Minnesota (State or other jurisdiction of incorporation or organization) | 6311 (Primary Standard Industrial Classification Code Number) | 41-1366075 (I.R.S. Employer Identification No.) |
As soon as practicable after this registration statement becomes effective.
| Calculation of Registration Fee | ||||
Title of each class of securities to be registered | Amount to be registered pursant to this Registration Statement | Proposed maximum offering price per unit | Proposed maximum aggregate offering price including previously registered securities | Amount of aggregate registration fee, including fee paid for previously registered securities |
Individual Flexible Purchase Payment Index-Linked Deferred Annuity Contract | $2,000,000,000(1) | NA(2) | $6,100,000,000(3) | $ 705,960(3) |
| Variable Options Currently Available | ||
AZL® MVP Growth Index Strategy Fund | AZL® MVP Balanced Index Strategy Fund | AZL® Government Money Market Fund |
| Crediting Methods | Indices Currently Available | |
| Index Protection Strategy | with…. | S&P 500® Index |
| Index Precision Strategy | with…. | S&P 500® Index, Russell 2000® Index, Nasdaq-100® Index and EURO STOXX 50® |
| Index Performance Strategy | with…. | S&P 500® Index, Russell 2000® Index, Nasdaq-100® Index and EURO STOXX 50® |
| Index Guard Strategy | with…. | S&P 500® Index, Russell 2000® Index, Nasdaq-100® Index and EURO STOXX 50® |
| ● | For Contracts issued in Delaware, Washington and Missouri: The Index Protection Strategy is not available to Contracts issued in Washington, or to inforce Contracts issued before August 24, 2015 in Delaware, or to inforce Contracts issued on or after April 25, 2016 in Missouri. If the renewal Caps for the Index Performance Strategy and Index Guard Strategy, or the renewal Precision Rates for the Index Precision Strategy are not acceptable to you, you will not be able to transfer into the Index Protection Strategy and take advantage of its principal protection. This would subject you to ongoing market risk. You could lose money. |
| ● | The Index Precision Strategy, Index Guard Strategy and EURO STOXX 50® are not available to inforce Contracts issued before August 24, 2015, or to inforce Contracts issued before April 25, 2016 in Missouri. |
| Glossary | 5 | |
| Summary | 10 | |
| Who Should Consider Purchasing the Contract? | 11 | |
| What Are the Contract's Charges? | 11 | |
| What Are the Contract's Benefits? | 12 | |
| What Are the Index-Linked Crediting Methods and How Do They Work? | 12 | |
| When Do You Establish the Values Used to Determine Index-Linked Credits? | 13 | |
| What Factors Impact the DPSC, Precision Rates and Caps? | 14 | |
| How Do the Index-Linked Crediting Methods Compare? | 14 | |
| How Can I Allocate My Purchase Payments? | 16 | |
| What Are the Different Values Within the Contract? | 16 | |
| How Do We Apply Credits to the Index Options? | 17 | |
| Can My Contract Lose Value Because of Negative Changes in an Index's Value? | 17 | |
| Can I Transfer Index Option Value Between the Allocation Options? | 17 | |
| How Can I Take Money Out of My Contract? | 18 | |
| What Are My Annuity Options? | 18 | |
| Does the Contract Provide a Death Benefit? | 18 | |
| What If I Need Customer Service? | 18 | |
| Fee Tables | 19 | |
| Owner Transaction Expenses | 19 | |
| Owner Periodic Expenses | 19 | |
| Annual Operating Expenses of the Variable Options | 20 | |
| Examples | 21 | |
| Condensed Financial Information | 22 | |
| 1. | Risk Factors | 22 |
| Liquidity Risk | 22 | |
| Risk of Investing in Securities | 23 | |
| Risk of Negative Returns | 23 | |
| Calculation of Credits | 24 | |
| Substitution of an Index | 24 | |
| Changes to Caps, Precision Rates, Declared Protection Strategy Credit (DPSC), and Notice of Buffers and Floors | 25 | |
| Investment in Derivative Securities | 26 | |
| Variable Option Risk | 26 | |
| Our Financial Strength and Claims-Paying Ability | 26 | |
| Regulatory Protections | 27 | |
| 2. | The Variable Annuity Contract | 27 |
| State Specific Contract Restrictions | 28 | |
| When The Contract Ends | 28 | |
| 3. | Ownership, Annuitants, Determining Life, Beneficiaries, and Payees | 28 |
| Owner | 28 | |
| Joint Owner | 28 | |
| Annuitant | 28 | |
| Determining Life (Lives) | 29 | |
| Beneficiary | 29 | |
| Payee | 29 | |
| Assignments, Changes of Ownership and Other Transfers of Contract Rights | 30 | |
| 4. | Purchasing the Contract | 30 |
| Purchase Requirements | 30 | |
| Applications Sent Electronically | 31 | |
| Allocation of Purchase Payments and Transfers Between the Allocation Options | 31 | |
| Automatic Investment Plan (AIP) | 32 | |
| Free Look/Right to Examine Period | 33 | |
| 5. | Variable Options | 34 |
| Substitution of Variable Options and Limitation on Further Investments | 35 | |
| Transfers Between Variable Options | 35 | |
| Electronic Transfer and Allocation Instructions | 36 | |
| Excessive Trading and Market Timing | 36 | |
| Financial Adviser Fees | 38 | |
| Voting Privileges | 39 | |
| 6. | Valuing Your Contract | 39 |
| Accumulation Units | 39 | |
| Computing Variable Account Value | 39 | |
| 7. | Index Options | 40 |
| Determining Index Option Value for the Index Protection Strategy | 41 | |
| Determining Index Option Values for the Index Precision Strategy, Index Performance Strategy and Index Guard Strategy | 42 | |
| The Alternate Minimum Value | 44 | |
| Optional Rebalancing Program | 45 | |
| 8. | Expenses | 46 |
| Product Fee | 46 | |
| Contract Maintenance Charge | 47 | |
| Withdrawal Charge | 48 | |
| Transfer Fee | 50 | |
| Premium Tax | 50 | |
| Income Tax | 50 | |
| Variable Option Expenses | 50 | |
| 9. | Access to Your Money | 50 |
| Free Withdrawal Privilege | 51 | |
| Systematic Withdrawal Program | 51 | |
| Minimum Distribution Program and Required Minimum Distribution (RMD) Payments | 52 | |
| Waiver of Withdrawal Charge Benefit | 52 | |
| Suspension of Payments or Transfers | 52 | |
| 10. | The Annuity Phase | 53 |
| Calculating Your Annuity Payments | 53 | |
| Annuity Payment Options | 53 | |
| When Annuity Payments Begin | 54 | |
| 11. | Death Benefit | 54 |
| Death of the Owner and/or Annuitant | 55 | |
| Death Benefit Payment Options During the Accumulation Phase | 56 | |
| 12. | Taxes | 57 |
| Qualified and Non-Qualified Contracts | 57 | |
| Taxation of Annuity Contracts | 57 | |
| Tax-Free Section 1035 Exchanges | 58 | |
| 13. | Other Information | 58 |
| The Registered Separate Account | 58 | |
| Our General Account | 59 | |
| Our Unregistered Separate Account | 59 | |
| Distribution | 59 | |
| Additional Credits for Certain Groups | 61 | |
| Administration/Allianz Service Center | 61 | |
| Legal Proceedings | 61 | |
| Status Pursuant to Securities Exchange Act of 1934 | 61 | |
| 14. | Information on Allianz Life | 62 |
| Directors, Executive Officers and Corporate Governance | 62 | |
| Executive Compensation | 67 | |
| Security Ownership of Certain Beneficial Owners and Management | 81 | |
| Transactions with Related Persons, Promoters and Certain Control Persons | 81 | |
| Risks Associated with the Financial Services Industry | 81 | |
| 15. | Financial Statements | 96 |
| 16. | Privacy Notice | 97 |
| 17. | Table of Contents of the Statement of Additional Information (SAI) | 98 |
| Appendix A – Available Indices | 99 | |
| Standard & Poor's 500 Index | 99 | |
Russell 2000® Index | 100 | |
Nasdaq-100® Index | 100 | |
EURO STOXX 50® | 101 | |
| Appendix B – Daily Adjustment | 102 | |
| Appendix C – Buffers and Initial and Renewal DPSCs and Caps | 104 | |
| Index Protection Strategy | 104 | |
| Index Performance Strategy | 105 | |
| Index Guard Strategy | 107 | |
| Appendix D –Selected Financial Data and Consolidated Financial Statements | 109 | |
| Management's Discussion and Analysis of Financial Condition and Results of Operations (For the 12 month period ending December 31, 2016) | 109 | |
| Consolidated Financial Statements and Supplemental Schedules | 109 | |
| For Service or More Information | 110 | |
| Our Service Center | 110 | |
| ● | You can lose money that you allocate to the Index Precision Strategy and Index Performance Strategy if Index losses are greater than the Buffer, or the Index Guard Strategy for Index losses down to the Floor. You cannot lose money that you allocate to the Index Protection Strategy due to Index losses. The Index Precision Strategy, Index Performance Strategy and Index Guard Strategy include a risk of potential loss of principal and this loss could be significant. If money is withdrawn or removed from an Index Precision Strategy, Index Performance Strategy or Index Guard Strategy Index Option before the Index Anniversary, you could lose principal even if the Index Return is positive on the date of withdrawal. |
| ● | For Contracts issued in Delaware, Washington and Missouri: The Index Protection Strategy is not available to Contracts issued in Washington, or to inforce Contracts issued before August 24, 2015 in Delaware, or to inforce Contracts issued on or after April 25, 2016 in Missouri. If the renewal Caps for the Index Performance Strategy and Index Guard Strategy or the renewal Precision Rates for the Index Precision Strategy are not acceptable to you, you will not be able to transfer Index Option Value into the Index Protection Strategy and take advantage of its principal protection. This would subject you to ongoing market risk. You could lose money. |
| · | The DPSC, Precision Rates and Caps may be different for newly issued Contracts and for inforce Contracts, even if the Contracts have Index Effective Dates with the same month and day. The initial DPSC, Precision Rates and Caps for newly issued Contracts may be higher or lower than the renewal DPSC, Precision Rates and Caps for inforce Contracts. However, all inforce Contracts with Index Effective Dates in the same date range will receive the same renewal DPSC, Precision Rates and Caps. |
| · | If your Contract is still within its Free Look/Right to Examine period you may be able to take advantage of any increase in initial DPSC, Precision Rates or Caps for newly issued Contracts by cancelling your existing Contract and purchasing a new Contract. |
| If the Index Return were…. | Credit Received Under Each Crediting Method | Analysis | |||
| Index Protection Strategy | Index Precision Strategy | Index Performance Strategy | Index Guard Strategy | ||
| 1% | 4% | 8% | 1% | 1% | The Index Precision Strategy provides the most potential return in this example because the Performance Credit would be equal to the 8% Precision Rate. |
| 25% | 4% | 8% | 10% | 10% | The Index Performance Strategy and Index Guard Strategy provide the most return potential in this example. If Caps were not equal between Index Performance Strategy and Index Guard Strategy, the Crediting Method with the higher Cap would provide the highest potential return. |
| -8% | 0% | 0% | 0% | -8% | The Index Guard Strategy has the highest risk of loss in this example as it provides the least amount of protection in periods of small negative returns. |
| -25% | 0% | -15% | -15% | -10% | The Index Protection Strategy provides the most protection from loss in this example. You cannot lose assets based on a loss in Index Value under the Index Protection Strategy. |
| Comparison of Crediting Methods | ||||
| Index Protection Strategy | Index Precision Strategy | Index Performance Strategy | Index Guard Strategy | |
| What is the growth opportunity? | Offers the least growth opportunity as the DPSC will generally be less than the Precision Rate and the Index Performance Strategy Cap. You receive the DPSC if the Index's current value is equal to or greater than its value from one year ago. | Generally offers more growth opportunity than the Index Protection Strategy, but less than the Index Performance Strategy. Growth opportunity may be more or less than what is available with the Index Guard Strategy depending on Precision Rates and Cap rates. You receive a Performance Credit equal to the Precision Rate if the current Index Value is equal to or greater than the Index Value on the last Index Anniversary. | Generally offers more growth opportunity than the Index Protection Strategy or Index Precision Strategy. Growth opportunity may be more or less than what is available with the Index Guard Strategy depending on Cap rates. Positive Index Returns are limited by the Cap. | Generally offers more growth opportunity than the Index Protection Strategy. Growth opportunity may be more or less than what is available with the Index Precision Strategy or Index Performance Strategy depending on Precision Rates and Cap rates. Positive Index Returns are limited by the Cap. |
| What is the asset protection? | Offers the most protection. You cannot lose assets based on a loss in Index Value. If the Index loses value, you do not receive a Credit. | Offers protection from smaller negative market movements, but also has the potential for the largest loss in any one year. Asset protection may be more or less than what is available with the Index Performance Strategy depending on Buffer rates. A percetage of negative Index Returns are absorbed by the Buffer, but you will receive a negative Performance Credit for losses greater than the Buffer. | Offers protection from smaller negative market movements, but also has the potential for the largest loss in any one year. Asset protection may be more or less than what is available with the Index Precision Strategy depending on Buffer rates. A percetage of negative Index Returns are absorbed by the Buffer, but you will receive a negative Performance Credit for losses greater than the Buffer. | Offers protection from significant negative market movements, but is sensitive to smaller negative market movements that persist over time. Permits negative Performance Credits down to the Floor. |
| What can change within a Crediting Method? | The DPSC is subject to a 1.50% minimum. Initial DPSCs for newly issued Contracts can change frequently. Your initial DPSC is set on the Index Effective Date. We can change your renewal DPSC annually on each Index Anniversary. | The Precision Rates are subject to a 1.50% minimum, and the Buffers subject to a 5% minimum. The Buffers and initial Precision Rates for newly issued Contracts can change frequently. Your initial Precision Rates are set on the Index Effective Date. We can change your renewal Precision Rates annually on each Index Anniversary, but we set your Buffers on the Issue Date and we cannot change them. | The Caps are subject to a 1.50% minimum, and the Buffers subject to a 5% minimum. The Buffers and initial Caps for newly issued Contracts can change frequently. Your initial Caps are set on the Index Effective Date. We can change your renewal Caps annually on each Index Anniversary, but we set your Buffers on the Issue Date and we cannot change them. | The Caps are subject to a 1.50% minimum, and the Floors subject to a -25% minimum. The Floors and initial Caps for newly issued Contracts can change frequently. Your initial Caps are set on the Index Effective Date. We can change your renewal Caps annually on each Index Anniversary, but we set your Floors on the Issue Date and we cannot change them. |
NOTE: ● The DPSC, Precision Rates, and Caps may vary substantially based on market conditions. ● Precision Rates, Caps, Buffers and Floors can all be different. For example, Caps for the Index Performance Strategy can be different between the S&P 500® Index and the Nasdaq-100® Index, and Caps for the S&P 500® Index can be different between the Index Performance Strategy and Index Guard Strategy. | ||||
| · | The Contract Value is the sum of your Variable Account Value and total Index Option Values. Contract Value does not include any currently applicable withdrawal charge, final product fee, or final contract maintenance charge that we assess on a full withdrawal or when you request Annuity Payments. |
| · | The Variable Account Value is the sum of the values in your selected Variable Options. It includes the deduction of Variable Option operating expenses, and any previously assessed transfer fee, contract maintenance charge, product fee, and withdrawal charge. Your Variable Account Value changes daily based on the performance of your selected Variable Options. |
| · | The total Index Option Value is the sum of the values in each of your selected Index Options. Each Index Option Value includes any Credits from previous Index Anniversaries and the deduction of any previously assessed contract maintenance charge, product fee, and withdrawal charge. On each Business Day during the Index Year other than the Index Effective Date or an Index Anniversary, we calculate the current Index Option Value for each Index Precision Strategy, Index Performance Strategy and Index Guard Strategy Index Option by adding a Daily Adjustment to the Index Option Base (which is the amount you allocate to an Index Option adjusted for withdrawals, Contract expenses, transfers into or out of the Index Option, and the application of any Performance Credits). We calculate the Daily Adjustment before we process any partial withdrawal or deduct any Contract expenses, and the adjustment can be positive or negative. Any amounts removed from these Index Options during the Index Year do not receive a Performance Credit on the next Index Anniversary, but the amount remaining does receive a Performance Credit subject to the Precision Rate or Cap and Buffer, or Cap and Floor. If you take a withdrawal, annuitize the Contract, transfer out of Index Options to the Variable Options, or if we pay a death benefit each Index Option Value for each Crediting Method also includes any increase from the Alternate Minimum Value, if higher. If we are determining the Alternate Minimum Value for an Index Precision Strategy, Index Performance Strategy or Index Guard Strategy Index Option Value on any day other than an Index Anniversary, we first calculate the Index Option Value by adding the Daily Adjustment, then compare this value to its associated Alternate Minimum Value and we pay the greater of these two amounts. If we are paying a partial withdrawal, we compare the percentage of Index Option Value with an equivalent percentage of its Alternate Minimum Value. We expect that an Alternate Minimum Value generally will not be greater than its Index Option Value. |
| · | Amounts removed from the Index Options during the Index Year for partial withdrawals and Contract expenses do not receive the DPSC or a Performance Credit on the next Index Anniversary. However, the remaining amount in the Index Options is eligible for the DPSC or a Performance Credit on the next Index Anniversary. Performance Credits under the Index Precision Strategy, Index Performance Strategy and Index Guard Strategy are subject to the Precision Rate or Cap and Buffer, or Cap and Floor. Contract expenses include the product fee, the contract maintenance charge and any applicable withdrawal charge. |
| · | If you take a partial withdrawal on any day other than an Index Anniversary, we first calculate the Index Option Value (which includes the Daily Adjustment under the Index Precision Strategy, Index Performance Strategy or Index Guard Strategy Index Option), then compare the percentage of Index Option Value withdrawn to an equivalent percentage of its Alternate Minimum Value and pay you the greater of these two amounts. |
| Number of Complete Years Since Purchase Payment | Withdrawal Charge Amount(3) |
| 0 | 8.5% |
| 1 | 8% |
| 2 | 7% |
| 3 | 6% |
| 4 | 5% |
| 5 | 4% |
| 6 years or more | 0% |
Transfer Fee(4)…………………………………....... …………………………… | $25 |
| (for each transfer between Variable Options after twelve in a Contract Year) | |
Premium Tax(5)…………………………………... ……………………………… | 3.5% |
| (as a percentage of each Purchase Payment) |
Contract Maintenance Charge(6)……………………………………………….. | $50 |
| (per Contract per year) |
| (1) | The Contract provides a free withdrawal privilege that allows you to withdraw 10% of your total Purchase Payments annually without incurring a withdrawal charge, as discussed in section 9, Access to Your Money – Free Withdrawal Privilege. |
| (2) | The Withdrawal Charge Basis is the amount subject to a withdrawal charge, as discussed in section 8, Expenses – Withdrawal Charge. |
| (3) | In Florida, the total withdrawal charge on a partial or full withdrawal cannot be greater than 10% of the Contract Value withdrawn. In Iowa and Pennsylvania the withdrawal charge is 8.25%, 8%, 7%, 6%, 5%, 4% and 0% for the time periods referenced. In Mississippi the withdrawal charge is 8.5%, 7.5%, 6.5%, 5.5%, 5%, 4% and 0% for the time periods referenced. |
| (4) | We count all transfers made in the same Business Day as one transfer, as discussed in section 8, Expenses – Transfer Fee. The transfer fee does not apply to transfers to or from the Index Options and these transfers do not count against your free transfers. Transfers are subject to the market timing policies discussed in section 5, Variable Options – Excessive Trading and Market Timing. |
| (5) | Not currently deducted, but we reserve the right to do so in the future. This is the maximum charge we could deduct if we exercise this right, as discussed in section 8, Expenses – Premium Tax. |
| (6) | Waived if the Contract Value is at least $100,000, as discussed in section 8, Expenses – Contract Maintenance Charge. |
Product Fee(7)…………………………………....... | 1.25% |
| (as a percentage of the Charge Base) |
| (7) | We do not assess the product fee during the Annuity Phase. See section 8, Expenses – Product Fee. |
| Minimum | Maximum | |
Total annual Variable Option operating expenses (including management fees, distribution or 12b‑1 fees, and other expenses) before fee waivers and expense reimbursements | 0.65% | 0.73% |
| Variable Option | Management fees | Rule 12b‑1 fees | Other expenses | Acquired fund fees and expenses | Total annual fund operating expenses before fee waivers and/or expense reimbursements |
| BLACKROCK | |||||
| AZL Government Money Market Fund | .35 | .25 | .05 | – | .65 |
| ALLIANZ FUND OF FUNDS | |||||
AZL MVP Balanced Index Strategy Fund(1) | .10 | – | .04 | .59 | .73 |
AZL MVP Growth Index Strategy Fund(1) | .10 | – | .02 | .57 | .69 |
| (1) | The underlying funds may pay 12b‑1 fees to the distributor of the Contracts for distribution and/or administrative services. The underlying funds do not pay service fees or 12b‑1 fees to the Allianz Fund of Funds and the Allianz Fund of Funds do not pay service fees or 12b‑1 fees. The underlying funds of the Allianz Fund of Funds may pay service fees to the insurance companies issuing variable contracts, or their affiliates, for providing customer service and other administrative services to contract purchasers. The amount of such service fees may vary depending on the underlying fund. |
| 1) | If you surrender your Contract (take a full withdrawal) at the end of each time period. |
Total annual Variable Option operating expenses before any fee waivers or expense reimbursements of: | 1 Year | 3 Years | 5 Years | 10 Years |
| 0.73% (the maximum Investment Option operating expense) | $1,100 | $1,466 | $1,803 | $2,747 |
| 0.65% (the minimum Investment Option operating expense) | $1,092 | $1,442 | $1,763 | $2,665 |
| 2) | If you annuitize your Contract and begin Annuity Payments at the end of each time period. The earliest available Annuity Date (the date Annuity Payments begin) is one year after the Issue Date (the date we issue the Contract). |
Total annual Variable Option operating expenses before any fee waivers or expense reimbursements of: | 1 Year | 3 Years | 5 Years | 10 Years |
| 0.73% (the maximum Investment Option operating expense) | - | $766 | $1,303 | $2,747 |
| 0.65% (the minimum Investment Option operating expense) | - | $742 | $1,263 | $2,665 |
| 3) | If you do not surrender your Contract. |
Total annual Variable Option operating expenses before any fee waivers or expense reimbursements of: | 1 Year | 3 Years | 5 Years | 10 Years |
| 0.73% (the maximum Investment Option operating expense) | $250 | $766 | $1,303 | $2,747 |
| 0.65% (the minimum Investment Option operating expense) | $242 | $742 | $1,263 | $2,665 |
| Period or Year Ended | AUV at Beginning of Period | AUV at End of Period | Number of Accumulation Units Outstanding at End of Period |
| AZL Government Money Market Fund | |||
| 12/31/2013 | NA | 12.754 | 346 |
| 12/31/2014 | 12.754 | 12.755 | 1560 |
| 12/31/2015 | 12.755 | 12.756 | 2726 |
| 12/31/2016 | 12.756 | 12.757 | 5376 |
| AZL MVP Balanced Index Strategy Fund | |||
| 12/31/2013 | NA | 12.212 | 10 |
| 12/31/2014 | 12.212 | 12.956 | 237 |
| 12/31/2015 | 12.956 | 12.927 | 473 |
| 12/31/2016 | 12.927 | 13.782 | 537 |
| AZL MVP Growth Index Strategy Fund | |||
| 12/31/2013 | NA | 13.412 | 7 |
| 12/31/2014 | 13.412 | 14.280 | 240 |
| 12/31/2015 | 14.280 | 14.165 | 382 |
| 12/31/2016 | 14.165 | 15.128 | 468 |
| 1. | RISK FACTORS |
| January 1, 2007 through December 31, 2016 | ||||
S&P 500® Index | Nasdaq-100® Index | Russell 2000® Index | EURO STOXX 50® | |
| Returns without dividends | 6.45% | 13.63% | 7.65% | -0.18% |
| Returns with dividends | 8.73% | 14.83% | 9.12% | 3.93% |
| · | the Index is discontinued, |
| · | we are unable to use the Index because, for example, changes to an Index make it impractical or expensive to purchase derivative securities to hedge the Index, or we are not licensed to use the Index, or |
| · | the method of calculation of the Index Values changes substantially, resulting in significantly different Index Values and performance results. This could occur, for example, if an Index altered the types of securities tracked, or the weighting of different categories of securities. |
| 2. | THE VARIABLE ANNUITY CONTRACT |
| · | The Business Day before the Annuity Date. |
| · | The Business Day we process your request for a full withdrawal. |
| · | Upon the death of any Owner (or the Annuitant if the Contract is owned by a non-individual), the Business Day we first receive the documents we require before we pay any death claim (Valid Claim) from any one Beneficiary, unless the surviving spouse/Beneficiary continues the Contract. If there are multiple Beneficiaries, the remaining Contract Value continues to fluctuate with the performance of the Allocation Options until the complete distribution of the death benefit. |
| · | Free look/right to examine provisions. |
| · | Availability of Crediting Methods. |
| · | The withdrawal charge. |
| · | Restrictions on additional Purchase Payments, Contract assignments and the earliest Annuity Date. |
| · | The insulation or non-insulation of the unregistered separate account that supports your Contract. |
| · | Availability of the waiver of withdrawal charge benefit. |
| · | all applicable phases of the Contract (Accumulation Phase and/or Annuity Phase) have ended, and/or |
| · | if we received a Valid Claim, all applicable death benefit payments have been made. |
| 3. | OWNERSHIP, ANNUITANTS, DETERMINING LIFE, BENEFICIARIES, AND PAYEES |
| UPON THE DEATH OF A SOLE OWNER | |||
| Action if the Contract is in the Accumulation Phase | Action if the Contract is in the Annuity Phase | ||
| · | We pay a death benefit to the person you designate (the Beneficiary) unless the Beneficiary is the surviving spouse and continues the Contract. | · | The Beneficiary becomes the Payee. If we are still required to make Annuity Payments under the selected Annuity Option, the Beneficiary also becomes the new Owner. |
| · | If the deceased was not an Annuitant, Annuity Payments to the Payee continue. No death benefit is payable. | ||
| · | If the deceased Owner was the Determining Life and the surviving spouse Beneficiary continues the Contract, we increase the Contract Value to equal total Purchase Payments adjusted for withdrawals (if greater), the Traditional Death Benefit ends, the surviving spouse becomes the new Owner, and the Accumulation Phase continues. If the deceased Owner was not the Determining Life the Traditional Death Benefit is not available. | · | If the deceased was the only surviving Annuitant, Annuity Payments end or continue as follows. – Annuity Option 1 or 3, payments end. – Annuity Option 2 or 4, payments end when the guarantee period ends. – Annuity Option 5, payments end and the Payee may receive a lump sum refund. |
| · | If the deceased was an Annuitant and there is a surviving joint Annuitant, Annuity Payments to the Payee continue during the lifetime of the surviving joint Annuitant. No death benefit is payable. | ||
| · | Upon the surviving spouse's death, his or her Beneficiary(s) receives the Contract Value. | ||
| · | If you remove a Joint Owner due to divorce we also remove that person as a Determining Life, or |
| · | If you establish a jointly owned Non-Qualified Contract and change ownership to a Trust, we remove the prior Owner who is not the Annuitant as a Determining Life. |
| · | An assignment does not change the Determining Life (Lives). |
| · | We cannot restrict assignments for Contracts issued in California, Florida, New Jersey, Ohio, and Wisconsin. For Contracts issued in Connecticut, we can only restrict assignments to settlement companies and institutional investors as described in your Contract. The Traditional Death Benefit is only available on the death of a Determining Life. If you assign the Contract and the Determining Life (Lives) are no longer an Owner (or Annuitant if the Owner is a non-individual) the Traditional Death Benefit may not be available to your Beneficiary(s). |
| 4. | PURCHASING THE CONTRACT |
| · | The minimum initial Purchase Payment due on the Issue Date is $10,000. |
| · | You can make additional Purchase Payments of $50 or more during the Accumulation Phase. |
| · | We do not accept additional Purchase Payments on or after the Annuity Date. |
| · | The maximum total Purchase Payments we accept without our prior approval is $1 million. |
| · | For Contracts issued in Florida, New Jersey, and Maryland: We can only decline a Purchase Payment if it would cause total Purchase Payments to be more than $1 million, or if it would otherwise violate the Purchase Payment restrictions of your Contract (for example, we do not allow additional Purchase Payments on or after the Annuity Date). |
| · | For Contracts issued in Mississippi and Utah: We do not accept additional Purchase Payments on or after the first Contract Anniversary. |
| · | your requested Index Effective Date would occur during this time, we change your Index Effective Date to the next Business Day after the free look period that is not the 29th, 30th or 31st of the month. |
| · | you cancel your Contract during this time, we return the greater of Purchase Payments less withdrawals, or Contract Value. |
| · | you do not cancel your Contract during this time, we re-allocate your money according to your future Purchase Payment allocation instructions after the free look period as follows: |
| – | if your instructions include the Variable Options, we re-allocate this portion of your money on the next Business Day after the free look period. |
| – | if your instructions include the Index Options, we re-allocate this portion of your money on the Index Effective Date. |
| 5. | VARIABLE OPTIONS |
| Investment Management Company and Adviser/Subadviser | Investment Option Name | Asset Class | Investment Objective | Principal Investment Strategies (Normal market conditions) |
| ALLIANZ FUND OF FUNDS | ||||
| Allianz Investment Management LLC | AZL MVP Balanced Index Strategy Fund | A "Fund of Funds" Model Portfolio | Long-term capital appreciation with preservation of capital as an important consideration | Invests primarily (approximately 80% to 100%) in a combination of five underlying index funds (generally allocated 40% to 60% to underlying equity index funds and 40% to 60% to underlying bond index funds), combined with the MVP (Managed Volatility Portfolio) risk management process intended to adjust the risk of the portfolio based on quantitative indicators of market risk. |
| AZL MVP Growth Index Strategy Fund | A "Fund of Funds" Model Portfolio | Long-term capital appreciation | Invests primarily (approximately 80% to 100%) in a combination of five underlying index funds (generally allocated 65% to 85% to underlying equity index funds and 15% to 35% to underlying bond index funds), combined with the MVP (Managed Volatility Portfolio) risk management process intended to adjust the risk of the portfolio based on quantitative indicators of market risk. | |
| BLACKROCK | ||||
| Allianz Investment Management LLC/BlackRock Advisors, LLC | AZL Government Money Market Fund | Cash Equivalent | Current income consistent with stability of principal | Invests at least 99.5% of its total assets in cash, government securities, or repurchase agreements that are collateralized fully. Invests at least 80% in government securities or in repurchase agreements collateralized by government securities. Investments include U.S. Treasury bills, notes and other obligations issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities, and repurchase agreements secured by such obligations. In addition, the Fund may invest in variable and floating rate instruments. During extended periods of low interest rates, and due in part to contract fees and expenses, the yield of the AZL Government Money Market Fund may also become extremely low and possibly negative. |
| · | Your request for a transfer must clearly state the Variable Options involved and how much to transfer. |
| · | Your right to make transfers is subject to the Excessive Trading and Market Timing policy discussed later in this section. |
| · | Variable Account Value transfers between Variable Options do not change your future Purchase Payment allocation instructions. |
| · | Dilution of the interests of long-term investors in a Variable Option, if market timers or others transfer into a Variable Option at prices that are below their true value, or transfer out at prices above their true value. |
| · | An adverse effect on portfolio management, such as causing a Variable Option to maintain a higher level of cash or causing a Variable Option to liquidate investments prematurely. |
| · | Increased brokerage and administrative expenses. |
| · | Limit transfer frequency (for example, prohibit more than one transfer a week, or more than two a month, etc.). |
| · | Restrict the transfer method (for example, requiring all transfers be sent by first-class U.S. mail and rescinding electronic transfer privileges). |
| · | Require a minimum time period between each transfer into or out of the same Variable Option. Our current policy, which is subject to change without notice, prohibits "round trips" within 14 calendar days. We do not include transfers into and/or out of the AZL Government Money Market Fund when available in your Contract. Round trips are transfers into and back out of the same Variable Option, or transfers out of and back into the same Variable Option. |
| · | Refuse transfer requests made on your behalf by an asset allocation and/or market timing service. |
| · | Limit the dollar amount of any single Purchase Payment or transfer request to a Variable Option. |
| · | Prohibit transfers into specific Variable Options. |
| · | Impose other limitations or restrictions to the extent permitted by federal securities laws. |
| · | Our monitoring will be 100% successful in detecting all potentially disruptive trading activity. |
| · | Revoking electronic transfer privileges will successfully deter all potentially disruptive trading. |
| · | You can provide voting instructions based on the dollar value of the Variable Option's shares in your Contract's subaccount. We calculate this value based on the number and value of accumulation units for your Contract on the record date. We count fractional units. |
| · | You receive proxy materials and a voting instruction form. |
| 6. | VALUING YOUR CONTRACT |
| · | On Wednesday, we receive at our Service Center an additional Purchase Payment of $3,000 from you before the end of the Business Day. |
| · | When the New York Stock Exchange closes on that Wednesday, we determine that the accumulation unit value is $13.25 for your selected Variable Option. |
| 7. | INDEX OPTIONS |
| Crediting Methods | Indices Currently Available | |
| Index Protection Strategy | with…. | S&P 500® Index |
| Index Precision Strategy | with…. | S&P 500® Index, Russell 2000® Index, Nasdaq-100® Index and EURO STOXX 50® |
| Index Performance Strategy | with…. | S&P 500® Index, Russell 2000® Index, Nasdaq-100® Index and EURO STOXX 50® |
| Index Guard Strategy | with…. | S&P 500® Index, Russell 2000® Index, Nasdaq-100® Index and EURO STOXX 50® |
| · | the amount of your initial Purchase Payment you allocated to the Index Option if the Index Effective Date is the Issue Date, or |
| · | the amount of Variable Account Value you allocated to the Index Option. |
| · | We deduct partial withdrawals and Contract expenses from the Allocation Options proportionately based on the percentage of Contract Value in each Allocation Option. |
| - | The percentage is equal to the Index Protection Strategy Index Option Value divided by the Contract Value using values determined at the end of the Business Day before we process the withdrawal or deduct the Contract expense. |
| · | However, if you specifically direct us to take a partial withdrawal from the Index Protection Strategy Index Option we reduce that Index Option Value by the dollar amount you specify, including any applicable withdrawal charge. |
| - | You cannot specify from which Allocation Option we deduct Contract fees and expenses, but you can specify from which Allocation Option we deduct a partial withdrawal. There is no financial advantage to deducting a partial withdrawal from any specific Allocation Option. |
| · | We then set the Index Option Base equal to its Index Option Value. |
| · | We multiply the Index Option Base by its DPSC and add this amount to the Index Option Base. |
| · | Then we set the Index Option Value equal to the Index Option Base. |
| · | Additional Purchase Payments received and allocated to this Index Option and transfers of Variable Account Value or Index Option Value into this Index Option increase these values by the dollar amount allocated to this Index Option. |
| · | Transfers out of this Index Option reduce these values by the dollar amount removed from the Index Option. |
| · | Partial withdrawals and Contract expenses reduce these values as on any other Business Day. |
| · | the amount of your initial Purchase Payment you allocated to that Index Option if the Index Effective Date is the Issue Date, or |
| · | the percentage of Variable Account Value you allocated to that Index Option. |
| · | We deduct partial withdrawals and Contract expenses from the Allocation Options proportionately based on the percentage of Contract Value in each Allocation Option. |
| - | The percentage is equal to each Index Option Value divided by the Contract Value using values determined at the end of the Business Day before we process the withdrawal or deduct the Contract expense. |
| · | However, if you specifically direct us to take a partial withdrawal from an Index Precision Strategy, Index Performance Strategy or Index Guard Strategy Index Option we reduce that Index Option Value by the dollar amount you specify, including any applicable withdrawal charge. |
| - | You cannot specify from which Allocation Option we deduct Contract fees and expenses, but you can specify from which Allocation Option we deduct a partial withdrawal. There is no financial advantage to deducting a partial withdrawal from any specific Allocation Option. |
| · | We then reduce each Index Option Base by the same percentage that the amount withdrawn reduced its associated Index Option Value. |
| · | If the current Index Value is equal to or greater than the Index Value on the last Index Anniversary (or the Index Effective Date if this is the first Index Anniversary) and you selected the Index Precision Strategy, you receive a positive Performance Credit equal to the Precision Rate. |
| · | If the Index Return is positive and you selected the Index Performance Strategy or Index Guard Strategy, you receive a positive Performance Credit limited by the Cap. For example if the Cap is 8% and the Index Return is 10%, you receive an 8% Performance Credit. |
| · | If the Index Return is zero and you selected the Index Performance Strategy or Index Guard Strategy, the Performance Credit is zero. |
| · | If the Index Return is negative and you selected the Index Precision Strategy or Index Performance Strategy, we apply the Buffer and determine if you receive a negative Performance Credit. For example, if the Buffer is 10% and the Index Return is -8%, we apply a Performance Credit of zero to your Index Option Base. If instead the Index Return is -12%, we apply a -2% Performance Credit to your Index Option Base. |
| · | If the Index Return is negative and you selected the Index Guard Strategy, we apply the Floor and determine the amount of the negative Performance Credit. For example, if the Floor is -10% and the Index Return is -8%, we apply a Performance Credit of -8% to your Index Option Base. If instead the Index Return is -12%, we apply a -10% Performance Credit to your Index Option Base. |
| · | We multiply each Index Option Base by its Performance Credit and add this amount to its Index Option Base. |
| · | Then we set each Index Option Value equal to its Index Option Base. |
| · | Additional Purchase Payments received and allocated to this Index Option and transfers of Variable Account Value or Index Option Value into this Index Option increase these values by the dollar amount allocated to this Index Option. |
| · | Transfers out of this Index Option reduce these values by the dollar amount removed from the Index Option. |
| · | Partial withdrawals and Contract expenses reduce these values as on any other Business Day. |
| 8. | EXPENSES |
| · | We increase it by the amount of any additional Purchase Payments. |
| · | We reduce it by the percentage of any Contract Value withdrawn. Withdrawals include all Contract expenses (withdrawal charge, product fee, contract maintenance charge, and transfer fee). |
| · | If you withdraw the total Contract Value, we deduct the final product fee (the total of all daily product fees we calculated for the current Contract quarter) before processing the withdrawal. |
| · | If you annuitize the Contract, we deduct the final product fee before calculating Annuity Payments. |
| · | Upon the death of an Owner (or Annuitant if the Owner is a non-individual), we deduct the final product fee before calculating the death benefit if death benefit payment Option A or Annuity Payments under death benefit payment Option C is selected. |
| · | During the Accumulation Phase, if the total Contract Value for all Index Advantage Contracts you own is at least $100,000 at the end of the last Business Day before the Contract Anniversary, or if the Contract Value for this single Index Advantage Contract is at least $100,000 on the Contract Anniversary. We determine the total Contract Value for all individually owned Index Advantage Contracts by using the Owner's social security number, and for non-individually owned Index Advantage Contracts we use the Annuitant's social security number. |
| · | During the Annuity Phase if the Contract Value on the last Business Day before the Annuity Date is at least $100,000. |
| · | When paying death benefits under death benefit payment options A, B, or C. |
| 1. | First we withdraw from Purchase Payments that we have had for six or more complete years, which is your Contract's withdrawal charge period. This withdrawal is not subject to a withdrawal charge and it reduces the Withdrawal Charge Basis. |
| 2. | Then, if this is a partial withdrawal, we withdraw from the free withdrawal privilege (see section 9, Access to Your Money – Free Withdrawal Privilege). This withdrawal is not subject to a withdrawal charge and it does not reduce the Withdrawal Charge Basis. |
| 3. | Next, on a FIFO basis, we withdraw from Purchase Payments within your Contract's withdrawal charge period and assess a withdrawal charge. Withdrawing payments on a FIFO basis may help reduce the total withdrawal charge because the charge declines over time. We determine your total withdrawal charge by multiplying each payment by its applicable withdrawal charge percentage and then totaling the charges. This withdrawal reduces the Withdrawal Charge Basis. |
| 4. | Finally we withdraw any Contract earnings. This withdrawal is not subject to a withdrawal charge and it does not reduce the Withdrawal Charge Basis. |
| Number of Complete Years Since Purchase Payment | Withdrawal Charge Amount(1) |
| 0 | 8.5% |
| 1 | 8% |
| 2 | 7% |
| 3 | 6% |
| 4 | 5% |
| 5 | 4% |
| 6 years or more | 0% |
| (1) | In Iowa and Pennsylvania the withdrawal charge is 8.25%, 8%, 7%, 6%, 5%, 4% and 0% for the time periods referenced. In Mississippi the withdrawal charge is 8.5%, 7.5%, 6.5%, 5.5%, 5%, 4% and 0% for the time periods referenced. |
| 1) | Purchase Payments beyond the withdrawal charge period. All payments are still within the withdrawal charge period, so this does not apply. |
| 2) | Amounts available under the free withdrawal privilege. You did not take any other withdrawals this year, so you can withdraw up to 10% of your total payments (or $10,000) without incurring a withdrawal charge. |
| 3) | Purchase Payments within the withdrawal charge period on a FIFO basis. The total amount we withdraw from the first Purchase Payment is $30,000, which is subject to a 7% withdrawal charge, and you receive $27,900. We determine this amount as follows: |
$30,000 x 0.93 = $27,900.
$14,100 ÷ 0.92 = $15,326.
