company has provided guarantees for the obligations of noninsurance affiliates who have
accepted assignments of structured settlement payment obligations from other insurers and
purchase structured settlement insurance policies from subsidiaries of the Company that match
those obligations. The guarantees made by the Company are specific to each structured
settlement contract and vary in date and duration of the obligation. These are numerous and are
backed by the reserves established by the Company to represent the present value of the future
payments for those contracts. The statutory reserve established at December 31, 2012 and 2011
for the total payout block is $3,688,696 and $3,770,907, respectively. As this reserve is already
recorded on the balance sheet of the Company, there was no additional liability recorded due to
the adoption of SSAP No. 5R.
The following table provides an aggregate compilation of guarantee obligations as of December
31, 2012 and 2011:
December 31
2012
2011
Aggregate maximum potential of future payments
of all guarantees (undiscounted)
$
Current liability recognized in financial statements:
Noncontingent liabilities
Contingent liabilities
Ultimate financial statement impact if action required:
Incurred claims
Other
Total impact if action required
$
384,774
$
268,249
–
–
–
–
384,529
245
384,774
267,940
309
268,249
$
The Company has issued funding agreements to FHLB, and the funds received are reported as
deposit-type liabilities per SSAP No. 52, Deposit-Type Contracts. Total reserves are equal to the
TLIC 2012 SEC
112
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
funding agreements balance. These funding agreements are used for investment spread
management purposes and are subject to the same asset/liability management practices as other
deposit-type business. All of the funding agreements issued to FHLB are classified in the general
account as it is a general obligation of the Company. Collateral is required by FHLB to support
repayment of the funding agreements. In addition, FHLB requires their common stock to be
purchased.
Year Ended December 31
2012
2011
FHLB stock purchased/owned as part of
the agreement
Collateral pledged to the FHLB
Borrowing capacity currently available
Agreement General Account
Assets
Liabilities
$
137,938
3,185,216
5,865,876
2,568,722
1,975,268
$
160,188
3,099,800
6,764,980
2,499,839
2,475,393
The Company has issued synthetic GIC contracts to benefit plan sponsors totaling $2,545,786
and $1,848,101 as of December 31, 2012 and 2011, respectively. A synthetic GIC is an offbalance sheet fee-based product sold primarily to tax qualified plans. The plan sponsor retains
ownership and control of the related plan assets. The Company provides book value benefit
responsiveness in the event that qualified plan benefit requests exceed plan cash flows. In certain
contracts, the Company agrees to make advances to meet benefit payment needs and earns a
market interest rate on these advances. The periodically adjusted contract-crediting rate is the
means by which investment and benefit responsive experience is passed through to participants.
In return for the book value benefit responsive guarantee, the Company receives a premium that
varies based on such elements as benefit responsive exposure and contract size. The Company
underwrites the plans for the possibility of having to make benefit payments and also must agree
to the investment guidelines to ensure appropriate credit quality and cash flow. A contract
reserve of $3,000 has been established for the possibility of unexpected benefit payments at
below market interest rates at December 31, 2012 and 2011.
As of December 31, 2012 and 2011, the Company had entered into a credit enhancement and a
standby liquidity asset purchase agreement on a municipal variable rate demand note facility
with commitment amounts of $470 and $490, respectively, for which it was paid a fee. Prior to a
change in the remarketing agent, this agreement was drawn upon and repaid during 2009. The
Company does not believe there will be an additional draw under this agreement. However, if
there were, any such draws would be purchases of municipal bonds, which would be repaid with
interest.
TLIC 2012 SEC
113
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
The Company is a party to legal proceedings involving a variety of issues incidental to its
business, including class actions. Lawsuits may be brought in nearly any federal or state court in
the United States or in an arbitral forum. In addition, there continues to be significant federal
and state regulatory activity relating to financial services companies. The Company’s legal
proceedings are subject to many variables, and given its complexity and scope, outcomes cannot
be predicted with certainty. Although legal proceedings sometimes include substantial demands
for compensatory and punitive damages, and injunctive relief, it is management’s opinion that
damages arising from such demands will not be material to the Company’s financial position.
During 2010, the Company recorded a one-time provision to general insurance expenses of
$140,000 for settlement of a dispute related to a Bank Owned Life Insurance (BOLI) policy in
the United States. Subsequent to the disruption in the credit market, which affected the
investment value of the policy’s underlying assets, a suit was filed alleging that the policy terms
were not sufficiently fulfilled by Aegon.
The Company is subject to insurance guaranty laws in the states in which it writes business.
These laws provide for assessments against insurance companies for the benefit of policyholders
and claimants in the event of insolvency of other insurance companies. Assessments are charged
to operations when received by the Company, except where right of offset against other taxes
paid is allowed by law. Amounts available for future offsets are recorded as an asset on the
Company’s balance sheet. The future obligation for known insolvencies has been accrued based
on the most recent information available from the National Organization of Life and Health
Insurance Guaranty Associations. Potential future obligations for unknown insolvencies are not
determinable by the Company and are not required to be accrued for financial reporting
purposes. The Company has established a reserve of $26,107 and $33,490 and an offsetting
premium tax benefit of $5,044 and $4,744 at December 31, 2012 and 2011, respectively, for its
estimated share of future guaranty fund assessments related to several major insurer insolvencies.
The guaranty fund (benefit) expense was $(4,325), $(3,645) and $2,465, for the years ended
December 31, 2012, 2011 and 2010, respectively.
14. Sales, Transfer, and Servicing of Financial Assets and Extinguishments of Liabilities
The Company has recorded liabilities of $89,724 and $88,828 for municipal repurchase
agreements as of December 31, 2012 and 2011, respectively. The repurchase agreements are
primarily collateralized by investment-grade corporate bonds with book values of $85,713 and
$94,288, respectively, and fair values of $92,872 and $99,880, respectively, as of December 31,
2012 and 2011. These securities have maturity dates that range from 2013 to 2025.
For repurchase agreements, the Company rigorously manages asset/liability risks via an
integrated risk management framework. The Company’s liquidity position is monitored
constantly, and factors heavily in the management of the asset portfolio. Projections comparing
TLIC 2012 SEC
114
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
liquidity needs to available resources in both adverse and routine scenarios are refreshed
monthly. The results of these projections on time horizons ranging from seven days to sixteen
months are the basis for the near-term liquidity planning. This liquidity model excludes new
business (non applicable for the spread business), renewals and other sources of cash and
assumes all liabilities are paid off on the earliest dates required. Interest rate risk is carefully
managed, in part through rigorously defined and monitored derivatives programs.
At December 31, 2012, the Company had dollar repurchase agreements outstanding in the
amount of $82,026. The Company did not participate in dollar repurchase agreements at
December 31, 2011.
The contractual maturities of the dollar repurchase agreement positions are as follows:
Fair Value
$
85,269
–
–
–
–
85,269
Open
30 days or less
31 to 60 days
61 to 90 days
Greater than 90 days
Total
Securities received
Total collateral received
$
–
85,269
In the course of the Company’s asset management, securities are sold and reacquired within 30
days of the sale date to enhance the Company’s yield on its investment portfolio. The details by
NAIC designation 3 or below of securities sold during 2012 and reacquired within 30 days of the
sale date are:
Book Value of
Number of
Securities
Transactions
Sold
Bonds:
NAIC 3
NAIC 4
NAIC 5
NAIC 6
4
12
4
1
$
6,827
17,865
5,756
1,020
Cost of
Securities
Repurchased
$
7,041
18,792
5,759
1,023
Gain/(Loss)
$
240
949
(28)
(40)
TLIC 2012 SEC
115
Transamerica Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share amounts)
15. Subsequent Events
The financial statements are adjusted to reflect events that occurred between the balance sheet
date and the date when the financial statements are issued, provided they give evidence of
conditions that existed at the balance sheet date (Type I). Events that are indicative of conditions
that arose after the balance sheet date are disclosed, but do not result in an adjustment of the
financial statements themselves (Type II). The Company has not identified any Type I or Type
II subsequent events for the year ended December 31, 2012 through the date the financial
statements are issued.
TLIC 2012 SEC
116
Transamerica Life Insurance Company
Summary of Investments – Other Than
Investments in Related Parties
(Dollars in Thousands)
December 31, 2012
SCHEDULE I
Type of Investment
Cost (1)
Fixed maturities
Bonds:
United States government and
government agencies and
authorities
$
3,944,595 $
States, municipalities and political
subdivisions
765,707
Foreign governments
527,762
Hybrid securities
933,577
All other corporate bonds
30,667,839
Preferred stocks
111,506
Total fixed maturities
36,950,986
Equity securities
Common stocks:
Industrial, miscellaneous and all
other
Total equity securities
Mortgage loans on real estate
Real estate
Policy loans
Other long-term investments
Receivable for Securities
Securities Lending
Cash, cash equivalents and short-term
investments
Total investments
$
167,843
167,843
Fair
Value
Amount at
Which Shown
in the
Balance Sheet (2)
4,798,184 $
3,944,753
838,916
574,808
792,433
33,740,350
111,258
40,855,949
765,556
527,762
930,882
30,512,613
111,471
36,793,037
218,026
218,026
218,026
218,026
5,730,665
83,054
708,794
1,318,082
4,475
2,160,218
5,730,665
83,054
708,794
1,318,082
4,475
2,160,218
3,974,902
51,099,019
3,974,902
50,991,253
$
(1)
Original cost of equity securities and, as to fixed maturities, original cost reduced
by repayments and adjusted for amortization of premiums or accrual of discounts.
(2)
United States government, state, municipal and political, hybrid and corporate
bonds of $115,527 are held at fair value rather than amortized cost due to having an
NAIC 6 rating. A preferred stock security is held at its fair value of $0 due to having an
NAIC 6 rating.
TLIC 2012 SEC
117
Transamerica Life Insurance Company
Supplementary Insurance Information
(Dollars in Thousands)
SCHEDULE III
Future Policy
Benefits and
Expenses
Year ended December 31, 2012
Individual life
Individual health
Group life and health
Annuity
Year ended December 31, 2011
Individual life
Individual health
Group life and health
Annuity
Year ended December 31, 2010
Individual life
Individual health
Group life and health
Annuity
$ 13,805,986
3,154,346
1,452,548
15,866,274
$ 34,279,154
Unearned
Premiums
$
$
$ 13,797,712
2,993,069
1,430,308
16,637,184
$ 34,858,273
$
$ 14,015,969
2,906,758
1,413,616
17,990,509
$ 36,326,852
$
S
$
–
95,888
13,761
–
109,649
–
97,990
14,510
–
112,500
–
102,601
15,466
–
118,067
Policy and
Contract
Liabilities
$
$
$
$
$
$
Premium
Revenue
1,058,471
457,502
342,755
9,948,086
$ 11,806,814
$
179,695
134,931
58,498
23,495
396,619
$
$
$
$
$
242,721
438,582
337,648
8,845,105
9,864,056
1,411,484
492,364
330,139
6,931,132
9,165,119
Other
Operating
Expenses*
803,205
218,644
117,963
1,589,715
2,729,527
$ 1,731,950
458,994
267,986
5,569,306
$ 8,028,236
$ (1,363,563)
68,566
164,138
5,850,131
$ 4,719,272
767,798
202,494
88,118
1,557,448
2,615,858
$ 1,288,152
420,327
272,474
5,006,408
$ 6,987,361
$
993,846
199,500
75,398
1,650,427
2,919,171
$ 1,938,525
437,569
281,807
5,378,791
$ 8,036,692
Net
Investment
Income*
197,787
126,252
61,621
22,285
407,945
256,354
137,513
96,571
26,915
517,353
$
Benefits,
Claims
Losses and
Settlement
Expenses
$
$
$
$
$
$
$
934,829
151,433
119,561
6,597,799
7,803,622
1,109,156
150,292
114,825
3,520,890
4,895,163
*Allocations of net investment income and other operating expenses are based on a number of assumptions and estimates, and the results would change if
different methods were applied.
TLIC 2012 SEC
118
Transamerica Life Insurance Company
Reinsurance
(Dollars in Thousands)
SCHEDULE IV
Ceded to
Other
Companies
Gross
Amount
Year ended December 31, 2012
Life insurance in force
$
455,851,953
Premiums:
Individual life
Individual health
Group life and health
Annuity
Year ended December 31, 2010
Life insurance in force
Premiums:
Individual life
Individual health
Group life and health
Annuity
987,454,502
$ 666,160,317
$ 134,557,768
495%
$
2,390,267
531,328
452,512
10,052,831
13,426,938
$
3,106,662
153,252
129,841
166,570
3,556,325
1,774,866
79,426
20,084
61,825
1,936,201
1,058,471
457,502
342,755
9,948,086
11,806,814
168%
17%
6%
1%
16%
$
452,085,562
$
1,075,361,646
$ 732,908,307
$ 109,632,223
669%
$
$
$
$
3,793,088
215,579
109,724
1,247,624
5,366,015
$
$
2,300,979
535,034
417,156
10,043,863
13,297,032
242,721
438,582
337,648
8,845,105
9,864,056
715%
27%
9%
1%
20%
$
459,820,666
$
969,368,385
$ 731,229,732
$ 221,682,013
330%
$
2,631,499
536,163
398,638
7,197,141
10,763,441
$
3,101,663
154,031
87,932
334,516
3,678,142
$
$
133%
22%
6%
1%
23%
$
TLIC 2012 SEC
Net
Amount
Percentage
of Amount
Assumed
to Net
$
Premiums:
Individual life
Individual health
Group life and health
Annuity
Year ended December 31, 2011
Life insurance in force
Assumed
From
Other
Companies
$
$
$
$
1,734,830
119,127
30,216
48,866
1,933,039
1,881,648
110,232
19,433
68,507
2,079,820
$
$
$
1,411,484
492,364
330,139
6,931,132
9,165,119
119
FINANCIAL STATEMENTS
STATUTORY BASIS
AND
SCHEDULES –
Transamerica Financial Life Insurance Company
Years Ended December 31, 2012, 2011 and 2010
TFLIC 2012 SEC
Transamerica Financial Life Insurance Company
Financial Statements and Schedules – Statutory Basis
Years Ended December 31, 2012, 2011 and 2010
Contents
Report of Independent Registered Public Accounting Firm ................................................1
Audited Financial Statements
Balance Sheets – Statutory Basis .........................................................................................3
Statements of Operations – Statutory Basis .........................................................................5
Statements of Changes in Capital and Surplus – Statutory Basis ........................................7
Statements of Cash Flow – Statutory Basis .........................................................................9
Notes to Financial Statements – Statutory Basis ...............................................................11
Statutory-Basis Financial Statement Schedules
Summary of Investments – Other Than Investments in Related Parties ...........................90
Supplementary Insurance Information...............................................................................91
Reinsurance ........................................................................................................................92
TFLIC 2012 SEC
Ernst & Young LLP
Suite 3000
801 Grand Avenue
Des Moines, IA 50309-2767
Tel: +1 515 243 2727
Fax: +1 515 362 7200
www.ey.com
Report of Independent Registered Public Accounting Firm
The Board of Directors
Transamerica Financial Life Insurance Company
We have audited the accompanying statutory-basis balance sheets of Transamerica Financial
Life Insurance Company (the Company) as of December 31, 2012 and 2011, and the related
statutory-basis statements of operations, changes in capital and surplus, and cash flow for each of
the three years in the period ended December 31, 2012. Our audits also included the statutorybasis financial statement schedules required by Regulation S-X, Article 7. These financial
statements and schedules are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the Company’s internal control over
financial reporting. Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the circumstances, but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the financial statements have been prepared in
conformity with accounting practices prescribed or permitted by the New York Department of
Financial Services, which practices differ from U.S. generally accepted accounting principles.
The variances between such practices and U.S. generally accepted accounting principles are
described in Note 1. The effects on the accompanying financial statements of these variances are
not reasonably determinable but are presumed to be material.
In our opinion, because of the effects of the matter described in the preceding paragraph, the
statutory-basis financial statements referred to above do not present fairly, in conformity with
U.S. generally accepted accounting principles, the financial position of Transamerica Financial
Life Insurance Company at December 31, 2012 and 2011, or the results of its operations or its
cash flows for each of the three years in the period ended December 31, 2012.
1304-1059200
A member firm of Ernst & Young Global Limited
However, in our opinion, the statutory-basis financial statements referred to above present fairly,
in all material respects, the financial position of Transamerica Financial Life Insurance Company
at December 31, 2012 and 2011, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2012, in conformity with accounting practices
prescribed or permitted by the New York Department of Financial Services. Also, in our opinion,
the related financial statement schedules, when considered in relation to the basic statutory-basis
financial statements taken as a whole, present fairly in all material respects the information set
forth therein.
As discussed in Note 1 to the financial statements, in response to new accounting standards in
2012, the Company changed its method of accounting for deferred income taxes.
ey
April 3, 2013
1304-1059200
Transamerica Financial Life Insurance Company
Balance Sheets – Statutory Basis
(Dollars in Thousands, Except per Share Data)
2012
Admitted assets
Cash and invested assets:
Bonds
Preferred stocks
Common stocks
Affiliated entities (cost: 2012 - $5,814; 2011 - $4,892)
Unaffiliated (cost: 2012 - $3,950; 2011 - $1,402)
Mortgage loans on real estate
Policy loans
Cash, cash equivalents and short-term investments
Derivatives
Other invested assets
Receivables for securities
Securities lending reinvested collateral assets
Total cash and invested assets
Premiums deferred and uncollected
Due and accrued investment income
Net deferred income tax asset
Reinsurance receivable
Receivable from parent, subsidiaries and affiliates
Accounts receivable
Estimated premium tax offset on the provision for future
guarantee fund assessments
Other admitted assets
Separate account assets
Total admitted assets
3
$
$
December 31
2011
7,413,206 $
1,573
7,790,711
2,228
6,573
5,113
544,544
60,041
587,426
41,613
95,315
–
258,143
9,013,547
5,697
4,191
625,301
55,858
178,103
123,812
92,134
6,185
476,053
9,360,273
11,297
87,584
69,021
14,782
87,032
67,897
10,587
96,954
50,594
15,795
21,243
27,050
16,319
1,110
17,590,145
26,958,734 $
TFLIC 2012 SEC
16,319
1,206
15,878,424
25,478,445
Transamerica Financial Life Insurance Company
Balance Sheets – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
2012
Liabilities and capital and surplus
Liabilities:
Aggregate reserves for policies and contracts:
Life
Annuity
Accident and health
Policy and contract claim reserves:
Life
Annuity
Accident and health
Liability for deposit-type contracts
Other policyholders’ funds
Federal income taxes payable
Transfers from separate accounts due or accrued
Amounts withheld or retained
Remittances and items not allocated
Borrowed money
Asset valuation reserve
Interest maintenance reserve
Funds held under coinsurance and other reinsurance treaties
Reinsurance in unauthorized companies
Commissions and expense allowances payable on
reinsurance assumed
Payable for securities
Payable to parent, subsidiaries and affiliates
Derivatives
Payable for securities lending
Taxes, licenses and fees due or accrued
Payable for derivative cash collateral
Deferred gain on assumption of reinsurance transaction
Other liabilities
Separate account liabilities
Total liabilities
Capital and surplus:
Common stock, $125 per share par value, 16,466 shares
authorized, issued and outstanding
Preferred stock, $10 per share par value, 44,175 shares
authorized, issued and outstanding
Aggregate write-ins for other than special surplus funds
Surplus notes
Paid-in surplus
Special surplus
Unassigned deficit
Total capital and surplus
Total liabilities and capital and surplus
$
December 31
2011
842,238
6,685,096
125,546
$
15,509
437
11,356
61,391
968
37,507
(109,165)
14,876
197,241
67,407
118,108
102,036
201
518
$
785,498
6,908,679
120,653
19,491
551
15,562
64,049
870
6,385
(59,547)
6,531
167,965
–
101,956
80,537
241
806
12,497
2
–
12,704
258,143
33,603
20,334
17,984
6,043
17,590,139
26,122,719
15,029
20,491
22,062
4,714
476,053
34,882
87,708
20,408
6,367
15,878,363
24,786,304
2,058
2,058
442
–
150,000
849,460
6,660
(172,605)
836,015
26,958,734 $
442
27,930
150,000
849,460
4,796
(342,545)
692,141
25,478,445
See accompanying notes.
TFLIC 2012 SEC
4
Transamerica Financial Life Insurance Company
Statements of Operations – Statutory Basis
(Dollars in Thousands)
2012
Revenues:
Premiums and other considerations, net of reinsurance:
Life
Annuity
Accident and health
Net investment income
Amortization of interest maintenance reserve
Commissions and expense allowances on reinsurance ceded
Income from fees associated with investment management,
administration and contract guarantees for separate accounts
Consideration on reinsurance transaction
Assumption reinsurance gain
Income from fees associated with investment management and
administration for general account
IMR adjustment due to reinsurance
Other income
$
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health benefits
Annuity benefits
Surrender benefits
Other benefits
Increase (decrease) in aggregate reserves for policies
and contracts:
Life
Annuity
Accident and health
Insurance expenses:
Commissions
General insurance expenses
Taxes, licenses and fees
Net transfers to separate accounts
Experience refunds
Interest on surplus notes
Consideration on reinsurance recaptured and novated
Other benefits
Total benefits and expenses
Gain (loss) from operations before federal income tax
expense and net realized capital gains (losses)
on investments
TFLIC 2012 SEC
$
Year Ended December 31
2011
127,077 $
4,733,483
79,788
427,128
17,065
58,516
(378,419) $
4,738,804
66,085
463,530
16,416
(52,546)
2010
394,883
4,664,761
85,634
506,127
10,260
60,476
125,160
–
–
114,076
75,821
–
92,604
–
53,413
22,885
–
28,867
5,619,969
35,591
13,086
24,308
5,116,752
11,120
–
26,579
5,905,857
82,522
121,593
4,039,973
5,689
145,511
105,868
3,671,197
8,152
306,149
99,443
3,045,837
10,637
56,740
(243,529)
4,893
4,067,881
(379,626)
193,394
1,742
3,746,238
136,548
(289,567)
8,224
3,317,271
161,079
120,202
10,206
942,930
476
9,375
12,732
(5,002)
1,251,998
5,319,879
152,964
143,542
18,065
1,143,898
85,372
9,375
–
(3,715)
1,549,501
5,295,739
144,196
123,475
15,895
2,092,506
12,074
9,375
–
(3,354)
2,394,167
5,711,438
300,090 $
(178,987) $
194,419
5
Transamerica Financial Life Insurance Company
Statements of Operations – Statutory Basis (continued)
(Dollars in Thousands)
2012
Federal income tax expense
Gain (loss) from operations before net realized capital gains (losses)
on investments
Net realized capital gains (losses) on investments (net of related
federal income taxes and amounts tranferred to interest
maintenance reserve)
Net income (loss)
$
Year Ended December 31
2011
110,930
$
189,160
$
8,817
197,977
$
44,789
$
2010
58,571
(223,776)
135,848
(43,004)
(266,780) $
(65,499)
70,349
See accompanying notes.
TFLIC 2012 SEC
6
Transamerica Financial Life Insurance Company
Statements of Changes in Capital and
Surplus – Statutory Basis
(Dollars in Thousands)
Common
Stock
Balance at January 1, 2010
Cumulative effect of change in accounting
principles
Net income
Change in net unrealized capital gains and
losses, net of tax
Change in net unrealized foreign capital
gains and losses, net of tax
Change in nonadmitted assets
Change in asset valuation reserve
Change in liability for reinsurance in
unauthorized companies
Change in reserve on account of change in
valuation basis
Surplus contributed to separate account
Other changes in surplus in separate account
statement
Change in net deferred income tax asset
Change in surplus as result of reinsurance
Increase in admitted deferred tax assets
pursuant to SSAP No. 10R
Change in deferred premium due to valuation
adjustment
Dividends to stockholders
Balance at December 31, 2010
Net income (loss)
Change in net unrealized capital gains and
losses, net of tax
Change in net unrealized foreign capital
gains and losses, net of tax
Change in nonadmitted assets
Change in asset valuation reserve
Change in liability for reinsurance in
unauthorized companies
Change in reserve on account of change in
valuation basis
Surplus withdrawn from separate account
Other changes in surplus in separate account
statement
Change in net deferred income tax asset
Change in surplus as result of reinsurance
Change in admitted deferred tax assets
pursuant to SSAP No. 10R
Correction of error-asset valuation reserve
Correction of error-TLIC novation of group
annuity policies
Dividends to stockholders
Balance at December 31, 2011
TFLIC 2012 SEC
$
$
Aggregate
Write-ins
for Other
Preferred than Special
Stock
Surplus Funds
Surplus
Notes
Paid-in
Surplus
27,585 $ 150,000 $ 849,460 $
Special
Surplus
3,753 $
Total
Capital and
Surplus
Unassigned
Deficit
2,058 $
442 $
(121,672) $ 911,626
–
–
–
–
–
–
–
–
–
–
–
828
601
69,521
601
70,349
–
–
–
–
–
–
4,775
4,775
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(2)
6,559
(21,129)
(2)
6,559
(21,129)
–
–
–
–
–
–
2,311
2,311
–
–
–
–
–
–
–
–
–
–
–
–
(3,001)
(547)
(3,001)
(547)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
610
24,065
(995)
610
24,065
(995)
–
–
3,891
–
–
–
–
–
2,058
–
–
–
442
–
–
–
31,476
–
–
–
150,000
–
–
–
849,460
–
–
–
4,581
215
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,891
(4,446)
(200,000)
(243,350)
(266,995)
(4,446)
(200,000)
794,667
(266,780)
–
48,801
48,801
–
–
–
–
–
–
(793)
19,988
1,914
(793)
19,988
1,914
–
–
–
601
601
–
–
–
–
–
–
–
–
520
965
520
965
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(860)
(7,754)
400,760
–
–
–
–
(3,546)
–
–
–
–
–
–
–
–
6,248
–
–
2,058 $
–
–
442 $
–
–
–
–
–
–
27,930 $ 150,000 $ 849,460 $
–
–
4,796 $
(860)
(7,754)
400,760
(3,546)
6,248
(2,590)
(2,590)
(300,000) (300,000)
(342,545) $ 692,141
7
Transamerica Financial Life Insurance Company
Statements of Changes in Capital and
Surplus – Statutory Basis (continued)
(Dollars in Thousands)
Common
Stock
Balance at December 31, 2011
Net income
Change in net unrealized capital gains and
losses, net of tax
Change in net unrealized foreign capital
gains and losses, net of tax
Change in nonadmitted assets
Change in asset valuation reserve
Change in liability for reinsurance in
unauthorized companies
Surplus withdrawn from separate account
Other changes in surplus in separate account
statement
Change in net deferred income tax asset
Change in surplus as result of reinsurance
Correction of error-GMWB reserve
Change in admitted deferred tax assets
pursuant to SSAP No. 101
Balance at December 31, 2012
$
$
Aggregate
Write-ins
for Other
Preferred than Special
Stock
Surplus Funds
Surplus
Notes
Paid-in
Surplus
27,930 $ 150,000 $ 849,460 $
–
–
–
Special
Surplus
Unassigned
Deficit
Total
Capital and
Surplus
2,058 $
–
442 $
–
–
–
–
–
–
–
(47,417)
(47,417)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
771
4,232
(16,152)
771
4,232
(16,152)
–
–
–
–
–
–
–
–
–
–
–
–
288
(152)
288
(152)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(55)
(12,128)
36,456
(19,946)
(55)
(12,128)
36,456
(19,946)
–
2,058 $
–
442 $
(27,930)
–
–
– $ 150,000 $ 849,460 $
4,796 $ (342,545) $
1,864
196,113
–
27,930
6,660 $ (172,605) $
692,141
197,977
–
836,015
See accompanying notes.
TFLIC 2012 SEC
8
Transamerica Financial Life Insurance Company
Statements of Cash Flow – Statutory Basis
(Dollars in Thousands)
2012
Operating activities
Premiums collected, net of reinsurance
Net investment income
Miscellaneous income
Benefit and loss related payments
Net transfers to separate accounts
Commissions, expenses paid and aggregate write-ins for
deductions
Federal and foreign income taxes paid
Net cash used in operating activities
$
Year Ended December 31
2011
4,939,853 $
440,693
273,207
(4,271,352)
(992,548)
4,483,991 $
481,777
592,123
(4,032,966)
(1,246,079)
(368,756)
(98,109)
(77,012)
(337,782)
(20,425)
(79,361)
2010
5,148,268
521,507
170,094
(3,490,532)
(2,050,540)
(259,124)
(110,673)
(71,000)
Investing activities
Proceeds from investments sold, matured or repaid:
Bonds
Preferred stock
Common stock
Mortgage loans
Other invested assets
Securities lending reinvested collateral assets
Miscellaneous proceeds
Total investment proceeds
2,068,919
1,291
514
159,142
16,285
217,909
10,801
2,474,861
1,767,840
–
2,041
199,996
23,669
798
23,856
2,018,200
3,047,327
1,700
2,909
187,431
17,733
–
971
3,258,071
Costs of investments acquired:
Bonds
Preferred stock
Common stock
Mortgage loans
Other invested assets
Securities lending reinvested collateral assets
Miscellaneous applications
Total cost of investments acquired
Net (increase) decrease in policy loans
Net cost of investments acquired
Net cash provided by (used in) investing activities
(1,629,354)
(521)
(3,892)
(80,113)
(14,161)
–
(12,500)
(1,740,541)
(4,183)
(1,744,724)
730,137
(1,486,259)
(618)
(1,694)
(55,689)
(12,955)
–
(32,729)
(1,589,944)
6,530
(1,583,414)
434,786
(3,120,465)
–
(2,535)
(46)
(11,074)
(476,851)
(103,341)
(3,714,312)
(2,794)
(3,717,106)
(459,035)
TFLIC 2012 SEC
9
Transamerica Financial Life Insurance Company
Statements of Cash Flow – Statutory Basis (continued)
(Dollars in Thousands)
2012
Financing and miscellaneous activities
Net deposits (withdrawals) on deposit-type contracts
and other insurance liabilities
Borrowed funds
Dividends to stockholders
Funds withheld under reinsurance treaties with
unauthorized reinsurers
Receivable from parent, subsidiaries and affiliates
Payable to parent, subsidiaries and affiliates
Payable for securities lending
Other cash (applied) provided
Net cash (used in) provided by financing and
miscellaneous activities
$
Net increase (decrease) in cash, cash equivalents and
short-term investments
Cash, cash equivalents and short-term investments:
Beginning of year
End of year
$
Year Ended December 31
2011
(65,804) $
–
(300,000)
(42,174)
–
(200,000)
(226)
(65,789)
(22,062)
(217,909)
(5,828)
288
(1,496)
(1,967)
(798)
54,106
(83)
49,192
(2,451)
476,851
171,697
(243,802)
(315,671)
453,032
409,323
39,754
(77,003)
823
67,189
–
178,103
587,426
$
2010
$
138,349
178,103
$
215,352
138,349
See accompanying notes.
TFLIC 2012 SEC
10
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis
(Dollars in Thousands, Except per Share Data)
December 31, 2012
1. Organization and Summary of Significant Accounting Policies
Organization
Transamerica Financial Life Insurance Company (the Company) is a stock life insurance
company and is majority owned by Aegon USA, LLC. (Aegon) and minority owned by
Transamerica Life Insurance Company (TLIC). Both Aegon and TLIC are indirect,
wholly owned subsidiaries of Aegon N.V., a holding company organized under the laws
of The Netherlands.
Nature of Business
The Company sells fixed and variable pension and annuity products, group life
coverages, life insurance, investment contracts, structured settlements and guaranteed
interest contracts and funding agreements. The Company is licensed in 50 states and the
District of Columbia. Sales of the Company’s products are primarily through brokers.
Basis of Presentation
The preparation of financial statements of insurance companies requires management to
make estimates and assumptions that affect amounts reported in the financial statements
and accompanying notes. Such estimates and assumptions could change in the future as
more information becomes known, which could impact the amounts reported and
disclosed herein.
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the New York Department of Financial
Services (formerly known as the Department of Insurance of the State of New York),
which practices differ from accounting principles generally accepted in the United States
(GAAP). The more significant variances from GAAP are:
Investments: Investments in bonds and mandatory redeemable preferred stocks are
reported at amortized cost or fair value based on their National Association of
Insurance Commissioners (NAIC) rating; for GAAP, such fixed maturity investments
would be designated at purchase as held-to-maturity, trading or available-for-sale.
Held-to-maturity fixed investments would be reported at amortized cost, and the
remaining fixed maturity investments would be reported at fair value with unrealized
holding gains and losses reported in earnings for those designated as trading and as a
separate component of other comprehensive income (OCI) for those designated as
available-for-sale. Fair value for GAAP is based on indexes, third party pricing
TFLIC 2012 SEC
11
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
services, brokers, external fund managers and internal models. For statutory reporting,
the NAIC allows insurance companies to report the fair value determined by the
Securities Valuation Office of the NAIC (SVO) or determine the fair value by using a
permitted valuation method.
All single class and multi-class mortgage-backed/asset-backed securities (e.g., CMOs)
are adjusted for the effects of changes in prepayment assumptions on the related
accretion of discount or amortization of premium of such securities using either the
retrospective or prospective methods. If the fair value of the mortgage-backed/assetbacked security is less than amortized cost, an entity shall assess whether the
impairment is other-than-temporary. An other-than-temporary impairment is considered
to have occurred if the fair value of the mortgage-backed/asset-backed security is less
than its amortized cost basis and the entity intends to sell the security or the entity does
not have the intent and ability to hold the security for a period of time sufficient to
recover the amortized cost basis. An other-than-temporary impairment is also
considered to have occurred if the discounted estimated future cash flows are less than
the amortized cost basis of the security.
If it is determined an other-than-temporary impairment has occurred as a result of the
cash flow analysis, the security is written down to the discounted estimated future cash
flows. If an other-than-temporary impairment has occurred due to intent to sell or lack
of intent and ability to hold, the security is written down to fair value.
For GAAP, all securities, purchased or retained, that represent beneficial interests in
securitized assets (e.g., CMO, CBO, CDO, CLO, MBS and ABS securities), other than
high credit quality securities, are adjusted using the prospective method when there is a
change in estimated future cash flows. If high credit quality securities are adjusted, the
retrospective method is used. If it is determined that a decline in fair value is otherthan-temporary and the entity intends to sell the security or more likely than not will be
required to sell the security before recovery of its amortized cost basis less any current
period credit loss, the other-than-temporary impairment should be recognized in
earnings equal to the entire difference between the amortized cost basis and its fair
value at the impairment date. If the entity does not intend to sell the security and it is
not more likely than not that the entity will be required to sell the security before
recovery, the other-than-temporary impairment should be separated into a) the amount
representing the credit loss, which is recognized in earnings, and b) the amount related
to all other factors, which is recognized in OCI, net of applicable taxes.
Derivative instruments used in hedging transactions that meet the criteria of an effective
hedge are valued and reported in a manner that is consistent with the hedged asset or
liability. Embedded derivatives are not accounted for separately from the host contract.
Derivative instruments used in hedging transactions that do not meet or no longer meet
the criteria of an effective hedge are accounted for at fair value, and the changes in the
TFLIC 2012 SEC
12
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
fair value are recorded in unassigned surplus as unrealized gains and losses. Under
GAAP, the effective and ineffective portions of a single hedge are accounted for
separately, and the change in fair value for cash flow hedges is credited or charged
directly to a separate component of OCI rather than to income as required for fair value
hedges, and an embedded derivative within a contract that is not clearly and closely
related to the economic characteristics and risk of the host contract is accounted for
separately from the host contract and valued and reported at fair value.
Derivative instruments are also used in replication transactions. In these transactions,
the derivative is valued in a manner consistent with the cash investment and replicated
asset. For GAAP, the derivative is reported at fair value, with the changes in fair value
reported in income.
Investments in real estate are reported net of related obligations rather than on a gross
basis as for GAAP. Real estate owned and occupied by the Company is included in
investments rather than reported as an operating asset as under GAAP, and investment
income and operating expenses for statutory reporting include rent for the Company’s
occupancy of those properties. Changes between depreciated cost and admitted
amounts are credited or charged directly to unassigned surplus rather than to income as
would be required under GAAP.
Valuation allowances are established for mortgage loans, if necessary, based on the
difference between the net value of the collateral, determined as the fair value of the
collateral less estimated costs to obtain and sell, and the recorded investment in the
mortgage loan. Under GAAP, such allowances are based on the present value of
expected future cash flows discounted at the loan’s effective interest rate or, if
foreclosure is probable, on the estimated fair value of the collateral.
The initial valuation allowance and subsequent changes in the allowance for mortgage
loans are charged or credited directly to unassigned surplus as part of the change in
asset valuation reserve (AVR), rather than being included as a component of earnings
as would be required under GAAP.
Valuation Reserves: Under a formula prescribed by the NAIC, the Company defers the
portion of realized capital gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the general level of
interest rates and amortizes those deferrals over the remaining period to maturity of the
bond or mortgage loan based on groupings of individual securities sold in five year
bands. That net deferral is reported as the interest maintenance reserve (IMR) in the
accompanying balance sheets. Realized capital gains and losses are reported in income
net of federal income tax and transfers to the IMR. Under GAAP, realized capital gains
and losses are reported in the statement of operations on a pre-tax basis in the period
that the assets giving rise to the gains or losses are sold.
TFLIC 2012 SEC
13
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
The AVR provides a valuation allowance for invested assets. The AVR is determined
by an NAIC prescribed formula with changes reflected directly in unassigned surplus;
AVR is not recognized for GAAP.
Subsidiaries: The accounts and operations of the Company’s subsidiaries are not
consolidated with the accounts and operations of the Company as would be required
under GAAP.
Policy Acquisition Costs: The costs of acquiring and renewing business are expensed
when incurred. Under GAAP, incremental costs directly related to the successful
acquisition of traditional life insurance and certain long-duration accident and health
insurance, to the extent recoverable from future policy revenues, would be deferred and
amortized over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves; for universal life
insurance and investment products, to the extent recoverable from future gross profits,
deferred policy acquisition costs are amortized generally in proportion to the present
value of expected gross profits from surrender charges and investment, mortality and
expense margins.
Separate Accounts with Guarantees: Some of the Company’s separate accounts provide
policyholders with a guaranteed return. In accordance with the guarantees provided, if
the investment proceeds are insufficient to cover the rate of return guaranteed for the
product, the policyholder proceeds will be remitted by the general account. These
separate accounts are included in the general account for GAAP due to the nature of the
guaranteed return.
Nonadmitted Assets: Certain assets designated as “nonadmitted”, primarily net deferred
tax assets and other assets not specifically identified as an admitted asset within the
NAIC Accounting Practices and Procedures Manual (NAIC SAP), are excluded from
the accompanying balance sheets and are charged directly to unassigned surplus. Under
GAAP, such assets are included in the balance sheet to the extent they are not impaired.
Universal Life and Annuity Policies: Revenues for universal life and annuity policies
with mortality or morbidity risk (including annuities with purchase rate guarantees)
consist of the entire premium received. Benefits incurred represent surrenders and
death benefits paid and the change in policy reserves. Premiums received and benefits
incurred for annuity policies without mortality or morbidity risk and guaranteed interest
in group annuity contracts are recorded directly to a policy reserve account using
deposit accounting, without recognizing premium income or benefits expense. Interest
on these policies is reflected in other benefits. Under GAAP, for universal life policies,
premiums received in excess of policy charges would not be recognized as premium
revenue and benefits would represent interest credited to the account values and the
TFLIC 2012 SEC
14
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
excess of benefits paid over the policy account value. Under GAAP, for all annuity
policies without significant mortality risk, premiums received and benefits paid would
be recorded directly to the reserve liability.
Benefit Reserves: Certain policy reserves are calculated based on statutorily required
interest and mortality assumptions rather than on estimated expected experience or
actual account balances as would be required under GAAP.
Reinsurance: Any reinsurance amounts deemed to be uncollectible have been written
off through a charge to operations. In addition, a liability for reinsurance balances
would be established for unsecured policy reserves ceded to reinsurers not authorized
to assume such business. Changes to the liability are credited or charged directly to
unassigned surplus. Under GAAP, an allowance for amounts deemed uncollectible
would be established through a charge to earnings.
Losses associated with an indemnity reinsurance transaction are reported within income
when incurred rather than being deferred and amortized over the remaining life of the
underlying reinsured contracts as would be required under GAAP.
Policy and contract liabilities ceded to reinsurers have been reported as reductions of
the related reserves rather than as assets as would be required under GAAP.
Commissions allowed by reinsurers on business ceded are reported as income when
incurred rather than being deferred and amortized with deferred policy acquisition costs
as required under GAAP.
Deferred Income Taxes: The Company computes deferred income taxes in accordance
with Statement of Statutory Accounting Principle (SSAP) No. 101, Income Taxes, A
Replacement of SSAP No. 10R and SSAP No. 10. Under SSAP No. 101, admitted
adjusted deferred income tax assets are limited to 1) the amount of federal income taxes
paid in prior years that can be recovered through loss carrybacks for existing temporary
differences that reverse during a timeframe corresponding with the Internal Revenue
Service tax loss carryback provisions, not to exceed three years, plus 2) the amount of
adjusted gross deferred income tax assets expected to be realized within three years
limited to an amount that is no greater than 15% of current period’s adjusted statutory
capital and surplus, plus 3) the amount of remaining adjusted gross deferred income tax
assets that can be offset against existing gross deferred income tax liabilities after
considering the character (i.e., ordinary versus capital) and reversal patterns of the
deferred tax assets and liabilities. The remaining adjusted deferred income tax assets
are nonadmitted.
Deferred income taxes do not include amounts for state taxes. Under GAAP, state taxes
are included in the computation of deferred income taxes, a deferred income tax asset is
TFLIC 2012 SEC
15
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
recorded for the amount of gross deferred income tax assets expected to be realized in
all future years, and a valuation allowance is established for deferred income tax assets
not realizable.
Goodwill: Goodwill is admitted subject to an aggregate limitation of ten percent of the
capital and surplus in the most recently filed annual statement excluding electronic data
processing equipment, operating system software, net deferred income tax assets and
net positive goodwill. Excess goodwill is nonadmitted. Goodwill is amortized over ten
years. Under GAAP, goodwill is measured as the excess of the consideration
transferred plus the fair value of any noncontrolling interest in the acquiree at the
acquisition date as compared to the fair values of the identifiable net assets acquired.
Goodwill is not amortized but is assessed for impairment on an annual basis, or more
frequently if circumstances indicate that a possible impairment has occurred.
Policyholder Dividends: Policyholder dividends are recognized when declared rather
than over the term of the related policies as would be required under GAAP.
Surplus Notes: Surplus notes are reported as surplus rather than liabilities as would be
required under GAAP.
Statements of Cash Flow: Cash, cash equivalents and short-term investments in the
statements of cash flow represent cash balances and investments with initial maturities
of one year or less. Under GAAP, the corresponding caption of cash and cash
equivalents includes cash balances and investments with initial maturities of three
months or less.
Securities Lending Assets and Liabilities: For securities lending programs, cash
collateral received which may be sold or repledged by the Company is reflected as a
one-line entry on the balance sheet (securities lending reinvested collateral assets) and
a corresponding liability is established to record the obligation to return the cash
collateral. Collateral received which may not be sold or repledged is not recorded on
the Company’s balance sheet. Under GAAP, the reinvested collateral is included
within invested assets (i.e. it is not one-line reported).
The effects of the foregoing variances from GAAP on the accompanying statutory-basis
financial statements have not been determined by the Company, but are presumed to be
material.
Other significant accounting policies are as follows:
TFLIC 2012 SEC
16
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
Investments
Investments in bonds, except those to which the SVO has ascribed an NAIC designation
of 6, are reported at amortized cost using the interest method.
Hybrid securities, as defined by the NAIC, are securities designed with characteristics of
both debt and equity and provide protection to the issuer’s senior note holders. These
securities meet the definition of a bond, in accordance with SSAP No. 26, Bonds,
excluding Loan-backed and Structured Securities and therefore, are reported at amortized
cost or fair value based upon their NAIC rating.
Single class and multi-class mortgage-backed/asset-backed securities are valued at
amortized cost using the interest method, including anticipated prepayments, except for
those with an initial NAIC designation of 6, which are valued at the lower of amortized
cost or fair value. Prepayment assumptions are obtained from dealer surveys or internal
estimates and are based on the current interest rate and economic environment. The
retrospective adjustment method is used to value all such securities, except principal-only
and interest-only securities, which are valued using the prospective method.
The Company closely monitors below investment grade holdings and those investment
grade issuers where the Company has concerns. The Company also regularly monitors
industry sectors. The Company considers relevant facts and circumstances in evaluating
whether the impairment is other-than-temporary including: (1) the probability of the
Company collecting all amounts due according to the contractual terms of the security in
effect at the date of acquisition; (2) the Company’s decision to sell a security prior to its
maturity at an amount below its carrying amount; and (3) the Company’s ability to hold a
structured security for a period of time to allow for recovery of the value to its carrying
amount. Additionally, financial condition, near term prospects of the issuer and
nationally recognized credit rating changes are monitored. Non-structured securities in
unrealized loss positions that are considered other-than-temporary are written down to
fair value. Structured securities considered other-than-temporarily impaired are written
down to discounted estimated cash flows if the impairment is the result of cash flow
analysis. If the Company has an intent to sell or lack of ability to hold a structured
security, it is written down to fair value. For structured securities, cash flow trends and
underlying levels of collateral are monitored. The Company will record a charge to the
statement of operations to the extent that these securities are determined to be other-thantemporarily impaired.
Investments in preferred stocks in good standing are reported at cost or amortized cost.
Investments in preferred stocks not in good standing are reported at the lower of cost or
fair value, and the related net unrealized capital gains (losses) are reported in unassigned
surplus along with any adjustment for federal income taxes.
TFLIC 2012 SEC
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Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
Common stocks of unaffiliated companies are reported at fair value and the related net
unrealized capital gains or losses are reported in unassigned surplus along with any
adjustment for federal income taxes.
If the Company determines that a decline in the fair value of a common stock or a
preferred stock is other-than-temporary, the Company writes it down to fair value as the
new cost basis and the amount of the write down is accounted for as a realized loss in the
statement of operations. The Company considers the following factors in determining
whether a decline in value is other-than-temporary: (a) the financial condition and
prospects of the issuer; (b) whether or not the Company has made a decision to sell the
investment; and (c) the length of time and extent to which the value has been below cost.
Common stocks of affiliated noninsurance subsidiaries are reported based on underlying
audited GAAP equity. The net change in the subsidiaries’ equity is included in the
change in net unrealized capital gains or losses, reported in unassigned surplus along
with any adjustment for federal income taxes.
There are no restrictions on common or preferred stock.
Short-term investments include investments with remaining maturities of one year or less
at the time of acquisition and are principally stated at amortized cost.
Cash equivalents are short-term highly liquid investments with original maturities of
three months or less and are principally stated at amortized cost.
Mortgage loans are reported at unpaid principal balances, less an allowance for
impairment. A mortgage loan is considered to be impaired when it is probable that the
Company will be unable to collect all principal and interest amounts due according to the
contractual terms of the mortgage agreement. When management determines that the
impairment is other-than-temporary, the mortgage loan is written down to realizable
value and a realized loss is recognized.
Policy loans are reported at unpaid principal balances.
The Company has minority ownership interests in joint ventures and limited partnerships.
The Company carries these investments based on its interest in the underlying audited
GAAP equity of the investee. For a decline in the fair value of an investment in a joint
venture or limited partnership which is determined to be other-than-temporary, the
Company writes it down to fair value as the new cost basis and the amount of the write
down is accounted for as a realized loss in the statement of operations. The Company
considers an impairment to have occurred if it is probable that the Company will be
unable to recover the carrying amount of the investment or if there is evidence indicating
TFLIC 2012 SEC
18
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
inability of the investee to sustain earnings which would justify the carrying amount of
the investment.
Investments in Low Income Housing Tax Credit (LIHTC) properties are valued at
amortized cost. Tax credits are recognized in operations in the tax reporting year in
which the tax credit is utilized by the Company.
Other “admitted assets” are valued principally at cost, as required or permitted by New
York Insurance Laws.
Realized capital gains and losses are determined using the specific identification method
and are recorded net of related federal income taxes. Changes in admitted asset carrying
amounts of bonds, mortgage loans, common and preferred stocks are credited or charged
directly to unassigned surplus.
Interest income is recognized on an accrual basis. The Company does not accrue income
on bonds in default, mortgage loans on real estate in default and/or foreclosure or which
are delinquent more than twelve months, or real estate where rent is in arrears for more
than three months. Income is also not accrued when collection is uncertain. In addition,
accrued interest is excluded from investment income when payment exceeds 90 days past
due. At December 31, 2012 and 2011, the Company excluded investment income due
and accrued of $568 and $248, respectively, with respect to such practices.
For dollar repurchase agreements, the Company receives cash collateral in an amount at
least equal to the fair value of the securities transferred by the Company in the
transaction as of the transaction date. Cash received as collateral will be invested as
needed or used for general corporate purposes of the Company.
Derivative Instruments
Overview: The Company may use various derivative instruments (options, caps, floors,
swaps, foreign currency forwards and futures) to manage risks related to its ongoing
business operations. On the transaction date of the derivative instrument, the Company
designates the derivative as either (A) hedging (fair value, foreign currency fair value,
cash flow, foreign currency cash flow, forecasted transactions or net investment in a
foreign operation), (B) replication, (C) income generation or (D) held for other
investment/risk management activities, which do not qualify for hedge accounting under
SSAP No. 86, Accounting for Derivative Instruments and Hedging Activities (SSAP No.
86).
Derivative instruments used in hedging relationships are accounted for on a basis that is
consistent with the hedged item (amortized cost or fair value). Derivative instruments
used in replication relationships are accounted for on a basis that is consistent with the
TFLIC 2012 SEC
19
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
cash instrument and the replicated asset (amortized cost or fair value). Derivative
instruments used in income generation relationships are accounted for on a basis that is
consistent with the associated covered asset or underlying interest to which the derivative
indicates (amortized cost or fair value). Derivative instruments held for other
investment/risk management activities receive fair value accounting.
Derivative instruments are subject to market risk, which is the possibility that future
changes in market prices may make the instruments less valuable. The Company uses
derivatives as hedges, consequently, when the value of the derivative changes, the value
of a corresponding hedged asset or liability will move in the opposite direction. Market
risk is a consideration when changes in the value of the derivative and the hedged item
do not completely offset (correlation or basis risk) which is mitigated by active
measuring and monitoring.
The Company is exposed to credit-related losses in the event of non-performance by
counterparties to financial instruments, but it does not expect any counterparties to fail to
meet their obligations given their high credit rating of 'A' or better. The credit exposure
of interest rate swaps and currency swaps is represented by the fair value of contracts,
aggregated at a counterparty level, with a positive fair value at the reporting date. The
Company has entered into collateral agreements with certain counterparties wherein the
counterparty is required to post assets on the Company's behalf. The posted amount is
equal to the difference between the net positive fair value of the contracts and an agreed
upon threshold that is based on the credit rating of the counterparty. Inversely, if the net
fair value of all contracts with this counterparty is negative, then the Company is required
to post assets.
Instruments: Interest rate swaps are the primary derivative financial instruments used in
the overall asset/liability management process to modify the interest rate characteristics
of the underlying asset or liability. These interest rate swaps generally provide for the
exchange of the difference between fixed and floating rate amounts based on an
underlying notional amount. Typically, no cash is exchanged at the outset of the swap
contract and a single net payment is exchanged at each due date. Swaps that meet hedge
accounting rules are carried in a manner consistent with the hedged item, generally at
amortized cost, on the financial statements. If the swap is terminated prior to maturity,
proceeds are exchanged equal to the fair value of the contract. These gains and losses
may be included in IMR or AVR if the underlying instrument receives that treatment.
Swaps not meeting hedge accounting rules are carried at fair value with fair value
adjustments recorded in unassigned surplus.
Cross currency swaps are utilized to mitigate risks when the Company holds foreign
denominated assets or liabilities therefore converting the asset or liability to a U.S. dollar
(USD) denominated security. These cross currency swap agreements involve the
exchange of two principal amounts in two different currencies at the prevailing currency
TFLIC 2012 SEC
20
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
rate at contract inception. During the life of the swap, the counterparties exchange fixed
or floating rate interest payments in the swapped currencies. At maturity, the principal
amounts are again swapped at a pre-determined rate of exchange. Each asset or liability
is hedged individually where the terms of the swap must meet the terms of the hedged
instrument. For swaps qualifying for hedge accounting, the premium or discount is
amortized into income over the life of the contract and the foreign currency translation
adjustment is recorded as unrealized gain/loss in unassigned surplus. Swaps not meeting
hedge accounting rules are carried at fair value with fair value adjustments recorded in
unassigned surplus. If a swap is terminated prior to maturity, proceeds are exchanged
equal to the fair value of the contract. These gains and losses may be included in IMR or
AVR if the hedged instrument receives that treatment.
Futures contracts are used to hedge the liability risk associated when the Company issues
products providing the customer a return based on various global market indices. Futures
are marked to market on a daily basis whereby a cash payment is made or received by the
Company. These payments are recognized as realized gains or losses in the financial
statements.
The Company may purchase foreign denominated assets or issue foreign denominated
liabilities and use forward rate agreements to hedge foreign currency risk associated with
these products. These forward agreements are marked to the current forward rate on the
financial statements and cash payments and/or receipts are recognized as realized gains
or losses.
A replication transaction is a derivative transaction entered into in conjunction with a
cash instrument to reproduce the investment characteristics of an otherwise permissible
investment. The Company replicates investment grade corporate bonds by combining a
highly rated security as a cash component with a credit default swap which, in effect,
converts the high quality asset into a lower rated investment grade asset. The benefits of
using the swap market to replicate credit include possible enhanced relative values as
well as ease of executing larger transactions in a shortened time frame. Generally, a
premium is received by the Company on a periodic basis and recognized in investment
income. In the event the representative issuer defaults on its debt obligation referenced
in the contract, a payment equal to the notional amount of the contract will be made by
the Company and recognized as a capital loss. Generally these swaps are carried at
amortized cost with periodic interest payments beginning at a future date. Any early
terminations are recognized as capital gains or losses. The Company complies with the
specific rules established in AVR for replication transactions.
Separate Accounts
The majority of the separate accounts held by the Company represent funds which are
administered for pension plans. The assets in the managed separate accounts consist of
TFLIC 2012 SEC
21
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
common stock, long-term bonds, real estate and short-term investments. The nonmanaged separate accounts are invested by the Company in a corresponding portfolio of
Diversified Investors Portfolios. The portfolios are registered under the Investment
Company Act of 1940, as amended, as open-ended, diversified, management investment
companies.
Except for some guaranteed separate accounts, which are carried at amortized cost, the
assets are carried at fair value, and the investment risks associated with fair value
changes are borne entirely by the policyholder. Some of the guaranteed separate
accounts provide a guarantee of principal and some include an interest guarantee of 4%
or less, so long as the contract is in effect. Separate account asset performance less than
guaranteed requirements is transferred from the general account and reported in the
statements of operations.
Assets held in trust for purchases of separate account contracts and the Company’s
corresponding obligation to the contract owners are shown separately in the balance
sheets. Income and gains and losses with respect to these assets accrue to the benefit of
the contract owners and, accordingly, the operations of the separate accounts are not
included in the accompanying financial statements. The Company received variable
contract premiums of $4,163,452, $4,218,991 and $4,117,105, in 2012, 2011 and 2010,
respectively. In addition, the Company received $125,160, $114,076 and $92,604, in
2012, 2011 and 2010, respectively, related to fees associated with investment
management, administration and contractual guarantees for separate accounts.
Aggregate Reserves for Policies and Contracts
Life, annuity and accident and health benefit reserves are developed by actuarial methods
and are determined based on published tables using statutorily specified interest rates and
valuation methods that will provide, in the aggregate, reserves that are greater than or
equal to the minimum or guaranteed cash value, or the amount required by law.
The Company waives deduction of deferred fractional premiums upon death of the
insured and returns any portion of the final premium for periods beyond the date of death.
The aggregate policy reserves for life insurance policies are based principally upon the
1941, 1958, 1980 and 2001 Commissioners’ Standard Ordinary Mortality Tables. The
reserves are calculated using interest rates ranging from 2.00 to 6.00 percent and are
computed principally on the Net Level Premium Valuation and the Commissioner’s
Reserve Valuation Method. Reserves for universal life policies are based on account
balances adjusted for the Commissioner’s Reserve Valuation Method.
Additional premiums are charged or additional mortality charges are assessed for policies
issued on substandard lives according to underwriting classification. Generally, mean
TFLIC 2012 SEC
22
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
reserves are determined by computing the regular mean reserve for the plan at the true
age and holding, in addition, one-half (1/2) of the extra premium charge for the year. For
certain flexible premium and fixed premium universal life insurance products, reserves
are calculated utilizing the Commissioner’s Reserve Valuation Method for universal life
policies and recognizing any substandard ratings.
Deferred annuity reserves are calculated according to the Commissioner’s Annuity
Reserve Valuation Method including excess interest reserves to cover situations where
the future interest guarantees plus the decrease in surrender charges are in excess of the
maximum valuation rates of interest. Reserves for immediate annuities and
supplementary contracts with and without life contingencies are equal to the present
value of future payments assuming interest rates ranging from 3.50 to 11.00 percent and
mortality rates, where appropriate, from a variety of tables.
Annuity reserves also include guaranteed interest contracts (GICs) and funding
agreements classified as life-type contracts as defined in SSAP No. 50, Classifications
and Definitions of Insurance or Managed Care Contracts In Force. These liabilities
have annuitization options at guaranteed rates and consist of floating interest rate and
fixed interest rate contracts. The contract reserves are carried at the greater of the account
balance or the value as determined for an annuity with a cash settlement option, on a
change in fund basis, according to the Commissioner’s Annuity Reserve Valuation
Method.
Accident and health policy reserves are equal to the greater of the gross unearned
premiums or any required mid-terminal reserves plus net unearned premiums and the
present value of amounts not yet due on both reported and unreported claims.
Tabular interest, tabular less actual reserves released and tabular cost have been
determined by formula. On group annuity deposit funds not involving life contingencies,
tabular interest has been determined by adjusting the interest credited to group annuity
deposits. On other funds not involving life contingencies, tabular interest has been
determined by formula.
During 2011, the Company implemented a new actuarial valuation system, ARCVAL.
This system allows for a more accurate calculation of continuous reserves and the use of
select factors in calculating deficiency reserves. As a result of implementing the new
system, the Company recorded a decrease in deficiency and non-deduction reserves of
$520, which had a corresponding adjustment to unassigned surplus.
During 2010, the Company reported an increase in reserves on account of changes in
valuation bases of $3,001. One of the Company's operating divisions converted from a
spreadsheet-based balance rollforward method of valuation of single premium group
annuity (SPGA) products to a seriatim valuation using a software package capable of
TFLIC 2012 SEC
23
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
making these calculations. This change in valuation process resulted in an increase in
reserves of $1,144. The remaining $1,857 increase in reserves corresponds to continued
enhancements to existing valuation platforms as well as ongoing efforts to convert from
client based reserves to in-house seriatim calculations using the Prophet valuation system
in another of the Company’s operating divisions. Related to this change was a
corresponding decrease in the deferred premium asset of $4,446. The changes in
reserves and deferred premium asset have been charged directly to unassigned surplus.
Policy and Contract Claim Reserves
Claim reserves represent the estimated accrued liability for claims reported to the
Company and claims incurred but not yet reported through the balance sheet date. These
reserves are estimated using either individual case-basis valuations or statistical analysis
techniques. These estimates are subject to the effects of trends in claim severity and
frequency. The estimates are continually reviewed and adjusted as necessary as
experience develops or new information becomes available.
Liability for Deposit-Type Contracts
Deposit-type contracts do not incorporate risk from the death or disability of
policyholders. These types of contracts may include GICs, funding agreements and other
annuity contracts. Deposits and withdrawals on these contracts are recorded as a direct
increase or decrease, respectively, to the liability balance, and are not reported as
premiums, benefits or changes in reserves in the statement of operations.
Premiums and Annuity Considerations
Revenues for policies with mortality or morbidity risk (including annuities with purchase
rate guarantees) consist of the entire premium received and are recognized over the
premium paying periods of the related policies. Considerations received and benefits paid
for annuity policies without mortality or morbidity risk are recorded using deposit
accounting, and recorded directly to an appropriate policy reserve account, without
recognizing premium revenue.
Claims and Claim Adjustment Expense
Liabilities for losses and loss/claim adjustment expenses for accident and health contracts
are estimated using statistical claim development models to develop best estimates of
liabilities for medical expense business and using tabular reserves employing
mortality/morbidity tables and discount rates meeting minimum regulatory requirements
for other business.
TFLIC 2012 SEC
24
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
Activity in the liability for unpaid claims and related processing costs net of reinsurance
is summarized as follows:
Unpaid Claims
Liability
Beginning
of Year
Year ended December 31, 2012
2012
2011 and prior
Active life reserve
Total accident and health
reserves
$
$
–
36,644
36,644
99,571
Claims
Incurred
$
$
Active life reserve
Total accident and health
reserves
$
$
24,865 $
20,127
44,992
25,520
8,323
33,843
103,059
$
136,902
136,215
Unpaid Claims
Liability
Beginning
of Year
Year ended December 31, 2011
2011
2010 and prior
50,385 $
(8,194)
42,191 $
Claims
Paid
–
45,420
45,420
98,202
143,622
Claims
Incurred
$
$
48,561 $
(15,249)
33,312 $
Unpaid Claims
Liability End
of Year
Claims
Paid
Unpaid Claims
Liability End
of Year
22,786 $
19,302
42,088
25,775
10,869
36,644
99,571
$
136,215
The Company’s unpaid claims reserve was decreased by $8,194 and $15,249 for the
years ended December 31, 2012 and 2011, respectively, for health claims that occurred
prior to those balance sheet dates. The change in 2012 and 2011 resulted primarily from
variances in the estimated frequency of claims and claim severity.
The balance in the liability for unpaid accident and health claim adjustment expenses as
of December 31, 2012 and 2011 was $714 and $821, respectively. The Company
incurred $473 and paid $580 of claim adjustment expenses during 2012, of which $264
of the paid amount was attributable to insured or covered events of prior years. The
Company incurred $864 and paid $823 of claim adjustment expenses during 2011, of
which $343 of the paid amount was attributable to insured or covered events of prior
years. The Company did not increase or decrease the provision for insured events of
prior years during 2012 or 2011.
TFLIC 2012 SEC
25
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
Reinsurance
Coinsurance premiums, commissions, expense reimbursements and reserves related to
reinsured business are accounted for on bases consistent with those used in accounting
for the original policies and the terms of the reinsurance contracts. Gains associated with
reinsurance of in force blocks of business are included in unassigned surplus and
amortized into income as earnings emerge on the reinsured block of business. Premiums
ceded and recoverable losses have been reported as a reduction of premium income and
benefits, respectively. Policy liabilities and accruals are reported in the accompanying
financial statements net of reinsurance ceded.
During 2011, the Company entered into a retrocession reinsurance contract and
subsequent novation agreements with respect to each of the unaffiliated retroceded
reinsurance contracts. The retrocession reinsurance contract transferred the Company’s
liabilities to SCOR SE (SCOR), a Societas Europaea organized under the laws of France,
and subsequently facilitated the ultimate novation of third party retrocession reinsurance
contracts in support of the exiting of the reinsurance operations. No additional net
consideration was contemplated upon execution of the novation agreements. Therefore,
the Company had the same net retained risk of zero both prior to and subsequent to the
execution of the novations.
SSAP No. 61, Life, Deposit-Type and Accident and Health Reinsurance, defines novation
agreements as one which extinguishes one entity’s liability and moves it to another
entity, which is applicable under this situation. The retrocession agreement had all
references to the Company removed and replaced with SCOR upon completion of the
novations. SSAP No. 61 does not specifically address novation and releases related to
retrocession agreements, however as both cedents and retrocessionaires in this situation
are a party to the agreement, the intent of the novation and release appears to be
consistent with the application for direct cedents application of the standard. Therefore,
the Company reported the novation and release similar to a novation, as outlined in
paragraphs 53-56 of SSAP No. 61, with direct adjustments to the balance sheet.
Recent Accounting Pronouncements
Effective December 31, 2012, the Company adopted non-substantive revisions to SSAP
No. 86 to require disclosure of embedded credit derivatives within a financial instrument
that expose the holder to the possibility of making future payments, and adopted
guidance from Accounting Standards Update (ASU) 2010-11, Derivatives and Hedging –
Scope Exception Related to Embedded Credit Derivatives, to clarify that seller credit
derivative disclosures do not apply to embedded derivative features related to the transfer
of credit risk that is only in the form of subordination of one financial instrument to
another. The adoption of these revisions had no impact to the Company’s results of
operations or financial position.
TFLIC 2012 SEC
26
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
Effective December 31, 2012, the Company adopted non-substantive revisions to SSAP
No. 86 to move one aspect of the criteria for a hedged forecasted transaction and
incorporate it as criteria for a fair value hedge. The adoption of this revision had no
impact to the Company’s results of operations or financial position.
Effective December 31, 2012, the Company adopted non-substantive revisions to SSAP
No. 27, Disclosure of Information about Financial Instruments with Off-Balance-Sheet
Risk, Financial Instruments with Concentrations of Credit Risk and Disclosures about
Fair Value of Financial Instruments, which clarifies that embedded derivatives, which
are not separately recognized as derivatives under statutory accounting, are included in
the disclosures of financial instruments with off-balance-sheet risk. The adoption of this
revision had no impact to the Company’s results of operations or financial position.
Effective December 31, 2012, the Company adopted non-substantive revisions to SSAP
No. 1, Disclosures of Accounting Policies, Risks and Uncertainties and Other
Disclosures. These revisions require reference to the accounting policy and procedure
footnote that describes permitted or prescribed practices when an individual note is
impacted by such practices. The adoption of this requirement had no impact to the
Company’s results of operation or financial position, but did require additional
disclosures. See Note 8 Policy and Contract Attributes for further details.
Effective January 1, 2012, the Company adopted revisions to SSAP No. 100, Fair Value
Measurements (SSAP No. 100). These revisions require new disclosures of fair value
hierarchy and the method used to obtain the fair value measurement, a new footnote that
summarizes hierarchy levels by type of financial instrument and gross presentation of
purchases, sales, issues and settlements within the reconciliation for fair value
measurements categorized within Level 3 of the hierarchy. The adoption of these
revisions had no impact to the Company’s results of operations or financial position, but
did require additional disclosures. See Note 4 Fair Values of Financial Instruments for
further details.
Effective January 1, 2012, the Company began computing current and deferred income
taxes in accordance with SSAP No. 101. This statement established statutory accounting
principles for current and deferred federal and foreign income taxes and current state
income taxes. The adoption of this statement resulted in the transfer of $27,930 from
Aggregate Write-Ins for Other than Special Surplus Funds to Unassigned Funds and
updates to the Company’s income tax disclosures. See Note 7 Income Taxes for further
details.
For the years ended December 31, 2011 and 2010, the Company adopted SSAP No. 10R,
Income Taxes – Revised, A Temporary Replacement of SSAP No. 10 (SSAP No. 10R).
This statement established statutory accounting principles for current and deferred
TFLIC 2012 SEC
27
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
federal and foreign income taxes and current state income taxes. The SSAP temporarily
superseded SSAP No. 10, Income Taxes. SSAP No. 10R allowed an entity to elect to
admit additional deferred tax assets (DTAs) utilizing a three year loss carryback
provision, plus the lesser of a look-forward of three years on gross DTAs expected to be
realized or 15% of statutory capital and surplus if the entity’s risk-based capital is above
the 250% risk-based capital level where an action level could occur as a result of a trend
test utilizing the old SSAP No. 10 provisions to calculate the DTA. Prior to the adoption
of SSAP No. 10R, the admitted DTA was calculated by taking into consideration a one
year loss carryback and look-forward on gross DTAs that can be expected to be realized
and a 10% capital and surplus limit on the admitted amount of the DTA. The Company
elected to admit additional deferred tax assets pursuant to SSAP No. 10R and as a result,
the cumulative effect of the adoption of this standard was the difference between the
calculation of the admitted DTA per SSAP No.10R and the old SSAP No. 10
methodology at December 31, 2011 and 2010. This change in accounting principle
increased surplus by a net amount of $27,930 and $31,476, respectively, at December 31,
2011 and 2010, which has been recorded within the statements of changes in capital and
surplus.
Effective December 31, 2011, the Company adopted SSAP No. 5R, Liabilities,
Contingencies and Impairments of Assets – Revised. The revisions require the Company
to recognize a liability equal to the greater of (a) the fair value of the guarantee at its
inception, even if the likelihood of payment under the guarantee is remote or (b) the
contingent liability amount required to be recognized if it is probable that a liability has
been incurred at the financial statement date and the amount of loss can reasonably be
determined. While this guidance does not exclude guarantees issued as intercompany
transactions or between related parties from the initial liability recognition requirement,
there are a couple exceptions. Guarantees made to/or on behalf of a wholly-owned
subsidiary and related party guarantees that are considered “unlimited” (for example, in
response to a rating agency’s requirement to provide a commitment to support) are
exempt from the initial liability recognition. Additional disclosures are also required
under this new guidance for all guarantees, whether or not they meet the criteria for
initial liability recognition. The adoption of this new accounting principle had no
material impact to the Company’s results of operations or financial position and did not
require any additional disclosures.
Effective December 31, 2011, the Company adopted non-substantive revisions to SSAP
No. 100 to incorporate the provisions of ASU 2010-06, Improving Disclosures about
Fair Value Measurements. This revision requires, for annual statutory financial
statements only, a new disclosure for assets and liabilities for which fair value is not
measured and reported in the statement of financial position but is otherwise disclosed.
The adoption of these revisions had no impact to the Company’s results of operations or
financial position. See Note 4 for further details.
TFLIC 2012 SEC
28
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
Effective December 31, 2011, the Company adopted non-substantive changes to SSAP
No. 32, Investments in Preferred Stock (including investments in preferred stock of
subsidiary, controlled, or affiliated entities). The amendment was made to clarify the
definition of preferred stock. Under the revised SSAP No. 32, a preferred stock is
defined as any class or series of shares the holders of which have any preference, either
as to the payment of dividends or distribution of assets on liquidation, over the holder of
common stock [as defined in SSAP No. 30, Investments in Common Stock (excluding
investments in common stock of subsidiary, controlled, or affiliated entities)] issued by
an entity. This revised definition had no impact to the Company.
Effective January 1, 2011, the Company adopted SSAP No. 35R, Guaranty Fund and
Other Assessments – Revised. This statement modified the conditions required for
recognizing a liability for insurance-related assessments and required additional
disclosures. See Note 14 for disclosures related to guaranty fund assessments. The
adoption of this accounting principle had no financial impact to the Company.
Effective January 1, 2011, the Company adopted revisions to certain paragraphs of SSAP
No. 43R, Loan-backed and Structured Securities to clarify the accounting for gains and
losses between AVR and IMR. The revisions clarify that an AVR/IMR bifurcation
analysis should be preformed when SSAP No. 43R securities are sold (not just as a result
of impairment). These changes were applied on a prospective basis and had no financial
impact to the Company upon adoption.
Effective January 1, 2011, the Company adopted revisions to SSAP No. 43R to clarify
the definitions of loan-backed and structured securities. The clarified guidance was
applied prospectively and had no financial impact to the Company upon adoption.
Effective December 31, 2010, the Company adopted modifications made to SSAP No.
91R, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities. The amendments resulted in cash collateral received from counterparties to
derivatives contracts also being reported on the Company’s balance sheet in the
respective asset class in which the cash was reinvested (short-term investments and
bonds). A separate liability was established to record the obligation to return the cash
collateral (Payable for derivative cash collateral). These balances were recorded on the
Company’s balance sheet effective January 1, 2010 and resulted in an increase to assets
of $37,735, an increase to liabilities of $37,134 and a net increase to surplus of $601.
Effective January 1, 2013, the Company will adopt SSAP No. 92, Postretirement
Benefits Other Than Pensions, A Replacement of SSAP No. 14 and SSAP No. 102,
Accounting for Pensions, A Replacement of SSAP No. 89. This guidance impacts
accounting for defined benefit pension plans or other postretirement plans, along with
related disclosures. SSAP No. 102 requires recognition of the funded status of the plan
based on the projected benefit obligation instead of the accumulated benefit obligation as
TFLIC 2012 SEC
29
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
under SSAP No. 89. In addition, SSAP No. 92 and SSAP No. 102 require consideration
of non-vested participants. The adoption of these standards will not impact the
Company’s results of operations, financial position or disclosures as the Company does
not sponsor the pension plan and is not directly liable under the plan. See Note 11 for
further discussion of the Company’s pension plan and other postretirement plans as
sponsored by Aegon.
Effective January 1, 2013, the Company will adopt SSAP No. 103, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities which
adopts with modifications the guidance in ASU 2009-16, Transfers and Servicing (Topic
860): Accounting for Transfers of Financial Assets and supersedes SSAP no. 91R,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. The impact of the adoption of this standard is expected to be immaterial to
the Company.
Effective January 1, 2013, the Company will adopt non-substantive revisions to SSAP
No. 36, Troubled Debt Restructuring. These revisions adopt guidance from ASU 201102, Receivables – A Creditors’ Determination of Whether a Restructuring is a Troubled
Debt Restructuring, which clarifies what constitutes a troubled debt restructuring and
adopts with modification troubled debt restructuring disclosures for creditors from ASU
2010-20: Receivables (Topic 310), Disclosures About the Credit Quality of Financing
Receivables and the Allowance for Credit Losses. The adoption of this revision is not
expected to impact the financial position or results of operations of the Company.
