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2. Restatement and Amendment of Previously Reported Financial Information
 9 Months Ended
Sep. 30, 2012
Notes to Financial Statements  
Restatement and Amendment of Previously Reported Financial Information

 

These interim financial statements should be read in conjunction with the restated and amended financial statements for the year ended December 31, 2011 contained in the Company’s 2012 Annual Report on Form 10-K (the “2012 Form 10-K”), which was filed April 25, 2014. As previously presented in the 2012 Form 10-K, during the preparation of the Company’s Form 10-Q for the period ended June 30, 2012, a related party reinsurance error was identified, followed by the identification of certain other errors within the statement of cash flows for the nine months ended September 30, 2012, as well as for previously reported periods. Following the identification of these errors, management initiated a comprehensive internal review of the Company’s historical financial information and identified additional errors. As part of its internal review, the Company evaluated the financial reporting process and the resulting financial statements as well as the appropriateness of prior accounting and reporting decisions in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). As a result, the Company has restated and amended its financial statements as of and for the three and nine months ended September 30, 2011 to: (i) adjust for impact of these errors; (ii) record previously identified out-of-period errors that were previously determined not to be material individually, or in the aggregate, in the appropriate period; and (iii) amend the financial statements for the impact of the retrospective adoption of amended accounting guidance discussed more fully in the “Revision for the Retrospective Adoption of Amended Accounting Guidance” section below.

 

The Company has classified the errors that were affected by the restatement into the following major categories:

 

1.      Actuarial Finance (which includes various subcategories as noted more fully below)

2.      Investments (which includes various subcategories as noted more fully below)

3.      Reinsurance Accounting (which includes two separate subcategories as noted more fully below)

4.      Cash Flows and Changes in Classification

 

In addition to these four categories, there are certain items labeled “other restatement adjustments” which primarily relate to previously recorded out-of-period errors that were previously identified and determined not to be material individually or in the aggregate. The Company reconsidered each of these errors individually or in the aggregate during the course of the restatement and concluded that certain of these previously identified errors, namely actuarial, would be most appropriately presented within separately identifiable categories as noted in more detail within the “Actuarial Finance” section below, with the remaining errors most appropriately categorized into “other restatement adjustments” rather than any of the four major categories. In an effort to provide greater transparency into these remaining “other restatement adjustments,” the Company has provided additional details underlying select errors for certain financial statement line items, as deemed appropriate. These details are presented in the financial statement tables detailed more fully within this Note below.

 

Actuarial Finance

 

The Company determined that there were errors related to the actuarial valuation of insurance liabilities and the amortization of deferred policy acquisition costs. Errors were identified related to data, assumptions and valuation methodologies and separated into the following sub-categories detailed below.

  

●   Accounting for Certain Universal Life Type Products: Certain of the Company’s universal life products have benefit features that are expected to produce profits in earlier periods followed by losses in later periods. Under U.S. GAAP accounting, the Company is required to establish reserves for the anticipated benefits that exceed the projected contract value and arise from these features. The Company did not properly evaluate certain benefit features and, therefore, did not properly establish the required reserves. The resulting changes in the reserve accruals had a secondary impact on gross profits used to amortize deferred acquisition costs and unearned revenue reserves.

 

In addition, the Company must periodically assess each of its lines of business for a potential premium deficiency including evaluating experience and if the line of business is expected to produce profits in earlier years followed by losses in later years. The Company did not properly assess the universal life or variable universal life lines of businesses for this profits followed by losses condition. Accordingly, the Company accrued additional reserves over the restatement period to provide for expected losses in the future.

 

The Company also determined it was using inappropriate approximations of reinsurance that when aggregated did not properly reflect the underlying reinsurance costs accurately within the models it uses to amortize deferred policy acquisition costs and to value policyholder liabilities. The impact of the correction of this reinsurance modeling error indirectly impacted the balances discussed above.

 

In addition, the impact of this error indirectly impacted the calculation of the “Shadow Accounting” error which is a separately identifiable component of the actuarial errors and, accordingly, is described within the “Shadow Accounting” section of “Actuarial Finance” directly below.

 

The impact of the correction of these errors on the financial statements is presented in the “Summary of Correction of Actuarial Finance Errors” table within the “Actuarial Finance” section of this Note below.

 

●   Shadow Accounting: Under U.S. GAAP accounting, assets and liabilities that are backed by a portfolio of assets classified as available-for-sale must be adjusted to reflect the amount of unrealized gains or unrealized losses “as if the amounts were realized” with a corresponding offset to other comprehensive income (loss) in a process commonly referred to as “shadow accounting”. The Company failed to recognize all of the relationships between the available-for-sale assets and the supported assets and liabilities in calculating these adjustments. During the restatement, the shadow accounting policy and valuation process were corrected to ensure all interrelated assets and liabilities were being properly identified and to ensure that the impacts of these unrealized gains or losses were properly recorded. The impact of the correction of these errors on the financial statements is presented in the “Summary of Correction of Actuarial Finance Errors” table within the “Actuarial Finance” section of this Note below.

 

●   Loss Recognition: Under U.S. GAAP accounting, the Company must periodically assess the net liability (net of deferred policy acquisition costs) to ensure it is sufficient to provide for the expected policyholder benefits and related expenses. Upon analysis, the Company determined that for certain lines of business the “locked-in” historical estimates used to calculate the policyholder liabilities were insufficient prior to, and also as a result of, entering into a new reinsurance treaty (as discussed within the “Reinsurance Accounting” section below) and in light of the current interest rate environment. Upon identification of loss recognition events, the Company reduced its deferred policy acquisition cost asset and established additional liabilities to rectify the insufficiency in the net liability which was identified for certain lines of business. The impact of the correction of these errors on the financial statements is presented in the “Summary of Correction of Actuarial Finance Errors” table within the “Actuarial Finance” section of this Note below.

 

●   Fixed Indexed Annuities (“FIA”): During the Company’s analysis of the fixed indexed annuity valuation process, errors associated with the actuarial modeling of certain fixed indexed annuity product features which were modeled beginning in 2011 were identified. These errors related to incomplete or inaccurate data and inappropriate approximations of product features which resulted in the incorrect calculation for the policyholder liabilities including the related embedded derivatives associated with certain benefits for the product. The impact of the correction of these errors on the financial statements is presented in the “Summary of Correction of Actuarial Finance Errors” table within the “Actuarial Finance” section of this Note below.

  

Other errors related to the FIA products for the 2010 period were previously identified and recorded as out-of-period errors. These errors which resulted in a net loss of $2.4 million are presented, along with all other actuarial out-of-period errors, within the “Other Actuarial Errors” section below.

 

●   Other Actuarial Errors: Included within these amounts are all actuarial out-of-period errors as well as other individually immaterial errors which were identified during the restatement process in conjunction with management’s comprehensive balance sheet review and relating to the Company’s actuarial assumptions, approximations and valuation methods/models for its life and annuity business. The impact of the correction of these errors on the financial statements is presented in the “Summary of Correction of Actuarial Finance Errors” table within the “Actuarial Finance” section of this Note below.

