| Variable Options Currently Available | ||
AZL® MVP Growth Index Strategy Fund | AZL® MVP Balanced Index Strategy Fund | AZL® Money Market Fund |
| Indices Currently Available with Index Performance Strategy | ||
S&P 500® Index | Russell 2000® Index | Nasdaq-100® Index |
Glossary | 4 | |
Summary | 7 | |
| Who Should Consider Purchasing the Contract? | 7 | |
| What Are the Contract's Charges? | 7 | |
| What Are the Contract's Benefits? | 8 | |
| What is the Index-Linked Crediting Method and How Does It Work? | 8 | |
| How Can I Allocate My Purchase Payments? | 9 | |
| What Are the Different Values Within the Contract? | 10 | |
| How Do We Apply Performance Credits to the Index Options? | 11 | |
| How Do the Caps and Buffers Affect My Contract's Potential Growth? | 11 | |
| Can My Contract Lose Value Because of Negative Changes in an Index's Value? | 11 | |
| Can I Transfer Index Option Value Between the Allocation Options? | 11 | |
| How Can I Take Money Out of My Contract? | 11 | |
| What Are My Annuity Options? | 12 | |
| Does the Contract Provide a Death Benefit? | 12 | |
| What If I Need Customer Service? | 12 | |
Fee Tables | 13 | |
| Owner Transaction Expenses | 13 | |
| Owner Periodic Expenses | 13 | |
| Annual Operating Expenses of the Variable Options | 14 | |
| Examples | 15 | |
| Condensed Financial Information | 15 | |
1. | Risk Factors | 16 |
| Liquidity Risk | 16 | |
| Risk of Investing in Securities | 16 | |
| Risk of Negative Returns | 16 | |
| Calculation of Performance Credits | 17 | |
| Substitution of an Index | 17 | |
| Changes to Caps and Notice of Buffers | 17 | |
| Investment in Derivative Securities | 18 | |
| Variable Option Risk | 19 | |
| Our Financial Strength and Claims-Paying Ability | 19 | |
| Regulatory Protections | 19 | |
2. | The Variable Annuity Contract | 19 |
| When The Contract Ends | 20 | |
3. | Ownership, Annuitants, Determining Life, Beneficiaries, and Payees | 20 |
| Owner | 20 | |
| Joint Owner | 20 | |
| Annuitant | 20 | |
| Determining Life (Lives) | 21 | |
| Beneficiary | 21 | |
| Payee | 21 | |
| Assignments, Changes of Ownership and Other Transfers of Contract Rights | 22 | |
4. | Purchasing the Contract | 22 |
| Purchase Requirements | 22 | |
| Applications Sent Electronically | 23 | |
| Allocation of Purchase Payments and Transfers Between the Allocation Options | 23 | |
| Automatic Investment Plan (AIP) | 24 | |
| Free Look/Right to Examine Period | 24 |
5. | Variable Options | 24 |
| Substitution of Variable Options and Limitation on Further Investments | 26 | |
| Transfers Between Variable Options | 26 | |
| Electronic Transfer and Allocation Instructions | 26 | |
| Excessive Trading and Market Timing | 26 | |
| Financial Adviser Fees | 28 | |
| Voting Privileges | 29 | |
6. | Valuing Your Contract | 29 |
| Accumulation Units | 29 | |
| Computing Variable Account Value | 29 | |
7. | Index Options | 30 |
| Determining the Index Option Values | 30 | |
| Optional Rebalancing Program | 32 | |
8. | Expenses | 32 |
| Product Fee | 32 | |
| Contract Maintenance Charge | 33 | |
| Withdrawal Charge | 33 | |
| Transfer Fee | 36 | |
| Premium Tax | 36 | |
| Income Tax | 36 | |
| Variable Option Expenses | 36 | |
9. | Access to Your Money | 36 |
| Free Withdrawal Privilege | 37 | |
| Systematic Withdrawal Program | 37 | |
| Minimum Distribution Program and Required Minimum Distribution (RMD) Payments | 37 | |
| Waiver of Withdrawal Charge Benefit | 38 | |
| Suspension of Payments or Transfers | 38 | |
10. | The Annuity Phase | 38 |
| Calculating Your Annuity Payments | 38 | |
| Annuity Payment Options | 38 | |
| When Annuity Payments Begin | 39 | |
11. | Death Benefit | 39 |
| Death of the Owner and/or Annuitant | 40 | |
| Death Benefit Payment Options During the Accumulation Phase | 41 | |
12. | Taxes | 41 |
| Qualified and Non-Qualified Contracts | 41 | |
| Taxation of Annuity Contracts | 42 | |
| Tax-Free Section 1035 Exchanges | 43 | |
13. | Other Information | 43 |
| The Registered Separate Account | 43 | |
| Our General Account | 43 | |
| Our Unregistered Separate Account | 44 | |
| Distribution | 44 | |
| Additional Credits for Certain Groups | 45 | |
| Administration/Allianz Service Center | 45 | |
| Legal Proceedings | 46 | |
| Status Pursuant to Securities Exchange Act of 1934 | 46 | |
14. | Information on Allianz Life of New York | 46 |
| Directors, Executive Officers and Corporate Governance | 46 | |
| Board of Directors | 46 | |
| Executive Compensation | 52 | |
| Security Ownership of Certain Beneficial Owners and Management | 66 | |
| Transactions with Related Persons, Promoters and Certain Control Persons | 66 | |
| Risks Associated with the Financial Services Industry | 66 | |
15. | Financial Statements | 80 |
16. | Privacy and Security Statement | 81 |
17. | Table of Contents of the Statement of Additional Information (SAI) | 82 |
Appendix A – Buffers and Initial Caps | 83 | |
| Index Performance Strategy | 83 | |
Appendix B – Available Indices | 84 | |
| Standard & Poor's 500 Index | 84 | |
Russell 2000® Index | 85 | |
Nasdaq-100® Index | 86 | |
Appendix C – Daily Adjustment | 87 | |
Appendix D – Selected Financial Data and Financial Statements | 88 | |
| Management's Discussion and Analysis of Financial Condition and Results of Operations (For the 12 month period ending December 31, 2014) | 88 | |
| Financial Statements and Supplemental Schedules | 88 | |
For Service or More Information | 89 | |
| Our Service Center | 89 |
| · | 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 Caps for newly issued Contracts may be higher or lower than the renewal Caps for inforce Contracts. However, all inforce Contracts with Index Effective Dates in the same date range will receive the same renewal 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 the initial Caps for newly issued Contracts by cancelling your existing Contract and purchasing a new Contract. |
| · | 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 Performance 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 Option by applying 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 an Index Option 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 Cap and Buffer. |
| Number of Complete Years Since Purchase Payment | Withdrawal Charge Amount |
| 0 | 8.5% |
| 1 | 8% |
| 2 | 6.5% |
| 3 | 5% |
| 4 | 3% |
| 5 | 1% |
| 6 years or more | 0% |
Transfer Fee(3)…………………………………..................................................... | $ | 25 | ||
| (for each transfer between Variable Options after twelve in a Contract Year) | ||||
Premium Tax(4)…………………………………………………………………….… | 3.5 | % | ||
| (as a percentage of each Purchase Payment) |
Contract Maintenance Charge(5)………………………………………………..... | $ | 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) | 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. |
| (4) | New York does not currently impose this tax, but we reserve the right to deduct this charge if they do so in the future. This is the current maximum charge we would deduct, as discussed in section 8, Expenses – Premium Tax. |
| (5) | Waived if the Contract Value is at least $100,000, as discussed in section 8, Expenses – Contract Maintenance Charge. |
Product Fee(6)…………………………………....... | 1.25% |
| (as a percentage of the Charge Base) |
| (6) | 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% | 0.74% |
| 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 Money Market Fund | .35 | .25 | .05 | – | .65 |
| ALLIANZ FUND OF FUNDS | |||||
AZL MVP Balanced Index Strategy Fund(1) | .10 | – | .05 | .59 | .74 |
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 | ||||||||||||
| 0.74% (the maximum Variable Option operating expense) | $ | 1,016 | $ | 1,399 | $ | 1,758 | $ | 2,757 | ||||||||
| 0.65% (the minimum Variable Option operating expense) | $ | 1,007 | $ | 1,372 | $ | 1,713 | $ | 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 13 months 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 | ||||||||||||
| 0.74% (the maximum Variable Option operating expense) | - | $ | 719 | $ | 1,258 | $ | 2,707 | |||||||||
| 0.65% (the minimum Variable Option operating expense) | - | $ | 692 | $ | 1,213 | $ | 2,615 | |||||||||
| 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 | ||||||||||||
| 0.74% (the maximum Variable Option operating expense) | $ | 251 | $ | 769 | $ | 1,308 | $ | 2,757 | ||||||||
| 0.65% (the minimum Variable 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 Money Market Fund | ||||
| 12/31/2014 | NA | 12.755 | 124 | |
| AZL MVP Balanced Index Strategy Fund | ||||
| 12/31/2014 | NA | 12.956 | 13 | |
| AZL MVP Growth Index Strategy Fund | ||||
| 12/31/2014 | NA | 14.280 | 8 | |
| 1. | RISK FACTORS |
| January 1, 2005 through December 31, 2014 | |||
S&P 500® Index | Nasdaq-100® Index | Russell 2000® Index | |
| Returns without dividends | 7.23% | 13.03% | 8.30% |
| Returns with dividends | 9.47% | 14.20% | 9.72% |
| · | 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 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. |
| · | 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. | ||
| · | you remove a Joint Owner due to divorce we also remove that person as a Determining Life, or |
| · | 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. |
| 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 is $1 million including amounts already invested in other Allianz Life of New York variable annuities. |
| 5. | VARIABLE OPTIONS |
Investment Management Company and Adviser/Subadviser | Name of Variable Option | Asset Category | Objective(s) | Primary Investments (Normal market conditions) |
| ALLIANZ FUND OF FUNDS | ||||
| Managed by 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. May invest up to 20% of the Fund's assets in a combination of derivative and fixed income instruments. |
| 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. May invest up to 20% of the Fund's assets in a combination of derivative and fixed income instruments. | |
| BLACKROCK | ||||
| Managed by Allianz Investment Management LLC/BlackRock Advisors, LLC | AZL Money Market Fund | Cash Equivalent | Current income consistent with stability of principal | Invests in a broad range of short-term, high quality U.S. dollar-denominated money market instruments, including government, U.S. and foreign bank, commercial and other obligations. During extended periods of low interest rates, and due in part to contract fees and expenses, the yield of the AZL 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 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 |
| Indices Currently Available with Index Performance Strategy | ||
S&P 500® Index | Russell 2000® Index | Nasdaq-100® Index |
| · | 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 Option we reduce that Index Option Value by the dollar amount you specify, including any applicable withdrawal charge. |
| · | We then reduce each Index Option Base by the same percentage that the amount withdrawn reduced its associated Index Option Value. |
| · | 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 New York 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 New York Contract is at least $100,000 on the Contract Anniversary. We determine the total Contract Value for all individually owned Index Advantage New York Contracts by using the Owner's social security number, and for non-individually owned Index Advantage New York Contracts we use the Annuitant's social security number. |
| · | During the Annuity Phase. |
| · | 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 reduces 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 |
| 0 | 8.5% |
| 1 | 8% |
| 2 | 6.5% |
| 3 | 5% |
| 4 | 3% |
| 5 | 1% |
| 6 years or more | 0% |
| 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 on a FIFO basis. The total amount we withdraw from the first Purchase Payment is $30,000, which is subject to a 6.5% withdrawal charge, and you receive $28,050. We determine this amount as follows: |
| 4) | Contract earnings. We already withdrew your requested amount, so this does not apply. |
| · | Because we do not reduce the Withdrawal Charge Basis for 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. |
| 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, and |
| · | less any withdrawal charge. |
| · | 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 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 Money Market Fund subaccount until the fund is liquidated. |
| · | 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. |
| · | 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. |
| 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. |
| · | Taxes on earnings are deferred until you take money out. Non-Qualified Contracts owned by corporations or partnerships 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. |
| · | 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, |
| · | processing and mailing of account statements and other mailings to Owners, and |
| · | routine customer service including: |
| – | responding to Owner correspondence and inquiries, |
| – | processing of Contract changes, |
| – | processing withdrawal requests (both partial and total) and |
| – | processing annuitization requests. |
| 14. | INFORMATION ON ALLIANZ LIFE OF NEW YORK |
| Name | Title | Allocation Percentage |
| Walter White | Chairman and Chief Executive Officer | 1.66% |
| Giulio Terzariol | Chief Financial Officer and Treasurer | 1.66% |
| Thomas Burns | President | 1.66% |
| Neil McKay | Chief Actuary | 1.66% |
| Robert DeChellis | Field Vice President, Broker Dealer Distribution | 4.20% |
| · | providing total compensation opportunities that are competitive with the levels of total compensation available at the large diversified financial services companies with which Allianz NA Group 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 AZOA Services Corporation Annual Incentive Plan ("AIP"). | ▪ Link compensation to annual performance results. ▪ Attract, motivate and retain high-caliber leadership. ▪ Align the interests of NEOs and our stockholder. |
| Long-Term Incentives | Incentive compensation that promotes and rewards the achievement of long-term performance objectives through awards under the AZOA Services Corporation 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. ▪ Attract, motivate and retain high-caliber leadership. ▪ 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"). | ▪ Attract and retain high-caliber leadership. ▪ Align the interests of NEOs and our stockholder. ▪ Provide market competitive compensation. |
| 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 compensation. |
| · | In consultation with senior management, establish the general compensation philosophy and strategy of the Allianz NA Group 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 enable the Allianz NA Group to attract and retain high-quality leadership. |
| · | Review and recommend to the Board of Directors of ASC the establishment of, or material modification to, any executive incentive compensation plans or programs for the Allianz NA Group. |
| · | Review and recommend to the Board of Directors of ASC the approval of any special benefits, perquisites or compensation contracts in effect for, or offered to, any prospective, current or former Allianz NA Group employee, regardless of the employee's level or assignment within the Allianz NA Group. Such benefits and perquisites are those that are unusual or different than the benefits offered to all similarly-situated employees. |
| · | Review and recommend to the Board of Directors of ASC 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 any Allianz NA Group company. 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. |
| · | In consultation with senior management, ensure that any Allianz NA Group plans are fiscally responsible, consistent with good management practices and in the best interest of the Allianz NA Group and our stockholder. Review and recommend to the Board of Directors of ASC the adoption of, or amendment to, any such plan. |
| · | Review and ratify compensation decisions. |
| · | Make Allianz NA Group-wide comparisons of compensation decisions and ensure adherence to Allianz NA Group standards and German regulations. |
| (1) | Mr. Torrance has resigned and will be leaving his position by June 30, 2015. |
| · | 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 NA Group. |
| · | 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) | (h) | (i)(5) | (j) | ||||||||||||||||||||||||
Walter White Chairman and Chief Executive Officer | |||||||||||||||||||||||||||||||||
| 2014 | $ | 13,671 | N/ | A | $ | 16,251 | N/ | A | $ | 32,502 | N/ | A | $ | 559 | $ | 62,983 | |||||||||||||||||
| 2013 | $ | 13,840 | $ | 19,188 | $ | 38,376 | (3) | $ | 422 | $ | 71,826 | ||||||||||||||||||||||
Giulio Terzariol(4) Chief Financial Officer and Treasurer | |||||||||||||||||||||||||||||||||
| 2014 | $ | 8,295 | N/ | A | $ | 7,881 | N/ | A | $ | 12,858 | N/ | A | $ | 939 | $ | 29,972 | |||||||||||||||||
| 2013 | $ | 8,062 | $ | 8,494 | $ | 13,331 | $ | 13 | $ | 29,901 | |||||||||||||||||||||||
Thomas Burns President | |||||||||||||||||||||||||||||||||
| 2014 | $ | 9,706 | N/ | A | $ | 8,047 | N/ | A | $ | 13,870 | N/ | A | $ | 572 | $ | 32,194 | |||||||||||||||||
| 2013 | $ | 10,121 | $ | 9,013 | $ | 15,086 | $ | 399 | $ | 34,619 | |||||||||||||||||||||||
Neil McKay Chief Actuary | |||||||||||||||||||||||||||||||||
| 2014 | $ | 8,129 | N/ | A | $ | 6,603 | N/ | A | $ | 11,481 | N/ | A | $ | 531 | $ | 26,745 | |||||||||||||||||
| 2013 | $ | 8,477 | $ | 7,699 | $ | 12,785 | $ | 378 | $ | 29,339 | |||||||||||||||||||||||
Robert DeChellis Field Vice President, Broker Dealer Distribution | |||||||||||||||||||||||||||||||||
| 2014 | $ | 16,800 | N/ | A | $ | 5,376 | N/ | A | $ | 25,620 | N/ | A | $ | 3,814 | $ | 51,610 | |||||||||||||||||
| 2013 | $ | 16,800 | $ | 5,376 | $ | 28,770 | $ | 7,749 | $ | 58,695 | |||||||||||||||||||||||
| (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 2014 for the 2013 performance year have a March 2018 exercise date, and the RSUs issued in 2015 for the 2014 performance year have a March 2019 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 at the grant date, 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. |
| Name | Year | Payments made pursuant to the AIP | Grants made pursuant to the ALTPUP | ||||||
| Walter White | 2014 | $ | 16,251 | $ | 16,251 | ||||
| 2013 | $ | 19,188 | $ | 19,188 | |||||
| Giulio Terzariol | 2014 | $ | 7,881 | $ | 4,977 | ||||
| 2013 | $ | 8,494 | $ | 4,837 | |||||
| Thomas Burns | 2014 | $ | 8,047 | $ | 5,823 | ||||
| 2013 | $ | 9,013 | $ | 6,072 | |||||
| Neil McKay | 2014 | $ | 6,603 | $ | 4,878 | ||||
| 2013 | $ | 7,699 | $ | 5,086 | |||||
| Robert DeChellis | 2014 | $ | 19,740 | $ | 5,880 | ||||
| 2013 | $ | 22,050 | $ | 6,720 | |||||
| (3) | Walter White, as Chief Executive Officer, participates in the global Allianz SE Mid-Term Bonus Program rather than the ALTPUP. |
| (4) | Mr. Terzariol also participates in certain plans maintained by Allianz SE that are not part of Allianz Life's compensation program. |
| (5) | The following table provides additional details regarding compensation found in the "All Other Compensation" column. |
| Name | Year | Spousal Travel (6) | Relocation (7) | Tax Services (8) | Milestone/ Anniversary/Recognition (9) | Tuition (10) | Life Insurance Premiums | Employer Match to 401(k) Plan | ASAAP Cont-ribution (11) | ESPP Imputed Income (12) | Total | ||||||||||||||||||||||||||||||
| Walter White | 2014 | $ | 194 | -- | -- | $ | 23 | -- | $ | 19 | $ | 324 | -- | -- | $ | 559 | |||||||||||||||||||||||||
| 2013 | $ | 75 | -- | -- | $ | 16 | $ | 331 | -- | -- | $ | 422 | |||||||||||||||||||||||||||||
| Giulio Terzariol | 2014 | -- | $ | 564 | $ | 70 | -- | -- | $ | 14 | $ | 290 | -- | -- | $ | 939 | |||||||||||||||||||||||||
| 2013 | -- | $ | 1 | -- | $ | 12 | -- | -- | -- | $ | 13 | ||||||||||||||||||||||||||||||
| Thomas Burns | 2014 | $ | 239 | -- | -- | -- | -- | $ | 10 | $ | 324 | -- | -- | $ | 572 | ||||||||||||||||||||||||||
| 2013 | $ | 62 | -- | -- | $ | 6 | $ | 331 | -- | -- | $ | 399 | |||||||||||||||||||||||||||||
| Neil McKay | 2014 | $ | 80 | -- | -- | -- | -- | $ | 15 | $ | 324 | -- | $ | 113 | $ | 531 | |||||||||||||||||||||||||
| 2013 | -- | -- | -- | $ | 12 | $ | 331 | -- | $ | 35 | $ | 378 | |||||||||||||||||||||||||||||
| Robert DeChellis | 2014 | -- | $ | 1,760 | -- | -- | $ | 1,229 | $ | 22 | $ | 735 | $ | 68 | -- | $ | 3,814 | ||||||||||||||||||||||||
| 2013 | -- | $ | 3,757 | $ | 3,168 | $ | 15 | $ | 735 | $ | 74 | -- | $ | 7,749 | |||||||||||||||||||||||||||
| (6) | Represents reimbursement or payments made to defray the costs of a spouse's travel. |
| (7) | Represents reimbursement or payments made to defray the cost of relocation expenses. |
| (8) | Represents reimbursements or payments made to defray the cost of tax related services. |
| (9) | Represents Milestone Anniversary Program, which pays a bonus at three and five year anniversaries, and then every five years thereafter. |
| (10) | Represents reimbursement or payments made to defray the cost of Executive MBA tuition expenses. |
| (11) | Represents company matching contribution to the Allianz Supplemental Asset Accumulation Plan for deferrals in excess of IRS compensation limit. |
| (12) | Represents value of the discount associated with stock purchases in the Employee Stock Purchase Plan. |
Estimated Future Payouts Under Non-Equity Incentive Plan Awards(1)(2) | Estimated Future Payouts Under Equity Incentive Plan Awards(3)(4) | ||||||||||||||||||||||||
Name | Grant Date | Threshold ($) | Target ($) | Maximum ($) | Threshold ($) | Target ($) | Maximum ($) | ||||||||||||||||||
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | ||||||||||||||||||
| Walter White | 3/6/2015 | ||||||||||||||||||||||||
| RSUs (under AEI) | $ | 0 | $ | 13,671 | $ | 67,670 | |||||||||||||||||||
| AIP Award | $ | 0 | $ | 13,671 | $ | 22,577 | |||||||||||||||||||
| Midterm Bonus Plan | $ | 0 | $ | 13,671 | $ | 22,577 | |||||||||||||||||||
| Giulio Terzariol | 3/6/2015 | ||||||||||||||||||||||||
| RSUs (under AEI) | $ | 0 | $ | 4,977 | $ | 24,637 | |||||||||||||||||||
| AIP Award | $ | 0 | $ | 4,977 | $ | 9,954 | |||||||||||||||||||
| ALTPUP Award | $ | 0 | $ | 4,977 | $ | 9,954 | |||||||||||||||||||
| Thomas Burns | 3/6/2015 | ||||||||||||||||||||||||
| RSUs (under AEI) | $ | 0 | $ | 5,823 | $ | 28,826 | |||||||||||||||||||
| AIP Award | $ | 0 | $ | 5,823 | $ | 11,647 | |||||||||||||||||||
| ALTPUP Award | $ | 0 | $ | 5,823 | $ | 11,647 | |||||||||||||||||||
| Neil McKay | 3/6/2015 | ||||||||||||||||||||||||
| RSUs (under AEI) | $ | 0 | $ | 4,878 | $ | 24,144 | |||||||||||||||||||
| AIP Award | $ | 0 | $ | 4,878 | $ | 9,755 | |||||||||||||||||||
| ALTPUP Award | $ | 0 | $ | 4,878 | $ | 9,755 | |||||||||||||||||||
| Robert DeChellis | 3/6/2015 | ||||||||||||||||||||||||
| RSUs (under AEI) | $ | 0 | $ | 5,376 | $ | 26,611 | |||||||||||||||||||
| AIP Award | $ | 0 | $ | 21,000 | $ | 42,000 | |||||||||||||||||||
| ALTPUP Award | $ | 0 | $ | 5,880 | $ | 11,760 | |||||||||||||||||||
| (1) | The target and maximum columns show the target award and maximum award for 2014 for each NEO under the AIP. There is no threshold amount for any participant in the AIP. The actual 2014 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 2014 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. The actual 2014 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, 2014" for disclosure regarding the number of RSUs that are unvested as of December 31, 2014. |
| (4) | The target and maximum columns show the target award and maximum award for 2014 for each NEO under the AEI. There is no threshold amount for any participant in the AEI. The actual 2014 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 | 69.017 | N/ | A | N/ | A | N/ | A | 3/10/2017 | N/ | A | N/ | A | |||||||||||||||||||||
| White | 91.863 | $ | 15,348 | ||||||||||||||||||||||||||||||
| 62.846 | $ | 10,500 | |||||||||||||||||||||||||||||||
| 131.564 | $ | 21,980 | |||||||||||||||||||||||||||||||
| 131.515 | $ | 21,972 | |||||||||||||||||||||||||||||||
| Giulio | 20.788 | N/ | A | N/ | A | N/ | A | 3/5/2015 | N/ | A | N/ | A | |||||||||||||||||||||
| Terzariol | 65.351 | 3/10/2017 | |||||||||||||||||||||||||||||||
| 117.695 | $ | 19,663 | |||||||||||||||||||||||||||||||
| 80.515 | $ | 13,452 | |||||||||||||||||||||||||||||||
| 62.912 | $ | 10,511 | |||||||||||||||||||||||||||||||
| 58.217 | $ | 9,726 | |||||||||||||||||||||||||||||||
| Thomas | 56.840 | N/ | A | N/ | A | N/ | A | 3/5/2015 | N/ | A | N/ | A | |||||||||||||||||||||