| 4) | Contract earnings. We already withdrew your requested amount, so this does not apply. |
| · | Because we do not reduce the Withdrawal Charge Basis for penalty-free withdrawals or the deduction of Contract expenses other than the withdrawal charge, we may assess a withdrawal charge on more than the amount you are withdrawing upon a full withdrawal of the total Contract Value. Also, upon full withdrawal, if the Contract Value has declined due to poor performance, the withdrawal charge may be greater than the total Contract Value and you will not receive any money. |
| · | Withdrawals may have tax consequences and, if taken before age 59½, may be subject to a 10% additional federal tax. For tax purposes in most instances, withdrawals from Non-Qualified Contracts are considered to come from earnings first, not Purchase Payments. |
| · | For Contracts issued in Florida: The withdrawal charge cannot exceed 10% of the Contract Value withdrawn. |
| 9. | ACCESS TO YOUR MONEY |
| · | by withdrawing your Contract Value; |
| · | by taking required minimum distributions (Qualified Contracts only) as discussed in "Minimum Distribution Program and Required Minimum Distribution (RMD) Payments" later in this section; |
| · | by taking Annuity Payments; or |
| · | when we pay a death benefit. |
| * | Does not apply to required minimum distributions. |
| · | total Contract Value, |
| · | less any final product fee and final contract maintenance charge, |
| · | less any withdrawal charge, and |
| · | plus any increase from the application of the Alternate Minimum Value if you selected an Index Option. |
| · | Ordinary income taxes and tax penalties may apply to any withdrawal you take. |
| · | We may be required to provide information about you or your Contract to government regulators. We may also be required to stop Contract disbursements and thereby refuse any transfer requests, and refuse to pay any withdrawals, surrenders, or death benefits until we receive instructions from the appropriate regulator. If, pursuant to SEC rules, the AZL Government Money Market Fund suspends payment of redemption proceeds in connection with a fund liquidation, we will delay payment of any transfer, partial withdrawal, surrender, or death benefit from the AZL Government Money Market Fund subaccount until the fund is liquidated. |
| · | For Contracts issued in Montana: If you take a partial withdrawal that reduces the Contract Value below $2,000, we contact you by phone and give you the option of modifying your withdrawal request. If we cannot reach you, we process your request as a full withdrawal. |
| · | For Contracts issued in Texas: We only treat a partial withdrawal that reduces the Contract Value below $2,000 as a full withdrawal if you have not made an additional Purchase Payment in the past two calendar years. |
| · | Ordinary income taxes and tax penalties may apply to systematic withdrawals. |
| · | The systematic withdrawal program is not available while you are receiving required minimum distribution payments. |
| · | You should consult a tax adviser before purchasing a Qualified Contract that is subject to RMD payments. |
| · | The minimum distribution program is not available while you are receiving systematic withdrawals. |
| · | Massachusetts – The waiver of withdrawal charge benefit is not available. |
| · | New Hampshire – The definition of nursing home is an institution operated in accordance with state law. |
| · | Pennsylvania – The waiver is not available if on the Issue Date, an Owner was confined to a nursing home or was already diagnosed with a terminal illness. Also, the nursing home confinement requirement is a total of 90 days within a six month period. These 90 days do not need to be consecutive. |
| · | the New York Stock Exchange is closed (other than customary weekend and holiday closings); |
| · | trading on the New York Stock Exchange is restricted; |
| · | an emergency (as determined by the SEC) exists as a result of which disposal of the Variable Option shares is not reasonably practicable or we cannot reasonably value the Variable Option shares; or |
| · | during any other period when the SEC, by order, so permits for the protection of Owners. |
| 10. | THE ANNUITY PHASE |
| · | The Contract Value on the Annuity Date. |
| · | The age of the Annuitant and any joint Annuitant on the Annuity Date. |
| · | The gender of the Annuitant and any joint Annuitant where permitted. |
| · | The Annuity Option you select. |
| · | Your Contract's interest rate (or current rates, if higher) and mortality table. |
| * | In Florida, the earliest acceptable Annuity Date is one year after the Issue Date. |
| 11. | DEATH BENEFIT |
| · | Contract Value, or |
| · | total of all Purchase Payments received, reduced by the percentage of Contract Value withdrawn, determined at the end of each Business Day. Withdrawals include withdrawal charges, but not amounts we withdraw for other Contract expenses. |
| · | If a Determining Life dies before you we do not pay a death benefit to the Beneficiary(s), but we may increase the Contract Value. We compare the Contract Value and total Purchase Payments adjusted for withdrawals determined at the end of Business Day we receive due proof of a Determining Life's death. If your Contract Value is less than total Purchase Payments adjusted for withdrawals, we increase your Contract Value to equal total Purchase Payments adjusted for withdrawals. The Traditional Death Benefit becomes the Contract Value, and the Traditional Death Benefit ends. We allocate any Contract Value increase to the Variable Options according to future Purchase Payment allocation instructions. |
| · | Upon your death your Beneficiary(s) receive the Contract Value determined at the end of the Business Day during which we receive each Beneficiary's Valid Claim. |
| · | The Business Day before the Annuity Date. |
| · | The Business Day that total Purchase Payments adjusted for withdrawals and Contract Value are both zero. |
| · | Upon the death of a Determining Life, the end of the Business Day we receive a Valid Claim from all Beneficiaries if you and the Determining Life are the same individuals, or if you and the Determining Life (Lives) are different individuals and die simultaneously as defined by applicable state law or regulation. |
| · | Upon the death of a Determining Life, the end of the Business Day we receive due proof of the Determining Life's death if you and the Determining Life (Lives) are different individuals and do not die simultaneously. |
| · | Upon the death of an Owner (or Annuitant if the Owner is a non-individual), the end of the Business Day we receive the first Valid Claim from any one Beneficiary, if the Owner (or Annuitant) is no longer a Determining Life. |
| · | The Business Day the Contract ends. |
| · | he or she may exercise all of the Owner's rights, including naming a new Beneficiary or Beneficiaries; |
| · | he or she is subject to any remaining withdrawal charge; and |
| · | upon the surviving spouse's death their Beneficiary(s) receive the Contract Value determined at the end of the Business Day during which we receive a Valid Claim from each Beneficiary. |
| 12. | TAXES |
| Type of Contract | Persons and Entities that can buy the Contract |
| IRA | Must have the same individual as Owner and Annuitant. |
| Roth IRA | Must have the same individual as Owner and Annuitant. |
| Simplified Employee Pension (SEP) IRA | Must have the same individual as Owner and Annuitant. |
| Certain Code Section 401 Plans | A qualified retirement plan is the Owner and the Annuitant must be an individual. We may determine which types of qualified retirement plans are eligible to purchase this Contract. |
| Inherited IRA and Inherited Roth IRA | Must have the same individual as Owner and Annuitant. The deceased owner of the previously held tax‑qualified arrangement will also be listed in the titling of the Contract. |
| · | Taxes on earnings are deferred until you take money out. Non-Qualified Contracts owned by corporations or partnerships and Roth IRAs do not receive income tax deferral on earnings. |
| · | When you take money out of a Non-Qualified Contract, earnings are generally subject to federal income tax and applicable state income tax. All pre-tax money distributed from Qualified Contracts are subject to federal and state income tax, but qualified distributions from Roth IRA Contracts are not subject to federal income tax. This prospectus does not address specific state tax laws. You should discuss state taxation with your tax adviser. |
| · | Taxable distributions are subject to an ordinary income tax rate, rather than a capital gains rate. |
| · | Distributions from Non-Qualified Contracts are considered investment income for purposes of the Medicare tax on investment income. Thus, in certain circumstances, a 3.8% tax may apply to some or all of the taxable portion of distributions (e.g. earnings) to individuals whose income exceeds certain threshold amounts ($200,000 for filing single, $250,000 for married filing jointly and $125,000 for married filing separately.) Please consult a tax advisor for more information. |
| · | If you take partial withdrawals from your Non-Qualified Contract, the withdrawals are generally taxed as though you were paid taxable earnings first, and then as a non-taxable return of Purchase Payments. |
| · | If you annuitize your Non-Qualified Contract and receive a stream of Annuity Payments, you receive the benefit of the exclusion ratio. The exclusion ratio is a calculation that causes a portion of each Annuity Payment to be non-taxable, based upon the percentage of your Contract Value that is from Purchase Payments. Purchase Payments are treated as a non-taxable return of principal, whereas earnings are taxable. |
| · | If you take partial withdrawals or annuitize a Qualified Contract, you will be responsible for determining what portion, if any, of the distribution consists of after-tax money. |
| · | If you take out earnings before age 59½, you may be subject to a 10% additional federal tax, unless you take a lifetime annuitization of your Contract or you take money out in a stream of substantially equal payments over your expected life in accordance with the requirements of the Code. |
| · | A pledge, assignment, or ownership change of a Contract may be treated as a taxable event. You should discuss any pledge, assignment, or ownership change of a Contract with your tax adviser. |
| · | If you purchase multiple non-qualified deferred annuity contracts from an affiliated group of companies in one calendar year, these contracts are treated as one contract for purposes of determining the tax consequences of any distribution. |
| · | Death benefit proceeds from Non-Qualified Contracts are taxable to the beneficiary as ordinary income to the extent of any earnings. Death benefit proceeds must be paid out in accordance with the requirements of the Code. |
| · | Depending upon the type of Qualified Contract you own, required minimum distributions (RMDs) must be satisfied when you reach a certain age. If you enroll in our minimum distribution program, we make RMD payments to you that are designed to meet this Contract's RMD requirements. |
| · | When you take money out of a Contract, we may deduct premium tax that we pay on your Contract. This tax varies from 0% to 3.5%, depending on your state. Currently, we pay this tax and do not pass it on to you. |
| · | you might have to pay a withdrawal charge on your previous contract, |
| · | there is a new withdrawal charge period for this Contract, |
| · | other charges under this Contract may be higher (or lower), |
| · | the benefits may be different, and |
| · | you no longer have access to any benefits from your previous contract. |
| 13. | OTHER INFORMATION |
| · | marketing services and increased access to their Financial Professionals; |
| · | sales promotions relating to the Contracts; |
| · | costs associated with sales conferences and educational seminars; |
| · | the cost of client meetings and presentations; and |
| · | other sales expenses incurred by them. |
| · | issuance and maintenance of the Contracts, |
| · | maintenance of Owner records, and |
| · | routine customer service including: |
| – | processing of Contract changes, |
| – | processing withdrawal requests (both partial and total) and |
| – | processing requests for fixed annuity payments. |
| 14. | INFORMATION ON ALLIANZ LIFE |
Director and Chair of the Board
Director, President and Chief Executive Officer
Director, Senior Vice President, Chief Financial Officer and Treasurer
Director
Director
Director
Director
Senior Vice President, Chief Distribution Officer
Senior Vice President, General Counsel and Secretary
Senior Vice President, Chief Marketing Officer
Senior Vice President, Chief Administrative Officer
Senior Vice President, Chief Actuary
Senior Vice President, Chief Investment Officer
Senior Vice President, Human Resources
Field Senior Vice President, Chief Retirement Strategist, Allianz Exchange
| · | Walter White, President and Chief Executive Officer |
| · | William Gaumond, Senior Vice President, Chief Financial Officer and Treasurer |
| · | Thomas Burns, Senior Vice President and Chief Distribution Officer |
| · | Neil McKay, Senior Vice President and Chief Actuary |
| · | Robert DeChellis, Field Senior Vice President, Broker Dealer Distribution |
| · | providing total compensation opportunities that are competitive with the levels of total compensation available at the large diversified financial services companies with which Allianz Life most directly competes in the marketplace; |
| · | setting performance metrics and objectives for variable compensation arrangements that reward executives for attaining both annual targets and medium-range and long-term business objectives, thereby providing individual executives with the opportunity to earn above-average compensation by achieving above-average results; |
| · | establishing equity-based arrangements that align executives' financial interests with those of Allianz SE by ensuring executives have a material financial stake in the equity value of Allianz SE and the business success of its affiliates; and |
| · | structuring compensation packages and outcomes to foster internal pay equity. |
| Compensation Element | Description | Objective |
| Base Salary | Fixed rate of pay that compensates employees for fulfilling their basic job responsibilities. For NEOs, increases are generally provided in the case of a significant increase in responsibilities or a significant discrepancy versus the market. | Attract and retain high-caliber leadership. |
| Annual Incentive Plan | Incentive compensation that promotes and rewards the achievement of annual performance objectives through awards under the Allianz Life Annual Incentive Plan ("AIP"). | ▪ Link compensation to annual performance results. ▪ Attract and motivate high-caliber leadership. ▪ Align the interests of NEOs and our stockholder. |
| Variable Compensation Plan | Variable compensation that promotes and rewards the achievement of annual performance objectives through awards under the Variable Compensation Immediate and Deferred Plan. | ▪ Link compensation to annual performance results. ▪ Motivate and retain high-caliber leadership with long-term vesting. |
| Long-Term Incentives | Incentive compensation that promotes and rewards the achievement of long-term performance objectives through awards under the Allianz Life Long-Term Performance Unit Plan ("ALTPUP"). In the case of Allianz Life's Chief Executive Officer, Walter White, he is eligible to receive annual awards through the Allianz SE Mid-Term Bonus Plan instead of the ALTPUP. | ▪ Link compensation to annual and multi-year performance results. ▪ Motivate and retain high-caliber leadership with multi-year vesting. ▪ Align the interests of NEOs and our stockholder. |
| Performance-Based Equity Incentives | Incentive compensation through restricted stock unit awards made under the Allianz Equity Incentive Plan ("AEI") that promotes and rewards the achievement of senior executive officers. The AEI replaced the Allianz Group Equity Incentives Plan 2007 ("GEI"). | ▪ Retain high-caliber leadership with multi-year vesting. ▪ Align the interests of NEOs and our stockholder. |
| Severance Arrangements | Severance payments to employees, including NEOs, under certain company-initiated termination events. | Compensate employees for situations where the employee's position is eliminated as a result of outsourcing, merger or other corporate transaction. |
| Perquisites-Benefits | Perquisites provided to our NEOs include employer matching contributions to the NEOs' 401(k) plans and may also include the payment of life insurance premiums, relocation reimbursements, reimbursements for financial planning and tax preparation services and reimbursements of spousal travel expenses. | Provide market competitive total compensation package. |
| · | In general, establish the compensation philosophy and strategy of Allianz Life and oversee the development and implementation of compensation, benefit and perquisite programs for corporate executives consistent with the principles of ensuring that leadership is compensated effectively in a manner consistent with the stated compensation strategy, internal equity considerations, competitive practices, shareholder interests, and the requirements of any applicable regulatory bodies in order to attract and retain high-quality leadership. |
| · | Review and approve the establishment of, or material modification to, any executive incentive compensation plans or programs for Allianz Life. |
| · | Review and approve any special benefits, perquisites or compensation contracts in effect for, or offered to, any prospective, current or former Allianz Life employee, regardless of the employee's level or assignment within Allianz Life. Such benefits and perquisites are those that are unusual or different than the benefits offered to all similarly-situated employees. |
| · | Review and approve any employment agreements or any severance, change in control or similar termination arrangements or agreements proposed to be made with any prospective, current or former employee of Allianz Life. This does not include special termination agreements, separation or settlement agreements negotiated in connection with and at the time of termination of an executive's employment. |
| · | Review and approve compensation decisions. |
| · | Oversee Allianz Life's compliance with regulations with respect to compensation matters and ensure adherence to the set principles and standards of the Allianz Group Rewards Framework and German regulations. |
| · | evaluating the compensation data from industry groups, national executive pay surveys and other sources for the NEOs and other executive officers as appropriate; |
| · | gathering and correlating performance ratings and reviews for individual executive officers, including the NEOs; |
| · | reviewing executive compensation recommendations against appropriate market data and for internal consistency and equity; and |
| · | reporting to, and answering requests for, information from the Compensation Committee. |
| · | reward the performance of participants who have made significant contributions to the achievement of annual goals and objectives; |
| · | provide an incentive that will encourage future superior individual performance; and |
| · | encourage the retention of employees who have demonstrated exceptional performance and/or are anticipated to significantly contribute to the long-term success of Allianz Life. |
| · | reward the performance of participants who have made significant contributions to the achievement of their company's annual goals and objectives, |
| · | provide an incentive that will encourage future superior individual performance, and |
| · | encourage the retention of employees who have demonstrated exceptional performance and/or are anticipated to significantly contribute to the long-term success of their company. |
| Name and Principal Position | Year | Salary | Bonus | Stock Awards | Option Awards | Non-Equity Incentive Plan Compensation | Change in Pension Value and Nonqualified Deferred Compensation Earnings | All Other Compensation | Total |
| (a) | (b) | (c) | (d) | (e)(1) | (f) | (g)(2),(3) | (h) | (i)(4) | (j) |
| Walter White | 2016 | $844,000 | N/A | $1,152,060 | N/A | $2,304,120 | N/A | $26,908 | $4,327,088 |
| President and Chief | |||||||||
| Executive Officer | |||||||||
| William Gaumond | 2016 | $375,000 | N/A | $205,031 | N/A | $430,031 | N/A | $26,465 | $1,036,528 |
| Senior Vice President | |||||||||
| and Chief Financial | |||||||||
| Officer | |||||||||
| Thomas Burns | 2016 | $595,000 | N/A | $433,755 | N/A | $790,755 | N/A | $37,393 | $1,856,903 |
| Senior Vice President | |||||||||
| and Chief Distribution | |||||||||
| Officer | |||||||||
| Neil McKay | 2016 | $500,000 | N/A | $360,000 | N/A | $690,000 | N/A | $32,342 | $1,582,342 |
| Senior Vice President | |||||||||
| and Chief Actuary | |||||||||
| Robert DeChellis | 2016 | $400,000 | N/A | $97,200 | N/A | $742,357 | N/A | $20,415 | $1,259,972 |
| Field Senior Vice | |||||||||
| President, Broker | |||||||||
| Dealer Distribution |
| (1) | Represents the grant date fair value of the RSUs issued pursuant to the AEI. The RSUs vest over a four-year period. The RSUs issued in 2017 for the 2016 performance year have a March 2021 exercise date. The grant price of the RSUs was the arithmetic average of the closing prices of an Allianz SE share in the electronic cash market trading system Xetra (or any successor system) on that day and the nine immediately preceding trading days, less the present value of dividends expected to be paid on one Allianz SE share over the vesting period. These numbers show the amount realized for financial reporting purposes as calculated in accordance with the FASB ASC Topic 718. Under FASB ASC Topic 718, the grant date fair value is calculated using the closing market price of the common stock of Allianz SE on the date of grant, which is then recognized over the requisite service period of the award. |
| (2) | Includes the following payments and grants made pursuant to the AIP and the ALTPUP and the Variable Compensation Immediate and Deferred Plan. |
| Name | Year | Payments made pursuant to the AIP | Grants made pursuant to the ALTPUP(3) | Payments made pursuant to the Variable Compensation Immediate & Deferred Plan |
| Walter White | 2016 | $1,152,060 | $1,152,060 | $0 |
| William Gaumond | 2016 | $205,031 | $225,000 | $0 |
| Thomas Burns | 2016 | $433,755 | $357,000 | $0 |
| Neil McKay | 2016 | $360,000 | $330,000 | $0 |
| Robert DeChellis | 2016 | $218,700 | $140,000 | $383,657 |
| (3) | Walter White, as Chief Executive Officer, participates in the global Allianz SE Mid-Term Bonus Program rather than the ALTPUP. |
| (4) | The following table provides additional details regarding compensation found in the "All Other Compensation" column. |
| Name | Year | Spousal Travel (5) | Milestone/ Anniversary/ Recognition(6) | Life Insurance Premiums | Employer Match to 401(k) Plan | ASAAP Cont-ribution(7) | ESPP Imputed Income(8) | Total |
| Walter White | 2016 | $5,878 | $1,155 | $19,875 | -- | -- | $26,908 | |
| William Gaumond | 2016 | -- | $604 | $18,000 | $1,875 | $5,986 | $26,465 | |
| Thomas Burns | 2016 | $16,925 | $593 | $19,875 | -- | -- | $37,393 | |
| Neil McKay | 2016 | $4,596 | $1650 | $915 | $19,875 | -- | $5,306 | $32,342 |
| Robert DeChellis | 2016 | -- | $20 | $520 | $19,875 | $1,875 | -- | $20,415 |
| (5) | Represents reimbursement or payments made to defray the costs of a spouse's travel. |
| (6) | Represents Milestone Anniversary Program, which pays a bonus at three and five year anniversaries, and then every five years thereafter. |
| (7) | Represents company matching contribution to the Allianz Supplemental Asset Accumulation Plan for deferrals in excess of IRS compensation limit. |
| (8) | Represents value of the discount associated with stock purchases in the Employee Stock Purchase Plan. |
| Name | Grant Date | Estimated Future Payouts Under Non-Equity Incentive Plan Awards(1),(2) | Estimated Future Payouts Under Equity Incentive Plan Awards(3),(4) | ||||
| Threshold ($) | Target ($) | Maximum ($) | Threshold ($) | Target ($) | Maximum ($) | ||
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) |
| Walter White | 3/3/2017 | ||||||
| RSUs (under AEI) | $0 | $844,000 | $4,177,800 | ||||
| AIP Award | $0 | $844,000 | $1,392,600 | ||||
| Midterm Bonus Plan | $0 | $844,000 | $1,392,600 | ||||
| William Gaumond | 3/3/2017 | ||||||
| RSUs (under AEI) | $0 | $168,750 | $835,313 | ||||
| AIP Award | $0 | $168,750 | $337,500 | ||||
| ALTPUP Award | $0 | $225,000 | $450,000 | ||||
| Thomas Burns | 3/3/2017 | ||||||
| RSUs (under AEI) | $0 | $357,000 | $1,767,150 | ||||
| AIP Award | $0 | $357,000 | $714,000 | ||||
| ALTPUP Award | $0 | $357,000 | $714,000 | ||||
| Neil McKay | 3/3/2017 | ||||||
| RSUs (under AEI) | $0 | $300,000 | $1,485,000 | ||||
| AIP Award | $0 | $300,000 | $600,000 | ||||
| ALTPUP Award | $0 | $300,000 | $600,000 | ||||
| Robert DeChellis | 3/3/2017 | ||||||
| RSUs (under AEI) | $0 | $80,000 | $396,000 | ||||
| AIP Award | $0 | $180,000 | $360,000 | ||||
| ALTPUP Award | $0 | $140,000 | $280,000 | ||||
| Variable Compensation | $0 | $388,000 | $776,000 | ||||
| (1) | The target and maximum columns show the target award and maximum award for 2016 for each NEO under the AIP. There is no threshold amount for any participant in the AIP. The actual 2016 awards granted to the NEOs are listed in the Non-Equity Incentive Compensation column of the Summary Compensation Table. AIP target and maximum awards are a pre-designated percentage of base salary determined at the executive's level. |
| (2) | The target and maximum columns show the target award and maximum award for 2016 for each NEO under the ALTPUP. Under the ALTPUP, all awards are discretionary. To the extent that awards are made, the minimum amount of an award will equal at least 50% of the target amount as determined by the Compensation Committee (or with respect to "principal officers" for purposes of the NEC Committee's duties, the NEC Committee with final approval of the Board). The actual 2016 awards granted to the NEOs are listed in the Non-Equity Incentive Compensation column of the Summary Compensation Table. ALTPUP target and maximum awards are a pre-designated percentage of base salary determined at the executive's level. |
| (3) | RSUs have a vesting schedule as disclosed in the footnotes to the Summary Compensation Table. See "Outstanding Equity Awards at December 31, 2016" for disclosure regarding the number of RSUs that are unvested as of December 31, 2016. |
| (4) | The target and maximum columns show the target award and maximum award for 2016 for each NEO under the AEI. There is no threshold amount for any participant in the AEI. The actual 2016 awards granted to the NEOs are listed in the Stock Awards column of the Summary Compensation Table. |
| SARs | RSUs | ||||||||
| Name | Number of Securities Underlying Unexercised SARs Exercisable | Number of Securities Underlying Unexercised SARs Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned SARs | SAR Base Price | SAR Expiration Date | Number of RSUs That Have Not Vested | Market Value of RSUs That Have Not Vested | Equity Incentive Plan Awards: Number of Unearned RSUs That Have Not Vested | Equity Incentive Plan Awards: Market or Payout Value of Unearned RSUs That Have Not Vested |
| (a) | (b)(1) | (c) | (d) | (e) | (f) | (g)(2)(3) | (h)(4) | (i) | (j) |
| Walter White | 4,160 | N/A | N/A | N/A | 03/10/2017 | N/A | N/A | ||
| 7,930 | $1,300,679 | ||||||||
| 7,927 | $1,300,187 | ||||||||
| 6,364 | $1,043,823 | ||||||||
| 10,097 | $1,656,110 | ||||||||
| William Gaumond | -- | N/A | N/A | N/A | -- | N/A | N/A | ||
| 2,234 | $366,421 | ||||||||
| 1,559 | $255,707 | ||||||||
| 679 | $111,370 | ||||||||
| 721 | $118,258 | ||||||||
| Thomas Burns | -- | N/A | N/A | N/A | -- | N/A | N/A | ||
| 3,526 | $578,335 | ||||||||
| 3,723 | $610,646 | ||||||||
| 3,151 | $516,827 | ||||||||
| 3,714 | $609,170 | ||||||||
| Neil McKay | -- | N/A | N/A | N/A | -- | N/A | N/A | ||
| 3,264 | $535,361 | ||||||||
| 3,180 | $521,584 | ||||||||
| 2,586 | $424,156 | ||||||||
| 3,536 | $579,975 | ||||||||
| Robert DeChellis | -- | N/A | N/A | N/A | -- | N/A | N/A | ||
| 1,147 | $188,131 | ||||||||
| 915 | $150,078 | ||||||||
| 832 | $136,465 | ||||||||
| 732 | $120,063 | ||||||||
| (1) | There is a two-year vesting period for exercisable securities underlying unexercised SARs. |
| (2) | Represents unvested RSUs issued pursuant to the AEI. RSUs issued under the AEI during 2016 are subject to a four-year vesting period from the grant date. At the end of the respective vesting period, the RSUs are exercised uniformly for all participants, provided they remain employed by Allianz Life or are pensioners. |
| (3) | For each of the NEOs, the number of RSUs listed on the first line expired 2017, the RSUs listed on the second line expire 2018, the RSUs listed on the third line expire 2019, and the RSUs listed on the fourth line expire 2020. |
| (4) | Based on an assumed stock price of $164.02 per share, which was the closing stock price of Allianz SE common stock on December 31, 2016, converted from Euros into U.S. dollars. |
| Option Awards | Stock Awards | |||
| Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($)(1) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($)(2) |
| Walter White | -- | $0 | 3,788 | $572,105 |
| William Gaumond | -- | $0 | 774 | $116,898 |
| Thomas Burns | -- | $0 | 5,201 | $785,512 |
| Neil McKay | -- | $0 | 4,357 | $658,042 |
| Robert DeChellis | -- | $0 | 1,407 | $212,501 |
| (1) | Represents Allianz SE SARs that were exercised during 2016 pursuant to the GEI. Amounts realized were paid in cash. |
| (2) | Represents Allianz SE RSUs that were exercised during 2016 pursuant to the GEI and AEI. Amounts realized were paid in cash. |
| · | employee's position is eliminated; |
| · | employee's position is outsourced; or |
| · | employee's position is eliminated in connection with a sale or merger or other corporate transaction.. |
| NEOs | Lump Sum Payment |
| Walter White | N/A(1) |
| William Gaumond | $562,500 |
| Thomas Burns | $892,500 |
| Neil McKay | $750,000 |
| Robert DeChellis | $384,615 |
| (1) | Mr. White is not eligible to receive payments pursuant to the Executive Severance Plan or Severance Allowance Plan. See "Allianz Life Executive Severance Agreement" for information regarding severance payments that Mr. White is eligible to receive upon termination of service. |
| Name | Fees Earned or Paid in Cash ($)(1) | Stock Awards ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Change in Pension Value and Nonqualified Deferred Compensation Earnings | All Other Compensation | Total ($) |
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) |
Jacqueline Hunt(2) Chairman of the Board | N/A | N/A | N/A | N/A | N/A | N/A | N/A |
Walter White(3) President and Chief Executive Officer | N/A | N/A | N/A | N/A | N/A | N/A | N/A |
William Gaumond(3) Senior Vice President, Chief Financial Officer and Treasurer | N/A | N/A | N/A | N/A | N/A | N/A | N/A |
Giulio Terzariol(2) Director | N/A | N/A | N/A | N/A | N/A | N/A | N/A |
Ronald M. Clark Independent Director | $40,000 | N/A | N/A | N/A | N/A | N/A | $40,000 |
David L. Conway Independent Director | $40,000 | N/A | N/A | N/A | N/A | N/A | $40,000 |
Udo Frank(5) Independent Director | $40,000 | N/A | N/A | N/A | N/A | N/A | $40,000 |
| 1 | Represents cash compensation provided to our independent directors for the year ended December 31, 2016. |
| 2 | Ms. Hunt and Mr. Terzariol did not receive any compensation for their services as a director since they are not an independent directors. |
| 3 | As employee directors, Messrs. White and Gaumond do not receive any compensation for their service as directors. The compensation Messrs. White and Gaumond receive as executive officers of Allianz Life is disclosed in the Summary Compensation Table as set forth herein. |
| · | licensing companies and agents to transact business; |
| · | calculating the value of assets to determine compliance with statutory requirements; |
| · | regulating unfair trade and claims practices, including through the imposition of restrictions on marketing and sales practices, distribution arrangements and payment of inducements; |
| · | establishing statutory capital and reserve requirements and solvency standards; |
| · | fixing maximum interest rates on insurance policy loans and minimum rates for guaranteed crediting rates on life insurance policies and annuity contracts; |
| · | restricting the payment of dividends and other transactions between insurance subsidiaries and affiliates; and |
| · | regulating the types, amounts, concentrations and valuation of investments. |
| · | reducing new sales of insurance products, annuities and other investment products; |
| · | increasing our cost of capital or limiting our access to sources of capital; |
| · | adversely affecting our relationships with our field marketing organizations, agents and other sales specialists; |
| · | materially increasing the number or amount of policy surrenders and withdrawals by contract holders and policyholders; |
| · | requiring us to reduce prices or increase crediting rates for many of our products and services to remain competitive; and |
| · | adversely affecting our ability to obtain reinsurance or obtain reasonable pricing on reinsurance. |
| · | training and educating our employees regarding our obligations relating to confidential information; |
| · | monitoring changes in state or federal privacy and compliance requirements; |
| · | drafting appropriate contractual provisions into any contract that raises proprietary and confidentiality issues; |
| · | maintaining secure storage facilities for tangible records; |
| · | limiting access to electronic information; and |
| · | in the event of a security breach, providing credit monitoring or other services to affected customers. |
| 15. | FINANCIAL STATEMENTS |
| 16. | PRIVACY NOTICE |
PO Box 1344
Minneapolis, MN 55440-1344
800.328.5600
| ● | From you, either directly or through your agent. This may include information on your insurance application or other forms you may complete. The information we collect includes, but is not limited to, your name, Social Security number, address, and telephone number. |
| ● | From others, through the process of handling a claim. This may include information from medical or accident reports. |
| ● | From your doctor or during a home visit by a health assessment professional. This may include medical information about you gathered with your written authorization. |
| ● | From your relationship with us, such as the number of years you have been a customer or the types of insurance products you purchased. |
| ● | From a consumer reporting agency such as a medical, credit, or motor vehicle report. The information in these reports may be kept by the agency and shared with others. |
| ● | With affiliates and other third parties in order to administer or service your policy. |
| ● | With consumer reporting agencies to obtain a medical report, credit report, or motor vehicle report. These reports are used to determine eligibility for coverage or to process your requested transactions. |
| ● | With your insurance agent so that they can perform services for you. |
| ● | With medical professionals in order to process your claim. |
| ● | With a state Department of Insurance in order to examine our records or business practices. |
| ● | With state or federal law enforcement agency, as required by law or to report suspected fraud activities. |
| ● | With research groups to conduct studies on claims results. No individual is identified in any study or report. |
| ● | Allianz Life Insurance Company of North America |
| ● | Allianz Life Financial Services, LLC |
| ● | Allianz Life and Annuity Company |
| 17. | TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION (SAI) |
Allianz Life as Custodian………………………… | 2 | Annuity Purchases by Nonresident Aliens and | |
Legal Opinions………………………………..….. | 2 | Foreign Corporations……………………………………. | 9 |
Distributor…………………………………………. | 2 | Income Tax Withholding…………………….……………….. | 9 |
Administrative Service Fees……………………. | 2 | Multiple Contracts……………………………………………. | 9 |
Federal Tax Status…………………………..….… | 3 | Partial 1035 Exchanges……………………………………… | 10 |
| Annuity Contracts in General……………….… | 3 | Assignments, Pledges and Gratuitous Transfers…………. | 10 |
| Taxation of Annuities in General……………… | 3 | Death Benefits………………………………………………… | 10 |
| Qualified Contracts……………………..……… | 4 | Spousal Continuation and the Federal Defense of | |
| Purchasing a Qualified Contract……………… | 5 | Marriage Act (DOMA)…………………………………… | 10 |
| Distributions-Qualified Contracts……………… | 6 | Federal Estate Taxes………………………………………… | 10 |
| Distributions-Non-Qualified Contracts……..… | 7 | Generation-Skipping Transfer Tax…………………………. | 11 |
| Required Distributions………………………..… | 8 | Foreign Tax Credits………………………………………….. | 11 |
| Diversification……………………………………. | 8 | Possible Tax Law Changes…………………………………. | 11 |
| Owner Control……………………………….…. | 9 | Annuity Payments…………………………………………….. | 11 |
| Contracts Owned by Non-Individuals………… | 9 | Annuity Payment Options…………………………………… | 11 |
Appendix – Death of the Owner and/or Annuitant……… | 12 | ||
| • | sponsor, endorse, sell or promote Allianz products. |
| • | recommend that any person invest in Allianz products or any other securities. |
| • | have any responsibility or liability for or make any decisions about the timing, amount or pricing of Allianz products. |
| • | have any responsibility or liability for the administration, management or marketing of Allianz products. |
| • | consider the needs of Allianz products or the owners of Allianz products in determining, composing or calculating the EURO STOXX 50 or have any obligation to do so. |
| • | STOXX, Deutsche Börse Group and their licensors, research partners or data providers do not give any warranty, express or implied, and exclude any liability about: |
| • | The results to be obtained by Allianz products, the owner of Allianz products or any other person in connection with the use of the EURO STOXX 50 and the data included in the EURO STOXX 50; |
| • | The accuracy, timeliness, and completeness of the EURO STOXX 50 and its data; |
| • | The merchantability and the fitness for a particular purpose or use of the EURO STOXX 50 and its data; |
| • | The performance of Allianz products generally. |
| • | STOXX, Deutsche Börse Group and their licensors, research partners or data providers give no warranty and exclude any liability, for any errors, omissions or interruptions in the EURO STOXX 50 or its data; |
| • | Under no circumstances will STOXX, Deutsche Börse Group or their licensors, research partners or data providers be liable (whether in negligence or otherwise) for any lost profits or indirect, punitive, special or consequential damages or losses, arising as a result of such errors, omissions or interruptions in the EURO STOXX 50 or its data or generally in relation to Allianz products, even in circumstances where STOXX, Deutsche Börse Group or their licensors, research partners or data providers are aware that such loss or damage may occur. |
| · | an at-the-money binary call; and |
| · | an out-of-the-money put. |
| · | an at-the-money call; |
| · | an out-of-the-money call; and |
| · | an out-of-the-money put. |
| · | an at-the-money call; |
| · | an at-the-money put; |
| · | an out-of-the-money call; and |
| · | an out-of-the-money put. |
| Index Effective Date | 9/16/2013- 9/30/2013 | 10/1/2013- 11/4/2013 | 11/5/2013- 12/2/2013 | 12/3/2013- 1/6/2014 | 1/7/2014- 2/3/2014 | 2/4/2014- 3/3/2014 | 3/4/2014- 3/31/2014 | 4/1/2014- 5/5/2014 |
| Initial DPSC | 4.00% | 4.50% | 4.50% | 4.00% | 4.00% | 4.00% | 4.00% | 4.00% |
| 1st Anniversary Renewal DPSC | 4.00% | 3.75% | 3.75% | 3.75% | 3.75% | 3.75% | 3.50% | 3.50% |
| 2nd Anniversary Renewal DPSC | 3.75% | 3.75% | 3.75% | 3.50% | 3.50% | 3.50% | 3.50% | 3.50% |
| 3rd Anniversary Renewal DPSC | 3.25% | 3.00% | 3.00% | 3.00% | 3.00% | 3.25% | 3.25% | 3.25% |
| Index Effective Date | 5/6/2014- 6/2/2014 | 6/3/2014- 6/30/2014 | 7/1/2014- 8/4/2014 | 8/5/2014- 9/1/2014 | 9/2/2014- 10/6/2014 | 10/7/2014- 11/3/2014 | 11/4/2014- 12/1/2014 | 12/2/2014- 1/5/2015 |
| Initial DPSC | 4.00% | 4.00% | 4.00% | 4.00% | 4.00% | 3.75% | 3.75% | 3.75% |
| 1st Anniversary Renewal DPSC | 3.50% | 3.50% | 3.50% | 3.50% | 3.75% | 3.75% | 3.75% | 3.50% |
| 2nd Anniversary Renewal DPSC | 3.50% | 3.25% | 3.25% | 3.25% | 3.25% | 3.00% | 3.00% | 3.00% |
| Index Effective Date | 1/6/2015- 2/2/2015 | 2/3/2015- 3/2/2015 | 3/3/2015- 4/6/2015 | 4/7/2015- 5/4/2015 | 5/5/2015- 6/1/2015 | 6/2/2015- 7/6/2015 | 7/7/2015- 8/3/2015 | 8/4/2015- 8/31/2015 |
| Initial DPSC | 3.75% | 3.75% | 3.50% | 3.50% | 3.50% | 3.50% | 3.50% | 3.50% |
| 1st Anniversary Renewal DPSC | 3.50% | 3.50% | 3.50% | 3.50% | 3.50% | 3.25% | 3.25% | 3.25% |
| 2nd Anniversary Renewal DPSC | 3.00% | 3.25% | 3.25% | 3.25% | TBD | TBD | TBD | TBD |
| Index Effective Date | 9/1/2015- 10/5/2015 | 10/6/2015- 11/2/2015 | 11/3/2015- 11/30/2015 | 12/1/2015- 1/4/2016 | 1/5/2016- 2/1/2016 | 2/2/2016- 2/29/2016 | 3/1/2016- 4/4/2016 | 4/5/2016- 5/2/2016 |
| Initial DPSC | 3.75% | 3.75% | 3.75% | 3.50% | 3.50% | 3.50% | 3.50% | 3.50% |
| 1st Anniversary Renewal DPSC | 3.25% | 3.00% | 3.00% | 3.00% | 3.00% | 3.25% | 3.25% | 3.25% |
| Index Effective Date | 5/3/2016- 6/6/2016 | 6/7/2016- 7/4/2016 | 7/5/2016- 8/1/2016 | 8/2/2016- 9/5/2016 | 9/6/2016- 10/3/2016 | 10/4/2016- 10/31/2016 | 11/1/2016- 12/5/2016 | 12/6/2016- 1/2/2017 |
| Initial DPSC | 3.50% | 3.25% | 3.25% | 3.25% | 3.25% | 3.00% | 3.00% | 3.00% |
| Index Effective Date | 1/3/2017- 2/6/2017 | 2/7/2017- 3/6/2017 | 3/7/2017- 4/3/2017 | 4/4/2017- 5/1/2017 | ||||
| Initial DPSC | 3.00% | 3.25% | 3.25% | 3.25% |
| Index Effective Date | 9/16/2013- 9/30/2013 | 10/1/2013- 11/4/2013 | 11/5/2013- 12/2/2013 | 12/3/2013- 1/6/2014 | 1/7/2014- 2/3/2014 | 2/4/2014- 3/3/2014 | 3/4/2014- 3/31/2014 | 4/1/2014- 5/5/2014 |
| Initial Cap | 13.00% | 14.00% | 14.00% | 13.00% | 13.00% | 12.75% | 12.75% | 12.75% |
| 1st Anniversary Renewal Cap | 12.75% | 12.50% | 13.50% | 12.75% | 11.75% | 12.00% | 11.75% | 11.00% |
| 2nd Anniversary Renewal Cap | 10.50% | 13.50% | 15.50% | 13.50% | 12.50% | 13.25% | 15.50% | 15.50% |
| 3rd Anniversary Renewal Cap | 11.25% | 10.75% | 11.00% | 11.25% | 10.75% | 10.25% | 12.00% | 12.00% |
| Index Effective Date | 5/6/2014- 6/2/2014 | 6/3/2014- 6/30/2014 | 7/1/2014- 8/4/2014 | 8/5/2014- 9/1/2014 | 9/2/2014- 10/6/2014 | 10/7/2014- 11/3/2014 | 11/4/2014- 12/1/2014 | 12/2/2014- 1/5/2015 |
| Initial Cap | 13.00% | 13.00% | 13.00% | 12.75% | 12.75% | 12.50% | 13.50% | 12.75% |
| 1st Anniversary Renewal Cap | 11.00% | 10.75% | 10.50% | 10.75% | 10.50% | 13.50% | 15.50% | 13.50% |
| 2nd Anniversary Renewal Cap | 13.75% | 12.50% | 13.25% | 13.00% | 11.25% | 10.75% | 11.00% | 11.25% |
| Index Effective Date | 1/6/2015- 2/2/2015 | 2/3/2015- 3/2/2015 | 3/3/2015- 4/6/2015 | 4/7/2015- 5/4/2015 | 5/5/2015- 6/1/2015 | 6/2/2015- 7/6/2015 | 7/7/2015- 8/3/2015 | 8/4/2015- 8/31/2015 |
| Initial Cap | 11.75% | 12.00% | 11.75% | 11.00% | 11.00% | 10.75% | 10.50% | 10.75% |
| 1st Anniversary Renewal Cap | 12.50% | 13.25% | 15.50% | 15.50% | 13.75% | 12.50% | 13.25% | 13.00% |
| 2nd Anniversary Renewal Cap | 10.75% | 10.25% | 12.00% | 12.00% | TBD | TBD | TBD | TBD |
| Index Effective Date | 9/1/2015- 10/5/2015 | 10/6/2015- 11/2/2015 | 11/3/2015- 11/30/2015 | 12/1/2015- 1/4/2016 | 1/5/2016- 2/1/2016 | 2/2/2016- 2/29/2016 | 3/1/2016- 4/4/2016 | 4/5/2016- 5/2/2016 |
| Initial Cap | 10.50% | 13.50% | 15.50% | 13.50% | 12.50% | 13.25% | 15.50% | 15.50% |
| 1st Anniversary Renewal Cap | 11.25% | 10.75% | 11.00% | 11.25% | 10.75% | 10.25% | 12.00% | 12.00% |
| Index Effective Date | 5/3/2016- 6/6/2016 | 6/7/2016- 7/4/2016 | 7/5/2016- 8/1/2016 | 8/2/2016- 9/5/2016 | 9/6/2016- 10/3/2016 | 10/4/2016- 10/31/2016 | 11/1/2016- 12/5/2016 | 12/6/2016- 1/2/2017 |
| Initial Cap | 13.75% | 12.50% | 13.25% | 13.00% | 11.25% | 10.75% | 11.00% | 11.25% |
| Index Effective Date | 1/3/2017- 2/6/2017 | 2/7/2017- 3/6/2017 | 3/7/2017- 4/3/2017 | 4/4/2017- 5/1/2017 | ||||
| Initial Cap | 10.75% | 10.25% | 9.75% | 10.00% |
| Index Effective Date | 9/16/2013- 9/30/2013 | 10/1/2013- 11/4/2013 | 11/5/2013- 12/2/2013 | 12/3/2013- 1/6/2014 | 1/7/2014- 2/3/2014 | 2/4/2014- 3/3/2014 | 3/4/2014- 3/31/2014 | 4/1/2014- 5/5/2014 |
| Initial Cap | 14.00% | 16.00% | 16.00% | 14.00% | 14.00% | 13.50% | 13.50% | 13.50% |
| 1st Anniversary Renewal Cap | 15.00% | 14.75% | 15.75% | 15.00% | 14.00% | 14.25% | 14.25% | 13.25% |
| 2nd Anniversary Renewal Cap | 13.75% | 16.25% | 17.50% | 15.50% | 15.25% | 15.50% | 18.50% | 18.50% |
| 3rd Anniversary Renewal Cap | 14.25% | 13.75% | 14.25% | 14.50% | 14.00% | 13.50% | 15.75% | 16.50% |
| Index Effective Date | 5/6/2014- 6/2/2014 | 6/3/2014- 6/30/2014 | 7/1/2014- 8/4/2014 | 8/5/2014- 9/1/2014 | 9/2/2014- 10/6/2014 | 10/7/2014- 11/3/2014 | 11/4/2014- 12/1/2014 | 12/2/2014- 1/5/2015 |
| Initial Cap | 15.00% | 15.00% | 15.00% | 15.00% | 15.00% | 14.75% | 15.75% | 15.00% |
| 1st Anniversary Renewal Cap | 13.25% | 14.50% | 14.25% | 13.50% | 13.75% | 16.25% | 17.50% | 15.50% |
| 2nd Anniversary Renewal Cap | 16.50% | 15.50% | 16.00% | 16.50% | 14.25% | 13.75% | 14.25% | 14.50% |
| Index Effective Date | 1/6/2015- 2/2/2015 | 2/3/2015- 3/2/2015 | 3/3/2015- 4/6/2015 | 4/7/2015- 5/4/2015 | 5/5/2015- 6/1/2015 | 6/2/2015- 7/6/2015 | 7/7/2015- 8/3/2015 | 8/4/2015- 8/31/2015 |
| Initial Cap | 14.00% | 14.25% | 14.25% | 13.25% | 13.25% | 14.50% | 14.25% | 13.50% |
| 1st Anniversary Renewal Cap | 15.25% | 15.50% | 18.50% | 18.50% | 16.50% | 15.50% | 16.00% | 16.50% |
| 2nd Anniversary Renewal Cap | 14.00% | 13.50% | 15.75% | 16.50% | TBD | TBD | TBD | TBD |
| Index Effective Date | 9/1/2015- 10/5/2015 | 10/6/2015- 11/2/2015 | 11/3/2015- 11/30/2015 | 12/1/2015- 1/4/2016 | 1/5/2016- 2/1/2016 | 2/2/2016- 2/29/2016 | 3/1/2016- 4/4/2016 | 4/5/2016- 5/2/2016 |
| Initial Cap | 13.75% | 16.25% | 17.50% | 15.50% | 15.25% | 15.50% | 18.50% | 18.50% |
| 1st Anniversary Renewal Cap | 14.25% | 13.75% | 14.25% | 14.50% | 14.00% | 13.50% | 15.75% | 16.50% |
| Index Effective Date | 5/3/2016- 6/6/2016 | 6/7/2016- 7/4/2016 | 7/5/2016- 8/1/2016 | 8/2/2016- 9/5/2016 | 9/6/2016- 10/3/2016 | 10/4/2016- 10/31/2016 | 11/1/2016- 12/5/2016 | 12/6/2016- 1/2/2017 |
| Initial Cap | 16.50% | 15.50% | 16.00% | 16.50% | 14.25% | 13.75% | 14.25% | 14.50% |
| Index Effective Date | 1/3/2017- 2/6/2017 | 2/7/2017- 3/6/2017 | 3/7/2017- 4/3/2017 | 4/4/2017- 5/1/2017 | ||||
| Initial Cap | 14.00% | 13.50% | 13.50% | 14.00% |
| Index Effective Date | 9/16/2013- 9/30/2013 | 10/1/2013- 11/4/2013 | 11/5/2013- 12/2/2013 | 12/3/2013- 1/6/2014 | 1/7/2014- 2/3/2014 | 2/4/2014- 3/3/2014 | 3/4/2014- 3/31/2014 | 4/1/2014- 5/5/2014 |
| Initial Cap | 11.00% | 13.00% | 13.00% | 12.50% | 12.50% | 12.25% | 12.25% | 12.25% |
| 1st Anniversary Renewal Cap | 12.25% | 12.00% | 13.00% | 12.25% | 11.25% | 11.50% | 11.50% | 10.75% |
| 2nd Anniversary Renewal Cap | 9.75% | 13.75% | 15.25% | 12.75% | 12.00% | 13.00% | 15.00% | 15.00% |
| 3rd Anniversary Renewal Cap | 11.25% | 11.00% | 10.75% | 11.00% | 10.75% | 10.50% | 12.00% | 11.75% |
| Index Effective Date | 5/6/2014- 6/2/2014 | 6/3/2014- 6/30/2014 | 7/1/2014- 8/4/2014 | 8/5/2014- 9/1/2014 | 9/2/2014- 10/6/2014 | 10/7/2014- 11/3/2014 | 11/4/2014- 12/1/2014 | 12/2/2014- 1/5/2015 |
| Initial Cap | 12.25% | 12.25% | 12.25% | 11.75% | 12.25% | 12.00% | 13.00% | 12.25% |
| 1st Anniversary Renewal Cap | 10.75% | 10.50% | 10.00% | 10.25% | 9.75% | 13.75% | 15.25% | 12.75% |
| 2nd Anniversary Renewal Cap | 13.25% | 12.75% | 12.75% | 13.00% | 11.25% | 11.00% | 10.75% | 11.00% |
| Index Effective Date | 1/6/2015- 2/2/2015 | 2/3/2015- 3/2/2015 | 3/3/2015- 4/6/2015 | 4/7/2015- 5/4/2015 | 5/5/2015- 6/1/2015 | 6/2/2015- 7/6/2015 | 7/7/2015- 8/3/2015 | 8/4/2015- 8/31/2015 |
| Initial Cap | 11.25% | 11.50% | 11.50% | 10.75% | 10.75% | 10.50% | 10.00% | 10.25% |
| 1st Anniversary Renewal Cap | 12.00% | 13.00% | 15.00% | 15.00% | 13.25% | 12.75% | 12.75% | 13.00% |
| 2nd Anniversary Renewal Cap | 10.75% | 10.50% | 12.00% | 11.75% | TBD | TBD | TBD | TBD |
| Index Effective Date | 9/1/2015- 10/5/2015 | 10/6/2015- 11/2/2015 | 11/3/2015- 11/30/2015 | 12/1/2015- 1/4/2016 | 1/5/2016- 2/1/2016 | 2/2/2016- 2/29/2016 | 3/1/2016- 4/4/2016 | 4/5/2016- 5/2/2016 |
| Initial Cap | 9.75% | 13.75% | 15.25% | 12.75% | 12.00% | 13.00% | 15.00% | 15.00% |
| 1st Anniversary Renewal Cap | 11.25% | 11.00% | 10.75% | 11.00% | 10.75% | 10.50% | 12.00% | 11.75% |
| Index Effective Date | 5/3/2016- 6/6/2016 | 6/7/2016- 7/4/2016 | 7/5/2016- 8/1/2016 | 8/2/2016- 9/5/2016 | 9/6/2016- 10/3/2016 | 10/4/2016- 10/31/2016 | 11/1/2016- 12/5/2016 | 12/6/2016- 1/2/2017 |
| Initial Cap | 13.25% | 12.75% | 12.75% | 13.00% | 11.25% | 11.00% | 10.75% | 11.00% |
| Index Effective Date | 1/3/2017- 2/6/2017 | 2/7/2017- 3/6/2017 | 3/7/2017- 4/3/2017 | 4/4/2017- 5/1/2017 | ||||
| Initial Cap | 10.75% | 10.50% | 10.25% | 10.00% |
| Index Effective Date | 8/24/2015- 8/31/2015 | 9/1/2015- 10/5/2015 | 10/6/2015- 11/2/2015 | 11/3/2015- 11/30/2015 | 12/1/2015- 1/4/2016 | 1/5/2016- 2/1/2016 | 2/2/2016- 2/29/2016 | 3/1/2016- 4/4/2016 | 4/5/2016- 5/2/2016 |
| Initial Cap | 13.50% | 13.75% | 16.25% | 17.50% | 15.50% | 15.25% | 15.50% | 18.50% | 18.50% |
| 1st Anniversary Renewal Cap | 16.50% | 14.25% | 13.75% | 14.25% | 14.50% | 14.00% | 13.50% | 15.75% | 16.50% |
| Index Effective Date | 5/3/2016- 6/6/2016 | 6/7/2016- 7/4/2016 | 7/5/2016- 8/1/2016 | 8/2/2016- 9/5/2016 | 9/6/2016- 10/3/2016 | 10/4/2016- 10/31/2016 | 11/1/2016- 12/5/2016 | 12/6/2016- 1/2/2017 | 1/3/2017- 2/6/2017 |
| Initial Cap | 16.50% | 15.50% | 16.00% | 16.50% | 14.25% | 13.75% | 14.25% | 14.50% | 14.00% |
| Index Effective Date | 2/7/2017- 3/6/2017 | 3/7/2017- 4/3/2017 | 4/4/2017- 5/1/2017 | ||||||
| Initial Cap | 13.50% | 13.50% | 14.00% |
| Index Effective Date | 8/24/2015- 8/31/2015 | 9/1/2015- 10/5/2015 | 10/6/2015- 11/2/2015 | 11/3/2015- 11/30/2015 | 12/1/2015- 1/4/2016 | 1/5/2016- 2/1/2016 | 2/2/2016- 2/29/2016 | 3/1/2016- 4/4/2016 | 4/5/2016- 5/2/2016 |
| Initial Cap | 10.25% | 10.25% | 10.00% | 9.50% | 10.00% | 9.50% | 9.75% | 10.00% | 10.25% |
| 1st Anniversary Renewal Cap | 9.25% | 9.25% | 9.00% | 9.00% | 9.00% | 9.00% | 9.25% | 9.00% | 9.75% |
| Index Effective Date | 5/3/2016- 6/6/2016 | 6/7/2016- 7/4/2016 | 7/5/2016- 8/1/2016 | 8/2/2016- 9/5/2016 | 9/6/2016- 10/3/2016 | 10/4/2016- 10/31/2016 | 11/1/2016- 12/5/2016 | 12/6/2016- 1/2/2017 | 1/3/2017- 2/6/2017 |
| Initial Cap | 10.50% | 10.75% | 9.50% | 9.25% | 9.25% | 9.00% | 9.00% | 9.00% | 9.00% |
| Index Effective Date | 2/7/2017- 3/6/2017 | 3/7/2017- 4/3/2017 | 4/4/2017- 5/1/2017 | ||||||
| Initial Cap | 9.25% | 9.00% | 9.75% |
| Index Effective Date | 8/24/2015- 8/31/2015 | 9/1/2015- 10/5/2015 | 10/6/2015- 11/2/2015 | 11/3/2015- 11/30/2015 | 12/1/2015- 1/4/2016 | 1/5/2016- 2/1/2016 | 2/2/2016- 2/29/2016 | 3/1/2016- 4/4/2016 | 4/5/2016- 5/2/2016 |
| Initial Cap | 10.00% | 9.75% | 9.75% | 9.75% | 9.75% | 10.25% | 10.00% | 10.75% | 11.00% |
| 1st Anniversary Renewal Cap | 10.00% | 10.00% | 9.75% | 9.75% | 9.75% | 9.75% | 9.75% | 9.75% | 10.50% |
| Index Effective Date | 5/3/2016- 6/6/2016 | 6/7/2016- 7/4/2016 | 7/5/2016- 8/1/2016 | 8/2/2016- 9/5/2016 | 9/6/2016- 10/3/2016 | 10/4/2016- 10/31/2016 | 11/1/2016- 12/5/2016 | 12/6/2016- 1/2/2017 | 1/3/2017- 2/6/2017 |
| Initial Cap | 10.75% | 10.25% | 10.00% | 10.00% | 10.00% | 9.75% | 9.75% | 9.75% | 9.75% |
| Index Effective Date | 2/7/2017- 3/6/2017 | 3/7/2017- 4/3/2017 | 4/4/2017- 5/1/2017 | ||||||
| Initial Cap | 9.75% | 9.75% | 10.50% |
| Index Effective Date | 8/24/2015- 8/31/2015 | 9/1/2015- 10/5/2015 | 10/6/2015- 11/2/2015 | 11/3/2015- 11/30/2015 | 12/1/2015- 1/4/2016 | 1/5/2016- 2/1/2016 | 2/2/2016- 2/29/2016 | 3/1/2016- 4/4/2016 | 4/5/2016- 5/2/2016 |
| Initial Cap | 9.00% | 9.25% | 9.25% | 9.50% | 9.25% | 9.00% | 9.00% | 9.50% | 9.75% |
| 1st Anniversary Renewal Cap | 9.00% | 8.75% | 8.50% | 8.25% | 8.50% | 8.50% | 9.00% | 8.75% | 9.50% |
| Index Effective Date | 5/3/2016- 6/6/2016 | 6/7/2016- 7/4/2016 | 7/5/2016- 8/1/2016 | 8/2/2016- 9/5/2016 | 9/6/2016- 10/3/2016 | 10/4/2016- 10/31/2016 | 11/1/2016- 12/5/2016 | 12/6/2016- 1/2/2017 | 1/3/2017- 2/6/2017 |
| Initial Cap | 9.75% | 9.50% | 9.00% | 9.00% | 8.75% | 8.50% | 8.25% | 8.50% | 8.50% |
| Index Effective Date | 2/7/2017- 3/6/2017 | 3/7/2017- 4/3/2017 | 4/4/2017- 5/1/2017 | ||||||
| Initial Cap | 9.00% | 8.75% | 9.50% |
| Index Effective Date | 8/24/2015- 8/31/2015 | 9/1/2015- 10/5/2015 | 10/6/2015- 11/2/2015 | 11/3/2015- 11/30/2015 | 12/1/2015- 1/4/2016 | 1/5/2016- 2/1/2016 | 2/2/2016- 2/29/2016 | 3/1/2016- 4/4/2016 | 4/5/2016- 5/2/2016 |
| Initial Cap | 10.25% | 10.25% | 10.00% | 9.75% | 10.00% | 10.25% | 10.00% | 10.75% | 11.00% |
| 1st Anniversary Renewal Cap | 10.00% | 10.00% | 9.75% | 9.75% | 9.75% | 9.75% | 9.75% | 9.75% | 10.50% |
| Index Effective Date | 5/3/2016- 6/6/2016 | 6/7/2016- 7/4/2016 | 7/5/2016- 8/1/2016 | 8/2/2016- 9/5/2016 | 9/6/2016- 10/3/2016 | 10/4/2016- 10/31/2016 | 11/1/2016- 12/5/2016 | 12/6/2016- 1/2/2017 | 1/3/2017- 2/6/2017 |
| Initial Cap | 10.75% | 10.75% | 10.00% | 10.00% | 10.00% | 9.75% | 9.75% | 9.75% | 9.75% |
| Index Effective Date | 2/7/2017- 3/6/2017 | 3/7/2017- 4/3/2017 | 4/4/2017- 5/1/2017 | ||||||
| Initial Cap | 9.75% | 9.75% | 10.50% |
Part I
Item 11(e).
Financial Statements meeting the requirements of S-X
Item 11(f).
Selected Financial Data
(dollars in thousands, unless otherwise stated)
The following table sets forth the Company’s selected historical consolidated financial data. The selected financial data has been derived from the audited Financial Statements included elsewhere in this prospectus, and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s consolidated financial statements and related notes.
These historical results are not necessarily indicative of results to be expected for any future period.
| Year Ended December 31, | ||||||||||||||||||||
Selected income data | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
Net premiums and policy fees | $ | 1,407,279 | $ | 1,449,591 | $ | 1,408,097 | $ | 1,288,373 | $ | 1,049,157 | ||||||||||
Interest and similar income, net | 4,325,737 | 4,175,469 | 3,955,659 | 3,587,373 | 3,628,234 | |||||||||||||||
Change in fair value of assets and liablilities | (178,238 | ) | (532,720 | ) | 1,841,989 | 921,265 | (157,279 | ) | ||||||||||||
Realized investment (losses) gains, net | (49,325 | ) | 94,413 | 77,762 | 188,297 | 227,701 | ||||||||||||||
Fee, commission and other revenue | 309,854 | 303,399 | 311,820 | 306,779 | 240,706 | |||||||||||||||
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Total revenue | 5,815,307 | 5,490,152 | 7,595,327 | 6,292,087 | 4,988,519 | |||||||||||||||
Benefits and expenses | 4,671,973 | 4,646,790 | 7,415,139 | 5,547,609 | 5,075,860 | |||||||||||||||
Income tax expense (benefit) | 355,156 | 243,066 | 24,723 | 203,292 | (44,959 | ) | ||||||||||||||
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Net income (loss) | $ | 788,178 | $ | 600,296 | $ | 155,465 | $ | 541,186 | $ | (42,382 | ) | |||||||||
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| As of December 31, | ||||||||||||||||||||
Selected balance sheet data | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
Total Investments | $ | 100,199,823 | $ | 91,030,336 | $ | 88,992,022 | $ | 75,459,751 | $ | 75,657,875 | ||||||||||
Deferred acquisition costs | 5,246,343 | 6,283,236 | 4,362,771 | 4,820,215 | 2,603,307 | |||||||||||||||
Separate account assets | 27,733,261 | 28,243,123 | 30,789,371 | 30,747,777 | 25,670,675 | |||||||||||||||
Total assets | 145,589,400 | 137,717,795 | 135,107,955 | 121,124,973 | 112,669,962 | |||||||||||||||
Policyholder liabilities | 106,395,800 | 98,282,760 | 92,264,270 | 78,949,169 | 75,844,762 | |||||||||||||||
Separate account liabilities | 27,733,261 | 28,243,123 | 30,789,371 | 30,747,777 | 25,670,675 | |||||||||||||||
Total liabilities | 138,514,733 | 131,201,469 | 127,331,605 | 114,028,449 | 104,024,654 | |||||||||||||||
Stockholder’s equity | 7,074,667 | 6,516,326 | 7,776,350 | 7,096,524 | 8,435,459 | |||||||||||||||
Item 11(h).
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides an assessment by management of the Company’s financial condition as of December 31, 2016, compared with December 31, 2015, and its results of operations for each of the three years ended December 31 2016, 2015, and 2014, respectively. The information contained herein should be read in conjunction with the Company’s 2016 and 2015 audited U.S. generally accepted accounting principles (GAAP) consolidated financial statements and schedules. The information contained below includes certain forward-looking statements that are subject to risks, uncertainties and other factors, as described in “Risk Factors” and elsewhere in this prospectus, that could cause
Selected Financial Data and Management’s Discussion and Analysis
Page 1 of 32
actual growth, results of operations, performance, financial position and business prospects and opportunities in 2017 and beyond to differ materially from those expressed in, or implied by, those forward-looking statements. See “Forward-Looking Statements.”
Company Overview
Allianz Life Insurance Company of North America (hereafter referred to as “the Company”, “we”, “our” and “us”) is a life insurance company with two wholly owned life insurance company subsidiaries, Allianz Life Insurance Company of New York (Allianz Life of NY) and Allianz Life and Annuity Company (ALAC). The Company is domiciled in the State of Minnesota, and is a wholly owned subsidiary of Allianz of America, Inc. (AZOA), which is a wholly owned subsidiary of Allianz Europe, B.V.. Allianz Europe, B.V. is a wholly owned subsidiary of Allianz SE. Allianz SE is a European Company registered in Munich, Germany, and is our ultimate parent.
We offer a portfolio of individual annuities and individual life insurance products. We are licensed to sell in the United States, Canada, and several U.S. territories. We also maintain a legacy portfolio of individual long-term care (LTC), individual and group life, individual and group annuity, and individual and group accident and health policies, but do not actively issue new policies related to these products. Our products are either sold through licensed independent agents, contracted with a field marketing organization or insurance agency, or through licensed registered representatives that are contracted with a broker-dealer or associated with a banking institution.
Our business is classified into four operating segments: Individual Annuities, Life, Questar, and Legacy Products.
Individual Annuity
The Individual Annuity segment provides tax-deferred investment growth and lifetime income opportunities for our customers through fixed, fixed-indexed, variable, and variable-indexed annuities. The “fixed” and “variable” classifications describe whether we or the contractholders bear the investment risk of the assets supporting the contract. We are one of the largest sellers of fixed-indexed annuity products and also offer a number of variable and variable-indexed products. Fixed and variable annuities provide for both asset accumulation and asset distribution needs. Fixed and fixed-indexed annuities provide guarantees related to the preservation of principal and interest credited. In 2016, sales of our fixed-indexed annuity products were higher than the prior year due to the Allianz 222 FIA sales promotion which offered policyholders certain bonus enhancements. In 2015, the decrease in sales was driven by product changes made to respond to the downward trend of interest rates in late 2014 and early 2015.
Variable annuities allow the contractholder to make deposits into various investment options and also have unique product features that allow for guaranteed minimum income benefits, guaranteed minimum accumulation benefits, guaranteed minimum death benefits, and guaranteed minimum withdrawal benefits. The variable annuity products with guaranteed minimum benefits which provide a minimum return based on their initial deposit may be increased by additional deposits, bonus amounts, or other account crediting features. The income and accumulation benefits shift a portion of the investment risk from the contractholder back to the Company. In 2015 and 2016, sales of the variable-indexed annuity continued to gain momentum. This product has characteristics similar to our fixed-indexed annuities but allows contractholders to invest a portion of the funds into a variety of investment options and stock indices. Our Individual Annuity products are sold through both independent and wholly owned distribution channels made up of agents and registered representatives.
Life
Our life insurance products provide flexibility and control over a person’s assets, providing the assurance that the beneficiaries will be protected after the insured is gone and, in certain cases, to add cash value accumulation potential. The focus of our Life segment is building and repositioning our fixed-indexed universal life (FIUL) insurance product. The Life segment is an emerging focus within our Company. The FIUL product allows the insured to increase or decrease the amount of death benefit coverage over the term of the contract and the owner to adjust the amount and frequency of the deposits. Deposits are credited to an account maintained for the policyholder. Our individual life products are sold through independent distribution channels made up of agents and registered representatives
Selected Financial Data and Management’s Discussion and Analysis
Page 2 of 32
Questar
The Questar segment consists of two wholly owned subsidiaries, Questar Capital Corporation (Questar Capital) and Questar Asset Management Inc. (QAM). Questar Capital is registered as a broker-dealer under the Securities Exchange Act of 1934 and operates as a retail broker-dealer. Questar Capital distributes a full range of securities products, including mutual funds and variable life insurance and annuity contracts. Questar Capital also processes general securities transactions through a clearing arrangement with a third party provider. QAM provides portfolio management for clients and revenue is based upon wrap fees of assets under management.
Legacy Products
The Legacy business consists of our closed block of LTC and our Special Markets products. The Special Market products consist of closed blocks of individual and group universal life, term, whole life, and accident and health insurance as well as annuities. Although our Legacy product lines are part of the consolidated results, we do not focus additional resources in this area, other than to maintain the operational support to our current customers. The performance of these product lines is not material enough to warrant discussion as separate operating segments.
Refer to Application of Critical Accounting Policies section for information related to the allocation of income and expense to our segments.
Basis of Presentation
The Consolidated Financial Statements have been prepared in accordance with GAAP, which vary in certain respects from accounting practices permitted or prescribed by state insurance regulatory authorities. The accounts of our subsidiaries have been consolidated and all intercompany balances and transactions have been eliminated in consolidation. The preparation of consolidated financial statements in conformance with GAAP requires us to make certain estimates and assumptions that affect reported assets and liabilities, including reporting or disclosure of contingent assets and liabilities as of the balance sheet date and the reported revenues and expenses during the reporting period. Future events, including but not limited to changes in mortality, morbidity, interest rates, capital markets, and asset valuations could cause actual results to differ from the estimates used within the Consolidated Financial Statements. Such changes in estimates are recorded in the period they are determined.
Application of Critical Accounting Policies
The preparation of the financial statements in conformance with GAAP requires us to adopt accounting policies and make certain estimates and assumptions, which affect amounts reported in the Consolidated Financial Statements. Our critical accounting policies are summarized in “Summary of Significant Accounting Policies” included in the accompanying notes to the consolidated financial statements and require the use of judgments related to a variety of assumptions and estimates, in particular expectations of current and future mortality, persistency, investment returns, equity market performance, expenses, and interest rates. Our most critical accounting policies include those policies related to the Company’s accounting for (i) Valuation of Investments, (ii) Other than Temporary Impairments (OTTI), (iii) Derivatives and Hedging, (iv) Deferred Acquisition Costs (DAC) and Deferred Sales Inducements (DSI), (v) Account Balances and Future Policy Benefit Reserves, (vi) Income Taxes, and (vii) allocation of Income and Expense. Due to the inherent uncertainty of assumptions and estimates, the effect of certain accounting policies under different conditions or assumptions could be materially different from that reported in the consolidated financial statements. A discussion of the various critical accounting policies is presented below.
Valuation of Investments
We have portfolios of certain fixed-maturity and equity securities classified as “available-for-sale.” Accordingly, the securities are carried at fair value, and related unrealized gains and losses are credited or charged directly to accumulated other comprehensive income (AOCI) in stockholder’s equity, net of tax and related shadow adjustments. The adjustments to DAC, DSI, and Value of Business Acquired (VOBA) represent the change in amortization that would have been required as a charge or credit to operations had such unrealized amounts been realized. The adjustment to reserves represents the increase or decrease in the reserve balance that would have been required had such unrealized amounts been realized. We use a significant amount of judgment to determine the fair value of these investments.
We also have portfolios of certain fixed maturity securities classified as “at fair value through income” and equity securities classified as “trading”. These securities are carried at fair value, and their respective related unrealized gains and losses are reflected in Change in fair value of assets and liabilities, on the Consolidated Statements of Operations. In
Selected Financial Data and Management’s Discussion and Analysis
Page 3 of 32
addition, we have portfolios of certain fixed-maturity securities classified as “held-to-maturity.” Accordingly, the securities are carried at amortized cost on the Consolidated Balance Sheets.
The Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) establishes a fair value hierarchy that prioritizes the inputs used in the valuation techniques to measure fair value.
Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets that we have the ability to access at the measurement date.
Level 2 – Valuations derived from techniques that utilize observable inputs, other than quoted prices included in Level 1, which are observable for the asset or liability either directly or indirectly, such as:
| (a) | Quoted prices for similar assets or liabilities in active markets. |
| (b) | Quoted prices for identical or similar assets or liabilities in markets that are not active. |
| (c) | Inputs other than quoted prices that are observable. |
| (d) | Inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
Level 3 – Valuations derived from techniques in which the significant inputs are unobservable. Level 3 fair values reflect our own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
The fair value of fixed-maturity securities and equity securities is based on quoted market prices in active markets when available. Based on the market data, the securities are categorized by asset class, and based on the asset class of the security, appropriate pricing applications, models and related methodology, and standard inputs are utilized to determine what a buyer in the marketplace would pay for the security in a current sale. When quoted prices are not readily available or in an inactive market, standard inputs used in the valuation models, listed in approximate order of priority, include, but are not limited to, benchmark yields, reported trades, Municipal Securities Rulemaking Board (MSRB) reported trades, Nationally Recognized Municipal Securities Information Repository (NRMSIR) material event notices, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. In some cases, including private placement securities and certain difficult-to-price securities, internal pricing models may be used that are based on market proxies.
Generally, U.S. Treasury securities and exchange-traded stocks are included in Level 1. Most bonds for which prices are provided by third-party pricing sources are included in Level 2 because the inputs used are market observable. Bonds for which prices were obtained from broker quotes, certain bonds without active trading markets and private placement securities that are internally priced are included in Level 3.
See Note 6 of the Notes to the Consolidated Financial Statements for additional information regarding fair value of investments, including management’s process related to review of third-party pricing services.
Other than Temporary Impairments
We review the available-for-sale and held-to-maturity investment portfolios each quarter to determine whether or not declines in fair value are other-than-temporary. We continue to evaluate factors in addition to average cost and fair value, including credit quality, the extent and duration of the decline, market analysis, current events, recent price declines, changes in risk-free interest rates, likelihood of recovery in a reasonable period of time, and management’s judgment, to determine whether fixed income securities are considered other-than-temporarily impaired.