 

Increase (decrease)   Summary of Correction of Actuarial Finance Errors – December 31, 2011 Balance Sheet Impacts (1)
($ in millions)   Actuarial Finance
   

Accounting

for UL Type

Products

    

Shadow

Accounting

    

Loss

Recognition

     FIA    

Other

Actuarial

    

Total

Actuarial

Finance

Errors (2)

  
                                       
ASSETS:                                      
Available-for-sale debt securities, at fair value   $ —     $ —     $ —     $ —     $ —     $ —  
Limited partnerships and other investments     —       —       —       —       —       —  
Policy loans, at unpaid principal balances     —       —       —       —       —       —  
Derivative investments     —       —       —       —       —       —  
Fair value investments     —       —       —       —       —       —  
Total investments     —       —       —       —       —       —  
Cash and cash equivalents     —       —       —       —       —       —  
Accrued investment income     —       —       —       —       —       —  
Receivables     1.1       —       —       —       1.9       3.0  
Deferred policy acquisition costs     70.9       (13.4 )     (1.4 )     (3.4 )     (2.6 )     50.1  
Deferred income taxes, net     —       —       —       —       —       —  
Receivables from related parties     —       —       —       —       —       —  
Other assets     —       —       39.6       —       4.7       44.3  
Separate account assets     —       —       —       —       —       —  
Total assets   $ 72.0     $ (13.4 )   $ 38.2     $ (3.4 )   $ 4.0     $ 97.4  
                                                 
LIABILITIES:                                                
Policy liabilities and accruals   $ 195.1     $ (13.6 )   $ 10.3     $ —     $ 11.3     $ 203.1  
Deferred income tax, net     —       —       —       —       —       —  
Policyholder deposit funds     —       —       —       0.8       2.4       3.2  
Deferred income tax, net                                                
Payable to related parties     —       —       —       —       —       —  
Other liabilities     —       —       —       —       —       —  
Separate account liabilities     —       —       —       —       —       —  
Total liabilities     195.1       (13.6 )     10.3       0.8       13.7       206.3  
                                                 
STOCKHOLDER’S EQUITY:                                                
Common stock     —       —       —       —       —       —  
Additional paid-in capital     —       —       —       —       —       —  
Accumulated other comprehensive loss     4.5       (19.8 )     —       —       —       (15.3 )
Accumulated deficit     (77.8 )     —       (0.8 )     (4.1 )     (12.2 )     (94.9 )
Treasury stock     —       —       —       —       —       —  
Total stockholder’s equity (3)     (73.3 )     (19.8 )     (0.8 )     (4.1 )     (12.2 )     (110.2 )
Total stockholder’s equity - cumulative impact (4)     (49.8 )     20.0       28.7       (0.1 )     2.5       1.3  
Total stockholder’s equity - impact     (123.1 )     0.2       27.9       (4.2 )     (9.7 )     (108.9 )
Total liabilities and stockholder’s equity   $ 72.0     $ (13.4 )   $ 38.2     $ (3.4 )   $ 4.0     $ 97.4  

———————

(1)   All amounts are shown before income taxes, unless otherwise noted.
(2)   Amounts represent the total “Summary of Correction of Actuarial Finance Errors” which is further aggregated into the “Summary of Correction of Errors” in the following pages.

(3)   Amounts represent restatement changes made to the 2011 and 2010 periods as presented within the 2012 Form 10-K.
(4)   Amounts represent cumulative impact of restatement changes to periods prior to 2010.

 

Increase (decrease)   Summary of Correction of Actuarial Finance Errors – Three months ended September 30, 2011 Income Statement and Comprehensive Income Impacts (1)  
($ in millions)   Actuarial Finance  
   

Accounting

for UL Type

Products

    

Shadow

Accounting

    

Loss

Recognition

     FIA    

Other

Actuarial

    

Total

Actuarial

Finance

Errors (2)

  
                                     
REVENUES:                                    
Premiums   $ —     $ —     $ —     $ —     $ —     $ —  
Insurance and investment product fees     (2.4 )     —       —       —       (0.6 )     (3.0 )
Net investment income      —       —       —       —       (0.5 )     (0.5 )
Net realized investment gains (losses):                                                
Total OTTI losses     —       —       —       —       —       —  
Portion of OTTI losses recognized in OCI     —       —       —       —       —       —  
Net OTTI losses recognized in earnings     —       —       —       —       —       —  
Net realized investment gains (losses), excluding OTTI losses     —       —       —       —       8.0       8.0  
Net realized investment gains (losses)     —        —       —       —       8.0       8.0  
Total revenues     (2.4 )     —       —       —       6.9       4.5  
                                                 
BENEFITS AND EXPENSES:                                                
Policy benefits     32.5       —       0.8       4.0       7.2       44.5  
Policy acquisition cost amortization     (18.6 )     —       —       1.5       (0.8 )     (17.9 )
Other operating expenses     —       —       —       —       3.7       3.7  
Total benefits and expenses     13.9       —       0.8       5.5       10.1       30.3  
Income (loss) from before income taxes     (16.3 )     —       (0.8 )     (5.5 )     (3.2 )     (25.8 )
Income tax expense (benefit)     —       —       —       —       —       —  
Net income (loss)   $ (16.3 )   $ —     $ (0.8 )   $ (5.5 )   $ (3.2 )   $ (25.8 )
                                                 
COMPREHENSIVE INCOME (LOSS):                                                
Net income (loss)   $ (16.3 )   $ —     $ (0.8 )   $ (5.5 )   $ (3.2 )   $ (25.8 )
  Other comprehensive income (loss) before income taxes:                                                
Net unrealized investment gains before income taxes     0.1       (20.8 )     —       —       —       (20.7 )
Non-credit portion of OTTI losses recognized in OCI before income taxes     —       —       —       —       —       —  
Other comprehensive income (loss) before income taxes     0.1       (20.8 )     —       —       —       (20.7 )
 Less: Income tax expense (benefit) related to:                                                
  Net unrealized investment gains (losses)     —       —       —       —       —       —  
  Non-credit portion of OTTI losses recognized in OCI     —       —       —       —       —       —  
    Total income tax expense (benefit)     —       —       —       —       —       —  
Other comprehensive income, net of tax     0.1       (20.8 )     —       —       —       (20.7 )
Comprehensive income (loss)   $ (16.2 )   $ (20.8 )   $ (0.8 )   $ (5.5 )   $ (3.2 )   $ (46.5 )

———————

(1)   All amounts are shown before income taxes, unless otherwise noted.
(2)   Amounts represent the total “Summary of Correction of Actuarial Finance Errors” which is further aggregated into the “Summary of Correction of Errors” in the following pages.

  

Increase (decrease)   Summary of Correction of Actuarial Finance Errors – Nine months ended September 30, 2011 Income Statement and Comprehensive Income Impacts (1)  
($ in millions)   Actuarial Finance  
   

Accounting

for UL Type

Products

    

Shadow

Accounting

    

Loss

Recognition

     FIA    

Other

Actuarial

    

Total

Actuarial

Finance

Errors (2)

  
                                     
REVENUES:                                    
Premiums   $ —     $ —     $ —     $ —     $ —     $ —  
Insurance and investment product fees     (1.9 )     —       —       —       (1.4 )     (3.3 )
Net investment income     —       —       —       —       (0.5 )     (0.5 )
Net realized investment gains (losses):                                                
Total OTTI losses     —       —       —       —       —       —  
Portion of OTTI losses recognized in OCI     —       —       —       —       —       —  
Net OTTI losses recognized in earnings     —       —       —       —       —       —  
Net realized investment gains (losses), excluding OTTI losses     —       —       —       —       10.9       10.9  
Net realized investment gains (losses)     —       —       —       —       10.9       10.9  
Total revenues     (1.9 )     —       —       —       9.0       7.1  
                                                 
BENEFITS AND EXPENSES:                                                
Policy benefits     43.6       —       2.5       4.0       9.4       59.5  
Policy acquisition cost amortization     (7.9 )      —       —       2.1       (8.4 )     (14.2 )
Other operating expenses     —       —       —       —       10.5       10.5  
Total benefits and expenses     35.7       —       2.5       6.1       11.5       55.8  
Income (loss) from before income taxes     (37.6 )     —       (2.5 )     (6.1 )     (2.5 )     (48.7 )
Income tax expense (benefit)     —       —       —       —       —       —  
Net income (loss)   $ (37.6 )   $ —     $ (2.5 )   $ (6.1 )   $ (2.5 )   $ (48.7 )
                                                 