Effective December 31, 2013, the Company will adopt revisions to SSAP No. 35R,
Guaranty Fund and Other Assessments – Revised which incorporates subsequent event
(Type II) disclosures for entities subject to Section 9010 of the Patient Protection and
Affordable Care Act related to assessments payable. The adoption of this revision is not
expected to impact the financial position or results of operations of the Company as
revisions relate to disclosures only.
2. Prescribed and Permitted Statutory Accounting Practices
The New York Department of Financial Services recognizes only statutory accounting
practices prescribed or permitted by the State of New York for determining and reporting
the financial condition and results of operations of an insurance company, and for
determining its solvency under the New York Insurance Law.
The State of New York has adopted a prescribed accounting practice that differs from
that found in the NAIC SAP related to the reported value of the assets supporting the
Company’s guaranteed separate accounts. As prescribed by Section 1414 of the New
York Insurance Law, the Commissioner found that the Company is entitled to value the
assets of the guaranteed separate account at amortized cost, whereas the assets would be
TFLIC 2012 SEC
30
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
required to be reported at fair value under SSAP No. 56, Separate Accounts, of the NAIC
SAP. There is no impact to the Company’s income or surplus as a result of utilizing this
prescribed practice.
3. Accounting Changes and Correction of Errors
During 2012, the Company determined that the model used for a particular guaranteed
minimum withdrawal benefit product was not appropriately calculating the correct
policyholder benefit guarantee values which are used when determining benefit reserves.
The correction of this error resulted in an increase in the reserves associated with this
product in the amount of $19,946 as of December 31, 2011, and is presented as a separate
charge in capital and surplus within the statement of changes in capital and surplus.
The Company incorrectly calculated the mortgages component of the AVR as of
December 31, 2010. The maximum Mortgage Experience Adjustment Factor (MEAF)
was used in the calculation when lower factors should have been used. As a result, the
AVR balance was overstated by $6,248. This was corrected in 2011, and the Company
reflected the surplus impact of the correction as a separate change in unassigned surplus
within the statement of changes in capital and surplus.
During 2011, the Company determined that too many contracts were novated to TLIC, an
affiliated company, in a reinsurance transaction that was effective January 1, 2010.
Correcting this error resulted in a reduction in the initial gain recognized on the novation
of $7,765, partially offset by an adjustment to the statement of operations for retention of
the policies that should have been retained by the Company of $5,175. The net amount
of $2,590 is reflected as a separate change in unassigned surplus within the statement of
changes in capital and surplus.
4. Fair Values of Financial Instruments
The fair value of a financial instrument is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the
measurement date.
Determination of fair value
The fair values of financial instruments are determined by management after taking into
consideration several sources of data. When available, the Company uses quoted market
prices in active markets to determine the fair value of its investments. The Company’s
valuation policy utilizes a pricing hierarchy which dictates that publicly available prices
are initially sought from indices and third-party pricing services. In the event that pricing
is not available from these sources, those securities are submitted to brokers to obtain
quotes. Lastly, securities are priced using internal cash flow modeling techniques. These
TFLIC 2012 SEC
31
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
valuation methodologies commonly use reported trades, bids, offers, issuer spreads,
benchmark yields, estimated prepayment speeds, and/or estimated cash flows.
To understand the valuation methodologies used by third-party pricing services, the
Company reviews and monitors their applicable methodology documents. Any changes
to their methodologies are noted and reviewed for reasonableness. In addition, the
Company performs in-depth reviews of prices received from third-party pricing services
on a sample basis. The objective for such reviews is to demonstrate that the Company
can corroborate detailed information such as assumptions, inputs and methodologies used
in pricing individual securities against documented pricing methodologies. Only thirdparty pricing services and brokers with a substantial presence in the market and with
appropriate experience and expertise are used.
Each month, the Company performs an analysis of the information obtained from indices,
third-party services, and brokers to ensure that the information is reasonable and
produces a reasonable estimate of fair value. The Company considers both qualitative
and quantitative factors as part of this analysis, including but not limited to, recent
transactional activity for similar securities, review of pricing statistics and trends, and
consideration of recent relevant market events. Other controls and procedures over
pricing received from indices, third-party pricing services, or brokers include validation
checks such as exception reports which highlight significant price changes, stale prices or
un-priced securities.
Fair value hierarchy
The Company's financial assets and liabilities carried at fair value are classified, for
disclosure purposes, based on a hierarchy defined by SSAP No. 100. The hierarchy gives
the highest ranking to fair values determined using unadjusted quoted prices in active
markets for identical assets and liabilities (Level 1), and the lowest ranking to fair values
determined using methodologies and models with unobservable inputs (Level 3). An
asset’s or a liability’s classification is based on the lowest level input that is significant to
its measurement. For example, a Level 3 fair value measurement may include inputs that
are both observable (Levels 1 and 2) and unobservable (Level 3). The levels of the fair
value hierarchy are as follows:
Level 1 - Unadjusted quoted prices for identical assets or liabilities in active
markets accessible at the measurement date.
Level 2 - Quoted prices in markets that are not active or inputs that are
observable either directly or indirectly for substantially the full term of
the asset or liability. Level 2 inputs include the following:
a) Quoted prices for similar assets or liabilities in active markets
TFLIC 2012 SEC
32
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
b) Quoted prices for identical or similar assets or liabilities in nonactive markets
c) Inputs other than quoted market prices that are observable
d) Inputs that are derived principally from or corroborated by
observable market data through correlation or other means
Level 3 - Prices or valuation techniques that require inputs that are both
unobservable and significant to the overall fair value measurement.
They reflect the Company’s own assumptions about the assumptions a
market participant would use in pricing the asset or liability.
The following methods and assumptions were used by the Company in estimating its fair
value disclosures for financial instruments:
Cash Equivalents and Short-Term Investments: The carrying amounts reported in the
accompanying balance sheets for these financial instruments approximate their fair
values. Cash is not included in the below tables.
Short-Term Notes Receivable from Affiliates: The carrying amounts reported in the
accompanying balance sheets for these financial instruments approximate their fair value.
Bonds and Stocks: The NAIC allows insurance companies to report the fair value
determined by the SVO or to determine the fair value by using a permitted valuation
method. The fair values of bonds and stocks are reported or determined using the
following pricing sources: indexes, third party pricing services, brokers, external fund
managers and internal models.
Fair values for fixed maturity securities (including redeemable preferred stock) actively
traded are determined from third-party pricing services, which are determined as
discussed above in the description of level one and level two values within the fair value
hierarchy. For fixed maturity securities (including redeemable preferred stock) not
actively traded, fair values are estimated using values obtained from third-party pricing
services, or are based on non-binding broker quotes or internal models. In the case of
private placements, fair values are estimated by discounting the expected future cash
flows using current market rates applicable to the coupon rate, credit and maturity of the
investments.
Mortgage Loans on Real Estate: The fair values for mortgage loans on real estate are
estimated utilizing discounted cash flow analyses, using interest rates reflective of current
market conditions and the risk characteristics of the loans.
Other Invested Assets: The fair values for other invested assets, which include
investments in surplus notes issued by other insurance companies and fixed or variable
TFLIC 2012 SEC
33
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
rate investments with underlying characteristics of bonds, were determined primarily by
using indexes, third party pricing services and internal models.
Derivative Financial Instruments: The estimated fair values of interest rate caps and
options are based upon the latest quoted market price at the balance sheet date. The
estimated fair values of swaps, including interest rate and currency swaps, are based on
pricing models or formulas using current assumptions. The estimated fair value of credit
default swaps are based upon the pricing differential as of the balance sheet date for
similar swap agreements.
Policy Loans: The fair value of policy loans is equal to the book value of the loan, which
is stated at unpaid principal balance.
Securities Lending Reinvested Collateral: The cash collateral from securities lending is
reinvested in various short-term and long-term debt instruments. The fair values of these
investments are determined using the methods described above under Cash, Cash
Equivalents and Short-Term Investments and Bonds and Stocks.
Receivable From/Payable to Parents, Subsidiaries and Affiliates: The carrying amount of
receivable from/payable to affiliates approximates their fair value.
Separate Account Assets and Annuity Liabilities: The fair value of separate account
assets are based on quoted market prices when available. When not available, they are
primarily valued either using third party pricing services or are valued in the same
manner as the general account assets as further described in this note. However, some
separate account assets are valued using non-binding broker quotes, which cannot be
corroborated by other market observable data, or internal modeling which utilizes input
that are not market observable. The fair value of separate account annuity liabilities is
based on the account value for separate accounts business without guarantees. For
separate accounts with guarantees, fair value is based on discounted cash flows.
Investment Contract Liabilities: Fair value for the Company's liabilities under
investment contracts, which include deferred annuities and GICs, are estimated using
discounted cash flow calculations. For those liabilities that are short in duration, carrying
amount approximates fair value. For investment contracts with no defined maturity, fair
value is estimated to be the present surrender value.
Deposit-Type Contracts: The carrying amounts of deposit-type contracts reported in the
accompanying balance sheets approximate their fair values.
Surplus Notes: Fair values for surplus notes are estimated using a discounted cash flow
analysis based on the Company’s current incremental borrowing rate for similar types of
borrowing arrangements.
TFLIC 2012 SEC
34
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
The Company accounts for its investments in affiliated common stock using the equity
method of accounting; as such, they are not included in the following disclosures as they
are not carried at fair value on the balance sheets.
Fair values for the Company’s insurance contracts other than investment-type contracts
(including separate account universal life liabilities) are not required to be disclosed.
However, the fair values of liabilities under all insurance contracts are taken into
consideration in the Company’s overall management of interest rate risk, such that the
Company’s exposure to changing interest rates is minimized through the matching of
investment maturities with amounts due under insurance contracts.
TFLIC 2012 SEC
35
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
The following tables set forth a comparison of the estimated fair values and carrying
amounts of the Company’s financial instruments, including those not measured at fair
value in the balance sheets, as of December 31, 2012 and 2011, respectively:
December 31
2012
Estimated
Fair Value
Admitted assets
Cash equivalents and short-term
investments, other than affiliates
Short-term notes receivable from affiliates
Bonds
Preferred stocks, other than affiliates
Common stocks, other than affiliates
Mortgage loans on real estate
Other invested assets
Interest rate swaps
Currency swaps
Credit default swaps
Foreign currency forward
Policy loans
Securities lending reinvested collateral
Receivable from parent, subsidiaries
and affiliates
Separate account assets
Liabilities
Investment contract liabilities
Interest rate swaps
Currency swaps
Credit default swaps
Foreign currency forward
Separate account annuity liabilities
Surplus notes
TFLIC 2012 SEC
$
528,981
54,700
8,191,209
2,241
5,113
581,335
20,653
39,746
142
3,083
883
60,041
257,972
Admitted
Assets
$
528,981
54,700
7,413,206
1,573
5,113
544,544
19,088
39,331
–
1,399
883
60,041
258,143
(Level 1)
$
(Level 2)
–
–
726,198
–
3,111
–
–
–
–
–
–
–
–
$
528,981
54,700
7,397,594
2,241
–
–
20,653
39,746
142
3,083
883
60,041
257,972
(Level 3)
$
–
–
67,417
–
2,002
581,335
–
–
–
–
–
–
–
Not
Practicable
(Carrying
Value)
$
–
–
–
–
–
–
–
–
–
–
–
–
–
87,032
17,781,262
87,032
17,590,145
–
7,982,621
87,032
9,726,976
–
71,665
–
–
5,989,132
7,024
–
2,946
1,233
17,231,486
167,085
5,953,575
5,575
153
5,743
1,233
17,204,274
150,000
–
–
–
–
–
–
–
3,481,554
7,024
–
2,946
1,233
9,936,870
–
2,507,578
–
–
–
–
7,294,616
167,085
–
–
–
–
–
–
–
36
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
December 31
2011
Carrying
Estimated
Amount
Fair Value
Admitted assets
Cash equivalents and short-term
investments, other than affiliates
Bonds
Preferred stocks, other than affiliates
Common stocks, other than affiliates
Mortgage loans on real estate
Other invested assets
Interest rate swaps
Currency swaps
Credit default swaps
Foreign currency forward
Policy loans
Securities lending reinvested collateral
Receivable from parent, subsidiaries
and affiliates
Separate account assets
Liabilities
Investment contract liabilities
Interest rate swaps
Currency swaps
Credit default swaps
Foreign currency forward
Payable to parent, subsidiaries
and affiliates
Separate account annuity liabilities
Surplus notes
TFLIC 2012 SEC
$
142,223
7,790,711
2,228
4,191
625,301
14,744
121,627
100
972
1,112
55,858
476,053
$
142,223
8,348,251
2,328
4,191
667,472
15,145
121,627
876
574
1,112
55,858
475,551
21,243
15,878,424
21,243
15,724,263
6,196,281
1,705
1,059
1,849
100
6,145,948
2,755
–
2,611
100
22,062
15,271,223
150,000
22,062
15,413,213
147,380
37
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
The following tables provide information about the Company’s financial assets and
liabilities measured at fair value as of December 31, 2012 and 2011:
2012
Level 1
Assets:
Bonds
Industrial and miscellaneous
Total bonds
Common stock
Industrial and miscellaneous
Total common stock
Short-term investments
Government
Industrial and miscellaneous
Money market mutual fund
Intercompany notes
Sweep account
Total short-term
Derivative assets
Separate account assets
Total assets at fair value
Liabilities:
Derivative liabilities
Total liabilites at fair value
TFLIC 2012 SEC
$
Level 2
–
–
$
Level 3
6,412
6,412
$
Total
11,390
11,390
$
17,802
17,802
3,111
3,111
–
–
2,002
2,002
5,113
5,113
$
–
–
–
–
–
–
–
7,982,621
7,985,732
1
446,681
82,102
54,700
196
583,680
34,734
2,388,209
$ 3,013,035
$
–
–
–
–
–
–
–
–
13,392
1
446,681
82,102
54,700
196
583,680
34,734
10,370,830
$ 11,012,159
$
$
–
–
$
$
$
$
–
–
350
350
$
$
350
350
38
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
2011
Level 1
Assets:
Bonds
Industrial and miscellaneous
Total bonds
Common stock
Industrial and miscellaneous
Total common stock
$
Level 2
–
–
$
Level 3
10,905
10,905
$
Total
10,978
10,978
$
21,883
21,883
695
695
–
–
3,496
3,496
4,191
4,191
Government
–
1
–
1
Industrial and miscellaneous
–
73,992
–
73,992
Money market mutual fund
–
68,230
–
68,230
–
142,223
–
142,223
–
121,934
–
121,934
6,314,601
2,668,010
–
8,982,611
$
6,315,296
$ 2,943,072
$
14,474
$
9,272,842
$
$
–
–
$
$
$
$
–
–
$
$
75
75
Short-term investments
Total short-term
Derivative assets
Separate account assets
Total assets at fair value
Liabilities:
Derivative liabilities
Total liabilites at fair value
75
75
Bonds classified in Level 2 are valued using inputs from third party pricing services or
broker quotes. Level 3 measurements for bonds are primarily those valued using nonbinding broker quotes, which cannot be corroborated by other market observable data, or
internal modeling which utilize inputs that are not market observable.
Common stock in Level 3 is comprised primarily of warrants valued using broker quotes.
Short-term investments are classified as Level 2 as they are carried at amortized cost,
which approximates fair value.
Derivatives classified as Level 2 represent over-the-counter (OTC) contracts valued using
pricing models based on the net present value of estimated future cash flows, directly
observed prices from exchange-traded derivatives, other OTC trades or external pricing
services.
Separate account assets in Level 2 are valued using inputs from third party pricing
services or are valued and classified in the same way as general account assets (described
above).
During 2012 and 2011, there were no transfers between Level 1 and 2, respectively.
TFLIC 2012 SEC
39
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
The following tables summarize the changes in assets classified in Level 3 for 2012 and
2011:
Balance at
January 1,
2012
Bonds
RMBS
Other
Common stock
Total
$
Transfers
into
Level 3
1,076
9,902
3,496
14,474
$
$
Purchases
Bonds
RMBS
Other
Common stock
Total
$
$
$
$
3,641
12,225
4,131
19,997
Purchases
Bonds
RMBS
Other
Common stock
Total
$
$
605
–
–
605
$
$
$
17
–
–
17
$
$
Issuances
– $
–
–
– $
–
–
–
–
Settlements
$
165
–
63
228
$
$
$
$
$
723
10,667
2,002
13,392
Total Gains
and (Losses)
Included in
Surplus (b)
(444) $
(591)
–
(1,035) $
Settlements
–
–
–
–
Balance at
December 31,
2012
Total Gains
and (Losses)
Included in
Net income (a)
Sales
$
979
2,165
(1,494)
1,650
365 $
1,737
–
2,102 $
$
Transfers
out of
Level 3
Total Gains
and (Losses)
Included in
Surplus (b)
(1,599) $
337
–
(1,262) $
$
–
–
–
–
$
Transfers
into
Level 3
$
$
Sales
–
–
–
–
$
Balance at
January 1,
2011
Bonds
RMBS
Other
Common stock
Total
$
Issuances
–
–
–
–
$
1,237
–
–
1,237
$
Total Gains
and (Losses)
Included in
Net income (a)
Transfers
out of
Level 3
(1,339)
526
(572)
(1,385)
Balance at
December 31,
2011
634 $
2,258
–
2,892 $
1,076
9,902
3,496
14,474
(a) Recorded as a component of Net Realized Capital Gains/Losses on Investments in
the Statements of Operations
TFLIC 2012 SEC
40
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
(b) Recorded as a component of Change in Net Unrealized Capital Gains/Losses in the
Statements of Changes in Capital and Surplus
The Company’s policy is to recognize transfers in and out of levels as of the beginning of
the reporting period.
Transfers in for bonds were attributable to securities being valued using third party
vendor inputs at December 31, 2011, subsequently changing to being internally modeled,
thus causing the transfer into Level 3 during 2012. In addition, transfers in for bonds
were a result of securities being carried at amortized cost at December 31, 2010,
subsequently changing to being carried at fair value during 2011.
Transfers out for bonds were the result of securities being valued using internal models at
December 31, 2011, subsequently changing to being valued using vendor inputs during
2012. In addition, transfers out for bonds were attributed to securities being carried at
fair value at December 31, 2011 and 2010, subsequently changing to being carried at
amortized cost during 2012 and 2011, respectively.
Transfers out for common stock were attributed to securities being valued using broker
quotes which utilize unobservable inputs at December 31, 2010, subsequently changing
to being valued using third party vendor inputs during 2011.
TFLIC 2012 SEC
41
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
5. Investments
The carrying amounts and estimated fair value of investments in bonds and preferred
stocks are as follows:
Carrying
Amount
December 31, 2012
Unaffiliated bonds:
United States Government and
agencies
State, municipal and other
government
Hybrid securities
Industrial and miscellaneous
Mortgage and other asset-backed
securities
Unaffiliated preferred stocks
$
612,515
Unaffiliated preferred stocks
Gross
Unrealized
Losses less
Than 12
Months
$
$
$
101,850
–
1
Estimated
Fair
Value
$
714,364
168,249
92,265
5,005,463
20,558
7,277
583,125
8,472
10,909
1,170
–
–
3,833
180,335
88,633
5,583,585
1,534,714
7,413,206
1,573
$ 7,414,779
114,427
827,237
1,049
828,286
23,912
44,463
381
44,844
937
4,771
–
4,771
1,624,292
8,191,209
2,241
$ 8,193,450
Gross
Unrealized
Gains
Gross
Unrealized
Losses 12
Months or
More
Gross
Unrealized
Losses less
Than 12
Months
Estimated
Fair
Value
$
$
$
$
Carrying
Amount
December 31, 2011
Unaffiliated bonds:
United States Gove rnment and
agencies
State, municipal and other
government
Hybrid securities
Industrial and miscellaneous
Mortgage and other asset-backed
securities
Gross
Unrealized
Gains
Gross
Unrealized
Losses 12
Months or
More
$
476,452
$
96,860
$
–
$
–
573,312
144,322
105,243
5,198,132
13,320
2,030
475,864
9,691
16,896
8,679
2,935
552
14,785
145,016
89,825
5,650,532
1,866,562
7,790,711
2,228
$ 7,792,939
76,197
664,271
724
664,995
51,384
86,650
517
87,167
1,809
20,081
107
20,188
1,889,566
8,348,251
2,328
$ 8,350,579
$
$
$
At December 31, 2012 and 2011, respectively, for bonds and preferred stocks that have
been in a continuous loss position for greater than or equal to twelve months, the
Company held 80 and 132 securities with a carrying amount of $266,840 and $536,070
TFLIC 2012 SEC
42
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
and an unrealized loss of $44,844 and $87,167 with an average price of 83.2 and 83.7
(fair value/amortized cost). Of this portfolio, 48.05% and 67.39% were investment grade
with associated unrealized losses of $20,046 and $47,520, respectively.
At December 31, 2012 and 2011, respectively, for bonds and preferred stocks that have
been in a continuous loss position for less than twelve months, the Company held 55 and
124 securities with a carrying amount of $234,770 and $500,725 and an unrealized loss
of $4,771 and $20,188 with an average price of 98.0 and 96.0 (fair value/amortized cost).
Of this portfolio, 76.98% and 85.67% were investment grade with associated unrealized
losses of $3,649 and $13,131, respectively.
At December 31, 2012 and 2011, the Company did not hold any common stocks that had
been in a continuous loss position for greater than or equal to twelve months.
At December 31, 2012, for common stocks that have been in a continuous loss position
for less than twelve months, the Company held 3 securities with a cost of $3,145 and
unrealized loss of $33 with an average price of 99.0 (fair value/cost). At December 31,
2011, the Company did not hold any common stocks that had been in a continuous loss
position for less than twelve months.
The estimated fair value of bonds, preferred stocks and common stocks with gross
unrealized losses at December 31, 2012 and 2011 is as follows:
Losses 12
Months or
More
Losses Less
Than 12
Months
Total
December 31, 2012
Unaffiliated bonds:
United States government and agencies
State, municipal and other government
Hybrid securities
Industrial and miscellaneous
Mortgage and other asset-backed securities
$
Unaffiliated preferred stocks
Unaffiliated common stocks
$
TFLIC 2012 SEC
–
36,512
22,250
17,474
145,029
221,265
731
–
221,996
$
1,863
$
–
$
–
172,884
55,252
229,999
–
3,112
233,111
$
1,863
36,512
22,250
190,358
200,281
451,264
731
3,112
455,107
43
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
Losses 12
Months or
More
Losses Less
Than 12
Months
Total
December 31, 2011
Unaffiliated bonds:
State, municipal and other government
Hybrid securities
Industrial and miscellaneous
Mortgage and other asset-backed securities
$
Unaffiliated preferred stocks
$
20,627
28,538
91,134
308,010
448,309
594
448,903
$
$
14,382
37,007
344,263
84,397
480,049
488
480,537
$
$
35,009
65,545
435,397
392,407
928,358
1,082
929,440
The carrying amount and estimated fair value of bonds at December 31, 2012, by
contractual maturity, is shown below. Expected maturities may differ from contractual
maturities because certain borrowers have the right to call or prepay obligations with or
without call or prepayment penalties.
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage and other asset-backed securities
Carrying
Amount
$
234,640
2,244,853
2,135,732
1,263,267
5,878,492
1,534,714
$ 7,413,206
Estimated
Fair
Value
$
240,499
2,448,799
2,361,728
1,515,891
6,566,917
1,624,292
$ 8,191,209
For impairment policies related to non-structured and structured securities, refer to Note
1 under Investments.
Subprime Mortgages
At December 31, 2012, the Company’s asset-backed securities (ABS) subprime
mortgages portfolio had investments in an unrealized loss position which had a fair value
of $74,656 and a carrying value of $84,691, resulting in a gross unrealized loss of
$10,035. The unrealized loss in the sector is primarily a result of the housing downturn
the United States has experienced since 2007. Even with the stabilization over the past
two years, fundamentals in ABS subprime mortgages continue to be weak, which impacts
the magnitude of the unrealized loss. Delinquencies and severities in property
liquidations remain at an elevated level, while prepayments remain at historically low
levels. Due to the weak fundamental situation, reduced liquidity and the requirement for
TFLIC 2012 SEC
44
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
higher yields due to market uncertainty, credit spreads remain elevated across the asset
class.
The Company does not currently invest in or originate whole loan residential mortgages.
The Company categorizes ABS issued by a securitization trust as having subprime
mortgage exposure when the average credit score of the underlying mortgage borrowers
in a securitization trust is below 660 at issuance. The Company also categorizes ABS
issued by a securitization trust with second lien mortgages as subprime mortgage
exposure, even though a significant percentage of second lien mortgage borrowers may
not necessarily have credit scores below 660 at issuance. The Company does not have
any “direct” residential mortgages to subprime borrowers outside of the ABS structures.
All ABS subprime mortgage securities are monitored and reviewed on a monthly basis.
Detailed cash flow models using the current collateral pool and capital structure on the
portfolio are reviewed quarterly. Model output is generated under base and stress-case
scenarios. The Company’s internal ABS-housing asset specialists utilize widely
recognized industry modeling software to perform a loan-by-loan, bottom-up approach to
modeling. Key assumptions used in the models are projected defaults, loss severities and
prepayments. Each of these key assumptions varies greatly based on the significantly
diverse characteristics of the current collateral pool for each security. Loan-to-value, loan
size and borrower credit history are some of the key characteristics used to determine the
level of assumption that is utilized. Defaults were estimated by identifying the loans that
are in various delinquency buckets and defaulting a certain percentage of them over the
near-term and long-term. Assumed defaults on delinquent loans are dependent on the
specific security’s collateral attributes and historical performance.
Loss severity assumptions were determined by observing historical rates from broader
market data and by adjusting those rates for vintage specific pool performance, collateral
type, mortgage insurance and estimated loan modifications. Prepayments were estimated
by examining historical averages of prepayment activity on the underlying collateral.
Once the entire pool is modeled, the results are closely analyzed by the Company’s
internal asset specialist to determine whether or not the particular tranche or holding is at
risk for not collecting all contractual cash flows, taking into account the seniority and
other terms of the tranches held.
If cash flow models indicate a credit event will impact future cash flows and the
Company does not have the intent to sell the tranche or holding and does have the intent
and ability to hold the security, the security is impaired to discounted cash flows. As the
remaining unrealized losses in the ABS subprime mortgage portfolio relate to holdings
where the Company expects to receive full principal and interest, the Company does not
consider the underlying investments to be impaired as of December 31, 2012.
TFLIC 2012 SEC
45
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
Residential Mortgage-Backed Securities (RMBS) Sector
At December 31, 2012, the Company’s RMBS sector portfolio had investments in an
unrealized loss position which had a fair value of $40,998 and a carrying value of
$47,369, resulting in a gross unrealized loss of $6,371. RMBS are securitizations of
underlying pools of residential mortgages on real estate. The underlying residential
mortgages have varying credit ratings and are pooled together and sold in tranches. The
Company’s RMBS portfolio includes prime jumbo pass-throughs and collateralized
mortgage obligations (CMOs), Alt-A RMBS, negative amortization RMBS and reverse
mortgage RMBS. The unrealized loss in the sector is primarily a result of the housing
downturn the United States has experienced since 2007. Even with the stabilization over
the past two years, fundamentals in RMBS continue to be weak, which impacts the
magnitude of the unrealized loss. Delinquencies and severities in property liquidations
remain at an elevated level, while prepayments remain at historically low levels. Due to
the weak fundamental situation, reduced liquidity and the requirement for higher yields
due to market uncertainty, credit spreads remain elevated across the asset class.
All RMBS securities of the Company are monitored and reviewed on a monthly basis.
Detailed cash flow models using the current collateral pool and capital structure on the
portfolio are updated and reviewed quarterly. Model output is generated under base and
stress-case scenarios. The Company’s internal RMBS asset specialists utilize widely
recognized industry modeling software to perform a loan-by-loan, bottom-up approach to
modeling. Key assumptions used in the models are projected defaults, loss severities and
prepayments. Each of these key assumptions varies greatly based on the significantly
diverse characteristics of the current collateral pool for each security. Loan-to-value, loan
size and borrower credit history are some of the key characteristics used to determine the
level of assumption that is utilized. Defaults were estimated by identifying the loans that
are in various delinquency buckets and defaulting a certain percentage of them over the
near-term and long-term. Assumed defaults on delinquent loans are dependent on the
specific security’s collateral attributes and historical performance.
Loss severity assumptions were determined by obtaining historical rates from broader
market data and by adjusting those rates for vintage, specific pool performance, collateral
type, mortgage insurance and estimated loan modifications. Prepayments were estimated
by examining historical averages of prepayment activity on the underlying collateral.
Once the entire pool is modeled, the results are closely analyzed by the Company’s
internal asset specialists to determine whether or not the particular tranche or holding is
at risk for not collecting all contractual cash flows, taking into account the seniority and
other terms of the tranches held.
If cash flow models indicate a credit event will impact future cash flows and the
Company does not have the intent to sell the tranche or holding and does have the intent
and ability to hold the security, the security is impaired to discounted cash flows. As the
TFLIC 2012 SEC
46
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
remaining unrealized losses in the RMBS portfolio relate to holdings where the Company
expects to receive full principal and interest, the Company does not consider the
underlying investments to be impaired as of December 31, 2012.
There were no loan-backed securities with a recognized other-than-temporary
impairment (OTTI) due to intent to sell or lack of intent and ability to hold during the
year ended December 31, 2012. The following tables provide the aggregate totals for
loan-backed securities with a recognized OTTI due to intent to sell or lack of intent and
ability to hold, in which the security is written down to fair value.
Amortized Cost
Basis Before OTTI
OTTI Recognized in Loss
Interest
Non-interest
Fair Value
Year Ended December 31, 2011
OTTI recognized 1st quarter:
Intent to sell
Total 1st quarter OTTI on loan-backed securities
$
1,800
1,800
$
3
3
$
–
–
$
1,797
1,797
Aggregate total
$
1,800
$
3
$
–
$
1,797
Amortized Cost
Basis Before OTTI
OTTI Recognized in Loss
Interest
Non-interest
Fair Value
Year Ended December 31, 2010
OTTI recognized 2nd quarter:
Intent to sell
Total 2nd quarter OTTI on loan-backed securities
$
23,536
23,536
$
890
890
$
–
–
$
22,646
22,646
Aggregate total
$
23,536
$
890
$
–
$
22,646
TFLIC 2012 SEC
47
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
The following tables provide the aggregate totals for loan-backed securities with a
recognized OTTI due to the Company’s cash flow analysis, in which the security is
written down to estimated future cash flows discounted at the security’s effective yield.
Amortized Cost
before Current
Period OTTI
Year Ended December 31, 2012
1st quarter present value of cash
flows expected to be less than
the amortized cost basis
2nd quarter present value of cash
flows expected to be less than
the amortized cost basis
3rd quarter present value of cash
flows expected to be less than
the amortized cost basis
4th quarter present value of cash
flows expected to be less than
the amortized cost basis
Aggregate total
$
$
9,907
Recognized
OTTI
$
Aggregate total
TFLIC 2012 SEC
$
$
9,784
Fair Value
$
5,625
31,773
3,092
28,681
20,633
17,199
1,222
15,977
10,640
22,099
921
21,178
15,312
80,978
$
Amortized Cost
before Current
Period OTTI
Year Ended December 31, 2011
1st quarter present value of cash
flows expected to be less than
the amortized cost basis
$
2nd quarter present value of cash
flows expected to be less than
the amortized cost basis
3rd quarter present value of cash
flows expected to be less than
the amortized cost basis
4th quarter present value of cash
flows expected to be less than
the amortized cost basis
123
Amortized Cost
After OTTI
36,356
5,358
Recognized
OTTI
$
988
$
75,620
$
Amortized Cost
After OTTI
$
35,368
52,210
Fair Value
$
23,938
32,000
3,301
28,699
16,513
44,931
807
44,124
28,144
54,257
2,573
51,684
41,432
167,544
$
7,669
$
159,875
$
110,027
48
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
Amortized Cost
before Current
Period OTTI
Year Ended December 31, 2010
1st quarter present value of cash
flows expected to be less than
the amortized cost basis
$
2nd quarter present value of cash
flows expected to be less than
the amortized cost basis
3rd quarter present value of cash
flows expected to be less than
the amortized cost basis
4th quarter present value of cash
flows expected to be less than
the amortized cost basis
Aggregate total
TFLIC 2012 SEC
$
74,985
Recognized
OTTI
$
3,059
Amortized Cost
After OTTI
$
71,926
Fair Value
$
52,424
34,351
1,477
32,874
23,893
64,601
3,573
61,028
45,518
85,652
2,191
83,461
66,159
259,589
$
10,300
$
249,289
$
187,994
49
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
The following loan-backed and structured securities were held at December 31, 2012, for
which an OTTI had been previously recognized:
CUSIP
225470FJ7
65536PAA8
75970JAJ5
75970QAH3
12667G5G4
225470FJ7
52522QAM4
65536PAA8
74925FAA1
75970JAJ5
75970QAH3
81744FDQ7
81744FFD4
86358EZU3
59020UJY2
02148AAA4
52108HV84
65536PAA8
759676AJ8
81744FDQ7
52108HV84
52524YAA1
759676AJ8
75970JAJ5
75970QAH3
12669GUR0
12668WAC1
14984WAA8
59020UJZ9
75970JAJ5
81379EAD4
81744FFD4
87613YAB7
12668WAC1
225470T94
22942KCA6
23332UDE1
TFLIC 2012 SEC
Amortized Cost Present Value of
Before Current Projected Cash
Recognized
Period OTTI
Flows
OTTI
$
338 $
327 $
11
268
263
5
8,528
8,426
102
773
768
5
239
233
6
317
308
9
13,542
13,354
188
261
244
17
2,115
2,104
11
8,229
8,167
62
754
749
5
1,353
1,322
31
604
500
104
3,065
1,522
1,543
1,294
177
1,117
5,995
5,939
56
2,838
2,021
817
206
198
8
6,844
6,676
168
1,317
1,143
174
1,989
1,738
251
518
459
59
6,542
6,321
221
7,774
7,627
147
720
714
6
4,555
4,320
235
9,808
9,574
234
15,118
14,891
227
385
373
12
9,513
9,315
198
668
436
232
865
779
86
1,800
1,797
3
9,434
9,236
198
133
131
2
2,119
1,881
238
4,819
2,860
1,959
Amortized
Cost After
OTTI
$
327
263
8,426
768
233
308
13,354
244
2,104
8,167
749
1,322
500
1,522
177
5,939
2,021
198
6,676
1,143
1,738
459
6,321
7,627
714
4,320
9,574
14,891
373
9,315
436
779
1,797
9,236
131
1,881
2,860
Fair Value at
Time of OTTI
$
331
124
4,715
455
234
288
11,363
118
2,091
4,596
442
206
123
530
642
5,020
1,004
119
4,270
228
1,005
388
4,418
5,765
552
3,183
5,194
12,105
384
6,044
38
174
1,797
4,616
115
1,604
2,546
Quarter in
which
Impairment
Occurred
1Q 2012
1Q 2012
1Q 2012
1Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
2Q 2012
3Q 2012
3Q 2012
3Q 2012
3Q 2012
3Q 2012
4Q 2012
4Q 2012
4Q 2012
4Q 2012
4Q 2012
4Q 2012
1Q 2011
1Q 2011
1Q 2011
1Q 2011
1Q 2011
1Q 2011
1Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
50
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
CUSIP
59020UJZ9
65536PAA8
75970JAJ5
75970QAH3
81379EAD4
81744FFD4
86358EZU3
12666UAC7
12668WAC1
14984WAA8
225470FJ7
225470U27
23332UDE1
65536PAA8
75970JAJ5
75970QAH3
81379EAD4
92922FZ27
12667G5G4
12668WAC1
225470FJ7
225470YD9
23332UDE1
52522QAM4
65536PAA8
74925FAA1
75970QAH3
761118AH1
81379EAD4
81744FDQ7
02148AAA4
02148YAJ3
12667G5G4
225470FJ7
225470YD9
22942KCA6
23332UDE1
TFLIC 2012 SEC
Amortized Cost Present Value of
Before Current Projected Cash
Recognized
Period OTTI
Flows
OTTI
$
369 $
287 $
82
300
293
7
9,160
9,063
97
866
836
30
435
353
82
775
617
158
3,590
3,140
450
9,303
9,279
24
9,096
9,052
44
13,878
13,513
365
392
386
6
108
107
1
–
–
–
286
279
7
8,896
8,775
121
819
810
9
352
139
213
1,800
1,785
15
7,015
6,850
165
8,912
8,717
195
376
350
26
12,026
11,178
848
–
–
–
15,404
14,412
992
274
271
3
3,111
2,991
120
794
789
5
4,820
4,752
68
137
7
130
1,389
1,367
22
8,643
8,555
88
508
497
11
9,559
9,488
71
525
515
10
16,556
16,325
231
2,809
2,777
32
6,778
6,445
333
Amortized
Cost After
OTTI
$
287
293
9,063
836
353
617
3,140
9,279
9,052
13,513
386
107
–
279
8,775
810
139
1,785
6,850
8,717
350
11,178
–
14,412
271
2,991
789
4,752
7
1,367
8,555
497
9,488
515
16,325
2,777
6,445
Fair Value at
Time of OTTI
$
361
164
5,662
528
24
150
742
5,802
4,101
10,586
338
84
–
137
5,019
470
7
1,600
6,306
3,860
328
10,865
–
11,438
112
2,898
451
4,480
5
691
5,599
416
8,205
430
10,165
2,060
3,152
Quarter in
which
Impairment
Occurred
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
2Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
3Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
4Q 2011
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
51
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
CUSIP
52524YAA1
59020UJZ9
74925FAA1
76110VTR9
81379EAD4
81744FFD4
86358EZU3
02148AAA4
02148YAJ3
05948KL31
225470FJ7
225470U27
22942KCA6
52522QAM4
65536PAA8
61750WAU7
02148AAA4
02148YAJ3
12667G5G4
225470T94
225470YD9
22942KCA6
23332UDE1
59020UJZ9
65536PAA8
75970JAJ5
75970QAH3
761118AH1
81744FFD4
92922FZ27
02148YAJ3
12640PAA3
12667G5G4
14984WAA8
225470U27
225470YD9
22942KCA6
TFLIC 2012 SEC
Amortized Cost Present Value of
Before Current Projected Cash
Recognized
Period OTTI
Flows
OTTI
$
8,493 $
8,488 $
5
799
427
372
3,669
3,504
165
8,815
8,751
64
993
741
252
1,211
1,141
70
4,896
3,556
1,340
8,244
7,893
351
487
476
11
563
540
23
495
470
25
138
125
13
2,670
2,650
20
20,295
19,416
879
777
730
47
2,996
2,610
386
7,549
7,079
470
467
466
1
9,806
9,750
56
155
152
3
15,369
14,600
769
2,548
2,518
30
6,109
5,508
601
420
417
3
429
396
33
10,896
9,867
1,029
1,000
910
90
6,057
5,891
166
1,134
920
214
2,122
2,098
24
457
448
9
334
299
35
7,849
7,752
97
15,885
15,461
424
119
117
2
13,946
13,870
76
2,418
2,256
162
Amortized
Cost After
OTTI
$
8,488
427
3,504
8,751
741
1,141
3,556
7,893
476
540
470
125
2,650
19,416
730
2,610
7,079
466
9,750
152
14,600
2,518
5,508
417
396
9,867
910
5,891
920
2,098
448
299
7,752
15,461
117
13,870
2,256
Fair Value at
Time of OTTI
$
6,681
291
3,250
8,613
11
191
2,878
5,690
401
347
443
102
1,891
13,840
666
2,610
5,933
346
9,287
119
10,689
1,967
2,847
361
372
5,466
540
4,963
156
1,931
353
324
7,586
12,225
98
10,249
1,837
Quarter in
which
Impairment
Occurred
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
1Q 2010
2Q 2010
2Q 2010
2Q 2010
2Q 2010
2Q 2010
2Q 2010
2Q 2010
2Q 2010
2Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
3Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
52
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
CUSIP
23332UDE1
52522QAM4
52524YAA1
59020UJZ9
74925FAA1
759676AJ8
81379EAD4
81744FFD4
92922FZ27
02148AAA4
02148YAJ3
225470FJ7
225470T94
22942KCA6
86358EZU3
02148AAA4
225470FJ7
225470T94
22942KCA6
86358EZU3
12667G5G4
02148AAA4
02148YAJ3
225470FJ7
52524YAA1
59020UJZ9
76110VTR9
81744FFD4
81744FDQ7
86358EZU3
225470T94
225470U27
TFLIC 2012 SEC
Amortized Cost Present Value of
Before Current Projected Cash
Recognized
Period OTTI
Flows
OTTI
$
5,327 $
5,125 $
202
17,766
17,596
170
5,957
5,692
265
413
389
24
3,746
3,597
149
7,764
7,304
460
737
668
69
917
870
47
2,017
2,017
–
9,601
9,359
242
613
588
25
598
588
10
21
13
8
3,391
3,129
262
14,602
7,151
7,451
3,706
3,581
125
588
567
21
199
194
5
1,581
1,507
74
7,151
5,743
1,408
11,215
10,958
257
8,965
8,897
68
569
537
32
549
546
3
9,419
9,370
49
1,030
818
212
13,052
9,142
3,910
1,348
1,216
132
1,862
1,497
365
5,690
5,474
216
176
153
23
182
147
35
Amortized
Cost After
OTTI
$
5,125
17,596
5,692
389
3,597
7,304
668
870
2,017
9,359
588
588
13
3,129
7,151
3,581
567
194
1,507
5,743
10,958
8,897
537
546
9,370
818
9,142
1,216
1,497
5,474
153
147
Fair Value at
Time of OTTI
$
2,812
13,550
5,610
375
3,560
5,514
39
171
1,854
4,668
311
339
99
1,751
4,183
1,997
379
111
895
2,085
9,524
5,470
374
403
6,533
294
8,236
244
208
265
122
104
Quarter in
which
Impairment
Occurred
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
4Q 2010
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
3Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
4Q 2009
53
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
The unrealized losses of loan-backed and structured securities where fair value is less
than cost or amortized cost for which an OTTI has not been recognized in earnings as of
December 31, 2012 and 2011 is as follows:
Losses 12
Months or
More
Year ended December 31, 2012
The aggregate amount of unrealized losses
The aggregate related fair value of securities with unrealized losses
$
Losses Less
Than 12
Months
33,297 $
162,801
Losses 12
Months or
More
Year ended December 31, 2011
The aggregate amount of unrealized losses
The aggregate related fair value of securities with unrealized losses
$
937
55,252
Losses Less
Than 12
Months
70,661 $
329,459
2,854
84,808
Detail of net investment income is presented below:
2012
Income:
Bonds
Preferred stocks
Common stocks
Mortgage loans on real estate
Policy loans
Cash, cash equivalents and
short-term investments
Derivatives
Other invested assets
Other
Gross investment income
Less investment expenses
Net investment income
TFLIC 2012 SEC
$
$
372,298
130
1,693
39,468
4,038
765
19,915
639
2,929
441,875
14,747
427,128
Year Ended December 31
2011
$
$
396,157
148
1,302
44,625
4,034
929
24,901
2,548
1,921
476,565
13,035
463,530
2010
$
$
412,132
235
20
55,846
3,962
1,589
39,735
4,722
2,333
520,574
14,447
506,127
54
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
Proceeds from sales and other disposals (excluding maturities) of bonds and preferred
stock and related gross realized capital gains and losses were as follows:
Year Ended December 31
2011
2012
Proceeds
$
Gross realized gains
Gross realized losses
Net realized capital gains
$
1,913,219
$
68,650
(9,531)
59,119
$
$
$
1,636,561
2010
$
44,316
(6,781)
37,535
2,882,307
$
$
88,416
(15,490)
72,926
The Company had gross realized losses for the years ended December 31, 2012, 2011
and 2010 of $6,205, $10,422 and $14,212, respectively, which relate to losses recognized
on other-than-temporary declines in fair values of bonds and preferred stocks.
Net realized capital gains (losses) on investments are summarized below:
Realized
Year Ended December 31
2012
2011
2010
Bonds
Preferred stocks
Common stocks
Mortgage loans on real estate
Cash, cash equivalents and short-term investments
Derivatives
Other invested assets
Federal income tax effect
Transfer to interest maintenance reserve
Net realized capital gains (losses) on investments
$
$
52,800 $
115
91
(1,020)
3
9,224
3,939
65,152
(17,772)
(38,563)
8,817 $
27,113 $
–
(995)
290
–
(32,729)
3,074
(3,247)
(15,802)
(23,955)
(43,004) $
58,442
273
876
(17,257)
3
(39,271)
262
3,328
(24,841)
(43,986)
(65,499)
At December 31, 2012 and 2011, the Company had recorded investment in restructured
securities of $2,940 and $2,602, respectively. The capital gains (losses) taken as a direct
result of restructures in 2012, 2011 and 2010 were $886, $(603) and $679, respectively.
The Company often has impaired a security prior to the restructure date. These
impairments are not included in the calculation of restructure related losses and are
accounted for as a realized loss, reducing the cost basis of the security involved.
TFLIC 2012 SEC
55
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
The changes in net unrealized capital gains and losses on investments, including the
changes in net unrealized foreign capital gains and losses, were as follows:
Change in Unrealized
Year Ended December 31
2012
2011
2010
Bonds
Common stocks
Affiliated entities
Mortgage loans on real estate
Derivatives
Other invested assets
Taxes on unrealized capital gains/losses
Change in unrealized capital gains (losses), net of tax
12,303 $
(1,627)
(45)
–
(87,646)
5,277
(71,738)
25,092
(46,646) $
$
$
(7,611) $
(1,216)
(145)
–
81,675
1,233
73,936
(25,928)
48,008 $
(6,939)
2,772
666
7,111
4,305
(930)
6,985
(2,212)
4,773
During 2012, the Company issued mortgage loans with a maximum interest rate of 4.60%
and a minimum interest rate of 3.21% for commercial loans. During 2011, the Company
issued mortgage loans with interest rates of 4.50% for commercial loans. The maximum
percentage of any one mortgage loan to the value of the underlying real estate originated
during the year ending December 31, 2012 at the time of origination was 70%. During
2012, the Company reduced the interest rate by 1% of one outstanding mortgage loan in
the amount of $8,362. The Company did not reduce interest rates on any outstanding
mortgages during 2011.
The Company did not have any impaired loans at December 31, 2012 or 2011. The
Company did not hold an allowance for credit losses on mortgage loans at December 31,
2012 or 2011. The Company had no average recorded investment in impaired loans
during 2012 or 2011.
The following table provides a reconciliation of the beginning and ending balances for
the allowance for credit losses on mortgage loans:
Year Ended December 31
2012
2011
2010
Balance at beginning of period
Additions, net charged to operations
Recoveries in amounts previously charged off
Balance at end of period
$
$
–
–
–
–
$
$
–
–
–
–
$
$
7,111
2,838
(9,949)
–
The Company accrues interest income on impaired loans to the extent deemed collectible
(delinquent less than 91 days) and the loan continues to perform under its original or
restructured contractual terms. Interest income on nonperforming loans generally is
TFLIC 2012 SEC
56
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
recognized on a cash basis. The Company did not recognize any interest income on
impaired loans for the years ended December 31, 2012 or 2011. The Company
recognized $679 of interest income on impaired loans for the year ended December 31,
2010. The Company did not recognize any interest income on a cash basis for the years
ended December 31, 2012 or 2011. The Company recognized $860 of interest income on
a cash basis for the year ended December 31, 2010.
During 2012 and 2011, there were no mortgage loans that were foreclosed and
transferred to real estate.
At December 31, 2012 and 2011, the Company held a
mortgage loan loss reserve in the AVR of $5,173 and $5,940, respectively.
The Company’s mortgage loan portfolio is diversified by geographic region and specific
collateral property type as follows:
Geographic Distribution
December 31
2012
2011
South Atlantic
Mountain
Pacific
Middle Atlantic
W. South Central
E. North Central
E. South Central
W. North Central
New England
23 %
21
16
16
13
6
3
1
1
20 %
20
24
17
6
8
3
1
1
Property Type Distribution
December 31
2012
2011
Retail
Industrial
Office
Other
Agricultural
Apartment
Medical
32 %
25
16
10
7
5
5
23 %
25
21
9
8
9
5
During 2012, 2011 and 2010, the Company did not recognize any impairment writedowns for its investments in joint ventures and limited partnerships.
At December 31, 2012, the Company had ownership interest in three LIHTC
investments. The remaining years of unexpired tax credits ranged from four to ten and
the properties were not subject to regulatory review. The length of time remaining for
the holding period ranged from five to fourteen years. The amount of contingent equity
commitments expected to be paid during 2013 is $2,127. There were no impairment
losses, write-downs or reclassifications during the year related to any of these credits.
At December 31, 2011, the Company had ownership interest in three LIHTC
investments. The remaining years of unexpired tax credits ranged from five to eleven
and the properties were not subject to regulatory review. The length of time remaining
for the holding period ranged from six to fifteen years. The amount of contingent equity
commitments expected to be paid during the years 2012 to 2013 was $8,603. There were
TFLIC 2012 SEC
57
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
no impairment losses, write-downs or reclassifications during the year related to any of
these credits.
The Company recognized net realized gains (losses) from futures contracts in the amount
of $77,308, $(38,303) and $(91,398) for the years ended December 31, 2012, 2011 and
2010, respectively.
At December 31, 2012 and 2011, the Company had replicated assets with a fair value of
$462,061 and $290,280, respectively, and credit default swaps with a fair value of $137
and $(2,037), respectively. The Company recognized capital losses in 2012 of $1,477,
while in 2011 and 2010, the Company did not recognize any capital losses related to
replication transactions.
TFLIC 2012 SEC
58
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
As stated in Note 1, the Company replicates investment grade corporate bonds by writing
credit default swaps. As a writer of credit swaps, the Company actively monitors the
underlying asset, being careful to note any events (default or similar credit event) that
would require the Company to perform on the credit swap. If such events would take
place, the Company has recourse provisions from the proceeds of the bankruptcy
settlement of the underlying entity or by the sale of the underlying bond. As of
December 31, 2012, credit default swaps, used in replicating corporate bonds are as
follows:
Deal, Receive (Pay), Underlying
4300,SWAP, USD 1 / (USD 0), :US670346AE56
4367,SWAP, USD 1 / (USD 0), :US534187AM15
4496,SWAP, USD 1 / (USD 0), :XS0203685788
4497,SWAP, USD 1 / (USD 0), :US168863AS74
4498,SWAP, USD 1 / (USD 0), :USY6826RAA06
4499,SWAP, USD 1 / (USD 0), :US50064FAD69
4528,SWAP, USD 1 / (USD 0), :US168863AS74
4601,SWAP, USD 1 / (USD 0), :CDX IG 18
4602,SWAP, USD 1 / (USD 0), :CDX IG 18
4618,SWAP, USD 1 / (USD 0), :CDX IG 18
4672,SWAP, USD 1 / (USD 0), :US836205AJ33
4673,SWAP, USD 1 / (USD 0), :XS0114288789
4674,SWAP, USD 1 / (USD 0), :US105756AL40
4682,SWAP, USD 1 / (USD 0), :US455780AQ93
47120,SWAP, USD 1 / (USD 0), :912828TJ9
4776,SWAP, USD 1 / (USD 0), :912828TJ9
4777,SWAP, USD 1 / (USD 0), :912828TJ9
4780,SWAP, USD 1 / (USD 0), :912828TJ9
4783,SWAP, USD 1 / (USD 0), :912828TJ9
4785,SWAP, USD 1 / (USD 0), :912828TJ9
4786,SWAP, USD 1 / (USD 0), :912828TJ9
4803,SWAP, USD 1 / (USD 0), :912810QV3
4807,SWAP, USD 1 / (USD 0), :912828TJ9
4810,SWAP, USD 1 / (USD 0), :912810QV3
4831,SWAP, USD 1 / (USD 0), :912803DP5
4845,SWAP, USD 1 / (USD 0), :912803DQ3
4863,SWAP, USD 5 / (USD 0), :912803DJ9
4865,SWAP, USD 1 / (USD 0), :912803DJ9
4872,SWAP, USD 1 / (USD 0), :12622DAC8
4876,SWAP, USD 1 / (USD 0), :36248EAB1
4877,SWAP, USD 1 / (USD 0), :36248EAB1
Maturity Date
3/20/2016
9/20/2016
3/20/2017
3/20/2017
3/20/2017
3/20/2017
3/20/2017
6/20/2017
6/20/2017
6/20/2017
9/20/2017
9/20/2017
9/20/2017
9/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
12/20/2017
Maximum
Future Payout
(Estimated)
$
10,000
20,000
11,000
10,000
12,000
10,000
10,000
20,000
20,000
5,000
8,500
2,200
3,200
2,000
20,000
15,000
15,000
15,000
15,000
10,000
5,000
25,000
5,000
10,000
20,000
25,000
10,000
10,000
10,000
10,000
10,000
Current Fair
Value
$
141
(357)
245
170
210
214
170
129
129
32
(135)
(22)
1
(16)
65
(202)
(28)
49
(859)
(134)
16
50
(67)
20
40
(177)
1,405
(717)
(97)
(111)
(24)
At December 31, 2012 and 2011, the fair value of all derivative contracts, aggregated at a
counterparty level, with a positive fair value amounted to $43,857 and $124,189,
respectively.
TFLIC 2012 SEC
59
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
At December 31, 2012 and 2011, the fair value of all derivative contracts, aggregated at a
counterparty level, with a negative fair value amounted to $11,206 and $5,466,
respectively.
At December 31, 2012 and 2011, the Company’s outstanding financial instruments with
on and off-balance sheet risks, shown in notional amounts, are summarized as follows:
Notional Amount
2012
2011
Interest rate and currency swaps:
Receive fixed - pay fixed
Receive fixed - pay floating
Receive floating - pay fixed
$
102,379
1,111,262
$
–
115,279
1,096,000
8,151
Open futures contracts at December 31, 2012 and 2011, were as follows:
Long/Short
Number of
Contracts
Opening
Fair
Value
Contract Type
Year-End
Fair
Value
December 31, 2012
Long
Short
Long
Short
Short
Short
Short
Long/Short
3
(659)
25
(9)
(350)
(540)
(50)
Number of
Contracts
HANG SENG IDX FUT Jan13
$
S&P 500 FUTURE Mar13
DJ EURO STOXX 50 Mar13
S&P 500 E-MINI FUTURE Mar13
FTSE 100 IDX FUT Mar13
NASDAQ 100 E-MINI Mar13
NIKKEI 225 (OSE) Mar13
437 $
(233,040)
865
(633)
(33,455)
(28,786)
(5,563)
Opening
Fair
Value
Contract Type
438
(233,961)
864
(639)
(33,482)
(28,676)
(6,035)
Year-End
Fair
Value
December 31, 2011
Short
Long
Short
Short
Short
TFLIC 2012 SEC
(1,208)
7
(690)
(1,270)
(80)
S&P 500 FUTURE Mar12
DJ EURO STOXX 50 Mar12
FT SE 100 IDX FUT Ma r12
NASDAQ 100 E-MINI Mar12
NIKKEI 225 (OSE) M ar12
$
(373,409) $
207
(58,550)
(57,731)
(8,924)
(378,285)
209
(59,772)
(57,772)
(8,782)
60
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
For the years ended December 31, 2012, 2011 and 2010, the Company recorded
unrealized gains of $34,383, $121,858 and $39,628, respectively, for the component of
derivative instruments utilized for hedging purposes that did not qualify for hedge
accounting. This has been recorded directly to unassigned surplus as an unrealized gain.
The Company did not recognize any unrealized gains or losses during 2012, 2011 or
2010 that represented the component of derivative instruments gain or loss that was
excluded from the assessment of hedge effectiveness.
At December 31, 2012 and 2011, investments with an aggregate carrying amount of
$3,292 and $3,315, respectively, were on deposit with regulatory authorities or were
restrictively held in bank custodial accounts for the benefit of such regulatory authorities
as required by statute.
6. Reinsurance
Certain premiums and benefits are assumed from and ceded to other insurance companies
under various reinsurance agreements. The Company reinsures portions of the risk on
certain insurance policies which exceed its established limits, thereby providing a greater
diversification of risk and minimizing exposure on larger risks. The Company remains
contingently liable with respect to any insurance ceded, and this would become an actual
liability in the event that the assuming insurance company became unable to meet its
obligation under the reinsurance treaty.
Premiums earned reflect the following reinsurance amounts:
Year Ended December 31
2012
2011
2010
Direct premiums
Reinsurance assumed - affiliates
Reinsurance assumed - non affiliates
Reinsurance ceded - affiliates
Reinsurance ceded - non affiliates
Net premiums earned
$ 4,960,351 $ 4,950,537 $ 4,894,908
104
101
81
621,553
660,888
633,476
(359,404)
(322,295)
(278,372)
(786,320)
(88,324)
(375,188)
$ 4,940,348 $ 4,426,470 $ 5,145,278
Aggregate reserves for policies and contracts were reduced for reserve credits for
reinsurance ceded to affiliates at December 31, 2012 and 2011 of $1,718,959 and
$1,539,578, respectively.
The Company received reinsurance recoveries in the amounts of $492,249, $325,524 and
$268,725 during 2012, 2011 and 2010, respectively. At December 31, 2012 and 2011,
TFLIC 2012 SEC
61
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
estimated amounts recoverable from reinsurers that have been deducted from policy and
contract claim reserves totaled $159,544 and $160,350, respectively. The aggregate
reserves for policies and contracts were reduced for reserve credits for reinsurance ceded
at December 31, 2012 and 2011 of $2,201,388 and $2,078,316, respectively.
The Company would experience no reduction in surplus at December 31, 2012 or 2011 if
all reinsurance agreements were cancelled.
The Company did not enter into any new reinsurance agreements in which a reserve
credit was taken during the years ended December 31, 2012 or 2011.
During 2012, the Company recaptured certain treaties associated with the divestiture of
the Transamerica Reinsurance operations that were previously ceded to an affiliate, for
which net consideration paid was $9,487, life and claim reserves recaptured were
$12,438 and other assets recaptured were $391, resulting in a pre-tax loss of $21,534
which was included in the statement of operations.
During 2012, the Company recaptured certain treaties associated with the divestiture of
the Transamerica Reinsurance operations that were previously ceded to a non-affiliate,
for which net consideration paid was $27,425, life and claim reserves recaptured were
$97,403, other assets recaptured were $7,410 and the unamortized gain related to these
blocks was released into income from surplus of $9,990, ($6,556 after tax), resulting in a
pre-tax loss of $107,428, which was included in the statement of operations.
Subsequent to the recaptures that took place during 2012, the Company reinsured to a
non-affiliate certain treaties associated with the business that was previously ceded to an
affiliate, for which a reinsurance premium and ceding commission were received in the
amount of $843 and $6,904, respectively, and life and claim reserves transferred were
$7,971, resulting in a pre-tax gain of $15,718 ($10,217 net of tax), which was credited
directly to unassigned surplus on a net of tax basis.
Subsequent to the recaptures that took place during 2012, the Company reinsured to an
affiliate certain treaties associated with the business that was previously ceded to a nonaffiliate, for which a reinsurance premium was paid in the amount of $13,711, ceding
commission was received in the amount of $18,696, life and claim reserves transferred
were $78,778 and other assets were transferred in the amount of $3,549, resulting in a
pre-tax gain of $80,214 ($52,139 net of tax), which was credited directly to unassigned
surplus on a net of tax basis.
Also subsequent to certain 2012 recaptures, the Company novated certain treaties to a
non-affiliate, in which consideration received was $24,179, life and claim reserves
released were $23,092 and other assets were transferred associated with the business of
TFLIC 2012 SEC
62
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
$4,251, resulting in a pre-tax gain of $43,020, which was included in the statement of
operations.
During 2012, amortization of previously deferred gains associated with the divestiture of
the Transamerica Reinsurance operations was released into income in the amount of
$29,383 ($19,344 after tax).
On April 26, 2011, Aegon N.V. announced the disposition of its life reinsurance
operations, Transamerica Reinsurance, to SCOR, which was effective August 9, 2011.
The life reinsurance business conducted by Transamerica Reinsurance was written
through several of Aegon N.V.’s U.S. and international affiliates, all of which remain
Aegon N.V. affiliates following the closing, except for Transamerica International
Reinsurance Ireland, Limited (TIRI), an Irish reinsurance company. As a result of this
transaction, the Company entered into a series of recapture and reinsurance agreements
during the third and fourth quarters of 2011 which directly resulted in a pre-tax loss of
$474,720 which was included in the statement of operations, and a net of tax gain of
$400,760 which has been credited directly to unassigned surplus. These amounts include
current year amortization of previously deferred gains, as well as releases of previously
deferred gains from unassigned surplus into earnings related to these transactions.
Additional information surrounding these transactions is outlined below.
Effective August 9, 2011, the Company recaptured business that was associated with the
divestiture of the Transamerica Reinsurance operations which was previously retroceded
on a coinsurance basis to an affiliate. The Company received recapture consideration of
$55,356, recaptured reserves of $293,975, recaptured other assets of $8,586 and released
into income a previously deferred unamortized gain resulting from the original
transaction in the amount of $2,297, resulting in a pre-tax loss of $227,736 which has
been included in the statement of operations. Prior to this transaction, the Company
amortized $498, net of tax, of the deferred gain related to the initial transaction into
earnings with a corresponding charge directly to unassigned surplus in 2011 and $995 on
a net of tax basis into earnings in 2010.
Subsequently, effective August 9, 2011, the Company ceded business that was associated
with the divestiture of the Transamerica Reinsurance operations on a coinsurance basis to
a non-affiliate. The Company paid a net reinsurance premium of $549,682, received an
initial ceding commission of $219,000, transferred other assets in the amount of $12,548
and released net reserves of $790,263. The Company paid an experience refund in the
amount of $84,770 to an affiliate and released IMR associated with certain business in
the amount of $13,086. These transactions resulted in a net of tax gain of $248,557,
which has been credited directly to unassigned surplus. During 2011, the Company
amortized $7,712, net of tax, of the deferred gain into earnings with a corresponding
charge directly to unassigned surplus.
TFLIC 2012 SEC
63
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
Effective October 1, 2011, the Company recaptured business that was associated with the
divestiture of the Transamerica Reinsurance operations which was previously retroceded
on a coinsurance basis to a non-affiliate. The Company paid recapture consideration of
$9,840, recaptured reserves of $402,503, recaptured other net assets of $10,226 and
released into income a previously deferred unamortized gain resulting from the original
transaction in the amount of $230,033, resulting in a pre-tax loss of $172,084, which has
been included in the statement of operations. Subsequently, effective October 1, 2011,
the Company ceded this business on a coinsurance basis to an affiliate and as a result
received cash, transferred other net assets and released reserves consistent with the
amounts recaptured, resulting in a net of tax gain of $262,245, which has been credited
directly to unassigned surplus.
Effective October 1, 2011, the Company recaptured business that was associated with the
divestiture of the Transamerica Reinsurance operations which was previously retroceded
on a coinsurance basis to an affiliate. The Company received recapture consideration of
$30,305, recaptured reserves of $123,935 and recaptured other assets of $17,964,
resulting in a pre-tax loss of $75,666, which has been included in the statement of
operations. Subsequently, effective October 1, 2011, the Company ceded this business
on a coinsurance basis to a non-affiliate and as a result paid cash, transferred other assets
and released reserves consistent with the amounts recaptured, resulting in a net of tax
gain of $49,183, which has been credited directly to unassigned surplus.
During the last half of 2011, the Company recaptured the business that was associated
with the divestiture of the Transamerica Reinsurance operations from several Aegon N.V.
affiliates. This business was subsequently ceded to SCOR entities and in addition,
retrocession reinsurance treaties were executed. The Company assigned certain third
party retrocession agreements to SCOR entities as a component of the divestiture of the
Transamerica Reinsurance operations and the associated Master Retrocession
Agreement. As a result, the unaffiliated retrocession reinsurance treaties were assigned
from the Company to a SCOR entity, resulting in this risk being ceded to SCOR and
subsequently to the unaffiliated third parties. The reserves and assets associated with
these assignments were $87,665, where the counterparty’s net reserves ceded exchanged
counterparties with no consideration exchanged, resulting in no net income or surplus
impact to the Company.
During 2010 the Company entered into assumption reinsurance agreements and a
recapture agreement. As a result the Company recognized pre-tax earnings of $49,551,
which includes the 2010 amortization of the deferred gain through the balance sheet of
$1,414. Additional information surrounding these transactions is outlined below.
During 2010, the Company entered into assumption reinsurance agreements in which the
Company assumed policies from an affiliate. The Company assumed net reserves of
$71,040 and other net assets of $83,170 and received net consideration of $12,118. This
TFLIC 2012 SEC
64
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
transaction resulted in a net pre-tax gain to the Company of $24,248, which has been
reclassified to the balance sheet and presented as a deferred gain, as this transaction was
deemed economic. The deferred gain will be amortized into general insurance expenses
over the period in which the Company benefits economically, not to exceed 10 years.
Amortization of the deferred gain during 2011 and 2010 was $2,425 and $1,414,
respectively.
During 2010, the Company entered into assumption reinsurance agreements in which the
Company ceded term life policies to an affiliate. Reserves of $64,848, and other assets in
the amount of $5,538 were ceded by the Company, with consideration paid of $5,897.
These transactions resulted in a net pre-tax gain to the Company of $53,413, which has
been reflected in the statement of operations, as this was deemed an economic
transaction.
Effective January 1, 2010, the Company entered into a recapture agreement in which the
Company recaptured term life policies from an affiliate. The Company recaptured life
and claim reserves of $6,051 and $80, respectively, and received consideration of $855.
This transaction resulted in a net pre-tax loss to the Company of $5,276, which has been
reflected in the statement of operations.
During 2011 and 2010, the Company amortized deferred gains from reinsurance
transactions occurring prior to 2010 of $1,991 and $995, respectively, into earnings on a
net of tax basis with a corresponding charge to unassigned surplus. The Company did not
amortize any deferred gains from reinsurance transactions occurring prior to 2010 into
earnings during 2012.
During 2001, the Company assumed certain traditional life insurance contracts from
Transamerica Occidental Life Insurance Company, an affiliate, which merged into TLIC,
an affiliate, effective October 1, 2008. The Company recorded goodwill of $14,280
related to this transaction which was non-admitted. The related amortization was $1,433
during 2010. The goodwill was fully amortized at the end of 2010. The Company
recorded $339 and $420 of goodwill at December 31, 2012 and 2011, respectively.
TFLIC 2012 SEC
65
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
7. Income Taxes
The net deferred income tax asset at December 31, 2012 and 2011 and the change from
the prior year are comprised of the following components:
Gross Deferred Tax Assets
Statutory Valuation Allowance Adjustment
Adjusted Gross Deferred Tax Assets
Deferred Tax Assets Nonadmitted
Subtotal (Net Deferred Tax Assets)
Deferred Tax Liabilities
Net Admitted Deferred Tax Assets
Gross Deferred Tax Assets
Statutory Valuation Allowance Adjustment
Adjusted Gross Deferred Tax Assets
Deferred Tax Assets Nonadmitted
Subtotal (Net Deferred Tax Assets)
Deferred Tax Liabilities
Net Admitted Deferred Tax Assets
Gross Deferred Tax Assets
Statutory Valuation Allowance Adjustment
Adjusted Gross Deferred Tax Assets
Deferred Tax Assets Nonadmitted
Subtotal (Net Deferred Tax Assets)
Deferred Tax Liabilities
Net Admitted Deferred Tax Assets
TFLIC 2012 SEC
$
$
$
$
$
$
Ordinary
113,219
–
113,219
11,932
101,287
45,060
56,227
December 31, 2012
Capital
$
22,618 $
–
22,618
–
22,618
9,824
$
12,794 $
Total
135,837
–
135,837
11,932
123,905
54,884
69,021
Ordinary
93,032
–
93,032
17,395
75,637
43,904
31,733
December 31, 2011
Capital
$
26,758 $
–
26,758
–
26,758
7,897
$
18,861 $
Total
119,790
–
119,790
17,395
102,395
51,801
50,594
Ordinary
20,187 $
–
20,187
(5,463)
25,650
1,156
24,494 $
Change
Capital
(4,140) $
–
(4,140)
–
(4,140)
1,927
(6,067) $
Total
16,047
–
16,047
(5,463)
21,510
3,083
18,427
66
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
The main components of deferred income tax amounts are as follows:
Year Ended December 31
2012
2011
Deferred Tax Assets:
Ordinary:
Discounting of unpaid losses
Policyholder reserves
Investments
Deferred acquisition costs
Receivables - nonadmitted
Section 197 intangible amortization
Guaranty fund accrual
Reinsurance to unauthorized companies
Assumption reinsurance
Other (including items <5% of
ordinary tax assets)
Subtotal
$
Statutory valuation allowance adjustment
Nonadmitted
Admitted ordinary deferred tax assets
Capital:
Investments
Subtotal
Statutory valuation allowance adjustment
Nonadmitted
Admitted capital deferred tax assets
Admitted deferred tax assets
$
239
79,398
–
18,294
2,430
119
6,189
181
6,176
$
313
50,688
4,842
20,940
1,999
147
6,452
282
6,996
Change
$
193
113,219
373
93,032
(180)
20,187
–
11,932
101,287
–
17,395
75,637
–
(5,463)
25,650
22,618
22,618
26,758
26,758
(4,140)
(4,140)
–
–
22,618
123,905
–
–
26,758
102,395
–
–
(4,140)
21,510
$
$
Year Ended December 31
2012
2011
Deferred Tax Liabilities:
Ordinary:
Investments
§807(f) adjustment
Reinsurance ceded
Other (including items <5% of total
ordinary tax liabilities)
Subtotal
Capital:
Investments
Subtotal
Deferred tax liabilities
Net deferred tax assets/liabilities
TFLIC 2012 SEC
$
$
(74)
28,710
(4,842)
(2,646)
431
(28)
(263)
(101)
(820)
10,496
7,302
14,225
$
8,286
8,621
15,395
18
32,041
321
32,623
22,843
22,843
54,884
69,021
19,178
19,178
51,801
50,594
$
Change
$
2,210
(1,319)
(1,170)
(303)
(582)
$
3,665
3,665
3,083
18,427
67
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
The Company did not report a valuation allowance for deferred income tax assets as of
December 31, 2012 or 2011.
As discussed in Note 1, for the year ended December 31, 2012 the Company admits
deferred income tax assets pursuant to SSAP No. 101. The amount of admitted adjusted
gross deferred income tax assets under each component of SSAP No. 101 is as follows:
December 31, 2012
Capital
Ordinary
Admission Calculation Components SSAP No. 101
2(a) Federal Income Taxes Paid in Prior Years
Recoverable Through Loss Carrybacks
2(b) Adjusted Gross Deferred Tax Assets Expected to
be Realized (Excluding The Amount of Deferred
Tax Assets From 2(a) above) After Application of
the Threshold Limitation (the Lesser of 2(b)1 and
2(b)2 below)
1. Adjusted Gross Deferred Tax Assets
Expected to be Realized Following the
Balance Sheet Date
2. Adjusted Gross Deferred Tax Assets
Allowed per Limitation Threshold
2(c) Adjusted Gross Deferred Tax Assets (Excluding
The Amount Of Deferred Tax Assets From 2(a)
and 2(b) above) Offset by Gross Deferred Tax
Liabilities
Deferred Tax Assets Admitted as the result of
2(d)
application of SSAP No. 101, Total (2(a) + 2(b) + 2(c))
$
$
56,227
TFLIC 2012 SEC
$
$
12,794
$
69,021
–
–
–
–
–
–
XXX
XXX
116,020
45,060
9,824
54,884
101,287
$
22,618
$
December 31, 2011*
Capital
Ordinary
Admission Calculation Components SSAP No. 101
2(a) Federal Income Taxes Paid in Prior Years
Recoverable Through Loss Carrybacks
2(b) Adjusted Gross Deferred Tax Assets Expected to
be Realized (Excluding The Amount of Deferred
Tax Assets From 2(a) above) After Application of
the Threshold Limitation (the Lesser of 2(b)1 and
2(b)2 below)
1. Adjusted Gross Deferred Tax Assets
Expected to be Realized Following the
Balance Sheet Date
2. Adjusted Gross Deferred Tax Assets
Allowed per Limitation Threshold
2(c) Adjusted Gross Deferred Tax Assets (Excluding
The Amount Of Deferred Tax Assets From 2(a)
and 2(b) above) Offset by Gross Deferred Tax
Liabilities
Deferred Tax Assets Admitted as the result of
2(d)
application of SSAP No. 101, Total (2(a) + 2(b) + 2(c))
$
Total
31,733
$
18,861
123,905
Total
$
50,594
–
–
–
–
–
–
XXX
XXX
145,949
43,904
7,897
51,801
75,637
$
26,758
$
102,395
68
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
Change
Capital
Ordinary
Admission Calculation Components SSAP No. 101
2(a) Federal Income Taxes Paid in Prior Years
Recoverable Through Loss Carrybacks
2(b) Adjusted Gross Deferred Tax Assets Expected to
be Realized (Excluding The Amount of Deferred
Tax Assets From 2(a) above) After Application of
the Threshold Limitation (the Lesser of 2(b)1 and
2(b)2 below)
1. Adjusted Gross Deferred Tax Assets
Expected to be Realized Following the
Balance Sheet Date
2. Adjusted Gross Deferred Tax Assets
Allowed per Limitation Threshold
2(c) Adjusted Gross Deferred Tax Assets (Excluding
The Amount Of Deferred Tax Assets From 2(a)
and 2(b) above) Offset by Gross Deferred Tax
Liabilities
Deferred Tax Assets Admitted as the result of
2(d)
application of SSAP No. 101, Total (2(a) + 2(b) + 2(c))
$
$
24,494
$
Total
(6,067) $
18,427
–
–
–
–
–
–
XXX
XXX
(29,929)
1,156
1,927
3,083
25,650
$
(4,140) $
21,510
*As reported on the statutory balance sheet for the most recently filed statement with the
domiciliary state commissioner adjusted in accordance with SSAP No. 10R.