When the fair value of a fixed-maturity security is less than its amortized cost, we assess whether or not: (i) we have the intent to sell the security or (ii) it is more likely than not that we will be required to sell the security before its anticipated recovery. We also evaluate factors to determine whether we or any of our internal or external investment managers have intent to sell a security or a group of securities. Additionally, we perform a cash flow projection for several years into the future to determine whether cash needs would require the sale of any securities in an unrealized loss position. If either of
Selected Financial Data and Management’s Discussion and Analysis
Page 4 of 32
these conditions are met, we must recognize an other-than-temporary impairment (OTTI) for the difference between the investment’s amortized cost basis and its fair value through earnings. For securities that do not meet the above criteria, and we do not expect to recover a security’s amortized cost basis, the security is considered other-than temporarily impaired. For these securities, we separate the total impairment into the credit loss component and the amount of the loss related to other factors. The amount of the total impairment related to credit loss is considered an OTTI and is recognized in Realized investment (losses) gains, net on the Consolidated Statements of Operations. The amount of the total impairment related to other factors is recognized in other comprehensive income, net of impacts to DAC, DSI, VOBA, reserves, and deferred income taxes.
See Note 2 and 4 of the Notes to the Consolidated Financial Statements for additional information regarding other than temporary impairment losses.
Derivatives and Hedging
We utilize derivatives within certain actively managed investment portfolios to manage the risk associated with variability in cash flows related to financial assets and liabilities. Within these portfolios, derivatives can be used for hedging, replication, and income generation only. The financial instruments are carried at fair value and the unrealized gains and losses on the derivatives are reflected in Change in fair value of assets and liabilities on the Consolidated Statements of Operations.
We also use foreign currency swaps to hedge cash flows and apply hedge accounting treatment. Specifically, we use foreign currency swaps to hedge foreign currency fluctuations on certain underlying foreign-denominated fixed-maturity securities. Until January 2015, we also utilized interest rate swaps (IRS) to hedge cash flows and applied hedge accounting treatment. The IRS and foreign currency swaps are reported at fair value as Derivative assets and Derivative liabilities on the Consolidated Balance Sheets. The fair value of the over-the-counter (OTC) IRS and foreign currency swaps are derived using a third-party vendor software program and deemed by management to be reasonable.
We also utilize OTC options and exchange-traded options (ETOs) with the objective to economically hedge certain fixed-indexed annuity and life products tied to certain indices as well as certain variable annuity guaranteed benefits. These options are not used for speculative or income generating purposes. The ETOs provide us flexibility to use instruments, which are exchange-cleared and allow us to mitigate counterparty credit risk. These options are cleared through the Options Clearing Corporation (OCC), which operates under the jurisdiction of both the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission (CFTC). The credit rating on the OCC is currently AA+ from S&P.
We utilize exchange-traded futures to economically hedge fixed-indexed annuity, life, and variable annuity guarantees. The futures contracts do not require an initial investment except for the initial margin and we are required to settle cash daily based on movements of the representative index. Therefore, no asset or liability is recorded as of December 31, 2016 and 2015.
We also utilize OTC and exchange-traded IRS to economically hedge certain variable annuity and fixed-index annuity guarantee benefits. We can receive the fixed or variable rate. The IRS are traded in varying maturities. We will only enter into OTC IRS contracts with counterparties rated BBB+ or better.
We issue certain variable annuity products with guaranteed minimum benefit riders, including the guaranteed minimum withdrawal benefit (GMWB) and the guaranteed minimum accumulation benefit (GMAB), which are measured at fair value separately from the host variable annuity contract, with changes in fair value reported in Change in fair value of annuity and life embedded derivatives on the Consolidated Statements of Operations. These embedded derivatives are classified within Account balances and future policy benefit reserves on the Consolidated Balance Sheets.
Certain fixed-indexed annuity products, variable annuity riders, and universal life policies include a market value liability option (MVLO), which is an embedded derivative with equity-indexed features. This embedded derivative is reported within Account balances and future policy benefit reserves on the Consolidated Balance Sheets with changes in fair value reported in Change in fair value of annuity and life embedded derivatives on the Consolidated Statements of Operations.
See Note 5 of the Notes to the Consolidated Financial Statements for additional information regarding derivatives and hedging instruments.
Selected Financial Data and Management’s Discussion and Analysis
Page 5 of 32
Deferred Acquisition Costs and Deferred Sales Inducements
We capitalize costs which consist of commissions and other incremental costs that are directly related to the successful acquisition of insurance contracts. Acquisition costs are deferred to the extent recoverable from future policy revenues and gross profits. However, acquisition costs associated with insurance contracts recorded under the fair value option are not deferred as guidance related to the fair value option requires that transaction costs are recorded immediately as an expense. For interest-sensitive products (all issue years) and variable annuity contracts (issued in 2010 and after), acquisition costs are amortized in relation to the present value of expected future gross profits from investment margins and mortality, morbidity, and expense charges. For variable annuity contracts issued prior to 2010, acquisition costs are amortized in relation to the present value of estimated gross revenues from investments and mortality, morbidity, and expense charges.
Acquisition costs for accident and health insurance policies are deferred and amortized over the lives of the policies in the same manner as premiums are earned. For traditional life and group life products, such costs are amortized over the projected earnings pattern of the related policies using the same actuarial assumptions used in computing future policy benefit reserves.
DAC are reviewed for recoverability and loss recognition, at least annually, and more frequently as needed. The evaluation is a two-step process where current policy year issues are evaluated for recoverability, and then in force policies are evaluated for loss recognition. Before assessing recoverability and loss recognition, DAC are capped, if necessary, such that the balance cannot exceed the original capitalized costs plus interest.
We review our best-estimate assumptions and record “unlocking” on an annual basis. These reviews are based on recent changes in the organization and businesses of the Company, and actual and expected performance of in-force policies. Our review includes all assumptions, including mortality, lapses, expenses, and separate account returns. The revised best estimate assumptions are applied to the current in-force policies to project future gross profits.
Sales inducements are product features that enhance the investment yield to the contractholder on the contract. We offer two types of sales inducements on certain universal life and annuity contracts. The first type, an immediate bonus, increases the account value at inception, and the second type, a persistency bonus, increases the account value at the end of a specified period.
Annuity sales inducements are deferred when credited to contractholders and life sales inducements are deferred and recognized as part of the liability for policy benefits. DSI is reported in Other assets in the Consolidated Balance Sheets. They are amortized over the expected life of the contract in a manner similar to DAC and are reviewed annually for recoverability. DSI capitalization and amortization are recorded in Policyholder benefits on its Consolidated Statements of Operations.
The impact of unlocking during 2016 was an $246,669 increase in amortization of DAC and $51,156 increase in amortization of DSI primarily due to adjustments made to future period assumptions for interest margins, policyholder behavior (including surrender, annuitization and lifetime income benefit utilization), separate account returns and maintenance expenses. In 2015, the impact of unlocking was a $109,797 increase in DAC amortization and a $32,400 increase in DSI amortization due to similar assumption changes.
On April 1, 2014, we applied a prospective change to our method of calculating DAC amortization for variable annuity policies issued prior to 2010. This was a change in estimate that is inseparable from the effect of a related change in accounting principle. For these annuities, acquisition costs are now amortized in relation to the present value of estimated gross revenues, and were previously amortized using estimated future gross profits. The implementation of the new DAC amortization will better reflect the revenue pattern of the pre-2010 variable block of business, which is currently in run-off. The implementation of this change resulted in a decrease in income from operations before income taxes of $165,790 for the year ended December 31, 2014.
On December 1, 2014, we applied a prospective change to the method of calculating DAC amortization for our variable annuity policies issued after 2010. The change in estimate will minimize accounting mismatches on interest and claim projections within the estimated gross profit (EGP) calculation. The implementation of this change resulted in a decrease in income from operations before income taxes of approximately $45,623 for the year ended December 31, 2014.
Selected Financial Data and Management’s Discussion and Analysis
Page 6 of 32
See Notes 9 and 10 of the Notes to the Consolidated Financial Statements for additional information regarding DAC and DSI.
Account Balances and Future Policy Benefit Reserves
We calculate and maintain reserves for the estimated future payment of claims to policyholders based on actuarial assumptions and in accordance with industry practice. Many factors can affect these reserves, including economic and social conditions, inflation, and changes in doctrines of legal liability. The reserves we establish are policy and contract account balances for interest-sensitive products, which include universal life and fixed deferred annuities and are generally carried at accumulated contract values. For fixed-indexed annuity products, the policyholder obligation is divided into two parts – one part representing the value of the underlying base contract (host contract) and the second part representing the fair value of the expected index benefit over the life of the contract. The value of the host contract accrues to guaranteed minimum amounts of the base policy. The index benefit is valued at fair value using current capital market assumptions, such as index and volatility, to estimate future index levels. The index benefit valuation is also dependent upon estimates of future policyholder behavior. We must include provisions for our own credit risk and for risk that our assumptions about policyholder activity could differ from actual experience. The fair value determination of the index benefit is sensitive to the economic market and interest rate environment, as it is discounted at current market interest rates. There is volatility in this liability due to these external market sensitivities.
Certain two-tier fixed annuity products provide additional benefits payable upon annuitization for period-certain and life-contingent payout options. An additional annuitization reserve is accrued using assumptions consistent with those used in estimating gross profits for purposes of amortizing DAC.
We issue variable annuity contracts through our separate accounts for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contractholder. We recognize gains or losses on transfers from the general account to the separate accounts at fair value to the extent of contractholder interests in separate accounts, which are offset by changes in contractholder liabilities. We also issue variable annuity contracts through our separate accounts where we provide certain contractual guarantees to the contractholder. These guarantees are in the form of a guaranteed minimum death benefit (GMDB), a guaranteed minimum income benefit (GMIB), a GMAB, and a GMWB. These guarantees provide for benefits that are payable to the contractholder in the event of death, annuitization, or at specified dates during the accumulation period.
Changes in GMDB and GMIB are calculated in accordance with the Financial Services – Insurance Topic of the Codification and are included in Policyholder benefits on the Consolidated Statements of Operations. GMAB and GMWB are considered to be embedded derivatives under the Derivatives and Hedging Topic of the Codification, and the changes in these embedded derivatives are included in Change in fair value of annuity and life embedded derivatives on the Consolidated Statements of Operations. The GMDB provides a specified minimum return upon death. The survivor has the option to terminate the contract or continue it and have the death benefit paid into the contract. The GMIB is a living benefit that provides the contractholder with a guaranteed annuitization value. The GMDB and GMIB liabilities are determined each period by estimating the expected future claims in excess of the associated account balances. We regularly evaluate estimates used and adjust the additional liability balance, with a related charge or credit to Policyholder benefits on the Consolidated Statements of Operations if actual experience or other evidence suggests that earlier assumptions should be revised. The GMAB is a living benefit that provides the contractholder with a guaranteed value that was established at least five years prior at each contract anniversary. The GMWB is a living benefit that provides the contractholder with a guaranteed amount of income in the form of partial withdrawals.
Policy and contract account balances for variable annuity products are carried at accumulated contract values. Future policy benefit reserves for any death and income benefits that may exceed the accumulated contract values are established using a range of economic scenarios and are accrued for using assumptions consistent with those used in estimating gross profits or gross reserves for purposes of amortizing DAC. Future policy benefit reserves for accumulation and withdrawal benefits that may exceed account values are established using capital market assumptions, such as index and volatility, along with estimates of future policyholder behavior.
See Note 2 of the Notes to the Consolidated Financial Statements for additional information regarding Account Balances and Future Policy Benefit Reserves.
Selected Financial Data and Management’s Discussion and Analysis
Page 7 of 32
Income Taxes
We file a consolidated federal income tax return with AZOA and all of its wholly owned subsidiaries. The consolidated tax allocation agreement stipulates that each company participating in the return will bear its share of the tax liability pursuant to certain tax allocation elections under the Internal Revenue Code and its related regulations and reimbursement will be in accordance with an intercompany tax reimbursement arrangement. We provide for federal income taxes based on amounts we believe are ultimately owed. Inherent in the provision for federal income taxes are estimates regarding the deductibility of certain items and the realization of certain tax credits. In the event the ultimate deductibility of certain items or the realization of certain tax credits differs from estimates, we may be required to significantly change the provision for federal income taxes recorded on the Consolidated Balance Sheets. Any such change could significantly affect the amounts reported within the Consolidated Statements of Operations. Management uses best estimates to establish reserves based on current facts and circumstances regarding tax exposure items where the ultimate deductibility is open to interpretation. Quarterly, we evaluate the appropriateness of such reserves based on any new developments specific to their fact patterns. Information considered includes results of completed tax examinations, Technical Advice Memorandums, and other rulings issued by the Internal Revenue Service or the tax courts.
We utilize the asset and liability method of accounting for income tax. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. Valuation allowances are established when it is determined that it is more likely than not that the deferred tax asset will not be fully realized or that the related temporary differences, such as OTTI, will not reverse over time.
Although realization is not assured, we believe it is not necessary to establish a valuation allowance for ordinary deferred tax assets, as it is more likely than not the deferred tax assets will be realized principally through future reversals of existing ordinary taxable temporary differences and future ordinary taxable income. For deferred tax assets that are capital in nature, considering all objective evidence and the available tax planning strategy, it is more likely than not the deferred tax assets that are capital in nature will be realized and no valuation allowance is required. The amount of the ordinary and capital deferred tax assets considered realizable could be reduced in the near term if estimates of future reversals of existing taxable temporary differences and future ordinary and capital taxable income are reduced.
See Note 11 of the Notes to the Consolidated Financial Statements for additional information regarding income tax estimates and assumptions.
Allocation of Income and Expense
The Company maintains segregated investment portfolios at the subsidiary level but does not maintain segregated portfolios for each segment. All Interest and similar income, net and Realized investment (losses) gains, net are allocated to the segments. Assets are only monitored at the total Company level, and as such, asset disclosures by segment are not included herein.
Income and expense related to assets backing policyholder reserves are allocated to the segments based on policyholder statutory reserve levels. The results of our Individual Annuity, Life, and Legacy segments also reflect allocation of income and expense related to assets backing surplus. Income and expense related to assets backing surplus are allocated to the segments based on required capital levels for each segment and are excluded from estimated gross profits used in reserve and DAC model projections.
Selected Financial Data and Management’s Discussion and Analysis
Page 8 of 32
Consolidated Results of Operations
| Increase (decrease) | Increase (decrease) | |||||||||||||||||||||||||||
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Revenue: | ||||||||||||||||||||||||||||
Net premiums and policy fees | $ | 1,407,279 | $ | 1,449,591 | $ | 1,408,097 | $ | (42,312 | ) | (2.9 | )% | $ | 41,494 | 2.9 | % | |||||||||||||
Interest and similar income, net | 4,325,737 | 4,175,469 | 3,955,659 | 150,268 | 3.6 | % | 219,810 | 5.6 | % | |||||||||||||||||||
Change in fair value of assets and liabilities | (178,238 | ) | (532,720 | ) | 1,841,989 | 354,482 | 66.5 | % | (2,374,709 | ) | (128.9 | )% | ||||||||||||||||
Realized investment (losses) gains, net | (49,325 | ) | 94,413 | 77,762 | (143,738 | ) | (152.2 | )% | 16,651 | 21.4 | % | |||||||||||||||||
Fee, commission and other revenue | 309,854 | 303,399 | 311,820 | 6,455 | 2.1 | % | (8,421 | ) | (2.7 | )% | ||||||||||||||||||
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Total revenue | 5,815,307 | 5,490,152 | 7,595,327 | 325,155 | 5.9 | % | (2,105,175 | ) | (27.7 | )% | ||||||||||||||||||
Benefits and expenses: | ||||||||||||||||||||||||||||
Net benefits and expenses | 2,383,178 | 2,603,094 | 5,875,825 | (219,916 | ) | (8.4 | )% | (3,272,731 | ) | (55.7 | )% | |||||||||||||||||
General and administrative and commission | 2,029,388 | 1,804,437 | 2,212,400 | 224,951 | 12.5 | % | (407,963 | ) | (18.4 | )% | ||||||||||||||||||
Change in deferred acquisition costs, net | 259,407 | 239,259 | (673,086 | ) | 20,148 | 8.4 | % | 912,345 | 135.5 | % | ||||||||||||||||||
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Total benefits and expenses | 4,671,973 | 4,646,790 | 7,415,139 | 25,183 | 0.5 | % | (2,768,349 | ) | (37.3 | )% | ||||||||||||||||||
Pretax income | 1,143,334 | 843,362 | 180,188 | 299,972 | 35.6 | % | 663,174 | 368.0 | % | |||||||||||||||||||
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Income tax expense | 355,156 | 243,066 | 24,723 | 112,090 | 46.1 | % | 218,343 | 883.2 | % | |||||||||||||||||||
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Net income | $ | 788,178 | $ | 600,296 | $ | 155,465 | $ | 187,882 | 31.3 | % | $ | 444,831 | 286.1 | % | ||||||||||||||
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Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Overview
| • | Net income: For the Company, the increase in net income was driven by our Individual Annuity segment due to the favorable impacts from the change in the equity markets, increase in interest rates, and positive unlocking. This was partially offset by Questar due to lower revenue, higher information technology (IT) expenses, and consulting fees due to anticipated Department of Labor (DOL) regulations. We also had higher claims and a model adjustment in our LTC business within the Legacy segment. |
Revenue
Net premiums and policy fees. Net premiums consist primarily of premiums for term life insurance, and LTC, net of reinsurance. Policy fees represent asset fees, cost of insurance charges, administrative fees, charges for guarantees on investment products, and surrender charges for investment products and universal life insurance.
| • | Premium and policy fee revenue decreased primarily due to the unfavorable impacts of unlocking within our Life segment and lower variable product maintenance and expense (M&E) fees due to the lower Separate Account balance in our Individual Annuity segment. This was partially offset by the variable product increase in rider charges due to the higher benefit base and higher variable-indexed annuity product fee income driven by the growth of this product in 2016. |
Interest and similar income, net. Interest and similar income primarily includes interest income on fixed-maturity securities classified as available-for-sale and held-to-maturity.
| • | Interest and similar income increased primarily due to an increase in the annuity products average invested assets, higher cash flows, and an increase in the General Account balance. |
Change in fair value of assets and liabilities. Change in fair value of assets and liabilities represents the changes in fair value and the realized gains and losses from derivative instruments driven by interest rate and equity market movement. It also includes gains and losses and changes in fair value on fixed maturity and equity security investments classified as trading or fair value through income or for which we have elected the fair value option. We utilize derivatives within certain actively managed investment portfolios to manage the risk associated with variability in cash flows or changes in fair values related to financial assets and liabilities. See Application of Critical Accounting Policies section for additional information.
Selected Financial Data and Management’s Discussion and Analysis
Page 9 of 32
| • | Change in fair value of assets and liabilities increased driven by favorable results in the Individual Annuity segment driven by gains on fixed annuity derivative assets due to the equity market gains in 2016 compared to losses in 2015. The positive variance also is driven by the interest rate impacts on derivatives backing variable annuity products (2016 interest rate increase compared to declines in 2015). The Individual Annuity and Life derivative results economically hedge reserve changes in net benefits and expenses. |
Realized investment (losses) gains, net. Realized investment gains consist of gains and losses from the sale or impairment of investments.
| • | Realized investment (losses) gains, net decreased in 2016 primarily related to higher credit impairments driven by the energy sector and lower realized gains due to normal sale activity. |
Fee, commission and other revenue. Fee, commission and other revenue relate primarily to annual marketing or distribution fees on investment options (12B-1 fees) and investment advisory fees earned on assets under management by fund companies within Individual Annuity and Questar, and gross dealer concessions from sales of products within Questar. This also includes the change in cash surrender value for our corporate-owned life insurance (COLI) policy.
| • | Fee, commission, and other revenue increased driven by favorable COLI results and offset by lower variable investment advisory fees and 12B-1 revenue within our Individual Annuity segment and lower revenue and higher IT expenses and consulting fees in our Questar segment. This was partially offset by the lower variable investment advisory fees and 12b-1 revenue due to the decline in the asset base in 2016. |
Benefits and Expenses
Net benefits and expenses. Net benefits and expenses consist of amounts paid to policyholders and changes in liabilities held for anticipated future benefit payments under insurance policies and annuity contracts. Amounts are net of benefit payments recovered or expected to be recovered under reinsurance contracts. The index benefit under fixed-indexed annuities and FIUL, and the accumulation and withdrawal benefits under variable annuity guarantees include the change in fair value for these embedded derivatives. The derivatives to economically hedge these benefits are included in revenue under change in fair value of assets and liabilities. Net benefits and expenses also include amortization of DSI.
| • | Net benefits and expenses decreased in 2016 primarily due to the Individual Annuity products which reflect a favorable change in reserves driven by the change in interest rates and positive impacts of unlocking. There was a favorable variance for both fixed and variable annuity products due to the increase in interest rates in 2016. This was partially offset by the change in reserves due to the change in equity markets. |
General and administrative and commission. General and administrative and commission includes compensation, commissions paid to sales force, consultant fees, IT expenses, facilities and equipment, advertising and marketing, legal and regulatory, and corporate related expenses. Commissions and other incremental acquisition costs, which are directly related to the successful acquisition of insurance contracts, are capitalized in change in deferred acquisition costs, net.
| • | General and administrative and commission increased primarily due to higher fixed annuity commissions, consistent with the increase in deposits, an Allianz SE IT initiative expense, and legal accrual activity. |
Change in deferred acquisition costs, net. Change in deferred acquisition costs, net represents the capitalization of acquisition costs reported in general and administrative and commission expenses, and amortization of DAC. Changes in assumptions are recorded as an increase or decrease in amortization (unlocking).
| • | The change in DAC reflects an unfavorable change primarily due to higher DAC amortization partially offset by higher DAC capitalization. The higher amortization is due to the impacts of unlocking. This partially offset by the change in EGPs and impacts from fixed-indexed annuities within the Individual Annuity segment, and favorable impacts of unlocking within the Life segment. The higher capitalization is driven by increased production in 2016 which is the result of the fixed-annuity sales promotion. |
Income tax expense
| • | Income tax expense: The increased pretax income, with minimal variance in deductions, resulted in an increased effective tax rate of 31.1% compared to an effective tax rate of 28.8% in 2015. |
Selected Financial Data and Management’s Discussion and Analysis
Page 10 of 32
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Overview
| • | Net income: For the Company, net income increased compared to the prior year driven by our Individual Annuity segment due to the favorable impacts from the change in the equity markets, partially offset by our Legacy segment due to future loss reserves recorded in 2015 compared to 2014, net of DAC. |
Revenue
| • | Premium and policy fee revenue increased primarily due to the favorable impacts of unlocking in 2015 compared to 2014 within our Life segment and increases in rider charges driven by the higher benefit base and higher variable-indexed annuity income within our Individual Annuity segment. This was partially offset by the discontinued sales of the Single Premium Immediate Annuity (SPIA) product in 2015 in the Individual Annuity segment. |
| • | Interest and similar income increased primarily due to an increase in the annuity products average invested assets and an increase in the general account balance. |
| • | Change in fair value of assets and liabilities decreased in 2015 and was driven by unfavorable results in the Individual Annuity segment driven by losses on fixed annuity derivative assets due to the market decline in 2015 compared to growth in 2014. The negative variance also is driven by the interest rate impacts on derivatives backing variable annuity products (2015 interest rates down less than 2014). The Individual Annuity and Life derivative results economically hedge reserve changes in net benefits and expenses. |
| • | Realized investment (losses) gains, net increased in 2015 primarily related to other assets backing surplus driven by a collateralized debt obligation (CDO) consolidation, CDO collateral sale, and a contingent gain from a real estate sale in 2011. This is partially offset by higher credit impairments in 2015 due to intent to sell securities with credit concerns. |
| • | Fee, commission and other revenue decreased due to the change in COLI driven by less positive market returns in 2015 compared to 2014 and the elimination of a deferred gain which fully amortized in 2014 within our Legacy segment, partially offset by higher registered investment advisor fees and gross dealer concessions revenue in Questar. |
Benefits and Expenses
| • | Net benefits and expenses decreased in 2015 primarily due to the Individual Annuity products which reflect a favorable change in reserves primarily driven by the relative decrease in equity market returns. The equity markets in 2015 were flat compared to gains in 2014. There was also a favorable variance for both fixed and variable annuity products due to the change in interest rates in 2015. These impacts were partially offset by the Life segment driven by a reserve adjustment recorded in 2015 due to impacts of updated estimated gross profit assumptions. |
| • | General and administrative and commission decreased primarily due to lower fixed annuity commissions, consistent with the decrease in gross written premiums driven by the product changes made in late 2014 and a 2015 legal reserve accrual release. |
| • | Change in deferred acquisition costs increased primarily due to the Individual Annuity products which reflect an unfavorable change in deferred acquisition costs primarily due to lower DAC capitalization driven by the decline in fixed annuity production in 2015. It also reflects higher fixed and variable annuity amortization due to lower declining interest rates (compared to higher declining rates in 2014) and the impact on EGPs in 2015 compared to 2014. These impacts were partially offset by the prospective changes to our method of calculating DAC amortization for variable annuity policies discussed in Application of Critical Accounting Policies. The variance also includes an unfavorable impact of $109,797 from unlocking in 2015 compared to $5,294 unfavorable unlocking in 2014. |
Income tax expense
| • | Income tax expense: The increased pretax income, with minimal variance in deductions, resulted in an increased effective tax rate of 28.8% in 2015 compared to an effective tax rate of 13.7% in 2014. |
Selected Financial Data and Management’s Discussion and Analysis
Page 11 of 32
Individual Annuity
Segment results of operations
| Increase (decrease) | Increase (decrease) | |||||||||||||||||||||||||||
| Year Ended December 31, | and % change | and % change | ||||||||||||||||||||||||||
| 2016 | 2015 | 2014 | 2016 - 2015 | 2015 - 2014 | ||||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||
Net premiums and policy fees | $ | 1,117,580 | $ | 1,133,285 | $ | 1,148,803 | $ | (15,705 | ) | (1.4 | )% | $ | (15,518 | ) | (1.4 | )% | ||||||||||||
Interest and similar income, net | 4,133,359 | 3,999,693 | 3,798,284 | 133,666 | 3.3 | % | 201,409 | 5.3 | % | |||||||||||||||||||
Change in fair value of assets and liabilities | (218,922 | ) | (492,479 | ) | 1,805,611 | 273,557 | 55.5 | % | (2,298,090 | ) | (127.3 | )% | ||||||||||||||||
Realized investment (losses) gains, net | (49,126 | ) | 90,948 | 74,926 | (140,074 | ) | (154.0 | )% | 16,022 | 21.4 | % | |||||||||||||||||
Fee, commission and other revenue | 243,789 | 236,454 | 246,021 | 7,335 | 3.1 | % | (9,567 | ) | (3.9 | )% | ||||||||||||||||||
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Total revenue | 5,226,680 | 4,967,901 | 7,073,645 | 258,779 | 5.2 | % | (2,105,744 | ) | (29.8 | )% | ||||||||||||||||||
Benefits and expenses: | ||||||||||||||||||||||||||||
Net benefits and expenses | 1,982,879 | 2,296,057 | 5,582,740 | (313,178 | ) | (13.6 | )% | (3,286,683 | ) | (58.9 | )% | |||||||||||||||||
General and administrative and commission | 1,774,740 | 1,549,692 | 1,963,032 | 225,048 | 14.5 | % | (413,340 | ) | (21.1 | )% | ||||||||||||||||||
Change in deferred acquisition costs, net | 315,760 | 279,582 | (615,902 | ) | 36,178 | 12.9 | % | 895,484 | 145.4 | % | ||||||||||||||||||
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Total benefits and expenses | 4,073,379 | 4,125,331 | 6,929,870 | (51,952 | ) | (1.3 | )% | (2,804,539 | ) | (40.5 | )% | |||||||||||||||||
Pretax income | $ | 1,153,301 | $ | 842,570 | $ | 143,775 | $ | 310,731 | 36.9 | % | $ | 698,795 | 486.0 | % | ||||||||||||||
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Selected operating performance measures
| Increase (decrease) | Increase (decrease) | |||||||||||||||||||||||||||
| Year Ended December 31, | and % change | and % change | ||||||||||||||||||||||||||
| 2016 | 2015 | 2014 | 2016 - 2015 | 2015 - 2014 | ||||||||||||||||||||||||
Individual Annuity | ||||||||||||||||||||||||||||
Deposits | $ | 12,254,785 | $ | 10,784,423 | $ | 14,961,713 | $ | 1,470,362 | 13.6 | % | $ | (4,177,290 | ) | (27.9 | )% | |||||||||||||
Inforce | 109,698,006 | 103,222,981 | 100,373,384 | 6,475,025 | 6.3 | % | 2,849,597 | 2.8 | % | |||||||||||||||||||
Deposits and in-force amounts in the table above are for direct and assumed business. Deposits reflect amounts collected on both new and renewal business. In-force represents account values of the annuity contracts for our fixed, fixed-indexed, variable, and variable-indexed annuity contracts. In 2016, sales of our fixed-indexed annuity products were higher than the prior year due to the Allianz 222 FIA sales promotion which offered policyholders certain bonus enhancements compared to sale decreases in 2015 as a result of product changes in response to the downward trend of interest rates. The strong sales of fixed-indexed annuity products in 2014 were driven by the growth of the BUDBI index option.
Change in key market factors
Our Individual Annuity segment is impacted by various market impacts and movements which are summarized below:
| Year Ended December 31, | % change | |||||||||||||||||||
| Stock Index | 2016 | 2015 | 2014 | 2016-2015 | 2015-2014 | |||||||||||||||
S&P 500 | 9.54 | % | -0.73 | % | 11.39 | % | 10.27 | % | -12.12 | % | ||||||||||
NASDAQ 100 | 5.89 | % | 8.43 | % | 17.94 | % | -2.54 | % | -9.51 | % | ||||||||||
BUDBI | 4.83 | % | -2.00 | % | 4.75 | % | 6.83 | % | -6.75 | % | ||||||||||
| Year Ended December 31, | basis point (bps) change | |||||||||||||||||||
| Interest Rates | 2016 | 2015 | 2014 | 2016-2015 | 2015-2014 | |||||||||||||||
LIBOR 10yr | 2.34 | 2.20 | 2.30 | 14 bps | -10 bps | |||||||||||||||
LIBOR 20yr | 2.56 | 2.50 | 2.60 | 6 bps | -10 bps | |||||||||||||||
Selected Financial Data and Management’s Discussion and Analysis
Page 12 of 32
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Overview
Our Individual Annuity segment pretax income increase is primarily driven by equity market and interest rate movements partially offset by higher realized losses and impairments, an Allianz SE IT initiative expense, and lower legal accrual reserve releases in 2016 compared to 2015.
Revenue
| • | Net premiums and policy fees: Premiums and policy fees decreased primarily due to lower M&E fees due to the lower Separate Account balance partially offset by increases in rider charges due to the higher benefit base and higher variable-indexed annuity product fee income driven by continued growth of this product in 2016. |
| • | Interest and similar income, net: The increase in interest and similar income is primarily due to an increase in the annuity products average invested assets, more favorable cash flows, and a higher general account balance. |
| • | Change in fair value of assets and liabilities: Change in fair value of assets and liabilities favorable change is driven by gains on derivative assets mainly due to the market movements in 2016 compared to 2015. This was partially offset by unfavorable interest rate impacts on derivatives backing variable annuity products and the change in the fair value option due to growth of the variable-indexed annuity product in 2016. The derivative results economically hedge reserve changes in net benefits and expenses. |
| • | Realized investment (losses) gains, net: The increased realized investment losses in 2016 were primarily due to higher credit impairments within the energy sector and lower realized gains due to normal sale activity. |
Benefits and Expenses
| • | Net benefits and expenses: The Individual Annuity products reflect a favorable change in reserves primarily driven by the increase in interest rates partially offset by the change in equity markets. Interest rates increased in 2016 compared to interest rate declines in 2015. The equity markets had gains in 2016 compared to losses in 2015. Reserve movements are economically hedged in Change in fair value of assets and liabilities. Net benefits and expenses include a favorable impact of $376,513 from unlocking in 2016 compared to $138,580 in the prior year. |
| • | General and administrative and commission: The General, administrative and commission expense increased primarily due to higher fixed-indexed annuity commissions consistent with the increase in deposits. The gross written premium increase is driven by the 2016 Allianz 222 sales promotion. We also incurred an Allianz SE IT initiative expense and had lower legal accrual releases in 2016 compared to 2015. |
| • | Change in deferred acquisition costs, net: The change in DAC within the Individual Annuity products reflect an unfavorable change primarily due to higher DAC amortization offset by higher DAC capitalization. The higher amortization is due to the impacts of unlocking and partially offset by the change in EGPs. The higher capitalization is driven by the increase in production in 2016 due to the fixed-annuity sales promotion. The change in DAC unfavorable unlocking impacts were $246,681 in 2016 compared to the unfavorable impact of $76,604 in 2015. |
Selected Financial Data and Management’s Discussion and Analysis
Page 13 of 32
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Overview
Our Individual Annuity segment pretax income increased compared to the prior year and was primarily driven by the equity market movement and legal accrual reserve release in 2015. It also reflects the 2014 prospective change in DAC amortization methodology for variable annuity and more favorable 2015 impacts of unlocking.
Revenue
| • | Net premiums and policy fees: Premiums and policy fees decreased primarily due to discontinued sales of the SPIA product in 2015 partially offset by increases in rider charges due to the higher benefit base and higher variable-indexed annuity product fee income driven by continued growth of this product in 2015. |
| • | Interest and similar income, net: Interest and similar income increased primarily due to an increase in the annuity products average invested assets. This is partially offset by a decrease in the average yield earned on the investments. |
| • | Change in fair value of assets and liabilities: Change in fair value of assets and liabilities decreased driven by derivative asset impacts due to the market decline in 2015 compared to growth in 2014. It also includes unfavorable interest rate impacts on derivatives backing variable annuity products. The derivative results economically hedge reserve changes in net benefits and expenses. |
| • | Realized investment (losses) gains, net: Realized gains increased primarily due to the allocation of gains related to other assets backing surplus. The higher gains in 2015 were driven by a CDO consolidation and liquidation and a contingent gain from a real estate sale in 2011 partially offset by losses driven by increased credit impairments in 2015. |
| • | Fee, commission and other revenue: Revenue decreased as a result of less favorable impacts of COLI, driven by the equity markets and partially offset by higher variable investment advisory fees and 12b-1 revenue due to the continued asset base growth in 2015. |
Benefits and Expenses
| • | Net benefits and expenses: Benefits decreased in 2015 compared to 2014. The Individual Annuity products reflect a favorable change in reserves primarily driven by the decrease in equity markets. The equity markets in 2015 were flat compared to significant gains in 2014. There was also a favorable variance for both fixed and variable annuity products due to lower declining interest rates in 2015. Reserve movements are economically hedged in Change in fair value of assets and liabilities. Net benefits and expenses include a favorable impact of $138,580 from unlocking in 2015 compared to $28,928 in the prior year. |
| • | General and administrative and commission: Expenses decreased primarily due to lower fixed and variable annuity commissions, consistent with the decrease in deposits (offset in change in DAC capitalization). |
| • | Change in deferred acquisition costs, net: The change in deferred acquisition costs, net increased in 2015 compared to 2014. The Individual Annuity products reflect an unfavorable change in deferred acquisition costs primarily due to lower DAC capitalization driven by lower fixed annuity production in 2015 and higher fixed annuity amortization due to the change in estimated gross profits. It also reflects higher variable annuity amortization due to the change in the equity market and its impact on the pre-2010 DAC blocks. These impacts were partially offset by the prospective changes to our method of calculating DAC amortization for variable annuity policies implemented in 2014, discussed in Application of Critical Accounting Policies. |
Selected Financial Data and Management’s Discussion and Analysis
Page 14 of 32
Life
Segment results of operations
| Increase (decrease) | Increase (decrease) | |||||||||||||||||||||||||||
| Year Ended December 31, | and % change | and % change | ||||||||||||||||||||||||||
| 2016 | 2015 | 2014 | 2016 - 2015 | 2015 - 2014 | ||||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||
Net premiums and policy fees | $ | 147,013 | $ | 172,660 | $ | 117,950 | $ | (25,647 | ) | (14.9 | )% | $ | 54,710 | 46.4 | % | |||||||||||||
Interest and similar income, net | 113,465 | 103,326 | 90,057 | 10,139 | 9.8 | % | 13,269 | 14.7 | % | |||||||||||||||||||
Change in fair value of assets and liabilities | 40,600 | (38,553 | ) | 41,292 | 79,153 | 205.3 | % | (79,845 | ) | (193.4 | )% | |||||||||||||||||
Realized investment gains, net | 623 | 1,597 | 1,579 | (974 | ) | (61.0 | )% | 18 | 1.1 | % | ||||||||||||||||||
Fee, commission and other revenue | 747 | 186 | 474 | 561 | 301.6 | % | (288 | ) | (60.8 | )% | ||||||||||||||||||
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Total revenue | 302,448 | 239,216 | 251,352 | 63,232 | 26.4 | % | (12,136 | ) | (4.8 | )% | ||||||||||||||||||
Benefits and expenses: | ||||||||||||||||||||||||||||
Net benefits and expenses | 194,667 | 114,377 | 147,348 | 80,290 | 70.2 | % | (32,971 | ) | (22.4 | )% | ||||||||||||||||||
General and administrative and commission | 159,455 | 165,386 | 162,942 | (5,931 | ) | (3.6 | )% | 2,444 | 1.5 | % | ||||||||||||||||||
Change in deferred acquisition costs, net | (69,477 | ) | (53,642 | ) | (72,109 | ) | (15,835 | ) | (29.5 | )% | 18,467 | 25.6 | % | |||||||||||||||
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Total benefits and expenses | 284,645 | 226,121 | 238,181 | 58,524 | 25.9 | % | (12,060 | ) | (5.1 | )% | ||||||||||||||||||
Pretax income | $ | 17,803 | $ | 13,095 | $ | 13,171 | $ | 4,708 | 36.0 | % | $ | (76 | ) | (0.6 | )% | |||||||||||||
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Selected operating performance measures
| Year Ended December 31, | Increase (decrease) and % change | Increase (decrease) and % change | ||||||||||||||||||||||||||
| 2016 | 2015 | 2014 | 2016 - 2015 | 2015 - 2014 | ||||||||||||||||||||||||
Total Life | ||||||||||||||||||||||||||||
Deposits and Gross Premiums Written | $ | 627,563 | $ | 574,388 | $ | 508,544 | $ | 53,175 | 9.3 | % | $ | 65,844 | 12.9 | % | ||||||||||||||
Inforce | 30,026,514 | 26,838,320 | 24,316,419 | 3,188,194 | 11.9 | % | 2,521,901 | 10.4 | % | |||||||||||||||||||
Deposits and gross premiums written and in-force amounts in the table above are for direct and assumed business. Deposits reflect amounts collected on our FIUL business, and gross premiums written reflect premiums collected on our term business. In-force amounts represent our FIUL and our older universal life and term life business. The increase in deposits in 2016 compared to 2015 was driven by an increase in renewal deposits and new gross premiums written as a result of product changes. The increase in deposits in 2015 compared to 2014 is a result of the offering of the BUDBI index crediting option in 2014 on FIUL products. The movement of in-force, year over year, is primarily driven by policyholder activity. Increases are driven by deposits and new business, and decreases are driven by policyholder charges, surrenders, and claims.
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Overview
The Life segment pretax income increased primarily due to the increase in interest and similar income due the growing and maturing block of business. This was partially offset by a universal life (UL) secondary guarantee reserve accrual adjustment recorded in 2016 and a 2015 premium bonus reserve adjustment, and unfavorable impacts of unlocking.
Revenue
| • | Net premiums and policy fees: Premiums and policy fees decreased primarily due to the unfavorable impacts of unlocking on unearned revenue reserves (URR) which was partially offset by higher premium and expense fees driven by increased deposits as a result of the continued growth of the Life Segment. |
| • | Interest and similar income, net: Interest and similar income increased primarily due to an increase in Life average invested assets. |
Selected Financial Data and Management’s Discussion and Analysis
Page 15 of 32
| • | Change in fair value of assets and liabilities: Derivative income increased due to derivative results primarily driven by change in fair value of futures and options, which are intended to economically hedge reserve changes in net benefits and expenses. |
Benefits and Expenses
| • | Net benefits and expenses: Net benefits and expenses increased primarily driven by the change in the equity market in 2016 and the impacts of reserve adjustments recorded in 2016 and 2015. Market returns were more favorable in 2016 which had negative impacts on the reserves. The reserve adjustment is related to an additional UL secondary guarantee reserve accrual recorded in 2016 and impacts from the 2015 premium bonus modeling adjustments. The Life fair value reserve movement is economically hedged in Change in fair value of assets and liabilities. |
| • | General and administrative and commission: The expenses decreased primarily due to lower commissions driven by the mix of premium partially offset by higher allocated expenses due to the growing block of Life business. |
| • | Change in deferred acquisition costs, net: The favorable change in DAC is driven by lower amortization and partially offset by lower capitalization. The lower amortization is driven by the impacts of unlocking and the lower capitalization is due to decline in first year premium production in 2016. |
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Overview
Our Life segment pretax income results are in line with prior year results due to offsetting variances in 2015. Pretax income in 2015 compared to the prior year is primarily due to favorable impacts due to unlocking, and higher interest and similar income in 2015 driven by a growing and maturing block of business offset by a UL secondary guarantee reserve accrual recorded in 2015 due to updated estimated gross profit assumptions.
Revenue
| • | Net premiums and policy fees: Premiums and policy fees increased primarily due to the favorable impacts of unlocking on URR in 2015 compared to 2014 and higher premium and expense fees driven by increased deposits as a result of the continued focus on growing the Life Segment. |
| • | Interest and similar income, net: Interest and similar income increased primarily due to an increase in Life average invested assets, partially offset by a decrease in the average yield earned on the investments. |
| • | Change in fair value of assets and liabilities: Derivative income decreased due to derivative results primarily driven by change in fair value of futures and options, which are intended to economically hedge reserve changes in net benefits and expenses. |
Benefits and Expenses
| • | Net benefits and expenses: Net benefits and expenses decreased driven by the market impacts in 2015 partially offset by net impacts of a reserve adjustment recorded in 2015. Market returns were less favorable in 2015 which had positive impacts on the reserves. The reserve adjustment is related to a new UL secondary guarantee reserve accrual due to impacts of updated estimated gross profit assumptions in 2015. The Life fair value reserve movement is economically hedged in Change in fair value of assets and liabilities. |
| • | General and administrative and commission: Expenses increased primarily due to higher allocated expenses due to the growing block of business. |
| • | Change in deferred acquisition costs, net: The change in deferred acquisition costs, net decreased primarily due to lower amortization is driven by the impacts of unlocking in 2015. |
Selected Financial Data and Management’s Discussion and Analysis
Page 16 of 32
Questar
Segment results of operations
| Increase (decrease) | Increase (decrease) | |||||||||||||||||||||||||||
| Year Ended December 31, | and % change | and % change | ||||||||||||||||||||||||||
| 2016 | 2015 | 2014 | 2016 - 2015 | 2015 - 2014 | ||||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||
Interest and similar income, net | $ | 32 | $ | 3 | $ | (17 | ) | $ | 29 | 966.7 | % | $ | 20 | 117.6 | % | |||||||||||||
Change in fair value of assets and liabilities | 2 | — | — | 2 | — | % | — | — | % | |||||||||||||||||||
Realized investment gains, net | — | — | 1 | — | — | % | (1 | ) | (100.0 | )% | ||||||||||||||||||
Fee, commission and other revenue | 101,432 | 105,830 | 102,234 | (4,398 | ) | (4.2 | )% | 3,596 | 3.5 | % | ||||||||||||||||||
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Total revenue | 101,466 | 105,833 | 102,218 | (4,367 | ) | (4.1 | )% | 3,615 | 3.5 | % | ||||||||||||||||||
Benefits and expenses: | ||||||||||||||||||||||||||||
General and administrative and commission | 114,009 | 110,624 | 111,967 | 3,385 | 3.1 | % | (1,343 | ) | (1.2 | )% | ||||||||||||||||||
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Total benefits and expenses | 114,009 | 110,624 | 111,967 | 3,385 | 3.1 | % | (1,343 | ) | (1.2 | )% | ||||||||||||||||||
Pretax loss | $ | (12,543 | ) | $ | (4,791 | ) | $ | (9,749 | ) | $ | (7,752 | ) | (161.8 | )% | $ | 4,958 | 50.9 | % | ||||||||||
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Fee, Commission and Other Revenue
| Increase (decrease) | Increase (decrease) | |||||||||||||||||||||||||||
| Year Ended December 31, | and % change | and % change | ||||||||||||||||||||||||||
| 2016 | 2015 | 2014 | 2016 - 2015 | 2015 - 2014 | ||||||||||||||||||||||||
Gross dealer concessions | $ | 54,811 | $ | 59,578 | $ | 58,314 | $ | (4,767 | ) | (8.0 | )% | $ | 1,264 | 2.2 | % | |||||||||||||
Allianz Life production | 31,583 | 32,308 | 34,527 | (725 | ) | (2.2 | )% | (2,219 | ) | (6.4 | )% | |||||||||||||||||
Registered investment advisor fee sand other revenue | 15,038 | 13,944 | 9,393 | 1,094 | 7.8 | % | 4,551 | 48.5 | % | |||||||||||||||||||
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Fee, commission and other revenue: | $ | 101,432 | $ | 105,830 | $ | 102,234 | $ | (4,398 | ) | (4.2 | )% | $ | 3,596 | 3.5 | % | |||||||||||||
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Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Overview
Our Questar segment pretax loss increased compared to the prior year and is primarily due to lower revenue, the rebate of 12B-1 fees, higher IT expenses and consulting fees due to the anticipated DOL regulations.
Revenue
Fee, commission and other revenue: Revenue decreased driven by lower gross dealer concessions revenue due to a decrease in first year concessions and partially offset by higher registered investment advisor fees due to higher assets under management.
Benefits and Expenses
General and administrative and commission: Expenses increased primarily due to higher general and administrative expenses due to higher IT expenses and consulting fees due to anticipated DOL regulations, and rebate of 12B-1 fees.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Overview
Our Questar segment pretax loss decreased compared to the prior year and was primarily due to lower legal fees and higher commission fee and revenue.
Selected Financial Data and Management’s Discussion and Analysis
Page 17 of 32
Revenue
Fee, commission and other revenue: Revenue increased driven by higher registered investment advisor fees due to higher assets under management and gross dealer concessions revenue driven by an increase in first year concessions.
Benefits and Expenses
General and administrative and commission: Expenses decreased primarily due to lower general and administrative expenses due to lower legal settlements and fees.
Legacy Products
Segment results of operations
| Increase (decrease) | Increase (decrease) | |||||||||||||||||||||||||||
| Year Ended December 31, | and % change | and % change | ||||||||||||||||||||||||||
| 2016 | 2015 | 2014 | 2016 - 2015 | 2015 - 2014 | ||||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||
Net premiums and policy fees | $ | 142,686 | $ | 143,646 | $ | 141,344 | $ | (960 | ) | (0.7 | )% | $ | 2,302 | 1.6 | % | |||||||||||||
Interest and similar income, net | 78,881 | 72,447 | 67,335 | 6,434 | 8.9 | % | 5,112 | 7.6 | % | |||||||||||||||||||
Change in fair value of assets and liabilities | 82 | (1,688 | ) | (4,914 | ) | 1,770 | 104.9 | % | 3,226 | 65.6 | % | |||||||||||||||||
Realized investment (losses) gains, net | (822 | ) | 1,868 | 1,256 | (2,690 | ) | (144.0 | )% | 612 | 48.7 | % | |||||||||||||||||
Fee, commission and other revenue | 1,191 | 253 | 6,217 | 938 | 370.8 | % | (5,964 | ) | (95.9 | )% | ||||||||||||||||||
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Total revenue | 222,018 | 216,526 | 211,238 | 5,492 | 2.5 | % | 5,288 | 2.5 | % | |||||||||||||||||||
Benefits and expenses: | ||||||||||||||||||||||||||||
Net benefits and expenses | 205,632 | 192,660 | 145,737 | 12,972 | 6.7 | % | 46,923 | 32.2 | % | |||||||||||||||||||
General and administrative and commission | 18,489 | 18,059 | 17,585 | 430 | 2.4 | % | 474 | 2.7 | % | |||||||||||||||||||
Change in deferred acquisition costs, net | 13,124 | 13,319 | 14,925 | (195 | ) | (1.5 | )% | (1,606 | ) | (10.8 | )% | |||||||||||||||||
Total benefits and expenses | 237,245 | 224,038 | 178,247 | 13,207 | 5.9% | 45,791 | 25.7 | % | ||||||||||||||||||||
Pretax (loss) income | $ | (15,227 | ) | $ | (7,512 | ) | $ | 32,991 | $ | (7,715 | ) | (102.7 | )% | $ | (40,503 | ) | (122.8 | )% | ||||||||||
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Selected operating performance measures
| Year Ended December 31, | and % change | and % change | ||||||||||||||||||||||||||
| 2016 | 2015 | 2014 | 2016 - 2015 | 2015 - 2014 | ||||||||||||||||||||||||
Legacy Products | ||||||||||||||||||||||||||||
Gross Premiums Written | $ | 260,649 | $ | 264,274 | $ | 261,193 | $ | (3,625 | ) | (1.4 | )% | $ | 3,081 | 1.2 | % | |||||||||||||
In-force | 3,721,992 | 3,973,990 | 4,243,003 | (251,998 | ) | (6.3 | )% | (269,013 | ) | (6.3 | )% | |||||||||||||||||
Gross premiums written and in-force amounts in the table above are for direct and assumed business. Gross premiums written reflect premiums collected on renewal business. There are no new premiums as these are closed blocks of business. In-force amounts represent life insurance in-force within our Special Markets products. The decrease in gross premiums written in 2016 compared to 2015 was partially driven by an increase in LTC third party administrator experience refund in 2016 which decreased assumed premiums due to the change in claim activity. The increase in gross premiums written in 2015 compared to 2014 was due to a rate increase implemented in the LTC block of business in 2015. The continued decline in in-force volume is attributable to the Legacy Segment being a closed block of business.
Selected Financial Data and Management’s Discussion and Analysis
Page 18 of 32
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Overview
Our Legacy Products segment pretax loss increased due to a Special Markets unclaimed property assessment accrual release in 2015 and higher LTC incurred claims and the implementation of a new reserving model in 2016.
Revenue
| • | Interest and similar income, net: LTC reflects higher investment income due to higher allocated interest and similar income due to growth in reserves driven by an aging block of business. |
| • | Change in fair value of assets and liabilities: The change in fair value of assets and liabilities increased due to lower allocated losses relating to investments not backing policyholder assets in 2016. |
| • | Realized investment (losses) gains, net: The realized investment loss increased due to higher impairments and allocated losses in 2016 primarily driven by normal investment activity. |
Benefits and Expenses
| • | Net benefits and expenses: Net benefits and expenses increased primarily due to overall higher LTC claim activity in 2016, impact of the implementation of a new LTC reserving model in 2016, and an unclaimed property assessment accrual release recorded in 2015. |
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Overview
Our Legacy Products segment pretax loss decreased in 2015 compared to the prior year and is driven by LTC primarily due to the overall growth of future loss reserves in 2015.
Revenue
| • | Net premiums and policy fees: Premiums and policy fees increased and is driven by LTC, due to higher premiums primarily driven by a rate increase implemented in 2014. |
| • | Interest and similar income, net: Interest and similar income increased in 2015 and was driven by LTC, which reflects higher investment income due to higher allocated interest and similar income due to growth in reserves driven by an aging block of business. |
| • | Change in fair value of assets and liabilities: The change in fair value of assets and liabilities increased due to lower allocated losses relating to investments not backing policyholder assets in 2015. |
| • | Realized investment (losses) gains, net: Realized investment gains increased due to higher allocated gains in 2015 compared to 2014. |
| • | Fee, commission and other revenue: Revenues decreased in 2015 compared to 2014 driven by the elimination of a deferred gain which fully amortized in 2014. |
Benefits and Expenses
| • | Net benefits and expenses: Net benefits and expenses increased primarily due to the increase in future loss reserves, model calculation updates recorded in 2015, and overall higher claim activity in 2015 compared to 2014 within LTC and an unclaimed property assessment recorded in 2015 within Special Markets. |
| • | Change in deferred acquisition costs, net: The change in deferred acquisition costs decreased and was driven by Special Markets which reflects lower amortization due to a deferred gain that became fully amortized in 2015 partially offset by lower LTC capitalization driven by policyholder activity and premium levels in 2015 compared to 2014. |
Selected Financial Data and Management’s Discussion and Analysis
Page 19 of 32
Financial Condition
Investment Strategy
Our investment strategy focuses on diversification by asset class. We seek to achieve economic diversification, while reducing overall credit and liquidity risks. We attempt to mitigate these credit and liquidity risks by adhering to investment policies that provide portfolio diversification on an asset class, creditor, and industry basis, and by complying with investment limitations governed by state insurance laws and regulations, as applicable. We also consider all relevant objective information available in estimating the cash flows related to structured securities. We actively monitor and manage exposures, and determine whether any securities are impaired. The aggregate credit risk taken in the investment portfolio is influenced by our risk/return preferences, the economic and credit environment, and the ability to manage this risk through liability portfolio management. We also have an asset-liability management strategy to align cash flows and duration of the investment portfolio with contractholder liability cash flows and duration.
The following table presents the investment portfolio at December 31.
Portfolio Composition
| 2016 | 2015 | |||||||||||||||
| Carrying value | % of total | Carrying value | % of total | |||||||||||||
Fixed-maturity securities | $ | 87,584,050 | 87.4 | % | $ | 80,771,634 | 88.7 | % | ||||||||
Mortgage loans on real estate | 10,351,741 | 10.3 | % | 8,788,018 | 9.7 | % | ||||||||||
Derivative assets | 1,059,031 | 1.1 | % | 591,609 | 0.7 | % | ||||||||||
Equity securities | 637,659 | 0.6 | % | 361,427 | 0.4 | % | ||||||||||
Acquired loans | 192,380 | 0.2 | % | 224,083 | 0.2 | % | ||||||||||
Policy loans | 171,012 | 0.2 | % | 163,129 | 0.2 | % | ||||||||||
Other invested assets | 164,830 | 0.2 | % | 97,431 | 0.1 | % | ||||||||||
Loans to affiliates | 39,120 | 0.0 | % | 33,005 | 0.0 | % | ||||||||||
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Total investments | $ | 100,199,823 | 100.0 | % | $ | 91,030,336 | 100.0 | % | ||||||||
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Fixed-Maturity Securities
Refer to Note 4 of the audited consolidated financial statements for information regarding the nature of our portfolio of available-for-sale securities and held-to-maturity securities in addition to detail related to the amortized cost and fair value by contractual value for these securities.
Selected Financial Data and Management’s Discussion and Analysis
Page 20 of 32
Total available-for-sale fixed-maturity securities by quality rating category were as follows at December 31, 2016 and 2015.
| 2016 | ||||||||||||||||
| Fair Value | % of Total | Amortized Cost | % of Total | |||||||||||||
AAA | $ | 8,528,225 | 9.7 | % | $ | 8,389,899 | 10.0 | % | ||||||||
AA | 20,269,321 | 23.2 | % | 19,495,026 | 23.2 | % | ||||||||||
A | 23,976,680 | 27.4 | % | 22,496,241 | 26.8 | % | ||||||||||
BBB | 32,545,459 | 37.2 | % | 31,404,065 | 37.4 | % | ||||||||||
BB | 1,599,321 | 1.8 | % | 1,614,331 | 1.9 | % | ||||||||||
B and below | 627,965 | 0.7 | % | 630,083 | 0.7 | % | ||||||||||
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| |||||||||
Total | $ | 87,546,971 | 100.0 | % | $ | 84,029,645 | 100.0 | % | ||||||||
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| 2015 | ||||||||||||||||
| Fair Value | % of Total | Amortized Cost | % of Total | |||||||||||||
AAA | $ | 9,008,030 | 11.2 | % | $ | 8,805,694 | 11.2 | % | ||||||||
AA | 19,063,926 | 23.6 | % | 18,214,797 | 23.0 | % | ||||||||||
A | 21,031,607 | 26.1 | % | 19,815,352 | 25.0 | % | ||||||||||
BBB | 30,057,566 | 37.2 | % | 30,454,995 | 38.5 | % | ||||||||||
BB | 1,472,821 | 1.8 | % | 1,776,088 | 2.2 | % | ||||||||||
B and below | 100,518 | 0.1 | % | 113,607 | 0.1 | % | ||||||||||
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Total | $ | 80,734,468 | 100.0 | % | $ | 79,180,533 | 100.0 | % | ||||||||
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Sub-prime and Alt-A Mortgage Exposure
We do not originate or purchase whole-loan mortgages with sub-prime or Alt-A exposure and do not have material exposure to non-agency residential mortgage-backed securities (RMBS). Sub-prime lending is the origination of loans to customers with weaker credit profiles. Due to the high quality of our mortgaged-backed securities, and the lack of sub-prime loans in the securities, we do not have a material exposure to sub-prime mortgages in those holdings. Our Sub-prime exposure is limited to a concentration within certain CDO investments. Alt-A loans are defined as any security backed by residential mortgage collateral which is not clearly identifiable as prime or sub-prime; we do not have a material exposure to Alt-A mortgages.