COMPREHENSIVE INCOME (LOSS):                                                
Net income (loss)   $ (37.6 )   $ —     $ (2.5 )   $ (6.1 )   $ (2.5 )   $ (48.7 )
  Other comprehensive income (loss) before income taxes:                                                
Net unrealized investment gains before income taxes     (0.4 )     (14.2 )     —       —       —       (14.6 )
Non-credit portion of OTTI losses recognized in OCI before income taxes     —       —       —       —       —       —  
Other comprehensive income (loss) before income taxes     (0.4 )     (14.2 )     —       —       —       (14.6 )
 Less: Income tax expense (benefit) related to:                                                
  Net unrealized investment gains (losses)     —       —       —       —       —       —  

  Non-credit portion of OTTI losses recognized

    in OCI

     —       —       —       —       —       —  
    Total income tax expense (benefit)     —       —       —       —       —       —  
Other comprehensive income, net of tax     (0.4 )     (14.2 )     —       —       —       (14.6 )
Comprehensive income (loss)   $ (38.0 )   $ (14.2 )   $ (2.5 )   $ (6.1 )   $ (2.5 )   $ (63.3 )

———————

(1)   All amounts are shown before income taxes, unless otherwise noted.
(2)    Amounts represent the total “Summary of Correction of Actuarial Finance Errors” which is further aggregated into the “Summary of Correction of Errors” in the following pages.

  

Investments

 

The Company determined that there were errors related to investment valuation and the accounting treatment for these investments which are specifically identified errors in the following sub-categories as detailed below.

 

●   Available-for-Sale Securities – The Company did not have an adequate process over: (1) the valuation and recording of private placement debt, private equity securities, and certain publicly traded securities; and (2) utilizing an appropriate model for identifying impairments related to these securities. The errors identified were related to: (i) inaccurate inputs used in the valuation models; (ii) and inappropriate valuation methodologies used to value certain instruments; and (iii) ineffective review of internally developed (matrix or manual) prices. The Company also failed to maintain an adequate process over the leveling and disclosure of fair value measurements. In the course of correcting these valuation errors, the Company also reassessed the presentation of the fair value hierarchy as disclosed within “Note 10: Fair Value of Financial Instruments.” This resulted in the determination in the leveling classification of $1,296.7 million of securities to Level 3 in the fair value hierarchy. The classification in Level 3 had no impact on the fair value of these securities.

 

The impact of the correction of these errors on the financial statements is presented in the “Summary of Correction of Investments Errors” table within the “Investments” section of this Note below.

 

●   Derivative Valuation – The Company did not appropriately apply U.S. GAAP accounting standards regarding the valuation of certain derivative instruments. Specifically, the Company did not properly recognize and measure counterparty non-performance risk on non-collateralized derivative assets. The impact of the correction of these errors on the financial statements is presented in the “Summary of Correction of Investments Errors” table within the “Investments” section of this Note below.

 

●   Structured Securities – The Company did not appropriately maintain a process over the assessment of accounting methodologies used to determine the appropriate interest income models. This resulted in improper income recognition and impairments for certain structured securities. In addition, the Company did not properly assess securitized financial assets for potential embedded derivatives which, when properly assessed, resulted in the reclassification of assets to fair value investments.  The reclassification of these assets results in the recognition of the change in fair value of these assets in net investment income.  The impact of the correction of these errors on the statements of comprehensive income is presented in the “Summary of Correction of Investments Errors” table within the “Investments” section of this Note below.

  

Increase (decrease)   Summary of Correction of Investments Errors – December 31, 2011 Balance Sheet Impacts (1)
($ in millions)   Investments  
    AFS Valuation     Derivative Valuation     Structured Securities     Total Investment Errors (2)  
ASSETS:                        
Available-for-sale debt securities, at fair value   $ 0.9     $ —     $ (35.1 )   $ (34.2 )
Limited partnerships and other investments     —       —       —       —  
Policy loans, at unpaid principal balances     —       —       —       —  
Derivative investments     —       (9.4 )     —       (9.4 )
Fair value investments     (0.5 )     —       35.1       34.6  
Total investments     0.4       (9.4 )     —       (9.0 )
Cash and cash equivalents     —       —       —       —  
Accrued investment income     —       —       —       —  
Receivables     —       —       —       —  
Deferred policy acquisition costs     —       (13.1 )     —       (13.1 )
Deferred income taxes, net     —       —       —       —  
Receivables from related parties     —       —       —       —  
Other assets     —       —       —       —  
Separate account assets     —       —       —       —  
Total assets   $ 0.4     $ (22.5 )   $ —     $ (22.1 )
                                 
LIABILITIES:                                
Policy liabilities and accruals   $ —     $ —     $ —     $ —  
Deferred income taxes, net     —       —       —       —  
Policyholder deposit funds     —       —       —       —  
Deferred income tax, net     —       —       —        —  
Payable to related parties     —       —       —       —  
Other liabilities     —       —       —       —  
Separate account liabilities     —       —       —       —  
Total liabilities     —       —       —       —  
STOCKHOLDER’S EQUITY:                                
Common stock     —       —       —       —  
Additional paid-in capital     —       —       —       —  
Accumulated other comprehensive loss     14.4       —       (0.4 )     14.0  
Accumulated deficit     0.9       (8.0 )     1.1       (6.0 )
Treasury stock     —       —       —       —  
Total stockholder’s equity (3)     15.3       (8.0 )     0.7       8.0  
Total stockholder’s equity - cumulative impact (4)     (14.9 )     (14.5 )     (0.7 )     (30.1 )
Total stockholder’s equity - impact     0.4       (22.5 )     —       (22.1 )
Total liabilities and stockholder’s equity   $ 0.4     $ (22.5 )   $ —     $ (22.1 )

———————

(1)   All amounts are shown before income taxes, unless otherwise noted.
(2)   Amounts represent the total “Summary of Correction of Investments Errors” which is further aggregated into the “Summary of Correction of Errors” in the following pages.

(3)   Amounts represent restatement changes made to the 2011 and 2010 periods as presented within the 2012 Form 10-K.
(4)   Amounts represent cumulative impact of restatement changes made to periods prior to 2010.

  

 

Increase (decrease)

     Summary of Correction of Investments Errors – Three months ended September 30, 2011 Income Statement and Comprehensive Income Impacts (1)
($ in millions)   Investments
    AFS Valuation     Derivative Valuation     Structured Securities    

Total Investment

Errors (2)

REVENUES:                      
Premiums   $ —     $ —     $ —     $ —  
Insurance and investment product fees     —       —       —       —  
Net investment income     —       —       (0.1 )     (0.1 )
Net realized investment gains (losses):                                
   Total OTTI losses     —       —       —       —  
  Portion of OTTI losses recognized in OCI     —       —       —       —  
  Net OTTI losses recognized in earnings     —       —       —       —  
Net realized investment gains (losses), excluding OTTI     —       (5.8 )     (0.4 )     (6.2 )
Net realized investment gains (losses)     —       (5.8 )     (0.4 )     (6.2 )
Total revenues     —       (5.8 )     (0.5 )     (6.3 )
                                 
BENEFITS AND EXPENSES:                                
Policy benefits     —       —       —       —  
Policy acquisition cost amortization     —       (0.4 )     —       (0.4 )
Other operating expenses     —       —       —       —  
Total benefits and expenses     —       (0.4 )     —       (0.4 )
Income (loss) from before income taxes     —       (5.4 )     (0.5 )     (5.9 )
Income tax expense (benefit)     —       —       —       —  
Net income (loss)   $ —     $ (5.4 )   $ (0.5 )   $ (5.9 )
                                 
COMPREHENSIVE INCOME (LOSS):                                
Net income (loss)   $ —     $ (5.4 )   $ (0.5 )   $ (5.9 )
Other comprehensive income (loss) before income taxes:                                
Net unrealized investment gains before income taxes     —       —       0.5       0.5  
Non-credit portion of OTTI losses recognized in OCI before income taxes     —       —       —       —  
Other comprehensive income (loss) before income taxes     —       —       0.5       0.5  
Less: Income tax expense (benefit) related to:                                
Net unrealized investment gains     —       —       —       —  

Non-credit portion of OTTI losses recognized

    in OCI

     —       —       —       —  
    Total income tax expense (benefit)     —       —       —       —  
Other comprehensive income, net of tax     —       —       0.5       0.5  
Comprehensive income (loss)   $ —     $ (5.4 )   $ —     $ (5.4 )

———————

(1)   All amounts are shown before income taxes, unless otherwise noted.
(2)   Amounts represent the total “Summary of Correction of Actuarial Finance Errors” which is further aggregated into the “Summary of Correction of Errors” in the following pages.