TFLIC 2012 SEC
69
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
December 31
2012
Ratio Percentage Used To Determine Recovery
Period and Threshold Limitation Amount
Amount of Adjusted Capital and Surplus Used To
Determine Recovery Period and Threshold
Limitation in 2(b)2 above
2011
784%
809%
$
766,655
$
641,126
The impact of tax planning strategies at December 31, 2012 and 2011 was as follows:
December 31, 2012
Capital
Percent
Ordinary
Percent
Impact of Tax Planning Strategies:
Adjusted Gross DTAs
(% of Total Adjusted Gross DTAs)
Net Admitted Adjusted Gross DTAs
(% of Total Net Admitted Adjusted Gross DTAs)
0%
100%
17%
0%
0%
0%
December 31, 2011
Capital
Percent
Ordinary
Percent
Impact of Tax Planning Strategies:
Adjusted Gross DTAs
(% of Total Adjusted Gross DTAs)
Net Admitted Adjusted Gross DTAs
(% of Total Net Admitted Adjusted Gross DTAs)
Total Percent
0%
0%
0%
0%
0%
0%
Change
Capital
Percent
Ordinary
Percent
Impact of Tax Planning Strategies:
Adjusted Gross DTAs
(% of Total Adjusted Gross DTAs)
Net Admitted Adjusted Gross DTAs
(% of Total Net Admitted Adjusted Gross DTAs)
Total Percent
Total Percent
0%
100%
17%
0%
0%
0%
The Company’s tax planning strategies do not include the use of reinsurance-related tax
planning strategies.
TFLIC 2012 SEC
70
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
Current income taxes incurred consist of the following major components:
Federal
Foreign
Subtotal
Federal income tax on net capital gains
Federal and foreign income taxes incurred
Federal
Foreign
Subtotal
Federal income tax on net capital gains
Federal and foreign income taxes incurred
TFLIC 2012 SEC
$
$
$
$
Year Ended December 31
2012
2011
44,789
110,930 $
–
–
44,789
110,930
15,802
17,772
60,591
128,702 $
Year Ended December 31
2011
2010
44,789 $
58,571
–
–
44,789
58,571
15,802
24,841
60,591 $
83,412
Change
66,141
–
66,141
1,970
68,111
$
$
$
$
Change
(13,782)
–
(13,782)
(9,039)
(22,821)
71
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
The Company's current income tax incurred and change in deferred income tax differs
from the amount obtained by applying the federal statutory rate of 35% to income before
tax as follows:
2012
Current income taxes incurred
$
Year Ended December 31
2011
128,702
$
60,591
$
7,754
12,128
2010
83,412
(24,065)
Change in deferred income taxes
(without tax on unrealized gains and losses)
Total income tax reported
$
140,830
Income before taxes
$
365,242 $
35.00%
(182,234) $
35.00%
197,747
35.00%
Expected income tax expense (benefit) at 35%
statutory rate
$
127,835
$
(63,782) $
69,211
$
(4,308)
(3,148)
6,726
12,782
15
(7,149)
(1,968)
–
39
10,356
(350)
140,830 $
(3,958)
(2,217)
(10,326)
140,266
2,882
(1,343)
(454)
(281)
30
4,791
2,737
68,345 $
(3,360)
(2,180)
(3,591)
(348)
13
(2,256)
59
–
35
1,760
4
59,347
$
68,345
$
59,347
Increase (decrease) in actual tax reported resulting from:
Dividends received deduction
Tax credits
Tax adjustment for IMR
Surplus adjustment for in-force ceded
Nondeductible expenses
Deferred tax benefit on other items in surplus
Provision to return
Transfer of basis
Dividends from certain foreign corporations
Prior period adjustment
Other
Total income tax reported
For federal income tax purposes, the Company joins in a consolidated income tax return
filing with its indirect parent company, Transamerica Corporation, and other affiliated
companies. The method of allocation between the companies is subject to a written tax
allocation agreement. Under the terms of the tax allocation agreement, allocations are
based on separate income tax return calculations. The Company is entitled to recoup
federal income taxes paid in the event the future losses and credits reduce the greater of
the Company's separately computed income tax liability or the consolidated group's
income tax liability in the year generated. The Company is also entitled to recoup federal
income taxes paid in the event the losses and credits reduce the greater of the Company's
separately computed income tax liability or the consolidated group's income tax liability
in any carryback or carryforward year when so applied. Intercompany income tax
balances are settled within thirty days of payment to or filing with the Internal Revenue
Service. A tax return has not yet been filed for 2012.
As of December 31, 2012 and 2011, the Company had no operating loss, capital loss or
tax credit carryforwards available for tax purposes.
TFLIC 2012 SEC
72
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
The Company incurred income taxes during 2012, 2011 and 2010 of $93,620, $113,223
and $60,543, respectively, which will be available for recoupment in the event of future
net losses.
The amount of tax contingencies calculated for the Company as of December 31, 2012
and 2011 is $32 and $24, respectively. The total amount of tax contingencies that, if
recognized, would affect the effective income tax rate is $32. The Company classifies
interest and penalties related to income taxes as interest expense and penalty expense,
respectively. The Company’s interest (benefit) expense related to income taxes for the
years ending December 31, 2012, 2011 and 2010 is $(203), $(25) and $77, respectively.
The total interest payable balance as of December 31, 2012 and 2011 is $2 and $205,
respectively. The Company recorded no liability for penalties. It is not anticipated that
the total amounts of unrecognized tax benefits will significantly increase within twelve
months of the reporting date.
The Company’s federal income tax returns have been examined by the Internal Revenue
Service and closing agreements have been executed through 2004. The examination for
the years 2005 through 2006 have been completed and resulted in tax return adjustments
that are currently undergoing final calculation at appeal. The examination for the years
2007 through 2008 has been completed and resulted in tax return adjustments that are
currently being appealed. An examination is already in progress for the years 2009 and
2010. The Company believes that there are adequate defenses against or sufficient
provisions established related to any open or contested tax positions.
8. Policy and Contract Attributes
Participating life insurance policies were issued by the Company which entitle
policyholders to a share in the earnings of the participating policies, provided that a
dividend distribution, which is determined annually based on mortality and persistency
experience of the participating policies, is authorized by the Company.
For the year ended December 31, 2012, there were no premiums for participating life
insurance policies. For years ended 2011 and 2010, premiums for participating life
insurance policies were $111 and $2, respectively. The Company accounts for its
policyholder dividends based on dividend scales and experience of the policies. The
Company did not pay any dividends to policyholders during 2012, 2011 or 2010.
A portion of the Company’s policy reserves and other policyholders’ funds (including
separate account liabilities) relates to liabilities established on a variety of the Company’s
annuity and deposit fund products. There may be certain restrictions placed upon the
TFLIC 2012 SEC
73
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
amount of funds that can be withdrawn without penalty. The amount of reserves on these
products, by withdrawal characteristics, is summarized as follows:
General
Account
Subject to discretionary withdrawal
With fair value adjustment
At book value less surrender charge
of 5% or more
At fair value
Total with adjustment or at fair value
At book value without adjustment
(minimal or no charge or adjustment)
Not subject to discretionary withdrawal
provision
Total annuity reserves and deposit
liabilities
Less reinsurance ceded
Net annuity reserves and deposit
liabilities
$
863,230
$
100,861
$
–
Total
$
964,091
Percent
4%
963,783
6,586
1,833,599
47,733
485,825
634,419
–
7,974,208
7,974,208
1,011,516
8,466,619
10,442,226
4
35
43
3,963,343
66,275
–
4,029,618
17
964,662
6,566,022
1,965,950
9,496,634
40
6,761,604
1,978
7,266,716
–
9,940,158
–
$ 6,759,626
$ 7,266,716
$ 9,940,158
General
Account
Subject to discretionary withdrawal
With fair value adjustment
At book value less surrender charge
of 5% or more
At fair value
Total with adjustment or at fair value
At book value without adjustment
(minimal or no charge or adjustment)
Not subject to discretionary withdrawal
provision
Total annuity reserves and deposit
liabilities
Less reinsurance ceded
Net annuity reserves and deposit
liabilities
December 31
2012
Separate
Separate
Account with Account NonGuarantees Guaranteed
$
881,103
23,968,478 100 %
1,978
$ 23,966,500
December 31
2011
Separate
Separate
Account with Account NonGuarantees Guaranteed
$
132,777
$
–
Total
$
1,013,880
Percent
5%
1,396,544
4,904
2,282,551
50,323
444,165
627,265
–
6,241,061
6,241,061
1,446,867
6,690,130
9,150,877
6
30
41
3,713,504
69,871
–
3,783,375
17
988,299
6,339,784
1,995,720
9,323,803
42
6,984,354
967
7,036,920
–
8,236,781
–
22,258,055
967
$ 6,983,387
$ 7,036,920
$ 8,236,781
$ 22,257,088
100 %
Separate account assets held by the Company represent contracts where the benefit is
determined by the performance of the investments held in the separate account.
Information regarding the separate accounts of the Company as of and for the years
ended December 31, 2012, 2011 and 2010 is as follows:
TFLIC 2012 SEC
74
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
Premiums, deposits and other considerations
for the year ended December 31, 2012
Reserves for separate acccounts as of
December 31, 2012 with assets at:
Fair value
Amortized cost
Total as of December 31, 2012
Reserves for separate accounts by withdrawal
characteristics as of December 31, 2012:
Subject to discretionary withdrawal:
With fair value adjustment
At book value without fair value adjustment and
with current surrender charge of 5% or more
At fair value
At book value without fair value adjustment and
with current surrender charge of less than 5%
Subtotal
Not subject to discretionary withdrawal
Total separate account reserves at December 31, 2012
TFLIC 2012 SEC
Nonindexed
Guarantee
Less Than
or Equal to 4%
Nonguaranteed
Separate
Accounts
$
1,805,525
$
2,357,927
$
4,163,452
$
$
$
10,008,134
–
10,008,134
$
$
–
7,266,715
7,266,715
$
10,008,134
7,266,715
17,274,849
$
100,860
$
–
$
100,860
$
Total
47,733
485,825
–
8,042,184
47,733
8,528,009
66,275
700,693
6,566,022
7,266,715
–
8,042,184
1,965,950
10,008,134
66,275
8,742,877
8,531,972
17,274,849
$
$
75
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
Premiums, deposits and other considerations
for the year ended December 31, 2011
Reserves for separate accounts as of
December 31, 2011 with assets at:
Fair value
Amortized cost
Total as of December 31, 2011
Reserves for separate accounts by withdrawal
characteristics as of December 31, 2011:
Subject to discretionary withdrawal:
With fair value adjustment
At book value without fair value adjustment and
with current surrender charge of 5% or more
At fair value
At book value without fair value adjustment and
with current surrender charge of less than 5%
Subtotal
Not subject to discretionary withdrawal
Total separate account reserves at December 31, 2011
TFLIC 2012 SEC
Nonindexed
Guarantee
Less Than
or Equal to 4%
Nonguaranteed
Separate
Accounts
$
2,184,262
$
2,035,362
$
4,219,624
$
$
$
8,294,680
–
8,294,680
$
$
–
7,036,920
7,036,920
$
8,294,680
7,036,920
15,331,600
$
132,777
$
–
$
132,777
$
Total
50,323
444,165
–
6,301,437
50,323
6,745,602
69,871
697,136
6,339,784
7,036,920
–
6,301,437
1,993,243
8,294,680
69,871
6,998,573
8,333,027
15,331,600
$
$
76
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
Premiums, deposits and other considerations
for the year ended December 31, 2010
Reserves for separate accounts as of
December 31, 2010 with assets at:
Fair value
Amortized cost
Total as of December 31, 2010
Reserves for separate accounts by withdrawal
characteristics as of December 31, 2010:
Subject to discretionary withdrawal:
With fair value adjustment
At book value without fair value adjustment and
with current surrender charge of 5% or more
At fair value
At book value without fair value adjustment and
with current surrender charge of less than 5%
Subtotal
Not subject to discretionary withdrawal
Total separate account reserves at December 31, 2010
TFLIC 2012 SEC
Nonindexed
Guarantee
Less Than
or Equal to 4%
Nonguaranteed
Separate
Accounts
$
2,664,188
$
1,453,005
$
4,117,193
$
$
$
5,501,299
–
5,501,299
$
$
2,050,715
6,343,146
8,393,861
$
7,552,014
6,343,146
13,895,160
$
131,701
$
–
$
131,701
$
Total
52,218
643,553
–
5,501,299
52,218
6,144,852
72,502
899,974
7,493,887
8,393,861
–
5,501,299
–
5,501,299
72,502
6,401,273
7,493,887
13,895,160
$
$
77
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
A reconciliation of the amounts transferred to and from the Company’s separate accounts
is presented below:
Year Ended December 31
2012
2011
2010
Transfer as reported in the summary of
operations of the separate accounts
statement:
Transfers to separate accounts
Transfers from separate accounts
Net transfers to separate accounts
Miscellaneous reconciling adjustments
Net transfers as reported in the
statements of operations of the life,
accident and health annual statement
$ 4,163,485 $ 4,219,645 $ 4,117,231
(3,075,684)
(2,024,827)
(3,220,563)
1,143,961
2,092,404
942,922
(63)
8
$
102
942,930 $ 1,143,898 $ 2,092,506
The legal insulation of separate account assets prevents such assets from being generally
available to satisfy claims resulting from the general account. At December 31, 2012 and
2011, the Company’s separate account statement included legally insulated assets of
$17,590,145 and $15,878,424, respectively. The assets legally insulated from general
account claims at December 31, 2012 and 2011 are attributed to the following products:
Variable life
Variable annuities
Market value separate accounts
Par annuities
Book value separate accounts
Total separate account assets
$
$
2012
80,147
6,288,266
1,550,300
2,220,569
7,450,863
17,590,145
$
$
2011
71,843
4,553,020
1,528,849
2,205,551
7,519,161
15,878,424
Some separate account liabilities are guaranteed by the general account. In accordance
with the guarantees provided, if the investment proceeds are insufficient to cover the rate
of return guaranteed for the product, the policyholder proceeds will be remitted by the
general account. As of December 31, 2012 and 2011, the general account of the
Company had a maximum guarantee for separate account liabilities of $47,317 and
$81,614, respectively. To compensate the general account for the risk taken, the separate
account paid risk charges of $31,916, $27,094 and $23,622 to the general account in
2012, 2011 and 2010, respectively. During the years ended December 31, 2012, 2011
and 2010, the general account of the Company had paid $619, $1,542 and $1,006,
respectively, toward separate account guarantees.
TFLIC 2012 SEC
78
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
At December 31, 2012 and 2011, the Company reported guaranteed separate account
assets at amortized cost in the amount of $7,450,863 and $7,519,161, respectively, based
upon the prescribed practice granted by the State of New York as described in Note 2.
These assets had a fair value of $7,618,858 and $7,682,141 at December 31, 2012 and
2011, respectively, which would have resulted in an unrealized gain of $167,995 and
$162,980, respectively, had these assets been reported at fair value.
The Company participates in securities lending within the separate account. The
Company follows the same policies and procedures as the general account for such
transactions conducted from the separate account. See Note 10 for a discussion of
securities lending policies and procedures. As of December 31, 2012 and 2011,
securities with a book value of $21,171 and $26,057, respectively, were on loan under
securities lending agreements, which represents less than one percent of total separate
account assets. The Company does not obtain approval or otherwise provide notification
to contract holders regarding securities lending transactions that occur with separate
account assets. However, the Company requires that borrowers pledge collateral worth
102% of the value of the loaned securities. As of December 31, 2012, the Company held
collateral from securities lending transactions in the form of cash and on open terms in
the amount of $21,606. This cash collateral is reinvested in a registered money market
fund and is not available for general corporate purposes.
For variable annuities with guaranteed living benefits and variable annuities with
minimum guaranteed death benefits the Company complies with Actuarial Guideline
XLIII (AG 43), which replaces Actuarial Guidelines 34 and 39. AG 43 specifies
statutory reserve requirements for variable annuity contracts with benefit guarantees
(VACARVM) and without benefit guarantees and related products. The AG 43 reserve
calculation includes variable annuity products issued after January 1, 1981. Examples of
covered guaranteed benefits include guaranteed minimum accumulation benefits, return
of premium death benefits, guaranteed minimum income benefits, guaranteed minimum
withdrawal benefits and guaranteed payout annuity floors. The aggregate reserve for
contracts falling within the scope of AG 43 is equal to the conditional tail expectation
(CTE) Amount, but not less than the standard scenario amount (SSA).
To determine the CTE Amount, the Company used 1,000 of the pre-packaged scenarios
developed by the American Academy of Actuaries (AAA) produced in October 2005 and
prudent estimate assumptions based on Company experience. The SSA was determined
using the assumptions and methodology prescribed in AG 43 for determining the SSA.
TFLIC 2012 SEC
79
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
At December 31, 2012 and 2011, the Company had variable annuities with minimum
guaranteed benefits as follows:
Subjected
Account
Value
Amount of
Reserve Held
Reinsurance
Reserve
Credit
Benefit and Type of Risk
December 31, 2012
Guaranteed Minimum Withdrawal Benefit
Guaranteed Minimum Death Benefit
$ 4,849,846
1,373,096
$
131,770
7,639
$
–
1,978
December 31, 2011
Guaranteed Minimum Withdrawal Benefit
Guaranteed Minimum Death Benefit
$ 4,863,047
1,328,603
$
181,344
7,406
$
–
967
Reserves on the Company’s traditional life insurance products are computed using mean
reserving methodologies. These methodologies result in the establishment of assets for
the amount of the net valuation premiums that are anticipated to be received between the
policy’s paid-through date to the policy’s next anniversary date. At December 31, 2012
and 2011, the gross premium and loading amounts related to these assets (which are
reported as premiums deferred and uncollected), are as follows:
Gross
December 31, 2012
Life and annuity:
Ordinary first-year business
Ordinary renewal business
Group life business
Credit life
Reinsurance ceded
Total life and annuity
Accident and health
$
$
TFLIC 2012 SEC
312 $
153,131
664
235
(146,264)
8,078
4,974
13,052 $
Loading
278
1,350
127
–
–
1,755
–
1,755
Net
$
$
34
151,781
537
235
(146,264)
6,323
4,974
11,297
80
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
Gross
December 31, 2011
Life and annuity:
Ordinary first-year business
Ordinary renewal business
Group life business
Credit life
Reinsurance ceded
Total life and annuity
Accident and health
$
$
1,976 $
166,851
639
265
(161,358)
8,373
4,085
12,458 $
Loading
290 $
1,434
147
–
–
1,871
–
1,871 $
Net
1,686
165,417
492
265
(161,358)
6,502
4,085
10,587
The Company anticipates investment income as a factor in premium deficiency
calculation, in accordance with SSAP No. 54, Individual and Group Accident and Health
Contracts. As of December 31, 2012 and 2011, the Company had insurance in force
aggregating $12,243,276 and $14,627,860, respectively, in which the gross premiums are
less than the net premiums required by the valuation standards established by the New
York Department of Financial Services. The Company established policy reserves of
$92,244 and $108,491 to cover these deficiencies as of December 31, 2012 and 2011,
respectively.
9. Capital and Surplus
At December 31, 2012 and 2011, the Company had 44,175 shares of 6% non-voting, noncumulative preferred stock issued and outstanding. Aegon owns 38,609 shares and TLIC
owns 5,566 shares. Par value is $10 per share, and the liquidation value is $1,286.72 per
share.
The preferred stock shareholders are entitled to receive non-cumulative dividends at the
rate of 6% per year of an amount equal to the sum of (1) the par value plus (2) any
additional paid-in capital for such preferred stock. Dividends are payable annually in
December. The amount of dividends unpaid at December 31, 2012 was $430. The
preferred shares have preference as to dividends and upon dissolution or liquidation of
the Company.
The Company is subject to limitations, imposed by the State of New York, on the
payment of dividends to its stockholders. Generally, dividends during any year may not
be paid, without prior regulatory approval, in excess of the lesser of (1) 10 percent of the
Company’s statutory surplus as of the preceding December 31, or (2) the Company’s
statutory gain from operations before net realized capital gains on investments for the
preceding year. Subject to the availability of unassigned surplus at the time of such a
TFLIC 2012 SEC
81
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
dividend, the maximum payment which may be made in 2013, without prior approval of
insurance regulatory authorities, is $83,602
On December 21, 2011, the Company paid a preferred stock dividend and a common
stock dividend of $3,410 and $296,590, respectively, to its parent companies, Aegon and
TLIC. Of the common stock dividend amount, $76,057 was considered an ordinary
dividend and $220,533 was considered an extraordinary dividend. Of the total $300,000
preferred and common stock dividends, Aegon received $262,200 and TLIC received
$37,800. On December 23, 2010, the Company paid a preferred stock dividend and a
common stock dividend of $3,410 and $196,590, respectively, to its parent companies,
Aegon and TLIC. Of the common stock dividend amount, $87,502 was considered an
ordinary dividend and $109,088 was considered an extraordinary dividend. Of the total
$200,000 preferred and common stock dividends, Aegon received $174,800 and TLIC
received $25,200. The Company did not pay any dividends during 2012.
Life and health insurance companies are subject to certain RBC requirements as specified
by the NAIC. Under those requirements, the amount of capital and surplus maintained by
a life and health insurance company is to be determined based on the various risk factors
related to it. At December 31, 2012, the Company meets the minimum RBC
requirements.
On May 2, 2008, the Company received $150,000 from Aegon in exchange for surplus
notes. The Company received approval from the Superintendent of Insurance of the New
York Department of Financial Services prior to the issuance of the surplus notes, as well
as the December 31, 2012, 2011 and 2010 interest payments. These notes are due 20
years from the date of issuance at an interest rate of 6.25% and are subordinate and junior
in the right of payment to all obligations and liabilities of the Company. In the event of
liquidation of the Company, full payment of the surplus notes shall be made before the
holders of common stock become entitled to any distribution of the remaining assets of
the Company.
Additional information related to the outstanding surplus notes at December 31, 2012 and
2011 is as follows:
For Year
Ending
2012
2011
Balance
Interest Paid Cumulative
Outstanding Current Year Interest Paid
$
150,000
150,000
$
9,375
9,375
$
43,750 $
34,375
Accrued
Interest
–
–
The Company held special surplus funds in the amount of $6,660 and $4,796, as of
December 31, 2012 and 2011, respectively, for annuitant mortality fluctuations as
TFLIC 2012 SEC
82
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
required under New York Regulation 47, Separate Account and Separate Account
Annuities.
10. Securities Lending
The Company participates in an agent-managed securities lending program. The
Company receives collateral equal to 102% of the fair value of the loaned domestic
securities as of the transaction date. If the fair value of the collateral is at any time less
than 102% of the fair value of the loaned securities, the counterparty is mandated to
deliver additional collateral, the fair value of which, together with the collateral already
held in connection with the lending transaction, is at least equal to 102% of the fair value
of the loaned domestic securities. In the event the Company loans a foreign security and
the denomination of the currency of the collateral is other than the denomination of the
currency of the loaned foreign security, the Company receives and maintains collateral
equal to 105% of the fair value of the loaned security.
At December 31, 2012 and 2011, respectively, securities in the amount of $238,014 and
$459,577 were on loan under securities lending agreements. At December 31, 2012, the
collateral the Company received from securities lending was in the form of cash and on
open terms. This cash collateral is reinvested and is not available for general corporate
purposes. The reinvested cash collateral has a fair value of $257,972 and $475,551 at
December 31, 2012 and 2011, respectively.
The contractual maturities of the securities lending collateral positions are as follows:
Open
30 days or less
31 to 60 days
61 to 90 days
Greater than 90 days
Total
Fair Value
$ 256,262
–
–
–
–
256,262
Securities received
Total collateral received
–
$ 256,262
The Company receives primarily cash collateral in an amount in excess of the fair value
of the securities lent. The Company reinvests the cash collateral into higher yielding
securities than the securities which the Company has lent to other entities under the
arrangement.
TFLIC 2012 SEC
83
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
The maturity dates of the reinvested securities lending collateral are as follows:
Open
30 days or less
31 to 60 days
61 to 90 days
91 to 120 days
121 to 180 days
181 to 365 days
1 to 2 years
2-3 years
Greater than 3 years
Total
Securities received
Total collateral reinvested
$
Amortized Cost
25,082
119,258
45,726
19,998
10,663
–
–
7,389
30,027
–
258,143
$
–
258,143
$
$
Fair Value
25,083
119,260
45,676
19,998
10,665
–
–
7,396
29,894
–
257,972
–
257,972
For securities lending, the Company’s sources of cash that it uses to return the cash
collateral is dependent upon the liquidity of the current market conditions. Under current
conditions, the Company has securities with a par value of $257,983 (fair value of
$257,972) that are currently tradable securities that could be sold and used to pay for the
$256,262 in collateral calls that could come due under a worst-case scenario.
11. Retirement and Compensation Plans
The Company’s employees participate in a qualified defined benefit pension plan
sponsored by Aegon. The Company has no legal obligation for the plan. The Company
recognizes pension expense equal to its allocation from Aegon. The pension expense is
allocated among the participating companies based on International Accounting
Standards 19 (IAS 19), Accounting for Employee Benefits and based upon actuarial
participant benefit calculations. The benefits are based on years of service and the
employee’s eligible annual compensation. Pension expenses were $9, $8 and $8 for the
years ended December 31, 2012, 2011 and 2010, respectively. The plan is subject to the
reporting and disclosure requirements of the Employee Retirement Income Security Act
of 1974.
The Company’s employees also participate in a defined contribution plan sponsored by
Aegon which is qualified under Section 401(k) of the Internal Revenue Service Code.
Employees of the Company who customarily work at least 1,000 hours during each
calendar year and meet the other eligibility requirements are participants of the plan.
Participants may elect to contribute up to twenty-five percent of their salary to the plan.
TFLIC 2012 SEC
84
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
The Company will match an amount up to three percent of the participant’s salary.
Participants may direct all of their contributions and plan balances to be invested in a
variety of investment options. The plan is subject to the reporting and disclosure
requirements of the Employee Retirement Income Security Act of 1974. The Company’s
allocation of benefits expense for the years ended December 31, 2012, 2011 and 2010
was $6 for each year, respectively.
Aegon sponsors supplemental retirement plans to provide the Company’s senior
management with benefits in excess of normal pension benefits. The plans are
noncontributory, and benefits are based on years of service and the employee’s
compensation level. The plans are unfunded and nonqualified under the Internal
Revenue Service Code. In addition, Aegon has established incentive deferred
compensation plans for certain key employees of the Company. The Company’s
allocation of expense for these plans for each of the years ended December 31, 2012,
2011 and 2010 was negligible. Aegon also sponsors an employee stock option plan/stock
appreciation rights for employees of the Company and a stock purchase plan for its
producers, with the participating affiliated companies establishing their own eligibility
criteria, producer contribution limits and company matching formula. These plans have
been accrued or funded as deemed appropriate by management of Aegon and the
Company.
In addition to pension benefits, the Company participates in plans sponsored by Aegon
that provide postretirement medical, dental and life insurance benefits to employees
meeting certain eligibility requirements. Portions of the medical and dental plans are
contributory. The postretirement plan expenses are charged to affiliates in accordance
with an intercompany cost sharing arrangement. The Company’s allocation of
postretirement expenses was negligible for the years ended December 31, 2012, 2011 and
2010.
12. Related Party Transactions
The Company shares certain officers, employees and general expenses with affiliated
companies.
In accordance with an agreement between Aegon and the Company, Aegon will ensure
the maintenance of certain minimum tangible net worth, operating leverage and liquidity
levels of the Company, as defined in the agreement, through the contribution of
additional capital by Aegon as needed.
The Company is party to a service agreement with TLIC, in which the Company receives
services, including accounting, data processing and other professional services, in
consideration of reimbursement of the actual costs of services rendered. The Company
is party to a Management and Administrative and Advisory agreement with Aegon USA
TFLIC 2012 SEC
85
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
Realty Advisors, Inc. (Advisor) whereby Advisor serves as the administrator and advisor
for the Company’s mortgage loan operations. Aegon USA Investment Management,
LLC acts as a discretionary investment manager under an Investment Management
Agreement with the Company. During 2012, 2011 and 2010, the Company paid $24,579,
$23,065 and $22,860, respectively, for these services, which approximates cost.
The Company has an administration service agreement with Transamerica Asset
Management, Inc. to provide administrative services to the Aegon/Transamerica Series
Trust. The Company received $2,699, $1,688 and $1,112 for these services during 2012,
2011 and 2010, respectively.
Transamerica Capital, Inc. provides wholesaling distribution services for the Company
under a distribution agreement. The Company incurred expenses under this agreement of
$5,633, $4,411 and $3,395 for the years ended December 31, 2012, 2011 and 2010,
respectively.
Payables to and receivables from affiliates and intercompany borrowings bear interest at
the thirty-day commercial paper rate. During 2012, 2011 and 2010, the Company paid
(received) net interest of $(12), $11 and $(14), respectively, to (from) affiliates. At
December 31, 2012 and 2011, the Company reported a net amount of $87,032 receivable
from and $819 due to affiliates, respectively. Terms of settlement require that these
amounts are settled within 90 days.
At December 31, 2012, the Company had short-term intercompany notes receivable of
$54,700 as follows. The Company did not have any short-term intercompany notes
receivable at December 31, 2011. In accordance with SSAP No. 25, Accounting for and
Disclosures about Transactions with Affiliates and Other Related Parties, these notes are
reported as short-term investments.
Receivable from
December 31, 2012
AEGON
TFLIC 2012 SEC
Amount
$
54,700
Due By
April 25, 2013
Interest Rate
0.12%
86
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
13. Managing General Agents
The Company utilizes managing general agents and third-party administrators in its
operations. Information regarding these entities is as follows:
Name and Address of Managing
General Agent or Third-Party
Administrator
FEIN
The Vanguard Group, Inc.
23-1945930
100 Vanguard Blvd.
Malvern, PA 19355
CBPU-
Exclusive
Contract
No
Types of
Types of
Business
Authority
Written
Granted
Deferred and C,B,P,U
Income
Annuities
Total Direct
Premiums
Written/
Produced By
$ 36,282
Claims Payment
Binding Authority
Premium Collection
Underwriting
For years ended December 31, 2012, 2011 and 2010, the Company had $36,282, $20,974
and $21,285, respectively, of direct premiums written by The Vanguard Group, Inc. For
the years ended December 31, 2012 and 2011, the Company did not have any direct
premiums written by Vision Financial Corp. For the year ended December 31, 2010, the
Company had $1,766 of direct premiums written by Vision Financial Corp. For the year
ended December 31, 2012 the Company did not have any direct premiums written by
League Insurance Agency. For the years ended December 31, 2011 and 2010, the
Company had $17 and $33, respectively, of direct premiums written by League Insurance
Agency.
14. Commitments and Contingencies
The Company has contingent commitments of $14,317 and $23,554, at December 31,
2012 and 2011, respectively, to provide additional funding for joint ventures,
partnerships and limited liability companies, which includes LIHTC commitments of
$2,127 and $8,603 at December 31, 2012 and 2011, respectively.
Private placement commitments outstanding as of December 31, 2012 were $11,715.
There were no private placement commitments outstanding as of December 31, 2011.
There were no securities acquired on a “to be announced” (TBA) basis at December 31,
2012. There were securities in the amount of $20,491 being acquired TBA basis at
December 31, 2011.
The Company may pledge assets as collateral for derivative transactions. At December
31, 2012 and 2011, the Company has pledged invested assets with a carrying value of
TFLIC 2012 SEC
87
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
$19,516 and $36,839, respectively, and fair value of $22,069 and $41,209, respectively,
in conjunction with these transactions.
Cash collateral received from derivative counterparties as well as the obligation to return
the collateral is recorded on the Company’s balance sheet. The amount of cash collateral
posted as of December 31, 2012 and 2011, respectively, was $20,331 and $87,702. In
addition, securities in the amount of $19,891 and $14,724 were also posted to the
Company as of December 31, 2012 and 2011, respectively, which were not included in
the financials of the Company. Noncash collateral is not to be recognized by the
recipient unless that collateral is sold or repledged or the counterparty defaults.
The Company is a party to legal proceedings involving a variety of issues incidental to its
business. Lawsuits may be brought in nearly any federal or state court in the United
States or in an arbitral forum. In addition, there continues to be significant federal and
state regulatory activity relating to financial services companies. The Company’s legal
proceedings are subject to many variables, and given its complexity and scope, outcomes
cannot be predicted with certainty. Although legal proceedings sometimes include
substantial demands for compensatory and punitive damages, and injunctive relief, it is
management’s opinion that damages arising from such demands will not be material to
the Company’s financial position or results of operations.
The Company is subject to insurance guaranty laws in the states in which it writes
business. These laws provide for assessments against insurance companies for the benefit
of policyholders and claimants in the event of insolvency of other insurance companies.
Assessments are charged to operations when received by the Company except where
right of offset against other taxes paid is allowed by law. Amounts available for future
offsets are recorded as an asset on the Company’s balance sheet. The future obligation for
known insolvencies has been accrued based on the most recent information available
from the National Organization of Life and Health Insurance Guaranty Association.
Potential future obligations for unknown insolvencies are not determinable by the
Company and are not required to be accrued for financial reporting purposes. The
Company has established a reserve of $34,002 and $34,754 at December 31, 2012 and
2011, respectively, for its estimated share of future guaranty fund assessments related to
several major insurer insolvencies. The Company had an offsetting premium tax benefit
of $16,319 and $16,319 at December 31, 2012 and 2011, respectively. The guaranty
fund expense was $174, $9,674 and $8,079 for the years ended December 31, 2012, 2011
and 2010, respectively.
TFLIC 2012 SEC
88
Transamerica Financial Life Insurance Company
Notes to Financial Statements – Statutory Basis (continued)
(Dollars in Thousands, Except per Share Data)
15. Sales, Transfer and Servicing of Financial Assets and Extinguishments of
Liabilities
As of December 31, 2012, the Company had dollar repurchase agreements outstanding in
the amount of $63,548. The Company did not participate in dollar repurchase
agreements at December 31, 2011.
The contractual maturities of the dollar repurchase agreement positions are as follows:
Open
30 days or less
31 to 60 days
61 to 90 days
Greater than 90 days
Total
Fair Value
$ 67,189
–
–
–
–
67,189
Securities received
Total collateral received
$
–
67,189
In the course of the Company’s asset management, securities are sold and reacquired
within 30 days of the sale date to enhance the Company’s yield on its investment
portfolio. There were no securities of NAIC designation 3 or below sold during 2012 and
reacquired within 30 days of the sale date.
16. Subsequent Events
The financial statements are adjusted to reflect events that occurred between the balance
sheet date and the date when the financial statements are issued, provided they give
evidence of conditions that existed at the balance sheet date (Type I). Events that are
indicative of conditions that arose after the balance sheet date are disclosed, but do not
result in an adjustment of the financial statements themselves (Type II). The Company
has not identified any Type I or Type II subsequent events for the year ended December
31, 2012 through the date the financial statements are issued.
TFLIC 2012 SEC
89
Statutory-Basis Financial
Statement Schedules
TFLIC 2012 SEC
Transamerica Financial Life Insurance Company
Summary of Investments – Other Than
Investments in Related Parties
(Dollars in Thousands)
December 31, 2012
Type of Investment
Cost (1)
Fixed maturities
Bonds:
United States government and
government agencies and
authorities
$
614,140 $
States, municipalities and political
subdivisions
144,091
Foreign governments
167,404
Hybrid securities
100,172
All other corporate bonds
6,395,832
Preferred stocks
1,573
Total fixed maturities
7,423,212
Fair
Value
717,293
Amount at
Which Shown
in the
Balance Sheet (2)
$
615,107
153,541
179,467
97,495
7,043,413
2,241
8,193,450
144,091
167,404
100,172
6,386,432
1,573
7,414,779
5,113
5,113
5,113
5,113
Equity securities
Common stocks:
Industrial, miscellaneous and all
other
Total common stocks
Mortgage loans on real estate
Policy loans
Other long-term investments
Cash, cash equivalents and short-term
investments
Securities lending reinvested
collateral assets
Total investments
3,951
3,951
$
544,544
60,041
66,552
544,544
60,041
66,552
532,726
532,726
258,143
8,889,169
258,143
8,881,898
$
(1) Original cost of equity securities and, as to fixed maturities, original cost reduced by
repayments and adjusted for amortization of premiums or accrual of discounts.
(2) United States government and corporate bonds of $17,802 are held at fair value rather
than amortized cost due to having an NAIC 6 rating.
TFLIC 2012 SEC
90
Transamerica Financial Life Insurance Company
Supplementary Insurance Information
(Dollars in Thousands)
SCHEDULE III
Year ended December 31, 2012
Individual life
Individual health
Group life and health
Annuity
Future Policy
Benefits and
Expenses
Unearned
Premiums
$
$
$
Year ended December 31, 2011
Individual life
Individual health
Group life and health
Annuity
$
$
Year ended December 31, 2010
Individual life
Individual health
Group life and health
Annuity
$
$
800,856
33,163
126,870
6,685,096
7,645,985
$
747,711
29,871
121,400
6,908,679
7,807,661
$
1,129,418
29,445
115,632
6,715,284
7,989,779
$
$
$
–
5,194
1,701
–
6,895
Policy and
Contract
Liabilities
$
$
–
5,405
1,764
–
7,169
$
–
6,118
1,779
–
7,897
$
$
$
Premium
Revenue
13,664
6,159
7,042
437
27,302
$
112,965
46,142
47,758
4,733,483
$ 4,940,348
17,650
10,749
6,654
551
35,604
$
61,723
11,591
14,004
377
87,695
Net
Investment
Income*
$
114,108
25,920
29,613
3,898,240
$ 4,067,881
(392,806) $
39,862
40,610
4,738,804
$ 4,426,470 $
57,137
2,680
7,514
396,199
463,530
$ (244,361) $ 195,549
23,875
20,769
21,200
18,354
3,945,524
1,314,829
$ 3,746,238 $ 1,549,501
$
71,555
2,616
7,621
424,335
506,127
$
$
$
$
Other
Operating
Expenses*
43,911
2,470
7,248
373,499
427,128
380,711
43,410
56,396
4,664,761
$ 5,145,278
$
Benefits,
Claims
Losses and
Settlement
Expenses
413,196
31,177
36,810
2,836,088
$ 3,317,271
$
111,558
17,866
14,835
1,107,739
$ 1,251,998
$
125,913
19,128
10,680
2,238,446
$ 2,394,167
*Allocations of net investment income and other operating expenses are based on a number of assumptions and estimates, and the
results would change if different methods were applied.
91
TFLIC 2012 SEC
Transamerica Financial Life Insurance Company
Reinsurance
(Dollars in Thousands)
SCHEDULE IV
Ceded to
Other
Companies
Assumed
From
Other
Companies
$ 247,623,959
$ 244,178,985
$
16,073,227
1519%
$
$
$
550%
0%
7%
0%
13%
1652%
Gross
Amount
Year ended December 31, 2012
Life insurance in force
Premiums:
Individual life
Individual health
Group life and health
Annuity
Year ended December 31, 2011
Life insurance in force
Premiums:
Individual life
Individual health
Group life and health
Annuity
Year ended December 31, 2010
Life insurance in force
Premiums:
Individual life
Individual health
Group life and health
Annuity
$
19,518,201
$
$
133,277
47,094
55,273
4,724,707
4,960,351
$
18,982,172
$
$
127,831
43,652
51,067
4,727,987
4,950,537
$
16,809,256
$
158,536
40,593
43,509
4,652,270
4,894,908
$
TFLIC 2012 SEC
621,218
94
3,369
8,876
633,557
$
112,964
46,142
47,759
4,733,483
4,940,348
$ 260,580,996
$ 257,168,145
$
15,569,321
$
$
606,665
148
3,893
10,951
621,657
$
$ 192,917,364
$ 259,292,608
$
83,184,500
312%
$
$
$
380,712
43,410
56,395
4,664,761
5,145,278
166%
8%
24%
0%
13%
$
$
$
641,531
1,046
10,883
100
653,560
Net
Amount
Percentage
of Amount
Assumed
to Net
1,127,302
3,938
14,350
134
1,145,724
409,081
746
560
232
410,619
$
$
$
631,257
3,563
13,446
12,723
660,989
$
$
(392,806)
39,862
40,610
4,738,804
4,426,470
-154%
0%
10%
0%
14%
92
ALLIANCEBERNSTEIN VARIABLE PRODUCTS SERIES FUND, INC.
INTERMEDIATE BOND PORTFOLIO
LARGE CAP GROWTH PORTFOLIO
GROWTH AND INCOME PORTFOLIO
GROWTH PORTFOLIO
INTERNATIONAL GROWTH PORTFOLIO
GLOBAL THEMATIC GROWTH PORTFOLIO
SMALL CAP GROWTH PORTFOLIO
REAL ESTATE INVESTMENT PORTFOLIO
INTERNATIONAL VALUE PORTFOLIO
SMALL/MID CAP VALUE PORTFOLIO
VALUE PORTFOLIO
BALANCED WEALTH STRATEGY PORTFOLIO
DYNAMIC ASSET ALLOCATION PORTFOLIO
(each a “Portfolio” and collectively, the “Portfolios”)
______________________________________________________________________________
c/o AllianceBernstein Investor Services, Inc.
P. O. Box 786003, San Antonio, Texas 78278-6003
Toll Free (800) 221-5672
______________________________________________________________________________
STATEMENT OF ADDITIONAL INFORMATION
May 1, 2013
______________________________________________________________________________
This Statement of Additional Information (“SAI”) is not a prospectus but
supplements and should be read in conjunction with the current prospectuses dated May 1, 2013,
for AllianceBernstein® Variable Products Series (VPS) Fund, Inc. (the “Fund”) that offer Class
A shares and Class B shares of the Fund’s Portfolios (each a “Prospectus”, and together, the
“Prospectuses”). Financial statements for each Portfolio of the Fund for the year ended
December 31, 2012, are included in the Portfolio’s annual report and are incorporated into this
SAI by reference. Copies of the Prospectuses and annual reports may be obtained by contacting
AllianceBernstein Investor Services, Inc. (“ABIS”) at the address or the “For Literature”
telephone number shown above or on the Internet at www.AllianceBernstein.com.
TABLE OF CONTENTS
PAGE
INFORMATION ABOUT THE PORTFOLIOS AND THEIR INVESTMENTS........................ 3
INVESTMENT RESTRICTIONS............................................................................................... 46
MANAGEMENT OF THE FUND.............................................................................................. 47
EXPENSES OF THE PORTFOLIOS.......................................................................................... 90
PURCHASE AND REDEMPTION OF SHARES...................................................................... 96
NET ASSET VALUE ................................................................................................................ 101
PORTFOLIO TRANSACTIONS .............................................................................................. 104
DIVIDENDS, DISTRIBUTIONS AND TAXES ...................................................................... 112
GENERAL INFORMATION.................................................................................................... 113
FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM ................................................................................... 129
APPENDIX A: STATEMENT OF POLICIES AND PROCEDURES FOR PROXY
VOTING ........................................................................................................................ A-1
__________________
AllianceBernstein® and the AB Logo are registered trademarks and service marks used by permission of the owner,
AllianceBernstein L.P.
INFORMATION ABOUT THE PORTFOLIOS AND THEIR INVESTMENTS
Introduction to the Portfolios
The Fund is an open-end series investment company designed to fund variable
annuity contracts and variable life insurance policies offered by the separate accounts of certain
life insurance companies. The Fund currently offers an opportunity to choose among the
separately managed pools of assets (the “Portfolios”) described in the Portfolios’ Prospectuses,
each of which has differing investment objectives and policies. The Fund currently has thirteen
Portfolios, all of which are described in this SAI.
Except as noted, the investment objective and policies described below are not
“fundamental policies” within the meaning of the Investment Company Act of 1940 (the “1940
Act”), and may, therefore, be changed by the Board of Directors of the Fund (the “Board” or the
“Directors”) without shareholder approval. However, no Portfolio will change its investment
objective without at least 60 days’ prior written notice to shareholders. There is no guarantee
that a Portfolio will achieve its investment objective. Whenever any investment policy or
restriction states a minimum or maximum percentage of a Portfolio’s assets that may be invested
in any security or other asset, it is intended that such minimum or maximum percentage
limitation be determined immediately after and as a result of such Portfolio’s acquisition of such
security or other asset. Accordingly, any later increase or decrease in percentage beyond the
specified limitations resulting from a change in value or net assets will not be considered a
violation of this percentage limitation.
Additional Investment Policies and Practices
The following information about the Portfolios’ investment policies and practices
supplements the information set forth in the Prospectuses.
Convertible Securities
Convertible securities include bonds, debentures, corporate notes and preferred
stocks that are convertible at a stated exchange rate into shares of the underlying common stock.
Prior to their conversion, convertible securities have the same general characteristics as
non-convertible debt securities, which provide a stable stream of income with generally higher
yields than those of equity securities of the same or similar issuers. As with all debt securities,
the market value of convertible securities tends to decline as interest rates increase and,
conversely, to increase as interest rates decline. While convertible securities generally offer
lower interest or dividend yields than non-convertible debt securities of similar quality, they do
enable the investor to benefit from increases in the market price of the underlying common stock.
When the market price of the common stock underlying a convertible security
increases, the price of the convertible security increasingly reflects the value of the underlying
common stock and may rise accordingly. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on a yield basis, and thus may not
3
depreciate to the same extent as the underlying common stock. Convertible securities rank
senior to common stocks in an issuer’s capital structure. They are consequently of higher quality
and entail less risk than the issuer’s common stock, although the extent to which such risk is
reduced depends in large measure upon the degree to which the convertible security sells above
its value as a fixed-income security.
Depositary Receipts
A Portfolio may invest in depositary receipts. American Depositary Receipts
(“ADRs”) are depositary receipts typically issued by a U.S. bank or trust company that evidence
ownership of underlying securities issued by a foreign corporation. European Depositary
Receipts (“EDRs”), Global Depositary Receipts (“GDRs”) or other types of depositary receipts
are typically issued by non-U.S. banks or trust companies and evidence ownership of underlying
securities issued by either a U.S. or non-U.S. company. Transactions in these securities may not
necessarily be settled in the same currency as transactions in the securities into which they
represent. In addition, the issuers of the securities of unsponsored depositary receipts are not
obligated to disclose material information in the United States. Generally, ADRs, in registered
form, are designed for use in the U.S. securities markets; EDRs, in bearer form, are designed for
use in European securities markets; and GDRs, in bearer form, are designed for use in two or
more securities markets, such as those of Europe and Asia.
Derivatives
A Portfolio may, but is not required to, use derivatives for hedging or other risk
management purposes or as part of its investment practices. Derivatives are financial
contracts whose value depends on, or is derived from, the value of an underlying asset, reference
rate or index. These assets, rates, and indices may include bonds, stocks, mortgages,
commodities, interest rates, currency exchange rates, bond indices and stock indices.
There are four principal types of derivatives: options, futures, forwards and
swaps. These principal types of derivative instruments, as well as the methods in which they
may be used by a Portfolio are described below. Derivatives may be (i) standardized,
exchange-traded contracts or (ii) customized, privately-negotiated contracts. Exchange-traded
derivatives tend to be more liquid and subject to less credit risk than those that are privately
negotiated. The Portfolios may use derivatives to earn income and enhance returns, to hedge or
adjust the risk profile of a portfolio and either to replace more traditional direct investments or to
obtain exposure to otherwise inaccessible markets.
Forward Contracts. A forward contract, which may be standardized and
exchange-traded or customized and privately negotiated, is an agreement for one party to buy,
and the other party to sell, a specific quantity of an underlying commodity or other tangible asset
for an agreed-upon price at a future date. A forward contract generally is settled by physical
delivery of the commodity or other tangible asset underlying the forward contract to an agreedupon location at a future date (rather than settled by cash) or will be rolled forward into a new
forward contract. Non-deliverable forwards (“NDFs”) specify a cash payment upon maturity.
4
Futures Contracts and Options on Futures Contracts. A futures contract is an
agreement that obligates the buyer to buy and the seller to sell a specified quantity of an
underlying asset (or settle for cash the value of a contract based on an underlying asset, rate or
index) at a specific price on the contract maturity date. Options on futures contracts are options
that call for the delivery of futures contracts upon exercise. Futures contracts are standardized,
exchange-traded instruments and are fungible (i.e., considered to be perfect substitutes for each
other). This fungibility allows futures contracts to be readily offset or canceled through the
acquisition of equal but opposite positions, which is the primary method in which futures
contracts are liquidated. A cash-settled futures contract does not require physical delivery of the
underlying asset but instead is settled for cash equal to the difference between the values of the
contract on the date it is entered into and its maturity date.
Options. An option, which may be standardized and exchange-traded, or
customized and privately negotiated, is an agreement that, for a premium payment or fee, gives
the option holder (the buyer) the right but not the obligation to buy (a “call”) or sell (a “put”) the
underlying asset (or settle for cash an amount based on an underlying asset, rate or index) at a
specified price (the exercise price) during a period of time or on a specified date. Likewise,
when an option is exercised the writer of the option is obligated to sell (in the case of a call
option) or to purchase (in the case of a put option) the underlying asset (or settle for cash an
amount based on an underlying asset, rate or index).
Swaps. A swap, which may be standardized and exchange-traded or customized
and privately negotiated, is an agreement that obligates two parties to exchange a series of cash
flows at specified intervals (payment dates) based upon or calculated by reference to changes in
specified prices or rates (e.g., interest rates in the case of interest rate swaps, currency exchange
rates in the case of currency swaps) for a specified amount of an underlying asset (the “notional”
principal amount). Most swaps are entered into on a net basis (i.e., the two payment streams are
netted out, with a Portfolio receiving or paying, as the case may be, only the net amount of the
two payments). Except for currency swaps, the notional principal amount is used solely to
calculate the payment streams but is not exchanged. With respect to currency swaps, actual
principal amounts of currencies may be exchanged by the counterparties at the initiation, and
again upon the termination, of the transaction.
Risks of Derivatives and other Regulatory Issues. Investment techniques
employing such derivatives involve risks different from, and, in certain cases, greater than, the
risks presented by more traditional investments. Following is a general discussion of important
risk factors and issues concerning the use of derivatives.
⎯
Market Risk. This is the general risk attendant to all investments that the
value of a particular investment will change in a way detrimental to a Portfolio’s
interest.
⎯
Management Risk. Derivative products are highly specialized
instruments that require investment techniques and risk analyses different from
those associated with stocks and bonds. The use of a derivative requires an
understanding not only of the underlying instrument but also of the derivative
itself, without the benefit of observing the performance of the derivative under all
5
possible market conditions. In particular, the use and complexity of derivatives
require the maintenance of adequate controls to monitor the transactions entered
into, the ability to assess the risk that a derivative adds to a Portfolio’s investment
portfolio, and the ability to forecast price, interest rate or currency exchange rate
movements correctly.
⎯
Credit Risk. This is the risk that a loss may be sustained by a Portfolio as
a result of the failure of another party to a derivative (usually referred to as a
“counterparty”) to comply with the terms of the derivative contract. The credit
risk for exchange-traded derivatives is generally less than for privately-negotiated
derivatives, since the clearinghouse, which is the issuer or counterparty to each
exchange-traded derivative, provides a guarantee of performance. This guarantee
is supported by a daily payment system (i.e., margin requirements) operated by
the clearinghouse in order to reduce overall credit risk. For privately-negotiated
derivatives, there is no similar clearing agency guarantee. Therefore, a Portfolio
considers the creditworthiness of each counterparty to a privately negotiated
derivative in evaluating potential credit risk.
⎯
Liquidity Risk. Liquidity risk exists when a particular instrument is
difficult to purchase or sell. If a derivative transaction is particularly large or if
the relevant market is illiquid (as is the case with many privately negotiated
derivatives), it may not be possible to initiate a transaction or liquidate a position
at an advantageous price.
⎯
Leverage Risk. Since many derivatives have a leverage component,
adverse changes in the value or level of the underlying asset, rate or index can
result in a loss substantially greater than the amount invested in the derivative
itself. In the case of swaps, the risk of loss generally is related to a notional
principal amount, even if the parties have not made any initial investment.
Certain derivatives have the potential for unlimited loss, regardless of the size of
the initial investment.
⎯
Risk of Governmental Regulation of Derivatives. Among other things,
recent legislation and regulatory developments will eventually require the clearing
and exchange trading of most over-the-counter derivatives investments. It is
possible that new government regulation of various types of derivative
instruments, including futures and swaps, may affect a Portfolio’s ability to use
such instruments as a part of its investment strategy.
⎯
Other Risks. Other risks in using derivatives include the risk of
mispricing or improper valuation of derivatives and the inability of derivatives to
correlate perfectly with underlying assets, rates and indices. Many derivatives, in
particular privately negotiated derivatives, are complex and often valued
subjectively. Improper valuations can result in increased cash payment
requirements to counterparties or a loss of value to a Portfolio. Derivatives do not
always perfectly or even highly correlate or track the value of the assets, rates or
indices they are designed to closely track. Consequently, a Portfolio’s use of
6
derivatives may not always be an effective means of, and sometimes could be
counterproductive to, furthering the Portfolio’s investment objective.
Other. A Portfolio may purchase and sell derivative instruments only to the extent
that such activities are consistent with the requirements of the Commodity Exchange Act
(“CEA”) and the rules adopted by the Commodity Futures Trading Commission (“CFTC”)
thereunder. Under CFTC rules, a registered investment company that conducts more than a
minimal amount of trading in futures, commodity options, swaps and other commodity interests
is a commodity pool and its adviser must register as a commodity pool operator. Under such
rules, registered investment companies are subject to additional disclosure and reporting
requirements. The Adviser and the Portfolios, except for the Dynamic Asset Allocation Portfolio,
have claimed an exclusion from the definition of commodity pool operator under CFTC Rule 4.5
and are not currently subject to these registration, disclosure and reporting requirements. This
exclusion is not available to the Dynamic Asset Allocation Portfolio, and the Adviser has
registered as a CPO with respect to this Portfolio. As a result, the Dynamic Asset Allocation
Portfolio will be subject to additional disclosure and reporting requirements. The CFTC has not
yet adopted final rules for these additional requirements and, therefore, the scope of these
requirements is currently unclear but could potentially affect the Portfolio’s expenses.
Use of Options, Futures, Forwards and Swaps by the Portfolios
– Forward Currency Exchange Contracts. A forward currency exchange
contract is an obligation by one party to buy, and the other party to sell, a specific amount of a
currency for an agreed-upon price at a future date. A forward currency exchange contract may
result in the delivery of the underlying asset upon maturity of the contract in return for the
agreed-upon payment. NDFs specify a cash payment upon maturity. NDFs are normally used
when the market for physical settlement of the currency is underdeveloped, heavily regulated or
highly taxed.
A Portfolio may, for example, enter into forward currency exchange contracts to
attempt to minimize the risk to the Portfolio from adverse changes in the relationship between
the U.S. Dollar and other currencies. A Portfolio may purchase or sell forward currency
exchange contracts for hedging purposes similar to those described below in connection with its
transactions in foreign currency futures contracts. A Portfolio may also purchase or sell forward
currency exchange contracts for non-hedging purposes as a means of making direct investments
in foreign currencies, as described below under “Currency Transactions”.
If a hedging transaction in forward currency exchange contracts is successful, the
decline in the value of portfolio securities or the increase in the cost of securities to be acquired
may be offset, at least in part, by profits on the forward currency exchange contract.
Nevertheless, by entering into such forward currency exchange contracts, a Portfolio may be
required to forgo all or a portion of the benefits which otherwise could have been obtained from
favorable movements in exchange rates.
A Portfolio may also use forward currency exchange contracts to seek to increase
total return when AllianceBernstein L.P., the Portfolios’ adviser (the “Adviser”) anticipates that
a foreign currency will appreciate or depreciate in value but securities denominated in that
7
currency are not held by the Portfolio and do not present attractive investment opportunities. For
example, a Portfolio may enter into a foreign currency exchange contract to purchase a currency
if the Adviser expects the currency to increase in value. The Portfolio would recognize a gain if
the market value of the currency is more than the contract value of the currency at the time of
settlement of the contract. Similarly, a Portfolio may enter into a foreign currency exchange
contract to sell a currency if the Adviser expects the currency to decrease in value. The Portfolio
would recognize a gain if the market value of the currency is less than the contract value of the
currency at the time of settlement of the contract.
The cost of engaging in forward currency exchange contracts varies with such
factors as the currencies involved, the length of the contract period and the market conditions
then prevailing. Since transactions in foreign currencies are usually conducted on a principal
basis, no fees or commissions are involved.
– Options on Securities. A Portfolio may write and purchase call and put
options on securities. In purchasing an option on securities, the Portfolio would be in a position
to realize a gain if, during the option period, the price of the underlying securities increased (in
the case of a call) or decreased (in the case of a put) by an amount in excess of the premium paid;
otherwise the Portfolio would experience a loss not greater than the premium paid for the option.
Thus, a Portfolio would realize a loss if the price of the underlying security declined or remained
the same (in the case of a call) or increased or remained the same (in the case of a put) or
otherwise did not increase (in the case of a put) or decrease (in the case of a call) by more than
the amount of the premium. If a put or call option purchased by a Portfolio were permitted to
expire without being sold or exercised, its premium would represent a loss to the Portfolio.
A Portfolio may write a put or call option in return for a premium, which is
retained by the Portfolio whether or not the option is exercised. A Portfolio may write covered
options or uncovered options. A call option written by a Portfolio is “covered” if the Portfolio
owns the underlying security, has an absolute and immediate right to acquire that security upon
conversion or exchange of another security it holds, or holds a call option on the underlying
security with an exercise price equal to or less than of the call option it has written. A put option
written by a Portfolio is covered if the Portfolio holds a put option on the underlying securities
with an exercise price equal to or greater than the put option it has written. Uncovered options or
“naked options” are riskier than covered options. For example, if a Portfolio wrote a naked call
option and the price of the underlying security increased, the Portfolio would have to purchase
the underlying security for delivery to the call buyer and sustain a loss equal to the difference
between the option price and the market price of the security.
A Portfolio may also purchase call options to hedge against an increase in the
price of securities that the Portfolio anticipates purchasing in the future. If such increase occurs,
the call option will permit the Portfolio to purchase the securities at the exercise price, or to close
out the option at a profit. The premium paid for the call option plus any transaction costs will
reduce the benefit, if any, realized by the Portfolio upon exercise of the option, and, unless the
price of the underlying security rises sufficiently, the option may expire worthless to the
Portfolio and the Portfolio will suffer a loss on the transaction to the extent of the premium paid.
8
A Portfolio may purchase put options to hedge against a decline in the value of
portfolio securities. If such decline occurs, the put options will permit the Portfolio to sell the
securities at the exercise price or to close out the options at a profit. By using put options in this
way, a Portfolio will reduce any profit it might otherwise have realized on the underlying
security by the amount of the premium paid for the put option and by transaction costs.
A Portfolio also may, as an example, write combinations of put and call options
on the same security, known as “straddles”, with the same exercise and expiration date. By
writing a straddle, a Portfolio undertakes a simultaneous obligation to sell and purchase the same
security in the event that one of the options is exercised. If the price of the security subsequently
rises above the exercise price, the call will likely be exercised and a Portfolio will be required to
sell the underlying security at or below market price. This loss may be offset, however, in whole
or part, by the premiums received on the writing of the two options. Conversely, if the price of
the security declines by a sufficient amount, the put will likely be exercised. The writing of
straddles will likely be effective, therefore, only where the price of the security remains
relatively stable and neither the call nor the put is exercised. In those instances where one of the
options is exercised, the loss on the purchase or sale of the underlying security may exceed the
amount of the premiums received.
A Portfolio may purchase or write options on securities of the types in which it is
permitted to invest in privately-negotiated (i.e., over-the-counter) transactions. By writing a call
option, a Portfolio limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. By writing a put option, a Portfolio
assumes the risk that it may be required to purchase the underlying security for an exercise price
above its then current market value, resulting in a capital loss unless the security subsequently
appreciates in value. Where options are written for hedging purposes, such transactions
constitute only a partial hedge against declines in the value of portfolio securities or against
increases in the value of securities to be acquired, up to the amount of the premium.
A Portfolio will effect such transactions only with investment dealers and other
financial institutions (such as commercial banks or savings and loan institutions) deemed
creditworthy by the Adviser, and the Adviser has adopted procedures for monitoring the
creditworthiness of such entities. Options purchased or written in negotiated transactions may be
illiquid and it may not be possible for the Portfolios to effect a closing transaction at a time when
the Adviser believes it would be advantageous to do so.
– Options on Securities Indices. An option on a securities index is similar to an
option on a security except that, rather than taking or making delivery of a security at a specified
price, an option on a securities index gives the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the chosen index is greater than (in the case of a
call) or less than (in the case of a put) the exercise price of the option.
A Portfolio may write (sell) call and put options and purchase call and put options
on securities indices. If a Portfolio purchases put options on securities indices to hedge its
investments against a decline in the value of portfolio securities it will seek to offset a decline in
the value of securities it owns through appreciation of the put option. If the value of a Portfolio’s
investments does not decline as anticipated, or if the value of the option does not increase, the
9
Portfolio’s loss will be limited to the premium paid for the option. The success of this strategy
will largely depend on the accuracy of the correlation between the changes in value of the index
and the changes in value of a Portfolio’s security holdings.
A Portfolio may also write put or call options on securities indices to, among
other things, earn income. If the value of the chosen index declines below the exercise price of
the put option, the Portfolio has the risk of loss of the amount of the difference between the
exercise price and the closing level of the chosen index, which it would be required to pay to the
buyer of the put option and which may not be offset by the premium it received upon sale of the
put option. Similarly, if the value of the index is higher than the exercise price of the call option,
the Portfolio has the risk of loss of the amount of the difference between the exercise price and
the closing level of the chosen index, which may not be offset by the premium it received upon
sale of the call option. If the decline or increase in the value securities index is significantly
below or above the exercise price of the written option, the Portfolio could experience a
substantial loss.
The purchase of call options on securities indices may be used by a Portfolio to
attempt to reduce the risk of missing a broad market advance, or an advance in an industry or
market segment, at a time when the Portfolio holds uninvested cash or short-term debt securities
awaiting investment. When purchasing call options for this purpose, a Portfolio will also bear
the risk of losing all or a portion of the premium paid if the value of the index does not rise. The
purchase of call options on stock indices when a Portfolio is substantially fully invested is a form
of leverage, up to the amount of the premium and related transaction costs, and involves risks of
loss and of increased volatility similar to those involved in purchasing call options on securities
the Portfolio owns.
– Other Option Strategies. In an effort to earn extra income, to adjust exposure
to individual securities or markets, or to protect all or a portion of its portfolio from a decline in
value, sometimes within certain ranges, a Portfolio that invests in equity securities may use
option strategies such as the concurrent purchase of a call or put option, including on individual
securities and stock indexes, futures contracts (including on individual securities and stock
indexes) or shares of exchange-traded funds (“ETFs”) at one strike price and the writing of a call
or put option on the same individual security, stock index, futures contract or ETF at a higher
strike price in the case of a call option or at a lower strike price in the case of a put option. The
maximum profit from this strategy would result for the call options from an increase in the value
of the individual security, stock index, futures contract or ETF above the higher strike price or
for the put options the decline in the value of the individual security, stock index, futures contract
or ETF below the lower strike price. If the price of the individual security, stock index, futures
contract or ETF declines in the case of the call option or increases in the case of the put option,
the Portfolio has the risk of losing the entire amount paid for the call or put options.
– Options on Foreign Currencies. A Portfolio may purchase and write options
on foreign currencies for hedging and non-hedging purposes. For example, a decline in the
dollar value of a foreign currency in which portfolio securities are denominated will reduce the
dollar value of such securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities, a Portfolio may
purchase put options on the foreign currency. If the value of the currency does decline, the
10
Portfolio will have the right to sell such currency for a fixed amount in dollars and could thereby
offset, in whole or in part, the adverse effect on its portfolio which otherwise would have
resulted.
Conversely, where a rise in the dollar value of a currency in which securities to be
acquired are denominated is projected, thereby increasing the cost of such securities, a Portfolio
may purchase call options thereon. The purchase of such options could offset, at least partially,
the effects of the adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to a Portfolio from purchases of foreign currency options will be reduced by
the amount of the premium and related transaction costs. In addition, where currency exchange
rates do not move in the direction or to the extent anticipated, a Portfolio could sustain losses on
transactions in foreign currency options which would require it to forgo a portion or all of the
benefits of advantageous changes in such rates.
A Portfolio may write options on foreign currencies for hedging purposes or to
increase return. For example, where a Portfolio anticipates a decline in the dollar value of nonU.S. Dollar-denominated securities due to adverse fluctuations in exchange rates it could, instead
of purchasing a put option, write a call option on the relevant currency. If the expected decline
occurs, the option will most likely not be exercised, and the diminution in value of portfolio
securities could be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, a Portfolio could write a put option on the
relevant currency, which, if rates move in the manner projected, will expire unexercised and
allow the Portfolio to hedge such increased cost up to the amount of the premium. As in the case
of other types of options, however, the writing of a foreign currency option will constitute only a
partial hedge up to the amount of the premium, and only if rates move in the expected direction.
If this does not occur, the option may be exercised and a Portfolio will be required to purchase or
sell the underlying currency at a loss which may not be offset by the amount of the premium.
Through the writing of options on foreign currencies, a Portfolio also may be required to forgo
all or a portion of the benefits which might otherwise have been obtained from favorable
movements in exchange rates.
In addition to using options for the hedging purposes described above, a Portfolio
may also invest in options of foreign currencies for non-hedging purposes as a means of making
direct investments in foreign currencies. A Portfolio may use options on currency to seek to
increase total return when the Adviser anticipates that a foreign currency will appreciate or
depreciate in value but securities denominated in that currency are not held by the Portfolio and
do not present attractive investment opportunities. For example, a Portfolio may purchase call
options in anticipation of an increase in the market value of a currency. The Portfolio would
ordinarily realize a gain if, during the option period, the value of such currency exceeded the sum
of the exercise price, the premium paid and transaction costs. Otherwise, the Portfolio would
realize no gain or a loss on the purchase of the call option. Put options may be purchased by a
Portfolio for the purpose of benefiting from a decline in the value of a currency that the Portfolio
does not own. The Portfolio would normally realize a gain if, during the option period, the value
of the underlying currency decreased below the exercise price sufficiently to more than cover the
premium and transaction costs. Otherwise, the Portfolio would realize no gain or loss on the
11
purchase of the put option. For additional information on the use of options on foreign
currencies for non-hedging purposes, see “Currency Transactions” below.
Special Risks Associated with Options on Currencies. An exchange-traded
options position may be closed out only on an options exchange that provides a secondary
market for an option of the same series. Although a Portfolio will generally purchase or sell
options for which there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange will exist for any particular option, or at any particular
time. For some options, no secondary market on an exchange may exist. In such event, it might
not be possible to effect closing transactions in particular options, with the result that a Portfolio
would have to exercise its options in order to realize any profit and would incur transaction costs
on the purchase or sale of the underlying currency.
– Futures Contracts and Options on Futures Contracts. Futures contracts that
a Portfolio may buy and sell may include futures contracts on fixed-income or other securities,
and contracts based on interest rates, foreign currencies or financial indices, including any index
of U.S. Government securities. A Portfolio may, for example, purchase or sell futures contracts
and options thereon to hedge against changes in interest rates, securities (through index futures
or options) or currencies.
Interest rate futures contracts are purchased or sold for hedging purposes to
attempt to protect against the effects of interest rate changes on a Portfolio’s current or intended
investments in fixed-income securities. For example, if a Portfolio owned long-term bonds and
interest rates were expected to increase, that Portfolio might sell interest rate futures contracts.
Such a sale would have much the same effect as selling some of the long-term bonds in that
Portfolio’s portfolio. However, since the futures market is more liquid than the cash market, the
use of interest rate futures contracts as a hedging technique allows a Portfolio to hedge its
interest rate risk without having to sell its portfolio securities. If interest rates were to increase,
the value of the debt securities in the portfolio would decline, but the value of that Portfolio’s
interest rate futures contracts would be expected to increase at approximately the same rate,
thereby keeping the net asset value (“NAV”) of that Portfolio from declining as much as it
otherwise would have. On the other hand, if interest rates were expected to decline, interest rate
futures contracts could be purchased to hedge in anticipation of subsequent purchases of longterm bonds at higher prices. Because the fluctuations in the value of the interest rate futures
contracts should be similar to those of long-term bonds, a Portfolio could protect itself against
the effects of the anticipated rise in the value of long-term bonds without actually buying them
until the necessary cash becomes available or the market has stabilized. At that time, the interest
rate futures contracts could be liquidated and that Portfolio’s cash reserves could then be used to
buy long-term bonds on the cash market.
A Portfolio may purchase and sell foreign currency futures contracts for hedging
or risk management purposes in order to protect against fluctuations in currency exchange rates.
Such fluctuations could reduce the dollar value of portfolio securities denominated in foreign
currencies, or increase the cost of non-U.S. Dollar-denominated securities to be acquired, even if
the value of such securities in the currencies in which they are denominated remains constant. A
Portfolio may sell futures contracts on a foreign currency, for example, when it holds securities
denominated in such currency and it anticipates a decline in the value of such currency relative to
12
the dollar. If such a decline were to occur, the resulting adverse effect on the value of non-U.S.
Dollar-denominated securities may be offset, in whole or in part, by gains on the futures
contracts. However, if the value of the foreign currency increases relative to the dollar, a
Portfolio’s loss on the foreign currency futures contract may or may not be offset by an increase
in the value of the securities because a decline in the price of the security stated in terms of the
foreign currency may be greater than the increase in value as a result of the change in exchange
rates.
Conversely, a Portfolio could protect against a rise in the dollar cost of non-U.S.
Dollar-denominated securities to be acquired by purchasing futures contracts on the relevant
currency, which could offset, in whole or in part, the increased cost of such securities resulting
from a rise in the dollar value of the underlying currencies. When a Portfolio purchases futures
contracts under such circumstances, however, and the price in dollars of securities to be acquired
instead declines as a result of appreciation of the dollar, the Portfolio will sustain losses on its
futures position which could reduce or eliminate the benefits of the reduced cost of portfolio
securities to be acquired.
A Portfolio may also engage in currency “cross hedging” when, in the opinion of
the Adviser, the historical relationship among foreign currencies suggests that a Portfolio may
achieve protection against fluctuations in currency exchange rates similar to that described above
at a reduced cost through the use of a futures contract relating to a currency other than the U.S.
Dollar or the currency in which the foreign security is denominated. Such “cross hedging” is
subject to the same risks as those described above with respect to an unanticipated increase or
decline in the value of the subject currency relative to the U.S. Dollar.
A Portfolio may also use foreign currency futures contracts and options on such
contracts for non-hedging purposes. Similar to options on currencies described above, a
Portfolio may use foreign currency futures contracts and options on such contracts to seek to
increase total return when the Adviser anticipates that a foreign currency will appreciate or
depreciate in value but securities denominated in that currency are not held by the Underlying
Portfolio and do not present attractive investment opportunities. The risks associated with
foreign currency futures contracts and options on futures are similar to those associated with
options on foreign currencies, as described above. For additional information on the use of
options on foreign currencies for non-hedging purposes, see “Currency Transactions” below.
Purchases or sales of stock or bond index futures contracts may be used for
hedging purposes to attempt to protect a Portfolio’s current or intended investments from broad
fluctuations in stock or bond prices. For example, a Portfolio may sell stock or bond index
futures contracts in anticipation of or during a market decline to attempt to offset the decrease in
market value of the Portfolio’s portfolio securities that might otherwise result. If such decline
occurs, the loss in value of portfolio securities may be offset, in whole or part, by gains on the
futures position. When a Portfolio is not fully invested in the securities market and anticipates a
significant market advance, it may purchase stock or bond index futures contracts in order to
gain rapid market exposure that may, in whole or in part, offset increases in the cost of securities
that the Portfolio intends to purchase. As such purchases are made, the corresponding positions
in stock or bond index futures contracts will be closed out.
13
Options on futures contracts are options that call for the delivery of futures
contracts upon exercise. Options on futures contracts written or purchased by a Portfolio will be
traded on U.S. exchanges.
The writing of a call option on a futures contract constitutes a partial hedge
against declining prices of the securities in a Portfolio’s portfolio. If the futures price at
expiration of the option is below the exercise price, a Portfolio will retain the full amount of the
option premium, which provides a partial hedge against any decline that may have occurred in
the Portfolio’s portfolio holdings. The writing of a put option on a futures contract constitutes a
partial hedge against increasing prices of the securities or other instruments required to be
delivered under the terms of the futures contract. If the futures price at expiration of the put
option is higher than the exercise price, a Portfolio will retain the full amount of the option
premium, which provides a partial hedge against any increase in the price of securities which the
Portfolio intends to purchase. If a put or call option a Portfolio has written is exercised, the
Portfolio will incur a loss which will be reduced by the amount of the premium it receives.
Depending on the degree of correlation between changes in the value of its portfolio securities
and changes in the value of its options on futures positions, a Portfolio’s losses from exercised
options on futures may to some extent be reduced or increased by changes in the value of
portfolio securities.