| Burns | 118.308 | $ | 19,766 | ||||||||||||||||||||||||||||||
| 86.288 | $ | 14,416 | |||||||||||||||||||||||||||||||
| 58.499 | $ | 9,733 | |||||||||||||||||||||||||||||||
| 61.767 | $ | 10,319 | |||||||||||||||||||||||||||||||
| Neil McKay | 39.270 | N/ | A | N/ | A | N/ | A | 3/5/2015 | N/ | A | N/ | A | |||||||||||||||||||||
| 70.909 | 3/10/2017 | ||||||||||||||||||||||||||||||||
| 106.065 | $ | 17,720 | |||||||||||||||||||||||||||||||
| 72.286 | $ | 12,077 | |||||||||||||||||||||||||||||||
| 54.152 | $ | 9,047 | |||||||||||||||||||||||||||||||
| 52.759 | $ | 8,814 | |||||||||||||||||||||||||||||||
| Robert | 78.498 | N/ | A | N/ | A | N/ | A | 3/5/2015 | N/ | A | N/ | A | |||||||||||||||||||||
| DeChellis | 116.676 | $ | 19,493 | ||||||||||||||||||||||||||||||
| 59.094 | $ | 9,873 | |||||||||||||||||||||||||||||||
| 48.174 | $ | 8,048 | |||||||||||||||||||||||||||||||
| 38.430 | $ | 6,421 | |||||||||||||||||||||||||||||||
| (1) | There is a two-year vesting period for exercisable securities underlying unexercised SARs. |
| (2) | Represents unvested RSUs issued pursuant to the GEI and the AEI. RSUs issued under the GEI during the years 2006 – 2010 are subject to a five-year vesting period from the grant date. RSUs issued under the AEI during the years 2012, 2013 and 2014 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 the Allianz NA Group or are pensioners. |
| (3) | For each of the NEOs, the number of RSUs listed on the first line expired March 2015, the RSUs listed on the second line expire March 2016, the RSUs listed on the third line expire March 2017, and the RSUs listed on the fourth line expire March 2018. |
| (4) | Based on an assumed stock price of $[ ] per share, which was the closing stock price of Allianz SE common stock on December 31, 2014, converted from Euros into U.S. dollars. |
| Option Awards | Stock Awards | |||||||||||||||
| Name | Number of Shares Acquired on Exercise (#) | Value Realized on Exercise ($)(1) | Number of Shares Acquired on Vesting (#) | Value Realized on Vesting ($)(2) | ||||||||||||
| Walter White | -- | $ | 0 | 10.485 | $ | 1,821 | ||||||||||
| Giulio Terzariol | -- | $ | 0 | 4.961 | $ | 862 | ||||||||||
| Thomas Burns | 71.241 | $ | 4,048 | 12.377 | $ | 2,150 | ||||||||||
| Neil McKay | -- | $ | 0 | 11.016 | $ | 1,914 | ||||||||||
| Robert DeChellis | 134.568 | $ | 6,210 | 24.906 | $ | 4,326 | ||||||||||
| (1) | Represents Allianz SE SARs that were exercised during 2014 pursuant to the GEI. Amounts realized were paid in cash. |
| (2) | Represents Allianz SE RSUs that were exercised during 2014 pursuant to the GEI. 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) | ||
| Giulio Terzariol | $ | 12,443 | ||
| Thomas Burns | $ | 14,588 | ||
| Neil McKay | $ | 12,194 | ||
| Robert DeChellis | $ | 13,569 | ||
| (1) | Mr. White is not eligible to receive payments pursuant to the 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) | |||||||||||||||||||||
Walter White2 Chief Executive Officer | N/ | A | N/ | A | N/ | A | N/ | A | N/ | A | N/ | A | N/ | A | ||||||||||||||
Giulio Terzariol2 Chief Financial Officer and Treasurer | N/ | A | N/ | A | N/ | A | N/ | A | N/ | A | N/ | A | N/ | A | ||||||||||||||
Thomas Burns2 President | N/ | A | N/ | A | N/ | A | N/ | A | N/ | A | N/ | A | N/ | A | ||||||||||||||
Steven J. Thiel2 Vice President, Appointed Actuary | N/ | A | N/ | A | N/ | A | N/ | A | N/ | A | N/ | A | N/ | A | ||||||||||||||
Marc B. Olson Vice President, Financial Consulting | N/ | A | N/ | A | N/ | A | N/ | A | N/ | A | N/ | A | N/ | A | ||||||||||||||
Ronald M. Clark Independent Director | $ | 6,000 | N/ | A | N/ | A | N/ | A | N/ | A | N/ | A | $ | 6,000 | ||||||||||||||
Martha Clark Goss Independent Director | $ | 3,000 | N/ | A | N/ | A | N/ | A | N/ | A | N/ | A | $ | 3,000 | ||||||||||||||
Stephen R. Herbert Independent Director | $ | 6,000 | N/ | A | N/ | A | N/ | A | N/ | A | N/ | A | $ | 6,000 | ||||||||||||||
Gary A. Smith Independent Director | $ | 6,000 | N/ | A | N/ | A | N/ | A | N/ | A | N/ | A | $ | 6,000 | ||||||||||||||
Kevin J. Doyle Independent Director | $ | 3,000 | N/ | A | N/ | A | N/ | A | N/ | A | N/ | A | $ | 3,000 | ||||||||||||||
| 1 | Represents cash compensation provided to our independent directors for the year ended December 31, 2014. |
| 2 | As employee directors, Messrs. White, Terzariol, Burns, Thiel and Olson do not receive any compensation for their service as directors. The compensation Messrs. White, Terzariol and Burns receive as executive officers of Allianz Life of New York 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 AND SECURITY STATEMENT |
| · | From you, either directly or through your agent. This includes information on your insurance application or other information provided during the application process or while you hold a policy with us. |
| · | From others, through the process of handling a claim. This may include information from medical or accident reports. |
| · | From your doctor or health provider. This is medical information about you, gathered with your written authorization. |
| · | From a consumer reporting agency such as a medical, credit, or motor vehicle report. |
| · | From sources using the information you provide, in order to obtain updated or additional information. An example is the U.S. Postal Service, in order to validate your current mailing address so that we may maintain records to correspond with you. |
| · | With affiliates and service providers in order to administer or service your policy, and with research groups to conduct various studies. However, no individual is identified in any study or summary report. These companies sign a Privacy and Security Agreement, requiring them to protect your information. |
| · | 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 and their affiliates 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 agencies, as required by law or to report suspected fraud activities. |
| 17. | TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION (SAI) |
Allianz Life as Custodian……………………… | 2 | Income Tax Withholding…………………….……………….. | 8 |
Legal Opinions………………………………….. | 2 | Multiple Contracts……………………………………………. | 9 |
Distributor………………………………………. | 2 | Partial 1035 Exchanges……………………………………… | 9 |
Federal Tax Status……………………………… | 2 | Assignments, Pledges and Gratuitous Transfers…………. | 9 |
| Annuity Contracts in General………………… | 3 | Death Benefits………………………………………………… | 9 |
| Taxation of Annuities in General…………… | 3 | Spousal Continuation and the Federal Defense of | |
| Qualified Contracts…………………………… | 3 | Marriage Act (DOMA)…………………………………… | 9 |
| Purchasing a Qualified Contract…………… | 5 | Federal Estate Taxes………………………………………… | 10 |
| Distributions-Qualified Contracts…………… | 5 | Generation-Skipping Transfer Tax…………………………. | 10 |
| Distributions-Non-Qualified Contracts……… | 7 | Foreign Tax Credits………………………………………….. | 10 |
| Required Distributions………………………… | 7 | Possible Tax Law Changes…………………………………. | 10 |
| Diversification…………………………………. | 8 | Annuity Payments…………………………………………….. | 10 |
| Owner Control…………………………………. | 8 | Annuity Payment Options…………………………………… | 10 |
| Contracts Owned by Non-Individuals……… | 8 | Appendix – Death of the Owner and/or Annuitant……… | 11 |
| Annuity Purchases by Nonresident Aliens and | |||
| Foreign Corporations……………………… | 8 |
| Index Effective Date | Initial Caps | |||||
S&P 500® Index | Russell 2000® Index | Nasdaq-100® Index | ||||
| 7/1/2014 | - | 8/4/2014 | 13.00% | 15.00% | 12.25% | |
| 8/5/2014 | - | 9/1/2014 | 12.75% | 15.00% | 11.75% | |
| 9/2/2014 | - | 10/6/2014 | 12.75% | 15.00% | 12.25% | |
| 10/7/2014 | - | 11/3/2014 | 12.50% | 14.75% | 12.00% | |
| · | an at-the-money call; |
| · | an out-of-the-money call; and |
| · | an out-of-the-money put. |
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 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 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 | 2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||
Net premiums and policy fees | $ | 61,716 | $ | 50,733 | $ | 40,192 | $ | 30,891 | $ | 22,564 | ||||||||||
Interest and similar income, net | 28,850 | 29,664 | 30,850 | 32,584 | 27,328 | |||||||||||||||
Change in fair value of assets and liabilities | 66,815 | (78,973 | ) | (14,676 | ) | (8,116 | ) | (10,267 | ) | |||||||||||
Realized investment gains, net | 77 | 829 | 14,502 | 1,605 | 869 | |||||||||||||||
Fee, commission, and other revenue | 6,864 | 5,904 | 4,698 | 3,642 | 1,861 | |||||||||||||||
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Total revenue | 164,322 | 8,157 | 75,566 | 60,606 | 42,355 | |||||||||||||||
Benefits and expenses | 168,618 | (8,747 | ) | 63,140 | 86,492 | 39,017 | ||||||||||||||
Income tax (benefit) expense | (3,133 | ) | 4,425 | 3,321 | (10,626 | ) | 145 | |||||||||||||
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Net (loss) income | $ | (1,163 | ) | $ | 12,479 | $ | 9,105 | $ | (15,260 | ) | $ | 3,193 | ||||||||
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| As of December 31, | ||||||||||||||||||||
Selected balance sheet data | 2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||
Total Investments | $ | 675,496 | 651,641 | 713,946 | 691,339 | 622,361 | ||||||||||||||
Receivables and reinsurance recoverables | 10,130 | 6,661 | 4,706 | 13,688 | 7,567 | |||||||||||||||
Deferred acquisition costs | 118,319 | 104,002 | 92,245 | 91,187 | 61,106 | |||||||||||||||
Separate account assets | 2,214,422 | 1,986,039 | 1,577,274 | 1,182,126 | 966,661 | |||||||||||||||
Total assets | 3,088,150 | 2,808,350 | 2,480,862 | 2,049,887 | 1,698,252 | |||||||||||||||
Policyholder liabilities | 697,519 | 583,008 | 699,081 | 721,901 | 602,472 | |||||||||||||||
Separate account liabilities | 2,214,422 | 1,986,039 | 1,577,274 | 1,182,126 | 966,661 | |||||||||||||||
Total liabilities | 2,926,743 | 2,652,089 | 2,313,382 | 1,921,080 | 1,584,918 | |||||||||||||||
Stockholder’s equity | 161,407 | 156,261 | 167,480 | 128,807 | 113,334 | |||||||||||||||
| Selected Financial Data and Management’s Discussion and Analysis | Page 1 of 21 |
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, 2014, compared with December 31, 2013, and its results of operations for each of the three years ended December 31. The information contained herein should be read in conjunction with the Company’s audited U.S. generally accepted accounting principles (GAAP) 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 actual growth, results of operations, performance, financial position and business prospects and opportunities in 2015 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 New York (hereafter referred to as “the Company”, “we”, “our” and “us”) is a life insurance company domiciled in New York and is licensed to sell annuity, group and traditional life and group accident and health policies in six U.S. states and the District of Columbia. We offer a portfolio of individual variable annuities, which are sold through licensed registered representatives contracted with a broker/dealer. We also maintain a legacy portfolio of individual fixed deferred and fixed-indexed annuities, individual and group life policies, and individual and group accident and health policies, but do not actively issue new policies related to these products. Product sales of our individual fixed deferred and individual fixed-indexed annuities were discontinued late in 2011.
The Company is a wholly owned subsidiary of Allianz Life Insurance Company of North America (Allianz Life). Allianz Life is a wholly owned subsidiary of Allianz of America, Inc. (AZOA), which is a subsidiary of Allianz Europe, B.V.. Allianz Europe, B.V. is a wholly owned subsidiary of Allianz SE, which is incorporated in Munich, Germany, and is our ultimate parent.
Our business is classified into two operating segments: Individual Annuities and Other.
Individual Annuity
The Individual Annuity segment provides tax-deferred investment growth and lifetime income opportunities for our customers through variable, variable-indexed, fixed deferred and fixed-indexed annuities. The “fixed” and “variable” classifications describe whether we or the contractholders bear the investment risk of the assets supporting the contract. 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 2014, we introduced a new variable-indexed annuity to the market. This product has characteristics similar to our fixed-indexed annuities but allows contractholders to invest a portion of the funds into a variety of mutual funds and stock indexes. Our individual annuity products are sold through independent distribution channels made up of registered representatives contracted with a broker dealer. As previously noted, we discontinued selling individual fixed deferred and fixed-indexed annuities in 2011; however, it continues to be a significant portion of our in-force volume.
Other
Our Other business consists of life insurance products and closed blocks of Long-Term Care (LTC) and Special Markets products. The Special Market products consist of closed blocks of individual and group whole life and term insurance. Although our Other product lines are part of the combined 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 below for information related to the allocation of income and expense to our segments.
| Selected Financial Data and Management’s Discussion and Analysis | Page 2 of 21 |
Basis of Presentation
The Financial Statements have been prepared in accordance with GAAP, which vary in certain respects from accounting practices prescribed or permitted by state insurance regulatory authorities. The preparation of 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 changes in mortality, morbidity, interest rates, capital markets, and asset valuations could cause actual results to differ from the estimates used in the 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 Financial Statements. Our critical accounting policies are summarized in “Summary of Significant Accounting Policies” included in the accompanying notes to the 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) Derivatives and Hedging, (iii) Deferred Acquisition Costs (DAC) and Deferred Sales Inducements (DSI), (iv) Account Balances and Future Policy Benefit Reserves (v) Other than Temporary Impairments (OTTI), and (vi) Income Taxes. 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 Financial Statements. A discussion of the various critical accounting policies is presented below.
Valuation of Investments
We have portfolios of certain fixed-maturity 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 in stockholder’s equity, net of tax and related adjustments to DAC, DSI, and reserves (commonly referred to as shadow adjustments). The adjustments to DAC and DSI 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.
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; and |
| (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).
| Selected Financial Data and Management’s Discussion and Analysis | Page 3 of 21 |
The fair value of fixed-maturity securities are 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 are included in Level 1. Most fixed-maturities for which prices are provided by third-party pricing sources are included in Level 2, because the inputs used are market observable. Fixed-maturities for which prices were obtained from broker quotes and private placement securities that are internally priced are included in Level 3.
See Note 6 of the Notes to the Financial Statements for additional information regarding fair value of investments, including management’s process related to review of third-party pricing services.
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 within the Statements of Operations.
We utilize interest rate swaps to economically hedge certain variable annuity guarantee benefits. We can receive the fixed or variable rate. The interest rate swaps are traded in 10, 20, and 30 year maturities. We will only enter into over the counter (OTC) interest rate swap contracts with counterparties rated A– or better. The interest rate swaps are subject to the rules of the International Swaps and Derivatives Association, Inc. and associated Credit Support Annex (CSA) agreements.
We utilize futures to economically hedge fixed-indexed annuity and variable annuity guarantees. Future contracts do not require an initial cash outlay and we have agreed to daily net settlement based on changes in fair value. Therefore, no asset or liability is recorded on the Balance Sheet except for the outstanding unpaid variation margin representing market movements on the last trading day of the year and cash posted as initial margin. Gains or losses on future contracts are included in the realized investment gains on the Statements of Operations as of December 31, 2014 and 2013.
We issue certain variable annuity products with guaranteed minimum benefit riders, including guaranteed minimum withdrawal benefit (GMWB) and 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 embedded derivatives on the Statement of Operations. These embedded derivatives are classified within account balances and future policy benefit reserves on the Balance Sheets.
Certain fixed-indexed annuity products 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 Balance Sheets with changes in fair value reported in change in fair value of annuity embedded derivatives on the Statements of Operations.
See Note 5 of the Notes to the Financial Statements for additional information regarding derivatives and hedging instruments.
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. For interest sensitive products and variable annuity contracts issued in 2010 and after, acquisition costs are amortized in relation to the present value of estimated future gross profits from investment 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 investment and mortality, morbidity, and expense charges. Acquisition costs for accident and health insurance policies are deferred and amortized over the lives of
| Selected Financial Data and Management’s Discussion and Analysis | Page 4 of 21 |
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 is reviewed for recoverability, at least annually, and adjusted when necessary. Recoverability is evaluated separately for fixed deferred annuities, variable annuities, and life insurance products. 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 is 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, we are required to record an increase or decrease in DAC amortization expense (DAC unlocking). In general, increases in the estimated investment spreads and fees result in increased expected future profitability and may lower 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.
We formally evaluate the appropriateness of the best estimate assumptions at least 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 as a change in DAC, net on the Statements of Operations.
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 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. DSI is reported in other assets in the 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 is recorded in policyholder benefits on the Statements of Operations.
The impact of unlocking during 2014 was a $856 decrease in amortization of DAC and $356 decrease in amortization of DSI primarily due to adjustments made to future period assumptions for interest margins, mortality, policyholder behavior (including surrender, annuitization and lifetime income benefit utilization), separate account returns and maintenance expenses. In 2013, the impact of unlocking was a $1,920 increase in DAC amortization and a $547 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, whereas previously were amortized using expected 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 $8,820 for the year ended December 31, 2014.
On December 1, 2014, we applied a prospective change to our 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 estimated gross profits (EGP) calculation. The implementation of this change resulted in a decrease in income from operations before income taxes of approximately $669 for the year ended December 31, 2014.
In 2012, we implemented the FASB issued guidance that changes the accounting for costs associated with acquiring or renewing insurance contracts. This guidance was adopted on a prospective basis. Specifically, the guidance changes the definition of acquisition costs eligible for deferral. In 2012, we capitalized $18,078 of acquisition costs compared to $20,123 that would have been capitalized if the Company’s previous policy had continued to be applied.
During 2012, we recorded a change in estimate related to the implementation of a new model for the valuation of policyholder reserves, DAC and DSI for the Company’s fixed deferred and fixed-indexed annuities. Reserve changes were primarily driven by more sophisticated modeling of newer product features such as lifetime income riders. In addition to DAC amortization related to these reserve changes, our DAC balances changed as a result of bringing the
| Selected Financial Data and Management’s Discussion and Analysis | Page 5 of 21 |
DAC projection model in line with the reserve model. Historically, the valuation and projection models were distinct in such cases as compression and product mapping. Now, valuation and projection are maintained within the same model, which provides greater consistency and a more refined estimate. This change in estimate resulted in a reserve increase of $1,538 and caused a reduction of DAC and DSI amortization of $76.
See Note 8 and 9 of the Notes to the Financial Statements for additional information regarding Deferred Acquisition Costs and Deferred Sales Inducements.
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 fixed deferred annuities and are generally carried at accumulated contract values. 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), 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 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 embedded derivatives on the Statement 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 Statement 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 EGPs 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.
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 host contract is valued using principles consistent with similar deferred annuity contracts without an index benefit. 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.
See Note 2 of the Notes to the Financial Statements for additional information regarding Account Balances and Future Policy Benefit Reserves.
| Selected Financial Data and Management’s Discussion and Analysis | Page 6 of 21 |
Other than Temporary Impairments
We review the available for sale investment portfolio 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, 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. In addition, the Investments-Debt and Equity Securities topic of the FASB ASC require that we evaluate other-than-temporary impairments on available for sale fixed-maturity securities based on additional factors. Specifically, declines in value resulting from changes in risk free interest rates must also be considered.
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 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. If either of these conditions is met, we must recognize an other-than-temporary impairment 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 gains, net on the 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, reserves, and deferred income taxes.
See Note 4 of the Notes to the Financial Statements for additional information regarding other than temporary impairment losses.
Income Taxes
We file a consolidated federal income tax return with AZOA. 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 Balance Sheets. Any such change could significantly affect the amounts reported on the 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 (IRS) 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.
| Selected Financial Data and Management’s Discussion and Analysis | Page 7 of 21 |
See Note 13 of the Notes to the Financial Statements for additional information regarding income tax estimates and assumptions.
Allocation of Income and Expense
The Company does not maintain segregated investment portfolios for each segment. All interest and similar income, net and realized investment gains, 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 reserve levels. The results of our Individual Annuity and Other 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.