 

 

Increase (decrease)

   Summary of Correction of Investments Errors – Nine months ended September 30, 2011 Income Statement and Comprehensive Income Impacts (1)
($ in millions)   Investments
    AFS Valuation     Derivative Valuation     Structured Securities     Total Investment Errors (2)  
Other Investments Total                        
REVENUES:                      
Premiums   $ —     $ —     $ —     $ —  
Insurance and investment product fees     —       —       —       —  
Net investment income     0.2       —       (0.2 )     —  
Net realized investment gains (losses):                                
   Total OTTI losses     —       —       —       —  
  Portion of OTTI losses recognized in OCI     —       —       —       —  
  Net OTTI losses recognized in earnings     —       —       —       —  
Net realized investment gains (losses), excluding OTTI     —       (5.6 )     (0.7 )     (6.3 )
Net realized investment gains (losses)     —       (5.6 )     (0.7 )     (6.3 )
Total revenues     0.2       (5.6 )     (0.9 )     (6.3 )
                                 
BENEFITS AND EXPENSES:                                
Policy benefits     —       —       —       —  
Policy acquisition cost amortization     —       (0.4 )     —       (0.4 )
Other operating expenses     —       —       —       —  
Total benefits and expenses     —       (0.4 )     —       (0.4 )
Income (loss) from before income taxes     0.2       (5.2 )     (0.9 )     (5.9 )
Income tax expense (benefit)     —       —       —       —  
Net income (loss)   $ 0.2     $ (5.2 )   $ (0.9 )   $ (5.9 )
                                 
COMPREHENSIVE INCOME (LOSS):                                
Net income (loss)   $ 0.2     $ (5.2 )   $ (0.9 )   $ (5.9 )
Other comprehensive income (loss) before income taxes:                                
Net unrealized investment gains before income taxes     5.4       —       0.9       6.3  
Non-credit portion of OTTI losses recognized in OCI before income taxes     —       —       —       —  
Other comprehensive income (loss) before income taxes     5.4       —       0.9       6.3  
Less: Income tax expense (benefit) related to:                                
Net unrealized investment gains     —       —       —       —  

Non-credit portion of OTTI losses recognized

    in OCI

     —       —       —       —  
    Total income tax expense (benefit)     —       —       —       —  
Other comprehensive income, net of tax     5.4       —       0.9       6.3  
Comprehensive income (loss)   $ 5.6     $ (5.2 )   $ —     $ 0.4  

———————

(1)   All amounts are shown before income taxes, unless otherwise noted.
(2)   Amounts represent the total “Summary of Correction of Actuarial Finance Errors” which is further aggregated into the “Summary of Correction of Errors” in the following pages.

 

Reinsurance Accounting

 

In 2008 and in 2009, the Company entered into complex reinsurance agreements with one of its third-party reinsurers which resulted in net costs incurred to the Company. Rather than appropriately deferring and amortizing these costs over the life of the underlying business, the Company had previously recognized these costs immediately in net income. In addition, in 2008, the Company separately entered into a related party reinsurance arrangement with its parent company, Phoenix Life, a wholly owned subsidiary of PNX, where the Company inappropriately recorded the ceded reinsurance balances as an offset to the reinsurance recoverable rather than to the appropriate financial statement line item within the statements of income and comprehensive income. For additional information on the related party reinsurance arrangement, refer to “Note 4: Reinsurance.”  The impact of the correction of these errors on the financial statements is presented in the “Summary of Correction of Errors” table within this Note below.

 

Upon review of the reinsurance transactions, the Company also determined that loss recognition was appropriate for a portion of the underlying block of business both prior to and subsequent to entering into the reinsurance agreements. The impact of the loss recognition prior to the reinsurance then indirectly impacted the amount of costs deferred at day one. The impact of the loss recognition error on those costs deferred resulted in a reduction of approximately $38.6 million and is reflected within the “Summary of Correction of Actuarial Finance Errors” table above. The impact of the reinsurance component of this error on the financial statements is presented in the “Summary of Correction of Errors” table within this Note below.

 

In addition, certain errors were identified related to the Company’s net presentation of direct and ceded reinsurance liabilities on the balance sheets. As a result, ceded policy liabilities were reclassified from policy liabilities and accruals to receivables within the balance sheets to correct the error and reflect the proper gross presentation required under U.S. GAAP. See “Changes in Classifications” below for additional information.

 

Cash Flows and Changes in Classifications

 

●   Statement of Cash Flows – The Company identified errors within its previously issued statement of cash flows which primarily consisted of: (i) the incorrect classification of deposits and withdrawals of universal life products as cash flows used for operating activities; (ii) the incorrect classification of capitalized interest on policy loans as an investing activity; (iii) certain other classification errors within cash flows from investing activities primarily related to investment purchases and sales; and (iv) the net impact of all other errors previously and separately described within this Note. The impact of the correction of these errors is summarized below and included in detail within the restated and amended statement of cash flows within this Note.

 

Increase (decrease) For the period ended  
($ in millions) September 30,  
  2011  
Statement of Cash Flows      
Cash provided by (used for) operating activities   $ (160.0 )
Cash provided by (used for) investing activities     23.4  
Cash provided by (used for) financing activities     138.1  

 

In addition to these errors noted above, the Company made certain changes in presentation to enhance disclosure of certain cash activity within the statement of cash flows. Most significantly: (i) interest credited to policyholder accounts has been separately disclosed within cash flows used for operating activities; and (ii) deposits into and withdrawals from separate accounts have been presented gross, rather than net, within cash flows provided by financing activities which are also reflected in the correction of errors above and within the restated and amended statement of cash flows within this Note. These changes in presentation did not have any impact on total cash flows provided by (used for) operating, investing or financing activities.

 

●   Changes in Classifications – The Company made certain corrections to: (i) present outstanding checks and cash held as collateral by a third party related to our derivative transactions in order to appropriately reflect the legal right of offset and to properly reclassify certain suspense accounts; (ii) reflect direct and ceded reinsurance liabilities gross in the balance sheets as described above in “Reinsurance Accounting” section; and (iii) reclassify sales inducements assets from deferred policy acquisition costs to other assets. These corrections had no impact to net income or total stockholder’s equity. The impact of the changes in classification are reflected in the correction of errors column in the “Summary of Correction of Errors” table within this Note.

 

Revision for the Retrospective Adoption of Amended Accounting Guidance

 

In October 2010, the Financial Accounting Standards Board (the “FASB”) issued amended guidance to ASC 944, Financial Services – Insurance, to address the diversity in practice for accounting for costs associated with acquiring or renewing insurance contracts. The amendment clarifies the definition of acquisition costs (i.e., costs which qualify for deferral) to include only incremental direct costs that result directly from, and are essential to, a contract and would not have been incurred by the insurance entity had the contract transaction not occurred. Therefore, only costs related to successful efforts of acquiring a new, or renewal, contract should be deferred. This guidance was retrospectively adopted on January 1, 2012 and such retrospective adoption results in amendments to previously reported balances as shown in the table below as if the guidance was applied at the inception of all policies in force. The cumulative effect of retrospective adoption reduced deferred policy acquisition costs and beginning stockholder’s equity by $36.1 million as of January 1, 2012. In any period, the adoption resulted in a decrease in amortization of policy acquisition costs due to the reduced deferred policy acquisition cost asset. Adjustments for the retrospective adoption reflect the impact of the adoption after consideration of correcting the errors associated with the restatement as noted more fully in the tables reflecting the impact of the retrospective adoption on financial statements presented within this Note below.