A Portfolio may purchase options on futures contracts for hedging purposes
instead of purchasing or selling the underlying futures contracts. For example, where a decrease
in the value of portfolio securities is anticipated as a result of a projected market-wide decline or
changes in interest or exchange rates, a Portfolio could, in lieu of selling futures contracts,
purchase put options thereon. In the event that such decrease was to occur, it may be offset, in
whole or part, by a profit on the option. If the anticipated market decline were not to occur, the
Portfolio would suffer a loss equal to the price of the put. Where it is projected that the value of
securities to be acquired by a Portfolio will increase prior to acquisition due to a market advance
or changes in interest or exchange rates, a Portfolio could purchase call options on futures
contracts, rather than purchasing the underlying futures contracts. If the market advances, the
increased cost of securities to be purchased may be offset by a profit on the call. However, if the
market declines, the Portfolio will suffer a loss equal to the price of the call, but the securities
that the Portfolio intends to purchase may be less expensive.
– Credit Default Swap Agreements. The “buyer” in a credit default swap
contract is obligated to pay the “seller” a periodic stream of payments over the term of the
contract in return for a contingent payment upon the occurrence of a credit event with respect to
an underlying reference obligation. Generally, a credit event means bankruptcy, failure to pay,
obligation acceleration or restructuring. A Portfolio may be either the buyer or seller in the
transaction. As a seller, a Portfolio receives a fixed rate of income throughout the term of the
contract, which typically is between one month and ten years, provided that no credit event
occurs. If a credit event occurs, a Portfolio typically must pay the contingent payment to the
buyer. The contingent payment will be either (i) the “par value” (face amount) of the reference
obligation in which case the Portfolio will receive the reference obligation in return, or (ii) an
amount equal to the difference between the par value and the current market value of the
obligation. The value of the reference obligation received by a Portfolio as a seller if a credit
event occurs, coupled with the periodic payments previously received, may be less than the full
14
notional value it pays to the buyer, resulting in a loss of value to the Fund. If a Portfolio is a
buyer and no credit event occurs, the Portfolio will lose its periodic stream of payments over the
term of the contract. However, if a credit event occurs, the buyer typically receives full notional
value for a reference obligation that may have little or no value.
Credit default swaps may involve greater risks than if a Portfolio had invested in
the reference obligation directly. Credit default swaps are subject to general market risk,
liquidity risk and credit risk.
– Currency Swaps. A Portfolio may enter into currency swaps for hedging
purposes in an attempt to protect against adverse changes in exchange rates between the U.S.
Dollar and other currencies or for non-hedging purposes as a means of making direct investments
in foreign currencies, as described below under “Currency Transactions”. Currency swaps
involve the exchange by a Portfolio with another party of a series of payments in specified
currencies. Actual principal amounts of currencies may be exchanged by the counterparties at
the initiation, and again upon termination of the transaction. Since currency swaps are typically
individually negotiated, a Portfolio expects to achieve an acceptable degree of correlation
between its portfolio investments and its currency swaps positions. Therefore, the entire
principal value of a currency swap is subject to the risk that the other party to the swap will
default on its contractual delivery obligations. If there is a default by the other party to such a
transaction, a Portfolio will have contractual remedies pursuant to the agreements related to the
transactions.
– Swaps: Interest Rate Transactions. A Portfolio may enter into interest rate
swap, swaption and cap or floor transactions, which may include preserving a return or spread on
a particular investment or portion of its portfolio or protecting against an increase in the price of
securities the Portfolio anticipates purchasing at a later date. Unless there is a counterparty
default, the risk of loss to a Portfolio from interest rate transactions is limited to the net amount
of interest payments that the Portfolio is contractually obligated to make. If the counterparty to
an interest rate transaction defaults, the Portfolio’s risk of loss consists of the net amount of
interest payments that the Portfolio is contractually entitled to receive.
Interest rate swaps involve the exchange by a Portfolio with another party of
payments calculated by reference to specified interest rates (e.g., an exchange of floating-rate
payments for fixed-rate payments) computed based on a contractually-based principal (or
“notional”) amount.
An option on a swap agreement, also called a “swaption”, is an option that gives
the buyer the right, but not the obligation, to enter into a swap on a future date in exchange for
paying a market-based “premium”. A receiver swaption gives the owner the right to receive the
total return of a specified asset, reference rate, or index. A payer swaption gives the owner the
right to pay the total return of a specified asset, reference rate, or index. Swaptions also include
options that allow an existing swap to be terminated or extended by one of the counterparties.
Interest rate caps and floors are similar to options in that the purchase of an
interest rate cap or floor entitles the purchaser, to the extent that a specified index exceeds (in the
15
case of a cap) or falls below (in the case of a floor) a predetermined interest rate, to receive
payments of interest on a notional amount from the party selling the interest rate cap or floor.
Caps and floors are less liquid than swaps. These transactions do not involve the
delivery of securities or other underlying assets or principal. A Portfolio will enter into interest
rate swap, swaption, cap or floor transactions only with counterparties who have credit ratings of
at least A- (or the equivalent) from any one nationally recognized statistical rating organization
(“NRSRO”) or counterparties with guarantors with debt securities having such a rating.
– Synthetic Foreign Equity Securities. A Portfolio may invest in different types
of derivatives generally referred to as synthetic foreign equity securities. These securities may
include international warrants or local access products. International warrants are financial
instruments issued by banks or other financial institutions, which may or may not be traded on a
foreign exchange. International warrants are a form of derivative security that may give holders
the right to buy or sell an underlying security or a basket of securities representing an index from
or to the issuer of the warrant for a particular price or may entitle holders to receive a cash
payment relating to the value of the underlying security or index, in each case upon exercise by
the Portfolio. Local access products are similar to options in that they are exercisable by the
holder for an underlying security or the value of that security, but are generally exercisable over
a longer term than typical options. These types of instruments may be American style, which
means that they can be exercised at any time on or before the expiration date, or European style,
which means that they may be exercised only on the expiration date.
Other types of synthetic foreign equity securities in which a Portfolio may invest
include covered warrants and low exercise price warrants. Covered warrants entitle the holder to
purchase from the issuer, typically a financial institution, upon exercise, common stock of an
international company or receive a cash payment (generally in U.S. Dollars). The issuer of the
covered warrant usually owns the underlying security or has a mechanism, such as owning
equity warrants on the underlying securities, through which they can obtain the securities. The
cash payment is calculated according to a predetermined formula, which is generally based on
the difference between the value of the underlying security on the date of exercise and the strike
price. Low exercise price warrants are warrants with an exercise price that is very low relative to
the market price of the underlying instrument at the time of issue (e.g., one cent or less). The
buyer of a low exercise price warrant effectively pays the full value of the underlying common
stock at the outset. In the case of any exercise of warrants, there may be a time delay between
the time a holder of warrants gives instructions to exercise and the time the price of the common
stock relating to exercise or the settlement date is determined, during which time the price of the
underlying security could change significantly. In addition, the exercise or settlement date of the
warrants may be affected by certain market disruption events, such as difficulties relating to the
exchange of a local currency into U.S. Dollars, the imposition of capital controls by a local
jurisdiction or changes in the laws relating to foreign investments. These events could lead to a
change in the exercise date or settlement currency of the warrants, or postponement of the
settlement date. In some cases, if the market disruption events continue for a certain period of
time, the warrants may become worthless resulting in a total loss of the purchase price of the
warrants.
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A Portfolio’s investments in synthetic foreign equity securities will be those
issued by entities deemed to be creditworthy by the Adviser, which will monitor the
creditworthiness of the issuers on an ongoing basis. Investments in these instruments involve the
risk that the issuer of the instrument may default on its obligation to deliver the underlying
security or cash in lieu thereof. These instruments may also be subject to liquidity risk because
there may be a limited secondary market for trading the warrants. They are also subject, like
other investments in securities of foreign issuers, to foreign risk and currency risk.
International warrants also include equity warrants, index warrants, and interest
rate warrants. Equity warrants are generally issued in conjunction with an issue of bonds or
shares, although they also may be issued as part of a rights issue or scrip issue. When issued
with bonds or shares, they usually trade separately from the bonds or shares after issuance. Most
warrants trade in the same currency as the underlying stock (domestic warrants), but also may be
traded in different currency (euro-warrants). Equity warrants are traded on a number of foreign
exchanges and in over-the-counter markets. Index warrants and interest rate warrants are rights
created by an issuer, typically a financial institution, entitling the holder to purchase, in the case
of a call, or sell, in the case of a put, respectively, an equity index or a specific bond issue or
interest rate index at a certain level over a fixed period of time. Index warrants transactions
settle in cash, while interest rate warrants can typically be exercised in the underlying instrument
or settle in cash.
A Portfolio also may invest in long-term options of, or relating to, international
issuers. Long-term options operate much like covered warrants. Like covered warrants, long
term-options are call options created by an issuer, typically a financial institution, entitling the
holder to purchase from the issuer outstanding securities of another issuer. Long-term options
have an initial period of one year or more, but generally have terms between three and five years.
Unlike U.S. options, long-term European options do not settle through a clearing corporation that
guarantees the performance of the counterparty. Instead, they are traded on an exchange and
subject to the exchange’s trading regulations.
– Eurodollar Instruments. Eurodollar instruments are essentially U.S. Dollardenominated futures contracts or options thereon that are linked to the London Interbank Offered
Rate and are subject to the same limitations and risks as other futures contracts and options.
– Currency Transactions. A Portfolio may invest in non-U.S. Dollardenominated securities on a currency hedged or un-hedged basis. The Adviser may actively
manage a Portfolio’s currency exposures and may seek investment opportunities by taking long
or short positions in currencies through the use of currency-related derivatives, including forward
currency exchange contracts, futures and options on futures, swaps and options. The Adviser
may enter into transactions for investment opportunities when it anticipates that a foreign
currency will appreciate or depreciate in value but securities denominated in that currency are
not held by a Portfolio and do not present attractive investment opportunities. Such transactions
may also be used when the Adviser believes that it may be more efficient than a direct
investment in a foreign currency-denominated security. The Portfolios may also conduct
currency exchange contracts on a spot basis (i.e., for cash at the spot rate prevailing in the
currency exchange market for buying or selling currencies).
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Forward Commitments and When-Issued and Delayed Delivery Securities
Forward commitments for the purchase or sale of securities may include
purchases on a “when-issued” basis or purchases or sales on a “delayed delivery” basis. In some
cases, a forward commitment may be conditioned upon the occurrence of a subsequent event,
such as approval and consummation of a merger, corporate reorganization or debt restructuring
(i.e., a “when, as and if issued” trade). When forward commitment transactions are negotiated,
the price is fixed at the time the commitment is made. A Portfolio assumes the rights and risks of
ownership of the security, but does not pay for the securities until they are received. If a
Portfolio is fully or almost fully invested when forward commitment purchases are outstanding,
such purchases may result in a form of leverage. Leveraging the portfolio in this manner may
increase the Portfolio’s volatility of returns.
The use of forward commitments enables a Portfolio to protect against anticipated
changes in exchange rates, interest rates and/or prices. For instance, a Portfolio may enter into a
forward contract when it enters into a contract for the purchase or sale of a security denominated
in a foreign currency in order to “lock in” the U.S. Dollar price of the security (“transaction
hedge”). In addition, when a Portfolio believes that a foreign currency may suffer a substantial
decline against the U.S. Dollar, it may enter into a forward sale contract to sell an amount of that
foreign currency approximating the value of some or all of that Portfolio’s securities
denominated in such foreign currency, or when a Portfolio believes that the U.S. Dollar may
suffer a substantial decline against a foreign currency, it may enter into a forward purchase
contract to buy that foreign currency for a fixed dollar amount (“position hedge”). If the Adviser
were to forecast incorrectly the direction of exchange rate movements, a Portfolio might be
required to complete such when-issued or forward transactions at prices inferior to the then
current market values. When-issued securities and forward commitments may be sold prior to
the settlement date, but a Portfolio enters into when-issued and forward commitments only with
the intention of actually receiving securities or delivering them, as the case may be. If a
Portfolio chooses to dispose of the right to acquire a when-issued security prior to its acquisition
or dispose of its right to deliver or receive against a forward commitment, it may incur a gain or
loss. Any significant commitment of a Portfolio’s assets to the purchase of securities on a
“when, as and if issued” basis may increase the volatility of the Portfolio’s NAV.
At the time a Portfolio intends to enter into a forward commitment, it will record
the transaction and thereafter reflect the value of the security purchased or, if a sale, the proceeds
to be received, in determining its NAV. Any unrealized appreciation or depreciation reflected in
such valuation of a “when, as and if issued” security would be canceled in the event that the
required conditions did not occur and the trade was canceled.
Purchases of securities on a forward commitment or when-issued basis may
involve more risk than other types of purchases. For example, by committing to purchase
securities in the future, a Portfolio subjects itself to a risk of loss on such commitments as well as
on its portfolio securities. Also, a Portfolio may have to sell assets which have been set aside in
order to meet redemptions. In addition, if a Portfolio determines it is advisable as a matter of
investment strategy to sell the forward commitment or “when-issued” or “delayed delivery”
securities before delivery, that Portfolio may incur a gain or loss because of market fluctuations
since the time the commitment to purchase such securities was made. Any such gain or loss
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would be treated as a capital gain or loss for tax purposes. When the time comes to pay for the
securities to be purchased under a forward commitment or on a “when-issued” or “delayed
delivery” basis, a Portfolio will meet its obligations from the then available cash flow or the sale
of securities, or, although it would not normally expect to do so, from the sale of the forward
commitment or “when-issued” or “delayed delivery” securities themselves (which may have a
value greater or less than the Portfolio’s payment obligation). No interest or dividends accrue to
the purchaser prior to the settlement date for securities purchased or sold under a forward
commitment. In addition, in the event the other party to the transaction files for bankruptcy,
becomes insolvent, or defaults on its obligation, a Portfolio may be adversely affected.
Illiquid Securities
A Portfolio will not invest in illiquid securities if immediately after such
investment, more than 15% or such other amount permitted by guidance regarding the 1940 Act
of the Portfolio’s net assets would be invested in such securities. For this purpose, illiquid
securities include, among others, (a) direct placements or other securities which are subject to
legal or contractual restrictions on resale or for which there is no readily available market (e.g.,
trading in the security is suspended or, in the case of unlisted securities, market makers do not
exist or will not entertain bids or offers), (b) options purchased by a Portfolio over-the-counter
and the cover for options written by the Portfolio over-the-counter, and (c) repurchase
agreements not terminable within seven days. Securities that have legal or contractual
restrictions on resale but have a readily available market are not deemed illiquid for purposes of
this limitation.
Mutual funds do not typically hold a significant amount of restricted securities
(securities that are subject to restrictions on resale to the general public) or other illiquid
securities because of the potential for delays on resale and uncertainty in valuation. Limitations
on resale may have an adverse effect on the marketability of portfolio securities and a mutual
fund might be unable to dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within seven days. A
mutual fund may also have to take certain steps or wait a certain amount of time in order to
remove the transfer restrictions for such restricted securities in order to dispose of them, resulting
in additional expense and delay.
Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”)
allows a broader institutional trading market for securities otherwise subject to restriction on
resale to the general public. Rule 144A establishes a “safe harbor” from the registration
requirements of the Securities Act for resales of certain securities to qualified institutional
buyers. An insufficient number of qualified institutional buyers interested in purchasing certain
restricted securities held by a Portfolio, however, could affect adversely the marketability of such
portfolio securities and the Portfolio might be unable to dispose of such securities promptly or at
reasonable prices.
The Adviser, acting under the oversight of the Board, will monitor the liquidity of
restricted securities in the Portfolio that are eligible for resale pursuant to Rule 144A. In
reaching liquidity decisions, the Adviser will consider, among others, the following factors: (1)
the frequency of trades and quotes for the security; (2) the number of dealers issuing quotations
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to purchase or sell the security; (3) the number of other potential purchasers of the security; (4)
the number of dealers undertaking to make a market in the security; (5) the nature of the security
(including its unregistered nature) and the nature of the marketplace for the security (e.g., the
time needed to dispose of the security, the method of soliciting offers and the mechanics of the
transfer); and (6) any applicable interpretation or position of the Securities and Exchange
Commission (the “SEC”) with respect to such type of securities.
Investment in Exchange-Traded Funds and Other Investment Companies
A Portfolio may invest in shares of ETFs, subject to the restrictions and
limitations of the 1940 Act or any applicable rules, exemptive orders or regulatory guidance.
ETFs are pooled investment vehicles, which may be managed or unmanaged, that generally
seek to track the performance of a specific index. ETFs will not track their underlying indices
precisely since the ETFs have expenses and may need to hold a portion of their assets in cash,
unlike the underlying indices, and the ETFs may not invest in all of the securities in the
underlying indices in the same proportion as the underlying indices for various reasons. The
Portfolios will incur transaction costs when buying and selling ETF shares, and indirectly bear
the expenses of the ETFs. In addition, the market value of an ETF’s shares, which is based on
supply and demand in the market for the ETF’s shares, may differ from its NAV. Accordingly,
there may be times when an ETF’s shares trade at a discount to its NAV.
A Portfolio may also invest in investment companies other than ETFs as
permitted by the 1940 Act or the rules and regulations thereunder. As with ETF investments,
if the Portfolio acquires shares in other investment companies, shareholders would bear,
indirectly, the expenses of such investment companies (which may include management and
advisory fees), which are in addition to the Portfolio’s expenses. The Portfolios intend to
invest uninvested cash balances in an affiliated money market fund as permitted by Rule 12d11 under the 1940 Act.
Loans of Portfolio Securities
A Portfolio may seek to increase income by lending portfolio securities to
brokers, dealers, and financial institutions (“borrowers”) to the extent permitted under the 1940
Act or the rules or regulations thereunder (as such statute, rules, or regulations may be amended
from time to time) or by guidance regarding, interpretations of, or exemptive orders under, the
1940 Act. Under the securities lending program, all securities loans will be secured continually
by cash collateral. A principal risk in lending portfolio securities is that the borrower will fail to
return the loaned securities upon termination of the loan and, that the collateral will not be
sufficient to replace the loaned securities upon the borrower’s default. In determining whether to
lend securities to a particular borrower, the Adviser (subject to oversight by the Board) will
consider all relevant facts and circumstances, including the creditworthiness of the borrower.
The loans would be made only to firms deemed by the Adviser to be creditworthy and when, in
the judgment of the Adviser, the consideration that can be earned currently from securities loans
of this type justifies the attendant risk. A Portfolio will be compensated for the loan from a
portion of the net return from the interest earned on the cash collateral after a rebate paid to the
borrower (which may be a negative amount – i.e., the borrower may pay a fee to the Portfolio in
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connection with the loan) and payments for fees paid to the securities lending agent and for
certain other administrative expenses.
A Portfolio will have the right to call a loan and obtain the securities loaned on
notice to the borrower within the normal and customary settlement time for the securities. While
securities are on loan, the borrower is obligated to pay the Portfolio amounts equal to any income
or other distribution from the securities.
A Portfolio will invest any cash collateral in a money market fund that complies
with Rule 2a-7 under the 1940 Act, has been approved by the Board and is expected to be
advised by the Adviser. Any such investment of cash collateral will be subject to the money
market fund’s investment risk. The Portfolio may pay reasonable finders’, administrative, and
custodial fees in connection with a loan.
A Portfolio will not have the right to vote any securities having voting rights
during the existence of the loan. The Portfolio will have the right to regain record ownership of
loaned securities or equivalent securities in order to exercise voting or ownership rights. When
the Portfolio lends its securities, its investment performance will continue to reflect the value of
securities on loan.
Mortgage-Related Securities, Other Asset-Backed Securities and Structured Securities
The mortgage-related securities in which a Portfolio may invest typically are
securities representing interests in pools of mortgage loans made by lenders such as savings and
loan associations, mortgage bankers and commercial banks and are assembled for sale to
investors (such as a Portfolio) by governmental, government-related or private organizations.
Private organizations include commercial banks, savings associations, mortgage companies,
investment banking firms, finance companies, special purpose finance entities (called special
purpose vehicles or SPVs) and other entities that acquire and package loans for resales as
mortgage-related securities. Specifically, these securities may include pass-through mortgagerelated securities, CMOs, CMO residuals, adjustable-rate mortgage securities (“ARMS”),
stripped mortgage-backed securities (“SMBSs”), commercial mortgage-backed securities, TBA
mortgage-backed securities, mortgage dollar rolls, collateralized obligations, Canadian
Government Guaranteed Mortgage Related Securities and other securities that directly or
indirectly represent a participation in or are secured by and payable from mortgage loans on real
property and other assets.
Pass-Through Mortgage-Related Securities. Interests in pools of mortgagerelated securities differ from other forms of debt securities, which normally provide for periodic
payment of interest in fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment consisting of both interest and principal
payments. In effect, these payments are a “pass-through” of the monthly payments made by the
individual borrowers on their residential mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying residential property, refinancing or foreclosure, net of
fees or costs that may be incurred. Some mortgage-related securities, such as securities issued
by Government National Mortgage Association (“GNMA”), are described as “modified pass21
through”. These securities entitle the holder to receive all interest and principal payments owed
on the mortgage pool, net of certain fees, regardless of whether or not the mortgagor actually
makes the payment.
The average life of pass-through pools varies with the maturities of the underlying
mortgage instruments. In addition, a pool’s term may be shortened by unscheduled or early
payments of principal and interest on the underlying mortgages. The occurrence of mortgage
prepayments is affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and demographic conditions.
As prepayment rates of individual pools vary widely, it is not possible to accurately predict the
average life of a particular pool. For pools of fixed-rate 30-year mortgages, common industry
practice is to assume that prepayments will result in a 12-year average life. Pools of mortgages
with other maturities or different characteristics will have varying average life assumptions. The
assumed average life of pools of mortgages having terms of less than 30 years, is less than 12
years, but typically not less than 5 years. Yields on pass-through securities are typically quoted
by investment dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption.
The principal governmental (i.e., backed by the full faith and credit of the U.S.
Government) guarantor of mortgage-related securities is GNMA. GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee, with the full faith and credit of the U.S. Government, the
timely payment of principal and interest on securities issued by institutions approved by GNMA
(such as savings and loan institutions, commercial banks and mortgage bankers) and backed by
pools of Federal Housing Administration-insured or U.S. Department of Veterans Affairsguaranteed mortgages.
Government-related (i.e., not backed by the full faith and credit of the U.S.
Government) guarantors include the Federal National Mortgage Association (“FNMA”) and the
Federal Home Loan Mortgage Corporation (“FHLMC”). FNMA and FHLMC are a
government-sponsored corporation or corporate instrumentality of the U.S. Government,
respectively, (government-sponsored entities or “GSEs”), which were owned entirely by private
stockholders until 2008 when they were placed in conservatorship by the U.S. Government.
After being placed in conservatorship, the GSEs issued senior preferred stock and common stock
to the U.S. Department of the Treasury (“U.S. Treasury”) in an amount equal to 79.9% of each
GSE in return for certain funding and liquidity arrangements. The GSEs continue to operate as
going concerns while in conservatorship and each remains liable for all of its obligations
associated with its mortgage-backed securities. The U.S. Treasury has provided additional
funding to the GSEs and their future is unclear as Congress is considering whether to adopt
legislation that would severely restrict or even terminate their operations. FNMA purchases
residential mortgages from a list of approved seller/servicers which include state and federally
chartered savings and loan associations, mutual savings banks, commercial banks and credit
unions and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to
timely payment of principal and interest by FNMA and are now, in effect, backed by the full
faith and credit of the U.S. Government. Participation certificates issued by FHLMC, which
represent interests in mortgages from FHLMC’s national portfolio, are guaranteed by FHLMC as
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to the timely payment of interest and ultimate collection of principal and are now, in effect,
backed by the full faith and credit of the U.S. Government.
Commercial banks, savings and loan associations, private mortgage insurance
companies, mortgage bankers and other secondary market issuers create pass-through pools of
conventional residential mortgage loans. Securities representing interests in pools created by
non-governmental private issuers generally offer a higher rate of interest than securities
representing interests in pools created by governmental issuers because there are no direct or
indirect governmental guarantees of the underlying mortgage payments. However, private
issuers sometimes obtain committed loan facilities, lines of credit, letters of credit, surety bonds
or other forms of liquidity and credit enhancement to support the timely payment of interest and
principal with respect to their securities if the borrowers on the underlying mortgages fail to
make their mortgage payments. The ratings of such non-governmental securities are generally
dependent upon the ratings of the providers of such liquidity and credit support and would be
adversely affected if the rating of such an enhancer were downgraded.
The structuring of the pass-through pool may also provide credit enhancement.
Examples of such credit support arising out of the structure of the transaction include the issue of
senior and subordinated securities (e.g., the issuance of securities by a SPV in multiple classes or
“tranches”, with one or more classes being senior to other subordinated classes as to payment of
principal and interest, with the result that defaults on the underlying mortgage loans are borne
first by the holders of the subordinated class); creation of “reserve funds” (in which case cash or
investments sometimes funded from a portion of the payments on the underlying mortgage loans,
are held in reserve against future losses); and “overcollateralization” (in which case the
scheduled payments on, or the principal amount of, the underlying mortgage loans exceeds that
required to make payment of the securities and pay any servicing or other fees). There can be no
guarantee the credit enhancements, if any will be sufficient to prevent losses in the event of
defaults on the underlying mortgage loans.
In addition, mortgage-related securities that are issued by private issuers are not
subject to the underwriting requirements for the underlying mortgages that are applicable to
those mortgage-related securities that have a government or government-sponsored entity
guaranteed. As a result, the mortgage loans underlying private mortgage-related securities may,
and frequently do, have less favorable collateral, credit risk or other underwriting characteristics
than government or government-sponsored mortgage-related securities and have wider variances
in a number of terms, including interest rate, term, size, purposes and borrower characteristics.
Privately-issued pools more frequently include second mortgages, high loan-to-value mortgages
and manufactured housing loans. The coupon rates and maturities of the underlying mortgage
loans in a private-label mortgage-related pool may vary to a greater extent than those included in
a government guaranteed pool, and the pool may include subprime mortgage loans. Subprime
loans refer to loans made to borrowers with weakened credit histories or with a lower capacity to
make timely payments on their loans. For these reasons, the loans underlying these securities
have had in many cases higher default rates than those loans that meet government underwriting
requirements.
Collateralized Mortgage Obligations. Another form of mortgage-related security
is a “pay-through” security, which is a debt obligation. A Portfolio may invest in other forms of
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mortgage-related securities including CMOs, which are debt obligations of the issuer secured by
a pool of mortgage loans pledged as collateral that is legally required to be paid by the issuer,
regardless of whether payments are actually made on the underlying mortgages. CMOs are the
predominant type of “pay-through” mortgage-related security. In a CMO, a series of bonds or
certificates is issued in multiple classes. Each class of a CMO, often referred to as a “tranche”, is
issued at a specific coupon rate and has a stated maturity or final distribution date. Principal
prepayments on collateral underlying a CMO may cause one or more tranches of the CMO to be
retired substantially earlier than the stated maturities or final distribution dates of the collateral.
Although payment of the principal of, and interest on, the underlying collateral securing
privately issued CMOs may be guaranteed by GNMA, FNMA or FHLMC, these CMOs
represent obligations solely of the private issuer and are not insured or guaranteed by GNMA,
FNMA, FHLMC, any other governmental agency or any other person or entity.
Adjustable-Rate Mortgage Securities. Another type of mortgage-related security,
known as adjustable-rate mortgage securities (“ARMS”), bears interest at a rate determined by
reference to a predetermined interest rate or index. ARMS may be secured by fixed-rate
mortgages or adjustable-rate mortgages. ARMS secured by fixed-rate mortgages generally have
lifetime caps on the coupon rates of the securities. To the extent that general interest rates
increase faster than the interest rates on the ARMS, these ARMS will decline in value. The
adjustable-rate mortgages that secure ARMS will frequently have caps that limit the maximum
amount by which the interest rate or the monthly principal and interest payments on the
mortgages may increase. These payment caps can result in negative amortization (i.e., an
increase in the balance of the mortgage loan). Furthermore, since many adjustable-rate
mortgages only reset on an annual basis, the values of ARMS tend to fluctuate to the extent that
changes in prevailing interest rates are not immediately reflected in the interest rates payable on
the underlying adjustable-rate mortgages.
Stripped Mortgage-Related Securities. Stripped mortgage-related securities
(SMRS) are mortgage-related securities that are usually structured with separate classes of
securities collateralized by a pool of mortgages or a pool of mortgage backed bonds or passthrough securities, with each class receiving different proportions of the principal and interest
payments from the underlying assets. A common type of SMRS has one class of interest-only
securities (IOs) receiving all of the interest payments from the underlying assets and one class of
principal-only securities (POs) receiving all of the principal payments from the underlying
assets. IOs and POs are extremely sensitive to interest rate changes and are more volatile than
mortgage-related securities that are not stripped. IOs tend to decrease in value as interest rates
decrease and are extremely sensitive to the rate of principal payments (including prepayments)
on the related underlying mortgage assets, and a rapid rate of principal prepayments may have a
material adverse effect on the yield to maturity of the IO class. POs generally increase in value
as interest rates decrease. If prepayments of the underlying mortgages are greater than
anticipated, the amount of interest earned on the overall pool will decrease due to the decreasing
principal balance of the assets. Due to their structure and underlying cash flows, SMRS may be
more volatile than mortgage-related securities that are not stripped. Changes in the values of IOs
and POs can be substantial and occur quickly, such as occurred in the first half of 1994 when the
value of many POs dropped precipitously due to increases in interest rates.
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A Portfolio will only invest in SMRS that are issued by the U.S. Government, its
agencies or instrumentalities and supported by the full faith and credit of the United States.
Although SMRS are purchased and sold by institutional investors through several investment
banking firms acting as brokers or dealers, the complexity of these instruments and the smaller
number of investors in the sector can lend to illiquid markets in the sector.
Commercial Mortgage-Backed Securities. Commercial mortgage-backed
securities are securities that represent an interest in, or are secured by, mortgage loans secured by
multifamily or commercial properties, such as industrial and warehouse properties, office
buildings, retail space and shopping malls, and cooperative apartments, hotels and motels,
nursing homes, hospitals and senior living centers. Commercial mortgage-backed securities
have been issued in public and private transactions by a variety of public and private issuers
using a variety of structures, some of which were developed in the residential mortgage context,
including multiclass structures featuring senior and subordinated classes. Commercial mortgagebacked securities may pay fixed or floating rates of interest. The commercial mortgage loans
that underlie commercial mortgage-related securities have certain distinct risk characteristics.
Commercial mortgage loans generally lack standardized terms, which may complicate their
structure, tend to have shorter maturities than residential mortgage loans and may not be fully
amortizing. Commercial properties themselves tend to be unique and are more difficult to value
than single-family residential properties. In addition, commercial properties, particularly
industrial and warehouse properties, are subject to environmental risks and the burdens and costs
of compliance with environmental laws and regulations.
Certain Risks. The value of mortgage-related securities is affected by a number
of factors. Unlike traditional debt securities, which have fixed maturity dates, mortgage-related
securities may be paid earlier than expected as a result of prepayments of underlying mortgages.
Such prepayments generally occur during periods of falling mortgage interest rates. If property
owners make unscheduled prepayments of their mortgage loans, these prepayments will result in
the early payment of the applicable mortgage-related securities. In that event, a Portfolio may be
unable to invest the proceeds from the early payment of the mortgage-related securities in
investments that provide as high a yield as the mortgage-related securities. Early payments
associated with mortgage-related securities cause these securities to experience significantly
greater price and yield volatility than is experienced by traditional fixed-income securities. The
level of general interest rates, general economic conditions and other social and demographic
factors affect the occurrence of mortgage prepayments. During periods of falling interest rates,
the rate of mortgage prepayments tends to increase, thereby tending to decrease the life of
mortgage-related securities. Conversely, during periods of rising interest rates, a reduction in
prepayments may increase the effective life of mortgage-related securities, subjecting them to
greater risk of decline in market value in response to rising interest rates. If the life of a
mortgage-related security is inaccurately predicted, the Portfolio may not be able to realize the
rate of return it expected.
As with other fixed-income securities, there is also the risk of nonpayment of
mortgage-related securities, particularly for those securities that are backed by mortgage pools
that contain subprime loans. Market factors adversely affecting mortgage loan repayments
include a general economic downturn, high unemployment, a general slowdown in the real estate
market, a drop in the market prices of real estate, or higher mortgage payments required to be
25
made by holders of adjustable rate mortgages due to scheduled increases or increases due to
higher interest rates.
Subordinated mortgage-related securities may have additional risks. The
subordinated mortgage-related security may serve as credit support for the senior securities
purchased by other investors. In addition, the payments of principal and interest on these
subordinated securities generally will be made only after payments are made to the holders of
securities senior to the subordinated securities. Therefore, if there are defaults on the underlying
mortgage loans, the holders of subordinated mortgage-related securities will be less likely to
receive payments of principal and interest and will be more likely to suffer a loss.
Commercial mortgage-related securities, like all fixed-income securities,
generally decline in value as interest rates rise. Moreover, although generally the value of fixedincome securities increases during periods of falling interest rates, this inverse relationship is not
as marked in the case of single-family residential mortgage-related securities, due to the
increased likelihood of prepayments during periods of falling interest rates, and may not be as
marked in the case of commercial mortgage-related securities. The process used to rate
commercial mortgage-related securities may focus on, among other factors, the structure of the
security, the quality and adequacy of collateral and insurance, and the creditworthiness of the
originators, servicing companies and providers of credit support.
Although the market for mortgage-related securities is becoming increasingly
liquid, those issued by certain private organizations may not be readily marketable. There may be
a limited market for these securities, especially when there is a perceived weakness in the
mortgage and real estate market sectors. In particular, the secondary markets for CMOs, IOs and
POs may be more volatile and less liquid than those for other mortgage-related securities,
thereby potentially limiting a Portfolio’s ability to buy or sell those securities at any particular
time. Without an active trading market, mortgage-related securities held in the Portfolio’s
portfolio may be particularly difficult to value because of the complexities involved in the value
of the underlying mortgages. In addition, the rating agencies may have difficulties in rating
commercial mortgage-related securities through different economic cycles and in monitoring
such ratings on a longer-term basis.
As with fixed-income securities generally, the value of mortgage-related
securities can also be adversely affected by increases in general interest rates relative to the yield
provided by such securities. Such an adverse effect is especially possible with fixed-rate
mortgage securities. If the yield available on other investments rises above the yield of the
fixed-rate mortgage securities as a result of general increases in interest rate levels, the value of
the mortgage-related securities will decline.
Other Asset-Backed Securities. A Portfolio may invest in other asset-backed
securities. The securitization techniques used to develop mortgage-related securities are being
applied to a broad range of financial assets. Through the use of trusts and special purpose
corporations, various types of assets, including automobile loans and leases, credit card
receivables, home equity loans, equipment leases and trade receivables, are being securitized in
structures similar to the structures used in mortgage securitizations. For example, a Portfolio
may invest in collateralized debt obligations (“CDOs”), which include collateralized bond
26
obligations (“CBOs”), collateralized loan obligations (“CLOs”), and other similarly structured
securities. CBOs and CLOs are types of asset-backed securities. A CBO is a trust, which is
backed by a diversified pool of high-risk, below investment grade fixed-income securities. A
CLO is a trust typically collateralized by a pool of loans, which may include, among others,
domestic and foreign senior secured loans, senior unsecured loans, and subordinate corporate
loans, including loans that may be rated below investment grade or equivalent unrated loans.
These asset-backed securities are subject to risks associated with changes in interest rates,
prepayment of underlying obligations and defaults similar to the risks of investment in mortgagerelated securities discussed above.
Each type of asset-backed security also entails unique risks depending on the type
of assets involved and the legal structure used. For example, credit card receivables are
generally unsecured obligations of the credit card holder and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There have also been proposals to cap the interest rate that a credit card issuer may
charge. In some transactions, the value of the asset-backed security is dependent on the
performance of a third party acting as credit enhancer or servicer. Furthermore, in some
transactions (such as those involving the securitization of vehicle loans or leases) it may be
administratively burdensome to perfect the interest of the security issuer in the underlying
collateral and the underlying collateral may become damaged or stolen.
Structured Securities. A Portfolio may invest in securities issued in structured
financing transactions, which generally involve aggregating types of debt assets in a pool or
special purpose entity and then issuing new securities. Types of structured financings include,
for example, mortgage-related and other asset-backed securities. A Portfolio’s investments
include investments in structured securities that represent interests in entities organized and
operated solely for the purpose of restructuring the investment characteristics of debt obligations.
This type of restructuring involves the deposit with or purchase by an entity, such as a
corporation or trust, of specified instruments (such as commercial bank loans) and the issuance
by that entity of one or more classes of securities (“Structured Securities”) backed by, or
representing interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued Structured Securities to create
securities with different investment characteristics such as varying maturities, payment priorities
and interest rate provisions, and the extent of the payments made with respect to Structured
Securities is dependent on the extent of the cash flow on the underlying instruments. Because
Structured Securities of the type in which a Portfolio anticipates it will invest typically involve
no credit enhancement, their credit risk generally will be equivalent to that of the underlying
instruments.
A Portfolio is permitted to invest in a class of Structured Securities that is either
subordinated or unsubordinated to the right of payment of another class. Subordinated
Structured Securities typically have higher yields and present greater risks than unsubordinated
Structured Securities.
Under the terms of subordinated securities, payments that would be made to their
holders may be required to be made to the holders of more senior securities and/or the
27
subordinated or junior securities may have junior liens, if they have any rights at all, in any
collateral (meaning proceeds of the collateral are required to be paid first to holders of more
senior securities). As a result, subordinated or junior securities will be disproportionately
affected by a default or even a perceived decline in the creditworthiness of the issuer.
Preferred Stock
A Portfolio may invest in preferred stock. Preferred stock is an equity security
that has features of debt because it generally entitles the holder to periodic payments at a fixed
rate of return. Preferred stock is subordinated to any debt the issuer has outstanding but has
liquidation preference over common stock. Accordingly, preferred stock dividends are not paid
until all debt obligations are first met. Preferred stock may be subject to more fluctuations in
market value, due to changes in market participants’ perceptions of the issuer’s ability to
continue to pay dividends, than debt of the same issuer.
Real Estate Investment Trusts
Real Estate Investment Trusts (“REITs”) are pooled investment vehicles that
invest primarily in income-producing real estate or real estate related loans or interests. REITs
are generally classified as equity REITs, mortgage REITs or a combination of equity and
mortgage REITs. Equity REITs invest the majority of their assets directly in real property and
derive income primarily from the collection of rents. Equity REITs can also realize capital gains
by selling properties that have appreciated in value. Mortgage REITs invest the majority of their
assets in real estate mortgages and derive income from the collection of principal and interest
and payments. Similar to investment companies, such as the Portfolios, REITs are not taxed on
income distributed to shareholders provided they comply with several requirements of the United
States Internal Revenue Code of 1986, as amended (the “Code”). A Portfolio will indirectly bear
its proportionate share of expenses incurred by REITs in which the Portfolio invests in addition
to the expenses incurred directly by the Portfolio.
Investing in REITs involves certain unique risks in addition to those risks
associated with investing in the real estate industry in general. Equity REITs may be affected by
changes in the value of the underlying property owned by the REITs, while mortgage REITs may
be affected by the quality of any credit extended. REITs are dependent upon management skills,
are not diversified, and are subject to heavy cash flow dependency, default by borrowers and
self-liquidation.
Investing in REITs involves risks similar to those associated with investing in
small-capitalization companies. REITs may have limited financial resources, may trade less
frequently and in a limited volume and may be subject to more abrupt or erratic price movements
than larger company securities. Historically, small-capitalization stocks, such as REITs, have had
more price volatility than larger capitalization stocks.
REITs are subject to the possibilities of failing to qualify for tax-free pass-through
of income under the Code and failing to maintain their exemptions from registration under the
1940 Act. REITs (especially mortgage REITs) also are subject to interest rate risks. When
interest rates decline, the value of a REIT’s investment in fixed-rate obligations can be expected
28
to rise. Conversely, when interest rates rise, the value of a REIT’s investment in fixed-rate
obligations can be expected to decline. In contrast, as interest rates on adjustable rate mortgage
loans are reset periodically, yields on a REIT’s investments in such loans will gradually align
themselves to reflect changes in market interest rates, causing the value of such investments to
fluctuate less dramatically in response to interest rate fluctuations than would investments in
fixed-rate obligations.
Repurchase Agreements and Buy/Sell Back Transactions
A repurchase agreement is an agreement by which a Portfolio purchases a security
and obtains a simultaneous commitment from the seller to repurchase the security at an agreedupon price and date, normally one day or a week later. The purchase and repurchase obligations
are transacted under one document. The resale price is greater than the purchase price, reflecting
an agreed-upon “interest rate” that is effective for the period of time the buyer’s money is
invested in the security, and which is related to the current market rate of the purchased security
rather than its coupon rate. During the term of a repurchase agreement, a Portfolio monitors on a
daily basis the market value of the securities subject to the agreement and, if the market value of
the securities falls below the resale amount provided under the repurchase agreement, the seller
under the repurchase agreement is required to provide additional securities or cash equal to the
amount by which the market value of the securities falls below the resale amount. Because a
repurchase agreement permits a Portfolio to invest temporarily available cash on a fully
collateralized basis, repurchase agreements permit the Portfolio to earn a return on temporarily
available cash while retaining “overnight” flexibility in pursuit of investments of a longer-term
nature. Repurchase agreements may exhibit the characteristics of loans by a Portfolio.
The obligation of the seller under the repurchase agreement is not guaranteed, and
there is a risk that the seller may fail to repurchase the underlying security, whether because of
the seller’s bankruptcy or otherwise. In such event, a Portfolio would attempt to exercise its
rights with respect to the underlying security, including possible sale of the securities. A
Portfolio may incur various expenses in connection with the exercise of its rights and may be
subject to various delays and risks of loss, including (a) possible declines in the value of the
underlying securities, (b) possible reduction in levels of income and (c) lack of access to the
securities (if they are held through a third-party custodian) and possible inability to enforce the
Portfolio’s rights. The Board has established procedures, which are periodically reviewed by the
Board, pursuant to which the Adviser monitors the creditworthiness of the dealers with which the
Portfolio enters into repurchase agreement transactions.
A Portfolio may enter into repurchase agreements pertaining to U.S. Government
securities with member banks of the Federal Reserve System or “primary dealers” (as designated
by the Federal Reserve Bank of New York) in such securities. There is no percentage restriction
on a Portfolio’s ability to enter into repurchase agreements. Currently, each Portfolio intends to
enter into repurchase agreements only with its custodian and such primary dealers.
A Portfolio may enter into buy/sell back transactions, which are similar to
repurchase agreements. In this type of transaction, a Portfolio enters a trade to buy securities at
one price and simultaneously enters a trade to sell the same securities at another price on a
specified date. Similar to a repurchase agreement, the repurchase price is higher than the sale
29
price and reflects current interest rates. Unlike a repurchase agreement, however, the buy/sell
back transaction, though done simultaneously, is two separate legal agreements. A buy/sell back
transaction also differs from a repurchase agreement in that the seller is not required to provide
margin payments if the value of the securities falls below the repurchase price because the
transaction is two separate transactions. A Portfolio has the risk of changes in the value of the
purchased security during the term of the buy/sell back agreement although these agreements
typically provide for the repricing of the original transaction at a new market price if the value of
the security changes by a specific amount.
Reverse Repurchase Agreements
Reverse repurchase agreements are identical to repurchase agreements except that
rather than buying securities for cash subject to their repurchase by the seller, a Portfolio sells
portfolio assets concurrently with an agreement by the Portfolio to repurchase the same assets at
a later date at a fixed price slightly higher than the sale price. During the reverse repurchase
agreement period, the Portfolio continues to receive principal and interest payments on these
securities. Generally, the effect of a reverse repurchase agreement is that the Portfolio can
recover all or most of the cash invested in the portfolio securities involved during the term of the
reverse repurchase agreement, while it will be able to keep the interest income associated with
those portfolio securities. Such transactions are advantageous only if the “interest cost” to the
Portfolio of the reverse repurchase transaction, i.e., the difference between the sale and
repurchase price for the securities, is less than the cost of otherwise obtaining the cash invested
in portfolio securities.
Reverse repurchase agreements involve the risk that the market value of the
securities the Portfolio is obligated to repurchase under the agreement may decline below the
repurchase price. In the event the buyer of securities under a reverse repurchase agreement files
for bankruptcy or becomes insolvent, the Portfolio’s use of the proceeds of the agreement may be
restricted pending a determination by the other party, or its trustee or receiver, whether to
enforce the Portfolio’s obligation to repurchase the securities. In addition, the use of these
investments results in leveraging the Portfolio’s common stocks because the Portfolio uses the
proceeds to make investments in other securities. See “Borrowing and Use of Leverage” below.
Rights and Warrants
A Portfolio may invest in rights and warrants, which entitle the holder to buy
equity securities at a specific price for a specific period of time but will do so only if the equity
securities themselves are deemed appropriate by the Adviser for inclusion in the Portfolio’s
portfolio. Rights and warrants may be considered more speculative than certain other types of
investments in that they do not entitle a holder to dividends or voting rights with respect to the
securities which may be purchased nor do they represent any rights in the assets of the issuing
company. Also, the value of a right or warrant does not necessarily change with the value of the
underlying securities and a right or warrant ceases to have value if it is not exercised prior to the
expiration date.
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Securities Acquired in Restructurings and Workouts
A Portfolio’s investments may include fixed-income securities (particularly
lower-rated fixed-income securities) or loan participations that default or are in risk of default
(“Distressed Securities”). A Portfolio’s investments may also include senior obligations of a
borrower issued in connection with a restructuring pursuant to Chapter 11 of the U.S.
Bankruptcy Code (commonly known as “debtor-in-possession” or “DIP” financings). Distressed
Securities may be the subject of restructurings outside of bankruptcy court in a negotiated
workout or in the context of bankruptcy proceedings. In connection with these investments or an
exchange or workout of such securities, a Portfolio may determine or be required to accept
various instruments. These instruments may include, but are not limited to, equity securities,
warrants, rights, participation interests in sales of assets and contingent-interest obligations.
Depending upon, among other things, the Adviser’s evaluation of the potential value of such
securities in relation to the price that could be obtained at any given time if they were sold, a
Portfolio may determine to hold the securities in its portfolio.
Securities Ratings
The ratings of fixed-income securities by Moody’s Investors Service, Inc.
(“Moody’s”), Standard & Poor’s Ratings Services (“S&P”) and Fitch Ratings (“Fitch”),
Dominion Bond Rating Service Ltd. and A.M. Best Company are a generally accepted barometer
of credit risk. They are, however, subject to certain limitations from an investor’s standpoint.
The rating of an issuer is heavily weighted by past developments and does not necessarily reflect
probable future conditions. There is frequently a lag between the time a rating is assigned and
the time it is updated. In addition, there may be varying degrees of difference in credit risk of
securities within each rating category.
Securities rated Baa, BBB+, BBB, or BBB- by S&P or Baa1, Baa2 or Baa3 by
Moody’s are considered by Moody’s to have speculative characteristics. Sustained periods of
deteriorating economic conditions or rising interest rates are more likely to lead to a weakening
in the issuer’s capacity to pay interest and repay principal than in the case of higher-rated
securities.
Non-rated securities will also be considered for investment by a Portfolio when
the Adviser believes that the financial condition of the issuers of such securities, or the protection
afforded by the terms of the securities themselves, limits the risk to a Portfolio to a degree
comparable to that of rated securities which are consistent with a Portfolio’s objectives and
policies.
The Adviser generally uses ratings issued by S&P, Moody’s, Fitch and Dominion
Bond Rating Service Ltd. Some securities are rated by more than one of these ratings agencies,
and the ratings assigned to the security by the rating agencies may differ. In such an event and
for purposes of determining compliance with restrictions on investments for the Portfolios, if a
security is rated by two or more rating agencies, the Adviser will deem the security to be rated at
the highest rating. For example, if a security is rated by Moody’s and S&P only, with Moody’s
rating the security as Ba and S&P as BBB, the Adviser will deem the security to be rated as the
equivalent of BBB (i.e., Baa by Moody’s and BBB by S&P). Or, if a security is rated by
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Moody’s, S&P and Fitch, with Moody’s rating the security as Ba, S&P as BBB and Fitch as BB,
the Adviser will deem the security to be rated as the equivalent of BBB (i.e., Ba1 by Moody’s,
BBB by S&P and BBB by Fitch).
The Adviser will try to reduce the risk inherent in a Portfolio’s investment in
fixed-income securities through credit analysis, diversification and attention to current
developments and trends in interest rates and economic conditions. However, there can be no
assurance that losses will not occur. In considering high-yielding investments for a Portfolio, the
Adviser will attempt to identify those fixed-income securities whose financial condition is
adequate to meet future obligations, has improved or is expected to improve in the future. The
Adviser’s analysis focuses on relative values based on such factors as interest or dividend
coverage, asset coverage earnings prospects and the experience and managerial strength of the
issuer.
Unless otherwise indicated, references to securities ratings by one rating agency
in this SAI shall include the equivalent rating by another rating agency.
Short Sales
A Portfolio may make short sales of securities or maintain a short position. A
short sale is effected by selling a security that a Portfolio does not own, or if the Portfolio does
own such security, it is not to be delivered upon consummation of sale. A short sale is against
the box to the extent that a Portfolio contemporaneously owns or has the right to obtain securities
identical to those sold. A short sale of a security involves the risk that, instead of declining, the
price of the security sold short will rise. If the price of the securities sold short increases
between the time of a short sale and the time a Portfolio replaces the borrowed security, the
Portfolio will incur a loss; conversely, if the price declines, the Portfolio will realize a gain. The
potential for the price of a fixed-income security sold short to rise is a function of both the
remaining maturity of the obligation, its creditworthiness and its yield. Unlike short sales of
equities or other instruments, potential for the price of a fixed-income security to rise may be
limited due to the fact that the security will be no more than par at maturity. However, the short
sale of other instruments or securities generally, including fixed-income securities convertible
into equities or other instruments, a fixed-income security trading at a deep discount from par or
which pays a coupon that is high in relative or absolute terms, or which is denominated in a
currency other than the U.S. Dollar, involves the possibility of a theoretically unlimited loss
since there is a theoretically unlimited potential for the market price of the security sold short to
increase.
Special Situations
A special situation arises when, in the opinion of the Adviser, the securities of a
particular company will, within a reasonably estimable period of time, be accorded market
recognition at an appreciated value solely by reason of a development particularly or uniquely
applicable to that company, and regardless of general business conditions or movements of the
market as a whole. Developments creating special situations might include, among others,
liquidations, reorganizations, recapitalizations or mergers, material litigation, technological
breakthroughs and new management or management policies. Although large and well-known
32
companies may be involved, special situations often involve much greater risk than is inherent in
ordinary investment securities.
Standby Commitment Agreements
A Portfolio may, from time to time, enter into standby commitment agreements.
Such agreements commit a Portfolio, for a stated period of time, to purchase a stated amount of a
security that may be issued and sold to the Portfolio at the option of the issuer. The price and
coupon of the security are fixed at the time of the commitment. At the time of entering into the
agreement a Portfolio is paid a commitment fee, regardless of whether or not the security is
ultimately issued, which is typically approximately 0.5% of the aggregate purchase price of the
security which the Portfolio has committed to purchase. The fee is payable whether or not the
security is ultimately issued. A Portfolio will enter into such agreements only for the purpose of
investing in the security underlying the commitment at a yield and price which are considered
advantageous to the Portfolio and which are unavailable on a firm commitment basis.
There can be no assurance that the securities subject to a standby commitment
will be issued, and the value of the security, if issued, on the delivery date may be more or less
than its purchase price. Since the issuance of the security underlying the commitment is at the
option of the issuer, a Portfolio will bear the risk of capital loss in the event the value of the
security declines and may not benefit from an appreciation in the value of the security during the
commitment period if the issuer decides not to issue and sell the security to the Portfolio.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the date on which the security can reasonably be
expected to be issued, and the value of the security will thereafter be reflected in the calculation
of a Portfolio’s NAV. The cost basis of the security will be adjusted by the amount of the
commitment fee. In the event the security is not issued, the commitment fee will be recorded as
income on the expiration date of the standby commitment.
Structured Products
A Portfolio may invest in structured products. Structured products, including
indexed or structured securities, combine the elements of futures contracts or options with those
of debt, preferred equity or a depositary instrument. Generally, the principal amount, amount
payable upon maturity or redemption, or interest rate of a structured product is tied (either
positively or negatively) to prices, changes in prices, or differences between prices, of underlying
assets, such as securities, currencies, intangibles, goods, articles or commodities or by reference
to an unrelated benchmark related to an objective index, economic factor or other measure, such
as interest rates, currency exchange rates, commodity indices, and securities indices. The
interest rate or (unlike most fixed-income securities) the principal amount payable at maturity of
a structured product may be increased or decreased depending on changes in the value of the
underlying asset or benchmark.
Structured products may take a variety of forms. Most commonly, they are in the
form of debt instruments with interest or principal payments or redemption terms determined by
reference to the value of a currency or commodity or securities index at a future point in time,
33
but may also be issued as preferred stock with dividend rates determined by reference to the
value of a currency or convertible securities with the conversion terms related to a particular
commodity.
Investing in structured products may be more efficient and less expensive for a
Portfolio than investing in the underlying assets or benchmarks and the related derivative. These
investments can be used as a means of pursuing a variety of investment goals, including currency
hedging, duration management and increased total return. In addition, structured products may
be a tax-advantaged investment in that they generate income that may be distributed to
shareholders as income rather than short-term capital gains that may otherwise result from a
derivatives transaction.
Structured products, however, have more risk than traditional types of debt or
other securities. These products may not bear interest or pay dividends. The value of a
structured product or its interest rate may be a multiple of a benchmark and, as a result, may be
leveraged and move (up or down) more steeply and rapidly than the benchmark. Under certain
conditions, the redemption value of a structured product could be zero. Structured products are
potentially more volatile and carry greater market risks than traditional debt instruments. The
prices of the structured instrument and the benchmark or underlying asset may not move in the
same direction or at the same time. Structured products may be less liquid and more difficult to
price than less complex securities or instruments or more traditional debt securities. The risk of
these investments can be substantial with the possibility that the entire principal amount is at
risk. The purchase of structured products also exposes a Portfolio to the credit risk of the issuer
of the structured product.
Structured Notes and Indexed Securities: A Portfolio may invest in a particular
type of structured instrument sometimes referred to as a “structured note”. The terms of these
notes may be structured by the issuer and the purchaser of the note. Structured notes are
derivative debt instruments, the interest rate or principal of which is determined by an unrelated
indicator (for example, a currency, security, commodity or index thereof). Indexed securities
may include structured notes as well as securities other than debt securities, the interest rate or
principal of which is determined by an unrelated indicator. The terms of structured notes and
indexed securities may provide that in certain circumstances no principal is due at maturity,
which may result in a total loss of invested capital. Structured notes and indexed securities may
be positively or negatively indexed, so that appreciation of the unrelated indicator may produce
an increase or a decrease in the interest rate or the value of the structured note or indexed
security at maturity may be calculated as a specified multiple of the change in the value of the
unrelated indicator. Therefore, the value of such notes and securities may be very volatile.
Structured notes and indexed securities may entail a greater degree of market risk than other
types of debt securities because the investor bears the risk of the unrelated indicator. Structured
notes or indexed securities also may be more volatile, less liquid, and more difficult to accurately
price than less complex securities and instruments or more traditional debt securities.
Commodity Index-Linked Notes and Commodity-Linked Notes: Structured
products may provide exposure to the commodities markets. These structured notes may include
leveraged or unleveraged commodity index-linked notes, which are derivative debt instruments
with principal and/or coupon payments linked to the performance of commodity indices. They
34
also include commodity-linked notes with principal and/or coupon payments linked to the value
of particular commodities or commodities futures contracts, or a subset of commodities and
commodities future contracts. The value of these notes will rise or fall in response to changes in
the underlying commodity, commodity futures contract, subset of commodities or commodities
futures contracts or commodity index. These notes expose a Portfolio economically to
movements in commodity prices. These notes also are subject to risks, such as credit, market and
interest rate risks, that in general affect the values of debt securities. In addition, these notes are
often leveraged, increasing the volatility of each note’s market value relative to changes in the
underlying commodity, commodity futures contract or commodity index. Therefore, the
Portfolio might receive interest or principal payments on the note that are determined based upon
a specified multiple of the change in value of the underlying commodity, commodity futures
contract or index.
Credit-Linked Securities: Credit-linked securities are issued by a limited purpose
trust or other vehicle that, in turn, invests in a basket of derivative instruments, such as credit
default swaps, interest rate swaps and other securities, in order to provide exposure to certain
high-yield or other fixed-income markets. For example, a Portfolio may invest in credit-linked
securities as a cash management tool in order to gain exposure to certain high-yield markets
and/or to remain fully invested when more traditional income-producing securities are not
available. Like an investment in a bond, investments in credit-linked securities represent the
right to receive periodic income payments (in the form of distributions) and payment of principal
at the end of the term of the security. However, these payments are conditioned on the trust’s
receipt of payments from, and the trust’s potential obligations to, the counterparties to the
derivative instruments and other securities in which the trust invests. For instance, the trust may
sell one or more credit default swaps, under which the trust would receive a stream of payments
over the term of the swap agreements provided that no event of default has occurred with respect
to the referenced debt obligation upon which the swap is based. If a default occurs, the stream of
payments may stop and the trust would be obligated to pay the counterparty the par value (or
other agreed-upon value) of the referenced debt obligation. This, in turn, would reduce the
amount of income and principal that a Portfolio would receive as an investor in the trust. A
Portfolio’s investments in these instruments are indirectly subject to the risks associated with
derivative instruments, including, among others, credit risk, default or similar event risk,
counterparty risk, interest rate risk, and leverage risk and management risk. These securities are
generally structured as Rule 144A securities so that they may be freely traded among
institutional buyers. However, changes in the market for credit-linked securities or the
availability of willing buyers may result in the securities becoming illiquid.
Trust Preferred Securities
Trust preferred securities are preferred securities typically issued by a special
purpose trust subsidiary and backed by subordinated debt of that subsidiary’s parent corporation.
Unlike typical asset-backed securities, which have many underlying payors and usually are
overcollateralized, trust preferred securities have only one underlying payor and are not
overcollateralized. Trust preferred securities may have varying maturity dates, at times in excess
of 30 years, or may have no specified maturity date with an onerous interest rate adjustment if
not called on the first call date. Dividend payments of the trust preferred securities generally
coincide with interest payments on the underlying subordinated debt. Issuers of trust preferred
35
securities and their parents currently enjoy favorable tax treatment. If the tax characterization of
trust preferred securities were to change, they could be redeemed by the issuers, resulting in a
loss to a Portfolio. Trust preferred securities are subject to special risks. Dividend payments
only will be paid if interest payments on the underlying obligations are made. These interest
payments are dependent on the financial condition of the parent corporation and may be deferred
for up to 20 consecutive quarters. There is also the risk that the underlying obligations, and thus
the trust preferred securities, may be prepaid after a stated call date or as a result of certain tax or
regulatory events, resulting in a lower yield to maturity.
U.S. Government Securities
U.S. Government securities may be backed by the full faith and credit of the
United States, supported only by the right of the issuer to borrow from the U.S. Treasury or
backed only by the credit of the issuing agency itself. These securities include: (i) the following
U.S. Treasury securities, which are backed by the full faith and credit of the United States and
differ only in their interest rates, maturities and times of issuance: U.S. Treasury bills (maturities
of one year or less with no interest paid and hence issued at a discount and repaid at full face
value upon maturity), U.S. Treasury notes (maturities of one to ten years with interest payable
every six months) and U.S. Treasury bonds (generally maturities of greater than ten years with
interest payable every six months); (ii) obligations issued or guaranteed by U.S. Government
agencies and instrumentalities that are supported by the full faith and credit of the U.S.
Government, such as securities issued by GNMA, the Farmers Home Administration, the
Department of Housing and Urban Development, the Export-Import Bank, the General Services
Administration and the Small Business Administration, including obligations that are issued by
private issuers that are guaranteed as to principal or interest by the U.S. Government, its agencies
or instrumentalities; and (iii) obligations issued or guaranteed by U.S. Government agencies and
instrumentalities that are not supported by the full faith and credit of the U.S. Government or a
right to borrow from the U.S. Treasury, such as securities issued by the FNMA and FHLMC
(which are, as described above, now in effect, backed by the full faith and credit of the U.S.
Government due to the conservatorship of the agencies), and governmental collateralized
mortgage obligations (“CMOs”). The maturities of the U.S. Government securities listed in
paragraphs (i) and (ii) above usually range from three months to 30 years. Such securities,
except GNMA certificates, normally provide for periodic payments of interest in fixed amount
with principal payments at maturity or specified call dates.
U.S. Government securities also include zero-coupon securities and principal-only
securities and certain stripped mortgage-related securities. Zero-coupon securities are described
in more detail in “Zero-Coupon Treasury Securities” below, and stripped mortgage-related
securities and principal-only securities are described in more detail in “Mortgage-Related
Securities and Other Asset-Backed Securities–Stripped Mortgage-Related Securities” above. In
addition, other U.S. Government agencies and instrumentalities have issued stripped securities
that are similar to SMRS.
Inflation-protected securities, or IPS, such as Treasury Inflation-Protected
Securities, or TIPS, are fixed-income securities whose principal value is periodically adjusted
according to the rate of inflation. If the index measuring inflation falls, the principal value of
these securities will be adjusted downward, and consequently the interest payable on these
36
securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of
the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of
U.S. Treasury inflation-protected securities. For bonds that do not provide a similar guarantee,
the adjusted principal value of the bond repaid at maturity may be less than the original principal.
IPS tend to react to changes in real interest rates. In general, the price of IPS can
fall when real interest rates rise, and can rise when real interest rates fall. In addition, the value
of IPS may be vulnerable to changes in expectations of inflation. Interest payments on IPS can
be unpredictable and will vary as the principal and/or interest is adjusted for inflation.
TIPS, which are issued by the U.S Treasury, use the Consumer Price Index for
Urban Consumers, or the CPI, as the inflation measure. The principal of TIPS increases with
inflation and decreases with deflation, as measured by the CPI. When TIPS mature, the holder is
paid the adjusted principal or original principal, whichever is greater. TIPS pay interest twice a
year, at a fixed rate, which is determined by auction at the time the TIPS are issued. The rate is
applied to the adjusted principal; so, like the principal, interest payments rise with inflation and
fall with deflation. TIPS are issued in terms of 5, 10, and 30 years.
Guarantees of securities by the U.S. Government or its agencies or
instrumentalities guarantee only the payment of principal and interest on the securities, and do
not guarantee the securities’ yield or value or the yield or value of the shares of the Portfolio that
holds the securities.
U.S. Government securities are considered among the safest of fixed-income
investments. As a result, however, their yields are generally lower than the yields available from
other fixed-income securities.
Zero-Coupon Treasury Securities. Zero-coupon Treasury securities are U.S.
Treasury bills, notes and bonds which have been stripped of their unmatured interest coupons
and receipts or certificates representing interests in such stripped debt obligations and coupons.
A zero-coupon security is a debt obligation that does not entitle the holder to any periodic
payments prior to maturity but, instead, is issued and traded at a discount from its face amount.
The discount varies depending on the time remaining until maturity, prevailing interest rates,
liquidity of the security and perceived credit quality of the issuer. The market prices of zerocoupon securities are generally more volatile than those of interest-bearing securities, and are
likely to respond to changes in interest rates to a greater degree than otherwise comparable
securities that do pay periodic interest. Current federal tax law requires that a holder (such as a
Portfolio) of a zero-coupon security accrue a portion of the discount at which the security was
purchased as income each year, even though the holder receives no interest payment on the
security during the year. As a result, in order to make the distributions necessary for a Portfolio
not to be subject to federal income or excise taxes, the Portfolio might be required to pay out as
an income distribution each year an amount, obtained by liquidation of portfolio securities if
necessary, greater than the total amount of cash that the Portfolio has actually received as interest
during the year. The Adviser believes, however, that it is highly unlikely that it would be
necessary to liquidate any portfolio securities for this purpose.
37
Currently the only U.S. Treasury security issued without coupons is the Treasury
bill. Although the U.S. Treasury does not itself issue treasury notes and bonds without coupons,
under the U.S. Treasury STRIPS program interest and principal on certain long term treasury
securities may be maintained separately in the Federal Reserve book entry system and may be
separately traded and owned. However, in the last few years a number of banks and brokerage
firms have separated (“stripped”) the principal portions (“corpus”) from the coupon portions of
the U.S. Treasury bonds and notes and sold them separately in the form of receipts or certificates
representing undivided interests in these instruments (which instruments are generally held by a
bank in a custodial or trust account).
Variable, Floating and Inverse Floating Rate Securities
These securities have interest rates that are reset at periodic intervals, usually by
reference to some interest rate index or market interest rate. Some of these securities are backed
by pools of mortgage loans. Although the rate adjustment feature may act as a buffer to reduce
sharp changes in the value of these securities, they are still subject to changes in value based on
changes in market interest rates or changes in the issuer’s creditworthiness. Because the interest
rate is reset only periodically, changes in the interest rate on these securities may lag behind
changes in prevailing market interest rates. Also, some of these securities (or the underlying
mortgages) are subject to caps or floors that limit the maximum change in the interest rate during
a specified period or over the life of the security.
Variable Notes
Variable amount master demand notes and variable amount floating-rate notes are
obligations that permit the investment of fluctuating amounts by a Portfolio at varying rates of
interest pursuant to direct arrangements between the Portfolio, as lender, and the borrower.
Master demand notes permit daily fluctuations in the interest rate while the interest rate under
variable amount floating rate notes fluctuate on a weekly basis. These notes permit daily
changes in the amounts borrowed. A Portfolio has the right to increase the amount under these
notes at any time up to the full amount provided by the note agreement, or to decrease the
amount, and the borrower may repay up to the full amount of the notes without penalty. Because
these types of notes are direct lending arrangements between the lender and the borrower, it is
not generally contemplated that such instruments will be traded and there is no secondary market
for these notes. Master demand notes are redeemable (and, thus, immediately repayable by the
borrower) at face value plus accrued interest at any time. Variable amount floating-rate notes are
subject to next-day redemption for 14 days after the initial investment therein. With both types
of notes, therefore, a Portfolio’s right to redeem depends on the ability of the borrower to pay
principal and interest on demand. In connection with both types of note arrangements, the
Portfolio considers earning power, cash flow and other liquidity ratios of the issuer. These notes,
as such, are not typically rated by credit rating agencies. Unless they are so rated, a Portfolio
may invest in them only if, at the time of an investment, the issuer has an outstanding issue of
unsecured debt rated Aa3 or better by Moody’s or AA- or better by S&P or Fitch.
38
General
The Fund has voluntarily agreed that each Portfolio with the ability to invest in
foreign issuers will adhere to the foreign security diversification guidelines promulgated by
certain State Insurance Departments. Pursuant to these guidelines, each such Portfolio will
invest in issuers from a minimum of five different foreign countries. This minimum will be
reduced to four different foreign countries when securities of foreign issuers comprise less than
80% of the Portfolio’s NAV, three different foreign countries when securities of foreign issuers
comprise less than 60% of the Portfolio’s NAV, two different foreign countries when securities
of foreign issuers comprise less than 40% of the Portfolio’s NAV and one foreign country when
securities of foreign issuers comprise less than 20% of the Portfolio’s NAV. The Fund has also
voluntarily agreed that each Portfolio that may invest in securities of foreign issuers will limit its
investment in the securities of issuers located in any one country to 20% of the Portfolio’s NAV,
except that the Portfolio may have an additional 15% of its NAV invested in securities of issuers
located in Australia, Canada, France, Japan, the United Kingdom or Germany.
In addition, the Fund has adopted an investment policy, which is not designated a
“fundamental policy” within the meaning of the 1940 Act, of intending to have each Portfolio
comply at all times with the diversification requirements prescribed in Section 817(h) of the
Code or any successor thereto and the applicable Treasury Regulations thereunder. This policy
may be changed upon notice to shareholders of the Fund, but without their approval. For more
information, see “Dividends, Distributions and Taxes” below.
Certain Risk and Other Considerations
Borrowing and Use of Leverage. A Portfolio may use borrowings for investment
purposes, subject to the restrictions of the 1940 Act. Borrowings by a Portfolio result in
leveraging of the Portfolio’s shares of common stock. The proceeds of such borrowings will be
invested in accordance with the Portfolio’s investment objective and policies. A Portfolio may
also create leverage through the use of derivatives or use leverage for investment purposes by
entering into transactions such as reverse repurchase agreements and forward contracts. This
means that the Portfolio uses the cash proceeds made available during the term of these
transactions to make investments in other securities.
Utilization of leverage, which is usually considered speculative, however,
involves certain risks to a Portfolio’s shareholders. These include a higher volatility of the NAV
of the Portfolio’s shares of common stock and the relatively greater effect on the NAV of the
shares caused by favorable or adverse changes in market conditions or interest rates. So long as
a Portfolio is able to realize a net return on the leveraged portion of its investment portfolio that
is higher than the interest expense paid on borrowings or the carrying costs of leveraged
transactions, the effect of leverage will be to cause the Portfolio’s shareholders to realize higher
current net investment income than if the Portfolio were not leveraged. However, to the extent
that the interest expense on borrowings or the carrying costs of leveraged transactions
approaches the net return on the leveraged portion of a Portfolio’s investment portfolio, the
benefit of leverage to a Portfolio’s shareholders will be reduced, and if the interest expense on
borrowings or the carrying costs of leveraged transactions were to exceed the net return to
shareholders, the Portfolio’s use of leverage would result in a lower rate of return than if the
39
Portfolio were not leveraged. Similarly, the effect of leverage in a declining market would
normally be a greater decrease in NAV per share than if the Portfolio were not leveraged. In an
extreme case, if the Portfolio’s current investment income were not sufficient to meet the interest
expense on borrowings or the carrying costs of leveraged transactions, it could be necessary for
the Portfolio to liquidate certain of its investments in adverse circumstances, potentially
significantly reducing its NAV.
Certain transactions, such as derivatives transactions, forward commitments,
reverse repurchase agreements and short sales involve leverage and may expose a Portfolio to
potential losses that, in some cases, may exceed the amount originally invested by the Portfolio.
When a Portfolio engages in such transactions, it will, in accordance with guidance provided by
the SEC or its staff in, among other things, regulations, interpretative releases and no-action
letters, deposit in a segregated account certain liquid assets with a value at least equal to the
Portfolio’s exposure, on a marked-to-market or on another relevant basis, to the transaction.
Transactions for which assets have been segregated will not be considered “senior securities” for
purposes of the Portfolio’s investment restriction concerning senior securities. The segregation
of assets is intended to enable the Portfolio to have assets available to satisfy its obligations with
respect to these transactions, but will not limit the Portfolio’s exposure to loss.
Real Estate Investments
If a Portfolio, including, in particular, Real Estate Investment Portfolio, receives
rental income or income from the disposition of real property acquired as a result of a default on
securities the Portfolio owns, the receipt of such income may adversely affect the Portfolio’s
ability to retain its tax status as a regulated investment company. Investments by Real Estate
Investment Portfolio in securities of companies providing mortgage servicing will be subject to
the risks associated with refinancings and their impact on servicing rights.
REITs are subject to the possibilities of failing to qualify for tax-free pass-through
of income under the Code and failing to maintain their exemptions from registration under the
1940 Act. REITs (especially mortgage REITs) also are subject to interest rate risks. When
interest rates decline, the value of a REIT’s investment in fixed-rate obligations can be expected
to rise. Conversely, when interest rates rise, the value of a REIT’s investment in fixed-rate
obligations can be expected to decline. In contrast, as interest rates on adjustable rate mortgage
loans are reset periodically, yields on a REIT’s investments in such loans will gradually align
themselves to reflect changes in market interest rates, causing the value of such investments to
fluctuate less dramatically in response to interest rate fluctuations than would investments in
fixed rate obligations.
Risks of Investments in Securities of Foreign Issuers.
Investors should understand and consider carefully the substantial risks involved
in securities of foreign companies and governments of foreign nations, some of which are
referred to below, and which are in addition to the usual risks inherent in domestic investments.
Investing in securities of non-U.S. companies, which are generally denominated in foreign
currencies, and utilization of derivative investment products denominated in, or the value of
which is dependent upon movements in the relative value of, a foreign currency, involve certain
40
considerations comprising both risk and opportunity not typically associated with investing in
U.S. companies. These considerations include changes in exchange rates and exchange control
regulations, political and social instability, expropriation, imposition of foreign taxes, less liquid
markets and less available information than are generally the case in the United States, higher
transaction costs, less government supervision of exchanges, brokers and issuers, difficulty in
enforcing contractual obligations, lack of uniform accounting and auditing standards and greater
price volatility.
There is generally less publicly available information about foreign companies
comparable to reports and ratings that are published about companies in the United States.
Foreign issuers are subject to accounting and financial standards and requirements that differ, in
some cases significantly, from those applicable to U.S. issuers. In particular, the assets and
profits appearing on the financial statements of a foreign issuer may not reflect its financial
position or results of operations in the way they would be reflected had the financial statement
been prepared in accordance with U.S. generally accepted accounting principles. In addition, for
an issuer that keeps accounting records in local currency, inflation accounting rules in some of
the countries in which the Portfolio may invest require, for both tax and accounting purposes,
that certain assets and liabilities be restated on the issuer's balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation accounting may indirectly generate
losses or profits. Consequently, financial data may be materially affected by restatements for
inflation and may not accurately reflect the real condition of those issuers and securities markets.
Substantially less information is publicly available about certain non-U.S. issuers than is
available about U.S. issuers.
It is contemplated that securities of foreign issuers will be purchased in over-thecounter markets or on stock exchanges located in the countries in which the respective principal
offices of the issuers of the various securities are located, if that is the best available market.