Results of Operations
| Total Company: | Year Ended December 31, | Increase (decrease) and % change | Increase (decrease) and % change | |||||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2014 - 2013 | 2013 - 2012 | ||||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||
Net premiums and policy fees | $ | 61,716 | $ | 50,733 | $ | 40,192 | $ | 10,983 | 21.6 | % | $ | 10,541 | 26.2 | % | ||||||||||||||
Interest and similar income, net | 28,850 | 29,664 | 30,850 | (814 | ) | (2.7 | )% | (1,186 | ) | (3.8 | )% | |||||||||||||||||
Change in fair value of assets and liabilities | 66,815 | (78,973 | ) | (14,676 | ) | 145,788 | 184.6 | % | (64,297 | ) | (438.1 | )% | ||||||||||||||||
Realized investment gains, net | 77 | 829 | 14,502 | (752 | ) | (90.7 | )% | (13,673 | ) | (94.3 | )% | |||||||||||||||||
Fee, commission, and other revenue | 6,864 | 5,904 | 4,698 | 960 | 16.3 | % | 1,206 | 25.7 | % | |||||||||||||||||||
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Total revenue | 164,322 | 8,157 | 75,566 | 156,165 | NM | (67,409 | ) | (89.2 | )% | |||||||||||||||||||
Benefits and expenses: | ||||||||||||||||||||||||||||
Net benefits | 143,893 | (38,103 | ) | 23,570 | 181,996 | 477.6 | % | (61,673 | ) | (261.7 | )% | |||||||||||||||||
General and administrative and commission | 39,789 | 35,519 | 35,140 | 4,270 | 12.0 | % | 379 | 1.1 | % | |||||||||||||||||||
Change in deferred acquisition costs, net | (15,064 | ) | (6,163 | ) | 4,430 | (8,901 | ) | (144.4 | )% | (10,593 | ) | (239.1 | )% | |||||||||||||||
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Total benefits and expenses | 168,618 | (8,747 | ) | 63,140 | 177,365 | NM | (71,887 | ) | (113.9 | )% | ||||||||||||||||||
Pretax (loss) income | (4,296 | ) | 16,904 | 12,426 | (21,200 | ) | (125.4 | )% | 4,478 | 36.0 | % | |||||||||||||||||
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Income tax (benefit) expense | (3,133 | ) | 4,425 | 3,321 | (7,558 | ) | (170.8 | )% | 1,104 | 33.2 | % | |||||||||||||||||
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Net (loss) income | $ | (1,163 | ) | $ | 12,479 | $ | 9,105 | $ | (13,642 | ) | (109.3 | )% | $ | 3,374 | 37.1 | % | ||||||||||||
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| NM | Not meaningful |
| Year Ended December 31, | Increase (decrease) and % change | Increase (decrease) and % change | ||||||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2014 - 2013 | 2013 - 2012 | ||||||||||||||||||||||||
Pretax (loss) income: | ||||||||||||||||||||||||||||
Individual Annuity | $ | (2,986 | ) | $ | 17,477 | $ | 10,933 | $ | (20,463 | ) | (117.1 | )% | $ | 6,544 | 59.9 | % | ||||||||||||
Other | (1,310 | ) | (573 | ) | 1,493 | (737 | ) | (128.6 | )% | (2,066 | ) | (138.4 | )% | |||||||||||||||
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Total Pretax (loss) income | $ | (4,296 | ) | $ | 16,904 | $ | 12,426 | $ | (21,200 | ) | (125.4 | )% | $ | 4,478 | 36.0 | % | ||||||||||||
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Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Overview
| • | Net (loss) income: For the Company, net loss is a decrease of $13,642 or 109.3% to $(1,163) for 2014 compared to $12,479 for the prior year. The net income decrease is primarily due to the unfavorable impact of the Individual Annuity reserves net of economic hedging driven by interest rate movement in 2014. |
| Selected Financial Data and Management’s Discussion and Analysis | Page 8 of 21 |
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Overview
| • | Net (loss) income: For the Company, net income is an increase of $3,374 or 37.1%, to $12,479 for 2013 compared to $9,105 for the prior year. The net income increase is primarily due to the favorable impact for the Individual Annuity reserves net of economic hedging driven by market movement in 2013. |
Selected operating performance measures
| Year Ended December 31, | Increase (decrease) and % change | Increase (decrease) and % change | ||||||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2014 - 2013 | 2013 - 2012 | ||||||||||||||||||||||||
Deposits & Gross Written Premium | ||||||||||||||||||||||||||||
Individual Annuity | $ | 322,272 | $ | 314,109 | $ | 343,346 | $ | 8,163 | 2.6 | % | $ | (29,237 | ) | (8.5 | )% | |||||||||||||
Other | 4,693 | 4,815 | 4,919 | (122 | ) | (2.5 | )% | (104 | ) | (2.1 | )% | |||||||||||||||||
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Total | 326,965 | 318,924 | 348,265 | 8,041 | 2.5 | % | (29,341 | ) | (8.4 | )% | ||||||||||||||||||
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Inforce | ||||||||||||||||||||||||||||
Individual Annuity | $ | 2,768,560 | $ | 2,546,237 | $ | 2,184,664 | $ | 222,323 | 8.7 | % | $ | 361,573 | 16.6 | % | ||||||||||||||
Other | 77,592 | 84,046 | 93,755 | (6,454 | ) | (7.7 | )% | (9,709 | ) | (10.4 | )% | |||||||||||||||||
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Total | 2,846,152 | 2,630,283 | 2,278,419 | 215,869 | 8.2 | % | 351,864 | 15.4 | % | |||||||||||||||||||
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Deposits, gross written premiums, and in-force amounts in the table above are for direct and assumed business. Deposits reflect amounts collected on both new and renewal business. Gross premiums written reflect premiums collected on renewal business. Individual Annuity in-force represents account values of the annuity contracts for our variable, variable-indexed, fixed-deferred, and fixed-indexed annuity contracts. The overall increase in deposits is a result of the variable-indexed annuity, which was introduced to the market in 2014. Other products in-force amounts represent life insurance in-force within our special markets products. The decrease in gross premiums written and in-force over the last two years is due to these being closed blocks of business. The movement of in-force, year over year, is primarily driven by policyholder activity and market performance. Increases are driven by deposits and new business, and decreases are driven by policyholder charges, surrenders, and claims.
Individual Annuity and Other
Based upon the significance of the Individual Annuity segment and its overall impact on the total results of operations, we only provided variance commentary at the total company level for year ended December 31, 2014 compared to 2013 and year ended December 31, 2013, compared to 2012. The following tables provide the results of operations for the Individual Annuity and Other segments.
Individual Annuity
Segment results of operations
| Year Ended December 31, | Increase (decrease) and % change | Increase (decrease) and % change | ||||||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2014 - 2013 | 2013 - 2012 | ||||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||
Net premiums and policy fees | $ | 58,728 | $ | 47,281 | $ | 36,997 | $ | 11,447 | 24.2 | % | $ | 10,284 | 27.8 | % | ||||||||||||||
Interest and similar income, net | 27,284 | 28,590 | 29,905 | (1,306 | ) | (4.6 | )% | (1,315 | ) | (4.4 | )% | |||||||||||||||||
Change in fair value of assets and liabilities | 66,815 | (78,973 | ) | (14,676 | ) | 145,788 | 184.6 | % | (64,297 | ) | (438.1 | )% | ||||||||||||||||
Realized investment gains, net | 73 | 796 | 14,170 | (723 | ) | (90.8 | )% | (13,374 | ) | (94.4 | )% | |||||||||||||||||
Fee, commission, and other revenue | 6,869 | 5,904 | 4,698 | 965 | 16.3 | % | 1,206 | 25.7 | % | |||||||||||||||||||
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Total revenue | 159,769 | 3,598 | 71,094 | 156,171 | 4,340.5 | % | (67,496 | ) | (94.9 | )% | ||||||||||||||||||
Benefits and expenses: | ||||||||||||||||||||||||||||
Net benefits | 138,957 | (42,034 | ) | 20,914 | 180,991 | 430.6 | % | (62,948 | ) | (301.0 | )% | |||||||||||||||||
General and administrative and commission | 38,886 | 34,595 | 34,590 | 4,291 | 12.4 | % | 5 | 0.0 | % | |||||||||||||||||||
Change in deferred acquisition costs, net | (15,088 | ) | (6,440 | ) | 4,657 | (8,648 | ) | (134.3 | )% | (11,097 | ) | (238.3 | )% | |||||||||||||||
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Total benefits and expenses | 162,755 | (13,879 | ) | 60,161 | 176,634 | 1,272.7 | % | (74,040 | ) | (123.1 | )% | |||||||||||||||||
Pretax (loss) income | $ | (2,986 | ) | $ | 17,477 | $ | 10,933 | $ | (20,463 | ) | (117.1 | )% | $ | 6,544 | 59.9 | % | ||||||||||||
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| Selected Financial Data and Management’s Discussion and Analysis | Page 9 of 21 |
Other
Segment results of operations
| Year Ended December 31, | Increase (decrease) and % change | Increase (decrease) and % change | ||||||||||||||||||||||||||
| 2014 | 2013 | 2012 | 2014 - 2013 | 2013 - 2012 | ||||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||
Net premiums and policy fees | $ | 2,988 | $ | 3,452 | $ | 3,195 | $ | (464 | ) | (13.4 | )% | $ | 257 | 8.0 | % | |||||||||||||
Interest and similar income, net | 1,566 | 1,074 | 945 | 492 | 45.8 | % | 129 | 13.7 | % | |||||||||||||||||||
Change in fair value of assets and liabilities | — | — | — | — | — | % | — | — | % | |||||||||||||||||||
Realized investment gains, net | 4 | 33 | 332 | (29 | ) | (87.9 | )% | (299 | ) | (90.1 | )% | |||||||||||||||||
Fee, commission and other revenue | (5 | ) | — | — | (5 | ) | — | % | — | — | % | |||||||||||||||||
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Total revenue | 4,553 | 4,559 | 4,472 | (6 | ) | (0.1 | )% | 87 | 1.9 | % | ||||||||||||||||||
Benefits and expenses: | ||||||||||||||||||||||||||||
Net benefits | 4,936 | 3,931 | 2,656 | 1,005 | 25.6 | % | 1,275 | 48.0 | % | |||||||||||||||||||
General and administrative and commission | 903 | 924 | 550 | (21 | ) | (2.3 | )% | 374 | 68.0 | % | ||||||||||||||||||
Change in deferred acquisition costs, net | 24 | 277 | (227 | ) | (253 | ) | (91.3 | )% | 504 | 222.0 | % | |||||||||||||||||
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Total benefits and expenses | 5,863 | 5,132 | 2,979 | 731 | 14.2 | % | 2,153 | 72.3 | % | |||||||||||||||||||
Pretax (loss) income | $ | (1,310 | ) | $ | (573 | ) | $ | 1,493 | $ | (737 | ) | (128.6 | )% | $ | (2,066 | ) | (138.4 | )% | ||||||||||
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Total Company – Statement of Operations Line Item Variance Analysis
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Revenue
Net premiums and policy fees. Net premiums consist primarily of premiums for long-term care, net of reinsurance, and life insurance. Policy fees represent asset fees, cost of insurance charges, administrative fees, charges for guarantees on investment products, and surrender charges for investment products.
| • | Premium and policy fee revenue increase of $10,983 or 21.6% in 2014 as compared to 2013 is primarily due to increases in fee revenue and rider charges driven by higher Individual Annuity separate account balances and growing benefit base. |
Interest and similar income, net. Interest and similar income primarily includes interest income on fixed-maturity securities classified as available-for-sale.
| • | Interest and similar income decrease of $814 or 2.7% in 2014 compared to 2013 is primarily due to a decrease in the book value of assets and the average yield earned on the investments. |
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. 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 for additional information.
| • | Change in fair value of assets and liabilities is an increase of $145,788 or 184.6% in 2014 compared to 2013. This is driven by the favorable hedge results on derivatives for Individual Annuity primarily due to interest rate movement impacting the hedge for variable annuity products. The Individual Annuity hedge results partially offset reserve changes in net benefits. |
Realized investment gains, net. Realized investment gains (losses) consist of gains and losses from the sale or impairment of investments.
| • | Realized investment gains is a decrease of $752 or 90.7% in 2014 compared to 2013 primarily a result of the lower sales in 2014 of fixed-maturity securities. |
Fee, commission and other revenue. Fee, commission and other revenue relate primarily to fees earned from assets under management by certain fund companies.
| Selected Financial Data and Management’s Discussion and Analysis | Page 10 of 21 |
| • | Fee, commission and other revenue increase of $960 or 16.3% in 2014 compared to 2013 is due to higher fund administration fees driven by increases in Individual Annuities assets under management as a result of the continued asset base growth in 2014. |
Benefits and Expenses
Net benefits. Net benefits 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 the accumulation and withdrawal benefits under variable annuity guarantees include the change in fair value for these embedded derivatives. The derivatives to hedge these benefits are included in revenue under change of fair value of assets and liabilities. Net benefits also include amortization of DSI.
| • | Net benefits increase of $181,996 or 477.6% in 2014 compared to 2013 is primarily due to an unfavorable change in reserves for Individual Annuity driven by the impact of interest rate movement in 2014 compared to 2013. Individual Annuity reserve movements are partially hedged in Change in fair value of assets and liabilities. |
General and administrative and commissions. General and administrative and commission expenses includes compensation, consultant fees, information technology, facilities and equipment, advertising and marketing, legal and regulatory and corporate related expenses.
| • | General and administrative and commission expenses increase of $4,270 or 12.0% in 2014 compared to 2013 is primarily due to higher trail commissions from the continued growth of assets under management as a result of positive market conditions and higher allocated expenses and service fees. |
Change in deferred acquisition costs, net. Change in deferred acquisition costs represents the capitalization of acquisition costs reported in general and administrative and commission expenses, and amortization of DAC and DSI. For fixed, fixed-indexed, and variable annuity contracts issued in 2010 and after, acquisition costs are amortized in relation to the present value of future EGPs from investment margins, 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 LTC policies are deferred and amortized over the lives of the policies. Changes in assumptions are recorded as an increase or decrease in amortization (unlocking).
| • | Change in deferred acquisition costs is a decrease of $8,901 or 144.4% in 2014 compared to 2013. The favorable change in deferred acquisition costs is due to the change in DAC amortization driven by the change in interest rates and its impact on estimated gross profits in 2014 compared to 2013. |
Income tax (benefit) expense
| • | Income tax (benefit)expense: The 2014 income tax benefit is a decrease of $7,558 compared to 2013. The change is primarily attributable to a decrease in pre-tax income of $21,200. |
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Revenue
| • | Net premiums and policy fees: Premium and policy fee revenue increase of $10,541 or 26.2% in 2013 as compared to 2012 is primarily due to increases in fee revenue and rider charges driven by higher Individual Annuity separate account balances. |
| • | Interest and similar income, net: Interest and similar income decrease of $1,186 or 3.8% in 2013 compared to 2012 is primarily due to a decrease in the book value of assets and the average yield earned on the investments. |
| • | Change in fair value of assets and liabilities: Change in fair value of assets and liabilities is a decrease of $64,297 or 438.1% in 2013 compared to 2012. This is driven by the unfavorable hedge results on derivatives for Individual Annuity primarily due to interest rate movement impacting the hedge for variable annuity products. The Individual Annuity hedge results partially offset reserve changes in net benefits. |
| • | Realized investment gains, net: Realized investment gains are a decrease of $13,673 or 94.3% in 2013 compared to 2012 is primarily as a result of the lower sales in 2013 of fixed-maturity securities. |
| Selected Financial Data and Management’s Discussion and Analysis | Page 11 of 21 |
| • | Fee, commission and other revenue: Fee, commission and other revenue increase of $1,206 or 25.7% in 2013 compared to 2012 is due to higher fund administration fees driven by increases in Individual Annuities assets under management as a result of improved market conditions in 2013. |
Benefits and Expenses
| • | Net benefits: Net benefits decrease of $61,673 or 261.7% in 2013 compared to 2012 is primarily due to a favorable change in reserves for Individual Annuity driven by the impact of market movement in 2013 compared to 2012 partially offset by unfavorable variance due to change in loss reserves in Long Term Care (LTC) due to change in claim continuance assumption updates in 2013. Individual Annuity reserve movements are partially hedged in Change in fair value of assets and liabilities. |
| • | General and administrative and commissions: General and administrative and commission expenses increase $379 or 1.1% in 2013 compared to 2012 is primarily due to lower insurance department fees partially offset by higher trail commissions. |
| • | Change in deferred acquisition costs, net: Change in deferred acquisition costs is a decrease of $10,593 or 239.1% in 2013 compared to 2012. The favorable change in deferred acquisition costs is due to the change in interest rates and its impact on estimated gross profits in 2013 compared to 2012 and lower capitalization from the decrease in premiums for Individual Annuities. |
Income tax expense (benefit)
| • | Income tax expense (benefit): The 2013 income tax expense is an increase of $1,104 compared 2012. The change is primarily attributable to an increase in pre-tax income of $4,478 offset by an additional Separate Account dividend received deduction (DRD) pre-tax benefit of $(898). |
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. In addition, we seek to mitigate the impact of cash flow variability from embedded options in our variable annuities, through certain investment products such as interest rate swaps and futures contracts. 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 relationship of credit risk in the asset portfolio to liabilities. 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 | 2014 | 2013 | ||||||||||||||
| Carrying value | % of total | Carrying value | % of total | |||||||||||||
Fixed maturities | $ | 655,141 | 97.0 | % | $ | 645,870 | 99.1 | % | ||||||||
Equity securities | 1,858 | 0.3 | % | — | 0.0 | % | ||||||||||
Short-term securities | 13,728 | 2.0 | % | — | 0.0 | % | ||||||||||
Derivatives | 4,516 | 0.7 | % | 5,508 | 0.8 | % | ||||||||||
Policy loans | 253 | 0.0 | % | 263 | 0.1 | % | ||||||||||
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Total investments | $ | 675,496 | 100.0 | % | $ | 651,641 | 100.0 | % | ||||||||
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| Selected Financial Data and Management’s Discussion and Analysis | Page 12 of 21 |
Fixed Maturity Securities
At December 31, the amortized cost, gross unrealized gains, gross unrealized losses, and fair value of fixed-maturity securities (excluding trading securities) are shown in the following tables:
| Gross | Gross | |||||||||||||||||||||||
| Amortized | % | unrealized | unrealized | Fair | % | |||||||||||||||||||
| cost | of Total | gains | losses | value | of Total | |||||||||||||||||||
2014: | ||||||||||||||||||||||||
Fixed-maturity securities: | ||||||||||||||||||||||||
U.S. government | $ | 93,692 | 15.3 | % | 1,446 | 61 | 95,077 | 14.5 | % | |||||||||||||||
States and political subdivisions | 11,679 | 1.9 | % | 305 | 42 | 11,942 | 1.8 | % | ||||||||||||||||
Foreign government | 2,517 | 0.4 | % | 30 | — | 2,547 | 0.4 | % | ||||||||||||||||
Public utilities | 36,746 | 6.0 | % | 4,625 | 43 | 41,328 | 6.3 | % | ||||||||||||||||
Corporate securities | 328,406 | 53.5 | % | 30,664 | 1,740 | 357,330 | 54.6 | % | ||||||||||||||||
Mortgage-backed securities | 140,682 | 22.9 | % | 6,416 | 181 | 146,917 | 22.4 | % | ||||||||||||||||
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Total | $ | 613,722 | 100.0 | % | 43,486 | 2,067 | 655,141 | 100.0 | % | |||||||||||||||
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| Gross | Gross | |||||||||||||||||||||||
| Amortized | % | unrealized | unrealized | Fair | % | |||||||||||||||||||
| cost | of Total | gains | losses | value | of Total | |||||||||||||||||||
2013: | ||||||||||||||||||||||||
Fixed-maturity securities: | ||||||||||||||||||||||||
U.S. government | $ | 57,053 | 9.3 | % | 646 | 471 | 57,228 | 8.9 | % | |||||||||||||||
States and political subdivisions | 17,574 | 2.9 | % | 114 | 1,179 | 16,509 | 2.6 | % | ||||||||||||||||
Foreign government | 2,534 | 0.4 | % | 44 | 155 | 2,423 | 0.4 | % | ||||||||||||||||
Public utilities | 39,615 | 6.4 | % | 4,363 | 648 | 43,330 | 6.7 | % | ||||||||||||||||
Corporate securities | 343,790 | 55.9 | % | 26,790 | 6,349 | 364,231 | 56.3 | % | ||||||||||||||||
Mortgage-backed securities | 154,728 | 25.1 | % | 8,390 | 969 | 162,149 | 25.1 | % | ||||||||||||||||
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Total | $ | 615,294 | 100.0 | % | 40,347 | 9,771 | 645,870 | 100.0 | % | |||||||||||||||
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As of December 31, 2014 and 2013, there were 32 and 79 available-for-sale fixed-maturity securities that were in an unrealized loss position, respectively.