 

Increase (decrease)   Summary of Correction of Errors – December 31, 2011 Balance Sheet Impacts (1)  
                                           
                Reinsurance Accounting     Changes in Classification              
($ in millions)  

Total

Actuarial

Finance (2)

    

Total

Investments(3)

     Third-party reinsurance     Related party reinsurance                    
   

Cash and

Suspense

     Reinsurance     Sales Inducement    

Other

Restatement

Adjustments

        
   

Total

Correction

of Errors (4)

  
 
ASSETS:                                                      

Available-for-sale

  debt securities, at fair value

   $ —     $ (34.2 )   $ —     $ —     $ —     $ —     $ —     $ (0.1 )   $ (34.3 )

Limited partnerships and

  other investments

      —        —        —        —        —        —        —       (0.3 )     (0.3 )

Policy loans,

  at unpaid principal balances

      —        —        —        —        —        —        —        —        —  
Derivative investments     —       (9.4 )     —       —       —       —       —       —       (9.4 )
Fair value investments     —       34.6       —       —       —       —       —       (0.1 )     34.5  
Total investments     —       (9.0 )     —       —       —       —       —       (0.5 )     (9.5 )
Cash and cash equivalents     —       —       —       —       (18.0 )     —       —       —       (18.0 )
Accrued investment income     —       —       —       —       —       —       —       —       —  
Receivables     3.0       —       —       (40.9 )     9.2       58.1       —       1.8       31.2  
Deferred policy acquisition costs     50.1       (13.1 )     —       (3.6 )     —       —       (42.3 )      (0.1 )     (9.0 )
Deferred income taxes, net     —       —       —       —       —       —       —       29.4       29.4  
Receivables from related parties     —       —       —       —       —       —       —       —       —  
Other assets     44.3       —       (38.6 )     —       9.1       —       42.3       —       57.1  
Separate account assets     —       —       —       —       —       —       —       (0.2 )     (0.2 )
Total assets   $ 97.4     $ (22.1 )   $ (38.6 )   $ (44.5 )   $ 0.3     $ 58.1     $ —     $ 30.4     $ 81.0  

———————

(1)   All amounts are shown before income taxes, unless otherwise noted.
(2)   Represents “Summary of Correction of Actuarial Finance Errors” from the previous pages of this Note.

 

(3)   Represents “Summary of Correction of Investments Errors" from the previous pages of this Note.
(4)   Amounts represent total correction of errors which is also presented in the “Statement of Comprehensive Income” reflected in the tables on the following pages.

  

(Continued from previous page)   Summary of Correction of Errors – December 31, 2011 Balance Sheet Impacts (1)  
                                           
                Reinsurance Accounting     Changes in Classification              
Increase (decrease)  

Total

Actuarial

Finance(2)

    

Total

Investments(3)

     Third-party reinsurance    

Related party

reinsurance

                    
($ in millions)  

Cash and

Suspense

     Reinsurance     Sales Inducement    

Other

Restatement

Adjustments

    

Total

Correction

of Errors (4)

  
 
 
LIABILITIES:                                                      
Policy liabilities and accruals   $ 203.1     $ —     $ —     $ 37.8     $ —     $ 58.1     $ —     $ 1.8     $ 300.8  
Policyholder deposit funds     3.2       —       —       —       —       —       —       —       3.2  
Deferred income taxes, net     —       —       —       —       —       —       —       (6.8 )     (6.8 )
Payable to related parties     —       —       —       —       —       —       —       —       —  
Other liabilities     —       —       —       —       0.3       —       —       (30.6 )     (30.3 )
Separate account liabilities     —       —       —       —       —       —       —       (0.2 )     (0.2 )
Total liabilities     206.3       —       —       37.8       0.3       58.1       —       (35.8 )     266.7  
                                                                         
STOCKHOLDER’S EQUITY:                                                                        
Common stock     —       —       —       —       —       —       —       —       —  
Additional paid-in capital     —       —       —       —       —       —       —       —       —  

Accumulated other

  comprehensive loss

     (15.3 )      14.0        —        —        —        —        —       —       (1.3 )
Accumulated deficit     (94.9 )     (6.0 )     3.0       (40.6 )     —       —       —       12.4       (126.1 )
Treasury stock     —       —       —       —       —       —       —       —       —  

Total stockholder’s equity –

  periods presented (5)

     (110.2 )      8.0        3.0       (40.6 )      —        —        —        12.4       (127.4 )

Total stockholder’s equity –

  cumulative impact (6)

      1.3       (30.1 )     (41.6 )     (41.7 )      —        —        —        53.8       (58.3 )
Total stockholder’s equity –impact     (108.9 )     (22.1 )     (38.6 )     (82.3 )      —        —        —        66.2       (185.7 )

Total liabilities and

  stockholder’s equity

   $ 97.4     $ (22.1 )   $ (38.6 )   $ (44.5 )   $ 0.3     $ 58.1     $ —     $ 30.4     $ 81.0  

———————

(1)   All amounts are shown before income taxes, unless otherwise noted.
(2)   Represents “Summary of Correction of Actuarial Finance Errors” from the previous pages of this Note.

 

(3)   Represents “Summary of Correction of Investments Errors” from the previous pages of this Note.
(4)   Amounts represent total correction of errors which is also presented in the “Statement of Comprehensive Income” reflected in the tables on the following pages.

 

(5)   Amounts represent restatement changes made to the 2011 and 2010 periods as presented within the 2012 Form 10-K.
(6)   Amounts represent cumulative impact of restatement changes made to periods prior to 2010.

  

Increase (decrease)   Summary of Correction of Errors – Three months ended September 30, 2011 Income Statement and Comprehensive Income Impacts (1)  
($ in millions)                                    
                Reinsurance Accounting              
   

Total

Actuarial

Finance (2)

    

Total

Investments (3)

    

 

Third-party reinsurance

     Related party reinsurance    

Other

Restatement

Adjustments

    

Total

Correction

of Errors (4)

  
REVENUES                                    
Premiums   $ —     $ —     $ —     $ —     $ —     $ —  
Insurance and investment product fees     (3.0 )     —       —       1.8       0.1       (1.1 )
Net investment income     (0.5 )     (0.1 )     —       —       (0.1 )     (0.7 )
Net realized investment gains (losses):                                                
  Total OTTI losses     —       —       —       —       (0.2 )     (0.2 )
  Portion of OTTI losses recognized in OCI     —       —       —       —       (0.2 )     (0.2 )
    Net OTTI losses recognized in earnings     —       —       —       —       (0.4 )     (0.4 )
  Net realized investment gains (losses), excluding OTTI losses     8.0       (6.2 )     —       —       0.4       2.2  
Net realized investment gains (losses)     8.0       (6.2 )     —       —       —       1.8  
Total revenues     4.5       (6.3 )     —       1.8       —       —  
                                                 
BENEFITS AND EXPENSES                                                
Policy benefits     44.5       —       (1.0 )     (12.3 )     —       31.2  
Policy acquisition cost amortization     (17.9 )     (0.4 )     —       13.0       (0.2 )     (5.5 )
Other operating expenses     3.7       —       —       —       0.7       4.4  
Total benefits and expenses     30.3       (0.4 )     (1.0 )     0.7       0.5       30.1  
Income (loss) before income taxes     (25.8 )     (5.9 )     1.0       1.1       (0.5 )     (30.1 )
Income tax expense (benefit)     —       —       —       —       —       —  
Net income (loss)   $ (25.8 )   $ (5.9 )   $ 1.0     $ 1.1     $ (0.5 )   $ (30.1 )
                                                 