Foreign securities markets are generally not as developed or efficient as those in the United
States. While growing in volume, they usually have substantially less volume than the New
York Stock Exchange (the “Exchange”), and securities of some foreign companies are less liquid
and more volatile than securities of comparable U.S. companies. Similarly, volume and liquidity
in most foreign bond markets is less than in the United States and, at times, volatility of price can
be greater than in the United States. Fixed commissions on foreign stock exchanges are
generally higher than negotiated commissions on U.S. exchanges, although a Portfolio will
endeavor to achieve the most favorable net results on its portfolio transactions. There is
generally less government supervision and regulation of stock exchanges, brokers and listed
companies than in the United States.
Expropriation, confiscatory taxation, nationalization, political, economic or social
instability or other similar developments, such as military coups, have occurred in the past in
countries in which a Portfolio may invest and could adversely affect a Portfolio’s assets should
these conditions or events recur.
Foreign investment in the securities of companies in certain countries is restricted
or controlled to varying degrees. These restrictions or controls may at times limit or preclude
Portfolio investment in certain securities of foreign issuers and increase the costs and expenses of
41
a Portfolio. Certain countries in which the Portfolio may invest require governmental approval
prior to investments by foreign persons, limit the amount of investment by foreign persons in a
particular issuer, limit the investment by foreign persons only to a specific class of securities of
an issuer that may have less advantageous rights than the classes available for purchase by
domiciliaries of the countries and/or impose additional taxes on foreign investors.
Certain countries may require governmental approval for the repatriation of
investment income, capital or the proceeds of sales of securities by foreign investors. In
addition, if a deterioration occurs in a country’s balance of payments, the country could impose
temporary restrictions on foreign capital remittances.
Income from certain investments held by a Portfolio could be reduced by foreign
income taxes, including withholding taxes. It is impossible to determine the effective rate of
foreign tax in advance. A Portfolio’s NAV may also be affected by changes in the rates or
methods of taxation applicable to that Portfolio or to entities in which that Portfolio has invested.
The Adviser generally will consider the cost of any taxes in determining whether to acquire any
particular investments, but can provide no assurance that the tax treatment of investments held
by the Portfolio will not be subject to change. A shareholder otherwise subject to U.S. federal
income taxes may, subject to certain limitations, be entitled to claim a credit or deduction for
U.S. federal income tax purposes for his or her proportionate share of such foreign taxes paid by
the Portfolio. See “Dividends, Distributions and Taxes”.
Investors should understand that the expense ratio of a fund investing in securities
of foreign issuers may be higher than investment companies investing only in domestic securities
since, among other things, the cost of maintaining the custody of securities of foreign issuers is
higher and the purchase and sale of portfolio securities may be subject to higher transaction
charges, such as stamp duties and turnover taxes.
For many securities of foreign issuers, there are U.S. Dollar-denominated ADRs
which are traded in the United States on exchanges or over-the-counter and are issued by
domestic banks or trust companies and for which market quotations are readily available. ADRs
do not lessen the foreign exchange risk inherent in investing in the securities of foreign issuers.
However, by investing in ADRs rather than directly in stock of foreign issuers, a Portfolio can
avoid currency risks which might occur during the settlement period for either purchases or
sales.
Foreign Currency Transactions. A Portfolio may invest in securities denominated
in foreign currencies and a corresponding portion of the Portfolio’s revenues will be received in
such currencies. In addition, a Portfolio may conduct foreign currency transactions for hedging
and non-hedging purposes on a spot (i.e., cash) basis or through the use of derivatives
transactions, such as forward currency exchange contracts, currency futures and options thereon,
and options on currencies as described above. The dollar equivalent of a Portfolio’s net assets
and distributions will be adversely affected by reductions in the value of certain foreign
currencies relative to the U.S. Dollar. Such changes will also affect a Portfolio’s income. A
Portfolio will, however, have the ability to attempt to protect itself against adverse changes in the
values of foreign currencies by engaging in certain of the investment practices listed above.
42
While a Portfolio has this ability, there is no certainty as to whether and to what extent the
Portfolio will engage in these practices.
Currency exchange rates may fluctuate significantly over short periods of time
causing, along with other factors, a Portfolio’s NAV to fluctuate. Currency exchange rates
generally are determined by the forces of supply and demand in the foreign exchange markets
and the relative merits of investments in different countries, actual or anticipated changes in
interest rates and other complex factors, as seen from an international perspective. Currency
exchange rates also can be affected unpredictably by the intervention of U.S. or foreign
governments or central banks, or the failure to intervene, or by currency controls or political
developments in the United States or abroad. To the extent a Portfolio’s total assets adjusted to
reflect the Portfolio’s net position after giving effect to currency transactions is denominated or
quoted in the currencies of foreign countries, the Portfolio will be more susceptible to the risk of
adverse economic and political developments within those countries.
A Portfolio will incur costs in connection with conversions between various
currencies. A Portfolio may hold foreign currency received in connection with investments
when, in the judgment of the Adviser, it would be beneficial to convert such currency into U.S.
Dollars at a later date, based on anticipated changes in the relevant exchange rate. If the value of
the foreign currencies in which a Portfolio receives its income falls relative to the U.S. Dollar
between receipt of the income and the making of Portfolio distributions, the Portfolio may be
required to liquidate securities in order to make distributions if the Portfolio has insufficient cash
in U.S. Dollars to meet distribution requirements.
If the value of the foreign currencies in which a Portfolio receives income falls
relative to the U.S. Dollar between receipt of the income and the making of Portfolio
distributions, a Portfolio may be required to liquidate securities in order to make distributions if a
Portfolio has insufficient cash in U.S. Dollars to meet the distribution requirements that the
Portfolio must satisfy to qualify as a regulated investment company for federal income tax
purposes. Similarly, if the value of a particular foreign currency declines between the time a
Portfolio incurs expenses in U.S. Dollars and the time cash expenses are paid, the amount of the
currency required to be converted into U.S. Dollars in order to pay expenses in U.S. Dollars
could be greater than the equivalent amount of such expenses in the currency at the time they
were incurred. In light of these risks, a Portfolio may engage in certain currency hedging
transactions, which themselves, involve certain special risks.
Risks of Forward Currency Exchange Contracts, Foreign Currency Futures
Contracts and Options thereon, Options on Foreign Currencies and Over-the-Counter Options on
Securities. Transactions in forward currency exchange contracts, as well as futures and options
on foreign currencies, are subject to all of the correlation, liquidity and other risks outlined
above. In addition, however, such transactions are subject to the risk of governmental actions
affecting trading in or the prices of currencies underlying such contracts, which could restrict or
eliminate trading and could have a substantial adverse effect on the value of positions held by a
Portfolio. In addition, the value of such positions could be adversely affected by a number of
other complex political and economic factors applicable to the countries issuing the underlying
currencies.
43
Further, unlike trading in most other types of instruments, there is no systematic
reporting of last sale information with respect to the foreign currencies underlying contracts
thereon. As a result, the available information on which trading decisions will be based may not
be as complete as the comparable data on which a Portfolio makes investment and trading
decisions in connection with other transactions. Moreover, because the foreign currency market
is a global, twenty-four hour market, events could occur on that market but will not be reflected
in the forward, futures or options markets until the following day, thereby preventing the
Portfolio from responding to such events in a timely manner.
Settlements of exercises of over-the-counter forward currency exchange contracts
or foreign currency options generally must occur within the country issuing the underlying
currency, which in turn requires traders to accept or make delivery of such currencies in
conformity with any U.S. or foreign restrictions and regulations regarding the maintenance of
foreign banking relationships and fees, taxes or other charges.
Unlike transactions entered into by a Portfolio in futures contracts and exchangetraded options, options on foreign currencies, forward currency exchange contracts and over-thecounter options on securities and securities indices may not be traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency options) the SEC. Such
instruments are instead traded through financial institutions acting as market-makers, although
foreign currency options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, that are subject to SEC
regulation. In an over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily price fluctuation
limits, and adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost. Moreover, the option
writer could lose amounts substantially in excess of the initial investment due to the margin and
collateral requirements associated with such positions.
In addition, over-the-counter transactions can be entered into only with a financial
institution willing to take the opposite side, as principal, of a Portfolio’s position unless the
institution acts as broker and is able to find another counterparty willing to enter into the
transaction with the Portfolio. Where no such counterparty is available, it will not be possible to
enter into a desired transaction. There also may be no liquid secondary market in the trading of
over-the-counter contracts, and the Portfolio could be required to retain options purchased or
written, or forward currency exchange contracts entered into, until exercise, expiration or
maturity. This in turn could limit the Portfolio’s ability to profit from open positions or to reduce
losses experienced, and could result in greater losses.
Further, over-the-counter transactions are not subject to the guarantee of an
exchange clearinghouse, and a Portfolio will therefore be subject to the risk of default by, or the
bankruptcy of, the financial institution serving as its counterparty. The Portfolio will enter into
an over-the-counter transaction only with parties whose creditworthiness has been reviewed and
found to be satisfactory by the Adviser.
44
Transactions in over-the-counter options on foreign currencies are subject to a
number of conditions regarding the commercial purpose of the purchaser of such option. A
Portfolio is not able to determine at this time whether or to what extent additional restrictions on
the trading of over-the-counter options on foreign currencies may be imposed at some point in
the future, or the effect that any such restrictions may have on the hedging strategies to be
implemented by them.
Options on foreign currencies traded on national securities exchanges are within
the jurisdiction of the SEC, as are other securities traded on such exchanges. As a result, many of
the protections provided to traders on organized exchanges will be available with respect to such
transactions. In particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the Options Clearing Corporation (“OCC”),
thereby reducing the risk of counterparty default. Further, a liquid secondary market in options
traded on a national securities exchange may be more readily available than in the over-thecounter market, potentially permitting a Portfolio to liquidate open positions at a profit prior to
exercise or expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however, is
subject to the risks of the availability of a liquid secondary market described above, as well as
the risks regarding adverse market movements, the margining of options written, the nature of
the foreign currency market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exchange-traded options on foreign currencies
involve certain risks not presented by the over-the-counter market. For example, exercise and
settlement of such options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a result, if the OCC
determines that foreign governmental restrictions or taxes would prevent the orderly settlement
of foreign currency option exercises, or would result in undue burdens on the OCC or its clearing
member, the OCC may impose special procedures on exercise and settlement, such as technical
changes in the mechanics of delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise.
45
INVESTMENT RESTRICTIONS
Fundamental Investment Policies. The following investment restrictions may not
be changed without approval by the vote of (1) 67% or more of the shares of that Portfolio
represented at a meeting at which more than 50% of the outstanding shares are present in person
or by proxy or (2) more than 50% of the outstanding shares of that Portfolio, whichever is less.
As a fundamental policy, a Portfolio:
(a)
may not concentrate investments in an industry as concentration may be
defined under the 1940 Act or the rules and regulations thereunder (as such statute, rules or
regulations may be amended from time to time) or by guidance regarding, interpretations of, or
exemptive orders under, the 1940 Act or the rules or regulations thereunder published by
appropriate regulatory authorities;1
(b)
may not issue any senior security (as that term is defined in the 1940 Act)
or borrow money, except to the extent permitted by the 1940 Act or the rules and regulations
thereunder (as such statute, rules or regulations may be amended from time to time) or by
guidance regarding, or interpretations of, or exemptive orders under, the 1940 Act or the rules or
regulations thereunder published by appropriate regulatory authorities. For purposes of this
restriction, margin and collateral arrangements, including, for example, with respect to permitted
borrowings, options, futures contracts, options on futures contracts and other derivatives such as
swaps are not deemed to involve the issuance of a senior security;
(c)
may not make loans except through (i) the purchase of debt obligations in
accordance with its investment objective and policies; (ii) the lending of portfolio securities; (iii)
the use of repurchase agreements; or (iv) the making of loans to affiliated funds as permitted
under the 1940 Act, the rules and regulations thereunder (as such statutes, rules or regulations
may be amended from time to time), or by guidance regarding, and interpretations of, or
exemptive orders under, the 1940 Act;
(d)
may not purchase or sell real estate except that it may dispose of real
estate acquired as a result of the ownership of securities or other instruments. This restriction
does not prohibit a Portfolio from investing in securities or other instruments backed by real
1
The Real Estate Investment Portfolio has not adopted a policy to concentrate investments in any one
industry. Although it invests generally in the real estate industry sector, the primary economic
characteristics of companies in this sector are materially different. For example, the Real Estate Investment
Portfolio invests in equity and mortgage REITs, each of which seeks different types of investments. Equity
REITs invest directly in real estate properties, and mortgage REITs make loans to real estate owners and
purchase mortgages on real estate. In addition, there are many different types of REITs in which the Real
Estate Investment Portfolio may invest, including, for example, those that invest in shopping malls,
industrial and office buildings, apartments, warehouses, lodging and hotels, and health care facilities.
REITs may also invest in specific regions, states, or countries. Foreign REITs or other non-U.S. real estate
investments may have significantly different characteristics than those in the United States.
46
estate or in securities of companies engaged in the real estate business;
(e)
may purchase or sell commodities or options thereon to the extent
permitted by applicable law; and
(f)
may not act as an underwriter of securities, except that a Portfolio may
acquire restricted securities under circumstances in which, if such securities were sold, the
Portfolio might be deemed to be an underwriter for purposes of the Securities Act.
As a fundamental policy, each Portfolio is diversified (as that term is defined in
the 1940 Act). This means that at least 75% of the Portfolio’s assets consist of:
•
Cash or cash items;
•
Government securities;
•
Securities of other investment companies; and
•
Securities of any one issuer that represent not more than 10% of the
outstanding voting securities of the issuer of the securities and not more
than 5% of the total assets of the Portfolio.
Non-Fundamental Investment Policies
As a matter of non-fundamental policy, each Portfolio has adopted a policy that
provides that the Portfolio may not purchase securities on margin, except (i) as otherwise
provided under rules adopted by the SEC under the 1940 Act or by guidance regarding the 1940
Act, or interpretations thereof, and (ii) that the Portfolio may obtain such short-term credits as
are necessary for the clearance of portfolio transactions, and the Portfolio may make margin
payments in connection with futures contracts, options, forward contracts, swaps, caps, floors,
collars and other financial instruments.
MANAGEMENT OF THE FUND
The Adviser
The Adviser, a Delaware limited partnership with principal offices at 1345
Avenue of the Americas, New York, New York 10105, has been retained under an investment
advisory agreement (the “Advisory Agreement”) to provide investment advice and, in general, to
conduct the management and investment program of the Fund under the supervision of the
Board. The Adviser is an investment adviser registered under the Investment Advisers Act of
1940, as amended.
47
The Adviser is a leading global investment management firm supervising client
accounts with assets as of December 31, 2012, totaling approximately $430 billion. The Adviser
provides management services for many of the largest U.S. public and private employee benefit
plans, endowments, foundations, public employee retirement funds, banks, insurance companies
and high net worth individuals worldwide.
As of December 31, 2012, the ownership structure of the Adviser, expressed as a
percentage of general and limited partnership interests, was as follows:
AXA and its subsidiaries
61.0%
Holding
37.5
Unaffiliated holders
1.5
100.0%
AXA is a societe anonyme organized under the laws of France and the holding
company for an international group of insurance and related financial services companies,
through certain of its subsidiaries (“AXA and its subsidiaries”). AllianceBernstein Holding L.P.
(“Holding”) is a Delaware limited partnership the units of which (“Holding Units”), are traded
publicly on the Exchange under the ticker symbol “AB”. As of December 31, 2012, AXA owned
approximately 1.4% of the issued and outstanding assignments of beneficial ownership of
Holding Units.
AllianceBernstein Corporation (an indirect wholly-owned subsidiary of AXA) is
the general partner of both Holding and the Adviser. AllianceBernstein Corporation owns
100,000 general partnership units in Holding and a 1% general partnership interest in the
Adviser. Including both the general partnership and limited partnership interests in Holding and
the Adviser, AXA and its subsidiaries had an approximate 65.5% economic interest in the
Adviser as of December 31, 2012.
Advisory Agreement and Expenses
The Adviser serves as investment manager and adviser of each of the Portfolios,
continuously furnishes an investment program for each Portfolio, and manages, supervises and
conducts the affairs of each Portfolio, subject to the oversight of the Board.
Under the Advisory Agreement, the Adviser furnishes advice and
recommendations with respect to the Portfolios’ portfolios of securities and investments, and
provides persons satisfactory to the Board to act as officers of the Fund. Such officers or
employees may be employees of the Adviser or of its affiliates.
The Adviser is, under each Portfolio’s Advisory Agreement, responsible for
certain expenses incurred by the Portfolios, including, for example, office facilities and certain
48
administrative services, and any expenses incurred in promoting the sale of shares of the
Portfolios (other than the portion of the promotional expenses borne by the Portfolios in
accordance with an effective plan pursuant to Rule 12b-1 under the 1940 Act, and the costs of
printing prospectuses of the Fund and other reports to shareholders and fees related to
registration with the SEC and with state regulatory authorities).
The Fund has, under the Advisory Agreement, assumed obligation to payment of all other
expenses. As to the obtaining of services other than those specifically provided to the Fund by
the Adviser, the Fund may employ its own personnel. For such services, the Fund may also
utilize personnel employed by the Adviser or its affiliates and, in such event, the services will be
provided to the Fund at cost and the payments therefore must be specifically approved by the
Board. The following table shows, for the Portfolios listed, the amounts the Adviser received for
such services during the fiscal year ended December 31, 2012.
PORTFOLIO
Intermediate Bond Portfolio
Large Cap Growth Portfolio
Growth and Income Portfolio
Growth Portfolio
International Growth Portfolio
Global Thematic Growth Portfolio
Small Cap Growth Portfolio
Real Estate Investment Portfolio
International Value Portfolio
Small/Mid Cap Value Portfolio
Value Portfolio
Balanced Wealth Strategy Portfolio
Dynamic Asset Allocation Portfolio
AMOUNT RECEIVED
$44,915
$45,150
$44,814
$44,841
$44,879
$45,432
$44,986
$45,659
$44,851
$45,506
$45,169
$45,528
$49,297
The Advisory Agreement continues in effect with respect to each Portfolio,
provided that such continuance is specifically approved at least annually by a vote of a majority
of the Fund’s outstanding voting securities or by the Board, including in either case approval by
a majority of the Directors who are not parties to the Advisory Agreement or “interested
persons” of such parties, as defined by the 1940 Act. Most recently, continuance of the Advisory
Agreement was approved for an additional annual term by the Board, including a majority of the
Directors who are not parties to the Advisory Agreement or interested persons of any such party,
at meetings held on May 1-3, 2012, July 31-August 2, 2012 and November 6-8, 2012.
Any material amendment to the Advisory Agreement must be approved by the
vote of a majority of the outstanding securities of the relevant Portfolio and by the vote of a
majority of the Directors who are not interested persons of the Fund or the Adviser. The
Advisory Agreement is terminable without penalty on 60 days’ written notice by a vote of a
majority of the outstanding voting securities of each Portfolio, by a vote of a majority of the
Directors, or by the Adviser on 60 days’ written notice, and will automatically terminate in the
event of its assignment. The Advisory Agreement provides that in the absence of willful
misfeasance, bad faith or gross negligence on the part of the Adviser, or of reckless disregard of
its obligations thereunder, the Adviser shall not be liable for any action or failure to act in
accordance with its duties thereunder.
49
Certain other clients of the Adviser may have investment objectives and policies
similar to those of the Fund. The Adviser may, from time to time, make recommendations that
result in the purchase or sale of the particular security by its other clients simultaneously with the
Fund. If transactions on behalf of more than one client during the same period increase the
demand for securities being purchased or the supply of securities being sold, there may be an
adverse effect on price. It is the policy of the Adviser to allocate advisory recommendations and
the placing of orders in a manner that is deemed equitable by the Adviser to the accounts
involved, including the Fund. When two or more of the clients of the Adviser (including the
Fund) are purchasing or selling the same security on a given day from the same broker or dealer,
such transactions may be averaged as to price.
For services rendered by the Adviser under the Advisory Agreement, the
Portfolios paid the Adviser, effective September 7, 2004, the annual percentage rates of the
average daily NAV as listed below.
PORTFOLIO
CONTRACTUAL FEE, AS A PERCENTAGE OF
THE PORTFOLIO’S AGGREGATE NET
ASSETS
Intermediate Bond Portfolio
.45 of 1% of the first $2.5 billion, .40 of 1% of the
excess over $2.5 billion up to $5 billion and .35 of
1% of the excess over $5 billion
Large Cap Growth Portfolio
.75 of 1% of the first $2.5 billion, .65 of 1% of the
excess over $2.5 billion up to $5 billion and .60 of
1% of the excess over $5 billion
Growth and Income Portfolio
.55 of 1% of the first $2.5 billion, .45 of 1% of the
excess over $2.5 billion up to $5 billion and .40 of
1% of the excess over $5 billion
International Growth Portfolio
.75 of 1% of the first $2.5 billion, .65 of 1% of the
excess over $2.5 billion up to $5 billion and .60 of
1% of the excess over $5 billion
Growth Portfolio
.75 of 1% of the first $2.5 billion, .65 of 1% of the
excess over $2.5 billion up to $5 billion and .60 of
1% of the excess over $5 billion
Global Thematic Growth Portfolio
.75 of 1% of the first $2.5 billion, .65 of 1% of the
excess over $2.5 billion up to $5 billion and .60 of
1% of the excess over $5 billion
Small Cap Growth Portfolio
.75 of 1% of the first $2.5 billion, .65 of 1% of the
excess over $2.5 billion up to $5 billion and .60 of
1% of the excess over $5 billion
Real Estate Investment Portfolio
.55 of 1% of the first $2.5 billion, .45 of 1% of the
excess over $2.5 billion up to $5 billion and .40 of
1% of the excess over $5 billion
International Value Portfolio
.75 of 1% of the first $2.5 billion, .65 of 1% of the
excess over $2.5 billion up to $5 billion and .60 of
1% of the excess over $5 billion
50
CONTRACTUAL FEE, AS A PERCENTAGE OF
THE PORTFOLIO’S AGGREGATE NET
ASSETS
PORTFOLIO
Small/Mid Cap Value Portfolio
.75 of 1% of the first $2.5 billion, .65 of 1% of the
excess over $2.5 billion up to $5 billion and .60 of
1% of the excess over $5 billion
Value Portfolio
.55 of 1% of the first $2.5 billion, .45 of 1% of the
excess over $2.5 billion up to $5 billion and .40 of
1% of the excess over $5 billion
Balanced Wealth Strategy Portfolio
.55 of 1% of the first $2.5 billion, .45 of 1% of the
excess over $2.5 billion up to $5 billion and .40 of
1% of the excess over $5 billion
Dynamic Asset Allocation Portfolio
.70 of 1% of average net assets
These fees are accrued daily and paid monthly. The Adviser has contractually
agreed for the period from the effective date of the Portfolios’ Prospectuses to the effective date
of the subsequent Prospectuses incorporating the Portfolios’ annual financial statements (the
“Period”) to waive its fee and bear certain expenses so that total expenses do not exceed, on an
annual basis, the percentages of average daily net assets for the share classes of the Portfolios
listed below. This fee waiver and/or expense reimbursement agreement automatically extends
each year unless the Adviser provides notice to the Portfolios at least 60 days prior to the end of
the Period.
Expense Caps
Portfolios
International Value Portfolio
Class A
Class B
1.20%
1.45%
Small/Mid Cap Value Portfolio
Class A
Class B
1.20%
1.45%
Value Portfolio
Class A
Class B
1.20%
1.45%
Balanced Wealth Strategy Portfolio
Class A
Class B
.75%
1.00%
Dynamic Asset Allocation Portfolio
Class A
Class B
.85%
1.10%
The following table shows, for each Portfolio, the amounts the Adviser received
for such services for the last three fiscal years (or since commencement of operations).
PORTFOLIO
Intermediate Bond Portfolio
FISCAL YEAR END
DECEMBER 31
2010
2011
2012
51
AMOUNT RECEIVED
$
$
$
756,946
663,933
537,093
PORTFOLIO
FISCAL YEAR END
DECEMBER 31
AMOUNT RECEIVED
Large Cap Growth Portfolio
2010
2011
2012
$ 3,074,645
$ 3,016,811
$ 2,763,102
Growth and Income Portfolio
2010
2011
2012
$ 5,452,055
$ 5,209,331
$ 4,970,692
Growth Portfolio
2010
2011
2012
$
$
$
International Growth Portfolio
2010
2011
2012
$ 1,406,212
$ 1,346,487
$ 1,134,380
Global Thematic Growth Portfolio
2010
2011
2012
$ 1,437,042
$ 1,394,681
$ 1,041,640
Small Cap Growth Portfolio
2010
2011
2012
$
$
$
314,995
450,810
449,446
Real Estate Investment Portfolio
2010
2011
2012
$
$
$
378,158
424,010
446,395
Small/Mid Cap Value Portfolio
2010
2011
2012
$ 3,552,405
$ 3,851,236
$ 3,713,115
Value Portfolio
2010
2011
2012
$ 1,135,415
$ 1,066,870
$ 929,258
International Value Portfolio
2010
2011
2012
$11,570,726
$ 9,735,549
$ 8,309,168
Balanced Wealth Strategy Portfolio
2010
2011
2012
$ 2,985,277
$ 3,138,158
$ 3,039,523
Dynamic Asset Allocation Portfolio
2011
2012
$
$
52
716,734
688,064
588,623
0
715,573
The amounts received in the table above are net of the amounts the Adviser
waived under a contractual fee waiver or otherwise. Amounts waived were:
AMOUNT WAIVED UNDER
CONTRACTUAL FEE WAIVER OR
OTHERWISE
Dynamic Asset Allocation Portfolio
2011
2012
$259,480*
$268,372
___________________
* Waiver excludes administrative fee waiver. The Adviser reimbursed the Portfolio an additional amount of
$112,620 in 2011 for certain of its non-advisory expenses.
The Adviser may act as an investment adviser to other persons, firms or
corporations, including investment companies, and is investment adviser to the following
registered investment companies: AllianceBernstein Blended Style Series, Inc.,
AllianceBernstein Bond Fund, Inc., AllianceBernstein Cap Fund, Inc., AllianceBernstein Core
Opportunities Fund, Inc., AllianceBernstein Corporate Shares, AllianceBernstein Discovery
Growth Fund, Inc., AllianceBernstein Equity Income Fund, Inc., AllianceBernstein Exchange
Reserves, AllianceBernstein Fixed-Income Shares, Inc., AllianceBernstein Global Bond Fund,
Inc., AllianceBernstein Global Real Estate Investment Fund, Inc., AllianceBernstein Global Risk
Allocation Fund, Inc., AllianceBernstein Global Thematic Growth Fund, Inc., AllianceBernstein
Growth and Income Fund, Inc., AllianceBernstein High Income Fund, Inc., AllianceBernstein
Institutional Funds, Inc., AllianceBernstein International Growth Fund, Inc., AllianceBernstein
Large Cap Growth Fund, Inc., AllianceBernstein Municipal Income Fund, Inc.,
AllianceBernstein Municipal Income Fund II, AllianceBernstein Trust, AllianceBernstein
Unconstrained Bond Fund, Inc., Sanford C. Bernstein Fund, Inc., Sanford C. Bernstein Fund II,
Inc., The AllianceBernstein Pooling Portfolios and The AllianceBernstein Portfolios, all openend investment companies; and to AllianceBernstein Global High Income Fund, Inc.,
AllianceBernstein Income Fund, Inc., AllianceBernstein Multi-Manager Alternative Fund,
AllianceBernstein National Municipal Income Fund, Inc., Alliance California Municipal Income
Fund, Inc. and Alliance New York Municipal Income Fund, Inc., all registered closed-end
investment companies. The registered investment companies for which the Adviser serves as
investment adviser are referred to collectively below as the “AllianceBernstein Fund Complex”,
while all of these investment companies, except the Sanford C. Bernstein Fund, Inc. and the
AllianceBernstein Multi-Manager Alternative Fund, are referred to collectively below as the
“AllianceBernstein Funds”.
53
Board of Directors Information
Certain information concerning the Directors is set forth below.
NAME, ADDRESS*,
AGE AND
(YEAR FIRST
ELECTED**)
INDEPENDENT
DIRECTORS
Chairman of the Board
William H. Foulk, Jr., #, ##
80
(1990)
John H. Dobkin, #
71
(1992)
PRINCIPAL
OCCUPATION(S)
DURING PAST FIVE YEARS
OR LONGER
PORTFOLIOS
IN ALLIANCEBERNSTEIN
FUND
COMPLEX
OVERSEEN
BY DIRECTOR
OTHER PUBLIC
COMPANY
DIRECTORSHIPS
HELD
BY DIRECTOR IN
THE PAST FIVE
YEARS
Investment Adviser and an
Independent Consultant since
prior to 2008. Previously, he
was Senior Manager of Barrett
Associates, Inc., a registered
investment adviser. He was
formerly Deputy Comptroller
and Chief Investment Officer of
the State of New York and,
prior thereto, Chief Investment
Officer of the New York Bank
for Savings. He has served as a
director or trustee of various
AllianceBernstein Funds since
1983 and has been Chairman of
the AllianceBernstein Funds
and of the Independent
Directors Committee of such
Funds since 2003.
101
None
Independent Consultant since
prior to 2008. Formerly,
President of Save Venice, Inc.
(preservation organization)
from 2001 - 2002; Senior
Advisor from June 1999 - June
2000 and President of Historic
Hudson Valley (historic
preservation) from December
1989 - May 1999. Previously,
Director of the National
Academy of Design. He has
served as a director or trustee of
various AllianceBernstein
Funds since 1992.
101
None
54
PORTFOLIOS
IN ALLIANCEBERNSTEIN
FUND
COMPLEX
OVERSEEN
BY DIRECTOR
101
OTHER PUBLIC
COMPANY
DIRECTORSHIPS
HELD
BY DIRECTOR IN
THE PAST FIVE
YEARS
Asia Pacific Fund,
Inc. and The Merger
Fund since prior to
2008, and Prospect
Acquisition Corp.
(financial services)
from 2007 until 2009
NAME, ADDRESS*,
AGE AND
(YEAR FIRST
ELECTED**)
Michael J. Downey, #
69
(2005)
PRINCIPAL
OCCUPATION(S)
DURING PAST FIVE YEARS
OR LONGER
Private Investor since prior to
2008. Formerly, managing
partner of Lexington Capital,
LLC (investment advisory firm)
from December 1997 until
December 2003. From 1987
until 1993, Chairman and CEO
of Prudential Mutual Fund
Management, director of the
Prudential mutual funds and
member of the Executive
Committee of Prudential
Securities Inc. He has served as
a director or trustee of the
AllianceBernstein Funds since
2005.
D. James Guzy, #
77
(2005)
Chairman of the Board of PLX
Technology (semi-conductors)
and of SRC Computers Inc.,
with which he has been
associated since prior to 2008.
He was a director of Intel
Corporation (semi-conductors)
from 1969 until 2008, and
served as Chairman of the
Finance Committee of such
company for several years until
May 2008. He has served as a
director or trustee of one or
more of the AllianceBernstein
Funds since 1982.
101
Cirrus Logic
Corporation (semiconductors) and PLX
Technology (semiconductors) since
prior to 2008 and
Intel Corporation
(semi-conductors)
until 2008
Nancy P. Jacklin, #
64
(2006)
Professorial Lecturer at the
Johns Hopkins School of
Advanced International Studies
since 2008. Formerly, U.S.
Executive Director of the
International Monetary Fund
(December 2002-May 2006);
Partner, Clifford Chance (19922002); Sector Counsel,
International Banking and
Finance, and Associate General
101
None
55
NAME, ADDRESS*,
AGE AND
(YEAR FIRST
ELECTED**)
PRINCIPAL
OCCUPATION(S)
DURING PAST FIVE YEARS
OR LONGER
Counsel, Citicorp (1985-1992);
Assistant General Counsel
(International), Federal Reserve
Board of Governors (19821985); and Attorney Advisor,
U.S. Department of the
Treasury (1973-1982).
Member of the Bar of the
District of Columbia and of
New York; and member of the
Council on Foreign Relations.
She has served as a director or
trustee of the AllianceBernstein
Funds since 2006.
Garry L. Moody, #
61
(2008)
Independent Consultant.
Formerly, Partner, Deloitte &
Touche LLP (1995-2008)
where he held a number of
senior positions, including Vice
Chairman, and U.S. and Global
Investment Management
Practice Managing Partner;
President, Fidelity Accounting
and Custody Services Company
(1993-1995); and Partner, Ernst
& Young LLP (1975-1993),
where he served as the National
Director of Mutual Fund Tax
Services. He has served as a
director or trustee, and as
Chairman of the Audit
Committee, of the
AllianceBernstein Funds since
2008.
56
PORTFOLIOS
IN ALLIANCEBERNSTEIN
FUND
COMPLEX
OVERSEEN
BY DIRECTOR
101
OTHER PUBLIC
COMPANY
DIRECTORSHIPS
HELD
BY DIRECTOR IN
THE PAST FIVE
YEARS
None
PORTFOLIOS
IN ALLIANCEBERNSTEIN
FUND
COMPLEX
OVERSEEN
BY DIRECTOR
101
OTHER PUBLIC
COMPANY
DIRECTORSHIPS
HELD
BY DIRECTOR IN
THE PAST FIVE
YEARS
Xilinx, Inc.
(programmable logic
semi-conductors) and
MEMC Electronic
Materials, Inc. (semiconductor and solar
cell substrates) since
prior to 2008
NAME, ADDRESS*,
AGE AND
(YEAR FIRST
ELECTED**)
Marshall C. Turner, Jr., #
71
(2005)
PRINCIPAL
OCCUPATION(S)
DURING PAST FIVE YEARS
OR LONGER
Private Investor since prior to
2008. Interim CEO of MEMC
Electronic Materials, Inc.
(semi-conductor and solar cell
substrates) from November
2008 until March 2009. He was
Chairman and CEO of Dupont
Photomasks, Inc. (components
of semi-conductor
manufacturing), 2003-2005,
and President and CEO, 20052006, after the company was
acquired and renamed Toppan
Photomasks, Inc. He has
served as a director or trustee of
one or more of the
AllianceBernstein Funds since
1992.
Earl D. Weiner, #
73
(2007)
Of Counsel, and Partner prior to
January 2007, of the law firm
Sullivan & Cromwell LLP and
member of ABA Federal
Regulation of Securities
Committee Task Force to draft
editions of the Fund Director’s
Guidebook. He has served as a
director or trustee of the
AllianceBernstein Funds since
2007 and is Chairman of the
Governance and Nominating
Committees of the Funds.
101
None
Senior Vice President of the
Adviser++ and head of
AllianceBernstein Investments,
Inc. (“ABI”)++ since July
2008; Director of ABI and
President of the
AllianceBernstein Mutual
Funds. Previously, he served as
101
None
INTERESTED
DIRECTOR
Robert M. Keith +
1345 Avenue of the
Americas, New York, NY
10105
52
(2010)
57
NAME, ADDRESS*,
AGE AND
(YEAR FIRST
ELECTED**)
PRINCIPAL
OCCUPATION(S)
DURING PAST FIVE YEARS
OR LONGER
Executive Managing Director
of ABI from December 2006 to
June 2008. Prior to joining ABI
in 2006, Executive Managing
Director of Bernstein Global
Wealth Management, and prior
thereto, Senior Managing
Director and Global Head of
Client Service and Sales of the
Adviser’s institutional
investment management
business since 2004. Prior
thereto, he was Managing
Director and Head of North
American Client Service and
Sales in the Adviser’s
institutional investment
management business, with
which he had been associated
since prior to 2004.
PORTFOLIOS
IN ALLIANCEBERNSTEIN
FUND
COMPLEX
OVERSEEN
BY DIRECTOR
OTHER PUBLIC
COMPANY
DIRECTORSHIPS
HELD
BY DIRECTOR IN
THE PAST FIVE
YEARS
_______
*
**
#
##
+
++
The address for each of the Fund’s Directors is c/o AllianceBernstein L.P., Attention: Philip L. Kirstein,
1345 Avenue of the Americas, New York, NY 10105.
There is no stated term of office for the Fund’s Directors.
Member of the Audit Committee, the Governance and Nominating Committee and the Independent
Directors Committee.
Member of the Fair Value Pricing Committee.
Mr. Keith is an “interested person”, as defined in Section 2(a)(19) of the 1940 Act, of the Fund due to his
position as a Senior Vice President of the Adviser.
The Adviser and ABI are affiliates of the Fund.
The business and affairs of the Fund are managed under the direction of the
Board. Directors who are not “interested persons” of the Fund as defined in the 1940 Act, are
referred to as “Independent Directors”, and Directors who are “interested persons” of the Fund
are referred to as “Interested Directors”. Certain information concerning the Fund’s governance
structure and each Director is set forth below.
Experience, Skills, Attributes, and Qualifications of the Fund’s Directors. The
Governance and Nominating Committee of the Board, which is composed of Independent
Directors, reviews the experience, qualifications, attributes and skills of potential candidates for
nomination or election by the Board, and conducts a similar review in connection with the
proposed nomination of current Directors for re-election by stockholders at any annual or special
58
meeting of stockholders. In evaluating a candidate for nomination or election as a Director the
Governance and Nominating Committee takes into account the contribution that the candidate
would be expected to make to the diverse mix of experience, qualifications, attributes and skills
that the Governance and Nominating Committee believes contributes to good governance for the
Fund. Additional information concerning the Governance and Nominating Committee’s
consideration of nominees appears in the description of the Committee below.
The Board believes that, collectively, the Directors have balanced and diverse
experience, qualifications, attributes, and skills, which allow the Board to operate effectively in
governing the Fund and protecting the interests of stockholders. The Board has concluded that,
based on each Director’s experience, qualifications, attributes or skills on an individual basis and
in combination with those of the other Directors, each Director is qualified and should continue
to serve as such.
In determining that a particular Director was and continues to be qualified to
serve as a Director, the Board has considered a variety of criteria, none of which, in isolation,
was controlling. In addition, the Board has taken into account the actual service and
commitment of each Director during his or her tenure (including the Director’s commitment and
participation in Board and committee meetings, as well as his or her current and prior leadership
of standing and ad hoc committees) in concluding that each should continue to serve. Additional
information about the specific experience, skills, attributes and qualifications of each Director,
which in each case led to the Board’s conclusion that the Director should serve (or continue to
serve) as a trustee or director of the Fund, is provided in the table above and in the next
paragraph.
Among other attributes and qualifications common to all Directors are their
ability to review critically, evaluate, question and discuss information provided to them
(including information requested by the Directors), to interact effectively with the Adviser, other
service providers, counsel and the Fund’s independent registered public accounting firm, and to
exercise effective business judgment in the performance of their duties as Directors. In addition
to his or her service as a Director of the Fund and other AllianceBernstein Funds as noted in the
table above: Mr. Dobkin has experience as an executive of a number of organizations and served
as Chairman of the Audit Committee of many of the AllianceBernstein Funds from 2001 to
2008; Mr. Downey has experience in the investment advisory business including as Chairman
and Chief Executive Officer of a large fund complex and as director of a number of nonAllianceBernstein funds and as Chairman of a non-AllianceBernstein closed-end fund; Mr. Foulk
has experience in the investment advisory and securities businesses, including as Deputy
Comptroller and Chief Investment Officer of the State of New York (where his responsibilities
included bond issuances, cash management and oversight of the New York Common Retirement
Fund), has served as Chairman of the AllianceBernstein Funds and of the Independent Directors
Committee since 2003, and is active in a number of mutual fund-related organizations and
committees; Mr. Guzy has experience as a corporate director including as Chairman of a public
company and Chairman of the Finance Committee of a large public technology company; Ms.
Jacklin has experience as a financial services regulator including as U.S. Executive Director of
the International Monetary Fund, which is responsible for ensuring the stability of the
international monetary system, and as a financial services lawyer in private practice; Mr. Keith
has experience as an executive of the Adviser with responsibility for, among other things, the
59
AllianceBernstein Funds; Mr. Moody has experience as a certified public accountant including
experience as Vice Chairman and U.S. and Global Investment Management Practice Partner for
a major accounting firm, is a member of the governing council of an organization of independent
directors of mutual funds, and has served as Chairman of the Audit Committee of the
AllianceBernstein Funds since 2008; Mr. Turner has experience as a director (including as
Chairman and Chief Executive officer of a number of companies) and as a venture capital
investor including prior service as general partner of three institutional venture capital
partnerships; and Mr. Weiner has experience as a securities lawyer whose practice includes
registered investment companies and as Chairman, director or trustee of a number of boards, and
has served as Chairman of the Governance and Nominating Committee of the AllianceBernstein
Funds since 2007. The disclosure herein of a director’s experience, qualifications, attributes and
skills does not impose on such director any duties, obligations, or liability that are greater than
the duties, obligations and liability imposed on such director as a member of the Board and any
committee thereof in the absence of such experience, qualifications, attributes and skills.
Board Structure and Oversight Function. The Board is responsible for oversight
of the Fund. The Fund has engaged the Adviser to manage the Fund’s Portfolios on a day-to-day
basis. The Board is responsible for overseeing the Adviser and the Fund’s other service
providers in the operations of the Fund in accordance with each Portfolio’s investment objective
and policies and otherwise in accordance with its prospectus, the requirements of the 1940 Act
and other applicable Federal, state and other securities and other laws, and the Fund’s charter and
bylaws. The Board typically meets in-person at regularly scheduled meetings eight times
throughout the year. In addition, the Directors may meet in-person or by telephone at special
meetings or on an informal basis at other times. The Independent Directors also regularly meet
without the presence of any representatives of management. As described below, the Board has
established four standing committees – the Audit, Governance and Nominating, Independent
Directors, and Fair Value Pricing Committees – and may establish ad hoc committees or working
groups from time to time, to assist the Board in fulfilling its oversight responsibilities. Each
committee is composed exclusively of Independent Directors. The responsibilities of each
committee, including its oversight responsibilities, are described further below. The Independent
Directors have also engaged independent legal counsel, and may, from time to time, engage
consultants and other advisors, to assist them in performing their oversight responsibilities.
An Independent Director serves as Chairman of the Board. The Chairman’s
duties include setting the agenda for each Board meeting in consultation with management,
presiding at each Board meeting, meeting with management between Board meetings, and
facilitating communication and coordination between the Independent Directors and
management. The Directors have determined that the Board’s leadership by an Independent
Director and its committees composed exclusively of Independent Directors is appropriate
because they believe it sets the proper tone to the relationships between the Fund, on the one
hand, and the Adviser and other service providers, on the other, and facilitates the exercise of the
Board’s independent judgment in evaluating and managing the relationships. In addition, the
Fund is required to have an Independent Director as Chairman pursuant to certain 2003
regulatory settlements involving the Adviser.
Risk Oversight. The Fund and its Portfolios are subject to a number of risks,
including investment, compliance and operational risks. Day-to-day risk management with
60
respect to the Fund and its Portfolios resides with the Adviser or other service providers
(depending on the nature of the risk), subject to supervision by the Adviser. The Board has
charged the Adviser and its affiliates with (i) identifying events or circumstances the occurrence
of which could have demonstrable and material adverse effects on the Fund or its Portfolios; (ii)
to the extent appropriate, reasonable or practicable, implementing processes and controls
reasonably designed to lessen the possibility that such events or circumstances occur or to
mitigate the effects of such events or circumstances if they do occur; and (iii) creating and
maintaining a system designed to evaluate continuously, and to revise as appropriate, the
processes and controls described in (i) and (ii) above.
Risk oversight forms part of the Board’s general oversight of the Portfolios’
investment programs and operations and is addressed as part of various regular Board and
committee activities. The Fund’s investment management and business affairs are carried out by
or through the Adviser and other service providers. Each of these persons has an independent
interest in risk management but the policies and the methods by which one or more risk
management functions are carried out may differ from the Fund’s and each other’s in the setting
of priorities, the resources available or the effectiveness of relevant controls. Oversight of risk
management is provided by the Board and the Audit Committee. The Directors regularly receive
reports from, among others, management (including the Global Heads of Investment Risk and
Trading Risk of the Adviser), the Fund’s Senior Officer (who is also the Fund’s chief compliance
officer), independent registered public accounting firm and counsel, and internal auditors for the
Adviser, as appropriate, regarding risks faced by the Fund and its Portfolios and the Adviser’s
risk management programs.
Not all risks that may affect the Fund and its Portfolios can be identified, nor can
controls be developed to eliminate or mitigate their occurrence or effects. It may not be practical
or cost-effective to eliminate or mitigate certain risks, the processes and controls employed to
address certain risks may be limited in their effectiveness, and some risks are simply beyond the
reasonable control of the Fund or the Adviser, its affiliates or other service providers. Moreover,
it is necessary to bear certain risks (such as investment-related risks) to achieve the Portfolios’
goals. As a result of the foregoing and other factors the Fund’s and its Portfolios’ ability to
manage risk is subject to substantial limitations.
Board Committees. The Board has four standing committees - an Audit
Committee, a Governance and Nominating Committee, a Fair Value Pricing Committee and an
Independent Directors Committee. The members of the Audit, Governance and Nominating,
Fair Value Pricing, and Independent Directors Committees are identified above.
The function of the Audit Committee is to assist the Board in its oversight of the
Portfolios’ financial reporting process. The Audit Committee met twice during each Portfolios’
most recently completed fiscal year.
The function of the Governance and Nominating Committee includes the
nomination of persons to fill any vacancies or newly created positions on the Board. The
Governance and Nominating Committee met three times during each Portfolios’ most recently
completed fiscal year.
61
The Board has adopted a charter for its Governance and Nominating Committee.
Pursuant to the charter, the Committee assists the Board in carrying out its responsibilities with
respect to governance of the Fund and identifies, evaluates, selects and nominates candidates for
the Board. The Committee may also set standards or qualifications for Directors and reviews at
least annually the performance of each Director, taking into account factors such as attendance at
meetings, adherence to Board policies, preparation for and participation at meetings,
commitment and contribution to the overall work of the Board and its committees, and whether
there are health or other reasons that might affect the Director’s ability to perform his or her
duties. The Committee may consider candidates as Directors submitted by the Fund’s current
Board members, officers, the Adviser, stockholders and other appropriate sources.
The Governance and Nominating Committee will consider candidates for
nomination as a Director submitted by a shareholder or group of shareholders who have
beneficially owned at least 5% of a Portfolio’s common stock or shares of beneficial interest for
at least two years prior to the time of submission and who timely provide specified information
about the candidates and the nominating shareholder or group. To be timely for consideration by
the Governance and Nominating Committee, the submission, including all required information,
must be submitted in writing to the attention of the Secretary at the principal executive offices of
the Fund no less than 120 days before the date of the proxy statement for the previous year’s
annual meeting of shareholders. If the Fund did not hold an annual meeting of shareholders in
the previous year, the submission must be delivered or mailed and received within a reasonable
amount of time before the Fund begins to print and mail its proxy materials. Public notice of
such upcoming annual meeting of shareholders may be given in a shareholder report or other
mailing to shareholders or by other means deemed by the Governance and Nominating
Committee or the Board to be reasonably calculated to inform shareholders.
Shareholders submitting a candidate for consideration by the Governance and
Nominating Committee must provide the following information to the Governance and
Nominating Committee: (i) a statement in writing setting forth (A) the name, date of birth,
business address and residence address of the candidate; (B) any position or business relationship
of the candidate, currently or within the preceding five years, with the shareholder or an
associated person of the shareholder as defined below; (C) the class or series and number of all
shares of a Portfolio owned of record or beneficially by the candidate; (D) any other information
regarding the candidate that is required to be disclosed about a nominee in a proxy statement or
other filing required to be made in connection with the solicitation of proxies for election of
Directors pursuant to Section 20 of the 1940 Act and the rules and regulations promulgated
thereunder; (E) whether the shareholder believes that the candidate is or will be an “interested
person” of the Fund (as defined in the 1940 Act) and, if believed not to be an “interested person”,
information regarding the candidate that will be sufficient for the Fund to make such
determination; and (F) information as to the candidate’s knowledge of the investment company
industry, experience as a director or senior officer of public companies, directorships on the
boards of other registered investment companies and educational background; (ii) the written and
signed consent of the candidate to be named as a nominee and to serve as a Director if elected;
(iii) the written and signed agreement of the candidate to complete a directors’ and officers’
questionnaire if elected; (iv) the shareholder’s consent to be named as such by the Fund; (v) the
class or series and number of all shares of each Portfolio of the Fund owned beneficially and of
record by the shareholder and any associated person of the shareholder and the dates on which
62
such shares were acquired, specifying the number of shares owned beneficially but not of record
by each, and stating the names of each as they appear on the Fund’s record books and the names
of any nominee holders for each; and (vi) a description of all arrangements or understandings
between the shareholder, the candidate and/or any other person or persons (including their
names) pursuant to which the recommendation is being made by the shareholder. “Associated
person of the shareholder” means any person who is required to be identified under clause (vi) of
this paragraph and any other person controlling, controlled by or under common control with,
directly or indirectly, (a) the shareholder or (b) the associated person of the shareholder.
The Governance and Nominating Committee may require the shareholder to
furnish such other information as it may reasonably require or deem necessary to verify any
information furnished pursuant to the nominating procedures described above or to determine the
qualifications and eligibility of the candidate proposed by the shareholder to serve on the Board.
If the shareholder fails to provide such other information in writing within seven days of receipt
of written request from the Governance and Nominating Committee, the recommendation of
such candidate as a nominee will be deemed not properly submitted for consideration, and will
not be considered, by the Committee.
The Governance and Nominating Committee will consider only one candidate
submitted by such a shareholder or group for nomination for election at an annual meeting of
shareholders. The Governance and Nominating Committee will not consider self-nominated
candidates. The Governance and Nominating Committee will consider and evaluate candidates
submitted by shareholders on the basis of the same criteria as those used to consider and evaluate
candidates submitted from other sources. These criteria include the candidate’s relevant
knowledge, experience, and expertise, the candidate’s ability to carry out his or her duties in the
best interests of the Fund, and the candidate’s ability to qualify as an Independent Director or
Director. When assessing a candidate for nomination, the Committee considers whether the
individual’s background, skills, and experience will complement the background, skills, and
experience of other nominees and will contribute to the diversity of the Board.
The function of the Fair Value Pricing Committee is to consider, in advance if
possible, any fair valuation decision of the Adviser’s Valuation Committee relating to a security
held by a Portfolio made under unique or highly unusual circumstances not previously addressed
by the Valuation Committee that would result in a change in the Portfolio’s NAV by more than
$0.01 per share. The Fair Value Pricing Committee did not meet during the Portfolios’ most
recently completed fiscal year.
The function of the Independent Directors Committee is to consider and take
action on matters that the Board or Committee believes should be addressed in executive session
of the Independent Directors, such as review and approval of the Advisory and Distribution
Services Agreements. The Independent Directors Committee met eight times during the
Portfolios’ most recently completed fiscal year.
The dollar range of the Fund’s securities owned by each Director and the
aggregate dollar range of securities of funds in the AllianceBernstein Fund Complex owned by
each Director are set forth below.
63
DOLLAR RANGE OF
EQUITY SECURITIES
IN THE PORTFOLIOS
AS OF
DECEMBER 31, 2012*
John H. Dobkin
Michael J. Downey
William H. Foulk, Jr.
D. James Guzy
Nancy P. Jacklin
Robert M. Keith
Garry L. Moody
Marshall C. Turner, Jr.
Earl D. Weiner
_______
*
AGGREGATE DOLLAR RANGE
OF EQUITY SECURITIES IN
THE ALLIANCEBERNSTEIN
FUND COMPLEX AS OF
DECEMBER 31, 2012
None
None
None
None
None
None
None
None
None
Over $100,000
Over $100,000
Over $100,000
Over $100,000
Over $100,000
$0
Over $100,000
Over $100,000
Over $100,000
The Directors cannot directly invest in the Fund’s Portfolios, because direct investments in the Portfolios
may be made only by variable annuity and variable life insurance separate accounts.
Officer Information
Certain information concerning the Fund’s officers is set forth below.
NAME, ADDRESS* AND
AGE
POSITION(S)
HELD WITH FUND
PRINCIPAL OCCUPATION
DURING PAST FIVE YEARS
Robert M. Keith,
52
President and Chief Executive
Officer
See biography above.
Philip L. Kirstein,
67
Senior Vice President and
Independent Compliance Officer
Senior Vice President and
Independent Compliance Officer
of the Funds in the
AllianceBernstein Fund Complex,
with which he has been
associated since 2004. Prior
thereto, he was Of Counsel to
Kirkpatrick & Lockhart, LLP
from October 2003 to October
2004, and General Counsel of
Merrill Lynch Investment
Managers L.P. since prior to
2008.
Robert Alster,
52
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
64
NAME, ADDRESS* AND
AGE
POSITION(S)
HELD WITH FUND
PRINCIPAL OCCUPATION
DURING PAST FIVE YEARS
Bruce K. Aronow,
46
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
Takeo Aso,
48
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
Joseph G. Carson,
61
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
Frank V. Caruso,
56
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
Paul J. DeNoon,
51
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
Vincent C. DuPont,
50
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
Sharon E. Fay,
52
Vice President
Senior Vice President of the
Adviser**, with which she has
been associated since prior to
2008.
John H. Fogarty,
43
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
Eric J. Franco,
53
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
65
NAME, ADDRESS* AND
AGE
POSITION(S)
HELD WITH FUND
PRINCIPAL OCCUPATION
DURING PAST FIVE YEARS
William A. Johnston,
52
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
Shawn E. Keegan,
41
Vice President
Vice President of the Adviser**,
with which he has been
associated since prior to 2008.
N. Kumar Kirpalani,
59
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
Samantha S. Lau,
40
Vice President
Senior Vice President of the
Adviser**, with which she has
been associated since prior to
2008.
Avi Lavi,
46
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
Dokyoung Lee,
47
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
Daniel J. Loewy,
38
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
James W. MacGregor,
45
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
Alison M. Martier,
56
Vice President
Senior Vice President of the
Adviser**, with which she has
been associated since prior to
2008.
66
NAME, ADDRESS* AND
AGE
POSITION(S)
HELD WITH FUND
PRINCIPAL OCCUPATION
DURING PAST FIVE YEARS
Christopher W. Marx,
45
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
Seth J. Masters,
53
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
Christopher H. Nikolich,
43
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
Joseph G. Paul,
53
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
Douglas J. Peebles,
47
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
Gregory L. Powell,
54
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
Amy P. Raskin,
41
Vice President
Senior Vice President of the
Adviser**, with which she has
been associated since prior to
2008.
Daniel C. Roarty,
41
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since 2011. Prior
thereto, he was in research and
portfolio management at Nuveen
Investments since prior to 2008.
Patrick J. Rudden,
50
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
67
NAME, ADDRESS* AND
AGE
POSITION(S)
HELD WITH FUND
PRINCIPAL OCCUPATION
DURING PAST FIVE YEARS
Kevin F. Simms,
47
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
Tassos M. Stassopoulos,
44
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
Wen-Tse Tseng,
47
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
Andrew J. Weiner,
44
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
Greg J. Wilensky,
46
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
Catherine A. Wood,
57
Vice President
Senior Vice President of the
Adviser**, with which she has
been associated since prior to
2008.
Vadim Zlotnikov,
51
Vice President
Senior Vice President of the
Adviser**, with which he has
been associated since prior to
2008.
Joseph J. Mantineo,
54
Treasurer and
Chief Financial
Officer
Senior Vice President of ABIS**,
with which he has been
associated since prior to 2008.
Emilie D. Wrapp,
57
Secretary
Senior Vice President, Assistant
General Counsel and Assistant
Secretary of ABI**, with which
she has been associated since
prior to 2008.
68
NAME, ADDRESS* AND
AGE
POSITION(S)
HELD WITH FUND
PRINCIPAL OCCUPATION
DURING PAST FIVE YEARS
Phyllis J. Clarke,
52
Controller
Vice President of ABIS**, with
which she has been associated
since prior to 2008.
________
*
The address for each of the Fund’s Officers is 1345 Avenue of the Americas, New York, NY 10105.
**
The Adviser, ABI and ABIS are affiliates of the Fund.
The Fund’s Portfolios do not pay any fees to, or reimburse expenses of, its
Directors who are considered “interested persons” of the Fund. The aggregate compensation
paid by the Fund’s Portfolios to each of the Directors during each Portfolio’s fiscal year ended
December 31, 2012, the aggregate compensation paid to each of the Directors during calendar
year 2012 by the AllianceBernstein Fund Complex, and the total number of registered
investment companies (and separate investment portfolios within those companies) in the
AllianceBernstein Fund Complex with respect to which each of the Directors serves as a director
or trustee, are set forth below. Neither the Fund or its Portfolios nor any other registered
investment company in the AllianceBernstein Fund Complex provides compensation in the form
of pension or retirement benefits to any of its directors or trustees. Each of the Directors is a
director or trustee of one or more registered investment companies in the AllianceBernstein Fund
Complex.
Name of Director
John H. Dobkin
Michael J. Downey
William H. Foulk, Jr.
D. James Guzy
Nancy P. Jacklin
Robert M. Keith
Garry L. Moody
Marshall C. Turner, Jr.
Earl D. Weiner
Aggregate
Compensation
From Intermediate
Bond Portfolio
$472
$477
$896
$520
$477
$ 0
$524
$493
$505
Aggregate
Compensation
From Large Cap
Growth Portfolio
$472
$537
$944
$627
$532
$ 0
$580
$569
$505
69
Aggregate
Compensation
From Growth and
Income Portfolio
$ 473
$ 631
$1,029
$ 849
$ 620
$ 0
$ 674
$ 711
$ 505
Aggregate
Compensation
From Growth
Portfolio
$472
$472
$891
$500
$472
$ 0
$524
$477
$505
Name of Director
John H. Dobkin
Michael J. Downey
William H. Foulk, Jr.
D. James Guzy
Nancy P. Jacklin
Robert M. Keith
Garry L. Moody
Marshall C. Turner, Jr.
Earl D. Weiner
Name of Director
John H. Dobkin
Michael J. Downey
William H. Foulk, Jr.
D. James Guzy
Nancy P. Jacklin
Robert M. Keith
Garry L. Moody
Marshall C. Turner, Jr.
Earl D. Weiner
Name of Director
John H. Dobkin
Michael J. Downey
William H. Foulk, Jr.
D. James Guzy
Nancy P. Jacklin
Robert M. Keith
Garry L. Moody
Marshall C. Turner, Jr.
Earl D. Weiner
Aggregate
Compensation
From International
Growth Portfolio
$472
$490
$909
$534
$489
$ 0
$542
$512
$505
Aggregate
Compensation
From Global
Thematic Growth
Portfolio
$472
$489
$898
$530
$488
$ 0
$535
$503
$505
Aggregate
Compensation
From International
Value Portfolio
Aggregate
Compensation
From Small/Mid Cap
Value Portfolio
$ 474
$ 670
$1,055
$ 934
$ 654
$ 0
$ 708
$ 753
$ 505
$472
$559
$961
$679
$553
$ 0
$606
$600
$505
Aggregate
Compensation
From Dynamic
Asset Allocation
Portfolio
$472
$485
$913
$529
$479
$ 0
$537
$521
$505
70
Aggregate
Compensation
From Small Cap
Growth Portfolio
$472
$472
$891
$490
$472
$ 0
$524
$472
$505
Aggregate
Compensation
From
Value Portfolio
$472
$499
$911
$543
$497
$ 0
$550
$515
$505
Aggregate
Compensation
From Real Estate
Investment Portfolio
$472
$472
$891
$505
$472
$ 0
$524
$478
$505
Aggregate
Compensation
From Balanced
Wealth Strategy
Portfolio
$472
$569
$970
$702
$562
$ 0
$616
$617
$505
Name of Director
John H. Dobkin
Michael J. Downey
William H. Foulk, Jr.
D. James Guzy
Nancy P. Jacklin
Robert M. Keith
Garry L. Moody
Marshall C. Turner, Jr.
Earl D. Weiner
Total Compensation
From the
AllianceBernstein
Fund Complex,
Including the Fund
Total Number of
Registered Investment
Companies in the
AllianceBernstein
Fund Complex,
Including the Fund, as
to which the Director is
a Director or Trustee
$252,000
$252,000
$477,000
$252,000
$252,000
$
0
$280,000
$252,000
$270,000
Total Number of
Investment Portfolios
in the
AllianceBernstein
Fund Complex,
Including the Fund,
as to which the
Director is a Director
or Trustee
31
31
31
31
31
31
31
31
31
101
101
101
101
101
101
101
101
101
As of April 1, 2013, the Directors and officers of the Fund as a group owned less
than 1% of the shares of the Fund.
Additional Information About The Portfolios’ Portfolio Managers
Additional information regarding the investment professional(s)2 primarily
responsible for the day-to-day management of each Portfolio’s portfolio may be found below.
For additional information about the portfolio management of each Portfolio, see “Management
of the Portfolios – Portfolio Managers” in the Portfolio’s Prospectuses.
None of the investment professionals identified below owned any equity
securities of the Portfolio directly or indirectly because shares of the Portfolio are held through
the separate accounts of certain life insurance companies (the “Insurers”).
INTERMEDIATE BOND PORTFOLIO
The day-to-day management of, and investment decisions for, the Portfolio are
made by the Adviser’s U.S. Core Fixed Income Investment Team. Mr. Paul J. DeNoon, Mr.
Shawn E. Keegan, Ms. Alison M. Martier, Mr. Douglas J. Peebles and Mr. Greg J. Wilensky are
the investment professionals with the most significant responsibility for the day-to-day
management of the Portfolio.
The following tables provide information regarding registered investment
companies other than the Portfolio, other pooled investment vehicles and other accounts over
which Mr. Paul J. DeNoon, Mr. Shawn E. Keegan, Ms. Alison M. Martier, Mr. Douglas J.
2
Investment professionals at the Adviser include portfolio managers and research analysts. Investment
professionals are part of investment groups (or teams) that service individual fund portfolios. The number
of investment professionals assigned to a particular Portfolio will vary from Portfolio to Portfolio.
71
Peebles and Mr. Greg J. Wilensky also have day-to-day management responsibilities. The tables
provide the numbers of such accounts, the total assets in such accounts and the number of
accounts and total assets whose fees are based on performance. The information is provided as
of December 31, 2012.
Portfolio Manager
REGISTERED INVESTMENT COMPANIES
(excluding the Portfolio)
Number of
Registered
Investment
Total Number Total Assets of
Companies
of Registered Registered
Managed with
Investment
Investment
PerformanceCompanies
Companies
based Fees
Managed
Managed
Total Assets of
Registered
Investment
Companies
Managed with
Performance-based
Fees
Paul J. DeNoon
90
$32,497,000,000
None
None
Shawn E. Keegan
10
$10,322,000,000
None
None
Alison M. Martier
6
$ 7,368,000,000
None
None
Douglas J. Peebles
54
$26,909,000,000
None
None
Greg J. Wilensky
39
$ 9,970,000,000
None
None
Portfolio Manager
Paul J. DeNoon
OTHER POOLED INVESTMENT VEHICLES
Total Number
Number of Other
Total Assets of
of Other
Pooled Investment
Other Pooled
Pooled
Investment
Vehicles Managed
Investment
with PerformanceVehicles
Vehicles
based Fees
Managed
Managed
Total Assets of
Other Pooled
Investment
Vehicles Managed
with Performancebased Fees
109
$50,397,000,000
2
$137,000,000
Shawn E. Keegan
42
$12,152,000,000
None
None
Alison M. Martier
29
$
None
None
Douglas J. Peebles
119
$65,263,000,000
3
$280,000,000
Greg J. Wilensky
62
$
1
$ 80,000,000
Portfolio Manager
Total
Number of
Other
Accounts
Managed
151,000,000
941,000,000
OTHER ACCOUNTS
Number of Other
Accounts
Total Assets of
Managed with
Other Accounts
Performancebased Fees
Managed
Total Assets of
Other Accounts
Managed with
Performance-based
Fees
Paul J. DeNoon
245
$ 51,853,000,000
6
$3,401,000,000
Shawn E. Keegan
192
$ 66,334,000,000
2
$2,894,000,000
Alison M. Martier
48
Douglas J. Peebles
393
$110,109,000,000
9
$6,529,000,000
Greg J. Wilensky
145
$ 12,254,000,000
1
$ 390,000,000
$
5,716,000,000
72
None
None
LARGE CAP GROWTH PORTFOLIO
The management of, and investment decisions for, the Portfolio’s portfolio are
made by the Adviser’s U.S. Large Cap Growth Investment Team. Mr. Frank V. Caruso, Mr.
Vincent C. DuPont and Mr. John H. Fogarty are the investment professionals with the most
significant responsibility for the day-to-day management of the Portfolio.
The following tables provide information regarding registered investment
companies other than the Portfolio, other pooled investment vehicles and other accounts over
which Mr. Frank V. Caruso, Mr. Vincent C. DuPont and Mr. John H. Fogarty also have day-today management responsibilities. The tables provide the numbers of such accounts, the total
assets in such accounts and the number of accounts and total assets whose fees are based on
performance. The information is provided as of December 31, 2012.
Portfolio Manager
Frank V. Caruso
Vincent C. DuPont
John H. Fogarty
REGISTERED INVESTMENT COMPANIES
(excluding the Fund)
Number of
Registered
Investment
Total Assets of
Total Number
Companies
Registered
of Registered
Managed with
Investment
Investment
PerformanceCompanies
Companies
based Fees
Managed
Managed
28
$6,759,000,000
None
27
$6,195,000,000
None
28
$6,759,000,000
None
Total Assets of
Registered
Investment
Companies
Managed with
Performancebased Fees
None
None
None
Portfolio Manager
Frank V. Caruso
Vincent C. DuPont
John H. Fogarty
OTHER POOLED INVESTMENT VEHICLES
Number of Other
Total Number
Pooled
of Other
Investment
Pooled
Total Assets of
Vehicles
Investment
Other Pooled
Managed with
Vehicles
Investment
PerformanceManaged
Vehicles Managed based Fees
24
$317,000,000
None
20
$393,000,000
None
20
$317,000,000
None
Total Assets of
Other Pooled
Investment
Vehicles
Managed with
Performancebased Fees
None
None
None
73
OTHER ACCOUNTS
Portfolio Manager
Frank V. Caruso
Vincent C. DuPont
John H. Fogarty
Total Number
of Other
Accounts
Managed
50,522
27,438
27,438
Total Assets of
Other Accounts
Managed
$6,762,000,000
$4,880,000,000
$4,880,000,000
Number of
Other Accounts
Managed with
Performancebased Fees
1
1
1
Total Assets of
Other Accounts
Managed with
Performancebased Fees
$16,000,000
$16,000,000
$16,000,000
GROWTH AND INCOME PORTFOLIO
Mr. Frank V. Caruso is the investment professional primarily responsible for the
day-to-day management of the Portfolio’s portfolio. Mr. Caruso does not own any equity
securities of the Portfolio directly or indirectly because shares of the Portfolio are held through
the separate accounts of certain Insurers. The following tables provide information regarding
registered investment companies other than the Portfolio, other pooled investment vehicles and
other accounts over which Mr. Caruso also has day-to-day management responsibilities. The
tables provide the numbers of such accounts, the total assets in such accounts and the number of
accounts and total assets whose fees are based on performance. The information is provided as
of the Portfolio’s fiscal year ended December 31, 2012.
Total Number of
Registered
Investment
Companies Managed
28
REGISTERED INVESTMENT COMPANIES
(excluding the Portfolio)
Number of Registered
Investment Companies
Managed with
Total Assets of
Performance-based
Registered Investment
Fees
Companies Managed
$6,215,000,000
None
Total Assets of
Registered Investment
Companies Managed
with Performance-based
Fees
None
Total Number of
Other Pooled
Investment Vehicles
Managed
24
OTHER POOLED INVESTMENT VEHICLES
Number of Other
Pooled Investment
Total Assets of Other
Vehicles Managed with
Pooled Investment
Performance-based
Fees
Vehicles Managed
$393,000,000
None
Total Assets of Other
Pooled Investment
Vehicles Managed with
Performance-based
Fees
None
OTHER ACCOUNTS
Total Number of
Other Accounts
Managed
50,522
Total Assets of Other
Accounts Managed
$6,762,000,000
Number of Other
Accounts Managed with
Performance-based Fees
1
74
Total Assets of Other
Accounts Managed
with Performancebased Fees
$16,000,000
GROWTH PORTFOLIO
The management of, and investment decisions for, the Portfolio’s portfolio are
made by the Adviser’s Growth Investment Team. Mr. Bruce K. Aronow, Mr. Frank V. Caruso
and Mr. John H. Fogarty are the investment professionals with the most significant
responsibility for the day-to-day management of the Portfolio’s portfolio.
The following tables provide information regarding registered investment
companies other than the Portfolio, other pooled investment vehicles and other accounts over
which the Portfolio’s portfolio managers also have day-to-day management responsibilities. The
tables provide the numbers of such accounts, the total assets in such accounts and the number of
accounts and total assets whose fees are based on performance. The information is provided as
of the Portfolio’s fiscal year ended December 31, 2012.
Portfolio Manager
REGISTERED INVESTMENT COMPANIES
(excluding the Fund)
Number of
Total
Registered
Investment
Number of
Registered
Companies
Total Assets of
Investment
Managed with
Registered
Investment
Companies
PerformanceCompanies Managed based Fees
Managed
Total Assets of
Registered
Investment
Companies
Managed
with Performancebased Fees
Bruce K. Aronow
30
$3,354,000,000
None
None
Frank V. Caruso
28
$7,038,000,000
None
None
John H. Fogarty
28
$7,038,000,000
None
None
Portfolio Manager
OTHER POOLED INVESTMENT VEHICLES
Number of
Total
Other Pooled
Number of
Investment
Other Pooled Total Assets of Other Vehicles
Pooled Investment
Investment
Managed with
PerformanceVehicles
Vehicles
Managed
Based Fees
Managed
Total Assets of
Other Pooled
Investment Vehicles
Managed with
Performance-based
Fees
Bruce K. Aronow
29
$147,000,000
None
None
Frank V. Caruso
24
$393,000,000
None
None
John H. Fogarty
20
$317,000,000
None
None
75
OTHER ACCOUNTS
Portfolio Manager
Total
Number of
Other
Accounts
Managed
Total Assets of Other
Accounts Managed
Number of
Other Accounts
Managed with
Performancebased Fees
Total Assets of
Other Accounts
Managed with
Performance-based
Fees
Bruce K. Aronow
27
$2,587,000,000
3
$315,000,000
Frank V. Caruso
50,522
$6,762,000,000
1
$16,000,000
Vadim Zlotnikov
27,438
$4,880,000,000
7
$16,000,000
GLOBAL THEMATIC GROWTH PORTFOLIO
The day-to-day management of, and investment decisions for, the Portfolio’s
portfolio are made by the Adviser’s Global Thematic Growth Investment Team, headed by Ms.
Catherine D. Wood and comprised of representatives of the Adviser’s Global Economic
Research Team, Quantitative Research Team, Early Stage Growth Team and Research on
Strategic Change Team. Each Investment Team relies heavily on the fundamental analysis and
research of the Adviser’s large internal research staff.
The following tables provide information regarding registered investment
companies other than the Portfolio, other pooled investment vehicles and other accounts over
which Ms. Catherine D. Wood, Mr. Joseph G. Carson, Ms. Amy P. Raskin, and Mr. Vadim
Zlotnikov also have day-to-day management responsibilities. The tables provide the numbers of
such accounts, the total assets in such accounts and the number of accounts and total assets
whose fees are based on performance. The information is provided as of the Portfolio’s fiscal
year ended December 31, 2012.
Portfolio Manager
REGISTERED INVESTMENT COMPANIES
(excluding the Fund)
Number of
Total
Registered
Investment
Number of
Registered
Companies
Total Assets of
Investment
Managed with
Registered
Investment
Companies
PerformanceCompanies Managed based Fees
Managed
Total Assets of
Registered
Investment
Companies
Managed
with Performancebased Fees
Catherine D. Wood
7
$ 252,000,000
None
None
Joseph G. Carson
7
$ 252,000,000
None
None
Amy P. Raskin
12
$2,028,000,000
None
None
Vadim Zlotnikov
41
$6,155,000,000
None
None
76
Portfolio Manager
OTHER POOLED INVESTMENT VEHICLES
Number of
Total
Other Pooled
Number of
Investment
Other Pooled Total Assets of
Vehicles
Managed with
Investment
Other Pooled
Vehicles
Investment Vehicles PerformanceManaged
Based Fees
Managed
Total Assets of
Other Pooled
Investment
Vehicles
Managed with
Performance-based
Fees
Catherine D. Wood
37
$2,797,000,000
None
None
Joseph G. Carson
37
$2,797,000,000
None
None
Amy P. Raskin
60
$4,858,000,000
1
$65,000,000
Vadim Zlotnikov
100
$6,748,000,000
2
$82,000,000
OTHER ACCOUNTS
Number of
Other
Accounts
Managed
with
Performancebased Fees
Total Assets of
Other Accounts
Managed with
Performance-based
Fees
Portfolio Manager
Total
Number of
Other
Accounts
Managed
Total Assets of
Other
Accounts Managed
Catherine D. Wood
111
$ 414,000,000
None
None
Joseph G. Carson
111
$ 414,000,000
None
None
Amy P. Raskin
124
$1,866,000,000
None
None
Vadim Zlotnikov
130
$2,540,000,000
1
$39,000,000
BALANCED WEALTH STRATEGY PORTFOLIO
The management of, and investment decisions for, the Portfolio’s portfolio are
made by the Multi-Asset Solutions Team. Mr. Dokyoung Lee, Mr. Seth J. Masters, Mr.
Christopher H. Nikolich and Mr. Patrick J. Rudden are the investment professionals with the
most significant responsibility for the day-to-day management of the Portfolio’s portfolio.