Selected Financial Data and Management’s Discussion and Analysis
Page 21 of 32
Commercial Mortgage-backed and Other Asset-backed Securities
Commercial mortgage-backed securities (CMBS) represent pools of commercial mortgages that are broadly diversified across property types and geographical areas. The following table summarizes our exposure to CMBS holdings by credit quality and vintage year as of December 31:
2016 | ||||||||||||||||||
% of total CMBS | Vintage | |||||||||||||||||
AAA | $ | 6,699,139 | 89.5 | % | 2016 | $ | 1,724,742 | 22.9 | % | |||||||||
AA | 740,389 | 9.9 | % | 2015 | 2,002,009 | 26.9 | % | |||||||||||
A | 37,949 | 0.5 | % | 2014 | 1,557,726 | 20.8 | % | |||||||||||
BBB | 1,270 | 0.0 | % | 2013 | 15,308 | 0.2 | % | |||||||||||
BB | 4,870 | 0.1 | % | 2012 and prior | 2,183,832 | 29.2 | % | |||||||||||
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| $ | 7,483,617 | 100.0 | % | $ | 7,483,617 | 100.0 | % | |||||||||||
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2015 | ||||||||||||||||||
% of total CMBS | Vintage | |||||||||||||||||
AAA | $ | 7,275,127 | 82.8 | % | 2015 | $ | 1,810,640 | 20.6 | % | |||||||||
AA | 1,049,137 | 11.9 | % | 2014 | 1,532,871 | 17.5 | % | |||||||||||
A | 457,975 | 5.2 | % | 2013 | 27,422 | 0.3 | % | |||||||||||
BBB | 3,988 | 0.1 | % | 2012 | 143,549 | 1.6 | % | |||||||||||
BB and below | 640 | 0.0 | % | 2011 and prior | 5,272,385 | 60.0 | % | |||||||||||
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| $ | 8,786,867 | 100.0 | % | $ | 8,786,867 | 100.0 | % | |||||||||||
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Asset backed security (ABS) holdings consist primarily of aircraft leases, credit card receivables and other asset-backed securities that meet specific criteria, such as credit quality, insurance requirements, or limits on these types of investments.
Selected Financial Data and Management’s Discussion and Analysis
Page 22 of 32
The following table summarizes our exposure to other ABS holdings by credit quality and vintage year as of December 31:
2016 | ||||||||||||||||||
% of total other ABS | Vintage | |||||||||||||||||
AAA | $ | 366,852 | 36.2 | % | 2016 | $ | 145,767 | 14.3 | % | |||||||||
AA | 142,659 | 14.0 | % | 2015 | 226,450 | 22.3 | % | |||||||||||
A | 220,805 | 21.7 | % | 2014 | 8,239 | 0.8 | % | |||||||||||
BBB | 266,701 | 26.3 | % | 2013 | 26,408 | 2.6 | % | |||||||||||
B and below | 19,467 | 1.8 | % | 2012 and prior | 609,620 | 60.0 | % | |||||||||||
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| $ | 1,016,484 | 100.0 | % | $ | 1,016,484 | 100.0 | % | |||||||||||
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2015 | ||||||||||||||||||
% of total other ABS | Vintage | |||||||||||||||||
AAA | $ | 421,072 | 44.1 | % | 2015 | $ | 239,287 | 25.0 | % | |||||||||
AA | 75,528 | 7.9 | % | 2014 | 8,776 | 1.0 | % | |||||||||||
A | 198,555 | 20.8 | % | 2013 | 18,450 | 1.9 | % | |||||||||||
BBB | 236,991 | 24.8 | % | 2012 | 82,996 | 8.7 | % | |||||||||||
BB and below | 23,664 | 2.4 | % | 2011 and prior | 606,301 | 63.4 | % | |||||||||||
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| |||||||||||
| $ | 955,810 | 100.0 | % | $ | 955,810 | 100.0 | % | |||||||||||
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Unrealized investment losses of fixed-maturity securities, for investment grade (IG) and below investment grade (BIG) securities by duration are as follows at December 31:
| 2016 | ||||||||||||||||
| IG | % of IG and BIG | BIG | % of IG and BIG | |||||||||||||
Twelve months or less below amortized cost | $ | 639,126 | 75.5 | % | $ | 12,984 | 1.6 | % | ||||||||
More than twelve months below amortized cost | 123,925 | 14.7 | % | 70,215 | 8.2 | % | ||||||||||
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Total | $ | 763,051 | 90.2 | % | $ | 83,199 | 9.8 | % | ||||||||
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| 2015 | ||||||||||||||||
| IG | % of IG and BIG | BIG | % of IG and BIG | |||||||||||||
Twelve months or less below amortized cost | $ | 1,358,255 | 64.3 | % | $ | 73,946 | 3.5 | % | ||||||||
More than twelve months below amortized cost | 415,392 | 19.7 | % | 265,907 | 12.5 | % | ||||||||||
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Total | $ | 1,773,647 | 84.0 | % | $ | 339,853 | 16.0 | % | ||||||||
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Selected Financial Data and Management’s Discussion and Analysis
Page 23 of 32
Unrealized investment losses of fixed-maturity securities, for instances in which fair value declined below amortized cost by greater than or less than 20% for consecutive periods as indicated in the tables below, were as follows at December 31:
| Fair Value | Unrealized Capital Loss | Number of Securities | ||||||||||||||||||||||
| 2016: | < 20% | > 20% | < 20% | > 20% | < 20% | > 20% | ||||||||||||||||||
Twelve months or less below amortized cost | $ | 19,950,380 | $ | 72,821 | $ | 636,932 | $ | 15,178 | 938 | 3 | ||||||||||||||
More than twelve months below amortized cost | 2,006,954 | 138,123 | 151,323 | 42,817 | 132 | 15 | ||||||||||||||||||
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| |||||||||||||
Total unrealized investment losses | $ | 21,957,334 | $ | 210,944 | $ | 788,255 | $ | 57,995 | 1,070 | 18 | ||||||||||||||
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| Fair Value | Unrealized Capital Loss | Number of Securities | ||||||||||||||||||||||
| 2015: | < 20% | > 20% | < 20% | > 20% | < 20% | > 20% | ||||||||||||||||||
Twelve months or less below amortized cost | $ | 22,304,110 | $ | 2,404,110 | $ | 852,092 | $ | 580,109 | 1,062 | 98 | ||||||||||||||
More than twelve months below amortized cost | 516,229 | 1,906,253 | 42,390 | 638,909 | 45 | 89 | ||||||||||||||||||
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Total unrealized investment losses | $ | 22,820,339 | $ | 4,310,363 | $ | 894,482 | $ | 1,219,018 | 1,107 | 187 | ||||||||||||||
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OTTI, by market sector, for impairments included in the Consolidated Statements of Operations, were as follows at December 31:
| 2016 | 2015 | |||||||||||||||
| Impairment | No. of Securities | Impairment | No. of Securities | |||||||||||||
US government | $ | — | $ | 2,365 | 8 | |||||||||||
States and political subdivisions | 2,866 | 1 | — | — | ||||||||||||
Public utilities | — | — | 6,646 | 3 | ||||||||||||
Corporate securities | 169,664 | 43 | 48,587 | 14 | ||||||||||||
Acquired loans | 2,293 | 6 | 1,377 | 5 | ||||||||||||
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| $ | 174,823 | 50 | $ | 58,975 | 30 | |||||||||||
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Refer to Note 4 of the audited consolidated financial statements for information regarding our cumulative impairments on fixed-maturity securities.
Selected Financial Data and Management’s Discussion and Analysis
Page 24 of 32
Financial instruments are carried at fair value on a recurring basis in the Company’s Consolidated Financial Statements. We have analyzed the valuation techniques and related inputs, evaluated its assets and liabilities reported at fair value, and determined an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Based on the results of this evaluation and investment class analysis, each valuation was classified into Level 1, 2, or 3. See Note 6 of the Notes to Consolidated Financial Statements for additional information.
| 2016: | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets accounted for at fair value | ||||||||||||||||
Fixed-maturity - available-for-sale | $ | 87,546,971 | $ | 1,736,523 | $ | 77,136,330 | $ | 8,674,118 | ||||||||
Fixed-maturity - at fair value through income | 37,051 | 36,901 | — | 150 | ||||||||||||
Derivative assets | 1,059,031 | 42,400 | 1,010,805 | 5,826 | ||||||||||||
Equity securities, available-for-sale | 320,166 | 320,166 | — | — | ||||||||||||
Equity securities, trading | 317,493 | 298,481 | 19,012 | — | ||||||||||||
Corporate-owned life insurance | 338,092 | — | 338,092 | — | ||||||||||||
Separate account assets | 27,733,261 | 27,733,261 | — | — | ||||||||||||
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Total assets accounted for at fair value | $ | 117,352,065 | $ | 30,167,732 | $ | 78,504,239 | $ | 8,680,094 | ||||||||
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Liabilities accounted for at fair value | ||||||||||||||||
Derivative liabilities | $ | 635,634 | $ | 27,345 | $ | 604,587 | $ | 3,702 | ||||||||
Separate account liabilities | 27,733,261 | 27,733,261 | — | — | ||||||||||||
Reserves at fair value | 20,152,641 | — | — | 20,152,641 | ||||||||||||
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Total liabilities accounted for at fair value | $ | 48,521,536 | $ | 27,760,606 | $ | 604,587 | $ | 20,156,343 | ||||||||
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| 2015: | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets accounted for at fair value | ||||||||||||||||
Fixed-maturity - available-for-sale | $ | 80,734,468 | $ | 1,755,324 | $ | 71,847,605 | $ | 7,131,539 | ||||||||
Fixed-maturity - at fair value through income | 37,111 | 37,111 | — | — | ||||||||||||
Derivative assets | 591,609 | — | 589,259 | 2,350 | ||||||||||||
Equity securities, available-for-sale | 68,611 | 68,611 | — | — | ||||||||||||
Equity securities, trading | 292,816 | 269,956 | 22,860 | — | ||||||||||||
Corporate-owned life insurance | 316,926 | — | 316,926 | — | ||||||||||||
Separate account assets | 28,243,123 | 28,243,123 | — | — | ||||||||||||
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Total assets accounted for at fair value | $ | 110,284,664 | $ | 30,374,125 | $ | 72,776,650 | $ | 7,133,889 | ||||||||
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Liabilities accounted for at fair value | ||||||||||||||||
Derivative liabilities | $ | 350,321 | $ | — | $ | 316,509 | $ | 33,812 | ||||||||
Separate account liabilities | 28,243,123 | 28,243,123 | — | — | ||||||||||||
Reserves at fair value | 18,096,009 | — | — | 18,096,009 | ||||||||||||
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Total liabilities accounted for at fair value | $ | 46,689,453 | $ | 28,243,123 | $ | 316,509 | $ | 18,129,821 | ||||||||
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Selected Financial Data and Management’s Discussion and Analysis
Page 25 of 32
Mortgage Loans on Real Estate
We evaluate the mortgage loan allowance for loan loss quarterly, which resulted in an increase of the provision of $11,000 and $2,400 for the years ended December 31, 2016 and 2015, respectively. The increase to the allowance for loan loss is a result of the growing asset base of the mortgage loan portfolio partially offset by improving quality indicators. The allowance for loan loss on mortgage loans on real estate is discussed further at note 4.
We analyze loan impairment quarterly when assessing the valuation allowance. We consider recent trends in the Company’s loan portfolio and information on current loans, such as loan-to-value ratios and debt service coverage, which could impact a loan’s credit quality. We also evaluate the valuation allowance to ensure that the estimate is based on the most recent available industry default and loss studies and historical default rates for the Company as compared with default rates for the industry group. We do not accrue interest on defaulted loans.
Loan-to-value (LTV) and debt service coverage (DSC) ratios are common measurements used to assess the risk and quality of mortgage loans. The LTV ratio, calculated at the time of origination, is the percentage of the loan amount relative to the value of the underlying property. The DSC ratio, based upon the most recently received financial statements from the debtor, is calculated as the amount of the property’s net income divided by the debt service payments.
See Note 7 of the Consolidated Financial Statements for additional information relating to LTV and DSC ratios.
Property collateralizing mortgage loans is geographically dispersed throughout the United States as follows at December 31:
| 2016 | 2015 | |||||||||||||||
| Gross Carry Value | % of Total | Gross Carry Value | % of Total | |||||||||||||
Mortgage loans by region | ||||||||||||||||
East North Central | $ | 1,465,654 | 14.1 | % | $ | 1,366,778 | 15.5 | % | ||||||||
East South Central | 56,310 | 0.5 | % | 15,040 | 0.2 | % | ||||||||||
Middle Atlantic | 617,117 | 5.9 | % | 529,458 | 6.0 | % | ||||||||||
Mountain | 663,095 | 6.4 | % | 619,976 | 7.0 | % | ||||||||||
New England | 862,994 | 8.3 | % | 709,760 | 8.0 | % | ||||||||||
Pacific | 3,250,895 | 31.3 | % | 2,635,075 | 29.9 | % | ||||||||||
South Atlantic | 2,270,291 | 21.8 | % | 1,784,590 | 20.2 | % | ||||||||||
West North Central | 589,021 | 5.7 | % | 606,865 | 6.9 | % | ||||||||||
West South Central | 624,764 | 6.0 | % | 557,876 | 6.3 | % | ||||||||||
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Total | $ | 10,400,141 | 100.0 | % | $ | 8,825,418 | 100.0 | % | ||||||||
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Property collateralizing mortgage loans diversified by property type are as follows at December 31:
| 2016 | 2015 | |||||||||||||||
| Gross Carry Value | % of Total | Gross Carry Value | % of Total | |||||||||||||
Mortgage loans by property type | ||||||||||||||||
Industrial | $ | 2,274,055 | 21.9 | % | $ | 2,026,199 | 23.0 | % | ||||||||
Retail | 2,313,307 | 22.1 | % | 1,701,088 | 19.2 | % | ||||||||||
Office | 3,370,449 | 32.5 | % | 2,963,797 | 33.6 | % | ||||||||||
Apartments | 2,442,330 | 23.5 | % | 2,134,334 | 24.2 | % | ||||||||||
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Total | $ | 10,400,141 | 100.0 | % | $ | 8,825,418 | 100.0 | % | ||||||||
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Liquidity and Capital Resources
Overview
Liquidity and Capital Resources represent our overall financial strength and ability to generate cash flows from the business. The liquidity requirements are generally met through funds provided by investment income, receipt of
Selected Financial Data and Management’s Discussion and Analysis
Page 26 of 32
insurance premiums, M&E fees and benefit rider income, maturities and sales of investments, reinsurance recoveries, and capital contributions from Allianz SE as needed.
We hold membership stock of the Federal Home Loan Bank (FHLB) of Des Moines which provides access to collateralized borrowings. Funding from the FHLB of Des Moines is collateralized with government securities, agency residential mortgage backed securities and commercial mortgage backed securities from our General Account investment portfolio. See Note 2 of the Notes to Consolidated Financial Statements for additional information regarding the funding agreement balances.
Reinsurance may play a key role in funding our continued growth, and is utilized for any new line of business for which there is significant uncertainty related to future claims experience. Moreover, we are generally risk adverse for our smaller lines of business, and predictability of future profitability takes precedence over retaining a large percentage of risk.
We do not utilize the capital markets as a source of capital. Should the need for capital arise, we may obtain capital contributions from our ultimate parent, Allianz SE, as an alternative source of funding. The primary uses of funds are policy benefits, commissions, other product-related acquisition and sales inducement costs, investment purchases, operating expenses, and dividends to AZOA. We routinely review our source and use of funds in order to meet our ongoing obligations.
Financial Ratings and Strength
We received the following financial strength ratings as of December 31, 2016:
• AM Best | A+ (Superior) | |||||
• S&P | AA (Very Strong) | |||||
• Moody’s | A2 (Good) |
The financial strength ratings are influenced by many factors including the operating and financial performance, asset quality, liquidity, asset/liability management, overall portfolio mix, financial leverage, relationship to Allianz SE, and exposure to risks.
Cash Flows
The following table sets forth information from our Consolidated Statements of Cash Flows for the years ended December 31:
| Year Ended December 31, | ||||||||||||
Consolidated Cash Flows | 2016 | 2015 | 2014 | |||||||||
Net cash provided by operating activities | $ | 2,644,667 | $ | 2,413,324 | $ | 3,164,605 | ||||||
Net cash used in investing activities | (6,926,348 | ) | (7,144,829 | ) | (9,915,481 | ) | ||||||
Net cash provided by financing activities | 4,374,483 | 3,588,070 | 7,101,813 | |||||||||
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| |||||||
Net change in cash and cash equivalents | $ | 92,802 | $ | (1,143,435 | ) | $ | 350,937 | |||||
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We have the funds necessary to meet the capital requirements of all states in which we do business, and to support our operations.
The increase in net cash provided by operating activities in 2016 as compared to 2015 is a result of the increase in the sale of trading securities, lower realized investment gains offset by the purchase of trading securities. The decrease in net cash provided by operating activities in 2015 as compared to 2014 is a result of the increase in the sale of trading securities mostly offset by product option losses in 2015 compared to 2014.
The 2016 increase in cash flows used in investing activities was primarily related to higher sales of available-for-sale fixed-maturity securities partially offset by higher purchases of fixed-maturity securities. In 2015, the increase in cash flows used in investing activities was primarily related to higher sales of available-for-sale fixed-maturity securities partially offset by decreased sales of derivative securities.
Selected Financial Data and Management’s Discussion and Analysis
Page 27 of 32
The 2016 increase in cash flows from financing activities was driven by higher deposits in our Individual Annuity segment offset by the payback of the FHLB advance and higher dividend payments in 2016 compared to 2015. The 2015 decrease in cash flows from financing activities was driven by lower deposits in our Individual Annuity segment, in addition to higher dividend payments made to our parent in 2015 compared to 2014.
Securities Lending and Repurchase Agreements
We account for our securities lending transactions as secured borrowings, in which the collateral received and the related obligation to return the collateral are recorded on the Consolidated Balance Sheets as Collateral held from securities lending agreements and Other liabilities, respectively. Noncash collateral received is not reflected on the Consolidated Balance Sheets. Securities on loan remain on the Consolidated Balance Sheets, and interest and dividend income earned on loaned securities is recognized in Interest and similar income, net on the Consolidated Statements of Operations.
We also participate in restricted securities lending arrangements whereby specific securities are loaned to other institutions. The collateral is defined by the agreement to be cash and cash equivalents. We began participating in unrestricted arrangements whereby we may use collateral for general purposes. For securities lending agreements, our policies require a minimum of 102% of fair value of securities loaned under securities lending agreements to be maintained as collateral. We had securities on loan of $2,798,597 and $2,392,657, in fixed maturities, at fair value on the Consolidated Balance Sheets, with associated collateral received in the amounts of $2,888,157 and $2,480,910, as of December 31, 2016 and 2015, respectively.
Risk-Based Capital
An insurance enterprise’s state of domicile imposes minimum risk based capital (RBC) requirements that were developed by the National Association of Insurance Commissioners (NAIC). The formulas for determining the amount of RBC specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of an enterprise’s regulatory total adjusted capital to its authorized control level RBC, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. This ratio for the Company significantly exceeds required minimum thresholds as of December 31, 2016 and 2015.
Capital Contributions and Dividends
We paid dividends of $894,165 to our parent, AZOA, which represented $861,000 cash and $33,165 related to an intercompany loan and accrued interest, during the year ended December 31, 2016 compared to dividends of $572,125 in the prior year.
Statutory accounting practices prescribed or permitted by our state of domicile are directed toward insurer solvency and protection of policyholders. Accordingly, certain items recorded in financial statements prepared under GAAP are excluded or vary in calculation in determining statutory policyholders’ surplus and gain from operations. Currently, these items include, among others, DAC, furniture and fixtures, deferred taxes, accident and health premiums receivable which are more than 90 days past due, reinsurance, certain investments, and undeclared dividends to policyholders. Additionally, future policy benefit reserves and policy and contract account balances calculated for statutory reporting do not include provisions for withdrawals.
Our statutory capital and surplus reported in the statutory annual statement filed with the State of Minnesota as of December 31, 2016 and 2015, was $6,165,279 and $5,822,117, respectively.
We are also required to meet minimum statutory capital and surplus requirements. Our statutory capital and surplus as of December 31, 2016 and 2015, was in compliance with these requirements. The maximum amount of dividends that can be paid by Minnesota insurance companies to stockholders without prior approval of the Commissioner of Commerce is subject to restrictions relating to statutory earned surplus, also known as unassigned funds. Unassigned funds are determined in accordance with the accounting procedures and practices governing preparation of the statutory annual statement. In accordance with Minnesota Statutes, the Company may declare and pay from its surplus cash dividends of no more than the greater of 10% of its beginning-of-the-year statutory surplus, or the net gain from operations of the
Selected Financial Data and Management’s Discussion and Analysis
Page 28 of 32
insurer, not including realized gains, for the 12-month period ending the 31st day of the next preceding year. Ordinary dividends of $1,497,192 can be paid in 2017 without prior approval of the Commissioner of Commerce.
Commitments
The following table summarizes certain contractual obligations and the Company’s commitments by period as of December 31, 2016:
| In 1 year | after 1 year | After 3 years | After | |||||||||||||||||
| Total | or less | up to 3 years | up to 5 years | 5 Years | ||||||||||||||||
Payments due | ||||||||||||||||||||
Policyholder liabilities | $ | 116,690,991 | $ | 7,707,162 | $ | 16,164,704 | $ | 17,121,915 | $ | 75,697,210 | ||||||||||
Mortgage notes payable | 76,916 | 8,288 | 18,012 | 20,111 | 30,505 | |||||||||||||||
Operating leases | 7,616 | 2,302 | 3,381 | 1,933 | — | |||||||||||||||
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Total payments due | $ | 116,775,523 | $ | 7,717,752 | $ | 16,186,097 | $ | 17,143,959 | $ | 75,727,715 | ||||||||||
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Policyholder liabilities include estimated claim and benefit, policy surrender and commission obligations offset by expected future deposits and premiums on in-force insurance policies and investment contracts in the Individual Annuity and Life segments. We have excluded the separate account liabilities as these obligations are legally insulated from general account obligations and will be fully funded by cash flows from separate account assets. The obligations have not been discounted at present value. Estimated claim and benefit obligations are based upon mortality, morbidity and lapse assumptions comparable to historical experience. The results are based on assuming market growth and interest crediting consistent with other valuation assumptions. In contrast to this table, the majority of our obligations are recorded on the balance sheet at current account values or other GAAP prescribed measurements that are not directly related to liability cash flows. These obligations do not incorporate an expectation on future market growth, interest crediting, or future deposits. Therefore, due to the significance of the assumptions used, the amounts presented could materially differ from actual results.
Mortgage notes payable includes contractual principal and interest payments and therefore exceeds the amount shown in the Consolidated Balance Sheet. See Notes 16 and 17 of the Notes to Consolidated Financial Statements for additional information.
Operating leases include non-cancelable obligations on certain office space and equipment.
Contingencies
We are named as defendants in various pending or threatened legal proceedings on an ongoing basis, including three putative class action proceedings, arising from the conduct of business: Sanchez v. Allianz Life Ins. Co. of North America (Superior Court of California, L.A. County, BC594715) was filed in 2015, Berthiaume et al. v. Allianz Life Ins. Co. of North America et al (Minnesota District Court, Henn. County) was commenced in 2016, and Thompson v. Allianz Life Ins. Co. of North America (United Stated District Court, District of Minnesota, Case No. 0:17-cv00096) was filed in 2016. None of these putative class actions has been certified. We generally intend to vigorously contest the lawsuits, but is or may pursue settlement negotiations in some cases, if appropriate. The outcome of the cases is uncertain at this time, and there can be no assurance that such litigation, or any future litigation, will not have a material adverse effect on the Company and/or its subsidiaries. We recognize legal defense costs as incurred.
We are also contingently liable for possible future assessments under regulatory requirements pertaining to insolvencies and impairments of unaffiliated insurance companies. Provision has been made for assessments currently received and assessments anticipated for known insolvencies.
The financial services industry, including mutual funds, variable and fixed annuities, life insurance, distribution companies, and broker-dealers, is subject to close scrutiny by regulators, legislators, and the media.
Selected Financial Data and Management’s Discussion and Analysis
Page 29 of 32
Federal and state regulators, such as state insurance departments, state securities departments, the SEC, the Financial Industry Regulatory Authority (FINRA) and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning various selling practices, including suitability reviews, product exchanges, sales to seniors, and compliance with, among other things, insurance laws and securities laws. We are subject to ongoing market conduct examinations and investigations by regulators which may have a material adverse effect on the Company.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet transactions, arrangements or other relationships that we believe would be reasonably likely to have a material effect on our liquidity or the requirements for capital resources.
We utilize exchange-traded futures to economically hedge certain product liabilities. Under this kind of transaction, we agree to purchase a specified number of contracts and settle the variation margin with the counterparty on a daily basis in an amount equal to the change in the market value of the underlying contracts from the close of the previous trading day. The parties with whom we enter into the exchange-traded futures contracts are regulated futures commission’s merchants who are members of a trading exchange.
We are exposed to credit-related losses in the event of non-performance by counterparties under the terms of the futures contracts. We minimize counterparty credit risk by establishing relationships only with counterparties rated BBB+ and higher. Given the credit ratings of the counterparties with which we transact, we do not expect any counterparties to fail to meet their obligations. We also execute Credit Support Annexes (CSA) with all active and new counterparties which further limits credit risk by requiring counterparties to post collateral to a segregated account to cover any counterparty exposure. As our futures transactions are executed through a regulated exchange, positions are marked-to-market and settled on a daily basis, and collateral is posted prior to execution of a transaction, we have minimal exposure to credit-related losses in the event of non-performance.
As our futures transactions are executed through a regulated exchange, positions are marked-to-market and settled on a daily basis, and collateral is posted prior to execution of a transaction, we have minimal exposure to credit-related losses in the event of non-performance.
We are also required to post collateral for any futures and options contracts that are executed. The amount of collateral required is determined by the exchange on which the contract is traded. For 2016 and 2015, we posted U.S. Government and acceptable corporate securities to satisfy this collateral requirement.
Forward-looking Statements
This report reviews the Company’s financial condition and results of operations. Where appropriate, factors that may affect future financial performance are also identified and discussed. Certain statements made in this report include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that may predict, forecast, indicate or imply future results, performance or achievements instead of historical facts, and may contain words like “believe,” “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “plan,” “will,” “shall,” “may,” and other words, phrases or expressions with similar meaning. Forward-looking statements are subject to risks and uncertainties. Readers are cautioned not to place undue reliance on forward-looking statements as a prediction of actual results. We undertake no obligation to update publicly or revise any forward-looking statements.
Item 11(j).
Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of the loss of fair value resulting from adverse changes in market rates and prices, such as interest rates and equity prices. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying financial instruments are traded. The following is a discussion of our market risk exposures and our risk management practices.
Interest Rate Risk
Interest rate risk is the risk that movements in interest rates or interest rate volatility will change and cause a decrease in the value of an insurer’s assets relative to the value of its liabilities and/or an unfavorable change in prepayment activity resulting in compressed interest margins. We have an asset-liability management strategy to align cash flows and duration
Selected Financial Data and Management’s Discussion and Analysis
Page 30 of 32
of the investment portfolio with policyholder liability cash flows and duration. We further limit interest rate risk on variable annuity guarantees through economic interest rate hedges.
Equity Market Risk
Equity market risk is the risk that movements in equity prices or equity volatility will cause a decrease in the value of an insurer’s assets relative to the value of its liabilities. The policy value of the fixed-indexed annuity and fixed-indexed universal life products is linked to equity market indices. We economically hedge this exposure with derivatives. Variable annuity products may provide a minimum guaranteed level of benefits irrespective of market movements. We have adopted an economic hedging program to manage the equity risk of these products. We also monitor the economic and accounting impacts of equity stress scenarios on assets and liabilities regularly.
Basis risk is the risk that the variable annuity hedge asset value changes unexpectedly relative to the value of the underlying separate account funds of the variable annuity contracts. Basis risk may arise from the Company’s inability to directly hedge the underlying investment options of the variable annuity contracts. We mitigate this risk through regular review and synchronization of fund mappings, product design features, and hedge design.
Legal/Regulatory Risk
Legal/regulatory risk is the risk that changes in the legal or regulatory environment in which the Company operates may result in reduced demand for its products or additional expenses not assumed in product pricing. Additionally, we are exposed to risk related to how the Company conducts itself in the market and the suitability of its product sales to contractholders.
We mitigate this risk by offering a broad range of products and by operating throughout the United States. We actively monitor all market related exposure and participate in national and international discussions relating to legal, regulatory, and accounting changes that may impact the business. A formal process exists to assess our risk exposure to changes in regulation including monitoring by the Compliance and Legal departments and regular reporting to the BOD of all known compliance risks and the effectiveness of the approach used to mitigate such risks. In addition, we have implemented suitability standards to mitigate suitability risk.
On April 6, 2016, the Department of Labor (DOL) issued a final rule that will significantly expand the definition of “investment advice” and increase the circumstances in which companies and broker-dealers, insurance agencies, and other financial institutions that sell the Company’s products could be deemed a fiduciary when providing investment advice with respect to plans under the Employee Retirement Income Security Act of 1974 (ERISA) or individual retirement accounts (IRAs). It is not yet certain how, if at all, the implementation of this rule will change our business, results of operations, or financial condition. The DOL has extended the implementation of the rule until April 2017. The DOL also introduced amendments to longstanding exemptions from the prohibited transaction provisions under ERISA that would increase fiduciary requirements in connection with transactions involving ERISA plans, plan participants and IRAs, and that would apply more onerous disclosure and contract requirements to such transactions. The DOL has introduced an additional transition period for these amendments until January 2018. It may be necessary to change sales representative and/or broker compensation, limit the assistance or advice provided to owners of our annuities, or otherwise change the manner of design and sales support of the annuities. These changes could have an adverse impact on the level and type of services provided and compliance with the rule could also increase the overall operational costs for the services currently provided.
Sensitivity Analysis
To assess the impact of changes in interest rate and equity markets, we perform sensitivity tests. Sensitivity tests measure the instantaeous impact of a single hypothetical interest rate or equity price change on our pre-tax income, or fair value of an asset or liability, while holding all other rates or prices constant. To assess interest rate risk we perform a sensitivity test which instantaneously shocks interest rates across all maturities by a hypothetical 50 basis points (bps). To assess equity risk, we perform a sensitivity test which instantaneously decreases all equity prices by a hypothetical 15%.
Interest Rate Risk
One means of assessing exposure to interest rate changes is to measure the potential change in fair value of an asset due to a hypothetical change in interest rates of 50 bps across all maturities. We noted that under this model, with all other
Selected Financial Data and Management’s Discussion and Analysis
Page 31 of 32
factors remaining constant, a 50 bps increase in interest rates would result in the decrease in the fair value of our fixed income securities of $3,933,587 based on our securities positions as of December 31, 2016.
We also examined the impact on pre-tax income due to a hypothetical decrease in interest rates of 50 bps across all maturities. Note that all impacts referenced below reflect reserve changes net of economic hedge impact and DAC changes unless otherwise noted. Under this model, with all other factors being constant, we estimated that such a decline would cause our pre-tax income to decrease by $416,232 as of December 31, 2016.
Equity Market Risk
One means of assessing exposure to changes in equity market prices is to estimate the potential changes in pre-tax income from a hypothetical change in equity market prices of 15%. Under this model, with all other factors constant, we estimated that a decrease in equity market prices would cause our pre-tax income to increase by $37,095, while an increase in equity market prices would cause our pre-tax income to decrease by $131,445, based on our equity exposure as of December 31, 2016.
Adoption of New Financial Accounting Standards
See Note 2 – “Summary of Significant Accounting Policies” of the Company’s Consolidated Financial Statements in Item 8 – Financial Statements of this prospectus for information related to recent accounting pronouncements.
Selected Financial Data and Management’s Discussion and Analysis
Page 32 of 32
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Consolidated Financial Statements
and Supplemental Schedules
December 31, 2016 and 2015
(With Report of Independent Registered Public Accounting Firm Thereon)
KPMG LLP 4200 Wells Fargo Center 90 South Seventh Street Minneapolis, MN 55402 |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholder
Allianz Life Insurance Company of North America:
We have audited the accompanying consolidated balance sheets of Allianz Life Insurance Company of North America and subsidiaries (the Company) as of December 31, 2016 and 2015, and the related consolidated statements of operations, stockholder’s equity and comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Allianz Life Insurance Company of North America and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the three years then ended in conformity with U.S. generally accepted accounting principles.
The supplemental information contained in Schedules I, III, and IV has been subjected to audit procedures performed in conjunction with the audit of the Company’s consolidated financial statements. The supplemental information is the responsibility of the Company’s management. Our audit procedures included determining whether the supplemental information reconciles to financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental information. In forming our opinion on the supplemental information, we evaluated whether the supplemental information, including its form and content, is presented in conformity with Regulation S-X Rule 7.05. In our opinion, the supplemental information contained in Schedules I, III, and IV is fairly stated, in all material respects, in relation to the consolidated financial statements as a whole.
/s/ KPMG LLP |
March 29, 2017
KPMG LLP is a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity.
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2016 and 2015
(In thousands, except share data)
| Assets | 2016 | 2015 | ||||||
Investments: | ||||||||
Fixed-maturity securities: | ||||||||
Available-for-sale, at fair value (amortized cost of $84,029,645 and $79,180,533, respectively) | $ | 87,546,971 | 80,734,468 | |||||
At fair value through income (amortized cost of $36,504 and $36,474 respectively) | 37,051 | 37,111 | ||||||
Held-to-maturity, at amortized cost (fair value of $3,630 and $5,279, respectively) | 28 | 55 | ||||||
Mortgage loans on real estate (net of allowance for loan loss of $48,400 and $37,400, respectively) | 10,351,741 | 8,788,018 | ||||||
Derivative assets | 1,059,031 | 591,609 | ||||||
Loans to affiliates | 39,120 | 33,005 | ||||||
Policy loans | 171,012 | 163,129 | ||||||
Acquired loans | 192,380 | 224,083 | ||||||
Equity securities: | ||||||||
Available-for-sale (cost of $316,541 and $71,005, respectively) | 320,166 | 68,611 | ||||||
Trading (cost of $312,592 and $299,017, respectively) | 317,493 | 292,816 | ||||||
Other invested assets | 164,830 | 97,431 | ||||||
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Total investments | 100,199,823 | 91,030,336 | ||||||
Cash and cash equivalents | 1,219,984 | 1,127,182 | ||||||
Accrued investment income | 1,095,038 | 1,043,464 | ||||||
Receivables (net of allowance for uncollectible accounts of $4,959 and $5,560, respectively) | 566,088 | 401,926 | ||||||
Reinsurance recoverables | 4,687,918 | 4,433,499 | ||||||
Deferred acquisition costs | 5,246,343 | 6,283,236 | ||||||
Net deferred tax asset | 388,009 | 542,971 | ||||||
Collateral held from securities lending agreements | 2,561,219 | 2,480,910 | ||||||
Other assets | 1,891,717 | 2,131,148 | ||||||
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Assets, exclusive of separate account assets | 117,856,139 | 109,474,672 | ||||||
Separate account assets | 27,733,261 | 28,243,123 | ||||||
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Total assets | $ | 145,589,400 | 137,717,795 | |||||
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| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 2 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2016 and 2015
(In thousands, except share data)
| Liabilities and Stockholder’s Equity | 2016 | 2015 | ||||||
Policyholder liabilities: | ||||||||
Account balances and future policy benefit reserves (includes $2,611,562 and $1,055,301 measured at fair value under the fair value option at December 31, 2016 and 2015) | $ | 105,354,460 | 97,314,497 | |||||
Policy and contract claims | 620,743 | 517,925 | ||||||
Unearned premiums | 145,335 | 154,116 | ||||||
Other policyholder funds | 275,262 | 296,222 | ||||||
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Total policyholder liabilities | 106,395,800 | 98,282,760 | ||||||
Derivative liabilities | 635,634 | 350,321 | ||||||
Mortgage notes payable | 76,916 | 84,761 | ||||||
Other liabilities | 3,673,122 | 4,240,504 | ||||||
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Liabilities, exclusive of separate account liabilities | 110,781,472 | 102,958,346 | ||||||
Separate account liabilities | 27,733,261 | 28,243,123 | ||||||
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Total liabilities | 138,514,733 | 131,201,469 | ||||||
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Stockholder’s equity: | ||||||||
Class A, Series A preferred stock, $1 par value. Authorized, issued, and outstanding, 8,909,195 shares; liquidation preference of $2,084 and $1,560 at December 31, 2016 and 2015 | 8,909 | 8,909 | ||||||
Class A, Series B preferred stock, $1 par value. Authorized, 10,000,000 shares; issued and outstanding, 9,994,289 shares; liquidation preference of $4,283 and $1,750 at December 31, 2016 and 2015 | 9,994 | 9,994 | ||||||
Common stock, $1 par value. Authorized, 40,000,000 shares; issued and outstanding, 20,000,001 shares at December 31, 2016 and 2015 | 20,000 | 20,000 | ||||||
Additional paid-in capital | 4,053,371 | 4,053,371 | ||||||
Retained earnings | 1,829,115 | 1,935,102 | ||||||
Accumulated other comprehensive income, net of tax | 1,153,278 | 488,950 | ||||||
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Total stockholder’s equity | 7,074,667 | 6,516,326 | ||||||
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Total liabilities and stockholder’s equity | $ | 145,589,400 | 137,717,795 | |||||
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See accompanying notes to consolidated financial statements.
Consolidated Financial Statements and Supplemental Schedules
Page 3 of 101
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2016, 2015 and 2014
(In thousands)
| 2016 | 2015 | 2014 | ||||||||||
Revenue: | ||||||||||||
Premiums | $ | 244,777 | 244,226 | 241,704 | ||||||||
Policy fees | 1,295,485 | 1,330,651 | 1,286,614 | |||||||||
Premiums and policy fees, ceded | (132,983 | ) | (125,286 | ) | (120,221 | ) | ||||||
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Net premiums and policy fees | 1,407,279 | 1,449,591 | 1,408,097 | |||||||||
Interest and similar income, net | 4,325,737 | 4,175,469 | 3,955,659 | |||||||||
Change in fair value of assets and liabilities | (178,238 | ) | (532,720 | ) | 1,841,989 | |||||||
Realized investment (losses) gains, net | (49,325 | ) | 94,413 | 77,762 | ||||||||
Fee and commission revenue | 274,562 | 293,333 | 282,058 | |||||||||
Other revenue | 35,292 | 10,066 | 29,762 | |||||||||
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Total revenue | 5,815,307 | 5,490,152 | 7,595,327 | |||||||||
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Benefits and expenses: | ||||||||||||
Policyholder benefits | 1,000,589 | 1,031,440 | 689,319 | |||||||||
Change in fair value of annuity and life embedded derivatives | 275,808 | 588,595 | 4,955,984 | |||||||||
Benefit recoveries | (527,978 | ) | (499,825 | ) | (371,608 | ) | ||||||
Net interest credited to account values | 1,634,759 | 1,482,884 | 602,130 | |||||||||
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Net benefits and expenses | 2,383,178 | 2,603,094 | 5,875,825 | |||||||||
Commissions and other agent compensation | 1,333,439 | 1,167,109 | 1,537,224 | |||||||||
General and administrative expenses | 695,949 | 637,328 | 675,176 | |||||||||
Change in deferred acquisition costs, net | 259,407 | 239,259 | (673,086 | ) | ||||||||
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Total benefits and expenses | 4,671,973 | 4,646,790 | 7,415,139 | |||||||||
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Income from operations before income taxes | 1,143,334 | 843,362 | 180,188 | |||||||||
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Income tax expense (benefit): | ||||||||||||
Current | 558,016 | 551,052 | 265,586 | |||||||||
Deferred | (202,860 | ) | (307,986 | ) | (240,863 | ) | ||||||
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Total income tax expense | 355,156 | 243,066 | 24,723 | |||||||||
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Net income | $ | 788,178 | 600,296 | 155,465 | ||||||||
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Supplemental disclosures: | ||||||||||||
Realized investment losses, net: | ||||||||||||
Total other-than-temporary impairment losses on securities | $ | (174,823 | ) | (58,975 | ) | (6,445 | ) | |||||
Portion of loss recognized in other comprehensive income | — | — | — | |||||||||
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Net impairment losses recognized in Realized investment losses, net | (174,823 | ) | (58,975 | ) | (6,445 | ) | ||||||
Other net realized gains | 125,498 | 153,388 | 84,207 | |||||||||
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Realized investment (losses) gains, net | $ | (49,325 | ) | 94,413 | 77,762 | |||||||
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See accompanying notes to consolidated financial statements.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 4 of 101 | ||||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Years ended December 31, 2016, 2015 and 2014
(In thousands)
| 2016 | 2015 | 2014 | ||||||||||
Net income | $ | 788,178 | 600,296 | 155,465 | ||||||||
Net unrealized gain (loss) on investments, net of shadow adjustments and deferred taxes | 663,675 | (1,284,297 | ) | 776,470 | ||||||||
Unrealized (loss) gain on postretirement obligation, net of tax | (39 | ) | 111 | (6 | ) | |||||||
Foreign currency translation adjustments, net of tax | 692 | (4,009 | ) | (2,103 | ) | |||||||
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Total other comprehensive income (loss) | 664,328 | (1,288,195 | ) | 774,361 | ||||||||
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Total comprehensive income (loss) | $ | 1,452,506 | (687,899 | ) | 929,826 | |||||||
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See accompanying notes to consolidated financial statements.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 5 of 101 | ||||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Consolidated Statements of Stockholder’s Equity
Years ended December 31, 2016, 2015 and 2014
(In thousands)
| Preferred stock | Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income | Total stockholder’s equity | |||||||||||||||||||
2014: | ||||||||||||||||||||||||
Balance, beginning of year | $ | 18,903 | 20,000 | 4,053,371 | 2,001,466 | 1,002,784 | 7,096,524 | |||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net income | — | — | — | 155,465 | — | 155,465 | ||||||||||||||||||
Net unrealized gain on investments, net of shadow adjustments and deferred taxes | — | — | — | — | 776,470 | 776,470 | ||||||||||||||||||
Net unrealized loss on postretirement obligation, net of deferred taxes | — | — | — | — | (6 | ) | (6 | ) | ||||||||||||||||
Foreign currency translation adjustment, net of deferred taxes | — | — | — | — | (2,103 | ) | (2,103 | ) | ||||||||||||||||
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| |||||||||||||||||||||||
Total comprehensive income | 929,826 | |||||||||||||||||||||||
Dividend to parent | — | — | — | (250,000 | ) | — | (250,000 | ) | ||||||||||||||||
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| |||||||||||||
Balance, end of year | $ | 18,903 | 20,000 | 4,053,371 | 1,906,931 | 1,777,145 | 7,776,350 | |||||||||||||||||
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2015: | ||||||||||||||||||||||||
Balance, beginning of year | $ | 18,903 | 20,000 | 4,053,371 | 1,906,931 | 1,777,145 | 7,776,350 | |||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net income | — | — | — | 600,296 | — | 600,296 | ||||||||||||||||||
Net unrealized loss on investments, net of shadow adjustments and deferred taxes | — | — | — | — | (1,284,297 | ) | (1,284,297 | ) | ||||||||||||||||
Net unrealized gain on postretirement obligation, net of deferred taxes | — | — | — | — | 111 | 111 | ||||||||||||||||||
Foreign currency translation adjustment, net of deferred taxes | — | — | — | — | (4,009 | ) | (4,009 | ) | ||||||||||||||||
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| |||||||||||||||||||||||
Total comprehensive loss | (687,899 | ) | ||||||||||||||||||||||
Dividend to parent | — | — | — | (572,125 | ) | — | (572,125 | ) | ||||||||||||||||
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|
| |||||||||||||
Balance, end of year | $ | 18,903 | 20,000 | 4,053,371 | 1,935,102 | 488,950 | 6,516,326 | |||||||||||||||||
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2016: | ||||||||||||||||||||||||
Balance, beginning of year | $ | 18,903 | 20,000 | 4,053,371 | 1,935,102 | 488,950 | 6,516,326 | |||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net income | — | — | — | 788,178 | — | 788,178 | ||||||||||||||||||
Net unrealized gain on investments, net of shadow adjustments and deferred taxes | — | — | — | — | 663,675 | 663,675 | ||||||||||||||||||
Net unrealized loss on postretirement obligation, net of deferred taxes | — | — | — | — | (39 | ) | (39 | ) | ||||||||||||||||
Foreign currency translation adjustment, net of deferred taxes | — | — | — | — | 692 | 692 | ||||||||||||||||||
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| |||||||||||||||||||||||
Total comprehensive income | 1,452,506 | |||||||||||||||||||||||
Dividend to parent | — | — | — | (894,165 | ) | — | (894,165 | ) | ||||||||||||||||
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Balance, end of year | $ | 18,903 | 20,000 | 4,053,371 | 1,829,115 | 1,153,278 | 7,074,667 | |||||||||||||||||
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See accompanying notes to consolidated financial statements.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 6 of 101 | ||||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2016, 2015 and 2014
(In thousands)
| 2016 | 2015 | 2014 | ||||||||||
Cash flows provided by operating activities: | ||||||||||||
Net income | $ | 788,178 | 600,296 | 155,465 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Realized investment losses (gains) | 47,558 | (80,225 | ) | (77,209 | ) | |||||||
Purchase of fixed-maturity securities at fair value through income | (150 | ) | (4,819 | ) | (9,156 | ) | ||||||
Sale, maturity, and other redemptions of fixed-maturity securities at fair value through income | — | 8,700 | 8,500 | |||||||||
Purchases of trading securities | (1,371,832 | ) | (497,657 | ) | (241,188 | ) | ||||||
Sale and other redemptions of trading securities | 1,355,529 | 503,912 | 158,825 | |||||||||
Change in annuity-related options, derivatives, and gross reserves | 172,780 | 109,763 | 1,561,437 | |||||||||
Deferred income tax benefit | (202,860 | ) | (307,986 | ) | (240,863 | ) | ||||||
Charges to policy account balances | (222,131 | ) | (187,637 | ) | (158,401 | ) | ||||||
Gross interest credited to account balances | 1,760,900 | 1,618,376 | 829,932 | |||||||||
Amortization and depreciation | 115,328 | 60,857 | (41,534 | ) | ||||||||
Change in: | ||||||||||||
Accrued investment income | (51,730 | ) | (124,230 | ) | (87,428 | ) | ||||||
Receivables | (164,182 | ) | (251,059 | ) | (12,479 | ) | ||||||
Reinsurance recoverables | (254,419 | ) | (227,639 | ) | (100,782 | ) | ||||||
Deferred acquisition costs | 259,407 | 239,259 | (673,086 | ) | ||||||||
Future policy benefit reserves | 328,295 | 1,218,582 | 1,826,979 | |||||||||
Policy and contract claims | 102,818 | 74,481 | 27,335 | |||||||||
Other policyholder funds | (20,960 | ) | (35,142 | ) | 59,155 | |||||||
Unearned premiums | 21,540 | (20,157 | ) | 11,669 | ||||||||
Other assets and liabilities | (19,822 | ) | (278,427 | ) | 166,689 | |||||||
Other, net | 420 | (5,924 | ) | 745 | ||||||||
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| |||||||
Total adjustments | 1,856,489 | 1,813,028 | 3,009,140 | |||||||||
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| |||||||
Net cash provided by operating activities | $ | 2,644,667 | 2,413,324 | 3,164,605 | ||||||||
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| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 7 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2016, 2015 and 2014
(In thousands)
| 2016 | 2015 | 2014 | ||||||||||
Cash flows used in investing activities: | ||||||||||||
Purchase of fixed-maturity securities | $ | (14,962,344 | ) | (15,028,477 | ) | (15,498,964 | ) | |||||
Sale and other redemptions of fixed-maturity securities | 8,405,110 | 7,224,211 | 4,264,652 | |||||||||
Matured fixed-maturity securities | 1,585,456 | 1,767,133 | 1,121,527 | |||||||||
Funding of mortgage loans on real estate | (2,249,020 | ) | (2,281,527 | ) | (1,854,016 | ) | ||||||
Repayment/disposal of mortgage loans on real estate | 674,296 | 673,278 | 811,372 | |||||||||
Purchase of derivative securities | (423,397 | ) | (512,523 | ) | (397,943 | ) | ||||||
Sale of derivative securities | 415,794 | 242,298 | 1,344,736 | |||||||||
Purchase of equity securities | (376,145 | ) | (143,684 | ) | (6,163 | ) | ||||||
Sale of equity securities | 152,821 | 58,858 | 29,209 | |||||||||
Purchase of partnership investments | (53,952 | ) | (19,777 | ) | (2,992 | ) | ||||||
Sale of real estate | — | 5,929 | — | |||||||||
Net change in short-term securities | 4,454 | 43,443 | (40,350 | ) | ||||||||
Purchase of home office property and equipment | (1,794 | ) | (7,486 | ) | (4,882 | ) | ||||||
Goodwill and intangible acquistion | (7,801 | ) | — | — | ||||||||
Change in loan to affiliate | (39,115 | ) | 817,110 | 341,055 | ||||||||
Change in loan to non-affiliate | (43,075 | ) | 19,343 | (21,966 | ) | |||||||
Other, net | (7,636 | ) | (2,958 | ) | (756 | ) | ||||||
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| |||||||
Net cash used in investing activities | (6,926,348 | ) | (7,144,829 | ) | (9,915,481 | ) | ||||||
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| |||||||
Cash flows provided by financing activities: | ||||||||||||
Cash (paid to) received from FHLB advance | (500,000 | ) | 500,000 | — | ||||||||
Policyholders’ deposits to account balances | 12,299,879 | 10,035,234 | 13,666,314 | |||||||||
Policyholders’ withdrawals from account balances | (6,601,844 | ) | (6,485,558 | ) | (6,207,879 | ) | ||||||
Policyholders’ net transfers between account balances | 56,943 | 101,897 | (98,712 | ) | ||||||||
Change in amounts drawn in excess of bank balances | (11,650 | ) | 16,045 | (884 | ) | |||||||
Dividend paid to parent company | (861,000 | ) | (572,125 | ) | (250,000 | ) | ||||||
Repayment of mortgage notes payable | (7,845 | ) | (7,423 | ) | (7,026 | ) | ||||||
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| |||||||
Net cash provided by financing activities | 4,374,483 | 3,588,070 | 7,101,813 | |||||||||
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| |||||||
Net change in cash and cash equivalents | 92,802 | (1,143,435 | ) | 350,937 | ||||||||
Cash and cash equivalents at beginning of year | 1,127,182 | 2,270,617 | 1,919,680 | |||||||||
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Cash and cash equivalents at end of year | $ | 1,219,984 | 1,127,182 | 2,270,617 | ||||||||
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| |||||||
Note: Supplemental disclosure of cash flow information for non-cash distribution - non-cash dividend payment to affiliate (see note 19 for further discussion) | $ | 33,165 | — | — | ||||||||
See accompanying notes to consolidated financial statements.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 8 of 101 | ||||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
| (1) | Organization |
Allianz Life Insurance Company of North America (the Company) is a wholly owned subsidiary of Allianz of America, Inc. (AZOA or parent company), which is a wholly owned subsidiary of Allianz Europe, B.V. Allianz Europe, B.V. is a wholly owned subsidiary of Allianz SE. Allianz SE is a European company registered in Munich, Germany, and is the Company’s ultimate parent.
The Company is a life insurance company licensed to sell annuity, group and individual life, and group and individual accident and health policies in the United States, Canada, and several U.S. territories. Based on 2016 statutory net premium written, 94%, 5%, and 1% of the Company’s business is annuity, life insurance, and accident and health, respectively. The annuity business comprises fixed-indexed, variable, variable-indexed, and fixed annuities. The fixed-indexed, variable-indexed, and variable business represents 83%, 12% and 5% of 2016 statutory annuity net premium written, respectively. Life business comprises both traditional and group life. Life business includes products with guaranteed premiums and benefits and consists principally of universal life policies, fixed-indexed universal life policies, term insurance policies, and limited payment contracts. Accident and health business is primarily comprised of closed blocks of long-term care (LTC) insurance. The Company’s primary distribution channels are through independent agents, broker-dealers, banks, and third-party marketing organizations.
| (2) | Summary of Significant Accounting Policies |
| (a) | Basis of Presentation |
The Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP), which vary in certain respects from accounting practices permitted or prescribed by state insurance regulatory authorities. The accounts of the Company’s primary subsidiary, Allianz Life Insurance Company of New York (AZNY), and all other subsidiaries have been consolidated. All intercompany balances and transactions have been eliminated in consolidation.
| (b) | Use of Estimates |
The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect reported amounts of assets and liabilities, including reporting or disclosure of contingent assets and liabilities as of the balance sheet date, and the reported amounts of revenues and expenses during the reporting period. Future events, including changes in mortality, morbidity, interest rates, capital markets, and asset valuations could cause actual results to differ from the estimates used within the Consolidated Financial Statements. Such changes in estimates are recorded in the period they are determined.
| (c) | Investment Products and Universal Life Business |
Investment products consist primarily of fixed and variable annuity products. Premium receipts are reported as deposits to the contractholders’ accounts. Policy fees in the Consolidated Statements of Operations represent asset fees, cost of insurance charges, administrative fees, charges for guarantees on investment products, and surrender charges for investment products and universal life insurance. These fees have been earned and assessed against contractholders on a daily or monthly basis
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 9 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
throughout the contract period and are recognized as revenue when assessed and earned. Amounts assessed that represent compensation to the Company for services to be provided in future periods are not earned in the period assessed. Such amounts are reported as unearned premiums, which include unearned revenue reserves (URR), and are recognized in operations over the period benefited using the same assumptions and factors used to amortize capitalized acquisition costs. Surrender charges are recognized upon surrender of a contract in accordance with contractual terms. Derivatives embedded in fixed-indexed, variable, and certain life products are recorded at fair value and changes in value are included in Change in fair value of annuity and life embedded derivatives in the Consolidated Statements of Operations. Benefits consist of interest credited to contractholders’ accounts and claims incurred in excess of the contractholders’ account balance and are included in Net interest credited to account values and Policyholder benefits, respectively, within the Consolidated Statements of Operations.
The Company offers a variable-indexed annuity product that combines a separate account option with a general account option that is similar to a fixed-indexed annuity. The Company has elected the fair value option to account for the entire insurance contract liability and the variable investment option assets in the separate account. The insurance contracts’ reserves are reported in Account balances and future policy benefit reserves and the variable investment option assets within the separate account are reported in Equity securities, trading on the Consolidated Balance Sheets. Assets backing the general account are primarily reported in Fixed-maturity securities, Available-for-sale on the Consolidated Balance Sheets. Electing the fair value option for an insurance contract liability requires that the Company account for that liability as a financial instrument and also requires that acquisition costs be recognized immediately in expense.
| (d) | Life and Accident and Health Insurance |
Premiums on traditional life products are recognized as revenue over the premium-paying periods of the contracts when due from contractholders. Premium revenue generally exceeds expected policy benefits in the early years of the contracts and it is necessary to accrue, as premium is recognized, a liability for costs that are expected to be paid in the later years of the contracts.
Accident and health premiums are recognized as earned on a pro rata basis over the risk coverage periods. Benefits and expenses are recognized as incurred.
| (e) | Investments |
Fixed-Maturity Securities and Equity Securities
The Company has portfolios of certain fixed-maturity securities and equity securities classified as “available-for-sale.” Accordingly, these securities are carried at fair value, and related unrealized gains and losses are credited or charged directly to accumulated other comprehensive income (AOCI) in stockholder’s equity, net of tax and related shadow adjustments. The adjustments to deferred acquisition costs (DAC), deferred sale inducements (DSI), and value of business acquired (VOBA) represent the change in amortization that would have been required as a charge or credit to operations had such unrealized amounts been realized. The adjustment to reserves represents the
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 10 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
increase or decrease in the reserve balance that would have been required as a charge or credit to operations had such unrealized amounts been realized.
The Company has portfolios of certain fixed-maturity securities classified as “at fair value through income” and equity securities classified as “trading”. These securities are carried at fair value, and their respective related unrealized gains and losses are reflected in Change in fair value of assets and liabilities, within the Consolidated Statements of Operations. Equity securities, trading includes, but is not limited to, a portfolio of mutual fund seed money investments and restricted stock units (RSU) for which the fair value option was elected. The fair value option was elected for these seed money investments because the portfolio is managed based on the fair values and ultimately sold to other investors at fair value. In addition, the Company has portfolios of certain fixed-maturity securities classified as “held-to-maturity”. Accordingly, these securities are carried at amortized cost on the Consolidated Balance Sheets. The Company has the intent and ability to hold such securities to maturity. Dividends are accrued on the date they are declared and interest is accrued as earned. Premiums or discounts on fixed-maturity securities are amortized using the constant yield method. Realized gains and losses are computed based on the average cost basis of all lots owned of each security.