COMPREHENSIVE INCOME (LOSS)                                                
Net income (loss)   $ (25.8 )   $ (5.9 )   $ 1.0     $ 1.1     $ (0.5 )   $ (30.1 )
  Other comprehensive income (loss) before income taxes (5):                                                
Net unrealized investment gains before income taxes (5)     (20.7 )     0.5       —       —       0.1       (20.1 )
Non-credit portion of OTTI losses recognized in OCI before income taxes (5)     —       —       —       —       0.1       0.1  
Other comprehensive income (loss) before income taxes     (20.7 )     0.5       —       —       0.2       (20.0 )
Less: Income tax expense (benefit) related to:                                                
  Net unrealized investment gains (losses) (5)     —       —       —       —       (15.3 )     (15.3 )

  Non-credit portion of OTTI losses recognized

    in OCI

     —       —       —       —       —       —  
    Total income tax expense (benefit)     —       —       —       —       (15.3 )     (15.3 )
Other comprehensive income, net of tax     (20.7 )     0.5       —       —       15.5       (4.7 )
Comprehensive income (loss)   $ (46.5 )   $ (5.4 )   $ 1.0     $ 1.1     $ 15.0     $ (34.8 )

———————

(1)   All amounts are shown before income taxes, unless otherwise noted.
(2)   Represents “Summary of Correction of Actuarial Finance Errors” from the previous pages of this Note.

(3)   Represents “Summary of Correction of Investments Errors” from the previous pages of this Note.
(4)   Amounts represent total correction of errors which is also presented in the “Statement of Comprehensive Income” reflected in the tables on the following pages.

(5)   In addition to adjustments described within this footnote the correction of errors column contains reclassifications related to changes in presentation of components of other comprehensive income.

  

Increase (decrease)   Summary of Correction of Errors – Nine months ended September 30, 2011 Income Statement and Comprehensive Income Impacts (1)  
($ in millions)                                    
                Reinsurance Accounting              
   

Total

Actuarial

Finance (2)

    

Total

Investments (3)

    

 

Third-party reinsurance

     Related party reinsurance    

Other

Restatement

Adjustments

    

Total

Correction

of Errors (4)

  
REVENUES                                    
Premiums   $ —     $ —     $ —     $ —     $ —     $ —  
Insurance and investment product fees     (3.3 )     —       —       1.4       —       (1.9 )
Net investment income     (0.5 )     —       —       —       (0.1 )     (0.6 )
Net realized investment gains (losses):                                                
  Total OTTI losses     —       —       —       —       (0.8 )     (0.8 )
  Portion of OTTI losses recognized in OCI     —       —       —       —       —       —  
    Net OTTI losses recognized in earnings     —       —       —       —       (0.8 )     (0.8 )
  Net realized investment gains (losses), excluding OTTI losses     10.9       (6.3 )     —       —       0.8       5.4  
Net realized investment gains (losses)     10.9       (6.3 )     —       —       —       4.6  
Total revenues     7.1       (6.3 )     —       1.4       (0.1 )     2.1  
                                                 
BENEFITS AND EXPENSES                                                
Policy benefits     59.5       —       (4.1 )     (10.2 )     (0.1 )     45.1  
Policy acquisition cost amortization     (14.2 )     (0.4 )     —       17.9       (0.1 )     3.2  
Other operating expenses     10.5       —       —       —       2.5       13.0  
Total benefits and expenses     55.8       (0.4 )     (4.1 )     7.7       2.3       61.3  
Income (loss) before income taxes     (48.7 )     (5.9 )     4.1       (6.3 )     (2.4 )     (59.2 )
Income tax expense (benefit)     —       —       —       —       (6.2 )     (6.2 )
Net income (loss)   $ (48.7 )   $ (5.9 )   $ 4.1     $ (6.3 )   $ 3.8     $ (53.0 )
                                                 
COMPREHENSIVE INCOME (LOSS)                                                
Net income (loss)   $ (48.7 )   $ (5.9 )   $ 4.1     $ (6.3 )   $ 3.8     $ (53.0 )
  Other comprehensive income (loss) before income taxes (5):                                                
Net unrealized investment gains before income taxes (5)     (14.6 )     6.3       —       —       0.5       (7.8 )
Non-credit portion of OTTI losses recognized in OCI before income taxes (5)     —       —       —       —       (0.2 )     (0.2 )
Other comprehensive income (loss) before income taxes     (14.6 )     6.3       —       —       0.3       (8.0 )
Less: Income tax expense (benefit) related to:                                                
  Net unrealized investment gains (losses) (5)     —       —       —       —       (4.7 )     (4.7 )

  Non-credit portion of OTTI losses recognized

    in OCI

     —       —       —       —       (0.2 )     (0.2 )
    Total income tax expense (benefit)     —       —       —       —       (4.9 )     (4.9 )
Other comprehensive income, net of tax     (14.6 )     6.3       —       —       5.2       (3.1 )
Comprehensive income (loss)   $ (63.3 )   $ 0.4     $ 4.1     $ (6.3 )   $ 9.0     $ (56.1 )

———————

(1)   All amounts are shown before income taxes, unless otherwise noted.
(2)   Represents “Summary of Correction of Actuarial Finance Errors” from the previous pages of this Note.

(3)   Represents “Summary of Correction of Investments Errors” from the previous pages of this Note.
(4)   Amounts represent total correction of errors which is also presented in the “Statement of Comprehensive Income” reflected in the tables on the following pages.

(5)   In addition to adjustments described within this footnote the correction of errors column contains reclassifications related to changes in presentation of components of other comprehensive income.

  

    Balance Sheet
($ in millions)   As of December 31, 2011  
   

As previously

reported

    

Correction

of errors (1)

    

Adjusted

prior to the

Retrospective

Adoption

    

Retrospective

Adoption (2)

    

As restated

and amended

  
ASSETS:                              
Available-for-sale debt securities, at fair value   $ 2,546.4     $ (34.3 )   $ 2,512.1     $ —     $ 2,512.1  
Limited partnerships and other investments     5.0       (0.3 )     4.7       —       4.7  
Policy loans, at unpaid principal balances     62.5       —       62.5       —       62.5  
Derivative investments     113.2       (9.4 )     103.8       —       103.8  
Fair value investments     7.3       34.5       41.8       —       41.8  
Total investments     2,734.4       (9.5 )     2,724.9       —       2,724.9  
Cash and cash equivalents     67.5       (18.0 )     49.5       —       49.5  
Accrued investment income     18.6       —       18.6       —       18.6  
Receivables     382.4       31.2       413.6       —       413.6  
Deferred policy acquisition costs     576.6       (9.0 )     567.6       (78.5 )     489.1  
Deferred income taxes, net     —       29.4       29.4       —       29.4  
Receivables from related parties     4.8       —       4.8       —       4.8  
Other assets     52.5       57.1       109.6       (1.0 )     108.6  
Separate account assets     2,547.0       (0.2 )     2,546.8       —       2,546.8  
Total assets   $ 6,383.8     $ 81.0     $ 6,464.8     $ (79.5 )   $ 6,385.3  
                                         
LIABILITIES:                                        
Policy liabilities and accruals (3)   $ 1,343.9     $ 300.8     $ 1,644.7     $ (43.4 )   $ 1,601.3  
Policyholder deposit funds     1,721.2       3.2       1,724.4       —       1,724.4  
Deferred income taxes     6.8       (6.8 )     —       —       —  
Payable to related parties     30.0       —       30.0       —       30.0  
Other liabilities     89.1       (30.3 )     58.8       —       58.8  
Separate account liabilities     2,547.0       (0.2 )     2,546.8       —       2,546.8  
Total liabilities     5,738.0       266.7       6,004.7       (43.4 )     5,961.3  
                                         
STOCKHOLDER’S EQUITY:                                        

Common stock, $5,000 par value:

  1,000 shares authorized; 500 shares issued

     2.5       —       2.5       —       2.5  
Additional paid-in capital     802.2       —       802.2       —       802.2  
Accumulated other comprehensive loss     6.2       0.2       6.4       (3.8 )     2.6  
Accumulated deficit     (165.1 )     (185.9 )     (351.0 )     (32.3 )     (383.3 )
Total stockholder’s equity     645.8       (185.7 )     460.1       (36.1 )     424.0  
Total liabilities and stockholder’s equity   $ 6,383.8     $ 81.0     $ 6,464.8     $ (79.5 )   $ 6,385.3  

———————

(1) Adjustments related to the correction of errors reflect amounts prior to the retrospective adoption of amended guidance to ASC 944, Financial Services – Insurance. See footnote 2 below for additional information regarding these amounts and the retrospective adoption.
(2) Adjustments related to the retrospective adoption of amended guidance to ASC 944, Financial Services – Insurance, have been updated from those originally disclosed in the 2012 first quarter Form 10-Q filing to reflect the correction of errors identified related to the adoption of the amended guidance as well as indirect impact of the correction of errors associated with the restatement.