As of December 31, 2014 and 2013, of the total amount of unrealized losses, $1,983 or 95.9% and $9,524 or 97.5%, 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&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 of the Financial Statements, 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 did not consider these investments to be other than temporarily impaired.
| Selected Financial Data and Management’s Discussion and Analysis | Page 13 of 21 |
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:
| 2014 | ||||||||||||||||
| IG | % of IG and BIG | BIG | % of IG and BIG | |||||||||||||
Twelve months or less below amortized cost | $ | 889 | 43.0 | % | $ | — | 0.0 | % | ||||||||
More than twelve months below amortized cost | 1,094 | 52.9 | % | 84 | 4.1 | % | ||||||||||
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Total | $ | 1,983 | 95.9 | % | $ | 84 | 4.1 | % | ||||||||
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| 2013 | ||||||||||||||||
| IG | % of IG and BIG | BIG | % of IG and BIG | |||||||||||||
Twelve months or less below amortized cost | $ | 8,290 | 84.8 | % | $ | 85 | 0.9 | % | ||||||||
More than twelve months below amortized cost | 1,233 | 12.6 | % | 163 | 1.7 | % | ||||||||||
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Total | $ | 9,523 | 97.4 | % | $ | 248 | 2.6 | % | ||||||||
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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, are as follows at December 31:
| Amortized Cost | Unrealized Loss | Number of Securities | ||||||||||||||||||||||
| 2014 | < 20% | > 20% | < 20% | > 20% | < 20% | > 20% | ||||||||||||||||||
Twelve months or less below amortized cost | $ | 25,396 | $ | 559 | $ | 791 | $ | 98 | 11 | 1 | ||||||||||||||
More than twelve months below amortized cost | 40,542 | — | 1,178 | — | 20 | — | ||||||||||||||||||
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Total unrealized investment losses | $ | 65,938 | $ | 559 | $ | 1,969 | $ | 98 | 31 | 1 | ||||||||||||||
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| Amortized Cost | Unrealized Loss | Number of Securities | ||||||||||||||||||||||
| 2013 | < 20% | > 20% | < 20% | > 20% | < 20% | > 20% | ||||||||||||||||||
Twelve months or less below amortized cost | $ | 178,517 | $ | 1,423 | $ | 8,077 | $ | 298 | 72 | 1 | ||||||||||||||
More than twelve months below amortized cost | 10,323 | — | 1,396 | — | 6 | — | ||||||||||||||||||
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Total unrealized investment losses | $ | 188,840 | $ | 1,423 | $ | 9,473 | $ | 298 | 78 | 1 | ||||||||||||||
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Other-than-temporary impairments, by market sector, for impairments included in the Statements of Operations, are at December 31, are as follows:
| 2014 | 2013 | |||||||||||||||
| Impairment | No. of Securities | Impairment | No. of Securities | |||||||||||||
Corporate securities | $ | — | — | $ | 241 | 1 | ||||||||||
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The following table presents a rollforward of the Company’s cumulative impairments on fixed-maturity securities held on December 31:
| 2014 | 2013 | |||||||
Balance as of January 1 | $ | 241 | — | |||||
Additions for credit impairments recognized on: | ||||||||
Securities not previously impaired | — | �� | ||||||
Additions for securities that the Company intends to sell or more likely than not be required to sell before recovery (interest) | — | 241 | ||||||
Reductions for credit impairments previously on: | ||||||||
Securities that matured or were sold during the period | (241 | ) | — | |||||
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| |||||
Balance as of December 31 | $ | — | 241 | |||||
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| Selected Financial Data and Management’s Discussion and Analysis | Page 14 of 21 |
Total available for sale fixed-maturity securities by quality rating category at December 31, are shown below:
| 2014 | ||||||||||||||||
| Fair Value | % of Total | Amortized Cost | % of Total | |||||||||||||
AAA | $ | 83,491 | 12.7 | % | $ | 79,933 | 13.0 | % | ||||||||
AA | 211,016 | 32.2 | % | 202,992 | 33.1 | % | ||||||||||
A | 192,507 | 29.4 | % | 174,112 | 28.4 | % | ||||||||||
BBB | 165,605 | 25.3 | % | 154,178 | 25.1 | % | ||||||||||
BB | 2,019 | 0.3 | % | 1,963 | 0.3 | % | ||||||||||
B and below | 503 | 0.1 | % | 544 | 0.1 | % | ||||||||||
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| |||||||||
Total | $ | 655,141 | 100.0 | % | $ | 613,722 | 100.0 | % | ||||||||
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| |||||||||
| 2013 | ||||||||||||||||
| Fair Value | % of Total | Amortized Cost | % of Total | |||||||||||||
AAA | $ | 88,965 | 13.8 | % | $ | 82,721 | 13.4 | % | ||||||||
AA | 185,011 | 28.6 | % | 181,640 | 29.5 | % | ||||||||||
A | 198,359 | 30.7 | % | 185,014 | 30.1 | % | ||||||||||
BBB | 172,606 | 26.7 | % | 164,828 | 26.8 | % | ||||||||||
BB | 460 | 0.1 | % | 545 | 0.1 | % | ||||||||||
B and below | 469 | 0.1 | % | 546 | 0.1 | % | ||||||||||
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| |||||||||
Total | $ | 645,870 | 100.0 | % | $ | 615,294 | 100.0 | % | ||||||||
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The amortized cost and fair value of available-for-sale and held to maturity fixed-maturity securities at December 31, 2014, by contractual maturity, are shown below:
| Amortized cost | Fair value | |||||||
Available-for-sale: | ||||||||
Due in one year or less | $ | 27,824 | 28,247 | |||||
Due after one year through five years | 152,066 | 165,127 | ||||||
Due after five years through ten years | 186,466 | 194,217 | ||||||
Due after ten years | 106,684 | 120,633 | ||||||
Mortgage-backed securities | 140,682 | 146,917 | ||||||
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| |||||
Total available-for-sale fixed-maturity securities | $ | 613,722 | 655,141 | |||||
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| |||||
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.
| Selected Financial Data and Management’s Discussion and Analysis | Page 15 of 21 |
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:
2014 | ||||||||||||||||||
% of total CMBS | Vintage | |||||||||||||||||
AAA | $ | 72,882 | 79.4 | % | 2014 | $ | 11,151 | 12.1 | % | |||||||||
AA | 11,211 | 12.2 | % | 2013 | 1,515 | 1.6 | % | |||||||||||
A | 7,740 | 8.4 | % | 2012 and prior | 79,167 | 86.3 | % | |||||||||||
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| |||||||||||
| $ | 91,833 | 100.0 | % | $ | 91,833 | 100.0 | % | |||||||||||
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2013 | ||||||||||||||||||
% of total CMBS | Vintage | |||||||||||||||||
AAA | $ | 72,622 | 77.4 | % | 2011 | $ | 2,138 | 2.3 | % | |||||||||
AA | 12,133 | 12.9 | % | 2010 | 2,201 | 2.3 | % | |||||||||||
A | 9,123 | 9.7 | % | 2009 and prior | 89,539 | 95.4 | % | |||||||||||
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| $ | 93,878 | 100.0 | % | $ | 93,878 | 100.0 | % | |||||||||||
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Our Asset Backed Security (ABS) holdings consist primarily of CDOs. The CDO investment assets generally include credit asset-backed securities, mortgage-backed securities, default swaps/synthetic CDO, and asset-backed securities that meet specific criteria, such as credit quality, insurance requirements, or limits on the types of collateral underlying those investments.
The following table summarizes our exposure to other ABS holdings by credit quality and vintage year as of December 31:
2014 | ||||||||||
% of total other ABS | Vintage | |||||||||
AAA | $ | 8,648 | 2008 and prior | $ | 8,648 | |||||
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| $ | 8,648 | $ | 8,648 | |||||||
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2013 | ||||||||||
% of total other ABS | Vintage | |||||||||
AAA | $ | 8,926 | 2008 and prior | $ | 8,926 | |||||
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| $ | 8,926 | $ | 8,926 | |||||||
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The following financial instruments are carried at fair value on a recurring basis in the Company Financial Statements: available-for-sale securities, freestanding and embedded derivatives, and separate accounts assets and liabilities. 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. See Note 6 of the Notes to Financial Statements in Item 8 for additional information.
| Selected Financial Data and Management’s Discussion and Analysis | Page 16 of 21 |
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
2014: | ||||||||||||||||
Assets accounted for at fair value: | ||||||||||||||||
Fixed-maturity securities: | ||||||||||||||||
U.S. government | $ | 95,077 | 95,077 | — | — | |||||||||||
States and political subdivisions | 11,942 | — | 11,942 | — | ||||||||||||
Foreign government | 2,547 | — | 2,547 | — | ||||||||||||
Public utilities | 41,328 | — | 41,328 | — | ||||||||||||
Corporate securities | 357,330 | — | 356,258 | 1,072 | ||||||||||||
Mortgage-backed securities | 146,917 | — | 146,917 | — | ||||||||||||
Derivative asset | 4,516 | — | 4,516 | — | ||||||||||||
Equity securities, trading | 1,858 | 1,858 | — | — | ||||||||||||
Separate account assets | 2,214,422 | 2,214,422 | — | — | ||||||||||||
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| |||||||||
Total assets accounted for at fair value | $ | 2,875,937 | 2,311,357 | 563,508 | 1,072 | |||||||||||
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| |||||||||
Liabilities accounted for at fair value: | ||||||||||||||||
Derivative liability | $ | 4,894 | — | 4,894 | — | |||||||||||
Separate account liabilities | 2,214,422 | 2,214,422 | — | — | ||||||||||||
Reserves at fair value | 150,251 | — | — | 150,251 | ||||||||||||
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|
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| |||||||||
Total liabilities accounted for at fair value | $ | 2,369,567 | 2,214,422 | 4,894 | 150,251 | |||||||||||
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| |||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
2013: | ||||||||||||||||
Assets accounted for at fair value: | ||||||||||||||||
Fixed-maturity securities: | ||||||||||||||||
U.S. government | $ | 57,228 | 57,228 | — | — | |||||||||||
States and political subdivisions | 16,509 | — | 16,509 | — | ||||||||||||
Foreign government | 2,423 | — | 2,423 | — | ||||||||||||
Public utilities | 43,330 | — | 43,330 | — | ||||||||||||
Corporate securities | 364,231 | — | 363,166 | 1,065 | ||||||||||||
Mortgage-backed securities | 162,149 | — | 162,149 | — | ||||||||||||
Derivative asset | 5,508 | — | 5,508 | — | ||||||||||||
Separate account assets | 1,986,039 | 1,986,039 | — | — | ||||||||||||
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|
|
|
|
|
|
| |||||||||
Total assets accounted for at fair value | $ | 2,637,417 | 2,043,267 | 593,085 | 1,065 | |||||||||||
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|
|
| |||||||||
Liabilities accounted for at fair value: | ||||||||||||||||
Derivative liability | $ | 73,273 | — | 73,273 | — | |||||||||||
Separate account liabilities | 1,986,039 | 1,986,039 | — | — | ||||||||||||
Reserves at fair value | 22,640 | — | — | 22,640 | ||||||||||||
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| |||||||||
Total liabilities accounted for at fair value | $ | 2,081,952 | 1,986,039 | 73,273 | 22,640 | |||||||||||
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| Selected Financial Data and Management’s Discussion and Analysis | Page 17 of 21 |
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 insurance premiums, management and expense (M&E) fees and benefit rider income, maturities and sales of investments, reinsurance recoveries, and capital contributions from Allianz Life.
We do not utilize the capital markets as a source of capital. Should the need for capital arise, we may utilize our parent, Allianz Life, as an alternative source of funding. We have a line of credit agreement with Allianz Life to provide liquidity as needed. As of December 31, 2014 and December 31, 2013, there are no amounts outstanding under the line of credit agreement and no amounts have been borrowed during the years ended December 31, 2014 and 2013. If capital infusions are deemed necessary, we obtain prior approval by the New York Department of Financial Services, as appropriate.
Financial Ratings and Strength
We received the following financial strength ratings as of December 31, 2014:
Ÿ AM Best | A (Excellent) | |||||
Ÿ S&P | AA (Very Strong) |
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, and exposure to risks.
Cash Flows
The following table sets forth information from our Statement of Cash Flows for the years ended December 31:
| Year Ended December 31, | ||||||||||||
Consolidated Cash Flows | 2014 | 2013 | 2012 | |||||||||
Net cash provided by operating activities | $ | 46,943 | $ | 8,590 | $ | 40,194 | ||||||
Net cash provided by (used in) investing activities | (13,692 | ) | 20,962 | 2,298 | ||||||||
Net cash (used in) provided by financing activities | (28,322 | ) | (71,068 | ) | (17,335 | ) | ||||||
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| |||||||
Net change in cash and cash equivalents | $ | 4,929 | $ | (41,516 | ) | $ | 25,157 | |||||
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For the year ended December 31, 2014, cash and cash equivalents increased $4,929 as compared to 2013 and decreased $41,516 for the year ended December 31, 2013, compared to 2012. We have the funds necessary to meet the capital requirements in the state of New York, and to support our operations.
The increase in net cash provided by operating activities in 2014 as compared to 2013 is driven by gains recognized on variation margin settlements relating to interest rate swaps. The decrease in 2013 compared to 2012 is driven by higher federal income taxes paid compared to taxes received in 2012.
In 2014, the decrease in cash flows used in investing activities was primarily driven by fewer sales and redemptions of available-for-sale fixed-maturity securities and partially offset by lower purchases of available-for-sale fixed maturity securities compared to 2013. In 2013, the increase in cash flows used in investing activities was primarily driven by decreased purchases partially offset by fewer sales and redemptions of available-for-sale fixed-maturity securities compared to 2013.
The increase in cash flows used in financing activities in 2014 as compared to 2013 was driven by higher deposits and lower policyholder withdrawals. In 2013, the higher level of cash used in financing activities was driven by increased withdrawals in 2013 and the capital contribution of $20,000 received from our parent company in 2012.
| Selected Financial Data and Management’s Discussion and Analysis | Page 18 of 21 |
Risk-Based Capital
An insurance company’s state of domicile imposes minimum risk-based capital (RBC) requirements that were developed by the 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 a company’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, 2014 and 2013. We consider our surplus position more than adequate to handle severe adverse experience based upon industry standards and our own risk analysis.
Dividends and Capital Contributions
We did not pay any dividends or receive and capital contributions during the year ended December 31, 2014, and December 31, 2013.
Commitments
The following table summarizes certain contractual obligations and the Company’s commitments by period as of December 31, 2014:
| 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 | ||||||||||||||||||||
Policy holder liabilities | $ | 774,277 | $ | 93,823 | $ | 166,987 | $ | 155,750 | $ | 357,717 | ||||||||||
Operating leases | 130 | 22 | 48 | 48 | 12 | |||||||||||||||
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Total payments due | $ | 774,407 | $ | 93,845 | $ | 167,035 | $ | 155,798 | $ | 357,729 | ||||||||||
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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 Other 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 the Company’s 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.
Operating leases include non-cancelable obligations on certain office space and equipment.
Contingencies
We may become subject to claims and lawsuits that arise in the ordinary course of business. It is our opinion that the ultimate resolution of such litigation will not have a material adverse effect on our financial position. We are 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. We recognize legal costs as incurred.
The financial services industry, including mutual funds, variable and fixed annuities, life insurance, distribution companies, and broker-dealers, has been the subject of close scrutiny by regulators, legislators, and the media over the past few years.
| Selected Financial Data and Management’s Discussion and Analysis | Page 19 of 21 |
Federal and state regulators, such as state insurance departments, state securities departments, the SEC, and 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. State regulators have also been investigating various practices relating to unclaimed property. In certain instances, these investigations have led to regulatory enforcement proceedings. 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 A- 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 have executed CSA agreements with all active counterparties and require a CSA from all new counterparties added to our counterparty pool. The CSA agreements further limit our counterparty credit risk by requiring the counterparty to post collateral to a segregated custodial account based on the net exposure to the Company.
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 2013 and 2012, we posted U.S. Government 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 of the investment portfolio with policyholder liability cash flows and duration. We further limit interest rate risk on variable annuity guarantees through interest rate hedges.
| Selected Financial Data and Management’s Discussion and Analysis | Page 20 of 21 |
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 mutual funds of the variable annuity contracts. We mitigate this risk through regular review and synchronization of fund mappings, product design features, and hedge design.
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 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 $17,493 based on our securities positions as of December 31, 2014.
We also examined the impact on pre-tax income due to 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 $7,316 as of December 31, 2014.
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 decline in equity market prices of 15%. Under this model, with all other factors constant, we estimated that such a decline in equity market prices would cause our pre-tax income to decrease by $15,549 based on our equity exposure as of December 31, 2014.
Adoption of New Financial Accounting Standards
See Note 2 – “Summary of Significant Accounting Policies” of the Company’s 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 21 of 21 |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Financial Statements and Supplemental Schedules
December 31, 2014 and 2013
(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
Allianz Life Insurance Company of New York:
We have audited the balance sheets of Allianz Life Insurance Company of New York (the Company) as of December 31, 2014 and 2013, and the related statements of operations, comprehensive income (loss), stockholder��s equity, and cash flows for each of the years in the three-year period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these 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 financial statements referred to above present fairly, in all material respects, the financial position of Allianz Life Insurance Company of New York as of December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information included in Schedules I, II, and III is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
| /s/ KPMG LLP |
Minneapolis, Minnesota
March 23, 2015
KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative
(“KPMG International”), a Swiss entity.
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Balance Sheets
December 31, 2014 and 2013
(In thousands, except share data)
| Assets | 2014 | 2013 | ||||||
Investments: | ||||||||
Fixed-maturity securities, available-for-sale, at fair value (amortized cost of $613,722 and $615,294, respectively) | $ | 655,141 | 645,870 | |||||
Short-term securities | 13,728 | — | ||||||
Policy loans | 253 | 263 | ||||||
Derivatives | 4,516 | 5,508 | ||||||
Equity securities, trading, (cost of $1,855 and $0, respectively) | 1,858 | — | ||||||
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| |||||
Total investments | 675,496 | 651,641 | ||||||
Cash and cash equivalents | 27,639 | 22,710 | ||||||
Accrued investment income | 8,130 | 8,795 | ||||||
Receivables (net of allowance for uncollectible accounts of $20 and $18, respectively) | 7,039 | 4,160 | ||||||
Reinsurance recoverable | 3,091 | 2,501 | ||||||
Deferred acquisition costs | 118,319 | 104,002 | ||||||
Other assets | 34,014 | 28,502 | ||||||
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| |||||
Assets, exclusive of separate accounts assets | 873,728 | 822,311 | ||||||
Separate account assets | 2,214,422 | 1,986,039 | ||||||
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Total assets | $ | 3,088,150 | 2,808,350 | |||||
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Financial Statements and Supplemental Schedules | 2 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Balance Sheets
December 31, 2014 and 2013
(In thousands, except share data)
| Liabilities and Stockholder’s Equity | 2014 | 2013 | ||||||
Policyholder liabilities: | ||||||||
Account balances and future policy benefit reserves | $ | 691,011 | 578,120 | |||||
Policy and contract claims | 2,787 | 1,528 | ||||||
Unearned premiums | 1,518 | 1,559 | ||||||
Other policyholder funds | 2,203 | 1,801 | ||||||
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| |||||
Total policyholder liabilities | 697,519 | 583,008 | ||||||
Other derivative liabilities | 4,894 | 73,273 | ||||||
Other liabilities | 9,908 | 9,769 | ||||||
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| |||||
Liabilities, exclusive of separate account liabilities | 712,321 | 666,050 | ||||||
Separate account liabilities | 2,214,422 | 1,986,039 | ||||||
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Total liabilities | 2,926,743 | 2,652,089 | ||||||
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Stockholder’s equity: | ||||||||
Common stock, $10 par value. Authorized, issued, and outstanding 200,000 shares, at December 31, 2014 and 2013 | 2,000 | 2,000 | ||||||
Additional paid-in capital | 72,500 | 72,500 | ||||||
Retained earnings | 70,251 | 71,414 | ||||||
Accumulated other comprehensive income, net of tax | 16,656 | 10,347 | ||||||
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| |||||
Total stockholder’s equity | 161,407 | 156,261 | ||||||
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Total liabilities and stockholder’s equity | $ | 3,088,150 | 2,808,350 | |||||
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See accompanying notes to financial statements.
Financial Statements and Supplemental Schedules | 3 |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Statements of Operations
Years ended December 31, 2014, 2013 and 2012
(In thousands)
| 2014 | 2013 | 2012 | ||||||||||
Revenue: | ||||||||||||
Premiums | $ | 4,559 | 4,703 | 4,760 | ||||||||
Policy fees | 58,599 | 47,579 | 36,988 | |||||||||
Premiums and policy fees, ceded | (1,442 | ) | (1,549 | ) | (1,556 | ) | ||||||
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Net premiums and policy fees | 61,716 | 50,733 | 40,192 | |||||||||
Interest and similar income, net | 28,850 | 29,664 | 30,850 | |||||||||
Change in fair value of assets and liabilities | 66,815 | (78,973 | ) | (14,676 | ) | |||||||
Realized investment gains, net | 77 | 829 | 14,502 | |||||||||
Fee, commission, and other revenue | 6,864 | 5,904 | 4,698 | |||||||||
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Total revenue | 164,322 | 8,157 | 75,566 | |||||||||
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Benefits and expenses: | ||||||||||||
Policyholder benefits | 7,993 | 9,668 | 10,876 | |||||||||
Change in fair value of annuity embedded derivatives | 112,364 | (71,546 | ) | 2,473 | ||||||||
Net interest credited to account values | 24,635 | 25,342 | 12,545 | |||||||||
Benefit recoveries | (1,099 | ) | (1,567 | ) | (2,324 | ) | ||||||
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Net benefits | 143,893 | (38,103 | ) | 23,570 | ||||||||
Commissions and other agent compensation | 25,275 | 23,011 | 22,105 | |||||||||
General and administrative expenses | 14,514 | 12,508 | 13,035 | |||||||||
Change in deferred acquisition costs, net | (15,064 | ) | (6,163 | ) | 4,430 | |||||||
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Total benefits and expenses | 168,618 | (8,747 | ) | 63,140 | ||||||||
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(Loss) income from operations before income taxes | (4,296 | ) | 16,904 | 12,426 | ||||||||
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Income tax (benefit) expense: | ||||||||||||
Current | 4,774 | 2,495 | 17,206 | |||||||||
Deferred | (7,907 | ) | 1,930 | (13,885 | ) | |||||||
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Total income tax (benefit) expense | (3,133 | ) | 4,425 | 3,321 | ||||||||
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Net (loss) income | $ | (1,163 | ) | 12,479 | 9,105 | |||||||
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Supplemental disclosures: | ||||||||||||
Realized investment gains, net: | ||||||||||||
Total other-than-temporary impairment losses on securities | $ | — | (241 | ) | (169 | ) | ||||||
Portion of loss recognized in other comprehensive income | — | — | — | |||||||||
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Net impairment losses recognized in realized investment gains, net | — | (241 | ) | (169 | ) | |||||||
Other net realized gains | 77 | 1,070 | 14,671 | |||||||||
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Realized investment gains, net | $ | 77 | 829 | 14,502 | ||||||||
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See accompanying notes to financial statements.
Financial Statements and Supplemental Schedules | 4 |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Statements of Comprehensive Income (Loss)
Years ended December 31, 2014, 2013, and 2012
(In thousands)
| 2014 | 2013 | 2012 | ||||||||||
Net (loss) income | $ | (1,163 | ) | 12,479 | 9,105 | |||||||
Other comprehensive income (loss): | ||||||||||||
Unrealized gains (losses) on fixed-maturity securities | 6,309 | (23,698 | ) | 9,568 | ||||||||
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Total other comprehensive income (loss) | 6,309 | (23,698 | ) | 9,568 | ||||||||
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Total comprehensive income (loss) | $ | 5,146 | (11,219 | ) | 18,673 | |||||||
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See accompanying notes to financial statements.