Mortgage-backed securities and structured securities are amortized using, among other assumptions, anticipated prepayments. Prepayment assumptions for loan-backed securities are obtained from various external sources or internal estimates. The Company believes these assumptions are consistent with those a market participant would use. The Company recognizes income using a constant effective yield method based on prepayment assumptions and the estimated economic life of the securities. For all structured securities without expected credit deterioration, when actual prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date and anticipated future payments using the retrospective method. Any resulting adjustment is included in Interest and similar income, net in the Consolidated Statements of Operations. For structured securities with expected credit deterioration, when adjustments are anticipated for prepayments and other expected changes in future cash flows, the effective yield is recalculated using the prospective method.
The fair value of fixed-maturity securities and equity securities is obtained from third-party pricing sources whenever possible. Management completes its own Independent Price Verification (IPV) process, which ensures security pricing is obtained from a third-party source other than the sources used by the internal and external investment managers managing the investments held by the Company. The IPV process supports the reasonableness of price overrides and challenges by the internal and external investment managers and reviews pricing for appropriateness. Results of the IPV are reviewed by the Company’s Pricing Committee.
The Company reviews the available-for-sale and held-to-maturity investment portfolios to determine whether or not declines in fair value are other than temporary. The Company continues to evaluate factors in addition to average cost and fair value, including credit quality, the extent and duration of the decline, market analysis, current events, recent price declines, changes in risk-free interest rates, likelihood of recovery in a reasonable period of time, and management’s judgment, to determine whether fixed-income securities are considered other-than-temporarily impaired. When the fair value
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 11 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
of a fixed-maturity security is less than its amortized cost, the Company assesses whether or not (i) it has the intent to sell the security or (ii) it is more likely than not that the Company will be required to sell the security before its anticipated recovery. The Company evaluates these factors to determine whether the Company or any of its internal and external investment managers have the intent to sell a security or a group of securities. Additionally, the Company performs a cash flow projection for several years into the future to determine whether cash needs would require the sale of any securities in an unrealized loss position. If either of these conditions are met, the Company must recognize an other-than-temporary-impairment (OTTI) for the difference between the investment’s amortized cost basis and its fair value through earnings. For securities that do not meet the above criteria and the Company does not expect to recover a security’s amortized cost basis, the security is considered other-than-temporarily impaired. For these securities, the Company separates the total impairment into the credit loss component and the amount of the loss related to other factors. The amount of the total impairment related to credit loss is considered an OTTI and is recognized in Realized investment (losses) gains, net in the Consolidated Statements of Operations. The amount of the total impairment related to other factors is recognized in other comprehensive income (OCI), net of impacts to DAC, DSI, VOBA, reserves, and deferred income taxes. For available-for-sale and held-to-maturity securities that have recognized an OTTI through earnings, if through subsequent evaluation there is a significant increase in the cash flow expected, the difference between the amortized cost basis and the discounted cash flows expected to be collected is accreted as interest income. Subsequent increases and decreases not related to additional credit losses in the fair value of available-for-sale securities are included in the Consolidated Statements of Comprehensive Income.
The Company evaluates whether a credit loss exists by considering primarily the following factors: (a) the length of time and extent to which the fair value has been less than the amortized cost of the security; (b) changes in the financial condition, credit rating, and near-term prospects of the issuer; (c) whether the issuer is current on contractually obligated interest and principal payments; (d) changes in the financial condition of the security’s underlying collateral, if any; and (e) the payment structure of the security. The Company uses a probability-weighted cash flow model for corporate bonds to determine the credit loss amount. This measurement is a quantitative and qualitative process that incorporates information received from third-party sources along with certain internal assumptions and significant judgments regarding the future performance of the security. The Company’s probability-weighted cash flow model involves assumptions including, but not limited to, various performance indicators, such as historical and projected default and recovery rates, credit ratings, and current delinquency rates. For structured securities, the Company selects a probability-weighted or best estimate cash flow model depending on the specifics of the individual security and the information available to measure the expected cash flows of the underlying collateral. In the event that sufficient information is not available to measure the expected cash flows of a structured security in a timely manner due to a lack of available information on the valuation date, the entire decline in fair value is considered to be related to credit loss.
The Company provides a supplemental disclosure within the Consolidated Statements of Operations that presents the total OTTI losses recognized during the period less the portion of OTTI losses recognized in OCI to equal the credit-related portion of OTTI that was recognized in earnings during the period. The portion of OTTI losses recognized in OCI includes the portion of OTTI losses related
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 12 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
to factors other than credit recognized during the period, offset by reclassifications of OTTI losses previously determined to be related to factors other than credit that are determined to be credit related in the current period. The amount presented in the supplemental disclosure within the Consolidated Statements of Operations represents the portion of OTTI losses recognized in OCI and excludes subsequent increases and decreases in the fair value of these securities.
The Company evaluates whether equity securities are other-than-temporarily impaired through a review process which includes, but is not limited to, market analysis, analyzing current events, assessing recent price declines, and management’s judgment related to the likelihood of recovery within a reasonable period of time. All previously impaired equity securities will incur additional OTTI should the fair value fall below the book value.
Impairments in the value of securities held by the Company, considered to be other than temporary, are recorded as a reduction of the cost of the security, and a corresponding realized loss is recognized in the Consolidated Statements of Operations. The Company adjusts DAC, DSI, and VOBA for impairments on securities, as discussed in their respective sections of this note.
Mortgage Loans on Real Estate
Mortgage loans on real estate are reflected at unpaid principal balances adjusted for an allowance for uncollectible balances. Interest on mortgage loans is accrued on a monthly basis and recorded in Interest and similar income, net in the Consolidated Statements of Operations. The Company analyzes loan impairment quarterly when assessing the adequacy of the allowance for uncollectible balances. The Company considers recent trends in the Company’s loan portfolio and information on current loans, such as loan-to-value ratios and debt service coverage, which could impact a loan’s credit quality. The Company also evaluates the mortgage loan reserve to ensure that the estimate is based on appropriate market assumptions to reflect default and loss rates. The Company does not accrue interest on delinquent loans.
Loans to Affiliates
The Company has a note receivable from a related party and has recorded it in Loans to affiliates on the Consolidated Balance Sheets. Loans to affiliate are carried at amortized cost on the Consolidated Balance Sheets and interest is accrued on a monthly basis. Interest payments are received annually.
Policy Loans
Policy loans are supported by the underlying cash value of the policies. Policy loans are carried at unpaid principal balances, which approximate fair value, on the Consolidated Balance Sheets.
Acquired Loans
The Company has a portfolio of assets that have deteriorated credit quality and are recorded as Acquired loans on the Consolidated Balance Sheets. Acquired loans are initially recorded at fair value, and changes in expected cash flows are recorded as adjustments to accretable yield, to the carrying amount, or both. Fair values are obtained using a combination of third-party vendors and cash flow modeling, which is reviewed by the Company’s Pricing Committee. Accretable yield
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 13 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
refers to the amount of undiscounted cash flows expected in excess of the carrying amount. This amount is converted into a rate and accreted into Interest and similar income, net in the Consolidated Statements of Operations. Interest is recorded as received on certain acquired loans that do not have reasonably estimable cash flows. Acquired loans are evaluated quarterly for impairment using updated cash flow models.
Other Invested Assets
Other investments include short-term securities, loans to non-affiliates, equity securities carried at cost, and partnership investments. Short-term securities are carried at amortized cost, which approximates fair value. Loans to non-affiliates are carried at amortized cost, and interest is accrued monthly. The Company invests in low income housing (LIH) partnerships for tax benefits. The LIH partnership investments are carried at cost and amortized in proportion to the total tax credits and other tax benefits to be received over the life of the investments. The investments in the LIH partnerships were $46,727 and $20,167 for the years ended December 31, 2016 and 2015, respectively. In addition, a liability and corresponding asset is recorded as commitment and decreases as the Company provides capital to fund. The tax benefit is recognized within the Current Income tax expense (benefit) in the Consolidated Statements of Operations. The Company has recognized tax credits related to the LIH partnership investments of $7,125, $2,793, and $1,235 for the years ended December 31, 2016, 2015, and 2014, respectively.
Investments in partnerships, other than LIH partnerships, are accounted for using the equity method of accounting. Partnership profits and losses are recorded in Interest and similar income, net in the Consolidated Statements of Operations. Distributions in excess of cost and impairments of investments in partnerships are recognized within Realized investment (losses) gains, net in the Consolidated Statements of Operations.
The Company is a member of the Federal Home Loan Bank of Des Moines (FHLB), primarily for the purpose of participating in the Bank’s mortgage collateralized loan advance program with short-term and long-term funding facilities. Members are required to purchase and hold a minimum amount of FHLB capital stock plus additional stock based on outstanding advances. The equity security investment is carried at cost, which approximates fair value, and is reported in Other invested assets on the Consolidated Balance Sheets. The Company held FHLB stock of $30,000 and $50,000 at December 31, 2016 and 2015, respectively. Advances received from FHLB are recorded in Other liabilities on the Consolidated Balance Sheets. The investment is evaluated for impairment based on the ultimate recoverability of its par value.
The Company has a funding agreement with a balance of $500,000 at December 31, 2016 and 2015. In 2015, the Company obtained an advance from FHLB which had a balance of $500,000 as of December 31, 2015. The FHLB advance was paid off in April 2016. Collateral posted on the FHLB funding agreement and FHLB advance at December 31, 2015 was $1,190,301. The previously issued 2015 financial statements improperly disclosed the pledged amount of collateral as $1,313,443 instead of $1,190,301, the fair value of the collateral related to the FHLB agreement. The December 31, 2015 amounts have been corrected to the proper amount. Collateral posted on the FHLB funding agreement at December 31, 2016 was $0.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 14 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
Variable Interest Entities
In the normal course of business, the Company enters into relationships with various entities that are deemed to be a variable interest entity (VIE). A VIE is an entity that either (1) has equity investors that lack certain essential characteristics of a controlling financial interest (including the ability to control activities of the entity, the obligation to absorb the entity’s expected losses, and the right to receive the entity’s expected residual returns) or (2) lacks sufficient equity to finance its own activities without financial support provided by other entities, which in turn would be expected to absorb at least some of the expected losses of the VIE. The Company consolidates a VIE if it is determined to be the primary beneficiary. Those entities which do not meet the requirements to be a VIE are voting interest entities (VOEs). The Company consolidates a VOE if it holds a voting interest that is greater than 50%.
| (f) | Derivatives |
The Company utilizes derivatives within certain actively managed investment portfolios. Within these portfolios, derivatives can be used for hedging, replication, and income generation only. The financial instruments are valued and carried at fair value and the unrealized gains and losses on the derivatives are reflected in Change in fair value of assets and liabilities in the Consolidated Statements of Operations.
Hedge Accounting
The Company uses hedge accounting as a risk management strategy to hedge its exposure to various market risks associated with both its products and operations. To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated changes in cash flow of the hedged item. The documentation process involves defining the Company’s risk management objective, strategy for undertaking each hedge transaction, linking specific derivatives to specific assets or liabilities on the Consolidated Balance Sheets, designating the relationship, and defining the effectiveness and ineffectiveness testing methods to be used. The Company also formally assesses, at inception and on a quarterly basis, whether the derivatives used in hedging transactions have been and are expected to continue to be highly effective in offsetting changes in cash flows of hedged items.
Hedge effectiveness is assessed using quantitative methods. Quantitative methods include analysis of changes in fair value or cash flows associated with the hedge relationship. Hedge effectiveness is measured using the hypothetical derivative and dollar offset methods. The dollar offset method compares changes in cash flows of the hedging instrument with changes in the cash flows of the hedged item attributable to the hedged risk through the use of a hypothetical derivative. Related changes in the cash flows of the hedging instrument are expected to offset the changes in the cash flows of the hedged item as the notional/par amounts, reset dates, interest rate indices, and business day conventions are the same for both the bond and the swap. The cumulative amount of unrealized gains and losses of the hedging instrument is recognized in AOCI, net of tax on the Consolidated Balance Sheets. The ineffective portion of the change in the fair value of the hedging instrument is recognized in Change in fair value of assets and liabilities in the Consolidated Statements of Operations.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 15 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
Interest Rate Swaps and Foreign Currency Swaps
The Company utilizes foreign currency swaps to hedge cash flows and applies hedge accounting treatment. Specifically, the Company uses foreign currency swaps to hedge foreign currency fluctuations on certain underlying foreign-denominated fixed-maturity securities. Until January 2015, the Company also utilized interest rate swaps (IRS) to hedge cash flows and applied hedge accounting treatment. The IRS and foreign currency swaps are reported at fair value in Derivative assets and Derivative liabilities on the Consolidated Balance Sheets. The fair value of the OTC IRS and foreign currency swaps are derived using a third-party vendor software program and deemed by management to be reasonable.
The Company has a timing difference between the purchase of the derivative and settlement of the bond for foreign currency swaps. Any changes in value of the derivative between the purchase and settlement date are recorded in Change in fair value of assets and liabilities in the Consolidated Statements of Operations. After the bond is settled, the Company completes documentation and designates hedge accounting.
Nonqualifying hedging
Options and Futures Contracts
The Company provides additional benefits through certain life and annuity products, which are linked to the fluctuation of various United States and international stock and bond market indices. In addition, certain variable annuity contracts provide minimum guaranteed benefits. The Company has analyzed the characteristics of these benefits and has entered into over-the-counter (OTC) option contracts, exchange-traded option (ETO) contracts, and exchange-traded futures contracts tied to an appropriate underlying index with similar characteristics with the objective to economically hedge these risks. The Company uses exchange-traded futures contracts with the objective to increase the effectiveness of the economic hedge. Management monitors in-force amounts and option and futures contract values to ensure satisfactory matching and to identify unsatisfactory mismatches. If persistency assumptions were to deviate significantly from anticipated rates, management would purchase or sell option and futures contracts as deemed appropriate or take other actions.
The OTC option contracts and ETO contracts are reported at fair value in Derivative assets and Derivative liabilities on the Consolidated Balance Sheets. The fair value of the OTC options is derived internally and deemed by management to be reasonable via performing an IPV process. The process of deriving internal derivative prices requires the Company to calibrate Monte Carlo scenarios to actual market information. The calibrated scenarios are applied to derivative cash flow models to calculate fair value prices for the derivatives. The fair value of the ETOs is based on quoted market prices. Changes in unrealized gains and losses on the OTC option contracts and ETO contracts and incremental gains and losses from expiring contracts are recorded within Change in fair value of assets and liabilities in the Consolidated Statements of Operations. The liability for the benefits is reported in Account balances and future policy benefit reserves on the Consolidated Balance Sheets. Futures contracts do not require an initial cash outlay, and the Company has agreed to daily net settlement based on movements of the representative index.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 16 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
Therefore, no asset or liability is recorded on the Consolidated Balance Sheets. Gains and/or losses on futures contracts are included in Change in fair value of assets and liabilities in the Consolidated Statements of Operations.
Interest Rate Swaps, Credit Default Swaps, Total Return Swaps, and To Be Announced Securities
The Company utilizes IRS, credit default swaps (CDS), and total return swaps (TRS) to hedge market risks embedded in certain annuities. Beginning in 2015, the Company began transacting To Be Announced (TBA) securities, which do not meet the regular-way security trade scope exception, to economically hedge market risks embedded in certain life and annuity products. The IRS, CDS, TRS, and TBA securities are reported at fair value in Derivative assets and Derivative liabilities on the Consolidated Balance Sheets. The fair value of the OTC IRS, CDS, and TBA securities are derived using a third-party vendor software program and deemed by management to be reasonable. Centrally cleared IRS fair values are obtained from the exchange on which they are traded. The fair value of the TRS is based on counterparty pricing and deemed by management to be reasonable. The unrealized gains and losses on the swaps and TBA securities are recorded in Change in fair value of assets and liabilities in the Consolidated Statements of Operations.
| (g) | Cash and cash equivalents |
Cash and cash equivalents include cash on hand, demand deposits, overnight commercial paper, and highly liquid debt instruments purchased with an original maturity of three months or less. During 2016, the Company began engaging in overnight reverse repurchase agreements, which is a form of short-term borrowing for dealers in government securities. These investments are classified as Cash and cash equivalents on the Consolidated Balance Sheets. Due to the short-term nature of these investments, the carrying value is deemed to approximate fair value.
| (h) | Securities Lending and Tri-Party Repurchase Agreements |
The Company participates in restricted securities lending arrangements whereby specific securities are loaned to other institutions. These loaned securities are reported on the Consolidated Balance Sheets as Available-for-sale fixed-maturity securities. The Company receives collateral from these arrangements including cash and cash equivalents, which is unrestricted and may be used for general purposes, and noncash collateral which may not be sold or re-pledged unless the counterparty is in default. The Company accounts for its securities lending transactions as secured borrowings, in which the cash collateral received and the related obligation to return the cash collateral are recorded on the Consolidated Balance Sheets as Collateral held from securities lending agreements and Other liabilities, respectively. Noncash collateral received is not reflected on the Consolidated Balance Sheets. Securities on loan remain on the Consolidated Balance Sheets, and interest and dividend income earned by the Company on loaned securities is recognized in Interest and similar income, net in the Consolidated Statements of Operations. Company policy requires a minimum of 102% of fair value of securities loaned under securities lending agreements to be maintained as collateral.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 17 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
The Company has entered into a tri-party repurchase facility agreement with an unaffiliated bank, whereby the Company may sell securities with an agreement to repurchase at a later date for a specified price. The facility has not been used since the inception of the agreement.
| (i) | Receivables |
Receivable balances (contractual amount less allowance for doubtful accounts) are based on pertinent information available to management as of year-end, including the financial condition and creditworthiness of the parties underlying the receivables. Receivable balances are monitored and allowances for doubtful accounts are maintained based on the nature of the receivable, and the Company’s assessment of the ability to collect. The allowance is estimated by aging the balances due from individual parties and generally setting up an allowance for any balances that are more than 90 days old.
| (j) | Reinsurance |
The Company assumes and cedes business with other insurers. Reinsurance premium and benefits paid or provided are accounted for in a manner consistent with the basis used in accounting for original policies issued and the terms of the reinsurance contracts and are included in Premiums and policy fees, ceded, and Benefit recoveries, respectively, in the Consolidated Statements of Operations. Insurance liabilities are reported before the effects of reinsurance. Account balances and future policy benefit reserves and policy and contract claims covered under reinsurance contracts are recorded in Reinsurance recoverables on the Consolidated Balance Sheets. Amounts paid or deemed to have been paid for claims covered by reinsurance contracts are recorded as Receivables on the Consolidated Balance Sheets. Reinsurance recoverables are recognized in a manner consistent with the liabilities related to the underlying reinsured contracts. Amounts due to other insurers on assumed business are recorded as a reinsurance payable, and are included in Other liabilities on the Consolidated Balance Sheets.
A gain recognized when the Company enters into a coinsurance agreement with a third-party reinsurer is deferred and recorded in Other liabilities on the Consolidated Balance Sheets. Such gains are amortized into operations over the revenue-producing period or the claims run-off period of the related reinsured policies. These amortized gains are recorded in Other revenue in the Consolidated Statements of Operations.
| (k) | Deferred Acquisition Costs |
Acquisition costs consist of commissions and other incremental costs that are directly related to the successful acquisition of insurance contracts. Acquisition costs are deferred to the extent recoverable from future policy revenues and gross profits. However, acquisition costs associated with insurance contracts recorded under the fair value option are not deferred as guidance related to the fair value option requires that transaction costs are recorded immediately as an expense. For interest-sensitive products (all issue years) and variable annuity contracts (issued in 2010 and after), acquisition costs are amortized in relation to the present value of expected future gross profits from investments and mortality, morbidity, and expense charges. For variable annuity contracts issued prior to 2010,
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 18 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
acquisition costs are amortized in relation to the present value of estimated gross revenues from investments and mortality, morbidity, and expense charges.
Acquisition costs for accident and health insurance policies are deferred and amortized over the lives of the policies in the same manner as premiums are earned. For traditional life and group life products, such costs are amortized over the projected earnings pattern of the related policies using the same actuarial assumptions used in computing future policy benefit reserves.
DAC are reviewed for recoverability and loss recognition, at least annually, and adjusted when necessary. The evaluation is a two-step process where current policy year issues are evaluated for recoverability, and then in-force policies are evaluated for loss recognition. Before assessing recoverability and loss recognition, DAC are capped, if necessary, such that the balance cannot exceed the original capitalized costs plus interest.
Changes in assumptions can have an impact on the amount of DAC reported for annuity and life insurance products and their related amortization patterns. In the event experience differs from assumptions or assumptions are revised, the Company is required to record an increase or decrease in DAC amortization expense, which is referred to as DAC unlocking. In general, increases in the estimated investment spreads and fees result in increased expected future profitability and may decrease the rate of DAC amortization, while increases in costs of product guarantees, and lapse/surrender and mortality assumptions reduce the expected future profitability of the underlying business and may increase the rate of DAC amortization.
The Company formally evaluates the appropriateness of the best-estimate assumptions on an annual basis. If the economic environment or policyholder behavior changes quickly and substantially, assumptions will be reviewed more frequently to affirm best estimates. Any resulting DAC unlocking is reflected prospectively in Change in DAC, net in the Consolidated Statements of Operations.
Adjustments to DAC are made to reflect the corresponding impact on the present value of expected future gross profits and revenues from unrealized gains and losses on available-for-sale investments used to support policyholder liabilities (commonly known as shadow DAC). These adjustments are included in AOCI and are explained further in the Investments section of this note.
Adjustments may also be made to the estimated gross profits (EGP) or estimated gross revenues related to DAC that correspond to deferred annuities and universal life products for investment activity, such as write-downs on other-than-temporarily impaired fixed-maturity securities, and realized gains and losses. Management action may result in assumption changes in the DAC models, such as adjustments to expected future gross profits or revenues used, as well as in-force management action such as crediting rate changes or index rate cap adjustments. This approach applies to fixed-maturity securities purchased at investment grade only and not noninvestment-grade items that were purchased with other yield considerations. See further discussion of DAC unlocking in note 9.
The Company assesses internal replacements on insurance contracts to determine whether such modifications significantly change the contract terms. An internal replacement represents a
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 19 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
modification in product benefits, features, rights, or coverages that occurs by the exchange of an in-force insurance contract for a new insurance contract, or by amendment, endorsement, or rider to a contract. If the modification substantially changes the contract, the remaining DAC on the original contract is immediately expensed and any new DAC on the replacement contract are deferred. If the contract modification does not substantially change the contract, DAC amortization on the original contract continues and any new acquisition costs associated with the modification are immediately expensed.
| (l) | Deferred Sales Inducements |
Sales inducements are product features that enhance the investment yield to the contractholder on the contract. The Company offers two types of sales inducements on certain universal life and annuity contracts. The first type, an immediate bonus, increases the account value at inception, and the second type, a persistency bonus, increases the account value at the end of a specified period.
Annuity sales inducements are deferred when credited to contractholders and life sales inducements are deferred and recognized as part of the liability for policy benefits. DSI are reported in Other assets on the Consolidated Balance Sheets. They are amortized over the expected life of the contract in a manner similar to DAC and are reviewed annually for recoverability. DSI capitalization and amortization are recorded in Policyholder benefits within the Consolidated Statements of Operations.
Adjustments to DSI are made to reflect the estimated corresponding impact on the present value of expected future gross profits and revenues from unrealized gains and losses on available-for-sale investments used to support policyholder liabilities (commonly known as shadow DSI). These adjustments are included in AOCI and are explained further in the Investments section of this note.
Adjustments may also be made to DSI related to deferred annuities for investment activity, such as write-downs on other-than-temporarily impaired fixed-maturity securities, and realized gains and losses. Management action may result in assumption changes in the DSI models, such as adjustments to expected future gross profits used, as well as policyholder changes, such as credited rate changes. This approach applies to fixed-maturity securities purchased at investment grade only and not noninvestment grade items that were purchased with other yield considerations.
| (m) | Income Taxes |
The Company and its subsidiaries file a consolidated federal income tax return with AZOA and all of its wholly owned subsidiaries. The consolidated tax allocation agreement stipulates that each company participating in the return will bear its share of the tax liability pursuant to certain tax allocation elections under the Internal Revenue Code and its related regulations and reimbursement will be in accordance with an intercompany tax reimbursement arrangement. The Company, and its insurance subsidiaries generally will be paid for the tax benefit on their losses and any other tax attributes to the extent they could have obtained a benefit against their post-1990 separate return tax liability.
The Company provides for federal income taxes based on amounts the Company believes it ultimately will owe. Inherent in the provision for federal income taxes are estimates regarding the
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 20 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
deductibility of certain items and the realization of certain tax credits. In the event the ultimate deductibility of certain items or the realization of certain tax credits differs from estimates, the Company may be required to significantly change the provision for federal income taxes recorded on the Consolidated Balance Sheets. Any such change could significantly affect the amounts reported within the Consolidated Statements of Operations. Management uses best estimates to establish reserves based on current facts and circumstances regarding tax exposure items where the ultimate deductibility is open to interpretation. Quarterly, management evaluates the appropriateness of such reserves based on any new developments specific to their fact patterns. Information considered includes results of completed tax examinations, Technical Advice Memorandums, and other rulings issued by the Internal Revenue Service or the tax courts.
The Company utilizes the asset and liability method of accounting for income tax. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. Valuation allowances are established when it is determined that it is more likely than not that the deferred tax asset will not be fully realized or that the related temporary differences will not reverse over time (see further discussion in note 11).
| (n) | Goodwill and Intangible Assets |
Goodwill is the excess of the amount paid to acquire a company over the fair value of its tangible net assets, VOBA, other identifiable intangible assets, and valuation adjustments (such as impairments), if any. Goodwill is reported in Other assets on the Consolidated Balance Sheets.
Goodwill is evaluated annually for impairment at the reporting unit level, which is one level below an operating segment. Goodwill of a reporting unit is also tested for impairment on an interim basis if a triggering event occurs, such as a significant adverse change in the business climate or a decision to sell or dispose of a business unit.
Intangible assets are required to be recognized apart from goodwill when they arise from contractual or legal rights or are capable of being separated and valued when sold, transferred, licensed, rented, or exchanged. The Company determines the useful life and amortization period for each intangible asset identified at acquisition, and continually monitors these assumptions. An intangible asset with a determinable life is amortized over that period, while an intangible asset with an indefinite useful life is not amortized.
The Company’s intangible assets include trademarks, trade names, service marks, agent lists, noncompete agreements, and state insurance licenses, and are reported in Other assets on the Consolidated Balance Sheets. These intangible assets were assigned values using the present value of projected future cash flows and are generally amortized over five years using the straight-line method.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 21 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
Recoverability of the value of the determinable life intangible assets is assessed whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Recoverability of the value of the indefinite life intangible assets is assessed annually or earlier if events or changes in circumstances indicate the carrying amount may not be recoverable.
| (o) | Value of Business Acquired |
The value of insurance in-force purchased is recorded as the VOBA and is reported in Other assets on the Consolidated Balance Sheets. The initial value was determined by an actuarial study using the present value of future profits in calculating the value of the insurance purchased. An accrual of interest is added to the unamortized balance using the rates credited to the policyholder accounts. The balance is amortized in relation to the present value of expected future gross profits in the same manner as DAC. The amortization period is expected to be approximately 20 years from the date the business was acquired; however, the Company continually monitors this assumption. If EGP differ from expectations, the amortization of VOBA is adjusted on a retrospective or prospective basis, as appropriate.
Adjustments to VOBA are made to reflect the estimated corresponding impact on the present value of expected future gross profits from unrealized gains and losses on available-for-sale investments used to support policyholder liabilities (commonly known as shadow VOBA). These adjustments are included in AOCI and are explained further in the Investments section of this note.
The recoverability of VOBA is evaluated annually, or earlier if factors warrant, based on estimates of future earnings related to the insurance in-force purchased. If the existing insurance liabilities, together with the present value of future net cash flows from the blocks of business acquired, are not sufficient to recover VOBA, the difference, if any, is charged to expense through General and administrative expenses in the Consolidated Statements of Operations.
| (p) | Held-for-sale Assets and Liabilities |
The Company has reported a subsidiary as held-for-sale. A buyer has been identified and a letter of intent has been signed. The Company reclassified assets of $13,615 and $12,436 as of December 31, 2016 and 2015, respectively, to held-for-sale and are recorded in Other assets on the Consolidated Balance Sheets. The Company reclassified liabilities of $2,754 and $3,223 as of December 31, 2016 and 2015, respectively, to held-for-sale and are recorded in Other liabilities on the Consolidated Balance Sheets. Income and expenses were reclassified as a result of the signed letter of intent and are recorded in Other revenue in the Consolidated Statements of Operations. See note 25 for further details regarding the sale of the subsidiary.
| (q) | Home Office Property and Equipment |
Home office property consists of buildings and land. Equipment consists of furniture, office equipment, leasehold improvements, and computer hardware and software. Both are reported at cost, net of accumulated depreciation, in Other assets on the Consolidated Balance Sheets. Major upgrades and improvements are capitalized, while maintenance and repairs are expensed when incurred. Depreciation is computed over the estimated useful lives (3 – 7 years, depending on the asset) of depreciable assets using the straight-line method. The cost and accumulated depreciation for home
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 22 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
office property and equipment sold, retired, or otherwise disposed of are relieved from the accounts, and resulting gains or losses are reflected in General and administrative expenses within the Consolidated Statements of Operations. The property and equipment balance was $180,328, net of accumulated depreciation of $94,395 as of December 31, 2016 and $189,065 net of accumulated depreciation of $85,899 as of December 31, 2015. During 2015, the Company disposed $80,289 of assets with an accumulated depreciation of $80,289 that were no longer in service. There was no gain or loss as a result of this transaction. Pre-operating and start-up costs incurred in connection with the construction of the Company’s headquarters were capitalized until the facility became operational. Interest was also capitalized in connection with the construction and recorded as part of the asset. These costs are being amortized, using the straight-line method, over a 39-year period. The amounts of capitalized costs amortized, including interest was $4,394, $4,393, and $4,390 during 2016, 2015, and 2014, respectively.
| (r) | Corporate-Owned Life Insurance |
Corporate-owned life insurance (COLI) is recognized as the amount that could be realized assuming the surrender of an individual-life policy (or certificate in a group policy), otherwise known as the cash surrender value. Subsequent measurement of the contract is also at the cash surrender value with changes in cash surrender value recognized in Other revenue in the Consolidated Statements of Operations. The COLI policies are reported in Other assets on the Consolidated Balance Sheets.
| (s) | Separate Accounts and Annuity Product Guarantees |
The Company issues variable annuity and life contracts through its separate accounts for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contractholder. The Company also issues variable-indexed annuity contracts to its customers. These products have investment options similar to fixed-indexed annuities, but allow contractholders to invest in a variety of variable separate account investment options. The Company recognizes gains or losses on transfers from the general account to the separate accounts at fair value to the extent of contractholder interests in separate accounts, which are offset by changes in contractholder liabilities. The Company also issues variable annuity and life contracts through its separate accounts where the Company provides certain contractual guarantees to the contractholder. These guarantees are in the form of a guaranteed minimum death benefit (GMDB), a guaranteed minimum income benefit (GMIB), a guaranteed minimum accumulation benefit (GMAB), and a guaranteed minimum withdrawal benefit (GMWB). The investments backing the guarantees are held in the general account. These guarantees provide for benefits that are payable to the contractholder in the event of death, annuitization, exercise of the living withdrawal benefit, or at specified dates during the accumulation period.
Separate account assets supporting variable annuity contracts represent funds for which investment income and investment gains and losses accrue directly to contractholders. Each fund has specific investment objectives and the assets are carried at fair value. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company. Separate account assets and liabilities are reported as summary totals on the Consolidated Balance Sheets. Amounts charged to the contractholders for mortality and contract maintenance are included in Policy fees in the Consolidated Statements of Operations. Administrative and other services are
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 23 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
included in Fee and commission revenue in the Consolidated Statements of Operations. These fees have been earned and assessed against contractholders on a daily or monthly basis throughout the contract period and are recognized as revenue when assessed and earned. Changes in GMDB and GMIB are calculated in accordance with the Financial Services – Insurance Topic of the Accounting Standards Codification (Codification) and are included in Policyholder benefits in the Consolidated Statements of Operations. GMAB and GMWB are considered to be embedded derivatives under the Derivatives and Hedging Topic of the Codification, and the changes in these embedded derivatives are included in Change in fair value of annuity and life embedded derivatives in the Consolidated Statements of Operations.
The GMDB net amount at risk is defined as the guaranteed amount that would be paid upon death, less the current accumulated contractholder account value. The GMIB net amount at risk is defined as the current amount that would be needed to fund expected future guaranteed payments less the current contractholder account value, assuming that all benefit selections occur as of the valuation date. The GMAB net amount at risk is defined as the current guaranteed value amount that would be added to the contracts less the current contractholder account value. The GMWB net amount at risk is defined as the current accumulated benefit base amount less the current contractholder account value.
The GMDB provides a specified minimum return upon death. The survivor has the option to terminate the contract or continue it and have the death benefit paid into the contract. The Company’s GMDB options have the following features:
| • | Return of Premium – Provides the greater of account value or total deposits made to the contract, less any partial withdrawals and assessments. |
| • | Reset – Provides the greater of a return of premium death benefit or the most recent five-year anniversary account value (prior to age 81), adjusted for withdrawals. |
| • | Ratchet – Provides the greater of a return of premium death benefit or the highest specified anniversary account value (prior to age 81), adjusted for withdrawals. Currently, there are three versions of ratchet, with the difference based on the definition of anniversary: quarterly – evaluated quarterly, annual – evaluated annually, and six-year – evaluated every sixth year. |
| • | Rollup – Provides the greater of a return of premium death benefit or premiums adjusted for withdrawals accumulated with a compound interest rate. There are two variations of rollup interest rates: 5% with no cap and 3% with a cap of 150% of premium. This GMDB locks in at age 81. |
| • | Earnings Protection Rider – Provides the greater of a return of premium death benefit or a death benefit equal to the contract value plus a specified percentage of the earnings on the contract at the date of death. |
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 24 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
The GMIB is a living benefit that provides the contractholder with a guaranteed annuitization value. The GMIB features are:
| • | Return of Premium – Provides the greater of account value or total deposits made to the contract less any partial withdrawals and assessments. |
| • | Ratchet – Provides an annuitization value equal to the greater of account value, net premiums, or the highest one-year anniversary account value (prior to age 81), adjusted for withdrawals. |
| • | Rollup – Provides an annuitization value equal to the greater of account value and premiums adjusted for withdrawals accumulated with a compound interest rate, which is subject to a cap for certain interest rates and products. |
The GMDB and GMIB liabilities are determined each period by estimating the expected future claims in excess of the associated account balances. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to Policyholder benefits in the Consolidated Statements of Operations, if actual experience or other evidence suggests that earlier assumptions should be revised.
The GMAB is a living benefit that provides the contractholder with a guaranteed value that was established at least five years prior at each contract anniversary. This benefit is first available at the fifth contract anniversary, seventh contract anniversary, or tenth contract anniversary depending on the type of contract. Depending on the contractholder’s selection at issue, this value may be either a return of premium or may reflect market gains, adjusted at least proportionately for withdrawals. The contractholder also has the option to reset this benefit.
The GMWB is a living benefit that provides the contractholder with a guaranteed amount of income in the form of partial withdrawals. The benefit is payable provided the covered person is between the specified ages in the contract. The benefit is a fixed rate (depending on the age of the covered person) multiplied by the benefit base in the first year the benefit is taken and contract value in following years. The benefit does not decrease if the contract value decreases due to market losses. The benefit can decrease if the contract value is reduced by withdrawals. The benefit base used to calculate the initial benefit is the maximum of the contract value, the quarterly anniversary value, or the guaranteed annual increase of purchase payments (either simple or compound interest, depending on the contract). Additionally, there is a GMWB living benefit where the benefit is an initial payment percentage established at issue, based on issue age. For each year there is a year-over-year contract value increase, the payment percentage will increase by 1.0% (up to age 91). This payment percentage is applied against total purchase payments instead of a benefit base value.
The GMAB and GMWB liabilities are determined each period as the difference between expected future claims and the expected future profits. One result of this calculation is that these liabilities can be negative (contra liability). If the sum of the total embedded derivative balance is negative, the Company will reclassify the balance as an asset on the Consolidated Balance Sheets. The Company regularly evaluates estimates used and adjusts the additional liability balance, with a related charge or credit to Change in fair value of annuity and life embedded derivatives in the Consolidated Statements of Operations, if actual experience or other evidence suggests that earlier assumptions
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 25 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
should be revised. In the calendar year that a product launches, the reserves are set to zero, until the policy’s first anniversary date.
GMAB cash flows are discounted using a rate equal to current month’s LIBOR plus a Company specific spread. The expected life-contingent GMWB payments are discounted using a blend of short and long term rates to the date the account value is expected to be exhausted. These obligations and all cash flows are then discounted to the current date using LIBOR plus a spread for the Company’s own nonperformance risk.
The Company issues fixed-indexed annuities with a GMWB as an optional rider. The GMWB has a roll-up feature. The net amount at risk is partially limited, because the contractholder account value has an annual credit that is floored at zero. Since the account value cannot decrease, in contrast to a variable annuity, the difference between the withdrawal value and the account value will not diverge to the degree that is possible in a variable annuity.
| (t) | Account Balances and Future Policy Benefit Reserves |
The Company establishes liabilities for amounts payable to policyholders associated with annuity, life insurance, and LTC policies sold. Policy and contract account balances for interest-sensitive products, which include universal life and fixed deferred annuities, are generally carried at accumulated contract values. For fixed-indexed annuity products, the policyholder obligation is divided into two parts – one part representing the value of the underlying base contract (host contract) and the second part representing the fair value of the expected index benefit over the life of the contract. The value of the host contract accrues to guaranteed minimum amounts of the base policy. The index benefit is valued at fair value using current capital market assumptions, such as index and volatility, to estimate future index levels. The index benefit valuation is also dependent upon estimates of future policyholder behavior. The Company must include provisions for the Company’s own credit risk and for risk that the Company’s assumptions about policyholder activity could differ from actual experience. The fair value determination of the index benefit is sensitive to the economic market and interest rate environment, as it is discounted at current market interest rates. There is volatility in this liability due to these external market sensitivities.
Certain two-tier fixed annuity products provide additional benefits payable upon annuitization for period-certain and life-contingent payout options. An additional annuitization reserve is accrued using assumptions consistent with those used in estimating gross profits for purposes of amortizing DAC.
Policy and contract account balances for variable annuity products are carried at accumulated contract values. Future policy benefit reserves for any death and income benefits that may exceed the accumulated contract values are established using a range of economic scenarios and are accrued for using assumptions consistent with those used in estimating gross profits or gross revenues for purposes of amortizing DAC. Future policy benefit reserves for accumulation and withdrawal benefits that may exceed account values are established using capital market assumptions, such as index and volatility, along with estimates of future policyholder behavior.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 26 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
Future policy benefit reserves on traditional life products are computed by the net level premium method based upon estimated future investment yield, mortality and withdrawal assumptions, commensurate with the Company’s experience, modified as necessary to reflect anticipated trends, including possible unfavorable deviations. Most life reserve interest assumptions range from 2.3% to 6.0%.
Future policy benefit reserves on LTC products are computed using a net level reserve method. Reserves are determined as the excess of the present value of future benefits over the present value of future net premiums and are based on best estimate assumptions at the time of issue for morbidity, mortality, lapse, and interest with provisions for adverse deviation. Most LTC reserve interest assumptions range from 5.0% to 6.0%. An additional reserve has been established to provide for future expected losses that are anticipated to occur after a period of profits. The reserve accrual will be over the profit period and is based on best estimate assumptions as of the current accrual period without provisions for adverse deviation.
| (u) | Policy and Contract Claims |
Policy and contract claims include the liability for claims reported but not yet paid, claims incurred but not yet reported (IBNR), and claim settlement expenses on the Company’s accident and health business. Actuarial reserve development methods are generally used in the determination of IBNR liabilities. In cases of limited experience or lack of credible claims data, loss ratios are used to determine an appropriate IBNR liability. Claim and IBNR liabilities of a short-term nature are not discounted, but those claim liabilities resulting from disability income or LTC benefits include interest and mortality discounting.
| (v) | Stockholder’s Equity, Accumulated Unrealized Foreign Currency |
Foreign currency translation adjustments are related to the conversion of foreign currency upon the consolidation of a foreign branch (see further discussion in note 23). The net assets of the Company’s foreign operations are translated into U.S. dollars using exchange rates in effect at each year-end. Translation adjustments arising from differences in exchange rates from period to period are included in Foreign currency translation adjustments, net of tax, reported as a separate component of comprehensive income within the Consolidated Statements of Comprehensive Income.
| (w) | Permitted and Prescribed Statutory Accounting Practices |
The Company is required to file annual statements with insurance regulatory authorities, which are prepared on an accounting basis permitted or prescribed by such authorities. Permitted statutory accounting practices encompass all accounting practices that are not prescribed; such practices differ from state to state, may differ from company to company within a state, and may change in the future. Prescribed statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (NAIC). The Company and its subsidiaries did not have any permitted practices in effect for 2016.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 27 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
The Company’s subsidiary, Allianz Life Insurance Company of Missouri, LLC (AZMO), has adopted an accounting practice that is prescribed by the Department of Insurance, Financial Institutions, and Professional Registration of the State of Missouri (the Missouri Department). The effect of the accounting practice allows a letter of credit to be carried as an admitted asset. Under NAIC statutory accounting principles (SAP), this letter of credit would not be allowed as an admitted asset. This prescribed practice does not impact the net income of AZMO and results in a $111,571 increase to statutory surplus as of December 31, 2016.
The Company, or its subsidiaries, does not have any other prescribed practices that had an impact on net income or statutory surplus as of December 31, 2016.
| (x) | Recently Issued Accounting Pronouncements – Adopted |
In December 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-19, Technical Corrections and Improvements, to make various minor changes and improvements to various sections of accounting guidance within the Codification. The FASB did not anticipate that these amendments would affect current accounting practice. The amendments on insurance are intended to simplify and improve the readability of select guidance and in particular result in clarification of glossary terms. The majority of the amendments in this update are effective immediately. The amendments in this update do not have an impact on the Consolidated Financial Statements.
In September 2015, the FASB released ASU 2015-16, Business Combinations, to require that an acquirer recognize changes to provisional amounts that are identified during the measurement period in the period in which the adjustment amounts are determined, rather than retrospectively adjusting with a corresponding adjustment to goodwill. The amendments are effective for fiscal years and interim periods beginning after December 15, 2015. The update does not impact the Consolidated Financial Statements.
In July 2015, the FASB issued ASU 2015-12, Plan Accounting, to reduce complexity in employee benefit plan accounting. Currently, employee benefit plan guidance requires fully benefit-responsive investment contracts to be measured at contract value. The guidance designates contract value as the only required measure for fully benefit-responsive investment contracts and is effective for fiscal years beginning after December 15, 2015. The Company is not an employee benefit plan; therefore, the guidance does not impact the Consolidated Financial Statements.
In May 2015, the FASB released ASU 2015-09, Disclosures about Short-Duration Contracts, to add disclosure requirements for the liability for unpaid claims and claim adjustment expenses on short-duration insurance contracts. The update is effective for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. The amount of short-duration contracts is not material and therefore no disclosures were included in the Consolidated Financial Statements.
In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). The existing Topic 820, Fair Value Measurement, permits a practical expedient to measure the fair value of certain investments using the
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 28 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
net asset value per share of the investment. The investments valued using the practical expedient are categorized within the hierarchy on the basis of whether the investment is redeemable with the investee at net asset value on the measurement date, never redeemable with the investee at net asset value, or redeemable with the investee at net asset value at a future date. The amendments in this update remove the requirement to categorize within the fair value hierarchy all investments for which fair values are measured using the net asset value per share practical expedient. The amendments are effective for fiscal years beginning after December 15, 2015 and interim periods within those years. This guidance does not have an impact on the Consolidated Financial Statements as the Company does not currently value any investments using the net asset value per share practical expedient.
In April 2015, the FASB issued ASU 2015-05, Intangibles- Goodwill and Other- Internal-Use Software, to provide guidance on cloud computing arrangements. Existing GAAP does not include explicit guidance about a customer’s accounting for fees paid in a cloud computing arrangement. The amendments provide guidance to customers about whether a cloud computing arrangement includes a software license. If the arrangement contains a software license, it is accounted for like other software licenses. If no software license exists, then the arrangement is accounted for as a service contract. The amendments will be effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. This update does not have a material impact on the Consolidated Financial Statements.
In April 2015, the FASB issued ASU 2015-03, Interest- Imputation of Interest, to simplify the presentation of debt issuance costs. The update requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The amendments are effective for fiscal years beginning after December 15, 2015. The update does not have an impact on the Consolidated Financial Statements.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis, to reduce the number of consolidation models and place more emphasis on risk of loss when determining a controlling financial interest. Specifically, the amendments: 1) modify the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities; 2) eliminate the presumption that a general partner should consolidate a limited partnership; 3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and 4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments are effective for fiscal years and interim periods beginning after December 15, 2015. The update does not have a material impact on the Consolidated Financial Statements.
In January 2015, the FASB issued ASU 2015-01, Extraordinary and Unusual Items, to simplify financial statements by eliminating the concept of extraordinary items. The amendments are effective for interim and fiscal years beginning after December 15, 2015. The Company does not currently report any extraordinary items; therefore, the amendment does not impact the Consolidated Financial Statements.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 29 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern, to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments in this update are intended to reduce diversity in the timing and content of footnote disclosures. Additional disclosures are required if the Company believes there is substantial doubt about the entity’s ability to continue as a going concern. The amendments in this update are effective for fiscal years ending after December 15, 2016 and for annual and interim periods, thereafter. The amendments in this update do not have an impact on the Consolidated Financial Statements as management believes there is not substantial doubt the entity’s ability to continue as a going concern.
In August 2014, the FASB issued ASU 2014-13, Measuring the Financial Liabilities of a Consolidated Collateralized Financing Entity, to release revised guidance related to consolidations of VIEs that are a collateralized financing entity, such as a collateralized debt obligation (CDO) or a collateralized loan obligation entity, when the reporting entity determines that it is the primary beneficiary. This revision will apply to reporting entities that are required to consolidate a collateralized financing entity under the VIE guidance when: 1) the reporting entity measures the financial assets and liabilities of that collateralized financing entity at fair value based on other Topics; and 2) the changes in the fair value are reflected in earnings. The amendments are effective for fiscal years beginning after December 15, 2015. Early adoption is permitted. The guidance does not have an impact on the Consolidated Financial Statements.
In June 2014, the FASB issued ASU 2014-12, Accounting for Share-based Payments when the Terms of an Award Allow a Performance Target to be Achieved after the Requisite Service Period. These revisions apply to entities that grant their employees share-based payments in which the terms of the award provide that a performance target affects vesting could be achieved after the requisite service period. The amendments are effective for fiscal years beginning after December 15, 2015. Early adoption is permitted. The guidance does not have a material impact on the Consolidated Financial Statements.
In January 2014, the FASB issued ASU 2014-01, Investments—Equity Method and Joint Ventures, that applies to investments in qualified affordable housing projects through limited liability entities that are flow-through entities for tax purposes. The amendments allow reporting entities to make an accounting policy election to account for investments in LIH tax credits using the proportional amortization method if certain conditions are met. For reporting entities that meet the conditions for and elect to use the proportional amortization method to account for LIH projects, all amendments apply. For reporting entities that do not meet the conditions or that do not elect the proportional amortization method, only the amendments related to disclosures apply. This guidance is effective for fiscal years beginning after December 15, 2014. The Company has elected to early adopt this guidance and has adopted it effective January 1, 2014. This update has been applied prospectively, as applying the guidance retrospectively would not result in materially different financial information.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 30 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
| (y) | Recently Issued Accounting Pronouncements – To Be Adopted |
The FASB issued the following updates as part of their comprehensive new revenue recognition standard:
| • | ASU 2014-09, Revenue from Contracts with Customers. This update defines the new standard for recognizing revenue from contracts when goods and services are transferred to a customer in exchange for payment. The model requires 1) identifying contracts with a customer; 2) identifying separate performance obligations; 3) determining the transaction price; 4) allocating the transaction price to the separate performance obligations; and 5) recognizing revenue when (or as) the entity satisfies a performance obligation. The revenue recognition standard does not apply to financial instruments or to insurance contracts. However, the standard will require significantly more disclosures about items that are recorded under the new revenue recognition model. The amendments in this update are effective for fiscal years beginning after December 15, 2017. |
| • | ASU 2016-08, Revenue Recognition – Principal versus Agent (reporting revenue gross versus net). This update adds clarifications to the principal versus agent guidance contained within ASU 2014-09 and provides guidance to aid in the assessment of control. Under the new guidance, an entity that controls the specified good or services before it is transferred to a customer is considered a principal and will recognize revenue on a gross basis. The amendments in this update are effective concurrently with ASU 2014-09. |
| • | ASU 2016-12, Revenue Recognition – Narrow-scope Improvements and Practical Expedients. This update provides clarifying guidance impacting several areas of the new standard, including noncash consideration and assessing collectability. The amendments in this update are effective concurrently with ASU 2014-09. |
| • | ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. This update makes various minor clarifications to the guidance issued in ASU 2014-09. The amendments in this update are effective concurrently with ASU 2014-09. |
Currently, fee and commission income is recognized upon completion of the service and is recorded in Fee and commission revenue in the Consolidated Statements of Operations. Under the new standard, the Company will be required to recognize fee and commission income when the intermediary has satisfied its performance obligation (provision of placement services) and the customer has contractually agreed to the terms of the insurance policy so long as it is probable that the agreement will not be subject to reversal. The new standard will result in an acceleration in revenue recognition for certain commission and fees compared to the current method which requires revenue recognition when it is earned and realized/realizable including consideration of when it is fixed or determinable. These fees and commissions are not material to the Company’s overall revenue. In addition, management, advisory, and fund administrative fees are currently recognized periodically over the respective investment period for which the services are performed and are recorded in Other revenue on the Consolidated Statements of Operations. The new standard does not impose a change to the Company’s current recognition of management, advisory, and fund administrative fees. Further, revenue is currently recognized on a gross basis as earned as the
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 31 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
Company maintains control of the good or service before it is transferred. The amendments related to principal versus agent considerations do not impose a change to this recognition.
The Company continues to evaluate the impact of the update and respective amendments, but does not expect a material impact on revenue.
In October 2016, the FASB issued ASU 2016-17, Consolidation: Interests Held Through related Parties That Are under Common Control, to require a reporting entity to include all of its direct variable interests in a VIE, and on a proportionate basis, its indirect variable interests in a VIE held through related parties, including related parties that are under common control with the reporting entity when determining whether the reporting entity is the primary beneficiary of the VIE, and therefore required to consolidate the VIE. The amendments in this update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments in this update do not have an impact on the Consolidated Financial Statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other than Inventory, to require entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when it is sold externally. The amendments in this update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact of the amendments in this update.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, to clarify or provide additional guidance regarding eight specific cash flow issues. These issues address the following topics: 1) debt prepayment or debt extinguishment costs; 2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; 3) contingent consideration payments made after a business combination; 4) proceeds from the settlement of insurance claims; 5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; 6) distributions received from equity method investees; 7) beneficial interests in securitization transactions; and 8) separately identifiable cash flows and application of the predominance principle. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently assessing the impact of this update.
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments, to replace the existing incurred loss impairment model with a new methodology that reflects expected credit losses and requires the entity to consider more information to develop credit loss estimates. The update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted after December 15, 2018. The Company is currently assessing the impact of this update.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation, to update share-based payment accounting for income tax consequences, and classification of awards on the balance sheet as well as the statement of cash flows. The amendments in this update are effective for
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 32 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
fiscal years beginning after December 15, 2016 and interim periods within those years. Early adoption is permitted. The Company does not anticipate the amendments in this update to have an impact on the Consolidated Financial Statements, other than disclosing the entity-wide election to continue estimating forfeitures for share-based payments.
In March 2016, the FASB issued ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting, which eliminates the requirement that, upon equity method qualification due to an increase in ownership interest, an investor must adjust the investment, results of operations, and retained earnings retroactively. The entity must recognize the unrealized holding gain or loss currently in AOCI through earnings at the date of qualification. The amendments in this update are effective for all fiscal years and interim periods beginning after December 15, 2016. The Company does not anticipate the amendments in this update to have a material impact upon adoption.
In March 2016, the FASB issued ASU 2016-06, Contingent Put and Call Options in Debt Instruments, to provide clarifying guidance regarding the assessment of whether contingent call or put options on debt instruments are clearly related to their debt hosts. The amendments in this update eliminate diversity in practice in assessing embedded contingent call and put options in debt instruments by requiring an entity to make the assessment solely with the four-step decision process. The amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The amendments in this update do not have an impact on the Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, which adds guidance to clarify that in the event of a change in counterparty to the derivative instrument designated as a hedging instrument, the change will not require de-designation unless other criteria are also present. The amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim periods within those years. The Company does not anticipate the amendments in this update to have a material impact upon adoption.
In February 2016, the FASB issued ASU 2016-02, Leases, to require that the lessee recognize a right-of-use asset and a lease liability for all leases. There continues to be a distinction between finance leases and operating leases; however, operating leases will now require that the lease assets and liabilities be recognized in the statement of financial position. Lessor accounting remains largely unchanged. The amendments in this update are effective for fiscal years beginning after December 15, 2018, and interim periods within those years. The Company is currently assessing the impact of the amendments in this update. The Company does not anticipate a material impact as it does not hold material leases as a lessee; however, it does anticipate that currently held leases would require recognition of a right-of-use asset and lease liability in accordance with the update.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, to make various targeted improvements to the accounting for financial instruments, especially equity investments. In particular, the amendments in this update provide improvements to recognition, measurement, presentation and disclosure guidance. The amendments
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 33 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
in this update are effective for fiscal years beginning after December 15, 2017 and interim periods thereafter. The Company is currently assessing the impact of the amendments in this update.
| (z) | Accounting Changes |
On April 1, 2014, the Company applied a prospective change to its method of calculating DAC amortization for variable annuity policies issued prior to 2010. This was a change in estimate that is inseparable from the effect of a related change in accounting principle. For these annuities, acquisition costs are now amortized in relation to the present value of estimated gross revenues, whereas previously the amortization was based on estimated future gross profits. The implementation of the new DAC amortization will better reflect the revenue pattern of the pre-2010 variable block of business, which is currently in run-off. The implementation of this change resulted in a decrease in income from operations before income taxes of approximately $165,790 for the year ended December 31, 2014.
On December 1, 2014, the Company applied a prospective change to its method of calculating DAC amortization for variable annuity policies issued after 2010. The change in estimate will minimize accounting mismatches on interest and claim projections within the EGP calculation. The implementation of this change resulted in a decrease in income from operations before income taxes of approximately $45,623 for the year ended December 31, 2014.