(3)   Included within policyholder liabilities and accruals is the post-ASU gross profits followed by losses reserve of $207.8 million. The corresponding net post-ASU amount of $193.6 million reported within the financial statements includes $(14.2) million of shadow profits followed by losses, both of which are discussed further within the “Actuarial Finance” section of this Note.

  

    Statement of Comprehensive Income  
($ in millions)   Three months ended September 30, 2011  
                Adjusted              
                prior to the              
    As previously     Correction     retrospective     Retrospective     As restated  
    reported     of errors(1)     adoption     adoption(2)     and amended  
REVENUES:                              
Premiums   $ 1.1     $ —     $ 1.1     $ —     $  1.1  
Insurance and investment product fees     98.0       (1.1 )     96.9       —       96.9  
Net investment income     25.7       (0.7 )     25.0       —       25.0  
Net realized investment gains (losses):                                        
  Total OTTI losses     (4.5 )     (0.2 )     (4.7 )     —       (4.7 )
  Portion of OTTI losses recognized in OCI     3.9       (0.2 )     3.7       —       3.7  
    Net OTTI losses recognized in earnings     (0.6 )     (0.4 )     (1.0 )     —       (1.0 )

  Net realized investment gains (losses),

    excluding OTTI losses

     (5.4 )      2.2       (3.2 )     —       (3.2 )
Net realized investment losses     (6.0 )     1.8       (4.2 )     —       (4.2 )
Total revenues     118.8       —       118.8       —       118.8  
                                         
BENEFITS AND EXPENSES:                                        
Policy benefits     61.8       31.2       93.0       0.9       93.9  
Policy acquisition cost amortization     39.8       (5.5 )     34.3       (5.4 )     28.9  
Other operating expenses     19.4       4.4       23.8       0.3       24.1  
Total benefits and expenses     121.0       30.1       151.1       (4.2 )     146.9  
Income (loss) before income taxes     (2.2 )     (30.1 )     (32.3 )     4.2       (28.1 )
Income tax expense (benefit)     (13.8 )     —       (13.8 )     (4.2 )     (18.0 )
Net income (loss)   $ 11.6     $ (30.1 )   $ (18.5 )   $ 8.4     $ (10.1 )
                                         
COMPREHENSIVE INCOME (LOSS):                                        
Net income (loss)   $ 11.6     $ (30.1 )   $ (18.5 )   $ 8.4     $ (10.1 )

  Other comprehensive income (loss)

    before income tax (3):

                                        
  Net unrealized investment gains before income tax     13.4       (20.1 )     (6.7 )     1.3       (5.4 )

  Non-credit portion of OTTI losses recognized

    in OCI before income tax

     (3.8 )     0.1       (3.7 )     —       (3.7 )

    Other comprehensive income (loss)

      before income taxes

     9.6       (20.0 )     (10.4 )     1.3       (9.1 )
  Less: Income tax expense (benefit) related to (3):                                        
  Net unrealized investment gains     10.3       (15.3 )     (5.0 )     4.2       (0.8 )

  Non-credit portion of OTTI losses recognized

    in OCI

     (1.3 )     —       (1.3 )     —       (1.3 )
    Total income tax expense (benefit)     9.0       (15.3 )     (6.3 )     4.2       (2.1 )
Other comprehensive income, net of tax     0.6       (4.7 )     (4.1 )     (2.9 )     (7.0 )
Comprehensive income (loss)   $ 12.2     $ (34.8 )   $ (22.6 )   $ 5.5     $ (17.1 )

———————

(1) Adjustments related to the correction of errors reflect amounts prior to the retrospective adoption of amended guidance to ASC 944, Financial Services – Insurance. See footnote 2 below for additional information regarding these amounts and the retrospective adoption.
(2) Adjustments related to the retrospective adoption of amended guidance to ASC 944, Financial Services – Insurance, have been updated from those originally disclosed in the 2012 first quarter Form 10-Q filing to reflect the correction of errors identified related to the adoption of the amended guidance as well as indirect impact of the correction of errors associated with the restatement.

(3)   In addition to adjustments described within this footnote the correction of errors column contains reclassifications related to changes in presentation of components of other comprehensive income.

  

    Statement of Comprehensive Income  
($ in millions)   Nine months ended September 30, 2011  
                Adjusted              
                prior to the              
    As previously     Correction     retrospective     Retrospective     As restated  
    reported     of errors(1)     adoption     adoption(2)     and amended  
REVENUES:                              
Premiums   $ 1.4     $  —     $  1.4     $  —     $  1.4  
Insurance and investment product fees     301.7       (1.9 )     299.8       —       299.8  
Net investment income     71.3       (0.6 )     70.7       —       70.7  
Net realized investment gains (losses):                                        
  Total OTTI losses     (6.2 )     (0.8 )     (7.0 )     —       (7.0 )
  Portion of OTTI losses recognized in OCI     4.7       —       4.7       —       4.7  
    Net OTTI losses recognized in earnings     (1.5 )     (0.8 )     (2.3 )     —       (2.3 )

  Net realized investment gains (losses),

    excluding OTTI losses

     (11.2 )      5.4       (5.8 )      —       (5.8 )
Net realized investment losses     (12.7 )     4.6       (8.1 )     —       (8.1 )
Total revenues     361.7       2.1       363.8       —       363.8  
                                         
BENEFITS AND EXPENSES:                                        
Policy benefits     186.3       45.1       231.4       7.8       239.2  
Policy acquisition cost amortization     107.8       3.2       111.0       (20.7 )     90.3  
Other operating expenses     55.8       13.0       68.8       0.9       69.7  
Total benefits and expenses     349.9       61.3       411.2       (12.0 )     399.2  
Income (loss) before income taxes     11.8       (59.2 )     (47.4 )     12.0       (35.4 )
Income tax expense (benefit)     (9.2 )     (6.2 )     (15.4 )     (1.4 )     (16.8 )
Net income (loss)   $ 21.0     $ (53.0 )   $ (32.0 )   $ 13.4     $ (18.6 )
                                         
COMPREHENSIVE INCOME (LOSS):                                        
Net income (loss)   $ 21.0     $ (53.0 )   $ (32.0 )   $ 13.4     $ (18.6 )

  Other comprehensive income (loss)

    before income tax (3):

                                        
  Net unrealized investment gains before income tax     25.4       (7.8 )     17.6       3.9       21.5  

  Non-credit portion of OTTI losses recognized

    in OCI before income tax

     (3.7 )     (0.2 )     (3.9 )     —       (3.9 )

    Other comprehensive income (loss)

      before income taxes

     21.7       (8.0 )     13.7       3.9       17.6  
  Less: Income tax expense (benefit) related to (3):                                        
  Net unrealized investment gains     8.8       (4.7 )     4.1       1.5       5.6  

  Non-credit portion of OTTI losses recognized

    in OCI

     (1.2 )     (0.2 )     (1.4 )     —       (1.4 )
    Total income tax expense (benefit)     7.6       (4.9 )     2.7       1.5       4.2  
Other comprehensive income, net of tax     14.1       (3.1 )     11.0       2.4       13.4  
Comprehensive income (loss)   $ 35.1     $ (56.1 )   $ (21.0 )   $ 15.8     $ (5.2 )

———————

(1) Adjustments related to the correction of errors reflect amounts prior to the retrospective adoption of amended guidance to ASC 944, Financial Services – Insurance. See footnote 2 below for additional information regarding these amounts and the retrospective adoption.
(2) Adjustments related to the retrospective adoption of amended guidance to ASC 944, Financial Services – Insurance, have been updated from those originally disclosed in the 2012 first quarter Form 10-Q filing to reflect the correction of errors identified related to the adoption of the amended guidance as well as indirect impact of the correction of errors associated with the restatement.