Financial Statements and Supplemental Schedules | 5 |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Statements of Stockholder’s Equity
Years ended December 31, 2014, 2013, and 2012
(In thousands)
| Common stock | Additional paid-in capital | Retained earnings | Accumulated other comprehensive income | Total stockholder’s equity | ||||||||||||||||
2012: | ||||||||||||||||||||
Balance, beginning of year | $ | 2,000 | 52,500 | 49,830 | 24,477 | 128,807 | ||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||
Net income | — | — | 9,105 | — | 9,105 | |||||||||||||||
Net unrealized gain on investments, net of shadow adjustments and deferred taxes | — | — | — | 9,568 | 9,568 | |||||||||||||||
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Total comprehensive income | 18,673 | |||||||||||||||||||
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Capital contribution | — | 20,000 | — | — | 20,000 | |||||||||||||||
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Balance, end of year | $ | 2,000 | 72,500 | 58,935 | 34,045 | 167,480 | ||||||||||||||
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2013: | ||||||||||||||||||||
Balance, beginning of year | $ | 2,000 | 72,500 | 58,935 | 34,045 | 167,480 | ||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||
Net income | — | — | 12,479 | — | 12,479 | |||||||||||||||
Net unrealized loss on investments, net of shadow adjustments and deferred taxes | — | — | — | (23,698 | ) | (23,698 | ) | |||||||||||||
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Total comprehensive (loss) | (11,219 | ) | ||||||||||||||||||
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Balance, end of year | $ | 2,000 | 72,500 | 71,414 | 10,347 | 156,261 | ||||||||||||||
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2014: | ||||||||||||||||||||
Balance, beginning of year | $ | 2,000 | 72,500 | 71,414 | 10,347 | 156,261 | ||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||
Net loss | — | — | (1,163 | ) | — | (1,163 | ) | |||||||||||||
Net unrealized gain on investments, net of shadow adjustments and deferred taxes | — | — | — | 6,309 | 6,309 | |||||||||||||||
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Total comprehensive income | 5,146 | |||||||||||||||||||
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Balance, end of year | $ | 2,000 | 72,500 | 70,251 | 16,656 | 161,407 | ||||||||||||||
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See accompanying notes to financial statements.
Financial Statements and Supplemental Schedules | 6 |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Statements of Cash Flows
Years ended December 31, 2014, 2013, and 2012
(In thousands)
| 2014 | 2013 | 2012 | ||||||||||
Cash flows provided by (used in) operating activities: | ||||||||||||
Net (loss) income | $ | (1,163 | ) | 12,479 | 9,105 | |||||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||||||
Realized investment gains, net | (77 | ) | (829 | ) | (14,502 | ) | ||||||
Change in annuity-related options, derivatives, and gross reserves | (71,181 | ) | 66,071 | 12,557 | ||||||||
Deferred federal income tax (benefit) expense | (7,907 | ) | 1,930 | (13,885 | ) | |||||||
Charges to policy account balances | (173 | ) | (247 | ) | (253 | ) | ||||||
Interest credited to policy account balances | 24,336 | 25,275 | 12,610 | |||||||||
Amortization of discount, net | (409 | ) | 1,570 | 1,188 | ||||||||
Change in: | ||||||||||||
Receivables and other assets | (4,112 | ) | (1,971 | ) | 8,981 | |||||||
Reinsurance recoverable | (590 | ) | (287 | ) | (297 | ) | ||||||
Deferred acquisition costs | (15,064 | ) | (6,163 | ) | 4,430 | |||||||
Future policy benefit reserves | 121,202 | (71,613 | ) | (5,197 | ) | |||||||
Policy and contract claims | 1,259 | (1,156 | ) | (518 | ) | |||||||
Unearned premiums | (17 | ) | (56 | ) | 73 | |||||||
Other policyholder funds | 402 | 347 | (522 | ) | ||||||||
Other liabilities | (357 | ) | (13,836 | ) | 21,400 | |||||||
Payable to (receivable from) parent | 794 | (2,924 | ) | 5,024 | ||||||||
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Total adjustments | 48,106 | (3,889 | ) | 31,089 | ||||||||
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Net cash provided by operating activities | 46,943 | 8,590 | 40,194 | |||||||||
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Cash flows (used in) provided by investing activities: | ||||||||||||
Purchase of available-for-sale fixed-maturity securities | (62,126 | ) | (109,700 | ) | (188,285 | ) | ||||||
Purchase of available-for-sale equity securities | (4,780 | ) | — | — | ||||||||
Sale and other redemptions of fixed-maturity securities | 57,669 | 123,684 | 189,191 | |||||||||
Maturity of fixed-maturity securities | 6,510 | 6,980 | 1,300 | |||||||||
Sale of available-for-sale equity securties | 2,927 | — | — | |||||||||
Net change in short-term securities | (13,728 | ) | — | — | ||||||||
Opions purchased, net | (174 | ) | — | — | ||||||||
Other, net | 10 | (2 | ) | 92 | ||||||||
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Net cash (used in) provided by investing activities | (13,692 | ) | 20,962 | 2,298 | ||||||||
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Cash flows (used in) provided by financing activities: | ||||||||||||
Policyholders’ deposits to account balances | 17,043 | 1,532 | 5,030 | |||||||||
Policyholders’ withdrawals from account balances | (45,731 | ) | (68,304 | ) | (41,074 | ) | ||||||
Policyholders’ net transfers between account balances | 182 | (3,504 | ) | (2,254 | ) | |||||||
Change in amounts drawn in excess of bank balances | 184 | (792 | ) | 963 | ||||||||
Contribution from parent | — | — | 20,000 | |||||||||
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Net cash (used in) provided by financing activities | (28,322 | ) | (71,068 | ) | (17,335 | ) | ||||||
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Net change in cash and cash equivalents | 4,929 | (41,516 | ) | 25,157 | ||||||||
Cash and cash equivalents at beginning of year | 22,710 | 64,226 | 39,069 | |||||||||
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Cash and cash equivalents at end of year | $ | 27,639 | 22,710 | 64,226 | ||||||||
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See accompanying notes to financial statements.
Financial Statements and Supplemental Schedules | 7 |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| (1) | Organization |
Allianz Life Insurance Company of New York (the Company) is a wholly owned subsidiary of Allianz Life Insurance Company of North America (Allianz Life), which is a wholly owned subsidiary of Allianz of America, Inc. (AZOA). AZOA is a wholly owned subsidiary of Allianz Europe B.V., which is a wholly owned subsidiary of Allianz SE. Allianz SE is a European Company registered in Munich, Germany.
The Company is a life insurance company licensed to sell annuity, group and traditional life and group accident and health policies in six states and the District of Columbia. Based on 2014 statutory net premium written, 99% of the Company’s business is annuity. Accident and health, and life insurance combined, amount to less than 1% of the Company’s business. The annuity business consists of variable and fixed-indexed annuities representing 99.8% and 0.2% of 2014 statutory annuity net premium written, respectively. Accident and health business comprises primarily long-term care (LTC) insurance. During 2011, the Company discontinued selling fixed annuity products. Prior to 2011, the Company had discontinued selling life and LTC products. The Company’s primary distribution channel is through broker-dealers.
| (2) | Summary of Significant Accounting Policies |
| (a) | Basis of Presentation |
The Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP), which vary in certain respects from accounting practices prescribed or permitted by state insurance regulatory authorities.
| (b) | Use of Estimates |
The preparation of 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 in the 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 variable and fixed annuity products. Premium receipts are reported as deposits to the contract holders’ accounts. Policy fees on the 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 contract holders on a daily or monthly basis 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 and 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
Financial Statements and Supplemental Schedules | 8 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
in accordance with contractual terms. Derivatives embedded in fixed-indexed and variable products are recorded at fair value and changes in value are included in change in fair value of annuity embedded derivatives on the Statements of Operations. Benefits consist of interest credited to contract holders’ accounts and claims incurred in excess of the contract holders’ account balance and are included in net interest credited to account values and policyholder benefits, respectively, on the Statements of Operations.
During 2014, the Company began offering a variable 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 mutual fund assets backing the separate account. The insurance contracts’ reserves are reported in account balances and future policy benefit reserves and the mutual fund assets backing the separate account are reported in equity securities, trading 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 earned when due. Benefits and expenses are associated with earned premiums so as to result in recognition of profits over the life of the contracts. This association is accomplished by establishing provisions for future policy benefits and deferral and amortization of related acquisition costs.
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) | 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. For interest-sensitive products 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 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 investment 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. Deferred acquisition costs (DAC) are reviewed for recoverability and loss recognition, at least annually, and adjusted when necessary. Recoverability and loss recognition are evaluated separately for fixed annuities, variable annuities, and life insurance products. 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 is capped, if necessary, such that the balance cannot exceed the original capitalized costs plus interest.
Financial Statements and Supplemental Schedules | 9 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
Adjustments to DAC are made to reflect the corresponding impact on the present value of expected future gross profits and revenue 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 accumulated other comprehensive income and are explained further in the investments section of this note.
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 (DAC unlocking). In general, increases in the estimated investment spreads and fees result in increased expected future profitability and may lower 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 as a change in DAC, net on the Statements of Operations.
Adjustments may also be made to the estimated gross profits (EGP) related to DAC that correspond with deferred annuities and universal life products for investment activity, such as write-downs on other-than-temporarily impaired fixed-maturity securities. Management action may include assumption changes in the DAC models, such as adjustments to expected future gross profits 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 as investment-grade only and not noninvestment-grade items that were purchased with other yield considerations. See further discussion of DAC unlocking in note 8.
The Company assesses internal replacements on insurance contracts to determine whether such modifications significantly change the contract terms. An internal replacement represents a modification in product benefits, features, rights, or coverage 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, or by the election of a feature or coverage within a contract. If the modification substantially changes the contract, the remaining DAC on the original contract are 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.
Financial Statements and Supplemental Schedules | 10 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| (f) | Deferred Sales Inducements |
Sales inducements are product features that enhance the investment yield to the contract holder 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 contract holders, and life sales inducements are deferred and recognized as part of the liability for policy benefits. Deferred sales inducements (DSI) is reported in other assets in the 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 is recorded in policyholder benefits on the 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 accumulated other comprehensive income 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. Management action may include 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.
| (g) | Account Balances and Future Policy Benefit Reserves |
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: the first 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 host contract is valued using principles consistent with similar deferred annuity contracts without an index benefit. 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.
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 using assumptions consistent with those used in estimating gross profits 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.
Financial Statements and Supplemental Schedules | 11 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except 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%.
| (h) | 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 long-term care benefits include interest and mortality discounting.
| (i) | 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, on the 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 as a reinsurance recoverable on the Balance Sheets. Amounts paid or deemed to have been paid for claims covered by reinsurance contracts are recorded as receivables on the 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 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 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 on the Statements of Operations.
| (j) | Investments |
Fixed-maturity and Equity Securities
The Company has portfolios of certain fixed-maturity securities classified as “available-for-sale.” Accordingly, the securities are carried at fair value, and related unrealized gains and losses are
Financial Statements and Supplemental Schedules | 12 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
credited or charged directly to accumulated other comprehensive income in stockholder’s equity, net of tax and related shadow adjustments. The adjustments to DAC and DSI represent the change in amortization that would have been required as a charge or credit to operations had such unrealized amounts been realized.
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 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. When estimated 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 on the Statements of Operations.
Short-term securities are carried at amortized cost, which approximates fair value. Policy loan balances, which are supported by the underlying cash value of the policies, are carried at unpaid principal balances, which approximate fair value.
The fair value of fixed-maturity 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 investment managers. The IPV process supports the reasonableness of price overrides and challenges by the 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 investment portfolio 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, 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. In addition, the Investments – Debt and Equity Securities Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (Codification) requires that the Company evaluate other-than-temporary impairments (OTTI) on available-for-sale and held-to-maturity fixed-maturity securities based on additional factors. Specifically, declines in value resulting from changes in risk-free interest rates must also be considered.
When the fair value 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 investment managers have an intent to
Financial Statements and Supplemental Schedules | 13 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
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 is met, the Company must recognize an 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 gains, net on the 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, 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 as a separate component in the Statements of Comprehensive Income (Loss).
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 on its Statements of Operations that presents the total OTTI losses recognized during the period less the portion of OTTI losses recognized in other comprehensive income to equal the credit-related portion of OTTI that was recognized in earnings during the period. The portion of OTTI losses recognized in other comprehensive income includes the portion of OTTI losses related 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 on the Statements of Operations represents the portion of OTTI losses recognized in other comprehensive income and excludes subsequent increases and decreases in the fair value of these securities.
Financial Statements and Supplemental Schedules | 14 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
The Company views equity securities that have a fair value of at least 20% below average cost at the end of a quarter or are in an unrealized loss position for nine consecutive months as other-than-temporarily impaired. However, other factors, including market analysis, current events, recent price declines, and management’s judgment related to the likelihood of recovery within a reasonable period of time, are also used to determine whether equity securities are considered other-than-temporarily impaired and may result in an equity security being impaired. 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 Statements of Operations. The Company adjusts DAC, and DSI for impairments on securities, as discussed in their respective sections of this note.
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 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 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 are reported at fair value as derivatives on the Balance Sheets. The fair value of the OTCs 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. 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. Therefore, no asset or liability is recorded on the Balance Sheets. Gains and/or losses on futures contracts are included in change in fair value of assets and liabilities on the Statements of Operations.
Interest Rate Swaps
The Company utilizes interest rate swaps to hedge cash flows and market risks embedded in certain annuities. The interest rate swaps are reported at fair value as derivatives on the Balance Sheets. The fair value of the interest rate swaps is derived using a third-party vendor software program and deemed by management to be reasonable. Changes in unrealized gains and losses on the swaps are recorded in change in fair value of assets and liabilities on the Statements of Operations.
Financial Statements and Supplemental Schedules | 15 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| (k) | 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.
| (l) | Income Taxes |
The Company and the Company’s parent, Allianz Life, file a consolidated federal income tax return with AZOA and many 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 that reimbursement will be in accordance with an intercompany tax reimbursement arrangement. The Company generally will be paid for the tax benefit on its losses and any other tax attributes to the extent it could have obtained a benefit against the Company’s 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 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 Balance Sheets. Any such change could significantly affect the amounts reported on the Statements of Operations. Management uses best estimates to establish reserves based on 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 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 (IRS) 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, such as OTTI, will not reverse over time (see further discussion in note 13).
Financial Statements and Supplemental Schedules | 16 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| (m) | Separate Accounts and Annuity Product Guarantees |
The Company issues variable annuity contracts through its separate accounts for which investment income and investment gains and losses accrue directly to, and investment risk is borne by, the contract holder. The Company recognizes gains or losses on transfers from the general account to the separate accounts at fair value to the extent of contract holder interests in separate accounts, which are offset by changes in contract holder liabilities. The Company also issues variable annuity contracts through its separate accounts, where the Company provides certain contractual guarantees to the contract holder. 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). These guarantees provide for benefits that are payable to the contract holder in the event of death, annuitization, 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 contract holders. 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 of the other business of the Company. Separate account assets and liabilities are reported as summary totals on the Balance Sheets. Amounts charged to the contract holders for mortality and contract maintenance are included in policy fees on the Statements of Operations. These fees have been earned and assessed against contract holders 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 Codification, and are included in policyholder benefits on the 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 embedded derivatives on the 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 contract holder 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 contract holder account value, assuming that all benefit selections occur as of the valuation date. The GMAB net amount at risk is defined as the current amount that would be added to the contracts less the current contract holder account value. The GMWB net amount at risk is defined as the current accumulated benefit base amount less the current contract holder account value.
Financial Statements and Supplemental Schedules | 17 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
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. There are three versions of ratchet, with the difference based on the definition of anniversary: quarter, evaluated quarterly; annual, evaluated annually; and six-year, evaluated every sixth year. |
The GMIB is a living benefit that provides the contract holder 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 |
| • | 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 and adjusts the additional liability balance, with a related charge or credit to policyholder benefits on the Statements of Operations, if actual experience or other evidence suggests that earlier assumptions should be revised.
The following assumptions were used to determine the GMDB and GMIB liabilities as of December 31, 2014 and 2013:
| • | 100 stochastically generated investment performance scenarios. |
| • | Mean investment performance assumption was 6.5% for 2014 and 2013. |
| • | Volatility assumption was 13.4% for 2014 and 2013. |
| • | Mortality assumption of 90.0% of the Annuity 2000 Mortality Table for all variable annuity products in 2014. In 2013, the assumption was 93.3% of the Annuity 2000 Mortality Table for all actively sold variable annuity products and 50.0% of the 1994 MGDB Mortality Table for all other products. |
| • | Lapse rates vary by contract type and duration. Spike rates could approach 40%, with an ultimate rate around 15%. |
Financial Statements and Supplemental Schedules | 18 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| • | Discount rates vary by contract type and are equal to 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 GMAB is a living benefit that provides the contract holder 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 contract holder’s selection at issue, this value either may be a return of premium or may reflect market gains, adjusted at least proportionately for withdrawals. The contract holder also has the option to reset this benefit.
The GMWB is a living benefit that provides the contract holder 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 (capped at twice the total purchase payments). 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). 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 embedded derivatives on the Statements of Operations, if experience or other evidence suggests that earlier assumptions should be revised. Products featuring these benefits were first issued in 2007. In the calendar year that a product launches, the reserves are set to zero, until the policy’s first anniversary date.
The following assumptions were used to determine the GMAB and GMWB liabilities as of December 31, 2014 and 2013:
| • | 1000 stochastically generated investment performance scenarios. |
Financial Statements and Supplemental Schedules | 19 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| • | Market volatility assumption varies by fund type and grades from a current volatility number to a long-term assumption over four years as shown below: |
Fund index type | Current volatility | Long-term forward volatility | ||||||
2014: | ||||||||
Large cap | 16.6 | % | 18.2 | % | ||||
Bond | 3.4 | 3.9 | ||||||
International | 16.3 | 23.7 | ||||||
Small cap | 21.3 | 21.2 | ||||||
Fund index type | Current volatility | Long-term forward volatility | ||||||
2013: | ||||||||
Large cap | 15.8 | % | 18.2 | % | ||||
Bond | 3.4 | 4.0 | ||||||
International | 17.0 | 24.5 | ||||||
Small cap | 19.8 | 21.1 | ||||||
| • | Mortality assumption of 90.0% of the Annuity 2000 Mortality Table for all variable annuity products in 2014. In 2013, the assumption was 93.3% of the Annuity 2000 Mortality Table for actively sold variable annuity products and 50.0% of the 1994 MGDB Mortality Table for all other products. |
| • | Lapse rates vary by contract type and duration. Spike rates could approach 40%, with an ultimate rate around 15%. |
GMAB cash flows are discounted using a rate equal to the current month’s London Interbank Offered Rate (LIBOR) plus a Company specific spread for the years ended December 31, 2014 and 2013. Beginning in December of 2014, 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. Previously, GMWB cash flows were discounted using a rate equal to the current month’s LIBOR plus a Company specific spread. In 2012 and prior years, these cash flows were discounted using the U.S. Treasury rate plus a company specific spread
The Company has in-force 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 contract holder 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.
Financial Statements and Supplemental Schedules | 20 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| (n) | Permitted Statutory Accounting Practices |
The Company is required to file annual statements with insurance regulatory authorities, which are prepared on an accounting basis prescribed or permitted by such authorities. 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). 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. The Company did not have any permitted practices in effect in 2014.
| (o) | Recently Issued Accounting Pronouncements – Adopted |
In November 2014, the FASB issued amendments to provide an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. This guidance was effective immediately upon issuance. The guidance did not have an impact on the Financial Statements.
In July 2013, the FASB issued guidance about the presentation of unrecognized tax benefits. This guidance requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. Under the tax law of the applicable jurisdiction, to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The guidance is effective for fiscal years beginning after December 15, 2013. There was no impact on the Financial Statements as a result of adopting this guidance.
In July 2013, the FASB issued guidance allowing the Fed Funds Effective Swap Rate (OIS) to be used as a benchmark interest rate for hedge accounting purposes, in addition to the US Treasury rate and LIBOR. Additionally, this guidance removes a restriction that previously required similar hedges to use the same benchmark interest rate. As part of this guidance, the glossary of the Codification was updated to define the OIS rate and define that it is considered a proxy for a risk-free interest rate. This guidance is effective for hedging relationships beginning on or after July 17, 2013. The Company adopted this guidance beginning July 17, 2013. The Company began discounting its collateralized derivatives recorded at fair value using OIS as the discount rate in 2013.
In June 2013, the FASB amended the guidance used to determine if an entity is an investment company within the scope of the Financial Service – Investment Companies guidance. Entities that are investment companies under the Investment Company Act of 1940 continue to be investment companies for accounting. Additionally, the guidance requires an investment company to measure noncontrolling ownership interests in other investment companies at fair value rather than using the equity method of accounting and to add disclosures to its financial statements. The guidance is effective for fiscal years beginning after December 15, 2013. There was no impact on the Financial Statements as a result of adopting this guidance.
Financial Statements and Supplemental Schedules | 21 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
In April 2013, the FASB issued guidance that requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. Liquidation is imminent when the likelihood is remote that the entity will return from liquidation and either a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties, or a plan for liquidation is being imposed by other forces (for example, involuntary bankruptcy). If a plan for liquidation was specified in the entity’s governing documents from the entity’s inception (for example, limited-life entities), the entity should apply the liquidation basis of accounting only if the approved plan for liquidation differs from the plan for liquidation that was specified at the entity’s inception. This guidance does not apply to investment companies under the Investment Company Act of 1940. The guidance is effective for annual reporting periods beginning after December 15, 2013. There was no impact on the Financial Statements as a result of adopting this guidance.
In March 2013, the FASB issued guidance that applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. Changes are applied prospectively and the guidance is effective for fiscal years beginning after December 15, 2013. There was no impact on the Financial Statements as a result of adopting this guidance.
In February 2013, the FASB issued guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements that are not included in other guidance and for which the total amount of the obligation is fixed at the reporting date. Examples of such liabilities include debt arrangements, other contractual obligations, and settled legal and judicial rulings. The guidance is effective for fiscal years beginning after December 15, 2013. There was no impact on the Financial Statements as a result of adopting this guidance.
In February 2013, the FASB issued guidance requiring an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. This guidance is effective for fiscal years beginning after December 15, 2012. This guidance was adopted January 1, 2013. The Company elected to present the required information in note 19 to the Financial Statements.
Financial Statements and Supplemental Schedules | 22 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
In July 2011, the FASB issued guidance related to recording liabilities under the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act (“the Acts”). This guidance applies to recording liabilities and expenses for fees under the act for insurers that provide qualifying health insurance under the Acts. These requirements are effective for calendar years beginning on or after December 31, 2013. The Company does not issue health insurance that is subject to fees under the Acts and, therefore, there is no impact on the Financial Statements as a result of adopting this guidance.
In October 2010, the FASB issued guidance that changes the accounting for costs associated with acquiring or renewing insurance contracts. Specifically, the guidance changes the definition of acquisition costs eligible for deferral. The new definition is meant to reduce diversity in practice regarding the types of expenses treated as DAC in the insurance industry. The new DAC definition states that acquisition costs include only those incremental costs that are directly related to the successful acquisition of insurance contracts. An entity may defer incremental direct costs of contract acquisition that are incurred in transactions sold by independent third parties and incremental direct costs of contract acquisition that are incurred in transactions sold by employees. Additionally, an entity may capitalize as DAC only those advertising costs meeting the capitalization criteria for direct-response advertising. All other acquisition costs are to be charged to expense as incurred. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The Company adopted this guidance beginning January 1, 2012. In 2012, the Company capitalized $18,078 of acquisition costs compared to $20,123 that would have been capitalized if the Company’s previous policy had continued to be applied.
| (p) | Recently Issued Accounting Pronouncements – To Be Adopted |
In August 2014, the FASB issued an amendment 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 are intended to reduce diversity in the timing and content of footnote disclosures. Additional disclosures are required. The revisions are effective for annual periods ending after December 15, 2016, and for annual and interim periods, thereafter. The guidance is not expected to have an impact on the Financial Statements.