In 2016, the Company elected one-line reporting to disclose reinvested collateral received from securities lending transactions due to the amendment of its securities lending agreement with an unaffiliated bank. Under the amended agreement, the Company can now receive collateral with maturities greater than 90 days. The Company has applied a retrospective change in which reinvested collateral received from securities lending transactions is now presented in a new caption named Collateral held from securities lending agreements on the Consolidated Balance Sheets. Historically, these balances were presented within Cash and cash equivalents on the Consolidated Balance Sheets. The implementation of one-line reporting provides a more meaningful presentation of its reinvested collateral received from securities lending transactions by increasing visibility of the amount reinvested at the end of each period.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 34 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
The changes to the Consolidated Balance Sheets and Consolidated Statement of Cash Flows are as follows:
| As originally | Effect of | |||||||||||
| reported | As adjusted | Change | ||||||||||
Consolidated Balance Sheets as of December 31, 2015 | ||||||||||||
Cash and cash equivalents | $ | 3,608,092 | 1,127,182 | (2,480,910 | ) | |||||||
Collateral held from securities lending agreements | — | 2,480,910 | 2,480,910 | |||||||||
Consolidated Statement of Cash Flows for the year ended December 31, 2015 | ||||||||||||
Net cash provided by operating activities | $ | 3,213,324 | 2,413,324 | (800,000 | ) | |||||||
Net cash used in investing activities | (7,025,871 | ) | (7,144,829 | ) | (118,958 | ) | ||||||
Cash and cash equivalents at beginning of year | 3,832,569 | 2,270,617 | (1,561,952 | ) | ||||||||
Cash and cash equivalents at end of year | 3,608,092 | 1,127,182 | (2,480,910 | ) | ||||||||
Consolidated Statement of Cash Flows for the year ended December 31, 2014 | ||||||||||||
Net cash used in investing activities | $ | (9,378,243 | ) | (9,915,481 | ) | (537,238 | ) | |||||
Cash and cash equivalents at beginning of year | 2,944,394 | 1,919,680 | (1,024,714 | ) | ||||||||
Cash and cash equivalents at end of year | 3,832,569 | 2,270,617 | (1,561,952 | ) | ||||||||
| (aa) | Reclassifications |
The Company reclassified the earnings of the RSU hedge asset into compensation expense, which is included within General and administrative expenses on the Consolidated Statements of Operations, in accordance with the Stock Compensation Topic of the Codification. This resulted in netting the earnings of the RSU and those of the related RSU hedge asset, consistent with the principal/agent relationship with Allianz SE, the sponsor of the stock-based compensation plan. The reclassification represents a change in principle and did not change total assets, stockholders equity, or net income as previously reported. See further discussion of the stock-compensation plan in note 18.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 35 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
The changes to the Consolidated Statement of Operations are as follows:
| As Reported | As Adjusted | |||||||||||
| 2015 | Reclassification | 2015 | ||||||||||
Revenue: | ||||||||||||
Interest and similar income, net | 4,180,103 | (4,634 | ) | 4,175,469 | ||||||||
|
|
|
|
|
| |||||||
Total Revenue | 5,494,786 | (4,634 | ) | 5,490,152 | ||||||||
|
|
|
|
|
| |||||||
Benefits and expenses: | ||||||||||||
General and administrative expenses | 641,962 | (4,634 | ) | 637,328 | ||||||||
|
|
|
|
|
| |||||||
Total benefits and expenses | 4,651,424 | (4,634 | ) | 4,646,790 | ||||||||
|
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|
|
|
| |||||||
Net income | 843,362 | — | 843,362 | |||||||||
|
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| |||||||
| As Reported | As Adjusted | |||||||||||
| 2014 | Reclassification | 2014 | ||||||||||
Revenue: | ||||||||||||
Interest and similar income, net | 3,957,298 | (1,639 | ) | 3,955,659 | ||||||||
|
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|
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| |||||||
Total Revenue | 7,596,966 | (1,639 | ) | 7,595,327 | ||||||||
|
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| |||||||
Benefits and expenses: | ||||||||||||
General and administrative expenses | 676,815 | (1,639 | ) | 675,176 | ||||||||
|
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|
|
|
| |||||||
Total benefits and expenses | 7,416,778 | (1,639 | ) | 7,415,139 | ||||||||
|
|
|
|
|
| |||||||
Net income | 180,188 | — | 180,188 | |||||||||
|
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| |||||||
Prior year balances related to investments classified as ‘Public utilities’ have been reclassified and are now presented within ‘Corporate securities’. Additionally, the Company reclassified prior year balances previously shown in Short-term securities into Other invested assets on the Consolidated Balance Sheets. The reclassifications did not change total assets, stockholders equity, or net income as previously reported.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 36 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
| (3) | Risk Disclosures |
The following is a description of the significant risks facing the Company and how it attempts to mitigate those risks:
| (a) | Credit Risk |
Credit risk is the risk that issuers of fixed-rate and variable-rate income securities, mortgages on commercial real estate, or other parties with whom the Company has transactions, such as reinsurers and derivative counterparties, default on their contractual obligations, resulting in unexpected credit losses.
The Company mitigates this risk by adhering to investment policies and limits that provide portfolio diversification on an asset class, asset quality, creditor, and geographical basis; and by complying with investment limitations from applicable state insurance laws and regulations. The Company considers all relevant objective information available in estimating the cash flows related to structured securities. The Company actively monitors and manages exposures, and determines whether any securities are impaired. The aggregate credit risk is influenced management’s risk/return preferences, the economic and credit environment, and the ability to manage this risk through liability portfolio management.
For derivative counterparties, the Company mitigates credit risk by tracking and limiting exposure to each counterparty through limits that are reported regularly and, once breached, restricts further trades; establishing relationships with counterparties rated BBB+ and higher; and monitoring the CDS of each counterparty as an early warning signal to cease trading when CDS spreads imply severe impairment in credit quality.
The Company executes Credit Support Annexes (CSA) with all active and new counterparties which further limit credit risk by requiring counterparties to post collateral to a segregated account to cover any counterparty exposure.
| (b) | Credit Concentration Risk |
Credit concentration risk is the risk of increased exposure to significant asset defaults (of a single security issuer or class of security issuers); economic conditions (if business is concentrated in a certain industry sector or geographic area); or adverse regulatory or court decisions (if concentrated in a single jurisdiction) affecting credit. Concentration risk exposure is monitored regularly.
The Company’s Finance Committee, responsible for asset/liability management (ALM) issues, recommends an investment policy to the Company’s Board of Directors (BOD). The investment policy and accompanying investment mandates specify asset allocation among major asset classes and the degree of asset manager flexibility for each asset class. The investment policy complies, at a minimum, with state statutes. Compliance with the policy is monitored by the Finance Committee who is responsible for implementing internal controls and procedures. Deviations from the policy are monitored and addressed. The Finance Committee and, subsequently, the BOD review the investment policy at least annually.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 37 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
To further mitigate this risk, internal concentration limits based on credit rating and sector are established and are monitored regularly. Any ultimate obligor group exceeding these limits is placed on a restricted list to prevent further purchases, and the excess exposure may be actively sold down to comply with concentration limit guidelines. Any exceptions require Chief Risk Officer approval and monitoring by the Risk Committee. Further, the Company performs a quarterly concentration risk calculation to ensure compliance with certain state insurance regulations.
| (c) | Liquidity Risk |
Liquidity risk is the risk that unexpected timing or amounts of cash needed will require liquidation of assets in a market that will result in a realized loss or an inability to sell certain classes of assets such that an insurer will be unable to meet its obligations and contractual guarantees. Liquidity risk also includes the risk that in the event of a company liquidity crisis refinancing is only possible at higher interest rates. Liquidity risk can be affected by the maturity of liabilities, the presence of withdrawal penalties, the breadth of funding sources, and terms of funding sources. It can also be affected by counterparty collateral triggers as well as whether anticipated liquidity sources such as credit agreements are cancelable.
The Company manages liquidity within four specific domains: (1) monitoring product development, product management, business operations, and the investment portfolio; (2) setting ALM strategies; (3) managing the cash requirements stemming from the Company’s derivative dynamic hedging activities; and (4) establishing liquidity facilities to provide additional liquidity. The Company has established liquidity risk limits, which are approved by the Company’s Risk Committee, and the Company monitors its liquidity risk regularly. The Company also sets target levels for the liquid securities in its investment portfolio.
| (d) | Interest Rate Risk |
Interest rate risk is the risk that movements in interest rates or interest rate volatility will cause a decrease in the value of an insurer’s assets relative to the value of its liabilities and/or an unfavorable change in prepayment activity resulting in compressed interest margins.
The Company has an ALM strategy to align cash flows and duration of the investment portfolio with policyholder liability cash flows and duration. The Company further limits interest rate risk on variable annuity guarantees through interest rate hedges.
| (e) | Equity Market Risk |
Equity market risk is the risk that movements in equity prices or equity volatility will cause a decrease in the value of an insurer’s assets relative to the value of its liabilities.
The policy value of the fixed-indexed annuity and fixed-indexed universal life products is linked to equity market indices. The Company economically hedges this exposure with derivatives.
Variable annuity products may provide a minimum guaranteed level of benefits irrespective of market movements. The Company has adopted an economic hedging program to manage the equity risk of these products.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 38 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
The Company monitors the economic and accounting impacts of equity stress scenarios on assets and liabilities regularly.
Basis risk is the risk that the variable annuity hedge asset value changes unexpectedly relative to the value of the underlying separate account funds of the variable annuity contracts. Basis risk may arise from the Company’s inability to directly hedge the underlying investment options of the variable annuity contracts. The Company mitigates this risk through regular review and synchronization of fund mappings, product design features, and hedge design.
| (f) | Operational Risk |
Operational risk is the risk of loss resulting from inadequate or failed internal processes and systems, from human misbehavior or error, or from external events. Operational risk is comprised of the following seven risk categories: (1) external fraud; (2) internal fraud; (3) employment practices and workplace safety; (4) clients/third party, products and business practices; (5) damage to physical assets; (6) business disruption and system failure; and (7) execution, delivery, and process management. Operational risk is comprehensively managed through a combination of core qualitative and quantitative activities.
The Operational Risk Management framework includes the following key activities: (1) loss data capture identifies historical operational events that meet a designated threshold to ensure transparency and remediation of each event; (2) risk-based integrated control system is performed to proactively manage significant operational risk scenarios throughout the organization; and (3) scenario analyses are conducted to quantify operational risk capital.
| (g) | Legal/Regulatory Risk |
Legal/regulatory risk is the risk that changes in the legal or regulatory environment in which the Company operates may result in reduced demand for its products or additional expenses not assumed in product pricing. Additionally, the Company is exposed to risk related to how the Company conducts itself in the market and the suitability of its product sales to contractholders.
The Company mitigates this risk by offering a broad range of products and by operating throughout the United States. The Company actively monitors all market-related exposure and participates in national and international discussions relating to legal, regulatory, and accounting changes that may impact the business. A formal process exists to assess the Company’s risk exposure to changes in regulation including monitoring by the Compliance and Legal departments and regular reporting to the BOD of all known compliance risks and the effectiveness of the approach used to mitigate such risks. In addition, the Company has implemented suitability standards to mitigate suitability risk.
On April 6, 2016, the Department of Labor (DOL) issued a final rule that will significantly expand the definition of “investment advice” and increase the circumstances in which companies and broker-dealers, insurance agencies, and other financial institutions that sell the Company’s products could be deemed a fiduciary when providing investment advice with respect to plans under the Employee Retirement Income Security Act of 1974 (ERISA) or individual retirement accounts (IRAs). It is not yet certain how, if at all, the implementation of this rule will change the Company’s business, results of operations, or financial condition. The DOL has extended the implementation of the rule until
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 39 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
April 2017. The DOL also introduced amendments to longstanding exemptions from the prohibited transaction provisions under ERISA that would increase fiduciary requirements in connection with transactions involving ERISA plans, plan participants and IRAs, and that would apply more onerous disclosure and contract requirements to such transactions. The DOL has introduced an additional transition period for these amendments until January 2018. It may be necessary to change sales representative and/or broker compensation, limit the assistance or advice provided to owners of Company annuities, or otherwise change the manner of design and sales support of the annuities. These changes could have an adverse impact on the level and type of services provided and compliance with the rule could also increase the overall operational costs for the services currently provided.
| (h) | Ratings Risk |
Ratings risk is the risk that rating agencies change their outlook or rating of the Company or a subsidiary of the Company. The rating agencies generally utilize proprietary capital adequacy models in the process of establishing ratings for the Company. The Company is at risk of changes in these models and the impact that changes in the underlying business that it is engaged in can have on such models. To mitigate this risk, the Company maintains regular communications with the rating agencies and evaluates the impact of significant transactions on such capital adequacy models and considers the same in the design of transactions to minimize the adverse impact of this risk. Rating agency capital is calculated and analyzed regularly. Stress tests are performed regularly to assess how rating agency capital adequacy models would be impacted by severe economic events.
| (i) | Mortality/Longevity Risk |
Mortality/Longevity risk is the risk that mortality experience is different than the life expectancy assumptions used by the Company to price its products.
The Company mitigates mortality risk primarily through reinsurance, whereby the Company cedes a significant portion of its mortality risk to third parties. The Company also manages mortality risk through the underwriting process. Both mortality and longevity risks are managed through the review of life expectancy assumptions and experience in conjunction with active product management.
| (j) | Lapse Risk |
Lapse risk is the risk that actual lapse experience evolves differently than the assumptions used for pricing and valuation exercises leading to a significant loss in Company value and/or income.
The Company mitigates this risk by performing sensitivity analysis at the time of pricing to affect product design, regular ALM analysis, and exercising management levers at issue, as well as post-issue as experience evolves. The Company quantifies lapse risk regularly.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 40 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
| (k) | Cyber Security Risk |
Cyber security risk is the risk of losses due to external and/or internal attacks impacting the confidentiality, integrity, and/or availability of key systems, data, and processes reliant on digital technology. The Company has implemented preventative, detective, response, and recovery measures including advanced malware detection, spyware and anti-virus software, phishing filters, email and laptop encryption, web content filtering, and regular scanning of all servers and network devices to identify vulnerabilities. Controls are implemented to prevent and review unauthorized access.
| (l) | Reinsurance Risk |
Reinsurance risk is the risk that reinsurance companies default on their obligation where the Company has ceded a portion of its insurance risk. The Company uses reinsurance to limit its risk exposure to certain business lines and to enable better capital management.
Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company.
The Company mitigates this risk by requiring certain counterparties to meet thresholds related to the counterparty’s credit rating, exposure, or other factors. If the thresholds are not met by those counterparties, they are required to establish a trust or letter of credit backed by assets meeting certain quality criteria. All arrangements are regularly monitored to determine whether trusts or letters of credit are sufficient to support the ceded liabilities and that their terms are being met. Also, the Company reviews the financial standings and ratings of its reinsurance counterparties and monitors concentrations of credit risk to minimize its exposure to significant losses from reinsurer insolvencies regularly.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 41 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
| (4) | Investments |
| (a) | Fixed-Maturity Securities and Equity Securities |
At December 31, 2016 and 2015, the amortized cost or cost, gross unrealized gains, gross unrealized losses, and fair values of available-for-sale and held-to-maturity securities are as shown in the following tables:
| Amortized cost or cost | Gross unrealized gains | Gross unrealized losses | Fair value | |||||||||||||
2016: | ||||||||||||||||
Fixed-maturity securities,available-for-sale: | ||||||||||||||||
U.S. government | $ | 1,712,400 | 41,003 | 16,880 | 1,736,523 | |||||||||||
Agencies not backed by the full faith and credit of the U.S. government | 8,766 | 113 | 22 | 8,857 | ||||||||||||
States and political subdivisions | 9,379,273 | 612,248 | 36,908 | 9,954,613 | ||||||||||||
Foreign government | 426,724 | 21,006 | 8,803 | 438,927 | ||||||||||||
Corporate securities | 60,668,745 | 3,489,117 | 617,795 | 63,540,067 | ||||||||||||
Mortgage-backed securities | 11,615,711 | 188,528 | 153,975 | 11,650,264 | ||||||||||||
Collateralized mortgage obligations | 209,165 | 491 | 11,867 | 197,789 | ||||||||||||
CDOs | 8,861 | 11,070 | — | 19,931 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total fixed-maturity securities, available-for-sale | 84,029,645 | 4,363,576 | 846,250 | 87,546,971 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Fixed-maturity securities, held-to-maturity: | ||||||||||||||||
Corporate securities | 28 | 5 | — | 33 | ||||||||||||
CDOs | — | 3,597 | — | 3,597 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total fixed-maturity securities held-to-maturity | 28 | 3,602 | — | 3,630 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Equity securities, available-for-sale: | ||||||||||||||||
Common stock | 316,541 | 3,625 | — | 320,166 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total available-for-sale and held-to-maturity securities | $ | 84,346,214 | 4,370,803 | 846,250 | 87,870,767 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 42 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
| Amortized cost or cost | Gross unrealized gains | Gross unrealized losses | Fair value | |||||||||||||
2015: | ||||||||||||||||
Fixed-maturity securities, available-for-sale: | ||||||||||||||||
U.S. government | $ | 1,682,642 | 78,089 | 5,407 | 1,755,324 | |||||||||||
Agencies not backed by the full faith and credit of the U.S. government | 10,474 | 91 | 51 | 10,514 | ||||||||||||
States and political subdivisions | 8,533,503 | 514,459 | 49,428 | 8,998,534 | ||||||||||||
Foreign government | 269,608 | 9,675 | 7,116 | 272,167 | ||||||||||||
Corporate securities | 56,402,323 | 2,756,065 | 1,989,705 | 57,168,683 | ||||||||||||
Mortgage-backed securities | 12,263,037 | 296,408 | 61,646 | 12,497,799 | ||||||||||||
Collateralized mortgage obligations | 9,208 | 1,075 | — | 10,283 | ||||||||||||
CDOs | 9,738 | 11,573 | 147 | 21,164 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total fixed-maturity securities, available-for-sale | 79,180,533 | 3,667,435 | 2,113,500 | 80,734,468 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Fixed-maturity securities, held-to-maturity: | ||||||||||||||||
Corporate securities | 55 | 10 | — | 65 | ||||||||||||
CDOs | — | 5,214 | — | 5,214 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total fixed-maturity securities held-to-maturity | 55 | 5,224 | — | 5,279 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Equity securities, available-for-sale: | ||||||||||||||||
Common stock | 71,005 | — | 2,394 | 68,611 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total available-for-sale and held-to-maturity securities | $ | 79,251,593 | 3,672,659 | 2,115,894 | 80,808,358 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
At December 31, 2016 and 2015, the Company did not have any OTTI losses in AOCI.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 43 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
The net unrealized gains on available-for-sale securities, held-for-sale securities and effective portion of cash flow hedges consist of the following at December 31:
| 2016 | 2015 | 2014 | ||||||||||
Available-for-sale securities: | ||||||||||||
Fixed maturity | $ | 3,517,326 | 1,553,935 | 6,258,406 | ||||||||
Equity | 3,625 | (2,394 | ) | 46 | ||||||||
Held-for-sale securities | 614 | 798 | — | |||||||||
Cash flow hedges | (29,547 | ) | 16,013 | 2,269 | ||||||||
Adjustments for: | ||||||||||||
Shadow adjustments | (1,728,234 | ) | (825,607 | ) | (3,542,160 | ) | ||||||
Deferred taxes | (617,324 | ) | (259,961 | ) | (951,480 | ) | ||||||
|
|
|
|
|
| |||||||
Net unrealized gains | $ | 1,146,460 | 482,784 | 1,767,081 | ||||||||
|
|
|
|
|
| |||||||
The unrealized gain on held-for-sale securities in 2016 and 2015 relates to fixed maturity securities that were transferred from available-for-sale due to the expected sale of a subsidiary. See note 2 for further details.
The amortized cost and fair value of available-for-sale and held-to-maturity fixed-maturity securities at December 31, 2016, by contractual maturity, are shown below:
| Amortized cost | Fair value | |||||||
Available-for-sale fixed-maturity securities: | ||||||||
Due in one year or less | $ | 1,546,150 | 1,578,807 | |||||
Due after one year through five years | 13,572,313 | 14,342,672 | ||||||
Due after five years through ten years | 19,833,072 | 20,189,034 | ||||||
Due after ten years | 36,284,633 | 38,581,463 | ||||||
Structured securities | 12,793,477 | 12,854,995 | ||||||
|
|
|
| |||||
Total available-for-sale fixed-maturity securities | $ | 84,029,645 | 87,546,971 | |||||
|
|
|
| |||||
Held-to-maturity fixed-maturity securities: | ||||||||
Due after one year through five years | $ | 28 | 33 | |||||
Structured securities | — | 3,597 | ||||||
|
|
|
| |||||
Total held-to-maturity fixed-maturity securities | $ | 28 | 3,630 | |||||
|
|
|
| |||||
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Fixed-maturity securities not due at a single maturity date have been presented in the year of final contractual maturity. Structured securities (which include mortgage-backed securities, collateralized mortgage obligations (CMOs), CDOs, and asset-backed securities) are shown separately, as they are not due at a single maturity.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 44 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
As of December 31, 2016 and 2015, investments with a fair value of $28,098 and $45,393, respectively, were held on deposit with various insurance departments and in other trusts as required by statutory regulations.
The Company’s available-for-sale and trading fixed-maturity security portfolios include mortgage-backed securities and CMOs. Due to the high quality of these investments and the lack of subprime loans within the securities, the Company does not have a material exposure to subprime mortgages.
| (b) | Unrealized Investment Losses |
The following table summarizes the fair value and related unrealized losses on available-for-sale securities that have been in a continuous loss position for the respective years ended December 31 are shown below:
| 12 months or less | Greater than 12 months | Total | ||||||||||||||||||||||
| Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | |||||||||||||||||||
2016: | ||||||||||||||||||||||||
Fixed-maturity securities, available-for-sale: | ||||||||||||||||||||||||
U.S. government | $ | 691,559 | 16,880 | — | — | 691,559 | 16,880 | |||||||||||||||||
U.S. government agency | 3,332 | 22 | — | — | 3,332 | 22 | ||||||||||||||||||
States and political subdivisions | 1,587,063 | 30,524 | 103,316 | 6,384 | 1,690,379 | 36,908 | ||||||||||||||||||
Foreign government | 99,527 | 6,634 | 10,383 | 2,169 | 109,910 | 8,803 | ||||||||||||||||||
Corporate securities | 12,637,792 | 433,682 | 2,000,338 | 184,113 | 14,638,130 | 617,795 | ||||||||||||||||||
Mortgage-backed securities | 4,811,364 | 152,501 | 31,040 | 1,474 | 4,842,404 | 153,975 | ||||||||||||||||||
CMOs | 192,564 | 11,867 | — | — | 192,564 | 11,867 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total temporarily impaired securities | $ | 20,023,201 | 652,110 | 2,145,077 | 194,140 | 22,168,278 | 846,250 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| 12 months or less | Greater than 12 months | Total | ||||||||||||||||||||||
| Fair value | Unrealized losses | Fair value | Unrealized losses | Fair value | Unrealized losses | |||||||||||||||||||
2015: | ||||||||||||||||||||||||
Fixed-maturity securities, available-for-sale: | ||||||||||||||||||||||||
U.S. government | $ | 600,970 | 5,395 | 4,959 | 12 | 605,929 | 5,407 | |||||||||||||||||
U.S. government agency | 4,536 | 51 | — | — | 4,536 | 51 | ||||||||||||||||||
States and political subdivisions | 1,873,125 | 48,306 | 28,015 | 1,122 | 1,901,140 | 49,428 | ||||||||||||||||||
Foreign government | 42,338 | 1,787 | 32,219 | 5,329 | 74,557 | 7,116 | ||||||||||||||||||
Corporate securities | 17,688,481 | 1,315,632 | 1,659,827 | 674,073 | 19,348,308 | 1,989,705 | ||||||||||||||||||
Mortgage-backed securities | 3,066,569 | 61,030 | 15,433 | 616 | 3,082,002 | 61,646 | ||||||||||||||||||
CDOs | — | — | 730 | 147 | 730 | 147 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total temporarily impaired securities | $ | 23,276,019 | 1,432,201 | 1,741,183 | 681,299 | 25,017,202 | 2,113,500 | |||||||||||||||||
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|
|
|
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|
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|
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|
| |||||||||||||
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 45 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
As of December 31, 2016 and 2015, there were 1,088 and 1,294 available-for-sale fixed-maturity security holdings that were in an unrealized loss position, respectively.
As of December 31, 2016 and 2015, of the total amount of unrealized losses, $763,051 or 90.2% and $1,773,647 or 83.9%, respectively, are related to unrealized losses on investment grade securities. Investment grade is defined as a security having a credit rating of Aaa, Aa, A, or Baa from Moody’s or a rating of AAA, AA, A, or BBB from Standards and Poor’s (S&P), or a NAIC rating of 1 or 2 if a Moody’s or S&P rating is not available. Unrealized losses on securities are principally related to changes in interest rates or changes in sector spreads from the date of purchase. As contractual payments continue to be met, management continues to expect all contractual cash flows to be received. As mentioned in note 2, the Company reviews these securities regularly to determine whether or not declines in fair value are other-than-temporary. Further, as the Company neither has an intention to sell, nor does it expect to be required to sell the securities outlined above, the Company does not consider these investments to be other-than-temporarily impaired.
| (c) | OTTI Losses |
The following table presents a rollforward of the Company’s cumulative credit impairments on fixed-maturity securities held at December 31:
| 2016 | 2015 | |||||||
Balance as of January 1 | $ | 59,365 | 36,948 | |||||
Additions for credit impariments recognized on: | ||||||||
Securities not previously impaired | 174,823 | 57,889 | ||||||
Securities previously impaired | — | 1,086 | ||||||
Reductions for credit impairments previously on: | ||||||||
Securities that matured, were sold, or were liquidated during the period | (118,758 | ) | (36,558 | ) | ||||
|
|
|
| |||||
Balance as of December 31 | $ | 115,430 | 59,365 | |||||
|
|
|
| |||||
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 46 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
| (d) | Realized Investment (Losses) Gains |
Gross and net realized investment (losses) gains for the years ended December 31 are summarized as follows:
| 2016 | 2015 | 2014 | ||||||||||
Available-for-sale: | ||||||||||||
Fixed-maturity securities: | ||||||||||||
Gross gains on sales and exchanges | $ | 198,851 | 108,094 | 96,698 | ||||||||
Gross losses on sales and exchanges | (71,002 | ) | (15,272 | ) | (11,114 | ) | ||||||
OTTI | (172,530 | ) | (57,598 | ) | (6,445 | ) | ||||||
|
|
|
|
|
| |||||||
Net (losses) gains on fixed-maturity securities | (44,681 | ) | 35,224 | 79,139 | ||||||||
|
|
|
|
|
| |||||||
Equity securities: | ||||||||||||
Gross gains on sales | 3,109 | 2 | 113 | |||||||||
Gross losses on sales | (897 | ) | (184 | ) | (1 | ) | ||||||
|
|
|
|
|
| |||||||
Net gains (losses) on equity securities | 2,212 | (182 | ) | 112 | ||||||||
|
|
|
|
|
| |||||||
Net (losses) gains on available-for-sale securities | (42,469 | ) | 35,042 | 79,251 | ||||||||
|
|
|
|
|
| |||||||
Held-to-maturity: | ||||||||||||
Gross gains on exchanges | — | 31,832 | — | |||||||||
Gross losses on exchanges | (11 | ) | (11 | ) | (84 | ) | ||||||
|
|
|
|
|
| |||||||
Net (losses) gains on held-to-maturity securities | (11 | ) | 31,821 | (84 | ) | |||||||
|
|
|
|
|
| |||||||
(Provision) benefit for mortgage loans on real estate | (11,000 | ) | (2,400 | ) | 5,000 | |||||||
Investment in affiliates | — | — | (6,500 | ) | ||||||||
Gain on real estate sales | — | 5,929 | — | |||||||||
Investment in limited partnerships | 2,150 | — | — | |||||||||
Net gains on sales of acquired loans | 2,005 | 24,027 | 95 | |||||||||
Other | — | (6 | ) | — | ||||||||
|
|
|
|
|
| |||||||
Net realized investment (losses) gains | $ | (49,325 | ) | 94,413 | 77,762 | |||||||
|
|
|
|
|
| |||||||
The 2016 realized gain on investment in limited partnerships is related to distributions received from the various limited partnership investments held by the Company. The 2015 realized gain on real estate sales is related to the recognition of a contingent gain as part of the terms of the 2011 sale of the Company’s real estate portfolio. The gross gain in held-to-maturity securities relates primarily to the impact of consolidating a CDO investment in 2015, as discussed in note 4(h). The 2014 realized loss on investment in affiliates is related to the disposal of an investment in an affiliate, as discussed in note 19.
Proceeds from sales of available-for-sale securities for the years ended December 31 are presented in the following table:
| 2016 | 2015 | 2014 | ||||||||||
Available-for-sale: | ||||||||||||
Fixed-maturity securities proceeds from sales | $ | 2,177,408 | 996,801 | 1,479,188 | ||||||||
Equity securities proceeds from sales | 152,821 | 58,858 | 29,209 | |||||||||
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 47 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
| (e) | Interest and Similar Income |
Major categories of Interest and similar income, net, for the respective years ended December 31 are shown below:
| 2016 | 2015 | 2014 | ||||||||||
Interest and similar income: | ||||||||||||
Available-for-sale fixed-maturity securities | $ | 3,847,272 | 3,752,867 | 3,552,896 | ||||||||
Available-for-sale equity securities | 11,314 | 1,416 | 26 | |||||||||
Mortgage loans on real estate | 470,547 | 413,103 | 377,917 | |||||||||
Acquired loans | 24,461 | 28,122 | 27,548 | |||||||||
Trading securities | 6,814 | 11,838 | 10,006 | |||||||||
Policy loans | 10,015 | 9,834 | 9,981 | |||||||||
Short-term securities, includes cash and cash equivalents | 13,896 | 8,761 | 7,864 | |||||||||
Held-to-maturity fixed-maturity securities | 1,012 | 5,746 | 15,894 | |||||||||
Derivative assets | 11,121 | 5,197 | 1,867 | |||||||||
Other invested assets | 5,898 | 1,870 | 2,057 | |||||||||
Assets held by reinsurers | 2,498 | 2,626 | 2,798 | |||||||||
Loans to affiliates | 384 | 516 | 980 | |||||||||
|
|
|
|
|
| |||||||
Total | 4,405,232 | 4,241,896 | 4,009,834 | |||||||||
Less investment expenses | 79,495 | 66,427 | 54,175 | |||||||||
|
|
|
|
|
| |||||||
Total interest and similar income, net | $ | 4,325,737 | 4,175,469 | 3,955,659 | ||||||||
|
|
|
|
|
| |||||||
| (f) | Mortgage Loans |
At December 31, 2016, mortgage loans on real estate in California and Illinois exceeded the 10% concentration levels by state with a concentration of 28.1% or $2,925,356 and 10.4% or $1,085,445, respectively. At December 31, 2015, mortgage loans on real estate in California and Illinois exceeded the 10% concentration levels by state with a concentration of 27.7% or $2,448,008 and 11.6% or $1,025,605, respectively.
Interest rates on investments in new mortgage loans ranged from a minimum of 3.0% to a maximum of 4.6%.
Credit quality indicators and allowance for loan loss for mortgage loans on real estate is discussed further at note 7.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 48 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
| (g) | Securities Lending and Reverse Repurchase Agreements |
The Company had fair value of securities on loan of $2,798,597 and $2,392,657 with associated collateral received of $2,888,157 and $2,480,910, as of December 31, 2016 and 2015, respectively.
Of the total collateral received from the respective counterparties, noncash collateral was $326,938 and $0 as of December 31, 2016 and 2015. The cash collateral liability by loaned security type was as follows:
| December 31, 2016 | December 31, 2015 | |||||||
| Remaining | Remaining | |||||||
| Contractual | Contractual | |||||||
| Maturity of the | Maturity of the | |||||||
| Agreements | Agreements | |||||||
| Open (1) | Open (1) | |||||||
U.S. government | — | 2,038 | ||||||
Foreign government | 9,429 | 13,984 | ||||||
Corporate securities | 2,551,790 | 2,464,888 | ||||||
|
|
|
| |||||
Total | 2,561,219 | 2,480,910 | ||||||
|
|
|
| |||||
| (1) | There is no contractual maturity on the loan agreements. The related loaned security could be returned to the Company on the next business day with notice from the counterparty and the Company would be required to return the cash collateral immediately. |
Liquidity risk exists in that the Company may be required to return significant amounts of cash collateral on short notice. The Company only reinvests cash collateral in cash and cash equivalents and short-term investments and has established reinvestment guidelines around approved investments, credit quality, concentration, maturity, and liquidity to mitigate risks. The Company’s reinvested collateral is recorded in Collateral held from securities lending agreements on the Consolidated Balance Sheets and held $1,445,249 and $2,480,910 in cash and cash equivalents and $1,115,970 and $0 in short-term investments as of December 31, 2016 and 2015.
In the normal course of business, the Company enters into overnight reverse repurchase agreements which are used to earn spread income. As part of the reverse repurchase agreements, the Company lends cash and receives U.S. Government securities as collateral. The Company had fair value of reverse repurchase agreements of $100,000 and $0 on the Consolidated Balance Sheets with associated collateral received of $100,000 and $0 as of December 31, 2016 and 2015, respectively.
| (h) | Variable Interest Entities |
The Company invests in structured securities and limited partnerships which represent interests in VIEs. The Company has carefully analyzed the VIEs to determine whether the Company is the primary beneficiary, taking into consideration whether the Company, or the Company together with its affiliates, has the power to direct the activities of the VIE, that most affect its economic performance and whether the Company has the right to benefits from the VIE. Based on that analysis, the Company has concluded that it is not the primary beneficiary for all but one of the
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 49 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
Company’s VIEs and, as such, only one VIE was consolidated in the Consolidated Financial Statements.
In 2015, the triggering event for consolidation occurred when the Company entered into an agreement with the collateral manager to liquidate some or all of the collateral underlying several classes of notes within one of the CDOs. Creditors of the consolidated VIE do not have any recourse on the Company. The Company does not have any implicit or explicit arrangements to provide financial support to the consolidated VIE. Upon initial consolidation, the Company recorded the underlying assets at fair value, generating a gain of $31,832 in Realized investment (losses) gains, net in the Consolidated Statements of Operations.
In October 2015, at the Company’s direction, the collateral manager liquidated $163,389 of assets at auction, of which $96,046 were purchased by the Company. The assets purchased at auction are reported at amortized cost as Acquired loans and at fair value as Fixed-maturity securities, Available-for-sale on the Consolidated Balance Sheets. As of December 31, 2016 and 2015, the Company held $43,640 and $44,527, respectively, as Acquired loans and $10,604 and $12,611, respectively, as Fixed-maturity securities, Available-for-sale. As of December 31, 2016 and 2015, the Company also held $19,833 and $26,941, respectively, of consolidated assets that are reported at fair value as Fixed-maturity securities, Available-for-sale on the Consolidated Balance Sheets. In addition, the Company has recorded liabilities of $565 and $2,789 as of December 31, 2016 and 2015, respectively, related to the consolidation of this entity. The liabilities are reported in Other liabilities on the Consolidated Balance Sheets.
The carrying amount and maximum exposure to loss relating to the VIEs which the Company holds a variable interest but is not the primary beneficiary and which have not been consolidated were as follows:
| December 31, 2016 | December 31, 2015 | |||||||||||||||
| Maximum | Maximum | |||||||||||||||
| Carrying | exposure | Carrying | exposure | |||||||||||||
| amount | to loss (1) | amount | to loss (1) | |||||||||||||
Fixed-maturity securities, available-for-sale: | ||||||||||||||||
Corporate securities | $ | 981,066 | 981,066 | 913,857 | 913,857 | |||||||||||
Mortgage-backed securities | 11,625,772 | 11,625,772 | 12,466,036 | 12,466,036 | ||||||||||||
Collateralized mortgage obligations | 197,789 | 197,789 | 10,283 | 10,283 | ||||||||||||
CDOs | 19,931 | 19,931 | 21,164 | 21,164 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total fixed-maturity securities, available-for-sale | $ | 12,824,558 | 12,824,558 | 13,411,340 | 13,411,340 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Other investments | ||||||||||||||||
Acquired loans | $ | 148,740 | 148,740 | 179,556 | 179,556 | |||||||||||
Other invested assets | 56,562 | 338,971 | 15,628 | 116,485 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total other investments | $ | 205,302 | 487,711 | 195,184 | 296,041 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Total investments | $ | 13,029,860 | 13,312,269 | 13,606,524 | 13,707,381 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
| (1) | The maximum exposure to loss is equal to the carrying amount for Fixed-maturity securities, Available-for-sale and Acquired loans. The maximum exposure to loss related to Other invested assets is equal to the carrying amount plus any unfunded commitments. |
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 50 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
| (i) | Redeemable Preferred Stock |
AZL PF Investments, Inc. (AZLPF), a wholly owned subsidiary of the Company, issued redeemable preferred stock as a result of a prepaid forward agreement settled in 2012. The preferred stock liability of $32,195 was recorded at December 31, 2016 and 2015 and is reported in Other liabilities on the Consolidated Balance Sheets. The preferred stock is mandatorily redeemable on January 9, 2017. AZLPF’s BOD approved the redemption of the preferred stock in November 2016. See further discussion over the redemption of the preferred stock in note 25.
| (5) | Derivatives and Hedging Instruments |
Each derivative is designated by the Company as either a cash flow hedging instrument (cash flow hedge) or not qualified as a hedging instrument (nonqualifying strategies).
Cash Flow Hedges
IRS were used by the Company to hedge against the changes in cash flows associated with variable interest rates on certain underlying fixed-maturity securities until January 2015. The Company uses foreign currency swaps to hedge against foreign currency fluctuations on certain foreign denominated fixed-maturity securities. IRS and foreign currency swaps have notional amounts and maturity dates equal to the underlying fixed-maturity securities and are determined to be highly effective as of December 31, 2016 and 2015.
The following table presents the components of the unrealized gains or losses on the effective portion of the derivatives that qualify as cash flow hedges and are recorded as a component of Total other comprehensive income within the Consolidated Statements of Comprehensive Income:
| Derivatives designated as | Amount of gains (losses) recognized at December 31 | |||||||||||
cash flow hedging instruments | 2016 | 2015 | 2014 | |||||||||
Interest rate swaps, net of tax benefit of $0, ($332), and ($217),at December 31, 2016, 2015, and 2014, respectively | $ | — | (617 | ) | (403 | ) | ||||||
Foreign currency swaps, net of tax expense of $12,355, $15,550, and $4,683 at December 31, 2016, 2015, and 2014, respectively | 22,945 | 28,879 | 8,698 | |||||||||
|
|
|
|
|
| |||||||
Total | $ | 22,945 | 28,262 | 8,295 | ||||||||
|
|
|
|
|
| |||||||
At December 31, 2016, the Company does not expect to reclassify any pretax gains or losses on cash flow hedges into earnings during the next 12 months. Recurring interest income earned is recorded in Interest and similar income, net in the Consolidated Statements of Operations. In the event that cash flow hedge accounting is no longer applied, because the derivatives are no longer designated as a hedge, or the hedge is not considered to be highly effective, the reclassification from AOCI into earnings may be accelerated.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 51 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
Nonqualifying Strategies
Option Contracts
The Company utilizes OTC options and ETOs with the objective to economically hedge certain fixed-indexed annuity and life products tied to certain indices as well as certain variable annuity guaranteed benefits. These OTC options and ETOs are not used for speculative or income generating purposes. The ETOs provide the Company flexibility to use instruments, which are exchange-cleared and allow the Company to mitigate counterparty credit risk. The ETOs are cleared through the Options Clearing Corporation (OCC), which operates under the jurisdiction of both the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission. The credit rating on the OCC is currently AA+ from S&P. The fair values of the collateral posted for OTC options and ETOs are discussed in the derivative collateral management section below.
Futures
The Company utilizes exchange-traded futures to economically hedge fixed-indexed annuity, life, and variable annuity guarantees. The futures contracts do not require an initial investment except for the initial margin described below and the Company is required to settle cash daily based on movements of the representative index. Therefore, no asset or liability is recorded as of December 31, 2016 and 2015. Futures contracts are also utilized to hedge the investment risk associated with seed money. The fair value of the collateral posted for exchange-traded derivatives is discussed in the derivative collateral management section below.
Interest Rate Swaps
The Company utilizes OTC and exchange-traded IRS to economically hedge certain variable annuity and fixed-index annuity guarantees. The Company can receive the fixed or variable rate. The IRS are traded in varying maturities. The Company only enters into OTC IRS contracts with counterparties rated BBB+ or better.
IRS are centrally cleared through an exchange. The fair values of the collateral posted and variation margin for OTC and exchange-traded IRS are discussed in the derivative collateral management section below.
Total Return Swaps
The Company engages in the use of OTC TRS, which allow the parties to exchange cash flows based on a variable reference rate such as the three-month London Interbank Offered Rate (LIBOR) and the return of an underlying index. The Company uses the OTC TRS with the intent to economically hedge fixed-indexed annuity and variable annuity guarantees. The fair value of the collateral posted for OTC TRS is discussed in the derivative collateral management section below.
To Be Announced Securities
Beginning in 2015, the Company began transacting OTC TBA securities to economically hedge market risks embedded in certain life and annuity products. The Company uses the OTC TBA forward contracts to gain exposure to the investment risk and return of mortgage-backed securities. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at a specified future date.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 52 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
The Company is exposed to market risk to the extent the Company is over or under-hedged from an economic perspective. To mitigate counterparty credit risk, the Company establishes relationships with only counterparties rated BBB+ and higher. The fair value of the collateral posted for OTC TBA securities is discussed in the derivative collateral management section below.
Stock Appreciation Rights
The Company enters into contracts with Allianz SE with the objective to economically hedge risk associated with the Allianz SE stock-based compensation plan, which awards certain employees stock appreciation rights (SAR). The contracts are recorded at fair value within Derivative assets on the Consolidated Balance Sheets. The change in fair value for SAR are recorded in Change in fair value of assets and liabilities and General and administrative expenses within the Consolidated Statements of Operations, respectively. See further discussion of the stock-based compensation plan in note 18.
Credit Default Swaps
The Company utilizes exchange-traded CDS to economically hedge certain fixed-indexed annuity guarantees. The CDS within the investment portfolios assume credit risk from a single entity or referenced index for the purpose of synthetically replicating investment transactions. The Company can be required to pay or be the net receiver on the contract depending on the net position. Credit events include bankruptcy of the reference and failure to pay by the reference. The notional amount is equal to the maximum potential future loss amount. The fair value of the collateral posted for exchange-traded CDS is discussed in the derivative collateral management section below.
The following table presents the notional amount, fair value, weighted average years to maturity, underlying referenced credit obligation type, and average credit ratings for the credit derivatives in which the Company was assuming credit risk as of December 31, 2016 and 2015:
Credit Derivative type by derivative risk exposure and reference type | Notional Amount | Fair Value | Weighted Average Years to Maturity | Average Credit Rating | ||||||||||||
2016: | ||||||||||||||||
Basket credit default swaps | ||||||||||||||||
Investment grade risk exposure U.S. corporate credit | $ | 331,400 | 367 | 6 | BBB+ | |||||||||||
|
|
|
| |||||||||||||
Total | $ | 331,400 | 367 | |||||||||||||
|
|
|
| |||||||||||||
2015: | ||||||||||||||||
Basket credit default swaps | ||||||||||||||||
Investment grade risk exposure U.S. corporate credit | $ | 150,900 | 1,569 | 7 | BBB+ | |||||||||||
|
|
|
| |||||||||||||
Total | $ | 150,900 | 1,569 | |||||||||||||
|
|
|
| |||||||||||||
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 53 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
The following table presents a summary of the aggregate notional amounts and fair values of the Company’s freestanding derivative instruments as of December 31:
| 2016 | 2015 | |||||||||||||||||||||||
| Gross Fair Value | Gross Fair Value | |||||||||||||||||||||||
| Notional (1) | Assets | Liabilities | Notional (1) | Assets | Liabilities | |||||||||||||||||||
Cash flow hedging instruments | ||||||||||||||||||||||||
Foreign currency swaps | $ | 676,000 | 96,975 | (11,731 | ) | 426,000 | 53,794 | — | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total cash flow hedging instruments | $ | 96,975 | (11,731 | ) | 53,794 | — | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Nonqualifying hedging instruments | ||||||||||||||||||||||||
OTC options | $ | 77,973,809 | 766,205 | (514,758 | ) | 52,623,290 | 359,335 | (226,761 | ) | |||||||||||||||
ETO | 11,109,074 | 42,400 | (27,345 | ) | — | — | — | |||||||||||||||||
Futures | 17,574,373 | — | — | 6,288,033 | — | — | ||||||||||||||||||
SAR | 7,422 | * | 545 | — | 7,422 | * | 614 | — | ||||||||||||||||
TRS | 7,154,000 | 5,826 | (3,702 | ) | 4,574,296 | 2,350 | (33,812 | ) | ||||||||||||||||
IRS | 7,227,500 | 144,384 | (77,799 | ) | 7,802,500 | 172,187 | (89,482 | ) | ||||||||||||||||
TBA securities | 693,900 | 833 | (299 | ) | 426,300 | 232 | (266 | ) | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total nonqualifying hedging instruments | $ | 960,193 | (623,903 | ) | 534,718 | (350,321 | ) | |||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total freestanding derivative instruments | 1,057,168 | (635,634 | ) | 588,512 | (350,321 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
| (1) | Notional amounts are presented on a gross basis. |
| * | The notional amount for SAR is equal to the number of contracts outstanding. |
Derivative Collateral Management
The Company manages separate collateral for exchange-traded and OTC derivatives. The total collateral posted for exchange-traded derivatives at December 31, 2016 and 2015, had a fair value of $1,447,970 and $1,019,112, respectively, and is included in Fixed-maturity securities on the Consolidated Balance Sheets. The Company retains ownership of the exchange-traded collateral, but the collateral resides in an account designated by the exchange. The collateral is subject to specific exchange rules regarding rehypothecation. The total collateral posted for OTC derivatives at December 31, 2016 and 2015, had a fair value of $49,133 and $13,939, respectively, and is included in Fixed-maturity securities on the Consolidated Balance Sheets. The Company posts collateral to OTC counterparties based upon exposure amounts. The Company retains ownership of the OTC collateral.
Embedded Derivatives
The Company issues certain variable annuity products with guaranteed minimum benefit riders, including GMWB and GMAB, which are measured at fair value separately from the host variable annuity contract, with changes in fair value reported in Change in fair value of annuity and life embedded derivatives within the Consolidated Statements of Operations. These embedded derivatives are classified within Account balances and future policy benefit reserves on the Consolidated Balance Sheets.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 54 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
Certain fixed-indexed annuity products, variable annuity riders, and universal life policies include a market value liability option (MVLO), which is essentially an embedded derivative with equity-indexed features. This embedded derivative is reported within Account balances and future policy benefit reserves on the Consolidated Balance Sheets with changes in fair value reported in Change in fair value of annuity and life embedded derivatives within the Consolidated Statements of Operations.
The Company bifurcated and separately recorded an embedded derivative related to certain CDOs. The last of these CDOs has been consolidated since 2015. See note 4 for further detail relating to the consolidation of this CDO. The embedded derivative was recorded within Derivative assets on the Consolidated Balance Sheets, with changes in fair value reported in Change in fair value of assets and liabilities within the Consolidated Statements of Operations.
Additionally, the Company bifurcated and separately recorded an embedded derivative related to modified coinsurance reinsurance agreements. The embedded derivative was recorded within Derivative assets on the Consolidated Balance Sheets, with changes in fair value reported in Change in fair value of assets and liabilities within the Consolidated Statements of Operations.
The following table presents a summary of the fair values of the Company’s embedded derivative instruments as of December 31:
| 2016 | 2015 | |||||||
GMWB | $ | (2,156,234 | ) | (2,170,539 | ) | |||
GMAB | (243,363 | ) | (374,857 | ) | ||||
MVLO | (15,141,482 | ) | (14,495,312 | ) | ||||
Other embedded derivative | 1,863 | 3,097 | ||||||
|
|
|
| |||||
Total embedded derivative instruments | $ | (17,539,216 | ) | (17,037,611 | ) | |||
|
|
|
| |||||
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 55 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
The following table presents the gains or losses recognized in income on the various nonqualifying freestanding derivative instruments and embedded derivatives:
| Location in Consolidated | Amount of (losses) gains on derivatives recognized for the years ended December 31 | |||||||||||||
Statements of Operations | 2016 | 2015 | 2014 | |||||||||||
MVLO | Policy fees | $ | (398,942 | ) | 79,951 | 194,229 | ||||||||
MVLO | Policyholder benefits | 139,481 | 115,737 | 2,159 | ||||||||||
MVLO | Change in fair value of annuity and life embedded derivatives | (386,709 | ) | 212,758 | (3,344,049 | ) | ||||||||
GMWB | Change in fair value of annuity and life embedded derivatives | 14,235 | (679,259 | ) | (1,445,524 | ) | ||||||||
GMAB | Change in fair value of annuity and life embedded derivatives | 96,666 | (122,094 | ) | (166,411 | ) | ||||||||
|
|
|
|
|
| |||||||||
Total change in fair value of annuity and life embedded derivatives | (275,808 | ) | (588,595 | ) | (4,955,984) | |||||||||
|
|
|
|
|
| |||||||||
OTC options | Change in fair value of assets and liabilities | 182,882 | (361,419 | ) | 862,097 | |||||||||
ETOs | Change in fair value of assets and liabilities | 13,055 | 291 | 66,855 | ||||||||||
Futures | Change in fair value of assets and liabilities | (287,724 | ) | (423,134 | ) | (267,628 | ) | |||||||
SAR | Change in fair value of assets and liabilities | (54 | ) | 630 | 69 | |||||||||
CDO embedded | Change in fair value of assets and liabilities | — | (188 | ) | (150 | ) | ||||||||
Other embedded | Change in fair value of assets and liabilities | (1,234 | ) | 1,423 | (230 | ) | ||||||||
TBA securities | Change in fair value of assets and liabilities | (2,837 | ) | 330 | — | |||||||||
IRS | Change in fair value of assets and liabilities | 87,380 | 279,158 | 1,085,355 | ||||||||||
TRS | Change in fair value of assets and liabilities | (37,143 | ) | 4,093 | 113,236 | |||||||||
CDS | Change in fair value of assets and liabilities | 4,689 | (2,220 | ) | (626 | ) | ||||||||
|
|
|
|
|
| |||||||||
Total change in fair value of assets and liabilities | (40,986 | ) | (501,036 | ) | 1,858,978 | |||||||||
|
|
|
|
|
| |||||||||
Total derivative loss, net | $ | (576,255 | ) | (893,943 | ) | (2,900,618) | ||||||||
|
|
|
|
|
| |||||||||
Offsetting Assets and Liabilities
Certain financial instruments and derivative instruments are eligible for offset on the Consolidated Balance Sheets under GAAP. The Company’s derivative instruments are subject to master netting arrangements and collateral arrangements. A master netting arrangement with a counterparty creates a right of offset for amounts due to and from that same counterparty that is enforceable in the event of a default or bankruptcy.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 56 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
The Company’s policy is to recognize amounts subject to master netting arrangements on a gross basis on the Consolidated Balance Sheets.
The following tables present additional information about derivative assets and liabilities subject to an enforceable master netting arrangement as of the dates indicated:
| December 31, 2016 | ||||||||||||||||||||||||
| Gross amounts not offset in the Balance Sheet | ||||||||||||||||||||||||
| Gross amounts recognized | Gross amounts offset in the Balance Sheet | Net amounts presented in the Balance Sheet | Financial instruments (1) | Collateral pledged/ received | Net amounts | |||||||||||||||||||
Derivative assets | $ | 1,056,623 | — | 1,056,623 | (615,349 | ) | (395,913 | ) | 45,361 | |||||||||||||||
Derivative liabilities | $ | (635,634 | ) | — | (635,634 | ) | 615,349 | 37,092 | 16,807 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net derivatives | $ | 420,989 | — | 420,989 | — | (358,821 | ) | 62,168 | ||||||||||||||||
|
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|
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|
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| |||||||||||||
| December 31, 2015 | ||||||||||||||||||||||||
| Gross amounts not offset in the Balance Sheet | ||||||||||||||||||||||||
| Gross amounts recognized | Gross amounts offset in the Balance Sheet | Net amounts presented in the Balance Sheet | Financial instruments (1) | Collateral pledged/ received | Net amounts | |||||||||||||||||||
Derivative assets | $ | 587,898 | — | 587,898 | (346,116 | ) | (216,659 | ) | 25,123 | |||||||||||||||
Derivative liabilities | $ | (350,276 | ) | — | (350,276 | ) | 346,116 | 4,160 | — | |||||||||||||||
|
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|
|
|
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|
|
|
|
| |||||||||||||
Net derivatives | $ | 237,622 | — | 237,622 | — | (212,499 | ) | 25,123 | ||||||||||||||||
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| |||||||||||||
| (1) | Represents the amount of assets or liabilities that could be offset by liabilities or assets with the same counterparty under master netting or similar arrangements that management elects not to offset on the Consolidated Balance Sheets. |
In the tables above, the gross amounts of assets or liabilities as presented on the Consolidated Balance Sheets are offset first by financial instruments that have the right of offset under master netting or similar arrangements, then any remaining amount is reduced by the amount of cash and securities collateral.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 57 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
| (6) | Fair Value Measurements |
The Fair Value Measurements and Disclosures Topic of the Codification establishes a fair value hierarchy that prioritizes the inputs used in the valuation techniques to measure fair value.
Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date.
Level 2 – Valuations derived from techniques that utilize observable inputs, other than quoted prices included in Level 1, which are observable for the asset or liability either directly or indirectly, such as:
| (a) | Quoted prices for similar assets or liabilities in active markets. |
| (b) | Quoted prices for identical or similar assets or liabilities in markets that are not active. |
| (c) | Inputs other than quoted prices that are observable. |
| (d) | Inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
Level 3 – Valuations derived from techniques in which the significant inputs are unobservable. Level 3 fair values reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
The Company has analyzed the valuation techniques and related inputs, evaluated its assets and liabilities reported at fair value, and determined an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Based on the results of this evaluation and investment class analysis, each valuation was classified into Level 1, 2, or 3.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 58 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
The following tables present the assets and liabilities measured at fair value on a recurring basis and their corresponding level in the fair value hierarchy at December 31:
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
2016: | ||||||||||||||||
Assets | ||||||||||||||||
Fixed-maturity securities, available-for-sale: | ||||||||||||||||
U.S. government | $ | 1,736,523 | 1,736,523 | — | — | |||||||||||
Agencies not backed by the full faith and credit of the U.S. government | 8,857 | — | 8,857 | — | ||||||||||||
States and political subdivisions | 9,954,613 | — | 9,925,338 | 29,275 | ||||||||||||
Foreign government | 438,927 | — | 404,687 | 34,240 | ||||||||||||
Corporate securities | 63,540,067 | — | 54,990,599 | 8,549,468 | ||||||||||||
Mortgage-backed securities | 11,650,264 | — | 11,609,060 | 41,204 | ||||||||||||
CMOs | 197,789 | — | 197,789 | — | ||||||||||||
CDOs | 19,931 | — | — | 19,931 | ||||||||||||
Fixed-maturity securities, at fair value through income | 37,051 | 36,901 | — | 150 | ||||||||||||
Derivative assets | 1,059,031 | 42,400 | 1,010,805 | 5,826 | ||||||||||||
Equity securities, available-for-sale | 320,166 | 320,166 | — | — | ||||||||||||
Equity securities, trading | 317,493 | 298,481 | 19,012 | — | ||||||||||||
Corporate-owned life insurance | 338,092 | — | 338,092 | — | ||||||||||||
Separate account assets | 27,733,261 | 27,733,261 | — | — | ||||||||||||
|
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|
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|
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| |||||||||
Total assets | $ | 117,352,065 | 30,167,732 | 78,504,239 | 8,680,094 | |||||||||||
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|
|
| |||||||||
Liabilities | ||||||||||||||||
Derivative liabilities | $ | 635,634 | 27,345 | 604,587 | 3,702 | |||||||||||
Separate account liabilities | 27,733,261 | 27,733,261 | — | — | ||||||||||||
Reserves at fair value (1) | 20,152,641 | — | — | 20,152,641 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities | $ | 48,521,536 | 27,760,606 | 604,587 | 20,156,343 | |||||||||||
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| |||||||||
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 59 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
2015: | ||||||||||||||||
Assets | ||||||||||||||||
Fixed-maturity securities, available-for-sale: | ||||||||||||||||
U.S. government | $ | 1,755,324 | 1,755,324 | — | — | |||||||||||
Agencies not backed by the full faith and credit of the U.S. government | 10,514 | — | 10,514 | — | ||||||||||||
States and political subdivisions | 8,998,534 | — | 8,998,035 | 499 | ||||||||||||
Foreign government | 272,167 | — | 238,794 | 33,373 | ||||||||||||
Corporate securities | 57,168,683 | — | 50,147,086 | 7,021,597 | ||||||||||||
Mortgage-backed securities | 12,497,799 | — | 12,442,893 | 54,906 | ||||||||||||
CMOs | 10,283 | — | 10,283 | — | ||||||||||||
CDOs | 21,164 | — | — | 21,164 | ||||||||||||
Fixed-maturity securities, at fair value through income | 37,111 | 37,111 | — | — | ||||||||||||
Derivative assets | 591,609 | — | 589,259 | 2,350 | ||||||||||||
Equity securities, available-for-sale | 68,611 | 68,611 | — | — | ||||||||||||
Equity securities, trading | 292,816 | 269,956 | 22,860 | — | ||||||||||||
Corporate-owned life insurance | 316,926 | — | 316,926 | — | ||||||||||||
Separate account assets | 28,243,123 | 28,243,123 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets | $ | 110,284,664 | 30,374,125 | 72,776,650 | 7,133,889 | |||||||||||
|
|
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|
|
|
|
| |||||||||
Liabilities | ||||||||||||||||
Derivative liabilities | $ | 350,0321 | — | 316,509 | 33,812 | |||||||||||
Separate account liabilities | 28,243,123 | 28,243,123 | — | — | ||||||||||||
Reserves at fair value (1) | 18,096,009 | — | — | 18,096,009 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities | $ | 46,689,453 | 28,243,123 | 316,509 | 18,129,821 | |||||||||||
|
|
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|
|
|
|
| |||||||||
| (1) | Reserves at fair value are reported in Account balances and future policy benefit reserves on the Consolidated Balance Sheets. |
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 60 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
The following is a discussion of the methodologies used to determine fair values for the assets and liabilities listed in the above table. These fair values represent an exit price (i.e., what a buyer in the marketplace would pay for an asset in a current sale or charge to transfer a liability).
| (a) | Valuation of Fixed-Maturity Securities and Equity Securities |
The fair value of fixed-maturity securities and equity securities is based on quoted market prices in active markets when available. Based on the market data, the securities are categorized into asset class, and based on the asset class of the security, appropriate pricing applications, models and related methodology, and standard inputs are utilized to determine what a buyer in the marketplace would pay for the security in a current sale. When quoted prices are not readily available or in an inactive market, standard inputs used in the valuation models, listed in approximate order of priority, include, but are not limited to, benchmark yields, reported trades, Municipal Securities Rulemaking Board reported trades, Nationally Recognized Municipal Securities Information Repository material event notices, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. In some cases, including private placement securities and certain difficult-to-price securities, internal pricing models may be used that are based on market proxies.