The following tables provide information regarding registered investment
companies other than the Portfolio, other pooled investment vehicles and other accounts over
which the Portfolio’s portfolio managers also have day-to-day responsibilities for coordinating
investments. The tables provide the numbers of such accounts, the total assets in such accounts
and the number of accounts and total assets whose fees are based on performance. The
information is provided as of the Portfolio’s fiscal year ended December 31, 2012.
77
REGISTERED INVESTMENT COMPANIES
(excluding the referenced Portfolio)
Number of
Registered
Total
Investment
Total Assets of
Number
Companies
of Registered Registered
Managed with
Investment
Investment
PerformanceCompanies
Companies
Portfolio
based Fees
Managed
Managed
Manager
Dokyoung Lee
44
$13,097,000,000
None
Seth J. Masters
59
$20,848,000,000
None
Christopher H. Nikolich
22
$ 5,448,000,000
None
Patrick J. Rudden
44
$13,097,000,000
None
Total Assets of
Registered
Investment
Companies
Managed with
Performancebased Fees
None
None
None
None
OTHER POOLED INVESTMENT VEHICLES
Portfolio
Manager
Dokyoung Lee
Seth J. Masters
Christopher H.
Nikolich
Patrick J. Rudden
Total Number
of Other
Pooled
Investment
Vehicles
Managed
200
210
49
200
Total Assets of
Other Pooled
Investment
Vehicles Managed
$23,064,000,000
$23,111,000,000
Number of Other
Pooled Investment
Vehicles Managed
with Performancebased Fees
2
2
$16,421,000,000
$23,064,000,000
None
2
Total Assets of
Other Pooled
Investment
Vehicles
Managed with
Performancebased Fees
$167,000,000
$167,000,000
None
$167,000,000
OTHER ACCOUNTS
Portfolio
Manager
Total Number
of Other
Accounts
Managed
Total Assets of
Other Accounts
Managed
Number of
Other Accounts
Managed With
Performancebased Fees
Total Assets of
Other Accounts
Managed With
Performancebased Fees
Dokyoung Lee
38
$10,437,000,000
1
$32,000,000
Seth J. Masters
54
$15,026,000,000
1
$32,000,000
Christopher H. Nikolich
7
$ 6,626,000,000
None
None
Patrick J. Rudden
38
$10,437,000,000
1
$32,000,000
INTERNATIONAL GROWTH PORTFOLIO
The management of, and investment decisions for, the Portfolio’s portfolio are
made by the Adviser’s International Growth sector heads, with oversight by the Adviser’s
International Growth Investment Advisory Members. Mr. Robert Alster, Mr. William A.
Johnston, Mr. Daniel C. Roarty and Mr. Tassos M. Stassopoulos are the investment professionals
78
with the most significant responsibility for the day-to-day management of the Portfolio’s
portfolio.
The following tables provide information regarding registered investment
companies other than the Portfolio, other pooled investment vehicles and other accounts over
which the Portfolio’s portfolio managers also have day-to-day management responsibilities. The
tables provide the numbers of such accounts, the total assets in such accounts and the number of
accounts and total assets whose fees are based on performance. The information is provided as
of the Portfolio’s fiscal year ended December 31, 2012.
REGISTERED INVESTMENT COMPANIES
(excluding the Portfolio)
Portfolio
Manager
Robert Alster
William A.
Johnston
Daniel C.
Roarty
Tassos M.
Stassopoulos
Portfolio
Manager
Robert Alster
William A.
Johnston
Daniel C.
Roarty
Tassos M.
Stassopoulos
Total Number
of Registered
Investment
Companies
Managed
Total Assets of
Registered
Investment
Companies
Managed
Number of
Registered
Investment
Companies Managed
with Performancebased Fees
Total Assets of
Registered
Investment
Companies
Managed with
Performance-based
Fees
4
$1,066,000,000
None
None
3
$1,056,000,000
None
None
3
$1,056,000,000
None
None
3
$1,056,000,000
None
None
OTHER POOLED INVESTMENT VEHICLES
Total Number
Number of Other
of Other
Pooled Investment
Total Assets of
Pooled
Vehicles Managed
Other Pooled
Investment
Investment
Vehicles
with Performancebased Fees
Vehicles Managed
Managed
Total Assets of
Other Pooled
Investment
Vehicles Managed
with Performancebased Fees
24
$2,072,000,000
1
$65,000,000
24
$2,072,000,000
1
$65,000,000
23
$2,061,000,000
1
$65,000,000
23
$2,061,000,000
1
$65,000,000
79
Portfolio
Manager
Robert Alster
William A.
Johnston
Daniel C.
Roarty
Tassos M.
Stassopoulos
Total Number
of Other
Accounts
Managed
OTHER ACCOUNTS
Number of Other
Total Assets of
Accounts Managed
Other Accounts
with PerformanceManaged
based Fees
Total Assets of
Other Accounts
Managed with
Performancebased Fees
16
$1,966,000,000
None
None
16
$1,966,000,000
None
None
13
$1,451,000,000
None
None
13
$1,451,000,000
None
None
SMALL CAP GROWTH PORTFOLIO
The management of, and investment decisions for, the Portfolio’s portfolio are
made by the Small Cap Growth Investment Team. Mr. Bruce K. Aronow, Mr. N. Kumar
Kirpalani, Ms. Samantha Lau and Mr. Wen-Tse Tseng are the investment professionals with the
most significant responsibility for the day-to-day management of the Portfolio’s portfolio.
The following tables provide information regarding registered investment
companies other than the Portfolio, other pooled investment vehicles and other accounts over
which the Portfolio’s portfolio managers also have day-to-day management responsibilities. The
tables provide the numbers of such accounts, the total assets in such accounts and the number of
accounts and total assets whose fees are based on performance. The information is provided as
of the Portfolio’s fiscal year ended December 31, 2012.
REGISTERED INVESTMENT COMPANIES
(excluding the Portfolio)
Portfolio
Manager
Bruce K.
Aronow
N. Kumar
Kirpalani
Samantha Lau
Wen-Tse Tseng
Total Number
of Registered
Investment
Companies
Managed
Total Assets of
Registered
Investment
Companies
Managed
Number of
Registered
Investment
Companies Managed
with Performancebased Fees
Total Assets of
Registered
Investment
Companies
Managed with
Performance-based
Fees
29
$3,480,000,000
None
None
29
29
29
$3,480,000,000
$3,480,000,000
$3,480,000,000
None
None
None
None
None
None
80
Portfolio
Manager
Bruce K.
Aronow
N. Kumar
Kirpalani
Samantha Lau
Wen-Tse Tseng
OTHER POOLED INVESTMENT VEHICLES
Total Number
Number of Other
of Other
Pooled Investment
Total Assets of
Pooled
Vehicles Managed
Other Pooled
Investment
Investment
Vehicles
with Performancebased Fees
Vehicles Managed
Managed
Total Assets of
Other Pooled
Investment
Vehicles Managed
with Performancebased Fees
29
$147,000,000
None
None
29
29
29
$147,000,000
$147,000,000
$147,000,000
None
None
None
None
None
None
OTHER ACCOUNTS
Portfolio
Manager
Bruce K.
Aronow
N. Kumar
Kirpalani
Samantha Lau
Wen-Tse Tseng
Total Number
of Other
Accounts
Managed
Total Assets of
Other Accounts
Managed
Number of Other
Accounts Managed
with Performancebased Fees
Total Assets of
Other Accounts
Managed with
Performancebased Fees
27
$2,587,000,000
3
$315,000,000
27
27
27
$2,587,000,000
$2,587,000,000
$2,587,000,000
3
3
3
$315,000,000
$315,000,000
$315,000,000
REAL ESTATE INVESTMENT PORTFOLIO
The management of, and investment decisions for, the Portfolio’s portfolio are
made by the REIT Senior Investment Management Team. Mr. Eric J. Franco is the investment
professional with the most significant responsibility for the day-to-day management of the
Portfolio’s portfolio.
The following tables provide information regarding registered investment
companies other than the Portfolio, other pooled investment vehicles and other accounts over
which the Portfolio’s portfolio manager also has day-to-day management responsibilities. The
tables provide the numbers of such accounts, the total assets in such accounts and the number of
accounts and total assets whose fees are based on performance. The information is provided as
of the Portfolio’s fiscal year ended December 31, 2012.
81
REGISTERED INVESTMENT COMPANIES
(excluding the Portfolio)
Portfolio
Manager
Eric J. Franco
Total Number
of Registered
Investment
Companies
Managed
22
Total Assets of
Registered
Investment
Companies
Managed
Number of
Registered
Investment
Companies Managed
with Performancebased Fees
Total Assets of
Registered
Investment
Companies
Managed with
Performance-based
Fees
None
None
$1,137,000,000
OTHER POOLED INVESTMENT VEHICLES
Portfolio
Manager
Eric J. Franco
Total Number
of Other
Pooled
Investment
Vehicles
Managed
Total Assets of
Other Pooled
Investment
Vehicles Managed
54
$395,000,000
Number of Other
Pooled Investment
Vehicles Managed
with Performancebased Fees
None
Total Assets of
Other Pooled
Investment
Vehicles Managed
with Performancebased Fees
None
OTHER ACCOUNTS
Portfolio
Manager
Eric J. Franco
Total Number
of Other
Accounts
Managed
9
Total Assets of
Other Accounts
Managed
$392,000,000
Number of Other
Accounts Managed
with Performancebased Fees
None
Total Assets of
Other Accounts
Managed with
Performancebased Fees
None
INTERNATIONAL VALUE PORTFOLIO
The management of, and investment decisions for, the Portfolio’s portfolio are
made by the International Value Senior Investment Management Team. Mr. Takeo Aso, Ms.
Sharon E. Fay, Mr. Avi Lavi and Mr. Kevin F. Simms are the investment professionals with the
most significant responsibility for the day-to-day management of the Portfolio’s portfolio.
The following tables provide information regarding registered investment
companies other than the Portfolio, other pooled investment vehicles and other accounts over
which the Portfolio’s portfolio managers also have day-to-day management responsibilities3.
The tables provide the numbers of such accounts, the total assets in such accounts and the
3
Each investment vehicle or account represented in the chart, for which the investment professionals have
portfolio management responsibility, is based upon one of eleven model portfolios. Each vehicle or
account differs from its respective model portfolio only to a limited extent based on specific client
requirements relating to tax considerations, cash flows due to the frequency and amount of investments, the
client’s country of residence and currency strategies related thereto, and/or client-imposed investment
restrictions regarding particular types of companies or industries.
82
number of accounts and total assets whose fees are based on performance. The information is
provided as of the Portfolio’s fiscal year ended December 31, 2012.
REGISTERED INVESTMENT COMPANIES
(excluding the Portfolio)
Portfolio
Manager
Takeo Aso
Sharon E. Fay
Avi Lavi
Kevin F.
Simms
Portfolio
Manager
Takeo Aso
Sharon E. Fay
Avi Lavi
Kevin F.
Simms
Total Number
of Registered
Investment
Companies
Managed
35
75
87
71
Total Assets of
Registered
Investment
Companies
Managed
$ 4,986,000,000
$12,352,000,000
$10,554,000,000
Number of
Registered
Investment
Companies Managed
with Performancebased Fees
None
None
None
Total Assets of
Registered
Investment
Companies
Managed with
Performance-based
Fees
None
None
None
$11,140,000,000
None
None
OTHER POOLED INVESTMENT VEHICLES
Total Number
Number of Other
of Other
Total Assets of
Pooled
Pooled Investment
Vehicles Managed
Other Pooled
Investment
with PerformanceInvestment
Vehicles
based Fees
Vehicles Managed
Managed
90
$4,321,000,000
3
140
$7,852,000,000
6
163
$3,801,000,000
3
119
$6,867,000,000
5
Total Assets of
Other Pooled
Investment
Vehicles Managed
with Performancebased Fees
$349,000,000
$745,000,000
$349,000,000
$680,000,000
OTHER ACCOUNTS
Portfolio
Manager
Takeo Aso
Sharon E. Fay
Avi Lavi
Kevin F.
Simms
Total Number
of Other
Accounts
Managed
102
27,962
27,936
Total Assets of
Other Accounts
Managed
$13,639,000,000
$25,202,000,000
$19,494,000,000
27,952
$23,988,000,000
83
Number of Other
Accounts Managed
with Performancebased Fees
6
10
7
10
Total Assets of
Other Accounts
Managed with
Performance-based
Fees
$1,290,000,000
$2,863,000,000
$1,306,000,000
$2,863,000,000
SMALL/MID CAP VALUE PORTFOLIO
The management of, and investment decisions for, the Portfolio’s portfolio are
made by the Small/Mid Cap Value Senior Investment Management Team. Mr. James W.
MacGregor, Mr. Joseph G. Paul and Mr. Andrew J. Weiner are the investment professionals with
the most significant responsibility for the day-to-day management of the Portfolio’s portfolio.
The following tables provide information regarding registered investment
companies other than the Portfolio, other pooled investment vehicles and other accounts over
which the Portfolio’s portfolio managers also have day-to-day management responsibilities. The
tables provide the numbers of such accounts, the total assets in such accounts and the number of
accounts and total assets whose fees are based on performance. The information is provided as
of the Portfolio’s fiscal year ended December 31, 2012.
REGISTERED INVESTMENT COMPANIES
(excluding the Portfolio)
Portfolio
Manager
James W.
MacGregor
Joseph G. Paul
Andrew J.
Weiner
Portfolio
Manager
James W.
MacGregor
Joseph G. Paul
Andrew J.
Weiner
Total Number
of Registered
Investment
Companies
Managed
Total Assets of
Registered
Investment
Companies
Managed
Number of
Registered
Investment
Companies Managed
with Performancebased Fees
Total Assets of
Registered
Investment
Companies
Managed with
Performance-based
Fees
85
85
$13,235,000,000
$13,235,000,000
None
None
None
None
50
$ 7,200,000,000
None
None
OTHER POOLED INVESTMENT VEHICLES
Total Number
Number of Other
of Other
Pooled Investment
Total Assets of
Pooled
Vehicles Managed
Other Pooled
Investment
Investment
Vehicles
with PerformanceVehicles Managed based Fees
Managed
Total Assets of
Other Pooled
Investment
Vehicles Managed
with Performancebased Fees
131
135
$2,592,000,000
$2,668,000,000
2
2
$119,000,000
$119,000,000
55
$ 476,000,000
None
None
84
OTHER ACCOUNTS
Portfolio
Manager
James W.
MacGregor
Joseph G. Paul
Andrew J.
Weiner
Total Number
of Other
Accounts
Managed
Total Assets of
Other Accounts
Managed
Number of Other
Accounts Managed
with Performancebased Fees
Total Assets of
Other Accounts
Managed with
Performance-based
Fees
27,925
51,009
$16,838,000,000
$18,720,000,000
4
4
$940,000,000
$940,000,000
27,863
$ 7,710,000,000
1
$ 16,000,000
VALUE PORTFOLIO
The management of, and investment decisions for, the Portfolio’s portfolio are
made by the U.S. Value Senior Investment Management Team. Mr. Christopher W. Marx, Mr.
Joseph G. Paul, and Mr. Gregory L. Powell are the investment professionals with the most
significant responsibility for the day-to-day management of the Portfolio’s portfolio.
The following tables provide information regarding registered investment
companies other than the Portfolio, other pooled investment vehicles and other accounts over
which the Portfolio’s portfolio managers also have day-to-day management responsibilities.4
The tables provide the numbers of such accounts, the total assets in such accounts and the
number of accounts and total assets whose fees are based on performance. The information is
provided as of the Portfolio’s fiscal year ended December 31, 2012.
REGISTERED INVESTMENT COMPANIES
(excluding the Portfolio)
Portfolio
Manager
Christopher W.
Marx
Joseph G. Paul
Gregory L.
Powell
4
Total
Number of
Registered
Investment
Companies
Managed
Total Assets of
Registered
Investment
Companies
Managed
Number of
Registered
Investment
Companies Managed
with Performancebased Fees
Total Assets of
Registered
Investment
Companies
Managed with
Performance-based
Fees
None
85
None
$13,581,000,000
None
None
None
None
63
$10,222,000,000
None
None
Each investment vehicle or account represented in the chart, for which the investment professionals have
portfolio management responsibility, is based upon one of three model portfolios. Each vehicle or account
differs from its respective model portfolio only to a limited extent based on specific client requirements
relating to tax considerations, cash flows due to the frequency and amount of investments, the client’s
country of residence and currency strategies related thereto, and/or client-imposed investment restrictions
regarding particular types of companies or industries.
85
Portfolio
Manager
Christopher W.
Marx
Joseph G. Paul
Gregory L.
Powell
OTHER POOLED INVESTMENT VEHICLES
Total
Number of
Number of Other
Other
Pooled Investment
Total Assets of
Pooled
Other Pooled
Investment
Vehicles Managed
with PerformanceInvestment
Vehicles
based Fees
Vehicles Managed
Managed
Total Assets of
Other Pooled
Investment
Vehicles Managed
with Performancebased Fees
4
135
$ 76,000,000
$2,668,000,000
None
2
None
$119,000,000
98
$2,337,000,000
2
$119,000,000
OTHER ACCOUNTS
Portfolio
Manager
Christopher W.
Marx
Joseph G. Paul
Gregory L.
Powell
Total
Number of
Other
Accounts
Managed
Total Assets of
Other Accounts
Managed
Number of Other
Accounts Managed
with Performancebased Fees
Total Assets of
Other Accounts
Managed with
Performance-based
Fees
23,084
51,009
$ 1,882,000,000
$18,720,000,000
None
4
None
$940,000,000
27,894
$15,928,000,000
4
$940,000,000
DYNAMIC ASSET ALLOCATION PORTFOLIO
The management of, and investment decisions for, the Portfolio’s portfolio are
made by the Adviser’s Dynamic Asset Allocation Team. Mr. Daniel J. Loewy and Mr. Seth J.
Masters are the investment professionals primarily responsible for the day-to-day management of
the Portfolio’s portfolio.
The following tables provide information regarding registered investment
companies other than the Portfolio, other pooled investment vehicles and other accounts over
which the Portfolio’s portfolio managers also have day-to-day management responsibilities. The
tables provide the numbers of such accounts, the total assets in such accounts and the number of
accounts and total assets whose fees are based on performance. The information is provided as
of December 31, 2012.
86
REGISTERED INVESTMENT COMPANIES
(excluding the Fund)
Portfolio Manager
Total Number
of Registered
Investment
Companies
Managed
Total Assets of
Registered
Investment
Companies
Managed
Number of
Registered
Investment
Companies
Managed with
Performancebased Fees
Total Assets of
Registered
Investment
Companies
Managed with
Performancebased Fees
Daniel J. Loewy
54
$13,762,000,000
None
None
Seth J. Masters
59
$21,176,000,000
None
None
OTHER POOLED INVESTMENT VEHICLES
Portfolio Manager
Daniel J. Loewy
Seth J. Masters
Total Number
of Other
Pooled
Investment
Vehicles
Managed
62
210
Total Assets of
Other Pooled
Investment
Vehicles Managed
$16,472,000,000
$23,111,000,000
Number of Other
Pooled
Investment
Vehicles
Managed with
Performancebased Fees
None
2
Total Assets of
Other Pooled
Investment
Vehicles
Managed with
Performancebased Fees
None
$167,000,000
Number of Other
Accounts
Managed with
Performancebased Fees
None
1
Total Assets of
Other Accounts
Managed with
Performancebased Fees
None
$32,000,000
OTHER ACCOUNTS
Portfolio Manager
Daniel J. Loewy
Seth J. Masters
Total Number
of Other
Accounts
Managed
33
54
Total Assets of
Other Accounts
Managed
$11,696,000,000
$15,026,000,000
Investment Professional Conflict of Interest Disclosure
As an investment adviser and fiduciary, the Adviser owes its clients and
shareholders an undivided duty of loyalty. We recognize that conflicts of interest are inherent in
our business and accordingly have developed policies and procedures (including oversight
monitoring) reasonably designed to detect, manage and mitigate the effects of actual or potential
conflicts of interest in the area of employee personal trading, managing multiple accounts for
multiple clients, including AllianceBernstein Mutual Funds, and allocating investment
opportunities. Investment professionals, including portfolio managers and research analysts, are
subject to the above-mentioned policies and oversight monitoring to ensure that all clients are
87
treated equitably. We place the interests of our clients first and expect all of our employees to
meet their fiduciary duties.
Employee Personal Trading. The Adviser has adopted a Code of Business
Conduct and Ethics that is designed to detect and prevent conflicts of interest when investment
professionals and other personnel of the Adviser own, buy or sell securities which may be owned
by, or bought or sold for, clients. Personal securities transactions by an employee may raise a
potential conflict of interest when an employee owns or trades in a security that is owned or
considered for purchase or sale by a client, or recommended for purchase or sale by an employee
to a client. Subject to the reporting requirements and other limitations of its Code of Business
Conduct and Ethics, the Adviser permits its employees to engage in personal securities
transactions, and also allows them to acquire investments in certain Funds managed by the
Adviser. The Adviser’s Code of Business Conduct and Ethics requires disclosure of all personal
accounts and maintenance of brokerage accounts with designated broker-dealers approved by the
Adviser. The Code of Business Conduct and Ethics also requires preclearance of all securities
transactions (except transactions in U.S. Treasuries and open-end mutual funds) and imposes a
90-day holding period for securities purchased by employees to discourage short-term trading.
Managing Multiple Accounts for Multiple Clients. The Adviser has compliance
policies and oversight monitoring in place to address conflicts of interest relating to the
management of multiple accounts for multiple clients. Conflicts of interest may arise when an
investment professional has responsibilities for the investments of more than one account
because the investment professional may be unable to devote equal time and attention to each
account. The investment professional or investment professional teams for each client may have
responsibilities for managing all or a portion of the investments of multiple accounts with a
common investment strategy, including other registered investment companies, unregistered
investment vehicles, such as hedge funds, pension plans, separate accounts, collective trusts and
charitable foundations. Among other things, the Adviser’s policies and procedures provide for
the prompt dissemination to investment professionals of initial or changed investment
recommendations by analysts so that investment professionals are better able to develop
investment strategies for all accounts they manage. In addition, investment decisions by
investment professionals are reviewed for the purpose of maintaining uniformity among similar
accounts and ensuring that accounts are treated equitably. Investment professional compensation
reflects a broad contribution in multiple dimensions to long-term investment success for our
clients and is generally not tied specifically to the performance of any particular client’s account,
nor is it generally tied directly to the level or change in level of assets under management.
Allocating Investment Opportunities. The investment professionals at the Adviser
routinely are required to select and allocate investment opportunities among accounts. The
Adviser has adopted policies and procedures intended to address conflicts of interest relating to
the allocation of investment opportunities. These policies and procedures are designed to ensure
that information relevant to investment decisions is disseminated promptly within its portfolio
management teams and investment opportunities are allocated equitably among different clients.
The policies and procedures require, among other things, objective allocation for limited
investment opportunities (e.g., on a rotational basis), and documentation and review of
justifications for any decisions to make investments only for select accounts or in a manner
disproportionate to the size of the account. Portfolio holdings, position sizes, and industry and
88
sector exposures tend to be similar across similar accounts, which minimizes the potential for
conflicts of interest relating to the allocation of investment opportunities. Nevertheless, access to
portfolio funds or other investment opportunities may be allocated differently among accounts
due to the particular characteristics of an account, such as size of the account, cash position, tax
status, risk tolerance and investment restrictions or for other reasons.
The Adviser’s procedures are also designed to address potential conflicts of
interest that may arise when the Adviser has a particular financial incentive, such as a
performance-based management fee, relating to an account. An investment professional may
perceive that he or she has an incentive to devote more time to developing and analyzing
investment strategies and opportunities or allocating securities preferentially to accounts for
which the Adviser could share in investment gains.
Portfolio Manager Compensation
The Adviser’s compensation program for portfolio managers is designed to align
with clients’ interests, emphasizing each portfolio manager’s ability to generate long-term
investment success for the Adviser’s clients, including the Portfolios. The Adviser also strives to
ensure that compensation is competitive and effective in attracting and retaining the highest
caliber employees.
Portfolio managers receive a base salary, incentive compensation and
contributions to AllianceBernstein’s 401(k) plan. Part of the annual incentive compensation is
generally paid in the form of a cash bonus, and part through an award under the firm’s Incentive
Compensation Award Plan (ICAP). The ICAP awards vest over a four-year period. Deferred
awards are paid in the form of restricted grants of the firm’s Master Limited Partnership Units,
and award recipients have the ability to receive a portion of their awards in deferred cash. The
amount of contributions to the 401(k) plan is determined at the sole discretion of the Adviser.
On an annual basis, the Adviser endeavors to combine all of the foregoing elements into a total
compensation package that considers industry compensation trends and is designed to retain its
best talent.
The incentive portion of total compensation is determined by quantitative and
qualitative factors. Quantitative factors, which are weighted more heavily, are driven by
investment performance. Qualitative factors are driven by contributions to the investment
process and client success.
The quantitative component includes measures of absolute, relative and riskadjusted investment performance. Relative and risk-adjusted returns are determined based on the
benchmark in the Portfolios’ Prospectuses and versus peers over one-, three- and five-year
calendar periods, with more weight given to longer-time periods. Peer groups are chosen by
Chief Investment Officers, who consult with the product management team to identify products
most similar to our investment style and most relevant within the asset class. Portfolio managers
of the Portfolios do not receive any direct compensation based upon the investment returns of
any individual client account, and compensation is not tied directly to the level or change in level
of assets under management.
89
Among the qualitative components considered, the most important include
thought leadership, collaboration with other investment colleagues, contributions to risk-adjusted
returns of other portfolios in the firm, efforts in mentoring and building a strong talent pool and
being a good corporate citizen. Other factors can play a role in determining portfolio managers’
compensation, such as the complexity of investment strategies managed, volume of assets
managed and experience.
The Adviser emphasizes four behavioral competencies—relentlessness, ingenuity,
team orientation and accountability—that support its mission to be the most trusted advisor to its
clients. Assessments of investment professionals are formalized in a year-end review process
that includes 360-degree feedback from other professionals from across the investment teams
and the Adviser.
EXPENSES OF THE PORTFOLIOS
Distribution Services Agreement
The Fund has entered into a Distribution Services Agreement (the “Agreement”)
with ABI, the Fund’s principal underwriter, to permit ABI to distribute the Portfolios’ shares and
to permit each Portfolio of the Fund to pay distribution services fees to defray expenses
associated with distribution of its Class B shares in accordance with a plan of distribution that is
included in the Agreement and that has been duly adopted and approved in accordance with Rule
12b-1 adopted by the SEC under the 1940 Act (the “Plan”).
In approving the Plan, the Directors determined that there was a reasonable
likelihood that the Plan would benefit each Portfolio and its Class B shareholders. The Adviser
may, from time to time, and from its own funds or such other resources as may be permitted by
rules of the SEC, make payments for distribution services to ABI; the latter may in turn pay part
or all of such compensation to brokers or other persons for their distribution assistance.
The Plan will continue in effect for successive one-year periods, provided that
each such continuance is specifically approved at least annually by a majority of the Independent
Directors of the Fund who have no direct or indirect financial interest in the operation of the Plan
or in any agreement relating to the Plan (“Qualified Directors”) and by a vote of a majority of the
entire Board at a meeting called for that purpose. Most recently, continuance of the Agreement
was approved for an additional annual term by the Board, including a majority of the Directors
who are not parties to the Agreement or interested persons of such party, at a meeting held on
May 1-3, 2012.
All material amendments to the Plan will become effective only on approval as
specified in the preceding paragraph and the Plan may not be amended in order to materially
increase the costs that the Portfolios may bear pursuant to the Plan without the approval of a
majority of the holders of the outstanding voting shares of the Class B shares of the Portfolios.
90
The Agreement may be terminated with respect to a Portfolio (i) by ABI or (ii) by
a Portfolio without payment of any penalty upon the vote of a majority of the outstanding voting
securities of the Portfolio, voting separately by class, or by vote of a majority of the Qualified
Directors. To terminate an Agreement, any party must give the other 60 days’ written notice; to
terminate a Plan only, a Portfolio is not required to give prior notice to ABI. The Agreement will
terminate automatically in the event of an assignment. The Plan is of a type known as a
“compensation plan”, which means that it compensates the distributor for services rendered even
if the amount paid exceeds the distributor’s expenses.
In the event that the Agreement is terminated by either party or not continued with
respect to the Class B shares of a Portfolio, (i) no distribution services fees (other than current
amounts accrued but not yet paid) would be owed by the Fund to ABI with respect to Class B
shares of such Portfolio and (ii) the Fund would not be obligated to pay ABI for any amounts
expended under the Agreement not previously recovered by ABI from distribution services fees
in respect of shares of such class.
During the fiscal year ended December 31, 2012, the Portfolios paid distribution
services fees for expenditures under the Agreement, with respect to Class B shares, in aggregate
amounts as described in the table below.
Fund
Intermediate Bond Portfolio
Distribution services fees
for expenditures
payable to ABI
$ 78,314
Percentage per annum of the
aggregate average daily net
assets attributable
to Class B shares
.25%
Large Cap Growth Portfolio
$ 498,774
.25%
Growth and Income Portfolio
$1,918,752
.25%
Growth Portfolio
$ 126,305
.25%
International Growth Portfolio
$ 149,521
.25%
Global Thematic Growth Portfolio
$ 242,265
.25%
Small Cap Growth Portfolio
$
74,116
.25%
Real Estate Investment Portfolio
$
35,666
.25%
International Value Portfolio
$2,642,116
.25%
Small/Mid Cap Value Portfolio
$ 846,302
.25%
Value Portfolio
$ 418,618
.25%
Balanced Wealth Strategy Portfolio
$1,266,577
.25%
Dynamic Asset Allocation Portfolio
$ 347,719
.25%
For the fiscal year ended December 31, 2012, expenses incurred by each Portfolio
and costs allocated to each Portfolio in connection with activities primarily intended to result in
the sale of Class B shares were as follows:
91
Category of Expense
Advertising/Marketing
Printing and Mailing
of Prospectuses and SemiAnnual and Annual Reports
to Other Than Current
Shareholders
Intermediate
Bond Portfolio
$ 2,640
Large Cap
Growth Portfolio
$
7,712
Growth and
Income Portfolio
$
17,885
9
24
45
Compensation to
Underwriters
25,242
87,153
202,982
Compensation to Dealers
98,928
937,284
3,603,008
Compensation to Sales
Personnel
60,220
195,180
452,280
Interest, Carrying or Other
Financing Charges
0
0
0
Other (includes personnel
costs of those home office
employees involved in the
distribution effort and the
travel-related expenses
incurred by the marketing
personnel conducting
seminars)
31,310
100,729
232,223
$218,349
$1,328,082
$4,508,423
Totals
92
Category of Expense
Advertising/
Marketing
Growth
Portfolio
$
Small Cap
Growth Portfolio
$ 4,480
15
16
16
7
Compensation to
Underwriters
39,144
44,097
51,076
20,871
Compensation to
Dealers
225,998
271,749
463,147
128,594
Compensation to
Sales Personnel
93,384
97,598
116,051
50,886
Interest, Carrying or
Other Financing
Charges
0
0
0
0
Other (includes
personnel costs of
those home office
employees involved
in the distribution
effort and the travelrelated expenses
incurred by the
marketing personnel
conducting
seminars)
47,431
51,834
59,432
23,360
$410,046
$469,646
$694,202
$225,253
Totals
4,074
Global Thematic
Growth Portfolio
4,352
Printing and Mailing
of Prospectuses and
Semi-Annual and
Annual Reports to
Other than Current
Shareholders
$
International
Growth Portfolio
93
$
1,535
Category of Expense
Real Estate
Investment
Portfolio
International Value
Portfolio
Advertising/
Marketing
$ 1,446
$ 23,270
5
58
23
21
Compensation to
Underwriters
12,675
268,904
97,744
71,479
Compensation to
Dealers
56,766
5,064,692
1,588,640
791,574
Compensation to
Sales Personnel
31,357
596,927
217,422
163,591
Interest, Carrying or
Other Financing
Charges
0
0
0
0
Other (includes
personnel costs of
those home office
employees involved
in the distribution
effort and the travelrelated expenses
incurred by the
marketing personnel
conducting
seminars)
15,564
308,202
113,111
84,016
$117,813
$6,262,053
$2,025,374
$1,117,197
Printing and Mailing
of Prospectuses and
Semi-Annual and
Annual Reports to
Other than Current
Shareholders
Totals
94
Small/Mid Cap
Value Portfolio
$
8,434
Value Portfolio
$
6,516
Category of Expense
Advertising/
Marketing
Balanced Wealth
Strategy Portfolio
Dynamic Asset
Allocation
Portfolio
$13,810
$6,721
38
20
Compensation to
Underwriters
152,824
70,992
Compensation to
Dealers
2,294,540
576,924
Compensation to
Sales Personnel
344,139
163,535
Interest, Carrying or
Other Financing
Charges
0
0
Other (includes
personnel costs of
those home office
employees involved
in the distribution
effort and the travelrelated expenses
incurred by the
marketing personnel
conducting
seminars)
177,004
83,381
$2,982,355
$901,573
Printing and Mailing
of Prospectuses and
Semi-Annual and
Annual Reports to
Other than Current
Shareholders
Totals
95
PURCHASE AND REDEMPTION OF SHARES
The following information supplements that set forth in the Portfolios’
Prospectuses under the heading “Investing in the Portfolios”.
Shares of each Portfolio are offered at NAV on a continuous basis to the separate
accounts of the Insurers without any sales or other charge. The separate accounts of insurance
companies place orders to purchase shares based on, among other things, the amount of premium
payments to be invested and surrendered and transfer requests to be effected pursuant to variable
contracts funded by shares of the Portfolio. The Fund reserves the right to suspend the sale of its
shares in response to conditions in the securities markets or for other reasons. See the prospectus
of the separate account of the participating insurance company for more information on the
purchase of shares.
The Insurers maintain omnibus account arrangements with the Fund in respect of
one or more Portfolios and place aggregate purchase, redemption and exchange orders for shares
of a Portfolio corresponding to orders placed by the Insurers’ customers (“Contractholders”) who
have purchased contracts from the Insurers, in each case, in accordance with the terms and
conditions of the relevant contract. Omnibus account arrangements maintained by the Insurers
are discussed below.
Frequent Purchase and Sales of Portfolio Shares
The Board has adopted policies and procedures designed to detect and deter
frequent purchases and redemptions of Portfolio shares or excessive or short-term trading that
may disadvantage long-term Contractholders. These policies are described below. There is no
guarantee that a Portfolio will be able to detect excessive or short-term trading or to identify
Contractholders engaged in such practices. Contractholders engaged in such practices,
particularly with respect to transactions in omnibus accounts. Contractholders should be aware
that application of these policies may have adverse consequences, as described below, and
should avoid frequent trading in Portfolio shares through purchases, sales and exchanges of
shares. Each Portfolio reserves the right to restrict, reject or cancel, without any prior notice, any
purchase or exchange order for any reason, including any purchase or exchange order accepted
by any Insurer or a Contractholder’s financial intermediary.
Risks Associated with Excessive or Short-Term Trading Generally. While the
Fund will try to prevent market timing by utilizing the procedures described below, these
procedures may not be successful in identifying or stopping excessive or short-term trading
attributable to particular Contractholders in all circumstances. By realizing profits through shortterm trading, Contractholders that engage in rapid purchases and sales or exchanges of a
Portfolio’s shares dilute the value of shares held by long-term Contractholders. Volatility
resulting from excessive purchases and sales or exchanges of shares of a Portfolio, especially
involving large dollar amounts, may disrupt efficient portfolio management and cause a Portfolio
to sell portfolio securities at inopportune times to raise cash to accommodate redemptions
relating to short-term trading activity. In particular, a Portfolio may have difficulty
96
implementing its long-term investment strategies if it is forced to maintain a higher level of its
assets in cash to accommodate significant short-term trading activity. In addition, a Portfolio
may incur increased administrative and other expenses due to excessive or short-term trading and
increased brokerage costs.
Investments in securities of foreign issuers may be particularly susceptible to
short-term trading strategies. This is because securities of foreign issuers are typically traded on
markets that close well before the time a Portfolio calculates its NAV at 4:00 p.m., Eastern Time,
which gives rise to the possibility that developments may have occurred in the interim that would
affect the value of these securities. The time zone differences among international stock markets
can allow a Contractholder engaging in a short-term trading strategy to exploit differences in
share prices that are based on closing prices of securities of foreign issuers established some time
before a Portfolio calculates its own share price (referred to as “time zone arbitrage”). Each of
the Portfolios has procedures, referred to as fair value pricing, designed to adjust closing market
prices of securities of foreign issuers to reflect what is believed to be fair value of those
securities at the time the Portfolio calculates its NAV. While there is no assurance, each of the
Portfolios expects that the use of fair value pricing, in addition to the short-term trading policies
discussed below, will significantly reduce a Contractholder’s ability to engage in time zone
arbitrage to the detriment of other Contractholders.
Contractholders engaging in a short-term trading strategy may also target a
Portfolio that does not invest primarily in securities of foreign issuers. Any Portfolio that invests
in securities that are, among other things, thinly traded, traded infrequently, or relatively illiquid
has the risk that the current market price for the securities may not accurately reflect current
market values. Contractholders may seek to engage in short-term trading to take advantage of
these pricing differences (referred to as “price arbitrage”). All Portfolios may be adversely
affected by price arbitrage.
Policy Regarding Short-term Trading. Purchases and exchanges of shares of the
Portfolios should be made for investment purposes only. The Fund seeks to prevent patterns of
excessive purchases and sales or exchanges of shares of the Portfolios. The Fund seeks to
prevent such practices to the extent they are detected by the procedures described below, subject
to the Fund’s ability to monitor purchase, sale and exchange activity. Insurers utilizing omnibus
account arrangements may not identify to the Fund, ABI or ABIS Contractholders’ transaction
activity relating to shares of a particular Portfolio on an individual basis. Consequently, the
Fund, ABI and ABIS may not be able to detect excessive or short-term trading in shares of a
Portfolio attributable to a particular Contractholder who effects purchase and redemption and/or
exchange activity in shares of the Portfolio through an Insurer acting in an omnibus capacity. In
seeking to prevent excessive or short-term trading in shares of the Portfolios, including the
maintenance of any transaction surveillance or account blocking procedures, the Fund, ABI and
ABIS consider the information actually available to them at the time. The Fund reserves the right
to modify this policy, including any surveillance or account blocking procedures established
from time to time to effectuate this policy, at any time without notice.
Transaction Surveillance Procedures. The Portfolios, through their agents, ABI and
ABIS, maintain surveillance procedures to detect excessive or short-term trading in
Portfolio shares. This surveillance process involves several factors, which include
97
scrutinizing individual Insurers’ omnibus transaction activity in Portfolio shares in order
to seek to ascertain whether any such activity attributable to one or more Contractholders
might constitute excessive or short-term trading. Insurers’ omnibus transaction activity
identified by these surveillance procedures, or as a result of any other information
actually available at the time, will be evaluated to determine whether such activity might
indicate excessive or short-term trading activity attributable to one or more
Contractholders. These surveillance procedures may be modified from time to time, as
necessary or appropriate to improve the detection of excessive or short-term trading or to
address specific circumstances.
Account Blocking Procedures. If the Fund determines, in its sole discretion, that a
particular transaction or pattern of transactions identified by the transaction surveillance
procedures described above is excessive or short-term trading in nature, the relevant
Insurers’ omnibus account(s) will be immediately “blocked” and no future purchase or
exchange activity will be permitted, except to the extent the Fund, ABI or ABIS has been
informed in writing that the terms and conditions of a particular contract may limit the
Fund’s ability to apply its short-term trading policy to Contractholder activity as
discussed below. As a result, any Contractholder seeking to engage through an Insurer in
purchase or exchange activity in shares of one or more Portfolios under a particular
contract will be prevented from doing so. However, sales of Portfolio shares back to the
Portfolio or redemptions will continue to be permitted in accordance with the terms of the
Portfolio’s current Prospectus. In the event an account is blocked, certain account-related
privileges, such as the ability to place purchase, sale and exchange orders over the
internet or by phone, may also be suspended. As a result, unless the Contractholder
redeems his or her shares, the Contractholder effectively may be “locked” into an
investment in shares of one or more of the Portfolios that the Contractholder did not
intend to hold on a long-term basis or that may not be appropriate for the
Contractholder’s risk profile. To rectify this situation, a Contractholder with a “blocked”
account may be forced to redeem Portfolio shares, which could be costly if, for example,
these shares have declined in value. To avoid this risk, a Contractholder should carefully
monitor the purchases, sales, and exchanges of Portfolio shares and should avoid frequent
trading in Portfolio shares. An Insurer’s omnibus account that is blocked will generally
remain blocked unless and until the Insurer provides evidence or assurance acceptable to
the Fund that one or more Contractholders did not or will not in the future engage in
excessive or short-term trading.
Applications of Surveillance Procedures and Restrictions to Omnibus Accounts. The
Portfolios apply their surveillance procedures to Insurers. As required by SEC rules, the
Portfolios have entered into agreements with all of their financial intermediaries that
require the financial intermediaries to provide the Portfolios, upon the request of the
Portfolios or their agents, with individual account level information about their
transactions. If the Portfolios detect excessive trading through their monitoring of
omnibus accounts, including trading at the individual account level, Insurers will also
execute instructions from the Portfolios to take actions to curtail the activity, which may
include applying blocks to accounts to prohibit future purchases and exchanges of
Portfolio shares.
98
Redemption of Shares
An insurance company separate account may redeem all or any portion of the
shares in its account at any time at the NAV next determined after a redemption request in the
proper form is furnished to the Fund. Any certificates representing shares being redeemed must
be submitted with the redemption request. Shares do not earn dividends on the day they are
redeemed, regardless of whether the redemption request is received before or after the time of
computation of NAV that day. There is no redemption charge. The redemption proceeds will
normally be sent within 7 days.
The right of redemption may be suspended or the date of payment may be
postponed for any period during which the Exchange is closed (other than customary weekend
and holiday closings) or during which the SEC determines that trading thereon is restricted, or
for any period during which an emergency (as determined by the SEC) exists as a result of which
disposal by the Fund of securities owned by a Portfolio is not reasonably practicable or as a
result of which it is not reasonably practicable for the Fund fairly to determine the value of a
Portfolio’s net assets, or for such other periods as the SEC may by order permit for the protection
of security holders of the Portfolios. For information regarding how to redeem shares in the
Portfolios, please see your insurance company’s separate account prospectus.
The value of a shareholder’s shares on redemption or repurchase may be more or
less than the cost of such shares to the shareholder, depending upon the market value of the
Portfolio’s securities at the time of such redemption or repurchase. Payment either in cash or in
portfolio securities received by a shareholder upon redemption or repurchase of his shares,
assuming the shares constitute capital assets in his hands, will result in long-term or short-term
capital gains (or losses) depending upon the shareholder’s holding period and basis in respect of
the shares redeemed.
Payments to Financial Intermediaries
Financial intermediaries, such as the Insurers, market and sell shares of the
Portfolios and typically receive compensation for selling shares of the Portfolios. This
compensation is paid from various sources, including any Rule 12b-1 fee that you or the
Portfolios may pay.
In the case of Class B shares, up to 100% of the Rule 12b-1 fee applicable to
Class B shares each year may be paid to the financial intermediary that sells Class B shares.
Insurers or your financial intermediary receive compensation from the Portfolios,
ABI and/or the Adviser in several ways from various sources, which include some or all of the
following:
•
Rule 12b-1 fees;
•
defrayal of costs for educational seminars and training;
•
additional distribution support; and
99
•
payments related to providing Contractholder recordkeeping and/or
administrative services.
Please read your Portfolio’s Prospectus carefully for information on this
compensation.
ABI and/or the Adviser may pay Insurers or other financial intermediaries to
perform recordkeeping and administrative services in connection with the Portfolios. Such
payments will generally not exceed 0.35% of the average daily net assets of each Portfolio
attributable to the Insurer.
Other Payments for Educational Support and Distribution Assistance. In addition
to the fees described above, ABI, at its expense, currently provides additional payments to the
Insurers. These sums include payments to reimburse directly or indirectly the costs incurred by
the Insurers and their employees in connection with educational seminars and training efforts
about the Portfolios for the Insurers’ employees and/or their clients and potential clients. The
costs and expenses associated with these efforts may include travel, lodging, entertainment and
meals.
For 2013, ABI’s additional payments to these firms for distribution services and
educational support are expected to be approximately $600,000. In 2012, ABI paid additional
payments of approximately $600,000 for the Portfolios.
If one mutual fund sponsor that offers shares to separate accounts of an Insurer
makes greater distribution assistance payments than another, the Insurer may have an incentive
to recommend or offer the shares of funds of one fund sponsor over another.
Please speak with your financial intermediary to learn more about the total
amounts paid to your financial intermediary by the Funds, the Adviser, ABI and by other mutual
fund sponsors that offer shares to Insurers that may be recommended to you. You should also
consult disclosures made by your financial intermediary at the time of purchase.
ABI anticipates that the Insurers or their affiliates that will receive additional
payments for educational support include:
Ameriprise Financial
ING
Lincoln Financial
Merrill Lynch
Metlife Investors Group Inc.
Morgan Stanley
Ohio National
Pacific Life Insurance Co.
Principal Financial Group
SunAmerica
The Hartford
Transamerica Capital
100
Although the Portfolios may use brokers and dealers who sell shares of the
Portfolios to effect portfolio transactions, the Portfolios do not consider the sale of
AllianceBernstein Mutual Fund Shares as a factor when selecting brokers or dealers to effect
portfolio transactions.
NET ASSET VALUE
For all of the Portfolios the NAV of each Portfolio is computed at the close of
regular trading on each day the Exchange is open (ordinarily 4:00 p.m., Eastern Time, but
sometimes earlier, as in the case of scheduled half-day trading or unscheduled suspensions of
trading) following receipt of a purchase or redemption order by a Portfolio on each Portfolio
business day on which such an order is received and on such other days as the Board deems
appropriate or necessary in order to comply with Rule 22c-1 under the 1940 Act. Each
Portfolio’s per share NAV is calculated by dividing the value of a Portfolio’s total assets, less its
liabilities, by the total number of its shares then outstanding. A Portfolio business day is any
weekday on which the Exchange is open for trading.
Portfolio securities are valued at current market value or at fair value as
determined in accordance with applicable rules under the 1940 Act and the Portfolio’s pricing
policies and procedures (the “Pricing Policies”) established by and under the general supervision
of the Board. The Board has delegated to the Adviser, subject to the Board’s continuing
oversight, certain of the Board’s duties with respect to the Pricing Policies. The Adviser has
established a Valuation Committee, which operates under policies and procedures approved by
the Board, to value a Portfolio’s assets on behalf of the Portfolio.
Whenever possible, securities are valued based on market information on the
business day as of which the value is being determined, as follows:
(a) a security listed on the Exchange, or on other national or foreign exchange
(other than securities listed on the NASDAQ Stock Exchange (“NASDAQ”)) is valued at the last
sale price reflected on the consolidated tape at the close of the exchange. If there has been no
sale on the relevant business day, the security is valued at the last traded price from the previous
day. On the following day, the security is valued in good faith at fair value by, or in accordance
with procedures approved by, the Board;
(b)
a security traded on NASDAQ is valued at the NASDAQ Official Closing
Price;
(c)
a security traded on more than one exchange is valued in accordance with
paragraph (a) above by reference to the principal exchange (as determined by the Adviser) on
which the security is traded;
101
(d)
a listed or OTC put or call option is valued at the mid level between the
current bid and asked prices (for options or futures contracts, see item (e)). If neither a current
bid nor a current ask price is available, the Adviser will have discretion to determine the best
valuation (e.g., last trade price) and then bring the issue to the Board’s Valuation Committee the
next day;
(e)
an open futures contract and any option thereon is valued at the closing
settlement price or, in the absence of such a price, the most recent quoted bid price. If there are
no quotations available for the relevant business day, the security is valued at the last available
closing settlement price;
(f)
a listed right is valued at the last traded price provided by approved
pricing vendors. If there has been no sale on the relevant business day, the right is valued at the
last traded price from the previous day. On the following day, the security is valued in good
faith at fair value. For an unlisted right, the calculation used in determining a value is the price of
the reference security minus the subscription price multiplied by the terms of the right. There
may be some instances when the subscription price is greater than the referenced security right.
In such instances, the right would be valued as worthless;
(g)
a listed warrant is valued at the last traded price provided by approved
vendors. If there is no sale on the relevant business day, the warrant is valued at the last traded
price from the previous day. On the following day, the security is valued in good faith at fair
value. All unlisted warrants are valued in good faith at fair value. Once a warrant has expired, it
will no longer be valued;
(h)
preferred securities are valued based on prices received from approved
vendors that use last trade data for listed preferreds and evaluated bid prices for non-listed
preferreds, as well as for listed preferreds when there is no trade activity;
(i)
a U.S. Government security and any other debt instrument having 60 days
or less remaining until maturity generally is valued at amortized cost if its original maturity was
60 days or less, or by amortizing its fair value as of the 61st day prior to maturity if the original
term to maturity exceeded 60 days, unless in either case the Adviser determines, in accordance
with procedures established by the Board, that this method does not represent fair value. The
Adviser is responsible for monitoring whether any circumstances have occurred that indicate that
the use of amortized cost method for any security is not appropriate due to such factors as, but
not limited to, an impairment of the creditworthiness of the issuer or material changes in interest
rates;
(j)
a fixed-income security is typically valued on the basis of bid prices
provided by an approved pricing vendor when the Adviser believes that such prices reflect the
market value of the security. In certain markets, the market convention may be to use the mid
price between bid and offer. Fixed-income securities may be valued on the basis of mid prices
when either the approved pricing vendor normally provides mid prices, reflecting the
conventions of the particular markets. The prices provided by a pricing vendor may take into
account many factors, including institutional size, trading in similar groups of securities and any
developments related to specific securities. If the Adviser determines that an appropriate pricing
102
vendor does not exist for a security in a market that typically values such securities on the basis
of a bid price, the security is valued on the basis of a quoted bid price or spread over the
applicable yield curve (a bid spread) by a broker-dealer in such security. The second highest
price will be utilized whenever two or more quoted bid prices are obtained. If an appropriate
pricing vendor does not exist for a security in a market where convention is to use the mid price,
the security is valued on the basis of a quoted mid price by a broker-dealer in such security. The
second highest price will be utilized whenever two or more quoted mid prices are obtained;
(k)
a mortgage-backed or other asset-backed security is valued on the basis of
bid prices obtained from pricing vendors or bid prices obtained from multiple major brokerdealers in the security when the Adviser believes that these prices reflect the market value of the
security. In cases in which broker-dealer quotes are obtained, the Adviser has procedures for
using changes in market yields or spreads to adjust, on a daily basis, a recently obtained quoted
bid price on a security. The second highest price will be utilized whenever two or more quoted
bid prices are obtained;
(l)
bank loans are valued on the basis of bid prices provided by a pricing
vendor;
(m)
bridge loans are valued at the outstanding loan amount, unless it is
determined by the Valuation Committee that any particular bridge loan should be valued at
something other than outstanding loan amount. This may occur due to, for example, a significant
change in the high-yield market and/or a significant change in the status of any particular issuer
or issuers of bridge loans;
(n)
whole loans: residential and commercial mortgage whole loans and whole
loan pools are fair market priced by Clayton IPS (Independent Pricing Service);
(o)
forward and spot currency pricing is provided by WM Reuters;
(p)
a swap is valued by the Adviser utilizing various external sources to obtain
inputs for variables in pricing models;
(q)
interest rate caps and floors are valued at the present value of the
agreements, which are provided by approved vendors; and
(r)
open end mutual funds are valued at the closing NAV per share and
closed-end funds are valued at the closing market price per share.
Each Portfolio values its securities at their current market value determined on the
basis of market quotations as described above or, if market quotations are not readily available or
are unreliable, at “fair value” as determined in accordance with procedures established by and
under the general supervision of the Board. When a Portfolio uses fair value pricing, it may take
into account any factors it deems appropriate. A Portfolio may determine fair value based upon
developments related to a specific security, current valuations of foreign stock indices (as
reflected in U.S. futures markets) and/or U.S. sector or broader stock market indices. The prices
of securities used by a Portfolio to calculate its NAV may differ from quoted or published prices
103
for the same securities. Fair value pricing involves subjective judgments and it is possible that
the fair value determined for a security is materially different than the value that could be
realized upon the sale of that security.
Each Portfolio expects to use fair value pricing for securities primarily traded on
U.S. exchanges only under very limited circumstances, such as the early closing of the exchange
on which a security is traded or suspension of trading in the security. A Portfolio may use fair
value pricing more frequently for securities primarily traded in non-U.S. markets because,
among other things, most foreign markets close well before each Portfolio values its securities at
4:00 p.m., Eastern Time. The earlier close of these foreign markets gives rise to the possibility
that significant events, including broad market moves, may have occurred in the interim. For
example, a Portfolio believes that foreign security values may be affected by events that occur
after the close of foreign securities markets. To account for this, the Portfolio may frequently
value many of its foreign equity securities using fair value prices based on third party vendor
modeling tools to the extent available.
Each Portfolio may suspend the determination of its NAV (and the offering and
sales of shares), subject to the rules of the SEC and other governmental rules and regulations, at
a time when: (1) the Exchange is closed, other than customary weekend and holiday closings,
(2) an emergency exists as a result of which it is not reasonably practicable for a Portfolio to
dispose of securities owned by it or to determine fairly the value of its net assets, or (3) for the
protection of shareholders, the SEC by order permits a suspension of the right of redemption or a
postponement of the date of payment on redemption.
For purposes of determining each Portfolio’s NAV per share, all assets and
liabilities initially expressed in a foreign currency will be converted into U.S. Dollars at the mean
of the current bid and asked prices of such currency against the U.S. Dollar last quoted by a
major bank that is a regular participant in the relevant foreign exchange market or on the basis of
a pricing service that takes into account the quotes provided by a number of such major banks. If
such quotations are not available as of the close of the Exchange, the rate of exchange will be
determined in good faith by, or under the direction of, the Board.
The assets attributable to the Class A shares and Class B shares are invested
together in a single portfolio for each Portfolio. The NAV of each class will be determined
separately by subtracting the liabilities allocated to that class from the assets belonging to that
class in conformance with the provisions of a plan adopted by each Portfolio in accordance with
Rule 18f-3 under the 1940 Act (the “18f-3 Plan”).
PORTFOLIO TRANSACTIONS
Subject to the general oversight of the Board, the Adviser is responsible for the
investment decisions and of placing of orders for portfolio transactions of the Portfolios. The
Adviser determines the broker or dealer to be used in each specific transaction with the objective
of negotiating a combination of the most favorable commission (for transactions on which a
104
commission is payable) and the best price obtainable on each transaction (generally defined as
“best execution”). In connection with seeking best price and execution, the Portfolios do not
consider sales of shares of the Portfolios or other investment companies managed by the Adviser
as a factor in the selection of brokers and dealers to effect portfolio transactions and has adopted
a policy and procedures reasonably designed to preclude such considerations.
When consistent with the objective of obtaining best execution, brokerage may be
directed to persons or firms supplying investment information to the Adviser. There may be
occasions where the transaction cost charged by a broker may be greater than that which another
broker may charge if a Portfolio determines in good faith that the amount of such transaction cost
is reasonable in relation to the value of the brokerage, research and statistical services provided
by the executing broker.
Neither the Portfolios nor the Adviser has entered into agreements or
understandings with any brokers or dealers regarding the placement of securities transactions
because of research or statistical services they provide. To the extent that such persons or firms
supply investment information to the Adviser for use in rendering investment advice to a
Portfolio, such information may be supplied at no cost to the Adviser and, therefore, may have
the effect of reducing the expenses of the Adviser in rendering advice to the Portfolio. While it
is impossible to place an actual dollar value on such investment information, its receipt by the
Adviser probably does not reduce the overall expenses of the Adviser to any material extent.
The investment information provided to the Adviser is of the type described in
Section 28(e) of the Securities Exchange Act of 1934, as amended, and is designed to augment
the Adviser’s own internal research and investment strategy capabilities. Research and statistical
services furnished by brokers through which the Fund effects securities transactions are used by
the Adviser in carrying out its investment management responsibilities with respect to all its
client accounts but not all such services may be utilized by the Adviser in connection with the
Portfolios.
The extent to which commissions that will be charged by broker-dealers selected
by a Portfolio may reflect an element of value for research cannot presently be determined. To
the extent that research services of value are provided by broker-dealers with or through whom
the Portfolio places portfolio transactions, the Adviser may be relieved of expenses which it
might otherwise bear. Research services furnished by broker-dealers as a result of the placement
of portfolio transactions could be useful and of value to the Adviser in servicing its other clients
as well as the Portfolio; on the other hand, certain research services obtained by the Adviser as a
result of the placement of portfolio brokerage of other clients could be useful and of value to it in
servicing the Portfolio.
A Portfolio may deal in some instances in equity securities which are not listed on
a national securities exchange but are traded in the over-the-counter market. In addition, most
transactions for the Intermediate Bond Portfolio are executed in the over-the-counter market.
Where transactions are executed in the over-the-counter market, a Portfolio will seek to deal with
the primary market makers, but when necessary in order to obtain the best price and execution, it
will utilize the services of others. In all cases, the Portfolio will attempt to negotiate best
execution.
105
Investment decisions for a Portfolio are made independently from those for other
investment companies and other advisory accounts managed by the Adviser. It may happen, on
occasion, that the same security is held in the portfolio of a Portfolio and one or more of such
other companies or accounts. Simultaneous transactions are likely when several funds or
accounts are managed by the same Adviser, particularly when a security is suitable for the
investment objectives of more than one of such companies or accounts. When two or more
companies or accounts managed by the Adviser are simultaneously engaged in the purchase or
sale of the same security, the transactions are allocated to the respective companies or accounts
both as to amount and price, in accordance with a method deemed equitable to each company or
account. In some cases this system may adversely affect the price paid or received by a Portfolio
or the size of the position obtainable for the Portfolio.
Allocations are made by the officers of a Portfolio or of the Adviser. Purchases
and sales of portfolio securities are determined by the Adviser and are placed with broker-dealers
by the order department for the Adviser.
The Portfolios’ portfolio transactions in equity securities may occur on foreign
stock exchanges. Transactions on stock exchanges involve the payment of brokerage
commissions. On many foreign stock exchanges these commissions are fixed. Securities traded
in foreign over-the-counter markets (including most fixed-income securities) are purchased from
and sold to dealers acting as principal. Over-the-counter transactions generally do not involve
the payment of a stated commission, but the price usually includes an undisclosed commission or
markup. The prices of underwritten offerings, however, generally include a stated underwriter’s
discount. The Adviser expects to effect the bulk of its transactions in securities of companies
based in foreign countries through brokers, dealers or underwriters located in such countries.
U.S. Government or other U.S. securities constituting permissible investments will be purchased
and sold through U.S. brokers, dealers or underwriters.
106
The aggregate brokerage commissions paid by the Portfolios during the three
most recent fiscal years or since inception are set forth below:
Portfolio
Fiscal
Year Ended
December 31
Aggregate Amount of
Brokerage Commissions
Growth Portfolio
2010
2011
2012
$138,028
113,496
79,251
Intermediate Bond Portfolio
2010
2011
2012
$0
405
217
Growth and Income Portfolio
2010
2011
2012
$1,259,175
1,384,525
1,263,653
Large Cap Growth Portfolio
2010
2011
2012
$535,536
512,272
435,586
Small Cap Growth Portfolio
2010
2011
2012
$93,410
119,513
117,081
Real Estate Investment Portfolio
2010
2011
2012(1)
$134,670
74,018
235,230
Global Thematic Growth Portfolio
2010
2011
2012(2)
$506,110
653,101
457,410
International Growth Portfolio
2010
2011
2012(3)
$477,109
311,071
213,153
Small/Mid Cap Value Portfolio
2010
2011
2012
$668,406
1,185,566
644,721
Value Portfolio
2010
2011
2012(4)
$292,823
259,034
161,524
International Value Portfolio
2010
2011
2012(5)
$1,897,83
1,815,021
1,451,452
107
Portfolio
Balanced Wealth Strategy Portfolio
Dynamic Asset Allocation Portfolio*
(1)
(2)
(3)
(4)
(5)
(6)
*
Fiscal
Year Ended
December 31
Aggregate Amount of
Brokerage Commissions
2010
2011
2012
$490,114
496,625
516,365
2011
2012(6)
$10,031
46,640
The aggregate brokerage commissions paid by the Portfolio increased materially in 2012 due to an increase
in the number of transactions.
The aggregate brokerage commissions paid by the Portfolio decreased materially in 2012 due to a decrease
in the value of transactions.
The aggregate brokerage commissions paid by the Portfolio decreased materially in 2012 due to a decrease
in the value of transactions.
The aggregate brokerage commissions paid by the Portfolio decreased materially in 2012 due to a decrease
in the number of transactions.
The aggregate brokerage commissions paid by the Portfolio decreased materially in 2012 due to a decrease
in the number of transactions.
The aggregate brokerage commissions paid by the Portfolio increased materially in 2012 due to an increase
in the number and value of transactions.
Fund commenced operations on April 1, 2011.
The Fund may, from time to time, place orders for the purchase or sale of
securities (including listed call options) with Sanford C. Bernstein & Co. and Sanford C.
Bernstein Limited, affiliates of the Adviser (the “Affiliated Brokers”). In such instances, the
placement of orders with such brokers would be consistent with each Portfolio’s objective of
obtaining best execution and would not be dependent upon the fact that the Affiliated Brokers
are affiliates of the Adviser. With respect to orders placed with the Affiliated Brokers for
execution on a securities exchange, commissions received must conform to Section 17(e)(2)(A)
of the 1940 Act and Rule 17e-1 thereunder, which permit an affiliated person of a registered
investment company (such as the Fund), or any affiliated person of such person, to receive a
brokerage commission from such registered investment company provided that such commission
is reasonable and fair compared to the commissions received by other brokers in connection with
comparable transactions involving similar securities during a comparable period of time.
The aggregate amount of brokerage commissions paid to Affiliated Brokers
during each Portfolio’s three most recent fiscal years or since inception, and, during the most
recent fiscal year, the Affiliated Brokers’ percentage of the aggregate brokerage commissions
and the aggregate dollar amount of brokerage transactions, respectively, are set forth below:
108
Portfolio
Fiscal Year
Ended
December 31,
Aggregate Amount
Of Brokerage
Commissions
Paid To
Affiliated Brokers
% of Portfolio’s
Aggregate Brokerage
Commissions Paid To
Affiliated Brokers
% of Portfolio’s
Aggregate Dollar
Amount of Brokerage
Transactions Involving
The Payment Of
Commissions Through
Affiliated Brokers
Large Cap
Growth
Portfolio
2012
2011
2010
$
0
0
427
0%
0%
$
0
0
0
0%
0%
Intermediate
Bond Portfolio
2012
2011
2010
Growth and
Income
Portfolio
2012
2011
2010
$ 1,692
0
496
0.13%
0.14 %
Growth
Portfolio
2012
2011
2010
$
635
107
131
0.80%
1.42 %
International
Growth
Portfolio
2012
2011
2010
$ 3,063
227
0
1.44%
3.07 %
Global
Thematic
Growth
Portfolio
2012
2011
2010
$ 6,078
2,875
75
1.33%
1.26%
Small Cap
Growth
Portfolio
2012
2011
2010
$
251
523
742
0.21%
0.16%
Real Estate
Investment
Portfolio
2012
2011
2010
$
70
27
108
0.03%
0.13 %
Small/Mid
Cap Value
Portfolio
2012
2011
2010
$
0
0
0
0%
0%
$
0
0
0
0%
0%
Value
Portfolio
2012
2011
2010
109
% of Portfolio’s
Aggregate Dollar
Amount of Brokerage
Transactions Involving
The Payment Of
Commissions Through
Affiliated Brokers
Fiscal Year
Ended
December 31,
Aggregate Amount
Of Brokerage
Commissions
Paid To
Affiliated Brokers
International
Value
Portfolio
2012
2011
2010
$10,923
7,187
14,809
0.75%
1.42 %
Balanced
Wealth
Strategy
Portfolio
2012
2011
2010
$
824
220
137
0.16%
0.42%
Dynamic
Asset
Allocation
Portfolio*
2012
2011
$
0
0
0%
0%
Portfolio
% of Portfolio’s
Aggregate Brokerage
Commissions Paid To
Affiliated Brokers
*Fund commenced operations on April 1, 2011.
Disclosure of Portfolio Holdings
The Fund believes that the ideas of the Adviser’s investment staff should benefit
the Portfolios and their shareholders, and does not want to afford speculators an opportunity to
profit by anticipating Portfolio trading strategies or using Portfolio information for stock picking.
However, the Fund also believes that knowledge of each Portfolio’s portfolio holdings can assist
shareholders in monitoring their investment, making asset allocation decisions, and evaluating
portfolio management techniques.
The Adviser has adopted, on behalf of the Portfolios, policies and procedures
relating to disclosure of the Portfolios’ portfolio securities. The policies and procedures relating
to disclosure of the Portfolios’ portfolio securities are designed to allow disclosure of portfolio
holdings information where necessary to the operation of the Portfolios or useful to the
Portfolios’ shareholders without compromising the integrity or performance of the Portfolios.
Except when there are legitimate business purposes for selective disclosure and other conditions
(designed to protect the Portfolios and their shareholders) are met, the Portfolios do not provide
or permit others to provide information about a Portfolio’s portfolio holdings on a selective
basis.
The Portfolios include portfolio holdings information as required in regulatory
filings and shareholder reports, disclose portfolio holdings information as required by federal or
state securities laws and may disclose portfolio holdings information in response to requests by
governmental authorities. In addition, the Adviser may post portfolio holdings information on
the Adviser’s website (www.AllianceBernstein.com). For each portfolio security, the posted
information includes its name, the number of shares held by a Portfolio, the market value of the
Portfolio’s holdings, and the percentage of the Portfolio’s assets represented by the Portfolio’s
110
holdings. The day after portfolio holdings information is publicly available on the website, it
may be mailed, e-mailed or otherwise transmitted to any person.
The Adviser may distribute or authorize the distribution of information about a
Portfolio’s portfolio holdings that is not publicly available, on the website or otherwise, to the
Adviser’s employees and affiliates that provide services to the Fund. In addition, the Adviser
may distribute or authorize distribution of information about a Portfolio’s portfolio holdings that
is not publicly available, on the website or otherwise, to the Fund’s service providers who
require access to the information in order to fulfill their contractual duties relating to the
Portfolios, to facilitate the review of the Portfolios by rating agencies, for the purpose of due
diligence regarding a merger or acquisition, or for the purpose of effecting in-kind redemption of
securities to facilitate orderly redemption of portfolio assets and minimal impact on remaining
Portfolio shareholders. The Adviser does not expect to disclose information about a Portfolio’s
portfolio holdings that is not publicly available to the Portfolio’s individual or institutional
investors or to intermediaries that distribute the Portfolio’s shares. Information may be disclosed
with any frequency and any lag, as appropriate.
Before any non-public disclosure of information about a Portfolio’s portfolio
holdings is permitted, however, the Adviser’s Chief Compliance Officer (or his designee) must
determine that the Portfolio has a legitimate business purpose for providing the portfolio
holdings information, that the disclosure is in the best interests of the Portfolio’s shareholders,
and that the recipient agrees or has a duty to keep the information confidential and agrees not to
trade directly or indirectly based on the information or to use the information to form a specific
recommendation about whether to invest in the Portfolio or any other security. Under no
circumstances may the Adviser or its affiliates receive any consideration or compensation for
disclosing the information.
The Adviser has established procedures to ensure that a Portfolio’s portfolio
holdings information is only disclosed in accordance with these policies. Only the Adviser’s
Chief Compliance Officer (or his designee) may approve the disclosure, and then only if he or
she and a designated senior officer in the Adviser’s product management group determines that
the disclosure serves a legitimate business purpose of a Portfolio and is in the best interest of the
Portfolio’s shareholders. The Adviser’s Chief Compliance Officer (or his designee) approves
disclosure only after considering the anticipated benefits and costs to the Portfolio and its
shareholders, the purpose of the disclosure, any conflicts of interest between the interests of the
Portfolio and its shareholders and the interests of the Adviser or any of its affiliates, and whether
the disclosure is consistent with the policies and procedures governing disclosure. Only
someone approved by the Adviser’s Chief Compliance Officer (or his designee) may make
approved disclosures of portfolio holdings information to authorized recipients. The Adviser
reserves the right to request certifications from senior officers of authorized recipients that the
recipient is using the portfolio holdings information only in a manner consistent with the
Adviser’s policy and any applicable confidentiality agreement. The Adviser’s Chief Compliance
Officer (or his designee) or another member of the compliance team reports all arrangements to
disclose portfolio holdings information to the Fund’s Board on a quarterly basis. If the Directors
determine that disclosure was inappropriate, the Adviser will promptly terminate the disclosure
arrangement.
111
In accordance with these procedures, each of the following third parties have been
approved to receive information concerning the Portfolios’ portfolio holdings: (i) the Fund’s
independent registered public accounting firm, for use in providing audit opinions; (ii) Data
Communique International, RR Donnelley Financial and, from time to time, other financial
printers, for the purpose of preparing Portfolio regulatory filings; (iii) the Fund’s custodian in
connection with its custody of the assets of the Portfolios; (iv) Risk Metrics for proxy voting
services; and (v) data aggregators, such as Vestek. Information may be provided to these parties
at any time with no time lag. Each of these parties is contractually and ethically prohibited from
sharing a Portfolio’s portfolio holdings information unless specifically authorized.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Portfolio of the Fund qualified and intends to continue to qualify to be taxed
as a regulated investment company under the Code. If so qualified, each Portfolio will not be
subject to federal income and excise taxes on its investment company taxable income and net
capital gain to the extent such investment company taxable income and net capital gain are
distributed to the separate accounts of insurance companies which hold its shares. Under current
tax law, capital gains or dividends from any Portfolio are not currently taxable to the holder of a
variable annuity or variable life insurance contract when left to accumulate within such variable
annuity or variable life insurance contract. Distributions of net investment income and net shortterm capital gains will be treated as ordinary income and distributions of net long-term capital
gains will be treated as long-term capital gain in the hands of the insurance companies.
Investment income received by a Portfolio from sources within foreign countries
may be subject to foreign income taxes withheld at the source. If more than 50% of the value of
a Portfolio’s total assets at the close of its taxable year consists of stocks or securities of foreign
corporations (which for this purpose should include obligations issued by foreign governments),
such Portfolio will be eligible to file an election with the Internal Revenue Service to pass
through to its shareholders the amount of foreign taxes paid by the Portfolio. If eligible, each
such Portfolio intends to file such an election, although there can be no assurance that such
Portfolio will be able to do so.
Section 817(h) of the Code requires that the investments of a segregated asset
account of an insurance company be adequately diversified, in accordance with Treasury
Regulations promulgated thereunder, in order for the holders of the variable annuity contracts or
variable life insurance policies underlying the account to receive the tax-deferred or tax-free
treatment generally afforded holders of annuities or life insurance policies under the Code. The
Department of the Treasury has issued Regulations under section 817(h) that, among other
things, provide the manner in which a segregated asset account will treat investments in a
regulated investment company for purposes of the applicable diversification requirements.
Under the Regulations, an insurance company segregated account is permitted to look-through a
Portfolio to satisfy asset diversification tests and treat its underlying securities, rather than the
Portfolio, as investments subject to certain diversification limits. A Portfolio will be considered
adequately diversified if no more than 55% of its assets are represented by any one investment,
no more than 70% of its assets are represented by any two investments, no more than 80% of its
112
assets are represented by any three investments and no more than 90% of its assets are
represented by any four investments. For this purpose, all securities issued by an issuer are
treated as a single investment. Each Portfolio plans to satisfy these conditions at all times so that
the shares of such Portfolio owned by a segregated asset account of a life insurance company
will be subject to this treatment under the Code.
For information concerning the federal income tax consequences for the holders
of variable annuity contracts and variable life insurance policies, such holders should consult the
prospectus used in connection with the issuance of their particular contracts or policies.
GENERAL INFORMATION
Description of the Portfolios
The Fund was organized as a Maryland corporation in 1987 under the name
“Alliance Variable Products Series Fund, Inc.” The name of the Fund became
“AllianceBernstein Variable Products Series Fund, Inc.” on May 1, 2003.
All shares of the Fund when duly issued will be fully paid and nonassessable.
The Board is authorized to reclassify any unissued shares into any number of additional series
and classes without shareholder approval. Accordingly, the Board in the future, for reasons such
as the desire to establish one or more additional Portfolio’s with different investment objectives,
policies or restrictions or to establish additional channels of distribution, may create additional
series and classes of shares. Any issuance of shares of such additional series and classes would
be governed by the 1940 Act and the laws of the State of Maryland.
Generally, shares of each Portfolio would vote as a single series for the election of
directors and on any other matter that affected each Portfolio in substantially the same manner.
As to matters affecting each Portfolio differently, such as approval of the Advisory Agreement
and changes in investment policy, shares of each Portfolio would vote as separate series.
Moreover, the Class B shares of each Portfolio will vote separately with respect to matters
relating to the 12b-1 Plan(s) adopted in accordance with Rule 12b-1 under the 1940 Act.
It is anticipated that annual meetings of shareholders will not be held;
shareholder meetings will only be held when required by federal or state law or in accordance
with an undertaking by the Adviser to the SEC. Shareholders have available certain procedures
for the election of Directors.