In August 2014, the FASB revised guidance related to consolidations of variable interest entities (VIE) that are a collateralized financing entity, such as a collateralized debt obligation (CDO) or a collateralized loan obligation (CLO) 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 variable interest entity 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 revisions are effective for fiscal years beginning after December 15, 2015. Early adoption is permitted. The guidance is not expected to have an impact on the Financial Statements.
Financial Statements and Supplemental Schedules | 23 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
In August 2014, the FASB issued amendments to guidance about troubled debt restructurings by creditors. The amendments require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: 1) the loan has a government guarantee that is not separable from the loan before foreclosure, 2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and 3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. The revisions are effective for fiscal years beginning after December 15, 2014. The guidance is not expected to have an impact on the Financial Statements.
In May 2014, the FASB issued a 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 guidance is effective for fiscal years beginning after January 1, 2017. The Company is currently evaluating the impact of these revisions on the Financial Statements.
| (q) | 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 $8,820 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 $669 for the year ended December 31, 2014.
On September 30, 2012, the Company applied a prospective change to its method of grouping insurance policies for measuring amortization of DAC and DSI for its variable annuity policies. This change was a change in estimate that is inseparable from the effect of a related change in accounting principle. The implementation of the new DAC and DSI groupings better reflect the way the Company examines the profitability of its variable business and results in more logical amortization rates, sensitivities, and other analyses. The implementation of this change resulted in additional income from operations before income taxes of $4,820 for the year ended December 31, 2012.
Financial Statements and Supplemental Schedules | 24 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
During 2012, the Company recorded a change in estimate related to the implementation of a new model for the valuation of policyholder reserves, DAC, and DSI for the Company’s fixed and fixed-indexed annuities. Reserve changes were primarily driven by more sophisticated modeling of newer product features such as lifetime income riders. In addition to DAC amortization related to these reserve changes, the Company’s DAC balances changed as a result of bringing the DAC projection model in line with the reserve model. Historically, the valuation and projection models were distinct in such cases as compression and product mapping. As a result of the change, valuation and projection are maintained within the same model, which provides greater consistency and a more refined estimate. This change in estimate resulted in a reserve increase of $1,583, and caused a reduction of DAC and DSI amortization of $76 for the year ended December 31, 2012.
| (r) | Reclassification |
Certain prior year balances have been reclassified to conform to the current year presentation.
| (s) | Immaterial Error Corrections |
The Company made correcting adjustments to the historical financial statements for the years ended December 31, 2013 and 2012. The Company does not believe the following adjustments are material to the financial statements for the respective reported periods. Certain fee and commission revenue was historically reported as a reduction of general and administrative expenses. The table below presents the reclassifications applied to the Consolidated Statements of Operations for the years ended December 31, 2013 and 2012.
Financial Statements and Supplemental Schedules | 25 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| As Reported 2013 | Reclassification | As Adjusted 2013 | ||||||||||
Revenue: | ||||||||||||
Fee, commission, and other revenue | $ | 2,795 | 3,109 | 5,904 | ||||||||
|
|
|
|
|
| |||||||
Total Revenue | 5,048 | 3,109 | 8,157 | |||||||||
|
|
|
|
|
| |||||||
Benefits and expenses: | ||||||||||||
General and administrative expenses | 9,399 | 3,109 | 12,508 | |||||||||
|
|
|
|
|
| |||||||
Total benefits and expenses | (11,856 | ) | 3,109 | (8,747 | ) | |||||||
|
|
|
|
|
| |||||||
Net income | $ | 12,479 | — | 12,479 | ||||||||
|
|
|
|
|
| |||||||
| As Reported 2012 | Reclassification | As Adjusted 2012 | ||||||||||
Revenue: | ||||||||||||
Fee, commission, and other revenue | $ | 2,385 | 2,313 | 4,698 | ||||||||
|
|
|
|
|
| |||||||
Total Revenue | 73,253 | 2,313 | 75,566 | |||||||||
|
|
|
|
|
| |||||||
Benefits and expenses: | ||||||||||||
General and administrative expenses | 10,722 | 2,313 | 13,035 | |||||||||
|
|
|
|
|
| |||||||
Total benefits and expenses | 60,827 | 2,313 | 63,140 | |||||||||
|
|
|
|
|
| |||||||
Net income | $ | 9,105 | — | 9,105 | ||||||||
|
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|
|
|
| |||||||
| (3) | Risk Disclosures |
The following is a description of the most significant risks facing the Company and how the Company 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 reinsurance 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 governed by state insurance laws and regulations, as applicable. 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 taken in the investment portfolio is influenced by management’s risk/return preferences, the economic and credit environment, and the ability to manage this risk through liability portfolio management.
Financial Statements and Supplemental Schedules | 26 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
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 A- and higher; and monitoring the credit default swap (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 counterparties and requires a CSA from all new counterparties added to the counterparty pool. The CSA agreement further limits 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.
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. Further, the Company performs a quarterly concentration risk calculation to ensure compliance with the State of New York basket clause.
| (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 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.
Financial Statements and Supplemental Schedules | 27 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
The Company does not utilize the capital markets as a source of capital. Should the need for capital arise, the Company may utilize its parent, Allianz Life, as an alternative source of funding. If capital infusions are deemed necessary, the Company obtains prior approval by the New York State Department of Financial Services (the Department), as appropriate.
| (d) | 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.
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 the 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 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.
The Parent Company monitors the economic and accounting impacts of equity stress scenarios on assets and liabilities on a consolidated basis regularly and on a Company specific basis periodically.
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 mutual funds of the variable annuity contracts. The Company mitigates this risk through regular review and synchronization of fund mappings, product design features, and hedge design.
Financial Statements and Supplemental Schedules | 28 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| (f) | Operational Risk |
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, external events, or legal/regulatory risk. Operational risk is comprised of the following seven risk categories: (1) internal fraud; (2) external fraud; (3) employment practices and workplace safety; (4) clients, 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 and control self-assessments are 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 contract holders.
The Company mitigates this risk by monitoring all market-related exposure, participating 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.
| (h) | Ratings Risk |
Ratings risk is the risk that rating agencies change their outlook or rating 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 the Company 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. Stress tests are performed regularly to assess how rating agency capital adequacy models would be impacted by severe economic events.
| (i) | Mortality Risk |
Mortality risk is the risk that life expectancy assumptions used by the Company to price its products are too high (i.e., insureds live shorter than expected lives). Conversely, longevity risk is the risk that life expectancy assumptions used by the Company to price its products are too low (i.e., insureds live longer than expected lives). The Company mitigates mortality risk primarily through reinsurance, whereby the Company cedes a significant portion of its new and existing mortality to third parties. The Company manages mortality risk through the underwriting process. The Company also manages both mortality and longevity risks by reviewing its mortality assumptions at least annually, and reviewing mortality experience periodically.
Financial Statements and Supplemental Schedules | 29 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| (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, ALM and regular monitoring of policyholder experience. The Company quantifies lapse risk periodically.
| (k) | 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, the counterparties 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 regularly 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.
Financial Statements and Supplemental Schedules | 30 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| (4) | Investments |
| (a) | Fixed-maturity Securities |
At December 31, the amortized cost, gross unrealized gains, gross unrealized losses, and fair values of available-for-sale securities are as shown in the following tables:
| Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | OTTI in accumulated other comprehensive income | ||||||||||||||||
2014: | ||||||||||||||||||||
Fixed-maturity securities: | ||||||||||||||||||||
U.S. government | $ | 93,692 | 1,446 | 61 | 95,077 | — | ||||||||||||||
States and political subdivisions | 11,679 | 305 | 42 | 11,942 | — | |||||||||||||||
Foreign government | 2,517 | 30 | — | 2,547 | — | |||||||||||||||
Public utilities | 36,746 | 4,625 | 43 | 41,328 | — | |||||||||||||||
Corporate securities | 328,406 | 30,664 | 1,740 | 357,330 | — | |||||||||||||||
Mortgage-backed securities | 140,682 | 6,416 | 181 | 146,917 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 613,722 | 43,486 | 2,067 | 655,141 | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| Amortized cost | Gross unrealized gains | Gross unrealized losses | Fair value | OTTI in accumulated other comprehensive income | ||||||||||||||||
2013: | ||||||||||||||||||||
Fixed-maturity securities: | ||||||||||||||||||||
U.S. government | $ | 57,053 | 646 | 471 | 57,228 | — | ||||||||||||||
States and political subdivisions | 17,574 | 114 | 1,179 | 16,509 | — | |||||||||||||||
Foreign government | 2,534 | 44 | 155 | 2,423 | — | |||||||||||||||
Public utilities | 39,615 | 4,363 | 648 | 43,330 | — | |||||||||||||||
Corporate securities | 343,790 | 26,790 | 6,349 | 364,231 | — | |||||||||||||||
Mortgage-backed securities | 154,728 | 8,390 | 969 | 162,149 | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 615,294 | 40,347 | 9,771 | 645,870 | — | ||||||||||||||
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|
|
|
|
|
|
|
| |||||||||||
Financial Statements and Supplemental Schedules | 31 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
The net unrealized gains on available-for-sale securities consist of the following at December 31:
| 2014 | 2013 | 2012 | ||||||||||
Available-for-sale: | ||||||||||||
Fixed-maturity securities | $ | 41,419 | 30,576 | 74,495 | ||||||||
Adjustments for: | ||||||||||||
Shadow adjustments | (15,794 | ) | (14,657 | ) | (22,118 | ) | ||||||
Deferred taxes | (8,969 | ) | (5,572 | ) | (18,332 | ) | ||||||
|
|
|
|
|
| |||||||
Net unrealized gains | $ | 16,656 | 10,347 | 34,045 | ||||||||
|
|
|
|
|
| |||||||
The amortized cost and fair value of available-for-sale fixed-maturity securities at December 31, 2014, by contractual maturity, are shown below:
| Amortized cost | Fair value | |||||||
Available-for-sale: | ||||||||
Due in one year or less | $ | 27,824 | 28,247 | |||||
Due after one year through five years | 152,066 | 165,127 | ||||||
Due after five years through ten years | 186,466 | 194,217 | ||||||
Due after ten years | 106,684 | 120,633 | ||||||
Mortgage-backed securities | 140,682 | 146,917 | ||||||
|
|
|
| |||||
Total available-for-sale fixed-maturity securities | $ | 613,722 | 655,141 | |||||
|
|
|
| |||||
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. The amortized cost of fixed-maturity securities with rights to call or prepay without penalty is $180,599 as of December 31, 2014.
Proceeds from sales of available-for-sale investments for the years ended December 31 are presented in the following table:
| 2014 | 2013 | 2012 | ||||||||||
Available-for-sale: | ||||||||||||
Fixed-maturity securities: | ||||||||||||
Proceeds from sales | $ | 22,808 | 77,960 | 134,346 | ||||||||
As of December 31, 2014 and 2013, investments with a fair value of $1,731 and $1,650, respectively, were pledged to the New York Superintendent of Insurance, as required by statutory regulation.
Financial Statements and Supplemental Schedules | 32 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
The Company’s available-for-sale securities portfolio includes mortgage-backed securities. 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 |
Unrealized losses on available-for-sale securities and the related fair value as of 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 | |||||||||||||||||||
2014: | ||||||||||||||||||||||||
Fixed-maturity securities: | ||||||||||||||||||||||||
U.S. government | $ | 6,476 | 20 | 2,075 | 41 | 8,551 | 61 | |||||||||||||||||
States and political subdivisions | — | — | 7,461 | 42 | 7,461 | 42 | ||||||||||||||||||
Foreign government | — | — | — | — | — | — | ||||||||||||||||||
Public utilities | — | — | 500 | 43 | 500 | 43 | ||||||||||||||||||
Corporate securities | 14,095 | 850 | 22,358 | 890 | 36,453 | 1,740 | ||||||||||||||||||
Mortgage-backed securities | 4,495 | 19 | 6,970 | 162 | 11,465 | 181 | ||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
| |||||||||||||
Total temporarily impaired available-for-sale securities | $ | 25,066 | 889 | 39,364 | 1,178 | 64,430 | 2,067 | |||||||||||||||||
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|
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|
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|
| |||||||||||||
2013: | ||||||||||||||||||||||||
Fixed-maturity securities: | ||||||||||||||||||||||||
U.S. government | $ | 38,474 | 471 | — | — | 38,474 | 471 | |||||||||||||||||
States and political subdivisions | 9,551 | 459 | 3,800 | 720 | 13,351 | 1,179 | ||||||||||||||||||
Foreign government | 1,837 | 155 | — | — | 1,837 | 155 | ||||||||||||||||||
Public utilities | 4,427 | 563 | 460 | 85 | 4,887 | 648 | ||||||||||||||||||
Corporate securities | 91,430 | 5,758 | 4,668 | 591 | 96,098 | 6,349 | ||||||||||||||||||
Mortgage-backed securities | 25,846 | 969 | — | — | 25,846 | 969 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Total temporarily impaired available-for-sale securities | $ | 171,565 | 8,375 | 8,928 | 1,396 | 180,493 | 9,771 | |||||||||||||||||
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|
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|
|
|
|
|
| |||||||||||||
As of December 31, 2014 and 2013, there were 32 and 79 available-for-sale fixed-maturity securities that were in an unrealized loss position, respectively.
Financial Statements and Supplemental Schedules | 33 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
As of December 31, 2014 and 2013, of the total amount of unrealized losses, $1,983 or 95.9% and $9,524 or 97.5%, 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 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 did 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:
| 2014 | 2013 | |||||||
Balance as of January 1 | $ | 241 | — | |||||
Additions for credit impairments recognized on: | ||||||||
Securities not previously impaired | — | — | ||||||
Securities that the Company intends to sell or more likely than not be required to sell before recovery (interest) | — | 241 | ||||||
Reductions for credit impairments previously on: | ||||||||
Securities that matured or were sold during the period | (241) | — | ||||||
|
|
|
| |||||
Balance as of December 31 | $ | — | 241 | |||||
|
|
|
| |||||
| (d) | Realized Investment Gains |
Gross and net realized investment gains for the respective years ended December 31 are summarized as follows:
| 2014 | 2013 | 2012 | ||||||||||
Fixed-maturity securities: | ||||||||||||
Gross gains on sales | $ | 277 | 2,324 | 14,894 | ||||||||
Gross losses on sales | (206 | ) | (1,286 | ) | (223 | ) | ||||||
OTTI | — | (241 | ) | (169 | ) | |||||||
Other | 6 | 32 | — | |||||||||
|
|
|
|
|
| |||||||
Net realized investment gains | $ | 77 | 829 | 14,502 | ||||||||
|
|
|
|
|
| |||||||
Financial Statements and Supplemental Schedules | 34 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except 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:
| 2014 | 2013 | 2012 | ||||||||||
Interest and similar income: | ||||||||||||
Fixed-maturity securities | $ | 29,131 | 29,904 | 31,075 | ||||||||
Short-term securities | 7 | 13 | 33 | |||||||||
Policy loans | 17 | 21 | 27 | |||||||||
Other | 15 | 33 | 20 | |||||||||
|
|
|
|
|
| |||||||
Total | 29,170 | 29,971 | 31,155 | |||||||||
Less: | ||||||||||||
Investment expenses | 320 | 307 | 305 | |||||||||
|
|
|
|
|
| |||||||
Total interest and similar income, net | $ | 28,850 | 29,664 | 30,850 | ||||||||
|
|
|
|
|
| |||||||
| (f) | Variable Interest Entities |
In the normal course of business, the Company enters into relationships with various entities that are deemed to be 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 invests in structured securities that include VIEs. These structured securities typically invest in fixed-income investments managed by third parties and include mortgage-backed securities and collateralized mortgage obligations.
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 and, as such, did not consolidate any VIEs in the Financial Statements. The structured securities are classified as fixed-maturity securities, available-for-sale on the Balance Sheets and reported at fair value.
The Company’s maximum exposure to loss from these entities is limited to their carrying value. The Company has not provided, and has no obligation to provide, material, financial, or other support that was not previously contractually required to these entities. The Company had no liabilities recorded as of December 31, 2014 or 2013, related to these entities.
Financial Statements and Supplemental Schedules | 35 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| (5) | Derivative and Hedging Instruments |
The Company uses derivatives as a risk management strategy to economically hedge its exposure to various market risks associated with both its products and operations. Derivative assets and liabilities are recorded at fair value in the Financial Statements using valuation techniques further discussed in note 6. None of the derivative investments held by the Company qualify as hedging instruments for accounting purposes.
| (a) | Interest Rate Swaps |
The Company utilizes interest rate swaps to economically hedge certain variable annuity guarantee benefits. The Company can receive the fixed or variable rate. The interest rate swaps are traded in 10-, 20-, and 30-year maturities. The Company will only enter into over-the-counter (OTC) interest rate swap contracts with counterparties rated A– or better. The interest rate swaps are subject to the rules of the International Swaps and Derivatives Association, Inc. and associated CSA agreements.
| (b) | Option Contracts |
The Company utilizes OTC options with the objective to economically hedge certain variable annuity guaranteed benefits. These options are not used for speculative or income generating purposes. 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.
| (c) | Futures |
The Company utilizes futures to economically hedge fixed-indexed annuity 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, 2014 and 2013.
The Company is required to post collateral for futures contracts by the Chicago Mercantile Exchange. The Company retains ownership of the collateral, but the collateral resides in an account designated by the exchange. The collateral is subject to specific exchange rules regarding rehypothecation. Collateral posted at December 31, 2014 and 2013, had a fair value of $29,677 and $12,366, respectively, and is included in fixed-maturity securities on the Balance Sheets.
| (d) | 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 embedded derivatives on the Statements of Operations. These embedded derivatives are classified within account balances and future policy benefit reserves on the Balance Sheets.
Financial Statements and Supplemental Schedules | 36 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
Certain fixed-indexed annuity products 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 Balance Sheets with changes in fair value reported in change in fair value of annuity embedded derivatives on the Statements of Operations.
The following table presents the balance sheet location and the fair value of the derivatives, including embedded derivatives, as of December 31:
| Fair value | ||||||||
Derivative instruments, net | 2014 | 2013 | ||||||
OTC | $ | 407 | — | |||||
GMWB | (92,877 | ) | 9,084 | |||||
GMAB | (16,870 | ) | (2,498 | ) | ||||
MVLO | (24,478 | ) | (29,226 | ) | ||||
Interest rate swaps | (785 | ) | (67,765 | ) | ||||
|
|
|
| |||||
Total derivative instruments, net | $ | (134,603 | ) | (90,405 | ) | |||
|
|
|
| |||||
Location in balance sheets | ||||||||
Derivatives | $ | 4,516 | 5,508 | |||||
Account balances and future policy benefit reserves | (134,225 | ) | (22,640 | ) | ||||
Other derivative liabilities | (4,894 | ) | (73,273 | ) | ||||
|
|
|
| |||||
Total derivative instruments, net | $ | (134,603 | ) | (90,405 | ) | |||
|
|
|
| |||||
Financial Statements and Supplemental Schedules | 37 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
The following table presents the gains or losses recognized in income on the various derivative instruments:
Derivative instruments, net | Location in statements of operations | Amount of gains (losses) on derivatives recognized for the years ended December 31 | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||||
GMWB | Change in fair value of annuity embedded derivatives | $ | (101,961 | ) | 61,222 | 7,103 | ||||||||
GMAB | Change in fair value of annuity embedded derivatives | (14,372 | ) | 11,899 | (290 | ) | ||||||||
MVLO | Change in fair value of annuity embedded derivatives | 3,969 | (1,575 | ) | (9,286 | ) | ||||||||
|
|
|
|
|
| |||||||||
Total change in fair value of annuity embedded derivatives | (112,364 | ) | 71,546 | (2,473 | ) | |||||||||
MVLO | Policy fees | 681 | 1,061 | 301 | ||||||||||
MVLO | Policyholder benefits | 98 | 248 | 127 | ||||||||||
Interest rate swaps | Change in fair value of assets and liabilities | 93,758 | (58,289 | ) | 110 | |||||||||
Futures | Change in fair value of assets and liabilities | (26,878 | ) | (20,684 | ) | (14,786 | ) | |||||||
OTC | Change in fair value of assets and liabilities | 232 | — | — | ||||||||||
|
|
|
|
|
| |||||||||
Total derivative loss | $ | (44,473 | ) | (6,118 | ) | (16,721 | ) | |||||||
|
|
|
|
|
| |||||||||
| (e) | Offsetting Assets and Liabilities |
Certain financial instruments and derivative instruments are eligible for offset in the 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. The Company’s policy is to recognize amounts subject to master netting arrangements on a gross basis on the Balance Sheets.
Financial Statements and Supplemental Schedules | 38 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
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, 2014 | ||||||||||||||||||||||||
| 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 | $ | 4,516 | — | 4,516 | (3,682 | ) | (7 | ) | 827 | |||||||||||||||
Derivative liabilities | (4,894 | ) | — | (4,894 | ) | 3,682 | 1,195 | (17 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net derivatives | $ | (378 | ) | — | (378 | ) | — | 1,188 | 810 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| December 31, 2013 | ||||||||||||||||||||||||
| 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 | $ | 5,508 | — | 5,508 | (5,508 | ) | — | — | ||||||||||||||||
Derivative liabilities | (73,273 | ) | — | (73,273 | ) | 5,508 | 66,853 | (912 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net derivatives | $ | (67,765 | ) | — | (67,765 | ) | — | 66,853 | (912 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| (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 Balance Sheets. |
| (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 |
Financial Statements and Supplemental Schedules | 39 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| (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.