(3)   In addition to adjustments described within this footnote the correction of errors column contains reclassifications related to changes in presentation of components of other comprehensive income.

 

    Statement of Cash Flows  
($ in millions)   For the period ended September 30, 2011  
                Adjusted              
                prior to the              
    As previously     Correction     retrospective     Retrospective     As restated  
    reported     of errors(1)     adoption     adoption(2)     and amended  
OPERATING ACTIVITIES:                              
Net income (loss)   $ 21.0     $ (53.0 )   $ (32.0 )   $ 13.4     $ (18.6 )
Net realized investment losses     12.7       (4.6 )     8.1       —       8.1  
Policy acquisition costs deferred     (3.2 )     (69.2 )     (72.4 )     0.9       (71.5 )
Amortization of policy acquisition costs     —       111.0       111.0       (20.7 )     90.3  
Interest credited     —       46.5       46.5       —       46.5  

Equity in earnings of

  limited partnerships and other investments

     —       (0.3 )     (0.3 )      —       (0.3 )
Change in:                                        
  Accrued investment income     (7.9 )     (1.7 )     (9.6 )     —       (9.6 )
  Deferred income taxes     (0.6 )     (3.9 )     (4.5 )     (1.5 )     (6.0 )
  Receivables     0.4       15.8       16.2       —       16.2  
  Policy liabilities and accruals     36.4       (155.8 )     (119.4 )     7.9       (111.5 )
  Due to/from affiliate     —       6.5       6.5       —       6.5  
  Other operating activities, net     (4.1 )     (51.3 )     (55.4 )     —       (55.4 )
Cash provided by (used for) operating activities     54.7       (160.0 )     (105.3 )     —       (105.3 )
                                         
INVESTING ACTIVITIES:                                        
Purchases of:                                        
  Available-for-sale debt securities     (2,008.2 )     971.5       (1,036.7 )     —       (1,036.7 )
  Derivative instruments     —       (23.0 )     (23.0 )     —       (23.0 )
  Fair value investments     —       (29.8 )     (29.8 )     —       (29.8 )
Sales, repayments and maturities of:                             —          
  Available-for-sale debt securities     1,345.7       (952.0 )     393.7       —       393.7  
  Derivative instruments     —       50.3       50.3       —       50.3  
  Fair value investments     —       6.2       6.2       —       6.2  
Contributions to limited partnerships     —       (0.9 )     (0.9 )     —       (0.9 )
Distributions from limited partnerships     —       0.1       0.1       —       0.1  
Policy loans, net     (4.7 )     1.6       (3.1 )     —       (3.1 )
Other investing activities, net     —       (0.6 )     (0.6 )     —       (0.6 )
Cash provided by (used for) investing activities     (667.2 )     23.4       (643.8 )     —       (643.8 )
                                         
FINANCING ACTIVITIES:                                        
Policyholder deposit fund deposits     697.7       185.9       883.6       —       883.6  
Policyholder deposit fund withdrawals     (67.2 )     (290.7 )     (357.9 )     —       (357.9 )
Net transfers to/from separate accounts     —       242.9       242.9       —       242.9  
Cash provided by financing activities     630.5       138.1       768.6       —       768.6  
Change in cash and cash equivalents     18.0       1.5       19.5       —       19.5  
Cash and cash equivalents, beginning of year     51.1       (17.0 )     34.1       —       34.1  
Cash and cash equivalents, end of year   $ 69.1     $ (15.5 )   $ 53.6     $ —     $ 53.6  
                                         
Non-Cash Transactions During the Year                                        
Investment exchanges   $ —     $ 12.0     $ 12.0     $ —     $ 12.0  

———————

(1) Adjustments related to the correction of errors reflect amounts prior to the retrospective adoption of amended guidance to ASC 944, Financial Services – Insurance. See footnote 2 below for additional information regarding these amounts and the retrospective adoption.
(2) Adjustments related to the retrospective adoption of amended guidance to ASC 944, Financial Services – Insurance, have been updated from those originally disclosed in the 2012 first quarter Form 10-Q filing to reflect the correction of errors identified related to the adoption of the amended guidance as well as indirect impact of the correction of errors associated with the restatement.

  

    Statement of Changes in Stockholder’s Equity  
($ in millions)   For the period ended September 30, 2011  
                Adjusted              
                prior to the              
    As previously     Correction     retrospective     Retrospective     As restated  
    reported     of errors(1)     adoption     adoption(2)     and amended  
COMMON STOCK:                              
Balance, beginning of period   $ 2.5     $ —     $ 2.5     $ —     $ 2.5  
Balance, end of period   $ 2.5     $ —     $ 2.5     $ —     $ 2.5  
                                         
ADDITIONAL PAID-IN CAPITAL:                                        
Balance, beginning of period   $ 802.2     $ —     $ 802.2     $ —     $ 802.2  
  Capital contributions from parent     —       —       —       —       —  
Balance, end of period   $ 802.2     $ —     $ 802.2     $ —     $ 802.2  
                                         

ACCUMULATED OTHER COMPREHENSIVE

INCOME (LOSS):

                                        
Balance, beginning of period   $ (12.5 )   $ 7.4     $ (5.1 )   $ (7.8 )   $ (12.9 )

  Adjustment for initial application of

    accounting changes

     —       —       —       —       —  
  Other comprehensive income     14.1       (3.1 )     11.0       2.4       13.4  
Balance, end of period   $ 1.6     $ 4.3     $ 5.9     $ (5.4 )   $ 0.5  
                                         

RETAINED EARNINGS (ACCUMULATED

DEFICIT):

                                        
Balance, beginning of period   $ (182.1 )   $ (133.8 )   $ (315.9 )   $ (47.4 )   $ (363.3 )

  Adjustment for initial application of

    accounting changes

     —       —       —       —       —  
Net income (loss)     21.0       (53.0 )     (32.0 )     13.4       (18.6 )
Balance, end of period   $ (161.1 )   $ (186.8 )   $ (347.9 )   $ (34.0 )   $ (381.9 )
                                         
TOTAL STOCKHOLDER’S EQUITY:                                        
Balance, beginning of period   $ 610.1     $ (126.4 )   $ 483.7     $ (55.2 )   $ 428.5  
  Change in stockholder’s equity     35.1       (56.1 )     (21.0 )     15.8       (5.2 )
Balance, end of period   $ 645.2     $ (182.5 )   $ 462.7     $ (39.4 )   $ 423.3  

———————

(1) Adjustments related to the correction of errors reflect amounts prior to the retrospective adoption of amended guidance to ASC 944, Financial Services – Insurance. See footnote 2 below for additional information regarding these amounts and the retrospective adoption.
(2) Adjustments related to the retrospective adoption of amended guidance to ASC 944, Financial Services – Insurance, have been updated from those originally disclosed in the 2012 first quarter Form 10-Q filing to reflect the correction of errors identified related to the adoption of the amended guidance as well as indirect impact of the correction of errors associated with the restatement.