Pursuant to an order received from the SEC, the Fund maintains participation
agreements with insurance company separate accounts that obligate the insurance companies to
pass any proxy solicitations through to underlying contractholders who in turn are asked to
designate voting instructions. In the event that an insurance company does not receive voting
instructions from contractholders, it is obligated to vote the shares that correspond to such
contractholders in the same proportion as instructions received from all other applicable
contractholders.
113
To the knowledge of the Fund, the following persons owned of record or
beneficially, 5% or more of a class of outstanding shares of each Portfolio as of April 1, 2013:
CLASS A
SHARES
NUMBER OF
CLASS A SHARES
PORTFOLIO
NAME AND ADDRESS
Intermediate
Bond Portfolio
American General Life
Insurance Company of Delaware
Attn: Ed Bacon
2727A Allen Parkway, # 4D1
Houston, TX 77019-2107
Large Cap
Growth Portfolio
Growth and
Income Portfolio
% OF CLASS A
SHARES
4,877,152.4
80.50%
The United States Life Insurance
Company In the City of New York
Attn: Ed Bacon
2727A Allen Parkway, MS 4D-1
Houston, TX 77019-2116
546,325.3
9.02%
Allmerica Financial Life
Insurance & Annuity Company
One Security Benefit Place
Topeka, KS 66636-1000
251,731.4
5.05%
American General Life
Insurance Company of Delaware
Attn: Ed Bacon
2727A Allen Parkway, # 4D1
Houston, TX 77019-2107
957,961.9
19.23%
Merrill Lynch Life Insurance Company
ML-Life V
4333 Edgewood Road, NE
Cedar Rapids, IA 52499-0001
364,783.7
7.32%
Merrill Lynch Life Insurance Company
ML-Retirement Plus A
4333 Edgewood Road, NE
Cedar Rapids, IA 52499-0001
2,146,690.2
43.09%
American General Life
Insurance Company of Delaware
Attn: Ed Bacon
2727A Allen Parkway, # 4D1
Houston, TX 77019-2107
1,939,635.9
32.33%
114
CLASS A
SHARES
PORTFOLIO
Growth Portfolio
NUMBER OF
CLASS A SHARES
% OF CLASS A
SHARES
492,628.8
8.21%
Lincoln Life Variable Annuity Account
Fund Accounting
1300 S. Clinton Street
Fort Wayne, IN 46802-3506
1,126,978.9
18.78%
Merrill Lynch Life Insurance Company
ML-Retirement Power
4333 Edgewood Road, NE
Cedar Rapids, IA 52499-0001
376,237.6
6.27%
Nationwide Life Insurance Company
C/O IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
431,293.2
7.19%
American General Life
Insurance Company of Delaware
Attn: Ed Bacon
2727A Allen Parkway, # 4D1
Houston, TX 77019-2107
607,883.4
58.98%
American General Life
Insurance Company of Delaware
Attn: Ed Bacon
2727A Allen Parkway, # 4D1
Houston, TX 77019-2107
59,192.4
5.74%
134,658.5
13.06%
55,655.3
5.40%
NAME AND ADDRESS
ING Life Insurance and Annuity
Company
Attn: ING Fund Operations
1 Orange Way, #B3N
Windsor, CT 06095-4773
The United States Life Insurance
Company In the City of New York
Attn: Ed Bacon
2727A Allen Parkway, MS 4D-1
Houston, TX 77019-2116
UBS Life Insurance Co.
P.O. Box 1795
Erie, PA 16507-1795
115
CLASS A
SHARES
PORTFOLIO
International
Growth Portfolio
NAME AND ADDRESS
American General Life
Insurance Company of Delaware
Attn: Ed Bacon
2727A Allen Parkway, # 4D1
Houston, TX 77019-2107
24.11%
662,507.8
11.82%
3,004,512.6
53.60%
American General Life
Insurance Company of Delaware
Attn: Ed Bacon
2727A Allen Parkway, # 4D1
Houston, TX 77019-2107
679,183.8
28.82%
Lincoln Life Variable Annuity Account
Fund Accounting
1300 S. Clinton Street
Fort Wayne, IN 46802-3506
969,927.9
41.15%
Merrill Lynch Life Insurance Company
ML-Retirement Plus A
4333 Edgewood Road, NE
Cedar Rapids, IA 52499-0001
283,559.6
12.03%
The United States Life Insurance
Company In the City of New York
Attn: Ed Bacon
2727A Allen Parkway, MS 4D-1
Houston, TX 77019-2116
145,622.1
6.18%
American General Life
Insurance Company of Delaware
Attn: Ed Bacon
2727A Allen Parkway, # 4D1
Houston, TX 77019-2107
829,663.8
58.10%
The Prudential Insurance
Company of America
c/o Prubenefit Laureate
80 Livingston Avenue, Bldg. ROS3
Roseland, NJ 07068-1753
Small Cap
Growth Portfolio
% OF CLASS A
SHARES
1,351,615.0
Great-West Life & Annuity
FBO Variable Annuity OneSource
Attn: Investment Div 2T2
8515 E. Orchard Road
Englewood, CO 80111-5002
Global Thematic
Growth Portfolio
NUMBER OF
CLASS A SHARES
116
CLASS A
SHARES
PORTFOLIO
NUMBER OF
CLASS A SHARES
NAME AND ADDRESS
Principal Life Insurance Co.
Attn: Individual Accounting
711 High Street
Des Moines, IA 50392-0001
219,925.4
15.40%
124,385.1
8.71%
77,004.9
5.39%
967,404.4
16.77%
Great West Life & Annuity
Insurance Company
FBO Schwab Annuities
Attn: Investment Div 2T2
8515 E. Orchard Road
Englewood, CO 80111-5002
1,358,716.2
23.56%
The Prudential Insurance
Company of America
c/o Prubenefit Laureate
80 Livingston Avenue, Bldg. ROS3
Roseland, NJ 07068-1753
2,997,954.5
51.98%
American General Life
Insurance Company of Delaware
Attn: Ed Bacon
2727A Allen Parkway, # 4D1
Houston, TX 77019-2107
654,367.1
18.32%
Great West Life & Annuity
Insurance Company
FBO Schwab Annuities
Attn: Investment Div 2T2
8515 E. Orchard Road
Englewood, CO 80111-5002
257,842.5
7.22%
Nationwide Life Insurance Company
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
The United States Life Insurance
Company In the City of New York
Attn: Ed Bacon
2727A Allen Parkway, MS 4D-1
Houston, TX 77019-2116
Real Estate
Investment
Portfolio
International
Value Portfolio
% OF CLASS A
SHARES
American General Life
Insurance Company of Delaware
Attn: Ed Bacon
2727A Allen Parkway, # 4D1
Houston, TX 77019-2107
117
CLASS A
SHARES
PORTFOLIO
Small/Mid
Cap Value
Portfolio
NUMBER OF
CLASS A SHARES
NAME AND ADDRESS
Lincoln Life Variable Annuity
Account Fund Accounting
1300 S. Clinton Street
Fort Wayne, IN 46802-3506
900,723.2
25.22%
National Life Group
Sentinel Advantage
1 National Life Drive
Montpelier, VT 05604-1000
302,633.9
8.47%
Nationwide Life Insurance Company
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
612,564.1
17.15%
1,016,102.4
11.48%
688,728.7
7.78%
4,257,774.6
48.08%
Nationwide Life Insurance Company
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
595,985.2
6.73%
New York Life Insurance And Annuity
Corporation
169 Lackawanna Avenue
Parsippany, NJ 07054-1007
523,452.9
5.91%
Merrill Lynch Life Insurance Company
ML – IVC Investors Series
4333 Edgewood Road, NE
Cedar Rapids, IA 52499-0001
122,849.2
81.51%
American General Life
Insurance Company of Delaware
Attn: Ed Bacon
2727A Allen Parkway, # 4D1
Houston, TX 77019-2107
AUL American Individual Variable
Annuity Unit Trust
Separate Accounts Administration
P.O. Box 368
Indianapolis, IN 46206-0368
Lincoln Life Variable Annuity Account
Fund Accounting
1300 S. Clinton Street
Fort Wayne, IN 46802-3506
Value Portfolio
% OF CLASS A
SHARES
118
CLASS A
SHARES
PORTFOLIO
NUMBER OF
CLASS A SHARES
NAME AND ADDRESS
Merrill Lynch Life Insurance
Company of New York
Investors Series
4333 Edgewood Road, NE
Cedar Rapids, IA 52499-0001
Balanced Wealth
Strategy
Portfolio
23,187.3
15.38%
2,906,787.2
88.66%
208,350.3
6.35%
AllianceBernstein L.P.
Attn: Brent Mather-Seed Acct
1 N. Lexington Avenue
White Plains, NY 10601-1712
1,000.0
21.67%
Nationwide Life Insurance Co.
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
429.0
9.30%
Nationwide Life Insurance Co.
c/o Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
1,674.6
36.29%
Nationwide Life Insurance Co.
c/o Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
479.8
10.40%
1,031.1
22.35%
American General Life
Insurance Company of Delaware
Attn: Ed Bacon
2727A Allen Parkway, # 4D1
Houston, TX 77019-2107
The United States Life Insurance
Company In the City of New York
Attn: Ed Bacon
2727A Allen Parkway, MS 4D-1
Houston, TX 77019-2116
Dynamic Asset
Allocation
Portfolio
% OF CLASS A
SHARES
Nationwide Life & Annuity Insurance
Co.
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
119
CLASS B SHARES
NUMBER OF
CLASS B SHARES
NAME AND ADDRESS
% OF CLASS
B SHARES
PORTFOLIO
Intermediate Bond
Portfolio
Hartford Life Separate Account
Attn: UIT Operations
P.O. Box 2999
Hartford, CT 06104-2999
218,838.3
9.36%
1,667,149.1
71.29%
Sun Life Assurance
Company of Canada (U.S.)
Attn: Product Accounting
SC 2282
1 Sun Life Park
Wellesley Hills, MA 02481-5699
192,356.1
8.23%
Allmerica Financial Life
Insurance & Annuity Company
One Security Benefit Place
Topeka, KS 66636-1000
863,519.0
14.18%
Allstate Life Insurance Company
3100 Sanders Road, #N4A
Northbrook, IL 60062-7156
551,812.5
9.06%
American General Life Insurance
Company of Delaware
Attn: Ed Bacon
2727A Allen Parkway, #4D1
Houston, TX 77019-2107
581,432.3
9.55%
GE Life and Annuity
Assurance Company
6610 W. Broad Street
Building 3, 5th Floor
Attn: Variable Accounting
Richmond, VA 23230-1702
375,798.2
6.17%
SunAmerica Annuity and Life
Assurance Company
Attn: Variable Annuity Accounting
21650 Oxnard Street, MS 6-9
Suite 750
Woodland Hills, CA 91367-4901
Large Cap Growth
Portfolio
120
CLASS B SHARES
NUMBER OF
CLASS B SHARES
% OF CLASS
B SHARES
1,077,670.6
17.69%
IDS Life Insurance Company
10468 Ameriprise Financial Center
Minneapolis, MN 55474-0014
318,778.6
5.23%
Transamerica Life Insurance Co.
FMD Operational Accounting
4333 Edgewood Road, NE
Cedar Rapids, IA 52499-0001
498,847.3
8.19%
Allmerica Financial Life
Insurance & Annuity Company
One Security Benefit Place
Topeka, KS 66636-1000
2,170,624.8
6.06%
Allstate Life Insurance Company
3100 Sanders Road, #N4A
Northbrook, IL 60062-7156
2,754,444.7
7.69%
American General Life
Insurance Company of Delaware
Attn: Ed Bacon
2727A Allen Parkway, # 4D1
Houston, TX 77019-2107
1,925,660.2
5.38%
GE Life and Annuity
Assurance Company
6610 W. Broad Street
Building 3, 5th Floor
Attn: Variable Accounting
Richmond, VA 23230-1702
2,468,493.2
6.89%
IDS Life Insurance Corp.
1438 AXP Financial Ctr.
Minneapolis, MN 55474-0014
7,435,578.3
20.77%
Lincoln Life Variable Annuity
Account Fund Accounting
1300 S. Clinton Street
Fort Wayne, IN 46802-3506
8,567,287.4
23.93%
NAME AND ADDRESS
PORTFOLIO
Horace Mann
Life Insurance Company
Separate Account
Horace Mann
Springfield, IL 62715-0001
Growth and Income
Portfolio
121
CLASS B SHARES
NUMBER OF
CLASS B SHARES
NAME AND ADDRESS
% OF CLASS
B SHARES
PORTFOLIO
Growth Portfolio
International
Growth Portfolio
Transamerica Life Insurance Co.
FMD Operational Accounting
4333 Edgewood Road, NE
Cedar Rapids, IA 52499-0001
2,513,595.8
7.02%
Allstate Life Insurance Company
3100 Sanders Road, #N4A
Northbrook, IL 60062
897,202.8
44.58%
American General Life
Insurance Company of Delaware
Attn: Ed Bacon
2727A Allen Parkway, # 4D1
Houston, TX 77019-2107
519,614.4
25.82%
AXA Equitable Life Insurance
Company Separate Account
1290 Avenue of the Americas
11th Floor
New York, NY 10104-1472
323,478.6
9.76%
Hartford Life and Annuity
Separate Account
Attn: UIT Operations
P.O. Box 2999
Hartford, CT 06104-2999
259,914.0
7.84%
SunAmerica Annuity and Life
Assurance Company
Attn: Variable Annuity Accounting
21650 Oxnard Street, MS 6-9
Suite 750
Woodland Hills, CA 91367-4997
323,955.1
16.10%
Sun Life Assurance
Company of Canada (U.S.)
One Sun Life Executive Park
Wellesley Hills, MA 02481-9133
696,646.0
21.02%
1,048,424.3
31.64%
Hartford Life and Annuity
Separate Account
Attn: UIT Operations
P.O. Box 2999
Hartford CT, 06104-2999
122
CLASS B SHARES
NUMBER OF
CLASS B SHARES
NAME AND ADDRESS
% OF CLASS
B SHARES
PORTFOLIO
Global Thematic
Growth Portfolio
Small Cap Growth
Portfolio
Hartford Life Separate Account
Attn:UIT Operations
P.O. Box 2999
Hartford, CT 06104-2999
299,803.8
9.05%
Sun Life Assurance
Company of Canada (U.S.)
One Sunlife Executive Park
Wellesley Hills, MA 02481
696,646.0
21.02%
SunAmerica Annuity and Life
Assurance Company
Attn: Variable Annuity Accounting
21650 Oxnard Street, MS 6-9
Suite 750
Woodland Hills, CA 91367-4997
332,116.7
10.02%
American General Life
Insurance Company of Delaware
Attn: Ed Bacon
2727A Allen Parkway, # 4D1
Houston, TX 77019-2107
321,838.0
6.04%
IDS Life Insurance Co.
222 AXP Financial Ctr.
Minneapolis, MN 55474-0014
502,137.3
9.43%
Lincoln Life Variable Annuity
Account Fund Accounting
1300 S. Clinton Street
Fort Wayne, IN 46802-3506
2,673,159.8
50.19%
GE Life and Annuity
Assurance Company
6610 W. Broad Street
Building 3, 5th Floor
Attn: Variable Accounting
Richmond, VA 23230-1702
791,075.4
55.64%
Horace Mann
Life Insurance Company
Separate Account
Horace Mann
Springfield, IL 62715-0001
143,758.0
10.11%
123
CLASS B SHARES
NUMBER OF
CLASS B SHARES
NAME AND ADDRESS
% OF CLASS
B SHARES
PORTFOLIO
Jefferson National Life Insurance
Company
Attn: Separate Accounts
10350 Ormsby Park Place,
Suite 600
Louisville, KY 40223-6178
Real Estate
Investment
Portfolio
96,107.7
6.76%
SunAmerica Annuity and Life
Assurance Company
Attn: Variable Annuity Accounting
21650 Oxnard Street, MS 6-9
Suite 750
Woodland Hills, CA 91367-4997
273,928.8
19.27%
Guardian Ins & Annuity Co Inc
S/A
3900 Burgess Place
Bethlehem, PA 18017-9097
178,937.5
16.41%
Guardian Ins & Annuity Co Inc
S/A
3900 Burgess Place
Bethlehem, PA 18017-9097
427,676.4
39.21%
73,474.5
6.74%
355,159.6
32.56%
6,799,608.3
8.87%
Hartford Life & Annuity
Separate Account
Attn: UIT Operations
P.O. Box 2999
Hartford, CT 06104-2999
SunAmerica Annuity and Life
Assurance Company
Attn: Variable Annuity Accounting
21650 Oxnard Street, MS 6-9
Suite 750
Woodland Hills, CA 91367-4997
International Value
Portfolio
GE Life and Annuity
Assurance Company
6610 W. Broad Street
Building 3, 5th Floor
Attn: Variable Accounting
Richmond, VA 23230-1702
124
CLASS B SHARES
NUMBER OF
CLASS B SHARES
NAME AND ADDRESS
% OF CLASS
B SHARES
PORTFOLIO
Small/Mid
Cap Value
Portfolio
Value Portfolio
Hartford Life and Annuity
Separate Account
Attn: UIT Operations
P.O. Box 2999
Hartford, CT 06104-2999
13,716,582.3
17.89%
Hartford Life
Separate Account
Attn: UIT Operations
P.O. Box 2999
Hartford, CT 06104-2999
5,954,400.9
7.75%
IDS Life Insurance Co.
1438 AXP Financial Ctr.
Minneapolis, MN 55474-0014
19,287,179.0
25.15%
Lincoln Life Variable Annuity
Account Fund Accounting
1300 S. Clinton Street
Fort Wayne, IN 46802-3506
14,581,384.3
19.01%
Sun Life Assurance
Company of Canada (U.S.)
One Sunlife Executive Park
Wellesley Hills, MA 02481
4,693,678.9
6.12%
Hartford Life and Annuity
Separate Account
Attn: UIT Operations
P.O. Box 2999
Hartford, CT 06104-2999
2,513,909.7
12.69%
Lincoln Life Variable Annuity
Account Fund Accounting
1300 S. Clinton Street
Fort Wayne, IN 46802-3506
8,194,927.1
41.37%
Nationwide Life Insurance Company
c/o IPO Portfolio Accounting
P.O. Box 182029
Columbus, OH 43218-2029
3,549,989.8
17.92%
American General Life
Insurance Company of Delaware
Attn: Ed Bacon
2727A Allen Parkway, # 4D1
Houston, TX 77019-2107
1,328,508.6
9.52%
125
CLASS B SHARES
NUMBER OF
CLASS B SHARES
NAME AND ADDRESS
% OF CLASS
B SHARES
PORTFOLIO
Balanced
Wealth
Strategy
Portfolio
Hartford Life
Separate Account
Attn: UIT Operations
P.O. Box 2999
Hartford, CT 06104-2999
3,559,200.4
25.49%
Hartford Life and Annuity
Separate Account
Attn: UIT Operations
P.O. Box 2999
Hartford, CT 06104-2999
7,256,590.0
51.98%
Hartford Life and Annuity
Separate Account
Attn: UIT Operations
P.O. Box 2999
Hartford, CT 06104-2999
7,748,416.7
18.75%
Hartford Life
Separate Account
Attn: UIT Operations
P.O. Box 2999
Hartford, CT 06104-2999
3,139,424.6
7.60%
11,610,338.9
28.09%
SunAmerica Annuity and Life
Assurance Company
Attn: Variable Annuity Accounting
21650 Oxnard Street, MS 6-9
Suite 750
Woodland Hills, CA 91367-4997
3,110,662.1
7.53%
Sunlife Assurance
Company of Canada (U.S.)
One Sunlife Executive Park
Wellesley Hills, MA 02481
4,863,936.6
11.77%
Transamerica Life Insurance Co.
FMD Operational Accounting
4333 Edgewood Road, NE
Cedar Rapids, IA 52499-0001
2,348,073.4
5.68%
Separate Account A of Pacific
Life Insurance Company
700 Newport Center Drive
Newport Beach, CA 92660-6307
126
CLASS B SHARES
PORTFOLIO
Dynamic Asset
Allocation Portfolio
NUMBER OF
CLASS B SHARES
NAME AND ADDRESS
Ohio National Life Insurance Co.
FBO Its Separate Accounts
One Financial Way
Attn: Cathy Gehr, Mail Code 56
Cincinnati, OH 45242-5851
Sunlife Assurance
Company of Canada (U.S.)
One Sunlife Executive Park
Wellesley Hills, MA 02481
% OF CLASS
B SHARES
16,820,146.9
72.90%
5,345,316.3
23.17%
Custodian
State Street Bank and Trust Company (“State Street”), One Lincoln Street,
Boston, MA 02111, acts as custodian for the securities and cash of the Fund but plays no part in
deciding the purchase or sale of portfolio securities. Subject to the supervision of the Board,
State Street may enter into sub-custodial agreements for the holding of the Fund’s securities of
foreign issuers.
Principal Underwriter
ABI, an indirect wholly-owned subsidiary of the Adviser, located at 1345 Avenue
of the Americas, New York, New York 10105, serves as the Fund’s Principal Underwriter.
Counsel
Legal matters in connection with the issuance of the shares of the Fund offered
hereby will be passed upon by Seward & Kissel LLP, New York, New York, 10004.
Independent Registered Public Accounting Firm
Ernst & Young LLP, 5 Times Square, New York, New York, 10036, has been
appointed as the independent registered public accounting firm for the Fund.
Code of Ethics And Proxy Voting Policies And Procedures
The Fund, the Adviser and ABI have each adopted codes of ethics pursuant to
Rule 17j-1 of the 1940 Act. These codes of ethics permit personnel subject to the codes to invest
in securities, including securities that may be purchased or held by the Fund.
The Fund has adopted the Adviser’s proxy voting policies and procedures. The
Adviser’s proxy voting policies and procedures are attached as Appendix A.
127
Information regarding how the Portfolios voted proxies related to portfolio
securities during the most recent 12-month period ended June 30 is available (1) without charge,
upon request, by calling (800) 227-4618; or on or through the Fund’s website at
www.AllianceBernstein.com; or both; and (2) on the SEC’s website at www.sec.gov.
128
FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The financial statements of the Portfolios of the Fund for the fiscal year ended
December 31, 2012 and the report of Ernst & Young LLP, the independent registered public
accounting firm, are incorporated herein by reference to the Portfolios’ annual reports. The
annual report was filed on Form N-CSR with the SEC on February 22, 2013. It is available
without charge upon request by calling ABIS at (800) 227-4618 or on the Internet at
www.AllianceBernstein.com.
129
APPENDIX A:
STATEMENT OF POLICIES AND PROCEDURES FOR PROXY VOTING
1. Introduction
As a registered investment adviser, AllianceBernstein L.P. (“AllianceBernstein”, “we” or
“us”) has a fiduciary duty to act solely in the best interests of our clients. We recognize
that this duty requires us to vote client securities in a timely manner and make voting
decisions that are intended to maximize long-term shareholder value. Generally, our
clients’ objective is to maximize the financial return of their portfolios within appropriate
risk parameters. We have long recognized that environmental, social and governance
(“ESG”) issues can impact the performance of investment portfolios. Accordingly, we
have sought to integrate ESG factors into our investment process to the extent that the
integration of such factors is consistent with our fiduciary duty to help our clients achieve
their investment objectives and protect their economic interests. Our Statement of Policy
Regarding Responsible Investment (“RI Policy”) is attached to this Statement as an
Exhibit.
We consider ourselves shareholder advocates and take this responsibility very seriously.
Consistent with our commitments, we will disclose our clients’ voting records only to them
and as required by mutual fund vote disclosure regulations. In addition, our proxy
committees may, after careful consideration, choose to respond to surveys so long as doing
so does not compromise confidential voting.
This statement is intended to comply with Rule 206(4)-6 of the Investment Advisers Act of
1940. It sets forth our policies and procedures for voting proxies for our discretionary
investment advisory clients, including investment companies registered under the
Investment Company Act of 1940. This statement applies to AllianceBernstein’s
investment groups investing on behalf of clients in both U.S. and non-U.S. securities.
2. Proxy Policies
Our proxy voting policies are principle-based rather than rules-based. We adhere to a core
set of principles that are described in this Statement and in our Proxy Voting Manual. We
assess each proxy proposal in light of those principles. Our proxy voting “litmus test” will
always be what we view as most likely to maximize long-term shareholder value. We
believe that authority and accountability for setting and executing corporate policies, goals
and compensation should generally rest with the board of directors and senior management.
In return, we support strong investor rights that allow shareholders to hold directors and
management accountable if they fail to act in the best interests of shareholders. In addition,
if we determine that ESG issues that arise with respect to an issuer’s past, current or
anticipated behaviors are, or are reasonably likely to become, material to its future
earnings, we address these concerns in our proxy voting and engagement.
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This statement is designed to be responsive to the wide range of proxy voting subjects that
can have a significant effect on the investment value of the securities held in our clients’
accounts. These policies are not exhaustive due to the variety of proxy voting issues that
we may be required to consider. AllianceBernstein reserves the right to depart from these
guidelines in order to make voting decisions that are in our clients’ best interests. In
reviewing proxy issues, we will apply the following general policies:
2.1. Corporate Governance
We recognize the importance of good corporate governance in our proxy voting
policies and engagement practices in ensuring that management and the board of
directors fulfill their obligations to shareholders. We favor proposals promoting
transparency and accountability within a company. We support the appointment of a
majority of independent directors on key committees and generally support separating
the positions of chairman and chief executive officer, except in cases where a
company has sufficient counter-balancing governance in place. Because we believe
that good corporate governance requires shareholders to have a meaningful voice in
the affairs of the company, we generally will support shareholder proposals which
request that companies amend their by-laws to provide that director nominees be
elected by an affirmative vote of a majority of the votes cast. Furthermore, we have
written to the SEC in support of shareholder access to corporate proxy statements
under specified conditions with the goal of serving the best interests of all
shareholders.
2.2. Elections of Directors
Unless there is a proxy fight for seats on the Board or we determine that there are
other compelling reasons to oppose directors, we will vote in favor of the
management proposed slate of directors. That said, we believe that directors have a
duty to respond to shareholder actions that have received significant shareholder
support. Therefore, we may vote against directors (or withhold votes for directors
where plurality voting applies) who fail to act on key issues such as failure to
implement proposals to declassify the board, failure to implement a majority vote
requirement, failure to submit a rights plan to a shareholder vote or failure to act on
tender offers where a majority of shareholders have tendered their shares. In
addition, we will vote against directors who fail to attend at least seventy-five percent
of board meetings within a given year without a reasonable excuse, and we may
abstain or vote against directors of non-U.S. issuers where there is insufficient
information about the nominees disclosed in the proxy statement. Also, we will
generally not oppose directors who meet the definition of independence promulgated
by the primary exchange on which the company’s shares are traded or set forth in the
code we determine to be best practice in the country where the subject company is
domiciled. Finally, because we believe that cumulative voting in single shareholder
class structures provides a disproportionately large voice to minority shareholders in
the affairs of a company, we will generally vote against such proposals and vote for
management proposals seeking to eliminate cumulative voting. However, in dual
class structures (such as A&B shares) where the shareholders with a majority
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economic interest have a minority voting interest, we will generally vote in favor of
cumulative voting.
2.3. Appointment of Auditors
AllianceBernstein believes that the company is in the best position to choose its
auditors, so we will generally support management's recommendation. However, we
recognize that there are inherent conflicts when a company’s independent auditor
performs substantial non-audit services for the company. The Sarbanes-Oxley Act of
2002 prohibits certain categories of services by auditors to U.S. issuers, making this
issue less prevalent in the U.S. Nevertheless, in reviewing a proposed auditor, we
will consider the fees paid for non-audit services relative to total fees and whether
there are other reasons for us to question the independence or performance of the
auditors.
2.4. Changes in Legal and Capital Structure
Changes in a company’s charter, articles of incorporation or by-laws are often
technical and administrative in nature. Absent a compelling reason to the contrary,
AllianceBernstein will cast its votes in accordance with management’s
recommendations on such proposals. However, we will review and analyze on a
case-by-case basis any non-routine proposals that are likely to affect the structure and
operation of the company or have a material economic effect on the company. For
example, we will generally support proposals to increase authorized common stock
when it is necessary to implement a stock split, aid in a restructuring or acquisition, or
provide a sufficient number of shares for an employee savings plan, stock option plan
or executive compensation plan. However, a satisfactory explanation of a company's
intentions must be disclosed in the proxy statement for proposals requesting an
increase of greater than 100% of the shares outstanding. We will oppose increases in
authorized common stock where there is evidence that the shares will be used to
implement a poison pill or another form of anti-takeover device. We will support
shareholder proposals that seek to eliminate dual class voting structures.
2.5. Corporate Restructurings, Mergers and Acquisitions
AllianceBernstein believes proxy votes dealing with corporate reorganizations are an
extension of the investment decision. Accordingly, we will analyze such proposals
on a case-by-case basis, weighing heavily the views of our research analysts that
cover the company and our investment professionals managing the portfolios in
which the stock is held.
2.6. Proposals Affecting Shareholder Rights
AllianceBernstein believes that certain fundamental rights of shareholders must be
protected. We will generally vote in favor of proposals that give shareholders a
greater voice in the affairs of the company and oppose any measure that seeks to limit
those rights. However, when analyzing such proposals we will weigh the financial
impact of the proposal against the impairment of shareholder rights.
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2.7. Anti-Takeover Measures
AllianceBernstein believes that measures that impede corporate transactions (such as
takeovers) or entrench management not only infringe on the rights of shareholders but
may also have a detrimental effect on the value of the company. Therefore, we will
generally oppose proposals, regardless of whether they are advanced by management
or shareholders, when their purpose or effect is to entrench management or
excessively or inappropriately dilute shareholder ownership. Conversely, we support
proposals that would restrict or otherwise eliminate anti-takeover or anti-shareholder
measures that have already been adopted by corporate issuers. For example, we will
support shareholder proposals that seek to require the company to submit a
shareholder rights plan to a shareholder vote. We will evaluate, on a case-by-case
basis, proposals to completely redeem or eliminate such plans. Furthermore, we will
generally oppose proposals put forward by management (including the authorization
of blank check preferred stock, classified boards and supermajority vote
requirements) that appear to be anti-shareholder or intended as management
entrenchment mechanisms.
2.8. Executive Compensation
AllianceBernstein believes that company management and the compensation
committee of the board of directors should, within reason, be given latitude to
determine the types and mix of compensation and benefits offered to company
employees. Whether proposed by a shareholder or management, we will review
proposals relating to executive compensation plans on a case-by-case basis to ensure
that the long-term interests of management and shareholders are properly aligned. In
general, we will analyze the proposed plan to ensure that shareholder equity will not
be excessively diluted taking into account shares available for grant under the
proposed plan as well as other existing plans. We generally will oppose plans that
allow stock options to be granted with below market value exercise prices on the date
of issuance or permit re-pricing of underwater stock options without shareholder
approval. Other factors such as the company’s performance and industry practice
will generally be factored into our analysis. In markets where remuneration reports or
advisory votes on executive compensation are not required for all companies, we will
generally support shareholder proposals asking the board to adopt a policy (i.e., “say
on pay”) that the company’s shareholders be given the opportunity to vote on an
advisory resolution to approve the compensation practices of the company. Although
“say on pay” votes are by nature only broad indications of shareholder views, they do
lead to more compensation-related dialogue between management and shareholders
and help ensure that management and shareholders meet their common objective:
maximizing the value of the company. In markets where votes to approve
remuneration reports or advisory votes on executive compensation are required, we
review the compensation practices on a case-by-case basis. With respect to companies
that have received assistance through government programs such as TARP, we will
generally oppose shareholder proposals that seek to impose greater executive
compensation restrictions on subject companies than are required under the applicable
program because such restrictions could create a competitive disadvantage for the
subject company. We believe the U.S. Securities and Exchange Commission (“SEC”)
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took appropriate steps to ensure more complete and transparent disclosure of
executive compensation when it issued modified executive compensation and
corporate governance disclosure rules in 2006 and February 2010. Therefore, while
we will consider them on a case-by-case basis, we generally vote against shareholder
proposals seeking additional disclosure of executive and director compensation,
including proposals that seek to specify the measurement of performance-based
compensation, if the company is subject to SEC rules. We will support requiring a
shareholder vote on management proposals to provide severance packages that
exceed 2.99 times the sum of an executive officer’s base salary plus bonus that are
triggered by a change in control. Finally, we will support shareholder proposals
requiring a company to expense compensatory employee stock options (to the extent
the jurisdiction in which the company operates does not already require it) because
we view this form of compensation as a significant corporate expense that should be
appropriately accounted for.
2.9. ESG
We are appointed by our clients as an investment manager with a fiduciary
responsibility to help them achieve their investment objectives over the long term.
Generally, our clients’ objective is to maximize the financial return of their portfolios
within appropriate risk parameters. We have long recognized that ESG issues can
impact the performance of investment portfolios. Accordingly, we have sought to
integrate ESG factors into our investment and proxy voting processes to the extent
that the integration of such factors is consistent with our fiduciary duty to help our
clients achieve their investment objectives and protect their economic interests. For
additional information regarding our approach to incorporating ESG issues in our
investment and decision-making processes, please refer to our RI Policy, which is
attached to this Statement as an Exhibit.
Shareholder proposals relating to environmental, social (including political) and
governance issues often raise complex and controversial issues that may have both a
financial and non-financial effect on the company. And while we recognize that the
effect of certain policies on a company may be difficult to quantify, we believe it is
clear that they do affect the company’s long-term performance. Our position in
evaluating these proposals is founded on the principle that we are a fiduciary. As
such, we carefully consider any factors that we believe could affect a company’s
long-term investment performance (including ESG issues) in the course of our
extensive fundamental, company-specific research and engagement, which we rely on
in making our investment and proxy voting decisions. Maximizing long-term
shareholder value is our overriding concern when evaluating these matters, so we
consider the impact of these proposals on the future earnings of the company. In so
doing, we will balance the assumed cost to a company of implementing one or more
shareholder proposals against the positive effects we believe implementing the
proposal may have on long-term shareholder value.
A-5
3. Proxy Voting Procedures
3.1. Proxy Voting Committees
Our growth and value investment groups have formed separate proxy voting
committees (“Proxy Committees”) to establish general proxy policies for
AllianceBernstein and consider specific proxy voting matters as necessary. These
Proxy Committees periodically review these policies and new types of environmental,
social and governance issues, and decide how we should vote on proposals not
covered by these policies. When a proxy vote cannot be clearly decided by an
application of our stated policy, the appropriate Proxy Committee will evaluate the
proposal. In addition, the Proxy Committees, in conjunction with the analyst that
covers the company, may contact corporate management, interested shareholder
groups and others as necessary to discuss proxy issues. Members of the Proxy
Committees include senior investment personnel and representatives of the Legal and
Compliance Department.
Different investment philosophies may occasionally result in different conclusions
being drawn regarding certain proposals and, in turn, may result in the Proxy
Committees making different voting decisions on the same proposal for value and
growth holdings. Nevertheless, the Proxy Committees always vote proxies with the
goal of maximizing the value of the securities in client portfolios.
It is the responsibility of the Proxy Committees to evaluate and maintain proxy voting
procedures and guidelines, to evaluate proposals and issues not covered by these
guidelines, to evaluate proxies where we face a potential conflict of interest (as
discussed below), to consider changes in policy and to review the Proxy Voting
Statement and the Proxy Voting Manual no less frequently than annually. In
addition, the Proxy Committees meet as necessary to address special situations.
3.2. Engagement
In evaluating proxy issues and determining our votes, we welcome and seek out the
points of view of various parties. Internally, the Proxy Committees may consult chief
investment officers, directors of research, research analysts across our value and
growth equity platforms, portfolio managers in whose managed accounts a stock is
held and/or other Investment Policy Group members. Externally, the Proxy
Committees may consult company management, company directors, interest groups,
shareholder activists and research providers. If we believe an ESG issue is, or is
reasonably likely to become, material, we engage a company’s management to
discuss the relevant issues.
Our engagement with companies and interest groups continues to expand as we have
had more such meetings in the past few years.
3.3. Conflicts of Interest
AllianceBernstein recognizes that there may be a potential conflict of interest when
we vote a proxy solicited by an issuer whose retirement plan we manage or
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administer, who distributes AllianceBernstein-sponsored mutual funds, or with whom
we have, or one of our employees has, a business or personal relationship that may
affect (or may be reasonably viewed as affecting) how we vote on the issuer’s proxy.
Similarly, AllianceBernstein may have a potentially material conflict of interest when
deciding how to vote on a proposal sponsored or supported by a shareholder group
that is a client. We believe that centralized management of proxy voting, oversight
by the proxy voting committees and adherence to these policies ensures that proxies
are voted based solely on our clients’ best interests. Additionally, we have
implemented procedures to ensure that our votes are not the product of a material
conflict of interest, including: (i) on an annual basis, the Proxy Committees taking
reasonable steps to evaluate (A) the nature of AllianceBernstein’s and our employees’
material business and personal relationships (and those of our affiliates) with any
company whose equity securities are held in client accounts and (B) any client that
has sponsored or has a material interest in a proposal upon which we will be eligible
to vote; (ii) requiring anyone involved in the decision making process to disclose to
the chairman of the appropriate Proxy Committee any potential conflict that he or she
is aware of (including personal relationships) and any contact that he or she has had
with any interested party regarding a proxy vote; (iii) prohibiting employees involved
in the decision making process or vote administration from revealing how we intend
to vote on a proposal in order to reduce any attempted influence from interested
parties; and (iv) where a material conflict of interests exists, reviewing our proposed
vote by applying a series of objective tests and, where necessary, considering the
views of third party research services to ensure that our voting decision is consistent
with our clients’ best interests.
Because under certain circumstances AllianceBernstein considers the
recommendation of third party research services, the Proxy Committees takes
reasonable steps to verify that any third party research service is, in fact, independent
taking into account all of the relevant facts and circumstances. This includes
reviewing the third party research service’s conflict management procedures and
ascertaining, among other things, whether the third party research service (i) has the
capacity and competency to adequately analyze proxy issues, and (ii) can make
recommendations in an impartial manner and in the best interests of our clients.
3.4. Proxies of Certain Non-U.S. Issuers
Proxy voting in certain countries requires “share blocking.” Shareholders wishing to
vote their proxies must deposit their shares shortly before the date of the meeting with
a designated depositary. During this blocking period, shares that will be voted at the
meeting cannot be sold until the meeting has taken place and the shares are returned
to the clients’ custodian banks. Absent compelling reasons to the contrary,
AllianceBernstein believes that the benefit to the client of exercising the vote is
outweighed by the cost of voting (i.e., not being able to sell the shares during this
period). Accordingly, if share blocking is required we generally choose not to vote
those shares.
A-7
AllianceBernstein seeks to vote all proxies for securities held in client accounts for
which we have proxy voting authority. However, in non-US markets administrative
issues beyond our control may at times prevent AllianceBernstein from voting such
proxies. For example, AllianceBernstein may receive meeting notices after the cutoff date for voting or without sufficient time to fully consider the proxy. As another
example, certain markets require periodic renewals of powers of attorney that local
agents must have from our clients prior to implementing AllianceBernstein’s voting
instructions.
3.5. Loaned Securities
Many clients of AllianceBernstein have entered into securities lending arrangements
with agent lenders to generate additional revenue. AllianceBernstein will not be able
to vote securities that are on loan under these types of arrangements. However, under
rare circumstances, for voting issues that may have a significant impact on the
investment, we may request that clients recall securities that are on loan if we
determine that the benefit of voting outweighs the costs and lost revenue to the client
or fund and the administrative burden of retrieving the securities.
3.6. Proxy Voting Records
Clients may obtain information about how we voted proxies on their behalf by
contacting their AllianceBernstein administrative representative. Alternatively,
clients may make a written request for proxy voting information to: Mark R. Manley,
Senior Vice President & Chief Compliance Officer, AllianceBernstein L.P., 1345
Avenue of the Americas, New York, NY 10105.
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Exhibit
Statement of Policy Regarding
Responsible Investment
Principles for Responsible Investment,
ESG, and Socially Responsible Investment
1. Introduction
AllianceBernstein L.P. (“AllianceBernstein” or “we”) is appointed by our clients as an
investment manager with a fiduciary responsibility to help them achieve their investment
objectives over the long term. Generally, our clients’ objective is to maximize the financial
return of their portfolios within appropriate risk parameters. AllianceBernstein has long
recognized that environmental, social and governance (“ESG”) issues can impact the
performance of investment portfolios. Accordingly, we have sought to integrate ESG factors into
our investment process to the extent that the integration of such factors is consistent with our
fiduciary duty to help our clients achieve their investment objectives and protect their economic
interests.
Our policy draws a distinction between how the Principles for Responsible Investment (“PRI” or
“Principles”), and Socially Responsible Investing (“SRI”) incorporate ESG factors. PRI is based
on the premise that, because ESG issues can affect investment performance, appropriate
consideration of ESG issues and engagement regarding them is firmly within the bounds of a
mainstream investment manager’s fiduciary duties to its clients. Furthermore, PRI is intended to
be applied only in ways that are consistent with those mainstream fiduciary duties.
SRI, which refers to a spectrum of investment strategies that seek to integrate ethical, moral,
sustainability and other non-financial factors into the investment process, generally involves
exclusion and/or divestment, as well as investment guidelines that restrict investments.
AllianceBernstein may accept such guideline restrictions upon client request.
2. Approach to ESG
Our long-standing policy has been to include ESG factors in our extensive fundamental research
and consider them carefully when we believe they are material to our forecasts and investment
decisions. If we determine that these aspects of an issuer’s past, current or anticipated behavior
are material to its future expected returns, we address these concerns in our forecasts, research
reviews, investment decisions and engagement. In addition, we have well-developed proxy
voting policies that incorporate ESG issues and engagement.
3. Commitment to the PRI
In recent years, we have gained greater clarity on how the PRI initiative, based on information
from PRI Advisory Council members and from other signatories, provides a framework for
incorporating ESG factors into investment research and decision-making. Furthermore, our
industry has become, over time, more aware of the importance of ESG factors. We acknowledge
these developments and seek to refine what has been our process in this area.
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After careful consideration, we determined that becoming a PRI signatory would enhance our
current ESG practices and align with our fiduciary duties to our clients as a mainstream
investment manager. Accordingly, we became a signatory, effective November 1, 2011.
In signing the PRI, AllianceBernstein as an investment manager publicly commits to adopt and
implement all six Principles, where consistent with our fiduciary responsibilities, and to make
progress over time on implementation of the Principles.
The six Principles are:
1. We will incorporate ESG issues into investment research and decision-making processes.
AllianceBernstein Examples: ESG issues are included in the research analysis process. In some
cases, external service providers of ESG-related tools are utilized; we have conducted proxy
voting training and will have continued and expanded training for investment professionals to
incorporate ESG issues into investment analysis and decision-making processes across our firm.
2. We will be active owners and incorporate ESG issues into our ownership policies and
practices.
AllianceBernstein Examples: We are active owners through our proxy voting process (for
additional information, please refer to our Statement of Policies and Procedures for Proxy Voting
Manual); we engage issuers on ESG matters in our investment research process (we define
“engagement” as discussions with management about ESG issues when they are, or we believe
they are reasonably likely to become, material).
3. We will seek appropriate disclosure on ESG issues by the entities in which we invest.
AllianceBernstein Examples: Generally, we support transparency regarding ESG issues when we
conclude the disclosure is reasonable. Similarly, in proxy voting, we will support shareholder
initiatives and resolutions promoting ESG disclosure when we conclude the disclosure is
reasonable.
4. We will promote acceptance and implementation of the Principles within the investment
industry.
AllianceBernstein Examples: By signing the PRI, we have taken an important first step in
promoting acceptance and implementation of the six Principles within our industry.
5. We will work together to enhance our effectiveness in implementing the Principles.
AllianceBernstein Examples: We will engage with clients and participate in forums with other
PRI signatories to better understand how the PRI are applied in our respective businesses. As a
PRI signatory, we have access to information, tools and other signatories to help ensure that we
are effective in our endeavors to implement the PRI.
6. We will report on our activities and progress towards implementing the Principles.
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AllianceBernstein Examples: We will respond to the 2012 PRI questionnaire and disclose PRI
scores from the questionnaire in response to inquiries from clients and in requests for proposals;
we will provide examples as requested concerning active ownership activities (voting,
engagement or policy dialogue).
4. RI Committee
Our firm’s RI Committee provides AllianceBernstein stakeholders, including employees, clients,
prospects, consultants and service providers alike, with a resource within our firm on which they
can rely for information regarding our approach to ESG issues and how those issues are
incorporated in different ways by the PRI and SRI. Additionally, the RI Committee is
responsible for assisting AllianceBernstein personnel to further implement our firm’s RI policies
and practices, and, over time, to make progress on implementing all six Principles.
The RI Committee has a diverse membership, including senior representatives from investments,
distribution/sales and legal. The Committee is chaired by Linda Giuliano, Senior Vice President
and Chief Administrative Officer-Equities.
If you have questions or desire additional information about this Policy, we encourage you to
contact the RI Committee at [email protected] or reach out to a Committee
member:
Erin Bigley: SVP-Fixed Income, New York
Alex Chaloff: SVP-Private Client, Los Angeles
Nicholas Davidson: SVP-Value, London
Kathy Fisher: SVP-Private Client, New York
Linda Giuliano: SVP-Equities, New York
Christopher Kotowicz: VP-Growth, Chicago
David Lesser: VP-Legal, New York
Mark Manley: SVP-Legal, New York
Takuji Oya: VP-Growth, Japan
Guy Prochilo: SVP-Institutional Investments, New York
Nitish Sharma: VP-Institutional Investments, Australia
Liz Smith: SVP-Institutional Investments, New York
Chris Toub: SVP-Equities, New York
Willem Van Gijzen: VP-Institutional Investments, Netherlands
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American Funds Insurance Series®
Part B
Statement of Additional Information
May 1, 2013
This document is not a prospectus but should be read in conjunction with the current prospectus
of American Funds Insurance Series (the “Series”) dated May 1, 2013 for the funds listed below.
Except where the context indicates otherwise, all references herein to the “fund” apply to each
of the funds listed below. You may obtain a prospectus from your financial adviser or by writing
to the Series at the following address:
American Funds Insurance Series
Attention: Secretary
333 South Hope Street
Los Angeles, California 90071
213/486-9200
Class 1 and Class 2 shares of:
International Growth and
Global Discovery FundSM
Global Growth FundSM
Income FundSM
Global Small Capitalization Asset Allocation FundSM
Global Balanced FundSM
FundSM
Growth FundSM
Bond FundSM
International FundSM
Corporate Bond
®
FundSM
New World Fund
Blue Chip Income and
Global Bond FundSM
High-Income Bond FundSM
Growth FundSM
Global Growth and Income Mortgage FundSM
SM
Fund
U.S. Government/AAA-Rated
SM
Growth-Income FundSM
Securities Fund
Cash Management FundSM
Class 3 shares of:
Growth Fund
International Fund
Growth-Income Fund
Asset Allocation Fund
High-Income Bond Fund
U.S. Government/AAA-Rated
Securities Fund
Cash Management Fund
Class 4 shares of:
Global Growth Fund
International Growth and
Global Small Capitalization
Income Fund
Fund
Asset Allocation Fund
Growth Fund
Global Balanced Fund
International Fund
Bond Fund
New World Fund
Corporate Bond Fund
Blue Chip Income and
Global Bond Fund
Growth Fund
High-Income Bond Fund
Global Growth and Income
Mortgage Fund
Fund
U.S. Government/ AAA-Rated
Growth-Income Fund
Securities Fund
Cash Management Fund
Table of Contents
Item
Page no.
Certain investment limitations and guidelines........................................................................ 2
Description of certain securities and investment techniques ............................................... 13
Fund policies....................................................................................................................... 33
Management of the series................................................................................................... 35
Execution of portfolio transactions ...................................................................................... 74
Disclosure of portfolio holdings ........................................................................................... 80
Price of shares.................................................................................................................... 82
Taxes and distributions ....................................................................................................... 85
General information ............................................................................................................ 87
Appendix............................................................................................................................. 89
Investment portfolio
Financial statements
American Funds Insurance Series — Page 1
Certain investment limitations and guidelines
The following limitations and guidelines are considered at the time of purchase, under normal
circumstances, and are based on a percentage of each fund’s net assets unless otherwise
noted. This summary is not intended to reflect all of the funds’ investment limitations.
Global Discovery Fund
General
•
The fund seeks to achieve its objective by investing in securities of companies
that can benefit from innovation, exploit new technologies or provide products and
services that meet the demands of an evolving global economy. Current income is
a secondary consideration.
Investing outside the U.S.
•
Although the fund currently expects to invest a majority of its assets in the United
States, it may invest its assets on a global basis. The fund may invest in securities
of issuers domiciled outside the United States, including securities denominated in
currencies other than the U.S. dollar.
Debt securities
•
The fund may not invest in debt securities rated below Ca and CC by Nationally
Recognized Statistical Rating Organizations, or NRSROs, designated by the fund
or in unrated securities determined to be of equivalent quality by the fund’s
investment adviser. The fund currently intends to look to the ratings from Moody’s
Investors Services, Standard & Poor’s Corporation and Fitch Ratings. If rating
agencies differ, securities will be considered to have received the highest of these
ratings, consistent with the fund's investment policies.
Global Growth Fund
General
•
The fund invests primarily in common stocks of companies located around the
world.
Debt securities
•
The fund may invest up to 10% of its assets in straight debt securities (i.e., debt
securities that do not have equity conversion or purchase rights) rated Baa1 or
below and BBB+ or below by NRSROs or in unrated securities that are
determined to be of equivalent quality by the fund’s investment adviser. The fund
currently intends to look to the ratings from Moody’s Investors Services, Standard
& Poor’s Corporation and Fitch Ratings. If rating agencies differ, securities will be
considered to have received the highest of these ratings, consistent with the
fund's investment policies.
American Funds Insurance Series — Page 2
Global Small Capitalization Fund
Equity securities
•
Normally, the fund invests at least 80% of its assets in equity securities of
companies with small market capitalizations, measured at the time of purchase.
However, the fund’s holdings of small capitalization stocks may fall below the 80%
threshold due to subsequent market action. The investment adviser currently
defines "small market capitalization" companies to be companies with market
capitalizations of $4.0 billion or less. The investment adviser has periodically
re-evaluated and adjusted this definition and may continue to do so in the future.
Investing outside the U.S.
•
Under normal conditions, the fund invests a significant portion of its assets outside
the United States, including in emerging and developing countries.
Debt securities
•
The fund may invest up to 10% of its assets in straight debt securities rated Baa1
or below and BBB+ or below by NRSROs, or unrated but determined to be of
equivalent quality by the fund’s investment adviser. The fund currently intends to
look to the ratings from Moody’s Investors Services, Standard & Poor’s
Corporation and Fitch Ratings. If rating agencies differ, securities will be
considered to have received the highest of these ratings, consistent with the
fund's investment policies.
Growth Fund
General
•
The fund invests at least 65% of its assets in common stocks.
Investing outside the U.S.
•
The fund may invest up to 25% of its assets in securities of issuers domiciled
outside the United States.
Debt securities
•
The fund may invest up to 10% of its assets in straight debt securities rated Ba1
or below and BB+ or below by NRSROs, or unrated but determined to be of
equivalent quality by the fund's investment adviser. The fund currently intends to
look to the ratings from Moody’s Investors Services, Standard & Poor’s
Corporation and Fitch Ratings. If rating agencies differ, securities will be
considered to have received the highest of these ratings, consistent with the
fund's investment policies.
American Funds Insurance Series — Page 3
International Fund
General
•
The fund invests at least 65% of its assets in common stocks of companies
domiciled outside the United States.
Debt securities
•
The fund may invest up to 5% of its assets in straight debt securities rated Baa1
or below and BBB+ or below by NRSROs or in unrated securities that are
determined to be of equivalent quality by the fund’s investment adviser. The fund
currently intends to look to the ratings from Moody’s Investors Services, Standard
& Poor’s Corporation and Fitch Ratings. If rating agencies differ, securities will be
considered to have received the highest of these ratings, consistent with the
fund's investment policies.
New World Fund
General
•
The fund invests primarily in stocks of companies with significant exposure to
countries with developing economies and/or markets.
•
The fund invests at least 35% of its assets in equity and debt securities of issuers
primarily based in qualified countries which have developing economies and/or
markets.
Equity securities
•
The fund may invest its assets in equity securities of any company, regardless of
where it is based, if the adviser has determined that a significant portion of its
assets or revenues (generally 20% or more) is attributable to developing
countries.
Debt securities
•
The fund may invest up to 25% of its assets in straight debt securities of issuers
primarily based in qualified countries which have developing economies and/or
markets, or issuers that the fund's investment adviser determines have a
significant portion of their assets or revenues (generally 20% or more) attributable
to developing countries.
•
The fund may invest up to 25% of its assets in straight debt securities rated Ba1
or below and BB+ or below by NRSROs, or unrated but determined to be of
equivalent quality by the fund's investment adviser. The fund currently intends to
look to the ratings from Moody’s Investors Services, Standard & Poor’s
Corporation and Fitch Ratings. If rating agencies differ, securities will be
considered to have received the highest of these ratings, consistent with the
fund's investment policies.
American Funds Insurance Series — Page 4
Blue Chip Income and Growth Fund
General
•
The fund seeks to produce income exceeding the average yield on U.S. stocks
generally (as represented by the average yield on the S&P 500) and to provide an
opportunity for growth of principal consistent with sound common stock investing.
Equity securities
•
The fund primarily invests in common stocks of larger U.S.-based companies
(those with market capitalizations of $4 billion and above).
•
The fund ordinarily invests at least 90% of equity assets in the stock of companies
in business for five or more years (including predecessor companies).
•
The fund ordinarily invests at least 90% of equity assets in the stock of companies
that pay regular dividends.
•
The fund ordinarily invests at least 90% of its equity assets in the stock of
companies whose debt securities are rated at least investment grade.
•
The fund will not invest in private placements of stock of companies.
•
The fund invests, under normal market conditions, at least 90% of its assets in
equity securities.
Investing outside the U.S.
•
The fund may invest up to 10% of assets in common stocks of larger non-U.S.
companies so long as they are listed or traded in the United States.
Global Growth and Income Fund
General
•
The fund seeks to make your investment grow over time and provide you with
current income by investing primarily in stocks of well-established companies
located around the world.
Investing outside the U.S.
•
The fund may invest a majority of its assets outside the United States. For
temporary defensive purposes, the fund may invest principally or entirely in
securities that are denominated in U.S. dollars or whose issuers are domiciled in
the United States. Securities denominated in U.S. dollars include American
Depositary Receipts, certain European Depositary Receipts and Global
Depositary Receipts.
American Funds Insurance Series — Page 5
Debt securities
•
The fund may invest up to 10% of its assets in straight debt securities rated Baa1
or below and BBB+ or below by NRSROs, or unrated but determined to be of
equivalent quality by the fund’s investment adviser. The fund currently intends to
look to the ratings from Moody’s Investors Services, Standard & Poor’s
Corporation and Fitch Ratings. If rating agencies differ, securities will be
considered to have received the highest of these ratings, consistent with the
fund's investment policies.
•
The fund may invest up to 5% of its assets in straight debt securities rated Ba1 or
below and BB+ or below by NRSROs, or unrated but determined to be of
equivalent quality by the fund's investment adviser.
Growth-Income Fund
General
•
The fund invests primarily in common stocks or other securities that demonstrate
the potential for appreciation and/or dividends.
Investing outside the U.S.
•
The fund may invest up to 15% of its assets in securities of issuers domiciled
outside the United States.
Debt securities
•
The fund may invest up to 5% of its assets in straight debt securities rated Ba1 or
below and BB+ or below by NRSROs, or unrated but determined to be of
equivalent quality by the fund's investment adviser. The fund currently intends to
look to the ratings from Moody’s Investors Services, Standard & Poor’s
Corporation and Fitch Ratings. If rating agencies differ, securities will be
considered to have received the highest of these ratings, consistent with the
fund's investment policies.
International Growth and Income Fund
General
•
The fund may invest up to 20% of its assets in securities of issuers domiciled in
the United States. However, the fund has no current intention of investing more
than 10% of its assets in securities of issuers domiciled in the United States
(excluding cash equivalents of U.S. issuers) and issuers whose securities are
primarily listed on U.S. securities exchanges. The fund currently intends to invest
at least 90% of its assets in securities of issuers domiciled outside the United
States whose securities are primarily listed on exchanges outside the United
States, and cash and cash equivalents (including cash equivalents issued by U.S.
issuers). The fund may invest a portion of its assets in companies located in
emerging and developing countries.
American Funds Insurance Series — Page 6
Asset Allocation Fund
General
•
Under normal market conditions, the fund generally invests 40% to 80% of its
assets in equity securities; 20% to 50% in debt securities; and 0% to 40% in
money market instruments (including cash).
Debt securities
•
Up to 25% of the fund’s debt assets may be invested in straight debt securities
(i.e., not convertible into equity) rated Ba1 or below and BB+ or below by
NRSROs, or unrated but determined to be of equivalent quality by the fund's
investment adviser. The fund currently intends to look to the ratings from Moody’s
Investors Services, Standard & Poor’s Corporation and Fitch Ratings. If rating
agencies differ, securities will be considered to have received the highest of these
ratings, consistent with the fund's investment policies.
Investing outside the U.S.
•
The fund may invest up to 15% of its assets in equity securities of issuers
domiciled outside the United States.
•
The fund may invest up to 5% of its assets in debt securities of issuers domiciled
outside the United States.
Global Balanced Fund
Equity securities
•
The fund invests at least 45% of the value of its assets in equity investments.
Investing outside the U.S.
•
The fund invests a portion of its assets in issuers domiciled outside of the United
States, including issuers domiciled in emerging and developing countries.
Debt securities
•
The fund invests at least 30% of the value of its assets in debt securities
(including money market instruments). These will consist of investment-grade
securities (rated Baa3 or better or BBB– or better by NRSROs or unrated but
determined to be of equivalent quality by the fund’s investment adviser). The fund
currently intends to look to the ratings from Moody’s Investors Services, Standard
& Poor’s Corporation and Fitch Ratings. If rating agencies differ, securities will be
considered to have received the highest of these ratings, consistent with the
fund's investment policies.
•
The fund may also invest up to 5% of its assets in lower quality, higher yielding
debt securities including those convertible into common stocks (rated Ba1 or
below and BB+ or below by NRSROs or unrated but determined to be of
equivalent quality by the fund’s investment adviser).
American Funds Insurance Series — Page 7
Bond Fund
General
•
The fund invests at least 80% of its assets in bonds. The fund may not purchase
equity securities directly, other than certain convertible securities. The fund may
retain up to 5% of its assets in common stock, warrants and rights received in
conjunction with, or in exchange for, debt securities.
•
The fund may invest up to 20% of its assets in preferred securities, including
convertible and nonconvertible preferred securities.
Debt securities
•
For purposes of the above limits, bonds include any debt instrument including
corporate bank loans and cash equivalents, and include nonvoting, nonconvertible
preferred securities.
•
The fund invests at least 35% of its assets in debt securities (including cash and
cash equivalents) rated A3 or better or A- or better by NRSROs or in unrated
securities that are determined to be of equivalent quality by the fund’s investment
adviser. The fund currently intends to look to the ratings from Moody’s Investors
Services, Standard & Poor’s Corporation and Fitch Ratings. If rating agencies
differ, securities will be considered to have received the highest of these ratings,
consistent with the fund's investment policies.
•
The fund invests at least 65% of its assets in debt securities (including cash and
cash equivalents) that are rated investment grade (rated Baa3 or better or BBBor better by NRSROs or in unrated securities that are determined to be of
equivalent quality by the fund’s investment adviser).
•
The fund may invest up to 35% of its assets in debt securities rated Ba1 or below
and BB+ or below by NRSROs, or unrated but determined to be of equivalent
quality by the fund's investment adviser.
Investing outside the U.S.
•
The fund may invest up to 20% of its assets in securities denominated in
currencies other than the U.S. dollar. The fund may also invest in bonds of issuers
domiciled outside the U.S. which are denominated in U.S. dollars.
American Funds Insurance Series — Page 8
Corporate Bond Fund
Debt securities
•
The fund will invest at least 80% of its assets in corporate debt securities. For
purposes of this limit, corporate debt securities include any corporate debt
instrument, including, but not limited to, bank loans, covered bonds, hybrids
(securities with equity and debt characteristics), certain preferred securities and
commercial paper and other cash equivalents.
•
The fund will invest at least 90% of its assets in debt securities, including money
market instruments, cash and cash equivalents, rated Baa3 or better or BBB- or
better by NRSROs designated by the fund’s investment adviser or unrated but
determined to be of equivalent quality by the fund’s investment adviser at time of
purchase. The fund currently intends to look to the ratings from Moody’s Investors
Services, Standard & Poor’s Corporation and Fitch Ratings. If rating agencies
differ, securities will be considered to have received the highest of these ratings,
consistent with the fund’s investment policies. The fund may invest in debt
securities guaranteed or sponsored by the U.S. government without regard to the
quality rating assigned to the U.S. government by a NRSRO.
Global Bond Fund
Debt securities
•
The fund invests at least 80% of its assets in bonds (for purposes of this limit,
bonds include any debt instrument including corporate bank loans and cash
equivalents and may include certain preferred securities).
•
Normally, the fund invests substantially in debt securities rated investment grade
(rated Baa3 or better or BBB- or better by NRSROs, or in unrated securities that
are determined to be of equivalent quality by the fund’s investment adviser). The
fund currently intends to look to the ratings from Moody’s Investors Services,
Standard & Poor’s Corporation and Fitch Ratings. If rating agencies differ,
securities will be considered to have received the highest of these ratings,
consistent with the fund's investment policies.
•
The fund may invest up to 35% of its assets in debt securities rated Ba1 or below
and BB+ or below by NRSROs, or unrated but determined to be of equivalent
quality by the fund's investment adviser.
American Funds Insurance Series — Page 9
High-Income Bond Fund
Debt securities
•
The fund invests at least 80% of its assets in bonds. For purposes of this limit,
bonds include any debt instrument including corporate bank loans and cash
equivalents, and may include certain preferred securities.
•
The fund invests at least 65% of its assets in debt securities rated Ba1 or below or
BB+ or below by NRSROs or in unrated securities that are determined to be of
equivalent quality by the fund’s investment adviser. The fund currently intends to
look to the ratings from Moody’s Investors Services, Standard & Poor’s
Corporation and Fitch Ratings. If rating agencies differ, securities will be
considered to have received the lowest of these ratings, consistent with the fund's
investment policies.
Equity and other securities
•
The fund may invest up to 20% of its assets in equity securities, such as common
and preferred stocks and convertible securities.
Maturity
•
The fund generally invests in securities with maturities in excess of three years.
Investing outside the U.S.
•
The fund may invest up to 25% of its assets in securities of issuers domiciled
outside the United States.
Mortgage Fund
General
•
Under normal market conditions, the fund invests at least 80% of its assets in
mortgage-related securities, including, but not limited to, residential mortgagebacked securities and commercial mortgage-backed securities, federal agency
debentures, contracts for future delivery of mortgage-related securities (such as to
be announced (TBA) contracts and mortgage dollar rolls), and other securities
collateralized by mortgage loans. Compliance with certain asset diversification
requirements in the Internal Revenue Code applicable to insurance company
separate accounts and their underlying funding vehicles may, at times, restrict the
fund’s ability to invest at least 80% of its assets in mortgage-related securities.
•
The fund invests at least 80% of its assets in mortgage-related securities that are
sponsored or guaranteed by the U.S. government, including securities issued by
government sponsored entities and federal agencies and instrumentalities that are
not backed by the full faith and credit of the U.S. government, and nongovernment mortgage-related securities that are rated in the Aaa or AAA category
by NRSROs or unrated but determined to be of equivalent quality by the fund’s
investment adviser. The fund currently intends to look to the ratings from Moody’s
Investors Services, Standard & Poor’s Corporation and Fitch Ratings. If rating
agencies differ, securities will be considered to have received the highest of these
ratings, consistent with the fund's investment policies.
American Funds Insurance Series — Page 10
•
The fund may invest up to 5% of its assets in securities that are in the AA, Aa or A
ratings category by NRSROs or unrated but determined to be of equivalent quality
by the fund’s investment adviser.
•
The fund may invest up to 10% of its assets in securities of issuers domiciled
outside the United States; however, all such securities will be U.S. dollar
denominated.
U.S. Government/AAA-Rated Securities Fund
General
•
The fund invests at least 80% of its assets in securities guaranteed by the "full
faith and credit" pledge of the U.S. government or debt securities that are rated
Aaa or AAA by NRSROs or unrated but determined to be of equivalent quality by
the fund’s investment adviser. The fund currently intends to look to the ratings
from Moody’s Investors Services, Standard & Poor’s Corporation and Fitch
Ratings. If rating agencies differ, securities will be considered to have received the
highest of these ratings, consistent with the fund's investment policies.
Cash Management Fund
General
•
The fund invests in high quality money market instruments rated in the two
highest quality short-term categories by at least two NRSROs.
Maturity
•
The fund may only purchase instruments having remaining maturities of 397 days
or less.
•
The fund maintains a dollar-weighted average portfolio maturity of 60 days or less.
•
The fund maintains the dollar-weighted average life of its portfolio at 120 days or
less.
•
For purposes of determining the weighted average maturity (but not the weighted
average life) of a fund’s portfolio, certain variable and floating rate obligations and
put securities which may otherwise have stated or final maturities in excess of 397
days will be deemed to have remaining maturities equal to the period remaining
until each next readjustment of the interest rate or until the fund is entitled to
repayment or repurchase of the security.
American Funds Insurance Series — Page 11
Liquidity
•
The fund may not acquire illiquid securities (i.e., securities that cannot be sold or
disposed of in the ordinary course of business within seven days at approximately
the value ascribed to them by the fund) if, immediately after the acquisition, the
fund would have invested more than 5% of its total assets in illiquid securities.
•
The fund holds at least 10% of its total assets in daily liquid assets (i.e. cash,
direct obligations of the U.S. Government or securities that mature or are subject
to a demand feature that is exercisable or payable within one business day).
•
The fund holds at least 30% of its total assets in weekly liquid assets (i.e. cash,
direct obligations of the U.S. Government, government securities issued by an
instrumentality of the U.S. Government that are issued at a discount and have a
remaining maturity of 60 days or less, or securities that mature or are subject to a
demand feature that is exercisable or payable within five business days).
American Funds Insurance Series — Page 12
Description of certain securities and investment techniques
The descriptions below are intended to supplement the material in the prospectus under
“Investment objectives, strategies and risks.” With respect to all funds, portfolio changes will be
made without regard to the length of time a particular investment may have been held.
Equity securities — Certain funds may invest in equity securities. Equity securities represent
an ownership position in a company. Equity securities held by the fund typically consist of
common stocks. The prices of equity securities fluctuate based on, among other things, events
specific to their issuers and market, economic and other conditions. For example, prices of
these securities can be affected by financial contracts held by the issuer or third parties (such as
derivatives) relating to the security or other assets or indices. Holders of equity securities are
not creditors of the issuer. As such, if an issuer liquidates, holders of equity securities are
entitled to their pro rata share of the issuer’s assets, if any, after creditors (including the holders
of fixed income securities and senior equity securities) are paid.
There may be little trading in the secondary market for particular equity securities, which may
adversely affect the fund’s ability to value accurately or dispose of such equity securities.
Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may
decrease the value and/or liquidity of equity securities.
The growth-oriented, equity-type securities generally purchased by certain of the funds may
involve large price swings and potential for loss. To the extent the fund invests in incomeoriented, equity-type securities, income provided by the fund may be reduced by changes in the
dividend policies of, and the capital resources available at, the companies in which the fund
invests.
Debt securities — Debt securities, also known as “fixed-income securities,” are used by
issuers to borrow money. Bonds, notes, debentures, asset-backed securities (including those
backed by mortgages), and loan participations and assignments are common types of debt
securities. Generally, issuers pay investors periodic interest and repay the amount borrowed
either periodically during the life of the security and/or at maturity. Some debt securities, such as
zero coupon bonds, do not pay current interest, but are purchased at a discount from their face
values and their values accrete over time to face value at maturity. Some debt securities bear
interest at rates that are not fixed, but that vary with changes in specified market rates or
indices. The market prices of debt securities fluctuate depending on such factors as interest
rates, credit quality and maturity. In general, market prices of debt securities decline when
interest rates rise and increase when interest rates fall. These fluctuations will generally be
greater for longer-term debt securities than for shorter-term debt securities. Prices of these
securities can also be affected by financial contracts held by the issuer or third parties (such as
derivatives) relating to the security or other assets or indices.
Lower rated debt securities, rated Ba1/BB+ or below by Nationally Recognized Statistical Rating
Organizations, are described by the rating agencies as speculative and involve greater risk of
default or price changes due to changes in the issuer’s creditworthiness than higher rated debt
securities, or they may already be in default. Such securities are sometimes referred to as “junk
bonds” or high yield bonds. The market prices of these securities may fluctuate more than
higher quality securities and may decline significantly in periods of general economic difficulty. It
may be more difficult to dispose of, and to determine the value of, lower rated debt securities.
Investment grade bonds in the ratings categories A or Baa/BBB also may be more susceptible
to changes in market or economic conditions than bonds rated in the highest rating categories.
American Funds Insurance Series — Page 13
Certain additional risk factors relating to debt securities are discussed below:
Sensitivity to interest rate and economic changes — Debt securities may be
sensitive to economic changes, political and corporate developments, and interest rate
changes. In addition, during an economic downturn or substantial period of rising interest
rates, issuers that are highly leveraged may experience increased financial stress that
could adversely affect their ability to meet projected business goals, to obtain additional
financing and to service their principal and interest payment obligations. Periods of
economic change and uncertainty also can be expected to result in increased volatility of
market prices and yields of certain debt securities. For example, prices of these
securities can be affected by financial contracts held by the issuer or third parties (such
as derivatives) relating to the security or other assets or indices. Changes in the value of
the fund’s portfolio securities will not necessarily affect the income derived from these
securities, but may affect the fund’s net asset value.
Payment expectations — Debt securities may contain redemption or call provisions. If
an issuer exercises these provisions in a lower interest rate market, the funds would
have to replace the security with a lower yielding security, resulting in decreased income
to investors. If the issuer of a debt security defaults on its obligations to pay interest or
principal or is the subject of bankruptcy proceedings, the funds may incur losses or
expenses in seeking recovery of amounts owed to them.
Liquidity and valuation — There may be little trading in the secondary market for
particular debt securities, which may affect adversely the funds’ ability to value
accurately or dispose of such debt securities. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the value and/or liquidity
of debt securities.
The investment adviser attempts to reduce the risks described above through diversification of
the fund’s portfolios and by credit analysis of each issuer, as well as by monitoring broad
economic trends and corporate and legislative developments, but there can be no assurance
that it will be successful in doing so.
Credit ratings for debt securities provided by rating agencies reflect an evaluation of the safety
of principal and interest payments, not market value risk. The rating of an issuer is a rating
agency’s view of past and future potential developments related to the issuer and may not
necessarily reflect actual outcomes. There can be a lag between the time of developments
relating to an issuer and the time a rating is assigned and updated. The investment adviser
considers these ratings of securities as one of many criteria in making its investment decisions.
Bond rating agencies may assign modifiers (such as +/–) to ratings categories to signify the
relative position of a credit within the rating category. Investment policies that are based on
ratings categories should be read to include any security within that category, without giving
consideration to the modifier except where otherwise provided. See the Appendix to this
statement of additional information for more information about credit ratings.
American Funds Insurance Series — Page 14
Securities with equity and debt characteristics — Certain funds may invest in securities that
have a combination of equity and debt characteristics. These securities may at times behave
more like equity than debt or vice versa. Some types of convertible bonds, preferred stocks or
other preferred securities automatically convert into common stocks or other securities at a
stated conversion ratio and some may be subject to redemption at the option of the issuer at a
predetermined price. These securities ordinarily do not have voting rights and, prior to
conversion, may pay a fixed rate of interest or a dividend. They may have preference over
common stocks with respect to dividends and any residual assets after payment to creditors
should the issuer be dissolved. Because convertible securities have both debt and equity
characteristics, their values vary in response to many factors, including the values of the
securities into which they are convertible, general market and economic conditions, and
convertible market valuations, as well as changes in interest rates, credit spreads and the credit
quality of the issuer.
These securities may include hybrid securities, which also have equity and debt characteristics.
Such securities are normally at the bottom of an issuer’s debt capital structure. As such, they
may be more sensitive to economic changes than more senior debt securities. These securities
may also be viewed as more equity-like by the market when the issuer or its parent company
experience financial problems.
The prices and yields of nonconvertible preferred securities or preferred stocks generally move
with changes in interest rates and the issuer’s credit quality, similar to the factors affecting debt
securities. Nonconvertible preferred securities will be treated as debt for fund investment limit
purposes.
Investing in smaller capitalization stocks — Certain funds may invest in the stocks of smaller
capitalization companies (typically companies with market capitalizations of less than $4.0
billion at the time of purchase). The investment adviser believes that the issuers of smaller
capitalization stocks often provide attractive investment opportunities. However, investing in
smaller capitalization stocks can involve greater risk than is customarily associated with
investing in stocks of larger, more established companies. For example, smaller companies
often have limited product lines, limited operating histories, limited markets or financial
resources, may be dependent on one or a few key persons for management and can be more
susceptible to losses. Also, their securities may be thinly traded (and therefore have to be sold
at a discount from current prices or sold in small lots over an extended period of time), may be
followed by fewer investment research analysts and may be subject to wider price swings, thus
creating a greater chance of loss than securities of larger capitalization companies. Because
Global Small Capitalization Fund in particular emphasizes the stocks of issuers with smaller
market capitalizations (by U.S. standards), it can be expected to have more difficulty obtaining
information about the issuers or valuing or disposing of its securities than if it were to
concentrate on larger capitalization stocks. The funds determine relative market capitalizations
using U.S. standards. Accordingly, the funds' investments in certain countries outside the United
States may have larger market capitalizations relative to other companies within those
countries.