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 | |||||||||||||
2014: | ||||||||||||||||
Assets accounted for at fair value: | ||||||||||||||||
Fixed-maturity securities: | ||||||||||||||||
U.S. government | $ | 95,077 | 95,077 | — | — | |||||||||||
States and political subdivisions | 11,942 | — | 11,942 | — | ||||||||||||
Foreign government | 2,547 | — | 2,547 | — | ||||||||||||
Public utilities | 41,328 | — | 41,328 | — | ||||||||||||
Corporate securities | 357,330 | — | 356,258 | 1,072 | ||||||||||||
Mortgage-backed securities | 146,917 | — | 146,917 | — | ||||||||||||
Derivative asset | 4,516 | — | 4,516 | — | ||||||||||||
Equity securities, trading | 1,858 | 1,858 | — | — | ||||||||||||
Separate account assets | 2,214,422 | 2,214,422 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets accounted for at fair value | $ | 2,875,937 | 2,311,357 | 563,508 | 1,072 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities accounted for at fair value: | ||||||||||||||||
Derivative liability | $ | 4,894 | — | 4,894 | — | |||||||||||
Separate account liabilities | 2,214,422 | 2,214,422 | — | — | ||||||||||||
Reserves at fair value | 150,251 | — | — | 150,251 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities accounted for at fair value | $ | 2,369,567 | 2,214,422 | 4,894 | 150,251 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Financial Statements and Supplemental Schedules | 40 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
2013: | ||||||||||||||||
Assets accounted for at fair value: | ||||||||||||||||
Fixed-maturity securities: | ||||||||||||||||
U.S. government | $ | 57,228 | 57,228 | — | — | |||||||||||
States and political subdivisions | 16,509 | — | 16,509 | — | ||||||||||||
Foreign government | 2,423 | — | 2,423 | — | ||||||||||||
Public utilities | 43,330 | — | 43,330 | — | ||||||||||||
Corporate securities | 364,231 | — | 363,166 | 1,065 | ||||||||||||
Mortgage-backed securities | 162,149 | — | 162,149 | — | ||||||||||||
Derivative asset | 5,508 | — | 5,508 | — | ||||||||||||
Separate account assets | 1,986,039 | 1,986,039 | — | — | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total assets accounted for at fair value | $ | 2,637,417 | 2,043,267 | 593,085 | 1,065 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Liabilities accounted for at fair value: | ||||||||||||||||
Derivative liability | $ | 73,273 | — | 73,273 | — | |||||||||||
Separate account liabilities | 1,986,039 | 1,986,039 | — | — | ||||||||||||
Reserves at fair value | 22,640 | — | — | 22,640 | ||||||||||||
|
|
|
|
|
|
|
| |||||||||
Total liabilities accounted for at fair value | $ | 2,081,952 | 1,986,039 | 73,273 | 22,640 | |||||||||||
|
|
|
|
|
|
|
| |||||||||
| (1) | Reserves at fair value are reported in account balances and future policy benefit reserves on the Balance Sheets. |
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 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 (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 certain cases, including private placement securities as well as certain difficult-to-price securities, internal pricing models may be used that are based on market proxies.
Financial Statements and Supplemental Schedules | 41 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
Generally, 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 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.
At December 31, 2014 and 2013, private placement securities of $1,072 and $1,065, respectively, were included in Level 3. Internal pricing models based on market proxy securities, and U.S. Treasury rates, which are monitored monthly by the investment manager for reasonableness, are used to value these holdings. This includes ensuring there are no significant credit events impacting the proxy security and that the spreads used are still reasonable under the circumstances.
| (b) | Valuation of Derivative Assets and Liabilities |
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. Options that are internally priced foreign swaps, credit default swaps, and interest rate swaps are included in Level 2, because they use market observable inputs.
The fair value of the interest rate swaps is derived using a third-party vendor software program and deemed by management to be reasonable. Interest rate swaps are included in Level 2 because the valuation uses market observable inputs.
Financial Statements and Supplemental Schedules | 42 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| (c) | 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. Funds in the separate accounts are primarily invested in mutual funds with the following investment types: bond; domestic equity; international equity; or specialty. The separate account funds also hold certain money market funds. Mutual fund investments are generally included in Level 1. The remaining investments are categorized similar to the investments held by the Company in the general account (e.g., if the separate account invested in corporate bonds or other fixed-maturity securities, that portion could be considered a Level 2 or Level 3). 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.
| (d) | Valuation of Reserves at Fair Value |
Reserves at fair value principally include the equity-indexed features contained in fixed-indexed annuity products and certain variable annuity riders. Fair values of the embedded derivative liabilities are calculated based on internally developed models, because active, observable markets do not exist for these liabilities. 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 policyholder 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 loss (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
Financial Statements and Supplemental Schedules | 43 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
using the current month’s LIBOR plus a company-specific spread. Beginning in December of 2014, 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 are then discounted to the current date using LIBOR plus a spread for the Company’s own nonperformance risk. In 2012 and prior years, these cash flows were discounted using the U.S. Treasury rate plus a company-specific spread. 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 policyholder 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 loss (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. 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 appropriate discount factors adjusted for nonperformance risk on the non-collateralized portions of the contract.
Financial Statements and Supplemental Schedules | 44 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| (e) | 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:
| Realized | ||||||||||||||||||||||||||||||||
| gains | ||||||||||||||||||||||||||||||||
| (losses) | ||||||||||||||||||||||||||||||||
| included in | ||||||||||||||||||||||||||||||||
| net (loss) | ||||||||||||||||||||||||||||||||
| income | ||||||||||||||||||||||||||||||||
| related to | ||||||||||||||||||||||||||||||||
| financial | ||||||||||||||||||||||||||||||||
| Other | Purchases | Sales | Transfer in | instruments | ||||||||||||||||||||||||||||
| Beginning | comprehensive | and | and | and/or on | Ending | still held at | ||||||||||||||||||||||||||
| balance | Net Income | (loss) income | issuances | settlements | Level 3, net | balance | December 31 | |||||||||||||||||||||||||
2014: | ||||||||||||||||||||||||||||||||
Fixed-maturity securities: | ||||||||||||||||||||||||||||||||
Corporate securities | $ | 1,065 | — | 7 | — | — | — | 1,072 | — | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total fixed-maturity | $ | 1,065 | — | 7 | — | — | — | 1,072 | — | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Reserves at fair value | $ | (22,640 | ) | (44,557 | ) | — | (85,482 | ) | 2,428 | — | (150,251 | ) | (130,039 | ) | ||||||||||||||||||
2013: | ||||||||||||||||||||||||||||||||
Fixed-maturity securities: | ||||||||||||||||||||||||||||||||
Corporate securities | $ | 1,102 | — | (37 | ) | — | — | — | 1,065 | — | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total fixed-maturity | $ | 1,102 | — | (37 | ) | — | — | — | 1,065 | — | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Reserves at fair value | $ | (95,625 | ) | 129,069 | — | (58,326 | ) | 2,242 | — | (22,640 | ) | 70,743 | ||||||||||||||||||||
| (f) | 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 in and/or out of Level 1, 2, and 3 are reported as of the end of the period in which the change occurs.
There were no transfers of securities between Level 1 and Level 2 for the years ended December 31, 2014 and 2013. Additionally, there were no net transfers in or out of Level 3 for the years ended December 31, 2014 and 2013.
Financial Statements and Supplemental Schedules | 45 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| (g) | 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:
| Valuation | Unobservable | Range (weighted | ||||||||
| Fair value | technique | input | average) | |||||||
2014: | ||||||||||
Fixed-maturity securities: | ||||||||||
Available-for-sale: | ||||||||||
Corporate securities | $ | 1,072 | Matrix pricing | Option adjusted spread* | 192 (192) | |||||
Reserves at fair value: *** | ||||||||||
MVLO | (24,478 | ) | Income approach | Annuitizations | 0–25% | |||||
| Surrenders | 0–25% | |||||||||
| Mortality ** | 0–100% | |||||||||
| Withdrawal Benefit Election | 0–50% | |||||||||
GMWB and GMAB | (109,747 | ) | Income approach | Surrenders | 0.5–35% | |||||
| Mortality ** | 0–100% | |||||||||
| * | No range is applicable due to only one security within classification or the same assumption used on all securities. |
| ** | Mortality assumptions are derived by applying management determined factors to the Annuity 2000 Mortality Table. |
| *** | Certain reseves at fair value related to a new product are not yet modeled and excluded from this disclosure. |
| (h) | Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs |
Fixed-maturity securities matrix pricing: The primary unobservable input used in the matrix pricing model is a benchmark security option adjusted spread (OAS), which is applied to an OAS ratio. A significant yield increase of the benchmark security OAS in isolation could result in a decreased fair value, while a significant yield decrease in OAS could result in an increased fair value.
Annuity and life embedded derivative liabilities: 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.
Financial Statements and Supplemental Schedules | 46 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| (i) | Nonrecurring Fair Value Measurements |
Occasionally, certain assets and liabilities are measured at fair value on a nonrecurring basis (e.g., impaired assets). At December 31, 2014 and 2013, there were no assets or liabilities reported at fair value on a nonrecurring basis.
| (j) | Fair Value of Financial Assets and Liabilities |
The following table presents the carrying amounts and fair values of financial assets and liabilities at December 31:
| 2014 | ||||||||||||||||||||
| Carrying | Fair value | |||||||||||||||||||
| amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Policy loans | $ | 253 | — | 253 | — | 253 | ||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Investment contracts | $ | 664,924 | — | — | 665,404 | 665,404 | ||||||||||||||
| 2013 | ||||||||||||||||||||
| Carrying | Fair value | |||||||||||||||||||
| amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
Financial assets: | ||||||||||||||||||||
Policy loans | $ | 263 | — | 263 | — | 263 | ||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Investment contracts | $ | 558,261 | — | — | 558,633 | 558,633 | ||||||||||||||
Policy loans, which are supported by the underlying cash value of the policies, are carried at unpaid principal balances, which approximate fair value. Therefore, fair value is classified as Level 2.
Investment contracts include certain reserves related to deferred annuity products. These reserves are included in account balances and future policy benefit reserves on the Balance Sheets. The fair values of investment contracts, which include deferred annuities and other annuities without significant mortality risk, 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.
Changes in market conditions subsequent to year-end may cause fair values calculated subsequent to year-end to differ from the amounts presented herein.
Financial Statements and Supplemental Schedules | 47 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| (7) | Financing Receivables |
The Company’s financing receivables comprise nontrade receivables. Nontrade receivables are amounts for policy or contract premiums due from the agents and broker-dealers, or amounts due from reinsurers. The nontrade receivables are evaluated on a collective basis for impairment. For additional information, see note 2 for nontrade receivables.
Rollforward of Allowance for Credit Losses
The allowance for credit losses and recorded investment in financing receivables as of December 31 are shown below:
| Nontrade | ||||
| receivables | ||||
2014: | ||||
Allowance for credit losses: | ||||
Beginning balance | $ | 18 | ||
Provision | 2 | |||
|
| |||
Ending balance | 20 | |||
|
| |||
Ending balance collectively evaluated for impairment | $ | 20 | ||
|
| |||
Financing receivables: | ||||
Ending balance | $ | 80 | ||
|
| |||
Ending balance collectively evaluated for impairment | $ | 80 | ||
|
| |||
| Nontrade | ||||
| receivables | ||||
2013: | ||||
Allowance for credit losses: | ||||
Beginning balance | $ | 15 | ||
Provision | 3 | |||
|
| |||
Ending balance | 18 | |||
|
| |||
Ending balance collectively evaluated for impairment | $ | 18 | ||
|
| |||
Financing receivables: | ||||
Ending balance | $ | 141 | ||
|
| |||
Ending balance collectively evaluated for impairment | $ | 141 | ||
|
| |||
Financial Statements and Supplemental Schedules | 48 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
Credit Quality Indicators
The Company analyzes certain financing receivables for credit risk by using specific credit quality indicators.
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:
| 2014 | 2013 | |||||||||||||||||||||||
| Agent | Reinsurer | Total | Agent | Reinsurer | Total | |||||||||||||||||||
Nontrade receivables | $ | 23 | 57 | 80 | 18 | 123 | 141 | |||||||||||||||||
Allowance for credit losses | (20 | ) | — | (20 | ) | (18 | ) | — | (18 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Net nontrade receivable | $ | 3 | 57 | 60 | — | 123 | 123 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Past-due Aging Analysis
Aging analysis of past-due financing receivables as of December 31 is shown below:
| 31–60 past due | 61–90 past due | Greater than 90 past due | Total past due | Current | Total | |||||||||||||||||||
2014: | ||||||||||||||||||||||||
Nontrade receivables | $ | 24 | 3 | 21 | 48 | 32 | 80 | |||||||||||||||||
| 31–60 past due | 61–90 past due | Greater than 90 past due | Total past due | Current | Total | |||||||||||||||||||
2013: | ||||||||||||||||||||||||
Nontrade receivables | $ | 36 | 1 | 18 | 55 | 86 | 141 | |||||||||||||||||
As of December 31, 2014, the Company’s financing receivables do 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.
Financial Statements and Supplemental Schedules | 49 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| (8) | Deferred Acquisition Costs |
DAC at December 31, and the changes in the balance for the years then ended, are as follows:
| 2014 | 2013 | 2012 | ||||||||||
Balance, beginning of year | $ | 104,002 | 92,245 | 91,187 | ||||||||
Capitalization (1) | 16,906 | 17,321 | 18,078 | |||||||||
Interest | 5,541 | 5,011 | 5,654 | |||||||||
Amortization | (7,383 | ) | (16,169 | ) | (28,163 | ) | ||||||
Change in shadow DAC | (747 | ) | 5,594 | 5,489 | ||||||||
|
|
|
|
|
| |||||||
Balance, end of year | $ | 118,319 | 104,002 | 92,245 | ||||||||
|
|
|
|
|
| |||||||
| (1) | Reflects prospective adoption of new acquisition cost guidance, in 2012. See note 2 for adoption impact. |
The change in shadow DAC balances are impacted by movements in unrealized gains and losses as a result of market conditions.
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 are applied to the current in-force policies to project future gross profits.
Financial Statements and Supplemental Schedules | 50 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
The pretax impact on the Company’s assets and liabilities as a result of the unlocking during 2014, 2013, and 2012 is as follows:
| 2014 | 2013 | 2012 | ||||||||||
Assets: | ||||||||||||
DAC | $ | 856 | (1,920 | ) | (1,743 | ) | ||||||
DSI | 356 | (547 | ) | (565 | ) | |||||||
|
|
|
|
|
| |||||||
Total asset increase (decrease) | 1,212 | (2,467 | ) | (2,308 | ) | |||||||
|
|
|
|
|
| |||||||
Liabilities: | ||||||||||||
Account balances and future policy benefit reserves | (1,259 | ) | (4,669 | ) | 3,354 | |||||||
Unearned premiums | (2 | ) | — | — | ||||||||
|
|
|
|
|
| |||||||
Total liabilities (decrease) increase | (1,261 | ) | (4,669 | ) | 3,354 | |||||||
|
|
|
|
|
| |||||||
Net increase (decrease) | 2,473 | 2,202 | (5,662 | ) | ||||||||
Deferred income tax benefit | 866 | 771 | (1,982 | ) | ||||||||
|
|
|
|
|
| |||||||
Net increase (decrease) | $ | 1,607 | 1,431 | (3,680 | ) | |||||||
|
|
|
|
|
| |||||||
| (9) | Deferred Sales Inducements |
DSI at December 31, and the changes in the balance for years then ended, are as follows:
| 2014 | 2013 | 2012 | ||||||||||
Balance, beginning of year | $ | 18,345 | 18,745 | 22,756 | ||||||||
Capitalization | 2,370 | 1,842 | 1,736 | |||||||||
Interest | 971 | 987 | 1,262 | |||||||||
Amortization | (1,762 | ) | (5,171 | ) | (6,664 | ) | ||||||
Change in shadow DSI | (414 | ) | 1,942 | (345 | ) | |||||||
|
|
|
|
|
| |||||||
Balance, end of year | $ | 19,510 | 18,345 | 18,745 | ||||||||
|
|
|
|
|
| |||||||
The change in shadow DSI balances are impacted by movements in unrealized gains and losses as a result of market conditions.
Financial Statements and Supplemental Schedules | 51 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| (10) | Separate Accounts and Annuity Product Guarantees |
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):
| 2014 | 2013 | |||||||||||||||||||||||
| Account | Net amount | Weighted | Account | Net amount | Weighted | |||||||||||||||||||
| value | at risk | age (years) | value | at risk | age (years) | |||||||||||||||||||
GMDB: | ||||||||||||||||||||||||
Return of premium | $ | 1,514,852 | 2,221 | 62.1 | 1,302,899 | 1,179 | 62.2 | |||||||||||||||||
Ratchet and return of premium | 660,984 | 8,232 | 64.6 | 625,593 | 4,198 | 64.7 | ||||||||||||||||||
Reset | 102,983 | 677 | 74.8 | 109,406 | 616 | 76.1 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 2,278,819 | 11,130 | 2,037,898 | 5,993 | |||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
GMIB: | ||||||||||||||||||||||||
Return of premium | $ | 10,697 | 132 | 65.8 | 11,388 | 134 | 66.2 | |||||||||||||||||
Ratchet and rollup | 170,337 | 23,212 | 63.6 | 192,236 | 20,017 | 63.5 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 181,034 | 23,344 | 203,624 | 20,151 | |||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
GMAB: | ||||||||||||||||||||||||
Five years | $ | 26,335 | 84 | 67.4 | 32,307 | 13 | 66.5 | |||||||||||||||||
Target date retirement – 7 year | 57,042 | 368 | 62.7 | 58,335 | 155 | 61.7 | ||||||||||||||||||
Target date retirement – 10 year | 22,803 | 69 | 62.3 | 23,064 | 29 | 61.5 | ||||||||||||||||||
Target date with management levers | 373,740 | 3,152 | 62.0 | 325,145 | 611 | 61.2 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 479,920 | 3,673 | 438,851 | 808 | |||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
GMWB: | ||||||||||||||||||||||||
No living benefit | $ | 56,606 | — | 67.0 | 47,399 | — | 67.3 | |||||||||||||||||
Life benefit with optional reset | 91,834 | 4,087 | 69.9 | 100,047 | 3,014 | 69.1 | ||||||||||||||||||
Life benefit with 8% rollup | 34,001 | 3,691 | 68.3 | 36,826 | 2,348 | 67.6 | ||||||||||||||||||
Life benefit with management levers | 1,241,305 | 97,957 | 60.2 | 1,020,428 | 45,777 | 59.6 | ||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
Total | $ | 1,423,746 | 105,735 | 1,204,700 | 51,139 | |||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||
The net amount at risk has increased in 2014 due to the market performance. The guaranteed rollup on the benefit base has exceeded the market impacts on account values.
Financial Statements and Supplemental Schedules | 52 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except 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 | 2014 | 2013 | ||||||
Mutual funds: | ||||||||
Bond | $ | 291,694 | 272,340 | |||||
Domestic equity | 1,172,573 | 1,020,867 | ||||||
International equity | 83,531 | 92,175 | ||||||
Specialty | 623,849 | 554,262 | ||||||
|
|
|
| |||||
Total mutual funds | 2,171,647 | 1,939,644 | ||||||
Money market funds | 41,586 | 45,515 | ||||||
Other | 1,189 | 880 | ||||||
|
|
|
| |||||
Total | $ | 2,214,422 | 1,986,039 | |||||
|
|
|
| |||||
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 Balance Sheets:
| GMDB | GMIB | GMAB | GMWB | Totals | ||||||||||||||||
Balance as of December 31, 2012 | $ | 820 | 3,758 | 14,527 | 52,138 | 71,243 | ||||||||||||||
Incurred guaranteed benefits | 531 | (791 | ) | (11,900 | ) | (61,222 | ) | (73,382 | ) | |||||||||||
Paid guaranteed benefits | (237 | ) | — | (129 | ) | — | (366 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance as of December 31, 2013 | 1,114 | 2,967 | 2,498 | (9,084 | ) | (2,505 | ) | |||||||||||||
Incurred guaranteed benefits | 669 | 191 | 14,372 | 101,961 | 117,193 | |||||||||||||||
Paid guaranteed benefits | (125 | ) | — | — | — | (125 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance as of December 31, 2014 | $ | 1,658 | 3,158 | 16,870 | 92,877 | 114,563 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
| (11) | 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, 2014, 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.
Financial Statements and Supplemental Schedules | 53 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
Activity in the accident and health claim reserves is summarized as follows:
| 2014 | 2013 | 2012 | ||||||||||
Balance at January 1, net of reinsurance recoverable of $264, $200, and $256 respectively | $ | 1,032 | 2,229 | 2,514 | ||||||||
Incurred related to: | ||||||||||||
Current year | 1,251 | 868 | 28 | |||||||||
Prior years | 283 | 564 | 153 | |||||||||
|
|
|
|
|
| |||||||
Total incurred | 1,534 | 1,432 | 181 | |||||||||
|
|
|
|
|
| |||||||
Paid related to: | ||||||||||||
Current year | 49 | 77 | 14 | |||||||||
Prior years | 381 | 2,552 | 452 | |||||||||
|
|
|
|
|
| |||||||
Total paid | 430 | 2,629 | 466 | |||||||||
|
|
|
|
|
| |||||||
Balance at December 31, net of reinsurance recoverable of $360, $264, and $200, respectively | $ | 2,136 | 1,032 | 2,229 | ||||||||
|
|
|
|
|
| |||||||
Prior year incurreds for 2014 and 2013 reflect unfavorable claim development with the group marketing and individual LTC lines of business. Prior year incurreds for 2012 reflect unfavorable claim development with the group marketing line of business.
| (12) | 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 coverage and coinsurance contracts. The Company generally retained between $50 and $1,500 coverage per individual life depending on the type of policy for the years ended December 31, 2014 and 2013.
On LTC business, the Company retains 90% of Limited Benefit Plans, and 90% on claims up through year eight and 20% on claims years nine and beyond for Lifetime Benefit Plans.
The Company monitors the financial exposure to the reinsurers, as well as evaluates the financial strength of the reinsurers on an ongoing basis.
Financial Statements and Supplemental Schedules | 54 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
The following table shows the net exposure to reinsurance receivables and recoverable at December 31:
| 2014 | 2013 | |||||||
Reinsurance receivables | $ | 60 | 126 | |||||
Reinsurance recoverable | 3,091 | 2,501 | ||||||
Reinsurance payables | (60 | ) | (64 | ) | ||||
|
|
|
| |||||
Net reinsurance exposure | $ | 3,091 | 2,563 | |||||
|
|
|
| |||||
| (13) | Income Taxes |
| (a) | Income Tax Expense (Benefit) |
Total income tax expense (benefit) for the years ended December 31 is as follows:
| 2014 | 2013 | 2012 | ||||||||||
Income tax (benefit) expense attributable to operations: | ||||||||||||
Current tax expense (benefit) | $ | 4,774 | 2,495 | 17,206 | ||||||||
Deferred tax (benefit) expense | (7,907 | ) | 1,930 | (13,885 | ) | |||||||
|
|
|
|
|
| |||||||
Total income tax (benefit) expense attributable to operations | (3,133 | ) | 4,425 | 3,321 | ||||||||
Income tax effect on equity: | ||||||||||||
Attributable to unrealized gains (losses) for the year | 3,397 | (12,760 | ) | 5,152 | ||||||||
|
|
|
|
|
| |||||||
Total income tax effect on equity | $ | 264 | (8,335 | ) | 8,473 | |||||||
|
|
|
|
|
| |||||||
Financial Statements and Supplemental Schedules | 55 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| (b) | Components of Income Tax (Benefit) Expense |
Income tax (benefit) expense computed at the statutory rate of 35% varies from income tax (benefit) expense reported on the Statements of Operations for the respective years ended December 31 as follows:
| 2014 | 2013 | 2012 | ||||||||||
Income tax (benefit) expense computed at the statutory rate | $ | (1,504 | ) | 5,916 | 4,349 | |||||||
Dividends-received deductions and tax-exempt interest | (1,447 | ) | (1,603 | ) | (1,035 | ) | ||||||
Other | (182 | ) | 112 | 7 | ||||||||
|
|
|
|
|
| |||||||
Income tax (benefit) expense as reported | $ | (3,133 | ) | 4,425 | 3,321 | |||||||
|
|
|
|
|
| |||||||
| (c) | Components of Deferred Tax Assets and Liabilities on the Balance Sheet |
Tax effects of temporary differences giving rise to the significant components of the net deferred tax asset (liability), which is included in other assets on the Balance Sheets, at December 31 are as follows:
| 2014 | 2013 | |||||||
Deferred tax assets: | ||||||||
Future benefit reserves | $ | 70,323 | 27,266 | |||||
Expense accruals | 132 | 162 | ||||||
Other-than-temporarily impaired assets | — | 84 | ||||||
Investment income | — | 23,577 | ||||||
|
|
|
| |||||
Total deferred tax assets | 70,455 | 51,089 | ||||||
|
|
|
| |||||
Deferred tax liabilities: | ||||||||
Deferred acquisition costs | (36,324 | ) | (31,506 | ) | ||||
Due and deferred premium | (6 | ) | (16 | ) | ||||
Net unrealized gains on investments | (14,497 | ) | (10,702 | ) | ||||
Investment income | (6,253 | ) | — | |||||
|
|
|
| |||||
Total deferred tax liabilities | (57,080 | ) | (42,224 | ) | ||||
|
|
|
| |||||
Net deferred tax assets | $ | 13,375 | 8,865 | |||||
|
|
|
| |||||
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
Financial Statements and Supplemental Schedules | 56 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
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 (received) by the Company were $2,271, $17,449, and $(6,606), in 2014, 2013, and 2012, respectively. The Company had a tax payable to AZOA of $4,713 and $2,210 at December 31, 2014 and 2013, respectively reported in other liabilities on the Balance Sheets.
