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obtain the underlying collateral, nor do we have control over the instruments in the VIEs, unless there is an event of
default. For those entities where we are the primary beneficiary, the assets consolidated are fixed-maturity securities,
perpetual securities, equity securities, and derivative instruments; collateral consisting of these asset classes is reported
separately with the caption "- consolidated variable interest entities" on our balance sheet.
For the mortgage- and asset-backed securities held in our fixed maturities portfolio, we recognize income using a
constant effective yield, which is based on anticipated prepayments and the estimated economic life of the securities.
When estimates of prepayments change, the effective yield is recalculated to reflect actual payments to date and
anticipated future payments. The net investment in mortgage- and asset-backed securities is adjusted to the amount that
would have existed had the new effective yield been applied at the time of acquisition. This adjustment is reflected in net
investment income.
We use the specific identification method to determine the gain or loss from securities transactions and report the
realized gain or loss in the consolidated statements of earnings. Securities transactions are accounted for based on
values as of the trade date of the transaction.
An investment in a fixed maturity, perpetual security or equity security is impaired if the fair value falls below book
value. We regularly review our entire investment portfolio for declines in value. Our fixed maturities and investment-grade
perpetual securities investments are evaluated for other-than-temporary impairment using our debt impairment model.
Our debt impairment model focuses on the ultimate collection of the cash flows from our investments and whether we
have the intent to sell or if it is more likely than not we would be required to sell the security prior to recovery of its
amortized cost. The determination of the amount of impairments under this model is based upon our periodic evaluation
and assessment of known and inherent risks associated with the respective securities. Such evaluations and
assessments are revised as conditions change and new information becomes available.
When determining our intention to sell a security prior to recovery of its fair value to amortized cost, we evaluate facts
and circumstances such as, but not limited to, future cash flow needs, decisions to reposition our security portfolio, and
risk profile of individual investment holdings. We perform ongoing analyses of our liquidity needs, which includes cash
flow testing of our policy liabilities, debt maturities, projected dividend payments and other cash flow and liquidity needs.
Our cash flow testing includes extensive duration analysis of our investment portfolio and policy liabilities. Based on our
analyses, we have concluded that we have sufficient excess cash flows to meet our liquidity needs without selling any of
our investments prior to their maturity.
The determination of whether an impairment in value of our debt securities is other than temporary is based largely on
our evaluation of the issuer
'
s creditworthiness. We must apply considerable judgment in determining the likelihood of the
security recovering in value while we own it. Factors that may influence this include the overall level of interest rates,
credit spreads, the credit quality of the underlying issuer, and other factors. This process requires consideration of risks
which can be controlled to a certain extent, such as credit risk, and risks which cannot be controlled, such as interest rate
risk and foreign currency risk.
If, after monitoring and analyses, management believes that fair value will not recover to amortized cost prior to the
disposal of the security, we recognize an other-than-temporary impairment of the security. Once a security is considered
to be other-than-temporarily impaired, the impairment loss is separated into two separate components: the portion of the
impairment related to credit and the portion of the impairment related to factors other than credit. We recognize a charge
to earnings for the credit-related portion of other-than-temporary impairments. Impairments related to factors other than
credit are charged to earnings in the event we intend to sell the security prior to the recovery of its amortized cost or if it is
more likely than not that we would be required to dispose of the security prior to recovery of its amortized cost; otherwise,
non-credit-related other-than-temporary impairments are charged to other comprehensive income.
Our investments in perpetual securities that are rated below investment grade and equity securities are evaluated for
other-than-temporary impairment under our equity impairment model. Our equity impairment model focuses on the
severity of a security's decline in fair value coupled with the length of time the fair value of the security has been below
amortized cost and the financial condition and near-term prospects of the issuer. For equity securities that have declines
in value that are deemed to be temporary, we make an assertion as to our ability and intent to retain the security until
recovery. Once identified, these equity securities are restricted from trading unless authorized based upon significant
events that could not have been foreseen at the time we asserted our ability and intent to retain the security until recovery.
If management believes that the equity security will not recover prior to the disposal of the security, we recognize an
other-than-temporary impairment of the security. Once an equity security is considered to be other-than-temporarily
impaired, its fair value on that date becomes the new cost basis and the impairment loss is recognized in earnings.
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