Generally, U.S. Treasury securities and exchange-traded stocks are included in Level 1. Most bonds for which prices are provided by third-party pricing sources are included in Level 2, because the inputs used are market observable. Bonds for which prices were obtained from broker quotes, certain bonds without active trading markets and private placement securities that are internally priced are included in Level 3.
The Company is responsible for establishing and maintaining an adequate internal control structure to prevent or detect material misstatements related to fair value measurements and disclosures. This responsibility is especially important when using third parties to provide valuation services.
The Company’s control framework around third-party valuations begins with obtaining an understanding of the pricing vendor’s methodologies. A Pricing Committee is in place that meets quarterly to establish and review a pricing policy, which includes approving any changes to pricing sources, assessing reasonableness of pricing services, and addressing any ad hoc valuation issues that arise. The pricing methodologies used by the service providers and internal control reports provided by the service providers are reviewed by management.
In addition to monitoring the third-party vendor’s policies, the Company is also responsible for monitoring the valuation results. Controls are in place to monitor the reasonableness of the valuations received. These controls include price analytic reports that monitor significant fluctuations in price as well as an IPV process by which the Company obtains prices from vendors other than the primary source and compares them for reasonableness. Results of the independent price verification are also reviewed by the Pricing Committee.
There are limited instances in which the primary third-party vendor is not used to obtain prices for fixed-maturity securities. These instances include private placement securities and certain other immaterial portfolios priced by a secondary external vendor or internal models.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 61 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
At December 31, 2016 and 2015, private placement securities of $8,509,548 and $6,685,280, respectively, were included in Level 3. Internal pricing models based on market proxy spread and U.S. Treasury rates, which are monitored by the investment manager for reasonableness, are used to value these holdings. This includes ensuring the spreads used are still reasonable based on issuer specific credit development.
The portfolios of securities received as a result of liquidating or consolidating CDOs are priced using a combination of third-party vendors and cash flow modeling. The methodology used is dependent on the availability of observable inputs. Prices are reviewed for reasonableness by reviewing cash flow projections, related yields on similar securities, and comparison to auction prices and other expectations. The securities are reviewed by Management via the Pricing Committee.
| (b) | Valuation of Derivatives |
Active markets for OTC option assets and liabilities do not exist. The fair value of OTC option assets and liabilities is derived internally, by calculating their expected discounted cash flows, using a set of calibrated, risk-neutral stochastic scenarios, including a market data monitor, a market data model generator, a stochastic scenario calibrator, and the actual asset pricing calculator. The valuation results are reviewed by Management via the Pricing Committee. OTC options that are internally priced, foreign swaps, CDS, TBA securities, and IRS are included in Level 2, because they use market observable inputs. TRS are included in Level 3 because they use valuation techniques in which significant inputs are unobservable. The fair value of ETOs and futures are based on quoted market prices and are generally included in Level 1.
Certain derivatives are priced using external third-party vendors. The Company has controls in place to monitor the valuations of these derivatives. Using market observable inputs, IRS prices are derived from a third-party source and are independently recalculated internally and reviewed for reasonableness at the position level on a monthly basis. TRS prices are obtained from the respective counterparties. These prices are also internally recalculated and reviewed for reasonableness at the position level on a monthly basis.
| (c) | Valuation of Corporate-Owned Life Insurance |
The Company holds COLI policies with unrelated third parties. The cash surrender value of the policies is based on the value of the underlying assets, which are regularly priced. The cash surrender value approximates fair value for these policies and is considered Level 2 based on the use of observable inputs.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 62 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
| (d) | Valuation of Separate Account Assets and Liabilities |
Separate account assets are carried at fair value, which is based on the fair value of the underlying assets. Separate account assets consist primarily of variable investment option funds with the following investment types: bond, domestic equity, international equity, or specialty. Variable investment option funds are included in Level 1 because their fair value is based on net asset values that are quoted as prices (unadjusted) in an active, observable market. Additionally, the separate account assets hold certain money market funds which are also included in Level 1 because their fair value is based on quoted prices (unadjusted) in an active, observable market. In accordance with the Financial Services – Insurance Topic of the Codification, the fair value of separate account liabilities is set to equal the fair value of separate account assets.
| (e) | Valuation of Reserves at Fair Value |
Reserves at fair value principally include the equity-indexed features contained in fixed-indexed annuity and life products, certain variable annuity riders and variable-indexed annuity products. Fair values of the embedded derivative liabilities are calculated based on internally developed models, because active, observable markets do not exist for these liabilities. The fair value is derived from techniques in which one or more significant inputs are unobservable and are included in Level 3. These fair values represent the Company’s best estimate of an amount that could be realized in a current market exchange absent actual market exchanges.
The fair value of the embedded derivative contained in the fixed-indexed annuity products is the sum of the current year’s option value projected stochastically, the projection of future index growth at the option budget, and the historical interest/equity-indexed credits. The valuation of the embedded derivative includes an adjustment for the Company’s own credit standing and a risk margin for noncapital market inputs. The Company’s own credit adjustment is determined by taking into consideration publicly available information on industry default risk with considerations for the Company’s own credit profile. Risk margin is incorporated into the valuation model to capture the noncapital market risks of the instrument, which represent the additional compensation a market participant would require to assume the risks related to the uncertainties of certain actuarial assumptions including surrenders, annuitization, and future equity index caps or participation rates. Market conditions including, but not limited to, changes in interest rates, equity indices, market volatility, changes in the Company’s own credit standing, and variations in actuarial assumptions regarding contractholder behavior and risk margin related to noncapital market inputs may result in significant fluctuations in the fair value of these embedded derivatives that could materially affect net income.
The Company issues certain variable annuity products with guaranteed minimum benefit riders, including GMWB and GMAB riders. The fair value for these riders is estimated using the present value of future benefits minus the present value of future fees using actuarial and capital market assumptions related to the projected cash flows over the expected lives of the contracts. A risk neutral valuation methodology is used under which the cash flows from the riders are projected under multiple capital market scenarios using observable overnight index swap rates (OIS) plus funding valuation adjustments, as approximated by LIBOR. These cash flows are then discounted using the current month’s LIBOR plus a company specific spread. The expected life-contingent
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 63 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
GMWB payments are discounted using a blend of short and long term rates to the date the account value is expected to be exhausted. These obligations are then discounted to the current date using LIBOR plus a spread for the Company’s own nonperformance risk. The valuation of these riders includes an adjustment for the Company’s own credit standing and a risk margin for noncapital market inputs. The Company’s own credit adjustment is determined taking into consideration publicly available information relating to the Company’s claims paying ability. Risk margin is established to capture the noncapital market risks of the instrument, which represent the additional compensation a market participant would require to assume the risks related to the uncertainties of certain actuarial assumptions including surrenders, annuitization, and premium persistency. The establishment of the risk margin requires the use of significant management judgment. These riders may be more costly than expected in volatile or declining equity markets. Market conditions including, but not limited to, changes in interest rates, equity indices, market volatility, changes in the Company’s own credit standing, and variations in actuarial assumptions regarding contractholder behavior and risk margins related to noncapital market inputs may result in significant fluctuations in the fair value of the riders that could materially affect net income.
The Company elected the fair value option for certain insurance contracts related to the variable-indexed annuity product. The fair value is calculated internally using the present value of future expected cash flows, floored at the current contract value. Future expected cash flows are generated using contractual features, actuarial assumptions, and market emergence over a complete set of market consistent scenarios. Cash flows are then averaged over the scenario set and discounted back to the valuation date using the appropriate discount factors adjusted for nonperformance risk on the noncollateralized portions of the contract.
The Company also has an embedded derivative asset related to a modified coinsurance agreement with an unrelated third party, which is reported within Derivative assets on the Consolidated Balance Sheets. This agreement results in a credit derivative, with a fair value based on the difference between the LIBOR and Corporate A- spread as of an average portfolio purchase date. The asset is included in Level 2 as the valuation uses market observable inputs. This derivative is on a closed block of business and is not significant to the ongoing results of the Company.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 64 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
| (f) | Level 3 Rollforward |
The following table provides a reconciliation of the beginning and ending balances for the Company’s Level 3 assets and liabilities measured at fair value on a recurring basis:
| Fixed-maturity securities | ||||||||||||||||||||||||||||||||||||
| Available-for-sale | Trading | |||||||||||||||||||||||||||||||||||
| States and | Mortgage- | |||||||||||||||||||||||||||||||||||
| political | Foreign | Corporate | backed | Corporate | Derivative | Derivative | Reserves at | |||||||||||||||||||||||||||||
| subdivisions | government | securities | securities | CDOs | securities | assets | liabilities | fair value | ||||||||||||||||||||||||||||
2016: | ||||||||||||||||||||||||||||||||||||
Balance, beginning of year | $ | 499 | 33,373 | 7,021,597 | 54,906 | 21,164 | — | 2,350 | (33,812 | ) | (18,096,009 | ) | ||||||||||||||||||||||||
Total realized/unrealized gains (losses) included in: | ||||||||||||||||||||||||||||||||||||
Net income | — | — | (86,539 | ) | 1,393 | — | — | 553,778 | (583,731 | ) | (649,516 | ) | ||||||||||||||||||||||||
Other comprehensive income (loss) | 790 | 867 | 272,556 | 302 | (503 | ) | — | — | — | — | ||||||||||||||||||||||||||
Purchases and issuances | 27,986 | — | 2,054,111 | 730 | — | 150 | — | — | (2,805,725 | ) | ||||||||||||||||||||||||||
Sales and settlements | — | — | (428,407 | ) | (16,127 | ) | (730 | ) | — | (550,302 | ) | 613,841 | 1,398,609 | |||||||||||||||||||||||
Transfer into Level 3 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Transfer out of Level 3 | — | — | (283,850 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||||
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|
| |||||||||||||||||||
Balance, end of year | 29,275 | 34,240 | 8,549,468 | 41,204 | 19,931 | 150 | 5,826 | (3,702 | ) | (20,152,641 | ) | |||||||||||||||||||||||||
(Losses) gains included in net income related to financial instruments still held at December 31, 2016 (1) | — | — | (80,134 | ) | — | — | — | 3,476 | (30,111 | ) | (649,516 | ) | ||||||||||||||||||||||||
| Fixed-maturity securities | ||||||||||||||||||||||||||||||||||||
| Available-for-sale | Trading | |||||||||||||||||||||||||||||||||||
| States and | Mortgage- | |||||||||||||||||||||||||||||||||||
| political | Foreign | Corporate | backed | Corporate | Derivative | Derivative | Reserves at | |||||||||||||||||||||||||||||
| subdivisions | government | securities | securities | CDOs | securities | assets | liabilities | fair value | ||||||||||||||||||||||||||||
2015: | ||||||||||||||||||||||||||||||||||||
Balance, beginning of year | $ | — | 34,147 | 5,733,760 | 1,332 | 45,229 | — | 11,583 | (757 | ) | (17,052,283 | ) | ||||||||||||||||||||||||
Total realized/unrealized gains (losses) included in: | ||||||||||||||||||||||||||||||||||||
Net income | — | — | (20,453 | ) | 30 | 516 | — | 182,923 | (179,854 | ) | 273,778 | |||||||||||||||||||||||||
Other comprehensive income (loss) | (1 | ) | (774 | ) | (339,441 | ) | (2 | ) | (167 | ) | — | — | — | — | ||||||||||||||||||||||
Purchases and issuances | 500 | — | 1,982,406 | — | — | — | — | — | (2,687,078 | ) | ||||||||||||||||||||||||||
Sales and settlements | — | — | (335,492 | ) | (1,314 | ) | (24,414 | ) | — | (192,156 | ) | 146,799 | 1,369,574 | |||||||||||||||||||||||
Transfer into Level 3 | — | — | 817 | 54,860 | — | — | — | — | — | |||||||||||||||||||||||||||
Transfer out of Level 3 | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
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|
|
|
| |||||||||||||||||||
Balance, end of year | 499 | 33,373 | 7,021,597 | 54,906 | 21,164 | — | 2,350 | (33,812 | ) | (18,096,009 | ) | |||||||||||||||||||||||||
(Losses) gains included in net income related to financial instruments still held at December 31, 2015 (1) (2) | — | — | (27,526 | ) | — | 36 | — | 2,917 | (28,494 | ) | 273,778 | |||||||||||||||||||||||||
| (1) | The Company classifies realized and unrealized gains (losses) on Reserves at fair value as unrealized gains (losses) for purposes of disclosure in this table because it is impracticable to track the realized gains (losses) on a contract-by-contract basis. |
| (2) | The previously issued 2015 financial statements improperly disclosed losses included in net income related to Reserves at fair value still held at December 31, 2015 by including issuances of $2,687,078. The December 31, 2015 amount has been corrected to conform with current year presentation. |
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 65 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
| (g) | Transfers |
The Company reviews its fair value hierarchy classifications annually. This review could reveal that previously observable inputs for specific assets or liabilities are no longer available or reliable. For example, the market for a Level 1 asset becomes inactive. In this case, the Company may need to adopt a valuation technique that relies on observable or unobservable components causing the asset to be transferred to Level 2 or Level 3. Alternatively, if the market for a Level 3 asset or liability becomes active, the Company will report a transfer out of Level 3. Transfers into and/or out of Levels 1, 2, and 3 are reported as of the end of the period in which the change occurs.
In 2016, transfers into Level 3 were $0 and transfers out of Level 3 were $283,850. All transfers out of Level 3 were recategorized as Level 2 as quoted market prices for similar securities became available, were considered reliable, and could be validated against an alternative source. In 2015, transfers into Level 3 were $55,677 and transfers out of Level 3 were $0. All transfers into Level 3 were a result of observable inputs no longer being considered reliable or could no longer be validated against an alternative source.
There were no transfers between Level 1 and Level 2 for the years ended December 31, 2016 and 2015.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 66 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
| (h) | Assets and Liabilities Measured at Fair Value Using Significant Unobservable Inputs |
The following table provides a summary of the significant unobservable inputs used in the fair value measurements developed by the Company or reasonably available to the Company of Level 3 assets and liabilities on a recurring basis at December 31, 2016:
| Fair value | Valuation Technique | Unobservable input | Range (weighted average) | |||||||||
Fixed-maturity securities: | ||||||||||||
Available-for-sale: | ||||||||||||
States and political subdivisions | $ | 29,275 | Discounted cash flow | Option adjusted spread* | 166 (166) | |||||||
Foreign government | 34,240 | Discounted cash flow | Option adjusted spread | 62-75 (70) | ||||||||
Corporate securities | 8,549,468 | Discounted cash flow | Option adjusted spread | -214-2,112 (147) | ||||||||
CDOs | 19,931 | Third-Party Vendor | Default and discount rates | ** | ||||||||
Mortgage-backed securities | 41,204 | Third-Party Vendor | Default and discount rates | ** | ||||||||
Trading: | ||||||||||||
Corporate securities | 150 | Cost | N/A | N/A | ||||||||
Derivative assets: | ||||||||||||
TRS | $ | 5,826 | Third-Party Vendor | Spread and discount rates | ** | |||||||
Derivative liabilities: | ||||||||||||
TRS | $ | (3,702) | Third-Party Vendor | Spread and discount rates | ** | |||||||
Reserves at Fair Value: | ||||||||||||
MVLO | $ | (15,141,482) | Discounted cash flow | Annuitizations | 0–25% | |||||||
| Surrenders | 0–25% | |||||||||||
| Mortality*** | 0–100% | |||||||||||
| Withdrawal Benefit Election | 0–50% | |||||||||||
GMWB and GMAB | (2,399,597) | Discounted cash flow | Surrenders | 0.5–35% | ||||||||
| Mortality*** | 0–100% | |||||||||||
Variable-indexed annuity | (2,611,562) | Contract value | N/A**** | N/A**** | ||||||||
| * | No range is applicable due to only one security within classification. |
| ** | Management does not have insight into the specific assumptions used. See narrative below for qualitative discussion. |
| *** | Mortality assumptions are derived by applying management determined factors to the Annuity 2000 Mortality Table. |
| **** | Unobservable inputs are not applicable as the fair value of the variable-indexed annuity reserve is held at contract value. |
| (i) | Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs |
Fixed-maturity securities: The primary unobservable input used in the discounted cash flow models for states and political subdivisions, foreign government, and corporate fixed-maturity securities, available-for-sale is a corporate index option adjusted spread (OAS). The corporate index OAS used is based on a securities’ sector, rating, and average life. A significant increase of the corporate index OAS in isolation could result in a decreased fair value, while a significant yield decrease in the corporate index OAS could result in an increased fair value.
CDOs and mortgage-backed securities are priced by a third-party vendor and the Company internally reviews the valuation for reasonableness. The Company does not have insight into the specific inputs
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 67 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
used; however, the key unobservable inputs would generally include default rates. A significant decrease (increase) in default rates could result in an increase (decrease) in fair value.
Derivative assets and liabilities: The TRS are priced by a third-party vendor and the Company internally reviews the valuation for reasonableness. The Company does not have insight into the specific inputs used; however, the key unobservable input would generally include the spread. For a long position, a significant increase (decrease) in the spread used in the fair value of the TRSs in isolation could result in higher (lower) fair value. For a short position, a significant increase (decrease) in the spread used in the fair value of the TRS in isolation could result in lower (higher) fair value.
Reserves at fair value: A significant increase (decrease) in the utilization of annuitization benefits could result in a higher (lower) fair value. A significant decrease (increase) in mortality rates, surrender rates, or utilization of lifetime income benefits could result in a higher (lower) fair value.
| (j) | Nonrecurring Fair Value Measurements |
Occasionally, certain assets and liabilities are measured at fair value on a nonrecurring basis. There were no nonrecurring fair value adjustments recorded in 2016, 2015, or 2014.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 68 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
| (k) | Fair Value of Financial Assets and Liabilities |
The following table presents the carrying amounts and fair values of financial assets and liabilities carried at book value at December 31:
| 2016 | ||||||||||||||||||||
| Carrying amount | Fair value | |||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||
Financial assets: | ||||||||||||||||||||
Held-to-maturity fixed-maturity securities | $ | 28 | — | — | 3,630 | 3,630 | ||||||||||||||
Mortgage loans on real estate | 10,351,741 | — | — | 10,900,205 | 10,900,205 | |||||||||||||||
Loans to affiliates | 39,120 | — | — | 39,120 | 39,120 | |||||||||||||||
Policy loans | 171,012 | — | 171,012 | — | 171,012 | |||||||||||||||
Acquired loans | 192,380 | — | — | 261,307 | 261,307 | |||||||||||||||
Other invested assets | 164,830 | — | — | 164,830 | 164,830 | |||||||||||||||
Collateral held from securities lending agreements | 2,561,219 | — | 2,561,985 | — | 2,561,985 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Investment contracts | $ | 77,305,738 | — | — | 78,018,770 | 78,018,770 | ||||||||||||||
Mortgage notes payable | 76,916 | — | — | 87,981 | 87,981 | |||||||||||||||
| 2015 | ||||||||||||||||||||
| Carrying amount | Fair value | |||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||
Financial assets: | ||||||||||||||||||||
Held-to-maturity fixed-maturity securities | $ | 55 | — | — | 5,279 | 5,279 | ||||||||||||||
Mortgage loans on real estate | 8,788,018 | — | — | 9,042,293 | 9,042,293 | |||||||||||||||
Loans to affiliates | 33,005 | — | — | 32,733 | 32,733 | |||||||||||||||
Policy loans | 163,129 | — | 163,129 | — | 163,129 | |||||||||||||||
Acquired loans | 224,083 | — | — | 271,927 | 271,927 | |||||||||||||||
Other invested assets | 92,977 | — | — | 92,977 | 92,977 | |||||||||||||||
Collateral held from securities lending agreements | 2,480,910 | — | 2,480,911 | — | 2,480,911 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Investment contracts | $ | 72,088,078 | — | — | 72,832,319 | 72,832,319 | ||||||||||||||
Other liabilities | 500,000 | — | — | 499,079 | 499,079 | |||||||||||||||
Mortgage notes payable | 84,761 | — | — | 98,890 | 98,890 | |||||||||||||||
The fair value of certain fixed-maturity securities classified as “held-to-maturity” is calculated internally with cash flow models using unobservable inputs and is categorized as Level 3.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 69 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
The fair value of mortgage loans on real estate is calculated by analyzing individual loans and assigning ratings to each loan based on a combination of loan-to-value ratios and debt service coverage ratios. Default rates and loss severities are then applied to each loan and a fair value is determined based on these factors as well as the contractual cash flows of each loan and the current market interest rates for similar loans. The inputs used are unobservable and the fair value is classified as Level 3.
Loans to affiliates are carried at cost, which approximates fair value. Loans to affiliates are classified as Level 3 due to transfer restrictions and lack of liquidity.
Policy loans are supported by the underlying cash value of the policies and are carried at unpaid principal balances, which approximate fair value. Therefore, fair value is classified as Level 2.
Acquired loans are initially recorded at fair value, and changes in expected cash flows are recorded as adjustments to accretable yield, to the carrying amount, or both. Fair values are obtained using a combination of third-party vendors cash flow modeling and matrix pricing with unobservable inputs. Due to lack of an active market and uncertainty on receiving contractual cash flows, acquired loans are classified as Level 3.
Other invested assets relate to an investment in FHLB stock, loans to non-affiliates, and miscellaneous partnership investments. The investment in FHLB stock and loans to non-affiliates are carried at cost, which approximate fair value, and are classified as Level 3 due to transfer restrictions and lack of liquidity. The partnership investments are valued utilizing the equity method of accounting, and are classified as Level 3 because there is no active market and the fair value is determined by valuation techniques in which significant inputs are unobservable.
Collateral held from securities lending agreements is primarily comprised of short-term, highly liquid, fixed maturity securities. Fair values are determined and classified within the fair value hierarchy in a manner consistent with the method utilized to determine the fair value of similar securities (fixed-income securities, equity securities, cash and cash equivalents) held within the Company’s General Account investment portfolio. Therefore, the fair value is classified as Level 2.
Investment contracts include certain reserves related to annuity products. These reserves are included in the Account balances and future policy benefit reserves on the Consolidated Balance Sheets. The fair values of the investment contracts are determined by testing amounts payable on demand against discounted cash flows using market interest rates commensurate with the risks involved, including consideration of the Company’s own credit standing and a risk margin for noncapital market inputs. Therefore, fair value is classified as Level 3. The previously issued 2015 financial statements improperly disclosed the carrying amount and fair value of investment contracts as $89,282,957 and $90,027,198, respectively. Investment contracts previously included reserves that are held at fair value on a recurring basis and reserves that do not meet the definition of a financial liability with a total carrying amount and fair value of $17,194,879. The December 31, 2015 amounts have been corrected to conform with current year presentation.
The fair value of mortgage notes payable is the sum of the outstanding balance of the note payable plus the expected prepayment penalty due to the lender if the Company were to prepay the mortgage.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 70 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
The Company believes this approximates fair value, as the calculation of the prepayment penalty is based on current market interest rates and represents lost interest to the lender and is an exit price. The penalty is based on specific provisions provided by the lender, which is an unobservable input. Therefore, the liability is classified as Level 3.
Changes in market conditions subsequent to year-end may cause fair values calculated subsequent to year-end to differ from the amounts presented herein.
| (7) | Financing Receivables |
The Company’s financing receivables are comprised of mortgage loans, nontrade receivables, loans to affiliates, and loans to non-affiliates. Mortgage loans consist of the unpaid balance of mortgage loans on real estate. Nontrade receivables are amounts for policy or contract premiums due from the agents and broker-dealers, or amounts due from reinsurers. Loans to affiliate include loans to related parties to fund certain companywide projects. Loans to non-affiliates are loans that are intended to meet certain financial objectives of the Company, AZOA, and Allianz SE. The mortgage loans and nontrade receivables are evaluated on a collective basis for impairment unless circumstances arise that warrant individual evaluation. The loans to affiliates and loans to non-affiliates are evaluated individually and do not require an allowance as of December 31, 2016 and 2015. For additional information, see note 2 for nontrade receivables, note 4 for mortgage loans, and note 19 for loans to affiliates.
Credit Quality Indicators
The Company analyzes certain financing receivables for credit risk by using specific credit quality indicators.
The Company has determined the loan-to-value ratio and the debt service coverage ratio are the most reliable indicators in analyzing the credit risk of its mortgage loan portfolio. The loan-to-value ratio is based on the Company’s internal valuation methodologies, including discounted cash flow analysis and comparative sales, depending on the characteristics of the property being evaluated. The debt service coverage ratio analysis is normalized to reflect a 25 year amortization schedule.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 71 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
The credit quality as of December 31 is shown below:
| Debt Service Coverage Ratios | ||||||||||||||||||||||||
| 2016: | Greater than 1.4x | 1.2x – 1.4x | 1.0x – 1.2x | Less than 1.0x | Total | Percent of Total | ||||||||||||||||||
Loan-to-value ratios: | ||||||||||||||||||||||||
Less than 50% | $ | 3,694,757 | 133,289 | 53,761 | — | 3,881,807 | 37.3 | % | ||||||||||||||||
50% – 60% | 3,740,956 | 173,453 | 23,378 | 18,930 | 3,956,717 | 38.0 | ||||||||||||||||||
60% – 70% | 1,442,783 | 502,746 | 26,005 | 43,607 | 2,015,141 | 19.4 | ||||||||||||||||||
70% – 80% | 198,103 | 153,481 | 24,086 | — | 375,670 | 3.6 | ||||||||||||||||||
80% – 90% | 57,439 | 83,046 | 27,384 | 2,937 | 170,806 | 1.7 | ||||||||||||||||||
90% – 100% | — | — | — | — | — | — | ||||||||||||||||||
Greater than 100% | — | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 9,134,038 | 1,046,015 | 154,614 | 65,474 | 10,400,141 | 100.0 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| Debt Service Coverage Ratios | ||||||||||||||||||||||||
| 2015: | Greater than 1.4x | 1.2x – 1.4x | 1.0x – 1.2x | Less than 1.0x | Total | Percent of Total | ||||||||||||||||||
Loan-to-value ratios: | ||||||||||||||||||||||||
Less than 50% | 3,310,857 | 134,224 | 117,417 | 76 | 3,562,574 | 40.4 | % | |||||||||||||||||
50% – 60% | 2,056,466 | 492,618 | 99,041 | 2,834 | 2,650,959 | 30.0 | ||||||||||||||||||
60% – 70% | 1,347,641 | 633,125 | 51,113 | 66,702 | 2,098,581 | 23.8 | ||||||||||||||||||
70% – 80% | 72,551 | 107,527 | 50,712 | 87,160 | 317,950 | 3.6 | ||||||||||||||||||
80% – 90% | 96,548 | 51,230 | 27,874 | 6,460 | 182,112 | 2.0 | ||||||||||||||||||
90% – 100% | — | — | 13,242 | — | 13,242 | 0.2 | ||||||||||||||||||
Greater than 100% | — | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | 6,884,063 | 1,418,724 | 359,399 | 163,232 | 8,825,418 | 100.0 | % | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
The Company’s nontrade receivables are analyzed for credit risk based upon the customer classification of agent or reinsurer. The nontrade receivable and allowance for credit losses by customer classification as of December 31 are shown below:
| 2016 | 2015 | |||||||||||||||||||||||
| Agent | Reinsurer | Total | Agent | Reinsurer | Total | |||||||||||||||||||
Nontrade receivables | $ | 11,860 | 20,963 | 32,823 | 6,976 | 23,581 | 30,557 | |||||||||||||||||
Allowance for credit losses | (4,876 | ) | — | (4,876 | ) | (5,525 | ) | — | (5,525 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net nontrade receivables | $ | 6,984 | 20,963 | 27,947 | 1,451 | 23,581 | 25,032 | |||||||||||||||||
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| |||||||||||||
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 72 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
Rollforward of Allowance for Credit Losses
The allowances for credit losses and recorded investment in financing receivables as of December 31 are shown below:
| Mortgage loans | Nontrade receivables | Loans to affiliates | Loans to non-affiliates | Total | ||||||||||||||||
2016: | ||||||||||||||||||||
Financing receivables, gross | $ | 10,400,141 | 32,823 | 39,120 | 10,145 | 10,482,229 | ||||||||||||||
|
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|
|
|
|
|
|
|
| |||||||||||
Allowance for credit losses: | ||||||||||||||||||||
Beginning balance | $ | 37,400 | 5,525 | — | — | 42,925 | ||||||||||||||
Provision/(benefit) | 11,000 | (649 | ) | — | — | 10,351 | ||||||||||||||
|
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| |||||||||||
Ending balance | 48,400 | 4,876 | — | — | 53,276 | |||||||||||||||
|
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|
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| |||||||||||
Financing receivables ending balance net of valuation allowance | $ | 10,351,741 | 27,947 | 39,120 | 10,145 | 10,428,953 | ||||||||||||||
|
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| |||||||||||
| Mortgage loans | Nontrade receivables | Loans to affiliates | Loans to non-affiliates | Total | ||||||||||||||||
2015: | ||||||||||||||||||||
Financing receivables, gross | $ | 8,825,418 | 30,557 | 33,000 | 11,341 | 8,900,316 | ||||||||||||||
|
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|
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|
| |||||||||||
Allowance for credit losses: | ||||||||||||||||||||
Beginning balance | $ | 35,000 | 6,486 | — | — | 41,486 | ||||||||||||||
Provision/(benefit) | 2,400 | (961 | ) | — | — | 1,439 | ||||||||||||||
|
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|
|
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| |||||||||||
Ending balance | 37,400 | 5,525 | — | — | 42,925 | |||||||||||||||
|
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|
|
| |||||||||||
Financing receivables ending balance net of valuation allowance | $ | 8,788,018 | 25,032 | 33,000 | 11,341 | 8,857,391 | ||||||||||||||
|
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|
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|
|
| |||||||||||
The Company evaluates the mortgage loan allowance for loan loss quarterly, which resulted in an increase of the provision of $11,000 and $2,400 for the years ended December 31, 2016 and 2015, respectively. The increase to the allowance for loan loss is a result of the growing asset base of the mortgage loan portfolio partially offset by improving quality indicators.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 73 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
Past-Due Aging Analysis
Aging analysis of past-due financing receivables as of December 31 is shown below:
| 31–60 days past due | 61–90 days past due | Greater than 90 days past due | Total past due | Current | Total | |||||||||||||||||||
2016: | ||||||||||||||||||||||||
Mortgage loans | $ | — | — | — | — | 10,400,141 | 10,400,141 | |||||||||||||||||
Nontrade receivables | 7,590 | 1,662 | 6,712 | 15,964 | 16,859 | 32,823 | ||||||||||||||||||
Loans to affiliates | — | — | — | — | 39,120 | 39,120 | ||||||||||||||||||
Loans to non-affiliates | 109 | 10 | 71 | 190 | 9,955 | 10,145 | ||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 7,699 | 1,672 | 6,783 | 16,154 | 10,466,075 | 10,482,229 | |||||||||||||||||
|
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| |||||||||||||
| 31–60 days past due | 61–90 days past due | Greater than 90 days past due | Total past due | Current | Total | |||||||||||||||||||
2015: | ||||||||||||||||||||||||
Mortgage loans | $ | — | — | — | — | 8,825,418 | 8,825,418 | |||||||||||||||||
Nontrade receivables | 6,893 | 1,796 | 5,629 | 14,318 | 16,239 | 30,557 | ||||||||||||||||||
Loans to affiliates | — | — | — | — | 33,000 | 33,000 | ||||||||||||||||||
Loans to non-affiliates | 60 | — | — | 60 | 11,281 | 11,341 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total | $ | 6,953 | 1,796 | 5,629 | 14,378 | 8,885,938 | 8,900,316 | |||||||||||||||||
|
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|
|
|
|
|
|
| |||||||||||||
As of December 31, 2016 and 2015, the Company’s financing receivables did not include any balances which are on a nonaccrual status, classified as a troubled debt restructuring, or impaired without a corresponding allowance for credit loss.
| (8) | Reinsurance |
The Company primarily enters into reinsurance agreements to manage risk resulting from its life, annuity, and accident and health businesses, as well as businesses the Company has chosen to exit.
In the normal course of business, the Company seeks to limit its exposure to loss on any single insured and to recover a portion of benefits paid by ceding risks under excess yearly renewal term (YRT) coverage. The Company may also enter into coinsurance agreements for the purpose of preserving capital. The Company generally retained between $1,000 and $5,000 coverage per individual life depending on the type of policy for the years ended December 31, 2016 and 2015.
The Company monitors the financial exposure to the reinsurers, as well as evaluates the financial strength of the reinsurers on an ongoing basis. The Company attempts to mitigate risk by arranging trust accounts or letters of credit with certain reinsurers. Reinsurance recoverables at December 31, 2016 and 2015 are covered by collateral of $3,419,252 and $3,485,810, respectively.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 74 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
The effect of reinsurance on premiums is disclosed in Schedule IV in the Consolidated Financial Statements.
| (9) | Deferred Acquisition Costs |
DAC at December 31 and the changes in the balance for the years then ended are as follows:
| 2016 | 2015 | 2014 | ||||||||||
Balance, beginning of year | $ | 6,283,236 | 4,362,771 | 4,820,215 | ||||||||
Capitalization | 1,006,773 | 911,425 | 1,349,236 | |||||||||
Interest | 172,195 | 181,239 | 177,754 | |||||||||
Amortization | (1,438,375 | ) | (1,331,923 | ) | (853,904 | ) | ||||||
Change in shadow DAC | (777,486 | ) | 2,159,724 | (1,130,530 | ) | |||||||
|
|
|
|
|
| |||||||
Balance, end of year | $ | 5,246,343 | 6,283,236 | 4,362,771 | ||||||||
|
|
|
|
|
| |||||||
The Company reviews its best estimate assumptions each year and records “unlocking” as appropriate. These reviews are based on recent changes in the organization and businesses of the Company and actual and expected performance of in-force policies. The reviews include all assumptions, including mortality, lapses, expenses, and separate account returns. The revised best estimate assumptions were applied to the current in-force policies to project future gross profits.
The pretax impact on the Company’s assets and liabilities as a result of the unlocking during the years ended December 31 is as follows:
| 2016 | 2015 | 2014 | ||||||||||
Assets: | ||||||||||||
DAC | $ | (246,669 | ) | (109,797 | ) | (5,294 | ) | |||||
DSI | (51,156 | ) | (32,400 | ) | (8,673 | ) | ||||||
VOBA | (212 | ) | (180 | ) | (120 | ) | ||||||
Reinsurance recoverables | 2,934 | 5,471 | 117 | |||||||||
|
|
|
|
|
| |||||||
Total decrease in assets | (295,103 | ) | (136,906 | ) | (13,970 | ) | ||||||
Liabilities: | ||||||||||||
Account balances and future policy benefit reserves | (412,959 | ) | (154,064 | ) | (38,177 | ) | ||||||
Unearned premiums | (1,787 | ) | (48,369 | ) | (1,968 | ) | ||||||
|
|
|
|
|
| |||||||
Total decrease in liabilities | (414,746 | ) | (202,433 | ) | (40,145 | ) | ||||||
|
|
|
|
|
| |||||||
Net increase before tax | 119,643 | 65,527 | 26,175 | |||||||||
Deferred income tax expense | 41,875 | 22,934 | 9,161 | |||||||||
|
|
|
|
|
| |||||||
Net increase after tax | $ | 77,768 | 42,593 | 17,014 | ||||||||
|
|
|
|
|
| |||||||
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 75 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
| (10) | Deferred Sales Inducements |
DSI at December 31 and the changes in the balance for years then ended are as follows:
| 2016 | 2015 | 2014 | ||||||||||
Balance, beginning of year | $ | 1,110,192 | 847,000 | 1,076,530 | ||||||||
Capitalization | 29,176 | 48,546 | 143,717 | |||||||||
Amortization | (277,616 | ) | (284,883 | ) | (183,504 | ) | ||||||
Interest | 28,569 | 33,927 | 35,528 | |||||||||
Change in shadow DSI | (125,767 | ) | 465,602 | (225,271 | ) | |||||||
|
|
|
|
|
| |||||||
Balance, end of year | $ | 764,554 | 1,110,192 | 847,000 | ||||||||
|
|
|
|
|
| |||||||
The change in shadow DSI balances are impacted by movements in unrealized gains and losses as a result of market conditions. See note 9 for impacts of unlocking relating to DSI.
| (11) | Income Taxes |
| (a) | Income Tax Expense (Benefit) |
Total income tax expense for the years ended December 31 is as follows:
| 2016 | 2015 | 2014 | ||||||||||
Income tax expense attributable to operations: | ||||||||||||
Current tax expense | $ | 558,016 | 551,052 | 265,586 | ||||||||
Deferred tax (benefit) | (202,860 | ) | (307,986 | ) | (240,863 | ) | ||||||
|
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|
| |||||||
Total income tax expense attributable to net income | 355,156 | 243,066 | 24,723 | |||||||||
Income tax effect on equity: | ||||||||||||
Income tax expense allocated to stockholder’s equity: | ||||||||||||
Attributable to unrealized gains (losses) on investments | 357,363 | (691,519 | ) | 418,073 | ||||||||
Attributable to unrealized gains on | 36 | — | — | |||||||||
Attributable to unrealized gains (losses) | 373 | (2,159 | ) | (1,132 | ) | |||||||
|
|
|
|
|
| |||||||
Total income tax effect on equity | $ | 712,928 | (450,612 | ) | 441,664 | |||||||
|
|
|
|
|
| |||||||
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 76 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
| (b) | Components of Income Tax Expense |
Income tax expense computed at the statutory rate of 35% varies from Income tax expense reported in the Consolidated Statements of Operations for the respective years ended December 31 as follows:
| 2016 | 2015 | 2014 | ||||||||||
Income tax expense computed at the statutory rate | $ | 400,167 | 295,177 | 63,066 | ||||||||
Dividends-received deductions and tax-exempt interest | (40,326 | ) | (40,687 | ) | (27,849 | ) | ||||||
State income tax | 11,266 | 4,642 | 4,106 | |||||||||
(Release) accrual of LIH tax credits | (5,819 | ) | (1,284 | ) | 321 | |||||||
Accrual (release) of tax contingency reserve | 373 | (10,701 | ) | 2,180 | ||||||||
Foreign tax, net | (3,587 | ) | (3,143 | ) | (3,202 | ) | ||||||
Corporate-owned life insurance | (7,833 | ) | (2,285 | ) | (7,806 | ) | ||||||
Penalties | (47 | ) | 529 | (6,174 | ) | |||||||
Other | 962 | 818 | 81 | |||||||||
|
|
|
|
|
| |||||||
Income tax expense as reported | $ | 355,156 | 243,066 | 24,723 | ||||||||
|
|
|
|
|
| |||||||
| (c) | Components of Deferred Tax Assets and Liabilities on the Consolidated Balance Sheets |
Tax effects of temporary differences giving rise to the significant components of the net deferred tax asset (liability). The net deferred tax asset (liability) on the Consolidated Balance Sheets at December 31 is as follows:
| 2016 | 2015 | |||||||
Deferred tax assets: | ||||||||
Policy reserves | $ | 3,326,409 | 3,219,849 | |||||
Expense accruals | 40,792 | 47,412 | ||||||
Other-than-temporarily impaired assets | 40,821 | 20,961 | ||||||
Provision for postretirement benefits | 49,437 | 34,072 | ||||||
Other | 3,267 | 6,898 | ||||||
|
|
|
| |||||
Total deferred tax assets | 3,460,726 | 3,329,192 | ||||||
|
|
|
| |||||
Deferred tax liabilities: | ||||||||
Deferred acquisition costs | (1,533,188 | ) | (1,948,643 | ) | ||||
Investment income | (253,987 | ) | (230,228 | ) | ||||
Depreciation and amortization | (59,822 | ) | (55,351 | ) | ||||
Net unrealized gains on investments and foreign exchange | (1,225,720 | ) | (551,999 | ) | ||||
|
|
|
| |||||
Total deferred tax liabilities | (3,072,717 | ) | (2,786,221 | ) | ||||
|
|
|
| |||||
Net deferred tax asset | $ | 388,009 | 542,971 | |||||
|
|
|
| |||||
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 77 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
Although realization is not assured, the Company believes it is not necessary to establish a valuation allowance for ordinary deferred tax assets, as it is more likely than not the deferred tax assets will be realized principally through future reversals of existing ordinary taxable temporary differences and future ordinary taxable income. For deferred tax assets that are capital in nature, considering all objective evidence and the available tax planning strategy, it is more likely than not the deferred tax assets that are capital in nature will be realized and no valuation allowance is required. The amount of the ordinary and capital deferred tax assets considered realizable could be reduced in the near term if estimates of future reversals of existing taxable temporary differences and future ordinary and capital taxable income are reduced.
Income taxes paid by the Company were $914,413, $329,563, and $250,127 in 2016, 2015, and 2014, respectively. At December 31, 2016 and 2015, respectively, the Company had a tax (receivable from)/payable to AZOA of ($89,111) and $291,948, reported in Other assets and Other liabilities, respectively, on the Consolidated Balance Sheets.
At December 31, 2016 and 2015, the Company had a tax payable separate from the agreement with AZOA in the amount of $18 and $119, respectively. These amounts are for foreign taxes.
The Company is included in the consolidated group for which AZOA files a federal income tax return on behalf of all group members. As a member of the AZOA consolidated group, the Company is no longer subject to U.S. federal and non-U.S. income tax examinations for years prior to 2013, though examinations of combined returns filed by AZOA, which include the Company by certain U.S. state and local tax authorities, may still be conducted for 2008 and subsequent years. The last Internal Revenue Service examination of AZOA involved amended returns filed by AZOA for the 2008 and 2009 tax years. These amended returns were accepted by the Internal Revenue Service as filed. The IRS has initiated an examination for AZOA’s 2011 tax return. While 2011 is closed to assessment, AZOA did file an amended tax return on which it claimed income tax refunds. Under federal tax law, the amount claimed is subject to offsetting assessments even though the statute of limitations for the year is closed.
In accordance with the Income Taxes Topic of the Codification, the Company recognizes liabilities for certain unrecognized tax benefits. Reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| 2016 | 2015 | |||||||
Balance at January 1 | $ | 1,367 | 59,103 | |||||
Additions based on tax positions related to the current year | 330 | 359 | ||||||
Amounts released related to tax positions taken in prior years | — | (58,095 | ) | |||||
|
|
|
| |||||
Balance at December 31 | $ | 1,697 | 1,367 | |||||
|
|
|
| |||||
The balance at December 31, 2016, consists of tax positions for which the deductibility is more likely than not. The disallowance would affect the annual effective tax rate.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 78 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in federal income tax expense. During the years ended December 31, 2016, 2015, and 2014, the Company recognized expenses/(benefit) of $373, ($10,701), and $2,180, respectively, in interest and penalties. The Company had $1,805 and $1,431 for the payment of interest and penalties accrued at December 31, 2016 and 2015, respectively.
| (12) | Goodwill and Intangible Assets |
Goodwill at December 31, 2016 and 2015, and the changes in the balance for the years then ended are as follows:
| 2016 | 2015 | |||||||
Balance, beginning of year | $ | 482,905 | 482,905 | |||||
Increase in goodwill due to acquisition (1) | 4,929 | — | ||||||
|
|
|
| |||||
Balance, end of year | $ | 487,834 | 482,905 | |||||
|
|
|
| |||||
The goodwill balance at December 31, 2016 and 2015, relates to the Individual Annuity segment. See note 24 for further discussion regarding the operating segments.
Intangible assets at December 31, 2016 and 2015, and the changes in the balance for the years then ended are as follows:
| 2016 | 2015 | |||||||
Balance, beginning of year | $ | — | 2,050 | |||||
Increase in intangibles due to acquisition (1) | 2,872 | — | ||||||
Amortization | (376 | ) | — | |||||
Transfer to held-for-sale | — | (2,050 | ) | |||||
|
|
|
| |||||
Balance, end of year | $ | 2,496 | — | |||||
|
|
|
| |||||
| (1) | The increase in goodwill and intangible assets relates to the acquisition of a Field Marketing Office (FMO). See note 19 for further details regarding the acquisition. |
During 2015, intangible assets of $2,050 were transferred to held-for-sale assets, and recorded in Other assets on the Consolidated Balance Sheets. See note 2 for further details.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 79 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
The net amortization of the intangible assets in each of the next five years is as follows:
2017 | $ | 410 | ||
2018 | 410 | |||
2019 | 410 | |||
2020 | 410 | |||
2021 | 410 | |||
2022 and beyond | 446 |
Accumulated amortization of intangible assets is $14,869 and $14,493 as of December 31, 2016 and 2015, respectively.
Goodwill and intangible assets are reviewed on an annual basis and impairment considerations are made depending on economic market conditions. There were no impairments to goodwill or intangible assets in 2016 or 2015.
| (13) | Value of Business Acquired |
VOBA at December 31 and the changes in the balance for the years then ended are as follows:
| 2016 | 2015 | 2014 | ||||||||||
Balance, beginning of year | $ | — | — | — | ||||||||
Interest | 127 | 210 | 314 | |||||||||
Amortization | (1,619 | ) | (2,950 | ) | (3,479 | ) | ||||||
Change in shadow VOBA | 1,492 | 2,740 | 3,165 | |||||||||
|
|
|
|
|
| |||||||
Balance, end of year | $ | — | — | — | ||||||||
|
|
|
|
|
| |||||||
The net amortization of the VOBA in each of the next five years is expected to be as follows:
2017 | $ | 2,059 | ||
2018 | 1,731 | |||
2019 | 711 | |||
2020 and beyond | — |
Accumulated amortization of VOBA is $242,835 and $241,216 as of December 31, 2016 and 2015, respectively.
| (14) | Separate Accounts and Annuity Product Guarantees |
The following assumptions were used to determine the GMDB and GMIB liabilities as of December 31, 2016 and 2015:
| • | 100 stochastically generated investment performance scenarios. |
| • | Mean investment performance assumption of 6.5% in 2016 and 2015. |
| • | Volatility assumption of 13.4% in 2016 and 2015. |
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 80 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
| • | For 2016 mortality assumption is based on the Annuity 2000 mortality table for all variable products. The 2016 past mortality improvement is based on gender distinct mortality loads varying by attained age, and future mortality improvement factors are based on gender distinct projection scales varying by attained age and subject to grading factors. The 2015 mortality assumption was 87% of the Annuity 2000 mortality table with a constant mortality improvement. |
| • | Lapse rates vary by contract type and duration. Spike rates could approach 40% with an ultimate rate around 15%. |
| • | Discount rates vary by contract type and equal an assumed long-term investment return (6.5%), less the applicable mortality and expense rate. |
| • | GMIB contracts contain a dynamic lapse assumption. For example, if the contract is projected to have a large additional benefit, then it becomes less likely to lapse. |
The following assumptions were used to determine the GMAB and GMWB liabilities as of December 31, 2016 and 2015:
| • | 1000 stochastically generated investment performance scenarios. |
| • | Market volatility assumption varies by fund type and grades from a current volatility number to a long-term assumption over one year as shown below: |
| 2016 | ||||||||
Fund index type | Current volatility | Long-term forward volatility | ||||||
Large cap | 16.3 | % | 18.1 | % | ||||
Bond | 3.4 | 3.9 | ||||||
International | 16.8 | 21.4 | ||||||
Small cap | 20.3 | 21.5 | ||||||
| 2015 | ||||||||
Fund index type | Current volatility | Long-term forward volatility | ||||||
Large cap | 17.6 | % | 18.1 | % | ||||
Bond | 3.4 | 3.9 | ||||||
International | 17.9 | 23.1 | ||||||
Small cap | 20.8 | 21.3 | ||||||
| • | For 2016 mortality assumption is based on the Annuity 2000 mortality table for all variable products. The 2016 past mortality improvement is based on gender distinct mortality loads varying by attained age, and future mortality improvement factors are based on gender distinct projection scales varying by attained age and subject to grading factors. The 2015 mortality assumption was 87% of the Annuity 2000 mortality table with a constant mortality improvement. |
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 81 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
| • | Lapse rates vary by contract type and duration. Spike rates could approach 40% with an ultimate rate around 15%. |
Guaranteed minimums for the respective years ended December 31 are summarized as follows (note that the amounts listed are not mutually exclusive, as many products contain multiple guarantees):
| 2016 | 2015 | |||||||||||||||||||||||
| Account value | Net amount at risk | Weighted age (years) | Account value | Net amount at risk | Weighted age (years) | |||||||||||||||||||
GMDB: | ||||||||||||||||||||||||
Return of premium | $ | 23,400,820 | 73,163 | 63.9 | $ | 22,106,973 | 144,789 | 63.4 | ||||||||||||||||
Ratchet and return of premium | 4,602,792 | 142,357 | 67.8 | 4,799,853 | 265,614 | 67.1 | ||||||||||||||||||
Ratchet and rollup | 3,602,988 | 484,301 | 71.0 | 3,756,726 | 590,255 | 70.2 | ||||||||||||||||||
Ratchet and earnings protection rider | 3,072 | 885 | 84.4 | 3,006 | 1,105 | 83.2 | ||||||||||||||||||
Reset | 84,191 | 692 | 76.1 | 88,037 | 1,422 | 75.7 | ||||||||||||||||||
Earnings protection rider | 235,360 | 22,383 | 68.8 | 244,262 | 21,146 | 68.1 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 31,929,223 | 723,781 | $ | 30,998,857 | 1,024,331 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
GMIB: | ||||||||||||||||||||||||
Return of premium | $ | 92,121 | 325 | 72.9 | $ | 103,455 | 390 | 71.7 | ||||||||||||||||
Ratchet and return of premium | 1,885,185 | 4,526 | 70.3 | 2,128,810 | 39,990 | 69.4 | ||||||||||||||||||
Ratchet and rollup | 4,653,568 | 723,893 | 67.5 | 4,921,715 | 894,936 | 66.7 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 6,630,874 | 728,744 | $ | 7,153,980 | 935,316 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
GMAB: | ||||||||||||||||||||||||
Five years | $ | 2,738,307 | 10,160 | 69.9 | $ | 3,125,235 | 75,278 | 68.8 | ||||||||||||||||
Ten years | 3,212 | 1 | 82.2 | 3,144 | 1 | 81.2 | ||||||||||||||||||
Target date retirement-7 year | 613,746 | 1,218 | 63.9 | 685,742 | 26,416 | 63.2 | ||||||||||||||||||
Target date retirement-10 year | 250,033 | 4,559 | 60.5 | 271,947 | 17,557 | 59.8 | ||||||||||||||||||
Target date with management levers | 3,332,790 | 73,070 | 61.9 | 3,361,471 | 189,196 | 61.3 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 6,938,088 | 89,008 | $ | 7,447,539 | 308,449 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
GMWB: | ||||||||||||||||||||||||
No living benefit | $ | 707,212 | — | 69.0 | $ | 689,570 | — | 68.5 | ||||||||||||||||
Life benefit with optional reset | 921,876 | 171,135 | 68.7 | 951,084 | 182,920 | 68.1 | ||||||||||||||||||
Life benefit with automatic reset | 1,471,419 | 194,438 | 65.2 | 1,498,005 | 205,492 | 64.4 | ||||||||||||||||||
Life benefit with 8% rollup | 28,562 | 6,286 | 70.2 | 30,070 | 6,520 | 69.1 | ||||||||||||||||||
Life benefit with 10% rollup | 1,109,985 | 348,423 | 64.6 | 1,138,409 | 338,886 | 63.8 | ||||||||||||||||||
Life benefit with management levers | 11,579,110 | 2,307,239 | 61.3 | 11,283,267 | 2,054,036 | 60.7 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 15,818,164 | 3,027,521 | $ | 15,590,405 | 2,787,854 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
The growth in account values has outpaced the growth in the net amount at risk in 2016 due to the increased market performance of the separate accounts.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 82 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
At December 31, variable annuity account balances were invested in separate account funds with the following investment objectives. Balances are presented at fair value:
Investment type | 2016 | 2015 | ||||||
Bond | $ | 3,484,805 | 3,447,255 | |||||
Domestic equity | 13,959,524 | 14,225,576 | ||||||
International equity | 1,308,840 | 1,473,393 | ||||||
Specialty | 8,320,880 | 8,362,991 | ||||||
Money market | 585,039 | 655,648 | ||||||
Other | 74,173 | 78,260 | ||||||
|
|
|
| |||||
Total | $ | 27,733,261 | 28,243,123 | |||||
|
|
|
| |||||
The following table summarizes the liabilities for variable contract guarantees that are reflected in the general account and shown in Account balances and future policy benefit reserves on the Consolidated Balance Sheets:
| GMDB | GMIB | GMAB | GMWB | Totals | ||||||||||||||||
Balance as of December 31, 2014 | $ | 86,422 | 152,779 | 264,857 | 1,491,280 | 1,995,338 | ||||||||||||||
Incurred guaranteed benefits | 24,238 | 34,835 | 122,095 | 679,259 | 860,427 | |||||||||||||||
Paid guaranteed benefits | (13,633 | ) | (11,149 | ) | (12,095 | ) | — | (36,877 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance as of December 31, 2015 | 97,027 | 176,465 | 374,857 | 2,170,539 | 2,818,888 | |||||||||||||||
Incurred guaranteed benefits | 9,845 | (17,290 | ) | (96,596 | ) | (14,236 | ) | (118,277 | ) | |||||||||||
Paid guaranteed benefits | (17,598 | ) | (13,942 | ) | (34,898 | ) | (69 | ) | (66,507 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance as of December 31, 2016 | $ | 89,274 | 145,233 | 243,363 | 2,156,234 | 2,634,104 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| (15) | Accident and Health Claim Reserves |
Accident and health claim reserves are based on estimates that are subject to uncertainty. Uncertainty regarding reserves of a given accident year is gradually reduced as new information emerges each succeeding year, thereby allowing more reliable reevaluations of such reserves. While management believes that reserves as of December 31, 2016, are appropriate, uncertainties in the reserving process could cause such reserves to develop favorably or unfavorably in the near term as new or additional information emerges. Any adjustments to reserves are reflected in the operating results of the periods in which they are made. Movements in reserves could significantly impact the Company’s future reported earnings.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 83 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
Activity in the accident and health claim reserves is summarized as follows:
| 2016 | 2015 | 2014 | ||||||||||
Balance at January 1, net of reinsurance recoverables of $340,048, $283,252, and 259,829, respectively | $ | 157,321 | 135,168 | 127,405 | ||||||||
Adjustment primarily related to commutation and assumption reinsurance on blocks of business | 34 | 323 | (35 | ) | ||||||||
Incurred related to: | ||||||||||||
Current year | 93,844 | 71,378 | 60,474 | |||||||||
Prior years | 789 | (4,275 | ) | (11,243 | ) | |||||||
|
|
|
|
|
| |||||||
Total incurred | 94,633 | 67,103 | 49,231 | |||||||||
|
|
|
|
|
| |||||||
Paid related to: | ||||||||||||
Current year | 5,829 | 4,331 | 3,677 | |||||||||
Prior years | 49,556 | 40,942 | 37,756 | |||||||||
|
|
|
|
|
| |||||||
Total paid | 55,385 | 45,273 | 41,433 | |||||||||
|
|
|
|
|
| |||||||
Balance at December 31, net of reinsurance recoverables of $396,850, $340,048, and $283,252, respectively | $ | 196,603 | 157,321 | 135,168 | ||||||||
|
|
|
|
|
| |||||||
Prior year incurred claim reserves for 2016 were unfavorable as a result of re-estimation of unpaid claims and claim adjustment expenses, principally on individual LTC and group health lines of business.
Prior year incurred claim reserves for 2015 and 2014 reflect favorable claim development primarily within the individual LTC line of business. This favorable development is partially due to an update to claim continuance assumptions.
| (16) | Mortgage Notes Payable |
In 2004, the Company obtained an $80,000 mortgage loan from an unrelated third party for the Company’s headquarters. In 2005, the Company agreed to enter into a separate loan agreement with the same counterparty in conjunction with the construction of an addition to the Company’s headquarters of $65,000. This loan was funded in 2006 and combined with the existing mortgage. As of December 31, 2016 and 2015, the combined loan had a balance of $76,916 and $84,761, respectively. This 20 year, fully amortizing loan has an interest rate of 5.52%, with a maturity date of August 1, 2024. The level principal and interest payments are made monthly. The loan allows for prepayment; however, it is accompanied by a make-whole provision. The proceeds of this mortgage were used to pay off a floating rate construction loan that the Company used to finance the acquisition of property for, and construction of, the Company’s headquarters.