The Company’s federal income tax return is consolidated with AZOA. The Company is no longer subject to U.S. federal, state, and local, or non-U.S. income tax examinations by tax authorities for years prior to 2011, though examinations by certain U.S. state and local tax authorities may still be conducted for 2008 and subsequent years. The IRS recently conducted an examination of the consolidated returns filed by AZOA for the 2008 and 2009 tax years. These amended returns were accepted by the IRS as filed and review by the Joint Committee on Taxation is now ongoing. The IRS has not proposed any adjustments that materially affect the Company nor has AZOA received notice from the IRS of its intent to examine any subsequent tax periods.
In accordance with the Income Taxes Topic of the Codification, the Company recognizes liabilities for certain unrecognized tax benefits. The Company had no unrecognized tax benefits as of December 31, 2014 and 2013. The Company does not expect any significant changes related to unrecognized tax benefits during the next 12 months.
The Company recognizes interest and penalties accrued related to unrecognized tax benefits in federal income tax expense. During the years ended December 31, 2014, 2013, and 2012, the Company did not recognize any expense related to interest and penalties. The Company accrued $0 for the payment of interest and penalties at December 31, 2014 and 2013.
| (14) | Related-party Transactions |
| (a) | Real Estate |
The Company subleases office space from Fireman’s Fund Insurance Company (an affiliate). In connection with this agreement, the Company incurred rent expense of $32, 29, and $26 in 2014, 2013, and 2012, respectively, which is included in general and administrative expenses on the Statements of Operations.
| (b) | Service Fees |
The Company has incurred fees for certain administrative services provided by Allianz Life of $8,368, $6,454, and $6,799 in 2014, 2013, and 2012, respectively. The Company’s liability for these fees was $948 and $939 as of December 31, 2014 and 2013, respectively, and is included in other liabilities on the Balance Sheets.
Financial Statements and Supplemental Schedules | 57 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
The Company has incurred fees for certain investment advisory services provided by affiliated companies of $212, $199, and $184 in 2014, 2013, and 2012, respectively. The Company’s liability for these charges was $22 and $15 as of December 31, 2014 and 2013, respectively, and is included in other liabilities on the Balance Sheets.
The Company has agreements with its affiliates Pacific Investment Management Company (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 contract holders was $1,182, $1,109, and $957 during 2014, 2013, and 2012, respectively, which is included in other revenue on the Statements of Operations. At December 31, 2014 and 2013, $97 and $192, respectively, was included for these fees in receivables on the Balance Sheets.
The Company has incurred commission expense related to the distribution of variable annuity products from Allianz Life Financial Services, LLC, (ALFS) an affiliated company, in the amount of $24,771, $22,493, and $21,613 for the years ended December 31, 2014, 2013, and 2012, respectively.
The Company has an agreement with ALFS, whereby 12b-1 fees are assigned to the Company and Allianz Life. The Company has also agreed with Allianz Life to share in reimbursing ALFS for the excess of ALFS expenses over revenues, exclusive of trading gains (losses). In the event that revenues exceed expenses, ALFS records a reimbursement to the Company and Allianz Life. The Company recorded revenue from this agreement of $3,860, $3,109, and $2,312 for the years ended December 31, 2014, 2013, and 2012, respectively. The Company recorded expenses related to this agreement of $1,454, $1,656, and $2,185, for the years ended December 31, 2014, 2013, and 2012, respectively.
| (c) | Capital Contributions |
The Company received a cash capital contribution of $20,000 from Allianz Life in 2012.
| (15) | 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 80.0% of the participants’ eligible compensation, although contributions remain subject to annual limitations set by the IRS. In 2014, 2013, and 2012, the Company matched 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.
Financial Statements and Supplemental Schedules | 58 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
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 $214, $144, and $123 in 2014, 2013, and 2012, respectively, toward the AAAP matching contributions and administration expenses.
In addition to the AAAP, the Company offers certain benefits to eligible employees, including a comprehensive medical, dental, and vision plan and a flexible spending plan.
| (16) | 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, 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, account balances and future policy benefit reserves and policy and contract claims calculated for statutory reporting do not include provisions for withdrawals.
The Company’s statutory capital and surplus reported in the statutory annual statements filed with the State of New York as of December 31, 2014 and 2013 were $165,195 and $97,828, respectively.
The Company is required to meet minimum statutory capital and surplus requirements. The Company’s statutory capital and surplus as of December 31, 2014 and 2013 were significantly in excess of these requirements. The maximum amount of dividends that can be paid by New York 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 statements. In accordance with New York statutes, the maximum amount of ordinary dividends that can be paid by the Company is the greater of 10% of prior year-end capital and surplus, or the prior year net gain from operations, but is limited by the amount in unassigned surplus. Based on these limitations, ordinary dividends of $36,291 can be paid in 2015 without the approval of the Department. The Company paid no dividends in 2014, 2013, and 2012.
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 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, 2014 and 2013.
Financial Statements and Supplemental Schedules | 59 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| (17) | Commitments and Contingencies |
The Company is or may become subject to claims and lawsuits that arise in the ordinary course of business. In the opinion of management, the ultimate resolution of any such known litigation will not have a material adverse effect on the Company’s financial position. 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 fund, variable and fixed annuity, life insurance, and distribution companies, is subject to close scrutiny by regulators, legislators, and the media.
Federal and state regulators regularly make inquiries and conduct examinations or investigations concerning various selling practices in the annuity industry, including suitability reviews, product exchanges, sales to seniors, and compliance with, among other things, insurance laws and securities laws. State regulators have also been investigating various practices relating to unclaimed property, and the Company has reached settlement agreements with some state regulators regarding unclaimed property. The Company is also 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 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 leases office space as mentioned in note 14. Expense for the operating lease was $32, $29, and $26 in 2014, 2013, and 2012, respectively. The future minimum lease payments required under operating leases are as follows:
2015 | $ | 22 | ||
2016 | 24 | |||
2017 | 24 | |||
2018 | 24 | |||
2019 | 24 | |||
2020 and beyond | 12 | |||
|
| |||
Total | $ | 130 | ||
|
|
Financial Statements and Supplemental Schedules | 60 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| (18) | Segment Information |
The Company has organized its principal operations into the following segments: Individual Annuities and Other products.
The Individual Annuities segment consists of variable and fixed annuities, which are provided through independent distribution channels made up of broker dealers and 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. Although the Company discontinued selling fixed annuity products in 2011, the in-force volume is significant and thus included within the Individual Annuities segment. Revenues for the company’s variable annuity products are primarily earned as management and expense fees charged on underlying account balances.
The Other products segment consists of closed blocks of Life, LTC, and Special Markets products. The Company discontinued selling Life products in 2010 and LTC products in 2009. The Special Markets products include individual and group annuity and life products, including whole and term life insurance. Although other products are part of the combined 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. Investment-related income, gains, and losses are allocated to the segments based on reserve levels and capital requirements.
Financial Statements and Supplemental Schedules | 61 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
Segment results are reconciled to the statements of operations in the tables below:
| Year ended December 31, 2014 | ||||||||||||
| Individual annuities | Other | Total | ||||||||||
Revenue: | ||||||||||||
Net premiums and policy fees | $ | 58,728 | 2,988 | 61,716 | ||||||||
Interest and similar income, net | 27,284 | 1,566 | 28,850 | |||||||||
Change in fair value of assets and liabilities | 66,815 | — | 66,815 | |||||||||
Realized investment gains, net | 73 | 4 | 77 | |||||||||
Fee, commission, and other revenue | 6,869 | (5 | ) | 6,864 | ||||||||
|
|
|
|
|
| |||||||
Total revenue | 159,769 | 4,553 | 164,322 | |||||||||
|
|
|
|
|
| |||||||
Benefits and expenses: | ||||||||||||
Net benefits | 138,957 | 4,936 | 143,893 | |||||||||
General and administrative expenses and commissions | 38,886 | 903 | 39,789 | |||||||||
Change in deferred acquisition costs, net | (15,088 | ) | 24 | (15,064 | ) | |||||||
|
|
|
|
|
| |||||||
Total benefits and expenses | 162,755 | 5,863 | 168,618 | |||||||||
|
|
|
|
|
| |||||||
Pretax (loss) | $ | (2,986 | ) | (1,310 | ) | (4,296 | ) | |||||
|
|
|
|
|
| |||||||
Financial Statements and Supplemental Schedules | 62 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| Year ended December 31, 2013 | ||||||||||||
| Individual annuities | Other | Total | ||||||||||
Revenue: | ||||||||||||
Net premiums and policy fees | $ | 47,281 | 3,452 | 50,733 | ||||||||
Interest and similar income, net | 28,590 | 1,074 | 29,664 | |||||||||
Change in fair value of assets and liabilities | (78,973 | ) | — | (78,973 | ) | |||||||
Realized investment gains, net | 796 | 33 | 829 | |||||||||
Fee, commission, and other revenue | 5,904 | — | 5,904 | |||||||||
|
|
|
|
|
| |||||||
Total revenue | 3,598 | 4,559 | 8,157 | |||||||||
|
|
|
|
|
| |||||||
Benefits and expenses: | ||||||||||||
Net benefits | (42,034 | ) | 3,931 | (38,103 | ) | |||||||
General and administrative expenses and commissions | 34,595 | 924 | 35,519 | |||||||||
Change in deferred acquisition costs, net | (6,440 | ) | 277 | (6,163 | ) | |||||||
|
|
|
|
|
| |||||||
Total benefits and expenses | (13,879 | ) | 5,132 | (8,747 | ) | |||||||
|
|
|
|
|
| |||||||
Pretax income (loss) | $ | 17,477 | (573 | ) | 16,904 | |||||||
|
|
|
|
|
| |||||||
Financial Statements and Supplemental Schedules | 63 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| Year ended December 31, 2012 | ||||||||||||
| Individual annuities | Other | Total | ||||||||||
Revenue: | ||||||||||||
Net premiums and policy fees | $ | 36,997 | 3,195 | 40,192 | ||||||||
Interest and similar income, net | 29,905 | 945 | 30,850 | |||||||||
Change in fair value of assets and liabilities | (14,676 | ) | — | (14,676 | ) | |||||||
Realized investment gains, net | 14,170 | 332 | 14,502 | |||||||||
Fee, commission, and other revenue | 4,698 | — | 4,698 | |||||||||
|
|
|
|
|
| |||||||
Total revenue | 71,094 | 4,472 | 75,566 | |||||||||
|
|
|
|
|
| |||||||
Benefits and expenses: | ||||||||||||
Net benefits | 20,914 | 2,656 | 23,570 | |||||||||
General and administrative expenses and commissions | 34,590 | 550 | 35,140 | |||||||||
Change in deferred acquisition costs, net | 4,657 | (227 | ) | 4,430 | ||||||||
|
|
|
|
|
| |||||||
Total benefits and expenses | 60,161 | 2,979 | 63,140 | |||||||||
|
|
|
|
|
| |||||||
Pretax income | $ | 10,933 | 1,493 | 12,426 | ||||||||
|
|
|
|
|
| |||||||
Financial Statements and Supplemental Schedules | 64 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
| (19) | Changes in and Reclassifications from Accumulated Other Comprehensive Income (AOCI) |
Changes in AOCI, net of tax, by component consist of the following:
| Year ended December 31, 2014 | ||||||||||||
| Net unrealized gain (losses) on securities | OTTI gains (losses) in OCI | Total AOCI | ||||||||||
Beginning balance | $ | 10,347 | — | 10,347 | ||||||||
OCI before reclassifications | 6,280 | 74 | 6,354 | |||||||||
Amounts reclassified from AOCI | 29 | (74 | ) | (45 | ) | |||||||
|
|
|
|
|
| |||||||
Net OCI | 6,309 | — | 6,309 | |||||||||
|
|
|
|
|
| |||||||
Ending balance | $ | 16,656 | — | 16,656 | ||||||||
|
|
|
|
|
| |||||||
| Year ended December 31, 2013 | ||||||||||||
| Net unrealized gain (losses) on securities | OTTI gains (losses) in OCI | Total AOCI | ||||||||||
Beginning balance | $ | 34,045 | — | 34,045 | ||||||||
OCI before reclassifications | (23,023 | ) | (157 | ) | (23,180 | ) | ||||||
Amounts reclassified from AOCI | (675 | ) | 157 | (518 | ) | |||||||
|
|
|
|
|
| |||||||
Net OCI | (23,698 | ) | — | (23,698 | ) | |||||||
|
|
|
|
|
| |||||||
Ending balance | $ | 10,347 | — | 10,347 | ||||||||
|
|
|
|
|
| |||||||
Financial Statements and Supplemental Schedules | 65 | (Continued) |
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Notes to Financial Statements
December 31, 2014 and 2013
(In thousands, except security holdings quantities)
Reclassifications from AOCI, net of tax, consist of the following:
| Amount reclassified from AOCI | Affected line item | |||||||||
| December 31, | in the | |||||||||
AOCI | 2014 | 2013 | Statements of Operations | |||||||
Net unrealized (loss) gain on securities: | ||||||||||
Available-for-sale securities | $ | (44 | ) | 1,038 | Realized investment gains, net | |||||
| (15 | ) | 363 | Income tax (benefit) expense | |||||||
|
|
|
| |||||||
| (29 | ) | 675 | Net (loss) income | |||||||
|
|
|
| |||||||
OTTI gains in OCI: | ||||||||||
Other than temporary impairments | 115 | (241 | ) | Realized investment gains, net | ||||||
| 41 | (84 | ) | Income tax (benefit) expense | |||||||
|
|
|
| |||||||
| 74 | (157 | ) | Net (loss) income | |||||||
|
|
|
| |||||||
Total amounts reclassified from AOCI | $ | 45 | 518 | Total net (loss) income | ||||||
|
|
|
| |||||||
| (20) | Subsequent Events |
No material subsequent events have occurred since December 31, 2014, through March 23, 2015 that require adjustments to the financial statements.
Financial Statements and Supplemental Schedules | 66 |
Schedule I
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Summary of Investments – Other than Investments in Related Parties
December 31, 2014
(In thousands)
Type of investment | Amortized cost (1) | Fair value | Amount at which shown in the balance sheet | |||||||||
Fixed-maturity securities: | ||||||||||||
U.S. government | $ | 93,692 | 95,077 | 95,077 | ||||||||
States and political subdivisions | 11,679 | 11,942 | 11,942 | |||||||||
Foreign government | 2,517 | 2,547 | 2,547 | |||||||||
Public utilities | 36,746 | 41,328 | 41,328 | |||||||||
Corporate securities | 328,406 | 357,330 | 357,330 | |||||||||
Mortgage-backed securities | 140,682 | 146,917 | 146,917 | |||||||||
|
|
|
|
|
| |||||||
Total fixed-maturity securities | 613,722 | 655,141 | 655,141 | |||||||||
|
|
|
|
|
| |||||||
Equity Securities, trading | 1,855 | 1,858 | 1,858 | |||||||||
|
|
|
|
|
| |||||||
Total other investments | 1,855 | 1,858 | 1,858 | |||||||||
|
|
|
|
|
| |||||||
Other investments: | ||||||||||||
Short term securities | 13,728 | 13,728 | ||||||||||
Policy loans | 253 | 253 | ||||||||||
Derivatives | 4,516 | 4,516 | ||||||||||
|
|
|
| |||||||||
Total other investments | 18,497 | 18,497 | ||||||||||
|
|
|
| |||||||||
Total investments | $ | 634,074 | 675,496 | |||||||||
|
|
|
| |||||||||
| (1) | Original cost of fixed-maturity securities reduced by repayments and adjusted for amortization of premiums or accrual discounts |
See accompanying report of independent registered public accounting firm.
Financial Statements and Supplemental Schedules | 67 |
Schedule II
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Supplementary Insurance Information
Years ended December 31, 2014, 2013, and 2012
(In thousands)
| December 31 | Year ended December 31 | |||||||||||||||||||||||||||||||||||||||||||
| Deferred acquisition costs | Deferred sales inducements | Account balances and future benefit reserves | Unearned premiums | Policy and contract claims | Net premium and policy fees | Interest and similar income, net | Net benefits | Net change in deferred sales inducements* | Net change in deferred acquisition costs** | Other operating expenses | ||||||||||||||||||||||||||||||||||
2014: | ||||||||||||||||||||||||||||||||||||||||||||
Annuities | $ | 115,271 | 19,510 | 670,265 | — | — | 58,728 | 27,284 | 140,536 | (1,579 | ) | (15,088 | ) | 38,886 | ||||||||||||||||||||||||||||||
Other | 3,048 | — | 20,746 | 1,518 | 2,787 | 2,988 | 1,566 | 4,936 | — | 24 | 903 | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
| $ | 118,319 | 19,510 | 691,011 | 1,518 | 2,787 | 61,716 | 28,850 | 145,472 | (1,579 | ) | (15,064 | ) | 39,789 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
2013: | ||||||||||||||||||||||||||||||||||||||||||||
Annuities | $ | 100,897 | 18,345 | 561,358 | — | — | 47,281 | 28,590 | (44,376 | ) | 2,342 | (6,440 | ) | 34,595 | ||||||||||||||||||||||||||||||
Other | 3,105 | — | 16,762 | 1,559 | 1,528 | 3,452 | 1,074 | 3,931 | — | 277 | 924 | |||||||||||||||||||||||||||||||||
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
| $ | 104,002 | 18,345 | 578,120 | 1,559 | 1,528 | 50,733 | 29,664 | (40,445 | ) | 2,342 | (6,163 | ) | 35,519 | |||||||||||||||||||||||||||||||
|
|
|
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|
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|
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|
|
|
|
| |||||||||||||||||||||||
2012: | ||||||||||||||||||||||||||||||||||||||||||||
Annuities | $ | 89,006 | 18,745 | 678,701 | — | — | 36,997 | 29,905 | 17,250 | 3,664 | 4,657 | 34,590 | ||||||||||||||||||||||||||||||||
Other | 3,239 | — | 14,703 | 1,539 | 2,684 | 3,195 | 945 | 2,654 | 2 | (227 | ) | 550 | ||||||||||||||||||||||||||||||||
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
| $ | 92,245 | 18,745 | 693,404 | 1,539 | 2,684 | 40,192 | 30,850 | 19,904 | 3,666 | 4,430 | 35,140 | |||||||||||||||||||||||||||||||||
|
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|
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|
|
| |||||||||||||||||||||||
| * | See note 8 for aggregate gross amortization of deferred sales inducements. |
| ** | See note 7 for aggregate gross amortization of deferred acquisition costs. |
See accompanying report of independent registered public accounting firm.
Financial Statements and Supplemental Schedules | 68 |
Schedule III
ALLIANZ LIFE INSURANCE COMPANY OF NEW YORK
Reinsurance
Years ended December 31, 2014, 2013, and 2012
(In thousands)
| Direct | Ceded to other | Assumed from other | Net | Percentage of amount assumed | ||||||||||||||||
Year ended | amount | companies | companies | amount | to net | |||||||||||||||
December 31, 2014: | ||||||||||||||||||||
Life insurance in force | $ | 77,593 | 67,376 | — | 10,217 | — | % | |||||||||||||
Premiums and policy fees: | ||||||||||||||||||||
Life | $ | 902 | 916 | — | (14 | ) | — | |||||||||||||
Annuities | 58,727 | — | — | 58,727 | — | |||||||||||||||
Accident and health | 3,529 | 526 | — | 3,003 | — | |||||||||||||||
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Total premiums and policy fees | $ | 63,158 | 1,442 | — | 61,716 | — | % | |||||||||||||
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December 31, 2013: | ||||||||||||||||||||
Life insurance in force | $ | 84,046 | 73,019 | — | 11,027 | — | % | |||||||||||||
Premiums and policy fees: | ||||||||||||||||||||
Life | $ | 1,389 | 975 | — | 414 | — | ||||||||||||||
Annuities | 47,280 | — | — | 47,280 | — | |||||||||||||||
Accident and health | 3,613 | 574 | — | 3,039 | — | |||||||||||||||
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Total premiums and policy fees | $ | 52,282 | 1,549 | — | 50,733 | — | % | |||||||||||||
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December 31, 2012: | ||||||||||||||||||||
Life insurance in force | $ | 93,755 | 82,448 | — | 11,307 | — | % | |||||||||||||
Premiums and policy fees: | ||||||||||||||||||||
Life | $ | 1,088 | 1,009 | — | 79 | — | ||||||||||||||
Annuities | 36,997 | — | — | 36,997 | — | |||||||||||||||
Accident and health | 3,662 | 547 | 1 | 3,116 | — | |||||||||||||||
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Total premiums and policy fees | $ | 41,747 | 1,556 | 1 | 40,192 | — | % | |||||||||||||
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See accompanying report of independent registered public accounting firm.
Financial Statements and Supplemental Schedules | 69 |
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 New York | Allianz Life Insurance Company of New York |
| NW5990 | P.O. Box 561 |
| P.O. Box 1450 | Minneapolis, MN 55440-0561 |
| Minneapolis, MN 55485-5990 | |
| OVERNIGHT, CERTIFIED, OR REGISTERED MAIL | OVERNIGHT, CERTIFIED, OR REGISTERED MAIL |
| Allianz Life Insurance Company of New York | Allianz Life Insurance Company of New York |
| NW5990 | 5701 Golden Hills Drive |
| 1801 Parkview Drive | Golden Valley, MN 55416-1297 |
| Shoreview, MN 55126 |