Investing in private companies — Certain funds may invest in companies that have not
publicly offered their securities. Investing in private companies can involve greater risks than
those associated with investing in publicly traded companies. For example, the securities of a
private company may be subject to the risk that market conditions, developments within the
company, investor perception, or regulatory decisions may delay or prevent the company from
ultimately offering its securities to the public. Furthermore, these investments are generally
American Funds Insurance Series — Page 15
considered to be illiquid until a company’s public offering and are often subject to additional
contractual restrictions on resale that would prevent the fund from selling their company shares
for a period of time following the public offering.
Investments in private companies can offer the fund significant growth opportunities at attractive
prices. However these investments can pose greater risk, and, consequently, there is no
guarantee that positive results can be achieved in the future.
Investing outside the U.S. — Certain funds may invest in securities of issuers domiciled
outside the United States and which may be denominated in currencies other than the U.S.
dollar. Investing outside the United States may involve additional risks caused by, among other
things, currency controls and fluctuating currency values; different accounting, auditing, financial
reporting, disclosure, and regulatory and legal standards and practices; changing local, regional
and global economic, political and social conditions; expropriation; changes in tax policy; greater
market volatility; different securities market structures; higher transaction costs; and various
administrative difficulties, such as delays in clearing and settling portfolio transactions or in
receiving payment of dividends.
The risks described above may be heightened in connection with investments in emerging
markets. Although there is no universally accepted definition, the investment adviser generally
considers emerging markets to refer to the securities markets of countries in the earlier stages
of their industrialization cycle with a low per capita gross domestic product (“GDP”) and a low
market capitalization to GDP ratio relative to those in the United States and the European
Union. Historically, emerging markets have been more volatile than the markets of developed
countries. In particular, developing countries may have less stable governments, may present
the risks of nationalization of businesses, may have restrictions on foreign ownership and
prohibitions on the repatriation of assets and may have less protection of property rights than
more developed countries. The economies of developing countries may be reliant on only a few
industries, may be highly vulnerable to changes in local or global trade conditions and may
suffer from high and volatile debt burdens or inflation rates. Local securities markets may trade
a small number of securities and may be unable to respond effectively to increases in trading
volume, potentially making prompt liquidation of holdings difficult or impossible at times.
Additional costs could be incurred in connection with the fund’s investment activities outside the
United States. Brokerage commissions may be higher outside the United States, and the fund
will bear certain expenses in connection with their currency transactions. Furthermore,
increased custodian costs may be associated with maintaining assets in certain jurisdictions.
In determining the domicile of an issuer, the fund’s investment adviser will consider the domicile
determination of a leading provider of global indexes, such as Morgan Stanley Capital
International, and may also take into account such factors as where the company’s securities
are listed and where the company is legally organized, maintains principal corporate offices
and/or conducts their principal operations.
In addition, in determining whether an issuer is located outside the United States for Global
Balanced Fund, the investment adviser may also consider factors such as where the issuer’s
assets are located and/or where it derives its revenues and/or profits.
Mortgage Fund, U.S. Government/AAA-Rated Securities Fund and Cash Management Fund
may purchase obligations of corporations or governmental entities outside the United States,
American Funds Insurance Series — Page 16
provided they are U.S. dollar-denominated and highly liquid. Accordingly, while the risks
mentioned above are still present, they are present to a lesser extent.
Investing in emerging market and developing countries — Certain countries in which the
fund may invest have developing economies and/or markets. These countries may have less
developed legal and accounting systems and more unstable governments than those in
developed countries. Many of these countries are also known as emerging market countries.
Certain risk factors related to developing and emerging market countries are discussed below:
Currency fluctuations — Certain funds may invest in securities valued in currencies
other than the U.S. dollar. Certain developing and emerging market countries’ currencies
have experienced and may in the future experience significant declines against the U.S.
dollar. For example, if the U.S. dollar appreciates against foreign currencies, the value of
the funds’ securities holdings would generally depreciate and vice versa. Consistent with
their investment objectives, the funds can engage in certain currency transactions to
hedge against currency fluctuations. See “Currency Transactions” below.
Government regulation — The political, economic and social structures of certain
developing and emerging market countries may be more volatile and less developed
than those in the United States. Certain developing and emerging market countries lack
uniform accounting, auditing and financial reporting standards, have less governmental
supervision of financial markets than in the United States, and do not honor legal rights
enjoyed in the United States. Certain governments may be more unstable and present
greater risks of nationalization or restrictions on foreign ownership of local companies.
Repatriation of investment income, capital and the proceeds of sales by foreign investors
may require governmental registration and/or approval in some developing and
emerging market countries. While the fund will only invest in markets where these
restrictions are considered acceptable by the fund’s investment adviser, a country could
impose new or additional repatriation restrictions after the funds' investment. If this
happened, the fund’s response might include, among other things, applying to the
appropriate authorities for a waiver of the restrictions or engaging in transactions in other
markets designed to offset the risks of decline in that country. Such restrictions will be
considered in relation to the fund’s liquidity needs and all other positive and negative
factors. Further, some attractive equity securities may not be available to the fund
because foreign shareholders hold the maximum amount legally permissible.
While government involvement in the private sector varies in degree among developing
and emerging market countries, such involvement may in some cases include
government ownership of companies in certain sectors, wage and price controls or
imposition of trade barriers and other protectionist measures. With respect to any
developing country, there is no guarantee that some future economic or political crisis
will not lead to price controls, forced mergers of companies, expropriation or creation of
government monopolies to the possible detriment of the fund’s investments.
Less developed and emerging market securities markets — Developing and
emerging market countries may have less well-developed securities markets and
exchanges. The securities markets have lower trading volumes than the securities
markets of more developed countries. These markets may be unable to respond
effectively to increases in trading volume. Consequently, these markets may be
substantially less liquid than those of more developed countries and the securities of
American Funds Insurance Series — Page 17
issuers located in these markets may have limited marketability. These factors may
make prompt liquidation of substantial portfolio holdings difficult or impossible at times.
Settlement risks — Settlement systems in developing and emerging market countries
are generally less well organized than in developed markets. Supervisory authorities
may also be unable to apply standards comparable with those in developed markets.
Thus, there may be risks that settlement may be delayed and that cash or securities
belonging to the funds may be in jeopardy because of failures of or defects in the
systems. In particular, market practice may require that payment be made before receipt
of the security being purchased or that delivery of a security be made before payment is
received. In such cases, default by a broker or bank (the “counterparty”) through whom
the transaction is effected might cause the funds to suffer a loss. The funds will seek,
where possible, to use counterparties whose financial status is such that this risk is
reduced. However, there can be no certainty that the fund will be successful in
eliminating this risk, particularly as counterparties operating in developing countries
frequently lack the substance or financial resources of those in developed and emerging
market countries. There may also be a danger that, because of uncertainties in the
operation of settlement systems in individual markets, competing claims may arise with
respect to securities held by or to be transferred to the fund.
Investor information — The fund may encounter problems assessing investment
opportunities in certain developing and emerging market securities markets in light of
limitations on available information and different accounting, auditing and financial
reporting standards. In such circumstances, the investment adviser will seek alternative
sources of information, and to the extent the investment adviser is not satisfied with the
sufficiency of the information obtained with respect to a particular market or security, the
fund will not invest in such market or security.
Taxation — Taxation of dividends and capital gains received by non-residents varies
among developing and emerging market countries and, in some cases, is comparatively
high. In addition, developing and emerging market countries typically have less welldefined tax laws and procedures and such laws may permit retroactive taxation so that
the fund could in the future become subject to local tax liability that they had not
reasonably anticipated in conducting their investment activities or valuing their assets.
Litigation — The fund and its shareholders may encounter substantial difficulties in
obtaining and enforcing judgments against resident individuals and companies domiciled
outside the United States.
Fraudulent securities — Securities purchased by the fund may subsequently be found
to be fraudulent or counterfeit, resulting in a loss to the fund.
Currency transactions — Certain funds may enter into currency transactions to provide for the
purchase or sale of a currency needed to purchase or sell a security denominated in that
currency (often referred to as a spot or cover transaction). Blue Chip Income and Growth Fund
and Growth-Income Fund currently intend to engage in currency transactions for these
purposes only.
American Funds Insurance Series — Page 18
Certain funds may also enter into forward currency contracts to protect against changes in
currency exchange rates. A forward currency contract is an obligation to purchase or sell a
specific currency at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract. Although forward
contracts entered into by the fund will typically involve the purchase or sale of a currency
against the U.S. dollar, the fund also may cross hedge and purchase or sell one currency
against another currency (other than the U.S. dollar). The funds, other than Bond Fund, Global
Balanced Fund, Global Bond Fund and High-Income Bond Fund, have no current intention to
cross hedge one currency against another currency (other than the U.S. dollar).
The fund will not generally attempt to protect against all potential changes in exchange rates
and the use of forward contracts does not eliminate the risk of fluctuations in the prices of the
underlying securities. If the value of the underlying securities declines or the amount of the
fund’s commitment increases because of changes in exchange rates, the fund may need to
provide additional cash or securities to satisfy its commitment under the forward contract. The
fund is also subject to the risk that it may be delayed or prevented from obtaining payments
owed to it under the forward contract as a result of the insolvency or bankruptcy of the
counterparty with which it entered into the forward contract or the failure of the counterparty to
comply with the terms of the contract.
While entering into forward currency transactions could minimize the risk of loss due to a
decline in the value of the hedged currency, it could also limit any potential gain that may result
from an increase in the value of the currency. Entering into forward currency transactions may
change the fund’s exposure to currency exchange rates and could result in losses to the fund if
currencies do not perform as expected by the fund’s investment adviser. For example, if the
fund’s investment adviser increases a fund’s exposure to a foreign currency using forward
contracts and that foreign currency’s value declines, the fund may incur a loss. The fund will
segregate liquid assets that will be marked to market daily to meet their forward contract
commitments to the extent required by the U.S. Securities and Exchange Commission.
Forward currency transactions also may affect the character and timing of income, gain, or loss
recognized by the fund for U.S. tax purposes. The use of forward currency contracts could result
in the application of the mark-to-market provisions of the Internal Revenue Code and may cause
an increase (or decrease) in the amount of taxable dividends paid by the fund.
Bond Fund, Global Balanced Fund, Global Bond Fund and High-Income Bond Fund may also
enter into exchange-traded futures contracts relating to foreign currencies in connection with
investments in securities of foreign issuers in anticipation of, or to protect against, fluctuations in
exchange rates. An exchange-traded futures contract relating to foreign currency is similar to a
forward foreign currency contract but has a standardized size and exchange date.
In connection with these futures transactions, the Series has filed a notice of eligibility with the
Commodity Futures Trading Commission (“CFTC”) that exempts the Series from CFTC
registration as a “commodity pool operator” as defined under the Commodity Exchange Act.
Pursuant to this notice, these funds will observe certain CFTC guidelines with respect to its
futures transactions that, among other things, limit initial margin deposits in connection with the
use of futures contracts and related options for purposes other than “hedging” (as defined by
CFTC rules) up to 5% of a fund's net assets.
American Funds Insurance Series — Page 19
Bond Fund, Global Balanced Fund, Global Bond Fund and High-Income Bond Fund may
attempt to accomplish objectives similar to those involved in their use of currency contracts by
purchasing put or call options on currencies. A put option gives a fund, as purchaser, the right
(but not the obligation) to sell a specified amount of currency at the exercise price until the
expiration of the option. A call option gives a fund, as purchaser, the right (but not the obligation)
to purchase a specified amount of currency at the exercise price until its expiration. A fund might
purchase a currency put option, for example, to protect itself during the contract period against a
decline in the U.S. dollar value of a currency in which they hold or anticipate holding securities.
If the currency's value should decline against the U.S. dollar, the loss in currency value should
be offset, in whole or in part, by an increase in the value of the put. If the value of the currency
instead should rise against the U.S. dollar, any gain to the fund would be reduced by the
premium it had paid for the put option. A currency call option might be purchased, for example,
in anticipation of, or to protect against, a rise in the value against the U.S. dollar of a currency in
which the fund anticipates purchasing securities.
Currency options may be either listed on an exchange or traded over-the-counter (“OTC
options”). Listed options are third-party contracts (i.e., performance of the obligations of the
purchaser and seller is guaranteed by the exchange or clearing corporation) and have
standardized strike (exercise) prices and expiration dates. OTC options are two-party contracts
with negotiated strike prices and expiration dates. Bond Fund, Global Balanced Fund, Global
Bond Fund and High-Income Bond Fund will not purchase an OTC option unless the investment
adviser believes that daily valuations for such options are readily obtainable. OTC options differ
from exchange-traded options in that OTC options are transacted with dealers directly and not
through a clearing corporation which guarantees performance. Consequently, there is a risk of
non-performance by the dealer. Since no exchange is involved, OTC options are valued on the
basis of a quote provided by the dealer. In the case of OTC options, there can be no assurance
that a liquid secondary market will exist for any particular option at any specific time.
Forward commitment, when issued and delayed delivery transactions — Certain funds
may enter into commitments to purchase or sell securities at a future date. When a fund agrees
to purchase such securities, it assumes the risk of any decline in value of the security from the
date of the agreement. If the other party to such a transaction fails to deliver or pay for the
securities, the fund could miss a favorable price or yield opportunity, or could experience a loss.
Certain funds may also enter into roll transactions, such as a mortgage dollar roll where the fund
sells mortgage-backed securities for delivery in the current month and simultaneously contracts
to repurchase substantially similar (same type, coupon, and maturity) securities on a specified
future date, at a pre-determined price. During the period between the sale and repurchase (the
“roll period”), the fund forgoes principal and interest paid on the mortgage-backed securities.
The fund is compensated by the difference between the current sales price and the lower
forward price for the future purchase (often referred to as the “drop”), if any, as well as by the
interest earned on the cash proceeds of the initial sale. The fund could suffer a loss if the
contracting party fails to perform the future transaction and the fund is therefore unable to buy
back the mortgage-backed securities it initially sold. The fund also takes the risk that the
mortgage-backed securities that it repurchases at a later date will have less favorable market
characteristics than the securities originally sold (e.g., greater prepayment risk). These
transactions are accounted for as purchase and sale transactions, which may increase the
fund’s portfolio turnover rate.
With to be announced (TBA) transactions, the particular securities (i.e., specified mortgage
pools) to be delivered or received are not identified at the trade date, but are “to be announced”
American Funds Insurance Series — Page 20
at a later settlement date. However, securities to be delivered must meet specified criteria,
including face value, coupon rate and maturity, and must be within industry-accepted “good
delivery” standards.
The fund will not use any of these transactions for the purpose of leveraging and will segregate
liquid assets that will be marked to market daily in an amount sufficient to meet their payment
obligations in these transactions. Although these transactions will not be entered into for
leveraging purposes, to the extent the fund’s aggregate commitments in connection with these
transactions exceed its segregated assets, the fund temporarily could be in a leveraged position
(because it may have an amount greater than its net assets subject to market risk). Should
market values of the fund’s portfolio securities decline while the fund is in a leveraged position,
greater depreciation of its net assets would likely occur than if it were not in such a position. The
fund will not borrow money to settle these transactions and, therefore, will liquidate other
portfolio securities in advance of settlement if necessary to generate additional cash to meet
their obligations. After a transaction is entered into, the fund may still dispose of or renegotiate
the transaction. Additionally, prior to receiving delivery of securities as part of a transaction, the
fund may sell such securities.
Obligations backed by the “full faith and credit” of the U.S. government —
U.S. government obligations include the following types of securities:
U.S. Treasury securities — U.S. Treasury securities include direct obligations of the
U.S. Treasury, such as Treasury bills, notes and bonds. For these securities, the
payment of principal and interest is unconditionally guaranteed by the U.S. government,
and thus they are of high credit quality. Such securities are subject to variations in
market value due to fluctuations in interest rates, but, if held to maturity, will be paid in
full.
Federal agency securities — The securities of certain U.S. government agencies and
government-sponsored entities are guaranteed as to the timely payment of principal and
interest by the full faith and credit of the U.S. government. Such agencies and entities
include The Federal Financing Bank (FFB), the Government National Mortgage
Association (Ginnie Mae), the Veterans Administration (VA), the Federal Housing
Administration (FHA), the Export-Import Bank (Exim Bank), the Overseas Private
Investment Corporation (OPIC), the Commodity Credit Corporation (CCC) and the Small
Business Administration (SBA).
Other federal agency obligations — Additional federal agency securities are neither direct
obligations of, nor guaranteed by, the U.S. government. These obligations include securities
issued by certain U.S. government agencies and government-sponsored entities. However, they
generally involve some form of federal sponsorship: some operate under a government charter;
some are backed by specific types of collateral; some are supported by the issuer’s right to
borrow from the Treasury; and others are supported only by the credit of the issuing government
agency or entity. These agencies and entities include, but are not limited to: Federal Home Loan
Bank, Federal Home Loan Mortgage Corporation (Freddie Mac), Federal National Mortgage
Association (Fannie Mae), Tennessee Valley Authority and Federal Farm Credit Bank System.
On September 7, 2008, Freddie Mac and Fannie Mae were placed into conservatorship by their
new regulator, the Federal Housing Finance Agency (“FHFA”). Simultaneously, the U.S.
Treasury made a commitment of indefinite duration to maintain the positive net worth of both
firms. As conservator, the FHFA has the authority to repudiate any contract either firm has
American Funds Insurance Series — Page 21
entered into prior to FHFA’s appointment as conservator (or receiver should either firm go into
default) if the FHFA, in its sole discretion determines that performance of the contract is
burdensome and repudiation would promote the orderly administration of Fannie Mae’s or
Freddie Mac’s affairs. While the FHFA has indicated that it does not intend to repudiate the
guaranty obligations of either entity, doing so could adversely affect holders of their mortgagebacked securities. For example, if a contract were repudiated, the liability for any direct
compensatory damages would accrue to the entity’s conservatorship estate and could only be
satisfied to the extent the estate had available assets. As a result, if interest payments on
Fannie Mae or Freddie Mac mortgage-backed securities held by the fund were reduced
because underlying borrowers failed to make payments or such payments were not advanced
by a loan servicer, the fund’s only recourse might be against the conservatorship estate, which
might not have sufficient assets to offset any shortfalls.
The FHFA, in its capacity as conservator, has the power to transfer or sell any asset or liability
of Fannie Mae or Freddie Mac. The FHFA has indicated it has no current intention to do this;
however, should it do so a holder of a Fannie Mae or Freddie Mac mortgage-backed security
would have to rely on another party for satisfaction of the guaranty obligations and would be
exposed to the credit risk of that party.
Certain rights provided to holders of mortgage-backed securities issued by Fannie Mae or
Freddie Mac under their operative documents may not be enforceable against FHFA, or
enforcement may be delayed during the course of the conservatorship or any future
receivership. For example, the operative documents may provide that upon the occurrence of
an event of default by Fannie Mae or Freddie Mac, holders of a requisite percentage of the
mortgage-backed security may replace the entity as trustee. However, under the Federal
Housing Finance Regulatory Reform Act of 2008, holders may not enforce this right if the event
of default arises solely because a conservator or receiver has been appointed.
Government support for short-term debt instruments — Various agencies and
instrumentalities of the U.S. government and governments of other countries have recently
implemented or announced programs that support short-term debt instruments, including
commercial paper, in an attempt to sustain liquidity in the markets for these securities. Entities
issuing obligations supported by these programs in which the fund invests must be on an
approved list that is monitored on a regular basis. The U.S. government or other entities
implementing these programs may discontinue these programs, change the terms of the
programs or adopt new programs at their discretion.
Pass-through securities —Certain funds may invest in various debt obligations backed by
pools of mortgages or other assets including, but not limited to, loans on single family
residences, home equity loans, mortgages on commercial buildings, credit card receivables and
leases on airplanes or other equipment. Principal and interest payments made on the underlying
asset pools backing these obligations are typically passed through to investors, net of any fees
paid to any insurer or any guarantor of the securities. Pass-through securities may have either
fixed or adjustable coupons. These securities include:
Mortgage-backed securities — These securities may be issued by U.S. government
agencies and government-sponsored entities, such as Ginnie Mae, Fannie Mae and
Freddie Mac, and by private entities. The payment of interest and principal on mortgagebacked obligations issued by U.S. government agencies may be guaranteed by the full
faith and credit of the U.S. government (in the case of Ginnie Mae), or may be
guaranteed by the issuer (in the case of Fannie Mae and Freddie Mac). However, these
American Funds Insurance Series — Page 22
guarantees do not apply to the market prices and yields of these securities, which vary
with changes in interest rates.
Mortgage-backed securities issued by private entities are structured similarly to those
issued by U.S. government agencies. However, these securities and the underlying
mortgages are not guaranteed by any government agencies and the underlying
mortgages are not subject to the same underwriting requirements. These securities
generally are structured with one or more types of credit enhancements such as
insurance or letters of credit issued by private companies. Borrowers on the underlying
mortgages are usually permitted to prepay their underlying mortgages. Prepayments can
alter the effective maturity of these instruments. In addition, delinquencies, losses or
defaults by borrowers can adversely affect the prices and volatility of these securities.
Such delinquencies and losses can be exacerbated by declining or flattening housing
and property values. This, along with other outside pressures, such as bankruptcies and
financial difficulties experienced by mortgage loan originators, decreased investor
demand for mortgage loans and mortgage-related securities and increased investor
demand for yield, can adversely affect the value and liquidity of mortgage-backed
securities.
Adjustable rate mortgage-backed securities — Adjustable rate mortgage-backed
securities (“ARMS”) have interest rates that reset at periodic intervals. Acquiring ARMS
permits the fund to participate in increases in prevailing current interest rates through
periodic adjustments in the coupons of mortgages underlying the pool on which ARMS
are based. Such ARMS generally have higher current yield and lower price fluctuations
than is the case with more traditional fixed income debt securities of comparable rating
and maturity. In addition, when prepayments of principal are made on the underlying
mortgages during periods of rising interest rates, the fund can reinvest the proceeds of
such prepayments at rates higher than those at which they were previously invested.
Mortgages underlying most ARMS, however, have limits on the allowable annual or
lifetime increases that can be made in the interest rate that the mortgagor pays.
Therefore, if current interest rates rise above such limits over the period of the limitation,
the fund, when holding an ARMS, does not benefit from further increases in interest
rates. Moreover, when interest rates are in excess of coupon rates (i.e., the rates being
paid by mortgagors) of the mortgages, ARMS behave more like fixed income securities
and less like adjustable rate securities and are subject to the risks associated with fixed
income securities. In addition, during periods of rising interest rates, increases in the
coupon rate of adjustable rate mortgages generally lag current market interest rates
slightly, thereby creating the potential for capital depreciation on such securities. The
fund’s current practice is to invest primarily in ARMS issued by U.S. government
sponsored entities.
Collateralized mortgage obligations (CMOs) — CMOs are also backed by a pool of
mortgages or mortgage loans, which are divided into two or more separate bond issues.
CMOs issued by U.S. government agencies are backed by agency mortgages.
Payments of principal and interest are passed through to each bond issue at varying
schedules resulting in bonds with different coupons, effective maturities and sensitivities
to interest rates. Some CMOs may be structured in a way that when interest rates
change, the impact of changing prepayment rates on the effective maturities of certain
issues of these securities is magnified. CMOs may be less liquid or may exhibit greater
price volatility than other types of mortgage or asset-backed securities.
American Funds Insurance Series — Page 23
Commercial mortgage-backed securities — These securities are backed by
mortgages on commercial property, such as hotels, office buildings, retail stores,
hospitals and other commercial buildings. These securities may have a lower
prepayment uncertainty than other mortgage-related securities because commercial
mortgage loans generally prohibit or impose penalties on prepayments of principal. In
addition, commercial mortgage-related securities often are structured with some form of
credit enhancement to protect against potential losses on the underlying mortgage
loans. Many of the risks of investing in commercial mortgage-backed securities reflect
the risks of investing in the real estate securing the underlying mortgage loans, including
the effects of local and other economic conditions on real estate markets, the ability of
tenants to make rental payments and the ability of a property to attract and retain
tenants. Commercial mortgage-backed securities may be less liquid or exhibit greater
price volatility than other types of mortgage or asset-backed securities and may be more
difficult to value.
Asset-backed securities — These securities are backed by other assets such as credit
card, automobile or consumer loan receivables, retail installment loans or participations
in pools of leases. Credit support for these securities may be based on the underlying
assets and/or provided through credit enhancements by a third party. The values of
these securities are sensitive to changes in the credit quality of the underlying collateral,
the credit strength of the credit enhancement, changes in interest rates and at times the
financial condition of the issuer. Obligors of the underlying assets also may make
prepayments that can change effective maturities of the asset-backed securities. These
securities may be less liquid and more difficult to value than other securities.
“IOs” and “POs” are issued in portions or tranches with varying maturities and characteristics.
Some tranches may only receive the interest paid on the underlying mortgages (IOs) and others
may only receive the principal payments (POs). The values of IOs and POs are extremely
sensitive to interest rate fluctuations and prepayment rates, and IOs are also subject to the risk
of early repayment of the underlying mortgages that will substantially reduce or eliminate
interest payments.
American Funds Insurance Series — Page 24
Warrants and rights — Certain funds may purchase warrants, which may be issued together
with bonds or preferred stocks. Warrants generally entitle the holder to buy a proportionate
amount of common stock at a specified price, usually higher than the current market price.
Warrants may be issued with an expiration date or in perpetuity. Rights are similar to warrants
except that they normally entitle the holder to purchase common stock at a lower price than the
current market price.
Depositary receipts — ADRs, in registered form, are designed for use in the U.S. securities
markets and are generally dollar denominated. EDRs, in bearer form, are designed for use in
the European securities markets and may be dollar denominated. GDRs, in bearer form,
primarily are designed for use in the European and the U.S. securities markets, and may be
dollar denominated. Depositary receipts represent and may be converted into the underlying
foreign security.
Inflation linked bonds — Certain funds may invest in inflation linked bonds issued by
governments, their agencies or instrumentalities and corporations.
The principal amount of an inflation linked bond is adjusted in response to changes in the level
of an inflation index, such as the Consumer Price Index for Urban Consumers. Repayment of
the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of
U.S. Treasury Inflation-Protected Securities, and therefore the principal amount of such bonds
cannot be reduced below par even during a period of deflation. However, the current market
value of these bonds is not guaranteed and will fluctuate, reflecting the rise and fall of yields. In
certain jurisdictions outside the United States the repayment of the original bond principal upon
the maturity of an inflation linked bond is not guaranteed, allowing for the amount of the bond
repaid at maturity to be less than par.
The value of inflation protected securities is expected to change in response to the changes in
real interest rates. Real interest rates, in turn, are tied to the relationship between nominal
interest rates and the rate of inflation. Therefore, if inflation were to rise at a faster rate than
nominal interest rates, real interest rates would decline, leading to an increase in value of the
inflation protected securities. In contrast, if nominal interest rates increased at a faster rate than
inflation, real interest rates might rise, leading to a decrease in value of inflation protected
securities. There can be no assurance, however, that the value of inflation protected securities
will be directly correlated to the changes in interest rates. If interest rates rise due to reasons
other than inflation, investors in these securities may not be protected to the extent that the
increase is not reflected in the security’s inflation measure.
The interest rate for inflation linked bonds is fixed at issuance as a percentage of this adjustable
principal. Accordingly, the actual interest income may both rise and fall as the principal amount
of the bonds adjusts in response to movements of the consumer price index. For example,
typically interest income would rise during a period of inflation and fall during a period of
deflation.
The market for inflation protected securities may be less developed or liquid, and more volatile,
than certain other securities markets. There is a limited number of inflation protected securities
currently available for the fund to purchase, making the market less liquid and more volatile than
the U.S. Treasury and agency markets.
Real estate investment trusts — Certain funds may invest in securities issued by real estate
investment trusts (REITs), which primarily invest in real estate or real estate-related loans.
American Funds Insurance Series — Page 25
Equity REITs own real estate properties, while mortgage REITs hold construction, development
and/or long-term mortgage loans. The values of REITs may be affected by changes in the value
of the underlying property of the trusts, the creditworthiness of the issuer, property taxes,
interest rates, tax laws and regulatory requirements, such as those relating to the environment.
Both types of REITs are dependent upon management skill and the cash flows generated by
their holdings, the real estate market in general and the possibility of failing to qualify for any
applicable pass-through tax treatment or failing to maintain any applicable exemptive status
afforded under relevant laws.
Cash and cash equivalents — The fund may hold cash or invest in cash equivalents. Cash
equivalents include (a) commercial paper (for example, short-term notes with maturities typically
up to 12 months in length issued by corporations, governmental bodies or bank/corporation
sponsored conduits (asset-backed commercial paper)); (b) short-term bank obligations (for
example, certificates of deposit, bankers’ acceptances (time drafts on a commercial bank where
the bank accepts an irrevocable obligation to pay at maturity)) or bank notes; (c) savings
association and savings bank obligations (for example, bank notes and certificates of deposit
issued by savings banks or savings associations); (d) securities of the U.S. government, its
agencies or instrumentalities that mature, or may be redeemed, in one year or less; and
(e) corporate bonds and notes that mature or that may be redeemed, in one year or less.
Cash Management Fund may only purchase commercial paper judged by the investment
adviser to be of suitable investment quality. This includes (a) commercial paper that is rated in
the two highest categories by at least two NRSROs, or (b) other commercial paper deemed on
the basis of the issuer's creditworthiness to be of a quality appropriate for Cash Management
Fund. No more than 5% of Cash Management Fund's assets may be invested in commercial
paper rated in the second tier (e.g., P-2/A-2) by any NRSRO; no more than the greater of 1% of
Cash Management Fund's assets or $1 million may be invested in such securities of any one
issuer. See the “Description of Commercial Paper Ratings” for a description of the ratings.
Cash Management Fund may only purchase instruments having remaining maturities of 397
days or less. These obligations originally may have been issued with maturities in excess of one
year. Cash Management Fund may invest only in corporate bonds or notes of issuers having
outstanding short-term securities rated as described above in “Commercial Paper.”
"Savings association obligations" include certificates of deposit (interest-bearing time deposits)
issued by savings banks or savings and loan associations.
"Floating rate obligations" have a coupon rate that changes at least annually and generally more
frequently. The coupon rate is set in relation to money market rates. The obligations, issued
primarily by banks, other corporations, governments and semi-governmental bodies, may have
a maturity in excess of one year. In some cases, the coupon rate may vary with changes in the
yield on Treasury bills or notes or with changes in LIBOR (London Interbank Offering Rate). The
investment adviser considers floating rate obligations to be liquid investments because a
number of securities dealers make active markets in these securities.
American Funds Insurance Series — Page 26
Restricted or illiquid securities — Certain funds may purchase securities subject to
restrictions on resale. Restricted securities may only be sold pursuant to an exemption from
registration under the Securities Act of 1933, as amended (the “1933 Act”), or in a registered
public offering. Where registration is required, the holder of a registered security may be
obligated to pay all or part of the registration expense and a considerable period may elapse
between the time it decides to seek registration and the time it may be permitted to sell a
security under an effective registration statement. Difficulty in selling such securities may result
in a loss to the fund or cause it to incur additional administrative costs.
Securities (including restricted securities) not actively traded will be considered illiquid unless
they have been specifically determined to be liquid under procedures adopted by the Series’
board of trustees, taking into account factors such as the frequency and volume of trading, the
commitment of dealers to make markets and the availability of qualified investors, all of which
can change from time to time. The fund may incur certain additional costs in disposing of illiquid
securities.
Loan assignments and participations — Certain funds may invest in loans or other forms of
indebtedness that represent interests in amounts owed by corporations or other borrowers
(collectively "borrowers"). Loans may be originated by the borrower in order to address its
working capital needs, as a result of a reorganization of the borrower’s assets and liabilities
(recapitalizations), to merge with or acquire another company (mergers and acquisitions), to
take control of another company (leveraged buy-outs), to provide temporary financing (bridge
loans), or for other corporate purposes.
Some loans may be secured in whole or in part by assets or other collateral. The greater the
value of the assets securing the loan the more the lender is protected against loss in the case of
nonpayment of principal or interest. Loans made to highly leveraged borrowers may be
especially vulnerable to adverse changes in economic or market conditions and may involve a
greater risk of default.
Some loans may represent revolving credit facilities or delayed funding loans, in which a lender
agrees to make loans up to a maximum amount upon demand by the borrower during a
specified term. These commitments may have the effect of requiring the fund to increase its
investment in a company at a time when it might not otherwise decide to do so (including at a
time when the company’s financial condition makes it unlikely that such amounts will be repaid).
To the extent that the fund is committed to advance additional funds, the fund will segregate
assets determined to be liquid in an amount sufficient to meet such commitments.
Some loans may represent debtor-in-possession financings (commonly known as “DIP
financings”). DIP financings are arranged when an entity seeks the protections of the
bankruptcy court under Chapter 11 of the U.S. Bankruptcy Code. These financings allow the
entity to continue its business operations while reorganizing under Chapter 11. Such financings
constitute senior liens on unencumbered collateral (i.e., collateral not subject to other creditors’
claims). There is a risk that the entity will not emerge from Chapter 11 and be forced to liquidate
its assets under Chapter 7 of the U.S. Bankruptcy Code. In the event of liquidation, the fund’s
only recourse will be against the collateral securing the DIP financing.
The investment adviser generally makes investment decisions based on publicly available
information, but may rely on non-public information if necessary. Borrowers may offer to provide
lenders with material, non-public information regarding a specific loan or the borrower in
general. The investment adviser generally chooses not to receive this information. As a result,
American Funds Insurance Series — Page 27
the investment adviser may be at a disadvantage compared to other investors that may receive
such information. The investment adviser’s decision not to receive material, non-public
information may impact the investment adviser’s ability to assess a borrower’s requests for
amendments or waivers of provisions in the loan agreement. However, the investment adviser
may on a case-by-case basis decide to receive such information when it deems prudent. In
these situations the investment adviser may be restricted from trading the loan or buying or
selling other debt and equity securities of the borrower while it is in possession of such material,
non-public information, even if such loan or other security is declining in value.
The fund normally acquires loan obligations through an assignment from another lender, but
also may acquire loan obligations by purchasing participation interests from lenders or other
holders of the interests. When the fund purchases assignments it acquires direct contractual
rights against the borrower on the loan. The fund acquires the right to receive principal and
interest payments directly from the borrower and to enforce their rights as a lender directly
against the borrower. However, because assignments are arranged through private negotiations
between potential assignees and potential assignors, the rights and obligations acquired by the
fund as the purchaser of an assignment may differ from, and be more limited than, those held
by the assigning lender. Loan assignments are often administered by a financial institution that
acts as agent for the holders of the loan, and the fund may be required to receive approval from
the agent and/or borrower prior to the purchase of a loan. Risks may also arise due to the
inability of the agent to meet its obligations under the loan agreement.
Loan participations are loans or other direct debt instruments that are interests in amounts owed
by the borrower to another party. They may represent amounts owed to lenders or lending
syndicates, to suppliers of goods or services, or to other parties. The fund will have the right to
receive payments of principal, interest and any fees to which it is entitled only from the lender
selling the participation and only upon receipt by the lender of the payments from the borrower.
In connection with purchasing participations, the fund generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement relating to the loan, nor any
rights of set-off against the borrower. In addition, the fund may not directly benefit from any
collateral supporting the loan in which it has purchased the participation and the fund will have
to rely on the agent bank or other financial intermediary to apply appropriate credit remedies. As
a result, the fund will be subject to the credit risk of both the borrower and the lender that is
selling the participation. In the event of the insolvency of the lender selling a participation, the
fund may be treated as a general creditor of the lender and may not benefit from any set-off
between the lender and the borrower.
Investments in loan participations and assignments present the possibility that the fund could be
held liable as a co-lender under emerging legal theories of lender liability. In addition, if the loan
is foreclosed, the fund could be part owner of any collateral and could bear the costs and
liabilities of owning and disposing of the collateral. The fund anticipates that loan participations
could be sold only to a limited number of institutional investors. In addition, some loan
participations and assignments may not be rated by major rating agencies and may not be
protected by the securities laws.
American Funds Insurance Series — Page 28
Reinsurance related notes and bonds — High-Income Bond Fund may invest in reinsurance
related notes and bonds. These instruments, which are typically issued by special purpose
reinsurance companies, transfer an element of insurance risk to the note or bond holders. For
example, such a note or bond could provide that the reinsurance company would not be
required to repay all or a portion of the principal value of the note or bond if losses due to a
catastrophic event under the policy (such as a major hurricane) exceed certain dollar
thresholds. Consequently, the fund may lose the entire amount of its investment in such bonds
or notes if such an event occurs and losses exceed certain dollar thresholds. In this instance,
investors would have no recourse against the insurance company. These instruments may be
issued with fixed or variable interest rates and rated in a variety of credit quality categories by
the rating agencies.
Repurchase agreements — Certain funds may enter into repurchase agreements under which
the fund buys a security and obtains a simultaneous commitment from the seller to repurchase
the security at a specified time and price. Because the security purchased constitutes collateral
for the repurchase obligation, a repurchase agreement may be considered a loan by the fund
that is collateralized by the security purchased. Repurchase agreements permit the fund to
maintain liquidity and earn income over periods of time as short as overnight. The seller must
maintain with the Series' custodian collateral equal to at least 100% of the repurchase price,
including accrued interest, as monitored daily by the investment adviser. The fund will only enter
into repurchase agreements involving securities in which they could otherwise invest and with
selected banks and securities dealers whose financial condition is monitored by the investment
adviser. If the seller under the repurchase agreement defaults, the fund may incur a loss if the
value of the collateral securing the repurchase agreement has declined and may incur
disposition costs in connection with liquidating the collateral. If bankruptcy proceedings are
commenced with respect to the seller, realization of the collateral by the fund may be delayed or
limited.
Reverse repurchase agreements — Certain funds are authorized to enter into reverse
repurchase agreements. A reverse repurchase agreement is the sale of a security by the fund
and its agreement to repurchase the security at a specified time and price. The fund will
segregate liquid assets which will be marked to market daily in an amount sufficient to cover its
obligations under reverse repurchase agreements with broker-dealers (no collateral is required
for reverse repurchase agreements with banks). Under the 1940 Act, reverse repurchase
agreements may be considered borrowing by the fund. The use of reverse repurchase
agreements by the fund creates leverage which increases the fund’s investment risk. As the
fund’s aggregate commitments under these reverse repurchase agreements increase, the
opportunity for leverage similarly increases. If the income and gains on securities purchased
with the proceeds of reverse repurchase agreements exceed the costs of the agreements, the
fund’s earnings or net asset value will increase faster than otherwise would be the case;
conversely, if the income and gains fail to exceed the costs, the fund’s earnings or net asset
value would decline faster than otherwise would be the case.
Maturity — There are no restrictions on the maturity compositions of the portfolios of certain
funds. Certain funds invest in debt securities with a wide range of maturities. Under normal
market conditions, longer term securities yield more than shorter term securities, but are subject
to greater price fluctuations.
American Funds Insurance Series — Page 29
Interest rate swaps — Certain funds may enter into interest rate swaps in order to manage the
interest rate sensitivity of the fund by increasing or decreasing the duration of the fund or a
portion of the fund’s portfolio. An interest rate swap is an agreement between two parties to
exchange or swap payments based on changes in an interest rate or rates. Typically, one
interest rate is fixed and the other rate changes based on changes in a designated interest rate
benchmark such as the London Interbank Offered Rate (LIBOR), prime rate or other
benchmark. Interest rate swaps generally do not involve the delivery of securities or other
principal amounts. Rather, cash payments are exchanged by the parties based on the
application of the designated interest rates to the principal dollar amount (called the “notional
amount”). Accordingly, the fund’s current obligation or right under the swap agreement is
generally equal to the net amount to be paid or received under the swap agreement based on
the relative value of the position held by each party.
The use of interest rate swaps involves certain risks, including losses if interest rate changes
are not correctly anticipated by a fund’s investment adviser. The funds will enter into swap
agreements only with counterparties that meet certain credit standards; however, if the
counterparty’s creditworthiness deteriorates rapidly and the counterparty defaults on its
obligations under the swap agreement or declares bankruptcy, a fund may bear the risk of loss
of any amount it expected to receive from the counterparty. The term of an interest rate swap
can be days, months or years and as a result certain swaps may be less liquid than others.
Diversification — Global Bond Fund is a nondiversified investment company which allows the
fund to invest a greater percentage of its assets in any one issuer. For the fund to be considered
a “diversified” investment company under the Investment Company Act of 1940, as amended,
the fund with respect to 75% of its total assets, would be required to limit its investment in any
one issuer (other than the U.S. government) to 5% of the market value of the total assets of the
fund or to 10% of the outstanding voting securities of such issuer. However, such a
diversification limitation would reduce the extent to which the fund could concentrate its
investments in securities of governmental issuers outside the United States, which are generally
considered to be of higher credit quality than are securities of private issuers domiciled outside
the United States. Accordingly, such a diversification limitation might increase the fund's
investment risk. Although the fund is nondiversified, it has no current intention of investing more
than 5% of its assets in securities of any one corporate issuer. In addition, the fund intends to
comply with the diversification and other requirements of the U.S. Internal Revenue Code of
1986, as amended, applicable to regulated investment companies so that the fund will not be
subject to U.S. taxes on the net investment income and net capital gains that it distributes to its
shareholders. (See “Taxes and Distributions.”)
*
*
*
*
*
*
American Funds Insurance Series — Page 30
Portfolio turnover — Portfolio changes will be made without regard to the length of time
particular investments may have been held. Short-term trading profits are not the funds’
objective, and changes in their investments are generally accomplished gradually, though shortterm transactions may occasionally be made. High portfolio turnover may involve
correspondingly greater transaction costs in the form of dealer spreads or brokerage
commissions. It may also result in the realization of net capital gains, which are taxable when
distributed to shareholders, unless the shareholder is exempt from taxation or his or her account
is tax-favored.
Fixed-income securities are generally traded on a net basis and usually neither brokerage
commissions nor transfer taxes are involved. Transaction costs are usually reflected in the
spread between the bid and asked price.
A fund’s portfolio turnover rate would equal 100% if each security in the fund’s portfolio was
replaced once per year. The following table sets forth the portfolio turnover rates for each fund
for the fiscal years ended December 31, 2012 and 2011:
Fiscal year
Portfolio turnover rate
Global Discovery Fund
2012
2011
40%
45
Global Growth Fund
2012
2011
22
28
Global Small Capitalization Fund
2012
2011
40
44
Growth Fund
2012
2011
21
19
International Fund
2012
2011
29
24
New World Fund
2012
2011
32
22
Blue Chip Income and Growth Fund
2012
2011
36
27
Global Growth and Income Fund
2012
2011
30
25
Growth-Income Fund
2012
2011
25
22
2012
2011
31
48
2012
2011
61
43
Global Balanced Fund
2012
2011
80
4
34
5
2012
2011
253
163
Global Bond Fund
2012
2011
160
101
High-Income Bond Fund
2012
2011
48
51
International Growth and Income Fund
2
Asset Allocation Fund
3
Bond Fund
5
1
American Funds Insurance Series — Page 31
Fiscal year
Portfolio turnover rate
Mortgage Fund
2012
2011
444
4
480
U.S. Government/
5
AAA-Rated Securities Fund
2012
2011
447
234
5
1
2
3
4
5
The decrease in the fund’s portfolio turnover rate is attributable to a decrease in sales of securities by the fund during the period.
The increase in the fund’s portfolio turnover rate is attributable to an increase in the purchases of securities by the fund during the
period.
The increase in the fund’s portfolio turnover rate is attributable to an increase in sales of securities by the fund during the period.
From May 2, 2011, commencement of operations.
The increase in the fund’s portfolio turnover rate is largely attributable to mortgage dollar roll transactions, which are accounted for
as purchase and sale transactions.
See “Financial Highlights” in the prospectus for each fund’s annual portfolio turnover rates for
each of the last five fiscal years.
Corporate Bond Fund expects to begin investment operations after May 1, 2013, and therefore
has not yet had portfolio turnover.
American Funds Insurance Series — Page 32
Fund policies
All percentage limitations in the following fund policies are considered at the time securities are
purchased and are based on a fund’s net assets unless otherwise indicated. None of the
following policies involving a maximum percentage of assets will be considered violated unless
the excess occurs immediately after, and is caused by, an acquisition by a fund. In managing a
fund, a fund’s investment adviser may apply more restrictive policies than those listed below.
Fundamental policies — The Series has adopted the following policies, which may not be
changed without approval by holders of a majority of its outstanding shares. Such majority is
currently defined in the Investment Company Act of 1940, as amended (the “1940 Act”), as the
vote of the lesser of (a) 67% or more of the voting securities present at a shareholder meeting, if
the holders of more than 50% of the outstanding voting securities are present in person or by
proxy, or (b) more than 50% of the outstanding voting securities.
The following policies apply to each fund in the Series (please also see “Additional information
about fundamental policies” below):
1.
Except as permitted by (i) the 1940 Act and the rules and regulations thereunder, or
other successor law governing the regulation of registered investment companies, or
interpretations or modifications thereof by the U.S. Securities and Exchange Commission
(“SEC”), SEC staff or other authority of competent jurisdiction, or (ii) exemptive or other relief or
permission from the SEC, SEC staff or other authority of competent jurisdiction, a fund may not:
a.
Borrow money;
b.
Issue senior securities;
c.
Underwrite the securities of other issuers;
d.
Purchase or sell real estate or commodities;
e.
Make loans; or
f.
Purchase the securities of any issuer if, as a result of such purchase, a
fund’s investments would be concentrated in any particular industry.
2.
The fund may not invest in companies for the purpose of exercising control or
management.
Nonfundamental policies — The following policy may be changed without shareholder
approval:
The fund may not acquire securities of open-end investment companies or unit investment
trusts registered under the 1940 Act in reliance on Sections 12(d)(1)(F) or 12(d)(1)(G) of the
1940 Act.
American Funds Insurance Series — Page 33
Additional information about fundamental policies — The information below is not part of
the Series’ fundamental policies. This information is intended to provide a summary of what is
currently required or permitted by the 1940 Act and the rules and regulations thereunder, or by
the interpretive guidance thereof by the SEC or SEC staff, for particular fundamental policies of
the Series. Information is also provided regarding the fund’s current intention with respect to
certain investment practices permitted by the 1940 Act.
For purposes of fundamental policy 1a, the fund may borrow money in amounts of up to 33⅓%
of its total assets from banks for any purpose. Additionally, the fund may borrow up to 5% of its
total assets from banks or other lenders for temporary purposes (a loan is presumed to be for
temporary purposes if it is repaid within 60 days and is not extended or renewed). A reverse
repurchase agreement may be considered the economic equivalent of borrowing by the fund;
however, to the extent that the fund covers its commitments under a reverse repurchase
agreement (and under certain similar agreements and transactions) by segregating or
earmarking liquid assets equal in value to the amount of the fund’s commitment, such
agreement will not be considered borrowing by the fund.
For purposes of fundamental policy 1b, a senior security does not include any promissory note
or evidence of indebtedness if such loan is for temporary purposes only and in an amount not
exceeding 5% of the value of the total assets of the fund at the time the loan is made (a loan is
presumed to be for temporary purposes if it is repaid within 60 days and is not extended or
renewed). Further, to the extent the fund covers its commitments under certain types of
agreements and transactions, including reverse repurchase agreements, mortgage-dollar-roll
transactions, sale-buybacks, when-issued, delayed-delivery, or forward commitment
transactions, and other similar trading practices, by segregating or earmarking liquid assets
equal in value to the amount of the fund’s commitment, such agreement or transaction will not
be considered a senior security by the fund.
For purposes of fundamental policy 1c, the policy will not apply to the fund to the extent the fund
may be deemed an underwriter within the meaning of the 1933 Act in connection with the
purchase and sale of fund portfolio securities in the ordinary course of pursuing its investment
objectives and strategies.
For purposes of fundamental policy 1e, the fund may not lend more than 33⅓% of its total
assets, provided that this limitation shall not apply to the fund’s purchase of debt obligations.
For purposes of fundamental policy 1f, the fund may not invest 25% or more of its total assets in
the securities of issuers in a particular industry. This policy does not apply to investments in
securities of the United States government, its agencies or instrumentalities or government
sponsored entities or repurchase agreements with respect thereto. Additionally, the Cash
Management Fund may invest without limitation in obligations of U.S. banks, including U.S.
branches of banks based outside the United States (e.g., certificates of deposit, interest bearing
time deposits, bank notes and banker’s acceptances). In evaluating and selecting such
investments, the investment adviser, on behalf of the fund, uses the criteria set forth under the
headings “Certain investment limitations and guideline” and “Description of certain securities
and investment techniques” in this statement of additional information.
The fund currently does not intend to engage in securities lending, purchase securities on
margin, sell securities short or invest in puts, calls, straddles or spreads or combinations
thereof.
American Funds Insurance Series — Page 34
Management of the Series
Board of trustees and officers
1
“Independent” trustees
The Series’ nominating and governance committee and board select independent trustees with
a view toward constituting a board that, as a body, possesses the qualifications, skills, attributes
and experience to appropriately oversee the actions of the Series’ service providers, decide
upon matters of general policy and represent the long-term interests of fund shareholders. In
doing so, they consider the qualifications, skills, attributes and experience of the current board
members, with a view toward maintaining a board that is diverse in viewpoint, experience,
education and skills.
The Series seeks independent trustees who have high ethical standards and the highest levels
of integrity and commitment, who have inquiring and independent minds, mature judgment,
good communication skills, and other complementary personal qualifications and skills that
enable them to function effectively in the context of the Series’ board and committee structure
and who have the ability and willingness to dedicate sufficient time to effectively fulfill their
duties and responsibilities.
Each independent trustee has a significant record of accomplishments in governance, business,
not-for-profit organizations, government service, academia, law, accounting or other
professions. Although no single list could identify all experience upon which the Series’
independent trustees draw in connection with their service, the following table summarizes key
experience for each independent trustee. These references to the qualifications, attributes and
skills of the trustees are pursuant to the disclosure requirements of the SEC, and shall not be
deemed to impose any greater responsibility or liability on any trustee or the board as a whole.
Notwithstanding the accomplishments listed below, none of the independent trustees is
considered an “expert” within the meaning of the federal securities laws with respect to
information in the Series’ registration statement.
American Funds Insurance Series — Page 35
Name, age and
position with
Series
(year first elected
2
as a trustee )
Principal
occupation(s)
during the past five
years
William H. Baribault, Chairman of the
67
Board and CEO,
Trustee (2009)
Oakwood
Enterprises (private
investment and
consulting)
Number of
3
portfolios
overseen
by
trustee
69
Other
4
directorships held
by trustee during
the past five years
Other relevant
experience
Former director of
• Service as chief
Henry Co. (until
executive officer
2009); Professional
for multiple
Business Bank (until
companies
2009)
• Corporate board
experience
• Service on
advisory and
trustee boards for
charitable,
educational and
nonprofit
organizations
James G. Ellis, 66
Trustee (2010)
Dean and Professor
of Marketing,
Marshall School of
Business, University
of Southern
California
70
Quiksilver, Inc.
Former director of
Genius Products
(until 2008)
• Service as chief
executive officer
for multiple
companies
• Corporate board
experience
• Service on
advisory and
trustee boards for
charitable,
municipal and
nonprofit
organizations
• M.B.A.
Leonard R. Fuller,
66
Trustee (1999)
President and CEO,
Fuller Consulting
(financial
management
consulting firm)
70
None
• Former partner,
public accounting
firm
• Financial
management
consulting
• Service on
advisory and
trustee boards for
municipal,
educational and
nonprofit
organizations
• M.B.A.
American Funds Insurance Series — Page 36
Name, age and
position with
Series
(year first elected
2
as a trustee )
W. Scott Hedrick,
67
Trustee (2007)
Principal
occupation(s)
during the past five
years
Founding General
Partner, InterWest
Partners (a venture
capital firm)
Number of
3
portfolios
overseen
by
trustee
66
Other
4
directorships held
by trustee during
the past five years
Hot Topic, Inc.;
Office Depot, Inc.
Other relevant
experience
• Corporate board
experience
• Service on
advisory and
trustee boards for
charitable and
nonprofit
organizations
• M.B.A.
R. Clark Hooper, 66
Chairman of the
Board (Independent
and Non-Executive)
(2010)
Private investor
72
JPMorgan Value
• Senior regulatory
Opportunities Fund,
and management
Inc.; The Swiss
experience,
Helvetia Fund, Inc.
National
Association of
Securities Dealers
(now FINRA)
• Service on trustee
boards for
charitable,
educational and
nonprofit
organizations
Merit E. Janow, 54
Trustee (2007)
Professor, Columbia
University, School of
International and
Public Affairs; former
Member, World
Trade Organization
Appellate Body
69
The NASDAQ Stock • Service with Office
Market LLC; Trimble
of the U.S. Trade
Navigation Limited
Representative
and U.S.
Department of
Justice
• Corporate board
experience
• Service on
advisory and
trustee boards for
charitable,
educational and
nonprofit
organizations
• Experience as
corporate lawyer
• J.D.
American Funds Insurance Series — Page 37
Name, age and
position with
Series
(year first elected
2
as a trustee )
Laurel B. Mitchell,
Ph.D., 57
Trustee (2010)
Principal
occupation(s)
during the past five
years
Clinical Professor
and Director,
Accounting Program,
University of
Redlands
Number of
3
portfolios
overseen
by
trustee
66
Other
4
directorships held
by trustee during
the past five years
None
Other relevant
experience
• Assistant
professor,
accounting
• Service in the
Office of Chief
Accountant and
Enforcement
Division of the
U.S. Securities
and Exchange
Commission
• Experience in
corporate
management and
public accounting
• Service on
advisory and
trustee boards for
charitable,
educational and
nonprofit
organizations
• Ph.D., accounting
• Formerly licensed
as C.P.A.
Frank M. Sanchez,
69
Trustee (2010)
Principal, The
Sanchez Family
Corporation dba
McDonald’s
Restaurants
(McDonald’s
licensee)
66
None
• Senior academic
leadership
position
• Corporate board
experience
• Service on
advisory and
trustee boards for
charitable and
nonprofit
organizations
• Ph.D., education
administration and
finance
American Funds Insurance Series — Page 38
Name, age and
position with
Series
(year first elected
2
as a trustee )
Margaret Spellings,
55
Trustee (2010)
Steadman Upham,
Ph.D., 64
Trustee (2010)
Principal
occupation(s)
during the past five
years
Number of
3
portfolios
overseen
by
trustee
President and CEO,
Margaret Spellings &
Company (public
policy and strategic
consulting);
President, U.S.
Chamber
Foundation and
Senior Advisor to the
President and CEO,
U.S. Chamber of
Commerce; former
U.S. Secretary of
Education, U.S.
Department of
Education
69
President and
University Professor,
The University of
Tulsa
69
Other
4
directorships held
by trustee during
the past five years
None
Other relevant
experience
• Former Assistant
to the President
for Domestic
Policy, The White
House
• Former senior
advisor to the
Governor of Texas
• Service on
advisory and
trustee boards for
charitable and
nonprofit
organizations
None
• Senior academic
leadership
positions for
multiple
universities
• Service on
advisory and
trustee boards for
educational and
nonprofit
organizations
• Ph.D.,
anthropology
American Funds Insurance Series — Page 39
“Interested” trustee(s)
5,6
Interested trustees have similar qualifications, skills and attributes as the independent trustees.
Interested trustees are senior executive officers of Capital Research and Management
Company or its affiliates. This management role with the Series’ service providers also permits
them to make a significant contribution to the Series’ board.
Name, age and
position with Series
(year first elected
2
as a trustee )
Donald D. O’Neal, 52
Vice Chairman of the
Board (1998)
Other officers
Principal occupation(s)
during the
past five years
and positions
held with affiliated
entities or the
Principal Underwriter
of the Series during the
past five years
Senior Vice President –
Capital Research Global
Investors, Capital Research
and Management Company;
Director, Capital Research
and Management Company
Number of
3
portfolios
overseen
by trustee
26
Other
4
directorships
held by trustee
during the
past five years
None
6
Name, age and
position with Series
(year first elected
2
as an officer )
Principal occupation(s) during the past five years
and positions held with affiliated entities
or the Principal Underwriter of the Series
Alan N. Berro, 52
President (1998)
Senior Vice President – Capital World Investors, Capital Research and
Management Company
Michael J. Downer, 58
Executive Vice President
(1991)
Director, Senior Vice President and Secretary, Capital Research and
Management Company; Director, American Funds Distributors, Inc.*;
Chairman of the Board, Capital Bank and Trust Company*
Abner D. Goldstine, 83
Senior Vice President
(1993)
Senior Vice President – Fixed Income, Capital Research and Management
Company
C. Ross Sappenfield, 47
Senior Vice President
(2008)
Senior Vice President – Capital Research Global Investors, Capital
Research and Management Company
John H. Smet, 56
Senior Vice President
(1994)
Senior Vice President – Fixed Income, Capital Research and Management
Company; Director, The Capital Group Companies, Inc.*
Carl M. Kawaja, 48
Vice President (2008)
Senior Vice President – Capital World Investors, Capital Research and
Management Company; Director, Capital International, Inc.*; Chairman of
the Board, Capital International Asset Management (Canada), Inc.*;
Director, The Capital Group Companies, Inc.*
American Funds Insurance Series — Page 40
Name, age and
position with Series
(year first elected
2
as an officer )
Principal occupation(s) during the past five years
and positions held with affiliated entities
or the Principal Underwriter of the Series
Sung Lee, 46
Vice President (2008)
Senior Vice President – Capital Research Global Investors, Capital
Research Company*
Maria T. Manotok, 38
Vice President (2012)
Vice President and Associate Counsel – Fund Business Management
Group, Capital Research and Management Company; Vice President and
Associate Counsel, Capital Group Companies Global*
S. Keiko McKibben, 43
Vice President (2010)
Senior Vice President – Capital Research Global Investors, Capital
Research Company*
Renaud H. Samyn, 39
Vice President (2010)
Senior Vice President – Capital Research Global Investors, Capital
Research Company*
Dylan Yolles, 44
Vice President (2012)
Senior Vice President – Capital International Investors, Capital Research
and Management Company
Steven I. Koszalka, 48
Secretary (2003)
Vice President – Fund Business Management Group, Capital Research and
Management Company
Gregory F. Niland, 41
Treasurer (2008)
Vice President – Fund Business Management Group, Capital Research and
Management Company
Courtney R. Taylor, 38
Assistant Secretary
(2010)
Assistant Vice President – Fund Business Management Group, Capital
Research and Management Company
Karl C. Grauman, 45
Assistant Treasurer
(2006)
Vice President – Fund Business Management Group, Capital Research and
Management Company
Dori Laskin, 61
Assistant Treasurer
(2010)
Vice President – Fund Business Management Group, Capital Research and
Management Company
* Company affiliated with Capital Research and Management Company.
1
The term “independent” trustee refers to a trustee who is not an “interested person” of the funds within the meaning of the 1940
Act.
2
Trustees and officers of the Series serve until their resignation, removal or retirement.
3
Funds managed by Capital Research and Management Company, including the American Funds; American Funds Insurance
Series,® which serves as the underlying investment vehicle for certain variable insurance contracts; American Funds Target Date
Retirement Series,® which is available through tax-favored retirement plans and IRAs; American Funds Portfolio Series;SM and
American Funds College Target Date SeriesSM.
4
This includes all directorships/trusteeships (other than those in the American Funds or other funds managed by Capital Research
and Management Company) that are held by each trustee as a director/trustee of a public company or a registered investment
company. Unless otherwise noted, all directorships/trusteeships are current.
5
“Interested persons” of the funds within the meaning of the 1940 Act, on the basis of their affiliation with the Series’ investment
adviser, Capital Research and Management Company, or affiliated entities.
6
All of the officers listed, with the exception of S. Keiko McKibben and Renaud H. Samyn, are officers and/or directors/trustees of
one or more of the other funds for which Capital Research and Management Company serves as investment adviser.
The address for all trustees and officers of the Series is 333 South Hope Street, 55th
Floor, Los Angeles, California 90071, Attention: Secretary.
American Funds Insurance Series — Page 41
Fund shares owned by trustees as of December 31, 2012:
Dollar range
of fund
3
shares owned
Aggregate
1
dollar range
of shares
owned in
all funds
in the
American Funds
family overseen
by trustee
Dollar
1
range of
independent
trustees
deferred
4
compensation
allocated
to fund
None
Over $100,000
N/A
1
Name
Aggregate
dollar
1,2
range of
independent
trustees
deferred
4
compensation
allocated to
all funds
within
American Funds
family overseen
by trustee
“Independent” trustees
William H. Baribault
James G. Ellis
Leonard R. Fuller
W. Scott Hedrick
R. Clark Hooper
Merit E. Janow
Laurel B. Mitchell
Frank M. Sanchez
Margaret Spellings
Steadman Upham
None
None
None
None
None
None
None
None
None
Over $100,000
Over $100,000
Over $100,000
Over $100,000
Over $100,000
$50,001 – $100,000
$10,001 – $50,000
Over $100,000
Over $100,000
5
$1 – $10,000
5
N/A
5
Over $100,000
5
N/A
5
Over $100,000
5
N/A
5
$10,001 – $50,000
5
N/A
5
$10,001 – $50,000
5
Over $100,000
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
American Funds Insurance Series — Page 42
Dollar range
of fund
2
shares owned
Aggregate
1
dollar range
of shares
owned in
all funds
in the
American Funds
family overseen
by trustee
None
Over $100,000
1
Name
“Interested” trustees
Donald D. O’Neal
1
2
3
4
5
Ownership disclosure is made using the following ranges: None; $1 – $10,000; $10,001 – $50,000; $50,001 – $100,000; and
Over $100,000. The amounts listed for “interested” trustees include shares owned through The Capital Group Companies, Inc.
retirement plan and 401(k) plan.
N/A indicates that the listed individual, as of December 31, 2012, was not a trustee of a particular fund, did not allocate deferred
compensation to the fund or did not participate in the deferred compensation plan.
Shares of the funds may only be owned by purchasing variable annuity and variable life insurance contracts. Each trustee’s need
for variable annuity or variable life contracts and the role those contracts would play in his or her comprehensive investment
portfolio will vary and depend on a number of factors including tax, estate planning, life insurance, alternative retirement plans or
other considerations.
Eligible trustees may defer their compensation under a nonqualified deferred compensation plan. Deferred amounts accumulate
at an earnings rate determined by the total return of one or more American Funds as designated by the trustee.
The funds in the Series are not available for investment in the independent trustees deferred compensation plan.
Trustee compensation — No compensation is paid by the Series to any officer or trustee who
is a director, officer or employee of the investment adviser or its affiliates. Except for the
independent trustees listed in the “Board of trustees and officers — ‘Independent’ trustees” table
under the “Management of the Series” section in this statement of additional information, all
other officers and trustees of the Series are directors, officers or employees of the investment
adviser or its affiliates. The boards of funds advised by the investment adviser typically meet
either individually or jointly with the boards of one or more other such funds with substantially
overlapping board membership (in each case referred to as a “board cluster”). The Series
typically pays each independent trustee an annual fee, which ranges from $40,400 to $65,400,
based primarily on the total number of board clusters on which that independent trustee serves.
In addition, the Series generally pays independent trustees attendance and other fees for
meetings of the board and its committees. The board chair receives an additional fee for this
service.
Independent trustees also receive attendance fees for certain special joint meetings and
information sessions with directors and trustees of other groupings of funds advised by the
investment adviser. The Series and the other funds served by each independent trustee each
pay an equal portion of these attendance fees.
No pension or retirement benefits are accrued as part of Series expenses. Independent trustees
may elect, on a voluntary basis, to defer all or a portion of their fees through a deferred
compensation plan in effect for the Series. The Series also reimburses certain expenses of the
independent trustees.
American Funds Insurance Series — Page 43
Trustee compensation earned during the fiscal year ended December 31, 2012:
Name
3
William H. Baribault
$135,192
$276,990
90,112
315,083
106,764
370,674
W. Scott Hedrick
98,245
204,961
R. Clark Hooper
127,688
515,890
90,542
325,554
131,821
269,461
110,269
236,990
86,916
242,616
78,860
248,054
James G. Ellis
Leonard R. Fuller
3
Merit E. Janow
3
Laurel B. Mitchell
Frank M. Sanchez
Margaret Spellings
Steadman Upham
1
2
3
Aggregate compensation
(including voluntarily
1
deferred compensation )
from the series
Total compensation (including
voluntarily deferred
1
compensation )
from all funds managed by
Capital Research and
Management
2
Company or its affiliates
3
3
Amounts may be deferred by eligible trustees under a nonqualified deferred compensation plan adopted by the Series in 1993.
Deferred amounts accumulate at an earnings rate determined by the total return of one or more American Funds as designated
by the trustees. Compensation shown in this table for the fiscal year ended December 31, 2012 does not include earnings on
amounts deferred in previous fiscal years. See footnote 3 to this table for more information.
Funds managed by Capital Research and Management Company, including the American Funds; American Funds Insurance
Series,® which serves as the underlying investment vehicle for certain variable insurance contracts; American Funds Target Date
Retirement Series,® which is available through tax-favored retirement plans and IRAs; American Funds Portfolio Series;SM and
American Funds College Target Date SeriesSM.
Since the deferred compensation plan’s adoption, the total amount of deferred compensation accrued by the Series (plus earnings
thereon) through the end of the 2012 fiscal year for participating trustees is as follows: William H. Baribault ($23,609), Leonard R.
Fuller ($96,823), Laurel B. Mitchell ($13,748), Margaret Spellings ($23,089) and Steadman Upham ($194,289). Amounts deferred
and accumulated earnings thereon are not funded and are general unsecured liabilities of the Series until paid to the trustees.
As of April 1, 2013, the officers and trustees of the Series and their families, as a group, owned
beneficially or of record less than 1% of the outstanding shares of each fund.
Series organization and the board of trustees — The Series, an open-end investment
company, was organized as a Massachusetts business trust on September 13, 1983. At a
meeting of the Series’ shareholders on November 24, 2009, shareholders approved the
reorganization of the Series to a Delaware statutory trust. The reorganization may be completed
in 2013 or 2014; however, the Series reserves the right to delay the implementation. A summary
comparison of the governing documents and state laws affecting the Delaware statutory trust
and the current form of organization of the Series can be found in a proxy statement for the
Series dated August 28, 2009, which is available on the SEC’s website at sec.gov.
All Series operations are supervised by its board of trustees, which meets periodically and
performs duties required by applicable state and federal laws. Independent board members are
paid certain fees for services rendered to the Series as described above. They may elect to
defer all or a portion of these fees through a deferred compensation plan in effect for the Series.
Massachusetts common law provides that a trustee of a Massachusetts business trust owes a
fiduciary duty to the trust and must carry out his or her responsibilities as a trustee in
American Funds Insurance Series — Page 44
accordance with that fiduciary duty. Generally, a trustee will satisfy his or her duties if he or she
acts in good faith and uses ordinary prudence.
The Series currently consists of separate funds which have separate assets and liabilities, and
invest in separate investment portfolios. The board of trustees may create additional funds in
the future. Income, direct liabilities and direct operating expenses of a fund will be allocated
directly to that fund and general liabilities and expenses of the Series will be allocated among
the funds in proportion to the total net assets of each fund.
Each fund (other than Global Discovery Fund, which only has Class 1 and Class 2 shares) has
Class 1, Class 2 and Class 4 shares. In addition, Growth Fund, International Fund, GrowthIncome Fund, Asset Allocation Fund, High-Income Bond Fund, U.S. Government/AAA-Rated
Securities Fund and Cash Management Fund have Class 3 shares. The shares of each class
represent an interest in the same investment portfolio. Each class has equal rights as to voting,
redemption, dividends and liquidation, except that each class bears different distribution
expenses and other expenses properly attributable to the particular class as approved by the
board of trustees and set forth in the Series’ amended and restated rule 18f-3 Plan. Class 2,
Class 3 and Class 4 shareholders have exclusive voting rights with respect to their respective
rule 12b-1 Plans adopted in connection with the distribution of Class 2, Class 3 and Class 4
shares. Class 4 shareholders have exclusive voting rights with respect to their Insurance
Administrative Services Plan. Shares of each Class of the Series vote together on matters that
affect all classes in substantially the same manner. Each class votes as a class on matters that
affect that class alone.
The Series does not hold annual meetings of shareholders. However, significant matters that
require shareholder approval, such as certain elections of board members or a change in a
fundamental investment policy, will be presented to shareholders at a meeting called for such
purpose. Shareholders have one vote per share owned. At the request of the holders of at least
10% of the shares, the Series will hold a meeting at which any member of the board could be
removed by a majority vote.
The Series’ declaration of trust and by-laws, as well as separate indemnification agreements
that the Series has entered into with independent trustees, provide in effect that, subject to
certain conditions, the Series will indemnify its officers and trustees against liabilities or
expenses actually and reasonably incurred by them relating to their service to the Series.
However, trustees are not protected from liability by reason of their willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the conduct of their office.
Leadership structure — The board’s chair is currently an independent trustee who is not an
“interested person” of the Series within the meaning of the 1940 Act. The board has determined
that an independent chair facilitates oversight and enhances the effectiveness of the board. The
independent chair’s duties include, without limitation, generally presiding at meetings of the
board, approving board meeting schedules and agendas, leading meetings of the independent
trustees in executive session, facilitating communication with committee chairs, and serving as
the principal independent trustee contact for Series management and independent fund
counsel.
Risk oversight — Day-to-day management of the Series, including risk management, is the
responsibility of the Series’ contractual service providers, including the Series’ investment
adviser, principal underwriter/distributor and transfer agent. Each of these entities is responsible
for specific portions of the Series’ operations, including the processes and associated risks
American Funds Insurance Series — Page 45
relating to the funds’ investments, integrity of cash movements, financial reporting, operations
and compliance. The board of trustees oversees the service providers’ discharge of their
responsibilities, including the processes they use. In that regard, the board receives reports
regarding the operations of the Series’ service providers, including risks. For example, the board
receives reports from investment professionals regarding risks related to the funds’ investments
and trading. The board also receives compliance reports from the Series and the investment
adviser’s chief compliance officers addressing certain areas of risk.
Committees of the Series board, as well as joint committees of independent board members of
funds managed by Capital Research and Management Company, also explore risk
management procedures in particular areas and then report back to the full board. For example,
the Series’ audit committee oversees the processes and certain attendant risks relating to
financial reporting, valuation of fund assets, and related controls.
Not all risks that may affect the Series can be identified or processes and controls developed to
eliminate or mitigate their effect. Moreover, it is necessary to bear certain risks (such as
investment-related risks) to achieve each fund’s objectives. As a result of the foregoing and
other factors, the ability of the Series’ service providers to eliminate or mitigate risks is subject to
limitations.
Committees of the board of trustees — The Series has an audit committee comprised of
William H. Baribault, Leonard R. Fuller, W. Scott Hedrick, Laurel B. Mitchell, Frank M. Sanchez
and Steadman Upham, none of whom is an “interested person” of the Series within the meaning
of the 1940 Act. The committee provides oversight regarding the Series’ accounting and
financial reporting policies and practices, its internal controls and the internal controls of the
Series’ principal service providers. The committee acts as a liaison between the Series’
independent registered public accounting firm and the full board of trustees. The audit
committee held five meetings during the 2012 fiscal year.
The Series has a contracts committee comprised of William H. Baribault, James G. Ellis,
Leonard R. Fuller, W. Scott Hedrick, R. Clark Hooper, Merit E. Janow, Laurel B. Mitchell, Frank
M. Sanchez, Margaret Spellings and Steadman Upham, none of whom is an “interested person”
of the Series within the meaning of the 1940 Act. The committee’s principal function is to
request, review and consider the information deemed necessary to evaluate the terms of certain
agreements between the Series and its investment adviser or the investment adviser’s affiliates,
such as the Investment Advisory and Service Agreement and plan of distribution adopted
pursuant to rule 12b-1 under the 1940 Act, that the Series may enter into, renew or continue,
and to make its recommendations to the full board of trustees on these matters. The contracts
committee held one meeting during the 2012 fiscal year.
The Series has a nominating and governance committee comprised of William H. Baribault,
James G. Ellis, R. Clark Hooper, Merit E. Janow, Laurel B. Mitchell and Margaret Spellings,
none of whom is an “interested person” of the Series within the meaning of the 1940 Act. The
committee periodically reviews such issues as the board’s composition, responsibilities,
committees, compensation and other relevant issues, and recommends any appropriate
changes to the full board of trustees. The committee also evaluates, selects and nominates
independent trustee candidates to the full board of trustees. While the committee normally is
able to identify from its own and other resources an ample number of qualified candidates, it will
consider shareholder suggestions of persons to be considered as nominees to fill future
vacancies on the board. Such suggestions must be sent in writing to the nominating and
governance committee of the Series, addressed to the Series’ secretary, and must be
American Funds Insurance Series — Page 46
accompanied by complete biographical and occupational data on the prospective nominee,
along with a written consent of the prospective nominee for consideration of his or her name by
the committee. The nominating and governance committee held two meetings during the 2012
fiscal year.
Proxy voting procedures and principles — The funds’ investment adviser, in consultation
with the Series’ board, has adopted Proxy Voting Procedures and Principles (the “Principles”)
with respect to voting proxies of securities held by the funds and other American Funds. The
complete text of these principles is available on the American Funds website at
americanfunds.com. Proxies are voted by a committee of the appropriate equity investment
division of the investment adviser under authority delegated by the Series’ board. Therefore, if
more t