Interest expense for all loans is $4,449, $4,871, and $5,271 in 2016, 2015, and 2014, respectively, and is presented in General and administrative expenses in the Consolidated Statements of Operations.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 84 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
The future principal payments required under the loan are as follows:
2017 | $ | 8,288 | ||
2018 | 8,758 | |||
2019 | 9,254 | |||
2020 | 9,778 | |||
2021 and beyond | 40,839 | |||
|
| |||
Total | $ | 76,917 | ||
|
|
| (17) | Commitments and Contingencies |
The Company and its subsidiaries are named as defendants in various pending or threatened legal proceedings on an ongoing basis, including three putative class action proceedings, arising from the conduct of business: Sanchez v. Allianz Life Ins. Co. of North America (Superior Court of California, L.A. County, BC594715) was filed in 2015, Berthiaume et al. v. Allianz Life Ins. Co. of North America et al (Minnesota District Court, Henn. County) was commenced in 2016, and Thompson v. Allianz Life Ins. Co. of North America (United Stated District Court, District of Minnesota, Case No. 0:17-cv00096) was filed in 2016. None of these putative class actions has been certified. The Company generally intends to vigorously contest the lawsuits, but is or may pursue settlement negotiations in some cases, if appropriate. The outcome of the cases is uncertain at this time, and there can be no assurance that such litigation, or any future litigation, will not have a material adverse effect on the Company and/or its subsidiaries. The Company recognizes legal costs for defending itself as incurred.
The Company is contingently liable for possible future assessments under regulatory requirements pertaining to insolvencies and impairments of unaffiliated insurance companies. Provision has been made for assessments currently received and assessments anticipated for known insolvencies.
The financial services industry, including mutual funds, variable and fixed annuities, life insurance, distribution companies, and broker-dealers, is subject to close scrutiny by regulators, legislators, and the media.
Federal and state regulators, such as state insurance departments, state securities departments, the SEC, the Financial Industry Regulatory Authority, and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning various selling practices, including suitability reviews, product exchanges, sales to seniors, and compliance with, among other things, insurance laws and securities laws. The Company is subject to ongoing market conduct examinations and investigations by regulators, which may have a material adverse effect on the Company.
It can be expected that annuity product design and sales practices will be an ongoing source of regulatory scrutiny and enforcement actions, litigation, and rulemaking. Similarly, private litigation regarding sales practices is ongoing against a number of insurance companies.
These matters could result in legal precedents and new industry-wide legislation, rules, and regulations that could significantly affect the financial services industry, including life insurance and annuity companies. It
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 85 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
is unclear at this time whether any such litigation or regulatory actions will have a material adverse effect on the Company in the future.
When evaluating litigation, claims, and assessments, management considers the nature of the litigation, progress of the case, opinions or views of legal counsel, as well as prior experience in similar cases. Management uses this information to assess whether a loss is probable and if the amount of loss can be reasonably estimated prior to making any accruals.
The Company has the following investments that require a commitment of capital for the years ended December 31, 2016 and 2015:
| 2016 | 2015 | |||||||
Limited partnerships | $ | 187,484 | 26,000 | |||||
Private placement debt | 127,438 | 103,200 | ||||||
Infrastructure debt | 320,913 | 37,990 | ||||||
Mortgage loans | 414,360 | 332,773 | ||||||
|
|
|
| |||||
| $ | 1,050,195 | 499,963 | ||||||
|
|
|
| |||||
The Company has LIH limited partnership investments that require a commitment of Capital. The Company has open capital commitments of $153,887 and $93,180 at December 31, 2016 and 2015, respectively. The Company has recorded an unfunded commitment liability of $144,180 and $87,928, as of December 31, 2016 and 2015, respectively, within Other liabilities on the Consolidated Balance Sheets. The liability represents the discounted present value of the expected payments.
The Company leases office space and certain furniture and equipment pursuant to operating leases with some leases containing renewal options and escalation clauses. Expense for all operating leases was $3,729, $3,155, and $2,828 in 2016, 2015, and 2014, respectively. The future minimum lease payments required under operating leases are as follows:
2017 | $ | 2,302 | ||
2018 | 1,946 | |||
2019 | 1,435 | |||
2020 | 1,041 | |||
2021 | 892 | |||
|
| |||
2022 and beyond | $ | 7,616 | ||
|
|
The Company had capital leases to finance furniture and equipment for the Company’s headquarters. The financed assets were fully depreciated as of December 31, 2015 with a cost and accumulated depreciation of $2,976 and $2,976 at December 31, 2015, respectively, and are included in Other assets on the Consolidated Balance Sheets. Depreciation on the financed assets was $619 and $744 in 2015 and 2014.
The Company has a service agreement (the agreement) with certain unrelated broker-dealers for a marketing support program related to the distribution of select variable insurance products. Under the agreement, the Company pays a base service fee of 0.10% on the amount of variable insurance products
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 86 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
under management at the commencement of the agreement. An additional service fee of 0.15% is calculated on the total variable insurance products under management held in excess of this base amount. The fee is calculated on a monthly basis and is paid quarterly. Either party may terminate the agreement with a 90-day notice. Upon termination, the service fee continues to be paid from the date of termination for a period of ten years provided that the broker-dealer is not in material breach of the contract. In the event of termination, the Company has calculated its total commitment at December 31, 2016, to be $5,509 annually with a total commitment of $55,086. The calculation was based on the total variable insurance products under management as of December 31, 2016, due to the variability in estimating future assets under management (such as sales, lapse rate, and fund performance). Total expense under the agreement amounted to $6,641, $6,677, and $7,734 in 2016, 2015, and 2014, respectively.
| (18) | Employee Benefit Plans |
The Company participates in the Allianz Asset Accumulation Plan (AAAP), a defined contribution plan sponsored by Allianz of America Corporation (AZOAC). Eligible employees are immediately enrolled in the AAAP on their first day of employment. The AAAP will accept participants’ pretax, Roth 401(k), and/or after-tax contributions up to 80% of the participants’ eligible compensation, although contributions remain subject to annual limitations set by the Internal Revenue Service. The Company matches up to a maximum of 7.5% of the employees’ eligible compensation. Participants are 100% vested in the Company’s matching contribution after three years of service.
The AAAP administration expenses and the trust fund, including trustee fees, investment manager fees, and audit fees, are payable from the trust fund but may, at the Company’s discretion, be paid by the Company. Any legal fees are not paid from the trust fund, but are instead paid by the Company. It is the Company’s policy to fund the AAAP costs as incurred. The Company has expensed $15,044, $14,204, and $13,242, in 2016, 2015, and 2014, respectively, toward the AAAP matching contributions and administration expenses.
A defined group of highly compensated employees is eligible to participate in the AZOAC Deferred Compensation Plan. The purpose of the plan is to provide tax planning opportunities, as well as supplemental funds upon retirement. The plan is unfunded, meaning no assets of the Company have been segregated or defined to represent the liability for accrued assets under the plan. Employees are 100% vested upon enrollment in the plan for funds they have deferred. Employees’ funds are invested on a pay period basis and are immediately vested. Participants and the Company share the administrative fee. The accrued liability of $26,358 and $20,108 as of December 31, 2016 and 2015, respectively, is recorded in Other liabilities on the Consolidated Balance Sheets.
The Company sponsors a nonqualified deferred compensation plan for a defined group of agents. The Company may decide to make discretionary contributions to the plan in the form and manner the Company determines. Discretionary contributions are currently determined based on production. The accrued liability of $64,738 and $45,171 as of December 31, 2016 and 2015, respectively, is recorded in Other liabilities on the Consolidated Balance Sheets.
The Company participates in a stock-based compensation plan sponsored by Allianz SE, which awards certain employees SAR and RSU that are tied to Allianz SE stock. Allianz SE determines the number of SAR and RSU granted to each participant. The Company records expense equal to the change in fair value
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 87 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
of the units during the reporting period. A change in value of $3,983, $9,820, and $8,429 was recorded in 2016, 2015, and 2014, respectively, and is included in General and administrative expenses in the Consolidated Statements of Operations. The related liability of $13,983 and $17,553 as of December 31, 2016 and 2015, respectively, is recorded in Other liabilities on the Consolidated Balance Sheets.
The Company participates in the Employee Stock Purchase Plan sponsored by AZOAC that is designed to provide eligible employees with an opportunity to purchase American Depository Shares of Allianz SE at a discounted price. An aggregate amount of 250,000 Ordinary Shares is reserved for this plan. Allianz SE determines the purchase price of the share-based on the closing price of an Ordinary Share of Allianz SE on the Frankfurt stock exchange on the date of each purchase. Employees are given the opportunity to purchase these shares quarterly on predetermined dates set by Allianz SE. Employees are not allowed to sell or transfer the shares for a one-year period following the purchase settlement date. The difference between the market price and the discount price, or the discount, is paid by the Company and amounted to $946, $754, and $654 in 2016, 2015, and 2014, respectively, and is recorded in General and administrative expenses in the Consolidated Statements of Operations. The discount is reflected as taxable income in the year of purchase to employees.
The Company participates in the AZOAC Severance Allowance Plan. Under the AZOAC Severance Allowance Plan, all employees who are involuntarily terminated due to job elimination or reduction in force are eligible to receive benefits. The Company expensed $983, $1,079, and $501 in 2016, 2015, and 2014, respectively, toward severance payments.
The Company offers a life insurance benefit to eligible employees hired prior to January 1, 1993, who retire under the Employer sponsored retirement program provided they are age 65 or age 55 with 10 or more years of service. The Company’s plan obligation at December 31, 2016 and 2015, was $1,105 and $1,057, respectively. This liability is included in Other liabilities on the Consolidated Balance Sheets.
The Company intends to close the Welfare Benefit Trust (Trust) in 2017. The Trust’s assets were used to prefund the Company’s self-insured medical plan. The balance was $0 and $160 at December 31, 2016 and 2015, respectively.
| (19) | Related-Party Transactions |
| (a) | Loans to Affiliates |
The Company held related-party Cash Pool investments of $0 and $5 at December 31, 2016 and 2015, respectively. The Company does not foresee a credit risk with these investments given the financial strength of Allianz SE, which currently has an A.M. Best rating of A+ and a S&P rating of AA.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 88 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
In 2015, the Company entered into an agreement to lend Allianz Managed Operations and Services of America (AMOSA) $33,000. The remaining loan balance was $33,000 as of December 31, 2015. In March 2016, the $33,000 loan and accrued interest of $165 was assigned to AZOA through a dividend and removed from the Company’s Loans to affiliates account on the Consolidated Balance Sheets. The interest rate is a fixed rate of 2.03%. Interest of $165 and $488 was earned during 2016 and 2015 and is included in Interest and similar income, net in the Consolidated Statements of Operations.
In 2016, the Company entered into an agreement to lend AZOA $39,120. The remaining loan balance was $39,120 as of December 31, 2016 and is included in Loans to affiliates on the Consolidated Balance Sheets. Repayment is due in August 2021 which is the maturity date of this loan. The interest rate is a fixed rate of 1.61%. Interest of $214 was earned during 2016 and is included in Interest and similar income, net in the Consolidated Statement of Operations.
| (b) | Investments in Limited Partnerships |
In 2016, the Company made an investment in a limited partnership that is managed by its affiliate Pacific Investment Management Company (PIMCO). The Company committed capital of $50,114 of which $44,000 is unfunded as of December 31, 2016. During 2016, the Company received distributions in excess of cost of $413 which is included in Realized investment (losses) gains, net in the Consolidated Statements of Operations. As of December 31, 2016, the fair value of the investment is $6,365 and is recorded in Other invested assets on the Consolidated Balance Sheets.
| (c) | Real Estate |
The Company has agreements to sublease office space to related parties, wholly owned by the same parent company, AZOA. The Company earned rental income of $909, $1,065, and $1,281 in 2016, 2015, and 2014, respectively, which is included in Other revenue on the Consolidated Statements of Operations. Related to this agreement, the Company had a receivable balance of $152 and $76 at December 31, 2016 and 2015, respectively. In addition, the Company leases office space from Allianz Global Corporate and Specialty pursuant to a sublease agreement. In connection with this subleasing arrangement, the Company has incurred rent expense of $27, $27, and $32, in 2016, 2015, and 2014, respectively, which is included in General and administrative expenses within the Consolidated Statements of Operations.
| (d) | Service Fees |
The Company incurred fees for services provided by affiliated companies of $100,689, $63,530, and $40,985 in 2016, 2015, and 2014, respectively. The Company’s liability for these expenses was $40,267 and $12,312 at December 31, 2016 and 2015, respectively, and is included in Other liabilities on the Consolidated Balance Sheets. On a quarterly basis, the Company pays the amount due through cash settlement.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 89 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
The Company earned revenues for various services provided to affiliated companies of $21,568, $6,305, and $4,711, in 2016, 2015, and 2014, respectively. The receivable for these revenues was $8,260 and $1,400 at December 31, 2016 and 2015, respectively, and is included in Receivables on the Consolidated Balance Sheets. On a quarterly basis, the Company receives payment through cash settlement.
The Company has agreements with its affiliates PIMCO, Oppenheimer Capital LLC (OpCap), and with certain other related parties whereby (1) specific investment options managed by PIMCO and OpCap are made available through the Company’s separate accounts to holders of the Company’s variable annuity products, (2) the Company receives compensation for providing administrative and recordkeeping services relating to the investment options managed by PIMCO and OpCap. Income recognized by the Company from these affiliates for distribution and in-force related costs as a result of providing investment options to the contractholders was $12,771, $14,102, and $16,260 during 2016, 2015, and 2014, respectively, which is included in Fee and commission revenue in the Consolidated Statements of Operations. At December 31, 2016 and 2015, $2,022 and $2,217, respectively, were included for these fees in Receivables on the Consolidated Balance Sheets. Expenses incurred to these affiliates for management of sub-advised investment options were $441, $732, and $848 during 2016, 2015, and 2014, respectively, which are included in General and administrative expenses in the Consolidated Statements of Operations. The related payable to these affiliates was $0 and $50 at December 31, 2016 and 2015, respectively, and is included in Other policyholder funds on the Consolidated Balance Sheets.
| (e) | Dividends to parent |
The Company paid dividends to AZOA of $894,165 in 2016, which represented $861,000 cash and $33,165 related to the AMOSA loan and accrued interest. The Company paid dividends to AZOA of $572,125 and $250,000 in 2015 and 2014, respectively.
| (f) | Subsidiary Transactions |
In July 2015, The Annuity Store (TAS), a wholly owned subsidiary of the Company, purchased a 100% interest in a FMO, from Fireman’s Fund Insurance Company (FFIC), a subsidiary of AZOA for $2,617. TAS recorded the assets and liabilities of the entity at the historical cost recorded by FFIC. An excess of $2,125 was paid over the basis and charged to equity as a dividend paid to AZOA. The dividend paid as the result of the sale is included in the dividend paid to parent listed above.
On February 1, 2016, Allegiance Marketing Group, LLC, a wholly-owned subsidiary of Allianz Individual Insurance Group LLC (AIIG), which is a wholly owned subsidiary of the Company, merged with and into GamePlan Financial Marketing (GamePlan), another wholly-owned subsidiary of AIIG. GamePlan was the surviving entity.
On February 2, 2016, GamePlan purchased a 100% interest in an independent FMO for a purchase price of $7,710. GamePlan recorded these assets and liabilities of the entity at fair value. As a result of the purchase, Goodwill in the amount of $4,929 and Intangible assets of $2,872 were recorded in Other assets on the Consolidated Balance Sheets. The intangible assets will be amortized over a
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 90 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
period of seven years. During 2016, the Company recorded amortization expense of $376 for the intangible assets acquired.
On November 1, 2016, Roster Financial LLC, a wholly owned subsidiary of AIIG, merged with and into GamePlan. GamePlan was the surviving entity.
The Company held a minority equity interest in a certain FMO. A put option within the stockholders agreement was exercised, which required the Company to purchase all of the remaining stock in the FMO. In lieu of purchasing the remaining stock, the Company purchased a put option for $6,500 on December 3, 2014, and subsequently cancelled it. Simultaneously, the FMO purchased the minority interest for $500. The Company recorded a loss of $6,500 related to the purchase of the put option. As part of the sale of the minority equity interest, goodwill of $1,496 was eliminated.
| (g) | Reinsurance |
On October 1, 2010, the Company created a subsidiary named Allianz Annuity Company of Missouri (AAMO), a captive reinsurance entity domiciled in Missouri with a $250 capital contribution. On December 22, 2010, an additional capital contribution was made for $288,234 to AAMO. Prior to December 1, 2015, the Company ceded to AAMO, and AAMO provided indemnity reinsurance on a combined funds withheld coinsurance and modified coinsurance basis, a 20% quota share of the Company’s net liability of variable annuity policies written directly by the Company starting with 2010 policies for a particular product. The impact of this reinsurance agreement is eliminated through consolidation.
On December 1, 2015, the Company recaptured all risks ceded to AAMO under the reinsurance agreement and terminated the reinsurance agreement. Following the recapture and termination, AAMO maintained its license to act as a Missouri Special Purpose Life Reinsurance Captive Insurance Company (SPLRC) under Missouri SPLRC Law. Upon recapture, the liabilities were incorporated into the Company’s general account liabilities and the modified coinsurance and funds withheld trust agreements were terminated. As part of the recapture, bonds and IRS were sold by AAMO which generated realized gains of $3,806. After intercompany balances were settled, AAMO paid a dividend to the Company in the amount of $455,843. The Company received approval from the Missouri Department for all transactions noted above.
On September 29, 2009, the Company created a subsidiary named AZMO, a captive reinsurance entity domiciled in Missouri with a $250 capital contribution. On December 31, 2009, the Company ceded to AZMO, on a coinsurance basis and modified coinsurance basis, a 100% quota share of the Company’s net liability of level term life insurance policies and certain universal life insurance policies written directly by the Company. A letter of credit was issued under an existing letter of credit facility in which Allianz SE is the applicant and the face amount of the letter of credit is in a qualifying trust established by AZMO. On December 31, 2009, an additional capital contribution was made for $282,000 to AZMO. The impact of this reinsurance agreement is eliminated through consolidation.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 91 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
The Company has reinsurance recoverables and payables due to or from reinsurance agreements with other affiliated entities. Total affiliated net reinsurance payable was $79 as of December 31, 2016 and is included in Other Liabilities on the Consolidated Balance Sheets. Total affiliated net reinsurance recoverable was $128 as of December 31, 2015, and is included in Reinsurance recoverables on the Consolidated Balance Sheets.
| (h) | Line of Credit Agreement |
The Company has a line of credit agreement with its subsidiary, AZNY, to provide liquidity, as needed. The Company’s lending capacity under the agreement is limited to 5% of the General Account admitted assets of AZNY as of the preceding year-end. There are no amounts outstanding under the line of credit agreement as of December 31, 2016 and 2015. No amounts have been borrowed during the years ended December 31, 2016 and 2015.
| (20) | Statutory Financial Data and Dividend Restrictions |
Statutory accounting practices prescribed or permitted by the Company’s state of domicile are directed toward insurer solvency and protection of policyholders. Accordingly, certain items recorded in financial statements prepared under GAAP are excluded or vary in calculation in determining statutory policyholders’ surplus and gain from operations. Currently, these items include, among others, DAC, deferred taxes, receivables (which are more than 90 days past due), reinsurance, and certain investments. Additionally, account balances and future policy benefit reserves calculated for statutory reporting do not include provisions for withdrawals.
The Company’s statutory capital and surplus reported in the statutory annual statement filed with the State of Minnesota as of December 31, 2016 and 2015, was $6,165,279 and $5,822,117, respectively. The Company’s net gain from operations reported in the statutory annual statement filed with the State of Minnesota as of December 31, 2016 and 2015, was $1,497,192 and $2,103,975, respectively.
The Company is required to meet minimum statutory capital and surplus requirements. The Company’s statutory capital and surplus as of December 31, 2016 and 2015, were in compliance with these requirements. The maximum amount of dividends that can be paid by Minnesota insurance companies to stockholders without prior approval of the Department is subject to restrictions relating to statutory earned surplus, also known as unassigned funds. Unassigned funds are determined in accordance with the accounting procedures and practices governing preparation of the statutory annual statement. In accordance with Minnesota Statutes, the Company may declare and pay from its surplus cash dividends of not more than the greater of 10% of its beginning-of-the-year statutory surplus, or the net gain from operations of the insurer, not including realized gains, for the 12-month period ending the 31st day of the next preceding year. Based on these limitations, ordinary dividends of $1,497,192 can be paid in 2017 without prior approval of the Commissioner of Commerce.
Regulatory Risk-Based Capital
An insurance enterprise’s state of domicile imposes minimum risk-based capital requirements that were developed by the NAIC. The formulas for determining the amount of risk-based capital specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 92 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
degree of risk. Regulatory compliance is determined by a ratio of an enterprise’s regulatory total adjusted capital to its authorized control level risk-based capital, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. This ratio for the Company significantly exceeds required minimum thresholds as of December 31, 2015 and 2016.
| (21) | Capital Structure |
The Company is authorized to issue three types of capital stock, as outlined in the table below:
| Authorized, | Voluntary or | |||||||||||
| issued, and | Par value, | involuntary | ||||||||||
| outstanding | per share | Redemption rights | liquidation rights | |||||||||
Common stock | 40,000,000 | $ | 1.00 | None | None | |||||||
| 20,000,001 | ||||||||||||
| 20,000,001 | ||||||||||||
Preferred stock: | ||||||||||||
Class A | 200,000,000 | $ | 1.00 | Designated by Board | Designated by Board | |||||||
| 18,903,484 | for each series issued | for each series issued | ||||||||||
| 18,903,484 | ||||||||||||
Class A, Series A | 8,909,195 | 1.00 | $35.02 per share plus | $35.02 per share plus | ||||||||
| 8,909,195 | an amount to yield a | an amount to yield a | ||||||||||
| 8,909,195 | compounded annual | compounded annual | ||||||||||
| return of 6%, after | return of 6%, after | |||||||||||
| actual dividends paid | actual dividends paid | |||||||||||
Class A, Series B | 10,000,000 | 1.00 | $35.02 per share plus | $35.02 per share plus | ||||||||
| 9,994,289 | an amount to yield a | an amount to yield a | ||||||||||
| 9,994,289 | compounded annual | compounded annual | ||||||||||
| return of 6%, after | return of 6%, after | |||||||||||
| actual dividends paid | actual dividends paid | |||||||||||
Class B | 400,000,000 | 1.00 | Designated by Board | Designated by Board | ||||||||
| for each series issued | for each series issued | |||||||||||
Holders of Class A preferred stock and of common stock are entitled to one vote per share with respect to all matters presented to or subject to the vote of shareholders. Holders of Class B preferred stock have no voting rights. All issued and outstanding shares are owned by AZOA. See note 1 for further discussion.
Each share of Class A preferred stock is convertible into one share of the Company’s common stock. The Company may redeem any or all of the Class A preferred stock at any time. Dividends will be paid to each class of stock only when declared by the BOD. In the event a dividend is declared, dividends must be paid to holders of Class A preferred stock, Class B preferred stock, and common stock, each in that order.
As discussed in notes 2 and 19, the Company carried out various capital transactions with related parties during 2016, 2015, and 2014.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 93 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
(22) Accumulated Other Comprehensive Income
Changes in AOCI, net of tax, by component consist of the following:
| Year ended December 31, 2016 | ||||||||||||||||||||
| Net unrealized gain on securities | Net gain (loss) on cash flow hedging instruments | Foreign currency translation adjustments | Pension and postretirement plan adjustments | Total AOCI | ||||||||||||||||
Beginning balance | $ | 472,376 | 10,408 | 6,231 | (65 | ) | 488,950 | |||||||||||||
OCI before reclassifications | 667,048 | (29,614 | ) | 692 | (42 | ) | 638,084 | |||||||||||||
Amounts reclassified from AOCI | 26,241 | — | — | 3 | 26,244 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net OCI | 693,289 | (29,614 | ) | 692 | (39 | ) | 664,328 | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Ending balance | $ | 1,165,665 | (19,206 | ) | 6,923 | (104 | ) | 1,153,278 | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| Year ended December 31, 2015 | ||||||||||||||||||||
| Net unrealized gain on securities | Net gain (loss) on cash flow hedging instruments | Foreign currency translation adjustments | Pension and postretirement plan adjustments | Total AOCI | ||||||||||||||||
Beginning balance | $ | 1,765,606 | 1,475 | 10,240 | (176 | ) | 1,777,145 | |||||||||||||
OCI before reclassifications | (1,263,867 | ) | 8,933 | (4,009 | ) | 95 | (1,258,848 | ) | ||||||||||||
Amounts reclassified from AOCI | (29,363 | ) | — | — | 16 | (29,347 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Net OCI | (1,293,230 | ) | 8,933 | (4,009 | ) | 111 | (1,288,195 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Ending balance | $ | 472,376 | 10,408 | 6,231 | (65 | ) | 488,950 | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 94 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
Reclassifications from AOCI, net of tax, consist of the following:
| Amount Reclassified from AOCI | Affected line item | |||||||||
| December 31, | in the Consolidated | |||||||||
AOCI | 2016 | 2015 | Statements of Operations | |||||||
Net unrealized (loss) gain on securities: | ||||||||||
Available-for-sale securities | $ | (40,370 | ) | 45,174 | Realized investment (loss) gains, net | |||||
Income tax (benefit) expense | (14,129 | ) | 15,811 | Income tax expense (benefit) | ||||||
|
|
|
| |||||||
Total | (26,241 | ) | 29,363 | |||||||
|
|
|
| |||||||
Pension and other postretirement plan adjustments: | ||||||||||
Amortization of actuarial losses | (5 | ) | (25 | ) | General and administrative expenses | |||||
Income tax benefit | (2 | ) | (9 | ) | Income tax expense (benefit) | |||||
|
|
|
| |||||||
Total | (3 | ) | (16 | ) | ||||||
|
|
|
| |||||||
Total amounts reclassified from AOCI | $ | (26,244 | ) | 29,347 | Net income | |||||
|
|
|
| |||||||
(23) Foreign Currency Translation
An analysis of foreign currency translation, net of tax for the respective years ended December 31 is as follows:
| 2016 | 2015 | 2014 | ||||||||||
Beginning amount of cumulative translation adjustments | $ | 6,231 | 10,240 | 12,343 | ||||||||
Aggregate adjustment for the period resulting from translation adjustments | 1,065 | (6,168 | ) | (3,235 | ) | |||||||
Amount of income tax expense for the period related to aggregate adjustment | (373 | ) | 2,159 | 1,132 | ||||||||
|
|
|
|
|
| |||||||
Net aggregate translation included in equity | 692 | (4,009 | ) | (2,103 | ) | |||||||
|
|
|
|
|
| |||||||
Ending amount of cumulative translation adjustments | $ | 6,923 | 6,231 | 10,240 | ||||||||
|
|
|
|
|
| |||||||
Canadian foreign exchange rate at end of year | 0.74568 | 0.71989 | 0.86337 | |||||||||
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 95 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
| (24) | Segment Information |
The Company has organized its principal operations into the following segments: Individual Annuities, Life, Questar, and Legacy products.
The Individual Annuities segment consists of fixed, fixed-indexed, variable, and variable-indexed annuities that are provided through independent distribution channels made up of agents and registered representatives. Revenues for the Company’s fixed annuity products are primarily earned as net investment income on invested assets supporting fixed account balances, with profitability driven by the spread between net investment income earned and interest credited to account balances. Revenues for the Company’s variable annuity products are primarily earned as management and expense fees charged on underlying account balances.
The Life segment issues fixed-indexed universal life insurance products, as well as maintains term and whole life in-force blocks that the Company no longer sells or distributes. The primary sources for revenue for this segment are premiums, fees, and charges that the Company receives to assume insurance related risk, in addition to earning a spread on net investment income on invested assets.
The Questar segment consists of two wholly owned subsidiaries, Questar Capital Corporation (Questar Capital) and Questar Asset Management, Inc. (QAM). Questar Capital is registered as a broker-dealer under the Securities Exchange Act of 1934 and operates as a retail broker-dealer. Questar Capital distributes a full range of securities products, including mutual funds and variable life insurance and annuity contracts. Questar Capital also processes general securities transactions through a clearing arrangement with a third party provider. QAM provides portfolio management for clients and revenue is driven by fees received based on assets under management.
The Legacy business consists of closed blocks of LTC and Special Markets products. The Special Markets products include individual and group annuity and life products, including universal life and term life insurance. Although Legacy products are part of the consolidated results, the Company does not allocate additional resources to these areas other than to maintain the operational support to its current customers.
The Company does not maintain segregated investment portfolios for each segment. All Interest and similar income, net and Realized investment (losses) gains, net are allocated to the segments. Assets are only monitored at the individual company level, and as such, asset disclosures by segment are not included herein.
Income and expense related to assets backing policyholder reserves are allocated to the segments based on policyholder reserve levels. The results of the Individual Annuity, Life, and Legacy segments also reflect allocation of income and expense related to assets backing surplus. Income and expense related to assets backing surplus are allocated to the segments based on required capital levels for each segment and are excluded from EGP used in reserve and DAC model projections.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 96 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
Unconsolidated segment results are reconciled to the Consolidated Statements of Operations amounts in the tables below:
| Year ended December 31, 2016 | ||||||||||||||||||||||||
| Individual | Legacy | |||||||||||||||||||||||
| annuities | Life | Questar | products | Eliminations | Consolidated | |||||||||||||||||||
Revenue: | ||||||||||||||||||||||||
Net premiums and policy fees | $ | 1,117,580 | 147,013 | — | 142,686 | — | 1,407,279 | |||||||||||||||||
Interest and similar income, net | 4,133,359 | 113,465 | 32 | 78,881 | — | 4,325,737 | ||||||||||||||||||
Change in fair value of assets and liabilities | (218,922 | ) | 40,600 | 2 | 82 | — | (178,238 | ) | ||||||||||||||||
Realized investment (losses) gains, net | (49,126 | ) | 623 | — | (822 | ) | — | (49,325 | ) | |||||||||||||||
Fee, commission, and other revenue | 243,789 | 747 | 101,432 | 1,191 | (37,305 | ) | 309,854 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total revenue (loss) | 5,226,680 | 302,448 | 101,466 | 222,018 | (37,305 | ) | 5,815,307 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Benefits and expenses: | ||||||||||||||||||||||||
Net benefits and expenses | 1,982,879 | 194,667 | — | 205,632 | — | 2,383,178 | ||||||||||||||||||
General and administrative and commission | 1,774,740 | 159,455 | 114,009 | 18,489 | (37,305 | ) | 2,029,388 | |||||||||||||||||
Change in deferred acquisition costs, net | 315,760 | (69,477 | ) | — | 13,124 | — | 259,407 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total benefits and expenses | 4,073,379 | 284,645 | 114,009 | 237,245 | (37,305 | ) | 4,671,973 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Pretax income (loss) | $ | 1,153,301 | 17,803 | (12,543) | (15,227 | ) | — | 1,143,334 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| Year ended December 31, 2015 | ||||||||||||||||||||||||
| Individual | Legacy | |||||||||||||||||||||||
| annuities | Life | Questar | products | Eliminations | Consolidated | |||||||||||||||||||
Revenue: | ||||||||||||||||||||||||
Net premiums and policy fees | $ | 1,133,285 | 172,660 | — | 143,646 | — | 1,449,591 | |||||||||||||||||
Interest and similar income, net | 3,999,693 | 103,326 | 3 | 72,447 | — | 4,175,469 | ||||||||||||||||||
Change in fair value of assets and liabilities | (492,479 | ) | (38,553 | ) | — | (1,688 | ) | — | (532,720 | ) | ||||||||||||||
Realized investment gains, net | 90,948 | 1,597 | — | 1,868 | — | 94,413 | ||||||||||||||||||
Fee, commission, and other revenue | 236,454 | 186 | 105,830 | 253 | (39,324 | ) | 303,399 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total revenue (loss) | 4,967,901 | 239,216 | 105,833 | 216,526 | (39,324) | 5,490,152 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Benefits and expenses: | ||||||||||||||||||||||||
Net benefits and expenses | 2,296,057 | 114,377 | — | 192,660 | — | 2,603,094 | ||||||||||||||||||
General and administrative and commission | 1,549,692 | 165,386 | 110,624 | 18,059 | (39,324 | ) | 1,804,437 | |||||||||||||||||
Change in deferred acquisition costs, net | 279,582 | (53,642 | ) | — | 13,319 | — | 239,259 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total benefits and expenses | 4,125,331 | 226,121 | 110,624 | 224,038 | (39,324 | ) | 4,646,790 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Pretax income (loss) | $ | 842,570 | 13,095 | (4,791) | (7,512 | ) | — | 843,362 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 97 of 101 | (Continued) | |||
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data and security holdings quantities)
| Year ended December 31, 2014 | ||||||||||||||||||||||||
| Individual | Legacy | |||||||||||||||||||||||
| annuities | Life | Questar | products | Eliminations | Consolidated | |||||||||||||||||||
Revenue: | ||||||||||||||||||||||||
Net premiums and policy fees | $ | 1,148,803 | 117,950 | — | 141,344 | — | 1,408,097 | |||||||||||||||||
Interest and similar income, net | 3,798,284 | 90,057 | (17 | ) | 67,335 | — | 3,955,659 | |||||||||||||||||
Change in fair value of assets and liabilities | 1,805,611 | 41,292 | — | (4,914 | ) | — | 1,841,989 | |||||||||||||||||
Realized investment gains, net | 74,926 | 1,579 | 1 | 1,256 | — | 77,762 | ||||||||||||||||||
Fee, commission, and other revenue | 246,021 | 474 | 102,234 | 6,217 | (43,126 | ) | 311,820 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total revenue (loss) | 7,073,645 | 251,352 | 102,218 | 211,238 | (43,126 | ) | 7,595,327 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Benefits and expenses: | ||||||||||||||||||||||||
Net benefits and expenses | 5,582,740 | 147,348 | — | 145,737 | — | 5,875,825 | ||||||||||||||||||
General and administrative and commission | 1,963,032 | 162,942 | 111,967 | 17,585 | (43,126 | ) | 2,212,400 | |||||||||||||||||
Change in deferred acquisition costs, net | (615,902 | ) | (72,109 | ) | — | 14,925 | — | (673,086 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total benefits and expenses | 6,929,870 | 238,181 | 111,967 | 178,247 | (43,126 | ) | 7,415,139 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Pretax income (loss) | $ | 143,775 | 13,171 | (9,749 | ) | 32,991 | — | 180,188 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| (25) | Subsequent Events |
No material subsequent events have occurred since December 31, 2016 through March 29, 2017, the date at which the financial statements were issued, that would require adjustment to the financial statements.
On January 9, 2017, the Company redeemed preferred stock and related accrued interest previously issued as part of a prepaid forward agreement by AZLPF in the amount of $32,244. See note 4 for further details.
On February 22, 2017, the Company declared a cash dividend payable to the parent company, AZOA. The dividend of $342,000 was paid on March 8, 2017.
On March 3, 2017, a stock purchase agreement was signed for the subsidiary recorded as held-for-sale. The sale of the subsidiary will be executed on or around March 31, 2017. In addition, the subsidiary entered into a modified coinsurance reinsurance agreement with the Company effective February 1, 2017. Under the reinsurance agreement, all liabilities and risk associated with subsidiary’s contract holders will be assumed by the Company.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 98 of 101 | ||||
Schedule I
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Summary of Investments – Other than Investments in Related Parties
December 31, 2016
(In thousands)
Type of investment | Cost (1) | Fair value | Amount at which shown in the consolidated balance sheets | |||||||||
Fixed-maturity securities: | ||||||||||||
Fixed-maturity securities, available-for-sale | ||||||||||||
U.S. government | $ | 1,712,400 | 1,736,523 | 1,736,523 | ||||||||
Agencies not backed by the full faith and credit of the U.S. government | 8,766 | 8,857 | 8,857 | |||||||||
States and political subdivisions | 9,379,273 | 9,954,613 | 9,954,613 | |||||||||
Foreign government | 426,724 | 438,927 | 438,927 | |||||||||
Corporate securities | 60,668,745 | 63,540,067 | 63,540,067 | |||||||||
Mortgage-backed securities | 11,615,711 | 11,650,264 | 11,650,264 | |||||||||
Collateralized mortgage obligations | 209,165 | 197,789 | 197,789 | |||||||||
Collateralized debt obligations | 8,861 | 19,931 | 19,931 | |||||||||
|
|
|
|
|
| |||||||
Total fixed-maturity securities, available-for-sale | 84,029,645 | 87,546,971 | 87,546,971 | |||||||||
|
|
|
|
|
| |||||||
Fixed-maturity securities, at fair value through income: | ||||||||||||
U.S. government | 36,504 | 37,051 | 37,051 | |||||||||
|
|
|
|
|
| |||||||
Total fixed-maturity securities, trading | 36,504 | 37,051 | 37,051 | |||||||||
|
|
|
|
|
| |||||||
Fixed-maturity securities, held-to-maturity: | ||||||||||||
Corporate securities | 28 | 33 | 28 | |||||||||
Collateralized debt obligations | — | 3,597 | — | |||||||||
|
|
|
|
|
| |||||||
Total fixed-maturity securities, held-to-maturity | 28 | 3,630 | 28 | |||||||||
|
|
|
|
|
| |||||||
Total fixed-maturity securities | 84,066,177 | 87,587,652 | 87,584,050 | |||||||||
|
|
|
|
|
| |||||||
Equity securities: | ||||||||||||
Equity securities, available-for-sale: | ||||||||||||
Common stocks: | ||||||||||||
Industrial and miscellaneous | 316,541 | 320,166 | 320,166 | |||||||||
Equity securities, trading: | ||||||||||||
Common stocks: | ||||||||||||
Industrial and miscellaneous | 312,592 | 317,493 | 317,493 | |||||||||
|
|
|
|
|
| |||||||
Total equity securities | 629,133 | 637,659 | 637,659 | |||||||||
|
|
|
|
|
| |||||||
Other investments: | ||||||||||||
Mortgage loans on real estate, net | 10,351,741 | 10,900,205 | 10,351,741 | |||||||||
Derivative assets | 1,059,031 | 1,059,031 | 1,059,031 | |||||||||
Loans to affiliates | 39,120 | 39,120 | 39,120 | |||||||||
Policy loans | 171,012 | 171,012 | 171,012 | |||||||||
Acquired loans | 192,380 | 261,307 | 192,380 | |||||||||
Other invested assets | 164,830 | 164,830 | 164,830 | |||||||||
|
|
|
|
|
| |||||||
Total other investments | 11,978,114 | 12,595,505 | 11,978,114 | |||||||||
|
|
|
|
|
| |||||||
Total investments | $ | 96,673,424 | 100,820,816 | 100,199,823 | ||||||||
|
|
|
|
|
| |||||||
| (1) | Original cost of equity securities and, as to fixed-maturities, original cost reduced by repayments and adjusted for amortization of premiums, accrual discounts, or impairments. |
See accompanying report of independent registered public accounting firm.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 99 of 101 | ||||
Schedule III
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Supplementary Insurance Information
As of and for the years ended December 31, 2016, 2015, and 2014
(In thousands)
| As of December 31 | Year ended December 31 | |||||||||||||||||||||||||||||||||||||||||||
| Deferred acquisition costs | Deferred sales inducements (1) | Account balances and future policy benefit reserves | Unearned premiums | Policy and contract claims | Net premium and policy fees | Interest and similar income, net | Net benefits (2) | Net change in deferred sales inducements* | Net change in policy acquisition costs** | Other operating expenses | ||||||||||||||||||||||||||||||||||
2016: | ||||||||||||||||||||||||||||||||||||||||||||
Annuities | $ | 4,704,646 | 763,386 | 97,927,975 | 5,864 | 1,731 | 1,117,580 | 4,133,359 | 1,763,154 | 219,725 | 315,760 | 1,737,434 | ||||||||||||||||||||||||||||||||
Life | 523,701 | 1,168 | 3,172,139 | 77,790 | 4,438 | 147,013 | 113,465 | 194,521 | 146 | (69,477 | ) | 159,455 | ||||||||||||||||||||||||||||||||
Questar | — | — | — | — | — | — | 32 | — | — | — | 114,009 | |||||||||||||||||||||||||||||||||
Legacy | 17,996 | — | 4,254,346 | 61,681 | 614,574 | 142,686 | 78,881 | 205,632 | — | 13,124 | 18,490 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
| $ | 5,246,343 | 764,554 | 105,354,460 | 145,335 | 620,743 | 1,407,279 | 4,325,737 | 2,163,307 | 219,871 | 259,407 | 2,029,388 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
2015: | ||||||||||||||||||||||||||||||||||||||||||||
Annuities | $ | 5,766,176 | 1,108,877 | 90,734,164 | 25,620 | — | 1,133,285 | 3,999,693 | 2,095,788 | 200,269 | 279,582 | 1,510,369 | ||||||||||||||||||||||||||||||||
Life | 486,195 | 1,315 | 2,678,431 | 70,621 | 3,335 | 172,660 | 103,326 | 112,236 | 2,141 | (53,642 | ) | 165,385 | ||||||||||||||||||||||||||||||||
Questar | — | — | — | — | — | — | 3 | — | — | — | 110,624 | |||||||||||||||||||||||||||||||||
Legacy | 30,865 | — | 3,901,902 | 57,875 | 514,590 | 143,646 | 72,447 | 192,660 | — | 13,319 | 18,059 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
| $ | 6,283,236 | 1,110,192 | 97,314,497 | 154,116 | 517,925 | 1,449,591 | 4,175,469 | 2,400,684 | 202,410 | 239,259 | 1,804,437 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
2014: | ||||||||||||||||||||||||||||||||||||||||||||
Annuities | $ | 3,934,701 | 843,545 | 85,548,020 | 1,164 | — | 1,148,803 | 3,798,284 | 5,578,815 | 3,925 | (615,902 | ) | 1,928,506 | |||||||||||||||||||||||||||||||
Life | 384,073 | 3,455 | 2,255,751 | 74,207 | 4,187 | 117,950 | 90,057 | 147,014 | 334 | (72,109 | ) | 154,952 | ||||||||||||||||||||||||||||||||
Questar | — | — | — | — | — | — | (17 | ) | — | — | — | 111,967 | ||||||||||||||||||||||||||||||||
Legacy | 43,997 | — | 3,554,990 | 55,330 | 439,257 | 141,344 | 67,335 | 145,737 | — | 14,925 | 16,975 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
| $ | 4,362,771 | 847,000 | 91,358,761 | 130,701 | 443,444 | 1,408,097 | 3,955,659 | 5,871,566 | 4,259 | (673,086 | ) | 2,212,400 | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
| (1) | Deferred sales inducements is located in Other assets on the Consolidated Balance Sheets. |
| (2) | Excludes net change in deferred sales inducements. |
| * | See note 10 for aggregate gross amortization of deferred sales inducements. |
| ** | See note 9 for aggregate gross amortization of deferred acquisition costs. |
See accompanying report of independent registered public accounting firm.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 100 of 101 | ||||
Schedule IV
ALLIANZ LIFE INSURANCE COMPANY
OF NORTH AMERICA AND SUBSIDIARIES
Reinsurance
Years ended December 31, 2016, 2015, and 2014
(In thousands)
Years ended | Direct amount | Ceded to other companies | Assumed from other companies | Net amount | Percentage of amount assumed to net | |||||||||||||||
December 31, 2016: | ||||||||||||||||||||
Life insurance in force | $ | 33,748,978 | 23,377,514 | 23,086 | 10,394,550 | 0.2 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Premiums and policy fees: | ||||||||||||||||||||
Life | $ | 207,771 | 59,071 | 746 | 149,446 | 0.5 | % | |||||||||||||
Annuities | 1,111,894 | (4,514 | ) | (425 | ) | 1,115,983 | — | |||||||||||||
Accident and health | 184,915 | 78,426 | 35,361 | 141,850 | 24.9 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total premiums and policy fees | $ | 1,504,580 | 132,983 | 35,682 | 1,407,279 | 2.5 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
December 31, 2015: | ||||||||||||||||||||
Life insurance in force | $ | 30,774,840 | 21,809,292 | 60,469 | 9,026,017 | 0.7 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Premiums and policy fees: | ||||||||||||||||||||
Life | $ | 219,959 | 45,746 | 683 | 174,896 | 0.4 | % | |||||||||||||
Annuities | 1,130,514 | (1,447 | ) | (442 | ) | 1,131,519 | — | |||||||||||||
Accident and health | 188,885 | 80,987 | 35,278 | 143,176 | 24.6 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total premiums and policy fees | $ | 1,539,358 | 125,286 | 35,519 | 1,449,591 | 2.5 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
December 31, 2014: | ||||||||||||||||||||
Life insurance in force | $ | 28,518,136 | 19,851,269 | 67,484 | 8,734,351 | 0.8 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Premiums and policy fees: | ||||||||||||||||||||
Life | $ | 162,098 | 41,659 | 779 | 121,218 | 0.6 | % | |||||||||||||
Annuities | 1,145,637 | (1,445 | ) | (153 | ) | 1,146,929 | — | |||||||||||||
Accident and health | 189,981 | 80,007 | 29,976 | 139,950 | 21.4 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total premiums and policy fees | $ | 1,497,716 | 120,221 | 30,602 | 1,408,097 | 2.2 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
The Life and Annuities categories above are prescribed splits based on product and will differ from the results of the Life and Individual Annuity segments.
See accompanying report of independent registered public accounting firm.
| Consolidated Financial Statements and Supplemental Schedules | ||||
| Page 101 of 101 | ||||
Send an application or additional Purchase Payment with a check: | Send an application or general customer service without a check: |
| REGULAR MAIL | REGULAR MAIL |
| Allianz Life Insurance Company of North America | Allianz Life Insurance Company of North America |
| NW5989 | P.O. Box 561 |
| P.O. Box 1450 | Minneapolis, MN 55440-0561 |
| Minneapolis, MN 55485-5989 | |
| OVERNIGHT, CERTIFIED, OR REGISTERED MAIL | OVERNIGHT, CERTIFIED, OR REGISTERED MAIL |
| Allianz Life Insurance Company of North America | Allianz Life Insurance Company of North America |
| NW5989 | 5701 Golden Hills Drive |
| 1801 Parkview Drive | Golden Valley, MN 55416-1297 |
| Shoreview, MN 55126 |
| Securities and Exchange Commission Registration Fee | $ 40,920 |
| -------------- | |
| Estimated Printing and Filing Costs: | $ 30,000 |
| -------------- | |
| Estimated Accounting Fees: | $ 75,000 |
| --------------- | |
| Estimated Legal Fees: | $ 175,000 |
| --------------- | |
| Estimated Miscellaneous Fees: | $ N/A |
| --------------- |
| The Bylaws of the Insurance Company provide: | ||
| ARTICLE XI. INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES | ||
| SECTION 1. RIGHT TO INDEMNIFICATION: | ||
| (a) | Subject to the conditions of this Article and any conditions or limitations imposed by applicable law, the Corporation shall indemnify any employee, director or officer of the Corporation (an "Indemnified Person") who was, is, or in the sole opinion of the Corporation, may reasonably become a party to or otherwise involved in any Proceeding by reason of the fact that such Indemnified Person is or was: | |
| (i) | a director of the Corporation; or | |
| (ii) | acting in the course and scope of his or her duties as an officer or employee of the Corporation; or | |
| (iii) | rendering Professional Services at the request of and for the benefit of the Corporation; or | |
| (iv) | serving at the request of the Corporation as an officer, director, fiduciary or member of another corporation, association, committee, partnership, joint venture, trust, employee benefit plan or other enterprise (an "Outside Organization"). | |
| (b) | Notwithstanding the foregoing, no officer, director or employee shall be indemnified pursuant to these bylaws under the following circumstances: | |
| (i) | in connection with a Proceeding initiated by such person, in his or her own personal capacity, unless such initiation was authorized by the Board of Directors; | |
| (ii) | if a court of competent jurisdiction finally determines that any indemnification hereunder is unlawful; | |
| (iii) | for acts or omissions involving intentional misconduct or knowing and culpable violation of law; | |
| (iv) | for acts or omissions that the Indemnified Person believes to be contrary to the best interests of the Corporation or its shareholders or that involve the absence of good faith on the part of the Indemnified Person; | |
| (v) | for any transaction for which the Indemnified Person derived an improper personal benefit; | |
| (vi) | for acts or omissions that show a reckless disregard for the Indemnified Person's duty to the Corporation or its shareholders in circumstances in which the Indemnified Person was aware or should have been aware, in the ordinary course of performing the Indemnified Person's duties, of the risk of serious injury to the Corporation or its shareholders; | |
| (vii) | for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the Indemnified Person's duties to the Corporation or its shareholders; | |
| (viii) | in circumstances where indemnification is prohibited by applicable law; | |
| (ix) | in the case of service as an officer, director, fiduciary or member of an Outside Organization, where the Indemnified Person was aware or should have been aware that the conduct in question was outside the scope of the assignment as contemplated by the Corporation. | |
| SECTION 2. SCOPE OF INDEMNIFICATION: | |
| (a) | Indemnification provided pursuant to Section 1(a)(iv) shall be secondary and subordinate to indemnification or insurance provided to an Indemnified Person by an Outside Organization or other source, if any. |
| (b) | Indemnification shall apply to all reasonable expenses, liability and losses, actually incurred or suffered by an Indemnified Person in connection with a Proceeding, including without limitation, attorneys' fees and any expenses of establishing a right to indemnification or advancement under this article, judgments, fines, ERISA excise taxes or penalties, amounts paid or to be paid in settlement and all interest, assessments and other charges paid or payable in connection with or in respect of such expense, liability and loss. |
| (c) | Such indemnification shall continue as to any Indemnified Person who has ceased to be an employee, director or officer of the Corporation and shall inure to the benefit of his or her heirs, estate, executors and administrators. |
| SECTION 3. DEFINITIONS: | |
| (a) | "Corporation" for the purpose of Article XI shall mean Allianz Life Insurance Company of North America and all of its subsidiaries. |
| (b) | "Proceeding" shall mean any threatened, pending, or completed action, suit or proceeding whether civil, criminal, administrative, investigative or otherwise, including actions by or in the right of the Corporation to procure a judgment in its favor. |
| (c) | "Professional Services" shall mean services rendered pursuant to (i) a professional actuarial designation, (ii) a license to engage in the practice of law issued by a State Bar Institution or (iii) a Certified Public Accountant designation issued by the American Institute of Certified Public Accountants. |
| Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted for directors and officers or controlling persons of the Insurance Company pursuant to the foregoing, or otherwise, the Insurance Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Insurance Company of expenses incurred or paid by a director, officer or controlling person of the Insurance Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. | |
| 1.(a) | Principal Underwriter Agreement by and between North American Life and Casualty Company on behalf of NALAC Financial Plans, Inc. dated September 14, 1988 incorporated by reference as exhibit EX-99.B3.a. from Pre-Effective Amendment No.1 to Form N-4 (File Nos. 333-06709 and 811-05618), electronically filed on December 13, 1996. (North American Life and Casualty Company is the predecessor to Allianz Life Insurance Company of North America. NALAC Financial Plans, Inc., is the predecessor to USAllianz Investor Services, LLC, which is the predecessor to Allianz Life Financial Services, LLC.) |
| (b) | Broker-Dealer Agreement (amended and restated) between Allianz Life Insurance Company of North America and Allianz Life Financial Services, LLC, dated June 1, 2010 incorporated by reference as exhibit EX-99B3b. from Pre-Effective Amendment No. 1 to Form N-4 (File Nos. 333-166408 and 811-05618), electronically filed on September 24, 2010. |
| (c) | The current specimen of the selling agreement between Allianz Life Financial Services, LLC, the principal underwriter for the Contracts, and retail brokers which offer and sell the Contracts to the public is incorporated by reference as exhibit EX-99.B3.b. from the initial filing on Form N-4 (File Nos. 333-134267 and 811-05618), electronically filed on May 19, 2006.The underwriter has executed versions of the agreement with approximately 2,100 retail brokers. |
| 3. (a) | Articles of Incorporation, as amended and restated August 1, 2006, of Allianz Life Insurance Company of North America, filed on January 3, 2013 as Exhibit 3(a) to Registrant's initial registration on Form S-1 (File No. 333-185864), is incorporated by reference. |
| (b) | Bylaws, as amended and restated August 1, 2006, of Allianz Life Insurance Company of North America, filed on January 3, 2013 as Exhibit 3(b) to Registrant's initial registration on Form S-1 (File No. 333-185864), is incorporated by reference. |
| 4.(a) | Individual Variable Annuity Contract-L40538 incorporated by reference as Exhibit 4(a) from Pre-Effective Amendment No. 1 to Registrant's Form S-1 (File No. 333-185864), electronically filed on April 17, 2013. | |||
| (b) | Contract Schedule Page S40877-01, incorporated by reference as Exhibit 4(b) from Post-Effective Amendment No. 1 to Registrant's Form S-1 (File No. 333-195462), electronically filed on December 8, 2014. Contract Schedule Pages-S40875, S40876, S40877 incorporated by reference as Exhibit 4(b) from Pre-Effective Amendment No. 1 to Registrant's Form S-1 (File No. 333-185864), electronically filed on April 17, 2013. | |||
| (c) | Application for Ind. Var. Annuity Contract-F40538-02 (5/2015), filed on April 20, 2015 as Exhibit 4(c) to Registrant's Post-Effective Amendment No. 2 on Form S-1 (File No. 333-195462), is incorporated by reference.. Application for Ind. Var. Annuity Contract-F40538 incorporated by reference as Exhibit 4(c) from Pre-Effective Amendment No. 1 to Registrant's Form S-1 (File No. 333-185864), electronically filed on April 17, 2013. | |||
| (d)* | Index Performance Strategy Rider-S40878-02, filed herewith. Index Performance Strategy Crediting Rider-S40878 incorporated by reference as Exhibit 4(d) from Pre-Effective Amendment No. 1 to Registrant's Form S-1 (File No. 333-185864), electronically filed on April 17, 2013. | |||
| (e) | Index Protection Strategy Crediting Rider-S40879 incorporated by reference as Exhibit 4(e) from Pre-Effective Amendment No. 1 to Registrant's Form S-1 (File No. 333-185864), electronically filed on April 17, 2013. | |||
| (f) | Traditional Death Benefit Rider-S40880 incorporated by reference as Exhibit 4(f) from Pre-Effective Amendment No. 1 to Registrant's Form S-1 (File No. 333-185864), electronically filed on April 17, 2013. | |||
| (g)* | Index Guard Strategy Rider-S40889-01, filed herewith. Index Guard Strategy Rider-S40889, incorporated by reference as Exhibit 4(g) from Post-Effective Amendment No. 1 to Registrant's Form S-1 (File No. 333-195462), electronically filed on December 8, 2014. | |||
| (h)* | Index Precision Strategy Rider-S40891, filed herewith. | |||
| 24. | (a) | Board Resolution, effective December 11, 2012, of the Board of Directors of Allianz Life Insurance Company of North America, filed on January 3, 2013 as Exhibit 24(b) to Registrant's Initial Registration on Form S-1 (File No. 333-185864), is incorporated by reference. |
(b) Form of Board Resolution of the Board of Directors of Allianz Life Insurance Company of North America, effective April 14, 2014, filed on April 14, 2014 as Exhibit 24(d) to Registrant's Post-Effective Amendment No. 2 to Form S-1 (File No. 333-185864), is incorporated by reference. |
| (c)* | Powers of Attorney, filed herewith. |
| 99. | (a) | Alternative Minimum Value Exhibit, version 1, incorporated by reference as Exhibit 99(a) from Pre-Effective Amendment No. 1 to Registrant's Form S-1 (File No. 333-185864), electronically filed on April 17, 2013. |
| (b)* | Appendix B Exhibit – Daily Adjustment Calculation, filed herewith. |
| (c) | Risk Factors Exhibit, filed on April 14, 2014 as Exhibit 99(c) to Registrant's Post-Effective Amendment No. 2 to Registrant's Form S-1 (File No. 333-185864), is incorporated by reference. |
| (1) | To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: | |
| (i) | To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; | |
| (ii) | To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. | |
| (iii) | To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. | |
| (2) | That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. | |
| (3) | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. | |
| (4) | That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use. | |
| (5) | That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities: The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: | |
| (i) | Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; | |
| (ii) | Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; | |
| (iii) | The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and | |
| (iv) | Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. | |
| (6) | Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. | |
| Signature | Title |
| Jacqueline Hunt | Director and Chairman of the Board |
| Walter R. White | Director, President & Chief Executive Officer |
| Giulio Terzariol | Director |
| Ronald M. Clark | Director |
| David L. Conway | Director |
| Udo Frank | Director |
| William E. Gaumond | Director, Senior Vice President, Chief Financial Officer and Treasurer |
| Exhibit | Description of Exhibit |
| 4(d) | Index Performance Strategy Rider-S40878-02 |
| 4(g) | Index Guard Strategy Rider-S40889-01 |
| 4(h) | Index Precision Strategy Rider-S40891 |
| 23(a) | Consent of Independent Registered Public Accounting Firm – KPMG LLP |
| 23(b) | Consent of Counsel |
| 24(c) | Power of Attorney |
| 99(b) | Daily Adjustment Calclulation Exhibit |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Taxonomy Extension Schema Document |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase |
| 101.LAB | XBRL Taxonomy Extension Labels Linkbase |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase |